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

Bob Johnston
President & CEO, MEAG Power

My name is Bob Johnston and I am the President and Chief Executive Officer of MEAG Power, located in Atlanta, Georgia. I am testifying today on behalf of the Large Public Power Council (LPPC). The LPPC is an association of 22 of the largest public power systems in the United States. LPPC members 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 — and include several state public power agencies as well.

The majority of LPPC members perform the same functions as traditional vertically-integrated utilities. However, LPPC members are publicly-owned, not investor-owned. As a result, LPPC member systems are not profit seeking entities. We are, instead, service-focused and committed to the residents and communities we serve. Therefore, the benefits resulting from the reliable and cost-effective provision of generation, transmission, and distribution service flow directly to public power 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 has long taken an active and progressive role in supporting the development of a competitive electricity market. The LPPC was the first group of transmission owning utilities to express support for open transmission access in the debates preceding the Energy Policy Act of 1992. More recently, we have led the way in developing and promoting regional transmission entities as a mechanism to manage and operate the transmission system in an open access environment and were one of the first organizations to promote the formation and implementation of Regional Transmission Groups.

The LPPC supports competitive wholesale power markets and open access, non-discriminatory transmission service. Public power systems are oftentimes net buyers in the market and greater access to competitive wholesale power markets will benefit our customers and communities. Public power also sells any excess power, when available, in the wholesale market. However, our systems are built specifically to serve our native load customers. We do not overbuild our systems or speculate on future energy needs.

Our first obligation is to our local customers and communities. Therefore, we support comprehensive energy and electricity legislation that will provide greater access to competitive wholesale power markets, that ensures open access, non-discriminatory transmission service, that improves reliability and increases efficiencies in the management and operation of the transmission grid, and that ensures delivery of services to consumers at the lowest reasonable rates. We oppose any changes in law that would undermine the use of our transmission assets to deliver reasonably-priced power to our retail customers.

We appreciate the efforts this Subcommittee has made to advance the debate on how to achieve benefits for electricity consumers and we would like to offer the Large Public Power Council's continued assistance in crafting legislation. During the debate on these issues in the last Congress, the LPPC provided our input to the Committee and contributed our views to the debate. We appreciate this opportunity to continue our involvement. We have reviewed the Discussion Draft dated September 21, 2001, issued by Chairman Barton, and, while we will not comment extensively on the Discussion Draft, we highlight a few of our specific concerns in this testimony. As noted above, we have been active in this debate for some time and have long supported Chairman Barton in his efforts to enact comprehensive energy legislation. However, we have serious concerns with the Discussion Draft in its present form, particularly with respect to (1) provisions of the draft that subject public power to virtually all of FERC's ratemaking authority and (2) the draft's repeal of FERC's authority to review mergers and asset sales. 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 this dialogue. We must, however, stress again that there are legal constraints - such as private use tax restrictions, bond indenture requirements, and state statutory obligations - that are unique to public power, which must be addressed before full open access can be provided or participation in RTOs can be contemplated. 

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

Transmission Policies and the Legal Constraints on Public Power

The LPPC believes that a competitive energy market should include open access to the transmission grid on a non-discriminatory basis and that the reliability of electric service must be preserved and preferably enhanced, through competition. For a competitive market to be viable, LPPC member systems must be able to continue to meet the needs of our customers and must be able to provide a reliable and cost-effective delivery system. We must be able to serve our native load at the lowest reasonable cost while meeting reliability standards. As locally-owned and operated entities, LPPC members' first obligation is to the communities that we serve. Our commitment to these communities is to continue to provide reliable and reasonably priced electric power.

It is important to emphasize that two things make us different than others in the electric industry. We are governed and supervised locally - and our performance directly affects our ratepayers rather than shareholders. We are therefore very protective of our ratepayers and our public policy positions tend to emphasize consumers rather than institutions. As a result, we believe that any transmission policy must recognize these obligations and allow us to continue to serve our native load.

In addition, since public power systems have retained the legal responsibility to meet the energy needs of their native load customers, they must maintain and retain resources to ensure the capability to supply such energy. Sufficient generation assets and assured transmission access are required to assure that the energy needs of customer-owners are met in a reliable and cost effective manner. State and local laws place requirements on public power systems that must be addressed. For example, my utility, MEAG Power, has an obligation under our state statute to serve our customers. Unlike an energy marketer who wants firm transmission rights to support a sales contract, we must preserve the capacity to supply our customers due to an obligation to serve imposed by state law. 

In order to create fully open access transmission, federal legislation must resolve the "private use" tax issue and should recognize the distinct nature of public power and its contribution to the electricity industry. The LPPC has testified extensively on this issue, both before this Committee and the House Ways and Means Committee. Without resolution of current tax restrictions relating to private use, restrictions on tax-exempt bonds (1) will prevent public power from fully opening up its transmission and distribution systems for use by investor-owned utilities and marketers, (2) will prevent our full participation in Regional Transmission Organizations (RTOs), and (3) will constrain our ability to make long-term sales of surplus power. Absent adequate reform of private use, one of the key problems - how to move electric power from generation to load - will continue to plague the system, and the objectives of comprehensive legislation, the development of a robust, competitive, and fair market, will not be achieved.

While we appreciate the efforts of the House on this issue and recognize that this Committee does not have direct jurisdiction over this matter, we cannot stress our position on this issue with more conviction. We appreciate the efforts of the subcommittee and the inclusions of our agreement on private use in the Discussion Draft. Earlier this session, the House passed H.R. 4, the Securing America's Future Energy (SAFE) Act. H.R. 4, as passed by the House, addresses private use issues, but contains a number of changes to the private use provisions as introduced in the Hayworth bill [H.R. 1459] that frustrate the aim of opening up and expanding the transmission grid. The Hayworth bill represented a landmark agreement between public power and investor-owned utilities forged at the request of Congress, and all parties believe it strikes an appropriate balance with respect to removing restructuring-related tax impediments. However, the private use provisions in H.R. 4 were modified in significant ways and these changes make H.R. 4's private use provisions unworkable - and in some respects, worse than current law - for public power. The Chairman's Discussion Draft contains the language as included in H.R. 1459 and we ask the Committee's assistance in ensuring that these key private use relief provisions are revised and modified so the original objectives sought by this agreement are achieved.

The LPPC supports proposals to ensure that all market participants have access to the transmission system on a fair and open basis. "FERC-lite," as included in the subcommittee's bill in the last Congress, is part of such an open access policy. It would require public power entities to provide transmission services at rates that are not unduly discriminatory and require non-rate terms and conditions to be comparable to those required of the investor-owned utilities. We believe that open transmission access, including the FERC-lite provision, will encourage a robust and competitive market. However, as noted above, absent adequate private use reform, public power will be unable to provide open access transmission service due to the existing legal constraints. For this reason, our support for the "FERC-lite" concept is predicated on the removal of these legal constraints.

In addition, due to "private use" tax restrictions, our transmission-owning members have sized their transmission systems to supply their own native loads. At this time, we have limited transmission capacity available for other entities. To the extent we have such capacity, we are willing to make it available to all comers on a non-discriminatory basis, as FERC-lite would require. But, a rule that required us to make available to others transmission capacity we need to serve our native load will result in power curtailments or higher prices to our own customers. Any expansion of FERC transmission jurisdiction must respect the interests of the customers for whom the transmission facilities were built.

The LPPC supported Chairman Barton's legislation introduced last Congress. The bill incorporated the "FERC-lite" concept and required large non-jurisdictional transmission providers to provide non-discriminatory open access. However, that bill did not apply to the transmission component of a bundled retail sale, thereby allowing public power transmission owners to continue to serve our native load. Similarly, the Administration in its "Comments on Draft Electricity Restructuring Act of 2001" (Senator Bingaman's Discussion Draft), has recommended that the provision on federal jurisdiction over the transmission component of the retail sale be eliminated from the draft. The LPPC believes that this is appropriate. Some current proposals would expand transmission jurisdiction in a way that would jeopardize the ability of public power systems to serve their own resident, retail customers. The LPPC cannot support extending FERC jurisdiction in this manner as it may interfere with our fundamental obligation to provide reliable power to our ratepayers and owners.

In addition, the LPPC has very serious concerns regarding the provisions contained in Section 702 of the Discussion Draft, which would amend Section 206 of the Federal Power Act. When combined with the amendments in Section 201, the effect is to take the "lite" out of FERC-lite. The "Uniform Refund Authority" provisions would allow FERC to set just and reasonable rates (and order limited refunds) for: (a) public power transmission to jurisdictional public utilities; and (b) public power wholesale sales to jurisdictional public utilities. This would largely negate the limitations on the Commission's ratemaking authority over public power transmission that are an integral part of FERC-lite. The Uniform Refund Authority provision would subject public power wholesale sales and transmission rates to review by FERC when and if such rates are challenged under Section 206. While public power systems would be able to set their own rates in the first instance, these rates could, at any time, be reset by FERC. If so reset, the public power system could then be required to pay retroactive refunds. In our view, the "Uniform Refund Authority" provision, as drafted, cancels out FERC-lite and imposes unworkable, "after-the-fact" rate regulation on public power entities.

RTO Policies Should Respect Unique and Regional Characteristics

As noted earlier, the LPPC strongly believes that the nation's transmission grid should be organized in a manner that first and foremost "does no harm" to existing transmission and related delivery systems that are performing properly and as designed. Any proposed changes should be thoroughly studied to ensure that benefits exceed costs and that unintended consequences are minimized. Necessary and timely upgrades to and expansion of the transmission grid are needed. This will most likely be accomplished if transmission assets are managed through a not-for-profit regional transmission organization (RTO). Under this model, such upgrades would not need to meet the higher rate of return requirements necessary for a for-profit entity. Native load customers of one state should not be forced to bear the cost of massive grid upgrades that are to benefit marketers or customers or another state. The costs of upgrades are more appropriately borne by those who benefit from them.

The LPPC believes that RTOs should be created to foster wholesale competition. RTOs should have an appropriate geographic scope, preferably be not-for-profit, and, in all cases, be fully independent of market participants. While LPPC believes that this type of organization will operate more cost-effectively and will more likely result in the open transmission necessary for a fully functioning market, our members are open to consideration of other types of models. The LPPC opposes granting FERC broad new authority to compel transmitting utilities to join RTOs. Similarly, the Administration in its "Comments on Draft Electricity Restructuring Act of 2001" (Senator Bingaman's Discussion Draft), did not endorse expansion of FERC's authority in this area and recommended that provisions providing FERC with additional authority be deleted. The LPPC does, however, support confirming the authority that FERC asserted in Order 2000 to order jurisdictional utilities into an RTO on a case-by-case basis in order to remedy undue discrimination or anticompetitive conduct.

The LPPC has significant concerns about provisions that mandate public power membership in RTOs. The LPPC believes that an evolutionary - and not revolutionary - approach is needed to ensure the continued delivery of reliable, affordable electricity to consumers. The LPPC does support the voluntary formation of RTOs. Many LPPC member systems are already participating voluntarily in RTOs or ISOs while others are working hard to establish RTOs in their regions. We have long endorsed the basic notion that coordination of transmission can have positive benefits for consumers. However, we understand that every region may have very different needs and problems. As such, we would strongly urge that the formation of RTOs proceed carefully, and without a "one-size-fits-all" approach.

Regional efforts to form RTOs and ISOs underway at this time should be recognized and the efforts made should be built upon. While the LPPC is not necessarily opposed to the concept of four large RTOs currently being advocated by FERC, this should not be the first step. We should not let the perfect be the enemy of the good. Creating RTOs over large geographic areas multiplies the complexities and has the real potential of slowing progress. We believe that the advances made on a smaller scale should be recognized and those efforts continued. It may be possible, at some later time, to build upon these efforts and create larger scale transmission systems. 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.

As our members participate in the development of RTOs and ISOs, our unique constraints have come into play. For example, my company, MEAG Power has participated in the discussions on a southeast RTO - "SeTrans." Since we have an obligation under state statute to serve our native load, our participation in SeTrans was predicated on an ability to preserve the capacity necessary to provide power to these customers. Through negotiations, we believe we will be able to grandfather in our native load obligations and obtain recognition of our pre-existing transmission rights. In addition, under proposed SeTrans policies, we would not be required to curtail our native load unless all other mitigation measures have been attempted. This will allow us to fulfill our obligations to our customers imposed by state law. However, the same solution would not work for all public power entities. Unfortunately, recent actions at FERC may undercut the voluntary efforts underway in many regions, e.g., the SeTrans RTO proposal in the southeast, that are designed to accommodate public power.

In addition, public power systems face difficult issues in participating in RTOs. These must be addressed before a national system of RTOs can be put into place. As noted earlier, private use restrictions present a barrier for participation by public power systems. Furthermore, many public power entities operate under additional legal and operational requirements that affect their ability to participate in the ownership of an RTO or to transfer ownership or operations of their transmission facilities to an RTO. These requirements include provisions in state constitutions, state and local laws, and bond covenants that vary from system to system. For these reasons, the LPPC believes that the voluntary regional efforts undertaken by the industry should be used and built upon, since through these negotiations efforts have been made to accommodate the unique characteristics and legal requirements of public power. 

The legal restrictions on public power and its participation in RTOs varies from state to state. Some states, such as Georgia, restrict the use of public funds while others limit the ability of public entities to associate with for-profit entities. Still other states specifically authorize public power entities to join with other public entities in the ownership and operation of electric transmission facilities. Attached to my testimony is a matrix that highlights some of the state and local requirements applicable to LPPC member systems which might affect their ability to participate in an RTO. What this illustrates is that a one-size-fits-all approach cannot feasibly address the myriad of issues that confront public power and its participation in RTOs.

CONCLUSION

As the Subcommittee continues to move forward with electricity legislation, the LPPC offers our continued assistance. We would be happy to work with the Subcommittee and its staff to properly tailor FERC transmission jurisdiction to the unique structures and responsibilities of public power systems, ensure market power and merger protections for consumers, and retain the appropriate level of flexibility for FERC as it approves new RTOs. However, I must again stress that any comprehensive electricity legislation must meaningful private use relief — either in the same bill or in companion legislation from the tax committee — in order to be workable.

We look forward to working with the Committee 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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