Communications to Policy Makers

October 10, 2001

Testimony on behalf of The Large Public Power Council before the Subcommittee on Energy and Air Quality House Energy and Commerce Committee

Robert R. Nordhaus
Van Ness Feldman, PC

My name is Robert R. Nordhaus and I appear today on behalf of the Large Public Power Council (LPPC). I am a member of the law firm of Van Ness Feldman, PC, and serve as outside counsel to LPPC. The LPPC is an association of 22 of the largest public power systems in the United States. LPPC member systems directly or indirectly provide reliable, affordably-priced electricity to approximately 18 million customers and we own and operate over 44,000 megawatts of generation and approximately 26,000 circuit miles of transmission lines. LPPC members are located in states and territories representing every region of the country, including several states represented by members of this Committee - such as Tennessee, Texas, California, New York, and Arizona.

LPPC members are publicly-owned, service-focused and committed to the local residents and communities they serve. The benefits of their reliable and cost-effective provision of generation, transmission, and distribution service flow directly to their customers and communities.

Mr. Chairman and members of the Subcommittee, the LPPC appreciates your efforts to develop comprehensive electricity legislation. The LPPC supports the enactment of comprehensive legislation that promotes a competitive, efficient wholesale power market of benefit to all consumers. The LPPC believes that a robust wholesale market should be encouraged and supports efforts to increase competition so long as low-cost, reliable service is ensured for consumers. 

The LPPC also appreciates the efforts this Subcommittee has made to advance the debate on how to achieve a competitive market that benefits consumers. The Large Public Power Council offers its continued assistance in crafting legislation to facilitate competitive markets. The LPPC has reviewed the Discussion Draft dated September 21, 2001, issued by Chairman Barton, and while we will not comment extensively on this draft, my testimony and that of Bob Johnston later today will highlight several of LPPC's specific concerns. We understand that this is a discussion draft and that it is intended to foster significant discussion among the affected parties and the Committee members. The LPPC would like to continue to participate in this dialogue.

I would like to comment on the issues that are the focus of the Committee's attention today. 

Incentive Rates

The LPPC supports the continued establishment of transmission rates according to well-established, cost-based rate principles. Allowed rates of return should be sufficient, as determined under conventional approaches, to compensate transmission owners for the risk and costs caused by increased use of the existing transmission facilities and reasonable costs to attract capital for the new transmission construction. However, the costs related more appropriately to the generation or distribution businesses of the transmission owner should not be included. Given the substantial uncertainties accompanying the restructuring of transmission ownership and operation, as well as the nature of the business going forward, it may be premature to depart from cost-based ratemaking principles in establishing transmission rates.

We do not support the concept of market-based rates for transmission service. Except for isolated circumstances involving the construction of merchant transmission facilities, there is no evidence of competition among transmission providers for wholesale or retail customer business. Only a tiny minority of wholesale or retail customers enjoy physical interconnections with more than one transmission provider. Under current circumstances, there is no competitive market pressure to limit transmission rates; thus there is no economic justification for implementing market-based transmission rates.

The LPPC believes that the establishment of transmission rates through negotiations between transmission providers and customers should be permitted only when the customer has either or both of two demonstrated alternatives: the ability economically to continue to conduct business without the proposed transmission service or the availability of the transmission provider's cost-based default tariff (similar to the "recourse rate" in natural gas regulation). The use of negotiated rates may also be appropriate when lining up customers for a new merchant or project-financed transmission facility.

Finally, the LPPC is willing to consider the appropriateness of a performance-based or other form of incentive rate for transmission service. We believe that the building of new transmission should be encouraged and believe that properly structured incentive rates might be able to encourage such investment. However, any incentives must be tied to acceptable and demonstrable benchmarks of performance. An acceptable proposal could provide for a "split the savings" formula under which the transmission provider would be permitted to retain a percentage of demonstrated savings achieved through improved efficiency of operation (as compared to an accepted baseline cost of service) or through construction of new facilities that relieve congestion and lower transmission users' congestion costs. The form of incentives or savings must not disadvantage or discriminate among different types of wholesale energy customers or transactions. In addition, we believe that such proposals should be made only in the context of a filing by an RTO or subsidiary organization encompassing more than one transmission provider's system, (e.g., an independent transmission company).

Section 401 of the Discussion Draft directs FERC to conduct a rulemaking to establish incentive rate policies, designed to promote expansion of and improvements in the transmission network. The LPPC urges a more narrow application than is contemplated by the Discussion Draft. For example, while we could support higher rates of return for critical new transmission investment, we would not support a general increase in rates of return for sunk investments that is unrelated to changes in market interest rates or equity returns.

Siting Issues

A thorough review of the various processes that serve as a barrier to constructing new power generation and to the more efficient use of existing power generation should be undertaken. There are multiple, sometimes duplicative permitting requirements for new generation facilities. In addition, various regulatory requirements make construction of new facilities time-consuming, costly, and unpredictable. Recognizing the need for a more efficient and transparent permitting system, the LPPC would encourage a review of the permitting requirements for new and existing generation and, where possible, require that the processes be streamlined, conducted in parallel and expedited to the maximum degree feasible. The LPPC supports the creation of an inter-agency process among the Environmental Protection Agency, the Department of Interior, FERC, and the Nuclear Regulatory Commission that would streamline the current requirements.

Coordination of federal approvals on the multiple permits would reduce time-lines, uncertainty, and costs for companies constructing or modifying generation facilities. Given the importance of getting power on line, this issue can make a real contribution to a comprehensive energy strategy.

The difficulty in constructing new transmission facilities and upgrading existing facilities on a timely basis is one of the key obstacles to assuring the delivery of low-cost, reliable electric power to consumers. Prompt federal and state action is necessary to enable transmission providers to install new facilities and upgrades where needed. The LPPC supports giving FERC carefully circumscribed authority to provide transmission-owning RTOs or ISOs the right of eminent domain if they demonstrate that the installation of transmission facilities is required to ensure adequate and reliable service. Owners of transmission facilities under operational control of an RTO or ISO would be given similar authority. Section 402 of the Discussion Draft provides federal eminent domain authority to an applicant seeking to construct or modify transmission facilities. As currently drafted, there is no requirement that the transmission facility be part of a regional planning process or approved by an RTO or ISO, or that it be necessary to enhance or improve reliability or economy of service. The LPPC would urge that this provision be revised to provide the eminent domain authority to the RTO (or to transmission owners whose facilities are operated by an RTO) and that the role of the state and local governments be given greater weight. One possibility would be to limit exercise of this authority to circumstances where adequacy of interstate service is at issue.

The LPPC also supports the development and use of mechanisms -- such as interstate transmission siting agencies or joint boards (comprised of members of federal and state regulatory agencies) -- that encourage the coordination of federal and state environmental permitting and certification activities.

Reliability

As the recent crisis in the West has demonstrated, great care must be taken to ensure the continued and reliable supply of electricity as the industry is restructured. The LPPC supports mandatory reliability criteria and standards developed by national or regional reliability organizations overseen by FERC. We supported the NERC reliability consensus legislation last Congress. Although it appears that the consensus has evaporated at this time, we remain committed to supporting the general concepts contained in that legislation. The LPPC believes that there is a need to clarify FERC authority over reliability, that there should be binding electric reliability standards, and that there should be a clear mechanism to enforce these reliability standards.

The LPPC believes that regional modeling should be done to assess the impacts of the creation and development of RTOs on the transmission grid. As the transmission grid is regionalized, an evaluation of the lessons learned should be done so that reliability is ensured and the potential benefits are maximized.

We believe that any legislative proposal should make it clear that compliance with reliability organization rules or standards does not subject entities to the jurisdiction of FERC for purposes other than to ensure reliability. Also, reliability standards need to be supported by long-term contracts that will ensure the availability of operating reserves.

Conclusion

As the Subcommittee continues to move forward with electricity legislation, the LPPC offers our continued assistance. We look forward to helping you to develop comprehensive electricity legislation that addresses our concerns, garners wide support and can ultimately be enacted. I will be happy to answer any questions you have.

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