<DOC>
[106th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:55641.wais]


 
                   ELECTRICITY COMPETITION--Volume 1

=======================================================================

                                HEARINGS

                               before the

                    SUBCOMMITTEE ON ENERGY AND POWER

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

            MARCH 18, 1999--EVOLVING FEDERAL AND STATE ROLES
APRIL 22, 1999--RELIABILITY AND TRANSMISSION IN COMPETITIVE ELECTRICITY 
                                MARKETS
             MAY 6, 1999--MARKET POWER, MERGERS, AND PUHCA

                               __________

                           Serial No. 106-63

                               __________

            Printed for the use of the Committee on Commerce



                      U.S. GOVERNMENT PRINTING OFFICE
55-641 CC                     WASHINGTON : 1999





                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio               HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    RALPH M. HALL, Texas
FRED UPTON, Michigan                 RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio                FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania     BART GORDON, Tennessee
CHRISTOPHER COX, California          PETER DEUTSCH, Florida
NATHAN DEAL, Georgia                 BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma              ANNA G. ESHOO, California
RICHARD BURR, North Carolina         RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California         BART STUPAK, Michigan
ED WHITFIELD, Kentucky               ELIOT L. ENGEL, New York
GREG GANSKE, Iowa                    THOMAS C. SAWYER, Ohio
CHARLIE NORWOOD, Georgia             ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma              GENE GREEN, Texas
RICK LAZIO, New York                 KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming               TED STRICKLAND, Ohio
JAMES E. ROGAN, California           DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois               THOMAS M. BARRETT, Wisconsin
                                     BILL LUTHER, Minnesota
                                     LOIS CAPPS, California

                   James E. Derderian, Chief of Staff

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

                    Subcommittee on Energy and Power

                      JOE BARTON, Texas, Chairman

MICHAEL BILIRAKIS, Florida           RALPH M. HALL, Texas
CLIFF STEARNS, Florida               KAREN McCARTHY, Missouri
  Vice Chairman                      THOMAS C. SAWYER, Ohio
STEVE LARGENT, Oklahoma              EDWARD J. MARKEY, Massachusetts
RICHARD BURR, North Carolina         RICK BOUCHER, Virginia
ED WHITFIELD, Kentucky               FRANK PALLONE, Jr., New Jersey
CHARLIE NORWOOD, Georgia             SHERROD BROWN, Ohio
TOM A. COBURN, Oklahoma              BART GORDON, Tennessee
JAMES E. ROGAN, California           BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois               ALBERT R. WYNN, Maryland
HEATHER WILSON, New Mexico           TED STRICKLAND, Ohio
JOHN B. SHADEGG, Arizona             PETER DEUTSCH, Florida
CHARLES W. ``CHIP'' PICKERING,       RON KLINK, Pennsylvania
Mississippi                          JOHN D. DINGELL, Michigan,
VITO FOSSELLA, New York                (Ex Officio)
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
  (Ex Officio)

                                  (ii)
                    ------------------------------  



                            C O N T E N T S

                               __________
                                                                   Page

Hearings held:
    March 18, 1999...............................................     1
    April 22, 1999...............................................   149
    May 6, 1999..................................................   239
Testimony of:
    Clark, Susan F., Commissioner, Florida Public Service 
      Commission.................................................    99
    Cordaro, Matthew, President and Ceo, Nashville Electric 
      Service....................................................   217
    Glazer, Craig A., Chairman, Ohio Public Utility Commission...    94
    Gordon, Kenneth, Senior Vice President, National Economic 
      Research Associates........................................   355
    Hoecker, Hon. James J., Chairman, Federal Energy Regulatory 
      Commission.................................................   160
    Hunt, Hon. Isaac C., Jr., Commissioner, Securities and 
      Exchange Commission........................................   270
    Iannucci, Joseph, Distributed Utility Associates.............   212
    Kahn, Joshua A., Kahn Mechanical Contractors.................   342
    Kanner, Marty, Coalition Coordinator, Consumers for Fair 
      Competition................................................   335
    King, Chris, Chief Executive Officer, Utility.com............   312
    Kurtz, Michael L., General Manager, Gainesville Regional 
      Utilities..................................................   320
    McCoy, Paul D., Senior Vice President, Commonwealth Edison...   187
    Melamed, A. Douglas, Principal Deputy Attorney General, 
      Antitrust Division, Department of Justice..................   254
    Moler, Elizabeth Anne, Vinson & Elkins.......................    18
    Naeve, Clifford M., Skadden, Arps, Slate, Meagher and Flom...    37
    Nevius, David R., Vice President, North American Electric 
      Reliability Council, Princeton Forrestal Village...........   200
    Persico, Vincent A., Co-Chair, Special Committee on Electric 
      Utility Deregulation, Illinois General Assembly............    81
    Quain, John M., Chairman, Pennsylvania Public Utility 
      Commission.................................................    90
    Rogers, James E., Vice Chairman, President and Chief 
      Executive Officer, Cinergy Corporation.....................   306
    Rose, Kenneth, Senior Institute Economist, National 
      Regulatory Institute.......................................   347
    Schmidt, Fred, Chief of Bureau of Consumer Protection, Office 
      of Attorney General, State of Nevada.......................   182
    Smith, Douglas W., General Counsel, Federal Energy Regulatory 
      Commission.................................................   276
    Smith, Marsha H., Commissioner, Idaho Public Utility 
      Commission.................................................   105
    Stalon, Charles G., Cape Girardeau, Missouri.................    31
    Stuntz, Linda G., Stuntz, Davis & Staffier...................    24
    Szwed, Stanley F., Vice President, Transmission, First Energy   190
    Thompson, Hon. Mozelle W., Commissioner, Federal Trade 
      Commission.................................................   261
    Tighe, Mary Elizabeth, Vice President, Statoil Energy, Inc...   329
    Utter, Trudy, Vice President and General Manager, Tenaska 
      Power Services Company.....................................   196
    Yurek, Gregory J., President and CEO, American Superconductor 
      Corporation................................................   205
Material submitted for the record by:
    American Public Power Association, prepared statement of.....   147
    Edwards, T. Graham, Chairman, Large Public Power Council, 
      letter dated November 23, 1999, enclosing response for the 
      record.....................................................   499
    Farmer, Richard M., prepared statement on behalf of the SEC 
      Roundtable Group...........................................   393
    Hoecker, Hon. James J., Chairman, Federal Energy Regulatory 
      Commission, letter dated June 11, 1999, to Hon. John D. 
      Dingell, enclosing response for the record.................   231
    Nevius, David R., Vice President, North American Electric 
      Reliability Council, Princeton Forrestal Village:
        Letter dated September 2, 1999, enclosing response for 
          the record.............................................   422
        Response to questions of Hon. John D. Dingell............   490
    Repeal PUHCA Now! Coalition, prepared statement of...........   385
    Szwed, Stanley F., Vice President, Transmission, First 
      Energy, letter dated September 3, 1999, enclosing response 
      for the record.............................................   493

                                 (iii)

  


                    EVOLVING FEDERAL AND STATE ROLES

                              ----------                              


                        THURSDAY, MARCH 18, 1999

                  House of Representatives,
                             Committee on Commerce,
                          Subcommittee on Energy and Power,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 11:06 a.m., in 
room 2123, Rayburn House Office Building, Hon. Joe Barton 
(chairman) presiding.
    Members present: Representatives Barton, Tauzin, Bilirakis, 
Stearns, Largent, Burr, Whitfield, Norwood, Rogan, Shimkus, 
Wilson, Shadegg, Pickering, Fossella, Bryant, Ehrlich, Bliley 
(ex officio), Hall, McCarthy, Sawyer, Pallone, Wynn, and 
Strickland.
    Also Present: Representative Barrett.
    Staff present: Catherine Van Way, majority counsel; Joe 
Kelliher, majority counsel; Donn Salvosa, legislative clerk; 
Sue D. Sheridan, minority counsel; Rick S. Kessler, minority 
professional staff member
    Mr. Barton. The Subcommittee of Energy and Power of the 
Energy and Commerce Committee will come to order.
    We know that there are still individuals who are trying to 
get into the room, and we would hope that that process would 
continue in an orderly fashion. We are about 7 minutes past the 
scheduled start time. A quorum is present. We wish to begin.
    Today's hearing is entitled Electricity Competition: The 
Evolving Role Between the Federal and State Governments. Today, 
the Subcommittee on Energy and Power is holding the first of a 
series of hearings on electricity restructuring. It is very 
important that the subcommittee hear from the witnesses that we 
are going to hear from today. I personally believe that market 
competition is coming, and I personally believe that that is a 
good thing.
    Today's hearing will focus on the Federal and States 
regulatory role. It will review whether the dramatic changes 
that have been occurring in the States and within the industry 
require changes to Federal law, and if so, it will consider 
what elements perhaps should be included in any Federal 
legislative changes.
    Dramatic changes have occurred since the subcommittee first 
began considering electricity deregulation legislation in 1995. 
Since that time, 18 Statesn, with 45 percent of the country's 
population, have decided to open their retail markets. Another 
12 States, with 23 percent of the population, including my home 
State of Texas, are going down that road. Just yesterday, the 
Texas Senate passed, in a bipartisan and overwhelming fashion, 
a comprehensive bill to deregulate the electricity markets in 
the great State of Texas.
    If all 12 of the States that are considering legislation 
open their markets this year, 68 percent of the national retail 
market will be opened. Given the competition among States for 
economic development and jobs, that figure can only grow. I 
personally believe that this activity is due, in large part, to 
the hard work in the past of full committee Chairman Bliley and 
former subcommittee Chairman Dan Schaeffer of Colorado along 
with ranking member Ralph Hall. They set the ball in motion 4 
years ago, and I doubt that anyone in this room had any idea so 
much change could occur so rapidly in such a short amount of 
time.
    We hope to examine the effects of those changes between the 
States and the Federal Government today. There is substantial 
consensus on how to approach some of the core Federal issues. I 
hope consensus can be reached on other issues in the hearings 
in the coming weeks ahead. I plan to work closely with my good 
friend Ralph Hall and all other subcommittee members to forge a 
bipartisan agreement on the elements of electricity 
legislation. I intend to draft, at the conclusion of these 
hearings, if there is consensus, a comprehensive bill to open 
the United States' electrical generation and transmission 
system to true open market competition.
    Today, we have two distinguished panels of witnesses. Our 
first panel is composed of experts who were Federal electric 
policymakers earlier in their professional careers. We will 
hear from a former FERC chairman; a former Department of Energy 
deputy secretary; another Department of Energy deputy 
secretary; and two other former FERC commissioners. One of our 
witnesses led the Bush Administration's National Energy 
Strategy, which resulted in the Energy Policy Act of 1992. 
Another developed the FERC's open access policy and led the 
Clinton Administration's development of comprehensive 
electricity legislation.
    These witnesses have decades of experience in electricity 
policy matters. Their testimony will help the subcommittee 
focus on the core Federal issues that can only be addressed by 
the U.S. Congress.
    Our second panel is composed of prominent State regulators 
and legislators, who represent a wide range of views on 
electricity restructuring. Some of the witnesses come from 
States that have opened their markets; one comes from a State 
that is grappling with the question of whether or not to open 
its retail market, and still others come from States who want 
to continue to rely on regulation rather than on competition.
    This panel, the second panel, will help the subcommittee 
learn how the States have been changing their emphasis, and 
they will help us to determine which issues the States are in 
the best position to address. Today's hearing is the start of a 
serious evaluation of the prospects for enacting comprehensive 
legislation opening our power generation and transmission to 
real market competition. The witnesses' testimony and their 
answers to the numerous questions of the subcommittee members 
will determine if the time is right for Federal legislation in 
this area.
    I am hopeful--and yes, I am optimistic--that the answer is 
yes. I look forward to hearing the testimony of the witnesses. 
With that, I would welcome an opening statement from my 
distinguished ranking member, Mr. Hall.
    Mr. Hall. Mr. Chairman, I thank you for convening the 
hearing here today and for the very cooperative effort and 
thrust that you have extended. I think this is our first 
hearing in about 18 months. I know you and I have had other 
hearings and private hearings and discussions, and we have even 
been out of State to visit with groups. You have been very kind 
and generous with your time, and I think you are a great 
chairman. We have nine other new members of the subcommittee 
who were not exposed to the education that we received during 
the hearings in the last Congress, so profound changes in 
utility regulation are continuing to take place in the States 
and at the Federal level since this subcommittee last met on 
this issue. We need to update ourselves, I think, on all that 
has happened since then, and that means that it is going to 
have to be a working committee, and you have certainly 
indicated your willingness to give us that leadership.
    Let me give you an example from the table of contents of 
one of the major trade publications out last week. The headings 
read, and I quote, Texas bill modified with new stranded cost 
provisions; Arkansas lawmakers schedule vote on reform 
legislation; deregulation bill passes New Mexico Senate, may 
raise environmental concerns; Maryland legislators and counties 
at odds over deregulated tax provisions; and finally, Virginia 
Legislature passes reform plan; Governor expected to sign. Mr. 
Chairman, you have relayed the actions of the Texas Senate as 
of yesterday, and I liked the way you put it. Mr. Pallone 
questioned the way you put it. You entitled it the great State 
of Texas, and he wondered why we always put the great State of 
Texas, and I must take a half a minute to tell him about one of 
the real Texas heroes, Ensign Gay of Torpedo Squadron 8, who 
was the sole survivor of the Battle of Midway. The Battle of 
Midway won the war in the Pacific.
    Ensign Gay was from Texas, but he always said do not ever 
ask anybody if they are from Texas, because if they are, they 
will tell you.
    And if they are not, there is not any reason to embarrass 
them.
    But Mr. Pallone is a good member of this committee and 
would make a good Texan, and we certainly would take him 
anytime.
    Mr. Barton. He is an honorary Texan just by being here 
today.
    Mr. Hall. Right.
    With nearly half the States having already gone forward on 
restructuring and others, obviously, in the pipeline, I think 
it is clear that the States are willing and able to move 
forward. A lot of credit should go to our former Chairman, Dan 
Schaeffer, for building the fire that set these State 
activities in motion, and it seems to me that we should now 
shift our focus away from the States and concentrate maybe more 
on what needs to be done within our current jurisdiction over 
electricity at the Federal level to facilitate rather than to 
interfere with whatever decisions the States are going to make.
    In our early discussions, I think you set the right 
approach for these hearings by posing this question: is there a 
need for Federal electric restructuring legislation, and if so, 
what should it contain? I do not know how you could cover it 
any better than that. I heartily agree that these hearings 
should go forward and with that premise, as we gather the 
facts, and by conducting thorough and objective hearings, we 
will determine whether there is member sentiment now to move 
the legislation and the direction we move it and how we move 
it.
    I agree with another of your earlier statements to the 
effect that if there is to be legislation, we want it to be a 
member-driven bill. I must also say, though, that other than 
being a member-driven bill, we need the input of these good 
people who are testifying before us here today and both of the 
groups that will be testifying. We need the input of the men 
and women of industry, whom we are going to have to make this 
go once we put it onto the books of this country.
    We want a business decision--I do, and I think the chairman 
does and most of us do--rather than a Congressional decision, 
and we will get that by having these hearings, having this 
testimony, having you all work together to bring us some 
decisions that we can put into the act and pass.
    To your goals and objectives, I would add that in all of 
our deliberations, it is kind of silly almost to say this, but 
we need to be fair. You know, fairness needs to enter into it. 
I never saw anything that I did not really believe could be 
deregulated. I am sorry for what happened to the airlines, and 
I think greed caused a lot of that not to go exactly the way we 
wanted it to, but I believe in deregulating. If we are fair to 
the customers of investor-owned cooperative and public power 
systems, fair to the utility stockholders and citizens of 
public power systems in their capacity as owners and the owner-
members of the rural electric cooperatives and fair to all of 
their employees, fairness is something that as a chairman, I 
know that has been your goal and the golden rule that you have 
followed since you have been chairman and since you have been 
on the committee.
    We just need to be fair to the new entrants in the utility 
business, the non-utility generators; the marketers of electric 
power and those who are promoting the new technologies. It is 
these new entrants who create the promise of more efficient 
markets and lower electric costs to our constituents; that must 
be our goal. Fundamental fairness will require a delicate 
balancing of interests and ensure a good outcome. If we adhere 
to these goals and objectives, Mr. Chairman, I believe that if 
we choose to do a bill, it will be one we can all be proud of.
    So today, we embark on an effort to find the answers to 
those questions with a slate of witnesses who know more about 
the intricacies of these issues than any of us will ever know 
or probably will want to know or be able to know. The first 
panel consists of men and women who have had distinguished 
careers in public service and have learned and dealt with the 
public policy issues of electricity from inside the government 
and are now in the private sector. So that gives them two views 
of it.
    The second panel, with one exception, is made up of State 
regulators, people who are on the front lines in this ongoing 
debate of whether to restructure the electric utilities. These 
two panels will give us different perspectives of utility 
restructuring. For those of us who have participated in the 
hearings of the last Congress, we will be listening carefully 
to understand better the changes that have occurred since this 
subcommittee last dealt with this issue. For those members new 
to the committee, I hope the witnesses will help you to 
understand better the tough and difficult questions that are 
raised in utility restructuring at the Federal level.
    Before I close, let me say a word to the first panel. In 
asking you to share your expertise, we are kind of putting you 
in an awkward position in some ways. You have client interests, 
many who have strongly held opinions about the content of 
restructuring legislation. It is extraordinarily difficult to 
find individuals of your character who are not already employed 
or retained by someone with an issue in this case to come and 
share your opinions with us today. We invited you here--the 
chairman invited you here--not as advocates but to help the 
committee learn. You are men and women of the highest 
integrity, and I know that you will do your best job you can, 
and for that, you have my deepest appreciation.
    Mr. Chairman, with that, let me yield back the balance of 
my time and thank you for this beginning today on a rough and 
rocky road but a very important road that can lead to lower 
rates for all the people all across this country.
    I yield back my time.
    Mr. Barton. Thank you.
    Some of you may know that Congressman Hall has been a 
little under the weather lately, but I can tell that he is 
getting back on his feet. That is the longest opening statement 
he has made in about a month.
    Mr. Hall. I yielded back my time.
    Mr. Barton. He is feeling better.
    The Chair would recognize the distinguished full committee 
chairman, the Honorable Tom Bliley of Virginia for an opening 
statement.
    Chairman Bliley. Thank you, Mr. Chairman, and thank you for 
holding this timely hearing on electric utility restructuring. 
I believe this is the Congress when we will pass a customer 
choice bill, so it is important that we begin examining this 
issue early. Make sure there is no doubt about where I am 
coming from. I will state up front that I believe retail 
competition in electricity markets is good.
    Through competition, consumers see lower prices, better 
service and greater investment and innovation in technology. I 
further believe all consumers should be given the ability to 
choose their own power companies, regardless of the size of the 
consumer or who they are served by today. I also believe that 
they should be given that choice sooner rather than later. The 
energy marketplace has evolved a great deal since the Energy 
Policy Act of 1992, and consumers have benefited from those 
changes. However, it will not be able to continue to evolve, 
and consumers will continue to be denied benefits, as long as 
Federal and State laws are standing in the way.
    Since the Commerce Committee first began its consideration 
of electric utility restructuring in 1995, those who are 
fearful of competition have worked hard to try to stop it or 
slow it down. These forces have argued that there are no 
benefits from retail competition and that we are moving too 
fast. Well, since we have been working on this for 5 years now, 
we can hardly be accused of moving too fast, and the fact that 
retail competition benefits consumers and lowers prices has 
been shown over and over again.
    The Department of Energy said last year competition would 
save consumers $20 billion per year; others have estimated 
more. More importantly, this is not merely theory but reality. 
Consumers who have choice, in States like Pennsylvania and 
California, are already saving money with even greater savings 
likely when each of those States is through the transition 
period. However, there are still those who oppose Federal 
action, and I am sure they will come up with lots of new 
reasons why we should not move this year. To them, I say what 
are you waiting for? Retail competition is inevitable. Rather 
than continuing to fight, it is time for everyone to end the 
rhetoric, roll up their sleeves and get to work on passing a 
plan which will benefit all Americans.
    I want to hear people's concerns and make sure we get it 
right, but I do not think there is any concern so great or 
difficult that it should keep us from moving forward. Now is 
the time to act; I look forward to hearing the testimony of the 
witnesses, and I thank you, Mr. Chairman, for yielding me the 
time.
    Mr. Barton. We thank the distinguished chairman. We would 
recognize the distinguished gentleman from New Jersey, Mr. 
Pallone, for an opening statement.
    Mr. Pallone. Thank you, Mr. Chairman.
    Since my good friend Mr. Hall started talking about the 
great State of Texas, I have to tell a little story. It has 
taken me awhile, Ralph, to get to the point where I understand 
this Texas phenomenon, but I was thinking when you mentioned 
that about when I was first elected or a couple years after I 
was elected. Greg Laughlin was here then, and he had just had a 
child, or his wife had just had a child, and I was just having 
my first child, and he was horrified because I told him that my 
daughter was going to be born in Washington, at Columbia 
Hospital, and he, like, looked at me horrified, and he said you 
cannot do that; you cannot do that. You have to put your wife 
on a plane and bring her back to the State of New Jersey, 
because, you know, I could never have a child who was not born 
in the State of Texas; it is absolutely necessary that you get 
her on this plane.
    And I tried to explain to him that it did not matter.
    Mr. Barton. What is funny about that?
    Mr. Pallone. I think I will stop there, Mr. Chairman.
    I am beginning to understand this phenomenon. It takes 
awhile.
    Anyway, I just wanted to thank the chairman and the ranking 
member for holding this hearing, and I was pleased to see the 
chairman mention that this was the first in a series of 
hearings on this topic, because I think it is important to have 
several hearings this Congress on the issue of electricity 
restructuring.
    And let me also say, to emphasize, if I could, the care 
with which we need to consider the issues before us. Americans 
spend about $220 billion each year on electricity. Thus, 
decisions Congress makes with respect to electric industry 
restructuring will affect the lives of all Americans and must 
be made with attention to potential impacts on industry and 
consumers alike.
    Electric industry restructuring has the potential to 
deliver real benefits to our economy and to our citizens in the 
form of lower costs, better technologies, more choice and new 
products and services, and we also can help our basic 
industries better compete in global markets. There are, 
however, Mr. Chairman, some difficult public policy issues 
involved in how this potential is realized, and the basic 
tenets that I feel that I bring to the restructuring debate 
focus on environmental and consumer protection. We must ensure 
that any and all decisions we make with respect to 
restructuring at the Federal level do not require consumers to 
choose between cheaper energy and a degraded environment, and 
no consumer, whether a resident of an inner city or a rural 
township, should be disenfranchised.
    Along those same lines, all utility workers and share 
owners should be treated equitably; further, all consumers 
deserve full disclosure from energy providers about the price, 
source and environmental content of the energy products and 
services that they are purchasing.
    I wanted to talk a little bit about my home State of New 
Jersey, which recently enacted legislation that will deregulate 
the electric market. All residents in New Jersey will be able 
to choose their electricity suppliers by August 1 of this year, 
and the New Jersey legislation requires the State utilities to 
cut rates by 10 percent over a 3-year transition period and 
directs the State Board of Public Utilities to set shopping 
credits that are designed to encourage competition and allow 
for greater consumer savings.
    I hope that our witnesses will provide their perspective on 
the effectiveness of mandating price cuts and whether the 
anticipated benefits outweigh the associated costs. The New 
Jersey plan also provides for stranded cost recovery; maintains 
a social safety net through a societal benefits charge; and 
recognizes the nexus between the electric power industry and 
the environment through a renewable energy mandate and 
environmental disclosure rules for energy providers. But I have 
to say that, in my opinion, New Jersey's law does not go far 
enough to protect the environment and consumers and, for these 
reasons, as long as the Federal Government continues to attempt 
to address restructuring, it must, as part of its 
consideration, provide some national measures to protect the 
health, welfare and environment of the entire Nation.
    We also must determine the most effective and appropriate 
methods for ensuring national reliability as well as equitable 
transmission provisions and, at the same time, we must, of 
course, ensure that we do not undo the progress that States 
have made. In the last Congress, I introduced legislation aimed 
at implementing uniform environmental standards that would 
apply to all electric generators, regardless of where they are 
located, and I was very pleased that every member of the New 
Jersey House delegation, both the Democrats and Republicans, 
cosponsored this bill, H.R. 2909, and that the bill attracted 
more cosponsors and bipartisan support than any other electric 
industry restructuring legislation.
    And I think this support reflects the concerns of 
constituents and electric consumers everywhere. Consumers want 
to realize the economic benefits of electric industry 
competition but not at the expense of being exposed to dirtier 
air or living with a system that translates weak, unfair 
environmental standards and the ability to pollute into a 
competitive advantage.
    Now, I am going to be reintroducing an updated version of 
this legislation during this Congress. In addition to uniform 
environmental standards for all utilities nationwide, the bill 
will include tough, meaningful and enforceable disclosure 
provisions, a kind of truth-in-labelling law for electric 
energy, among other provisions.
    We will hear today from representatives of the States from 
different regions of the country who have different priorities. 
Individual States clearly have the right and responsibility to 
establish their own game plans for introducing energy 
competition, and I want to hear from States that believe they 
need our help as to what kind of assistance they would need 
from the Federal Government and which, if any, of the 
legislative proposals that have been introduced might serve as 
a vehicle for addressing their concerns.
    And finally, if I could say, as more and more States move 
toward competition, it seems to me that the Federal Government 
should examine whether and work to ensure that competition is 
fair; reliability is maintained; and the rules include 
environmental standards. I am looking forward to the witnesses 
today, and I hope that they will clarify the capacity in which 
they are speaking before our subcommittee and the perspectives 
they bring.
    I strongly believe that we have a responsibility to 
adequately represent the public interest, and I certainly hope 
my concerns will be heeded in determining appropriate witnesses 
for future hearings. I think you know, Mr. Chairman, that there 
was some concern today that the environmental and consumer 
protection interests were not represented on the panel, and I 
do not want to dwell on that, but I hope that in future 
hearings that we will make sure that we do include them.
    Mr. Barton. Well, I thank the gentleman from New Jersey, 
and we will certainly guarantee that this is not the only 
hearing, and we will let you suggest witnesses, and I am almost 
certain we will put them before the subcommittee. So we want a 
comprehensive set of hearings, and that means all interests 
must be heard from.
    The Chair wants to gently remind members who have not yet 
made an opening statement that technically, they are supposed 
to be 3 minutes or less. We are not going to hold you to that 
today, because this is a very serious hearing issue that we are 
undertaking, so we want to give every member an opportunity to 
have their full views, but it would be nice if they could 
generally come within the 3 to 4 minute period.
    With that, we want to hear from the gentleman from the 
gorgeous State of Georgia. It will take him 3 minutes to say 
hello probably. Mr. Norwood.
    Mr. Norwood. You are right, Mr. Chairman, but thank you, 
however, for giving me some time. I am honored to be on your 
subcommittee, and I am pleased that you are having these 
hearings. It is going to be a pleasure to serve with you as we 
try to solve these problems. I guess I would like to associate 
myself with your opening remarks, where you said I personally 
think market competition is coming; and then, you went on to 
say I personally think that is a good thing, and I certainly do 
agree with you, other than to say that competition is here; it 
is not just coming, and that is one of the reasons that the 
great State of Georgia has a 21 percent rate less than the 
national average, because we are already dealing with 
competition.
    And then, I would like to associate myself with the remarks 
of my friend Mr. Hall. He pointed out numerous times that any 
final bill that we had had to be fair, and I want to just say 
up front any final bill where we use a one-size-fits-all 
situation that tends to lower the electric rates in New Jersey 
at the expense of raising the electric rates in Georgia will 
not fall under the heading of fair, and it will tend to make me 
real pillish on this subject, and I hope we do not get into a 
situation like that.
    Last, I want to associate my remarks with the chairman of 
the full committee, Mr. Bliley. Mr. Bliley said that he thought 
every American should be able to choose his own power company, 
and I agree with him, and I believe he wants to do that because 
it promotes competition, and I am glad to hear him come out 
with that. That actually promotes what the whole Commerce 
Committee is about. We are promoting choice in the Energy and 
Power Subcommittee, Mr. Chairman, but over in the Health and 
Environment Subcommittee, we are promoting choice there, saying 
that actually, every American ought to be able to choose his 
own doctor, and I am sure that if they want to choose their 
power companies, he is going to agree with me that they would 
probably want to be able to at least choose their own doctors 
as well.
    So the Commerce Committee is moving in the right direction, 
Mr. Chairman. Let me thank the panel witnesses for being here 
and taking their time. I know they are busy, and their input, 
clearly, on electricity deregulation is going to be appreciated 
by all of us. They are experts in the area, and we need to hear 
from them.
    Now, what is expected to be a series of hearings, I am sort 
of pleased that we are hearing the States' perspective first. 
In my view, that is the most important perspective. Like on so 
many issues of national concerns, the States have already taken 
the lead on electricity deregulation, and that is certainly, in 
my view, how it ought to be. Whenever we, in Congress, try to 
fix something from up here, whether it is educating our 
children or policing the streets or deregulating the electric 
utility industry, we tend to drift, and we drift always, it 
seems to me, toward a one-size-fits-all solution, and I fear 
greatly that that is not going to work real well for 
electricity restructuring.
    Certainly, the approach that California wishes to pursue is 
not necessarily the best approach for Georgia, where, again, I 
repeat that our rates are 21 percent below the national 
average. The point is that at least 18 States are now in the 
process of opening up their electricity markets to competition 
at their own pace. The consequences of that, both good and bad, 
are now becoming evident, and States are able to make judgments 
as they see fit. With Federal mandates on timelines and other 
restrictions, this experimentation would not at all be 
possible. I also strongly believe that a date certain on 
implementation amounts to a Federal mandate on the States.
    When it comes to retail competition, the best thing that we 
can do at the Federal level, generally, is to stay out of the 
States' way. Of course, there are things that we can and should 
do at the Federal level. Even the Securities and Exchange 
Commission agrees that PUHCA should be repealed, and PURPA is a 
Jimmy Carter-era liberal nightmare that, frankly, never should 
have been put into place the first time.
    We also need to find a way to help the utilities to recover 
stranded costs, and we need to clarify exactly what is Federal 
and what is State jurisdiction, but the Federal involvement 
should be focused and should be limited.
    Now, Mr. Chairman, these are very important issues. They 
need to be addressed. I am excited about the possibility that 
we are going to do this under your leadership, and I thank you 
once again for having this hearing and the many others I know 
you will have in the future. Thank you, Mr. Chairman, for that 
extra minute.
    Mr. Barton. Thank you for that soft-spoken, moderate 
statement, Mr. Norwood.
    Mr. Hall. Mr. Chairman, if I have any time left, could I 
yield it to the gentleman from Georgia?
    Mr. Barton. I think the gentleman from California, Mr. 
Rogan, has an inquiry of the Chair.
    Mr. Rogan. Thank you, Mr. Chairman.
    In that I have another hearing that I must run off to, in 
the event that I am unable to return during the base of opening 
statements, may I have unanimous consent from this committee to 
allow my opening statement to be submitted for the record?
    Mr. Barton. Without objection, so ordered.
    Mr. Rogan. Thank you, Mr. Chairman.
    [The prepared statement of Hon. James E. Rogan follows:]
Prepared Statement of Hon. James E. Rogan, a Representative in Congress 
                      from the State of California
    I thank the Chairman for holding this hearing on electricity 
restructuring, which is one in a series of such hearings. I trust we 
will have a constructive dialogue today and throughout this process on 
how to protect and enhance a free market system in our nation's 
electricity industry.
    Mr. Chairman, I join you in your desire to see changes in our 
electricity industry makeup. The federal government should seek greater 
competition and increased opportunities for families and businesses to 
save on their electricity bills. Only by breaking the barriers 
established by our current system can our electricity industry keep up 
with the market and technological changes expected in the 21st century.
    For some time, I have worked to see this goal realized, and 
protected, in California. Just a few short years ago, California's 
electricity industry suffered with rates that were 50 percent higher 
than the national average. Entrepreneurs and businesses were fleeing 
the state. Further, efforts to protect our state's environment were 
suffering due to uncertainty about the timing and structure of 
competition in electricity markets.
    California is ahead of Washington on many issues, and our progress 
in creating a competitive electricity market is no exception. In 1996, 
as Majority Leader of the California State Assembly, I worked to pass 
AB 1890.
    This bill established a four-year changeover period in California's 
electricity industry. It was intended to protect the reliability of 
electric services and the interests of large and small consumers. 
Further, it was designed to enhance the ability of market participants 
to transition into the new market in a way that would keep rates 
consistent. I note for the record that AB 1890 passed both houses of 
the California Legislature with no dissenting votes.
    In two weeks, Mr. Chairman, we will celebrate the one-year 
anniversary of my state's shift from the monopolistic electricity 
industry of old to an open competitive market. And one year later, I am 
pleased to report that the shift is working well. Electricity customers 
have reliable and innovative options of service. We have taken steps to 
protect our environment, and we are moving into the competitive market 
phase.
    Businesses are returning to California to reap the benefits of a 
competitive electricity market. Large and small consumers have access 
to competitively-priced electricity rates. In addition, all consumers 
have the ability to monitor the price of power. Residential and small 
consumers are enjoying a ten percent decrease in rates, and even 
greater savings are projected when the transition is completed in the 
year 2002.
    In California, and in 17 other states, large investments have been 
made in an effort to create a new, competitive electricity market. As 
we have seen in California, the dividends from these investments are 
being realized by our families, businesses, and environment. I am sure 
my colleagues from other states can attest to similar results.
    Mr. Chairman, it is my hope that the success of California's 
electricity restructuring legislation serves as inspiration to those 
states who have not yet embraced this concept. The entire nation should 
be afforded the same benefits. However, as we work to craft federal 
legislation to this end, it is key that we not undo the progress made 
in California and other states. Let us not punish those progressive 
states who have seen the future and responded to it.
    Mr. Chairman, as we embark down the road of providing all Americans 
a competitive electricity market, I urge that we work together to 
protect the great strides California has made through state law.
    I thank the Chairman.

    Mr. Barton. The Chair would recognize the gentleman from 
Ohio, the Honorable Tom Sawyer, for a statement.
    Mr. Sawyer. Thank you, Mr. Chairman.
    I notice that a number of our membere s are feeling better 
this morning.
    Mr. Barton. That is true; very true.
    Mr. Sawyer. I am going to be brief. I just want to thank 
you for beginning this series of hearings. I absolutely agree 
with virtually all of my colleagues in recognizing the 
importance of those hearings and the work that we are 
undertaking here.
    In no small way, what we are really doing is to ask 
ourselves to deal with an enormously complex mix of policy and 
practice and law and regulation that has evolved in 50 
different States and nationally across this country for the 
entire century of the electric industry. That evolution that 
has brought us to the current juncture has yielded the most 
reliable, universal, accessible electric industry in the world, 
and it did not happen by accident, and I would submit that it 
did not happen through a series of bad business decisions that 
leave us, today, at an untenable juncture but, rather, that 
were brought to where we are today as much as anything because 
of the enormous change that has taken place within the electric 
industry and the change in technology that has made it possible 
for this to happen.
    In short, restructuring is happening today not because it 
must but, for the first time, because it can. I absolutely 
agree that this enormous diversity and mix of generating 
capacity and distribution and transmission across this country 
does not lend itself to one size fits all, but it all has to be 
done within a national framework that makes it possible, for 
the first time, for what used to be specific State 
jurisdictions and even specific service territories to operate 
together in a way that benefits industrial and residential and 
commercial consumers; but more than that, not just the 
consumers but the fabric of the economy of which electricity is 
such an important part: the communities and the regions that 
are the kind of economic beneficiaries that Mr. Norwood spoke 
of in his statement.
    In short, I think what it really comes down to is what the 
chairman of the full committee said, and that is our first 
obligation is not only to do it within a foreseeable period of 
time but to do it well and to take care to get it right. It is 
our first obligation.
    With that, Mr. Chairman, I thank you again for this hearing 
and yield back the balance of my time.
    Mr. Barton. We thank the gentleman from Ohio.
    We would now like to recognize the lady from the Land of 
Enchantment, the great State of New Mexico, the Honorable 
Heather Wilson, for an opening statement.
    Ms. Wilson. Thank you, Mr. Chairman.
    I am looking forward to this hearing and particularly the 
issue of the interrelationship between Federal legislation and 
what the States are already doing in leading the way with 
respect to State deregulation and how, in an environment of 
competition, this will change those State and Federal roles 
with respect to things like reliability; what are the standards 
for entering into the grid; reciprocity with respect to States 
that are deregulated or are not deregulated and may have 
companies who are selling power to other States, which is 
clearly an interstate commerce issue and also the question of 
access to reliable, low-cost power for all customers and 
consumers.
    We talk about the great benefits of competition, and I, 
too, believe there are tremendous benefits to competition. We 
also need to make sure that people have access to those 
benefits. It is great if we can get reliable, low-cost power to 
manufacturers, but if you cannot get power in Truth or 
Consequences, New Mexico at a low-cost rate or even a high cost 
rate, then we have not served the citizens that we were elected 
to serve. So all of these things require thought and balance, 
and I am looking forward to hearing the testimony today.
    Thank you.
    Mr. Barton. Thank you.
    We would now like to hear from the gentleman from the 
Volunteer State, Mr. Bryant of Tennessee.
    Did Mr. Bryant leave? He volunteered to leave, did he not?
    I think it is time to go to the Sooner State of Oklahoma, 
then, and hear from Mr. Largent.
    Mr. Largent. Thank you, Mr. Chairman.
    I will submit my entire statement for the record and just 
make a few brief remarks. This is a big issue. Close to $250 
billion a year is spent on electricity, and it is going to be 
hard; I do not think there is any question about that. The old 
saying, though, is that anything worth having is worth working 
for, and I think creating a competitive market in the retail 
electric industry is worth working for, and I can tell you that 
as a professional athlete, my foot speed was often referred to 
as glacial, and the electric deregulation bill has moved at 
glacial speed over the last Congress, but I sense that it is 
roiling to a slow boil in this Congress, and I look forward to 
working in a bipartisan manner on this issue.
    We have been in an effort to meet with all of the members 
on this subcommittee, Democrat and Republican alike, to develop 
a member-driven bill on electricity deregulation and have met 
with a very positive and favorable response from members on 
both sides of the aisle. You have heard a lot about competition 
already in the opening statements, and I think I know just a 
little bit about competition. We talk a lot about competition 
driving prices down and creating better service and more 
choice, more opportunities, more technological advances, and I 
believe all of that will happen in the electric industry.
    In fact, one of the things and buzzwords that you heard in 
telcom deregulation that you are now hearing in electricity is 
about creating the level playing field, and I know just a 
little bit about playing on a level playing field, because I, 
in fact, for 14 years, played on a perfectly level playing 
field, and there are tremendous benefits in doing that, and I 
think that that is a worthy goal as we talk about moving to a 
competitive field in the electric industry.
    This is an issue that is going to be great for all 
Americans, regardless of their party stripe or where they live, 
and I think that the effort has to be made at the Federal 
level. I think that it is great that the States are continuing 
to move forward. But what would have happened if we had moved 
forward in a piecemeal fashion on the airline deregulation or 
telcom deregulation, where we deregulated long distance calls 
or airline prices one State at a time? It is absolutely 
untenable and not defensible at all.
    And so I think it is important that here at this hearing, 
we have an opportunity to discuss what role the Federal 
Government plays in moving toward a restructured market. And 
with that, Mr. Chairman, I would just say, again, thanks for 
the opportunity to be here, and I look forward to this hearing.
    [The prepared statement of Hon. Steve Largent follows:]
Prepared Statement of Hon. Steve Largent, a Representative in Congress 
                       from the State of Oklahoma
    Mr. Chairman, I want to thank you for holding the first in a number 
of hearings on electricity restructuring. Bringing retail competition 
to every American is one of the most exciting and substantial courses 
of action we can take to impact peoples lives for the better.
    I believe that kicking things off with a discussion of what the 
state's are already doing to bring competition to their customers is a 
good way to open the debate. However, it is just as important to 
recognize that a number of substantial issues exist over which states 
simply do not have jurisdiction. Inevitably, the debate will be 
centered around those issues in which both the federal government and 
the states share jurisdiction and how those issues are resolved. These 
broad questions of jurisdiction are among those I am sure our panelists 
will make clearer in their testimony today.
    As complex as the issue of restructuring can be, I am glad that in 
my discussions with all the members of the subcommittee I have found 
that partisanship does not appear to be among the challenges we will 
face. We may share different views on restructuring given where we are 
geographically, but not based on where we fall on the political 
spectrum. Any debate focused on resolving policy differences, and not 
exacting political pain, is a debate that can result in changes that 
make America a better place.
    While I am very excited about restructuring and optimistic about 
our chances for success this Congress, I understand that there are 
those who oppose allowing monopolies to compete and customers to choose 
who they buy their electricity from. We all remember making calls to 
Grandma on a black rotary phone for $1 a minute and paying 3 times more 
to fly to go see her over Christmas. Competition has given us cellular 
phones (with clearer connections) for 10 cents a minute and all kinds 
of supersaver airline rates for you to choose from. These are exactly 
the type of innovations and cost savings we have to look forward to 
from deregulating our electricity monopolies.
    Removing the federal restrictions and making other changes 
necessary to allow states to continue to move toward competition will 
not be easy. It can be like a Rubik's Cube sometimes with all the 
competing issues and constituencies, but there are not many things in 
this world worthwhile doing that come easy. I am committed to doing 
everything in my power to help the Chairman get this done, and get it 
done right. I look forward to hearing from our distinguished panelists 
as to how we may get it done and get it done right. Thank you, Mr. 
Chairman.

    Mr. Barton. Good; we certainly plan on the all-NFL Hall of 
Famer going deep numerous times as these hearings progress.
    We would like to hear from the all-star third baseman from 
the Congressional baseball team from the State of more Miss 
Americas than any other State in the Union, the great State of 
Mississippi, Mr. Pickering.
    Mr. Pickering. Mr. Chairman, after that introduction, I do 
not know if I should say anything else, but when Texas and 
Mississippi align together, we can do great things.
    I do want to commend the chairman for having this hearing 
but also for the approach that he is taking on this issue, an 
open process where everyone has a seat at the table, getting 
all of the industry representatives, consumers as well as, on a 
bipartisan basis, all members involved. I look forward to 
listening to all of the panels today and working through that 
open process to reach the consensus necessary to pass 
legislation to get to the eventual objective of competition and 
choice but to do it in a way that maximizes State flexibility 
and the role there as well as to address the issues that we 
must solve as we move forward, removing the barriers; 
conforming Federal policy where necessary; and getting to the 
end objective of competition and choice, lower price and 
eventual legislation.
    I thank the chairman again.
    Mr. Barton. We thank Mr. Pickering.
    We would like to hear from the last person in the 
Congressional All-Star Game to actually hit a home run, the 
catcher, from the fighting State of the Illini, Mr. Shimkus of 
Illinois.
    Mr. Shimkus. Thank you, Mr. Chairman.
    I, too, would like to submit my full text for the record 
and just want to say we have had numerous hearings on this in 
the last Congress, and, you know, I hope we have many hearings 
this Congress but not nearly as many as we had in the last 
Congress.
    And I really wanted to welcome State Representative Vince 
Persico, who is going to be on the second panel, and encourage 
my colleagues to hear his whole statement and stay around for 
questions. Illinois has moved, and it is a process that I think 
people will want to hear about how Illinois addressed this 
issue, and it may be a guideline from which to move State-by-
State and also, eventually, find the areas in which the Federal 
Government needs to move in that area.
    I will also question other panelists on the price spikes of 
last year in the Midwest and ask some questions on how, maybe, 
Federal regulation could avert another similar activity as what 
we saw last year.
    Again, I would like to thank Representative Persico for 
traveling all the way from Illinois, and I yield back the 
balance of my time.
    [The prepared statement of Hon. John Shimkus follows:]
 Prepared Statement of Hon. John Shimkus, a Representative in Congress 
                       from the State of Illinois
    Good morning Chairman Barton and to the two panels of witnesses. It 
is good to be here this morning. I am very interested in hearing the 
testimony today and learning what issues are to be governed by the 
States, the federal government and by both.
    Before I continue, however, I want to welcome one of the panel 
witnesses. State Representative Vince Persico. Representative Persico 
serves in the Illinois General Assembly and was a key player in 
Illinois' efforts to restructuring its industry. His role as Co-
Chairman of the Special Committee on Electric Utility Deregulation will 
provide our panel with much needed incite. On behalf of the Energy and 
Power Subcommittee, welcome Vince and thanks for flying out to DC this 
week.
    Mr. Chairman, as I mentioned earlier, I want to learn today exactly 
what role the States play in restructuring and what role the federal 
government will play. I also understand that some roles will be shared. 
I know these issues are complex, but we must begin to sort it all out. 
I also hope that today's hearing will answer some question I have on 
price-spikes. As most people in this room know, last summer the Midwest 
experienced power shortages and price spikes that cost our utilities 
millions and threatened the reliable flow of electric power. I plan to 
explore with our witnesses today whether or not federal electricity 
reforms will enhance or hinder the chances for price spikes and power 
shortages in the Midwest.
    Some key questions I have are: Are the states doing all they can to 
encourage new generation? Are the states promoting interstate 
transmission rules that develop competitive markets? And what is the 
role for the federal government in siting transmission, if any?
    Mr. Chairman, FERC studied the price spikes last year and released 
its report which stated that lack of generation capacity and 
transmission constraints were two key factors which likely caused our 
crisis. My theme today is to investigate how or if federal electric 
restructuring can help the Midwest avoid price spikes in the future. I 
yield back the balance of my time.

    Mr. Barton. We thank the gentleman.
    We would now like to hear from the distinguished vice-
chairman from the great State of Florida and the home of the 
prior national championship Florida Gators, although 
Congressman Stearns did not go to Florida, he represents them 
well.
    Mr. Stearns?
    Mr. Stearns. Well, thank you, Mr. Chairman.
    After listening to the introduction of the gentleman from 
Mississippi, I thought there was nowhere else to go but down.
    I think what is important to realize is we have had a big 
debate about energy deregulation now in the last Congress, but 
you know, and I say this to all of my colleagues on both sides, 
we have accomplished a lot in terms of developing a consensus 
with the distinguished gentleman from Colorado, Mr. Schaeffer; 
we had all of those hearings.
    But I think all of us have a better understanding now how 
to deal with PUHCA and PURPA, and I think there is almost 
unanimous opinion that these should be repealed. We now have a 
better feel with stranded costs, how to deal with that, and I 
think we are left with, perhaps, out of all of the issues, 
there are two issues that perhaps are paramount, and that is 
dealing with transmissions, ISOs, and the second thing is 
market power: what do you do with a company that has and owns 
and operates the transmission lines, and how do you continue to 
deregulate when you have market power in place?
    So I think if we have these discussions and these debates 
and these hearings, Mr. Chairman, we will be able to develop a 
consensus on these, and then, I think we will be ready to start 
deregulation, but I think, as many members have pointed out, we 
have 18 States with 45 percent of the country's population have 
already enacted laws or adopted final regulatory orders opening 
up their retail markets, so, in some many cases, we have the 
States moving forward, and the Federal Government, I think, can 
provide incentives to continue that deregulatory process, 
because States historically, historically, have had the 
principal responsibility to address all of these regulatory 
electrical issues, including consumer protection, public 
benefits, universal service; and so, frankly, my colleagues, I 
think we are poised to develop a bill, and I thank the chairman 
for the hearing.
    Mr. Barton. I thank the gentleman.
    We would like to hear from the distinguished gentleman from 
Maryland for an opening statement, Mr. Wynn.
    Mr. Wynn. Thank you, Mr. Chairman.
    I am very appreciative of this hearing, and I am anxious to 
hear from the witnesses, so I am going to forego an opening 
statement. I would like permission to submit at a later date.
    Mr. Barton. Without objection.
    We would like to hear from another gentleman from the 
Terrapin State, Mr. Ehrlich, for an opening statement.
    Mr. Ehrlich. Sweet 16.
    Mr. Barton. The Sweet 16; that is true.
    Mr. Ehrlich. Winner this evening, Mr. Chairman.
    I can take a hint from the chairman as well, and I will 
submit an opening statement for the record.
    Mr. Barton. I thank the gentleman.
    We now go to the great State of Arizona. Is Mr. Shadegg 
still here? He is missing in action. He was here.
    Then, Mr. Fossella? Mr. Fossella of New York.
    Mr. Fossella. I have nothing to add.
    Mr. Barton. That is the first time New York has had nothing 
to add; I can tell you that.
    All right; Mr. Burr of North Carolina, the Tarheel State.
    Mr. Burr. Mr. Chairman, in an effort not to give away where 
I am on this position, I think I will forego any opening 
statement.
    But I do thank the chairman for his willingness to start 
these hearings back up, and I hope that every member, on both 
sides of the aisle, will take this challenge in a serious way. 
This is not an easy issue. There are some very tough decisions, 
and hopefully, through these hearings, we can, for once, find 
the right solutions to them, and I yield back.
    Mr. Barton. We would now like to hear from the 
distinguished subcommittee chairman of Health and Environment, 
also from the great State of Florida, Mr. Bilirakis.
    Mr. Bilirakis. Thank you, Mr. Chairman.
    Mr. Chairman, first, I would like to take a moment to 
welcome Susan Clark, a commissioner of the Florida Public 
Service Commission, to the subcommittee this morning and 
welcome Ms. Clark back to Washington.
    Mr. Chairman I, too, commend you for holding this hearing. 
Mr. Chairman, we sometimes overlook or forget the fact that we 
hold these hearings to learn. I know that we are all human 
beings, and quite often, we are predecided on issues. But 
hopefully, at least during the hearings, we are openminded 
enough to learn. Mr. Stearns has already shared with us that 18 
States have enacted laws. We all know that. Another 12 are 
considering similar actions. Some have made the statement that 
all States have to be a part of this deregulation; otherwise, 
it will not work. Well, I am just not sure that this is the 
case. I think that it is just very important that we go into it 
with an open mind. There are a lot of tough issues. Some issues 
affect some States more than they do others, and unless we do 
our job objectively and have an open mind, we are liable to run 
into another case of unintended consequences to something that 
might seem really good at this point in time.
    In any case, Mr. Chairman, thank you for holding the 
hearing. Again, I trust we will continue to learn on this 
subject. Thank you.
    Mr. Barton. And I believe our last opening statement of 
members present will be from the great State of Kentucky, Mr. 
Whitfield.
    Mr. Whitfield. Mr. Chairman, thank you very much. I had the 
opportunity to be involved in deregulation of the airline 
industry, the railroad industry and the trucking industry and 
was really an advocate for the deregulation of all of those 
industries, but I also recognize that certainly in the case of 
the airlines and railroads, some small communities did suffer 
as a result of deregulation.
    I am from a very rural State. We have, I guess, about the 
second lowest rates in the country, and many constituents ask 
the question, well, how can we really benefit from 
deregulation? And then, I noticed just recently the Department 
of Agriculture came out with a study indicating that in their 
analysis, energy prices would increase in about 12 or 13 
States: Alabama, Colorado, Idaho, Indiana, Kentucky, 
Mississippi, Montana and others. So I am delighted we are 
having these hearings, because I recognize there are strong 
arguments on each side, and I know that with the witnesses we 
have scheduled all of us will be able to make a better decision 
on whether or not deregulation is truly beneficial for the 
entire country.
    Mr. Barton. I thank the gentleman from Kentucky.
    All members not present will be given the requisite number 
of days to put an opening statement in the record. Seeing no 
other member present who has not been given the opportunity, we 
will conclude with the opening statements. At subsequent 
hearings, we do not plan to have opening statements except from 
the Chair and the ranking member and the full committee 
chairman and the full committee ranking member if they are 
present.
    [Additional statement submitted for the record follows:]
Prepared Statement of Hon. Karen McCarthy, a Representative in Congress 
                       from the State of Missouri
    Thank you Mr. Chairman. I would like to commend our Chairman and 
Ranking Member for convening this hearing today. Elevating our 
awareness and increasing our knowledge of electric utility deregulation 
is critical. Having the opportunity to communicate with and learn more 
from our expert panelists today will be of great value as we proceed 
with the last major deregulation requiring Congressional action.
    Addressing the deregulation of the electrical industry in a manner 
which is fair to consumers, assures reliability, and promotes fair 
competition is a goal which we all share. In the process of 
accomplishing these objectives, it will be vital that we at the federal 
level not overtly intrude upon state jurisdictions which are the 
primary regulatory body for public utilities. Legislation from the 
federal level should complement state laws and regulatory efforts not 
stifle creativity and innovation. We must be sure that the date certain 
is realistic for state compliance.
    In many instances, the states have been the successful laboratories 
for change. Federal actions will need to incorporate the best model to 
effectively produce a national system based upon equity for all. The 
State of Missouri is a lower-cost State. We are below the national 
average in our rates, both commercial and residential. Missouri was one 
of the 23 Low Cost Electric State Coalition asking that their concerns 
be considered by Congress. I am interested in testimony that will 
demonstrate how we can best assure that these states maintain their 
lower-cost position.
    Through hearings such as this one, we are able to enhance the 
education of all parties involved as stakeholders in the deregulation 
of electricity. I am committed and know that my colleagues are 
committed to accomplishing deregulation in a manner that produces 
satisfactory results, not chaos. Deregulation of electricity must be 
done well, for the heat and lights necessary for comfort and commerce, 
and in emergency instances for survival.
    I look forward to the testimony of our expert panelists today and 
our committee's subsequent dialogue and debate regarding the critical 
issues associated with electric utility deregulation.
    Thank you, Mr. Chairman.

    Mr. Barton. We would like to welcome our first panel of 
witnesses to please come forward at this point in time. We have 
before us the Honorable Elizabeth Moler from Vinson & Elkins. 
We have the Honorable Linda Stuntz, who is representing Stuntz, 
Davis & Staffier. We have the Honorable Charles Stalon; we have 
the Honorable Mike Naeve. All of these individuals are former 
FERC Commissioners or Deputy Secretaries of Energy in various 
administrations.
    Ladies and gentlemen, we welcome you. Your entire 
statements are in the record in their entirety. We are going to 
start with Ms. Moler and give you 7 minutes to summarize your 
statement, and then, we will go right down the line.
    Ms. Moler?

 STATEMENTS OF ELIZABETH ANNE MOLER, VINSON & ELKINS; LINDA G. 
   STUNTZ, STUNTZ, DAVIS & STAFFIER; CHARLES G. STALON, CAPE 
  GIRARDEAU, MISSOURI; AND CLIFFORD M. NAEVE, SKADDEN, ARPS, 
                    SLATE, MEAGHER AND FLOM

    Ms. Moler. Thank you, Mr. Chairman and members of the 
subcommittee.
    It is an honor to appear before you today and to be asked 
to testify on my favorite subject. I have testified before this 
subcommittee many times. This is my first time as a private 
citizen. Though I do have clients who are engaged in the 
electricity business, the subcommittee asked me to appear 
before you to give my own views about the need for Federal 
electricity legislation.
    Mr. Barton. If you could make sure the microphone is on; 
flip that switch. Is it on?
    Ms. Moler. Now, it is.
    Mr. Barton. Okay; the power of electricity.
    Ms. Moler. It is good to keep mikes on as well as the 
lights on, yes, sir.
    The views I am presenting today are my own and do not 
necessarily reflect the views of my clients, nor have they paid 
me for my presentation. I have four basic points to make. I 
also identify 10 core elements of what I believe can and should 
be enacted as bipartisan consensus Federal restructuring 
legislation.
    First, there is a need to act. Congress last enacted 
electricity legislation in 1992. Since then, events in the 
marketplace and actions undertaken by both Federal and State 
regulators have partially reshaped this vital industry. Now, 
inaction by the Congress is frustrating further progress toward 
an even more reliable, efficient industry for our country.
    Second, this is not rocket science. Though the industry is 
an economic giant and produces the lifeblood of our modern 
economy, the issues pertaining to reform legislation are really 
quite basic, and they are ripe for action.
    Third, the industry needs your leadership. Something magic 
could happen if a bipartisan group of members makes a serious 
effort to write a consensus bill.
    Fourth, the elements of consensus legislation have broad 
support in the private sector.
    Ten core elements of Federal restructuring legislation are 
apparent if one looks at the array of restructuring proposals 
that have been introduced so far this Congress and during the 
last Congress. Enacting legislation composed of these core 
elements is a very worthy, achievable goal. These elements 
include mandating customer choice; ensuring reliability of the 
grid; repealing the Public Utility Holding Company Act; 
repealing the Public Utility Regulatory Policies Act, 
substituting instead a market-oriented approach to renewable 
power; updating the Federal Power Act; requiring all owners of 
interstate transmission lines to provide open access 
transmission under the Federal Power Act; providing the Federal 
Energy Regulatory Commission authority to address market power 
issues; providing consumers with reliable, user-friendly 
information about the sources of their power; supporting 
research and development funding; and finally, recognizing that 
electricity markets are now regional and facilitating regional 
solutions to problems.
    Let me elaborate briefly. It is not surprising that an 
electric industry structure that was appropriate for the 20th 
Century needs fine-tuning to best serve the public in the 21st 
Century. Federal laws governing this industry no longer promote 
the public interest; rather, they inhibit the development of a 
rational, competitive U.S. power industry.
    As several members of this subcommittee have observed, 18 
States have approved plans to give customers of some of their 
utilities customer choice. Other States are on the verge of 
acting. But even in those States that have acted, not all 
customers have the benefit of customer choice, because some 
utilities are not included in the program. While there has been 
considerable progress, the glass is, at best, half full. Those 
problems need to be solved.
    Progress in the States does not mean Congress should not 
act; rather, Congress must act, or there will be an increasing 
likelihood of volatile markets and even catastrophic 
transmission system failures.
    Let me turn to two of the elements that I addressed in my 
prepared statement; first, mandating customer choice. Congress 
should pass legislation providing all customers the ability to 
shop for their electricity supplier by a date certain. The date 
is negotiable; the principle is not. I personally would choose 
April 15, 2001. That is sufficient time for State regulatory 
authorities to act to establish an appropriate regulatory 
regime if they have not already done so. I like April 15 rather 
than January 1, because something good should happen on that 
date for a change.
    I congratulate the States that have enacted customer choice 
for their leadership and would grandfather those programs.
    Three years ago, I testified before the Senate Energy and 
Natural Resources Committee in favor of mandated customer 
choice that would give States the ability to opt out if they 
made a determination on the record that customer choice is 
contrary to the interests of their consumers. I still advocate 
that point of view. Last year's administration bill dubbed this 
the flexible mandate. I believe it is a reasonable middle 
ground upon which a consensus piece of legislation could be 
built as well. In order to opt out, State authorities would 
have to make a determination on the record that customer choice 
would be detrimental to their consumers.
    As part of any industry restructuring, utilities should 
have an opportunity to recover prudently incurred, legitimate, 
verifiable stranded costs that cannot be mitigated. Every State 
implementing customer choice, except one, has provided for full 
stranded cost recovery.
    While I personally regard stranded cost recovery as an 
essential element of a fair transition, I do not believe 
stranded cost recovery needs to be Federalized. The States have 
and should deal with this issue.
    Ensuring reliability of the grid: it would be easy to be an 
alarmist on the subject of the fragility of our Nation's 
transmission system. I do not want to be an alarmist, nor do I 
want to understate the serious nature of the situation. Rather, 
I want to stress the need to address the issue promptly and 
responsibly. Your former colleague and subcommittee chairman 
recently chaired a task force that stressed the need for 
reliability legislation. They came to a unanimous conclusion 
that reliability legislation is urgently needed. I would urge 
you to pay attention to that report and to act positively on 
their recommendations.
    Mr. Chairman, in my prepared statement, which I have 
submitted for the record, I have tried to outline a proposal 
that I believe could form the nucleus of much-needed 
legislation. In conclusion, I would urge you and your 
colleagues to roll up your sleeves; to talk to each other and 
commit yourselves to action. It is a vitally important public 
policy area that is worthy of your time and effort. This need 
not be a partisan issue; there is bipartisan support for 
legislation at the highest levels in the Congress and in the 
administration. We have had 4 years of oversight hearings and 
policy discussions. It is time to enact something.
    Thank you.
    [The prepared statement of Elizabeth Anne Moler follows:]
 Prepared Statement of Elizabeth Anne Moler, Partner, Vinson & Elkins, 
                                 L.L.P.
    Mr. Chairman and Members of the Subcommittee: It is an honor to 
appear before you today, and to be asked to testify on my favorite 
subject. I have testified before this Subcommittee many times; this is 
my first time as a private citizen. Though I do have clients who are 
engaged in the electricity business, the Subcommittee asked me to 
appear before you to give my own views about the need for Federal 
electricity restructuring legislation. Therefore, the views I am 
presenting today are my own, and do not necessarily reflect the views 
of my clients.
    I have four basic points to make. I also identify ten core elements 
of what I believe can and should be enacted as bipartisan, consensus 
Federal restructuring legislation.
    First, there is a need to act. Congress last enacted electricity 
legislation in 1992. Since then, events in the marketplace, and actions 
undertaken by both Federal and State regulators, have partially 
reshaped this vital industry. Now, inaction by the Congress is 
frustrating further progress toward an even more reliable, efficient 
industry for our Nation.
    Second, this is not rocket science. Though the industry is an 
economic giant and produces the lifeblood of our modern economy, the 
issues pertaining to reform legislation are really quite basic. And 
they are ripe for action.
    Third, the industry needs your leadership. Something magic COULD 
happen if a bipartisan group of Members makes a serious effort to write 
a consensus bill.
    Fourth, the elements of consensus legislation have broad support in 
the private sector. Ten core elements of Federal restructuring 
legislation are apparent if one looks at the array of restructuring 
proposals that have been introduced so far this Congress, and last 
Congress. Enacting legislation composed of these core elements is a 
very worthy, achievable goal. These core elements include:

<bullet> Mandating customer choice;
<bullet> Ensuring reliability of the grid;
<bullet> Repealing the Public Utility Holding Company Act;
<bullet> Repealing the Public Utility Regulatory Policies Act, 
        substituting instead a market-oriented approach to renewable 
        power;
<bullet> Updating the Federal Power Act;
<bullet> Requiring all owners of interstate transmission lines to 
        provide open access transmission under the Federal Power Act;
<bullet> Providing the Federal Energy Regulatory Commission authority 
        to address market power issues;
<bullet> Providing consumers with reliable, user friendly information 
        about the sources of their power;
<bullet> Supporting research and development funding; and
<bullet> Recognizing electricity markets are now regional and 
        facilitating regional solutions to problems.
    Let me elaborate, and in doing so I will address the issues you 
asked me to address in your letter of invitation.
    It is not surprising that an electric industry structure that was 
appropriate for the 20th Century needs fine-tuning to best serve the 
public in the 21st Century. Yet, the basic organic statutes governing 
the industry, the Federal Power Act (FPA) and the Public Utility 
Holding Company Act (PUHCA), have really not been comprehensively 
updated since the 1930's. They are now archaic and in need of reform. 
The Public Utility Regulatory Policies Act (PURPA), enacted in 1978, 
paved the way for new competitors to enter the electric generating 
business. The same statute also established the Federal policies that 
currently apply to renewable sources of power. PURPA's requirements 
have now outlived their usefulness. The Energy Policy Act of 1992 
(EPAct) recognized the changed circumstances in the industry, and paved 
the way for wholesale competition. But more needs to be done in order 
for the Federal laws to be compatible with State initiatives and to 
encourage a more efficient and competitive industry. Indeed, in today's 
evolving industry structure, this array of Federal statutes no longer 
promotes the public interest; rather, it inhibits the development of a 
rational and competitive U.S. power industry.
    As of today, authorities in eighteen states have approved plans to 
give customers of some of their public utilities ``customer choice''; 
that is, consumers will have the ability to choose their power 
supplier. Virginia is the most recent state to enact such a program. 
Other states, notably Maryland, Michigan, New Mexico, Ohio, and Texas 
are on the verge of acting. But even in those states that have acted, 
not all of the businesses and individual customers have the benefit of 
customer choice because some utilities are not included in the program. 
While there has been considerable progress, the glass is at best half 
full. Many, many customers are served by utilities that do not allow 
them to shop for power. In California, for example, the municipally-
owned utilities are not a part of the state's restructuring plan 
because of concerns about the loss of tax exempt financing if they 
provide open access. Those problems need to be solved.
    Electrons do not recognize state or corporate boundaries. 
Electricity is an industry that is fundamentally in interstate 
commerce. Congress needs to act to recognize this fact, and to provide 
a Federal regulatory scheme that will provide a much more seamless 
national power grid. Progress in the states does not mean the Congress 
should not act; rather, Congress must act or there will be an 
increasing likelihood of volatile markets and even catastrophic 
transmission system failures.
    Earlier I outlined the core elements of what I believe could be a 
solid, comprehensive, consensus based restructuring initiative. I would 
like to discuss each element in somewhat greater detail.
1. Mandating customer choice
    Congress should pass legislation providing all customers the 
ability to shop for their electricity supplier by a date certain. The 
date is negotiable; the principle is not. I personally would choose 
April 15, 2001. That is sufficient time for state regulatory 
authorities to act to establish an appropriate regulatory regime if 
they have not already done so. I like April 15, rather than January 1, 
because something good should happen on that day for a change.
    I congratulate the states that have enacted customer choice for 
their leadership, and would grandfather their programs. Three years ago 
I testified before the Senate Energy and Natural Resources Committee in 
favor of mandated customer choice that would give states the ability to 
``opt out'' if they made a determination that providing customer choice 
is contrary to their interest. I still advocate that point of view. 
Last year's Administration bill dubbed this the ``Flexible Mandate'' 
and I would urge you to give it serious consideration. I believe it is 
a reasonable middle ground upon which a consensus piece of legislation 
could be built. In order to ``opt out,'' state authorities would be 
required to undertake a regulatory proceeding and compile a record that 
customer choice would be detrimental to their customers. I personally 
do not believe that is likely, but states should have the flexibility 
to make such a finding.
    As part of any industry restructuring, utilities should have an 
opportunity to recover prudently incurred, legitimate, verifiable, 
stranded costs that cannot be mitigated. Every state implementing 
customer choice except one has provided for full stranded cost 
recovery. While I personally regard stranded cost recovery as an 
essential element of a fair transition, I do not believe stranded cost 
recovery needs to be ``federalized.'' The states have, and should, deal 
with the issue.
2. Ensuring reliability of the grid
    It would be easy to be an alarmist on the subject of the fragility 
of our Nation's transmission system. I do not want to be an alarmist; 
nor do I want to understate the serious nature of the situation. Rather 
I want to stress the need to address the issue promptly and 
responsibly.
    Your former colleague and Subcommittee Chairman, the Honorable 
Philip Sharp, recently chaired a Task Force reporting to the Secretary 
of Energy on Electric System Reliability. The Task Force was very 
broadly based; it had the widest possible range of industry 
participants and observers. They came to a unanimous conclusion that 
reliability legislation is urgently needed. Their final report stated:
          There is a sense of urgency throughout this report. Driven by 
        the expectation of billions of dollars in annual savings to the 
        Nation's economy, the electricity industry is in a transition 
        from a highly regulated industry dominated by monopoly 
        utilities to an industry that will rely, in large part, upon 
        competitive commercial markets at both the wholesale and retail 
        levels. The industry is unbundling, and the old institutions 
        for reliability are no longer sufficient. We are already in the 
        middle of our journey toward a restructured electricity 
        industry. However, the new policies and institutions needed to 
        assure electric reliability are not yet in place. Until such 
        policies and institutions are in place, substantial parts of 
        North America will be exposed to unacceptable risk.
          . . . The Congress, for example, urgently needs to clarify 
        the FERC's authority over an electric industry self-regulating 
        reliability organization and expand the FERC's jurisdiction for 
        reliability over the bulk-power system.
    They stressed:
          These steps must be taken soon. Indeed, the Task Force 
        believes that the primary challenges to bulk-power system 
        reliability are presented by the transition itself, rather than 
        by the end state of competition. Failure to act will leave 
        substantial parts of North America at unacceptable risk.
    The Administration has been working with the North American 
Electric Reliability Council and others on legislation to provide FERC 
with authority to oversee and enforce mandatory electric reliability 
standards. I cannot overstate its importance; if we are to keep the 
lights turned on it must be enacted. If it is not enacted, Congress 
will be considered part of the problem, rather than part of the 
solution.
3. Repealing the Public Utility Holding Company Act
    I do not believe PUHCA any longer serves a useful purpose. It 
should be repealed. In conjunction with its repeal, Congress should 
ensure that FERC and State regulators have access to the books and 
records to insure that captive customers are not subsidizing affiliated 
corporate business ventures. PUHCA repeal legislation should be part of 
a comprehensive restructuring bill.
4. Repealing the Public Utility Regulatory Policies Act and 
        substituting instead a market-oriented approach to renewable 
        power
    PURPA provided a much needed impetus for the development of an 
independent power industry. It is no longer useful and should be 
repealed. I would do so prospectively, honoring existing contracts. In 
its place, I would substitute a modest renewable portfolio standard, 
coupled with tax incentives for renewable resources.
5. Updating the Federal Power Act
    The Federal Power Act is replete with anachronisms. It should be 
updated. An essential element is to ensure that FERC has authority to 
provide interstate transmission for transactions that are ultimately 
retail sales.
6. Requiring all owners of interstate transmission lines to provide 
        open access transmission under the Federal Power Act
    There are many examples of power lines that are interstate in 
nature that are not subject to Federal Power Act jurisdiction and 
regulated by FERC. They should be. Transmission lines owned by 
municipalities, and the Federal Power Marketing Administrations 
(Bonneville, Southeastern, Southwestern, and Western), and the 
Tennessee Valley Authority should be regulated under the Federal Power 
Act just like those owned by other utilities. While I served at the 
Department of Energy, we established a special advisory committee to 
develop reform proposals for TVA, and worked with the Northwest 
Governors' Transition Board on reform proposals for BPA. Like you, I 
look forward to analyzing the conclusion of that process when the 
Administration's new restructuring package is forwarded to the 
Congress.
    In addition to the Federal Power Act jurisdiction, the Congress 
also needs to address the private use and tax exempt bond restrictions 
to enable municipal and cooperative utilities to provide open access 
and customer choice. While the subject area is not within this 
Subcommittee's jurisdiction, it is important to note that the fabric of 
open access transmission looks a lot like Swiss cheese--there are holes 
in the cloth. In particular, the tax writing committees need to address 
the private use restrictions that limit use of facilities constructed 
with tax exempt bonds. Use of existing generating capacity for sales 
outside a municipal utility traditional service territory and use of 
existing transmission lines to provide open access transmission should 
not upset existing tax exempt financing arrangements.
7. Providing the Federal Energy Regulatory Commission authority to 
        address market power issues
    Competitive markets work well only if you have lots of competitors. 
There need to be appropriate regulatory authorities in place that 
provide Federal regulators authority to address market power issues. I 
recognize that this is a particularly thorny area. Nonetheless, I 
believe that FERC should be given authority to address market power 
issues in order to ensure that competition flourishes.
    Five years ago, generation asset divestitures were unheard of in 
the utility business. Now, sales of generating assets are recognized as 
providing corporations and stockholders with very positive returns on 
their investments. They are also providing much needed financial 
restructuring tools so that utilities can develop a business strategy 
that is compatible with serving customers and positive balance sheets.
    I would also encourage the Subcommittee to provide FERC with 
additional authority to encourage a more rational structure for the 
interstate transmission grid. It needs to undertake reforms in 
transmission pricing so that the private sector will continue to invest 
the necessary resources in grid infrastructure. Increasingly utilities 
are looking at divesting assets and forming independent transmission 
companies, or ``transcos.'' I would provide FERC with authority to 
require integrated utilities that are not members of a regional 
transmission organization (either an Independent System Operator or a 
transco) to join one.
8. Providing consumers with reliable, user friendly information about 
        the sources of their power
    Customers who are interested in learning about the source of their 
power should be able to do so. Utilities should not be able to claim 
that they are selling ``green'' or renewable power unless they are. 
California, for example, has instituted a successful consumer 
information program. On the other hand, power marketers should not have 
to contend with different requirements in each state. A federal program 
designed to ensure truth in advertising if companies make claims about 
the source of their power should be enacted. The disclosure 
requirements need not be elaborate, nor expensive to comply with, in 
order to provide customers with reliable information.
9. Supporting research and development funding
    Support for research and development in the electric technology 
area has plummeted in the wake of restructuring. State regulators 
should have clear authority to impose a surcharge on distribution in 
order to support research and development. At the Federal level, I 
would focus on beefing up the DOE's electric R&D portfolio.
10. Recognizing electricity markets are now regional and facilitating 
        regional solutions to problems
    As I said earlier, electrons know no state or corporate boundaries. 
But the Federal-State system does not provide good regional solutions. 
Transmission planning and transmission siting are two excellent 
examples of things that need to be coordinated on a regional basis. 
Some have advocated Federal transmission siting legislation. Interstate 
pipelines are sited by the FERC under the Natural Gas Act; it should 
and could work for interstate transmission lines. I personally would 
favor such a move. If this Subcommittee cannot muster the support for 
Federal siting authority, at a minimum I would urge you to clarify that 
states can exercise authority on a regional basis and would encourage 
them to do so. For example, facility siting authorities should be able 
to get together and plan transmission facilities on a regional basis 
without running into concerns that their planning efforts will run into 
federal preemption. The Interstate Compact provisions in the 
Administration bill would clearly help.
Conclusion
    Mr. Chairman, I have tried to outline a proposal that I believe 
could form the nucleus of much-needed legislation. I would urge you and 
your colleagues to roll up your sleeves, talk to each other, and commit 
yourselves to action. It is a vitally important public policy area that 
is worthy of your time and effort. This need not be a partisan issue; 
there is bipartisan support for legislation at the highest levels in 
both the Congress and the Administration.
    We have had four years of oversight hearings and policy 
discussions. It's time to enact something.

    Mr. Barton. Thank you.
    I would like to welcome now the Honorable Linda Stuntz, 
who, in addition to being a former Deputy Secretary of Energy, 
I believe was a former counsel for the Republicans on this 
committee at one point in time. It was all downhill since then, 
right?

                  STATEMENT OF LINDA G. STUNTZ

    Ms. Stuntz. That is where I learned everything I ever knew 
about this subject, Mr. Chairman.
    Thank you so much for inviting me back. It is a great 
privilege, and it is one that I respect. I, too, have clients 
in many aspects of this industry, but you asked me to come here 
and give you my judgment myself as was my privilege to do on a 
more regular basis some time ago, and that is what I am here to 
do today.
    Mr. Barton. You really need to pull that microphone up to 
you, Ms. Stuntz.
    Ms. Stuntz. Okay; there is no switch on mine, so I do not 
know.
    My message today to you, I hope, is simple. You do need to 
legislate in the area of electricity, and second, I believe 
that you can legislate. I think all that work under Mr. 
Schaeffer's leadership that you all helped the effort in 
crafting the Paxon-Largent compromise of last year has really, 
although it may not have made it very far in terms of the 
legislative process schematic, it has enabled us now to 
identify, and hopefully you, issues on which there is 
sufficient consensus that legislation is possible.
    In my written testimony, and I would suggest to you today 
that there are five. I think you are going to hear some of them 
in common across most of us. First is the reliability issue. I 
think it is very important to empower a reliability 
organization that can set mandatory rules of the road. Right 
now, there are no such things. There is no entity or enterprise 
that can set a binding reliability rule. Now, that was okay 
when it was sort of a club, and people could take care of each 
other, because that is the way it worked in the previous 
scheme. It is not okay now. In fact, there are issues as to 
even whether funds can be collected. They are having difficulty 
doing that. So that needs to happen.
    Second, we need to clarify Federal and State jurisdiction. 
It is not clear that the States can, in fact, require access to 
their local distribution systems. There are lawyers' issues 
related to the scope of the Federal Power Act and the extent to 
which it may preempt the States. It would help the States move 
forward, empower them, if that clarification were provided. It 
has been done in Paxon-Largent; it is done in Mr. Burr's 
legislation, I believe, and there really should not be any 
dispute about that.
    Third, FERC's jurisdiction does need to be extended to all 
transmission. If we are going to have an interstate market for 
electricity that is backed up by a reliable, efficiently run 
grid, all transmission, regardless of who owns it, ought to be 
accessible on the same terms and conditions. And again, I do 
not really think that should be too controversial, although I 
do not minimize that for some for whom FERC regulation has not 
been fully applicable, this will require a change in business.
    Fourth, we need to repeal the Public Utility Holding 
Company Act. It is difficult to explain. That statute, as you 
know, is the province only of a few people, including my 
colleague here at the end of the table who can actually explain 
it out loud, but it affects everything that any utility company 
does: every business decision they make; the issuance of debt; 
how they are going to structure it; whether or not they can 
enter competition. It has outlived its usefulness; it is 
distorting competition, and it should be repealed.
    Finally, we need to prospectively repeal PURPA, preserving 
the existing contracts on which a lot of investment has been 
based, and there is a Federal responsibility, I believe, to 
provide for recovery of those costs, because it was a Federal 
obligation that was imposed on the utilities to enter into 
those contracts. Mr. Stearns has introduced legislation in the 
last Congress and, I believe, in this Congress to do that. I 
think it has bipartisan support, and I think that would be an 
easy module to put in your legislation.
    These are things that only Congress can do. If you do not 
do them, they will not be done. They are things that are 
necessary for you to do to remove barriers to State action; to 
allow the States to move forward with the competitive choice 
programs of their choice. I think it would be nice to have a 
date certain; I do not think it is essential, and I am quite 
persuaded that it is not legislatively possible. It is not in 
the Senate, and I do not think there is consensus on this 
committee. So, although, as I said, it may be useful, it also 
complicates the legislative effort, because you have to start 
worrying about grandfathering: what will we grandfather; what 
will we not grandfather.
    By not moving to a federally mandated date certain, we do 
not have to get into that issue, and I honestly do not think 
you have to go there to provide a lot of benefits for consumers 
and to get the Federal Government out of the way to improve the 
electricity market and allow the competition to move forward.
    I would conclude simply by saying that there are many of 
those--and you know them, I am sure--that have sought to hold 
electric restructuring legislation hostage until everything is 
done. There was a boss I had at one time who used to caution me 
against letting the perfect be the enemy of the good. I would 
encourage you in the same way. There may be things that turn 
out that need to be done later. I talked about a couple of them 
in my written testimony, one dealing with the issue of FERC's 
merger review approval; another dealing with transmission 
policy, about which I am greatly concerned. I do not think our 
current policies encourage anybody to invest in new 
transmission or to use it more efficiently. I think it is all 
based on the notion that we have to be concerned about 
allocating a scarcity, and that is no way to run transmission.
    It is also true that you can get in big trouble if you have 
a transmission outage. You do not get much benefit if you use 
transmission efficiently. That is encouraging transmission 
owners to always err on the side of perhaps maintaining more 
capacity reserves than they need. That is not a good way to go 
about moving to a competitive marketplace, but I do not think 
that there is a remedy that has clearly been proposed for that; 
I think we need to do some more homework on that and allow FERC 
and some of the agencies that are dealing with this every day 
to develop the solutions before we try to legislate in that 
area.
    With that, Mr. Chairman, I will cease and look forward to 
your questions.
    [The prepared statement of Linda G. Stuntz follows:]
 Prepared Statement of Linda G. Stuntz, Stuntz, Davis & Staffier, P. C.
    Thank you for the opportunity to testify before you at this 
critical time in the restructuring of this nation's electricity 
markets.<SUP>1</SUP> There is no more complex, capital intensive or 
vital industry than the electric industry. Little wonder then, that 
despite some 30 days of House hearings, over one dozen Senate 
``workshops'' and the introduction of no less than 28 bills dealing 
with at least one aspect of this issue in the last Congress, only one 
bill (S. 621 repealing PUHCA) was reported from Committee and no bill 
reached the floor. The good news, I believe, is that all this work was 
not for naught. Although controversy remains over many issues, 
consensus is emerging on certain issues, and in one area in 
particular--reliability--it becomes clearer every day that the lack of 
federal legislation is posing real risks. Thus, my message to you today 
is simple.
---------------------------------------------------------------------------
    \1\ The views expressed herein are solely my own, and are not 
offered on behalf of, nor should they be attributed to, any other 
person or firm.
---------------------------------------------------------------------------
    1) There is a need for federal legislation.
    2) There is, or can be, sufficient consensus to allow you to enact 
the needed legislation this Congress.
                     the electricity industry today
    As illustrated by the chart below, in no industry is there a larger 
or more diverse number of suppliers.
[GRAPHIC] [TIFF OMITTED] T5641.001

    Fueled, in part, by passage of the Energy Policy Act of 1992, which 
effectively created a competitive wholesale generation market, the 
share of nationwide generating capacity from non-utility generators 
(NUGs) has more than doubled from 3.6 percent in 1987 to 8.5 percent in 
1997. In fact, since 1990, non-utility generators have contributed over 
half of all new investment in generating facilities.
    Utilities also are no longer the only sellers of electricity. As 
illustrated in Figure 2, sales growth by power marketers has increased 
dramatically in the last three years.
[GRAPHIC] [TIFF OMITTED] T5641.002

    In the first quarter of 1995, power marketers sold slightly less 
than three million megawatt hours, about the power required for one 
million homes. By the second quarter of 1998, that amount had grown to 
almost 501 million megawatt hours, enough to power almost 210 million 
homes. The Federal Energy Regulatory Commission (FERC) has approved 
nearly 500 power marketing entities. Of these, some 115 are posting and 
reporting sales.
                              state action
    As a result of the Energy Policy Act of 1992, and actions by the 
FERC implementing that Act, a wholesale purchaser of electricity (for 
example, a municipal utility) can obtain electricity from any supplier, 
and have that power transmitted to it over the transmission systems of 
any utility that is FERC jurisdictional. (The transmission systems of 
the PMAs, TVA, municipal utilities and co-ops are not FERC-
jurisdictional, although FERC has sought to apply reciprocity 
requirements and in some cases has some limited oversight). Retail 
sales and the distribution of electricity are matters of state 
jurisdiction. Thus, although wholesale customers can obtain power from 
any supplier, retail customers traditionally could purchase power only 
from their local utility, which, in exchange for undertaking the 
obligation to serve all consumers at a regulated rate, was given by 
most states an exclusive retail franchise.
    Starting in about 1994, the states began to consider in earnest 
whether the benefits of the emerging competitive wholesale market 
should be extended to retail consumers. As of today, 14 states have 
enacted legislation to provide retail customers with the option to 
choose any supplier they wish; four states are pursuing customer choice 
by means of state commission developed programs; legislation is pending 
in four additional states and virtually every state has considered 
whether and how it should adopt customer choice. 
[GRAPHIC] [TIFF OMITTED] T5641.003

    As a result of all this activity, more than 50 percent of the 
population of this country lives in states that have adopted firm 
customer choice plans. That being said, there is substantial variety 
among these state plans. As examples:

* Some require or strongly encourage divestiture of generation.
* Some ``unbundle'' distribution service and require competition in 
        such services as billing and metering.
* Some require utilities to turn over control of their transmission 
        systems to Independent System Operators (ISOs). One has created 
        a power exchange separate from an ISO. Others have combined 
        these functions.
* Some have established programs to support renewable energy.
* All, save one, have provided the opportunity for utilities to recover 
        fully the costs of investments made and costs incurred that 
        were approved under the prior regulatory regime.
* All have given municipal and cooperative utilities the opportunity, 
        but not the requirement, to participate in customer choice 
        programs.
                       what congress needs to do
    With this background, and with our evolving experience in wholesale 
and retail electricity competition, it is clear that Congress needs to 
do certain things.
1. Reliability
    No organization currently has the ability to set and enforce 
binding rules necessary to ensure continued reliability. This is a 
problem that Congress must remedy. Last year, a Department of Energy 
Task Force led by a former chairman of this Subcommittee, the Honorable 
Philip Sharp, completed a study on the matter of reliability in the 
restructured electricity industry. Mr. Sharp did not mince words in his 
preface to this report:
          Driven by the expectations of billions of dollars in annual 
        savings to the Nation's economy, the electricity industry is in 
        a transition from a highly regulated industry dominated by 
        monopoly utilities to an industry that will rely, in large 
        part, upon competitive commercial markets at both the wholesale 
        and retail levels. The industry is unbundling, and the old 
        institutions for reliability are no longer sufficient. We are 
        already in the middle of our journey toward a restructured 
        electricity industry. However, the new policies and 
        institutions needed to assure electric reliability are not yet 
        in place. Until such policies and institutions are in place, 
        substantial parts of North America will be exposed to 
        unacceptable risk.
    The good news is that many of the parties that contributed to this 
Task Force Report, including public and consumer-owned utility 
representatives, ELCON, Enron, DOE and state representatives, worked 
over a period of many months to develop consensus reliability 
legislation that would provide the new policies and institutions needed 
to assure electric reliability in the emerging restructured industry. 
This language was recently adopted by the North American Electric 
Reliability Council (NERC) by a near-unanimous vote. This then is 
module one of necessary federal legislation on electricity 
restructuring.
2. Clarify State/Federal Jurisdiction
    Currently, the dividing line between what is subject to federal 
regulation and what is subject to state regulation is unclear. Some 
argue, for example, that the states do not have the ability to order 
customer choice because states do not have authority over transmission 
in interstate commerce. FERC, however, is prohibited from ordering 
retail wheeling. Thus, there is, some contend, a ``gap'' in the current 
jurisdictional scheme.
    There are other confusions. In Order 888, FERC took the position 
that it has the authority to regulate the transmission component of 
``unbundled'' retail sales. Some states disagree. Moreover, some who 
agree with FERC believe that FERC also has jurisdiction over the 
transmission component of ``bundled'' retail sales and should be 
exercising this jurisdiction.
    Until and unless these ambiguities are resolved, there will be 
litigation, uncertainty and conflict between and among the states and 
FERC, and other elements of the electric industry. To resolve this 
uncertainty, legislation such as was set forth in the Paxon-Largent 
draft of last year and the Bingaman bill in the Senate (S. 1276) should 
be enacted. Among other things, states would be given secure 
jurisdiction over all retail customers through a more clearly-defined 
distribution jurisdiction, and FERC's authority over transmission in 
interstate commerce, including the transmission component of unbundled 
retail sales, would be confirmed.
3. Extend FERC's Jurisdiction to Encompass All Transmission Facilities, 
        Including Transmission owned by the PMAs, Munis, Co-ops and TVA
    We cannot have the efficient, reliable interstate transmission grid 
necessary to support a competitive electricity generation market and 
increased customer choice unless the entire grid is operating under the 
same rules and conditions. The great majority of co-ops and municipal 
utilities do not own substantial transmission, but those who do should 
provide access to those facilities on the same rates, terms and 
conditions as apply to transmission owned by investor-owned utilities. 
The same should be true for transmission owned by TVA, BPA and other 
Power Marketing Authorities.
    Again, the Paxon-Largent draft of last year contained provisions to 
accomplish this. These should be the third module of federal 
legislation.
4. Repeal PUHCA
    There is no reason whatsoever to retain this statute and many 
reasons to repeal it. Every day it remains on the books, it distorts 
competition and investment in the electric and natural gas industries. 
Its principal focus of encouraging ``integrated'' utilities (growth 
through contiguous expansion) actually is in conflict with antitrust 
objectives which seek to limit the presence of any one firm in a given 
geographic market. PUHCA repeal legislation as introduced last year in 
the House and the Senate, and included in the Paxon Largent draft 
should be the fourth module of federal legislation.
5. Prospectively Repeal PURPA Purchase Mandate, Preserve Existing 
        Contracts and Provide for Recovery of PURPA Costs
    There is no place in a competitive generation market for a federal 
statute that mandates that utilities (even utilities that have divested 
all their generation) purchase power from certain favored generators. A 
vestige of the Carter-era Energy Plan, PURPA inadvertently demonstrated 
that non-utilities could generate electricity and that generation could 
be competitive. PURPA, however, has largely failed in its stated 
purposes, which were to encourage energy conservation and more 
generation from non-fossil fuel resources. The substantial majority of 
PURPA projects are fossil-fuel powered. Moreover, because of a 
complicated government-dictated pricing scheme dependent on our ability 
to accurately predict energy prices (tried and failed more than once) 
PURPA is now costing consumers billions of dollars every year for over-
priced power. It is time to put this to an end. However, the 
investments made based upon PURPA should be honored, and the federal 
government, which imposed this purchase obligation on utilities, should 
ensure that these utilities are able to recover these costs
    Legislation to make these reforms to PURPA has been introduced in 
the House by Mr. Stearns and in the Senate by Messrs. Mack and Graham. 
Similar legislation was included in Paxon-Largent, and should be 
included in any federal legislation.
    That is it. Doing just these five things would remove critical 
federal barriers to customer choice, competition and innovation in the 
electric industry.
          issues for the future: what congress may need to do
    While I believe that there is at present insufficient consensus to 
enact legislation in areas other than the five that I have addressed 
above, growing concern in two areas, in particular, compels me to bring 
these to your attention and offer my views.
1. Mergers
    Section 203 of the Federal Power Act requires that FERC approve the 
disposition of any jurisdictional facilities in excess of $50,000. 
Thus, in addition to the traditional antitrust approvals required from 
the Department of Justice or the FTC, an entity disposing of 
jurisdictional electric facilities must obtain FERC approval. FERC has 
made valiant efforts to manage this responsibility in a manner 
compatible with the restructuring electric industry, but I, at least, 
have come to the conclusion that change is necessary. While an $80 
billion merger of two oil giants can be approved in a matter of months 
(or so it appears) mergers involving utilities one-tenth that size (or 
less) are taking years. In the natural gas pipeline industry, as to 
which FERC has no similar section 203 authority, substantial 
consolidation has taken place and continues to occur in the aftermath 
of wellhead deregulation and open access transportation in order to 
obtain economies of scale and scope. Consolidation in the electric 
industry, as it has in the natural gas pipeline industry, is being 
driven by deregulation, technology evolution and growing competition. 
Consumers will not obtain the full benefits of competitive generation 
markets unless the process of consolidation and industry 
rationalization is allowed to go forward.
    Mr. Burr has introduced legislation that would repeal section 203. 
Personally, I think this makes sense. I believe that section 203 FERC 
review is largely redundant to the reviews that are done by Justice and 
the FTC. However, I suspect that this is too big a step at this time. 
Instead, I would suggest a look at the referral process used in the 
United Kingdom. Borrowing from that process, section 203 could be 
amended to require that proposed merger proponents file information 
with the FERC, and that FERC be given a set time (perhaps four or five 
months) to analyze that information and make a recommendation to the 
antitrust authorities. In this way, the antitrust authorities would 
have the benefit of FERC's special expertise, but FERC would not be in 
the position of trying to recreate antitrust and market power expertise 
that resides already with the antitrust authorities. Most importantly, 
the industry realignment necessary and appropriate to provide more 
efficient, lower cost service to consumers in the new, restructured 
industry can go forward without undue delay and redundant reviews.
2. Transmission Policy
    With your permission, I would like to submit with this statement a 
paper entitled ``Transmission, Congestion, Pricing and Incentives,'' 
authored by Leonard S. Hyman, a senior Industry Advisor at Salomon 
Smith Barney. This paper was presented at a conference in New York on 
February 3, 1999. I would like to do this because I believe this little 
paper provides you with more and better information about what is right 
and wrong with our current transmission policies than anything else I 
have seen. Taking a step back from the current raging debates over ISO 
vs. Transcos, Mr. Hyman documents that transmission expansion has not 
kept up with growth in the market, and that current transmission policy 
provides little incentive to invest in new transmission or deploy new 
technologies to improve the capacity or efficiency of the system. 
Although Mr. Hyman comes down on the side of independent, for-profit, 
transmission companies as opposed to non-profit ISOs, this may be less 
important than getting the underlying regulatory structure right so 
that two things are known: 1) who is responsible for maintaining an 
adequate, efficient transmission system; and 2) those investing in 
increasing the capacity or performance of the transmission system will 
earn a reasonable return.
    If these two matters are not resolved, we will all be spending our 
time talking about how to manage the symptoms of inadequate 
transmission capacity rather than providing to all consumers the full 
benefits of a competitive generation market.
                               conclusion
    Thank you again for the opportunity to offer my views. I know it 
will not be easy, but I encourage this Committee to assemble and move 
the five-part legislation that I have outlined. As with most 
legislative efforts, it will not be all that everyone, or perhaps even 
anyone, wants. It may be too much for some. It would, however, remove 
critical federal barriers to the advance of competition in the electric 
industry, while providing the new reliability institutions and 
protocols necessary to maintain and enhance the reliability of electric 
service. Other issues will be raised, such as transmission policy and 
mergers, but seeking to address these issues at this time will doom the 
legislative effort to failure. These issues are simply too far from 
consensus or are insufficiently developed to determine whether the 
legislative prescription being sought is addressing the right problem.
    ``Doing the doable,'' and the necessary that only the Congress can 
do is an important next step to unleash competitive generation markets 
and deliver the benefits of those markets to all consumers. I welcome 
the opportunity to work with this Committee toward this end.

    Mr. Barton. We thank you.
    The Chair has a pending engagement with the Texas 
Congressional delegation lunch. I am going to excuse myself. I 
have read the two statements of our next two testifiers. I will 
be back for the question period. So I would recognize Mr. 
Stalon and then turn the Chair over to the vice-chairman, Mr. 
Stearns.

                 STATEMENT OF CHARLES G. STALON

    Mr. Stalon. Good morning, Mr. Chairman; thank you for the 
opportunity of making a statement. At the expense of some 
redundancy, I will repeat some of the arguments that have been 
made earlier but start from a slightly different perspective.
    The principal feature of the modern electric industry that 
allowed proponents of electric industry restructuring to make a 
persuasive case for that restructuring is the nature of the 
modern transmission grid. The growth of extensive 
interconnections among electric utilities of North America, and 
I emphasize it is a North American grid, not the U.S. grid 
only, but the growth of extensive interconnections among 
electric utilities of North America and the continent-wide 
standards for the use of that grid permitted substantial 
expansion of trade among utilities in the 1970's and the 
1980's.
    The success of that trading demonstrated to all but the 
most skeptical that the creation of competitive markets for 
generating services was feasible and that the inherited system 
of regulating the industry as an end to end monopoly was no 
longer necessary or desirable. In the Energy Policy Act of 
1992, the Congress took a crucially important first step in 
restructuring the industry. A second step is sorely needed.
    I want to mention very briefly three issues that I consider 
to be critical. First, the one that has already been mentioned 
twice and deserves a third and perhaps a fourth emphasis: In 
order to create efficient markets for electricity and preserve 
reliability in the system and to preserve certain key features 
of the current system for creating and enforcing rules 
necessary to make the system work well, three things have to be 
dealt with and dealt with fairly quickly. First, the industry 
needs an organization that can credibly promise to create and 
enforce reliability standards for the planning, construction 
and use of the North American grid. Congressional action is 
necessary to empower such an organization. The North American 
Electric Reliability Council on which we have depended in the 
past can no longer make such a credible promise.
    Second, transmission lines are not generally considered to 
be good neighbors. In fact, to everyone other than electrical 
engineers, they are just ugly. Their benefits, however, are 
great, and they are essential to the efficient and reliable 
operation of the electric industry, and the only plausible 
assumption on which to build public policy is that the Nation 
will need to build more of them.
    These facts focus attention on the need to reallocate 
regulatory responsibility for overseeing the planning, 
construction and use of the U.S. component of the North 
American grid. The Federal Power Act allocated regulatory 
responsibilities between the States and the Federal Government 
for a concentrated and intensely regulated electric utility 
industry, and it did so at a time when using the grid to buy 
and sell power was a limited activity practiced only among 
utilities and even in that role was severely limited by the 
incentives confronting the utilities.
    That allocation has remained essentially unchanged since 
the initial enactment of the Federal Power Act in 1935. It is 
not likely that the transmission assets needed for efficient 
and reliable industry performance can be constructed under the 
existing allocation of regulatory powers and responsibilities.
    Third, there exists an urgent need to impose unambiguous 
responsibility on the Federal Energy Regulatory Commission for 
creating and maintaining efficient and reliable bulk power 
systems in the U.S. and to encourage the continued integration 
of the U.S. regional systems and to integrate those systems 
with those of Canada and, increasingly, with Mexico.
    To permit the FERC to fulfill these responsibilities, the 
Congress must grant the agency significant new powers. Such 
powers should include regulatory oversight and empowerment of 
the North American Electric Reliability Organization, which is 
the proposed replacement for the North American Electric 
Reliability Council, and give the FERC also strengthened powers 
to oversee the market rules for the operation of interconnected 
areas.
    My testimony elaborates to some degree on this, and I would 
close merely with one observation: it is apparent to all 
careful observers that progress toward efficient electricity 
markets has slowed substantially in the last year; I would say 
the last year or two. Restructuring continues, but the process 
is increasingly reflecting the bargaining power of different 
parties in different parts of the Nation more than it reflects 
an attempt to create efficient and reliable markets. We need to 
remind ourselves that the objective is to replace the 
regulation of natural monopolies with efficient markets for 
generating services and not to replace the regulation of 
natural monopolies with the regulation of rivalrous 
oligopolies.
    Congressional action is needed to reenergize this process 
and to make clear the objectives for the regulators.
    I thank you.
    [The prepared statement of Charles G. Stalon follows:]
          Prepared Statement of Charles G. Stalon <SUP>1</SUP>
---------------------------------------------------------------------------
    \1\ A Resume is attached at the end of the statement.
---------------------------------------------------------------------------
Introduction
    The principal feature of the modern electric industry that allowed 
proponents of electric industry restructuring to make a persuasive case 
is the modern transmission grid. The growth of extensive 
interconnections among electric utilities of North American and 
continent-wide standards for use of that grid permitted substantial 
expansions in trade among utilities in the 1970s and 1980s. The success 
of such trading demonstrated to all but the most skeptical that 
creation of a competitive marker for generation services was feasible, 
and that the inherited system of regulating the industry as an end-to-
end monopoly was no longer necessary or desirable. In the Energy Policy 
Act of 1992 (EPACT) the Congress took a crucially important first step 
in restructuring the industry. A second step is sorely needed.
Three Critical Issues
    In order to create efficient markets for electricity and to 
preserve key features of the current system for creating and enforcing 
rules necessary for electric industry reliability, three ``needs'' call 
for Congressional attention very soon. They are:
    One. The need for an organization that can credibly promise to 
create and enforce reliability standards for the planning, construction 
and use of the North American grid. Congressional action is needed to 
empower such an organization. The North American Electric Reliability 
Council (NERC) can no longer make such a promise.
    Two. Transmission lines are not generally considered to be good 
neighbors. In fact, to everyone other than an electric engineer they 
are ugly. Their benefits, however, are great. And they are essential to 
the efficient and reliable function of the electricity industry. The 
only plausible assumption on which to build public policy is that the 
nation will need to build more of them.
    These facts focus attention on the need to re-allocate regulatory 
responsibilities for overseeing the planning, construction, and use of 
the U. S. component of the North American grid. Transmission remains a 
natural monopoly and, consequently, extensive regulation remains a 
necessity. The Federal Power Act (FPA) allocated regulatory 
responsibilities between the states and the federal government for a 
concentrated and intensely regulated electric industry, and it did so 
at a time when using the grid to buy and sell electric power was a 
limited activity, practiced only among utilities, and even that role 
was severely limited by the incentives confronting utilities. That 
allocation has remained essentially unchanged since 1935 when the 
Federal Water Power Act of 1920 was made Part I of the Federal Power 
Act and Parts II and III were added to impose federal regulation on 
certain interstate activities of investor-owned utilities. It is not 
likely that the transmission assets needed for efficient and reliable 
industry performance can be constructed under the existing allocation 
of regulatory powers and responsibilities.
    Three. The need to impose unambiguous responsibility on the Federal 
Energy Regulatory Commission (FERC) for creating and maintaining an 
efficient and reliable the bulk power systems in the U.S. and to 
encourage the continued integration of the U.S. regional systems and 
the integration of these systems with those of Canada and Mexico. To 
permit the FERC to fulfill these responsibilities the Congress should 
grant to the agency significant new powers. Such FERC powers should 
include regulatory oversight of a new North American Electric 
Reliability Organization and strengthened oversight of market rules so 
that the rules in interconnected control area are complementary and 
will produce efficient outcomes.
    Permit me to discuss each issue in turn.
I. On the Need for Federal legislation to Empower a new North American 
        Electric Reliability Organization (NAERO).
    For a competitive generating industry to fulfill its theoretical 
promise, there must exist an organization that can credibly promise the 
beneficiaries of the system--and that includes almost every person, 
firm and government in North America--that it can create and enforce 
standards on all parties who build, operate, and/or use the North 
American grid that will provide, at a minimum, the level of electric 
industry reliability to which we have become accustomed. The North 
American Electric Reliability Council (NERC) is the organization to 
which we now look for the creation and enforcement of such standards. 
As I noted earlier, that organization cannot credibly make the needed 
promise in the new industry.
    In particular, the NERC relies on peer pressure as its principal 
enforcement tool; it has no ability to impose financial or other types 
of penalties on industry participants who dishonor the rules. That 
enforcement system worked tolerably well in the system in which 
regulated, large vertically-integrated utilities, government-owned and 
investor-owned, dominated the industry. But even in that environment 
failures occurred. Such a ``voluntary'' system cannot be expected to 
work when entrepreneurial, competitive generators dominate the 
generating sector.
    To its great credit the NERC has recognized that fact and has 
worked diligently for the last several years to develop a proposal for 
the Congress that can replace the NERC with a new organization (NAERO) 
with greater powers. That proposal should be before you soon, if it has 
not already arrived. That proposal deserves your serious and immediate 
consideration.
    When designing the powers of the NERC replacement and the powers of 
government regulators to oversee this new organization, it is important 
to keep in mind that reliability as we have come to know it in North 
America requires much more than the enforcement of a set of technical 
standards. Bulk power system reliability, on which reliability of 
service depends, is best seen as the cooperative production of a public 
good, to use the jargon of economists. Examples of public goods are 
national defense, light houses and medieval town clocks. The essence of 
a public good is that it cannot be withheld form one individual without 
withholding it from all. The public good called ``bulk power system 
reliability'' is produced by the control area operators, each of whom 
accepts a responsibility to buy certain inputs, commonly called 
ancillary services, that make it possible for all of them collectively 
to maintain a low probability of system failure. It is this 
``agreement'' among control area operators to share the cost of 
producing reliability that deters ``free riding.'' This ``agreement'' 
takes the form of mutual acceptance of the NERC reliability standards. 
Perpetuating this agreement is vital to the future of the industry, 
since each control area operator faces strong incentives to free ride, 
that is, minimize its expenditures for such services and let other 
control area operators bear the cost.<SUP>2</SUP>
---------------------------------------------------------------------------
    \2\ In California these ``inputs to reliability'' have been grouped 
under six heading, ``Regulation,'' ``Spinning reserves.'' Non spinning 
reserves,'' ``Replacement reserves,'' ``Voltage support/reactive 
power,'' and ``Black start capability.'' All six services are provided 
by generators. The first four are procured by the Independent System 
Operator (ISO), the control area operator for that portion of 
California served by competitive markets, in competitive bidding. The 
last two are acquired by the ISO by contract. Markets in other states 
are using different categorizations of such services and different 
models for producing reliability.
---------------------------------------------------------------------------
Background for reliability recommendation
    Power failures are one of the many inconveniences of modern life. 
Keeping the frequency of such failures relatively small is an important 
objective of managers and regulators of the electric industry. Power 
failures occur for many reasons, but it is convenient to group them 
into two types, failures of distribution systems and failures of bulk 
power systems.<SUP>3</SUP> Failures of distribution systems are caused 
primarily by weather-related phenomena, such as ice storms, 
thunderstorms, hurricanes, and tornados that break distribution lines. 
Such power outages are usually localized, and planning and actions to 
minimize the frequency and duration of them are management 
responsibilities of individual utilities. In contrast, failures of a 
bulk power system can cause power outages for users on many 
distribution systems simultaneously, and there is little that managers 
of individual utilities can do to protect their customers from them. 
Consequently, the reliability of each utility's services depends 
critically on the reliability of the bulk power system from which the 
utility receives its power. In 1965 an equipment failure in Ontario 
caused a complete loss of power in New York and Boston within seven 
minutes. In 1996 a failure later ascribe to a transmission line in 
Northern California overheating and sagging into trees caused a loss of 
power in nine states.<SUP>4</SUP> The Secretary of Energy's letter to 
the President of August 2, 1996 on this topic noted that an earlier 
failure on July 2, 1996 caused a loss of power to 2 million customers 
in 14 states.
---------------------------------------------------------------------------
    \3\ A bulk power system is defined as a set of generators and the 
transmission lines that interconnect them and, in turn, connect them to 
users and distribution companies. Such a system is commonly called an 
``interconnection,'' or ``grid,'' although the latter term is also used 
to describe the transmission network and connected generators of a 
single utility. The word ``interconnection'' has two common 
definitions: originally it meant a transmission line or set of 
transmission lines connecting one utility to another. The original 
meaning is still common. A second meaning is an alternating current 
transmission network in which all generators operate synchronously. The 
second definition encompasses the first.
    \4\ See, ``Blackout a Caution Sign on Road to Deregulation,'' New 
York Times, August 19, 1996, p. A.7 for a description of the August 
1996 blackout.
---------------------------------------------------------------------------
    The role of control area operators. Creating efficient, competitive 
power markets in an electric industry composed of interconnected 
control areas requires the existence of some agency with authority to 
define, impose and enforce rules for the operation of all control areas 
so interconnected. It has been noted that ``the pursuit of self-
interest, unrestrained by suitable institutions, carries no guarantee 
of anything except chaos.'' <SUP>5</SUP> In no part of the economy is 
this lesson more relevant than in the North American electric industry. 
As the industry evolves from one dominated by vertically-integrated 
utilities into one with competitive power markets and non-utility 
generators the system of coordinating institutions that has worked 
acceptably well to restrain and guide self-interested decision makers 
of intensely regulated firms must now be reconstructed to restrain and 
guide self-interested decision makers of competitive generating 
companies, competitive power merchants and competitive brokers.
---------------------------------------------------------------------------
    \5\ Lionel Robbins, The Theory of Economic Policy in English 
Classical Political Economy: (Macmillan & Co
---------------------------------------------------------------------------
    In an isolated system, such as one on a small island, one utility 
company may own the bulk power system and all distribution companies 
that take power from it. In that case, the task of reducing the 
frequency and duration of bulk power system failures is a management 
task. The more common case, whether on a large island or on a 
continent, is that generators and transmission lines of many companies 
are interconnected. In such a bulk power system, no single utility 
company has the capability of implementing rules to minimize the 
frequency and duration of bulk power system failures. Planning policies 
and operating rules must be imposed on decision makers in each control 
area for the benefit of all. Such plans and rules might be imposed by a 
government or by collective actions of the interconnected firms. In the 
North American electric industry the latter approach has been used. 
Collective actions by interconnected firms can continue to play a 
significant role in the new system, but adding financial penalties to 
the reliability agency's enforcement quiver will require the 
endorsement of the Federal government, as well as Canadian and Mexican 
governments when the penalty is to be levied on industry participants 
in those nations.
    Currently, the coordination of generators and transmission assets 
is done by 150 or so control area operators. In each control area, the 
control area operator is required to operate the area's generating 
plants and transmission lines in conformity with rules created to 
ensure that the systemic results of the individual actions of all 
interconnected control area operators provide reliable service to all 
users in the interconnection. In operating these assets the control 
area operators' are expected to balance two objectives, economic 
efficiency and reliability.
    This description of the reliability system makes clear that because 
generators and the transmission lines to which they are connected do 
work as a machine, any discussion of one without the other can be 
justified only as an expository convenience. Any proposal for creating 
competitive power markets in which entrepreneurs are free to build 
generators and sell power into competitive markets must include a plan 
for the construction and operation of transmission lines that make a 
competitive market possible. Furthermore, it must be recognized that 
operation of a transmission system means operation of the generators 
attached to the transmission lines.<SUP>6</SUP> Still further, when 
large users connect directly to the grid, rather than to the lines of a 
distribution company, the control area operator will, for both 
reliability and efficiency reasons, want direct communications with 
such users.
---------------------------------------------------------------------------
    \6\ Existing technology does permit some direct controls that 
retard power flows over particular lines. Phase shifters, in 
particular, can be installed and operated to limit flows over 
particular lines. Technology on the horizon promises other control 
devices. However, a free flowing transmission system has desirable 
stability characteristics, so those who place a high value on 
reliability demand a heavy burden of proof from those who want to 
install such control devices. If the industry finds it difficult to 
build additional transmission lines, or to upgrade the old ones, it is 
likely the industry will expand the role of direct control devices.
---------------------------------------------------------------------------
II. On the Need for Re-allocating Regulatory Responsibilities
    State regulators and many other have often characterized the FPA 
(and the Public Utility Holding Company Act) as legislation designed to 
``fill the Attleboro gap.'' The ``Attleboro gap'' was the ``gap'' in 
the system of utility regulation opened by the Supreme Court in 1927 in 
Public Utility Commission v. Attleboro Steam & Electric Co. (273 U.S. 
83 (1927)) when the court determined that states could not regulate the 
terms of an interstate transaction of a utility. Since states could not 
regulate such transactions and the Federal government did not regulate 
them, users could not be protected from the monopoly power of a utility 
engaged in such transactions.
    While this description of the FPA oversimplified reality, the 
statement does convey some basic insights into the FPA. First, the 
intent of the legislation was, in part at least, to preserve the powers 
of the states to regulate utilities effectively by imposing federal 
regulation on those matters which the States could not regulate 
effectively. For example, the last phrase in Section 201(a) states, ``. 
. . such Federal regulation, however, to extend only to those matters 
which are not subject to regulation by the States.'' Second, the FPA 
explicitly limits the jurisdiction of the Federal regulator. In Section 
201(b) the Federal regulator is explicitly denied jurisdiction over 
``facilities used for the generation of electric energy,'' ``facilities 
used in local distribution'' and over ``the transmission of electric 
energy in intrastate commerce, or over the facilities for the 
transmission of electric energy consumed wholly by the transmitter.'' 
<SUP>7</SUP>
---------------------------------------------------------------------------
    \7\ The FPA allows the FERC to order a utility to connect its 
transmission facilities with those of ``one or more persons engaged in 
the transmission or sale of electric energy, to sell energy to or 
exchange energy with such persons.'' This authority is limited by 
requiring the Federal regulator to find that the utility subject to the 
order would not be ``unduly burdened'' and that the order would not 
``impair [the utility's] ability to render adequate service to its 
customers.'' (FPA Section 202(b))
---------------------------------------------------------------------------
    Of utmost importance to the current debate, the FPA does not permit 
the Federal regulator to order a utility to build transmission 
facilities (except for the very limited purpose of establishing an 
interconnection with another utilities (See footnote 7.) nor does it 
permit the Federal regulator to grant a utility eminent domain rights 
to build transmission facilities if the utility wants to build. These 
powers were left with states in the original FPA and the remain with 
the states.
    This assignment of regulatory responsibilities is almost certain to 
cause serious inefficiencies and probably reduced reliability. The FERC 
has plenary powers to price unbundled transmission services of 
investor-owned utilities, and in the competitive market all 
transmission services of such utilities will be unbundled. Furthermore, 
the modern grid often requires that a line be built in one state when 
the initial benefits accrue largely to persons in another state. 
Obviously, the state asked to approve such a transmission line will 
resist. There will always be an alternative to building a particular 
line. The consequences of inadequate transmission capacity is 
increasing transmission congestion and less efficient forms of 
competition.
    Gaining the benefits of an efficient transmission system in an 
environment of hostility to transmission lines, especially new ones, 
calls for constructive compromise in two senses: In one sense, Some 
responsible agency must make a defensible decision that there exist a 
need for the investment and then make a defensible decision on exactly 
where the line should be built, recognizing both the need and the 
environmental and social costs. This dimension of the problem is not 
new. Regulators have been making these difficult decision for decades. 
Shifting this decision process from the states to the federal regulator 
would merely change the locus of decision power. It is the essential 
second compromise that is new. Many states will vigorously oppose a 
shift of these decisions to the federal regulator. Some compromise 
between national and local interests needs to be developed.
    An attractive proposal surfaced in the 1980s. It was created by 
Commissioner Ashley Brown of the Ohio Public Utility Commission who was 
Chairman of the Committee on Electricity of the National Association of 
Regulatory Commissioners.<SUP>8</SUP> His proposal recognized that the 
need determination might be made by the federal regulator and the 
actual routing of the line could be made by the state regulators. The 
federal regulator would be required to specify the beginning and ending 
point and perhaps some points in between. The task of the state 
regulators would be to determine the precise route of the facility.
---------------------------------------------------------------------------
    \8\ See Ashley Brown, ``The Balkans Revisited: a Modest Proposal 
for Transmission Reform,'' The Electricity Journal, vol. 2. 1989.
---------------------------------------------------------------------------
III. On the Need for Federal Action to Ensure That Regional Markets 
        Integrate to a Rational and Efficient North American Market.
    Substantial progress has been make in creating efficient markets in 
the former tight power pools of New England and PJM and in two large 
states, New York and California. Much work, however, remains to make 
those market as efficient as they ought to be. There remain two large 
states with a potential for creating reasonably efficient markets, 
Texas and possibly Florida. All other states are too small to create an 
efficient market within their state's boundaries. In my judgement, the 
California and PJM markets, the largest now in existence, are too 
small. The 150 control areas in North America need to be consolidated 
into less than 20 regional markets.
    Creating 20 or fewer markets, each of which can claim efficiency, 
is a necessary condition but not a sufficient condition to have an 
efficient electric industry. Those regional markets cannot be permitted 
to balkanize themselves by creating market rules and transmission 
pricing practices that deter efficient integration of the regional 
market into North American markets.
    The nation is not likely to get a truly efficient electricity 
market unless the Congress or the federal regulator has the power to 
insist on the development of large control area and on market rules 
that integrate the regional markets. Although the FERC is now testing 
the capability of FPA Section 202(a) to define the boundaries of 
regional markets, and the agency may find more power in that Section 
than I currently see, the ambiguity of that section persuades me under 
the best of circumstances it will take a several court rulings to 
establish its power. Congressional action could make it clear to all 
that the FERC is charged with and has the power to insist on large 
regional control areas and on market rules that harmonize markets in 
the different regions.
IV. Concluding Thoughts
    It is apparent to all careful observers that progress towards 
efficient electricity markets has slowed substantially in the last year 
or so. Restructuring continues, but the process reflects the bargaining 
power of the different parties in different parts of the nation more 
than it reflects an attempt to create efficient markets.
    We need to remind ourselves that the objective is to replace the 
regulation of natural monopolies with efficient markets for generating 
services, not to replace the regulation of natural monopolies with the 
regulation or rivalrous oligopolies.
    Congressional action is needed to re-energize the process and to 
make clear the objectives.

    Mr. Stearns [presiding]. I thank the gentleman.
    The Honorable Mike Naeve is next.

                 STATEMENT OF CLIFFORD M. NAEVE

    Mr. Naeve. Thank you, Mr. Chairman.
    First, in response to the story told by Mr. Hall, I wish 
you would pass on to him that I began my testimony by telling 
the committee that I am from Texas.
    I very much appreciate the opportunity to testify today. I 
would like to begin by discussing what is happening outside 
this committee room. The electric power industry is changing at 
a phenomenal rate. Even as we meet today, the pace of change is 
increasing. This change is being driven by competitive forces. 
These competitive forces have been unleashed by Congress 
through the enactment of PURPA, the Energy Policy Act; through 
FERC through Order 888 and a great many other individual cases; 
by responsible State regulators and State legislators; and even 
by neighboring jurisdictions, such as the Canadian provinces of 
Ontario and Alberta, who are restructuring their markets.
    These competitive forces have reached irresistible 
proportions. They are driving the industry to reshape itself to 
fit the new competitive model. By way of example, many 
vertically integrated utilities are today beginning to 
disaggregate their businesses into the wires business, 
generating business, marketing business and so forth. Just 
within the last 2 years, over 50,000 megawatts of generating 
capacity have been auctioned off by previously vertically 
integrated utilities.
    The competitive forces are encouraging the entry of new 
market participants into this industry. These new market 
participants bring both investment capital, but more 
importantly, they bring intellectual capital to this industry. 
The forces have caused a great many mergers and consolidations 
among a variety of participants in the industry. These mergers 
are driven by the need and the competitive pressures to lower 
costs and find economies of scale.
    And finally, these competitive forces are forcing the 
rationalization of the transmission system, through the 
formation of regional transmission organizations: ISOs and, 
hopefully, Transcos.
    Having set this process in motion, it cannot be reversed--
nor should it. But we must see the process through to the end, 
and we must do so in a way that enables us to capture the 
benefits of competition while protecting against decreases in 
the reliability of service during the transition.
    In my prepared testimony, I have recommended a number of 
legislative changes that Congress could make to facilitate this 
transition. I have divided my recommendations into two broad 
categories. The first category includes those steps that 
Congress can take to simply get the Federal Government out of 
the way of the process. It is ironic that it was Federal law 
and Federal regulators that kicked off the transition to a 
competitive market. And yet, other aspects of Federal law now 
preclude us from realizing the full benefits of competition. 
Therefore, I believe the most important thing that this 
committee can do is to clean up the Federal Government's own 
back yard. This includes repealing PUHCA, reforming PURPA, 
bringing TVA and PMAs under FERC's transmission jurisdiction 
and directing them to participate in RTOs, regional 
transmission organizations.
    My second category of recommended legislative changes 
consists of additional steps Congress can take to facilitate 
competition. These include giving FERC transmission siting and 
eminent domain authority and giving FERC transmission 
jurisdiction over public utilities. I recognize that these 
proposals and many of the proposals recommended by my 
colleagues on the committee are not without political 
controversy. If, in your judgment, it will take time to build a 
consensus to take these difficult steps, then you have no 
choice but to build that consensus and to take the time to do 
it.
    But I do have one suggestion, and that is do what you can 
now, while building the consensus needed on the remaining 
issues. The greater the competitive pressures that you unleash 
today, the easier it will be to finish the job tomorrow. In 
each of these steps I have described, any one of them will 
further increase the pressure on the industry, further change 
the industry, and as the industry changes, it becomes easier to 
enact the other steps.
    For the past 5 years, the search for a comprehensive bill 
has been a formula for inaction. Since there is much you can do 
right now, I would respectfully suggest that you just do it.
    Thank you; and Mr. Hall, I did begin my statement by saying 
I am from Texas.
    [The prepared statement of Clifford M. Naeve follows:]
             Prepared Statement of Clifford M. (Mike) Naeve
                              introduction
    I am pleased to testify today before this Subcommittee on electric 
utility restructuring issues. I served as a Commissioner of the Federal 
Energy Regulatory Commission (FERC) from 1985 to 1988, and I have 
represented a wide variety of clients in the electric utility industry 
in the 11 years since then.<SUP>1</SUP> While at FERC I was actively 
involved in numerous FERC initiatives to make natural gas markets more 
competitive. I believe that consumers have reaped considerable benefits 
from the resulting competitive commodity market that has developed in 
the natural gas industry. I likewise believe that the expansion of 
competitive forces in electric markets will bring about tangible 
consumer benefits. I hope that my testimony will be helpful to this 
Subcommittee as it considers legislation to accelerate the pace of 
electric restructuring.
---------------------------------------------------------------------------
    \1\ Attached as Exhibit A to this testimony is a statement of my 
qualifications.
---------------------------------------------------------------------------
    I and my law firm represent a number of electric utilities, 
independent power producers, power marketers and other participants in 
the electric power industry. These clients have diverse views on the 
need for comprehensive federal legislation. My testimony today 
represents my own views, and cannot be ascribed to any other person or 
entity. My practice is not focused on legislative activity. Instead, my 
practice focuses almost exclusively on restructuring transactions in 
the electric industry, and on the regulatory and antitrust issues 
associated with those transactions. In the interest of full disclosure, 
attached as Exhibit B to this testimony is a list of the significant 
publicly disclosed transactions in which my firm currently is engaged.
                  traditional federal and state roles
    Since the passage of the Federal Power Act (FPA) and Public Utility 
Holding Company Act (PUHCA) in 1935, the division of regulatory 
authority in the electric utility industry between the federal and 
state levels has been relatively static. Certain responsibilities have 
been assigned exclusively to one level or the other, while other 
responsibilities have been shared between both levels. The primary 
allocation of responsibility has been as follows:
Exclusively State
<bullet> retail sales
<bullet> distribution of electricity
<bullet> generation of electricity
<bullet> resource planning
<bullet> transmission siting
Exclusively Federal
<bullet> wholesale sales (FERC)
<bullet> interstate transmission of electricity (FERC)
<bullet> limited authority over interconnections (FERC)
<bullet> corporate structure (SEC)
<bullet> nuclear operations and safety (NRC)
Shared State and Federal
<bullet> mergers (States, FERC, SEC, NRC, DOJ/FTC)
<bullet> disposition of assets (States, FERC, DOJ/FTC)
<bullet> issuance of securities
<bullet>     SEC regulates issuance of securities by registered holding 
        companies and subsidiaries
<bullet>     States regulate issuance of securities by all other 
        utilities
<bullet>     FERC regulates issuance of securities if states do not
    The two major statutes affecting the industry that have been 
enacted since 1935--the Public Utility Regulatory Policies Act (PURPA) 
and the Energy Policy Act (EPAct)--have removed certain generation 
facilities from certain types of regulation, but have not disturbed the 
above allocation of jurisdiction.
                     traditional industry structure
    Investor-owned utilities range in size from a few very large, 
integrated holding companies spanning multiple states to a great many 
small companies operating in part of a single state. All investor-owned 
utilities are under FERC's jurisdiction for transmission and wholesale 
transactions. Until the last few years, investor-owned electric 
utilities for the most part were vertically integrated, franchised 
monopolies. Because the utilities had exclusive retail franchises, 
there was no competition for retail sales to speak of. And, because 
utilities controlled access to their transmission facilities, there was 
very little competition for wholesale sales either.
    Co-existing with investor-owned utilities are numerous publicly-
owned entities that were formed to provide utility services to various 
classes of customers. These include TVA, BPA and other federal Power 
Marketing Agencies (PMAs) that own and operate significant generation 
and transmission facilities. Also included are municipal and state-
owned utilities, as well as rural and other cooperatives created 
pursuant to the Rural Electrification Act. Many of these entities also 
own considerable transmission assets. Each type of publicly-owned 
entity is subject to a different regulatory scheme. No publicly-owned 
entity, however, is directly regulated by FERC.<SUP>2</SUP>
---------------------------------------------------------------------------
    \2\ These entities are subject, however, to FERC's authority to 
order transmission under Sections 211 and 212 of the Federal Power Act.
---------------------------------------------------------------------------
    As demand for electricity grew and utility systems expanded, these 
public and investor-owned utilities began to interconnect with one 
another, primarily for reliability purposes, i.e. to provide service in 
the event of emergencies and to purchase and sell power needed to serve 
load. These interconnected systems, in turn, formed the backbone of 
large regional transmission grids. Until recently, however, control of 
the regional grids has been balkanized among the diverse owners of 
transmission facilities that collectively made up the grids. Not only 
has the control been divided among the numerous entities but a number 
of regulatory schemes have been applied to the various owners of the 
grid, depending upon whether the owner is an investor-owned utility, a 
PMA or a publicly-owned utility.
                 the electric industry is in transition
    In the last few years, legislators and regulators have enacted 
programs that have given the electric industry strong incentives to 
rethink and restructure the way that they do business. The first step 
was the passage of PURPA in 1978, but most of the steps have been taken 
in this decade. These steps include:

<bullet> The passage of the EPAct in 1992. This Act (1) created the 
        Exempt Wholesale Generator (EWG) exemption from PUHCA; (2) 
        granted FERC more explicit authority to order access to 
        transmission facilities under Sections 211 and 212 of the 
        Federal Power Act; and (3) created the Foreign Utility (FUCO) 
        exemption from PUHCA.
<bullet> The issuance by FERC of Order No. 888, which requires 
        utilities to provide nondiscriminatory open access to their 
        transmission facilities. FERC has taken a number of other 
        procompetitive actions on a case-by-case basis, frequently 
        relying upon its conditioning authority in mergers.
<bullet> The efforts by the SEC to provide more flexibility under 
        PUHCA, which have been limited by the strict confines of this 
        antiquated statute.
<bullet> The enactment of restructuring legislation and regulations by 
        a number of states.
    In response to these important policy changes, the traditional 
vertically integrated structure of the industry has started to come 
undone. Regulators and industry participants are beginning to view the 
electric utility industry as consisting of at least five distinct lines 
of business: (1) generation; (2) wholesale sales; (3) retail sales; (4) 
transmission; and (5) distribution. Some of these business activities, 
such as transmission and distribution, must continue to be regulated in 
some fashion as natural monopolies, at least until technological 
advances permit greater competition. Under the right circumstances, 
however, other business lines, such as generation and wholesale and 
retail sales, can be carried out on a competitive basis. Indeed, the 
generation business already is very competitive, and the wholesale 
sales sector is not far behind. The retail sales market also is 
becoming increasingly competitive as the states implement 
restructuring.
    In response to the programs implemented by state and federal 
legislators and regulators to facilitate and encourage competition, the 
utility industry has changed rapidly. Four significant changes in the 
traditional industry structure have emerged:
Disaggregation
    First, as generation and sales markets have been opened up to 
competition, a number of utilities have begun the process of 
disaggregation and separation of their regulated wires businesses from 
the other businesses that can operate in competitive markets. This 
process, which is a natural consequence of the opening up of generation 
and sales to competition, also has been spurred by state and federal 
regulations to prevent owners of wires businesses from using their 
natural monopolies in those regulated businesses to benefit themselves 
unfairly in the competitive markets.
Entry of Non-Utility Participants
    Second, hundreds of new entities, such as independent power 
producers and power marketers, have entered the competitive generation 
and sales markets. While some of these entities are merely affiliates 
of utilities formed as part of the disaggregation process, many are 
completely new players with no previous connections to the electric 
utility industry.
Consolidation
    Third, in the last few years there have been a flurry of mergers of 
electric utilities, independent power producers, power marketers and 
other market participants. These mergers are a natural response to the 
onset of competition. In the old regulated cost of service regime, 
utilities had less incentive to be efficient, given that all prudently 
incurred costs could be recovered through rates charged to customers 
who had no alternative suppliers. As markets have become more 
competitive, utilities and other market participants have vastly 
increased incentives to explore all alternatives for reducing costs and 
improving services. Mergers frequently create the opportunity for scale 
economies that make suppliers more competitive in the new cut throat 
world. Even small savings, when applied to high sales volumes, can 
result in significant benefits both to shareholders and customers.
    Mergers also are a natural response to the disaggregation of 
vertically integrated utilities. Absent a merger, a smaller utility 
that divests its generating assets could become so small as to lose its 
ability to finance its remaining transmission and/or distribution 
business on reasonable terms and conditions. A merger between utilities 
that are divesting generation provides the combined entities with 
greater financial strength, as well as with scale economies.
Regional Control Over Transmission
    Finally, there has been a change in the operations and control of 
the regional transmission grids. Transmission systems are most 
efficiently and reliably operated on a regional basis. Several 
utilities have placed the operations of their transmission systems 
under the control of an independent system operator (ISO). Other 
utilities have begun the process of creating incentive-driven 
independent transmission companies (Transcos). FERC has actively 
encouraged the formation of both ISOs and Transcos, as well as other 
forms of regional transmission organizations (RTOs).
    The statistics tell the story of this dramatic evolution of the 
electric utility industry:

<bullet> Since 1997, 23 utilities have divested generation facilities 
        representing more than 50,000 MW of generation capacity, and 
        several other utilities have announced their intent to follow 
        suit.
<bullet> Through the end of 1998, FERC has issued 560 power marketers' 
        authorizations.
<bullet> Since 1997, 6 ISOs have been formed, covering the transmission 
        systems of California, Texas, the eastern United States from 
        Maryland north through New England, and a large part of the 
        Midwest. Several other ISOs and Transcos are in various stages 
        of development.
<bullet> Since 1995, almost 20 states have enacted statutes or 
        promulgated regulatory schemes requiring restructuring. 24 more 
        states currently are considering electric restructuring in 
        regulatory proceedings or proposed legislation.
<bullet> Since 1995, there have been 23 electric utility mergers 
        consummated, and over a dozen more have been announced and are 
        in the process of obtaining the necessary regulatory approvals. 
        There have been numerous other combinations involving 
        independent power producers, power marketers and other industry 
        participants.
<bullet> Since 1995, total wholesale sales by power marketers have 
        increased from 27 million MWh to 2.3 billion MWh in 1998.
                     implications of restructuring
    It may be too late to ask the question, but it is worth considering 
whether all the change that we are experiencing is a good thing. In my 
view, while the process has been somewhat uneven, on the whole we are 
on the right track. My experience has been that when competition is 
substituted for regulation, efficiency improves, innovation increases, 
and supply and demand become more closely balanced--all of which work 
to the benefit of both shareholders and consumers. Although vertically 
integrated companies do provide consumers with scope and scale 
economies, I believe the benefits of competition will more than offset 
the efficiencies that may be lost through disaggregation.
    I do not mean to say that there is no future role for regulation. 
When the circumstances do not permit effective competition to exist, 
regulation is necessary to ensure that market participants do not abuse 
their market power. Even in markets that are competitive, some type of 
oversight is necessary to ensure that markets continue to operate 
competitively. For example, to the extent that an entity that owns a 
regulated wires business also participates in a competitive generation 
or sales market, regulation of some type is necessary to ensure that 
the entity does not use its market power in the wires business to give 
it an unfair advantage in the competitive market.
    The current transition toward disaggregation allows the benefits of 
competition while retaining regulatory oversight where needed. By 
disaggregating the industry into separate sectors, those sectors that 
are competitive can operate with a minimum of regulation, while those 
sectors that are not competitive can continue to be regulated.
    Another issue that frequently is raised in connection with electric 
utility restructuring is the potential impact on reliability of 
service. There are two principal elements to reliability. The first is 
the reliable and secure operation of regional transmission grids, and 
the creation and implementation of rules to promote such reliable and 
secure operation. The second is the ability to construct new facilities 
to ensure that there is enough generation and transmission capacity 
available to satisfy customer demand.
    With respect to the first element, restructuring can only help. The 
trend towards centralizing control of the regional transmission grids 
under a single regional operator instead of under several owners with 
differing interests and incentives will allow better decisions 
regarding the operation and maintenance of the grid. This should result 
in more reliable operations.
    With respect to the construction of new facilities, it is too early 
to tell for sure how the competitive model will work in comparison with 
the command and control type regulation that has been used in the past. 
I do know, however, that under any model investments will not be made 
unless the investors believe that it will be profitable to do so. I 
also know that, under the old system, there have been relatively few 
investments in facilities by regulated electric utilities in recent 
years. This is illustrated by the supply shortage that occurred in the 
Midwest last year, which was a result of the failure of the old system 
to provide the proper incentives for investment in generation 
facilities. I believe that a competitive market is more likely to 
provide the correct incentives for investment. Again, this is 
illustrated by the example of the Midwest, where several new 
unregulated merchant plants have been announced in the wake of last 
year's supply shortage.
                      additional legislative steps
    The changes that have occurred over the last few years are 
phenomenal. I would not have expected at the beginning of the decade to 
see such rapid progress. The question that Congress now must face is 
whether the existing incentives that have driven the changes are 
adequate to complete the job, or are additional policy changes 
necessary to see the transition through to the end. Congress also must 
consider whether the pace of change has been or will be fast enough, or 
whether additional steps are necessary to accelerate the process.
    In my view, federal regulators are doing as about as good a job as 
they can under the current statutory framework, as are many state 
regulators. There are a number of additional legislative steps that 
only Congress can take, however, to facilitate the process and maximize 
the benefits of restructuring. These steps fit into two broad 
categories: (1) elimination of existing federal impediments to 
restructuring (i.e. getting the federal government out of the way); and 
(2) creation of additional regulatory tools to facilitate 
restructuring. I discuss below possible legislative action that could 
be taken in each of these categories.
Elimination of Barriers
    1. Repeal of PUHCA. In my view, the single greatest existing 
barrier to industry competition and restructuring is PUHCA. This Act 
was passed at a time when large holding companies were engaging in 
suspect securities transactions and taking advantage of the limited 
reach of state regulatory commissions over interstate transactions. 
PUHCA was decidedly successful in breaking up those holding companies 
and putting an end to their abuses. It is not needed today, however. As 
the SEC Staff found in 1995, securities laws have advanced considerably 
since 1935, and the Federal Power Act, which was passed in conjunction 
with PUHCA, has filled the regulatory gap. Furthermore, state public 
utility regulatory laws and agencies have improved significantly since 
1935.
    In proposing the repeal of PUHCA, I am arguing against my own self 
interest. A major part of my practice in the past several years has 
consisted of advising clients how to structure transactions in ways 
that will pass muster under PUHCA. All too often, however, I have seen 
PUHCA act as a barrier to efficient restructuring transactions, or else 
cause transactions to be structured in a suboptimal way.
    The manner in which PUHCA favors or disfavors transactions is 
almost completely random. PUHCA makes it easier for a domestic utility 
to acquire foreign utility assets than U.S. utility assets. It 
significantly restricts successful non-utility businesses from 
acquiring utility assets or offering utility services. It also 
restricts utilities from investing in the businesses they know best--
utility businesses--while, for the majority of companies, imposing no 
restrictions on investments in unrelated businesses. PUHCA also 
prevents EWGs from competing directly for retail electric sales.
    PUHCA frequently is mistakenly described as protecting against 
anticompetitive combinations. That description is mistaken. Very large 
utility transactions can be completed without any PUHCA review 
whatsoever, while small transactions may simply be impossible to 
complete under the Act's arcane standards. Further, in its 
administration of PUHCA, the SEC almost universally defers to other 
states and federal regulators to evaluate competitive issues.
    PUHCA also frequently is mischaracterized as a consumer protection 
statute. Again, this description misses the mark. While PUHCA requires 
the SEC to regulate certain transactions between utilities and their 
affiliates, the effect of SEC regulation frequently is to preempt FERC 
or the states--which have greater resources and expertise--from 
regulating the same transactions that effect rates charged to 
consumers. The relatively few consumer protection tools found in PUHCA 
are duplicative of, and inferior to, the consumer protection powers of 
FERC and the state regulators.
    Finally, repeal of PUHCA is not solely of interest to public 
utilities. While PUHCA repeal certainly would benefit traditional 
utilities, it also would benefit independent power producers and other 
entities that are interested in participating in the electric utility 
market. PUHCA has the effect of keeping out of the market all potential 
participants who cannot qualify for an exemption or who are unwilling 
to become registered holding companies--which in and of itself places 
severe restrictions on market participation. Repeal of PUHCA would 
permit efficient transactions to occur, would allow transactions to be 
structured in the most rational way and, most importantly, would allow 
a host of new competitors to own utility assets and compete to provide 
utility services.
    2. Amendment of PURPA. When PURPA was passed in 1978, it played a 
very important role in opening the generation market to competition, 
which was the first step in the transition away from the vertically 
integrated utility structure. Now that we are much further down the 
road, however, there are two aspects of PURPA that need to be 
reconsidered.
    First, PURPA obligates utilities to purchase electricity from 
qualifying facilities (QFs). This mandatory purchase obligation was 
crucial in 1978 to force utilities to purchase power from independent 
power producers. It no longer is needed in today's market for new 
generation, where most utilities have all but abandoned the field, and 
state regulators are skeptical of generation that is added without 
going through competitive procurement. The mandatory purchase 
obligation is the very antithesis of competition and is fundamentally 
inconsistent with the creation of competitive markets. This obligation 
should be eliminated on a prospective basis.<SUP>3</SUP>
---------------------------------------------------------------------------
    \3\ Elimination of the obligation to purchase should be prospective 
only. Large investments of capital already have been made based on 
existing contracts, and those contracts should not be abrogated.
---------------------------------------------------------------------------
    Second, PURPA limits the ability of electric utilities to invest in 
QFs. This too was an important feature of the Act in 1978, when the 
goal was to encourage independent ownership of generation. Again, 
conditions have changed enough today so as to nullify the concern 
underlying the ownership restriction. The generation market now is 
highly competitive, and there is no reason to restrict utility 
ownership of any type of generation facility. Indeed, in 1992 Congress 
saw no reason to restrict utility ownership of EWGs.
    The PURPA ownership restrictions have had another unintended 
consequence. PURPA not only limits utility investments in QFs, but it 
also limits QF owners' investments in utility assets. Once a QF owner 
purchases utility assets, it becomes either a utility or a utility 
holding company, both of which are restricted by the FERC regulations 
implementing PURPA from owning more than 50% of a QF. Thus, for 
example, Cal Energy has been forced to divest a portion of its 
ownership interests in its QFs as a consequence of its purchase of 
MidAmerican--an electric utility holding company.
    As a consequence, PURPA should be amended to revise the ownership 
restrictions. Utilities who have retail franchise monopolies probably 
still should be limited in their ability to own QFs from which they 
purchase power, but otherwise utilities should be permitted to own QFs.
    3. Amendment of Atomic Energy Act Foreign Ownership Prohibition. 
The Atomic Energy Act (AEA) currently includes a prohibition against 
foreign ownership of nuclear generation. This restriction has inhibited 
a number of transactions that have involved foreign companies. Again, 
the result has been a less-efficient transition toward a restructured 
industry.
    As many U.S. utilities are exploring ways to divest their interests 
in nuclear plants, there is much to be gained by permitting 
knowledgeable foreign companies to compete to acquire nuclear 
facilities. I am not suggesting that there are not important national 
security concerns associated with the foreign ownership of nuclear 
generation, nor am I recommending that these concerns not play a role 
in determining whether and how foreign ownership should be permitted. 
However, the prohibition contained in the current law makes no sense to 
me. There surely must some way to permit foreign ownership without 
jeopardizing national security. There are sophisticated nuclear power 
technologies employed by utilities in England, France, Japan and other 
Western allies. Our domestic nuclear industry could benefit from the 
knowledge and experience of these utility companies without endangering 
national security.
    4. Include TVA and PMAs in the Transition. Another stumbling block 
in the path to competition has been TVA, BPA and other PMAs. These 
entities, particularly BPA and TVA, dominate their regions. Yet they 
have lagged behind the private sector in restructuring, and have 
represented a significant impediment to the creation of regional 
transmission entities in their regions. It is not necessarily the case 
that these entities actively oppose a national transition to 
competition. Rather, their underlying statutory schemes are not easily 
adaptable to the new competitive model.
    Congress has two choices for dealing with this problem. First, 
these entities could be privatized. This automatically would cause them 
to fit under the same regulatory scheme as the rest of the industry and 
would permit them to follow the same transition to competition.
    I recognize that this may be a difficult step to take. At the very 
least, however, legislative changes should be implemented to ensure 
that TVA, BPA and the other PMAs join the path toward competition 
rather than act as impediments to the transition process.
    First, the provision of transmission by these entities should be 
brought under FERC's jurisdiction. It is important for competition that 
all interstate transmission fall under a common regulatory scheme. 
While the federal utilities have filed transmission tariffs that are 
similar to the open access tariff required by FERC, the fact that FERC 
does not have direct jurisdiction over them makes a big difference in 
how they are required to behave.
    Second, legislation should be written that makes clear that TVA, 
BPA and the other PMAs are required to join ISOs or other regional 
transmission organizations within a reasonable amount of time. As I 
previously discussed, lack of federal utility participation has made it 
difficult for regional transmission organizations to get started in 
regions where they are located.
Tools to Facilitate Restructuring
    The most important step for the federal government to take is to 
eliminate existing barriers to restructuring and get out of the way. 
The proposals that I have identified above are intended to achieve this 
objective. In addition, there are some affirmative steps that Congress 
could take to facilitate efficient restructuring. Included are the 
following:
    1. Federal Authority Over Transmission Construction and Siting. 
There is one significant mismatch in the allocation of authority 
between the federal government and the states. On the one hand, FERC 
has jurisdiction to regulate the rates and terms and conditions for 
transmission service. On the other hand, the states have the authority 
to approve the siting and construction of transmission facilities. The 
lack of FERC jurisdiction over transmission siting represents a major 
distinction between the two principal statutes that FERC 
administrates--the Federal Power Act and the Natural Gas Act. FERC is 
responsible for authorizing interstate natural gas pipeline 
construction under the Natural Gas Act.
    In the past, transmission was built largely to upgrade the 
reliability of service by vertically-integrated electric utilities to 
their retail franchise monopoly customers. In that circumstance it made 
some sense for state commissions, who were primarily responsible for 
regulating the provision of service to the retail franchise monopoly 
customers, to have jurisdiction over transmission additions. Today, 
however, the primary need for transmission is to permit or enhance 
interstate wholesale transactions and competition, and to enhance the 
reliability of the interstate grid. FERC more properly is the overseer 
of transmission additions for this purpose.
    Second, it increasingly is the case that the benefits of 
transmission construction may fall primarily outside of the state where 
most of the construction occurs. For example, if a utility located in 
one state constructs a transmission line in another state to connect it 
with a source of supply, it may be that the majority of the benefits go 
to one state while the majority of the construction occurs in another 
state. Under these circumstances it may be difficult to obtain the 
necessary permits from the adjoining state, which has no incentive to 
approve the construction.
    The effect of the different allocation of siting responsibility 
between the Natural Gas Act and the Federal Power Act can be seen in 
the amount of construction activity in the two industries. Both 
industries have been transformed in the last decade into competitive 
industries where the construction of new facilities is vital to 
increasing competition. Yet, while there has been substantial 
construction of new interstate pipeline facilities in that time, there 
has been comparatively little construction of transmission facilities.
    It no longer is appropriate for decisions over transmission 
construction and siting to be made on a state level. Instead, that 
authority should be moved to FERC, consistent with its authority under 
the Natural Gas Act. Similarly, FERC should be given the power of 
eminent domain for the construction of transmission facilities, 
consistent with the grant of eminent domain under the Natural Gas Act. 
This way decisions regarding new transmission facilities can be made 
with a view towards achieving the best results on a regional or 
national basis rather than on a parochial basis, and those decisions 
can be carried out effectively to enhance competition.
    2. Encouragement of RTOs. As I testified previously, control over 
the operation of transmission facilities is increasingly being shifted 
to regional entities, whether ISOs, Transcos or other forms of RTOs. In 
my view, this is a good trend. Competition in sales markets is enhanced 
when entities are able to transmit electricity on a regional basis at 
non-pancaked rates. More importantly, reliability is enhanced when 
transmission operators control flows over the entire regional grid 
rather than over fragmented segments, and when investment decisions are 
based on regional needs.
    Furthermore, for the same reason that I favor competition, I am 
inclined to believe that incentive driven Transcos should be preferable 
to ISOs. A Transco will have more incentives to operate and expand its 
facilities and consider all resource options in an efficient manner 
than an ISO that is not primarily motivated by operating the 
transmission system in a way that maximizes profits.
    I do recognize, however, that many believe that it is easier to 
form an ISO governing the transmission systems of several entities than 
it is to form Transcos, although there are Transco proposals currently 
under development. Given the benefits of regional transmission 
operation, I believe that ISOs at the very least can be useful 
transition vehicles for eliminating the balkanization of control over 
regional transmission grids.
    Given the rapidly evolving nature of regional transmission 
organizations, I am hesitant at this point to recommend that the 
Congress mandate any particular path. Our learning on the issue may not 
be advanced enough for any particular solution to be locked in today. 
Instead, we need to leave in the flexibility for paths not yet apparent 
to be pursued.
    There are, however, several impediments to the formation of 
regional transmission organizations that should be removed. I have 
discussed some of these previously, but I will address them again with 
particular emphasis on their relationship to the formation of regional 
transmission entities.

<bullet> PUHCA ownership restrictions. Among its numerous impediments 
        to competition is the impact of PUHCA on the formation of 
        regional transmission entities--particularly Transcos. Any 
        large regional Transco will cover a multistate area. Yet PUHCA, 
        which would apply to the ownership of a Transco, would place 
        restrictions on the private ownership of such an entity. The 
        solution is to repeal PUHCA.
<bullet> Transmission constraints. In some regions there are 
        transmission constraints that place significant limits on the 
        amount of power that can flow through certain facilities. The 
        result may be fragmented transmission systems that cannot 
        easily be integrated into a regional system. States may be 
        reluctant to act to relieve such constraints solely to improve 
        the interstate grid, and likely will become more reluctant in 
        response to a request by a regional transmission operator where 
        the apparent benefits to that state may be even more remote. 
        The solution is to give FERC siting and eminent domain 
        authority for the construction of transmission facilities.
<bullet> Nonjurisdictional transmission owners. Some regions are 
        dominated by transmission owners that are not subject to FERC's 
        jurisdiction, and who are either reluctant to participate in 
        regional entities or cannot so participate as a matter of law. 
        For example, it is difficult to form an ISO in a region where 
        there is a large federal utility, such as BPA in the Pacific 
        Northwest and TVA in the Southeast. Similarly, public power 
        systems are concerned that participation in an ISO might cause 
        the loss of their tax-exempt status. The solution is to bring 
        the federal utilities under FERC's jurisdiction and otherwise 
        require their participation in regional transmission entities, 
        as I previously have testified. FERC also should be given 
        jurisdiction over transmission services provided by the other 
        public power entities that currently are beyond FERC's reach. I 
        recognize that so extending FERC's reach probably requires 
        additional steps to eliminate barriers to participation by 
        these entities in RTOs, such as revisions in the tax code to 
        protect these entities existing financing.
  congress should not enact a comprehensive bill if that would delay 
               action on important individual components
    I feel compelled to make one final point, although I acknowledge 
that it is politically naive. There are a number of important actions 
that Congress can take to encourage competition that are completely 
unrelated to each other. In my view, Congress should enact as many of 
these as it can right away, even if that means that others have to be 
put off until later. Even if only one component can be enacted at this 
time, that component should be enacted. We now are in a crucial stage 
of the transition, and should do everything we can to move it along. If 
we wait until all parties can agree on all aspects of a comprehensive 
bill, it very well may be that the bill will be passed too late to have 
the intended effect.
    Whether it is repeal of PUHCA, amendment of PURPA, or any of my 
other proposals, Congress should act now on those issues that it can 
agree on even as it struggles with other more difficult issues. Any 
steps that it can take will benefit consumers and market participants, 
and Congress should do everything that it can to effect those benefits.

    Mr. Stearns. I thank the witnesses. Let me open up by just 
making an observation from listening to your testimony. First 
of all, it appears that all of you seem to agree that we need 
Federal electric legislation. I think that is trying to look 
where we all can agree, and also, all of you agree that the 
existing statutory authority that we have in place is 
inadequate to assure, I guess, perhaps, this deregulatory 
process and also the continued reliability of the transmission 
system. Do any of you disagree with that?
    No; okay. With those two premises in place, it seems to me 
in listening to the testimony, one of the areas of disagreement 
is the date certain. The Honorable Linda Stuntz has indicated 
that she thinks it is not mandatory, and the Honorable Moler 
has indicated she thinks it is. I would like to take off, just 
if you would, from that point of view and hear each of you, in 
a very short amount of time, say strongly why you think a date 
certain is very important and why it is not, and we will just 
go across the panel, because I think that has been one of the 
contentious issues among members, and so, to reiterate again, 
if you might start off, Ms. Moler, to describe why date certain 
is important.
    Ms. Moler. I believe a date certain is important because 
there are large sectors of the country where there is virtually 
nothing happening. I would respect, ultimately, a decision that 
any State regulatory commission made or any State legislature 
made if it were to determine that it did not want to have 
customer choice, but I believe that that determination should 
be made on a record where citizens have an opportunity to 
participate, and they would have to compile a record that would 
compellingly decide why competition is bad.
    Fundamentally, I believe that it would be very difficult to 
compile such a record, but if they make it, that is fine with 
me.
    Mr. Stearns. And FERC would have the environment?
    Ms. Moler. No, I would have a very simple certification to 
the Commission that we have looked at this, and we have decided 
that we do not want to do it, and then, any challenge to the 
State's determination would be done under State law.
    Mr. Stearns. Okay; Ms. Stuntz?
    Ms. Stuntz. Thank you, Mr. Stearns.
    I believe it is not a critical element of legislation, 
first, because nearly half the country is already in a State 
that has adopted choice, so we are already, depending on your 
statistics, 45 or 50 percent of the country is there; that does 
not include Texas or Ohio, which I know are looking hard at 
this. So I believe that number will go up before the end of the 
year.
    Second, of the States where nothing or less is happening, I 
believe many of those are low-cost States who legitimately view 
this as not necessarily in their interest to do, and I think it 
is hard for us to say from the Federal level that they are 
wrong and they should be preempted.
    And I guess third is I think if this market expands, and I 
think we are seeing signs of this already, brings to consumers 
the benefits that I expect that this is going to happen on its 
own, so that--and you see signs of that in the paper if you 
read about what is going on in Maryland or Virginia. They talk 
about, well, Pennsylvania has done this, and we need to get 
with this, because we might lose economic development 
opportunities.
    And, I guess, finally, as I said, I do believe it will be 
the poison pill in your legislative effort.
    Mr. Stearns. Okay.
    Ms. Stuntz. And I think the perfect will be the enemy of 
the good.
    Mr. Stearns. Do you think if you had two States that did 
not want to comply with a date certain that you could develop 
reciprocity incentives between them? What you are indicating, 
like in the State of Maryland, it is going to change because of 
survival, because the economics----
    Ms. Stuntz. Right.
    Mr. Stearns. [continuing] is going to other States.
    Okay; Charles Stalon?
    Mr. Stalon. I would draw a distinction between the role of 
very large players, large users, and creating efficient markets 
and very small users, and I would not insist that the States 
have a date certain for allowing smaller users to enter the 
competitive market. I would let them have substantial freedom, 
perhaps complete freedom, to make that decision.
    But large users are quite different. It is very difficult, 
almost impossible, to create an efficient competitive market 
unless you have sensitivity to prices among the buyers. As long 
as the buyers and the distribution companies who are required 
to sell to the users at an average price, the only demand curve 
they can bid into the market is a perfectly vertical one, which 
creates the terrible problem of price spikes. So I would 
mandate a date certain for large users, so we could get their 
buying skills into this market as a constraint on price spikes 
and as an intensifying pressure in a competitive market.
    Mr. Stearns. Mike Naeve?
    Mr. Naeve. Thank you.
    First, let me state that I believe in retail choice. I 
think it is good public policy. I have watched as Congress has 
attempted to build a consensus on retail choice. The concern 
that I have is that the longer it takes to build this 
consensus, the more difficult it becomes to enact legislation. 
While we are waiting to enact retail choice legislation, each 
State or a great many States are adopting their own programs. I 
believe those programs should be grandfathered.
    But as you build those programs, the complexity of the 
legislative process becomes more difficult, both because you 
tend to lose support for the process but also because it 
becomes very difficult to draft a bill that decides what is 
grandfathered; what is not; what are the parameters; which 
programs do you change or do you not change?
    I would also say I have been involved in the State retail 
choice programs in several States, and it is very complicated: 
questions about demand credits; questions about what do you do 
with load pockets; so forth. It is a more complicated issue 
than I previously thought. So I would say retail choice is a 
good thing, but my primary concern is waiting for a consensus 
for retail choice has caused us to lose the opportunity to do a 
great many other good things, and if we were to do those other 
good things, I think the forces of competition inevitably would 
cause retail choice to be a consensus in this country.
    Mr. Stearns. I thank the witnesses, and now, questioning 
from the ranking member, the gentleman from Texas, Mr. Hall.
    Mr. Hall. I thank you, and I guess, Ms. Moler, you have 
been a real leader on thinking through competition, and we are 
very happy to have you here today, as we were happy to have you 
in Texas when you were the----
    Ms. Moler. Thank you, sir.
    Mr. Hall. [continuing] speaker there for us.
    If I understand your testimony, on the one hand, it seems 
you seem to say on page 4 of your testimony that there are 
problems with some State plans, but since munis are not 
included, you also seem to call for a hard mandate requiring 
States to adopt retail competition by 2001, and I do not know 
which one of those to pursue, but I have read later where you 
seem to soften your testimony by saying opt out is a good idea 
and that you would grandfather existing retail competition 
laws.
    I do not really want to put you on too much of a spot, but 
I guess my question is whether or not you favor a real hard 
mandate or an opt out, and do you favor a clean grandfather for 
the State action or something else, and if it is something 
else, what would that be?
    Ms. Moler. I would favor a mandate, but I do not think it 
could fairly be called a hard mandate. I would grandfather 
generically those States that have acted. I would not try and 
figure out whether the fact that the California Legislature 
included some water projects in its legislation somehow made 
that an unworthy program. I would simply grandfather actions by 
States that have enacted customer choice, and I would, as I 
have said earlier, respect a determination made on the record 
by an appropriate State regulatory authority, presumably the 
PUC, that customer choice is detrimental to the citizens in 
that State.
    Mr. Hall. You would require that to be proved by the 
States?
    Ms. Moler. Pardon, sir?
    Mr. Hall. Was that the part where you were talking about 
competition and your proposal to have the States carry the 
burden of establishing, on the record----
    Ms. Moler. Yes, sir.
    Mr. Hall. [continuing] that competition would be harmful.
    I guess my problem with that is would that--and I ask you 
as an attorney--would that lead to a final decision that would 
make it appealable?
    Ms. Moler. Yes, it would; they would certify that to the 
FERC. I do not think it is necessary to have it appealable at 
the Federal level. I would just leave the normal State 
machinery in place for appealing State regulatory decisions.
    Mr. Hall. There would have to be a final decision by 
someone, somewhere, sometime, though, that would be appealable 
by the court, and would that not lead to the courthouse? And 
that is where something like that is going to wind up.
    Ms. Moler. We are headed there in many respects in this 
business. The restructuring statutes have been appealed even 
without a mandate in a number of States. So that is not a new 
problem.
    I also think that establishing a mandate for customer 
choice and then having the States take some sort of voluntary 
action is consistent with the Constitutional questions that 
have arisen under the Prinz v. United States, the Brady Bill 
Supreme Court decision.
    Mr. Hall. Linda, do you have any comments on that? I think 
you--go ahead. I am not trying to tell you what to say, but I 
would like to hear it.
    Ms. Stuntz. Well, thank you, Mr. Hall. I actually agree 
with Mr. Naeve. I support retail choice, but for the reasons I 
said and I think he articulated very well, I do not believe any 
mandate, frankly----
    Mr. Stearns. Could you move your microphone just a little 
closer?
    Ms. Stuntz. I do not believe any mandate is essential--a 
date certain--is an essential component of necessary Federal 
legislation.
    Mr. Hall. What are the complicating factors in a date 
certain?
    Ms. Stuntz. I do not think it is necessary, although I, 
too, think retail choice is the right policy, and I think it is 
going to happen; I think it is happening, and it will happen 
more quickly if we get rid of some of the Federal barriers.
    Mr. Hall. Mr. Stalon?
    Mr. Stalon. I guess I agree with what Linda has said. I 
think it will happen, and I am very much in favor of it 
happening. I would like to see all consumers with a choice. But 
I am most impressed with a need to get the large ones in to 
make the markets work well. Once the markets are working and 
working fairly well at the wholesale level, it is much easier 
to persuade legislators to have choice at the retail level for 
smaller customers.
    Mr. Hall. My time is up, Mike. I will get back to you in a 
little bit.
    Mr. Stearns. I am pleased to recognize the chairman of the 
committee, Mr. Bliley.
    Chairman Bliley. Thank you, Mr. Chairman.
    For all of you, everyone seems to believe that retail 
competition is inevitable. Why? Is it because competition is 
better for consumers than regulation or what? We will go from 
the left to the right.
    Mr. Naeve. I think that is the basic answer. I think 
competition--there are many aspects of this industry, perhaps, 
that cannot be made competitive, but there are aspects that can 
be: the marketing of power; the ownership of generation; the 
construction of generation. These are parts of the industry 
that can be made competitive. And a part of those components 
becoming competitive is giving customers the choice to decide 
who they are going to buy from. So I think it is a part of the 
competitive landscape if we believe that competition is better 
than regulation; in those parts of the industry where we can 
introduce competition, then, this is a part of the landscape.
    Chairman Bliley. Does anybody disagree with that?
    Well, good.
    There are many States that would prefer Congress to do 
nothing with respect to retail choice and kind of let the 
market evolve. Can retail markets evolve without some Federal 
or State action? Are there barriers to national retail 
competition?
    Ms. Moler. I think all four of us have testified to the 
fact that there are significant impediments in existing law to 
retail competition, yes.
    Chairman Bliley. So we will have to have Federal 
legislation at some point in time.
    Ms. Moler. The State legislature in the Commonwealth of 
Virginia, to my knowledge, cannot amend the Federal Power Act, 
PUHCA, et cetera.
    Chairman Bliley. No; Dominion Resources would like it very 
much if they could. But unfortunately, they cannot.
    Does wholesale competition provide consumers with the 
lowest prices, the best service and the greatest degree of 
innovation, or do we need to move to retail competition?
    Mr. Stalon. I would insist we must move to retail 
competition and fairly quickly for all of the large users in 
order to make wholesale competition work and work efficiently. 
If buyers cannot respond when prices change, and they are 
continually required to buy at regulated rates which are 
averages over some period of time, the buyer for them, the 
utility, is required to submit a perfectly inelastic demand 
curve.
    Look at the recent studies in California where the demand 
curve is perfectly vertical as submitted by the distribution 
utilities. It is very difficult to have an efficient market 
with a perfectly vertical demand curve.
    Chairman Bliley. Well, but there is a corresponding 
argument. If you have the big users and are able to bargain and 
to get better prices, what about the other side of that coin 
which says, well, if that happens, then, the little guys are 
going to have their rates increased to make up the slack?
    Mr. Stalon. No, I do not think that is true at all. In a 
competitive market, if you take a cut on one side, you cannot 
arbitrarily charge someone else unless you have monopoly power. 
If we take away the monopoly power of the generators, I am not 
concerned about that.
    Chairman Bliley. Does anybody take exception to what he 
said?
    Mr. Naeve. No, I do not take exception. I will point out 
that in a tightly regulated market, there are a lot of built-in 
cross subsidies. As markets become competitive, many of those 
cross subsidies may evaporate, so you can see cost shifts from 
one customer class to another. It is not necessarily a result 
of competition; it is a result of getting rid of cross 
subsidies.
    I will also add that I do not think there is disagreement 
among us as to whether retail competition is the right policy. 
Nor do I think there is disagreement among us as to whether or 
not you need legislative changes. I think the only disagreement 
is which legislative changes are needed to get us there, and 
how can we get there the quickest? And some of us think there 
should be a Federal mandate; some of us think there should not 
be; and I must admit I am a little in between. I think we 
should do what we can first; unleash competition. I think the 
mere force of that competition will drive us toward retail 
competition, and if, in the long run, we do not get there, 
then, I think we should consider a Federal mandate, but I think 
once you unleash competition, it forces the industry to change.
    In fact, that is already happening now. There are 
tremendous changes in this industry because of the changes that 
were enacted by this Congress a decade ago, a little bit less 
than a decade ago. And I think if we could do some of these 
other things now, we are going to see a continued movement, a 
momentum toward greater and greater competition, and that will 
drive the industry and the States to retail competition very 
quickly. It is already happening. If it does not, we need to 
look at mandates.
    Chairman Bliley. Thank you; I see my time has expired, Mr. 
Chairman.
    Mr. Stearns. I thank the gentleman.
    The Chair recognizes the gentleman from New Jersey, Mr. 
Pallone.
    Mr. Pallone. Thank you, Mr. Chairman.
    I wanted to ask Ms. Moler and also Ms. Stuntz a couple of 
questions. I know that in the next panel, we have two witnesses 
who are going to say that they oppose a Federal mandate to 
deregulate their States' retail electricity industry, and we 
have, I guess, 23 States who have stated their concern that 
retail competition will result in higher costs for their 
consumers. You have kind of gotten into this a little bit, but 
I wanted to, if you would, tell us why you think, if you do, 
you know, why should we force these States to deregulate if 
they do not think it is a good idea, and are there compelling 
price or transmission or delivery problems in these States that 
warrant intervention by the Federal Government?
    I know, Ms. Moler, you kind of touched on that a little 
bit, but I wanted you, if you could, both of you, to respond a 
little more fully.
    Ms. Moler. Many of the States have initiated some kind of 
regulatory proceeding. In many cases, those regulatory 
proceedings are just sort of meandering and have not come to a 
conclusion that retail competition is contrary to the interests 
of their consumers. In many instances, it is not likely that 
those regulatory proceedings will ever get to a final 
conclusion, so that those who are interested in customer choice 
really do not have anywhere to go. They are stymied.
    So I believe that if States do not want to have 
competition, I would respect that as a determination by the 
State regulatory authorities, but I would make them put that on 
the record. I believe, furthermore, that having to go through 
such a proceeding and make those kinds of determinations will 
force very significant changes in the industry in those States 
that are now just stymied. There is no other major market in 
this country where consumers cannot choose from whom they want 
to buy, whether it is bananas or automobiles, and there is no 
compelling technological or engineering reason in this day and 
age why consumers need to be protected and prohibited from 
exercising their choice of from whom they buy electricity.
    Mr. Pallone. So the lack of clarity about what the States 
are doing in itself is sort of a negative in your opinion?
    Ms. Moler. Yes, sir.
    Mr. Pallone. Okay; would you like to respond, Ms. Stuntz?
    Ms. Stuntz. Thank you, Mr. Pallone.
    I do see it a little differently. I believe most States are 
looking at this, and I think they are looking at this 
seriously, and I guess I do not, at this point, see the need to 
preempt a State decision that it may not be in the interests of 
that State at this time to move forward. Some States--I know 
New Jersey just enacted legislation this year; Ohio; I know one 
of the issues out there, and it is not unique, has been a 
question of taxes. Many of--much of Ohio's school funding came 
from taxes that were levied on utility sales, and they 
suddenly, if you are going to put this into a competitive 
environment, you can no longer tax utility property at a hugely 
different rate, which meant you had to make up for those 
revenues, and it has been a big problem that is going to take 
some time to work through. I hope they will work it through; I 
hope they will pass a law this year, but I think it is just an 
illustration of the difficulty, I think, for the Federal 
Government to say now is the time; here is the date; have it 
done by then.
    And every State plan is different in some respects, and I 
think, to echo what Mr. Naeve said, I really think if we get 
some of the barriers out of the way; for example, clarify that 
the States can do this so that they cannot be taken to court on 
an issue of Federal Power Act preemption if they choose to move 
ahead. I think that would be a very helpful thing for us to do 
to let the States move forward who want to move forward.
    Mr. Pallone. Well, let me--in your testimony, Ms. Stuntz, 
you stated that--you said this committee need not tackle now 
those issues as to which consensus is remote, the issues are 
not yet ripe, or the issues are only loosely related to 
restructuring. What kind of issues would you put into that 
category? And, you know, why do they fall into those 
categories?
    Ms. Stuntz. Well, I would certainly say date certain is one 
of those in which I do not think a consensus can be forged 
soon, and there are others. I personally do not think Congress 
knows enough yet or anyone knows enough yet to say Congress 
should authorize FERC to order people into transmission 
organizations of a particular type. I am not sure that there is 
consensus on a renewal portfolio standard. I think there are 
efforts underway that may result in that. I think there is some 
good work that potentially needs to be done: things like fuel 
diversity for our generation mix is an important policy issue, 
but I am not sure we have consensus yet on exactly what the 
mechanism should look like; how it should be funded. The States 
are doing it different ways, and those are some examples of 
issues that I think may be too hard to deal with right now.
    Mr. Pallone. Okay; thank you.
    Thank you, Mr. Chairman.
    Mr. Stearns. I thank the gentleman.
    The Chair is pleased to recognize the gentleman from 
Georgia, Mr. Norwood.
    Mr. Norwood. Thank you very much, Mr. Chairman.
    I would like to again associate my remarks at the beginning 
with Ms. Stuntz and Ms. Moler. My views today are my own.
    But the difference is for both of you that I admit freely 
that I am influenced greatly in my views by my clients, all 
650,000 of them in the Tenth District of Georgia.
    Now, I am going to ask you some questions that I am going 
to ask as kindly and gently as I can, and I would like the 
record to reflect that I am smiling, not frowning. I do not 
intend to impugn your motives or your character, and I am going 
to ask these same questions to every panel that comes before us 
in this great debate.
    Now, I would like for each of you for the record, really so 
that the committee can better understand your testimony, state 
for me whether you are receiving compensation by a client or a 
coalition of clients to lobby Congress on electricity 
restructuring. Either end.
    Ms. Moler. Mr. Norwood, I am a registered lobbyist for the 
Enron Corporation. I serve as counsel to the----
    Mr. Norwood. For which corporation?
    Ms. Moler. Enron.
    Mr. Norwood. Enron.
    Ms. Moler. Enron Corporation, a Texas corporation.
    Mr. Norwood. Okay.
    Ms. Moler. I----
    Mr. Norwood. I am glad the chairman is not here. Go ahead.
    Ms. Moler. [continuing] serve as counsel to a group known 
as Americans for Affordable Electricity. However, and I also do 
work for an alliance of companies who are interested in forming 
a regional transmission organization. And it is early in my 
practice, and I hope to have more clients one of these days.
    Mr. Norwood. And I hope you do, too, Betsy, and I hope you 
do not take this question personally.
    Ms. Moler. I do not take it personally.
    Mr. Norwood. Thank you.
    Ms. Moler. I understand the public interest behind the 
client.
    Those clients have not paid me for the time, nor will I ask 
them to do so, for the time I have spent during this testimony.
    Mr. Norwood. I understand that.
    Linda?
    Ms. Moler. And indeed they probably disagree with some of 
the things I have said.
    Ms. Stuntz. Mr. Norwood, I am counsel to a group called the 
PURPA Reform Group, which has advocated the prospective repeal, 
cost recovery of the Public Utility Regulatory Policies Act. I 
am a registered lobbyist for Southern California Edison 
Company, and I am on the board of American Electric Power 
Company.
    Mr. Stalon. I am not being paid by anyone to participate in 
this hearing. I am a member of the Board of Directors of ISO 
New England; I am a member of the California Market Monitoring 
Committee, and I have many other interests in the utility 
industry and clients in the past from the utility industry. 
Given my age, I have been withdrawing from the consulting 
business, and so, currently, I only have one, and that one is 
not in the United States.
    Mr. Norwood. The implication in the question is not about 
this hearing. I know none of you are being paid to come here; 
you are doing it because you are good Americans. But what I am 
after is if you are actually lobbying during this debate over 
the next 4 or 5 months.
    Yes, sir?
    Mr. Naeve. I am not being paid to lobby Congress on these 
issues. I represent a great many companies that have positions 
on these issues, because I am involved in a lot of transactions 
in this industry. They are largely mergers, asset divestitures, 
that sort of stuff, and I am sure my clients in those 
transactions have views on all of these issues. I also am quite 
confident that, given the breadth of that client base, that 
they have very diverse views.
    Mr. Norwood. I appreciate your answer, and I presume you do 
not represent or lobby any coalition.
    Mr. Naeve. I do not.
    Mr. Norwood. Okay.
    Mr. Naeve. And I attached to my testimony a list of the 
transactions I am currently in and the parties in those 
transactions, but I have not consulted with them on their views 
and----
    Mr. Norwood. Now, here is the second question, which is the 
zinger. Now, this is not personal, but I need an answer. If you 
are lobbying a coalition of clients, will you identify for this 
committee the major sources of funding for your coalition? Who, 
in fact, are the biggest financial participants? And last, if 
you lobby for a coalition, does your coalition favor a Federal 
solution or a continued State experimentation?
    Ms. Moler. Mr. Norwood, as I said previously, I am 
registered as a lobbyist for the Enron Corporation. They are 
the largest supporter of the Americans For Affordable 
Electricity. That group, however, does have many, many active 
corporations and public interest groups that are in favor of a 
Federal solution to this issue.
    Mr. Norwood. Enron is in favor of a Federal solution.
    Ms. Moler. Yes, sir.
    Mr. Norwood. Well, I guess all Americans need to be a 
member of the Affordable Electricity. We all want to be part of 
that.
    Ms. Moler. We welcome your membership.
    Mr. Norwood. I mean, everybody wants cheaper electricity, 
do we not?
    Linda, could you explain for us?
    Ms. Stuntz. Yes, sir, and this is filed in our lobbying 
registration form. The PURPA Reform Group does advocate a 
Federal solution, because only the Congress can reform PURPA. 
It is about 12 members at the moment, including a number of 
investor-owned utilities and Edison Electric Institute, ranging 
from Florida Power Corporation, Central Maine, GPU, Duke, 
SEMPRA Energy. I am going to get in trouble if I forget one of 
them now but----
    Mr. Norwood. No, you will not with me. The idea is that you 
went to work for the right people, because your views happen to 
work very well with theirs on having a Federal solution. That 
is the way you ought to do it.
    Ms. Stuntz. I have always been in favor of reducing the 
U.S. Code; thank you.
    Mr. Norwood. Mr. Stalon, do you have any comment at this 
point?
    Mr. Stalon. No, I do not.
    Mr. Norwood. Mr. Chairman, I am going to ask this question 
every time, and here is the problem: in an industry that moves 
around $250 billion a year, which is a lot of money, it attends 
to attract a lot of lobbyists when Congress starts to interfere 
in their business, understandably so. And I would suggest 
perhaps our committee ought to, if they can find anybody, an 
expert in this area to testify before us at each hearing that 
is not a lobbyist.
    Mr. Stearns. I thank the gentleman from Georgia.
    A couple of things I might comment. First of all, all the 
background and their lobbying interests are already disclosed 
in their resumes, which are part of the packages that each of 
us have. The second thing is, for example, some of these folks, 
including the Honorable Moler, Elizabeth Moler, actually wrote 
the Clinton Administration's bill. If she was working for EEI 
or a co-op or a municipal, no matter where, we would have her, 
because experts do not necessarily live on a mountaintop. You 
are going to have to go to industry and say, by golly, what do 
you know and give us your opinion.
    And so, my point would be is that we are going to find with 
these individuals that their expertise was developed somewhere 
and somehow. But I appreciate what the gentleman is referring 
to, but I would point out that the staff has assured me that 
all of these people were selected on the basis of their 
knowledge, and any questions you have, you certainly can look 
in their resumes.
    Mr. Norwood. Mr. Chairman, I was not impugning anybody, 
their character. I knew they were based on their knowledge. But 
surely, in this large country, there are enough people with 
knowledge that we can have come before us that are not 
lobbyists, and I would ask for unanimous consent that my 
question and the answers be placed in the written record just 
prior to the testimony.
    Mr. Stearns. Agreed.
    Mr. Norwood. I yield back the----
    Ms. Moler. Mr. Norwood, I would also point out that I am a 
retiree, so I am here on behalf of Federal retirees.
    Mr. Stearns. There you go.
    All right; the Chair is pleased to recognize the gentleman 
from Ohio, Mr. Sawyer.
    Mr. Sawyer. Thank you, Mr. Chairman. I have really enjoyed 
the testimony this morning, and I have particularly been 
gratified by the focus that every one of the witnesses has 
brought to the largely unresolved and, in some cases, 
unaddressed questions of how we deal with the infrastructure of 
transmission in this country.
    Let me just ask you a basic question. Is it your belief 
that all infrastructure, whether currently owned by an IOU or a 
public power entity or a co-op be treated in essentially the 
same way in terms of FERC's authority to regulate?
    Ms. Moler. I would treat all transmission----
    Mr. Sawyer. I am speaking specifically of transmission.
    Ms. Moler. Transmission infrastructure the same and put it 
under the same Federal Power Act amended, obviously, set of 
rules and also the same reliability rules, which is vitally 
important.
    Mr. Sawyer. Ms. Stuntz?
    Ms. Stuntz. I would agree with that.
    Mr. Sawyer. Everybody?
    Mr. Naeve. I endorse that.
    Mr. Stalon. I endorse that as well.
    Mr. Sawyer. There are some who have suggested that FERC 
ought to have the authority to order generating entities to 
join a particular regional transmission organization. Do you 
subscribe to that? And if you do, how will FERC know which is 
best for any individual generating portfolio on a case-by-case 
basis?
    Ms. Moler. My testimony focuses on this issue. I do not 
think of it in terms of generating entities; I think of it in 
terms of transmission entities, and I would give the Commission 
authority to order those who are not currently a member--
integrated transmission companies, because that is where the 
vertical integration raises the market power questions, but I 
would have them be able to order those who are transmission 
entities are part of integrated companies----
    Mr. Sawyer. Right.
    Ms. Moler. [continuing] to join a regional transmission 
organization of their choice.
    Mr. Sawyer. Of their choice?
    Ms. Moler. Yes, so only those who are not currently 
members----
    Mr. Sawyer. But that is the crux of my question.
    Ms. Moler. Right.
    Mr. Sawyer. You are not suggesting that FERC would assign 
them to a particular----
    Ms. Moler. I would not have FERC draw the lines on the map, 
no, sir.
    Ms. Stuntz. I think I agree with that, but I have a little 
concern about, getting back to why we care about RTOs in the 
first place, which is market power. And I guess I would rather 
FERC say these are the rules in order to protect against abuse 
of market power and leave it to the utilities, the transmission 
owners and the generation owners to decide how they are going 
to address that. And I understand that RTOs can include both 
transcos and ISOs, which is important, because I do not think 
we know yet which is the right way to do this, but I am 
thinking also about some small utilities that may own 
transmission, and is there some line that should be drawn at 
some point? Is there a market power issue raised by a small, 
integrated utility that requires a FERC remedy? And I just do 
not know the answers to that.
    Mr. Stalon. I would disagree on this point with Ms. Moler. 
I think the FERC must have the authority to draw lines, to 
define transmission regions and markets, the edges of markets. 
One thing seems to be very clear: we now have approximately 150 
control areas on the North American continent; we probably need 
less than 20. There needs to be a merger, and somebody has to 
draw those lines, and I do not know of any other agency that 
can draw the lines other than the FERC. And so, I would draw 
the lines; define the regional organizations and insist that 
every significant player in those regional organizations be 
integrated by communications and perhaps also operating rules 
and perhaps for other reasons with the control area operator, 
whether it be a transco; whether it be an ISO or a transco that 
is an ISO.
    However we choose to do this, someone has to draw the 
lines, and I do not know of another agency other than the FERC 
that could do so.
    Mr. Sawyer. Mr. Naeve?
    Mr. Naeve. Well, I agree with the other panelists that we 
do need regional transmission organizations. We do not need so 
many as we have now. We need a very small number. I think it is 
more than for just market power reasons. I think it very much 
helps in reducing market power, but I also think it is for 
reliability reasons. I think we get more rational transmission 
investments; we can better plan the grid, and we can better 
operate the grid if done so on a regional basis.
    With respect to legislation, I think we need to encourage, 
and the FERC is encouraging, the formation of regional grids. I 
think they have a lot of power, frankly, they are not using. 
For example, in merger cases, there are pending merger cases 
today where we could force the creation of very large regional 
organizations if they choose to do that.
    So I think they have a great deal of power. I also, as I 
mentioned in my prepared remarks, think one of the most 
important things we can do to facilitate the creation of RTOs 
is to get the Federal agencies in it. In the Pacific Northwest, 
Bonneville is a giant. They dominate the system. There have 
been attempts to create RTOs out there, and the difficulty of 
integrating Bonneville into that RTO has been a huge problem.
    Likewise, TVA sits right in the middle of the southeastern 
United States with tremendous transmission assets. It is a 
pathway between markets, and if with Federal legislation 
requiring TVA to participate in RTOs, that would greatly 
facilitate the formation of large regional RTOs.
    Mr. Sawyer. Mr. Chairman, I appreciate your flexibility on 
those answers.
    Is it possible that we might have a second round with this 
panel?
    Mr. Stearns. If members would like it, we will have a 
second round.
    Mr. Sawyer. Thank you.
    Mr. Stearns. I thank the gentleman. I just wanted to 
clarify that what Mr. Norwood indicated in his request, I want 
to interpret his request that his oral statement will appear in 
the record in accordance with the point or at the point in the 
record where he said it.
    At this point, we will recognize a gentleman from 
Tennessee, Mr. Bryant.
    Mr. Bryant. Thank you, Mr. Chairman.
    I would like to ask the panel about a concern I have that 
would it be possible that low-cost providers may raise their 
rates in a competitive environment? And also, I guess, do you 
believe in a competitive world, electricity suppliers will have 
that ability, will truly have the ability to sell to some 
customers at prices higher than the market? Anybody want to 
jump in?
    Mr. Naeve. In a competitive world, there will be a market 
price, and that market price may fluctuate from hour to hour, 
day to day, season to season. And there will be times when low 
cost providers who today are regulated at a price that is very 
low will be able to sell their power at prices higher than they 
receive today. At other hours, they will sell their electricity 
at prices lower than what they receive today. On average, I 
believe prices will be lower than they are today, because 
competition is a better regulator than regulation.
    And there is also, I think, a misunderstanding that if we 
have competition, what we will have is an averaging of pricing 
throughout regions or an averaging of pricing throughout the 
United States. If that is all we do, it is not worth doing. I 
think what we will have is a lowering of prices, because 
competition will drive prices down.
    Mr. Bryant. Let me ask you another question. You spoke 
about--you felt that Federal regulation ought to require TVA to 
participate in the RTOs. What impact will that have on TVA and 
its consumers?
    Mr. Stalon. I draw a distinction between the retail 
activities and the wholesale activities. Integrating the 
transmission system of TVA and Bonneville into the North 
American network and subjecting it to FERC regulation would 
permit more efficient trades, but nothing changes at the 
distribution level unless you approve it. The Bonneville 
structure would still benefit the Bonneville area to the extent 
that it does today. We are not, to my knowledge, discussing the 
changing of the distribution sector of the industry. It will be 
subject to the same regulation that it is today.
    Mr. Bryant. Mr. Naeve, do you have any additional comment?
    Mr. Naeve. I would agree with that. Today, there are 
prohibitions against selling power to certain TVA distribution 
customers. You can integrate TVA into an RTO and not upset 
those prohibitions. Now, I would say down the road, perhaps you 
should do away with those prohibitions as well. That may cause 
TVA to incur stranded costs, just like we might impose stranded 
costs on any other utility, but that is the price of 
competition, and we should find ways to deal with that.
    And I do think it is good policy to permit recovery of 
stranded costs. In this case, TVA, the stranded costs may 
belong to the Government.
    Mr. Bryant. Let me ask, again, whoever wants to answer 
this. We seem to all agree that something is going to happen 
either at the Federal level or the State level and that retail 
competition is inevitable. This being the case, would one of 
you like to describe some of the things that companies are 
doing to prepare for this competition and also describe, 
perhaps, some of the products or services that you believe 
might be available in a competitive marketplace that are not 
available today?
    Ms. Moler. I think that companies that are facing 
competition, and I do serve on the Board of Directors of the 
Unicom Corporation, though I am not retained by them to lobby 
in any way, shape or form, have looked at their assets. They 
are selling assets at the present time that are not performing 
as well as they would like. They are working very hard to take 
the assets, such as Unicom's nuclear fleet, and have them 
perform much more efficiently and have made significant 
progress there. They are also investigating a wide variety of 
non-regulated business opportunities, and just one of the 
things that needs to happen with the repeal of the Public 
Utility Holding Company Act, for example, is to free up 
corporate structures so that they can invest in new lines of 
business and have the kind of creative opportunities that are 
now precluded from entering into if they are PUHCA-registered 
utilities.
    There are just any number of efficiency opportunities and 
new kinds of businesses that they are anxious to get into.
    Ms. Stuntz. Yes; I would just add that as Mr. Naeve 
mentioned, there are some more than 50,000 megawatts of 
formerly utility-owned generation that is being divested. 
Utilities are saying people who invest in my company are 
looking for a stable rate of return; a regulated rate of 
return. The generation business is not going to provide that 
anymore, right, because it is competitive, and I do not think I 
want to be in that business, so I am going to get rid of those 
assets; I am going to focus on my wires business. I mean, that 
has been one, I think, emerging strategy.
    Others are looking at diversification. They are looking 
into energy services, and I think consumers are going to get 
tremendous benefits from people now looking to offer them 
bundled packages of, you know, we are not going to be electric 
or gas; we are going to be lighting or heating or cooling and 
put it together in a way, or maybe it is going to be onsite, a 
lot of people, you know, whether it is fuel cells or 
distributed generation, more control over your energy future.
    You may not have time to monitor or run home because it is 
a peak price at 12 in the day, and you might want to throttle 
down your refrigerator or your air conditioning, but people 
will do that for you, and it is already happening, certainly at 
the commercial level, where you can see chains like McDonald's 
and department stores now coming together in one building and 
one provider for their units all across the country.
    It is just beginning to unfold, but it is very exciting, 
and I think it is going to continue to accelerate.
    Mr. Stearns. I thank the gentleman.
    The Chair is pleased to recognize the gentleman from 
Oklahoma, Mr. Largent.
    Mr. Largent. Thank you, Mr. Chairman.
    I would just say that I guess I have a little different 
view than my friend from Georgia about our witnesses today. I, 
frankly, admire people who have enough knowledge that they can 
market it and make a living as well.
    Ms. Moler, I wanted to ask you a question about what I 
referred to as kind of a rogue study that was conducted by the 
USDA, kind of released prematurely, that reflected that some 
States would not benefit from competition. Do you have any 
comments about that?
    Ms. Moler. Like you, I was quite curious about the USDA 
study. I got a copy of it from a reporter. They are a wonderful 
source of information and misinformation as well.
    I have personally read the USDA study that purports to show 
that there will be significant increases in costs from retail 
competition in a number of States. While I was in my prior life 
at the Department of Energy, we did what was then the most 
comprehensive analysis of what would happen in a competition 
scenario. It was released as the supporting analysis for the 
Comprehensive Electricity Competition Act. It was a region-by-
region study of the benefit of competition, and it showed that 
in every region of the country, all classes of consumers would 
benefit from competition.
    I believe that there is considerable controversy within the 
administration over the USDA study, and I am very much looking 
forward to the really expert analysts at the Department of 
Energy, and there are some terrific people there, who are 
committed to doing unbiased analyses, coming to grips with the 
assumptions in the USDA study.
    It seems to imply that you are going to deregulate 
distribution, for example. I know of no one who is seriously 
talking about that. So I do not worry about what happens from 
deregulating distribution, and I do not think that is a valid 
assumption.
    Mr. Largent. Ms. Stuntz, let me ask you a question. Can you 
just tell us, for the record, who the largest generator of 
electricity in this country is, what single entity is the 
largest single generator of electricity?
    Ms. Stuntz. You know, I should know that. I believe it is 
the Southern Company but----
    Mr. Largent. Actually, I think it is the Tennessee Valley 
Authority.
    Ms. Stuntz. Probably.
    Mr. Largent. It is the largest generator of electricity.
    Ms. Stuntz. I believe you.
    Mr. Largent. So, in light of that, if you do not have a 
date certain, how do you deal with TVA and Bonneville in 
particular and States that they serve?
    Ms. Stuntz. I see them somewhat different questions, Mr. 
Largent. I think you do have to deal with TVA and Bonneville. 
You have to deal with their transmission systems; you have to 
deal with wholesale competition, getting them firmly engaged in 
that, which they are not yet, and ultimately, I think you will 
have to deal with retail competition, and I think that is going 
to be hard to do. I am sure you are aware that TVA has a debt 
in the neighborhood of $27 or $28 billion. That is the reality 
you have to deal with.
    The BPA is facing a whole lot of issues. I think they are 
close to deciding that they are going to separate generation 
from transmission, which I think would be a good thing. I think 
it would make it easier for their transmission to be put into 
an RTO or to become part of the national grid. I do not believe 
TVA is close yet, and I think it is very important for the very 
reason you say: their size, their location, that they cannot be 
left outside.
    But I am not sure that we are close enough yet to be able 
to work through those issues, to say that needs to be done 
right now, because I think it will further delay legislation 
and prevent some good things that could be done in the near 
term from being done.
    Mr. Largent. Ms. Moler, I wanted to ask you about--in your 
testimony, you talk about market oriented approach to renewable 
power. Would you say that the administration's proposal that 
was submitted last year is a market-oriented proposal to 
renewable power?
    Ms. Moler. Yes, I believe it is a market-oriented.
    Mr. Largent. It is not a mandate?
    Ms. Moler. It is both, and I believe it is possible to have 
both.
    Mr. Largent. A market-oriented mandate?
    Ms. Moler. Yes, sir.
    Mr. Largent. Okay; could you explain that? That is unique.
    Ms. Moler. It is market-oriented in the sense that it would 
require any entity that sells power to have, eventually, 5.5 
percent of its portfolio from renewables. However, and that is 
the mandate part. The market part is that if that entity does 
not own those particular generating sources, it could buy 
credits, renewable credits, on the market just as we do now 
with Clean Air Act SO2 credits.
    So, it has a trading scheme in it. In that sense, it does 
not say that you, ABC Utility, have to have 5 percent or 4 
percent or 3 percent of your power from renewable. You could 
trade for your credit.
    Mr. Largent. Okay; Mr. Chairman, if I could just have one 
additional minute----
    Mr. Stearns. Without objection.
    Mr. Largent. [continuing] The question I wanted to ask you, 
it seems to me that I recall that there was some aspect of the 
proposal from the administration that actually took some of the 
savings from moving to a retail market and spent that--I mean, 
that savings came to the Federal Government in some capacity. 
Do you know what I am talking about?
    Ms. Moler. The administration believes that the Federal 
Government would be a huge beneficiary from retail 
competition----
    Mr. Largent. As a consumer; I understand that.
    Ms. Moler. [continuing] as a consumer, but there was not 
any transfer payment of the sort you are describing.
    Mr. Largent. And one last question, was the renewable 
portfolio, was that sunset in----
    Ms. Moler. It had a date certain 5.5 percent by the year 
2010. It also, if the price of the credits reached a certain 
level, it would have said okay, that is enough. So it had a 
cap.
    I would also, if I may, mention the administration is 
developing a proposal on both Bonneville and TVA. We had an 
advisory committee that looked at considerable length at the 
TVA while it was in the administration. They came up with a 
proposal for restructuring TVA. I believe, though I have not 
talked to them, the administration is refining that proposal, 
and it will include provisions, instead of the placeholders, 
with respect to Bonneville, that were in last year's 
legislation. There will hopefully be a more refined proposal 
that should give you a good starting point for integrating 
Bonneville and TVA.
    Mr. Largent. Mr. Chairman, thank you, and if we have a 
second round, I have some other questions. But I would like to 
say thank you to all of our panelists and particularly Ms. 
Moler, because I think she has really added a lot of impetus in 
keeping us moving forward by, you know, putting together the 
administration's proposal.
    Ms. Moler. Thank you.
    Mr. Stearns. The Chair intends to let every member present 
ask the first round. Then, we are going to give the panel a 
personal convenience break.
    And then, we are going to do a second round at Mr. Sawyer's 
request. So, we have got Mr. Pickering, Mr. Shimkus, Mr. Burr 
and Mr. Whitfield. Then, we are going to take a little break. 
And then, we will come back for one round of second questions. 
Then, we will go to the second panel.
    Mr. Pickering for 5 minutes.
    Mr. Pickering. Thank you, Mr. Chairman.
    I have two directions or two questions that I would like to 
ask. One is a followup on the cost shifting concern.
    Ms. Moler, you mentioned that you did a regional analysis 
when you were at the DOE. It must be my sense, from what I have 
heard on the Department of Agriculture study, that it was a 
State-by-State analysis. Given the nature of my State, being 
very rural, Mississippi, one of the States mentioned in the 
USDA study, can you see, in some instances, if we go to 
competition, could a rural State like Mississippi, which is now 
a low-cost State, could you see some cost shifting and higher 
costs and that type of situation.
    If you could please respond.
    Ms. Moler. The DOE's economists and other modelers did the 
study. I cannot claim to have any personal expertise in this 
area, although I have read it in detail. It was not a State-by-
State study, though I believe that they are doing the analysis 
now and have a collaborative between the various analysts in 
the Government to look State-by-State.
    I believe that, as I stated earlier, that each State should 
be able to choose its own destiny as far as whether to have 
retail competition is concerned, and if they have real problems 
to determine on the record that competition would be 
detrimental to the citizens. As I have said, I would respect 
that.
    I do not believe, however, that it is likely that 
competition would be bad for consumers. I believe that you can 
deal fairly with the stranded costs and transmission issues and 
come out ahead, with lower costs for all customer classes, 
State-by-State.
    Mr. Pickering. Does the rest of the panel share that view 
that in a State like Mississippi, that it, too, would benefit 
from competition?
    Mr. Naeve. I would have to say in the short run, I have 
done no analysis, so I do not know. In the long run, I tend to 
believe that all customers will benefit. In the short run, I 
cannot say.
    Mr. Stalon. I guess I would add, again, that I have done no 
detailed analysis here, but a reality of a competitive market 
in the short run is that if you have a barrier between the two 
markets, and you remove the barrier, prices will tend to 
equalize, which means that they will go up in a low-price area, 
and they will come down in a high price area. And it was the 
nature of the old utility system that there were quite 
remarkable differences in cost from area to area because of 
accidents of history when things were built.
    And I think it is inappropriate to look in the short term 
here and ask yourself what are the incentives being provided to 
minimize costs over a long term.
    Mr. Pickering. Excuse me; you realize that Congress runs in 
the short-term, every 2 years.
    Mr. Stalon. But we are creating an industry that will, we 
hope, in the future act with a longer-term time horizon than it 
has in the past, and it has a long time horizon even in the 
past.
    I cannot make a flat assertion that there is not somebody 
in the Nation who will lose because of this process, although I 
think the effort has been made to make sure that everybody is a 
winner.
    Mr. Pickering. Let me just say that that is a concern that 
we are going to have to address, each of us in our own 
respective districts. I do believe in the benefits of 
competition. We just want to see if there is a flexible way 
that will minimize any harm while we maximize the benefit.
    Having said that, let me ask a question to see if we can 
reach a consensus among this panel, and let me ask the date-
certain question in a little bit different manner. Previously, 
it was asked who supports a date certain; what kind of date 
certain? Let me ask the pragmatic question that I think Mr. 
Naeve hits at the heart of, and that is if we do not have a 
date certain, whether it is, as Ms. Moler recommends, a State 
opt-out; I believe Mr. Stalon was talking about a mandate, but 
it would apply to the class or the size of the utility.
    Let us remove all date-certain mandates, whether it is by 
State or by size, and if we had a core element of a bill that 
established an organization for reliability; that clarified the 
Federal Power Act concerning retail wheeling; that removed 
barriers such as PUHCA; prospectively removed PURPA; tried to 
look at any other issues such as jurisdictional issues on 
stranded costs, leaving that to the States; if we could not 
reach consensus on a date-certain, would all four panelists 
still support moving forward on that core framework that I just 
outlined?
    Ms. Stuntz. I certainly would.
    Mr. Stalon. I would with one exception, and it is that by 
not having adequate demand elasticity in the market, we may end 
up with some uncomfortable price spikes after we move to 
competitive markets.
    Mr. Pickering. If we did not have a mandate.
    Mr. Stalon. If we did not succeed in attracting or 
compelling all of the large users into that market so that they 
can provide demand elasticity, we could end up with 
uncomfortable price spikes.
    Mr. Naeve. I support making as much progress as soon as you 
can make it, and if that is what we can do now, I would say let 
us do that. And I think if you were to do that, it would 
further increase competition in the market, and that 
competition would drive down prices and would create additional 
pressure to bring about retail competition in the States that 
do not have it.
    Mr. Pickering. Ms. Moler?
    Ms. Moler. I have stated my position on the mandate. I also 
think you need to address market power issues. That was not in 
your list.
    Mr. Pickering. If you add that to the list?
    Ms. Moler. Then, I would not let the perfect be the enemy 
of the good.
    Mr. Pickering. Thank you, Mr. Chairman.
    Mr. Stearns. The next on the list is Mr. Shimkus of 
Illinois, but our senior member, Mr. Bilirakis, may be seeking 
recognition.
    Congressman Bilirakis, do you have another engagement? I am 
sure Mr. Shimkus would yield to you.
    Mr. Bilirakis. No.
    Mr. Stearns. Mr. Shimkus for 5 minutes.
    Mr. Shimkus. Thank you, Mr. Chairman.
    And it was good to see Ms. Moler here again, because as 
this is my second term, and I cut my teeth in the last Congress 
and, of course, being with the administration, I think you help 
educate and move this process along, and I just--a short note. 
I think Mr. Largent's question on cost shifting is something 
that I addressed a lot in the last Congress was I think the 
administration would always see moving the energy dereg as a 
way to mitigate the additional costs of global warming. Now, 
there is nothing ever written down, but I have heard the 
administration state that if we have increased costs under the 
Kyoto Accords, the saving, the mitigation would be energy 
dereg, and I just throw that out; I will not ask for a comment, 
but we had discussed that numerous times.
    There were two things I wanted to address briefly, and I 
hope I can get both of these out. One deals with regional 
pools, and one deals with merchant plants. So I am going to 
talk on the regional pools issue, and Mr. Pickering is here, 
and I think this addresses the price spikes and some of the 
concerns. Of course, being from the Midwest, we had the price 
spikes last year, and during that, the PJM pool, which we all 
know is the Pennsylvania, New Jersey, Maryland pool, there is a 
lot of criticism that that pool did not do its duty to help the 
Midwest, and you all know the argument that they held--they 
thought they were going to have the demand, so they held their 
pool, and it turns out that they did not need it.
    I am interested in your short, concise comments on the 
export rules of the PJM or just, as we move to energy dereg, 
what do we need to do at the Federal level to preclude this 
from happening? Why do we not just go down the line, starting 
with Ms. Moler?
    Ms. Moler. I believe that you need much more transparent 
markets. I believe that you need to have much more clearly 
defined capacity rights in the transmission system. That is why 
I think it is very important to have integrated companies be a 
part of some sort of regional transmission organization so that 
they take service under the regional transmission 
organization's tariff for their bundled load as well as for 
their wholesale load.
    By doing that and getting much more flexible, fungible 
transmission rights and congestion management, which you will 
get as a result of those regional transmission organizations, 
you will have a much more fluid flow of power between pools. 
And you also have to deal with and have the same reliability 
rules of the road apply across the board, so that individual 
companies cannot cheat.
    Mr. Shimkus. Does anyone else have anything to add to this 
question?
    Mr. Stalon. I would differ with one particular point. I do 
not support the extensive development of capacity rights in the 
transmission grid. That grid has traditionally been allocated 
10 minutes at a time or 5 minutes at a time under continuous 
control. It must continue to do that. Assigning firm 
transmission rights that are real rights rather than financial 
rights will greatly expand the need for transmission assets for 
the system to function and function reliably.
    What we need, I think, primarily are bigger control areas. 
As big as PJM is, and it is the largest control area we have, 
it is not big enough. We need to expand it with larger control 
areas. The border problem becomes less troublesome and more 
easy to handle.
    Mr. Shimkus. Anyone else?
    I would like to move to merchant plants if I may. Some 
States require a certificate of need from merchant plants, and 
they make the argument that the rate-payers are at risk, and 
so, they do not approve plants where, in today's environment, 
only the shareholders would be at risk. Do you have any 
comments on what we should do at the Federal level with the 
issue of merchant plants?
    Mr. Naeve. Well, obviously, if you are going to have a 
competitive market, you do not want to create barriers to 
entry, and if some States adopt siting requirements that limit 
entry, of course, in the long run, it is their consumers who 
will pay. I must say, I have not personally come across this as 
a major problem, because I think as we move to a competitive 
market, most States recognize that there is a need to build new 
generation; most welcome new generation. So I have not seen it 
as a problem but----
    Mr. Shimkus. There is a recent case in Florida where the 
incumbent utilities tried to block construction of a Duke 
merchant plant on this very basis, so there is obviously that 
possibility out there.
    Ms. Moler. I would congratulate the regulators in Florida 
who have determined that Duke should be allowed to build that 
plant. In order to have a competitive market, you need 
competitors.
    Mr. Shimkus. Great.
    Mr. Barton. Mr. Burr of North Carolina for 5 minutes.
    Mr. Burr. I would like to welcome all four of you here, 
especially Ms. Moler and Ms. Stuntz, to have you guys back.
    Let me just--Ms. Moler, you make it very clear in your 
testimony that you do not feel that there is a Federalization 
of stranded cost recovery needed; that that is a State issue. 
Let me ask: if there was a date-certain in a piece of 
legislation, do you believe that that changes whether there is 
any Federalization of that stranded cost?
    Ms. Moler. No, sir, I do not.
    Mr. Burr. Ms. Stuntz, how about you? Clearly, you made some 
comments on PURPA that you believe that our actions as it 
related to PURPA make us obligated, then----
    Ms. Stuntz. Right.
    Mr. Burr. [continuing] to participate in the stranded 
costs. Do you believe that a date-certain would move that 
marker one way or the other?
    Ms. Stuntz. I do believe that if the Federal Government is 
going to mandate a date-certain, it takes upon itself more 
responsibility for determining how retail stranded costs are 
going to be dealt with, because they have taken the choice out 
of the States' hands in terms of what the time should be, and, 
I mean, I have heard this argued both ways. It just seems to me 
that if the Federal Government is going to make that choice, it 
does take upon itself more responsibility to do that.
    Now, with respect to PURPA and possibly things like Federal 
nuclear decommissioning funds, I think those are already 
Federalized, and I really think it is the Federal Government's 
obligation to make sure that in the competitive transition, 
those responsibilities are carried forth.
    Mr. Burr. You said in your testimony that repeal of Section 
203 was too big a step. Can you just elaborate on that a little 
bit?
    Ms. Stuntz. Well, I said I agree with you personally, 
because I believe that for consumers who truly enjoy the 
benefits of a competitive market, we cannot continue to have a 
utility industry that looks like it did when we had exclusive 
retail franchises. I think I had a triangle in my testimony 
that talks about the 200 and some investor-owned utilities, 
more than 1,000 co-ops. I mean, this industry has got to 
rationalize; there has to be consolidation; there have to be 
mergers and acquisitions, and I believe under Betsy's 
leadership and subsequent, the FERC has tried to find a way to 
accommodate that necessary consolidation, but I, for one, think 
the process is bogging down; that it is duplicative now of the 
FTC and Justice reviews that should go forward. They have the 
antitrust expertise, and I would basically leave it to them, 
since they regulate this activity in the rest of our economy, 
to let them do this in this area as well. But I suspect we need 
to do more educating on that, and what I tried to set forth was 
a potential half-way measure that would at least, perhaps, 
allow this consolidation to occur when I----
    Mr. Burr. Certainly, my hope to repeal Section 203 is not 
indicative of the past leadership at FERC and the participation 
of commissioners. And one quick followup to that for each of 
you. FERC in the future: bigger, smaller, the same? Those are 
the only three choices.
    Ms. Moler?
    Mr. Stalon. Going to be bigger.
    Mr. Burr. Bigger?
    Mr. Stalon. Yes.
    Mr. Burr. I guess my question, let me say should it be 
bigger, smaller or the same?
    Mr. Stalon. It should be the same.
    Mr. Burr. Ms. Moler?
    Ms. Moler. If you repeal the Public Utility Holding Company 
Act, there are some functions that the Commission will need to 
perform. They are well-recognized in the PUHCA repeal 
legislation. And the Commission's resources are taxed like lots 
of agencies' resources. I give my successor Jim Hoecker, 
Chairman Hoecker, credit for trying to reinvent many of their 
processes, and the thing I worry about most there is burnout of 
the best people.
    Mr. Burr. Bigger, smaller or the same?
    Ms. Moler. I think it depends on how successful the 
reinvention effort is.
    Mr. Burr. Okay.
    Ms. Moler. Most likely--I said bigger with respect to 
PUHCA, though.
    Mr. Burr. Ms. Stuntz?
    Ms. Stuntz. I believe it does not need to get bigger. I 
think it is hard to make it smaller. But remembering that they 
also regulate things like natural gas and hydroelectricity and 
oil pipelines, where I think there are opportunities to make it 
smaller--in electricity, I think we would be doing well to keep 
it the same.
    Mr. Burr. Mr. Naeve?
    Mr. Naeve. It will change. Their mission will change, and I 
must say I, at this stage, cannot tell you whether they will 
need more people or fewer people to carry out that mission, but 
it will be a much different agency than it is today. There will 
be certain functions that they carry out today that they will 
continue to carry out, but they will be relieved of the 
obligation to regulate wholesale markets. They also will be 
given the responsibility, though, to protect competition, to 
make sure that the preconditions are there for competition.
    Mr. Burr. I see my time has run out.
    Mr. Barton. Yes; we have a pending vote, and we have got 
two other members. I want to try to get both members' questions 
in in the first round, so then, we can go vote; let them take a 
break; and then come back.
    So I am going to recognize Mr. Bilirakis for 5 minutes, but 
Mr. Burr will be given an opportunity in the second round.
    Mr. Bilirakis. Thank you, Mr. Chairman.
    Ms. Stuntz, utilities, in many States, certainly in 
Florida, have been obligated to sign numerous long-term 
contracts under PURPA. Let us get into PURPA. Is there any 
reason why Congress should not act to repeal this mandatory, 
and I underline mandatory, purchase obligation--and at the same 
time ensure the recovery of those Government-mandated costs? 
And I mean eliminate it not necessarily tied into deregulation. 
Why should it be tied in? I cannot really believe that we, in 
our infinite wisdom, passed that type of a thing awhile back.
    Ms. Stuntz. I do not remember that you were on the 
subcommittee at the time.
    Mr. Bilirakis. I may not have been. Hopefully, I was not at 
the time.
    So go ahead.
    Ms. Stuntz. And I think there is really a consensus on 
that. It is just a question of what it gets linked to.
    Mr. Bilirakis. There is a consensus that we can eliminate 
PURPA regardless of deregulation? Because last year's 
legislation basically said as soon as a State opts in, then, 
PURPA is eliminated. That need not be the case, is it?
    Ms. Stuntz. Well, I do not think so, but as I said, I think 
there are still some who would link it either expressly or say 
it cannot go until we get other parts of this restructuring.
    Mr. Bilirakis. Yes, blackmail kind of a thing, right?
    Ms. Stuntz. Yes.
    Mr. Bilirakis. Well, all right, but do you think that is 
wrong? It can be done without it being tied in.
    Ms. Stuntz. I certainly think so.
    Mr. Bilirakis. Should it be done?
    Ms. Stuntz. I think so.
    Mr. Bilirakis. Ms. Moler? Now, you indicated earlier, and I 
wrote it down; you said you would respect that if a State 
decided to opt out. So apparently, you are flexible insofar as 
the States coming on board by a date-certain.
    Ms. Moler. Yes, I am.
    Mr. Bilirakis. All right; that being the case, how would 
you feel about PURPA being eliminated now rather than later?
    Ms. Moler. I believe, as I said, that there are some core 
elements of a package that can be moved. I do not believe that 
PURPA will move on its own, nor should it.
    Mr. Bilirakis. Nor should it?
    Ms. Moler. No, sir.
    Mr. Bilirakis. Why? Because you do not think that the 
others will move without it?
    Ms. Moler. PURPA is our statement at the present time of a 
policy in favor of renewables, and if you repeal PURPA, I would 
make whatever statement the Congress wishes to make with 
respect to renewables policy----
    Mr. Bilirakis. Okay.
    Ms. Moler. [continuing] as a part of a comprehensive 
restructuring bill.
    Mr. Bilirakis. All right; so, you might tie it into 
renewables but not necessarily to the date-certain.
    Ms. Moler. No, as a part of a comprehensive restructuring 
bill. Whatever you all can put together, but there is clearly a 
need to do as much as you can possibly do.
    Mr. Bilirakis. Frankly, I am very pleased with your 
testimony, all four of you. You seem to be very flexible in 
that regard. You feel that it needs to be done and should be 
done but do as much as can be done and then tackle the tough 
parts.
    Yes, sir.
    Mr. Naeve. I would first say, as I stated earlier, do what 
you can when you can.
    Mr. Bilirakis. Yes.
    Mr. Naeve. If you can do this now, do it.
    I would add one thing. I think you need to do more than 
prospectively repeal the purchase obligation. I think there are 
other things in PURPA you can do, and one of the more important 
things is to change the ownership restrictions. Right now, 
utilities and utility holding companies cannot own more than 50 
percent of a QF. That may have made sense back when we were 
trying to encourage independent power development. When 
Congress passed the Energy Policy Act, though, we decided that 
was not important anymore; we did not put that restriction on 
the ownership of exempt wholesale generators. I think we should 
go back and take it off of QFs.
    Mr. Bilirakis. I want to be fair to Mr. Whitfield, sir, and 
the chairman wants to really finish up this first round, so 
maybe I will just cut you off, and we can continue in the 
second round, because obviously, I want to hear what you have 
to say and Mr. Stalon too.
    I am going to yield back for that reason, Mr. Chairman.
    Mr. Barton. Thank you, and the Chair would recognize Mr. 
Whitfield for 5 minutes, and we have got about 7 minutes to 
vote, which means we have about 10 minutes actually, because 
they give us about 3.
    Mr. Whitfield?
    Mr. Whitfield. Mr. Bilirakis, I have always been a fan of 
yours; thank you.
    We all know that one of the major opponents to deregulation 
are the rural co-ops, and I think, in a nutshell, they are just 
concerned that if you go to deregulation, they are going to 
have to discount their rates in order to keep their large 
industrial customers; and then, the concern is that they are 
going to raise the rates on the residential users, because they 
are going to have to make up at least some revenue somewhere.
    Now, what arguments would you all make to the rural co-ops 
as to why they should support deregulation?
    Mr. Stalon. I would make one quickly. The traditional 
justification for REAs as distribution utilities is unchanged 
by anything we are doing, and I just simply do not see why all 
users of electricity, especially large users, should not pay 
the competitive market price for electricity, and we can only 
determine that price with a competitive market.
    Ms. Moler. I also believe that they should clearly be given 
authority to deal with transition costs just as I would have 
any other utility deal with transition costs, and if they need 
to do exit fees in order to get from here to there in terms of 
a transition, that would be fine with me as well.
    Ms. Stuntz. I think you have asked one of the hardest 
questions of this whole issue, and it is one we have struggled 
with. I guess where I come out is I think if a rural co-op 
wants to continue to do what it has historically done as, you 
know, not a big owner of generation, not a G&T, because they 
are different, and provide that distribution function, I think 
there is a real role for them to play, continuing to do that. 
Choice could be provided through aggregation if they thought it 
desirable, but if they want to stay in that role, and their 
owners are happy with that, I would sort of come down and say 
okay, that is fine.
    I think the tougher issue are larger co-ops, particularly 
the G&Ts, who, in many cases, are not in great financial shape; 
who are very concerned about what this transition is going to 
mean for them but for whom it seems to me it is essential that 
they be part of the process; that they need to allow their 
customers choice; their transmission needs to be put into the 
system with everyone else's, and we deal with the debt issues 
like we are dealing with stranded cost issues for other 
utilities.
    Mr. Barton. Would the gentleman yield on that?
    Mr. Whitfield. Yes.
    Mr. Barton. Just as an elaboration.
    Would it not be possible for a co-op to at least 
collectively and in this new era bargain for a better supplier? 
Would that not----
    Ms. Stuntz. Oh, absolutely.
    Mr. Barton. They would not be disadvantaged, and it is 
possible they could actually be advantaged.
    Ms. Stuntz. No, absolutely, Mr. Barton, and I think that is 
one of the tough things now is because they can do that now, 
and many of them, as wholesale buyers, are doing it very 
effectively. So sort of stopping your wholesale competition for 
them in many respects is the best of all worlds.
    Mr. Barton. Okay; we have 3 minutes until the vote.
    Mr. Whitfield. Well, there is more than one component to 
the cost charge of the co-ops and, for that matter, utilities, 
and one component is the cost of the supply itself, and that is 
what we are talking about with competition here. Would the 
industrials have access to lower-cost supplies? Because many 
co-ops do not own generation but buy their power themselves, 
they may not incur additional costs by allowing those 
industrial users to go out and buy directly from other 
suppliers.
    There are other costs, such as the costs of the 
distribution system itself; the cost of manpower and so forth. 
They can continue to allocate those costs as they do today 
because in many cases, those industrial customers are still 
going to need their wires serviced.
    Mr. Whitfield. Mr. Chairman, I am in a tough district, and 
I cannot miss a vote so----
    Mr. Barton. Okay; we are going to recess until 2. We are 
going to go vote, and we will reconvene at 2. We want this 
panel to come back, because a number of members want a second 
round of questions.
    [Brief recess.]
    Mr. Barton. As is usually the case, the people who wanted a 
second round of questions are represented as empty chairs. But 
we are going to go ahead and reconvene; it is 2; there are two 
members present, so a quorum is present.
    The Chair is going to recognize himself for 5 minutes of 
questions. I will get the clock turned on.
    I want to ask a question to our two former FERC 
dignitaries. Most observers indicate to handle the transition 
rules and to handle the reliability issue that we need an 
expanded role for the FERC. I question the wisdom of making 
that a permanent expansion, so my question to Mr. Stalon and 
Mr. Naeve, what is your opinion of transition rules that give 
FERC an expanded role but do it in a sunsetted fashion?
    Mr. Stalon. The principal reason for giving the FERC any 
particular authority here is so that the new international 
reliability regulatory organization can impose financial 
penalties on players in all three nations. The principal 
weakness of the NERC today is that it relies entirely on peer 
pressure in order to get its rules obeyed, and peer pressure, 
obviously, is not adequate; it has not always been adequate 
even in the old system when it was a club.
    It is clearly not adequate with a lot of entrepreneurs in 
the game, and it seems to me that the FERC will have an ongoing 
oversight rule, because there will be appeals, and somewhere or 
the other, the appeals of parties have to get to some point 
where a government agent--it could be a court--says yes, this 
is a correct form of behavior; the reliability organization is 
behaving in accordance with its charter and exercising powers 
that we have explicitly approved and doing it in the right way.
    So I think that role is a never-ending role now for some 
agency, and I cannot think of one better than the FERC for 
that.
    Mr. Barton. Mr. Naeve?
    Mr. Naeve. I will defer to people who have spent more time 
studying this subject, but I am not completely convinced that 
more legislation is required to give FERC an important role in 
reliability. FERC has jurisdiction over transmission service, 
and every reliability rule that is adopted has an effect on 
transmission service. So, through its jurisdiction over 
transmission services and over the grid, FERC has indirect 
jurisdiction over reliability. I think if we were to have a 
reliability organization that is independent; that is composed 
of a variety of participants in the industry or has an 
independent board, FERC would be in a position to give 
substantial deference to their recommendations and would not 
have to become directly involved in reliability issues.
    To the extent that those reliability issues have an effect 
on nondiscriminatory transportation, FERC could serve as an 
appellate body to look at them and review them; but again, as 
long as they are recommended by an independent board, I think 
they would be in a position to give tremendous deference to an 
independent board.
    As to the issue of penalties and the ability to impose 
penalties, to the extent that you have large, regional 
transmission organizations, and those penalties are embedded in 
their operating tariffs and procedures, I would think those, 
too, would be jurisdictional to FERC and that they perhaps 
would have the ability to authorize the imposition of penalties 
and have jurisdiction over them without additional legislation, 
but again, I am prepared to defer to people who have spent more 
time studying that subject.
    Mr. Barton. Ms. Moler, you are a former FERC commissioner 
also. Do you wish to have an opinion on this question?
    Ms. Moler. Yes, I do. I think it is, as my prepared 
statement says, I think it is essential to give the Commission 
expanded jurisdiction for reliability over the bulk power 
system. That is not a conclusion that I, alone, have. While I 
was at the Department of Energy, former Secretary of Energy 
O'Leary did establish a very broadly based group of individuals 
who struggled with the reliability issue for a couple of years 
under Phil Sharp's leadership, and they are very, very firm in 
their conviction that additional authority is needed here.
    Mr. Barton. But does the additional authority need to be 
permanent? See, my view is if you really believe markets will 
work, you may need an expanded FERC authority to get to that 
perfect world, but once you get to there, it is no longer 
necessary, except perhaps on a monitoring or an appellate 
basis, you know, occasionally. But I am willing to give 
additional authority, but I am not yet willing to do it 
permanently and expand the power permanently.
    Ms. Moler. The markets that we are talking about working 
really are generation markets, and the transmission grid is the 
facilitator, if you will, and you have to make sure that on a 
long-term basis, that everybody plays by the same rules, and I 
do not believe that we can foresee the loss of the monopoly 
that is transmission.
    Mr. Barton. Okay.
    Ms. Moler. That still has not happened in the gas area many 
years after we have had increased competition in the natural 
gas area.
    Mr. Barton. And my time has expired.
    Ms. Stuntz, did you want to----
    Ms. Stuntz. Mr. Barton, if I may just add, I have a little 
different take on that, maybe, because I am not at FERC, but I 
do support the legislative proposal that has been worked out by 
the industry and a lot of shippers and interested consumers, 
and I do not really see it as necessarily adding to FERC's 
authority. What it would do is it actually empowers an 
independent organization to set these rules. You have to have 
FERC as a backstop, because otherwise, you have a 
Constitutional problem under the delegation clause.
    But if we do not do that, then, I agree with Mr. Naeve. I 
think FERC could do it through top-down and start setting rules 
for every grid all over the country, for every interconnection. 
That would be a very central thing. I think they could probably 
do that now if they had to. I think it would be much better to 
have this independent organization with deference procedures 
that are embedded in it, for example, to the Western Systems 
Coordinating Council, and FERC plays only a necessary backstop 
role to make sure that the arrangement is Constitutional.
    Mr. Barton. Okay; Mr. Bilirakis for 5 minutes.
    Mr. Bilirakis. Mr. Chairman, I am not sure that anybody on 
this panel is not for deregulation. It is a case, again, of how 
it is done and how it affects our States. Let us face it; we 
are Representatives, and how it affects our States, is our main 
concern, after all.
    And the gentleman from Oklahoma mentioned, that you have 
got to deregulate by a date certain, and everybody has got to 
be regulated by that particular date. I guess that is what 
Steve is saying. And I just wonder, why is that the case? You 
have your high priced States, and you have your low-priced 
States. In Florida, and I mean to get parochial, is different. 
We have a peninsula that sticks out there, and the energy that 
comes in the State is transmitted from the northern border.
    And Florida is a low price State. I am not picking on New 
York, but if New York is a high price State, then, deregulation 
might be better for their consumers. Why does it mean that just 
because it is good for New York's consumers, it is good for 
Florida's consumers? Ms. Stuntz, can you describe a scenario 
for us? Let us say deregulation goes into effect, and some 
States, as is the case now, have deregulation in effect, and a 
few States do not have it in effect. Let us say maybe Georgia 
and Alabama, which border on Florida, have deregulation in 
effect.
    Now, what kind of a scenario might we expect as far as 
Florida is concerned? How would the Florida consumers be 
benefited by their being forced to deregulate when, the Public 
Service Commission and the State legislature have turned it 
down in the past, in the distant past, in the more recent past?
    Linda, I am not sure the question is a clear one but----
    Ms. Stuntz. Well, I think the argument for a date-certain 
is that you would have more uniformity; that maybe in some 
instances, you know, judgments based on parochial concerns are 
not the best judgments in the national interest, and that sort 
of once you require them to do this by a certain date, and I do 
not know that we are really so far apart, because I think at 
some point, a flexible mandate or an opt-out, or I do not want 
to put words in your mouth, is not so different than what we 
are saying, which is that it is probably a good idea, but you 
are going to have to give States an opportunity to take into 
account local needs, and if they do not want to go now, as long 
as they have considered it in a good faith fashion, that may be 
enough.
    At some point, I mean, maybe that is the way that lets us 
get out of this, because I think that in the end, it is very 
hard to say that the people would----
    Mr. Bilirakis. But if it were the case, where we would have 
more flexibility opting out off opportunities, you are not 
going to have the uniformity that you mentioned.
    Ms. Stuntz. Well, I think it will happen over time. I think 
it is a question of timing. I mean, right now, California is 
open; Pennsylvania is soon going to be open; Massachusetts is 
open. You know, I have not noticed any huge problems that we 
could say other people should be open; other people should be 
open sooner, and maybe their consumers would benefit sooner, 
but I think in the end, you know, it is happening for 50 
percent of the population already on a schedule; Virginia has 
said now no later than 2007.
    Mr. Bilirakis. Should we allow it to just continue 
happening rather than mandating it from this ivory tower?
    Ms. Stuntz. You know, I do not think this is the most 
important issue. I think that you can without being adverse to 
consumers.
    Mr. Bilirakis. You mean deregulation is not the most 
important issue or the mandate?
    Ms. Stuntz. No, I think the date-certain is not the most 
important issue.
    Mr. Bilirakis. Yes.
    Ms. Stuntz. Deregulation, you have already deregulated 
generation effectively in the Energy Policy Act of 1992 and 
wholesale markets, and the question is is that going to be 
expanded to retail customers? And if so, when? And who is going 
to make that decision? And what are individual retail customer 
choice programs going to look like? And how many of those 
decisions do you want to make? And how many do you want to 
leave to the good folks who are coming up later? And those are 
hard questions.
    Mr. Bilirakis. Thank you a lot.
    Thank you, Mr. Chairman.
    Mr. Barton. Well, as the chairman of the ivory tower 
subcommittee, I would like to recognize my ranking member, Mr. 
Hall, for 5 minutes.
    Mr. Hall. I will not take the 5 minutes. I just would point 
up some questions because I do not know what has been asked, 
and we have another panel waiting, and we have beat on these 
folks for a long, long time here.
    But, Mr. Stalon, I appreciate the concern that you showed 
about the need for new transmission capacity to make the 
competitive market work. I did not totally understand some of 
the things that you said, and I am going to write you a letter 
and ask you for that if I might. We had a lot of warning signs 
in the real world last summer and then in the form of a DOE 
blue ribbon task force, both of which tell us that the system 
might lack the capacity to function reliably. I think I am 
correct in understanding you, Mr. Stalon, that you recommend 
Congress enact legislation to set up a Federal authority, FERC 
or some other entity, with sitting authority that would preempt 
State and local authority.
    Is that your position?
    Mr. Stalon. The States, no, I would not agree with that 
wording. We are asking that the powers of the existing 
organization, which are being eroded dramatically by 
competitive forces be reestablished, and the reestablishment of 
those powers to set and enforce standards must now be 
accompanied by the ability to levy financial penalties. So we 
need a new international organization to carry out the 
functions that the old one carried out fairly well for the club 
of big utilities.
    Mr. Hall. With sitting authority that would preempt State 
and local authority.
    Mr. Stalon. My proposal, as embodied in my written 
testimony, was a compromise proposal to leave with the States 
the power to determine the precise route of a new transmission 
line after the Federal Government, the FERC, has made a finding 
of need for the line and perhaps specified several points on 
the line that must be interconnected but leave the details to 
the States.
    Mr. Hall. Okay; I will ask more pointed questions to you in 
writing, and I thank--is it all right, Mr. Chairman, that we do 
that? It will save me time.
    I think I know what you are saying. I will go back and 
reread the testimony.
    Mr. Nave, your testimony seems to make a case for Federal 
authority over the transmission construction, and you used a 
Gas Act provision as a semi-model or something, and my 
questions to you will be if the Gas Act provisions are the 
model, what changes are you going to have to make to make it 
fit electricity if any, and those are some of the questions I 
will ask you. You need not answer them now.
    In the interests of time, I will yield back the balance of 
my time.
    Mr. Barton. You do not want him to give you a partial 
answer now?
    Mr. Hall. Oh, he will give me a full answer a little bit 
later.
    Mr. Barton. The Chair recognizes Mr. Largent of Oklahoma.
    Mr. Largent. Ms. Moler, one of the statements you make in 
your report or your testimony, it says that support for 
research and development in the electric technology area has 
plummeted in the wake of restructuring. It seems to me that, I 
mean, it sort of flies in the face of what we are trying to 
talk about in a competitive market that technology and research 
would actually increase as your competitors are seeking market 
share and new services.
    Ms. Moler. The difficulty is that in the prior regulatory 
regime, States imposed R&D and other public benefits kinds of 
requirements on the regulated utilities. Now that the regulated 
utilities are out competing with, in the States that have 
customer choice and open access, are out competing with those 
who do not have similar obligations, they have cut support for 
R&D very significantly. State regulators have expressed a major 
concern with this phenomenon. They have developed a proposal 
that is similar to what happened under the telecom bill, where 
States could impose an R&D charge, if you will, that would be 
an across-the-board charge done as an add-on on distribution 
rather than on the utility, so that everybody would have to pay 
it.
    Mr. Largent. Would it not be better to wait until we 
actually are in a totally deregulated market and see if 
competition does not drive technology as opposed to on the 
front end, imposing an R&D tax on, you know, end users?
    Ms. Moler. My proposal, as I said, is one that was 
developed by the State regulators. I would leave it up to them 
to monitor the efforts in their States and determine whether 
such a charge is necessary.
    Mr. Largent. Yes?
    Ms. Moler. The Federal role should be performed by the 
Department of Energy-supported R&D.
    Ms. Stuntz. Mr. Largent?
    Mr. Largent. Yes.
    Ms. Stuntz. I am the chairman this year of the Electric 
Power Research Institute, which has been the umbrella 
organization coordinating the electric utility industry's 
research enterprise, and it is a real issue. Particular types 
of research, I would say, have been more effective than others. 
It tends to be longer-term, higher-risk things that it was 
easier to fund when you were not facing competition for utility 
contributors. EPRI is struggling right now to come up with a 
proposal that it could present to you. I would say on behalf of 
the committee that there is not uniform support within EPRI for 
that particular matching fund proposal. It has got goods and 
bads, but it is something that I think will need to be 
addressed, because it is one of the many mechanisms that worked 
in the old regime that is not necessarily going to work in the 
new regime.
    Mr. Largent. Yes; okay.
    Ms. Moler, could you explain how your opt-out works? And 
the other question I wanted to ask about that is did you look 
at other flexible, date-certain options beside the one that you 
chose? I mean, is this a subjective thing that has taken, say, 
well, we just do not feel like doing it? We will go on record 
in saying we do not feel like doing it?
    Ms. Moler. The provision is fully drafted and was presented 
when the administration's bill was transmitted to the Congress 
last year, and the mechanism is actually fairly simple, you 
know; State authorities would write to the Federal Energy 
Regulatory Commission and say we have determined we are not 
going to do this. It is not hard.
    Mr. Largent. So it could be a totally subjective thing; not 
necessarily a----
    Ms. Moler. They would have to have a record that would back 
up their determination. Their determination that they did not 
want to do it would not be challengeable as a matter of Federal 
law, and so, whatever is the ordinary mechanism under the State 
regime would apply for challenging decisions of the Public 
Service Commission, presumably, and that is a fairly well-
settled body of law, how one goes about doing that.
    Mr. Largent. But basically, what you are saying is that 
would be a fairly easy thing for a State to do to just opt out.
    Ms. Moler. A self certification, if you will, is the 
concept.
    Mr. Largent. Okay.
    Thank you, Mr. Chairman.
    Mr. Barton. The gentleman from Ohio is recognized for 5 
minutes.
    Mr. Sawyer. Thank you, Mr. Chairman.
    It is probably fair to say that some regions of the country 
are having difficulty in transmission constraints and that in 
no small part, that is due to the difficulties just simply in 
siting transmission facilities. With transmission facilities 
being used in terms of large bulk sales over long distances in 
ways that they may well not have been designed for, 
increasingly, the business of siting new facilities will become 
even more important and more difficult. Do you have thoughts on 
how the Congress, in legislation that deals broadly with these 
kinds of questions, might address that specific kind of problem 
State-by-State?
    A State might well be even expected to be reluctant to 
build transmission facilities that will not directly benefit 
their populations. Can you talk about that for a moment?
    Mr. Naeve. For the very reasons that you mentioned, I 
recommended in my testimony that we transfer to FERC, as we did 
in the Natural Gas Act, the responsibility for siting and the 
power of eminent domain for interstate transmission facilities. 
That is not to say that local interests should be ignored, and 
indeed, FERC does not ignore local interests when they site 
natural gas transmission facilities. They have a great many 
local hearings; they hear from all of the affected 
environmental agencies. There is a great deal of local input 
into the process.
    So the local concerns are taken care of, but nonetheless, 
the decisions to build the line in the first place are made on 
a regional basis or a national basis, the national need. And 
then, once those decisions are made, then, you have to factor 
in local consideration and environmental issues when you are 
doing the siting, but the decision to go forward is done on a 
national or regional basis.
    Mr. Sawyer. Any other points of view on the question?
    Ms. Moler. Mr. Naeve and I did not consult on this ahead of 
time. On page 11 of my prepared testimony, I made a very 
similar proposal to emulate the Gas Act, the Natural Gas Act 
jurisdiction for Federal siting authority.
    If you cannot muster the support for that, at a minimum, I 
would urge you to clarify that States can exercise authority on 
a regional basis and to encourage them to do so. The 
administration bill has an interstate compact concept in it 
that is worthy of thought. One of the hopes I hold out for 
these large regional transmission organizations that we are 
trying to either compel or induce into being is that they will 
begin to plan and think regionally, and if you can build a 
regional consensus that this new capacity is necessary, I have 
hope, but it is tempered with a hard dose of reality that 
transmission companies will undertake to build new 
transmission.
    It is incredibly expensive and incredibly difficult to do 
so, and they do not get paid enough to make it worth their 
while these days to do that.
    Ms. Stuntz. Mr. Sawyer, that was the point I wanted to 
make. I think this may be a useful proposal, but even under the 
Natural Gas Act now, it is getting increasingly difficult to 
site this stuff, so there are siting issues. But you have got 
to have the right incentives, and right now, I agree with what 
Betsy said. It is extremely expensive, and frankly, I do not 
think transmission pricing is--nobody is encouraged to do it.
    Mr. Stalon. I would agree that no one is encouraged right 
now to do it, but I would also, and I did in my proposal, 
postulate that the States are going to be very resistant to 
build when the principal benefit is to someone outside the 
State, and I can give examples where transmission in the 
western system is needed, and it ought to be built in Idaho, 
and the principal beneficiaries are Southern California and 
Arizona. By the way, it was never built.
    My proposal would give to the FERC the power to make the 
finding of need, and that would impose a legal obligation on 
the State, and the Federal agent could also specify several 
points on the route to make sure that the objective is achieved 
and then let the details of the routing be left to the States.
    Mr. Sawyer. Thank you, Mr. Chairman.
    Mr. Barton. Thank you.
    Mr. Sawyer. Thank you all very much.
    Mr. Barton. The Chair would observe that there are 3 or 4 
young men in the far back corner who are having entirely too 
much fun for such a serious hearing, and I am going to deputize 
the lovely young lady, Ms. Ireland, to serve as their detention 
monitor, and they are going to be required to write down the 
answers to the questions they just missed verbatim for the next 
30 minutes, and that will be deducted from their client billing 
for monitoring this hearing.
    The Chair would recognize Mr. Burr of North Carolina for 5 
minutes.
    Mr. Burr. Mr. Chairman, I do not know who is more 
challenged: the members to come up with more questions or for 
you guys to rephrase the answers that we did not get the first 
time, but I will try to go to some new areas other than to 
rehash things.
    Let me ask you: do any of you believe NERC's draft 
reliability language? Do you believe that there exists 
consensus on that language?
    Mr. Stalon. I do not. It was a compromise within the NERC, 
and I am sure that if every member who voted for that 
compromise was to write his own, parts of that would be 
missing. I know I would have left out certain parts of that and 
changed it, so yes, it was a compromise piece of legislation, 
proposed legislation.
    Ms. Moler. I would say it is a lot like when Congress 
passes legislation by a very lopsided majority to a small 
minority. You have decided it is the best you can do, and it is 
in the public interest to go ahead. You would have written your 
bill differently, just as Mr. Hall would have written his bill 
differently, but you have decided it is a good thing to do, all 
considered.
    And I think it is like consensus building in any 
organization.
    I'm sorry, Mr. Hall would have written his billed 
differently, but you decided it is a good thing to do, all 
considered. I think it is like consensus building in any 
organization.
    Mr. Burr. Mr. Stalon, let me ask you a question. How much 
capital will chase the industry without any Federal 
legislation?
    Mr. Stalon. I am sorry, I don't understand the question.
    Mr. Burr. How much available capital in the marketplace 
will be made available to the entities, those generators out 
there, if, in fact, there is not Federal legislation that 
clears up some of the laws and the hurdles that exist on the 
books?
    Mr. Stalon. Well, I don't have any concern that we will 
create adequate generating capacity. I think firms can borrow 
that money. The capital is there.
    Mr. Burr. You feel that the capital is sufficient even with 
the hurdles still in place?
    Mr. Stalon. Right.
    Mr. Burr. Even with the hurdles? But the price is going to 
be unnecessarily high, the industry is going to be 
unnecessarily inefficient. Do we accelerate the availability of 
capital when we move to that open marketplace?
    Mr. Stalon. I think you lower the cost of capital. In the 
American economy, capital is almost an unlimited supply. It is 
the cost that matters. And by making the industry more 
efficient, you will lower the cost of capital to key players, 
because it gives them more security. But they can live in an 
inefficient market and they can borrow money to produce in the 
inefficient market.
    Mr. Burr. Mr. Naeve, did you want to----
    Mr. Naeve. Well, I generally agree with what Charles said. 
I would focus, though, on other parts of the industry as well, 
not just the generation sector. And there are a variety of 
potential participants in this market who would have capital 
and intellectual capital to bring to bear on it, if they were 
permitted to do so, but are precluded from doing so under the 
Public Utility Holding Company Act.
    Mr. Burr. Ms. Moler, let me go back to you for a second. I 
want to follow up on what Steve Largent raised. When you came 
on behalf of the Administration's plan last time, I left with 
the impression that opt-out was a very difficult process for a 
State to go through, but, in fact, States would have to prove 
that there was no benefit at all, from a rate standpoint, to 
their consumers in their marketplace in their State. I heard of 
something a little bit different from that with your response 
to Congressman Largent. I'm allowing an opportunity for 
clarification. Is it one or the other, or somewhere in the 
middle?
    Ms. Moler. I think it's a simple process. In most States, 
determinations by regulatory bodies are given a presumption of 
validity, just as they are under the Federal statute. And if 
the PUC said ``We've decided not to do this, because we don't 
think it would be good for our consumers,'' I do not believe--
first, that would be fine under the way the administration's 
bill is drafted so there would not be any Federal mandate 
imposed upon that State. I don't think it is a difficult 
process at all.
    Mr. Burr. If the administration does what is rumored, and 
that is that their next bill incorporates a 10-percent 
renewable, you feel like they would be headed in the wrong 
direction. Would that be an accurate statement?
    Ms. Moler. I think that is a little steep.
    Mr. Stalon. Ten percent is a little steep, or being an 
accurate statement is a little steep?
    Ms. Moler. I have not kept up on the rumor mill about the 
administration. I will say, I shy away from that, because I 
have very strict restrictions these days. I can't talk to them 
about what they are up to. I was very comfortable with where 
the administration bill was last time. I don't know what else 
they might be putting in a bill that would make it so that you 
still had significant consumer benefits from the piece of 
legislation, which I think is important. So I don't have a 
judgment at this point.
    Mr. Burr. You made a statement, and I appreciate the 
chairman's indulgence; you made a statement earlier that the 
inaction of Congress is holding the marketplace back. I don't 
disagree with you, but I guess I would ask you, do you believe 
that this administration is ready and willing to deal with 
Congress to move legislation?
    Ms. Moler. Yes, I do. I have nothing but the highest 
respect for Secretary Richardson's negotiating skills. They are 
legendary around the World, and I believe that they will come 
prepared to come to the table and work with the Congress to 
enact legislation.
    Mr. Burr. But you would counsel us to negotiate and not 
necessarily just to blindly accept?
    Ms. Moler. I have nothing but the highest respect for this 
Congress' negotiating skills either. I think you are a fair 
match.
    Mr. Burr. I thank the chairman.
    Mr. Barton. Thank you. I have one final question, then we 
are going to let the panel go. When I was in graduate school, 
my two favorite subjects were economics and marketing, and 
every case study always started with the assumption, assume a 
perfect market. We never have a perfect market in the real 
world, but we always study to assume a perfect market, so 
you've got perfect knowledge and perfect allocation of marginal 
costs. But, we have an opportunity to create a more perfect 
market, if we can move this legislation. And, I want to ask 
Mrs. Moler directly, but anybody can answer it; it would seem 
to me in trying to create a more perfect market that you would 
want some Federal guidelines on stranded costs, because, while 
it's true most States are allowing some stranded cost recovery 
as they act, it is theoretically possible that some States 
would not, and if you were in a situation where you had States 
that were interconnected and had a greater likelihood that they 
would be transmitting power, if one State did their stranded 
cost recovery a totally different way or the impact was 
disproportional, wouldn't that cause quite a bit of problem?
    So you indicated, Ms. Moler, you didn't think stranded 
costs necessarily need to be a part of a Federal bill, and it 
would seem to me it would almost have to be a part of a Federal 
bill.
    Ms. Moler. The States in New England, which have all 
enacted customer choice, all have very different stranded cost 
recovery mechanisms. We have a practical experience with 
adjoining States having very different stranded cost recovery 
mechanisms. I am not aware that it has been a problem there, so 
I don't see why in the future it would be a problem.
    Mr. Barton. That's a fair answer. Anybody else?
    Mr. Stalon. I would endorse that by saying the difference 
in rates shows up in the distribution charges, and that is 
still a monopoly, which will permit you to sustain those 
different rates.
    Ms. Moler. Right.
    Mr. Stalon. The energy market will be competitive, and such 
differences need not be and could not be sustained.
    Mr. Barton. But if you take a State like California that 
pretty well allowed stranded cost recovery up-front, so their 
utilities got quite a bit of money, they can then use that 
money to go into the marketplace and buy power plants and do 
things that in States that allow stranded cost recovery over an 
extended period of time, they don't have that opportunity. It 
creates an imbalance, at least the appearance of an imbalance. 
That's my point.
    Mr. Naeve. I would say this. I think governments, like 
people, should take responsibility for their actions. To the 
extent that restructuring is mandated by a State legislature or 
a State public utility commission, I think the responsibility 
is theirs for deciding how they are going to deal with the 
consequences of their action, namely, the stranded cost. I 
think if the stranded cost in a particular case is the bi-
product of a Federal mandate, then the Federal Government 
should take, in part, responsibility for that.
    Mr. Barton. I could go down that line, too.
    Well, I'm going to excuse this panel. We will have other 
questions for the record. We do very much appreciate your time 
and your expertise on this issue, and I'm sure that you will be 
called on again, if not formally, informally to give us your 
advice. Thank you very much.
    Ms. Moler. Thank you for the opportunity to appear. This is 
my idea of a good time.
    Mr. Barton. Yes, well. It's my idea of a time, I don't know 
how good of a time. It is interesting.
    We would like to call our second panel now, please. We have 
the Honorable John Quain, who is the Chairman of the 
Pennsylvania Public Utility Commission; the Honorable Craig 
Glazer, Chairman of the Public Utility Commission of Ohio; we 
have the Honorable Vincent Persico, who is the Co-Chairman of 
the Special Committee on Electric Utility Deregulation for the 
Illinois General Assembly; we have the Honorable Susan Clark, 
the Commissioner from the Florida Public Service Commission; 
and the Honorable Marsha Smith, the Commissioner for the Idaho 
Public Utility Commission.
    Welcome. Your testimony is in the record in its entirety. 
We are going to recognize each of you for approximately 7 
minutes to elaborate on it. Mr. Persico, I am told, has a plane 
at 4 o'clock. Is that correct?
    Mr. Persico. Correct.
    Mr. Barton. So we are going to let you go first, and we are 
going to give the panelists an opportunity to question you 
before we allow the others their opening statements, so that 
you can catch your plane.
    Does anybody else have a place to catch?
    Ms. Smith. At 5:30.
    Mr. Barton. You are 5:30. You don't count.
    Ms. Clark. Six o'clock.
    Mr. Barton. Okay. But the earliest is the 4 o'clock plane, 
right?
    Mr. Persico. Correct.
    Mr. Barton. So we are going to recognize you for 7 minutes 
and then give the panel an opportunity to specifically ask 
questions to you and then you can be excused, since it is 2:45.
    So, Mr. Persico?

   STATEMENTS OF HON. VINCENT A. PERSICO, CO-CHAIR, SPECIAL 
 COMMITTEE ON ELECTRIC UTILITY DEREGULATION, ILLINOIS GENERAL 
ASSEMBLY; JOHN M. QUAIN, CHAIRMAN, PENNSYLVANIA PUBLIC UTILITY 
  COMMISSION; CRAIG A. GLAZER, CHAIRMAN, OHIO PUBLIC UTILITY 
   COMMISSION; SUSAN F. CLARK, COMMISSIONER, FLORIDA PUBLIC 
 SERVICE COMMISSION; AND MARSHA H. SMITH, COMMISSIONER, IDAHO 
                   PUBLIC UTILITY COMMISSION

    Mr. Persico. Thank you, Mr. Chairman, and members of the 
committee for the opportunity to present testimony before the 
subcommittee on this very important issue. Hopefully, I can 
bring another perspective to the debate on this issue, because 
for one thing, not only do I represent the 39th District of 
Illinois, which is in a western suburb of Chicago, but also, 
for 6 months a year, I try to harness a different kind of 
energy, and that is teaching seventh graders government and 
history, and you know how lively 12 and 13 year olds can be. 
Plus, I am one of the few, I guess, members in the whole United 
States that have actually voted on this particular issue, and 
we went about it in a somewhat different way. Besides my role 
as a regular member in the general assembly, I was appointed as 
Co-Chairman of the Electric Utility Deregulation Committee, a 
special committee established 2 years ago to help guide our 
members to through the debate of deregulation and restructuring 
of the electric industry in our State.
    The Committee is unique in the sense that it is made up of 
equal numbers of Republicans and Democrats, and has one Co-
Chairman from each party. The leadership of the General 
Assembly in Illinois felt that this was the best approach to 
take, because, first of all, we had to draft a bill that was 
not only good for the State of Illinois, but also a bill that 
we could go back to our respective caucuses and have it pass in 
the law. And that's precisely what happened. After 4 years of 
debate in the legislative process, the Illinois General 
Assembly passed the Electric Service Consumer Choice and Rate 
Relief Law of 1997, in November of that year, and our former 
Governor, Jim Edgar, signed it into law in December.
    Historically, the retail electricity industry has been the 
policy and regulatory responsibility of the States, whether it 
was in the establishment of the traditional rate base rate of 
return regulatory system which served our States and Nation 
well for over 75 years, or in the most recent review and 
adjustments made to that system. State policymakers have 
established that the interests of their constituents can be 
best served by the exercise of local control over the electric 
industry. Each State has unique characteristics which bear on 
how the industry operates within its borders and boundaries, 
and State legislators, Governors and regulators have always 
been in the best position to oversee that process on the retail 
level. My own State of Illinois provides an excellent example 
of the wisdom of this approach. Illinois is diverse in many, 
many respects. Not only do we have a huge urban metropolis in 
the city of Chicago, but we have small and medium sized towns 
throughout the whole State, and a very large agricultural area. 
We also have a very diverse people, a mixture of races, creeds 
and colors, and we are in many ways the microcosm of the whole 
United States. In the same way, we also run the spectrum in 
terms of the electricity industry. Commonwealth Edison serves 
the city of Chicago and most of Northern Illinois, and is one 
of the largest investor-owned electric companies in the United 
States. Prior to the passage of our law, it also had some of 
the highest electricity rates in the Midwest, rates which can 
be traced back to its concentration of nuclear generating 
capacity. In other parts of Illinois, we have electricity 
companies which have much lower prices, because they generate 
power with one of their most abundant resources, which is coal. 
We have larger customers served by municipal electric companies 
and rural cooperatives. Again, the Illinois electricity 
industry is very representative of the industry in the Nation 
as a whole.
    The point of the description of the State is to emphasize 
that as policymakers in Illinois, we cannot even govern our 
State with the one-size-fits-all approach, especially when it 
comes to restructuring our electric industry. Our challenges 
were unique to our State, and we were successful in meeting 
them only because we had the necessary familiarity with the 
issues, the stake holder and the constituents which were 
affected.
    I have attached supplemental material to my testimony in 
the form of a two-page layman's summary of the law which we 
passed in 1997. If you examine the issues which we have 
highlighted in that summary, I believe that you will find most 
of the restructuring issues which are being addressed at the 
State level. These include such major issues as the timing of 
customer choice, the recovery transition costs, and the 
provision of delivery service. Also included in our law were 
such issues as maintaining the obligation to serve, how to deal 
with entrance to the marketplace, consumer education and 
protection, restructuring of our utility tax system, and a host 
of other public benefit issues, including protections for 
utility industry employees. I can tell you from literally 
hundreds of hours of personal experience that in each of these 
areas, Illinois policymakers and stake holders struggled to 
craft solutions which were very unique to our own State.
    I would also like to take this opportunity to point out 
that Illinois is not alone in meeting the challengings of 
restructuring the electricity industry. Now, like two dozen 
other States have taken on either legislative or regulatory 
action, or both, to begin the process of moving from a 
traditional monopoly electricity industry to the new 
competitive environment. More will follow. So the States have 
definitely stepped up to the plate and met this challenge. We 
simply ask that you let us continue this process and assist us 
when necessary. While some States have taken a regulatory 
approach to restructuring their electricity industry, we, in 
Illinois, decided early on to address the matter with a 
comprehensive legislation, and our product is probably the most 
comprehensive law passed by any State. As you can see from the 
summary, we tackled every major issue involved in the debate, 
as well as a host of minor ones. When some State legislators 
have merely adopted a list of general principles and then asked 
their State public utility commissions to turn them into 
reality, we, in Illinois, opted to have our elected legislators 
make the critical policy decisions which are found in our law. 
Our regulatory commission and other State agencies were charged 
with implementing these decisions, and that process is well 
underway as we speak. In fact, we are progressing toward the 
first phase of opening our mark on October 1, 1999, and we will 
meet that deadline.
    The decision made by our legislative leaders and Governor 
to take the comprehensive legislative route reflects the 
necessity of crafting unique solutions to the challenges 
presented by our State's diversity, as I outlined at the 
beginning of my remarks. Other States have chosen other 
approaches which work better for them. They and we should have 
the ability to make these choices, both in the overall approach 
and the details of our work product. If there ever was an area 
of public discourse where one side does not fit all, it is in 
the deregulation and restructuring of the electric utility 
industry.
    And, finally, after a long and difficult process of 
education, discussion and legislation, we, in Illinois, passed 
a law which we believe will bring the benefits of competition 
in the electricity industry to all citizens of our State. We 
passed a law which is comprehensive in its approach and 
balanced in its provisions. We believe it will provide an 
orderly transition for all the industry stake-holders from the 
old world to the new. In short, we, in the Illinois General 
Assembly, are convinced that it is the best possible law for 
Illinois. I would urge you to respect that judgment by taking 
no Federal action which would have the effect of changing our 
law or disturbing a very delicate balance that we have so 
crafted.
    And, with that, I will be happy to answer any questions.
    [The prepared statement of Hon. Vincent A. Persico 
follows:]
     Prepared Statement of Hon. Vincent A. Persico, Illinois State 
                             Representative
    Thank you, Mr. Chairman, and Members of the Committee, for the 
opportunity to present testimony here today before this Subcommittee on 
the important issue of the evolving federal and state roles in 
fostering competition in the electricity industry. My name is Vince 
Persico and I represent the citizens of the 39th District in the 
Illinois House of Representatives. I live in Glen Ellyn, Illinois, 
which is a suburb of the City of Chicago. In the Illinois House of 
Representatives I serve as Co-Chairman of the Electric Utility 
Deregulation Committee, a special committee established two years ago 
to help guide our Members through the debate over deregulation and 
restructuring of the electricity industry in our state. The committee 
is unique in recent Illinois legislative history in that it is bi-
partisan, has one Co-Chairman from each party and is made up of equal 
numbers of Republicans and Democrats. The leadership of our General 
Assembly felt that such an approach provided the best chance of success 
in terms of producing legislation which could pass both the House and 
Senate and be approved by our Governor. And that is precisely what 
happened. After a full year of debate and legislative process, the 
Illinois General Assembly passed The Electric Service Customer Choice 
and Rate Relief Law of 1997 in November of that year. Governor Jim 
Edgar signed the bill into law the next month.
State Role in Electric Regulation
    Historically, the retail electricity industry has been the policy 
and regulatory responsibility of the states. Whether it was in the 
establishment of the traditional rate-base, rate-of-return regulatory 
system which served states and the nation well for over 75 years or in 
the more recent review and adjustments made to that system, state 
policymakers have established that the interests of their constituents 
can best be served by their exercise of local control over the 
electricity industry. Each state has unique characteristics which bear 
on how the industry operates within its boundaries and state 
legislators, governors and regulators have always been in the best 
position to oversee that process on the retail level. My own state of 
Illinois provides an excellent example of the wisdom of this approach.
    The State of Illinois is diverse in many, many respects. We have an 
urban metropolis in the City of Chicago, we have fast-growing suburban 
areas which provide their own special challenges for policymakers, and 
we have lots of medium-sized and small towns and agricultural areas. We 
are also a diverse people, a mixture of races, creeds, colors and 
nationalities which reflects the nation as a whole. In many ways, 
Illinois is a microcosm of this country. And, in this same way, we also 
run the spectrum in terms of the electricity industry. Commonwealth 
Edison Company serves the City of Chicago and most of Northern Illinois 
and is one of the largest investor-owned electricity companies in the 
United States. Prior to passage of our law, it also had some of the 
highest electricity rates in the Midwest, rates which can be traced to 
its concentration of nuclear generating capacity. In other parts of 
Illinois, we have electricity companies which have much lower prices 
because they generate power with one of our most abundant resources--
coal. We also have large numbers of customers served by municipal 
electric companies and rural co-operatives. Again, the Illinois 
electricity industry is very representative of the industry in the 
nation as a whole.
    The point of this description of our state is to emphasize that as 
policymakers in Illinois, we cannot even govern our own state with a 
``one-size-fits-all'' approach, especially when it comes to 
restructuring our electricity industry. Our challenges were unique to 
our state and we were successful in meeting them only because we had 
the necessary familiarity with the issues, the stakeholders and the 
constituents which were affected.
The Need for Changes to the State Role
    I am of the opinion that the basic policy decision which you, as 
federal legislators, should make in terms of deregulating and 
restructuring the electricity industry is to maintain the traditional 
division of responsibility between the retail and wholesale aspects of 
the industry. For many of the reasons which I outlined above, states 
are best equipped to govern the retail electricity industry which 
operates within their boundaries. This is true on both a constitutional 
and a practical basis. The federal government, through the Federal 
Energy Regulatory Commission and any potential national transmission 
reliability body, is best equipped legally and practically to handle 
the wholesale, interstate commerce side of the industry.
    However, there may be issues which arise during the course of the 
transition from the traditional electric utility industry to the new 
competitive marketplace where the federal government should act to 
assist the states and its own regulators so that they can better 
perform their roles in the overall system. There may well be some areas 
where only the Congress can act to clear up ambiguities or remove 
roadblocks to a smooth transition. These areas may include interstate 
transmission, federal power marketing administrations, repeal or reform 
of the Public Utilities Holding Company Act and other issues. However, 
the emphasis should always be on assisting the states who remain the 
primary drivers of the changes taking place in the retail electricity 
industry.
State-Level Restructuring Issues
    I have attached supplemental material to my testimony in the form 
of a two-page layman's summary of the law which we passed in 1997. If 
you examine the issues which are highlighted in that summary, I believe 
you will find most of the restructuring issues which are best addressed 
at the state level. These include such major issues as the timing of 
customer choice, the recovery of transition costs and the provision of 
delivery services. Also included in our law were such issues as 
maintaining the obligation to serve, how to deal with new entrants to 
the marketplace, consumer education and protection, restructuring of 
our utility tax system and a host of public benefit issues, including 
protections for utility industry employees. I can tell you from 
literally hundreds of hours of personal experience, in each of these 
areas Illinois policymakers and stakeholders struggled to craft 
solutions which were very unique to our state.
    I would also like to take this opportunity to point out that 
Illinois is not alone in meeting the challenges of restructuring its 
electricity industry. Nearly two dozen states have now taken 
legislative or regulatory action, or both, to begin the process of 
moving from the traditional, monopoly electricity industry to the new 
competitive environment. More will follow. The states have definitely 
stepped up to the plate and met this challenge head on and will 
continue to do so because it is of critical importance to each of our 
constituents and to the various state economies. We simply ask that you 
let us continue this process and assist us when necessary.
The Illinois Approach
    While some states have taken a regulatory approach to restructuring 
their electricity industries, we in Illinois decided early on to 
address the matter with comprehensive legislation. And our product is 
probably the most comprehensive law passed by any state. As you can see 
from the summary, we tackled every major issue involved in the debate 
as well as a host of minor ones. Where some state legislatures have 
merely adopted a list of general principles and then asked their state 
public utility commissions to turn them into reality, we in Illinois 
opted to have our elected legislators make the critical policy 
decisions which are found in our law. Our regulatory commission and 
other state agencies were charged with implementing those decisions and 
that process is well under way as we speak. In fact, we are progressing 
toward the first phase of opening our market on October 1, 1999 and we 
will meet that deadline.
    The decision made by our legislative leaders and governor to take 
the comprehensive legislative route reflects the necessity of crafting 
unique solutions to the challenges presented by our state's diversity 
as I outlined at the beginning of my remarks. Other states have chosen 
other approaches which work better for them. They, and we, should have 
the ability to make those choices, both in our overall approach and in 
the details of our work product. If there was ever an area of public 
discourse where one size does not fit all, it is in the deregulation 
and restructuring of the electricity industry.
Conclusion
    After a long and difficult process of education, discussion and 
legislation, we in Illinois passed a law which we believe will bring 
the benefits of competition in the electricity industry to all the 
citizens of our state. We passed a law which is comprehensive in its 
approach and balanced in its provisions. We believe it will provide an 
orderly transition for all of the industry's stakeholders from the old 
world to the new. In short, we in the Illinois General Assembly are 
convinced that it is the best possible law for Illinois. I would urge 
you to respect that judgment by taking no federal action which would 
have the effect of changing our law or disturbing the balance contained 
therein.
summary of the electric service customer choice and rate relief law of 
                                  1997
Customer Choice of Supplier
    By May 1, 2002, all Illinois electricity consumers will be able to 
choose their electricity supplier. On 10-1-99 customer choice is 
phased-in beginning with the ability to obtain direct access to 
alternative suppliers given to industrial customers with loads of 4 
megawatts or larger and aggregated commercial loads of 9.5 megawatts or 
larger. On that same date, one-third (1/3) of all other commercial and 
industrial customers get choice based on a lottery. On 12-31-2000, the 
remainder of commercial and industrial customers get choice. The 
residential class gets choice on 5-1-02.
Rate Reductions
    Illinois utilities are divided into two categories for purposes of 
rate reductions. Those above the current Midwest average residential 
rate must reduce their rates for residential customers by 15% on August 
1, 1998 and an additional 5% on May 1, 2002. Utilities (except CILCO) 
below the current Midwest average must reduce residential rates by 5% 
effective 1-1-98. Additional 5% reductions are scheduled for 10-1-2000 
and 10-1-02 if those utilities are not below the Midwest average on 
those dates. CILCO rates must be reduced 2% on 1-1-98, 2% on 10-1-2000, 
and 1% on 10-1-02.
    Utilities will receive credit against any rate reductions under 
this law for rate decreases ordered by the Illinois Commerce Commission 
in regulatory proceedings before the effective dates of the reductions. 
The Commission cannot alter rates during the phase-in period except in 
case of financial emergencies for utilities. If utilities have excess 
earnings during the transition, they must share them with their 
customers. Rate reduction provisions apply to all companies with more 
than 12,500 customers in Illinois.
Transition Costs
    The bill uses a ``lost revenues'' methodology to determine the 
amount of transition costs which utilities can recover from customers 
during the change from a regulated to a competitive environment. The 
amount of the charge is calculated by first determining the amount of 
revenues lost to the utility when a customer leaves its system for a 
new electricity supplier, and then subtracting from that figure the 
value of the now-available power previously used by the former 
customers. Also subtracted is the amount of the charge which that 
customer still pays to the utility for delivery of the power from the 
new supplier. Finally, a ``mitigation'' factor is subtracted. This 
factor reflects the amount of cost-reduction for which the utility is 
directly responsible and the number subtracted increases during the 
transition. After all the subtractions, the number which remains is the 
transition charge which the utility can collect from the departed 
customer. 2006 is the final year of recovery of transition costs by 
utilities. Transition costs are paid only by those customers leaving 
the utility's system.
Obligation to Serve
    Utilities have a continuing obligation to provide traditional, 
bundled service to customers who do not wish to shop for power. 
Residential customers who leave the host utility are allowed to return 
without penalty but cannot switch again for 24 months.
Transition Funding
    Often referred to as ``securitization,'' this transition funding 
mechanism allows utilities to lower their cost of debt. Upon petition 
by a utility, the Illinois Commerce Commission can issue a Transitional 
Funding Order which the utility could then use to secure financing and 
raise funds to pay down transition costs. Up to 20% of the monies can 
be used for costs such as employees transition, billing and metering 
transition and ISO start-up. Transitional funding ends in 2006.
Delivery Services
    While the generation aspect of the electric industry is 
deregulated, the transmission and distribution functions remain 
regulated. In order to facilitate competition, however, the bill 
provides mechanisms to establish non-discriminatory delivery of power 
by local distribution utilities.
Independent System Operator
    In addition to unbundling delivery services from power generation 
and using non-discriminatory transmission techniques, eventually 
utilities will have to turn over operation of their transmission 
systems to an independent system operator who will run the system in 
order to institutionalize the fairness concepts. Illinois utilities 
must seek to become part of a regional independent system operator plan 
or, if none is available, establish an in-state ISO. In the meantime, 
Illinois utilities must ``functionally unbundle'' their generation, 
transmission and distribution operations.
Municipal Utilities and Cooperatives
    The bill allows municipal electric utilities and electric 
cooperatives the right to decide for themselves whether to become part 
of the competitive power supply market. These customer-controlled 
entities can elect to open their current territories to competition or 
remain in their current status. If they seek customers from other 
suppliers, they automatically subject their own territories to 
competition.
Alternative Retail Electric Suppliers
    Alternative Retail Electric Suppliers (ARES) will be allowed to 
compete for the customers of current Illinois electric utilities. They 
must first meet minimum certification requirements and along with their 
competitors comply with a Code of Conduct set out in the bill.
Consumer Education and Protection
    Working with suppliers, the Illinois Commerce Commission will 
develop materials which will be sent to all electric consumers in the 
state seeking to educate such consumers on the new competitive electric 
supply system. Additionally, a new Consumer Utilities Unit will be 
established in the Attorney General's Office to deal with complaints 
regarding the new system and the state's consumer fraud statute is 
amended to be consistent with a customer choice environment.
Public Utilities Act Amendments
    Several provisions of the state's Public Utilities Act are amended 
to streamline the current regulatory process and make it more amenable 
to a competitive electricity environment. These include such areas as 
removal of least-cost planning requirements, options for utilities to 
do away with fuel adjustment clauses and making utility reorganization 
and financial activities less cumbersome and time-consuming.
Taxes
    The state's revenue-based utility tax system is completely revamped 
under the bill in order to treat all suppliers equally and maintain 
revenue neutrality as closely as possible. Except for a transitional 
period where large customers will pay utility taxes based on the old 
percentage of gross receipts basis, the state will move to a ``use'' 
tax system where charges are based on consumption of electricity rather 
than revenues. This will be the case not only for state utility taxes 
but for municipal taxes as well. Additionally, the state's Invested 
Capital Tax as it applies to electric utilities is replaced by a usage 
based tax. Finally, a usage based infrastructure maintenance fee system 
is established for the imposition and collection of fees associated 
with the use of public right of way for delivery of electricity.
Environmental Provisions
    The bill mandates disclosure to customers of sources of power and 
amounts of pollutants. On a quarterly basis, suppliers must inform 
customers of the known sources of the power which they are supplying, 
such as coal, nuclear, wind, etc. They must also list the known amounts 
of pollutants such as carbon dioxide, sulfur dioxide and nitrous oxide 
which come from those sources. Also, funds to promote renewable energy 
resources and clean coal technology are created and paid for by charges 
to customers. An energy efficiency fund is also established with the 
money for same coming from suppliers of electricity. Effective 1-1-98.
Assistance to Low-Income Customers
    The legislation establishes a fund to supplement federal money 
received for energy assistance to low-income consumers. When fully 
implemented the fund will generate over $75 million per year. 
Additionally, a long-term planning process is put in place which will 
develop a permanent low-income energy assistance program for the new 
customer choice environment. Effective 1-1-98.
Utility Employees
    Provision is made for assisting utility employees in the event of 
dislocations resulting from moving to a competitive electricity market. 
These include severance pay, retraining, outplacement and voluntary 
retirement plans. Utilities must develop workforce reduction plans if 
dislocations occur.
Other Provisions
    The 250+-page bill includes a myriad of other provisions, each of 
which has individual importance to stakeholders in the electricity 
industry. These include the ability of utilities to engage in billing 
experiments before and during the transition to competition, options 
for customers to elect real-time pricing of their power supply, and 
safeguards on the reliability of the transmission and distribution 
functions.

    Mr. Barton. Thank you, Mr. Persico. Does any member of the 
subcommittee have specific questions for Mr. Persico? Does 
anyone, because I want to excuse him if there are no specific 
questions.
    Mr. Hall. I take it, Mr. Persico, that you and all the 
others of you, that none of you favor a Federal mandate 
requiring States to enact any kind of a specific type of retail 
competition plan on a specific time table? You all five are in 
agreement on that, aren't you?
    Mr. Persico. Well, I think it would be out of my place to 
recommend a certain time table for Utah or Idaho, or whatever 
State. I mean, Illinois has a time certain in the year 2002, 
all industry and all residential customers will have the 
ability to choose. And, again, it was through major hours of 
negotiations where we literally sat in a room this large with 
80 to 90 people and we went point-by-point, because what we 
first did is we gave them 12 guidelines. We wanted obligation 
to serve in there. We wanted protection for utility employees. 
We wanted to cover the issue of transition costs--I mean, 
stranded costs. So we sat down and said, ``This is what we 
want,'' and then we hashed it out and debated and discussed, 
and finally came up with a bill that fit Illinois.
    Mr. Hall. Your State's act, right?
    Mr. Persico. Pardon me?
    Mr. Hall. Your State has acted?
    Mr. Persico. Yes, it passed it in 1997.
    Mr. Hall. So you would want an unconditional grandfather 
under your State's plan?
    Mr. Persico. Without a doubt.
    Mr. Hall. Okay.
    Mr. Persico. I think we crafted a very delicate balance of 
a very good piece of legislation that is unique to Illinois, 
and I believe other States should be given the same 
opportunity.
    Mr. Hall. Do I get some kind of a ``yes'' from all five of 
you when I asked----
    Mr. Barton. Well, let's try to be specific to Mr. Persico 
so we can let him go. We are going to give you time to----
    Mr. Hall. I'm trying to leave, too. I've got a 5:10 flight. 
Seriously, he can hold up his hand as quick as the other four 
do. I don't want to defy the chairman, not this early in the 
game, anyway. I said, I take it that none of you favor a 
Federal mandate requiring States to enact a specific type of 
retail competition plan on a specific time table. That's right, 
isn't it?
    Mr. Quain. Representative John Quain from Pennsylvania. I 
don't----
    Mr. Hall. I'll get you later, John.
    Mr. Quain. Okay.
    Mr. Hall. You would hold your hand up to that?
    Mr. Persico. I don't favor a one-size approach fits all.
    Mr. Hall. I yield back my time.
    Mr. Barton. Before we let Mr. Persico go, does Mr. Shimkus 
have a question for him, since he represents your State?
    Just a specific question for him and Mr. Burr also has a 
specific question.
    Mr. Shimkus. What can the Federal Government do to help 
prohibit the price spikes that we experienced in Illinois last 
year, question No. 1?
    Mr. Persico. These are issues, again, that we struggled 
with. And one of the things that is in the Illinois bill is we 
eliminated the fuel adjustment cost, which meant that when we 
had those price spikes in Illinois last Summer, where they were 
buying it 4, 5, 10 times over the original cost, they couldn't 
pass it on to the consumers. And so, many utilities which, 
through discussion and debate and agreement, agreed to 
eliminate this fuel adjustment clause, because everybody was 
giving in on each side, it meant that the consumers, both at 
the industrial and residential level, were not affected by it. 
So how you do that on a more national level is something that 
this committee and Congress, as a whole, are going to struggle 
with.
    Mr. Shimkus. But you can see how that is a critical role 
for the Federal Government to get involved with?
    Mr. Persico. Yes.
    Mr. Shimkus. The last question. Illinois addressed low-
income assistance in its law. Should the Federal Government do 
the same?
    Mr. Persico. Again, I think what you decide is important, 
and what we decided in Illinois were those 12 guiding 
principles, and one of them was assistance to low-income 
customers. And as a result of that piece of legislation, we 
enacted, I believe, a forty cent charge per month on a 
customer's bill, for a residential customer, which went into a 
low-income assistance program which generates around $75 
million a year to provide assistance, as well as, I believe, 
like $50 million to $55 million in Federal assistance. So we 
felt, as a General Assembly, that that was important. By the 
same token, we also felt that any restructuring act, that we 
would pass that reduction by law for residential customers as 
well as industrial customers. For example, we had a 15 percent 
rate cut which took effect last August 1998 that what ever the 
customer's bill was as of July 1998, it was 15 percent less in 
their August bill and from then on, and another 5 percent in 
2002.
    Mr. Shimkus. And let me ask one last question. If the 
Federal bill changes one comma, colon, or period in the 
Illinois law, what does that do to the Illinois restructuring 
law that you all passed?
    Mr. Persico. Well, again, it was a very delicate balance 
with each giving and taking, or whatever they felt was 
necessary. For example, one of the things that we are 
struggling with right now is--and we knew that it was coming, 
and that's why we set up a special commission to study that 
problem; was the school districts and the municipalities in 
certain areas where they have these nuclear generating plants 
would be adversely affected, because the value of those plants 
would dramatically go down. And so, right now we are trying to 
craft a piece of legislation that again will be very difficult 
to pass the Illinois General Assembly on how to help out these 
school districts and municipalities. So if you came in with a 
one-size-fit-all, and so on, it could very much upset this 
balance that we're still struggling with ourself.
    Mr. Shimkus. What about the severability clause that you 
all have?
    Mr. Persico. Again, I'm not an expert on this, but we did 
have a clause in there that if one part was found 
unconstitutional, that everything would found.
    Mr. Shimkus. Not just unconstitutional.
    Mr. Persico. That it wouldn't work. It wasn't going to----
    Mr. Shimkus. But if the Federal Government preempted any 
part of your statute, isn't that correct?
    Mr. Persico. I believe that's correct.
    Mr. Shimkus. We would want to follow-up and make sure we 
can get that into the record.
    Mr. Barton. Does Mr. Burr have a question for Mr. Persico?
    Mr. Burr. Just one quick question. Do you believe it's 
possible for Congress to pass a comprehensive piece of 
legislation that, in fact, does not preempt you and does not 
require grandfathering, but eliminates many of the Federal 
hurdles that have been identified?
    Mr. Persico. I guess we started at the same page almost. We 
had people on all sides of the spectrum on either end, and we 
finally were able to craft a piece of legislation through 2 
years of very hard work and 2 years of compromise. Yes, I think 
the Federal Government does have a role, you know, whether 
through the wholesale transmission lines or the PURPA Act, or 
so one, eliminating and repealing the PURPA Act. I think you 
definitely do have a role. This is my humble opinion, I think 
if you come in and say that every State has to do this by this 
certain date, I think it is going to be very difficult to craft 
that kind of piece of legislation. I think you're going to have 
a hard time selling it to your members.
    Mr. Burr. Clearly, a date certain would be preemptive. And 
I'm talking about, do you think it's possible for us to do a 
bill that's comprehensive, that addresses the Federal hurdles, 
that's not preemptive?
    Mr. Persico. Yes, I do.
    Mr. Burr. I'm going to deal back, Mr. Chairman.
    Mr. Barton. Thank you, Mr. Persico. We are going to excuse 
you so that you can catch your airplane. We are going to resume 
regular order. We will hear from Mr. Quain, Mr. Glazer, Ms. 
Clark, Ms. Smith, and then we'll allow each member to question 
them in turn.
    Mr. Persico. Thank you, Mr. Chairman, and members of the 
committee.
    Mr. Barton. We appreciate your testimony. Mr. Quain, you're 
recognized for 7 minutes.

                   STATEMENT OF JOHN M. QUAIN

    Mr. Quain. Thank you, Mr. Chairman, and members of 
subcommittee. Let me answer the question that was asked 
earlier. I do favor a time-line mandate in Federal legislation 
for States to act. Although, I believe that should be far 
enough in advance to allow each State to craft a solution 
individual to its own needs. Listening to Mr. Persico talk, it 
sounded very much like my State in the sense that we have some 
of the highest costs to utility providers in Pennsylvania and 
some of the lowest cost providers in the Nation. And when we 
sat down to look at the electric choice process, we began at 
the Public Utility Commission in Pennsylvania in 1995, and by 
the Summer of 1996, we had concluded as a group that generation 
was no longer a natural monopoly and, as a result, should not 
be regulated as such, but transmission and distribution should. 
But with the findings in that report, the Governor of 
Pennsylvania, Tom Ridge, one of your former colleagues, 
requested that I convene a group of stake-holders to see if we 
could identify problems, reach a consensus piece of legislation 
to present to the Pennsylvania General Assembly that would 
handle all the issues from the various prospectives on such a 
complex and difficult matter. And we did just that. We had 
certainly our electric utilities in the room, we had our rural 
electric co-ops, we had labor, environmentalists, low-income 
consumers, residential consumers, small business advocates, 
large industrial consumers, marketers, independent power 
producers, and the like, and I'm sure I've missed some. But we 
had 50, 60 people sitting around a table, and in over a 2-month 
period of time, we reached a piece of consensus information, 
that all agrees was a good way to open the market in 
Pennsylvania. So the center to that was the environmentalist 
who wanted us to put provisions in the statute that we believe 
were in conflict with Federal law, so we parted ways on that 
singular issue.
    Having done that, we moved to the General Assembly and we 
had a lobbying effort that was rather unique. We had large 
industrial customers sitting in their representives office with 
small and low-income consumers. We had marketers and brokers 
sitting in with industrial users, as well as IOU's, all saying 
the same thing; this is a good way to open up the Pennsylvania 
market. In October 1996, the General Assembly passed the bill 
in both Houses without amendment. In December 1996, the 
Governor signed it into law.
    Now, as of January 1, 1997, the details for implementing 
the electric choice law moved to the Pennsylvania Public 
Utility Commission. We had, under the law, an obligation to 
open the market by January 1, 1999. I am pleased to report that 
over the last 2 years, we have gone through that transition 
process. On January 1, 1999, the market for 66 percent of all 
consumers in Pennsylvania opened, and we believe, in our humble 
opinion, it is a tremendous success story. Let me just give you 
some basic facts. Beginning in July, when we asked people to 
begin to enroll for the first 66 percent of capacity available 
under electric choice, out of 5.2 million customers in 
Pennsylvania, electric customers, 2,000,000 signed up and said, 
``We want to learn more.'' And as time passed, about 1.2 
million of those 2,000,000 customers actually participated in 
the choice process, actually went out and looked for 
alternative suppliers. Now this is a maturing marketplace. We 
are 2 months into the first 66 percent of our electric choice 
program. At this date, over 400,000 Pennsylvania citizens and 
businesses--I'm sorry, just under 400,000. That represents 
approximately 33 percent of all winter peak load in 
Pennsylvania are now shopping for alternative energy in the 
State. Once we passed the legislation, we, of course, had to 
handle such issues as stranded investment and the other 
restructuring issues, and we brought each of our electric 
utilities in for a prolonged rate case proceeding. At the 
conclusion of those rate case proceedings, there were, of 
course, a number of appellate actions which challenged the 
Commissions authority, rights and obligations to enter the 
orders that it did.
    We then turned around and sought to settle the five major 
electric utility cases in Pennsylvania so we could avoid 
litigation. Why did we do that? Because we believe that the 
marketplace needs certainty. The greater the certainty, the 
greater the market, the greater fluidity, the greater 
competition will occur in Pennsylvania. And we were successful 
in five our of five cases negotiating results that all the 
parties, with very few exceptions, have signed off on.
    So today in Pennsylvania, in 1999, if not a single person 
shops in 1999, rates will go down by $458 million in 1 year, 
and at the same time, low-income funding has gone up 122 
percent, as compared to what it was under traditional 
regulations. We have sustainable energy funds that will be 
funded to the tune of $60 million over 5 years. We have 
announced $1.1 billion of additional investment and generating 
capacity in Pennsylvania in 1999 alone. In additional to that, 
we have rate caps in place under the negotiated settlements 
which last years in Pennsylvania. And just looking at the 
energy component that rate payers pay, which you normally see 
our energy cost rate, which is a direct flow-through, by 
tapping those costs through negotiated settlements, we project 
the citizens avoid $8.7 billion, what would otherwise be 
automatic pass-through under traditional regulations. And we're 
excited about the possibility of electric choice in 
Pennsylvania. We look to open up the remainder of the market in 
1 year. We have a tremendous amount of consumer education left 
to do. There is a transition process, there is a need to have 
States develop their own plans to fit the nature of the 
demographics, but to say that regulation is a suitable 
substitute where competition can and should exist, to me, makes 
very little sense. Regulation was only intended to be a 
surrogate where competition could not exist. And if generation 
competition can exist in the United States, it should, and, as 
a result, free market enterprise should be allowed to develop 
and regulation should pull back. That is the philosophy which 
we are operating under, and we think we are beginning to see 
very quickly the benefits of that philosophy in Pennsylvania.
    I'm happy to answer any questions. Thank you.
    [The prepared statement of John M. Quain follows:]
  Prepared Statement of John M. Quain, Chairman, Pennsylvania Public 
   Utility Commission, on Behalf of the Commonwealth of Pennsylvania
    Good afternoon, Mr. Chairman and members of the Subcommittee. Thank 
you for your kind invitation to speak on the role of state regulators 
in restructuring the electric industry. I come before you today to 
discuss the Pennsylvania Public Utility Commission's (``PaPUC'') role 
in electric industry restructuring, and the steps taken by the PaPUC to 
foster competition in electric energy generation. I will also discuss 
the effects these steps have had on the PaPUC's traditional role in 
electric regulation, and identify issues the Pennsylvania Public 
Utility Commission believes should continue to be addressed by the 
states as the electric industry changes.
    Retail electric competition in Pennsylvania is a success story. It 
represents the vision of our Governor, Tom Ridge, the will of our state 
General Assembly, and the cooperation of all of the parties involved in 
the process. Pennsylvania's Electricity Generation Customer Choice and 
Competition Act <SUP>1</SUP> (``Competition Act'' or ``Act'') was 
signed into law by Governor Tom Ridge on December 3, 1996. The Act 
provides for a careful transition to full retail generation choice by 
January 1, 2001. Sixty six percent of retail electric customers in all 
classes are already eligible to choose their electric generation 
providers. After January 1, 2001, all retail customers will have the 
opportunity to choose their electric generation provider. The purpose 
of the Act is to open up the electric generation market for competition 
in Pennsylvania. Transmission and distribution services continue to be 
regulated by the F.E.R.C. and the PaPUC, respectively.
---------------------------------------------------------------------------
    \1\  PA H.B. 1509, Session of 1995, 66 Pa.C.S. Sec. 2801 et seq., 
``The Electricity Generation Customer Choice and Competition Act'', 
effective January 1, 1997.
---------------------------------------------------------------------------
    Pennsylvania's Act provides for a four-year transition and phase-in 
period to prepare utilities, shareholders, consumers and regulators to 
achieve the maximum benefits of competition. This phase-in period began 
on April 1, 1997, and will continue to January 1, 2001, at which time 
transition to full customer choice will be complete. The purpose of the 
phased transition was to permit our traditional, vertically integrated 
utilities a chance to file restructuring plans functionally unbundling 
their services while allowing all parties to grow into competition. The 
transition has been challenging, but it has also been a success. Retail 
customers now have the choice of who will provide their electricity.
    As I come before you today, more than 1.2 million customers in 
Pennsylvania are eligible to shop for electricity. I should note that 
even if one single customer did not select an alternate supplier, 
Pennsylvania ratepayers will still save approximately $458 million in 
guaranteed rate reductions over the next year by virtue of the 
economies of restructuring and mandatory rate relief. However, I am 
pleased to report that approximately 400,000 customers say they have 
already switched to a competitive market supplier. Those who have 
elected to remain with their traditional utility have also made a 
choice--a choice that was not open to them before the passage of this 
innovative and dynamic legislation. Pennsylvania's consumers are 
leading the nation in exploring the benefits of electric choice. These 
numbers are a strong indication that Pennsylvania is well on its way to 
developing a viable competitive electricity market.
    The Act was the result of a considered process. Prior to 
facilitating the stakeholder process that led to the Pennsylvania Act, 
the PaPUC undertook an investigation into retail competition 
<SUP>2</SUP> which concluded after two years of extensive testimony. 
Among other things, the investigation confirmed that restructuring the 
electric industry at the retail level would be a formidable challenge. 
On the most basic level, it is imperative to balance full retail access 
and customer choice with the need to assure utilities and their 
shareholders a reasonable level of financial stability. Pennsylvania's 
Competition Act provides a reasonable opportunity for utilities to make 
the transition to retail competition and customer choice while 
preserving their financial stability through the opportunity to recover 
stranded costs--utility assets rendered uneconomic by the move to 
competition.
---------------------------------------------------------------------------
    \2\ See, Report and Recommendation to the Governor and General 
Assembly on Electric Competition: From the Investigation into Retail 
Competition, PaPUC Docket No. I-940032 (July 3, 1996). http://
www.pa.us/PA--Exec/Public--Utility/electric--competition
---------------------------------------------------------------------------
    In its role as arbiter and adjudicator in each of the restructuring 
proceedings which have taken place since the effective date of the Act, 
the PaPUC has analyzed all the evidence submitted in favor of and in 
opposition to each company's stranded costs and has led negotiations 
among all parties addressing the appropriateness of each company's 
proposed stranded cost recovery. Ultimately, the PaPUC adjudicated the 
stranded cost issue for each utility in a way which has proved fair to 
both the consumers and the utility shareholders.
    The Act also contains a clear set of directives that electric 
system reliability must be maintained at present levels, or it must 
exceed those levels. The PaPUC has issued competitive safeguards in the 
nature of a proposed rulemaking and continues to ensure that utilities 
adhere to this mandate. Further, the Act guarantees that all consumer 
protections now in place under the Pennsylvania Public Utility Code and 
its attendant regulations will continue in the new era of customer 
choice. The role of the PaPUC in this regard continues, as the 
Commission modifies its regulations as necessary and adjudicates 
consumer complaints. The PaPUC has also implemented the universal 
service provisions contained in the Act, and will continue to do so 
through the issuance of orders and the promulgation of regulations as 
necessary.
    Electric industry competition and restructuring transcends state 
borders. Many of the electricity generation providers licensed to do 
business in Pennsylvania are located outside of our Commonwealth. 
Pennsylvania's Competition Act recognizes that the interconnected 
electric system is a regional and national as well as a state resource. 
The PaPUC is committed to working with the federal government and with 
other states in the region to accomplish the goals of industry 
restructuring, open access and competition. I would be remiss if I did 
not point out that to date, the cooperation which the Commission has 
received from the Federal Energy Regulatory Commission has been 
exemplary and indeed indispensable. Open communication and cooperation 
between the states and the federal government, as well as within 
regions, is essential to realize the full potential of competition. 
Regional cooperation is also necessary to maintain system reliability.
    Pennsylvania prefers that each state be allowed the opportunity to 
set its course into retail competition; however, we recognize that 
there will be those states who choose not to act. We therefore submit 
that the implementation of retail competition on a national basis by a 
date certain is a logical and equitable approach that the PaPUC 
endorses. In order to insure that all states are subject to the same 
competitive forces and that no state is disadvantaged by the creation 
of a new market, reciprocity, nationally and regionally, is imperative. 
Accordingly, any federal legislation which is enacted should contain a 
reciprocity clause.
    Notwithstanding the recognition that federal legislation providing 
for retail competition is necessary, Pennsylvania's Competition Act 
reflects our desire to maintain a necessary measure of control of our 
state's destiny in this area. Accordingly, it is our hope that any 
federal legislation would allow the states an opportunity to act on 
their own by a date certain and would ``grandfather'' existing state 
legislation to the extent that a states' actions are not inconsistent 
with the principles of open access, on a non-discriminatory basis, for 
all of the market participants. We have provided draft language on this 
subject as an attachment to this testimony.
    Additionally, the PaPUC's proposed language includes specific 
language addressing Pennsylvania's desire to have any federal 
initiative preserve the states' authority to collect taxes on energy 
provided to end users situated within the states, regardless of the 
source or its location. One of the stated goals of the Pennsylvania 
legislation was to make competition ``revenue neutral'' with respect to 
tax matters. The proposed language would ensure that any federal 
legislation also remains ``revenue neutral'' as applied to the states.
    In the event that federal legislation is drafted which does not 
contain a grandfathering clause, the PaPUC submits that the legislation 
should preserve the states' authority to enforce regulations to 
implement the requirements of the Act, to the extent feasible, without 
compromising the legislative intent to open up retail competition on a 
state, regional and national basis. Particularly, the PaPUC believes 
that any issues relating to system reliability, universal service, 
retail stranded costs and consumer protections should remain within the 
states' jurisdiction. Pennsylvania has successfully addressed these 
issues through its Competition Act and the issuance of Commission 
orders and regulations, and we hope any federal legislation will 
preserve our authority to do so.
    The consensus-building process that led to the adoption of 
Pennsylvania's Competition Act was intense, sometimes contentious, but 
ultimately very rewarding for Pennsylvania's consumers and, I believe, 
for the electric industry. Managing the transition from regulation to 
increased competition has been our greatest challenge. However, we are 
confident that our efforts will result in benefits for all 
Pennsylvanians, as they have access to safe, reliable and efficient 
service at competitive prices. We will continue, as a state, to do 
everything within our power to make electric competition work for 
Pennsylvania and for the region. We look forward to cooperating with 
Congress in an effort to further the goal of customer choice in 
electric energy.
    I thank you for your attention, your consideration, and I await 
your questions.

    Mr. Barton. Thank you, Mr. Quain.
    We would now like to hear from the Honorable Mr. Craig 
Glazer from the great State of Ohio. Your statements in the 
record in its entirety, and we'll give you 7 minutes to 
summarize.

                  STATEMENT OF CRAIG A. GLAZER

    Mr. Glazer. Okay. Thank you, Mr. Chairman, and members of 
the committee. It is a great honor to testify before you on the 
subject of evolving Federal and State responsibilities in 
electric competition.
    My name is Craig Glazer. I'm the Chairman of the Public 
Utilities Commission of Ohio, and have served in that role for 
the last 8 years and under three Governors, at this point.
    I have to sort of let you in on a little bit of a secret. 
One of your esteemed colleagues on this committee, 
Representative Tom Sawyer--unfortunately, he's not here; used 
to work for us. He worked at the Commission many, many years 
ago, and we still find memos from him----
    Mr. Barton. He's complained about that repeatedly. No, he 
spoke very positively of it. I think you have 4 or 5 Ohioans on 
this committee, so I think your State's position is going to be 
well represented when we get to the mark-up.
    Mr. Glazer. Well, that's good. That's good. We like it that 
way, and we consider ourselves one of the other great States, 
along with the great State of Texas. I've also worked with your 
esteemed minority counsel. I spent many years in the law 
library at Vanderbilt University trying to figure out this 
thing called the ``Interstate Commerce Clause'' years ago.
    We are something of a bellwether for the national mood, as 
you all know. On election night, Ohio is one of the swing 
States that people watch to get a feeling for what's happening 
in the national elections. By the same token, McDonald's and 
Wendy's test markets products in our cities and towns, and so 
we kind of consider ourselves sort of a good indicator as to 
where the national mood is. And like Pennsylvania and Illinois, 
we also were something of a microcosm of the Nation. We have 
high costs and low costs in the same State. We're both a large 
energy producer and a large energy consumer. We are coal State. 
We are also a natural gas producing State. We have strong 
transmission systems, have two competing ISO's going in our 
State at the same time, and we have more registered holding 
companies under PUHCA, the Public Utility Holding Company Act, 
than just about any other State. So we have a great interest in 
these issues.
    Where are we at? Well, it's interesting. Literally, we are 
in the throws of trying to pass electric deregulation in our 
State. We feel the heat from my esteemed colleague, Chairman 
Quain, from Pennsylvania. The Governor just last week 
announced, ``We want to get this done,'' and the House and 
Senate are in intensive discussions. I literally was faxing 
back amendments this morning to proposed legislation. With that 
being said, how do you get your hands around this and what can 
the Federal Government do. That's sort of the questions I heard 
this morning. I'd like to propose a path that would avoid some 
of the mandate problems, of date certains, but also be very 
constructive, I would argue, in moving this issue forward. 
Because, I think this is a Federal and State partnership and 
think there are important things this Congress can do to move 
this forward without stepping over the line and mandating the 
States that might not want to move forward.
    We've got to come up, in my opinion, with a harmonized plan 
that moves forward and serves individual State goals, but has 
incentives, the things that the Federal Government might want 
to see happen, as well. But I would definitely--First, I'm 
going to talk about what I would recommend you not do and then 
talk about what you might do.
    What I would recommend you not do is pull out any one piece 
of legislation, repeal the Public Utility Holding Company Act, 
for example, and do nothing else. It think that that would be 
huge mistake, and there's a lot of reasons for that. I think, 
instead, you ought to borrow a page from your own 
Telecommunications Act of 1996, which set up a checklist for 
States to follow, some incentives for things to happen, but 
also provided for some State flexibility. And I think I would 
argue that that might be the key here, and I can talk about 
that in a minute. But let me go back to sort of what you 
shouldn't do and why, taking PUHCA for a minute, I think it 
would be a mistake to just rip up PUHCA, to just repeal it on 
its own. Let's look at PUHCA for a minute. Well, it addressed a 
number of issues that we are still talking about today, issues 
this Congress dealt with in 1935 that are still issues today. 
PUHCA had provisions about corporate structure. We're still 
talking today about corporate structure; should people be in 
this business or that business. It was an issue back then, an 
issue today. PUHCA talked about cross-subsidization from 
competitive businesses into monopoly businesses, from one 
business into another. That's also a subject we're still 
talking about today. PUHCA was concerned about the 
effectiveness of State regulation on the monopoly parts of the 
business. There are provisions in PUHCA that deal with that. 
That is also something we are still dealing with today. And, 
frankly, the statute is not exactly ancient. This Congress just 
modernized it in 1996 as it related to electrics going into the 
telephone business. PUHCA, in effect, was a market power 
statute, because it dealt with many of these same issues. Is it 
the right statute for the 1990's? Absolutely not. Does it need 
modernization? Absolutely, it does.
    With that being said, my fundamental point is, I think, the 
biggest mistake would be to just rip it up without addressing 
the market-power issue in some other way. And it is for those 
reasons I ask the committee to consider sort of a different 
approach where you would, in fact, adopt a checklist approach. 
How would that work. Let's take PUHCA. PUHCA has line of 
business restrictions, its got merger restrictions, et cetera. 
Those would be lifted under this model, once the individual 
States certified that they had appropriate protections under 
State law that addressed abuses in market-power by large multi-
state holding companies. So a State that has moved toward 
retail competition, those utilities operating in that State 
would be free of PUHCA, as long as there, in fact, was some 
other market-power protection that the State legislature or 
State commission had come up with. For a State that doesn't 
want to move toward retail competition at all, PUHCA could also 
be lifted for those States, but those States would certify that 
the effectiveness of State regulation would still be available 
over a large multi-state holding company. They would certify 
that issue. Just like in the Telecom Act, we certify that 
certain things have happened, and then the FCC, in fact, takes 
some action. So, too, would I suggest you could use that model.
    Now, what happens if one State says, ``Well, I don't want 
to play, I just want to be a hold-out``? I'd be willing to say, 
if there's one State holding out, and it's holding out in a way 
that's having an adverse effect on other States, then and only 
then should there be some kind of override provision, some kind 
of preemption provision. And there is language in the Federal 
Telecom Act that dealt with that. With a State that just didn't 
want to move forward, the FCC then had some authority to move 
forward.
    But under this checklist approach, you could craft a number 
of things. You could give incentives for the very issues that 
you raised. You could give incentives for independent 
transmission. You could give incentives for States to resolve 
stranded costs in a fair way. You could address all of these 
issues and have the States make certifications of them, rather 
than have this one-size-fits-all solution being decided here 
inside the beltway. The bottom line is I think we can work 
through this issue, I think we can find the appropriate 
balance. You did it in the Telecom Act. It hasn't worked 
perfectly, but it's a very sound piece of legislation, and I 
think if you adopt an approach like that, you might be able to 
accomplish some of the ends. I stand ready to work with this 
committee on putting some of these ideas into action.
    [The prepared statement of Craig A. Glazer follows:]
   Prepared Statement of Craig A. Glazer, Chairman, Public Utilities 
                           Commission of Ohio
    Chairman Barton and Committee Members: It is a great honor to 
testify before you on the subject of the evolving Federal and State 
roles in electricity competition. My name is Craig Glazer and I have 
had the honor of serving over the past eight years and under three 
Governors as Chairman of the Public Utilities Commission of Ohio. In 
fact, my appointing authority and former boss, George Voinovich, now 
serves as a U.S. Senator in this Congress as does my former Cabinet 
colleague, then Ohio Lieutenant Governor now U.S. Senator Mike DeWine. 
I bring you greetings from the Buckeye State, which, coincidentally, is 
in the throes of legislative debates on this very topic this week. I 
want you to know that these are my comments and not necessarily those 
of the Public Utilities Commission of Ohio.
    As you may know, our state is something of a bellwether for the 
national mood. We are often one of the swing states that is closely 
watched on election night. By the same token, McDonald's and Wendy's 
often test market products in our cities and towns since Ohio is 
considered a good testing ground of the tastes and fancies of the 
nation.
    Not surprisingly, the same is true with the issue of electricity 
competition. We are something of a microcosm of the nation on this 
issue: we have high-cost and low-cost power in the same state; we are 
both an energy producer and energy consumer; we have large reserves of 
both coal and natural gas; we have strong electric transmission 
systems; we have two different ISOs forming with a border which slices 
our state in two; and we have more registered holding companies subject 
to the Public Utility Holding Company Act (PUHCA) than any other state. 
For all these reasons, we consider ourselves something of a bellwether 
with some unique perspectives from being both a high-cost and low-cost 
state.
    Although only seventh largest in population, Ohio is the fourth 
largest energy consumer in the nation. We are very much part of the 
industrial heartland of the nation and our steel and auto industries 
have retooled and have taken on the international competition. Because 
of our heavy industrial base, the issue of electric competition is very 
important to us. Ohio has high electric costs in the northern part of 
our state (up to 12 cents per kWh), and much lower costs in the 
southern part of the state. However, we are surrounded by states such 
as West Virginia, Kentucky and Indiana, which have lower costs still. 
Even more pressing, at least two states which border us, Michigan and 
Pennsylvania, are aggressively moving forward with restructuring 
implementation.
    For the third year in a row, our state is attempting to pass 
comprehensive restructuring legislation. The leadership of the House 
and Senate of the state legislature are involved, and our Governor, in 
his State-of-the-State message just last week, indicated that the time 
to move forward is now. We've tried to learn from the good and bad of 
the states around us. The proposal now on the table, put forward by a 
bipartisan working group of state legislators, calls for a number of 
things:

a. The commencement of full retail competition on 1/1/01;
b. A ``black box'' approach to stranded costs wherein a specific 
        company-by-company time period for recovery of revenues is set 
        forth in legislation, thus avoiding protracted proceedings;
c. An aggressive stance on ensuring against abuses of market power 
        harming competitive markets. A number of tools are put in place 
        by legislation including: mandatory independent operation and 
        separation of transmission from generation; elimination of 
        pancaked transmission rates; large shopping credits designed to 
        provide an approximate 10% up-front savings for residential and 
        commercial customers if they switch providers; an auctioning 
        off of default customers after the transition period to avoid 
        the incumbent realizing the horizontal market power associated 
        with incumbency; and, incentives for divestiture;
d. Various state tax reforms to ensure a level playing field between 
        in-state and out-of-state generators.
    We are hopeful that this proposal will be passed by June of this 
year enabling us to meet the 1/1/01 start date.
    I firmly believe that there is a role for BOTH state and federal 
legislation in the area of restructuring of the electric industry. I 
want to compliment this particular Federal Energy Regulatory Commission 
under the leadership of Chairman Jim Hoecker, and with an excellent 
group of Commissioner, for reaching out and working with the states. 
There is a dual role here that, if we get it right, can lead to a 
success story for the nation.
    As I mentioned, I firmly believe there is a role for both the 
states and the federal government. Because the provision of electric 
service has BOTH interstate and intrastate qualities, I think it 
critical that we come up with a harmonized plan that moves forward and 
serves individual state goals while recognizing the national and 
international nature of the markets being created. To pull out any one 
piece, be it PUHCA repeal, PURPA repeal, or the imposition of mandatory 
date certains without examining the complex role of how the pieces all 
fit together, would be a mistake. For this reason, I urge the House not 
to pass stand-alone PUHCA repeal or mandatory date certain legislation 
at this time. Rather, I suggest the crafting of a complementary role 
for states and the federal government similar to that embodied in the 
Telecommunications Act. The 1996 Act hasn't worked perfectly; there 
have been state and federal conflicts. But the Congress correctly 
recognized a dual role with states setting local interconnection 
agreements and arbitrating disputes on local matters concerning same, 
and the FCC, after mandatory state consultation, ultimately passing on 
the national issue of the Regional Bell Operating Companies' (RBOC) 
entry into long distance. The basic framework of the Act was sound, 
although the FCC and individual states have gotten in trouble when they 
pushed too hard one way or the other and tried to occupy the field 
rather than recognize the delicate state/federal role.
    I think we can achieve a similar harmonized role if we look to and 
adopt the basic structure of the Telecommunications Act passed by this 
Congress in 1996.
    Let's look at PUHCA for a moment. PUHCA basically provided for a 
corporate structure of this industry which revolved around ``home 
town'' utilities locally based rather than spread across the country. 
PUHCA, through its geographic integration requirements and line of 
business restrictions, was, in effect, a market power statute--one 
designed to address the market power abuses as well as the investor 
abuses of the 1930's multi-state holding companies. After all, one 
cannot forget that a big part of PUHCA was the recognition of the 
otherwise inability of the states to properly regulate a large multi-
state holding company operating through many subsidiaries in multiple 
jurisdictions so as to prevent abuses of markets and customers. In 
fact, the statute was just modernized in 1996 by this Congress to 
include a section to address the complex issues of cross-subsidization 
that can arise when electric companies enter the telecommunications 
market. The statute certainly isn't a perfect one--it definitely needs 
modernization, but that's my whole point. We shouldn't just rip it up 
without carefully ensuring that the market power issue, which can so 
harm competitive markets, is addressed. The same holds true for PURPA 
or provisions of the Federal Power Act.
    It is for these reasons, that I ask the Committee to consider a 
``checklist'' approach to federal legislation as was done in the 
Telecommunications Act of 1996. PUHCA line of business and other 
restrictions would be lifted once the states certified that they had 
appropriate protections under state law that address abuses of market 
power by a large multi-state entity in a state moving toward 
competition. For a state not moving toward retail competition, the 
state would certify that the effectiveness of state regulation over a 
large multi-state holding company is not impaired. There could also be 
a safety valve for federal preemption of a state if the state's actions 
in not certifying lead to a ``one-state holdout'' that is having an 
adverse effect on interstate commerce.
    There has been much talk about the FERC and the states developing 
incentives for companies that take steps to structure themselves in a 
way which fosters independent transmission. Companies that participate 
in ISOs or otherwise eliminate pancaking of rates and improve 
reliability through large multi-state Transco's should get credit for 
that under the checklist approach, leaving clear incentives in federal 
relief from statutes if the underlying goals are met. Through a 
checklist approach, the Congress would be fostering movement toward a 
restructured industry, providing a clear path to the industry itself 
and indicating its intent to be flexible and respectful of individual 
state policies rather than holding a gun to the heads of industrial 
states or centralizing the solution for the country inside the halls of 
FERC, the SEC or this Congress. I would be happy to work further with 
this Committee on the development of such a checklist approach.
    I also want to briefly discuss the issues of setting a mandatory 
date certain for retail electric competition nationwide. At some point, 
the forces of competition are going to force a state to open up its 
markets. But that shouldn't be done through Congressional fiat, but 
rather through the actions of the marketplace and the inevitable 
demands that customers will place on the system. Thus, I would 
discourage a date certain approach in favor of a state opt-out 
approach, so long as the state's actions do not unduly harm the 
interests of other states. I have much respect for the interests of the 
low-cost states. I have low-cost power in my own state. But, at some 
point, in order to maintain a state's competitive position, the low-
cost generating plants will have to be replaced and then this issue 
would be faced. It is in no ones interests to have investors passing 
over investing in a particular state in the process.
    For all these reasons, I encourage a harmonized approach through 
the development of a checklist, with state certification and 
appropriate overrides for an errant state's refusal to cooperate if 
such refusal has a serious impact on interstate commerce and is 
affecting the states around it. Regional oversight would be encouraged, 
and a harmonized patchwork would be developed that would avoid the 
problems of a one-size-fits-all solution on one hand, or the dangers of 
total inaction on the other.
    I look forward to working with this Subcommittee on these concepts 
in the weeks and months to come. Thank you for this opportunity to 
testify today.

    Mr. Barton. We thank you, Commissioner.
    Now, I would like to recognize the Honorable Susan Clark 
from the Great State of Florida and the Chair noticed with 
great sense of envy the show of public affection you gave to 
Congressman Bilirakis as he left the hearing room earlier. We'd 
hope you would extend that to all the other members of the 
subcommittee at the appropriate time.
    Your entire statement is in the record and you are 
recognized for 7 minutes.

                  STATEMENT OF SUSAN F. CLARK

    Ms. Clark. Well, for a minute, I'm speechless, but if I 
turn to the substance of what I want to say, I think I may 
recover a bit.
    Obviously, we disagree on the mandate. And I'm going to put 
that aside, because I think we've had questions on that and 
I'll await any questions on that particular issue. I would only 
point out that what savings you might realize depends on where 
you start from. If you are a high cost State, you are likely to 
recognize much more savings than one that is a low cost State. 
And I know with interest, the savings that were articulated 
with respect to deregulation in Pennsylvania, I would only 
point out to you that recently we approved a rate decrease in 
Florida for Florida Power and Light that will represent over $1 
billion in savings to Florida customers of FP&L over 3 years. 
That isn't to say, I think that is justification for continued 
regulation, but I would only point out that we continue to look 
at how our companies provide power and continue to look at 
whether or not it is at the appropriate price. But let me tell 
you what we do agree on, and I think there are a number of 
things that you can do, Congress should do, and let me start 
with the first one, and that has to do with reliability. I 
think you will get agreements that there needs to be some 
Federal legislation with respect to liability. And I believe 
that authorizing a self-regulating reliability organization to 
establish mandatory standards for reliability and operations of 
the Nation's transmission system are in order. There is a need 
for mandatory compliance with reliability standards and a 
provision of explicit authority for FERC and for States to 
enforce those necessary standards. I would note that we have 
been working with Bonnie Suchman and we have worked with FERC. 
There is a sticking point on the language on the savings clause 
with respect to what jurisdiction and the authority the States 
might have with respect to reliability. And on that point, I 
would remind you that when the lights go out, it's not likely 
that they will call you all, it's not likely they will call up 
here to Washington; they are going to call our Governor, and 
the Governor is going to, in turn, call us at the Public 
Service Commission. So, in course, we feel if we are going to 
be held responsible for it, we should have some responsibility 
in that area. The other thing is, with respect to market-power, 
I think there are areas in which we will need your assistance 
in ensuring that there is not an abuse of market power. We 
recommend, for instance, authorizing, but not mandating, the 
formation of voluntary regional transmission organizations or 
other kinds of entities to promote regional reliability and 
fair and nondiscriminatory open access.
    You know that FERC, at this time, has undertaken a 
proceeding to hear from the States on that subject and 
hopefully come to some resolution with respect to those areas 
that would like their help and those areas that they think need 
further guidance. I can tell you that in Florida, in response 
to FERC's concern about the fairness and nondiscriminatory 
nature of the transmission system, we have workshops, where the 
transmission owning utilities, the transmission dependent 
utilities, and all interested parties are trying to work out 
exactly how we can manage, and by that I mean plan and operate 
the transmission system in Florida, to the advantage of 
everyone. I attended one of those workshops this last Monday 
and I can tell you that there is movement on the part of 
transmission owning companies to accommodate those concerns, so 
that we can have a truly fair and nondiscriminatory open 
process.
    With respect to PUHCA reform, I think it's appropriate to 
repeal PUHCA, provided that there are other measures to guard 
against market power abuses. And the repeal of PUHCA should 
include a provision that State commissions and FERC continue to 
have access to holding company books and records.
    Finally, I agree with the idea that PURPA should be 
repealed. I would note that our commission hasn't taken a 
formal position on this, at this point. But, it would seem if 
you were going to have an open competitive market for 
generation, a mandatory obligation to purchase is inconsistent 
with that. I would point out that I think we should be careful 
in any PURPA legislation, with respect to mandating stranded 
cost. I think that PURPA contracts should be handled in the 
same way utility investment is handled that might be stranded. 
There should be an obligation to mitigate those costs. I 
believe the State commissions are in the best position to deal 
with stranded cost. They are likely to have been involved in 
the decision in the first place, with respect to those 
investments or the contracts. And so, they have some ideas as 
to the way they may be mitigated and the fairness of the 
recovery, with respect to them.
    I suppose I'm here as one of those States that has not 
moved forward with retail competition and, at this point, there 
is nothing on the horizon with respect to State legislation to 
do that. But, I would point out that we have been a leader in 
bringing competition to our regulated industries, when we think 
it's a good idea. We have had competition in the wholesale 
market importer since the late 1970's. We have what is called a 
broker system. We mandated the formation of the broker system 
and then provided incentives to utilities to buy and sell their 
power on that system, so the lowest cost generation would be 
the next generation to be dispatched at any time.
    Also, with respect to telecommunications, we passed our 
Telecommunications Deregulation Act in 1995. We found local 
competition would be beneficial, and so we moved to introduce 
that competition.
    I make those comments today in response currently to Ms. 
Moler's comments, with respect to mandating retail competition. 
In my mind, it assumes that State regulators and State 
legislators will not move to do that, when it is in the 
interest of the people of the State they represent. I think 
that's a false premise. We will move to do that when we see the 
benefits of it. And with that, I will turn my time over to Ms. 
Smith.
    [The prepared statement of Susan F. Clark follows:]
Prepared Statement of Susan F. Clark, Florida Public Service Commission
    Mr. Chairman and members of the subcommittee: Good afternoon. My 
name is Susan Clark. I am a Commissioner on the Florida Public Service 
Commission and Chair of the Committee on Electricity of the National 
Association of Regulatory Utility Commissioners, commonly known as the 
NARUC. Today, I am here representing the Florida Public Service 
Commission (Commission). I have submitted a written statement that I 
respectfully request be included in today's hearing record.
    I understand this subcommittee may soon be dealing with profound 
issues surrounding changing the electric utility industry. You have 
asked me to offer my opinion as to what issues require federal 
intervention to restructure this industry, what areas are best left to 
state authority, and what areas are best addressed by joint state/
federal authority. Before responding, I would like to take just a few 
brief minutes to give the historical backdrop and explain why we find 
ourselves at this junction in reforming the electric industry. For over 
a half century, state public utility commissions (PUCS) have been 
charged with the duty of regulating the retail rates and services of 
electric, gas, water and telephone utilities operating within their 
respective jurisdictions. We have the obligation under state law to 
assure the establishment and maintenance of such energy utility 
services as may be required by the public, and to ensure that such 
services are provided at rates and conditions which are just, 
reasonable and nondiscriminatory for all consumers.
    The Energy Policy Act of 1992 (EPAct) injected a mandatory open 
access requirement for the transmission system that acted as a catalyst 
to promote and encourage wholesale competition. Wholesale competition 
is the sale and purchase of bulk power between utilities and suppliers 
which will ultimately be delivered to the end-use customer by regulated 
companies. Both before and after the competitive changes brought about 
by the EPAct, the U.S. has enjoyed the most economical electricity 
rates among the Western industrialized nations not heavily dependent on 
hydropower. Times and fashions change, of course, and now the electric 
utility industry is one of the last regulated industries to undergo the 
transformation from a monopoly franchise to an open access system. 
States are taking the lead in promoting this change when the state PUC 
and legislature have judged it to be in the public interest.
    Some seventeen states have gone beyond the EPAct and have adopted 
retail electric restructuring programs that enable end-use customers to 
choose among energy suppliers while ensuring the safety, reliability 
and quality of electric services. A substantial number of other states 
are examining whether and when to permit retail access.
    While some argue that this level of activity is insufficient, the 
states that have adopted retail open access electricity programs are 
home to nearly half of the nation's population. All this activity has 
taken place within the last three years, and I believe states will 
continue to pursue restructuring programs if those programs benefit the 
retail customers.
    The states pursuing retail open access are acting with great care 
and precision to ensure the continued reliability of electric services, 
universal access to retail services and public benefits previously 
provided by a vertically integrated industry. Careful review of these 
activities discloses that state restructuring initiatives contain many 
common elements: customer choice, functional unbundling, pricing 
reform, stranded cost recovery, protection of public benefits, market 
power mitigation, and mechanisms to support emerging regional markets. 
It should also come as no surprise that the timing and implementation 
of such initiatives differ from state to state in ways that reflect 
local customer needs and other market realities including such factors 
as climate, demographics, indigenous resources, environmental impacts, 
past choices of technology, current resource preferences, system 
capacity, geography, and form of utility ownership--to name a few.
    It is just this attention to detail that warrants that the states 
continue to have the ultimate responsibility for deciding if and when 
retail competition is permitted. I strongly believe that it would be a 
mistake for any federal legislation to require a mandated date certain 
for retail competition. Clearly, a federally mandated one-size-fits-all 
approach cannot and will not account for the unique concerns and 
circumstances of the individual states. We have seen confusion created 
by the federalization of the telephone industry. Therefore, my most 
important message as a regulator of a state that is taking a more 
deliberative view of retail competition is to not force a federal 
mandate on us. Recently, commissioners from 23 states (The Low-Cost 
States Initiative) addressed a letter to members of Congress confirming 
this stance.
               essential elements of federal legislation
     Federal Energy Regulatory Commission's (FERC) Order No. 888 
spurred the creation of a competitive wholesale power supply market and 
is still in the early stages of development. We believe it prudent for 
Congress to not risk disrupting these policies through prescriptive 
national models, but rather consider targeted and focused legislation 
that facilitates state restructuring efforts. Congress can take steps 
to help the states by removing uncertainty and reducing the prospect of 
tortuous litigation. I believe there are four areas where federal 
action would be helpful in facilitating electric restructuring. These 
four areas include reliability, market power, and PUHCA and PURPA 
reform. Let me address each one of these in some detail.
    As I mentioned earlier, the EPAct opened up the transmission grid 
to promote wholesale competition. Retail competition has imposed even 
more demands on the nation's transmission system in terms of more 
transactions, greater power flows, and therefore higher risks of power 
interruptions and system failures. It is important to keep in mind that 
the overwhelming number of transmission lines that have been 
constructed were primarily designed to serve native retail load. Over 
time, utilities extended transmission lines to import and export 
limited amounts of power and to help backup each other's electrical 
control areas. The system was not designed to act as a huge seamless 
network to transmit bulk electric power around the nation, but FERC 
Orders 888 and 889 specifically intend for these systems to perform 
this function.
    Historically, regional coordination councils have operated 
voluntarily in geographic areas with interconnected transmission or 
control areas to maintain reliable and uniform standards for all users 
of the transmission system. These voluntary and regional councils 
operate under the auspices of the North American Electric Reliability 
Council or NERC. Again, these are voluntary associations with the 
common objective of maintaining a safe and reliable transmission 
system.
    However, with the increased volume of users and new competitive 
users of the system, the NERC recognized the need for a more open and 
representative council that would balance the needs of both the 
historical owners of the system (i.e. the regulated utilities) and the 
new competitive users created by FERC Orders 888 and 889. The NERC has 
worked on legislation that would authorize this self-regulating entity 
to establish mandatory standards for reliability and operations of the 
nation's multi-transmission regions.
    Both the NERC and the NARUC have concluded that Federal legislation 
would be useful in this area. In fact, the NERC has voted to move 
forward with specific language this year. While I do have some concerns 
about the specific NERC legislation because of its lack of mention of 
any role for the states in ensuring planning and operational 
reliability, I am personally convinced that any authorizing legislation 
to give certain regulatory powers to the NERC is needed. Any such 
legislation should explicitly confirm the public interest in 
transmission grid reliability, the need for mandatory compliance with 
reliability standards, and a provision of explicit authority for the 
FERC and the states in cooperation to enforce the necessary standards. 
I emphasize the cooperative nature of this task. This kind of focused 
legislation would further the goals and objectives of the FERC Orders 
and therefore encourage wholesale competition.
    As you consider reliability legislation, I would encourage you to 
remember that the state commissions are the ones that have the ultimate 
responsibility for keeping the lights on, and we are the ones who are 
held accountable when the lights go out. When there is an outage of an 
essential service like electricity, utility customers do not call, nor 
should they be expected to call, the NERC, the FERC or the DOE. Rather, 
customers call the staff and commissioners of the individual state 
PUCs. Our legislative leaders and governors also call us to find out 
when the problem will be resolved.
    Secondly, Federal legislation should authorize, but not mandate, 
the formation of voluntary regional transmission organizations or other 
kinds of entities to promote regional reliability, and fair and 
nondiscriminatory open access. Some movement in this direction is 
happening with the recent announcement by the FERC that it intends to 
consult with the states to explore such organizations. The DOE recently 
transferred its authority under Section 202(a) of the Federal Power Act 
to the FERC with the stated purpose in its news release to, ``provide 
the FERC with the authority to establish boundaries for ISOs, or other 
appropriate transmission entities which could aid in the orderly 
formation of properly sized transmission institutions and enhance the 
development of ISOs in a rational, comprehensive manner.'' The FERC 
recently issued a Notice of Consultation to pursue this stated 
objective. I am optimistic at this time that the voluntary and 
cooperative approach that I am advocating will be championed by the 
FERC.
    The third area in which federal legislation would be helpful is in 
repealing the Public Utility Holding Company Act (PUHCA) and the Public 
Utility Regulatory Policies Act (PURPA) provided certain conditions are 
met. As you may recall, the PUHCA statute was established during the 
1930s to give regulatory oversight to multi-state utility holding 
companies. With today's dramatic transformation of this industry and 
the many mergers and acquisitions that are occurring, the PUHCA appears 
to have outlived its usefulness. The PUHCA law probably is inconsistent 
with the goals of a highly competitive wholesale and retail market, but 
states do not have the authority to grant waivers or exempt utilities 
from the provisions of this act. There is, however, concern that some 
states may not have the authority to address market power issues. In 
light of this concern, Congress should specify in any repeal of the 
PUHCA that state commissions and FERC have access to holding company 
books and records.
    Finally, with respect to PURPA, I would recommend that this statute 
be repealed, but that any existing contracts not be abrogated. Please 
note that our Commission has not formally addressed this particular 
point, however, so my comments here are my own. This statute derives 
from the late 1970s when this law required utilities to purchase power 
from qualifying cogeneration facilities at full avoided costs. Now, 
with a vibrant wholesale market, this requirement simply burdens retail 
customers with long-term power obligations that are usually above 
market rates. However, any legislation on this issue should preserve 
state utility commissions' authority to require electric utilities to 
mitigate costs associated with above-market contracts.
                helpful elements of federal legislation
    Florida has not taken steps to introduce retail choice. 
Nevertheless, we recognize that other states have found such 
restructuring efforts to be in their best interests. To that end, we 
believe legislation should be aimed at assisting those states' efforts 
by:

<bullet> Affirming states' authority to order and implement retail 
        access/customer choice programs free from the threat of 
        preemption under the Commerce Clause or the Federal Power Act;
<bullet> Affirming states' authority to impose wires charges to support 
        the recovery of stranded costs, state-sponsored energy 
        efficiency and/or environmental programs, and universal service 
        programs;
<bullet> Clarifying state jurisdiction to regulate rates, terms and 
        conditions of unbundled retail transmission services;
<bullet> Affirming states' exclusive jurisdiction over the rates, terms 
        and conditions of retail electric services.
    With these issues resolved legislatively, while continuing to 
accord states the discretion to determine whether, when and how to open 
retail electricity markets to competition, states would be confident of 
their legal authority to move forward on restructuring efforts. Without 
these changes, states contemplating market reforms may find themselves 
in the position of states like Michigan and New Hampshire where federal 
court litigation, although not yet successful in attacking state 
programs, has slowed restructuring processes.
                               conclusion
    While many believe that wholesale competition provides the vast 
bulk of any uncaptured economic efficiencies for ratepayers, I respect 
the fact that many states have concluded that additional benefits are 
to be gained from direct retail access. In Florida, we are carefully 
watching the more experimental states to learn what models work and 
what lessons are applicable to Florida. At this time, neither the 
Commission nor the Florida legislature has opted to initiate the 
necessary changes to permit retail access. Just last week however, the 
Commission did approve a petition for determination of need for the 
state's first merchant power plant that will be constructed to compete 
on the wholesale level. While still subject to judicial review and 
approval of our governor and cabinet, this project is a major step in 
promoting ever greater wholesale competition in Florida.
    The states are now performing their historic role as laboratories 
to test how the words ``greater competition for retail consumers'' can 
be turned into real-world services that customers will buy. As the FERC 
moves forward in its implementation of Order 888, the state commissions 
and legislatures must be allowed to continue to experiment with retail 
access, including customer choice initiatives. As the consequences of 
competitively-based wholesale markets become clearer, states are 
putting in place complementary retail policies which are adapted to 
regional market conditions. State commissions are developing and 
implementing compatible retail policies which preserve reliability, 
prevent the stranding of ``public goods,'' ensure consistency with 
environmental values, minimize cost shifting, provide for stranded cost 
recovery, and most importantly, improve economic efficiency. Over time, 
states will work together, as some are now doing, to devise and 
implement regional institutions to adapt their regulatory 
responsibilities to the reality of regional power markets.
    If Congress chooses to act in this area, any federal legislation 
should preserve broad state authority to implement these policies 
flexibly in response to the conditions in local retail markets. The 
development of retail customer choice should be implemented in a manner 
that respects these differences. In our view, that can only happen if 
decision makers closest to these conditions--State commissions and 
legislatures--enjoy the flexibility to adapt pro-competitive policies 
to the needs of local retail consumers. In the weeks and months ahead, 
my colleagues and I look forward to working with Congress, with our 
colleagues at the FERC, and with all interested parties to develop 
workable policies that support an efficient and environmentally sound 
electric services industry that meets the needs of all retail 
customers.

    Mr. Barton. Thank you, Ms. Clark. We would now like to 
recognize last, but not least, the commissioner from the great 
potato State of Idaho----
    Ms. Smith. That's right.
    Mr. Barton. Ms. Smith, and point out that when Congressman 
Craig was in the House, he had a photograph, and I don't know 
if he still does, on his Senate office wall of Marilyn Monroe 
in an Idaho potato sack.
    Ms. Smith. Well, I think everyone would look good in an 
Idaho potato sack.
    Mr. Barton. Well, Ms. Monroe did look very good in a burlap 
Idaho potato sack.
    Ms. Smith. Just eat them spuds.
    Mr. Barton. Your testimony is in the record in its entirety 
and you're recognized for 7 minutes.

                  STATEMENT OF MARSHA H. SMITH

    Ms. Smith. Thank you, Mr. Chairman, and members of the 
committee. It's a great honor to be here. Although I would note 
that airline deregulation may work differently, my ticket here 
was $1,764. But, you're worth it.
    Mr. Barton. Doubt that.
    Ms. Smith. Well, maybe I'm worth it.
    Mr. Barton. That's definitely true.
    Ms. Smith. I just want to make some brief remarks, 
basically reacting to comments that I heard earlier today in 
opening statements and from questions of members, because, like 
you say, my comments are in the record. And I am definitely 
here as a State that's not going to retail competition anytime 
soon. And I guess I'd like to point out first of all, in my 
mind, competition is not a goal. Competition is a tool, just 
like regulation is a tool. And the question is: when and where 
do you use which tool to bring adequate, reliable, and 
reasonably price electric service to consumers.
    Many opening remarks seem to be based on the assumption 
that retail competition in this industry will benefit all 
Americans. And I don't believe that's a foregone conclusion or 
a self-fulfilling prophecy. Instead, I would like to turn that 
back to you, as a challenge: if you're going to do something, 
it has to benefit all Americans. And I think that's a big 
challenge.
    And, of course, the key is: first do no harm. So far in the 
past 3 years plus of working on this issue, Idaho hasn't found 
a way to make that happen for our citizens, so that they will 
all benefit. We enjoy some of the lowest electric rates in the 
Nation, due in part to a longstanding active wholesale market 
in the northwest and the west, a market that existed before the 
Energy Policy Act of 1992, and I might add a market that's 
essential to Idaho as a net power importer.
    Another key to our uniqueness in the northwest is the 
predominance of hydroelectric generation, both publicly owned 
and privately owned dams, immense in scale and generation 
output, both, of course, not without its own set of concerns 
and problems. Given our circumstances, Idaho has adopted a go 
slow approach. Just because we've said be cautious, don't rush 
into it, and know what you're doing before you do it, doesn't 
mean we haven't done anything.
    As pointed out in my written remarks, the Public Utilities 
Commission has instituted several pilot programs with our 
investor-owned utilities. Results of one showed some savings in 
the first year of a 2-year pilot, and a change in the wholesale 
market meant there were no savings for those participants in 
the second year and, therefore, they were not anxious to have 
the pilot continued. And at its end, it was terminated. In 
another pilot, they got no one to sign up for it.
    So, I guess another approach we took for which the 
Commission was criticized is for a large industrial customer. 
We allowed them for half of their load to be priced at a market 
rate. In other words, they buy and sell power through their 
local utility, but the utility does it at their direction, and 
they're essentially playing the market. Reports are that 
they've learned a lot. They may be marginally ahead price-wise. 
The price varies, so sometimes they're up and sometimes they're 
down. But, the important thing they told me to point out was 
that this contract has been operating in a time of 
exceptionally good water conditions, where power is plentiful, 
low-cost power is plentiful in the wholesale market. So, 
everybody is kind of concern what happens when we don't have a 
good water year and low cost power isn't plentiful. Because, if 
they're barely saving money now, we don't know what will happen 
in the future. And if this sophisticated large industrial 
customer can't save a lot of money, we worry for the other 
customers.
    The region has also been very active. I think several years 
ago, the four Governors of the northwest States, Washington, 
Oregon, Idaho, Montana, developed a regional review committee 
that gave several recommendations. And out of that has come a 
subscription process for the power of Bonneville Power 
Administration, which, as you know, is a large Federal power 
marketing entity in our region. So the region hasn't been 
inactive and has been going forward in the manner that they see 
might benefit our citizens.
    We've, also, been working hard on the area of 
interconnection. The western interconnection has a group that 
works regularly together, called the Committee for Regional 
Electric Power Cooperation or CREPC. We meet at least twice a 
year on these important issues. It includes Canadian provinces 
and also some States of Mexico, because the interconnection is 
international in scope. And I think one of the most important 
things that Ms. Moler mentioned in her list today, but which 
she didn't emphasize in her oral comments, was that you should 
recognize the regional nature of markets and allow regional 
solutions. And I'm a strong proponent of that, because I think 
the west has a system set up to address issues of a regional 
nature that come up and to see that the region solves its own 
problems.
    Mr. Chairman, I said I wanted to be brief. I found your 
questions very interesting, and I enjoy that interaction. So, 
I'll just close with the comments of one of my colleagues in 
Montana, who when I said I was coming here to do this and did 
he have any suggestions, he said, well, for sure, there 
shouldn't be a Federal mandate. He said, every State should be 
free to do it, even like Montana, to do it in the wrong way at 
the wrong time.
    Thank you, Mr. Chairman.
    [The prepared statement of Marsha H. Smith follows:]
     Prepared Statement of Marsha H. Smith, Idaho Public Utilities 
                              Commissioner
    Good morning. I would like to thank Chairman Barton for this 
opportunity to address the United States House Subcommittee on Energy 
and Power. This valuable process of defining our respective roles in 
the evolving era of electric restructuring will serve the best 
interests of the American public.
    The first issue I've been asked to address this morning is a review 
of the State role in electric regulation. Idaho law requires the 
regulation of investor-owned electric companies, of which there are 
three, but not municipal and cooperative electric providers. Eighty 
percent of Idaho citizens are served by regulated investor-owned 
electric companies. Idaho's electric companies are protected from 
encroachment by other service providers through the state's Electric 
Supplier Stabilization Act. Unless the incumbent provider consents to 
allow service by other providers, it has an exclusive right to serve in 
the geographic area assigned to it.
    In its regulatory authority, the Idaho Public Utilities Commission 
has quasi-legislative and quasi-judicial as well as executive powers 
and duties. In its quasi-legislative capacity, the Commission sets 
rates and makes rules governing utility operations. In its quasi-
judicial mode, the Commission hears and decides complaints, issues 
written orders similar to court orders and may have its decisions 
appealed to the Idaho Supreme Court. As an executive agency, the 
Commission enforces state laws affecting the utility and transportation 
industries.
    Idaho residents consistently enjoy some of the least expensive 
electric service in the nation, according to surveys conducted by the 
National Association of Regulatory Utility Commissioners (NARUC), the 
Edison Electric Institute and the Energy Information Administration of 
the U.S. Department of Energy.<SUP>1</SUP>
---------------------------------------------------------------------------
    \1\ Attachment #1
---------------------------------------------------------------------------
    According to NARUC, Idaho's electric utilities--Idaho Power Co., 
Avista Utilities and PacifiCorp (application on file to merge with 
ScottishPower)--ranked 1st, 6th and 25th among the investor owned 
utilities nationwide with the least expensive rates for residential 
customers during the 1996-97 winter season.
    Our role, then, as state utility regulators is to ensure our 
citizens continue to enjoy affordable, adequate and reliable service 
from providers, which are assured a fair, reasonable and just return on 
their service to and investment in Idaho.
    The second issue I have been asked to address this morning concerns 
any ``dramatic changes'' occurring at the state level and within the 
electric industry which may require changes to the state role in 
regulating our electric service providers.
    Let me begin by saying that electrically, Idaho is in the Northwest 
and part of the Western Interconnection. The key to the uniqueness of 
the Northwest is its hydro predominance, both federally- and privately 
owned dams immense in scale and generation output. In addition there is 
a major federal presence in transmission and an already advanced 
integration of power markets. The Western Interconnection will continue 
to be, in essence, electrically separated from other Interconnections 
in North America. Thus, the power market for western consumers is 
defined by the boundaries of the Western Interconnection.
    As far as any ``dramatic changes'' occurring at the state level and 
within the electric industry, there really haven't been any as far as 
Idaho is concerned. Initially in Idaho, as the national debate over 
restructuring the electric industry heated up, there seemed to be a 
sense of urgency to figure out what was happening before we got run 
over. Now that some states have taken steps, however, many problems and 
unintended consequences seem to have arisen even in states that 
actively sought to restructure in their belief it would be a real 
source of relief from high costs. The blush is off the rose, so to 
speak, and low cost states feel a little more comfortable stating 
openly the real doubts we have had from the outset.
    As a low-cost energy state, Idaho has been and remains very 
interested in the role federal and state policy makers have in 
restructuring the nation's electric industry. And while our perspective 
and concerns may appear somewhat unique to members of this committee, 
particularly those esteemed members from high-cost energy states, I can 
assure you that nearly half the states in the Union <SUP>2</SUP> share 
Idaho's concerns and they too are determined to play a vital part in 
defining and fulfilling these roles.
---------------------------------------------------------------------------
    \2\ Low Cost Electricity States Initiative signed by the 
Commission's of Alabama, Florida, Georgia, Idaho, Indiana, Kentucky, 
Louisiana, Minnesota, Mississippi, Missouri, Montana, North Carolina, 
North Dakota, Oklahoma, Oregon, South Carolina, South Dakota, 
Tennessee, Utah, Virginia, Washington, West Virginia and Wisconsin.
---------------------------------------------------------------------------
    The Low Cost Electricity States Initiative <SUP>3</SUP>, in brief, 
states, ``As a restructured electric industry becomes a reality in many 
parts of the nation, little attention has been given to the concerns of 
low cost states . . . these low cost states are being pressured into 
opening their electric industries to competition with little or no 
consideration of the effects on native retail customers.''
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    \3\ Attachment #2
---------------------------------------------------------------------------
    This is an important document and I strongly encourage the members 
of this committee who may not already be familiar with it to study the 
Initiative closely as it represents the views of 23 states.
    Because we could not find a clear potential for significantly lower 
rates, the Idaho Public Utilities Commission in 1996 issued Order No. 
26555 (Case GNR-E-96-1) which stated that we should be ``cautious with 
respect to an outright deregulation of Idaho's electric markets.'' 
Because our citizens already pay some of the lowest electric rates in 
the nation, deregulation may actually result in lower quality of 
service. We also believe that deregulation has the potential to 
introduce significant rate volatility--something we know from past 
experience that customers do not like.
    Before proceeding to the third and final topic of discussion this 
morning, I would like to take a moment to address the Committee's 
inquiry pertaining to what specific restructuring issues are best 
addressed at the state level. Let me just say that the decision on 
whether to authorize retail competition with a state remains and must 
continue to remain a state decision.
    This brings me to the third issue you have asked me to address . . 
. a review of the steps taken by Idaho to open its retail markets.
    It has been almost two years ago that I appeared here and reported 
to this subcommittee that our Legislature had appropriated $100,000 to 
fund a committee to study electric restructuring. Their work has led to 
a series of generally negative conclusions indicating a feeling that 
electric restructuring is more likely a source of peril than of benefit 
for the state of Idaho. The legislative report <SUP>4</SUP> also 
vigorously reinforces my earlier testimony to this subcommittee that 
water resource questions of the sort unlikely to even appear on the 
national scale are of vital importance to any consideration of electric 
restructuring in Idaho as well as for other Northwest states.
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    \4\ Attachment #3
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    In it's final report to the Idaho Legislature, the legislative 
committee formed and funded to study electric restructuring made seven 
recommendations. The first two of these seven recommendations are 
strong position statements that best sum up the political and, perhaps, 
social position in Idaho toward electric restructuring. Recommendation 
One: ``The Committee recommends that our Congressional delegation 
vigorously oppose further deregulation at the federal level.'' 
Recommendation Two: ``The Committee recommends that no state 
legislative actions be taken at this time that would encourage retail 
electric power restructuring.''
    The Idaho legislative committee on electric restructuring has been 
extended by the current Legislature, but their focus seems to have 
become even more clearly, how can Idaho protect itself from 
restructuring.
     Although Commission Order No. 26555 encouraged a cautious approach 
to electric restructuring for Idaho, it also encouraged utilities and 
other interested groups to continue to make innovative proposals. The 
Idaho Commission has approved several utility pilot programs that allow 
for limited tests of retail access.
    Two of these pilot programs were conducted by Washington Water 
Power Co., now known as Avista Utilities, and the third was conducted 
by the Idaho Power Co. The two Avista pilot programs targeted 
industrial, commercial and residential customers. The two programs 
combined had a total eligible customer base of 5,581. Of that base, the 
two pilots attracted 66 participants. Out of fairness, it should be 
noted that 61 participating customers did realize some small savings in 
the first year of the retail pilot. Those savings, however, had 
completely disappeared by the pilot's second year of operation. The 
pilot program offered by Idaho Power Co. to 11 of its industrial 
customers failed to attract even one participant.<SUP>5</SUP>
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    \5\ Attachment #4
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    The Commission has also approved a special contract between Idaho 
Power and its largest customer that some opponents claimed was a de 
facto restructuring pilot. The contract allows Idaho Power's largest 
customer--constituting 20-percent of Idaho Power's total load--to shop 
on the market, through an Idaho Power employee, for half its power 
needs.
    Early results of this contract seem to indicate that even this 
major customer, whom one would expect is sophisticated enough to fend 
for itself in a market environment, has not fared any better during the 
first few months of trying the market than it would have with regulated 
rates. It is important to note that the Northwest has experienced 
banner water conditions since the approval of this contract. Thus, 
power has been plentiful and low priced on the wholesale market. If 
this type of customer doesn't benefit under these favorable 
circumstances, what will happen to the majority of Idaho's small 
commercial and residential customers as they try to cope with real 
market choices?
    The Idaho Commission will continue with a number of efforts aimed 
at bringing our state closer to full and informed participation in a 
restructured electric environment <SUP>6</SUP>, but past programs and 
their numbers graphically illustrate the definite lack of interest for 
electric restructuring in Idaho and other low-cost energy states.
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    \6\ Attachment #5
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    Given this resistance by state lawmakers, a coalition of 23 states 
and customers overcome with a complete and utter lack of interest to 
engage in pilot programs imitating free-market conditions, we in Idaho 
do not feel federal authorities should simply impose a ``one size fits 
all'' mandate on the theory that deregulated electric conditions may--
and I emphasize the word ``may''--benefit some customers in the high-
cost energy states . . . states that comprise less than half of the 
country.
    It is the role of citizens and authorities at the state level, and 
where appropriate, the regional level--not federal lawmakers, agencies 
or commissions--to decide and shape this issue according to our own 
energy use patterns, geography, market dynamics, values and interests.
    If Congress is to consider electric restructuring legislation, a 
``Northwest Chapter'' should be incorporated to address the unique 
situation and circumstances of Idaho and her Pacific Northwest 
neighbors. This Northwest Chapter must also include provisions for the 
future of the Bonneville Power Administration.
    Most importantly, the states must have assurances that any federal 
legislation will not force local utilities to renounce their native 
service areas in order to survive in a restructured environment. And 
finally, if you determine that some federal electric restructuring 
policy is unavoidable, we implore you to develop this policy to allow 
for regional differences. The states can work out regional differences 
within the context of broad federal policy guidelines, but without 
federal interference.
    In closing, I would again like to thank you for this opportunity to 
address the subcommittee. Idaho has taken a proactive approach to 
determining what will work best for Idaho industry and Idaho consumers. 
We are a fiercely independent sort in Idaho and while we believe the 
federal government should address broad principles that are of national 
necessity, the details of implementing those principles and other 
matters that are local and regional in nature really belong and must 
remain under state jurisdiction.
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    Mr. Barton. Sounds like a Texan talking, if you ask me.
    The Chair's going to recognize himself for 5 minutes and we 
expect to vote any time between 3:30 and 4, so, hopefully, we 
can get one round in before we break. Unless there's just a 
huge interest, we'll only ask one round of questions of this 
panel and then let the rest be in writing. So, I'm going to 
recognize myself for 5 minutes.
    Commissioner Smith, you obviously have come from what we 
call a low cost State, so it's not exactly a surprise that you 
tend not to want a Federal role in this issue, at this point in 
time. But, I think that you're aware that Idaho did participate 
in a comprehensive review of this issue, along with three other 
States: I think Washington, Oregon----
    Ms. Smith. Montana.
    Mr. Barton. [continuing] and Montana. What were the 
findings of that comprehensive review?
    Ms. Smith. Well, I didn't bring the entire list with me. 
The Bonneville subscription process was one of those I 
mentioned. I believe they also had a finding that the region 
should go to retail choice by July of this year or next year. I 
would say the only State in the region that's enacted 
legislation has been Montana, and they did not choose the date 
in the regional review.
    Mr. Barton. What was the conclusion of the regional review 
about the need, if any, for Federal legislation in this area?
    Ms. Smith. I don't recall that. Perhaps, you have a better 
idea than I do right now.
    Mr. Barton. Well, my staff has the idea that it said that 
there was some Federal legislation necessary.
    Ms. Smith. Well, and I think that's correct. And we've 
heard the areas of Federal legislation that need to be 
addressed. The Holding Company Act, the PURPA purchase 
requirement, I think, are some things that are in Federal law 
now that only Congress can fix.
    Mr. Barton. Again, the staff----
    Ms. Smith. And, I guess, the other item that I think I 
mentioned when I testified here not quite 2 years ago was that 
we need some help with the Bonneville Power Administration, in 
how to deal with that Federal entity as the region 
restructures, because only Congress can address some of the 
requirements and restrictions.
    Mr. Barton. Well, again, we're not here to be argumentative 
and we know that your State, as any low-cost State, is going to 
be less than effusive about the Federal position preempting 
anything in your State. But, this comprehensive review, at 
least according to my staff, did indicate that you needed some 
changes in the Federal Power Act and the Bonneville Power 
Administration that would require Federal legislation. So, even 
in a low-cost State like yours, there has been some political 
input, at least at the gubernatorial level, that you might 
support some change without going whole hog into the issue.
    Ms. Smith. Absolutely. I think you're entirely correct, 
that the northwest does need help in dealing with Bonneville. I 
think what we'd like to work toward is having a place for what 
we have been calling the northwest chapter in any legislation 
that Congress would draft, that would then directly address the 
specific and unique concerns that deal with those agencies in 
our area.
    Mr. Barton. Now, my general question to the other three 
panelists that are still with us: is there anyone at the table 
that doesn't support any type of Federal legislation at all 
this year? Ms. Clark, would Florida's position be----
    Ms. Clark. Well, I have indicated to you the areas that I 
think that you need to act: in reliability market power, PUHCA 
reform, and PURPA repeal. I guess I would characterize it as 
you need to clear out the brush, so that we can move forward, 
as is appropriate for us to do.
    Mr. Barton. Mr. Glazer and Mr. Quain?
    Mr. Glazer. As I indicated, Mr. Chairman, in my remarks, I 
think you can do actually the whole hog, if you will, but do it 
in an incentive based way, such as was done in the 
Telecommunications Act. And that way, you can respect the 
rights of the low-cost States, but still put some stamp on 
moving forward on the national issues.
    Mr. Barton. Okay. Mr. Quain?
    Mr. Quain. I find myself being very much in agreement with 
many of the comments of the first panel, that I think it's 
appropriate to move forward with Federal legislation. I would 
go farther than some of my colleagues sitting at this table, 
but I think a lot of the discussion you had in the first panel 
gave you good ideas as to what needs to be done and I think 
it's appropriate that you do it.
    Mr. Barton. Now, with respect to the grandfathering issue 
in a State like Pennsylvania or a State like Illinois that has 
acted or is in the process of acting, some of the issues that 
both those two States mentioned in their testimony was low-
income energy assistance. So, I would assume that if we pass a 
Federal statute, that grandfathered States, specific activities 
within State boundaries may preempt some of the transmission 
issues, because of the interstate nature of the interconnection 
and the reliability, that that would be an acceptable 
grandfather compromise. And, again, I'm only talking in general 
terms, now. But, as long as we didn't tell you how to dot the 
Is and cross the Ts on how you do low-income energy assistance 
or be too specific on stranded costs recovery, if you've 
allowed for stranded cost recovery and we focused on the 
interstate aspect of the electricity generation and 
transmission system, your State would tend to find that 
acceptable. Is that a fair statement?
    Mr. Quain. I think that's a fair statement, Mr. Chairman. 
I'd be happy to work with you on the details of that. Some of 
those issues seem to fall into the general transmission 
category at first blush, that may have unintended impacts on a 
delicate balance in our legislation, just as Mr. Persico talked 
about it in Illinois. But, I think it's a general proposition, 
that's correct.
    Mr. Barton. Well, I can assure that, as the representative 
of the States, my State of Texas has moved the bill out of the 
State Senate yesterday. It has a number of provisions on low 
income energy assistance and market allocation, and I don't 
think Congressman Hall or myself intends to preempt those. So, 
we're very aware that if the States have acted and it's not 
directly an opposition to the goal of the Federal legislation, 
we see no reason to preempt that.
    My time has expired. I recognize the gentleman from Ohio, 
Mr. Sawyer, for 5 minutes.
    Mr. Sawyer. Thank you, Mr. Chairman. Welcome, Craig Glazer. 
I used to work where he works and----
    Mr. Barton. He was bragging on you when you weren't here. 
He was.
    Mr. Glazer. I've got some secret memos of yours still in 
the file.
    Mr. Sawyer. That was 25 years ago. In any event, I wasn't 
here for the testimony. I read some of your testimony. And so, 
I'm reluctant to consume a lot of time asking questions. Let me 
ask you, though, Craig, you mentioned incentives for fostering 
independent transaction. Could you develop that a little bit 
more for us?
    Mr. Glazer. I think if we borrow the telecommunications 
model, there could be incentives for companies that went 
forward with independent transmission, that separated out 
transmission, from generation. And that would be part of the 
checklist and that would get them some PUHCA relief or some 
other additional incentives. Those are the kind of things that 
I was talking about.
    Mr. Sawyer. Do you have strong feelings about the design of 
independent transmission entities or do you believe we should 
simply describe characteristics that we'd like to see and let 
them develop as they will region by region?
    Mr. Glazer. Well, Representative, it's an excellent 
question. And there was discussion earlier about the price 
spikes in the Midwest that were felt in Illinois and felt in 
Ohio. The Federal Energy Commission did a report on what caused 
that and what's the prospect of the future and the Ohio 
Commission did a report, as well.
    The Federal Energy Commission, I'm not criticizing them. 
The report was excellent. But, it said, it was a one-time 
thing. I don't think we have to be concerned about. We actually 
found, no, this really could happen again and in a retail 
environment could really then affect customers. And your 
constituents start calling you, as they'll call us when they 
see their bill fly up.
    Part of the problem we found is there are no rules for of 
road. There are separate transmission companies. There are five 
just in Ohio. There are five different toll booths to move 
power just from Cincinnati to Akron, Ohio. And there's no rules 
of the road. I sort of analogize it to the air traffic control 
system. Imagine if the air traffic controllers, each worked for 
a different airline, and had an incentive to move their planes 
from their airline, as opposed to having some neutral system--
--
    Mr. Sawyer. Sounds like Europe.
    Mr. Glazer. [continuing] and then imagine on top of that 
that all of them around the country had a different set of 
rules. The planes are flying and nobody knows what the rules of 
the road are. That's kind of where we are in transmission.
    Mr. Barton. That sounds like Congress.
    Mr. Glazer. And the Federal Energy Commission says they 
don't feel that there's a debate whether they have enough 
authority from this Congress to move forward to deal with that 
issue. We think it's got to be solved.
    Mr. Sawyer. Let me ask--take a different task here. I don't 
know whether you saw Energy Daily today. There is an article I 
don't want you to comment on. It's Ohio IOUs take stock hit 
over State deregulation bill. And I think their point is that 
Ohio, being--sitting there betwixt and between now for an 
extended period of time, with legislation on the table that 
gives some people heartburn and the cures aren't there yet and 
being uncertain about whether or not it's going to be able to 
move forward, has had this kind of consequence.
    Mr. Glazer. Yes.
    Mr. Sawyer. Without commenting on that, at some point, it 
seems to me that we run the same risk nationally, having 
legislation that--in many different forms, where we don't move 
and, yet, the market and the technology and the economy is 
moving all around us. Would any of you care to comment on 
problems that that might create within the industry, itself?
    Mr. Glazer. The only comment I would make on that, I think 
it's a very good point, that's why I sort of had suggested this 
checklist approach. There's some broad Federal things you want 
to see happen: independent transmission, some easing of the 
PUHCA restrictions; but, then, still having the flexibility to 
deal with the specific problems of Florida, of the northwest, 
of Pennsylvania. There might be a way around having to tackle 
this very difficult issue, a date certain. And what is that 
date? Is that the same date in Ohio as it is in Idaho?
    I wouldn't want to be in your shoes, having to make that 
decision.
    Mr. Sawyer. Well, Pennsylvania, it's yesterday; in Ohio, 
it's tomorrow; and in Idaho, it's never; right?
    Thank you, Mr. Chairman.
    Mr. Barton. Okay. Mr. Quain, do you want to comment on it?
    Mr. Quain. Well, I just had the comment that I think if you 
set the date certain out far enough and make it clear that 
you're going to give the States individual opportunities to 
craft a piece of legislation that makes sense for their 
jurisdiction, I think you've accomplished the best of both 
worlds, because I think you do run the risk, without a date 
certain, that you do get a patchwork type of approach to this 
and we end up with the same kind of problems with market 
barriers that Chairman Glazer talked about in the transmission 
system. And they ought to be avoided. We ought to have a free-
flowing, open marketplace, but give each State plenty of time 
to develop their own solutions as to how we get there.
    Mr. Sawyer. Thank you, very much.
    Mr. Barton. We recognize the gentleman from Oklahoma for 5 
minutes.
    Mr. Largent. Thank you. Ms. Smith, a question I have for 
you is, we refer to Idaho as a low cost State. Does that also 
mean that your cost of production is low?
    Ms. Smith. The costs that we have related to electric that 
are low are generation costs and transmission costs. Actually--
--
    Mr. Largent. So, generation costs are low?
    Ms. Smith. Our generation costs are low. I think right now 
they're probably below the wholesale market. Our transmission 
costs are low. We found that out when we tried to create 
INDIGO. But, however, I would note that our distribution costs 
are significantly above the national average, because of our 
low density and our terrain.
    Mr. Largent. Right. The question I have for you, then--I 
mean, I guess I'm taking the opposite view of our Chairman, who 
concedes we understand why low-cost States would not want to 
participate in a competitive market. I don't understand that. 
If you are the low cost producer in a competitive marketplace, 
you have a distinct advantage in a competitive field. You've 
got a lot of States to choose to sell to, if you can get to a 
competitive market. You're the low cost producer. Why wouldn't 
you want to compete and earn money? I mean, that's the nature 
of a de-monopoly, that you can do that.
    Ms. Smith. And I agree. And I've often wondered if I were 
sitting on the Board of one of my investor utilities and one of 
my goals was to maximize the company's profits, why wouldn't I 
divest my generating assets, thumb my nose at the State Public 
Utility Commission and the State legislature and make all the 
money I could in the wholesale market. I guess from a 
regulator's point of view, the rates are based on a return that 
the Commission allows. Maybe the company could make more money 
in the market; I'm not sure. But, you see the dilemma.
    Mr. Largent. Not yet. I'm trying.
    Ms. Smith. It's a distinction of whether you're looking at 
it from the point of view of an investor of a utility company 
and whether you're looking at it from the point of view of a 
customer in Idaho. Is that something, if you're the customer, 
that you want your utility to do.
    Mr. Largent. Okay, let me ask you this question: would 
deregulation cause the cost of production to increase?
    Ms. Smith. I don't think so. And I guess I would say that 
in the market we have today, when there is surplus power by one 
of our investor-owned utilities, they do sell that on the 
market, and those revenues are then used to keep our rates 
lower for the regulated side of the company.
    Mr. Largent. So, you like to compete when it benefits you?
    Ms. Smith. That's right.
    Mr. Largent. Well, of course. I mean, that's true for 
anybody. But, I guess what I'm not understanding is, you have 
low cost of production. And you go into a unregulated market or 
a free market, where you have competition, you still have low 
cost production. And now, you are the low cost producer. That's 
the term we hear all the time in free enterprise. You want to 
be the low cost producer. So why would a low cost producer in 
the electric generating industry not want to compete, when 
you've got so many opportunities? I don't get that.
    Ms. Smith. Well, I think you have to distinguish between 
the wholesale market and the retail market.
    Mr. Largent. That's what we--we've already----
    Ms. Smith. Right. Wholesale is deregulated.
    Mr. Largent. We're there; right. We're talking about 
retail. And so what I'm saying is to your customers, who are 
paying a low cost, your cost of getting that electricity to him 
does not go up in a competitive market. So, you don't have to 
raise the rates. You still get to produce it at the same cost. 
You see what I'm saying?
    Ms. Smith. Well, the other complicating factor, I think 
that always snags our legislators is water rights and the 
issues of river governance, because as I stated before, in an 
average water year, 60 percent of our State's electricity is 
generated by hydro projects. And I think Montana has 
deregulated in Montana Power, their generating assets. And I 
believe that they're finding that there are some complications 
with priority rights over the use of that water and the 
availability of the water. So, it's not just the price of power 
that you tinker with when you're dealing with, basically, 
hydroelectric system. And that's one of our legislation's major 
concerns.
    Mr. Largent. That's above our pay grade for sure, because I 
think God is in control of that water issue. But, are we going 
to get another round?
    Mr. Barton. I don't----
    Mr. Largent. I have one short question.
    Mr. Barton. Well, then ask it right now, because we are 
expected to vote in the next 15 minutes. And I think once we 
break for voting, we won't be able to come back.
    Mr. Largent. Okay. This question is for Ms. Clark. You were 
talking about Ms. Moler's comments. But, I'm trying to figure 
out if, say the administration bill passed to deregulate 
electricity and they had a opt out for a State. Why would you 
be opposed to that, when you would have the ability, and it 
sounds like its fairly easy, for your permission to say, you 
know, we've decided that our State is not going to benefit from 
that and so we elect to opt out of this? Why would that--why 
would you be opposed to that?
    Ms. Clark. Let me answer it this way. First of all, if 
those were our choices, you're either going to mandate or opt 
out, we certainly want the opt out.
    Mr. Largent. Well, it's a mandate with an opt out clause.
    Ms. Clark. Well, I know there is, in some legislation, 
that's a pure mandate.
    Mr. Largent. Yeah, right. Okay, we're talking about the----
    Ms. Clark. We're moving up the ladder of what's acceptable. 
What I take issue with is the premise that State commissions 
and State legislators will not make the move to retail 
competition, when they see it as in the best interest of the 
customers in their State. And I agree with what Ms. Smith said, 
competition, in itself, is not the goal. The goal is to get 
lower rates, adequate and reliable service to your customers.
    Mr. Largent. Are commissioners in the State of Florida 
elected or appointed?
    Ms. Clark. No, we are appointed.
    Mr. Largent. Well, I would say that as an appointee, you're 
probably not as sensitive as somebody who would be elected. 
But, I agree with you, I think that you are sensitive to--I 
mean, I think that your serving the public in the capacity that 
you're----
    Ms. Clark. Well, let me point out, and I'm not sure if you 
were here, we have had competition in the wholesale market in 
Florida since the late 1970's.
    Mr. Largent. Yeah, I heard you say that.
    Ms. Clark. We saw the benefit of that. We moved more 
quickly than you all did to introduce competition into 
telecommunications.
    Mr. Largent. Right, I heard you say that.
    Ms. Clark. And we are now taking further steps to assure 
that our transmission in Florida achieves better the goal of 
nondiscriminatory and open access. And we're dealing with the 
issue of merchant plant.
    Mr. Largent. And did you benefit from moving to wholesale 
deregulation in the State of Florida?
    Ms. Clark. You bet. In 1978, I think that was the year, and 
then up through the early 1990's, when we took----
    Mr. Largent. And did you benefit from deregulating telecom?
    Mr. Barton. We do need to recognize Mr. Shimkus, here.
    Ms. Clark. Well, I think there's still a debate going there 
and just let me say, the demographics of Florida are such that 
some of our elderly population don't feel that they've 
benefited from it.
    Mr. Largent. Thank you, Mr. Chairman.
    Mr. Barton. The Chair would recognize Mr. Shimkus for 5 
minutes.
    Mr. Shimkus. Thank you, Mr. Chairman. As many of you know, 
Illinois was very close to rolling blackouts last summer. One 
of the clear problems that the FERC report pointed out was that 
transmission constraints reduced the ability of utilities to 
move power where it was needed. To address this problem, the 
administration's bill and Congressman Largent's bill have 
included provisions to set up regional transmission planning 
agencies.
    Would your State consider joining voluntary regional 
transmission planning agencies, even if that meant giving up 
some authority to site transmission?
    Mr. Quain. Pennsylvania, yes.
    Mr. Shimkus. Good answer.
    Mr. Glazer. That's hard to top, if you like that answer. We 
are a member of a regional transmission organization. I'm not 
sure that organization has to go so far as to actually locate 
lines in people's backyards, because as Commissioner Clark 
mentioned, at the end of the day, they're going to call the 
Governor and they're going to call us. And giving them the name 
of a regional transmission organization to call to complaint 
about that is just not going to satisfy them.
    Mr. Shimkus. But, you understand the problem in Illinois 
last summer?
    Mr. Glazer. Very much so. We had the same problem.
    Mr. Shimkus. Right. And for us, it was getting through the 
transmission lines that kind of crossed the State of Ohio.
    Mr. Glazer. Well, we actually think it was Pennsylvania 
that was the problem. We are cooperating. They were not 
cooperating. But putting that aside, again, I think, 
Representative, the problem is we have this patchwork system, 
but we don't have any rules of the road. It's like the air 
traffic control system operating----
    Mr. Shimkus. But, you know, when you make that argument, 
you're making the argument for a Federal role.
    Mr. Glazer. I agree. I am suggesting a Federal role on 
transmission. I don't think it has to go so far as to literally 
siting the lines. That's figuring out whose backyard the line 
goes in. But, I am totally in agreement that the Federal 
Government needs a role in transmission----
    Mr. Barton. Would the gentleman yield? You're saying you 
support something, I think, that former FERC Commissioner 
Stalon talked about, where the Federal role is to say there is 
a need and it is the State role to dictate the siting of the 
transmission line?
    Mr. Glazer. I'd certainly be willing to work out something 
along those lines. I think that we need to take a broader view 
of the need for lines, than just the not in my backyard 
syndrome.
    Mr. Barton. Right.
    Mr. Shimkus. Can we go to--let's go to Florida and then 
let's go to the great State of Idaho, where my brother lives.
    Ms. Clark. I'm not quite sure how to answer that, because 
siting transmission is a very difficult problem. Our commission 
has a responsibility for finding a need for a transmission line 
and then it goes to a separate siting board to determine where 
it goes. Last time we sited a transmission line where we said 
there was a need, it did not get built, because they couldn't 
get through the litigation and all the problems of putting it 
in my backyard. I don't know if you'll be any more successful.
    Mr. Shimkus. I'm going to have a follow-up question to 
this, so Ms. Smith----
    Ms. Clark. But, I would just say, I would urge you to be 
aware of that issue, the difficulty of siting transmission.
    Mr. Shimkus. Ms. Smith?
    Ms. Smith. I guess I just want to first say that I don't 
think the western interconnection operates in the same 
patchwork manner that apparently there exists in the Midwest. 
So, I just want to clear up that and state that electrically, 
the western interconnection is separate from the east, so you 
can do anything you want.
    Mr. Shimkus. Okay, let me follow up with this question.
    Ms. Smith. Because, it's people in the east.
    Mr. Shimkus. Let me follow up with this question. Isn't it 
true, though, that in the west, in your area, Bonneville has 
got 80 percent of the transmission grid?
    Ms. Smith. That may be true for the northwest as a whole. 
But, if you look at the map, you will see that there is very 
little Federal transmission in Idaho and most of ours is owned 
by investor-owned utilities, which has given rise to the big 
debate of how you do this RTO. And one way around constraints, 
some of the investor owners say, is let's look at a for-profit 
transco., which would have the incentive to build the line, 
because they're going to make money.
    Mr. Shimkus. Let me follow up: it is most likely that 
Congress will not take away the duty of siting from the States. 
However, if the Federal Government does not site lines and the 
States are reluctant to move forward, how will high quality 
regional markets be established?
    Mr. Glazer. Let me jump in to say I think you need to give 
the FERC some clear authority, relative to these regional 
transmission organizations, so that we get out of this debate 
that we're in, as to do they have authority or not. I would 
strongly suggest that that is a key to getting effective 
wholesale markets; and with effective wholesale markets, then 
effective retail markets can happen. Without effective 
wholesale markets, you can pass all the retail laws you want, 
all the date certains you can, it won't work. So, we've got to 
get the wholesale structure, and really that is something for 
Congress to do.
    Mr. Quain. I think you're exactly right, Representative. I 
think that's the problem in a nutshell. If we're going to move 
toward a new paradigm, we've got to let go of the old and we've 
got to be willing to talk about new structures. And the way I 
heard your question, you didn't say the States were going to 
give up all rights; you said would you be willing to give up 
some. I mean, we have to start talking about new ways to look 
at the movement of power in a reliable fashion, which also 
provides cost benefits to the consumer. And you can't hold on 
to old paradigms just because you're afraid to let go and try 
something different. To have that kind of discussion, to sit 
down and look at those details and determine whether it's a 
better way to handle a developing marketplace is absolutely 
appropriate.
    Mr. Barton. The Chair recognizes the gentleman from Texas, 
Mr. Hall, for 5 minutes.
    Mr. Hall. Mr. Quain, I'll let you answer what you've tried 
to answer for me a while ago. Go ahead.
    Mr. Quain. Well, I thought the question was, do we all 
agree there should not be a Federal mandate for a time line 
certain, and I think there ought to be.
    Mr. Hall. That's one. And you're uncertain, I reread your 
testimony to this.
    I'll stay on the issue that we're on here about 
transmission capacity. I think most of you heard the testimony 
of the first panel and you heard Mr. Stalon, who expressed his 
concern about new transmission capacity, in order to have a 
competitive market. He just felt like you had to have it. And I 
may or may not have misread his testimony as to his 
recommendation that Congress enact legislation to set up a 
Federal authority. And did I understand, Mr. Glazer, that's 
what you think they ought to do?
    Mr. Glazer. I seem to recall there were two different 
Federal authorities he was talking about. If he was talking 
about a regional transmission organization, some independent 
transmission organization, I totally agree with him, and making 
that same argument.
    Mr. Hall. Are you saying ``transition'' or 
``transmission?''
    Mr. Glazer. Transmission, I'm sorry; transmission. If he 
was talking about physically some Federal organization 
physically siting lines, that's all bound up in local zoning 
and local issues, and they want to hear from somebody locally 
on that. So, I think that, frankly, would be stepping over the 
line, if you did that.
    Mr. Hall. Well, I couldn't detect in any of his testimony 
any practical suggestion, if he had his way to craft the 
Federal authority. I think what you're saying there certainly 
carries that out. But, then Mr. Naeve, also, went on to talk 
about making a case for Federal authority. He didn't say 
transition or permanent or what. And he cited the Gas Act and 
you remember I asked him if he could tell us the difference in 
using it for electricity, if it's the Gas Act, and I'll have 
some questions to send to him on that.
    Now, the other witnesses were, I guess, kind of all over 
the place on whether or not the country could truly realize the 
benefits of competition, if FERC, and that was kind of the 
suggestion of the first gentleman, Mr. Moler, or some other 
national entities--he said FERC or another national entity--
couldn't fully realize the benefits, unless some of those 
people were given the authority to site new transmission lines. 
And you may have hit on the answer to it, to give somebody some 
initial transitory authority, but leave it with the States, 
leave it with the local people.
    So, you know, it's pretty easy to understand from the 
viewpoint of just a purely economic theory, that it might 
easiest just to turn it over to feds and let them have full 
power. But, that would be a very controversial political 
decision. I know the chairman here remembers well that we've 
had difficult deciding a permanent nuclear repository site in 
one State, let alone punishing all the other 49. So, I just 
don't think that would sell. But, I think we do well--and I may 
send some more questions to you about some more suggestions 
that you have about an initial thrust that would be transitory 
only. Maybe something good comes out of these hearings.
    Mr. Barton. Wouldn't that be a revelation.
    Mr. Hall. And I thank you for your visit by my office 
yesterday--the day before yesterday. I'm sorry I wasn't there, 
because I enjoyed your testimony. I believe in Atlanta and 
maybe Chicago. I don't know, where you at Chicago--Atlanta? You 
testified in Atlanta?
    Ms. Clark. It was in Atlanta. I don't think it was in 
Chicago, but it's hard to remember.
    Mr. Hall. It was another nice looking lady in red, then. I 
think I've asked everything that I don't intend to ask in my 
letter. Thank you, Mr. Chairman.
    Mr. Barton. We recognize the distinguished vice chairman, 
Mr. Stearns, for 5 minutes.
    Mr. Stearns. Thank you. Thank you, Mr. Chairman. Of course, 
my colleague from Florida, Mr. Bilirakis, already recognized 
the Honorable Susan Clark. And so, I'm belatedly----
    Mr. Barton. She gave him a smooch when he left the hearing 
room. And I'm told that's why you came back.
    Mr. Stearns. That's why I came back. Let me ask you: do you 
know all about--I mean, you studied the Clinton proposal for 
deregulation of energy, Susan?
    Ms. Clark. I have looked at it. But to be honest, you know, 
you get so many things in between, I can't remember the details 
of it, and there have been so many other issues. Unless I have 
it right before me, I don't----
    Mr. Stearns. Oh, I understand.
    Ms. Clark. So, I'd be willing to try and answer your 
question.
    Mr. Stearns. Well, let's just try it. The two things that I 
think are controversial are the portfolio standard and the 
Public Benefits Fund. And I think I was going to ask you and I 
was going to ask all the witnesses what their impressions are 
of that. Maybe if you would care to----
    Ms. Clark. With respect to the portfolio standard, as I 
recall it, it increases costs to Florida, because it calls for 
some percentage of renewables.
    Mr. Stearns. And it mandates it.
    Ms. Clark. Right. And while we are the sunshine State, 
there are problems with solar energy, as far as its cost 
effectiveness. We don't have any wind to speak of either. Well, 
just to indicate that that kind of mandate would not bring 
costs down in Florida.
    Mr. Stearns. Okay. Marsha Smith?
    Ms. Smith. I think that probably the issue is, as 
Commissioner Clark had said it, it probably won't bring costs 
down. But I guess the judgment call for policymakers is, is it 
something that's good for us, even if it cost us money. And I 
guess in my State, it's hard for me to imagine us getting 
public benefits program, unless Congress told us we had to. So, 
if you think that's a good thing, then maybe Congress should 
tell us we have to.
    Mr. Stearns. Well, what the President is proposing is 
through this Public Benefits Fund, a national transmission tax 
and then distributing these funds to the States, if they 
provide matching funds.
    Ms. Smith. Right.
    Mr. Stearns. And so what we're trying to get a feel for, if 
you support that idea, if so, why, and if not, why not?
    Ms. Smith. Well, it's a terrible dilemma for me, 
personally, here, because I suspect that a majority of Idaho 
legislature would not support that. But, I, personally, think 
there may be some benefit to it.
    Mr. Stearns. So, you, personally, support it, but you don't 
think your State legislature would?
    Ms. Smith. I don't think so.
    Mr. Barton. Would the gentleman yield on that?
    Mr. Stearns. Yes.
    Mr. Barton. Well, Pennsylvania and Illinois both have a 
State low income or public benefits funds. So why would we need 
to have a Federal fund, also? Wouldn't that be an area we'd 
just let the States do what they want to do? Wouldn't that 
solve your problem?
    Ms. Smith. Well, I think the Public Benefits Trust Fund 
that I think Mr. Stearns is speaking of is something different 
from a low income assistance program that's on a State level.
    Mr. Barton. But, they go toward the same general purpose. 
It would just balance the needs of the less affluent in those 
States, in some way.
    Ms. Smith. Well, I think the public purposes, as I 
understand it, is to encourage the development of renewables or 
alternative energy sources and research and development, as 
opposed to helping individual low income consumers.
    Mr. Stearns. Of course, once you set up a government fund, 
you sometimes don't know where it's going to go.
    Ms. Smith. That's true.
    Mr. Stearns. Mr. Glazer, maybe you would like to comment, 
as well as Mr. Quain.
    Mr. Glazer. Thank you. Two things on that, and they're sort 
of two different things. This Public Benefits Fund and then the 
portfolio standard, as I understand it----
    Mr. Stearns. Those are the two that I----
    Mr. Glazer. Two, yes, and----
    Mr. Stearns. [continuing] want to know what you feel about 
it.
    Mr. Glazer. Okay. This Congress actually has a Public 
Benefits Fund, in the form of the LIHEAP program, the Low 
Income Home Energy Assistance Program, and, frankly, my State 
and some other States are very dependent on that program. We 
would have people literally going cold in the winter without 
that program.
    The fear is that that program, because of various other 
Federal requirements, gets cut and there's nothing put in its 
place. So, perhaps if there was some kind of ability to put a 
wires charge, we could get out of this every 2 year debate 
about the LIHEAP program, which has been difficult for the 
Congress and difficult for the States.
    The issue of a portfolio standard, which goes to do we have 
renewables, to me, that's a national energy security issue. And 
I think this Congress is uniquely qualified to render a 
judgment on that. We did have energy security problems in the 
1970's and we went to war in the Middle East. So, I don't think 
we should just brush away that on the grounds that it may cost 
us some money. I think it's really an issue to consider, in 
terms of international energy security and national energy 
security.
    Mr. Quain. I thank you. I think this is one that's clearly 
best handled by the States. We do have a low income energy 
assistance program built into our statute and to all of the 
settlements I talked about. We do not have a portfolio 
requirement in the law. But, I would note that when we sat down 
and negotiated each of the settlements for the five major 
electric companies in Pennsylvania, we came up with one, and we 
came up with one that was a little different and funded a 
little differently for each of the five, taking into note that 
the specific characteristics of that utility and the goals that 
that fund was trying to reach. It's different in Philadelphia 
than it would be in the western part of the State, out near 
Allegheny County. So, I think my preference on that would be to 
let that one to the States.
    Mr. Barton. I thank the gentleman from Florida. I recognize 
the gentleman from Ohio, Mr. Strickland, for 5 minutes.
    Mr. Strickland. Thank you, Mr. Chairman. Mr. Glazer, you 
said, I think correctly, that Ohio is a microcosm of the 
Nation. And as you know, in Ohio, we have low cost energy 
regions and high cost energy regions. I happen to represent 
what is a low cost energy region. So, I assume my question to 
you, if Ohio is a microcosm, means that there are such 
conditions existing across the Nation.
    Is it possible or are you concerned that deregulation in 
Ohio will result in the electricity cost for some of the low 
cost regions, which tend to be the poorer parts of the State of 
Ohio, will actually increase, while they may be reduced in 
higher cost parts of the State?
    Mr. Glazer. Representative, it's an excellent question. In 
fact, it is an issue in the Ohio General Assembly right now and 
it's essentially going to tear the General Assembly apart on 
just that very issue. I don't see it, though, as being a 
situation where, oh, if we do this, rates automatically go up 
in the southeastern Ohio, for a couple of reasons. One is 
although southeastern Ohio is low cost, there, in fact, is 
lower cost around us, in Kentucky and West Virginia. And the 
national wholesale market is even cheaper today than the rates 
that your constituents in southeast Ohio pay. So, there's some 
room to move there, to even go lower. Also, we're looking at 
rate caps, some protection for the low cost regions. For 
example, American Electric Power, we would put a rate cap on, 
so they cannot see an increase for a period of time.
    Over the long term, one of the concerns is if we don't move 
at all, what happens is the investment community just says, 
we're not going to invest in generation, in those States that 
are just closed. And, in fact, an AEP or utilities like that 
start disinvesting in southeastern Ohio. And, in fact, then, 
service goes bad and rates then potentially can go up.
    So, I think we have to take some steps to protect the low 
cost areas of the State. I am very concerned about those. And I 
think we can achieve that proper balance. It's an excellent 
question.
    Mr. Strickland. I would like to ask our friend from 
Pennsylvania, have there been regions in Pennsylvania where 
consumers have actually experienced an increase in what they 
have paid versus--prior to deregulation?
    Mr. Quain. We have in our legislation, in our law, rate 
caps for all of our electric utilities in Pennsylvania. And 
it's a two-piece rate cap. There's a generation rate cap that 
runs generally the length of your stranded investment recovery 
and there's a separate transmission distribution rate cap for 
local line rates. So, if you choose to do nothing or you choose 
to stay with your host utility, your rates are capped.
    Interestingly enough, one of the major players that we've 
seen in the early parts of our choice marketplace are renewable 
energy companies coming in that say, I will sell you green 
energy and, yes, it's more expensive than what you're currently 
paying now under rates--we started this whole process, because 
we thought they were too high, and they're more expensive than 
that, but we will guarantee you that it's green energy. It's 
compatible with the environment. And lots and lots and lots of 
people are buying it. So, in that instance, the rates are going 
up. But, it's their choice to do that. They have the protection 
of the rate caps not to make that decision. But, they're 
consciously doing it, because they want to use energy that's 
environmentally compatible.
    Mr. Strickland. And Mr. Glazer, one other question. As you 
know, my region has coal mines.
    Mr. Glazer. Yes.
    Mr. Strickland. And I'm interested in your opinion, as to 
the effect of deregulation on the coal industry. And if the 
other panel members would have thoughts about that, as well, I 
would be interested in what they may think.
    Mr. Glazer. Representative, I'm really glad you're asking 
me this question this morning. I thought Mr. Pallone would come 
after me on environmental stuff from New Jersey.
    I actually see deregulation as having a huge benefit for 
the coal industry, because where does low cost power, which 
they'll be such a demand for, come from. It comes from coal. 
We've got to make sure we deal with these environmental issues, 
in a way it doesn't make coal obsolete, which would be a 
disaster. But, in fact, I see it as a great benefit for the 
coal industry and for the coal miners, because all these States 
around us, Pennsylvania, Illinois, are looking for low cost 
power. That comes from the coal fields in southeastern Ohio.
    Mr. Strickland. Thank you, sir. And I'll try to deal with 
my friend, Mr. Frank Pallone. Help you out there. Thank you.
    Mr. Barton. We thank the gentleman from Ohio. And may I ask 
the gentleman from North Carolina to bring us home; bring us 
around home, third base, and home run down at the home plate.
    Mr. Burr. The pressure is tough.
    Mr. Barton. I know. The Tar Heel State can deliver. 
Although North Carolina didn't exactly shine in the NCAAP 
tournament.
    Mr. Burr. The word is Duke.
    Mr. Barton. My team didn't even make it, so--five minutes.
    Mr. Burr. Mr. Glazer, tell me what significant difference 
the Ohio Commission's position would be, other than yours. You 
made a note in your testimony, ``I speak as an individual and 
not as the Commission.''
    Mr. Glazer. It was just a CYA here, if you will. We didn't 
actually have the time to vote on these comments as a 
Commission, sir.
    Mr. Burr. But not--your views are not inconsistent with 
what's going on in Ohio?
    Mr. Glazer. No, they are not.
    Mr. Burr. Thank you. Ms. Clark, let me just ask you a real 
bold question. Do you believe that there's any generating 
company out there that can bring to Florida cheaper prices than 
what you have today?
    Ms. Clark. You mean the average price?
    Mr. Burr. I'm talking about is there anybody out there, 
given that we went to retail competition that could supply 
Florida customers cheaper than they currently pay for 
electricity.
    Ms. Clark. Well, you need to remember, we price on average 
cost. And I'm sure there are marginal cost plants and the new 
plants are going to be lower cost. I would point out to you 
that I think those benefits come from wholesale competition. 
The question is how much more benefits come from retail 
competition.
    Mr. Burr. If one believed that to be really a solution, 
then I would suggest that Mr. Glazer wouldn't have--as a matter 
of fact, I might even go to Mr. Quain, because I think 
Pennsylvania had the biggest disparity between high price and 
low price power of any State. Am I right, Mr. Quain?
    [Witness nodded yes.]
    Mr. Burr. And given that there's wholesale capabilities to 
buy, you would think that they wouldn't have a disparity of 
that kind, wouldn't you?
    Mr. Clark. A disparity in cost from different plants?
    Mr. Burr. A disparity in what the consumer pays.
    Mr. Stearns. Would the gentleman yield just to follow up 
what you said? I think he's asking what the average residential 
family pays, kilowatt per hour----
    Ms. Clark. Right.
    Mr. Stearns. [continuing] is pretty good, relative to New 
Hampshire and New York.
    Ms. Clark. Florida, yes.
    Mr. Stearns. But, if we had retail competition, do you 
foresee the average residential customer getting it cheaper 
than it is today?
    Ms. Clark. Not necessarily.
    Mr. Burr. All right. Let me rephrase my question in the way 
it was asked.
    Is it possible your customers might get lower cost 
electricity?
    Ms. Clark. Again, I would point out that you need to make a 
distinction between if you introduce it in wholesale 
competition and you're assuring that the next unit you dispatch 
is the least cost unit, then everyone benefits from it. You 
spread the cost across the whole body of ratepayers.
    Mr. Burr. Ms. Smith, is it true that Bonneville does supply 
some power to Idaho?
    Ms. Smith. Yes. About 20 percent of customers in Idaho are 
served by either cooperative or municipal utilities. And while 
some of those own a small amount of generation, most of them 
are full requirements customers of Bonneville, which means they 
take power wholesale from Bonneville at a preference rate.
    Mr. Burr. Would you have any objection if Congress passed a 
bill that required Bonneville, over some period of time, maybe 
5 years, to pay back the Federal Government and to recover that 
through the power cost of their sale price?
    Ms. Smith. I believe Bonneville is paying back the Federal 
Government. I've sat at lengthy meetings, where they discussed 
their revenue and their debt payment and how they're going to 
cover it. So, I believe that Bonneville is paying back the 
Federal Government.
    Mr. Burr. Actually, I would challenge you on that. I've 
heard the same statements by them and, unfortunately, on the 
balance sheet, there's very little effort. As a matter of fact, 
I don't believe that we can give Bonneville away today, as a 
Federal entity, that there's any power concern out there that 
we can turn it over to and that they would accept it.
    But, let me ask you about--Congressman Crapo, I think, 
drilled in and said, you can't reach much lower prices than you 
have in Idaho. So, I'll give you that. Do you believe that if 
Idaho were to stay closed, but everywhere else stayed open, 
should the investor owners in Idaho be able to sell into the 
other States?
    Ms. Smith. Absolutely.
    Mr. Burr. So, reciprocity would both you, if you didn't 
open up your market, but--and other States said to your 
investor owners, sorry, if you're not--if your State isn't 
open, then you can't sell into ours.
    Ms. Smith. Well, I wouldn't see why a State, which 
advocated competition, both wholesale and retail, would want to 
foreclose the opportunity of their citizens to buy from anyone, 
who had the lowest price. So, to me, I don't understand that 
kind of thought.
    Mr. Burr. I guess we would have trouble understanding why a 
State, who had the lowest cost, would close their State from 
retail competition.
    Ms. Smith. Well, like I pointed out in my response earlier, 
when you're dealing with a hydro system, it's not just the 
price of power that people are worried about, and it's all 
these other things they haven't figured out how to manage in 
that transition.
    Mr. Burr. But, you wouldn't see an inequity in the fact 
that you chose not to open your marketplace, and your investor 
owners were not offered the opportunity to sell into other 
States? You would see a problem with that?
    Ms. Smith. Well, I would not understand the State that 
opened that said we're foreclosing some people from 
participating in selling to our customers, especially if those 
are entities that maybe could provide the lowest cost energy.
    Mr. Burr. I'll wait and try to ask you some further 
questions written, because I think just your actions sort of 
answers the questions for me, as far as Idaho's position. 
Currently, it's fairly easy for that to happen or for people to 
understand it. It doesn't make much sense to me.
    Mr. Barton. We know North Carolina and Idaho can disagree 
agreeably. So, let's wrap this up, Ms. Clark has a plane to 
catch at 5.
    Mr. Burr. I thank the chairman and I thank all of the 
witnesses. And the attempt here is not to highlight the 
differences, it's to really figure out where the consensus is; 
but more importantly, as we proceed forward, either as States 
or as a Congress, to find out how we do it right. And I thank 
the chairman.
    Mr. Barton. That's correct. The Chair would ask unanimous 
consent that a statement by the National Retail Federation be 
put in the record. It's been reviewed by the staff and both the 
majority and minority, and there's no objection.
    Do I hear an objection from any of the members?
    [No response.]
    Mr. Barton. Hearing none, so ordered.
    [The statement follows:]
          Prepared Statement of The National Retail Federation
    The National Retail Federation is the world's largest with 
membership that comprises all retail formats and channels of 
distribution including department, specialty, discount, catalogue, 
Internet and independent stores. NRF members represent an industry that 
encompasses more than 1.4 million U.S. retail establishments, employs 
more than 20 million people--about 1 in 5 American workers-and 
registered 1998 sales of $2.7 trillion. NRF's international members 
operate stores in more than 50 nations. In its role as the umbrella 
group, NRF also represents 32 national and 50 state associations in the 
U.S. as well as 36 national associations representing retailers abroad.
    NRF's vision of the way in which electricity will be purchased in 
the future is quite simple. A large network of electricity generators 
and power marketers will sell electricity to end-users across the 
country, either directly or including power marketers, at prices set by 
the competitive markets. Prices will be determined as they are with any 
other commodity, based on supply and demand, through both spot and 
future markets. Power will be purchased from power plants across the 
country, transported through transmission systems operated by 
independent systems operators and delivered through distribution 
companies which will appear, to consumers, to resemble today's public 
utility companies. Distribution and transmission companies will remain 
regulated monopolies for the foreseeable future.
    Our view of the future is a FEDERALLY deregulated electric industry 
in which:

<bullet> All customers benefit from deregulation.
<bullet> Deregulation is achieved through universal direct access, 
        rather than a government-mandated pool approach.
<bullet> Direct access occurs simultaneously for all customers. If 
        technical constraints require that, in a few instances, direct 
        access to be phased-in, the phase-in will not disadvantage any 
        class of customers.
<bullet> Generation, transmission, and distribution services, are 
        unbundled, either functionally or through divestiture.
<bullet> Smaller electric consumers participate in the competitive 
        market place through aggregation.
<bullet> Stranded cost recovery is shared equitably by utility 
        customers and by utility shareholders.
    All Customers Will Benefits From Federal Deregulation. Deregulation 
will lead to a competitive environment which will benefit all 
customers. The benefits to be derived from competition are evident in 
the federal deregulation of the natural gas, airline, trucking and 
telecommunications industries. When pressure builds for electric rate 
relief, regulated monopolies react by giving relief to large customers 
who threaten to self-generate or to leave the service area of the 
monopoly. Everyone else pays for the benefit received by the few 
customers who have the economic power to negotiate discounts.
<bullet> A deregulated environment will not allow for such distortion 
        of the competitive market. NRF member companies want to 
        purchase electricity competitively so that they can share in 
        the benefits of competition at the earliest possible time. NRF 
        members also want their customers, the residential electric 
        consumer, to share equally in those benefits. After all, 
        retailers benefit whenever their customers have additional 
        disposable income.
<bullet> Competition Is Best Achieved Through Universal Direct Access. 
        Direct access to competing generators of electricity provides 
        consumers with the incentives necessary to participate in the 
        competitive marketplace. Those incentives are muted in the 
        poolco approach which has been proposed in some states. Direct 
        access, whether through bilateral contract or through 
        aggregation, provides the opportunity for a willing buyer and a 
        willing seller to set prices through competitive negotiation, 
        rather than relying on a price auction controlled by utilities, 
        which could distort free market pricing. Mandatory pools will, 
        in essence, result in a shift from multiple utilities within a 
        state to a single larger utility. Such a shift will not create 
        competition and does not drive prices down. The pool approach 
        will most likely lead to a re-regulation rather than to 
        deregulation. If pools develop they should develop through the 
        action of market forces rather than as a result of government 
        mandate.
<bullet> Direct Access Should Occur Simultaneously For All Customers. 
        In the few instances where technical constraints might prohibit 
        immediate direct access for all customers, no class of customer 
        should be disadvantaged by any resulting phase-in of universal 
        direct access. In those instances where a phase-in is 
        necessary, it should be implemented in such a way which will 
        benefit all classes of customers simultaneously.
<bullet> Unbundling is Necessary to Promote Competition. Unbundling, 
        whether it is functional unbundling or unbundling through 
        divestiture, is necessary to insure that utilities do not 
        unfairly shift generation expenses to their transmission and 
        distribution functions, or otherwise give unfair advantage to 
        their generation components, which will be to the detriment of 
        true competition.
<bullet> Smaller Electric Consumers Can Participate in the Competitive 
        Market Through Aggregation. Some consumers, especially large 
        consumers, will aggregate off of their own facilities in a 
        given area. Other consumers, including small commercial and 
        residential consumers, will aggregate with a number of 
        unrelated companies or individuals in a geographic area. 
        Aggregation could provide participants an average rate 
        reduction of 18 percent. Innovative planning such as 
        aggregation will define the electricity market in years to 
        come, insuring that electricity consumers, large and small, 
        will benefit from competition.
<bullet> Stranded Cost Recovery Dominates Much Of the Electricity 
        Utility Deregulation Debate. We do not believe that utilities 
        are entitled to total stranded cost recovery. Stranded Costs 
        caused by government mandate should be recovered to the extent 
        utilities are unable to mitigate those costs. Stranded costs 
        caused by bad management decisions should not be recovered.
<bullet> We envision a burst of competitive pricing as deregulation 
        becomes a reality. This will be followed by a period of 
        reflection as consumers and electric generators analyze the 
        effect of this new pricing. As competition forces utilities and 
        other power suppliers to become more efficient, as stranded 
        costs are dealt with and as competition encourages innovation 
        in load management and conservation techniques, electricity 
        prices will enter into a period of long, steady decline and 
        savings will increase over a period of many years.
<bullet> In Conclusion, the National Retail Federation looks forward to 
        the development of a federally deregulated electric market 
        throughout the United States which will provided competitive 
        benefits for all consumer classes on a non-discriminatory basis 
        through customer choice. The Congress is encouraged to enact 
        legislation which will facilitate nationwide retail competition 
        as soon as possible and which will insure that federal 
        regulatory activity will not impede competition.

    Mr. Barton. We want to thank you, ladies and gentlemen, for 
testifying. We will work with the minority next week to 
determine the next hearing on this issue, and we hope that we 
will be able to reach agreement, as to the subject and the time 
and be able to announce that sometime next week.
    The next hearing the subcommittee is going to convene is on 
the Iraqi oil for food program that's been sanctioned by the 
United Nations. There will be additional questions for each of 
you in the record. We appreciate your timely response.
    And this hearing is adjourned.
    [Whereupon, at 4:15 p.m, the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]
        Prepared Statement of American Public Power Association
    The American Public Power Association, the national service 
organization representing the interests of the nation's 2,000 
community- and state-owned, not-for-profit public power systems, 
commends Chairman Barton on restarting the hearing and discussion 
process on the details of electricity competition. Sorting out the 
appropriate federal and state roles in this matter is among the most 
important activities that can be undertaken in order to move the 
process forward.
    Public power systems have long played a vital, pro-competitive role 
in the electric utility industry, and APPA supports the enactment of 
federal legislation that removes federal barriers and encourages the 
creation of retail competition. Since the first municipal systems were 
established over 115 years ago, public power has fostered competition 
by serving as a comparison ``yardstick'' for consumers against which to 
judge the performance of private utilities. Today, APPA's members are 
actively participating in efforts at the state and local level to 
implement retail choice initiatives. Public power associations in 
several states have endorsed ``customer choice'' initiatives under 
consideration by their respective legislatures. In addition, cities 
like Cleveland, Ohio, and Lubbock, Texas, have had ``door-to-door'' 
retail competition in place for decades.
    With this in mind, APPA believes the following issues are 
appropriate and necessary to deal with at the federal level:

<bullet> ensure there are no federal legal impediments to state and 
        local decision-making regarding retail competition and clarify 
        jurisdictional questions, while preserving the traditional 
        authorities of state and local governments over retail electric 
        service;
<bullet> mitigate market power through provisions such as a revised 
        merger standard that provides FERC with clear authority to 
        condition proposed mergers on divestiture of such generation 
        and transmission facilities as necessary to prevent market 
        power in any relevant geographic or product market;
<bullet> remove federal tax impediments on public power systems' 
        ability to compete and participate in independent regional 
        transmission organizations by including the provisions 
        contained in H.R. 721, the Bond Fairness and Protection Act;
<bullet> provide clear and specific authority to require the creation 
        of strong, truly independent regional transmission 
        organizations in order to facilitate the development of 
        vigorously competitive regional power markets;
<bullet> maintain or enhance the reliability of the electric system by 
        including the industry consensus language which assists in the 
        transition of the North American Electric Reliability Council 
        (NERC) to the North American Electric Reliability Association 
        (NAERO);
<bullet> address regulatory impediments to hydropower's competitive 
        position in a restructured marketplace;
<bullet> ensure that electricity is available to all consumers at a 
        reasonable price through options such as municipal aggregation 
        programs;
<bullet> encourage cost-effective renewable energy without prescribing 
        quotas;
<bullet> promote energy research and development.
    The balance of the detailed decisions should be left up to state 
and local authority.
    Examples of decisions better left to the states include:
<bullet> When (or 10 the state can realize benefits from choice and is 
        prepared to move to retail competition;
<bullet> Determination of reasonable stranded cost recovery for 
        generation assets;
<bullet> The percentage (if any) that electricity providers are 
        required to generate from renewable resources, including 
        hydropower;
<bullet> The level at which all participants in the electricity market, 
        including non-traditional power providers, are required to 
        contribute toward the costs and other obligations of public 
        interest programs;
<bullet> Deference to regional and customer decisions in certain areas 
        of the country served by federal power marketing 
        administrations on how best to deal with those entities in a 
        restructured environment. These regional approaches should be 
        encouraged and respected by Congress in any federal 
        restructuring legislation. In the Pacific Northwest, for 
        example, issues regarding the Bonneville Power Administration 
        involve a multitude of complex and interrelated concerns. 
        Stakeholders in this region, including public power systems, 
        are in the best position to develop consensus solutions to the 
        unique concerns affecting their region. The same is true in the 
        Tennessee Valley, where TVA power distributors, TVA, and the 
        Department of Energy are developing a consensus proposal on how 
        best to deal with the complex issues surrounding the evolution 
        of TVA in competitive markets;
<bullet> Maintaining ultimate decision-making authority over customer 
        safeguards and service quality protections;
<bullet> Determination of which ancillary services should be opened to 
        competition, such as metering and billing functions in order to 
        retain the highest levels of accuracy, customer privacy, and 
        public safety.


    RELIABILITY AND TRANSMISSION IN COMPETITIVE ELECTRICITY MARKETS

                              ----------                              


                        THURSDAY, APRIL 22, 1999

                  House of Representatives,
                             Committee on Commerce,
                          Subcommittee on Energy and Power,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:05 a.m., in 
room 2322, Rayburn House Office Building, Hon. Joe Barton 
(chairman) presiding.
    Members present: Representatives Barton, Bilirakis, 
Stearns, Largent, Burr, Whitfield, Norwood, Shimkus, Pickering, 
Bryant, Ehrlich, Bliley (ex officio), Hall, Sawyer, Markey, 
Gordon, Wynn, and Dingell (ex officio).
    Staff present: Cathy Van Way, majority counsel; Joe 
Kelliher, majority counsel; Donn Salvosa, legislative clerk; 
Sue Sheridan, minority counsel; and Rick Kessler, minority 
professional staff.
    Mr. Barton. If the subcommittee could come to order, we 
would like to start the second in a series of hearings in the 
electricity restructuring issue. Today's hearing is on 
reliability and transmission and how that will help us to a 
competitive electricity market.
    I want to welcome everyone today. The changes sweeping the 
electric industry in recent years have been nothing short of 
incredible. The industry is rapidly transforming itself from a 
highly regulated industry to one where competition plays a 
driving role. I believe this trend toward retail competition is 
irreversible. At the same time it is becoming apparent it is 
time for our Federal laws and regulations to catch up where the 
marketplace is headed.
    As Chairman Bliley has said and I have said, the question 
before the Congress has shifted from whether Congress should 
pass legislation to open retail markets, to when Congress 
should pass such legislation. Today we are going to examine 
what the scope of Federal legislation should be with respect to 
reliability and transmission.
    When I accepted the gavel at the beginning of this 
Congress, one of the goals we set for the subcommittee was to 
pass a comprehensive bill that lowers electricity prices for 
consumers by promoting competition. Toward this end, we are 
going to hear today from witnesses about two issues that are 
critical to restructuring. Those issues, as I said earlier, are 
transmission and reliability. They are certainly issues that 
are not unfamiliar to this body.
    From the input that we have received from the largest and 
smallest consumers and everyone in between, reliability is a 
very big concern. The question that is raised time and time 
again is, Who will I call when our lights go out? It is a 
simple question, but it is an important question. Similarly, 
while everyone recognizes competition changes the way we need 
to think about reliability, it does not necessarily imperil it. 
In fact, separating generation, which will be competitive, from 
transmission and distribution, which are likely to remain 
regulated, will have a positive impact on reliability.
    As the system changes, I believe we need Federal 
legislation to provide for enforceable reliability provisions. 
There is a broad consensus that continued reliance on voluntary 
reliability standards is not viable and will lead to 
significant reliability problems. Consensus is forming around a 
self-regulating organization certified by the FERC that will 
develop reliability standards ultimately enforced by the FERC.
    Today we are going to take a close look throughout the 
reliability proposal developed by the North American Electric 
Reliability Council, or NAERC.
    Similarly, for competition to truly flourish, we must make 
sure that our transmission system is genuinely open and is 
governed by one set of rules. It is clear that EPAct and Order 
No. 888, went a long way to make access to the transmission 
system more open. However, most of today's testimony verifies 
that complete open access to transmission lines has not 
arrived.
    We hope to hear some suggestions today about how to assure 
our interstate transmission lines are as open as possible so 
that consumers can reap the benefits of competition. We look 
forward to hearing from all of our witnesses today.
    [The prepared statement of Hon. Joe Barton follows:]
Prepared Statement of Hon. Joe Barton, Chairman, Subcommittee on Energy 
                               and Power
    The changes sweeping the electric industry in recent years have 
been nothing short of incredible. The industry is restructuring itself 
with every diversification, with every merger, and with every voluntary 
and involuntary divestiture. I believe the trend towards retail 
competition is irreversible.
    As Chairman Bliley and I have said many times before, the question 
before Congress has shifted from ``whether'' Congress should pass 
legislation to open retail markets to ``when.'' Today we examine what 
the scope of Federal legislation should be with respect to reliability 
and transmission.
    When I accepted the gavel at the beginning of this Congress, one of 
the goals we set for this Subcommittee was to pass comprehensive 
Federal electricity legislation that lowers electric prices for 
consumers by promoting competition in retail markets. Towards this end, 
today we are going to hear from two panels about two of the most 
talked-about issues related to the restructuring of the electricity 
industry in this country. The issues are transmission and reliability 
and they are certainly not unfamiliar to this body.
    From the input we have received from the largest and smallest 
electricity consumers, and everyone in between, reliability is one of 
the biggest concerns. The question that is raised time and time again 
is, ``Who will I call if my lights go out?'' It is a simple question, 
and it is important. Importantly though while everyone recognizes this, 
we must change the way we think about reliability, it does not 
necessarily imperil it. In fact, separating generation which will be 
competitive and suppliers will be looking to cut costs from 
transmission and distribution which are likely to have a positive 
impact on reliability.
    I believe Federal legislation will provide for enforceable 
reliability provisions. There is a broad consensus that continued 
reliance on voluntary reliability standards is not viable, and will 
lead to significant reliability problems. Consensus has developed 
around developing a self-regulating organization certified by FERC that 
will develop reliability standards ultimately enforced by FERC. I 
believe we should take a close look at the work done by the North 
American Reliability Electricity Council.
    Similarily, for competition to truly flourish, we must make sure 
our transmission system is genuinely open and is governed by one set of 
rules. It is clear that EPAct and Order 888 went a long way to make 
access to the transmission system more open. However, most of today's 
testimony verifies that access to transmission lines are still subject 
to problems. I hope to hear some suggestions today about how to assure 
our interstate transmission are as open as possible.
    I look forward to hearing from all of the witnesses on both of 
these important issues and learning from what they have to tell us.

    Mr. Barton. Now I would like to recognize the distinguished 
ranking member of the full committee, the gentleman from 
Michigan, the Dean of the House of Representatives, Mr. 
Dingell, for an opening statement.
    Mr. Dingell. Mr. Chairman, I thank you. Mr. Chairman, I 
commend you for holding today's hearings. These hearings will 
touch on one of the most important issues in this entire debate 
on electrical utility restructuring.
    Historically, the United States has enjoyed the most 
reliable electric transmission system in the world. It also has 
enjoyed the cheapest and the best service. This gives a 
tremendous advantage to ordinary citizens, residential 
dwellers, business and consumers alike and also to American 
industry. It is a major factor in the high competitiveness of 
the American economy.
    The electrical utility industry faces changes on every 
front, all of which bear upon the issue of reliability. About 
20 States are now at some stage of switching over to retail 
competition. This raises question about how generation reserves 
will be maintained and how adequate transmission capacity will 
be preserved under even more competitive circumstances. It is 
evident already that reliability in certain areas of the 
country may be jeopardized by constraints in the transmission 
system at a time when building new lines is more difficult than 
ever.
    Last summer we saw real stress on the system and we came 
very close to serious trouble, including major blackouts and 
brownouts, particularly in the Middle West.
    On the environmental front, the timing of new regulatory 
requirements is going to result in plants being temporarily 
shut down. This means that reliability is going to again be 
stressed. I would note this threatens to occur at the worst 
possible time in the need to maintain the system's reliability. 
And that is something to which EPA and others who are pushing 
for changes in the system could better direct their attention.
    Last summer, as I mentioned, the Midwest experienced real 
difficulties which should be unsettling to anyone concerned 
with electric reliability and the well-being of consumers. 
Although we did not have blackouts, these were narrowly averted 
and only then because a number of customers were curtailed and 
because things like rolling cutbacks occurred. Utilities in 
this region did it by the book, but that did not lessen the 
inconvenience and the costs to those whose service was 
interrupted.
    I would note that a lot of wholesalers got into the 
business and a fair number of them were incapable of delivering 
power at the time and under the terms that their contracts 
required. I think that is something we better take a look at 
because I would note that in most instances, the bills before 
us, and other proposals, impose less requirements for good 
character, financial capability, and other things important 
than do the requirements of State law with regard to 
beauticians.
    Let us look a little bit at what happened last year. Only a 
small volume of power was sold at spectacular prices but those 
were in the range of $7,000 per kilowatt hour. In California, 
they went $9,000 and more per kilowatt hour. These price spikes 
should warn us that we can ill afford to take the stability of 
our electrical utility system for granted in a time of power 
change, particularly as it appears that the level overall of 
reserves is falling.
    State regulators and utilities in the Midwest are braced 
for another difficult summer. And it behooves all of us to 
closely examine the forces at work in this rapidly changing 
marketplace.
    I want to commend you again, Mr. Chairman, for holding this 
hearing. And I want to tell you how important it is that we 
look to see what is going to occur with regard to the question 
of reliability of service. Clearly, this must be one of the 
committee's central concerns as it considers--as it continues 
its deliberations on these matters. Again, I commend you and I 
thank you, Mr. Chairman.
    [The prepared statement of Hon. John D. Dingell follows:]
    Prepared Statement of Hon. John D. Dingell, a Representative in 
                  Congress from the State of Michigan
    Today's hearing touches on one of the most important issues in the 
electric restructuring debate. Historically, the United States has 
enjoyed the most reliable electric transmission system in the world. 
This is a tremendous advantage to residential and business consumers 
alike, and one which we simply must maintain.
    The electric industry faces change on every front, all of which 
bear on reliability.
    About twenty states are at some stage of switching over to retail 
competition. This raises questions about how generation reserves will 
be maintained, and how adequate transmission capacity will be 
preserved, under ever more competitive circumstances.
    It is evident already that reliability in certain areas of the 
country may be jeopardized by constraints in the transmission system, 
at a time when building new lines is more difficult than ever.
    On the environmental front, the timing of new regulatory 
requirements will result in plants being temporarily shut down, which 
threatens to occur at the worst possible time in terms of the need to 
maintain the system's reliability.
    Last summer the Midwest experienced difficulties which should be 
unsettling for anyone concerned with electric reliability and 
consumers' wellbeing. Although we did not have blackouts, these were 
narrowly averted and only because certain customers were curtailed. 
Utilities in the region did this by the book, but that did not lessen 
the inconvenience and cost to those whose service was interrupted.
    And while only a small volume of power sold at the spectacular 
prices in range of $7,000 per kilowatt hour, these price spikes serve 
notice that we can ill afford to take the stability of our electric 
system for granted in this era of rapid change. State regulators and 
utilities in the Midwest are braced for another difficult summer, and 
it behooves all of us to closely examine the forces at work in this 
rapidly changing marketplace.
    I thank the chairman for holding this hearing and for focusing on 
what certainly must be this Committee's central concern as it continues 
its deliberations on the future of the electric industry.

    Mr. Barton. Thank you, Mr. Dingell.
    We recognize the distinguished gentleman from Kentucky, Mr. 
Whitfield, for an opening statement.
    Mr. Whitfield. Mr. Chairman, thank you very much. Although 
I was not in Congress at the time, I was involved in 
deregulation of the airline industry, the railroad industry, 
and the trucking industry, all of which I supported. And when 
you represent an area of the country that has some of the 
lowest rates in the country for electricity, you want to 
proceed with these hearings with an open mind but also to look 
closely at issues like reliability and others and their impact 
on the district that you represent.
    So I am delighted that we are continuing these hearings and 
particularly today to focus on reliability. I noticed that we 
have two panels of nine witnesses, all of whom have a lot of 
experience in this area, and I know that their testimony will 
be quite helpful to us as we proceed to explore this 
opportunity of deregulation. I yield back the balance of my 
time.
    Mr. Barton. Thank you. I recognize the distinguished 
ranking member, Mr. Hall.
    Mr. Hall. Mr. Chairman, thank you very much. I think 
today's hearing on transmission and reliability issues is 
probably one of the most important hearings that we will have 
today as we address the Federal Government's role in the 
restructuring of the electric utility industry.
    It seems to me that the issues that are before us today are 
not mandates and the dates certain are the real centerpiece of 
what might be contained in any Federal legislation. Reliability 
has got to be the one word that we can't give up on, our right 
to rely or someone to call in case it fails. And quality. And, 
of course, quality is the end word for reliability and 
transmission.
    So I am glad to see us get away from talking about mandates 
and dates certain and all of that and get to what the real 
centerpiece of what this thing is. These are unique Federal 
issues, issues that can only be dealt with by Congress, and 
what we ultimately do will have profound implications on 
reliability, and that is reliability of the power system and 
the viability of all the stakeholders that use it.
    Now, Mr. Chairman, I expect that there will be a number of 
questions and additional issues raised here today that are 
going to need even some further examination, which will lead us 
into other questions and answers that we need to seek to make 
the puzzle fit together. While I am not a fan of endless 
hearings, I think we owe it to ourselves to make certain we 
have a good grip on all the policy options. It looks as if we 
need it. If it looks that way, why I know and hope you will 
schedule such additional days as are required to develop a 
thorough and complete record.
    I know you, Mr. Chairman, and I know your background. I 
know that you have been recognized as engineer of the year in 
your own State, that you have an inquiring mind--and I am 
buttering you up here.
    Mr. Barton. Keep buttering.
    Mr. Hall. You are enjoying it, aren't you?
    Mr. Barton. It is good.
    Mr. Hall. And the courage to act. You know, those are 
ingredients that a good chairman needs. Believe me, Joe Barton 
has every one of those. So it is a pleasure to work with him 
and take this information. That is the reason we have the 
interest in this legislation. That is the way you attracted 
``his honor'' here to testify for us today, so it is too 
important to the economic well-being of this country not to 
build a complete and accurate record and that is what we are 
doing.
    I think we need the best minds to come before us and the 
consequences of not doing it and not doing it right can be very 
unfortunate. Speaking of the best minds, we have some of them 
here today, Mr. Chairman. Thank you for being here, and other 
witnesses. I want to issue a special welcome, if the chairman 
hasn't already done it, to Trudy Utter of Garlington, Texas, 
who is on our second panel.
    I yield back the balance of my time, Mr. Chairman, unless 
you would like me to talk about you a little more, but I think 
I read it just exactly as you wrote it.
    Mr. Barton. I don't think the recording clerk got it down, 
though.
    Mr. Hall. Would you like a second reading?
    Thank you, Mr. Chairman.
    Mr. Barton. Thank you, Congressman Hall. The Chair would 
like to recognize the distinguished gentleman from the great 
State of Tennessee, Mr. Bryant, for an opening statement.
    Mr. Bryant. Thank you, Mr. Chairman. I was going to echo 
the remarks of Mr. Hall up to the point where he started 
talking about you, and then I realized what we had was two 
Texans here. I looked down there at Ed Markey from 
Massachusetts, and we kind of shook our heads. I just want 
Texas fans to realize there would not be a Texas were it not 
for Tennessee, Sam Houston, David Crockett, and all those good 
volunteers we sent down there to help them out.
    Mr. Barton. Amen to that, brother.
    Mr. Bryant. Amen. Along that line, I do want to echo what 
Mr. Hall and Mr. Whitfield said, and others I am sure had said 
before I arrived, about this issue being an important one--
along with the cost, I think, low cost, I think reliability is 
the other key to any system that we go to in restructuring. I 
am just pleased to be here today and also to welcome Matthew 
Cordaro, a friend I have known from years past in Nashville. He 
is the President and CEO of the Nashville Electric Service and 
will be testifying today on behalf of the Large Power Council. 
I look forward to hearing from Matthew and the other 
distinguished members of this panel, and would simply remind 
all of you that, as you know the business of Washington--we are 
at various meetings throughout the day, and at times you will 
see us come and go, and it is not anything that you should view 
as disrespectful. It is just that we can only be at one place 
at one time. We unfortunately are scheduled to be at other 
hearings throughout the Capitol area today, so if we have to 
leave, that is our reasoning or excuse early on; but again, we 
thank you and look forward to hearing from your distinguished 
panel. Mr. Chairman.
    Mr. Barton. Thank you. I might point out that my relatives, 
way back when, came from eastern Tennessee but they got to 
Texas about 1840.
    Does the gentleman from Massachusetts, Mr. Markey, wish to 
make an opening statement?
    Mr. Markey. Thank you. Thank you, Mr. Chairman, very much. 
As we move from the era where the wholesale demonopolization of 
the electricity marketplace, which was enacted and ultimately 
implemented pursuant to the Energy Policy Act which was passed 
out of this committee in 1992, to an era of retail competition, 
it is very important for us to deal with the issues of 
reliability. That is, guaranteeing that the lights don't go out 
or dim in people's homes, that their television sets work, that 
they are never interfered with, that industries don't have 
unfortunate interruptions of their service. After all, that is 
what the American economy is all about. And I think that is 
really where our committee once again comes into play.
    We have an opportunity to make sure that as we break down 
these State and relatively small regional conglomerates and 
create national marketplaces, we have to make sure that as 
electricity is being wheeled around the country, that there are 
guarantees that the system is going to be reliable, that all 
parts of it understand that they have a responsibility now to 
other parts of the country to guarantee that the electricity is 
flowing into every home, every industry in the United States.
    And toward that goal, I have been able, without question, 
to partner with a great Texan, a man whom I admire, and I think 
someone who as a partner is somebody who I believe will help to 
give us the leadership which we need. And, of course, I am 
speaking here of Tom Delay, the Majority Whip, who has 
introduced with me a piece of legislation on these issues to 
guarantee----
    Mr. Barton. Is he a member of this subcommittee?
    Mr. Markey. You have got to have a Texan to be in this 
fight. I feel a little bit like I am at the Alamo a lot of the 
time, coming in from another State. So I am looking for all the 
help I can get. These Texans are tough.
    So, Mr. Delay and I have introduced a piece of legislation 
that would establish authority over the North American 
Electricity Reliability Council and the regional reliability 
councils, enhance FERC's authority to deal with market power 
abuses that could degrade reliability, and create incentives 
for new transmission siting. It seems to me that this is the 
kind of thing that our subcommittee is uniquely qualified to be 
able to deal with.
    As we move from smaller, more isolated regional and State-
based electricity networks to national networks, in turn we 
have a responsibility to make sure that these national networks 
in fact are effective.
    I thank you, Mr. Chairman. I share the gentleman from 
Texas, Mr. Hall's admiration for your knowledge in these areas. 
I think that we are really kicking off this subject with just 
the right kind of hearing today and I look forward to working 
with both of you toward the goal of resolving this issue this 
year. I thank you, Mr. Chairman.
    Mr. Barton. Thank you, Congressman Markey. We recognize Mr. 
Burr from North Carolina for an opening statement.
    Mr. Burr. Thank you, Mr. Chairman. I would be remiss if I 
didn't also highlight your good qualities and follow up on Mr. 
Bryant's suggestion that had it not been for Tennessee, there 
would have been no Texas, and had there not been the kind gift 
of North Carolina, there would have been no Tennessee. So now 
that we have gotten to the front of the food chain----
    Mr. Markey. Can I say something here? I am going to put in 
a word for Plymouth Rock here.
    Mr. Burr. If you can bring that rock in. I have learned one 
valuable thing this morning: why Texans wear boots and high 
pants.
    Mr. Barton. I think he has gone to meddling now. Time is 
up.
    Mr. Burr. I do, on a serious note, want to thank the 
chairman for the continuation of this process. I believe moving 
forward is the thing for us to do. We have a great set of 
witnesses today to hopefully guide us through, and I only wish 
that the answer to the reliability question were as easy as the 
lights that somebody in the back of the room cutoff just a few 
minutes ago and very quickly cut back on but. It is not that 
simple to identify where the problem is, and in many cases the 
problem exists before you know there is one.
    And I think that one of the responsibilities of the 
industry and of the Congress is as we move forward to better 
understand how to have the safeguards and to hopefully take--
Mr. Hoecker, your first paragraph where you said, ``Let markets 
not regulators, determine the price of,'' and you had 
``wholesale power,'' and I think our attempt is just to say 
``power.'' I am confident the markets can do it and that we can 
have the assurances of reliability and the effectiveness of our 
transmission system.
    And with that, I yield back, Mr. Chairman.
    Mr. Barton. Thank you, Congressman Burr.
    We now recognize the gentleman from Ohio, Mr. Sawyer. I am 
interested to see how he is going to talk about his State in 
the beginnings of the great State of Texas.
    Mr. Sawyer. Mr. Chairman, while I live in Ohio, my family 
first came to this country through Virginia, one of those dates 
that you memorized in your history books. I have always 
hesitated to talk about that and I discovered why when Kika de 
la Garza told the story that he loved to tell. I am sure you 
know about when he was first asked, when he first came to the 
Congress, by the daughters of Texas how long his people had 
been in this country, and he paused for a moment and smiled and 
said, ``Well, it is kind of hard to tell. You see, first, we 
lived in Spain. We lived so many places. We lived in Spain and 
we lived in Mexico. Then we actually lived in the Republic of 
Texas and then we lived in the Confederacy, and then finally 
lived in the State of Texas and, you know, we never left the 
land. We settled in 1604.'' It puts things into perspective for 
all of us as you might----
    Mr. Hall. I think my uncle Christopher knew your people.
    Mr. Sawyer. To get back to the topic, one of my staff 
clipped an item that noted trade journal, Rolling Stone, in 
which John ``Cougar'' Mellencamp observed that in the thirties, 
rural electrification brought electricity to rural dwellers and 
with that came radios, record players, music. According to 
Mellencamp, his upcoming tour will be called the ``Rural 
Electrification Tour.'' In many ways, he is trying to take from 
one era and build into another. It is exactly what we are 
trying to do.
    I have a longer opening statement that I would like to 
offer for the record, but I just want to make one observation; 
and that is, today's transmission structure works but it works 
largely by the accident of physics and not through any 
particularly well-crafted, thoughtful, far-seeing vision of 
what an effective transmission system ought to look like. It 
really comes about because various service territories, rate of 
return, regulated entities, really abut up against one another, 
and it provides the capacity for product to move.
    In that sense, it seems to me that it is very much like the 
condition of the U.S. highway system prior to the 1950's. Yes, 
people could get from one place to another and it worked 
reasonably well, but it was wholly unsuited to the kind of 
commerce that developed in the fifties and sixties and since 
then. With the growth of the interstate highway system, the 
highway system became a backbone of commerce in the United 
States and, in many ways, created personal freedom that allowed 
communities to grow and develop in wholly natural ways. But 
those systems followed the siting of the interstate highway 
system, that growth.
    We face a similar circumstance here where the development 
and growth of a transmission system can be the genuine backbone 
of competition in this industry as it evolves in the next 
century. It is that which it seems to me offers the greatest 
opportunity for an effective and flexible Federal framework 
within which that private growth can take place.
    How well we do that is really going to be at the heart of 
how well we succeed in this large national undertaking of the 
deregulation and restructuring of a large and complex century-
old business. We have the strongest economy on Earth. It is in 
no small way due to the effectiveness of that system that has 
grown to this point, and how well we nurture that growth in the 
coming century may well depend on how well we do this job here.
    With that I conclude my comments and thank you, Mr. 
Chairman, for your latitude in offering----
    Mr. Barton. Thank you.
    I recognize the gentleman from Oklahoma who has been one of 
the strongest advocates for this issue and has worked 
tirelessly on it for many years. Mr. Largent of Oklahoma.
    Mr. Largent. Thank you, Mr. Chairman. Thanks for having 
this hearing. We have got a number of issues to work on. I am 
excited that we are developing the momentum. The question is 
not whether we are going to do electricity restructuring, it is 
just when. And I think reliability is one of those issues that 
is important to everybody.
    And so I look forward to hearing from both panels this 
morning on what we need to do to make our transmission system--
if in fact moving to a restructured environment actually can 
improve reliability and transmission innovations. So thank you 
for holding this hearing and I look forward as we continue the 
march forward on electricity restructuring.
    [The prepared statement of Hon. Steve Largent follows:]
Prepared Statement of Hon. Steve Largent, a Representative in Congress 
                       from the State of Oklahoma
    Thank you, Mr. Chairman, for continuing the forward momentum of 
comprehensive restructuring of the electricity industry monopoly with 
this hearing on reliability and transmission issues in a competitive 
market.
    When those with concerns about the federal role in electricity 
restructuring ask why we need to move at the federal level--ensuring 
nationwide system reliability is among the best of reasons. In fact, 
now that 21 states have moved toward a restructured marketplace it is 
critical that reliability provisions be enacted at the federal level.
    While I believe that the need exists for strengthened reliability 
provisions regardless of whether you support federal restructuring 
legislation, I also believe that it should be a vital part of any 
restructuring bill that this subcommittee considers later this summer.
    I think the witnesses today can enlighten us on all the major 
issues associated with reliability and transmission in competitive 
markets, beginning with FERC Chairman Hoecker. In addition, I look 
forward to hearing about more pure market solutions to increasing 
reliability and transmission capabilities. These solutions include 
superconductor technologies that maximize current transmission 
capacities by reducing line losses and distributive power advances that 
place the generation closer to the end user. I look forward to their 
testimony.
    Last week, Secretary Richardson unveiled the Administration 
Electricity bill and I believe momentum grows each day that this 
Subcommittee sits down and works through these issues. I think we will 
soon discover that we can move a good, fair, bipartisan bill to the 
floor because there is more that joins us then separates us. The 
importance of reliability of our electrical energy is something I think 
we can agree on.
    Thank you once again Mr. Chairman.

    Mr. Barton. Thank you. Does the gentleman from Georgia, Mr. 
Norwood, wish to make an opening statement?
    Mr. Norwood. No, Mr. Chairman. Thank you very much for 
having the hearing. I would like to offer my statement for the 
record. It is very lengthy, but frankly I have talked so much 
this week I am tired of hearing myself talk so I will pass.
    Mr. Barton. The audience appreciates that, I am sure.
    Does the gentleman from Illinois, Mr. Shimkus, wish an 
opening statement?
    Mr. Shimkus. Thank you, Mr. Chairman. Thank you for holding 
this hearing. I just look forward to hearing today how the 
regional transmission organizations, expanded NAERC authority, 
and additional FERC authority will help address price spikes. 
Of course, Illinois experienced those last year. I think it 
would be a good day to get some questions answered. So I want 
to welcome Chairman Hoecker, and I look forward to the 
testimony.
    Mr. Barton. Being no other members present--oh, I am sorry. 
I didn't see Mr. Wynn. I apologize.
    Mr. Shimkus. He is small.
    Mr. Barton. I recognize the distinguished gentleman from 
the great State of Maryland, Mr. Wynn, for an opening 
statement.
    Mr. Wynn. Thank you, Mr. Chairman. I will be brief. Let me 
also applaud you for holding these hearings and continuing this 
process of moving this forward.
    I am particularly interested in today's hearing because I 
think it hits on an area where we may in fact have a 
significant Federal role. We are looking at a system that was 
designed around a regional concept of transmission. We are now 
entering an era in which we will be looking at a very different 
interstate, a national interstate system, larger amounts of 
electricity traveling longer distances. And I think that will 
pose new challenges in the area of reliability. I am very 
excited to hear the witnesses and would like to submit a full 
statement at a later time.
    Mr. Barton. I want to apologize to Congressman Wynn. I 
recognized two Republican Congressmen who came in after you. I 
sincerely didn't see you. I apologize.
    Mr. Wynn. No problem.
    Mr. Barton. The Chair, taking a very careful look around 
the room, I see no other members present. All members that are 
not present will have the requisite number of days to put a 
written statement in the record. All members present who wish 
to elaborate on their statements will do so without objection.
    [Additional statement received for the record follows:
Prepared Statement of Hon. Cliff Stearns, a Representative in Congress 
                       from the State of Florida
    Thank you Mr. Chairman. As always is the case, I commend you for 
the decision to hold a hearing on this subject, and for your diligent 
work on the broader topic of energy-related matters. Today's hearing is 
timely considering the current State and Federal efforts toward 
restructuring.
    At the heart of the Federal debate are the issues of transmission 
and reliability. They are the cornerstone of the electric utility 
industry. Put simply, Americans expect power to reach their homes and 
turn on the lights each and every time they flip a switch.
    In developing a Federal approach to competition, we have an 
obligation to consider the merits of competition and its effect on the 
reliability of the system. The current scheme is remarkable. System 
reliability is achieved by a dynamic and intricately crafted framework. 
The organization chiefly responsible for this transmission framework 
and the reliability of bulk electric systems in the US is the North 
American Electric Reliability Council, or NERC.
    The best and most important features of the NERC is that it was 
developed by the utilities, not by the government, and that it depends 
entirely upon itself for guidance and regulation. But there is a 
drawback in that NERC does not enforce compliance with reliability 
standards because it lacks enforcement power. Additionally, FERC is not 
authorized to enforce reliability standards.
    Given increasing competition in the electricity industry, some 
propose that we establish a new self-regulating reliability 
organization subject to FERC certification and oversight that would 
develop enforceable reliable standards. A number of legislative 
proposals provide for enforcement of reliability standards by a FERC-
certified self-regulating organization.
    Another key issue in this discussion will surely be the fact that 
the transmission system is not subject to the same set of rules. FERC 
is only authorized to regulate the transmission systems owned by 
investor-owned utilities. FERC does not regulate the other 34% of the 
transmission system owned by the Federal electric utilities, State and 
municipal utilities, and rural electric cooperatives. Additionally, 
distributive generation technology presents the question of how to 
interconnect this dispersed generation with the traditional 
distribution grid.
    Many believe that a competitive market would better operate if the 
transmission market were fully open and subject to one set of rules. 
This would require legislation to amend the Federal Power Act and other 
laws.
    Transmission owners are collaborating to create regional 
transmission organizations, or RTO's to manage and operate the 
transmission grid and provide nondiscriminatory access to the grid. 
RTO's are proposed as one response to address concerns that internal 
practices and procedures would be inadequate to prevent manipulation of 
transmission systems to limit competition in generation. FERC is 
expected to issue a notice of rulemaking on RTO's in the near future. 
This may provide guidance, however some fear that FERC may exceed its 
authority under current law in the rule.
    Clearly a consensus is developing that the transmission and 
reliability are foremost in the list of issues Congress must deal with 
in formulating a Federal deregulation strategy. I anticipate a fruitful 
and enlightened debate today, I welcome our panels and I look forward 
to their testimony. Again, I commend the Chairman of the Subcommittee 
for his work on this issue.

    Mr. Barton. The Chair would now like to recognize our first 
witness, the distinguished Chairman of the Federal Energy 
Regulatory Commission, The Honorable James Hoecker, and your 
statement is in the record in its entirety. We will recognize 
you for such time as you may consume.
    We will just simply say as a personal aside that it has 
been a pleasure to share the dais of several events with you in 
the last 3 months, and I am sure we are going to continue to do 
so in a very cooperative and congenial way. The floor is yours.

 STATEMENT OF HON. JAMES J. HOECKER, CHAIRMAN, FEDERAL ENERGY 
                     REGULATORY COMMISSION

    Mr. Hoecker. Thank you, Mr. Chairman, and members of the 
subcommittee. It is a pleasure to be here today to discuss the 
current restructuring of the electric power industry. I, too, 
commend you, Mr. Chairman, and members of the subcommittee for 
focusing on this critical development involving the Nation's 
most capital-intensive industry.
    As you requested of me, I plan to testify this morning on 
matters related directly to electrical reliability and 
transmission issues. Of course, these are precisely the issues 
that concern the Commission most in its continuing effort to 
promote competitive bulk power markets, and you certainly have 
my commitment, Mr. Chairman, that the Commission will support 
this subcommittee's investigation of these issues in any way 
you think is appropriate.
    Competition is growing in wholesale power markets in 
response to the Energy Policy Act of 1992, technological and 
business developments and the Commission's effort to remove 
barriers to competition and let markets, not just regulators, 
determine the price of wholesale power.
    Wholesale competition will provide substantial benefits to 
industry and to consumers. Among other things, it offers the 
prospect of reduced prices for end users, even where retail 
choice is not available, by lowering the cost of power 
purchased for them by utility suppliers.
    But getting to competitive markets is a journey that is not 
without its complications, however. The Commission's Order No. 
888, which in 1996 made open nondiscriminatory transmission 
access an important feature of the bulk power market, did not 
solve all problems. Significant impediments to full competition 
in wholesale markets remain. Even for utilities already subject 
to the requirements of Order No. 888, there remain substantial 
concerns about the use of transmission to deny access to 
competing sellers of power. Moreover, substantial gaps remain 
in the availability of open access transmission service 
nationwide.
    Approximately one-third of the Nation's integrated 
transmission grid is, with limited exception, not subject to 
the Federal Power Act or to the Commission's open access 
requirements. These gaps reduce the trading opportunities and 
prevent customers from realizing the full benefits of 
competition. And although the laws of physics and the growing 
number of bulk power transactions mean that wholesale markets 
tend to operate across States and regions, management of the 
transmission system which supports this trade is not regional 
in most parts of the country. So competition and efficiency 
benefits are consequently being lost.
    Ironically, Mr. Chairman, even the arrival of competition 
itself, for all its promise, creates some new problems. Because 
there are many more bulk power transactions and because 
transmission facilities are increasingly used in ways not 
contemplated when they were planned and built, the need for 
better congestion management and more efficient pricing and 
regional planning is likewise increasing.
    But, most importantly, reliability of electric service, so 
vital to the Nation's economy and the welfare of individual 
citizens, may be challenged in significant ways.
    Assigning responsibility for maintaining transmission 
system reliability is more problematic in a dynamic environment 
where market participants have competing or conflicting 
commercial interests in how the grid is to be operated.
    Well, what are the solutions? In my view, it would be a 
mistake to resurrect Federal command