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Congressional Testimony
December 13, 2001 Testimony
on Behalf of The Large Public Power Council Bob Johnston 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), an association of 24 of the largest public power systems in the United States. LPPC members directly or indirectly provide reliable, affordably-priced electricity to most of the 40 million customers served by public power. 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 Subcommittee - such as Georgia, Tennessee, Texas, California, New York, and Arizona - and include several state public power agencies as well. Mr. Chairman and members of the Subcommittee, the LPPC appreciates your efforts to develop comprehensive electricity legislation. The LPPC has long taken an active and progressive role in supporting the development of a competitive, efficient wholesale power market of benefit to all consumers. 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 this process. 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. This session, we have testified before the Subcommittee on three other occasions and have worked with members and their staff in a cooperative fashion. We appreciate the opportunity to continue our involvement. We appreciate the support the Chairman has provided for our agreement on private use. In addition, on behalf of our members from the Tennessee Valley, I want to make sure I thank the Chairman and the Subcommittee for including the consensus language in your bill. However, we have serious concerns other provisions with H.R. 3406, particularly with respect to (1) mandating the participation of public power in regional transmission organizations (RTOs), (2) subjecting public power to virtually all of FERC's ratemaking authority through the uniform refund authority provision and (3) the repeal of FERC's authority to review mergers and asset sales. I would now like to comment more fully on the issues that are the focus of the Subcommittee's attention today. Public Power Systems are Unique What does it mean to be a public power system? Public power systems are owned by the communities we serve, not by investors. We are not-for-profit entities, which makes us different. Public power systems exist for a variety of reasons and were often created in response to specific concerns. Public power systems first appeared in the United States in the late 1800s and many were created as a part of the city government. In fact, many LPPC member systems continue to provide additional services to their communities, such as flood control and natural gas, water and wastewater services. Initially, electric service was used for public services, such as street lights, and was not generally available to residential customers. However, this changed rapidly and electricity became the essential service it is today. Electricity is a vital component of our lives now and, as was demonstrated in California last summer, a cornerstone of the economy. Consumers' confidence is shaken and there are dire consequences if electricity is not reliable and affordable. LPPC members are generally obligated to serve their native load customers by state law and, as a result, all available resources go first to serving those customers. Power is sold and surplus transmission made available only if it is surplus to those needs. Our rates reflect the fact that we are not-for-profit entities. Our rates include only the costs of producing and delivering power to our customers and, in some cases, payments to our governing boards or municipal entities as a component of the local budget. Investor-owned utility rates are set to include profits paid to shareholders. Since public power systems are locally controlled, decisions about policies such as rates are made by people who are in touch with local concerns. The city council sets policies for many LPPC members, while other public power systems have a separately elected or appointed utility board that governs their policies. Local control helps ensure that we respond to community needs. In addition, since public power systems are community based, our revenues stay close to home. This helps keep the local economy strong. Moreover, the policies of public power systems are often designed to promote business participation and investment in the community. My company, MEAG Power, was created by act of the Georgia General Assembly in 1975. Now one of the nation's largest joint action agencies and doing business as MEAG Power, the organization is the all-requirements wholesale electricity provider to 48 Georgia municipalities. These cities formed MEAG Power and issued over $4 billion in municipal bonds for the purchase of generation and transmission facilities in order to ensure reliable, economical electric service. Another LPPC member system, the South Carolina Public Service Authority ("Santee Cooper") was established by the South Carolina legislature in 1934 "for the benefit of all the people of South Carolina and for the improvements of their health, welfare and material prosperity." Specifically, it was chartered because the state needed to build a dam on the Santee River, for flood and malaria control as well as electricity production. However, since the state lacked funds, the federal government provided financial assistance. The federal government required that the recipient of the funds be a state agency in charge of the project - and so, Santee Cooper was created. Since that time, Santee Cooper has functioned as an independent state agency, providing reliable electric services to the citizens of South Carolina at rates which are lower than those of other utilities in South Carolina and lower than the national average. Public power systems have been created, in some instances, to resolve specific problems and address local concerns, filling a role that an investor-owned utility could not. For example, the Long Island Power Authority (LIPA) was established in 1986 by the state legislature to resolve a controversy over the Shoreham Nuclear Power Plant (Shoreham) and to achieve lower utility rates on Long Island. Created as a corporate municipal instrumentality of the State of New York, LIPA was authorized under its enabling statute to acquire all or any part of the securities or assets of the Long Island Lighting Company (LILCO) on a negotiated or unilateral basis and to issue lower cost, tax-exempt debt to finance the acquisition. LIPA was able to resolve the issues relating to the Shoreham facility and acquire LILCO's assets, as well as delivering significant rate reductions. Public power is different from investor owned or cooperative utilities. We have a unique mandate and unique operating conditions, as well as some statutory constraints. These must be accommodated in regulation and legislation before public power can join in the effort to achieve consumer benefits through competition. LPPC Believes That The Imposition of Mandatory RTO Membership Contained in H.R. 3406 is Unnecessary The LPPC opposes the concept of an RTO mandate for public power. Title II, section 202, of H.R. 3406 would provide the Federal Energy Regulatory Commission (FERC) with the authority to order all "transmitting utilities" to join an RTO. As you know, public power entities are not public jurisdictional utilities under the Federal Power Act. Congress established this jurisdictional line for good reason. In contrast to investor-owned utilities that seek to return profits to their shareholders, public power is an arm of municipal or state government, is subject to their oversight, has no shareholders, and is unambiguously devoted to serving its customers. This remains true today and, as a result, public power systems must answer to state and local governments for our actions. In addition, LPPC members have unique constraints on our ability to join RTOs. Providing FERC with the authority to order public power systems into RTOs is unnecessary. Such an extension of FERC jurisdiction is also unwarranted. The vast majority of LPPC members are active participants in existing ISOs or in developing RTOs in their region of the country, as shown in the chart attached to my testimony. For example, our New York members, the New York Power Authority and the Long Island Power Authority, have been active participants in the New York ISO and are working to integrate that system into a larger Northeast RTO. Three large public power systems in the Southeast, MEAG Power, Santee Cooper, and Jacksonville Electric Authority, are participating in the discussions to create SeTrans in the Southeast RTO mediation. A number of public power entities have announced that they will participate in the development of transcos - specifically, the Salt River Project is participating in the development of WestConnect while Nebraska Public Power District and Omaha Public Power District will both join TransLink. LPPC members typically do not own keystone transmission assets that put them at the center of RTO development. However, public power wants to participate if it is not contrary to its customers' interests and the requirements of state and local law. LPPC member systems are actively participating in the formation of RTOs. 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 we are able to participate fully in RTOs. If this legislation is enacted as drafted, public power systems will be mandated into RTOs without the flexibility to work through the constraints unique to public power and without the leverage we have in voluntary negotiations. FERC has required that transmission-owning investor owned utilities join RTOs. We accept and, in some cases, welcome the establishment of RTOs to support competition and we want to achieve all possible benefits for our customers. LPPC members, however, lack the size and scope to create our own RTOs. As a result, we must negotiate the terms of participation with investor-owned utilities so that our unique constraints are accommodated. For example, my company, MEAG Power, has participated in the discussions on a Southeast RTO - "SeTrans" - with other public power systems and investor-owned utilities. MEAG Power has an obligation under state statute to serve our native load and, therefore, 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. 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, actions at FERC or in legislation may undercut the voluntary efforts underway in many regions, e.g., the SeTrans RTO proposal in the Southeast, that have accommodated public power. In a similar manner, two of LPPC's Midwest members, Nebraska Public Power District (NPPD) and Omaha Public Power District (OPPD), will join TransLink, an independent transmission company that will own and operate transmission facilities. Participants include both investor-owned utilities and public power systems. The members can either sell their assets to TransLink or lease them, in which case they will sign an operating agreement with the transco. NPPD will continue to own its own transmission - under state law, ownership by others is not permitted. NPPD also retains functional responsibility vis-à-vis its native load, another requirement imposed by state law. In addition, NPPD can override operating directions from the transco in the case of a public emergency. However, were the participation of public power mandated, as provided for in H.R. 3406, these examples of transcos and RTOs would not have been created. In the Southeast, for example, the FERC administrative law judge recently expressed a preference for another model, GridSouth. If MEAG Power and other public power systems were under a mandatory obligation to join this RTO, we would be in violation of our state laws. GridSouth requires all participants to sign a uniform agreement for operation of the assets, or else the participant must divest itself of the assets. At least one of the public power participants in SeTrans, Santee Cooper, would be precluded from joining GridSouth due to the absence of the flexibility present in the SeTrans model. Under South Carolina law, Santee Cooper is only authorized to sell "surplus" property and must maintain assets sufficient to serve its local customers. In order to joining GridSouth, Santee Cooper would either sign the uniform agreement which makes no accommodation for private use restrictions or state law constraints or it would have to divest its transmission assets. If participation in GridSouth was mandated, Santee Cooper would be in the untenable position of violating state law and operating contrary to its organic statute. This raises significant legal issues, whose resolution could add years to the process of RTO formation. However, the SeTrans model does not require that ownership of the transmission assets transfer to the RTO and allows contracts to be negotiated on a company-by-company basis, thereby allowing for the resolution of the unique challenges of public power in this region. Simply put, 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 ensure 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 not present for investor-owned utilities. Unlike an energy marketer who wants firm transmission rights to support a sales contract, we must preserve adequate capacity to supply our customers due to an obligation to serve imposed by state law. Finally, many of our members are concerned that RTO participation could lead to increased transmission costs and unexpected operating costs which would compromise our low-cost service to our customers. Provisions in H.R. 3406 ask for cost-benefit analyses to justify RTO proposals. We agree. Independent, detailed, cost-benefit analysis must be done to assure participants of predictable costs and performance which can be part of a proposed RTO. The New York ISO originally estimated that its annual operating costs would be $40 million. However, those costs are currently $100 million (five times the annual operating budget of its predecessor the New York Power Pool) and increasing. This results in significant charges to the members of the ISO and, ultimately, may result in a significant rate increase for their consumers. Public power would like to capture the benefits of competition for our customers, but we need to make assurances to our governing entities that consumers will not bear an inordinate cost burden. The LPPC believes that good cost-benefit analyses are necessary to assess the impacts of RTOs on the local or regional market and on the customer. The costs associated with the creation of an RTO or ISO are significant - the New York ISO incurred startup capital costs of $60 million and approximately $80 million was spent on GridSouth before the negotiations were abandoned. We want quantifiable benefits for our customers. We are concerned about startup and operating costs of the RTO or ISO. Without independent, detailed, quantitative cost-benefit analysis, we will have tremendous difficulty in assuring our governing bodies that these structures benefit our customers. Our ultimate objective as public power is to ensure reliable electric service at reasonable rates. Therefore, we urge the Chairman make certain that the benefits of RTOs and ISOs are quantifiable and will exceed the significant costs associated with their development, startup and operation. We believe that mandating participation in RTOs by public power is unnecessary. The LPPC believes that this provision should be deleted from H.R. 3406. As noted above and in previous testimony, public power has constraints that limit our ability to fully participate in RTOs. Without resolution of the private use issues, accommodation of state and local statutory constraints, and preservation of our obligation to serve our native load, LPPC members cannot participate in RTOs. We have generally been able to address our concerns through negotiation and compromise on an individual basis and continue to believe that this is the optimal means for achieving the objective of a functioning, successful RTO. FERC-lite Issues FERC-lite and Private Use In the past, the LPPC has supported proposals to ensure that all market participants have access to the transmission system on a fair and open basis. "FERC-lite," as contained in Section 201, is 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. 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. We would ask that the bill include a provision recognizing this constraint and condition adoption of the requirements of FERC-lite on public power on the resolution of private use issues. While we recognize that this Subcommittee does not have direct jurisdiction over the private use issue, we appreciate the Subcommittee Chair's support of the industry consensus tax agreement that was introduced as H.R. 1459 by Congressman Hayworth. 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 of H.R. 1459 that frustrate the aim of opening up and expanding the transmission grid. The Hayworth bill represented a landmark consensus 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. We ask the Subcommittee'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. We also ask that H.R. 3406 include language recognizing this constraint on public power and limiting our obligations until this issue is resolved. Uniform Refund Authority Cancels out FERC-lite The LPPC has very serious concerns regarding the provisions contained in Section 702 of H.R. 3406, which would amend Section 206 of the Federal Power Act. 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 Section 201 of the bill, known as FERC-lite. The Uniform Refund Authority provision would subject public power wholesale sales and transmission rates to review by FERC on FERC's own motion or whenever 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. FERC-lite was designed to ensure that public power entities and cooperatives provide open access transmission services on non-rate terms and conditions that are comparable to those required of investor-owned utilities. However, while it required transmission rates to be non-discriminatory, it did not authorize FERC to set just and reasonable transmission rates for such entities. But, because Uniform Refund Authority authorizes FERC to set just and reasonable rates for any public power transmission to a jurisdictional utility, the FERC-lite limitations on FERC ratemaking are cancelled out. Section 702 should be deleted. Uniform refund authority also applies to public power wholesale sales to jurisdictional public utilities. We believe that giving FERC this new authority is unnecessary and likely to discourage sellers from participating in the market. The uniform refund authority provision is backwards - rather than telling market participants what the market rules are ahead of time, it allows FERC to start up a regulatory proceeding, decide what the market rules are, and then apply them retroactively and require refunds for up to 15 months. This is no way to regulate. These provisions also pose significant practical problems for many LPPC members. As not-for-profit entities, most LPPC members do not retain surplus revenues at the end of the fiscal year. For instance, MEAG Power operates on a one-year accounting system. Each year, any surplus revenues realized during the course of the year are redistributed and returned to our customers. Other LPPC members may return the surplus to their cities. What this means is that each year MEAG Power zeros out our books. As a result, were we required to issue a refund fifteen months after the fact, we would not have the "profits" to do so and would be required to either raise our rates or levy an assessment against our customers to obtain the funds. The discussion draft would repeal the Public Utility Holding Company Act (PUHCA). It would also repeal FERC's current authority to review investor-owned utility mergers and asset sales. If PUHCA is repealed, FERC's merger authority under section 203 of the Federal Power Act should be strengthened, not eliminated. FERC must be provided with adequate tools to review mergers, including holding-company-to-holding-company mergers, and to prevent abuses of market power. The LPPC believes, at a minimum, that the draft should be revised to give FERC clear authority over holding company-to-holding company mergers and over generation-only transactions. 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 Subcommittee on 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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