LEXIS-NEXIS® Congressional Universe-Document

LEXIS-NEXIS® Congressional

April 13, 2000, Thursday

SECTION: PREPARED TESTIMONY

LENGTH: 10574 words

HEADLINE: PREPARED TESTIMONY OF GARY ZIMMERMAN EXECUTIVE VICE PRESIDENT MICHIGAN MUNICIPAL ELECTRIC ASSOCIATION AND GENERAL MANAGER MICHIGAN PUBLIC POWER AGENCY ON BEHALF OF THE AMERICAN PUBLIC POWER ASSOCIATION

BEFORE THE SENATE COMMITTEE ON ENERGY AND NATURAL RESOURCES

SUBJECT - PENDING ELECTRICITY INDUSTRY RESTRUCTURING PROPOSALS

BODY:
Good morning Mr. Chairman, and members of the committee. My name is Gary Zimmerman; I am the Executive Vice President of the Michigan Municipal Electric Association (MMEA), an organization representing 37 municipal electric communities across the state, from Baraga to Zeeland. Our members currently serve approximately 700,000 electric customers in Michigan. In addition, the Detroit Public Lighting Department, an MMEA member for many years, provides the street lighting services to one million people in Detroit. I also serve as General Manager of the Michigan Public Power Agency, a joint action agency and political subdivision of the state created in 1978 to serve wholesale electricity to more than a dozen Michigan towns and cities. I am pleased to testify today on behalf of the American Public Power Association (APPA). APPA is the national service organization representing the interests of over 2,000 municipal and other state and local government-owned utilities throughout the U.S. APPA member utilities include state public power agencies, and serve many of the nation's largest cities, but the majority of our members are located in small and medium-sized communities in 49 states, all but Hawaii. In fact, 75 percent of our members are located in cities with populations of 10,000 people or less. APPA members serve about 14 percent of all kilowatt-hour sales to ultimate consumers in the country.Mr. Chairman, I am here today to discuss public power's views regarding federal electricity industry restructuring legislation, and to provide our thoughts on the eight bills the committee is considering, including your own legislation, S. 2098, the Electric Power Market Competition and Reliability Act. Other bills include: the Electric Utility Restructuring Empowerment and Competitiveness Act (S. 516); the Transition to Competition in the Electric Industry Act (S. 282); the Comprehensive Electricity Competition Act (S. 1047); the Electric Consumer Choice Act (S. 1284); the Federal Power Act Amendments of 1999 (S. 1273); the Clean Energy Act of 1999 (S. 1369); and S. 2071, the Electric Reliability 2000 Act.

As the committee proceeds with its consideration of restructuring legislation for electricity competition, we urge you to ensure that federal policies preserve the rights of states and local governments to make their own decisions based on their knowledge of their own electricity needs. We believe the aim of federal legislation is two- fold: to facilitate state decisions to implement retail competition by addressing issues that are necessary for retail competition to work, but which cannot be completely resolved by a single state or even a group of states, and to resolve the problems found in the interstate wholesale market, which are fundamentally within the jurisdiction of Congress.

Public power has a long history of support for increased competition in the electricity industry. We were a primary force behind the transmission access provisions of the Energy Policy Act of 1992 that were the culmination of 25 years of our advocacy, and have been working closely with the Federal Energy Regulatory Commission (FERC) and others to foster the conditions needed for effective competition in wholesale electricity markets.

Our leadership in the drive toward competition is no coincidence. Public power has existed in a competitive environment from the very beginning of the electric industry. In public power communities throughout the country, the very future of the electric utility is always a ballot box issue that can be put to the test by local voters in the next election. Even in non-public power communities the future of electricity service is a critical factor in planning for economic growth and stability. Witness the current municipalization initiatives underway in large cities like Buffalo, NY and Portland, OR, and smaller communities such as the Villages of Hamburg and Sloan in upstate New York. These citizens understand the importance of low- cost, reliable electric service, and are willing to investigate the possibilities of owning and operating an electric utility themselves.There are other communities interested in pursuing aggregation arrangements. In early March the citizens of Parma, OH voted overwhelmingly to have the city act as an aggregator of electricity customers when retail competition begins in the state next year. A number of other communities, including several in Michigan and Massachusetts, are also interested in aggregating load for their residents. For example, residents of Barnstable County, MA, faced with paying some of the highest electric rates in the country, are beginning to realize the benefits of aggregation. (See attached report, "Promoting Competitive Electricity Markets Through Community Purchasing: The Role of Municipal Aggregator.")

Because wholesale electric markets are interstate in nature, it is up to Congress to put in place an industry structure in which competition can succeed. A competitive wholesale market is a necessary condition for competitive retail electric markets and, in fact, wholesale competition is likely to provide greater benefits to more consumers than retail.

APPA Supports Effective Wholesale Competition-and Competition Supports a Role for Public Power

Throughout its history, APPA has promoted competition and opposed its opposite, the exercise of market power. Simply put, market power and competition are two sides of the same coin. A market participant that has the ability to increase production (i.e., generation) prices for a significant period of time above the level that could be sustained in a truly competitive market is exercising horizontal market power. Vertical market power is exercised when a market participant uses its control of delivery systems (i.e., transmission) in order to block competitors from alternative suppliers.

Dating back to at least the 1960s, APPA has advanced proposals to open up the nation's transmission system to facilitate competition in the wholesale electricity market. For example, APPA was the leading force in convincing Congress to amend the Atomic Energy Act to require the Nuclear Regulatory Commission to determine whether granting a construction permit or operating license for nuclear power facilities would create or maintain a situation inconsistent with the antitrust laws. If it would, the NRC was required to impose conditions on the licensee to remedy such situations.

Throughout the 1970s and 1980s, and through our work on the Energy Policy Act, APPA promoted expanded FERC authority to require transmitting utilities to provide transmission access on just, reasonable and nondiscriminatory conditions. More recently, APPA has adopted a number of resolutions identifying market power problems that should be addressed in the context of comprehensive federal electric utility restructuring legislation.

These include clarified FERC authority with respect to the creation of regional transmission organizations, more rigorous review of utility mergers and the effects they would have on competition, clarification of FERC's ability to act as an umpire in remedying anti- competitive behavior in wholesale markets, and conditions to protect consumers in the event of repeal of the Public Utility Holding Company Act.

But just as we have been adamant in pursuing strong federal positions in the interstate wholesale market, we have been equally insistent in our efforts to preserve local control and decision making on matters related to retail competition. Public power stands for local control and local regulation. For decades, local elected officials have been making decisions that affect public utility systems in their communities. This diversity has brought numerous benefits to the entire industry, and federal legislation should not attempt to homogenize the industry. Diversity among suppliers and other sectors of the industry should be encouraged as it offers consumers more choices and options, not less. Thus, these elements should be preserved by any federal restructuring legislation.

The benefits of public power have recently been extolled in a new report by Dr. Eugene Coyle, an economist who challenges the assumptions that retail competition will benefit all consumers. Dr. Coyle's report, "Price Discrimination, Electronic Redlining, and Price Fixing in Deregulated Electric Power," sponsored by APPA, points out the dangers of blithely accepting cliches about "the market," and undertakes a more rigorous analysis of electricity economics (see attached). Coyle submits that unless Congress acts appropriately, residential rates inevitably will go up. Large customers will have options--fuel switching, self-generating units, and even relocation alternatives. They also have economic clout, and can usually lock in a new contract under a much lower price.

Residential and small business customers, on the other hand, especially low-income ratepayers, have few options, and "will be charged higher prices," beyond what cost differences would justify, writes Coyle. Price discrimination is as inevitable in retail electric sales as it is in online ticket sales.

With 24 states, representing 60 percent of the total U.S. population, having already taken steps to deregulate retail electric service, Coyle's challenge to examine the underlying assumption that all consumers will benefit may have come too late (although it deserves careful consideration by policymakers in those states that have not yet acted). But the challenge is certainly timely when it comes to congressional action on restructuring.

Whether one accepts or rejects Coyle's assessment that retail competition will not benefit small consumers, one thing seems absolutely dear--deregulation at the retail level cannot succeed unless it is built on a solid foundation of a competitive wholesale electric market. If the wholesale market is dysfunctional, as is currently the case, it is simply unreasonable to expect consumers to benefit from retail competition.

Why Federal Restructuring Legislation is Needed

APPA is not alone in this thinking. A large group of electricity stakeholders, representing a diverse cross-section of the industry, has recently developed a series of principles that should serve as the foundation for federal legislation (see attached list of principles and stakeholders). The group consists of pro-competition investor- owned utilities, consumer organizations, new market entrants, and other market participants, including both large suppliers and users of electricity. These principles are geared toward solving the problems in the interstate wholesale market, and include clarifying FERC's authority in several areas, supporting minimum functions and characteristics of regional transmission organizations (RTOs), mitigating the abuse of market power, and removing federal obstacles to competition found in the tax code. It is a serious effort that has proved how diverse stakeholders can find consensus on important policy matters affecting the industry. APPA is pleased to be part of the group, and is hopeful Congress will endorse the principles as it develops federal legislation.

APPA supports enactment of restructuring legislation because new federal policies are necessary to address growing problems within the industry. These problems are impeding both wholesale and retail competition, thus denying consumers the benefits of competition whether or not they are in states that have established retail competition.

It is clear that state legislatures across the country are moving swiftly to advance state restructuring measures. However, without the removal of federal barriers and the establishment of an effectively functioning interstate marketplace upon which to build, the consumer benefits promised by these state plans cannot be realized.

The proper role of federal legislation is not to intrude upon or usurp state authority, but to lay the groundwork upon which the states' objective of competitive electricity markets can be achieved. Unfortunately, as evidenced by the House subcommittee markup of H.R. 2944, the concept of states' rights can be taken to an extreme that ignores states' limitations and abandons the federal role over interstate commerce matters to the detriment of consumers. Only Congress is positioned to effectively address the problems that exist in the interstate market. Federal legislation must strike the appropriate balance between federal, state, and local authority.

Ultimately, there is only one reason for federal legislation-to promote competition for the benefit of all electricity consumers. This single overriding objective must be to restructure the industry in a way that has a high probability of benefiting all classes of customers, with no degradation of reliability of service. The abuse of existing market power, aggravated by the accumulation of ever- increasing control over transmission and generation in the hands of an ever-decreasing number of players, is the biggest single obstacle to the realization of this objective and the creation of robust competition in the electric utility industry. Some states have taken steps toward addressing market power within their borders. While such actions are very important, there is still a clear federal role in fostering competition that extends far beyond what individual states can accomplish.

Unfortunately, Congress has not had a very promising beginning in this regard. Last year's action in the House led to subcommittee adoption of H.R. 2944, the Electricity Competition and Reliability Act. In APPA's view, the bill neither promotes true competition nor ensures reliability. Rather than addressing the serious impediments that currently frustrate wholesale competition--such as anticompetitive control of transmission, or the elimination of competitors through mergers and consolidation-H.R. 2944 marches off in the opposite direction.

Some industry stakeholders, including APPA, were highly critical of H.R. 2944 immediately following its adoption by the House subcommittee. Other major players are now registering their own concerns. For example, FERC Chairman James Hoecker said in late December, "H.R. 2944 represents an unfortunate retreat from the goal of a competitive, efficient and transparent wholesale power market." Energy Secretary Bill Richardson has also cited many problems with the legislation, including the absence of FERC authority to require participation in regional transmission organizations, the failure to address the issue of horizontal market power, and the need for FERC to ensure that proposed mergers do not inhibit the trend toward competitive markets. Even officials from the New York Mercantile Exchange have stated that the bill "threatens the very viability of the interstate market ... (and) falls short of its stated intention to clarify federal and state jurisdiction and instead undermines FERC Order 888 .... "APPA hopes the bill can be improved, and if not, believes it should be abandoned.

Vigorously competitive regional wholesale markets will benefit all end users of electricity and are an essential foundation for competitive retail markets authorized by the states. Failure to achieve this goal will lead to deregulated monopolies, with little real choice, higher prices and poorer service for consumers. However, if this goal can be accomplished, the result will be reduced reliance on regulation, greater reliance on competition, and a new role for FERC that is more in line with the role of the Securities and Exchange Commission in monitoring and safeguarding securities markets, than the individual company and industry rate regulation role currently performed.

But Congress must move on the wholesale front; the states cannot do it alone. The Energy Policy Act of 1992 represented a good start, but problems still exist at the wholesale level, and all recognize, even FERC, that more needs to be done to realize the promise of competition held out by that Act. Put simply, problems found in the interstate wholesale market are fundamentally within the jurisdiction of Congress, and interstate commerce issues remain under FERC jurisdiction.Clearly, the ability of states to adequately address market power issues is limited.

For example, several problems--including conflict of interest issues--continue with a myriad of state commissioners and state legislatures. In addition, some problems are regional, and not simply related to state boundaries.

Michigan, for instance, is unfortunately an excellent example of how market power continues, and why the state legislature cannot solve the problem on its own. As representatives of Michigan's public power communities, we understand that any development of effective competition within the state's electricity industry will hinge on the ability of the state to address market power. Effective competition will not come about over night, since the state's two largest electric utilities exercise market power through their 90 percent control of Michigan's lower peninsula generation resources, a like percentage of the transmission system, and they key dispatch and scheduling operations. Similar circumstances also exist in Michigan's upper peninsula. These two large investor-owned utilities should not be able to exercise control over these facilities to favor their own generation resources, placing power generators, competing power suppliers, and bulk power purchasers, including municipal utilities, at a competitive disadvantage.

The key ingredients for effective competition in Michigan's electricity market--indeed, in every electricity market throughout the country--include the existence of many sellers and buyers, freedom of entry and exit for competitors, and unrestricted and nondiscriminatory access to transmission. But Michigan cannot do it alone, and we welcome the legislative assistance and intervention of Congress.

Congressional action is also needed to resolve potential reliability problems and other issues specifically under federal jurisdiction. Only Congress can address reliability at the wholesale or interstate level, and reliability should not be handled by stand-alone legislation. Too many critical issues--for example, transmission grid management, development of RTOs, and even barriers found in the federal tax code--raise reliability concerns. Today, most observers agree that the traditional voluntary approach to reliability will not work in a new, competitive era, and the old system of cooperation and mutual assistance, especially when it comes to enforcement issues, needs updating.

Recent developments in the electricity industry In the last few months, several significant developments have occurred in the electricity industry. APPA has taken a keen interest in these events, and urges Congress to heed the words and advice of various industry stakeholders.On December 15, 1999, FERC unanimously issued its final rule on the development and formation of RTOs, Order No. 2000. This order builds on both the successes and limitations of FERC Orders 888 and 889, and represents a seminal development in the electricity industry.

Order 2000 explicitly states that the commission has the authority to order utilities to join an RTO. In its press release, FERC said the "commission clarified that adoption of a voluntary approach to RTO formation does not preclude the exercise of any of its Federal Power Act authorities to remedy undue discrimination or the exercise of market power, including the remedy of requiring RTO participation where supported on the record." FERC Chairman Hoecker hailed the order as a "critical step toward broad market reforms in bulk power markets." APPA agrees. Commissioner William Massey added that Order 2000 says FERC can make RTO participation a condition for approval of a merger or of authority to charge market-based rates for wholesale power.

Significant changes from the proposed rule also were made to the commission's criteria for independence, including increasing the cap on active ownership of an RTO by a market participant from one percent to five percent, and adding a sunset provision for active ownership. If anyone doubted the commission's intent, FERC ruled on the proposed Alliance RTO the very same day, putting to test their new Order 2000.

In that related ruling delivered on December 15, FERC gave conditional approval to the proposed Alliance RTO, but essentially found the proposal did not meet the criteria outlined in Order 2000, specifically in such key areas as independence and geographic scope. In a statement regarding the order, FERC said the Alliance RTO plan raised many questions for the commission, including "the governance structure, the financial conflicts of interest of alliance's officers and directors, the proposed rate structure and potential barriers to east-west power transactions." In what amounted to FERC's first test of Order 2000, the Alliance RTO clearly failed.

More recently, Chairman Hoecker suggested that FERC's voluntary RTO policy might not be enough, and echoed APPA's contention that RTOs should be considered when attempting to mitigate market power and review mergers. In recent comments at the annual conference of the National Association of State Utility Consumer Advocates, Chairman Hoecker made a strong pitch for RTOs, saying they could not only help to mitigate market power, but also improve reliability. He also said that FERC may have to step in if utilities don't join RTOs voluntarily, as planned; while FERC remains "flexible" on RTOs, he said, FERC "may have to lapse into something that's more activist."

That sense of activism was very apparent when FERC ruled recently on the AEP-CSW merger proposal. On March 15, FERC approved the merger of American Electric Power Co. and Central and South West Corp., but with conditions intended to mitigatethe merged company's market power. With one commissioner dissenting, FERC attached several conditions to its approval, including a firm deadline for the two companies to transfer operational control of their transmission facilities to an RTO approved by FERC.

This recent ruling should not be overlooked. The AEP-CSW merger would create a new holding company that generates 38,000 megawatts, serving nearly five million customers throughout 11 states. FERC's conclusion that the merger posed vertical market power problems through the companies' control of generation and thousands of miles of transmission lines is an important finding for future consideration of mergers. APPA also notes the commissioners underscored the importance of open, unbiased transmission access with its interim conditions requiring an independent party to calculate the companies' available transmission capacity and to monitor operation of their transmission system.

Another important development for the industry was the release last month of DOE's report, "Horizontal Market Power in Restructured Electricity Markets," which details examples of potential market power abuses and puts a price tag on these problems. The "exploitation of market power can significantly erode the consumer benefits that would be expected from the transition" to a new electricity environment, the report declares. A Stanford University study cited by DOE calculated that wholesale prices in California during the summers of 1998 and 1999 were more than $800 million above competitive levels.

In releasing the report, Energy Secretary Richardson said the report "clearly demonstrates that, to assure that consumers realize the full benefits of electricity competition, federal and state electricity restructuring legislation must provide the necessary tools to address market power." While the study concentrated on specific problems in the United Kingdom and California, market power problems are widespread and not limited to a few congested areas, according to the study. The report raises serious concerns about market power and provides strong evidence that some utilities are using their near- monopoly control over generation to raise electricity prices far above what would be charged in a truly competitive marketplace.

Other significant developments include the aforementioned study by economist Dr. Coyle, who takes on the retail competition establishment. "Competition can bring benefits to consumers," Coyle writes. But textbook competition simply can't exist in some industries because they behave differently. Such industries share the common characteristics of selling a product that is an undifferentiated commodity (like airline seats or electrons), and/or the production of the commodity requires large fixed investment. "Electric power has both characteristics. Because of the product and cost characteristics of electric power, severe price discrimination is certain to occur in deregulated electric power, and small business and residential customers will be the targets." According to Coyle, "rather than textbook competition driving prices down to ever-lower costs and providing low-cost electricity to all, what will unfold is price discrimination, redlining of customers, and, ultimately, producer cooperation and/or collusion to frustrate competition."

One of Coyle's recommendations is that public power and public aggregation ("community choice") is a means of bringing the benefits of deregulation to consumers, while mitigating adverse effects of price discrimination. At the retail level, publicly owned utilities can provide protections against price discrimination.

Equally important, a competitive wholesale market--free from the distortions of market power--is critically important for the many public power utilities that purchase wholesale power and that are dependent on transmission access at fair, open, and non-discriminatory terms.

Finally, APPA is pleased to be part of a new pro-competition stakeholders group that has developed core restructuring principles over the last couple of months. These principles support effective wholesale competition. A consensus is beginning to develop regarding the issues that must be addressed in restructuring legislation, and how they should be addressed. We hope these principles will guide Congress as it develops federal restructuring legislation. (A list of the principles and those endorsing them is attached.)

APPA goals for federal restructuring legislation

Congress' goal in restructuring the electric utility industry should be to vigorously foster competitive interstate electricity markets supported by robust and reliable regional grids that are controlled, operated and planned on a competitively neutral basis. These markets should recognize the value to the public of maintaining a diverse industry consisting of private, public, and cooperative participants, offering an important element of choice. Accomplishment of this goal is essential to replacing FERC's traditional and historical role of rate regulation with the discipline of effective competition.

Some states have taken steps toward addressing market power within their borders.

For example, Texas has adopted restructuring legislation that takes an important step toward addressing generation market power by mandating that a power generation company cannot own and control more than 20 percent of the installed generation capacity within a qualifying power region. However, the ability of the states to address adequately market power is limited since power markets are regional, often crossing state borders, and state commissions and legislatures generally lack jurisdiction over out of-state market participants. While such state actions are significant, there is still a clear federal role in fostering competition that extends far beyond what individual states can accomplish.

Federal legislation must address this critical issue by instituting new structural protections against market power abuses. At a minimum, these structural protections should include: effective wholesale competition by providing sufficient federal authority and oversight to ensure nondiscriminatory access to transmission facilities; the development of truly independent RTOs, participation, and "neutral management" of the nation's transmission facilities, including size and scope criteria; enhanced FERC merger review authority; protections against generation market power; and repeal of the Public Utility Holding Company Act (PUHCA) only in the context of comprehensive restructuring legislation, and then only in combination with provisions to protect consumers' interests.

Transmission and RTOs

In many cases, Congress can foster the development of competitive interstate markets by simply reinforcing FERC's role in several areas. For example, in Order 2000 dealing with RTO matters, FERC concluded that it had a number of "tools" that it might use with respect to RTOs. It declined to require private power companies to join RTOs, but clearly stated that it had such authority when dealing with a number of issues, including the tool of its ability to remedy undue discrimination. In fact, the "tools" provided to FERC to deal with RTO formation, approval and participation may already exist under the Federal Power Act. At a minimum, APPA urges Congress to preserve FERC's existing authority in any federal restructuring legislation, including the authority asserted in Order 2000.

Comparable, non-discriminatory transmission access, service and pricing must be available to all participants in wholesale markets. FERC should have the authority to require open access transmission service at rates, terms, and conditions that are fully comparable to the service a transmission owner provides itself for all its own uses. Where FERC finds that a transmission owner has engaged in undue discrimination in the provision of transmission services, or has abused its control over transmission, FERC should be clearly authorized to require the transmission owner to surrender control of its transmission to an independent RTO that meets FERC RTO criteria.

In addition to this power to mandate participation in certain cases, FERC must be authorized to establish the parameters and conditions for RTO approval to ensure independence, proper size and scope of operations, and conditions for fair treatment of different market participants. The latter point includes recognition of the unique legal and tax code issues, including acknowledgement of bond covenants, faced by public power systems. Therefore, Congress should not limit FERC's discretion in determining the appropriate characteristics for what is required for RTOs. Instead, it should charge FERC with the responsibility of establishing the necessary framework for vigorously competitive regional electricity markets.While explicitly preserving any authority FERC has under existing law to order "jurisdictional" utilities to join an RTO, Congress should expressly confirm the authority already asserted by FERC in Order 2000. This authority includes the right to order RTO participation by a jurisdictional "public utility" to remedy undue discrimination or anti-competitive effects where supported by the record in particular cases, and as a condition for mergers or market based rates. For example, RTO participation by jurisdictional utilities should be a necessary condition in determining that proposed mergers of vertically integrated utilities are consistent with a showing, not a presumption, of public interest. Congress should also confirm FERC's authority that served as the foundation for Order 888.

FERC jurisdiction over public power transmitting utilities, however, should be limited for several reasons. Not all participants in the electricity market are the same. There are key differences between investor-owned utilities, public power systems, rural electric cooperatives, and independent power producers that warrant distinctions in regulation. The committee should recognize these differences and allow public power and cooperative transmitting utilities to retain control of the rate-setting function while ensuring that their transmission rates are comparable, not unduly discriminatory, or preferential. Allowing FERC to remand the rates back to these "non-jurisdictional" utilities that have not met these standards allows the federal entity to be the ultimate arbiter of comparability, while still retaining local control over significant related matters, such as adhering to bond covenants.

Nationally, public power systems own and operate approximately nine percent of the transmission network at voltage levels of 139kv and higher. These facilities are spread out over about 100 distinct public power utilities, and are typically not considered key elements in the backbone transmission grid, but generally serve as components of local distribution systems. Federal purview over these transmission systems should be limited, and in this regard APPA supports the approach taken in the House bill, H.R. 2944.

The House language includes an exemption from FERC jurisdiction for public power and rural electric cooperative owners of "limited and discrete" transmission facilities that are not part of the nation's bulk electric grid. Subjecting numerous small systems that may own short high-voltage lines (e.g., radial lines) that are not part of the bulk power system to FERC jurisdiction makes no sense. Utility costs would rise unnecessarily. Coordinating these determinations with regional reliability organization recommendations and allowing other stakeholders to challenge the self-certification for an exemption as authorized in H.R. 2944 provides adequate safeguards to a system that properly tries to balance increased regulation with the desired outcome.

Mergers

Mergers eliminate potential competitors from the market, and frequently mergers are pursued not to get ready for competition, but to throw up protections against it. According to a recent report by the Energy Information Administration, since 1992 investor-owned utilities have been involved in 26 mergers, with an additional 16 pending approval. In 3 years, from 1994-97, nine electric mergers were proposed. But just since 1997, 44 mergers have been proposed or completed (see attached APPA paper, "What Might Electricity Deregulation Bring?").

One clear effect of this activity has been an intense concentration of the entire industry. Less than 10 years ago, the ten largest IOUs owned 36 percent of the generation capacity in the country, while the 20 largest companies owned 56 percent.

But today the 10 largest IOUs own 51 percent of all generation capacity, while the 20 largest own a significantly increased 73 percent:

To address the threat to competition posed by the ever-accelerating flood of mergers and acquisitions, FERC's merger authority needs to be clarified, abbreviated where appropriate, but also strengthened as necessary. Uncontroversial mergers (for example, those passing through a screen designed to sort out ones that pose little threat to competition) should obtain swift approval. Timing of merger reviews by FERC should be established under a two-tiered process, with speedy disposition of those with little competitive consequence, and more extensive review for the remainder.

In addition, the time required for FERC to protect the public interest from adverse consequences of mergers cannot and must not be established by Congress. Congress may set goals, but it should not impose inflexible deadlines which, if not met, result in the automatic approval of proposed mergers. Such deadlines shortchange the needs of the public only to satisfy the impatient demands of private corporations.

Congress can act in this area in other ways. To ensure that all mergers that could adversely affect electricity markets are considered by FERC and to prevent evasion, FERC's merger authority needs to be clarified and expanded to encompass generation only mergers and acquisitions, convergence (gas and telecom) mergers, and holding company mergers. In addition, FERC should be required to examine mergers based on their effect on wholesale competition and, where authorized by state law or regulation, retail competition, approving those where FERC can make a positive finding that the merger is consistent with the goal of achieving effective and sustainable competition, and will produce net savings and benefits to consumers, over and above those that could be achieved by other means than merger. Conversely, FERC should have the authority to condition or reject those mergers that would not produce these results.

Public Utility Holding Company Act

The Public Utility Holding Company Act (PUHCA) established passive restraints on the structure of the electric utility (and natural gas) industry in order to mitigate the accumulation and exercise of market power, preclude practices abusive to consumers and competitors, and facilitate effective regulation. APPA believes that outright repeal of PUHCA would result in a frenzy of new mergers, and retard if not halt the development of competitive markets.

Still, PUHCA has limitations. It was enacted in a period when regulated, vertically integrated electric utility monopolies were considered to be in the public interest. Today, federal policies favor wholesale competition, and many state statutes are designed to promote retail competition. However, modifications to PUHCA should occur only to the extent that they promote these evolving federal and state policies. Freedom from restraints of the Holding Company Act should be conditional, and FERC should determine when these conditions have been met.

These conditions should include: a requirement that a holding company's affiliate companies turn over ownership or control of transmission facilities to an independent RTO; a rule that a holding company, to be free of PUHCA restraints, must control no more than 20 percent of the generation in a relevant market; protections against affiliate cross-subsidization, information sharing, and potential abuses of less than arms-length transactions between affiliates; and full and complete access to holding company books and records by regulators.

Reliability

In the traditional monopoly model, reliability has been protected by mutual back-up arrangements among utilities, plus a regional reliability council structure. However, this system of cooperation and mutual assistance lacks both clearly enforceable rules and sanctions, as well as competitively neutral entities to determine and enforce the rules on a non-discriminatory basis. This voluntary approach to reliability will not work in an increasingly competitive market. Reliability rules and their enforcement can have significant competitive impacts, and it is essential that reliability be maintained and enhanced in the transition to competitive markets.

Power outages could present us with the next "energy crisis," according to recent remarks by FERC Chairman Hoecker. To avoid last summer's tragic problems, asserts the Chairman, Congress must act quickly on legislation that strengthens reliability oversight to keep pace with restructuring. For example, Chairman Hoecker cited reports declaring that the Midwest could fall 700 MW short of generation this summer. In addition, recent statements from the Electric Power Research Institute claim "the potential for large-scale outages and disruption is considered higher than at anytime since the great Northeast blackout, 35 years ago.

"APPA supports the North American Electric Reliability Council's (NERC's) consensus legislative language on reliability, which will create a self-regulating reliability organization that would be overseen by FERC. The mission of this new organization would be to ensure that reliability rules are applied equally to all electricity providers. APPA urges Congress to incorporate this language in any restructuring legislation. While there is some discussion about the possibility of advancing a stand-alone reliability bill this year, APPA is generally opposed to that notion at this time. APPA is concerned that such a bill would not include the requisite number of policy provisions, including RTO participation, that would be necessary to ensure the industry's reliability. APPA is further concerned that such a measure would never survive the "stand-alone" test, and instead would be overwhelmed by numerous, superfluous additions to the bill.

Reconcile existing federal tax laws with changes in federal and state energy policy Twenty-four states have now adopted restructuring proposals that create serious conflicts for public power communities seeking to comply with new energy laws, but are facing unworkable private use tax restrictions found in the federal tax code. In most cases, implementation of state restructuring plans-even FERC policies designed to provide open transmission access for competitive wholesale markets--will jeopardize the financial standing of public power communities and millions of bondholders across the U.S. Specifically, if municipal utilities enter the competitive arena and violate private use restrictions, their outstanding tax-exempt bonds could become retroactively taxable to the date of issuance.

APPA supports a solution spearheaded by Senators Slade Gorton and Bob Kerrey-the Bond Fairness and Protection Act (S. 386)--that would preserve local decision making about how to manage tax-exempt bonding authority. It would allow each public power system to "elect" to obtain relief from private use limits, but forego the right to issue municipal tax-exempt bonds for new generation facilities in the future. A slightly different proposal is contained in the Administration's restructuring plan, offered as S. 1048. While APPA commends the Department of Energy for including this critical provision, APPA prefers S. 386 for its election provision that acknowledges and preserves local control and accountability.

If enacted, S. 386 will accomplish two objectives: clarify existing tax laws and regulations regarding the private use rules so that they will work in a new competitive marketplace, and provide encouragement for public power utilities to open their transmission or distribution systems, thereby providing choice to more consumers. This bill has gained strong bipartisan support in the Senate, where it currently has 33 co-sponsors. Companion House legislation (H.R. 721) has 126 bipartisan co-sponsors.

Congressional action in this area is urgently needed-existing wholesale markets cannot function effectively, and state restructuring plans cannot be fully implemented, without public power's full participation. The private use restrictions not only hamstring the ability of public power utilities to ensure that their communities receive the benefits that effective competition can provide, but several public power systems' experience shows that private use restrictions also negatively impact the underlying market.

Promote community aggregation

Federal legislation should provide for customer aggregation to assure that small business and residential consumers can derive maximum benefits from a competitive market. APPA believes the jury is still out on whether residential and small business consumers will benefit financially from restructuring, or whether it will even be of interest to many marketers. Aggregation provides these customers with an important tool that can help strengthen their position in an emerging competitive marketplace.

One of the possible bright spots in the House bill was inclusion of aggregation language, a provision that promotes the right to be represented in the market as a group by local governments. Unfortunately, the House bill erred when it adopted a provision requiring that customers explicitly opt-in to aggregation plans of municipalities, instead of authorizing aggregation plans that allow individuals to opt-out. The opt-in requirement makes aggregation much more unlikely because it increases the difficulty and costs of the aggregation process and may inhibit the development of competitive aggregation options. Private power companies consistently advocate the opt-in requirement when they have been unable to prevent state legislatures from endorsing stronger aggregation approaches. The weakening of this provision puts many consumers, especially residential consumers, at risk since aggregation is the one tool that residential and small business customers could use to their advantage. APPA urges the Senate to adopt similar proposals.

Preserve cost-based rates for PMA and TVA customers

The fundamental objectives and public benefits, including cost-based rates, provided through the federal power program and the Tennessee Valley Authority should be preserved. The four PMAs-- Southeastern, Southwestern, Western, and Bonneville-market the power produced at federal multipurpose projects. Power is then sold at cost-based rates to repay the federal government's initial capital investment in the power facilities, and to cover interest as well as operation and maintenance. These PMAs are operated in the public interest to help ensure low electricity rates, to expand market diversity, and to lower risks associated with market consolidation.

APPA does not represent directly the interests of the PMAs or of TVA. However, APPA does represent the interests of more than 600 municipal electric utilities in 33 states that receive PMA power, and the more than one hundred local distributors that receive TVA power. Municipal utilities and rural electric cooperatives are the only competition the investor-owned utilities have historically faced at the retail level. These consumer-owned utilities are vital to maintaining the diversity of sellers necessary to develop and sustain a competitive electric marketplace.

We must keep in sight the fundamental goal of increased competition in the electricity industry, which is to bring about lower prices for all consumers. A move toward marketbased rates not only exacerbates market power problems in the industry, but such action would result in a federally-mandated price hike for millions of electricity customers at the same time that the states and Congress are seeking to make electricity more affordable for all Americans. The ultimate objective of competition is lower prices-and market-based rates, however such rates are determined, compromises the very policy objective that is the underpinning of state and federal restructuring efforts.

APPA believes the present system works very well. If major changes such as marketbased rates or the elimination of preference power to nonprofit electric systems are imposed on the PMAs, then it will be more difficult for us to develop a competitive market, and it will be less likely that all consumers will benefit from restructuring.

APPA's review of pending restructuring legislation

S. 2098 - The Electric Power Market Competition Act

In APPA's view, S. 2098's positive attributes are more for what the legislation does not contain than for what is actually included. There is no federal mandate on the states, for example, no controversial tax language, or PMA-related provisions. Moreover, there is seemingly room for inclusion of provisions to address the Tennessee Valley Authority and the Bonneville Power Administration based on still-developing regional consensus.

However, a closer examination of the measure, especially after the bill's simple reiteration of existing state authority, reveals that on several critical issues specifically under federal jurisdiction, S. 2098 falls far short of a positive effort. For example, the bill relies heavily on state authority and is reluctant to even affirm the authorities set out by FERC in Order 2000. Hence, APPA is concerned that the legislation fails to address adequately the market power problems that currently exist in the interstate wholesale market, and those that are likely to arise in a new, deregulated environment. Admittedly, S. 2098 was originally proposed before FERC issued Order 2000, but at a minimum the bill ought to reflect the authority FERC has under the new order. Instead, the bill seemingly takes a step back from Order 2000, and does not reflect current FERC thinking on several issues.

The bill does reveal some willingness to give FERC additional authority; however, that is only with regard to FERC jurisdiction over publicly owned transmission facilities. For example, the measure would give FERC new authority over "determining, fixing, and otherwise regulating the rates, terms and conditions for the transmission of energy" by public power utilities, rural electric cooperatives, the U.S. Power Marketing Administrations and the Tennessee Valley Authority. The extent of authority in this provision is an unnecessary encroachment on local control, though some limited extension of authority over these facilities to ensure open access and comparable treatment would be appropriate so long as rates continue to be set by the current local authority.

As discussed earlier, public power represents diversity in the electricity marketplace, and key differences among all three sectors of the industry ought to be acknowledged. For example, APPA supports provisions allowing public power transmitting utility systems the ability to retain control over rate-setting functions ensuring their transmission rates are comparable, not unduly discriminatory, or preferential. Allowing FERC to remand the rate back to the public utility allows local control that still adheres to local bond covenants.

The bill also prospectively repeals the mandatory purchase requirements of the Public Utility Regulatory Policies Act and repeals the Public Utility Holding Company Act twelve months after enactment. APPA believes PUHCA should not be repealed on a stand-alone basis; repeal should occur in comprehensive legislation, and only if accompanied by alternative consumer protection provisions. Outright repeal of PUHCA will enable existing monopolies to increase their market power through mergers and widespread diversification while escaping effective regulatory oversight. While S. 2098 is arguably a comprehensive restructuring bill, it fails to include market power and consumer protection provisions that are essential to structure and oversee the wholesale market as it exists today and is it will exist once PUHCA is repealed.

In addition, S. 2098 is quiet on mergers and acquisitions. Legislation is needed to address rapid consolidation of the electricity industry, which is already characterized by a highly concentrated monopoly structure. Concentration in the marketplace only increases the difficulty of creating new competitive markets, and FERC's merger review authority should allow for approval of only those mergers that do not pose a threat to the development of competition. FERC should be given explicit authority to review holding company-to-holding company mergers. Further, mergers should be approved only on a finding of positive benefits for consumers and competition.

Regarding reliability, S. 2098 adopts consensus language that was developed by the North American Electric Reliability Council, which would become NAERO - the North American Electric Organization. APPA supports such language. However, the bill includes several state savings clauses that have been advanced by the National Association of Regulatory Utility Commissioners, essentially enabling state commissions to veto reliability decisions made by NAERO, which would weaken the original provisions. While APPA supports the new NAERO language, we do not support a stand alone reliability bill at this time.

S. 2098 does not include a tax title and does not address public power's private use problem. However, we appreciate the Chairman's acknowledgement in his statement introducing S. 2098 that this problem needs to be addressed. We also appreciate the Chairman's advice to all publicly and privately owned utilities that we try to resolve our differences rather than tossing this difficult and controversial issue to Congress for a resolution that may not be acceptable to any of the parties.

S. 1047 -- The Comprehensive Electricity Competition Act

The Administration's comprehensive restructuring proposal goes a long way toward addressing the key APPA objectives for restructuring legislation. However, since it was introduced over a year ago, a few provisions are out of date, including the bill's flexible mandate.

Clearly, a mandate is not needed given the substantial progress that has been made by the states in this area. In addition, the bill does not reflect the findings on RTOs in FERC Order 2000.

With regard to market power, the Administration has included in its bill some important provisions designed to prevent market power abuses. In particular, S. 1047 expands FERC's merger review authority to account for potential impacts of proposed mergers on the status of competition in wholesale and retail electricity markets. This provision is desirable to ensure that existing levels of market power in the industry do not inhibit the development of truly competitive markets.

On PUHCA, S. 1047 would provide slightly over a year for implementation of structural market power protections prior to repeal of the Act. APPA agrees that structural market power protections must be deployed in advance of PUHCA repeal in order to protect consumers from market power abuses, and to ensure that competitive markets are given a meaningful chance to develop. We also support strong provisions to require state and federal access to books and records of holding companies to ensure that consumers are protected against the effects of cross-subsidization and abusive interaffiliate transactions.

We have briefly discussed the tax-related portion of the Administration's bill, which has been introduced as S. 1048. To reiterate, it is our view that the Bond Fairness and Protection Act (S. 386) mentioned above offers a preferable approach to addressing the private-use tax issues that inhibit the ability of municipal utilities to fully participate in a restructured electricity industry. While the Administration's proposal is commendable in that it eliminates the private use restrictions on facilities financed with tax-exempt debt and protects bondholders, it has several significant shortcomings. It prohibits all units of local government from using tax-exempt debt to finance new generation facilities. In contrast, S. 386 allows these public power systems with a private userproblem to resolve that problem through the elimination of the private use restraints. But the quid pro quo is for those systems to give up their right to issue new tax-exempt debt for generation. In our view, this is a much more equitable solution to the problem.

First, it provides no element of choice for public power. Second, we find little justification for eliminating tax-exempt financing for transmission facilities. It is unlikely that transmission services will be affected by competitive pressures in the foreseeable future. The benefits of bond-financed transmission facilities accrue to all electricity market participants: states and localities, investor-owned utilities, power marketers and, most important, consumers.

In other areas, the Administration recognizes the need to provide specific treatment of issues related to the Bonneville Power Administration, the Tennessee Valley Authority, and the other federal power programs. We believe that any proposals in this regard must honor the traditional objectives and responsibilities of the power marketing administrations as they play an important role in maintaining market diversity and help further the goals of competition by ensuring affordable electric rates for millions of consumers. We are also pleased that the bill allows for aggregation of electricity consumers to ensure they have the means to achieve the lowest possible electricity rates. In addition, we support the Administration's general inclusion of the industry consensus reliability language as developed through the NAERO process.

Finally, APPA would encourage the committee to consider any air quality issues stemming from the restructuring debate in the context of the Clean Air Act rather than as a part of a comprehensive federal restructuring bill. Moreover, we do not support the imposition of any fuel mandate such as the renewable portfolio standard as proposed in S. 1047. However, if such a mandate is to be imposed, we urge you to include hydropower within the eligible mix. We do believe that federal restructuring legislation can promote clean energy and energy efficiency and result in a cleaner environment. This is one of several principles we and other industry stakeholders have endorsed. Those could be done, for example, through the creation or continuation of programs that promote distributed generation and renewable resources.

S. 1273 - The Federal Power Act Amendments

This bill emphasizes preventing the occurrence of market power abuses by granting FERC strong authority to order both the formation of RTOs and mandate participation in RTOs by transmitting utilities. Such federal authority over investor-owned utilities is necessary to ensure the development of broad and truly neutral transmission organizations to provide the foundation for effective competition. APPA would urge that this authority be modified to apply only to publicly owned transmitting systems when FERC finds that such a system has engaged in discriminatory or anti-competitive behavior that places competitors at a disadvantage and only when the problem cannot be resolved by the filing of open access transmissions tariffs.

While APPA clearly supports the development of RTOs as part of the foundation of effective wholesale competition, we do not support the bill's proposed full expansion of FERC authority over public power's transmission facilities as discussed above. APPA continues to believe that regulatory treatment throughout the industry needs to respect the diversity found in the public power community, and stresses the need to retain local control as a fundamental tenet for the future of the entire industry.

S. 2071 - The Electric Reliability 2000 Act

APPA commends Senator Gorton for his efforts to move forward with his reliability proposal. While we do not favor a stand-alone reliability bill at this time, we understand and appreciate the importance of reliability throughout the industry, and encourage the committee to adopt the Gorton plan, including the so-called consensus language on reliability, in a broad-based comprehensive package.

We believe the bill is a good starting point, and agree with the assessment that the proposal does not include several other critical factors in reliability, including full and open access to transmission systems, effective conservation programs, and the ability to site generation plants closer to the loads they serve. APPA looks forward to working with the committee on this critical issue.

S. 516 -- The Electric Utility Restructuring Empowerment and Competitiveness Act APPA appreciates that Senator Thomas, in introducing the Electric Utility Restructuring Empowerment and Competitiveness Act of 1999, preserved the ability of state legislatures to decide the future of retail electric competition in their respective states, rather than adhering to a federal mandate. However, we believe that the bill does not provide the elements necessary for establishing effective wholesale competition as previously outlined.

For example, the legislation does not contain provisions designed to prevent market power abuses, thereby facilitating a transition to effective competition. The bill also would repeal PUHCA without providing much-needed consumer protections in its place. Finally, APPA is concerned that S. 516 does not include provisions to address the private use restrictions that are inhibiting effective functioning of wholesale electricity markets and preventing public power communities from enjoying the benefits of increased competition. Admittedly, tax issues do not fall under the jurisdiction of the Energy and Natural Resources Committee; nevertheless, the bill calls for a study of tax subsidies that would appear to give undeserved merit to the assertion that public power systems receive unfair tax advantages.

S. 1284 - The Electric Consumer Choice Act

As units of state and local governments, APPA members are concerned about the limitations this restructuring proposal would place on state and local authority. The bill's mandate for competition, already passed at this point, will prevent states from setting their own timelines based on the particular needs of the consumers they represent. APPA is also concerned that the plan would result in preemption of existing state laws related to utility regulation and oversight.

Further, the bill seeks to repeal both PUHCA and PURPA outright, which APPA opposes unless both are addressed in the context of a broader restructuring package that contains market power and consumer protection provisions.

S. 282 -- The Transition to Competition in the Electric Industry Act APPA supports the goal of S. 282 to prospectively repeal the mandatory purchase requirements of the Public Utility Regulatory Policies Act (PURPA), as long as changes to PURPA are undertaken only as part of comprehensive industry restructuring legislation. It is important that S. 282 is not enacted singularly, but is tied to legislation that can preserve the underlying goals of PURPA through new mechanisms that are more appropriately implemented in a competitive environment.

S. 1369 - The Clean Energy Act of 1999

While we commend the efforts of Senator Jeffords to concentrate on the environmental aspects of restructuring, APPA continues to oppose federal mandates, including renewable portfolio standards and fuel use mandates of any kind. However, our members continue to take great pride in promoting the use of renewable energy sources whenever possible, and continue to support and promote several environmental initiatives. APPA is concerned, however, that the Clean Air Act not become part of the overall debate over restructuring, but rather remain a separate discussion.

Conclusion

The real-time nature of the electric utility industry, with its virtual lack of storage, the essential nature of electricity that requires many consumers to purchase it almost irrespective of the price, and the complexity of transmission constraints, render electric markets prone to manipulation and abuse by those who can dominate the market through the ownership or control of strategic assets. FERC must be provided the tools it needs to fix problems as they arise (or in some cases prevent them from arising), if we are to achieve effective and sustainable competition.

Mr. Chairman, thank you for inviting me to testify before you today regarding public power's restructuring objectives and views on pending industry restructuring proposals.APPA looks forward to working closely with you to enact legislation that can achieve our shared goal of bringing more affordable electricity rates to all electricity consumers.

END

LOAD-DATE: April 14, 2000