SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 2469 words

COMMITTEE: SENATE ENERGY AND NATURAL RESOURCES

HEADLINE: NATIONAL ENERGY POLICY

TESTIMONY-BY: STEPHEN WARD, PUBLIC ADVOCATE,

AFFILIATION: STATE OF MAINE

BODY:
July 25, 2001

Testimony of

Stephen Ward Public Advocate, State of Maine And President The National Association of State Utility Consumer Advocates

Before the Committee on Energy and Natural Resources Senate of the. United States

Chairman Bingaman, distinguished members of the Committee on Energy and Natural Resources: I am Stephen Ward and have served since 1986 as Maine's Public Advocate representing utility consumers before Maine's Public Utilities Commission, before FERC, the FCC and the courts. I also have served since March of 2000 as President of NASUCA, the National Association of State Utility Consumer Advocates. NASUCA consists of organizations charged by statute with the representation of utility consumers and currently has members in 40 states. I also serve as an appointed member of NERC's Market Interface Committee. It is an honor and a privilege to appear on this distinguished panel and I thank you for the extending this invitation to NASUCA and its 43 member offices for whom I am testifying today. Just since April of last year when I testified on behalf of NASUCA before this Committee, NASUCA's representatives have testified on four occasions before committees of the House or Senate on matters pertaining to electricity restructuring. We are very happy to be invited once more to provide the consumer's perspective at these hearings, as I will attempt to do again today. In April of 2000 in my testimony before this Committee, I presented NASUCA's "Consumer Checklist" of necessary safeguards in any federal restructuring legislation. Because of turnover on this Committee I thought it might be useful to provide a copy of the "Consumer Checklist," which is attached to this testimony.

The Chairman's White Paper on Electricity Legislation seems to me to an auspicious start in the process of marking up comprehensive energy legislation. That is because the White Paper takes a broad overview of the history and current functioning of utility electricity markets, focusing as much on the forest as the trees. This is appropriate in the case of a commodity like electricity that has so many unique characteristics. Unlike virtually any other commodity, it cannot be stored and therefore must have production match usage in every moment of the day. Electricity is a commodity that, over the years, has been heavily freighted with the public interest, benefiting from the exercise of eminent domain in the construction of its transmission lines and being subject to multiple expectations for affordability, for low- income support and for protections against disconnection. But most importantly, electricity is a commodity which virtually every citizen, every family, every business depends on as a necessity of life. For all of these reasons, it makes great sense to proceed cautiously and with great care in undertaking fundamental changes in this industry, by means of federal legislation. I urge you not to hurry as you take up this task.

The White Paper also provides a very convenient framework for discussion and analysis of key issues, laying out the issues in several general areas (including "Other Provisions" and "Tax Provisions"). Since many of these issues correspond to proposals that have been debated by NASUCA's membership in 40 states around the country, I can provide commentary on some of the White Paper's proposals from NASUCA's perspective. In other cases, NASUCA has adopted no resolution that is directly germane to a proposal in the White Paper. In such cases, I will note the absence of a NASUCA Position.

Since 1986, NASUCA has adopted 16 resolutions that directly address the restructuring of the electricity industry and the creation of competitive choices for consumers - large and small. Of these sixteen resolutions, ten directly address desirable or necessary features of federal law or regulation, as opposed to policy proposals that are entirely within the scope of state jurisdiction. Probably the most vexing aspect of any effort to transform a system of vertically integrated utilities into a system relying in part on competitive markets, it seems to me, is the inter-mixture of state and federal responsibilities. As the Committee is fully aware, aspects of the electric industry (such as retail pricing) have been entirely under state jurisdiction since the first decades of the last century. It is equally so that, since enactment of the Federal Power Act in 1935, other aspects (such as interstate transmission pricing) have been completely under federal jurisdiction. Any comprehensive effort to restructure this industry must tread lightly on these jurisdictional dividing line.

The White Paper proposes to reconfigure jurisdiction over all transmission-related questions so as to make FERC's jurisdiction pre-eminent. For a near-majority of states today where transmission rates are bundled together with distribution and generation rates, however, this proposal does represent a departure from the status quo. NASUCA has no formal resolution addressing the question of whether bundled transmission prices should be set by FERC in a way that pre-empts state action. Due to the multiplicity of views within NASUCA, on the part of states like Maine that have undertaken comprehensive restructuring and as well for states in low cost regions that have no incentive to restructure, it is doubtful that NASUCA will ever adopt a final view as to whether FERC authority over transmission should properly supercede state authority. In any event, I won't offer one today.

Similarly NASUCA has no formal position as to whether public, cooperative and federal entities like TVA, REA cooperatives and marketing authorities should be subject to FERC oversight under the Federal Power Act. Speaking just for myself, however, it appears to me to be difficult to establish workable protections against market power and against malfunctions that jeopardize the reliability of the grid without establishing broad and consistent authority within FERC across all types of utilities - public and private. NASUCA has taken a strong stance in favor of granting FERC authority to require electric utilities to join Regional Transmission Organizations and, to the extent possible, enabling public entities like TVA likewise to participate in the operation of regional RTO's. A NASUCA resolution, adopted two years ago, recognizes the primacy of FERC jurisdiction over RTO development but urges collaboration with state PUC's in formulating common agendas for managing transmission congestion and developing new transmission facilities.

With respect to the reliability proposals in the White Paper, NASUCA has strongly supported the creation of an independent NERC (North American Electric Reliability Council) that is not dependent on the short-term preferences of any user of the transmission system. With NARUC and other parties, NASUCA has endorsed the stand-alone NERC legislation that is pending before Congress. In a 1998 Resolution, NASUCA unanimously supported enactment of "federal legislation that would clarify FERC authority to review the reliability requirements imposed by NERC (or any successor national organization) and to ensure that such requirements are adopted and implemented in a manner that benefits all consumers." Key among the interests that NASUCA has advanced in three of its resolutions is the principle that for RTO's, for ISO's and for NERC, Congress or FERC should assure the operational independence of grid managers from players in national and regional electric markets. One good reason for guaranteeing this independence is to enable grid managers to act impartially with sanctions and penalties, as an enforcement entity in the event of malfeasance or grid disruption - rather than merely as a scheduler of transaction in a regional market. For this reason I applaud the White Paper's suggestions on this point.

The White Paper's third major area addresses "Rates and Market Power" and does so in a manner that, to me, may be too optimistic in endorsing market-based outcomes. This section of the White Paper doesn't appear to focus on what is unfortunate reality today: competitive markets are not generating just and reasonable prices in many hours of the year in Western markets, and in some hours of the year in New York and New England markets. In view of the price spikes and blackouts that have plagued California, I think it is premature to base a discussion of rates and market power entirely on the hope that markets can be made workably competitive. NASUCA addressed these issues in a resolution adopted at its mid-year meeting last month. That resolution urges FERC not to rely on market-based rates in situations where markets are not functioning adequately but, instead, to use its powers under the Federal Power Act to set just and reasonable rates based on a cost analysis or oher appropriate means of mitigation. In essence, the resolution urges FERC not to accept the prices produced by any market as necessarily just and reasonable but to investigate for evidence of market power and marketing anomalies. Possibly the difference between NASUCA's position and the White Paper is a question of degree, or merely a matter of emphasis but, to my mind, this nuance is an important one.

The final portion of the "Rates and Market Power" section concerns market mitigation measures as ordered by FERC. We agree that market mitigation (i.e. following up on evidence of market power or of marketing anomalies with a formal investigation and, where warranted, an enforcement action) is a critical aspect of discipline that keeps bidders honest and helps markets function. To my mind, this mitigation function is a key aspect of ISO operations, and shouldn't necessarily reside at FERC rather than in the regions. At present, both ISO-New England and the New York ISO have authority to reset any price that is excessive or that results from market power. I don't think it makes sense to take away such authority as already exists.

With respect to regional planning and siting, NASUCA has no specific resolution that addresses the exercise of eminent domain for a project under federal jurisdiction. As a general matter, it makes great good sense to promote the coordination of state and federal siting authority, wherever possible. But I doubt that NASUCA's members would endorse the proposal that FERC receive eminent domain authority for electricity comparable to what already exists for gas pipelines - and certainly not unanimously. As a matter of practice, all of NASUCA's resolutions are adopted by consensus, so I would be very surprised to see a unified NASUCA position on a matter as controversial as a federal transmission line siting.

The White Paper discusses the potential repeal of PUHCA and PURPA on terms that are very close to NASUCA resolutions adopted in 1996 and 1997. NASUCA has explicitly endorsed adoption of a renewable portfolio standard as a device for creating diversity in the nation's supply mix and supporting new, non-polluting sources of generation. Historically, NASUCA's members have been defenders of PURPA as a technique for injecting competition into the closed operations of electric utilities. NASUCA also has repeatedly testified in opposition to PUHCA repeal - at least until new systematic protections against affiliate abuse and cost shifting within holding companies are in place. Competition in wholesale markets is too powerful a force to operate without the structural restraints that PUHCA has imposed since 1935, in my opinion. The last thing that we should be doing today is to assume that the absence of regulation is the same as vigorous competition. As the nation learned from Sam Insull 80 years ago, the absence of regulation leads directly to unregulated monopoly power.

The White Paper also endorses the creation of a Public Benefits Fund from which financial support can be drawn for a variety of purposes including low-income assistance, conservation programming, and R&D activities. States like Maine, since 2000, have had in place a state-mandate for ratepayer-supported public benefits programs. They should not see federal legislation disturbing or replacing these mechanisms. Having said this, however, I am confident that NASUCA's membership today would endorse the same approach as was adopted in a 1998 resolution: any comprehensive federal electricity legislation should beef up support for ratepayer-funded weatherization, and for targeted low- income support assistance in addition to the support already provided through the LIHEAP and DOE Weatherization programs. It is critical that, as markets evolve, the ability to afford electricity not separate "the haves" from "the have-nots." We cannot tolerate having the nation's most vulnerable populations become the casualties of competition.

Finally and before closing, I should turn to the last substantive set of issues raised in the White Paper, concerning changes in the tax code. While it is true that the federal tax law is beyond the purview of this Committee, it also is the case that tax policy establishes long-lived incentives that directly affect investment decisions and, in the case of utility plant, can affect the bottom-line earnings of investors. Missing from the list of ideas that appear in the White Paper's final paragraph is a proposal that NASUCA endorsed by resolution last year and that also has received support from NARUC and the American Public Power Association. The proposal is to require that any tax benefits (so-called Excess Deferred Income Taxes and unamortized Investment Tax Credits) that are on the books of an electric utility for generating units that are divested by operation of state law or sold voluntarily should be flowed-through to ratepayers in lowered distribution rates and not be captured by the utility's shareholders. Such a one-time windfall for shareholders was never envisioned when the tax rate was lowered in 1986, was not sought by the utilities and EEI at that time, and cannot be justified today. We urge the Committee to recommend action to close this billion dollar loophole.

In sum, it should be clear that NASUCA has formally endorsed many of the specific proposals that appear in the White Paper. Dating back to 1996, NASUCA's resolutions have anticipated key impacts on consumers that may result from industry restructuring if regulators and legislators are not vigilant. You are to be congratulated for the breadth and depth of the White Paper's proposals. NASUCA as an organization will make every effort to assist you in your deliberations as you refine these proposals.

Thank you again for the opportunity of testifying today on behalf of the nation's electricity consumers.



LOAD-DATE: July 26, 2001