[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]



                                                   S. Hrg. 102-000 deg.

 
  ANTICOMPETITIVE THREATS FROM PUBLIC UTILITIES: ARE SMALL BUSINESSES 
                              LOSING OUT?
=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                      WASHINGTON, DC, MAY 4, 2005

                               __________

                           Serial No. 109-15

                               __________

         Printed for the use of the Committee on Small Business


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house


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                      COMMITTEE ON SMALL BUSINESS

                 DONALD A. MANZULLO, Illinois, Chairman

ROSCOE BARTLETT, Maryland, Vice      NYDIA VELAZQUEZ, New York
Chairman                             JUANITA MILLENDER-McDONALD,
SUE KELLY, New York                    California
STEVE CHABOT, Ohio                   TOM UDALL, New Mexico
SAM GRAVES, Missouri                 DANIEL LIPINSKI, Illinois
TODD AKIN, Missouri                  ENI FALEOMAVAEGA, American Samoa
BILL SHUSTER, Pennsylvania           DONNA CHRISTENSEN, Virgin Islands
MARILYN MUSGRAVE, Colorado           DANNY DAVIS, Illinois
JEB BRADLEY, New Hampshire           ED CASE, Hawaii
STEVE KING, Iowa                     MADELEINE BORDALLO, Guam
THADDEUS McCOTTER, Michigan          RAUL GRIJALVA, Arizona
RIC KELLER, Florida                  MICHAEL MICHAUD, Maine
TED POE, Texas                       LINDA SANCHEZ, California
MICHAEL SODREL, Indiana              JOHN BARROW, Georgia
JEFF FORTENBERRY, Nebraska           MELISSA BEAN, Illinois
MICHAEL FITZPATRICK, Pennsylvania    GWEN MOORE, Wisconsin
LYNN WESTMORELAND, Georgia
LOUIE GOHMERT, Texas

                  J. Matthew Szymanski, Chief of Staff

          Phil Eskeland, Deputy Chief of Staff/Policy Director

                  Michael Day, Minority Staff Director

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                               Witnesses

                                                                   Page
Martin, Mr. Mike, President, F.K. Everest, Inc...................     5
Harvey, Mr. Brian, President-H&C, Inc............................     9
Kelleher, Mr. Hugh, President-PHCC of Greater Boston.............    10
Peters, Mr. Adam, Progress and Freedom Foundation................    12
Hargis, Ms. Lynn, Public Citizen.................................    14

                                Appendix

Opening statements:
    Manzullo, Hon. Donald A......................................    29
    Velazquez, Hon. Nydia........................................    32
Prepared statements:
    Martin, Mr. Mike, President, F.K. Everest, Inc...............    34
    Harvey, Mr. Brian, President-H&C, Inc........................    38
    Kelleher, Mr. Hugh, President-PHCC of Greater Boston.........    42
    Peters, Mr. Adam, Progress and Freedom Foundation............    53
    Hargis, Ms. Lynn, Public Citizen.............................    57
Attachments:
    Richardson, Mr. Alan H., President & CEO, American Public 
      Power Association..........................................    60
    Martin, Mr. Mike, President, F.K. Everest, Inc...............    73

                                 (iii)


       ANTICOMPETITIVE THREATS FROM PUBLIC UTILITIES: ARE SMALL 
                         BUSINESSESLOSING OUT?

                              ----------                              


                         WEDNESDAY, MAY 4, 2005

                   House of Representatives
                                Committee on Small Business
                                                     Washington, DC
    The Committee met, pursuant to call, at 2:15 p.m. in Room 
311, Canon House Office Building, Hon. Donald A. Manzullo 
[chairman of the Committee] presiding.
    Present: Representatives Manzullo, Bartlett, Chabot, Akin, 
Fortenberry, Westmoreland, Velazquez, Lipinski, Christensen, 
Davis, Sanchez and Moore. 

    Chairman Manzullo. Good afternoon, ladies and gentlemen. 
Today's hearing focuses on another part of a consistent theme 
raised from this podium.
    Our Committee and small business advocates of every stripe 
worry about the health of the marketplace and certain actions 
by government that tip the scales in favor of one party over 
another. There have been many instances where the big guys and 
the well connected are protected at the expense of the 
entrepreneur or where the new entrant or small businessman is 
overlooked. We have fought against this many times in the past.
    For instance, when our Committee learned that the Federal 
Government Printing Office was taking away work from the 
private sector we shut them down. We went after Federal Prison 
Industries for similar unfair practices. This even applies in 
the trade setting.
    We have raised questions about government subsidized or 
government controlled entities winning U.S. Defense contracts. 
I have spoken out about Chinese state owned companies competing 
with U.S. companies that have private shareholders and face 
real market pressures which state controlled entities can 
avoid. It is a simple question of fairness.
    Today the issue we confront is growing competition from 
service companies owned and controlled by investor owned 
utilities and some municipal owned utilities. The real worry we 
have here is not dissimilar to the other examples I mentioned. 
The utility companies in most every state have their rates 
fixed by public utility rate commissions, and they are 
essentially guaranteed a profit each year. Their costs are a 
public record. Their rates are fixed with a reasonable profit 
in mind.
    This is a legacy of the very high priority we place on 
electrifying nearly every home in America and not unlike the 
universal service fund program we have devised for telephone 
services. While many might question the wisdom of these 
arrangements, they are a fact of life for every American.
    Increasingly, the utility companies are creating 
subsidiaries and affiliate companies that provide other kinds 
of services apart from the basic power supply delivery. The 
diversity and scope of these services seems to grow each year. 
Companies owned and operated by these utilities sell plumbing 
and electrical services, home remodeling, vinyl siding, storm 
windows, subscription service contracts, appliance sales and 
rentals and many other services that range from home security 
systems to high-speed internet access. It is truly a growing 
phenomenon.
    Like me, the witnesses here today are concerned that these 
new companies enjoy unique advantages because of their special 
status as instruments of a public utility. While direct subsidy 
from ratepayers is proscribed, there are many ways that these 
new entrants could get an unfair advantage.
    For sure, they can obviously use the highly visible brand 
name developed over many years and paid for by the guaranteed 
profits. So too, many are able to avoid a lot of the pitfalls 
of finding start-up capital that others might face without the 
benefit of a successful and long-established parent. These are 
just a few of the concerns we hope to learn more about today.
    If you do not see a witness from the public utility sector, 
they refused to participate in this hearing. We have other 
methods, including subpoenas, to get to the heart of this 
matter. We are very upset--very, very upset, extremely upset--
with the special status that the public utilities have and the 
lists of customers are being used to disadvantage little 
people, those before us, those who have the integrity to show 
up and participate in the hearing.
    I now recognize the Ranking Member, the gentlelady from New 
York, for her opening remarks.
    All Members are reminded that following today's hearing 
they will have five business days to submit statements in 
writing or other supportive material that without objection 
will be made a part of the hearing transcript.
    At the appropriate time following Mrs. Velazquez's opening 
statement I am going to recognize Congressman Tierney, who has 
a constituent that he wants to recognize.
    Congresswoman Velazquez?[Chairman Manzullo's statement may 
be found in the appendix.]

    Ms. Velazquez. Thank you, Mr. Chairman. There is no 
question that our nation's small businesses are facing a myriad 
of challenges today. Between skyrocketing health care, energy 
and gas prices to a growing budget deficit, there are 
significant barriers standing in the way only making it more 
difficult for small business owners to successfully run their 
business on a daily basis.
    Not only do they have to deal with this additional cost, 
but small business traditionally face unfair competition from 
larger businesses. This competition has been particularly 
dominant in industries related to energy. Small firms 
consistently find themselves living in the shadow of large 
public utility companies. That is why protections such as the 
Public Utility Holding Company Act, PUHCA, have been put into 
place.
    Since its inception in 1935, PUHCA has acted as a firewall 
protecting small businesses from having to compete with 
monopolies within the public utility industry. PUHCA was 
created to eliminate unfair practices and other abuses by 
electricity and natural gas holding companies. By limiting the 
geographic scope of public utilities, state utility commissions 
were able to effectively regulate them.
    However, regulation and protection is about to become 
significantly tougher. Two weeks ago the House passed an energy 
bill that did little, if anything, to help small firms. With 
today's national average price of gasoline at a record level of 
$2.24 a gallon, 42 cents higher than just a year ago, the 
situation is only getting worse.
    Not only did the energy bill fail to relieve small 
businesses of the record high gasoline prices, but it also 
repealed PUHCA. Without the protections of PUHCA it will be 
difficult to regulate multi-state public utility holding 
companies. Utilities will be able to take liberties in regard 
to cross-subsidization that are currently prohibited.
    The repeal of PUHCA gives utility companies a clear, 
competitive advantage. Not only will this wrongfully harm small 
businesses and consumers, but it will negatively impact the 
U.S. economy altogether. In the past, allowing public utility 
companies to break into unregulated areas has simply not 
worked.
    Prior to the inception of PUHCA, 53 public utilities 
failed, creating significant economic disruption. Since its 
inception, not one PUHCA regulated utility has failed, and it 
has prohibited utilities from entering into unregulated 
endeavors, protecting small businesses and this nation's 
economy.
    When the House passed the energy bill, not only did it 
repeal PUHCA, but it failed to offer any new safeguards. 
Clearly what we need now is strong protection for small firms. 
If the Bush Administration decides that public utility 
companies should be able to delve into this area then we need 
to ensure that protections are in place.
    Democrats have been engaged on this issue in the past. Over 
the last two Congresses we wrote a letter to the chairman of 
the Energy and Commerce Committee asking them to ensure that 
protections are in place in these instances.
    What is most upsetting is that we are sitting here weeks 
later to address a problem that could have been prevented if we 
had broached this subject before the energy bill came up in the 
House. Now the battle is even tougher as we try to ensure that 
a provision is offered in the Senate.
    What we need now is a provision that offers protection to 
small businesses, one that will not allow the public utility 
companies to use ratepayer assets to pursue their own ventures, 
one that prohibits utilities from using an already branded name 
and using equipment already under their monopoly in order to 
provide additional services.
    Clearly small businesses do not have the resources to 
compete with these unfair advantages. Not only do this nation's 
entrepreneurs deserve a level playing field, but they also 
deserve to be protected. Without the protections offered under 
PUHCA, our nation's entrepreneurs and our economy will be 
teetering on the brink of yet another economic disruption.
    With an economy still struggling to recover, we must ensure 
that a provision is offered in the Senate so our nation's small 
businesses can continue doing what they do best, creating jobs 
and stimulating economic growth.
    Thank you, Mr. Chairman.
    [Ranking Member Velazquez's statement may be found in the 
appendix.]

    Chairman Manzullo. Thank you.
    Congressman Tierney?

    Mr. Tierney. Thank you very much, Mr. Chairman and Ranking 
Member Velazquez. I appreciate this opportunity to introduce my 
friend, a member from my district on this.
    Hugh Kelleher is the Executive Director of the Plumbing-
Heating-Cooling Contractors Association of Greater Boston. He 
has great ties to my district, which is north of Boston, and 
helps out on a lot of different Committees from the Tree 
Committee on up in the community in which he lives.
    He is also obviously the head of the Plumbing Contractors 
Association of Boston, but I found out from our conversations 
earlier that he is a former staff member here in Congress, 
having worked for Jim Shannon when he was a congressman here on 
the Ways and Means Committee, and he himself is a licensed 
master plumber and a small businessman who is now working with 
the Association.
    Mr. Chairman, I understand that this hearing is going to 
deal with anti-competitive threats from public utility 
companies, and Mr. Kelleher has a compelling story to tell 
about what is going on in Massachusetts.
    You mentioned in your opening remarks about the tipping of 
the scales, the big guys against the small people, the small 
regular people in America. I think that is what we are seeing 
more and more. Here with utilities we are dealing with 
monopolies that have friends in high places. Unfortunately, too 
often those friends in high places wage their influence here in 
Washington, and it is not always a good result for small 
businesses.
    There are a number of ways we can deal with that. One is 
legislatively, and I am glad to see that this Committee is 
getting out in front of that. I commend you for that. Another 
is regulatory, but in both of those ways too often it is like a 
David and Goliath battle for small businesses.
    There is a saving grace in our system, and that is of 
course the balance of powers and the fact that we have a 
judicial system that allows people to take recourse there if 
necessary. I talked to Mr. Kelleher earlier today and told him 
that I think that if we are not able to do things legislatively 
then certainly hopefully their national and state organizations 
might look at the Federal Trade Commission Act and our local 
FTC Acts like Massachusetts' Chapter 93[A] and try to get to 
the bottom of this by using those resources against these 
unfair business practices. It will help them both prove their 
case and get some recourse for it.
    I just want to thank you, both of you, and all the other 
Members of this Committee for the hard work that you are doing 
in this area and the fact that you regularly stand up for small 
businesses and do such a great job of it. I thank you for 
welcoming Mr. Kelleher here. I know you will give his testimony 
full consideration, and I appreciate the opportunity to come 
here today and introduce him.

    Chairman Manzullo. Thank you, Congressman Tierney.
    Our first witness is Mike Martin, president of F.K. 
Everest, speaking on utility unfair competition and cross-
subsidization.
    Mike, you have to speak closely into the mike. Thank you.
    The clock is timed for five minutes. It is right in front 
of Mr. Kelleher. That does not mean that the timing only 
applies to him. When it gets down to the yellow that is one 
minute. When it gets to the red you are out of time, okay?
    We look forward to your testimony. The written statements 
of all the witnesses will be entered into the record without 
objection.
    Please proceed, Mr. Martin. You have to turn on the mike 
there.

    Mr. Martin. Sorry.

    Chairman Manzullo. All right. Start all over again. We will 
reset the clock. Go ahead.

    STATEMENT OF MIKE MARTIN, PRESIDENT, F.K. EVEREST, INC.


    Mr. Martin. Good afternoon, Chairman Manzullo and Members 
of the Committee. My name is Mike Martin. I am president of 
F.K. Everest Electrical Contracting, a firm headquartered in 
Fairmont, West Virginia. Our firm is a member of the National 
Electrical Contractors Association, and today I speak for 
myself and also on behalf of the entire association of 4,200 
electrical contractors across the United States.
    I have served as president of F.K. Everest since the year 
2000. In that position I have had direct experience with 
problems of competing with utilities on a playing field that is 
anything but balanced. Prior to coming to F.K. Everest, between 
1986 and 1996 I held several positions with Allegheny Power 
System, so I can truly speak to this issue from personal 
experience.
    Here are some examples of the ways utilities can unbalance 
the competitive playing field in favor of their unregulated 
entities. One way a utility gains a competitive advantage is 
for its unregulated, non-utility entity is through the practice 
of incremental billing. When a normal business has to rent or 
purchase equipment or hire manpower it must do so at market 
rates.
    However, an unregulated electric utility using the same 
equipment and manpower provided by its utility operations is 
billed only the incremental cost for the rental of the 
equipment instead of the fair market price. This constitutes a 
major unfair advantage for the utility's unregulated venture.
    The utility will argue that billing at such incremental 
cost is not cross-subsidization because they are billing for 
all costs incurred for the additional use of that equipment or 
for the personnel.

    Chairman Manzullo. Mr. Martin, first of all I want you to 
take a sip of water, and I want you to relax, okay? We are 
going to add some time back to your clock again.
    Are you all right? Is this your first time speaking before 
a congressional hearing?

    Mr. Martin. Yes. Yes, sir.

    Chairman Manzullo. Okay. What I would like you to do is to 
go to the portion of the testimony that tells your story.

    Mr. Martin. Sure.

    Chairman Manzullo. Then if there is time we can go back to 
the general picture. Is that okay with you?

    Mr. Martin. That is great.

    Chairman Manzullo. All right.

    Mr. Martin. Thank you very much, Mr. Chairman.

    Chairman Manzullo. We will tell you when to stop. Just 
ignore that timepiece, okay? Go ahead.

    Mr. Martin. Okay. Addressing the issue of incremental cost, 
the utilities are customarily billing their non-regulated 
entities for incremental cost, which is just the additional 
cost for using that equipment or personnel and not the full 
market price of the use of that equipment.
    However, while there are no additional costs to the 
utility, the non-regulated company has gained an unfair 
advantage. It is a benefit derived from the use of the utility 
property, and I feel that that difference between the market 
price and the incremental cost should remain in the regulated 
company to the benefit of the utility customers.
    A specific example might be if a specialized piece of 
equipment is used by the non-regulated utility and it is used 
let us say 10 percent of the time. The utility may have 
purchased that again for themselves for 10 percent of the time, 
and they have to have it available to them 24 hours a day, 
seven days a week, in case of an emergency, but if the non-
regulated side needed that piece of equipment and it is rented 
to them at the incremental cost, just the cost for demand power 
or to operate the equipment or the fuel or maintenance, there 
is an unfair advantage because while they are not directly 
subsidizing the non-regulated utility and the equipment is 
better utilized, the subsidiary has been given an unfair 
advantage by the below market rates.
    If a contractor needs the same piece of equipment he has a 
couple options. One, he can purchase the equipment, and if he 
is only using it 10 percent of the time he has to spread the 
full cost of that equipment over that 10 percent of the time he 
is using it, or he could go out and rent the equipment, and 
again he has to pay the full market price for that equipment. 
If the subsidiary chooses to use that equipment again for its 
competitive ventures it should be charged the full market price 
for that equipment.
    Another item would be a non-regulated entity affiliated 
with the public utility benefits directly and substantially if 
it uses the name and logo of the public utility. It also 
benefits even for its inherent relationships whether it uses 
the actual name or logo. As soon as a sales representative 
tells a potential customer their relationship with a public 
utility they immediately gain from the name recognition and the 
goodwill of that public utility.
    An independent contracting firm has to use its own money to 
advertise and to build its own business relationships. In our 
area, if you look in the yellow pages of the local telephone 
book you will see many advertisements for electrical 
contractors. However, you will not see any advertisements from 
a utility non-regulated business.
    As a contractor, I would love to have mailings on a monthly 
basis, a postcard or a utility bill, mailed to all my current 
customers and potential customers on a monthly basis so when my 
salesperson makes a call to that customer they would 
immediately know who I am. Again, this is just another example 
of how the utilities gain, how their non-regulated entities 
gain from the utility business.
    Another example would be upgrades involving customer owned 
and utility owned facilities. There was a local hospital who 
was upgrading their electrical facilities for future 
renovations, and it included their switchyard and some utility 
facilities within their switchyard. This particular service 
point was a critical point for the hospital. It could not be 
taken out of service, nor could it afford any interruptions.
    The customer's representative who heard about this before 
the general public and was dealing with the customer had 
stressed to the customer that there had to be very strict, 
close cooperation between the contractor and the utility to 
achieve this work. He also went on to say the only way to 
assure that cooperation was for the utility to do work on both 
the customer owned and the utilities. In fact, he was in our 
office and mentioned that he was--

    Chairman Manzullo. Mike, go on to the college.

    Mr. Martin. Sure. Okay. The local college--

    Chairman Manzullo. Is this not fun? Go ahead. Go ahead, 
please.

    Mr. Martin. Yes. In this instance, the local college had a 
10-year construction plan where they were going to be building 
some new buildings and remodeling and renovating some existing 
buildings. In this case it was a state owned college, and they 
received their service at a high voltage through a single 
metering point. From that point to the individual buildings it 
went through the college owned facilities; not utility owned, 
but the college owned facilities.
    Again the utility, through the utility practice, heard 
about the project before the general public did, had their foot 
in the door, talked with them and convinced the colleagues to 
single source the construction or upgrade these facilities 
directly to the public utility but through their non-regulated 
entity.
    When we became aware of it and mentioned it to the National 
Electrical Contractors Association they challenged the project 
as a giveaway and the fact that in the State of West Virginia 
state agencies are to solicit bids for any projects over 
$25,000, and in this case they had not.
    After challenging that issue all of a sudden the project 
became a utility owned facilities. The college turned the 
facilities over to the utility, and the utility upgraded them 
and put individual metering points at each service location. 
Therefore, it took the work away from the non-regulated side, 
and it became a utility property.

    Chairman Manzullo. Okay. I am going to halt you right 
there.

    Mr. Martin. Sure.
    [Mr. Martin's statement may be found in the appendix.]

    Chairman Manzullo. Are you doing all right?

    Mr. Martin. I am doing okay. I apologize.

    Chairman Manzullo. You do not need to apologize. Have 
another sip of water, and then we will be back with a round of 
questions, okay?

    Mr. Martin. Sure.

    Chairman Manzullo. Our next witness is Brian Harvey. Brian 
is from Laurel, Maryland. I think we met what, a couple months 
ago?

    Mr. Harvey. You met our president, Richard Dean.

    Chairman Manzullo. Okay.

    Mr. Harvey. Yes.

    Chairman Manzullo. In any case, from your company. That was 
one of the interesting stories that further peaked my interest 
in the subject.
    Brian, we look forward to your testimony.

    Mr. Harvey. Thank you. Thank you, Mr. Chairman.

    Chairman Manzullo. If you see the clock there, we will 
follow regular order on the clock. I gave an exception to Mr. 
Martin because he needed some time to drink his water.
    Go ahead.

         STATEMENT OF BRIAN HARVEY, PRESIDENT, H&C INC.


    Mr. Harvey. Thank you, Mr. Chairman and Ranking Member 
Velazquez and all the other Members of the House Committee on 
Small Business.
    I am here representing the Air Conditioning Contractors of 
America. We represent 5,000 local, state and national members. 
Most of our contractors are family owned and operated small 
businesses, and many of these businesses are in their second 
and third generation of family ownership.
    My company in Laurel, Maryland, we have 25 employees. I am 
a second generation owner. My father started the business in 
1969. We provide residential and commercial heating and air 
conditioning service throughout the State of Maryland. I am 
also a board member of the Maryland Alliance for Fair 
Competition and the past president of the National Capital 
Chapter of ACCA.
    I first experienced unfair competition with a local utility 
company in July of 1994 when Baltimore Gas & Electric, BG&E, 
purchased one of my largest competitors. BG&E's acquisition of 
Maryland Environmental Systems created a 800 pound gorilla in 
the central Maryland heating and air conditioning contracting 
community.
    Before purchasing Maryland Environmental Systems, our 
company had always had a good working relationship with BG&E 
and participated in many, if not all, of their contractor 
programs. Maryland Environmental Systems was a large, well-
established, well-organized heating and air conditioning 
company. BG&E gave them an infusion of cash and allowed them to 
share in over one million residential and commercial electric 
customers and 600,000 gas customers.
    Maryland Environmental Systems, which was renamed BG&E 
Home, gave BG&E immediate entry into the air conditioning 
contracting field. They provided the platform of established 
operating systems, trained personnel and contracting knowledge.
    Almost immediately we saw former Maryland Environmental 
Systems employees driving around in BG&E trucks, trucks that 
were paid for with ratepayers' money. These trucks that were 
originally purchased by Baltimore Gas & Electric to provide 
Maryland ratepayers with gas and electric service were now 
being used by BG&E Home to install heating and air conditioning 
systems in direct competition to me.
    The two companies began to share resources and consolidate 
overhead expenses. Needless to say, with plenty of cash and 
plenty of customers the company flourished. As an independent 
businessman, I find myself continually working harder to try 
and maintain market share. I do not get free trucks from the 
electric company. I have to pay for my trucks like every other 
business does.
    When marketing to new customers I have to explain to them 
who my company is and why they should choose us to install 
their new furnace or air conditioner. BG&E Home never has to 
explain who they are because everyone gets an electric bill 
every month with the BG&E logo on it. No doubt, many of you 
have these in your own homes. You get the utility bill with the 
stuffer in there trying to sell you storm windows and plumbing 
repairs and what else. The point is that the name has immediate 
and enormous name recognition. The utility's name is just a 
slam dunk with the consumer.
    To give you an idea of how important that name is, a 
somewhat different scenario recently played out in the 
Washington metropolitan area. Washington Gas, which is a public 
utility like BG&E, decided to enter the air conditioning 
business. They did this by putting up $25 million along with a 
private venture capital fund who also put up $25 million to 
begin operations, so with a pool of $50 million they started 
purchasing privately owned air conditioning firms and 
consolidating them under one name.
    They named the new company Primary Multicraft, a $50 
million company with acquired HVAC contracting expertise, but 
with no identifiable history and no name recognition. They had 
almost the same business model as BG&E Home, yet they did not 
use the utility's trademark name. Two years later they filed 
Chapter 7, and they were out of business.
    This shows the importance of the brand and what that means 
to the companies. Recently both Home Depot and Sears have 
enthusiastically entered the home air conditioning market. I do 
not like competing against two of the largest retailers in the 
country, but it is a fair fight. They have paid for their name 
recognition with their own resources and not with the 
ratepayers' money.
    I do not want preferential treatment or more regulatory 
burdens, but I do want a fair playing field. Let the consumer 
decide for themselves. I am happy to compete with anybody, but 
a utility has a unique advantage over an independent business 
person, and it is really not fair.
    Thank you for your time and attention.
    [Mr. Harvey's statement may be found in the appendix.]

    Chairman Manzullo. Thank you.
    Our next witness is Mr. Kelleher, who has already been 
introduced. Mr. Kelleher, we look forward to your testimony.
    If the remainder of the witnesses would try to concentrate 
on the anecdotal stories that brought them here? We know the 
big picture. We want to know how it impacts you directly.
    Mr. Kelleher?

     STATEMENT OF HUGH KELLEHER, PLUMBING-HEATING-COOLING 
                 CONTRACTORS OF GREATER BOSTON


    Mr. Kelleher. Thank you, Congressman Manzullo, Ranking 
Member Velazquez, other Members of the Committee. Let me get 
right to the point, although I do just want to mention it is a 
great pleasure as a former congressional aid to be here in a 
meeting and actually be offered a seat.
    The situation in my home state really began to take on 
added dimension when KeySpan moved up from New York. Each year 
they have been authorized by our state's energy regulatory 
agency to include in its rate structure a promotional budget 
line item.
    That promotional budget line item costs the natural gas 
customers millions of dollars each year in Massachusetts, but 
if you peel back that line item to see what those millions of 
dollars are spent on you find that much of it is being used to 
promote KeySpan's unregulated affiliated businesses.
    What are those businesses? They include a large heating and 
air conditioning which competes directly against mom and pop 
contractors like the ones I represent.
    Just to follow up on an earlier example, I can tell you 
that in Massachusetts we saw one utility company bid directly 
against an electrical contractor on a job. The utility company 
bid remarkably low. People wondered how they could even cover 
the cost of the materials. Naturally they won the job.
    A few weeks later if you went out to that jobsite do you 
know what you saw? You saw the trucks. You saw the backhoes. 
You saw the workmen of that utility company. Now, I am sure 
that my friends who are electrical contractors would be very 
pleased if they could have the ratepayers covering the cost of 
salaries for their employees and making payments on their 
trucks.
    How aggressive are the utility companies in terms of 
syphoning off assets to open up and support other unregulated 
business? I think the most extreme example that I have seen 
occurred when KeySpan came into our state and opened up a web 
based business called MyHomeKey.com.
    One day I went to their website and discovered to my 
amazement that not only would this gas company affiliate send 
someone over to install a gas stove in direct competition to my 
business or a sink. Their website told me in fact that they 
would even be willing to come over and clean my drapes or have 
someone come by and cut my lawn. So much for the efficient 
delivery of natural gas.
    Now, we do not know how much money was wasted while the 
utility company tried to get into the landscaping and drapery 
cleaning businesses, but each dollar spent on that ill-
conceived business plan was absolutely a dollar which could 
have been spent either upgrading their unreliable gas delivery 
system or reducing the cost of natural gas.
    One of the common models actually is the free equipment 
giveaway. A utility like KeySpan makes every effort to convert 
customers from other energy sources by giving away free 
equipment. Free equipment offers raise a couple of basic 
points. First of all, the consumer is paying through their gas 
or electric bill the cost of that free equipment. If the 
utility company stuck to its primary business, which is 
supposed to be the reliable, cost-efficient delivery of natural 
gas or electricity, prices could actually be lowered and their 
delivery systems could be improved.
    The second problem is that these promotional giveaways have 
a highly negative effect on small business people. It is very 
difficult for a plumbing company to bid a job against a 
utility's affiliate when, as in the case of KeySpan, that 
affiliate has a whole warehouse full of boilers and furnaces 
which have been paid for by the ratepayers.
    Before I conclude I just want you to imagine one scenario. 
You and I each run a business in the same town. We are 
competitors, but part of my business has access to hundreds of 
thousands of dollars of government approved subsidies. That 
part of my business has a special status which in fact grants 
me a profit, and I use that profit and shift funds and 
resources over to the part of my business which competes 
directly against your business.
    I can guarantee that over time no matter how well you run 
your business, no matter how well your employees are trained, 
no matter that you offer a truly market rate price, I will put 
you out of business. Now, this does not sound to me like the 
kind of economic model that made the American economy the 
greatest in the world.
    What we are asking for in quick summary is that in 
conference with the Senate that your Committee work with 
representatives from Energy and Commerce, take a closer look at 
this issue. We are not asking for more regulation. All we are 
asking is that Congress actually create a firewall between the 
utility's regulated businesses and its unregulated affiliates.
    Thank you very much.
    [Mr. Kelleher's statement may be found in the appendix.]

    Chairman Manzullo. Before you end, you are speaking on 
behalf of yourself and on behalf of the?

    Mr. Kelleher. Plumbing-Heating-Cooling Contractors 
Association National. We represent thousands of plumbing and 
heating/cooling contractors from every state in the United 
States.

    Chairman Manzullo. Thank you, Mr. Kelleher.

    Mr. Kelleher. Thank you.

    Chairman Manzullo. Our next witness is Adam Peters, 
Research Fellow and Regulatory Counsel at the Progress & 
Freedom Foundation.
    Mr. Peters, we look forward to your testimony.

  STATEMENT OF ADAM PETERS, THE PROGRESS & FREEDOM FOUNDATION


    Mr. Peters. Thank you, Chairman and Members of the 
Committee. Thank you for the opportunity to speak to you today. 
My name is Adam Peters, and I am a Research Fellow and 
Regulatory Counsel for the Progress & Freedom Foundation, a 
think tank that studies the digital revolution and its 
implications for public policy.
    Your hearing today is a timely one as public utilities 
increasingly are entering into new markets, including 
communications, which is my area of research. I have a lot of 
sympathy for regulators who must address the questions raised 
by utility entry into new markets. From a consumer welfare 
perspective, it may be efficient for a firm to expand into 
complementary markets. This may serve to increase competition 
in these markets, driving down prices and fostering innovation.
    However, the incentive may also exist for a utility to 
cross-subsidize the activities of an affiliate through its rate 
base. Left undetected, this strategy may cripple competition in 
the unregulated market while additional costs are extracted 
from the rate base through higher monthly bills.
    In addressing cost subsidization concerns, one tool 
regulators use to balance efficiency benefits with fair 
competition is the cost allocation method. Cost allocation is 
vital because it sets the competitive equilibrium in the 
market. To be sure, cost allocation issues can quickly devolve 
into an exercise in blackboard economics where competitors seek 
protection from competition and where one right answer is 
unattainable so the process essentially asks regulators to make 
a predictive judgment, but I do think it is the best one they 
have.
    The balance between efficiency and fair competition is 
therefore more tenuous when the cost allocation is removed from 
the equation. For instance, literally dozens of municipalities 
are entering into the communication space, and these efforts 
are usually backed by municipally owned electric utilities.
    In recent months this has become a highly contentious issue 
in a number of states. Municipal entrants in the communications 
markets may enjoy several artificial advantages over entrants 
from the private sector. They may be exempt from taxation. They 
can raise capital through the issuance of guaranteed tax exempt 
bonds. They may enjoy free access to utility poles and rights-
of-way.
    Finally, municipally owned utilities in many states are 
exempt from oversight by state commissions and are therefore 
immune from the cost allocation requirements that might 
otherwise apply to their privately owned counterparts. Under 
these circumstances, the right of cross-subsidization and 
market distortion is magnified.
    For example, a recent study authored by my colleague, Tom 
Leonard, focused on three municipal entrants in Bristol, 
Virginia, Kutztown, Pennsylvania, and Ashland, Oregon. Dr. 
Leonard concluded that the three municipalities which offer 
broadband services in competition with private companies were 
unable to cover their costs without being subsidized. He 
estimated that the subsidies in these localities range from 
$350 per customer to over $1,000 per customer.
    Now, admittedly it is quite possible and perhaps even 
likely that head-to-head competition between these entrants and 
a private competitor will apply downward pressure on prices in 
the short run, but the ability of the municipal entrant to tap 
into an endless stream of subsidies from their rate base may 
include both short run and long run costs.
    The short run costs may include higher electric rates for 
taxes. The long run costs include the possibility of picking 
their own technology, creating entry barriers to new 
competition and predatory pricing, which would drive capital 
from the market.
    Now, despite the foregoing care should be taken in my view 
before legislating new federal rules without a clear showing 
that there is a jurisdictional vacuum. Where investor owned 
public utilities are concerned, in my view state commissions 
are pretty well equipped to handle cross-subsidization 
concerns.
    To be sure, the challenge of monitoring and regulating 
investor owned utilities is real, but most states to my 
knowledge have brought authority to protect consumers from 
unreasonable rates, including auditing authority and the power 
to investigate affiliate relationships.
    Some states have in recent years adopted codes of conduct 
which govern regulated and non-regulated entities, and while 
municipal entry into communications raises another set of 
difficult policy questions I would likewise defer to the 
judgment of state and local officials and citizens in 
evaluating the need for these services in light of local 
conditions.
    I want to thank the Committee once again for this 
opportunity and ask that my written remarks be made part of the 
record. I am happy to answer any questions later.
    [Mr. Peters' statement may be found in the appendix.]

    Chairman Manzullo. Thank you very much.
    Our next witness is Lynn Hargis, who is an energy attorney 
with Public Citizen. We look forward to your testimony.

     STATEMENT OF LYNN HARGIS, ON BEHALF OF PUBLIC CITIZEN


    Ms. Hargis. Thank you, Mr. Chairman, Ms. Ranking Member, 
Members of the Committee. Thank you very much most of all for 
having this hearing.
    If the Public Utility Holding Company Act is actually 
repealed after 70 years we are going to have a Tsunami of 
problems with utility non-regulated affiliates not only for 
small businesses, though they will be very affected, but for 
all the rest of the country as well.
    I would like to just point out one mistake in my testimony. 
In the last paragraph on the first page I said under PUHCA 
utilities could not go into non-utility business and companies 
had to give up their non-utility businesses.
    I am afraid I bought sort of the other side, which is that 
PUHCA is already gone. It is not already gone, so that should 
say that under PUHCA utilities cannot go into non-utility 
businesses and companies have to give up their non-utility 
businesses.
    Right now it comes as a surprise to a lot of people that 
oil companies cannot for example own public utilities. The 
minute PUHCA is gone they will be able to do that. We may not 
be able to reduce the oil prices immediately with a stroke of 
the pen, but with a stroke of the pen repealing PUHCA we 
absolutely can come up with an electricity/natural gas/oil 
cartel.
    This is a matter of great, great importance and I really 
commend this Committee for taking a look at it. Just to quickly 
illustrate that PUHCA is still very much alive, this is from an 
international law firm whose clients deal power plants. It is 
called The Project Finance News Wire. It happens to be the 
distinguished law firm at which I worked for 17 years, but they 
do not in any way endorse what I am saying here today.
    It has just a heading in this article, and it says, ``The 
1935 law called PUHCA requires overseas buyers acquiring U.S. 
utilities to shed their non-utility businesses.'' I do not 
know. I find that a lot of people do not realize right now that 
foreign companies cannot under PUHCA come in and acquire public 
utilities unless they happen to be public utility holding 
companies themselves, and that is only very recently.
    It does not seem to bother anyone else, but I think it may 
bother small businesses that they are not only going to have to 
compete with huge American public utility holding companies, 
but also EON is a German pharmaceutical company who wants to 
buy American utilities. There are companies all over the world 
that want to do that, and the minute that PUHCA is gone they 
will be able to do that.
    The other thing I wanted to show you happened after I wrote 
my testimony yesterday morning I am afraid, so this is very, 
very recent breaking news. We won a case at the Securities and 
Exchange Commission, and an Administrative Law Judge ruled that 
the American Electric Power/Central & Southwest Public Utility 
Holding Company merger should be denied under PUHCA because the 
main issue in that case was are Michigan and Texas in the same 
region of the United States.
    Now, I have personal opinions as somebody who grew up in 
Texas on that, and I think probably most of you do as well. The 
judge found that they did not. The Court of Appeals had 
indicated this when they remanded the case along with a map 
showing AEP up here and Central & Southwest down here.
    This still goes to the full Commission, but the point I am 
trying to make is there is nothing in the federal law, in any 
of the laws of the United States, that would stop this merger 
other than PUHCA. The FERC said oh, it looks great to us. They 
I think required them to get rid of 500 megawatts. That is like 
one merchant power plant. AEP has 30,000 megawatts.
    The Department of Justice said this looks okay under the 
antitrust laws. The Federal Trade Commission said this looks 
okay to us under the antitrust laws, but they have repeatedly 
told the Congress in testimony that they do not have the kind 
of structural jurisdiction over utilities that PUHCA does.
    So you are talking about an 800 pound gorilla. This is 
going to be an 800 million pound gorilla because they made it 
very clear that if PUHCA is gone not only can AEP acquire 
Central & Southwest; they can acquire the Southern Company, 
Entergy, Xcel, Excelon. In fact, we can have one big, happy 
public utility holding company that owns all the utilities in 
the United States. Prior to the enactment of PUHCA that is 
pretty much where they were headed.
    Some of you may have seen on 60 Minutes the show Who Killed 
Montana Power Company. This is a 90-year-old electric utility 
in Montana, and as soon as utilities were allowed to purchase 
telecommunications businesses they jumped into that. They 
bought telecommunications businesses, and then they thought oh, 
let us get rid of this utility stuff--it is kind of boring--and 
so they did.
    Unfortunately, the telecommunications business did not 
quite work out. They went bankrupt. In the meantime, 
Northwestern, which is a South Dakota utility who had bought 
some of those transmission and other utility facilities, had 
also gotten into telecommunications. They went bankrupt. In the 
meantime, Montana citizens found out they were having to pay 
really high prices to get power from their own former power 
plants that had been sold off to an unregulated business.
    You know, whether you look at what happened before PUHCA in 
the 1920s or you look at what happens like with someone like 
Enron who got all sorts of exemptions from PUHCA today or 
whether you look at Montana Power--

    Chairman Manzullo. One thing I am not exempt from is the 
time.

    Ms. Hargis. I am sorry. I forgot to look.

    Chairman Manzullo. That is okay.

    Ms. Hargis. Thank you very much.
    [Ms. Hargis' statement may be found in the appendix.]

    Chairman Manzullo. Thank you very much. Thank you for the 
excellent and very diverse testimony.
    Let me try to weave something here, and perhaps you can 
help me. I think whoever wants to try to answer the question 
please feel free to go ahead with it.
    Ms. Hargis, let me ask you this question. Are there any 
public utility companies that are not-for-profit in the 
country, municipally owned?

    Ms. Hargis. Well, municipally owned ones I assume.

    Chairman Manzullo. Okay. Do we see any indications that 
some municipally owned utilities are getting into the heating 
and air conditioning business? Does anybody have any knowledge 
of that?

    Mr. Kelleher. I cannot say I know.

    Chairman Manzullo. Because that would be one scenario with 
a group that is not-for-profit.

    Ms. Hargis. Right, but they are typically--I mean, they are 
creatures of the states, so the states could regulate that.

    Chairman Manzullo. Okay.

    Ms. Hargis. I think the big problem is when you get into 
interstate holding companies, owners of utilities where one 
single state cannot control what would be happening to the 
utilities.
    That is why we had PUHCA because President Roosevelt had 
originally been governor of New York, and he found that no 
matter what he did he could not control New York electric rates 
because of the interstate holding companies.

    Chairman Manzullo. Okay. Let me go on to my second question 
then with regard to the public utility companies. How many of 
them or how many states actually regulate the rates, or are 
some states unregulated with regard to the rates?

    Ms. Hargis. All states regulate distribution rates. Some 
have deregulation in terms of power supply, which is wholesale 
rates are regulated or rather right now deregulated by the 
Federal Energy Regulatory Commission, and under the supremacy 
clause of the Constitution those costs have to be passed 
through so the states have very little choice. They have to 
pass through what the wholesale rates are.

    Chairman Manzullo. So the rate regulation, would it be fair 
to say, results in a built in profit margin for the utility?

    Ms. Hargis. They certainly have the ability to make a 
profit, you know, if they screw up their business. Usually 
rates are set at a certain level.

    Chairman Manzullo. Right.

    Ms. Hargis. If they indeed, you know, manage to make a 
profit at that level then to that extent it is built in, yes.

    Chairman Manzullo. But the purpose of setting the rate by 
the government, the state government, is to ensure that there 
is at least a reasonable rate of return so that the company 
stays in business.

    Ms. Hargis. Yes, sir.

    Chairman Manzullo. Therefore, the rate guarantees a profit.

    Ms. Hargis. As I say, if you operate efficiently enough to 
make a profit at that rate.

    Chairman Manzullo. Okay. Okay. Mr. Kelleher?

    Mr. Kelleher. I know that some of the research that I have 
done, the standard return on capital investment is about 10 
percent. That is a guaranteed amount that the utility companies 
in our region are often able to maintain. They do have to 
invest some of their money obviously in improving their 
infrastructure.
    Again, I am familiar with what happens in New England, but, 
as I said, I am here representing contractors all around the 
country.

    Chairman Manzullo. Okay. Now I can do the followup. So the 
objection is the fact that companies who are given a government 
guaranteed profit then can leverage those assets, which would 
be customer lists, name brand and just pure muscle based upon 
the size to the detriment of the little guys?

    Mr. Kelleher. Equipment, manpower.

    Chairman Manzullo. Okay. Is there anything illegal in that, 
Ms. Hargis? I think you are the only attorney on the panel, 
correct?

    Ms. Hargis. No. I do not think they are supposed to use 
business for--you know, you should certainly not use utility 
assets for non-regulated business.
    It is illegal under the Holding Company Act for a holding 
company to do that, and that is why if you are a multi-state 
holding company they are very, very strictly regulated by the 
Securities and Exchange Commission, all of their financial 
interactions with the public utilities, for that very reason.

    Chairman Manzullo. What about, Mr. Harvey, it was in 
Baltimore. What is the name of the company?

    Mr. Harvey. Baltimore Gas & Electric.

    Chairman Manzullo. Okay. Do you know anything about that 
company, Ms. Hargis?

    Ms. Hargis. They have changed. They were a holding company, 
and in Constellation I think they spun that off. Now they may 
have merged with Pepco. I am sorry. They have been moving 
around pretty fast.
    In terms of the parent company, if indeed it is in two 
states and no single state can regulate that utility then that 
is when PUHCA kicks in and the Securities and Exchange 
Commission does it.

    Chairman Manzullo. Mrs. Velazquez?

    Ms. Velazquez. Thank you, Mr. Chairman.
    Ms. Hargis, are small businesses throughout the economy 
likely to see a reduction in their electricity bills or rates 
as a result of the PUHCA repeal?

    Ms. Hargis. Absolutely not because what we are going to see 
is massive consolidation on the part of the utility holding 
companies, and that usually leads to higher rates.
    Certainly there was a tremendous problem with higher rates 
back when PUHCA was originally passed, and also with the credit 
ratings both Standard & Poor's and Fitch's have said that PUHCA 
regulated utilities have much better credit ratings, and that 
decreases their cost of capital.

    Ms. Velazquez. Will the energy bill and specifically the 
repeal of PUHCA do anything to improve electricity service and 
reliability? How will it reduce the likelihood of another 
blackout?

    Ms. Hargis. Well, I do not think it will at all because the 
reason that we are having so much problem right now is that the 
transmission system is being used for something that it was not 
designed for, which is to carry--everybody wants to go to the 
highest priced markets, and the system was not really designed 
for that, so that is what I think is causing the problem.

    Ms. Velazquez. Mr. Kelleher, do you want to comment on 
that?

    Mr. Kelleher. One point I would like to make--

    Ms. Velazquez. Sure.

    Mr. Kelleher. --is that we were discussing the role of the 
state regulatory agencies when they are supposed to be 
addressing these problems.
    I cannot specifically guess as to what the impact might be 
in terms of blackouts or that kind of thing, but I do know that 
the state regulatory agencies in my area have absolutely failed 
to do adequate analysis of the rates in terms of the volume, 
the percentage of the rates that is actually being diverted to 
these unregulated businesses. That is bound to have an impact 
on the efficiency of the utility company.

    Ms. Velazquez. Thank you. Ms. Hargis, what has happened to 
consumers in Kansas following Westar's attempt to become a home 
security company, and can you also discuss allegations that 
Westar attempted to illegally influence Members of Congress?

    Ms. Hargis. Well, what happened originally certainly was 
the same sort of situation, and I think Westar sort of used 
Montana Power as a model. The executives there were getting 
ready to sell off the utility assets and go instead into the 
home security business that they thought was going to be more 
profitable, but in fact was not. Again, I think there was a 
bankruptcy situation, or at least they had to sell it off.
    What happened was they thought PUHCA would be repealed, but 
that was not enough. They also wanted to get out of the 
Investment Company Act, which would have kicked in for them 
when PUHCA was gone, and so the allegations were that they 
contributed a lot of money to get an exemption from the 
Investment Company Act.

    Chairman Manzullo. Mr. Kelleher, assuming that PUHCA is 
repealed are there any safeguards that could be implemented 
that would limit a public utility's ability to cross-subsidize?

    Mr. Kelleher. The group that I am here representing 
nationally, the plumbing and heating contractors, what we would 
be looking for would be some kind of compromise legislation 
were PUHCA repealed that would draw a line in the sand which 
would prevent in clear legislative language the cross-
subsidization of the unregulated businesses.
    The fact is this is needed nationally because I think if 
you go around to your various states I think the Members of 
this Committee, if you ask the small business people in your 
states are you having a problem like this the first answer is 
probably going to be yes.
    The second problem is trying to deal with it on a state-by-
state basis is virtually impossible. At local levels the 
utility companies maintain a massive amount of influence. It 
has been very difficult for small contractors, small business 
people to overcome that level of influence.

    Ms. Velazquez. What about ring fencing? Would that protect 
small businesses?

    Mr. Kelleher. Yes. The term that has been used in the 
Energy Committee of ring fencing would in fact be an effective 
way to address this problem.
    Essentially what that does, it prevents the regulated 
utility company from diverting its assets either directly over 
to an affiliate or, and this is another important point, to not 
allow that regulated utility company to pass its assets up to a 
holding company which then would be allowed to pass it back 
down to one of the unregulated affiliates.
    The idea of ring fencing, which has been used in the Energy 
and Commerce Committee, would be one effective way to maintain 
the kind of separation that would prevent damage to small 
businesses.

    Ms. Velazquez. Thank you, Mr. Chairman.

    Chairman Manzullo. Mr. Westmoreland?

    Mr. Westmoreland. Thank you very much.
    You know, when you talk about this I represented part of 
the great State of Georgia for a while, and I am in the 
construction business and so I understand and feel your pain 
and am familiar with what Atlanta Gas Light has done with their 
company and what Georgia Power and Southern Company has tried 
to do with several of the unregulated companies that they have 
had. They have all failed, to be honest with you.
    In Georgia though we had a problem with our natural gas. We 
deregulated gas and had a problem with the marketing of that. 
We established some firewalls or some partitions there to keep 
some of these utility companies that wanted to offer gas 
service from using their regulated side to do the marketing on 
the gas side.
    Does Maryland or any of the states that you all represent 
have any such firewalls as that to keep your public utilities 
from getting into the unregulated business? Evidently they do 
not, but have you approached the legislature about doing that?

    Mr. Harvey. I have testified in Annapolis for the last 
three years. It is better now than it used to be. It used to be 
if your power went out and you called the power company you 
would go to a phone tree, and they would say if you need a new 
air conditioner press nine. No kidding. It would get you over 
to the unregulated air conditioning company.
    We are beyond that, but last time I was testifying in 
Annapolis BG&E Home had Constellation Energy's attorney there. 
How much did they pay for that? I do not know.

    Mr. Westmoreland. One last question, Mr. Chairman.
    Do you think that on the federal level there is something, 
a simple fix, that we could do that would not be as complicated 
as the PUHCA Act? I mean, is there something that you see that 
you all have in mind collectively that you could come up with 
that would be a simple fix to this?

    Mr. Kelleher. The answer, although many people here do have 
an appreciation for what PUHCA has done in the past, there are 
things that could be done. In this particular issue, put aside 
the other important issues that PUHCA deals with, but in terms 
of actually isolating this particular problem there would be 
language which could be crafted which would prevent this kind 
of improper cross-subsidization.
    One final point. At the various levels of state operations 
there are codes of conduct which, for instance, in my state 
happen to have some language in there which would suggest the 
utility companies are not supposed to be involved in cross-
subsidization.
    The reality is though that these state regulatory agencies 
have often been dominated by former employees of utility 
companies and have been extremely sympathetic to the barrage of 
documentation that they have provided.
    When we have challenged codes of conduct, when we have 
charged violations of codes of conduct, we have not been very 
successful, which is why finding some language that everyone 
could agree on which would really put a ring or a firewall 
around this would really be the answer. Again, yes, this could 
be done, and I think it could be done fairly effectively.

    Mr. Westmoreland. I would appreciate if you could get us 
that information. I think we would all appreciate if you could 
get us that information.

    Mr. Kelleher. We will do that. We will do that, Mr. 
Westmoreland. Thank you.

    Chairman Manzullo. Congressman Lipinski?

    Mr. Lipinski. Thank you, Mr. Chairman. This is a very 
important issue obviously for all of you here and also 
important for me and I think all of us up here. I apologize for 
having to leave there for a little bit, but this is something 
we definitely--another area that we need to help the small 
businesses in.
    Now, I never have quite as good of questions as Mr. 
Westmoreland because of his experience, but I want to sort of 
follow up on something, on what he was just asking Mr. 
Kelleher.
    Do any of you question the possibility that cross-
subsidization can actually be prevented? Do any of you? I know 
Mr. Kelleher had said he believes it can. Do any of you 
question that? Has this definitely happened at the state level? 
Have you seen problems in any states who have tried to stop it, 
but there are ways to get around the legal barriers that were 
set up?
    Mr. Harvey?

    Mr. Harvey. If you were able to eliminate all the shared 
expenses of back office and overhead and all those things and 
totally separated the regulated side from the unregulated side 
they would still have the trademark. They would still have the 
name recognition, which it is just huge.
    You know, I do not know if you can take that away. 
Certainly in Maryland we are trying to. We are actually trying 
to impose a royalty that they would have to pay to use that 
trademark.

    Mr. Lipinski. Mr. Peters?

    Mr. Peters. I would just add, and maybe this is more a 
followup also to the previous question, that there really is no 
simple solution to this problem when you look at what a 
regulator needs to go through as I discussed in my testimony 
about the cost allocation method.
    In certain circumstances it may be good for these utilities 
to move into complementary markets, but you have to balance 
those concerns against questions of fairness so in a market 
where you have a lot of competition already you can probably 
more adequately set a price based on the fair market value, but 
utilities entering into a market where there is not already a 
lot of competition you will probably want some of these 
efficiencies to be passed along to customers for lower prices.
    On the communications sector, there is a new technology 
called broadband over power line. It is being deployed in 
Cincinnati. It is being tested in a lot of markets. I have no 
idea whether or not it is ever going to work out on a 
widespread basis, but as far from a consumer welfare 
perspective you want that sort of technology to go out in the 
market, but you also want to have these rules.
    A lot of states do have cross-subsidization rules and 
conduct rules. I think a majority of the states actually have a 
lot of those rules in place. NARUC, the National Association of 
Regulatory Commissioners, I think in 1999-2000 studied the 
issue extensively, came up with codes of conduct. A lot of the 
states are implementing those codes, and it has taken time 
because in the last few years this is a new phenomenon.
    I do have a lot of sympathy particularly in these 
behavioral questions and the use of a company's trademark and 
its logo. These are difficult issues, but I think that state 
regulators do have the resources. They are closer to the 
consumer and so I am not sure what a federal solution would 
actually bring to the table other than maybe a redundant set of 
regulations and some confusion.

    Mr. Kelleher. If I could just add, to disagree a bit, I 
think the codes of conduct so far have been proven to be 
extremely ineffective.
    What we would be asking for, Mr. Lipinski, you asked can 
this be achieved. I think part of the answer would be to say 
that the unregulated businesses would have to be separately 
capitalized. They would have to have a different name. They 
would have to have different buildings. They would have to have 
different trucks. They would have to have different personnel, 
and they would have to have different logos.
    By putting together that kind of system we can really make 
sure that the current ratepayers--remember, the ratepayers are 
actually bearing this cost, and it is an unnecessary additional 
fraction of their utility bill that is being used to compete 
against small businesses and put small businesses out of 
business.

    Mr. Lipinski. Well, I have certainly heard from a number of 
small business owners in my district, and I look forward to 
working with you to figure out what we can do and get something 
done to stop this really unfair practice that is hurting our 
small business owners.
    Thank you, Mr. Chairman.

    Chairman Manzullo. Thank you.
    Mr. Fortenberry, we have been notified that we have a bunch 
of votes coming up in about 10 minutes, so if you could take 
that into consideration in asking your questions in fairness to 
everybody else? Thank you.

    Mr. Fortenberry. Thank you, Mr. Chairman. That is a very 
polite way of saying hurry up, Jeff. I will heed your advice.
    Actually, thank you all for your insightful testimony. This 
is a very important issue that I, being a member of city 
council in a small city and having bumped up into in a previous 
life a number of questions in this regard across the spectrum, 
but I did want to follow up with Mr. Peters. You preempted some 
of my questions.
    Nonetheless, there is a big issue out there in the 
development of communications as to how utilities who have 
already taken on the process obviously of providing a quasi 
public good can use those efficiencies, to use your language, 
without unfairly stifling private competition, but actually 
promoting or helping to potentially partner with it so that 
consumer benefit can come about--greater consumer benefit can 
come about--through the use of these again quasi public goods.
    Are there other examples out there particularly in the 
energy industry in which broadband has been piggybacked like 
that successfully without bumping up into the type of 
legitimate questions that you all have raised because of unfair 
subsidies of a public good? In other words, has the private 
market been allowed to partner, lease, in some way find new 
markets because of this public investment?

    Mr. Peters. I am not sure about other BPL. I am aware of I 
think Minnesota is looking at that as a WI-FI model for city-
wide access. I think the city would help to deploy the network 
but then would bid it out to a private entity, so I think that 
is sort of the public/private model that you might be looking 
at.
    It is a cleaner form I think of some of these controversial 
WI-FI networks that are in the news in Philadelphia and some 
other cities.

    Mr. Fortenberry. So this is very underdeveloped I think is 
what you are saying?

    Mr. Peters. It is very, very recent.

    Mr. Fortenberry. Okay.

    Mr. Peters. It is just, I mean, really the next few months.

    Mr. Fortenberry. All right. Thank you.

    Chairman Manzullo. Mrs. Moore?

    Ms. Moore. Thank you, Mr. Chairman. I was just sitting here 
feeling frustrated because I did not hear one single--I did not 
read one single talking point about the repeal of PUHCA during 
the bankruptcy bill discussion, and I am really wondering if in 
fact these kinds of arguments, if this PUHCA was repealed 
inadvertently from drafting instructions or was there a lot of 
dialogue in Congress about the impact of repealing PUHCA. That 
is one question I have.
    Another question that I have, and I am mindful of the time. 
What do small businesses or companies do now for emergencies, 
when someone has a gas explosion or electrical problem? I can 
see these larger companies contending that they need to 
maintain an operation in order to respond to the emergency. How 
does the small business community respond to those sort of 
contentions that they need to use whatever loopholes or have 
other holding companies so that they can respond to emergency 
situations?
    Thank you.

    Mr. Kelleher. I could answer that as a gas fitter. We 
definitely believe that the utility companies, since they are 
providing the gas to a building, they are well suited to go in 
in an emergency situation. Contractors have no problem with 
that.
    What we have a problem with is when someone goes out to 
read your gas meter and leaves a little ad behind that says 
call the gas company. We will come over and replace your 
boiler. That is what we have a problem with.

    Ms. Moore. And this repeal of PUHCA during the discussions 
of the bankruptcy bill, was there a lot of activity? Maybe the 
public member would have some knowledge of this.

    Ms. Hargis. Well, there has been a huge industry lobby 
trying to kill PUHCA since about 1935, actually 1934. It was 
the biggest legislative fight of FDR's first term, and it looks 
like they finally succeeded at least partly.
    No. I mean, I wish the Financial Services Committees had 
looked at this because the bankruptcy situation--as somebody 
had pointed out, with the Southern Company they put all their 
deregulated businesses into Merit. Merit not only went 
bankrupt. It is now suing the Southern Company.
    Xcel. They had three PUHCA regulated utilities, affiliates. 
They are doing just fine. They put all of theirs--they spun 
them off into NRG. NRG went bankrupt, pulling down the credit 
rating of all the rest of them. It is a terrific problem.
    Even with Enron, you know, the SEC under PUHCA actually has 
jurisdiction over bankruptcy of public utilities so that ahead 
of the bankruptcy, the creditors, they can put the consumers. 
You know, with PUHCA gone that is gone as well, so it is a huge 
issue.

    Chairman Manzullo. Mr. Akin?

    Mr. Akin. Thank you, Mr. Chair. Just a quick question or 
two here for Mr. Harvey.
    First of all, does the Baltimore Gas & Electric use its 
employees to perform non-utility work in central Maryland? 
Second of all, has your company lost jobs due to unfair 
competition from Baltimore Gas & Electric's unregulated 
utility?

    Mr. Harvey. They used to use utility employees. I do not 
know if they still are or not. I do not know if they are 
sharing back office personnel. We suspect they are, but that is 
kind of behind their closed doors. We do not have access to 
that.
    We lose work to Baltimore Gas & Electric every day without 
a doubt. They are a force to be reckoned with in our 
marketplace.

    Mr. Akin. I have heard of this issue as a legislator. 
Probably even before I came to the Congress it was out there.
    I guess my question was how common is it, and I assume 
probably there are areas or certain states where it may be more 
common compared to other places where we are not seeing that 
much. It is more sensitive. I am afraid they are going to do it 
rather than the fact that they are.

    Mr. Harvey. Right.

    Mr. Akin. Can anybody on the panel answer how much is this 
currently a problem and in what parts of the country?

    Mr. Martin. It is occurring in West Virginia. We have had 
several instances where the utilities have gone out and bid on 
projects in fact where their price was artificially low because 
they are only paying that incremental cost and not the portion 
of the fixed cost everybody else has to share in.

    Mr. Akin. So you are saying it was common in West Virginia, 
and in Maryland there is some of it there. Anybody know about 
anywhere else?

    Mr. Kelleher. I think if you look around the country you 
are going to see it in a number of states. Michigan, for 
instance. The contractors in Michigan fought a very long battle 
to deal with this issue.
    It is not just the large utility companies that are 
involved. I think if you go to some of these states you will 
find that some of the smaller regional companies are doing 
exactly the same thing. It is a national problem.

    Mr. Akin. Okay. Thank you. I think that answered my 
question.
    Thank you, Mr. Chairman.

    Chairman Manzullo. Thank you.
    Mr. Davis?

    Mr. Davis. Thank you very much, Mr. Chairman.
    Mr. Martin, you mentioned in your testimony one specific 
problem with utility competition. Are you aware of any other 
instances of any other contractor groups where there have been 
similar problems?

    Mr. Martin. Yes. There have been several different 
instances. I recall at a local prison changing out some 
electrical transformers where the utility was the low bidder 
and got that job. There was another one at a hospital, the same 
type of thing. It was changing out transformers.
    One particular instance was a street lighting project in 
Charleston, West Virginia, and that one in fact was challenged 
in the court. Again, the utility was the low bidder. Their 
price was substantially lower than the next bidder. Again, it 
was challenged in the court, but the utility explained that 
they were not cross-subsidization because they were paying the 
full incremental or additional cost.
    What they do not say is the fixed cost that a small 
business has to incur to have an office complex or the 
equipment sitting there being non-productive. We have to spread 
that across the times that we are productive and do have a job. 
Therefore, their cost is much less.

    Mr. Davis. Has the West Virginia Public Service Commission 
been of any help?

    Mr. Martin. No, they have not. Their focus seems to be more 
on the direct subsidization and not these indirect or hidden 
subsidies that are out there. They are looking at are they 
paying for these additional costs and making sure that the 
regulated side is not incurring any additional cost for the 
non-regulated side.

    Chairman Manzullo. Mr. Davis, if I could interrupt to let 
Mr. Chabot have an opportunity to ask a couple questions?

    Mr. Davis. Okay.

    Chairman Manzullo. Is that okay with you?

    Mr. Davis. Yes.

    Chairman Manzullo. Mr. Chabot?

    Mr. Chabot. Thank you very much. I will be brief.
    Mr. Harvey, I might mention that the chairman of your 
association, Greg Lesgang, lives in my district. He came into 
my office and spoke with me--

    Mr. Harvey. Good.

    Mr. Chabot. --in Cincinnati this past week and had some 
suggested questions.

    Mr. Harvey. Good.

    Mr. Chabot. Most of those have already been asked by my 
colleagues, but I think this has been a very interesting 
hearing.
    Let me ask. You talked in your testimony about the utility 
companies sharing resources and consolidating overhead with 
these unregulated businesses. Are you aware of these utilities 
sharing customer information or marketing data with unregulated 
businesses?

    Mr. Harvey. Yes. Yes. We have seen instances where, for 
instance, the gas company will be running gas lines to a 
neighborhood, and then the BG&E Home salesman will essentially 
immediately start canvassing those homeowners for what we call 
conversion.

    Mr. Chabot. Okay. What has been the immediate economic 
impact on your company specifically or on others in your 
association relative to the cross-subsidization?

    Mr. Harvey. We have seen a big impact on our business. It 
has really stymied a lot of our potential growth, and when you 
talk to the vendors and you look at how much equipment is sold 
in our area and where it is going, through which contractors, 
BG&E has a big piece of the pie.

    Mr. Chabot. Okay. Thank you very much.
    I will yield back the balance of my time, Mr. Chairman. 
Thank you. I would like to commend the Chairman for getting 
around late. You handled this masterfully, I have to say.

    Chairman Manzullo. Well, we try to be fair.
    First, I want to thank you all for coming. I guess one of 
the lingering questions here is whether or not once there is a 
relationship between a utility company and an extended service 
as it were whether or not when a phone call comes in that 
somebody's utilities are out does somebody get preferred? I 
guess that is one thing we will never know.

    Mr. Kelleher. No. That does happen. That is common in fact 
if a utility customer calls in and they have some kind of 
problem. In fact, as my colleague has mentioned, sometimes 
right on the phone tree there they will refer you over to their 
affiliated business. They will directly refer you over to their 
affiliated business.
    That is a job that is being subsidized by the ratepayers, 
and it is a job that is not going to private business.

    Chairman Manzullo. Mr. Harvey?

    Mr. Harvey. Just another tactic is that they will finance 
the new installation and put it right on your gas bill or right 
on your electric bill.

    Chairman Manzullo. We have to go vote. This is a 
fascinating hearing. It sounds like this might be the beginning 
of some further inquiry here.
    This is the Small Business Committee. We have absolutely no 
jurisdiction over what goes on in the bankruptcy and obviously 
under Energy and Commerce, but I guess it is the type of thing 
where it is a problem you are sort of living with now, but 
where are you going to be five years from now?
    Is everything going to be Mr. Big? Will the ability to, for 
example, buy health care through a huge utility at lower rates 
because of your large company, will that make them more 
competitive as it were with the small mom and pop shop that 
cannot afford that type of break?
    I do not have the answers to these, but I just want to let 
you know that we are open for more inquiry, and the record will 
be open for five days for people that want to submit 
statements.
    This hearing is adjourned. Thank you.
    [Whereupon, at 3:39 p.m. the Committee was adjourned.]

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