LEXIS-NEXIS® Congressional Universe-Document
Federal News Service, Inc.
Federal News Service
JULY 22, 1999, THURSDAY
SECTION: IN THE NEWS
LENGTH: 10117 words
HEADLINE: PREPARED TESTIMONY OF
MR. DAVID OWENS
EXECUTIVE VICE PRESIDENT
EDISON ELECTRIC INSTITUTE
HOUSE COMMERCE COMMITTEE
ENERGY AND POWER SUBCOMMITTEE
SUBJECT - H.R. 667
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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
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
forces in a competitive environment, it is responsible for addressing the
transition issues and establishing the ground rules for fair and effective
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
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
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.
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
electric service, they obviously cannot address federal statutes such as the Public
Utility Holding Company Act (PUHCA) or the Public Utility Regulatory Policies
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
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.
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
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
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
"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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
organizations to resolve a few outstanding issues concerning state authority in
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
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
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
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
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
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
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
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
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
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
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
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
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
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."
LOAD-DATE: August 17, 1999