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JUNE 29, 1999, TUESDAY


LENGTH: 4554 words



Thank you, Chairman Murkowski. On behalf of the State of Nebraska and my fellow governors in the Governors' Public Power Alliance, I am pleased to appear today to discuss the importance of electric utility restructuring, including a review of the Clinton administration's comprehensive proposal and providing the Alliance's viewpoint on specific areas under consideration.
The Governors' Public Power Alliance, a bipartisan alliance of governors, was formed to ensure that federal initiatives do not disadvantage the millions of Americas who are served by locally and consumer-owned electric utilities. Tennessee Governor Donald Sundquist and I chair the Alliance. Alas Governor Tony Knowles is vice chairman. Other Alliance members are South Dakota Governor Bill Janklow, Puerto Rico Governor Pedro Rossello, and Washington Governor Gary Locke. I am honored to appear on their behalf.The Senate Energy and Natural Resources Committee is facing a difficult task -- the restructuring of an entire $200 billion a year industry. While some proposals have already been offered, others are sure to follow. But one thing is clear: Congress has only one chance to get it right. To include a date certain or not? Repeal or reform the Public Utilities Regulatory Policies Act of 1978 and the Public Utility Holding Company Act of I935? Additional regulation or no regulation? Increased or diminished reliability and customer services? Lastly, what do all these changes mean for consumers - are rates higher or lower? For my Alliance colleagues and I, that is the most important question of all.
I commend you, Mr. Chairman, as well as Ranking Member Bingaman for holding this hearing. Restructuring the electric utility industry is clearly an important issue. And not just in Washington -- almost half of the states have deregulated all or part of their respective electricity sectors; Texas and Ohio are the latest examples.
But some states, including those in the Alliance, remain skeptical. Indeed, several states where electric rates are low continue to ask: What's in it for our residents? Recent experiences with deregulation -- including the airlines and telecommunications industries -- certainly provide justification for such skepticism.
Before we rush headlong into yet another federal experiment in the deregulation of an essential public service, perhaps we ought to pause and take stock of the legacy of prior initiatives. First, let's recognize that the absence or reduction of regulation does not in itself neccessarily increase competition. Without the propermarket characteristics, competition will not develop and consumers may pay the price.
We are finding this to have been the case in rural Nebraska.
And surprisingly, in larger Cities, too. In Council Bluffs, Iowa -- population 54,000 -- the local investor-owned utility tried to open the electric market to other suppliers. Not a single utility -- other than a subsidiary of the local utility -- wanted to compete for customers in this test of competition in the electric industry in Iowa. Can we realistically expect electric industry competition when population density in some rural areas is less than 2 customers per mile of line?
Airline deregulation has resulted in a dramatic loss of air service in rural Nebraska with enplanements in our smaller cities down more than 65 percent since 1978, and two of those airports - Columbus and Sidney - now closed to commercial air service entirely. In the railroad industry, the story is much the same. Nearly 2,000 miles - roughly one-quarter of the active rail lines in Nebraska have been abandoned since 1982 and our vital agricultural industry, especially in remote parts of the state, is finding it ever more difficult and expensive to get products to market.
In the communications industry, a significant rate shift is now well underway and the trend lines are already clear: residential customers will end up paying more. Of equal or greater concern is the growing communications infrastructure deficiency in rural areas, compared to urban markets, which if not addressed will compromise the ability of rural communities to optimize commerce, healthcare and educational opportunities.As you well know, Mr. Chairman, in your own home state of Alaska, the electric industry is unusual. The state is very large and the utilities are very small. Most utilities are isolated from each other, none are connected to the interstate grid, and most are not even connected to an intra-state grid. Because most of Alaska's utilities are stand-alone systems, even the smallest are vertically integrated, providing generation, transmission, and distribution to their power customers. To emphasize how small the utilities in Alaska are, the largest utility in the state generates only about 480 megawatts.
The State of Alaska shares your belief, Mr. Chairman, that any federal legislation should have a minimum emphasis on federal mandates and a maximum emphasis on state flexibility. The Knowles Administration and the Alaska Legislature are moving carefully and deliberately, They have commissioned a comprehensive study on electric utility restructuring. Alaska's electric utilities - most of which are cooperatives or municipally owned systems - are actively participating in this study. The consensus among virtually all the participants is to move cautiously and systematically. Deregulation is likely to be an issue before the Alaska Legislature next year.
Tennessee, like Nebraska, is unique. With small exceptions, public power provides electric service throughout the state. Citizens of Tennessee purchase power that is generated by the Tennessee Valley Authority and its distributors through locally owned and controlled municipalities and rural electric cooperatives. The Tennessee General Assembly created a special joint committee to study electric utility industryrestructuring in 1997. The Committee continued during that year and throughout 1998 to examine the anticipated impact upon citizens of that state in the event of a restructuring of the electric utility industry.
Like other members of the Governors' Public Power Alliance, Tennessee Governor Sundquist is concerned about the impact of a federal mandate for electric restructuring. Tennessee is anxious to determine for itself the best way to assure continued availability to its citizens of reliable and low-c, st electric power in the event of retail competition.
From the state level, we watch with great interest - and some trepidation -- what Congress is doing. Amid the hearings and legislative proposals, the Clinton Administration recently unveiled its plan to restructure the electric utility industry, which has since been introduced by you as S. 1047 and S. 1048.
As you know, when it comes to electricity Nebraska is unique. We have a longstanding tradition of enjoying the benefits of what we commonly refer to as public power -- every single resident receives electric power from a municipality, public power district, or rural electric cooperative. No other state can make that claim. At the beginning of the century, Nebraska Senator George Norris, the father of the Tennessee Valley Authority, fought to create public power to give consumers local control, reliable service, and low rates.

In the late 1960s, long before the Energy Policy Act of 1992 required deregulation of the wholesale electric industry, Nebraska had wholesale wheeling. Today that pioneering tradition continues, and Nebraskans are better off because of it.Still, like so many other states, Nebraska is studying its own options for restructuring. The Nebraska Legislature is currently reviewing this issue and expects to issue its findings later this year. This study could lead to Nebraska creating its own plan for retail competition. By what date certain this could happen is, of course, uncertain at this time, but this is exactly the way states should proceed -- on their own timetable, with no federal mandates that set a schedule. In this respect, Nebraska is not unique. The fact that so many states have moved forward on restructuring should give pause to any Member of Congress that still thinks a federal mandate with a date certain is in the best interest of all Americans.
This is why the Alliance commends the Administration for proposing a comprehensive plan to advance the debate on how the electric utility industry should be restructured, but the Alliance remains opposed to any mandate -- flexible or otherwise. Federal mandates imply that state and local governments cannot -- or will not -- act without federal intervention. In fact, state restructuring initiatives prove that a federal mandate of any sort is simply not necessary.
Nebraska, with its special concentration of public power systems, is particularly concerned about federal legislative proposals. However, Nebraska is not alone -- public power, delivered through power districts, cooperatives, and municipal electric utilities, exists in every single state except Hawaii. One of every four American consumers -- almost 70 million Americans -- receives power from customer-owned electric systems. These local assets have made enormous contributions to the nation's economic prosperity for more than 115 years. Their localownership and not-for-profit structure makes them very different from private companies. Public power systems will require different solutions to the challenges of the new marketplace envisioned by restructuring advocates. Many states that have embarked upon the deregulatory path, such as California, have acknowledged this basic fact. Because of their common focus on consumer owner, we have included cooperatives as part of a broader public power community. However, we recognize that there are key legal differences between governmental utilities and cooperatives, especially on tax and governance issues. Public power's first and only purpose is to provide reliable, efficient service to their customers at the lowest possible cost. Like public hospitals, public schools, water, sewer, parks, and police and fire departments, these public power systems are local institutions that address a basic community need: They operate to provide an essential public service at a reasonable, not-for-profit price. Public power systems are governed democratically through state, regional and local governing bodies. They operate in the sunshine, subject to open meeting laws, public records laws, and conflict of interest rules.
Local power customers are direct owners of the utilities' operations and future.
In turn, public power utilities are community institutions with community-wide goals. As state and local government entities, they boost economic development, return taxes, and make in-lieu-of-tax payments to states and communities, and lower citizen costs through coordination of services with other government bodies. Local electric systems give citizens -- as owners -- opportunities to participate in service, financial,and operating decisions. For purposes of competition, they serve as an important yardstick against which to measure the price, service, reliability, and performance of private power companies.
While restructuring the electric utility industry and introducing competition may give consumers new choices from electric power providers, consumers have always had a choice between creating their own public power systems or awarding franchises to private power companies. The Alliance believes this choice should be maintained for all Americans.
Alliance members are concerned consumers served by local and regional electric systems will be overlooked in federal legislative and regulatory proposals. That is why the Alliance adopted the following principles to guide its analysis of electric utility restructuring:
- Several issues are solely within federal jurisdiction and must be addressed to openthe door to retail competition and foster the development of competitive markets,including:
- Tax treatment;
- Reliability; and
- Market power.
- A cornerstone of federal policy should be a commitment to respect state and localdecision-making and not attempt to overrule it. For example, several states -California, Massachusetts, and Texas have established renewable energy goals and established funding mechanisms for projects that benefit the public good.
- It is inappropriate for the federal government to preempt state and local restructuring efforts. Instead, the federal government should respect the traditional prerogative of state and local authorities to regulate retail utility transactions and support their efforts.
- Any federal legislation should facilitate state and local decisions regarding retail competition.
- Federal barriers to competition should be eliminated. These barriers include eliminating existing levels of market power while guarding against future concerns, or clarifying appropriate state and federal roles so restructuring can proceed.
- Federal legislation is needed to establish additional protections for consumersagainst the establishment and abuse of market power.
Several of these same principles are also found in the Administration's proposal. For example, the Alliance commends the Department of Energy for strengthening market power protections. We support the provisions that allow anyentity, including a municipality, to aggregate customers. While I support fostering the growth of renewable energy resources, Alliance members view this as an area where state and local decisions should be respected.
The Alliance would be remiss if we did not offer comments on a very serious problem facing publicly-owned electric utilities: current restrictions on tax-exempt bonds. While I understand the Energy and Natural Resources Committee does not have jurisdiction over tax matters, this is important not only to Nebraskans and Alliance states, but to the millions of public power customers across the country.
Substantial portions of generation, transmission and distribution facilities owned by public power systems are financed through the sale of tax-exempt bonds. These bonds, like bonds for all types of governmental purposes, carry with them restrictions on the amount of private use allowed for those facilities. While sound tax policies may warrant certain restrictions on private use of public facilities, public power facilities have been singled out for unduly restrictive treatment including the imposition of additional restrictions under the Tax Reform Act of 1986.
These private use restrictions, which previously had a negative but survivable impact on the financing of community-owned electric output facilities, in their new form -- and in the new competitive environment -- will restrict the financing of governmental facilities far beyond Congress' intent as expressed in the Tax Reform Act of 1986. The restrictions are also contrary to the goals of the Energy Policy Act of 1992, and will infringe upon the historical and fundamental right of citizens to act as a community and utilize their best judgment to provide basic government services.The Clinton Administration should be commended for tackling this difficult issue. The Alliance is pleased the Administration's proposal seeks to "modify" and revise tax-exempt bond rules as part of electric utility restructuring "so that consumers benefit from competition." As I understand the proposal, public power systems that implement retail competition would retain tax exempt status for outstanding bonds previously issued to finance generation and distribution facilities. Similarly, bonds issued to finance transmission facilities would also continue their tax-exempt status "even if private use resulted from allowing nondiscriminatory open access" to those facilities, including, for example, participation in an independent system operator. The Alliance endorses this approach for previously issued bonds.

However, another part of the bill seems to prohibit public power systems from building both generation and transmission facilities in the future with tax-exempt bonds. While the Alliance appreciates the political debate surrounding this issue, we are particularly concerned about the essence of this provision: community-owned electric systems, especially the majority of the small systems in Nebraska and around the country, could no longer exercise "local control," and may be unnecessarily burdened by an overly restrictive proposal which, in turn, would lead to higher utility bills for consumers.
The Alliance supports a fair alternative to this aspect of the Administration's bill. The Bond Fairness and Protection Act (S. 386) introduced by Senator Slade Gorton and Senator Bob Kerrey, is a reasonable solution to the problems posed by theprivate use restrictions on present and future public power bonds. A companion bill has also been introduced in the House of Representatives.
The Bond Fairness and Protection Act provides state and locally owned utilities with two options for obtaining the necessary level of relief they need to eater competitive markets without raising rates or jeopardizing the tax-exempt status of outstanding bonds. The bill also requires those talcing this option to make significant concessions on the future use of tax-exempt bonds by giving up the fight to issue such debt for generation facilities, but retaining the same fight to issue debt in the future for transmission and distribution facilities. The Alliance considers The Bond Fairness and Protection Act to be a superior solution to the taxation issue.
Representatives Steve Largent and Ed Markey recently adopted the Gorton-Kerrey proposal as part of their comprehensive restructuring legislation, H.R. 2050. I urge you to consider the merits of the Gorton-Kerrey proposal, which has 22 cosponsors from both sides of the aisle.
The Comprehensive Electricity Competition Act, first unveiled by Energy Secretary Richardson on April 15, represents an extensive approach to bringing retail competition to the electricity industry. Among other key elements, the measure focuses on a flexible plan for states -- and public power utilities -- to opt out of competition if they believe that their consumers would be better off under an alternative policy. The "opt out" provision is a step in the fight direction. However, to fully respect states' fights, we would urge that any federal legislation leave to the states the decision on when and how to restructure electric industries in the states.To his credit, Secretary Richardson has recognized that while supporters may have concerns with specific elements of the proposal, they stand behind the measure's comprehensive approach to retail competition and the desire to see congressional action. I commend the Department of Energy's approach for its emphasis on providing the greatest benefits to all consumers of electricity, including the residents of Nebraska and other Alliance states. Further thoughts by Governors' Public Power Alliance members on S. 1047:
- Flexible Mandate. The proposal requires retail choice by January 1, 2003, but would permit sates or "non-regulated utilities" to opt out of the competition mandate if they find -- aft a public proceeding -- that consumers would be better served by an alternative policy. As previously stated, the Alliance is concerned with any federal mandate, flexible or absolute, because it implies state and local governments cannot or will not act without federal intervention. The proposed" opt out" provision needs to also be flexible in the "public hearing process" allowed. In Nebraska, for example, ere are 168 separate utilities, each of which would be required to go through this process. Can't a simpler solution be found?
- Market Power. The Administration's bill has been made stronger than the earlierproposal in that it requires the Federal Energy Regulatory Commission to includethe effects of mergers on competition in wholesale and retail electric generationmarkets during the Commission's review. Strengthening market power protections in the current legislation is not only a step in the right direction, it is critical to the future of the entire industry and is supported by the Alliance.
Also, the Commission would be granted authority to establish independent entities for the operation and control of interconnected transmission facilities. Importantly, these independent transmission entities would be given new authority over planning transmission facilities. The Alliance views this aspect as important, but problematic since this authority could usurp previously held local and state planning authority. We would favor language that would give the Federal Energy Regulatory Commission authority to promote, not mandate, the creation of voluntary regional transmission organizations.
- Federal Power Marketing Administrations. In a significant change from last year's proposal, the Administration's newest proposal would authorize the Bonneville Power Administration, Southwestern Power Administration and Western Area Power Administration - which provides some power to Nebraska -to recover their stranded costs through a transmission surcharge that would be subject to review and approval by the Commission. The Alliance believes the customers who benefit from low-cost electricity from the regional entities should help pay for any stranded costs incurred. As such, the Alliance supports this concept.The bill anticipates that Bonneville will spin off its transmission facilities into the "Bonneville Transmission System." The Commission also would have the authority over Southwestern and Western on transmission access and transmission ratemaking. The Alliance has no position on this aspect of the bill.
However, the Governors' Public Power Alliance opposes any legislative efforts to sell these federal assets and would oppose any efforts to change to other than cost-based rates.
As Governor of Nebraska, I must comment on Congressional efforts to treat one or two of the power marketing administrations as "special cases, deserving of separate consideration." Each of the federal entities, be it Bonneville, Western, Southwestern or Tennessee Valley Authority, has unique issues which make crafting a one-size fits all solution difficult. For example, Western may be viewed by some as having fewer complex problems. While it does not have Bonneville's salmon issues or Tennessee Valley Authority's 'wall" issues, it has navigational, flooding, and environmental concerns which are critical to economies in states served by We. stem. I am certainly familiar with the difficulty of resolving complex hydropower issues among competing interests be they power generation, environmental, agricultural, recreational or governmental. It took 14 years and $40 million to secure reissuance of hydropower license for just one darn on a riverin Nebraska. And no one knows if the proposed agreement costing $75 million will work.
Lastly, some have suggested that power marketing administration customers have the ability to resell inexpensive federal hydropower and pocket the profit. Current federal law prohibits this practice and the Alliance members endorse this prohibition.
- National Electric Reliability Council - This authorizes the North American Electric Reliability Organization to replace the North American Electric Reliability Council and oversee a mandatory -- not voluntary -- reliability system backstopped by the Commission. This provision is based on an industry consensus and is supported by Alliance members.
- Aggregation. As I indicated earlier, the Alliance endorses the efforts of the Administration to amend the Public Utility Regulatory Policies v Act of 1978 to allow any entity, including municipal utilities, to aggregate customers in a retail competitive market. This is a prime example of true competition at the local level.
- Renewable Portfolio Standard. Much has already been said or written about the Renewable Portfolio Standard, which would require all retail sellers to cover a percentage of their electricity sales with generation from renewable technologies,excluding hydropower. By 2010, fully 7.5 percent of electricity sales must be comprised of generation from wind, solar, closed-loop biomass and geothermal only. Numerous public power utilities have invested in the development of renewable resources. As previously stated, the Alliance does not support mandates, but if a renewable portfolio standard - or minimum amount of power from renewable resources is required -- let each of the states determine the mix of fuel sources that would be appropriate for its area. We need to keep in mind one of the goals of restructuring is to reduce rates for all customers. The impact of a renewable portfolio standard should not nullify cost savings realized by electric customers.
- Public Benefits Fund. The Administration's bill would create a $3 billion a year public benefits fund to provide matching funds to states for low-income assistance, energy efficiency programs, and other related efforts. This fund would be financed through a generation or transmission interconnection fee on all electricity.
The Alliance believes the concept of this fund - especially a rural safety net is admirable. As always seems to be the case, the devil is in the details. Because matching state funds are required to receive grants under this fund, would the rural safety net be exempt from this matching requirement? If not, wouldn't this be adding an additional hardship for rural Americans?
Senator Craig Thomas introduced another bill, S. 516, earlier this year. I understand the senator is a former member of the rural electric cooperative community, so I think I understand the fundamental principles of his bill. Clearly, I support his effort to work on restructuring by not imposing a federal mandate on the states. Several other provisions -- stranded costs, renewable resources, universal service -- are also appropriately left to the states. The Alliance has several concerns over provisions regarding market power, repeal of the Public Utility Holding Company Act of 1935, and the absence of a balanced approach on taxes, but I commend Senator Thomas for his efforts.
S. 282, introduced by Senator Mack and Senator Graham, addresses repeal of a portion of the Public Utility Regulatory Policies Act of 1978. Previous Alliance testimony has been presented on this issue. Clearly, much like repeal of the Public Utility Holding Company Act of 1938, this is best done through comprehensive legislation.
S. 161, introduced by Senator Moynihan plots a course for moving the all federal power producers to a market-based, not a cost-based, rate for electricity.
The Alliance is concerned about the provisions contained in this legislation since it could pose substantial hardships for those consumers least likely to benefit from restructuring of the electric industry: rural consumers.
I appreciate the opportunity to present these comments on behalf of the people of Nebraska and the members of the Governors' Public Power Alliance. We look forward to working with the Committee as you design a legislative approach which will benefit all Americans.

LOAD-DATE: June 30, 1999