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SUBJECT - H.R. 667


I am David K. Owens, Executive Vice President of the Edison Electric Institute (EEI). EEI is the association of U.S. shareholder-owned electric utilities and industry affiliates and associates worldwide. A super-majority of EEI's members have established EEI's approach to competition in the electricity industry, although a few members disagree with some elements of that approach. We are pleased to have the opportunity to share our views on specific issues and legislative proposals pending before this Committee.
The pace of electricity restructuring in the states is far more intense than occurred in either the telecommunications or natural gas industries. Just three years ago this May, the first state adopted a retail competition plan. Today, roughly 70 percent of all American electricity consumers live in the twenty-two states that have approved customer choice programs. Oregon is about to become the twenty-third state once the governor signs the retail competition plan approved by the state legislature. The remaining states and the District of Columbia are considering reforms to retail electric service.
As states move forward with their retail choice plans, it is obvious that there are significant restructuring issues they cannot address. We believe Congress should resolve these issues to help facilitate state activities and remove federal barriers to competition. While government cannot and should not control market forces in a competitive environment, it is responsible for addressing the transition issues and establishing the ground rules for fair and effective competition.
As Congress considers electricity restructuring legislation, it is essential to understand how dramatically electricity markets are changing. One of the few constants in the electricity industry today is fundamental change. All too often, proponents of re-regulation or different regulation of competitive electricity markets ignore this reality.
Today's Changing Electricity Market
It is important to remember what will be regulated and what will not be in competitive electricity markets. Electricity suppliers will compete to sell power and energy services to consumers. However, the "wires" side of the electricity business - the distribution lines that deliver power to homes and businesses and the interstate transmission lines that move bulk power between sellers and buyers - will remain regulated for the foreseeable future.
One of the keys to competitive markets is the existence of competitors. Thousands of suppliers currently participate in electricity markets, including almost 2,000 municipal electric utilities, more than 900 electric cooperatives, and roughly 200 shareholder-owned utilities. There also are more than 4,000 non- utility generation projects that currently sell their power to utilities, as well as 650 power marketers. Plans for the construction of new merchant generating facilities representing over 90,000 megawatts of capacity are underway in states from coast to coast. As electricity markets become more competitive, many of these suppliers will be competing head-to-head to provide electricity and a variety of services to consumers.
There also will be new entrants into competitive electricity markets, many of which are large corporations long familiar to American consumers. For example, Shell Oil Company and the recently merged BP Amoco Corporation - both among the world's largest oil and natural gas companies - have established subsidiaries to sell electricity. Honeywell, Inc. - the world's leading maker of control systems and components for buildings, industry, space and aviation - also has registered to compete in retail electricity markets.
Energy markets are also becoming increasingly globalized. In recent weeks, the Federal Energy Regulatory Commission (FERC) approved the first acquisitions of U.S. electric utilities by foreign companies. In these transactions, National Grid of Great Britain will acquire New England Electric, and ScottishPower will merge with PacifiCorp.
These competing suppliers will move power over distribution and transmission systems that remain regulated. FERC regulates the interstate high-voltage wires of shareholder-owned utilities to ensure guaranteed open access for all suppliers and to set fair and reasonable charges for transmission services. In 1996, FERC, in its Order 888, ordered shareholder-owned utilities, which own about 75 percent of the country's transmission systems, to open up their transmission lines to all suppliers in the wholesale market. This means that any wholesale power supplier can use transmission lines owned by shareholder-owned utilities at the same price and terms that those utilities charge themselves to ship power.
In competitive retail electricity markets, states will still regulate the distribution wires to make sure that all suppliers have access to consumers and to establish fair and reasonable charges for distribution services. The states traditionally have regulated retail electric service, or the sale of power and energy services from the utility to retail consumers, such as homeowners, small businesses and industrial companies.
As electricity markets become more competitive, electric utilities are making strategic decisions about which lines of business they intend to pursue. Because the generation side of the business will carry more risk in a competitive market, a number of utilities believe they do not have the size to adequately manage those risks and are selling their generation facilities in order to focus on other business opportunities. Other companies are purchasing generation with the intention of becoming national generation companies. As electricity becomes more of a bulk trading market, with a greater emphasis on achieving economies of large scale operations, generation companies will need to become significantly larger than most are currently in order to compete in regional and national energy markets.
By the year 2000, about 25 percent of the total shareholder-owned fossil and hydro generation is expected to be offered for sale. The leading purchasers are national and international energy companies, some of them unregulated affiliates of electric utilities that compete around the world and others independent power producers who also are global competitors. Three of the five leading purchasers of divested generation are independent energy producers.
Other electricity market players will pursue different business opportunities. Some energy companies will bundle electricity with specialized services, such as energy management. Others will become "network" companies, utilizing their expertise in the "wires" business to provide cable, Internet and telecommunications services to consumers. Still others will become "convergence" companies, offering consumers the ability to purchase natural gas and other energy sources, along with electricity. It also will be important for these types of companies to achieve economies of scale through mergers and other forms of consolidation to achieve efficiencies and innovation that will lower prices to consumers.

Essential Issues in the Transition to Competition
EEI supports federal legislation that removes federal barriers to competition, facilitates state restructuring actions, addresses critical transmission and reliability issues and applies the same rules to all competitors. We would like to identify those areas in which we believe Congress should act and those in which we believe federal legislation is not appropriate, and give our views on the specific legislative proposals before this Committee.
Congress should remove federal barriers to competition.
We believe that Congress can most effectively promote competitive electricity markets by reforming federal law to remove barriers to efficient electricity competition. While the states should continue to have the lead in restructuring retail electric service, they obviously cannot address federal statutes such as the Public Utility Holding Company Act (PUHCA) or the Public Utility Regulatory Policies Act (PURPA).
Congress should repeal the Public Utility Holding Company Act of 1935.
PUHCA is an impediment to competitive markets that only Congress can address. We strongly support H.R. 2363, the Public Utility Holding Company Act of 1999, which was introduced by Representative Tauzin. We urge Congress to move expeditiously to consideration and passage of this bill. Representative Burr's bill (H.R. 667) contains the same provisions. These bills would repeal PUHCA 12 months after enactment and substitute a new act giving FERC and state regulatory commissions greater access to the books and records of holding companies and affiliates. The PUHCA provisions in Representative Stearns' bill, H.R. 1587, are similar.
The Administration's bill, H.R. 1828, contains similar provisions but would delay repeal until 18 months after enactment. H.R. 2050, introduced by Representatives Largent and Markey, would not repeal PUHCA for an electric or gas holding company having utility subsidiary companies operating in two or more states that have not elected retail competition. We are opposed to linking PUHCA reform to the implementation of retail competition. It does not make sense to repeal a federal statute on a company-by-company basis. PUHCA was enacted during the Great Depression and the New Deal in response to the virtual collapse of the holding companies that controlled the electricity industry at that time. By 1932, three holding companies - set up literally as pyramids - controlled almost half of the electricity generated in the country. As the economy collapsed, so did these companies. However, like everything else, the electricity industry obviously has changed over the past 60 years.
In addition, the regulations that govern the industry also have changed. Since the 1930s, states have significantly increased their regulatory oversight of utilities. Other securities laws that cover electric utilities are on the books to protect investors. And, the Federal Power Act, passed in conjunction with PUHCA and amended many times since, provides FERC with tremendous regulatory oversight over utilities.
PUHCA currently acts as a major barrier to electricity competition. First, it imposes an additional layer of regulation and restrictions on 18 registered electric and gas holding companies. PUHCA prevents these companies from responding quickly to consumers' needs and from offering consumers the range of services and products that will exist in competitive markets.
PUHCA also artificially distorts companies' business decisions. PUHCA makes it easier for U.S. utilities to invest in foreign utility assets than in U.S. utility assets. It also discourages non-utility businesses from acquiring utility assets, in effect keeping some potential competitors out of the market because they cannot qualify for an exemption and are unwilling to become registered holding companies. While most utilities can invest in other business opportunities without being affected by PUHCA, registered holding companies have a more difficult time investing in utility businesses in which they have expertise. And, under PUHCA, exempt wholesale generators are prohibited from selling electricity directly to retail consumers.
PUHCA also acts as a barrier to one of the emerging trends in the electricity industry: the growth of regional transmission organizations (RTOs), particularly independent transmission companies. In order for these companies to be regional in scope, they obviously must cover multiple states. However, PUHCA would apply to the ownership of such a company, imposing significant restrictions on its operations.
Congress should repeal prospectively the mandatory purchase obligation under PURPA, protect existing contracts, and provide for the recovery of PURPA costs.
PURPA forces electric utilities to purchase power at above-market prices regardless of whether they need the power. New PURPA qualifying facilities continue to be developed even today. This anti-consumer statute will require consumers to pay roughly $36 billion to $40 billion above market prices over the life of the PURPA contracts. It is inconsistent with competitive generation markets. It has no justification when there is open transmission access where many different buyers can purchase a plant's output, let alone in a competitive retail market.
The PURPA reform bill introduced by Representative Stearns, H.R. 1138, recognizes that PURPA has no place in a competitive market. It would repeal the mandatory purchase obligation (Section 210) of PURPA prospectively, assure utilities they can recover the costs they incurred to comply with PURPA, and protect the sanctity of existing PURPA contracts. We strongly support passage of this bill. The same provisions are included in Representative Stearns' subsequent bill, H.R. 1587, and in Representative Burr's bill, H.R. 667. Representatives Largent and Markey's bill, H.R. 2050, also repeals section 210 and provides for recovery of PURPA costs.
The Administration bill (H.R. 1828), while heading in the right direction on this issue, falls short. It would prospectively repeal the mandatory purchase requirement but fails to assure recovery of these federally-mandated costs. Representative Walsh's bill, H.R. 971, while attempting to ensure that rates charged for PURPA contracts do not exceed avoided costs, fails to repeal the mandatory purchase requirement, which is the source of these above-market costs. It also would allow states to require renegotiation of PURPA contracts. While contract renegotiation is one means to mitigate above-market mandatory purchase costs, it should be done by the parties themselves, and any statute should include the basic principle of honoring existing contracts.
Because PURPA is a federal statute, and PURPA contracts are wholesale contracts, the federal government has a clear responsibility to assure the recovery of these costs. Under the Federal Power Act, FERC has exclusive jurisdiction over wholesale sales of electricity. States are prohibited from denying utilities the opportunity to recover FERC- approved wholesale costs, including, arguably, costs associated with contracts mandated by PURPA. In addition, PURPA itself has been interpreted to preclude states from denying the passthrough of PURPA contract costs.
Congress should facilitate state restructuring activities.
Congress should respect state decisions regarding retail competition.
The bills introduced by Representative Burr (H.R. 667) and Representative Stearns (H.R. 1587) take the right approach on this issue: both bills would clarify that states have the authority to restructure retail electric services under their own timetable, taking into consideration the interests of their consumers.
The so-called "flexible mandate," similar versions of which are contained in both the Administration bill (H.R. 1828) and the Largent- Markey bill (H.R. 2050), in fact, gives the states too little flexibility. H.R. 1828 would require distribution utilities to provide open access to consumers by January 1, 2003, unless the state regulatory authority or non-regulated utility made a certain finding. H.R. 2050 requires states to make this critical decision one year earlier. The "opt-out" language contained in both bills significantly limits the state regulatory authorities' actions by providing them with only one standard for opting out: if implementation of retail competition would have a "negative impact on a class of customers of that utility that cannot be mitigated." This standard is completely undefined. The bills also appear to leave the entire decision of whether to implement retail competition to the state regulatory commission, ignoring the critical roles played by state legislatures and governors in state restructuring decisions.

Federal legislation should respect decisions already made by states regarding retail competition. However, the Administration bill (H.R. 1828) does not grandfather customer choice plans already approved by state legislatures and regulatory commissions. And, a state such as Virginia, which is not scheduled to implement full retail competition until 2004, would presumably have to change its state plan to meet the 2003 deadline or the state regulatory authority would have to "opt out" under the non-mitigable negative impact standard.
The Largent-Markey bill does include a grandfathering provision, but its coverage seems incomplete. First, it only applies where the retail competition plan adopted covers retail sales to all classes of customers. On this basis, it would not include the recently passed Oregon bill, which does not include retail choice for residential customers at this time, preferring to bring the benefits of competition to these consumers through portfolio options and savings at the wholesale level. Second, it only exempts a state from making the actual retail competition election. It does not exempt or protect the existing 22 state restructuring plans from the many new federal requirements relating to retail service in H.R. 2050. Some of these requirements may be inconsistent with the provisions in state retail competition plans already adopted. To the extent that a bill includes prescriptive requirements, such as the Administration bill or the Largent-Markey bill, it should respect state decisions that have already been made.
Finally, the Supreme Court decision in Alden v. Maine raises questions about the constitutionality of the Administration's flexible mandate approach and the provision allowing enforcement of it in state court. In Alden, the Supreme Court held that a person cannot bring a suit against a state in state court to enforce a right under a federal statute, unless the state agrees to waive its sovereign immunity. The Alden case appears to put sharp limits on the ability of Congress to make federal requirements, such as the flexible mandate and opt-out provisions, binding on the states.
The Largent-Markey bill (H.R. 2050) also would require FERC to order retail access to Department of Defense facilities and Indian tribes, even where a state has not yet approved retail competition. Again, this fails to respect state decisions on restructuring and could shift costs unfairly to other customers in the state, especially when it preempts state laws and policies.
Congress should endorse utilities' right to recover legitimate stranded costs.
Federal electricity legislation should endorse utilities' right to recover legitimate transition costs, while recognizing that the states will be responsible for key implementation decisions regarding retail transition costs. Congress also should confirm FERC's jurisdiction to provide for the recovery of legitimate wholesale transition costs and support recovery of PURPA and other federally created transition costs.
In many states that have approved retail competition plans, utility worker protection has been an integral part of these packages and an integral part of transition cost recovery. To support utility workers who might be displaced, we urge Congress to also recognize that transition cost recovery should include costs for outplacement assistance, job retraining and/or appropriate severance packages for workers.
Because policymakers create transition costs when they promote competition, they have the responsibility of ensuring that utilities can recover these legitimate costs. Allowing industries to recover their transition costs has been a normal part of the deregulation of major industries, including airlines, railroads, trucking, telecommunications and natural gas. Policymakers have taken different approaches to recovery of transition costs in various industries, including direct government subsidies for maintenance of unprofitable services, compensation to displaced workers, special consumer charges, and liberalized merger standards. The length of the transition period to competition also has varied from industry to industry. But, what has not varied is the government's commitment to assure payment of these transition costs.
For almost a century, electric utilities have operated in a business environment vastly different from the one faced by competitive businesses. In order to fulfill their requirements to serve all consumers in their service areas, utilities have invested billions of dollars in generating facilities and a reliable distribution and transmission system. In addition, utilities invest heavily in public purpose programs like low-income energy assistance, energy efficiency and renewable energy resources. They also have been mandated by PURPA to purchase power produced from cogeneration and renewable energy facilities. And, utilities are heavily taxed at the local, state and federal levels.
Before utilities can recover these investments from consumers, the expenditures must be reviewed and approved by regulators, and they are currently included in consumers' bills under regulated rates. Because one of the objectives of regulation has been to stabilize rates for consumers, recovery of these utility investments frequently has been stretched out over as long as 30 or more years. Government action that denies legitimate stranded cost recovery violates the government's half of the traditional "regulatory bargain" and would amount to an unconstitutional taking. Under the Constitution's Fifth Amendment, the government cannot "take" private property without providing just compensation. Because the property of utilities was committed to serve the public, the Constitution's protection against taking without just compensation requires regulators to set rates to provide an opportunity for an overall rate of return adequate to operate successfully, maintain financial integrity, attract capital and compensate investors. Duquesne Light Co. v. Barasch, 488 U.S. 299 (1989); FPC v. Hope Natural Gas Co., 320 U.S. 591 (1944).
Virtually all of the states that have adopted retail competition have provided for transition cost recovery, and they are moving swiftly toward implementing their restructuring plans. In contrast, New Hampshire -- the only exception -- has been mired in litigation over its failure to provide recovery for commitments made under the prior regulatory regime until recently.
In fact, the judge in that litigation stated that the New Hampshire plan's failure to address transition cost recovery raised serious concerns that it violated the Constitution's Fifth Amendment. Likening a rate order that would have the effect of denying transition cost recovery to the confiscation of private property that occurred in Cuba, federal judge Ronald R. Langeux stated: "If the Constitution of the United States means anything, it means here that the private property of a corporation cannot be taken without just compensation. What is happening here is that the (New Hampshire Public Service) Commission is acting for the benefit of the rate payers in New Hampshire to the detriment of the people who have invested in these two utilities. ... It is, in effect, appropriating to the use of the rate payers of New Hampshire the property of these two utilities."
A few weeks ago, a preliminary settlement was reached in New Hampshire that will allow competition to proceed and that recognizes transition cost recovery. The lesson is that fair dealing on transition cost recovery is a necessary part of the restructuring process.
The Administration bill (H.R. 1828) recognizes the importance of transition cost recovery. It endorses the principle that utilities should be able to recover prudently incurred, legitimate and verifiable costs arising from the transition to retail competition. However, while the Administration bill provides assurances of transition cost recovery to federal utilities, and allows electric cooperatives and other government-owned utilities to determine their own transition costs, it provides no such assurances for shareholder- owned utilities. The Administration bill provisions addressing transition cost recovery for shareholder-owned utilities should be as strong as those afforded other utilities.
The Burr bill (H.R. 667) attempts to provide incentives for transition cost recovery by tying it to the receipt of federal energy assistance. H.R. 667 also prohibits a state from changing its transition cost recovery provisions for seven years. While this provision appears well-intentioned, we are concerned that it would freeze in place initial state proposals, even if they could bankrupt utilities. In most state proceedings, the final transition cost recovery settlements are the result of intense negotiations.
Congress should resolve federal/state jurisdictional issues that may impede the progress of competition.
Since the beginning of the electricity industry, the states have regulated retail electric rates.

In the 1935 Federal Power Act, Congress sought to draw a "bright line" between federal jurisdiction affecting interstate commerce and state jurisdiction over matters uniquely local. Any ambiguity in federal law about the scope of state authority to provide for retail competition in electricity should be removed. The Burr (H.R. 667), Stearns (H.R. 1587) and Largent-Markey (H.R. 2050) bills include provisions to clarify state authority. Similarly, federal law should make clear that each state has authority to impose wires charges and similar fees upon all users of electricity within the state, including end-users that connect directly with FERC-regulated transmission facilities. These three bills also allow states to impose a non- bypassable charge on the purchase or distribution of electricity for a number of public policy purposes, including transition costs.
In addition, federal jurisdiction over unbundled retail transmission, that is, the transmission component of a sale once retail competition has been implemented, should be clarified. Finally, federal law should provide reasonable mechanisms to distinguish interstate transmission from distribution facilities subject to state jurisdiction. H.R. 1587 includes a good approach to these issues. The Administration bill (H.R. 1828) also clarifies state and federal jurisdiction.
Legislation should also clarify that states that provide for retail choice have the authority to impose reciprocity requirements, so that all generators that sell, directly or indirectly, to end-users within their borders themselves provide retail choice to their customers. The provision in the Burr bill (H.R. 667) that FERC must certify that the "predominance" of energy sold by a particular seller is produced in a state without retail competition demonstrates the problems of implementing reciprocity provisions. While reciprocity provisions may be difficult to enforce, the Administration bill (H.R.1828) provides a good starting point for addressing these issues. The Largent-Markey bill (H.R. 2050) takes a similar approach, but it includes loopholes that would provide an exception to power generated by nonregulated utilities, such as government-owned utilities and electric cooperatives, that are not themselves open to competition. Finally, while we believe that states should have the option to impose a reciprocity requirement, the federal government should not mandate such a provision. Some states may prefer to allow the consumers unfettered choices of electricity suppliers, while other states may believe promoting competition in neighboring states is in their best interests. Thus, we find the requirement of a mandatory reciprocity requirement in the Stearns bill (H.R. 1587) troublesome. CONGRESS SHOULD ADDRESS CRITICAL TRANSMISSION AND RELIABILITY ISSUES
In only three specific areas, Congress should grant FERC additional jurisdiction to ensure that the interstate transmission system will be able to meet the challenges and needs of competitive markets.
Congress should require all transmission providers to be subject to FERC jurisdiction over transmission service to facilitate efficient use of our nation's transmission system.
Currently, transmission providers such as the federal Power Marketing Administrations (PMAs), the Tennessee Valley Authority (TVA), state and municipally-owned utilities and most electric cooperatives, which together operate about one-fourth of our nation's transmission system, are not subject to the same transmission rules as are shareholder- owned utilities that are subject to FERC jurisdiction. For example, these transmission providers are not subject to the nondiscriminatory open access requirements in FERC's landmark Order 888. In some areas such as the Northwest, these non-jurisdictional transmission providers dominate the transmission system. It does not make sense, from a regulatory standpoint or from a competitive standpoint, to have a significant portion of the nation's transmission system operating under a different set of rules, or in some cases, no rules at all. Only Congress can address this concern by bringing all transmission providers under FERC jurisdiction for regulation of transmission service.
The most comprehensive solution to this problem is contained in the Stearns bill (H.R. 1587), which would amend the definition of "public utility" in the Federal Power Act to include these entities. There is, however, a technical problem in the provision that may prevent it from fully covering all nonjurisdictional transmission providers. The Largent-Markey bill (H.R. 2050) attempts to deal separately with each class of nonjurisdictional transmission providers. In doing so, in what we believe is merely an oversight, H.R. 2050 fails to bring the transmission facilities of PMAs other than the Bonneville Power Administration under FERC's jurisdiction. While the Administration bill (H.R. 1828) attempts to address this issue, it allows too many opportunities for TVA and the PMAs to avoid complying with the same rules as all other transmission providers. Representative Franks' bill (H.R. 1486) also includes a provision to require the PMAs to provide open access, but this provision does not cover the other nonjurisdictional transmission providers. The Burr bill (H.R. 667) does not address this critical issue.
Some have argued that electric cooperatives should be exempted from FERC's transmission jurisdiction because many cooperatives are small or own minimal transmission facilities. FERC already has the authority to grant waivers from its transmission regulations to small transmission providers and has granted such waivers on several occasions. Therefore, this should not be a reason to carve out the transmission facilities of electric cooperatives from FERC regulation, preventing uniform regulation of the nation's interstate transmission grid.
Congress should provide incentives for the construction of new transmission facilities.
Perhaps the most critical aspect of transmission policy is to address the substantial barriers to improving and expanding the interstate transmission system. As electricity markets grow and become more competitive, new transmission capacity will need to be constructed. Otherwise, electricity suppliers and regulators will find themselves fighting increasingly pitched battles over who gets priority for use of an increasingly scarce resource.
In the past, transmission was built largely to upgrade the reliability of service by vertically integrated electric utilities to their retail franchise customers. In that circumstance it has made sense for state commissions, who are responsible for regulating retail electric service, to have jurisdiction over transmission additions. In competitive markets, however, transmission must facilitate interstate transactions and enhance the reliability of the interstate grid. FERC's role in encouraging transmission additions needs to be reexamined.
Siting new transmission in a regulated monopoly environment is difficult enough. Eminent domain laws in some states require a demonstration of specific benefits to the state, and even to particular counties, that a proposed transmission line might cross. Increasingly, the benefits of transmission construction may fall primarily outside of the locality, or even the state where most of the construction occurs. Under these circumstances, it may be difficult to obtain the necessary permits from an affected state, which receives few direct benefits and thus has little incentive to approve the construction. As the electricity market becomes increasingly interstate in nature, these individual state requirements may hinder needed transmission expansions.
In order to ensure that the nation's transmission system is adequate to meet consumers' electricity needs and to promote economic growth, Congress should carefully examine ways to remove barriers to transmission expansion, including enhancing FERC's authority over the siting of new transmission in consultation with the states. FERC currently has such authority over natural gas pipelines under section 7 of the Natural Gas Act.
We are certainly mindful of the concerns about possible encroachment on what has traditionally been an area of exclusive state control. To that end, we would recommend that in any proposal enhancing FERC's siting authority, states have the right to act first before resort to any federal authority would be sanctioned.
Another major impediment to transmission expansion is the lack of a transmission pricing policy that provides incentives for construction of new facilities and a rate of return necessary to attract capital to these highly capital-intensive projects. Artificially holding down transmission rates such that no new construction takes place may appear to benefit consumers in the short term, but in the long run, consumers will be harmed. FERC must reform its transmission pricing policy to facilitate needed transmission construction in order to assure the continued expansion of competitive markets.
Congress should ensure the reliability of the transmission grid by establishing a self-regulating organization to establish and enforce reliability standards under FERC oversight.

Assuring the reliability of our nation's transmission system is the third area where we believe that additional FERC authority is necessary. Our existing voluntary reliability organizations have served us well. However, with the dramatic changes in the use of the transmission system due to open access transmission under Order 888 and the spread of retail competition, the transmission system is being used by more market participants for more transactions than ever before and for purposes which it was not originally designed to accomplish.
These changes are pushing the existing system harder. The many new entrants in the electric market also make it more difficult to manage the system using voluntary reliability standards. Virtually all industry participants believe strongly that new, enforceable standards need to be adopted to help ensure that our transmission system continues to operate safely and reliably.
Consensus reliability legislation has been developed through a stakeholder process sponsored by the North American Electric Reliability Council (NERC). This proposal would establish an Electric Reliability Organization (ERO), modeled on the National Association of Securities Dealers (NASD), which regulates the stock exchanges and securities dealers. The Securities and Exchange Commission exercises oversight of the NASD, just as FERC would provide oversight of the ERO. Federal government oversight is necessary to assure mandatory compliance with reliability standards and in order for a private organization to enforce the reliability rules under the antitrust laws.
A diverse group including EEI, the American Public Power Association, the National Rural Electric Cooperative Association, the Electric Power Supply Association, and the Electric Consumers Resource Council (ELCON) supports the NERC legislation. Representatives of state regulatory commissions, state energy offices, and the federal government also participated in the NERC process. The members of the coalition supporting the NERC language are working with representatives of various state organizations to resolve a few outstanding issues concerning state authority in this area.
The fact that each of the comprehensive bills before this Subcommittee, with the exception of the Burr bill (H.R. 667), includes a reliability provision demonstrates the critical importance of action on this issue. The NERC consensus language has been included in the Largent-Markey bill (H.R. 2050). The Administration bill (H.R. 1828) contains the NERC language with some changes in language that are significant. We find the reliability provisions in the Stearns bill (H.R.1587) to be a less satisfactory approach than the NERC language, in part because it gives more authority to FERC at the expense of the broad-based industry ERO envisioned in the NERC language.
Congress should ensure that the same rules apply to all suppliers.
Our principle is a simple, fundamental one: in competitive markets, the same rules should apply to all suppliers. This is essential for the most efficient, innovative and responsive companies to succeed. Therefore, Congress should address the role of federal utilities, such as the PMAs and TVA, as well as other government-owned utilities and electric cooperatives, in a competitive market and should deal with federal subsidies provided to certain suppliers, including the use of federal tax-exempt financing to build new facilities.
The electricity industry is different from other deregulated industries. In industries such as natural gas or airlines, private enterprise did not have to compete with subsidized government providers. In certain regions, such as the Northwest and the Tennessee Valley, government utilities own significant amounts, if not the majority, of both generation and transmission facilities. Only Congress -- not the states -- has the authority to deal with many of the issues involving the role of these suppliers in competitive markets.
Government-owned utilities and electric cooperatives are taxed very differently at the federal, state and local levels in comparison to shareholder-owned utilities. They also raise their financing differently. Government utilities can issue tax-exempt financing, while electric cooperatives are eligible for direct federal loans and federal loan guarantees. Credit subsidies available to cooperatives and municipal systems are substantial and enhance their abilities to compete and prevail in newly deregulated markets. The value of tax- exempt financing to those municipal systems that can issue federally tax-exempt bonds has been reliably estimated at $0.5 billion per year. The Rural Utilities Service (RUS) has issued some $33 billion in low- cost loans and guarantees to electric cooperatives. Roughly 70 percent of this went to generating cooperatives.
A third subsidy to government-owned utilities and electric cooperatives is their preferential access to low-cost power, much of it hydroelectric power, generated at federal facilities and marketed through the PMAs and TVA. Yet another advantage enjoyed by these entities is that their transmission facilities are not subject to FERC jurisdiction.
We are not challenging the right of government-owned utilities and electric cooperatives to exist, nor are we challenging the benefits they enjoy to provide distribution service to their traditional retail customers. However, when government utilities and electric cooperatives use their governmentally-derived benefits to compete directly for customers against taxpaying companies, markets are distorted and tax revenues are lost. Taxpayers in other areas of the country end up subsidizing these suppliers in competitive markets. This "growing government" at the expense of private business in our country is in direct contrast with England and other countries, which are achieving electricity competition by "privatizing" government- owned utilities.
Put all entities on the same accounting principles.
Representative Franks' bill (H.R. 1486) and the Largent-Markey bill (H.R. 2050) make a contribution to needed reforms in this area. Both would require the PMAs (the Franks bill includes TVA as well) to use the same accounting principles and requirements as FERC applies to the electricity operations of public utilities subject to its jurisdiction. The bills would also require these federal utilities to submit rates for their power sales to review by FERC to ensure that costs attributable to generation, such as fish and wildlife expenditures, are included as generation costs. H.R. 1486 would also require that these entities transition to market-based pricing and would retain preferences to power generated by PMAs for government- owned utilities and cooperatives, but at market-based rates.
Do not subsidize future generation.
The Administration bill (H.R. 1828) and the Largent-Markey bill (H.R. 2050) begin to restructure TVA, but unfortunately, neither bill addresses the underlying subsidies that TVA or the PMAs receive.
Instead, we support prohibiting TVA or the PMAs from constructing new generation facilities or entering into long-term contracts with other suppliers, except when it is necessary to meet the electricity needs of their current customers. We also oppose removing the TVA fence or allowing them to make retail sales to new customers until these subsidies are removed.
Finally, while H.R. 1828 brings TVA's operations under the nation's antitrust laws beginning in 2003, it exempts TVA from some of the most effective tools for antitrust enforcement - civil damages and attorneys fees. Moreover, the bill does not subject BPA or the other PMAs to the antitrust laws in any respect. H.R. 2050 would bring TVA, BPA and the other PMAs under federal antitrust laws, but exempts BPA and the other PMAs from civil damages and attorneys fees.
While the Administration bill and the Largent-Markey bill fall short in removing competitive subsidies for government utilities and electric cooperatives, the other comprehensive bills, H.R. 667 and H.R. 1587, do not address these critical issues at all.
Congress should provide the same commitment to all competitors regarding transition costs. The Administration bill (H.R. 1828) and the Largent-Markey bill (H.R. 2050) also continue to grant special treatment to TVA, the PMAs, government-owned utilities, and electric cooperatives by ensuring their ability to recover transition costs, without a comparable commitment for shareholder-owned utilities. Non-regulated distribution utilities, which will include most electric cooperatives and government-owned utilities, would have the authority to determine for themselves whether they could recover their transition costs.

In addition, RUS borrowers would be able to apply to FERC to impose a charge on transmission service to help pay for the recovery of transition costs. H.R 1828 and H.R 2050 would also authorize TVA to recover its transition costs. Finally, the Administration bill provides for the recovery of generating costs by BPA and the other transmission-owning PMAs through a surcharge on their transmission rates, thus forcing shareholder-owned utilities to pay for the generating capacity used to compete with them. The Largent-Markey bill (H.R. 2050) includes a similar provision for BPA.
Congress must address the tax benefits enjoyed by government utilities.
Finally, amendments to the Internal Revenue Code concerning the tax- exempt status of bonds issued by government utilities are an essential part of a comprehensive resolution to the role of government utilities in competitive markets. The tax provisions in the Administration bill reflect a reasonable compromise, allowing government utilities to avoid current IRS "private use" restrictions on the ability to compete without having to refund existing tax-exempt bonds, but providing, in return, that as government utilities move into competitive markets, no new tax-exempt bonds should be issued for new generation or transmission facilities. The Largent-Markey bill (H.R. 2050), on the other hand, would expand the ability of government-owned utilities to use tax-exempt financing in competitive markets without requiring them to open up to competition.
We believe that legislation introduced by Representative Phil English (H.R. 1253) represents the best solution to this problem. It provides needed flexibility for government-owned utilities that choose to compete, while allowing those that elect not to compete and small government utilities the option to continue to operate under the existing private use rules. These changes are needed to ensure that government utilities that enter competitive markets do not enjoy any new unfair competitive advantages subsidized by the taxpayers.
There are other areas, however, in which federal legislation is not appropriate.
As Congress considers electricity restructuring legislation, it should focus on deregulating, not reregulating.
New federal authority to order divestiture is not needed.
The utility industry is currently subject to intense scrutiny by federal and state governments acting under a number of different federal and state laws to address potential market power concerns. In addition, state restructuring plans are addressing potential market power concerns. For example, the laws recently passed in Texas and Ohio both contain market power provisions. FERC, the FTC and Department of Justice also can address market power issues under their antitrust and merger responsibilities. FERC certainly has adequate authority under the Federal Power Act to regulate wholesale rates, if necessary. Congress should not enact draconian new market power provisions, such as granting FERC new authority to order divestiture, to regulate retail rates, or to mandate participation in a regional transmission organization.
FERC's open access rules address vertical market power concerns by mandating non-discriminatory open access to the transmission grid and removing the ability of integrated utilities to use their control over transmission to gain a competitive advantage in upstream or downstream power markets. FERC's rules also require utilities to separate both information flows and personnel between unregulated power marketing activities and their regulated wires business.
In addition, potential market power is limited by the vigorous competition to construct new generation, which can also be constructed and brought on line much more quickly than in the past. In New England alone, there are proposals to build new plants representing 28,645 megawatts in new generation, which is more than the total existing generation in that region of approximately 23,500 megawatts. In the ERCOT ISO in Texas, over 26,000 megawatts of new generation capacity is being proposed. While all these projects will not be built, they provide strong evidence that a vibrant competitive market imposes price pressure on existing generation.
Many utilities are selling some or all of their generation. Since 1997, generating facilities representing 61,834 megawatts of capacity have been sold or are the subject of pending sales transactions. Companies have also announced their intent to divest generating assets representing another 92,000 megawatts in fossil and hydroelectric generating capacity and over 11,000 megawatts in nuclear generation and purchased power agreements. As previously mentioned, some of the largest purchasers of these assets are independent power producers.
The four largest shareholder-owned electric utilities combined have just a 16.5 percent share of the national market. Catalogue of Investor-Owned Utilities, 1997 revenues, 38th Edition, EEI, 1998. By comparison, the four largest long distance telephone carriers generate roughly 72 percent of the industry revenues. Trends in Telephone Service, Industry Analysis Division, Common Carrier Bureau, Federal Communications Commission, February 1999. The four largest railroads run 87 percent of all of the revenue ton/miles. Analysis of Class I Railroads 1997, Policy and Economic Department, Association of American Railroads. Defined by total capital, the four largest securities firms have 70 percent of the capital of the securities industry. Securities Industry Yearbook, 1998-99, Securities Industry Association, 1998. As we have seen, mergers and strategic alliances within all of these industries continue.
Any evaluation of market power issues must look to where the electricity industry is rapidly heading, not to where it has been, or even where it is right now. As previously discussed, thousands of suppliers already participate in electricity markets and new business opportunities are attracting numerous new competitors, many of them huge international companies. These companies will go head-to-head to sell electricity and other energy services to consumers. They will sell their electricity over wires that remain regulated by the states and federal government to ensure guaranteed, open access to these essential facilities.
Congress should let market trends continue to evolve and should refrain from enacting draconian market power provisions. We commend Reps. Burr and Stearns for not including such provisions in their respective bills. On the other hand, we find that the Administration bill (H.R. 1828) goes too far in giving FERC sweeping new powers. It authorizes FERC to require divestiture of generation facilities, even though states clearly have the authority to address these issues, and extends FERC's reach into retail markets within individual states. The Largent-Markey bill (H.R. 2050) would also give FERC unnecessary new authority to set retail rates - a clear intrusion into traditional state jurisdiction.
Regionalization of transmission requires flexibility.
EEI supports grid regionalization policies that rely on flexible, market-based approaches that apply to both private and public transmission providers. Existing regional grid organizations and those under development reflect - and will continue evolving to reflect - changes in technology, reliability requirements, corporate structure, local and regional priorities, market boundaries, and other market characteristics.
Different forms of regional transmission organizations (RTOs) include independent system operators (ISOs), regulated, not-for-profit entities which control and operate transmission systems, but do not own the transmission assets. Another form of a RTO is an independent transmission company (an ITC or transco). A transco is a regulated for-profit company that owns or leases transmission facilities within a certain area. A transco also administers and operates the transmission system.
Since 1997, six independent system operators have been formed, covering the transmission systems of California, Texas, the eastern United States from Maryland north through New England, and a large part of the Midwest. Several other RTOs, including several independent transmission companies, are in various stages of development. On May 12, FERC proposed new measures to promote the formation of RTOs. FERC's new proposed RTO rule will further facilitate the development of RTOs.
RTOs help facilitate competition in electricity markets by assuring that all electricity suppliers will have fair, open access to transmission facilities. They coordinate the use of the transmission lines on a broader regional basis, as well as assuring the continued reliability of the bulk-power transmission system. And, they help reduce costs by eliminating the "pancaking" of transmission rates (the adding of costs for using the transmission systems of different utilities as power is moved across a region). However, RTOs and other market players must have the ability to profitably operate and construct new transmission facilities in order to expand markets.

Just as companies need the flexibility to determine which corporate structure or which business opportunities to pursue as electricity markets change, so, too, should they have the flexibility to determine the best transmission structure for the future. Like everything else in electricity markets right now, these structures are not static or fixed in stone. The appropriate market organizations should be allowed to develop, instead of prematurely mandating one particular transmission structure on a company.
The Stearns bill (H.R. 1587) is consistent with this approach. While it encourages the formation of independent system operators, it gives FERC no new authority to require them. Representative Burr's bill (H.R. 667) is silent on this issue, allowing utilities the flexibility to continue current trends toward regionalization. Both the Administration bill (H.R. 1828) and the Largent-Markey bill (H.R. 2050), however, give FERC unnecessary new authority to order establishment of independent transmission entities, to mandate participation in such an entity, and perhaps even to draw the boundaries of transmission entities, rather than leaving it to market forces to determine the appropriate configurations of regional electricity markets. These bills also would carve out special exceptions for TVA and the PMAs regarding their participation in regional transmission organizations, which are unwarranted.
Congress should streamline the review of utility mergers.
As for reviews of mergers, we urge the Subcommittee to streamline and simplify the process. FERC, the Department of Justice, the Federal Trade Commission, the SEC and state regulatory agencies review electricity mergers. Literally no other industry is as heavily regulated with regard to mergers as the electric utility industry.
Many of the mergers are between electric utilities and companies that own natural gas distribution, pipelines and exploration and production capabilities. Combining electricity and natural gas products enables companies to offer consumers convenient "one-stop shopping" for their energy needs. These combinations also give companies more efficient, more competitive operations through economies of scope.
Like almost every other industry in the country, the electricity industry is becoming global, and U.S. companies are positioning themselves to be regional, national and even international players. As a result, more mergers are occurring among energy companies. The reality is that U.S. energy companies are significantly smaller than their European or Asian counterparts. Most of the world's largest utilities are foreign. And, a growing number of foreign utilities are also interested in merging with U.S. utilities. European utilities entering our market are amazed and frustrated at the time it takes to get regulatory approvals, as compared to Europe where regulatory reviews take a fraction of the time.
Federal statutes recognize that mergers are a normal and beneficial part of the competitive process unless they significantly increase market power. Mergers and other strategic alliances can increase efficiencies in product and service offerings, resulting in lower costs and greater benefits for consumers. Yet, regulatory delays in reviewing mergers impose significant costs on companies - impeding efficient combinations - and reduce or delay the benefits for consumers. It usually takes years to complete utility mergers. In comparison, giant multinational oil mergers can be approved in significantly less time, as are combinations of utilities in Great Britain and other European nations.
Representative Burr, by the elimination in his bill (H.R. 667) of FERC authority to review mergers, has apparently concluded that the Department of Justice and FTC have sufficient authority to review mergers. We would certainly agree that utility mergers currently are subject to too many layers of frustratingly slow reviews. The Administration bill (H.R. 1848) and the Largent-Markey bill (H.R. 2050), on the other hand, would expand FERC's authority to review mergers. None of the other bills address merger review.
Renewable energy should be encouraged, but a mandate is not appropriate.
Encouraging use of renewable sources of energy is an appropriate policy goal; however, the Administration bill follows the wrong course to achieve that goal. H.R. 1828 would impose a renewable portfolio standard on sellers of electricity of 7.5 percent. A renewable portfolio standard is a hidden tax on all consumers. This mandate also sets an unrealistically high requirement and will force consumers to pay more for electricity. The Largent-Markey bill (H.R. 2050) also establishes a renewable portfolio standard, albeit lower. Both the Administration and Largent-Markey bills ignore hydroelectric power, one of our nation's most abundant and most important renewable energy resources. Polls demonstrate that consumers will voluntarily pay a premium to purchase electricity generated from renewable sources. Many different companies are eager to market such products. Tax incentives may also be a vehicle to promote renewable energy sources. We should let market forces and production incentives, rather than government mandates, provide the encouragement for renewable energy. Reps. Burr and Stearns, by not including a renewable energy mandate in their respective bills, reach the same conclusion.
Additional federal requirements for consumer protection should be carefully crafted.
Public benefit programs, such as low-income assistance and universal service programs, which have traditionally been incorporated in utility rates, need to be restructured to work in a competitive market. States should have clear authority to assure that all users of electricity contribute equitably to the cost of such programs.
We agree that representations about the source of fuels used to generate electricity and their environmental impact must not be false or misleading, but we believe that the Federal Trade Commission and the states can enforce the accuracy of such representations under existing law. To illustrate this, the FTC is holding workshops in September on electricity labeling and the National Association of State Attorneys General is already working on a detailed policy in this area. Thus, new statutory authority for determining the accuracy of claims about electric generation sources, such as is included in the Administration bill, is not needed.Electricity restructuring legislation should not be used as a vehicle to address broader environmental issues.
Finally, we believe that electricity restructuring legislation should be just that. We are opposed to reopening the Clean Air Act or other environmental statutes in this context. This is not the appropriate place to deal with environmental issues. Any changes to the environmental laws should be addressed in a debate that considers all industries, not just one that singles out the electric utility industry.
As we have outlined, we support legislation that removes federal barriers to competition, facilitates state restructuring activities, and addresses critical transmission and reliability issues. These are restructuring issues that only Congress can address.
The details of how we get from a regulated electricity regime to a competitive market are critical. The electric utility industry is a $200 billion a year industry, and it is the country's most capital- intensive industry. Electricity powers our economy; it not only is essential to our well-being, it improves the quality of life of every American consumer. That's why we emphasize that it's important that we "get it right."
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LOAD-DATE: August 17, 1999