SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 5314 words

COMMITTEE: HOUSE ENERGY AND COMMERCE

SUBCOMMITTEE: ENERGY AND AIR QUALITY

HEADLINE: ELECTRICITY TRANSMISSION

BILL-NO:

 

H.R. 3604             Retrieve Bill Tracking Report


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H.R. 3406             Retrieve Bill Tracking Report


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H.R. 2944             Retrieve Bill Tracking Report


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H.R. 1601             Retrieve Bill Tracking Report


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TESTIMONY-BY: GLENN ENGLISH, CHIEF EXECUTIVE OFFICER

AFFILIATION: NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION

BODY:
Testimony of

Glenn English Chief Executive Officer National Rural Electric Cooperative Association

before the Energy & Air Quality Subcommittee

of the Commerce Committee U. S. House of Representatives

Regarding H.R. 3604, the Electric Supply and Transmission Act

December 13, 2001

Executive Summary

NRECA believes that states should retain their traditional jurisdiction over retail sales and electric distribution systems. The Federal Energy Regulatory Commission (FERC) lacks the experience and resources to assume those responsibilities. FERC also lacks the capacity to address the important state and local interests inherent in retail electric service. Accordingly, NRECA cannot support the provisions in Title I respecting distributed generation, net metering, and price responsive demand programs.

A robust wholesale electric market can only develop if regulators have the authority to prevent individual market players from abusing market power. Thus, if Congress repeals PUHCA as Title I, Subtitle B proposes, Congress must replace it with modern legislation that takes a practical approach to controlling market power. Such legislation should provide regulators an array of tools that they can use to protect consumers and enhance competition in electric markets. In particular, Congress should strengthen FERC's merger review authority, not repeal it as Section 141 would do. NRECA supports the Chairman's proposal to repeal the mandatory purchase requirements in PURPA Section 210.

NRECA opposes expanding FERC jurisdiction over cooperatives. Any expansion of jurisdiction would unnecessarily impose heavy financial burdens on electric cooperatives and their consumer- owners. While sections 201 and 702 would subject electric cooperatives to additional FERC jurisdiction, Section 702 would destroy the comparability standard or "FERC lite" established in Section 201. Section 702 must not apply to cooperatives.

NRECA supports the formation of large, independent Regional Transmission Organizations (RTOs) for all transmission owners because RTOs can, if fully independent and properly designed and operated, minimize market power, maximize efficiencies, significantly improve reliability and reduce the potential for power market instability that can lead to price spikes. NRECA believes that the FERC is making excellent strides towards the development of effective RTOs and does not support language in Section 202 that would sharply limit FERC's latitude in this area. If Congress legislates on RTOs, NRECA would be happy to work with the Chairman to fix certain problems cooperatives face as they seek to join RTOs.

NRECA supports the Chairman's proposal in Section 301 to replace the North American Electric Reliability Council (NERC) with a new self-regulating industry organization that has the authority, under FERC oversight, to develop and enforce mandatory reliability standards.

NRECA supports the development of an interstate highway system for the electric transmission grid. That highway system should be developed at the lowest possible cost for consumers by lowering the risk to investors in the transmission sector and by enabling new entities to compete to build needed transmission. NRECA does not support language in Section 401 that would limit FERC's discretion to determine the appropriate incentives to encourage the construction of new transmission.

Introduction

Chairman Barton and Members of the Subcommittee, I appreciate this opportunity to continue our dialogue on the restructuring of the electric utility industry. For the record, I am Glenn English, CEO of the National Rural Electric Cooperative Association, the Washington-based association of the nation's nearly 1,000 consumerowned, not for profit electric cooperatives.

These cooperatives are locally governed by boards elected by their consumer owners, are based in the communities they serve and provide electric service in 46 states. The 35 million consumers served by these community-based systems continue to have a strong interest in the Committee's activities with regard to restructuring of the industry.

Electric cooperatives comprise a unique component of the industry. Consumerowned, consumer-directed electric cooperatives provide their member-consumers the opportunity to exercise control over their own energy destiny. As the electric utility industry restructures, the electric cooperative will be an increasingly important option for consumers seeking to protect themselves from the uncertainties and risks of the market. I would like to thank you, Mr. Chairman, and Members of the Committee for your receptiveness to the concerns and viewpoints of electric cooperatives.

DISTRIBUTION AND RETAIL ISSUES

Title I of H.R. 3406 would: (a) grant FERC the responsibility for establishing standards for the interconnection of distributed generation to the distribution and transmission systems; (b) mandate net metering for some consumer-owned generation; (c) establish principles for setting rates for retail energy service to consumers with distributed generation; and (d) grant FERC new authority to regulate demand-side management programs.

NRECA is pleased that the Chairman has narrowed the language on priceresponsive demand programs since the September draft. The statement that FERC programs "shall not preempt or displace existing non-Federal price responsive demand programs" is critically important. Nevertheless, NRECA opposes the federalization of these issues for several reasons.

First, electric cooperatives own 44% of the nation's distribution system. Much of these distribution systems are located in rural areas where the population density is low, averaging less than 6 consumers per mile. As a result, the revenue generated in these areas is extremely low, averaging approximately $7,000 per mile. Net metering and distributed generation interconnection programs, for instance, if formulated and implemented without a strong sensitivity and appreciation for local conditions would lead to increased electricity costs for consumers in rural areas that could least afford to pay them.

Second, electric cooperatives have obtained $36.4 billion in RUS financing. As a result of this financing, RUS must approve the rates and practices of distribution cooperatives and cooperatives that own generation and transmission. Negawatt and net metering programs and distributed generation interconnection standards have a direct impact on these rates and practices; however, they are being federalized without any role for RUS. This will create significant problems for cooperatives, including increased costs and the risk of conflicting regulatory obligations.

Third, these issues have traditionally been the responsibility of states and local regulatory bodies for a very good reason: moving these issues to the federal level makes it more difficult, or in some cases impossible, for states and local regulators to protect the public interest. Policy decisions with respect to retail electric and distribution services can have a tremendous impact on local standards of living and economies. It is important, therefore, for state and local regulators to be able carefully to balance local interests and to craft tightly focussed regulations of retail electric and distribution services that meet local needs. Moving responsibility over these issues away from the local community to the federal level makes it less likely that regulatory decisions will reflect local needs or protect local interests. Moving responsibility over these issues away from the local community to the federal level also makes it harder for utilities to provide reliable, universal electric service at a reasonable cost.

Moreover, NRECA does not believe that FERC has the experience or the resources to regulate effectively matters relating to retail electric or distribution services. Over more than 65 years, FERC and its predecessor, the Federal Power Commission (FPC), regulated wholesale sales and transmission service. FERC has never established technical standards for the interconnection of generation at the transmission levels, and it has never had any experience whatsoever regulating retail services or distribution systems. FERC does not employ today a single distribution engineer. Further, FERC is experiencing difficulty meeting its existing responsibilities today with its limited resources. Multiplying FERC's responsibilities by giving it new jurisdiction over retail and distribution services would spread FERC's limited resources even more thinly to the detriment of both wholesale and retail consumers.

NRECA was pleased to see in S. 1766, the Energy Policy Act of 2002, introduced by Senators Daschle and Bingaman, that at least some of these issues were left to the states. While S. 1766 expressed Congress' interest in distributed generation and similar retail policies, the bill left it to the states and local authorities under PURPA Title I to decide whether and how best to address those policies in light of local conditions and interests. NRECA believes that the PURPA Title I approach is the best way for Congress to address all of the retail issues on which it feels the need to speak.

If Congress insists on setting mandatory federal standards for distributed generation interconnection, net metering, and demand response programs, NRECA would be happy to work with the Chairman to adjust and focus the language to better serve consumer interests.

PUHCA, MARKET POWER, AND FERC MERGER REVIEW NRECA believes that existing federal processes have been insufficient either to prevent concentration of market power or to protect consumers and competitors from the exercise of market power. Moreover, the proposal in Title I, Subtitle B, to repeal PUHCA, and the proposals in Sections 141 and 142 to repeal FERC's merger review authority and to eliminate NRC antitrust review would exacerbate existing market power problems by accelerating the process of consolidation in the electric industry and by making it more difficult for state and federal regulators effectively to police market behavior.

NRECA believes that if PUHCA is repealed, it should be replaced with modern legislation that takes a practical approach to controlling market power. Such legislation should provide regulators an array of tools that they can use to protect consumers and enhance competition in electric markets. In particular, Congress should:

Impose on large electric utilities that seek to merge the burden of proof that their merger is consistent with the antitrust laws if the Federal Trade Commission (FTC) challenges the merger. The language would not change the burden of proof in criminal cases.

Prohibit FERC from approving a merger involving a large electric utility if the merger would lessen competition or tend to create or perpetuate market power.

Clarify, as does S. 1766, that FERC has jurisdiction to review mergers between holding companies.

Clarify, as does S. 1766, that FERC has jurisdiction to review dispositions of generating facilities.

Authorize the FERC to take action to remedy existing market power, including the authority to require a public utility with market power to divest generation assets. Require the FERC, the Department of Justice, and the FTC to conduct an interagency study of market power in the electric industry.

Authorize the FERC to impose civil penalties on any public utility that exercises market power in violation of the Federal Power Act.

Only by including such provisions in restructuring legislation that repeals PUHCA can Congress protect markets and consumers from excessive consolidation in the electric industry and the exercise of undue market power.

PURPA

NRECA supports the Chairman's proposal, in Title 1, Subtitle C, to repeal the mandatory purchase requirements in PURPA Section 210.

OPEN ACCESS AND FEDERAL JURISDICTION

NRECA opposes efforts to subject electric cooperatives to the jurisdiction of FERC. That expansion of jurisdiction would unnecessarily impose heavy financial burdens on electric cooperatives and their consumer-owners.

To put it in perspective, FERC should have a more significant role regulating larger electric utilities such as Entergy - whose subsidiaries own and operate more than 14,000 miles of transmission line and sell more than 97,000,000 MWH to more than 2,400,000 metered accounts - than it should have regulating Hickman-Fulton Counties Rural Electric Cooperative - which owns 1 mile of transmission line, and sells less than 120,000 MWH per year to fewer than 4,000 member-owners.

NRECA, sincerely appreciated the Chairman Barton's efforts in the 106th Congress to limit the expansion of FERC jurisdiction over electric cooperatives by applying the comparability standard over our transmission rate terms, and conditions, thereby establishing "FERC." While NRECA opposes the expansion of FERC jurisdiction, we remained neutral on H.R. 2944, the Electricity Competition and Reliability Act, that incorporated the comparability standard.

NRECA is disappointed that H.R. 3406 does not reflect a similar understanding of the cooperative difference.Section 702 emasculates FERC lite. While Section 201 creates the veneer of establishing the comparability standard as the basis for expanding FERC jurisdiction over transmission-owning utilities, Section 702 eviscerates the comparability concept. Under this section, rather than review cooperative transmission rates under a comparability standard, FERC would subject cooperative transmission rates to a full review under the just and reasonable standard if there were a complaint. Rather than remand rates to boards of directors elected by cooperatives member-consumers, FERC would set the rates itself at whatever level FERC considers appropriate.

In addition to emasculating FERC lite, Section 702 would also, for the first time, subject cooperatives' wholesale rates to FERC review and regulation. At a time when Congress and FERC are seeking to move towards a competitive wholesale market for electric energy, Section 702 would move in the opposite direction, increasing the regulatory burden on electric cooperatives that seek to sell power in the wholesale market. Yet, electric cooperatives have not been part of the problem. Not- for-profit electric cooperatives have not gamed markets, they have not abused consumers, and they have not exercised market power. It would be impossible for them to have done so. Cooperatives do not own enough generation and are not large enough players in electric markets to exercise market power. All together, electric cooperatives generate only about 5% of the electric power in the country, which is less than half of the power they need to serve their own consumers. All combined, electric cooperatives' sales to public utilities represent less than 1 % of all sales in the wholesale market.

Nevertheless, NRECA would like to work further with the Chairman and the Committee to resolve any concerns they may have about FERC's role in a manner that minimizes the adverse impacts on cooperatives and their consumer-owners. In particular, NRECA would like to Committee to note that S. 1766 lacks any equivalent to Section 702, and that S. 1766 includes a "bright-line test" exempting small electric utilities from "FERC-lite" over transmission facilities without the need to engage in expensive litigation.

REGIONAL TRANSMISSION ORGANIZATIONS

NRECA supports the formation of large, independent Regional Transmission Organizations or RTOs for all transmission owners.

RTOs, if fully independent and properly designed and operated, can substantially mitigate the ability of transmission owners that also own generation to influence the market for electric energy and to potentially discriminate against competitors. Because an effective RTO can operate the transmission system on a regional basis to maximize efficiencies, it can also significantly improve reliability and reduce the potential for power market instability that can lead to price spikes.

NRECA believes, however, that the RTO provisions in H.R. 3406 have two serious shortcomings:

1. They fail to address certain issues that must be resolved before cooperatives can participate fully in RTOs; and

2. They sharply restrict FERC's authority to shape RTOs in a way that strengthens wholesale markets and protects consumers.

H.R. 3406 Must Enable Cooperatives to Join RTOs

NRECA has supported the formation of RTOs in a number of ways. NRECA submitted comments to the FERC in the rulemaking that resulted in Order No. 2000, and, in fact, FERC adopted several of NRECA's recommendations. NRECA representatives attended each of the Commission's five regional collaborative meetings during 2000 and facilitated presentations made by individual cooperatives at those meetings. NRECA also successfully facilitated voluntary RTO informational filings by cooperatives even though the Commission's regulations did not require most cooperatives to make such filings. Finally, NRECA and cooperatives in the southeastern United States have been very active in the ongoing FERC mediation that is seeking to establish a single, large

Southeast RTO.

For cooperatives to fully participate in RTOs as they clearly wish to do, and in order for properly formed RTOs to develop, the following issues are of critical importance and must be addressed by H.R. 3406:

Full Recovery of Transmission Revenue Requirements. Transmission- owning cooperatives must obtain full, immediate recovery of their revenue requirements from an RTO if they agree to commit their facilities to the functional control of that RTO, as contemplated by Order No. 2000.

Comparable Inclusion of Transmission Facilities. Some transmission-owning cooperatives have had difficulty getting their transmission facilities accepted for operation/cost recovery by a future RTO on the same basis as investor-owned utilities during the RTO formation process. Those IOUs opposing inclusion of cooperative transmission facilities point to the radial, load serving nature of these facilities as a reason for excluding them, overlooking the fact that they own comparable facilities that are included in their FERC-regulated transmission revenue requirements. Cooperatives therefore favor the use of a single, consistent standard to govern the RTO's functional control of all transmission facilities, regardless of the owner.

Grandfathered Contracts. Many cooperatives have substantial contractual arrangements with neighboring transmission providers. These contracts take many forms: some are among joint transmission owners, others deal with provision of both generation and transmission, and some are transmission-only agreements (both pre- and post-Order No. 888). Whatever their content and form, these contracts are vital to sustaining the cooperative's ability to provide on-going service to their own memberowners. Transmission-owning cooperatives will not be able to join an RTO unless they have assurances that such contractual rights will not be severed without their consent. Similarly, transmission-dependent cooperatives cannot lose access to the transmission facilities needed to serve their member loads.

Regulation by the Rural Utilities Service. Many cooperatives have substantial loans from, and, as a result, are substantially regulated by the Rural Utilities Service (RUS) of the U.S. Department of Agriculture. The Commission must take RUS regulation into account and coordinate with RUS to ensure that when cooperatives seek to join RTOs, inconsistent, inefficient regulation of cooperatives by these two federal agencies does not occur.

85-15 Revenue Test. Cooperatives lose their tax-exempt status when more than 15 percent of their revenue is received from nonmembers. The Internal Revenue Service (IRS) has not clarified that, when a cooperative joins an RTO, the revenues received by the cooperative from the RTO will not be deemed to be nonmember income for purposes of the 85-15 revenue test. Congress must ensure that cooperatives can join RTOs without unintentionally violating their current not-for-profit tax status. NRECA appreciates the Chairman's effort to address the 85-15 issue in the September 21 discussion draft. That language, however, is inadequate to solve the problem and permit cooperatives to participate in RTOs. Since the September 21 discussion draft addresses tax issues, it should incorporate the provisions in H.R. 1601.

Cost Shifting. RTO transmission rates and tariffs should (a) mitigate cost shifting and take into account the specific needs and characteristics of each affected region, including costs of operation, debt, and other expenses; (b) use the same effective returnon-investment to all participating transmission owners; and (c) recognize the goal of establishing a single non-pancaked rate structure applicable to all customers.

RTO Market Power. As transmission service remains a monopoly, and as individual RTOs assume control of larger transmission systems than individual transmitting utility owners, RTOs will possess unprecedented market power. In this context, a badly governed and operated RTO may be worse than no RTO at all. Thus, the monopoly status of an independent RTO must be acknowledged at the outset, and the RTO's transmission rate structure and associated cost-of- service should be developed using traditional cost-of-service ratemaking principles. RTOs should not be eligible for "incentive ratemaking," "performance-based ratemaking" or "light-handed regulation" that would have the effect of increasing rates to transmission customers without concomitant benefits or reducing independent regulatory oversight of such an RTO's activities.

Collaborative Process. The Commission has sought to encourage RTO forming public utilities to actively collaborate with cooperatives in order to accommodate their needs as consumer- owned entities. Unfortunately, in numerous instances collaboration has been nothing more than a thinly disguised effort of saying, "take it or leave it." For cooperatives to effectively join RTOs, public utilities must be required to meaningfully collaborate with cooperatives beginning with the earliest stages of RTO formation efforts. The Commission should not fail to act when informed of RTO formation efforts that exclude cooperative participation.

NRECA would be happy to work with the Chairman and the Committee to draft language that addresses these concerns.

H.R. 3406 Should Not Handcuff FERC

In a number of ongoing proceedings, FERC is now actively developing an RTO policy intended to enhance wholesale electric markets and protect the public interest. Congress should not interfere with that process with overly detailed and prescriptive legislative language or by creating new procedural and substantive hurdles for FERC to jump. Section 202 of H.R. 3406 suffers from both failings.

First, Section 202 reads far more like a regulation than a statute. It includes detailed standards for RTOs that track many of the concepts included in FERC's Order 2000. As a result, it sets in stone concepts that are - and should be - in a state of flux. None of us yet knows what the wholesale markets will look like when the transition to competitive markets is complete. We all continue to learn what approaches are most likely to support a robust wholesale market and what approaches hinder the development of that market. Congress should not freeze the process of experimentation now. Congress should not deprive FERC of the flexibility it needs to respond to changing circumstances and new information. Otherwise Congress will likely stunt the formation of wholesale markets and freeze in place inefficiencies and inequities.

Moreover, while Section 202 includes many of the provisions of Order 2000, a careful reading indicates that it is not a faithful recreation of the Order 2000 standards. Instead, it appears there are several "strategic" absences from the requirements of Order 2000. As a result, if FERC were required to approve any RTO that met these incomplete standards, we could see many RTOs that are not independent, that do not have adequate size or scope, that do not reflect the infrastructure needs of the developing regional wholesale markets. Even if these holes in the statutory standards were not intentional, they reflect the danger of being overly specific and prescriptive in statutory language.

Finally, Section 202 imposes new procedural requirements on FERC and grants parties before FERC new appeal remedies that they do not have in other contexts. The combined effect of these new procedures and new remedies makes it far more difficult for FERC to meet its statutory obligation to protect the public interest. Congress should not interfere in this manner. FERC's existing procedures and appeal processes are adequate in other contexts and should not be changed for the limited benefit of transmission owners seeking to retail their market power after joining RTOs.

ELECTRIC RELIABILITY

NRECA supports the reliability language in S 301 of H.R. 3406. That language would require FERC to approve a new North American Electric Reliability Organization that would have the power to ensure the reliable operation of the interstate bulk transmission grid. NRECA believes that similar legislation needs to be enacted as soon as possible.

NRECA opposes a competing proposal that would grant authority over reliability directly to FERC. The Commission lacks the expertise or the resources to address reliability on its own. There are questions whether it has been able to handle adequately its existing mandate to regulate wholesale markets. Responsibility for the reliability of the nation's grid would strain its existing staff even further. On the other hand, while stronger enforcement authority is needed, there is no question that NERC has done an admirable job of setting reliability standards. Congress should not reject an industrybased model that has worked extremely well for over 20 years.

TRANSMISSION INFRASTRUCTURE

North America needs the electric transmission equivalent of the interstate highway system. The current transmission system cannot reliably handle the dramatic increase in transactions since the enactment of the 1992 Energy Policy Act. Transmission deficiencies are contributing to wholesale and retail electric market failures that are harming consumers.

For the following reasons, NRECA does not believe that these problems can be solved by offering utilities high incentive transmission rates or other financial incentives to build transmission.

FERC's Existing Authority. FERC already has the authority to establish incentive transmission rates. FERC issued a policy statement in 1994 that would permit "more flexibility to utilities to file innovative pricing proposals...." In Order 2000, FERC stated that it was "critically important for RTOs [regional transmission organizations] to develop ratemaking practices that ... provide incentives for transmission owning utilities to efficiently operate and invest in their systems."' In testimony before the Energy and Air Quality Subcommittee on September 20, 2001, Deputy Secretary of Energy Frank Blake stated that "FERC has great flexibility under current law to set transmission rates at a level to attract investment." Since FERC has existing ratemaking authority to approve incentive transmission rates, legislative language is unnecessary.

Higher Electricity Prices for Consumers. Currently, FERC has wide discretion in determining whether a public utility's transmission rate is reasonable. Legislative language requiring FERC to approve incentive transmission rates is designed solely to handcuff FERC by curtailing its authority to reject unreasonably high transmission rates, resulting in higher electricity prices for consumers. Also, by limiting FERC's ability to reject unreasonable rates, Congress grants transmission owners the opportunity to gouge consumers with unreasonably high transmission rates.

The Investment Community Is Unconvinced. During the July 26 hearing before the Energy and Air Quality Subcommittee, Thomas Lane, Managing Director in Goldman Sachs Energy and Power Group, responded to Member questions and stated that there is a role for transmission rates that include the more traditional return on investment of around 12%.Since Wall Street believes that investments will flow into the transmission sector based on the current rate structure, it is unnecessary to force FERC to rubber stamp unreasonable rates.

Lack of Newly Constructed Transmission. Legislative language forcing FERC to approve incentive transmission rates will not automatically result in the construction of new transmission for two reasons. First, the language fails to guarantee that transmission facilities will, in fact, be built in exchange for FERC's approval of incentive rates. Second, the language would require FERC to approve incentive rates for the operation of existing transmission facilities. High rates of return associated with existing transmission facilities will act as disincentives to the construction of new transmission that is needed to support a robust wholesale market.

Impediment to Generation Markets. The interstate transmission system should exist to enhance the competitive generation market not to balkanize it further. Any approach that allows individual companies with a financial interest in the energy market to control transmission would have the unwelcome effect of erecting tollgates on the interstate system, thereby narrowing generation markets and protecting the existing power of local generators.

NRECA is concerned that the incentive approach would raise the rates of return and increase the costs for consumers, the intended beneficiaries of lower prices from competition. Also, FERC not only has that authority under existing law, but also has been encouraging utilities to propose innovative incentive-based rate designs for years. 2 In fact, FERC recently offered utilities a 300 basis-point increase in the rate of return and a 7- year recovery period if they would build transmission in the West by a stated deadline.

Given FERC's current efforts to encourage innovative rates, NRECA is concerned that legislative language establishing only incentive rates may handcuff FERC, limiting the agency's ratemaking discretion at a critical time in the development of a competitive industry.

As an option to legislating higher rates of return, NRECA believes Congress should lower the risk of building transmission. Congress should direct FERC to allow any entity that builds a qualifying transmission project to recover its costs. By reducing the risk, Congress could encourage institutional investors and others looking for low risk investments invest in improvements to the nation's transmission grid.

To qualify for assured cost recovery, NRECA believes that transmission projects must:

be identified through a regional joint-planning process that coordinates and has oversight for the reliable operation of the regional transmission system

be constructed according to best engineering practices

be operated by the relevant Regional Transmission Organization (RTO)

offer service pursuant to traditional cost-of-service principles, with the cost-of-service analysis taking into account the low risk provided by FERC's obligation to assure cost recovery.

By mitigating risk, spreading the cost of new facilities broadly, and enabling new competitors to build transmission, NRECA's approach to new transmission helps to ensure that the interstate highway system can be built at the lowest possible cost to consumers.



LOAD-DATE: December 13, 2001