SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 5752 words

COMMITTEE: SENATE ENERGY AND NATURAL RESOURCES

HEADLINE: NATIONAL ENERGY POLICY

TESTIMONY-BY: ROY THILLY, CHIEF EXECUTIVE OFFICER OF

AFFILIATION: WISCONSIN PUBLIC POWER, INC.

BODY:
July 25, 2001

Statement of

Roy Thilly, Chief Executive Officer of Wisconsin Public Power, Inc. On behalf of the American Public Power Association

Hearing on "Legislative Proposals Relating to Comprehensive Electricity Restructuring Legislation" Senate Energy and Natural Resources Committee

Thank you, Chairman Bingaman and Ranking Member Murkowski. On behalf of the

American Public Power Association, I am pleased to appear today to discuss electricity restructuring.

I am the Chief Executive Officer of Wisconsin Public Power, Inc., and past Chair of the APPA Board of Directors from June 1999 through June 2000. APPA represents the interests of more than 2000 publicly owned electric utility systems across the country, serving about 40 million customers. APPA member utilities include state public power agencies and municipal electric utilities that serve some of the nation's largest cities. However, the vast majority of these publicly owned electric utilities serve small and medium-sized communities in 49 states, all but Hawaii. In fact, 75 percent of our members are located in cities with populations of 10,000 people or less. Public power systems' first and only purpose is to provide reliable, efficient service to their local customers at the lowest possible cost. Public power exists for a purpose, not a profit. Like hospitals, public schools, police and fire departments, and publicly owned water and waste water utilities, public power systems are locally created governmental institutions that address a basic community need: they operate to provide an essential public service, reliably and efficiently at a reasonable, not-for-profit price. Publicly owned utilities also have an obligation to serve the electricity needs of their customers. And, because they are governed democratically through their state and local government structures, public power systems operate in the sunshine, subject to open meeting laws, public record laws and conflict of interest rules. Most, especially the smaller systems, are governed by an elected city council, while an elected or appointed board independently governs others. Democratically governed, not-for-profit, obligation to serve - the importance of these unique characteristics has been highlighted by the recent events in the West. Under California's restructuring law, public power was able to retain its obligation to plan for and serve the electricity needs of our consumer- owners. As a consequence, municipal utilities retained their power plants dedicated to serve native load customers, and they engaged in long-range planning to satisfy demands that exceeded their own generation resources. This gave public power utilities the ability to mitigate market risk for their customer-owners.

Understanding the underlying structure and mission of public power is essential in crafting balanced electricity legislation that will maintain industry diversity. This diversity has helped many public power communities in the West endure the electricity crisis with bumps and bruises rather than broken bones. We believe the entire nation has been well

served by this diverse mix of publicly, privately and cooperatively owned utilities combined with federal institutions including the Tennessee Valley Authority and the federal power marketing administrations. In restructuring our industry, every effort should be made to ensure the preservation of this diversity.

Wholesale Competition First - the Role of the Federal Government

The rush to restructure the electric utility industry in several states has truly put the cart before the horse. Retail choice programs adopted by states and localities cannot succeed without truly competitive wholesale markets. (This is certainly one of many lessons learned from what has happened in California.) The fundamental characteristics of a competitive market include, among other things: access of buyers to numerous sellers; mitigation of market power; ease of entry into the market for new participants; a sufficient number of participants to impose discipline on all; and transparency of information.

APPA has supported legislative efforts to make the wholesale electric market more competitive for decades. APPAwas one of the major supporters of the transmission access provisions of the Energy Policy Act of 1992. On numerous occasions over the past few years, we have testified in support of additional legislation to ensure that the promises of wholesale competition become reality. In our view, comprehensive federal restructuring legislation must, at a minimum, achieve the following objectives:

Promote more effective wholesale competition by providing sufficient federal authority to ensure non-discriminatory access to regional transmission facilities at fair and comparable rates.

Promote the maintenance and expansion of the nation's transmission facilities including, where necessary and subject to appropriate limitations, the exercise of federal eminent domain authority.

Establish policies to maintain the reliability of the nation's electricity industry through competitively neutral means.

Eliminate market power in generation and transmission by: 1) Providing for truly neutral management of the nation's transmission system - allowing for federal oversight to ensure RTO development, independence and effectiveness, 2) Clearly articulating FERC's role in monitoring the wholesale market, directing FERC to investigate and mitigate market power, and enhancing its power to accomplish this difficult task, and; 3) Strengthening FERC's merger review process to allow for consideration of a proposed merger's impact on the development of competition.

Eliminate the tax-related impediments to competition for municipal utilities imposed by the private use restrictions on tax-exempt bonds while retaining local control over municipal decisions.

Consider changes to PUHCA only in the context of providing reasonable substitutes to protect consumers and promote competition.

APPA Comments on Chairman Bingaman's "WMte Paper on Electricity Legislation"

APPA believes that Chairman Bingaman's White Paper memorandum of July 20, 2001, represents an excellent starting point for industry restructuring legislation. Many of the principles are absolutely essential to the creation of truly competitive wholesale markets.

The remainder of my testimony will focus on these topics following, for the most part, in the order in which they are delineated in the white paper. I will reference existing legislation as appropriate.

Transmission Jurisdiction

Local control is one of the most fundamental aspects of public power. However, it is difficult to envision effective wholesale markets, which, as noted, APPA strongly supports, without some degree of federal involvement in public power transmission that is part of the regional grid. APPA members have struggled with the problem of balancing the retention of local control with the recognition that transmission is a matter of interstate commerce.

The White Paper recommends that "FERC [transmission] jurisdiction should be extended to public, cooperative and federal utilities. Such jurisdiction should not extend to setting transmission rates for these entities, but should require that rates set by these transmitting utilities should be comparable to those that the public power utilities charge to themselves." While publicly owned utilities with transmission facilities are not anxious to be subjected to FERC jurisdiction, the limited jurisdiction contemplated in this portion of the White Paper is an acceptable compromise and is consistent with a resolution adopted by APPA in 1998.

The White Paper states that "[1]egislation should affirm FERC's authority to order utilities to join regional transmission organizations." Presumably, this authority would extend to all "transmitting" utilities regardless of ownership. For the most part, publicly owned utilities have been anxious to participate in RTOs that are consistent with the specific criteria set forth by FERC in Order No. 888. In fact, FERC commissioners and various FERC orders have specifically addressed public power participation, not to encourage public power systems to join but rather to encourage private utilities to let them join on fair and reasonable terms.

FERC has indicated that it believes it currently has the authority to order jurisdictional utilities to participate in RTOs, and we agree that Congress should affirm this authority. FERC should be required to condition market-based pricing for jurisdictional utilities on becoming part of a large, regional RTO.

It is not clear from the White Paper whether FERC authority to order RTO participation would apply only to jurisdictional utilities, or whether this would extend to publicly owned utilities as well. If the latter, then deference should be provided to publicly owned utilities, similar to the restraints on FERC jurisdiction over transmission noted above. Specifically, APPA recommends that FERC authority to order publicly owned utilities to join a regional transmission organization should be limited to situations in which FERC finds that (1) the publicly owned transmission owner has (a) engaged in undue discrimination in the provision of transmission services, or (b) abused its control over transmission so as to disadvantage competitors; and (2) that the FERC open access transmission tariff has not and is not likely to remedy the problem. In such cases, APPA agrees FERC should be authorized to require the publicly owned utility at issue to surrender control of its transmission to an independent regional transmission organization that meets FERC RTO criteria. We also believe Congress, in clarifying FERC's authority to order utilities to join RTOs, should take into consideration the cost consequences of such action. Clearly, RTOs should decrease, not increase, total transmission costs. Cost shifts and increases have been a very significant problem for public power systems in California. Obviously, it would be imprudent for a public power system, which has financed transmission with public funds, to join an RTO that will significantly increase the cost of power to its customers. Some cost shifting may be inevitable, but any FERC action in this area should be premised on the principle that adverse cost consequences for utilities ordered to join RTOs should be held to the minimum possible, and this is particularly important with respect to public power systems that have constructed their facilities with public funds.

The White Paper also recommends clarification of the Federal Power Act to ensure that "FERC has jurisdiction over all transmission, whether bundled or unbundled. Once jurisdiction has been clarified, the Commission can use its existing legal authority [to] determine which facilities are transmission in interstate commerce and which are distribution facilities and thus state jurisdictional." (We assume that "state jurisdictional" includes "local jurisdictional" in the case of publicly owned utilities.) In some respects, this statement is similar to H.R. 2944, legislation reported from the House Subcommittee on Energy and Power in the last Congress. That measure authorized FERC to determine whether particular facilities were transmission or distribution based on function. We supported that aspect of H.R. 2944. We disagreed with another aspect of the same section of H.R. 2944 because, while it attempted to establish a bright line between federal and state regulatory jurisdiction, it compromised FERC jurisdiction by failing to allow sufficient FERC regulation over the transmission component of bundled retail sales.

We support the clarification of interconnection rules suggested in the White Paper including a sufficient reservation of local authority to address system-specific issues. Not addressed here, however, is the issue of who bears the cost of interconnection. We are concerned over a possible trend to shift onto the bulk power grid costs that should be borne by generation owners. We do not believe it is appropriate to force all users of the interstate grid to assume interconnection costs driven by the decisions of individual generators.

It is not clear whether the provisions in the White Paper would apply to utilities within Electric Reliability Council of Texas (ERCOT). FERC does have limited jurisdiction over utilities in ERCOT under section 211. The need for further expansion of FERC jurisdiction over ERCOT utilities is not readily apparent, at least until ERCOT is interconnected through AC facilities with other regions. APPA's policies with respect to FERC jurisdiction have generally been adopted with the understanding that they would not apply to ERCOT unless or until public utilities in that region become jurisdictional through interconnections.

Reliability

APPA urges the Committee to require mandatory involvement by all industry participants in a national compliance program to ensure continued reliability of the high voltage electric transmission grid. The Administration's National Energy Policy report also calls for enactment of mandatory reliability standards by an independent body and overseen by

FERC to "address the problems created by increased demands on the transmission system that have resulted from changes within the industry brought on by wholesale competition." In their respective energy policy bills, Chairman Bingaman and Ranking Member Murkowski have included reliability language supported by APPA and other industry stakeholders.

Even though the United States has the most reliable electric system in the world, the crisis in the West has demonstrated the delicate balance between reliability and the markets within which the electric grid must operate. Consequently, great care needs to be taken to ensure that the current level of reliability is not sacrificed in any restructuring of the industry. As the industry has become more competitive, more participants have been executing an increasingly larger number of transactions every day. The focus of most of these transactions is on short-term costs rather than system stability. While the current voluntary system of compliance with reliability standards worked reasonably well in the regulated environment in which the industry previously operated, it will not continue to provide the necessary safeguards in a competitive market.

Currently, reliability standards are established and monitored by the North American Electric Reliability Council (NERC), which is a non-profit organization that monitors the electric utility industry's voluntary compliance with policies, standards, principles, and guides, and assesses the future reliability of the bulk electric systems. The NERC Board of Trustees has approved and begun the transformation of NERC to the North American Electric Reliability Organization (NAERO), in which participation and adherence to standards and practices would be mandatory. Federal legislation is required to give

NAERO the enforcement tools necessary to ensure compliance and achieve a system that properly balances reliability with market pressures and decisions. An industry-wide effort to forge a compromise on such legislation resulted in the language being advanced by the Chairman and Ranking Member and by Members in the House.

APPA has worked actively on the NERC consensus proposal, and we continue to support it. However, we could also support simplifying that proposal so long as the basic tenets are adhered to. We do have concerns about reliability being delegated exclusively to RTOs, some of which may be for-profit entities, that would not only set the rules, but must comply with them.

An item of particular importance to APPA in the consensus reliability legislation is a sentence developed during negotiations in late 2000. The sentence would clarify that FERC is granted oversight authority over public power systems in the regulatory title only for the purposes of enforcement of reliability standards. Public power systems support oversight with regard to reliability standards but this provision should not be used by FERC to impose additional regulation at a later date. Through an oversight, this sentence was not included in reliability legislation pending in Congress. We would appreciate it if the sentence were added to your draft bill.

Rates and Market Power, Market Transparency Rules and PUHCA

We have combined three different areas of the White Paper to address in this portion of our testimony because, from our perspective, they are interrelated and all must be addressed to achieve the goal of workably competitive wholesale markets. Here again, we believe there are some extremely important lessons to be learned from California. These include:

-Market structure is critical to market performance.

-Market power is a very real problem that must be addressed.

-Markets need rules and market monitors to enforce them.

-Market monitors need data.

There are many aspects of the White Paper that we endorse. We agree that, where feasible, "legislation should require the FERC to promote competitive markets." From our perspective, however, the paramount role of a regulatory agency must be to protect the public interest and the interests of consumers. Competition is a means to this end, not the end itself. In California and throughout the West over the last year, we believe FERC was so focused on promoting competition that it completely lost sight of its obligation to permit only just and reasonable wholesale rates, and its responsibility to ensure consumers were protected from abuses of market power. We hope that, in clarifying FERC's mission, Congress will provide that, first and foremost, FERC must protect the public interest and the interests of consumers.

We support the proposition in the White Paper that, if markets are allowed to set rates, FERC must ensure that such markets are workably competitive. This begs the question, however, with respect to the methodology used to make such a determination, and also doesn't specify how rates should be established in markets that are not competitive. APPA believes market based rates for jurisdictional utilities should only be approved on a finding that the applicant will not possess market power and that effective and sustainable competition will exist in that market. The analysis must include an examination not only of the resources available to individual applicants and whether such assets could be used to set the market clearing price, but also of the effect of transmission constraints and how those assets fit into the broader market structure. Location-specific constraints must be taken into account, as should requirements for grid reliability. Further, and frequently ignored in traditional market analysis, is the time-sensitive nature of electricity. In some markets, an entity controlling a very small amount of generation can exercise market power.

FERC should be given other "tools" in addition to those it already has to address market power problems. It should, for example, require jurisdictional utilities to submit market power mitigation plans for approval or modification. Its merger review process should be revised to require that merger approval be granted on an affirmative finding that the proposed merger is in the public interest as opposed to the current standard which only requires that the merger be consistent with the public interest. In reviewing mergers, FERC should be required to consider whether they will promote effective wholesale competition, or undermine it.

FERC should also have the authority to require shared access to essential assets, including reserve/risk sharing mechanisms, on a nondiscriminatory basis and with just and reasonable rates. Further, FERC should be able to preserve the integrity of the market through preliminary relief in order to prevent irreparable harm pending issuance of a final order.

The White Paper states that "all sellers (which we assume includes public power sellers) into such [competitive] markets should be clearly subject to market rules and market mitigation measures ordered by the Commission. It should be made clear that normal transactions, not into market-based rate setting institutions, by public power entities should continue to be non jurisdictional." As consumer-owned utilities, APPA's members certainly believe that no market participant should be able to abuse market power to the detriment of end users. Until the debacle in the West, application of this principle to public power systems in wholesale markets has not been an issue, and therefore this specific issue has not been addressed by APPA. However, publicly owned utilities in California and elsewhere in the West have stated that they would voluntarily abide by market rules applicable to jurisdictional utilities. The exclusion for "normal" transactions is clearly appropriate, but the extent to which sales by public power systems into market institutions would be subject to FERC oversight is unclear and could be problematic. APPA is confident that, if FERC clearly defines in advance the rules applicable to jurisdictional utilities who are responsible for the vast majority of all such transactions, public power systems will live within that framework without the need for any expansion of FERC jurisdiction.

As this particular element of the White Paper is given additional consideration, it is important for members of the Committee to keep in mind that publicly owned utilities are units of local government. They have their own unique set of legal requirements imposed by state and local laws as well as under contracts or, more specifically, bond covenants. Accounting principles, that apply to governmental entities are not the same as those that apply to private, for-profit corporations. Power sold, whether through bi-lateral contracts or into the spot market, is publicly owned property. Public power systems have a fiduciary responsibility to ensure that they and their customer-owners receive reasonable compensation.

The White Paper notes that "legislation must ensure transparent information on market transactions and should grant clear authority to the Energy Information Administration and the FERC to collect and publish appropriate data, while protecting proprietary information." APPA agrees and strongly supports this proposition with the important clarification that "proprietary information" warranting protection must be narrowly circumscribed. APPA would, in fact, encourage that congressional direction be absolutely clear that data must be collected and made public. Claims of confidentiality of data based on commercial sensitivity are already being made to limit data collection or dissemination. There is a danger that commercial sensitivity arguments will completely undermine the legitimate right of the public to this data. Transparency of market information is a fundamental prerequisite of competitive markets and necessary to protect consumers. (We would note that disclosure is required under the security laws, and such disclosure has had a salutary effect on the markets. If the SEC's rules did not exist today, almost every company that is subject to SEC regulation would claim that much of the information they are required to disclose today is in fact proprietary.) Congress should be very clear in telling EIA and FERC that close calls should be resolved in favor of transparency, not secrecy.

We believe consideration of PUHCA repeal should logically be undertaken within the context of the discussion of market power. This is recognized within the White Paper, which states that PUHCA should be repealed "only if FERC is given enhanced authority to address market power problems, and both FERC and the states are given greater access to the books and records of holding companies to prevent affiliate abuses."

While these are appropriate pre-conditions to PUHCA repeal, APPA does not believe they are sufficient.

In addition to the recommendations regarding authority for FERC to address market power issues, APPA would recommend specific authority for FERC to review mergers of utility holding companies as well as the disposition of generation assets by jurisdictional utilities and acquisition of natural gas companies. The FERC lacks the clear authority to review the former. While we believe it has the authority and responsibility to review the latter, it has recently declined to do so. This action has come at precisely the same time that utilities and utility holding companies are swapping assets like trading cards. A utility with a significant presence in generation in one region sells those assets, then buys similar assets in another region. Such transactions can clearly lead to the concentration of significant amounts of generation in specific geographic markets, yet no one is examining what consequences these asset trades will have on competition.

FERC and state commission access to books and records of holding companies to prevent affiliate abuses is an inadequate substitute for the protections provided consumers, state commissions and others under PUHCA. As a practical matter, many state commissions don't have the resources to examine the books and records of today's extremely complex utility holding companies and all of their subsidiary companies. And even if they do, it isn't clear what remedies they can impose when the keeper of the funds - the parent holding company - may exist outside of the jurisdiction of specific state utility commission.

Advocates of PUHCA repeal have argued that the statute is no longer necessary, that it is redundant with other statutes, and, incredibly, that it is an impediment to competition. S. 206, the Public Utility Holding Company Act of 2001, reported out of the Senate Banking Committee earlier this year, provides, in the statement of findings and purposes, the following:

-Developments since 1935, including changes in other regulation and in the electric and gas industries, have called into question the continued relevance of the model of regulation established by that Act.

-Limited Federal regulation is necessary to supplement the work of State commissions for the continued rate protection of electric and gas utility customers.

The Attorney General of California strongly disagrees with these two statements. Earlier this month, he filed a petition with the Securities and Exchange Commission (the agency with responsibility to enforce PUHCA) for review and revocation of PG&E Corporation's exemption from PUHCA. As stated in the petition "PG&E Co. [the electric operating utility] has now filed for bankruptcy after upstreaming billions of dollars from the utility to the utility holding company - the precise type of behavior identified in PUHCA as a primary basis for the law." He concludes his petition as follows: "All of the primary evils addressed by PUHCA are relevant to PG&E Corp. [the utility holding company], including movement of capital and assets from its utilities to the holding company and affiliated, wholly-owned subsidiaries as well as massive investments in out-of-state nonutility activities and properties. The Commission has the chance, indeed the obligation, to address potential holding company abuses by PG&E Corp. before additional damage is done. The current crisis in California has been a catalyst for closer scrutiny of federal and state regulation of the utility industry. This crisis highlights the fact that Commission enforcement of PUHCA is still needed."

Clearly times have changed since PUHCA was enacted in 1935. Utilities have changed. Human nature hasn't. The abusive practices that gave rise to PUHCA 65 years ago have been more difficult to accomplish, because of the existence of PUHCA's restraint on corporate structure and behavior, but have not disappeared entirely. It may be that some elements of PUHCA need to be revised. But the opportunity for the California Attorney General, and perhaps others similarly situated in the future, to have a forum at FERC or the SEC in which they can examine the financial transactions within a monstrously complex interstate holding company structure to determine whether electric consumers have been abused, must not be eliminated.

Regional Planning and Siting

APPA supports federal eminent domain authority to form a more cohesive and functional national approach to the expansion of the transmission grid. The more certainty that exists in transmission, the better our members are able to serve their customers. However, permitting private parties to use this extraordinary tool of government should be undertaken very carefully, permitting the maximum possible involvement of state and local governments. It could, for example, be a last resort remedy. It should also be exercised in a manner that ensures the optimal expansion of the grid, which will require regional transmission planning. Finally, facilities constructed when this authority is exercised must be dedicated to serve the general public interest, including the lowest reasonable rates for transmission service. We believe that the White Paper's suggestion that regional siting compacts be authorized and encouraged is definitely worth pursuing. These compacts should recognize RTO orders and regional needs. FERC should be available as a backstop if states do not deal with siting issues jointly on a regional-needs basis.

Other Provisions

APPA offers the following comments with respect to the "other provisions" in the White Paper.

1) Repeal PLTRPA!s mandatory purchase requirements with certain replacements - interconnection standards for distributed generation. APPA does not oppose the repeal of PURPA's purchase requirements, so long as stranded cost recovery is addressed using FERC's current process. APPA strongly supports increased use of distributed resources and efforts at the federal level to promote such use. We therefore encourage the committee to pursue legislative language on transmission and distribution interconnection policies that provide FERC the authority to order the use of standardized technical interconnections while at the same time preserving local authority to require any additional measures necessary for system reliability, safety, or other factors deemed to be in the public interest. A positive step has been taken with the introduction of S. 933 by Senator Jeffords, which for the first time addresses the concern of local utilities.

2) Incentives for renewable resources. In preparing its recently- published report on public power's renewable profile, entitled "Shades of Green," (copies of which were previously sent to all members of this Committee) , APPA discovered that public power systems have a higher proportion of renewable, non-hydropower generation than other segments of the industry - but we still have more work to do. APPA therefore applauds the idea of creating market-based incentives for all segments of the industry. I'll discuss comparable incentives for public power systems in the section on tax provisions below.

3) Public Benefits Fund.APPA believes such programs are better suited to state and local initiatives as opposed to federal legislation.

4) Tax Provisions. An area of great importance to public power systems is their treatment in the tax code. Tax exempt bonds issued to finance generation, transmission and distribution facilities owned by public power systems carry with them restrictions on the amount of private use allowed for those facilities. While sound tax policies warrant certain restrictions on private use of public facilities, such policies must change with changing times. These private use restrictions, which were manageable several years ago, are now unreasonable in the new competitive environment and need to be modified to conform to the goal of enhancing greater competition. The restrictions are contrary to the goals of the Energy Policy Act of 1992. The public power community and the Investor Owned Utilities have worked together to come up with language to remedy this situation and certain tax code problems that they are encountering as a result of industry changes. Ranking Member Murkowski has taken the lead to address this problem with his bill, the Electric Power Industry Tax Modernization Act, S. 972, which provides greater flexibility to publicly owned utilities to accommodate industry changes. APPA sincerely appreciates Senator Murkowski's leadership on this issue. We hope that the Finance Committee will act soon to address this vital issue.

Finally, I would like to mention one other tax related issue. It is clear that additional generation is needed in this country. It is also clear that such generation should come from non- traditional renewable energy sources as well as from better and cleaner utilization of our nation's most abundant resource, coal. Traditionally, Congress has turned to tax credits to provide incentives to industry to achieve socially desirable goals. If the goal is to promote renewable energy and clean coal technology development and utilization by the electric utility industry, then incentives must be provided that work for all elements of the industry. Tax credits can be utilized by IOUs, which serve about 75 percent of the nation's electric consumers, but cannot be used by not-for-profit publicly and cooperatively owned utilities that serve the balance. As a policy matter, it seems to make little sense to refuse to provide comparable incentives to ensure that 100 percent of the nation's utilities are encouraged to develop these resources. We have recommended "tradable tax credits" for publicly and cooperatively owned utilities. These tradable credits could be sold to tax paying entities at a discount to help then reduce their own tax liability. This concept has been developed by municipal public power systems and the rural electric cooperatives and is supported by the entire electric utility industry. APPA commends Chairman Bingaman for including tradable tax credits language in his comprehensive bill S. 597. We hope this proposal receives favorable action in the Senate Finance Committee.

Thank you again for inviting me to testify and I will be happy to answer any questions you may have.



LOAD-DATE: July 26, 2001