SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 2047 words

COMMITTEE: SENATE ENERGY AND NATURAL RESOURCES

HEADLINE: NATIONAL ENERGY POLICY

TESTIMONY-BY: FRANK BLAKE, DEPUTY SECRETARY OF

AFFILIATION: ENERGY

BODY:
July 25, 2001

STATEMENT OF FRANK BLAKE DEPUTY SECRETARY OF ENERGY

BEFORE THE COMMITTEE ON ENERGY AND NATURAL RESOURCES UNITED STATES SENATE ON COMPREHENSIVE ELECTRICITY LEGISLATION (S. 388, S. 597, S.1273, AND S. 2098)

Mr. Chairman and Members of the Committee, I welcome the opportunity to testify before you today on comprehensive electricity legislation.

I commend you for holding this hearing. Earlier in the year, many believed there was little likelihood the Congress would consider electricity legislation. The view was that the California electricity crisis would discourage both the Administration and the Congress from dealing with electricity legislation. Your hearing disproves this common wisdom. Need for Federal Electricity Legislation

The Administration recognizes the need for the Congress to pass comprehensive electricity legislation. The National Energy Policy included a recommendation that the "Secretary of Energy propose comprehensive electricity legislation that promotes

competition, protects consumers, enhances reliability, promotes renewable energy, improves efficiency, repeals the Public Utility Holding Company Act of 1935, and reforms the Public Utility Regulatory Policies Act of 1978." We are working to that end.

Since 1995, the Congress has been grappling with electricity legislation. Initial efforts sought to require states to open their retail electricity market by a date certain. Subsequent legislation focused on promoting competition in electricity markets and complementing state retail competition programs.

We clearly need to revise Federal electricity laws to recognize changes in electricity markets. The principal Federal electricity law - the Federal Power Act - was written in 1935. At the time, there was virtually no interstate commerce in electricity, there was no interstate transmission grid, electricity markets were local, power plants were built right next to consumers, and electricity generation was perceived to be a natural monopoly.

Today, the transmission grid is both interstate and international, electricity markets encompass entire regions, almost all wholesale electricity sales are in interstate commerce, and the natural monopoly in generation has long since been disproved.

Mr. Chairman, your white paper describes the changes that have taken place in the electricity industry since 1935, and concludes: "The business of supplying electricity has changed. So must the regulatory and legal framework within which it operates now

change." We could not agree more. The Administration believes the time has come to make changes to Federal electricity law to reflect changes that have occurred over the past 66 years, and the sweeping changes that are underway in the industry.

The California electricity crisis demonstrates that mistakes made by a single state can extend to an entire region. The impact of the California electricity crisis on the West has been significant. The Bonneville Power Administration recently announced a 46 percent increase in its wholesale rates. That increase was caused in large part by the California electricity crisis, which drove up electricity prices throughout the West.

The Administration believes it is essential that Congress pass comprehensive electricity legislation. Electricity legislation can make electricity markets more competitive, lower prices, and assure ample and reliable electricity supplies.

The Administration believes that electricity legislation should focus on core Federal issues that are beyond State authority.

Before I review these core Federal issues, I want to make it very clear that the Administration respects the state role in electricity regulation. For example, the Administration does not support proposals to require that states open their retail electricity markets by a date certain.

Regulation of Interstate Commerce

Electricity markets are increasingly regional in nature. Under the Constitution, states have no authority to regulate interstate commerce and regulation of interstate commerce is a Federal responsibility. The California experience shows that actions taken by one state can have regional consequences.

Transmission

Assuring that our transmission system can deliver reliable electricity supplies is a core Federal issue. As the National Energy Policy noted, investment in new transmission capacity has failed to keep pace with growth in demand and with changes in the industry's structure. Since 1989, electricity sales have increased by 2.1 percent per year, yet transmission capacity has increased by only 0.8 percent per year. There is widespread recognition that there is a need to expand the transmission system, remove bottlenecks, and provide for open access. Since the transmission system is both interstate and international, regulation of the grid is a Federal responsibility.

There are various reasons why transmission constraints exist. In some cases, the problem is a lack of economic incentive. The national energy policy proposes a solution to that problem: encouraging the Federal Energy Regulatory Commission (FERC) to develop incentive rates to promote transmission expansion. FERC has great flexibility under current law to set transmission rates at a level to attract investment. Recently,

FERC has shown flexibility in considering non-traditional transmission rates. For those reasons, it is not clear legislation is needed to address transmission pricing.

In other cases, the problem is the siting process itself. Under current law, transmission siting is an exclusively state function. That law was written 66 years ago, at a time when power plants were located right next to customers, and decades before transmission lines interconnected states and regions. Congress did not provide for transmission siting by the Federal government because it did not foresee the transmission system would develop into not only an interstate but also an international grid.

Much has changed since 1935. The transmission grid is the interstate highway system for electricity. It should not be a system of local toll roads.

Electricity legislation can remove transmission bottlenecks by providing for siting by the Federal government of transmission facilities used for interstate transmission. Legislation could provide for Federal siting of transmission facilities in certain limited circumstances.

Reliability

Ensuring the reliability of the interstate transmission system is also a Federal responsibility. Since the 1960s, the reliability of our transmission system has been based on voluntary compliance with unenforceable reliability standards. That is no longer

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tenable, and Federal legislation is needed to provide for enforceable standards developed by a self-regulating organization subject to FERC oversight.

Market Power

In our view, the debate about market power often starts with a misunderstanding about FERC authority under current law. Under the Federal Power Act, FERC is responsible for ensuring that rates charged by public utilities are just and reasonable. As a general matter, the ability to set rates is the ability to prevent the exercise of market power. An exercise of market power generally entails charging rates that are higher than those produced in a truly competitive market. For that reason, FERC can prevent the exercise of market power through its authority over wholesale rates and by ordering refunds of unjust and unreasonable rates.

A discussion of market power issues must start with a recognition of FERC's authority under existing law, and a determination of whether existing FERC authority to

address market power is inadequate.

Legislation is needed to address some issues in this area. For example, the Administration agrees with the Chairman that legislation is needed to clarify FERC authority to approve holding company mergers as well as mergers and asset dispositions involving generation facilities.

Consumer Protection

Consumer protection is another core Federal issue. Electricity markets are regional in nature, and are no longer confined neatly within individual States. For that reason, there is a need for electricity legislation that: protects consumers against "slamming" and "cramming," strengthens the bargaining power of consumers through aggregation, protects consumer privacy, and ensures that consumers have the information to make informed decisions to meet their needs.

Federal Electric Utilities

Another core Federal issue is defining the role of Federal electric utilities such as the Tennessee Valley Authority (TVA) and Bonneville Power Administration in competitive electricity markets. Obviously, states have no authority over Federal electric utilities. Legislation is needed to provide open access to transmission systems operated by the Federal electric utilities and ensure that one set of rules governs the entire interstate transmission system.

Reform of Federal Electricity Laws

There is a need to reform Federal electricity laws, such as the Public Utility Holding Company Act of 1935 (PUHCA) and the Public Utility Regulatory Policies Act of 1978 (PURPA). With respect to PUHCA, each of the past four presidents have

supported PUHCA repeal, and earlier this year the Senate Banking, Housing, and Urban Affairs Committee reported out legislation to repeal PUHCA by a vote of 19 to 1. PUHCA repeal is an idea whose time came a long time ago. There is also a need to repeal the PURPA mandatory purchase obligation prospectively.

Jurisdiction

The jurisdictional boundaries between the Federal and state regulatory roles have blurred as the electricity industry has changed. The Federal Power Act was enacted to fill a regulatory gap when the Supreme Court found that states lacked legal authority under the Constitution to regulate interstate commerce in electricity.

One jurisdictional issue is state authority to charge public purpose fees. The Administration believes that states are in the best position to develop public purpose programs to suit their needs. One state may prefer to develop strong low income assistance programs, while another may elect to encourage aggressive conservation. States have different needs, and need the flexibility to craft programs to suit those needs. These programs can be funded through the distribution charges - an area where states have exclusive jurisdiction - or charges on retail sales of electricity.

Electricity legislation can clarify the authority of states to impose fees to fund public purpose programs that meet their needs and avoid bypass of state fees. We believe this is a better approach than imposing a Federal tax to fund a Public Benefits Fund. One

concern relating to a Public Benefits Fund that has not received much attention is that of equities in allocating funds. There is no assurance that tax revenues raised in one state to finance a Public Benefits Fund will not be spent in other states.

By no means is this intended to be an exclusive list and there are other issues that may be appropriate to address in Federal electricity legislation.

Conclusion

We have a rare opportunity to learn a lesson from the California experience and act to prevent a future electricity crisis. The Congress normally passes energy legislation in the wake of a crisis, and it is rare for it to act to prevent an energy crisis.

Mr. Chairman, the Congress has been slowly reforming Federal electricity laws for over twenty years. This process began with the Public Utility Regulatory Policies Act of 1978, which the encouraged the development of independent power producers. This process continued with enactment of the Energy Policy Act of 1992, which provided greater access to the transmission system and further encouraged the development of independent power producers. The time has come for Congress to take another step, a bigger step, one that can make electricity markets more competitive and result in lower electricity prices, and ample and reliable electricity suppliers.

The Administration looks forward to working closely with the Committee to develop comprehensive electricity legislation.

I appreciate the opportunity to testify before you today.



LOAD-DATE: July 26, 2001