SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 3474 words

COMMITTEE: HOUSE ENERGY AND COMMERCE

SUBCOMMITTEE: ENERGY AND AIR QUALITY

HEADLINE: NATIONAL ENERGY POLICY

TESTIMONY-BY: BRUCE LEVY, SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

AFFILIATION: GPU, INC.

BODY:
Statement of Bruce Levy Senior Vice President and Chief Financial Officer GPU, Inc. 300 Madison Avenue Morristown, NJ, 07962

SUMMARY OF TESTIMONY

The electric industry is in the midst of a transition from a regulated monopoly, with vertically integrated utilities, defined service territories and cost-based pricing, to an industry with competitive power generation markets, market-based pricing and the development of independent regional transmission organizations, including, in many parts of the country, for- profit investor-owned transmission companies to own and operate the transmission grid. This transition has not been painless. There is much we need to do to make competitive wholesale generation markets work better. I strongly believe, however, that well-designed, properly- functioning competitive wholesale electricity markets will provide consumers with adequate supplies of reliable electric power at reasonable prices. Our collective goal should be to eliminate those federal legislative and regulatory barriers that stand in the way of competitive wholesale electricity markets. While the FERC can address a number of important issues, there is much that only the Congress can do. I urge Congress to:

Remove federal statutory barriers that stand in the way of a more competitive industry, including the Public Utility Holding Company Act of 1935 ("PUHCA") and Section 210 of the Public Utility Regulatory Policies Act of 1978 ("PURPA"); Extend the wholesale transmission open access policies of the Federal Energy Regulatory Commission ("FERC") to currently non-FERC jurisdictional transmission owners, including municipal and cooperative utilities, the Tennessee Valley Authority and the federal Power Marketing Administrations; Provide incentives necessary to upgrade and expand the transmission system; Aid the development of Regional Transmission Organizations (RTOs); and Eliminate tax code impediments to efficient restructuring of the industry.

INTRODUCTION

Mr. Chairman and Members of the Subcommittee, I am Bruce Levy, Senior Vice President and Chief Financial Officer of GPU, Inc. GPU, Inc., headquartered in Morristown, NJ, is a registered public utility holding company providing utility and utility- related services to customers throughout the world. GPU serves 4.6 million customers directly through its electric companies - GPU Energy in the US, GPU Power UK in England, and Emdersa in Argentina. GPU has domestic utility operations serving approximately 2 million customers in Pennsylvania and New Jersey. The company's independent power project business units own interests in and operate eight projects in five countries. I am testifying today on behalf of myself and GPU, Inc., but my views are consistent with the positions taken by EEI, the Alliance for Competitive Electricity, the PURPA Reform Group, and Repeal PUHCA Now!, industry organizations of which GPU is a member.

I am particularly pleased to be here today to talk about how to make competitive wholesale electric generation markets work better. This is an important issue in determining whether we continue to enjoy adequate supplies of reliable electric power at fair prices to the consumer.

We are currently about mid-way through the transition of the electric power industry from a system of defined franchise service territories, cost-based regulation of generation, and pervasive regulation of all aspects of the business, to a wholesale market premised on open, non-discriminatory access, market-determined generation prices, and independent operation of the transmission grid. While this transition has not been easy, it is clear that if we successfully navigate this transition, the industry will be forced to be more efficient and consumer prices will be less than they otherwise would have been under the old system. The upside potential of this new, more competitive electric industry is enormous, but so will be the costs if we fail.

It is becoming clearer each day that much remains to be done by regulators, and most importantly, by the Congress, to ensure that this transition to a more market-oriented electric industry is successful. The problems that plague the wholesale electric power sector today can be ignored, but they will not go away and they cannot be entirely solved by the FERC or state regulators. Congress has an important role to play and I encourage you to exert the leadership necessary to help ensure viable, robust, competitive wholesale generation markets. The following highlights some of the issues that are important to properly functioning wholesale power markets, and are issues that only the Congress can address satisfactorily.

Repeal Federal Legislation that Hinders Competition

Legislation enacted in an era of vertically integrated utilities with defined retail franchise territories makes no sense in today's world. Legislation is necessary to prospectively repeal section 210 of the Public Utility Regulatory Policies Act of 1978 ("PURPA") and to repeal the Public Utility Holding Company Act of 1935 ("PUHCA"), two impediments to a more competitive electric industry.

PURPA

The Public Utility Regulatory Policies Act of 1978 ("PURPA") was enacted as part of the Carter Energy Plan to help alleviate the oil and natural gas shortages of the late 1970s. It failed to achieve these objectives, and today, it stands as an impediment to more competitive and efficient wholesale power markets.

PURPA was intended to encourage conservation and promote the development of renewable fuels in the electric generation sector. It did this by establishing a special class of power generators, known as qualifying facilities ("QFs"). In general, a QF must be of a certain size, burn certain renewable or waste fuels, or produce steam for commercial or industrial use as well as electricity. PURPA requires utilities to buy all the electricity these qualifying facilities wish to sell at the utility's "avoided cost," which is determined by state regulators under guidelines issued by the FERC.

In drafting PURPA, Congress aimed to ensure that consumers would pay no more for PURPA power than for other power. Unfortunately, due to a confluence of factors not foreseen by the authors of PURPA, this has not been the case. Instead, long-term PURPA contracts continue at above market prices throughout the United States. And some 65 percent of PURPA contracts will not expire until after the year 2010.

PURPA is an anachronism in today's power markets. Competition in electricity generation has been unleashed by the enactment of the Energy Policy Act of 1992 and the issuance of FERC Order Nos. 888 and 889, providing for open, non-discriminatory access to utility transmission systems for wholesale transactions. Consequently, electricity generators and wholesale customers have access to each other under the same terms and conditions applicable to the utility owning the transmission wires. This open access has sharply increased competition for wholesale sales of electricity. But it also has resulted in a substantial competitive disadvantage for utilities mandated to purchase wholesale power at rates above currently prevailing market prices. PURPA also disadvantages non-utility generators not eligible for the special privileges of a guaranteed market for their power.

PURPA was premised on utilities continuing to be the exclusive suppliers of electricity to all consumers within their franchise territories. It was never imagined that PURPA would apply to a world of open transmission access for wholesale and retail customers. Continuation of PURPA's purchased power mandate in this new open access world distorts competition and denies consumers the benefit of the lowest cost power. If a utility goes out of the generation business, as my company and many other utilities have decided to do, requiring those utilities to continue to make new commitments to purchase QF generation makes no sense. For example, under the restructuring plan adopted in New Jersey, all utilities are required to bid out the provider of last resort obligation and thus will have no further supply obligation to its customers. Requiring those utilities to make new purchases of QF power makes no sense. Similarly, if a utility is precluded from marketing energy, as utilities in Texas have been under that State's restructuring law, it has no use for energy delivered under a PURPA contract. Thus, continuing PURPA merely impedes the transition to a competitive market.

PURPA also has failed to achieve one of its primary goals, to encourage the development of renewable energy resources. According to the Department of Energy's Energy Information Administration, as of December 31, 1998, wind turbines, solar and geothermal units together comprised only 3.7 percent of all installed non-utility generation capacity. Biomass and waste comprised another 16.1 percent. On the other hand, natural gas, coal and oil make up over 75 percent of the installed non-utility generating capacity. Thus, non-renewable sources of energy have been the primary beneficiaries of the PURPA mandatory purchase requirement, not renewables.

PURPA should be prospectively repealed. However, existing contracts, rights and expectations, including the expectation of PURPA cost recovery by utilities currently provided by law, should be honored. Mr. Stearns has introduced bi-partisan legislation (H.R. 381) that would accomplish this. I urge its inclusion in any comprehensive legislation you might consider.

PUHCA

The Public Utility Holding Company Act of 1935 ("PUHCA") was enacted during the Great Depression with two primary objectives: the integration and simplification of complex natural gas and electric utility holding company systems, which then dominated the utility industry, and protection of investors and consumers through effective regulation of multi-state utilities operating through subsidiaries.

PUHCA long ago achieved its first objective of restructuring the electric and natural gas industries. Consumer and investor protection is now the purview of other regulatory and statutory authorities, which did not exist 65 years ago.

PUHCA met its first objective by dismantling and simplifying the organizational structure of the more than 200 complex electric and gas utility holding company systems in existence in the mid- 1930s. These geographically scattered and diverse businesses were limited to the operation of a single integrated utility system, plus such other businesses as were closely related to an integrated utility system. By the early 1950s, according to the Securities and Exchange Commission ("SEC"), the agency responsible for administering PUHCA, the reorganization of the electric and gas utility industries was complete.

The second objective of PUHCA-to protect investors and consumers- was met by authorizing the SEC to regulate certain holding companies that remained the owner of utility subsidiaries in more than one state. This regulation requires advance SEC approval for many business and financial transactions, including the issuance of debt or equity, acquiring utility or non-utility assets and entering into service arrangements with affiliated companies.

Even the SEC has recommended PUHCA's repeal because it is no longer needed and is largely duplicative of other investor and consumer protection authority administered by the SEC and the states. As an SEC report has noted, "[a]cting under authority in the Securities Act of 1933 and the Securities Exchange Act of 1934, the SEC has, over the past six decades, created a comprehensive system of investor protection that obviates the need for many of the specialized provisions of the Holding Company Act."

Not only has PUHCA outlived its usefulness, but it also is a barrier to competition. It requires fewer than 20 out of the nation's more than 200 electric and natural gas utilities to register and be subject to pervasive SEC regulations. By significantly limiting geographic and product diversification, and imposing numerous burdensome filing requirements, PUHCA severely limits the ability of companies to compete in today's fast evolving energy marketplace and deprives consumers of the full range of energy provider services and choices they would have if the Act were repealed. PUHCA restricts the flow of capital into new generation and transmission facilities and limits the number of new suppliers in electricity markets by prohibiting exempt wholesale generators from selling directly to retail consumers.

PUHCA also acts as a perverse impediment to the formation of RTOs. Shareholder-owned utilities and FERC are working quickly to meet FERC's goal, established in Order No. 2000, of having RTOs operational by the end of 2001. However, PUHCA is an impediment to utility efforts to establish independent transmission companies with the scope and size desired by FERC. Any such company could be required to become a registered holding company and subject to the many restrictions and additional regulation under PUHCA. As our companies attempt to raise financing for these newly formed RTOs, they are discovering that PUHCA's restrictions are a significant concern to Wall Street firms and a barrier to investment by the very non-utility businesses that are "independent" of market participants. Mr. Pickering has introduced bi-partisan legislation (H.R. 1101) that would repeal PUHCA. I urge its inclusion in any comprehensive electricity legislation that the Subcommittee might consider.

Extend Non-Discriminatory Open Access Requirements to Municipal, Cooperatively- Owned and Federally-Owned Transmission Facilities

In 1992, Congress passed the Energy Policy Act ("EPAct"). One of its most significant provisions is a requirement that, upon request, utilities must transmit or "wheel" wholesale power generated by others. If a utility fails to wheel when requested to do so on mutually satisfactory terms, the requesting party can petition the FERC for an order requiring the wheeling.

In 1996, the FERC issued its landmark decision in Order No. 888, directing utilities to provide other users with access to their transmission facilities on the same terms and conditions that they themselves have. The purpose was to promote wholesale competition by providing ways for competitive generators to move their power to wholesale customers through open, non- discriminatory transmission services.

Order No. 888, however, only applies directly to utilities subject to FERC's jurisdiction under the Federal Power Act -- mostly investor-owned companies. Almost one-third of transmission facilities in the U.S. are not subject to FERC jurisdiction, and thus, are beyond the open access requirements of Order No. 888. Thus, the Order No. 888 open access requirements are not directly applicable to federally-owned, municipal, or cooperatively-owned utilities, although the FERC has imposed a reciprocity requirement on non-jurisdictional utilities that seek to use the transmission facilities of jurisdictional entities. In order to promote greater market efficiency, competition and reliability, FERC's open transmission access requirements should be extended to all transmission-owning entities. In today's market, it makes no sense for there to be different rules for different transmission-owning entities.

Upgrade and Provide Necessary Incentives to Expand the Transmission System

Generation is of little use if the power that is generated cannot be moved to where it is needed, and when it is needed, instantaneously. "Busy" signals are not acceptable in our business. Our increasingly interconnected and overloaded transmission system is what makes the entire electric system work (or not).

All segments of the electricity industry are imposing tremendous demands on the transmission system to carry more and more transactions across greater distances. As a result, the transmission system is facing significant increases in congestion.

On an interstate highway system overloaded with traffic, gridlock often results. On a transmission system with congestion, transactions are curtailed to ensure that the system does not become overloaded, limiting delivery of low-cost power and potentially resulting in a loss of reliability.

Annual investment in transmission has been declining by almost $120 million a year for the past 25 years. Transmission investment in 1999 was less than half of what it had been 20 years earlier. Maintaining transmission adequacy at current levels would require about $56 billion in investment during the present decade. EPRI estimates it will cost up to $30 billion to bring the western regional transmission system back to a stable condition and $1 billion to $3 billion a year after that to maintain this condition in the face of continued growth.

Without adequate transmission capacity to meet growing demand, reliability will be compromised, prices will increase, overall system efficiency will decline and the benefits of wholesale generation competition will not be realized. A regulatory regime that fosters an economic climate to encourage investment in transmission is necessary. It is time for innovative, non-cost based forms of regulation to reward transmission investments and operations that enhance reliability and greater system efficiency. A bipartisan bill introduced or cosponsored by six members of this Committee in the last Congress (H.R. 2786) provides a satisfactory framework for addressing the need for new investment in transmission. I urge the Subcommittee's careful consideration of this bill.

Establish Regional RTOs

The biggest gap in FERC's RTO authority remains its inability to impose the same requirements on federal electric utilities, municipal utilities and electric cooperatives. These utilities operate important transmission facilities that are integral to RTOs throughout the nation. FERC has invited these entities to participate in mediation talks. However, because FERC lacks jurisdiction over these entities' transmission systems, it cannot put the same pressure on them to join RTOs that it has clearly demonstrated it intends to put on shareholder-owned utilities. FERC's Federal Power Act authority must extend to all transmitting utilities, regardless of their ownership form.

Tax Code Provisions that Impede the Efficient Restructuring of the Industry Should be Eliminated

While I realize that tax issues are not jurisdictional to the Energy and Commerce Committee, I want to encourage your support for a number of tax law changes that are critical to assuring adequate investment in transmission infrastructure. With regard to RTOs, these organizations will succeed only if all transmission owners in a region join. In some areas of the country, such as the Pacific Northwest, the participation of all publicly owned transmission entities will be needed to form an effective RTO. Municipal owners of transmission argue they cannot join RTOs because tax code provisions preclude the "private use" of tax-exempt financed utility property. These provisions should be modified to allow municipal transmission assets to be placed into an RTO without violating "private use" rules.

We commend the House Ways and Means Committee for reporting legislation last week that largely reflects the compromise agreement reached between EEI, LPPC and APPA last year that would address many of these problems. This agreement would (1) grant "private use" relief for government-owned utilities that provide open access to their transmission systems, (2) grant tax relief for the sale or spin-off of transmission facilities to form FERC- approved RTOs or independent transmission companies that are part of a FERC-approved RTO, (3) allow continued contributions to nuclear decommissioning trust funds in a restructured electricity market, and (4) remove the tax on contributions in aid of construction.

Conclusion

Our country needs a comprehensive national energy policy that ensures the adequate supply of affordable and reliable electricity. The removal of barriers to the wholesale generation market will go a long way to ensuring the supply that is essential to our modern economy that increasingly depends on adequate supplies of highly reliable, and reasonably priced electricity. Modern technologies powered by electricity have been responsible for as much as half of the nation's economic growth since the 1930s. Electric technologies have improved our productivity, reduced our overall energy use and enhanced Americans' quality of life.

Action is needed now to ensure our country has affordable and reliable electricity for years to come. I look forward to working with this Subcommittee to achieve these objectives.



LOAD-DATE: July 30, 2001