SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 2174 words

COMMITTEE: SENATE ENERGY AND NATURAL RESOURCES

HEADLINE: NATIONAL ENERGY POLICY

TESTIMONY-BY: JEFFREY D. AYERS, SENIOR VICE PRESIDENT AND GENERAL COUNSEL,

AFFILIATION: AQUILA, INC.

BODY:
July 25, 2001

Statement of Jeffrey D. Ayers Senior Vice President and General Counsel, Aquila, Inc.

Before the Energy and Natural Resources Committee United States Senate

Mr. Chairman, Senator Murkowski and members of the Committee, my name is Jeffrey Ayers. I am the Senior Vice President and General Counsel for Aquila, Inc. (NYSE: ILA). Based in Kansas City, Missouri, Aquila is a provider of risk management services including weather and plant outage protection, and a wholesale supplier of electricity, natural gas and coal in North America as well as a developer of power plants. It also provides wholesale energy services in the United Kingdom and continental Europe. Aquila is an 80% owned subsidiary of UtiliCorp United (NYSE:UCU), an international energy company with more than 4 million customers across the U.S. and internationally. I am here today representing Aquila and the member companies of the Electric Power Supply Association (EPSA). EPSA is the national trade association representing competitive power suppliers, including independent power producers, merchant generators and power marketers. EPSA members provide reliable, competitively priced electricity from environmentally responsible facilities in U.S. and global power markets. On behalf of the competitive power industry, I thank you for this opportunity to respond to legislative proposals to address electricity markets.

We believe that the keys to a secure energy future are well- functioning, competitive energy markets and a national infrastructure that is robust and efficient. While EPSA's vision of the future ultimately demands a national, competitive retail market for electricity, there is a broad consensus that additional federal action is needed today to promote truly competitive wholesale power markets, and your white paper provides an outstanding set of principles for federal policy.

One of the crucial lessons from the electricity crisis in the Western states is that no market can function without adequate supply or without transmission policies - the "rules of the road" - that are fair and consistent to all market participants. Appropriate reform of the regulatory framework that governs the interstate transmission grid is essential to ending the crisis in the West and avoiding these same pitfalls elsewhere.

Competitive power suppliers stand ready to commit hundreds of billions of dollars of private sector investment to increase the supply of electricity. This new investment in efficient, cleaner technologies is desperately needed not only in the West, but nationwide. Since 1990, the competitive power supply industry has accounted for more than half of all the power generation capacity brought online in this country, and we expect this percentage to increase as competitive wholesale markets develop.

More and more, however, EPSA companies view their investment decisions as contingent upon the continued development and regulatory reform of the interstate transmission grid. I can also assure you, Mr. Chairman, that the financial community will not provide the $56 billion that EEI estimates is necessary for transmission upgrades and investment in the current decade, unless reform occurs. This magnitude of investment will require a consistent, FERC-led approach, throughout the nation, and innovative financial incentives. In addition, even with new generation supply, there will be no long-term remedy to the situation in the West and elsewhere without critical changes to transmission regulatory policies and expansion of the interstate transmission grid.

Federal energy policy must recognize power flows from state-to- state and regionto-region on a regular basis. The interstate transmission grid is the linchpin of our electricity infrastructure and regulation of that grid needs to be uniform, predictable and capable of fostering regional and national wholesale power markets. Although I will comment on a wide range of policies outlined in the White Paper, we will focus much of our attention on proposals to reform and improve the regulation of the interstate transmission grid.

Transmission Jurisdiction

Clarification of Federal/State Authority over the Interstate Grid

We agree that the division of authority between state and federal regulatory organizations must be clear and consistent, and cannot be allowed to Balkanize the wholesale power market. Today, there is too often ambiguity as to whether a transmission asset lies within state or federal jurisdiction. While a state role in retail markets should be maintained, more uniform and efficient regulation of the interstate transmission grid - with consistent, predictable regulatory oversight at the federal level - is essential.

As the White Paper makes clear, these rules must cover all owners of interstate transmission assets, regardless of whether these assets are held by private companies, public power, co-operatives or the federal government.

Assurance of a Robust Interstate Transmission Grid

The White Paper affirms FERC's authority to order utilities to join Regional Transmission Organizations (RTOs). We are supportive of FERC's recent bold step to organize large, regional RTOs to reflect the way power flows. FERC's action was a very important step, but we urge you to go further. The transmission system is sporadically open to competition, and barriers to new plant development are slowing the infusion of critical investment for increased generation supply. Congress must set a clear deadline for all utilities to join

Regional Transmission Organizations (RTOs). RTOs should be large and conducive to competition. Pricing for transmission should preclude "pancaking" (multiple charges as power flows from one transmission system to the next), and each use of the transmission grid must be required to take service under a single open access transmission tariff. Also, Congress should also explicitly require currently non-FERC-jurisdictional entities that own interstate transmission assets to join RTOs.

Standardized Interconnection To The Transmission Grid

The White Paper endorses a clarification of interconnection rules for new sources of power generation. We cannot overemphasize how important this issue is for investment and construction of new generation. For companies interested in expanding electric generation capacity (critical to affordable power rates throughout the country), the physical interconnection of the generation plant to the power grid has become too often the "choke point" for project development. Ad hoc interconnection standards create uncertainty, extensive delays and unexpected or unfair costs for developers. Legislation needs to affirm the right of new generation to interconnect on a non-discriminatory basis to transmission facilities, provide a clear avenue for the federal review of interconnection policies, and establish a timely remedy, if necessary, for any abuse.

We will comment briefly on the remaining policy proposals of the White Paper:

Reliability

We support establishing a national framework for electric grid reliability that will assist, not impede, the growth of robust, competitive power markets. EPSA has been an active participant in the NERC "consensus" process. We are engaged today in an effort to update the legislative proposal from last Congress and hope that this effort will succeed. A national self-regulating reliability organization must have adequate representation from all segments of the industry, be consistent with existing and future market structures, and be subject to federal oversight.

Rates and Market Power

Federal legislation should require FERC to promote competitive markets by providing clear, consistent rules - applied evenly to all market participants - and addressing any abuse of market power. EPSA believes strongly that the development of a pro- competitive framework for transmission regulation and the adoption of reforms identified earlier in this statement will go far towards reducing the risks of abusive market practices and protecting electricity consumers. In addition, market participants should be encouraged to use risk management mechanisms, such as long-term contracting, to reduce their exposure to price volatility. The California experience has demonstrated the effects of a prohibition of basic risk management tools.

Regional Planning and Siting

Expansion of the interstate transmission grid must occur in a timely fashion and fully reflect the best interests of the whole region. Siting issues remain an enormous roadblock to critically needed facilities. Any transmission expansion provision should encourage the construction and siting of much-needed transmission lines and ensure that costs are fairly borne by all users of transmission. We reiterate, however, that additional transmission assets and an expanded transmission grid will do little to prevent future bottlenecks if there is no concomitant regulatory reform of this same grid.

Other Provisions

PURPA - If PURPA is amended as. part of a comprehensive federal electricity bill, there must be explicit recognition and preservation of existing PURPA contracts. We also endorse your efforts to guarantee the recovery of PURPA contract costs as appropriate federal policy. However, such cost recovery must be explicitly related to the honoring of existing contracts. Moreover, EPSA urges the repeal of the ownership restrictions on PURPA Qualifying Facilities (QFs). In 1992, the Congress placed no such restrictions on Exempt Wholesale Generators (EWGs) and the time has come for similar treatment for QFs.

-PUHCA - EPSA supports the repeal of PUHCA as part of comprehensive federal legislation.

-Public Benefits Fund - If a Public Benefits Fund is included in federal legislation, its costs and benefits should be allocated so that no market participant is favored over any other. We would urge you to avoid a provision that places the costs of such a fund solely on generators. Given that some generators operate pursuant to long-term contracts, it is not clear that the costs of such a fund will have a balanced and fair impact on all sources of generation and operators. If the Committee endorses a Fund, its costs should be truly non-discriminatory.

Renewable Energy - Renewable energy plays a vital role in energy markets today and this role will increase in the future. EPSA believes that federal legislation should recognize the value of fuel diversity and continued investment in a broad range of energy resources. The full range of renewable technologies, including solar energy, wind, landfill gas, biomass, geothermal and waste-to-energy should be supported in any renewable provisions. EPSA has also endorsed the extension and expansion of tax credits for renewable power resources.

-Tax Provisions - The White Paper identifies a number of changes in tax law that are important to the development of competitive markets. Federal legislation is also needed to resolve uncertainties associated with the tax treatment of assets associated with interconnection. Although tax issues are not under the direct purview of your Committee, one issue (referred to generally as "Contributions in Aid to Construction") should be addressed in federal electricity legislation. IRS policies since 1988 have generally held that interconnection costs should not be classified as income to a utility. However, the IRS is now studying this issue and has opened the door to possible revisions in this policy. This, in turn, has caused significant financial uncertainty for our members who make the investments in capital necessary to establish interconnections and to build power plants. The Energy Policy Tax Act of 2001 should be amended to clarify that the costs of interconnection, which are essential for power plant developers to supply power to the electric grid, should not be treated as taxable income to transmission owners. Treating the costs of interconnection as income to the transmission owning utility increases the cost of connecting to the transmission grid and impedes construction of new generation. As a consequence, electricity consumers face higher costs, whether due to shortages of available electricity or higher tax bills to new plant developers.

EPSA appreciates this opportunity to provide you with comments on the White Paper. We applaud your leadership on this matter, and appreciate all the time and energy that the Committee has dedicated to this matter over the past few years. We believe that appropriate federal legislation can finish the job that this Committee began in 1978 with PURPA and in 1992 with EPAct to create a national grid under FERC oversight for open, non- discriminatory movement of wholesale power. This action is necessary to ensure a reliable, affordable supply of electricity, to foster the creation of new technologies, to attract the necessary capital for this infrastructure and to ensure a robust marketplace for the future.



LOAD-DATE: July 26, 2001