SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 4059 words

COMMITTEE: SENATE ENERGY AND NATURAL RESOURCES

HEADLINE: NATIONAL ENERGY POLICY

TESTIMONY-BY: JOHN W. ROWE, PRESIDENT AND CO-CHIEF EXECUTIVE OFFICER

AFFILIATION: EXELON CORPORATION

BODY:
JULY 25, 2001

TESTIMONY OF

JOHN W. ROWE PRESIDENT AND CO-CHIEF EXECUTIVE OFFICER EXELON CORPORATION ON BEHALF OF THE EDISON ELECTRIC INSTITUTE

BEFORE THE COMMITTEE ON ENERGY AND NATURAL RESOURCES UNITED STATES SENATE

EXECUTIVE SUMMARY OF TESTIMONY BY JOHN W. ROWE

The electricity industry is in the middle of a painful transition from an industry composed of highly regulated integrated utilities with monopoly service territories and cost-based pricing, to an industry with competitive power generation markets, market based pricing and a wide diversity of market participants. It is our firm belief that market-oriented restructuring of the electric industry remains the best opportunity we have to provide consumer benefits and to develop reliable new sources of supply. To accomplish this goal, EEI strongly supports passage of a comprehensive energy policy that achieves the following objectives:

(1) Assures a stable and diverse supply of fuel sources, consistent with responsible environmental goals;

(2) Facilitates the ability of utilities and other generators to build adequate, competitive generation to meet consumer demand. This requires the repeal of the Public Utility Holding Company Act (PUHCA) and the Public Utility Regulatory Policies Act (PURPA);

(3) Enables regional transmission organizations (RTOs) and other transmission-owning utilities to expand the nation's transmission grid;

(4) Enhances energy efficiency and conservation initiatives; and (5) Helps protect lower income consumers. Our country needs a comprehensive national energy policy. The bedrock principle upon which the policy should be based is the encouragement of competitive electricity markets. Action is needed to ensure our country has affordable and reliable electricity for years to come.

Testimony of John W. Rowe Mr. Chairman and Members of the Committee:

My name is John W. Rowe. I am the President and Co-Chief Executive Officer of Exelon Corporation. Exelon, formed last year by the merger of Unicorn Corporation and PECO Energy, is headquartered in Chicago, Illinois. We serve over five million customers principally in Illinois and Pennsylvania, which have both restructured their electricity markets.

I am testifying today on behalf of the Edison Electric Institute (EEI), which is the association of U.S. shareholder-owned electric utilities and industry affiliates and associates worldwide. We are pleased to have the opportunity to testify before the Committee on the development of a comprehensive national energy policy. My testimony today includes comments on Chairman Bingaman's recently released White Paper on Electricity Legislation which includes a comprehensive legislative proposal, as well as S. 388, the "National Energy Security Act of 2001," S. 597, the "Comprehensive and Balanced Energy Policy Act of 2001," and the Administration's National Energy Policy Development Group (NEPD Group) Report, released on May 17 (the "Cheney Task Force Report").

The electricity industry is in the middle of a sometimes painful transition from an industry composed of highly regulated integrated utilities with monopoly service territories and cost- based pricing, to an industry with competitive power generation markets, market-based pricing and a wide diversity of market participants. New institutions are emerging, such as regional transmission organizations. It remains our firm belief that market-oriented restructuring of the electric industry remains the best opportunity we have to provide consumer benefits and to develop reliable new sources of supply. We must work together to make competitive markets work.

To accomplish the goal of a competitive market-oriented electricity industry, EEI strongly supports passage of a comprehensive national energy policy that achieves the following objectives: (1) assures a stable and diverse supply of fuel sources, consistent with responsible environmental goals; (2) facilitates the ability of utilities and other generators to build adequate, competitive generation to meet consumer demand, (3) enables regional transmission organizations (RTOs) and other transmission-owning utilities to expand the nation's transmission grid; (4) enhances energy efficiency and conservation initiatives; and (5) helps protect lower income consumers.

We are pleased, Mr. Chairman, that you have announced your intention to ask the Committee to consider comprehensive legislation designed to ensure the integrity of our Nation's electricity supply infrastructure. While EEI has not had an opportunity to develop a detailed position on the White Paper on Electricity Legislation which you released last week, Mr. Chairman, I feel safe in saying that most utility executives that I know would support your effort to enact a comprehensive proposal.

Let me highlight each of the objectives we believe should form the basis for comprehensive legislation.

(1) Assure a Stable, Diverse Supply of Fuels

Maintaining a diversity of fuel supply options is essential for affordable and reliable electricity. No individual fuel is capable of providing the energy required to meet all of our nation's electricity demands. Policy makers and regulators should work together to maximize the development and viability of all our fuel sources. And, they should reconcile conflicting energy, environmental and other public policy goals.

Right now natural gas is nearly always the fuel of choice for new generation. That is unlikely to change soon. But, gas prices rose to painfully high levels in recent months and may do so again. A sustained change could affect the economics of the fuel choice for new generation.

We must enable the continued operation of our nuclear fleet by completing a permanent spent fuel repository and by renewing the Price-Anderson Act.

Given President Bush's rejection of the Kyoto accord, it is appropriate for this Committee to reexamine what this Nation's policy should be on a going forward basis. Many of us - including myself and my company - believe it is time for the federal government to limit CO2 in

a "no regrets" way. I also believe that we need to revisit the standards for S02, NO,,, and mercury so that decisions on life extensions for existing coal-fired plants can be made on a sound economic basis.

(2) Assure Adequate, Competitive Electricity Generation

Rapid economic growth, combined with the increasing electrification of our homes, businesses and industries, has strained our energy infrastructure. Between 1995 and 1999, U.S. electric demand increased by 9.5 percent, while total electricity generation additions rose by only 1.6 percent. This has resulted in a decline in utility reserve margins.

The dramatic increase in electricity prices we have seen in California is proof positive of what happens when capacity does not keep up with demand. Responsible public officials must support the siting and construction of generating facilities to ensure reliable and adequate

electricity supplies; otherwise consumers will pay a very high price.

Congress can facilitate the availability of adequate generation by removing federal roadblocks that hinder development of sufficient and affordable generation capacity. These

barriers include the Public Utility Holding Company Act (PUHCA) and the Public Utility Regulatory Policies Act (PURPA).

Public Utility Holding Company Act

Comprehensive national energy legislation should repeal PUHCA. PUHCA repeal is included in the Chairman's White Paper, in S. 388, and in the Cheney Task Force Report. The Securities and Exchange Commission (SEC), which administers PUHCA, also calls for PUHCA repeal. Clearly there is a consensus in favor of PUHCA repeal.

PUHCA is an outmoded 1935 statute that acts as a barrier to competition. PUHCA restricts the flow of capital into new generation and limits the number of new suppliers in electricity markets by prohibiting exempt wholesale generators from selling directly to retail consumers. PUHCA also acts as an impediment to the formation of RTOs - a problem I will discuss in greater detail later.

Public Utility Regulatory Policies Act

Comprehensive national energy legislation also should repeal PURPA's mandatory purchase obligation, protect existing contracts and provide for the recovery of federally mandated ("FERC") jurisdictional PURPA costs. Again, repeal of PURPA's mandatory purchase obligation is included in the Chairman's White Paper, in S. 388, and in the Cheney Task Force Report. Clearly there is a consensus in favor of repealing PURPA's mandatory purchase requirements.

PURPA has failed to achieve one of its primary goals, to encourage the development of renewable energy resources. Even though PURPA was enacted 23 years ago, only 2 percent of the electricity generated in this country is from non-hydroelectric renewable energy resources.

PURPA is also anti-competitive and anti-consumer. PURPA's mandatory purchase obligation forces utilities to purchase power they may not need at above-market prices even when more efficient and less expensive generating resources are available. As a result, utility consumers pay more than $8 billion a year in above-market electricity prices. Distributed Generation/Net Metering

Distributed generation involves the use of small generation facilities built at customer locations to serve some or all of a consumer's energy needs, which also can deliver surplus power to the distribution network. Distributed generation is becoming a viable option to meet consumers' electricity needs. This is especially true for consumers who can use distributed generation to hedge against price volatility, those who place a premium on reliability and power quality and for consumers who are in isolated, hard-to-serve areas.

Recognizing the growing utilization of distributed generation facilities, EEI's member companies have been working with proponents of distributed generation to reach a compromise on legislation that will facilitate the interconnection of distributed generation to the grid while addressing issues relating to jurisdiction, backup power requirements and cost recovery. Again, the Chairman's White Paper recognizes the need to develop interconnection standards for distributed generation. We support doing so.

Market Power

California's electricity crisis has increased the focus on FERC's market power authority. I personally believe that FERC already has adequate authority to address the market power issues posed by public utilities that are already subject to its jurisdiction under the Federal Power Act. Under Sections 205 and 206 of the Federal Power Act, FERC has the authority to regulate prices

for wholesale power and transmission services charged by investor- owned utilities, and to order refunds when it finds those prices unjust and unreasonable.

FERC has utilized its existing authority in a series of orders that impose just and reasonable standards appropriate to different kinds of markets. FERC is actively discussing revisions to its market power analysis for its market-based rate standards with regard to jurisdictional utilities. However, FERC lacks comparable authority over federal, state and municipal utilities, as well as electric cooperatives, which are engaged in interstate commerce. Government-owned utilities and electric cooperatives argue that the rates they charge for wholesale power sales and transmission services should not be subject to FERC's "just and reasonable" standard because they are not-for-profit entities. However, we believe their not-forprofit status is irrelevant when they engage in wholesale sales and provide interstate transmission for others.

No solution to any regional price issues can occur as long as a significant number of energy suppliers in those markets are outside of FERC's jurisdiction. Thus, a comprehensive energy bill should extend FERC's "just and reasonable" rate standard to all electricity suppliers by making all utilities subject to Sections 205 and 206 of the Federal Power Act. The Chairman's White Paper includes such a proposal.

(3) Expand the Electricity Transmission System

Like the nation's generation capacity, our transmission capacity has not expanded to keep pace with demand. The current situation is comparable to a country road trying to carry the traffic of an interstate highway. All segments of the electricity industry are imposing

tremendous demands on the transmission system to carry more and more transactions across even greater distances. As a result, the transmission system is facing significant increases in

congestion. Between 1999 and 2000, transmission congestion grew by more than 200 percent. In the first quarter of 2001, transmission congestion was already three times the level experienced during the same period in 2000.

Annual investment in transmission has been declining by almost $120 million a year for the past 25 years. Transmission investment in 1999 was less than half of what it had been 20 years earlier. Maintaining transmission adequacy at current levels would require about $56 billion in investment during the present decade. The Electric Power Research Institute ("EPRI") estimates it will cost up to $30 billion to bring the western regional transmission system back to a stable condition and $1 billion to $3 billion a year after that to maintain this condition in the face of continued growth.

How do we ensure sufficient transmission capacity to help assure the success of competitive electricity markets? We believe the following proposals should be included in a comprehensive national energy policy.

Transmission Siting Authority

EEI supports granting FERC a backstop role to help site new transmission lines when states are unable or unwilling to act on new transmission line applications. The Cheney Task Force Report recommends developing legislation to grant FERC siting authority for new transmission. S. 2098, introduced by Senator Murkowski and Senator Landrieu in the 106'h Congress, included FERC transmission siting authority if a state failed to act on an application within a year. Such an approach would give states the first opportunity to act on transmission siting applications. EEI would not favor the portion of the transmission siting proposal contained in the Chairman's White Paper that provides for regional compacts because it could

create yet another bureaucracy governing our industry. RTOs are emerging as regional planning entities. Establishing yet another regional bureaucracy would be counter-productive.

It made sense in 1935 when the Federal Power Act was adopted to leave transmission siting authority with the states, since transmission lines were generally local in nature. Now, however, our transmission system is being asked move large amounts of energy across long distances and across state lines. Under these circumstances, it could be increasingly difficult to obtain the necessary siting permits from affected states, which may receive few direct benefits and thus have little incentive to approve construction.

Under this proposal, FERC would be given the authority to issue a certificate of public convenience and necessity for a transmission line. Eminent domain authority will rest with the holder of the certificate. Electric utilities that are issued such certificates by the states also may exercise the power of eminent domain if they are unable to acquire the rights-of-way through other means.

Federal electric utilities that own transmission, including the Tennessee Valley Authority, Bonneville Power Administration and the other power marketing administrations, already have such authority. In addition, FERC has this authority for transmission for hydroelectric facilities. Innovative Pricing

Current returns on transmission are too low to attract the huge amounts of capital needed to fund investments in transmission expansion. A comprehensive national energy policy should include direction to FERC to utilize innovative transmission pricing incentives, including rates of return more appropriate with the higher levels of investor risk in a restructured electricity industry. These incentives must be available to all transmission owners; not just to owners who have made transmission improvements and not just to RTO operators - which is the current

FERC policy. The Cheney Task Force Report called for DOE to work with FERC to encourage the use of incentive ratemaking proposals.

Reliability

As NERC testified recently before this Committee, it is seeing increasing violations of its reliability rules. A voluntary reliability regime lacks the enforcement authority needed in a competitive electricity market. A comprehensive national energy policy should include

provisions to establish a self-regulating reliability organization, with FERC oversight, to develop and enforce reliability rules and standards that are binding on all market participants. We are extremely pleased that the Chairman's White Paper, S. 388, and S. 597 include these provisions and that the Cheney Task Force Report calls for such legislation. This Committee approved and the Senate passed a similar bill last year.

PUHCA

As I mentioned earlier, PUHCA also acts as a barrier to the formation of interstate independent transmission companies. Shareholder-owned utilities and FERC are working quickly to meet FERC's goal, established in Order No. 2000, of having RTOs operational by the end of 2001.

PUHCA is an impediment to this effort. An RTO could be required to become a registered holding company and subject to PUHCA restrictions and additional regulation. As our companies attempt to raise financing for these newly formed RTOs, they are discovering that PUHCA's restrictions are a significant concern to Wall Street firms and a barrier to investment. Federal Lands Issues

A comprehensive national energy policy should provide for the coordination of transmission siting activities among multiple federal land management agencies. FERC should

be designated as the lead agency for any environmental analysis necessary to site transmission lines. A FERC decision to grant a transmission line a certificate of public convenience and necessity should be conclusive as to the need for the facility for the purposes of any other permits that might be necessary to build the line. A comprehensive national energy policy also should include provisions to help reduce delays associated with transmission permit processing and approval by requiring federal land management agencies to develop and implement uniform regulations and practices to utilize qualified third-party contractors to assist in these responsibilities.

Transmission Tax Issues

A number of tax law changes are critical to expanding our transmission infrastructure. Chairman Bingaman's White Paper correctly highlights the need for changes to the tax code to expand our transmission infrastructure. Also, we commend Senator Murkowski for including in S. 389 the tax compromise agreement reached between EEI, LPPC and APPA last year. This agreement would (1) grant "private use" relief for government-owned utilities that provide open access to their transmission systems, (2) grant tax relief for the sale or spin-off of transmission facilities to form FERC-approved RTOs or independent transmission companies that are part of a FERC-approved RTO, (3) allow continued contributions to nuclear decommissioning trust funds in a restructured electricity market and (4) remove the tax on contributions in aid of construction.

We also support the provisions included in both S. 389 and S. 596 that would shorten the depreciable life for transmission facilities. Chairman Bingaman's White Paper addresses these issues as well, though the tax relief is limited to spinoffs of transmission systems; it should cover sales as well.

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(4) Enhance Energy Efficiency and Conservation

Wise energy use and improved energy efficiency and conservation can reduce demand for energy and can help lower consumers' energy bills. Today, the U.S. economy uses 42 percent less energy to produce one dollar of gross domestic product when compared to 1970 energy intensity levels. However, there still is obvious room for improvement, beginning with public sector facilities.

I would like to call the Committee's attention to the conservation and efficiency provisions in legislation passed in the last two weeks by the House Energy and Commerce and Ways and Means Committees. They have broad support in both the utility and conservation/efficiency communities.

New metering technologies that enable consumers to respond to variable energy prices can help reduce energy costs and consumption. Utilities are working closely with their customers, particularly larger energy users, to install real-time meters so consumers will know when to reduce or modify their energy usage to help reduce peak demands for electricity. We also support tax incentives for real-time metering, as contained in H.R. 2511, the Energy Tax Policy Act of 2001.

The federal government is the largest single user of electricity in the world. Utilities work closely with their federal customers to improve their energy efficiency. S. 388 includes provisions specifically intended to help achieve this goal. The Cheney Task Force Report also calls for reducing energy use in federal facilities. EEI believes that any legislation to promote greater energy efficiency in federal facilities should ensure the continued viability of utility incentive programs as well as Energy Savings Performance Contracts (ESPCs). Section 605 of S. 388 would continue this policy as well as enhance it.

We support including provisions in a comprehensive energy bill to establish a federal grants program to local school districts to improve energy efficiency of school buildings. Both S. 388 and S. 597 contain such provisions.

We support the inclusion of provisions to expand and extend the authorization for state energy conservation programs, as called for in S. 388. In addition, we support federal funding for enhanced research and development programs, as outlined in S. 597. And, while tax issues fall outside of this Committee's jurisdiction, we also support tax incentives to purchase energy efficient homes, appliances and vehicles.

The Cheney Task Force Report calls for increasing public awareness of Energy Starlabeled products and for expanding the scope of appliance standards programs, where appropriate. We support both of these initiatives.

Many of these issues are included in the Chairman's White Paper; we would be pleased to work with the Committee staff to help develop specific proposals for the Committee's consideration.

(5) Protect Lower Income Consumers

We believe comprehensive energy legislation should expand and increase funding for the Low Income Home Energy Assistance Program (LIHEAP). We are pleased that S. 388 and S. 352, introduced by Chairman Bingaman, call for increased funding for the LIHEAP program. In addition, the Chairman's White Paper and the Cheney Task Force Report both call for a higher funding level for LIHEAP.

Similarly, funding for the low-income weatherization assistance program should be increased to assist low-income families with lowering their energy bills through increased energy

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efficiency and conservation. Again, S. 388, S. 352, the Chairman's White Paper, and the Cheney Task Force Report support additional financial support for this program.

Conclusion

Our country needs a comprehensive national energy policy. The bedrock principle upon which the policy should be based is the encouragement of competitive electricity markets. Action is needed to ensure our country has affordable and reliable electricity for years to come. Congress has been debating electricity issues for six years. In the meantime our Nation's electricity infrastructure has not kept pace with the growing demands of our new economy. California's woes have clearly sounded an alarm bell that must be heeded by the Congress. The time to act is now. We look forward to working with this Committee to achieve these objectives.

I would be pleased to answer any questions the Committee may have.



LOAD-DATE: July 26, 2001