SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 5087 words

COMMITTEE: HOUSE ENERGY AND COMMERCE

SUBCOMMITTEE: ENERGY AND AIR QUALITY

HEADLINE: NATIONAL ENERGY POLICY

TESTIMONY-BY: ROBERT D. PRIEST, MANAGER

AFFILIATION: YAZOO CITY (MS) PUBLIC SERVICE COMMISSION

BODY:
Statement of Robert D. Priest, Manger Yazoo City Public Service Commission 210 South Mound Street PO Box 660 Yazoo City, MSMS, 39194

Thank you, Chairman Barton and Ranking Member Boucher. On behalf of the American Public Power Association, I am pleased to appear today to discuss important electricity issues facing the subcommittee.

My name is Bob Priest. I am the Manager of the Yazoo City Public Service Commission, the local electric utility serving Yazoo City, Mississippi; I am also a member of the APPA Board of Directors. APPA represents the interests of more than 2,000 publicly owned electric utility systems across the country, serving about 40 million customers. Yazoo City is one of 24 such systems in Mississippi. APPA member utilities include state public power agencies and municipal electric utilities that serve some of the nation's largest cities. However, the vast majority of these publicly owned electric utilities serve 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. Public power systems' first and only purpose is to provide reliable, efficient service to their local customers at the lowest possible cost. Public power exists for a purpose, not a profit. Like hospitals, public schools, police and fire departments, and publicly owned water and waste water utilities, public power systems are locally created governmental institutions that address a basic community need: they operate to provide an essential public service, reliably and efficiently at a reasonable, not-for-profit price. Publicly owned utilities also have an obligation to serve the electricity needs of their customers. And, because they are governed democratically through their state and local government structures, public power systems operate in the sunshine, subject to open meeting laws, public record laws and conflict of interest rules. Most, especially the smaller systems, are governed by an elected city council, while an elected or appointed board independently governs others. Democratically governed, not-for-profit, obligation to serve - the importance of these unique characteristics has been highlighted by the recent events in the West. Under California's restructuring law, public power was able to retain its obligation to plan for and serve the electricity needs of our consumer- owners. As a consequence, municipal utilities retained their power plants dedicated to serve native load customers, and they engaged in long-range planning to satisfy demands that exceeded their own generation resources. This gave public power utilities the ability to mitigate market risk for their customer-owners.

Understanding the underlying structure and mission of public power is essential in crafting balanced electricity legislation that will maintain industry diversity. This diversity has helped many public power communities in the West endure the electricity crisis with bumps and bruises rather than broken bones. We believe the entire nation has been well served by this diverse mix of publicly, privately, and cooperatively owned utilities, combined with federal institutions including the Tennessee Valley Authority and the federal power marketing administrations. In restructuring our industry, every effort should be made to ensure the preservation of this diversity.

Wholesale Competition First - the Role of the Federal Government

The rush to restructure the electric utility industry in several states has truly put the cart before the horse. Retail choice programs adopted by states and localities cannot succeed without truly competitive wholesale markets. This is certainly one of many lessons learned in California. The fundamental characteristics of a competitive market include, among other things: access of buyers to numerous sellers; mitigation of market power; ease of entry into the market for new participants; a sufficient number of participants to impose discipline on all; and transparency of information.

APPA has supported legislative efforts to make the wholesale electric market more competitive for decades. APPA was one of the major supporters of the transmission access provisions of the Energy Policy Act of 1992. On numerous occasions over the past few years, we have testified in support of additional legislation to ensure that the promises of wholesale competition become reality. In our view, comprehensive federal restructuring legislation must, at a minimum, achieve the following objectives:

Promote more effective wholesale competition by providing sufficient federal authority to ensure non-discriminatory access to regional transmission facilities at fair and comparable rates.

Promote the maintenance and expansion of the nation's transmission facilities including, where necessary and subject to appropriate limitations, the exercise of federal siting authority.

Establish policies to maintain the reliability of the nation's electricity industry through competitively neutral means.

Eliminate market power in generation and transmission by: 1) providing for truly neutral management of the nation's transmission system, including allowing for federal oversight to ensure Regional Transmission Organization (RTO) development, independence and effectiveness; 2) clearly articulating Federal Energy Regulatory Commission's (FERC) role in monitoring the wholesale market, directing FERC to investigate and mitigate market power, and enhancing its power to accomplish this difficult task; and 3) strengthening FERC's merger review process to allow for consideration of a proposed merger's impact on the development of competition.

Eliminate the tax-related impediments to competition for municipal utilities imposed by the private use restrictions on tax-exempt bonds while retaining local control over municipal decisions.

Consider changes to Public Utility Holding Company Act (PUHCA) only in the context of providing reasonable substitutes to protect consumers and promote competition.

APPA Comments on Issues Critical to Effective Wholesale Competition

We commend the subcommittee for its focus on barriers to competitive generation in the wholesale market and look forward to working with the panel in developing comprehensive legislation.

Market Power, Market Transparency Rules and PUHCA

APPA believes these three critical issues are interrelated and must be addressed simultaneously to achieve the goal of a workable competitive wholesale market. These issues highlight the important lessons learned from the California experience, including:

Market structure is critical to market performance.

Market power is a very real problem that must be addressed.

Markets need rules and market monitors to enforce them.

Market monitors need data.

The paramount role of a regulatory agency must be to protect the public interest and the interests of consumers. Competition is a means to this end, not the end itself. In California and throughout the West over the last year, APPA believes FERC was so focused on promoting competition that it completely lost sight of its obligation to permit just and reasonable wholesale rates only after considering its responsibility to ensure consumers were protected from abuses of market power. We hope that, in clarifying FERC's mission, Congress will provide that, first and foremost, FERC must protect the public interest and the interests of all consumers.

If markets are allowed to set rates, FERC must ensure that such markets are workably competitive. This begs the question, however, with respect to the methodology used to make such a determination, and also doesn't specify how rates should be established in markets that are not competitive. APPA believes market based rates for jurisdictional utilities should only be approved on a finding that the applicant will not possess market power and that effective and sustainable competition will exist in that market. The analysis must include an examination not only of the resources available to individual applicants and whether such assets could be used to set the market clearing price, but also of the effect of transmission constraints and how those assets fit into the broader market structure. Location-specific constraints must be taken into account, as should requirements for grid reliability. Further, and frequently ignored in traditional market analysis, is the time-sensitive nature of electricity. In some markets, an entity controlling a very small amount of generation can exercise market power.

FERC should be given other "tools" in addition to those it already has to address market power problems. It should, for example, require jurisdictional utilities to submit market power mitigation plans for approval or modification. Its merger review process should be revised to require that merger approval be granted on an affirmative finding that the proposed merger is in the public interest as opposed to the current standard which only requires that the merger be consistent with the public interest. In reviewing mergers, FERC should be required to consider whether they will promote effective wholesale competition, or undermine it. FERC should also have the authority to require shared access to essential assets, including reserve/risk sharing mechanisms, on a non-discriminatory basis and with just and reasonable rates. Further, FERC should be able to preserve the integrity of the market through preliminary relief in order to prevent irreparable harm pending issuance of a final order.

As consumer-owned utilities, APPA's members certainly believe that no market participant should be able to abuse market power to the detriment of end users. Until the debacle in the West, application of this principle to public power systems in wholesale markets has not been an issue, and therefore this specific issue has not been addressed by APPA. However, publicly owned utilities in California and elsewhere in the West have stated that they would voluntarily abide by market rules applicable to jurisdictional utilities. The exclusion for "normal" transactions is clearly appropriate, but the extent to which sales by public power systems into market institutions would be subject to FERC oversight is unclear and could be problematic. APPA is confident that, if FERC clearly defines in advance the rules applicable to jurisdictional utilities who are responsible for the vast majority of all such transactions, public power systems will live within that framework without the need for any expansion of FERC jurisdiction.

Market Transparency

APPA believes that legislation should ensure transparent information on market transactions and should grant clear authority to the Energy Information Administration (EIA) and the FERC to collect and publish appropriate data while protecting proprietary information. While "proprietary information" warranting protection must be narrowly circumscribed, APPA would encourage that congressional direction be absolutely clear that data must be collected and made public. Claims of confidentiality of data based on commercial sensitivity are already being made to limit data collection or dissemination. There is a danger that commercial sensitivity arguments will completely undermine the legitimate right of the public to this data. Transparency of market information is a fundamental prerequisite of competitive markets and necessary to protect consumers. (We would note that disclosure is required under the security laws, and such disclosure has had a salutary effect on the markets. If the SEC's rules did not exist today, almost every company that is subject to SEC regulation would claim that much of the information they are required to disclose today is in fact proprietary.) Congress should be very clear in telling EIA and FERC that close calls should be resolved in favor of transparency, not secrecy.

PUHCA

APPA believes PUHCA repeal should logically be undertaken within the broader context of addressing market power concerns. PUHCA established a structure for the electric utility industry in ways that were intended to limit if not eliminate the abuse of market power. Unfortunately, debates over PUHCA repeal today suggest that consumers can be adequately protected if FERC and the states are given greater access to books and records for the limited purpose of reviewing electric utility rates. While such expanded authority is appropriate, it is by no means an adequate substitute for the protections afforded by PUHCA. Before PUHCA is repealed, there must be strong market power protections in place, regulatory gaps must be filled, and opportunities must be provided to ensure that transactions across the entire utility holding company and all of its subsidiaries can be carefully examined.

APPA recommends giving specific authority to FERC to review mergers of utility holding companies as well as the disposition of generation assets by jurisdictional utilities and acquisition of natural gas companies. The FERC lacks the clear authority to review the former. While we believe it has the authority and responsibility to review the latter, it has recently declined to do so. This action has come at precisely the same time that utilities and utility holding companies are swapping assets like trading cards. A utility with a significant presence in generation in one region sells those assets, then buys similar assets in another region. Such transactions can clearly lead to the concentration of significant amounts of generation in specific geographic markets, yet no one is examining what consequences these asset trades will have on competition.

FERC and state commission access to books and records of holding companies to prevent affiliate abuses is an inadequate substitute for the protections provided consumers, state commissions and others under PUHCA. As a practical matter, many state commissions don't have the resources to examine the books and records of today's extremely complex utility holding companies and all of their subsidiary companies. And even if they do, it isn't clear what remedies they can impose when the keeper of the funds -- the parent holding company -- may exist outside the jurisdiction of a specific state utility commission.

Advocates of PUHCA repeal have argued that the statute is no longer necessary, that it is redundant with other statutes, and, incredibly, that it is an impediment to competition. H.R. 1101, the Public Utility Holding Company Act of 2001, introduced earlier this year, provides, in the statement of findings and purposes, the following:

Developments since 1935, including changes in other regulation and in the electric and gas industries, have called into question the continued relevance of the model of regulation established by that Act.

Limited Federal regulation is necessary to supplement the work of State commissions for the continued rate protection of electric and gas utility customers.

The Attorney General of California strongly disagrees with these two statements. On July 5 he filed a petition with the Securities and Exchange Commission (the agency with responsibility to enforce PUHCA) for review and revocation of PG&E Corporation's exemption from PUHCA. As stated in the petition, "PG&E Co. [the electric operating utility] has now filed for bankruptcy after upstreaming billions of dollars from the utility to the utility holding company - the precise type of behavior identified in PUHCA as a primary basis for the law." He concludes his petition as follows: "All of the primary evils addressed by PUHCA are relevant to PG&E Corp. [the utility holding company], including movement of capital and assets from its utilities to the holding company and affiliated, wholly-owned subsidiaries as well as massive investments in out-of-state non-utility activities and properties. The Commission has the chance, indeed the obligation, to address potential holding company abuses by PG&E Corp. before additional damage is done. The current crisis in California has been a catalyst for closer scrutiny of federal and state regulation of the utility industry. This crisis highlights the fact that Commission enforcement of PUHCA is still needed."

Clearly times have changed since PUHCA was enacted in 1935. Utilities have changed. But human nature hasn't. The abusive practices that gave rise to PUHCA more than 65 years ago have been more difficult to accomplish, because of the existence of PUHCA's restraint on corporate structure and behavior, but have not disappeared entirely. It may be that some elements of PUHCA need to be revised. But the opportunity for the California Attorney General, and perhaps others similarly situated in the future, to have a forum at FERC or the SEC in which they can examine the financial transactions within a monstrously complex interstate holding company structure to determine whether electric consumers have been abused, must not be eliminated.

Interconnection Policy

Distributed resources, typically small generation units located close to the load they serve, offer a variety of benefits for consumers, communities, the environment, and utilities. Efforts are currently underway to develop new distributed generation technologies, enhance existing technologies, and address various technical and policy issues that may be hindering the deployment of distributed resources. Congress has taken an active interest in this issue and several industry restructuring proposals have included provisions to give the Federal Energy Regulatory Commission additional authority to order interconnection of distributed resources to transmission and distribution facilities using a uniform technical standard. Public power supports efforts to promote greater use of distributed resources so long as those efforts respect local authority and recognize the diverse characteristics of local electric systems.

APPA believes distributed resources not only increases overall production and generation, but decreases constraints placed on transmission facilities, and tends to reduce problems encountered by vertical market power situations. While APPA supports bringing distributed generation facilities on line as quickly as possible, we remain concerned about the myths of the "plug and play" attitude so prevalent today. We support a more streamlined, simplistic approach to distributed generation, but not at the expense of public health and safety, cost-shifting, and potential reliability problems.

APPA believes Congress should adopt transmission and distribution interconnection policies that provide FERC the authority to order the use of standardized technical interconnections. At the same time, Congress must preserve local authority to require any additional measures necessary for system reliability, safety, or other factors deemed to be in the public interest. That is, interconnection standards for distributed resources, while removing barriers to competition, should remain flexible. APPA has already agreed to accept additional FERC jurisdiction for a standardized interconnection policy; we believe in the appropriate amount of jurisdiction for public power distributed generation facilities, but, again, not at the expense of the system's reliability. A positive step has been taken with the introduction of H.R. 1945 by Representative Quinn, which, for the first time, addresses the concern of local utilities. (Attached is APPA's policy resolution supporting interconnection standards for distributed generation, approved by our membership June 19, 2001.)

Aggregation

The concept of aggregation is generally more relevant to retail competition programs, but should be encouraged by federal legislation. Aggregation, however, offers an opportunity for smaller consumers in particular to shield themselves from wholesale market abuses and to promote generation competition by increasing these customers' clout in the marketplace.

The early results of state retail electricity deregulation experiments across the country present a mixed bag for consumers, but one thing is already clear -- consumers demand that the lower electricity prices and other promised benefits of competition benefit all customers, not just the large users. One demonstrated means of ensuring residential customers' participation in a competitive market is by establishing their right to be represented by their local government through community or municipal aggregation. By themselves, small-load or residential customers lack the power and resources to negotiate better deals; banding together through aggregation programs, local governments can wield purchasing clout on behalf of their residents for lower prices.

APPA believes aggregation increases participation in restructuring efforts at the state level for smaller customers, creating a more robust market and therefore lowering electricity costs for all consumers. Further, APPA believes that aggregation of small-load customers is essential, and that municipalities and local governments -- the ones in the best position to look after the social and economic welfare of the community -- are well suited for the job and should not be restricted from performing this service. APPA realizes there are still several obstacles to aggregation efforts in the details of the legislative process, including restrictions on local government authority, "slamming" or other fraudulent issues, and whether consumers should opt-in to a program rather than opt-out, but supports a strong aggregation provision in any federal legislation aimed at improving wholesale electricity competition. Finally, APPA believes that federal legislation should ensure that states do not impose any barriers to the formation of municipal aggregation programs.

Net metering

APPA has no formal policy on net metering at this time, but realizes its potential to increase the use of renewable resources and provide generation alternatives, thus promoting competition. Several general principles should be followed when developing legislation. For example, APPA believes net metering is best applied to residential and small customers; larger and industrial customers can have more significant impacts on a utility's distribution system reliability. In addition, a qualified generating facility should utilize only renewable energy resources, such as solar, wind, geothermal or biomass, and should be considered a small facility. In addition, when applied, APPA believes net metering customers still retain their full obligations on transmission and distribution charges, and the necessary backup or standby charges.

Since more than 30 states have already adopted net metering programs, states should have the authority to establish a different program, including further incentives and limitations, and states and local communities should be provided flexibility to allow additional control and testing requirements.

Public Utility Regulatory Policies Act (PURPA)

APPA does not oppose PURPA's mandatory purchase provisions, as long as this is considered under a comprehensive energy bill. In addition, we believe stranded cost recovery under PURPA should only be addressed by using FERC's current process.

Private use tax restrictions

One issue directly related to public power utilities that, if resolved, would improve and facilitate electricity competition is "private use" tax restrictions imposed on municipal electric systems. Rapid changes in wholesale electricity markets have created a need to update private use restrictions on tax-exempt bonds used by public power systems to finance their electric facilities. These restrictions hamper public power's ability to provide access to their transmission lines, adjust to evolving energy policies and adapt to a volatile energy market, just as the nation faces power shortages, transmission constraints and increased reliance on electricity to fuel the nation's economy. These rules form a barrier to open and efficient electricity markets at both the wholesale and retail level, making it impossible for community-owned utilities to open up their transmission and distribution facilities to third parties.

Bipartisan legislation (H.R. 1459), which offers a fair and balanced approach to several critical energy-related tax issues, has been introduced in the House to correct this situation. A version of H.R. 1459 was recently included in the Ways and Means Committee's own energy bill. The electricity industry understands that removing the private use restrictions will provide the necessary flexibility for those generation facilities financed with tax-exempt bonds. In addition, legislation is needed to clarify the rules for public power on the use of tax-exempt bonds for new generation facilities or upgrades without running afoul of the private use test. APPA appreciates this subcommittee's understanding of this complex issue, and knows this panel has always been supportive of viable solutions.

Incentives for renewable resources

In preparing its recently-published report on public power's renewable profile, entitled "Shades of Green"(copies of which were previously sent to all members of this subcommittee), APPA discovered that public power systems have a higher proportion of renewable, non-hydropower generation than other segments of the industry -- but we still have more work to do. APPA applauds the idea of creating market-based incentives for all segments of the industry. The goal is not simply more generation, but a diversity of generation resources. Today, renewable resources remain at above-market prices; appropriate incentives are necessary so that all consumers benefit.

While it is clear that additional generation is needed in this country, it is also clear that such generation should come from non-traditional renewable energy sources as well as from better and cleaner utilization of our nation's most abundant resource, coal. Traditionally, Congress has turned to tax credits to provide incentives to industry to achieve socially desirable goals. If the goal is to promote renewable energy and clean coal technology development and utilization by the electric utility industry, then incentives must be provided that work for all elements of the industry.

Tax credits can be utilized by for-profit, investor owned utilities, which serve about 75 percent of the nation's electric consumers, but cannot be used by not-for-profit publicly and cooperatively owned utilities that serve the balance. As a policy matter, it seems to make little sense to refuse to provide comparable incentives to ensure that 100 percent of the nation's utilities are encouraged to develop these resources. We have recommended "tradable tax credits" for publicly and cooperatively owned utilities. These tradable credits could be sold to tax paying entities at a discount to help them reduce their own tax liability. This concept has been developed by public power systems and the rural electric cooperatives and is supported by the entire electric utility industry; we hope this proposal receives favorable action in the House.

Reliability

APPA urges the subcommittee to require mandatory involvement by all industry participants in a national compliance program to ensure continued reliability of the high voltage electric transmission grid. The Administration's National Energy Policy report also calls for enactment of mandatory reliability standards by an independent body and overseen by FERC to "address the problems created by increased demands on the transmission system that have resulted from changes within the industry brought on by wholesale competition." Even though the United States has the most reliable electric system in the world, the crisis in the West has demonstrated the delicate balance between reliability and the markets within which the electric grid must operate. Consequently, great care needs to be taken to ensure that the current level of reliability is not sacrificed in any restructuring of the industry.

As the industry has become more competitive, more participants have been executing an increasingly larger number of transactions every day. The focus of most of these transactions is on short- term costs rather than system stability. While the current voluntary system of compliance with reliability standards worked reasonably well in the regulated environment in which the industry previously operated, it will not continue to provide the necessary safeguards in a competitive market.

Currently, reliability standards are established and monitored by the North American Electric Reliability Council (NERC), which is a non-profit organization that monitors the electric utility industry's voluntary compliance with policies, standards, principles, and guides, and assesses the future reliability of the bulk electric systems. The NERC Board of Trustees has approved and begun the transformation of NERC to the North American Electric Reliability Organization (NAERO), in which participation and adherence to standards and practices would be mandatory. Federal legislation is required to give NAERO the enforcement tools necessary to ensure compliance and achieve a system that properly balances reliability with market pressures and decisions.

APPA has worked actively on the NERC consensus proposal, and we continue to support it. However, we could also support simplifying that proposal so long as the basic tenets are adhered to. We do have concerns about reliability being delegated exclusively to RTOs, some of which may be for-profit entities, that would not only set the rules, but must comply with them.

An item of particular importance to APPA in the consensus reliability legislation is a sentence developed during negotiations in late 2000. The sentence would clarify that FERC is granted oversight authority over public power systems in the regulatory title only for the purposes of enforcement of reliability standards. Public power systems support oversight with regard to reliability standards but this provision should not be used by FERC to impose additional regulation at a later date. Through an oversight, this sentence was not included in reliability legislation currently pending in Congress; APPA supports inclusion of the sentence in any House subcommittee draft legislation.



LOAD-DATE: July 30, 2001