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



 
            THE ELECTRIC SUPPLY AND TRANSMISSION ACT OF 2001
=======================================================================


                                HEARINGS

                               before the

                 SUBCOMMITTEE ON ENERGY AND AIR QUALITY

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                                   on

                               H.R. 3406
                               __________

                        DECEMBER 12 and 13, 2001
                               __________

                           Serial No. 107-81

                               __________

       Printed for the use of the Committee on Energy and Commerce








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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, Mississippi    KAREN McCARTHY, Missouri
VITO FOSSELLA, New York                    TED STRICKLAND, Ohio
ROY BLUNT, Missouri                        DIANA DeGETTE, Colorado
TOM DAVIS, Virginia                        THOMAS M. BARRETT, Wisconsin
ED BRYANT, Tennessee                       BILL LUTHER, Minnesota
ROBERT L. EHRLICH, Jr., Maryland           LOIS CAPPS, California
STEVE BUYER, Indiana                       MICHAEL F. DOYLE, Pennsylvania
GEORGE RADANOVICH, California              CHRISTOPHER JOHN, Louisiana
CHARLES F. BASS, New Hampshire          JANE HARMAN, California
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, Mississippi     KAREN McCARTHY, Missouri
VITO FOSSELLA, New York                     TED STRICKLAND, Ohio
ROY BLUNT, Missouri                         THOMAS M. BARRETT, Wisconsin
ED BRYANT, Tennessee                        BILL LUTHER, Minnesota
GEORGE RADANOVICH, California               JOHN D. DINGELL, Michigan
MARY BONO, California                         (Ex Officio)
GREG WALDEN, Oregon
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                  (ii)










                            C O N T E N T S

                               __________
                                                                   Page

Hearings held in Washington, DC:
    December 12, 2001............................................     1
    December 13, 2001............................................    99
Testimony of:
    Acquard, Charles, Executive Director, National Association of 
      State Utility Consumer Advocates...........................   164
    Blake, Hon. Francis, Deputy Secretary, U.S. Department of 
      Energy.....................................................    21
    Breathitt, Hon. Linda K., Commissioner, Federal Energy 
      Regulatory Commission......................................    31
    Brownell, Hon. Nora Mead, Commissioner, Federal Energy 
      Regulatory Commission......................................    35
    Church, Lynne H., President, Electric Power Supply 
      Association................................................   156
    English, Glenn, CEO, National Rural Electric Cooperative.....   144
    Gent, Michehl R., President and CEO, North American Electric 
      Reliability Council........................................   152
    Hochstetter, Hon. Sandra L., Chairman, Arkansas Public 
      Service Commission, on behalf of National Association of 
      Regulatory Utility Commissioners...........................   105
    Hunt, Hon. Isaac C., Jr., Commissioner, Securities and 
      Exchange Commission........................................    99
    Hyman, Leonard S., Senior Industry Advisor to Salomon Smith 
      Barney.....................................................   177
    Johnston, Robert, President and CEO, Municipal Electric 
      Authority of Georgia, on behalf of the Large Public Power 
      Council....................................................   179
    Massey, Hon. William L., Commissioner, Federal Energy 
      Regulatory Commission......................................    39
    McCullough, Glenn L., Jr., Chairman, Tennessee Valley 
      Authority..................................................    44
    Prindle, William R., Director of Building and Utilities 
      Programs, the Alliance To Save Energy......................   169
    Richardson, Alan H., President and CEO, American Public Power 
      Association................................................   134
    Rouse, James B., Director, Energy Policy, Praxair, Inc., on 
      behalf of the Electricity Consumers Resource Council.......   160
    Sokol, David L., Chairman and CEO, Mid-American Energy 
      Holdings Company...........................................   128
    Wood, Hon. Pat, III, Chairman, Federal Energy Regulatory 
      Commission.................................................    23
Additional material submitted for the record:
    Blake, Hon. Francis, Deputy Secretary, U.S. Department of 
      Energy, letter dated January 31, 2002, enclosing response 
      for the record.............................................    94
    Wood, Hon. Pat, III, Chairman, Federal Energy Regulatory 
      Commission:
        Letter dated February 13, 2002, enclosing response for 
          the record.............................................    88
        Letter dated February 25, 2002, enclosing response for 
          the record.............................................    92
        Letter dated February 28, 2002, enclosing response for 
          the record.............................................    96

                                 (iii)

  











            THE ELECTRIC SUPPLY AND TRANSMISSION ACT OF 2001

                              ----------                              


                      WEDNESDAY, DECEMBER 12, 2001

                  House of Representatives,
                  Committee on Energy and Commerce,
                    Subcommittee on Energy and Air Quality,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 1 p.m., in 
room 2123, Rayburn House Office Building, Hon. Joe Barton 
(chairman) presiding.
    Members present: Representatives Barton, Largent, Burr, 
Whitfield, Ganske, Norwood, Shimkus, Pickering, Bryant, Walden, 
Tauzin (ex officio), Boucher, Hall, Sawyer, Wynn, Waxman, 
Markey, Gordon, McCarthy, Strickland, Barrett, and Dingell (ex 
officio).
    Staff present: Jason Bentley, majority counsel; Sean 
Cunningham, majority counsel; Andy Black, policy coordinator; 
Sue Sheridan, minority counsel; and Rick Kessler, minority 
professional staff.
    Mr. Barton. The subcommittee will come to order. If 
everybody will find your seat.
    I want to welcome the four FERC commissioners that are 
confirmed and our Deputy Secretary, Mr. Blake, from the 
Department of Energy and our Commissioner of the TVA, Mr. 
McCullough. We are glad to have you folks.
    Today, we start 2 days of legislative hearings on a 
comprehensive electricity bill, H.R. 3406. This bill is 
intended to be the subject of a subcommittee markup next week, 
assuming that Congress is going to still be in session next 
week, which more and more is beginning to look like a good 
assumption.
    I want to ask our witnesses today and tomorrow to be 
forthright, to be specific when talking about the bill. This is 
a legislative attempt to balance all the various stakeholder 
interests that have been expressed in numerous hearings over, 
in the case of my subcommittee chairmanship, a 3-year period, 
and if you want to go back further than that, you could go back 
7 years when Congressman Schaeffer was subcommittee chairman 
and did a number of hearings on this very same issue.
    We have spent a great amount of time on both sides of he 
aisle in this subcommittee reviewing electricity markets this 
year and in years previous to this year. Major lessons that we 
learn again and again are part of the bill before us today. No. 
1, we must increase, or at least put incentives to increase, 
the supply of electricity available to consumers. No. 2, we 
must improve the effective operation of our transmission grid, 
and more and more that's on an interstate basis, not just on an 
intrastate basis. And No. 3, we've got to improve the capacity 
of our transmission grid.
    Today, our witnesses are various Federal officials. We have 
the Deputy Secretary of Energy Frank Blake before us again, and 
we want to welcome you. We also have, as I said earlier, the 
four confirmed FERC commissioners before us, and we look 
forward to the day when the fifth one, Joe Kelliher, who used 
to be committee staff counsel, is also on your distinguished 
panel.
    I want to also say that it's good to see Chairman Wood here 
as chairman. There are those today who are probably going to 
make it appear that Mr. Wood and I have some differences, and 
we may have some policy differences, but we have no personal 
differences. If I can be personal for a minute, I have known 
Pat Wood for a long, long time, and I remember three or 4 years 
ago he and I plotting to get tickets to the Sugar Bowl when A&M 
was playing Ohio State. So we go back a ways, and the best part 
of our relationship, Chairman Wood, is that the best days are 
ahead of us--you, as chairman of your Commission, and hopefully 
me, as chairman of this distinguished subcommittee.
    Mr. Wood. And we hope A&M will actually win the Sugar Bowl 
next time.
    Mr. Barton. It would be nice if the Aggies would win a bowl 
game in our lifetime. I would admit to that.
    I expect that we are going to get many questions today 
about recent actions of the FERC, questions about Regional 
Transmission Organizations, market-based rates in connection 
with RTOs, the market power screen test, the suitability of 
transcos in an RTO future, things like that.
    We also want to welcome our chairman of the Tennessee 
Valley Authority. We want to thank you for coming. There is a 
title in our bill that has been worked out with Congressman 
Bryant on the Republican side and Whitfield on the Republican 
side and Congressman Gordon on the Democratic side. I think it 
is a good title, and I look forward to what your concerns and 
comments are on that particular title of the bill.
    Tomorrow, we are going to hear from the SEC. We are also 
going to have our usual number of stakeholder participants. And 
the problem we have is that we have got lots of stakeholders, 
and the table will only hold so many people.
    I want to thank Chairman Tauzin of the full committee, 
Ranking Member Rick Boucher, my good friend, of the 
subcommittee, and also the full committee Ranking Member John 
Dingell for their help in scheduling these hearings and their 
cooperation in helping us to get witnesses.
    After these hearings of today and tomorrow, it is my intent 
to sit down and try to sift through all the testimony and see 
what needs to be changed so that we can go to markup next week. 
I would ask members to prepare suggestions in legislative form 
for discussion and be prepared to offer them either to myself, 
to Mr. Boucher or have them drafted and ready to go to markup 
next week. I will be preparing a manager's amendment to 
incorporate whatever changes I think improve the bill.
    I see lots of people here in the audience who we have 
worked with for the last few years. It is Christmastime, and so 
I am kind of in the spirit of which of you have been naughty 
and which of you have been nice. I don't think anybody has been 
really naughty; I can almost say I don't think anybody has 
really been nice either.
    So I would say to you that normally Christmastime is--some 
celebrate Christmas Christmas Eve, some celebrate Christmas 
morning, some who are not of the Christian faith celebrate 
Hanukkah, but whenever and however you celebrate, I think it 
would be very nice for this subcommittee to give a Christmas 
present early to the country, to the full committee, if we 
could work together and pass a good electricity bill sometime 
next week.
    So with that, I would yield the balance of my time and 
recognize my good friend, the distinguished ranking member, Mr. 
Boucher, for an opening statement.
    [The prepared statement of Hon. Joe Barton follows:]
Prepared Statement of Hon. Joe Barton, Chairman, Subcommittee on Energy 
                            and Air Quality
    Today, the Subcommittee starts two days of legislative hearings on 
comprehensive electricity legislation, H.R.3406. This bill will most 
likely be the subject of a subcommittee markup next week, if the 
Congress is still in.
    Today and tomorrow, I ask witnesses to be forthright and specific 
when talking about the bill. Keep in mind that this legislation is an 
attempt at a balance between stakeholders and Members, and few 
compromise bills are universally loved.
    The Members of this Subcommittee, on both sides of the aisle, have 
spent a great deal of time reviewing electricity markets this year and 
in years previous. Major lessons we learn again and again are part of 
the bill before us today:

1. We must increasing the supply of electricity available to consumers;
2. We must improve the effective operation of our transmission grid; 
        and
3. We must increase the capacity of our transmission grid.
    First, we welcome a very distinguished panel of Federal witnesses. 
Deputy Secretary Frank Blake is back before us today, and I welcome 
you. Thank you for your past work with this Subcommittee on Price-
Anderson and your previous testimony about electricity restructuring.
    Next, we welcome back the four confirmed commissioners of the 
Federal Energy Regulatory Commission (FERC). I look forward to when you 
come back with a full slate of Commissioners. I commend the President's 
great decision when he announced the intent to nominate Joe Kelliher to 
FERC.
    But back to the four of you. Led by my good friend, Chairman Wood, 
it appears you four have been quite busy lately. I expect you will be 
receiving many questions from Members today. I, for one, ask you to 
address recent actions and statements on Regional Transmission 
Organizations (RTOs), market-based rates in connection with RTOs, the 
market power screen test , the suitability of transcos in an RTO 
future, and whatever else we might be hearing about soon.
    Chairman McCullough of the Tennessee Valley Authority (TVA) is also 
here today. Welcome, and thanks for your help in forging agreement, 
within the valley, among TVA, its distributors, as well as large and 
small customers.
    Tomorrow, we will welcome the Securities and Exchange Commission on 
PUHCA and a regulator from the State of Arkansas. Following that, we 
will have our usual wide table of industry participants and observers.
    I want to thank Chairman Tauzin of the full committee, Ranking 
Member Boucher of the subcommittee, and Ranking Member Dingell of the 
full committee for their help in scheduling these hearings and 
implementing a fair and open process. I thank all Subcommittee Members 
for the attention they have given to these issues.
    After this hearing, it will be time to work on changes to the bill. 
I ask Members to prepare suggestions in legislative form for discussion 
and, if not accepted, for offering as an amendment during markup. I 
will be preparing a manager's substitute amendment incorporating some 
of the changes discussed today.
    As I look out to the audience and to both sides up here, I see lots 
of people who have been nice. Not too many have been naughty, at least 
not all of the time. While I have no songs for you, I do hear from 
Santa that one of the packages under the tree is a model kit for a 
pretty little electricity bill. My parents wouldn't let me open my 
presents early, but if we do our homework we just may get to open it 
next week. I can't imagine a more legislatively-satisfying holiday 
season.

    Mr. Boucher. Well, thank you very much, Mr. Chairman. I 
appreciate the scheduling of 2 days of legislative hearings by 
the subcommittee prior to our taking further action on the 
chairman's electricity industry restructuring legislation.
    Given the very significant changes that have recently 
occurred, both in the market for wholesale electricity and in 
the regulation of that market by the FERC, it is appropriate 
that we take stock of current circumstances before we take 
further legislative action. These hearings provide that 
opportunity, and I thank Chairman Barton for honoring the 
request that we made that these hearings take place.
    I very much applaud the steps designed to strengthen the 
wholesale electricity market, which have recently been 
undertaken by the FERC. The Commission has issued notice of a 
proposed rulemaking to develop a uniform standard for 
interconnection. It has acted to ensure membership in broad 
Regional Transmission Organizations by companies that own the 
transmission lines. It has demonstrated, I think, a commendable 
determination to make the wholesale market more functional and 
more predictable.
    To the extent that legislation is needed to reinforce 
FERC's authority in these areas, we should act. In my view, we 
should not take any steps which would impede the progress that 
FERC is seeking to achieve in perfecting the market for 
wholesale electricity transactions. And I am frankly concerned 
that some of the provisions in the measure now before us might 
have that effect, particularly the provisions in the bill that 
relate to Regional Transmission Organization membership.
    I also question the appropriateness of repealing the FERC's 
merger review authority through which the Commission acts to 
promote competition and address market power concerns. The 
removal of merger review authority is all the more troubling 
when it is teamed with repeal of the Public Utility Holding 
Company Act, an event which inevitably will lead to greater 
industry consolidation and heighten concerns about the 
potential to misuse market power. Under these circumstances, 
the FERC's merger review authority may be more needed in the 
future than it is even at the present.
    There is a clear need to encourage the construction of new 
transmission lines in many places around the Nation. The bill 
seeks to address this need through the creation of incentive 
pricing for new transmission lines and by conferring Federal 
authority to site new lines in instances in which the States 
deny approval for that construction. Both of these provisions 
are highly controversial. I will welcome the views of our 
witnesses, both today and tomorrow, on whether other approaches 
can achieve the goal of new transmission line construction.
    In particular, I am interested in knowing whether Regional 
Transmission Organizations can encourage the needed investment 
under regular pricing without the use of incentive pricing. I 
am also interested in learning about instances in which those 
supporting Federal siting authority believe that States have 
acted arbitrarily in balancing the need for new transmission 
against the other values that States have an obligation to 
consider. I am personally unaware of any such instances, and we 
did in fact inquire about such instances in previous hearings.
    The chairman's measure focuses on a range of other complex 
matters, including the balance between State and Federal 
jurisdiction over transmission, transmission reliability, 
Federal authority over public power entities in certain 
circumstances and the repeal of PURPA. While I have 
reservations about many of the bill's provisions, I want to 
commend Chairman Barton for his single-minded persistence in 
working to achieve a landmark reform in our Nation's 
electricity laws and for placing before this subcommittee a 
comprehensive measure that addresses the most relevant topics.
    I look forward to continued conversations with the chairman 
and with other members of the subcommittee as we continue to 
consider the best means of addressing the wholesale electricity 
market and its related concerns. Thank you, Mr. Chairman, and I 
want to welcome our witnesses, and I very much look forward to 
their testimony.
    Mr. Barton. The Chair would thank the gentleman from 
Virginia for that statement. It is the Chair's intention to 
continue opening statement. Mr. Shimkus has gone to vote and 
hopefully will be back so that we can continue without having 
any interruption. The Chair would ask if Mr. Bryant wishes an 
opening statement.
    Mr. Bryant. Yes. Thank you, Mr. Chairman; I have one. I 
would also like to thank you for holding today's hearing on 
H.R. 3406 and commend you for inviting such a distinguished 
panel of witnesses representing the Federal perspective on the 
electricity restructuring legislation. I especially look 
forward to my friend, Glenn McCullough, testifying, who is the 
chairman of the Tennessee Valley Authority, and I am sure 
Chairman McCullough would agree that among the residents living 
in the Valley there is an ``if it ain't broke, don't fix it'' 
mentality toward such legislation as restructuring our Nation's 
electricity market.
    However, as America's largest public power company, TVA 
has--I should say America's largest public power company, TVA, 
has provided reliable, low-cost power to all of us in the 
Valley for nearly 70 years, and we are happy with the services 
TVA provides. However, there is a nationwide movement toward a 
more competitive electricity market. Several States have 
already deregulated their wholesale electricity markets, and 
times are changing. TVA must be prepared to change with them.
    To prepare for life in a more competitive market, TVA, the 
region's 158-power distributor to its customers, and industrial 
users, after much negotiation, have reached a consensus on a 
TVA title. The title, this consensus title, would allow the 
distributors to renegotiate the contracts with TVA and to buy 
some power outside of the seven-state region or the so-called 
fence of TVA, which will help meet the growing demand from 
Valley consumers.
    In addition, the title would permit TVA to sell excess 
power at a wholesale level outside the fence, which they cannot 
currently do. Additionally, TVA's 17,000 miles of transmission 
would come under the regulation of FERC for the first time. 
This would help FERC in their effort to form Regional 
Transmission Organizations to facilitate the reliable flow of 
power.
    I feel that H.R. 3406, the Electric Supply and Transmission 
Act, is the most appropriate vehicle for the TVA title, and I 
commend Chairman Barton for recognizing what is in the best 
interest of the Tennessee Valley and including the consensus 
agreement as the TVA title in H.R. 3406. I know there are some 
in the power industry who want to compete with the Valley on a 
one-way basis. These interests seek to create a market that 
favors their utilities and that will put TVA at a competitive 
disadvantage. I ask my colleagues on the subcommittee to 
recognize the efforts of the stakeholders throughout the 
Tennessee Valley and oppose them when the time comes up for 
this vote. It is very important to my constituents that the 
Valley's stakeholders be allowed to control the region's 
destiny in a restructured market.
    Again, I thank the chairman for his work on the electricity 
restructuring issue, which I know is so important to him. And, 
furthermore, I want to thank him for his work on behalf of the 
residents and the numerous States involved in the Tennessee 
Valley. Thank you.
    Mr. Barton. Thank the gentleman from Tennessee and 
recognize the distinguished gentleman from California for an 
opening statement.
    Mr. Waxman. Thank you, Mr. Chairman. The bill we are 
considering today is called Electric Supply and Transmission 
Act. I think a better name might be the One Last Gift for Enron 
Act. This follows the $254 million gift to Enron in the 
Republican stimulus bill and the long wish list of subsidies, 
tax breaks and deregulation provisions Enron received in the 
House energy bill. Enron's fingerprints are all over the 
legislation we are examining today. This bill essentially 
Federalizes the Nation's electricity transmission grid just as 
Enron had advocated for years.
    Five and a half years ago, Enron CEO Ken Lay testified 
before this subcommittee and derided those who argued against 
Enron's vision of the future. He testified that we did not need 
to listen to those who argued that Enron's plan was untried and 
too risky or that we needed to go slow. He ridiculed the 
arguments that service will deteriorate or reliability will be 
put at risk. Mr. Lay testified that competition in the 
electricity markets would cause great things to happen. 
Consumers would benefit handsomely, the environment would be 
protected, and of course Enron would make a lot of money.
    Mr. Lay's vision turned out to be dramatically wrong. 
California and the West have suffered from skyrocketing energy 
prices. A new report from the Consumer Federation of America, 
which I ask unanimous consent to introduce into the record, 
documents double-digit rate increases in Massachusetts, a 40 
percent increase in New York and a 50 percent rate increase in 
Montana over the last year.
    There has even been evidence of market abuses in 
Pennsylvania. And, of course, Enron itself is now in 
bankruptcy. Mr. Lay and other Enron executives essentially 
looted the company, while leaving employees and shareholders 
with nothing. Even the environment seems to be suffering. As a 
result of restructuring, emissions of nitrogen oxides and 
carbon dioxide were significantly higher last year than FERC 
had projected just a few years ago.
    The legislation we are considering should be put on display 
in a museum. It is an artifact of the era when corporate 
America swooned at the mention of Enron's name. I think we need 
to go back to the drawing board. The last thing we ought to do 
now is pass another law that makes it easier for top executives 
to steal and swindle millions of dollars from their workers and 
shareholders. First and foremost, we need to figure out how to 
prevent future energy collapses like Enron. The answer will 
require more regulation and oversight of energy marketers, not 
more deregulation like this legislation proposes.
    We also need to be focused on how we ensure that 
electricity is reliable, clean and affordable. This will 
require doing more to promote conservation and renewable 
sources of energy. Even before the collapse of Enron many 
States were reconsidering restructuring. Of the 25 States that 
have decided to restructure, three electric utilities, nine are 
now reconsidering their decisions. Nevada even repealed its 
deregulation law of April 2001.
    I am glad we are holding today's hearing, but clearly we 
need to hold many more before we consider moving legislation. 
As many people have remarked, September 11 changed our world. 
In its own way, December 2, the date Enron filed for 
bankruptcy, fundamentally changed how we need to think about 
energy policy. This should be a time for deep rest, 
deliberative reevaluations, not a headlong rush to legislation 
to preconceived ideological theories that fly in the face of 
the disastrous reality Enron-style deregulation is inflicting 
on millions of Americans. Thank you very much, Mr. Chairman.
    Mr. Shimkus [presiding]. Thank you, Mr. Waxman. Just to 
inform the panelists, what I plan to do is conduct my opening 
statement, see if other members filter back from the votes. If 
no one gets here in time, then we will kind of recess in place 
until every member gets an opportunity, and then we will go to 
the opening statements. That is per direction of the chairman.
    So I, too, want to thank the panelists here today, although 
I don't totally agree with my colleague from California. I have 
sat through more energy hearings than the years that I have 
been alive, seems like. And I have only been a member 5 years, 
so we have really--those of us who have been on this 
subcommittee for the past five or 6 years, I think we have got 
a pretty good handle on energy.
    But be that as it may, I will start with a prepared 
statement and just say the Federal role in our Nation's 
electricity system is an important one. For years, it has 
worked to ensure that our Nation has reliable and affordable 
power, but the system that generated and delivered that power 
has changed dramatically, and the Federal Government's role has 
to change to meet the challenges of this new system.
    Illinois is a very unique State. We have a deregulated 
market that will allow consumers to choose their energy 
supplier in the coming year. We lead the Nation in electricity 
produced by nuclear power. We are among the leaders in the 
amount of electricity generated from coal. Greenpeace released 
a study last month saying that Illinois is the fourth in the 
Nation in the amount of planned power from solar electric 
systems, and Illinois will soon become a major player in 
electricity generated from wind power. On top of all that, 
there is a project in my district to create a hydroelectric 
dam.
    Illinois has a truly diversified energy portfolio. The 
problem is how do we get all this low-cost power to consumers? 
And that is what I think we are here for to discuss. The answer 
is transmission. This legislation provides incentives and an 
environment to expand and update our Nation's transmission 
grid. It provides for a process for transmission siting that 
won't create a bottleneck at the States' borders, similar to 
what we saw with natural gas pipelines at the California 
border. We have utilities in Illinois that are begging to new 
transmission but are being forced to stop these lines once they 
hit the State borders. This bill will remedy that. And I say, 
constitutionally, in the interstate commerce clause, this is 
interstate commerce.
    The bill also allows for open access to transmission for 
all transmitting utilities. If we are to have a truly national 
grid that is reliable and offers a seamless way to move power 
from one part of the country to another part, then it is 
important to have equal and open access to all transmission. 
The RTO provisions in this legislation mandate participation in 
an RTO but doesn't set a specific number of RTOs. I believe 
this is the correct approach. RTOs are needed to facilitate an 
open transmission system to move power easily from one place to 
another.
    This legislation has a number of other provisions aside 
from what I have mentioned, but I wanted to focus on 
transmission, because it is most important to me. I look 
forward to addressing these and other issues in these hearings, 
and when we mark up this legislation hopefully before we leave 
before the Christmas break.
    And with that, I will yield back my time, and I will now 
recognize the gentleman from Iowa, Dr. Ganske, for 5 minutes--
for 3 minutes.
    Mr. Ganske. Thank you, Mr. New Chairman. I want to thank 
the Deputy Secretary, the FERC commissioners, the chairman of 
the Tennessee Valley Authority for joining us today, as well as 
the witnesses who will join us tomorrow, in particular, Mr. 
David Sokol of Mid-American Energy Company, which helps to 
supply energy in my Iowa district. I appreciate all of you for 
taking time to address the committee.
    We have an obligation to help assure that our power 
generation system is ready to supply a reliable source of 
electricity, both for our own safety and for the productivity 
of our economy. The transmission system in our country is 
crucial in guaranteeing a consistent and uninterrupted flow of 
power to our cities, towns and rural communities. Recent events 
have magnified the concerns that we have about our power 
supply, but even before those events there were many steps 
which needed to be taken to improve our power grid and our 
transmission capabilities. Our electricity power grid is an 
essential part of the American economy and of our basic 
infrastructure.
    I strongly believe we need to promote the use of renewable 
resources. My State of Iowa has been a leader in the 
development of wind energy power. I believe it is a clean, 
practical source of energy which can be utilized to a much 
greater extent than it currently is. Iowa is tenth in the 
country in the potential for utilization of wind resources, but 
we are currently third in the amount of wind energy produced. 
Wind turbines in Iowa already produce enough energy to power 
more than 60,000 residential homes. I know that in more 
temperate areas of the country solar power holds more 
potential.
    The provisions of this legislation which would encourage 
the use of net metering systems around the country are a 
positive step toward making the use of solar and wind generated 
power a more practical alternative to the small producer. Net 
metering can play an important role in facilitating the 
development of wind and solar power by small producers. I 
commend the chairman for his leadership in including this 
section in the legislation, and I plan to work with him in 
offering an amendment during the markup, which I hope will 
serve to clarify a couple of the provisions.
    I thank the chairman, and I yield back my time.
    Mr. Shimkus. The gentleman yields back his time. Chair 
recognizes the other doctor, from the great State of Georgia, 
Dr. Norwood.
    Mr. Norwood. Thank you very much, Mr. Chairman. I would 
like to simply place my opening statement in the record, and 
perhaps you would reserve the amount of time I would have used 
for an opening statement and extend the amount of time I will 
have for questions.
    So if you will do that, I will yield back to you.
    Mr. Shimkus. I would say that is above my pay grade, so you 
will have to negotiate.
    With that, seeing no other members present, we are going to 
ask the panelists and our guests to recess in place until we 
come back.
    [Brief recess.]
    Mr. Barton. The subcommittee will come to order. 
Congressman Hall will stop meeting and greeting. Was 
Congressman Shimkus the last one to give an opening statement, 
do we know? Ganske? So the last one was a Republican? Okay. The 
Chair would recognize Mr. Sawyer for an opening statement.
    Mr. Sawyer. Thank you very much----
    Mr. Barton. The Chair is in error, and Mr. Markey was in 
attendance before Mr. Sawyer. The Chair would recognize Mr. 
Markey for a non-musical opening statement.
    Mr. Markey. The theme is movies today, okay? You know, at 
the very end, Mr. Chairman, of the 1942 Hollywood classic, 
Casablanca, Captain Renault, the French police inspector, 
played by Claude Raines, has just pulled up to the crumpled 
body of the Nazi officer that Humphrey Bogart's character just 
killed. He jumps out of his car and says, ``Major Strasser has 
been shot.'' Bogart looks at him with expressionless eyes, and 
Renault turns to his gendarmes and says, ``Round up the usual 
suspects.'' That is kind of what we are doing here today, Mr. 
Chairman.
    In May, the majority pulled the plug on its markup of 
California's emergency electricity legislation. In July and 
August, the majority short-circuited efforts in the committee 
and on the floor to address the electricity problems taking 
place in the West as part of the comprehensive energy package. 
And so today we are rounding up the usual suspects to 
interrogate them yet again in a process which at this point 
appears increasingly unlikely to result in enactment of any 
public law.
    Meanwhile, in a hearing room right across the hall from 
here, in the Banking Committee, another feature is headlining. 
It involves the dramatic implosion of a company called Enron. 
Last year, the company was No. 7 on the Fortune 500; today, 
Enron is essentially a penny stock company reduced to 
bankruptcy. What happened? Where did all the money go? This 
little drama is a tale of greed and ambition with multiple plot 
twists, elaborate deceptions, villains and victims. It includes 
complex deals with mysterious insider partnerships dubbed JEDI, 
Chewbacca and Raptor. What a hearing, huh?
    These are accounting--there are accounting firms with 
apparent amnesia about their public responsibilities and scores 
of Enron employees who have just seen their retirement savings 
evaporate as they stood helplessly by unable to shift funds 
into other investments.
    So I would ask, is this subcommittee going to hold any 
hearings on the Enron debacle before it proceeds to mark up an 
electricity bill? It seems to me there are many lessons that 
this subcommittee could learn from what went wrong with Enron. 
Are we going to thoroughly investigate what happened to Enron 
and what it means to emerging electricity markets? Or are we 
going to engage in the absurd pretense that the collapse of 
what was once the Nation's largest electricity and natural gas 
marketing company has nothing to do with our electricity 
markets? Does anybody think that if Enron had been the subject 
of greater regulatory oversight, such as the types of rules 
that we require for traders in securities, traders in futures 
or other financial intermediaries, that the types of financial 
shenanigans that occurred and took place would have been 
allowed to occur? I think not.
    In the aftermath of the Enron collapse, I think that we 
need to look very seriously at extending some greater oversight 
over the trading of electricity. Right now the bill we have 
before us does not address this issue. Mr. Chairman, I ask 
unanimous consent to address the committee for 1 additional 
minute?
    Mr. Norwood [presiding]. Any objection? Mr. Markey, the 
chairman objects. We need to get through this so everybody will 
have a turn. We have a lot of witnesses we want to hear from.
    Mr. Markey. I know, I know, a lot of witnesses. I 
appreciate it, I appreciate it.
    Mr. Norwood. Mr. Sawyer, you are recognized for 3 minutes.
    Mr. Markey. Excuse me. Oh, did anyone object?
    Mr. Norwood. I did.
    Mr. Markey. You objected, Mr. Chairman.
    Mr. Norwood. Yes.
    Mr. Markey. Why is that?
    Mr. Norwood. Because we have a lot of witnesses we need to 
hear from, and all of us are going to read the record to finish 
listening to your statement.
    Mr. Markey. No, but Mr. Chairman, let me ask--point of 
personal privilege, Mr. Chairman. I did not schedule this 
hearing for 1 in the afternoon. You can't persecute the 
persecuted, okay? You are basically now holding the minority 
accountable for the scheduling tactics of the majority. Now 
that is not fair to us to wait for weeks to have a hearing like 
this and then to tell us that we can't be extended 1 additional 
minute. That doesn't show any good grace or courtesy on your 
part.
    Mr. Norwood. It doesn't show any good grace to extend over 
the time that we have all agreed to either. Mr. Sawyer, you are 
recognized for 5 minutes.
    Mr. Markey. You are noted for your good grace, Mr. 
Chairman. I mean it is a personal trait that you hold dear, I 
thought, and here it is that you are making an exception only 
because, I would hate to say it, but it seems to be personal, 
and the subjects which I am raising seem to bring personal pain 
to you. And it is not that I mean to have you pointed out as 
the person not having the hearing on Enron, it is only that I 
just wanted to finish what I thought was a relatively humorous 
and----
    Mr. Norwood. Mr. Markey, you now have your other 1 minute. 
Mr. Walden, you are now recognized for 3 minutes.
    Mr. Markey. Mr. Chairman, you have moved from the jocular 
to the jugular here, unnecessarily, okay? I was keeping it in a 
relatively light vain rather than----
    Mr. Norwood. Mr. Walden, you are recognized for 3 minutes.
    Mr. Walden. Thank you, Mr. Chairman. I would like to hear 
from the witnesses, so in essence of time, so we can get on to 
the subject at hand, I will waive the opportunity for an 
opening statement and would appreciate time during questioning. 
Thank you, Mr. Chairman.
    Mr. Norwood. Mr. Sawyer, you are now recognized for 3 
minutes.
    Mr. Sawyer. Thank you, Mr. Chairman. The struggle that we 
are all going through in trying to establish functional, stable 
electricity markets is an important one. We can't just sit back 
and hope that markets will emerge of their own accord. They 
simply won't function without an appropriate regulatory 
framework to support them, and these hearings are an important 
step toward establishing them.
    We are in the middle of an historic transformation of 
vertically integrated utilities to a system of nationwide 
wholesale competition and retail competition in about half the 
States, merchant generators and soon RTOs. This is based on the 
straightforward idea that modernizing regulation to move power 
from low-cost producers to end consumers in a competitive 
market can result in cheaper and more reliable electricity. But 
if we are going to fulfill that promise, it seems to me we need 
to take steps now to update a transmission system that has not 
kept pace with the changes in the way electricity is generated 
and regulated.
    Wholesale competition has dramatically increased the number 
of transactions and the amount of electricity being sent along 
a makeshift grid that was designed decades ago to handle a 
smaller number of point-to-point transactions. At the same 
time, investment in new transmission has declined by an average 
of about $117 million a year, each and every year since 1980, 
and the decline is actually longer than that. It is, in short, 
a system in long, slow atrophy. The result has been 
predictable. Congestion, rising electricity prices, the lurking 
risk of blackouts as transmission gets caught in bottlenecks.
    This is a recognition that in order to create functioning, 
competitive markets, we need to address several issues. First, 
we need to redress the decline in investment in transmission. 
Transmission is no longer the low-cost, country cousin 
enterprise that it used to be. We need to bring rates of return 
in line with higher risk involved in providing transmission--
provided that transmission assets are controlled independently 
to assure open access to generators.
    Incentive and performance-based rates, a concern to some, 
do not have to be a giveaway to the electric industry; rather 
they are a smart investment, properly managed, to create 
viable, independent transmission business and to make up for 
the shortage in capacity in this country. Innovative rates have 
the potential to end up lowering electricity costs by getting 
rid of the price distortions caused by transmission 
bottlenecks. That is not simply theory; we have experience of 
that in the not too distant past.
    Second, we have got to encourage demand management programs 
through the use of new technologies to expand the capacity of 
existing rights-of-way. I also believe there needs to be some 
form of backstop Federal authority in siting. Providing for new 
lines is an important part of relieving identifiable 
bottlenecks, and giving the States time to do that, after which 
the FERC would have the authority to approve projects if the 
States have not been able to do so, I think is an important 
component.
    Fourth, and finally, I believe we need to establish a 
single mandatory national reliability organization to create 
and enforce technical reliability standards that do not 
endanger the stability of the grid. Moreover, I would hope that 
they would be empowered to create procedures to safeguard the 
grid itself against terrorist attacks.
    I look forward to hearing from our witnesses. Thank you for 
your flexibility in time and yield back whatever may remain.
    Mr. Norwood. Thank you very much. And now I would like to 
recognize our distinguished chairman of the full Commerce 
Committee, Mr. Tauzin.
    Chairman Tauzin. Thank you, Mr. Chairman. I want to thank 
Chairman Barton for calling this hearing and for moving on this 
process. This has been a labor of love for the chairman of this 
subcommittee, and I want to encourage you all in this endeavor. 
Mr. Barton has worked for a long and hard time crafting an 
Electric Supply and Transmission Act, which we are going to 
hear comments and suggestions and analysis on today. And I want 
to thank him for that effort.
    This is an attempt, literally, to comprehensively deal with 
the questions of supply and transmission. Regardless of how you 
feel about energy markets and whether they work or don't work 
or whether deregulation crafted properly can work well and 
crafted improperly, as we saw in California, can be an absolute 
failure, we know two things: That if there isn't an adequate 
supply and if that supply cannot be moved properly, that not 
only will the markets fail but any attempts to properly 
deregulate are not going to succeed. And so Mr. Barton has set 
upon a course that hopefully will take this subcommittee 
forward in producing for our committee and for the Congress a 
piece of legislation designed to ensure those two elements are 
as abundantly available to Americans as possible.
    You know, until recently, electricity was sort of taken for 
granted. I saw a poll in California where people were asked 
where electricity came from, and awfully high percentage said, 
``From the wall.'' I also saw a poll that said when people were 
asked about the gasoline spikes in this country, they said, 
``Isn't it remarkable that the gas companies knew just where to 
put those stations right on top of the gas supplies?''
    There is a lot of misunderstanding about electric markets 
and energy markets in this country, and we all assumed that 
when you turned the switch on electricity was going to be 
there. We never had to worry about it. Absolutely reliable. And 
then we saw the shortages in California and the West, and we 
saw what tremendous economic havoc it can cause to a region of 
the country that is so important to our Nation. We just can't 
have that happen again, and we can't have it happen in other 
parts of the country.
    In a few weeks, we begin the year 2002. It will have been 
10 years, a whole decade, since Congress enacted major energy 
legislation, which was the Energy Policy Act of 1992. In that 
time we have seen competitive electric markets struggle to take 
hold. We have also seen more clearly the vital connection 
between our Nation's economy and a clean, affordable, reliable 
electric supply. And we have come to recognize what is 
necessary to update the electric system for future economic 
growth.
    We learned, for example, that the four main structures of 
the Internet system in this country, when looked at in toto, 
consume as much energy as the entire country of Italy 
consumes--about 8 percent of our national total. For that 
economy to grow, we had better have reliable sources of 
electricity and reliable means to deliver them to the parts of 
the country that require them.
    So it is time for Congress to address the issue again. It 
is just that simple. And when we passed comprehensive national 
energy policy legislation earlier this year, we made it very 
clear we would be moving electricity at a later date. The later 
date is here.
    As a Nation, we can't rely upon the FERC alone to do this 
for us. Well, the simple truth is that on occasion FERC may 
think they can solve all these problems, but there is only so 
much they can do. We in Congress must give them guidance, and 
we must give them the tools that they need to make sure that 
American ratepayers are protected and assured of affordable 
electric supplies for the next 10-year period and beyond.
    FERC can help us determine what to do, and that is why I am 
very interested in what our FERC commissioners will say about 
this bill today and why I am very pleased that you are here and 
ready to help us think through the policy that will help you 
and us work through the right answers.
    I want to welcome Chairman Wood, and we have had a private 
meeting before, and I want to thank you for agreeing to serve 
the country in a hot spot. This is a tough one. And for all of 
you on the Commission. We all know these are going to be tough 
decisions as we move from regulated markets and shortage 
markets to more abundant and flexible markets in the 
electricity marketplace of America.
    I want to also welcome Deputy Energy Secretary Frank Blake 
again before our committee. We always appreciate your work with 
us, Frank, and----
    Mr. Markey. Mr. Chairman? Mr. Chairman? I would like to 
make a unanimous consent request, Mr. Chairman, that the 
gentleman from Louisiana be allowed to consume as much time as 
he desires in his opening statement.
    Chairman Tauzin. Actually, if my time is up, I am going to 
wrap in one word, and that is I also want to welcome the TVA 
chairman Mr. McCullough, to the subcommittee and look forward 
to hearing all your testimony. I yield back any time that I may 
have improperly consumed.
    Mr. Norwood. It has been an observation, generally, that 
the chairman of the full committee does get about whatever time 
they wish to consumer. Mr. Gordon, you are recognized for 3 
minutes.
    Mr. Gordon. Thank you, Mr. Chairman. I think we have 
already had one interruption today with a vote. I am going to 
put my comments in the record so that we can move forward with 
these witnesses. I don't want them to caught again.
    Mr. Norwood. Thank you, Mr. Gordon. Mr. Whitfield, you are 
recognized for 3 minutes.
    Mr. Whitfield. Mr. Chairman, I know you will be 
disappointed, but I am going to waive my opening statement.
    Mr. Norwood. Actually, I am disappointed, Ed, but I accept 
that. Mr. Hall, you are recognized for 3 minutes.
    Mr. Hall. Mr. Chairman, I guess I am pleased that we are 
conducting these hearings. I have mixed emotions about it. I 
think the one good thing that can come out of it is to get some 
detailed comments on the language of this legislation from the 
folks that are in front of us here. All of us know a lot has 
happened in the 2 years or so since we marked up 2944 in this 
subcommittee. For some, like California, it has been agonizing. 
I remember earlier in the year how we dreaded to see August 
hit. August was lurking out there, and luckily we had a fairly 
mild August. We are learning in Texas, and it is not easy. And 
at the Federal level, we have begun to zero in on dealing with 
the essential Federal issues.
    For the most part, I think they are reflected in this 
legislation, and while I don't think for a minute this is a 
perfect bill, I think it is a good enough bill to move to the 
full committee. I know the concerns of the coops, of public 
power folks, of State commissions and a lot of others, and 
hopefully we can work out ways to find ways to deal with their 
concerns in this legislation.
    One, I hope that we can get some stability and certainty to 
the electric power industry and customers. I think I have used 
about a minute and a half. Would I get in trouble with the 
chairman if I wanted to offer to my friend from Boston my last 
minute and a half?
    Mr. Norwood. Well, after what you said about him in the 
last hearing on nuclear energy, I think you ought to, and it is 
certainly agreeable with----
    Mr. Hall. Well, all right. I really want to do that.
    Mr. Norwood. Go ahead.
    Mr. Markey. You know, I just want to--I would like to say 
that if you looked up the word ``graciousness'' in the 
dictionary, Ralph Hall's picture would be next to it. You know 
what I mean? This man is just the embodiment of the wonderful 
spirit of collegiality that has always characterized this 
committee. And I just want to say how honored I am to serve 
with you and despite the fact that you come from Texas, there 
is a great deal of admiration. If we don't produce anything up 
in Massachusetts, we produce a lot of admiration for the 
gentleman from Texas, and I----
    Mr. Hall. Can I ask you something?
    Mr. Markey. I will be glad to yield to the gentleman.
    Mr. Hall. Are you about to do me like those two boys did 
the Sierra Club? They had their meeting, and they had Santa 
Clause there and a little boy on each knee, and one of them 
said, told Santa, he said he wanted for Christmas a bird 
feeder, and all those Sierra Club people clapped. They love 
people that love little birds. And the other one said, ``And a 
couple of BB guns.''
    You are not going to do me like that, are you?
    Mr. Markey. Where am I going now? You know, somebody has to 
be Ed McMahon. Anyway, it is just great to have you all here 
today.
    I see vast amounts of billable hours out here, and we can't 
believe what they are saying. They are really talking about 
marking up right before we break for Christmas. And it is like 
a Godsend, there is like hundreds of memos being faxed to 
energy companies all over America putting them on alert that 
this committee may be thinking about marking up----
    Mr. Norwood. Mr. Hall, do you wish to reclaim your time now 
that the time is up?
    Mr. Markey. I think we should have the SEC investigate all 
these people sitting out here collecting for what they are 
doing today. Anyway, thank you, Mr. Chairman.
    Mr. Norwood. The Chair would like to now recognize Mr. 
Largent for 3 minutes.
    Mr. Largent. Thirty minutes?
    Mr. Norwood. Three.
    Mr. Largent. Oh, 3 minutes. Thank you, Mr. Chairman. I do 
want to commend Mr. Barton for holding the hearing today on 
tomorrow's--and tomorrow's legislative hearings on the recently 
introduced bill, H.R. 3406, the Electric Supply and 
Transmission Act of 2001.
    As many in this room know, one of my greatest concerns when 
it comes to restructuring is how do we ensure an open and 
transparent wholesale transmission market? There are 
transmission constraints throughout the system. Probably one of 
the most notable is the Path 15 that runs the length of 
California. The constraints are only magnified by the various 
forms of regulation of the grid. I think the word picture that 
comes to mind when thinking about the grid's current regulatory 
structure is swiss cheese.
    I know that FERC commissioners here before us today share 
similar concerns, as evidenced by their recent rulemakings and 
orders. And with that, Mr. Chairman, I want to yield back my 
time and insert my entire statement for the record; look 
forward to this hearing.
    Mr. Norwood. So ordered. Thank you, sir.
    Mr. Norwood. Ms. McCarthy, you are recognized for 3 
minutes.
    Ms. McCarthy. Mr. Chairman, I am going to put the bulk of 
my remarks in the record, if you wouldn't mind, and I thank you 
and Ranking Member Boucher for holding this hearing. And I am 
very much appreciative of the panel's efforts to educate us on 
the need to protect our national security and take a look at 
diversity and conservation and reliability and certainty in our 
electric energy delivery system. I hope this committee will 
take a look at distributed generation of renewable energy 
sources that can also be a viable way to supplement our grid 
and diversify the Nation's energy supply, because I do think 
diversity is the key to the future as we address electric 
energy needs and also global climate change.
    I would like to yield back the balance of my time, Mr. 
Chairman, and just put the extent of my remarks into the 
record.
    Mr. Norwood. So ordered. Thank you, Ms. McCarthy.
    We will postpone just for a second till the chairman gets 
here. He wants to do the introductions of the panel. I expect 
him here any second.
    Mr. Markey. Mr. Chairman, could I be recognized while we 
are waiting? I have like 1 more minute to go.
    Mr. Barton. Has Mr. Dingell been given an opportunity to 
have an opening statement?
    Mr. Dingell. Mr. Chairman, I thank you. Mr. Chairman, I 
understand that, first of all, my own concerns about the Enron 
situation and the wisdom of proceeding with the markup before 
we've thoroughly examined the debacle that occurred in that 
matter have already been raised by Mr. Markey and Mr. Waxman. I 
think it is regrettable that Mr. Markey was not given an 
additional minute to conclude his opening statement, because I 
think it would have been of value to us in our consideration of 
this matter.
    I would be happy to yield Mr. Markey a minute of my time, 
because I share his concerns about Enron and the future of the 
electricity markets. I have a fine statement that I will be 
happy to submit for the record in order to enable the committee 
to accommodate Mr. Markey and to perhaps get into the question 
of some of the rascality and misfortunes that have been 
inflicted on so many people by the Enron debacle. While we are 
talking about whether or not PUHCA and other Federal regulatory 
statutes should be repealed, modified and so forth, given the 
misfortunes and failures and, quite frankly, the obvious abuses 
and perhaps even criminal misbehavior of the Enron matter.
    So I ask unanimous consent for two things, Mr. Chairman: 
One, that I be permitted to revise and extend my statement and 
include it in the record, and, two, that the balance of my time 
be yielded to Mr. Markey.
    Mr. Barton. Will the gentleman yield?
    Mr. Dingell. I am happy to yield.
    Mr. Barton. We have the tradition on this subcommittee of 
letting the ranking member of the subcommittee and the full 
committee speak, I won't say forever, but I try not to cut our 
senior membership off. So the gentleman from Michigan, as the 
ranking member of the full committee, really has such time as 
he may consume. And if he wishes to yield that to the 
distinguished member from Massachusetts, that is fine with me. 
I don't want us to get into a tizzy here before we even hear 
from our distinguished panel. So I am open.
    Mr. Dingell. Mr. Chairman? Mr. Chairman, I knew that your 
natural grace and dignity and charm and ability and the very 
fine conciliatory character that you have always displayed in 
your capacity would encourage you in that direction, and I want 
to express to you my thanks.
    Mr. Barton. So do you wish to yield to the gentleman from 
Massachusetts?
    Mr. Dingell. At this time, I would ask unanimous consent I 
be permitted----
    Mr. Barton. You don't even have to ask unanimous consent; 
you just yield to him, and we will put him on his good graces 
to be his naturally charming self in an expeditious fashion.
    Mr. Markey. Thank you, Mr. Chairman.
    Mr. Dingell. As always, Mr. Chairman, you are gracious, 
thank you.
    Mr. Markey. You are gracious, Mr. Chairman. I thank you. 
And I think Mr. Hall is kind of the master of the metaphor of 
the parable within which the truth emerges, and I think his 
story about the rabbits and the BB gun kind of have a certain 
truth.
    And I was thinking what would be the analogous metaphor 
which I would use, and it came to me, and it's this: It's the 
story of the mother with her two children, and they were at the 
zoo, and the children went into one of the cages and they saw a 
lion laying with a lamb, and they were remarking on how 
beautiful it was. And the mother was exclaiming that it was the 
biblical fulfillment of the prophecy of the lion and the lamb 
laying together peacefully. And along came the zookeeper, and 
the mother was just saying how beautiful it was to see the lion 
and the lamb lying together. And the zookeeper said, ``Hey, 
lady, don't get excited. We've got to put a new lamb in every 
day.''
    And so this legislation that we debate--and Mr. Dingell and 
I and I think most on our side share this view--in my opinion 
is heading toward the point where we will just be feeding more 
lambs into a system which, unfortunately, is broke and that we 
are not going to be providing the powers to the FERC which they 
are going to need in order to protect the lambs, the upstarts, 
the consumer, the competitors, those that want to have a full 
place within this energy electricity structure, and we hope 
that this hearing will help to illuminate those deficiencies. I 
yield back the balance of my time.
    Mr. Barton. Does Mr. Dingell wish to continue his opening 
statement?
    Mr. Dingell. You're so gracious that I will simply rely on 
my authority to insert this in the record.
    Mr. Barton. Without objection.
    Are there any other members who have not yet had an 
opportunity to present an opening statement? Hearing none, the 
Chair would ask unanimous consent that all members not present 
have the requisite number of days to put their opening 
statement in the record.
    [Additional statements submitted for the record follows:]
Prepared Statement of Hon. Heather Wilson, a Representative in Congress 
                      from the State of New Mexico
    Mr. Chairman, thank you for holding these final hearings on 
electricity and the electric power industry and for bringing together 
these excellent witnesses on electricity issues.
    The issue of electric transmission policy is very important and it 
is an integral part of our energy policy. The transmission grid is an 
integral part of our energy infrastructure and we need a strong, 
reliable, flexible energy grid to move our electricity. The events in 
California this past year are evidence that we need to make positive 
changes to ensure that there is an adequate supply, sufficient 
transmission, improved reliability, reasonable cost of our nations 
electricity.
    I applaud the Chairman of this Committee for setting out the draft 
of this bill months ago and asking for input. There are provisions in 
this bill that I like and some that I have some concerns about, 
particularly issues impacting states rights and the rural electric 
cooperatives. It appears to me that there are a number of provisions in 
this bill that FERC has authority to act on--they do not need 
additional authority. (Examples. RTO's and incentive rates.)
    Electricity markets are regional in character. They are defined by 
the three electrically-separate interconnections. The Western 
Interconnection includes all or parts of 14 western states and western 
Canada and northwest Mexico. Regional markets require regional 
solutions.
    States have and will continue to be major players in this nation's 
electricity policy. I seek cooperative approaches that will encourage 
coordinated state and federal action, not federal preemption of states.
    One of our challenges is to enable states and FERC to collaborate 
on regional electricity issues. FERC has recognized this need in their 
November 9 order. We need to amend HR 3406 to build on FERC's 
initiative.
    The some of the issues that need to be addressed are:

 We need to amend the reliability provisions to provide states, 
        when acting on a regional basis, significant say in the design 
        and enforcement of reliability standards.
 We need to delete Section 402 that gives FERC the power to 
        preempt states on the siting and permitting of transmission 
        facilities. FERC does not have the expertise, resources or 
        local knowledge to make transmission siting and eminent domain 
        decisions. This provision is not needed in the West. No western 
        state has ever denied a permit for an interstate transmission 
        line. The major challenge to permitting new transmission in the 
        West is getting rights-of-way across federal lands.
 We need to rethink the preemptive powers HR 3406 would grant 
        FERC and the Federal Trade Commission in the areas of 
        interconnection standards, net metering, demand response and 
        consumer protection.
 In the case of interconnection standards, FERC may already 
        have sufficient authority.
 In the case of demand response, many programs were put in 
        place during the Western electricity crisis. We are now getting 
        valuable information from those measures and states will be 
        able to incorporate such information into their own measures. 
        Even within the West, there are important differences among the 
        states that need to be recognized. In the Northwest, which is 
        reliant on hydroelectric generation, reducing total energy use 
        is typically more important that cutting peak load. Uniform 
        FERC standards would not recognize such differences.
 In the case of consumer protection, states, particularly those 
        that have moved to retail competition, largely have in place 
        consumer protection provisions.
 We need to ensure that FERC oversight over the rural electric 
        co-operatives and public power is reasonable. Except for a few 
        isolated examples, locally owned utilities typically do not 
        have surplus electricity to sell. These systems do not 
        represent a significant presence in wholesale markets, and they 
        have been and will continue to be net purchasers of generation.
 Section 201 creates FERC-lite for co-op that transmit 
        electricity. The co-op would set the transmission rate and the 
        FERC would review it to ensure it satisfies the 
        ``comparability'' standard. The co-op retain control of rate 
        setting and FERC expands it jurisdiction over co-op 
        transmission rates.
 However, Section 702 would negate any notion of FERC-lite 
        authority and should be removed. It transfers the rate setting 
        function from the co-op to FERC which destroy Section 201.
    I realize that HR 3406 includes provisions for retaining some 
state-specific requirements in these areas. However, I am concerned 
whenever we empower a federal agency to make determinations of whether 
a state program is ``equivalent to'' or ``not inconsistent with'' we 
are opening the door to new intrusions by the federal government into 
state authorities. While the current members of the FERC or FTC may not 
exercise such authorities to second-guess states, there is no assurance 
that future members of those bodies.
    I am looking forward to hearing from the witnesses as we continue 
to work on the state and co-op issues.
    Thanks
                                 ______
                                 
   Prepared Statement of Hon. George Radanovich, a Representative in 
                 Congress from the State of California
    Mr. Chairman, today's hearing is a very important step towards 
securing America's energy future. As this year comes to a close, we are 
now well into the Twenty-First century. It is time for us to discard 
entrenched views and work to secure ample, reliable and affordable 
energy for our future.
    We are now decades from the 1930's and the 1970's. It is time for a 
change from the paradigms of industry currying favors from political 
regulators, or of a cottage industry of subsistence energy. Fair 
markets, consumer choice, and responsible entrepreneurship are the path 
to a vibrant future.
    The California Electricity Crisis of the past year is only 
temporarily dormant. The underlying problems remain unresolved. Already 
we see signs of a return to power plant construction delays, regulatory 
manipulation, and consumer disregard. We are kidding ourselves if we 
believe that a return to monopolies, or to the utopian proposals of the 
1970's and 80's will provide reliable and affordable power for an 
industrious state of 54 million citizens.
    There are many positive steps in H.R. 3406 I would like to endorse. 
First, electricity markets must be designed to work both in times of 
overabundance and of undersupply. Consumers in California have shown 
their unwillingness to pay any price for electricity as demonstrated by 
their conservation efforts. Title I, Section 103 is a necessary action 
to let the demand side, and consumers, be an active part of the market.
    Second, we learned in California, that PURPA has unintended and 
disastrous consequences on the prices consumers pay for electricity now 
and for years to come. PURPA QF contracts represent approximately one-
third of California's outstanding electricity debt. PURPA was written 
for a structure of monopoly electricity providers and in its present 
form is no longer workable.
    Third, PUHCA did nothing to help consumers in California's 
Electricity Crisis. Any benefits of this arcane law are not evident to 
consumers, although compliance with the law does impose additional 
consumer costs. Since any benefits to consumers from this law no longer 
exist, let us repeal this law and thus its costs.
    There are some aspects of this law, which I would like to see 
strengthened. I am concerned that Title I, Section 102 does not mention 
hydroelectricity and geothermal sources along with solar, wind and 
biomass. Small hydroelectric and geothermal sources are important 
renewables that are available in the Sierra Nevada Mountains. The 
Department of Energy has estimated that there are 3,000 MW of 
incremental hydroelectricity, that can be responsibly developed in 
California alone. We must do everything we can to secure the future of 
this vital resource for our nation.
    I am also concerned that the net-metering section carries risks 
similar to those we are trying to correct through the repeal of PURPA 
in that it shifts the costs of ``storing'' energy to the load serving 
entities. These types of transactions should be limited to the capacity 
of a utility to store energy, such as by a pumped hydro project. No 
benefit is gained by requiring utilities to build power plants to sit 
idle waiting for cloudy or windless days.
    Lastly, I believe that the comparison of our transmission system to 
our national road system prior to the development of the Interstate 
Highway System is an appropriate one. The Federal Energy Regulatory 
Commission is clearly struggling with how to put these various local 
systems into a unified national framework. This legislation attempts to 
be of help to that process by addressing issues such as RTOs, incentive 
rates, and eminent domain, but it fails to provide a context for those 
measures.
    It is time to take a chalk to a clean slate. We can be of 
tremendous help to this process by providing a ``bright line'' criteria 
to focus the FERC on interstate transmission, and the States on 
intrastate distribution. A separation criteria of 100 KV is reasonable 
and appropriate. We should also require that the Department of Energy 
provide a layout, by a date certain and with state input, for a 21st 
Century National Interstate Transmission Highway of 100 KV lines and 
above which incorporates all existing transmission lines in this size 
range. Only transmission constructed in accordance with such a national 
plan should be the beneficiary of incentive rates and eminent domain.
    I encourage all of the parties with interests in this legislation 
to abandon entrenched positions and to consider this legislation in the 
light of the national interest and to best help consumers have secure 
and affordable energy for their futures.
                                 ______
                                 
Prepared Statement of Hon. Chip Pickering, a Representative in Congress 
                     from the State of Mississippi
    Mr. Chairman, I would like to take this opportunity to bring to 
your attention as well as that of the Commissioners concerns I have 
regarding the new interim, generation market power test the Commission 
adopted late last month. As I understand it, the Commission abandoned 
the so-called ``Hub-and-Spoke'' generation market power screen, which 
had been in place for many years and relied upon by market 
participants, and adopted a new, definitive generation market power 
standard called the ``Supply Margin Assessment'' test.
    I have some real concerns about FERC's action. First, I find it 
deeply troubling that such an important change in policy would be 
ordered by FERC without any process for public comment.
    Second, the substance of the policy change itself seems ill-advised 
and wrong. I don't pretend to understand all the details or the 
differences between the ``Hub-and-Spoke'' and ``Supply Margin 
Assessment'' methods. And as you know, this Subcommittee has spent a 
lot of time the past few years trying to understand, address, and 
respond to legitimate market power concerns. We all want to avoid 
another California-style mess. We all share the goal of having 
competitive wholesale power markets. Addressing legitimate market power 
concerns is an important part of this process. But I must tell you all 
that there appear to be very serious problems with the new interim, 
generation market power test you have adopted.
    For example, we have heard that the new test will discourage new 
generation investment and potentially expose other regions of the 
country to ``California-like'' dependence on short-term markets and 
power purchases. Additionally, we have heard that the new, interim test 
may effectively deny most, if not all, of the nation's investor-owned 
utilities that still own generation plants market-based rates in their 
home states. This not only appears unfair, but also may create a 
perverse incentive against longer term investments as utilities and 
major merchant plant developers try to avoid being or becoming a 
pivotal supplier and flunking the new test in certain areas. This, 
combined with the blanket refund obligations you all have proposed, may 
actually end up increasing consumer rates, create tremendous regulatory 
and financial uncertainty, and lead to an unhealthy reliance on shorter 
term and riskier transactions. I thought we had been down this road 
before and were hoping to take a better-planned route to competitive 
wholesale markets.
    We all want to avoid another California debacle. But in view of all 
the legitimate problems that have been raised about this interim, 
market power test, and since you have already announced that you will 
be starting a notice and comment rulemaking proceeding to address and 
adopt a longer-term generation market power method--which I encourage--
I would ask that the Commission not implement or enforce in any way 
this new interim method until all of its potential effects are better 
understood. This can only be done after the Commission receives more 
input from all interested parties--including state Commissioners--in a 
notice and comment rulemaking proceeding. In my view, reviewing the 
rehearing petitions, while important, does not substitute for a full-
blown rulemaking proceeding.
    While I understand the Commission delayed full implementation of 
the new test on December 20, 2001, I am still concerned about the 
thought process leading up to the original order. Why did the 
Commission risk disrupting what appear to be efficiently operating 
wholesale electricity markets in most parts of the country to implement 
a potentially costly and problematic interim test--especially as we 
head into the winter heating season? It doesn't appear that the 
Commission even considered that in many parts of the country, 
electricity prices have been decreasing--in some areas significantly--
as new merchant plants come on line. Simply put, I don't see a crisis 
warranting such a dramatic intervention in the market that would 
justify such a major departure from long-standing FERC policy.
    We all share Chairman Wood's and Commissioner Brownell's view that 
the ``long-term success of the market model to address customers' needs 
depends upon sufficient infrastructure and balanced market rules.'' 
However, the new, interim generation market power test appears to be 
inconsistent with these important goals. If you all want utilities to 
join Regional Transmission Organizations--a goal I share--this approach 
seems like an awfully indirect, punitive, and potentially dangerous way 
to get there. I would ask you all to take a step back and fully 
consider the impact of the new test and hear from all concerned before 
it has unintended and bad consequences for consumers and our nation's 
electricity markets. I would hope you would consider these concerns in 
a notice and comment rulemaking proceeding and not just review the 
pending rehearing requests.

    Mr. Barton. The Chair now wishes to welcome its 
distinguished first panel. We have the distinguished Deputy 
Secretary of Energy, Mr. Blake, from the Department of Energy; 
we have the four FERC commissioners, including their 
distinguished Chairman, Mr. Wood, and we have the chairman of 
the Tennessee Valley Authority, Mr. McCullough.
    Ladies and gentlemen, your statements are in the record in 
their entirety. We are going to start with Deputy Secretary 
Blake. Then we will go to Chairman Wood, and I would assume 
each of the other commissioners have a statement you wish to 
make; is that correct? Okay. And then we will go to Mr. 
McCullough.
    Welcome, Mr. Blake.

   STATEMENTS OF HON. FRANCIS BLAKE, DEPUTY SECRETARY, U.S. 
  DEPARTMENT OF ENERGY; HON. PAT WOOD III, CHAIRMAN, FEDERAL 
    ENERGY REGULATORY COMMISSION; HON. LINDA K. BREATHITT, 
 COMMISSIONER, FEDERAL ENERGY REGULATORY COMMISSION; HON. NORA 
    MEAD BROWNELL, COMMISSIONER, FEDERAL ENERGY REGULATORY 
   COMMISSION; HON. WILLIAM L. MASSEY, COMMISSIONER, FEDERAL 
  ENERGY REGULATORY COMMISSION; AND GLENN L. MCCULLOUGH, JR., 
              CHAIRMAN, TENNESSEE VALLEY AUTHORITY

    Mr. Blake. Thank you, Mr. Chairman and members of the 
committee, and thank you for the opportunity to come before you 
today. I will just briefly summarize my testimony.
    The administration strongly believes that we need to 
continue the work of establishing open, transparent and 
competitive electricity wholesale markets. This will benefit 
consumers, through increased supply and lower prices, and it 
will benefit the reliability and security of our transmission 
infrastructure, an infrastructure that is essential to our 
economy.
    The President's national energy policy calls for 
comprehensive electricity legislation. It respects the role of 
the States and focuses on the regulation of wholesale power 
markets and transmission in interstation commerce. We welcome 
this committee's attention to the issues and applaud the 
chairman's leadership on this matter.
    As outlined in my testimony, we agree with most of the 
goals of the proposed legislation, and we look forward to 
working with the committee on those areas in the specifics 
where we might have some disagreement.
    let me close by emphasizing what we view as the importance 
of following through on our nation commitment to open and 
transparent markets. We need to continue on a clear path 
forward to assure that affordable capital is available for the 
infrastructure needs of our country. Thank you very much.
    [The prepared statement of Hon. Francis Blake follows:]
  Prepared Statement of Hon. Francis Blake, Deputy Secretary, United 
                      States Department of Energy
    Mr. Chairman and Members of the Subcommittee, I welcome the 
opportunity to testify before you today on Chairman Barton's bill, HR 
3406, the Electric Supply and Transmission Act.
    The Administration believes that electricity legislation--done 
right--will make wholesale power markets more competitive, strengthen 
the transmission grid, increase electricity supply, lower prices, 
protect consumers, and improve reliability. The President's National 
Energy Policy calls for comprehensive electricity legislation that 
respects the role of the States and focuses on the regulation of 
wholesale power markets and transmission in interstate commerce.
    When the Federal Power Act was written in 1935 there was virtually 
no interstate commerce in electricity, there was no interstate 
transmission grid, electricity markets were local, power plants were 
built near consumers, and electricity generation was perceived to be a 
natural monopoly.
    The evolution of the electricity industry today presents a 
different picture. The transmission grid is both interstate and 
international, electricity markets encompass entire regions, almost all 
wholesale electricity sales are in interstate commerce, and the natural 
monopoly in generation has long since been disproved. The electricity 
industry has been swept by dramatic changes for years, investment in 
new transmission and generation has lagged as a result, and legislation 
can significantly reduce this uncertainty and strengthen the U.S. 
electricity industry. The time has come to modernize federal 
electricity laws to recognize these changes.
    In order to address these changes in the electricity market, the 
President's National Energy Policy recommends several proposals to 
encourage modernization of electricity law and foster investment in 
both generation and transmission. First, the Department of Energy has 
been tasked with conducting an analysis of the nation's transmission 
grids in order to determine where we need more transmission and better 
interconnectivity and instructs DOE to consider the benefits of a 
national grid. A Department of Energy report on these issues is shortly 
forthcoming. Second, the Policy encourages FERC to develop a rate 
structure that would encourage the construction of additional 
transmission. Finally, the Policy instructs DOE to develop legislation 
that would provide the federal government with transmission siting 
authority to address situations that might arise where failure to act 
by a state or local government causes major constraint in an area's 
transmission needs. The Department of Energy has been working with both 
Congress and States to develop siting authority language that respects 
the role of the States as well as regional needs.
    The recent electricity crisis in California and the West was a 
dramatic demonstration of the problems that exist under the status 
quo--problems that Congress can and should address. The time has come 
for Congress to reduce the tremendous regulatory uncertainty facing the 
electricity industry, and modernize federal electricity laws in order 
to make wholesale power markets more competitive, strengthen the 
transmission grid, increase electricity supply, lower prices, protect 
consumers, and improve reliability. We believe that Chairman Barton's 
proposed legislation goes a long way toward accomplishing these goals, 
and look forward to working with the Committee on this important bill.
    As to the specifics of H.R. 3406:
Title I
 The Administration agrees with the policy goals of sections 
        101, 102 and 103.
 The Administration supports the repeal of PUHCA, as has every 
        Administration since 1984.
 The Administration supports prospective repeal of the 
        mandatory purchase obligation under PURPA and believes the 
        legislative language should be amended to eliminate the 
        ownership limits on PURPA qualifying facilities.
 The Administration supports section 142 because the 
        Administration believes that NRC antitrust review is redundant 
        and unnecessary and should be prospectively repealed.
Title II
 The Administration supports the policy goal of section 201 and 
        looks forward to working with the Committee to agree on final 
        specific language.
 With regard to section 202, the Administration believes RTOs 
        have great potential to improve competition, secure reliability 
        and ensure sensible regional coordination. To the degree RTOs 
        serve those purposes, we support them.
Title III
 With regard to section 301, the Administration believes this 
        section is an improvement over the reliability provisions of 
        legislation approved by the Subcommittee two years ago and 
        approved by the Senate last year.
Title IV
 The Administration agrees that FERC transmission-pricing 
        policies should encourage increased investment in new 
        transmission. The Administration therefore supports the 
        legislative proposal in section 401 to direct FERC to develop a 
        performance-based regulatory framework for transmission 
        pricing.
 Section 402 grants FERC limited authority to issue permits to 
        construct or modify transmission facilities under certain 
        circumstances. The Administration supports this proposal.
Title V
 The Administration generally supports the language in Title V 
        and looks forward to working with the Committee to agree on 
        final specific language.
Title VI
 The Administration generally agrees with the consumer 
        protection provisions in Title VI and looks forward to working 
        with the Committee to agree on final specific language.
Title VII
 The Administration opposes section 702, which expands FERC's 
        refund authority.
    The President has asked for comprehensive electricity legislation 
which will reduce regulatory uncertainty, make wholesale power markets 
more competitive, strengthen America's transmission grid, increase 
electricity supply, lower prices, and improve reliability. We believe 
that this legislation is a good start on these principles and look 
forward to working with Congress to enact them.
    At this time I would be happy to answer any questions that the 
Committee may have for me.

    Mr. Barton. I think that's the shortest administration 
statement before my subcommittee in the 3 years I have chaired 
it. So I appreciate the support.
    We will now go to the Chairman of the FERC, Mr. Pat Wood of 
Texas.

                 STATEMENT OF HON. PAT WOOD III

    Mr. Wood. Thank you, Chairman Barton and members. When I 
joined the Federal Energy Regulatory Commission earlier this 
summer, I did so with a sense of urgency. In the aftermath of 
the tortuous experience in the western markets and the impacts 
that it had on customer faith in the concept of competition 
serving customers well, followed shortly after my ascension to 
the chairmanship with the bombing of the World Trade Center and 
the Pentagon and the implications upon what we redefined energy 
security to mean and now in the aftermath of Enron and the, I 
think, unfair association of its unique issues with other 
players in the energy market, it is very clear to me from 
talking to investors, from talking to customers and everybody 
in between that we need to get this industry clarified, and we 
need to make sure that the ground rules for investment and for 
customers and for new participants are nailed down. So I think 
the sense of urgency that I certainly heard from a number of 
the committee members this morning is one that I personally 
share at the Commission.
    It is not a theory that we are talking about; it is real 
dollars. With Congress and FERC, back in the mid-1980's, the 
deregulation of the other great network energy industry, 
natural gas, began. It took about 7 years compared to the 9 
years which we are in now, in electricity. But since that 
effort was largely wrapped-up in 1992, tens of billions, with a 
``b,'' of dollars have stayed in customer pockets because of 
the successful one-two punch of introducing competition and 
then deregulating, getting government out of the way, a 
significant sector of the natural gas industry. I think that is 
not theory; that is a very real model that has got a lot of 
application to what the committee has before it in the 
chairman's package today.
    I think that package does a lot of things. While FERC has 
moved forward in the areas where we do have authority today, we 
certainly think there are a number of areas where our authority 
is either not clear or is nonexistent that are very important 
to completing the energy infrastructure and competition-
certainty picture that investors and customers need to have 
faith that their energy markets are working well on their 
behalf.
    I think I will list just a few of those. Certainly, the 
steps that we are taking, I will be glad to discuss them along 
the lines that I believe Chairman Barton laid out in his 
statement. But the issues where we have no ability, such as on 
the issues of PUHCA, PURPA, demand-side management--the 
clarification about the issues there--and the great future of 
the electric industry for small-scale distributed generation. 
There is a provision there that I think is very important for 
setting some clear investment and cost recovery standards for 
DG. The importance of open access is not just a voluntary 
thing. As the court affirmed yesterday, we have the right to 
``lay out'' on a voluntary basis. With that, Chairman Barton's 
bill actually says it is something that everybody should do; 
that also includes Federal power agencies, which up to now have 
not been as directly involved in the efforts to create a 
seamless national power grid from coast to coast.
    Enforcement of liability standards is important. This bill 
addresses that as well, which we cannot do through the current 
statute. The backstop of transmission expansions, while I share 
the opinions of many that this may be a solution looking for a 
problem, it would be nice if this happens in 10-year cycles to 
ensure that good transmission concepts do not get forgotten or 
overlooked or nixed by a State that may not want to have the 
region improved.
    And, finally, certainly, the customer protections, which do 
not involve my agency, but the market oversight tools that are 
strengthened and expanded at the end of the chairman's mark are 
very important provisions that I think will enhance the 
Commission's ability to oversee these markets. I think we are 
doing quite a bit on that effort. I would like to report on 
that later, but I think the sense of urgency also applies to 
today's schedule, so I will conclude now, Mr. Chairman, and 
look forward to any questions from the members.
    [The prepared statement of Hon. Pat Wood III follows:]
  Prepared Statement of Hon. Pat Wood, III, Chairman, Federal Energy 
                         Regulatory Commission
                            i. introduction
    Mr. Chairman and Members of the Subcommittee: Good afternoon. Thank 
you for the opportunity to speak today on the Chairman's proposed 
legislation, H.R. 3406, to restructure the electric utility industry to 
full, effective wholesale competition. This industry has changed 
substantially in the years since Congress enacted the Energy Policy Act 
of 1992, moving closer to the Congressional goal of a competitive 
wholesale electricity market. However, the transition is not complete. 
Infrastructure investment suffers from the uncertainty of this long 
transition. Reliability is being tested and customers are being 
deprived of the financial savings and other benefits of a competitive 
marketplace. It is time to finish the job.
    Today, I will describe briefly the significant actions taken by the 
Commission in recent months to do just that, and the efforts planned by 
the Commission in the future. I will identify those areas in which 
legislation could facilitate the Commission's efforts. Finally, I will 
discuss other significant aspects of the Chairman's proposed 
legislation and suggest certain modifications to the legislation.
    My key point today is that successful completion of the industry's 
transition requires a balancing of short-term and long-term 
considerations. In the short term, we must take steps to ensure that 
the transmission grid is operated more efficiently and fairly, and is 
expanded when appropriate. We must eliminate unnecessary barriers to 
entry of new generation, big or small. We must facilitate the 
development of more market-based demand reduction programs. And we must 
take steps to ensure that the type of market problems experienced in 
California do not recur there or elsewhere by establishing clear, fair, 
balanced market rules. Taking these steps in the short term will give 
investors the certainty they need to make long-term commitments to new 
electrical infrastructure. Over the long term, this commitment to sound 
infrastructure and sound market rules ultimately will allow us to 
achieve the kind of competitive wholesale markets envisioned by the 
Energy Policy Act--with choices dictated by the market, not by 
government.
    Some argue that the short-term steps envisioned by the Commission 
will chill infrastructure investments, not encourage them. I disagree. 
People will not invest in generation where they believe transmission 
owners will operate the grid unfairly, delay interconnections of new 
generation or fail to expand the grid as needed. Similarly, markets 
characterized by a pattern of extreme price turmoil and the risk of 
further governmental restrictions will not provide the certainty needed 
by investors. The short-term steps described below will encourage the 
future stability of the markets, reduce or eliminate the risk of 
crisis-driven governmental interventions and, thus, give investors the 
confidence to commit billions of dollars to building the infrastructure 
our nation needs.
             ii. regional transmission organizations (rtos)
    Electric power markets are regional in nature. For that reason, the 
Commission has been promoting the formation and development of a small 
number of RTOs. These institutions, once formed, will assure reliable 
minute-by-minute grid operations, optimize fair use of the ``electric 
highway'' by all users, plan for the future transmission needs of the 
region and help long-term supply stay ahead of long-term demand.
    Two years ago, the Commission decided to move forward with RTO 
formation on a voluntary basis. Although that has been a more tortuous 
path than originally intended, it is drawing to a close with utilities 
in all regions of the country coalescing around organizations of 
appropriate scope, governance and configuration. But if any party 
challenges this progress in courts, then Congress should make clear its 
intent that these organizations are its preference. This will save the 
industry years in the courts, ensure customers get the billions of 
dollars of savings that a competitive power market can deliver during 
that time, and most importantly, rebuild to secure and reliable levels 
a bedrock industry that has suffered inadequate investment in the past 
decade.
    Recently, the Commission clarified its policies and plans on RTOs. 
In an order issued last month, the Commission indicated that it intends 
to complete the RTO effort on two parallel tracks. The first track will 
be to resolve issues on scope and governance in pending cases; the 
second track will be a rulemaking to standardize the market design for 
public utilities, to be implemented by RTOs. The Commission has also 
begun forming state-federal regional panels as a structured forum for 
constructive dialogue with state commissions on RTO development. We 
hope to expand these panels in the future to discuss other joint 
concerns. The Commission is updating cost-benefit studies on RTOs (with 
input on the analysis from a diverse panel of state commissioners) and 
will establish in future orders the timelines for continuing RTO 
progress in each region. We expect to address the RTO structure in the 
large Midwestern region of the country at our December meeting.
    In establishing the characteristics and functions of RTOs and the 
procedures for obtaining Commission approval of an RTO, the Commission 
relies on sections 205 and 206 of the Federal Power Act. These sections 
are the Commission's fundamental authority for ensuring that the rates, 
terms and conditions of transmission in interstate commerce by public 
utilities are just, reasonable and not unduly discriminatory or 
preferential. In addition, the Commission has relied on its authority 
under section 203 of the Federal Power Act to review proposed transfers 
of operational control over jurisdictional transmission facilities. 
While some may question the Commission's as-yet-unexercised authority 
to require the formation of RTOs, there is no legitimate debate about 
the Commission's authority to oversee voluntarily-formed RTOs.
    I strongly support the formation of RTOs. RTOs will provide 
significant benefits to electric utility customers across our Nation. I 
believe the best legislative approach at this time would be for 
Congress to adopt a provision permitting the Commission to require RTOs 
where it finds such RTOs to be in the public interest. This simple step 
would avoid problems that could arise if Congress codifies extensive 
and cumbersome procedures for formation of RTOs and detailed standards 
for those RTOs; it also would allow the Commission to adapt the RTO 
procedures and standards appropriately over time, as circumstances 
change.
    Section 202 of the Chairman's proposed legislation would codify 
more prescriptive procedures. Section 202 would require all 
``transmitting utilities'' (a term that includes both investor-owned 
utilities and public power/electric power cooperative utilities) to 
participate in an RTO. A utility not in a Commission-approved RTO upon 
enactment of the bill must submit an application to form or join an 
RTO. If the Commission finds the application does not meet the 
standards specified in the bill, the Commission, in consultation with 
affected State authorities, must propose modifications. The Commission 
cannot mandate formation of, or participation in, an RTO except under 
these provisions. If an applicant asks, the Commission must hold an 
evidentiary hearing on the proposed modifications. Subsequently, the 
utility has a right to seek appellate review, during which time the 
Commission's order is stayed. If the court finds the Commission's 
decision is supported by a preponderance of the evidence, the court 
must uphold the Commission's decision. Otherwise, the Commission must 
order the utility to participate in its proposed RTO without 
modification.
    If Congress decides to proceed with the more elaborate process laid 
out in Section 202, I have specific concerns about aspects of the 
provision. First, I do not support giving a single RTO applicant the 
unilateral right to require an ``evidentiary'' (trial-type) hearing 
instead of ``paper'' hearings. While evidentiary hearings may be 
appropriate in certain cases, most cases can be fairly resolved much 
more quickly based on paper submissions and non-trial type procedures. 
Further, because the provision requires a ``stay'' of a Commission RTO 
order pending court review, and a Commission order likely would address 
one application filed on behalf of all the participants in the region, 
this provision could allow a single applicant to stall the creation of 
an RTO and an effective wholesale market for many years, raising costs 
for other applicants and all regional electricity consumers. Formation 
of workable wholesale markets will be more likely and swift without 
these provisions.
    Second, I do not support the requirement for a ``preponderance'' of 
the evidence instead of ``substantial'' evidence supporting the 
Commission's decisions. The ``substantial evidence'' test has been the 
basis for court review under the Federal Power Act since 1935, and I 
see no reason why a different standard is now needed for this one 
category of cases.
    Third, I see no reason for the provision resembling ``baseball-
type'' arbitration, under which the Commission either must prevail in 
court or accept without modification the utility's proposal. Judicial 
review of Commission decisions sometimes yields a remand to the 
Commission for a fuller explanation or more fact-finding, and I see no 
reason to preclude that option here. In general, having RTO formation 
dependent upon only transmission-owning applicants, rather than all 
wholesale market players, leads to a less balanced and robust 
marketplace. A successful wholesale market model must have strong 
stakeholder participation and oversight at its core.
    Section 202 also specifies the standards for RTOs. These standards 
are drawn partly from the Commission's Order No. 2000. While it might 
be appropriate to codify some general standards (such as the basic 
independence requirement), other standards and the details of 
implemention are not appropriate to legislate. As market circumstances 
and structures change, and as the Commission gains experience with 
market behavior, the Commission needs the flexibility to adapt its 
rules over time to ensure that markets remain robust and customers' 
interests are safeguarded; a rigid, legislative codification of 
standards could preclude this flexibility.
    If Congress does codify such standards, certain elements of section 
202's standards raise other concerns. For example, the bill requires a 
proposed RTO to have ``sufficient generation within the RTO's 
boundaries to serve the load within such boundaries.'' While I agree 
that this is desirable, exceptions may be appropriate in certain 
circumstances, and section 202 should allow exceptions deemed 
appropriate by the Commission.
    The bill allows each public utility in an RTO to file ``original or 
amended rates concerning transmission service on such utility's 
facilities.'' This is contrary to the Commission's requirement in Order 
No. 2000 that the RTO have the exclusive right to make rate filings 
related to the rates, terms and conditions of transmission services it 
provides to transmission customers in the region. While the Commission 
found that transmission owners have the right to file to recover from 
the RTO their own revenue requirements, it also found that it would be 
contrary to the basic RTO independence requirement if transmission 
owners could control the RTO's rate filings.
    I note that section 3 of the bill would define a ``market 
participant'' as ``any entity that generates, sells, or aggregates 
electric power (other than State-ordered transition or default service) 
that is transmitted on the transmission system operated by a regional 
transmission organization.'' As above, I do not believe Congress should 
legislate a definition of ``market participant,'' since such a 
definition may need to be changed over time as we gain experience with 
market behavior and new types of market institutions and activities 
(for instance, it excludes energy service companies that could 
aggregate demand and ``negawatts'' and offer price-responsive demand 
opportunities in wholesale and retail electric markets). Further, with 
respect to the specific definition in section 3, I disagree with the 
provision on State-ordered transition or default service. This 
provision appears to assume that, unlike other market participants, 
utilities providing such services are economically indifferent to the 
grid's operation because their profits or growth potential will not 
depend on the cost of their power supplies. Depending on the terms 
under which they provide this service, however, utilities may have the 
same economic incentive as other market participants to benefit from 
grid operations that provide them preferential access to low cost 
supplies.
    If Congress does legislate a definition, a better approach to 
defining ``market participant'' is the definition adopted by the 
Commission in Order No. 2000, which includes:
          (i) Any entity that, either directly or through an affiliate, 
        sells or brokers electric energy, or provides ancillary 
        services to the Regional Transmission Organization, unless the 
        Commission finds that the entity does not have economic or 
        commercial interests that would be significantly affected by 
        the Regional Transmission Organization's actions or decisions; 
        and
          (ii) Any other entity that the Commission finds has economic 
        or commercial interests that would be significantly affected by 
        the Regional Transmission Organization's actions or decisions.
18 CFR 35.34 (b)(2) (2001). This approach is more flexible than the 
bill's assumption that providers of State-ordered transition or default 
service always lack economic or commercial interests that would be 
significantly affected by the RTO's actions or decisions.
    Finally, three other provisions raise concerns. First, the 
legislation would require the Commission to accept a cost/benefit 
analysis submitted by an applicant to support its proposed scope and 
configuration, unless the Commission finds the scope and configuration 
does not meet the statutory requirements by a preponderance of the 
evidence. Cost-benefit analyses are easily susceptible to manipulation 
of assumptions and data to achieve a desired result, so any analysis 
should be tested and verified rather than automatically accepted. 
Second, the standard for the Commission's findings should be 
``substantial evidence,'' not a preponderance. Third, the legislation 
would preclude the Commission from requiring any change to the 
governance or scope of an RTO finally approved without condition before 
the law's enactment. This provision would prevent the Commission from 
responding to changed circumstances warranting modifications in the 
RTO's governance or scope.
                         iii. interconnections
    The current lack of standardized interconnection agreements and 
procedures means that every new generator can be forced to expend time 
and money negotiating the terms and conditions of an interconnection 
arrangement, before it can have any certainty about its ability to 
deliver power to the grid. This uncertainty is a significant barrier to 
entry for new generation.
    To remedy this problem, on October 25, 2001, the Commission issued 
an Advance Notice of Proposed Rulemaking (ANOPR) requesting comments on 
a standardized generator interconnection agreement and procedures. The 
ANOPR strongly encouraged interested parties to pursue consensus on the 
issues and presented a model that was used successfully in Texas as a 
strawman to facilitate the process. Parties must file this Friday a 
document describing the consensus views and any remaining 
disagreements; any additional comments are due by December 21, 2001. I 
understand that industry is reaching consensus on many issues in the 
ANOPR process but that they may request a brief extension of time to 
complete their negotiations. I assure you that I will be receptive to a 
brief extension if it is evident that progress is being acheived toward 
a consensual resolution of these issues.
    The Commission expects to use the outcome of the ANOPR as the 
starting point for a rulemaking to standardize interconnection 
protocols. This rulemaking will clarify and simplify the procedures for 
interconnecting new generation, thus promoting competition and 
benefitting customers.
    The Commission has held that interconnection is a component of 
transmission service. Thus, the Commission's authority to standardize 
interconnection protocols derives from sections 205 and 206 of the 
Federal Power Act, under which the Commission oversees the rates, terms 
and conditions of jurisdictional transmission service.
    Section 101 of the Chairman's proposed legislation establishes 
requirements for interconnections with distribution or transmission 
facilities. Section 101 addresses the generator's right to interconnect 
and its duty to pay interconnection costs, the availability of backup 
power and the rates, terms and conditions for such power. The 
Commission is required to promulgate the technical standards for 
interconnections. The Commission is also required to establish the 
process and procedures for interconnection with transmission 
facilities. A transmitting utility or regional transmission 
organization is exempted from the Commission-established process and 
procedures upon showing that ``substantially comparable interconnection 
procedures and agreements have previously been filed with and approved 
by the Commission for interconnection with that entity.'' But this 
exemption provision would nullify the benefits of standardization by 
forcing the Commission and utilities to litigate over which 
``substantially comparable'' non-standard provisions are acceptable and 
exempt from the standard, and keep non-standard agreements in place for 
years.
    As stated above, standardization of rules and procedures for 
interconnecting all new generation and expansions of existing 
generation is a good policy, both for traditional power plants and for 
small-scale distributed generation. This is a high priority goal for 
the Commission. Standardization will help minimize the costs and 
barriers to entry for new and expanded generation, which is critical to 
a robust competitive marketplace and the realization of lower 
electricity costs for end users.
    As written, Section 101 may be overly prescriptive and impede the 
Commission's ability to adapt its approach as the industry changes over 
time. A more general approach may be preferable. If the current 
approach is retained, I suggest another change in Section 101, 
pertaining to the right to backup power for generators interconnecting 
with distribution facilities unless the local distribution utility 
allows open access to its facilities. In this context, open access is 
defined as access ``that is not unduly discriminatory or 
preferential.'' However, the Commission found in establishing wholesale 
open access to public utilities' transmission facilities that the lack 
of a published tariff of rates, terms and conditions was a significant 
obstacle to service. The Commission required public utilities to 
provide open access transmission service by tariff. Accordingly, I 
believe a local distribution utility must offer open access service by 
tariff before it can be relieved of its duty to provide backup power.
                  iv. test for generation market power
    Since beginning to grant market-based rates (rate deregulation) to 
public utilities in the 1980s, the Commission primarily focused on the 
applicant and employed a ``hub-and-spoke'' analysis to determine 
whether an individual entity and its affiliates have generation market 
power. In a hub-and-spoke analysis the applicant computes its market 
share of generation in a particular market. While the Commission did 
not use a ``bright line'' test, it looked to a benchmark for generation 
market power of whether a seller had a market share of 20 percent or 
less in each market.
    In public deliberations shortly after I joined the Commission this 
summer, which were informed in part by our experiences in California, 
my colleagues and I questioned the usefulness of the hub-and-spoke test 
as a tool to identify the potential for the exercise of harmful market 
power. After reviewing the issue over the summer, the Commission 
instructed our staff at an Open Meeting on September 26th to refine the 
hub-and-spoke test on an interim basis for future applications and for 
current certificate holders' three-year updates, while contemplating a 
rulemaking to address the issue on a more permanent basis.
    The revised test, the Supply Margin Assessment (SMA), improves upon 
the hub-and-spoke in two critical ways. First, unlike the hub-and-
spoke, the SMA excludes from the analysis of the relevant market those 
sellers who are physically precluded from participating in that market 
by transmission constraints. Second, instead of deriving an overall 
market share, the SMA determines whether any part of a seller's 
capacity is ``pivotal,'' i.e., must be used to meet the market's peak 
demand. For example, if peak demand in a market is 100 megawatts, total 
capacity in the market (including the applicant's) is 120 megawatts and 
the applicant owns 60 of the 120 megawatts, the seller's capacity is 
pivotal because at least 40 megawatts of the seller's capacity is 
needed to meet peak demand. By contrast, a seller with only 15 
megawatts would not be pivotal because peak demand in the market could 
be met fully by other suppliers.
    A company that fails the SMA screen is subject to mitigation to 
ensure that the company does not exercise market power by withholding 
its capacity from the market. Under this mitigation, the company must 
offer for sale, a day in advance, any short-term capacity which is not 
already committed for sale or use by the company. The price for any 
such sales is based on a ``split-the-savings'' approach which divides 
the economic benefits of the transaction equally between the seller and 
buyer. This test is administratively preferable to the more intensive 
cost-of-service based calculation traditionally used, for example, to 
set retail rates in regulated states. The company must also post offers 
to sell long-term energy products (in addition to the daily products 
noted above).
    This mitigation is carefully tailored to apply only to the extent 
necessary. For example, mitigation applies only in the specific market 
where the utility has market power, and the utility (and its 
affiliates) are still allowed to sell at market-based rates in any 
areas where they do not possess market power. The mitigation applies 
only to capacity that is not committed a day in advance (``spot'' 
sales), and does not affect a utility's authorization to sell its 
capacity under long-term contracts. Finally, the SMA does not apply to 
sales in an RTO or an Independent System Operator (ISO) with 
Commission-approved market monitoring and mitigation.
    The Commission soon will initiate a generic proceeding to consider 
long-term changes to its analysis for generation market power. In the 
meantime, the SMA and its carefully-crafted mitigation are a 
substantial improvement on the prior approach, while continuing to 
allow sellers to compete freely in markets where they lack generation 
market power. I would note that the interim SMA market power screen is 
subject to rehearing, and the Commission will consider carefully any 
requests for rehearing.
    Apart from these efforts, the Commission recently proposed a new 
condition on its authorization of market-based rates for electricity 
producers. Under this proposal, a seller would be subject to refunds or 
other appropriate remedies if it engages in anti-competitive behavior 
or exercises market power. This condition would be triggered only when 
the seller engages in inappropriate conduct, not when market problems 
are caused by poor market rules or other generic dysfunctions. The 
Commission adopted a similar condition to help address the market 
problems in California and the Western United States, and is now 
proposing to extend the condition to public utilities elsewhere. The 
Commission is receiving public comments on this proposal and will fully 
consider the comments before making a final decision.
                             v. reliability
    Section 301 of the Chairman's proposed legislation provides for 
Commission certification of an electric reliability organization (ERO) 
to develop and enforce reliability standards applicable to all users, 
owners and operators of the bulk power system. The bill specifies the 
criteria for the ERO. The ERO would be required to file its proposed 
reliability standards with the Commission, and the Commission would 
need to act on those proposals within specified time periods. The ERO 
and the Commission would have to rebuttably presume that a proposal 
from a regional entity for a reliability standard applicable on an 
interconnection-wide basis is just, reasonable, not unduly 
discriminatory or preferential and in the public interest. The ERO 
would have authority to enforce its standards, subject to Commission 
review.
    Section 301's approach to reliability is a step in the right 
direction. Although I have not seen problems with the current voluntary 
process, parties inform me that federal legislation is needed to ensure 
the enforceability of the reliability standards. While some technical 
clarifications or modifications to the proposed language might be 
useful, as a general matter section 301 takes a reasonable and 
efficient approach to this problem.
                     vi. transmission jurisdiction
A. Open Access
    ``Separate but equal'' transmission is inherently unequal. 
Transmission of electric power is interstate commerce and should be 
fairly recognized as such. And all users of transmission service should 
be treated equally, provided they pay for it. One need look no further 
than Chairman Barton's home state to observe the positive impact that 
having clear rules from a single regulator has had on needed investment 
and expansion of the grid.
    Section 201 of the Chairman's proposed legislation would allow the 
Commission to require all public utilities and transmitting utilities 
to offer open access transmission services. In recent years, open 
access transmission services by public utilities have increased 
competition in wholesale power markets significantly. Extending this 
requirement to the large portion of the grid owned or operated by 
transmitting utilities that are not public utilities will further 
increase competition. I believe this can be done in a manner that 
respects the historic independence of certain public power utilities 
while ensuring that a consistent approach is applied to all users of 
the interstate grid, to further wholesale electric competition and 
benefit all electricity customers.
    I support Section 201 but suggest minor changes. First, for reasons 
explained above, section 201 should be clarified to provide that the 
Commission can require open access transmission services by tariff, and 
can require such tariffs to be on file with the Commission so that 
potential transmission customers have available for public inspection, 
in a centralized place (the Commission), all open access services being 
offered and the rates, terms and conditions of such services.
    Second, section 201 would require the Commission to ensure that the 
rates charged for open access services by a transmitting utility other 
than a public utility are comparable to the rates the utility charges 
itself. The Commission would be given authority to review and remand 
the rates for revision where necessary, but would not have the 
authority to modify the rates directly. The Commission could be given 
the authority to modify the rates where necessary, to prevent any delay 
in the establishment of rates in compliance with section 201.
B. Stranded Costs
    Section 201 also would require the Commission to authorize recovery 
of wholesale stranded costs caused by a ``municipalization,'' and 
specifies precisely how the Commission should determine the 
``reasonable expectation period'' for purposes of calculating the 
stranded costs. I am concerned about the latter provision, and believe 
that the calculation of stranded costs should be left to the 
Commission's discretion based on all relevant circumstances in a 
particular case. The Federal Power Act does not prescribe how to 
calculate stranded costs except in requiring that rates must be just, 
reasonable and not unduly discriminatory or preferential. This 
statutory approach should not be changed.
C. Transmission Siting
    Section 402 would allow the Commission to authorize construction or 
modification of transmission facilities if it makes each of three 
findings: (1) the relevant State lacks authority to approve the action, 
has withheld or delayed approval for more than a year or has 
conditioned its approval such that the action is economically 
infeasible; (2) the facilities being authorized will be used for 
transmission of electric energy in interstate commerce; and (3) the 
action is consistent with the public interest, as proposed or 
conditioned.
    A FERC backstop such as this may well be the best decision, but 
there are others that could work. Since these siting issues are largely 
regional, the RTO could be the backstop instead of FERC. This keeps the 
relevant determinations of need, environmental issues and landowner 
concerns closer to the affected citizens. Or, it may be enough to 
simply require states to make final decisions (pro or con) within a 
fixed time-frame. Some states specifically require that a transmission 
line approval by that state be shown to provide direct benefits to the 
citizens of that state. This sort of provision may make it difficult 
for a state to approve routing of a line that has significant regional 
benefits but not specific local benefits.
                           vii. other issues
A. Investigations, Refunds and Penalties
    Section 702 of the proposed bill expands section 206 of the Federal 
Power Act to allow the Commission to order refunds not only by public 
utilities but also by other entities that provide transmission service 
or power to a public utility. Section 703 expands the criminal 
penalties authorized under section 316 of the Federal Power Act. 
Section 703 also broadens section 316A of the Federal Power Act so that 
civil penalties are authorized for violations of any provision under 
Part II of the Federal Power Act, instead of only sections 211, 212, 
213 or 214.
    These provisions are helpful changes to the Federal Power Act. The 
recent problems in wholesale markets in California and the Western 
United States demonstrated the need for such changes.
B. PUHCA
    Sections 111-125 of the Chairman's proposed legislation repeal the 
Public Utility Holding Company Act of 1935 (PUHCA) and replace it with 
increased access by the Commission and state regulators to certain 
books and records. This is appropriate. PUHCA was enacted primarily to 
undo harms caused by certain holding company structures that no longer 
exist. In the 65 years since PUHCA was enacted, utility regulation has 
increased substantially under the Federal Power Act (including 
oversight of corporate restructurings such as electric utility mergers, 
discussed below), federal securities laws and state laws, all of which 
ensure that customers are fully protected.
C. PURPA
    Sections 131-134 of the Chairman's proposed legislation repeal 
prospectively the mandatory purchase obligation in the Public Utility 
Regulatory Policies Act of 1978 (PURPA). As indicated in the bill's 
proposed findings, PURPA's ``forced sale'' requirement is no longer 
necessary to promote competition, in light of the availability of open 
access transmission, and more often serves to distort competitive 
outcomes. Thus, I agree that Congress should repeal PURPA but 
``grandfather'' existing PURPA contracts. To provide a smoother 
transition for parties which made investments under the expectations 
created by PURPA, it may be appropriate to limit its repeal to those 
states where all generation entities have the ability to sell their 
output to the widest possible range of customers.
D. Mergers
    Section 141 would repeal section 203 of the Federal Power Act, the 
authority under which the Commission reviews proposed mergers and other 
dispositions of public utility facilities. This provision may not be in 
the public interest. The Commission deals with the electric utility 
industry on a daily basis and much more closely than the federal 
antitrust agencies. Thus, the Commission is better able to identify and 
remedy any harmful effects of mergers and other dispositions. Our 
efforts do not duplicate those actually being performed today by other 
merger reviewing agencies. The Commission has used its section 203 
authority as intended by Congress to ensure that mergers and other 
dispositions are consistent with the public interest. Also, in recent 
years, the Commission has acted quickly on merger applications, almost 
always within 90 days after receiving public comments on a proposed 
merger.
    In addition, it may be a good idea to clarify the Commission's 
authority to review mergers involving only generation facilities and 
mergers of holding companies with electric utility subsidiaries. The 
increasing amount of competition in power generation markets makes this 
more than an academic question. But, to be fair, there are other, less 
blunt tools that the Commission has to address generation market power.
                            viii. conclusion
    The electric utility industry has come far since the enactment of 
the 1992 Energy Policy Act. The Commission is moving ahead aggressively 
to achieve that legislation's vision of fully competitive wholesale 
markets. Additional legislation will help us get there faster. I 
support the Commission-related provisions of Chairman Barton's proposed 
legislation, with the modifications described above. This legislation 
will help all electric customers realize greater benefits from 
wholesale competition.

    Mr. Barton. Thank you, Chairman.
    We now go to Commissioner Breathitt from the great State of 
Kentucky.

              STATEMENT OF HON. LINDA K. BREATHITT

    Ms. Breathitt. Thank you, Mr. Chairman and members of the 
subcommittee. I appreciate the opportunity to appear before you 
today to discuss your energy restructuring legislation. I 
believe it is important for Congress and FERC to work in tandem 
to accomplish the critical goal of ensuring the development of 
a competitive wholesale electric power market that is fair and 
efficient and that benefits consumers.
    While I believe FERC has made great strides in the effort 
to increase wholesale competition over the past several years, 
I welcome congressional guidance through legislation that 
assists in articulating and clarifying the steps that must be 
taken toward this end.
    I am supportive of the policies underlying H.R. 3406, and I 
am pleased to see that it is consistent with many of the 
comments I have made in past hearings before this subcommittee. 
As I set forth in more detail in my written testimony, I 
welcome congressional clarification of FERC's authority with 
respect to RTOs and expansion of our authority in the areas of 
civil and criminal penalties for violations of the Federal 
Power Act. I support the repeal of PURPA and PUHCA, and I agree 
that interconnection rules should be standardized. I also 
believe the bill's approach to transmission siting represents a 
great improvement over the current jurisdictional scheme.
    I would like to take this opportunity to highlight an 
aspect of H.R. 3406 that I cannot support, and that is repeal 
of Section 203 of the Federal Power Act, which embodies the 
Commission's merger review authority. I don't agree with the 
basic underlying premise that FERC's merger review is 
redundant. All merger reviews are not created equal. Unlike any 
other agency with jurisdiction over mergers, our agency uses a 
different test, and that is the public interest standard. This 
is significantly different and distinct from the ``no harm to 
competition'' review employed by other agencies, and I urge 
this subcommittee to continue allowing FERC to protect the 
public in this regard.
    With this exception, while my testimony highlights various 
details on which I suggest minor changes, I believe that your 
work on this document ultimately will serve to aid the 
Commission and the public as we move ahead with our agenda. I 
didn't address the other topics that you said may likely come 
up today. I stuck to your legislation, and I will happy to get 
to those others if the time comes.
    [The prepared statement of Hon. Linda K. Breathitt 
follows:]
 Prepared Statement of Hon. Linda K. Breathitt, Commissioner, Federal 
                      Energy Regulatory Commission
    Mr. Chairman and Members of the Subcommittee: I appreciate the 
opportunity to appear before you today to discuss the Subcommittee's 
proposed energy restructuring legislation. I believe it is important 
for Congress and the Federal Energy Regulatory Commission (FERC) to 
work in tandem to accomplish the critical goal of ensuring the 
development of a competitive wholesale electric power market that is 
fair and efficient and benefits consumers. While I believe FERC has 
made great strides in the effort to increase wholesale competition over 
the past several years, I welcome Congressional guidance through 
legislation that assists in articulating and clarifying the steps that 
must be taken toward this end.
    My testimony today will comment on H.R. 3406 and highlight specific 
aspects of the proposed legislation that I consider to be especially 
important from the perspective of a federal energy regulator. As a 
general matter, I am very supportive of H.R. 3406. I have testified 
before this Subcommittee many times on restructuring issues, and I am 
pleased that this proposed legislation is largely consistent with many 
of the views I have expressed. I am also pleased that the bill would 
have the effect of promoting small-scale renewable generation. As I 
will discuss in greater detail below, however, there is one important 
exception: I do not support the proposed repeal of section 203 of the 
Federal Power Act (FPA).
    Title I of the proposed legislation deals with electric supply. 
Among the provisions of Title I, I would like to address my comments to 
interconnection, the Public Utility Holding Act of 1935 (PUHCA), the 
Public Utility Regulatory Policies Act of 1978 (PURPA), and merger 
review. I have previously testified before this subcommittee that 
interconnection rules should be clarified and standardized in order to 
ensure that new sources of generation are able to interconnect to the 
transmission system. The Commission accelerated this process of 
standardization in October with the issuance of an Advanced Notice of 
Proposed Rulemaking (ANOPR) addressing procedures and protocols for 
interconnection. The ANOPR encourages parties to reach consensus on non 
cost-related issues of transmission interconnection and uses as a 
``strawman'' the ERCOT model as supplemented by current Commission 
interconnection policy. Reports of the progress being made are 
positive, and I support issuance of a NOPR as soon as possible. The 
Commission's intention is to instruct parties to take up the issues of 
cost responsibility for transmission interconnections in the second 
phase of the transmission interconnection rulemaking.
    Section 101 of the proposed legislation would decide the major 
issue of cost responsibility by assigning system upgrade costs to the 
generator. I believe these pricing decisions need to be made carefully 
and with consideration of the multiple factors at issue. Although this 
legislative process certainly is one forum for deciding this important 
issue, the cost responsibility aspect might also benefit from comments 
and a consensus process such as the Commission plans for the second 
phase of our rulemaking. I expect the second phase, dealing with cost 
issues, will be more difficult and contentious; many states already are 
expressing their views.
    Section 101 of the proposed legislation also requires the 
Commission to promulgate the technical standards for generators 
interconnecting with distribution facilities. Although it is no modest 
undertaking to establish national standards for distribution 
interconnections, I do believe reducing obstacles for small-scale 
distributed generation can produce good results. Distributed generation 
can increase options for consumers and would provide added reliability 
to the grid. Standards for all players, as well as the net metering 
provisions included in this legislation, may encourage the growth of 
this fledgling movement toward decentralization of the electric grid. 
Of course, we should expect the states to insist on a process that 
allows their opinions and concerns to be heard since this section 
shifts jurisdiction to the federal level.
    The proposed legislation repeals PUHCA and replaces it with 
increased access by the Commission and state regulators to certain 
books and records. I support this legislation. The proposed legislation 
also repeals prospectively the PURPA mandatory purchase obligation. I 
support the repeal of the mandatory purchase requirement in Section 210 
of PURPA. I also support proposed section 133 of the bill, which would 
``grandfather'' existing PURPA contracts.
    I would like to highlight Subtitle D of Title I, which would 
eliminate FERC's merger review authority now embodied in section 203 of 
the FPA. This is the single aspect of this proposed legislation that I 
cannot support. The title itself of Subtitle D, ``Redundant Review of 
Certain Matters,'' reveals my basic concern in this regard: I do not 
agree that FERC merger review is redundant. All merger reviews are not 
created equal. FERC's FPA ``public interest'' standard is different 
from the ``no harm to competition'' antitrust standard of the Sherman 
Act and the Clayton Act. The relevant information required for the type 
of review conducted by FERC is not the same information required by 
another agency conducting antitrust review of the same merger. While 
the same merger may be reviewed by various agencies, the analyses are 
not parallel; standards and requirements vary from agency to agency.
    I believe it is important for FERC to continue its public interest-
focused merger analysis, which looks at a merger's effects on rates, 
regulation, and competition. FERC, in its regulatory role, is 
particularly attuned to the issues that may arise as a result of 
competition and industry consolidation, including technical issues and 
new kinds of mergers that may lead to the blurring of traditional 
utility services with other business lines. By acknowledging these 
issues, I believe that FERC has developed a dynamic and flexible 
process--one that is required in today's market. I urge the 
Subcommittee to continue to allow FERC to retain the authority to 
protect the public in this respect.
    Title II of the proposed legislation deals with transmission 
operation. Section 201 of the proposed legislation would allow the 
Commission to require all public utilities and transmitting utilities 
to offer open access transmission services, extending the requirement 
for open access to transmitting utilities that are not public 
utilities. As I have testified on other occasions, I believe it is 
important to have equal and open access to all transmission at 
nondiscriminatory rates and comparable terms and conditions. At the 
same time, the public power sector has expressed concerns unique to its 
status, and these concerns should be addressed with respect to sections 
201 and 202. Chairman Wood's testimony requests a change to the 
legislation to allow all tariffs for open access transmission service 
be on file with the Commission. I share the Chairman's concerns on 
these issues and support his testimony in this regard.
    Section 202 addresses Regional Transmission Organizations (RTOs). 
There is no more important effort underway at FERC today than the 
formation of RTOs. Since the Commission began promoting RTOs as a means 
to remove barriers and impediments present in wholesale electricity 
markets, I have been fully committed to the goal of RTO formation. 
While there is room for disagreement on the best path to attain the 
goal of fully functioning RTOs, FERC is very actively pursuing the 
completion of the development of RTOs with clear responsibilities, 
independence, and sufficient scope.
    When the Commission issued Order No. 2000 in December 1999, we 
decided to adopt an open and collaborative process that relied on 
voluntary regional participation. Since that time, I have strongly 
urged that FERC not depart from the basic philosophies embodied in 
Order No. 2000, particularly in the absence of a formal decision to do 
so, informed by the views of interested parties and state commissions. 
In my view, sufficient question remains over FERC's authority to 
mandate the formation of, or participation in, RTOs, such that any 
moves on our part toward a mandate will be counterproductive to FERC's 
ultimate goals. My concern is that this lack of clarity could lead the 
industry and the Commission to divert resources away from the important 
task of RTO implementation, and instead toward expensive and time-
consuming litigation over FERC's authority. I therefore support 
Congressional clarification of FERC's authority with respect to RTOs.
    Proposed section 202 mandates that all transmission utilities--both 
investor-owned utilities and public power/electric power cooperative 
utilities--participate in an RTO. To the extent this direction will 
eliminate any existing uncertainty regarding FERC's authority and 
permit RTO formation to proceed expeditiously, I support it. Proposed 
section 202 also requires FERC to establish uniform market rules, 
including the establishment and enforcement of ``seams'' agreements. 
This direction is consistent with a generic rulemaking proceeding that 
FERC already has announced.
    While the RTO standards embodied in the proposed legislation are, 
for the most part, consistent with those established in Order No. 2000, 
I believe it is possible that RTO procedures and standards may need to 
be adapted over time. In his testimony, Chairman Wood suggests that 
instead of codifying detailed standards and procedures for 
implementation of RTOs, additional flexibility for FERC to oversee an 
adaptive process might be warranted. Chairman Wood advocates a 
legislative approach that would have Congress adopt a simple provision 
permitting the Commission to require RTOs where it finds such RTOs to 
be in the public interest. I believe this approach would serve to 
remove existing uncertainties, while preserving FERC's ability to 
tailor its RTO program to an increasingly dynamic marketplace.
    If Congress decides to take the approach of codifying RTO standards 
and procedures, Chairman Wood's testimony outlines several concerns 
regarding (1) the right of a single RTO applicant for an evidentiary 
hearing; (2) the requirement for ``preponderance'' of the evidence 
supporting FERC decisions; (3) the judicial review provision; (4) the 
requirement for a proposed RTO to have ``sufficient generation within 
the RTO's boundaries to serve the load within such boundaries;'' (5) 
the right of each pubic utility in an RTO to make rate filings; (6) the 
definition of ``market participant;'' and (7) the preclusion of FERC 
modification to the governance and scope of an RTO approved before the 
law's enactment. I share the Chairman's concerns on these issues and 
support his testimony in this regard.
    Title III of the proposed legislation provides for Commission 
certification of one electric reliability organization to develop and 
enforce reliability standards for the bulk-power system. I agree that 
the voluntary reliability system, which has been in place for over 
three decades, should be replaced with one in which a self-regulated 
independent reliability organization, with oversight by the Commission, 
establishes and enforces mandatory reliability standards. I especially 
support the provisions of section 216(e), which provides for sanctions 
and penalties for failure to comply with reliability rules. In my view, 
such a change in the manner in which the reliability of the 
interconnected grid is overseen and managed is required in order to 
ensure a competitive bulk power market.
    The provisions of Title IV direct the Commission to conduct a 
rulemaking to establish incentive and performance-based rate policies 
for expansion of transmission networks to promote expansion of the 
transmission grid to support the growth of competitive markets. Section 
401 states that such policies should encourage the deployment of new 
transmission technologies to increase capacity of existing networks and 
to reduce line losses; promote environmentally sound transmission 
design techniques; and promote the efficient use of transmission 
systems on a real-time basis. I believe that the Commission's 
transmission rate policies should encourage and promote such policy 
objectives. I would point out that I believe these goals may be 
achieved through rate policies other than incentive or performance-
based rates. In my view, policies such as allowing a reasonable return 
on equity or accelerated depreciation for new technologies would act to 
encourage such investment.
    Section 402 would give the Commission a ``backstop'' role in 
transmission siting. I believe that this is certainly an improvement 
over the present jurisdictional scheme, in which the Commission has no 
role in the permitting and siting of new transmission facilities. 
However, as I have testified previously, my primary concern with a 
backstop role for the Commission is that such an approach could result 
in costly and inefficient duplication of processes, records, and 
efforts by the various decisional authorities involved in transmission 
siting.
    My preference would be for FERC to be granted federal eminent 
domain authority similar to the authority the Commission exercises with 
respect to the siting of interstate natural gas pipelines under the 
Natural Gas Act. The Commission could develop procedures to ensure 
cooperation with the states and provide for regional participation. I 
believe that this more centralized approach is preferable from an 
efficiency standpoint, and will result in less bureaucracy and more 
timely decisions for transmission providers and consumers. I am not 
advocating that the Commission should have siting authority for 
electric distribution lines or power plants. I believe that state 
governments are best positioned to make those determinations.
    Finally, I would like to acknowledge the provisions of Title VII of 
the proposed legislation. These provisions strengthen the Commission's 
authority to assess civil and criminal penalties for violations of the 
FPA and increase the level of such penalties. I have advocated such 
changes and believe they will greatly aid the Commission in fulfilling 
its regulatory responsibilities.
    In conclusion, I again thank the Subcommittee for this opportunity 
to comment upon the Subcommittee's proposed legislation. As I have 
testified in previous hearings before this Subcommittee, the Commission 
must have sufficient authority to advance its goals of achieving fair, 
open and competitive bulk power markets. I believe that this 
legislation, with the modifications I have suggested, would clarify our 
authority and greatly assist the Commission in realizing the benefits 
of wholesale competition.

    Mr. Barton. Thank you.
    We now welcome our new Commissioner, Commissioner Nora 
Brownell from the great State of Pennsylvania, from Harrisburg 
to Washington. I think this is your first time to testify 
before this subcommittee. Is that correct?

              STATEMENT OF HON. NORA MEAD BROWNELL

    Ms. Brownell. Actually, it is my second as a Commissioner 
and then a few times as a State commissioner, but I am glad to 
be back.
    Mr. Barton. We are glad to have you. Your statement is in 
the record, and we will ask you to elaborate on it for 6 
minutes.
    Ms. Brownell. And perhaps the next time we come back it 
will be to celebrate the passage of a comprehensive energy 
bill.
    I am going to be quick, because I know that the committee 
has a lot of questions, and there are a lot of complex issues 
to discuss. But I would note that events of the past few 
months--September 11, the meltdown of Enron, the confusion of 
the consumer market--have caused us all to evaluate what we do 
and how we do it. But I believe we are at a critical juncture 
in the development of energy markets that are needed to support 
the continued growth of a digital economy. The issues are 
complex, the answers are not easy, but they are issues that 
have a long-term impact on our country.
    We can succumb to inertia and the fear of change, and we 
can leave the American public saddled with an inadequate, 
inefficient electric system or we can complete the 
transformation of that industry into the economically 
competitive, reliable, technologically vibrant marketplace that 
this Nation's consumers deserve. I believe that comprehensive 
energy legislation and the work that we are doing at FERC can 
provide the certainty and reliability that all stakeholders 
need, that consumers need to have confidence in the system, 
that investors need to invest in the system and that new 
technology providers need to introduce what I think is a 
vibrant new future that we have not even seen yet.
    To accomplish this, I think we need large Regional 
Transmission Organizations. I think we need to ensure there is 
sufficient infrastructure, and we need to guarantee there are 
equitable, well-understood business rules that reflect the 
realities of a restructured market. There is much in this bill 
that I support and have articulated that in my statement, and I 
really applaud you for your vision and the comprehensive nature 
of this bill. I do have concerns over some of the limitations 
that this might put on FERC in establishing RTOs and the rules 
under which they function, and I do have some concerns about 
our merger authority. But I do believe that we can work 
together with this agency and the other agencies represented 
here to get the answers that we need and to have this train 
finally arrive at the station since it left so long ago.
    [The prepared statement of Hon. Nora Mead Brownell 
follows:]
Prepared Statement of Nora Mead Brownell, Commissioner, Federal Energy 
                         Regulatory Commission
                            i. introduction
    Mr. Chairman and Members of the Subcommittee: Thank you for the 
opportunity to share my thoughts on H.R. 3406 as well as the 
Commission's recent actions concerning wholesale electricity markets. 
We are at a critical juncture in the development of energy markets to 
support the growth of a digital economy. We can succumb to inertia and 
fear of change, and leave the American public saddled with an 
inadequate, inefficient electric system. Or, we can complete the 
transformation of that industry into the economically competitive, 
technologically vibrant marketplace that this nation's consumers 
deserve. I, for one, am committed to the latter course of action.
    Passage of a comprehensive energy bill will certainly settle the 
many concerns created by the lack of a long-term energy policy for our 
country. I also believe the resolution of the issues related to the 
restructuring of the electricity markets will, in fact, act as an 
economic stimulus and unleash capital for the development of 
infrastructure and new technologies. I also believe that we at FERC 
must lay out a clear strategy for completing the transformation of 
electricity markets. Not only is investment constrained, but business 
plans are hampered by uncertainty. I am convinced that the prerequisite 
to success is creation of a clear and cogent course of action that will 
bring certainty and stability for all of the stakeholders by: (1) 
establishing large Regional Transmission Organizations (RTOs); (2) 
ensuring there is sufficient infrastructure; and (3) ensuring there are 
equitable, well understood business rules that reflect the realities of 
a restructured marketplace.
    There are many provisions in H.R. 3406 that I support as consistent 
with this course of action, including the call for standardization of 
interconnection procedures, the establishment of minimum federal net 
metering standards, the repeal of the Public Utility Holding Company 
Act (PUHCA) and the Public Utility Regulatory Policies Act (PURPA), the 
increase in enforcement tools, and the grant of backstop transmission 
siting authority to the Commission as well as the authority to require 
all transmitting utilities to offer open access transmission service. I 
commend the continued leadership and hard work of the members of the 
Subcommittee. I would, however, suggest that Section 202, concerning 
the formation of RTOs, and Section 141, repealing Commission review of 
mergers, be amended.
                     ii. section 202--rto formation
A. RTO formation has been delayed at the expense of electricity 
        customers
    Large, independent RTOs can improve grid reliability by 
facilitating transmission planning across a multi-state region, create 
better pricing mechanisms such as eliminating ``pancaking'', improve 
efficiency through better congestion management, and attract investment 
in infrastructure by facilitating regional consensus on the need for 
construction. Consistent with the Energy Policy Act of 1992, the 
Commission has been working to foster RTOs for a number of years. So 
far, the Commission has relied on the voluntary efforts of utilities to 
form RTOs, and has held mediation and outreach to assist market 
participants in reaching consensus on RTO governance, scope, and 
configuration. Nevertheless, to date not a single RTO is up and 
running.
    I believe the price of doing nothing on RTO formation grows daily 
and that we must move forward. The Commission has recently initiated a 
number of processes to help ensure that any actions we take concerning 
the development of RTOs be ones that will produce the most benefits for 
customers and that adequately accommodate states' interests. First, the 
Commission recently hired an outside consultant to perform an updated 
study of the costs and benefits of RTO formation. Second, we have begun 
to consider the standard RTO design features that will best ensure a 
seamless national wholesale electricity market. During the week of 
October 15, 2001, we held a conference to discuss the issue of standard 
RTO design features with a wide range of market participants and state 
commissions, and we will be doing more outreach and issuing a proposed 
rule on the subject. Our RTO conference demonstrated considerable 
consensus on a number of issues, such as congestion management, energy 
markets, and market monitoring. Third, we have set up a new program 
within FERC under which a number of regional panels consisting of 
Commission staff and state commission staff will be established to 
ensure better coordination with our state regulatory counterparts on 
RTO development issues.
    It may soon become necessary for the Commission to take more direct 
action to establish mandatory RTOs. I believe the current language of 
the Federal Power Act already gives us the authority to take such 
action, and I will encourage my colleagues to join me in exercising 
that authority in a prudent manner. Nevertheless, the few who oppose 
RTOs would likely file judicial challenges to the exercise of that 
authority, thus legislative clarification would save us all the time 
and expense of litigation.
B. Section 202 would not speed development of competitive markets
    Section 202 of H.R. 3406 does clarify that the Commission has the 
authority to require transmitting utilities, whether investor- or 
publicly-owned, to join an RTO. However, the following provisions of 
Section 202 would leave the Commission so hamstrung in its exercise of 
this authority, that I fear we would make no greater progress toward 
the development of truly competitive wholesale electricity markets than 
we have under the current statute:

Narrowly prescribing Commission review of an RTO application--Section 
        202 limits the Commission's authority over the development of 
        specific RTOs to proposing modifications to a utility's 
        application to form or join an RTO. Further, the Commission can 
        only propose such modifications when the application fails to 
        satisfy a rigid and limited set of standards specified in the 
        bill.
Allowing applicants to unnecessarily delay process--The provisions of 
        Section 202 requiring the Commission to hold an ``evidentiary'' 
        trial-type hearing on the proposed modifications whenever an 
        applicant so requests and imposing a stay of the Commission's 
        order whenever an applicant seeks judicial review could enable 
        one RTO applicant to significantly delay and increase the cost 
        of RTO formation.
Making it easier for applicants to overturn Commission orders--Section 
        202's replacement of the existing ``substantial-evidence'' 
        standard for judicial review under the Federal Power Act with a 
        ``preponderance-of-the-evidence'' standard for review of 
        Commission modifications to RTO applications would make it 
        easier for applicants to overturn such modifications.
C. Section 202 should be replaced with a simple affirmation of 
        Commission authority to issue such RTO orders as are in the 
        public interest
    I believe that Section 202 may not achieve the goals that the 
Subcommittee has identified, i.e., the creation of competitive markets. 
Therefore, I urge this Subcommittee either to replace it with a 
provision simply affirming the Commission's authority to issue such 
orders concerning the establishment, design, and operation of RTOs, and 
the participation of transmitting utilities therein, as are in the 
public interest. I would also urge the Subcommittee to consider tax 
code amendments to ensure that electric cooperatives and public power 
entities do not lose their tax-exempt status by transferring 
transmission assets over to a for-profit RTO.
                     iii. section 141-merger review
    Section 141 would repeal Section 203 of the Federal Power Act and, 
thus, leave review of mergers and other dispositions of public utility 
facilities to the Department of Justice and the Federal Trade 
Commission. While I support coordination of federal agency review of 
proposed utility mergers to ensure that such reviews are not 
duplicative or overly time-consuming, I do not believe it is 
appropriate to eliminate FERC review. The Commission has knowledge of 
the electric utility industry that the federal antitrust agencies do 
not, and Commission review is necessary to ensure that mergers and 
other dispositions are consistent with the public interest.
                   iv. other provisions of h.r. 3046
    Although I would suggest changes to Sections 202 and 141, there are 
other provisions of H.R. 3046 that I heartily endorse.
A. Section 101 would ensure standardization of interconnection 
        procedures and allow consideration of an application's effect 
        on competition
    Section 101 calls for standardization of interconnection 
procedures. I strongly support the development of standardized 
interconnection procedures, and I am happy to report that the 
Commission is conducting a rulemaking to address this issue.
    I further support the proposed amendment of the criteria for 
evaluating an interconnection application. Under the existing language 
of section 210 of the Federal Power Act, the Commission may grant an 
application if it is in the public interest and it would either 
encourage overall conservation, optimize efficiency, or improve 
reliability. This bill would allow the Commission to grant an 
application if it were in the public interest and promoted competition. 
This language allows the Commission to continue to consider 
conservation, efficiency and reliability, while also permitting the 
Commission to consider competitive goals that will truly benefit 
consumers.
B. Section 102's net metering standards would remove a barrier to entry 
        of new technology
    I support the bill's call for minimum federal net metering 
standards. Most utilities have been slow to provide for net metering, 
and net metering is an essential step in the development of viable 
markets for new technologies, such as distributed generation. The 
establishment of national minimum standards on which states will build 
net metering programs would enable this important new technology a 
chance to compete. Net metering is also a valuable tool for consumers 
who want to be actively involved in their purchasing decisions.
C. Sections 111-125 would appropriately repeal PUHCA
    I support the bill's repeal of PUHCA. PUHCA was necessary to 
address abuses that existed a half-century ago. However, that statute 
has not only outlived its usefulness, it is actually thwarting needed 
development of our electricity resources by subjecting registered 
utility holding companies to heavy-handed regulation of ordinary 
business activities and to outdated requirements that they operate 
``integrated'' and contiguous systems. One of PUHCA's perverse effects 
is that it causes foreign companies to buy here and U.S. companies to 
invest overseas. Nevertheless, I appreciate the concerns of those, like 
the rural electric cooperatives, who have opposed elimination of 
certain safeguards that PUHCA provides against market power. The 
Commission is aware of the concerns of the cooperatives and of the 
problems with market power in general, and we are engaged in an 
overhaul of our efforts at market monitoring and market power 
protection. I believe that Section 111-125 strikes an appropriate 
balance by replacing PUHCA with increased access by the Commission and 
state regulators to certain books and records.
D. Sections 131-134 would appropriately eliminate prospective PURPA 
        forced sales
    I support the bill's prospective elimination of the forced sale 
provision of PURPA. PURPA was enacted out of concern over dependence on 
oil for electric generation. Now, 22 years later, when a gas-fired 
generator can be on-line in less than two years, and many advances are 
being made in distributed generation, PURPA's subsidies for certain 
types of generation are no longer appropriate.
E. Section 201 would ensure non-discriminatory access to the entire 
        transmission grid
    Section 201 would grant the Commission the authority to require all 
transmitting utilities (not just those that constitute ``public 
utilities'' under the Federal Power Act) to offer open access 
transmission service. I believe that all interstate transmission 
facilities should be under one set of open access rules, including the 
facilities owned and/or operated by municipals, cooperatives, the 
Tennessee Valley Authority, and the federal power market 
administrations and regardless of whether they are used for unbundled 
wholesale, unbundled retail, or bundled retail transactions. Having all 
transmission under one set of rules will ensure a properly functioning 
and transparent transmission grid.
F. Section 301 will promote transmission reliability
    I support Section 301, which grants the Commission jurisdiction 
over electric reliability organizations. The reliability of the 
electrical grid is critical to this nation's safety and economy, and it 
is appropriate to have a greater governmental role in reviewing 
reliability standards.
G. Section 402 will remove logjams to siting needed transmission
    As I stated in my September 21, 2001 testimony before this 
Subcommittee, I believe the Commission should have backstop authority 
to site transmission facilities. State-by-state siting of such 
transmission superhighways is an anachronism that impedes transmission 
investment and slows transmission construction. There are many models 
for regional planning that might be considered. For example, the 
Western Governors Association has been working hard to address regional 
issues in the West. Therefore, I support section 402, which allows the 
Commission to authorize construction of transmission facilities that 
are consistent with the public interest when the state has withheld or 
delayed approval. But I also believe new models may respond to siting 
issues in a way that recognizes state concerns while accepting the 
reality that electricity planning and operations are regional, if not 
national, in nature.
H. Sections 701-703 would provide needed expansion of enforcement 
        authority
    The Commission must have an expanded role in monitoring for, and 
mitigating, market power abuse. The enabling statutes of the Securities 
and Exchange Commission and the Federal Communications Commission 
provide for a range of enforcement measures, such as civil penalties. I 
believe that providing FERC with similar authority would send a 
powerful message to electricity market participants that we take 
violations of the Federal Power Act just as seriously. Therefore, I 
support H.R. 3406's recognition of the Commission's refund authority 
over non-public utilities that provide transmission service or power to 
a public utility. I also support the bill's increase in the level of 
criminal penalties allowed under Section 316 of the Federal Power Act, 
as well as the bill's authorization of civil penalties for violation of 
any provision of Part II of the Federal Power Act.
                             v. conclusion
    I appreciate the enormous commitment of time and energy that the 
Chairman and the other members of this Subcommittee have put into 
developing legislation to help transform the electricity industry into 
the thriving force it should be. There are many competing interests to 
be satisfied against a larger goal: the creation of a robust, viable, 
liquid energy market supported by an enhanced infrastructure. Our 
country is well served by change leaders such as yourself. I thank you 
for the opportunity to share my thoughts with you.

    Mr. Barton. We now welcome Commissioner Massey from the 
great State of Louisiana. He has obviously been here a few 
times. Your statement is in the record in its entirety. We 
would ask you to elaborate for 6 minutes. Arkansas, I am sorry, 
I said Louisiana--Arkansas.

               STATEMENT OF HON. WILLIAM L. MASSEY

    Mr. Massey. Thank you, Mr. Chairman. I respect and applaud 
your efforts to enact electricity restructuring legislation. My 
view is that without your help with changes in the law, the 
restructuring of the electric industry will continue to be a 
patchwork. Necessary transmission investments may not keep pace 
with the needs of competitive markets, and this is a very 
serious problem. And it will be much more difficult to maintain 
reliability long term.
    Thus, a number of provisions of this legislation are 
excellent and have my support, and I have concerns about 
others. In particular, I support the provisions related to 
standardized generation interconnection, to ensure demand 
responsiveness, and those related to mandatory reliability 
rules, civil penalties and transmission infrastructure and 
siting. I particularly appreciate your interest, Chairman 
Barton, in solving this knotty problem related to transmission 
siting, and it seems to me that you have proposed a manner of 
proceeding that balances competing concerns and is reasonable. 
I applaud it, and I think it will help get necessary 
transmission built.
    These are all excellent provisions. I support placing all 
transmission under one set of Federal rules. I think we have to 
do this. The bill sends a strong signal that RTOs are in the 
public interest and that FERC may require their formation, and 
I applaud this.
    The legislation also includes provisions that I cannot 
support, however. The Commission's merger review authority 
should not be repealed. Indeed, this authority should be 
strengthened to ensure that consumers are protected from 
consolidations that may choke off the very competition that we 
are striving to facilitate. And I would like to associate 
myself with the remarks of Commissioner Breathitt on this very 
point. In addition, I do not support legislatively tying FERC's 
hands with respect to RTO approval standards and hearing 
procedures. These should remain a matter of Commission policy 
that may evolve over time with the changing needs of 
competitive markets.
    Let me close by saying, since members of the subcommittee 
have raised the Enron collapse, I am deeply concerned about the 
Enron collapse. I am concerned about the 21,000 employees who 
are losing their jobs, I am concerned about investors and 
retirees who lost their shirts, I am concerned because Enron 
was the most visible corporate symbol of energy deregulation in 
the world. We should be looking at whether there are lessons 
here for our evolving energy policy.
    Based upon what I have seen thus far, however, the collapse 
was not related to a failure in energy markets. In fact, a 
strong argument can be made that if Enron had focused on energy 
assets and energy trading in the United States and had it 
accurately disclosed profits and losses, it would probably 
still be humming right along. And the energy market appeared to 
recover rather quickly from the Enron collapse. We don't know 
the whole story yet, but what we know thus far indicates that 
the market has adjusted reasonably. Other market participants 
moved into the breach. The energy market itself did not 
collapse.
    Nevertheless, whatever lessons there are here for energy 
policy and energy markets, we should heed those lessons. 
Perhaps the accounting standards and disclosure requirements 
for a public utility should be a strengthened--perhaps we 
should take a look at disclosure requirements for all public 
utilities. I have an open mind. But the good news here is that 
the short-term energy markets appeared to adjust rather quickly 
to the collapse of the largest energy trading company in the 
world. Thank you, Mr. Chairman.
    [The prepared statement of Hon. William L. Massey follows:]
  Prepared Statement of Hon. William L. Massey, Commissioner, Federal 
                      Energy Regulatory Commission
    Mr. Chairman and Members of the Subcommittee on Energy and Air 
Quality: Thank you for the opportunity to testify on the important 
electricity legislation now pending before the House and recent 
Commission activity promoting efficient and reliable electricity 
markets.
         i. h.r. 3406--the electric supply and transmission act
A. Interconnection
    I am generally supportive of the provisions of Title I. Section 101 
addresses interconnection standards. The Commission has made a firm 
decision to move forward on developing standard procedures and 
agreements regarding interconnection and will likely do so in a way 
that is consistent with section 101.
B. Demand response
    Section 103 provides for implementation of price responsive demand 
programs. As I have testified previously, markets need demand 
responsiveness to price. This is a standard means of moderating prices 
in well-functioning markets, but it is generally absent from 
electricity markets. When prices for other commodities get high, 
consumers can usually respond by buying less, thereby acting as a brake 
on price run-ups. If the price, say, for a head of cabbage spikes to 
$50, consumers simply do not purchase it. Without the ability of end 
use consumers to respond to price, there is virtually no limit on the 
price suppliers can fetch in shortage conditions. Consumers see the 
exorbitant bill only after the fact. This does not make for a well 
functioning market.
    Instilling demand responsiveness into electricity markets requires 
two conditions: first, significant numbers of customers must be able to 
see prices before they consume, and second, they must have reasonable 
means to adjust consumption in response to those prices. Accomplishing 
both of these on a widespread scale will require technical innovation. 
A modest demand response, however, can make a significant difference in 
moderating price where the supply curve is steep.
    Once there is a significant degree of demand responsiveness in a 
market, demand should be allowed to bid demand reductions, or so called 
``negawatts,'' into organized markets along with the megawatts of the 
traditional suppliers. This direct bidding would be the most efficient 
way to include the demand side in the market. But however it is 
accomplished, the important point is that market design simply cannot 
ignore the demand half of the market without suffering painful 
consequences, especially during shortage periods. There was virtually 
no demand responsiveness in the California market. Customers had no 
effective means to reduce demand when prices soared.
    It is important for Congress to send a message that instilling a 
significant measure of demand responsiveness into electricity markets 
is in the public interest. This legislation does just that, and I 
endorse it.
C. PUHCA and PURPA
    Subtitle B of Title I repeals PUHCA. I am pleased that the bill 
appears to include important provisions regarding state and federal 
access to the books and records of holding companies and their 
subsidiaries.
    Subtitle C of Title I repeals PURPA on a going forward basis. I 
would support such repeal of PURPA if there were a mechanism to promote 
the development of renewable resources, such as a reasonable portfolio 
standard.
D. Review of Mergers
    Section 141 repeals the Commission's authority to review mergers. I 
do not support this provision. As we strive to move toward competitive 
markets and light-handed regulation, the Commission's ability to remedy 
market power is increasingly important. Market power is likely to exist 
in the electric industry for a while. It is unreasonable to expect an 
industry that has operated under a heavily regulated monopoly structure 
for 100 years suddenly to shed all pockets of market power. An agency 
such as FERC with a broad interstate view must have adequate authority 
to ensure that market power does not squelch the very competition we 
are attempting to facilitate.
    The Commission's authority over mergers is important. We are seeing 
unprecedented industry consolidation now. While mergers can produce 
efficiencies, they can also increase both horizontal and vertical 
market power. The Commission is particularly well suited to evaluate 
proposed mergers involving electric utilities. The Commission's 
detailed experience with electricity markets and its unique technical 
expertise can provide critical insights into a merger's competitive 
effects. In addition, the Commission's duty to protect the public 
interest is broader than the focus of the antitrust agencies and thus 
allows us to better protect consumers from other possible effects of a 
merger, such as unreasonable costs. As the architect of Order No. 888 
and the RTO Rule, Order No. 2000, the Commission must retain the 
authority to condition a merger to ensure consistency with broader 
policy goals. And unlike the antitrust agencies, the Commission's 
merger procedures allow public intervention and participation in 
proceedings critical to the restructuring of this vital national 
industry.
    For these reasons, I would not support any weakening of the 
Commission's merger authority. Indeed, to ensure that mergers do not 
undercut our competitive goals, the Commission's authority over 
electricity mergers must be strengthened in a number of ways. The 
Commission should be given direct authority to review mergers that 
involve generation facilities. The Commission has interpreted the 
Federal Power Act as excluding generation facilities per se from our 
direct authority, although that interpretation is currently before the 
courts. It is important that all significant consolidations in 
electricity markets be subject to Commission review. For the same 
reason, the Commission should be given direct authority to review 
consolidations involving holding companies.
    I am also concerned that significant vertical mergers can be 
outside of our merger review authority. Under section 203 of the FPA, 
our merger jurisdiction is triggered if there is a change in control of 
jurisdictional assets, such as transmission facilities. Consequently, 
consolidations can lie outside of the Commission's jurisdiction 
depending on the way they are structured. For example, a merger of a 
large fuel supplier and a public utility would not be subject to 
Commission review if the utility acquires the fuel supplier because 
there would be no change in control of the jurisdictional assets of the 
utility. If the merger transaction were structured the other way, i.e., 
the fuel supplier acquiring the utility, it would be subject to 
Commission review. Such vertical consolidations can have significant 
anticompetitive effects on electricity markets. Those potential adverse 
effects do not depend on how merger transactions are structured, and 
thus our jurisdiction should not depend on how transactions are 
structured. Therefore, I recommend that the Commission be given 
authority to review all consolidations involving electricity market 
participants, however structured.
E. Open Transmission Access
    Section 201 allows the Commission to require all transmitting 
utilities as well as public utilities to offer open access transmission 
service. I am generally supportive of placing all transmission owners 
under the same set of rules. I have concerns, however, with codifying 
the manner in which the Commission should calculate stranded costs. 
Such calculation should be left to the Commission's discretion and 
judgment.
F. Regional Transmission Organizations
    Section 202 sets out a number of provisions regarding RTOs and RTO 
formation. I am particularly pleased that this legislation sends a 
clear message that RTOs are in the public interest. Nevertheless, I am 
concerned with the proposals to codify matters such as RTO standards, 
hearing requirements, and when the Commission may or may not make 
modifications to existing RTOs. It would be far more useful to give the 
Commission express authority to require RTO formation under standards 
determined to be appropriate by the Commission. This would allow 
standards to evolve along with the requirements of competitive markets.
G. Reliability
    Section 301 provides for Commission certification of an 
organization to develop and enforce reliability standards. The industry 
needs mandatory reliability standards. Vibrant markets must be based 
upon a reliable trading platform. Yet, under existing law there are no 
legally enforceable reliability standards. Compliance with the 
reliability rules of the North American Electric Reliability Council 
(NERC) is voluntary. A voluntary system is likely to break down in a 
competitive electricity industry.
    I support legislation that would lead to the promulgation of 
mandatory reliability standards. A private standards organization with 
an independent board of directors could promulgate mandatory 
reliability standards applicable to all market participants. These 
rules would be reviewed by the Commission to ensure that they are fair 
and not unduly discriminatory. The mandatory rules would then be 
applied by RTOs, the entities that will be responsible for maintaining 
short-term reliability in the marketplace. Mandatory reliability rules 
are critical to evolving competitive markets, and I urge Congress to 
enact legislation to accomplish this objective.
    Section 301 seems reasonable and I support its adoption.
H. Transmission Infrastructure
    Section 401 directs the Commission to adopt policies that 
facilitate construction of transmission facilities needed for 
competitive electricity markets, and to report to the Congress on 
transmission adequacy. I support these goals. I am particularly 
supportive of the legislation's specific goals such as promoting 
economically efficient enlargement of transmission networks, including 
the provision of proper price signals so that new generation and 
transmission is built where it provides the lowest overall cost to 
consumers.
I. Transmission Siting
    Section 402 enacts backstop transmission siting authority for the 
Commission. In previous testimony, I have recommended that Congress 
transfer to the Commission the authority to site new interstate 
electric transmission facilities. The transmission grid is the critical 
superhighway for electricity commerce, but it is becoming congested 
because of the new uses for which it was not designed. Transmission 
expansion has not kept pace with changes in the interstate electricity 
marketplace.
    Although the Commission is responsible for well functioning 
electricity markets, it has no authority to site the electric 
transmission facilities that are necessary for such markets to thrive 
and produce consumer benefits. Existing law leaves siting to state 
authorities. This contrasts sharply with section 7 of the Natural Gas 
Act, which authorizes the Commission to site and grant eminent domain 
for the construction of interstate gas pipeline facilities. Exercising 
that authority, the Commission balances local concerns with the need 
for new pipeline capacity to support evolving markets. We have 
certificated well over 15,000 miles of new pipeline capacity during the 
last six years. No comparable expansion of the electric grid has 
occurred.
    I continue to recommend legislation that would transfer siting 
authority to the Commission. Such authority would make it more likely 
that transmission facilities necessary to reliably support emerging 
regional interstate markets would be sited and constructed. A strong 
argument can be made that the certification of facilities necessary for 
interstate commerce to thrive should be carried out by a federal 
agency.
    Adequate grid facilities are essential to robust wholesale power 
markets. I am confident that transmission will be built in sufficient 
quantities if siting authority is rationalized, rate jurisdiction is 
clarified, and adequate cost recovery mechanisms and risk-based rates 
of return are allowed.
    Proposed section 402 provides the Commission with backstop siting 
authority to ensure that the necessary transmission facilities are 
built. This provision appears to provide appropriate respect for the 
siting prerogatives of the states and has my support.
J. Federal Utilities
    I have long advocated placing all transmission providers under the 
same set of rules. Placing TVA, BPA and the Federal Power Marketing 
Administration under Commission authority has my full support.
    Section 523 permits BPA to transfer operational control of its 
transmission facilities to an RTO. Although I strongly support allowing 
BPA to participate in an RTO, I would not limit its participation in an 
RTO of a specific scope as this section does. In addition, I would 
recommend that Congress specifically authorize TVA and the PMAs to 
participate in RTOs determined to be appropriate by the Commission.
K. Penalties
    Section 703 expands the scope of civil penalties to include all of 
Part II of the Federal Power Act. This provision moves toward giving 
the Commission much needed tools to police the markets and I support 
it.
          ii. recent ferc action on rto formation and markets
A. RTO Formation
    The Commission has received a number of proposals to form RTOs, and 
has acted on most such proposals. In general, the Commission has 
strongly encouraged RTOs to grow larger and has provided guidance on 
independence and RTO governance. In July, the Commission issued an 
order expressing its preference for no more than four large RTOs in the 
nation, but has recently indicated that greater flexibility will be 
allowed in RTO formation.
    During October 15-19, 2001 the Commission held five days of public 
hearings on a wide range of issues related to RTO formation and market 
design. In an order issued November 7, the Commission indicated a 
desire to receive additional comment from state commissions with regard 
to RTO formation, and indicated that additional cost benefit analyses 
on RTOs would be conducted. Also, the Commission stated its intention 
to standardize market design rules as appropriate. The November 7 order 
stated that since it is not possible for all RTOs to be in operation by 
our December 15, 2001 deadline, the Commission will set out in future 
orders a time line for continuing RTO progress in each region. I expect 
the Commission to act on such orders in the near future.
B. Market-based Rates
    In two orders the Commission issued November 7, 2001, we began to 
correct severe weaknesses in our market based pricing policy. My 
longstanding concerns had been sharpened by the failure of the 
California market and the economic consequences that spun from it. 
We've learned that we must accurately assess market conditions when 
depending on markets to discipline prices. And we must provide adequate 
refund protection to customers when poorly functioning markets do not 
protect them from unreasonable prices.
    In AEP Power Marketing, et al., the Commission took three important 
steps in our market based pricing policy. First, we concluded that our 
traditional market power analysis no longer adequately protects 
customers against generation market power.
    Second, we announced a new interim analytic screen to protect 
customers until we develop the tools we need for the longer term. That 
interim tool is the Supply Margin Assessment, or SMA, and will be 
applied to all sales except those into an ISO or RTO with approved 
monitoring and mitigation. This is a major step in the right direction. 
The SMA improves on the old analysis by taking into account 
transmission capability and by looking to the critical notion of a 
``pivotal supplier'' in a market. When supplies are tight, prices in 
electricity markets can run up quickly, especially when there is a 
pivotal supplier whose capacity is needed to satisfy demand. The SMA 
addresses that problem and does not allow pivotal suppliers to charge 
market based prices. The SMA is a major improvement. Like most new 
policy tools, it is not perfect, but we are moving in the right 
direction. As with any analytic method, it is only a snapshot of 
current market conditions. But if market conditions change, parties are 
free to file a complaint showing that the new conditions result in a 
seller failing the SMA screen.
    Third, the Commission applied the SMA to three sellers in the 
context of their triennial updated analysis, found that they fail, and 
put in place innovative mitigation measures requiring the applicants to 
offer all uncommitted generation capacity into the spot market. Sales 
will be priced at the traditional split savings adder. As the order 
points out, maintaining an accurately priced spot market is the single 
most important element for disciplining longer term transactions. Thus, 
with the spot market mitigation in place, an applicant may freely 
negotiate longer term transactions but must post on its web site a 
portfolio of long term products and prices that are available.
    In another order issued November 20 in EL01-118, the Commission 
took two additional important steps. First, we announced the start of a 
generic proceeding to develop new analytic methods for evaluating 
markets and market power on a long term basis. I fully support 
launching this important initiative. Second, the order initiated a 
section 206 proceeding to place a refund condition in the tariffs of 
sellers with market based pricing. That condition would prohibit 
anticompetitive behavior and the exercise of market power. This is an 
improvement providing customers with some added protection, and to that 
extent I support the order.
    But we should do more for customers. The order fails to provide any 
refund protection to customers when market structure and market rules 
are flawed and unjust and unreasonable rates result. The Federal Power 
Act states that such rates are unlawful. This is precisely the 
situation in which the Commission found itself in the California 
proceeding. We did not make any findings of bad behavior on the part of 
any sellers. We found only a market that was badly broken. The risk of 
a broken market should not be placed solely on customers. Our tariff 
condition should provide for refunds whenever the Commission finds that 
unjust and unreasonable rates are charged.
                            iii. conclusion
    I stand ready to answer questions and to assist the Subcommittee in 
any way. Thank you for this opportunity to testify.

    Mr. Barton. Thank you, Commissioner.
    We would now like to hear from the chairman of the 
Tennessee Valley Authority. I believe this is your first time 
to testify.

              STATEMENT OF GLENN L. MCCULLOUGH, JR.

    Mr. McCullough. Before your subcommittee, it is, sir.
    Mr. Barton. Yes, sir.
    Mr. McCullough. Thank you, Mr. Chairman.
    Mr. Barton. Your statement is in the record, and you are 
recognized for 6 minutes.
    Mr. McCullough. Thank you very much, Mr. Chairman and 
distinguished members of the subcommittee. I would like to 
thank you, Chairman Barton, as well as Ranking Member Boucher, 
for your leadership on issues relating to the supply of 
reliable and affordable electricity throughout the Nation. I 
would also like to express my gratitude and appreciation to 
Congressman Ed Bryant, Congressman Chip Pickering, Congressman 
Bart Gordon and Congressman Ed Whitfield, all of whom sit on 
this subcommittee as they have been amongst the strongest 
advocates for the people of the Tennessee Valley and TVA.
    We are very grateful to them for their collective support 
of the TVA title. The title represents their consensus, and 
ours, on the best way to comprehensively address TVA's place in 
a more competitive market. I would also like to thank the 
Tennessee Valley Public Power Association, the Tennessee Valley 
Industrial Committee for their help in drafting this important 
legislative proposal. The title, which is now part of H.R. 
3406, affirms TVA's role as a steward within the Valley region, 
and it maintains the integrity of TVA's mission. It ensures the 
availability of affordable electricity for rural and fixed-
income consumers in the Tennessee Valley, and it ensures the 
reliability of TVA's power supply and transmission system.
    The specific provisions of the title are discussed in my 
written testimony, and TVA and its customers believe that these 
provisions are in the best interest of the people and the 
businesses of our region. We are grateful to everyone who had a 
role in developing the TVA title, and we appreciate the support 
it has received from members of the subcommittee.
    It has been more than 2 years since a representative from 
TVA appeared before this subcommittee, Mr. Chairman. In that 
time there have been many changes, and truly it is a new day at 
TVA. Director Skila Harris and I began serving the Valley in 
November 1999. Director Bill Baxter was sworn in less than 2 
weeks ago. We are committed to making TVA a more responsible 
and business-like agency as we work to deliver affordable, 
reliable power, a cleaner environment and a vibrant economy for 
the good of the people.
    I would like to report to the subcommittee that TVA is 
stronger operationally and financially as our entire 
organization prepares for the future of competition. And I am 
proud to say that through our diverse power supply, reliable 
transmission system, operational and financial performance and 
leadership in renewable energy and new technologies, TVA is 
addressing some of the key concerns in our Nation's energy 
future. While there is still much work to be done, I am 
confident that TVA will add value in the competitive 
marketplace as a result of our excellent business performance.
    Now let me take just a couple of moments to share some of 
the recent examples of the value we provide to the people in 
the Tennessee Valley. Through distributors of TVA power, we 
provide affordable, reliable electricity to 8.3 million 
residential consumers. And in recent years, we have pushed 
TVA's performance to new levels of excellence. TVA won the 2001 
Quality Cup awarded by the Rochester Institute of Technology in 
USA Today for comprehensive business improvement initiatives. 
During fiscal year 2001, our customer outage duration was three 
times better than the average of other U.S. companies we 
benchmark. In 2000, TVA's Sequoyah and Browns Ferry Nuclear 
Plants were ranked as the second and third most efficient 
nuclear power generators in the Nation.
    TVA is providing financial value to our customers, having 
had only one rate increase in 14 years. We reduced TVA's debt 
by $610 million in fiscal year 2001, which is $160 million more 
than was projected. We reduced TVA's overall interest expense 
as a percentage of revenue to its lowest level in more than 15 
years. We are repaying the U.S. Treasury for its original 
investment in the TVA power system. For fiscal year 2001, our 
payment to the Treasury, including principal and interest, was 
$55 million. TVA does not receive any Federal appropriations.
    TVA's commitment to excellence also provides value for the 
environment. TVA has conducted a multibillion dollar program to 
further reduce nitrogen oxide and sulfur dioxide emissions from 
our generating plants. By 2005, we will have reduced sulfur 
dioxide emissions 75 to 80 percent since 1977. Nitrogen oxide 
emissions during the ozone season will be down by 70 to 75 
percent. In addition, TVA is one of the first three utilities 
in the Nation to offer an accredited green power option for our 
customers.
    In these and many other ways, TVA provides value to our 
customers and value to the Nation. Our priorities are closely 
aligned with the issues identified in the national energy 
policy. By providing reliable, affordable, environmentally 
sound energy, TVA is demonstrating many of the objectives 
outlined in this policy. I will work very closely with you, 
with every member of this subcommittee as we continue to work 
on ways to improve affordable, reliable energy for the Nation.
    Thank you for this opportunity to appear before you today, 
and I look forward to answering any questions.
    [The prepared statement of Glenn L. McCullough follows:]
  Prepared Statement of Glenn L. McCullough, Jr., Chairman, Tennessee 
                            Valley Authority
    Good afternoon, Mr. Chairman and distinguished members of the 
Subcommittee. I would like to thank you, Chairman Barton, as well as 
Ranking Member Boucher, for your interest and leadership on issues 
relating to the continuous supply of reliable and affordable 
electricity throughout the Nation. I assure you that it is an issue we 
take very seriously at the Tennessee Valley Authority.
    I am pleased to be here today to discuss with the subcommittee how 
H.R. 3406, the Electric Supply and Transmission Act, addresses the way 
in which TVA might look in the more competitive and restructured 
electricity marketplace of the future. Together with the Tennessee 
Valley Public Power Association (TVPPA), the trade association 
representing the distributors of TVA power, and the Tennessee Valley 
Industrial Committee (TVIC), which represents TVA's large industrial 
customers, I am very pleased that the Valley's consensus language was 
accepted as the TVA title in H.R. 3406. Additionally, this language is 
generally acceptable to the administration. The regional consensus 
approach, included in this title, reflects a great deal of hard work 
and compromise from stakeholders throughout the Valley, and represents 
a common-sense approach to addressing, in a comprehensive manner, the 
unique setting of TVA in the electricity marketplace. It is for this 
reason that I would like to express a great deal of gratitude and 
appreciation to Congressman Ed Bryant, Congressman Chip Pickering, 
Congressman Bart Gordon, Congressman Rick Boucher, and Congressman Ed 
Whitfield, all of whom sit on this subcommittee, as they have all been 
among the strongest advocates for TVA, TVPPA, TVIC, and most 
importantly the Valley's ratepayers, throughout this process.
                            a new day at tva
    It has been more than two years since a representative from TVA 
last appeared before this subcommittee. In that time, there have been 
many changes, and it is a new day at TVA. We have a completely new 
Board. Director Skila Harris and I began serving the Valley in November 
of 1999 and Director Bill Baxter was sworn in less than two weeks ago. 
We are committed to making TVA a more responsible and business-like 
agency as we work to deliver affordable, reliable power, a cleaner 
environment and a vibrant economy for the good of the people.
    I would like to report to the subcommittee that TVA is stronger 
operationally and fiscally as the entire organization prepares for the 
future of competition. While there is still much work to be done, I am 
confident that a very bright future lies ahead for the people we are 
charged to serve. As a result of our hard work, I am certain that we 
will succeed in the competitive marketplace as people continue to 
recognize the value TVA delivers through excellent business 
performance.
                             tva background
    TVA, which is the Nation's largest provider of public power, was 
created by Congress in 1933 to provide for flood control, navigation, 
and the generation of electric power in the seven-state region of the 
Tennessee Valley, which includes Alabama, Georgia, Kentucky, 
Mississippi, North Carolina, Tennessee, and Virginia. This mission is 
the cornerstone of our service across the Valley today. Together with 
158 municipally and cooperatively owned distributor customers, TVA 
provides electricity ultimately to 8.3 million residential consumers 
throughout the Tennessee Valley, while managing and developing the 
Tennessee River watershed and providing leadership for sustainable 
economic development for the people we serve.
    The Tennessee River system is the fifth-largest river basin in the 
United States. It stretches 652 miles from Knoxville, Tennessee, to 
Paducah, Kentucky, where it flows into the Ohio River and ultimately 
the Mississippi. It encompasses over 11,000 miles of shoreline, 54 dams 
and 14 locks. About 34,000 loaded barges travel the Tennessee River 
each year--the equivalent of two million trucks traveling the roads. 
TVA, incidentally, no longer receives any federally appropriated funds 
for the management and stewardship of the Tennessee River. TVA has used 
power revenues for these functions since October 1999.
    TVA's power system has a generating capacity of 30,365 MW. TVA 
operates 59 coal fired units at 11 plants, five nuclear reactors at 
three plant sites, 29 hydro-power plants, and five combustion turbine 
plants. The Bush Administration's National Energy Policy released 
earlier this year recognizes the importance of diversity in energy 
supply--including new attention to promoting nuclear energy, clean coal 
technologies, and renewable energy sources. TVA's mix of coal, nuclear, 
hydroelectric, and natural gas-fired generation resources illustrates 
the value and benefits of such diversity. In FY2001 TVA's generation 
sources were approximately 65 percent fossil and combustion turbine, 29 
percent nuclear, and 6 percent hydropower.
    TVA provides wholesale power to 158 local power distributors and 62 
directly served customers through a network of 17,000 miles of 
transmission lines in the seven state region. The TVA Act directs the 
three members of the Board of Directors, all of whom are appointed by 
the President and confirmed in the Senate, to set TVA's electric rates 
as low as feasible, while recovering the full costs of providing 
electricity for the Valley.
                       tva's business performance
    I am very proud of the way employees from throughout TVA have 
responded to the call of service in the public interest throughout the 
Tennessee Valley. Here are just a few examples of our most recent 
accomplishments:
POWER SYSTEM
 In Fiscal Year 2001, TVA transmission reliability to customers 
        was 99.999 percent. To put that In perspective, we are three 
        times better in terms of customer outage duration than the 
        average of the U.S. companies we benchmark.
 TVA won the 2001 Quality Cup awarded by the Rochester 
        Institute of Technology and USA Today for a comprehensive 
        improvement initiative. The improvements helped TVA set a best-
        in-industry record for transmission system operating 
        efficiency.
 The July 2001 issue of Nucleonics Week ranked TVA's Sequoyah 
        and Browns Ferry nuclear plants as the second and third most 
        efficient nuclear power generators in the Nation in 2000.
 On October 15, 2001, TVA broke ground on the nation's first 
        large-scale flow-battery energy-storage plant. The Regenesys 
        plant, located in Mississippi, will store electricity during 
        off-peak periods and release it for use when the need for 
        electricity increases, using a chemical process to store 
        energy.
FINANCIAL
 Fiscal Year 2001 power sales increased by 1.2 percent over 
        sales the previous year and interest expense was down $103 
        million from the 2000 fiscal year.
 TVA reduced debt by $610 million in 2001, $160 million more 
        than projected, for a total reduction of almost $2.4 billion 
        since 1997. Interest expense in 2001 accounted for 23 percent 
        of TVA revenue, down from a high of 34 percent in 1997, for the 
        lowest percentage in more than 15 years. TVA continues to be 
        interested in further cost cutting and debt reduction where 
        warranted.
 Fiscal year 2002 budget projections estimate revenues 
        exceeding $7--billion for the first time in TVA's history.
 In the fiscal year 2001, TVA sent $55 million to the United 
        States Treasury, $20 million in principle and $35 million in 
        interest, on the original appropriated investment in TVA. To 
        date, TVA has returned to the Treasury $3.4 billion, including 
        interest, on the original investment of $1.419 billion.
ENVIRONMENTAL STEWARDSHIP
 On October 4, 2001, TVA announced plans to construct five 
        scrubbers, one each at fossil plants in Kentucky and Alabama, 
        and three at two plants in Tennessee. They will cost about $1.5 
        billion altogether and when completed will collectively reduce 
        emissions of sulfur dioxide by more than 200,000 tons per year. 
        At that point TVA will have reduced total SO2 emissions by 85 
        percent since 1977.
 TVA is also in the midst of a $1 billion program to reduce 
        nitrogen-oxide emissions at its plants by constructing 18 
        selective-catalytic-reduction systems--or SCRs--on 25 coal-
        fired generating units. It is one of the most massive 
        pollution-control programs in the nation. This will reduce 
        TVA's NOX emissions by 70 to 75 percent during the 
        ozone season by 2005.
 TVA is one of only three utilities in the nation to offer a 
        fully accredited Green Power option to its customers. Along 
        with participating distributors, TVA offers residential 
        consumers 150 kilowatt-hour blocks of electricity that include 
        a portfolio of wind, solar, and land-fill gas generation.
 TVA's power system is setting production records, operating 
        more efficiently and more cost-effectively than at any time in 
        the past three decades, and TVA has had only one rate increase 
        in 14 years. Affordable, reliable electric power is the fuel of 
        our region's economy, and TVA is performing as a business as it 
        delivers power production, economic growth and environmental 
        stewardship for the region.
                             the tva title
    Once again, I would like to express my appreciation for the 
subcommittee's leadership on electricity issues and to you 
specifically, Chairman Barton, for working closely with members from 
the Tennessee Valley delegation on issues relating to TVA. As a Federal 
corporation, TVA plays a unique role in meeting the power supply needs 
of the seven-state Tennessee Valley region, and there are statutory and 
regulatory issues that affect our region that are not experienced by 
investor-owned utilities. As a result, TVA has been involved in 
extensive discussions with distributors of TVA power and industries 
directly served by TVA in an effort to reach consensus on the 
appropriate role for TVA to play in a future restructured competitive 
environment. The TVA provisions that are part of H.R. 3406 reflect that 
consensus, although they are still under review within the 
Administration. Some of the key provisions within the TVA title in H.R. 
3406 include:
Equitable Competition
 Restrictions to fair competition, such as the TVA ``Fence'' 
        and ``Anti-Cherry Picking'' amendment will be removed 
        simultaneously on the effective date of federal legislation.
TVA Power Sales
 TVA will only sell electricity outside of the existing service 
        area at the wholesale level. These sales will be limited to 
        electricity that is excess to the demand of its customers in 
        the TVA service area.
 TVA will be permitted to sell to its existing retail customers 
        inside the TVA service area. Only if retail open access is 
        implemented in a distributor's service area will TVA be allowed 
        to sell to new retail customers in that distributor's service 
        area.
Regulation of TVA Transmission System
 TVA transmission service rates, terms and conditions will be 
        subject to regulation by the Federal Energy Regulatory 
        Commission.
    It would come as no surprise to any of you that TVA is a large and 
complex organization and quite different from any other utility in the 
Nation. The area in which TVA can serve electricity is limited by law. 
The boundary that was established by the 1959 amendments to the TVA Act 
is known as the ``fence.'' While TVA is limited outside the fence, 
other utilities are limited in their ability to serve loads within the 
fence. Many of these unique and complex issues may require 
Congressional action.
    TVA's mission, as codified by the TVA Act, is to serve the people 
of the Valley. There is a key theme throughout the TVA title contained 
in H.R. 3406 that I would like to emphasize--the title continually 
reaffirms TVA's role as a steward within the Valley region. The 
original mission is left unchanged by the title I have come here to 
discuss today.
    In the effort to maintain the integrity of our original mission, 
TVA has agreed to several restrictions that I am certain no other 
utility in the country would be willing to subject themselves to. The 
TVA Title in H.R. 3406, creates a model where TVA would be required to 
renegotiate its current contracts with all of its customers inside the 
Valley in order to bring about wholesale competition. Furthermore, with 
respect to sales outside the Valley, this title prohibits TVA from 
selling to any retail customers outside the Valley, and allows only the 
sale of excess power to wholesale customers outside the Valley.
    TVA has been in the process of preparing for competition for 
several years. As I mentioned earlier, we have reduced debt by $2.4 
billion over the past four years, while reducing the interest burden of 
our debt from a high of 34 percent of our costs in 1997 to the current 
rate of 23 percent. Additionally, we have been paying debt down while 
making significant upgrades to our transmission system to ensure 
reliability, adding peaking generation to our system, and installing 
significant emissions control equipment at our fossil plants across the 
Valley. All of these things add up to better service to our customers. 
We continue to believe that when competition arrives in the Valley, we 
will be the low-cost choice for our customers.
    Customer service has been a core component of the process of 
developing the consensus title. To this end, in addition to internal 
preparation for competition, we are also in the midst of discussions 
with our customers about the future. We have offered distributors of 
TVA power a 10-percent partial-requirements contract and a shorter-term 
contract. In doing so, we hope to promote a new relationship with our 
customers through innovation and flexibility. Moreover, while some 
distributors are seeking shorter-term contracts, others would like 
long-term contracts with more price stability and rate security. The 
needs of our customers are diverse. By working closely with 
distributors and knowing what each distributor plans for its future, 
TVA can best serve the Valley in the competitive future.
    I would like to share several basic principles that we believe are 
necessary, with respect to the TVA Title, as this subcommittee moves 
forward: (1) that TVA legislation affirms TVA's responsibility for the 
integrated resource management of the Tennessee River and economic 
development; (2) ensures the availability of affordable electricity for 
rural and fixed-income consumers in the Tennessee Valley; and (3) 
ensures the continued reliability of the power supply and the 
transmission system.
                               conclusion
    TVA is working hard to prepare for competition by reducing our 
debt, keeping our electric rates low, and efficiently managing the 
Tennessee Valley's integrated resource system. I want to assure all of 
you that TVA will continue to work cooperatively with Congress and the 
people of the Valley to ensure that restructuring is done in a way 
that's fair to TVA, to the ratepayers, to our distributors, to 
taxpayers, and that it enables us to set the standard for public power 
in the future.
    We have worked with many stakeholders, especially TVPPA and TVIC, 
to develop a regional, common sense approach to restructuring. I am 
very proud of the progress we have made at TVA, and I have never been 
more confident that the Valley's future is bright. I hope to continue 
working very closely with this Subcommittee, and I applaud you all for 
your insight and leadership. Furthermore, TVA and the Administration 
look forward to working with Congress on the legislative provisions in 
Title V dealing with TVA. Thank you again for the opportunity to appear 
here today, and I look forward to answering your questions.

    Mr. Barton. Thank you, Mr. Chairman. The Chair recognizes 
himself for 5 minutes for questions.
    There is never going to be a good time to comprehensively 
try to change an industry that is as integral to our Nation's 
economy as the electricity generation, transmission and 
distribution industry, because there are always going to be 
vested players with status quo special interests that they wish 
to protect. So there comes a time you have to hold a number of 
hearings, and then you have to look at all the record and put 
your best team on the field, so to speak. And that is what the 
latest bill is, H.R. 3406.
    Let me say with regard to Enron in that the bill that the 
subcommittee passed last year Enron opposed. The only CEO I 
have ever thrown out of my office was the CEO of Enron, Mr. 
Jeff Skilling, because he came into my office last year and 
basically told me what was going to be in the bill or else, and 
I said, ``or else,'' and he was asked to leave. Now, we later 
had some substantive discussions, but if anybody thinks that 
Enron can dictate what this subcommittee does or what this 
subcommittee chairman does, I have got a bridge in Brooklyn 
that I want to try to sell you, because that just does not 
happen.
    And I can also say with regards to what happened at Enron 
that it is amazing to me that the largest player in making the 
market, Enron Online was the largest market maker for wholesale 
electricity, and I think I am correct in saying for natural gas 
too, although I may be incorrect in that, that it was larger by 
orders of multiples. The day after Enron Online went blank 
there was no energy price spike, there were no shortages of 
electricity or natural gas anywhere in this country.
    And if you think about that, if you were in a town that had 
two grocery stores, or maybe three grocery stores, and one was 
a little Mom and Pop on the corner, and the other one was one 
that had just come into town, and the other one was one that 
dominated the market and had 70 percent of the market, and that 
grocery store shut down. People would probably not have food 
the next day in certain parts of that community. That did not 
happen when Enron went belly up. The market worked. Power was 
presented and the prices didn't spike and life went on.
    So I don't think that this is a hearing necessarily going 
to be dominated by what happened at Enron. Enron leveraged 
itself to the hilt and engaged in some accounting practices 
that were very questionable, to say the least. And we have 
investigators looking at those, as does the Financial Services 
Committee. So if there are corrections to be made because of 
what happened at Enron, so be it, but that does not take away 
the need to create a national electricity system that is based 
on open markets that are accessible to all.
    Now let me ask a few questions to our distinguished panel. 
Does everybody on the panel support the position in the bill 
that everybody, whether they are an IOU, a muni or a co-op, if 
they are engaged in the interstate transmission, has to be a 
part of an RTO? Is there anybody that opposes that? Okay. 
Nobody is saying anything, so the Chair is going to say they 
are all looking at me like they at least accept it if not 
support it.
    Mr. McCullough. Mr. Chairman, TVA believes that the concept 
of a Regional Transmission Organization in the Southeast is 
desirable, and we pledge to work cooperatively with this 
subcommittee toward that concept in a way that is fair to our 
ratepayers, our distributors and our bond holders.
    Mr. Barton. Well, the bill does make all Federal power 
administrations, including Bonneville and TVA, FERC 
jurisdictional for interstate transmission rates.
    To my four commissioners, the pending bill requires that 
RTOs be up and functional 1 year after date of enactment. I am 
told that the pending proposals--and I don't want you to 
comment necessarily on any specific proposal--but that the 
proposals on RTOs that are currently before the FERC those are 
in sufficient shape that within a year after passage of this 
bill, if we maintain the current language, we could have RTOs 
up and functioning. Do you all agree or disagree with that?
    Mr. Wood. Chairman Barton, I would agree with that.
    Mr. Barton. You would agree. And the other FERC 
commissioners all agree with that.
    We have a title in this on reliability, which several of 
the commissioners, I believe, in your written--and I know the 
Deputy Secretary of Energy, in his statement, said is an 
improvement over the past bill. Would the FERC commissioners 
wish to comment on the reliability title of the bill?
    Mr. Massey. I think it is a good title, Mr. Chairman. I 
think you ought to enact it.
    Mr. Barton. Oh, well, I appreciate that.
    Ms. Breathitt. I support it and said so in my testimony and 
didn't have any recommended tweaks or changes.
    Mr. Barton. Okay. I have got 12 seconds left; I want to ask 
some questions later in the hearing, if we have time, about the 
FERC order on market power and the ability to set market 
prices. I have had a phone conversation with Chairman Wood 
about this. I read, I believe, the dissenting opinion that 
Commissioner Breathitt had when that order came out. I share 
some of Commissioner Breathitt's concerns about it. It would 
seem to me that we would not want to penalize a market maker or 
a market provider before there has even been a complaint of 
market power.
    And as I understand the order, just the fact that you have 
enough reserve capacity so that if your reserve capacity is 
larger than the peak power demand, you are deemed automatically 
to have market power and to have used that market power. And to 
me that is a little bit like being convicted before there has 
even been a crime committed. So I have got some concerns about 
that. I would let Chairman Wood comment briefly, and then I am 
going to have to go to Mr. Boucher, because my time has 
expired.
    Mr. Wood. Thank you, Chairman Barton. The supply margin 
assessment test that we adopted following discussions we had 
since the first day I was on the Commission, I think all four 
of us and our prior colleague, Curt Hebert, recognize that the 
tests that we were applying to market-based rate authority, 
which is in effect a deregulation certificate, in light of the 
California history and the need for the Commission to do what I 
would characterize as a pretty dramatic response to that, is to 
make sure that this never happens again.
    There is a balance between having a totally deregulated 
market, which is what we had in the West, and the need to do 
what we had to do on June the 19th, which was put a mitigation 
plan over the top of every single player in the entire western 
half of the country. We were looking for something, or I was, 
certainly, looking for something much more surgical than that, 
that would not be an after-the-fact response but would in 
effect look at who has the ability to exercise market power, 
allow them to make the money and to make, in the formula that 
we adopted, sufficient money, but not allow them to go above a 
cloud of reasonable rates, which we are required under the 
Federal Power Act to maintain a zone of reasonableness for 
rates in advance.
    It is not a conviction of something, they are not being 
punished for something, but we identify people who because of 
their size in a relevant market have the ability to actually 
control the price of that market and say you can do so much but 
not more than that. It is to me an example of what I would hope 
any Federal agency would do: get through the crisis and then 
look at what could in fact be a more focused and surgical 
solution toward making sure that crisis never happens in any 
other part of the country again.
    So with the 1,200 people who have deregulation 
certificates, there may be a few, as they come back through the 
Commission, that because of their size are going to be subject 
to the supply margin assessment test. But I think that is a 
pragmatic response to a situation that we want to ensure never 
happens again, because customers do not need to go through what 
they went through in the West again.
    Mr. Barton. Well, put me down as undecided.
    Mr. Wood. Okay.
    Mr. Barton. And we will continue to dialog on this. But the 
chairman would recognize the distinguished ranking member, Mr. 
Boucher, for 5 minutes of questions.
    Mr. Boucher. Well, thank you very much, Mr. Chairman. I 
welcome this opportunity to have a conversation with the 
distinguished members of the Federal Energy Regulatory 
Commission about a number of the provisions that are contained 
in the legislation now before us. I apologize for being absent 
while you made your statements. You may have actually answered 
some of the questions I will propound. I had to attend briefly 
a hearing in another committee, the name of which is rarely 
ever mentioned in this committee, but I do apologize. It shall 
not be mentioned here. I apologize for being absent.
    I am interested in your views on these matters, so let me 
just ask all of these questions at one time, and you can 
respond to those questions that you choose to respond to as a 
group. First of all, I am interested in your view with regard 
to a continuation of the FERC's merger authority. I suspect you 
have definite views on this, and I would welcome those views. I 
happen to think that if we repeal your authority simultaneously 
with repealing the Holding Company Act, all of the inevitable 
consolidation in the industry that will occur in the wake of 
that will produce enormous market power concerns, and you would 
then be perhaps powerless to address those if you didn't have 
merger review authority. So your response to that would be 
welcome.
    As a second matter, I am interested in your response to the 
provisions in the bill that would prescribe the way in which 
investor-owned utilities and others who own transmission become 
members of Regional Transmission Organizations. It strikes me 
as a rather detailed prescription, and your response to those 
particulars would be welcome. It may be that you would prefer a 
simple statement in the legislation clearly confirming your 
authority to regulate RTO membership, and if that is the case, 
I hope you will tell us.
    As a third matter, the bill contains provisions on 
incentive pricing for the construction of new transmission, and 
my question to you is whether that is appropriate, in your 
opinion, or as a possible alternative should we specifically 
empower, or can you empower, Regional Transmission 
Organizations to bid out that construction, to manage the 
construction and in some way through its own mechanism to 
achieve the goal of having new construction built in those 
parts of the country where new construction is required. And so 
your view with regard to incentive pricing and the alternative 
of simply having the RTOs undertake the job of bidding out the 
new construction would be welcome.
    And, then finally, I would like to have your view with 
regard to the language in the proposed statute that relates to 
uniform interconnection standards. I know that you have a 
notice of proposed rulemaking out on that subject. Do you 
believe that you have sufficient statutory authority to adopt a 
standard? Do you need additional authority? And what is your 
reaction to the provision in the bill that addresses uniform 
interconnection standards? Mr. Wood, would you like to begin?
    Mr. Wood. Yes, sir, Mr. Boucher. In brief, the merger 
authority issue, I probably don't have as strong a feeling on 
that as my colleagues do. I think I share their general 
direction, but I also recognize that we are the only agency in 
the government that does that. If you want that issue to 
continue, then it probably should be stuck in someone else's 
statute that they should have the duties that we have, if there 
is a concern about inefficiency in government there.
    I do think in just the brief time I have been on the 
Commission, we deal with mergers rather routinely in 90 days. 
There are a few examples of those that are very slow but 
certainly nothing like the FCC that I know the committee has 
been concerned with in the past.
    The consolidation that will happen in the industry as a 
result of mergers, combined with the RTO provision, and 
consolidation of companies that transmit and stay regulated are 
probably not a big concern; in fact, it probably will happen to 
recognize the economies of scale. Consolidation of generation 
owners within a given market, yes, that would be a market power 
concern. Quite frankly, our tests that I just discussed briefly 
with Mr. Barton would, in effect, limit those companies' 
ability to exercise that market power as it works today. But 
there are two things going on there.
    RTOs, I think that looking through those provisions, and 
there was some language there, but the main thing that when you 
look at successful models in the country that have set up 
wholesale markets that work is it is not just a transmission-
owning company game. They have the assets, but there are a lot 
of people that play in that market, and the most successful 
models, the ones here on the East Coast, the one in Chairman 
Barton's and my home State, and others around the world, did 
start very broadly from a broad stakeholder participatory 
effort. And I think that the way some of the language goes, and 
I mention this in my testimony on RTOs, is a bit more focused 
on the right of the transmission owner to stop something, to 
slow it down in court, et cetera, recognizing that there are a 
lot more people here than just the transmission owners; it is a 
wholesale market we are talking about.
    Mr. Boucher. So you would prefer not to have that language 
in that statute.
    Mr. Wood. Again, I think the confirming of the Commission's 
authority, as Chairman Barton outlined, is helpful. It was just 
reaffirmed yesterday that order 2000, which made it a voluntary 
effort, was just reaffirmed by the local court here in the D.C. 
Court of Appeals.
    Mr. Boucher. Well, let me ask you the other side of the 
equation, though. Do you see anything in the statutory 
provisions, the proposed provisions in this bill, that might 
restrict your authority to take the kinds of steps that you are 
currently taking with regard to RTO membership?
    Mr. Wood. Yes, and those are what I specifically mentioned 
in my written testimony. So I could go through those, but, by 
and large, certainly the haste to get into an RTO is a 
positive. I think we are getting there, but, certainly, you 
never know until you actually get it stuck in the sand that you 
are there. And the nailing-down of some contours in what ought 
to work is positive but in some cases could be a little more 
detailed than we may need 5 years from now, because these will 
morph over time into institutions that address the needs of 
their customers and of their owners. And so my only concern is 
just a general statutory legislative type concern that very 
specific language, while it may work today may 5 years from now 
be difficult. But that is not a critical ``at-the-heart'' 
concern.
    Incentive pricing, requiring bidding out, we haven't 
discussed this as a body, but I certainly would intend that it 
be an option out there that should be employed anyway to ensure 
that the best product for the least cost is what we get in 
these systems.
    Mr. Boucher. On that note, do we need to do something 
statutorily to authorize the RTOs to undertake bidding out, or 
is this something that their basic charters could empower them 
to do?
    Mr. Wood. Well, I think the basic charter of the RTO could. 
If, however, you are in conflict with a State statute that says 
only a regulated utility can build a power line, as opposed to 
a merchant that may want to come in and invest in a power line 
to fix a constraint----
    Mr. Boucher. So some provision that affirmatively empowers 
RTOs to bid out would be a helpful measure.
    Mr. Wood. And also follows through and says if you are in 
fact the winning bidder, that you have a right to move forward 
under perhaps some Federal authority to build that line. Then 
that, of course, ties back into the siting issue, which I know 
is quite delicate and I think was addressed pretty delicately 
by the bill.
    And your final provision was uniform interconnection 
standards. Yes, we are moving forward on uniform 
interconnection standards with regard to the larger power 
plants. But as I mentioned in my opening statement, what the 
Barton bill does that we cannot do is really allow a broad 
national template to be laid for the small distributed 
generation that I really think is a big part of our Nation's 
energy future.
    Mr. Boucher. And you would like to be able to do that.
    Mr. Wood. Well, I think we or the Department or somebody 
that--when I was at Texas, the Department gave the State a 
pretty nice grant of R&D money to actually get consultants to 
draft those standards. So the State of Texas has them. I 
understand that California and New York have similar although 
not exactly the same standards. And we could do a 50-state kind 
of approach to this here or you could have a very investor-
friendly, kind of here's how it works in America approach on 
distributed generation, which this bill would do. It would have 
the standards set nationally and implemented by the States.
    Mr. Barton. We can possibly do a second round if members 
wish.
    Mr. Boucher. Well, thank you, Mr. Chairman. I realize this 
has taken a great deal of time. This is a helpful conversation, 
Mr. Wood. I thank you for those answers. And in a second round, 
I would like to get the response of the other panel members to 
that same set of inquiries. Thank you, Mr. Chairman.
    Mr. Barton. Gentleman from Tennessee, Mr. Bryant's 
recognized for 5 minutes.
    Mr. Bryant. I thank the chairman. I would like to direct 
two of my first questions to the director of the TVA Board, 
Glenn McCullough. The first one, and I will give you the 
question and ask you to answer it, and then I will ask you 
another question after that. Keep that in mind as you answer 
from a timing standpoint. One of my biggest concerns is the 
continuation of reliable and affordable electricity to my 
constituents and to the people of Tennessee. Would this 
language in this bill do anything to jeopardize those issues of 
reliability and affordability?
    Mr. McCullough. No, Mr. Bryant; in fact, the consensus 
title language that is in tact in H.R. 3406 we believe is the 
best language to ensure affordable, reliable power for the 
people of Tennessee Valley and also to have a competitive, 
transparent marketplace.
    Mr. Bryant. Okay. My second question would be could you 
explain in some detail, if you would like, to this subcommittee 
some of the ways in which TVA and the distributors, the 158 
customers plus, I guess, the direct-buy customers for that 
matter, how TVA has been preparing for the eventuality of a 
restructured electricity marketplace?
    Mr. McCullough. Yes. Mr. Bryant, TVA is offering partial 
requirements contracts to our 158 power distributors. In other 
words, we are saying to the power distributor, ``You can look 
into the market, you can self-generate, you can go with an 
independent power producer.'' We recognize that an open 
marketplace offering competition and choice is desirable, and 
TVA wants to embrace that sort of marketplace. So the consensus 
title language enables distributors to buy power from another 
supplier. With 2 years notice, they can buy 10 percent of their 
requirements, and now they are under full requirements 
contract. With 3 years length of notice, they could buy all 
their power from another provider.
    Second, the language in the consensus title, which is 
contained in this bill, yields to FERC on oversight of 
transmission. That is a compromise, but we trust the judgment 
of FERC on oversight of transmission tariffs. And we feel like 
that that again demonstrates TVA's willingness to embrace a 
competitive and open marketplace.
    Third, the merchant plan activity in the Tennessee Valley 
is vibrant and brisk. Many independent power producers are 
interested in locating in the Valley. There is an abundance of 
natural gas pipelines. We go through the FERC-ordained 
procedure to enable them to access our transmission grid to 
deliver power to a place where it is needed. So TVA is working 
cooperatively in compliance with FERC, with the ordained 
procedure for independent power producers to access our system, 
and, again, we think that that is in line with the energy 
security needs of the country.
    Those are three ways that we are embracing competition and 
choice, and that language is contained in this bill.
    Mr. Bryant. Thank you. Let me ask one question to Mr. Wood, 
if I could, regarding transmission siting, which is an always 
an issue to me in terms of a State's and individual rights 
versus efforts by government, whether it be, again, a State 
government or Federal Government to site over somebody's 
private property. And there is a balance there. I would ask you 
to describe FERC's authority to site, in this case, natural gas 
pipelines. Is it the same broad authority necessary to 
effectively site interstate transmission lines? And what do you 
see on behalf of--or at least chairman of FERC, the right 
balance between State and regional concerns as well as 
individual concerns?
    Mr. Wood. Thank you, Mr. Bryant. I am probably not the 
strongest advocate for Federalizing this particular issue, as 
you might find either at the table or in the administration, 
but I think, having been a State commissioner, in fact, I am 
just filing an affidavit today in a lawsuit that I am still 
being sued for for putting a transmission line in South Texas, 
so I remember these responsibilities well and have to say from 
a personal level I would rather they not follow us up here to 
DC. But in the purpose of balancing what is in the best 
interest of the public, I would say largely, in my experience, 
the States have been able to address these issues.
    The one instance I mention in my testimony where there 
might be a concern is if a State statute, which is not the same 
one I had to deal with but I understand is true in about 10 or 
so States, says that you have to show there is a local benefit 
for the placement of a transmission line. If that transmission 
line is meant to bring up the voltage of the entire grid but 
you may be at the corner of a State, it may be difficult to say 
that the residents of that corner of Tennessee, in fact, are 
benefiting from the placement of this line. That may be more 
for the benefit of Kentucky. But yet that is an approval that 
is required by the State of Tennessee. So the regional aspects 
on the regional lines really would probably be the area where 
there is a problem.
    On the addressing lines that rest largely within a single 
State, I can't say I have heard of any problem with that. It is 
when you have got regional lines. And I would suggest, as I 
mentioned in my testimony, that these Regional Transmission 
Organizations, which are made up of multiple States, their 
commissions, some oversight by FERC, by all the participants in 
those regional markets, that a proper procedure may be to put 
it not at the Federal level, but at the regional level to look 
at what the best siting is. The Western Governors have set a 
good template in fact for how that ought to work and that I 
have kind of been on record of being a pretty good fan of.
    Mr. Bryant. Mr. Chairman, I think my time has expired.
    Mr. Largent [presiding]. Yes, sir; your time is expired. I 
recognize the gentleman from Tennessee, Mr. Gordon.
    Mr. Gordon. Thank you. Chairman McCullough, since you 
seemed to be up to bat a little earlier, I will return to you. 
As you know, the Tennessee Valley Authority was created to help 
control the flooding that was devastating to a large region of 
the country, as well as to help with economic development to 
one of the poorest regions of our Nation. And with that, there 
was a Federal investment. Three years ago, Congress has 
mandated there will be no more Federal dollars appropriated for 
the Tennessee Valley Authority. Not only that, but the TVA's 
continuing to pay back that original investment, millions of 
dollars to the Treasury every year, which is appropriate, an 
agreement that was made.
    I guess one thing that concerns me is that every river in 
the Nation the management is paid for by the Corps of Engineers 
except for the Tennessee River, which is underwritten by the 
ratepayers in that area. So it appears that not only is this a 
misconception that somehow there is a Federal appropriated 
subsidy to TVA not accurate, but TVA really is having to take 
up additional responsibilities that taxpayers take care of 
elsewhere. Would you want to comment on that if I am correct or 
not?
    Mr. McCullough. Well, Mr. Gordon, you are correct in every 
point you make. I would emphasize that while TVA does not 
receive any Federal appropriations, we have not in any way 
neglected our responsibility to manage and develop the 
Tennessee River and its tributaries. Appropriations, I believe, 
is your prerogative and the leadership of Congress, as far as 
TVA is concerned. We are committed to running TVA like the big 
business that is it, being held accountable to you and your 
colleagues here on the Hill. In fact, we benchmarked our 
performance in terms of water quality, in terms of navigation, 
flood control.
    And you are exactly correct, in 1933, the Tennessee River 
was out of control, and the Tennessee Valley was flooded almost 
every year. That has not been the case since the dams and the 
reservoirs have been constructed. Not only that, we have 
affordable, reliable power in the Tennessee Valley. And the 
Tennessee Valley's economy has grown significantly, providing 
better jobs for the people of the Tennessee Valley.
    Mr. Gordon. You had mentioned earlier in your testimony 
about some of the model environmental programs you were doing. 
Once again, these are programs that are underwritten by 
ratepayers, yet they are modeled for the entire Nation. Can you 
talk some more about those environmental initiatives?
    Mr. McCullough. Yes. We have significant water quality 
initiatives and amebas hydro and oxygenization program in our 
hydroelectric facilities to ensure that the water quality in 
the Tennessee Valley is among the best in the country. We are 
working very closely with State and Federal oversight 
authorities to ensure that the water--as a matter of fact, over 
4 million people get their drinking water each day from the 
Tennessee River. TVA has a mandate to ensure that it is of the 
highest quality. We are working on other initiatives to 
modernize and in fact to generate more hydroelectricity and at 
the same time have a higher quality of water. And we are doing 
it all without a penny of federally appropriated dollars. We 
think it is our reason for being, it is our mission, and we 
think it is a responsible way to run the business. But you are 
correct in the points you make.
    Mr. Bryant. Thank you.
    Mr. McCullough. Yes, sir.
    Mr. Largent. Does the gentleman yield back?
    Mr. Gordon. Yes. I yield back the balance of my time.
    Mr. Largent. Mr. Shimkus from Illinois is recognized for 
questions.
    Mr. Shimkus. Thank you, Mr. Chairman. Mr. Blake, two quick 
questions, then I have a question for the commissioners. Does 
the administration support the inclusion of currently non-FERC 
jurisdiction transmission owners into RTOs?
    Mr. Blake. Yes.
    Mr. Shimkus. And based upon the President's national energy 
policy, do you think that the Barton energy draft meets the 
intent of the administration when they presented their national 
energy policy?
    Mr. Blake. I think it is definitely in line with the 
administration's desire for comprehensive electricity 
legislation.
    Mr. Shimkus. Thank you. For the FERC commissioners, I am 
interested in this seams agreement issue, and especially for 
the State of Illinois in which we currently have three RTOs or 
we may have three RTOs. We understand that the cost of getting 
electricity into one's home may be 5 to 10 percent of the cost 
per kilowatt hour. As someone who is concerned about the 
competitive benefits to the individuals in my State, can you 
talk me through the seams agreement, and are there things that 
we need to do to address this? To tell you the truth, I am kind 
of confused by the whole issue. And why I don't just go with 
the chairman and then go from my left to my right? Thank you.
    Mr. Wood. Yes, sir; let me jump in first. These are all 
pending, actually, I just posted the agenda for next Wednesday 
for our Commission, in which we will take up the seams 
agreement, among really a litany of issues relating to the 
structure of the wholesale market in the Midwestern United 
States. So I think I might defer to Linda and Bill, who were 
there actually when the seams agreements were first voted on, 
for giving you some specific answers.
    Mr. Shimkus. That is great. Commissioner Breathitt?
    Ms. Breathitt. I need to speak generically about this, 
because there is a particular seams agreement that was worked 
out between two parts of the Midwestern area of the U.S. But 
seams are going to occur between RTOs. And the purpose of 
working out seams agreements between RTOs is to minimize the 
flow of electricity between the seams. So the protocols don't 
impede--the protocols that one RTO has don't impede the flow of 
electricity from one region to the other, from two different 
RTOs.
    So that is one way to address the ability for power to flow 
from one to the other is through a seams agreement that might 
address procedures and protocols or rates even, or congestion 
bottlenecks. So they can address those very important aspects, 
and that is what I think will be important for us to make sure 
our agency encourages, because you are going to have a number 
of RTOs within the United States.
    Mr. Shimkus. If I could follow up. A good seams agreement, 
could that help forestall some market power abuses? Could there 
be market power abuses because of poor seams agreements and the 
like?
    Ms. Breathitt. Market power abuses can occur whether you 
have a seams agreement or not, and those need to be dealt with 
through a number of ways. But a seams agreement, per se, may 
not directly address market power. But what a seams agreement 
can help minimize is the inability for power to flow easily 
between regions and markets.
    Mr. Shimkus. Commissioner Massey?
    Mr. Massey. Mr. Shimkus, a couple of years ago, when this 
issue came before the Commission, the question was whether we 
should encourage a seams agreement in the Midwest or encourage 
the formation of a single RTO. And my vote----
    Mr. Shimkus. And we are still debating that.
    Mr. Massey. Yes. Well, my vote at that time was in favor of 
a single RTO for the Midwest. However, a seams agreement can be 
a good thing. It depends on how well it is enforced and how 
well it is complied with. I think it can help to mitigate 
market power. I think it can ensure that power flows freely 
across the seam without trading difficulties. In particular, it 
can help deal with the critical issue of how to manage 
congestion on the grid. But I think a better solution in many 
parts of the country is simply to ensure that the RTOs are 
appropriately sized to start with.
    Mr. Shimkus. Mr. Chairman, my time is expired, and I will 
quit my questions.
    Mr. Largent. Yes. Mr. Sawyer from Ohio is recognized.
    Mr. Sawyer. Thank you, Mr. Chairman. I just want to observe 
that these exchanges I think have been extraordinarily helpful, 
and I am particularly grateful that we took the time to have 
these hearings this week.
    Let me touch on a couple of observations that you made, 
Chairman Wood, and one that I made. The first is that even at a 
time when transactions and generating capacity has been--or 
investment has been growing, the transmission really has been 
in a very long, slow decline. It seems to me that that is the 
single most debilitating impediment to achieving the goal that 
we are all talking about here.
    At the same time, in your testimony, you suggested that 
infrastructure investment suffers from the uncertainty of the 
long transition to competitive wholesale electricity markets. I 
am inclined to agree with that. Can you talk to me briefly, or 
other commissioners, about the steps that have been taken to 
increase the certainty and what steps you need from us to help 
you achieve it? I would be happy to hear from other 
commissioners as well.
    Mr. Wood. A great question. In 1996, the Commission in what 
was called Order 888, put down the first--I guess the first 
book of the trilogies and said, ``We are going to open these 
wholesale markets.'' That now was argued before the Supreme 
Court shortly after the attacks, and we expect a decision on 
that in the spring. Order 2000, which was the step that was 
taken in late 1999 says, ``Not only are we going to fix this on 
a utility-by-utility specific basis, but we want to encourage 
the development of regional groups that look at electricity on 
a regional basis, which most people acknowledge makes a lot of 
sense.'' So that was actually affirmed--that order was affirmed 
yesterday by the D.C. Court of Appeals.
    So now we are implementing those two orders of the 
Commission on a utility basis and on a regional basis, and so 
those steps are going forward. They are tediously slow, from my 
perspective. Investors, I know would look for somewhere else 
until these rules got clarified. That is why we have now 
announced that we are going to finish the trilogy with the 
``third book,'' which will be saying not only do we want these 
things and we think they are a good idea, but here is what we 
specifically want them to do, so that investors know these are 
the rules of the road for investing in a transmission business 
from now for 10 years.
    We were at Wall Street last week. I heard that message in 
spades, even in the post-Enron----
    Mr. Sawyer. We have as well.
    Mr. Wood. Yes.
    Mr. Sawyer. What do you need from us to help you facilitate 
this and move----
    Mr. Wood. Yes. And I am sorry I didn't put this in my 
testimony, because it is an idea that I actually heard in 
discussions from an exasperated participant in these markets, 
that no matter what the committee does by adding incentive 
rates to the legislation or the Commission does to pull it all 
together, at the end of the day, the bulk, say 90, 80 percent 
of the revenues that a transmission company would spend would 
be ultimately paid by--or would be paid by a ratepayer that is 
retail-regulated by our colleagues at the States. The split 
jurisdiction between--we have jurisdiction over some of the 
transmission--over all the transmission access, some of the 
transmission rates--encouraging transmission to be built, with 
the States collecting 80 percent of the dollars, they may not 
agree that it gets built.
    Mr. Sawyer. Could we just have a quick commentary from 
other commissioners?
    Ms. Breathitt. I think this is something that our agency 
can do and you asked for something that Congress could do, but 
may I spend 30 seconds on that?
    Mr. Sawyer. Sure.
    Ms. Breathitt. State returns are often a couple or several 
hundred basis points over Federal returns on transmission. One 
thing that the FERC can do is make those more comparable so it 
incents transmission owners or transmission companies to build.
    Mr. Sawyer. Others?
    Ms. Breathitt. We have heard that.
    Mr. Sawyer. Other comments?
    Ms. Brownell. I would simply add that I think we could 
clarify with one simple statement or authority to establish 
RTOs. I agree with my colleague on incentive rates, but you 
need to give incentive rates to innovators, not for people to 
continue their jobs the way they have always done them. Because 
that will bring the changes that you talked about.
    Mr. Sawyer. Commissioner Massey?
    Mr. Massey. I believe that you are moving in the right 
direction in placing transmission under one set of rules. I 
think that is critically important. Right now about 30 percent 
of the grid is exempt from the open access requirements 
directly. No. 2, I do think it is important for Congress to 
make a statement about RTOs and their importance to evolving 
regional markets. It would be helpful to have a clear statement 
from Congress that we can insist that these institutions be 
formed. Otherwise we may continue to have a patchwork because a 
particular State may, for example, have its own statute that 
says you can't transfer control of any transmission assets in 
this State or any assets at all without the approval of the 
State Commission. And if they withhold that approval, we may 
still have a patchwork in some parts of the country. So I think 
it needs to be clear that the Federal entity that is 
responsible for regional markets can get this done. And, No. 3, 
I think we do need mandatory reliability rules.
    Mr. Sawyer. Thank you for your flexibility, Mr. Chairman.
    Mr. Largent. I recognize the gentleman from Oregon, Mr. 
Walden.
    Mr. Walden. Thank you very much, Mr. Chairman. I want to 
thank the chairman of the subcommittee specifically for working 
with us for the inclusion of a Northwest title, because similar 
to my colleagues from Tennessee and who are representing the 
Tennessee Valley Authority, the Northwest is indeed unique in 
its power system and the way it operates and how we are working 
together to form regional RTO out there. So I appreciate the 
subcommittee chairman's work with us on inclusion of that 
title.
    There was a little present associated with that section of 
the bill, however, that I hope to work with the full committee 
chairman on, and that is the section 525 language that deals 
with continuation of preference power for the DSIs in the 
Northwest. They have been under enormous pressure of late 
because of power costs and yet represent 40 percent of the 
Nation's supply of aluminum and are important employers in the 
region. My concern is that this inclusion may indeed blow up 
talks that are ongoing right now in the region, and so I draw 
the committee's attention to that.
    I wanted to follow-up a little bit on FERC's--the language 
in Section 401 that would expand oversight over transmission 
networks on reliability and support. And I wonder, some of the 
comments I have received indicate that FERC already has that 
authority to approve incentive transmission rates that are just 
and reasonable. Do you feel you need this additional authority?
    Mr. Wood. Sir, it wouldn't hurt. I think a lot of things 
that were not written in the 1992 law or in the 1935 law are 
subject to being challenged by court, and my experience 
certainly at the State level if issues related to ratemaking 
are not clear enough from the statute, they certainly become 
litigation targets. And if Congress deemed that this is a good 
goal, and I would agree that it is a good goal, then it would 
be helpful to put that in the statute, clearly that authority 
is here.
    Mr. Walden. Do you feel that it will result in construction 
of additional transmission facilities? I mean is there a 
guarantee that comes with this for consumers?
    Mr. Wood. No, no, no. I think as with ratemaking in 
general, you give somebody sufficient revenue, sufficient 
return, you have a high expectation that they will deliver on 
that but no guarantee.
    Mr. Walden. One of the other concerns would come out of 
Section 101 of the bill, the interconnection standards--and 
this may have been addressed in some earlier discussions I 
think my colleague from Virginia raised--about whether FERC has 
the technical expertise to set some of these very technical 
standards. How would you go about that? Are you going to rely 
on the IEEE standards?
    Mr. Wood. The current process that we have going on now is 
very much a collaborative effort with the industry, with, quite 
frankly, the Commission staff playing a catalyst and 
shepherding role, getting the experts together on talking about 
issues of this nature. It is clearly the right way to go 
forward. IEEE standards--I know from having done this back in 
my home State, IEEE standards fill a lot of that effort, a lot 
of the contract revised back on the industry standard setting 
bodies to that, which is referenced in the statute.
    Mr. Walden. I think that is all the questions I have at 
this time, Mr. Chairman.
    Mr. Largent. Okay. The Chair recognizes Mr. Markey for his 
questions.
    Mr. Markey. Thank you, Mr. Chairman, very much.
    Mr. Barton. Would the Chair suspend just a second? This 
will be our last questioner before we go, because we have six 
votes. So we will do Mr. Markey, and then we will recess, and 
then we will come back at approximately four o'clock. I don't 
see how we can do six votes in less than that time.
    Mr. Largent. Mr. Markey is recognized.
    Mr. Markey. Thank you, Mr. Chairman. It seems to me that 
the Enron collapse raises some fundamental questions about the 
nature and the adequacy of oversight over the traders who are 
marketing electricity. If in fact the transactions that are now 
raising eyebrows wee intended to conceal trading, our 
investment losses, what does that say about whether we can 
continue to allow these energy trading firms to be completely 
unregulated? When it comes to banks, security firms and 
commodities markets, we have Federal regulators in place that 
have holding company, risk assessment authorities, authorities 
to set capital standards and margin rules, audit trail and 
recordkeeping authorities, large trading or large position 
reporting requirements, and anti-fraud and anti-manipulation 
authorities, backed up with market surveillance systems and 
enforcement powers.
    But when it comes to electricity trading, we really don't 
seem to have that type of regulatory infrastructure. Don't you 
think, Mr. Chairman, that we should put such a regulatory 
structure in place so that we can make sure that any future 
potential Enron collapse is much less likely to ever occur.
    Mr. Wood. Thank you, Mr. Markey. One of the major features 
of the RTO rule that was just affirmed yesterday by the D.C. 
Court of Appeals is that we have a market monitoring section 
that looks at the regional transactions on a hour-by-hour, 
minute-by-minute basis. We have the ability now certain in the 
Northeast and your area, as well as on down through here, with 
our oversight of the markets that have already been organized 
up here. So you monitor transactions on a--transaction-by-
transaction basis and we do. That information is valuable, it 
is very helpful. The fact that the local monitors and at the 
Commission are looking at that, and on occasion acting on that 
information is very helpful. We do not have the capability 
across the entire country, because quite frankly the markets 
across the country are not that organized. It is difficult 
without an organized market to have much oversight of a lot of 
disparate activity.
    Mr. Markey. What is your authority to regulate a non-
utility electricity trader like Enron?
    Mr. Wood. Well, they, actually, under the act, would be 
considered a public utility. The way that the utilities--they 
don't own the wires in this, but they have a marketing 
certificate just as I have discussed with some other questions 
earlier. There are 1,200 people that have market certificates--
--
    Mr. Markey. So you believe you have existing authority.
    Mr. Wood. We do, and in the past we have waived our 
accounting requirements for the last 10 years of these 
unregulated parties, because we don't set their rates. The main 
reason we have accounting requirements is not to protect 
sophisticated players in the market, but to protect the 
customers.
    Mr. Markey. So what are you going to put in place post-
Enron?
    Mr. Wood. We just posted this afternoon--this morning--our 
agenda for next week, and we were taking up an item which 
interestingly was work already going on to reflect the changes 
in accounting for derivatives and for hedging instruments that 
we were looking from a ratemaking point of view but we are 
considering looking at that for more of a disclosure point of 
view.
    Mr. Markey. Would that allow you to look at the capital 
structure of Enron?
    Mr. Wood. That is an open question. That would be certainly 
something we would ask the--it would be a notice of proposed 
rulemaking. So at the phase of asking in public----
    Mr. Markey. Do you have the capacity and do you believe you 
have the inherent authority to look at the capital structure of 
these companies, if you put such a rulemaking in place?
    Mr. Wood. The statutory authority, yes. The technical 
expertise on our staff at present to discern that, I would have 
to get back to you on that, sir.
    Mr. Markey. Mr. Massey?
    Mr. Massey. Well, I think we have the authority to look the 
capital structure. Whether we should is a matter that I am open 
to argument about. We certainly have the authority to take a 
look at the current exemption that we had in place, as Pat 
says, for about 10 years, an exemption from our uniform system 
of account filings for about 1,200 power marketers and sellers, 
because we don't generally regulate their rates. However, we 
have conditioning authority that we can use in reasonable ways.
    Mr. Markey. When you say you are open, who else would do it 
but you? Who would have responsibility but you? You are the 
expert agency in the field of energy trading.
    Mr. Massey. Well, we definitely ought to consider what the 
lessons from this are for energy trading, and I think we will.
    Mr. Markey. Let me just--I know my time is going to run 
out--l just want to run down yes or no, and I would like you 
and the chairman to each answer. In your opinion, do you have 
the power and intent to establish, one, capital requirements? 
Chairman Wood?
    Mr. Wood. I am not given enough of a question to give you a 
thoughtful answer. I will be glad to do so.
    Mr. Markey. Mr. Wood--I mean Mr. Massey?
    Mr. Massey. I think we have the power----
    Mr. Markey. Yes or no. I mean I am going to run out of 
time.
    Mr. Massey. Yes, we have the power. I don't know whether we 
ought to establish those standards.
    Mr. Markey. Okay. Ms. Breathitt?
    Ms. Breathitt. Mr. Markey, we have also included in a 
recent rulemaking electronic trading platforms to come in under 
our standards of conduct.
    Mr. Markey. Capital requirements, yes or no?
    Ms. Breathitt. I haven't studied that, but I----
    Mr. Markey. Okay. That is fine. I think you should study 
it. Next----
    Ms. Breathitt. I have the intent.
    Mr. Markey. The intent, that is good. I just need you--
margin requirements, yes or no?
    Mr. Wood. Same answer.
    Mr. Markey. Answer is?
    Mr. Wood. I will get back to you.
    Mr. Markey. Okay. Ms. Breathitt?
    Ms. Breathitt. I haven't looked at it, but I would have the 
intent to do it if we can.
    Mr. Wood. If we have the authority, I am willing to look at 
it.
    Mr. Markey. Ms. Brownell?
    Ms. Brownell. I think it is important we work with other 
financial oversight agencies to make sure that we having a 
coordinated appropriate response, which would include, 
Congressman Markey asking these questions. But in many cases, 
from what we have seen, these are financial issues, so I just 
want to make sure that the right agency is looking at the right 
thing.
    Mr. Markey. They are exempted from many of those other 
agencies' regulations. I mean you won't be responsible. 
Auditing and bookkeeping requirements?
    Mr. Wood. The answer to that is that we do have the 
authority certainly on the physical delivery of the power, and 
that is what I mentioned to you a moment ago that would be 
subject to our discussions next week in our open meeting.
    Mr. Markey. Ms. Breathitt, very quickly, and then I am 
going to----
    Ms. Breathitt. Yes.
    Mr. Markey. Yes.
    Ms. Brownell. Yes.
    Mr. Markey. Yes.
    Mr. Massey. I answer the same as Chairman Wood.
    Mr. Markey. Okay. And the large trader or large position 
reporting, so you know what is going on in the market.
    Mr. Wood. Same answer on the accounting side. Yes, sir. I 
think that is certainly something that would come up next week 
in our discussions.
    Ms. Breathitt. I agree with the chairman's response.
    Ms. Brownell. As do I.
    Mr. Massey. I agree, and I think we ought to take a close 
look at that.
    Mr. Markey. And, finally, anti-fraud and anti-manipulation 
rules applicable to trading activities.
    Mr. Largent. This will be the last question.
    Mr. Markey. Okay. Thank you.
    Mr. Wood. I do understand that the other two agencies do 
have authority over fraud issues, and I would certainly defer 
to their expertise on that. But if they don't I am not aware 
that we do have that authority. But we will certainly look for 
it and I will get back to you on that.
    Mr. Markey. Would you want that authority?
    Mr. Wood. I think anything that diminishes customers' faith 
in the efficacy of markets ought to be vested in us or 
somebody.
    Mr. Largent. Gentleman's time has expired. I yield to the 
chairman of the subcommittee for a brief statement.
    Mr. Barton. Before we break for the recess, I want to 
follow-up on some of Congressman Markey's questions just 
briefly. There is absolutely no question that the collapse of 
Enron's stock price has wiped out many of their pensioners, 
many retirees around the country. I mean it is a major, major 
calamity, and nobody is taken away from that. Until this year, 
until this Congress, this committee had jurisdiction over the 
financial industry also. So you had one committee that had 
energy jurisdiction and also security jurisdiction. And both 
Mr. Markey and I are very unhappy that we lost the security 
jurisdiction to the new Financial Services Committee.
    I am not taking away from the collapse of Enron, but in 
terms of the energy markets, is there any evidence that because 
of the collapse of Enron and the disappearance of Enron Online, 
that power was not sent where it was supposed to have been 
sent? Did the market fail in the sense of energy getting to 
where it was contracted to go?
    Mr. Wood. In fact, no. No, sir. The physical deliveries of 
gas have continued, and in fact I think the big story here is 
that the markets really didn't hardly hiccup at all.
    Mr. Barton. So we have got an accounting disaster with 
Enron and a financial reporting disaster and probably a 
partnership creation problem, but we don't have an energy 
market problem.
    Mr. Wood. No, I think energy markets performed admirably 
well in the past couple of months on this issue.
    Mr. Barton. Thank you, Mr. Chairman.
    Mr. Largent. Well, we will recess this hearing until four 
o'clock, and I know that the chairman of the subcommittee feels 
Enron's pain.
    [Brief recess.]
    Mr. Barton. If our panelists are still in the room, they 
could resume their seats. And if we have--do we have a member 
back there, anybody? It is Mr. Norwood's turn.
    The subcommittee will come to order. When we recessed, Mr. 
Markey had asked his 5 minutes of questions. We now go to the 
majority,and Mr. Norwood of Georgia is recognized for 5 minutes 
for questions.
    Mr. Norwood. Thank you very much, Mr. Chairman. I am 
delighted about this hearing and, as others on the committee, I 
am very concerned about Federal deregulation of electricity, I 
am concerned about its unintended consequences, and I want to 
take this opportunity to see if we can't clear up some things.
    It seems to me that we all ought to be a little concerned 
about deregulation of electricity. We have noted the 
deregulation in California, and the consequences of that was 
generally the cost to the ratepayer. Enron, the poster boy for 
deregulation, right or wrong, has ended up hurting people. And 
in my own State of Georgia, we were one of the first States to 
deregulate gas. And though it looked right, it appeared right, 
everything should have been right, but in the end it turned out 
to be a very costly mistake to the ratepayers in Georgia. So it 
is right and correct that we have great concerns about this.
    Now, just so you know where I am coming from, I come from 
the State of Georgia. We are very happy with our utilities 
there. That includes the coops, that includes the munis, that 
includes Souther Company, that includes Georgia Power. And, 
frankly, the reason we are very happy with them is that the 
give us very good service at very good rates, and we want to be 
sure that the FERC doesn't do anything that it might help 
somebody else but at a great cost to us locally.
    I want to thank all of the Commission members for being 
here, and I am going to direct my questions to the chairman in 
hopes that because of time limitations the rest of you would be 
kind enough to at some point in time be willing to respond too.
    Mr. Wood, it has been a while since I have had as many 
people as upset coming through my office here and in Augusta 
with you. It has been a long time since a Federal agency has 
generated quite so much concern. I have been, frankly, amazed. 
And in view of our good relations with our utilities and our 
good relations with the consumers, many of whom I know well as 
voting citizens and friends, it is just rather been amazing.
    Of course, I tried to defend you and tell them you were 
from Texas, couldn't be all bad. But I----
    Mr. Barton. All bad?
    Mr. Norwood. All bad.
    Mr. Barton. All good.
    Mr. Norwood. I sort of have stopped defending you. I read 
the other day in Energy Daily, I think it was September the 
26th, of an interview, a remarkable interview that you had, and 
in that interview there is a quote of yours reported in that 
article from the Senate hearing that you were talking about 
punishing regulated entities, regulated utilities. Now, the 
quote says, ``A few heads on the stakes around the campfire may 
make all the animals behave a lot better in the forest.'' Is 
that accurate?
    Mr. Wood. I recall saying that; yes, sir. Not in that 
context, I would like to explain, but----
    Mr. Norwood. Well, that is accurate. That is the first 
thing, so I don't have to go check the Senate record. I guess 
probably where I am coming from a little bit here is I have got 
a great curiosity about whose head you want to put on a stake, 
and I have even got more interest in that if any of those 
people are friends of mine. And I am beginning to think maybe 
that might be the case. In Georgia, when we start talking about 
animals and campfires and forests, we are usually talking about 
deer hunting. Are you a deer hunter?
    Mr. Wood. No, sir.
    Mr. Norwood. I don't know why I sort of suspected that. But 
that is a quite a metaphor. And I want to--I am going to get 
back to that in a little while, but I want to just get right at 
the bottom line in here, and it is going to take a while, Mr. 
Chairman, so I hope you will have a few rounds.
    I am curios to know about this order from November the 20th 
revoking market-based rates of two or three companies that were 
singled out, one of which was Southern Company, which 
apparently shifts the cost of doing business from wholesale to 
retail and how this is going to affect the retail customer in 
Georgia. Now, I suspect that it is going to affect the retail 
customer in Georgia and probably not in a good way. I would 
just like to make sure that when FERC goes utility hunting they 
don't end up shooting the customer. And that is really the 
bottom line. I really think we all sort of agree with that. 
That is really what this is about, isn't it, the ratepayer and 
trying to give them the least costly electricity with the best 
service.
    When you decided that you wanted to force these companies 
into not being able to use market-based rates, were you aware 
at the time that in Southern Company at least the profits they 
make by selling power at market-based rates goes back to our 
retail customers to reduce their rates. At least 90 percent of 
the profits do. So in the end, those profits are used by our 
utilities to reduce what a member of the household might pay. I 
heard you talking about customers earlier, and I am not talking 
here about industrial customers; I am talking about folks at 
home. We you aware of that fact when you decided that market-
based rates wouldn't be good enough for these companies, guilty 
or not?
    Mr. Barton. This will have to be your last question in this 
round.
    Mr. Norwood. I am just warming up, boss.
    Mr. Barton. I know you are just warming up, but you are 2 
minutes over in this warmup period.
    Mr. Norwood. All right. Well, could the----
    Mr. Barton. He can answer.
    Mr. Norwood. [continuing] Chairman answer? Thank you.
    Mr. Barton. If he has a good answer. We won't accept bad 
answers.
    Mr. Wood. I have several. Could I respond to the full list, 
sir? Is that appropriate?
    Mr. Barton. You have got the right.
    Mr. Wood. My comment on the animals in the forest, sir, 
related to people who are violating the Natural Gas Act or 
violating the Federal Power Act. And if they are in the context 
of all the California issues, we were looking at market power 
and anti-competitive conduct, at physical and economic 
withholding of power from the market, those type of things. 
Those are people who are violating the law, and those are the 
people whose heads should be on the stake.
    Mr. Norwood. And you should do that, but don't put innocent 
people's head on the stake in the process of one-size-fits-all.
    Mr. Wood. I agree with that. We will not do that, sir. Our 
job is to go through due process. In fact, we have got a number 
of enforcement actions at the Commission today. Some may result 
in the finding of guilt, some may result in the finding of 
innocence, but we go through that process first.
    As to the order on November 20, we took the oldest three 
people in line that we told 3 years ago we are going to look at 
this every 3 years and see if it still matches what is going on 
in the marketplace. We learned from California--as an answer to 
Mr. Barton's question a moment ago, we learned from California 
that you could have a deregulated marketplace or you could have 
one that gets out of control as that one did, that necessitated 
the Commission to come in and put what I think, as a market-
oriented person, was a very prescriptive and I think a 
difficult non-market-based solution on top of that market.
    What we sought to do with our new policy, which we 
discussed through the summer and voted on, on September 26, at 
that same meeting, and implemented on November 20 with these 
first three applicants--there will be others that either pass 
it or don't pass the test, coming up at this next meeting next 
week--is updating a policy that we have all acknowledged is 
broken and does not appropriately address market power. And if 
the profits from the market were being used to refund the 
California retail customers, our job is to look after the 
wholesale market as well. Those profits are coming from a 
market that may have resulted in some of the wholesale 
customers paying too much.
    So what we are looking at here is a balance of all the 
customers. I think my colleagues on the Georgia Commission are 
totally capable of making sure that the retail customer stays 
protected in that State, but our job is to make sure that the 
wholesale----
    Mr. Norwood. Not if you force the wholesale basic utility 
company to raise rates that they can't help raise them because 
you are forcing them to sell their generated power at a 
different rate; in other words, at a cost rate rather than a 
market rate. They lose money.
    And my question was do you understand that 90 percent of 
that money goes for the retail payer and helps then reduce the 
retail rate?
    Mr. Wood. Yes.
    Mr. Norwood. You understood that.
    Mr. Wood. Yes, sir, and we had that same policy in Texas 
when I was a regulator, as do most States.
    Mr. Barton. We are going to have to suspend this question 
for this period. So we are going to go to Mr. Waxman now for 5 
minutes.
    Mr. Waxman. Thank you very much, Mr. Chairman. Before I ask 
some questions about this legislation before us, Mr. Blake, I 
wanted to ask you, I understand you have been deeply involved 
in ongoing discussions within the administration about changing 
the new source review air pollution requirements under the 
Clean Air Act; is that correct?
    Mr. Blake. Yes, sir; I have been involved.
    Mr. Waxman. The utility industry has been the strongest 
proponent of rolling back these important air pollution 
protections. Have you met with or otherwise received the views 
of the electric utilities or other industry sectors on this 
topic?
    Mr. Blake. Yes, sir.
    Mr. Waxman. And have you met with the environmental groups 
on this topic?
    Mr. Blake. Yes, sir.
    Mr. Waxman. Will you provide to the members of this 
subcommittee with a list of the names and dates for all these 
contacts?
    Mr. Blake. Yes, sir.
    Mr. Waxman. I thank you for your cooperation.
    In your testimony, Mr. Blake, you repeat seven goals for 
electricity legislation: Reducing uncertainty, increasing 
wholesale competition, strengthening transmission, increasing 
supply, lowering prices, protecting consumers and improving 
reliability. I am disappointed that promoting cost effective 
energy conservation doesn't even make your list. We all know 
that you can't improve reliability by addressing supply and not 
demand for electricity. That is like trying to balance the 
budget only by raising taxes and never controlling spending. 
Your testimony also calls for modernizing electricity law but 
not our power sources. In fact, you urge repeal of the PURPA 
provision supporting renewable energy sources. Electricity 
legislation should promote not disadvantage clean, renewable 
energy sources.
    And, finally, you make no mention of environmental 
protection. We now have evidence that our air pollution has 
increased under restructuring to date. It appears that you have 
fundamentally changed our electricity system without protecting 
air quality from the effects of restructuring. Does the 
administration believe that energy conservation, promotion of 
renewable energy and environmental protection must be goals of 
any electricity restructuring legislation?
    Mr. Blake. Yes, sir. And I would just comment that there 
are provisions in the legislation that we noted the 
administration supports, such as advocating net metering as 
well as distributed generation. In terms of emissions increase, 
I am not quite sure what the baseline comparisons are pre- and 
post-deregulation that would suggest that opening up markets 
has resulted in greater pollution. In fact, most of the 
experience over the last several years has been the addition of 
new cleaner natural gas-fired turbines around the country, and 
I would suspect that if you looked at a per GDP basis that you 
would actually see a substantial reduction in emissions that we 
gained through opening up the markets, rather than an increase.
    Mr. Waxman. Thank you. Mr. Chairman, I have a report from 
Synaps Energy Economics, Inc., a retrospective review of FERC's 
environmental statement on open transmission access, and the 
summary--both the summary and the report I would like to have 
the committee receive for the record.
    Mr. Barton. Could we have an opportunity to have the 
committee staff look at it?
    Mr. Waxman. Certainly.
    Mr. Barton. I am sure we will put some version if not the 
whole thing in, but we would like to at least review before we 
agree to put it in the record.
    Mr. Waxman. And since I have a second more, Mr. Blake, 
would you agree that using energy more efficiently can boost 
our economy, enhance our energy security and help the 
environment?
    Mr. Blake. Yes, sir.
    Mr. Waxman. Thank you very much, Mr. Chairman.
    Mr. Barton. You still have a minute and 20 if you actually 
have more--we have got the clock set at 2 minutes. It goes 
yellow, so you have got a minute and a half if you still want 
to use it.
    Mr. Waxman. Thank you. You are very kind, Mr. Chairman, but 
I am going to yield it back for one of the other members to 
take advantage of that opportunity.
    Mr. Barton. Okay. We thank the gentleman from California. 
Gentleman from North Carolina, the very patient Mr. Burr, is 
recognized for 5 minutes.
    Mr. Burr. Thank you, Mr. Chairman. Chairman Wood, what is 
your definition of market power?
    Mr. Wood. The ability in a real-time market to affect price 
by withholding supply.
    Mr. Burr. Can that be also achieved because an entity has 
limited competition?
    Mr. Wood. Yes. He can withhold a certain amount of 
supplies, whatever the market is. He has the ability and no 
competitive check.
    Mr. Burr. Could it be affected because the general capacity 
was not adequate to meet the need?
    Mr. Wood. Yes.
    Mr. Burr. So there are multiple reasons that there could be 
a spike in price other than a company that just wanted to gouge 
consumers; am I correct?
    Mr. Wood. Yes, absolutely.
    Mr. Burr. And the end result of that would resemble market 
power abuse in every case. Price would go up because something 
had happened to supply; is that correct?
    Mr. Wood. Correct.
    Mr. Burr. And how would FERC determine on the spot--I take 
for granted that there is a process that you go through. How 
long would that be to determine whether there was a market 
power finding?
    Mr. Wood. Well, quite frankly, it could take a year. I mean 
we have been looking at the California market for quite some 
time. There have been----
    Mr. Burr. And what effect would that have on Wall Street's 
view of the electric industry, the companies that make it up? 
What effect might that have on the availability of capital for 
new generation, given that every potential charge, every 
potential bill that goes out is susceptible to a refund 
determined by FERC over some period of time yet to be defined?
    Mr. Wood. I think it could be a problem, and we have got--
as you may know, there is a pending item that we have out for 
comment from the parties on just that issue.
    Mr. Burr. Has the Commission ever had a finding of market 
power?
    Mr. Wood. Well, we have a pending case regarding natural 
gas on that issue, but I have not----
    Mr. Burr. Did we find a market power abuse in California? 
Is there a finding of market power in California?
    Mr. Wood. Not from a specific player; no, sir.
    Mr. Burr. Let me read Mr. Massey's comments. I think these 
were from the debate over E47. And I quote, ``has concerns 
about the tariff conditions, because it requires a showing of 
bad behavior for FERC to order refunds.'' He argued that ``FERC 
has never been able to show bad behavior, even in California.'' 
Unfortunately, he would add another test, a bad market test. 
But, clearly, through the information I found, there has never 
been a determination of finding of market power in California.
    Mr. Wood. That is correct.
    Mr. Burr. Biggest spike in electricity pricing.
    Mr. Wood. In the electric markets; yes, sir.
    Mr. Burr. Now, given that there is a mechanism that you 
have proposed, FERC's proposed, that would force the automatic 
refund, would Wall Street respond differently if California 
were to happen a second time with still no finding of market 
power?
    Mr. Wood. I was asked this question last week. Commissioner 
Brownell had the opportunity to meet over 2 days with a number 
of Wall Street analysts and investors. And quite frankly, the 
issue of the refund authority for anti-competitive behavior I 
think was viewed in its proper context, which is a customer 
protection issue that, like a nuclear bomb, would never be 
invoked. I don't perceive that that is----
    Mr. Burr. Well, a customer protection could also be 
extended to our inability to allow people to compete to supply 
power within a given power, because that created the same price 
spike as somebody that withholds power, right?
    Mr. Wood. I am sorry, can you repeat that, Mr. Burr?
    Mr. Burr. You said earlier that you get the same result 
when you limit competition in a given market. So if potentially 
you are holding people liable, shouldn't we hold those liable 
that limit competition in a marketplace, because they 
artificially affect the price?
    Mr. Wood. If I missed something----
    Mr. Burr. I am trying to decide the scope of what FERC 
would like, as a Commission, to be involved in.
    Mr. Wood. Well, I think, certainly, we would like the 
market to be open and transparent and full of diverse number of 
players whose----
    Mr. Burr. And is it transparent when every potential sale 
of electricity is susceptible to a refund under a determination 
that FERC will make on an undetermined amount of time?
    Mr. Wood. I have to admit I don't believe that this is 
actually a cloud at all. I don't think----
    Mr. Burr. Well, given that there has been no finding of 
market powers, why are we so insistent on this new rule that 
deals with market power?
    Mr. Wood. Again, you are talking about the refund authority 
on the anti-competitive?
    Mr. Burr. Yes.
    Mr. Wood. The anti-competitive behavior, quite frankly, if 
somebody were making a business plan of making money off of 
anti-competitive behavior, I would expect that we would not 
allow them to be in this market. And so I think those are the 
only people who are going to be negatively affected by the 
condition that we placed in all the power marketer 
certificates.
    Mr. Burr. Because I am out of time, let me just turn to 
RTO's for just a second and follow Mr. Norwood with something 
dear to me, and that is the GridSouth. GridSouth was approved--
--
    Mr. Wood. Initially; yes, sir.
    Mr. Burr. Yet it is not operational. What is the problem 
that FERC has with GridSouth?
    Mr. Wood. The GridSouth, again, was approved before I 
joined the Commission. GridSouth was given conditional approval 
with the urging that they approach their neighboring RTO 
proponents in Florida and Georgia and other States to increase 
the scope, the size of the relevant area over which the RTO 
would have control. And so the condition for the approval was 
that there be sufficient scope and----
    Mr. Burr. My interpretation of Order 2000 left a tremendous 
amount of flexibility on governance and market rules. But now 
it seems like what we are calling for is a standard market 
rule. We have approved you to do an RTO, but now we want to set 
some new conditions in there so we don't this to be 
operational. You have been approved, but you have not met rules 
that we have yet as a Commission to decide what they are going 
to be. Is that an accurate statement?
    Mr. Wood. We are engaging in a rulemaking for standardized 
market designs so that we don't have the seams issues that 
Commissioner Breathitt pointed out.
    Mr. Burr. How long have we been in that now?
    Mr. Wood. I am sorry?
    Mr. Burr. How long have we been in that process?
    Mr. Wood. We announced that we were doing the rulemaking on 
September 26, and we intend to be complete on that by this 
summer.
    Mr. Burr. If I heard you earlier, you, in an answer to a 
question--and I know my time is up, Mr. Chairman--basically 
said, as it related to merger authority at FERC, that you 
didn't have heartburn if that was taken away. Did I understand 
you accurately or is that something you are passionate about 
maintaining with the jurisdiction of.
    Mr. Wood. I think you could characterize me as thinking it 
is appropriate to have it at FERC, but I think Congress has a 
right to put these issues where they want to put them, and I 
don't have as strong an opinion about that as Commissioner 
Breathitt may. So I mean to be fair as to who might be the best 
one to discuss that, I probably wouldn't.
    Mr. Burr. That is why I chose you. I thank the chairman.
    Mr. Barton. Thank Congressman Waxman. He yielded his time 
to me to use at my discretion, and then recommended that you be 
given his 2 minutes. So you owe----
    Mr. Burr. I thank the gentleman from California.
    Mr. Barton. [continuing] you owe Mr. Waxman for that extra 
2 minutes. The Chair recognizes himself for the second round of 
questions for 5 minutes, and we hope that the second round we 
can get all members' questions on the record.
    I want to go to Mr. McCullough, because I haven't asked you 
a question yet. I understand that the TVA is considering 
leasing one or more of its unfinished nuclear power plants to a 
private entity, and then the private entity would put up the 
operating--put up the capital necessary to finish the plant and 
then lease it back to the TVA. I am extremely, and I want to 
triple extremely skeptical of such a plan. So would you like to 
elaborate on whether this just some private developer's wish 
list or is something you are seriously considering ?
    Mr. McCullough. To my knowledge, we don't have any specific 
proposal that would be specific in terms of some sort of lease 
proposal regarding Bellafonte. I assume it would be the 
Bellafonte site or perhaps Browns Ferry Unit 1 or Watts Barr 
Unit 2. There are all sorts of concepts, and people who are 
interested in submitted proposals to TVA we accept those and we 
evaluate them in a business-like manner, and we respond.
    Mr. Barton. Well, I think I would have to look at the TVA 
stats written. I don't claim to be an expert, but certainly if 
TVA wishes to finish those plans and operate themselves, you 
have got that opportunity and that right. I would support 
legislation if it would require legislation. If you want to 
dispose of them and basically privatize them, let those plants 
be put up on the market for private utilities to come in and 
bid and finish out. I would go that way, but I am extremely 
leery to kind of have something that is half fish and half 
fowl, that you have a government entity that still owns it, it 
is financed by private capital, and then it is leased back to 
the government entity. That does not sit well with me.
    Mr. McCullough. I recognize and I don't disagree with the 
points you make, Mr. Chairman.
    Mr. Barton. Okay. I want to give Commissioner Breathitt an 
opportunity to comment on the market-based rate authority that 
came out, because it is my understanding that you had a 
dissenting opinion. So I want to give you a chance to dissent, 
because from what I know I share most of what you dissented 
about. If I can't be more leading than that, let me know and I 
will try again.
    Ms. Breathitt. Well, you have just given me an opportunity 
to restate my views, and I would like to start by saying that I 
agree with my colleagues wholeheartedly that the Commission 
does need to come up with an improved way to determine 
applications for market-based rates, that we may be in, or we 
are in, an era in the evolution of electricity markets that the 
hub-and-spoke analysis is probably not serving the public as it 
used to. So we all agreed that we needed to come up with a new 
permanent way to assess applications for market-based rates.
    That given, what I disagreed with, Mr. Chairman, is the 
interim measure that the Commission decided upon for 
determining market-based rates for those companies coming up 
for their 3-year review and those entities asking for market-
based rates for the first time. I disagreed with the interim 
method. Would you like to know why?
    Mr. Barton. Yes.
    Ms. Breathitt. I disagreed with the interim method because 
I felt that it made the finding already that entities were 
engaging in anti-competitive behavior without giving the 
entities a chance to say that they weren't and our Commission 
saying, ``Yes, you were, and here's the cure.'' I think back to 
when we approved the AEPCSW merger, and we found, using the 
hub-and-spoke, that there was a potential for market power, and 
the cure was that they had to sell one power plant and that 
that would eliminate their ability to exercise it. In this 
instance, we said that every power plant had to go back to 
cost-based rates, and I felt that this interim test was too 
blunt, that it didn't make a more finely tuned assessment; that 
was one part. The other was that it didn't give the parties an 
opportunity to say whether they thought that was the best way 
we could come up with an interim approach.
    And the final point that I disagreed with was that it could 
have unintended consequences, which we have already seen in a 
new application. In another area of the country, an entity has 
declined to sell power into an area where they failed the test. 
So the power from that new plant will never be sold into an 
area in Virginia because--I don't think that is what we 
intended, but----
    Mr. Barton. Well, my problem is that we are trying to 
create a real national market while protecting the rights of 
specific States. If they don't want to open their markets, they 
don't have to. We are not trying to preempt that. But if you 
are concerned about market power, the way to prevent it, in my 
opinion, is to create a real market so there are a lot of 
potential suppliers going into the market. You have adequate 
transmission capacity to get the power to the market. You do 
that and no one player that is supplying power can dominate the 
market. So I would rather address market from a market 
initiative than from a regulatory initiative.
    And any time even the best--we have got four very bright 
people here. And to some extent, I know all four of you 
personally, and I have the highest opinion of your intellect 
and your willingness to do good public service. But when four 
or five people try to develop a market test for a nation as 
diverse as the United State of America, you are almost, be 
definition, bound to fail. And so I would err on the side of 
trying to create the market, create the transmission grid, give 
the States the right to oversee at the local level, and do it 
that way, instead of even with the best of intentions coming up 
with something almost out of the blue. I mean Mr. Wood 
disagrees with that. He is frowning. I should say out of the 
maroon, but then you wouldn't like it if I said that.
    So in any event, before I turn it over to Mr. Boucher, I 
want to make--I asked I think in the first round of questions 
if everybody supported the concept of net metering, but I want 
to make sure that you all--you may not agree exactly how we are 
doing that metering in the bill, but the concept of net 
metering you support. Does the administration support that, Mr. 
Blake? Okay. Does the Commission support it?
    Ms. Breathitt. Yes.
    Mr. Barton. Okay. I don't know that TVA would have to have 
a position on net metering, but it would be nice to know if you 
do support it.
    Mr. McCullough. Yes, we do, Mr. Chairman.
    Mr. Barton. I thank you. The chairman recognizes Mr. 
Boucher for 5 minutes.
    Mr. Boucher. Well, Mr. Chairman, at a minimum, I think we 
could do a net metering bill.
    Mr. Barton. That is a start, that is a start.
    Mr. Boucher. Let me give the other members of the FERC, 
apart from the chairman, the opportunity to respond to the set 
of questions that I had propounded to the chairman earlier. And 
let me just briefly mention what these are. First of all, do 
you support a continuation of your merger review authority, and 
if so, why? Do you support the provisions in the legislation 
relating to incentive pricing as a way to encourage new 
transmission construction, or do you believe that there are 
other ways to accomplish the task of getting new transmission 
lines built?
    With regard to Regional Transmission Organization 
membership, do you support any of the provisions in the 
legislation that relate to ways that membership will be 
required or do you believe in the alternative that your present 
processes and your present authorities are adequate to 
accomplish that task? And do you have any comments with regard 
to the uniform interconnection standards that are contained in 
the legislation? Or, in the alternative, do you think that you 
can go forward with current authority in order to promote a 
uniform interconnection standard? Ms. Breathitt, would you like 
to begin?
    Ms. Breathitt. Yes. I would like to address your question, 
No. 1, with respect to mergers. If I am not already on strong 
record, I would like to be placed on strong record now for 
asking the committee to please reconsider the language in the 
bill that would take away our merger authority. As I had 
mentioned earlier, we use a public interest standard. We are 
the only agency in merger review that uses that standard. Other 
agencies use a different standard, which is ``no harm to 
competition,'' and I think it is real important for one agency 
to have that standard for merger review. All mergers aren't 
created equal, and we look at the effect on rates, competition 
and the effect on regulation. I think that is very important 
for the public to have our agency as a place for that.
    Mr. Boucher. While we are on the subject of merger review, 
let me ask Mr. Massey and Ms. Brownell if they have comments 
concerning that. Ms. Brownell?
    Ms. Brownell. I never thought I would say this, having been 
on the other side of a merger when I worked in banking for a 
regulator, but I think we do need that authority. I think we 
look at it through a different screen, but I think it is 
important that we maintain discipline and focus and not use it 
as an opportunity for people to have a shopping spree to extort 
commitments that do not advantage either the merger, the 
shareholders or the consumers.
    Mr. Boucher. Mr. Massey?
    Mr. Massey. I agree with Commissioner Breathitt and 
Commissioner Brownell's comments. I think an important point is 
we have a very public and open process for determining mergers 
and all stakeholders get to come in and tell us what they 
think. That is important. It is not a closed process, and 
keeping it open is absolutely critical. And I agree that we 
have a broader standard than the anti-trust agencies use, and 
at this particularly critical time I would not recommend 
repealing our authority when we are promoting competitive 
markets. It could be that a merger would undercut the very 
competition that we are trying to facilitate.
    Mr. Boucher. Thank you very much. Ms. Breathitt, would you 
like to talk to the RTO issue?
    Ms. Breathitt. Yes. Because of our open architecture 
language in Order 2000, we do have the ability to allow RTOs to 
change over time, and I would hate to see the committee 
limiting our flexibility to do that by having a very strict 
title. I liked your idea of addressing it and perhaps even 
mandating it, but keep the title simple to allow the 
flexibility that is going to happen over time.
    Mr. Boucher. Okay. Ms. Brownell?
    Ms. Brownell. I would agree with Commissioner Breathitt. I 
think it is very important that we encourage, mandate if you 
wish to do that, people to join RTOs, but because of the 
evolutionary nature and because we do have a different 
evaluation, companies should not control the process. They act 
in their own self-interest, as they should, and I applaud that. 
We have that larger self-interest to protect the consumers and 
the other stakeholders, and I think the provisions of this bill 
would limit that.
    Mr. Boucher. Thank you. Mr. Massey?
    Mr. Massey. I agree with my colleagues.
    Mr. Boucher. Thank you, Mr. Massey. Thank you for that 
answer; that was terrific. You are an excellent witness. That 
is very much to the point.
    Ms. Breathitt, Ms. Brownell and Mr. Massey, the question of 
incentive pricing.
    Ms. Breathitt. That one is tougher for me, because actually 
it was a controversial part of Order 2000, and we put that in 
there because it was a voluntary rule, and we wanted to have 
some carrots. It is in the reg text. Yes, it was controversial. 
But I do think that the Commission can use incentive pricing, 
but we need to do it carefully, and, as Commissioner Brownell 
stated earlier, we shouldn't just be willy nilly using 
incentive pricing without a good public policy goal.
    Mr. Boucher. Do you need any additional authority to do 
that?
    Ms. Breathitt. It is already in our reg text. We have made 
it part of the Federal regulations.
    Mr. Boucher. So whatever is in the bill is really 
superfluous in that regard?
    Ms. Breathitt. I think so.
    Mr. Boucher. Okay. Ms. Brownell, Mr. Massey, quickly, do 
you have a response?
    Ms. Brownell. I don't think we need additional authority. I 
would reemphasize let us use this to incent innovation, incent 
efficiency, incent companies who are committed to opening 
markets. We have seen some interesting models in the UK where 
they have used performance-based and incentive-based ratemaking 
to reduce congestion through not only building new transmission 
but in fact adding innovative solutions to existing 
transmission. So I think we need to just not buy into the 
concept without addressing those very specific policy goals.
    Mr. Boucher. Mr. Massey?
    Mr. Massey. I don't think we should just throw money at 
transmission just for the sake of it. We ought to get some bang 
for our buck. If we are going to increase the incentives for 
transmission, we need more transmission to actually get built, 
and we need good performance in managing those transmission 
assets, and we ought to insist on it.
    Mr. Boucher. Okay. Thank you all very much. Thank you, Mr. 
Chairman.
    Mr. Norwood [presiding]. You are welcome. The Chair now 
recognizes Mr. Bryant, the gentleman from Tennessee, for 5 
minutes for questions.
    Mr. Bryant. Thank you. Mr. McCullough, let me ask you a few 
more questions. The changes in TVA in this bill would result in 
the enactment of changes that are I think very dramatic to TVA. 
How do you think that TVA and TVA distributors would fare in a 
competitive wholesale market?
    Mr. McCullough. Well, Mr. Bryant, I believe that, first of 
all, has been taking steps, in terms of focusing on our 
business performance to ensure that we had a delivered price of 
power that was competitive, competitive with any region in the 
country, to ensure that our reliability when benchmarked 
against other utilities, the best in America, compares 
favorably. We have worked with our distributors to provide them 
with some flexibility in the requirements of their contracts. 
What does that--I had dinner last night with Herman Morris, the 
CEO at Memphis Light, Gas and Water. We have a proposal on the 
table that would enable any one of 158 power distributors to go 
to the market for 10 percent of their requirements with 24 
months notice. They give us 24 months notice, they can buy 10 
percent of what is now total requirements contract. With 36 
months notice, they can buy all of their power in the open 
market from another supplier.
    The way we are best preparing for competitive and open 
marketplace that TVA desires is by having the best practices in 
place in the way we run our business. We believe without any 
doubt that TVA is competitive today and will be even more 
competitive in the future. We welcome competition and choice. 
It needs to be done in a manner that is consistent with the 
language that you and others have made sure is in tact in this 
3406. The consensus title language welcomes competition and 
choice, enables TVA to compete with investor-owned utilities 
and other entities. Our distributors and the consumer can 
choose. We welcome that, and that is why we are very pleased 
that that language is in tact in H.R. 3406.
    Mr. Bryant. Now, you have testified that there will be 
language in the bill that would allow these 158 distributors to 
purchase their power elsewhere. Were a distributor to do this, 
how would their stranded cost be determined?
    Mr. McCullough. First of all, the language says that after 
2000--after September 30 of 2007, there would be no potential 
stranded cost recovery for TVA. In the event that there are 
stranded costs--and we believe that we can wholesale. The fence 
should fall in both directions. In other words, once this 
language is enacted into law, the distributors can choose where 
to buy their power. TVA would be given the opportunity to 
wholesale, and I underline that word ``wholesale'' outside what 
is now the fenced-in area. If stranded costs become an issue, 
we would yield to FERC, and we have confidence in the wisdom of 
FERC to determine an equitable stranded cost recovery 
mechanism.
    Mr. Bryant. As I understand this new title, new generation 
to serve the Tennessee Valley load could be built by TVA but 
also by the distributors, by independent power producers and by 
other utilities. Is this correct, and why is it important that 
TVA be among those that would be allowed to build to meet its 
load?
    Mr. McCullough. You are correct. That language is in tact 
in H.R. 3406. TVA only asks the opportunity to compete on a 
level playing field with other investor-owned utilities, 
independent power producers, power marketers, as the Valley's 
economy continues to grow, and we hope it paces the rest of the 
Nation. We are in business to serve the Valley. We feel that we 
ought to have the right with the input from our power 
distributors. So TVA, unilaterally, would not make a decision 
on the need for new generation, but as the Valley's economy 
continues to grow, we feel it is only fair that TVA would have 
the right to choose, if necessary, to add new generation 
capacity to meet the growing demands of our Valley's economy.
    Mr. Bryant. Mr. Chairman, my voice is about to go, and I 
would yield back my time. Thank you.
    Mr. Norwood. I thank the gentleman. Mr. Sawyer, you are 
recognized now for 5 minutes.
    Mr. Sawyer. Thank you, Mr. Chairman. Let me return to a 
topic that we have touched on in the course of these 
discussions in a more specific way, and that is the need, as 
Commissioner Massey put it, to make decisions and get on with 
the business of building transmission capacity. The chairman 
has an approach in his bill that has a three-pronged test 
whether or not new transmission capacity is needed. First, if 
the States have not acted within 12 months, the FERC determines 
that the project will be used for interstate commerce, and, 
third, the project is in the public interest.
    Mine would trigger itself in a different way, but 
essentially come down to similar kinds of decisions. It would 
make a determination up front that there are transmission 
constraints and therefore a need and create an annual list of 
such locations and then proceed to permit that same, I suppose, 
arbitrary 12-month timeframe within which the States might act, 
after which the FERC would undertake this cut that the chairman 
would--I understandably prefer not to have to bring to his 
lips.
    He suggested something the Department of Energy has talked 
about in terms of regional siting boards. I suppose that is a 
nice way around the whole States' rights question, but how they 
would work and how we would structure them it seems to me 
remains very much open. Could you, each of you, comment on the 
specifics of the siting procedures that are not only before us 
in the course of this week and suggest directions that we might 
go to reach a structure and a procedure that in the end would 
let us do what Commissioner Massey wanted to do--get on with 
it.
    Mr. Blake. To start from the administration's perspective, 
I think, as you have articulated, is, first, circumscribing the 
authority very narrowly, using it only in the context where 
there is an identified national interest. And our view is that 
that would be something that we would identify in a larger 
national transmission study. Second, that you try to make this 
a regional decision, using presumably something like the RTO 
process, and that you would only be addressing those instances 
where, for a variety of reasons, the region can't act. I mean 
it would be a last step backstop.
    Mr. Sawyer. Would the regions have a specific set of 
standards that we would determine nationally that each region 
would make separately or would they set separate standards? How 
do you----
    Mr. Blake. Well, I think the national interest would be 
identified outside of the individual regions, and then the 
region, presumably, would have a number of different methods 
for addressing that national interest.
    Mr. Sawyer. Chairman?
    Mr. Wood. There are really two things that happen in a 
transmission line. The first is the need. That is largely my 
experience has been, although not exclusively, been kind of not 
a big issue. The RTO engineers get an objective enough group of 
people that everybody acknowledges they are expert.
    Mr. Sawyer. Well, if we look at Southern California----
    Mr. Wood. Well, you have got the need there. The issues 
then become----
    Mr. Sawyer. But it was so difficult they couldn't get to 
it.
    Mr. Wood. And this is exactly why the RTO function is 
great. You had it on a boundary between PG&E and SoCal Edison. 
Well, SoCal Edison wanted to take care of the area within SoCal 
Edison. PG&E wanted to take care of the people within PG&E, but 
nobody really wants to build a bridge to the other one, because 
there is not a lot of money in it, there is not an incentive in 
it, your customers aren't perceived to get a real benefit from 
it. Too bad, actually they would have gotten a great benefit 
from it had it been worked out. But the same thing applies that 
even when you regionalize something to an RTO, you do get 
around the very parochial nature of each utility and each 
transmission company taking care of itself.
    Mr. Sawyer. Commissioner?
    Ms. Breathitt. I think the provisions in the bill, as I 
have testified, take us in a very positive step forward. Now, I 
had advocated, though, for outright transmission siting 
authority for interstate, because one State could act within 
the 12 months, and another State may not. So then you have 
added a year to the process.
    But the other point I would like to make is that the 
solution isn't always a transmission solution. It might be more 
inexpensive to build a power plant to solve congestion or it 
may be less expensive to build a gas pipeline to serve a 
constraint. So as Mr. Blake stated, there are several ways to 
cure a congestion problem besides just a new transmission.
    Mr. Wood. We would agree on that.
    Ms. Brownell. Which I think speaks to the importance that 
an impartial analysis done by an RTO would speak to, because 
they would have no vested interest in either a transmission or 
a generation solution. Further, your suggestion, which I think 
DOE has already taken, to do an annual evaluation of 
transmission constraints and what they are costing us, because 
that is the point that we haven't really looked at, and is the 
invisible cost of, frankly, doing nothing with these markets.
    Mr. Massey. And the third possible solution, in addition to 
a transmission solution or a generation solution, is a demand-
side solution that lightens the load. And I think the RTO 
planning process can look at all three options, and on a 
regional basis, not just on a State-by-State basis, but on a 
regional basis. What is the best regional solution? It is not 
always transmission.
    But when transmission is the best solution, we have got to 
get it sited, and I think the bill is a reasonable compromise 
respecting States' rights and the Federal responsibility to 
ensure that interstate markets work well. We have crossed the 
divide. We did that 6 years ago, and we said we wanted a 
market-based approach at the wholesale level. It seems to me it 
is now our responsibility to make sure those markets work well, 
and we can't do that without the necessary investment in 
transmission.
    Mr. Sawyer. Thank you. Thank you, Mr. Chairman.
    Mr. Norwood. I recognize myself now for 5 minutes, and 
Chairman Wood, if we could try to go back to where we left off.
    Mr. Wood. Yes, sir.
    Mr. Norwood. The new FERC order that really singled out 
three companies changed the formula FERC used to calculate 
market power, not to mention that these companies don't have to 
commit an abuse, which drives me a little crazy. Your order 
includes generating capacity that is used to serve its retail 
customers and contracted commitments as far as generation and 
capacity. In short, if the order is intended for the wholesale 
market, retail customers shouldn't be affected by principle. 
The biggest problem with this test that you have set up is that 
it assumes that all the generation that a utility owns is 
available for sale in a whole sale market and thus included in 
the market power analysis.
    Now, we talked about the fact that these companies could 
very easily be changed to cost-based rates for market-based 
rates and that that would cost, for example, our major utility 
a lot of money for which much of that money is used to keep the 
retail rates down. Now, when you came to this decision, when 
you determined that we were going to do this, did FERC take 
time to have a study or look at how this would affect the rates 
of my constituents and Georgia Power customers? Did you do any 
work in that area?
    Mr. Wood. We did not do a cost/benefit study; no, sir.
    Mr. Norwood. Did FERC then go ahead and analyze whether 
requiring Souther Company to post its cost for the world to see 
would reduce price competition and raise the prices at which 
Southern Company would have to buy power; again, another cost 
for my constituents? Did you do a study on that?
    Mr. Wood. We didn't do a study, but we actually are pretty 
familiar with the split savings approach. It has been one that 
the Commission has used for a while, which is how they put the 
cost of them producing the next increment, and then we split 
the difference between them and the customers' cost of buying 
the next increment, which is usually a number in between 
those----
    Mr. Norwood. So you have a written detailed analysis of how 
you determined this wouldn't affect the ratepayer?
    Mr. Wood. No, but we have a written policy of how this 
process is done and was done for 80 years before the move to 
market-based rates----
    Mr. Norwood. But you have made it so easy, you see, to take 
people out of market-based to cost-based now that it is a 
greater concern now. So we would like--you know, I would like 
to know how you are going to help me keep from raising the 
rates on consumers in Georgia?
    Mr. Wood. Well, I think the most helpful thing that can 
happen is--which we left specifically open, is that outside the 
area where they have a dominant market share, the utilities and 
their affiliates can sell into those markets in the neighboring 
States, the neighboring areas, and make sales into those 
markets in a competitive market that they don't have a dominant 
control, which is I think the goal that certainly this bill 
seems to be pointing toward.
    Mr. Norwood. Well, do you--just tell me this: Do you agree 
forcing a company to post its cost of doing business for the 
world to see will end up then for that company causing them to 
pay more or less for power?
    Mr. Wood. I think their posting the costs for what it costs 
them to generate is what regulated companies do every time they 
go to retail rate cases. I think that data is certainly there 
for the Georgia regulators and the Alabama regulators to look 
at when they set the rates for the regulated retail side, and 
we are asking them to look at the same data.
    Mr. Norwood. Well, I don't know that the Georgia regulators 
post it for the world to see. We have handled it pretty well. 
But you are talking about posting it for the whole damn world 
to see.
    Mr. Wood. Again, I think those are----
    Mr. Norwood. And in a competitive market which you believe 
in that interferes with your ability to be competitive. Let us 
move to the next one because time is limited.
    Mr. Wood. Yes, sir.
    Mr. Norwood. Tell me this: How many hundreds of millions of 
dollars might it cost Georgia Power's retail customer when 
large corporations want to interconnect to its transmission 
system and must, at least according to your November 20 order, 
be considered a network resource? Example: A cost that must be 
borne by retail customers again rather than the interconnecting 
company. How high do our rates got to go because of that 
November 20 order?
    Mr. Wood. Sir, I think in fact the interconnecting of more 
power plants in Georgia and in every other State will put 
downward pressure on the cost of power. The cost of power is 
probably 70 percent of a Georgia customers retail bill and to 
have that be derived not just from one company but from several 
companies competing against each other in Georgia and in the 
neighboring States will put downward pressure on the bills. 
That is the point of the whole initiative: to open up the grid 
so that competitive power plants compete against each other and 
drive those costs down. And there may be some costs to upgrade 
the transmission grid.
    Mr. Norwood. What do you mean maybe?
    Mr. Wood. Well, there may be. If the transmission grid has 
to be added onto faster than other costs than the utilities 
rates are coming down, which they do, they depreciate over 
usually a 15-, 20-year life. If the cost of adding new plants 
is more than the cost of the old plant, depreciating down, and 
there is no growth of load, which is not true in that part of 
the country, there are a lot of things that have to be true 
before rates go up.
    Mr. Norwood. Well, that is similar to the story we heard in 
Georgia about gas deregulation. It all makes sense when you sit 
there behind a desk and work it out, but in the end, many of 
these things you presume might happen, you think might happen 
in a free market, actually don't, and the problem here is when 
you are dealing with electricity in this country, energy in 
this country, we better be right. And you are sitting here 
telling me that you have put out a marketing order November 20 
and nobody had time to do any studies, because we don't have to 
worry about Georgia because we are here in Washington worrying 
about the country.
    Somebody has to worry about what the ratepayers have to pay 
at home, and I am being told by a lot of people, and it is 
amazing how many people who come from different walks of life 
in the utility market, that many of these things that you are 
doing are not going to work the way you hope and I hope they do 
too. They are going to increase the cost for our ratepayers. So 
did you do any studies? You said no already a couple of times.
    Mr. Wood. I have answered your question, but I think it is 
important to realize that monopolies generally do not favor 
competition, despite the very strong evidence in the wholesale 
gas industry that competition has resulted in tens of billions 
of dollars going back to customers. Your State has chosen to go 
to a retail gas experiment. That is a political decision. But 
the choice to open up wholesale markets is an economic 
decision, and I think the evidence is uniform.
    Mr. Norwood. Well, it wasn't intended to be a political 
decision, and my time is up. It was intended to be an economic 
decision, the same as your decisions are intended to be 
economic decisions, and all I am saying is when you make those 
decisions and you affect thousands and thousands of people, 
then we are concerned when you don't have a study to back--I 
need more information, because other smart people are saying 
you are not right. My time is up, don't forget where we were, I 
will be right back after this vote.
    Mr. Chairman, Mr. Waxman would like to have the next 5 
minutes.
    Chairman Tauzin. He is entitled to it, I believe.
    Mr. Norwood. Mr. Waxman, you are recognized.
    Mr. Waxman. Thank you very much, Mr. Chairman, both Mr. 
Chairmans. Mr. Wood, the policy you advocate regarding Regional 
Transmission Organizations is a bit different from the policy 
contained in H.R. 3406. You recommend that Congress authorize 
FERC to require RTOs where it would be in the public interest. 
H.R. 3406 mandates RTOs whether or not they are in the public 
interest. Is that an accurate distinction between your position 
and H.R. 3406?
    Mr. Wood. It is accurate, but it is not the source of my 
recommendations for amendment.
    Mr. Waxman. Okay. I can see why you don't think there ought 
to be--I can see why you think there ought to be a public 
interest test. If Congress or FERC chose to force States into 
RTOs, that would be a pretty dramatic step. We don't yet know 
how much it would cost to establish RTOs, but it could cost 
tens or hundreds of millions of dollars. These costs could be 
borne by States and the private sector. Is that accurate?
    Mr. Wood. Yes, sir. All costs are borne by the customer, 
ultimately.
    Mr. Waxman. Before mandating participation in RTOs, don't 
we have an obligation to ensure that RTOs make sense 
economically and from a policy perspective?
    Mr. Wood. Yes, sir. And for that reason we have agreed to 
do a region-by-region cost/benefit analysis for RTOs prior to 
implementing them.
    Mr. Waxman. Establishing RTOs is a major Federal action, 
isn't it?
    Mr. Wood. I am not sure what those words mean, but I mean 
it certainly is an important thing that we would be doing.
    Mr. Waxman. Okay. Whenever the Federal Government 
undertakes something important, like a major Federal action, it 
is required by law to examine the potential impacts on the 
environment. FERC should understand this, because when it 
issued Order 888, FERC analyzed the expected environmental 
impacts of increased competition. Unfortunately, we now know 
that FERC's analysis got it wrong.
    A new study by the North American Commission on 
Environmental Cooperation demonstrated the links between 
electricity restructuring, increased demand for electricity and 
increased air pollution. In 1996, FERC projected that emissions 
from power generation were most likely to fall under 
competition. Instead air emissions increased and by more than 
FERC projected in its worse case scenario. The CEC study shows 
that FERC's worse case scenario underestimated the growth and 
demand from 1995 to 2000 by 4.6 percent. As a consequence, FERC 
underestimated emissions of nitrogen oxides by 4 percent and 
carbon dioxide by 8 percent.
    Mr. Wood, since we agree there should be a sound policy 
basis for RTOs prior to their establishment, I have the 
following question for you: Would you commit today to updating 
FERC's projection of the environmental impact of increased 
competition prior to FERC's approval of any RTOs?
    Mr. Wood. I would not be able to agree to do that today.
    Mr. Waxman. And why not?
    Mr. Wood. I have to look into whether actually NEPA would 
apply to what is an economic regulatory action. I read the 
report from the CEC that you have discussed, and I know these 
issues were reviewed on the court's original review of Order 
888 and Order 2000, and I think the Commission was found to be 
within what it did appropriately the first time.
    Mr. Waxman. Well, I am going to leave it to you to review 
and see whether it is required or not, along with your 
colleagues. But let me ask this of the members of the 
Commission. Chairman Barton in text in proposed H.R. 3406 to 
restructure the electric utility industry. Enron, a Texas-based 
energy company, has been lobbying for the policies in this bill 
for years. President Bush has endorsed Enron's model for 
electricity competition and his Department of Energy has 
testified they are generally in favor of this legislation. 
Reliant, another Texas-based energy company, has lobbied for 
the demand reduction program under Section 103 of this bill. 
And, Mr. Wood, you are a former Texas regulator, and you are 
working toward the goals of this bill through administrative 
action.
    There is a lot of support for the policies we are 
considering today from companies and officials from Texas. 
However, the bulk of the bill before us does not appear to 
apply to Texas. Texas, one State in the continental U.S. that 
is not affected by the transmission provisions in this 
legislation. Historically, Texas has been treated separately 
from the rest of the U.S. under the logic that electricity does 
not flow across its borders. This logic is no longer true. 
Texas is now connected to other States. I would like to from 
the members of the Commission wouldn't it make sense to put 
Texas under the same rules that apply to Wisconsin, Georgia, 
California, Michigan and every other State in the continental 
U.S.? And wouldn't the rest of us in the U.S. feel more 
comfortable if they were also in there? Mr. Massey, do you want 
to comment on that?
    Mr. Massey. Oh, I think it would probably make sense to do 
that, yes.
    Mr. Barton. Would the gentleman yield?
    Mr. Waxman. Let us get the commissioners, and then I will 
be able to yield if I have any time.
    Ms. Brownell. I think it would probably make sense. I would 
also add that there have been a number of advocates for 
competitive markets who come from other States. Certainly, 
Pennsylvania has a number of those advocates, and I am one of 
them.
    Ms. Breathitt. I think it would make sense for all 
interstate transmission to be part of the new grid that this 
bill is trying to create. I don't know what it would take to do 
that with respect to Texas, but I think that it should become 
part of the grid, just as this bill is asking public power to 
become.
    Mr. Waxman. Mr. Wood?
    Mr. Wood. If I didn't think it would slow down the progress 
that was made in Texas for 5 years to have FERC catch up to 
where Texas is, I would probably not have a problem with it. 
But as one who committed the last 6 years of my professional 
career to advance the ideas that I am advancing here on the 
Federal level, I think putting Texas under Federal jurisdiction 
now would dramatically slow down the positive growth that has 
happened in my home State and would not support it.
    Mr. Norwood. Thank you, Mr. Waxman. Mr. Chairman, you are 
recognized for 5 minutes.
    Mr. Barton. Well, I asked to be--I guess unanimous consent 
to be briefly----
    Chairman Tauzin. I do ask to be recognized. I yield quickly 
to my friend from Texas.
    Mr. Barton. I would just point out, in response to my good 
friend from California's question, you can make the argument 
that it would make a lot more sense to put the same State 
situation in the great State of California that we have in 
Texas where you have an intrastate system with more than ample 
supply and an interconnection network intrastate, through 
ERCOT, that disseminates power around the State in a very 
efficient and cost-effective fashion.
    My good friend from California knows that California has an 
intrastate pipeline system for natural gas that is not subject 
to FERC jurisdiction----
    Chairman Tauzin. Maybe that ought to be.
    Mr. Barton. [continuing] and my recollection is that when 
Mr. Green of Texas offered an amendment to make it FERC 
jurisdictional, my good friend from California vehemently 
opposed that. So let us talk apples and apples and oranges and 
oranges, not apples and oranges. And with that, I would yield 
back.
    Chairman Tauzin. I thank my friend. I don't have a lot of 
time, Mr. Chairman, because I have not had a chance on the 
first round to ask a few questions. I am going to be very 
brief, but I am going to submit some questions to you and the 
other commissioners in writing.
    I am deeply concerned, as a number of my colleagues on this 
panel are concerned, about the order issued on November 20. I 
am deeply concerned that it was issued without a process of 
public comment and that we are hearing an awful lot of about 
some very deleterious effects that it might have upon companies 
in our region and more importantly upon consumer rates and 
decisions those companies may make.
    We are hearing, for example, that this new interim 
generation market power test you have adopted may well 
discourage new generation investment. It may expose our regions 
of the country to the same kind of problems California had, 
that it may indeed have the perverse incentive against longer-
term investments and thus put us into a position where 
companies are making shorter-term and riskier transactions in 
order to avoid flunking your test. Some have said you put 
forward a test nobody can pass, and therefore it is met and 
designed simply to punish or force some companies into an RTO.
    Now, I want those companies in an RTO; I think we all agree 
with that. I think getting the companies to join RTOs is a 
worthwhile goal. I share that with you and Commissioner 
Brownell, but I want to suggest to you that without having 
public comment, with all of these incredible assertions we are 
hearing about the effects of this order, that perhaps you might 
want to consider delaying the effectiveness of this order until 
you have had a chance to go on notice and accept public 
comments and examine some of these consequences.
    I join the gentleman in the chair in being very concerned 
about the impact it may have on consumer rates in my part of 
the country. Rates are going down right now. There is no big 
crisis. And I question the wisdom of putting a big change like 
this into effect just perhaps to punish a few companies into 
joining RTOs when it may have some pretty serious effects. Now, 
I will let you respond, but I am going to ask some very 
specific questions on the record in writing since I am just 
about out of time, I think. Chairman Wood?
    Mr. Wood. Thank you, Chairman Tauzin. These orders, as the 
others, are subject to rehearing. Rehearing is the appropriate 
place for those companies and others to make comments to the 
Commission about these effects. The hub-and-spoke methodology, 
as well as this methodology, and really all the market-based 
rate issues, have always been dealt with on case-by-case 
adjudication and not by rulemaking. So it is not a departure 
from our process to do that, and we do have a process by which 
people can provide input on a rehearing, and I think those are 
actually due in the next couple of weeks for people to do so.
    I have to say, as a practical matter, certainly in the 
South and in other parts of the country, there is a lot of 
progress toward RTO development or even independent system 
operators, which was the kind of precursor to RTOs. And our 
order specifically said if you are in an ISO or an RTO, that 
has a market monitoring, a market mitigation function that can 
identify on a surgical basis anti-market, anti-competitive 
behavior: that is the end goal we want. We don't want to have 
to live through California again, Mr. Chairman. We don't want 
the Congress to have to be put through that test, we don't want 
the consumers or the State, to be put through that test, and, 
actually, it is in a time when prices are low, when things are 
more calm and peaceful that we should be putting the trip wires 
that keep market power from hopping up and----
    Chairman Tauzin. I don't deny that. I don't deny that we 
ought to be encouraging the RTO transactions. I think we ought 
to encourage them, and I want to help you, but I am deeply 
concerned that the interim order you have put in place may have 
some very damaging effects on the market in the meantime. And 
you ought to hear some public comments. Whether you hear it in 
rehearing or whether you delay the implementation until you 
have had a chance to ferret all these questions out, we ought 
to have some confidence in that. None of us want to go home and 
say that on our watch our Federal authority made a significant 
change without a lot of public comment, that caused a 
dislocation of rates and generation investment in our 
communities when in fact we are very deeply concerned about 
what we saw in California and it repeating itself in other 
parts of the country.
    I had a blackout in Louisiana, believe it or not. Energy-
rich State like Louisiana, we had one a few years ago. I can't 
afford the risk of having that happen in my State, on my watch, 
and I would urge you to be extraordinarily careful about 
receiving the public comment and input you need before you move 
forward.
    Mr. Wood. We will, Mr. Chairman, and the comments on that 
were extended at parties' request until early January. So 
people do have time to get that in.
    Mr. Norwood. I thank the Chairman. I would like to close 
our hearing by announcing that there will be a notice published 
that will go to markup next Wednesday when we are back in town. 
And I would like to close, Chairman Wood, by just telling you 
that I have a lot of other questions that I am deeply sorry 
that we couldn't air them here, that I would like to get very 
specific answers to, and for you to note that we have noted 
that by joining an RTO, a utility can make all these bad things 
go away with the market order. And that suggests, perhaps, just 
suggests to an untrained eye that FERC's November 20 order 
might have been punitive like heads on stakes and stuff like 
that.
    Punishing companies who have not yet complied with Order 
2000, an order that I know you know was voluntary, but it is 
really, in our view, the customers of Georgia Power who will be 
harmed of public power in Georgia, a State that is very proud 
of what and how we have been doing things. And I hope that 
hasn't escaped the Commission.
    There is a lot I would like to tell you about deer hunting. 
You know, this thing being in the woods and campfires and all 
that kind of stuff, heads on stakes, it is dealing with deer 
hunting but unexperienced deer hunters can run into a lot of 
problems in the woods. Sometimes you are real anxious, 
sometimes you have got a itchy finger, sometimes you are 
staring out there real, real hard looking for that buck-only 
day and everything looks like it has antlers on it. And 
sometimes you shoot the wrong deer and you kill that doe and 
you are not supposed to, and they will come along and take your 
license and sometimes you are so anxious as an experienced 
hunter that you actually wound a buck, and they are real 
dangerous when they get wounded. Those antlers and hooves will 
chew you up.
    So we are glad you are here, and we hope we are going to be 
able to work this out, but you better pick on a lot more 
companies than three if you want to do any picking, 
particularly when one of them is out of the Southeast. So with 
that, I will adjourn this hearing until tomorrow where we will 
resume the hearing tomorrow. Meeting adjourned.
    [Whereupon, at 5:29 p.m., the hearing was recessed until 
Thursday, December 13, 2001.]
    [Additional material submitted for the record follows:]

               Federal Energy Regulatory Commission
                                     Office of the Chairman
                                                  February 13, 2002
The Honorable W.J. ``Billy'' Tauzin
Chairman
Committee on Energy and Commerce
U.S. House of Representatives
Washington, D.C. 20515-6115
    Dear Mr. Chairman: I am pleased to reply to the questions in your 
letter of January 14, 2002 on recent Commission actions regarding 
regional transmission organizations (RTOs) and market based rate 
authorizations. For your convenience, I've repeated your question 
before providing an answer.
    Question (1) Please describe any analyses the Commission has 
undertaken of the proper scope, configuration and market rules for RTOs 
and of the costs and benefits to consumers in each State of proposed 
RTOs and alternatives.
    Following our week-long public hearings on RTO issues in October, 
2001, the Commission committed to our state commissioner colleagues and 
others that we would update and disaggregate the cost-benefit studies 
that were done in 1999 for Order No. 2000. On November 1, 2001, the 
Commission contracted with ICF to perform the analyses. The base case 
the contractor uses in these analyses characterizes current utility 
dispatch, planning, and other industry conditions important for 
analyzing the economic impacts of an RTO proposal. The base case also 
reflects the ``no action'' alternative, i.e., status quo implementation 
of Order No. 888 by the Commission. The analyses include use of a 
modeling framework that builds scenarios needed to characterize and 
study the proposed RTO initiatives and produce economic impacts for use 
in economic cost and benefit analysis. We are consulting with a 
regionally diverse, interested and knowledgeable group of state 
Commissioners on the details of the models to make the results as 
accurate and meaningful as possible. Our contractor expects to deliver 
the study later this month.
    Question (2) As you know the Louisiana Public Service Commission 
issued a show cause order to Entergy and others about why they should 
be allowed to join an RTO. What have you done to resolve the concerns 
of state regulators in Louisiana and other states about impacts on 
retail customers from utility participation in RTOs?
    The Commission has worked extensively to identify and begin to 
solve the concerns of state regulators about impacts on retail 
customers from utility participation in RTOs in all the states. 
Specifically, in brief, we have:

 Held five RTO national outreach workshops in March and April 
        2000;
 Held state-specific sessions during the Commission's October 
        2001 RTO Week;
 Undertaken a cost-benefit analysis of RTOs in response to 
        state requests;
 Begun using state-FERC panel discussions to identify and 
        address RTO issues of mutual concern;
 Expanded collaboration through the National Association of 
        Regulatory Utility Commissioners (NARUC);
 Invited and received extensive state commissioners' on-the-
        record comments on a number of regional RTO concerns.
    The details on each of these below, though somewhat lengthy, show 
we continue to work with state regulators to resolve state concerns 
about RTO impacts on retail customers.
    RTO National Outreach. In Order No. 2000, the Commission said that 
it would undertake a collaborative process, one in which Commission 
staff would be fully engaged with transmission owners, public and non-
public utilities, as well as state officials and affected interest 
groups, to actively work toward the voluntary development of RTOs. That 
process began in March and April 2000 with five national workshops, 
including one in Kansas City, Missouri and another in College Park, 
Georgia.
    State Sessions During RTO Week. To continue our dialogue, we held 
workshops on RTOs in October 2001 and devoted various sessions to state 
issues. We learned about the retail-customer concerns states have 
related to cost-shifting, RTO startup costs, and independence.
    Cost-Benefit Analysis. As discussed in response to question No. 1, 
during those October meetings, the states asked the Commission to do a 
cost-benefit analysis for each RTO region (and perhaps for each state) 
to determine the effect on retail customers. We began that work right 
away and expect to have some results by late February 2002.
    State-FERC Panel Discussions. Based on the discussion at the 
October 2001 workshops, the Commission decided to move on two parallel 
tracks to finalize RTO issues. The first track is addressing geographic 
scope and governance aspects of RTO proposals after we have consulted 
with state commissions. The second track for resolving RTO issues is a 
proceeding addressing transmission tariff and market design rules for 
public utilities, including RTOs. This will address the issues needed 
for organizations to accomplish the characteristics and functions in 
Order No. 2000.
    The Commission has begun regional state-FERC panel discussions on 
RTO and market design issues to provide a more systematic foundation 
for obtaining state input. The Commission has already had state-FERC 
panel discussions with state commissioners from the Midwest and 
Northeast and plans discussion with Southeast Commissioners on February 
15. Transcripts of these discussions are placed in the appropriate 
dockets. The Commission also has created a new Division of State 
Relations within the Office of External Affairs.
    Expanded Collaboration Through NARUC. The Commission also has 
reached out to the states through the National Association of 
Regulatory Utility Commissioners. The Commission held two of three 
sessions on issues of mutual concern during NARUC's upcoming winter 
meetings in Washington, D.C. On February 10, we discussed whether 
wholesale and retail transmission service should be under the same 
rates, terms and conditions. On February 11, we discussed how 
regulators can assure an adequate capacity reserve for regional energy 
markets. On February 14, we will be cosponsoring with the Department of 
Energy a demand response conference.
    Finally, with respect to the specific concerns of the Louisiana 
Public Service Commission and other Southeast state commissions, I want 
to assure you of my commitment to carefully consider their views on 
these important matters.
    Question (3) How does the new ``supply margin'' market power test 
in the Commission's order of November 20 differ from the established 
``hub-and-spoke'' test for market power? Did the Commission conduct any 
study or analysis before issuing the new market power test to determine 
what percentage of vertically-integrated public utilities, if any, 
would be able to pass the test? Would any such utility be able to pass 
the new test?
    The ``hub-and-spoke'' test for generation market power computes an 
applicant's market share of installed capacity and uncommitted capacity 
in a particular market. A separate analysis is required for each 
utility that is directly interconnected with the applicant (relevant 
market). The analysis compares the installed capacity of the applicant 
to the sum of the installed capacity of the applicant, all utilities 
directly interconnected with the applicant, and all utilities directly 
interconnected with the relevant market. A similar analysis is 
performed for uncommitted capacity. While the Commission did not employ 
a bright line test, it used a benchmark that a seller did not have 
generation market power if, on balance, a seller has a market share of 
20 percent or less in each relevant market.
    The ``supply margin assessment'' (SMA) builds on and improves the 
established hub-and-spoke analysis in two ways. First, in determining 
the geographic market, the SMA considers transmission constraints that 
may prevent a seller from delivering its power to a particular buyer. 
Thus, the SMA can more accurately determine what supply can reach 
buyers to compete with the applicant. Second, in determining the size 
that triggers generation market power concerns, the SMA establishes a 
threshold based on whether an applicant is pivotal in the market, i.e., 
whether at least some of the applicant's capacity must be used to meet 
the market's peak demand. An applicant will be pivotal if its capacity 
exceeds the market's surplus of capacity above peak demand--that is, 
the market's supply margin. Thus, an applicant will fail the SMA screen 
if the amount of its capacity exceeds the market's supply margin. By 
contrast, under the hub-and-spoke method, an applicant would pass the 
screen if its market share were less than 20 percent, even if its 
capacity were pivotal. Effectively, the supply margin threshold 
identifies whether the applicant is a must-run supplier needed to meet 
peak load in a market. Thus, the supply margin is sensitive to the 
potential for the applicant to successfully withhold supplies in the 
market in order to raise prices.
    The Commission's staff examined numerous options for addressing 
generation market power, and a copy of a staff paper on the topic was 
made available to the public on the Commission's website following the 
September 26, 2001 Commission meeting. Because the test is an objective 
one, intended to apply on a nondiscriminatory basis to all applicants, 
the Commission did not conduct a study or analysis to determine which 
of the current 1200 power market certificate holders would be able to 
pass the test. Whether a particular vertically-integrated public 
utility would be able to pass the SMA screen will depend on the facts 
of a particular case. A vertically-integrated public utility will pass 
the test if its capacity is not pivotal in relevant markets; i.e., the 
control area that it operates or adjacent control areas.
    Question (4) What findings, circumstances, or emergency conditions 
warranted the Commission's apparently sudden change of policy in the 
November 20 order? What specific findings of abuse of market power did 
the Commission make prior to issuing the order?
    The November 20 order was issued in response to continuing concerns 
raised by intervenors in market-based rate cases (including the dockets 
involving AEP, Entergy and Southern) that the hub-and-spoke analysis 
does not adequately assess generation market power and, in particular, 
that it does not consider transmission constraints. The issue was 
identified and discussed in dissenting and concurring opinions by three 
of the four current FERC Commissioners in a number of orders issued 
last summer. See, e.g., Sierra Pacific Power Company and Nevada Power 
Company, 96 FERC para. 61,050 (2001); Huntington Beach Development, 
L.L.C., 96 FERC para. 61,212 (2001). In addition, the issue was 
discussed by the Commission at its September 26, 2001 public meeting. 
As noted in response to question (3), a staff paper discussing options 
for addressing market power was made available to the public following 
the September 26, 2001 public meeting.
    In the November 20 order, the Commission stated that it ``has 
concluded that, because of significant structural changes and corporate 
realignments that have occurred and continue to occur in the electric 
industry, our hub-and-spoke analysis no longer adequately protects 
customers against generation market power in all circumstances. The 
hub-and-spoke analysis worked reasonably well for almost a decade when 
the markets were essentially vertical monopolies trading on the margin 
and retail loads were only partially exposed to the market. Since that 
time markets have changed and expanded. While we intend to undertake a 
generic review of markets and market power in general, we conclude that 
in the interim a more appropriate test should be applied to ensure that 
customers are protected against market power in generation. 
Accordingly, we have developed a Supply Margin Assessment (SMA) screen 
to be used pending completion of a generic rulemaking proceeding.'' 97 
FERC para. 61,219 at 61,969.
    Question (5) What analysis did the Commission conduct to determine 
whether revocation of market based rate authority could result in 
increased retail rates for consumers in states served by the affected 
utilities?
    In its November 20 order, the Commission did not revoke the market-
based rate authority of the affected utilities. The Commission 
established cost-based mitigation only for prospective spot market 
sales (i.e., less than 24 hours) within the affected utilities' control 
areas. The Commission subsequently deferred implementing price 
mitigation measures pending further proceedings.
    The Commission did not conduct an analysis to determine whether 
revocation of market-based rate authority could result in increased 
retail rates. The Commission stated in the November 20 order that the 
hub-and-spoke analysis no longer adequately protects customers against 
generation market power In all circumstances. Therefore, it concluded 
that the interim SMA screen ``should be applied to ensure that 
customers are protected against market power in generation.'' 97 FERC 
para. 61,219 at 61,969. Preventing the exercise of such market power 
benefits the retail customers of utilities that would otherwise have to 
pay excessive prices for purchases from sellers with market power.
    Question (6) Would a public utility that is a member of a 
Commission-approved RTO be exempt from the November 20 order? If so, 
given that no public utility is now a member of a Commission-approved 
RTO, was the order intended to penalize RTO applicants who disagree 
with the Commission regarding the appropriate scope or configuration of 
an RTO?
    The November 20 order explains that all sales, including bilateral 
sales, into an ISO or RTO with Commission-approved market monitoring 
and mitigation will be exempt from the SMA and, instead, will be 
governed by the specific thresholds and mitigation provisions approved 
for the particular markets. 97 FERC para. 61,219 at 61,970. As a 
result, a public utility that is a member of a Commission-approved RTO 
would be exempt from the November 20 order to the extent that the RTO 
has Commission-approved market monitoring and mitigation. The 
Commission-approved market monitoring and mitigation should prevent the 
exercise of generation market power in the relevant markets, thus 
justifying the exemption from the SMA. The order was not intended to 
penalize RTO applicants who disagree with the Commission regarding the 
appropriate scope or configuration of an RTO. Since the November 20 SMA 
order, FERC has approved the MISO RTO, which currently supports 
electric service to more than 8 million customers in 15 states across 
the Midwest and Canada.
    Question (7) The District of Columbia Circuit Court of Appeals 
recently held that RTO participation under the Commission's Order No. 
2000 is voluntary. Do you believe that indirect means of 
``encouraging'' RTO participation, such as revocation of market based 
rate authority, are consistent with the voluntary and flexible approach 
of Order No. 2000?
    The Commission's actions are not inconsistent with Order No. 2000 
and, indeed, were taken to fulfill our responsibilities under the FPA 
to ensure just and reasonable rates. Because an RTO with approved 
market monitoring and market power mitigation reduces sellers' ability 
to exercise market power within the RTO region, and because an RTO 
ensures nondiscriminatory transmission access and increases market 
efficiency, it is appropriate to encourage all utilities to join an RTO 
and is not necessary to require those utilities in an RTO to comply 
with an additional market power test such as the SMA. For utilities 
that do not sell in areas that have market power mitigation in place, 
however, the Commission has the responsibility under the FPA to ensure 
that market power cannot be exercised before it authorizes market-based 
rates. Because the hub-and-spoke test no longer assures lack of market 
power in generation, the Commission replaced it.
    Question (8) Is it appropriate for the Commission to adopt an 
entirely new market power test without first holding a rulemaking 
proceeding with opportunity for comment? In the absence of a new rule 
developed out of an open process, is it appropriate for the Commission 
to revoke a utility's market-based rate authority without a hearing for 
that utility?
    This question concerns legal issues that have been raised by a 
number of entities in requests for rehearing of the November 20 order. 
Since these are pending before the Commission now, under the 
Administrative Procedure Act and the Commission's ex parte rule, it is 
inappropriate for me to respond to these questions at this time.
    Question (9) We understand that the Commission has issued a stay 
with respect to portions of the November 20 order, and we are pleased 
that the Commission will convene a technical conference where affected 
parties will have the opportunity to address the consequences of the 
order. Does the Commission also plan to engage in an open notice-and-
comment rulemaking process before adopting a new market power test? If 
not, will each affected company be afforded an opportunity for a 
hearing before its market-based rate authority is revoked under a new 
policy?
    This question also concerns issues that have been raised by a 
number of entities in requests for rehearing of the November 20 order. 
Thus, I cannot comment on the merits at this time.
    Question (10) Our understanding is that the Commission has not 
delayed the implementation of that portion of the November 20 order 
that requires all three companies to treat unaffiliated entities 
seeking to interconnect as competing network resources and to post 
optimum areas for the location of prospective generating facilities on 
their websites. Does the Commission intend to provide the affected 
parties an opportunity for a hearing or comment before this requirement 
takes effect?
    It is correct that the Commission has not delayed the 
implementation of that portion of the November 20 order that requires 
all three companies to treat unaffiliated entities seeking to 
interconnect as competing network resources and to post optimum areas 
for the location of prospective generating facilities on their web 
sites. A number of entities have raised issues regarding this aspect of 
the November 20 order in their requests for rehearing. The full 
Commission will decide at some future time how to address these 
questions.
    Question (11) Numerous utilities have expended a great deal of 
time, money and effort to develop RTO applications that meet the RTO 
standards under Order No. 2000. Our understanding is that Order No. 
2000 established a voluntary and flexible approach to RTO formation and 
specifically contemplated a variety of corporate structures for RTOs, 
including independent transmission companies and independent system 
operators. Despite this, the Commission has not approved a single RTO, 
including RTOs that were previously conditionally approved by the 
Commission. Does this mean tile Commission has taken a narrower or 
different course on RTO policy in departure from the voluntary and 
flexible approach of Order No. 2000?
    No, the Commission had not changed course on RTO policy.
    On December 19, 2001 the Commission granted RTO status to the 
Midwest ISO (97 FERC para. 61,326). Although the Commission directed 
the Midwest ISO to make certain additional filings, the new RTO 
received the authority it needed to begin to operate immediately. The 
Midwest RTO began commercial operations and security coordination in 
December 2001 and began providing service under a single tariff in 
February 2002.
    Question (12) Our understanding is that the Alliance RTO was 
conditionally approved several times prior to the order of December 19, 
in which the Alliance must now consider merging with the Mid-West ISO 
(MISO). Please explain why the Commission has apparently changed course 
with respect to the Alliance and how (if at all) this change is 
consistent with the voluntary and flexible approach of Order No. 2000.
    As stated in the Commission's December 19 order:
    Our earlier finding regarding the adequacy of the scope of the 
Alliance RTO relied, in part, on implementation of the [Inter-RTO 
Coordination Agreement (IRCA)] . . . which was intended to provide the 
basis for a seamless market in the territories served by the Midwest 
ISO and the Alliance RTO. However, since the Commission issued its 
order approving the Settlement and its July 12 Order approving Alliance 
RTO's scope, the confidence of the Commission and participating state 
commissions in the IRCA's ability to resolve seams issues has eroded. 
Specifically . . . the Midwest ISO and Alliance Companies filed status 
reports which indicate that the IRCA implementation has not progressed 
as expected . . . We have also taken additional continents from the 
various state commissions in the Midwest, and they overwhelmingly 
prefer a single Midwest RTO and Midwest ISO as the surviving RTO. 
Another change affecting our ruling is International Transmission's 
election to withdraw from the Alliance RTO, thereby shrinking the 
Alliance RTO and concomitantly diminishing its scope. As a result, we 
can no longer conclude that the proposed Alliance RTO has sufficient 
scope consistent with the factors identified in Order No. 2000 . . . In 
sum, the Alliance RTO has not achieved the necessary close coordination 
that was called for to achieve Order No. 2000's characteristics, and in 
particular, scope, that it could not achieve on its own. 97 FERC para. 
61,327 at 62,529-530
    The December 19 order is pending rehearing, so I cannot comment 
further.
    Question (13) The Commission states in its December 19 Alliance 
order that ``our action should not be construed to prejudge other types 
of RTOs in other parts of the country, including a structure in which a 
for-profit transmission company could be an umbrella RTO.'' If the 
Commission is able to conditionally approve, and then later reject, an 
RTO proposal developed at great expense on the requirements of Order 
No. 2000, what assurances do RTO applicants in other regions have that 
``rules of the road'' will not change and prevent them from forming 
RTOs that satisfy the requirements of Order No. 2000?
    The rules of the road have not changed. The Commission is committed 
to choosing regulatory approaches that foster competitive markets 
whenever possible and assure reliable service at a reasonable price. 
This question also raises issues that are the subject of rehearing and 
I cannot discuss it further.
    I hope this information is helpful. If I can be of further 
assistance in this or any other Commission matter, please let me know.
            Best regards,
                                              Pat Wood, III
                                                           Chairman
                                 ______
                                 
              Federal Energy Regulatory Commmission
                                     Office of the Chairman
                                                  February 25, 2002
The Honorable Joe Barton
Chairman, Subcommittee on Energy and Air Quality
Committee on Energy and Commerce
U.S. House of Representatives
Washington, D.C. 20515-6115
    Dear Mr. Chairman: Thank you for your letter of February 15, 2002. 
Your letter cites a study issued by the Commission's staff in December 
2001 on electric transmission constraints. The study identified 
numerous transmission constraints across the United States and stated 
that increases in transmission infrastructure investment would benefit 
customers by decreasing costs caused by congestion on existing lines. 
You ask several questions about this study and the provisions in 
section 401 of H.R. 3406 on transmission pricing methods that could 
encourage expansion of the transmission grid. Below are my answers to 
your questions.
    Question 1: The Study states that Commission staff have 
``identified a number of significant transmission constraints that 
increase costs to customers.'' It identifies 16 specific constraints 
across the Northeast, the Eastern Interconnection, and the West. It 
estimates that these constraints cost consumers more than $1 billion 
total the summers of 2000 and 2001 combined. Please explain further why 
these constraints have resulted in higher electricity costs for 
consumers.
    Answer: Transmission constraints hamper the efficient operation of 
markets and increase customer costs by restricting the ability of 
suppliers to deliver less expensive energy into constrained ``load 
pockets''. This means that when customer demand inside the ``load 
pocket'' exceeds the capability of the transmission lines to deliver 
power into the area, the transmission limit may, depending on the 
availability of cheaper generation outside the load pocket, shut out 
additional cheaper generation and force local demand to be met by more 
expensive generation inside the constraint area. Thus, transmission 
constraints force customers to buy more expensive energy because they 
cannot get cheaper energy over the transmission grid.
    Question 2: The Study also set forth an objective to ``[r]ecognize 
that even with the high estimated cost of transmission investment . . . 
the overall savings in energy could significantly benefit customers.'' 
The Study apparently achieved this objective, finding that the benefits 
to consumers from increased transmission investment (in terms of the 
delivered price for electricity) are ``potentially quite large.'' Is 
substantial new investment in transmission capacity necessary to 
eliminate or reduce the costly constraints identified in the Study?
    Answer: In many cases, yes. The transmission constraints that were 
studied limit significant amounts of low-cost power imports for many 
hours in each year. In most of those cases, area reliability and total 
power costs would be significantly improved by construction of 
additional bulk transmission lines.
    For other constraints, however, transmission expansion is one 
option to eliminate transmission constraints, but not necessarily the 
only one. Other options include building new generation, including 
distributed generation, and energy conservation within the constrained 
area. The Study noted that substantial additional investment in new 
transmission capacity could be made with only a small impact on 
customer bills, and can produce significant cost savings in the 
delivered price of energy into the load pocket. Moreover, all 
alternatives are problematic. For example, constructing new generation 
necessitates finding an acceptable location for the plant, air 
pollution offsets, and additional fuel supplies. A regional planning 
process, such as the one contemplated in the Commission's Order No. 
2000 on regional transmission organizations, is needed to determine 
which alternatives are both feasible and cost effective.
    Question 3: How will the Commission's transmission rate policies, 
including incentive and performance-based rate treatments, help ensure 
that the transmission industry attracts sufficient investment to 
alleviate transmission constraints on a priority basis?
    Answer: A longstanding principle of the Commission's ratemaking is 
that rates must allow an opportunity for the utility to earn a return 
on invested capital commensurate with the returns earned by other 
companies facing similar risks. This principle is intended to ensure 
that utilities can attract the capital they need to build 
infrastructure. The Commission has authorized additional incentives for 
transmission investments in certain circumstances. Last year, for 
example, the Commission authorized a range of premiums on equity 
returns and accelerated depreciation for transmission expansions 
completed by certain deadlines in the Western United States. The goal 
of these rate incentives was to encourage urgently-needed 
infrastructure expansions in response to the severe electric energy 
shortages then facing California and other areas in the West. As 
another example, the Commission has authorized a range of rate 
incentives for regional transmission organizations, since these 
organizations can bring greater efficiencies to power markets and 
benefits to customers. I am willing to consider similar incentives or 
other ratemaking methods whenever necessary to ensure that utilities 
and independent merchant transmission builders can obtain the capital 
they need to support timely and adequate expansion of our Nation's 
infrastructure.
    Question 4: Particularly given the Study's findings regarding the 
benefits of increased transmission investment, section 401's provisions 
for incentive and performance-based transmission rates seem to be 
reasonable and in the public interest. Surprisingly, opponents of 
transmission rate reform have claimed that section 401 would require 
the Commission to set transmission rates at ``unjust and unreasonable'' 
levels. In your opinion, would section 401 repeal, undermine, or 
otherwise be inconsistent with the just and reasonable standard of the 
Federal Power Act (``FPA'')? In other words, would section 401 permit 
or require the Commission to charge rates that are unjust or 
unreasonable under sections 205 or 206 of the FPA (either the plain 
text of those sections or as they have been historically construed by 
the courts)?
    Answer: No. Section 401 of H.R. 3406 would require the Commission 
to adopt by rule:
        . . . transmission pricing policies and standards for promoting 
        the expansion and improvement of interstate transmission 
        networks through incentive-based and performance-based rate 
        treatments and other means the Commission deems necessary or 
        appropriate to ensure reliability of the electric system, to 
        support interstate wholesale markets for electric power, and 
        expand transmission capacity needed to sustain the growth of 
        wholesale competition.
    The policies and standards established under section 401 would be 
required to accomplish certain goals, such as ``promot[ing] 
economically efficient enlargement of transmission networks,'' 
``provid[ing] a return on equity that causes needed investment in 
transmission facilities to be made,'' ``promot[ing] the voluntary 
participation in and formation of regional transmission 
organizations,'' ``reduc[ing] congestion on transmission networks,'' 
and ``allow[ing] for accelerated depreciation for transmission 
equipment and facilities.'' Section 401 requires that all transmission 
rates approved after the effective date of the new rules must comply 
with, among other things, ``the requirement of sections 205 and 206, 
that all rates, charges, terms and conditions be just and reasonable 
and not unduly discriminatory.''
    These provisions are consistent with the existing provisions of the 
FPA as applied by the Commission and interpreted by the courts. We 
interpret the provisions of section 401 as clarifying authority that 
the Commission already has under the FPA, in its discretion, to allow 
different types of non-traditional rate treatments to meet our 
regulatory goals, so long as those rate treatments meet the statutory 
requirement that rates be just and reasonable and not unduly 
discriminatory or preferential. As noted above in response to Question 
3, the Commission already has taken certain actions similar to those 
specified in section 401. In addition, the Supreme Court has held that 
``rate-making agencies are not bound to the service of any single 
regulatory formula; they are permitted, unless their statutory 
authority otherwise plainly indicates, `to make the pragmatic 
adjustments which may be called for by particular circumstances.' '' 
Permian Basin Area Rate Cases, 390 U.S. 747, 776 (1968) (citing FPC v. 
Natural Gas Pipeline Co., 315 U.S. 575, 586 (1942)). The Commission may 
set rates to achieve relevant regulatory purposes, and may do so by 
including non-cost incentives to encourage behavior in the public 
interest. Mobil Oil Corp. v. FPC, 417 U.S. 283, 316-17. Encouraging 
future supply is an appropriate factor in determining a just and 
reasonable rate and adequate protection of customers. Permian Basin, 
390 U.S. at 796, 815. Accordingly, section 401 of H.R. 3406 would not 
permit or require the Commission to allow utilities to charge unjust or 
unreasonable rates under sections 205 or 206, and would provide us 
continued discretion to allow non-traditional rate treatments as 
appropriate.
    Question 5: While the Commission already has broad authority to set 
the boundaries of the ``zone of reasonableness'' under the just and 
reasonable standard, do you agree that section 401 would provide useful 
clarification and direction to the Commission to tailor transmission 
rates to the policy goals of eliminating transmission constraints, 
increasing efficiency of wholesale power markets, and reducing the 
overall cost of delivered power for consumers? Would section 401 help 
prevent non-productive challenges to the Commission's legal authority 
to design rate treatments appropriate to meet these policy goals?
    Answer: Ensuring development of adequate energy infrastructure is 
vitally important to all energy customers. One of my goals as Chairman 
of the Commission is to encourage the full exercise of our statutory 
authority to promote such development. While I believe the FPA's 
existing provisions allow the Commission to take the types of actions 
addressed in section 401, some participants in the industry may 
disagree. Section 401 could help reduce or forestall legal challenges 
on these issues. Thus, I support the provisions of section 401.
    If I can be of further assistance in this or anything else, please 
call me.
            Best regards,
                                              Pat Wood, III
                                                           Chairman
                                 ______
                                 
                     The Deputy Secretary of Energy
                                       Washington, DC 20585
                                                   January 31, 2002
The Honorable Henry A. Waxman
U.S. House of Representatives
2204 Rayburn House Office Building
Washington, DC 20515
    Dear Representative Waxman: I am writing in response to your 
questions during my testimony before the House Energy and Air Quality 
Subcommittee on December 12, 2001, as well as your letter dated January 
25, 2002, regarding discussions with electric utilities, other industry 
sectors, and environmental groups about the new source review (NSR) 
program.
    I have held the following meetings regarding the NSR program. A 
list of the meeting attendees is enclosed.

 July 10, 2001: Natural Resources Defense Council
 July 18, 2001: Sinclair Oil Company
 July 23, 2001: Electric Reliability Coordinating Council
 July 25, 2001: The Coal-Based Generation Stakeholder's Group
 August 28, 2001: WEST Associates
 August 29, 2001: Wisconsin Energy Corporation
 September 10, 2001: Edison Electric Institute
 November 28, 2001: Air Quality Coalition
    Please let me know if I can be of any further assistance on this, 
or any other, matter.
            Sincerely,
                                                   Francis S. Blake
Enclosure
 Attendees at Meetings/Discussions Between Deputy Secretary of Energy 
  Francis S. Blake and Representatives from Electric Utilities, Other 
 Industry Sectors, and Environmental Groups Regarding: The New Source 
                             Review Program
July 10, 2001, Natural Resources Defense Council
David Hawkins, Natural Resources Defense Council.
July 18, 2001, Sinclair Oil Company
Clint Ensign, Klane Forsgren, Albert Knoll, Dick Wilson, Lee Lampton, 
Richard Meeks, and Jim McCarthy.
July 23, 2001, Electric Reliability Coordinating Council
Glenn McCullough, TVA, Anthony J. ``Tony'' Alexander, FirstEnergy, 
Dwight Evans, Southern Company, Bill Coley, Duke Power, Richard M. 
``Dick'' Hayslip, Haley Reeves Barbour, ERCC, Boyden Gray, ERCC, Marc 
Racicot, ERCC, Jeanette Pablo, TVA, Michael Dowling, FirstEnergy, Karl 
Moor, Southern Company, David Mitchell, Duke Energy, Henry Nickel, 
Hunton & Williams, Terry Grauman, Hunton & Williams, and Rene Eastman, 
Salt River Project.
July 25, 2001, The Coal-Based Generaton Stakeholder's Group
Irl Englehardt, Peabody Energy, Tom Kuhn, Edison Electric Institute, 
Fred Palmer, Peabody Energy, James Roberts, RAG American Coal, Tom 
Altmeyer, National Mining Association, Tony Kavanaugh, American 
Electric Power, and Quin Shea, Edison Electric Institute.
August 28, 2001, West Associates
Robbie Aiken, Pinnacle West Capital Corporation, Renee Eastman, The 
Salt River Project, Don Elliott, Paul, Hastings, Janofsky & Walker, 
Dave Lock, Platte River Power Authority, C.V. Mathai, Pinnacle West 
Capital Corporation, Gloria Quinn, Southern California Edison, David 
Steele, Strategic Issue Management Group, and Linda Stuntz, 
representing PacifiCorp.
August 29, 2001, Wisconsin Energy Corporation
Richard Abdoo, Darnell Demasters, Larry Bruniel, and Pat Quinn.
September 10, 2001, Edison Electric Institute
Gerard M. Andreson, DTE Energy, William A. Coley, Duke Energy, E. Linn 
Draper, American Electric Power, Dwight H. Evans, Southern Company, 
Robert A. Fenech, Nuclear, Consumers Energy, Thomas R. Kuhn, Edison 
Electric Institute, Gary L. Rainwater, AmerenCIPS, James E. Rogers, 
Jr., Cinergy Corporation, Skiles W. Boyd, Detroit Edison, Ray Harry, 
Southern Company, Mary D. Kenkel, Cinergy Corporation, John D. Kinsman, 
Edison Electric Institute, Susan LaBombard, Ameren Services, Alfonse S. 
Mannato, Jr., Edison Electric Institute, Quinlan J. Shea, III, Edison 
Electric Institute, Daniel V. Steen, FirstEnergy Corporation, William 
F. Tyndall, Cinergy, and Steven Colovas, American Continental Group.
November 28, 2001, Air Quality Coalition
Kevin O'Donovan, Larisa Dobriansky, Red Cavaney, API, Tom Kuhn, Edison 
Electric Institute, Tom Altmeyer, National Mining Association, Henson 
Moore, American Forest Paper Association, Rose Sanders, American 
Chemistry Council, Mark Whittendon, National Association of 
Manufacturers, and James Schultz, American Iron/Steel Institute.
                                 ______
                                 
               Federal Energy Regulatory Commission
                                     Office of the Chairman
                                                  February 28, 2002
The Honorable Joe Barton, Chairman
Subcommittee on Energy and Air Quality
Committee on Energy and Commerce
U.S. House of Representatives
Washington, D.C. 20515-6115
    Dear Chairman Barton: This is in response to Congressman Waxman's 
request for information asked at your subcommittee hearing on February 
13, 2002. He asked me to provide a list of my contacts with Enron 
officials during my terms as a commissioner at the Federal Energy 
Regulatory Commission (FERC) and at the Public Utility Commission of 
Texas (PUCT).
    As the enclosed chronology details, I first met Ken Lay on May 29, 
1996, when I was invited to present an update on Texas 
telecommunications and electric utility regulation to the members of 
the Governor's Business Council, an advisory group of Texas business 
executives that Mr. Lay had chaired since then-Governor Ann Richards 
formed the council in the early 1990's.
    The enclosed chronology reflects my best recollection of all 
contacts I had with Enron officials based in part on calendars I have 
maintained since January 1996. 1 do not have any records prior to 
January 1996. 1 have not maintained phone logs during this period. 
Despite this, I believe that the contacts in the enclosed chronology 
represent all contacts with Mr. Lay and other officials, with the 
exception of Steve Kean, with whom I may have talked by phone two or 
three times over the seven-year period. From my records, the first 
occurrence of a meeting with Steve Kean is in 1998, but I feel certain 
we had been introduced sometime prior to that date.
    In addition, the enclosed chronology does not list any meetings 
with non-executive Enron staff or outside attorneys, nor does it 
reflect contacts I may have had at legislative hearings, PUC Open 
Meetings, public conferences or public speeches. The enclosed 
chronology does not reflect several meetings I had with former Enron de 
Mexico President Max Yzaguirre in Texas during May, 2001 to discuss the 
duties of a PUCT Commissioner.
    Finally, as you prefaced your oral request with a reference to 
letters Mr. Lay was reported to have written endorsing my nomination to 
both my current and prior positions, the letter that actually played a 
role in getting me an interview with then Governor Bush in early 1995 
has not been in the public record. In 1991-1993 I worked as a legal 
counsel to FERC Commissioner Jerry J. Langdon, a Democrat from Midland, 
Texas who had known Governor Bush for many years. Martin L. Allday, 
also from Midland, was Chairman of FERC under President George H.W. 
Bush, including during the time I worked for Commissioner Langdon. 
Shortly after the 1994 Texas gubernatorial election, these two men 
wrote a letter recommending me to Governor-elect Bush for the open PUCT 
position. After his inauguration, Governor Bush called me in for an 
interview for the position on January 27, 1995. During my interview, I 
observed the enclosed letter from Chairman Allday and Commissioner 
Langdon on his desk. He offered me the position after our interview. I 
accepted it, and following my confirmation by the Texas Senate on 
February 22, 1995, was sworn in by Governor Bush and joined the PUCT 
the following day.
    I trust this information satisfies the request. Please contact me 
if I can provide any further information.
            Best regards,
                                              Pat Wood, III
                                                           Chairman
Enclosures

Cc: The Honorable Rick Boucher
[GRAPHIC] [TIFF OMITTED] T7118.001

[GRAPHIC] [TIFF OMITTED] T7118.002













            THE ELECTRIC SUPPLY AND TRANSMISSION ACT OF 2001

                              ----------                              


                      THURSDAY, DECEMBER 13, 2001

                  House of Representatives,
                  Committee on Energy and Commerce,
                    Subcommittee on Energy and Air Quality,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 9:30 a.m., in 
room 2123, Rayburn House Office Building, Hon. Joe Barton 
(chairman) presiding.
    Members present: Representatives Barton, Largent, 
Whitfield, Ganske, Norwood, Shimkus, Fossella, Bryant, Walden, 
Tauzin (ex officio), Boucher, Sawyer, Wynn, John, Waxman, 
Markey, Gordon, McCarthy, and Dingell (ex officio).
    Staff present: Jason Bentley, majority counsel; Sean 
Cunningham, majority counsel; Andy Black, policy coordinator; 
Sue Sheridan, minority counsel; and Eric Kessler, minority 
professional staff.
    Mr. Barton. The subcommittee will come to order. Today is a 
continuation of 2 days of hearings on the Electric Supply and 
Transmission Act of 2001. These are legislative hearings on a 
pending bill, H.R. 3406, preparing to go to markup next week.
    Today we have two panels. Our first panel is our executive 
branch witnesses. We have the Honorable Isaac Hunt, who is the 
Commissioner of the Securities and Exchange Commission; and we 
have the Honorable Sandra Hochstetter, who is Chairman of the 
Arkansas Public Service Commission. She is appearing on behalf 
of the National Association of Regulatory Utility 
Commissioners, better known as NARUC.
    Lady and gentleman, welcome. Your statement is in the 
record in its entirety. We are going to recognize you, 
Commissioner Hunt, to elaborate on your statement for 6 
minutes; and then we will recognize the Chairwoman Hochstetter 
to elaborate on her statement. Welcome to the subcommittee.

STATEMENTS OF HON. ISAAC C. HUNT, JR., COMMISSIONER, SECURITIES 
   AND EXCHANGE COMMISSION; AND HON. SANDRA L. HOCHSTETTER, 
  CHAIRMAN, ARKANSAS PUBLIC SERVICE COMMISSION, ON BEHALF OF 
    NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS

    Mr. Hunt. Thank you, Mr. Chairman, Ranking Member Boucher, 
and members of the subcommittee. I am Commissioner Isaac C. 
Hunt, Jr., of the U.S. Securities and Exchange Commission. I am 
pleased to have this opportunity to testify before you on 
behalf of the Commission about H.R. 3406 and the SEC's 
continuing support for repeal of the Public Utility Holding 
Company Act of 1935.
    The SEC continues to support efforts to appeal the 1935 Act 
and replace it with legislation that preserves certain 
important consumer protections. In considering repeal, it is 
useful to review both the history that led Congress to enact 
the Act in 1935 and the changes that have occurred in the 
electric industry since then.
    During the first quarter of the last century misuse of the 
holding company structure led to serious problems in the 
electric and gas industry. Abuses arose, including inadequate 
disclosure of the financial position, and earning power of 
holding companies, unsound accounting practices, excessive debt 
issuances, and abusive affiliate transactions.
    The 1935 Act was enacted to address these problems. In the 
years following the passage of the Act the SEC worked to 
reorganize and simplify existing public utility companies in 
order to eliminate the problems that Congress identified.
    By the early 1980's the SEC concluded that the 1935 Act had 
accomplished its basic purpose and that many aspects of it had 
become redundant with other Federal and State regulation.
    In addition, changes in the accounting profession and in 
the investment banking industry had provided investors and 
consumers with a range of protections unforeseen in 1935. 
Because of these changes the SEC unanimously recommended that 
Congress repeal the 1935 Act based on its conclusion that it 
was no longer necessary to prevent the recurrence of the abuses 
that led to the Act's enactment.
    For a number of reasons, including the potential for abuse 
through the use of a multi-State holding company structure, 
related concerns about consumer protection, and the lack of a 
consensus for change, repeal legislation was not enacted during 
the early 1980's.
    Because of continuing changes in the industry, however, the 
SEC continued to look at ways to administer the statute more 
flexibly. In response to continuing changes in the utility 
industry during the early 1990's, then Chairman Arthur Levitt 
directed the SEC staff in 1994 to undertake a study of the 1935 
Act that culminated in a June 1995 report.
    That report again recommended repeal of the 1935 Act, or 
amendment of the Act to give the SEC broad exemptive authority 
to administer the Act.
    The June 1995 report also outlined and recommended that the 
Commission adopt a number of administrative initiatives to 
streamline regulation under the Act. The SEC has implemented 
many of these initiatives.
    The utility industry has continued to undergo rapid change 
since publication of the report. Congress facilitated some of 
these changes. Specifically the Energy Policy Act of 1992 added 
statutory exemptions to the 1935 Act, which allow holding 
companies to own exempt wholesale generators and foreign 
utility companies and allow registered holding companies to 
engage in a wide range of telecommunication activities.
    Based on the findings in 1995, as well as the continuing 
pace of change in the industry, the SEC continues to recommend 
that Congress appeal the 1935 Act, subject to appropriate 
safeguards.
    Repeal of the Act is not, however, a magical solution to 
the current energy problems in the United States. While it can 
be viewed as a part of a needed response, repeal will not 
directly affect the supply of electricity due to the fact that 
the Energy Policy Act, as I just mentioned, removed 
restrictions under the Act for investment and generation 
facilities.
    Repeal of the Act would, however, remove provisions that 
prohibit utility companies from owning utilities in different 
parts of the country, and generally prevent non-utility 
businesses from acquiring utilities in more than one State.
    If the 1935 Act were repealed, the greatest impacts would 
probably be the continuing consolidation of the utility 
industry, as well as the entry of new companies into the 
utility business.
    Repeal of the Act would also eliminate any impediments that 
exist to other regulators' attempts to modernize regulation of 
the utility industry. For example, the FERC recently 
implemented new regulations designed to create independent 
regionally operated transmission grids.
    As a result of FERC's new regulations, many utilities will 
cede operating control, and in some cases actual ownership, of 
their transmission facilities, to newly created entities.
    The status of both the new entities that will control these 
systems, and the status of the utility companies that will own 
stakes in the new entities, raise a number of issues under the 
1935 Act.
    Most notably, it has been asserted that the limits the Act 
places on the other business activities of a utility holding 
company will create obstacles for non-utility companies to 
invest in or operate these new transmission entities.
    The SEC believes that it has the necessary authority under 
the Act to deal with the issues created by FERC's restructuring 
without impeding that restructuring. Nevertheless, repeal of 
the Act would effectively resolve these issues.
    In conclusion, let me emphasize that the SEC takes 
seriously its duties to administer faithfully the letter and 
spirit of the 1935 Act and is committed to promoting the 
fairness, liquidity, and efficiency of the United States 
securities markets.
    By supporting conditional repeal of the 1935 Act, the SEC 
hopes to reduce unnecessary regulatory burdens on America's 
energy industry while providing adequate protections for energy 
consumers. Mr. Chairman and Members, I would be pleased to 
answer your questions.
    [The prepared statement of Hon. Isaac C. Hunt, Jr. 
follows:]
   Prepared Statement of Hon. Isaac C. Hunt, Jr., Commissioner, U.S. 
                   Securities and Exchange Commission
    Chairman Barton, Ranking Member Boucher, and Members of the 
Subcommittee: I am pleased to have this opportunity to testify before 
you on behalf of the Securities and Exchange Commission (``SEC'') 
regarding H.R. 3406 and the SEC's continuing support for repeal of the 
Public Utility Holding Company Act of 1935 (``PUHCA'' or ``1935 Act''). 
In particular, because much of the regulation required by PUHCA is 
either duplicative of that done by other regulators or unnecessary in 
the current environment, the SEC continues to support repeal of PUHCA. 
H.R. 3406 would accomplish the goal of eliminating duplicative and 
unnecessary regulation. As the SEC has testified in the past, however, 
we continue to believe that repeal should be accomplished in a manner 
that also preserves important protections for consumers of utility 
companies in multistate holding company systems.
                            i. introduction
    To understand the SEC's position on repeal of PUHCA, it is useful 
to review both the history that led Congress to enact PUHCA in 1935 and 
the changes that have occurred in the electric industry since then. 
During the first quarter of the last century, misuse of the holding 
company structure led to serious problems in the electric and gas 
industry. These abuses included inadequate disclosure of the financial 
position and earning power of holding companies, unsound accounting 
practices, excessive debt issuances and abusive affiliate transactions. 
The 1935 Act was enacted to address these problems.1 The Act 
also placed restrictions on the geographic scope of holding company 
systems and limited holding companies to activities related to their 
gas or electric businesses. Because of its role in addressing issues 
involving securities and financings, the SEC was charged with 
administering the Act. In the years following the passage of the 1935 
Act, the SEC worked to reorganize and simplify existing public utility 
holding companies in order to eliminate abuses.
---------------------------------------------------------------------------
    \1\ See 1935 Act section 1(b), 15 U.S.C. Sec. 79a(b).
---------------------------------------------------------------------------
    By the early 1980s, however, many aspects of the 1935 Act 
regulation had become redundant: state regulation had expanded and 
strengthened since 1935, and the SEC had enhanced its regulation of all 
issuers of securities, including public utility holding companies. 
Changes in the accounting profession and the investment banking 
industry also had provided investors and consumers with a range of 
protections unforeseen in 1935. The SEC therefore concluded that the 
1935 Act had accomplished its basic purpose and that many of its 
remaining provisions were either duplicative or were no longer 
necessary to prevent the recurrence of the abuses that had led to the 
Act's enactment. The SEC thus unanimously recommended that Congress 
repeal the Act.2
---------------------------------------------------------------------------
    \2\ See Public Utility Holding Company Act Amendments: Hearings on 
S. 1869, S. 1870 and S. 1871 Before the Subcomm. On Securities of the 
Senate Comm. On Banking, Housing, and Urban Affairs, 97th Cong., 2d 
Sess. 359-421 (statement of SEC).
---------------------------------------------------------------------------
    For a number of reasons--including the potential for abuse through 
the use of a multistate holding company structure, related concerns 
about consumer protection, and the lack of a consensus for change--
repeal legislation was not enacted during the early 1980s. Because of 
continuing change in the industry, however, the SEC continued to look 
at ways to administer the statute more flexibly.
    In response to continuing changes in the utility industry during 
the early 1990s, and the accelerated pace of those changes, in 1994, 
then-Chairman Arthur Levitt directed the SEC's Division of Investment 
Management to undertake a study, under the guidance of then-
Commissioner Richard Y. Roberts, to examine the continued vitality of 
the 1935 Act. The study was undertaken as a result of the developments 
noted above and the SEC's continuing need to respond flexibly in the 
administration of the 1935 Act. The purpose of the study was to 
identify unnecessary and duplicative regulation, and at the same time 
to identify those features of the statute that remain appropriate in 
the regulation of the contemporary electric and gas 
industries.3
---------------------------------------------------------------------------
    \3\ The study focused primarily on registered holding company 
systems. There were, at the time of the study, 19 such systems. The 
1935 Act was enacted to address problems arising from multistate 
operations, and reflects a general presumption that intrastate holding 
companies and certain other types of holding companies, which the 1935 
Act exempts and which now number 119, are adequately regulated by local 
authorities. Despite their small number, registered holding companies 
account for a significant portion of the energy utility resources in 
this country. As of September 30, 2001, the 27 registered holding 
systems (which included 35 registered holding companies) owned 133 
electric and gas utility subsidiaries, with operations in 44 states, 
and in excess of 2500 nonutility subsidiaries. In financial terms, as 
of September 31, 2001, the 27 registered holding company systems owned 
more than $417 billion of investor-owned electric and gas utility 
assets and received in excess of $173 billion in operating revenues. 
The 27 registered systems represent over 40% of the assets and revenues 
of the U.S. investor-owned electric utility industry and almost 50% of 
all electric utility customers in the United States.
---------------------------------------------------------------------------
    The SEC staff worked with representatives of the utility industry, 
consumer groups, trade associations, investment banks, rating agencies, 
economists, state, local and federal regulators, and other interested 
parties during the course of the study. In June 1995, a report of the 
findings made during the study (``Report'') was issued. The staff's 
Report outlined the history of the 1935 Act, described the then-current 
state of the utility industry as well as the changes that were taking 
place in the industry, and again recommended repeal of the 1935 Act. 
The Report also outlined and recommended that the Commission adopt a 
number of administrative initiatives to streamline regulation under the 
Act.
    Since the report was published, the utility industry in the United 
States has continued to undergo rapid change. Some of these changes 
have been facilitated by Congress. Specifically, as a result of 
recently-created statutory exemptions, anyone, including registered and 
exempt holding companies, is now free to own exempt wholesale 
generators and foreign utilities and to engage in a wide range of 
telecommunication activities.4 In addition, the SEC has 
implemented many of the administrative initiatives that were 
recommended in the Report.5
---------------------------------------------------------------------------
    \4\ Sections 32 and 33 of the Act, which were added to it by the 
Energy Policy Act of 1992, permit, subject to certain conditions, the 
ownership of exempt wholesale generators and foreign utility companies. 
The impact of section 32 on the electricity industry is discussed in 
more detail below. Section 34, which was added by the 
Telecommunications Act of 1996, permits holding companies to acquire 
and retain interests in companies engaged in a broad range of 
telecommunications activities.
    \5\ The Report recommended rule amendments to broaden exemptions 
for routine financings by subsidiaries of registered holding companies 
(see Holding Co. Act Release No. 26312 (June 20, 1995), 60 FR 33640 
(June 28, 1995)) and to provide a new exemption for the acquisition of 
interests in companies that engage in energy-related and gas-related 
activities (see Holding Co. Act Release No. 26667 (Feb. 14, 1997), 62 
FR 7900 (Feb. 20, 1997) (adopting Rule 58)). In addition, the Report 
recommended and the SEC has implemented changes in the administration 
of the Act that would permit a ``shelf'' approach for approval of 
financing transactions. For example, during calendar year 2000, all 
eleven of the new registered holding companies received multi-year 
financing authorizations that included a wide range of debt and equity 
securities. The Report further recommended a more liberal 
interpretation of the Act's integration requirements which has been 
carried out in our merger orders. The Report also recommended an 
increased focus upon auditing regulated companies and assisting state 
and local regulators in obtaining access to books, records and 
accounts. Six state public utility commissions participated in the last 
three audits of the books and records of registered holding companies.
---------------------------------------------------------------------------
                          iii. repeal of puhca
    Based on the findings in the Report as well as the continuing pace 
of change in the utility industry, the SEC continues to recommend that 
Congress repeal the 1935 Act subject to appropriate 
safeguards.6 As the Report stated, regulation under the 1935 
Act that affects the ability of holding company systems to issue 
securities, acquire other utilities, and acquire nonutility businesses 
is largely redundant in view of other existing regulation and controls 
imposed by the market.7 Repealing the Act is not, however, a 
magic solution to the current problems facing the U.S. utility 
industry. PUHCA repeal can be viewed as part of the needed response to 
the current energy problems facing the country--notably, the 
Administration's recent report on energy policy includes a 
recommendation that PUHCA be repealed.8 But repeal of the 
Act will not, for example, have any direct effect on the supply of 
electricity in the United States. The Act does not, for example, 
currently place significant restrictions on the construction of new 
generation facilities. As part of the Energy Policy Act, Congress 
amended the Act in 1992 to remove most restrictions on the ability of 
registered and exempt holding companies (as well as nonutility 
companies) to build, acquire and own generating facilities anywhere in 
the United States. These types of facilities--exempt wholesale 
generators or ``EWGs''--are not considered to be electric utility 
companies under PUHCA, and, in fact, are exempt from all provisions of 
PUHCA. The only limitation that remains under PUHCA is one imposed by 
Congress on registered holding companies--namely, that a registered 
company may not finance its EWG investments in a way that may ``have a 
substantial adverse impact on the financial integrity of the registered 
holding company system.'' 9 In short, the Energy Policy Act 
removed restrictions on the ability of registered and exempt holding 
companies to build, acquire and own generating facilities anywhere in 
the United States. As a result, a number of registered holding 
companies now have large subsidiaries that own generating facilities 
nationwide. Numerous other companies not subject to the Act have also 
entered the generation business.10
---------------------------------------------------------------------------
    \6\ We do, however, have a concern about coupling PUHCA repeal with 
provisions that would provide unique regulatory benefits to small 
groups of companies under other statutes that the Commission 
administers. Section 125 of H.R. 3406 raises this concern. Section 125 
appears to address a unique set of circumstances that give rise to 
questions about the status of an issuer as an ``investment company'' 
under the Investment Company Act of 1940. The Investment Company Act 
already provides the Commission with significant flexibility to deal 
with status issues. We therefore see no reason for legislation to deal 
with such issues. More broadly, we are prepared to work with any 
utility holding companies currently relying on the exemption from the 
definition of ``investment company'' provided by section 3(c)(8) of the 
Investment Company Act if repeal of PUHCA leads to questions about 
their status under the Investment Company Act.
    \7\ As we have testified previously, however, there is a continuing 
need to protect consumers. Although deregulation is changing the way 
utilities operate in some states, electric and gas utilities have 
historically functioned as monopolies whose rates are regulated by 
state authorities. Some regulators subject these rates to greater 
scrutiny than others. There is a continuing risk that a monopoly, if 
left unguarded, could charge higher rates and use the additional funds 
to subsidize affiliated businesses in order to boost its competitive 
position in other markets. Thus, so long as electric and gas utilities 
continue to function as monopolies, the need to protect against this 
type of cross-subsidization will remain. In view of the sophistication 
of contemporary securities regulation, and analysis by the public and 
private sectors, the best means of guarding against cross-subsidization 
is likely to be audits of books and records and federal oversight of 
affiliate transactions. The SEC therefore continues to recommend the 
enactment of legislation to provide necessary authority to the FERC and 
the state public utility commissions relating to affiliate 
transactions, audits and access to books and records, for the continued 
protection of utility consumers. More broadly, repeal of the 1935 Act 
may be accomplished either separately or as part of a more 
comprehensive package of energy reform legislation. The SEC does not 
have a preference as to whether the Act is repealed on a stand-alone 
basis or as part of broader, energy-related legislation.
    \8\ See National Energy Policy: Report of the National Energy 
Policy Development Group at 5-12 (May 2001) (recommending the reform of 
``outdated federal electricity laws, such as the Public Utility Holding 
Company Act'').
    \9\ While no Commission approval is required for the acquisition of 
an EWG as a result of the Energy Policy Act, Commission approval is 
required, for example, before a registered holding company can issue 
securities to finance the acquisition of, or guarantee securities 
issued by, an EWG. Under the Energy Policy Act, Congress directed the 
SEC to adopt rules with respect to registered holding companies' EWG 
investments. Pursuant to these requirements, in 1993 the SEC adopted 
rules 53 and 54 to protect consumers and investors from any substantial 
adverse effect associated with investments in EWGs. Rule 53 created a 
partial safe harbor for EWG financings. Rule 53 describes circumstances 
in which the issue or sale of a security for purposes of financing the 
acquisition of an EWG, or the guarantee of a security of an EWG, will 
be deemed not to have a substantial adverse impact on the financial 
integrity of the system. For transactions outside the Rule 53 safe 
harbor, a registered holding company must obtain SEC approval of the 
amount it wishes to invest in EWGs. The standards that the SEC uses in 
assessing applications of this type are laid out in Rule 53(c).
    \10\ See, e.g., National Energy Policy: Report of the National 
Energy Policy Development Group at 5-11 (May 2001) (noting that 
``[m]ost new electricity generation is being built not by regulated 
utilities, but by independent power producers'').
---------------------------------------------------------------------------
    Instead, repeal of the Act would eliminate regulatory restrictions 
that prohibit utility holding companies from owning utilities in 
different parts of the country and that prevent nonutility businesses 
from acquiring regulated utilities. In particular, repeal of the 
restrictions on geographic scope and other businesses would remove the 
impediments created by the Act to capital flowing into the industry 
from sources outside the existing utility industry. Repeal would thus 
likely have the greatest impact on both the continuing consolidation of 
the utility business as well as the entry of new companies into the 
utility business.
    Repeal of the Act would also eliminate any impediments that exist 
to other regulators' attempts to modernize regulation of the utility 
industry. For example, during the past year, questions have arisen 
about how the Act will impact the ability of the Federal Energy 
Regulatory Commission (``FERC'') to implement its plans to restructure 
the control of transmission facilities in the United 
States.11 Specifically, in order to ``ensure that 
electricity consumers pay the lowest price possible for reliable 
service,'' the FERC recently implemented new regulations designed to 
create ``independent regionally operated transmission grids'' that are 
meant to ``enhance the benefits of competitive electricity markets.'' 
12 As a result of FERC's new regulations, many utilities 
will cede operating control--and in some cases, actual ownership--of 
their transmission facilities to newly-created entities. The status of 
these entities, as well as the status of utility systems or other 
companies that invest in them, raise a number of issues under the Act. 
Most prominently, it has been asserted that the limits the Act places 
on the other businesses in which a utility holding company can engage 
will create obstacles for nonutility companies that may wish to invest 
in or operate these new transmission entities.
---------------------------------------------------------------------------
    \11\ See FERC Order 2000, ``Regional Transmission Organizations,' 
65 FR 810 (Jan. 6, 2000) (codified at 18 C.F.R. Sec. 35.34).
    \12\ Order 2000, 65 FR at 811.
---------------------------------------------------------------------------
    The SEC believes it has the necessary authority under the Act to 
deal with the issues created by the FERC's restructuring without 
impeding that restructuring. Nonetheless, repeal of the Act would 
effectively resolve these issues.
    The SEC takes seriously its duties to administer faithfully the 
letter and spirit of the 1935 Act and is committed to promoting the 
fairness, liquidity, and efficiency of the United States securities 
markets. By supporting conditional repeal of the 1935 Act, the SEC 
hopes to reduce unnecessary regulatory burdens on America's energy 
industry while providing adequate protections for energy consumers.

    Mr. Barton. Thank you, Commissioner.
    We would now like to hear from the Chairwoman of the 
Arkansas Public Services Commission, the Honorable Sandra 
Hochstetter. Your statement is in the record, and we would ask 
that you elaborate for 6 minutes.

             STATEMENT OF HON. SANDRA L. HOCHSTETTER

    Ms. Hochstetter. That you, Mr. Chairman, and members of the 
subcommittee. I am here today on behalf of NARUC, and we would 
like to commend you for your tireless work on the issue of 
electric restructuring.
    We would also like to thank you for including NARUC in the 
discussions and process since you have been chairman of this 
subcommittee. Our testimony here today is a mixture of 
concerns, as well as compliments.
    To begin with, NARUC would like to say that we are pleased 
that you did not include a section that would expand FERC 
jurisdiction to include unbundled retail transmission service 
in H.R. 3406.
    We do believe that the issue of transmission jurisdiction 
is now properly before the Supreme Court. Accordingly, we 
recommend that Congress allow the Court to continue to rule on 
transmission jurisdiction issues prior to taking any 
legislative action.
    Second, we would like to thank you for Section 605 with 
respect to retail competition. However, we do feel that you 
could go a bit further to clarify that a State can determine 
not to implement retail competition.
    The issue of whether or not that it makes economic sense 
for any particular State to adopt retail competition is clearly 
a unique State-specific factual inquiry that should depend upon 
a quantitative analysis of cost versus benefit.
    We appreciate the difficulties with divergent points of 
view that you have confronted to get the legislation to this 
point. However, we feel like we must express significant 
concern with H.R. 3406 as it is currently drafted.
    First, as to interconnection standards. While NARUC 
supports national technical power quality standards adopted by 
an appropriate technical standards organization, we must oppose 
the provisions found in Section 101 which provides for Federal 
preemption of distribution of interconnection terms, 
conditions, costs, and rates.
    FERC should properly focus on transmission interconnection 
standards, and not distribution. We consider this to be a 
safety and reliability issue, as well as a generation supply 
and potential cost shifting issue, and therefore State and 
local officials, and retail customers, should be responsible 
for working out those details.
    As to net metering, while NARUC appreciates the efforts of 
this committee to permit States to establish additional 
requirements to those net metering standards promulgated by 
FERC, we must express concern and oppose the federally 
preemptive provisions found in Section 102.
    Once again that metering is a retail jurisdiction issue, 
subject to State jurisdiction. With respect to Section 103, we 
support demand management programs, but believe that retail 
demand reduction programs should be developed by the States 
under traditional State jurisdiction over retail services.
    Once again, these are retail consumer programs. We do feel, 
however, that Congress could be helpful in the demand reduction 
area by doing things in the following areas. Congress can 
promote energy efficiency programs through the use of increased 
funding, tax credits, in the setting of increasingly more 
efficient national building codes and standards for motors, 
lighting, and appliances.
    And additionally Congress should continue to provide 
funding for energy efficiency and conservation for low and 
moderate income consumers, as these are appropriate Federal 
programs.
    On the issue of a regional transmission organization, NARUC 
believes that an RTO formation can provide benefits to the 
market and to all consumers provided that the policies that 
establish RTOs will enhance the Federal-State partnership, and 
provide for truly independent RTO governance and operation with 
appropriate Federal and State oversight.
    The Arkansas Commission, as a matter of fact, has been one 
of the strongest State Commission supporters of FERC's efforts 
to facilitate the formation of RTOs. However, we remain 
concerned that an appropriate role for State Regulators in both 
RTO creation and operation has not been formalized.
    In addition, there are certain important transmission 
pricing issues that need to be resolved. H.R. 3406 does not 
advance State participation in any aspect of RTO governance or 
decisionmaking.
    The mandatory participation provisions of H.R. 3406 also 
fail to recognize and take into consideration that currently 
under State laws utilities are generally required to obtain 
State Commission approval to participate in RTOs if the 
membership would require transfer of assets into the RTO.
    In addition, we believe that Congress should require FERC 
to recognize States' interests in actively reviewing questions 
of RTO governance. These areas would include the development 
and revision of market rules, reliability in planning, access 
to RTO market monitoring information, and development with 
Federal authorities of market power mitigation programs.
    With respect to transmission reliability, NARUC has 
consistently agreed that reliability should be addressed in any 
Federal electricity legislation. However, we believe that while 
this needs to take place on a Federal level, the law should 
also preserve the authority of the States to set more rigorous 
standards when deemed to be in the public interest.
    Congress should expressly include in the legislation a 
savings clause that would protect existing State authority to 
ensure reliable transition service, as well as a regional 
advisory role for the State.
    State officials ultimately will be held accountable by the 
public when the lights fail to stay on. So, because of this 
responsibility, we believe that we need to act effectively to 
ensure uninterrupted electricity service.
    With respect to siting authority, we would strongly oppose 
any legislative provisions that contemplate Federal siting 
authority. While the Arkansas Commission certainly understands 
the basis for the recommendation by some parties that 
transmission siting authority should be vested in FERC, we 
would recommend that the States, utilizing where appropriate 
regional mechanisms, continue to have primary siting authority.
    And then if such regional approaches once employed prove 
inadequate or fail, then the question of FERC's role can 
certainly be revisited at that time. In conclusion, we would 
like to thank you again for our ability to participate in this 
process.
    Unfortunately, we can't support the bill as it is currently 
drafted. We don't believe that a compelling case has been made 
for Federal preemption of State retail authority. Congress can 
and should do much to help the wholesale market and focus on 
those issues.
    But it should stop short of usurping State regulatory 
jurisdiction over retail matters. Thank you again, and I would 
be happy to answer any questions that you may have.
    [The statement of Hon. Sandra L. Hochstetter follows:]
 Prepared Statement of Hon. Sandra L. Hochstetter, Chairman, Arkansas 
  Public Service Commission on behalf of the National Association of 
                    Regulatory Utility Commissioners
    Mr. Chairman and Members of the Subcommittee: My name is Sandra L. 
Hochstetter. I am the Chairman of the Arkansas 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.
    Mr. Chairman, NARUC commends you for your tireless work on the 
issue of electric restructuring. We would also like to thank you and 
your staff for including NARUC in the discussions and process since you 
have been Chairman of this Subcommittee. You have been willing to speak 
to our members on numerous occasions and have been consistently willing 
to listen to our concerns.
    NARUC is pleased that you did not include a section that would 
expand FERC jurisdiction to include unbundled retail transmission 
service in H.R. 3406. We believe that the issue of transmission 
jurisdiction is now properly before the Supreme Court. Accordingly, 
NARUC continues to recommend that Congress allow the Court to rule on 
transmission jurisdiction issues prior to taking any legislative 
action. We would also like to take this opportunity to thank you for 
section 605, which clarifies that this legislation will not require a 
State to implement retail competition or require the unbundling of 
retail transmission.
    Mr. Chairman, while we do appreciate the difficulties with 
divergent points of view you have confronted to get this legislation to 
this point, NARUC must express our significant concerns with H.R. 3406 
as it is currently drafted. NARUC is troubled by the great extent to 
which the bill intrudes into areas now regulated by the States.
    I would now like to share NARUC's views on specific provisions 
found in H.R. 3406. In some instances the NARUC positions may be at 
variance with the view of the Arkansas Commission and I will note these 
distinctions.
            interconnection; net metering; demand management
    While NARUC supports national technical power quality standards 
adopted by appropriate technical standards organizations, we must 
oppose the provisions found in section 101 which provide for the 
Federal pre-emption of distribution interconnection terms, conditions, 
costs and rates. NARUC believes that Congress should support the 
States' authority to work with local distribution utilities and other 
stakeholders, including the renewable and small generating community, 
to provide interconnection arrangements for self-generation units that 
utilize the local distribution network. NARUC considers this a safety 
and reliability issue, as well as a generation supply and potential 
cost shifting issue, and therefore State and local officials and retail 
customers should be responsible for working out cooperative solutions 
that best fit the specific circumstances of connection to a 
distribution system. This way the safety, reliability, and economic 
impact concerns of a particular project and system are not jeopardized 
by a generic rule promulgated without the benefit of the project and 
systems unique specifications.
    While NARUC appreciates the efforts to permit States to establish 
additional requirements to those net metering standards promulgated by 
FERC, NARUC must also oppose the Federally pre-emptive provisions found 
in section 102. Once again we must stress that net metering is a retail 
issue subject to State jurisdiction. NARUC supports legislation 
removing federal barriers to State implementation of net metering. The 
most critical barrier involves the current lack of jurisdictional 
clarity over net metering. The Federal Power Act has been alleged to 
preempt State net metering programs, slowing development of this 
promising new approach to promoting competition and resource diversity. 
Therefore, the bill should be amended to promote State implementation 
of net metering programs of the States' own choosing, in the States' 
own time, rather than being forced to implement minimum standards of 
FERC's choosing.
    With regard to section 103, NARUC supports demand management 
programs, but believes that retail demand reduction programs should be 
developed by the States under traditional State jurisdiction over 
retail services. Congressional action to provide for more robust and 
effective demand-side options, without FERC pre-emption of the States, 
can be accomplished.
    For example, Congress could promote energy efficiency programs 
through increased funding, tax credits, and the setting of increasingly 
more efficient national building codes and standards for motors, 
lighting and appliances.
    Congress could also promote planning strategies for maintaining a 
proper balance between supply and load, which includes demand-side 
management techniques (including price-responsive demand mechanisms), 
intermittent and renewable resources, conservation/energy efficiency 
programs, as well as traditional supply and transmission options. One 
good way for Congress to act in this area would be to authorize willing 
States to address these issues on a regional basis. I would note that 
regulators in Arkansas, Louisiana, and Mississippi and the Entergy 
Corporation supported legislation introduced by Senator Dale Bumpers in 
the early 1990's, which would have authorized States that regulated 
electric utilities operating under PUHCA to conduct integrated resource 
planning on a regional basis. I believe such approaches are even more 
appropriate now than ten years ago.
    Finally, Congress should continue to provide funding for energy 
efficiency and conservation for low and moderate income consumers 
through programs that provide education, weatherization, housing 
improvements, installation of higher efficiency appliances, and similar 
usage reduction measures.
    Taken together, these options could help lower costs to consumers, 
reduce load, conserve valuable resources, and lower costs to utilities, 
while spreading the costs and benefits to all retail ratepayers, rather 
than providing benefits to just large industrial customers.
                                 puhca
    Congress should reform the Public Utility Holding Company Act 
(PUHCA), but in doing so, should allow the States to protect the public 
through maintaining effective oversight of holding company practices 
and expanding State access to holding company books and records, 
independent of any similar authorities granted to the federal 
regulatory bodies. NARUC believes that Subtitle B of H.R. 3406 fits 
within our criteria for support.
                                 purpa
    NARUC supports legislation to lift PURPA's purchase requirement 
where a State determines that generating markets are competitive or 
that the public interest in resource acquisition is protected. However, 
NARUC opposes pre-empting State jurisdiction by granting FERC authority 
to order the recovery of costs in retail rates or to otherwise limit 
State authority to require mitigation of PURPA contract costs. It is 
NARUC's position that the States that have already approved these 
contracts are in a better position to address this issue than FERC.
    In section 133, FERC is directed to promulgate and enforce 
regulations to provide for recovery of PURPA costs. Therefore, NARUC 
cannot support the PURPA provisions found in H.R. 3406.
               regional transmission organizations (rto)
    On the important issue of RTOs, NARUC believes that RTO formation 
can provide benefits to the market and all customers, provided the 
policies that establish RTOs enhance the Federal-State partnership and 
provide for truly independent RTO governance and operation with 
appropriate Federal and State oversight. The Arkansas Commission has 
been one of the strongest State commission supporters of FERC's efforts 
to facilitate the formation of RTOs. However, we remain concerned that 
an appropriate role for State regulators in both RTO creation and 
operation has not been formalized.
    Unfortunately, H.R. 3406 does not advance State participation in 
any aspect of RTO governance or decision making. The mandatory 
participation provisions of H.R. 3406 fail to recognize that currently, 
under State laws, utilities are generally required to obtain State 
commission approval to participate in RTOs, if RTO membership requires 
the utility to relinquish control or divest the transmission facilities 
held in the retail rate base. For instance, the utilities whose 
facilities comprise existing RTOs, which are ``grandfathered'' in 
section 202 (h) (6) on page 64, received State commission approval to 
participate in those RTOs.
    Congress should require FERC, in cooperation with the States, to 
determine boundaries, structure, and functions for regional 
transmission organizations (RTO). The RTOs should be given sufficient 
authority to perform regional grid management and expansion, while 
providing for efficient system operations that are built and operated 
in the most economical, reliable and environmentally acceptable way in 
order to realize shortterm and longterm reliability as well as 
facilitate efficient wholesale market transactions.
    Congress should require FERC to recognize the States' interest in 
actively reviewing questions of RTO governance. This would include: 
development (and revision) of market rules; reliability and planning; 
access to RTO market monitoring information; and development, with 
federal authorities, of market power mitigation programs.
    In addition, Congress should require that RTOs or other regional 
bodies have sufficient authority to conduct long term planning for 
their regions and, working with the States and transmission owners, 
implement long-term planning that should:

1. Recognize the need for new investment in transmission facilities;
2. Assures that reliability is not compromised;
3. Reduces any decisional role for entities with unreasonable market 
        power; and
4. Provides a cost allocation method that is objective, non-
        discriminatory, weighs environmental and societal risk, and 
        ensures that costs are allocated in a proportionate manner to 
        those that receive the benefits.
                        transmission reliability
    In numerous communications with this Subcommittee, both in letters 
and in testimony, NARUC has consistently and repeatedly expressed the 
belief that reliability should be addressed in any Federal electricity 
legislation. Our position as to what policies must be included in any 
reliability legislation have been equally consistent.
    NARUC believes that Congress should mandate compliance with 
industry-developed reliability standards for the bulk power system, 
while preserving the authority of the States to set more rigorous 
standards when deemed to be in the public interest. Congress should 
also ensure that States continue to have the authority to establish 
effective price signals that allow consumers to choose alternative 
levels of reliability and power quality. To that end, 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.
    We would like to thank you Mr. Chairman for including in Title III 
of H.R. 3406 the savings provisions that were substantially the similar 
to those savings provision included in S.2071 which was passed by the 
Senate during the 106th Congress. However, I would also like to bring 
to your attention that H.R. 3406 does not address a regional advisory 
role for the States, which is especially critical to western States.
    Reliability language should not fail 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.
                     transmission siting authority
    NARUC strongly opposes any legislative provisions that contemplate 
Federal siting authority. States should retain authority to site 
electric facilities, while Congress should support the States' 
authority to negotiate and enter into cooperative agreements or 
compacts with federal agencies and other States to facilitate the 
siting and construction of electric transmission facilities as well as 
to consider alternative solutions to such facilities, such as 
distributed generation and energy efficiency. Here again Congress 
should authorize the development of regional approaches in this area.
    Giving 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, NARUC does not believe that 
many examples actually exist, beyond anecdotal evidence, where a State 
action (or inaction) is solely responsible for unreasonably preventing 
a needed transmission project. Further, the numbers of examples that 
may exist do not warrant Federal pre-emption in this area.
    In addition, there may be alternatives to a specific transmission 
project. 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 effects of the transmission project.
    While the Arkansas Commission does understand the basis for the 
recommendation by some parties that transmission siting authority 
should be vested in the FERC, we would recommend that the States, 
utilizing where appropriate regional mechanisms, continue to have 
primary siting authority. If such regional approaches once employed 
prove inadequate, the question of FERC's role can certainly be 
revisited.
                          consumer protection
    NARUC's members have a long standing commitment to consumer 
protection. Indeed, State utility commissions were established to 
ensure that consumers received essential services without fear of 
predatory practices and pricing. Therefore, we compliment you for your 
attention, Mr. Chairman, to the consumer issues that are found in H.R. 
3406. However, while we favor strong consumer protection measures, 
NARUC does not believe that pre-empting the States by Federally 
legislating retail consumer protections is the way to go. The States 
are more capable in dealing with abuses that occur at the retail level, 
and in fact many, if not most, of the States that have moved to 
restructure and unbundled their retail electric markets have in place 
regulations or laws that address the consumer issues found in H.R. 
3406. In short, Congress should not limit State authority to prescribe 
and enforce laws, regulations or procedures regarding consumer 
protection.
    NARUC believes that it would be helpful if Congress would reinforce 
the States' authority to require all load serving entities to disclose 
generation sources and accompanying environmental impacts. 
Additionally, Congress should require regional transmission 
organizations, system operators, reliability counsels and other 
regional agencies to adopt policies that allow public access to 
information necessary to enable adequate monitoring of energy markets, 
while also providing protection for information demonstrated to be 
commercially sensitive.
    Mr. Chairman, in conclusion, NARUC would again like to thank you 
for your efforts on this legislation and for offering us an opportunity 
to express our views. For your review and information I have included, 
as part of this testimony (Attachment1), a copy of the NARUC National 
Electricity Policy that was adopted by the NARUC membership at our 
Annual Convention in November.
    Unfortunately, NARUC cannot support H.R. 3406 as drafted. We do not 
believe that a compelling case has been made for Federal pre-emption of 
State retail authority. It is the position of NARUC that Congress can 
do a great deal to advance and enhance the wholesale market without 
risking possible harm to those retail institutions that have heretofore 
not experienced the major dislocations that have occurred in wholesale 
markets.
    NARUC would welcome the opportunity to work with you and your 
office prior to the Subcommittee markup to address the concerns raised 
here today. I would be happy to answer any questions you may have.
                              Attachment 1
                  naruc's national electricity policy
I. GENERAL PRINCIPLES
    The nation's energy policy should assure adequate, reasonably 
priced, reliable, safe, and environmentally sound electricity. To 
achieve this goal, Federal legislation should:

1. Encourage additional fuel- and technology-diverse supply resources 
        to meet the nation's growing energy demands;
2. Promote demand-side management to achieve the most efficient use of 
        electricity;
3. Provide for reliability standards and their enforcement;
4. Assure open and effective regional wholesale markets;
5. Minimize the environmental impacts of energy generation, delivery 
        and use; and
6. Respect, preserve and strengthen the States' traditional roles in 
        regulating distribution systems, planning, siting approval, 
        reliability assurance, and consumer protection.
II. DIVERSE, PLENTIFUL AND ENVIRONMENTALLY RESPONSIBLE ENERGY SUPPLIES
A. Congress should encourage environmentally responsible electricity 
        generation and the increased use of renewable energy 
        technologies as a tool to achieve fuel diversity and greater 
        energy security.
B. Congress should encourage domestic exploration and production of new 
        natural gas supplies and expansion of natural gas transmission 
        and delivery infrastructure in an environmentally sound manner 
        at reasonable costs, but should avoid an overreliance on 
        natural gas for new electric generation.
C. Coal fuels a significant portion of the nation's electric power and 
        is expected to do so for the foreseeable future. However, 
        because of coal's air emissions, it is important that Congress 
        and States work together to reduce such air emissions and 
        encourage development of lowpolluting central station 
        generation, including clean-coal technology.
D. Congress or the Administration should increase the efficiency for 
        licensing and relicensing processes of hydroelectric and 
        nuclear facilities, without compromising substantive 
        environmental and safety standards.
E. Although nuclear facilities create long-term radioactive waste 
        problems, they should continue to play an important part of our 
        national electric supply portfolio because they provide a 
        significant portion of the nation's electricity supply and do 
        not produce air emissions.
F. Congress needs to fulfill its commitment to provide the long-term 
        storage of spent nuclear fuel very quickly. To accomplish this, 
        Congress should ensure that the Nuclear Waste Fund revenue and 
        appropriations are managed responsibly and used only for the 
        establishment of a permanent repository. Pending development of 
        a permanent repository, it is better to store spent fuel at one 
        (or more) central location(s) on an interim basis than to leave 
        it at reactor sites.
G. The States support ongoing and renewed efforts to maintain the 
        security of nuclear power plants and prevent the proliferation 
        of weapons-grade byproducts.
H. Congress should enact legislation to lift the Public Utility 
        Regulatory Policies Act's mandatory purchase requirement, but 
        should allow the States to determine appropriate measures to 
        protect the public interest in resource acquisition and to 
        address mitigation and cost recovery issues associated with 
        these contracts.
III. DEMAND MANAGEMENT
A. Congress should promote energy efficiency programs through increased 
        funding, tax credits, and the setting of increasingly more 
        efficient national building codes and standards for motors, 
        lighting and appliances.
B. Congress should promote planning strategies for maintaining a proper 
        balance between supply and load that includes demand-side 
        management techniques (including price-responsive demand 
        mechanisms), intermittent and renewable resources, 
        conservation/energy efficiency programs, as well as traditional 
        supply and transmission options.
C. Congress should continue to provide funding for energy efficiency 
        and conservation for low and moderate income consumers through 
        programs that provide education, weatherization, housing 
        improvements, installation of higher efficiency appliances, and 
        similar usage reduction measures.
IV. RTOS, RELIABILITY, PLANNING & DELIVERY INFRASTRUCTURE
A. Regional Transmissions Organizations
1. Congress should require the FERC, in cooperation with the States, to 
        determine boundaries, structure, and functions for regional 
        transmission organizations (RTO).
2. Congress should require the FERC to give RTOs sufficient authority 
        to perform regional grid management, expansion, and efficient 
        system operations that are built and operated in the most 
        economical, reliable and environmentally acceptable way to 
        realize shortterm as well as longterm reliability and 
        facilitate efficient wholesale market transactions.
3. Congress should require the FERC to recognize States' rights to 
        active participation in RTO governance. This would include 
        development (and revision) of market rules, reliability and 
        planning, access to RTO market monitoring information, 
        development, with federal authorities, of market power 
        mitigation programs.
B. Long-term planning
1. Congress should require that RTOs or other regional bodies have 
        sufficient authority to conduct long term planning for their 
        regions and, working with the States and transmission owners, 
        implement long-term planning that should:
    (a) Take into account fuel diversity including renewables 
            resources;
    (b) Recognize the need for new investment in generation and 
            transmission facilities that provides adequate reserve 
            margins;
    (c) Assure that reliability is not compromised by resource 
            imbalances;
    (d) Reduce any decisional role for entities with unreasonable 
            generation or transmission market power;
    (e) Include broad public participation and collaboration among 
            market participants and third party participation in 
            offering competitive alternatives such as demand-side and 
            distributed generation options;
    (f) Develop a cost allocation method that is objective, non-
            discriminatory, weighs environmental and societal risk, and 
            associates costs with benefits;
    (g) Allow the use of competition, subject to appropriate regulatory 
            oversight, to encourage robust wholesale markets; and
    (h) Assure adequate resources in all regions of the nation.
2. Congress should support the States' authority over local 
        distribution utilities to provide interconnection arrangements 
        for selfgeneration and generation units that utilize the local 
        distribution network.
C. Reliability
1. Congress should mandate compliance with industry-developed 
        reliability standards on the bulk power system that include 
        adequate reserve margins and preserve the authority of the 
        States to set more rigorous standards when deemed to be in the 
        public interest.
2. Congress should ensure that States continue to have the authority to 
        establish effective price signals that allow consumers to 
        choose alternative levels of reliability and power quality.
D. Delivery Infrastructure
1. States should retain authority to site electric facilities, while 
        Congress should support the States' authority to negotiate and 
        enter into cooperative agreements or compacts with federal 
        agencies and other States to facilitate the siting and 
        construction of electric transmission facilities as well as to 
        consider alternative solutions to such facilities, such as 
        distributed generation and energy efficiency.
2. Congress should pursue policies that promote and ensure pipeline 
        safety, and streamline existing siting processes to increase 
        administrative efficiency, including the coordination of all 
        federal, State and local participation in these processes, 
        without compromising substantive environmental and safety 
        standards.
V. ENERGY MARKETS
A. Access to Information
1. Congress should recognize that States implementing competitive 
        retail markets and those with traditional regulatory 
        structures, and Federal, State and regional agencies and 
        organizations overseeing the development of wholesale energy 
        markets require comprehensive and timely market information. 
        Congress should adopt policies that safeguard public access to 
        information necessary to enable the monitoring of these 
        markets, while also providing protection for information 
        demonstrated to be commercially, or otherwise, sensitive.
B. Retail Markets
1. Congress should not interfere with the States' authority over all 
        aspects of retail service including the authority to determine 
        just and reasonable retail rates, and those retail rates 
        designed to encourage reductions in peak demand and to 
        encourage demand-side management options.
2. Congress should not mandate retail electricity competition.
C. Wholesale markets
1. Congress should require the FERC to promulgate clear and 
        consistently applied market rules that foster investment in 
        generation, transmission and demand-side management resources.
2. Congress should mandate effective and independent monitoring of the 
        wholesale electricity markets and empower the relevant States 
        and federal agencies with authority to investigate, enforce, 
        and remedy problems resulting from the exercise of market power 
        or other abusive behavior that distorts market operations. Such 
        remedies should include the use of structural remedies, codes 
        of conduct, or affiliate rules.
3. Congress should preserve a State's ability to require that a 
        utility's retained generation be used to serve native load.
VI. ENVIRONMENTAL PROTECTION
A. Congress should assure that State and federal energy and 
        environmental policies be coordinated and complementary.
B. Congress should address all air emissions from all electric power 
        generation in ways that: 1) minimize adverse environmental 
        impacts; 2) are comprehensive and synchronized to reduce 
        regulatory costs; 3) rely, to the extent possible, on market-
        based trading mechanisms, and 4) identify, to the extent 
        possible, the net impact of resource decisions, including 
        external factors, on public health, the environment and the 
        economy.
C. Congress should assist States and utilities to establish programs to 
        phase out power plants grandfathered under the Clean Air Act 
        with facilities that utilize clean coal technology or by other 
        means, in a way that preserves the integrity of the bulk power 
        system and minimizes the economic impact on local areas.
VII. CONSUMER PROTECTION
A. Congress should not limit State authority to prescribe and enforce 
        laws, regulations or procedures regarding consumer protection.
B. Congress should reinforce the States' authority to require all load 
        serving entities to disclose generation sources and 
        accompanying environmental impacts.
C. Congress should address the preservation of public benefits in any 
        electric industry restructuring legislation. Societal costs and 
        benefits should be studied prior to the adoption of any 
        particular implementation or funding mechanism.
D. Congress should require regional transmission organizations, system 
        operators, reliability counsels and other regional agencies to 
        adopt policies that allow public access to information 
        necessary to enable adequate monitoring of energy markets, 
        while also providing protection for information demonstrated to 
        be commercially sensitive.
E. Congress should reform the Public Utility Holding Company Act 
        (PUHCA), but, in doing so, should allow the States to protect 
        the public through maintaining effective oversight of holding 
        company practices and expanding State access to holding company 
        books and records, independent of any similar authorities 
        granted to the federal regulatory bodies.

    Mr. Barton. Thank you.
    The Chair would recognize himself for the first 5 minutes 
of questions. Commissioner Hunt, you stated that your agency 
supports repeal of PUHCA you said with proper safeguards. Could 
you elaborate on the proper safeguards, please?
    Mr. Hunt. Yes, sir. The proper safeguards in our view would 
be giving access to books and records both to State regulatory 
authorities and auditing powers, and access to, books and 
records of utilities to the FERC.
    We think that is necessary for FERC to look at affiliate 
transactions, cross-subsidization, and for the States to have 
enough power to audit the utilities in their particular States.
    Mr. Barton. And do you consider the provisions on H.R. 3406 
with regards to the safeguards to be acceptable or appropriate, 
or do you think we need to enhance them in some way?
    Mr. Hunt. I think they are adequate, sir, but I would 
accede to FERC on that issue, because they will be the ones at 
the Federal level who would really have the power under the 
bill to audit the books and records of the utilities.
    Mr. Barton. Okay. Chairwoman Hochstetter, do you think that 
NARUC would ever support a Federal bill?
    Ms. Hochstetter. Well, certainly. It would just depend on 
the language within the Federal bill.
    Mr. Barton. But we have to have a Federal system, and you 
are looking at the most States' rights chairman you are going 
to have on this subcommittee, and I have bent over backwards to 
prevent preemption of the States' rights in almost every title 
of the bill.
    And you are a very eloquent spokeswoman, but basically 
everything in the bill to protect the States doesn't go quite 
far enough to protect the States in your written testimony, 
which means that if we go far enough, we don't have a Federal 
bill.
    So if you were me, what would you do? Would you just throw 
up your hands and say the heck with it, and let these great 
States that have been out there for all these years squabbling 
among themselves continue to squabble?
    Or would you just pass a bill that says let FERC do it, 
instead of letting the Congress do it, where you have a little 
input?
    Ms. Hochstetter. Mr. Chairman, honestly, there is much 
about this bill that we can support, and I think if I were in 
your shoes, I would ask NARUC for specific wording provisions, 
some specific amendatory language that might be acceptable to 
the organization and to individual States to address these 
particular preemption concerns that I have identified.
    Mr. Barton. Well, we have been doing that for 3 years.
    Ms. Hochstetter. Well, we would certainly be happy to give 
another go at it.
    Mr. Barton. And we will be happy to give you another go at 
it, but we have got about a week to let you have a go at it. I 
did listen with detail to what you said, and when you talked 
about a savings clause, I think we can work on that.
    I don't see a way around the RTO issue, and I just think it 
is going to be real tough to create a national system if we 
don't change to some extent the status quo at the State level 
on a fallback position on transmission siting.
    And if I heard you correctly, you said that NARUC, that if 
the States can't agree, instead of letting the FERC come in at 
the end like we do, and let the FERC make the decision, your 
group apparently wants to create some sort of a regional 
arbitration panel; is that correct?
    Ms. Hochstetter. Mr. Chairman, the States have been engaged 
in recent discussions with FERC on creating regional advisory 
panels, or regional advisory boards, to work with FERC on RTO 
issues.
    And I think that that mechanism with respect to RTO issues 
could also work for transmission siting. And I also think that 
there have been some approaches, particularly in the Western 
part of the United States, where groups of States have worked 
together to work through transmission citing issues.
    In my part of the country, which is your part of the 
country as well, I am not aware of any transmission projects 
that have not been able to go forward. I think that these cases 
may be isolated where there have been problems.
    I think it may be a spotty thing, as opposed to a universal 
problem that needs a universal fix. So that's why I had 
respectfully suggested that we may want to approach it in a 
more moderate basis.
    Mr. Barton. Do you think that NARUC is willing to allow the 
RTO body, once it is in power, to make the final siting 
decisions?
    Ms. Hochstetter. I think it is entirely possible, Mr. 
Chairman, that if the States had a strong real formalized role 
in RTO governance decisions, then siting could become part of 
that process, yes, sir. But it would depend upon the structure 
of our role, our ongoing role with respect to RTO governance 
and operation.
    Mr. Barton. And, of course, our RTO proposal that is in the 
bill gives the States that real authority in the RTO creation. 
You are aware of that?
    Ms. Hochstetter. That's correct.
    Mr. Barton. And you like that part of the bill?
    Ms. Hochstetter. Yes, sir. I think it is the ongoing 
involvement on a day-to-day operational basis that we would 
like to see strengthened in the bill.
    Mr. Barton. Thank you. My time has expired. The gentleman 
from Virginia, Mr. Boucher.
    Mr. Boucher. Thank you, Mr. Chairman. Ms. Hochstetter, I 
share your view with respect to the need to retain State 
authority over the siting of transmission lines, and frankly I 
don't think the case has been made that States have abused 
their discretion to site these lines in a way that would 
warrant this grant of Federal siting authority.
    So we are in agreement on that. Tell me if you would what 
some of the concerns that States have to consider are when the 
decision is made whether or not transmission lines should be 
approved?
    Ms. Hochstetter. Yes, sir. I am glad that you asked that 
question. There are a number of things set out in our statute 
that we must consider, in addition to getting the input of a 
number of other State agencies.
    There are citing issues involving historic property, 
landowners rights, environmental quality, endangered species, 
and then on an economic basis, there are cost benefit 
ramifications, in terms of making sure that the infrastructure 
and its costs are in fact allocated in a manner that provides 
benefits to those that pay the costs.
    Mr. Boucher. Are you aware of any instances cited by the 
proponents of this grant of Federal authority to site 
transmission lines, where the claim has been made that the 
State has acted arbitrarily in balancing these competing 
interests of new transmission lines on the one hand, versus the 
other values that you have mentioned on the other, that the 
State has not engaged in a reasonable balancing process?
    And that it has in some way its discretion to weigh these 
various values and come to a decision? Are you aware of 
instances where the allegation has been made of some abuse of 
discretion in that regard?
    Ms. Hochstetter. I have honestly only heard of one 
antidotal story, and I don't have much information or knowledge 
on it. And so I did find it somewhat interesting that that was 
a proposal in the legislation, because from my knowledge and 
experience--and I have been in this industry for 17 years--I am 
not aware of any line that was necessary that has failed to be 
sited.
    I am sure that there may be one or two examples, but I am 
not aware of any.
    Mr. Boucher. Okay. Well, I have been asking that question 
to a number of witnesses who have been testifying before this 
subcommittee this year, and we have yet to hear examples from 
anyone that would suggest that States have acted 
inappropriately, and would lend credence to the claim that 
there needs to be Federal authority in this area.
    And let me just ask one additional question, and that 
relates to a way in which we might encourage the investments to 
be made in new transmission lines where they in fact have to be 
built.
    A number of proposals have been put forward to address that 
concern. The bill contains a new system of incentive pricing 
authorities for the FERC. I would welcome your view with regard 
to the appropriateness of incentive pricing as a way to 
encourage and incent new power line construction.
    And I would also welcome your view with regard to whether 
or not there might be another alternative. And that is 
sufficiently to empower regional transmission organizations to 
bid out the construction of these lines themselves.
    And perhaps ultimately to be the owner of the newly 
constructed lines. Your thoughts on that alternative and 
whether or not that might work?
    Ms. Hochstetter. Yes, sir. Thank you. I am honestly not 
aware of any examples, at least in my State and in my regional 
of the country, where traditional cost of service based rate 
making has not be sufficient to incent transmission owners to 
build new transmission.
    Certainly incentive rates might provide more encouragement 
and inducements, but I am not aware of the fact that we are at 
that point where that is absolutely necessary. I think it is 
something that could be considered at some point.
    But we do have to keep in mind that when you use a rate 
design that it generally increases retail rates to consumers. 
So there is a balancing act that has to go into the process, 
and I would think that from a logical standpoint that you would 
start with the cost of service basis for incremental 
transmission construction.
    And if that didn't work, then move to something else, but I 
don't think you have to jump over that first phase necessarily 
to get new transmission constructed.
    Mr. Boucher. Okay. Mr. Chairman, those are my questions. 
Thank you very much.
    Mr. Largent [presiding]. I thank the gentleman. The 
gentleman from Illinois, Mr. Shimkus, is recognized.
    Mr. Shimkus. Thank you, Mr. Chairman. I will have just a 
brief question for Chairman Hochstetter. Define retail. In your 
statement, you talked about retail issues. Define retail for 
me.
    Ms. Hochstetter. There are a couple of different 
definitions that I might proffer. One is those program that 
have to do with services provided off of the distribution 
facilities, which is what State regulators regulate everything 
that is of a distribution nature.
    Another definition of retail might be those rates, 
programs, and services offered to residential, commercial, and 
industrial customers.
    Mr. Shimkus. Is there not another definition of retail? 
Could there not be retail over the transmission lines?
    Ms. Hochstetter. A portion of the transmission lines 
certainly are involved in retail service, and of course from 
the standpoint of the bundled service that we still have, a 
majority of the transmission service is in fact retail.
    Mr. Shimkus. Now, if we have a generating facility in 
Arkansas, and a manufacturing plant in Missouri, by the 
Constitutional definition that would be interstate commerce 
would it not?
    Ms. Hochstetter. That's correct, and based on my 
understanding, Missouri would have to have retail open access 
to allow that manufacturing plant in Missouri to buy from the 
merchant plant in Arkansas.
    Mr. Shimkus. Okay. What about Illinois?
    Ms. Hochstetter. Then in that scenario, that plant or the 
manufacturing plant in Illinois would certainly be free to 
purchase from the merchant plant in Arkansas.
    Mr. Shimkus. Would it not make an argument for our role in 
the debate referencing interstate commerce to try to create 
that national grid as the chairman has so aptly attempting to 
do?
    Ms. Hochstetter. I agree that the division lines are 
somewhat gray at times, because certainly the transmission 
commerce is a mixture of retail and wholesale.
    Mr. Shimkus. And I think that is probably the fundamental 
principle of what we try to address here on this committee, and 
as the committee Members have stated, this is the only 
committee really defined by the Constitution that deals with 
interstate commerce.
    It is really a tough argument to make these days that 
wholesale, i.e., and some retail, are not interstate commerce 
and should be kept solely for the jurisdiction of the control 
of the State, and that's why we probably are going to move in 
some direction.
    And we would rather that you be helpful than adversary, and 
with that, Mr. Chairman, I yield back the balance of my time.
    Mr. Largent [presiding]. I thank the gentleman. The 
gentleman from Michigan, Mr. Dingell, is recognized.
    Mr. Dingell. Mr. Chairman, I thank you for your courtesy, 
and I commend the chairman for this hearing. To the witnesses, 
I am going to give you questions which I hope can be answered 
yes or no.
    Your testimony states this morning that repeal of the Act 
would eliminate regulatory restrictions that prevent utility 
holding companies from owning utilities at different parts of 
the country, and to prevent non-utility businesses from 
acquiring regulated utility.
    I interpret this as meaning that but for PUHCA, Enron could 
have acquired regulated utilities. Is that correct?
    Mr. Hunt. Mr. Congressman, I don't think--that may be 
correct. Enron is exempt from PUHCA now because it does not 
operate a utility outside of Oregon, where it is incorporated.
    Mr. Dingell. So they could then have bought it either way?
    Mr. Hunt. They could have bought another utility outside of 
Oregon, and they would have probably become an interstate 
company obviously, and been subject to the Act.
    Mr. Dingell. So if they bought one outside?
    Mr. Hunt. Yes, sir.
    Mr. Dingell. So the answer to the question then is yes. 
Now, let's look at the accounting in the Enron matter. It was 
celebrated perhaps by meeting one of two tests. It was either 
incompetent or it was criminal, or perhaps both.
    Having said that, in that case, wouldn't you and I now be 
sitting here discussing how State regulators would be faced 
with the massive job of shifting through Enron's 
extraordinarily complex corporate structures where evidence of 
cross-subsidization of non-energy investments financed by 
captive utility consumers?
    Mr. Hunt. Mr. Congressman, as you know, my agency has just 
begun a serious investigation of the Enron matter, and it would 
be difficult for me to speak either about the accounting issues 
or anything specific about Enron until we have all the facts 
with respect to our investigation.
    Mr. Dingell. Well, would you not now then be in a situation 
of rubbing around through Enron's accounting to find whether or 
not there was evidence of cross-subsidization of non-energy 
investments being made by charging captive utility consumers 
for the costs of that?
    Mr. Barton. After he answers the question would the 
gentleman yield?
    Mr. Dingell. I would be happy to yield for the Chair. But 
isn't that a real possibility, and you would be here discussing 
that with me this morning?
    Mr. Hunt. Sir, the SEC's Office of Chief Accountant is 
going to look very seriously at, and our other accountants are 
going to look very seriously and note, all the ramifications of 
the accounting problems as they relate to Enron.
    And I am not going to guess as to what they are going to 
find, but they will be looking at the whole accounting issue 
with respect to Enron.
    Mr. Dingell. I am not asking for that answer. All I am 
doing is saying we would have been in the awkward position then 
of probably having to be looking to see if Enron was using 
captive utility consumers' payments to subsidize cross-
fertilization of investments; isn't that right?
    Mr. Hunt. That is a possibility, as I said, Mr. 
Congressman. They only own one utility.
    Mr. Dingell. And as you have already told me, but for 
PUHCA, they could have bought more?
    Mr. Hunt. Yes.
    Mr. Dingell. Now, in the light of what we are now learning, 
is the SEC confident in its earlier contention that the books 
and records protection is an adequate legislative offset for 
repealing PUHCA?
    Mr. Hunt. I think that FERC would be better able to handle 
that. They are the ones that we would suggest should have the 
books and records authority at the Federal level.
    Mr. Dingell. Isn't it fair to observe that on securities 
matters that the SEC is the premier and the major, and the 
principal Federal Agency dealing with securities matters?
    Mr. Hunt. Yes, sir.
    Mr. Dingell. And PUHCA is, of course, a twofold 
responsibility of the Federal Government; a part deals with 
energy, but more importantly, a part, or the principal part, 
deals with securities because it was directed at dealing with 
the outrages committed by Mr. Ensel in the 1920's; isn't that 
right?
    Mr. Hunt. Yes, sir.
    Mr. Dingell. Very good. I thank you. Mr. Chairman, I am 
happy to yield to you.
    Mr. Barton. I thank you, Congressman. You know, I was 
talking to the staff when you started your question, and so I 
may have missed the premise. But my understanding is that Enron 
is not a public utility holding company under the PUHCA.
    So that what Mr. Dingell was asking you was really more of 
a hypothetical question than a real time question, because they 
are not subject to PUHCA.
    Mr. Hunt. They are not subject to PUHCA, because they only 
operate utilities in one State, the State in which they are 
incorporated.
    Mr. Barton. And if they had been a PUHCA regulated company 
would their books have been looked at in any more detail than 
they should have been looked at under the reality of how they 
have been regulated or been reviewed by the SEC?
    Mr. Hunt. Well, the----
    Mr. Barton. The gentleman has yielded to me to let you have 
a pop at answering my question.
    Mr. Hunt. I think that certainly I can't see anything 
different, Mr. Chairman, with respect to the relationship 
between the outside auditors and the company itself.
    Mr. Barton. I would ask for unanimous consent that the 
gentleman from Michigan be given an additional 2 minutes since 
he yielded to me on his last 15 seconds, and obviously I have 
peaked his interest by my question.
    Mr. Dingell. Mr. Chairman, I thank you, and you have helped 
with the point. But the point that we come down to is under 
PUHCA the Enron folks had one utility, and the Enron folks 
could not under PUHCA have owned, or bought, or acquired a 
second utility in another State.
    And in that PUHCA precluded certain fine possibilities of 
serious misbehavior by the Enron folks then; isn't that true?
    Mr. Hunt. Sir, they could not have acquired a utility in 
another State without coming under the SEC's jurisdiction under 
PUHCA.
    Mr. Dingell. Right. So that would have had the practical 
effect then of preventing them from diversifying, right?
    Mr. Hunt. They may not have minded being under PUHCA, sir.
    Mr. Dingell. And adding a splendid new level of complexity 
to some of the most obscure, murky, perhaps incompetent, or 
more perhaps a plainly dishonest aggregation of corrupt 
bookkeeping; isn't that right?
    Mr. Hunt. I can't say whether it was corrupt or not, Mr. 
Congressman, because we have not completed our investigation.
    Mr. Dingell. Well, if it looks like a duck, and quacks like 
a duck, and flies a duck, let it be said that it is a duck. And 
I think here, dear friends, that we have before us a duck, or 
more correctly, an incorrect, incompetent, dishonest, and 
embarrassing bookkeeping.
    Mr. Sawyer. Will the gentleman yield?
    Mr. Dingell. I am happy to yield to the gentleman if he 
wants to talk about this correct, incompetent, bookkeeping.
    Mr. Sawyer. I just wondered. You do have some experience in 
duck hunting don't you?
    Mr. Dingell. I do. I also have some experience in correct 
and dishonest bookkeeping.
    Mr. Sawyer. Truly as an observer, I'm sure.
    Mr. Dingell. It is from observation and not from engaging 
in the practice. Mr. Chairman, as always, you are courteous and 
kind, and I thank you for your graciousness.
    Mr. Largent [presiding]. The gentleman's time has expired. 
I recognize the gentleman from Kentucky, Mr. Whitfield, for 
questions.
    Mr. Whitfield. Mr. Chairman, actually, I am not going to 
ask any questions today.
    Mr. Largent. Okay. All right. Then the Chair will yield to 
himself, as I am next in line here, and I have just one 
question. Actually, one comment and a question.
    Mr. Hunt, I wanted to ask you, is it possible--and kind of 
following up on Mr. Dingell's line of questioning, if PUHCA had 
been repealed and Enron had gotten into more diverse utility 
company holdings, is it not possible that it would have raised 
Enron to another level of scrutiny by the SEC or by FERC that 
perhaps would have kept Enron out of trouble?
    And I know that we are projecting into the future here, and 
thinking about possibilities, but it is my belief that perhaps 
if PUHCA had been repealed and Enron had gotten into where they 
held more than one utility company, that possibly they could 
have been scrutinized to a greater degree, and thereby avoiding 
some of the problems that they now find themselves in?
    Mr. Hunt. Well, we would certainly hope that if PUHCA had 
been repealed FERC would have been given more power to examine 
the books and records of a company in the situation of Enron, 
particularly if they bought utilities outside of Oregon where 
they now own a utility.
    So we would hope that FERC would expand its authorities and 
would have given close scrutiny to a company like that with its 
new powers.
    Mr. Largent. Thank you, Mr. Chairman. Ms. Hochstetter, I 
would like to ask you a question. I was surprised a little bit 
by your response about cost of service rates, and that those 
are good enough to construct transmission.
    Is it your belief that we have a shortage of transmission 
in this country today?
    Ms. Hochstetter. I believe it depends upon what type of 
transmission service you are talking about.
    Mr. Largent. I am talking about interstate transmission.
    Ms. Hochstetter. To serve the bulk wholesale power market, 
it is my understanding that that is correct. I don't know that 
there is a constraint, at least in my part of the country, with 
respect to serving native load customers. But certainly the 
system is not configured in such a manner to serve the bulk 
wholesale power market.
    Mr. Largent. So we are talking about interstate 
transmission, which is what we are talking about here in 
Washington, that you believe that there is a shortage in 
transmission to serve the bulk power grid?
    Ms. Hochstetter. Capacity. Maybe not necessarily a 
situation where you automatically have to go toward 
constructing new lines. But there are obviously as you know 
ways to enhance capacity without building new lines, and siting 
new transmission lines.
    But I am certainly aware of and would acknowledge the fact 
that we will need incremental transition capacity, and probably 
lines in this country. But I am not necessarily convinced that 
incentive rate making is the first necessary step.
    Mr. Largent. Well, we have heard stories and perhaps you 
haven't, of constraints--you know, Path-15 is one that we have 
heard a lot about in California, where there is a significant 
transmission constraint, intrastate constraint in California.
    We have heard of constraints in Wisconsin and Illinois, 
between Chicago and Milwaukee, that there is serious 
constraints of transmission there. And I am just wondering if 
you feel like that the--I mean, your opinion is that cost to 
service rates are good enough for transmission construction 
today, then why aren't those transmission lines where there are 
constraints being constructed?
    Ms. Hochstetter. I think honestly, sir, one of the reasons 
is that because everyone is waiting to make investments until 
the RTO structure is a known quantity, and RTOs are actually 
implemented, and up and running.
    I think people are delaying making investments until they 
know what that type of organization is going to look like. And 
what also the transmission pricing policies will be coming out 
of FERC.
    You know, they have an interconnection note going on right 
now, the second phase of which will deal with incremental 
transition pricing policies. So I think that once we have the 
RTO system configured, and these new transition pricing 
policies, I think you will see folks stepping up to the bar and 
making transmission infrastructure investments.
    Mr. Largent. Let me ask you a question about RTOs. I sat 
here when you were talking about that, and I had actually 
wanted to ask some of the panelists that we had yesterday this 
question.
    How involved should FERC be in determining the size or 
number of RTOs in this country?
    Ms. Hochstetter. I think they should be very involved, and 
I think they should be involved in a partnership format with 
the States, which is a step that they had taken, and we commend 
them greatly for doing that.
    We have over the last few months begun to forge that type 
of partnership in an ongoing dialog with them on RTO issues.
    Mr. Largent. Is less better in terms of the number of RTOs?
    Ms. Hochstetter. I honestly think it is a region specific 
question, and I think that Chairman Wood has recognized that, 
and I think that they have recently changed their position on 
four being the perfect number. So I think it is one of those 
things that has to be looked at on a region by region basis.
    Mr. Largent. Okay. I see that my time has expired. Let's 
see. The Chair recognizes the gentleman from Ohio, Mr. Sawyer, 
for questions.
    Mr. Sawyer. Thank you very much, Mr. Chairman. In light of 
the exchanges, Commissioner Hunt, let me just return to what I 
think Congressman Barton asked earlier. You make a very 
specific recommendation with regard to what you believe the 
role between the SEC and FERC ought to be with regard to 
affiliate transactions, audits, access to books, records, and 
continued protection of utility companies.
    Do the provisions of the bill before us, 3406, satisfy your 
recommendations?
    Mr. Hunt. I think so, Mr. Congressman. Obviously, you 
should also get the views of FERC, and whether they think that 
this power is adequately amplified in this bill for them to do 
the job, because we would be--if we had our way, we would be 
out of this business, and this business would belong to FERC.
    Mr. Sawyer. Let me just make an observation before I move 
on. It strikes me that looking to the kinds of traditional 
solutions provided either by the SEC or FERC with regard to 
Enron may not be where we need to look.
    It strikes me that Enron structured its business to operate 
in the seams between the controls put in place 65 years ago, 
and that those controls may not have been adequate even in the 
best of circumstances, but that is just an observation.
    Mr. Hunt. I think part of that business was unregulated by 
us and by FERC, the trading part of the business. We regulate 
another part and FERC regulates another part, but as to the 
trading part, I think you are right. Neither of us regulates it 
under existing law.
    Mr. Sawyer. It is good to see you here today.
    Mr. Hunt. It's good to see you, too, sir.
    Mr. Sawyer. Ms. Hochstetter, I guess I would agree with Mr. 
Boucher and with you with regard to the way in which the States 
have functioned, and I think to suggest that they acted 
arbitrarily or inappropriately, or abused discretion with 
regard to siting responsibilities that they have, it is an 
accurate observation to say that those kinds of things have 
simply not occurred.
    And I think it is probably also true that any transmission 
that has been needed--I can't think of a circumstance anywhere 
in the country where it has been ultimately denied as a product 
of siting difficulties.
    Our problem it seems to me, however, is that not just 
recently, and not just waiting for RTOs to come into place, but 
over the last quarter of a century, we have seen a decline in 
investment, in overall transmission.
    And that a transmission system designed to serve a cost of 
service environment, and with an obligation to serve a service 
territory, has worked.
    But it has not created the broader grid of the kind that 
the Sitting Chair was suggesting, and that the decline year in 
and year out of over $100 million in investment in transmission 
has led to a system that over the long term has begun to 
atrophy in terms of the uses to which it has attempted to be 
put today.
    That is to say, that for the bulk transmission and the 
functioning of a real grid in regional markets instead of a 
series of transmission lines cobbled together to meet the needs 
of a grid.
    Having said that, could you describe for me the kind of RTO 
or kind of regional siting authority that you are talking 
about? Would it function within an RTO?
    Would it have the authority to bring eminent domain to 
difficult siting decisions in the same way that the States can 
today? And when there is disagreement between existing siting 
authorities among States, who resolves it?
    Ms. Hochstetter. I think, sir, the vision that I had 
mentioned earlier on a regional basis would probably have to by 
law involve voluntary cooperation and coordination as the first 
step.
    I am not certain that regional eminent domain authority is 
something that is appropriate. But I certainly think that a 
regional association of some sort, hand-worked through a 
majority, if not all of the difficulties, and should at least 
be a first step, a first effort that is made.
    And to the extent that either an RTO isn't the one siting 
the authority or to the extent that the States can't achieve 
that.
    Mr. Sawyer. When Arkansas confronted a difficult siting 
decision, you mentioned that you had an obligation to look at a 
number of questions, and included among those was whether or 
not it provides service to the people affected by the siting 
decision.
    If in fact this is an interstate transmission line, and 
Arkansas disagrees with Texas and Louisiana, for example, how 
does that get resolved under the structure that you envision?
    Ms. Hochstetter. Well, I certainly recognize that you are 
not going to have a perfect scenario and that there could be 
problems. I think what I am just suggesting is that let's not 
jump over the first couple of alternative methods in getting to 
the ultimate objective.
    I certainly acknowledge, and I am just speaking on behalf 
of the Arkansas Commission at this point, I will certainly 
acknowledge that at some point FERC's siting authority, or some 
kind of FERC backstop, might be appropriate and might be 
necessary.
    But I don't think that you have to automatically go to that 
as your first approach, the first step if you will, in doing 
that if you like.
    Mr. Sawyer. I would just submit that I believe that at 
least both the bill that the chairman has worked on, and the 
one that I have does give primary initial siting authority and 
sufficient time for the States to act directly.
    But that that backup authority is put in place not as a 
first use, but in anticipation of potential problems.
    Mr. Barton. Would the gentleman yield?
    Mr. Sawyer. With whatever I have left, I would be happy to.
    Mr. Barton. I would ask for unanimous consent that Mr. 
Sawyer have 2 minutes, and if you would yield 1 minute to me.
    Mr. Sawyer. I would be pleased to do so.
    Mr. Barton. Let's use that hypothetical. Let's say you have 
a three State COMPAC, and Arkansas is right in the middle, and 
so we have Oklahoma and Tennessee, and we have this regional 
citing authority that you talked about.
    And the regional citing authority has got one 
representative from the State of Arkansas, and one 
representative from the State of Oklahoma, and one 
representative from the State of Tennessee.
    And the pending transmission line is an interstate line 
that goes from Oklahoma to Tennessee across the great State of 
Arkansas. The regional siting authority meets and it votes 2 to 
1 to build it, the one vote being the State of Arkansas, and it 
says that we don't need it, and we don't get anything out of 
it, and we vote no.
    If we went to that regional siting authority could we put 
language in the regional siting authority that would bind the 
losing State, the losing State, to exercise their State eminent 
authority, right of eminent domain, even if they lose? Would 
NARUC accept that?
    Ms. Hochstetter. Well, without checking with the NARUC 
officers and the NARUC board, I would have to say that I 
honestly don't know. It is an interesting hypothetical, and----
    Mr. Barton. Well, would you accept that? If you were the 
Commissioner representing the State of Arkansas in this three 
State COMPAC, and you voted no, but the other two States voted 
yes, and we were giving that State COMPAC the right to make the 
decision and not the FERC, would you accept that kind of a 
provision acting on behalf of the State of Arkansas?
    Ms. Hochstetter. I honestly don't know. I think I would 
have to look at to what extent, if any, there was an impact on 
retail rates.
    Mr. Barton. No, I am not talking about that. We are going 
to do something.
    Ms. Hochstetter. I understand, sir.
    Mr. Barton. We are going to get a national grid built, one 
way or the other. I want the States to have every bit of access 
and authority, and input possible, but at some point in time 
somebody has got to pull the trigger so to speak and say we are 
going to build it if it is in the regional interest.
    Now, you put on the table this regional authority and that 
is not a unique brand new idea.
    Ms. Hochstetter. Right.
    Mr. Barton. I am willing to go down that road if I can get 
your group and your utility commissioners to accept that at 
some point in time, even acting on behalf of your State, that 
you vote no, and you still accept the overall product for the 
greater good.
    But if you won't accept that, if NARUC won't accept that, 
then we will keep our backup authority at the FERC level.
    Ms. Hochstetter. Well, let me answer you on behalf of the 
Arkansas commission, because I honestly cannot speak based on 
your hypothetical on behalf of NARUC. Our Commission does not 
want to be parochial, and that is one of the reasons that we 
have been a strong advocate of RTOs at FERC.
    And I think that we are somewhat unique, at least in our 
part of the country, in our support of the RTO concept. Along 
these lines----
    Mr. Barton. You have got some of the biggest merchant 
plants in the country being built in your State.
    Ms. Hochstetter. Yes, sir.
    Mr. Barton. And you want to get that power out there.
    Ms. Hochstetter. Provided that we get some benefit out of 
that, that's correct. But the concept of net public interest is 
near and dear to my heart and to our Commission's heart.
    And if you are looking at something on a regional basis and 
the net public interest shows that the majority of the folks 
will benefit from the project, I personally do not have a 
problem with that, and I don't think our Commission would.
    Mr. Barton. I will take that.
    Mr. Largent [presiding]. The gentleman's time has expired. 
I recognize the gentleman from Tennessee, Mr. Bryant.
    Mr. Sawyer. Mr. Chairman, I yielded 1 minute of my 2. Can I 
have 1 minute as long as his?
    Mr. Largent. Sure.
    Mr. Sawyer. Well, probably not. Okay. Forget I asked.
    Mr. Barton. I am reinforcing your point, Mr. Sawyer.
    Mr. Bryant. Thank you. Madam Chairman, let me follow up on 
that, and not to beat a dead horse here, but this is a very 
important issue. Coming from the State of Tennessee, let me 
assure you that we probably would not vote against Arkansas in 
that scenario.
    Ms. Hochstetter. I appreciate that.
    Mr. Bryant. But we could always run it through Texas, or 
perhaps Missouri. This question though is that there is no 
question that the President and his energy policy, and the 
report indicated that we needed more infrastructure, and I 
don't think that is the issue here.
    It is how we go about it, and by protecting State's rights, 
and regional rights, and even individual property owner's 
rights as we talk about this process. And I am interested in 
your testimony as it relates to the incentive pricing.
    And a couple of times you have referred to in your 
statement or in your testimony today about not leaping over the 
cost of service and going right to the incentive pricing 
because ultimately we all know the rate payer is going to be 
charged with this.
    And not necessarily seeing a direct visible benefit out of 
that, it is going to be difficult to accept. It is going to be 
very difficult in the Tennessee Valley, where we have become 
accustomed over the years to very reliable and inexpensive 
power, particularly to our residential customers and our 
constituents.
    As we move toward this restructuring my constituents are 
very concerned about prices going up. So every point that is 
out there where this court occur, I know that the blame for 
that is going to come back to restructuring in general, and 
those in Congress responsible for it.
    And I am a rate payer also, and so I don't want to see that 
either. So I am intrigued that if there is truly a middle 
ground so that we don't leap over and go right to the incentive 
pricing.
    But my question to you though is realistically--and I have 
always heard that that is--that people are waiting for Congress 
to act to provide some ``stability'' before they start building 
and putting money, and investing money in infrastructure.
    Can we say how we would get there without incentive 
pricing? I mean, how do you say that we are not going to start 
out with this, but if it doesn't work, we will get to that, 
because everybody is going to hold out until it gets to that 
point?
    I mean, how do you reasonably get some interim steps in 
there that would actually work, rather than people continuing 
to hold out on building until they get the money that they want 
to build?
    Ms. Hochstetter. Yes, sir. I think that FERC is ultimately 
going to need to take a lead in that, and so I think in terms 
of waiting for Congressional action, it is probably waiting for 
Congressional action to ask FERC to move forward in 
coordination and in consultation with the States to address 
some of these issues.
    But I think that is something that could be done in a 
proceeding at FERC to discuss that type of cost of service, 
versus incentive rate design, and work through those issues in 
this consultative process that we have begun to form with the 
FERC.
    So I think that is something that could be handled on an 
administrative basis, as opposed to in Congressional 
legislation, just to direct us to move forward in partnership, 
the States, in conjunction with FERC on these issues.
    Mr. Bryant. I have additional time, but I know there is a 
very qualified and competent second panel ready to testify, and 
I would waive the balance of my time so we can move on toward 
our second panel.
    Mr. Largent. All right. The gentleman yields back his time, 
and I will recognize the gentleman from Louisiana, Mr. John.
    [No response.]
    Mr. Largent. Mr. Wynn, from Maryland.
    [No response.]
    Mr. Shimkus. Mr. Chairman, I have one additional question, 
but I am not up yet.
    Mr. Largent. Well, maybe Mr. Walden would yield you time.
    Mr. Walden. Mr. Chairman, I would be happy to yield to my 
colleague.
    Mr. Shimkus. And I thank my colleague. For Mr. Hunt. I have 
been told from some Illinois utilities PUHCA has prevented them 
from refinancing bonds. Could this be true?
    Mr. Hunt. Without knowing the facts of that case, Mr. 
Congressman, I couldn't answer, but I would be glad to get back 
to you with an answer.
    Mr. Shimkus. Well, I don't question them, but the final 
question is if they do have an inability to refinance bonds 
under PUHCA at this time, understanding how rates have gone, we 
could then make a correlation that individual rate payers are 
not getting the advantage of the ability to refinance, and in 
essence are incurring higher rates than they probably are, 
unless they were able to refinance. Is that a fairly good 
analysis?
    Mr. Hunt. Well, I just don't know what PUHCA's involvement 
in that problem is, Mr. Congressman. Certainly if a utility 
can't refinance, the rate payers may suffer some harm. But to 
the extent that PUHCA and we had anything to do with the non-
refinancing in this instance, I can't speak to that because I 
don't know the facts.
    Mr. Shimkus. And if you would check to get that, I would 
appreciate that.
    Mr. Hunt. I will try.
    Mr. Shimkus. That is the only question I have, Mr. 
Chairman. Thank you.
    Mr. Largent. The gentleman from Oregon, does he yield back 
his time? Do you have any questions?
    Mr. Walden. I will save mine for the next panel, Mr. 
Chairman.
    Mr. Largent. Okay. The gentleman from Georgia, Mr. Norwood. 
Do you have any questions for this panel?
    Mr. Norwood. No questions.
    Mr. Largent. Seeing no other requests for questions, I will 
excuse this panel. Thank you, Mr. Hunt, and Ms. Hochstetter, I 
appreciate your testimony, and we will ask the next panel to 
come in.
    Ladies and gentlemen, we thank all of you for your 
willingness to testimony before this committee. I would ask you 
to summarize your remarks in 5 minutes, and I will begin by 
introducing Panel Two.
    They are David Sokol, representing Mid-American Energy 
Holdings Company; Mr. Robert Johnston, representing the 
Municipal Electric Authority of Georgia; Mr. Alan Richardson, 
representing the American Public Power Association; Mr. Glenn 
English, an Oklahoman, also representing the National Rural 
Electric Cooperative.
    And Mr. Michehl Gent, representing the North American 
Electric Reliability Council; Ms. Lynne Church, representing 
the Electric Power Supply Association; Mr. James B. Rouse, 
representing the Electric Consumers Research Council; Charles 
Acquard, representing the Consumers for Fair Competition; Mr. 
William Prindle, representing The Alliance to Save Energy; and 
finally Mr. Leonard Hyman, representing or with Salomom Smith 
Barney.
    As I said, we welcome you and we will begin with Mr. Sokol 
to present your testimony in 5 minutes, and then we will move 
through the panel.
    Thank you, Mr. Sokol.

 STATEMENTS OF DAVID L. SOKOL, CHAIRMAN AND CEO, MID-AMERICAN 
ENERGY HOLDINGS COMPANY; ALAN H. RICHARDSON, PRESIDENT AND CEO, 
AMERICAN PUBLIC POWER ASSOCIATION; GLENN ENGLISH, CEO, NATIONAL 
RURAL ELECTRIC COOPERATIVE; MICHEHL R. GENT, PRESIDENT AND CEO, 
 NORTH AMERICAN ELECTRIC RELIABILITY COUNCIL; LYNNE H. CHURCH, 
 PRESIDENT, ELECTRIC POWER SUPPLY ASSOCIATION; JAMES B. ROUSE, 
   DIRECTOR, ENERGY POLICY, PRAXAIR, INC., ON BEHALF OF THE 
   ELECTRICITY CONSUMERS RESOURCE COUNCIL; CHARLES ACQUARD, 
   EXECUTIVE DIRECTOR, NATIONAL ASSOCIATION OF STATE UTILITY 
 CONSUMER ADVOCATES; WILLIAM R. PRINDLE, DIRECTOR OF BUILDING 
AND UTILITIES PROGRAMS, THE ALLIANCE TO SAVE ENERGY; LEONARD S. 
  HYMAN, SENIOR INDUSTRY ADVISOR TO SALOMON SMITH BARNEY; AND 
    ROBERT JOHNSTON, PRESIDENT AND CEO, MUNICIPAL ELECTRIC 
   AUTHORITY OF GEORGIA, ON BEHALF OF THE LARGE PUBLIC POWER 
                            COUNCIL

    Mr. Sokol. Thank you, Mr. Chairman, for the opportunity to 
be here today. I am David Sokol, Chairman and CEO of Mid-
American Energy Holdings Company, and my comments are fully 
endorsed today by our largest shareholder, Warren Buffett, and 
his Berkshire Hathaway Company.
    Before providing comments on H.R. 3406, I would like to 
explain why we believe that moving forward with this 
legislation is so crucial. As the head of a company that 
provides the electrical load that feeds industry jobs and 
production, we have seen a very steady downward trend for much 
of this year that has accelerated in recent months.
    We do not share the view of some who believe that this 
recession is destined to be either relatively brief or 
comparatively painless. Congress does, however, have in its 
power to take the steps that will spur the economy and reassure 
investors and consumers in this sector.
    Passing real comprehensive energy legislation, a bill that 
contains electricity modernization as a fundamental component 
is vital to that effort.
    This perhaps could be one of the most important stimulus 
measures this committee can pass for the American economic 
recovery. With regard to the bill, I would like to offer my 
comments section by section, and under Title One of Electricity 
Supply, Subtitle A, Mid-American fully supports this section.
    Tough Mid-American does not have a financial stake in this 
area, we believe that distributed generation should be an 
integral part of the energy future of this country, and will 
deliver significant benefits to consumers and the environment.
    We have some minor technical concerns on the net metering 
language, but establishing minimum standards to encourage 
States to adopt policies to promote generalization and with 
renewables is clearly appropriate.
    Under Subtitle B regarding the Public Utility Holding 
Company Act, Mid-American strongly supports repealing PUHCA and 
replacing it with comprehensive provisions to enhance 
regulatory access to the books and records of all utility 
holding companies.
    PUHCA is the most substantial impediment to new investments 
and energy infrastructure, keeping billions of dollars of new 
capital out of this industry. The SEC, FERC, State Regulators, 
the administration, and the Democratic leadership of the 
Senate, have all endorsed PUHCA repeal as necessary pieces of a 
national energy strategy.
    It is in the words of your former colleague, Senator Tom 
Carper of Delaware, ``a no-brainer.'' Subtitle C provisions 
regarding the Public Utility Regulatory Act, we strongly 
support these provisions as well, and we note that respective 
PURPA repeal is long enjoyed by partisan support.
    Under Subtitle D, the redundant review of certain matters. 
Section 142 eliminates the redundant review of multiple 
agencies over utility mergers. This is a desirable provision, 
but I understand that there is significant opposition to 
certain parts of the section.
    At a minimum, we would recommend establishing reasonable 
time limits on the FERC merger review period. Under Title II, 
Transmission Operations, Section 201 embodies the FERC like 
compromise, bringing non-jurisdictional utilities under limited 
FERC oversight.
    Mid-American was one of the first investor-owned utilities 
to endorse this compromise and we support this section 
strongly. Section 202 on regional transmission organizations, 
or RTOs, includes many items that have been sought for years by 
advocates of a more transparent transmission system.
    First, a date certain for RTO participation; and second, 
placing all uses of the system under the same tariff; and, 
third, independence requirements and minimum standards for 
RTOs.
    The principles underlying this language is very sound; 
mandatory participation with flexible implementation. At the 
same time we understand that this section has received some 
criticism that it is too cumbersome, and perhaps too 
prescriptive.
    We would suggest the work continue on the section as the 
bill moves forward through the process in order to refine these 
very sound concepts. Under Title III of transmission 
reliability, Section 301 is a streamline version of the 
reliability language that has been included in earlier bills.
    This language has broad stakeholder support, and Mid-
American supports and prefers this approach, and we could also 
accept the section on reliability in the Daschle and Bingaman 
bill.
    The most important thing is that we must have a mandatory, 
enforceable, reliability system in place. Under transmission 
infrastructure, Section 401 addresses two priority issues for 
improving the transmission infrastructure.
    Encouraging FERC to develop incentive rates for investments 
and new infrastructure, and requiring FERC to conduct a 
rulemaking on pricing to ensure adequate capitalization of 
stand-alone transmission entities.
    These provisions are sound policy, and frankly shouldn't be 
controversial. Some of the other policy directives toward FERC 
we would characterize as clearly desirable, but not absolutely 
essential, and non-binding language could be appropriate.
    Under Section 402, this is a very important section. 
Performing siting of interstate transmission lines is an issue 
that only Congress can address. Every electricity consumer has 
a stake in fixing transmission bottlenecks, and making for a 
more wholesome transmission system.
    While my first instincts would usually be unfettered 
protection of property rights, there must be some way to ensure 
that vital transmission infrastructure gets built for this 
country.
    The formula that you have outlined will do the job, and we 
would encourage the committee to continue exploring options 
with the various stated entities involved.
    Under Federal Utilities, we understand that these three 
sections represent consensus approaches by the stakeholders in 
the affected regions, and while we are not an expert on these 
issues, we commend that consensus approach.
    And Mid-American strongly supports Title VI and VII of the 
Consumer Protection and related matters. Mr. Chairman, there is 
one other topic that I would like to address before I conclude, 
and that is the problems at Enron.
    No one should make Enron or the Enron situation an energy 
issue. It is an issue of bad investments and the clear misuse 
of accounting. Energy markets are functioning fine without 
Enron.
    This committee has a great history on matters of oversight 
investigations, and we applaud Chairman Tauzin on announcing 
his intentions to hold hearings on this matter. I also believe 
that Representative Markey has raised valid questions about the 
oversight of electricity trading markets that deserve the 
committee's attention.
    But the subcommittee should not turn away from the task of 
doing its part to aid the economic recovery modernizing the 
vastly needed electricity laws and infrastructure because of 
the problems at one company, no matter how high profile that 
company is.
    The changes that you are proposing under 3406 are very long 
overdue, and I would be happy to answer any questions that you 
might have.
    [The prepared statement of David L. Sokol follows:]
  Prepared Statement of David L. Sokol, Chairman and CEO, MidAmerican 
                          Energy Holdings Co.
    Thank you, Mr. Chairman, for the opportunity to testify today. I am 
David L. Sokol, Chairman and CEO of MidAmerican Energy Holdings 
Company, a global energy company based in Des Moines, Iowa. I was 
pleased to testify before the Subcommittee earlier this year on the 
topic of barriers to competitive generation, and am appreciative that 
the subcommittee has allowed me to come back.
    MidAmerican is a diversified, international energy company 
headquartered in Des Moines, Iowa with approximately $11 billion in 
assets. The company consists of four major subsidiaries: CE Generation 
(CalEnergy) a global energy company that specializes in renewable 
energy development in California, New York, Texas and the West, as well 
as the Philippines; MidAmerican Energy Company, an electric and gas 
utility serving the states of Iowa, South Dakota, Illinois and a small 
part of Nebraska; Northern Electric, an electric and gas utility in the 
United Kingdom, and Home Services.com, a residential real estate 
company operating throughout the country.
    As head of a company that includes both regulated utility assets 
and independent, competitive generation assets, in addition to 
experience participating in the already-deregulated energy markets in 
the U.K., I hope I bring a balanced perspective to the consideration of 
these issues.
    For the last three years, MidAmerican has taken a leadership role 
in attempting to build support for reasonable, middle ground solutions 
to modernizing the electricity industry.
    In that spirit, I will attempt in my testimony to point out some 
areas of potential compromise that could resolve outstanding 
disagreements over the few remaining areas of dispute in this 
legislation. It is time for all stakeholders to engage to help resolve 
these issues. To do otherwise only serves the interest of those who 
seek to gain advantage from the existing inefficiencies in the system 
at the expense of energy consumers.
    Mr. Chairman, in addition to your leadership in this area, I have 
been impressed by the commitment of both Secretary Abraham and the 
Democratic leadership of the Senate to ensuring that electricity 
modernization is a core component of our national energy strategy. They 
recognize that attempting to create a twenty-first century energy 
policy without modernizing electricity laws is akin to trying to 
install a high-speed rail system on seventy year-old tracks.
    Before providing comments on H.R. 3406, I would like to explain why 
I believe moving forward with this legislation is so critical.
    As the head of a company that provides the electric load that feeds 
industry, jobs and production, I have seen a steady downward trend for 
much of the year that has accelerated in recent months. I do not share 
the view of some who believe that this recession is destined to be 
relatively brief and comparatively painless.
    Congress does, however, have it in its power to take steps that 
will spur the economy and reassure investors and consumers. Passing 
real comprehensive energy legislation--a bill that contains electricity 
modernization as a fundamental component--is vital to that effort. This 
perhaps could be one of the most important stimulus measures this 
committee can pass for American economic recovery.
    With regard to the bill, I'd like to comment section-by-section:
Title I: Electric Supply
Subtitle A--Interconnection, Net Metering and Demand Management
    MidAmerican supports this section.
    I believe distributed generation should be an integral part of our 
energy future and will deliver significant benefits to consumers and 
the environment. The provisions in H.R. 3406 refine the principles of a 
stakeholder compromise between transmission and distribution owners and 
independent generators that will bring greater clarity and certainty to 
the interconnection process.
    I know that there is some concern about addressing distribution 
interconnection in this section, but members should be aware that this 
section only mandates that a national technical standard be established 
where feasible and that generators pay the reasonable costs of 
interconnection. I would recommend a technical change to the bill to 
clarify the section on back-up power that we will provide to the 
committee staff.
    The language on net metering should not overturn existing state net 
metering policies, but should establish minimum standards to encourage 
states to adopt policies to promote remote generation with renewables. 
Net metering will create some cost shifting to customers who are not 
net metered under the rate design used by most utilities today. These 
costs are for services that would otherwise be billed based upon the 
net metered customer's meter registration, but net metering eliminates 
that registration. Such costs include transmission and distribution 
service, billing and other customer services, taxes and system benefits 
charges. Determining the means for recovering these shifted costs is 
best left to the states.
Subtitle B--Provisions Regarding the Public Utility Holding Company Act 
        of 1935
    MidAmerican strongly supports repealing PUHCA and replacing it with 
comprehensive provisions to enhance regulatory access to the books and 
records of all utility holding companies.
    PUHCA is the most substantial impediment to new investment in 
energy infrastructure, keeping billions of dollars of new capital out 
of this industry. The SEC, FERC, state regulators, the Administration 
and the Democratic leadership of the Senate have all endorsed PUHCA 
repeal as a necessary piece of the national energy strategy.
    PUHCA places a set of arbitrary and often counter-productive 
limitations on investments in the regulated energy industry. It keeps 
new capital and new ideas out of the industry at a time when 
transmission infrastructure alone requires tens of billions of dollars 
in new investment. PUHCA requires the concentration of utility assets 
because of its physical integration standard, increasing concerns about 
market power.
    PUHCA is an impediment to bringing new capital and new 
infrastructure into California's market because no entity that owns 
more than ten percent of any utility in the eastern two-thirds of the 
country could make a significant capital investment in those companies 
or in regulated assets such as new transmission without running afoul 
of PUHCA. And, finally, PUHCA provides a ``first bite'' advantage to 
foreign-owned corporations seeking to acquire American utility assets.
    Replacing PUHCA with up-to-date provisions that provide state and 
federal regulators with enhanced access to the books and records of all 
utility holding companies is, in the words of your former colleague, 
Sen. Tom Carper of Delaware, ``a no brainer.''
Subtitle C--Provisions Regarding the Public Utility Regulatory Policy 
        Act of 1978
    MidAmerican strongly supports these provisions and notes that 
prospective repeal of PURPA's Sec. 210 mandatory purchase requirement 
with full guarantee of cost recovery has long enjoyed bipartisan 
support.
    Through our CalEnergy subsidiary, MidAmerican owns geothermal 
energy facilities that are QF producers. While PURPA has played an 
important role in opening up wholesale electricity markets, there have 
been cases where QF contracts anticipated higher levels of ``avoided 
costs'' than market conditions actually produced. At the same time, I'm 
pleased to note that the recent settlement in California between QF 
producers and one of the state's largest utilities will provide 
consumers clean, renewable electricity at a fraction of the cost of 
many of the long-term contracts for conventional generation signed by 
the state.
    Virtually every state in the country is looking at more market-
based methods of promoting renewable energy, and the PURPA Sec. 210 
mandatory purchase requirement has become outdated.
Subtitle D--Redundant Review of Certain Matters
    Section 141 of the bill eliminates the redundant review of multiple 
agencies over utility mergers. While I understand that there is 
significant opposition to this section, I would recommend at a minimum 
establishing some reasonable time limit on FERC merger review.
    Placing a time limit on merger consideration would not in any way 
prejudice the outcome of FERC's proceedings, but it would provide the 
markets with greater certainty in making judgments on transactions.
Title II: Transmission Operations
    Section 201 embodies the ``FERC lite'' compromise bringing non-
jurisdictional utilities under limited FERC oversight. MidAmerican was 
one of the first investor-owned utilities to endorse the compromise and 
supports this section.
    ``FERC lite'' brings all owners of transmission facilities that are 
used in interstate commerce under FERC jurisdiction for the purposes of 
establishing terms and conditions of service. FERC would also be given 
the authority to ensure that rates charged by currently non-
jurisdictional utilities to users of their transmission systems are 
comparable to the rates those utilities charge themselves.
    This is a major step forward in the creation of a seamless 
transmission grid while recognizing the different financial structures 
of different transmission owners.
    Many non-jurisdictional transmission owners have already moved to 
place their assets in regional transmission organizations to ensure 
that their customers are not isolated from regional electricity 
markets. TRANSLink, the independent transmission company that 
MidAmerican has joined in the Upper Midwest, includes both public power 
entities and a large regional rural cooperative.
    Section 202 on regional transmission organizations, or RTOs, 
includes many items that have been sought for years by advocates of a 
more transparent transmission system: 1) a date certain for RTO 
participation 2) placing all uses of the system under the same tariff 
and 3) independence requirements and minimum standards for RTOs. The 
principle underlying the language is sound--mandatory participation 
with flexible implementation.
    At the same time, I understand that this section has received some 
criticism that it is too cumbersome and prescriptive. I suggest that 
work continue on this section as the bill moves through the process in 
order to refine the sound concepts you have laid out.
Title III--Transmission Reliability
    Section 301 is a streamlined version of the reliability language 
that has been included in earlier bills. This language has broad 
stakeholder support. MidAmerican supports and prefers this approach, 
but could also accept the section on reliability in the Daschle/
Bingaman bill. The most important thing is to get a mandatory, 
enforceable reliability system in place.
    In recent years, as markets have become more competitive and 
transmission capacity more constrained, pressures on the transmission 
network have multiplied. We were fortunate that mild weather in much of 
the country last year prevented any recurrences of the reliability 
problems we had seen in previous years, but voluntary compliance with 
reliability rules by organizations that do not have enforcement 
authority is not a viable long-term system.
Title IV--Transmission Infrastructure
    Section 401 addresses two priority issues for improving the 
transmission infrastructure--encouraging FERC to develop incentive 
rates for investments in new infrastructure and requiring FERC to 
conduct a rulemaking on pricing to ensure adequate capitalization of 
stand-alone transmission entities.
    Transmission costs are pennies on the dollar of retail electricity 
rates, but the cost of inadequate transmission capacity can be 
enormous. We need to get new transmission built to improve reliability, 
security and market efficiency. Incentive rates are one way to help get 
new transmission in the ground.
    Congress also should direct FERC to review its transmission pricing 
policies to ensure that these policies will support stand-alone 
transmission entities. Rates of return must be adequate to attract 
capital to these new entities or else the system will deteriorate. 
Legislation should not dictate what rate of return that FERC provides 
for transmission, but FERC needs to look at this issue as it moves 
forward with RTOs.
    These provisions are sound policy and should be non-controversial.
    Some of the other policy directives toward FERC I would 
characterize as desirable, but not absolutely essential. Non-binding 
language may be appropriate.
    Section 402 on transmission siting is very important. Reforming 
siting of interstate transmission lines is an issue that only Congress 
can address. Every electricity consumer has a stake in fixing 
transmission bottlenecks. My first instincts are usually unfettered 
protection of property rights, but there must be some way to ensure 
that vital transmission infrastructure gets built.
    There are several problems here. When a proposed new transmission 
line or upgrade crosses through a number of states, not every state 
will benefit equally--some will not benefit at all. In other cases, 
because of complex transmission flows, a constraint in one state can 
only be addressed only by improving facilities in an entirely different 
state. Finally, a number of states are constitutionally prohibited from 
using their own eminent domain authorities for facilities that do not 
primarily benefit the public in their own states.
    The formula you have outlined would do the job. MidAmerican also 
has been involved in talks with state regulators about an approach that 
would establish joint federal-state boards under Section 209a of the 
FPA to address interstate transmission issues such as new transmission 
line construction. If that approach would resolve concerns expressed by 
others about this section, I would encourage the Committee to explore 
it.
Title V--Federal Utilities
    I understand that these three sections represent consensus 
approaches developed by stakeholders in the affected regions. While I 
am not an expert on these issues, I commend you and the representatives 
of these regions for your hard work and the compromises you have 
developed.
Titles VI and VII--Consumer Protection and Related Matters
    MidAmerican supports these sections. Consumer protection should be 
foremost in the Committee's mind as it moves forward with electricity 
modernization. Nothing will turn consumers against the marketplace 
faster than abusive practices such as slamming and cramming. H.R. 3406 
includes provisions in these areas that are very similar to those 
proposed by both the Clinton and Bush Administrations, as well as the 
bill introduced last week by Senators Daschle and Bingaman.
    The bill's provisions clarify states' authority to order retail 
electric competition and the rights of consumers in open states to 
aggregate their purchases. The bill protects state public purpose 
programs, increases criminal penalties for Federal Power Act violations 
and expands FERC refund authority.
    In addition to these provisions, regulatory transparency and access 
to books and records provide the most important consumer protections. 
Under the PUHCA repeal section of this bill, both FERC and state 
commissions have explicit statutory authority to review the books and 
records of every utility holding company, not just the limited number 
of companies currently covered under PUHCA.
    It's probably not often that private sector witnesses come before 
this committee and ask you to pass legislation increasing the ability 
of regulators to look at their books. But regulatory transparency, 
protection against cross-subsidization and consumer protection all make 
sense. Laws that arbitrarily keep investment and investors out of 
critical industries don't.
    Mr. Chairman, there's one other topic I'd like to address before I 
conclude--the problems at Enron. No one should make the Enron situation 
an energy issue--it is an issue of poor investments and the misuse of 
accounting. Energy markets are functioning fine without Enron.
    One of the untold stories of the Enron collapse is how little 
impact this has had on the regulated entities that are the direct 
providers of most electricity and natural gas to consumers. Most 
regulated entities took steps to limit their exposure to Enron in the 
weeks leading up to the company's collapse. While lenders and traders 
face liabilities as a result of their relationships with Enron, 
utilities managed their potential exposure well.
    I find it particularly ironic that some are trying to claim that 
the collapse of Enron shows that we shouldn't repeal PUHCA. For years, 
Enron was one of the most vocal opponents of PUHCA repeal, working to 
keep highly regulated, established, asset-backed companies out of 
emerging energy markets.
    Enron is not, and never had been, subject to PUHCA. And, for the 
most part, because of the nature of its business, it was not subject to 
many forms of state and federal regulation to which public utilities 
would continue to be subject under this bill.
    State and federal regulators possess extensive authority over 
utility companies in terms of the rates of return on investment that 
they allow. State regulators have complete authority over what costs 
they will allow to be recovered in rates, and the language of this bill 
clarifies that they have a federal right to review the books and 
records of any utility under their jurisdiction.
    This Committee has a great history on matters of oversight and 
investigations, and I applaud Chairman Tauzin for announcing his 
intention to hold hearings on this matter. I also believe 
Representative Markey has raised valid questions about oversight of 
electricity trading markets that deserve the Committee's attention.
    I would recommend focusing on the following areas:

1) Did this situation involve abusive accounting practices?
2) Did outside auditors meet their professional obligations?
3) Were both the letter and intent of the law followed?
4) Is there adequate oversight of the trading side of the energy 
        business and what federal agency should have primary 
        jurisdiction over these markets?
    I believe the Committee should review these questions thoroughly 
and ensure that measures to address any abuses are implemented 
properly. Given the scale of this situation, I believe that if 
legislation is needed, there will be adequate incentive for Congress to 
act. The Subcommittee should not, however, turn away from the task of 
doing its part to aid the economic recovery by modernizing our 
electricity laws and infrastructure because of problems at one company, 
no matter how high profile.
    Thank you and I'll be happy to answer any questions you may have.

    Mr. Largent [presiding]. Thank you, Mr. Sokol.
    The Chair recognizes Mr. Richardson for his statement.

                 STATEMENT OF ALAN H. RICHARDSON

    Mr. Richardson. Thank you, Mr. Chairman. It is a pleasure 
to be here today, and I appreciate the opportunity to testify. 
I am Alan Richardson, President and CEO of the American Public 
Power Association.
    We have testified before this committee a number of times 
myself, and managers of individual public power systems. For 
the most part, public power systems are net deficient in 
generation.
    We are dependent upon an effectively competitive wholesale 
market. Again for the most part, Public Power Systems are net 
deficient in transmission. Most of us are transmission 
dependent utilities.
    Even those with significant transmission facilities of 
their own are dependent upon others for additional transmission 
services. We have a vested interest in making sure that the 
wholesale market is really competitive, effectively 
competitive, and that it benefits the interests of our 
utilities, the interests of our communities, and the interests 
of our consumers, and in fact the interest of all electric 
consumers across the country.
    We have been strong proponents of effective wholesale 
competition and proponents of Federal legislation throughout 
these long debates over industry restriction that have 
proceeded for the past 5 years.
    There have been a number of very significant events that 
have occurred in the last couple of years, bookmarked by the 
bankruptcy of PG&E at the beginning or the end of last year, 
and the bankruptcy of Enron at the beginning of this year, or 
at the very end of this year.
    And then a series of events in between, including a change 
in leadership and direction of the Federal Energy Regulatory 
Commission, and a real commitment by current Commissioners to 
try to improve the situation in the wholesale power market.
    They are taking a number of steps that we find very 
appropriate, and there are things that we thought that the 
Commission should have been doing in the past, and they are the 
kinds of things that we have been encouraging Congress to 
address because of the reluctance of the Commission to act on 
their own behalf.
    So in many cases we believe that a number of things that we 
have been endorsing for Federal legislation are less necessary 
today than they have been in the past, and we believe that the 
Commission is on the right track and proceeding to put right 
things in the wholesale power market arena.
    And so for that reason, we would urge some caution in 
moving forward in some of these areas. Let me address our 
primary concerns with respect to this legislation, and focus on 
those rather than all parts of the legislation, and then answer 
questions later in this hearing.
    We oppose the repeal of the FERC merger review authority in 
this regard, and we support the position of the administration 
to preserve this authority, and in fact we would like to see it 
expanded to deal with the mergers of holding companies and to 
deal with the consolidation and the acquisition of generation 
facilities.
    And in fact as we have advocated for a considerable period 
of time, we believe that the condition or the test that the 
Commission should use is not one of whether mergers are 
consistent with the public interest, but in fact whether 
mergers promote the public interest and promote competition.
    Every merger takes a competitor out of the marketplace, and 
it can have significant adverse consequences for competition, 
and we believe that this authority should remain in the hands 
of the Commission.
    We oppose the repeal of the Public Utility Holding Company 
Act, and at the present time we believe that the Act has 
provided great stability and financial structure to this 
industry.
    In this period of turmoil, we believe that it would be 
inappropriate to repeal the act at this time. Further, we 
believe that it would be inappropriate to repeal the Act until 
we are clear and confident that we have created a market 
structure that can sustain competition over time.
    The Holding Company Act deals not only with structure, but 
with protection of consumers from various abuses, and to the 
extent that those authorities are eliminated, additional 
authorities should be given to the Federal Energy Regulatory 
Commission to deal with problems of market power abuses in the 
new marketplace.
    We oppose the provisions regarding the regional 
transmission organizations, and in this regard I believe we are 
consistent with the views that have been expressed to this 
committee yesterday by members of the Federal Energy Regulatory 
Commission.
    This is a very prescriptive provision, and today more than 
ever I believe the Commission needs the flexibility to deal 
with changing circumstances, and this provision in our view 
reduces that flexibility and does not enhance it.
    And for this reason, as well as for the fact that this 
provision captures public power systems as a blanket 
requirement for participation in regional transmission 
organizations, we do not believe that it is appropriate.
    We believe that the Commission has adequate authority under 
the present laws to deal with these issues. We oppose the new 
standard on the stranded costs provision that would apply only 
to newly created, publicly owned, electric utilities.
    The States are fully capable of handling stranded cost 
provisions when communities desire to establish their own 
electric utility system, and in the event that they are not, 
there is a backstop with the Federal Energy Regulatory 
Commission under Order 888.
    We do not believe that an additional backstop created by 
this legislation is necessary, and further the formula that is 
proposed in here for stranded cost recovery is so onerous that 
it will make the creation of new publicly owned utilities 
virtually uneconomic.
    The bill requires FERC to consider incentive rates for new 
transmission provisions, and new transmission facilities. We do 
not believe that this is necessary. We believe that the 
Commission has the authority and the ability under the current 
standard of just and reasonable rates, which is a zone, and not 
a single rate, to provide incentives that will attract capital.
    We do not think that the problems in investing in 
transmission have been due to a lack of capital, but they have 
been due to other problems that go beyond that. Finally, the 
legislation subjects wholesale power rates, and rates for 
transmission services provided by publicly owned utilities to 
private power companies to after the fact regulatory 
proceedings.
    And while we support the FERC-lite provisions that were 
mentioned a minute ago about Mr. Sokol, this provision in the 
bill in effect undoes that FERC like compromise. We do not 
think it is necessary and we oppose that.
    We believe that the Commission is moving in the right 
direction in terms of rectifying many of the serious problems 
in the wholesale power market. It is pushing utilities toward 
RTO participation, but it is acting within its statutory 
limitations.
    It is addressing the issue of when and under what 
circumstances jurisdictional utilities may sell power at 
market-based rates. It is establishing market monitoring and 
taking steps to ensure greater transparency of information.
    It is doing all of these things under the authority that it 
currently has, and we do not believe that the authority should 
be circumscribed, nor do we think that its flexibility to deal 
with these issues should be limited.
    Thank you for the opportunity to testify, Mr. Chairman, and 
it is a pleasure, Mr. Largent, to appear before you, and 
perhaps my final time before you. So, it is a pleasure to be 
here today.
    [The prepared statement of Alan H. Richardson follows:]
 Prepared Statement of Alan H. Richardson, President and CEO, American 
                        Public Power Association
    Mr. Chairman and members of the subcommittee, my name is Alan 
Richardsonand I am the President and Chief Executive Officer of the 
American Public Power Association (APPA). Thank you for the opportunity 
to appear before you today to discuss APPA's views on H.R. 3406, the 
Electricity Supply and Transmission Act. APPA represents the interests 
of more than 2000 publicly owned electric utility systems across the 
country, serving approximately 40 million citizens. 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. Further, most publicly owned utilities are not 
generation self-sufficient but depend on wholesale power purchases to 
meet the retail loads of the communities they serve. Competitive 
wholesale markets are in our interest and we have a very long record in 
support of legislative and regulatory initiatives that promote greater 
real competition in these markets. Finally, almost without exception, 
publicly owned utilities depend on others for transmission. Fair terms 
for transmission access at just, reasonable and non-discriminatory 
rates have always been critically important for public power
    Public power systems' first and only purpose is to provide 
reliable, efficient service to their local customers at the lowest 
possible cost. 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.
    For decades, APPA has supported legislative efforts to make the 
wholesale electric market more competitive. APPA was one of the major 
supporters of the transmission access provisions of the Energy Policy 
Act of 1992. On numerous occasions over the past few years, we have 
testified in support of the enactment of federal legislation that 
promotes competition, increases reliability, expands the transmission 
system, addresses market power in generation and transmission, and 
eliminates tax-related impediments to competition for municipal 
utilities.
    These past few years, and especially the past two years, have been 
a period of rapid and dramatic change in our industry. This change has 
occurred in federal and state policies on electricity competition and 
regulation; in the wholesale and retail markets for electricity; and in 
the minds and attitudes of consumers. The lessons learned from these 
experiences should serve to guide this subcommittee and other policy 
makers on any additional changes to the industry that may be necessary.
    The goal of Federal restructuring legislation should be to promote 
competition in the wholesale electric market for the benefit of 
consumers. There are several fundamental elements necessary for real 
competition to exist and be sustained over time. These include: ease of 
entry to and exit from the market; availability and transparency of 
market data; a sufficient number of buyers and sellers; and effective 
controls to prevent the abuse of market power where possible and remedy 
abuses when discovered. 1H.R. 3406 is, presumably, a bill ``to benefit 
consumers and enhance the Nation's energy security by removing barriers 
to the development of competitive markets for electric power . . .'' 
H.R. 3406 falls far short of these lofty goals because it fails to 
encourage the creation of an environment that is consistent with the 
fundamental elements that are prerequisites for competition. Indeed, 
H.R. 3406 represents a significant step in the opposite direction. In 
its present form, this bill will neither benefit consumers nor remove 
barriers to competition. It does just the opposite.
    Briefly stated, we oppose H.R. 3406 in its present form because:

1. It eliminates FERC merger review authority. This review is not 
        redundant with existing authority under the antitrust laws 
        exercised by the Department of Justice and the Federal Trade 
        Commission. Unrestrained and unexamined mergers can clearly be 
        a barrier to the development of competitive markets. Every 
        merger eliminates at least one competitor from the market and 
        many mergers are pursued precisely for this reason. FERC's 
        authority to review proposed mergers should be expanded to 
        include mergers of holding companies, transfers of generation 
        facilities, and consolidation of electric and natural gas 
        companies. FERC should also retain present authority to be used 
        as necessary to promote competition, including the authority to 
        condition mergers and grant permission to sell power at market 
        based rates on membership in FERC approved regional 
        transmission organizations.
2. It repeals the Public Utility Holding Company Act, an important 
        consumer protection statute, without enhancing FERC's authority 
        to deal with market power problems. All agree that PUHCA repeal 
        will result in new mergers and further consolidation within the 
        electric utility industry. . . . Prescriptive that they 
        severely limit FERC's discretion with respect to such critical 
        issues as appropriate size, scope and function. Further, H.R. 
        3406 would prohibit FERC from conditioning approval of such 
        things as sales of power at market based rates on RTO 
        membership.
3. It imposes almost insurmountable financial obstacles on communities 
        that want to create their own locally owned and publicly 
        controlled electric utility by dictating the formula that must 
        be used to calculate ``stranded costs'' incurred by the 
        incumbent utility. In calculating stranded costs, FERC must use 
        as a benchmark factors that existed in 1996, factors that are 
        not likely to bear any relationship to conditions that exist 
        today or in the future, not the least of which is the 
        underlying historically installed generation capacity 
        situation. The intent of this section is clear--to prevent the 
        creation of new public power systems whether or not they 
        advance competition, or promote lower rates and better service 
        for America's electric consumers.
4. It promotes incentive rates for transmission service that are 
        unnecessary, inconsistent with the Commission's 
        responsibilities to ensure only just and reasonable rates for 
        transmission, and will certainly lead to higher costs for 
        consumers.
5. It subjects wholesale power sales and rates charged for transmission 
        access by publicly owned utilities to private power companies 
        to after-the-fact regulatory proceedings by FERC for no 
        legitimate public purpose.
    Due to a number of recent developments, we recommend that the 
subcommittee defer action on comprehensive restructuring legislation at 
this time. The number of issues that now require congressional action 
has greatly decreased. This is due in large part to the willingness of 
the current members of FERC to exercise authorities already available 
to them under the Federal Power Act. We believe the current members of 
FERC have a very clear vision as to what is necessary to promote real 
competition and they recognize that competition is a means to promote 
the interests of consumers and not an end in itself. FERC has set out, 
and begun to act on, an impressive set of initiatives to establish 
effective wholesale competition. And while public power systems have 
concerns about aspects of some of those initiatives, on the whole, we 
applaud the FERC for taking action to deal with serious problems in the 
wholesale markets.
    Much of what APPA and others have advocated in federal legislation 
debates prior to these actions by the FERC was mainly necessary in 
order to direct an unwilling FERC to use its existing authority 
appropriately. APPA has consistently supported pro-competitive 
legislative proposals that would both direct the Commission to act, and 
provide it with the political support to do so. Thus, in light of 
FERC's new direction, it seems prudent to allow FERC to develop and 
implement these stated initiatives without overly prescriptive 
statutory changes imposed by Congress.
    Any legislation that may ultimately be approved by Congress must 
first do no harm to consumers and should, as mentioned above, build on 
the valuable lessons learned in the recent past. For example, we 
learned from the Western electricity crisis that premature decisions to 
allow market-based rates, based on outdated and inadequate analytical 
tools and faulty assumptions, will have significant negative 
consequences for consumers. FERC is undertaking such a review at the 
present time. An important tool at its disposal is to condition market 
based rate approval on participation in an approved RTO. Provisions of 
H.R. 3406 would eliminate this authority. If Congress is serious about 
promoting competition, it should applaud FERC's recent initiatives, not 
advance proposals that undermine them. The collapse of Enron teaches us 
that market transparency and full access to all books, records, and 
other pertinent information by regulators is essential, although there 
may be many other lessons yet to be learned as the Enron story unfolds.
    We also learned that local control of public power systems 
continues to work extremely well. Publicly owned utilities in 
California and throughout the nation have retained their obligation to 
serve all their customers and continue to meet that obligation with 
quality, reliable service at cost-based rates. About the only thing 
California did right was preserve local control of public power. Public 
power systems have retained their generation assets and are actively 
planning and building to bring additional resources on line, including 
significant investments in renewable and distributed generation 
projects. Public power is also working to add additional transmission 
capacity to the grid, particularly in key constrained areas. For 
example, a public power entity, the Transmission Agency of Northern 
California, is a major participant in the project to upgrade 
California's infamous Path 15. Despite these proven benefits of public 
power, and its role in promoting both infrastructure development and 
greater competition, H.R. 3406 would create a nearly insurmountable 
financial barrier to the creation of new publicly owned electric 
utilities.
    Following, then, are comments on certain specific provisions of 
H.R. 3406, based on the foregoing discussion. As delineated below, APPA 
has significant concerns about major elements of the bill and some 
additional concerns regarding several other provisions. There are also 
several provisions in the bill that APPA supports and those are 
discussed below as well. The positive provisions of the bill, however, 
do not offset its significant negative impacts.
                             major concerns
Section 141--Repeal of certain provisions of the Federal Power Act 
        regarding disposition of property, consolidation, and purchase 
        of securities
    This section repeals Section 203 of the Federal Power Act, thereby 
completely eliminating FERC's authority to review, approve and 
condition utility mergers and asset disposition. Accelerating 
consolidation in the electricity industry already threatens competition 
and consumers' interests. Not only does H.R. 3406 fail to include any 
provisions to address generation market power, as discussed below, but 
inclusion of this provision actually makes it more likely that large 
generation companies will get larger and be able to exercise market 
power. Thus, APPA strongly opposes this section and urges its deletion.
    Instead, APPA has consistently urged adoption of a higher standard 
that would condition merger approval on an affirmative finding that the 
proposed merger will promote the public interest, as opposed to the 
current standard that only requires the merger to be consistent with 
the public interest. In addition, FERC's merger authority needs to be 
clarified and expanded to cover mergers of utility holding companies as 
well as the disposition of generation assets by jurisdictional 
utilities and the acquisition of natural gas companies. FERC lacks the 
clear authority to review the former. While APPA believes FERC has the 
authority and responsibility to review the latter, it has recently 
declined to do so. Removal of FERC's merger authority will lead to an 
increasing amount of mergers resulting in greater consolidation of 
market power that will ultimately undermine competition.
Title I--Subtitle B Provisions Regarding PUHCA
    APPA continues to oppose repeal of the Public Utility Holding 
Company Act (PUHCA) unless FERC is provided clear authority and support 
to protect consumers against the abuse of generation market power. 
PUHCA has been, and continues to be, an important part of the structure 
of the electric utility industry by defining the permissible structures 
of holding company formation and ensuring effective state and federal 
regulation of these companies in order to protect consumers, investors 
and the public interest. PUHCA is also the only federal statute that 
protects against the abuse of cross-subsidization of affiliated 
ventures by regulated utility operations. Cross-subsidization destroys 
true competition in unregulated markets and overcharges ratepayers. The 
repeal of PUHCA should be considered with great caution.
    Unfortunately, H. R. 3406 simply repeals PUHCA without any 
offsetting provisions to protect consumers against generation market 
power or cross-subsidization in company affiliate transactions. At a 
minimum, Section 113 should be amended to allow federal and state 
regulators access to a broader range of pertinent information, rather 
than the proposed limitation of records relating to ``costs''. In 
addition, APPA suggests that FERC, perhaps in consultation with the 
Federal Trade Commission and the Department of Justice, should retain 
the authority to require the restructuring of utility holding companies 
where its is demonstrated that the holding company operated in a manner 
inconsistent with the interests of electric consumers.
    Members of the subcommittee may have heard arguments from those in 
favor of repealing PUHCA asserting that the Act has inhibited 
investment in new generation. PUHCA does not, in fact, inhibit 
investment in either generation or transmission. Under 1992 amendments 
to PUHCA, investments in generation plants can be made by any party in 
any location throughout the United States. In addition, if regulation 
under PUHCA is such a detriment to the ability of a private company to 
grow then why has the number of holding companies regulated by the 
Securities and Exchange Commission (SEC) increased. In fact, in the 
past eight years both the number of registered holding companies and 
the number of electric customers served by registered holding company 
subsidiaries has more than doubled.
Title VII--Investigation and Correction of Anti Competitive Conduct
    APPA is also strongly opposed to this title's extension of FERC 
jurisdiction over public power systems. This encroachment on local 
authority is neither prudent nor warranted. Public power systems have 
been regulated differently under federal law for more than 66 years. 
This is neither an accident nor an oversight, but rather good public 
policy that recognizes that public power systems operate in the public 
interest and are regulated at the local level. Local elected officials 
oversee public power systems across the country to ensure consumers 
continue to receive low-cost, reliable electricity from their local 
providers.
    Except for a few isolated examples, public power systems do not 
have surplus electricity to sell. These systems do not represent a 
significant presence by sellers in the wholesale markets, and public 
power is, and will continue to be, net purchasers of electricity. The 
limited volume of surplus energy from public power systems precludes 
their ability to set a market-clearing price--public power systems are 
price makers, not price takers. There is no policy justification for 
reversing decades of effective, local authority.
    In addition, Section 702 undermines the compromise reached in 
portions of Section 201, commonly referred to as ``FERC-lite'', for 
regulation of public power transmission facilities. Contrary to the 
intent of FERC-lite, Section 702 allows FERC to retroactively set rates 
for transmission service.
Section 202--Regional Transmission Organizations
    APPA believes that Section 202 is unnecessary and in fact counter-
productive. It should be deleted from the bill. This section proposes 
modification of FERC's RTO authority as set forth in Order 2000. It 
would require all transmission owners, including public power systems, 
to form or participate in an RTO within 12 months, and make certain 
other changes to characteristics of RTOs as set out in the Order. APPA 
agrees that the single most important step that can be taken to achieve 
the goal of a robust transmission system is the establishment of 
properly configured, truly independent RTOs that have primary planning 
responsibility for the regional grids under their control. APPA 
continues to support FERC's existing authority to establish and require 
public utility participation in strong, truly independent RTOs in order 
to facilitate the development of vigorously competitive retail markets.
    FERC has maintained in Order 2000 and subsequent orders and 
proceedings, that it has the authority to order RTO participation by 
jurisdictional utilities to remedy undue discrimination or facilitate 
competition. Congress should do nothing to statutorily interfere with 
FERC's development of RTOs or attempt to prescribe specific elements 
and deadlines.
    Section 202 represents a significant and inappropriate contraction 
of FERC's existing authority and creates opportunities that will permit 
potential RTO participants to delay RTO formation (evidentiary hearings 
before FERC, FERC decisions to be approved on appeal to the courts only 
if supported by a ``preponderance of the evidence'' as opposed to the 
customary standard of ``substantial evidence''). The section fails to 
guarantee that RTOs created under this new authority will in fact 
promote effective competition, and because it is so prescriptive, it 
will virtually eliminate the opportunity for FERC to make mid-course 
corrections as experience is gained regarding the creation, operation 
and appropriate functions of RTOs. FERC has substantial authority under 
the Federal Power Act to promote the creation of RTOs and to determine 
the appropriate size, scope and functions to be performed, including 
the authority to condition approval of proposed mergers or market based 
rate sales on membership in a FERC-approved RTO. Section 202 expressly 
eliminates this authority.
    FERC must be allowed to proceed so that industry will have the 
stability that regulatory certainty in this area will provide and 
regulators will have the flexibility they need to make adaptations as 
necessary. In addition, it is not necessary for Congress to expand 
FERC's authority to order participation by public power systems, public 
power will voluntarily join RTOs that are properly configured and 
provide benefits for public power customers.
Section 401--Sustainable Transmission Networks Rulemaking
    Section 401 directs FERC to conduct a rulemaking on incentive and 
performance-based transmission rates. APPA is strongly opposed to this 
section because it is unnecessary and would lead to higher transmission 
rates. We therefore urge its' deletion. 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 ratemaking 
authority for decades. (This standard was recently affirmed by FERC in 
Order 2000 on RTOs). The language in this section would have the effect 
of requiring FERC to undermine that standard.
    Proponents of this language have asserted that incentive pricing is 
necessary in order to raise the capital needed for investments in new 
transmission facilities. They argue that incentives are justified 
because transmission investment is risky. This is clearly not the case. 
Developing new transmission facilities is clearly a difficult task. 
There are substantial obstacles in the siting and permitting process. 
Rights of way may be denied for parochial reasons with no consideration 
given to broader public interest considerations. Current transmission 
owners may have incentives to delay grid expansion in order to protect 
sales of their own generation. These are not problems that can be 
overcome simply by throwing money at them. The fact is, transmission 
construction and operation is not inherently risky. Transmission is the 
prototypical low risk, traditional, regulated utility investment that 
has been very successful in attracting capital at reasonable, regulated 
rates of return. A good example of this 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 obstacle to new transmission is, in fact, the lack of siting 
approvals, not the lack of available capital. Thus, this provision will 
do nothing to cause the construction of additional transmission 
facilities or add capacity to existing lines. Moreover, APPA believes 
that incentive rates will undoubtedly lead to increases in overall 
transmission costs, which are decidedly not in the public interest.
                     other concerns with h.r. 3406
    In addition to the major issues of concern identified above, APPA 
also has serious concerns with several other provisions in the bill as 
discussed below.
Section 201(a)(3)--Certain Wholesale Stranded Costs
    This section would require FERC to impose wholesale stranded costs 
on cities and towns that municipalize their electric service, using a 
prescribed formula. That formula requires the calculation of wholesale 
stranded cost based on ``a reasonable expectation period that is based 
on the weighted average remaining useful life of generation assets 
owned or power purchased under contract by the public utility and 
included in wholesale or retail rates in effect on July 9, 1996.'' The 
fact that these generation assets may have been sold, or the contracts 
may have been modified in the intervening years is irrelevant. Clearly, 
the only purpose of this language is to render municipalization cost 
prohibitive and thus deny cities and towns across the nation the 
fundamental right to determine whether they will offer electricity 
service themselves, or franchise that service to a private company. 
This is the antithesis of the ``choice and competition'' philosophy the 
U.S. Congress has espoused as justification for restructuring of the 
electric utility industry. Moreover, FERC currently has the authority 
to fairly decide wholesale stranded cost disputes on a case-by-case 
basis. Thus, this provision is unnecessary and APPA strongly urges that 
it be deleted.
Section 525--Direct Service Industries
    These provisions direct the Bonneville Power Administration (BPA) 
to negotiate power sales contracts with all willing Northwest aluminum 
direct service industrial customers beyond the term of the currently 
effective BPA power supply contracts. This section would authorize the 
Department of Energy and not BPA to determine what constitutes a 
``reasonable level of federal firm power.'' The determination regarding 
reasonableness is to be based on an allocation of power ``that will 
enable such customers to operate their facilities in the Pacific 
Northwest in an economic manner for the long term.'' It would appear 
that the interests of a few aluminum companies are to take precedence 
over all other consumers in the Pacific Northwest. It is inappropriate 
for Congress to legislatively interfere with the renewal of these 
contracts or to re-establish the situation where, due to wholesale 
price volatility, these companies could, as they did in the recent 
past, make more money re-selling their BPA power than by producing 
aluminum.
Section 532--Wholesale Sales by Federal Power Marketing Administrations
    This section states that all rates and charges for the sale of 
electric energy and capacity by Power Marketing Administrations (PMAs) 
shall be the lowest possible rates. Furthermore, the section asserts 
that charges to consumers will allow the recovery over a reasonable 
period of years, in accordance with sound business principles, of all 
costs incurred by the United States for the production of electric 
energy sold by a PMA, including repayment of the capital investment 
allocated to power and costs assigned by the Acts of Congress to power 
for repayment.
    Section 532 is unnecessary and should be deleted. Existing criteria 
in federal law, going back to the Reclamation Project Act of 1939 and 
the Flood Control Act of 1944, for establishing PMA wholesale power 
rates is sufficient and appropriately balances the requirements to 
recover federal investments and maintain low electricity rates.
Section 533--Regulation of Federal Power Marketing Administration 
        Transmission Systems
    APPA is opposed to this section which would subject PMA 
transmission rates to full FERC jurisdiction, identical to that applied 
to ``public utilities''. APPA believes that the current system of 
regulating these rates, which recognizes the inherent differences 
between investor-owned utilities and federal entities, is sufficient to 
recover the federal government's costs and to protect consumers' 
interests.
Section 534--Accounting
    Section 534 directs FERC to issue rules to ensure that PMAs utilize 
the same accounting principles and requirements that are applicable to 
public utilities, procedures for the filing of complaints with FERC to 
parties seeking to ensure compliance, and procedures to ensure the 
power generating agencies and PMAs maintain a consistent set of books 
and records for purpose of debt repayment.
    This section is also unnecessary and should be deleted. Federal 
entities are different than ``public utilities'' in many ways, 
including their basic purposes and obligations as prescribed in federal 
law. This section would set up conflicts between those legally 
prescribed obligations that could increase electricity costs for 
consumers while providing no long-term benefit to the federal 
government.
Section 102--Federal Standards for State Net Metering Programs
    These provisions require states, non-regulated electric utilities, 
and federal power marketing agencies to implement net metering programs 
that meet minimum federal standards--for renewable resources (up to 250 
kilowatts). If a utility fails to implement a program within one year, 
then FERC establishes a program that the utility must implement. While 
there can be positive benefits to net metering, such as its potential 
to increase the use of renewable resources and provide generation 
alternatives, net metering is essentially a ``retail'' program and 
should be left to states and localities. Approximately half of the 
states already have some type of net metering program in the works. If 
net metering is to be included in a federal bill it should, at the 
minimum, grandfather existing state programs.
Section 103--Price-responsive Demand Programs
    All utilities have demand reduction, load curtailment, and energy 
efficiency programs available now to their customers and public power 
systems in particular have been very responsive to customers in this 
regard. APPA believes such programs are best left to state and local 
entities, and this language is unnecessary. Moreover, this provision 
raises a question about whether it is appropriate for the agency that 
regulates wholesale power markets to be, in effect, a participant in 
those same markets.
               provisions of h.r. 3406 that appa supports
    While APPA is opposed to the overall bill in its current form, 
there are several sections of the bill where APPA either supports the 
language as introduced, or supports the concept embodied in the 
provision and would seek certain modifications. These are discussed 
below:
Section 201(a)(2)--Open Access Transmission (FERC-Lite)
    While public power systems with transmission facilities are not 
anxious to be subjected to FERC jurisdiction, the limited jurisdiction 
contained in this section of H. R 3406, 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 non-jurisdictional transmitting utilities. Instead, 
FERC would determine whether the rates they charge to others are 
comparable to those they charge themselves. If there were 
discrepancies, FERC would remand the issue to the publicly owned 
utility. It is important to note that these provisions do not work 
unless accompanied by changes in the federal tax code that resolve the 
barriers posed by the private use limitations on tax-exempt bonds used 
to finance public power transmission facilities.
Title III--Transmission Reliability
    APPA supports this title that represents one of the few matters 
relating to restructuring on which Congress could have the confidence 
to legislate. We appreciate the inclusion in H. R. 3406 of additional 
language suggested by the North American Electric Reliability Council 
and Chairman Barton's efforts towards creating a national electric 
reliability organization to set and enforce reliability standards, 
subject to FERC oversight.
Section 402--Transmission Siting
    APPA also supports, in principle, the bill's approach to federal 
siting authority as outlined in section 402. APPA recognizes that 
backstop siting authority is a necessary tool to facilitate the siting 
of new transmission lines that are stymied by the current balkanized, 
state-by-state siting approval process. Transmission lines are 
necessary to support interstate commerce, as well as security 
interests, and thus a federal role in the siting of these lines is 
appropriate. APPA would strongly urge that every reasonable effort be 
made first at the local and state levels to resolve siting issues and 
that federal siting authority should only be used as a last resort.
Section 101--Interconnection
    APPA generally supports the provisions in the draft given the 
preservation of appropriate local authority. We agree with calls for a 
more streamlined, uniform approach to distributed generation and the 
use of a standardized technical interconnection, but not at the expense 
of public health and safety, cost-shifting, and potential reliability 
problems. This is one of a number of issues, however, where legislation 
may not be necessary. FERC already has jurisdiction under Section 210 
of the Federal Power Act (FPA) to order interconnection to any 
transmission facility. In addition, the IEEE may soon adopt an 
industry-wide interconnection standard that adequately preserves local 
(distribution) control, and FERC may soon adopt some standardized 
interconnection agreements that resolve most of the issues that have 
concerned the generator manufacturers and owners. The successful 
convergence of these events may obviate the need for Congress to act on 
this issue.
Title V, Subtitle A--Tennessee Valley Authority
    This subtitle represents a previously developed consensus on the 
relevant issues among the various stakeholders, including in particular 
TVA's municipal utility distributors, TVA, and the congressional 
delegation representing TVA's service territory. APPA supports the 
efforts of its members in this region to modify provisions of existing 
law to promote overall goals of increased competition, better service 
and lower rates for customers served by TVA.
Title VI--Consumer Protections
    Should restructuring legislation move forward, APPA supports the 
inclusion of the provisions in this title to further protect consumers. 
However, other provisions previously addressed, including the 
elimination of FERC merger review, incentive pricing for transmission, 
PUHCA repeal, and overly prescriptive provisions regarding RTO 
formation create significant risks for consumers that are not offset or 
overcome by these modest consumer protection provisions.
                               conclusion
    APPA opposes H. R. 3406 in its current form because so much of the 
bill is either unnecessary or contrary to the interests of consumers 
and the promotion of effective wholesale competition. Congress should 
either defer legislation and allow the FERC to continue to implement 
its stated objectives, or address a much narrower range of subjects 
necessary to fill in the gaps in federal oversight. In any event, it 
would be wise to heed the lessons learned over the recent past and 
avoid overly prescriptive changes in federal law.

    Mr. Largent. Thank you, Mr. Richardson. Did you like the 
name of the bill? I am just looking for one thing.
    Mr. Richardson. Well, the name is quite nice. I am not sure 
that it lives up to its promise, sir.
    Mr. Largent. Okay. Thank you, Mr. Richardson.
    Mr. Johnston, we will let you collect yourself, and kind of 
come back to you at the end. We appreciate you being here.
    Mr. Johnston. Thank you.
    Mr. Largent. And now we will recognize Mr. English.

                   STATEMENT OF GLENN ENGLISH

    Mr. English. Thank you very much, Mr. Largent. Let me start 
out by saying that I like the name of the bill. It is very 
nice, and I appreciate that. The last time that I testified 
here with regard to the draft legislation, I pointed out 
specific items that we had concern over.
    Today what I would like to address is not so much the trees 
as much as the forest. I would like to step back and take a 
look at this bill. The Rural Electric Cooperatives who I 
represent, some 35 million consumers across this country, 
consumer-owned and not for profit organizations, have no issue 
with the objectives of this legislation.
    I think we are certainly in accord with what the stated 
objectives of this legislation are. But sometimes things don't 
quite work the way that we say we would like for them to work 
out.
    A number of years ago the State legislators in California, 
when they passed the restructuring bill, all thought that they 
were voting for cheaper power for their consumers.
    They thought that this would be the results of the 
legislation that was passed. Well, obviously things didn't 
quite work out that way. The concerns that we have is that the 
stated objectives of this legislation don't square with what 
the legislative language says and what the legislation actually 
does.
    I would suggest to you that instead of providing the 
Federal Energy Regulatory Commission with more authority, it 
actually restricts what the Federal Energy Regulatory 
Commission can do. It takes away power from what State 
Regulators can do in order to protect the public.
    It makes it more difficult for the Federal Energy 
Regulatory Commission to deal with disasters such as what we 
had in California and less publicized disasters in Montana, and 
even in States that have been heralded as great success stories 
like Pennsylvania.
    I might point out to you that not a single rural electric 
consumer in the State of Pennsylvania has had anyone who has 
offered them any choice in any type of competition whatsoever.
    That is not what was stated and not what was promised when 
it took place. It certainly makes it much more difficult for 
the States to deal with protecting consumers and the local 
communities in those States over whom they have a 
responsibility and obligation to take care of.
    The limitation on the Federal Government's ability to 
protect consumers and investors starts out with a repeal of the 
Public Utility Holding Company Act. Certainly that restricts 
the ability to deal with market power, and there is nothing in 
this legislation to take the place of that in protecting the 
consumers of this country, as was the objective of the Public 
Utility Holding Company Act or is.
    It repeals Section 203 of the Federal Power Act, taking 
away FERC's authority to review mergers and transfers, and the 
facilities again, and the ability to deal with a market power 
issue.
    It includes four pages of detailed requirements for 
transmission rates, and narrowing FERCs authority to reject 
transmission rates that it believes are too high, and in fact 
requires the Federal Energy Regulatory Commission to pass rates 
that they consider to be unjust and unreasonable.
    Nor does it take any of those excessive funds and require 
that those funds be used to build new transmission, which is 
purportedly the stated objective of this particular provision.
    It includes 12 pages of detailed requirements for RTOs, 
restricting FERCs authority to guide the formation of RTOs in 
the public interest, and making it far more difficult for FERC 
to change course in response to the changes in technology or 
wholesale power markets.
    It includes 21 pages of detailed requirements for 
interconnection standards, preempting the ongoing rulemaking 
and restricts FERCs ability to encourage new generation needed 
for a robust, wholesale energy market.
    With regard to the restrictions on the State, Mr. Chairman, 
it Federalizes net metering, and preempting the net metering 
provisions that have already taken place in 34 States, as well 
as the deliberate decisions by many of these States that net 
metering has not been official to their communities.
    It Federalizes the standards for interconnection for the 
distributed generation, preempting the interconnection 
provisions in several States, and the ongoing rulemaking that 
is taking place in many others.
    It Federalizes the standards for retail rates for energy 
sold to consumers with their own generators, and evading the 
absolute core of State responsibilities. Now, this is not what 
I think the common perception of the members of this committee, 
and perhaps not even the authors of the legislation.
    This is not what I think that they want. I think that we 
all want the same thing, but I do say that we have to address 
the legislative language to deal with this particular problem.
    And even where it says that the authority is expanded, Mr. 
Chairman, that in and of itself is restrictive. In a provision, 
for instance, that requires the Federal Energy Regulatory 
Commission to regulate the smallest of those within the 
electric utility industry, that in itself limits the Federal 
Energy Regulatory Commission because it requires them to use 
very limited and scarce resources to focus their attention on 
those who have the least impact, and those where no complaint 
has been made, at the expense of focusing on those who are the 
largest, and those where the abuses have taken place, those 
where numerous complaints exist.
    So I would simply suggest, Mr. Chairman, that we need to 
take a hard look at this legislation in general, and look at it 
from a distance. Let's make sure that the legislation language 
does indeed agree with what the promise is.
    Let's make sure when the Members of this Congress vote for 
this legislation that they do have the hope and be able to have 
the opportunity, and realize the reality that this legislation 
accomplishes what it promises. 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.
                     distribution and retail issues
    Title I of H.R. 3406 would: (a) grant FERC the responsibility for 
establishing standards for the interconnection of distributed 
generation to the distribution and transmission systems; (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 FERC new authority to 
regulate demand-side management programs.
    NRECA is pleased that the Chairman has narrowed the language on 
price-responsive demand programs since the September draft. The 
statement that FERC programs ``shall not preempt or displace existing 
non-Federal price responsive demand programs'' is critically important. 
Nevertheless, 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, including increased costs and the risk of conflicting 
regulatory obligations.
    Third, these issues have traditionally been the responsibility of 
states and local regulatory bodies for a very good reason: 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 a 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.
    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 levels, and it has never had any experience whatsoever 
regulating retail services or distribution systems. FERC does not 
employ today a single distribution engineer. Further, 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.
    NRECA was pleased to see in S. 1766, the Energy Policy Act of 2002, 
introduced by Senators Daschle and Bingaman, that at least some of 
these issues were left to the states. While S. 1766 expressed Congress' 
interest in distributed generation and similar retail policies, the 
bill left it to the states and local authorities under PURPA Title I to 
decide whether and how best to address those policies in light of local 
conditions and interests. NRECA believes that the PURPA Title I 
approach is the best way for Congress to address all of the retail 
issues on which it feels the need to speak.
    If Congress insists on setting mandatory federal standards for 
distributed generation interconnection, net metering, and demand 
response programs, NRECA would be happy to work with the Chairman to 
adjust and focus the language to better serve consumer interests.
              puhca, market power, and ferc merger review
    NRECA believes that existing federal processes have been 
insufficient either to prevent concentration of market power or to 
protect consumers and competitors from the exercise of market power. 
Moreover, the proposal in Title I, Subtitle B, to repeal PUHCA, and the 
proposals in Sections 141 and 142 to repeal FERC's merger review 
authority and to eliminate NRC antitrust review would exacerbate 
existing market power problems by accelerating the process of 
consolidation in the electric industry and by making it more difficult 
for state and federal regulators effectively to police market behavior.
    NRECA believes that if PUHCA is repealed, it should be replaced 
with modern legislation that takes a practical approach to controlling 
market power. Such legislation should provide regulators an array of 
tools that they can use to protect consumers and enhance competition in 
electric markets. In particular, Congress should:

 Impose on large electric utilities that seek to merge the 
        burden of proof that their merger is consistent with the 
        antitrust laws if the Federal Trade Commission (FTC) challenges 
        the merger. The language would not change the burden of proof 
        in criminal cases.
 Prohibit FERC from approving a merger involving a large 
        electric utility if the merger would lessen competition or tend 
        to create or perpetuate market power.
 Clarify, as does S. 1766, that FERC has jurisdiction to review 
        mergers between holding companies.
 Clarify, as does S. 1766, that FERC has jurisdiction to review 
        dispositions of generating facilities.
 Authorize the FERC to take action to remedy existing market 
        power, including the authority to require a public utility with 
        market power to divest generation assets.
 Require the FERC, the Department of Justice, and the FTC to 
        conduct an interagency study of market power in the electric 
        industry.
 Authorize the FERC to impose civil penalties on any public 
        utility that exercises market power in violation of the Federal 
        Power Act.
    Only by including such provisions in restructuring legislation that 
repeals PUHCA can Congress protect markets and consumers from excessive 
consolidation in the electric industry and the exercise of undue market 
power.
                                 purpa
    NRECA supports the Chairman's proposal, in Title I, Subtitle C, to 
repeal the mandatory purchase requirements in PURPA Section 210.
                  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.
    To put it in perspective, FERC 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.
    NRECA, sincerely appreciated the Chairman Barton's efforts in the 
106th Congress to limit the expansion of FERC jurisdiction over 
electric cooperatives by applying the comparability standard over our 
transmission rate terms, and conditions, thereby establishing ``FERC.'' 
While NRECA opposes the expansion of FERC jurisdiction, we remained 
neutral on H.R. 2944, the Electricity Competition and Reliability Act, 
that incorporated the comparability standard.
    NRECA is disappointed that H.R. 3406 does not reflect a similar 
understanding of the cooperative difference. Section 702 emasculates 
FERC lite. While Section 201 creates the veneer of establishing the 
comparability standard as the basis for expanding FERC jurisdiction 
over transmission-owning utilities, Section 702 eviscerates the 
comparability concept. 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 if there were a complaint. 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, Section 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, Section 702 
would move in the opposite direction, increasing the regulatory burden 
on electric cooperatives that seek to sell power in the wholesale 
market. Yet, 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.
    Nevertheless, NRECA would like to work 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. In particular, NRECA would like to Committee to 
note that S. 1766 lacks any equivalent to Section 702, and that S. 1766 
includes a ``bright-line test'' exempting small electric utilities from 
``FERC-lite'' over transmission facilities without the need to engage 
in expensive litigation.
                  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 believes, however, that the RTO provisions in H.R. 3406 have 
two serious shortcomings:

1. They fail to address certain issues that must be resolved before 
        cooperatives can participate fully in RTOs; and
2. They sharply restrict FERC's authority to shape RTOs in a way that 
        strengthens wholesale markets and protects consumers.
H.R. 3406 Must Enable Cooperatives to Join RTOs
    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 and must be addressed by H.R. 3406:
    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.
    NRECA would be happy to work with the Chairman and the Committee to 
draft language that addresses these concerns.
H.R. 3406 Should Not Handcuff FERC
    In a number of ongoing proceedings, FERC is now actively developing 
an RTO policy intended to enhance wholesale electric markets and 
protect the public interest. Congress should not interfere with that 
process with overly detailed and prescriptive legislative language or 
by creating new procedural and substantive hurdles for FERC to jump. 
Section 202 of H.R. 3406 suffers from both failings.
    First, Section 202 reads far more like a regulation than a statute. 
It includes detailed standards for RTOs that track many of the concepts 
included in FERC's Order 2000. As a result, it sets in stone concepts 
that are--and should be--in a state of flux. None of us yet knows what 
the wholesale markets will look like when the transition to competitive 
markets is complete. We all continue to learn what approaches are most 
likely to support a robust wholesale market and what approaches hinder 
the development of that market. Congress should not freeze the process 
of experimentation now. Congress should not deprive FERC of the 
flexibility it needs to respond to changing circumstances and new 
information. Otherwise Congress will likely stunt the formation of 
wholesale markets and freeze in place inefficiencies and inequities.
    Moreover, while Section 202 includes many of the provisions of 
Order 2000, a careful reading indicates that it is not a faithful 
recreation of the Order 2000 standards. Instead, it appears there are 
several ``strategic'' absences from the requirements of Order 2000. As 
a result, if FERC were required to approve any RTO that met these 
incomplete standards, we could see many RTOs that are not independent, 
that do not have adequate size or scope, that do not reflect the 
infrastructure needs of the developing regional wholesale markets. Even 
if these holes in the statutory standards were not intentional, they 
reflect the danger of being overly specific and prescriptive in 
statutory language.
    Finally, Section 202 imposes new procedural requirements on FERC 
and grants parties before FERC new appeal remedies that they do not 
have in other contexts. The combined effect of these new procedures and 
new remedies makes it far more difficult for FERC to meet its statutory 
obligation to protect the public interest. Congress should not 
interfere in this manner. FERC's existing procedures and appeal 
processes are adequate in other contexts and should not be changed for 
the limited benefit of transmission owners seeking to retail their 
market power after joining RTOs.
                          electric reliability
    NRECA supports the reliability language Sec. 301 of H.R. 3406. 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.
                      transmission infrastructure
    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.
    For the following reasons, NRECA does not believe that these 
problems can be solved 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, Congress grants 
        transmission owners the opportunity to gouge consumers with 
        unreasonably high transmission rates.
 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.

    Mr. Largent. Thank you, Mr. English.
    Mr. Gent.

                  STATEMENT OF MICHEHL R. GENT

    Mr. Gent. Thank you, Mr. Largent, and Chairman Barton, and 
committee members. My name is Michehl Gent, and I am the 
President and CEO of the North American Electric Reliability 
Council, often referred to as NAERC.
    I am going to restrict my comments to your Title III, which 
is the provisions for reliability. We do support the 
reliability provisions of this bill, and we strongly urge this 
subcommittee to move and approve the language as soon as 
possible.
    The electricity industry is changing in fundamental ways. 
These changes are disrupting the mechanism that has ensured the 
reliability of the North American electricity grid.
    In order to prevent these changes from jeopardizing the 
reliability, we must establish a system of mandatory 
enforceable reliability rules. This bill does just that. As you 
know the industry is in a great state of flux as regional 
transmission organizations are forming and reforming, and 
vertically integrated companies are separating their 
organizations into different business units.
    It is more important than ever that an industry-led self-
regulating reliability organization be created to establish and 
enforce reliability standards applicable to the entire North 
American grid.
    The electric transmission grid is a single interconnective 
machine that spans the United States and Canadian borders, and 
having reliability rules developed and enforced by a private 
organization, in which varied interests from both countries 
participate, with oversight by the United States by the FERC, 
and similar review by regulators from Canada, is a practical 
and effective way to develop a common set of rules needed for 
the international grid.
    FERC plays a critical role in protecting the security, as 
well as the reliability, of the North American grid, by 
marshaling the industry's best expertise as to the design and 
operation of electricity transmission systems in North America.
    And by serving as the point of contact for the various 
government agencies that are interested in national security. 
Yet, their continuing ability to serve in this function cannot 
be taken for granted.
    This legislation addresses this issue by authorizing FERC 
to certify a self-regulating electric reliability organization. 
This new electric reliability oversight system is needed now.
    The continued reliability of North America's high voltage 
electricity grid, and the security of its customers, whose 
electricity supplies depend on that grid, 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 language of H.R. 3406, with the addition of a State 
regional advisory body language, presents a sound approach for 
ensuring the continued reliability of the Northern American 
electricity grid.
    The reliability of North America's interconnective 
transmission grid need not be compromised by all these changes 
that are taking place in our industry, provided that we have 
this legislation and it is enacted now.
    I would like to close by commending Chairman Barton for his 
leadership on these very important electricity issues. Thank 
you.
    [The prepared statement of Michehl R. Gent follows:]
 Prepared Statement of Michehl R. Gent, President and Chief Executive 
          Officer, North American Electric Reliability Council
    Good morning, Mr. Chairman and members of the Subcommittee. My name 
is Michehl Gent and I am President and Chief Executive Officer of the 
North American Electric Reliability Council (NERC).
    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.
Summary
    NERC supports the reliability provisions (Title III) of H.R. 3406, 
and strongly urges the Subcommittee to approve this legislation as soon 
as possible. With or without Congressional guidance, the electricity 
industry is changing in fundamental ways. These changes are disrupting 
the mechanisms that ensured the reliability of the North American 
electricity grid. In order to prevent these changes from jeopardizing 
the reliability of our electric transmission system, we must adapt how 
we deal with reliability of the bulk power system. NERC and a 
substantial majority of other industry participants believe that the 
best way to do this is through an independent, industry self-regulatory 
organization with FERC oversight, 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).
    Title III of H.R. 3406 embraces this concept, and preserves the key 
elements of earlier versions of this legislation, such as H.R. 312, 
introduced earlier this year by Mr. Wynn and co-sponsored by Mr. 
Shadegg, Ms. Eshoo and Mr. Ehrlich. Aside from a few technical 
suggestions, the only suggestion for improving the reliability language 
of H.R. 3406 that NERC would make is to add back the provisions 
addressing the establishment of State regional advisory bodies and 
their role in advising reliability entities and the Commission on 
reliability matters. This language can be found in proposed new Federal 
Power Act section 215(n) of the Wynn Bill.
    Just about two months ago, my colleague, David Cook, testified 
before the Subcommittee on the subject of reliability legislation. I 
will not repeat his points, but today will focus on two questions: (1) 
why is this legislation needed now; and (2) how will Title III of H.R. 
3406 meet this need.
Why Is This Legislation Needed Now?
    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 and as the vertically integrated companies are being 
disaggregated, NERC is seeing an increase in the number and severity of 
rules violations. Moreover, new issues are arising that demand an 
institution that can act fairly, but decisively, and in a timely 
manner.
    Let me give you an example. Traditionally, integrated utilities 
operated their generators to supply both the ``real'' (MW) and 
``reactive'' (MVar) power necessary to maintain secure operation of the 
transmission system, and charged for these services as part of the 
regulated cost of service. (It's worth noting here that control of 
flows on an electric system is not accomplished by valves and switches, 
as in gas or telecommunications systems, but by controlling the outputs 
of generators.) These ``services'' provided by generators included such 
things as spinning and non-spinning reserves and system voltage 
support. Now with the generation function separated from the 
transmission function in many cases, these ``services'' are no longer 
provided by a single, integrated entity, but must be arranged and paid 
for separately through tariffs and contracts with generators. To assure 
that this is done, we need enforceable standards that require 
transmission operators (including RTOs) to make adequate provision in 
their tariffs and contracts for these essential reliability services. 
How these arrangements are made can be the subject of filings with FERC 
or other regulators, but they must be made. Absent such enforceable 
standards, the reliability of our interconnected grids will be at 
serious risk.
    As a result of these changes in the industry, NERC is rewriting all 
of its reliability standards according to a new ``functional'' 
reliability model that sets out measurable and, under Mr. Barton's 
proposed legislation, enforceable requirements for entities that are 
responsible for performing critical reliability functions. These new 
standards will place uniform requirements on those that have the 
responsibility for maintaining the minute-to-minute balance between 
load and generation, for seeing that power flows remain within the 
physical limits of the system, and that grid voltages stay within 
tolerance.
    Let me give you another, very different example of why this 
legislation is needed. NERC plays a critical role in protecting the 
security, as well as the reliability, of the North American grid. Since 
the early 1980s, NERC has been involved with the electromagnetic pulse 
phenomenon, vulnerability of electric systems to state-sponsored, 
multi-site sabotage and terrorism, Year 2000 rollover impacts, and most 
recently the threat of cyber terrorism. At the heart of NERC's efforts 
has been its ability to marshall the industry's best expertise as to 
the design and operation of electricity transmission systems in North 
America, and serve as the point of contact with various federal 
government agencies including the National Security Council, Department 
of Energy (DOE), the Nuclear Regulatory Commission (NRC), and the 
Federal Bureau of Investigation (FBI), to reduce the vulnerability of 
interconnected electric systems to such threats.
    I know that this Subcommittee understands how vitally important 
this function is. Yet NERC's continuing ability to serve this function 
cannot be taken for granted. NERC traditionally has been funded by 
contributions from its Regional Councils. New entrants and the pressure 
of competitive markets have made this funding mechanism increasingly 
unsatisfactory. A new funding mechanism is needed that properly and 
fairly supports NERC's activities, including its activities related to 
security. H.R. 3406 would address this issue by authorizing FERC to 
certify an electric reliability organization that, among other things, 
has established rules that ``allocate equitably dues, fees and other 
charges among end users.'' See proposed section 215(c)(2)(B)(ii).
Title III of H.R. 3406 Would Provide for an Organization Capable of 
        Protecting the Reliability and the Security of the North 
        American Electricity Grid
    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. Title III of H.R. 3406 would do this. Under these provisions:

 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.
 This 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.
    On this latter point, H.R. 3406 authorizes the electric reliability 
organization approved by FERC to enter into agreements to delegate 
authority to a regional entity to enforce reliability standards. H.R. 
3406, however, omits provisions in previous reliability legislation, 
such as H.R. 312, that direct the Commission to establish a regional 
advisory body of State representatives to provide advice to the 
Commission and the national reliability organization. See proposed new 
section 215(n) of the Federal Power Act in H.R. 312. NERC would suggest 
that the State regional advisory body language be added to H.R. 3406.
    Having an industry self-regulatory organization develop and enforce 
reliability rules under government oversight as H.R. 3406 would do, 
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. Having FERC itself set the reliability standards through 
its rulemaking proceedings, even if based on advice from outside 
organizations, would require FERC to develop or acquire technical 
expertise that it does not now have, and would dramatically expand 
FERC's workload at perhaps the worst possible time. In addition, 
reliability rules and market standards need to be worked out together, 
using a fair and open process, in a collaborative fashion by all 
segments of the industry. FERC's adjudicative processes are ill-
equipped for this.
    The electric industry is in a great state of flux, as regional 
transmission organizations are forming and reforming, and vertically 
integrated companies are separating and selling off various portions of 
their business. 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 reliability organization authorized in H.R. 3406 
can help assure that grid reliability is maintained, even while new 
market structures and new RTOs are being formed. Because FERC will 
provide oversight of the electric reliability organization in the U.S., 
FERC can ensure that the organization's actions and FERC's evolving 
market policies are closely coordinated.
    The industry self-regulatory organization authorized in H.R. 3406 
also addresses the international character of the interconnected grid. 
There is strong Canadian participation within NERC now. 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 equivalent activity by provincial 
regulators in Canada, is a practical and effective way to develop 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. With that increased trade, 
the international nature of the North American electricity market will 
take on even more importance, further underscoring the necessity of 
having an industry self-regulatory organization, rather than FERC 
itself, set and enforce compliance with grid reliability standards.
Conclusion
    NERC commends the drafters of H.R. 3406 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 
grid, 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 language of H.R. 3406, with 
the addition of State regional advisory body language, presents a sound 
approach for ensuring the continued reliability of the North American 
electricity grid. It is also an approach that has widespread support 
among industry, state, and consumer interests. 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. Largent. Thank you, Mr. Gent.
    Ms. Church.

                  STATEMENT OF LYNNE H. CHURCH

    Ms. Church. Thank you, Mr. Largent, and Chairman Barton, 
and other members of the committee. I am Lynne Church, 
President of the Electric Power Supply Association, which is 
the trade association representing competitive power suppliers.
    This includes independent power producers, marketers, and 
merchant generators. The industry today comprises over 33 
percent of the Nation's installed capacity. The draft bill 
generally endorses a competitive wholesale market, which of 
course we want, and we deeply appreciate the leadership that 
Chairman Barton and others on this committee have shown on the 
issue of electric restructuring.
    We support the spirit of this bill, like Chairman Barton 
absolutely believes in a competitive, reliable, and efficient 
wholesale market. And many of the provisions of this bill 
further this goal by providing either needed legislative 
authority, or affirmation and endorsement of authority that 
FERC already is implementing.
    An example of this provisions include the requirement that 
all transmitting utilities join regional transmission 
organizations within 12 months; assurance that currently non-
FERC jurisdictional utilities provide open access to their 
grid; the adoption of predictable, non-discriminatory 
interconnection standards, which are critical for the 
investment in construction of new generation; and recognition 
that there must be authority to enforce reliability standards.
    While there is much in the bill to applaud, key provisions 
in this legislation could hinder the ongoing evolutionary 
process, and hamper the development of a truly competitive 
wholesale market.
    The new RTO procedures in Section 202 of the bill would 
slow or even stop the ongoing progress of RTO development, and 
invite additional litigation and foot dragging. It does this 
through the requirements for multiple evidentiary hearings, new 
cost benefit assessments, and court appeals under standards of 
judicial review that are not currently applicable to the 
Federal Power Act.
    Most critically it provides for a stay of FERC action while 
these appeals are being heard. These new requirements will 
provide ample opportunity for obstruction of RTO development by 
those opposed to truly open access grid.
    A second example is the prescriptive approach taken that 
will prevent progress in fine-tuning the existing ISOs and RTOs 
that have been approved. It will remove much of the flexibility 
that FERC and the stakeholders have to adjust and reform these 
market organizations as the wholesale power market inevitably 
changes and matures.
    A third example is that the definition of market 
participant is too limited and does not recognize that 
transmitting organizations compete with generators in 
alleviating congestion, and that default providers to have 
generating assets that compete also with competitive assets.
    A fourth example is that the reliability provisions do not 
reflect recent industry developments, and would hinder 
coordination of reliability standards and market practices.
    EPSA endorses the need for mandatory reliability standards 
that are broadly applicable for the entire industry.
    However, this bill does not reflect that FERC must be the 
ultimate authority to endorse reliability standards, and that 
RTOs have an important role in enforcing reliability. In 
addition, the industry has begun a DOE sponsored collaborative 
standards cross-setting process that would integrate 
reliability in market practices.
    Ideally, this process will produce a new legislative 
proposal that can be considered by the full committee next 
spring or next year when it takes up this bill. If I may, I 
would like to discuss the Enron situation, which has been the 
underlying current of this whole discussion, and what it does 
and what it does not mean.
    Opponents of the competition have seized upon the occasion 
of the company's fall to proclaim that electric restructuring 
should be halted or even reserved. In fact, however, the most 
persuasive proof of the success of competitive markets was seen 
in what happened in the markets after the bankruptcy occurred.
    As the FERC Commissioner stated yesterday, trading went on 
without a wrinkle. Competitors immediately stepped into the 
void and kept prices and supplies on an even kneel. Other 
trading platforms saw a significant increase in their volume 
and several new trading platforms are even in the works as we 
speak.
    And most importantly the lights stayed on. While still 
young, the competitive energy markets have matured to the point 
where they can withstand the departure of a once-dominant 
player.
    And finally, members of this subcommittee, and to others 
involved in this debate, a word of caution. Some thought 
leaders, including financial analysts and commentators, have 
been making allegations that other competitive suppliers may be 
quick to follow Enron.
    We have already heard some discussion of the Cal-Pine 
situation that was triggered by some quotes in the New York 
Times this past weekend. Their stock dropped precipitously, 
although it is fortunately coming back.
    Such irresponsible statements made with no real evidence 
and a lack of understanding of Cal-Pine's and other suppliers' 
business models have the potential to repeat the Enron tragedy 
for other employees and stockholders unjustifiably.
    The factor that ultimately brought Enron down was a lack of 
confidence in their financial strength by investors and 
customers. I urge caution in debating these issues to avoid 
casting doubt on other companies' financial strength without 
knowing the facts.
    In closing, thank you for allowing me to testify for the 
industry today. We look forward to continuing to work with the 
subcommittee to advance development of a robust competitive 
market.
    [The prepared statement of Lynne H. Church follows:]
Prepared Statement of Lynne H. Church, President, Electric Power Supply 
                              Association
    Chairman Barton, Representative Boucher and members of the 
Committee, I am Lynne H. Church, President of the Electric Power Supply 
Association (EPSA) and am here today representing EPSA's member 
companies. EPSA is the national trade association representing 
competitive power suppliers, including independent power producers, 
merchant generators and power marketers. These suppliers, which account 
for more than a third of the nation's installed generating capacity, 
provide reliable and competitively priced electricity from 
environmentally responsible facilities serving global power markets. 
EPSA seeks to bring the benefits of competition to all power customers. 
On behalf of the competitive power industry, I thank you for this 
opportunity to comment on H.R. 3406, the Electric Supply and 
Transmission Act.
             the rationale persists for federal legislation
    We deeply appreciate the leadership that Chairman Barton and others 
here today have shown on the issue of electricity restructuring and the 
time and energy this subcommittee has devoted to this topic. We support 
the spirit of this bill--like Chairman Barton, EPSA believes in a 
competitive, reliable, efficient, environmentally-friendly wholesale 
electricity market. Many provisions in this bill further this goal. For 
example, there is the requirement that all transmitting utilities join 
regional transmission organizations (RTOs). In addition, the bill will 
ensure that currently non-FERC-jurisdictional utilities provide open 
access to the interstate transmission grid.
    We particularly endorse the adoption of predictable, non-
discriminatory interconnection standards, because we cannot 
overemphasize how important these rules are for investment and 
construction of new generation. We have been heavily involved in the 
regulatory process underway at FERC to resolve these issues. Your bill 
could give additional impetus to this effort and shortcircuit dilatory 
litigation.
    While there is much in your bill to applaud, key provisions in this 
legislation could hinder the evolutionary process that started with 
Energy Policy Act of 1992, and hamper the development of a truly 
competitive wholesale market. These include language in the sections on 
RTOs and reliability, which I will discuss in turn.
          rto language would slow progress of rto development
    Although the bill text requires full participation by owners of the 
interstate transmission grid in RTOs, the provisions in Section 202 of 
this legislation would stop or dramatically slow progress that is now 
being made towards RTO development and invite additional litigation and 
foot-dragging. The provision is prescriptive and includes requirements 
for multiple evidentiary hearings, a new cost-benefit assessment, court 
appeals under standards of judicial review not normally applicable to 
Federal Power Act cases, and--most critically--a stay on FERC action 
while these appeals are being heard. This new process would radically 
change the calculations that companies now make when they consider how 
and whether to take part in the development of an RTO.
    The RTO process now underway at FERC is difficult and painful for 
most participants. But there is no substitute for a deliberative 
process that allows for the steady evolution of market institutions and 
needs. We believe that the prescriptive approach laid out in the bill 
will stop the progress being made towards RTO development while 
participants take their cases to court. It will also remove much of the 
flexibility that the FERC has to adjust or reform these market 
organizations as the wholesale power market inevitably changes in size 
and scope.
    We all agree that RTOs must be independent of any class of market 
participants in order to be an effective, non-discriminatory manager of 
the interstate grid. However, the definition of market participant in 
this bill specifically excludes both transmission owners that do not 
buy or sell power and entities that own generation but only provide 
default service. Transmission development clearly affects the market 
value of generation and default providers have assets that influence 
regional wholesale prices. The blanket exclusion as it appears in the 
bill cannot be justified.
    Lastly, the language in Title IV, Sec. 216 (a) 6 says that 
incentive rates should be used to ``promote the voluntary participation 
in and formation'' of RTOs. While EPSA does not, in general, object to 
the use of incentive rates, this particular language should be removed. 
The language runs contrary to the idea that RTO participation must be 
mandatory, and conflicts with the RTO section of the legislation.
   reliability provisions do not reflect recent industry developments
    With respect to the bill's provisions related to grid reliability, 
EPSA endorses the need for mandatory reliability standards that are 
broadly applicable to the wholesale power industry. However, the 
language in this bill could limit the industry's ability to address the 
challenges of the ongoing development and restructuring of the 
wholesale transmission system essential for reliable, efficient and 
well-functioning markets. As currently drafted, the bill shifts 
significant aspects of standards development and enforcement away from 
FERC to a new electric reliability organization. The text also does 
little to reflect the role that will need to be played by RTOs in 
future market management.
    Given FERC's substantial responsibility to ensure the reliable and 
efficient operation of the transmission grid and the imperative to 
develop effective RTOs, this makes little sense. However, developed 
energy standards will have an inevitable impact on bulk power 
transmission systems and market operation essential for reliability. 
Accordingly, the standard setting process outlined in the bill raises 
serious concerns that failing to centralize this activity with FERC 
could lead to confusion and conflicts among multiple entities.
    Further, the bill fails to account for recent industry efforts to 
rethink the nature, scope and organizational structure for a new 
standards setting process that recognizes the need to integrate 
reliability and market practices. On December 7th, over 125 
representatives from all areas of the industry met at a DOE-sponsored 
conference co-facilitated by EPSA, EEI, ELCON and NEM. The forum 
provided an opportunity for all interested parties to begin a broader 
collaborative effort to consider whether and how to combine NERC's 
reform proposals with the new North American Energy Standards Board 
(NAESB) that the Gas Industry Standards Board (GISB) approved on 
December 5th. As currently written, Chairman Barton's legislation could 
preempt this important process.
    Many participants in the DOE conference acknowledged the potential 
benefits of merging NERC into NAESB. In a reprisal of the leadership 
role she assumed as FERC Chair, Betsy Moler challenged all the parties 
to work on a compromise model for a new standard setting organization. 
The implications of these developments are clear: legislation should 
not deny FERC or industry stakeholders the opportunity to develop new 
approaches to energy standards development. The DOE intends to host 
another conference on January 28th to discuss the progress on resolving 
these issues. Ideally, this process will produce a new legislative 
proposal that can be incorporated in this legislation when it is 
considered by the full Energy and Commerce Committee next spring.
              purpa ownership restrictions are out-of-date
    Permit me to make one last point on the legislation: the bill 
addresses PURPA without repealing the current PURPA ownership 
restrictions. These restrictions were initially included to encourage 
non-utility ownership of new power facilities and are now out-of-date. 
These restrictions are not applicable to other competitive generation, 
such as exempt wholesale generators, and add unnecessary complexity and 
inefficiency to the generation industry. While this reform has not yet 
been included in the Subcommittee bill, this proposal was included in 
the Senate Democratic energy proposal unveiled recently and in 
Administration position papers. We urge you to adopt this proposal.
                   a comment on the enron bankruptcy
    While my testimony today is focused on legislation, it is 
reasonable to expect the members of the Subcommittee are likely to 
raise questions related to the recent tragic bankruptcy of an EPSA 
member company, Enron. Let me make a few comments on the matter.
    In the days since the company sought protection under bankruptcy 
laws, there have probably been hundreds of Enron obituaries published 
in news and trade papers. Some have been straightforward and thought-
provoking examinations of how a company could move so quickly from 
being an industry innovator to insolvency. Others raised complex and 
appropriate questions about the diligence of investment analysts or the 
role of public accounting firms.
    However, some of these post-mortem pieces have illuminated little 
more than the well-established fact that, like every entity that forges 
a new path to overwhelming success, Enron made some enemies along the 
way. While it's true and ironic that the competitive markets Enron 
helped to foster ultimately sealed its fate, they also worked as 
intended to help shield energy customers from any catastrophic 
consequences.
    Opponents of the competition that Enron helped bring to the 
nation's energy markets have seized upon the occasion of the company's 
fall to proclaim that electricity restructuring should be halted or 
even reversed. In fact, however, the last few months have demonstrated 
exactly the opposite.
    Perhaps the most persuasive proof of competition's power was seen 
in what happened in energy markets immediately following the largest 
bankruptcy filing in U.S. history--practically nothing. There's no talk 
of a bailout, either at the state or federal level. Trading went on 
with the many strong competitors who immediately stepped into the void 
and kept prices and supplies on an even keel.
    Although the move toward open markets is still young, competitive 
energy markets already have matured to the point where they can 
withstand the departure of a once-dominant player.
    Many have used Enron's collapse to predict an end to competitive 
wholesale power markets. Missing from this chorus of doomsayers, 
however, are those who watch energy markets most closely. On Wall 
Street and at the Federal Energy Regulatory Commission, experts 
understand that Enron's decline, rather than a caution against 
competitive markets, actually highlights the need to hasten their 
arrival throughout the nation. These observers remain committed to 
opening energy markets because they have seen the power of competition 
put downward pressure on prices, open new reservoirs of supply and 
encourage efficiency and technology advances at every turn.
    In closing, thank you for allowing me to testify here today. We 
look forward to continuing to work with you to advance the development 
of a robust, competitive electricity market.

    Mr. Largent. Thank you, Ms. Church.
    Mr. Rouse.

                   STATEMENT OF JAMES B. ROUSE

    Mr. Rouse. Chairman Barton, Congressman Largent, and 
members of the subcommittee, I am James Rouse from Praxair, 
Inc., an industrial gases company in Danbury, Connecticut. I am 
here as Chairman of and represent the Electricity Consumers 
Resource Council, or ELCON, the national trade association of 
large industrial customers.
    ELCON recognizes a functioning and competitive wholesale 
market is necessary to support retail competition, which is 
slowly being implemented in States throughout the Nation. We 
continue to believe that retail competition can benefit all 
consumers if markets are truly open and consumers are free to 
choose among suppliers who are actually competing.
    Unfortunately, too many States, California being prime 
among them, purport to establish free and open retail markets, 
but in reality they simply have created the appearance of 
competition, while operating in more or less the traditional 
regulatory mode.
    The legislation before us today, H.R. 3406, addresses 
wholesale markets. On behalf of ELCON and its member companies, 
I compliment Chairman Barton for introducing the bill.
    However, while I believe that the legislation represents 
progress, it has certain shortcomings that would deny wholesale 
electricity markets from realizing their full competitive 
potential. Let me take some examples.
    The link issue of regional transmission organizations, 
transmission citing, and the repeal of PUHCA, all of which 
affect market power. Customer choice in retail access are 
wonderful goals, but they are worthless if the transmission 
system does not allow for the free and non-discriminatory 
movement of electricity from sellers to buyers.
    That's why RTOs are important. FERC's actions to date 
recognize that the scope and configuration of RTOs are 
essential to their operation. RTOs must be large enough to 
mitigate market power.
    The governance must be truly independent, and not subject 
to undue influence from vested interests. As I have explained 
at greater length in my written material, I believe that the 
language in H.R. 3406 is harmful in that it constrains FERCs 
ability to objectively analyze a regional market, and ensure 
that each proposed regional transmission organization will in 
fact facilitate the most effective movement of power.
    It would encourage smaller--the bill would--smaller rather 
than larger RTOs, and that is not conducive, in my opinion, to 
increased competition. Similarly the language in H.R. 3406 
could restrict FERC as it continues in its efforts to provide 
guidance on market design and operation.
    This is an issue of vital interest to large industrial 
users. FERC, under the able chairmanship of Pat Wood, needs the 
opportunity to be flexible and creative. H.R. 3406 would 
constrain and inhibit FERC in its current market design docket.
    Turning to incentive rates, which Section 401. Let me 
reiterate what others have said. ELCON has previously stated 
before this committee that there is no demonstrated reason--
other than perhaps greed of monopoly transmission owners----
    to provide incentive rate making for construction of new 
transmission.
    This subcommittee in an earlier proceeding heard from 
somebody from Goldman Sachs, I believe, an analyst who said 
that investment in transmission is low risk and that 
traditional rates of return are sufficient to induce 
investment.
    The recently released winter assessment by the North 
American Electrical Liability Council stated that transmission 
capacity for this coming winter is adequate. If FERC believes 
that incentive rates are necessary, which is a decision that 
can and should be made on a case-by-case basis, they have 
sufficient authority under the present law.
    But I have seen no study or documentation to support this 
far reaching proposal to implement across the board incentives. 
Such a provision will produce higher electricity prices for all 
consumers as previous witnesses have stated, and it may not 
relieve the transmission congestion where it is truly needed.
    ELCON members believe that legislation should address 
demand-side issues, as well as supply site issues. We view the 
inclusion of a price responsive demand program in Section 103 
as generally positive.
    But we question the need to set an arbitrary 5 percent 
target, which we fear would create yet another Federal program 
rather than developing a robust customer remote response or CRR 
market.
    There is no magic or correct number for customer load 
response. Individual consumers should be able to compare the 
value of continuing to consume electricity to manufacture their 
products, with a value being paid to reduce the consumption of 
electricity.
    We hope that this section will not result in a traditional 
Demand-Side Management, responses which have historically 
resulted only in added costs for consumers, with relatively 
little reduction in overall demand and virtually no reduction 
in the system peaks, which is really the most critical area.
    We believe that consumers, large and small, if given 
sufficient information, and appropriate market based 
incentives, will adjust their electricity consumption 
accordingly.
    No target or any other artificial threshold is necessary or 
desirable. A final note on reliability. ELCON has worked on 
this issue for nearly 5 years. We at ELCON have a simple 
objective; one organization charged with setting standards for 
both reliability and commercial practices, and retail and 
wholesale standards, which we believe those two cannot be 
separated.
    That organization should be overseen by the FERC, and the 
organization's standard setting practices should be truly fair, 
open, balanced, and inclusive. The new language proposed in 
H.R. 3406 may be too prescriptive to achieve that goal.
    In conclusion, Mr. Chairman, may I compliment you and your 
staff for a valuable document. I appreciate the time that you 
and your staff have spent with industrial users, and in 
particular, ELCON.
    And although we do not believe that this bill in its 
present form contains all the answers, it does offer a sound 
structure from which to proceed when the subcommittee begins 
mark-up.
    As always, Mr. Chairman, we thank you for your continuing 
interest in making electricity markets more competitive.
    [The prepared statement of James B. Rouse follows:]
 Prepared Statement of James Rouse, Chairman The Electricity Consumers 
                            Resource Council
    Mr. Chairman, members of the Subcommittee, I am James Rouse from 
Praxair, Inc., an industrial gases company headquartered in Danbury, 
Connecticut. I am Chairman of, and today represent, the Electricity 
Consumers Resource Council, or ELCON, the national association of large 
industrial users of electricity. ELCON members represent nearly every 
segment of the manufacturing community and have operations in every 
state.
    ELCON was established in 1976, and ELCON member companies pride 
themselves on being among the original proponents of open and 
competitive retail and wholesale electricity markets. We compete in 
open markets to sell our products. Since we purchase nearly every other 
raw material or component needed to manufacture our products in 
competitive markets. Why shouldn't we be able to purchase electricity 
in competitive markets as well?
    We recognize that a functioning and competitive wholesale market is 
necessary to support retail competition which is slowly being 
implemented in states throughout the Nation. We continue to believe 
that retail competition can benefit all consumers if markets are truly 
open and consumers are free to choose among suppliers who are actually 
competing. Unfortunately too many states (California being prime among 
them) purport to establish free and open retail markets but in reality 
have simply created the appearance of competition, while operating in 
the traditional regulatory mode.
    The legislation before us today, HR 3406, addresses wholesale 
markets. On behalf of ELCON and its member companies, I compliment 
Chairman Barton for introducing this bill. While I believe that the 
legislation represents progress, it has certain shortcomings that would 
deny wholesale electricity markets from realizing their full 
competitive potential.
    Take, for example, the linked issues of regional transmission 
organizations (RTOs), transmission siting, and the repeal of the Public 
Utility Holding Company Act (PUHCA), all of which affect market power. 
Customer choice and retail access are wonderful goals, but they are 
worthless if the transmission system (which will remain monopolistic 
for many years) does not allow for the free and non-discriminatory 
movement of electricity from seller to buyer. Given that owners of 
monopoly transmission facilities will still possess and exercise market 
power--that is monopoly power--I cannot emphasize too strongly that 
some regulation is needed to ensure that the owners of transmission 
systems do not use their government-granted monopoly power to the 
detriment of real competition and consumers.
    That is why RTOs are so important. FERC's actions to date recognize 
that the scope and configuration of RTOs are essential to their 
operation. RTOs must be large enough to mitigate market power. Their 
governance must be truly independent and not subject to undue influence 
from vested interests. I believe that the language in HR 3406 is 
harmful in that it constrains FERC's ability to objectively analyze a 
regional market and ensure that each proposed regional transmission 
organization will, in fact, facilitate the most efficient movement of 
power and increase competition in wholesale markets.
    The two tests proposed in this bill as a means of demonstrating 
adequate scope and configuration of an RTO are both flawed. Asking an 
RTO to conduct a cost-benefit study is an invitation to litigation--
litigation that will be based only on dueling--and probably 
inconclusive--cost-benefit analyses. This will not resolve the issue 
quickly, nor will it necessarily resolve the issue properly. The 
``generation sufficiency'' test is based on a faulty premise; it would 
encourage smaller rather than larger RTOs and, furthermore, it is 
simply not workable for several reasons. Sufficient generation within 
an RTO is an irrelevant factor. In an optimally constructed wholesale 
market, we would have large seamless RTOs where power can flow not only 
within but between RTOs so that the most efficiently produced 
electricity can reach the greatest number of consumers. A generation 
sufficiency test invites monopoly transmission owners to exclude from 
an RTO new, more efficient generation facilities once the generation 
sufficiency test is met. It also fails to consider both load increases 
and generation changes that could transform generation sufficiency to 
generation insufficiency. I could go on, but we see no reason to 
hamstring or otherwise restrict FERC as it looks at proposed RTOs under 
the guidelines it promulgated in Order 2000.
    Similarly, the language in HR 3406 could restrict FERC as it 
continues its efforts to provide guidance on market design and 
operation. This is an issue of vital interest to large industrial 
users. In fact, six ELCON members, including my own company, recently 
submitted affidavits to FERC as part of an ELCON filing in FERC's 
docket on market design, pointing out that the model now utilized by 
the PJM-ISO, while favorable in many ways, should not necessarily be 
used as the sole template for ``best practices'' throughout the 
Northeast and the Nation. At a minimum, the existing flaws in PJM 
should be fixed before its platform is extended to the entire Northeast 
region. FERC, under the able Chairmanship of Pat Wood, needs the 
opportunity to be flexible and creative. HR 3406 would constrain and 
inhibit FERC in its current market design docket.
    Turning to incentive rates (Section 401), let me reiterate what 
ELCON has previously stated before this Subcommittee. There is no 
demonstrated reason--other than the greed of monopoly transmission 
owners--to provide incentive rate-making for the construction of new 
transmission. The Subcommittee, in an earlier proceeding, heard from a 
Goldman Sachs analyst that investment in transmission is low risk and 
that traditional rates of return are sufficient. The recently released 
Winter Assessment by the North American Electric Reliability Council 
(NERC) stated that transmission capacity for this coming winter is 
adequate. There may be specific areas where new transmission is 
necessary to alleviate congestion. Path 15 is an obvious example. But 
simply giving the monopoly transmission owners a higher return on 
transmission will not motivate them enough to relieve congestion that 
is now protecting their high-cost generation. If FERC believes 
incentive rates are necessary--a decision that can and should be made 
on a case-by-case basis--they have sufficient authority under present 
law. But I have seen no study or documentation to support this far-
reaching proposal to implement across-the-board ``incentives.'' Such a 
provision will produce higher electricity prices for all consumers and 
may not relieve transmission congestion where it is truly needed.
    Rather than simply requiring incentive rates, first remove 
governmental impediments. One way to remove impediments is to offer a 
federal right of eminent domain for the siting of transmission lines. 
There is no reason that the siting of new transmission lines should be 
treated differently from the siting of new natural gas pipelines. The 
language in HR 3406, by a providing federal backstop, is a good, though 
incomplete, first step.
    Turning to PUHCA repeal, this statute is the only federal consumer 
protection statute for electricity consumers. No bona fide consumer 
group supports the repeal of PUHCA without adequate replacement 
provisions. We believe that there should be clear authority vested in 
the FERC to prohibit any potential anti-competitive practices involving 
regulated utilities and unregulated affiliates. Rules are needed to 
address the operational unbundling of generation, transmission, system 
control, marketing and local distribution functions. State and Federal 
regulators must have complete access to all books and records of all 
regulated entities and entities owned or controlled by regulated 
entities. In addition, PUHCA repeal should not be effective until 
states have retail access or until competition on a nation-wide basis 
is otherwise achieved. ELCON and ELCON members find the language in HR 
3406 lacking in this regard.
    ELCON witnesses and others have long defended before this 
Subcommittee the Public Utility Regulatory Policies Act (PURPA), 
including the need for back-up power in non-competitive states (which 
we are pleased is included in this bill. I will make the case--very 
briefly--from a slightly different perspective. Utilities claim PURPA 
has resulted in higher rates for consumers. By definition, this cannot 
happen as long as PURPA is implemented correctly. In fact industrial 
users value PURPA as having brought competition to the electricity 
marketplace. Any higher prices, if there were any, were the result of 
state-approved actions and of poor decision-making by utilities. To 
repeat a point ELCON witnesses have made previously: PURPA did not 
create above market contracts for utilities. In fact utilities have 
more above-market contracts with other utilities than they do with 
PURPA qualifying facilities. It is worth noting that only utilities, 
not consumers, are seeking the repeal of PURPA's purchase and sale 
provisions.
    ELCON members believe that legislation should address demand side 
issues as well as supply side issues. We view the inclusion of a 
``Price-Responsive Demand Program'' in Section 103 as generally 
positive. But we question the need to set a ``5 percent'' target, which 
we fear would create yet another federal program rather than developing 
a robust customer load response (CLR) market. There is no magic or 
``correct'' number for CLR. Individual consumers should be able to 
compare the value of continuing to consume electricity to manufacture 
their products with the value of being paid to reduce their consumption 
of electricity. We hope that this Section will not result in 
traditional Demand Side Management responses, which have historically 
resulted only in added costs for consumers and relatively little 
reduction in overall demand and virtually no reduction in system peaks. 
We believe that consumers--large and small--if given sufficient 
information and appropriate market-based incentives will adjust their 
electricity consumption accordingly. No target or any other artificial 
threshold is necessary or desirable.
    A final note on reliability. For nearly five years ELCON has worked 
with NERC to craft language creating a new reliability organization 
that recognizes both changes in the transmission system and changes in 
the electricity stakeholder community. We lately have worked with the 
Gas Industry Standards Board (soon to be renamed the North American 
Energy Standards Board) as they too attempt to provide structure and 
guidance to our interstate electricity grid. We at ELCON have a simple 
objective: one organization charged with setting standards for both 
reliability and commercial practices and retail and wholesale standards 
(because we believe that they cannot be separated). That organization 
should be overseen by FERC. The organization's standard-setting 
practices should be truly fair, open, balanced and inclusive. The new 
language proposed in HR 3406 may be too prescriptive to achieve that 
goal.
    In conclusion, Mr. Chairman may I compliment you and your staff for 
a valuable document. I appreciate the time that you and your staff have 
spent with industrial users. Although we do not believe that this bill, 
in its present form, contains all of the answers, it offers a sound 
structure from which to proceed when the Subcommittee begins markup. 
May I observe that the State of Texas has conferred on our Nation its 
President, the chairman of the FERC, and the chairman of this 
Subcommittee. Seldom is a single state the source of such potential for 
the improvement of our country's electricity market. And, as always, 
Mr. Chairman, we thank you for your continuing interest in making 
electricity markets more competitive.

    Mr. Largent. Thank you, Mr. Rouse.
    Mr. Acquard.

                  STATEMENT OF CHARLES ACQUARD

    Mr. Acquard. Thank you, Mr. Chairman and members of the 
subcommittee. I am Charlie Acquard, Executive Director of the 
National Association of State Utility Consumer Advocates. I am 
here today testifying on behalf of Consumers for Fair 
Competition.
    Our ad hoc coalition believes that Congress and the Federal 
Energy Regulatory Commission 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.
    The events of the past year in California highlight the 
imperfections in the market, and the consumer consequences of 
failing to promote effective competition. CFC is pleased that 
the FERC has begun to take the steps to address these problems.
    Any electricity legislation approved by Congress should 
affirm and strengthen the general direction taken by FERC. 
Anything else will undermine the creation of effectively 
competitive wholesale markets and harm the interests of 
consumers.
    Regrettably, H.R. 3406 fails to do this. Rather, it 
retreats from current law and reasons for policy initiatives, 
and actually reduces consumer protections. Specifically, CFC 
believes that the following changes to this proposal are 
necessary to promote effective wholesale competition.
    First, H.R. 3406 will repeal the Public Utility Holding 
Company Act. We continue to oppose PUHCA repeal unless a 
company by provisions that satisfy the underlying purpose of 
the Act; consumer protection, mitigation and market power; 
prevention of abusive affiliate transactions; and effective 
regulatory oversight.
    H.R. 3406 does not include these basic consumer 
protections. Therefore, CFC urges the subcommittee to permit 
PUHCA repeal only if other changes outlined below are 
simultaneously adopted, or other steps are taken to ensure 
competitive wholesale markets and non-abusive utility affiliate 
transactions.
    Second, CFC again urges the subcommittee to strengthen the 
utility merger review and ``FERCs merger review authority.'' We 
believe mergers should be approved only if they promote the 
public interest, resulting in discernible consumer and 
competitive benefits.
    Rather than ensure effective scrutiny of all proposed 
utility mergers, H.R. 3406 retreats from current law. 
Therefore, CFC urges the subcommittee to delete Sections 141 
and 142 of H.R. 3406, and instead amend Section 203 of the 
Federal Power Act to, one, require utility mergers to promote 
the public interest to be approved.
    And, two, ensure that FERC has clear authority to review 
mergers between holding companies, convergence mergers between 
gas and electric utilities, and generation only asset sales.
    Third, the CFC commends you, Mr. Chairman, for addressing 
the thorny issue of RTO formation and attempting to forge a 
compromise. However, we do not believe that the language 
contained in H.R. 3406 will permit the grid management needed 
to support effective wholesale competition.
    Therefore, CFC urges this subcommittee to replace Section 
202 with language affirming the authority of the Commission to 
promote RTOs and produce clear and discernible consumer 
benefits.
    Fourth, we continue to strongly oppose mandated incentive 
or performance based rates for transmission as contained in 
Section 401. The Federal Power Act currently provides 
sufficient latitude for adopting of incentive and performance 
based transmission rates, provided that such rates be statutory 
and mandated, and a just and reasonable determination.
    Section 401 would effectively redefine the just and 
reasonable standard and require incentive rates for 
transmission service. We similarly would oppose then the 
inclusion of negotiated rates that would violate the tenants of 
the Federal Power Act.
    Therefore, CFC urges the deletion of Section 401. Fifth, 
CFC supports the increase in criminal and civil penalties for 
Federal Power Act violations that is contained in H.R. 3406.
    However, this action does not provide the guidance and 
tools needed to establish competitive markets, oversight of 
those markets, and remedies for market flaws, manipulation, and 
abuse.
    CFC cannot support electricity legislation that fails to 
include effective market power provisions. CFC urges the 
subcommittee to include provisions to, one, require the 
establishment of clear rules defining the conditions necessary 
for competitive markets and market-based rate authority.
    Two, establish information disclosure requirements and a 
market monitoring responsibility. Three, direct FERC to take 
any action necessary to penalize violations of market rules, 
correct market flaws, and imperfections, and remedy and 
mitigate market manipulations and market power abuses.
    And, four, remove the time restrictions on rate refunds 
contained in existing law. Finally, any treatment of market 
power must also address the potential for abuse in the area of 
affiliate transactions. Such abuses bring with them intended 
harm to rate payers and competition alike.
    Neither FERC nor the individual State Commissions currently 
possess the jurisdiction authority to oversee the relationship 
between utilities and their affiliates that engage in 
unregulated, multi-State, non-poor, business operations.
    With proper oversight these affiliate transactions can lead 
to unfair competition, and higher rates from captive customers. 
Therefore, CFC urges inclusion of effective mechanisms to 
prevent abuse of any competitive affiliate transactions.
    We propose extending Federal Trade Commission Authority and 
unfair competition, and trade practices, in the energy services 
market. In conclusion, competitive wholesale electric markets 
can produce consumer benefits.
    However, those benefits will not materialize or be 
consistently available if the market is not structured to 
ensure its competitive functioning. FERC has taken steps since 
the extension of Chairman Wood to take the necessary steps.
    However, the direction of the Commission can radically 
shift through changed membership, judicial challenge, and 
political pressure. We believe that the market and consumers 
will benefit from statutory support for the general policy 
direction of the current Commission, providing clear statutory 
guidelines and tools consistent with the policies outlined in 
our testimony, will foster a robust and competitive market, and 
provide certainly to market participants, avoid unnecessary 
delay, and ensure that consumers benefit.
    Thank you, Mr. Chairman, for this opportunity, and I would 
be happy to answer any questions that the subcommittee might 
have.
    [The prepared statement of Charles Acquard follows:]
 Prepared Statement of Charlie Acquard on Behalf of Consumers for Fair 
                              Competition
    Mr. Chairman, members of the Subcommittee, I am Charlie Acquard, 
Executive Director of the National Association of State Utility 
Consumer Advocates. 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.
    The events of the past year in California highlight the 
imperfections in the market and the consumer consequences of failing to 
promote effective competition. CFC is pleased that the Federal Energy 
Regulatory Commission (FERC) has begun to take steps to address these 
problems, including actions to advance RTOs, refine the screen for 
market-based rates and lay out conditions for approval of performance-
based transmission rates. Any electricity legislation approved by 
Congress should affirm and strengthen the general direction taken on 
these issues by FERC. Anything else will undermine the creation of 
effectively competitive wholesale markets and harm the interests of 
consumers.
    Specifically, CFC's urges the subcommittee to include the following 
provisions in electricity legislation:

 The development and application of effective market rules, 
        oversight and enforcement for wholesale electric markets that 
        parallels those that exist for the securities industry;
 A stronger standard for approval of proposed utility mergers--
        and application of that standard to all mergers, combinations 
        and asset sales;
 Formation of large, independent regional transmission 
        organizations that possess strong maintenance, planning and 
        expansion responsibility;
 Limitations on utility diversification and inter-affiliate 
        transactions to protect consumers, promote fair competition, 
        and prevent complicated transactions that pose risks to 
        investors; and
 Provides necessary consumer protections as part of any PUHCA 
        repeal effort.
    Regrettably, as outlined below, H.R. 3406 fails to advance these 
necessary policies, retreats from current law and recent FERC policy 
initiatives, and reduces consumer protections. CFC offers you the 
following detailed comments and looks forward to working with the 
subcommittee in making those changes necessary to ensure effective 
wholesale competition.
PUHCA Repeal
    Title I--Subtitle B of H.R. 3406 would repeal the Public Utility 
Holding Company Act of 1935 (PUHCA). As CFC has previously testified 
before this subcommittee, we oppose PUHCA repeal unless accompanied by 
provisions that satisfy the underlying purposes of the Act--consumer 
protection, mitigation of market power, prevention of abusive affiliate 
transactions and effective regulatory oversight. H.R. 3406 does not 
include these basic consumer protections.
    CFC urges the Subcommittee to permit PUHCA repeal only if the other 
changes outlined below are simultaneously adopted, or other steps are 
taken to ensure competitive wholesale markets and non-abusive utility 
affiliate transactions.
Merger Review
    As detailed in prior testimony, CFC urges the Subcommittee to 
strengthen utility merger review and close gaps in FERC's merger review 
authority. We believe mergers should be approved only if they promote 
the public interest--resulting in discernable consumer and competitive 
benefits. The rapid rate of industry consolidation threatens to reduce 
competition, frustrate market entry and create new opportunities for 
market power abuse by far-flung economic empires. In addition, CFC 
agrees with FERC Chairman Pat Wood and the Administration that FERC 
merger review should extend to holding company mergers and generation-
only asset sales. We also believe that the proposed Dynegy acquisition 
of Enron underscores the need for FERC review of ``convergence'' 
mergers between electric and gas utilities.
    Rather than ensure effective scrutiny of all proposed utility 
mergers, H.R. 3406 retreats from current law. Title I--Subtitle D would 
eliminate important merger review and conditioning authority by the 
FERC and Nuclear Regulatory Commission (NRC). Repealing Section 203 of 
the Federal Power Act--combined with repeal of the Security and 
Exchange Commission's merger review under PUHCA--drastically reduces 
effective merger review and eliminates the ability of FERC to condition 
proposed mergers on those actions necessary to protect the public 
interest and facilitate effective competition. The Justice Department 
and Federal Trade Commission lack the resources and expertise to 
effectively review proposed mergers and the on-going regulatory 
responsibility to enforce merger conditions.
    CFC also opposes Section 142 that would eliminate prospective NRC 
anti-trust review and allow for the waiver of existing anti-trust 
license conditions. Contrary to the section's title, this review is not 
``duplicative'', since it is not performed by any other anti-trust 
agency at the time of license issuance or renewal. NRC anti-trust 
review has been an effective tool in securing transmission access over 
the years--and the transmission agreements resulting from these reviews 
form much of the basis for the competition that exists in the wholesale 
electric market today. Rather than upholding these existing 
transmission rights, Sec. 142 of H.R. 3406 would allow these 
transmission rights to be waived, thereby undermining efforts to 
promote fair and equal transmission access.
    CFC urges the Subcommittee to delete Sec. 141 and 142 and, instead, 
amend Sec. 203 of the Federal Power Act to (1) require utility mergers 
to promote the public interest to be approved, and (2) ensure that FERC 
has clear authority to review mergers between holding companies, 
convergence mergers between gas and electric utilities, and generation-
only asset sales.
RTO Formation
    CFC commends you, Mr. Chairman, for addressing the thorny issue of 
RTO formation and attempting to forge a ``compromise.'' However, we do 
not believe that the language contained in H.R. 3406 will promote the 
grid management needed to support effective wholesale competition. We 
believe that Section 202, while attempting to require full RTO 
participation, suffers from the following shortcomings:

 An unusual judicial review system is established, with the 
        FERC RTO directive stayed while the proposal undergoes 
        seemingly endless rounds of review and appeal.
 The provision is extremely prescriptive and limiting. The 
        California experience has showed us that the competitive 
        wholesale market is still in its infancy. Unfortunately, 
        Section 202 limits the ability of FERC to respond to the 
        markets growing pains by preventing the Commission from 
        modifying the scope, configuration, governance structure or 
        other key elements of existing RTOs. In addition, it cannot use 
        its other authorities under the Federal Power Act to require 
        RTO participation or RTO modification. This legal 
        straightjacket will impede the natural evolution of RTOs and 
        the market.
 The ``scope and configuration'' standard appears to provide 
        for self-certification by the applicant that the RTO is ``good 
        enough''--even if it would otherwise fail FERC's standard.
 A ``market monitoring'' standard that lacks effective 
        enforcement authority. While the independent market monitoring 
        unit would gather information and monitor tariff compliance, 
        any noncompliance or structural flaws uncovered by these units 
        are left to the market participants to address.
    CFC urges the Subcommittee to replace Sec. 202 with language 
affirming the authority of the Commission to promote RTOs that produce 
clear and discernable consumer benefits.
Incentive Rates for Transmission
    As CFC testified at the Subcommittee's October 10 hearing, we 
oppose mandated incentive or performance-based rates for transmission 
as contained in Sec. 401 of H.R. 3406. The Federal Power Act currently 
provides sufficient latitude for adoption of incentive and performance 
based transmission rates--provided that such rates meet the statutorily 
mandated ``just and reasonable'' determination. Section 401 would 
effectively redefine the ``just and reasonable'' standard and require 
incentive rates for transmission service. We similarly would oppose the 
inclusion of ``negotiated rates'' that would violate the tenets of the 
Federal Power Act.
    In an October 25 order, FERC highlighted the problems inherent in a 
blanket incentive rate directive. In that case, the applicant sought 
performance-based rates for renovation of a high-voltage line. In 
rejecting the application, FERC determined that the proposal did not 
balance risks and rewards, lacked an effective baseline against which 
to measure performance, and created a perverse incentive to allow the 
degradation of transmission facilities in order to then reap the later 
incentive for renovation work.
    CFC urges the deletion of Section 401. If the issue of incentive or 
performance-based rates must be addressed, then CFC would urge the 
adoption of either (1) a directed rulemaking for FERC to determine what 
actions are needed, consistent with Sec. 205 and 206 of the Federal 
Power Act, to promote the efficient expansion and improvement of 
interstate transmission networks, or (2) a performance-based rate 
standard that mirrors the recent FERC case and determine when such 
rates would produce demonstrable beneficial behavior, investment or 
actions that are unlikely to occur absent such rates.
FERC Authority on Anti-Competitive Conduct
    CFC supports the increase in criminal and civil penalties for 
Federal Power Act violations that is contained in Title VII of H.R. 
3406. However, this action does not provide the guidance and tools 
needed to establish competitive markets, oversight of those markets, 
and remedies for market flaws, manipulation and abuse. CFC cannot 
support electricity legislation that fails to include effective market 
power provisions.
    CFC urges the Subcommittee to include provisions to:

 Require the establishment of clear rules defining the 
        conditions necessary for competitive markets and market-based 
        rate authority;
 Establish information disclosure requirements and a market 
        monitoring responsibility;
 Direct FERC to take any action necessary to penalize 
        violations of market rules, correct market flaws and 
        imperfections and remedy and mitigate market manipulations and 
        market power abuses; and
 Remove the time restrictions on rate refunds contained in 
        existing law.
Affiliate Transactions
    Any treatment of market power must also address the potential for 
abuse in the area of affiliate transactions. The repeal of PUHCA, the 
growth of unregulated business ventures owned and controlled by 
utilities and their parent companies, and the increasingly interstate 
nature of affiliate operations have all fostered additional 
opportunities for anti-competitive self-dealing, cross-subsidization 
and cost-shifting. Such abuses bring with them attendant harm to 
ratepayers and competition alike. Neither FERC nor the individual state 
commissions currently possess the jurisdiction and authority to oversee 
the relationship between utilities and their affiliates that engage in 
unregulated, multistate, non-core business operations. Without proper 
oversight, these affiliate transactions can lead to unfair competition 
and higher rates for captive consumers.
    CFC urges inclusion of effective mechanisms to prevent abusive and 
anti-competitive affiliate transactions. We propose extending Federal 
Trade Commission authority to prevent unfair competition and trade 
practices in energy services markets.
Conclusion
    Competitive wholesale electric consumers can produce consumer 
benefits. However, those benefits will not materialize, or be 
consistently available, if the market is not structured to ensure its 
competitive functioning. FERC has taken steps, since the ascension of 
Chairman Wood, to take the necessary steps. However, the direction of 
the Commission can radically shift--through changed membership, 
judicial challenge and political pressure. We believe that the market--
and consumers--will benefit from statutory support for the general 
policy direction of the current Commission. Providing clear statutory 
guidance and tools, consistent with the policies outlined in our 
testimony, will foster a robust, competitive market, provide certainty 
to market participants, avoid unnecessarily delay, and ensure that 
consumers benefit.
    Consumers for Fair Competition looks forward to working with you to 
make the changes necessary to accomplish these objectives.

    Mr. Largent. Thank you, Mr. Acquard.

                 STATEMENT OF WILLIAM R. PRINDLE

    Mr. Prindle. Thank you, Mr. Largent, Mr. Chairman, and 
members of the committee, my name is Bill Prindle, and I am the 
Director of Buildings and Utilities Programs for The Alliance 
to Save Energy.
    The Alliance is a bipartisan, non-profit, coalition of 
business, government, environmental, and consumer leaders, 
dedicated to improving the efficiency with which our economy 
uses energy.
    I would like to talk to you today about energy efficiency, 
and demand resources, and demand response, and that is part of 
the wider world of what we called distributed resources, which 
includes renewables and distributed generation in their many 
forms.
    Now, we have known for a long time that efficiency in the 
other distributed resources can often be the fastest, cleanest, 
cheapest way to meet a large part of our energy needs.
    And I would also just like to point out that since 
September 11th that we have been forced to also consider the 
fact that we need to really need to focus more intently on the 
security of our energy systems.
    So in that light I would add a fourth superlative and say 
that efficiency in distributed resources are also the safest 
way to secure our energy systems.
    Overall, I would like to say that H.R. 3406, while it 
commendably touches on demand response in Section 103, overall 
we feel that it misses a golden opportunity, an opportunity to 
use distributed resources and energy efficiency to make 
electric markets safer, more efficient, to reduce customer 
bills, to reduce the risk of blackouts, and to improve air 
quality.
    I would like to highlight some of the issues and tell you 
four things that we would like to see in the bill. First, let's 
take a look at the real world and what is going on out there. 
Now, we see a few good things happening out in the marketplace, 
but we don't see that matched in the way that Federal policy is 
going.
    Now, we have seen that deficiency in distributed resources 
can help reduce the risk of blackouts, and can help drive down 
marginal prices in wholesale markets, especially at those key 
peak times, and can improve air quality.
    In the State of New York, Governor Patacki has instituted 
programs that among other things replaced 40,000 air-
conditioners last summer, which took several megawatts off the 
peak.
    They also worked with the ISO to encourage pilot programs 
and demand response, taking several hundred megawatts again off 
the peak there. The State of Texas has been an innovator in 
using energy efficiency for air quality compliance.
    There is a new State energy code in Texas that is there 
largely because there is a need to reduce NOX emissions; and 
even in the State of California, regardless of who you would 
choose to blame with all the problems that have occurred in 
California, we now have some data on how California is working 
its way out.
    In the last year, we know for instance that while about 
2,400 megawatts of new supply have come on-line, we have also 
seen documentation from the energy commission that 6,600 
megawatts of demand-side resources have come into play in 
California.
    So that is a more than 2-to-1 margin and clearly 
distributed resources are delivering big time when it counts. 
So, now let's turn to the Federal policy world. Earlier this 
year the FTC issued a report on electricity competition, and 
they had a chapter on demand-side resources, and the sub-title 
of the chapter was, ``The Sound of One Hand Clapping.''
    And I think that phrase kind of sums up the situation that 
we have in our electricity markets, where it is all sellers and 
no buyers. I mean, clearly, we wouldn't want to run a 
stockmarket that only put options and no call options.
    E-Bay could not survive if only sellers and no buyers were 
allowed to log on to the system. This is the kind of 
fundamental problem that we are facing in our electricity 
markets today.
    There are built-in market barriers that discourage 
generators and distribution companies from doing anything to 
reduce sales. In fact, their profits only go up as sales go up.
    So the question arises, well, what is the Federal role in 
this, and why can't the States just take care of this on their 
own as some of them have been attempting to do. I think the 
bottom line is that we are trying to move toward regional and 
national markets for electricity.
    And in order to do that, we have to have some consistency 
in market rules, and we have to have a level playing field as 
far as how distributed resources are treated in these 
increasingly regional markets.
    And I would just ask that people in Oregon who have seen 
their prices go up on an average of 30 percent in the last year 
because of what happened in California, whether they think that 
energy efficiency and electricity matters are a State issue 
only.
    So, let me just give you four things that we would like the 
committee to look at in the course of marking up this 
legislation. The first is what we call a public benefits fund.
    A lot of States have tried this, and more than 20 States 
are now using this kind of a tool. Essentially, it establishes 
a very small charge on electricity sales of typically one mil.
    And what this would do is essentially replace the billion 
or more dollars that has been lost in the last 5 or 6 years as 
States and utilities have cut back their efficiency programs 
looking toward competition.
    Nobody knew what was going to happen, and a lot of States 
and a lot of companies drop their programs, and this would help 
to replace that resource commitment. The second issue that we 
want the committee to look at is an energy efficiency 
performance standard, and this was really pioneered in the 
State of Texas.
    Governor Bush signed a restructuring bill that essentially 
required utilities to offset 10 percent of their projected load 
growth with energy efficiency. I met with people from AEP and 
Reliant, and TXU last week, and they are all cranked up and 
they are going to spent $75 million next year on programs to 
implement that.
    This approach would simply apply this in a modest way 
across the Nation, and would establish a 1-percent target, or 
electricity retailers to reduce sales, a lot of flexibility and 
the means to do that. And even the ability to trade among 
companies if one company is not able to meet its target in a 
particular year.
    Most pertinent to Section 103, we have several 
recommendations for how to make demand response truly 
functional in the wholesale market, and I won't go into all 
those details.
    But our written statement contains three categories of 
items that we think are important to include in making demand 
response markets work properly, and truly enabling customers to 
participate fully.
    And finally, Mr. Chairman, and members of the committee, I 
would like to emphasize the importance of metering in all of 
this. The meter is either the gateway or the barrier for 
customers to participate effectively in these markets.
    And we have a fundamental problem here in that smart 
metering is not in place for most customers. It is for some 
larger customers, but most customers are not able to use this 
technology.
    So we need two things. We need uniform protocol for how 
metering is designed and installed so that there can be a 
national market; and second of all, we need a customer right-
to-choose that allows a customer to get a smart meter installed 
if they want one.
    And no distribution company rule or other red tape should 
prevent a customer from getting that kind of choice, just as 
customers should have the right to choose their power supplier.
    With that, I will stop. Thank you for the opportunity to 
speak, and I will be happy to answer any questions at this 
time.
    [The prepared statement of William R. Prindle follows:]
   Prepared Statement of William R. Prindle, Director, Buildings and 
            Utilities Programs, The Alliance to Save Energy
    Mr. Chairman and members of the Committee, thank you for the 
opportunity to speak with you today on energy efficiency and demand 
response as vital components of electricity policy. Efficiency and 
demand response are the cleanest, cheapest, and fastest ways to match 
electricity demand with supply, reduce price volatility, cut electric 
bills for American families, prevent power outages, and improve air 
quality.
    My name is William R. Prindle. I am Director of Buildings and 
Utilities Programs for the Alliance to Save Energy, a bi-partisan, non-
profit coalition of business, government, environmental, and consumer 
leaders dedicated to improving the efficiency with which our economy 
uses energy. Senators Charles Percy and Hubert Humphrey founded the 
Alliance in 1977; our Chairman today is Senator Byron Dorgan, and our 
vice chairs are Senator Bingaman, Senator Jeffords and Congressman Ed 
Markey.
    Over seventy companies and organizations currently belong to the 
Alliance to Save Energy. If it pleases the Chairman I would like to 
include for the record a complete list of the Alliance's Board of 
Directors and Associate members, which includes many of the nation's 
leading energy efficiency firms, electric and gas utilities, and other 
companies providing cost savings and pollution reduction to the 
marketplace.
    The Alliance has a long history of researching and advocating 
energy efficiency policies and programs. We also have a long history of 
supporting energy efficiency promotion efforts that rely not on 
mandatory federal regulations, but on partnerships between government 
and business, and between the federal and State governments. Federal 
energy efficiency programs at the Department of Energy (DOE), the 
Environmental Protection Agency (EPA), and other agencies are largely 
voluntary programs that further the national goals of environmental 
protection, as well as broad-based economic growth, national security 
and economic competitiveness.
Electricity Restructuring So Far: The Sound of One Hand Clapping
    Mr. Chairman, as we observe the record of electricity restructuring 
in this country, we see a mixed picture. While some parts of some 
markets have been restructured with varying degrees of success, overall 
there is a striking imbalance between policies aimed at the supply side 
of the industry and those intended to employ the resources available on 
the demand side, the customer side of the meter. The Federal Trade 
Commission, in its report on restructuring earlier this year, aptly 
subtitled the chapter on demand-side resources ``The Sound of One Hand 
Clapping''', referring to the almost total lack of focus on demand-side 
resources in today's markets.
    Clearly, we need to do more to make electricity markets truly 
competitive. Electricity policy without the proper balance between 
supply and demand is like a stock market with all put options and no 
call options. Buyers and sellers need to be able to participate fully 
in a real competitive market, and right now that is not the case in our 
electricity markets. Customers are still mostly forced to take prices 
determined by sellers, and are not able to realize the full market 
value of the resource they can offer from their own operations. We need 
strong and clear policies that enable energy efficiency and demand 
response to make the contributions they are capable of making.
    Stronger policies for efficiency and other distributed resources 
are needed in our electricity policy because in competitive electricity 
markets operating in the U.S. today, there are built-in barriers to the 
development of these resources. For example: in a competitive 
generation market, generators have no financial incentive to promote 
either efficiency or load management, and their profits increase with 
increases in sales and in peak demand. Additionally, under the rate 
designs used in most states, wires companies profit from increased 
throughput, and find their profits harmed by energy efficiency 
programs. Because of these structural barriers, neither providers, nor 
load-serving entities, nor end-users see the real value that demand-
side resources can provide to the market and the grid. These market 
barriers make U.S. wholesale electric markets more expensive, more 
volatile, and less reliable than they should be.
    In addition to making markets fairer and more efficient, efficiency 
and demand response can help solve the pressing problems facing our 
electricity systems, such as:

 Increased price volatility. Electric demand has grown faster 
        than was projected in the early days of restructuring. The 
        Federal Energy Regulatory Commission's 1995 projection of 
        national electric demand through 2000 was lower than actual 
        experience by 4.6 percent 1. In the western, 
        Northeast, and Midwest markets we have seen unprecedented peak 
        price problems. This stems from several factors, but a key is 
        the needless ``peakiness'' of demand. These situations have 
        dramatically illustrated the need to manage demand along with 
        supply. Effective demand response programs can reduce prices 
        through an entire power pool, benefiting all customers.
---------------------------------------------------------------------------
    \1\ North American Commission for Environmental Cooperation, A 
Retrospective Review of FERC's Environmental Impact Statement on Open 
Transmission Access, 19 October 2001
---------------------------------------------------------------------------
 Worsened system reliability. These peak problems have led to 
        blackouts, brownouts, emergency voltage reductions, and other 
        extraordinary actions by power pool managers from California to 
        Chicago and New York. While it is important to boost the 
        reliability of the grid infrastructure, it is typically faster 
        and cheaper to reduce the overall load on the system first. For 
        this reason the National Association of Regulatory Utility 
        Commissioners has adopted a resolution urging Congress to 
        include in energy legislation ``workable mechanisms to support 
        cost-effective State, utility, and market participant energy 
        efficiency programs in order to enhance the reliability of the 
        nation's electric system.'' 2
---------------------------------------------------------------------------
    \2\ Resolution Supporting Energy Efficiency and Load Management as 
Cost-Effective Approaches to Reliability Concerns, NARUC (July 23, 
1999). See also, R.Cowart, ``Efficient Reliability: The Critical Role 
of Demand-Side Resources in Power Systems and Markets,'' published by 
NARUC in June 2001.
---------------------------------------------------------------------------
 Increased air pollution. These demand increases have increased 
        interstate air pollution, especially nitrogen oxides 
        (NOX), which contribute to smog and acid rain. The 
        1995 FERC projection of nitrogen oxide emissions turned out to 
        be 4.3 percent lower than actual emissions in 2000 
        3. Saving energy, especially at peak times, has an 
        especially strong effect on reducing such air pollution.
---------------------------------------------------------------------------
    \3\ NACEC, Op. cit.
---------------------------------------------------------------------------
Comments on H.R. 3406
    We appreciate the fact that the Chairman has included a section in 
the bill on demand response in Title 1, Subtitle A, Section 103, in 
recognition of the fact that electricity markets should be truly 
competitive by addressing demand-side resources. While we support the 
general principles expressed in Section 103, we are disappointed in the 
bill's broader failure to address energy efficiency and other 
distributed resources, such as renewable energy. We want to emphasize 
that energy efficiency and demand response, while often compatible, are 
different and require different kinds of policy support. Energy 
efficiency can provide peak demand benefits, and demand response, which 
is aimed primarily at load management, can also save energy. It thus 
essential to address both efficiency and demand response explicitly in 
H.R. 3406.
    We believe that more substantial and specific measures are needed 
to create a better balance between supply-side and demand-side 
resources. We also suggest the Committee take advantage of the 
``research'' done by the states in testing various electricity policy 
options. The states have experimented with a variety of efficiency, 
distributed-resource and renewable policy options in restructuring 
their electricity markets. These have included public benefits funds, 
efficiency performance standards, and renewable portfolio standards. We 
support all of these as part of a balanced electricity policy, and 
commend them to the Committee as worthy of its consideration.
    In the context of energy efficiency and demand response in H.R. 
3406, we respectfully ask the Committee to consider additional 
provisions for the policies described below.
    A Public Benefits Fund. We need a federal public benefits fund to 
reverse the decline in public benefits spending over the last several 
years. Over the last two decades, states were able to use Integrated 
Resource Planning to generate a network of utility demand-side 
management programs that succeeded in avoiding the need for about 100 
300-Megawatt powerplants 4. However, utility spending on 
these programs has been cut by half as the electricity industry has 
been deregulated. To offset the lost benefits in reducing peak demand, 
cutting customer bills, helping low-income people, and supporting the 
development of new technology, the Alliance supports the creation of a 
federal public benefits fund to support these state-based programs.
---------------------------------------------------------------------------
    \4\ U.S. Department of Energy. Energy Information Administration. 
U.S. Electric Utility Demand-Side Management 1999. http://
www.eia.doe.gov/cneaf/electricity/dsm99/dsm--sum99.html
---------------------------------------------------------------------------
    The energy efficiency programs run by states in the 1980s and 1990s 
have been not only successful in their primary goal of saving energy, 
they have also been good for the economy. The Rand Corporation issued a 
report in 2000 that quantified the benefits of California's utility 
energy efficiency programs, finding that between 1980 and 1995, utility 
efficiency investments generated roughly $1000 in returns for every $1 
spent. Rand also found that the overall economic benefit to the state 
from these programs was responsible for 3 percent of the California 
gross state product in 1995. A Public Benefits Fund would thus be an 
economic stimulus, helping to create jobs and new business 
opportunities in this time of economic uncertainty.
    The fund would come from a non-bypassable charge on electricity, 
which would then go to match state expenditures on energy efficiency, 
low income programs, renewable energy, and state-based research and 
development. States are spending about $1.7 billion this year on public 
benefits programs, including efficiency, renewables, low-income 
programs, R&D, and related public goods. A federal match at this level 
would raise another $1.7 billion annually. The residential share of 
this would amount to about $12 per year per family-or about a dollar a 
month. Over time, the savings generated by the fund will likely drive 
the net cost into net savings.
    The benefits would be enormous; they are projected to include: 
130,000 Megawatts of electric capacity savings by 2020 (equivalent to 
about 400 powerplants); 1.24 trillion kWh saved over 20 years, cutting 
consumer energy bills by $100 billion; and 150,000 tons of nitrogen 
oxides emissions avoided.5
---------------------------------------------------------------------------
    \5\  Alliance staff analysis based on: U.S. Department of Energy. 
Energy Information Administration. U.S. Electric Utility Demand-Side 
Management 1999. http://www.eia.doe.gov/cneaf/electricity/dsm99/dsm--
sum99.html
---------------------------------------------------------------------------
    The public benefits fund is off-budget, providing an efficient way 
to support the states in their efforts to respond to their mandates for 
reliability, clean air, and affordable energy. A dollar a month is a 
very small price to pay for keeping the lights on, the air clean, and 
energy bills down.
    An Energy Efficiency Performance Standard. The state of Texas has 
pioneered this approach in its electricity restructuring bill by 
requiring that utilities achieve a 10% reduction in their load growth 
forecasts. The energy efficiency performance standard would mirror this 
approach at the national level by setting a uniform national goal for 
energy savings that is implemented at the state level. The requirement 
to achieve energy use savings would apply to electricity retailers (or 
``load-serving entities''). They would report compliance to state 
utility regulatory commissions (or, in the case of public power, to 
their governing boards), who would be responsible for verification and 
enforcement. Federal agencies, including the Environmental Protection 
Agency and the Department of Energy, would set uniform national energy 
savings measurement and verification protocols, as well as guidelines 
for forecasting and reporting.
    The uniform national standard would require each electricity 
retailer to arrange for and document modest, attainable, cost-effective 
savings as a percentage of sales and peak demand. Based on two decades 
of state and utility experience, a 1% target in terms of annual 
forecast electricity sales and peak demand is appropriate. Each year, 
electricity retailers would determine the energy savings that were 
achieved, according to the national protocols. Retailers would compare 
these savings to forecast sales, determine whether they met the 1% 
goal, and report this information to the utility commission.
    The annual energy savings requirement would be cumulative. That is, 
each retailer would incorporate past savings into subsequent years' 
forecasts, and would achieve a 1% savings target for each succeeding 
year based on those forecasts. A 1% annual increase in energy 
efficiency is a fairly modest goal that is comparable to the savings 
that have been achieved under state demand-side management and other 
efficiency programs. To make compliance easier, the standards and 
reporting requirements could be set on a multi-year basis, as long as 
the overall cumulative savings target is met.
    Electricity retailers would also have programmatic flexibility to 
meet the performance goal. The range of traditional and newer demand-
side options includes approaches such as appliance and lighting rebate 
programs, new construction efficiency programs, real-time metering and 
pricing, performance contracting, consumer education campaigns, and 
low-income weatherization programs. The energy efficiency performance 
standard would also include a trading provision, which would allow a 
retailer that exceeded the standard to sell its excess ``efficiency 
credits'' to another retailer.
    Specific wholesale market rules that support distributed resource 
participation. Section 103 sets forth laudable goals and principles, 
but more specifics are needed to fully capture the potential for demand 
response, energy efficiency, and other distributed resources that this 
section seeks to encourage.
    We recommend the Committee consider the following additional 
provisions in Section 103:

Demand-side Participation in Ancillary Service Markets. FERC should 
        require that market rules allow demand-side resources to supply 
        ancillary services on an equal basis with supply-side 
        resources. The criteria for supplying ancillary services should 
        be written in technology-neutral terms, and should not require 
        costly telemetry and metering for individual demand-side 
        resources whose performance could be verified on a statistical, 
        aggregated basis.
An Efficient Reliability Standard. RTOs, reliability managers, and 
        transmission owners often seek cost recovery in FERC-approved 
        tariffs for investments intended to enhance system reliability. 
        Before granting recovery in transmission tariffs or uplift 
        charges that would recover those costs, FERC should require 
        applicants to show that the benefits are broadly dispersed, and 
        that they have selected the lowest-cost resource, including 
        demand-side resources, reasonably-available to meet the need in 
        question.
      Before approving wholesale energy or transmission rates to 
        recover the costs of a proposed reliability-enhancing 
        investment in transmission facilities or ancillary services, 
        the FERC should examine the relevant wholesale market and 
        transmission access rules to ensure that price-responsive, 
        distributed, and demand-side resources may compete on an equal 
        basis with supply-side and transmission alternatives. It should 
        require the applicant for cost recovery in rates to demonstrate 
        that it has taken a ``hard look'' at transmission, generation, 
        demand-management, and other distributed resources to meet the 
        congestion relief or reliability need in question. Before 
        approving such rates, the Commission determine whether:
    (1) the relevant market is fully open to demand-side as well as 
            supply-side resources;
    (2) the proposed investment or standard is the lowest cost, 
            reasonably-available means to correct a remaining market 
            failure; and
    (3) benefits from the investment or standard will be widespread, 
            and thus appropriate for support through broad-based 
            funding.
    FERC Authority to Approve Regional Reliability Charges. While it is 
        understood that distributed resources and demand management 
        investments may be both quicker and less expensive means of 
        enhancing reliability than remote central stations and new 
        transmission lines, some observers question whether FERC has 
        the authority to include the costs of demand-side and 
        distributed reliability programs in wholesale rates and 
        transmission tariffs. FERC should be given the mandate and the 
        authority to recover the costs of traditional transmission 
        investments AND non-transmission alternatives in rates.
      FERC should, by rule or order, require jurisdictional 
        transmission providers and RTOs to examine region-wide, 
        reliability-enhancing investments in demand-side resources that 
        would improve reliability and lower power costs. When supported 
        by cost-effectiveness analysis, those utilities and RTOs should 
        be permitted to recover those investments on the same basis as 
        regional transmission investments, ancillary service costs, or 
        other RTO expenses.
    Standards for time-based metering and communication technology. The 
electric meter is the essential gateway through which many distributed 
resources are enabled, especially demand-response strategies. Without 
advanced metering capable of time-internal recording and digital 
communication, most customers will be frozen out of the market for many 
demand-side resource options. At present, the vast majority of users 
are neither aware that energy prices vary based on time of day nor do 
they have any financial incentive to shift usage to times of lower 
production costs. By varying prices by time of day, and by providing 
users with easy access to this price signal, users can shift usage and 
reduce their bills. The overall result is a more efficient market.
    With advanced metering equipment, users can get the information 
they need when they need it and adjust their energy use not just to 
reduce their bill but to use less energy overall. This was demonstrated 
by Puget Sound Energy's efforts begun last December to provide time-of-
use information to over 400,000 of its residential customers. Strictly 
an informational program at its outset, Puget has reported that 79% of 
its residential customers and 70% of business customers had taken 
action to alter their energy use and that 41% and 45%, respectively, 
reduced their usage. A recent survey showed that 89 percent of 
participants said the program has encouraged them to shift some of 
their power use to off-peak hours. Forty-nine percent said they have 
cut their overall energy consumption.
    Additionally, power-usage data indicate that variable, time-
sensitive rates are saving energy as well as shifting time of use among 
Puget customers. Residential customers paying time-of-day rates shifted 
about 5 percent of their electricity usage, on average, away from the 
morning and early evening hours when public demand for power--and 
wholesale power prices--are highest. In addition, these customers 
reduced their overall electricity usage in June by more than 6 percent 
compared to their June 2001 usage.
    Time-based metering and communications, and the new capabilities 
that it provides energy users, is an essential pre-requisite for the 
effective application of energy efficiency and demand response as 
resource options. It is thus important that Congress, support the 
acceleration of the installation, deployment and use of advanced 
metering and communications technology. We ask that the Committee 
require in Section 103 the development of uniform national metering 
protocols to ensure that the new market for interval metered data and 
time-sensitive information and pricing is created in a manner that is 
orderly, cost-effective, and not confusing or impractical. This will 
ensure that those who want to pursue demand response and related 
programs will not be thwarted by technology issues. The Alliance is 
working with companies in this field who are forming a coalition to 
advance policy that--accelerates the deployment of--these--
technologies, and we will be pleased to offer the Committee further 
input as it moves forward on this issue.
    It is also important that customers who want to use advanced 
metering not be thwarted by outdated utility rules. We thus urge the 
Committee to include provisions that ensure customers who want better 
metering are not prevented from doing so by distribution utility rules. 
With national protocols in place for metering, utility concerns about 
safety, accuracy, and security will have been addressed.
    As with other new technologies for energy efficiency or sustainable 
energy use, it is important for Congress to provide financial 
assistance for more rapid deployment of advanced meters and demand 
response programs. We want to underscore our support for the tax credit 
included in H.R. 4 for advanced metering equipment as a vital stimulus 
for those who would implement the demand-response programs under 
Section 103.
    In summary, energy efficiency, demand response, and other 
distributed resources are essential to a balanced electricity policy. 
We have offered several policy options, and we hope the Committee will 
give due consideration to our recommendations.
    Thank you, Mr.Chairman, for the opportunity to share our views with 
the Committee today. I will be happy to answer any questions you might 
have.

    Mr. Largent. Thank you, Mr. Prindle. Mr. Hyman.
    Mr. Sawyer. Mr. Chairman, is it possible to break? I would 
really like to hear Mr. Hyman's testimony, but if I sit here 
and wait, I am not going to get my vote in.
    Mr. Largent. The problem is that Mr. Hyman has to leave. It 
is my understanding that he can give his testimony, and we 
still will have time to sprint over there and vote.
    Mr. Sawyer. Okay. We are not going to be able to ask him 
any questions anyway then.
    Mr. Largent. Oh, that's right. Yes, we are not go able to 
do that anyway, no matter what we do.
    Mr. Sawyer. I will read his testimony.
    Mr. Largent. Do you have a question for him right now?
    Mr. Sawyer. No, that's all right. Thank you.
    Mr. Largent. Mr. Hyman.
    Mr. Hyman. I will be brief. I know that you are hungry.
    Mr. Largent. Hold on, Mr. Hyman. Tom, do you have something 
specific that you want to ask him that maybe he could address 
in this statement right now?
    Mr. Sawyer. No, I don't.
    Mr. Largent. Okay. Mr. Hyman.

                  STATEMENT OF LEONARD S. HYMAN

    Mr. Hyman. Thank you. Payments to the transmission sector 
account for about 8 percent of the electric bill. Yet, 
transmission plays a crucial role in providing reliable 
service, and competition is not going to work if we don't have 
a robust transmission network that brings competitive power to 
consumers.
    The transmission sector has not kept up with the expansion 
of the industry over the past 15 years. It is designed for the 
old utility era, and transmission expansion plans for the next 
decade seem even less adequate.
    I am not proposing that we declare a problem, and then 
mandate a solution consisting of building so many lines of new 
transmission. We can employ new technologies that enhance the 
abilities of the network to handle more traffic.
    We can encourage the network operator to find ways to 
operate the existing system more efficiently, and we can employ 
distributed resources and market-based incentives to consumers 
to reduce the stress on the network.
    We can't do any of this, however, without a regulatory 
system that incentivizes the network operators to invest in the 
network, or to find the best operational solution. If all an 
incentive does is raise prices, it is not an incentive. It is 
just a give-away.
    For the moment, I think the industry is mired in debates 
about processes, and governance, and how to form large 
entities. I don't hear very much about business plans or about 
customers.
    And I don't really see how these organizations are going to 
expand their networks more effectively than the old power 
poles. These seem to be entities with one customer that counts, 
and that is the regulator, and that is not much of a change 
from the old regime.
    Now, everyone wants to see the formation of transmission 
operators that are truly independent from market players. But I 
really don't see the regulators or the government officials 
getting to work on concrete steps that will remove a lot of the 
perceived barriers to structural separation of transmission 
from the rest of the utility.
    There are very serious tax and accounting issues that can 
be dealt with and should be. I personally would rather see 
truly independent transmission systems whose sole business is 
serving transmission customers, rather than these convoluted 
structures that engender so much suspicion in the market.
    Now, the proposed legislation addresses some of these 
issues. Section 202, for instance, makes it clear that 
utilities should not escape from the obligation to put their 
transmission under the control of an independent entity.
    But it does not remove road blocks to really cutting the 
ties between the utilities and the transmission business, and 
it doesn't create an environment in which the transmission 
owner runs a company whose prosperity depends entirely on its 
ability to satisfy transmission customers.
    And it does not deal with the disincentive to investment 
that could come about by placing one's assets under control of 
an entity that is not responsible for the commercial success of 
these assets.
    Section 216 requires FERC to establish incentive rate 
making standards that would ensure reliability, as well as 
attract capital for expansion, and this is long overdue. In 
other countries, utilities run on this basis.
    And I think that incentive-based regulations could 
encourage the implementation of new technologies, and encourage 
innovative management in financial procedures. Incentive 
regulation, I have to emphasize those, has an upside and a 
downside, and that means that the firm that doesn't meet the 
standards comes out behind and suffers a penalty, and that's 
fine with me.
    What I am not clear on is how FERC will give meaningful 
incentives to the transmission owners, the people who receive 
the returns, when the presumably non-profit regional 
transmission organization operates the system.
    The incentives presumably should reward those who make the 
decisions in order to encourage better decisionmaking and the 
penalties should go to those who make the poor decisions, and 
right now there is going to be a disconnect.
    Now, I think by focusing on specific customer friendly 
goals, and by encouraging the use of the regulatory framework 
that promotes an expandable and reliable transmission network, 
I think this bill should contribute to the development of more 
competitive markets and more reliable service.
    And just as an add-on, even if you assume the most obscene 
returns to the transmission entities, it is only 8 percent of 
the bill. You don't really need to do very much. The customers 
would never notice. My own feeling is that they shouldn't 
notice.
    I think it is imperative though that whatever system is 
devised, it has to have an incentive to attract capital for 
ongoing investment in the business. Thank you.
    [The prepared statement of Leonard S. Hyman follows:]
  Prepared Statement of Leonard S. Hyman, Senior Industry Advisor to 
                          Salomon Smith Barney
    Payments to the transmission sector account for less than 10% of 
the electric bill. Yet, transmission plays a crucial role in providing 
reliable service. And competition will not work, if we don't have a 
robust transmission network that brings competitive power to consumers.
    The transmission sector, however, has not kept up with the 
expansion of the industry, and it operates with a network designed for 
the old utility era. Expansion plans for this decade seem even more 
inadequate. I would not, however, propose that we declare a problem, 
and then mandate a solution consisting solely of building so many miles 
of new lines. We can employ new technologies that enhance the ability 
of the network to handle more traffic. We can encourage the network 
operator to find ways to operate the existing system more efficiently. 
And we can employ distributed resources and market-based incentives to 
customers to reduce stress on the network. We can't do any of this 
however, without a regulatory system that incentivizes the network 
operator to invest in the network or to find the best operational 
solution. Right now, we do not have that, and our regulators seem far 
away from proposing it.
    For the moment, the industry seems mired in debates about the 
process needed to form large transmission entities and to determine 
their governance procedures. I do not hear much about business plans, 
or customer service, or specifics about how these organizations will 
expand their networks more effectively than the old power pools. These 
seem to be entities with one customer that counts: the regulator. 
That's not much of a change from the old regime.
    Almost everyone wants to see the formation of transmission 
operators that are truly independent from market players. Yet I don't 
believe that regulators or government officials have yet to put into 
effect the concrete steps needed to remove the perceived obstacles to 
structural separation of transmission from the rest of the utility. I 
would rather see truly independent transmission systems whose sole 
business is serving transmission customers (which involves willingness 
to invest in new wires, new technologies and even normal system 
maintenance), rather than convoluted structures that seem to engender 
suspicions in the market.
    The proposed legislation addresses many of these issues.
    Section 202 makes clear that utilities cannot escape from the 
obligation to put their transmission under the control of an 
independent entity, but it does not remove any of the roadblocks to 
really cutting the ties between the utility and the transmission 
business. It does not create an environment in which the transmission 
owner runs a company whose prosperity depends entirely on its ability 
to satisfy transmission customers. It does not deal with the 
disincentive to investment that could come about by placing assets 
under control of an entity not responsible for their commercial 
success.
    Section 216 requires FERC to establish incentive ratemaking 
standards that would ensure reliability as well as attract capital for 
expansion. This is long overdue. Other countries regulate utilities on 
this basis. Incentive-based regulation could encourage the 
implementation of new technologies and encourage innovative management 
and financial procedures. Incentive regulation, of course, has an 
upside and downside. The firm that does not meet the standards comes 
out behind: that is, suffers a penalty. What I am not clear on is how 
FERC will give meaningful incentives to transmission owners, when the 
presumably non-profit regional transmission organization operates the 
system. The incentives, presumably, should reward those who make the 
decisions, in order to encourage better decision-making, and the 
penalties go to those who make poor decisions.
    By focusing on specific customer-friendly goals and by encouraging 
the use of a regulatory framework that promotes an expandable and 
reliable transmission network, this bill should contribute to the 
development of more competitive markets and more reliable service. It 
is imperative, though, that whatever system is devised, there is 
incentive to attract capital for ongoing investment in the business.

    Mr. Largent. Thank you, Mr. Hyman.
    Mr. Johnston, are you ready to give your statement?
    Mr. Johnston. Yes, I am.
    Mr. Largent. All right.

                  STATEMENT OF ROBERT JOHNSTON

    Mr. Johnston. My name is Bob Johnston, and I am here today 
representing The Large Public Power Council, which is a group 
of the 24 largest public power systems in the country, owning 
44,000 megawatts of generation, and 26,000 miles of 
transmission.
    First of all, LPPC would like to thank Chairman Barton for 
his support, continuing support, of the industry's private use 
relief needs, and we would also like to thank the Chairman for 
the PVA consensus language in the bill. Our members strongly 
support that language.
    LPPC has supported comprehensive legislation for years, but 
at the present time we are unable to support H.R. 3406 in its 
present form. We have some major issues, and I would like to 
address three of those today.
    Uniform refund authority, Section 702. LPPC has supported 
the FERC-lite industry compromise which requires us to offer 
open access transmission services to all parties at rates that 
are comparable to those that we charge ourselves, eliminating 
the potential for discrimination.
    But it did not give FERC full rate making authority over 
our transmission, which has traditionally been at the State and 
local level. However, the uniform refund authority provision 
completely negates the FERC-lite provision because it gives 
FERC full authority to set the level of public power 
transmission rates, and to require refunds as it deems 
appropriate.
    This is exactly what we thought we were avoiding when we 
bought into the FERC-lite compromise. The section also gives 
FERC the authority to start proceedings to reset our wholesale 
energy rates for sales to jurisdictional entities and require 
retroactive refunds once FERC decides what the rates should 
have been.
    This would be the worst kind of after-the-fact regulation, 
where we don't know the rules up front, and months or years 
later, we are told to make refunds. This simply doesn't work 
for public power.
    When we make a sale into the wholesale energy market, those 
net revenues, if any, go directly back to our customers to 
lower their rates. If FERC comes back to me a year or more 
later and says make a refund on a transaction, what they are 
effectively doing is saying going to your end-customer and levy 
a charge.
    That simply does not work and in effect the unintended 
consequence will be to remove much of public power's excess 
energy from the wholesale market, which I don't think is in the 
public interest.
    Regarding RTO mandates, the bill gives FERC the authority 
to order public power transmission owners into RTOs, and I have 
a few points regarding this mandate. Basically, the first is 
that we don't feel that it is necessary.
    Virtually every one of the LPPC's transmission owners, 
which represents the bulk of public power transmission in this 
country, already is in an ISO, has sponsored an RTO, or filed 
it, or is in serious negotiations with other utilities to 
create an RTO.
    Furthermore, we have unique features that must get 
addressed as part of our negotiations into the RTO. We have tax 
issues, and bond indenture issues, State law and State statute 
issues, and probably, and most importantly, native load 
protection issues that have to get addressed before we can 
enter the RTO.
    We are successfully addressing those issues through these 
negotiations that we are involved in, and I particularly--my 
utility in particular, SeTrans, negotiations are successfully 
addressing these issues if we could be allowed to complete that 
process.
    However, if you put a mandate in place, you are effectively 
removing the incentive for the parties at the table to 
negotiate these issues. The bill in its present form does not 
require the RTOs to accommodate these public power issues.
    Further, it does not require FERC to accommodate these 
issues. Therefore, if you apply the mandate, thereby removing 
the incentive to negotiate these issues, we don't believe that 
the issues will get successfully negotiated.
    Public power will be the first to stand up and join RTOs if 
we can simply be allowed to negotiate these issues, and if the 
RTOs bring value, which is the last issue regarding RTOs that I 
would like to mention.
    We need independent, comprehensive cost benefit analysis by 
region for the operating expenses and startup expenses of these 
RTOs so we will know the predictable costs and performance of 
these RTOs.
    There is a big disconnect right now between what the actual 
costs and benefits that we are seeing incurred, versus the 
theoretical or philosophical debate regarding RTO cost 
benefits, and I want to give you a specific example.
    The New York ISO originally estimated its operating costs 
would be $40 million. The costs today exceed $100 million. And 
that is five times the annual operating budget of its 
predecessor, the New York Power Pool, and these numbers are 
still increasing.
    And this is not a unique situation. This is a common theme 
throughout the country. We estimate that over $1 billion has 
been spent to date in RTO startups and we are just getting 
started.
    There will be billions more spent in startup, and there 
will be billions spent in operating costs, and we must be able 
to demonstrate to our governing bodies that RTOs will provide 
benefits to our consumers who will ultimately pay this bill.
    Last, mergers. If you repeal PUHCA, we need to strengthen 
FERC merger authority, and not repeal it. Specifically, you 
should clarify FERC's authority to review holding company 
mergers and sales of generation facilities to protect consumers 
from market power abuse.
    Thank you, Mr. Chairman. We appreciate you allowing us to 
participate in this. We look forward to continuing to work with 
you and your staff to develop these important energy 
legislation.
    [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), an 
association of 24 of the largest public power systems in the United 
States. LPPC members directly or indirectly provide reliable, 
affordably-priced electricity to most of the 40 million customers 
served by public power. 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 Subcommittee--such as Georgia, Tennessee, Texas, 
California, New York, and Arizona--and include several state public 
power agencies as well.
    Mr. Chairman and members of the Subcommittee, the LPPC appreciates 
your efforts to develop comprehensive electricity legislation. The LPPC 
has long taken an active and progressive role in supporting the 
development of a competitive, efficient wholesale power market of 
benefit to all consumers. 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 this process. 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. This session, we 
have testified before the Subcommittee on three other occasions and 
have worked with members and their staff in a cooperative fashion. We 
appreciate the opportunity to continue our involvement. We appreciate 
the support the Chairman has provided for our agreement on private use. 
In addition, on behalf of our members from the Tennessee Valley, I want 
to make sure I thank the Chairman and the Subcommittee for including 
the consensus language in your bill. However, we have serious concerns 
other provisions with H.R. 3406, particularly with respect to (1) 
mandating the participation of public power in regional transmission 
organizations (RTOs), (2) subjecting public power to virtually all of 
FERC's ratemaking authority through the uniform refund authority 
provision and (3) the repeal of FERC's authority to review mergers and 
asset sales.
    I would now like to comment more fully on the issues that are the 
focus of the Subcommittee's attention today.
                    public power systems are unique
    What does it mean to be a public power system? Public power systems 
are owned by the communities we serve, not by investors. We are not-
for-profit entities, which makes us different. Public power systems 
exist for a variety of reasons and were often created in response to 
specific concerns. Public power systems first appeared in the United 
States in the late 1800s and many were created as a part of the city 
government. In fact, many LPPC member systems continue to provide 
additional services to their communities, such as flood control and 
natural gas, water and wastewater services.
    Initially, electric service was used for public services, such as 
street lights, and was not generally available to residential 
customers. However, this changed rapidly and electricity became the 
essential service it is today. Electricity is a vital component of our 
lives now and, as was demonstrated in California last summer, a 
cornerstone of the economy. Consumers' confidence is shaken and there 
are dire consequences if electricity is not reliable and affordable. 
LPPC members are generally obligated to serve their native load 
customers by state law and, as a result, all available resources go 
first to serving those customers. Power is sold and surplus 
transmission made available only if it is surplus to those needs.
    Our rates reflect the fact that we are not-for-profit entities. Our 
rates include only the costs of producing and delivering power to our 
customers and, in some cases, payments to our governing boards or 
municipal entities as a component of the local budget. Investor-owned 
utility rates are set to include profits paid to shareholders. Since 
public power systems are locally controlled, decisions about policies 
such as rates are made by people who are in touch with local concerns. 
The city council sets policies for many LPPC members, while other 
public power systems have a separately elected or appointed utility 
board that governs their policies. Local control helps ensure that we 
respond to community needs. In addition, since public power systems are 
community based, our revenues stay close to home. This helps keep the 
local economy strong. Moreover, the policies of public power systems 
are often designed to promote business participation and investment in 
the community.
    My company, MEAG Power, was created by act of the Georgia General 
Assembly in 1975. Now one of the nation's largest joint action agencies 
and doing business as MEAG Power, the organization is the all-
requirements wholesale electricity provider to 48 Georgia 
municipalities. These cities formed MEAG Power and issued over $4 
billion in municipal bonds for the purchase of generation and 
transmission facilities in order to ensure reliable, economical 
electric service.
    Another LPPC member system, the South Carolina Public Service 
Authority (``Santee Cooper'') was established by the South Carolina 
legislature in 1934 ``for the benefit of all the people of South 
Carolina and for the improvements of their health, welfare and material 
prosperity.'' Specifically, it was chartered because the state needed 
to build a dam on the Santee River, for flood and malaria control as 
well as electricity production. However, since the state lacked funds, 
the federal government provided financial assistance. The federal 
government required that the recipient of the funds be a state agency 
in charge of the project--and so, Santee Cooper was created. Since that 
time, Santee Cooper has functioned as an independent state agency, 
providing reliable electric services to the citizens of South Carolina 
at rates which are lower than those of other utilities in South 
Carolina and lower than the national average.
    Public power systems have been created, in some instances, to 
resolve specific problems and address local concerns, filling a role 
that an investor-owned utility could not. For example, the Long Island 
Power Authority (LIPA) was established in 1986 by the state legislature 
to resolve a controversy over the Shoreham Nuclear Power Plant 
(Shoreham) and to achieve lower utility rates on Long Island. Created 
as a corporate municipal instrumentality of the State of New York, LIPA 
was authorized under its enabling statute to acquire all or any part of 
the securities or assets of the Long Island Lighting Company (LILCO) on 
a negotiated or unilateral basis and to issue lower cost, tax-exempt 
debt to finance the acquisition. LIPA was able to resolve the issues 
relating to the Shoreham facility and acquire LILCO's assets, as well 
as delivering significant rate reductions.
    Public power is different from investor owned or cooperative 
utilities. We have a unique mandate and unique operating conditions, as 
well as some statutory constraints. These must be accommodated in 
regulation and legislation before public power can join in the effort 
to achieve consumer benefits through competition.
lppc believes that the imposition of mandatory rto membership contained 
                      in h.r. 3406 is unnecessary.
    The LPPC opposes the concept of an RTO mandate for public power. 
Title II, section 202, of H.R. 3406 would provide the Federal Energy 
Regulatory Commission (FERC) with the authority to order all 
``transmitting utilities'' to join an RTO. As you know, public power 
entities are not public jurisdictional utilities under the Federal 
Power Act. Congress established this jurisdictional line for good 
reason. In contrast to investor-owned utilities that seek to return 
profits to their shareholders, public power is an arm of municipal or 
state government, is subject to their oversight, has no shareholders, 
and is unambiguously devoted to serving its customers. This remains 
true today and, as a result, public power systems must answer to state 
and local governments for our actions. In addition, LPPC members have 
unique constraints on our ability to join RTOs.
    Providing FERC with the authority to order public power systems 
into RTOs is unnecessary. Such an extension of FERC jurisdiction is 
also unwarranted. The vast majority of LPPC members are active 
participants in existing ISOs or in developing RTOs in their region of 
the country, as shown in the chart attached to my testimony. For 
example, our New York members, the New York Power Authority and the 
Long Island Power Authority, have been active participants in the New 
York ISO and are working to integrate that system into a larger 
Northeast RTO. Three large public power systems in the Southeast, MEAG 
Power, Santee Cooper, and Jacksonville Electric Authority, are 
participating in the discussions to create SeTrans in the Southeast RTO 
mediation. A number of public power entities have announced that they 
will participate in the development of transcos--specifically, the Salt 
River Project is participating in the development of WestConnect while 
Nebraska Public Power District and Omaha Public Power District will 
both join TransLink. LPPC members typically do not own keystone 
transmission assets that put them at the center of RTO development. 
However, public power wants to participate if it is not contrary to its 
customers' interests and the requirements of state and local law.
    LPPC member systems are actively participating in the formation of 
RTOs. 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 we are able to participate fully in RTOs. If 
this legislation is enacted as drafted, public power systems will be 
mandated into RTOs without the flexibility to work through the 
constraints unique to public power and without the leverage we have in 
voluntary negotiations. FERC has required that transmission-owning 
investor owned utilities join RTOs. We accept and, in some cases, 
welcome the establishment of RTOs to support competition and we want to 
achieve all possible benefits for our customers. LPPC members, however, 
lack the size and scope to create our own RTOs. As a result, we must 
negotiate the terms of participation with investor-owned utilities so 
that our unique constraints are accommodated. For example, my company, 
MEAG Power, has participated in the discussions on a Southeast RTO--
``SeTrans''--with other public power systems and investor-owned 
utilities. MEAG Power has an obligation under state statute to serve 
our native load and, therefore, 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. 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, actions at FERC or in legislation may undercut 
the voluntary efforts underway in many regions, e.g., the SeTrans RTO 
proposal in the Southeast, that have accommodated public power.
    In a similar manner, two of LPPC's Midwest members, Nebraska Public 
Power District (NPPD) and Omaha Public Power District (OPPD), will join 
TransLink, an independent transmission company that will own and 
operate transmission facilities. Participants include both investor-
owned utilities and public power systems. The members can either sell 
their assets to TransLink or lease them, in which case they will sign 
an operating agreement with the transco. NPPD will continue to own its 
own transmission--under state law, ownership by others is not 
permitted. NPPD also retains functional responsibility vis-a-vis its 
native load, another requirement imposed by state law. In addition, 
NPPD can override operating directions from the transco in the case of 
a public emergency.
    However, were the participation of public power mandated, as 
provided for in H.R. 3406, these examples of transcos and RTOs would 
not have been created. In the Southeast, for example, the FERC 
administrative law judge recently expressed a preference for another 
model, GridSouth. If MEAG Power and other public power systems were 
under a mandatory obligation to join this RTO, we would be in violation 
of our state laws. GridSouth requires all participants to sign a 
uniform agreement for operation of the assets, or else the participant 
must divest itself of the assets. At least one of the public power 
participants in SeTrans, Santee Cooper, would be precluded from joining 
GridSouth due to the absence of the flexibility present in the SeTrans 
model. Under South Carolina law, Santee Cooper is only authorized to 
sell ``surplus'' property and must maintain assets sufficient to serve 
its local customers. In order to joining GridSouth, Santee Cooper would 
either sign the uniform agreement which makes no accommodation for 
private use restrictions or state law constraints or it would have to 
divest its transmission assets. If participation in GridSouth was 
mandated, Santee Cooper would be in the untenable position of violating 
state law and operating contrary to its organic statute. This raises 
significant legal issues, whose resolution could add years to the 
process of RTO formation. However, the SeTrans model does not require 
that ownership of the transmission assets transfer to the RTO and 
allows contracts to be negotiated on a company-by-company basis, 
thereby allowing for the resolution of the unique challenges of public 
power in this region.
    Simply put, 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 ensure 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 not present 
for investor-owned utilities. Unlike an energy marketer who wants firm 
transmission rights to support a sales contract, we must preserve 
adequate capacity to supply our customers due to an obligation to serve 
imposed by state law.
    Finally, many of our members are concerned that RTO participation 
could lead to increased transmission costs and unexpected operating 
costs which would compromise our low-cost service to our customers. 
Provisions in H.R. 3406 ask for cost-benefit analysis to justify RTO 
proposals. We agree. Independent, detailed, cost-benefit analysis must 
be done to assure participants of predictable costs and performance 
which can be part of a proposed RTO. The New York ISO originally 
estimated that its annual operating costs would be $40 million. 
However, those costs are currently $100 million (five times the annual 
operating budget of its predecessor the New York Power Pool) and 
increasing. This results in significant charges to the members of the 
ISO and, ultimately, may result in a significant rate increase for 
their consumers. Public power would like to capture the benefits of 
competition for our customers, but we need to make assurances to our 
governing entities that consumers will not bear an inordinate cost 
burden. The LPPC believes that good cost-benefit analyses are necessary 
to assess the impacts of RTOs on the local or regional market and on 
the customer. The costs associated with the creation of an RTO or ISO 
are significant--the New York ISO incurred startup capital costs of $60 
million and approximately $80 million was spent on GridSouth before the 
negotiations were abandoned. We want quantifiable benefits for our 
customers. We are concerned about startup and operating costs of the 
RTO or ISO. Without independent, detailed, quantitative cost-benefit 
analysis, we will have tremendous difficulty in assuring our governing 
bodies that these structures benefit our customers. Our ultimate 
objective as public power is to ensure reliable electric service at 
reasonable rates. Therefore, we urge the Chairman make certain that the 
benefits of RTOs and ISOs are quantifiable and will exceed the 
significant costs associated with their development, startup and 
operation.
    We believe that mandating participation in RTOs by public power is 
unnecessary. The LPPC believes that this provision should be deleted 
from H.R. 3406. As noted above and in previous testimony, public power 
has constraints that limit our ability to fully participate in RTOs. 
Without resolution of the private use issues, accommodation of state 
and local statutory constraints, and preservation of our obligation to 
serve our native load, LPPC members cannot participate in RTOs. We have 
generally been able to address our concerns through negotiation and 
compromise on an individual basis and continue to believe that this is 
the optimal means for achieving the objective of a functioning, 
successful RTO.
                            ferc-lite issues
FERC-lite and Private Use
    In the past, the LPPC has supported proposals to ensure that all 
market participants have access to the transmission system on a fair 
and open basis. ``FERC-lite,'' as contained in Section 201, is 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. 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. We would ask 
that the bill include a provision recognizing this constraint and 
condition adoption of the requirements of FERC-lite on public power on 
the resolution of private use issues.
    While we recognize that this Subcommittee does not have direct 
jurisdiction over the private use issue, we appreciate the Subcommittee 
Chair's support of the industry consensus tax agreement that was 
introduced as H.R. 1459 by Congressman Hayworth. 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 of H.R. 1459 
that frustrate the aim of opening up and expanding the transmission 
grid. The Hayworth bill represented a landmark consensus 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. We ask the Subcommittee'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. We also ask that H.R. 
3406 include language recognizing this constraint on public power and 
limiting our obligations until this issue is resolved.
Uniform Refund Authority Cancels out FERC-lite
    The LPPC has very serious concerns regarding the provisions 
contained in Section 702 of H.R. 3406, which would amend Section 206 of 
the Federal Power Act. 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 Section 201 of the bill, known as FERC-lite. 
The Uniform Refund Authority provision would subject public power 
wholesale sales and transmission rates to review by FERC on FERC's own 
motion or whenever 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.
    FERC-lite was designed to ensure that public power entities and 
cooperatives provide open access transmission services on non-rate 
terms and conditions that are comparable to those required of investor-
owned utilities. However, while it required transmission rates to be 
non-discriminatory, it did not authorize FERC to set just and 
reasonable transmission rates for such entities. But, because Uniform 
Refund Authority authorizes FERC to set just and reasonable rates for 
any public power transmission to a jurisdictional utility, the FERC-
lite limitations on FERC ratemaking are cancelled out. Section 702 
should be deleted.
    Uniform refund authority also applies to public power wholesale 
sales to jurisdictional public utilities. We believe that giving FERC 
this new authority is unnecessary and likely to discourage sellers from 
participating in the market. The uniform refund authority provision is 
backwards--rather than telling market participants what the market 
rules are ahead of time, it allows FERC to start up a regulatory 
proceeding, decide what the market rules are, and then apply them 
retroactively and require refunds for up to 15 months. This is no way 
to regulate.
    These provisions also pose significant practical problems for many 
LPPC members. As not-for-profit entities, most LPPC members do not 
retain surplus revenues at the end of the fiscal year. For instance, 
MEAG Power operates on a one-year accounting system. Each year, any 
surplus revenues realized during the course of the year are 
redistributed and returned to our customers. Other LPPC members may 
return the surplus to their cities. What this means is that each year 
MEAG Power zeros out our books. As a result, were we required to issue 
a refund fifteen months after the fact, we would not have the 
``profits'' to do so and would be required to either raise our rates or 
levy an assessment against our customers to obtain the funds.
  ferc's authority over mergers should be strengthened, not eliminated
    The discussion draft would repeal the Public Utility Holding 
Company Act (PUHCA). It would also repeal FERC's current authority to 
review investor-owned utility mergers and asset sales. If PUHCA is 
repealed, FERC's merger authority under section 203 of the Federal 
Power Act should be strengthened, not eliminated. FERC must be provided 
with adequate tools to review mergers, including holding-company-to-
holding-company mergers, and to prevent abuses of market power. The 
LPPC believes, at a minimum, that the draft should be revised to give 
FERC clear authority over holding company-to-holding company mergers 
and over generation-only transactions.
                               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 Subcommittee on 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.

          Participation by LPPC Members in RTO/ISO Development
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Austin Energy.............................  Participate in the ERCOT
                                             RTO, which is operational
Chelan County Public Utility District.....  Participating in RTO West
                                             discussions
Clark Public Utilities....................  Participating in RTO West
                                             discussions
Colorado Springs Utilities................  Was involved in early
                                             discussions on DesertSTAR
                                             and currently reviewing
                                             TransLink and DesertSTAR
                                             proposals--no RTO activity
                                             currently in Colorado
Jacksonville Electric Authority...........  Sponsor of the SeTrans
                                             proposal
Knoxville Utilities Board.................  Not a transmission owner
Long Island Power Authority...............  Participant in New York ISO,
                                             which is operational
Los Angeles Department of Water & Power...  Participated in the
                                             development of the
                                             California ISO Tariff; Key
                                             participant in the
                                             Transmission Access Charge
                                             discussions; Opted not to
                                             join California ISO
Lower Colorado River Authority............  Participant in ERCOT RTO,
                                             which is operational
MEAG Power................................  Sponsor of the SeTrans
                                             proposal
Memphis, Light, Gas & Water Division......  Surrounded by TVA;
                                             participates in RTO
                                             discussions to the degree
                                             TVA does
Nebraska Public Power District............  Sponsor of the TransLink
                                             Transco which has filed a
                                             proposal with FERC;
                                             TransLink has agreed to
                                             join the MISO
New York Power Authority..................  Participant in NYISO, which
                                             is operational
Omaha Public Power District...............  Sponsor of the TransLink
                                             Transco which has filed a
                                             proposal with FERC;
                                             TransLink has agreed to
                                             join the MISO
Orlando Utilities Commission..............  Was involved in the RTO
                                             discussions of Grid
                                             Florida, which is on hold
                                             pending the Florida PSC
                                             hearing.
Platte River Power Authority..............  Was involved in discussions
                                             on DesertSTAR; no RTO
                                             activity currently in
                                             Colorado
Puerto Rico Power Authority...............  N/A
Sacramento Municipal Utility District.....  Opted not to join the
                                             California ISO until
                                             certain issues are resolved
Salt River Project........................  Participating in development
                                             of the WestConnect Transco
                                             proposal
San Antonio...............................  Participant in ERCOT RTO,
                                             which is operational
Santee Cooper.............................  Sponsor of the SeTrans
                                             proposal
Seattle City Light........................  Participating in RTO West
                                             discussions
Snohomish County Public Utility District    Participating in RTO West
 #1.                                         discussions
Tacoma Public Utilities-Light Division....  Participating in RTO West
                                             discussions
------------------------------------------------------------------------


    Mr. Barton. Thank you, Mr. Johnston. We appreciate you 
being here. I am tempted to ask for unanimous consent to move 
the bill right now since it is myself and Mr. Ganske here, and 
he is for the bill, or at least he was last week. So that 
wouldn't be right.
    The Chair would recognize himself for 5 minutes of 
questions, or until other Members, in addition to Mr. Ganske, 
return. I have got so many questions that I really don't know 
where to start. I am told, Mr. Hyman, that you have to leave in 
about 5 minutes; is that correct?
    Mr. Hyman. Something like that.
    Mr. Barton. Okay. So let me kind of get you to square off 
against Mr. Rouse. Mr. Rouse says that we really don't need 
these incentive rates if I understood him correctly, that there 
is adequate transmission being built.
    The Chairwoman of the Arkansas Public Utility Commission 
also said that she wasn't real sure that incentive rates were 
necessary, although she wasn't automatically opposed to them.
    I am told that the demand for electricity is growing twice 
as fast as the announced capacity increases in transmission.
    So it would seem to me that we need something to get more 
transmission built. So, Mr. Rouse, if we are not building the 
transmission that we need today according to all of the 
Department of Energy and Energy Information Agency, why not try 
incentive rates for transmission?
    Mr. Rouse. Mr. Chairman, I think the reason why we are not 
has more to do with what local opposition has----
    Mr. Barton. Well, now, the Chairwoman of the Arkansas 
Public Utility Commission said, hey, they are siting all these 
lines, and so do you think a little local opposition is 
stopping them?
    Mr. Rouse. Well, the local opposition will vary from place 
to place, and what we really need I think is not a wholesale 
massive additions to the system, but rather selected areas 
where we have low pockets. The PATH-15 was mentioned by 
Congressman Largent.
    There are areas where we need new transmission to relieve 
congestion, and I think as the demand there is such that we 
don't need incentive rates to get that transmission built, we 
simply need either the oversight of FERC as a kind of last 
resort, or some way for the States and the local authorities to 
overcome local opposition.
    Mr. Barton. So you would just adopt the club them to death 
mentality, and let somebody come in and do it that way?
    Mr. Rouse. Well, I think the club, you say--the last resort 
would have to be that there should be some authority to 
recognize the need. But as far as incentive rates for the 
transmission, I don't think that would be necessary.
    Mr. Barton. Mr. Hyman, what is your response to Mr. Rouse's 
comments?
    Mr. Hyman. First of all, I think the numbers show that the 
capacity or the demand is growing four times as fast as the 
increase in capacity. Second, my attitude--the reason that I am 
proposing to use incentives is not necessarily to get someone 
to build a line.
    I want to use an incentive to get this person to try to 
figure out the best solution, and if the best solution is 
building a line, fine. If the best solution is putting in some 
sort of facts device which actually increases the capacity of 
existing facilities, I want that to be the solution.
    I want to create a tariff arrangement which causes the 
transmission company to find the best way to solve the solution 
for the customer, and that is the reason for the incentive.
    Mr. Barton. Now, let's go to Mr. Prindle. I thought that we 
were really encouraging distributed generation in our bill. You 
don't think we are. What would we have to do to get you to say 
yes?
    In other words, how can I get you to marry my bill? What do 
we have to do, because I think we are really helping distribute 
generation, but you didn't think that.
    Mr. Prindle. Well, we are focusing on energy efficiency 
here. We do recognize that there are certain provisions that do 
provide some encouragement for these kinds of technologies, and 
we do think that there are some opportunities that are missed.
    Things like the performance standard, and the more detailed 
rules under Section 103, and things like that. It is a matter 
of degree, I guess.
    Mr. Barton. So if we were just a little more specific, you 
would like it better?
    Mr. Prindle. Yes, a little more specific, and there is a 
couple of specific provisions that we would like to see added, 
sure.
    Mr. Barton. Okay. Now, let's go to my two good friends, Mr. 
Richardson, and Mr. English. I probably met with you two guys, 
or your association, about as much as anybody at the table, and 
I have had a good dialog.
    I am not being facetious. I have enjoyed it. But you all 
were somewhat negative on the bill, to be polite, and I guess I 
would ask Mr. Richardson how do we have a national grid if we 
don't have mandatory participation in the grid, which seems to 
be one of the big bottlenecks from your group. You just don't 
want to have to be told that you have to join.
    Mr. Richardson. By mandatory, are you talking about 
national grid in terms of regional transmission?
    Mr. Barton. Yes.
    Mr. Richardson. I think that Mr. Johnston's comments were 
right on target, in terms of public power's participation. You 
look at the transmission owners and public power community, and 
they are participating in regional transmission organization.
    Now, in terms of the mandatory participation, I think there 
are a couple of problems that I have tried to address in our 
testimony and in my comments. One is the very prescriptive 
nature of what is in the bill, in terms of its mandate and 
timing, and procedural obstacles that are available to----
    Mr. Barton. But I mean does your association--I would 
assume that there are those in your association that do have 
some interstate transmission capacity; is that correct?
    Mr. Richardson. There are some that have interstate 
transmission capacity, and there are some in my association 
that are completely transmission dependent. It makes for an 
interesting dynamic, but let me----
    Mr. Barton. I have only got 5 minutes, although I am the 
chairman. I can take more if I want to, especially since there 
are not all that many people here. But I want to get the 
concept. I want people to understand the concept.
    We have been talking about a national grid for probably 10 
to 15 years. Now, it is about time for the rubber to hit the 
road. We have kind of a least common denominator bill in the 
Senate, which is a great accomplishment for my friends in the 
Senate.
    They have at least put out something. I love them for that. 
It is not comprehensive, and it doesn't address all the 
controversial issues, and as usual, it is up to the poor old 
nitty-gritty House of Representatives to tackle the tough 
issues.
    And one of the toughest issues is are we really going to 
have a national grid. Mr. Richardson, do you think we ought to 
have a national grid on behalf of your association?
    Mr. Richardson. Yes, I do. I think we need to rationale----
    Mr. Barton. Okay. Thank you. Mr. English, do you think we 
ought to have a national grid?
    Mr. English. Indeed.
    Mr. Barton. Okay. Now, there are two ways to do that, or 
three ways. We can make it voluntary, and just pray that 
everybody sees the same issue. We can put incentives, or we can 
go a combination of that, but ultimately make it mandatory.
    Now, I have gone around that track every way I could. I 
have tried voluntary, and I have tried incentives, and I am now 
in the position after 3 years of being chairman of this 
subcommittee, I want to have incentives, and I want to make it 
voluntary, but at the end of the day, if you have to join, you 
have to join.
    So we give you a year to join and work out the details, and 
participate however you want, but at the end of the year under 
the current bill, if you still haven't joined, the FERC can 
tell you that you have to. Now, with regard to the Co-Ops, we 
tried to make it as easy as possible.
    Mr. English. Well, we appreciate that, too, Mr. Chairman.
    Mr. Barton. And I was told that you had a conversation with 
the full committee chairman, and that on behalf of your trade 
association that you had a few minor things that you wanted 
worked out. Well, I listened for 5 minutes and you listed a 
number of minor things.
    Mr. English. Well, the point, and that is what I was 
attempting to get at, Mr. Chairman.
    Mr. Barton. Well, my time has expired. Answer the question 
and then I will go to Mr. Ganske.
    Mr. English. Well, the thing that I was trying to get at 
with what I was saying is that I think there is agreement on 
the objectives. Certainly there is from us as to what you are 
trying to do.
    The point that we are coming down to is that we think that 
we are missing the mark in what we are doing. Now, you are 
talking about the emphasis with regard to RTOs, and the issue 
of how that is handled.
    We think certainly that the Federal Energy Regulatory 
Commission obviously has to play that role. We think that there 
should be a lot of local involvement with RTOs.
    Mr. Barton. I agree with you.
    Mr. English. In other words, a lot of what we are talking 
about is process. A lot of what we are talking about also is 
this--and this is particularly true for us, is this big 
question of independence.
    Are those RTOs truly going to be independent, and is FERC 
going to have the authority to make sure that they are 
independent, or are we going to be able to go in there and not 
be in effect taken over.
    And that is what this--you know, we can talk about 
incentives, and we can talk about mandatory, and we can do 
this, and we can do that, but the real hang up that we are into 
is this question of is it really independent. Is FERC really 
going to make sure----
    Mr. Barton. That the RTO is independent?
    Mr. English. Exactly.
    Mr. Barton. Okay. Well, we can work on that. My time has 
expired. We recognize Mr. Ganske for 5 minutes.
    Mr. Ganske. Thank you, Mr. Chairman. About a week ago I 
gave a talk at the Des Moines morning rotary, and I asked the 
150 people that were there how many of them either through 
their mutual funds or individual investments had an exposure to 
Enron.
    And about two-thirds of the people raised their hands, and 
so I want to pursue this a little bit. I thank all of you for 
coming, and Mr. David Sokol, I thank you, from coming from the 
Midwest.
    Mr. Sokol, your testimony says that the problems with Enron 
shouldn't stop us from doing electricity legislation because 
these problems are primarily about bad investments and misuse 
of accounting. Do you have any personal expertise to base this 
on, or is that just your conjecture?
    Mr. Sokol. Thank you, Congressman. Unfortunately, yes, I 
do, both directly with Enron, but more sadly in 1992, I was 
asked to become president of the company that 4 months later I 
turned into the SEC for serious accounting fraud that had been 
perpetrated over a 5 year period.
    And the Enron situation, being an active participant in the 
markets both that they participate in nationally, as well as 
directly in the midwest, the energy markets have not been 
disrupted at all by Enron's bankruptcy.
    Certainly banks, and unfortunately employees, and 
shareholders, and many of the creditors of Enron, have been 
severely impacted. But it is not an issue relevant to 3406. It 
is, however, and on behalf of both myself and Mr. Buffett, who 
takes these issues very seriously, changes need to be made, 
because I think a follow-up effect of when a corporation the 
size of Enron is caught doing what it has been doing, falls as 
fall and as fast as it has done, it cannot help but harm 
confidence in the United States securities markets.
    And that is an issue that may not be relevant in today's 
hearing, but it is unquestionably important to be acted on 
quickly, and again Enron is not unusual. JWP, the company that 
I mentioned, Waste Management, Sunbeam, and many others, we 
have lost the obligation to follow not only the letter of 
accounting, but the intent of accounting.
    Mr. Ganske. Mr. Sokol, I think it is really important to 
distinguish between Enron and the companies that are 
represented at your table. I wondered if you could expand on 
that. What is the difference between your company and Enron, or 
the other utility companies?
    Mr. Sokol. Well, first of all, I think it is important to 
make a difference. First of all, the Public Utility Holding 
Company Act, which is a discussion that has been part of this 
conversation, did nothing to stop Enron from doing what it was 
doing.
    It did nothing to stop PG&E from going bankrupt in 
California, and it did nothing to stop Southern California 
Edison from being bankrupt in California. Enron is an 
independent power company, and it happens to own a utility in 
Oregon.
    I think it is important to note that the only two assets 
that Enron owns of any substance today that are not bankrupt is 
Portland General Electric, which was protected by the State 
Regulatory Commission in Oregon, and not PUHCA, and interstate 
gas pipeline systems that Enron owns that are also regulated by 
FERC and certain State regulatory bodies.
    And what Enron did, and by the way, what Enron has done is 
not unique in our industry. And it is not unique in a lot of 
industries, and it needs to be considered and looked at 
carefully.
    They inflated earnings inappropriately, and they used off-
balance sheet treatments to avoid rating agency scrutiny, and 
perhaps many other activities that we are not yet aware of. I 
don't believe that the regulated utilities in this country 
participate in those activities.
    If they do the management and their auditors should be 
fined and go to jail.
    Mr. Ganske. So, as we look at repealing PUHCA--I mean, what 
kind of assurances can we give consumers?
    Mr. Sokol. Well, PUHCA actually--and with all due respect 
to the U.S. Congress, we have been talking about repealing 
PUHCA for 18 years. PUHCA and the distortions that are created 
by outdated and ineffective regulation are what create the 
opportunities for the kind of accounting abuses and misuse of 
markets that you are seeing with Enron.
    PUHCA has nothing to do with having stopped that. What it 
does stop is credible players like ourselves and others from 
being more involved in the industry, and frankly helping stop 
things like that from happening.
    It had nothing to do to stop it, and it didn't stop it, but 
the provisions of 3406 would in fact help stop it by actually 
making access to all the books and records of every holding 
company in the United States available to those State 
regulators.
    As an example, Portland or the State of Oregon could have 
asked for the books and records of the rest of Enron underneath 
3406. They did not have the right to under today's regulatory 
regime with PUHCA in place.
    Mr. Ganske. So let me just repeat that. Your contention is 
that had the chairman's bill been law that it might actually 
have helped prevent the Enron problem?
    Mr. Sokol. I believe that's correct.
    Mr. Ganske. Mr. English, did you want to make a comment 
also?
    Mr. English. I did. I think there is something that we may 
be missing here a bit on the Enron thing, and I am going to 
agree with you. I don't think that PUHCA obviously didn't 
prevent Enron from happening and so forth.
    But the issue that we have got moving into this environment 
is--and certainly the COMPACs that our members have had, and 
the impressions that we have gotten, you are dealing with a 
bunch of folks that were swashbucklers.
    You were dealing with a bunch of folks that quite frankly 
were arrogant, and you were dealing with a bunch of folks that 
were going to do it their way because they thought they had 
this thing all figured out.
    And whether there were laws broken or not I have no idea, 
but I think that certainly as we get into this kind of a 
marketplace with competition in what has been previously been a 
regulated industry, I think it does attract that element.
    And I would suggest to you that if you are going to repeal 
PUHCA, then you darn well better put something in place to 
protect the consumers, or you are going to have more of this 
kind of activity just because that is the kind of folks that 
are attracted to this kind of a marketplace.
    Mr. Ganske. So you would agree with Mr. Sokol that the 
transparency provisions in this bill are pretty important?
    Mr. English. Well, I think we need to go further. I think 
that we need some good solid consumer protection version. I 
think we need to have an exchange. If you are going to repeal 
PUHCA and say that PUHCA no longer is relevant here, then you 
have got to have some solid consumer protection to make sure 
that they are protected against this element.
    Mr. Barton. The gentleman's time has expired. We may have 
time to come back for a second round.
    Mr. Ganske. Thank you, Mr. Chairman.
    Mr. Barton. The gentleman from California, Mr. Waxman.
    Mr. Waxman. Thank you, Mr. Chairman. Mr. Prindle, thank you 
for your testimony today. I know that you and The Alliance to 
Save Energy are widely respected for your expertise on these 
matters.
    It is critically important for all of us to understand why 
the current structure of our electricity system often 
discourages efficient use of energy, and why restructuring will 
make that problem worse.
    Would you please walk us through what has happened to 
investments in energy conservation over the past decade, and 
would you also explain how the market structure encourages us 
to expand transmission and generation even where conservation 
measures would be a less expensive way to meet demand.
    Mr. Prindle. Well, certainly. As I mentioned in my 
testimony, over the last 5 to 6 years, we have lost half of the 
investment we used to have in energy efficiency programs, and 
that is largely because States backed away from their former 
commitments to integrated resource planning, in which the 
utilities were vertically integrated monopolies.
    And there was a logical framework in which if you wanted to 
build a power plant, you could do analysis to see if there were 
demand-site options which were more cost effective before 
committing to that capital investment.
    Well, now with restructuring, we have a virtually fully 
deregulated generation sector in which a utility at the State 
level can't really say anything about generation, and can't 
even determine an avoided cost for generation because the 
utilities that it regulates don't own generation.
    So we have essentially lost the framework that used to 
exist that allowed for the kind of planning to make rationale 
resource decisions. Right now in the generation markets there 
is an active disincentive for generators to save energy.
    And in fact if you look at California's market, there is a 
lot of evidence that very high demand and very peaky demand 
actually increases revenues to generators, and it encourages 
market behavior to maximize that effect.
    Unfortunately, over the last summer, we have seen an 8 
percent drop in demand in this State because of energy 
efficiency and other kinds of investments that have really 
taken the rug out from under that kind of supply oriented 
behavior.
    So we clearly need that kind of risk management if you will 
on the demand-site to offset the inherent disincentive that 
exists in the wholesale markets as they are today.
    Mr. Waxman. Do you see anything in this bill to either 
provide funds for investments in energy efficiency or establish 
requirements to improve energy efficiency?
    Mr. Prindle. Well, we don't see enough. In Section 103, 
there is a provision to require FERC to foment the 
proliferation of demand response programs, and we think that is 
a positive thing.
    However, there is nothing specifically that enables energy 
efficiency to participate in those demand response markets. So, 
we have offered some specifics to encourage that. But beyond 
demand response, we think there is a need for a broader 
approach to encourage energy efficiency and related resources.
    Mr. Waxman. If we don't have a broader approach, and if we 
don't have other substantive measures in legislation, can we 
really expect to overcome the market barriers to energy 
conservation that you have discussed?
    Mr. Prindle. Well, not the way that markets are running 
now. As I have said, generators only make money when sales go 
up, and the same is true for distribution companies as long as 
States continue to use a through put base regulation in which 
volume of sales determines revenues and profits.
    Some States have gone to a different form of performance-
based rate making where that is not the case. But right now 
most distribution companies again are net losers in energy 
efficiency programs.
    Mr. Waxman. Well, we heard from the administration 
yesterday that they support energy efficiency, renewable 
energy, and environmental protection. And Mr. Blake pointed to 
some provisions in this bill as furthering those goals.
    But in your opinion they are not enough?
    Mr. Prindle. We certainly would like to see more in the 
bill, yes.
    Mr. Waxman. I was disappointed that the majority did not 
grant our request to invite a witness to speak about renewable 
energy today. This bill directly addresses renewable energy, 
but only in a negative way. It would repeal Section 210 of 
PURPA, which has allowed renewables to start to compete in 
energy markets.
    And since we don't have a renewable energy witness here 
today, I would like to ask you, Mr. Prindle, does anything in 
this bill either provide funds for renewable energy, or 
establish requirements to develop renewable energy?
    Mr. Prindle. Well, I am not a renewables expert, and The 
Alliance has no specific position on that. We do work with a 
lot of our colleagues in the renewables world through the 
sustainable energy coalition, and we are equally disappointed 
that those folks were not invited to testify.
    And we would suggest that at a future hearing that those 
folks be included in the discussions.
    Mr. Waxman. If I might just take another second or so. The 
administration agreed yesterday that they thought that the 
legislation should support renewable energy. Instead, I think 
the bill would increase our reliance on old and polluting 
energy sources.
    It is a critical topic, and it deserves more attention. Mr. 
Alden Myer, of the Union of Concerned Scientists, is a renowned 
expert on renewable energy, and I would like to ask for 
unanimous consent to insert his testimony into the record.
    Mr. Norwood [presiding]. Without objection, so ordered.
    Mr. Waxman. And I want to conclude by pointing out that a 
new study by the North American Commission on Environmental 
Cooperation demonstrated the link between electricity 
restructuring, increased demand for electricity, and increased 
air pollution.
    And I think that we ought to keep that in mind, and I was 
disappointed that we didn't have any part of this hearing 
devoted to the air pollution consequences of energy 
legislation. So I want to make that point for the record.
    I would ask you some questions about it, Mr. Prindle, but I 
have run out of time. But I assume that you agree that there is 
an air pollution consequence to energy policies, and we ought 
to realize that there is an interconnection between the two?
    Mr. Prindle. Absolutely.
    Mr. Waxman. Thank you, Mr. Chairman.
    Mr. Norwood. I would now like to recognize Mr. Walden for 5 
minutes.
    Mr. Walden. Thank you, Mr. Chairman. I would like to follow 
up on one of these issues of energy efficiency. I know that I 
have been in small business for nearly 16 years, and every 
light socket that will take a fluorescent light bulb I have put 
in.
    And I know that a lot of people are doing the same thing in 
their homes, and looking for other energy efficiency. Hasn't 
energy efficiency actually gone up, Mr. Prindle?
    Mr. Prindle. The question is whether energy efficiency has 
gone up?
    Mr. Walden. Yes. Isn't the market responding, and aren't 
consumers responding?
    Mr. Prindle. Well, in the State of Oregon, it is, Mr. 
Walden, largely because there has been a 20 year history of 
investment through the municipal utilities, and the Bonneville 
Power System, and the Northwest Power Planning Council, and now 
the new Oregon energy trust.
    There is a sustained and now even an increasing commitment 
to implementing the fundamental policies and creating the 
incentives, and the market transformation programs. But in most 
States, we don't have that.
    Mr. Walden. Okay. But I also know that one of the things 
that spurred me along, and some of my neighbors, was a proposed 
increase of 46 percent by Bonneville. That kind of gets our 
attention more than a--I mean, I am participating in some of 
the State programs, too.
    We replaced a washer and dryer, and the Energy Star Program 
provides for some tax benefits for buying upscale dryers 
basically, and you are going to save on energy in the long run.
    But it just seems to me that the market also plays a role, 
and I am a very strong advocate, and in fact I supported one of 
Mr. Waxman's amendments last spring to make more use of 
renewables, and demand-site reduction issues are a concern as 
well.
    One of the troubling parts for me in this bill and in 
general is that, one, there are the 29 States out there that 
have the so-called net metering programs that have engaged in 
some of these other programs to reduce demand and provide for 
efficiency.
    And I want to make sure that we don't upend their apple 
cart through this. But beyond that, it is just the 
philosophical debate about demand reduction. You can only go so 
far before you shut down your economy, because if I am in 
business and I make more money by selling off the power that I 
don't consume, and not operating the plant that I have, I may 
be forced to do that from a financial standpoint.
    But it doesn't do much for our economy does it? And I think 
we have to be careful about how much we put on that side, as 
opposed to creating more generation opportunities, and a grid 
that works.
    Mr. Prindle. That is a very good question, and we are very 
committed at The Alliance to working with the market. We have 
70 associate members, many of whom are the major manufacturers 
of energy efficient technology.
    And I can say that the analysis that has been done does 
show a net positive impact on the economy from energy 
technology. For example, The Rand Corporation did a study of 
California's efficiency programs, and found that for every 
dollar invested in efficiency that a thousand dollars on net 
came back into the economy.
    And, in fact, in the year 2000, about 3 percent of the 
gross State product was related to investments in efficiency. 
So we believe that energy efficiency and a growing economy 
actually go hand-in-hand. And our efficiency performance 
standard doesn't purport to stop economic growth, but only to 
mitigate the rate of electricity demand.
    And we have seen this over the last 25 years in the economy 
with a 40 percent increase in GNP with almost flat energy 
growth.
    Mr. Walden. So there has been.
    Mr. Prindle. And the key here is to keep the economy 
growing while moderating demand growth so that we can put the 
cap over----
    Mr. Walden. Well, I guess that is what I was getting at 
initially. I thought I had read where there has been fairly 
extraordinary energy efficiency, but my biggest concern is that 
we are going to end up at some point in a recession and a 
snapback that we are going to be right back to where we were 
last spring talking about blackouts again, and lack of energy 
supply if we are not careful.
    And so I want to make sure that what we do in this bill 
gets us a grid out there that will work, and a marketplace that 
will function that won't end up sticking the consumers along 
the way.
    And that gets us to some of the issues about the RTOs and I 
would be curious to hear what you have to say as to that. I 
know that I have heard from some of my co-ops. And I apologize 
for not being here for all of your testimony, but I am curious 
as to your comments on that.
    Mr. English. I think that an assurance that it is clearly 
independent. I think that the regulation is there and in fact 
the emphasis is there in enforcement--and the concern I think 
is that they are going to be swallowed up and they are going to 
be taken over, and they are going to have their assets used in 
a manner that is contrary to their best interests.
    And so that's where time and time again we hear this 
concern arising and I don't think that emphasis is there in 
this legislation, and I don't think we are seeing that emphasis 
as far as FERC at this particular point in time, not to the 
degree that we would like.
    Mr. Walden. My tine has expired, Mr. Chairman. Thank you.
    Mr. Norwood. Thank you, Mr. Walden, for those very 
insightful questions, and ending on time. Now I would like to 
recognize my friend from Ohio, Mr. Sawyer, for 5 minutes.
    Mr. Sawyer. Thank you, Mr. Chairman. Mr. Gent, NAERC is the 
sector coordinator for the electric industry under the 
President's Commission on Protection of Critical Infrastructure 
for 1996. You just came out this past spring with a report and 
recommendations.
    But adherence to those recommendations is voluntary, as 
with most recommendations. Are you satisfied that there is 
sufficient voluntary progress in meeting those recommendations?
    Do you think that it would be appropriate to build a more 
defined and perhaps mandatory role for an electric reliability 
organization to have the authority to enforce standards for 
protection of critical infrastructure?
    I mean, we have heard a great deal of talk about generating 
capacity, particularly nuclear and fuel storage dumps around 
the country as weapons in place. But I am frankly just every 
bit as concerned about the vulnerability of the grid to this 
sort of thing, and I was wondering if you could comment on 
that.
    Mr. Gent. Mr. Sawyer, the solution is right here in your 
legislation. I think that the self-regulating reliability 
organization can be extended into including national security 
interests.
    I have heard a lot from the Department of Energy and other 
government agencies talking about standards. We have yet to 
define what they would like to have as standards. But should we 
decide as a Nation that we want to have some kind of security 
standards, uniform security standards, for energy facilities, 
we think that needs to be debated in an open way.
    And once the standards are implemented, they need to be 
mandatory. I think industry itself is in the best position to 
enforce those standards. There would have to be government 
oversight like there is in all SROs. But I think that what you 
are proposing in your legislation would do that also.
    Mr. Sawyer. Critical vulnerabilities, and just identifying 
them is an incredibly important first step.
    Mr. Gent. Yes, and it is also critically important that we 
don't create a list so that everybody knows what those are.
    Mr. Sawyer. I understand. Thank you. Mr. Sokol, I wish Mr. 
Hyman were still here, but let me ask you. You suggested that 
we direct FERC in your testimony to review its transmission 
pricing policies, and you spoke about that a little bit.
    And yet we heard from FERC yesterday that they think that 
they have the authority to do what needs to be done, although 
they wouldn't mind having a little bit of additional emphasis 
on that restate of direction.
    Could you give us a sense of how you think innovative 
pricing policies would work in the business of developing the 
kind of ongoing reliable capital investment that the grid 
needs, and the kind that Mr. Hyman talked about, and why you 
think that FERC may have been so far reluctant to act on the 
authority that they believe that they have?
    Mr. Sokol. Well, first, Congressman, I strongly agree with 
what I think is one of the most important elements of this 
bill, is dealing with transmission, because we do have a 
vulnerable transmission system, both purely as an energy 
delivery system for this country, remembering that it was brown 
from a patchwork quilt, and not as a national system.
    It grew together and it did not grow intelligently.
    Mr. Sawyer. He sounds like me 4 years ago doesn't he?
    Mr. Sokol. That's a compliment. Thank you. The issue of 
incentive pricing, first of all, should not be taken as an 
absolute in our view in any sense other than the recognition 
that as you move from a patchwork quilt of 1,800 participants 
owning transmission in this country, to 5 or 10 RTOs, or 
whatever the right number is, that you have got to find a 
mechanism to incentivize the construction of transmission that 
may not be an obvious need.
    As an example, in our area, we could make additions to 
transmission that would allow the power to be moved to several 
other States, including Iowa, to Kansas during certain peak 
times because of the way that load shifting has occurred over 
the last 20 years.
    There is today no mechanism for us to be compensated or any 
of the other three participants, one of which is a public power 
agency, to be compensated for making that addition if that 
power doesn't flow; i.e., a cooler summer, and Kansas City 
doesn't necessarily need the power flow.
    It may, however, be an absolutely essential piece of a 
redundant, highly reliable grid system that that transmission 
piece be made.
    And what we are really speaking to is merely that 
traditional forms of finding the capital to do that may need to 
be enhanced, whether that is an incentive or whether or not it 
is merely the recognition at State and Federal levels that 
putting in $100 million here may provide something that doesn't 
have direct compensation tied to it, but national security 
issues.
    It is a reliability issue and things of that nature. So I 
think that giving FERC that ability and perhaps us all working 
harder to prod them to use it where it is necessary, and 
explain the reasons for it, is ultimately in the consumer's 
interest. And whether we make the investment or someone else 
does is really irrelevant from our standpoint.
    Mr. Sawyer. Just an observation, Mr. Chairman. It seems to 
me that those kinds of investments, carefully done, and 
appropriately compensated, can go a long way toward getting rid 
of the kinds of price distortion practices that we saw recently 
caused by transmission bottlenecks. Thank you, Mr. Chairman.
    Mr. Norwood. Thank you very much, Mr. Sawyer. I would like 
to now, and it is a pleasure now, recognize a gentleman from 
New York for 5 minutes.
    Mr. Fossella. Thank you, Mr. Norwood. For Mr. Gent from 
NAERC, and I guess a question from a New York perspective. 
Currently there are special rules in place for the Metropolitan 
region in New York City in order to be able to quickly respond 
to any disturbances in the transmission system, and reduce the 
likelihood of blackouts.
    The rules include such things as temporarily reducing the 
level of imported energy, and starting up expensive gas 
turbines in the Metro region, and fuel switching at certain 
generating stations.
    They are overseen in some cases by the Public Service 
Commission, and maintains a detailed familiarity with the 
specifics of the New York system. I say that because as I see 
one of the suggestions that NAERC makes is that there will be a 
national standard.
    And I am just more curious as to how you would envision 
this one national standard, and its relationship to what New 
York City, given its unique circumstances, what that 
relationship would be?
    I guess what I am saying is that there is a sentiment that 
we don't want to see those standards or rules relaxed, and that 
the standard that is ultimately implemented on a national level 
lower than that, we would just be curious as to how New York 
City would fare?
    Mr. Gent. Congressman, I can assure you that we don't want 
to see lower standards for New York City either. NAERC was born 
out of the first Northeast blackout, which centered around New 
York City.
    And then there was the blackout of 1997 that gave rise to 
the standards that you are discussing. The legislation as it is 
proposed has allowances for special situations in various 
regions.
    And whether it be a variance or not, there will also be 
conditions where somebody will have a better idea for 
accomplishing the same performance. And so that is all provided 
for in the way of variances.
    We have had long discussions with people from New York 
State, and we think that their needs and concerns can be 
accommodated.
    Mr. Fossella. So New York will basically have the 
flexibility to maintain its own standards separate and apart 
from----
    Mr. Gent. Yes, as long as there is ample demonstration that 
they are not endangering the rest of the grid, which in this 
case that's not the case, they will have standards that would 
be acceptable to the rest of the interconnection.
    Mr. Fossella. Okay. Thank you. That's all.
    Mr. Norwood. I would recognize the Ranking Member, Mr. 
Boucher, for 5 minutes.
    Mr. Boucher. Thank you very much, Mr. Chairman. We all 
acknowledge that we need to build new transmission lines in 
various parts of the Nation, and there are some substantial 
differences of opinion as to the proper approach for Congress 
to take in order to encourage that.
    The bill that is before us contains provisions for 
incentive pricing for new transmission, and that is 
controversial in the minds of some, on the theory that 
incentive pricing necessarily means higher pricing, and that 
has a direct effect on electricity consumers.
    Others may take the position that the market can be relied 
upon to attract the capital necessary for new transmission line 
construction, and perhaps RTOs should be affirmatively 
empowered to take whatever steps are necessary to bid out the 
construction, and to manage the construction, and perhaps even 
to own the new lines.
    And I would welcome views from our witnesses, perhaps 
starting with Mr. Richardson and Mr. Hyman, to talk about the 
validity of that latter approach. First, I know Mr. Richardson 
has some problems with incentive pricing, and you might briefly 
comment on that and tell us what they are.
    But more to the point, I am interested in knowing whether 
the capital markets can be relied upon to supply the funding 
that is necessary in the event that RTOs undertake the 
responsibility of building lines.
    That strikes me as a very interesting approach if it has 
merit, and I would be interested in knowing if it has merit. 
So, Mr. Richardson, let's begin with you.
    Mr. Richardson. Thank you, Mr. Boucher. Yes, we do have 
problems with the incentive pricing provisions. Thus, what this 
suggests is prices that are in excess of or rates that are in 
excess of just and reasonable rates that are currently 
authorized under the Federal Power Act.
    And that as I said in my opening comments, just and 
reasonable is a zone. It is not a fixed point. And it is set 
within that zone to compensate for the risk of the investment 
itself, and we think that gives the Commission sufficient 
latitude to encourage through rates new transmission 
facilities.
    The suggestion that you raised with respect to regional 
transmission organizations and bidding out the construction of 
new transmission facilities is one that I think makes a 
tremendous amount of sense.
    There are individual owners of transmission facilities who 
have reasons not to build transmission or to maintain 
constraints because it is in their economic interests to do so, 
and that is a problem that needs to be overcome.
    There is transmission that needs to be constructed because 
it is in the public interest to do so. Yet, it may not be in 
the economic self-interest of any single participant.
    But it is in the regional interest, and Mr. Sokol pointed 
out an example of where that could well be the case. If you 
have a regional transmission organization that has the 
authority to bid out the construction, there is money in 
construction, and you certainly find people to construct if you 
can get over the siting problems.
    You could certainly raise the capital because we have been 
able to raise capital for transmission facilities, including 
the noted constrained PATH-15 in California under the current 
regulatory regime.
    And those facilities could then be owned by the regional 
transmission organization, and rates set system-wide for that 
organization, sufficient to cover the depth that was issued. So 
that seems to me to make a lot of sense.
    Mr. Boucher. That is the answer that I was hoping to hear. 
Let me ask you this. Do we need to do anything legislatively in 
order to enable RTOs to exercise that bid out and then 
construct opportunity?
    I think that some States may have statutes that say that 
the only entities that can build transmission are the 
certificated and regulated utilities. Are you aware of this 
circumstance?
    Mr. Richardson. I am not aware of that. Obviously, a 
backstop would be to specifically authorize if it is in the 
public interest for the Commission to do so to allow regional 
transmission organizations.
    Mr. Boucher. Okay. That's fine. Thank you. Mr. Hyman, let 
me ask you this. You heard the proposed structure here--oh, I'm 
sorry. Your nameplate says Mr. Hyman.
    Mr. Prindle. Mr. Hyman was sitting to my left.
    Mr. Boucher. I see.
    Mr. Prindle. But if the Congressman would indulge me, I do 
have something to say about that.
    Mr. Boucher. I would be happy to hear what you have to say. 
Please.
    Mr. Prindle. Well, our forte is energy efficiency and not 
transmission, per se. But we do work with companies that are in 
the transmission technology business. And as most people know, 
there are enormous losses in the transmission system.
    The old steel core transmission lines that have been out 
there since the 1930's are inefficient. They lose enormous 
amounts of energy, and they cause lines to sag, and hit pine 
trees, and cause outages. That is what almost caused the whole 
Western system to go down a couple of summers ago because a 
line sagged and hit a tree.
    There are new technologies, like composite materials, out 
there that can increase the through put of transmission lines 
substantially. But in order to do that, there have to be 
incentives out there to invest in those new higher efficiency 
technologies.
    And so just another way of supporting the idea that some 
sort of incentive needs to be there to encourage efficiency 
within the transmission system, as well as the construction of 
new lines.
    Mr. Boucher. Okay. Yes, Mr. English. We will conclude with 
you.
    Mr. English. Very, very quickly, I just want to make the 
point, two things. One is we need to establish Federal 
standards with regard to transmission lines, and new 
transmission needs to be built of those standards.
    Second, I don't believe that we have looked at the question 
of why transmission is not being built. There are a whole host 
of reasons. And third is we ought to open it up and let others 
build transmission other than the established utilities, and 
invite others to come in and build this transmission and get it 
done. And, fourth----
    Mr. Boucher. Including RTOs?
    Mr. English. Yes, indeed. Indeed. And, fourth, I think we 
get down to the whole question that incentive rates, if any 
money is going to be derived out of incentive rates, they must 
be used to build new transmission and not for any other 
purpose.
    Mr. Boucher. Okay. Thank you. Mr. Chairman, my time is up.
    Mr. Norwood. Thank you, Mr. Boucher. I now recognize myself 
for 5 minutes. I would like to thank all of you lady and 
gentlemen for being here, but I particularly want to thank 
Robert Johnston for being here from Georgia.
    These types of little gatherings are always very helpful to 
us. I am sorry that Chairman Barton has already left, because 
my first question was to him as he was talking about 
incentivizing people to go into RTOs, I wondered if he would 
define incentive.
    They can be negative and they can be positive and it is 
going to be very important in my view which way we try to 
encourage people to do that. Perhaps all of you know that 
yesterday we had the FERC Commissioners here, and Chairman 
Wood, and we had some rather lengthy discussions regarding FERC 
orders and studies, or maybe the lack of studies.
    Now, Mr. Johnston, I want to talk to you specifically about 
RTOs just for a minute. I am very concerned--and part of that 
is that many of my constituents seem to be very concerned--
about what the bottom line is going to be; what effect these 
RTOs might have on rates.
    With respect to some of the FERC policies, I think it is 
for sure that they have not measured cost benefits in regards 
to these RTOs. Are you aware of any cost benefit studies that 
Chairman Wood has conducted on the issue of RTOs?
    Mr. Johnston. I believe that they have recently initiated 
cost benefit studies at the urging of many in the industry, and 
those are underway. I don't believe that there have been any 
impartial independent comprehensive studies done to date that I 
have seen.
    Mr. Norwood. Well, he indicated that perhaps that would be 
in our future, but things are moving pretty fast. I would like 
if we are going to do that, I would like to see it done as soon 
as possible.
    Is it possible that RTOs may not be as effective in some 
regions of the country as they might be in other regions of the 
country? Does this concern you, and if it does, now is a good 
time to talk about that.
    Well, we have said that those studies need to be regional 
and the reason they need to be regional is that we have 
different cost structures, and different transmission needs, 
and different issues regionally.
    And I know in particular the LPPC members in the Northwest, 
and in the Southeast as well, both being low cost regions have 
concerns about out of control costs for the RTO without 
corresponding benefits to offset those costs.
    And when you are in a low cost State, it is a little more 
difficult to--we believe it will be a little more difficult to 
generate a positive cost benefit. We are not saying that it 
can't be done, but we are saying that it will be more difficult 
in a low cost State for obvious reasons.
    And going back to the mandatory participation in RTOs, it 
becomes particularly difficult for us to be mandated into an 
RTO that has a negative cost benefit.
    Mr. Norwood. So in a State like ours, we have to be a 
little bit concerned, because apparently I think Georgia is 
doing pretty well, and that if we aren't very, very careful 
some of these good ideas are going to end up costing our rate 
payers more money.
    Mr. Johnston. They may.
    Mr. Norwood. As we talk of moving into a new system, and 
market place for electricity, I would like for you to take a 
minute and tell us how all of this will effect my 48 cities in 
Georgia about tax exempt financing?
    Mr. Johnston. Well, the tax laws for a long time, both Alan 
and myself, and many others, have insisted that the tax laws, 
and the private use provisions of the tax laws, has got to be 
changed, or it is essentially a non-starter for us.
    We can't enter the RTOs and offer up our assets under the 
current provisions because we would violate those tax laws. 
Those have got to be changed as a prerequisite to entering 
RTOs, even if the RTOs are cost beneficial.
    Mr. Norwood. Those tax laws are fairly new aren't they? I 
mean, it hasn't always--that has been a change for you, the tax 
law itself; is that not correct?
    Mr. Johnston. There is a current tax law that is still in a 
temporary form, I believe, but you could make that permanent, 
but that does not take care of all of the issues that we have 
under the tax code. It is the 1987 tax law that actually 
applies today, but we still need to make revisions to that 
effectively in our RTOs.
    Mr. Norwood. The red light is on. I am certainly not 
through, and Mr. English, I am going to get into this with you 
in just a little bit in the next round on the RTOs. But at this 
time--well, who is next? Well, Ms. McCarthy, I believe you are 
next for 5 minutes.
    Ms. McCarthy. Thank you very much, Mr. Chairman, and I 
thank the panels for their expertise here today. PUHCA has been 
amended three times, and I know that you are aware of that, by 
the Congress to permit diversification into independent power 
in telecommunications and foreign utility companies.
    But each time this committee has okayed an exemption, it 
has ensured that the State Regulators had a role in approving 
the diversification or the letter of investment, particularly 
whenever State regulated existing utility assets could be 
involved in the new venture.
    This bill before us repeals PUHCA without any similar State 
role. I am a former State legislator. So, for full disclosure, 
I am coming from that particular point of view.
    So it just gives the States the right to see the books, and 
the records of the company.
    But in light of Enron, is this enough. And also following 
up on an issue that Representative Waxman raised earlier with 
regard to if PUHCA is eliminated that the negative effect of 
that on renewables, I wonder if you would speak to what extent 
that there should be incentives or a renewable portfolio 
standard in any comprehensive electricity restructuring 
legislation.
    And also what you think would be a realistic goal for a RPS 
by the year 2010 or 2020, so that we could have those thoughts 
in mind. And I would welcome a response from any of the 
panelists on both of those questions. Mr. Sokol.
    Mr. Sokol. Mine is specifically on PUHCA. The assurances 
that Congress has received in the past were in fact accurate. 
That the States do in fact have access to stop the types of 
diversification, et cetera, within the State regulated utility.
    That would be unchanged under 3406, as well as in the 
Bingamam and Daschle Senate bill, because PUHCA is merely the 
books and records, and affiliate issues would actually be 
expanded at the State level to all utilities today, and books, 
records and affiliate abuse activities only are available to 
PUHCA companies.
    Those that aren't--as an example, Portland General 
Electric, which is owned by Enron, is not subject to the Act. 
So what this Act would do is actually expand that books and 
records authority to every State.
    And as I mentioned before, one of the most important points 
that I think to recognize in Enron is that the only new assets 
that Enron has that aren't of any substance that aren't 
bankrupt today is Portland General Electric and its interstate 
pipeline gas activities. And that is because both of those were 
protected by State regulations, and not by PUHCA.
    Ms. McCarthy. I think that I want to clarify where I am 
coming from in this question. Yes, I think the expanded 
involvement with the books and assets, and all of that is 
important.
    But the fact that the State regulators will no longer have 
a role in approving diversification nor the level of investment 
was what the thrust of my question was about; and, yes, it is 
nice that they can go out and examine those things, and that 
has been expanded.
    Mr. Sokol. But States do have the ability to stop--and as 
an example. The reason Enron was not able to make a mess out of 
Portland General Electric is the State didn't let them. Enron 
could not pledge the assets of Portland General Electric.
    It could not borrow money to use in its derivative 
activities against those assets because of State regulation, 
and not because of PUHCA. The only thing that PUHCA does today 
is that it stops companies like ourselves, a Triple-A rated 
company, Burcher-Hathaway, from investing in the industry.
    It does not stop a utility from making bad decisions at its 
holding company level elsewhere in the industry, and I think 
that is a key distinction.
    Mr. Acquard. Congresswoman, if I may jump in here.
    Ms. McCarthy. Yes, please.
    Mr. Acquard. I agree with my friend that the Public Utility 
Holding Company Act would not have prevented the Enron 
situation, but I think it is very clear or I think it is clear 
that what it did prevent was the Enron situation getting worse.
    And I say that because the Public Utility Holding Company 
Act helps structure the industry to encourage single-State 
systems, and not multi-State systems. And once you get into a 
multi-State system--for example, if the Enron Company had 
purchased another utility, the Holding Company Act would have 
kicked in.
    Now, I don't know what their business plan was, but I would 
guarantee you, or I can almost guarantee you that they did not 
get into other utilities because they did not want to get 
covered by the Public Utility Holding Company Act.
    And there are many ramifications of that, one of which is 
non-energy related businesses they would have to sell off. So 
if they were involved in any non-energy related businesses, if 
they purchased a second utility, then they would have had to 
have spent off some of the other businesses.
    So it is not so much--the beauty of the Public Utility 
Holding Company Act is not what it does. It's what it prevents 
from being done.
    Ms. McCarthy. I think that was my concern all along, 
because in a multi-State Holding Company, how does the State 
control that big company if we eliminate PUHCA? And I very much 
appreciate your response to that.
    I would also like to hear your thoughts on renewables if we 
eliminate PUHCA. What kind of portfolio should we have, and how 
do we put incentives in to make sure that we have reached 
reasonable goals in 2010 and 2020?
    It is a part of the solution that we seek for energy 
security in this Nation, and that we get off our dependence on 
imports and we start looking at renewables. And in particularly 
in electric utility restructuring the obvious has been studied 
and is there, and on a small scale happening, and so how do we 
increase that by incentives if we are going to eliminate PUHCA?
    Mr. Acquard. Well, again, as perhaps wanting to be heard on 
this, as one of the largest renewable energy generators in the 
world, PUHCA has not either helped or inhibited renewable 
generation because it is a non-regulated entity.
    And we have just announced an expansion of 170 megawatts of 
our renewable energy in California, and we have well over a 
thousand megawatts of renewables around the world. PURPA on the 
other hand, on a prospective basis being removed, we don't 
believe--and again as one of the largest players in the 
industry, we don't believe that it will in fact slow down 
renewable generation as long as open transmission access is in 
fact achieved through a bill like 3406.
    So that we actually have the right to get on to the grid 
system and utilize the grid system with fair and reasonable 
rates. We would certainly be in favor of a renewable 
utilization standard, either in the State level or the Federal 
level. But since it would be self-benefiting, I probably should 
not give a level.
    Ms. McCarthy. Do you have an estimate on goals in 2010 and 
2020, realistic goals?
    Mr. Sokol. Realistic goals on the order of 6 to 7 percent 
would be certainly encouragable.
    Mr. Norwood [presiding]. Thank you, Ms. McCarthy. Your time 
has expired.
    Ms. McCarthy. I'm sorry, Mr. Chairman. You have been most 
gracious.
    Mr. Norwood. That's all right. I understand.
    Ms. McCarthy. I thank you very much.
    Mr. Norwood. The gentleman from Oklahoma is now recognized, 
Mr. Largent, for 5 minutes.
    Mr. Largent. Thank you, Mr. Chairman. As one who has been 
following this debate for a number of years, it is interesting 
to me to hear a number of our panelists in their testimony this 
morning.
    It seems like not that long ago that we were hearing that 
whatever we do in restructuring that we don't hand FERC too 
much authority, and that is a very bad thing. And maybe that 
was a Hecker-lead FERC, and we don't want to give them too much 
authority.
    And now it is a Pat Woods led FERC, and we are hearing 
don't be too prescriptive to FERC on how RTOs are formed, and 
so and so forth. And it used to be that when we started talking 
about a comprehensive restructuring bill that we could click 
off about 3 or 4 things that there was fairly broad agreement 
on.
    And like right out of the bat it was PUHCA and repeal. 
Done. Interconnection. Done. Reliability standards. Done. Those 
were like the easy things. Now, let's get into the harder 
things, in RTO formations, and so on and so forth. 
Transmission.
    And now we are back to where the PUHCA repeal is even 
controversial. I mean, there is a number of our panelists who 
have testified that it is a bad thing that we repealed PUHCA.
    I guess my question that I don't have for any specific 
panelist, but I would be glad to listen to, is why now that we 
don't want to be too prescriptive when we talk about RTO 
formations.
    Why shouldn't that be the responsibility of Congress? 
Lynne?
    Ms. Church. Well, Mr. Largent, I think that FERC already 
has a tremendous amount of jurisdiction, although there are 
challenges to that jurisdiction, to enable the markets to go 
forward, and to enable the establishment of RTOs.
    And while we have always encouraged making sure that FERC 
had adequate jurisdiction, I think now what is being seen by 
some who are opposed to a competitive market is that FERC is 
really trying to exercise that authority.
    And now there is pushback from those who really do not want 
to see that exercise done. I think that has resulted in this 
reversal.
    Mr. Largent. But at the same time, you are just one 
election away from seeing that change again potentially, right? 
I mean, why wouldn't you just want to statutorily say this is 
how we are going to form RTOs and this is what they should look 
like?
    Ms. Church. I don't want to statutorily say that.
    Mr. Largent [presiding]. I know. I am saying why don't you?
    Ms. Church. Because I believe that FERC, even under 
Chairman Hecker, and certainly under Chairman Moeller, and 
under Chairman Hebert, and now Chairman Wood, have all agreed 
that we have to move forward.
    And they have all tried in various ways, and dependent upon 
what the atmosphere was at that time, to move forward toward 
setting up RTOs in really regional vibrant markets. I think the 
circumstances both in the industry and in the make-up of the 
Commission, and in the make-up of Congress, have changed enough 
that now we are seeing a recognition that FERC has a tremendous 
amount of authority and expertise, and perhaps they should be 
doing or exercising that themselves without a lot of 
restrictions.
    But at the same time, we are now seeing the push back I 
think from those who are really concerned about their exercise 
of that jurisdiction.
    Mr. Largent. Well, the other question that I had was--and 
this is a little bit baffling to me, too--that I know that we 
have had panelists here just this year that have come and 
testified, Goldman Sachs and so far, and saying that one of the 
reasons that new transmission is not being constructed is 
because there is incentive to do that.
    That the rate of return that is allowed by FERC is not high 
enough, and so that is kind of what has spawned the incentive-
based rate. Everybody is shaking their head like that didn't 
happen. I was right here and the gentleman was sitting in that 
chair who said it.
    He maybe wasn't from Goldman Sachs, but that was what he 
said, and we can get the testimony from anyone who wants to 
disagree with me. But anybody have any comments on why 
incentive-based rates won't be helpful in building new 
transmission in this country?
    Ms. Church. Well, if I could just follow up on that one as 
well. I think incentive rates have a role, and I think FERC has 
adequate authority right now to decide when it would be 
appropriate.
    But I think the main reason that we have not seen more 
transmission bills was the uncertainty of what was going to 
happen in the markets, and whether or not RTOs are going to be 
put in place, and how quickly.
    And so that uncertainty has had a cost, and second, of 
course, the siting issues. That while no one has been able to 
cite a case here where a State has turned down a transmission 
grid, we know that getting a transmission line sited is very, 
very difficult, and very time consuming.
    And to the extent that it could be expedited by having a 
fallback from FERC to exercise some authority, I think that it 
would be very helpful.
    Mr. Largent. Anybody else want to comment?
    Mr. Sokol. Yes, sir. Congressman, I think the issue of 
incentive rates really kind of fall into two categories, and it 
is about definition of who is going to determine the need for 
the asset.
    And if in today in our service territory, or I think in any 
municipal service territory, if for us to service our customers 
we need a transmission line, we build it, and we find a way to 
get it sited and we get it built.
    The question is that with a national grid system, where 
there are pieces of the system that need to be built to help a 
lot of folks, and not necessarily my customers, if you are 
going to leave the rules unclear, you are going to have to 
incentivize somebody to come in and take the risk that it will 
get used.
    Or you are going to have to have a body that determines its 
need and determines how it is going to get paid for. If you do 
the latter, capital will show up to do that. But it is a bit 
like adding a lane on to an interstate. Is it for everybody's 
good, and then who pays for it, or are you going to make it a 
toll road.
    Most likely the person that puts in the toll road will 
expect a higher return because he is running the risk that it 
will get used. And I think we are going to need a mixture of 
those two, but either will solve the problem.
    A good portion of which really should be just resolved by 
having the rules set out so that FERC, or an RTO, or someone 
can determine the need, and assess the costs reasonably to all 
the parties involved in the RTO, and build it. That capital 
will be there if those rules are clear.
    Mr. Largent. Mr. English.
    Mr. English. In answer to your previous question, I think 
with regard to the FERC issue, basically what it comes down to 
is that this legislation is trying to regulate the regulators, 
and I don't think that you can do that very well through the 
legislative language.
    You may be able to do that with the administration of 
programs, but if you have got regulators out there and you 
don't like what they are doing, and you want to regulate in 
their place, then you ought to get rid of them.
    And Congress can try to regulate directly. I don't think 
that is going to work, but that would be the approach. If you 
look at this, this is Congress trying to tell FERC that you 
have got to do this or you have got to do that.
    I would suggest to you that if that is what this committee 
wants to do, it would be far more appropriate, and far more 
effective, and certainly better for the Nation, if you simply 
called FERC up here and tell them this is what we think you 
ought to be doing.
    But to eliminate their discretion and to tell them 
specifically what you are going to do, then you are trying to 
take their place, and you are trying to regulate for them.
    Now, we have had--I would totally agree with you that you 
have serious disagreements, depending on who the Commissioners 
are and what actions are taken.
    You know, we have disagreed with some, and in some cases we 
thought they were doing a great job. And they are making their 
call, but that's the reason that I think that it is far more 
appropriate to express displeasure in that manner rather than 
through legislation.
    Mr. Largent. Mr. Acquard.
    Mr. Acquard. Just to give you a real world example. A 
couple of weeks ago we had our annual conference up on 
Philadelphia, and my folks traveled out to PJM, which many 
consider one of the most successful operating RTOs today.
    And one of the questions that my members asked was do you 
need incentive rates and siting authority to do your job, and 
they said absolutely not. We are operating properly without 
them. So the short answer to your question is that they are not 
needed.
    Mr. Largent. Well, I guess my only argument to that, and 
specific to that area of the country, is that it took--and I 
think that this is fairly analogous, is that it took forever to 
get another natural gas pipeline built to the northeast part of 
the country because of all of these issues that we are talking 
about, and that we are trying to address in electricity.
    So it is an issue. I mean, they can tell you that it is not 
a problem to deal within their RTO, but when you are trying to 
connect hopefully what will be a national power grid, that's 
where the problem comes in, and that is what we are supposed to 
be dealing with.
    We are not supposed to be getting into what happens in the 
State of Pennsylvania. That's Pennsylvania's issue. What we are 
talking about is making sure that we have an interconnected 
national bulk power grid.
    Mr. Acquard. And then didn't think that was a problem 
either.
    Mr. Largent. Well, I can tell you that there is a lot of 
people that are having trouble moving power across their grid 
that would disagree with that. Mr. Chairman, I yield back.
    Mr. Norwood [presiding]. Thank you, Mr. Largent. Mr. Wynn, 
you are now recognized.
    Mr. Wynn. Thank you, Mr. Chairman, and I thank the 
panelists for coming here today. Let me ask first kind of a 
general question. Is there anyone on the panel who strongly 
opposes bidding out the construction of new facilities? Is 
there anyone that says that that is a real problem?
    Mr. Johnston. As a matter of fact, the southeast SeTrans 
model that we are negotiating with the other Southeast 
utilities does just that.
    Mr. Wynn. Okay. Great. The next question is that I believe 
that it was Mr. Richardson who said that he felt that in terms 
of incentive pricing that FERC had enough authority under just 
and reasonable to accommodate the concerns that were raised.
    Apparently, Mr. Sokol, do you disagree with that? I don't 
want to kind of point a finger at you, but I just wanted to 
find out if there was disagreement with that analysis?
    Mr. Sokol. Under the historic structure, no, I don't 
disagree.
    Mr. Wynn. Is there anyone that feels strongly that we 
should not grandfather in State and net metering?
    [No response.]
    Mr. Wynn. I believe, Mr. Richardson, that you said that 
there needed to be--that in the absence of PUHCA, there was at 
least some momentum toward repealing PUHCA, but in the absence 
of PUHCA, there needed to be some market or some protection for 
consumers against abusive market power. What did you have in 
mind?
    Mr. Richardson. Well, first of all, just to clarify a point 
earlier. APPA at least has been consistently opposing or has 
been acknowledging the fact that the modifications of the 
Public Utility Holding Company Act are probably in the cards in 
this debate over industry restructuring.
    So in that sense there has been a consensus that the 
Holding Company Act is an issue that needs to be addressed, but 
repeal is not something that we have supported. And in fact, as 
you said, we have endorsed the proposition that if you are 
going to take away the consumer protection provisions of the 
Holding Company Act that they need to be replaced by something 
else.
    And the something else is that those other things need to 
be expanded in FERC authority in dealing with the holding 
company mergers, in addition to the authority that FERC already 
has; and a reexamination of the standards under which FERC 
examines mergers.
    Perhaps the preservation of the authority to disband the 
holding company and the so-called death sentence provision of 
the holding company. If it is found that a holding company is 
operating utilities or operating in ways that are detrimental 
to the interests of consumers, as well as other market power 
provisions that we have identified in previous testimony.
    Mr. Wynn. I appreciate that, and if I could impose upon 
you, or have someone from your group send me those alternatives 
in writing, I would appreciate that.
    Mr. Richardson. We would be happy to. There is a number of 
other issues; affiliate abuse, protections, and so forth, and I 
would be happy to do that.
    Mr. Wynn. I would like to get that. Also, I believe you 
said that you believe that in terms of access to records that 
it is too narrowly drawn with respect to only costs. What 
additional government records do you believe that Federal 
regulators ought to have beyond the, quote, costs?
    Mr. Richardson. It appears to us that the access to books 
and records, assuming that the State Commissions are not asleep 
at the switch and are doing what needs to be done to look at 
the books and records, the provisions allow them to look at 
books and records only with respect to rates charged.
    Now, how broad is that or how narrow is that, that's an 
issue that certainly would be subject to interpretation, but it 
is not clear to me that it goes all the way to affiliate 
transactions, and potentials for affiliate abuses.
    Transactions to the holding companies, and structure, and 
the financial posture and structure of the holding company 
itself rests over on top of the operating utilities.
    So it is not clear that all of those books and records that 
have to do with the operations of the holding company actually 
could be obtained under the provisions that are in this 
provision.
    Mr. Wynn. If I could impose upon you again to provide me 
with that information, I would appreciate it.
    Mr. Richardson. I would be happy to.
    Mr. Wynn. I won't impose again, but I thought that was 
useful. Now, I guess the final point that I would just make is 
that we are giving or proposing to give FERC broad authority, 
but it seems like we are narrowly construing the authority in 
that critical area.
    So I think that it is important that we have the maximum 
ability to look at all of the records. The imposition of 
wholesale strategy and costs by FERC; I have a concern about 
that. Is there anyone that has a concern about whether or not 
States ought to be----
    Mr. Richardson. Well, if you are referring to the section 
on the wholesale costs for----
    Mr. Wynn. Right.
    Mr. Richardson. In cases where communities would like to 
establish their municipal electric utility system, we are very 
concerned about that. That is a provision that is in our view 
completely unnecessary, and would make the creation of new 
public power systems, or even the exploration of new public 
power systems cost prohibitive.
    States have the authority to deal with this issue, and FERC 
is a back stop to deal with this issue on a case-by-case basis. 
Additional legislation is not necessary. In fact, it is 
counterproductive.
    Mr. Wynn. Thank you very much. I see that my time is up. 
Thank you, Mr. Chairman.
    Mr. Norwood. Thank you, Mr. Wynn. Mr. Markey, you are now 
recognized.
    Mr. Markey. Thank you, Mr. Chairman, very much. Mr. 
Richardson, if Enron had been an SEC regulated registered 
holding company, it would have had to have undergone prior SEC 
review of its corporate and capital structure, including its 
equity, its debt, and its relationships with its affiliates; is 
that right?
    Mr. Richardson. That's correct.
    Mr. Markey. Now, do you think that the SEC would have 
granted prior approval to the types of disclosure documents, 
capital structures, and insider deals with all of those shadowy 
partnerships that we have been reading about?
    Mr. Richardson. It seems unlikely.
    Mr. Markey. Now, PUHCA also restricts the ability of 
registers to diversified into unregulated business areas; isn't 
that correct?
    Mr. Richardson. Yes, it is.
    Mr. Markey. And even in those areas where Congress has 
authorized some diversifications--exempt wholesale generation, 
foreign utility investments, telecommunications--that Congress 
has placed certain restrictions on such investments in order to 
protect utility operating companies from failed 
diversifications; is that right?
    Mr. Richardson. Yes, they have.
    Mr. Markey. Now, your testimony suggests that the only real 
benefit of repealing PUHCA is that it allows large multi-State 
utility holding companies to merge and grow even larger by 
acquiring operating utility companies all over the country, and 
to diversify into other non-utility businesses; is that 
correct?
    Mr. Richardson. Yes.
    Mr. Markey. So if we do what H.R. 3406 recommends, what is 
to prevent the next Enron from being a large utility holding 
company and the bankruptcy of that company from harming utility 
consumers in a crisis far worse than the collapse of Enron?
    Mr. Richardson. In my view, very little, and I think that 
is the point that Mr. Dingell was making earlier today about 
what if the Act were repealed and Enron were to become a 
holding company.
    Mr. Markey. Well, great minds think alike.
    Mr. Richardson. Yes, they do, sir.
    Mr. Markey. If I can restate that now. Now, Mr. Sokol, the 
SEC was not regulating Enron on-line as a broker dealer; isn't 
that correct?
    Mr. Sokol. Nor as a public utility holding company.
    Mr. Markey. So, Enron on-line was not subject to the 
provisions of the Securities Exchange Act that are normally 
applicable to broker dealers, and these include holding company 
risk assessment, large trader reporting, capital rules, margin 
requirements, audit trails, broker-dealer record keeping, front 
running, and other anti-manipulation and anti-fraud rules.
    So, Enron was not subject to any of those rules as far as I 
understand the situation.
    Mr. Sokol. Well, first of all, Congressman, as you know, I 
am not a defender of Enron by any stretch of the imagination. 
But I believe that Enron is subject to the rules of every 
public company, and of proper disclosure of its financials, and 
proper and full disclosure to its investors of the risks, and 
all information necessary for intelligent investment decisions.
    And so I think certainly a large portion of the SEC rules, 
Enron was subject to, and should have been responding to.
    Mr. Markey. Well, do you think that this subcommittee 
should consider regulating the over-the-counter markets in 
which Enron operated, including both the markets for physical 
delivery of electricity and the OTC electricity derivatives 
markets?
    Mr. Sokol. I think it definitely at a minimum should hold 
hearings and very seriously look at those issues, in addition 
to potentially revamping the methods for the criminal and civil 
penalties for improper disclosure, both for company management, 
as well as auditors.
    Mr. Markey. Do you agree that if we repeal PUHCA that we 
need to retain and strengthen FERC's merger review authority so 
that the market power issues are dealt with?
    Mr. Sokol. Well, I think first of all that PUHCA clearly 
should be repealed, and as you said yourself, and I think 
Congressman Dingell indirectly as well, PUHCA did absolutely 
nothing.
    In fact, in many ways as Congressman Sawyer said, PUHCA 
allowed an Enron to exist, and it in no way resisted it. As to 
merger powers, we are completely fine with FERC's review of 
mergers.
    There are redundant merger review processes, and the only 
request we would have is merely that there be some level of 
time commitment to review them in a prompt way and make a 
decision. But market power issues clearly should be a major 
consideration in those reviews.
    Mr. Markey. Does anyone on the panel think that FERC should 
not have strengthened review powers over mergers if PUHCA is 
repealed?
    [No response.]
    Mr. Markey. Earlier on, Mr. Sokol, you said that what Enron 
had done with respect to its accounting practices, its off-
balance sheet items, and its special purpose limited 
partnerships, is not unique in the energy business. How 
widespread are these practices?
    Mr. Sokol. Well, I would say that of companies like Enron, 
and again the non-regulated sides of the business, it is more 
widespread certainly than is helpful. I think we are already 
seeing other companies unwind similar activities.
    Mr. Markey. Well, what other companies are doing that right 
now?
    Mr. Sokol. Well, yesterday, El Paso announced that it would 
unwind two of its off-balance sheet partnerships that were very 
similar to what Enron had. Again, El Paso is not a Public 
Utility Holding Company Act company, and PUHCA did not in any 
way prohibit them.
    And I believe that there are other folks in that sector 
that have used accounting treatments that perhaps shouldn't be 
used in the future.
    Mr. Markey. Okay. And, Mr. English, Glenn, back when you 
served in Congress, you had jurisdiction over the CFTC over 
there at the Agriculture Committee, and during that time you 
may recall that Congress passed the Futures Trading Practices 
Act of 1992.
    And that authorized the CFTC to exempt over-the-counter 
derivatives from regulation as futures, and this exemption was 
further expanded during the last Congress when we passed the 
Commodity Futures Modernization Act.
    Now as a result of those laws, the CFTC has virtually no 
jurisdiction over the OTC derivative markets, and hence over 
the activities of companies like Enron.
    Mr. English. Well, I hope that you also remember when I was 
chairing that subcommittee that I strongly objected to that and 
felt that those derivatives should be regulated.
    Mr. Markey. Well, I am ready to serve up the great truth. 
Let me finish. I have the big home run pitch coming.
    Mr. English. Okay. Don't make it too slow now.
    Mr. Markey. Okay. I have to try and speak as slowly as they 
do in the Southwest right now in setting up this pitch. So in 
light of that, do you think we should consider giving FERC 
additional authority over electricity trading markets and 
related derivative markets so that there is some Federal 
regulation over these things in view of the fact that at that 
time you had great reservations about granting those 
exemptions?
    Mr. English. And given that previous experience, I would 
say whole-heartedly, yes. I don't think there is any question 
that we need to focus more attention on these derivative 
devices that are used to in effect evade any kind of oversight, 
and that is basically what we are talking about here.
    Mr. Markey. Does anyone on the panel disagree with Mr. 
English?
    Ms. Church. Yes, sir.
    Mr. Markey. Okay.
    Ms. Church. While I am not suggesting that it is 
inappropriate for certainly Congress and the regulators to 
relook at the issue, I would just strongly remind the 
Congressman and the rest of the panel that Enron's core 
business of electricity trading--their platform, and their 
other trading--was not what brought them down.
    It was not their problem. Their problem was in their debt 
leverage and in their disclosure process. In fact, their 
trading was in fact their crown jewel, which was providing the 
cash-flow, and ultimately it was the discipline of that trading 
market and the fact that the counter-parties lost confidence in 
Enron's financial status.
    Mr. Markey. So, what you are saying here for the record 
then is that none of the debt, none of the problems, were in 
any way related to the trading practices that were going on. 
You are ready to go on the record and say that?
    Ms. Church. Yes.
    Mr. Markey. None of it?
    Ms. Church. Yes, that is my understanding.
    Mr. Markey. So what did cause it, just so we can all 
understand it if it wasn't that?
    Ms. Church. I think it was a lack of financial confidence 
that was due to their disclosure about the level of debt which 
was not what had been known before. And particularly in their 
off-balance sheet partnerships, and the fact that there was 
increasing concern about their disclosure in their financial 
statements. That is what started the spiral eventually that I 
think brought them under.
    Mr. Markey. I thank you, Mr. Chairman, for your tolerance. 
I would just say that I think that a lot of their bad debt was 
related to obviously this diversification strategy in my 
opinion.
    And obviously derivators in the words of many people on 
Wall Street are really just like nuclear weapons out there; and 
that if not understood--and we know that there isn't a single 
CEO in America that I know of that really understands 
derivatives, which is why the higher 27 year olds that went to 
MIT, and who go summa cum laude degrees in advanced math, and 
so they really don't understand them.
    So to say that they are over here in this OTC derivatives 
marketplace, and somehow or other the marketplace will work 
out, with no oversight whatsoever, I think is a very dangerous 
game to play. And I thank you, Mr. Chairman.
    Mr. Norwood. Yes, sir, Mr. Markey, and let the record show 
that to get back into your good graces you got 10 minutes of 
questioning done.
    Mr. Markey. I thank you, Mr. Chairman.
    Mr. Norwood. If the panel would indulge us, we would like 
to ask a couple of more questions, and in a very limited time, 
to 3 minutes, and if we can have that understanding, I am going 
to slam the gavel down in 3 minutes.
    And so if you would be kind enough to answer just a couple 
of more questions. Mr. Walden, you have 3 minutes.
    Mr. Walden. Well, Mr. Chairman, for your good graces, I 
would like 13, but I will take three. I wanted to follow up on 
PURPA because we have heard about it from the perspective of 
its importance to spawn these alternative energy production 
facilities.
    But isn't there another side to PURPA? I mean, I have got a 
few of those contracts in my district, and for 3 years I have 
heard from some of those who have been ``stuck'' with them from 
the buying side, and that it has been a burden on consumers, 
and on the rate payers because the rate was higher than the 
market and they were locked into those agreements.
    Can you speak to that, because I think we have got to get a 
balance here on making sure that the renewables that we put on-
line are affordable to the rate payers.
    Ms. Church. I will speak to PURPA if I may. I think the 
mandatory requirement to buy that is in the bill really no 
longer makes a lot of sense in this market.
    Mr. Walden. You mean in the law?
    Ms. Church. In the law.
    Mr. Walden. Not in the bill?
    Ms. Church. Sorry, not in the bill. Correct. The law 
currently has a mandatory take requirement from utilities, and 
in this day and age, and in this type of market, that really 
does not make sense.
    And we have not opposed eliminating prospectively the must-
take provision. There is one problem with the bills dealing 
with PURPA, in that it does not eliminate the ownership 
restrictions that are also currently in the bill. Excuse me, 
currently in the law.
    But generally PURPA--has PURPA really spawned the 
competitive industry? I think it has had a great deal of 
success in bringing renewable facilities on-line, and I think 
it will continue, but I think that the must-take provision no 
longer makes sense.
    Mr. Walden. Another topic is that we have heard a lot about 
Enron's problems, and how once their revenues were recalculated 
and their off-balance sheet debt was brought into play, and 
then it all began to link to one another, and as the debt 
appeared to increase, it triggered other requirements.
    And then the credit ratings went down, and it just got away 
like a chain reaction. Then I noticed in the news recently that 
California is saying that they want to renegotiate the 
contracts for power that they just entered into earlier this 
year, which triggered some companies to begin to put forward 
that their revenues might be less than anticipated if that 
occurs.
    And as a result, I think it was Cal-Plan if I have got this 
right, and their stock began to tumble. Can any of you speak to 
what is going on in California, because we spent all spring 
trying to figure out what it was, and then about the time the 
market started to correct, they decided to enter into long-term 
agreements.
    And I predicted then that they would be back once the 
market straightened out complaining about these horrible long-
term agreements that they were ``forced'' to enter into.
    Are we now beginning to see a sort of new bludgeoning over 
these agreements?
    Ms. Church. Yes, sir, I believe you are, and we are 
unfortunately. The powers that be in California took the 
correct step in January and February when they entered into 
long term contracts to supply most of the power.
    Unfortunately, their timing was terrible. It was much too 
late, and----
    Mr. Walden. After they had denied the utilities the ability 
to do the same thing within a prior year period, right?
    Ms. Church. That's correct.
    Mr. Walden. So they entered the market at the wrong time 
and into agreements that were long?
    Ms. Church. That's correct. There were suppliers publicly 
offering the utilities long-term contracts at 5 cents, and 5\1/
2\ cents, or 6 cents, in the summer of 2000.
    And had those utilities been allowed by the State 
Regulators at that time and the State Legislature to do that, 
we would not have been in the situation we were.
    The Governors group bought at the top of the market, and 
those are contracts that are bilateral contracts. They are 
enforceable contracts. I have heard many of the suppliers say 
that they are willing to discuss renegotiating those contracts 
if it results in mutually beneficial results.
    But those are enforceable contracts, but they in hindsight, 
the Governor moved too slowly.
    Mr. Norwood. Thank you, Mr. Walden. Your time is up. Sorry, 
gentlemen. Mr. Boucher, you are recognized for 3 minutes.
    Mr. Boucher. Thank you, Mr. Chairman. I have one question, 
and Mr. Acquard, I will pose this to you. Those who are 
advocating a removal of the Federal Energy Regulatory 
Commissions' authority to review mergers argue that the 
function of promoting competition can be performed very 
adequately by the Department of Justice, or the Federal Trade 
Commission, one or the other of which would have jurisdiction 
in the event of mergers.
    Tell me--and this is for the benefit of the record, which 
we will share with other members. What is it that the FERC can 
do, and is uniquely positioned to do that these anti-trust 
enforcement agencies are not?
    Mr. Acquard. I think basically that they have an 
understanding of the energy industry. The FTC and the 
Department of Justice does not have that understanding. So we 
believe that it is important that FERC continue to have a role 
in those mergers.
    The concern ultimately is that unless you take a close look 
at the mergers, and you have added authority on mergers, that 
we are going to turn into a Bell system, turning to the 
telecommunications area, where we will have fewer and fewer 
competitors, and we will not have an agency that fully 
understands the industry that they are regulating.
    Mr. Boucher. So FERC has special knowledge which can and is 
brought to bear on merger reviews?
    Mr. Acquard. Absolutely.
    Mr. Boucher. A deeper knowledge than the anti-trust 
agencies possess?
    Mr. Acquard. Absolutely.
    Mr. Boucher. And FERC can utilize this knowledge to promote 
competition more effectively than the anti-trust review can 
promote it?
    Mr. Acquard. That's correct.
    Mr. Boucher. Thank you, Mr. Acquard, and thank you, Mr. 
Chairman.
    Mr. Norwood. Thank you, Mr. Boucher. I recognize myself for 
3 minutes. Mr. Johnson, you have 48 cities in your association 
in Georgia. Now, over the past 20 to 25 years how much money 
has your operation spent in investing in transmission 
infrastructure to serve those customers?
    Mr. Johnston. We have between $300 and $400 million of tax 
exempt bond investment in transmission in Georgia.
    Mr. Norwood. And under this new system are you going to be 
able to guarantee those customers that they will not experience 
a brown-out when merchant plants in other States sell and 
transfer electricity through Georgia transmission systems, and 
say up to Mr. Markey's area?
    Mr. Johnston. Not unless we can successfully negotiate a 
native load protection provision that we are negotiating. But 
without that, we would not be able to guarantee delivery, no.
    Mr. Norwood. Now, if you have brown-outs and you can't 
guarantee that delivery, who are we going to holler at? Are we 
going to be mad at you or are we going to be mad at the RTO?
    Mr. Johnston. Well, I know that there is going to be a lot 
of hollering going on, and I probably have plenty of it 
directed to me, and there will probably be plenty of it 
directed at you and others.
    Mr. Norwood. Well, Congressman Barton just pointed out that 
they would be hollering at me, too. So, you seem to think that 
the rate payers, the native load customers, should be given 
some kind of priority consideration?
    Mr. Johnston. Yes, because frankly they have paid for that 
system, and they are subject to the bond debt for the life of 
that debt, and why shouldn't they have priority. It was built 
for them.
    Mr. Norwood. You are talking about incentives that 
Congressman Largent was talking about. Had you known years ago 
that this $300 to $400 million that you had invested in 
transmission lines were going to be taken away from you and 
perhaps you could only use it when somebody else says you could 
use it, would you have had an incentive to build that 
transmission line?
    Mr. Johnston. No, we would not.
    Mr. Norwood. And if we do have RTOs, there had better be 
some incentives for new transmission?
    Mr. Johnston. Yes.
    Mr. Norwood. And it needs to be incentives that we think 
will last a few years and not be taken away as we might be 
talking about doing that now, and with that, I yield back the 
balance of my time, and I yield the chair to the dcairman.
    Mr. Barton. Thank you. I am not going to ask any questions. 
It is 1:15 and I could debate with each of you and say 
something funny, and you could come back with something smart, 
and all of that.
    We know where you are, and we appreciate you being here. We 
have been messing with this issue for--you could say for the 
last 10 years. We certainly have been trying to do something 
for the last seven, and I have been trying to do something for 
the last three.
    The bill before us is not a perfect bill, but it is a real 
attempt at a balanced approach that tries to balance all the 
concerns that you put on the table. We are going to continue to 
work with you. I don't think some of you are as opposed to the 
bill as you have said today based on what you have said off the 
record.
    But I am not going to put you on the record when you said 
to keep it off the record. I am going to check with Chairman 
Tauzin. It looks like the House is going to be in session next 
week. We are coming in at 6:30 next Wednesday, and we will be 
here all day Thursday.
    My intention is to schedule opening statements on the mark-
up Wednesday afternoon late, probably about four o'clock, and 
then go to mark-up on Thursday. That is an intention, and that 
is not a declaration. I need to check that with the chairman, 
and obviously I need to check it with Mr. Boucher and Mr. 
Dingell.
    I would like to get this bill out of the subcommittee next 
week if we have time to do it, so that we can set it up to go 
to the full committee. I really want this Congress to move a 
comprehensive electricity restructuring bill.
    I think the time has come and I think we are close to 
consensus, and there will never be the perfect time. I mean, if 
we wait 6 months or a year, there is always going to be 
something else.
    The only real alternative in my mind to doing something 
close to what we have got on the table would be a very slimmed 
down bill that just gave explicit authority to FERC to do what 
they wanted to do.
    And in my opinion that is an abrogation of the Congress to 
legislate. The Congress legislates and the executive branch 
implements, and too many Congresses have punted to the 
executive branch because we are not willing to make tough 
choices on issues that there is not total consensus.
    So, I do appreciate each of you individually, and I do 
appreciate the groups that you represent. I would encourage you 
and your staffs to work with the member staffs and the 
leadership staffs on constructive ideas to perfect the bill, in 
terms of amendments and things that need to be added and 
deleted because it is now intention this afternoon to the 
opening statements next Wednesday, and go to mark-up on 
Thursday.
    So I want to thank you for your attention and thank you for 
your participation, and with that, this hearing is adjourned.
    [Whereupon, at 1:18 p.m., the subcommittee was adjourned.]
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