SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 3517 words

COMMITTEE: HOUSE ENERGY AND COMMERCE

SUBCOMMITTEE: ENERGY AND AIR QUALITY

HEADLINE: NATIONAL ENERGY POLICY

TESTIMONY-BY: DAVID L. SOKOL DAVID L. SOKOL, CHAIRMAN AND CEO

AFFILIATION: MID-AMERICAN ENERGY HOLDINGS COMPANY

BODY:
David L. Sokol, Chairman and CEO Mid-American Energy Holdings Company 302 South 36th Street Suite 400 Omaha, NE, 68131

Mr. Chairman and members of the Committee, my name is David Sokol, Chairman and CEO of MidAmerican Energy Holdings Company, a diversified, international energy company headquartered in Des Moines, Iowa, with approximately $11 billion in assets. I am here today representing MidAmerican and other companies that support H.R. 1101 and the modernization of the electricity industry.

Thank you for the opportunity to testify this morning on an issue of great importance both to our industry and to American energy consumers. I would also like to thank Representatives Ganske and Terry for their very kind introductions.

MidAmerican Energy Holdings Company consists of four major subsidiaries: CE Generation (CalEnergy), a global energy company that specializes in renewable energy development in California, New York, Texas, and the West, as well as the Philippines; MidAmerican Energy Company, an electric and gas utility serving the states of Iowa, South Dakota, Illinois and a small part of Nebraska; Northern Electric, a competitive electric and gas utility in the United Kingdom, and Home Services.com, a residential real estate company operating throughout the country. CalEnergy owns and operates geothermal power plants in the Imperial Valley of Southern California. The company is the largest employer and taxpayer in Imperial County, one of the most economically disadvantaged counties in California. I would like to commend Chairman Barton and the members of the Committee for holding this important and timely hearing. I believe this hearing is so important because, at the end of the day, if Congress does not address electricity issues, the country cannot have a truly comprehensive National Energy Policy. No other issue impacts Americans and our economy as pervasively as the quality and reliability of our electric supply system. Congress cannot afford to wait to act until some undefined future time when consensus is reached on every conceivable issue related to electricity. Taking that stance merely works to the advantage of those who take extreme positions in the policy arena or who prosper as a result of failures in the markets. The time for federal action on electricity has come - and maybe gone by a little; but if Congress moves quickly it can catch up before the type of damage we have seen in California and the West spreads to other parts of the country.

MidAmerican has been a leader in efforts to build consensus on electricity, and there are a number of important issues on which substantive consensus exists. These include prospective repeal of the PURPA mandatory purchase obligation, standardization of interconnection procedures, the establishment of a mandatory reliability regime and some form of federal backstop authority for transmission siting, as well as support of FERC's ongoing efforts to promote open access transmission. I would like to focus my remarks today, however, in support of MidAmerican's number one legislative priority: replacing the outdated and counterproductive Public Utility Holding Company Act of 1935 (PUHCA) with a modern framework and broad investigative powers for federal and state regulators.

PUHCA, a Depression-era law passed to cure abuses at a time when the SEC and state regulatory bodies were in their infancy, is today limiting investment in energy infrastructure, thereby reducing the supply options for consumers at the very time when this industry needs new investment most.

In his recent testimony before the Senate Banking Committee, Securities and Exchange Commission Chairman-Designate Harvey L. Pitt stated that he saw his primary mission as the need to "nurture a climate that is conducive to, and encourages, the creation of capital. .the lifeblood of innovation." He went on to say that "our securities laws are, in the main, nearly seventy years old, and reflect a time, and a state of technology, light years away from what we now confront daily." Given that previous SEC Commissioners have noted that PUHCA is the most intrusive and burdensome regulation administered by the agency, and that the SEC has been recommending its repeal for almost twenty years, I think we can safely apply those sentiments to this Act.

From my first-hand experience in California, I believe that its complex problems can be tied to two root causes: 1) lack of adequate investment and infrastructure in the energy sector, and 2) regulatory policies that distort energy markets.

As to the first issue, FERC last year found that "there is little doubt that the most crucial task ahead is to ensure that a robust supply enters this market, both now and in response to any future price signals." Nationwide, data from the North American Electric Reliability Council (NERC) project electric reserves of only 11.48 percent in 2001, with electric demands increasing by more than two percent per year. Typically, a 15 percent reserve is considered to be the minimum to ensure reliable service. Moreover, conservative estimates show that more than $76 billion will need to be invested in the sector by the end of the decade to assure reliable service.

With regard to the second problem -- regulatory policies that distort energy markets -- California's actions proved disastrous. In the name of reducing concerns about utility market power, the state either compelled or encouraged large-scale generation divestitures by the incumbent utilities and required them to purchase power in the volatile day-ahead spot market. The state restructuring legislation also mandated significant rate reductions that discouraged new entrants from competing for retail customers. Combined with PUHCA's limitations on selling electricity generated by exempt wholesale generators (EWGs) at retail and the inadequacy of available transmission and generation, these measures helped smother competition at the retail level in its infancy. The state also failed to address preemptively the excessive bureaucracy in its plant siting and environmental review procedures.

As you consider the actions you can take to ease the energy crisis in California and the West, I believe you will see that PUHCA contributes to both of these problems. The law can and should be repealed, and only Congress can do so. To do otherwise would leave a federal statute on the books that will continue to inhibit investment and distort markets throughout the country. The results of California's failure to address these issues in advance of the onset of full retail competition should be a warning to Congress about the need to move quickly on removing barriers to investment and market entry.

Let me provide the committee with two concrete examples of how the Act prevents actions that could help alleviate the California electricity crisis. Last summer, we at MidAmerican began to see signs foreshadowing the severe problems that have afflicted the California electricity market. The investor-owned utilities in the state had already begun to suffer financially from the impacts of soaring wholesale electricity costs and capped retail rates, and we gave serious consideration to a number of options that would have involved MidAmerican taking an equity position in the California utilities while working with the state to return the market to long-term viability.

Every scenario we reviewed ran into the same roadblock - the Public Utility Holding Company Act. MidAmerican is exempt from the most intrusive regulatory restrictions of the Act because its regulated utility business is primarily in one state, Iowa. However, MidAmerican could not acquire more than 4.99 percent of the equity in any of the California utilities without running afoul of PUHCA on several fronts.

First, the physical integration requirements of PUHCA would have required MidAmerican to demonstrate that it could physically interconnect its utility systems in the Midwest with those of the California utilities. This is an impossible standard for MidAmerican to meet. Any public utility, registered or exempt, operating within the eastern two-thirds of the United States would run into the same barrier.

Second, even if we could have solved the problem of the physical integration requirement, MidAmerican would have been forced to become a registered holding company under the Act. This probably would have required the company to separate itself from Berkshire Hathaway or have Berkshire divest itself of all non-energy related assets. For obvious reasons, neither of those options was acceptable.

Another example pertains to our interest in expanding our Imperial Valley geothermal operations. These plants currently provide the California electricity market with approximately 340 megawatts of baseload, emissions-free, renewable electricity. We would like to double the size and output of these facilities, providing desperately needed electricity to the California market. This project will require the construction of additional transmission lines. As you are well aware, the state's investor- owned utilities are in no financial condition to undertake this type of project. The obvious answer would be for CalEnergy to make the investment in the transmission lines necessary to connect these plants to electricity consumers. Unfortunately, PUHCA may stand in our way.

Being an owner of a transmission facility in California creates similar PUHCA problems to investing in a California utility. Once again, the company would be faced with maneuvering around the physical integration standard and dealing with Berkshire Hathaway's diversified portfolio. There may be some way around these problems, and we will explore every option to find a way to complete this expansion. Nonetheless, the existence of this unnecessary, outdated law makes it far more difficult to invest in this critical industry.

I hope you will take a moment to reflect on the absurdity of this. Berkshire Hathaway is one of the most financially stable private entities in the world, with a AAA bond rating. A federal law enacted more than 65 years ago with the intent of protecting investors keeps MidAmerican and Berkshire out of California's utility market and almost prevented Berkshire from investing in MidAmerican. At the same time, one California utility has declared bankruptcy and the other was recently unable to complete a bond issue offering junk bond premiums to refinance its debts because of lack of investor interest.

California's utility companies face a long climb back to fiscal health and will have a difficult time raising capital for new infrastructure. Yet, PUHCA will prevent most, if not all, domestic utilities, and discourage non-utility companies, from making equity investments in this market. Where will needed capital come from? I anticipate one of three sources. First, non- utility companies could make these investments, but these companies will not have the benefit of prior experience in the industry and will be impeded by PUHCA just as Berkshire Hathaway is. Federal or state governments are a second possible source of capital, but the political issues would seem to make that unlikely. The most likely scenario, I believe, is that foreign utility companies looking for a foothold in the U.S. market will take long looks at these companies. Since foreign companies are not restricted by the physical integration requirement on their "first bite" entry into the American market, they will enjoy a substantial advantage over U.S. companies in the mergers and acquisitions market. I'm not making a case against international investment. In fact, I strongly support it. But outdated, unnecessary laws should not hamstring American companies in this competition.

PUHCA made sense 66 years ago, when there was no other statutory framework to control the misuse of the holding company structure. All that has changed. Today, the FERC and state agencies closely regulate utilities. The SEC retains full authority over securities functions. The FTC and the Justice Department have well-established antitrust authority. And more information is available in the markets, with bond rating agencies, accounting standards, and financial disclosure requirements quickly punishing companies that engage in excessive speculative activity.

Are there any good reasons not to repeal PUHCA? I don't believe so.

1) The SEC has consistently supported PUHCA repeal for almost twenty years.

Speaking on behalf of the SEC before the Senate Banking Committee's Subcommittee on Securities and Investment, Commissioner Isaac C. Hunt, Jr. testified: "By the early 1980's, many aspects of 1935 Act regulation had become redundant: state regulation had expanded and strengthened since 1935, and the SEC had enhanced its regulation of all issuers of securities, including public utility holding companies. Changes in the accounting profession and the investment banking industry also had provided investors and consumers with a range of protections unforeseen in the 1935. The SEC therefore concluded that the 1935 Act had accomplished its basic purposes, and its remaining provisions were either duplicative or were no longer necessary to prevent the recurrence of the abuses that had led to the Act's enactment. The SEC thus unanimously recommended that Congress repeal the Act." Based on a comprehensive staff report in 1995, the SEC again recommended repeal of PUHCA, accompanied by the creation of additional authority to exercise jurisdiction over transactions among holding company affiliates. That is exactly the approach embodied in H.R. 1101.

2) Federal Energy Regulatory Commissioners have consistently supported repeal.

On March 20, 1997 then-FERC Chair Elizabeth Moler, a Democratic appointee, testified that PUHCA "inhibits competition. Congress should eliminate these impediments. Utilities need the freedom to pursue structural changes without facing antiquated rules that do not easily accommodate current policies favoring competition." Independent Commissioner Donald Santa, Jr. added that "this anachronistic federal statute no longer serves any useful purpose and, in fact, is an impediment to greater competition in electricity markets." The current FERC Chairman, Curt Hebert, a Republican, is also a strong proponent of PUHCA repeal.

PUHCA repeal will enable FERC to continue policies to promote efficient, competitive wholesale markets. PUHCA is premised on geographically limiting utility companies while at the same time FERC is working to reduce market concentration.

The limits PUHCA places on FERC's ability to promote competitive wholesale electricity markets are even more apparent today. For example, PUHCA inhibits utilities' efforts to comply with FERC Order 2000 to establish independent regional transmission organizations (RTOs), yet every consumer group, industrial user group, public power entities and rural coops favor the establishment of RTOs to ensure the most efficient use of the electric transmission system and to guarantee that utilities do not use control of the transmission system to distort wholesale electricity markets.

Many utilities, including MidAmerican Energy, are working to establish independent transmission companies, or "transcos," that would provide for efficient management of transmission networks in large regional markets. As FERC strongly prefers that these organizations be large, multi-state companies, they will be subject to PUHCA's restrictions. PUHCA is discouraging potential investors in these new businesses and delaying the day we will see operational control of transmission fully separated from competitive market functions.

3) PUHCA repeal is pro-consumer.

PUHCA was passed at the height of the Depression to remedy abuses of holding companies that were taking advantage of lax or non- existent utility regulation at the state and federal level. Its purpose then was to preserve and reinforce the model of a regionally vertically integrated utility monopoly. PUHCA did its job then. The paradigm in the industry has shifted, but PUHCA has not. As a result, the Act today narrows the range of market entrants and thereby stifles competition, which is turn hurts consumers.

H.R. 1101 has strong new consumer protections applicable to more utilities than are currently subject to the restrictions of PUHCA. It guarantees state and federal regulators full access to the books and records of utility holding companies. We strongly support those provisions. Those elements of our business that are regulated should be available to the regulators to insure that our customers are protected. That is absolutely essential.

At the same time, repealing PUHCA will allow new investment, new ideas and new efficiencies in the electric and gas industries at a time when these are needed most. Last year, MidAmerican commissioned an independent study by the highly respected econometrics firm Analysis Group/Economics. Using the most conservative possible estimates, the study demonstrated directs costs to the economy of hundreds of millions of dollars annually from PUHCA. Other surveys that have attempted to quantify lost opportunity costs in the industry have estimated a multi-billion dollar annual drag on the economy from PUHCA. I am pleased to provide our study to members of the committee for your review.

Any claim that Congress should not repeal PUHCA because of events in California is misleading and specious. All three of California's utilities are exempt from PUHCA's restrictions under the intrastate exemption, and the overwhelming majority of generators selling electricity in California's electric markets are also PUHCA exempt. California officials made a huge policy mistake in allowing their utilities to distribute proceeds of their stranded cost settlements without either requiring that revenues be set aside in some form of hedge against rising wholesale costs or that these funds not be distributed until after the rate freeze transition period was complete.

That decision was one of many flawed aspects of the California restructuring plan, but it has absolutely nothing to do with PUHCA. If any of these utilities violated California law in their handling of these matters, they can and should be subject to damages and remedies under existing state law. Failure to regulate these utilities properly was may have been poor state policy, but PUHCA has nothing to do with those issues.

4) There is strong bipartisan support for PUHCA repeal in the other body.

On April 24th, the Senate Banking Committee voted 19-1 in support of PUHCA repeal. Having testified at the hearing on the bill the previous month, I can assure you that this was no pro forma vote. The hearing was well attended, particularly by senators new to the Committee hearing the case for PUHCA repeal for the first time.

Why then has PUHCA not been repealed yet?

Because PUHCA repeal is a hostage to other aspects of the larger electricity debate. Some stakeholders in the industry have sought to use PUHCA as leverage to achieve their goals in energy policy. I don't say that in an accusatory sense. That's the way the game is often played, and as I said earlier, MidAmerican has taken a leadership role in trying to resolve policy differences on the full range of these issues.

Those efforts can and should continue, but I believe both Congress and the stakeholder community need to step forward and focus on what they support and are willing to help get passed. We need to end the politics of stalemate where interest groups have focused more on blocking progress on one anther's priorities than on moving forward with good policy. Unfortunately, the losers in this hard-played game have been America's energy consumers.

While there has been some new interest in the utility sector in the last two years, partly as a result of the entry of non- traditional investors, far more capital is sitting on the sidelines waiting to see if Congress will move forward with PUHCA repeal and other needed modernizations. I am concerned that if Congress fails to act this year when the need for new investment in the industry has never been more apparent, a strong negative signal will be sent to the financial community. In view of our undeniable capital needs, that would have far-reaching negative impacts.

Last year, I joined Mr. Warren Buffet in discussing PUHCA repeal with House and Senate leaders. In those meetings, we warned that the energy sector was headed for a train wreck in either California or the Midwest. I don't take any pleasure in being right in that prediction, but I hope you will understand why I believe so strongly Congress must act now.

The political game that has held PUHCA repeal hostage has left the American consumer the loser. It is time to change the way the game is played. I thank you for the opportunity to testify this morning and ask you to support H.R. 1101 and other needed industry modernizations.



LOAD-DATE: July 30, 2001