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LEGISUTION TO AMEND THE PUBUC UHLriT 
HOLDING COMPANY ACT OF 1935 



HEARING 

nsroiiKTUR 

SUBCOMMITTEE ON SEOUKITIRS 

COiMTTEE ON 

RANKING. HOUSING, AM) UEBAN AEFAIRS 

UNITED STATES SENATE 

ONE HUNDRED SECOND CONGRESS 

nnsTSSssiois 

ON 

(yOW win Tiir -f-r.i.;i ATlnv *ri.-c.T TUt iv.n nwtr.;.": n\--\\-: qi 

I RATES ■ ■ ' :ir 

TO C(J^t. ■ ■ ■ : o 

TBC7T' OtJNyLlMKKt; AND HHAKiiilOLLltlii.S K.Kmi \bM:-.l'> >M) i/UN- 
FLICTS OF fNTHRESrr 



SEPTEMBER 17, lOttl 



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i 



S. Hra. 102-S62 

LEGISLATION TO AMEND THE PUBUC inUTTY 
HOLDING COMPANY ACT OF 1935 



HEARING 

BirOSETHK 

SUBCOMMITTEB ON SECUKITIES 

OFTHB 

COMMITTEE ON 

BAMING, HOUSING, AND UEBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED SECOND CONGRESS 

FIRST SESSION 

ON 

HOW WnX THE LEGISLATION AFFECT THE FOLLOWING ITEMS: [1] 
RATES CONSUMERS PAY FOR ELECTRICITY? [2] COMPEmnON IN THE 
POWER INDUSTRY? [S] THE NATIONS ENERGY SUPPLY FOR DECADES 
TO COME? AND [4] FEDERAL AND STATE LAWS DESIGNED TO PRO- 
TECT CONSUMERS AND SHAREHOLDERS FROM ABUSES AND CON- 
FLICTS OF INTEREST? 



Printed for the uee of the Committee on Banking, Housing, and Urban Affairs 



31 T % 

""9E 53-005-00 . 

For ale by Ac U.S. GDvemment Printing OfTice 
DfDncumentg.CongmuonilSHleBOfiux.Washuiglon. DC 20402 
ISBN 0-1 6-037*7t-X 



■,:...dbv Google 



COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

DONALD W. RIEaL£, Ja., Michi gan, Ouunnaa 
ALAN OlANSTON, Califanil* JAKE GASN, Utah 

PAUL S. SARBANES. Hurlaiid ALFONSE tL D'AHATO. Naw Ycrt 

CHRISTOPHER J. DODD, dmnacticut PHIL GRAMM, Teua 

ALAN J. DIXOK, Illinois CHRISTOPHra S. BOND, MiMouri 

JIH SASSER, T«nn«MM CONNIE BUCK, Florida 

TERRY SANPGRD. North Candina WILLIAM V. ROTH, Ja., Delawan 

RICHARD C. SHELBY. Alabama PETE V. DOHENICI, New Hexioo 

BOB GRAHAM, Florida NANCY LANDON KA8SEBAUM, Kau 

TIMOTHY E. WntTH, Colorado JOHN H. CHAFEE. Rhode bland 

JOHN F. KERRY, BfMMcbuMtta 
RICHARD H. BRYAN. Nevada 

SnviN B. HAaan, Su^ Dirtctor and Chief Caaatil 
Laiui Swth, Sepubliean Staff Director and BeeaomitI 



SuacbtOBrTEm on SBCUKims 
CHRISTOPHER J. DODD, CoDnecticut, Chairman 
RICHARD C. SHELBY. Alabama PHIL GRAMM, Teiaa 

TIMOTHY E. WntTH, Colorado WIUJAM V. ROTH, Ja, Delaware 

ALAN CRANSTON. CUiforina ALFONSE H. CAMATO, Now Yoit 

JIM SASSER, TenneaaBe CHRISTOPHER S. BOND, Hiaouri 

TERRY SANFORD. North Carolina CONNIE MACK, Florida 

Maztha L Cochbam, Staff Direclar and Chitf Counttl 
Michael J, SrctN, Financial Policy Analytt 
BaADLEY D. Bn-T, Rqmblican Cburuct 
Iba Paull, Rtpublican Counael 



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CONTENTS 



TUESDAY, SEPTEMBER IT, IWl 



Opening atatement of Senator Dodd ... 
<^wning statemeot of: 

S^tor Bond 

Senator Shelby 



WITNESSES 

S. Kinnie Smith, Jr., vice chainnan, ConBumer's Power Company, Jackson, 

MI 

Premred etatement 

Paul Ebton, chairman. National Independent Energy Producera PUHCA 
Teak Force, Wariiington, DC „ _ 



Prepared bI 
m White, chi 



T(Mn White, chairman and chief executive ofBcer, Enron Power Corporation, 

League atv.TX 

nepered Btatement 

Keys Curry, Jr., executive vice preeident, Deetec Energy, Inc., Washington, 

Pr^iared atatement 

Scott Hempling, counael. Environmental Action Foundation, Washington, DC . 
Prepared atatei 



Charles Patriae, partner, Paul, Haatinga, Janofak^ and WaUier, Repi 
ad hoc group of registered electric utility holding companies, Washingtoni 



Prepared statement ... 



o written questions of Senator Shel^ 



James Doty, General CtHuuel, Securities and Exchwige CoT^oissioD 



mgton. DC 

Prepared statei 
CUftMi Leonhardt^ 



CUftMi Leonhardt, Commiaaknier, GonnectiGut Department at PuUic UliUty 

Control, New Britain, CT. 

Prepared statement „ „....„..„....„.„....„..» „. 

Gary Zimmerman, executive vice preeident, Michigan Municipal Electric As- 
sociation, Kentwood, MI 

Prepared statement 

Gabriel Stem, Director of Planning and Project Etevelopment, Connecticut 

Municipal Electric Enei^ Cooperative. Norwich, CT 

Prepared atat' ~ 



meeC^wve, 



X president. United Dluminating Co., New Haven, CT . 
Prepared statement 



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nudd Srkora, 
too, TX 

Prepared ■ 
hn Lobbu, c 
Detroit, MI... 

Prepared Btatainent ... 



prMndftnt and COO, Houtton Power and U^liiig Co., Houb- 



AomnoNAL Maivbial Suppued fox rat Ricord 



Palmer Bellevue Corp ... 
Michigan Public Service Coni 



Pacific Gas and Electric Co., statement for the record.... 



D,g,;,zeclbyG00glC 



S. Hkg. 102-362 

LEGISUTION TO AMEND THE PUBUC irnLTTY 
HOLDING COMPANY Aa OF 1935 



HEARING 

BETORK THK 

SUBCOMMITTEE ON SECUKITIES 

OF THK 

COMMITTEE ON 

BANKING, HOUSING, AND UEBAN AFFAIES 

UNITED STATES SENATE 

ONE HUNDRED SECOND CONGRESS 

FIRST SESSION 

ON 

HOW WILL THE LEGISLATION AFFECT THE FOLLOWING ITEMS: [1] 
BATES CONSinWEBS PAY FOR ELECTRICITY? 12] COMPETITION IN THE 
POWER INDUSTRY? [3] THE NATIONS ENERGY SUPPLY FOR DECADES 
TO COME? AND 14] FEDERAL AND STATE LAWS DESIGNED TO PRO- 
TECT CONSUMERS AND SHAREHOLDERS FROM ABUSES AND CON- 
FLICIS OF INTERESr? 



Printed for the use of the Committee on Banking, Housing, and Urban AlTaira 



WAMllWOTON : iwt ^^^^ 53-005-00 ' 

Foriile by Ihc U.S. Govemment Printing Office 
lU of DocyoienU.Congreukinal Sales Office, Washington. DC 20402 
ISBN 0-1 6-037 t74-X 



31 T %- 

ID^B 53-005-00 «■ 

X: 204O2 

Digi-jzedbyGoOglC 



ooMMrrrEE on banking, housing, and urban affairs 

DONALD W. RIEOLE, Jr., Michigan, OuanTum 
ALAN CRANOTON, CaUfornia JAKE QARN, Utah 

PAUL S. SABBANES, Harylaiul ALFONSE H. D'AMATO, New YoA 

CHRISrOPHER J. DODD, CMwacticut PHIL ORAHM. IVnu 

ALAN J. DIXON, nUni^ CHBISrCK'HER S. BOND, BfiMOuri 

JIM SAS^R. Tenneane CONNIE BUCK, Florida 

TERRY SANFOItO, North CtrvOm WILUAH V. ROTH, Ja.. Delawam 

RICHARD C. SHEIAY, Alabama PETE V. DOMENIO, New Mexko 

BOB GRAHAM, Florida NANCY LANDON KAS^BAUM, KaiMM 

TDilOTHY E. WntTH, Colorado JOHN H. CHAFEE, Rhode laland 

JOHN F. KERRY, Maauchuaetto 
RICHARD H. BRYAN, Nevada 

SnvEN a Habbib, Staff Director and Chief Cou/uel 
LtMAS Smith, B^ublican Staff Dinetor and SamemUt 



SuBOOMMiTm ON SvcuBmcs 
CHRISTOPHER J. DODD, Connecticut, CKturTnan 
RICHARD C. SHELBY. Alabama PHIL ORAHM. Texa* 

IIMOTHY E. WIRTH, Colorado WILLIAM V. ROTH, Jb, DeUware 

ALAN CRANOTON, Celifbrina ALFONSE M. D'AMATO, New Yoil 

JIM SASSER, Tenneoaee CIIRI?rDPHER S. BOND, HiSMUri 

TERRY SANFORD, North Carolina CONNIE HACK, Florida 

Hiunu L. CocHBAn, Staff Director and Chitf Couneel 
MicHAiL J. Stdn, Financial Policy Analyat 
Bkaalr D. Bnr, R^ublican Counsel 
laA pAinx, B^blican Counsel 

(n) 



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CONTENTS 



TUESDAY, SEPTEMBER 17, 1991 



Opening statenient of Senator Dodd ... 
(^ning statement of: 

Senator Bond - 



Senator Riegle 

Senator lyAniato 

Senator KaBMbamn . 



S. Ktnnie Smith, Jr., vice chairman, Conmuner'a Power Companjr, Jackaon, 

MI 

PreiNaed atatement 

Paul Ebton, chairman, National Indqmtdent Energjr Producera PUHCA 

Taak Force, Washington, DC 

Prepared statement 

T(Hn White, chairman and chief executive oflicer, Enron Power Corporation, 

League atv.TX 

I¥epared statement „ 

Keys Curry, Jr., executive vice president, Deatec Ekwrgy, Inc^ Waahington, 

Prepared statement 

Scott Hempling, counsel. Environmental Action Foundation, Washington, DC . 

Prepared statement 

Charlee Patrizia, partner, Paul, Hastings, Jano&l^ and Walker, Bepreeenting 
ad hoc group of registered electric utility holding companies, Washington, 

DC 

Prepared statement 

Response to written queationa cJ Simator Shell^ 

James Do^ General Counsel, Securities and Exchange Commission, Wash- 
ington . DC „ „.„ .. 

Prepared statement „.„._ _... _.._...»».,..,..„....„. «... 

. Clifton Leonhardt, CommiasioiMr, Gnuwctkut Dqwrtment of Public Utili^ 

Control, New Britain, CT 

Prepared statement „ 

Gary Zimmerman, executive vice [»«aident, Michigan Municipal Electric As- 
sociation, Kentwood, MI 

Prepariad statement 

Gabriel Stem, Director of Planning and Pngect Develt^Huent, Connecticut 

Municipal ^ectric Energy Cooperative, Norwich, CT 

Prepared statement 

Jamee Leahy, executive director, Connecticut Public Interest Reaearch Group, 

West Hartford. CT 

Prepared statement 

James Crowe, senior vice preoident, United niuminating Co., New Haven, CT . 
Prepared statement 



D,g,;,zeclbyG00glC 



Prepared rtatement 

John Lobbia, chairman, pruident and chief executive officer, Detroit Edison, 
Detroit, MI 



AimrnoNAL Matrrial Suppubd fox the Rbcoeu) 



Palmer Believue Corp 

Michigan Public Service Com 



Pacific Gas and Electric Co., statement for the record.... 



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LEGISLATION TO AMEND THE PUBLIC UTILITY 
HOLDING COMPANY ACT OF 1935 



TUESDAY, SEPTEMBER 17, 1991 

U.S. Senatk, 
CoMMirrEE ON Banking, Housing, and Urban Affairs, 

SUBCOHMITTEE ON SkCURITIES, 

Washington, DC 
The subcommittee met, pursufmt to notice, at 9:40 B.m., in room 
SD-538 of the Senate Dirkaen Office Building, Senator Christopher 
J. Dodd (chairman of the subcommittee) presiding. 

OPENING STATEMENTS OF SENATOR CHRISTOPHER J. DODD 

Senator Dodd. The subcommittee will come to order. 

Let me first welcome all of our witnesses this morning and wel- 
come Eis well the distinguished chainnan of the Banking Commit- 
tee, Senator Riegle and my colleague from Alabama, Senator 
Shelby. 

This is a little different sort of a framework for hearings, since 
we have so many witnesses this morning, I thought it made more 
sense to try and create a roundtable effect, rather than to have just 
opening statements and a series of witnesses, Mr. Chairman. 

Let me also welcome Senator Bond from Missouri who just joined 
us this morning. 

So to conduct the hearing in this fashion, we're going to invite a 
lot of informahty here. Although I'll address, smd members will ad- 
dress, specific questions to various members of our distinguished 
panel, I'd like others to feel free at the end of those statements, if 
there's something that you'd like to add or some point which you'd 
like to address, then feel free to do so. 

This way, we can have a good and lively discussion here this 
morning about this legislation. 

I don't think I have to tell the people in this room how much is 
at stake in the debate over this legislation. It has the potential, of 
course, to affect virtually every consumer of electrical power in 
this country, the rates they pay, the supply of electricity they 
obtain, and the reliability of the service that they receive. 

Before we begin this morning, I think it's important to talk 
about the setting in which this committee and the subcommittee 
finds itself. 

We call this hearing to discuss S. 1220, the National Energy Se- 
curity Act of 1991, and specifically, title 15 of that legislation. That 
title amends the Public Utility Holding Company Act of 1935, as 
(1) 



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everyone in this room is aware, is under the jurisdiction of this 
committee. 

However, the legislation itself is not before this committee. 
Chairman Riegle and Senator Gam asked for referral of the bill, 
but their request was not granted. And lifter the bill was reported 
by the Energy and Natural Resources Committee, the bill was 
placed on the Senate calendar and now it awaits, as you know, 
floor consideration. 

I would note that some of the witnesses urged in their testimony 
that this committee assert jurisdiction over this legislation. Our 
chfiirmEm and our ranking member have tried but were unsuccees- 
ful in doing that. 

The rules of the U.S. Senate are rather clear on this point. The 
subject matter of the bill is predominantly in the jurisdiction of an- 
ott^er committee. 

Nonetheless, we scheduled this hearing this morning in the hope 
that we can add to the pool of knowledge on the important pubUc 
policy issues raised by this legislation — what tuce those m^or 
issues? 

First, how will the l^islation affect the rates consumers pay for 
electricity? Many r^ons of the country remain deep in recession. 
Incomes are falling. And yet, utility rates, at best, have remained 
the same or have risen slightly. Utility bills are a significant por- 
tion of the budgets of most families. We have to do eveiythii^ pos- 
sible — I think everyone would agree — to keep rates down. 

Second, how will the legislation eiffect the Nation's enei^ 
supply, not just this year or next, but for decades to come? 

In other areas of our economy in our society, we have seen what 
happens when we fail to plemt the seeds for future growth. We 
simply must ensure an affordable supply of power for our children 
and their children and for future years. 

Third, how wiU this legislation affect the competition in the 
power industry? 

In other areas of our jurisdiction, this committee tuis heard re- 
peatedly about the need for competition, on the one hand, and the 
need for a level playing field on the other. We have heard it 
enough to know tiiat competition is not an end in itself, but a 
means rather to an end. We have seen how competition generates 
new ideas, lowers costs, and increeises supply. 

But when we are dealii^ with a r^ulated industry or a situation 
where one segment of an industiy is regulated differently from an- 
other, competition is never perfect and it is extremely hard to 
judge. 

That brings me to the fourth question, which is how will this leg- 
islation affect Federal/State laws designed to protect consumers 
and shareholders from abuses and conflicts of interest? 

We have a 56-year-old Federal law — ^the Public Utihty Holding 
Company Act — which has worked to protect both stockholders and 
consumers from abuses by utility companies. That Federal law has 
made it possible for State regulators to do their jobs. 

And so while we consider I^islation that would relax that law in 
order to provide greater competition, it is essential that we know 
precisely what consumer and shareholder protections are being re- 



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moved by the l^islation and what protectioDS we have to take 
their place. 

A mth question we must ask is how will the legislation afTect the 
financial condition of our Nation's utilities? 

After all, we want our sources of pwwer to remain strong and fi- 
nancially viable. In addition, we must understand how changes in 
the law will affect the ability of investors and r^^ulators to assess 
the financial condition of these companies. 

Sixth, how will the l^islation afTect environmental and other 
concerns? 

It has been argued that how we structure this industry from a 
r^ulatoiy point of view will affect conservation efforts, the effi- 
ciency of [>ower production, pollution control effects, and other en- 
vironmental concerns. 

Issues in this area rarely come before this subcommittee or this 
full committee, but they obviously are extremely important to 
every member of the U.S. Senate. 

Because of the importance of these issues, my goal in conducting 
these hearings has been to conduct them fairly and objectively. 1 
have not come here this morning, nor do I believe my colleagues 
have, with any agenda, other than to attempt to sort through the 
major issues and to learn from our distinguished witnesses what 
we have before us. 

After hearing and reEiding the testimony, I will say the written 
statements of the witnesses raise a number of concerns about how 
the legislation impacts the major issues that I have outlined. 

So my sense is that we should go slow here. There is a lot more 
we need to know before dianantling the current regulatory 
scheme. Perhaps some of my concerns will be addressed through 
the process of raising questions and listening to the responses of 
the witnesses here this morning. 

However, I must add that this process has not been helped by the 
actions of one group involved in this d^>ate — the Electrical Reli- 
ability Coalition. Last week, thi& group ran tin ad in a m^r news- 
paper in my home State of Connecticut as part of what can only be 
seen as an effort to create hysteria over tins issue, linking this leg- 
islation with everything from the proUems in the airline industry 
to the savings and loan debacle, and label those who support this 
legislation as special interests somehow. 

The false and nusleading statements in the ad were designed, in 
my view, to mislead consumers about this subcommittee's power to 
effect l^islation in this area, stating that I somehow nad the 
power to stop this l^islation. 

It was a pretty blatant attempt, in my view, to bully Members of 
the U.S. Senate into taking positions opposing the l^islation even 
before holding the hearing this morning. 

At any rate, I'll ask by unanimous consMit that the ad be insert- 
ed in the record so that my colleagues can have an oi^tortunity to 
read it emd to see it. It's pretty blatant and pretty foolish, in my 
view, as well. 

Whoever had the bright idea to add that ad certainly didn't help 
that coalition in this Senator's eyes at all. 

At £iny rate, on the fundamental issue of whether or not this in- 
dustry should be der^ulated, there are some exceptionally credible 



D,g,;,zeclbyG00glC 



and thoughtful witnesses here this morning who argue that it 
should not be, or at least that Congress should move forward only 
if additional safeguards are added to the bill. 

There are also those who argue strongly that the legislation is in 
the best interests of the Nation's consumers. 

The debate that we will engage in this morning is exactly the 
way that the process is supposed to work, not throi^h ad cam- 
paigns or creating hysteria, as I mentioned earlier. 

Anyway, let me close by returning to the basic question we need 
to ask this morning. If this legislation is adopted or if it fails, will 
the Nation's consumers and businesses get the power that they 
need when they need it at a cost they can aiford. 

I look forward to a productive morning and I'll now turn to my 
colleagues for Einy opening statements they may have. 

ru turn to Senator Bond first of Missouri. And, Kit, I apologize 
for not looking over and seeing you there. 

Senator Bond. Please don't let it happen again. 

Senator Dodd. I promise I won't. [Laughter.] 

I presume I'll hear about some bullying. 

OPENING STATEMENT OF SENATOR CHRISTOPHER 9. BOND 
Senator Bond. I commend you for your fearless fortitude in 
moving forward to hold a hearing on this very difficult, but impor- 
tant, issue. 

As you have stated, Mr. Chairman, the Public Utility Holding 
Company Act, or PUHCA, as some like to call it, falls within the 

{'urisdiction of the Senate Banking Committee. Despite that fact, 
lowever, as you noted, the Senate Energy Committee included sev- 
eral significant amendments to the act in title 15 of S. 1220, the 
National Enei^ Security Act, which it reported out of committee 
in June. 

You also not«d the chairman and ranking member of this com- 
mittee requested jurisdiction over title 15, but it was not granted, 
and t find this regrettable, Mr. Chairman. 

The Energy Committee bill makes significant and far-reaching 
changes in a statute which this committee wrote back in 1935, and 
is reviewed periodically since then. 

While PUHCA clearly affects the important energy-related issues 
of electricity generation, it is a significant securities law which is 
administered by the Securities and Exchange Commission. 

For these reasons, I think the committee should have been able 
to review title 15 of S. 1220. This maJies today's hearing by the Se- 
curities Subcommittee all the more important. It is a crucieil oppor- 
tunity to highlight the concerns regarding debt financing and 
power supply reliability raised by the proposed changes in PUHCA. 

I believe, eis I think most members of this committee do, that it is 
essential to maintain a stable financial environment for consumers 
and for all users of electricity, and that must be included in the 
deliberations as we discuss various aspects of this measure. 

Finally, Mr. Chairman, I ask unanimous consent that a state- 
ment by Mark SchoUander, general counsel of the Kansas City 
Power Light Co., be included in the record of the hearing. 

Senator Dodd. Without objection. 



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Senator Bond. I believe that it's quite helpful in understanding 
the perspective of many Missourians on this issue. 
I thank you, Mr. Chairman. 
Senator Dodd. Theuik you. Senator Bond. 
Senator Shelby. 

OPENING STATEMENT OF SENATOR RICHAIU) C. SHELBY 

Senator Shelby. Thank you, Mr. Cheiirman. 

Mr. Chairmem, I WEUit to tell you, I appreciate your holding this 
hefu-ing this morning. This Senator didn t know about the ad in the 
Hartford paper and I'm like you. I deplore those kinds of tactics. 

The Senate Banking Committee has had a very busy schedule 
this year, as we all know, and it's been difficult to turn the com- 
mittee's focus onto other issues, such as we have today. 

However, since the Public Utilities Holding Company Act is 
under this committee's jurisdiction, I think it's important that this 
subcommittee, Mr. Chairman, evaluate the issues surrounding 
reform of this law, what it means, who it's going to affect. 

However, after having said that, also as a member of the Energy 
Committee, I can attest that the issues associated with PUHCA 
have already been thoroughly explored. Under the predominance 
rule of the Senate, the Energy Committee had that right. But we 
also have some jurisdiction here that I well understand. 

Mr. Chairman, I thought Banking Committee issues could be 
complicated, very complicated, until I joined the Energy Commit- 
tee. Let me say that PUHCA smd the issues associated with this 
law challenge Euiything that this committee confronts in complex- 
ity and divisiveness. 

The Energy Committee devoted a considerable amount of time 
and effort to the issues associated with PUHCA reform. Ultimate- 
ly, we were able to work out some compromises that I believe meet 
people can live with. This was not easily done. 

I would compare that process to many of the efforts this commit- 
tee, the Banking Committee, has undertaken in the past few years. 
Perhaps not everyone is happy, but, on balance, it's a deal I hope 
we can all live with. 

I'm glad that this committee is exercising its right to examine 
the Public Utility Holding Company Act. I also believe that we 
should be extremely cautious about trying to alter any of the com- 
promise worked out by the Energy Committee. 

E^h part of PUHCA reform rests in a delicate balance with the 
other parts and changing one provision will change the balance of 
the whole. We all know that. We should proceed cautiously. 

Mr. Chairman, I want to ageun commend you for holding this 
heEU*ing. I'm not going to be able to be here long this morning. I 
have one question that I'd like either for Charles Patrizia — I'd ask 
the chairman to ask on my behalf or ask for the record. 

Senator Dodd. I will make sure that is asked or put in the 
record, one or the other. 

Senator Shelby, lliank you. 

Senator Dodd. Senator Mack. 

Senator Mack. I don't have any statement, Mr. Chairman. 

Senator Dodd. Mr. Chairman. 



D,g,;,zeclbyG00glC 



OPENING STATEMENT OF SENATOR DONALD W. RIEGLE, JR. 

Senator Ribole. Thank you, Senator Dodd. 

Let me say at the outset in line with Senator Shelby's comments, 
this committee has been extraordinarily busy this year with a host 
of issues, many of which are still in the process of being resolved 
either within the committee or on the Senate floor and Senate- 
House conference committees. 

But I want to particularly commend you, Senator Dodd, for the 
extraordin^y amount of work tiiat you are doing within your sub- 
committee. We had the hearings in that subcommittee on Ihe Salo- 
mon situation last week, which was very complex and time con- 
suming. 

I want to just tell you from the vantage point of the full commit- 
tee how much I appreciate the exceptional work you and your sub- 
committee are doing by pressing ahead with this part of the agenda 
of the committee. I'm very grateful for that 

Senator Dodd. Thank you, Mr. Chairman. 

Senator Rmou. The fact that today's hearing on the Public Util- 
ity Holding Company Act is being held by the Banking Committee 
may in the first instance seem somewhat strange. I think many 
people mistakenly believe that this legislation deals solely with 
enet^ issues. 

However, PUHCA is in fact a securities statute administered by 
the Securities find Exchange Commission under the exclusive juris- 
diction of this Banking Committee. A review of the statute reveals 
why. 

Li enacting the Holding Compeuiy Act, Congress repeatedly ex- 

Kressed concern for "the interest of investors in the securities of 
olding companies and their subsidiary companies and affiliates," 
and also, "consumers of electric energy and natural and manufac- 
tured gas." 

As most everyone here knows, and has been stated already 
today, the Senate Enei^ Committee chaired by Senator Johnston 
has reported out the Enei^ Security Act of 1991. 

That act would fundamentally Eimend the Holding Company Act, 
which is intended to eliminate corporate abuses and manipulation 
of the securities markets for utilities. 

Senator Johnston has proposed expanding the class of companies 
that can generate power without triggering the registration re- 
quirements of the Holding Company Act. As Senator Dodd has 
stated, this committee sought a joint referral over this legislation, 
but that has been effectively denied. 

This hearing provides the members of this committee an oppor- 
timity to consider whether the Eneiigy Security Act of 1991 would 
undermine the protections of either investors or consumers of utili- 
ties. 

My focus for today and for our ongoing consideration of efforts to 
Eunend the Holding Company Act is plain and simply the interest 
of energy consumers and customers. There are two miyor utilities 
in my State that are represented here this moming—^nsumers 
Power and Detroit Edison. They have strongly held and differing 
views about the effect of pending efforts to amend PUHCA and 
we'll hear about that today. 



D,g,;,zeclbyG00glC 



While ConBumers Power favors the proposed amendments, De- 
troit Edison, for its part, is opposed. They both contend that their 
position will best protect the interests of utility customers. 

We will hear from these two important compsinies this morning 
and each has a highly respected executive representing them — 
John Lobbia, who is the chairman and CEO of Detroit Edison, and 
S. Kinnie Smith, Jr., who is the vice chairman of Consumers 
Power. 

I know these genUemen well and I welcome them to the commit- 
tee this momii^. 

I'm also pleased that the Michigem Municipal Electric Associa- 
tion represented by executive vice president Gary Zimmermem, is 
also here to present its views. I'm looking forward to their testimo- 
ny, but want to state at the outset that my approach to the issue is 
to ensure that customers of our public utilities have access to reli- 
able, low cost energy. 

Other issues that I believe deserve serious consideration are 
whether utilities provide sufficient access to their trimsmission fa- 
cilities. 

Further, I am particuleirly concerned that the Energy Security 
Act of 1991, as currently drafted, does not address the issues of 
cross-subsidization or self-dealing. Amendments to the Holding 
Company Act must ensure that companies cannot force their cap- 
tive customer base to fund activities that do not directly benefit 
these customers. 

Now I can understand why we have decided on the format that 
we have today, because we have a number of points of view that 
need to be expressed and made a part of the record and for us to 
consider. 

But I wemt to make it clear that as this moves along, this com- 
mittee wUl fully meet its responsibilities under the jurisdictional 
assignment of duties within the Senate. That's something that I 
feel strongly about. I know Senator Dodd does as well. 

So, in any event, this hearing is a very important part of that 



I thank the chairman. 

Senator Dodd. Thank you very much, Mr. Chairman. I appreci- 
ate your comments. 

what I'd like to do is, first of all, Mr. Chairman, and my col- 
leagues, all the statements that have been prepared will be insert- 
ed in the record as if read in full and any supporting documenta- 
tion that you care to include as part of the record as well will be 
included. 

And then, what I'm going to ask you to do is ask each of you, 
beginning here on my left, to introduce yourselves and who you 
represent, who you're with, and then we'll begin directly with the 
questions. 

The questions — in my own opening statement, I've sort of indi- 
cated the six areas that are sort of fundamental areas. Frankly, the 
purpose here this morning for us is to do more listening, in a sense. 

So I really want to invite as much discussion from our panel as 
possible here, emd I'll generate questions, or my colleagues will, 
and I'm going to do this in a fairly loose fashion. 



D,g,;,zeclbyG00glC 



So we're not going to work on a clock here. We'll just go back 
and forth. We're not a lai^ number here this morning, so it can 
be managed. And as we move in, we'll begin irankly with probably 
the rates themselves. I've tried to arrange the room so that — and I 
want to be careful how I state this. [Laughter.] 

Those on the left are inclined to be supportive of the bill, with 
amendments in many cases. My good Mend from Connecticut, Cliff 
Leonhardt, is sort of the center here. On the left are sort of sup- 
porters with amendments. And to the right are those who are op- 
posed generally. That's to say, eigain, there are exceptions and 
there are modincations along the way. 

So I don't want to try and put you in too neat and tidy box as 
one would si^est. That will give my colleagues some idea how the 
room breaks down. 

With that 

Senator Bond. Mr. Chairman, have you thought about havii^ 
different colored caps. [Laughter.] 

Senator Dodd. We thought about caps and we thought about T- 
shirts and everything else we could have done here Uiis morning. 
[Laughter.] 

But let me begin with you, Mr. Smith. Why don't you tell us who 
you are and who you represent. And then, Paul, we'll go right to 
you and around the room. 

S. KINNIE SMITH, JR., VICE CHAIRMAN, CONSUMER'S POWER 
COMPANY, JACKSON, MI 

Mr. S. KiNNiE Smith. Good morning, Chairman Dodd, Chairman 
Riegle, members of the committee. 

I'm Kinnie Smith, president of CMS Enei^ Co., the parent of 
Consumers Power Co., a combination gas emd electric utility locat- 
ed in the State of Michigan. 

The peirent company, CMS, is an exempt holding company under 
the Holding Compemy Act. 

We're delighted to be here. 

Senator Dodd. Thank you very much, Mr. Smith. 

PAUL ELSTON, CHAIRMAN, NATIONAL INDEPENDENT ENERGY 
PRODUCERS PUHCA TASK FORCE. WASHINGTON, DC 

Mr. Elston. I'm Paul Elston. I'm the chairman and CEO of Long 
Lake Energy Corp., an independent pwwer company. And I'm edso 
representing the National Independent Energy Producers, an asso- 
ciation of compEinies like my own, and we are here in support of 
the PUHCA reform bill. 

TOM WHITE, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, 
ENRON POWER CORPORATION, LEAGUE CITY, TX 

Mr. Whttk. I'm Tom White, Senator, and I want to say that I've 
never sat on the left side of anything before. [Laughter.] 

Senator Dodd. We tried to arrange it that way for you, Mr. 
White. [Laughter.] 

Mr. WHrrK. I'm the chairman of Enron Power Corp. We're a 
nuyor independent power producer, as is Long Lake, both here in 
the United States and internationally. 



D,g,;,zeclbyG00glC 



KEYS CURRY, JR. EXECUTIVE VICE PRESIDENT, DESTEC 

ENERGY, INC., WASHINGTON. DC 

Mr. Curry. Chedrman Dodd, Chairman Riegle, I thank you for 

the opportunity to be here. I'm Keys A. Curry, Jr., executive vice 

president of D^tec Energy, an independent power company located 

in Houston, TX. 

My group elected me the offensive line for this side of the table. 

Senator Riegle. We can see why. [Laughter.] 

SCOTT HEMPLING, COUNSEL, ENVIRONMENTAL ACTION 
FOUNDATION. WASHINGTON, DC 

Mr. Hempung. Mr. Chairman, Scott Hempling, on behalf of the 
Environmental Action Foundation. We have litigated on behalf of 
consumer and environmental interests in a variety of Holding 
Company Act and Federal Power Act cases. 

I would say that Mr. Patrizia and I were both surprised to find 
each other so close this morning, and we hope that reflects an 
agreement we have not yet reached. [Laughter.] 

CHARLES PATRIZIA, PARTNER, PAUL, HASTINGS, JANOFSKY AND 
WALKER, REPRESENTING AD HOC GROUP OF REGISTERED 
ELECTRIC UTILITY HOLDING COMPANIES, WASHINGTON, DC 

Mr. Patrizia. Mr. Chairman, Chairman Riegle, Senators, I'm 
Chuck Patrizia from the law firm of Paul, Hastings, Janofsky 
Walker. I'm here appearing on behalf of the registered electric util- 
ity holding companies. Those are the companies which are a sub- 
ject of the full provisions of the 1935 act in eiII of its power and 
authority. 

Mr. Hempling believes that I am here to reach an agreement 
with him, but actually, I am here simply to mediate between him 
and Mr. Doty. [Laughter.] 

JAMES DOTY, GENERAL COUNSEL, SECURITIES AND EXCHANGE 
COMMISSION, WASHINGTON, DC 
Mr. Doty. Chairman Dodd, Chairman Riegle, I'm James R. Doty. 
I'm the general counsel of the U.S. Securities and Exchange Com- 
mission. And, as the Chairman has noted, Eimoi^ our responsibil- 
ities, we administer the Public Utility Holding Company Act. 

CLIFTON LEONHARDT, CHAIRPERSON, CONNECTICUT 
DEPARTMENT OF PUBLIC UTILITY CONTROL. NEW BRITAIN, CT 

Mr. Leonhardt. Good morning. Senator. I'm Cliff Leonhardt, the 
cheiirperson of the Connecticut Department of Public Utility Con- 
trol. Behind me and to my left is Darcy McGraw, the executive di- 
rector of the department. 

GARY ZIMMERMAN, EXECUTIVE VICE PRESIDENT, MICHIGAN 
MUNICIPAL ELECTRIC ASSOCIATION, KENTWOOD, MI 

Mr. Zimmerman. Mr. Chfiirman, Senator Riegle, Committee 
members, my name is Gary Zimmerman. I am executive vice presi- 
dent of the Municipal Electric Association of the State of Michigan. 



D,g,;,zeclbyG00glC 



10 

In my role here today, I'm representing the Rural Electric Coop- 
erative Association, eiIso of the state. We represent about 1 million 
customers in the Stat«. 

In addition, I'm speaking on behfilf of the American Public 
Power Association etnd the National Rural Electric Cooperative As- 
sociation that serves approximately 25 percent of the U.S. popula- 
tion in total. 

GABRIEL STERN, DIRECTOR OF PLANNING AND PROJECT DEVEL- 
OPMENT, CONNECTICUT MUNICIPAL ELECTRIC ENERGY COOP- 
ERATIVE, NORWICH, CT 

Mr. Steen. Good morning, Mr. Chairman, Senators. My name is 
Gabe Stem. I represent the Connecticut Municipal Electric Eneigy 
Cooperative. I Eim the cooperative's director of planning and project 
development. 

The cooperative serves five municipal utilities in Connecticut 
providing generation and transmission services. I'm here also today 
to represent the Northeast Public Power Association, representing 
some 70 municipally owned utilities in New England. 

Thank jfou. 

JAMES LEAHY, EXECUTIVE DIRECTOR, CONNECTICUT PUBUC 
INTEREST RESEARCH GROUP, WEST HARTFORD, CT 

Mr. Leahy. Good morning, Senator. My neune is James Leahy. 
I'm the executive director of the Connecticut Public Interest Re- 
search Group. We are a statewide consumer and environmental ad- 
vocacy organization with about 75,000 members in Connecticut. 

We also work in affiliation with the U.S. Public Interest Re- 
search Group, which has IVz million members around the country. 

JAMES CROWE, SENIOR VICE PRESIDENT, UNITED 
ILLUMINATING COMPANY, NEW HAVEN, CT 

Mr. Crowe. Good morning, Chairman Dodd, Chairmfm Ri^le, 
and other members of the subcommittee. My name is Jim Crowe. 
I'm a senior vice president with United Illuminating in Connecti- 
cut. We serve about 25 percent of the population of the State. We 
like to think of ourselves as the other investor-owned utility in the 
State of Connecticut. 

DONALD SYKORA, PRESIDENT AND COO, HOUSTON POWER AND 
LIGHTING COMPANY, HOUSTON, TX 

Mr. Sysora. Good morning, Mr. Chairman. It's nice to see my 
Senator from my home State of Tex£is here. Good morning. Senator 
Gramm. 

I'm Don Sykora. I'm president and chief operating ofRcer of 
Houston L^htii^ Power. Houston Lighting Power is a geographi- 
cally small utility located entirely in Texas. We cover an area of 
about a 50-mile radius of Houston, TX. We serve 1.3 million cus- 
tomers. We have revenues of about $3V^ billion a year, including 
the fuel cost. 

I'm here this morning to give you something that is not a text- 
book theory of what happens when you have unregulated power 
producers in your area. We currently probably have more — we 



D,g,;,zeclbyG00glC 



11 

know we have more unregulated power producers than any other 
utility in the country. 

We have 4,800 megawatts. That is enough power to more than 
serve the State of Connecticut in 1989. 

Senator Dodd. We'll look forward to it coming up our way. 
[Laughter.] 

JOHN LOBBIA, CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE 
OFFICEJt, DETROIT EDISON, DETROIT, MI 

Mr. LoBBiA. Good mornine, Chairman Dodd, and Chairman 
Ri^le. I'm John Lobbia, president and chief executive oflicer of the 
E)etroit Edison Co. 

Detroit Edison is an electric-only company. We serve 1.9 million 
customers in southeastern Michigan. We are pleased to be able to 
have the opportunity today to represent those customers in front of 
this committee. 

SHERWOOD SMITH, CHAIRMAN, CAROLINA LIGHT AND POWER, 
RALEIGH, NC 

Mr. Sherwood Smith. Good morning. Chairman Dodd and Chair- 
man Riegle. My name is Sherwood Smith, chairman of Carolina 
Power Light Co. We serve in both North and South Carolina. 

I'm eilso here representing not only my own compemy, but a 
group of electric utilities, including our company, Mr. Lobbia's 
company, Mr. Sykora's company, which form the Electric Reliabil- 
ity Coalition. 

We are presenting testimony in opposition to the proposed 
amendments to the Public UtUity Holding Company Act. 

Senator Doon. Thank you very much. Mr. Smith. 

We've been joined by two admtional colleagues. Senator Gramm, 
Senator Graham of Florida. 

Any opening comments? 

Senator Gbaham. No Uiank you, Mr. Chairman. I appreciate the 
opportunity to participate in tlus subcommittee hearing. 

Senator Dodd. Phil. 

Sienator Gramm. Mr. Chairman, first let me ask ummlmous con- 
sent that Senator D'Amato's statement be placed in the record as if 
read. 

Senator Dodd. Without objection. 

STATEMENT OF ^NATOR ALPONSB D'AHATO 

Senator D'Amato. Thank you, Mr. Chairman. I would like to 
thank you for calling this important hearing. There is no question 
that the electric power industry is evolving into a more competitive 
industry. 

During the l£ist decade, independent electric producers have 
grown to more than 37,000 megawatts of capacity — the equivalent 
of over 30 large nuclear power plants. These producers have sup- 
plied about 20 percent of all new capacity since 1978 and have 
brought on-line 50 percent of new capacity since 1989. 

The question before us today is to what extent, the Public Utility 
Holding Company Act of 1935, continues to help or hinder this new 
era of competition. 



D,g,;,zeclbyG00glC 



12 

I am no stranger to PUHCA reform. Last year, I aponsored the 
fourth successful amendment to PUHCA since its passeige in 1935. 
My amendment mfide PUHCA consistent with the reality of in- 
creased competition in the natural gets industiy- S. 1220 demon- 
strates that the Energy Committee is convinced that a change to 
PUHCA is needed to reflect the growth of competition in the elec- 
tric power industry. 

PUHCA, more than any other statute, haa shaped the structure 
of the electric industry. This industry has worked well, with a 
proven record of reliabUity . We must carefully scrutinize the elec- 
tric industry. While competition is emerging, we should take care 
not to foster unsound proposfils that may in the long run lead to 
any additioncd financial burdens on the ratepayer. 

Congress must look to see that in making tmy changes to 
PUHCA we emphasize that the ultimate aim is to provide consum- 
ers with a stable, environmentally sound source of electric power 
at the lowest possible cost. 

I look forward to hearing from the witnesses today. I expect that 
this hearing will help shed light on whether there is any further 
need for PUHCA reform, and the risks of that reform, if smy, 

Mr. Chairman, let me take this opportunity to eepecitdly wel- 
come Mr. Paul Elston of Long Lake Energy Company of New York 
City. 

Thank you, Mr. Chairmtm. 

STATEMENT OF SENATOR NANCY KASSEBAUM 

Senator Kassgbaum. Mr. Chairman, I am pleased you are hold- 
ing this hearing today. As we can see from the interest and partici- 
pation in this hearing, reform of the Public Utility Holding Compa- 
ny Act of 1935 [PUHCA] is a complex and highly controversial 
issue. 

There is no dispute that PUHCA falls squarely within the juris- 
diction of our committee. In my view, the proposed changes to 
PUHCA are too controversial end complex to be dismissed without 
debate and markup by our full committee. If this issue reaches the 
floor as part of a larger hill over which our committee has no juris- 
diction, I would urge you, the ranking member of this subcommit- 
tee find the chairman and ranking member of the full committee to 
work to strike the PUHCA title. 

In this regard, I would note the PUHCA appears to have worked 
well in correcting the abuses that plsigued the industry in the 
1930's. Before we embark on any substantial change to PUHCA, we 
should be convinced such changes will be in the long-term best in- 
terests of the consumers. For example, I recently noted in a Wall 
Street corporate financing newsletter that if the PUHCA title of 
the energy bill is passed in its present form it will result in a m^or 
source of new junk bond flnemcing for the development of new 
energy generators. 

Mr. Chairman, at a time when we are trying to digest the prob- 
lems junk bonds visited upon the savings and loan industry, we 
should think long fmd hard before we act to unleash them on an- 
other regulated industry. If we allow generators to be built with 
substantial junk bond financing, I anticipate that consimiers will 



D,g,;,zeclbyG00glC 



IS 

once again be asked to shoxilder the burdens of excessive leverage. 
This may not be the case, but these are the types of issues we 
should look at long find hard before we give up our PUHCA juris- 
diction. 

OPENING STATEMENT OF SENATOR PHIL GRAHM 

Senator Gramm. Mr. Chairmein, I wiint to thank you for holding 
this roundtable discussion. 

As we all know, a nuoor piece of energy legislation is going to 
come to Uie floor of the Senate probably in the next 2 months. It 
deals with many issues. One of those issues has to do with intro- 
ducing private power production into the system on a more expan- 
sive basis than we've had in the past through reform of PUHCA. 

We're all going to have to learn bow to pronounce that, I guess, 
if we're going to debate it. I don't know if the sound of it is reflec- 
tive of the content of the debate or not, Mr. Chairman. [Lat^hter.] 

Senator Dodd. It's called onomatopoeia. 

Senator Gaamm. But in any case, I think it's very important that 
we hear from people who have money at stake. I always take the 
advice of people who have a serious investment in something. 

I think that since this is under our jurisdiction, even though it's 
going to be debated as part of an energy bill, it's very important 
that we, though this hearing record will mctke available to people 
what the facts are in terms of the views of the two groups that are 
on opposite sides. 

So I thank you, Mr. Chairman. 

Senator Dodd. Thank you very much, Senator Gramm. 

I'm going to ask that as you respond to questions, for the pur- 
poses of our recorder here, that you identify yourself. Try to re- 
member to do that so that our recorder will know, the record will 
be able to reflect whose comments. 

Well I've indicated to you the first obvious question, I suppose, 
that we'd all be asked. While this is highly complicated legislation, 
and reading over the materieil, it is reiilly not the subject for light 
reading, to try and understand the history of this. And I'm not 
going to pretend at all and I presume my coll^:ues are far more 
expert thfm I am in this — but I've tried to become at least a mar- 
ginal student of the history of the legislation and what some of the 
issues are about that are included in the energy packeige. Prom the 
broad perspective, I have fsuniliarize myself where each of you 
here, come down on the proposed amendments to PUHCA and how 
you would modify or not amend those proposab. 

But the first question that comes to mind is rates. What's the 
eflect of this in terms of the people that you serve and that we rep- 
resent, by and large, here in terms of the rates they'll be paying? 

I asked Clifl' Leonhardt from my own State of Connecticut to go 
back and take a look over the l£ist 10 years at the month of July — 
what has been the increases in rates, for a household using 500 
kilowatts a month, the average July utility bill in Connecticut. 

Now you may argue here and say, that s a terrible month to use, 
it's a terrible State to use, for a variety of reasons. But the utility 
rates rose from $44.13 in 1982 to S52.88 10 years later. That's a 20- 
percent increase over 10 years under the existing structure. 



D,g,;,zeclbyG00glC 



14 

So I gueas the obvious first question is how will this legislation, 
how will these amendments aifect those kinds of rate increases? 

Would we anticipate an increase of that 20 percent? Would it sta- 
bilize that 20 percent? You'd have to see some decreases in those 
rates. 

I'll begin, ClifT, maybe with you and start, ^ain, I'd invite the 
panel here — ^Phil, I've encouraged the panel to jump in here and 
have us be more of a listening than to try and do much talking up 
here. 

So why don't you give us some reflection tm how you think these 
changes will affect rates. 

Mr. Leonhardt. Done correctly, with proper fine-tunir^ and this 
committee and other parts of the Coi^freas, and over time, this leg- 
islation would reduce rates. And that is actually the reason for 
d<»ng it. 1 mean, it's to serve the long-term inter^ts of the Ameri- 
can people. 

Obviously, the Congress shouldn't adopt this l^islation unless it 
did provide reliable, long-term power. 

I think we're into a thing of removing bfurriers to entry. The pur- 
pose 10 years ago now, the small, qualifying facilities, the ct^enera- 
tors. It's time to take another step to increase the role of nonutility 
generators. It's a big step that should be done carefully. But we 
shouldn't recoil from the task. 

The United States is goii^ to need the power. We have the con- 
cerns about self-dealing, cross-subsidization, and so forth. They're 
real, but they shouldn't be overdone. 

Competitive generators — we'll monitor this and keep the States 
in their with their prudence review to the extent to which the mar- 
kets aren't operating during a transitional phase. 

Let the States look at the books and records of the EWG affili- 
ates, and so forth. But with all these kinds of safeguards protecting 
to see that leverage abuses don't result in financial losses that hurt 
utihties, with these kinds of protections, this legislaticm will — ^not a 
pimacea, but over time— reduce rates for the average American 
consumer. 

Senator Dodd. Let me turn, if I can, just to generate some debate 
because I know there are those who disagree with that, and I'll 
stay for the moment with Connecticut, you, Mr, Stem, you, Mr. 
Leahy. 

Either way, in any direction, if you agree with that and if not, 
why not? 

Mr. Stern. I think it's possiUy correct and certainly correct in 
theory. 

The concern is — I think Mr. Leonhardt spoke correctly when he 
said, if done right. 

It's not always easy to do r^ht. It's not always easy for regula- 
tion to act the way it should. And I think the concerns about self- 
dealing are real. 'The concern about some possible initial rate in- 
creases are real. 

We've had some positive experiences I think in the past when we 
have deviated from PUHCA. The SEC, within its authority, took a 
favorable view of the formation of the Yankee nuclear companies 
and they were exempted from the holding act requirements. And 
what that meant was that when the Yankee companies would in- 



D,g,;,zeclbyG00glC 



16 

crease their rates, they would flow through on the retail side and 
on tiie wholesale side. 

The wholesale companies, when they're able, have done a good 
job of going to FERC and controlling those kinds of costs and advo- 
cating for themselves. The States have done varying jobs, in pro- 
tecting their retail customers before FERC depenthng upon the eco- 
nomic climate of the State and the abihty of the regulation to act 
in an additional forum. 

So I agree that, done right, the EWG proposal can help competi- 
tion, but I'm concerned about self-dealing tuid 

Senator Dodd. You have other concerns, but beisically, you agree 
with Mr. Leonhardt that if done correctly, this l^islaUon could 
reduce consimier rates. But your concerns have to do with other as- 
pects of this. 

Is that correct? 

Mr. Stern. Well, we have additional concerns which I'm sure 
we'll get into on transmission access. 

Senator Dodd. Yes. 

Mr. Stern. My concern is that there not be such a euphoria if 
this kind of l^^lation goes through, that in the encouragement of 
EWG's which may flow from this, that there not be large tempo- 
rary transitional rate increases, some of which we've seen in Con- 
necticut with the introduction of IPP's. And that's settling down 
now, but there has been — one of the reasons, I think, for the in- 
creases in cost that you cited over the years on the retail side in 
Connecticut and over the last decade lias been a timing problem 
with the introduction of IPP's into the Connecticut market where 
they came in at a very favorable time in terms of being able to ne- 
gotiate with utilities, a time when long-term costs looked high, 
some avoided costs were high and there were some very favor^le 
contracts granted. And for a while, Connecticut consumers are suf- 
fering because of the timing of that and some of the initial eupho- 
ria over the IPP concept. 

Senator Dodd. Senator Gramm just asked me a good question, 
Cliff, going back. 

The increases in that 10-year period in the month of July, are 
those real dollars or are those dollars where inflation and other 
factors have been factored in? 

Mr. Leonhardt. I think they are not real dollars. I don't think 
they are factored in. I'd have to doublecheck. 

But in Connecticut, the IPP's that we talked about, that's a big 
factor, correctly. The other thing is, in Connecticut, Millstone 3 
and Seabrook coming into the rate bases, large, new nuclear facili- 
ties, they were driving those up, even in real terms. 

Senator Mack. Can the Connecticut information about what 
those dollars represent be given to us before we conclude here this 
morning? To start out with that kind of information and not know- 
ing whether it's 

Senator Dodd. Yes, we ought to have that. I assumed that they 
were dollars that took account of that, because, otherwise, jrou 
could ai^e that it actually was a decrease in rates in that 10-year 
period without knowing exactly what else went into it. 

I assumed that was the case. That's a good question. We ought to 
know that. Is there some way we can find that out? 



D,g,;,zeclbyG00glC 



16 

Mr. Leonhardt. Let me look here. 

Senator Dodd. Yes, go ahead, Mr. Stem. 

Mr. Stern. I think one of the issues is — I'm sorry. I lost my 
thought for the moment in the interval. I'll be back to you. 

Senator Dodd. Mr. Leahy? 

Mr. Leahy. Senator, I think the point that Cliff and we agree on 
is that removing the barriers to entry and promoting true competi- 
tion in the market is something that we all want because that is 
the way that we are going to lower consumer prices, simple eco- 
nomics. 

Our concern, and the reason we are opposed to the proposal here 
today is because some of the dangers involved, we feel, with self- 
dealing and some of the cross-subsidization will promote a false 
competition, one which will allow instances of providing benefits to 
shareholders as opposed to ratepayers. 

Those benefits are then demanded as a strategy to make the util- 
ity more fmanciiilly stable. That is our concern. I think the prea- 
quisition review and the subsequent review by the SEC is critical 
to ensure dealings between closely affiliated companies. 

Mr. Doty. Mr. Chairmem, a point of clfiriflcation here. As an 
agency that is not concerned with rates, but with corporate struc- 
ture and the capitalization and Belf-decding of holding companies, I 
think it's important that we are clear in this discussion that these 
issues which have been raised by my colleague relate to exempt 
holding companies; that is to say, nonregistered holding companies. 

Principally, our authority is to r^ulate find to govern and attend 
to the transactions of registered holding companies. This bill, this 
measure, would not significantly alter our ability, in our view, to 
regulate the self- dealing aspects of that. 

Mr. Hempung. Mr. Chairmem, if I may, from the standpoint of a 
person who litigates under the Holding Company Act and has 
spent a good deal of time reading and writing about it, the SEC's 
review of exempt holding companies, their review of those who at- 
tempt to enter the industry claiming under the beinner of competi- 
tion to lower rates, but actually behaving anticompetitively, is crit- 
ical. 

The SEC's role is not simply to protect consumers throi^h moni- 
toring interaffiliate transactions. The SEC role is to protect the 
customer when a new entrant comes to the industry. 

And the fundamental change in the holding company act today 
authored by title 15 is to eliminate completely the entry tests for 
many kinds of new entrants. 

Today, for example, a construction contractor like a GE or a 
Westinghouse cannot enter the industry without substantial 
review. In some circumstances, it can't enter at all. 

Or a compsmy like Consumers Power cannot at all create a new 
subsidiary to engage in independent power without a review by the 
SEC, 

Mr. Doty is correct. That's not a rate review, but it is a structur- 
al review to ensure that there are not later abuses of customers. 

Under title 15, we would go from total prohibition of entry in 
some circumstances to total permissiveness. There would be abso- 
lutely no review, and that is how the rates would be effected. 



D,g,;,zeclbyG00glC 



17 

So doing it right, as Mr. Leonhardt correctly pointed out, is not a 
mere nuance. It goes to the fundamental question — will there be an 
advanced review before a newcomer enters this industry? Will 
there be an advanced check to see if this is the kind of competitor 
that actually will bring competition to the industry? 

That is the review that's eliminated by title 15. 

Mr. Doty. Sorry, Mr. Chairmsui. Jim Doty of the SEC. I'm not 
sure, Scott, that that dog will hunt. 

First of all, the entry is still monitored in the sense that for ro- 
istered public utility holding companies, the statute does not strip 
away all r^ulatory determinations to be made by the Commission. 
Nor does it strip away the provisions by which the commission con- 
tinues to monitor the cross-subsidization and other affiliate trans- 
actions. 

That remains intact. And my point here is only that there is in 
fact an area of utility power production and distribution, namely 
the large intrastate utilities, represented to our left, that is not 
now regulated by the SEC, and which is part of this picture. 

We're dealing with this statute to the extent that powers are 
beii^ limited only with respect to a limited portion of the universe 
of companies. 

Mr. Hempuno. I will have to correct Mr. Doty. When a rois- 
tered company acquires a new EWG under this bill, there is ateo- 
lutely no review. In fact, the acquisition and the resulting corpo- 
rate structure is deemed to be a single, intonated holding company 
under title 15. 

Mr. Doty. But questions of financing, questions which have typi- 
cally been considered by the Commission concerning the financing 
structure, if there are securities issued to acquire that E!WG, are 
not left unroulated. 

The issue is shifted from whether or not the location of the gen- 
erating facility results in the loss of an exemption or requires ap- 
provfil of the Commission. Those two issues are, as you say, re- 
solved in favor of the utility and that we do not consider. 

But the questions of the structure of the financing and the over- 
all soundness of the utility after financing would not be taken from 
this Commission. 

Senator Dodd. Paul, why don't you — ^we're going to have to give 
the lawyers a quota here in terms of time, I tlunk. [Laughter.] 

Mr. EuTON. And I'm not a lawyer. I think what I'm hearing is 
this debate about registered holding companies and about the regu- 
lation by the SEC and the nuances of that. 

But it's important to keep this piece of legislation in context. It's 
one of many bodies of legislation that govern the situation. 
Namely, the Federal Power Act as well as State regulation. 

I am in the process of building one of these plfuits. I started this 
by competing. When Virginia Power asked for 3,000 megawatts of 
power, 30,000 megawatts were offered. And the utilities sorted 
through those and decided that my proposal was one of the ones 
they wanted to buy. 

For a year, I negotiated the terms of that contract and then went 
with that utility to the State regulators and provided tons of mate- 
rial for them and they examined that thing from 50 ways from 



Digi-jzedbyGoOglC 



18 

Sunday to see if it was a good deal for the ratepasrers and whether 
we comd do the job that we said that we could do. 

And when we were done with that, we came down to Washington 
to the Federal Energy R^ulatory Commission under the Federal 
Power Act and presented again reams of information and came 
under close scrutiny by them. 

When I was all done with that, you'd think I was done, but I 
wasn't. 

At that point I had to go over to the SEC. And to sus^est that b^ 
removing this last step removes oversight to this process is ludi- 
crous. 

I went over to the SEC under this law and they told me I had to 
separate my ownership from my control. That's ludicrous, too, be- 
cause it turns on its head what the original purpose of this law 
was. 

So, keep in mind, as we're debating sort of the refinements of 
how the SEC works and all the nuances of it, that in the first order 
is State r^ulation and that's where this business is going to be pri- 
marily and should be primarily r^ulated. 

Then you've got the FERC backing that up. And to say tiiat you 
need yet the SEC to judge whether Long Lake Energy Corp., this 
3&«mployee corporation in this country should be regulat^ by a 
Federal agency is on its face ludicrous. 

We're t^llting about, through the amendment of this law, taking 
away that type of reflation, but only that very limited type of r^- 
ulation. 

Senator Dodd. Let me invite the gentlemen on the right to re- 
spond to that. 

Mr. Sykora. Mr. Chairman, I'd like to go hack to the original 
question as to what would happen to the customer rights. 

Senator Dodd. I appreciate that, but I'd also like to hear you re- 
spond to the point and the refil-life case that Mr. Elston has just 
raised about, in that kind of a situation, a 3&«mployee firm, where 
you have State regulation, you've got FERC, why it would be neces- 
sary that the SEC necessarily be involved. 

I think it's an importfuit point he's raised. But I appreciate your 
comments on the rates as well. 

Mr. Sykora. I think I'll leave the question of the interstate — my 
company is not governed by FERC. 

Senator Dodd. Fine. 

Mr. Sykora. We're completely intrastate. So I'm going to leave 
that up to one of these experts over here. 

If you'd like an answer now, do you want to take it, Sherwood? 

Mr. Sherwood Smith. Senator, I'd be glad to comment on it. 

I think reference has been made in our testimony to a very com- 
prehensive statement made by Commissioner Ronald Russell on 
the Michigan Public Service Commission. He's described the diffi- 
culties that that State commission has hftd dealing with affiliated 
transactions of simply an instate holding company. 

The whole puipose of the Public Utility Holding Company Act 
was based upon msclosure and a sound capital structure to protect 
the public of the United States. 

We think that this is a public issue. We think that the cost— if I 
understood Mr. Stem's response correctly, the cost in your State of 



Digi-jzedbyGoOj^lC 



19 

Connecticut may Eilready be higher and rates to consumers may al- 
ready be higher in Connecticut because of the purchasing; of IPP 
power and qualifying facility power. 

I know in the Carolinas, our rates are higher than they need to 
be because we've already been required under the Public Utility 
Regulatory Policy Act of 1978 to buy power that we didn't need at 
higher costs. 

In Mr. Sykora's State of Texas, the testimony has been that his 
customers are paying about $190 million a year more for their elec- 
tricity than they should be paying because of what's already hap- 
pened with the requirements that utilities buy from nonr^ulated 
sources. 

We think it's a consumers' issue. We think that over time, costs 
will go up. It's inescapable that no matter how long these contracts 
are, if they're 10 years or 15 years, at the end of the time when 
those contracts expire, then you're going to have a jurisdiction 
that's going to be largely dependent upon nonre^lated generating 
facilities for its energy, and instead of the public being able to buy 
electricity from those at a depreciated a»t of service basis, it s 
going to have to pay what may be euphemistically called market 
rates or avoided cost rates, and the chickens are really going to 
come home to roost. 

I don't think the American public is going to be very pleased 
with it. 

Senator Mack. Mr. Chairman, if I could 

Senator Dodo. Senator Mack. 

Senator Mack. Let me just hop in here for a second. I just want 
to pick up on the comment that was made by — is it Paul Elston? 

Mr. Elston. Yes. 

Senator Mack. The series of kinds of thin^ that you needed to 
go through in order to put your company into business and then 
get down to the end and find out that you have to go to I guess the 
Securities and Elxchange Commission and have this reviewed, and 
then they made some recommendation to you — my instincts say 
that you shouldn't have to do that. 

But there must be some reason why someone wants to take a 
final look from a different perspective. 

What is the risk? If I were to say to you, I don't think you should 
go through that final step. He's gone through enough bureaucracy 
already to make sure that they're in fact going to be going through 
this properly. 

Why is it necessary to take this last step? 

Mr. Doty. Well, Senator, his comment is generally one that the 
Commission would endorse. We believe that in fact the flnfincing 
vehicles and the structures which independent power producers 
have had to resort to in order to avoid holding company status, as 
explained in more detail in my written testimony, probably are not 
the most efficient and may in fact be inefficient ways of structur- 
ing the ownership of an independent power-producing project. 

In terms of the statutes which the Commission has administered 
and the policies of the Holding Company Act, we would view this 
proposed legislation as a very conservative approach to the overall 
pattern of holding company regulation. It's our view that it leaves 
the pattern largely intact, but merely shifts to the States where 



Digi-jzedbyGoOglC 



20 

the issue properly resides the question of whether there should be 
an independent power producer owned by or operated by a compa- 
ny in that State and what the rates should be is an issue that has 
been said to be determined by FERC. The prudence of the contracts 
to be entered into with the distributor of enei^y would be a matter 
for the State authority under the legislation. 

So, we do not believe that the continued case-by-case review by 
the staff of the SEC of the structure of these entities, to determine 
whether there is sufficient continuing influence and control of a 
project to constitute an Eissociate or an affiliated comptmy of a 
public utility, is a good use of our time or a good way to administer 
the statute. 

Mr. Elstgn. Senator, could I just add a comment to that? 

The fact of the matter is that back in 1935, this law was written 
at a time when 13 companies controlled something like 75 percent 
of all the assets in this country, the electricity assets of this coun- 
try. And it was written to regulate very large, multistate compa- 
nies that couldn't be r^ulat«d at the State level find that had con- 
sumer franchises. That is, they could actually tax the consumer, if 
you would, through their rate structure. 

When it was written, it didn't envision a company like Long 
Lake. It didn't envision competition being a discipline in this situa- 
tion. 

In addition, it was written at a time when there was no State 
regulation that could effectively be applied in these situations. 

Now you've seen most of, elII but 15 percent. Basically, the assets 
today are owned by companies that are regulated intensely by the 
State. So it'a a different world today. 

No one ever thought that Long Lake would have to come in and 
take this additional step. 

And the direct answer to your question, there's no risk bfisically 
if this additional step is cut out in the Long Lake situation. 

Senator Dodd. Let me, if I can, before we get further, make sure 
that we give everyone a chance on the panel, to address the subject 
matter. Until we get to transmission questions and so forth, the 
rate questions and the r^ulatory scheme may interest only a 
handful. 

But also, we have time constraints. Obviously, there's a limit and 
there are a lot of questions. So let me take a few more minutes on 
this and invite my colleagues as well. 

I should say, Terry, as well, we're not going to go at a normal 
pattern here. If you have questions based on statements that are 
made, just jump right in here. We're going to disregard a bit the 
formality that we normally have in a hearing process. 

Mr. S. KiNNiB Smfih. Mr. Chairman. 

Senator Dodd. Yes, 

Mr. S. KiNNiK Smfth. I'd like to respond to your rate question 
from the standpoint of a utility that favors PUHCA reform and the 
passage of S. 1220. 

We find this edmost inevitably to lead to better or lower rates for 
our ratepayers for some fairly simple resisons. 

This bill presents a voluntary concept. As a utility, we can select 
through a competitive bidding process the lowest cost power. We 



Digi-jzedbyGoOglC 



21 

can build the plant ourselves or we can take a bid from a reliable 
low-cost bidder from an aggressive independent power industry. 

In that way, we see rates being controlled. 

An additional point I would like to mfike is that this bill ie not a 
deregulation bill. All of the rate powers of the FBRC to deal with 
wholesale rates are preserved. The rate powers of the public utility 
commissions are unchanged. In fact, they are enhanced. 

The bill has a number of provisions which augment the State 
PUC powers. First of all, they expressly grant it the ability to pass 
on prudence so that they can join in the selection of the lowest cost 
power. This is consistent with the least-cost power concepts that 
utilities such as my company, and public utility commissions are 
applying. 

They nave also enhanced the powers of the State commission to 
review self-dealing transactions, to review the effect on rates of the 
capital structure and financing of an IPP, and also have granted 
broader access to books Euid records so that the State PUC can 
better police problems such as cross-subsidies and self-dealing. 

I would like to respond just very briefly to the point about Michi- 
gan. 

As you know, we have a lat^ge cogeneration plant, a PURPA- 
qualifying facility in Michigan. That plant is 49 percent owned by 
our parent company, CMS Ener|^. 

There hfis been an allegation that the power purchase agreement 
was not negotiated at arm's-length. You have to recognize that the 
rates under that agreement have been approved and will be ap- 

tiroved by our Commission pursuant to PURPA law and State regu- 
ations in a State proceeds. 

The ownership issues have been decided no less than five times 
by the FERC favorably, namely that we comply with the provisions 
of that bill which allow us to own up to 50 percent. 

We feel that those questions have been answered in a long and 
difficult r^ulatoiy process. 

Senator Riegle. Mr. Chairman, would you srield at that point, as 
long as we're on the Michigan case? 

Senator Dodd. Mr. Chairman. 

Senator Riegle. I think it would be useful to ask Mr. Lobbia be- 
cause we've got another Michigem company here that has sort of 
the counterpoint of view, to let me hear your viei^i so that these 
can be sort of juxtaposed now euid in this record. 

Mr. Lobbia. Well, largely, what you hear, Mr. Senator, is a lot of 
speculation on how well this could go if it's done right. And I've 
heard three or four times "done right ' here. 

We have some experience with PURPA the last time we changed 
some provisions. Clearly, there are cases, and Houston is men- 
tioned in here, California, Connecticut, I believe we also heard a 
little bit where "from the consumer's standpoint," it W£is not done 
right, that there are excessive costs up front being borne by those 
customers in those areas. 

I go farther and say, here is an example in Michigan where we 
already have a project, very significant, 1,200 megawatts, under the 
current laws. 

Mr. Elston mentioned that Virginia Power went out for 3,000 
m^awatts and 30,000 megawatts was bid under current law. 



D,g,;,zeclbyG00glC 



It seems to me that those systems are working all right. Fm 
sorry that Mr. Elston as one small person has to go to the SEC at 
the end. But the history of this business is that there are not msuiy 
36-per8on companies out there. There are a few today trying to 
carve out a niche in the business. 

Our concern is not the 36-per8on companies. Our concern is the 
major players, the same people who built these powerplants before 
and sold them to the utilities, the same people who supplied the 
equipment to the utilities for these powerpleints before, the same 
fuel suppliers who supplied to the utUities before, now coming into 
the business. 

And they are not small players, as evidenced by that 30,000 
megawatts that was bid. 

There's plenty of room in the system today, albeit, difHcult and 
complicated, as all the Senators mentioned this morning, for en- 
tremts to come into the business if they can truly afford some bene- 
fits to all the customers in the business over the long term, not just 
a short-term benefit provided by a financial structure that gets a 
cost advantage up front, but long term. 

This industry is extremely capital intensive. It is one of the last 
healthy industries in this country in terms of its capital structure. 
I think that's why we're in front of this committee, because we see 
a lot of this as an attack on the capital structure of this industry — 
using the strength in this industry to lever up, to then have cost 
effective projects to come back and compete with those who have 
been in the business so lot^. 

Senator Riegle. Could I — if the committee would indulge me just 
one more moment. 

We've got a third witness from Michigem, Mr. Zimmerman, could 
you perhaps add your comments tmd either react to what Mr. 
Smith has said or what Mr. Lobbia has s£iid and fill this discussion 
out a little bit from your vantage point? 

Mr. ZiMMERUAN. It's my pleasure. Mr. Smith, I read his testimo- 
ny last night and was quite surprised by some of the views he took 
in having the bacl^round and knowledge of how the company has 
structured itself in the recent years. 

First of all, it has set up a complex structure of orgEinizations 
that formed a holding company in 1985, currently has approxi* 
mately 60 subsidiaries to that company. 

The Michigan Public Service Commission has testified, I believe 
before R^resentative Sharp's committee, that it does not have ade- 
quate autiiority to review and screen e\\ of the books and interacti- 
vities of this structure of afTUlates that have been set up. 

The cost that Mr. Smith mentioned under PURPA, the Michigan 
Public Service Cammission went through a hearing proceffi to es- 
tablit^ PURPA rates which were required by Congress. These rates 
were set fairly high at that time, approximately 6 cents. 

No one ever envisioned a privately held, investor-owned company 
setting up a qualifying facility in the size of 1,200 megawatts when 
they developed the language on PURPA. It was to bring in people 
like Mr. Elston. 

Now the question is about rates. You go to rates, then, what 
were the rates? 



D,g,;,zeclbyG00glC 



Well, the public service commission, if this is a QF, and that's 
decided by FERC, not the State commission. So now we have multi* 
pie jurisdictions that play, increases another level of complexity in 
the decisionmaking. 

FERC has decided that it is a QF, and properly so, according to 
the rules. But not without extensive litigation. 

The interveners in that have had to pay a tremendous amount of 
money for lawyers, for consultants, for the time that's required on 
staff to go through this hesiring process. 

We must stop the ability of investor-owned utility companies to 
own and deal with their own affiliates for EWG's. /uid I would say 
tha1>— it would only add cost to the customers. We have the hard 
cases in Michigan to show that. The history has absolutely shown 
that. And there is not adequate regulatory oversight. 

As a matter of fact, one reason for the vacuum here, as PURPA 
was created in 1978, there was no equivalent control at the State 
level. 

Right now, if you're going to modify PUHCA, you're going to 
leave a vacuum in the regulatory arena because there is no one ju- 
risdictional body that has the responsibility to oversee the EWG's. 

Senator Dodd. Let me go to Senator Gramm for a minute. 

Senator Geamm. Mr. Chairman, I get lost in all this r^ulatory 
paperwork stuff. I'd like to try to go back to some first principles of 
this issue. 

Let me just give you a brief, thumbnail sketch of bow I see this 
history. I think what we really need to know boils down to two 
questions. 

First of all, we made a decision in adopting PUHCA that power 
generation was a natursil monopoly. That was not an unusu^ con- 
clusion since in 1932, 67 percent of the electric power in the United 
States was generated by eight companies. 

Because power generation was deemed to be a natural monopoly, 
the Government set up all these hurdles for people, hurdles ad- 
dressing self-dealing, eis well as capital requirements. We did so 
rec(^mzing that as a natural monopoly, we had a right to set all of 
these conditions, and basically, American power generation has 
evolved under that process. Until recently, we've had few changes. 

I don't think anybody here is arguii^ Uiat we have done a bad 
job. My guess is electric power in real terms is cheaper today than 
it was 20 years ago. 

The real question is, can it be improved? May I say that Depres- 
sion-era legislation, in my mind, is always suspicious. I view it with 
suspicion because it was an era of basically bad economic thinking, 
almost uniformly. Not just here, but around the world. 

So, as I see it, there are only two questions that are relevant to 
this issue. One is, in 1991, is power generation a natursil monopoly? 
Is it something that should be undertaken £ind controlled by one 
company, and can that one company do it more efficiently than 
competition could do it? 

If that's not true, the whole logic of PUHCA collapses, in my 
opinion. 

The second issue is, if it is not a natural monopoly, then should a 
company that does not have a natural monopoly, that does not 
have a guarantee that it can sell its power to a specific locality. 



D,g,;,zeclbyG00glC 



24 

that is engaged in fact in competition, should that company be re- 
quired to meet all these requirements that we have set for a natu- 
ral monopoly? 

Now in my mind, those are the two relevant questions. And de- 
pending on how those questions are Einswered, either this is a case 
where competition doesn't fit or we're debating Perestroika. 

And so I'd like to throw out the two questions. First, is power 
generation in 1991 a natural monopoly? And then, second, if it is 
not, should people who are engeiged in competitive power produc- 
tion have to meet all these requirements that were set in 1935 for 
companies that were going to have an exclusive right to sell power? 

And since everybody else has done it, let me begin by letting my 
Texans respond. [Laughter.] 

Why don't I begin—I'll just start on the left with Tom White. 

Mr. White. Thank you. Senator. 

I think it's quite clear, particularly since 1978 with the PURPA 
Act, that in this day and age, that there should be no natured mo- 
nopoly on generation. 

The utilities have no comer on the ability to build safe, cheap, 
reliable plants that operate under long-term power purchase con- 
tracts to the advantage of ratepayers. And I think that's been 
proven clearly here and it's also been proven in the United King- 
dom, where you have a totally open, competitive market in the 
generating side and where we do a lot of business. 

Now given that you agree with that, I think the second point — 
that is, to inflict upon people that do not have market control, that 
is, we don't sell to retail customers and we don't have transmission 
wire control — to inflict on them the same rules that monopolists 
have to play the game by, doesn't seem to me to be a feiir or a pru- 
dent way to structure the industry to see that the ratepayer gets 
maximum advantage from the competition. 

So I think that the answers to those questions are fairly obvious. 

Senator Gramm. Let me first say that I don't necessairfy agree. I 
don't know what the answer is, but it seems to me that those are 
the two questions. 

Mr. Curry. 

Mr. CuBRY. Yes. I would like to also say that my answer to the 
first is DO as well. I think the independent power industry has dem- 
onstrated very clearly that it can build safe, reliable powerplants. 

I think to sum up what a lot of people have said here is let s do it 
right. Well, what does do it right mean? 

In my mind, that means that we need an increase in the number 
of people that are competing to sell that power. In my mind, that 
means that no competitor is unfairly disadvantaged or advantaged. 
And that ties in with some of the pretzellike, PUHCA pretzellike 
efforts that independent power has to go through to compete. 

And finally, we need no discriminatory denial of access to our 
highway to get our power to the marketplace. And I think that re- 
sults in lower consumer rates. 

And a couple of specific examples are that if we overrun the cost 
of a plant, we the developer eat that cost. Typically, the contracts 
that we have with utilities in Texas and California do not pay us 
unless we produce. 



D,g,;,zeclbyG00glC 



26 

For example, we had an explosion in a chemical plant where we 
provide steam, the Arco chemical plant. We were interrupted, our 
power wafi interrupted because of the exploeion. We got the plant 
back in 2V^ weeks, but that was not considered a force measure. 

Under our contract with the utility, we were penalized in terms 
of the price we receive for that power until we can build back up 
and show that we have the power reliably. 

So I think what we're saying is that there are three things that 
are necessary to make this work properly and eliminate a lot of the 
convoluted efforts we have to go through today. 

Thank you. 

Senator Grahm. Mr. Sykora, let me give you an opportunity to 
respond. 

Mr. Sykora. I take the opposite side of the question. I think that 
power generation is a natural monopoly. I think it's been proven in 
this country. 

Now, Tom, you know dam well that England has only been open 
access for less than — how long? Less than 2 years, isn't it? 

Mr. White. Year and a half. 

Mr. Sykoha. Year and a half. They have no history over there. 

Now we do have a history here. We have a history of what hap- 
pened with well-intended l^^ation called PURPA. And what hap- 
pened in our service area, our customers are paying $190 million a 
year more than if we would have been allowed to build the same 
plants because we were not allowed to. We forget about the Fuel 
Use Act of 1978 that l^islated that gas would not be used for 
boiler fuel after 1990. We were not allowed to build those plants. 
Plus, we're talking about two different, entirely different thii^. 
We're talking about baseload fuel diversification, the more plenti- 
ftU fiiels in the Stete of Texas. 

Now, Keys, I appreciate your bringing out the real agenda here. 
The real eigenda here doesn't have anything to do with power gen- 
eration specifically. It has to do with mandatory access to transmis- 
sion. 

That is the agenda that is trying to be realized by this reform of 
PUHCA. 

But we do have a history. Would anyone argue that PURPA was 
not well-intended legislation? I don't know how to argue a hypo- 
thetical question of what's done right. I never met euiyone that 
went out and said, I'm going to go out and do a bad job. 

I don't know how to argue that question. But I can tell you this, 
that it was very quick for the entrepreneurs to find the loopholes 
in the PURPA and along with the Fuel Use Act, to do some hand- 
some prolitteering out of the cogenerated power business. 

I think that the system that we have today is the finest in the 
world. I don't think anyone would argue with that. It seems to me 
like, at the very least, a lot more study would be required to deter- 
mine if there were any changes needed. And why fix it if it's work- 
ing so well? 

Thank you. 

Senator Dodd. I want to have Jim Crowe respond and answering 
this question as well that's been raised. 

Mr. Cbowe. Thank you, Senator DOdd. 



D,g,;,zeclbyG00glC 



Senator Gramm's perspective on this thing is in fact a useftil 
way of clearly looking at this issue. 

Id like to address those two queetions and then add a corollary 
question which I think is really the crux of the issue. 

Yes, I think the generation of power can be a ft*ee market situa- 
tion. I think the key to that is can we deal effectively with the 
ti^nsmission access requirements to make it truly a competitive 
and free market, the building find production of electricity. 

Senator Dodd. Jim, just on that point. We should make it clear 
that the Johnston bill, and Senator Johnston has been rather clear 
on this, does not wish to eiddress the transmission access issue at 
all in the legislation. 

Mr. Crowe. That's right. 

Senator Dodd. So it's interesting to hear about it and talk about 
it, but the l^islation doesn't address that. 

Mr. CaowE. I think it's got to come. I think some things that are 
going on on the House side are more in tune with the transmission 
requirements. 

But in order for it to be a true competitive market, vou have to 
address the transmission. And the question therein is what cost fire 
we paying when we deeil with the very sophisticated — the electrons 
are going to go where the electrons want to go, not where we tell 
them to go by law. And there are some very, very serious implica- 
tions of fooling with that transmission system. 

If we can fix the transmission access without jeopardizing reli- 
ability, your first question is, yes, we can make it a truly competi- 
tive market. And I think there are opportunities for doing that. 
And theoretically, under that r^ime, consumers should benefit in 
a competitive situation. 

The second part of the question is do we need to impose on 
these — given the right answers to the first part, do we need to 
in:u>08e on these players the kind of regulatory review? 

I think the corollary question here is is the decision to purchase 
a free decision, or should it be a free decision? 

Certainly, in a free market, you don't 

Senator Gramm. What kind of decision? 

Mr. Cbowe. The decision to purchase. The consiuner, the individ- 
ual residential, business, industrial owner does not make the deci- 
sion to purchase in this free market. That decision is made for him 
through complex re^latory utihty processes, the interrelationship, 
the power planning process at the utility level and the conunission 
level and the siting council level. 

I think that is really the key issue. Should we just allow the con- 
sumers to be making these decisions in a free market basis? What 
are the long-term implications of the reliability of the power 
supply? 

In the past, utility planning has taken into consideration securi- 
and bfdance of energy sources and location of enet^ sources, 

le basic financial structure underlsring that industry, 

When or if we make a decision to purchase on the free market 
our ener^ sources, we have to address those issues. And we would 
support PUHCA changes that address those issues pttmerly. 

Unfortunately, we're coming out of an era of PURPA — ^you've 
heard some of the PURPA abuses. I could go on for the rest of the 



On 



D,g,;,zeclbyG00glC 



27 

day Eibout some of the improper decisionmaking we made which 
has cost customers money to purchase mandatory purchase re- 
quirements under PURPA. 

So there's a natural suspicion of the industry that there will be 
tampering in this free market and that the tampering will not nec- 
essarily be good public policy at all times. 

I'll just give you one exEunple right now of tampering. 

The Massachusetts commission has ordered one of the utilities 
out there to go out for bid for independent power and QF power, 
and utility bids have been excluded. And that's tampering. 'There's 
some kind of social agenda there. 

I think the mandatory purchase at 6 cents in New York and in 
other States, I think history has shown that that's way above 
avoided cost. We've experienced that kind of thing in Connecticut. 

So I think it's the purchasing decision that we've got to talk 
about and whether we should just leave that — I think we have to 
control that purchasing decision of what will get purchased and 
what's in it, in terms of the long-term ability to serve our custom- 
ers. 

Senator Oodd. Kit Bond wanted to raise some questions. 

Senator Bond. Mr. Chairman, actually I have a question. The 
first question would be for, I guess, Mr. Smith, Mr. Lobbia, Mr. 
^kora. It picks up on something that Mr. Crowe just mentioned. 

Gentlemen, in your testimony, you've raised the question about 
the 50-percent equity. I would like to know why that is a signifi- 
cant difference between you and the IPP's and why, if you were to 
contract with the IPP's for power, why you would not be able to 
include in your contract protections against the dangers you cite of 
d^radation, decapitalization, and risk without compensation? 

What's the problem and why Cfin't you deed with it in a contract? 

Mr. Sherwood Smith. Senator Bond, I think your question raises 
two very importfmt points. The first one is the proper use of lever- 
age. 

I think we've all seen that the improper use of leverage in our 
society can lead to excesses which will cause the industry that's 
serving the public, whether the airline industry, the thrift industry 
or, in this case, the electric power industry, to be burdened with 
debt find to take advantage of the tax deductions that are available 
for interest payments and have structures that do not have simply 
enough capital in them to sustain their operation on a sound flscfd 
basis over the long term. 

The use of debt in the IPP situation is simply obvious to anyone 
who's looked at any of these transELctions. In some cases, it's not 
been just 90-percent debt. It's been lOO^percent debt. 

That means that two things happen. The entity, the IPP is fi- 
nanced basically with the cr^t of the utility because it's only the 
long-term purchase contract of the utility that enables the IPP to 
get financing. This has been identified by the rating agencies and 
by others as a financial burden similar to long-term debt and leases 
on the utility. 

It has the effect of reducing the credit worthiness of the utility, 
the effect of increasing its debt and its capital structure, and over 
time, is going to increase the rates that the utili^ will have to pay 



D,g,;,zeclbyG00glC 



for capital and the rates that it will have to charge its customers 
for service. 

We think that, insofar as the contracts between the utilities Euid 
the IPP'a are concerned, and these may vary widely from one loca- 
tion to another, but essentifilly, they're contracts that mandate 
pa^nnent by the utility. They're take and purchase contracts. 

Those contracts may be required of State regulators based upon 
tiie apparent short-term lower costs of a small, fully financed facili- 
ty- 
It's been estimated that the cost initially could be 5 or 10 percent 
less. State commissioners may be induced to require utilities to 
enter into those contracts. Because of the apparent short-term ad- 
vantage, it's our opinion that, over the long term, the rates are 
going to go up and that the whole utUity system is going to be dis- 
advantaged. 

We do think that utility generation is principally a natural mo- 
nopoly. A professional economist here might use the word "idiosyn- 
cratic," that the capital, once devoted to an electric generating 
plant, can't be used for any other purpose. 

If you want to look at whether or not the industry is and should 
be regulated as a natural monopoly instead of in some other way, 
you don't need to speculate on it at all. All you'd have to do is look 
at what's already happened around the United States under the 
Public Utility Regulatory Policy Act and you can see, particularly 
in Texas and Cftlifomia, where the situation has been egregious, 
you've seen that the change in law and the tampering, that was 
Mr. Crowe's word, by the Government in this situation, has led to 
building excessive, unneeded facilities and forcing the public to pay 
for it, because rates in California and Texas paid by electric con- 
sumers Eu-e higher because of actions of the U.S. Congress than 
they otherwise would be. 

Mr. EidTON. Mr. Bond, since the question wasn't answered, 
which was, if you have a problem, why ceui't you do something 
about it, I'd like to answer it. 

Senator Bond. Well, let me ask you a question and then both 
sides can discuss it because I was going to address one to you and 
Mr. Smith and Mr. White. 

And that is, if everybody has access to the same ftrchitecture, en- 
gineering, and the same scientific knowledge available in the field, 
you could both get a turnkey plant. What is it, other than the fact 
that, as the gentleman on this side has pointed out, that you have 
advantage of having a more highly leveraged opportunity and they 
perhaps have a disadvantage of certain of the regulatory con- 
straints which are not market constraints, that you could do a 
better job. 

And I would like you to discuss your response in light of that 
question and maybe we can have comment f^om the others as well. 

Mr. EiBTON. I think the fundamental principle that you've got to 
keep in the front of your mind here is mat this legislation doesn't 
require anybody to buy any electricity from anybody else. It's ena- 
bling legislation. 

If Mr. Smith doesn't like the contract that I offer, he says no. To 
go back and talk about PURPA, which has a mandatory require- 
ment, is to talk around the subject. This is voluntary l^ulation. It 



D,g,;,zeclbyG00glC 



doesn't require anyone to buy. It doesn't require any utility regula- 
tory to buy and it doesn't require any utility executive to buy. 

They'll only buy if I come forward and offer them a good deal, a 
deal that they tlunk is good for their ratepayers and their share- 
holders. And we've seen plenty of evidence in this country, some 
13,000 m^awatts have actually been purchased because utility ex- 
ecutives have looked at the oners that were put on the table and 
they've said, this is a good detil for the consumer and this is a good 
deal for my ratepayer, and therefore, I'm going to buy it. 

Now you ask, why can we do something better than the ratepay- 
ers? You ask me why the Soviet Union hasn't worked as an econo- 
my, which is the command and control without the profit incen- 
tive. 

That to me is right at the essence of your question here. We're 
talking about profit incentive. I don't make a buck unless I deliver 
a product. 

The problem with the cost-plus system is that if they build, they 
get their costs back and they get a profit on top of it. 

Now I think this country has been built on the free enterprise 
system and it's why we're so efficient. There's very clear evidence 
on the fact that you can take this free enterprise concept and now 
brii^ it into the electricity industry ani that it can work there as 
it's worked in the rest of this world. 

It's ironic to me that the rest of the world now has recognized 
the bankruptcy of this communistic approach in the Soviet Union, 
and yet, we have in this country — I have utility executives talking 
about me as being greedy because I want to make a profit, as 
though they don't want to make a profit. 

Now the truth of the matter is that the free enterprise s^tem 
with a profit motive that will only pay if you deliver is where the 
efficiencies are going to come in the long term. 

The rest of the details can be argued out. The fact is if you look 
at what FERC has said, if you look at what a whole bunch of differ- 
ent studies have said, the cost of capital, of independence, is no dif- 
ferent — some say it's a little bit higher, some say it's a little bit 
lower. It's at least argumentable whether the cost of capital of in- 
dependence is lower than that of utilities. 

But the fact of the matter is it is a more powerful force that 
we're talking about here. It's competition and the free enterprise 
system. 

Senator Bond. So, Mr. Elston, your answer to my question is, 
yes, there are financial and other regulatory constraints that puts 
them at a disadvantage. And to carry your analt^y further, we 
ought to take the constraints off of the utility companies and let 
everybody go at it. 

That is the Ic^celI extension, is it not? [Laughter.] 

Mr. Elston. The utilities are given an exclusive franchise to 
serve a consumer that no one else can do. And there's got to be 
regulation of that. That is truly a monopolistic business and that 
part of the business should be kept closely regulated. 

It's a ticklish business to make sure that the interface of a mo- 
nopoly with the free market system is done properly. We have 
always advocated strong regulation on that interface. But it doesn't 



49-970 0-92-2 

D,g,;,zeclbyG00glC 



80 

mean that you shouldn't bring the benefits of free enterprise to the 
generation sector where we've cleeirly demonstrated it's possible. 

Mr. Patkizia. Senator, I'd like to aidd to what Mr. Elston has said 
because I think there Eu*e several issues that need to be addressed 
in that context. 

The Brat problem is that if electric generation is no loI^^r a nat- 
UTEil monopoly, it is because the remainder of the system, transmis- 
sion Emd distribution system, still is a natural monopoly because it 
meets all the classic economic definitions of a natunil monopoly. 

There are huge economies of scale in building only transmission 
lines in a particular place. Duplication of those lines is both eco- 
nomically inefTicient and very burdensome on ratepayers. 

So if generation is now not a natural monopoly, it is only because 
the system has already been constructed to permit the distribution 
and to permit the transmission. 

For those who say that what we need to make the generation 
sector work on a fi*ee market basis is access to transmission, what 
they're really saying is we want the ability to take advantage of 
that system without paying the costs of that system. And there's a 
problem with that. 

The second point that has to be made is that if, in fact, the elec- 
trie generation sector is now no longer a naturftl monopoly, and if 
it is available for competition, then that competition must be open 
to all. We cannot create a privileged few. We cannot create niche 
marketers to go out and have privileges in that system that no one 
else has. 

The principal flaw in PURPA was precisely that it created niche 
marketers, a privileged few with a memdatory right to require a 
utility to purchase. 

If we're going to have competition, everybody has to be able to 
compete on the same basis. 

Senator Dodd. Senator Sanford? 

Senator Sanporo. Let me go back to the capitalization of these 
ineces of the industry. I have, as you know, Mr. Chairman, for a 
long time complained about leveraging of corporations and take- 
overs Emd that kind of capital formation. 

It seems to me, from what Sherwood Smith said, that one of the 
reasons that the PURPA companies can be more effective or cheap- 
er, if indeed they are, is that they're so heavily leveraged that they 
don't have the investment in capital. 

And I carry it one step further and ask you this question. 

Is this not a case of being subsidized by the taxpayers because of 
interest rates, that they take the deductions and we're paying it all 
over. We're passing a subsidy to a company that's that highly lever- 
aged. 

Mr. Sherwood Smtth. In my opinion, yes. Senator, that is what 
happens. And you could tfike any assumption that you wanted to 
make with a lump sum of dollars. Let's assume $1 billion is going 
to be invested, and that $1 bilhon will go into electrical generating 
facilities. 

If 50 percent of that $1 billion represents equity capital, that's 
going to require a return that will be sufficient to pay the taxes. 



D,g,;,zeclbyG00glC 



31 

If, on the other hand, it's all debt, vou're going to have a tremen- 
dous decreetse in taxes and, indeed, the losses to the Federal Treas- 
ury and to State Governments could be significant. 

Senator Sanford. Well, now, do we have any calculations on 
that, how that works and how it works in the long run when pre- 
sumably that debt is paid off? 

Mr. Sherwood Smith. That certainly could be provided. And if I 
may, I'd like to provide something for the record. 

Senator Dodo. Without objection. 

Senator Sanford. Well, I wish you would. Now let me go back 
and ask you a question that early on was questioned, was duputed. 

I understood you to say that you have to pay more for electricity 
than it costs you to generate it. 

Mr. Shkbwood Smith. Yes, that's correct. In the two Carolinas 
now, we're buying electricity that we don't need at higher prices 
than we can generate the same electricity for simply because of 
what happened because this U.S. Congress enacted the Public Utili- 
ty Regulatory Policies Act of 1978. 

That was well-intended legislation, but it was misused and par- 
ticularly misused in California and Texas. 

Senator Sanford. Well, I've just heard it said that you don't 
have to buy this if you don't want to. 

Mr. Sherwood Smith. I think that reference would be to what is 
now being proposed under the amendments; that is, title 15. That 
the qualifying facility rule under PURPA which mandates that the 
utility must buy, would not be a part of these amendments. 

But instead, you would have a framework of incentives applied 
by local commissions — that is. State commissions — that, in my 
opinion, would achieve the same result. And you can look around 
the country find see that. You can see that m the State of New 
Jersey, a number of years ago when the State commission turned 
down a very attractive, low cost purchase from a neighboring utili- 
ty in favor of mandating purchases from privately owned, nonregu- 
lated IPP's. 

Mr. Crowe has ^ust described a situation in Mfissachusetts where 
that State commission, for whatever reasons, has decided to seek 
nonregulated generation facilities to be built in that State. 

Now those commissioners are unlikely to be in office when those 
contracts expire and when the chickens come home to roost euid 
when market prices, whatever those may be determined to be, will 
be applied in the future. 

And if I were one of those commissioners, 1 certainly would not 
want to be in office at that time. 

Senator Sanford. Well, I fail to see how the consumer is favored 
by this l^pslation. 

Mr. Sherwood SMrm. The consumer, in my opinion, is substan- 
tially disadvantaged by this legislation. 

Senator Sanford. 1 m glad to be getting rid of you Communists, 
you understand. [Laughter.] 

Mr. Shekwood Smith. Yes, sir. I don't think this is a Marxist- 
Leninist forum. 

Mr. S. KiNNiE Shtth. Senator, I would like to address the issue 
of excessive 

Senator Sanford. Yes, right here. 



D,g,;,zeclbyG00glC 



82 

Mr. Crowe. Senator Sanford, I think that, unless you fix these 

kinds of abuses or tamperii^ temptations, that the consumer ccm 
be disturbed by this kind of l^islation. 

Just take the equity, the capital structure, for example. It's very 
appealii^ to me as an fu-gument. We've been frustrated over the 
years as electric utility executives and planners that, probably 
emotion more than anything, but we don't feel that risk and 
reward have been balsmced. And particularly the last 10 or IS 
years through these large construction programs, some of which 
have gone awry. 

We feel that, typically, we've had more risk and regulated re- 
turns find therefore, less reward. 

So the appeal on the surface of an unregulated power production 
system is to get the risk and reward, the risk and return system in 
balance. 

But unless you put some protections in there, and certainly, 
we've addressed the return side of it. The unr^ulated entities are 
typically looking at 15, 20, 25 percent return. 

I think in the past, some of them have made far in excess of that. 
I think through competitive bidding, that is diminishing. That op- 
portunity is diminished. 

So they £iddress the return side of this thing. I think we need to 
address the risk side of it. What are we buying when we buy one of 
these entities? And that gets back to this issue of the purchasing 
decision. 

If we're goi^ to allow high leverage, then basicsdly, we're not 
accepting, the IPP's are not accepting the level of risk that the util- 
ity has accepted, emd the risk return is not the same. 

For instance, at the end of 20 years, the contract expires. If the 
utility hftd built that plant, it's depreciated on our books, the cus- 
tomer gets the benefit of those plants, we all have them, we all 
have undepreciated or fully depreciated plants on our books that 
are still running, still servii^ our customers. 

The IPP can go out and resell that plant at market prices. 
You're not bujdng the same thii^ because you don't have the risk 
and reward system in balance. 

That's specifically what we're talking about when we're talking 
about creating a level playing field. And unless we address those 
things, consumers over the long haul, I think Mr. Smith said those 
chickens will come home to ro(»t. And they will. 

Senator Sanford. Was it Mr. White or Mr. Elston that wanted to 
speak? 

Mr. S. KiNNiE Smith. Mr. Smith. Excuse me. Senator. 

Senator Dodd. We have two Mr. Smiths here. 

Mr. S. KiNNiE Smfth. I'd like to address the issue of excessive 
debt leverage from the standpoint of a purchasing utility. 

The claim that that risk will be passed on to the utility I think is 
false. It overlooks the essential character of this l^islation. That 
is, that the utility has a voluntary choice whether or not to pur- 
chase power from an independent power producer or build a plant 
itself. 

In setting the terms and conditions of that purchase, the utili^ 
can literally write the contract and put it out in its bid terms, ft 
can specify the amount of equity that must be required. It can 



D,g,;,zeclbyG00glC 



88 

specify the types of debt, its maturities and interest, the fact that it 
might have to have fixed interest rates. It can specify any other 
term that it desires. 

That is the way that the power would be bid. 

If it is concerned about the effect on its credit rating, it can 
simply go to Wall Street. It can explain the transaction to its in- 
vestment bankers, to their ratiiw agencies, to the banks, and if 
they're told that it's going to af^ct the credit rating of the pur- 
chasing utility, they obviously will not complete the transaction. 

This is a voluntaty decision by the utility and presumably, they 
will not make mistaEces, and when the State public utility commis- 
sion reviews the transaction, presumably they will not make mis- 
takes and approve it if the leverage is too high. 

You do not have to have heck-or-high-water contract terms. You 
do not have to have minimum purchase terms. You do not have to 
have tfike-or-pay agreements. You can have an agreement which 
sii[y)Iy says, we will pay for power as delivered or as available. 

lliat is the utility's choice and not the IPP's. 

Senator Dodd. Mr. Zimmermeui? 

Mr. Zimmerman. Mr. Chairmsm, we do have the history of Con- 
sumers Power in Michigan. I think you ought to have the perspec- 
tive of the comments of Mr. Smith because Mr. Smith has current- 
ly been able to voluntarily enter into agreements with QS in Michi- 
gan. And evidently that's the case because let me tell you, there's 
been over 2,000 megawatts of QF capacity that's been wanted to be 
sold into the Michigan market. 

As of this time, Consumers Power has contracts on 91 percent of 
the capacity it's contracted for. They are a participant with an af- 
filiate company in the project. 

So, yes, certain power companies would love to voluntarily pick 
and choose. And that's where the very abuses that we're address- 
ing by PUHCA come into play. They'll choose the one they want to 
the exclusion of the other. 

The question came up earlier from Senator Graham as to wheth- 
er generation was a natural monopoly imd there was dispute here 
among the industry. 

One thing no one is disputing is transmission is a natural monop- 
oly. No question about it. 

Senator Dodd. How about distribution? 

Mr. Zimmerman. I beg your pardon? 

Senator Dodd. How about distribution? 

Mr. Zimmerman. Distribution can be replicated, in my opinion, 
at competitive prices. It depends on the system and so on. 

But I think both distribution and generation can be provided b^ 
someone for expansion and coat and still, they would be competi- 
tive. 

They cannot provide transmission, though. You cannot get the 
rightof-wavs. You cannot duplicate a transmission line that s capa- 
ble of handling 1,000 megawatts of capacity for a 50-megawatt job. 
I meeui, you just can't do that. "The economics aren't there. 

The fact of the matter is, though, let's talk, if I may, just a little 
bit about some of the history in Michigein. 

We have figures on just two projects — MCV and the Palisades 
Generatii^ Co. — which, by the way, according to the record here, 



D,g,;,zeclbyG00glC 



84 

that is an existing, almost highly depreciated plant that has been 
sold off to a generating company that's been formed, of which Con- 
sumers is an affiliate. 

In the Pfilisades Generatii^ Co. case and ^e MCV case, we have 
conservative figures that the additional cost due to the private 
ownership of these, not the traditional utility, will add $8 billion to 
the ratepayers' bill. 

That's enough to pay the rates of all of Consumers' customers fbr 
a 4-year period, to give you an example. 

Now this self-dealing and this ability to sign contracts 

Senator Riegle. Now Mr. Zimmerman, let me just say 

Mr. Zimmerman. Yes, sir. 

Senator Riegle. Take a moment, if you would, if I may. It is a 
Michigan situation. Explain irom your view how that works and 
_why that $8 billion of premium cost comes into the picture. And 
try to do it in the context of this general debate that's going on 
here. 

Mr. Zimmerman. All right. 

Senator Riegle. In other words, from your vantage point, what 
has happened here to cause that extra cost to come into the pic> 
ture, if that in fact is accurate. 

Mr. Zimmerman. All right. Senator. The one hazard, of course, 
and the No. 1 precept that we're discussing here is the ability to 
deal with yourself. Tha.t is, you have an affiliate that is an IPP or 
an EWG, whatever the buzzphrase is, and the traditional operating 
utility company executes a contract with it. 

In the case of MCV, which is the Midland cogeneration venture, 
the price was set for the current assets or some of the assets at the 
abandoned nuclear plant. Those were sold by Consumers Power 
Co., which is the operating utility company, at a price of approxi- 
mately $1.5 billion. 

Now Consumers Power had $4 billion approximately invested in 
the project when it was abandoned. 

In turn, MCV came in, put in combustion turbines, gas- fired 
combustion turbines, utilizing the steam turbines that were on this 
site. 

The cost is approximately, on the total project, and this cost was 
in the contract between MCV, the affiliate, and Consumers Power 
Co., came in at about $1,500 a kilowatt. Consultants today have 
told me that plant could be replicated from scratch without the 
buyit^ of any existing assets at approximately $500 to $600 a kilo- 
watt. 

So right off the bat, the price, negotiated, not at arm's-length, in 
our opinion, but between the two parties, is three times higher 
than what a private party could truly, or a traditional utility, could 
build the plant for. 

Right there is part of the cost. 

To show you how the web gets spun even deeper. Consumers hap- 
pens to be a gas-operating utility also. The record in Michigan 
shows that when they went to n^otiate a gas contract for their 
retail sales, they were also authorized to negotiate the gas contract 
for the MCV, t^e so-called independent affiliate. 



D,g,;,zeclbyG00glC 



When th^ did this, stnuigely enough, the rates that were devel- 
oped for the MCV project were less than those for the r^fulated 
retail sales end of things. 

Also, the terms and conditions, although the calculation in 
recent years has shown the rate in the first couple years of this 
contract, the rates have come out about the same, it's due to the 
market, the amoimt of gas that's being sold currently. But the 
terms and conditions are significantly different under the two 
agreements, edso. 

So all of this interaction has raised not only the cost of the elec- 
tric customers that are captive to Consumers Power Co., but also 
now we have a gaa company that could be represented as subsidiz- 
ing the affiliate that's already maximizing their profits. 

Senator Riegle. Well, let me ask you this, and then I think Mr. 
Smith ought to have a chance to respond, if he wishes to do so. 

And that is, is the point that's at the foundation of the observa- 
tion you've made the self-desding point and the fact that if you set 
up a situation in which self-dealing can occur between these vari- 
ous component parts, if you're tal^g the retail sales end of it or 
the tTEmsmission end of it or the enet^ generation end of it, if you 
allow self- dealing to go on here, you can have abuse. And you 
think that we've got examples of that. In your mind, this is one. 

Is that the principetl point you're making, or is there einother 
fundamental point you're making here that would cut through this 
entire discussion? 

Mr. Zimmerman. Well, if the reform goes through. Senator, we 
do feel that the abuse definitely needs to be addressed. 

We feel the only way to address that is to eliminate any self-deal- 
ing; that is, the aifiliates cannot deal with the operating company. 
No. 1. 

No. 2, we definitely feel there should not be an across-the-board 
approved or relaxation of PUHCA, but it ought to be taken on a 
case-by-case basis for this very resison. 

There should be review in advance of entering into any contracts 
and projects or forming of additional companies for this purpose. 

Senator RmcLE. And are you sayit^ that because — didn't I hear 
you say earlier that you thoi^ht that the State agencies mi^t 
have not the muscle or the staff size, or what have you, to sort of 
track through all of these kinds of interconnections and so forth? 

Mr. Zimmerman. That's correct. 

Senator Riegle. Is that your argument as to why you need to 
maintain the Federal authority in this area? 

Mr. Zimmerman. It could be done at any level. Senator, at State 
or Federal. I think it's more appropriate for Federal, going back to 
the original act, is you've got across to interstate commerce. That 
is, some of these companies cross borders. 

Consumers has intemationetl operations with some of its affili- 
ates. So trying to track the flow of money and where the money is 
being used and appropriated is a megor challenge to a regulator 
who has just a small piece of the pie to look at. 

If he's only able to look at the operating utilities books, it's very 
difficult to tell what is happening. 



D,g,;,zeclbyG00glC 



86 

Senator Rieglb. Mt. Smith, Mr. Zimmerman has asserted that 
something on the order of $8 billion is sort of a premium cost that 
comes out of this that gets laid on the customer or the ratepayer. 

What's your response to that? 

Mr. S. KiNNiE Smfth. We clearly deny that there's any such 
excess cost at all. [Laughter.] 

Let me go back to the beginning. This plant is a cogeneration 
plant — 1,340 m^awatts of capacity. One thousand two hundred 
and forty of that will be purchased by Consumers Power Co. 

Without that plant today, we would have a n^ative reserve 
margin. Without that plant yesterday, the chief operating ofTicer of 
Consumers Power Co. told me last night, we would have had a 
blackout or a brownout in our favorite state. Senator. 

Tliis is a key energy source for the Middle West. 

Now we could have let the steel rust and the concrete decay at 
Midlfind. We elected not to. We created value out of those assets. 
That value is the core of much of this dispute. 

"The Michigan Public Service Commission, fifter extensive hear- 
iiurs, determined what the avoided cost rate was. And that is what 
is oeing charged. 

Now certain aspects of that are being titrated by all parties, euid 
perhaps will be, Emd it's in the courts. But it will be decided iis a 
regulated rate under the concepts established bv PURPA. 

I'd like to address the issue about affiliated iPP's. 

If you ban sifFiliated IPP's, all you are doing is reducing competi- 
tion. They are well-capitalized, experienced, and expert types of 
companies. They should be allowed to compete. 

The State public utility commissions in Mich^ian and in other 
States will review all of the self-dealing ctll^ations, all of the aiHli- 
ate transtictions. The FERC will have the same right of review. 
Our public service commiasion has an absolute veto over imy con- 
tract with an IFF. 

The Johnston-Wallop bill strengthens State PUC powers, and we 
support that. 

so we think that the self-dealii^ issue is adequately handled 
under existing regulation emd the enhsmced regulation of the bill. 

With respect to the gas contracts, he was kind enough to point 
out that currently the price paid by the utility under a separate 
contract because it has a different pattern of needs and loat^, is a 
lower price today, signiflCEUitly lower than that being paid by the 
MCV. 

Different markets were being served and different prices were 
being n^otiated with the producers. There was no intercompany 
transfer of value in those gas contracts. That issue weis thoroughly 
argued and debated and decided in the r^ni^atoiy proceeding. 

Senator Rieole. May I just ask this? Mr. Lobbia, do you support 
Mr. Zimmerman's view that the self-dealing issue, either in or out 
of the Michigan context, ia a fundamental issue here? 

Mr. Lobbia. It's alMolutely a fundamental issue. I think because 
of this controversy that we ve seen in the State of Michigan, that 
it's highly likely mat our regulators would put severe limits on af- 
filiate transactions or if you want to cetll it self-dealing. 

In fact, there has been l^islation that's already been proposed in 
the Michigan Legislature that would do that. Part of the difficulty 



D,g,;,zeclbyG00glC 



37 

is that then, you put companies like myself in the position where 
you're not going to be able to build for your own needs because 
that would be an afiUiate transaction or self-dealing. 

So now, I can go off imd try to build in some other State. And 
what you do is you take the advantage that a utility has that 
knows its service territory, that knows the politics there, that 
knows the customers, and you remove them and you send them off 
to deal in some other jurisdiction. 

Much of what's being said is still premised on the doing it right. 
Mr. Smith suggests that we can do it by contract We certainly can. 
I mean, you can do everything by contract. 

All of this should go away. We'll just do it all by contract. 

The reality in a State with a regulatory commission, with the 
oversight they have, is such that it isn't goii^ to be that eaay. We 
see it in our own State all the time. We see a bias away fit>m 
having the utility do it, to try to find other reasons to get someone 
else to do it. 

We're correcting the ills of the past when we have huge writeoffs 
in this industry, 98 percent of which were for nuclear powerplants. 

You don't have to slap my hand about that. I have the point. I 
think we understand. I think the market is doing its job there. 

This whole concept of doing it right, I would suggest to you that 
I'll bet Congress, when they enacted PURPA, thought they were 
doing it right, thought there were a lot of good opportunities, 
small, independent entrepreneurial, new, renewable enei^ that 
they were bringing on. Aiid yet, when we sit here 10 years later 
and look back, we can see a lot of the problems that have been de- 
veloped. 

I think the best thing I've heard is I don't think you can change 
this at the Federal level without doing something a different way 
at the state level. 

I don't think State commissions have the horsepower or the 
staffs, the wherewithal, the experience, to defil with all the kinds of 
situations that are going to come up as we go forward. 

Because what we're doing is we're laying one strip of competition 
on the business, just on the margin, just creating one little change 
here. 

It's kind of like the old-^ as, new-gas in the natural gas industry. 
We'll just make one little change. 

Well, that caused a lot of distortions. I think we have to stand 
back and answer some of the fundamental questions that Senator 
Gramm aaked about a monopoly, and if not, why subject Mr. Elston 
and others to SEC? 

In fact, why subject the rest of the industry to it? Why don't we 
spin off the whole generation side of this industry? Let them go out 
and lever up however they all want to go lever up and let every- 
body compete for it. 

Why just create the special exemption out on the outside? 

Senator Donn. Let me ask, if I can, Commissioner Leonhardt, to 
respond just to that last point that Mr. Lobbia made about whe^er 
or not our State public utilities commissions can in fact deal with 
tiiis. 



D,g,;,zeclbyG00glC 



I realize that we're t-nlltjng about one State, but 3^ know the 
others around the country fairly well, in terms of stamng, in terms 
of professional ability, and so forth. 

How Intimate Ib that concern? 

Mr. LEONHAaoT. I think it is a legitimate concern. In fact, I don't 
think the idea has been put on the table yet, but I think this legia- 
lation, if it's ultimately adopted, should have some Federal mecha- 
nism to get more resources into the State utUity commissions be- 
cause this is going to be a more complicated world. 

Senator Gramm talked about we're kind of going into what you 
call a gray or a twilight zone, part competition, part monopoly, in 
these different realms that we've discussed. 

As it gets more complicated, more like the telephone industry, 
frankly, the State utility commissions will frankly have to be more 
sophisticated tiian they are today. They were Bet up to handle the 
simple integrated companies operating in one State all vertically 
int^crated and so forth, in the old days, the way PUHCA required. 
And as the whole system gets more complicated, tmd you certainly 
see it here this morning, the State utility commissions will need 
more resources to supervise these contretcts. 

I'll just pick up on a couple other points, if I may, too, for a 
second. 

Senator Riegle was concerned about this situation in Michigan. 
I'm not an expert. I've read a little bit about the tough plant you 
had out there and everything. I'm not expert in it. But I would say 
that plants that have come in in the traditional system of rate- 
based r^ulation and ihe old way and so forth, they have not 
always had, and particularly in the last 10 years of the nuclear in- 
dustry in this country, an easy history. 

You can come in the old way euid it's goii^ to be tough, too. 

So you come in the new way, and there's going to be some diffi- 
culties and everprbedy starts sayii^, self-deling and raising that 
flag and everythmg and that gets people aroused and so forth. 

A lot of the plants that came in in the old way were not without 
their problems. 

PURPA's had a bad time here this morning. And sure, there 
were some problems. There were some excesses. Everybody said, 
this small generation and cogeneration and alternative energy 
sources, this is going to be great in the 1970's emd everything. And 
maybe we went a little far. But actually, more nonutility genera- 
tion was built in this country last year than utility generation. 

Really, PURPA, on the whole, Jim Crowe is right about some of 
the excesses. We're going to address them in Connecticut in terms 
of avoided costs being too expansively interpreted and PURPA 
being given such a special status, more than it deserved and unfEtir 
to the traditional utUities. 

That's right, and we will address it at the State level, which is 
where FERC del^ated the definition of avoided cost. 

But, really, PtJRPA's done a lot of good. It shouldn't be lost 
along the way here. It's built a lot of power. It's brought a first 
st^ in competition smd generation in this country. 

Yes, there are problems. There are with anjrthing new and 
th^'re being addressed now and corrected. And I don't think 
PURPA should be seen as a nightmare. 



D,g,;,zeclbyG00glC 



Excuse me for wanderii^ around. 

Senator Dodd. Jim. 

Mr. Crowe. Chainnan Dodd, I'd just like to comment fiirther on 
this, particularly in regard to the State commissions and their abil- 
ity to deeil with these issues. 

I think it doesn't necessarily go to just the resources of the com- 
mission or the competency level, the experience level of the com- 
missions. But if you look, for instance, in New England, the temp- 
tation is very large for any given State. There is competition 
among the States, not only the utilities, but Eimong the States 
themselves. And the temptation is very great. 

Connecticut, for example, has had a concerted, long- range plan 
to reduce our dependence on oil. My company was 94 percent de- 
pendent on oil in 1971. Next year, we'll be 12 percent dependent on 
oil. 

It cost a lot of money to do that and our consumers are paying 
for it, but we think th^ got something. 

On the other hand, the expansion that's going on in other States, 
two of which touch our borders, and others in New England, don't 
have those same elements of plannii^. I think the temptations is 
there at the Stete level to take advantage of the short-term expan- 
sion of the relatively inexpensive and right now plentiful gas 
supply with these kinds of IPP projects that are gas-bf^ed, relative- 
ly inexpensive, highly leveraged. And if everything goes OK, then 
the consumers get the advantage of that. 

But they don t have the same where's the beef? They don't have 
the same meat behind them that the utility infrsistructure has. 

I think the temptation is there among other Stetes and their 
commissions and tney have the ability to tamper with the REP'S, 
the requests for proposals that are going out, the setting of the 
scoring system. 

Theoretically, we can say, yes, you can do these things by con- 
tract. Massachusetts Utility didn t want to exclude udlity bids. 
They can't do that by contract. They can't require certain debt/ 
eqmty ratios in these bids because these scoring systems are being 
developed by the States. At least the ones that we bid into. 

We bid into an RFP in New York State and we lost. We were 
told that it was on price. They couldn't have possibly beaten our 
price with a new plant. 

Somehow, in that scoring system, the new plant, the IPP or 
whatever was purchased down there, got some kmd of a preference 
in the scoring system, which I believe, through the interaction of 
the utility and the Stete, was constructed to favor the IPP's. 

I think we need some Federal guidelines to control this kind of 
tampering that keeps the important piannii^ parameters in our 
power supply. And with that, and it's going to be difficult to do, 
with that, I think we can then go ahead and talk about more com- 
petition. 

Senator Rieglb. Mr. Chairman, if I can just make a couple of ob- 
servations sort of in genersJ having to do with a nimiber of the 
comments that have been made here today. 

If you step way back from this, if we had the general public in 
the room here today, Euid there isn't much of the general public in 
the room today, which is a matter of concern to me. 



D,g,;,zeclbyG00glC 



40 

I think to the extent that th^ are, th^'re here around this 
table, as properly they should be, and that's our job. 

But I think the issue of the impact on what's happening to 
people in their lives today, just the economic reeilities in the coun- 
try, are really quite severe. Even if somebody is in em elevated fi- 
nancial position and is sort of removed from all of the economic 
riptides that are going through the economy, boy, you'd have to be 
really tuned out not to understand that an awful lot of people are 
hurting in the country. 

And the aggr^ate data on that shows that over the Ifist 20 
years, medism family income for sort of middle income people in 
this country has stayed just about the same. There's been no real 
improvement that one can measure in disposable family income 
after inflation over the last 20 years. People are working a lot 
harder. Two people are working in one family to sort of try to keep 
up, but it's a treadmill operation for most of the people in tiie 
coimtry. 

The data is inescapable on that point. I won't go into it in great- 
er length here now. 

One of the unavoidable costs that virtually everybody in the soci- 
ety has to cope with, unless they're living out under a bridge in a 
cardboard box in a doorway, is the cost of public utilities, along 
with the other absolutely basic requirements in life such as food 
and shelter. 

But the public utility cost is there for just about everybody in 
our society. It is, in my view, a fundament^ cost of living. 

There is a very powerful public interest £u*gument I would draw 
from that that says, first of all, you want to make sure you've got 
enough of it in the way of the power requirements that the country 
needs, but you also want to make sure that you're getting it out 
there in a way that keeps those costs down. 

And if those costs are metisurably higher thaa they otherwise 
need to be, we really miss the boat as a society. 

Now, I think it was unfortunate that we sort of veered off earlier 
in that conversation about whether we're really talking about some 
sort of communism or some kind of a central planning mechanism 
coming in here and really sort of wrecking the values of a more 
freely operated market economy. 

But it's worth noting that the reason that we're having this 
hearing today is we couldn't have it any sooner because we've been 
having nonstop hearings in here on all of the wreckage that's accu- 
mulated from the blowoff of the 1980'b. 

We've got a bill right now to borrow $70 billion to refinance the 
Bank Insurance Fund because it's empty. The latest estimates on 
the savings and loan debacle are about $700 billion. It may hit a 
trillion before it's done. That's a SO-yeeu* cost. 

We've got other major problems out there which I believe are not 
yet fully recognized in other financial areas. 

It's hard to draw these historic parallels, but I heard the talk 
about we don't want to just go with what we did in the 1930's, the 
sort of anti-Depression measures and so forth and so on. 

What we did in the 1930's was the result of what we did in the 
1920's. I don't want to lose sight of some larger timeframe because 



D,g,;,zeclbyG00glC 



41 

I don't want to go back to the 1920'8 any more than we already 
have because I don't wEint to go back to the 1930'8. 

We may be on the verge of that because we've had kind of a 
1920*8 mentality, a roaring 1920'b mentality in terms of the roaring 
1980*8 mentality. 

I'll tell you what I'm concerned about eis I listen, and I appreci- 
ate the pomts of view that everybody's been expressing here. 

I'm a little nervous about ^e leveraging opportunities. I look 
around the room and there'8 an awful lot of moneyed interests rep- 
resented in the room quite apart from those of you around the wit- 
ness table. I mean, there are billions and billions and billions of 
dollars at etake here, depending upon how these decisions go. They 
may look nice and neat and trim, but there are huge financial 
stakes here. And out on the other end of it sit all these consumers 
in our country who are very far removed from this process who 
don*t have any extra income to give you or anybedy else that they 
don't otherwise absolutely have to because they need their money 
for basic things. 

So if the cost of electric power or other power generation is 
driven up by an extra penny or nickel or dime or dollar or multiple 
of dollftrs, I think it hurts the country and it sure hurts those 
pecjvle. And that's got to be the bottom line test here. 

Tne bottom line test is what gives us aa efficient system that 
keeps those costs down, keeps a reliable system in place with 
enough energy, but keeps those c(»ts absolutely at a rockbottom 
minimum. At a rockbottom minimum. 

We need that because the country haa got some very tough prob- 
lems to solve economically. We talk about the Soviet Union. 
They've got tough problems to solve. But we've got very tough eco- 
nomic problems to solve in this country also. 

So we can't afford a misstep here. And we can't afford to veer off 
track and find later on down the line, that we're eating premium 
costs that we could have avoided because, by and large, the people 
that make the decisions won't be eating the costs. They*ll be pass- 
ing those on to somebody else. And the people that are going to be 
asked to eat them can't afford them. 

I don't want to see that happen. 

So the bottom line here I believe is that as we go about trying to 
make sure that we've got sufficient competition in the system, and 
I want to encourage lis much entrepreneurship as we can 
maneige — that is a part of what drives this country. But when it 
gets out to the other end, when somebody's plugging a toaster into 
an electrical outlet or turning on a television set or tumii^ on 
their furnace in the wintertime, I want people to be assured that 
they're paying the most efficient and the lowest price that they can 
pay to have that power available to them. 

I think it's the obligation of everybody around this table to see 
that that happens. That to me comes way ahead of maximizing 
value for shareholders, maximizing executive salaries, and maxi- 
mizing the size of organizations. 

Those are all quite proper things within a narrower scope of in- 
terest in our system. But the bottom line in the end in terms of 
providii^ the power needs of this country is how do we get a suffi- 
cient amount out there at the lowest price to consumers? 



D,g,;,zeclbyG00glC 



42 

And if we get off the mark in terms of that objective, we're going 
to end up hurtii^ this country. It might help a firm. It might help 
an executive of a firm. It might help a shareholder of a firm. But it 
will hurt America. And if it hurts America, then it's bad policy. 

And I don't want to see it happen if that's the situation that 
we're going to find ourselves facing. 

Thank you, Mr. Chfiirman. 

Senator Dodd. Thank you, Mr. Chairman. 

I just would add, and I certainly don't disagree at all with what 
my chairmein has said. But one issue that we really haven't spent 
as much time on here this morning is the supply question in terms 
of long-term enet%y needs. And obviously, price is extremely impor> 
tant. In fact, fundainental. 

Obviously, what's also important is to try and look down the 
road and see what our supply needs are going to be, where those 
supplies are going to come from. 

Ajid I commend what Jim has done in Connecticut because we've 
moved away from this dependency, this lunacy, in my view, where 
we're today far more greatly dependent upon the mrat precarious 
re^on of Uie world, in my view, for these supplies. And the more 
rapidly we can move away from that and b^^in to appreciate what 
the demands will be for a society that will have to be tremendously 
competitive in a global economy, also, it seems to me, is a crucial 
element. 

And while it's certainly been touched upon here this morning, 
we spent a great desd of tune talkit^ about competitive elements in 
the bureaucratic structure and so forth. But I'd like to hear some 
discussion about the prospects of supply. Those I know argue that 
are opposed to this is that there is plenty of supply out there fil- 
ready, that there's really not a tremendous need to move forward 
here. 

I accept that today. However, in my State there's been a 
debate — those from Connecticut will appreciate it because it got 
into a heated debate in the little town of Norwich, CT, over a thmg 
called Uncuses Leap, which is a sensitive, historical and environ- 
mental piece of property in the town my greatgrandpeu'ents settled 
in when they came to this country. Recently a small generating 
power property was built on the property. 

One of the arguments is we don t need it, that there's filready 
excess capacity. 

But, nonetheless, I suspect going down the road, as you look 
ahead, by the end of this decade, the early part of the 2lBt century, 
there's going to be obviously a need for additional supply. 

I would hope that we're looking at ways in which we re less imd 
less dependent upon outside resources, Edthough that doesn't seem 
to be the case, at least in the near short-term past, as we now con* 
aider where we are on that particulEU* score. 

So I'd be interested in hearing that. 

I'd also like you to get a bit specific, if you could. We've been 
rather generic here this morning. I'd like to know from those who 
support this i^islation speciflc^y — why the changes in PUHCA, 
what specific changes in PUHCA are r^dly going to be beneficial. 
And I suppose from those who are in opposition, why those specific 



D,g,;,zeclbyG00glC 



43 

changes in your view are going to create the kind of problems that 
you've discussed here. 

But I need to know in some sense, to rate these changes that are 
occurring in the legislation in terms of their gravity, I guess, might 
be helpful. 

So u you'd care to comment on Senator Rifle's comments as 
well, we d be willing to entertain that. 

Mr. S. KiNNiE Shpth. Excuse me, Mr. Chairman. I'd like to com- 
ment on the need for power in this Nation. 

The Department of Energy hfis made an estimate that by the end 
of this decade, we will neea between 100 and 150 eigawatts of addi- 
tional capacity. That is 100 to 150 mfgor, large plants would have 
to be brought on line. 

The indications eu« now in the plans of the int^rated utilities 
that, at best, 50 percent of that will be provided by the standard 
utility industry. 

That is the reason why 

Senator Dodd. Whose estimates are thoee? 

Mr. S. KiNNiE Smpth. Those estimates, I believe, are in the DOE 
report aad a number of independent anedysts have come up with 
approximately the same numbers, and we'll provide that for the 
record. 

There are a number of studies that are all within this range. In 
fact, a recent one was issued by the Energy Information Agency, I 
believe it's called. 

We'll provide that. 

Senator Dodd. I appreciate that. 

Mr. S. KiNNiB Smith. Ilierefore, it is essential that this legisla- 
tioD be passed so that we can have a vibrant, independent power 
industry. 

If you are limited to one plant in one State, you're not going to 
dedicate the people and the capital to this industry. When you can 
do it on a multistate basis, then you wiU find the strong companies 
that have the engineering talent and the financial capabilities en- 
tering this indusbry and competing. 

That will be largely in terms of competing in a competitive bid 
environment. Over 26 States now either have competitive bidding 
or have proceedings lesiding to competitive bidding to assure that 
this new capacity comes on at a lower cost. 

With respect to changes in the pending bill, we are in substantial 
agreement with the Johnston-Wallop bill. We've also looked at the 
PUHCA portions of the bills on the House side find find that they 
all contam very soundly conceived protections for the consumer in- 
terest, the ones that I had mentioned earlier. 

We have no disagreement with providing all the protection that's 
needed to prevent self-dealing. 

We do strong urge that if this power need is going to be met, 
though, that Eimliated IPP's must be allowed to compete because 
they are some of the strongest compsmies in terms of their engi- 
neering Emd operating capabilities. 

I tried to address your question. Thank you. 

Mr. Patrizia. Mr. ChfiirmEm, one of the privileges that I had 
before I took on the role that I have now was to nave worked in 
the U.S. State Department. And part of my duties durii^ that 



D,g,;,zeclbyG00gIC 



44 

period were to be at the International Energy Agency in Paris, 
where I -waa responsible for studying the security of the energy 
supplies to the entire OGCD. 

So I am very sensitive to the question that you rfiised about the 
security of our energy supplies Eind where those resources are going 
to come from. 

I think three things have to be said about that. 

The first one is that, eis has alreeidy been expressed by the gen- 
tleman from Connecticut and from your own recognition. Senator, 
that there has been great progress in this country in moving away 
from oil as an input to our electric generation sector. We Btm have 
an incredible amount of dependency on oil, but it's mostly in the 
transportation sector. It's no longer in the generation sector. 

That has to continue, however. We need to be sure that the fuel 
mix as we move into the future continues to be a reliable mix of 
fuels, including all the kinds of generation that we can have and 
including conservation and demand-side management. 

All of those pn^ams have to serve a role and that's the second 
point. 

The third point I would make is the one that the gentleman from 
Connecticut has already made, end that is that there has to be a 
planning process that the utilities have control in to make sure 
that process works. We cfinnot have a situation where the planning 
process is left to the vagaries of politics. We cannot have a situa- 
tion where the planning process is left to short-term views or short- 
term economics. 

When we did that, we ended up very dependent upon oil supplies 
and it was a major problem for us when we had oil supply disrup- 
tions in the 1970^8. 

For those of us who went through the policy process at that 
point, it's something we don't wemt to repeat. 

Senator Dodd. Let me go to this side of the room. 

Mr. Pathizia. Mr. Chairman. 

Senator Dodd. Yes. 

Mr. Patrizia. Can I address the other couple of questions that 
you had? 

Senator Dodd. Yes. 

Mr. Patrizia. It seems to me that the question is not whether 
additional generation capacity will be needed, but when. And that 
situation is going to occur differently in different parts of the coun- 
try. 

While ,we have a very vibrant economy nationally overall, it 
seems to be back on Uie growth path, it's a big economy and it 
varies very much r^on to r^on. 

I think that rather than trying to decide how much capacity 
we're going to need nationally, it's a question of what kind of ca- 
pacity we're going to need where and when. 

I also don't thmk the question is if that capacity is going to be 
buUt, but how. There is going to be some independent power capac- 
ity. There is going to be some utility capacity. There's going to be 
conservation. There's going to be demand-side management. 

All of those have a role to play suid should play a role as we 
move out beyond 2000. 



D,g,;,zeclbyG00glC 



45 

Senator Dodd. Let's come back on this side of the room. Jim, do 
you want to respond? 

Mr. Crowe. Let me just make a quick list and I'm sure others 
can add to it. 

Specifically, we'd like to see the elimination of the privil^e 
status under PURPA. I think this is an important message if we're 
going to go forward and stimulate more competition. We should go 
back, give eui important message that we're going to eliminate the 
privileges under PURPA, and things are in fact going to be, deci- 
sions are going to be made on a truly competitive basis. 

We're going to require in some fadiion that when there is compe- 
tition, that everybody's competing on equal terms in r^ard to le- 
verage and tax status, that we're going to deal effectively with the 
transmission access issues to be sure that everybody has a fair shot 
at the market, that we should set purchasii^ guidelines for com- 
missions to assure that we have the important planning param- 
eters built into our system, that we don't have the temptetion or 
that we eliminate the temptation for the ahort-tenn gain of people 
not holding up their responsibilities in terms of long-term reliabil- 
ity and security of supply. 

I didn't make the point esu'lier, but we have this tightly int^^at- 
ed pool. If somebody fails in one of the other Stetes, they can lean 
on the other Stetes and that's just not right. 

We have to have the proper incentives to go and build a sound 
utility infrastructure and go forward. 

Senator Dodd. Would you respond, Jim, as well to the criticisms 
raised by those of you who oppose the l^islation, generally oppose, 
that, in fact, in responding to Mr. Patrizia's point, that we're going 
to need additional generating capacity. 

Mr. Crowe. Absolutely. 

Senator Dodd. And that by restraining the access to competition 
or to entry by the independent power producers, that, in a sense, 
we Eu*e limiting in a way our capaci^ to create that additional 
sources. 

Mr. Crowe. I'm not sure I would characterize it that way. 

I think the introduction of sound competition into this market- 
place under the kinds of guidelines that I listed is good for the in- 
dustry. Competition will make us all do a better job. 

I think the central issue for this country in regard to the fViture 
supply is where is the energy going to come from? And I think it's 
primarily an environmental issue. 

The technolt^y, the resources, the capability are there. The3''re 
there on the IPP side. They're there on the utUity side. 

I think it really comes down to an environmental issue. 

Mr. Hempling. If I may address the environment issue, Mr. 
Chairman. 

Senator Dodd. That's appropriate, Mr. Hempling. 

Mr. Hebipung. The point that is not coming through clearly is 
tiie interaction between title 15'b changes to the Holding Company 
Act, which doesn't say anything about the environment, and this 
desire to build more capacity. 

And I want to make that interconnection as clear as I can for 
you. 



D,g,;,zeclbyG00glC 



46 

You don't Bee proponents of title 15 from the solar industry, the 
wind industry, the biomaiss industry or the conservation industry. 
You see the proponents of title 15 from the construction industi^. 

I'm not against construction. I'm not against efficient competi- 
tion. But one must ask the question, why are the proponente of 
title 15 all from the construction side of the industry? 

Now if I can do this as clearly as I can, remember what the 
changes to the Holding Company Act In title 15 will do. They will 
permit entry into the industry without any review by the SEC and 
without any review by the FERC. 

That's point No 1. 

Point No. 2, what happens when an existing 

Senator Dodd. Let me stop you at this point. 

Mr. Hempung. Yes, sir. 

Senator Dodd. I imderstood FERC was still very much involved 
here. 

Mr. Hbmpling. Not in terms of entry, sir. Just in terms of rate- 
making, and I will come to that in a moment. 

So the first step is enterii^ the industry. Under the Holding 
Company Act today, there is review, as several people have men- 
tioned. After title 15 is enacted, there will be no review. Someone 
simply enters. That's step No. 1. 

Step No. 2, what happens when the entrant is a wholesale gener- 
ator, which is the type of entity that title 15 would create? A 
wholesale generator sells at wholesale to a retail utility. 

Remember that wholesale transactions are FBRC jurisdictional 
transactions, not State jurisdictional transactions. 

Why is that important? It is important because there is now a 
doctrine called the preemption doctrine which came with the case 
called Mississippi Power Light that many people have testified to. 
And with certain kinds of wholesale treinsactions, once FERC ap- 
proves the wholesale transaction, the State commission that Mr. 
Leonhardt, his counterpart in Michigan and elsewhere, lack any 
jurisdiction to protect ratepayers from that peissthrough. 

Now why does that matter? ^^ 

It wouldn't matter at all is FERC ratesetting was a highly com- 
petitive process where eili alternatives — conservation, biomass, nu- 
clear power, fuel, et cetera — were placed in one room and forced to 
compete with each other, everyone having fair access to the trans- 
mission highways. 

But that is not the FERC ratemaking process. The FERC rate- 
making process today is distorted, not all at FERC's fault because 
FERC lacks the authority to order fair access to the transmission 
hirfiways. 
, The point is that FERC, although lacking the authority to ensure 
fair competition, can also make things worse by awarding what we 
call market-based prices where there is not actually a competitive 
market. 

To summarize, if title 15 permits the creation of wholesale gen- 
erators, if the creation of wholesale generators preempts State rate- 
making, if FERC ratemakit^ is biased in favor of construction and 
not in favor of a level playing field amoi^ edl sources of load, man- 
agement and production, that is the connection between title 15 
and construction. 



D,g,;,zeclbyG00glC 



47 

So the issue is not whether we need more powerplants. The issue 
is whether there will be a methodolc^^ for comparing the alterna- 
tives, a methodol(^y which is regulated and planned by those who 
know the alternatives the best, and that's the State commissions. 

And what title 15 does is create a huge State jurisdictional gap 
in the absence of an ability by FERC to ensure a fair market. 

So that's why I am for title 15 doing it right, as Chairperson 
Leonhardt said. But doing it right will take a great deed of discus- 
sion, sir. 

Mr. E^LBTON. Mr. Chairman, if I could fiddress the environmental 
issue as well, or do you want to come back to that? 

Senator Dodd. Well, let me finish up on this point, and then 
we'll come back and make the leist point the environmental ques- 
tion. 

But on this particular point here, do we have — • — 

Mr. Sheewood SHrm. On the supply matter? 

Senator Dodd. Yes. 

Mr. Sheewood SHrm. May I speak to that? 

The definitive document in existence dealing with whether or 
not there is an adequate supply of electricity in this country, and is 
likely to be, is the annual report of the North American Electric 
Reliability Council. It covers this country and it covers Cfuiada and 
it covers the nine interrelated regions. 

Senator Dodd. Is this the same crowd that ran that ad in the 
Hartford Courant? 

Mr. Sherwood Smith. No, it's a different oi^anization. [Lau^- 
ter.] 

Senator Dodd. Boy, that would have been about the dumbest 
thing you could have said here today. [Laughter.] 

Mr. Sherwood Smith. But they, too, are concerned about the 
availability of service and the cost of service. Senator Dodd. 

But the North American Electric Reliability Council, or NERC, 
has consistently said that the electric utilities do have adequate 
plans for the future for providii^ electric generation. 

It will be provided in many of the ways that Mr. Patrizia stated. 
It will be provided through conservation and load memagement 
where that's effective, through purchases from nonutilities under 
existing law, where that's economical and effective, and utility gen- 
eration (instruction. 

There is no crisis. In fact, the most recent report of the North 
American Electric Reliability Council 

Senator Dodd. I don't thmk, Mr. Smith, anyone said, at least I 
didn't hear that debate, that there's a crisis today. The question 
wEis whether or not and to what extent additioneil generating ca- 
pacity was going to be necessary in the immediate future. 

Mr. Sherwood SfloxH. It will be necessary and the utilities are 
prepared to build that and to meet that demand. 

In fact, the most recent report shows that reserves in New Eng- 
land Eu:e predicted to be higher at the end of this century than pre- 
viously forecast. 

So there's no supply crisis that means that we should let every- 
body come in and be unrelated and build generation plants. 



D,g,;,zeclbyG00glC 



48 

Senator Dodd. That's not Mr. Patrizia's point because — we're 
going to end up losing aome population in the Northeast and you're 
gaining population elsewhere. 

So I guess you've got to be careful about what part of the country 
you're talking about. 

Mr. Patrizu. It is a regional issue, Mr. Chairman. But eis Mr. 
Smith points out, the North American Reliability Council is an or- 
ganization created under congressional auspices following the 
famous Northeast blackout, in order to be sure that there was in 
fact reliability concerns being addressed throughout the country. 

And that council is made up of a variety of regional organiza- 
tions that worry about the reliability within particular regions of 
the country. 

It is distinct from 

Senator Dodd. I heard Electrical Reliabili^. 

Mr. Patrizia. I understand, Mr. Chairman. That's a distinct or- 
gfuiization and I won't say who in this room comes from that 
group. 

But the point is that regional supply does have to be looked at 
regionally. There are of course int^rations in the grid. But it has 
to be looked at on a regional basis, depending on Uie needs there. 

Mr. Curry. Mr. Chairman. 

Senator Dodd. Yes. 

Mr. Curry. The other pEirt of your question, in addition to the 
need for electrical power in the future had to do with what specifi- 
cally we required or what specifically we felt would take bill 1220 
and make it achieve the things that we hope for it to achieve, 

I think that can be done. We've submitted an amendment that 
we fe el is very narrow and very targeted on two specific issues. The 
FERC needs to be able to order utUities to provide nondiscrimina- 
tory access, keeping all the other protections that they have, in- 
cluding ensuring reliability and fair compensation. 

That's one thing. 

The other thing is that we propose very simple and targeted 
issue. We've already talked a lot in here about ttie difficulty and 
the additional resources needed to regulate and handle self-dealing. 

Very simply put — no PUHCA-exempt self-dealing. 

Those two things, very simple and very targeted, can make this 
bill accomplish what we feel needs to be accomplished in order to 
provide the consumer with lower rates. 

Senator Dodd. Cliff, you mentioned some things that you thought 
support the amendments with some changes. From a public utility 
commissioner's standpoint, what are some of those changes? 

Mr. Leonhardt. Right. 

Senator Dodd. Would you be speaking for yourself here or are 
you speaking for the national organization? 

Mr. Leonhardt. For myself. But my comments will correlate 
closely with NARC, the National Association of Regulatory Com- 
missioners. So we're not here on their behalf today, but close to 
their views. 

I agree with Scott Hempling. The prudence review over purchase 
power does not go far enough in the bill. And this could be of spe- 
cific relevance to us in Connecticut. 



D,g,;,zeclbyG00glC 



49 

If NU and PS&H merge, in section 15106 (DX2) and (DXSXb) of 
the bill, tiiere would be a m^or loophole where, under the current 
language, if PS&H purchased power from an EWG affiliate and 
then 8ul»equently sold or interchanged this power to CL&P, the 
Connecticut DPUC would be expressly preempted from reviewing 
the prudence of CL&Fs purchase. 

So that would be like one right at home-type issue for us. 

More generaUy, the compromise that came out of the Energy 
Committee in the U.S. Senate kind of at I think sort of the last 
minute, came up with this new idea or new to this context of the 
prior approval provision. I would argue that the State commissions 
have to be able to review the prudence of the contract execution on 
an ongoing basis. 

In other words, the bill in its current form has a prior approval 
where the utility can request prior approval of an EWG purchase. I 
think that's an attempt to get past the problems of the nuclear 
construction program in the last decade and all the headaches that 
caused everybody. And the utilities have many valid points. 

But I think the State commissions are going to have to stay in- 
volved in looking at the prudence of this on an ongoing basis. 

After that, I think we need to be able to look at the EWG's affili- 
ates and parents' companies' books and records, eis well eis just the 
EWG itself, which is now in the bill, take this ability to look into 
the records further than the bill itself takes it at the current time. 
And then the area you, Senator Dodd, hit on earlier, I think very 
important. 

It's great to have all of these legal rights and everything at the 
State level. We hope the Congress wUl give them to us and under- 
score them. But without some kind of funding mechanism to have 
a staff to do these things — and the truth of the matter is, today, a 
lot of your inhouse stan has somewhat limited capacity to do ^is. 
You're honestly talking about bringing in — ^we have a very good 
management audit statute that the Connecticut legislature peissed 
for us where we can assess the utilities and go in and look at this 
cost of service stuff in a lot of detail. 

We'd bring in a Booz-Allen or some other big firm to do it, what 
we couldn't do ourselves in New Britain. 

I think that if we're going to go this route, aa we should, at the 
Federal level, eis you brought out in your earlier question, we're 
going to have to give the States some real funding mechanism 
under Federal law, I believe, assess the utilities, whatever, not tax- 
payer dollars, to really implement these legal rights. 

Senator Donn. Well, Mr. Chairman, this has been helpful. The 
hour we've reached — it's noon. We could litereilly go on all day 
here. I want to make a couple of comments just briefly, if I can. 

First of all, I've learned a great deal from Uiis process here this 
morning. It's been very worthwhile to have the interchange here at 
the table between the various points of view that are represented 
obviously here. 

I want to thank Cliff Leonhardt as well. He gave me a very good 
document that sort of laid out the points on all sides of this issue a 
week or two ago and gave me a chcmce to acquire a superficial 
knowledge of this issue. From my stfmdpoint, it's a very complicat- 
ed area. 



D,g,;,zeclbyG00glC 



But it's been tremendously helpful as we look at this, and the 
record I think will be valuable to our colleagues aa well, Mr. Chair- 
man, in at least ubderstanding the debate and the points that have 
been rfiised here this morning. 

I want to underscore what the chairman said about costs. We 
have a tendency to — and I was very impressed this morning that 
virtually every single one of you, in discussing this issue, made it 
rather clear that you had in mind cost and that competition wasn't 
Eui end in itself, but what it would produce and how important that 
ifl because too often in these debates, we forget that the crowd that 
Senator Riegle talked about is really what we're addressing here; 
in a broader sense, the country. 

But specifically, in these instances, the tremendous economic 
pressures and hardships they feel, and this being such a vital ele- 
ment in their well-being and our economic strength, that the public 
policy decisions that we make here have a profound effect on tiiose 
decisions. 

And your input and your involvement at least help us sort out 
those questions. 

I don't know what the likelihood is of the Johnston- Wallop bill 
moving. I think most of you probably follow the politics of this 
more closely than I have over the last several days. But I gather 
that it's stalled. And whether or not we're even going to get l^isla- 
tion this year is highly questionable. 

But, nonetheless, these issues are not going to go away. That's 
for darn sure. We're going to have to deal with them. 

So I want to thank you on behalf of the subcommittee and the 
full committee for your patience, your time, your involvement. 
We'd like to make this an ongoing relationship here, in that as we 
move forwEU^ and as we come closer, any additional comments emd 
thoughts you have in this regard, title 15 of the legislation, would 
be extremely helpful I think to all of us. 

So, Mr. Qiairman, unless you have some closing comments 

Senator Riegle. No. Chairman Dodd, I sort of made my closing 
comment earlier, I think. 

I just want to commend you and the staff. I think this has been a 
very good format. I think it's helped bring more relevant material 
to the surface, along with all of the prepared statements which are 
being part of the record. 

I look forward to working with you to pursue this issue beyond 
today. 

Senator Dodd. We thank you all very much. If there are any ad- 
ditional questions by the members of the committee, we'll submit 
them to you. 

But I thtmk you for your patience here this momir^. TTie sub- 
committee stands adjourned. 

[Whereupon, at 12:06 p.m., the subcommittee was adljoumecL] 

[Response to written questions, prepEired statement of witnesses 
and additional material supplied for the record follows:] 



D,g,;,zeclbyG00glC 



STATEMBHT OF S. KINNlE SMUH, JR. 

OIS ENBSSX CORPORATION /CONSDKERS POMER CCMPAMY 

BEFORE THE 

SUBCOMMITTEE ON SECURITIES 

OF THE 

SBUTE CCMHITTEE OH BAHKtHS, HOOSIKG AND URBAN AFFAIRS 

TtM nnlt*d Statu vlll iM«d 100,000 to 150,000 additional 
■•gawatts oC alactrlclty - tbe equivalent of 100 to 150 large 
generating plant* - to aaat growing onargy dsaand in the 1990s. 
Nittiout ttaaa* plants, the country is headad Cor sulMtantial 
alactriclty shortagas. But utllltlas ara building less than 
ona-half of the electric generating capacity that la needed. 
Instead, Bany utilities prefer to aeet their future power needs 
through purcbaaea frm independent power producers (IPPs) . 

IPPs ara antltiea engaged exclusively in the buainesa of 
generating and marketing wholesale power to utilities and have 
beeo>a an increasingly iaportant energy supply option for 
utilities. But future development of IPPs is llaitad by the 
Public Utility Holding Coapany Act of 193S (PtIHCA) . 

PDHCA was enacted to breakup huge, diverse aulti-state utility 
holding co^ianieB. Using Its autbority under PDHCA, the SEC 
successfully restructured the electric utility industry. Of the 
■ore than 2,400 companies which at one ti>s or another were 
registered under the Act, only 13 active registered holding 
coapany systevs reaain. State public utility conmlBslons have 
extended their regulatory effectiveness over the operations and 
finances of electric utilities and over transactiona with their 
affiliates. PBRC has vigorously regulated wholesale power 
transactions, and the SEC's regulreaent for full disclosure of 
all financial and operating data by publicly owned utilities and 
holding coipanies under securities laws has protected utility 
investors fros the abuses which led to POHCA. Kith the problems 
Of the ipast corrected, it is appropriate to look at the effects 
of PUHCA on tbe present condition of the electric power industry 
and its future. 



D,g,;,zeclbyG00glC 



currently, under PUHCA, orniarship of 10% or »ore of the voting 
securities of an "olectrlo utility" will subject any company, 
whether utility or non-utility, to the ojctenslve regulatory 
requirements of POHCA. For IPPs, the practical effect of PUHCA 
is to ll»lt operation and ownership to a single generating plant 
In a single state. In the case of a utility or an exetipt holding 
coapany, PUHCA efl*ctlvely prevents them from investing In 
generating sources in etates outside their traditional service 
territory. It an IPP, utility or exempt holding company violated 
these ownership liaitations, they would be required to become a 
registered holding company and thereby subject to cotiplex and 
detailed regulation of the financial and other everyday aspects 
of their business. Few, if any, major investors in IPPs would 
alsct to subject thenselves to this extensive regulation. The 
only reaainlng option is to Invest in IPPs trtiich have highly 
complex and distorted capital structures that prevent the 
investing company from exercising voting power or managerial 
control . 

Title XV of the Johnaton-Mallop bill (s. 1220) would effect a 
very narrow change to PDHCA by exempting IPPs from the ownership 
limitations of PUHCA if they generate power for bulk sales to 
utilities. The impact of this narrow change would be to allow 
utility and non-utility entities to make substantial investments 
in IPPs in any state - wherever the need for power occurs. 

More importantly, utilities would have significant new supply 
options . The choice of whether to purchase fro* an IPP or 
construct new generation capacity thOMelves, if it would provide 
a lower cost or sore reliable source of generation, is completely 
voluntarv . With this freedom of choice, PUHCA reform will result 
in lower future generating costs for utilities and their 
custOMers. A recent DOE cost-benefit analysis estimated that the 
present value of benefits to consumers over the 1991-2000 period 
varies between $871 Billion and $5.2 billion. 



D,g,;,zeclbyG00glC 



POBCA rmtocm im not daragulatlon. Stat* and federal rate 
regulation and eecuritiea law* reaaln in full effect a* will the 
regulation of tioldlng ccnpanies under PDHCIL. In addition, 
S. 1220 contains A aeries of proviaiona that ralntorc* and eicpand 
the povers of state public utility cowaissions to protect 
conauaara. flw axtandad atate Pnc powera include (1) prudency 
review to eaanre that the least coat option is aelected, (3) 
raviaw of transactlone with affiliatee to prevent croaa-auba idles 
and othar iiUiaaa. (3} accaas to books and records and (4) review 
Of the effects on reliability and ratea of the IPPs financial 
atructura. Allegations by utility opponents of FORCA retore that 
IPPa will underaine reliability of electric service, force 
utilities to purchase unneeded capacity, and eliainate the 
obligation to aarva are Misleading and false, and reflect the 
mindset of ■onopolists trtio fear and oppose coapetition. 

Sobs have snggeatad severe or even total ownarahip raatrictiona 
on utility afCiliataa qualifying aa IPPa in the utility's service 
area. Sucfa a restriction would be both unfair and harmful to 
electric cnatoaara. By laarrlng a utility affiliate from the 
ocapetition, the consuaers may be aarioualy harmed Bay eliminating 
one of the most experienced and potentially lowest coat 
competitors It ataould be noted again that federal and state 
regulators have aufficiant axiating authority to enaure that no 
affiliate-related self-dealing abuses and 
cross- subs idles occur. 

A final isaiie relates to tranaaission acceaa. Soma auggeat that 
you cannot have competitive trtiolesale generation without broad, 
mandatory ti aiismias ion access legislation. I agree that 
transaission acceaa la necessary, but believe that it will be 
provided voluntarily. A combination of voluntary acceaa granted 
bf utilitiea deairing to purchase power in a cof^atitive market 
and FBRC'a condition of open access before approving market-based 
ratea for IPPs have created an open grid enabling "free entry" 
Into the wholeaala generation market for all IPPa. If Congress 



D,g,;,zeclbyG00glC 



dacid*> to address transalssion acc«ss in connection with PURCA 
ralon, bow«v«r, it is vital that such Isgislation contain 
appropriate protsctions for th* econoaic interest of native load 
customers and the reliability of service to all customers, as 
well as allow growth of an independent ipower industry. 



D,g,;,zeclbyG00glC 



tntmm states sbutb 

IXMUITBE OK BANKING, HODSIHG AMD ORBAM AFFAIRS 
SDBCmHITTEE OH SECURITIES 

SEPTEHBER 17, 1991 

TESTIMOHy OF S. KINNIE SMITH, JR. 
PRESIDENT, CMS BMBRGY CORPORATICM 



D,g,;,zeclbyG00glC 



Mr. ChairBsn and HsMbcra of Ui« CC»Bitt««. 

I tui S. Kiiuil* Saith, Jr., Prcsidant of OIS En«rgy 
Corporation, thm par*nt of Consuaars Powar Ccmpany, th« 
Hation'a fourtb largaat coabinatlon alactric and gaa 
utility. Conauaara Powar aarvaa alx aillion of ttaa nine 
Million raaidants of Michigan. CMS Bnargy la an axuq»t 
holding co^wny undar tha Public Utility Holding Co^^any Act 
of 1935 (PDHCA) . 

I am pleasad to appear before this Committae today to 
diacues the issue of aaanding the Public ntility Holding 
Company Act of 1935. Our company is a strong supporter of 
PUHCA reform and wa are mambars of tha Dtility iforking 
Group, a coalition of electric utilitias that aupports PUHCA 
reform. 

Hy testimony today reflects the dual Interest we have 
In enactment of PDHCA reform legislation. As a utility. 
Consumers Power supports reform as a means of creating new, 
competitively priced power supply options to meat tha 
growing energy needs of its Industrial, commercial and 
residential customers. As an exempt holding coi^any, CHS 
Energy Is interested in applying its experience and 
expertise to the construction and devel^mant of independent 



D,g,;,zeclbyG00glC 



pow«r plants in araas of th* U.S. and abroad wbara anargy 
■hortagaa ara particularly acuta. 

Tha Maad For POHCX Baf or» 

Juwrioa's alactrio utllitiaa naad anargy aupply 
altamativaa In tba 1990s. 

Tba D.S. Dapartaant oC Enargy, as wall as indapandant 
analyatai concluda that to aaat growing daaaiKlt Asarlca'a 
elactric utilitisa will naad 100,000 to 150,000 additional 
aagawatts of alaotricity in tba 1990a - tba aquivalant of 
100 to 150 larga ganarating plants. Without thaa, tba 
country is haadad for alactricity shortagas, daspita 
substantial Invastaant in conaarvation initiativas. But all 
of this Bsw capacity will not ba built by tba nation'a 
traditional alaotric auppliars, tha utilitias. 

In fact, utilitiaa ara coaaitting to lass than ona-half 
of tba new alactric ganarating capacity that will ba naadad 
nationwlda batwaan now and tha and of tha dacada. Inataad 
of building plants tbaaaalvas and subjacting thaaaalvas to 
tha risk that thay will not ba allowad by ragulatora to 
recovar tbair invaataant, many utilitiaa prafar to aaat 
thalr futura powar naads through purchasae from indapandant 
power producers (IPPa). 



D,g,;,zeclbyG00glC 



Th« Bol* Of IPP« 

ZPPs dlftar froa traditional utilitiaa in a nuabar of 
ways. IPPa ara axclUBivaly in tha buainaaa of ganarating 
and Barkatlng wholaaala powar to utilitiaa who in turn ara 
rasponaibl* for tha tranaaisaion and ratail distribution of 
that powar. Onlika utilitiaa, ZPPs do not hava franchisad 
sarvica araas or guaranteed aarkata to sail thalr powar. 
And, wharaas utilitiaa ratas ara aat 1^ ragulators on a 
coEt-of-servlc«/Tate-of -return baaia, IPP ratas ara 
sBtablished by contracts batwaan tba sallar and tha 
purchasar and oftan pursuant to a compatltiva bidding 
procass involving othar Miolasala powar suppliars. 

Aa tha Congrass, stata and fadaral ragulatora, and 
Btata lagislators adopt policiea proaoting coapatition in 
tha generation of elactricity, ZPPs hava becoae an 
increasingly important anergy supply option for utilities. 
Indaed, ovar 50 parcent of the naw generating capacity 
constructed in tha past two years was conatructed by IPPs, 
prinarlly plants naatlng tha requirements for "qualifying 
facilities" (QFs) under tha Public Utility Regulatory 
Policiea Act of 1978 (POSPA) . Consumera Power, in recant 
years, has relied heavily on power purchases to meet rising 
energy deaand. In 1990, for example, 37 percent of 



D,g,;,zeclbyG00glC 



nmiiiwi ■ P OU T '* alactric — naont imb parcfaasad froa IPPs 
and othar ntiUtias. Ovar 1S% of its availabl* 9MMratlng 
capacity i« provldad by th* Midland cogAncration V*ntur« 
1340 — jaiiatt coQMMration plajit coaatructad by eonv«rting 
an abandcxMd nnclaar plant o«mwl by CoraaUBars Powar in 
Midland, MidOgan. it alao purcJiaaaa powar froa a nunbar of 
aaallar IPPs. 

It is gMiarally agraad, howavar, that Cutura 
davalopaant o£ inOapandant powar projacts undar axisting lav 
is liMitad. Mot all IPPa can aaat PORPA'a raquiraaants for 
QP status — and tbua ba axaaptad frtm FDHCA — and 
alternative corporata structures ara baavily constrainad by 
PtBCft. Experienced and financially atrong anargy co^tanias 
liJca ois Bnargy ara raady and willing to invaat in wbolaaala 
powar ganaration, but ara raatrainad by POHCA's ownarahip 
liaitaUons. 

Tha Boldlng Coiqiany Act succassfully raatructurad tha 
industry dacadas ago, but now pravants tha growth of a vital 
and coipatitiva alactric ganaration aarkat independent of 
the fully intagratad, franchiaad alactric powar industry. 
Hitli tba abusas of tba 1920'a eorractad, PORCA ahould ba 
reforsad to look forward to halp aaat tba incraasing 
alactric po«far naads of Uia nation. At tha aa»a tisa, it 



D,g,;,zeclbyG00glC 



should provld« protection and benefits to consimere In the 
new competitive climate of the 1990's and the next century. 

The Problem Created by POHCA 

PUHCA was enacted over 50 years ago to break up huge, 
diverse holding coiqMinies, a handful of which controlled 
over two-thirds of the country's electric generating 
capacity. The complex corporate structures of these holding 
companies and the absence of effective state or federal 
regulation led to self dealing, cross subsidization and 
other abuses to the detriment of both consumers and 
investors. Dsing Its authority under PUHCA, the Securities 
and Exchange Commission completely restructured the electric 
utility industry. 

Today, about one-half of investor- owned utilities are 
not affiliated with a holding company system. Of the more 
than 2,400 co^anies which were at one time or another 
registered under the Act, only 12 active registered holding 
company systems — nine electric and three gas — remain. 
There are approximately 90 utilities that are exempt holding 
companies because they are either predmainately intrastate 
or predominately operating utilities. But, the Act that 
decades ago successfully restructured the industry now 



D,g,;,zeclbyG00glC 



prevwitB the growth ot a vital and C(»p«tit:iv* electric 
generation market. 

Since enactment of PUHCA in 1»3S, state public utility 
coBmleslonB have extended their regulatory effectiveneee 
over the operations and finances of electric utilities and 
over transactions with tbelr affiliates. Detailed utility 
accounting principles have been applied by state end federal 
utility regulators to assure that costs and revenues of 
utilities and their parents and affiliates can be tracked 
and properly accounted for in rate, securities Issuance and 
other regulatory proceedings. The PBRC has vigorously 
regulated wholesale power transactions, including the 
growing use of regional power pools that have contributed to 
improved efficiency and lower rates. Very iaportantly, the 
SEC's requirement for full and current disclosure of all 
financial and operating data by publicly owned utilities and 
holding companies under the Securities Act of 1933 and the 
Securities Exchange Act of 1934 has protected utility 
Investors from the abuses of the 1930's that led to pcbca. 

With the problcBS of the past •llnlnatedt It is now 
appropriate to look at the effects of PDBCA on tb« present 
condition of the electric power Industry and its future. 
Currently, under PDBCK, ownership of 10 percent or more of 
the voting securities of an "electric utility" will subject 



D,g,;,zeclbyG00glC 



any coqwny, wtiatlwr a utility or a non-utility, to ttM 
•xtonslvo raqulatory roquira>ant> of PDHCA. 

For IPPa, ttM praetioal affact of PDHCA ia to liait 
oparation and ownarahip to a aingla qanarating plant in a 
■ingla atata. In tlw oasa of a utility or an axaapt utility 
boldinq coa^any, ttala aaana that tbay say not invast in 
atataa outsida tliair traditional sarvioa tarritory. It thoy 
did invaat in a aacond ganarating plant in anotbar atata, 
ttaay would ba raquirad to bacoaa a raaiatarad holding 
coapany. Hiia would aubjact thav to oamplvt and datailad 
ragulation of avaryday financial and otbar aapacta of tbair 
buainaaa. For axa^>la, SZC ragulatory approval ia raguirad 
bafora any dabt or aquity eecurities may ba iaauad. Thia 
tlaa conauBing procaaa would pravant IlVa trcm aaating tha 
praaauroa of tha compatitlva Mtrkatplaca. Alae, PDHCA 
limita ragiatarad ocapanlaa to a aingla lina of buainaaa, 
tha alactric utility buainaaa. Thia affactivaly pravanta 
othar typaa of anargy or anargy ralatad coapaniaa froa 
participating and would dafaat any attaapt to raly on tha 
IPP induatry for a aignificant ahara of tha nation'a futura 
ganaration raquiramanta. Ihua, for a nuabar of raaaona, 
faw, if any, aajer invaatora In indapandant powar projacta 
would alacrt to aubjact ttaaaaalvaa to tbia axtanaiva 
raqulation. 



D,g,;,zeclbyG00glC 



IIm only ramslnlnq cq^ion ia to inv*Bt in Ind opm aont 
povar projaets with blglily coMplax and dlatortad capital 
■tructuraa that pravant tha invastinq ooq^any Croa 
axerciaing voting pewar or aanagarlal control. Olwlouslyt 
this savaraly liaita tha flew of capital Into IPPs ainca 
■oat coapaniaa inaiat upon diract control ov«r tba 
Kanageaent of thair aaaata and invaataanta. Ironioallyf 
thasa coaplax capital atruoturaa - oftan oallad "POHCK 
pratzala" - ara axaotly what POBCA was intandad to pravant. 

Tha Solution to tha Prohlaa - POBCX amtarm 

Titla XV Of tba Jotanston-Halltv Bill (B.1330) would 
af fact a vary narrow dianga to pdhca by axai^ting oartain 
iroa froa tha ownarshlp liaitationa of PUHCA. A atatutory 
claas of IPPs daftnad aa "axa^tt wholaaala gansraters" 
(XHGb) would ba allowad to own facilitiaa tor tha ganaration 
of alactric anargy axcluaivaly fmr oala at wholaaala without 
bacoaing an "alactric utility" undar PURCA. Ilia Bill 
axaapta tha EH6 and ita parant coq^any fr^ tha strict 
cwnarsbip liaitatimis of POBCA. 

Tha ii^act of this narrow cbanga, affaoting only 
corporata struotura, would t>a to allow utility and non- 
utility antitiaa to aaka aubatantial Invastaants in IPPs in 
any stata - trtisravar tha naad for powar occurs. Mora 



D,g,;,zeclbyG00glC 



10 

ii^ortantly, utlliti«s would luv« ilgnifiouit nmr supply 
optloiw. Th«y could ■•laot froB a gr»at«r array of purohasa 
choices baaed upon tbe lowast price and othar factors 
nacsasary to assure financial and operational reliability. 
They will also be able to prasairva their option to CMtstruot 
nev generation capacity if, in their cwn opinion, it 
providea a lower coat or aora reliable source of generation. 

It Must be atrassad that a utility's decision ot 
irtiather to purdiasa frMi an IPP or conatruot itaalf la 
completely voluntary - Nothing in the PCBCX aaendMant would 
force utilitiaa to do anything. Those utilitiea and stats 
regulators who prefer to rely on traditional cost-oe-sarvice 
rata reguljitlon for the development of new generation 
capacity may do ao. PDHCA reform merely parmita thoaa 
utilitiea and raqulatora who wish to pursue nen-rata-baaed 
options such as ceaq^etitive bidding and IFF development to 

Benefits of POHta Reform 

It should ba pointed out that PDHCA reform is merely a 
logical extension of the ongoing structural and regulatory 
changea occurring in the electric industry today. In recent 
years, atats and federal policy makers have embraced 
policies to promote greater cmnpetitlon in the irttolasale 



D,g,;,zeclbyG00glC 



11 

q«n*ration aarlMt. At l««st 26 statas nov b«v* soa* Com ot 
competitive bidding Cor n«r gMwration in •Zfat or undar 
consideration. Ibis coapareB to only a handful ot atataa 
just a e«H yaars ago. By allowing a vital, growing 
indapandant power industry to develop in this naw 
competitive regulatory context, POHCA rafom will inevitably 
result in lower future generating costs for utilities and 
their < 



A recent Department of Energy coat-benefit analysis haa 
estiaated that the ■Inisus benefit to oonsuaers will vary 
between $300 sillion and $1.8 billion par year by the year 
2000, depending i^en the aaount of new capacity net throu^ 
coepetitive procureMent. nie present value of this streaa 
of benefits to consuaers over the 1991-3000 period variaa 
froa $871 Million to $5,336 billion. 

ConsuMT and Investor Protection 

PUHCA refers is not deregulation. State and federal 
retail and tAoleaala rate regulation and aecurltles laws 
raaain in full effect without any change. The Johnston- 
Hallop Bill contains a serisa of provisions that reinforce 
and expand the powers of state coamissions to protect 
consuvars. Thus, consuaer protections are enhanced by the 



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11, not dlalnislMd as maam have cont«i>d«d. Spacifioally. 
:iM Bill protacti ratepayers in tha following ways: 

1. Stat* onmiasions ara ai^rassly granted ttM 
authority to allow or disallow tha cost of any 
wbolasala powar purchasa froa an ENG on tbs 
grounds of prudsnoa or Ij^nidanoa. Tills authority 
is granted In order to prevent any federal 
prae^tlon of etate comiseion authority under 
certain prevailing Supreae court and other Court 
decisions (Sec. 15105). 

2. State ooBsiBsions are authorised to evaluate any 
potential incraaeea or decreasas in the cost of 
capital of the purchasing utility or increases or 
decreases in rates resulting er<» a wholesale 
power purchaaa froa an EHB (Sec. 15107). 

3. State coaslaeions are authorised to evaluate any 
negative or positive effects on reliability of 
electric service and any unfair conpetitive 
advantage resulting from the capital structure of 
the BHS selling to the utility (Sec. 15107) . 

4. State comissions are granted aooess to all 
relevant financial inforwation and other records 



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and contract* of EHG's aa if it vara a utility 
aubjact to Ita jurtadiction. This anablaa tba 
atata coaaiaaion to polica any allagad aalf- 
daaling abuaaa and pravant any croaa-aubaidy of an 
EHG (Sac. 15108). 

It ia inatructiva for tha Congraaa to not« tbat Kr. 
stavan Pattar, ChairBan of tba Michigan Public sarvica 
Commission, taatlfiad on Hay 2, 1991, bafora tha Rouaa 
Sutjcomnittee on Xnargy and Powar, in favor of PDHCA rafora 
provided adaquata aafaguarda ara included to ananra that 
aubaidiaa or aalf-daaling do not occur and that atata 
ragulatora have a prudancy raviav. 

Each of the conau>ar protactiona rafarrad to by 
Chairman Pattar are covered by tha provialona of tha 
Johnaton-Hallop Bill Miiob I have juat daacribad. 

Hhan viewed properly, PUHCA rafom ia not deregulation 
of the generating aegxent of tha alactric power induatry. 
It ia allowing vigorous coMpetition within tba axlating 
atata and federal regulatory ayataa protecting conauaara and 
invaatora. 



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Babuttal at QoaontAntm ArmiMtif 

AdHlttadly, PURCk rsfon Iwb onponwita witliln tlw 
utility Industry that s«*k to pr«aarv« th« atatmi qt^g , •¥•» 
though tho «iihBnc«d option for thaa* utilities to purchaBO 
wholasala pow«r from EWG's la coapl«t«ly voluntary, mass 
utllltiaa aaka a numbar of arguaants that naad to ba 
rabuttad on tba racord. Ittair arguManta and our raaponaa 
are aa follewa: 



Allowing Indapandant wholaaala pewar ganaratien to 
davalop will raduca tha ovarall raliability of 
alaotrlc production bacausa IPPa will not bava tha 
aicpartiaa, aiqwrianca or financial atrangth of 
utilltiaa. 



First, tbara la plsnty of data to daaonatrata tha 
high laval of raliability of indapandant powar 
plants built undar PURPA. Purtharaora, tha vast 
Majority of invaators In tha IPP/coganaration 
bualnass ara aubatantial anargy coa^anlas. Many 
ara affiliataa of aoaa of Amrioa's largast 
corporations — with considarabls axparisnca in 
anargy projact. niass Includa utility affiliataa, 



D,g,;,zeclbyG00glC 



15 
pewsr plant •guipsant vandora, 

arclii tacts /anglnaafa, and gaa plpallna caiqwnlaa. 
Affiliates of coapaniaa auch aa Ganaral Blactric, 
Dow CbaHic»l, Naatlnghousa, Fluor, Bacbtal, CMS 
Bnargy, ScnithazTi California Edison, Enron, ^aotal 
and aany othara ara tlia aatablislwd laadara In tba 
independent pewar buainasa. m«aa coapanias are 
experienced and thair plant operating records are 
excel lent. 

Second, atandarda for power plant reliability and 
related factora are controlled by the purchasing 
utility contracting power fr(» the IPP. lUe 
utility can require tn Ita power purchaaa apeciCi- 
oatiens anything it wants regarding plant quality 
and reliability, and thus has prljaary control in 
deteraining the quality of ita contract power 
capacity. FurttaarBore, wholesale power generators 
ara generally paid only for power they are able to 
deliver or sake available; therefore, tbay have at 
laaat as strong an interest in reliability aa 
utilities and consuaars to prevent extended 
outages. 



D,g,;,zeclbyG00glC 



ABUMling PUHCA will toTom utilitiM to purcbase 
uniM*d«d pov«r or povcr at hlqhar costs than can 
b* providttd by utilitlos. 



DnllK* PORPA, PtmCA r*fon is totally poraiasiva 
and doaa not forca any utility to purobasa powar 
froa any seurca. As axplalnad abova, it axpands a 
utility's options tdiich will rasult in Bora 
competition and lowar ratas. Likawisa, nothing in 
tha aaandaant would aapowar stata PDCa or otbara 
to raiiuira purobaaaa Croa Ippa by a utility. 



Proaoting an indapandant powar industry for 
alsctric ganaration by aaanding FtlHCA would 
affsctivaly aliainata tha obligation to aarvt 
wbioh has baan a comerstona of tha utility 
industry. 



Natural gas distribution utilitiaa hava 
obligations to aarva juat aa alactric diatribution 
utilitiaa, yat thay raly haavily on gaa auppliara. 
In tha natural gas Induatry, thara ara distinct 



D,g,;,zeclbyG00glC 



mmgmuttM of gas diatribution, gas plpcliiws 
(transnlaslon) and gaa produoars. undar ttaa 
Holding Coapany Act, imly gaa distribution 
co^wnlaa ara jurisdiotlMtal, wtatla tranaaiaaion 
and preduotiMi ara not undar PDHCA. PurtharBora, 
gaa dlatributora purchaaa virtually all of ttaair 
gaa undar contractual relationahipa with plpalinea 
and producara vithout dininishlng tbair obligation 
to aarva. Likaviaa, an alactrlo dlatrlbatlen 
eoapany would bava no laaa an obligation to aarva 
its cnstoaara if it purchaaad aoaa, or avan all. 
of its powar froB wholaaala generators. In fact, 
tbara ara >any alsctrlc dlatributora, aaall and 
larga, as wall as aunicipala and oooparatlvaa irtio 
alraady purchaaa undar long-tara contracts 
significant quantitias of powar froa otbar 
ganaratora. nnis, it is Inconsistent to argna 
tbat purchasas froa IPPs will soMhow altar a 
utility's obligation to sarva, wbaraas axlating 
purdiasas froa ottiara do not. It a utility ia 
I about its ability to sarvloa ita 

nara with purchaaad powar, it will si^^ly 

; to build and not buy. 



D,g,;,zeclbyG00glC 



Jtvwidlng PUHCA to •llov 9r«at«r and !•■• 
rastrlctad owiwrahip o£ atM power 9WMratl«i 
•tfactivaly d«r«gul>t*s tta« alttetrie induatry 
laadlng to a mmvmrm loaa of rogulatory oversight 
tbat could ranilt in uxitlMr "savings and loan" 
typs crisis. 



nis propossd aasndBsnt to PUHCA is vary narrov and 
doss not rssovs any rsgistsrsd or axa^>t utility 
holding coiqwny froa tlis purvisw of ths SBC undsr 
POHCK- It sliqily assurss that ssrs ownsrshlp of 
nsw IPPs doss not oonstituts a reason to ba 
regulated under POBCX. 

Furtberaore. as I have stated before, the pr^osed 
PUHCA ref ore does net change or remove any 
authority to regulate electric rates either at the 
FERC tor wholesale power aalea and transsission or 
at the state PDCa In the case of retail rates. 

Finally, the savings and loan crisis oaae about 
because of large federal financial guarantees of 
the saving and loan industry and Inadequate 
scrutiny of StL investaent practices. In the case 



D,g,;,zeclbyG00glC 



of iPPs or Ui« utlllti«s tbay supply, thora ar* no 
Cadaral or stata financial guarantaas tbat oould 
raault in such a taxpayer burdan. Alao, atata and 
fadaral utility and scouritias ragulation will 
^•mp all aspacts of aaob IPP in tba public aya for 
all to Bcrutiniza. Moraovar, ttaara is nothing in 
tha propoaad POHCA aaandaant which would vaakan 
utilitias. ttathar, tha aaandaant oould strangtban 
utilities by raducing thair future exposure to 
power plant construction risks. 



nis proposed PURCA naanrtaant would prae^t state 
regulatory authority and shift mora power to the 
federal govemaent. 



There is nothing in the proposed a»end»ent that 
diainishes the current authority of states to 
regulate electric utilitias. All the state 
authority that currently exists will continue to 
exist. In fact, as I have stated sarlieTf the 
Jehnston-Nall^ Bill reinforces state regulatory 
authority in a nunbar of respects. 



D,g,;,zeclbyG00glC 



20 
All ratail rat* witters will continu* to b* 
r«qulated by tb* stat* and all whol«sftl« rat* 
■attars vlll continu* to ba raqulatad by ttaa FERC. 
FurtherMore, stataa continua to ba fraa to enact 
tdiatavar atatutaa thay da«a to t>a naoaaaary for 
thair PDCa ao long as thay do not conflict with 
Csdaral jurisdiotion ovar tdiolaMla pewar trans- 
actions. 



XPPa cannot build powar plants any chaapar or any 
battar than utilities; ttaarafora, tbara la no naad 
for tbaa and govamMnt policias ahould not 
•ncouraga tbaa. 



This is always the arguMsnt of those who do not 
want c«q^etition or who tear it. If utilities 
really can always build chaapar and battar powar 
plants, than those vho support this traditional 
approach to providing new ganarating capacity 
should have nothing to fear from IPPs, for these 
utilities would always pravail. The fact is, 
however, that CM^etition is healthy and generally 
ensures that the consuaers are getting the t>eBt 
value. 



D,g,;,zeclbyG00glC 



21 
In aany caa«a, IPPs can and will provide th* best 
alternative and should at least have tbe 
opportimity to cmpet*. 



Fira eontracte for power froa IPPa allow tar too 
mch financial leverage of the IPPs and become tbe 
basis for IPP's credit at the mxpmnsm of the 
purchasing utility's balance sheet. 



In structuring the contractual tenu for a power 
purchase froa an IFF, utilities have co^ilete 
f reedMi to deteralne the power contract 
conditions, including the financial leverage used 
by the IPP. If a utility is concerned about these 
■atters, it need only require that the IPP aeet 
certain financial integrity tests. It is 
important to note that it is the purchasing 
utility that establishes the ground rules for IFF 
contractual terns, not the IPF. With FCBCA 
refora, larger, well financed ooapantes will be 
able to oo^mte and the financial risk issue 
rising out of tbe obligation to purchase fron 
avail, start-up QPs under PDRPA will disappear. 



D,g,;,zeclbyG00glC 



22 
Conamars Power '■ aiciMrlwic* prev«s tiM point. 
With tlM ocapl«tlon of ttio Midland Cogonaration 
Vantura's 1340 Bagawatt coganaration plant Mtiob 
providaa 124 O BagawBtta of capacity to Conauaara 
Powar, a aubatantial portion of Conauaara Powar'a 
total capacity is now aoquirad tbrou^ tliia 
wbelasala powar purobaaa. Nittaout this purcbasad 
power, ConsuMTS Powar would bava no rssarvs 
■argin. Daspita this ralianca on lAolesala powar 
purcbasa Croa an IPP, all tha major rating 
agsnoias bava upgradad Consuaara power's iBond 
ratlnga two gradaa ainca tha commencement of 
construction of the plant. It ia highly doubtful 
that either of these upgradea would have occurred 
if consumers Power would have constructed and 
financed the plant itaalf. 

Flnanoial riak to utilities and tbalr ratepayers 
can be controlled in many ways. By requiring 
conaervativa balance shaata, pre-conatruction 
financing coBmitments, consti-uctlon contracts with 
fixed price and guaranteed completion provisions, 
long tern fuel comnitnents and other performance 
guarantaea, the purchaaing utility can place tha 
risks on the IPP along with a strong incentive to 
■set tha utility'a conditions to signing a powar 



D,g,;,zeclbyG00glC 



23 

purcliM« agr*MMnt. Insisting upon only 
di^Mitdiabla powar purchas* obligation* without 
any significant Minima purchas* coanitaants ear 
taka-or-pay obligations will also put tha 
opsrating risks on tha ipp. with thia approach, 
thara is no reason why rating agancias, Invastsent 
batVksrs <xc institutional Investors would find any 
adverse effect on tba purchasing utility's credit. 

Itffue^ that Should Mot be Included In Legislation 

Soma have suggested severe or even total ownership 
restrictions on utility affiliates qualifying as iPPs in the 
utility's own traditional service area. Such a restriction 
would be both unfair and harmful to electric consusers. By 
Iwrring a utility affiliate from the co^»atition, consusers 
■ay be seriously hwnied by ellsinating one of the strongest 
and Bost experienced co^Mtitors. There are no ratepayer 
advantages to eliainating coi^etitors of any kind. 

It should be noted that sufficient authorities already 
exist, at both PERC and state public utility ccnsissien 
levels to ensure that no affiliate-related ebuses occur. Zn 
fact, as explained above, the Johnston-Wallop Bill clarifies 
and expanda tha authority of state comiasions to prevent 
self-dealing abuses and cross-subsidies. 



D,g,;,zeclbyG00glC 



In approving IPP wtiol*nl« rate*, FERC baa a 
rasponalbility to anaure "juat and raaaonabla" wboleaale 
rataa. If a co^Mtlng tPP offering battar tans ia unfairly 
aquaezed out by an affiliated IPP, tbara ia aapla 
opportunity undar axiating law for the FERC to diaapprove 
the proposed transaction vith the utility affiliate. 
Purthermore , atatea have tha rataaaking authority to enaura 
that utilitiea can be penalized for power contracting 
practicea which are determined to ba injurious to consuBere. 

Tranaaiaalon teceaa 

A final issue relates to transMiasion aecaas. Soae 
suggest that you cannot bava conpetitive wholeaale 
generation without broad mandatory trananiaaion accaaa 
legislation. I do not agree with that. 

Access to a purchasing utility's transmission aystaa is 
obviously easential for an IPP. However, 1 am unaware of 
any situation where an IPP has been excluded from a 
utility's co^Mtitiva power procurement process by a failure 
to obtain access to its grid. Purchasing utilities bave 
every reason to voluntarily open their grid so they can 
select the lowest cost option. Their state public utility 
commissions will require tbe same undar prevailing "least 



D,g,;,zeclbyG00glC 



25 
cost" regulations and policies. Likewise, If the IPP and 
purcbasing utility sssk support before the FESC for a 
"■arket based" rata as "just and reasonable" under the 
Paderal Power Act, the FERC will noraally require ogpen 
access In order to find that a workably CM^etitlve Icnlk 
power aarket axlste. FERC has recently also conditioned ite 
approval of utility SMrgers and acquisitions on an open 
transBlssion systea by the Merging utilities. 

Thus, as a practical eatter, a coabination of voluntary 
access granted by utilities and FBRC's conditions for 
an^rovlng market based rates and utility Bergers have 
created an open grid enabling "free entry" into the 
wholesale power market for all iPPs. Mandatory access 
legislation is not necessary at this time. 

Under a system of voluntary access, utility management 
will be able to control the operation of the grid in order 
to assure reliability of service to its native load 
cust^iers. Also, the FERC will be able to review all cost 
allocations and rete designs ai^licable to the grid under 
its currant rate making authority. This will protect native 
load cuetomere from any current or future adverse rate 
impacts resulting from new users' access to the existing 
grid and any upgrades of it. 



D,g,;,zeclbyG00glC 



36 

If tba currant syatwa of voluntary acceSB undor the 
•xlatlng i^ovlsions of ths ?*d«ral Powu: Act proves 
inadequate to tb* task, tiM congresa ahould address tbe 
Issue lAen specific problems are Identified. Tbe voluntary 
syetea should be given a chance to succeed first. If, on 
the other band, tranaeisslon legislation in the Congress is 
introduced in connection with FOHCA reform, we would like 
the opportunity to eicprass our views. It is very iiq^rtant 
that transBlssion legislation contain appropriate 
protections for the econoiic interest of native load 
custoners and the reliability of service to all custoaers, 
as well as allow the growtb of an independent power 
industry. 

In Michigan, Censuaers Power Coapany bas had a history 
of successful operation of our transaission systea whitA is 
operated as a pool with Detroit Edison's transaission 
facilities. Ae a result of a settlement agreement entered 
into in the 1970 's under tbe anti-truet provisions of tbe 
Atoaic Energy Act, Consuaere Power's transmission systea has 
open access. He have never denied service under our ferc 
transmission tariff and we are currently planning to broaden 
tbe scope of tbe service offered in accordance with the 
request of some of our custoaers. Host inportantly, the 
open access granted by Consuaers power to others has not 
affected tbe reliability of service to our native load 



D,g,;,zeclbyG00glC 



27 
cuMto— K or tlM qnality of swrvioa providad by ttw Hicliigan 
pow r ptml. Oar •xpcrlwto* cut b* m valuabls wtaapla of how 
ofMn MOMS can work in Uk» bMt intarMts of utllitioa. 
tlMir cuito— r» and amm oaMra of tba grid. 



In smaary, Xr. Cbairaan, anactaant of PDBCIl rafoxa ia 
vary aoch In tba poblio intaraat bacauaa of tha iaprovaaanfca 
In tha capiat Itlva availability of wholosala powar that 
would raanlt. nia lagialation is aii^la in its scopa. It 
doaa not co^mI any utility to do anything — and cartainly 
nothing that would barn cuatonara. To tha contrary, 
anaotiMnt of FDHCA rafora would balp tha ayatan work battar 
by providing naw optiona for tba banafit of tha alactric 



niank you vary such. 



D,g,;,zeclbyG00glC 



mLMER 
BELLEVUR 

CORPORATION 



PUHCA REFORM: EXPLODINe THE MYTH 
OF DEREGULATION 



PmUPK. O'CONNOR. PH.D. 
VMYNEP. OLSON 
GEMLD M. KSENAN 



M WashtTglun Si ■ Su«j 1247 ■ Chicago, l 



D.,rn.db,G00glC 



TABLE OF CONTENTS 



A PERSONAL PREFACE 

EXECUTIVE SUMMARY: PUHCA REFCMtM AND THE EVOLUTION OF 
TRAOmONAL OTHJIY RBOULATICM 

INTBODUCnON 

WHY THE DEBATE OVER PUHCA? 

PUHCA: A BRIEF HITItMY 

THE MISMATCH BETWEEN PUHCA AND THE ELECIRIC MARKET 

KEY ELECTRIC INDUSTRY TRENDS LEADING TO THE MISMATCH 

PURPA 

■B^jmmaat^ai£at£ 

iww„i I i-it. Ra, pimPA qp, 

am£AJ£attd£. 

PUHCA REFORM AND THE PRINCIPLES OT UTtLTTV REOULATKW 

Bi-HiMnH wi Marina Pima 

Rmt RwiilHtinii 

Stite lail Utility rMmi n-r b>«..«* A-ajniritifni And VnuiM^ 

Rnfimciin Service <>■% md Bie-OMip 

Repilalion of Utility Divmifiation 

StitB md Utility- CWrttiBl Oiw Remmce Acgmation- And Pnictoieii 

THE DEBATE OVER TRANSMISSICW ACCESS 

CONCLUSION 

ENDNOTES 



D,g,;,zeclbyG00glC 



A PERSONAL PREFACE 



Typical of a conbuvcny on be voge of decistm is the emergence of 

other siuuioiu, fKik libelling designed to ev<Ae emobonai lattm than intellectual 

B ficnzicd icuch for the 'sUvcr baUet' 



SoTx contend thu reviiioni in Ihc PobUc Utility Holding Company Act of 1935 (PUHCA) 
coniiiiutc "deregnlMiCHi' becuue pnticqiation in independent electric wholculc £enerali<H) 
projects would not ttiggEt t^iplicatiao of re^stoed holding company controls by be Secuhliei 
and Exchange CommissicHL This claim has been buttressed by a comparison of PUHCA Tcfocm 
proposals to regnlatoty and stractunt changes triiich have taken wrong turns in odter industries. 
Some go so far at tti charge that PUHCA refonn vinually guarantees a wave of Sftl^type 
insolvencies in the electric power indusny. 

The proponents sboold be Ihankfiil dial the opponents have resorted to the S£L argument ~ 
which is cuncntly the political equivalent of potting on a Halloween mask and jumping odI of 
a closet to shoot "BOO." Once the iccipient gets over the initial startle, the event it neither 
funny nor acaiy - and die mask wcaitT seems a bit foolish. 

My colleagues and I at Raima BeJIevne Cotpontion were asked, under a grant btan the Utility 
Working Groiq) winch nqipoits PUHCA refonn, to assess the validity of the "doegulation' label 
as it has been anacbed lo the two main PUHCA measures now before the House and Senate. 
The audioTS. however, aie idely ic^ouiUe (or the <9inions expressed in this ptftx. 

I have a personal peitp ec ti ve on vliat consiioiies 'deregulation' in a regulated industry. As 
Illinois Director of Insmnce and then as C3iaiiman of the Illinois Co mm erce CommissioD (the 
Slate's utility icgulator) dwing the fiisl half of the 19S0s, I actively promoled sevenl major 
deregulatoiy efforts. Tbew included price deccmtrol and decanelization of workers compensation 



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c, fdiMGe oa vtitnui pnncip lei mhcf ibui me k^uIaikid in property wl c w u rity 
c pridns, procRnivc mnowil of FedenI wdJ-hcMl price eontndi fnm nuunl pt. 



dbttaoe idqAone pricci. Atortyw 1983, Ibecvneaprinny voice wldiindiennkttrf'me 
( liyrifiwBrty gicuer eccen lo nuunl gu ud decbic tnuunrinian lyUnat. 

a an cvly ■dvoctte of bfliiit tnditiaail cost-of-xrtice, nte-or-retuni retutuion fiom 
a in wUcta tlte buyo- and •eUo can finrly n ey Xial e phcc I have 
•t of die BonoeviUe Power Adminittntion fioin PedenI ownenh^ 
and ocntral lo ownerdnp and control by BPA't tivlitioaai cuflomen in the Paciflc Nortfaweil. 
My background at a linandal solvency r^ulator, wtaidi includes chairing ihe m^or solvency and 
aeoounting commitHetfrf'ilw National Assodatloa of Insoranee Commissioners (NAIC), gives 
ne « triid ba^ to evaluate wbeiher PUHCA leform bears toy similarity lo the deregulation of 
*'"«'•'»' inttitiitiont at tome bave daimed. 

Moreitccndy, mya whwfia l s asi'ileregulator' wcreiccqitBdbyiwlesslhandieCongreisional 
ttatanA Service in itx rqwrt to Ibe Hoiue CommittEe on Encigy and Cooimerce entitled 
Hjytfij^jlY- f, M>» B>y..l.ft,fY fH*^ Onc of Ibe OX moddU uicd in tbe CRS rqwct to iUustiale 
potdble 'market force* tegimet for tlw deciric industry is ilie 'O'Comor model,' a ten point 
plan for ■ Innwtian finn dw cuncBt industry riiucture and icgulalian lo one diancterind by 
market ^—•m^'-A pnoet for dcctridiy and mailcet-based decisioos on capacity addlticn and 



. The PXJHCA icvixiotu Rpfesentn) by Ibe m 
peadingindKHouseHidScntteasofdiis willing smplydonolconstilutedenculation. Rather, 
tbey seek to adqX conve nt ional icgulalion lo changed conditions. This paper represents the 
analysi wUcb led to Sttt coodusiao. 

Philip R. O'Connor, Ph.D. 
Chicago, niiiKHi 

1 10, 1991 



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EXF yynVE SUMMARY; PI IHrA BFJORM - EKPU>DIN(I TOE DERET.ULATION 
MYTH 

PUHCA itforni is now on a patii thai leflecU the evolutjonoiy nHxId ncommended by Ox 
CongTHSotMl ReKan:h Seivke in iti Jime 199 1 i^ion on Uw adaptation of i^ulatioa to cbangn 
in [he elecliic indiu&y market. 

Rather than itprtsendng 'detegulatkn.' PUHCA refbnn is a moden redrawing of regulatory 
linex to bring develoiHng activities in the electric indultiy clearty and decisively under the 
purview of traditional utility regulation. 

The two primary PUHCA reform nwasures currently pending in Congress, the August 1 staff 
draft circtiiued by Chainnan Sharp and Senate Bill 1220 rqioned out June 3, take ■ 
fundamentally conservative approach focused on the preservation and strengthening of the 
existing system of utility r^ubtion. They attempt to hold the regulatory compact together by 
removii^ some of the points of alnuion which have developed between market conditions and 



No one maintains that conditions in the electric industry are as they were in 1935 wben PUHCA 
was enacted. Changes in technology, global energy markets, government energy policy and 
utility regulation at the state and Federal levels have pioduccd a mismatch between market 
realities and PUHCA. It is appropriate for Congress to consider changing PUHCA to make it 
(and therefbre overall utility regulation) more conusteni with market development]. 



PUHCA currently places severe limitations on the ability of state regulaton, utilitJei and 
investors to adapt non-utility, non-PURPA generation as a component of least-cost and int^raied 
resource planning policies that are receptive to competitive procurement of new power sources. 



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PtJHCA oanaAy oatf* the iraqr ttnt while moM dcctric utUibei may diveniiy into viibally 
«By Do^^ectric biniMn. th^ lie lai|dy &>edoxd from dtvasficatkm wiifain dw 
dectncinduMiy. ManwIiik.devdopcnandinveitomiEeffectivdyprevenled&omiJgnificm 
putkaiatioo ia multiple ■on-PURPA wboloik power pcojecti. PUHCA lefbnn, iuieHl of 
exposing Ifae electnc indnay nd in conwmen lo addibood divBviiatiao riik, would pennit 
utililiei to diveni^-witiiiii the butincts tttej know best and have done well in. Non-utility 
pulies would be pemined k> putidpete in multiple non-PURPA wliolesile power projecti 
wilfaDiit triOHiai te iqutntioii provinotu of PUHCA. 

PUHCA lelarm would leooodk dw miiinaicli of PUHCA ud the market while adhering lo 
tiwUtional iqutaloiy priodplet. The two billi refrain &am mandating dunget in 0>e meihodi 
and misilan of Hate wgnlatinn or the friacement of any new obligabooa on utilities to pindiaae 
power from non-utility producen. Imponantjy, the 'Pike County' doctrine under wbidi itiin 
may judge the ptudeace <rf' trttolenle electric mnsaclian* is embodied for the fint time in 
lfyil^t»w No euneutly regulated enteqiriKSaiEfElievtd of n^ulation of OKtrcuncotactivitiei 
becuue of FVHCA tcfbnn. In additioa, no wholesale generator of electric power, whcdwr a 
PURPA QF, a utib^KMoed plant or an independent pOMT unit i» idieved of any existing 



X for the devtlopment of no*- 
utility geaenlori (NUO*) or dectric wholesale geneiaton (EWGs) while continuing - and, in 
bet, extending- the existing regulatory fnmewcKk governing the U.S. ekcttic utility industry. 
They woidd not nuMlaie a change in the structure, otganiation, operation or itgulation of 



PUHCA reform adheres to estiUished principles of utility legulaiion t^: 

Maintaining a focus on mtiajning die potential for abuse of monopoly or market power. 



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Awndiag In l er fef eace with the 
in Kiting ju*t 



Dtawing ckar juisdictiaral linei between itale ind Fedenl racuiaiion *»<) lenKwiag 
opponunitia ind incentives fOT 'fbnim shopping' by uiiliCiei and otben; 



Supporting stale authority over resowce aaiuistum and the api^ication of int^tated 
lewurce pUnning by codi^ing die Pike County doctrine ot stale aullMtrity over the 
pnidBice of wholesale power puichates; 

Extending the PilK CkNinty prudence review power to cover purchases of iiriiide»le power 
by utility aiAsidiaries of registered mulii-tiate holding companies fnm aflil^ and 
ent EWGs; 



Leaving untouched the ability of states to enforce quality of service and 'obligation lo 
serve" standards; 



Maintaining the roles of state utility commissions and FERC in the review of ca|dta! 
structures for effiects on consumers and of the SEC in regulating the capital structure of 
festered holding companies; 

Conditioning the formation of new power pools or be spin-off of current utility 
generatioo units to EWG status under PUHCA reform on the prior consent of each 
affected Sate: 

Assuring stale regulator! access to books and rectnds of ubltiies and EWGs in ibe 
exercise of tnditiontU state authoiily over affiliate tnnsadions; and 



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Ovenll, tote utility icsuluin ii eohmced in ihe two PUHCA mcuuret. Fint, die uithoiity 
of Mates ID dinlk>wiii9nidcmii4iolcnie cost inclunon u ooasumcr run would be more dear 
nd definite. Second, tbe mch of me regulation would be effectively eidcnded MH into Ibe 
wbcrtcMle maiket lUid, FedenI i^uUlory auttiorily ii dM expuided it die aqnue of ttlte 



Tbe HouM and Semae nJHCA propoaili adhere to the banc boundaria between state and 
Fedcnl r^olBtioii by iqediog bodi h extenoon of the Pike County doctrine to utility kffillate 
ImuactiaDS wiAin a multi-ttiie lepuered holding comptny and (he creatiao of a new layer of 
utility icgidatkia dnmi^ i^onal intenlaie omipKli. 

Tbe only aqxct of the PUHCA icfixni pKJage DOW wider oootideaiioa that would dMr a basic 
fctfnre <^ utili^ Rpibtjon ii Hk ptoponl in the Houm draft autliarinng PERC to ma n da ie 
twaimiisioB accen for wfatricnle trannctiao*. The t ian i miiii oo issue is diittnguishable from 
PUHCA reform for tbe sinqile reaaon diat the oveiall thnist <rf PUHCA reform is entiidy 
permissive, not nawtataty. 'KansniisBon access mandates would, however, vest genuinely new 
legulaiofy audiatiQr in FERC at the expense of the states. 



To the extent that there is a dene u legislate widi reqiect to tn 
PUHCA reform, it irauldbeadvisable to design a mosure that is oonsisteni with the voluntary 
and itate-aricnted fbvur of Uk Senate and Houk billi including piDviaions urineh encouiage 
PEXC to focui on the priciBX issue* to a wwfcable system of vtriuniary transmission acocn. 

PUHCA reform is a losiGal, evolutionary devdopment flowing from more than a decade (rf 



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90 

Funbcr eqiericnce under ibe ict may 



Devdopmenii in an induUiy's mifket or lecbnotogy pcriodicaDy require dwt the boundiriet oT 
■ rcyulalory ftamework be mode^y redrawn. In the electric industry, Ibe cunEnl debate over 
nftnn of tbe PuUic Uti% Hai^ng Company Act (PUHCA) ii pnKCcdiiis in t)« pngmBe 
qiuit cmmdated by Wlliam O. Douglas, Ouunnan of Ibe Securities and Exchange Commiaiiaa 
in Ibe eariy yean of PUHCA and one of PUHCA's aichiiects. PUHCA refimn in 1991 
rtpreMnii not revolution, but inerentental impiDvemenL 

In Ibe wake of tbe Gulf War and srowinE iinerea in the global cnvirocuncDi, eaeriy-rdated 
iHue* lie at center riage on the 1991~1992 domeSic priicy i^nda. Prendent Butb'i National 
BiergySlnaegy(NES) and a variety ^pnfKMilt by mcmbew of Congrew may lead lo panage 
of m^tor caergy policy Iqiilation in ibe t02nd Congreu. 

Itie Presidcat'i NES ii notable far iu reliance m coiTqKtitioD and maricet fotcet n Kt dw coune 
tfnatiaml energy policy.* Electiictty-relaied legislative proposals put fbrib by iboie ciitiol of 
the NES alio demenatme confidence in the value of market foieei and competiiioa. 

la recent yean there has been mudi policy discussion, and a ^r anMuni of action. Hoarding 
Gompetitian and the entry of new playen into the electric power maiketi.* The dectrical world 
ii a difflBtem [tece than it was in 1933 when PUHCA was enacted. 



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llie cmcffcace irf Mw-utili^ po««r gnenton u ■ mqor RMiqNnenl of onr dectnc leMorae 
bwe hi tfimublrd wbrtMtaJ MMe on two imita duecOy rdiMd to PUHCA.' ThefintuMe 
rdiles ID die proper mie of noo-vdlily power mouicei in the U.S. The xccnd lelales to the 
mle of utiUtie* IK- Aeir iffilkln ia die atn-utilily power buaaen, outside bar own tervke IRU 
where Ibey have no mcrtet power or in their letwl Krvice tenitonca. Tbe cuncni ddMte over 
revUkni to PUHCA bmn on Unk two inoee. 

FUHCA tefdtm H now eooKaqiliMd cunot possiMy becuesotued u 'deieguluion,' M lonie 
have cliinwd. If it were, then viitunlly iny legulatory change deaigiied to meet new 
dmmutances in any ngutaied induKiy could be coniidend 'denguUtiao.' The tenn then 
beeomet meanin^ett u a way of distinguishing among competing proposals for change. 

Tlii* pver coosiden two tpeaSc PUHCA lefbnn inoposali and their [dace in dectric induHiy 
Rsulatiao in the Uniled Stale*. One ii Title XV of Seoale Bili 1220 a* reported out by the 
Senau Energy and Natural ReaourcesConuninee on June 3, 1991. The od« is die staff dnft 
circulated AuguS 1, 1991 by Congressman Phi] Sharp, Chunnan (rf die Energy and Power 
Subcooimittee of the Houk Couunilke on Eneify and Commerce. Thi) pqxr also considers 
the transmiaMB aocot piwiMos of die HouK stafT draft, but aqanatcs ttial coosideradon front 
the qiecifie PUHCA provisioot of die diaft bill. 



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WHY TOE MJATE OVER FIIHCA? 

Muty obKTven view the munMnuicc of PUHCA exactly in in eunent fbnn h « bairier lo 
■chievii^ fvodunenul electric policy otqectiva. Proponaitt of PUHCA refbnn, ringing ftom 
the Biuh AdminittfUion lo Mm-uliUly gcnenuian finni and cotuumer advocuei to ettablidKd 
utililiex, maintain that sudiKguUlorygotls as the provision of leut-coitiervieemiy be hindered 
bectuse PUHCA needlessly ckne» o!J valuable opboni and choices. Proponeals of PUHCA 
lefonn ccoiend thai modest changa whidi permit greater opponunittei for oompetitive wtudeaale 
power choices by local distribution ultlilies would be eoruisient with the maimenance of 
traditional regulatory goals. 

PUHCA can indeed be changed to provide for greater beedom of choice in sources of 
generation, yet still continue to adhere to the goals of the Act's authors. Instilling investor 
confidence in the intqrity of the securities issued by the int^raied electric utili^ industry and 
protecting consumen ficni imprudent power tiansacdons ot inappropriate affiliate dealings are 
conaistent with the proposed PUHCA refcmns. 

PUHCA, enacted in 193S, was dengoed to address protilenis of the day in die electric utility 

industry. PUHCA should not be viewed as having cast Ibe structure of the electric power 

industry in concrete. Nor should PUHCA be Ihoughi to have closed off entry to each and every 

pan of the industry forever. To Ow conDary, in onkr to 

of the Federal-state ^ric of utility regulation, PUHCA should periodically be n 

determine ifPUHCA's individual provisions still meet the needs of the industry, consumers and 

the finandal martes.^ 

Some current opponents of PUHCA reform have claimed that the proposals for PUHCA 
revisiiMS now being considered in the House and Senate somehow constitute 'deregulation.' 
Specifically, opponents ^ipear lo contend thu modification of PUHCA constitutes dei^ulation 
because substantial participation in non-PURPA independent electric wholesale generation 



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prpjccta wcmU wN tagga qiplicttion of the povuivc syflcm of ngubtiaa by whick die 
Securiiief ind Exdiinge CocnmiukKi (SEQ mpermu reguknd IxMint compwiy oootralt.' 

Upon clDwr itapecboo, however, the prcponls for PUHCA refonn itprexni modett, urrow 
reviskms of PUHCA which ire ckvly designed [o lem is a component of an ovcnil NUicnd 
Energy Stmegy. Tbe proposed modificatioat would mcnly pmvide a gnaler nrpiHiinity for 
Ihe drvdopiiKntor mm-ulilily generuon (NUGi) or dectric wholenle feneiuon (EWGs) triiile 
Gootiouing - and, in tad, extendinf •- the exitdng regulalory fnmeworii govemins the U.S. 
elecuic utility induMiy. The propoKd PUHCA iwinont do not mandate a change in Die 
structure, organization, operation or regulation of dectric utilities. No cuiienlly regulated 
Cflterinises aie relieved of any regulatofy lequirementi with req»cl to their cuiient activiliei. 
In addition, no wholesale geitcnior of dectric power, whether ft PURPA QF, a ublily-ownMl 
plant or an independent power unit is relieved of any existing economic, rate regulatory or 
prtidence ovenigbL 

Overall, the PUHCA relbnn proposals (hat are activdy being coosidend in Congress eoostituie 
a iTwdest and realistic lecondlialian of the existing r^ulatory structure with marlcet and 
technological changes, in ways designed lo preserve the fundatnentals of the exiKing rqulaiory 



49-970 0-92-4 

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PUHCA. A BHIEF HISTORV 

Uliliiy holding company lyueou emeixed iraund ihe turn ^ the eentuiy and tben grew npidly 
during the 19203.' Local dectric companies were often unable to obtain the eqiiial lo puTCbae 
the generuing and mnsmiaskNi equipment necessary to expand their ability to terve npidly 
growing demand. EquipmentcotnpamessuchuGcnenlElectncandWestinghouie adopted the 
practice of accqHing itock in a company a* partial payment fOT goodi or invkes. '° 

Some manufKiuren of hnvy declrical equipment, along with engineering and construetiaa 
firms, and investment banks eventually formed utility holding companies to hold (he utility bondi 
and stocks of Ihe numerous utilities that they aocumulaled in Ihe course of dcring butineis." 
Coosidenng the rapid growth of flte electric induitiy during thai time and its cafntal intensive 
nature, these developments were entirely logical." 

A few of dieie holding company systems begin to rapidly expand by simply 'buying up whatever 
propertie* were on the maricet.'" An extnordinaiy d^ree of concentration of elccuic utility 
ownership eventually resulted from the accumulation of utility securities by a few bedding 



By 1929, roughly 80 percent of the nation's electric output was accounted fm- by o 
utilities contnriled by die 16 largest holding companies and the three largest systems — United 
Corpoialians Group, Electric Bond and Share Company, and the InsuU Group — generated, 
transmitted, or distributed about 4S pereent of the nation's electricity." At its high point, for 
instance, die Insull Qmip controlled more than 12 percent of the country's electric business." 

The abuses whidi grew up in the utility holding companies are wdl documented." These 
abuses included: 1] Pyramiding of controli" 2] Write-ups of assets and ihe manipulation of 
accounts;" 3) Payment of escesnve dividends, unbvorable service contracts, and other fbnnt 
tf exploitation of operating companies;" and 4) Ctnnplex and highly leveraged financial 



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Aon fffff ral ly, utility h^tWinf coinpuici provided uudequue dijckvuic 10 
invoton of infornMlian needed 10 Duke an invettnwu deeiiiao and leDded to compliaue or 
obnuct me KguUtioa." In iddilica, nme utilily htdding companiei woe rqwned to pay 
exortriBnt pdcei for utility prapotiei in thdr liviliy to add to thdr lyitenu.'' 



During the 192(h, the utility holding compania were flying high, iloag with munenwi other 
riock maiket bvorlEei of llie time. But llie 1929 ttock market crash and die Gieat Deptenkm 
bqan to unravel a number of the m^or hiridiag compMie*. The extraofdinary levengB uxd 
by the holding companies, coOly service contncti between openting cooqaaiei and their 
paiaiti, and tiie highly inefficienl, widely aeatlend holding company lyilenii had built a 'houK 



Hk InsuU empire wai die first to crash.'* By ibe time it was over, 33 holding companies went 
into bankruptcy, eventually leaving investors with only a small fiaction of the original $1.7 
billion investmoil in their securities.^ Other holding conqMuies, while not blUng into 
bankruptcy nevertiieless experienced dramatic declines in their eanunp." 

A critically important point, however, ii that in spile of die financiR] disaster eipeiienced by 
many bokting companies and their inveaon and lenders, dcctric udlity opesaling canqaunei 
themselves weathered the financial and economic storm reasonably well." In every case of die 
^hue of a utility bokling company, the underlying operating companies continued to function 
and to provide service." 

PUHCA of 1933 was a controversial and narrowly ettacted nexus between the New Deal's 
finandal marketi legislation and its program on energy.^ PUHCA's primary purpoK, cleariy 
stated in Section 1 , was to: 

Compel the simplification of public-ulilily holding-company systems and the 
dimination therefrom of properties detrimental 10 the proper functioning of such 
systems, and to provide as soon as practicable for the elimination of public-utility 
holding companies excqX as otherwise expressly provided in this title." 



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PUHCA eliminued holding comptny abuw* ttiu hid grown up within regulatory g^ii. Thete 
mil were largely the result of ■ Eombinaiioa of: 1) numerous coiponte layers in many holding 
companies; 2) eomplicated Inter-afRliate trannctions between hotding companies and operating 
companies Aat were widely scattered among many slates; 3) weak state laws; and 4) rudlmeniary 
T^ulatory techniques at the state level. The most profound abuses affected investors. But 
ratqiayen were not left entirely unharmed dlher.^' 

The complex ooiporate structures, whidi tied togeflter utilities in many states under common 
ownership, [daced practical limiQ on the abili^ of states to effectively ccotrd the imnnce of 
securitieitBied on the value or cash generating potential of the utilities under their juriHlictioa. 
In the ^sence of adherence to standardized accounting and effective Federal securities laws 
(whidi would come only with Qie New Deal), holding companies were able to issue Kcurilie* 
that proved to have little value." Investors often had little information about what it was thqr 
were actually investing in. During the slock market ficnzy of the 1920s, gullibiliq) was not in 
short nipply. The Kcurities of several holding companies were sold door-to-door ia tmall 
Increinents to customera of the operating companies. Many invesKns in the slodcs and bonds of 
On holding companies, of course, lost all or nearly all of their investment. 



VtiUty consumers suffered little in comparison lo the eventual damage done to avenge holding 
company investors." Nevertheless, stale regulators of the day were probably at a disadvantage 
in insulating consumers from excessively costly service coniiacti and other types of aflUialB 
transactions within holding companies or from the improper allocation of those costs anwog 
alliliaie utilities in various states." Many ccnporate layers and lack of adequate disclosure 
requirements served to shield the details of Ote transactions ftom review of regulators and 



The intent of PUHCA was to establish adequate Federal oversight of utility holding company 
systems beyond a certain level of cottiplexily while leaving acQial utility iqulation to the stUCS 
and to die Federal Power Commission. FERC's predecessor. Through PUHCA, the utility 



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propeitiei foniwriy hdd by hiriduig compuiiei in i *hdter-ikelier' and 'cnzy-qnilt' imnner 
wetc simplified inio ccAiennt, gBogcaptue^\y integialB] utility lyitenu." 

PUHCA required - tbroucb Section 1 1, Ihe tolled 'death lenlence' clause - that (he utility 
holding company syttemi iCMxinize into phyiieally interconnected, coMdiutcd and 
geographically int^rUed sysUms. The simpler entities that the implementation of PUHCA 
produced were more easily r^ulated by die state and Federal rale n^ulaUns of the day. 

The 'proof of the pudding ' of PUHCA is that investon have substantial and reasonably accunie 
infornuOion available to them and that increasingly sophisticated stale utility r^ulatMS and the 
Federal Energy Rqulatory Commission (FERC) are not tsxd with serious corporate structure 
obstacles to the effective regulation of operating utilities. 

In an imporant khk, PUHCA 's job of dismembeting the elaborate holding company systems 
was conplele by I960." Knee then, the SEC has played an ongoing, maintenance role. 

Tbe current coniroveny over PUHCA, while mild in comparism to that which MWwM its 
eaactmenl and early implemcmation, does represent the most healed debate about PUHCA sidcc 
it) enactment. It is unlikely, however, that the PUHCA ddMie this time will contiibuie to 
produdng a challenger fcv dw White House, as it did with Wendell Willlde in 1940." 

Since PUHCA's enactment, there have periodically been proposals fiir revision, or even repeal. 
For dK most pan, these proposals were either aimed at greater efficiency in administering die 
law after its main goals had been achieved or lo free registered holding companies from die 
constraints of die law, thus re-fighting the battle of I93S. The major changes discussed tbr 
PUHCA primarily involved either repeal or virtual repeal and/or die movement of tbe 
enforcement responsibility to an energy agency such as Ihe Dqnrtment of Energy or FERC." 

The current substantive and policy-based debate over PUHCA accepts the basic purposes of 
PUHCA and is only incidentally concerned with administrative efficiency. It is characterized by 



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(undunenial difTcRncei of opinion wilhin Ihe electric indiutry, utility and Don-utility, about how 
bat to accomiDodaie (or to resist) impomnt cfaan^ thai have taken place in the electric roirictt. 



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TffE MISMATCH BETWEEN PUHCA AND THF EI.Ff-TB IC MARKET 

The PUHCA fcforni proposals now under discusuon in CoagTess focus on bringing ■ very 
qxcific part of utility bedding conqjany rqulalion into line with the evolution of the utility 
industry. In its sinqriesi terms, the q«cific mismatch between PUHCA and the evolving electiic 
industry has two features. 

First, utilities or their afRlitues cannot easily invest or partidpace in non-PURPA wholesale 
electric power projects outside their home state without becoming reginerEd holding companies. 

Second, no non-utility party or group of investors can rEaaonably invest or participate in multiple 
non-PURPA wholesale power prefects in mote Qian one sou. Tlie many nuances and 
complexities involved serve only to euceifeale and make more unwiddy the curicnl and glowing 

mismatch. 

The bottom line of the mismatch is that many utilities and their regulators, who are in the front 
lines of assuiing reliable electric service at reasonable prices, believe that their flexibility to do 
the best possible job ii hampered by the triggering of the registration requirements in the case 
of non-PURPA indqmdent power prpjects. The remedy for the mismatch is not a complete 
revision of PUHCA - or tt^eal -- but an evotudonary step which merely keeps pace with the 
evolution in the maiicet of non-utility generation and clarifies and codifies any ambiguity in state 



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100 

IfPVBIgrTHICINMIgraVTUBfllS LEADING TO raEMlSMATCT 



It ii clearly qipropriale for Coogreu to coiuidn' whether PUHCA reqtnres H 

10 nuke it (and dierefore overall utUily regulation) more consistent with market devdopmeots 

and with other public pdida thai have been implemenied over the past two decades. 

No doubt, others could cite their own list of trends and developmeno in the electric industry. 
One thing, however, ii certain. No one mainiaina thai condiliDni in the electric buvneu are as 
they were in 1933 when PUHCA was siacled, or even a decade ago. This evolution is a 
fimction of: 1) changing technology; 2) changes in Ifae global energy market generally; and 3) 
past public policy chraces which have introduced new competiiive features into the industry, nnst 
notably the Public Utility Regulatory PoUdcs Act of 1978 (PURPA). 

A brief examination of some of these trends will highlight lome of these changes. 



In the wake of the oil crises of the 19T0s and the resulting concerns about ftesil Aid availabitt^ 
and prices. Congress passed several tneasures which would prove to have long-lasting efEect* on 
flic electric industry. In 197S, PURPA wasenactedpriroarilyioencouraceenertyefficiencyaiMl 
conservation and to refine Federal and state regulation of electric energy. Included in PURPA 
were pKFvi&ons intended to encourage the uk of alternative (waste or renewable) fuels and/or 
cogeneration (the ^multancous production of electridty and uaefid diermal energy), creating a 



PURPA has proven to be a critical first step in increasing competition in the U.S. electric 
generation market. PURPA has provided a gateway for new players to enter the electric industry 
and therefore has been an important incubatOT of competition in the electric utility industry.** 



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PURPA exempu 'Quali^Fing Fadlitia' (QFs), diher cogeneraton oi uniU power praducen, 
finxn PUHCA and from leguladon u electric utilidei under Federal juid *UUe utility laws and in 
Ibis xnae repnmts important PUHCA reform. Thus, PUHCA is not a buriei to entry ftx 
these new market participanti.*' Indeed, a recent U.S. Court of Appeals decision tughlighti 
the advanlasc that QFs have by noting that: 

Such advantage as a QF may have stems directly from the Congresi'i policy 
chnce to encourage the »le of powo- by QF's nUher than by traditiotial 



Largdy because of PURPA, cogeoeratian and small power bcilities account fbr about 35,000 
m^awatts of electrical gcneratiDg capacity," roughly equivalent to 3S cmiventionally-sized 
nuclear power plants or about five percent of total U.S. instaUed c^Mci^." Indeed, almost 
30 percent of new capacity in 1990 was ^tHn QFi," 

TYx most impcmani advantage that PURPA provides QFs is that utilities are obliged to bi^ 
power from QFs at avmded cost (the cost which the ulilily would otherwise incur if it were 10 
generate the power itself).*' 

Some utilities have contracted to buy power from QFs that they do not need or at priceilhal now 
amn uoeoonomic. TMsoccuiTedforavarietyofreasonsinduding: 1) the manner in which stale 
public service commissions calculated avoided costs; 2] inaccurate fuel cost and aqxtcity need 
prageciions by uHUtiesi or 3) stale laws that set high minimum QF rates. It is important to note, 
however, thai virtually all of these problems are the result erf stale implemeniuion of PURPA, 
» of the law itself. Many nates have not encountered these problems. 



As dixwied in greater detail laiei in this p^sr, the types of generation covered by PUHCA 
reform proposals (whether called EWGs, IPPs or NUGs) will not enjoy the 'finrORd nalkv* 
features that have provided dear advantages to QFs. 



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A key feature of the electric induitiy in lecem yetn hu been Ae emettence of > nwie 
competitive wholeiale maikeL Contempomieous with Ae rise of the PURPA QF industry u an 
■lierMtive source of power, many utilities wen comfdcting m^or eoiutructian projects begun 
before the ihup decline in electric demand precipitated by the oil dtocict of tbe 1970s and the 
iccessioi) in the eariy 1980*. Utilities often tbund themtdvet with ample tempoiaiy reaeive 
roafgins, Ktmetiines less charitably called 'excess ofiav/.' 

BHccAatiiii the pnbtem was the Act that the trend of the cost line in the electrie IndnMiy 
reverted itselfin this period. Previously, electricity hadbeenadediningcostbusinesswithCKli 
new increment of capacity coming into commercial operation at a lower coil per idtowatt-Jioiir 
than the previous inciemenL Thii had been achieved by economies of scale, impioved 
technology, high growth in demand, low inflation and interest rates and stable fuel prices. All 
of that changed, bi addition, new environmental requirenienis and r^ulatory-related delays in 
■he completion of nuclear plants made many new [rtants very expensive. 

In some cases there was a 'double whammy.* Not only was the new genenling opacity fiu 
greater Dwn needed in the near-tenn, but that cqxKi^ was often very expensive. At this point, 
in the view of many, the implied regulatory compact began to unnvel. Faced with signifieant 
rate increases many state r^ulalray commissions chose to disallow hundredi of millions of 
dollars in plant costs from recovery in rates, or 'phased' costs in ova- many yean. 

In the end, the electric industry proved to be no more immune to the effects of consumer 
response to price increases and surplus than other industries hive been. While die sunriits itself 
was Knipotary, the activity in the wholesale maricel that it stimulated ha* triggered a continuing 
inleic« by many utilities and r^ulators in wholesale transactions as an important pan of meeting 
dectrical demand. 



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The ivailAbility ef non-utilily louices of generation has engendered i npid\y growing interest 
Iqr stUe regulaton vid by many ulilitiei in various fbmii of 'competitive bidding* to Ktve 
incmneno] power genendon needs. Competiiive procuiement is becoming 4n established 
fiiature of the power markets. 

An important event ia framing thinking about competitive bidding in the power industry was the 
1988 FERC Notice of Proposed Rulemaking (NOPR) vMek suggested that wholesale power sales 
made brough state supenised t»dding programs be laigdy relieved of the requirement to xek 
Federal rate qiproval. WbJIe the NOFS did not advance beyond the profrasal stage, it is dear 
that it had a dramatic impact in terms of framing the dttaie which has proceeded since.* 



and Demand-Siile Man 



Many states, often in landem with an interest in competitive bidding, have jtrined a 
toward 'least-cost' or 'int^raled resource' planning." Under this apinoach, utilities m 
obliged to consider all approfniale alternatives for meeting their customers' rteeds - including 
both demand and supply-side options - before b^inning to build or acquire additional generating 
opacity. Dr. Mark N. Cooper, of the Qmsumer Federation of America, atjues that the 
'organizing jninciple' for structuring the electric utility industry in the future and which PUHCA 
'reform must reinforce are integrated least cost resource planning and competiiive bidding to 
fulfill these plans."* 

Demand-side management includes energy conservation and load management (such as energy 
efficient lighting and thermal energy storage, respectively) to reduce the need for capacity and/or 
energy.* Many stales now require utilities to consider demand-side opticms on a level playing 
field with supply-side options. More importantly, stales have bc^un to provide ei 



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104 

iooentivei in order to encourage utilida to pursue more aggreuive demand-ilde mnigea 



Th>. Impwidiny Nted Rir New rapadtv 

EleEtrical power denwnd it likely lo continue to enjoy > pCMitive coiiclation with genenl gnmrth 
in the ecoowny. Electiicily laagt bai inoeaied Krongly durinB the 1973 to 19S8 time period 
even u toUl energy consumption has increased slightly. Electricity usage grew at an avenge 
me of 2.7 percent per year -- dightly exceeding GNP growth during the 1973 to 1988 time 



Predictions by some experts in the mid-1980s that demand for electricity would level off or 
decline have proven dranutically incorrect." Ai the ecoiKxny grows, we can expect an 
increasing demand for electricity because of its vemtitity and convenience. The inescapable 
conclusion is that imponant decisions about the mix of new generating oqMCity and demand-side 
capability win have to be made in many areas of the country during this decade. 

Until ulilitiei dedde whether to commit their own capital to new generating plants, they will, in 
genetal, be generating more cash from thdr business operations than they will need for 
investment in upgrading transmisncm and distribution systems and for twrmal shareb<dder 
dividends. As is customary following a construction cycle in the electric industry, utilities ate 
using cash to retire debt and to strengthen their balance sheets by increasing the equity 
components in thdr capital structures. Imponantly, unlike past periods, many utilities may wisb 
10 have the readily available option of forgoing commitmeni of their own oqntal to power plant 
coostrvction and ownership. They may choose to rely cm alternative sources of power. 

To the extent that a udlity or its regulator has a preference for purchased power, utility capital 
would not be direcdy invested in generating oqiacLty to serve load. Thu leaves the question of 
what (or whether) investment will be made to grow the underlying book value of the stock. 



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Pr.aial IJmlB Pnr PIIRPA f»« 

As uiiliiiei coonder new pou«r sources, including non-udlity power which has been Ic^timiud 
l^ the mukel and the taw, opportunitie) for additioiua PURPA QF bdlities have become 
incicasiiigly limiled. InsomeaRasofthecounlrythenuinberofpotcafial'steainhosti* required 
for meeting the energy efiickocy standards contempUled in PURPA is thought to be agnilicantly 



This is important for two reasons, one quite substantive, die other for what it illustrates abaut 
Ole growing PUHCA miimalch with the maiket. 

The substantive point is diat to die extent there is a markci demand for non-utility poiver sources 
to serve port of the growing demand for electric power, the primary PURPA option may grow 
scvce. IfPUHCA effectively limibnon-PURPA.non-uIilitypowerprcijeGtdevelopmenlbecause 
the 'legistraiion risli* deters both ubliiies and ind^eiKlent developert, then there could be the 
uninlEDded creation by rcfutalion of a ihoittge of nmething thai the market wants — leliabte 
dectric generating capadly and energy. 

The illusirBlive pram is that some observers suqwci that the PURPA steam host shortage is being 
'cured' m some cases by theinveniimofasteam host for die sake of the power project rather 
Iban the creation of the project for the sake of the host Increasingly, it appears that some 
PURPA cogeneration bdlities are being built and operated, often with die encouragement or 
acquiescence of Ow purchasing utility, in ways which make only the most minimal use of Hie 
steam in ■ pmceu application. In short, a PURPA EKdllty, even with a 'Potemkin villace' 
steam host created to quali^ under PURPA, may be more attractive economically lo a utility 
than a utility-owned plant If this is true, it follows that an attractive non-PURPA power plant 
will be even more economically attractive to die utility than a PURPA 'machine.' 



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Whik there il an increaiini desire to nuke continued use of non-ulilily power sources, Sodm 
PURPA'i requirements may be hindering the mtization of the abundant efficiencies that w 
ori^nally desired. PURPA'srequiienwntiinay infposeadditionalcosiicompiiedtoihoiewli 
might be incuned by an indqiendent power unit abKnt the ileam hon. 



PUHCA -Pretzeli- 

An important indicator that PUHCA has developed a certain mismatch with Ate denumdt of Qk 
markeiand with itsownobjecttvesislheenKrgenceof the 'PUHCA pretzel.* Therearenow 
several instances in which the SEC has granted exemptions to non-PURPA, non-utility affiliated 
dectnc wholesale projects, bi these cases, elaborate and ingenious efforts have been nude by 
the developen, their lawyers and the regulaton to devise coiporale and finandal structures which 
can pass through the *eye' of the PUHCA 'needle' and avoid classificaiion as a registered 
holding company." 



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nmcK maanuM and the pmNriPi.Fs of unurv reculation 

A cicv distinction slx)uU be made between 'utiUiy r^ubtkM* and 'holdinB CMnpany T^ulalkm* 
uiKkf PUHCA. Tbe SEC hu no raiemaking authority and PUHCA does not rcguble etectric 
nlililies. Kalher, PUHCA r^uloles the coiporue fonn and financial transactions of certain 
legislered electric or gas utility holding companies. 

Utility operaiioiu, rales, quality of service and most inter-aTRIiBte tranactions of dearie uiiliiiea 
ne r^ulaled by itate regulalcKi it the inliaitite letail level under ilile iawi. FERC regulates 
wholesale transactions, priniaiily under the Federal Power Act. 

Nothing in the two primary PUHCA refonn measures pending befme Congress alters the banc 
featuresofetectricutilitynxuUlionintheU.S. if anything, the PUHCA lefbnn provisions are 
an attempt to hold the iqulatoiy compact togflbcr by removing kntk of the points of abiaskm 
which have developed between markel conditions and regulation at both the Fedeial and stale 
levels. PUHCA reform does not abrogate the assumed regutaloty compact. Rather, it 
stRngihens and reinforces it. 

An examinalion of PUHCA refonn proposali nveals an attempt to remain true to well- 
esiablished utility r^ulatory principles in the face of changing drcumstancei. Adherence lo 
r^ulatory principles should not be confused with a blind loyalty to speeiHe regulaKwy 
metbcKlologies, irreqxctive of changed conditions. Nor should there be an assumption that 
today's companies and corporate structures are the only posubte ones for the future. 

The electric industry continues to evolve. The i^ulatory ftameworii has always evolved while 
managing to adhere to basic prindples. To contend that PUHCA, written over half a ceniuiy 
ago, should t>e considered immutable would be to ignore ttie basic realities of tbe electric 
industry of today. Just as PUHCA was a product of its time, so, too, should PUHCA refnm. 



D,g,;,zeclbyG00glC 



Tlw key to evalauing the ill^adon thai PUHCA reform is tantunount to der^ulatioa ii lo 
deienimie if the PUHCA refonn piopoaii violate otablished goals and prindiriei ot utilhy 
T^ulatkw. lodeedjtb Intimate to coiuiikr the exlenl to whidi PUHCA refonn actually could 
Ruiforee and reaffirm traditional r^ulatory goals. 



Utility r^ulation ii not so much predicated on a commitment by govenunent to enftnra a tyOem 
of vertically int^raled, locally fianchiied monopolies u it i) designed to place restninti on die 
ability of such a system to abuse its market power. In fact, utility regulation fiiUy aelcDOwledge* 
die possibility of competition and of segmeniation in die industry, wiUi diKerait firms and 
orpnizatioiis perfbrming diffinnt functions al time). «4M4her generation, transmission or 
distribution. 

It is not necessary to resolve in ttus pqcr the issue of ttie extent to which xime aqiect of dectiic 
service provision may be a 'natural' monopoly which optimizes efficiency and costs as a result 
of the govemmenl'i enfbrteitient of the monopoly and is ttierefore n^ulaied K> prevent market 
abuse.*' For purposes of a discussion of PUHCA refoin, only the obvioui need be staled. 
First, local distribution is almost always a franchised monopoly. Second, there are significaM 
limitations in transmission c^Mbility such that tranimission is likely to continue to exhibit 
monopolistic features. Third, generation is demonstrably not a monopdy. 

Generation cannot be considered part of a 'natural' monopidy. Whdtsale power tnnsactioiii 
have always been a feature of the electric industry. Arrangements among and between vertically 
integrated utilitie), local electric distribution endlies (often government owned) and enterprises 
bvolved exclusively in die generation of power (e.g., generation and transmission cooperatives 
serving rural distribution cooperadves and Federally owned and operated power marketJng 
agencies) are ubiquitous. 



D.,r„.db,G00glC 



Hie two pnnmty PtMCA lelbnn ptopoalt lake the wtnld u It is, dBncterizcd by * high 
detrae vf n^ulafed monupoly in dittribution and traiumiuion □oeniting wiOi the increasingly 
competHive wbidesale power inatket They both provide some modest room for the indiutry u 
develop ia the directioo of a more competitivB maricei ftn' wholesale power, if Uwl is what 
utilities and iheiT uaic legolaion want in tlie future. 

Neither of Oie two main PUHCA bills lemmT* or alters the ability of electiic icgtOalon to 
'inaulate' coosumers from Ibe txtniwe of monopoly or mariiet power in any segment of Ote 
industry. If anyAing, the Ulli grant dew and unequivocal auihohiy to siatoRgulators to more 
cknely ovOKe and cootiol iriuleole power pmchase decisions by utilities uwkr dieir 
jsrisdicdon, evea when dte utilities can dioose among competing power sources which 
tbemselves have no mailEet power. 



The primary method by which legulaton U the stale and Fedeial levdi exercise dieir 
icqwnsibility has been rate nyulsiiDn. State lepiUtors and their Federal counteipattt have 
jieaaiy control over lalei and genenlly have autliority to icquiic prior tqiproval before any rale 
or tariff is 



In general, dectric rale regulation has been based on 'rate^f-ietura' or 'cost-of-senice' 
i^ulation. These meOiods set i targeted annualized levenue level ('revenue requiremcM') for 
a utility, taking into account the company's actual or aniidpated opeming expenses, projected 
sales levels, fluids required for debt service and a return on equity capital. Tbc equity lEtum on 
capital invested in 'rale base' (e.g., power plants, tranimiiaon lines, etc.) is supposed to 
apfnwunute that nddcb investon codM expect to cam in a busness of similar risk. 

Utility regulators have "'"""■I discretion in the medudologies they use to estimate a utility's 
revenue itquiiement. Regulators also have substantial discretion in flieir evaluotiiin of ifae facts 



D,g,;,zeclbyG00glC 



whidi lew] u the detoiiuiiaiion of the revenue target and the profit level thai is conudered to be 



Id addition to regulating (he overall revenue level, ekctiic utiliiy regulators decide bow the cosu 
will be allocated among customer groupings and lypn. R^ulalon also decide what each and 
every separately priced service will cost whether at wholesale or retail. ReguLaiMS can also set 
the temu and conditions under which the service v^ll be provided. 

Neither of the PUHCA refbnn bills impede state or Federal regulators in the exercise <rf 
traditional rate r^ulation nor in the selection of the meUiods to t>e i^iplied in making thdr 
decisions. Nor do the bills alter the reality that r^ulators cannot be compelled to acc^ 
'market-based' pricing pnqxisals rather than to choose the imposibon of iradiiicmal coa-of- 
KTvice rates on both buyer and seller. The PUHCA bills in no way der^ulale wholesale electric 
prices and make no presumption as to what methods regulators wilt apply in approving wholesale 
or retail prices. 



peaw line* of Federal i>nrt ^bm P^yulalnry Juriadiction 

Until recent times, ttiere was relatively little controversy over die re^ective electric utility 
i^ulatory jurisdiction by the FERC and state public service commissions. FERC regulates 
wholcnie power rates and latex for iransmiuion nrvice provided by utilitia (o other utilitia. 
Slate public service commissions regulate retail rates for end-use cmsunten and have set the 
avoided cost rates which utilities must pay for PURPA QF power. 

The primary ctMitroversies betwecnihe two levels of regulation have come io the context of billy 
conventional situations rooted in PUHCA as it is today. FERC has been criticized for permitting 
arguably excessive rales by one utility for power sold to another or for allocadng allegedly 
excessive allocations of allegedly excessively expensive power plants among companies within 
the same multi-stale festered holding company.'^ 



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TTlecorerftfaec o at K iw ct iy ii few it hw generally bed held by ttie oourU that ■ iWb Rgulator 
mmt pcmdl noovoy ot Knvue it leliil ttMC cxiitx incurred in a wboleade power purdkue 
«bere FERC hu Jetennined dK cfaniei ■! wtaoleiale to be jmt ind rauauble.** 

The coiiuilictfiiig Mm^^ait^ ill ijie ccxitrovcny hu been Ibe inue of Ibe extent to wbicb &ic me 
RgulitoT may deny icoovery <rf wbolenle coiU «4iich h»e been impnidently incurred by die 
looluiility. ¥rtuk die ectMl price of d>e power miy be 'ju«M>dreMooriile' under traditionnl 
piiftP- aHmifHtHw i lUfr^-nCiini R^ulitioat die puictauiiig utility my iuve mide i bad choice 
in deckliDg to boy Ihe power, periapi becwue diere wu no need for die power or becaiue diere 
were (NherieMlily mibMe «4vUei u more umctive prioeioT tennt. TliiidNUly of tbeme 
se of a wbolenle purchue by ■ utility hu been called die 'Pike County* 



Moit HUB npiUton have CMn e w e d an interest in die maintaunice or ohancenient of die *Kkc 
County* doctrine.** Thii deaiic ii entirely undentandable, uice reviewinf die prudence of a 
wliolenle power puidnx is nndy an extennon of Ibe otablidied lutbority of ttate icfulalon 
(C-t-, leviewt of power plant oorutruction dedsoni and isqilenieatation or fiid purcliaie 



It bat been alkfed a«t PUHCA teviwau would permil utililiei to enter into iinpnideni wholeaale 
tranaacboos widi BWOi, (he coits of which me regulatvi would then be obliged to pan on to 
retail cuatomeis. Such an oucome it impossible under the two PUHCA measures now pending 
in the Congicss. 



t lEgulatm win be Mt to exercise dor authority to insulate consutnen fran imprudent 
rieale tianiKtion* widi EWGs. Futdicr, both PUHCA bills lake sKps to incorpofiic die 
ncc of the Pike County doctrine into law with rcqKct to more convenliaaal wholesale maAet 



D,g,;,zeclbyG00glC 



If OMCted, die POHCA rdtmn fHoponls wouM sjgnifiamtly cUrUV the allocatkia of 
reqwnsibiUties between itite and FedenI regublois, with stale legulalon gaining cotuidereble 
•dditiona] •utboiily. Re«aablishing clear lioes of uithority will substantiaUy lenwve the 
iDcentives, as wdlutheopportuniiiei, for 'fbnim shopping.' One complaini of state reeulaton 
aboullbeallocationofauthOTity between the Hate and Federal levels has been that there an gaps 
or amlnguities which may encourage some in the electric industry to seek Federal juiisdictiDn 
over their actions in the belief that the treatntent may be more favoiatde." 

The real problem is the potential for dimive jurisdictional dispulei which lend to make even 
more convoluted an increasingly comidicaKd r^ulalory environment. The PUHCA reform 
proposals, by establishing clear lines of r^utatory responabilily with respect to EWGs. Urgely 
eliminates not merely the reality of certain jurisdictional problems but ibe even more damaging 
su^cious anticipation by state regulators that utilities and others may attempt to escape state 



Additional evidence of the e^ort in 

die Senate bill provides the Of^ioitunity, with stale commission qiproval, for existing PURPA 

or PUHCA pretzels to convert their status to that of EWGs. 



State and Utility Contml Over Remurce Acqnisition And Pnidence Reviewi 

The giecifk provisions of the two pending PUHCA bills which clarify and strengthen slate 
r^ulalory authority are rooted in the authority date r^ulaton have over resource planning and 
itsouice acquisition by udlides. This authority has been increasingly formalized by least-cost 
and integrated lesource planning statutes and procedures in many states. Both PUHCA Ulls 
reinforce die ability of states to require utilities to comply with state least-cost planning. 

The least-cost planning process is, among other things, an effort to move more of Ihe pntdcace 
mview process up-front and before the bet, rather than waiting until a utili^ actually seeks to 



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lTlin>r TBCxr/ttj on a new power plant in ib lalei. In itceni yeus, ■ number of utililiei luvc 
■iffiBRd Kvcfe finaadal bnddiip becnue thdr uaie conimluions have disallowed Urge pntiont 
of Uk ccMti of new power pbatt-*" Up-front prudence leriewi aie designed to creUe greater 
certainty fbr inieitori, uiBtjr manigenient, i^ulaion and oonsunen by letting limiu on 
"'™"«' recovBy for qxdfic leaomee acquintioi pn^eca. Rolling prudence reviews, which 
would allow a periodic leview at the need fbr a pRgect, have alio been propoied. In thcK 
wayt,inqNittantdeci»onf are not put off until a date, voy&r in the future, when the icgulaton 
origtually idvcdvcd in dedsioot are no longer around. 

Lcut-cotf ptanning ii alio an eflbn to better match reaoufce aeqtiitiiion to customer demand and 
to incorpor at e a con ii deration of deitiand-wie optioai Into Ote retource base. Mtich of the 
oMivation for kait-GoS p**™""! ii tiie denie to find wayi of avoiding repeali of the 'exce** 
dfAdty* and "rate Aock' ntuatioiu of the recent pan." 

The two PUHCA bin* accommodate and nqiport kaM-cost planning and up-ftonl prudence 
review in sevend ^KCific wiyi. 

The Senate and Howe billt qtedfically ensure the right of a stale to disallow the ineluiton 
ofimpntdeotly incurred costs of awholesalepowertiinsactioa in retail raiet.*^ Fedml 
p r eemp tion is possMe only in the case of the allocation of utility-owned plant costs 
among the operating affiliates of a registered holding company.** 

The same Senate and Houk sections noted above gnnt plenary authority to tbe date to 
disallow inqnudoidy incurred wholesale power costs, whether fbr power purchased (rom 
an EWC or a utility. ' 

lite Senate biD provide* that a utility may request an up-fnml prudence review vAMi 
would be binding on future commissions with respect to an EWG power purchase. The 
deadline fbr such a decisioa by the stale oommisiion is the effective date of the utility's 
proposed action. This qiparcnt impostion on siaie authority come* in the context of a 

30 



D,g,;,zeclbyG00glC 



codification of the Pike County doctiine. The pracliea] reality ii diat any $tate 
Gommiuion imcomfbilBble with thii new nqxmibility bta the ability, if it lo chooses, 
to forestall a utility purchase from an EWG either by denyins the prudence of the 
purchaae, sped^ing such conditiooj ta FERC rates of a certain level, or umply dragging 
out the proceedinc concluding the proceeding in ^te of the deadline which appears to 
have no default pTaviiion." 

The Senate and Houk bills, while maintaining dte longstanding Federal pre-emption of 
plant cost allocation among die afRliaies of r^neied holding companies, both ensure 
state prudence review authority with itspeet to power purchases by afiitiate* of roistered 
holding companies from affiliated EWGs." 

"nie Senate and House bills both require the consent of the applicable slate for any 
currently operating wholesale or retail power plant lo EWG status.'' 

The House bill provide* dial any future inl^ratian of operations among electric udlities 
must gain the prior consent of every state to whidi service would be provided." 

Finally, both bills provide access by slate regulators to the books and records of utilitiet, 
utility afflljaies and EWGs to the extent required for elective state regulation. Tliii 
certainly includes such purposes as prudence leview and dw oversight of inter-afliliate 



An evaluation of die two PUHCA measures must lead to three conclusions with respect to the 
exercise of slate tcjulation. First, the authority of slates to disallow imprudent wholesale costs 
(and effectively, therefine, imprudent transactions themselves) would tie made more clear and 
definite. Second, in a very practical xax the reach of slate rqulation has been extended well 
into Hie wholesale market. Third, Federal r^ulaiory auihoriiy has not been exparwled at dw 
expense of state audwrity. 



D,g,;,zeclbyG00glC 



115 

■d tta •Ohlip 

The CMC of Ihe 'oUi^tiaa to ibvc* principle ii Aal in lEluni fix local monopoly dUtributioa 
mus, lulUityagraabaditoMrveaUcomcnwhojtrewiUingiopayancI toirian toKTvefiituie 
demind. Ei rfunqug* of ddt obHptiaa mlh ic^Kct to lAuMlng to raeet ovendl demmd Ims 
Indiliaailly been quHe genend. Theoieiiadly, all OM dioald be necetmy to encoungc utUitiei 
to meet ihii leaenliiad obtitatiaa to Mrve ii to ippmvt tales wh^ ue hlely to produce in 
adequate profit An adequate pnlitpoteniia] will motivate utility manager* to lake itqs to meet 



Thenaiefinv, ifany, exa m p le a trfttaieretnlatoraMidefingautiliqr.atainttitiwill, wconstnia 
a specific power plaat, bofld a paiticular transmisson line or to make a particular power 
putcbase. Then aie oeitvnly more eumplei of Ate rcfulawiy or odwr auDwrlties refiuing 
peniitmon to a utili^ to embark on a projecl that the udlily maintaini ii worthwhile, or even 
eaaendal, for adequakly <fi«ch af y iB g iti obligation to lerve. 

In recent yean, however, ga«enuneal at the state and Fedeiil level has become more dnecfly 
involved in resource acq uisi tion decisions by udlities. The two most obvkaii inteiveniiorH have 
been PURPA wfaidi requirEd power pmeiiaiei from QFi at avoided cost and ttie Introductiao of 
various least-oost and imeg t MH l resource planning processes in ihe states. In Ihe case of Ote 
staie-levd planning procc a se a , desnand-side options have become increanngly prominent along 
widi aupply-nde bidding. 

The two PUHCA refimn praposb in Ae Congress do not intetfeie with (be tight of any state 
to take steps to enfotce the obligation to Krve either ai it has in die past or in ways it my 
cbooK to do so in die future. Inqxittanlly, all aspects of utility and state regulatory ■<«^f'''i 
to creau or to do busiDeas widi EWGs are entirely votumary. From die Federal levd, there 
would be iw obligation for utilities to purchase EWG power or fbr any n^ulator to accept any 
new qipTOach to rate Kning. Nor does PUHCA reform reduce the ability of states to require 
utilities to invest in demand-side measures. 



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T>» P^iLlinn nf Utility r.pihil «!B..r>..»^ 

Until the ncenl PUHCA itfonn debate. Ibe role of udlily legulolon and of PUHCA with reqiecl 
to utUity cqrital structures was a topic which receivol little attention outside regulatory ranks. 
And even within the ranks of regulator, the subject was an arcane one. Unfortunately, it is also 
now becoming confused because some opponents of PUHCA lefbim have addressed the question 
in ways wMch have little genuine substance. Unfortunately, arcane matters lend themselves to 
being twisted beyond all recognition. 

Some critics have charged that PUHCA reform would open the door to the creation of large 
numbers of ittdependent power firms (EWGs) which would be highly leveraged. According to 
the critics, leveraged EWG c^tal structures would pose a variety of risks to utility purchasers 
of dtdr power and to consumers reliant on those purchases. 

The most extreme approach to this cajMtal structure argument has been the cttitention by a few 
PUHCA reform opponents that the situation which would develi^ would be aldn lo that in the 
savings and loan industry. Although this pTOpostion is absurd on its face, it has managed to gain 
some currency pertiqs iMcause the S&L issue itself is lo politically virulent these days. 
. Therefore, it deserves to be addressed with some ^ecificity. 

It is important to first omsider whit regulation of utili^ c^tal structure actually is and has been 
before entering into a ddxUe over the effect PUHCA refmm might or might not have on that 
traditional regulation. 

The cairital structures of operating utilities are regulated to a limited extent through the exercise 
of regulatory aulhoriiy over securities issuance by operating utilities and by utility bedding 
companies. Sections 6 and 7 of PUHCA allocate power of piiar i^qiroval over securities 
issuance by registered holding companies and their subsidiaries in order to ensure that operating 



D,g,;,zeclbyG00glC 



utUidci wni not be burdened by excessive ddx oblisUioai inclined outnde dw jurisdiciion of 
Mate Tepdatm. 

The SEC iiM o p tnu i on • nile of Oiumb which liu rasnded 3S percent u die dednble 
omiimiin letti of endty Ibrudlity holdiiigaxnpuiiel, whether legiiieicd or exempt. Coatnri 
over wcurides itnanee by exenqit holding companie) and thdr nibadiwie* or by operating 
nfllidcs is IcA, by debuh, to the state discretion. 

For the mott put, utility ca{Htal strtKiuiet are not directly icgulMed in the w^ in wMcfa, for 
instance, bank reeulaiors reqidic ■ minimum ratio of equity cqiiDd relative to Die ovcnll assets 
ei a bank or SAL." Similarly, inamiice i^ulaton insist on a minimum cafrilal and surplus 
level toe an insurer. Banks, S&L'i and insurance companies which fail to meet known, pn- 
determined oqiltal tiandardt are contidered impaired and subiect lo smne kim of direct 
lUpenition by die legulalor or other i^ulatory action. 



In reality, the nnyor regublny encounter wiOi utility capital structures is in the context of rate 
making. Raiet, in pan, are calculated to include a compooBit for ■ letuni on the equity portion 
of the eqijtalstruclme of the operating utility. Similarly, the costs of servidni debt sold by the 
wiatde. Nmnially, state icsidaton and FERC tend to accept the 
rn Frajeciion <rf the cafMtal sOucture <rf the utili^ as a basil for rate making. 



Utility It 

of the nies being set or may lake other step* to encourage the movement by a utility to 

efficient capital Structure. 



In lome cbki, itak and Federal me legulatoiy ai 
itnKtnre to a utility tor rate making purposes. R^ulators may assume more or ton equity in 
the attempt to estimate a mote efficient and iberefbie less costly cai^tal structure. Therefore tiw 
rales set in the process may be kiwer for customen dian if the actual capital itnicture were used. 
For instance, a utility with a very high equity ratio of eighty pen«nt might be accorded only an 



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imputed eqinty levd of 50 percem because, in the view of regulator!, the ovenU capital ttTucniR 
would be leis coitly if there were more low coat delH included. 

In addition to the queuion of maintaining latK as low ai possible over the long-term through an 
opdmally efficient cqrital structure, i^ulators have a reqxnuibility to encourage a utility to 
maintain the financial flexibility so that the utility can go into the dd)t market to lx>rrow the 
wbstaniialiununeceuary for construction ofa new power plant, in both good markets and bad. 
There has been a cycle phenomenon in the utility indiutry in which d^t levels rise as money is 
borrowedandcashisexpendedonconstruclionof a new plant which is not reflected in rates for 
IbeyeanpeiKlingconipletion. Following the plant's inclusion in rates, the effort is to build llie 
equity levd back up in tame for the next construction cycle. 

It is possible that the pattern of the cycle may change for those utilities which choose to rely 00 
wholesale power purchases to tneet new demand. It does not mean, however, that the 
fundamental financial realities will have changed or that brand new risks are entering the electric 
industry which omsumers have not previously experienced. 



The financial community is well aware of the fact that many utilities and r^ulators ate 

w ways which place greater rclianc 



For instance, bcmd rating agencies such as Standard & Poor's and Moody's have traditionally 
assigned bond ratings to utilities based largely on an evaluation of the capitid structure and its 
effect on ttie ability to assure serving of the dd>I. More recently, the bond rating agencies have 
b^un to look at the obligations of utilities under power purchase contracts with other utilities 
or with PURPA and indqtendent power producers. The ciedit raters, then, are merely 
recognizing that Mie sorted obligation may be partially replacing one with which we have been 



D,g,;,zeclbyG00glC 



119 



When Sunud luull devdoped Ihe idea of the open-end mortgage bond for udliry Glance he 
adjiuied electric induury liiiuee in Mder to meel Ihe demand* of the day . He helped reconcile 
the intenst of Ibe financial Goaununity in having a reliable flow of coupon paymenti ooauel- 
■ecuredboodtwlthBieneedof utilities to laiaeenonnouianKiunit of money to build plants and 
pay ttie principal back over tbe many yean of luefLiI sendee ftom Ibe plant.^' 

Ai with die opea-cnd inorlgage bond, the qtfdicatiDn of protect finance techniques in mofe recent 
yean ihould not be leganled with alann but radier should be understood as a feature of ttie 
deciiK industiy financial fiMe wtiich has emeiged to meet a mafkel demand and need. Many 
PURPA QF uBiU have been financed with high kevds of non-recourse debt where tbe lenders 
have relied tor security on a vaiiely of risk mitigating ^cton such as die strength of the power 
purehaae contnct with die local utility and die perfbrmance guarantees by the eq uip ment. 



Tbe PURPA e]qKiience has been cited by lomecriticsof PUHCArefbnnaiahaiUngerof an 
dectfic industry whidi wiD beomie increasingly levenged and ihenfbre dangerous to the 
interests of investon and ooosumers. The further aH^atim is dial EWGs will in aonw way 
un&iily rdy on die cre^i of vertically integrued purchasing utilities, to the detriment of die 
puicbaser. Upoo doMr caanrination, these contenttons are yet another example of ap(de* and 



Pint, as noted above, tbe financial comrounily and investon are fiilly cogniant of die nature of 
power project finance and tbe bet that tbe overall credit worthiness of both ilie project finandng 
andof Ibe utility are a function of Ihe total set of UaUlilies and assets with which to meet diote 
obligatkMis. The financial community is also aware of Ibe rale of rc^ulalon in oveneeing the 
balance between tbeae Halrilitie* and the ability to roeei them. PUHCA reform critics seem to 
be taking the position that do one will be 'minding the store* and that a massive industry will 
be leveraged up and eadangoed through the 'back door.* They further xem to coDttnd that 
investors will blindly provide funds for over-ieveiaged, non-credit-worthy companies and 
projects. TWs aigiunem ignons tbe increasing equity requirements now demanded for QF 



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prajecB, die*|ay fbrperfornunce* and diqatchability features oT many new QPconincU with 
utilitiei and otticr feuuies of maturing QF-uiility business relationships. 

Second, in sharp conirasi to the PURPA obligation to purchase Rquirerocnts, PUHCA refcvm 
measures contain no sudi obligations. Regulatory obstacles at the state level are actually 
iitereased ttierdiy limiting the ability of utilities to make unilateral choices to incur a votuntary 
obli(alion to buy EWG power. PUHCA reform cntics xem to be iu(gesting that EWGs wlU 
have the privile^ of forcing utilitiei to purdiase their power. In ftKt, the exact opposite is true. 



Third, the money invested or lent to finance EWGs will go into precisely the types of ge 
assets which investor have been accustomed to funding in the electiic industry for many 
decades. Some PUHCA lefbnn critic) sttra la contend that the invested tiuids will not go to 
crate long-lailing generating aueti available to meet the EWC's cantnd obligation) to its utility 
customen. Even the financial Auluie of an EWG firm will not render the power plant 
inoperative or unavail^ie. If anything, there will be a greater incentive than ever to operate be 
[riant and sell the power. If, of course, the flnancial ^lure results from a lack of demand for 
the power, then the EWG investors would be the oaa with the problem, not the customers of 
the utility. 



Finally, ttw Senate bill takes the stq) of requiring state utility a 
Dk capital stnictuieofanEWG, if it is contains less than 3S percent equity, will pose any haatd 
to the financial inte^ty or the consumcn of the utility planning lo purchase the EWG-produced 
power. This miirois the SEC rale of thumb fbr rc^itered utility holding companies and their 
operating companies. While this places added responsibility on the stales, it is certainly an 
n of confidence in the ability of the slates and in thdr central role as the primary 
n of utility actions. 



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UK Rgnbtkn of afliliue imuMtioat ii u often nrisundentood area oT utility RfuUnkn. 
Afliliaie ti M Mi c ti on regutadoo ii a natunl outgrowtli of die ovenll r^ulitocy goal of limidni 
be opponnmty bribuK of monopoly power. The uuei of affiliate bannctioiu and cofponte 
ttriKtuie an cloady idated to tboK of diversification vducfa are diKusiecl in die next section of 



As noted ewlicr in Uni paper, cmk of die primary objcctivet <rf PUHCA in 193S wai to asiial 
the Hate* in copiot •mA the ecooomic Mhwt of inter-affiliate innncticni which were iwnpant 
in the 192(h as die heldiiig cooqiany systems grew. PUHCA simplified the corporate structure 
of holding com p a nin lo dat aue and Federal utility rale r^ulators would have less difficulty 

The Federal Power Act devdoped a Federal layer ai regulation to oversee wholesale power 
InnMctioas vdiich take place in interstate commerce and therefore are beyond die reach of an 
udividual MiIb poMic utili^ commisBon. 

Given dial the bulk of utility activities are *t die state regulated level, the stales have a significant 
ability lo deal with the question of intercorporate transactions ranging from fiiel purchases to 
oomputer acnkes. The state* can oercise comprriiensive oversight of other types of 



Stales have dev el oped various ways of regulating inter-affiliaie tr 
with altentian to limitini the economic consequences of these traniactioas on consumers. Two 
mvorconcenudominile die regulation of affiliate transactions. First, diere is often a concern 
that die captive consumers served by the regulated utility might pay an excessive price fiir a 
lerviee provided lo a utility by an affiliate. Second, there is ■ concern that an afliliate might 
ncdve a subsidy fiom die otiliiy designed to enable it to more effixtivdy compete in its market 



D,g,;,zeclbyG00glC 



Some statn have dioKn to lequiie ulilitia under their jtnixliction to seek prior ipprovi] at 
tnuuactiotubefbreenleiinBinlOBnafHIuletiaiuaction. Even in IhoK ilalei which require prior 
qjproval for the transaction to take place, the commission) still retain the authority lo disallow 
Kcovoy from customers of unmionable or excessve cost) related to an affiliate tn 
even though the tianmctiin itielf was qipioved by the commiuian. 



Regardleu of the qiprooch taken by a stale commiuion in overseeing affiliate tianMctioni by 
utilities, accurate and up-to-date information is jmponant to making a bir and reasonable dednon 
on recovery. Therefore, reastmable acceu to books and records whidi provide information on 
the transaction or even on the woikingl of the unregulated affiliate can prove to be valuable to 



The access and information issue, howetvr, should not be overplayed. Lack of information, 
cspeciallyif it is the result of a refusal by the utility to provide it, cannot compel stale regulaton 
toapprovecottsfmaffiliatetraniaciioniwhich they suspect are excess. With reqxct lo affiliate 
transactions, utilitiesgenerally bear an extra burden of proof -they are obliged to afGrmaiivdy 
demonstrate the reasonableness of the cost rather than idying on a rebuttable presumption of 

Many commissions have concluded that the price paid for a good ot service from an affiliate i* 
acceptable if it is comparable to the price thai would be charged for the product in the market. 
In other cases, commissions have determined that the highest acceptable price for a good or 
service is one that results in a profit level fn'tbeaffilialethalisequivalent to theprofitlevdlhe 
nlility itself is permitted by the a 



Closely aiity'?"^ with state r^ulalory authority r^arding recovery of affiliate transaction costs 
is the power states can exercise with reqwct to utility corporate structure, A slate legislaluie 
may giant authority to its state public utility commission, and many have done so, to contrM 
corporate 'reconfiguration.* Many states require explicit prior tppmvai, for instance, before a 
utility may act to create a holding company or to establish a subsidiary company under the utili^. 



D,g,;,zeclbyG00glC 



Thae hn been crilicuni DM PUHCA lefonn wouM euccrtMle prablemi some stjUei have hid 
in contniUiiis Ifae Ibnaatiiia by dwir udlitiet of exempt htddius compAiuei whidi Ihcn engage in 
■ffiliale tunwctinoi, The mUtake ibould oM be male of laying Ibe blame for problcnif 
aafubete ocbcr thm wben Ibey bdoog. which is at Ihe doonup of state auihoritiei. 

PUHCA ptovidei aome niks (rf ibe game regarding itie acceptable cttporate ttiuctiue of 
f e giue ted htdding ""T""^ and Oraae companiet thai prefer lo avoid beoMning regiiteied 
holding ootqanict. Beyond thugeaefa] oversight, however, regulatioa of operaiiaAalutiliiiet 
u left to the diKietion of the stales. 



Nothing in the PUHCA relbrm bills would pre-empt the ability of states to exerdse thtit 
bwlitional and wdl-csttMisfaed authority to oversee affiliate transactions, the recovery of 
associated ccMts and the formation of ulilily corpoiale relationships. If anything, the PUHCA 
propo n b actually *"l™™^ dale regulaloiy authority in several leqiecls. FuA, both billt 
explicitly Slate ditt die states shall have wlequaie access to ulilily and afliliiie EWG books and 
records. Second, die bills ensure that affiliate whdesale transactions aie not immune fiom 
prudence review by state regulaton. Third, theesiablishmeniofnewint^tstedudliiyoperadons 
and Ihe qnn-ofT ot utility asKis to EWG status must receive the prior approval of the state. 



Kiyilirtrnn rt Htility DIvmifkalion 

PUHCA eunendy makes it virtually impossible for any electric utility or its holding company 
to partidpale in Ifae elecliic industry beyond the locally franchised, vertically int^rated eoniexl. 
Such divendfication almost ootainly means that a utility would become subject to r^ismtion 
under PUHCA and all diat it entails. 

It is important to cnq)hasiie the sidistantive dininction between utility diverufication within the 
dectiic industry as oppoxd to diversification outside die industry. Under current SEC 
KgulatiOD, PVHCA has jdaced no significani obstacle in the way of exempt holding companies 



D,g,;,zeclbyG00glC 



or opaoiag utiliiiet diversfying into any non-electric business. Even r^siered holding 
Gompaniei have divenified outside of the 'electric utility company* business (although Ihe 
process is somewhat mote compUoUed). 

The inNiy, then, is that iriiile most elecliic utilities can divera^ into any non-electric business, 
^ven constraints that each state can impose, PUHCA largely shuts off utilities from 
diversification within Ihe electric induitiy — the industry that they know best and are most adept 
aL That leaves only PURPA as an avenue for electric diversification. 

PUHCA reform, rather than exposing the industry to more diversification problems, actually will 
permit utilities to divertily into the one business they know and have done well in. 



The Overall Relationship of PUHCA Reform to the Fabric of State Utility Regulation 



In truth, it is difficult to imagine how the two PUHCA measures could be substantively mme 
accommodating to the expressed desires of state regulators. 

The PUHCA reform proposals embody the Pike County doctrine in l^slation. They not only 
icnipuloully tefirain from interfering with stale least-cost plaiming and reliabihiy authority, they 
actually ensure that state r^ulator^ will have better control over the mix of generatimi coming 
liam all non-PURPA wholesale sources. They provide ample access to books and records to 
control affiliate transactions. They provide for prior approval of any transfer of utility assets 
either to EWG status or lo a role in an int^raled system or pool. And. by requiring that each 
state served by common plant have a veto over transfers and pooling, nates are given a good 
combination of autonomy and cooperative reqwnsibitity relative to one another. 

There have been suggestions that the Pike County doctrine be extended beyond its current limits 
to include state control over conventional utility affiliate power transactions within registered 
hcMing companies. There have also been suggestion) that a layer of regional r^ulation through 



D,g,;,zeclbyG00glC 



Bolti-stUe compacti diouU be eitabliihed for planning and odier purpotM." EkA of tfaCK 
would r tp t cjen l a m^ior dqartuie fnxa the iflalin mm in tcmu of the fiamewoik of regulation. 
ft ibnuld be emphatically ippTeciated that the two PUHCA measures have taken a conaeivative 
or piexTvatJoaisI appnxctt to the effect of PUHCA refonn on slate regulation. They refrain 
tjttm cnaling a new i^ulalcny fiainewoilc. 



D.,r„.db,G00glC 



THE DEBATE OVER THANSMISSION ACCESS 

The debate over the terms and conditiofu Ux acoeu to bulk tranunisiion heUilief i 
is not new. The inue hai, however, grovm in inienti^ since die eady-1980s, u the 
Mctor of the electiic industry bu become less vertically integnied widi die disiribuiioa 
vrtiich deliver powa to cfKUunters." 



More recenlly, tranimisiioii acceu hu emer|ed in the PUHCA refbrm ddiate in a curious way. 
Some opponenu of PUHCA refonn have claimed that PUHCA reform is dangerous becaiue it 
will inexorably lead to more pressure for tranimission access for non-jlility generation, all^edly 
tuHlennining overall system reliability. They also raise concerns diat retail customers would 
su^er a loss of benefits from some economy energy transactions or that udlily assets would be 
uoKuriy used by parties other than die owners. 

Some proponents of PUHCA reform have eipiessed similar concerns, while othen have Eakea 
die position that transmission access is essential fOT die full flowering of the cmnpedtive 
ig oppMtmiities opened up by PUHCA refonn. 



The central point, however, is that v^ien considered in the context of the Senate and Houie 
PUHCA reform measures, the transmission access provisions in the House lull appew 
inconsistent in several areas. These inconsistencies are significant in terms of the lelatioaship 
of PUHCA refonn to the maintenance of the traditiooal regulatory framework, whic}i the 
PUHCA reform proviiioni scrupulously attempt to uphold. 

While the PUHCA reform provisions themsdvei are entirely voluntary, die tiansmisson accen 
provisions would involve a mandatory feature. The House measure (Sections 7 and 8) has 
several mandatory features regarding transmission. 

New powcn are gnoted lo FERC to order spedfic actioos by regulated eoliliet. 



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FEKC it Tequind ID make uk of tndilioiul me-of-ietam lepihtkn u 



Miik the iauet in PUHCA icfonn ace actuiUy wdl uadentood, tbenby imkini ifae question 
i^ for Ktion, tnnaniisaa acceueannMbeeauidend tobe nubm. There mnain aieai of 
die debate tha are not yet fidly explicaied, wdi u compenMlion for uninieaded Voop flow and 
thettatusoTnaiiveloMl in the cvaluaiioa of wtaolesak access requess. The iniumiiiioii aceeu 
inue ii a good deal len manuE than ii PUHCA refbnn itjclf. 



Hie PUHCA refbrm rocasuics do a good job of awning the tnditkmal rtrie of state utility 
r^ulation and draws jurisdictioiial tines more deaily, «4ii)e the transmission pioposa] has 
Federal pre-emption al its heart. It creates a new Federal regulalofy power H4iich has no 
eoniUary state authority to provide the balance wliid) chaiacteriws PUHCA reform measuret. 
For ingjnn*, the pant of antbority to PERC to compel the coostructiaa of bdlities is wH 
IfhFMt^ witti a state role. 

While PUHCA reform is intended to create an atmo^Aiere in which vcduntary actiooi in the 
market will seek out best scriutioas, the transmission access measure lends to focus on litigiied 
procecdingi before FERC to compel actxis or the negotiation of access. 

While PUHCA reform does not presume Aat FERC and Oie states will replace rate-of-renim 
r^ulation with maiket-baied pcidng for competitive generation, it leaves the door open for 
regulators lo apply abemaiive pricing methods at their discretion. The transmission access 
pleasure, however, appears to *lock-in' rate-of-rHuin i^ulation for transmission, thus ignoring 
the genuine potential tor inadvertent disincentives for increasing ttie sapfiiy (rf Oinanission 



D,g,;,zeclbyG00glC 



While PUHCA refonn craUef do idditiwwl inuei for the imus between inti-Inut laws nd die 
electric indiutry, mwidiled tnmniittiai] acceti necemrily niiei the unaniwend queMkm u to 
the extent thai luA lefiilalion provider (ome degree of immunily to transidHion-owniiig 
utiliiies. 



While PUHCA refonn imfdidily ukei account of developmenn in other policy aKnai, in 
FERC, die courts and state commissioiu and legislatures, the traiumission provisioai may be 
acting too tpncldy to impose a new regime rather than waiting Ibr diese other arenas to bdp 
iCu^ a long term lolutiaa. 

Hie tiansroission access debate can and should be diitinguished from the inues basic to the 
PUHCA refonn ddiate. In contimK to the more prewrvitionist apjxoacb of PUHCA reform, 
transmission access mandatei ^gnificantly alter the regulatory and induttry landscape dirougb 
odier dian voluniary means. Moxt importandy, they expand Federal regulatory audrarity at the 



To Ibe extent that then a a deare to legislate widi respect to transmission access in Ondeni wilb 
PUHCA reform, it would be advisable to design a measure which is more consistent with Ott 
vtiuniary and sate oriented flav(» of the Senue and House bills. 

This could be done in several, relabvely simple ways which would bring about an accelerated 
but incremental opening up of die tranimisaions system radier than creating an entirdy new 
tiramewoil: for transmission regulation. 

First, in die qririt of making die most modest changes in law necessary to accomiriisb the lade, 
consideration could be ^ven to eliminating the ambiguous requtremenl in Section 2)1 of the 
Pederal Power Act that FERC lake into account eiusdng competidve relabonships when 
evaluating a transmisson request. This would stimulate a greater willingness to arrive U 



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SecoDd, in tbe quit of encounging volunteeriam ind crativity UinMigh incentives rather Ihu 
the fear of penally, FERC could be given explicit authority to experiment wilti opportunity con 
pridng and lo iccqii tnifli negotiued between the ptniei wtA only miniinal iniaventiaa 
■Uowed by coaqriaironi pnties. 

Tliinl, in keeping with the till towird ■ reliance on stale regulation, stales nright be p e fmi ned lo 
CTperimcDt in thepciciacof wholenlemnsmisnon service which oecun wiihin ihe boundariei 
of the indtvidual sttie. 

Am li^w^f^' aiiproach to Wmmuaon acccsi which permits (he maiket lo develop, a* is 
cle«)y the inlem in the PUHCA UIU, H deady the best solutian u this pcnnt in Ihe transtnissiaa 



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-Ilie PURCA meaiuKi now before dw Home aDd ScMtt CMooi be ooosideml "dM^utatiaa- 
for Ibe linq^ reuon thai there is not a jingle identinable utUily Kttvily left without a clearly 
^fffiyifWiH and fully empowered i^ulitor. TheM two billi neiOier itplace nor Rfcnnulale 
elearic power Rgulation. If anythini. PUHCArefona involve* an effort to gather a variety tf 
relatively new induitry actlviiiei and wayt of doing thingi ioio the xxift of Gcaventk»al utility 



The mea$urei realign r^ulatory boundaiiet so that respoiuibilltiei are clearly allocated between 
die Fedcnl and itale levels. The bills tilt significantly in the directioa of hvoring flaie 
regulation and the ability of the stales to exercise discretion in thdr regulabon of ttie activities 
which PUHCA reform would permit. 

In addition, the two PUHCA refbnn mouures would tain an even handed qiproadi to new 
source! of generation. Utilitiei, their expertiie now often wiihhdd from Ibe madtet, could 
become active paitidpanls in the potentially important role non-PURPA wholesale power pnjjects 
can pl^. PUHCA reftrnn would alio pmvide expanded cqiptntunity for those PURPA and 
iodependeoi power developers who panidpated in the maturatioa of a compedtive wholesale 



Tbe two measures are incremental and express confidence in eonvendcnal state and Fedcnl 
utility regulabon, making concrete the evolutionary model formulated by the Coogressiaaal 
Research Service in its leport. This appioxti contrasts lo other fonnulations, whiA would 
reallocate authority between the state and Federal levels at the expense of the states or would 
deretulaie currently regulated operating utility activities. 



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m l») if<tii Aa IMmmtrma 3 abmi t/ttH Kimt haUlmi nnfwiln. 

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m 

PALMER 
BELLEVUE 

CCMIPORATION 



PHajP R. O'CONNOR. FH.D 



Dr. O'Connor ii Chainnan ind Pmkkat of Chicaso-based Pibner Bellevue 
Corporation. 

Palmer Bcllcvuc Corporadoii u a Chicago-based firm specializing in energy 
resources, electric and gas utilities, telecommunications, and financial services. 
The firm is involved as both principal and advisor in acquisitions, corporate and 
financial restructurings, natural gas marketing and acquisition, and in the 
deveh^ment and implementation of strategic and public policy options for investor- 
owned and publicly owned utilities. 

Prior to forming lUmer Bellevue Corporation in 1985, Dr. O'Connor served 
as Illii»is' chief utility r^ulator, chairing the Illinois Commerce Commisaim. Dr. 
O'Connor also served as Political Director of Governor James R. Thompson's 
successful third>term election campaign in 1982, and as Director of the Illinois 
Departmem of Insurance. He also served as Deputy Director of the Illinois 
Insurance Department, and as Administrative Assistant to California U.S. 
Representative George Miller and former Dlinois Governor Richard B. Ogilvie. 

Dr. O'Connor is an Adjunct Fellow of the Hudson Institute and is Chairman 
of the Council of Advisors of die irwtimti' for niiaois, the research arm of the 
Illinois Congressional Delegation. He also was selected by the Admmistrator of 
the U.S. Environmental Protection Agency to chair the Allowance Tracking and 
Trading Subcommittee of the Acid Rain Advisory Committee. 

A native of Califbnua, O'Connor attended the University of San Francisco, 
the Loyola Universi^ of Chicago-Rome Campus of Liberal Arts in Italy, graduated 
Muoa saua laude fiom Loyt^ University of Chicago, and received his Masters 
and Doctoral degrees in Political Science from Northwestern University. 



shinglo" S( ■ Suae W7 ■ Clwago, IL 60602 - Phone (312) 807-4848 ■ Fai (312) 807-4992 



D,g,;,zeclbyG00glC 



PALMER 
BELLEVUE 

CORPORATION 



WAYNE P. OLSOH. CFA 



Wayne P. Olsoo is Manager, I^nandal Analysis at Mmer Bellevue Corporation. 

Mnier BcUevue Corporation is a Chicago-based firm that provides consulting and 
financial advisory services in enctxy resoorces, electric and gas utilities, 
telccomnuinications and financial services. The firm is involved as both principal 
and advisor in acquisitions, corporate and financial restructuring, natural gas 
marketing and acquiutitm and in the dcvelc^mcnt and implementation of strategic 
options for both tnvestoiH>wned and publicly owned utilities. 

Prior to joining Palmer Bellevue, Mr. Olson was an International Banking Officer 
at Westpac Banldng Corporation, an Australian bank. At Wcstpac, Mr. Olson was 
part of a Special Industries team that specialized in providing financing to electric, 
telecommunicUions, cable TV and o^neration entities. Before joining Westpac, 
Mr. Olson was a Finanoal Analyst in the Economics and Rates department of the 
Illinois Commerce Commission. He has testified on the cost of capital and other 
financial issues before the niinois Commission. 

Mr. Olson received an M.A. in Economics and a B.S. in business administratitKi 
with majors in economics and accounting from the University of North Dakota. 
Mr. Olson's M.A. thesis was entitled "The Efkct oa Risk and Return from Utili^ 
Diverufication.' Mr. Olson is a Chartered Financial Analyst as welt as a Certified 
Public Accoontant. 



shingior 9. ■ SiHe 1247 • Chicago, IL 60602 ■ Phone 1312) 607-4848 ■ Fax (312) 807-4992 



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189 

PALMER 
BELLEVUE 

CORPORATION 



GERALD M. KEENAN 



Gerald M. Keenan is Senior Vice President of Chicago-based Palmer 
Bellevue Coiporation. 

Miner Bellevne provides ctMisulting, financial and demand-side managemeot 
services to the utili^, natural gas, tctecommunications, indepcodcnt power and 
icUtcd industries. 

Mr. Keenan and his colleagues have been active participants in die legislative 
and r^ulatory ddtates legarding the enactment and implementation of the Clean 
Air Act Amendments of 1990. Mr. Keoian assisted one of the nation's largest 
utilities in devek^ing and ioqilementing its successfid legislative strategy regarding 
the Acid Rain Title. He is a frequent speaker regarding the impact on utilities of 
the Acid Rain Title and is the author of a chapter regarding the effect of that 
legislation on utility cqierations in The New Clean Air Act: Compliamy Mnrt 
g pp^lft^ni^y , published by Public Utility Rq>orts. 

Mr. Keoan also serves as industry and regulatory advisor to natural gas 
pipelines, storage companies, producers and marketers. 

Prior to joining Palmer Bellevue in January 1986, Mr. Keenan served as 
General Manager of the Illinois Commerce Commission, which regulates public 
utilities and transportation con^tanies in that State. Mr. Keenan also served as the 
ICC's Director of Intergovernmental and Public Afbirs, representing the State of 
Illinois in Washington, D.C. on utility and other energy related issues before 
Congress and Federal agencies. Previously, be served as Manager of the 
Commission's Consumer Aflairs DivisitHis, Research Coordmalor for the National 
Training and Infonnation Center, and was engaged in the retail petroleum 
marketing business. 

Mr. Keenan hoMs a B.A. from Northwestern Universi^ m Evanston, 
Dlinois. 



111 W WasriBigion SI - Sjite 1247 ■ Cfucago, IL 6O603 ■ Phone (312) 807-4848 ■ Fa» (312) 807-4992 



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NaticMial Indepeadeat Eneigy Pioducefs 



SOIWARI TESTIHOHI OF PAUL J. ELSIOH, CHAIRMAN & CBO, LONG LAKE 
EHBROX CORPORATION AND VICB-PRBSIDENT, NATIONAL INDEPENDENT ENERGT 
PRODOCBRS TO THE SENATE COMHITIEB ON BAHKIHO, HOUSING AND URBAN 
AFFAIRS 

Septaabar 17, 1991 

Th« National Indepandant Energy Produoars (NIBP), an 
aaaooiatlOD of conpaniaa ttiat ganarate el«otrloity and aall to 
utllltlas In a coapatitlva market, expresses ICs strong support 
for Titla XV of 3. 1220, the National Energy Security Act of 
1991. Title XV would peforn the Puolio Utility Holding Coapany 
Aot of 1935 (PUHCA) and eobanoa ooapatltion in wbolesale elaotrlo 
generatlw) markets. 

Title XV of S. 1220 Hill foster ooBpetltion and produoe 
aoonomio effiotenoles, fuel savings, and environoantal proteotloa 
— all at the lowest possible oost to oonsuaars. 

Hy testimony on 3. 1220 will inolude a report on the 
status of oompatittoni address In detail improvements to POHCA 
legislatlMi) disouss and oake reooamandati ma regarding tbe 
inpltoatloas of debt leveraging on IPPs and utllltiesi and revleu 
the impaot of environmental oonoarna on legislation. 

H. STATUS OF COHPETITITB POWEH MARtBT 

The natiCm a conaumers have much to gain from Inoreased 
partloipation of Independent generators In oompetltlve elaotrlo 
power markets. During the past decade QPs and non-QF Independent 
Power Produoars (IPPs) have grown to over 37,000 megawatts (MH) of 
elaotrlo generating oapaoity, or about five peroant of the nation's 
ospaoity. 

Since 1964, utilities and publio utility oommlssiona in 
36 states have adopted or are developing ooapetitlve bidding to 
prooure generation oapaoity. As of Hay 1991, 72 requests for 
proposals have been issued, resulting In davelopara bidding 
nearly 159,000 KW of oapaoity. On average, eight t4W have been 
bid for «aoh one raquestad. 

III. C0M3WBB PBOTBCTIOH - SKLg-DBlLIIQ AMP ClOaa 3UB3IDIK3 



60IThinc«uhS(i«n,N.W SuhOIOS WidiM«Hin.C 



D,g,;,zeclbyG00glC 



Pretfgntion of Undue Intlue nce Th rough an Attiliatg Relationship 

NIEP reconnends that state coaai^sslona raqulatlng 
utilities with EWG affLliataa be speciEically authorised to 
nonitoc cross-Bubsldles and that an BwC upon application to FERC 
Cor approval of whol«aale ratca. vuat ahow that tha atate 
conunlssion with Juriadiction ovac any utility Inveator in the EHG 
haa certified to tha FISC that it haa in place a ayatea or 
procaaa for nonlcorlng and leaiedyinq croaa-aubsldlee on a generic 
baala. PERC would be authorized to deny pricing approval to an 
n*G which bad not vade auch • abowing. 

Access to aooKa and Reco tda 

NIEP agrees that access to hooka and iceorda la 
necessary to detect crnan-aubwldlea irtien there la a poealblllty 
of misuse of aeieta ut >-<i>>ivc r«tep«yera. He alao do not 
believe that auch acr^'t >n «|)|.<' opr late for BMGa that ate not 
affiliated with a utlnty «nd «nere. therefore, no iaeue of 
possible cross-subsidies arlars. State co— iaaiona. Moreover, 
should not be able to exdmine tne books and recorda of affiliated 
BNSa for the purpose of re>]u1ating their profits. 

IV. AFFILIATK SJU -KS TO UTILIT Y PAaWTS 

NIEP Strongly eupporta the poaitlon that the burden of 
persuasion should be on the utility proposing to buy froe Its 
affiliate and that such purchases should not go forward unlesa 
flret approved by the state regulatory authority. NIEPi hovever, 
opposes a statubory prohibition on sales by a utility affiliate 
to its parent. 

He propoBCt inateadi that Congreas codify the current 
federal poticyi ai exprcaaed in soae 20 Market-baaed pricing 
caaaa to date, of having PStC give cloae aerutiny to Market power 
leauea any tlMa a aale by an EMG to its utility parent is 
Involved - 



NIEP believee that the current protection against pot- 
ential abuae of traasMlaaion ownership In 5 1220 is too narrow, 
aa fERC remains powerleaa with respect to ordering tranami salon. 
Consequently, ire Support an amendment to S 1220 which we under- 
stand will be offered by Senators Bradley and OoDenlcl this 
aMendnent would give the FERC, upon petition by a wholesale 



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geneiatoFt th« authority to order transmission acceaa when it 
Cinds that by doing so it will promote cotnpetitton in electric 
power markets or prevent abuse -r niarket power by transmission 

VI. rimWCIAL LBVEMCIMG 

NIEP opposes the provision in Section IS107 that 
requires state coanissions to consider whether equity levels less 
than 35% may impair the contract reliability of the EWG or give 
it an unfair competitive advantage over a utility. Contrary to 
popular myth, three strong arguments suggest that greater 
regulatory supervision is not necessaryt 

1) There is no evidence to suggest that higher debt 
levels of IPPs decrease their cost of capital, granting then a 
eonpetitive advantage over traditional utilities. For a variety 
of reasons, costs of capital for IPPS and utilities have proven 
to be approximately the same. 

2) Purchasing power does not have an adverse impact on 
the capital structure of a utility or Its credit rating. In 
fact, experience has shown that buying instead of building may 
improuc a utility's financial position and credit rating. 

3] The greater leverage of IPPs has no impact on 
project reliability. By all accounts, the record of non-utility 
generators is rxc-vlient, both under normal operating conditions 
and in emergency situations. Consistent with other studies, a 
recent survey of 173 projects selected through competitive 
bidding since 1994 shows that the vast majority of projects (85 
percent) are in development, under construction or on-line. 

Til. STATE AMD FgPEHAL JORISPICTICTI 

NIEP Strongly opposes the stranded investment provision 
in Section 15103 as an unjustified interference in appropriate 
state regulation. The provision gives utilities a club to use 
against their state commission and a license to meddle In FERC 
approval of EWG contracts. 

NIEP supports affirming state authority by codifying the 
so-called Pike County doctrine and pre-approving contracts 
embodied in this provision but recommends that disincentives for 
registered holding companies to make purchases from EWGs be 
removed by requiring that FERC alone approve such contracts. 



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pricing toe EHGs that «r« not «CIili«t*d wltb the pucchasinq 
utility> if th« FBRCi after appropriate notice and c«Mwnt, finds 
that no ns^ativ* inpact on coapetitlon will result froa this 
delegation. 



VIII. 

PDHCA refora advances environmental protection by giving 
utilities a greater spectra* of choice in obtaining the new 
electric capacity Bost coi^at Ible vith state and federal 
environmental standards. The co^wtition that develops aa a 
result encourages innovation and efficiency in coMplying with 
envlronnental standards and gives state regulators « aarket- 
tested benchMark for evaluating the pollution Mitigation 
proposals oE traditional utilities. 

CmCLOSIOM 

NtEP believes that PD8CA retora structured to prevent 
abuse of aarket power and pcoamte free and fair conpvtltion 
offers aaziBua flexibility to titilitiea to seleii the hind of 
power which best aaeta their needs. 

Refora of POBCA will also secure greater energy 
efficiency! billions of dollars in savings in coaing decades> and 
a viable source of energy for the future. 



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144 
Nadooal Indqwndent Enagy Produceis 



TBSTIHOHI OF PIOL J. ELSTOH 

CHAIRMAN & CBO 

LONG LAKE BNERGI CORPDRATIOII 

VICB-PRESIDBNT 

HATIOMAL INDBPBKDBHT BKBRai PRODOCBRS 

OH BEHALF OP NATIORAL INDBPBHDBHT BHBROY PRODUCBRS 

SUBMITTED FOR THB RECORD 

bafor* th* 

nHITBD STATES SEHATE 

COHHITTBB OH BAHKIHQ, HOUSING AND URBAN AFFAIRS 

SUBCOMMITTEE OH SBCDRITIBS 

Waahington, D.C. 

Hearlnga Oni 

Tit le lev of 5J2 20 

Tha Hatlonal Bnorgy Saourtty Aot of \9^\ 



3opt«iiib«r 17, 1991 



It is ay plaaaura to aooapt your Invitation to 
testify on bahalf of tha National Indap«nd«nt Energy 
Produoors ("HIBP') bafore tha Subcoamlttae oa Soourttioa 
regarding Title XV of tha national Energy Saoarlty Aot of 
1991 (S. 1220). I an Cbalnaan and CEO of Long Lake Energy 
Corporation, a private developer of Independent power and 
Vloe-Chalrinan of HIBP. On behalf of NIEP, I am pleaaed to 
aubalt the following stateiient for the raoord. 

HIBP la an assoolatlon of ooipanles that generate 
•leotrtolty for aala to utilities and develop cogeneratlon 
projects for a Tsristy of users. NIEP aanbership is ooa- 
prlsed of both publicly traded and privately held oorpora- 
ttona that rapraaant the entire speotrua of fossil fual- 
flred and renewable taohnologias. Including hydro, puapad 



IhimnnhSiRei.N.W. SiuceS2aS Vuhincuw. DC 20001 



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•toragcf blouia, gcothccnal, wlndt wood and waate-to-encrgy 
plantBa aa well aa oil> gaa and coal-tlcad coganacation and 
independent generation facllitlas. Ne do not build cata- 
baaed powarplants. Out planta uae the lateat and cl«anast 
tachnolo^las. 

NIBP la coHBttted to Incceaalng coopatition in 
•lactrlc power generation Markata to isprove the efficiency 
oC thoae macketa. Independent, ganecation haa grown out of 
the entrepreneurial and coapetitlve cliMate foatered by the 
Public Dtility Regulatory Policiea Act of 1978 <PORPA). 
Since this 1978 legislation aadc the competitive power 
induatry a poaaibility. Independent electric producers have 
frown to more than 37,000 megawatts oC capacity ■>- 
equivalent to over 30 large nuclear power plants. In 
addition, this new industry has supplied about 20 percent of 
all new electric capacity since 1970 and has brought on-line 
SO percent of new capacity since 1989. 

Independent generators In coapetltive power markets 
therefore already play a vital role In Meeting the demand 
Cor new alectiic generating capacity. HIEP ballevea that 
competition In electric generation markets is the beat 
system Cor achieving energy, econoMlc and cnviromiental 
efficiencies in the production of electricity. Bsachlng 
these goals In the electricity sector ia essential for the 
nation's competitiveness in global markets. 

In light of these go«ls. HIEP advocates amendments 
to the Public Utility Holding Coaqtany Act of 193S {PDHCA) to 
remove institutional and regulatory barriers to market entry 
by independent generators of electricity (called 'axeaipt 
wholesale generators ~ EHCa* in the legislation). 

He strongly support the efforts of Senators 
Johnston, Nallop and their committee colleagues to remove 
it«tutory impedimenta to competition In electric power 
■arketa. Currently. POHCA blocka entry by independent 
generators notwithstanding their lack of market pawer> when 
it was intended to do something else — end the monopolistic 
abuaes of ratepayers and ahareholdere associated with dis- 
persed utility holding companies in the 19208 and 1930s. 



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creating a class oC axeapt wbolasale genera- 
toia (EMGs), C[«ed Ciom requlAtion under 
PUHCA. This would permit independents, and 
subsidiaries ot utilities and utility holding 
coapanies, to develop QfCa to compete for the 
light to supply new capacity when utilities 
decide they need capacity. This will oCCer 
utilities additional, eCClcient generation 
options) 

peraittlng owners oC qualifying fecilltLes to 
own EHGb without jeopardising their QP 
ownatshipi 

permitting exempt utility holding cOD^anies to 
own ENGs without jeopardising thelt current 
exemption] 

pcrinlttlnq regintered utility holding com- 
panies to Invest In EMGs without triggering 
the 'Integiation* requirements of PDHCA (all 
other regulatory requirements would remain 



Changes In PUHCA are essential to promote competition In 
wholesale electric generation markets for the benefit of the 
nation's consumers because they will give utilities 
additional supply options from which to choose in meeting 
ratepayer needs. 

I this statement I 
report on the status of competition] 



additional consumer protections againi 
self "dealing, cross-subsidies and othi 
anti-competitive Impacts; 



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— qttmfr protection «gainst pot«nti«l abu*« 
of ownvrahlp or control ot tranaalaaion 
f«cilltiM) 

— clarieication of st«ta authority over 
ENGa, Including codification of tba Pike 
County dacialon, ranoval of dlaincvntlvea 
for r«9iaterBd holding coapanlea to aaka 
purctiaaaa Cco« EHGa> and delegation by 
rERC of authority to approve Market 
pricing for nonaffiliated BMCa to state 
coaaiaaions or Hilti-atat* boards t 

— relief for true Independents fro« 
regulationa daaignad for franchisad 
aonopolies or thalr affiliates. 

discuss and nake reccwnendat ions regarding the 



AS you review this landmark leglalation. we respect- 
fully request that you consider these changes that we 
believe ulll enhance consuner protection and coaqwtltion. 

II. STAtOS or OOMPETITITB PQWBI lUUUCCT 

The nation's consuners have auch to gain fioa 
increased participation of Independent generators in 
competitive electric power markets. First, a decade of 
axperienca with the Qualifying Facilities (OF) under purpa 
has shown that non-utlllty generation can compete effec- 
tively on a coat basis with utility facilities to provide 
efficient snd reliable generation for the nation. 

The success of the QF prograsi and non-utility 
generation in general. In providing new electric generating 
capacity and In bringing competition to power markets, has 



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far exc««d«d •xpactatlona. During the past decade, QFs and 
non-QP Indapendent Power Pcoduceta (IPPa) have grown to over 
37.DD0 uegawatts (NH) of electric generating capacity, or 
about Cive percent oC the nation's capacity. 

Also, coapetitive processes to supply future 
capacity needs are taking hold throughout the nation. Since 
19S4, utilities and public utility cominissions in 3fi states 
have adopted or are developing conpecitive bidding to 
procure genecation capacity. As of August 1991, 73 requests 
for proposals have been Issuedi resulting in developers 
bidding nearly 159.000 MW of capacity. On average, eight HN 
have been bid for each one requested. In addition, indepen- 
dents have oCCered utilities seeking capacity other competi- 
tive options outside formal bidding. Dtllities and indepen- 
dents use ccdipetitive negotiation and arms-length negotia- 
tion to solicit ai^d propose projects outside bidding or 
where bidding does not yet exist. Developers have offered 
diverse fuels and technologies In their efforts to gain a 
competitive advantage. 

As we look at the data provided by examining 
competitive procurement systemsr there is no question that 
the process has led to lower costs for electricity. By 
August of 1991, as a result of competitive bid 
solicitations, utilities awarded bids to nearly 13,000 
megawatts of capacity. In each of these winning bids, the 
utility's decision to buy capacity rather than build 
resulted from Its own evaluation that wholesale power 
purchase would be cheaper. In the relatively short time 
since competitive bidding began, over 1750 HW procured 
through bidding have cosiplated development and have begun 
delivering power. 

IPPs Are Good for Competition 



IPPs -are important for cooipetition Cor a number of 
leesons. First QPs laust cither "cogenerate" steam and 
•lectrlcity or use a renewable technology. The availability 
of "steam hosts" for cogeneration will not necessarily 
correspond to areas which need electricity, and, while there 
certainly is untapped renewable potential, the availability 
of rencwablea will not necessarily correspond to areas which 
need electricity. By contrast, IPPs can locate near load 
centers, fuel supplies or transmission interconnections. 
IPPs can also be sited to meet the needs of the purchasing 



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requK 
QFs «ie restricted by the site of their steam loads. Nora 
suppliers can enter the ourket as welli not just cosqMnies 
with access to steaa hosts. 

iPPs can also be aoce cesponsive to utilities' 
demands for plants which are "dispatchable." A diapatchable 
contract pecMlts a utility to schedule operation of non- 
utility generatoci to meet a utility's deswnds. Cogcnera- 
torsi to maintain their QF statuB> operate according to the 
needs of their steam host andi many tlasB> suit produce 
electricity around the clock. Currently, atany utilities 
seek to buy power fro« planta they can dispatch according to 
their 'peaking' needs. Peaking plants operate only during 
spikes in the demand for electricity and usually operate no 
■ore than a few hours a day or a month. These plants must 
generally be available around the clock and itait up 
quickly. 

IPPs can create new and viable options for utili- 
ties and states. POHCA reform will permit new suppliers to 
enter the market and Increase the choices utilities and 
states have to meet growing electricity demand. Increased 
c^Bpetition gives regulators a benchmark for assessing the 
performance of their utilities versus Other real options. 

Mcidtf Icatlon o£ PUHCA, therefore, is needed to 
essure tha> wholesale generation facilities, in addition to 
OPa and rarebased plants, will be able to meet the demand 
for electric gbneiating capacity. In addition, changes that 
exempt Independent generators which lack market powsr from 
POBCA will allow developers to make truly economic and 
optimal choices in corporate structure, siting, siis and 
technology. 

III. mw su i iEH vaotECttam - gELr-i«iu.iiB amp caoss sobsipiks 

Hhllc we applaud the efforts of Senators Johnston 
and Nallop to strengthen consuawr protection, NIEP believes 
that additional consumer protections are warranted in order 
to ensure free and fair competition. The current regulatory 
structure governing wholesale markets Is somewhat undefined. 
PERC haa gaps in its authority and the role of states is 
unclear. An effective regulatory system to protect the 



D,g,;,zeclbyG00glC 



consuner and ptoBote tie* and fair competitLon auat h«vc 
cleat authorities, sensible rules and stconcg enfotce&tnt 
■echanlsna. 

By tree and fair coapetitlont we aean any 
competitive process (whether fornal cmipetitive bidding, 
arns-length negotiation or other conpetitive process) 
consistent with resource or least-cost planning goslSf in 
which there is no abuse of market power by the EHG, its 
affiliates, or by the purchasing utility, Including no 
improper self-dealing between the EWG and the purchasing 
utility or utilities, no cross-subsldiiation of the tStn with 
ratepayer assets by an affiliated utility or utilltiesi no 
Improper reciprocal dealing between an EHC's affiliated 
utility and other utilities, and no unfair or discriminatory 
use of control of transmlBBlon facilities by the EWG or any 
affiliated utility. 

prevention of Und ue In fluence Through an AEtlliate Relationship 

S.1220 addresses this Issue in Section ISIOS. 
Provisions In this section would prevent PERC Cro« approving 
wholesale rates Cor EWGs where the EWG has received 'undue 
advantage" from an affiliation with a purchasing utility. 

NIEP suppocts ihis provision but does not feel It 
goes far enough. By focusing on transactions between an 
affiliate and a purchasing utility. It addresses self- 
dealing but Ignores the pci ential for cross-subsidy abuses 
when an affiliate Is selling to another unrelated utility. 

NIEP recoofflends that state comalssions regulating 
utilities with EWG affiliates be specifically authorised to 
monitor cross-subsidies and that an EWG, upon application to 
FERC for approval of wholesale rates, must show that the 
state commission with jurisdiction over any utility investor 
in the EWG has certified to the FERC that It has In place a 
system or process for monitoring and remedying cross- 
subsidiea on a generic basis. FERC would be authorized to 
deny pricing approval to an EHG which had not made such a 
showing . 



D,g,;,zeclbyG00glC 



txemaa to Booka and R«cord» 

To aiuble state comnisslons to aonitor for crosa- 
■ubaldlea with rcapect to EWG aalea both Inside and outside 
thalr taitltocy, S. 1220 provides cegulatois access to the 
books and recocda of EHGs. The Committee Report notes that 

the principal purpose of this provision is to prevent croaa- 
aubsidies using ratepayer -assets in favor of an aCClliated 
£HC ^IeP agrees that such access to books and records Is 
neceaaary to detect cross-subsidies when the[« Is a possl- 
billty of niauae of assets of captive lacepayera. State 
commissions however should not be able to examine the 
books and records of affiliated EHCs for the purpose of 
regulating their profits Such regulation would frustrate 
the pvii^se of coMpetitlve contracting and ultimately 
deprive ratepayers of Its benefits. 

He do not believe, however, that auch access Is 
appropriate for BHGa that are not affiliated with a utility 
and wherei thrrelorei no Lasue of possible cross-subsidies 
•riaes. For the aane reasons mentioned above there Is also 
no reason lu examine books and records for the purpose of 
regulation of profit. FuttherinOre the safeguards of 
financial soundness built into the competitive procurement 
process and the resulting power purchase agreements nego- 
tiated at arn-i' length between utilities and EWGs make 
federal law reqi^f nq arress redundant for reliability 
purpoaes. 

IV. *grit.lATB SALES TO OTILITTt PAHEWTS 

KIEP atrongly supports the position that the 
burden of persuasion should be on the utility proposing to 
buy from ita affiliate and that auch purchases should not go 
forward unless first approved by the state regulatory 
authority. NIEP, however, opposes a statutory prohibition 
on sales by a utility affiliate to its parent. Me do not 
feel federal preemption of state discretion in this area is 
warranted. Such a prohibition by Congress bould Interfere 
with legitimate state authority. Many state public service 
conmieslona have long established policies tor protecting 
against self-dealing between a utility end its aftlliatea. 
Sone fltatesi like Virginia, have adopted altiliate laws 
that forbid any affiliate transactions. Others, like 



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N* pcoposct Instead, that Congresa codify the 
current federal policy, as expresaed In aone 20 market-based 
pricing caaea to date, of having FERC give close scrutiny to 
■arket power issues any time a aale by an CHG to its utility 
parent la involved. A prohibition of any aale by an EMG to 
an affiliated utility would prohibit sales even on a cost- 
o£-secvlce basis. 

Banning utility purchases fron affiliates will not 
protect competition If the utility then gives an unfair 
preference to its own cost-oE-service proposal over 
competing third party alternatives. Indeed, "self-dealing" 
practices such aa faulty cost comparison of a 'build" 
proposal vls-a-vls a compating EWG may be more difficult for 
regulators to detect in such a case than they would be with 
a separate affiliate. 

Whether the utility buys from an affiliate or 
chooses to build on a coat-of-aervlce basis, the beat 
protection against harm to ratepayera from self-dealing is 
subjecting all new capacity options to competition under the 
same terms and conditions. NIEP Is worklnc)- with, state 
coomissions to encourage adoption of rules of competition 
that will have this result. 

V. TRANSMISSION 

Electricity generators use transmission facilltiea 
as the highway to market leaat-coat power. Accesa to 
transmission la critical to the continued success of 
independent power. Hartin Allday, Chairman of the Federal 
Energy Regulatory ComaiasLon, underscored the significance 
of access to transmission in stating recently: 

Transmission has been a key concern in our market 
pricing cases. He can have lots of people willing 
and able to build new and efficient generating 
facilittcsi but It doesn't do much good if those 
who control transmission lines won't let the power 
go where it's most valued. Ij^ 



D,g,;,zeclbyG00glC 



Mnial of access by owiwrs of tonsBlsaion lines 
prevents electricity producers Ctoa selecting the eptiaua 
locations and fuels Coc their plants. Inhibits the develop- 
■ent of site-bound renewable resourcea, and discourages new 
entrants into coepetltive karkete. 

The Report to S.1I20 notes that both PERC and DOB 
have testified that the Federal Power Act prohibits an BNG 
that controls transaiesion facilities Croa using that 
control to exercise aerket power over a purchaser of Its 
power. 

MIEP believes that this protection against pot- 
ential abuse of transMlsslon ownership is too narrow, «• 
PERC is rendered powerless with respect to ordering 
transelssion. Consequently, we support an anendeent to 
S.122a which we understand will be offered by Senators 
Bradley and Doaenicl. This anendacnt would give the FERC, 
upon petition by a wholesale generator, the authority to 
order tranavlssion access when it finds Chat by doing so 
It will proBote coi^etitien In electric power markets or 
prevent abuse of market power by transnisslon owners. 

Specifically, the Rradley/Doaenicl enendaent would 
aiiend Sec. 211(c)(i) of the Pederal Power Act to renove the 
requirenent that FERC "preserve existing cotipetltive rela- 
tionships" In ordering transeisslon access. Increased 
cM^etition, by definition, alters the coapetitlve statue 
quo in any aarket. It should be the goal of a tranealsslon 
order, not a reason for denying it. 

VI. PIWMCIM. LKgRRftSIWB 

S.1220's provisions with respect to financial 
leveraging (Sec. 1S107) require state commIssIohs to con- 
sider, on a general basis, the potential lapact of a 
wholesale power supplier's capital structure on the pur- 
chasing utility's cost of capital and on the supplier's 
financial soundness. The provision also requires state 



D,g,;,zeclbyG00glC 



coomlasiona to pte-«pp[Ov* long-ttra wholesale povac 
contractSi and In doing so> to conduct a 'reliability" 
review oC the CueL provialons of the contract. 

Specifically, the pcovLaiDn requirea atate coaala- 
alona to conalder wh<>ther equity levela less than 35t may 
Inpair the contract reliability of the ENG or give it an 
unfair coopatitive advantage over a utility. NIEP strongly 
objects to legislation of a fixed equity percentage nundier 
which will interfere with narket baaed financing of 
Independent projects. 

The CoDBlttee Report notes correctly that 'there is 
a significant difference of opinion* concerning the merits 
of this regulatory issue. Three arguMents have been made to 
support why greater regulatory aupervlaion — sisiilar to 
provisions in Section 1S107 — is necessary: 

1) Higher debt levels of IPPs decrease their cost 
of capital, granting th«a a coapetitive 
advantage over traditional utilities! 

2) Purchaeing power Imposes fixed cost obliga- 
tions on a utility which are viewed by credit 
eating agencies as long tem debt. This newly 
acquired debtt as the argument goesi destabills* 
the utility's capital structure, increases Its 
cost of capital, and jeopardiies its credit 
rating; 

3} IPPs' unsound capital structures make 
purchased power an unreliable source of 

The flaws in eech of these arguments are discussed below. 

The Putative Competitive Advantage 

There are a variety of reasons why the more highly 
leveraged IPPs do not enjoy a -competitive advantage over 
utilities. First, in financing pOver projects where the 
leverage is greater than IS to 80 percent, the borrower 
generally pays a premium on the amount borrowed In escess of 
a "conventional" leverage amount Thus, the alleged 
financial advantages of higher leverage can be. In many 



D.,r.,i.db,G00glC 



cases, substantially nullified by the ptealua iaposed on 
such l«var«9ln9> Moreover, which party has Che cost oC 
capital advantage Mill vary acco[dln9 to the particular 
project — independents slnply oCCer utilities alternatives 
against which to judge the relative econcalca of their 
resource options. 

Second, the coat of equity capital Is greater for 
independents since they aust raise their equity capital 
before construction and coa*ercial operation. Independents 
Mist raise capital in a market fully aware of the risks 
Inherent in inuestlng in the facility. Since independents 
do not enjoy the security of a utility's (ranchlsed service 
territory, their costs of capital are greater. Therefore, 
the only way independents can b« co^etltive Is by lowering 
the required amount of equity In the project. 

Third, although IPP project financing typically 
starts with approziaately 60% debt, projsct cash flow Is 
pledged to retire that d?bt within 15 to 20 years of a 30- 
year project life. Thus, not only is the term of debt 
shorter (utilities generally borrow for 30 years acre), but 
■o is the average percentage of debt over project life (34% 
for IPPs versus 57% Cor investor -owned electric utilities, 
assusilng the conventional 15-year loan). 

Fourth, utilities provide other services to their 
ratepayers that do not add revenues to their bottou line. 
This is why SOifl* slate comnlsaions require utilities to 
maintain greater levels of equity noaely, to provide Cor 
cash outlays for services unielated to power production and 
sales Conversely, IPPs alraost exclusively base cash flows 
on power sold and perCoraanca. 

In suMSiinq up the leveraging issue, Coldaan-Sachs 
noted in a letter to the Senate Energy Coainittee, dated 
April IB, 19911 

h KXi's ability to achieve a cost of capital 
advantage is dependent on the requi rencnts of 
arranging non-recourse project financing on 
attractive teras and conditions. Credit enhance- 
ment mechanisiDS and shorter debt maturities 
increase financing costs and serve to erode any 
advantage created by higher leverage. In addition, 



D,g,;,zeclbyG00glC 



unpredictable accass to the world's capital narketa 
further disadvantaqea HUGs and increases ttieic 
implicit cost of capital.* 

. third party power 
of -capital advantage in procui 
their projects. 

Impact on Credit Ratings 

Some have also argued that purchasing power imposes 
fixed costs which raise a utility's cost of capital and 
threaten its credit standing. This assertion derives from a 
misunderstanding of the Implications of financing and con- 
tracting for third-party generation on the capital structure 
of the purchasing utility. Indeedi purchasing power rather 
tllity'a financial 



than utility construction mav Impi 
position and credit rating." 



The central Inaccuracy oE the credit rating argu- 
ment is equating a power purchase contract with debt. For 
this argument to be true, power purchase contracts would 
have to be "take-or-pay* contracts, or agreements in which 
utilities are obligated to make fixed capacity payments to a 
non-utility generator [NUG] regardless of whether the power 
■- - -liable. .V ■ 



, , IPPs and NUGs offer ~ and 
itilities sign -- "take- aod -pay" or "performance" contracts 
n which the utility must pay only if the power, is produced 
md available in accordance with the contract.!/ If the NOG 



2/ Haill, Roger F. and Sharp, Barry, "Tbe Effects of 
Independent Power on Utilities' Credit Rating,* 
page w (unpublished manuscript) [hereinafter 
"Nalll"). 



Standard and Foots' "Utilities' Risks in Purchasing 
Poweri' Credit Cosounti March 26, 1990i page 3 
[hereinafter "S&P Credit Comment"]. 



D,g,;,zeclbyG00glC 



Thus, the essential difference between 'take-or- 
pay* and 'take-and-pay* contracts is the conditional obliga- 
tion loosed upon the utility. The conditional nature 
deterainea whether an obligation should be considered debt. 
The significance of this diitlnction is recogniied by the 
credit rating agencies. Standard and Poor's has stated 
unequivocally that the performance condition differentiating 
'take-or-pay* and 'take-and-pay* contracts is *the essential 
Cleaent deterBinlng whether the off-bsLancc-shect liability 
le flra enough to be considered a debt equivalent."^ 

Even Bore reassuring is the experience of utilities 
that purchase power. Neither Standard and Poor's nor 
Moody's — according to their established credit criteria — 
has lowered the credit rating of any utility as a result of 
taking on third party capacity. This is not the case, 
however, with utilities who build rather tHan buy. PEPCO 
was the BOst recent utility to suffer a downgraded credit, 
rating as a result of an aabitloua construction program. £' 

Reliability 

Sooe utilities have disputed the gains fro« coa- 
petitlon in power narketa. In the last decade, independents 
have proven their ability to both construct and operate 
power plants reliably. By all accounts, the record ol non- 
utility generators is excellent, both under normal operating 
conditions and in emergency situations. 

Selling power under a contract price to utilities 
creates strong incentives for reliable operation. Wholesale 
generators who are paid only Eoc power actually delivered 
have a strong financial interest in the reliability OC their 



SkP Credit Cos 



D,g,;,zeclbyG00glC 



facilities, stronger In nany cases than utilities that csn 
pass the coats of their Bistakes on to ratcpayecs if their 
facilities do not operate properly. 

A recent survey of 171 projects selected through 
competitive bidding since 1984 shows that the vast majority 
of projects (85 percent) are In developaent, under con- 
struction or on-line. Leas than 15 percent oC those 
projects have been canceled, most of then very early in the 
process, and with little or no Impact on utilities' supply 
plans. In addition, utilities can and do factor failure 
rate for projects selected through competitive bidding into 
their resource plans. 

The nature of the project finance process provides 
a powerful discipline to ensure reliability, for example, 
each project generally goes through three independent 
engineering evaluatlonsi the developer, the construction- 
lender, and the suppliers of long-term financing. All have 
experts who intensively review every aspect of the design 
and construction plan of the project because they only get 
paid if the facility operates as specified. 

Nevertheless, some utilities argue that you cannot 
count on independent energy projects because Independents, 
unlike vertically integrated utilities (which control 
generation, transmission and distribution), do not have an 
■obligation to serve." lU Hllllan Berry, Chalrnan of 
Virginia Power, noted in a recent speech, howeveri 

The independent capacity already In service has had 
excellent reliability, with availabilities in 
excess of 90 percent. The capacity that we have 
bought competitively is essentially dlspatchable 
and the larger units are under automatic generation 
control just like our own units. Our ability to 
control our generating system is as strong as 
ever JJ 



D.,r„.db,G00glC 



Although Independents may not have a atatutory 
obligation to eerve, they clearly have the incentive and a 
contractual obligation to serve, both in theii power sale* 
agreement with the utility and In multiple agreement* with 
lenders. Independents are subject to obligations to deliver 
power according to specific operating standards. They 
suCCer severe Clnanclal penalties it they fail Co satisfy 
these coaaltments. They also rely on the saRe petfocnance 
guarantees troa equipnent suppliers, such as General 
Electric and Neatinghouae, that utilities rely on in 
building their plants. In the rare event that an Indepen- 
dent project fails, performance obligations flov to the 
lender whose only recourse to recover his Investment is to 
^arate the Cacllity and deliver power in accordance with 
the power sales a^reeitent. 

In sua, the Clnanclal leveraging oC IPPs does not 
conpromise the quality and reliability of third party power, 
and HIBP reconunds that the restrictive provisions with 
respect to these areas be reaoved Cron 8. 1230. 

VII. STATE AMD raOBUU. JOBIBDXCTHMI 

One of the concerns of state coaMlssions regarding 
POHCA reform is that refota will lead to a reduction In 
state control over generating facilities located in its 
borders. HIEP supports effort! to reduce jurisdictional 
conflicts between the states and FERC and aake* recon- 
aendations in the areas below. 

Stranded Inveatment (Sec. 15103) 

This provision Is designed to insure that EWGs 
co^ete to serve increaental electric demand without Inter- 
fering with recovery of a purchasing utility's existing 
capital investment In generation. This provision would 
require FERC to disapprove wholesale purchases which have 
the effect, by virtue of substitution of the EHG's elec- 
tricity energy for the purchaser's own generation, of 
leading public service commissions to disallow utility 
investment In cost-of-servlce facilities either under con- 
atruction as of the date of enactment, or already built. 
The provision responds to fears by utilities that the avail- 
ability of cheaper power froa EHGs will increase the 
probability of noncecovery of a utility's capital investoent. 



D,g,;,zeclbyG00glC 



NIEP Strongly opposas this provision as an un- 
juatiCied intsifer«nce in appropriate stata regulation. 
NARUC and the consuaet groups also strongly oppose thla 
provision. It will give utilities a club to us* against 
their state codHiasion and » license to aeddle in PERC 
approval of ENG contracts. 

Clarityinq State Authority (8ec. 15106) 

This provision aCfiraa the authority of state 
COMiiSBions to prohibit the purchase of wholesale power by a 
jurisdictional utility, to allow or disallow the inclusion 
o£ costs of the purchase in retail ratesi and to Ispose any 
other condition the stata finds neceasacy to protect con- 
sumers, including requirements on the aatount of equity 
investaent which aust be maintained in the capital structure 
of the ENG. 

An exception to this rule applies to transactions 
between affiliates of registered holding companies or 
between several auch affiliates and *a person who is not an 
affiliate," so long as the seller Is not an ENG. tn the 
case of a purchase from an EWG by a registered holding com- 
pany, the purchaser must seek consent from every state 
commission with jurisdiction over any affiliate of the 
holding company. Thla requirement will create a significant 
disincentive for purchase from EHGa. 

Section ISloe would also requite state coomisslons, 
upon request by a purchasing utility, to pre-approve con- 
tracts with EWGa. Once a commission had approved the 
contract, it could not later reconsider the prudence of the 
purchase in a subsequent rate proceeding. 

NIEP supports aCCiming state authority by codify- 
ing the so-called Pike County doctrine and pre-approving 
contracts embodied In this provision but recommends that 
disincentives for registered holding companies to make 
purchases from EHGs be removed by requiring that FBRC alone 
approve such contracts. 



D,g,;,zeclbyG00glC 



P»l«qaf d State Authority 

MIEP belL«ves that the conCltct ana overlap In 
regulation oC EWGs that now exist between state and federal 
authority waitea tine and money and Increaaea regulatory 
risk for developers. 

We propose therefore that the FERC be authorised to 
delegate to the state ccHiuiilssions Ita authority to approve 
oarket pricing for EHGa that are not affiliated with the 
purchasing utility. If the PERC, after appropriate notice 
and consient , finds that no negative inpact on competition 
will result from this delegation. Dnder this proposal, to 

Sallfy for delegated authorityi the state nust adopt a plan 
r PBRC approval which embodies established guidelines to 
protect against abuse of market power. 

NIEP believes that this proposal would respond to 
states legitimate fear over loaa of control of local 
narketSi give s(atei> Inientlves to adopt 'rules of 
competition" In ordrr to qualify for delegation, mitigate 
jurisdictional conCi ict ■ that Interfere with utility 
planning, impede market efficiencies, and increase costs for 



VIII. mnrlRONHKNTAi. IMPACTS 

PUHCA reform advances environmental protection by 
giving utilities a greater spectrum of choice in obtaining 
the new electric capacity aost compatible with state and 
federal environnental standards. Just as competition makes 
EHGa more efficient in pricing, designing, and constructing 
power plants. It also encourages innovation and efficiency 
in complying with environmental standards. 

Competition gives state regulators a market-tested 
benchmark for evaluating the pollution mitigation proposals 
of traditional utilities. When dozens of non-utility 
suppliers ccapete to provide both efficient and clean power, 
regulators can make real choices among alternatives. They 
are not limited to review of a single cost of service 
proposal from a single utility. 



D,g,;,zeclbyG00glC 



IX. COBCL08IOB 

HIEF believes Chat PDHCA reCocm stiuctured to 
pr«v«nt abutB oC lucket power and promote free and Cait 
competition oEfeta oaximuni flexibility to utllitieB to 
select the kind of power which best neeta their needs. 
PsrtLclpation In wholesale generation markets is voluntary. 
Dtllitles needing new capacity. In conjunction with their 
atate regulatota, would be free to decide whether or not 
they want to: 

• buy power fton a wholesale generator) 

• participate In wholesale generation iiarketst or 

• build their own cob t-ol-ser vice plant. 

In short, PDHCA reform will give utilities additional supply 
options to consider in meeting their ratepayers needs 
without closing any existing ones. By exempting wholesale 
generators from regulation under PUBCA, TiUc XV of 8. 1220 
will create the opportunity for competition in power markets 

Reform of PUHCA will secure greater energy effi- 
ciency, billions oC dollars in savings in coaing decades, 
and a viable source of energy tor the future. It will give 
regulators better market information In protecting rate- 
payers and give utilities nore options in meeting their 
supply needs. 

He look forward to working with Members of Congress 
in achieving a more efficient and secure energy future for 
the Dnited States. 



D,g,;,zeclbyG00glC 



THE RELIABILITY OF 
inDEFEnDEnT POWER: 



oPEKATina. SYSTEM. rLANnina. ruEL 
AND niunciAL 




D.,r„.db,G00glC 



NATIOnAL irfDBPBnDCnT ETIERQY PRODUCERS STAFF 



Mmibd S. Ayro, Eiccutive Dircdor 

Nancy H. Sutley, Policy Director 

Tobyn ]. Andcnon, GovenuneM ind PuMic Afhira Dinctot 

W. Harrison Wdlfbrd, General Counad 



The National Independent Energy Producerj (NIEP) ii in MMdMloa of Gon^aoiei tlui geoerate dectrkky 
for tale to uQlitia and develop cogeneratkMpraJecti for iviriely of uMn. NIEP mendienhq) ii cotqjirlied 
of bodi puUldy tnded md privatdy held mporXioni wlikA npnaent die c«if« >pectnunof fbull bkt- 
fired and memMete^iiolatlM, indndlng hydro, pumped tanie, bkMnw, leotfaeraul, wind, ivaod mi 
waKe-t04Der|y planB, ai wdl ai oil, gas and coal-fired cogeneraikin and lod^endeM genenliDa (adlitie*. 



Cover photo courtesy of Coastal Power Production Cotnpany. Photo talten by Tom Sheppard. 



D.,r„.db,G00glC 



THB RBLIABIUTY OF inDEPBnDEnT FOWBRt 
OFERATinO, SYSTEM, FLATininQ. FUEL ARD nnARCIAL 



KmUl Cipittl PHtDKi 



Cofea Ttduulotiet 
ThMttM Dipr* 



B.JBUiiwHiilt 

lUdMa Finrar Sytua», Inc. 

P«dJ. Btuo 

Looi L*ke Encciy Corp. 



McDennoa.WDlAEaM(y 



PGJtE/BecbUl GeoecatUit CoMpMy 



■■ Eocriy Productfi Suff; 



Nmcy H. Sulley 
PdUcyDinctDr 



D,g,;,zeclbyG00glC 



TABLE OF conrsnTS 



I. INTROWCTION 1 

Termi aai Defiiiitioai 2 

D. POWER GENERATlCm RELiABUJTY 3 



Syaem Rdubility 4 

Planning Rdiibility 5 

Fiid Reliability 5 

Pimiidal RdialnBty 6 

m. CONCLUSKW 13 



D,g,;,zeclbyG00glC 



CHArTER I. IRTRODUCTIOn 



nMrii« ilBM dw PuUic UtUity tufilmary 

PoticiN Act or 1971 (PURPA) IBMl* R 

ta pmnr aacttn « ralliy. PURPA ■ 



dwM buih by utllib«. In bo. QFi cumoDy ac- 
oouu for ^ipRiikmMcly ilx parcaH of dN 
BMloo'* geoeratiiig e^xciiy, 

SwenI leadiat electric uUitiei luve 
welcooHd dw DppcKttuilty to make aipptj 
decidoo* (or new |(D«nboa kn • oo m pwl th w 
DurkM. At utility nacutim aod numscn, tbay 
He iblt BCMi aurkM M aa 0(fMtunlQr for dMKio 
capture dw oo« laviosi, ledmolcifical imova- 
tlM* Md overall eAidMciea wfakk reeult ftooi 
cotnpeUtkNi. Yei, odm uUIUm oootime lo be bi- 
veated la dw oioQopoly mua quo. Tbey aUesa 
dial dtanga bi dN ttncem of dw bMtattty u 
proaMe cooveiltioa would AreMea k* 
teliatdlliy. liar hnber a>|ue ibM iba flexMby 



... .... iiaaiaaa 

laof PURPAn 
a ftoa (be Publk 
Utility Holdb« Coovaay Act ot 1933 (PUHCA). 
Soma ladapandwi (anarann an cooaitataad Iqr 
availability of (Ml aad inaopriMe 'ttanttl 
boat*- to QF*. avedally bi oMabt aiaM of dN 
couiKiy. UMaa ■oaatllby nqtplkn afgua Am 
^ dmld KN be limltad otdy » W mua ataca 
...,__. ... _...._,.^ - a towat coat 10 



ladepeodau leMnion malaula ibM dwy 
ibciuld ba aaoMingad b play i laier rale in 
H plani fci tba p 

. -Micm. SImU ■ 

byai 

MtkMwideai 

■nm» ntUkiea with not only a 

aMfceia, twl aae poaiibUitla lo dhini^ ino a 

bualaaai la wMek dwy ba*e rn|iiii» iwly. 



nlUitic*, ThepuipoMof ttaianfion laloeiamlM 

Controvatay about *e infiaci of com- 
pedika en biduttfy ttf«ciai« It au taqirliiat. 
' hPURPAwaaaot 



nupayert tad ttocUwIden. li, tloi« wbb iba 
FPA, aad dN Sacuritiat Acta, waa iauultd lo 
doae tegultaory ppt tad itraatlbai (cdccil Kid 
ttue audwtUaa. Cleariy, PUHCA hM adiivrad 
' Bi^arily of dN n 




1. niit davelofHoU led 
lapilaion 10 taek varloui typea of coBvetltkM 10 
allocaie dN tucplut tupply. In dN p«oc«at dNy 
diacoverad ttat coaopctiiive aytteaiB would an 
oaiy petnk dw allocadoe of QF capacity aloag 
toow criteria, but tito would provide a 
■ 10 Dwke ntioatl dedtioot tboui fii- 



ara tufHciaady drattic lo eecourage tcnqiulout 
cotwplitnce, «d «uinptio« (roa dw A«t are 
Ibulud. However, (be ttuom of PUHCA eoaU 
act bave ptedlctad dw evtdutioa of coa^Miltloa la 



D,g,;,zeclbyG00glC 



PUHCA Mtni* H the iMt Mnuofy bK- 
' to compettliv* power ourkeli in wlikli 
itiM cboow tma a viriMy of ifternMivM lo 
N tlMlr hMd - difoa)h putdiiiM ftom ind«' 



ittaeatt 10 ntf 00 putduMd power for Miy 
ificm taatm of new nqtcdy.- Hm; perceive 
oqniBion of opponunltlii for Indcpendan 



power potdkiiee b«cau«e diey m» eatidad Kt 
recover all (pnideni) coett through Met. Bim, 
deariy, current i^utalory tmtclurea do not (iv* 
a lOiliiy ibe lioM laceMtve lo purdiate power at 
to boild ib owB ledcntloD. However, r«btr ibaa 
focal on Am iiaoe of how atQItiei can be nade 
profitiUe !• co ta pe l ith^ f en er al k wi iirt t ti , 
ntUkkt prtto u diidd dMOMlvet fioM 
- "' - 'ifordiettaintquo.lna ' 



nuifceti threaten rtUdrillty. TUi report ei wi l n e t 
the impact on retiabiU^, tf any, of iMUity p«- 
diatea thm Indepeodeot g eoer a fo rt ^ lie ttftM 
Audi Ibe ilk^tiaDa (rfmirelUiUity Id be ntaap- 
ported. 



Tenns and E>efiiutions 



• Tlie term "utDity'e 



The tenn "QF* appliei to a qualifying &:ility 
irtiidi, by meaisg die teduiical and owacnhip 
crilerb ol^uhed by the Federal Energy 
R^ulMoty CommisaioD (FERC), beoeTiu from 
PURPA*a mandate to uiilitiet to buy its output a> 
wdl at die OKhition of QFt ftom rejuiaiioD under 
Oie Public Utility Holding Company Act of 1915 
(PUHCA), die Fedoal Power Act (FPA) Md nan 
udlUylaw. 



«r producer" (IPP), 
a Doa-ulilily, noa-QF geneialioD bcility 
which sellj iu output to a utility. IPPi do ool qualify 
for any PURPA benefiU. Indeol, tew IPPi exin, 
due largely lo the rescrictiom of PUHCA. 



D,g,;,zeclbyG00glC 



CHAPTER II. POWER GEnERATION RELIABILITY 



Any duGuuion of ididnlily mun con- 
tm» » tcria of imwi. Thli report will iddren 
Rv* ooDcepti of nlidiil%: 

• Opcnmi Rdiibility: Do power b^ilitica 



' SyttBm Rdiibilily: Will tbe cotry of 
nuDMroua indtpei^cat giamton into die 
wholeMle |«aenlioii otnkit caue * break- 
down in lyMem cocsdioHioa «nd iMtfrtr 
tioifl 

■ Flinniiig RelidiUity: Will omnEtiul oon- 
utilily power come on-lins in tbe propcf 
amount, tt the proper time bmI at die 
projected ant, or wilt project i 



• FinuiciilRdiability: Are non-utility geaer- 
tton Ming the pwditting Willly'i credit W 
gun u un^ir financial advanuge via 
leveraging and rU (hiftiagT Are th«y lulng 
too mud leverage, and iberefoie, increaa- 
ing die likellMod diey will d^uU on 
loanaT If diey do d^mli on loaiK. how 
does thn iffMt iMqnyenT 

OperaUns Reliability 

Pbyiical or opertfing reliriiility ii the 
eaaicat iuue to addrnt. Despite toate wdl- 
pMiclMd dtimt, dot Mggeitlag Uul focititles 
owned lad operated by non-utili^ tnppiWn an 
leu reiiaUe dian coa^uMe utUiiy ftcilUk* bu 
yet to be produced. A 1989 itndy by dte U.S. 
Coocren Office of Tedutology fittttuaeat 
(OTA), toeaa no evideoee to tugged dul non- 
utility genenlon were liu rdiabte dun indition- 
al Mili^ power idaals. 



Tbe Gulf Coan Cogeoerabon Auocia- 
tion, in I 1987 aurvey of cogenerMion projects 
' g 3,126 mepmMa (MW) of capaoty 



availability and capacity 




tton praiectt I 
hcianof96 

lyT 

Utilitici airveyed by McGraw-HOri 
Electric Utility Week newiletter repotted that in- 
dependent geoeraton which kU elecukity to 
utilitiw perfbrm rellddy. NUtan-M<riuwfc 
Power, which hai about 469 MW of non-utility 
genmion oa-line h) npHHe New York, indicated 
diat indepcBdent generaori have provided a rdi- 
■Mb wuice (rf energy. In addition. Central Maine 
Power, which haa 425 MW of mn-wUity genera- 
tion oft^me, couidan indepcodcM geoeraticKi 
liKilltiet as iduMe ai its own plants. Tbe New 
nddic UtilHiea Commisaian has been 
i-utility bdlities 



Two of die utilities with die most ex- 
perience widi purchased power, Pacific Gat & 
Electric (PGdtE) and Virginia Power, have tei- 
lified before Ihelr public service commissions diat 



pcrfiirm reliably. PG&E filed data in a I98R 
proceeding before die Califbniii Public Utilitici 
GHnmission showing diat 1,621 MW of non- 
ulility firm capacity on-line in its Mrvice aru 
were operating at a 94. g pcrcen capacity factor. 

Wuilun Berry. Quinnan of Dominion 
Reaourcea, the hoMulg company for Virginia 
Power, noted ui a recent ipeecfa, "the inde- 
pendent c^Mcity already in lervice hat had excel- 
lent reliability, whh anilabilitiei in excess of 90 
percent. Tbe opacity Oat we have bou^ com- 
petitively ii euenlially diapatdiable ud die larger 
units are under autoiiutic generatiMi control just 
like our own uniti. Our ability to coolrol our 
generating tyilem is as Krone " ever." 

CatifonuB and several odier sla 
oize ttie potential bighei rejiabilily of in 
generators by audwrizing boimses for projects 
which offer highti c^Mcity factors dian die 
utility's avoided uiul. Tbece bonuses represent a 






D.,r„.db,G00glC 



Mofcovv, At nlure of project fiiuDC- 
Ins provtdM • powvAil dibciidlii* to auure 
TelitblU^. For exiaqtle, eadi pnOect feoenlly 



evahutkNiK the ilcwelo|Mt, dw cootiniciloo- 
koder, (be equity pKddpu Md Hm Mppllen of 
laa(-tcrm debt Ail have teduUcil cnpena who 
intMiivdy review every upect of die d«*lgD wd 
' a plan of Ilie prctjeet. Tbb review ii 



Altbough i _ 

Dot have a narutory obiigatim to lerve, di^ 
dearly iuve a OHllractual oUigation to lerve, aal 
a Hrong finandai inceadve to operate rdiatdy 
both in fteir power ula afrecnieat with Hie 
utility ud ia agreemeou with leDden. Inde- 
pcoden leoeraton are contractually obligated K) 
ddivec power accordiog to ipedfic operation 
itmdardi. They tuffer levere fmancial penaltiea 
if itaey fUl to Mitfy bete oimmiimentt. Hwy 
alM rely on the um« performance guanutteet 
fnm equ^iiiienl nipplien, ludi aa General 
Electric and WeHio^Kiuae, that utilitlet rely oa ia 



In die event that an independent project 
fUU, perfomaiKe oUigMloai flow to dte 
moftgagor wbote oidy tecoune lo recover iia in- 
vectmen b to operate die facOiiy and deliver 



menl. However, iiNh|ieadeat ganaMiai have a 
ittong. loog-ienn incentive to keep a pttitet ftom 
bUlng. Id addition to the limnfilliif flnancUl im- 
pact, a Med prpiect would hmt die developer*! 
repualion and hbder it* ability In the fidure to 



Is MunnHry, idliiig power under fixed 
caotract term and pricea createa an»g inceativei 
fix tetiaNe openilon. Indepcndna gaoaraion 
«to are piid only for power actually delivend 
have a ttrong finndal iourat in die rdlabUity of 



1 rliki to die 
utility ihardiolden and boodhcridert which nuy 
be greater than die risks of purchating power. 



Syitem Reliabitity 

Another reliability inue 1* whether iob- 
utUity nvplken will etdier ttraia or cwse a 
breakdown in die ooonUoatios among intartelMed 
coaqnneait erf die kuiptai electric power aya- 
tetUt such ai imisniittioiit economic dlapacdi itd 
eroergeacy lervke. EaperieneeiiadMrlnduMrieB 
indicatea dut venkal integraioa it not re^dred 
to Tnilmin reliibility. 

Williain McConnick, Chairman and 
CEO of CMS Energy/Comumcrs Power Com- 
pany, noted, 'Natural i«* and telephone tervice 
are jiut m inqioitaaC to connuner* at electricity. 
Yet duae bdiutriat are largely ditlmegrated. 
Neverdieleis, ttieir diatiibution lacton mtiatain 
hi^ reliability and a ttrong tervice obligation to 
1 ttamu^ reaopable 

■I raiiliniHhhic ** 



tupfrilert. For many year*, utititiet have par- 
dined finn and non-firm (or economy) bulk 
power bora oilier utilitica on both a long and 
■hrat-tetin bait. Ahbou^ any power purdiaie 




a^ of regioiul reliability councili 
Notdi American Electric ReliabUity 
(NEKQ. lodepeadeot ginaiMofa have a 
been permitted to participate in dieie coi 
Moreover, utilitiea have recoMly prapoaad 
mena which would hcilitXe increaiad wbi 
power idea «4ifaln bnercoimeGted sytlem 
example, the Nortfaaaal UtUitlea/PuMic S 
Company of New Hampihlre merger an 
Weatetn Syttema Power Pool). 

Udliiie* will eomfaaie » potdiate 
from undated nvpllett, Indudhig other at 
fPPi Md QFi. Fnm die ttaodpoiM of coe 
Uoe. diere it no difEereoce betwaea 
ptnduMi from another utility and 
a noiHidlily nqipller. ~ 
dut electric utilitiea ha 
and the experience to 



Council 
not ^ 



D,g,;,zeclbyG00glC 



In tddkloa, udUlM i^ i wmber of 
" ' mUnd NlUUltty 



ArHliMof dtAoMltibtprocunaiMi «v«liMtkM 
tyRM tMek pr»^Mlin« bUdtn md Ukn IBo 
•coouM dHir Ailky u ootrpltu prajMU od timt 
ad » openu DtMi dtpMdibly ovir ttw lib uf 
dMcooinct 



. d 10 io- 

Ugntt Ik* m/QP bdlity iHa Hm porchuiat 
ntilily'* nrMa. Cumodjt, moK poww cooncti 
utililia ti(d wUi inJtixndwl (CMnHM IM fix 
bcUiilM imlildt K« pmly or ftiUy dlqmduble at. 
far Itffer onin, nader ■umMie leMntioa con- 
trol. Hw power piirdMte l y wnen ii wfaidb 




bcililiei nliiUy during 
HunicaK GillNtt Hiuck Kwih Toui in l9Sa. 
DOD-utUity EKilkiei in HouitOD U(ktii« ud 
Powcr'i Htvice arci itayfd oaAia» widioui iiMr- 




• utUiqrdi 

tort, itmUm Mlopl odMT proudiODi to guvd 
*g*lD« power iborugM ftoM auridon: ovw-wb- 
Kriptioa Ibr oftdty, frognmntBi ilippigi of 
dodlioK ftir wbea dM c^Mcily It due os-ltee 
■Dd, nnelly, ttw tl(lN to buy bilW prajecti. The 
purehHini utUkiM abo try to tttenMe * divine 
poitfblio of oofriailiiy pn^ecu of dUftring tiiee, 
AnI lourcet Md ownaihip 10 diM dte loii of i^ 
one ceo b« abtorbed wUdn ■onnl nierM nur- 



Duriiv dte December 19S9 freeze ia 
TexjB, cogeoBTHora in die HouKon «rea provided 
flte uBIity widi 23 pveen more power dun re- 
quired ia dMir cootmen* Durlnt Ae 1989 
Caiitonia aardiquake, cogeoeralort and odier In- 
depeodoa gcoentDn itayed ao4)De and Ikdped 
PG&E to reoore urvlce quickly lo coniumen in 
dw Bay Area. WImd Soudiem Caliloniia Ediioa 
wn uib)ect lo Daturai gu cunaiimew latt 
winter, die utility tequeued and received io- 



Planning iteliabitity 

The piocesa of ex«cutiB| pow« purcliase 
agreeoteau belweei the boat utili^ and the lode- 
pendeM gOMrators coMaiu many checks and 
balancea to emure dut power will be delivHed <» 



A reced nuvey of 172 project! idecud 
through ctunpethive bidding aince 1984 ihowl 
diac the van majority of projecia (8S percett) are 
in developnwai. voder cotittrucUoa or on-liDe. 
Leu duo IS percent of tboie projecn have bea 
canceled, moat of dteaa very eHly in the proceaa, 
and wUi Iklle or 00 1 " 

nluH '^ ThH« iHunhH- 



Fuel Reliability 

Oppooem of the oompttltive power io- 
duslry have alio expteeied coocera dut uHlitiei 
will loM control of dieir fiiel nix ad becoM* 
overly depeodeM on gai-fired prajectt vulnerable 
to price fluctuatiom ad aupply ittterruptioni. 
However, iodependaa genenton hive no in- 
herent preference far a pinicular technology or 



fuel. L 



d, they le^Kiod to 



D,g,;,zeclbyG00glC 



UtHitMi own] 
and coadltkmi of On coo^etilive procuraMMt, 
not IndcpwidaK gmtnton. The mace virlad md 
flexDtle die tout pre&raocM for uchnolc^p' md 
fItA, the better die ofi|K)ftuiut)> for Gtrnpetitioa to 



mmti dircNigh Miy 1991, indejieDdeal leoentoii 
have ofhrad a dlvcne fiid mix. Tweoty-slx pa- 
Cfoi of the maBiwMti bid by indcipeadeal gcoer- 
MDCt were coil. Gm icoomaed ibr 47 pcrcrat of 
dw mes«ntti bid. In additioo, indciModett 



Aisumcol f I - Id 

uutun dieu bigb isvdi of debt bjr Alftini 

riik to utilitiee widiout axqMotHioii; 



Finally, many iBilitiM are coottaiztini fix 
coiBbuilioa tiirbia«* fix peakinf c^iadty became 
they bave CDOiijb bacdotd ci(Mdty> M> meeicur- 
ntt neeik wcU into dw 1990*.'' It ii dieu 
market bcton, DM ny bias of tbe compelillve 
|eoBr«ioa ayiteu ktdf, 0x1 have led U 
fnitnact for gaa-fired hdlkkt in recent yean. 

Moreover, ulllitiei' comtnictioD iriim 
ire coDceonted on natural gai plinli. Tbe Utility 
Data [natitute report! dut abnoK two-dilidi of dw 
newly announced planta planned by ulilitlei will 
be hided by natural fat. 

Fiiianciil Reliability 

PeriM|M dw mo« miwndowood oooi- 
podeol (rf dte overall fdiiUlity of Mo^utility fco- 
arHon iilbe iHecrih of Ibe flaanciag ttnicturea 
for audi pnyeoa. lieae ptojectt rdy on aitel- 
iMMd project financing where the devdopeti 
pledge die aaiet and part or all of die pmjecl'i 
revenues to leaden. By oontrait, utilitiet fmaoce 
GommiGIion on tbe ttreoflh of dieir overal! cor- 
porMe balance duet. OppcmeMS of noiHitility 
te— Muii argue dial Mghly leveraged capital 
atnidiirea upon iriiich indepeodent generaton 
rely are inbereotly more riiky dian draw bated on 




v« monolUik and 



'Hie bllaey of dieee « 
. IJom Ilea In dw Implicit lack of u 
■fanHing of bow c^^ltal sttTkaia aiaett and a 
liaka to deliver project flnaacing al Ihe k 
ct«a. Tbey alao reflect a miilMeipreialloii of tbe 




generSon rely on 'high' Jevelt of debt - there 

certainly is no migic mnnber for tbe deM-eqiily 

ntio of t power pnil< 

miEiog flrint, indeper 

of debt and e^ity which m 

capital. The correct nlio wj 

die ipecifici of the project and Itt power ulee 



■hifl risk away bom utility ratepayers. It ia tiM 
diat bankers and other leaders look lo the qualtty 
and credit wonhineu of tbe purchaaer of ■ 



D.,r„.db,G00glC 



product, in fliii cms dte ^Stitj pMTtiMln 
deoriciiy. to ihunniBa *• llmmriU Oddity of 
the product provider md prajacl Id be fiiTrri. 



dnpiy not aonnH i 



« » npQ itt (Ml. It It 



miullocMioa of lUt Miqr ftoM dM Jadqwndew 
toHnloc Bid 10 Ibe idUqr AmfeoUn, debi- 
hcdikr ■ul niepiycr. 

Eoonomic ffficincy dicton dut no cd- 
tlty be requited u bar riiki for wbick it it not 




Fint, ratcpayen bar tbe deownd riik w 
nutter wtio buildi ni 
noted if ■< 




demud lUKat^tty. UiHitiet miy ■ 
riski dvoutb lent-coit ptao^ng ptoccsua, com- 
petitive procuremea or tbnuth diveni^ing aip- 
plien lai wpply poidi. 

Second, wiifa reelect to oontiiuctioi] tad 
operating rixki, vtilitiet uie a vniely of devicei 
10 itlocme ritk to ttw teller: 

• Requiring btna-eod deposits (o guutriee 
die project is coasliucted on linie. Fin' ex- 
ample, Virginia Power requires dial inde- 
pendeol generaors put $30/kilowan in 




wtiidi c*n be dnwn o 

dmiged or tbe equipmeu does not pet^ 

fxm to coetnKt iemit; 

I SpadQiiDg amual teadsg of equipmnt to 
determine if it meet* cofNnct ttaodardt, 
widi pentllice If it do«a not; tnd, 

■ Kequlnng tecurity liMretIt in fiitl uqiply 



In tlwrt, dw risk of o 
ovemint ii dimiutad by i _ , 
coMrtct wltti t flied price fbmwia and including 
performance and tecurity provitiont tudi at thote 
deecribed above, llete petAnnaac^^tted con- 
iracti, in wliicli profits are directly rdaied to 
" ■■"'■"■y. five ind«p«nd(M geoeraiort 
a to operate plants at optimum 
~o Mtprlte, Ibereftai, dul the 



by all accounit, kave been remtrkaUy ttrong. 

Finally, wlieo one wd^ tfat relMive 
regnlMiry risk (br utilities of building vcnui 
m alio t^ in fivor of 
noeea, one of the nujor 
id 10 purchased power in the 
I980i was far of piudeoce reviewi and 



m programs. Stmtcs 
look brarably on purchases from iodtpendenl 
ute Aeir coDtractt are miikct- 



Economic efficiency Mctates that no 

entity be required to bear risks for 

tvhich It Is not appropriately 

compensated or wMch are beyond Its 

conlrof. 



D,g,;,zeclbyG00glC 



n lefusa] to pass through th« 
costs of third puty power contracts, this concern 
ia grenly exaggerated. Uiiiities are not obligated 
10 sign comracB with independent power 

In addition, state regulators are far le»s 
likely lo review costs disciplined by Ibe market in 
as open conqtetitive process thin diey ire to 



proceedings. Tliis is even 
stiites which give pre-consiruction 
contracts signed wiA independent 



'regulatory out' clauses which work to hold die 
utiUqr purchaser hannleu if pass-ttirough of Ihe 
contract costs was DM approved. 

Argument #2 - Through high levels of 
debt, independent generators gain an artificial 
cost of capital advantage ovei uiiliiles. 

This argutnent is composed of two parts: 



conrARison or risk allocatioh 



sn'iiirRfsr^"'^""'' 


RISK SHIFTS TO DEVELOPER IN 
MOST DR AU. CASES 


SOME CASES OR TO SOME 








fu^icmiL 






lt,«,..l R.l» 






P.oj.a Fmlurc 






Fioi.cl D.I., 






D^m.hd f« Po™. 






FiMn=.-i Riik. N..n -P.rf„,m.n=.: 
























AcUDf(i«I.F««M.icu.c 






Su»IU(ul.K>r, 




., _ . 



D.,r„.db,G00glC 



niluKB on deM mMmtttkillj lowtn tb* ooM of 
Mpkil ifawirwii • bDnra to i mw c l — liw 
oD^riaxltlM of pnjM floMM. UtOkiM hm 
tndJtkMdly HtWM ttrir durAoldn wiA i 
raculMad mora on wpilqr ki dw naft of II u 
13 pwceM bMad om ib» p«Uic ■vU'i parop- 
liiiiiiflliiiliMiM Mill lull Ml Tlifi Mill 



■ of Iba bonuwa'iiqylqi ■ 

rUk. Tlw uMil ru)« of damb it A« l«i a^ilqi M 
rUc dM UgbK Ih* (Ml CMt la finKliv pmw 
. .. --Tn75B 



wjtt Ifae bdMM of ■ MilQ'i fiuMiiv providtd 

Hw cnmU opU MrMora of te ■tflkj noH ba 
■ ■ '• nfulaur. Fimbw 




lag.' In fliii apkil Hnicfure, dw nle n 
bnb rqMyniHa of dcM ind Ibe Mura on «|Blt]r b 
d b]r lbs Mui flnmced (i.e.. 




by eidi type of E^iital 






To imt, dw iDOM (OkkM lUocKlon of 
rU in pfo^ finmciag kN rwalnd la • pM«r 
pnponaMMte Aks of deU is Oe opkil ttrac- 
tan. Howovet, dM com of boib dibi «d equky 
opitil b hishar ftir bdepMdeK IMiMcn dun 
fir iKiUlki, reflectms (b« prcDhmM vitiiis from 
At riik dlootkni dMctibed ibove. 



tal htloit coaMfoalaaHd eonaaarclil opendon 
of ■ facBhy ttraatb ■ coMtbulkiB of kma nd 
pMic or prtvaM ttock btaia cei or dHwsb 
limited pMBnUpi. " 




In Bidillca, aqi a 
•npomed beewM dw tena of ddN It iboner for 
iadepMdcM fiaMMoci dm ibr BtUkia. TVl^dl- 
ly. Indeptodean borrow fcr I2-IS yem, whila 
ntllilkl llDmlly bonow far 30 or more yaai. 
Ftaally. etilitiM fkuMce on coipotile bilMce 
Aeen wbick nflact renoMa nd Luqiuain not 
direcdy nialed (o power pnjdoctloa, nid m 
trinuDinioa, dtatifliatiaa md olhtr lovicca. On 
tiw oliiar hand, indqiandent prpjacti gcoeraUy ex- 
dutivdy ban cadi flow* m powar kM and pcr- 



of h]|b dd* Iwdi pacmiii pnitactt to be taeO- 
cteat while iwniinlin ooat oonipetMv*. lUi 
I. At dittutted dwve, dun it 



"price ciMtaioii' lo mtek ladnckocki tfnora iba 
auateoce of bi^y comiMtitive power mtifcett, 
where die levd of compctitimi drivee down price. 
At of May 1991, in all Dompediiva "Raqueatt far 
Propoult* iuuad (o dde, a^ tlmaa aa biA 
icnenlipt cspacity wtt bid at requeited. 

IW date lo Table 1 lUutnua a typkd 
mllliy't fiaaadil itnMtura Md dta coat to taiaa 

SLDOOofc^ritd. -nwiaUl^'iooaior 

ii then tt i araii ed lo • lypicti' ' 
"""■'■■g HnOure. The farnidi attaaei a cor- 
porate tax nie idr biMb udlidM and ladcjWBJtat 
inveHmcMi of 33 panxtt, TMe 2 demoaMraM 
dui, given realiatk aitumptiaBa on MM of taona 
on dibl and aifiity, it ii eaay and plaulble lo ere- 
Ma ■ tcaoario where itae ublicy, not Ibe inde- 
pendent leDerator. hte a fiBaadm advaaafe. 



D,g,;,zeclbyG00glC 



COST OF CAPITAL ANALYSIS 

TYwrALirniJTYnAPiT *iJ7*Tinw 



An nv DWM twii SU.7T ia rev«Bue U 
MTvks each SIOO of c^inl uidt IbU mix. In 
thit ca*e. ibi COM of c^ilul for tk* IPP ii 6.S* 
higher ihia for the utUtiy, tOUcdat dw highar 
coMof a«iil*l >B a compctidvt «Dvkn»aNai. 



nUivdy hi^ Imta of dcM » riiey uek id mU- 
miie com Id vny tOKftO&M mMfctU. tade- 
peodot piPiKti BMut uak nnoiiigAd con 
Mvlop tram loiNr overall coaamctkM coHt 
(Multini flMB; 1) ibanar cooMrnctioii paiodi, 2) 
greater dtK^loe In dM acqoidbaa of engioeeriiV 
Mrvicea. AmI »d equtpmew. 3) moic eflkkn 
uie of ftM, or 4) ecoiumiei In e^i|»tMM pur- 

ArgumnS ti - The re 



A utility null nm $13.BT in reveoue tc 
■ervice each SIOO ofcapital wing diii mil. 

TVPir*! ffP r*PiT*i t7*TfnM 



A higher debt-equity ratio doae not lead 
to unraliiMB fimiKU nnictuiea. Pint, the dii- 
cipliae of dw fimDciiig laoceu itsdf increaui 
ttie (iMiKitl accouiubilitjr of ptojecti. Banki re- 
quire devdopcn to deariy ideoti^ dw sourco of 
risk UwnM la the pcqfect and attenpt •> miDV 
ttitm by aulgniag ibe« to die pinki ban iUe to 
bear dwae rUca, It addltioii. projectt inidefgo !•- 
temive review by Ibe leaden' own "■*-'-■' ■>■ 
pent, audi at indepeodeH architect >id 
iiHiilmiiH linn review, to eonire that projecu 
will perform well eoou^ to cover their loant. 



Second, project finindag is aaicl-tMud. 
Project devdopen pledge the attel and part or all 
of die project'! tevenuea to koden. Analogies to 
leveraged buy-outi, die SAL criiit, and ttie flnan- 
dal tcandaU of die I920>, '30i and 'Hi are un- 
founded and irrelevant. FirtI, no govetnaM 
guaraiHee of die power plait lavectniaol «iiatt. 



value of ipecific, tangible aueta (iha powarplatt), 
while Ihau umtdde financial atiuciuraa alluded to 
iixive Naked corporKe balance theeb on the 
value of qMculMive or iham aueta. 



D.,r„.db,G00glC 



DEBT BY OWNERSHIP TYPE 



■ecMMrily aaiaaia hi«b levdi of diM o 
Hfeoftfaepcojcct. At prplMt Evh flow ratim tlu 
debt. Ibe Mx-e^uty aOo dedioM. Wheo tiie 
MM to retired (mmUy 12 - IS y«m). 100 pa- 
OMM of die ptoject't vihw b«iciop lo equity in- 
MMon. By cootnM, iMUitie* scMnlly owiauja i 
ueady itbt level becwM diey fimnce oo a cot- 
poratB, rabcr flun ptoiea, Ind. Tdde 3 rapre- 
MOl* debt levdi by ownenhip type for ■ typical 
proJect-finaDced IPP, • typical invntDt-owiMd 
utility (lOU) and > typical public power entity. 

The indcpoidaa geaawac turn wilta SO 
percent ietn, whidi decliiu ■ it ii repaid ui 
readiea zero percent in yev IS. The mdepet 
averages 24 percent debt over die lift af ibe 
prpiea. In loow catei, aftat Ibe debt it retired, 
Ibe devdopei uuy refiniDce all or a poition of 
Ibe debt. Evoi —■"■-*-; leAiMiEiai occura, d»e 
average debt level over the life of lbs project will 
be leat diaa 30 percem. The lOU debt level 
■vengae 57 percent. Tbe tiptctl poblk power en- 
tity "'ii'"W''H a debt level of appnnimauly 97 



in cbooting to [fnrrtiMr power 
geooXon and take meamrei to saftpiird igainit 
finBDciil failure. Purdiuei ^m indqteodeot 
powKproducm arevolunury. If a project Owner 
ii uniblc to nwel iti fiiuncial obligntom, deariy 
die (inindng partiei will tttk U mitigate dtejr 
louea by findiDg a new owner or operator for die 
hcility or reniucture tbe cqiital anangementi to 



lo addition, many power ulei contracti 
■pecify dial in die event of a banknqNcy, die 
utility may tike over and contiiaie to run die 
project. An of Ibie belpi to emure diH ibe pn^ect 
can contiiwe lo produce power ecmmnically over 
die life of die oontnct widiout bttenuption for 
" rever, we know of no IPP or QF 



Mate utility ( 
authority lo review die financial structure of inde- 
pendent generator* who witb to lell to utilities in 
ditir jurndictioa. 



rtnally, utilities can, and do. 
consider the financial reliability and 
stabllUy of developers In choosing to 
purchase power from Independent 
generators and take measures to 
safeguard against financial failure. 



D,g,;,zeclbyG00glC 



CflAFTBR III. concLusion 

Over 6k hm few yem. ttura tua been ■ In Munnury, NIEP belie 

f6| of rhetoric •urrDundioi die idiiUlity debate. ahowi dut Dan-utility gsoenlDn 

Ptx lome udliliei lod saUB, the rdi^ity of Mwrce of power. Rdijibility i* m imporUM to in- 

IRndmed powtr ii liinply ta m Inue-lnde- depndeBi goMnion at k it lo utiBitlet-tini^y 

pendesi t"""""* ^"^ i'f^y pmed die teal. pW, indepeodead ilo KM (ct paid unku d»ey per- 
fbtm. Argumeott 10 Ae CMOtfi' do noiMiMlup 

Utaidea in Virginia, Nn* Jeney, f4ew very trail under Krutiny. AIlegKioni of dmtttu 

York aul New EiqlaDd and other areat where die rellAUity are rrfuted by dw data available. 
donand for new E^iacity bai been acute in recea 

ye>i, rdy lM*vfly on contrad power and Claim* of Independem levera^iv ad- 

genecally give non-utility generalan high lurki vaioanea alio vanish tqwa dote examinHioa. 

(brrdiwDity. Thete gtoeraKnt are already pndudn) a voce 

Hable Md (fficien Mpi^ <rf electricity to keep 

It ii alio wordinodng Oat dte Mate utility die United Stam cotnpMitive ta (labal niaAett. 

conuniuioni have alrewly conducted a kind Ot Ttie recMd Id dale ifaowt that die martet-baMd 

referendum on the rdiabQity of the noo-utUity biceativM of contract (eneration have eouted 

gewntion 'experiment.' By May of 1991, that indepeodenl (eneralon devdop reliable 

udlitiei or public aerviceaHmniiiioni in 28 Kates power ^lliei, on tchedule, ■ a coiqMilive 

had eidwr adopted competitive bidding ai die price. 
primary method for acqutriiv new gcocration or 
bad it under developiMst. 



RellaMIK^ Is as Important to (ndependenl 
generators as It Is to uttlltles-stmpty put. In- 
dependents do not get paid ttnless they per- 
form. 



D,g,;,zeclbyG00glC 



peOOoH. OTA-e-409. (Waahlngton. DC. Hay 1989.) Page 9. 

Qutf Coast Cogeneratlon Association. SurD^c/Coaeiwralion In I^exu. 19B7. 

eiMMc until Wee*. January 2, 1990, page 12. 



TeaUmony of WDIUm McCormlck. Qialnnan and CEO oT CHS Energy/Can- 
sumera Poiver Company, before the Committee on Energy and Natural Resour- 
ces, United States Senate, Kovember 9. 1969, page 6. 

The niRC Transmission Took force's Report to the Commission noUs that 
bulk or wholeaales sales of power, excluding sale to requirements customers 
(captive wholesale customcts). account for 22.4% of the megawatts ultimate- 
ly sold St retan. 

Federal Energy Regulatory Commission. TTie rSRC TVansmlssion nak n>rce'a 
Report to the Commission.- Electrlclb TVarumlsslon.- ReaU^ Theory, and 
mOcv^ttematlaes. (Washington. DC. October 1989) Page 18. Table 2-7. 

J. Hamrin, page 19. 

eiectnc Waty Htedt January 29, 1990, pages 12-13. 



Kobertaon's Ctarent Competition. Volume 2, Number 5, Hay 1991, pagea 8 



More ^pically today. nuOs rely on 73 to SO percent deU paM down over a 12 - 
20 period. However, some prqlects will use more or substantially leas debt 
(projects may be 100 percent equity financed). 



See generally. "Letter to the Honorable J. Bennett Johnston, Chairman, US 
Senate Committee on Energy and natural Resources, from T. Depre, 
DonaMaon. Lufkln at Jenrette." May 17. 1991. 

See gerterally 'Letter to the Honorable J. Bennett Johnston. Chairman, US 
Senate Committee on Bncroy and Natural Reaourcea, from P. Hlller. Ooldman, 
Sachs flcCo.' April 18. 1991. 



D,g,;,zeclbyG00glC 



smocutx or tsb RtriiiovT ow 

THOMAS B. WBITE, JK> 

BE r OKI THE 

U.S. SSMATE BXHKIlia CCODIITTII 

BCBCOMKITTEZ OK SECDHITIBS 

1 17, 1>*1 



Enron Povar corporation strongly Bupports raforp of th« Public 
Utility Holding Coapany Act of 1935, «■ r«fl*ctad in Tltlo XV of 
the National Energy Security Act, 5.1220. 

Enron Power la an experienced and aucceaaful cogenerator. Dua to 
the lack of (tean hosts for cogeneration operations, the growth 
of our busineBB requires that we construct "independent power 
producers" (IPP'a) rather than PUBPA "qualified facilities." 
Unlike qualified facilities, IPP's are not exempt from the Public 
Utility Holding Company Act (PUHCA) . Therefore, by operating 
IPP'B, Enron Power and our parent, Enron Corp., could become 
subject to PUHCA's organizational constraints, investment 
limitations, and reporting requirements. Unleea specific 
exemptions are granted on each IPP that we construct, PUHCA could 
result in the SEC ordering Enron Corp. to divest itself of the 
largest natural gas business in the country and other significant 
aasBts. PUHCA is a serious impediment to the development of both 
Enron Power and the entire independent power industry. 

The United States is facing massive needs for new generation 
capacity. The Department of Energy (DOE) estimates that 134,000 
megawatts of additional capacity will be required nation-wide in 
the next decade. The Public Utility Connission of Texas 
estimates that about 12,000 aegawatts will be needed during this 
period in the State of Texas alone. By the year 2OI0, the DOE 
estimates that 200,000 megawatts of additional capacity, the 
equivalent of 200 large generating stations, will be needed. If 
it is exempted from PUHCA, the independent power industry can 
supply a large amount of this capacity — much more than tha 38,000 
megawatts currently provided — and thus ensure an adequate supply 
of electric power will be available. 

According to data from the Ediaon Electric Institute, real 
electricity prices increased 36 percent between 1973 and 19S9. 
Independent power can stop this upward spiral by providing 
Inexpensive power. For example, the plants currently operated by 
Enron Power produce electricity for an average of three to four 
cents per kwh This compares to the 1989 U.S. average retail 
•lactricity price of 6.5 cants par kwh. 

PUHCA refers will allow consumers to enjoy aors of this low cost 
power, utilities will not purchase electricity from IPP's unless 
the power is priced lower than the utility's avoided cost. 
IDsrafore, IPP's will only be built if they will commit to 



D,g,;,zeclbyG00glC 



CuTTBntly, tba wartcet •nvlronnent for whalaBala alaetric 
9enerat.ion !■ vary unconpet.lt iva Opportunltlaa for non- 
utilities to enter the aarlcet are Halted. In order to )aaet 
FUHCA requiraaanta, IPP ownera auBt adopt -unconaercial ovnarship 
■tructures. For axaaple becauae of PtlHCA constraints, Xnron 
Pover will own only ■ ainorlty ahsre in the generating facility 
that we ara building in Hllford, HaEsachuBetta, and will not have 
operating control over the plant. tvHcA rafor« will greatly 
Inprova the coapetitlva environaent by allalnatlng these 
nonsensical raqoiraaantB. It will also land to lower costs 
becausa of the innovation and technological improvanent that 
coapatition always craataa. 

PUHCk refora will not Aange tha alectrlc industry's rsgulatory 
framework. The jurisdiction and authority of FBRC, SEC, and 
state regulatory coaalsaions over utility financial affairs will 
be aaintained. Consunera and utility stockholdars will contlnua 
to ba protaotad by the san« mechanlsas that axlst today. 

The financial condition of utilltiaa will net ba andongarad by 
FUHCA retorn either. Purchases fron IPP'S ara lass risky and 
require aucb lass capital than the construction at powar plants 
by utilities. Tha project financing used by Iff • doaa net 
result in an inappropriate degrae of leverage. In tact, evar tha 
life of a typical IPP, It will be financed with a SMller 
proportion of debt than utility-owned facilities 

Because non-utility generation Is generally natural gas-fualad. 
It has less anvlronaental iapact than tnost other types of 
generating technology. Stack ealssions fron gas-firad coabined 
cycla plants are less than half of those fron coal-fired power 
plants, which exceed one ton of emissions per megawatt hour. 
Independent power and anviroruDental requlraaants for cleaner 
fuels are expected to significantly Increase the demand for 
natural gas. In its "Outlook for Natural Gas' publication, Enron 
astimates that gas-fired 'generation will increase the annual 
demand for natural gas by up to thr*« trillion cubic feet by the 
year 3005. Enron also aatlvatas that the United States has more 
than a £0 yaar supply of natural gas. Tha additional danand for 
gas will causa Incraasea In production and stimulata the aconony. 

In suMiary, KIHCA rafora, and the IPP development that will 
Tesult fron it will benefit the country in several ways 
Independent powet will ensure adequate supplies of electricity at 
affordable rates Lower electric rates will lead to lower more 
competitive prices tor Juaarlcan products. IPP s built abroad 
vlll boost exports and Incraasa federal tax ravanuas. Together 
inproved competitiveness, increased exports, and tha expanded use 
□t natural gas mean more Aaarican jobs, a stronger sconomy, and a 
cleaner environment. 



D,g,;,zeclbyG00glC 



D.S. SEKATB BJUnCIIIG COMMITFEB 



SUBCOMKITrBE OK SECOBITIBS 



Septeabar 17, 1991 



ORAL 5TKTEHEHT OF THCnOS E. WHITE, JR. 



1 behalf of 



ENROH POHER COBPORATIOH 



D,g,;,zeclbyG00glC 



Mr. OwlTBMt and MmwDmr* of tb* 8M»rltl*B SobcoMMltt**; 

My iHW* i> Tom Mbit*. I am tb* Ouimn and Cblct Bx«eutlv« 
Of(lc«r of th« Bnron Power Corporation. I an?r«clat* tha 
oppor t unity to taatlfy in support oi tba propoaad aaandaanta to tha 
public Utility Holding Co^wny Act (FOHCA) as raflactad in Titla XV 
of 8.1330, ttaa national Bnargy Sacurity Act. Thia lagialation will 
balp maintain raaamiabla alactric prica* in thia country and vill 
ijiprova our ability to coaq^ata in tha at^iply of alactricity abroad. 

Ha at Enron Powar bring a unigua parq>activa to tha nracA dabata; 
wa bav« a long track racord ol dasign, construction and eparation 
of qualifiad facilitiaa undar raitPA in tha wholaaala ganarating 
Markat. Ha ara braaking naw ground with an IPP projact in Kiltord, 
Hasaactnwatta starting construction and currantly undar raviaw by 
tbm SIC twr a FOHCA axai^ion. In Taassida, England wa ara 
aonatmcting ona of tha world'a largaat ooganaratlon plants at so«a 
1,725 Msgawatts in capacity. Our England axparianoa ia ralavant 
bacauaa it ia a 50,000 nagawatt narkat, about th« sisa of Taxas, 
wfaidi has no vartieally intagratad utilitiaa, with an opan accass 
transnlsalon ayatan and 100% porrhaaad powart Ira* markat 
provisions far bayond anything conta^latad in tha raforaa to PDBCA 
providad tor in tba bill bafora your subcoaaittaa. I an happy to 
raport to you that all tha lights ara burning brightly throughout 



D,g,;,zeclbyG00glC 



England and tha MBmaga la claarr anhancing growth in th* 
Indapandant ganaratlng aactor andangars abaolutaly no ana and 
banaClta avary ona. 

Mltl) our bualnaaa axparlanoa at Enron Powar providing tha avldanca, 
lat mm addraaa aoaa of your quastlona ragardlng thia laaua. First, 
a atrong and viabla indapandant powar aactor la vital to providing 
tba Baaaiva awnint of additional ganarating capacity our country 
naada in tha naxt dacada. Bstiaataa ol tha Cutura daaand vary, taut 
both tba Dapartoent of Enargy and tha North Aaarican Elactric 
Rallatalllty Council foracaat capacity raquirananta in aiccaaa of 
100,000 aagawBtta by tha yaar 2000. ntilitiaa can not, and 
abould not, >aat thaaa capacity naada In-houaa. During 1990 non- 
utility ganaratora inatalled 6,356 aagawatta of capacity, bringing 
tha total aMount in ^^ration natlonwlda to 38,000 aagawatta. with 
PDHCA rafora, wa will ba fraa to t>rovida much mora of thia rallable 
and raaaonably pricad powar, Tha dlvaraity and coapatltion 
rapraaanted in indapandant Markat ia haalthy and rapraaanta aavlnga 
to tha rata payar. Evary ona of our powar aalaa agraaaanta ia 
laalow tha avoldad coat of tba utility wa auK>^y> and I would put 
our availability rataa and tha quality of our plant daalgn and 
conatruction up agalnat any utility in thia country. If It wara 
any otbar way, tba utility would navar antar Into a contract with 
ua ia tha firat placa. 

Ragarding tha impact of thia lagialatlon on tha conpatltiva 






in Addition to rwduclng olactric rat*s, raRCk rcfora will banafit 
tbls oountrr in mmrnxml otbar waym. First, a« I have »antionad. It 
will asaur* an adoquat* aupply of alactric powar. Many utilitiaa 
ara raluotant to build additional capacity du* to financial atraln 
and ragulatocy dlBallowancaa. Obviously, supply auat kaap paca 
with danand. Sactmd, by lifting JVBCX raatrictlona, foraign 
invastaant ^pportnnitiaa — Ilka our Taaaalda projact — will allow 
graatar axport of KBarioan toclinology. Thia will incraaaa tax 
ravanua bacauaa wa pay taxaa on our aamlnga Cron our ovaraaaa 
oparaCiona. Finally, aa our hlatory with anviron>antally banlgn 
gaa-firad coganaratlon plaata daaonatrataa, indai^andsnt powar la 
good (or tba anvlronBant. 

you hava also aakad about tha lapact of FuncA rafon on tha 
financial haalth of utilltlaa and atatutory protactlona tor utility 
rata payors and atoekholdars. Thosa who argua that FOHCA rafOEB 
will bring graatar dapandance on Indapandant powar and, tharalora, 
graatar risk bacausa wa ara laas raliabla or dapandant upon bigbar 
lavaraga financing alsa a basic fact. Na sail powar undar contract 
to utllitlas. Tbay ara traa to axtract whatavar raliabllity 
atandard* thay wish, or financial stability aaasuras thay raquira 
in thosa contracts, ma risk in honoring tbosa oontracta rasts on 
us and our aha r aholdars , not on tha rata payar. Iba lavaraga 
"lasua" is a daaalo rad barring. Financing arrangaaanta do not 
■aka indapandant powar unraliabla. IPF'a ara financad with typical 
forms of projact financing. Ovar tba Ufa of our lacilitias, wa 



D,g,;,zeclbyG00glC 



T«*s«id« plant in Bngland. Mltbout FOHCA rafom Bany coq>ani*B 
will raftw* to run tta« EVBCk gauntlet and tti* raault will b« a Biich 
tighter au^ly of power and bighar coeta to custoMara. 

you hav* aakad about tba ii^act of FDBCA raCom on alactric rates. 
The anawar to thla quaation la vary ai^la. Rataa will la* lower 
witb PUBCA refor« bacauaa IPP'a will only lae built if tbay are the 
laaat coat alternative. Data fro* the Bdiaon Electric inatitute 
ravaala that alactric ratea Incroaaed 36 percent in real tarma 
between 1973 and 1989. Ind^iendant power can atop tbia aplral. Hy 
coi^Bny'a planta currently produce power lAich haa an average price 
of three to four centa, lower than the national average retail 
price of 6.5 cents and mich lower than the IncreHantal coat of 
power froa soae new utility-owned plants. FDHCK refora will allow 
us to auiqtly aora of this low-coat power and ainiHlse future rata 

Lower electricity prices are ii^ortant to the econoey because they 
naka Aaarican industry Bore covpotitive and thereby cut iaporta. 
Additionally, there is a wiltipllar affect aesociated with electric 
rate increases. Dollars spent on needlessly high electricity costs 
are not available for savings, invesbaent, and the consu^ttion of 
other goods, nie lower rates that will result troa FORCk refora 
will lead to a stronger econoay, aore Jobs, and a batter atanderd 
of living. 



D,g,;,zeclbyG00glC 



In addition to raducing •l*ctrie xmtmm, VOHCIt rkfora trill bon*fit 
this oo unt TT In ■•varal otbax ways. First, aa I bav« ■antlonad. It 
will asrar* an adaquat* aopply of alactrio powar. Many utllltlas 
ara raluotant to build additional capaoity dua to financial atrain 
and ragulatory disalloMancaa. Obvioualy, aupply auat Xaap paoa 
with dawuid. saoond, by lifting niHCX raatrictlona, toralgn 
invastJMnt opporttmltlas — Ilka our Taaaaida projact — will allow 
graatar ai^ort of Aaarlcan tacbnology. Uila will Inoraaaa tax 
ravanua harnnaa wa pay taxaa on our aamlnga tram eur ovaraaaa 
oparatlona. Finally, aa our history with anvironaantally banlgn 
gaa-firad coganaratlon plants daaonstratas, indapandant i^owar is 
good for tha anviroiisaiit. 

lou hava alao aakad about tba iKpaet of FQHCA rafors on tha 
financial haalth of utilitias and statutory protaotions for utility 
rata payara and stookholdars. Thosa who argua that POBCA rafora 
will bring graatar d ap s n danea on indapandant powar and, tbsratora, 
graatar risk baeausa wa ara lass raliabla or dapandant upon blghar 
lavaraga ilitancing nisa a basic tact. 9» sail j^owar undar contraot 
to utilitias. Ttasy ara fraa to axtraot whatavar raliability 
standarda tbay wish, or financial stability massuras tbay raquira 
in thoaa contracta. Tha risk In honoring thosa contracts rasta on 
us and our sharaholdara, not on tba rata payar. Tha lavaraga 
"laaua" la a daasle rad barring. Financing arrangaaanta do not 
■aka indapandant powar unrallabla. IPP's ara financad with typical 
foras of projact financing. Ovar tha lifa of cur facilitlas, wa 



D,g,;,zeclbyG00glC 



will actually uaa !••■ dabt: than utilitis*. In tta« cbb* of Enron 
Sovmr, V bring to tb* tabl* strong reliability numbara and tha 
financial stability oC a 910 billion parent corporation balanca 



Additionally, nothing about POHCA raCon thraatans tha financial 
intagrlty of elactric utilities, or >Bk«a them rlsklar Invsabaants. 
TO tha contrary. It is lass risky for a utility to purcbaaa power 
than to build its own ganarating capacity. Let «e undarscora that 
point by noting that the financial calanitiaa faced by nany 
•lactric utilitias in tb* past decade were caused by cost overruns 
and delaya at utility "constructed power plants, not by purchaaed 



State regulator concerns that so*ebow roHCk refer* will diainlsh 
thair ability to protect rata payers are without basis. Tha 
regulatory structure post-EVBCA reform will have F£RC regulating 
wholesale rates and statea regulating retail ratea just as they do 
now, Purchassd powsr contracts will still be driven by utility 
avoided cost structures controlled by the states. EDHCk rsfom is 
not about daragulation, it is about aliainating SBC intrusion in an 
independent power aarlcat that bears no seMblanc* to tb* 1935 
situation tba Act was intended to correct. State PUCs' ability to 
control croas- subsidisation and affiliate transactions will not b* 
Halted by PUHCA refora. This is an issue left appropriately with 
the states, nothing in FDHCA refora will expose rate payers to tlM 



D,g,;,zeclbyG00glC 



atanaa that IQRCA waa Intended to •llNlnat*. Nor will th« propoaad 
rtrvisiona disturb tha imraator protactions that also drova tha 
original n«*d for PUBCA. Th* SBC will still bav* tull jurisdiction 
ovar utility holding coapaniaa. R«|^rting raqulraMants will not b« 
changed, ao investors will continue to have access to all of the 
accounting and operating data that is available today. 

Finally, let ■■ deal with your question about the environaental 
iipact of independent power. IPP'a will be subject to exactly 
the saBa anisslon standards as other generating facilities. Enron 
Power's (Kiganaration plants have an enviable environsantal record 
because they rely on envlroiwentally-benign natural gaa aa a fuel. 
Hatural gas, which is in plentiful supply, produces less than one- 
half ot the stack eMiaeiona of coal. Uao, because IPP's will 
operate in a coqmtltlva, rather than a profit-regulated 
environaent, we will have an incentive to be as efficient as 
possible, including designing and operating our plants in auch a 
way that fuel use will be Blnlsizad. 

Let >e sunaarlze by saying that the EVnck reform legislation under 
consideration before this subconsittee is absolutely necessary to 
sustain the Independent power sector in the future, and independent 
power is critical to aeetlng this country's future energy needs. 
The proposed refom threatens no one: not the electric Industry, 
not regulatory bodies at federal or state level, and nost of all 
not tha rata payers of this country. I strongly urge you to pass 



D.,r„.db,G00glC 



tills vital lagislation. 



jdbyGoOglC 



•mxuy or tmtihomi 

or XRi k. cnux, jr., 

BiBCDTivK vici PEMiDnn or 

DBITBC DnaOT, IKC. 



17, till 



K*ya A. Curry, Jr. , la Exacutiv* Vice Preaidant of Daatac 
Enargy, Inc . , a laadlnq Indapandant povar producer baaad in 
Houalon, Texaa. Daatac ha* Interaata In tan oparatinq power 
projacts with total rated capacity of 960 magawatta (KH) . 7hoae 
projecta have received nuneroua awarda for efficiency and for 
proBoting environmental ly-aound energy generation. 

Destec, together with a broad coalition of conaumer groups, 
anvlronaental intereats and other Independent power producera, haa 
developed a Fair Conpetltion Amendment to Title XV of 5. 1220. The 
Amendment, which la attached to and diacuaaed in Kr. Curry'e 
testimony, correcta two fatal dafecta in Title XV that will prevent 
it from achieving Ita goal of a competitive wholeaale electricity 
market. Thoaa defecta are the lack of acceea to eaaentlal 
tranaplsaion facilities and the potential for abualve aelf-dealing 
between utilltlaa and unregulated utility affiliates. 

The Pair Competition Amendment authorlzea the Federal Energy 
Regulatory commiaaion (FERC) to grant requeata for tranamiaaion of 
wholesale electricity where, after notice and opportunity for 
hearing, FERC determlnee that the requested transnisaion will 
promote competition without diminishing the reliability of 
electricity service. The Amendment aleo withholds puhca exemption 
from any wholeaale power producer that entera Into self-dealing 
power aalea with an affiliated electric utility. Deatao urqea the 
Subcommittee to support this Amendment to Title XV, and further 
a ska Subcommittee members to communicate that support to the 
sponsors of S.12Z0, Senators Johnston and Hallop. 



D.,r„.db,G00glC 



r TastlBoay oC X*y* ft. Curry, JE. 
Dasteo iBergTf lae. 
**ptMb*r 11, i>it 
p«9« a 



the Nation's energy security and the Nation's anvironnant. Destac 
accordingly aupporta Title XV' a atatad objactive to "Coatar 
competition in the electric utility induatry." Aa reported by tha 
Comnittea on Energy and Natural Kaaources, housver, Title XV will 
not actiiave that critical objactive. Title XV correctly racognizea 
that tha burdenaona requlranenta of tbe Public Utility Holding 
company Act [PUHCA] ara an obatacla to achieving a conpetltiva 
wholeaala electricity market, and the Title removes ttios* barriera 
by exempting non-utility wholaaale power producsrs Iron PUHCA. 
Kouever, romoving PUHCA barriers alona uill not make wholesale 
competition possible. 

In order to achieve competition, wholesale power producers 
must be able to get thair product to market; yet Title XV does 
nothing to ensure fair access to utility-controlled tranemisaion 
facilities. Under current law, the electric utilities that have 
monopoly control over the Nation's electricity transmission lines 
can deny transaission acceaa to their competitors in the wholesale 
power market. Wholeaala power ganeratora ara routinely denied 
access. At present, thoss denied accaaa have no affective recourae 
becauss the Federal Energy Regulatory Comniaalon la effectively 
prohibited from ordering tranamiaaion access if the requested 
transmission would promote competition. 

Title XV also jeopardizes its own procompetltive objectives 
by exempting utility-affiliated power producara from PUHCA without 
prohibiting self-dealing between an exempt uholasale power producer 
and its affiliated utility, without a bar againat self-dealing. 
Title XV opens the door to one of the agregioua practices that 
PUHCA was enacted to stop: self-dealing transactions in which an 
unrsgulatsd utility affiliate overchargaa the affiliated retail 
utility and its ratepayers for the benefit of the unregulated 
holding company and its atockholders. The extreme difficulty of 
detecting and effectivaly regulating self-dealing abuses is well 
documented. If true arm's-lsngth competition ia to result IroM 
PUHCA reform. Title XV must prohibit self-dealing between exempt 
wholeaala generators and their affiliated utilltias. 

With the Fair Competition Amendaent, Title XV can be expected 
to lower consuner electricity rataa and incraaaa the divsraity and 
security of the Nation's electricity capacity. Increased 
competition and access to transmission will not compromise the 
reliability of electricity service. However, without the Fair 
Competition Amendment, the market discipline of true competition 
will not eaerge and operate to safeguard consumers in the absence 
of PUHCA'* protective requirements. 



D,g,;,zeclbyG00glC 



198 



TMTiHcarT or xixt i. cuwT, Js., 
BiicnTivB vici nuiDtn or 

DEITBC tMnSY, IMC. 
BBfors TIiB 



■•ptaabar it, istt 

I an Keys A. Curry, Jr., Exacutlv* Vic* Pr*ald*nt of Dastac 
Enargy, Inc. On bahalt of Oaatac, it ia sy plaaaure to taatify 
befora tha SubcoBBlttaa on Sacuritiaa concaming Titla XV of Tha 
National Enargy Sacurlty Act of 1991, S.1130. It ia ay purpoae 
today to raconnand to tha Subcomnittaa a aiapla and targatad Fair 
Conpatltion Anandnant to Title XV. nia Fair Coapatition Anandment 
la nacaaaary to anaure that rafor> of tha Public Utility Holding 
CoBpany Act of 1935 (PUHCA) will actually raault in a conpatitiva 
wholaaala powar Harkat that will no longar raquire the fully 
panoply of PUHCA invaator and conauner protect lona that the 
Sacuritiaa and Exchanga Conniaaion enforcaa and thia Subcommittee 
overaaes. Without the Fair Conpatition Amandnent, Title XV will 
sinply open tha door on aona of tha moat haraful conauner and 
invaator abuaaa that PUHCA waa enacted to atop. I have attached 
to thia testimony a copy of the Fair competition Amendment and a 
liat of Ita aupportera. 



D,g,;,zeclbyG00glC 



TkBtinony of Kays A. Curry, Jr. 
DBstac Energy, Inc. 
SapCanbar 17, 1991 
Paga 2 



ZI. B««TEe BMKRaT. IWC. 

First lat m* introduce Dastac and axplsln to you why Daatac 
is vitally intarasted in ensuring that Title XV achiavaa a 
compatitiva wholesale power narlcet. Destec Energy, Inc. is a 
leading independent power producer baaed in Houston, Texas. Destec 
develops, builds, owns and operates cogeneration facilities that 
produce and sell electrical and theraal energy, as well as 
facilities that manufacture synthetic fuel gas for use In energy 
production. Destec has interests in ten operating power projects 
with a total rated-capaclty of 960 Megawatts (HW) of electricity 
and over two million pounds per hour of steam. Oeatec also markets 
tor The Dow Chemical Company over S3S MW of coganarated 
electricity. 

Destec was formed by The Dow chemical Coepany, an Industrial 
consumer of energy with a history of more than 90 years generating 
Ite own power and steaa. Destec has established a prenier position 
In the industry building upon Dow's technical Xnow-how and 
operating experience. As a long-time leader in the development of 
Innovative energy technologies, Dow has acquired expertise In 
operating power general plants based on natural gas, coal and 
alternative energy sources. Dow has made this expertise available 
to Destec. To further strengthen the Destec position, Dow 
contributed to Destec its ownership position in Louisiana 



D,g,;,zeclbyG00glC 



TaBtinony of Koys A. Curry, 
Dastec Energy, Inc. 

Saptember 17, 1991 
Pag* 3 



Gaslcication Technology, Inc. , (LGTI) , ownar of the world's largest 
Integrated coal gasiCicatlon conbinad cycla power plant. 

in 19S9, to Btrangthan ita position in tha Independent power 
market, Dastec acquired PSE inc., a company whose roots extend from 
the earliest days of what has becona today's independent power 
industry. In 19G9, Dow bacane FSE's first customsr whan PSE began 
development of the lOO-HH Salt Grass facility tor Dow in Freaport, 
Texas, a facility which is still operating today. Hith expertise 
in combined cycle cogeneration and heat recovery systems and a 
reputation for excallancs in anginesring and project development, 
PSE has established a significant position in tha independent power 
industry. 

In 1989, th« Indspandsnt Powar Report recognized Dastac and 
its affiliatee as the nation'e largest independent power company. 
Destec hae received numerous awarda and commendations , including 
Tha Environmental Protection Award from Power Magaiine, The 
Industrial Energy Conssrvation and Environmental Protection Award, 
tha Innovative Technology Award from the Electric Power Research 
Institute, The Halter riowera Achievement Award from the Council 
on Alternate Fuels, and The Industrial Energy Technology Conference 
Award. 

Deatac is committed to being a premier independent energy 
company, dedicated to supplying retail utilities with 
competltively-pricad electricity from the projects that we develop. 



D,g,;,zeclbyG00glC 



TestiKony ot Keys A. Curry, Jr. 
Dcstec Enargy, Inc. 
Saptembar 17, 1991 



Consiatsnt with this camnltnant, wa awport the Tltl* XV's 900! of 
amending FUHCA to accoaBodBt* robust compatition in tha wholaaala 
electricity markat. However, aa I will explain, Dastec doaa not 
beliave that Title XV, aa reported, will acbiava that goal. 

III. OMTXCLM TO X COMPWITiyi WHOLMAI-i MMim 

The Energy Coanittee's recognition that PUHCA is an obstacle 
to compatltlve wholesale power is only one necessary step In 
fashioning a legislative vehicle for achieving a coppatitiva 
wholesale power narkat. Other necessary steps are identifying and 
removing other significant obstacles, and isolating which 
provisions of PUHCA require change, and which do not. 

Title XV, as reported, ia an incomplete vehicle for achieving 
competition in the wholesale power market. It fails to go beyond 
simple recognition that PUHCA is an obstacle. An equally great 
obstacle to wholesale coepetition is that would-be coMpatltors 
cannot compete unleaa they can gat tbelr product to markets. This 
requires access to the Nation's electricity transmission 
Infrastructure. That infrastructure was built by electric utility 
companies exercising the State-granted power Of eminent domain. 
The electric utility companies, acting pursuant to state 
franchises, exercise monopoly control over those tranamission 

llMS. 



D,g,;,zeclbyG00glC 



Tsatinany of K«ya A. Curry, Jr. 
Dsatac Energy, Inc. 
saptambar 17, 1991 
Paga 5 



Elactric utilltla* routinaly dany would-ba compatitora accaas 
to availatala capacity on thalr tranaDiaaion ayateaa. Moreover, the 
would-be conpatitorB have no legal or othar recouraa inaanuch aa 
a 197B aaandnent to the Fedaral Powar Act affectively bara the 
Federal Energy Regulatory Conniaaion (PERC) tron ordering the 
utilltlaa to provide non-di a criminatory acceaa to thatr 
tranSBlaaion Unas aven If accaaa would promote conpetition. 
Although the Federal Powar Act (FPA) granta FERC the authority to 
order utilities to provide transBission services if such an order 
would be in the public interest, subaection 211(c) (1] of the FPA 
specifically prohibits FERC fro* issuing these tranauisaion orders 
unlaaa such an order "would reasonably preserve existing 
competitive relationships."* Given that increased competition 
necessarily alters existing competitive relationships, FERC's 
current authority to order transmission access is illusory. 
Indeed, FERC has rejected legitimate requests far transmission 
access on the ground that "aubsaction 211 (c] (i) prohibits the 
iasuanca of irtieeling orders that have a aigniticant procompetitiva 
effect."' If PUHCA reform is to promote competition, and not 
merely effectuate misguided deregulation, then FERC must be given 
the authority to order procompetitive wholesale wheeling. That 
authority, of course, would remain subject to all of the other 
protectiona granted utilitiea under the Federal Power Act, such as 
ensuring reliability and fair campenaation. 



D,g,;,zeclbyG00glC 



Testimony of K«ya A. Curry, Jr. 
Dastac Enargy, Inc. 
Saptambar 17, 1991 
Paqa 6 



Titla XV la aiao an Incoaplata vahiel* in that it falls to 
ensura that utilltias arc not paraitted to abuaa thalr aonopoly 
powara. Trua indapandant powar producsra auch as Daatac — thoae 
not affillatad with franchlaa slactric utilltiaa — can safaly ba 
•xanpted fron PUHCA's invastor and conaun«r protactlon raquirsDants 
becausa thay do not hava any Konopoly povar to abusa. Likawisa, 
utility-aff iliatad powar producars aalling povar In conpatltiva 
transactions to utilltias othar than thalr parent utllitlas can 
saf«ly b* axanptad from PUHCA, provided that thara ara in placa 
appropriate protections against cross subsidies and collusive 
arrangements between the parent utility and the purchasing utility. 
Uowevar, no PUHCA exemption ahould b* available to a utility 
affiliate that sails power to Its parent. The aeminal premise of 
exempting certain wholesale producers fron PUHCA regulation is that 
thoae producers will be disciplinsd by competition. There Is no 
narket discipline to replace competition in self-dsallng 
tranaactions. Selt-dsaling tranaactiona ara not at arm's length 
and cannot Bm effectively regulated or policed. Pernitting salt- 
dealing will not serve the pro -competitive purposes of PUHCA 

IT. FAia CO»lTlTI{MI «|liniDMEllT TO TIM X7 

This Subcomnlttee has long bean concerned with enforcement of 
PUHCA's consumer and Investor protections. Destec submits that 



D.,r„.db,G00glC 



TsstlMony of K«ya A. Curry, Jr. 
D*at«c En»t9y, Inc. 

3*ptBBb«r 17, 1991 
Paga 7 



thia Subcomnitte* ahould inslat on a coaplata lagialativa progra> 
for achiavlng a conpatitlva aarkat bafora its agraaa to relax any 
of thos* conaunar and invastor protactlona. Ho lagislation to 
refora PUHCA can achlava ita proconitatltiva goal without both: (a) 
providing coapatitora an opportunity to obtain non-discrlainatory 
tranBBiaslon accaaa; and (b) barring aslf-daaling tranaactions 
batwaan alactric utilitias and their affiliatad vholaaala powar 
producer a ■ 

To aid thia Subcomnittaa and the Sanat* in davaloping a truly 
pro-compatitive PUHCA-refom package, Daatec has worked with a 
broad group of independent powar producers, consumer groups and 
environmental intareata to faahion the Pair conpetition Amendment 
to Title XV. Thia Anendaent would both raaady ferc's current lack 
of authority to order pro-competitiv* transmission access, and 
would close Titla XV' a open-door to abuaiva aalf-dealing 
transactions. 

The Fair Coapatition A-iandmant is both narrow and targeted, 
on transaiaaion accaaa, the Amendment eliainates the exietlng bar 
against FERC ordering tranaaiaaion accasa where to do so would 
alter existing competitive relationships. Tha underlying premise 
of PUHCA reform is that the non-competitive status quo should not 
be preserved. To promote coapatition, the Amendment would 
authorize PBRC to grant a request for tranamiaaion acceas where, 
after full notice and opportunity for hearing, FERC determines that 



D,g,;,zeclbyG00glC 



Tastlnony of K«ys A. Curry 
Daatec Energy, Inc. 
September 17, 1991 



the requested access wou 
bulk power market. ThE 
existing requirements tt 
compensation to the trans 
On self-dealing, the 
If a utility wishes tc 
affiliate, it is tree to 
of PtJHCA, the exempt util 
any retail utility in the 
affiliated utility. Th< 
fold. First, Icgislatio 
from eligibility for PL 
approach; we see no reas' 
operating in markets w' 
second alternative is t. 
to self-deal subject to .. 
they nay self -deal. t- 
targeted! No fUHCA-ex-.-. 
utility affiliates virtue . 
in the new wholesale power 

targeted approach is ful 
Energy's (DOE's) finding : 
technical annex on amendln:; 






.■Ailing ful pretest i; 
>:aJ •utsBpe wholesi: 
. :i.>na, Th« harx ; 
...o^Ktltlon Is vei 



D,g,;,zeclbyG00glC 



Taatioony of X*ya A. Curry, Jr. 
Dtstac Enargy, Inc. 
SaptaobBr 17, 1991 



In a broadly conpktitlva aarket, prospective 
sallara would faca many posalbla buyers; the 
loss of tha option of Balling to thonselvos 
would not reduce tha numbar of buyers 
appreciably. Similarly, the prospective 
buyer's options would be constrained little by 
not being able to buy from an [aCf illate) . 
Thus it appears that there would be little 
loss of economic efficiency In banning self- 
dealing, and it would eliminate a major source 
n about possible adverse impacts upon 



V. DEflTECfl POfllTIOM OM iaflnE» HKIHKD BT an^COmHTTBC 

Chairman Dodd's Invitation to testify Identified six issues 
of Subcommittee interest concerning the expected effects of Title 
XV. To the extent I can, I will briefly address those issues. I 
defer to the environmental interests represented on the panel to 
comnent on the environmental Impacts of Title XV; let ne just note 
that Destec's electricity generating plants have received numerous 
envlronnental awards and we will strive to Improve further our 
impressive environmental record in the future. 

A. impaet om Ceaimmmr pttlitY Ratea 

Irrespective of whether a new class of generators of wholesale 
power is exempted from the requirements of PUHCA, regulatory 
authority over all rates for interstate wholesale electricity will 
remain with the Federal Energy Regulatory Commission, acting under 
the Federal Power Act. In recent years, the F£RC has shown a 



D,g,;,zeclbyG00glC 



T««tli»ony of Kaya A. Curry, Jr. 
DBStsc Energy, Inc. 
septtmber 17, 1991 
Pags 10 



villlngness to authoriza narket-bassd rates where It has been 
demonstrated that a wholesale power sales agreenent was entered 
into at em's length in a competitive procuremant process. 
Historically, however, wholesale power rates have been cost-banad 
and not market-based. 

Reduced consumer utility rates could be expected from 
exempting wholesale generators it, among other things, each of the 
tallowing were to occur: 

• an increase in Uu mmbu a£ 

wholesale generators competing for 
each wholesale sale to en electric 
utility; 

• potential sellers compete in a 
market in which no competitor ia 
unfa Irlv advantacad gj 



• potential sellers of power are able 
to get their product to all 
potential buyers, with no 
discriminatory denial of aeceaa to 
essential transmission facilttlea. 

Only the first of theaa three preconditions to lower i 
rates will be satisfied by Title XV. PUHCA exemption will 
certainly produce more potential wholesale sellers, at least in 
the short-term. But Title XV provides no meaningful protection 
against utilities buying from their affiliated axenpt wholesale 
power producers in non-arm's length transactions. The harm of 
utility self-dealing on ratepayers and competition la well 



D,g,;,zeclbyG00glC 



Taatimony of Key* A. Curry, Jr. 

D«Btac Enargy, Inc. 
S«ptambar 17, 1991 
Pag* 11 



documented in the trade litaritura, and is aptly captured in the 
abaervatlon oC the Michigan Public Service ComilsBion concerning 
wholesale power transactions between the electric utility. 
Consumers Power Company, and its wholesale power afClliate, HCV: 
"(0)ne nust wonder whether Conaumeri has once again negotiated 
with Itaelf and lost."' Nor does Title XV do anything to remedy 
the status quo under which utilities can and do diecriminatorily 
deny access to monopoly controlled transmission facilities 
essential to effectuating power sales. 

without safeguards against unfair conpetition by utility 
affiliates and aeeurancas of fair transmission access, all that 
will result from PUHCA reform is more potential and eventually 
frustrated competitors, with no increase in competition or any 
appreciable lowering of utility rates. Indeed, unfair competition 
and exclusion from the transmission grid will drive many 
independent PUHCA-exempt generators out of business, further 
concentrating control of electricity generation in the hands of 
utllitlea and their affiliates. That concentration, in turn, 
could reduce competition and result In higher utility consumer 



D,g,;,zeclbyG00glC 



Tastinony of Keys A. Curry, Jr. 
Destcc Enargy, Inc. 

S*pt«IDbar 17, 1991 

Pag* 12 



B. Impact on Ad»quacY ot Natloa'm Xnargy Supply 
to Nsst tb» tacrvamlng Damand tor Ptxrar In 
thim Country 

Non-utillty vholaaalc gsnerator* tiava a history of using a 
mora divarsifiad nix of primary fuala to ganarate electricity than 
tha alactric utility industry. Qualifying facilltias (QF's) under 
tha Public Utility Regulatory Policiea Act ot 197B (PUHFA) and non- 
utility independent power producers generate or cogenarata povar 
from traditional fuels, such as coal, natural gas and fuel oil, as 
veil as a broad array of ranevabl* aourcea, such as solar and 
gaotheraal, and non-convantional Baterials, such aa waste-to- 
•nargy. As I noted in ay Introduction, Dastac ia a racognizad 
leader in producing ga> from coal. At its LCTI facility, located 
near Plaquenine, Louisiana, Destec convartB coal through a 
gasification process into a refined grade of synthetic fual gas 
for us* in advanced gas turbines. The facility haa tha capacity 
to convert approxivately 3,400 tons of vastern subbituninous coal 
into approxinately 30 billion BTUs par day of fu*l. Tha facility 
ganarata* the equivalent of 160 MHs. 

To tha extent that FUUCA reform not only fosters a new market 
sector of exanpt vholaeala generators, but also ensures fair 
competition and non-discriminatory transnlssion access, then it is 
reasonable to ex|^ct that tha Nation's electricity generating 
capacity stands to b« both expanded and aada mors secure through 
diversification of primary fuel sources. However, because Title 



D,g,;,zeclbyG00glC 



Teatlmony of K«ys A. Curry-, Jr. 
Deatac Bnarqy, Inc. 
Saptttmbar 17, 1991 



XV, as roportsd by thn ComBitte* on Energy and Natural Resources, 
does not protect against unfair conpetition Cron utility aCtiliatea 
and does not provide for non-diacrlninatory tranamlaslon accass, 
little significant inproveaent in the Hation's energy aupply to 
meet future denand la likely to result from enactment of Title XV. 



C. Impact on coapetitlve BivironMJit tor 

Geaaration ot Klactrlelty, Availability 
and RaliabllitY of ■iv»i—«-<lon Accama 

Since L97B, experience with non-utility power generation under 
PURPA has demonstrated that generation of wholesale power need not 
be the exclusive bailiwick of vertically integrated utilities. The 
potential for competitive power generation has also been enhancedi 
by the increasing insistence of state regulators that their local 
electric utilities cam>etitively procure their pdwar requirements. 

Continued growth of a coiqietitlve tAiolesale power industry, 
however, inevitably stops at PUHCA's door. Potential developers 
ot competitive non-OF plants, such as Destec, will not undertake 
those projects because to do so would, in moat Instances, subject 
them to the extensive and burdensome PUHCA requlremsnta concerning 
corporate structure, capitalization, issuance of securities, 
accounting and reporting. The only alternative to subjecting 
themsslves to these costly and burdensome reguirements is resort 
to convoluted financial and ownership structures — known as 'fuhca 



D,g,;,zeclbyG00glC 



Tastimony of Keys A. Curry, Jr. 
Dastsc Enargy, Inc. 
Sepunbez' 17, 1991 
Paqe 14 



prscialB" — in which ounarship and control of tha vholesala 
generating projacta ara divorcad. 

Examption of wholasala ^anarators from PUHCA undar Titla XV 
Is thus likaly to raault in an incraaaa in tha number of potantial 
developars actually entering the market and bringing new 
electricity generating plants on lina. Hors potential competitors, 
however, does not mean mora wholaaala power competition. Titla XV 
does not remedy tha persisting problem that non-utility generators 
are denied access to essential transmission facilities, without 
transmission access, any increase in the number of wholesale 
generators will not produce a proportionate increase in 
competition. 

You have also inquired into tha Impact that Title XV is 
•xpectsd to have on the reliability of transnisslon. The simple 
answer Is that, bscauae Title XV does nothing to remedy the absence 
of transmission access, it will have no impact on transmission 
reliability. Let ne suggest that the vore germane inquiry is 
whether leqislatlve action to facilitate increased transmission 
access by exempt wholesale generators will impact transmission 
reliability. In response to this inquiry, let ma first point to 
tha DOE'S recently-published National Energy Strategy technical 
annex entitled "Electricity Transnlsaion Access," which concludes 
that "given adequate time to adjust, and without a very large 
increase in the number of entitles aasking transmission access. 



D,g,;,zeclbyG00glC 



W7 



Tastlnony of Keys A. Curry, 

D««t«c Enargy, Inc. 
Scptanbar IT, 1991 



there seems to be no reason why increased transmission access 
should cause decreased reliability."* DOE based this conclusion 
on the analyaes performed by both the Office of Technology 
Aesesenent (Electric Power wheeling and Dealing. Kay 1989) and the 
Large Public Power Council.' 

Let Be briefly point to the experience of Oeatec In our home 
state of Texas. For aore than six years the Stats of Texas has 
required wholesale wheeling of QF power to utility buyers within 
the Electric Reliability Council of Texas (ERCOT) . Over 1,300 HHs 
of power is currently being wheeled from the Texas Gulf Coast 
region, where surplus cogensrated power exists, to Central and 
North Texas, where additional power is needed. Destec and The Dow 
Chemical Company account for approximately 600 HHs ol this power. 
Texas has experienced no diminution of system reliability as a 
result of this required wholesale wheeling. Hor has the 
Introduction of wholesale wheeling led to a trip down the much- 
ballyhooed "slippery slope" to retail wheeling and stranded 
Investments . 

D. Impact on flegniatioos Uiat Protect 

riiiisiiesi s and Stocfcboldsrs fnrai Otillty 
Abtisa and Coatllct ot Intarmst 

one ot the most common abuses of the pre-P(JHCA holding 

c^qtanies was self-dealing — transactions between retail utilities 

and the various affiliated eervics colonies within the same 



D,g,;,zeclbyG00glC 



Tcatlnony of Kays A. Curry, Jr. 
D«st«c Energy, Inc. 
Scptuiber 17, 1991 
Pacr* 1« 



holding coopany syatsn. Thaaa tranaactlons uar« structurad to 

ovarcharcra th« operating utilltiaa and ovarvalua thalr asaata so 

as to ovarchar^a ratapayars and siphon the raaultlng profits to 

the hoiaing company and its limited number at InveatorB. In his 

March 12, 1935, transmittal letter aanding PUHCA to the Congress, 

President Roosevelt eiiplained: 

Wa seek to establish the sound principle that 
the utility holding company so long as it is 
permitted to continue should not profit from 
dealings with subsidiaries and affiliates 
where there is no semblance of actual 
bargaining to get the bast value and the best 
price. If a management company is equipped to 
offer a genuinely aconooic managament sarvic* 
to the smaller operating utility companies it 
ought not to own stock in the companies it 
manages, and its fees ought to be reasonable. 

To the extent that affiliated conpanias within a holding company 

are permitted to transact business under fuhca, they are required 

to do so at the lesser of cost or fair market price. 

Utility-affiliated wholesale generatore are tha modern 

equivalent of the affiliate companies referred to in President 

Roosevelt's letter. Under Title XV, they would be exempted from 

PUHCA, and tha only protection provided against abusive self- 

dealing transactions between a utility and its affiliated PUHCA- 

exempt power producer is Title XV's directive that: 

A rate or charge for the sale of electric 
energy at wholesale In interstate commerce by 
an exempt wholesale generator shall not be 
considered just and reasonabla within the 
meaning of sections 205 and 206 of the Federal 



D,g,;,zeclbyG00glC 



T««tiaony oC K«ya A. Curry, Jr. 
: 17,' 1991 



Power Act ... if th« rat* or chart)* allows 
th* mxma^ wholaaala gvnarator to racaiva 
undu* advantage raaulting from tha fact that 
th* purdiascr of >U(A aloctric anargy la an 
affiliata or aaaocijta coapany of such exaapt 
irilolaaala gsnarator. 



In other wocda. If a utility ahowa favoritira to its atf iliat* and 
9«ts cau^t, and if tha accusar convinces FERC of tha utility's 
undue affiliate favoritlse, then FERC cannot approve the wholesale 
sale, these protections are too littla and too attenuated. 

In east instances, as State conmisaicns have found, affiliate 
favorltis* in ealf-deallng transactions is difficult and axpenslve 
to detect, althougb very costly to ratepayer and would-ba 
eoapetltera. An enlightening example is found In the California 
Public Otllities Comission's (CPUC's) protracted investigation of 
a self -dealing wholesale power agraaaent between Southern 
California Edison Co^>any and the Keam River Coqenaration Company, 
a partnership in which Edison possessed a 30 percent interest. Th* 
CPUC found numerous instances of conflict of interest and that, as 
a result of the self-dealing, California ratepayers war* 
overcharged $48 «illion during the three-year period covered by the 
CFUC investigation. me testimony of the CPUC's Department of 
Ratepayer Advocate (DRA) s(>*aks eloquently of the Inability of even 
well-staffed regulatory conmlssiona to police self-dealing! 



D,g,;,zeclbyG00glC 



Tflstiaany of Keys A. Curry, Jr. 
Damtac Enargy, Inc. 
Septenber IT, 1991 
Page IS 



and their corporate relations ... is 
nonumentally difficult, painful, controveraial 
and lltiqioua. Utility oanaganent ia often 
forced to defend aweetheart deala made for the 
benefit of affiliates or holding conpany 
headquarters, thus putting utility oanagemant 
In a vary unconfortabla position. The DRA is 
not equipped to monitor and investigata all 
passible abuses in utility transactions with 
attlliaCes and headquarters. 

In short, detection of afliliate favoritism in self -dealing 

transactions will ba the axception to the rule. Title XV will thus 

offer no protection. 

VI. coMCLnaiQii 

In closing, let na anphasiza that Destec supports pro- 
competitive reform of PUHC&. Hith the Amendment that I have 
discussed. Title XV could become a vehicle for achieving a 
competitive wholesale power industry. Destec therefore urges the 
Subcommittee to support this Amendment and urge its adoption to 
Chairman Johnston, the HanlMra of the Committee on Energy and 
Natural Resources and your fellow senators. 

On behalf of Destec, and on behalf of the independent power 
producers, consumer groupa and environmentel interests that have 
worked with Destec on the Fair Competition AnandMsnt, I thank you 
Hr. Chairman and Subconnittea members for this opportunity to 
testify. 



D,g,;,zeclbyG00glC 



16 0.3. C. S 824j{C)(lt. 

Soi j< ; heast ern Power Admin, v. Kentucky Otlla. Co.. op. 
Ho. laa-A, 26 FLBC \ £1,137 at 61,323 (19B4) . FERC haa 
also deteminod that -aubsoction 211lcJ(l) prohlbita 
the Commiaalon froB using Ita new whaaling authority to 
remedy relationstiipa that ara unlavCul under "the 
antitruat lava . . . ." SoutheaptsF" . Po"eF A4mi P i . v,l 
Keritucjty H . tila. Co. . Op. No. 198, 25 FERC % 61,204 at 
61,538 (1983), reh'q denied in pertinent part. Op. Ho. 
198-A, 2S FERC 1 61,127 (1984). 

V. 3. Dapt. of Energy, national Enarov Strataav 
Annlyala of Optiona to toend the Public Utility Holdlno 
C qffpany tct of 193S . Tacluiical Annex 1, at 33 (1st ad. 

1991/1992). 

E,q, . Bogorad, Selt-Deal inq : The Case Aoainst Removing 
PUHCA Reatrictions on Utility-Affiliated Power 
Producers . Jan. /Feb. 1991 Elec. J. 45; R.E. Russell, 

Aaaoclation Section of Natural Reaourcea, Energy, and 
Environmental Low (Match a, 1991) . For the convenience 
of the Subcommittee both tha Bogorad article and the 
ramarks or Commission Ruagell, Michigan Pub. Serv. 
Comm'n, ara attached. 

, Order of June 22, 1989, at 



18 dated. 1991/1992). 



S. 1220, losnd Cong., let Scsa., S 1510S. 

Report on the Reasonableness of Southern California 
Edison Non-standard Power Purchase contracta with 
Qualifying Facilities, prepared by the Staffa of the 
Energy ftesources Branch ind the Bnargy Auditing Branch 
of the DRA, aulaitted In CPUC Application Ho. S8-03- 
016, at IV-30 (Dec. 198S] . 



D,g,;,zeclbyG00glC 



mZR COKPITITZOM »ii»|mifWH T TO 

TZTLl XT or S. 1310, 

TKB mXIOHU BVEKOy aTSATHY kCff OT 1«*1 

1. TRUmUMIOH kCCKH TO PROXOTl COMSWSinaM 
Add the folloving aectlon attar Section 15108: 

Sec. 15109 TEKC &DTBOKITT TO nOKOTB COKPRITIOV THBOUOH 



<a) Subaaction 211(c) of tha Fedaral Fowar Act (IG U.S.C. 
824j(c}} iw avandad by strlKlng paragraph (1) and 
redesignating paragrapha (2), (3), and (4} as i^ragraphs 
(1), (2) and (3) respectively. 

(b) Subaaction 311(a) of the Federal Power Act <1G U.S.C. 
B24 j [a] ) is aaendad by inserting after subparagraph (3) (A) 
the following '(B) increase the potential for competition In 
wholesale electricity aarketa," and redesignating 
subparagraphs (B) and (C) as subparagraphs (C) and (D) 
respectively, Subsactlon 211(a) is further aaended by 
striking "geothenaal power producer (including a producer 
which is not an electric utility]," in the first sentence 
and substituting "other person generating electric energy 
for aala for resale," and by striKlng "aay" in the second 
sentence and svibstltuting "shall". 



Section 15103 is amended by changing subsection "(a)" to "(1)" 
and subsection "(b)" to "(2)", and by inserting into the first 
sentence of tha section, between the phrase "wholesale generator" 
and the word "If," the following: 

"(a) If any part of that electric energy is, at any tiaa, 
sold to any person that is, or is an affiliate or associate 
coapany of, a public-utility coapany or holding company that 
is an affiliate or associate coapany of such exempt 
wholesale generator; or (b)" 



D,g,;,zeclbyG00glC 



IWcrican Iron l Staal Instltuta 

Aacrican Public Pcjvar AaBociatlon 

XBarican Pap«r Inatitut* 

XBerlcan Hind Energy Aaaociation 

Qiaalcal Kanutacturars of Aasrlca 

Conauaar raderatlon of Aaarloa 

Council of Induatrlal Bollar Ownarc <CIBO) 

Elactricity ConauBara Raaourca Council (BLCOK) 

Bnvlroimantal Action 

Ind^andant BMrgy Producer* (IKP) 

Michigan Municipal Cooparativaa Group 

Michigan Municipal Electric Aaaoaiation 

onion of Cmtcamad Sciantiata 



. — ^ ftfK-^ — titl— 



bwrgy Michigan, 

Florida Hnticipal Powar Agancy 

GatMns Staal. Corporation 

Kanwtacfc Ccrporatioa 
Kordie Povar, Inc. 
g.S. Miadpowar, Inc. 
■olvariaa Poaw Snvplr 



D,g,;,zeclbyG00glC 



Self-Dealing: The Case 
Against Removing PUHCA 
Restrictions on 
Utility-Affiliated Power 
Producers 

; Utilities have ^toum htm they can use i^ialed 

; power suj^iers to create shareholder gains and 

: nOepayer losses. Their opportunities shouid be 

\ restricted, not expanded. 



mHmlnrrlirtfititnmlDaina ' ■» ^u"^"™^ 



I Acl(PUHCA)d193Snb^ 




Ai -nllUrs' o'dntrtc Mid |B 




D,g,;,zeclbyG00glC 




Thejohtstonbin •»» i«iwiio<*»«guuiory 

would fiK^ plant am- ^:^!Z^Z^7^ 

struction bifiiffSiates AtPuitncaRMit. Cm^ 

ofthesameutaities ^^^^;^,:^^^^^,ZZ. 

Outbroug^usMartie njimriiimvioteiniuMi 

HOl.CTBtulCulf. -fliiri<ii«.«ii*r.«™w™. 

Shordmn. SaamK* . ^SZ^lJIJ!!«.^ 

etc., m VK UpflUTfnt ta/l^mMmitt 

ass ump t i on (tef (hey ^1^ ™" 

know best how to '^" 




D,g,;,zeclbyG00glC 



A-PUHCA 

The Public UdSty tUdii^ 
Comfuny Afi- which tvuAint 

fuit line otf dc^cruf tguns t 



T^UHCA ivquira pntcquM^ 

ind Euhing(Coauna»it(SEO 
o( uiv uDLty AcqudUuti by i rvg^ 

o(hn ftnoa wMn ih> n^uim 
B. or B • mull of ttw icquaibiin 



m of an mtvgiiifd pubbc uoi- 



coiuumcn' Nrvnthtlm. tvtn 
in «Krmpt holding ampuw 
mint tompJv mlh PUHCA'i pr»- 

WhiJf vmr PUHCA utrguirdi 



pnwl by iIhSEC." U tlwy «i 



B.SuHB>dF*difillUtt 
Itigiilatkin 

Om the PUHCA bamH i> HI 
JlorivoHkilundtfllii 



h; 



dicpuiThuf oidHlf the 

ocif itnUMd utaUies by 
laFEKC-iunidinonil 
trsimngement'^ Even 




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I linii[TTt«rrti>tiiiii1iagrni1 in 

in(ca>dii«ioihtpn'iliMi(y ' pnidi KldiaaMl cMhflw n 

DfihtV < MpCoMuBMnRwBavad 

Tn du> w(y, pfRTAponiiiuiih- buikiupKy uid biiMuIlv laM- 





lion in dH [KillK Ir IMS. Itii 
ilKSBVKtOm 



PURPA permits 
utilities to establish 
"independent power" 
affUiates under a 
kAting co mp a ny 
structure, vMe 
avoidit^ regulation as 
a holding company. 



MySlibOtaolboolitf 



VkMunMCV). MCVmmnid 
6imlKaitr.BaB<atitawBrt*f 



•n Itomr « ■ PURMqiaKlrtns 

heOUrP 

V V 9M of MCVlini^ Mb- 




u M MW fm OttMCV pcor 



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SIOiXD UputidpH* In th* 




unwUltaig n pnvidt the hi 



quiRd adi pn^ k pajF ■ fM gf 




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tl> MF9C liaiHl: "TTlhi nra- 
^MCVMda*ii iii»)*»l»- famiil *M, !■*■ Ja n LM i ylf »afc— laoi^Ci— wiu ^ 0.6 

rwmmirininliiililiiiiini ^wwMiJtWp— lMwfi» itlBainiaai^lDtv^tllKR- 




Mo»K»>lyA>MkM«» jtad-ntadbrtt-MPSCto ^ *« *. l»«nl *. -tt)- 



™"™"''™' feriMkiftcMCVpi^BMB i Wm 

•""^""t— 199ft*-. »*-l™.«»- 

^™^ tondltaMdlHiliHBBMCV < icmtel 

, MiBMCVnddthHIoflJba- 
.. .^ ^-. lencfmnteaUeMCViBM" 

llofdiMoidB OB*«Mmid«,*.i«>d.rf 



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Anolhci nunple of I 
pDHdby 



AconUnt lo ttwCFlJC, Edm 

jnl KSCC BW no corflid d in- 
nxM. AUheughSauthenSitin 



<jlifoniiiEdliDnCaniF*ny'iCDn- 
met with w iMliMd QF, s dc 

Knbcd by thi OlitoniB PuHc 

UtibMt CCRUUBBEB OVCl 

On luuuy ]«. IWl EdBOn oi- 



IvKanRivfr 
nor Compuny (KKCO, 
( %/SD pirtnmhip bitwHn 
Getty Eno^Compwiy Inow 
pin of TexKO nwludng, Inc) 
and Southern 5iem Ennn^Coin- 
piny (Southern Siem tr SSEO 

1 whoUy-owned fubudiuy of Ed- 




TlvKRCCctnln 

,Mofine.te«ivein«WI(«k» 
by do CFUCi Dq«B«a of 
RMtpwa AdvocMM (EIRM.* 
ThtCEitCi mm did*n» 






KRCChMippiw novcnx; 




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i 



atlafc^iai.l^ 





II III 1 h-qftTW 




















■STbeiAicirwinaMnd 




«>>«««Mpiitoa.<M- 



■nilf^iniCCl 

■■* ^M» *rtilf^ ■lui 111 

•rvtcnx: igwrf M te H> 

"liM. „ i,>ti,|.,... „^ . , . 
mMB r( »IiH»>»^bI», 



|Hjlrc^iMndn(a|afMlM *«AnlMMdMaiai 



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„__ SCEl»a» „|w*-rtp^«lBi«itJi-« toBiiBie«NtHiTirtrt 

WMdUwCPlXTfiuwlirton AlM<ltfi mUn| i u«w ™nM- ■» lti«ACCi*twi»*a«f 




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According u lltt ACC in De- 
cnnbv 1964. TIPippK^'Til 0* 
!fnn-o(f of AUmilo with *e tgiw- 



■f State Ripilfr (lMlii«wHhifl 



nddiMTEP I 



(.ndwrdun 
icHJI-dnlmg 



i. TEP-i chili (iKutiitoSinr 
Aid • nunbcr of dw TEP offiaalt 
initilt'ad with thi AUmin co«- 
imt M TEP Mid jointd AUmin 
u officen a ■ iBult of die i|9in- 
o«.'=' 

ACCc«ndud<d:1fdi* 

nukof 



iT^eACC 



1. Sjikt to HalviHn. Tlw Alt- 



teaumtuwnd ttiitiigultUjiy 




ACCslUVUi 
TlirACCan^ 



Vie examples 
discussed here demon- 
strate the need for 
maeasinghf vigilant 
regulation of utilities 
en^igid in sdf-dtaiing 
with i03iates, not 
reduced regulation. 



TEF Iw dMilBvd an ACCi *e- 



ihaiwaildbtiU 
fDhnmnba.'" Wtiiltdadra- 
dsvf could b( 




btptnavNd. WhlidKfalB- 



D,g,;,zeclbyG00glC 





» for puMc ikI privMt idSi- 



The case studia above t^^m 

must,,!, that utaiti^ Ji^„,^,^,^ 

are not setting up sub- tkuisiyifiiBipRMctenin 

sidiaries to sell power 

to their customers at a tkmh^^ 

huxr cost. That being *«i&diti«indBDortiMiioii 

so. the supposed i 'Z^.^Z^^^!^^'^ 

ben^(^dSuting \ jMoittuttMitpmitni} gmi 

PUHCAprotections '., ^^T^^^^l!!^,^^ 

and expanding OppOr- ■ Vt^ -mr r»ilM T]<niinin» 

tunitiesforsdf-dealing : 
shndd be questioned. - 



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TldwPiiilicUiflliyl 



a^UwrkaUuitcniipiiMtiiniii | (Mm irC.FR-t^MUi. WFM IU| 



. fVHUt*l>KII.l)[;«£. 



Lnwuiiui.iiuic.ini 



MMiy ihmOii dliiTiMnlln 



I. piki CHiar ij#H k rows ct 



KlltlJU.ntti 



jiFEH;i*iJiiii9aat^ 



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■■iiidOp«KalDKlT. 



•. OpMHMldOldHSl*^ It 







n.(M>i(iiHiLi« 



a.OMKgi)H.)t.i«w«i 



a..iAfp.i.*in<M«r». 



; MaNtlMMiKrVCIiiKB. 



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ilftliofltit Znrrp Rboukb BmkI 






buiir III IM ACC TUcun £|k. ^kw 









ipr &.»!, i,r,K-_ l~ .tl FEK 



CamtHiiit Ca, unK 111 . 
lianL-CiHwiHiFinnr Ca, 



ioF DiaucamViiu 



■.tat.jofMn.M6-iU<,fi 



D,g,;,zeclbyG00glC 



AMEUCAN lAK AfSOCUTION 

»CnON OF NATVIAL RESOUBCES, ENEXCV, 

AND ENVHONMINIAL LAW 

Wta NNdt rtnCAT 



In the conmiveiiy luironndiiii the puita tonwd coapethivB whoieuk eleclhc 
mirkcis. many voicei an heard U ny thai the Public Uiiliqr HoUin| Company Aa of 1V3] 
(HoUini Compaiqp Act or PUHCA) ii aidiak, no loa|Bi xiving the pUbHc interen and 
actually ioipedini pcofrai lomrd the "b an c fl t i nf enhanced coapetjtion.' One heart thai 
the abmci ol the inOi are no iMifei prevalent and the flower of true competition ii jui 
waitiif to unfirid in the electric 'wiataj (it only PUHU iKmU |el out of Itc way). 

We, in MkUpa, have bad • miqoc oppot tuni g » ennine wbM the tuiurc mi^ 
be like without the pr oi e ctl oBi ifltanM by the Holdini Comptny An. Tltc Public Utihty 
Regutoiory PoUde* Ad of 1911 (PURPA) opened Hm iefultio«y iihimrt door when it 

Holdini Company AcL RerMoM to the Ad, lucfaMthotepropoe ed by Senawtl. Bennett 
JohnitDn. would remove the door. In the next few minulci I would like to uk the example 
d CMS Eneriy Corporaticm to iDunnte the eonpkxitiei and chaUengei that itate iniliiy 
refulaton &ce when cnmpiian to the Holdfai| Cooipeay Act are allowed, t win leave it 
to you to emapolate bom out e apei te a ce^ 



OH and pi (xphxaikM end pradnction, ^dependent power fenentJM and ut 



D,g,;,zeclbyG00glC 



affaiiM. Id the caM of CMS EiKigy, the ume leveii or cighi niiiiei *ppc*r lime ifier time 



The •dvent of eofeaentioa ind compethive M(^ Kquithlon pMt^ magniDei dM 
potentid br eKcutve Inttaqittem dnffBi.* Tin cue rtcocd to UiSTI, t 

Cogenentiaa Venture'* •pplleatlnfotqiiMwaldtbepowctpurchaKii '' 

iiKlfudCoMainenPower.deariyravaleduabeeiKeafuni'k " 
the two iiIBatct 10 the dctriimni of both die rateptyen lod (be k 
who hoped to ten power to the iniUtjp. B)i unne coin ' ' 
mintgert tppewed to bugun much harder o^ieo they w 
than when ibey wctc repreteniiiit ibe utility in negodaiioni. 

The terna of the conaact between Contumen Power and MCV are loo complei to 
go into here. SutBce it to lay that the contract includei * number of unutual provinoni thii 
protect the MCV, rather Ihin Comuroen Power, in ihe event of any ditallowancei by the 
Michifan Commluton. Tlie contract alH> providei that if MCV ever lotei iu itatui ai a 
quali^g facility. Ihe MCV ~ not the utility - hai Ihe option of cither tcnninaling Ihe 
conirad or continuin| to deUvcr capacity under a tariff re|ulated by the FERC. 

After leviewing the Utiigr of telf-dealing abuiei that diataeteiized the record in the 
U-8S7I proceeding I. akuif with my feDow Cooumuionan, wai moved to malce the often 
quDied remark thai '. . . one mini wonder whether Comumen hat once again negotiaicd 
wiih iuelt and loti." (U-SB71 et al, OpinioD and Order dated June 22, 1989). 

Abuiei were Bbo found on the pi lidc. In U-M6T-R, Connirocn Power') 1988 Cai 
Coit Rccoveiy (GCR) recondliation, tubsidiei by Contumert Power of the MCV were bund 
by Ihe Michigan Commisiion. Ai an tgcni for the MCV, Comumen Power negotiated 
package deal coniracu ihai inequitably allocated to Ihe MCV certain benefiu iruing bom 
the combined leverage of negotiating contract! for both companlei wiih Ihe ume producen. 
A diuUowaitce of unreaionable and imprudent gai com of SIS million wai ordered. 

In leximony in U-9433, Contumen Power't 1990 OCR Plan, Commiiiion naff 
analyied the queitton of improper tubiMliaiion, and identified tevcral aipecu of whii it 
calli un&ir bargaining on the part of Comumen Power. TlueeiigniGcuiimptopneiietarc 
aHegedbynaffi 1) the timi^ofputdwteob)igaiiom,e.g,CaBtumenPoiw«»requirtd 
to uke the gam uon a> it wai avaHaUe, wberea* the MCV ol under no tuch obliptloiw 
2) a price advantage ftir MCV over ConniBeit Power, e.g, wei|hted avenge 1*1 acquitilioa 
com were uKd in Comumen Powen' coomett tad Gnd etcalaton or coal-lied pticet in 
Ihe MCVi, and 3) the riilc of lignificant diai^et in pt markeu, ef, the liik of a change 
boffl a boyen' market to a tcDen' market h eaduiively laid on ihc back* of ihc CoDnimen 
Power CQl cutiomer throu^ price reop e ner and contract termination clauiei, while the 
" ig MCV comracu do DM cotnaai an 



D,g,;,zeclbyG00glC 



i]r and expciuc of liiifitKin reliied to CMS Enerur'i iciiviiiM 
uapncedentcd. It li coounonly runvked that one ot CMS Eaergjr'i itnufiet it 
to u; and inidcT the Michipa CoctuniMioa iadbcim bf aveTloadiii|our MOandkpl 
(nonrca. Oiha Mkhlgu utiUtki have beta hcari to """p'*'* that tbcy do not p timely 
•ncmiaci to thdt icmei becuM naff k Had ^ on the nuhliad* of CMS-tdatcd ohm. 
Who* «« maka cveiy wBon H aam Om al K|ulal«d Wflitki nccivt w^iiioui 
traaOBem tf ihdr ap pB cabo w , k b DM ihai a dtaftopofiiowM amomi tt tetoMCM are 
ipeni OP cflbm to ragulaia Cetm um t n ttrntt C t rn p ut t- Thk tituatioa can only |tt wane 
if KvlilaM to the HMb% Caofuj An nrnnfafr all of our ckork utUJila lo uduUk 
Conmmni PonEt Company. 

STA-n-MENT 1: 

"Holding companji promoien did not conflne their uquiiiiiou 
of utility propenin to any one (Mgraphic ana e* regioK- . .' 

CMS Eneriy bat actively publictted hi cffoni to acquire aa toicrcn in utiKiy plann 
in other tiaio, tucb ti Rancho Seco in CaUTornia and Shorehan In New York. CMS ii 
reportedly wSm punuing utility opponunitiei intemaiianally. Wth tetpcct to iti acimiiei 
withu) Midi|an, OtS Enerpr and/or iti uteidiariei have become affiliated wWi niany 
nattooal and luemational cotporatiom inclaJn| Dow Qtemical. Panhandle Eaiiem 
Cocpocatioti, A*ea Brown Bowtil Fluot Corpocaikm, Combuition Enfneerii^ and Becklcl 
Corporatioa amang oihcn. 

STATgMgNTl. 

*. . .wlib opcraiint properxiM on both coatts and the Gulf of 
Medco, iht Mattered tcrvicc tcrriuric* of thcM car^ hoMiiq 
compaakt often bore no economic or timciioaa) lelatiMKhip to 
eadi otbei or to other bwinwiei in the boldinf company 



■ tli|bily diHeieni 

twin to atat occurred [n the 1931k. Mom of the legulauxy conOici I have leen derivei from 
fnnctioaaiYKtucd acilvitiet. While tbcMaciiviiici may tend to appear tomewhaikumlcy 
hi that the nilliy b not venturiai forth into areai about which it knowi nothing, there a a 
■ipdlkantlr greater riik of divenion of maiugement talent and attention, ai weD ai olhei 
laoDicci, ID the aon-rcgulatcd activiqi. 

Oiqwftunitiei for butlnett iramactioni which favor holding company ihaiehoMcrt at 
the cxpcmc of utility ratepayen abound when DtBceii of the ulihly alio head up non-utility 



D.,r„.db,G00glC 



affilitiei. latbccueofCMSEaefif, Iheuncicvenoteightnunaippeirtimeaheriinie 
M otSccn ind dincton of numerou* ttdSt-ted eptiUei. 

Tie MlvcTit of cofonentioa ud campetMve tupfHj icqntdlioa grtnly mignifin the 
potemiil tor ocealve Imnqmem dmtei.' Tbt caie iceord tai U-S871, Midltail 
C^enentjan Venture'* (ppHcatloa for qtpraval of the power pucehuc ipecmcmbetwcea 
itielf Md CoMuiaen Pom, dearif levetled an ebMaec of umi' iBngtli bupniiii between 
Ihe two imaici la the detrimeM of both Ote iaicpt]pen end Ihc noD-ifCllaied cogenerMon 
oho hoped 10 teO power to the utOi^. Bj tome coinddoce, tndividinl ofEcen end 
[miu|en ippeared to Iwrgiin much httder when they wen "weaiing theit aCBUtie has' 
than when they weie reprctcatini the uiiU^ in negoiiaiioni. 

Tbt lerau of the coniract between Comumen Power and MCV are too complex 10 
go inio bctt. SufDce it to la; that ihe comnct include* a number of unmual provuioni that 
proieci Ihe MCV, rather than Comumen Power, in the even) of any diuUDwancet by Ihe 
Michigan Commiuwn. The coniract atao providei that if MCV ever k»ei in tuim ai a 
quailing faciliiy, Ihe MCV - not the utiUly - has the oplion of eilher lerminaiing [he 
coniraci or conlinuing 10 deliver capacity under a lariS regulated by Ibe FERC 

AfierreviewingihcUtinyoficlt'4)cal[n|abuK*ihat chaiactenied the record in the 
U-BS71 proceeding I, along with my fellow Commiuionen, wai moved 10 make the often 
quoted remart that '. . . one mun wonder whether Contumcn hat once again negotiated 
wiih iuelf and lott.' (U-8871 et al. Opinion and Order dated Ium 22, 1989}. 

Abuiei were abo found on the gat tide. In U-6867-R, Cormimeit Power'* 1988 Cai 
Coil Recovery (GCR) recondliaiion, lubndici by Comumen Power of itie MCV were found 
by Ihe Michigan Commission. A* an ageni for ihe MCV. Connunen Power negonaicd 
package deal conlracti Ihal inequitably aDocated 10 the MCV certain benefltl arising from 
the combined leverage of negotiating cootiacts for bolfa companiei with Ihe same producers. 
A disallowance of unreasonable and imprudent gas costs of SZJ million was ordered. 

In todmony hi U-9413, Contumen Power'* 1990 OCR Plan, Commiition naff 
analyzed Ibe question at improper subtidizaiion, and identified *evcr*l a*pects of what ii 
calls unfair bargaining on the part of Coiwunci* Power. Three sipiificani impropnetie* are 
alleged by siaffi 1) the liata|af putdwieoblipiioot, e^CoBtoDeis Powerwas requited 
to take the pa at toon as ii was available, whereas the MCV was under no such obli^tioo, 
2) a price advantage for MCV ovct Coosuinen Power, e.f, weighted average gat acquiHinn 
COSH were used in Consumer* Power*' cooiracls and fixed exalaton or roal-iied prices in 
the MCV% and 3) the risk of ilgnifieam change* in gas markets, e.g., ihe rnk of a chaiqe 
from a biqien' marker u B *eDer*' roaitei 1* eachnively laid on the becks of the Couumen 
Power cot cu*totnci ihiougb price rcopener and a 
" ig MCV contiactt do DM cootain 



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dlDinti}, lad nmj aim pcwikM )wm b«M bnnigbl to ll|bt (Sm inida by Oidjr 
Bofnad, -SdT Xitilaf The Cub Afilw Ronoviiv FUHCA ttcnriaioa on Utility 
— .... . . . -.|,i99ij 



Tham tinli*^ compaoki qpicill]r woe Ushljp Irv cn yd ind 
dwneiaiad by ^nupoD ^rer o( ptttUlji-awiied inbddiKriei. 
The buft of the ctpttalintlca oL the lwUtnt<onipatq> qmm 
I uid p whr n J nock, 
ol cf mtram utiili)' qmuii could 
I *q«ii)> Invanncm bjr M ~ 



UTitb mpect 10 the nhM o( udUqr prapcciiei, ■ tnod leemi to bi dcvclopini which 
would illow 1 non-nittlwed ■lllUat* to bcnrib (ram the mukei vihic of • IbntMt uiiU^ 
met. whkh mi tnndeiTcd to the alllUilt It book vttaK. 

CMS EnerBr wu bnned in I9ST iriih no uku othci than thoM tbti bdoafcd <o 
Coiuumen PtMfcr. Smcc thai ttmcipcoccM of dectpitaUiin|Coniunicn Power to iramfer 
aiteu to CMS Ei>eiD> and •HSUta Mcmi to be iiadei«*T. Two exam^ of ihit iKtude 
the weU-pnMidMd lifidaDd CogeMnlion VemuR, whidi ii now a MK MW gu 
coienentor wiib a comncl to hU pawn to Coatunen Power, and PaUudet Cencntuf 
Company (PCC), wWdt ii cumttOf bi the proccn of tijit^ to become the natioa'i Gni 
niKku independent poMTpradneet- or more cofTectlji-afBliatcdpoweipnNlucei. The 
PCC ii t cotporatioa Ibnwd by Connnnoi Power, Bechtel and Wetdi^houu, to iianifer 
(he PallMdet Niidear Plant from Comumcn Power lo POC and then leD power baA 10 the 
utiliijr under a leveni een y ear coniracL Pnccediogi lebled to tUi proica m proently 
underway before the FERC and the Mldiipii Commhrioft. AppBc ati nw for regiriaioiT 
^)provalt have aha been (Oed ai the SEC and the Nvdnr R^ntatofy Conunaiiaa. 

In addhkai to uatHferriaf iMca eway &oa the utflhy, we are wchv lueh thitifi ai 
deciiknu to retire Don'maadatoiy pce f e n ed itock and theielqi further reduce equity ratiot 
even when the econnnici dinaie olbciwlK (U-9S94, U-9S93}. Such deddom could have 
the effect of provldlDf ireatsr coatnil to ihareholden of the bokUng coapany while 
increaimi k>n|-icnn ratepayer cotu and cqioiure of the utility. 



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Anome} Ccdci*) k ■iiuinf thai Coonmcn Pomr doet an need to tame idditioiial 
lecuiitk* became ll would have nilBdan fundi if onlf fe woutd quil ittMUnmg tncB to 
Bon^tfideted ■tBUaiei, achutfliig Uqrid tnfliqp ■Men tbc leu inadwtiUt imiruitienti from 
CMS Enerijptiid voluatuliji dtatailihta| In mh Do* (or the benefit of fti parent. 

Is *<ew of the Und of actMdei mcVie teen in NOcUim, I find h enrenKly difllculi 
to undenaad hoi* Senitar Jotomoa ai 
candelQ' the pumdt of cow p ei M »e r 
•ppueadf obdvioni to the ["""n't*! to mcmnnue iiiaci. aca-aeaoni ana giner Mm- 

the new competitive rcflme bjr p iwMIn i unwurwned mbridiei and other advania|e> to a 
few 'conqtetiton* to the dettinwM o( all othcn. 

Soow of yoti out there ai« ondoi)bte<tl)F ihinldni, Hey, he'i jun made our argument 
for m: He'i demoottrated that tiate* on cllectivel]> uncwcr alBliBie abuic* and correct tec^ 
them.' To you, [ have tUt to t^ Itel)iin|iolelyupon*(ttr-the-bct rate leviewi to protect j 

cDniumcn bom utility holding company abuse* it like trying lo eat a meal with only one [ f^f 
chopitick and both handi tied behind your back. You can be looiewhai effective holding / ^^ 
the chopitick with your feet and biinginf food up to yout niauih, but there ate many foodi / '' 
thai you won't be able to manige cDoqiletely and mott that you couMi't even 
State utility comninioM can, and win, become virnxsoi with our nn^ chopnicki. 
However, wc can oa^ iddren whit we on uncover and condnnvcly doouneni. 

Tbe key to mitigating utOiiy abuiet it to ptevem them from happening in the tint 
pUcc. The pre-acqultiiion reviewi that aie provitled for in the HoMing Company An are 
intended to prevent the creation of corpcrtie itruetares and traanetiinu that are Inheicnily 
nnceptible to abutivc behaviot. The more comidei the corporate lelatianihlpt, the more 
difGcuIt it becoma to detect abuiive a 



ftiOa. I 



once agahi let for u' 

If Senator Johnttoo't goal Et lo have full and Ua ompetition In the generation sector, 
IcanMipponihatfoaL I recogoiie that government onnot legislate mocaltiy or corporate 
^litotophy. However, ff we are going to reahape rtfidatkNi to eneonnge ctMnpctitloa, let's 
eneoutigetalre on ipe Uii onaiidnot letOBitelvetnp tbrarepeatcfBteabutet ofthe I93(la. 
Ute Co^teti can and should reduce, not InKreaie. the oppommiiie* lor bnpr^wr actioiii 



In the background paper he i^avided to accompany Title XV of hit National Energy 
Secort? Acio(1991, Senator Johnston dailDed tome of the tbinkiiv that went into hit bin. 
I cofflinead the Senator fOr his wiDinpwt* to share Us ideat, but I End it necetsaiy to 
chaDenge some of Ms most basic anumptkns. 



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b hi! tagenat to expand the luUvtnc of ihotc who an enter the compciiilve 
fCMniJon mufcet vkboM bceomini > utility hoUiiig compuy, ibe Senator tcemt cuenTiaOy 
' "* El (hat «aU idn be retained b)> the inveitor-oiimcd utili^ 




TV buic queiiiaB o( PUHCA reviiioo (in inr mind) revoh>ei around the definition 
of a uiiUty'i obligation u> lervc Ii it the utiliiy'i oUiption to mtamae coipon 
•nd - oh, bjr the wajp — ddiver eleuiiulji, or k lllo aerve iti frandite motwpoly 
in the moit efficient waji ponibk with an opponuaiq' foe a &ir rate of reium? 



While ii ii tnw thit n 



«ei the iBiei that can be di 



Some d tlM aun|dei I mentioned eailier reflect the ponlioni of vaiioui paniei in 
ongoing caici. The Connninioa hai not jtt made any finding with r eipee t to these caiei. 
led tbem here became tliejr belp iDunrale the Idndt of aDepiiom ihat 



In additioa m the dilHnUtia inKdved with lavcnigiiitu alkged abmei of multiple 
Mitity hotdinf CM^ai^ affiHilM in the fKC of d^MIci about iceeu to afliliaie boob ud 



t, there it a limit to the 
nt and &cquengp of dinlkwaDee* thai can be made before a < 
concerned with die fittndalviafailiqi of the ulili^.j If one aisumei thai the parent n 
R o( the utility to dic^ttreia of the hi _ 

' ' m could easily find themselves 
dltyaadD,di - - -- 




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Any legiilation which rcmovei vinualty tU (C*lninu on ■ utOity'i «bilny lo creiw 
croui geneimting •fBliiiei ind pannenhip* - wiihoui lubtiuituUy strenpbraing the 
lutei' atHliiy to tddrew the cancomiuni inii-compctithre ibinei - it unienibk. At ben, 
it would renib in a butioeu boon for anii-innt lawyer*. At wocn ii could expoM US 
dtizeni lo unconiclonabte rate diqiaritiei (id the eneni thai they could not be mit%Med by 
locat refulatoiy commiuioiii) and Enntiate i nationBl goal of gmicr competitiaa in ibe 



With all due reipect lo Senator Johniton, il it a bUaiy to auume, at he doei, that 
the Kfulaloiy legimei that have been enacted lubtcquent to PUHCA *la a laije extent 
provide duplicative protectiaD* and that Tbt Holdin| Ctnnpany AcL-.bai 
becoiDC.Juperfluoui.'' Lei me su|geil that the oppoiile ii true: Subtequent legltlttion wai 
enacted with both the knowtedgc that the HoUii^ Comptny An pnncctioBi ipinit tnti- 
competitive behavion were in place and the auumpiion that they would continue to (tmain 

If it ii the win of Conpeu lo remove the protection! that the Ho]din| Company Act 
provide!, let Ihcm clearly uodcmaiKt that in so doing they are creatini not otdy a new 
ciicgoiy of conipciiiort, but alto resurrecting and energizing a group i 
who may seek to take unfair advanugc of their monopoly power. 

Who needs PUHCA? I tubmii that monopoly ratepayer!, state regulatoiy agenciei. 
and ihii country need it. I also submit to you that the protectitm! of the Public UtillQi 
Holding Company Act are jmi at relevant today at they were in 193i. Vlgorout 
enforcement of the Act is increatingly called for, and any changet to the Act which ate 
intended to Increate competition in the generation market thoukt, at a minimunt, prohibit 
utility owncrthip of generation in their own service areas under the guise of independent or 
separate Goinpaniei, retain the limitation! tm the extent of corporate complenty and jxtivide 
stale legulatoiy badles with uniliiputable iccei! lo reeoidi of irantactioni between a utility 
and its aElilialet. 

Thank ytni for your attention. 



i 



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TESTIHOKY OF 



SCOTT HEHPLIN6 



SDBCOMUTTEE OH SECURITIES 
OIWITTBE ON BANKING 
DHITBD STATES SENATE 



> THE POBLIC UTILITV HOLDING COHFANY ACT 



Sept. 17. 1991 



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ABSTRACT 

Today's alectrlc narkat* ara tlawad. They are aarked by 
:aaatlc anticoBpatltiva practlcea in tha ganaration and 
ilaaion aactora. Thesa practlcea hara conauMera, aa well aa 
aaall Indapandanta, Bunlcipal aysteDB and rural alactric 
ccx>peratlvaa -- ttM vary antitlaa who can bring fair compatltion 
to thia induatry. Meraly adding naw players, or paralttlng 
expanalon by azlating large pleyera, will not cura tbaaa 

Utllitiaa cast the alactrlclty dabate aa a dabata ovar two 
poaalbla worlda: 'ccmpatitlon, * rapcaaanted by utilities seeking 
to woakan the Public Utility Holding Coapany Act ( 'PUHCA and 
'no coBpatition,* rapraaantad by the utilitlaa opposing change to 
PUHCA. That la a false dlctiotomy Thare are In fact three 
possibla Horlda: 'no competition.* 'unfair competition and 
'fair competition.' Freeing utilitlaa to axpand without review 
represents 'unfair competition.' Neakanlng PUHCA «ay add 
compctitorB : but it will not add coBoatitlon . 

Proposala to weaken PUHCA would enact the noat draatic 
structural change In the electric Industry In over 50 years. 
These proposals ara disguised as 'narrow tlxea; ' but broader 
leglalatlon Is difficult to ia«glna. 

In order to enhance conpetltlon. we nuat address agisting 
antlcoMpatltlve pcocticaa dlractly. Thaae proposals assuae those 
practicea away. Woraa, they reward anticoapetltlve practices by 
freeing the ant 1 competitor a to expand into new territories 
without regulatory review. 

Today's alactric induatry also la aarked by great 
uncertainty over the quality and predictability of state and 
federal regulation. No one Is sure who has jurisdiction over 
which types of transactiona. No one la aure It regulators have 
the tools necoEBary to antlcipata and Beet the new challenges 
posed by a rapidly restructuring Induatry. Tha proposala aasuoie 
this probleB away aa well. 

Many atata lagislaturea have not given their conalsslons 
atotutory authority to deal with the problea of expanding 
utilitlaa, because federal statutes Ilka PUHCA have prevented or 
monitored them. We cannot ellminete federal standards and 
protections without knowing that state atandarda and protectlona 
will replace tham. Soma atandard and protection la necaasary. 

Evan it wa aolva the problama of atate juriadlctlon and 
atata statutory authority, tha queatlon of reaourcea looms. Two 
Of our largest states — California and Michigan — hova 
encountered unprecedented regulatory dlfflcultlaa as utilities 
engaged in corporate reatructurlng and anticonpetitlva practicea. 

of changing tha 



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to tb* qiMStlon of tiM envlronaent. Hhll* atataa iaplwwnt 
least-coat planning and pranate conservation pragToniB to meet 
future energy needs, these efforts will be fmltl*BB If Congreaa 
does not ensure a level playing field for demand- side 
conservation and supply side options If iww regulation 
pToraoteE building new generation by presenting opportunities foi 
utilities to earn unequitable returns on tbeir Inveatnentl 
without the consideration of environmental extemalttlca, th*n 
utllitas will continue find ways around stata laaat-coat plans 
and ignore conaervatlon opportunities 

Wa cannot asaoaa strong coapatltion In an Induetry wblch la 
anticoapatltiv*. Wa cannot aaaoaa strong ragulatlon In an 
industry whicb la taat bacona unragulatad. Tltla ZV of the bill 
approvad by tba Bnargy Coaaittaa sakaa both errors. 

The Public Dtility Holding Coapanr Act is tba asaantlal 
statutory protector of coapatltion and conauaara. AwMig othar 
thinga, tha Act ~ 

1. Bars utility acguiaitlona wblch Monopolise new 
territories or naw power aourcaa, or wblch create rlaka 
to conswaara or invastora. S*a Section 10(b)(1). (2), 
(3). 

2. Deaands that utility acqulaltlons 'aarva tha public 
intsrast by tandlng toward the acononical and efficient 
davalopwant of an Integrated public-utility systaa.* 
Sea Saction 10(c)(3). 

3. Lialts utility apaculation in unrelated venturaa ( e.g. . 
benka. real eatata, diatant utility buslnasaaa), where 
tbat apaculation iapoaaa rlska on electric custoaers. 
See Bactlona 1(b), 11(b)(1). 

PDHCA played a central rola in breaking up tha large holding 
companies that ooce plagued the nation. But the tendency toward 
concentration baa not diaappaarad. Aa the Honorable Ronald 
Ruasell of tba Michigan Public Service Coaalaalon haa stated, 
hjuman nature has not changed ainca tha 1930e," 1 FroposBle to 
weaken PUHCA ignore this Simple fact. By repealing key 
protect lona, they would leave conauB»ra, coapatition and 
regulation aubatantlally unprotected froa utility Monopolisation. 



1 Commissioner R. Ruaaell, 'Uho Naada PUHCA?', Spaach Bafora 
the American Bar Association, Section of Natural Raaourcaa, 
Bnargy and Envlronnental Law (Mar. 8, 1991} [bereinaftar citad as 
'Comb. Ruasall Speech']. 



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facilities to deny coapetltors oondlscrialnatOTy, Bconoalc bccbbb 
to wtwlesale aarketB, at the aaaa tlM that the utllltlOB 
th««s«lv*B expand into ttioBe very aarketB by avading hey 
provialona of PDBCA. 8a*e change clearly ia ueceaaary. ThlB 
teBtlMony preaenta a propoaal for that change. 



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TABLE OF CCHTTENTS 



UTILITIES ARE RESTROCTDRING TO HEAXBH COHPETITION AND REDUCE 
REGULATORY OVERSIGHT 1 

A. Orervlaw 1 

B. Dttltties are CreatlDg Afflllataa to Waakan 
CoiVatltlon and CoDsiuer Protection 2 

1. Creation of Utility Affiliate* Leada to 
BaiMful Self-Dealing: 2 

2. Utllltlea Are Ualng Afflllataa to Force 
Captive CuBtoaars to Subaldlze Ezpanalon Into 

New Tarrttorlas: 2 

C. Dtllitlea Are Using Corporate Form to Bacapa Stat* 

Law and Regulation 3 

D. ntllitlaa Are Ualng Tbelr Transalaaion Honopollaa 

to Create Generation Honopollea 4 

E. Dlveralfication — The Mixing of Utility and 
Hon-Utllity Bualoeaa — la Increaalng ConauBar 
Rlaka 4 

F. Conatruction Contractors Buying Utility Coapanlea 
Will Create New Biases In Favor of Risky 
Conatruction, and Against Low-Risk Conservation 

and Load Manageaent 6 

REGULATORY INCENTIVES TO CONSTRUCT UNMEBDED GENERATING 
CAPACITY DBTBR ENVIRmNENTALLy SOUND ACTIONS 7 

A. Harket-based Pricing Currently Acta aa a 
Disincentive to Envl ronaontal ly Beneficial 
Conservation Prograaw 7 

B. The Restructuring Permitted by Proposals to Weaken 
FUHCA Can Lead the Nation Away froa Environaantally 
Protective Power Supply Altematlvea B 



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. TO ENSURE FAIR COMPETITION AT ALL LEVELS OF THE 
IHDUSTRY, CONGRESS MUST BOTH CORRECT CURRENT PROBLQ1S 
AND HARNESS THE FORCES OF COHPETITICM 8 

A. Solutions to Current Problems 8 

Preclude Self-Dealing: 8 

Grant Transalsslon Access Rights to the Host 
Efficient Deals, Subject to Transition Rules to 
Protect the Inveatsent of the Native Load 
CustoBer: 8 

Essential Resources 9 

IS to Least Cost, 



Ensure Equal Access to Other 



Rationalize State and Federal Jurisdiction: 

Require Least cost Planning at FERC: 

Restrict FERC Departures Froa Cost-Based 
Pricing In Wholesale Power and TransDlsslon 
Transactions: 



by Utilities 



1 Nonutlllty 



Enterprises: 

Confira the Legal Standing of Retail Custoners 
to Challenge Agency Decisions Adverse to 
Hholesale Conpetltion: 

Methods for Harnessing the Forces of Competition 

1. Prohibit Utilities Froa Expanding Frcoi Their 
Base as Retail and Transmission Monopolists 
Unless They Verity That They Will Compete 
Fairly: 



Require Other Entities Seeking Entry Into 
wholesale Markets to Denonstrate. In Advance, 
Their Permanent Inability to Obtain or 
Exercise Market Influence: 



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Individual States Hill Have Severe Difficulties 
Regulating Corporate Structures Spread Acroa* Many 
Statea and Many Industclea 



Regulation by FERC, and Residual Regulation 
SEC, Will not be Sufficient to Protect ~ 
or Co«petltloa 



Proposals to 



It is Virtually lapossible to Ii 
Hholasale Generators As Long 
Cnstoawrs are Captive 



As Dlstribntioo 



V. DTILITIBS OPPOSING COHPETITIOH SKOOLD BE IGHCHIED . 



CONCLUSION 



APPEHDICBS 



APPENDIX F 



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D.,r„.db,G00glC 



TSSTIHCWV OF 

SCOTT HBMPLING 

BNVIROMKBHTAL ACTIO! POONDATKXt 



Hr. Chalinui and M*ab«r« of the CoaalttM: 



Hy luuM ia Scott Hwipllng. I aa an attocnay in privata 
practice Id Washington, D.C., appearing on behalf of the Knergy 
Project of Envl rontuntal Action Foundation ('EAF'). EAF !■ a 
nonprofit, research and education organicatlon concemad with 
•oergy and environaental iaauea. 

I appreciate the opportunity to psrtlclpata In thla hlatoric 
debate oo the changing electric Industry. My taatiaony haa four 
pacts- Part I analyiea the threats to consuaars and co«9Stltlon 
in today's Industry today and explains how these threats would bs 
exacerbated by proposals to wsaksn the Public Dtlllty Holding 
CoBpony Act ('PUHCA' or *tba Act*)- Pact II outlines a proposal 
for eliainatlng these threats ao that consuMsrs can rssllsa tb« 
benefits of coapetltion. Part III responds to thosa utilities 
who seek to weaken PDHCA without r*gard for the falmsas of 
co«petition. Part IV responds to tboss utllitiss who seek to 
avoid co^tition altogether. 



A- Ov*rvl*w 

Many utilities today are restructuring their corporate fora 
and changing thelc strategic plans. Their goals are to II] 
dilute or avoid state regulation, (2) co^iete unfairly against 
■true independents,' and 13] shift businass risks to while 
earning returns which not sustainable in a coivietltive aarket. 

weaken PUHCA will make aattera worse- 
1 distinguish between two types of 
•ntitles; (l J entities financed, owned and controlled by 
utilities with ■onopolies over distribution or transaission 
■arketa; and (2) 'true independents,' 1 .e. . those entrepreneurs 
who raise and risk theic own capital, unasaiated by a 
distribution or traasaisaion Monopoly. 

In this ccmtused world, utilities will uss captive custoaars 
to finance ezpanalon into distant tercltocles. They will 
describe theaaalve* as 'independent power producers* and "exeapt 
wholesale generators. * But a utility affiliate acting aa an 
'independent power producer' is on oxynraron. When a utility with 
a distribution or transalssion aonopoly creates, finances, owns 
and controls another coivany, that coa^any is not independent. 
And under proposals to weaken PUHCA, not Just utilities but any 
corporatloa froa any Industry could enter the market anywhere. 



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» tbay daair«, and face no 

Some have framed the debate ovui PDHCA as a debate ovei 
whether we should have coapetition. But the goal of competition 
is not disputed, except by some utllitlea fearful of that 
competition. Thuii the real questions are; 

How do we proaote vigoroua, p«rBaii«nt and fair 
competition, as distinct treat taavorary rlvalrtea 
marked by antlcoBpertitlTe practices? 



To answer these qoestlons properly, 
utilitiui* aie distorting competition today, 
at least five way*. 

3 Weaken Competition 

1. Creation of Utility Affiliates Leads to Har«fai 
Self-Dealing: Abusive aelf-deallng occurs when the custoRiers of 
the monopoly utility pay an above-market price for a service or 
good supplied by an affiliate. Self-dealing is inconsistent with 
the "regulatory compact' — the utility's obligation to serve the 
public at least feasible coat. According to the Huuuiable Ronald 
Russell of the Michigan Public Service Commission, 2 

corporate structure, and transactions between corporate 
affiliates, can ba manipulated to embrace the concept 
of competitive generation whi le insuring that al 1 
competitive advantages reside with holding company 
affiliates. 

A technical description of self-dealing appears In Appendix A. 

2. atllitles Are Using Affiliates to Force Captivm 
Customers to Sobsidlsa Expansion Into New Territories: Utility 
expansion Into new markete raises the same problems as does 
utility diversification into unrelated buBinesBes risk of 
failure, diversion of utility profits from neasureB which would 
strengthen the utility's financial condition reduced utility 
maintenance, the 'draining of top management from the cors 
utility, and cross- subsidization 



lusly, that (I] it has 



2 See Comm. Russell Speech, ynnra . 



D,g,;,zeclbyG00glC 



t«rrltOTi««, and (2) that it la retaining its bast reaourcaa and 
Banagaaant for tba local utility bualneaa. Tha baat aanagara 
cannot Im in two placaa at tbe aaaa tlaa. 

3. Propoaala to Haakan PUBCJl Hill Haka Balt-Daal Ing 
Horsa: Tha Public Utility Regulatory Pollclaa Act of 1978 erred 
la paralttlng utilltiaa to fora afflllatea without raviaw under 
PDHCA. Corrant propoaala to weaken PDHCA, auch as tha one 
■VProved by tha Senate Energy CoMilttaa. would expand this 
autboEtiation. These proposals also directly eliminate existing 
protections against self ~deal Ing. A utility could acquire 
ttnli«lted nuab«rs of ezeapt wholesale generators (*BHGs*) in an 
unltBlted noeber of atatea. 

Dndar PUBCA today, a holding coapany with wboleaale utility 
subsidiaries spread across severel atatea would be a ragiatered 
holding coapany like Batergy or Aeerlcan Electric Power. As a 
registered holding cOBpany, Ita Interaf filiate tranaactlons would 
be reviewed by the SEC. The present proposals would eliminate 
ell this review. 

C. 

In tbe 1970's, utilities Initiated large capacity espanalon 
prograas, based on projection of high daaand and eoderate 
construction coats. These projections were wrong. State 
regulator a conaequently excluded a substantial aeount of 
etilitlea' conatruction Investment froai retail rataa. 
Disappointed utilities now seek to Blnlelae future atata 
regulatory scrutiny by creating wholesale subsidiaries regulated 
by FBRC, but unregulated by states. 

In Htseissippl Power 6 Light v. State of Kisalssippl . 
487 D.S. 354 (1988). the U.S. Supreme Court held that FERC'a 
allocation of power plant cc»istructlan capacity aaong the utility 
subsldlarlea of a centrally planned holding company preeapted 
state conmiselon review of the subsldlarlea' declalon to 
participate In that construction The resulting uncertainty over 
state regulation haa slowed innovations ilka least cost planning 
liitlve bidding. According to the Arkansas Public 

Integrated resource planning requires direct action by, 
and collaboration between, at 
utilities. To bring discipline t 

rnMlsBlona need legal clout. But uncertainty over 
state legal authority, including the threat of federal 
preemption, ia haepering states' ability to bring 
Integrated resource planning to registered holding 
coBpany systees. Put another way. Integrated raaource 
planning regnires state-baaed co«parlaon of generation. 



D,g,;,zeclbyG00glC 



consarvation and load BaiiBgeBent optlona. It la not 
poaaible to conduct tbt* conparlson on a atate-by-Btate 
baalB when the In-atata subaidlary takaa orders tzom a 
■ultlstate parent. 3 

Undar Sactlon 201 of the Federal Potrec Act, FERC doea not 
have JurisdlctioD ovar 'sanarattng facilities.* Thus FERC lacks 
clear authority to conduct Intagratad rasourca planning. Uhea a 
utility shifts to FERC regulation, it ia doing Hora than avoiding 
state regulation; it is escaping intagratad resource planning 
completely. 

The law In this area la vary uncertain. Federal legislation 
la necessary to clarify the states future Tola. Qntll then, any 
proposal to ease the creation of utility aftlliatas by rapaallng 
PUHCA will weaken state regulation further. 

to 
m HMtopollas 

Trans^laaion tacllltlea are the highways of cnrinnrca. 
Ganaratora cannot compete fairly unless they can >ove their 
products to market and unless buyers can acceas the least 
expensive product. The major transalsslon hlghwaya are owned by 
invest or -i3Hned companies with retail nonopoly fconchlsea. Theae 
utilities create anticompetitive 'bottlenecks* by denying access 
to others. See Appendix 8. 

Proposals to weaken PUHCA ignore thla fact of lita. Absent 
PDBCA's restraints on unllaitad ezpanalon, utilities can (1) 
create affiliate* to serve distant narkets, (2) grant^ 
preferantial transnlssion access to the affiliates, and thereby~ 
( 3 ) prevent others f ro« competing in those aarkets . puhCA 
anendnent and tranamlaslon access Is linked, inaaparably, by the 
reality of this industry. 



Two kinds of utilities are turning to dlveralf Icatlon. Ona 
group, which includes Wisconsin Power 6 Light, seeks new outlets 
for aicass cash. Another group, which includes Kentucky 
Utilities, aipecta to fare poorly in an electric industry which 
has Bore coapatltors. Both types hope to use their nana 
recognition and preferred acceas to capital, gained through their 
axcluaive retail ■onopolles, to sake new profits in nonutility 



3 TastlBony before U.S. Senate Committee on Energy and 
Natural Raaourcaa (Her. 14, 1991). 



D,g,;,zeclbyG00glC 



utility dlvarBlf Icatlon h«s b*ma an unbappr wiparlsnca. 
Arlsona Public B«rvlc* Company'* affiliation with a saving* and 
loan association. MsraBank, brought tha parwit holding coapany. 
Plnnacla Mat, to ttw brink of bankruptcy. Although tba SEC 1b 
requlrad to ravlaw diveralti cation by any utility using tba 
holding coapany form, its inaction aakas It an unraiiabia 
protactor. 

1 . Tba PotantlBl DaBaga of Divatsif Ication Puts 
Ratapayara at Unfair Risk; Tha debacle of Pinnacle West 
Itlghltghts not only tbe SEC's failure to ragulate, but also tha 
severe ranlf icatlons on tbe utility Itself when dlvaraif Ication 
ventures go awry Pinnacle West Cepital Corporation Is the 
parent boldlng coapany of Arizona Public Service. In 1986, 
Pinnacle Hoat's corporate predecessor acquired MeraBank for $426 
■llllon. HeroBank was a Savings and Loan Institution. According 
to the Arizona Corporation CoBKlsslon, the 8426 allllon price was 
two tlaes MeraBank a book value; about 80% of tbe acquisition 
cost represented an acqulsltitui praalua, and was recorded on tha 
books as good wl 11 . 

As an e«a«pt boldlng coapany. Pinnacle West wes entitled to 
retain Its exeeptlon only 'unless and except insofar as Cthe 
Co^isalon] finds tba ezaaption datriaantal to the public 
interest or the interest of investors or consumers ..." Section 
3 a) of the Act Several months before the acquisition, tba BBC 
wrote to the holding coapany, requesting an explanation as to the 
rationale supporting tba holding coapany'a continued exemption In 
light of the proposed acgulsltion. Tba holding company responded 
that 'MeraBank has an establishad record of continuing growth 
iditcb will contribute favorably to tba [holding coapany]. — in 
no event may APS s financial resourced be directly or Indirectly 
committed or pledged to accomplish tba acquisition.* The SBC 
apparently accepted this explanation; I am aware of no further 
communications troa the BEC to the holding coapany. 

Tbe SSC'a acceptance of Pinnacle West's explanation, coupled 
with Ita failure to pay any attention to post acquisition 
davslopsinta. lad to the largest diversification loss In the 
electric industry since the statute was enacted. 

1. On Deceaber 31, 1988, NaraBank recorded a loss of 8309 
Million, virtually cancelling out APS' net incoaa that 
year and producing a 9S% decline In Pinnacle West's net 
incoaa as coapared wltb 1987. 

2 . In Nove»bar 19S9, Hoody ' s lowered tha ratings on 
certain AP8 sacuritlas and indicated it will keep APS' 
securities on credit watcb. direction uncertain. 
Moody's cited, aaong other factors, tba potential tac 
decreasing financial flexibility at APB due to the 



D,g,;,zeclbyG00glC 



1989, the Federal Offlco of Thrift 
Supervision and Pinnacle West enteced Into an agreement 
Which released Pinnacle West from any continuing 
obligation to nalntaln HeraBank'8 financial soundness 
In return for Pinnacle West Injecting $300 nllllon In 
cash nto MeraBank, and agreeing to pay MeraBank 
another S150 ■illlon over a fixed period. 



In order i 




the nonev 




ball OU1 


































out standi no 





atock. Pinnacle West, an Buempt intrastate holding 
company, thus aBslgnea the right to future ownership of 
a public utility to out-of-state financial interests 
without any advance notJce to the Ari^drta Corporation 
CoDmisBlon or the SBC's holding conpany regulators. 

Throughout all these deveiopaents , which were widely 
reported in the press, the SEC's holding conpany regulators did 
nothing. Finally, on May I 1990. the Arizona Corporation 
COMtlBSlon took the unprecedented action of filing a complaint 
and a petition to revoke or modify Pinnacle Nest's esenptlon on 
the grounds that the exemption had become 'detrimental to the 
public Interest or the Interest of Investors or consumers....' 
Section 3(a) of the Act. That docuaent brought the entire matter 
to the sec's formal attention. Sixteen months later, the 8EC 
still has not acted. 

Proposals to weaken FDmZfl would permit unlimited 
diversification at wholesale The corollary to a fully 
competitive wholesale market Is higher risk for the competitlors. 
Under the Johnston proposal utilltes would be allowed to roam the 
country building generators without any review to ensure the 
financial health of the utility. 

F. Construction Contractors Buying Utility Companies Hill 
Creatm Hmw Biases in Favor of Risky Construction, and 
Against Low-Risk Conservation and Load Management 

Proposals to weaken PimCA would permit construction 
contractors and fuel suppliers to own the very utilities they 
supply. This type of ownership structure can stifle competition 
in the market for construction goods and services- Only those 
contractors wealthy enough to buy stock In new power supply 
ventures will be able to bid for project work. Other suppliers 
of engineering and construction services, fuel and financial 
skills may be More highly ■killed: but If tbey are less wealthy 
or less well-connected, they will be locked out. 



D,g,;,zeclbyG00glC 



Future opportunities for aucb abuaa will grow If PUHCA Is 
wsakensd to peralt construction contractor ownsrshlp without 
review. Furtheraore, providing construction contractors and 
fual suppliers with the added Incentive to build detracts Iro« 
efforts to proaote low-rlsk conservation and load aanageaant. 
Any tlBB Congress creates Incentive to build new generating 
capacity, it mat recogniia that the affect is a disincentive to 



Utilities enjoy an eslcuslve teiritory with captive 
custoaars. The security of tbis sonopoly affords utilltiea a 
reasonable opportunity to earn a fair rate of return on their 

investaant. Congress alBo paased the Federal Power Act, and gave 
the Federal Energy Regulatory Commission the responsibility to 
ensure that wholesale ratea are Just and reasonable 

Dntll recently rates approved by PBRC have been bsssd on 
actual cost That toraula allowed monopo tstlc utilities to earn 
a reBGonable return on their nvestment However, the current 
trend Is for utilities to request and FERC to grant SO-called 
market' based' rates. In a truly competitive market thia trend 
would be acceptable, as competition wou d keep rates at cost- 
based levels. But there are not eaay truly competitive markets. 
The seal with which utilities have sought market-based rates 
underscores this fact; utilities would not fight for market- 
baaed rates if they were not higher than cost-besed rates. 

Huch of the reaaon a truly coapetitive aarket doea not esiat 
is that transmission access is controlled by a few large 
utllitea, who grant access on a 'voluntary' has s; i.e. . when 
they feel like It, Until Congrege passes laws authorising FERC 
to require access when necessary for competition, and untl a 
truly competitive market aiists, there should be no market- based 
pricing. vet as this coaalttee convenes FERC continues to 
loosen the stsndards tor grnstlog earket-based rates. The aost 
recent trend at FERC Is to grant market-based rates by latter 
order, which represents the lowest level of review. 4 

While recogninzlng that FERC's actions do not (all althln 
the Jurisdiction of this Coaalttee. the Coaaittee aust 
nevertheless consider the raalficatlons of asrket-based pricing 

Docket Ho. BR91-401- 



D,g,;,zeclbyG00glC 



5. Rationalise StBt« and Fedaral Jurladlctlon: State 
x«gulatoca have the best knowledge of ttieir utilities' supply- 
aide and demand-Bide options. On tbe othar band, fedaral 
regulation has an advantage over state regulation in that it nora 
objectively saaks out efficient solutions when provincial stata 
goals are in conflict. The following solution tries to steer a 
consistent patb through these principles. 

In General : PERC should create competitive conditions 
In wholesale markets. Thus FBRC sets industry guidelines for 
transalSBion and power pooling, and reviews specific transmission 
tariffs. The stata's raspooslbllity is to ensure that local 
distribution companies act prudently in buying from tbesa 
markets. Thus states regulate utility purchases at wholesale. 

Not all wholesale markets will be competitive, even aftac 
PERC has ordered transmission access. What If a utility purchase 
Is the least cost purchase, but the price still Is too high 
because competition to sell was weak? In those situations, tba 
state (or a atate consunat advocate) should be able to initiate a 
FERC proceeding concerning the Justness and reasonableness of the 
sailer's rate. FBRC review In this situation Is logical because 
the likely reason for the excess rate Is a flaw In the market, 
which FERC Is best able to correct- 

MlaBiaail^;^ Power ^ Light Situations : A proposal 
recant ly agreed to by Entergy, the Arkansas Public Service 
Cowilasion and the City of Hew Orleans (which has the regulatory 
powers of a State commission] would restore much of the State's 
jurisdiction lost in Mlsstaaippl Power 6 Light . A synopsis of 
the proposal is attached as Appendix H. 

6. Require Least cost Planning at FERC: in any 
wholesale rata proceeding affecting more than one state, PERC may 
not determine that a sales price was just and reasonable except 
according to a least cost planning process which assures that the 
option Is the least cost option. 

7. Reatrict FERC Departures From Cost-Based Pricing in 
Uholesaie Power and Transmission Transactions: Deviation from 
wholesale pricing based on prudent cost should tM permitted only 
upon (1) a precise deaonstratlon that there is a vigorously 
competitive wholesale market which reliably generates 
alternatives to the product whose price is at Issue, and 12) 
creation of review process which revisits the market inquiry each 
year to ensure that any market power reaulns mitigated. 

B. Limit Investment by Otllitims in Noautttity 



D,g,;,zeclbyG00glC 



identifying typae of Invoetaant ( e.g. . "blacli lung funds' 
standard now applied to decomnilBBlonlng funds undsr IRS rules); 
(2) requiring advance oppioval and annual reviews; (3) limiting 
amounts invested. 

9. Confirm tiM Legal Standing of Retail CuatcMners to 
Challeng* Agency Decisions Adverse to Wholesale Coapetitton: In 
two recent cases utilities have cliallenged the legal standing of 
retail ratepayers to assert an interest in wholesale conpetition 
and In corporate restructuring. But if a captive retail 
ratepayer does not have a direct, aconooic interest in fully 
competitive markets, who does? Congress, within the Units of 
its constitutional authority, must nake clear that the 
banaflclary — or vlctin — of eiectilc utility practices and 
utility regulation is the conswMr. 

B. Methods for Bamesetng the Forces of Coi^etltloii 

1. Prohibit DtilitiM Pro* Expanding Proa Tbatc Ba«« 
as Retell and Transaisslon (tonopollsts Unless They Verify That 
They Hill Compete Fairly: Bzistlng utilities are not new 
entrants In who essle bulk power markets. They are existing 
players, protected by monopolies over distribution or 
transMlSBlon, hoping to expand their Influence. We do not have 
regulatory tools which reliably can prevent abuse by one entity 
with two persona itte£ — a monopolist and d competitor. We 
cannot authorize monopoly utility expansion, and then hope those 
tools develop Tbus far most utilities have not baen willing to 
participate in serious deliberations over regulatory protections. 
When they do, this question will be worth reviewing. 

2. Considsr A Carsfully Targsted Adjustmant to the 
'Integration* Requira— nt of the Act: Some 'true indepandants' 
argn* that PUHCA unnecessarily discourages certain corporate 
structures that could lead to least cost electricity production. 
SpacKlcally, they argue that lenders insist thst each power 
project be placed in a separate subsidiary. 

These arguments are not consistent with reality. Many 
companies, such as PaciflCorp and UtiliCorp, do business over 
large territories without setting up aaparate subsidiaries. If 
tha true independents' arguments are eventually shown to bava 
tactual support. Congress should consider the necessary 
adjustmants to PDHCA. Before doing 60 however. Congress must 
learn more about the financing process, to assure that the 
subsidiary fom for true independents is both necessary and 
efficient. 

This relaxation of PUHCA should be a narrow one. True 
independents do not need ezenptlon from all ongoing financial 
review. The local economy has a strong Interest in the financial 
viability of electric producers. PUHCA review assures such 



D,g,;,zeclbyG00glC 



5. Ratlo&BllBB StatB and Fcdaral JuTlsdlctlon: State 
ragulatorB tisve tti« beat knoMledga of ttislr utilities' supply- 
Bide and demond-aida options. On the othsr hand, taderal 
ragulatlon haa an advantage over state regulation in that It more 
objectively sssks out efficient solutlona wtien provincial atate 
goats aie in conflict. The tollOMlng aolution triaa to steer a 
consistent path through these principles. 

In General: 
In wholesale aarkets. 

transnission and power pooling, and reviews specific transais* 
tariffs. The state's responsibility is to Misur* that local 
diatribution conpanles act prudently In buying from these 
Barketa. Thus states regulete utility purchases at wholesale. 

Not all wholesale narhets will be conpetitlve, even after 
FBRC has ordered transmission access. What if a utility purchase 
is the least cost purchase, but the price still is too high 
because competition to sail was weak? In those situations, the 
state (or a state conauner advocate) should be able to Initiate a 
FERC proceeding concerning the Justness and reasonableness of the 
sailer's rate. FERC review in this situation is logical because 
the likely reason for the eacess rate Is a flaw in the aiarket, 
which FERC Is best able I 

Htsalaalppl PC 



of Hew Orleans (which has the regulatory 
powers of a State commission) would restore much of the State's 
Jurisdiction lost In Misalsslppi Power 6 Light . A aynopals of 
the proposal la attached as Appendix H. 

6. Require Least cost Planning at FERC: in any 
wholesale rate proceeding affecting More than one state, FERC nay 
not determine that a sales price was just and reasonable except 
according to a leaat cost planning process which aaauras that the 
option is the least cost option. 



wholesale pricing based on prudent cost should be permitted only 
upon (1) a precise demonstration that there Is a vigorously 
competitive wholesale market 
alternatives to the product whose p: 



ably generates 

issue, and (2) 

creation of review process which revialts the market Inquiry each 



y«ar to ansura that any aarket powar rsaalns mi 



8. Limit Invaatment by Otll: 
ms : We should restrict such Invest) 



Honuttllty 



V 

D.,r„.db,G00glC 



Idwtti tying typas ot Invastaant i f.y. . 'black lung funds* 

■tandard now applied to dacoiMilaaionlng funda undar IRS rulaa); 

(2) requiring advance approval and annual revlewa; (3) Halting 
aaounta Invaated. 

9. Contlra tba Legal Standing ot Retail CuatoaMra to 
Cballange Agency Decialona Adverse to Hboleaale Coapetitloa; In 
two recent caaes. utilities have challenged the legal standing ot 
retail ratepayers to assert an Intaraat in wholeaale coapatitlon 
and in corporate restructuring . But it a capti va ratal 1 
ratepayer doaa not have a direct, sconoalc Interest in fully 
coMpetitlva sarketa, wbo does? Congress, within the Halts ot 
Ita conatltutional authority, aniat Make clear that the 
beneficiary — or victlB — ot electric utility practices and 
utility regulation is the consuaar. 

B. Hatbods tor Hamesaing the Fotcea ot Coapctltlon 

1. Pcoblbit Utilities Proa Eipandlng Fro* Tbalr Bue 
as Retail and Transaiasion Honopollata Unleaa Tbay Verify Tbat 
Tbey Hill Coapata Faltly: Existing utilities are not new 
entranta In wholesale bulk power aarketa. They are exlatlng 
players, protected by aonopolles over distribution or 
tranaaisaion, hoping to expand their influence. Ws do not have 
regulatory tools which reliably can prevent abuse by ons entity 
with two paraonalities — a aonopoliat and a coapatitor. We 
cannot authorize aonopoly utility eipanaion, and than hope thoae 
tools develop. Thua tar aost utllltiaa have not bean Milling to 
particlpata in sarious deliberations over regulatory protsctlons. 
When they do, this question will be worth reviewing. 

2. Conalder A Careful ly Targeted Adjuataent to the 
■Intagratlon* Require— nt ot the Act: Soaa 'true independent a* 
argue tbat PDHCA unnaceaaari ly discourages certain corporate 
structures tbat could lead to leaat coat electricity production. 
Bpecif Ically, they argue that lenders Insist that each power 
project be placed In a separate subsidiary. 

These arguaents are not consistent with reality. Kony 
coapanles, such aa FacifiCorp and DtiliCorp, do business over 
large terrltoriaa without aettlng up aeparate subaidlariea. If 
the true independents' arguaenta era eventually shown to have 
factual support. Congress should consider the necessary 
adjustaants to PUHCA. Batore doing ao, however, Congreaa auat 
leam aor« about tha financing proceas, to aaaura that the 
aubaidlary tora tor true independents is both necessary and 
efficient. 

This relaxation ot PUHCA ahould be s narrow one. True 
indepandenta do not need ezeaptlon froa all ongoing financial 
review. The local aconovy haa a atrong Interest In tha financial 
viability ot electric producera. 



D,g,;,zeclbyG00glC 



14 

Utilities who benefit froB the statUB quo of transBlasion 
control t«li Congress that ferc should solve th« problsms growing 
out of that control. Then they argue to FERC that Congress has 
denied them the tools necessary to do so. The positions are not 
consiBtent. Again, the ArkansaB Public Service Caulsslon: 

We agree strongly with those who Insist that there 
cannot be competition or least-cost planning unless all 
competitors have fair access to essential transnlsslon 
facilities. Arkansas cannot Institute least coat 
planning It the least-cost generators are barred from 
transmission by higher cost competitors. Effective 
least-cost planning requires fair coag^tltlon. 

C. Regulation by FERC, and Residual Regulation by SBC, 
Will not be Sufficient to Protect ConauMsrs or 
Competition 

FBRC'b 'Market-Based Pricing* Cannot Protect Consuaers in 
the Absence of PtIHCA S Structural Protectlona: As dlscuBBod 
above. FERC has begun to abandon cost-based conpetltive pricing 
in favor of "market based pricing even where no fair Market 1* 
guaranteed In Its noBt extreme manifestation, FERC reasoning 
allows a new producer to build generation on the grounds that the 
price of the new generation s less than the utility's "avoided 
cost;* that is, the cost of other alternatives which the utility 
would otherwise pursue. 

In none of these cases has FERC deterBlned whether the 
avoided cost le a prudent avoided cost. In particular, FERC has 
disregarded conservation and load management as an altamatlve 
measures of avoided coat. In one case, all the Co^ission 
required was a certificate from the buyer, saying that the sales 
price did not exceed avoided cost. This 
*regulatlon-by-certlf icatlon, " without a proper market analysis, 
is not consumer- protective regulation. 8 Repealing PDHCA's 
structural protectlona In reliance on FERC's transactional 
protectlona Is not good policy. 

SEC and Pra-Acqulsitlon Review; Recent SEC Interpretations 
of its pre-acquleltlon review duties have left consumers at risk 
of utility corporate structures that ancourage Inefficiencies, 
forum-shopplng, consuDMr abuse and anticompetitive behavior. We 
cannot rely on the SEC's holding company regulators to administer 



B See Citizens Power 6 Light Corporation . 48 F.E.R.C. pars. 
61,120 (1589). Contrast Baltimore Gae 6 Electric , 40 F.B.R.C. 
para. 61,170 at p. 61.538 (1987), where each avoided cost rate 
permitted by the Commission 



D,g,;,zeclbyG00glC 



CoBBi««lon*r Rttasall 
only get worm* if r*vlaioiti 
all of ouc elactrlc utliicisa 
Com>an]r.' He then atated (Id.l: 

. . . Creating axea^t wbolaaale generator will not in and 
of Itaelf atiaulate a truly coapatltiva Market . 
Regulated utilitlea ara tha priMary cuato«ara of tba 
would-be wholaaala generatora. Ab long a* they retain 
both the eiclualva control of the national tranaaiaalon 
ayaten — and the ability to opt out of the coapetitive 
marketplace — utilitlea will retain all ot tha 
advantagaa that their nonopoly poaitiona give then plua 
tbay will gain new opportunitiea tor configuring 
thaaaelvaa to extract Monopoly profita froa their 



filMllarly, tha Arhanaaa Public Service Co^iaaion haa atated: 

We are not certain of Bntargy'a goala. Becauae ot our 
uncertainty concerning Entergy'a goala, we need 
certainty concaming atatc regulatory juriadlction, ae 
well aa the regulatory backatop tumiahed by Public 
Utility Holding Company Act. 7 

Mot Protect 

Hany utilitlea point to verloua 'voluntary' tranaelaalon 
laa propoaala by utilitlea aa a aign that the loduatry la 
■ovlng to a tranaeiaalon access rcglne without regulatory or 
legislative eandate. But "voluntary* acceas la voluntary for the 
'havea;* involuntary for the 'have nots.' Under 'voluntary' 
acceaa, the transnlsalon aonopoliat provides aervlce when It 
wants to; not when others need It. 

Utilities' Interest In 'voluntary* acceaa likely will last 
no longer than their excess generating capacity. Utllltiaa Ilka 
Public Service of Indiana have exceas generating capacity that 
they wish to earket at purportedly 'flexible* prices. In order 
to win FERC approval of pricae that depart fro« coat ( I.e. . 
prices which can produce extraordinary rates of return), these 
utilities must offer transmission scceas to thoae who otherwiae 
would be forced to buy tbla hlgh-pricad power. When there is 
less generation excess, there will be lass transmission acceaa. 



ilttee on Energy and 



D.,r„.db,G00glC 



14 

Dtllltl«B Who b*n«fit frcNi th* atatua quo of trana«laaion 
control tell Congraaa that FERC ahould aolv* th« problana growing 
out of that control. Then they argue to FERC that Congress has 
denied them the tools necessary to do so. The poeltlone are not 
consistent. Again, the Arkansas Public Service Conalssion: 

We agree strongly with those who insist that there 
cannot be competltiOA or least-cost planning unless all 
competitors have fair access to essential transmission 
facllltlee. Arkansas cannot institute leest cost 
planning It the least-cost -generators are bacrad fro* 
transMlsalon by higher cost competitors. Effective 
least-cost planning requires fair competition. 

C. Ragulatlon by FERC, and Residual Ragulation by SBC, 
Will not be Sufflclant to Protact Consuaara or 
CoMpetltlon 

FBRC'a ''Market -Based Pricing' Cannot Protect ConsuMars In 
tha Absence of PDHCA's Structural Protections: As dlscuaaad 
above, FERC has begun to abandon cost-based competitive pricing 
in favor of 'market based pricing, even where no fair Market is 
guaranteed. In its iBost eztraae manifestation, FERC rsaeonlng 
ellows a new producer to build generation on the grounds that the 
price of the new generation ia lass than tha utility's 'avoided 
cost;' that is, the cost of other alternatives which the utility 
would otherwise pursue. 

In none of these cases has FERC determined whether the 
avoided cost is a prudent avoided cost. In particular, FERC has 
disregarded conservation and load ■anagaiiant as an altematlva 
■easures of avoided cost. In ona case, all the CoDBlselon 
required was a certificate froe the buyer, saying that the sales 
price did not exceed avoided cost . This 
*regulatlon-by-certif icatlon, ■ without a proper market analyeia, 
is not consumer-protective regulation. 6 Repealing FlTHCA's 
structural protections in reliance on FERC ' s transactional 
protections is not good policy. 

BBC and Pre-Acqulsltion Review: Recent SEC Interpretatione 
of Ita pre-acquisltion review duties have left consumers at risk 
of utility corporate structures that encourage inefficiencies, 
forua- shopping, consumer abuse and anticoapatltive behavior. Wa 
cannot rely on the SEC's holding company regulators to administer 



8 See Citizens Power & Light Corporation . 48 F.E.R.C. para. 
61,120 (1989). Contrast Baltimore Gas 6 Electric . 40 F.B.R.C. 

para. ei.i70 at p. 61,538 (I9B7), where each avoided coat rata 
permitted by the CommisElon was a rate which the Commission 
previously had determined to be just and reesonabta. 



D.,r„.db,G00glC 



7 Appendix C «xplains thl« 

Otilltr Kargar* G«n>rallv: 
acquisition provialona of the Peden 
Utility Holding Coapany Act should produce an elvctric industry 
which la locally nanagad and locally ragulated. Utilitlas should 
IM tocuaing on their core custoBers. providing the type of energy 
service Host consistent with the custaaers' needs. 



Dtillttas acquire other utilities, sake the acquirees 
divisions rather than aufrsld^arles . and thereby escape 
review under PURCA coapletely. 

Dtllity and others acquire wholesale generating 
coapanles In reMote locations using a Halted 
partnecshlp torv rather than ■ new corporation, and 
slailarly escape FUHCA. Southern California Bdiaon and 
Mitsubishi are prias exaaples of this distant 



After FERC's decision in the recent HlBaourl 



The consequences of FERC's Missouri Basin decision are 
draaatlc. Where PERC has jurisdiction over nergera, FERC has 
insisted that the nerger not weaken coapetltlon; If it does, FBRC 
Insists on transaission access. But where FERC has no 
Jurisdiction over the nerger, FERC cannot protect against 
anticoapetltlve consequencea . 

More generally, nerger law as applied by FERC fails to 
distinguish between efficient nergers and Inefficient nergers. 
Noraally, we expect aanageaent to act to Minimize costs for 
ratepayers. But manageaent of a target coapany will refuse even 



7 A aora detailed treataent of Inadequate SEC enforceaent 
an>a*^* In ay article, 'Corporate Restructuring and Consumer 
Risk: Is the SEC Enforcing the Public utility Holding Coapeny 
Act?- The Electricity Journal (July 1988). 

8 SfiB Missouri Basin Municipal Power Aoencv v. Midwest 

BmrflT Co. and Iowa Resources Inc. ■ FERC Docket Ko. EL90-31-000, 
Order Wotina and Granting Interventions and Dlsalsalna CtMPlalnt . 
Dec. 13, 1990. Sss also D. Allen. 'To FERC or Not to FERC, That 
Is the Question" The Electrlcitv Journal 62-65 ( January /February 
1991). 



D,g,;,zeclbyG00glC 



efficient aergera until they obtain tb* hlglMSt posalbl* price 
tor the Bhareholdera. That high price. If paid by the acquirer 
In the tora of an acqulaltlon prMBiun, can burden ratepayers. 9 

: MecAseary to 

Son* utilttl** argue that they should create affiliates 
becauee afflllatea can uee "leversgad' capital structures that 
produce lower costs. A leveraged structure has higher ratio of 
debt to equity than noraal. Since debt costs less than equity, 
the arguaent goes, costs ace lower. This argument does not stand 
up. 

Leveraging Is not a free lunch. 
the greater the fears of investors — both 
bondholders -- that the entity lacks sufficient asae 
dividends consistently, or retire the debt princlpli 
tlntes of econoMlc downturn. Owners of securities In 
utility Hill be concerned that If the affiliate encountara 
financial difficult, the holding coepany parent will shift assets 
oc funds from the utility to the affiliate, thereby weakening the 
utility. The utility's equity owners will demand sobs protection 
for that risk, in the forn of higher returns. The noney for 
those higher returns cones from captive ratepayers. 

If leveraging were indisputably beneficial to consumers, 
utilities would leverage, and there would be no just itlcat ion for 
the affiliate. But Many states and their regulators are risk 
adverse, and do not want the utility to leverage. under these 
clrcuostances, a utility who proceeds to create a leveraged 



9 Regulatory policy on the acquisition premium does not 
steer a clear path through these Issues. Thirty years ago, the 
Commission asserted that It would permit an acquisition 
adjustment only 11 consuaer benefits were (1) clearly traceable 
to the acquisition, and (2) not achievable without the 
acquisition. Gulf Energy 6 Development Corporation . 4 F.E.R.C. 
para 61,060 at p. 61,173 11976]. Assuming these first two tests 
were met, the Conmlsslon then would limit the amount of the 
adjustment to the dollar level specifically quantified by the 

However, in a 196B decision, the CoaMlsslon applied a more 
relaxed standard, considering only wbathec the acquisition was 

*prudent . ' Minnesota P?wer t Light Company and Morthem States 

power CoiBPany . 43 F.E.R.C. para. 61,103 (1988). The COBassion 
did not insist on any (a) quantification, (b) tracing of benefits 
to the acquisition, {c) a showing that baneflta would not have 
been achieved without the acquisition, or (d) a limit of the 
acquisition adjustment to the level at benefits shown. 



D,g,;,zeclbyG00glC 



liate Is alBply 



Pxaponenta ot propoaala to weaken FUHCA »aka no dtetlnctlon 
between the changes they want and the changes they need. More 
specifically, they fall to distinguish between barriers and 
burdens . 

tlonal utilities, 

company may 
IS all the utility 
'atad, coordinated 
system. Under the Act, a holding company may not own a utility 



n California; the 
.nated system. 

If the utility 
h project In a 
Some say, 'Wall 
.anges to the Act 
t* requires those 
h skills to spare 
filiates. 



In the case of true tndependenta and trad 
the only possible barrier to entry is the 'Intel 
Section 10(c)(2). Onder that requirement, a bi 
not own more than one utility corporation unlet 
assate operate togather aa a single Integi 
system. Under the Act, a holding company ma] 
subsidiary in Maine and a utility subsidiary 
two utilities never could act as a single coordi 

Tha barrier, if thera la one, exists 
chooses a corporate structure which plact 
separate subsidiary. Is thle choice necessary' 
Street requires It.' Those who seek radical 
certainly must do more than say that 'Wall St 
changes. As Appendix F explains, utilities wl' 
can spin off new companiea rathar than create al 

Even If Congresa doea eliminate the Integration requirement 
of Section 10(c)(2}, It need not relax the Improvement 
requirement. The improvement requirement Is necessary to ensure 
that a single holding company does not merely expand for the sake 
of expansion; but that it expands because expansion Improves the 
lot of ratepayers. 

F. It Is Virtually laqtoaslble to Impose Real Risk on 
Wholesale Ganeratots Aa Long Aa Distrlbntion Custotaera 
are Captive 

Utilities argue that their IPPs will bear risks of generator 
construction. IPP supporters contrast ths 19708' 'cost plus' 
construction In which ratepayers bore the risk of all cost 
Increases . 

To expect all risks to sit with the risktakera In an 
Industry of captive tnistomers Is to ask the impossible. The 
indnstry has not worked that way. 

1. Public Service of New Hampshire's Investors took the 
risk of building a nuclear plant. When PSHH failed, 
the costs fall only partially on PSNH shareholders and 
credltora. A significant share of the coat — hundreds 



D,g,;,zeclbyG00glC 



18 

of »illlons of dollars — fall on PSHH'a captiv* 
ratapayara, aa wall aa otbar ratepayer* in N«w England 
(who, under tha KU-PSNH merger proposal, must forfeit 
existing coordination savings for the bonaflt of tba 
nerged coapanr). 

2. When Consumers Power's Midland Nuclear plant tailed, 
taking the company near bankruptcy, the coapany sought 
and racalTed 'financial etabiliiation rates': 
above-coat ratea that never could be auatained in a 
coMpatitlve market. The aavinga and loon industry 
provides another example of transfer of risk. In that 
industry, the captives taxpayers were forced to cover 
the bets that investors took. In the utility iadustry 
the captlvea are, and alwaya will be, the ratepayer!. 

We all desire competitive wholesale marketa. But retail 
markets are not competitive. They ace controlled franchised 
monopolists and their custoMers are captive. Competition means 
winners and losers. If utilities are going to venture into 
competitive wholesale markets, there must be some means of 
protecting their captives from lose. 

V. DTILITIB8 OPPOSING COHPBTITION SHOULD BE IGNORED 

Posing as allies of the consumer, some utilities have 
attacked truly independent power producers as 'unreliable.' 10 
These utilities are in no position to criticize. Their 
overinvestment In billions of dollars In baseload generation in 
the 1970a has been criticised by every objective observer, 
including Forbes magazine (Peb. 11, 1985). 

Theae utilities reapond that state regulators did not uphold 
the ao-called 'regulatory compact.* By "regulatory compact,* 
they mean thelc expectation that shareholders are protected from 
market risks. Tttere is no such compact. The D.S. Supreme Court 
has rejected a claim that utility shareholders some 'compact' 
grants a constitutional right to a return. Duquesne Light 
Company v. Barasch . 488 U.S. 299 (1989). 

These utilities also claim no aversion to competition. Aa 
Kr. Jordan wrote ( Id. at 28.], 'we have always dealt squarely 
with the forces of the marketplace. ' When? This Industry, 
including Kr. Jordan's company, has realsted granting fair acceaa 
to the transmission highways on economic terms. Horeover, every 
fuel source used by this Industry — coal, gas, oil and nuclear 
Is subsidized by someone: another region may pay tor 



D.,r„.db,G00glC 



19 

spillaga, a futUE« generation may pay for pollution clean up, 
federal taxpayers nay aupport reaearch and developaent, and 
everyone nay support the cost of a nuclear accident In excess of 
the ceilings stated In the Price-Anderson Act. We do not have 
conpetition in the industry today. 

Finally, these utilities also argue that independent 
generators are less reliable than traditional utilities because 
the independenta arc bound by contracts only, not franchises. 
That is circular ceaaonlng. We can bind wholesale generating 
entities to a franchise obligation Just as we bind distribution 
utilities. 

OmCLDSION 

Proposals to weakan PUHCA constitute the Bost dramatic 
weakening of electric utility ragulation sine* the 1920s. They 
authorise entry to everyone, snail and large, with and without 
■arket power, and simultaneously 
protections. 

I appreclste this opportunity to present > 



D,g,;,zeclbyG00glC 



APPBHDICBS 



ABSUiK a new low-coat generation opportunity appears within 
jtllity 6 service territory. The parent utility with the 
ill moncpcly should exploit this opportunity for its 
Instead. if the parent utility has an affiliate It 
will channel this opportunity to its affiliate. The affiliate 
then will produce the low-cost power and sail to the parent 
utility at the parent'* higher avoided cost. The captive retail 
custoners then pay a marked^up price In effect, tha utility has 
diverted savings fron captive cuatoaers to shareholders. 

The utility also has violated principles of fair 
coapetitlon. In a free aarket, coMpatitlon would push the retail 
price down to the level of the «oet efficient seller's production 
cost. But in the case of a franchlsed utility, where there ia no 
conpetitlon at retail, the price remains at the utility's avoided 
cost. The difference is nonopoly rent. 

This type of ahuse Is a relatively recent phenomenon. Until 
a utility could not create or acquire more than one such 
.late without first satisfying the "advance review" teste of 
:he Act. These tests effectively barred a utility fron creating 
in offiliste to supply power thst the utility could supply 
tself. 11 

In 197B, this statutory scheme changed dramatically. Under 
:he Public Utility Regulatory Policies Act ot 1978 ("PUHPA-), a 
iradltlonal utility now may create or acquire an unlimited nunber 
ot generating utilities without satisfying the advance review 
tests of PUHCA. provided the generating utilities are "qualifying 
facilities" under PORPA. The transactions between utilities and 
affillatee, nonr«viewable by the SEC under FUHCA, have 
engendered mich controversy. The problem was summarized aptly by 
Michigan Public Service Commission when it described last 
ler an intecaf filiate contract Involving Consumers Power: 



U-88T1, Order of June 22, 1969 i 



11 Sections 9 and 10 ot PUHCA, 15 U.S.C. sec. 791 and 79j. 
required the utility to make an affirmative showing to the U.S. 
Securities and Exchange Commlsaion (*SEC*] that the acquisition 
1 wou a produce economies and efficiencies for the utility's 
ratepayers by 'integrating* the acquired asaeta with the 
utility's existing assets. (2) would not create the potential for 
anticompetitive behavior, and (3) would not result in corporate 
atructurea that coi^llcate state regulation. 



D,g,;,zeclbyG00glC 



contained caae atudlaa of u 
Southern California Bdlaon, 
Coiporatlon. Tucaon Electric 
Power, ColuMbla Ga* Syatan, 
Mohawk Power Corporatl 



Company, Hont ana-Dakota Utility COBpany, 
Coapany of New Mexico. Theaa i 
, aaong >aAy other* : 



:illty affiliate problema involving 
Conauaera Power, Florida Power 

Power. Sierra Pacific Power. Ohio 
Arlsona Public Service, Niagara 

Central III Inola Fubl ic Service 






utility paya t 



capacity charge* I 



Utility paya the ealacy ot tha affiliate's negotiating 



1 nonaftillati 



Utility buy* 
high- cost gae 
affiliate. 



■ affiliate bnt 



> Ita coal aubaldiary 1 



I inflate the coat of 
■alee broker to 



D,g,;,zeclbyG00glC 



Ottar T«ll Power Cowpanv 

■r Co. V. Unltad Stataa . 410 U.S. 366 
1 Court rulad that Dttar Tall engagad In 
anticoBpatitive practices designed to pravent towns fro« 
astabllBhlng their own municipal systems. Anong Its findings, the 
Court stated that Ottac Tali's refusal to wheel power to its 
aniniclpals constituted illegal Bonopollzatlon, which forecloaad 
potential entrants In the retail area tiom obtaining electric 
power fron outside sources of supply. 

Even after the Supreme Court ruling Otter Tail continued to 
erect trananisalon obstaclea. In aplte of the fact that ita 
earlier predictions of system erosion and increasing rates for 
its remaining customers proved to be unfounded. In fact. Otter 
Tali's revenues increased from $34.46 million in 1970 to S175 
alllion In 1988. 

Southeastern Power artalnt^tration v. Kentucky gtilltiea Company 

Beginning in 1974, the Southeastern Power Administration 
(SEPA) began negotiations with Kentucky Utilities Company (KU) 
concerning wheeling 2S EW of federal preference power to eight 
municipal utilities (seven of which were full requirement 
cuatomera of KU] . SEPA planned to sell the taunicipala the power 
from its Laurel hydroelectric project, but after 1977 sold that 
power elsewhere because neither SEPA nor the municipals could 
arrange for tri>eellng. 

In 1979 SEPA and the municipals filed a request with FERC 
asking it to order KU to wheel, and in 1981 FERC denied this 
request. Also In 1981 the Department of Justice filed an 
antitrust violation suit agalnet KU concerning its tactics toward 
SEPA and the municipals (DOJ ultlmstsly dropped the suit). In 
1963 SEPA filed with FERC again. This time FBRC ruled that it 
could not order KU to wheel because such an order would not 
preserve existing competitive relationships as required by the 
Federal Power Act (see FPA section 211 (c)(1)). 

Southern California Edison Company 

Five California cities filed 
Southern California Edison (SCE) ii 
effected a price squeeze and denied 
cost alternative energy on the Pacific Intertie. SCE has 
continuously stonewalled the cities' efforts to obtain access to 
Cheaper power by ottering only Interruptible tranamission service 



D,g,;,zeclbyG00glC 



•nd Mwurlng that capacity on the intertie would rarely be 
avallobla. Moraovac, SCE rejactad the citiaa' proposal to aasiat 
In upgrading the Intactla In order to Incraasa ItB capacity. 

Perhaps the aoat alanlng aspect of this situation Is the 
CltlSB' discovery that in Instances when SCE has curtailed a 
city's i^ort, it has contacted the supplier and purchased the 
available energy in the city s stead. Effectively SCE has 
prevented the municipal utility from taking advantage of a low 
cost opportunity, purchased the power itself - and then turned 
around and sold it to the Rtunldpal utility at higher rates. 

The parties tried this case in 1986 before the U.S. District 
Court, and in NoveBber 1990 the court finally Issued a ruling 
against tbs cities. Tha cities bava appealed to the U.S. Court 
of Appeals for the Ninth Circuit. 

Tampa Electric Company 

On Septeaber 3 l^Sg. W.R. Grac:e & Co. filed a petition with 
the Florida P5C requesting a declaratory stateaent requiring TBCO 
to provide transmission access which would allow Grace to wheal 
power from its cogenerating facility at a cbealcal plant to its 
mining operation eleven miles away. Dnder the rule at issue, tba 
PSC can only order this type of salf-service wheeling where 
provision of the transmission service would not result in higher 
costs to the utility's ratepayers and would not adversely affect 
system reliability. 

The PSC denied Grace's request on the ground that wheeling 
would likely result in higher cost to TECO'B ratepayers tnit 
noted that TECO 6 refusal to wheel could b« subject to prudency 
review based on Grace's stated intention to construct ite own 
transmission line and TECO's duty to take action to alnialze the 
adverse impact of revenue loss (which would emanate from Grace's 
lost fees from not using TECO's transsdssion lines). 

Public Service Company of Colorado 

Federal legislation gives designated cnstOMsrs preference to 
federally generated hydroelectric power. Starting in 19B5 three 
federal executive agencies (PBAs) In Colorado atteapted to 
purcbaoa such power fro« the Western Area Power Administration 
(UAPA), boMevar the purchase agreemant was contingent on the 
agencies securing tranaaission access. 

For an extensive period of time tba FEAa attempted to 
negotiate agreMPents with Public Servica Company of Colorado 
(PSCO) to wheal tba NAPA power. PSCD refused to wheel, claiming 
that it would cons* an increase in rates to other PSCO customers. 



D,g,;,zeclbyG00glC 



despite the fact that PSCO supplemented ite own generating 
capacity with firm power purchases (PSCO could have stopped the 
power purchases and sold transBlsslon access to the agencies, 
thereby lowering rates). 

On April 14, 19B6 the agencies filed a conplalnt with the 
Colorado PUC requesting a wheeling order. However, the PUC 
dismissed the coMplaint on the grounds that the Commerce Clause 
barred it from ordering wheeling, and on Harch 7, 198B PSCO tiled 
an appeal in a Colorado state court (can we be nore specific ?). 

8 p|»them California Edison - San Dleoo Gas 6 Electric 

During the recent PERC hearings on the proposed Southern 
California Edison SCE) takeover of San Diego Gas & Electric 
(SDGGiE). a FGRC staff witness testified that SCE has frequently 
denied transmission service for economic reasons. In one 
Instance SCE denied SDG&E north-bound transalssion fr^ a jointly 
owned nucAeiar pl^nt, due to an alleged lack of available 
capacity, despite on internal meao which indicated the 
availability of such capacity. In another Instance, SCE offered 
its municipal 'resale' cities flm transmission service only If 
they purchased a firm share of the San Onofre Nuclear Generating 
Station power. 

Another instance of SCB nunlpulatlon concerning transmission 
service presented itself during state level proceedings on the 
Bergar. A witness from SDGbE testified that SCE arranged a 
tranamlssion swap with the Los Angeles Department of Water and 
power (LADVrP) In order to squelch LAMP interest In another 
ilsslon project which would allow various other smaller 
ision dependent utilities to avoid purchasing transmission 
access trcn SCE. 

Hew York State Electric 6 Gas Corporation 

In a case Involving transmission of preference power from 
the Power Authority of the State Of New York (PASHY) by New York 
State electric & Gas Corporation {NYSEGI. FERC found restrictive 
provisions in the contracts to he unreasonably anticompetitive. 
TERC upheld complaints by the village of Penn Yen, N.Y., that 
restrictions in the contract limited the use of the power within 
the village boundaries thereby restricting Penn Yen's ability to 
extend its ounlcipsl system. 

The U.S. Court of Appeals for the Second Circuit ruled that 

PERC's opinion amounted to a motion to compel wheeling, thus 
requiring a hearing under Federal Power Act sections 211 and 212. 
The court remanded the case to PERC. Penn Yan, PBRC, and the 



D,g,;,zeclbyG00glC 



Flonaa Poiwt and Light 

in Florida, Florida Power and Light (PP&L] r*tu««B to til* a 
txansalsalon tariff and will daal only on a contract -by- contract 
basis Thla policy laaTaa aunlclpal ayatMU dependant on 
transBlssion by FP&l unable to taka advantafla of econoalcal 
«hort-tera tranaactlona with other utilltlaa. aa by tha tiaa 
nagatlations can ba concluded, the opportunity la gone. 

American Electric Power Corporation 

The giant Aaerlcan Electric Power Corpocation torcaa otbar 
ntilitlea dependent on its Monopoly ownarahlp of trananlsBion to 
forego short-ter« and opportunity sales and purchases AEP haa 
rafuaad to a«ll transnlssion service in less than iJ-month tiaa 
asgaanta, and inposes unreasonable notice requi renenta on 
utilltlaa raqoasting tranaalaalon. Tlia upahot la that UP 
acqulraa a coapatltlva advantage ovar othar generating utilltlaa 
through Ita cootrol of tha tranamiaalon ayataa. 

Carol iM Pgwr-Jafl LitOtt. Duke Po— r. and Viroinla Blactrlc and 

Carolina Power and Light raqulraa an eight yaar notice 
before it will wheel power froa alternate suppliara to a 
■unlclpal custoaer on ita ayatea, unlaaa that power is preference 
federal hydro power Duka Power has -a similar conatralnt tor 
those municipal -cooperative cuatoaera baying power troa tha 
Catuaba Nuclear plant Virginia Power alallarly raatrlcta thoaa 
wholesale cuatoaers who participate as owners la tha North iknna 
nuclaar units fro« access to suppleinental purchaaea. 

City of Mantl. Otah v. Utah Power j Light Co. 



tllad an application with FERC rerequestlng tranemlBi 
on a long-ten basts Manti had arranged alternative sources of 
power to replace UP6L, but could not finalize the agreement until 
irPbL guaranteed tronsalaalon acceaa. UP&L stonewalled Manti for 
eleven aooths (Jan. 'BG to Nov. -86} clalalng that it naadad 
additional Inforaation, and during thla tlaa filad a w>tton with 
FBRC to disaiaa tha application. Only after FEKC dlaalssad 
UPKL's aotlon. did Hantl and ITPbL raacb an agraeaent. 



D,g,;,zeclbyG00glC 



Section 10(b)(1) of the Act requires the ConnlSBlon to 
diaapprove any holding coapany acquisition which *tend[s] towards 
... the concent rattan of control of public-utility conpantes, of 
a kind or to an extent detrimental to the public Interest or the 
Interest of Investors or consuMers.' The ConntSBlon'a analyses 
of the antl-coapetltlve risks of recent holding conpany 
acquisitions bear little reseablance to rational antitrust 
analysis. 

One exBBple Is Northeast Utilities' acquisition of Public 
Service of New Haapshlre. Admin. Proc. 70-7695 (December 21, 
1990). The Conmission held that acquisitions were per b« not 
anticompetitive because the post-acquisition entity was smaller 
than other holding companies In the nation. There was no 
analysis of relevant product market, relevant geographic market, 
concwitcation ratios or Indices, or any of the other conventional 
or reliable [actors used in antitrust analysis. The ComDlsslon 
essentially found that b merger would not dominate Market X 
because the merged company was smaller than companies In Market 
Y. No statute, court, agency, or commentator. In the history of 
antitrust law has ever analyzed a question of competition in this 



B. The Commission's Decisionmaking Procedures are Biased 
Against Consomacs and Inconsistent with Administrative 

Proper enforcement requires not only adequate staffing, 
procedures which ensure public participation and review. In 
regard, the SEC's procedures are faulty, in several ways. The 
first example concerns utility proposals which trigger a notice 
in the Federal Register and an opportunity for public cob 
In those cases, utility officials commonly meet with the SEC 
staff in advance of the notice to Iron out details in private. 
Then when consunera file protests pursuant to the Federal 
Heaister notice, the very same staff advises the CoanlBslon to 
reject the consumers' concerns. This procedure Is Inconsisti 
with administrative fairness. 

In numerous other cases , no Federal Register notice 
triggered whatsoever, instead, the utility and the staff mi 
privately, and agree on a corporate structure that does not, ii 
the staff's view, implicate a specific provision of the statute 
The staff then sends the utility a so-called *no-actlon* letter, 
stating the staff's expectation that It will take no action to 
oppose the proposal. The public has no opportunity to comment on 
whether the Act Is Implicated, and does not even learn about the 
utility transaction until afterwards, If at all. I am aware of 



D.,r„.db,G00glC 



A. Tha BonndBrloa of PDHCA's 'Intrastate' Ezaaptlon Bvaporat* 
HhenaTar An interstate Electric Company *Transt*rs Tltl« to 
Blactrcns* Htthin tb* Stats of Gmwration 

Tho SBC haa JnrTtl 'intrastate* a holding company structure 
with explicit planm to sell interstate. tn the Sierra Pacific 
Resources case discussed previously the construction consortium 
planned to sell electi^lcity at wholesale to customers throughout 
the Western U S. The Commission found that the consortium would 
be Intrastate because the interstate contracts would be drafted 
■o a* to 'transfer titl« to the electrons' at the plant slta In 
Nevada. The notion that etectrohs are gooda that are selected, 
owned, .and transferred in Identifiable lota has no basis in the 
law of PUHCA or tha law of physics. 



Section 10<c>(2) of puHCA reatricts holding con^tany 
acqniaitiona to tbosa which might bring actual oparational 
benefits to Ita coa^onant parts from related operations and 
unified management. 1 On at least three occasions, the SEC haa 
approved a type of restructuring where a shell corporation 
acquired the atock of an exiating utility system while making no 
change in the operations of utility aaaets. The third declaion, 
involving Wisconsin Power & Light, waa challenged In court by a 
conanmar group I represented on the ground (among other grounds) 
that because the restructuring made no improvement in utility 
operatlona (HF6L had admitted as much). It could not aatlaty 
Section 10(c)(2). In August 19B9, the U.S. Court of Appeals for 
tba D.C. Ctrcait found that the SEC approval violated Section 
10(c)(2). lfl§con«m'a Enviropaientai Oecade v. BEC . 882 F.2d 523 
(D.C. Clr. 1989). 2 



1 See, e-q. . Electric Energy, Inc. . 38 S.B.C. 658, 670-71 
(195B) (CoDmtssion's approval rested on findlnga that tha 
acquisition led to creation of an 'operating co^ittee' to 
'effectuate the efficient coordination of tha generating 
facilities ol [tba to-be-acquired utility] with the generation 
transmission and distribution systems" of the acquiring 
utilities; use of new microwave communication linka to coord nate 
pre-planned power transfers among the naw plant and the exiating 
utilities: anhancamant of the existing 'power pool* relationahlp 
among three of the four acquiring utilities). 

2 Tba Court resMndad tha outtar to the SEC, and tha parties 
now are diaputing what type of Improvemants are necessary to 
aatlafy the statute. The coapany continues to assert that no 
change tn the operation of utility aaaets la neceaaacy. 



D,g,;,zeclbyG00glC 



Section lO(b)Il) of the Act requires the Canmlaslon to 
disapprove any holding company acquisition which ■tend[B] towards 
... the concentration of control of public-utility conpanles, of 
a kind oc to an extent detriaental to the public Interest or the 
int«raat of investors or consuBsrs.* The CoBnisslon's analyses 
of the antl-cOMpetitlve risks of racant holding coi^any 
acquisitions bear little resaablanca to rational antitrust 
analysis. 

One exanple is Northeast Utllitias' acquisition of Public 
Service of New Baaapshlre, Adaln. Prac. 70-7695 [Decenber 21, 
1990). The Commission held that acquisitions were per ye not 
anticompetitive because the post-acquisition entity was smaller 
than oth«r holding companies In the nation. There was no 
analysis of relevant product market, relevant geographic market, 
concentration ratios or Indices, or any of the other conventional 
or reliable factors used In antitrust analysis. The Commission 
easentlally found that a merger would not dominate Market X 
because the merged co«vany was smaller than companies in Market 
y. No statute, court, agency, or connentator. In the history of 
antitrust law has ever analyzed a question of competition in this 



Proper enforcement requires not only adequate staffing, but 
procedures which ensure public participation and review. In this 
regard, the EEC's procedures are faulty, in several ways. The 
first example concerns utility proposals which trigger a notice 
In the Federal Register and an opportunity for public coodaent. 
In those cases, utility officials connonly meet with the SEC 
staff In advance of the notice to Iron out details In private- 
Then when consumers file protests pursuant to t 
Register notice, the very same staff advises the Cos 
reject the consumers' concerns. This procedure 
with administrative fairness. 

In numerous other cseas, no Federal Register notice Is 
triggered lAiatsoever. Instead, the utility and the staff meat 
privately, and agree on a corporate structure that does not. In 
the staff's view. Implicate a specific provision of the statute. 
The staff then sends the utility a so-called 'no-action* letter, 
stating the staff's expectation that it will take no action to 
oppose the proposal. The public has no opportunity to comment on 
whether the Act is implicated, and does not even learn about the 
utility transaction until afterwards, if at all. I am aware of 



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'8«lf-daallng* Bbould b« daflnad to Include *r«clprocal 
daaltna^* Asiimm a Virginia uttlltr craatas an affiliate that 
Mlla to a California utility. Aasuaa further that the 
Callfoxula utility creates an affiliate to aell to the Virginia 
utilitir. Finally, assune that each affiliate la producing at a 
cost balow Its affiliated utility's coat. In tbsaa tranaactlona. 
tiotb ntilitiaa Bay be overpaying tor powar, if aach buying 
utility conld bava prodncad poaar Itsalf at a Immr coat than tha 
parcbasa prlc*. 

Regulating cross-country reciprocal daallng will be 
difficult. In tfa* ajcaaple abora, regulators anat prot*Ct tha 
tntarasta of captlva cnstoaars In Virginia, c^^lva cnstaaara In 
California, co^ietitian in Virginia and coHpatitton in 
I anactad with that typa 



Soaa utilltlsa oppoaa tranaMiaalon accaaa by arguing that 
thair nattva load coatonara ha«a a right to prafarential uaa of 
tha facilities for idilch tbay bava paid. This iiiuii—iil inflstaa 
a transitional di^pota into a pazaanant distortion of wbolasala 
■arkats. 

To tba axtant tha native load cnstaaars bava alraady paid 
for facilities, they are antltlad to sosm typa of prafaranca. 
Bat that preference should be no larger and last no longar. than 
necessary to coapensate the native load for costs intrurrad. 
Existing capacity will not lost forever Over the long tacB, all 
prospective users should bava an eguat rigbt 
facilities provided they pay thair faf 
perpetuating tba nativa load preference, ■ 
equal right to 'pay for' whatever they need 
evenhandedly In bulk power narkets. This principle ■ 
ownars of aonopoly transaission facilities must take into a cc o un t 
tba naads of non-native load rat^ayaES. 

During tba traBsitlon period, aativa load coatoaara of tba 
transBlssiCD ■onopoliat bava no lagltiaate aspaetatlon of 
■ooopoly cavanaatioa. Vor do thasa cnstoaars bava a rf^t to 



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11 

assign the Increnental cost 

transalssion customers. On ai 

benefit all users. Therefore, all customers should st 

costs of all facilities. To force newcomers alone t 

cost of new facilities is to create a monopolist's dl 

which could not be sustained in a conpetltive market. 



APPENDIX F 



Some argue that utilities should be free to expand so that 
they can export their experience and eklll to new regions. This 
argument is wrong. If an existing utility has management to 
spare, it need not expand to new territories. It can transfer 
that management to a new company and spin off that company to its 
shareholders. In this way, other regions will receive the 
benefits of the excess skills and assets. There is no public 
interest reason why the pre-existing utility need retain control 
of the new company. 

The only argument against the spin-off option is that the 
original utility could not itself profit from these new ventures. 
That is precisely the point. The utility cannot serve two sets 
of customers, one captive and one competitive, without creating 
ciske of abuse that currently are insoluble. 



The following legislation offers the protection necessary to 
ensure a truly competitive market. PUHCA exemptions would be 
available only after FERC deems such exemption to bs in the 
public Interest, on a case-by-case basis. The applicant would 
Obtain the PUHCA exemption and FERC price approval in one 
proceeding. FERC would analyze the distinct benstits and risks 
of each project on a case-by-case basis. Exemption would be 
conditioned on the wholesale power supply contract being pro- 
competitive, protective of consumers, and consistent with state 
requi renients . 

Two specific features of the legislation lacking in tb* 
Johnston Bill are Section 9 which guarantees fair transmission 
access to all IPFs and Section 6 which prohibits self-dealing. 
Additianally, Section 5 sets out requirements regarding 
registered holding conpanies and the protection of states rights 
to participate in integrated resource planning. 



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Ty* TITLK. 

rmDIHGS AMD POHPOSE. 

DBmiTIONS 

M ca iPTIOHS FKCH THE HOLDING COMPMy KT 

nCDIPTIOlI REQDIRQIENTS FOR POWER PSODnCZK SALES. 

BKXTIRBfBMTS APPLICABLE TO DTILXTIEfl AMD DTXLZTV 

AfraiATES 

OTHKK RXOtllRBCGHTS RKUT8D TO BXSIPT POWER 

PRODtlCBtS 

SBCnOH •! ALTERNATIVE OWNERSHIP STRUCTURES 

SECnOI »l PAIR TRANSMISSION ACCESS 

SBCnOM lOt JURISOICTIOH OF OFFIMSBSl BRFOSCBaMT OF 

LIABILITIES AMD DOTIES 



SBcnoa 3. 

As oMd In tliia A«e — 

(a) BMAIL OTILITV.— nw tvTB "r«tail utility" wmmjm any 
p«rsMi baving th« right and«r 8tat« law to •all •lactrlcity at 

(b) Pomt niODOCIR.— nw t*r> 'powar i^roduoar" aaana any 
parooa, etbar than a public utility holding ooapany, which la 
•ngagad axoluaiTaly in tb* buainava of awning ex oparating on« or 
nora aligibla faoilitlM as dafinad by tbia Tltl*. 

(o) AFFILIATB POWER PRODDCER. — Tha tan "affiliata powar 
prodnoar" aaina a powar imiducar that is an affiliata ex 
osoociata ooapany of a ratail utility eoi^any. 

(d) EXEMPT PCNOR PREXIOCBR. — Tha tan '•xmrnpt powar 
produear" aaoiM a powar prodnoar or affiliata powar producar that 
gualifiea for and baa obtainad an axanption undar this Tltla froa 
ona of Bora provisioos of tha Aet. 

(a) BLICIBLB PACXLITV. — (1) The tara ■eligible facility" 
aeana a facility that ganaratas electric anargy for oala at 
irtwlaaala (whiidt facility nay include intaroonnacting 



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tranamlssion facilltl** naammmmxy to afCaot auch sal* at 
trtiolasala), pfovldad tbct if Ui* •lactrlcity produo*d tram maOb 
facility i« sold, dirwAly or indiractly, within tbs Unlt*d 
Stataa, «11 •Icctrlcity ««iwrat*d by such facility 1« aold nndar 
« pow«r puxcbasa «gr«*B*nt or agroaBanta approved purauant to tba 
requircmants of aaetion S; and provided further , that aalaa of a 
aaall aaount of alactricity fra« a facility to a geographically 
pToxiaata nltiBata conauaar that la intagral to tha oparatlon of 
and! facility, including an oaaantial auppllar of auch facility, 
ahall not praclude auch facility froa aligiblllty if auch aala la 
not in violation of Stat* lav. 

(2) If at any tiaa thara ia In affect a rata or cbarga 
for, or in conitaoticn with, tha conatruotion or laaaa of a 
facility, or for tha purchaa* or aala of elactric anargy 
ganaratad by tha facility, that facility may not bacoaa an 
aligibl* facility for purpoaaa of thia Act unleaa 

(A) aach Stata coaaiaaion having juriadiction ovar 
■u^ rat* or eliarg* cen**nta to tb* facility bacoaing an 
aligibla facility; 

(B) tha Oo^aaion baa found that tha ownar of 
audi facility aatiafiaa tha r*qulT«»*nta of sactlona 4, 
S and C, vbar* a^lieabla) and 

(C) tha Saouritiaa and Exchanga Ccaaiaaion baa 
approvad any cbanga in ownarahlp of au^ facility nndar 



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•iqr vplle«bl« provision of tho Public Dtility Holding 
Oeopaiqr Aot. 

(f) PDSCmtsnK UTHiZTS.— nia 1:>rM "purcrfiBBlng utility" 
•MAS « public utility that oatoo u tM m power purcb««« agraoaont 
witb a powar pradaoor, or that otbarwiaa, diractly or Indlraotly, 
purdtasoo •lootric powar or anergy tram that pcwar prodncar. 

(g) AFFZLUn. — nta tars 'affiliata" baa tbe aama 
dafiuitloo aa la tha Public Dtility Holding Ceapany kcti provldad 
tbat an iviiif p cwar pmdnoar ataall ba daaaad to ba an af f lliata 
o£ a zwtail ntlli^ if, at any tla*r baforo or aftor tha mxmmpt 
potior pKodnovr nn^innia oaaaorcial oparatlon of an allglblo 
facility, tba rotail otiUty, diractly or indiractly, owna or 
Influoneao, 1* owMd by, or ia mbjaot to eoHMn oimarahlp or 
Inflnaooo wltb, aadi a T a Tl - powar producor or sucb ox^^rt powor 

c prodooaoacr. Tor purpoaas of this 



(1) 'ow n o ra hlp' ■aiM. 5 par cantua ownaroblp of aiqr 
oc Kpx r a to or partaaraltip int*raat, ragardlaaa of wbothar 
■udi latavaot ia a voting or a nonvoting iataraat; and 

(2) "inflnanoa" Man* baving ttao petantUl to aftaot 
aiqr dadsloB of tbo afflliato wbieb doolalon will bavo a 
natarlal affoot on coots, rovannea eo: eaopatltlva babavior 

m ami OOMOSnOH.— ma tars "Stat* eo^dsaion" baa tbo 
■oaning ^ovldad tar aoetlon 3(14) of tbo radaral Pewar tot. 



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(1) cowassiw.— Th* t«ra "ni^liiliin" auns tb* p«d«ral 
Energy RMgulatory CoBaiKalon. 

(j) ACT. — The tan "Act' mmmnm th* Public Dtllity Holding 
Co^any Act, 15 D.S.C. mc. 79, i£ uq. 

(k) UTBGRXTBD USOmtCI PLUI. — Th« t«XB ■Intagratad raaourca 
plan" Baana a laast cost anavgy consarvatlan and slactrlc povar 
plan which avaluataa all raaBonataly avallabla raaouroaa, 
including >mv pOMar auppliaa, anargy conaarvaticn. and ranavabla 
raaonroas, in rardar to aaat aq>actad futura daaand. 

(1) COMPBTinvB PBOCmtBam PROCESS. — Tha tan 'ccivatltlva 
proouraaant proc aa a" aaana a procaaa anaurlng that all paraona 
viahlng to provida ganaratlon or non-ganaration aarvicaa hava a 
raasonabla opportunity to do ao. 

(■) ifUMIciPAi.ITY. — Tha taxa "mnielpallty" has tba aaaning 
■at forth in Saetlon 3 (7) of tha Fadaral Powar Act. 

<n) ATFECIBD STATE COHKISSXCW — Any Stata coMBiasion with 
authority to raqulata tha ratall rata* of a retail utility 
purohaaing (dlraotly or Indiraotly) troa, or afZillatad with, an 



(o) OTBlIt TXRHS.— Sxoapt aa otharwiao dafinad in thia 
aaotioR, all tarma naad In thla Titla hava tha aaaning providad 
by aaction 2(a} of tha Holding Coapai^ Act. 

sBcncm 4. EXENPnoHS n»H tse boidihg caNFAirr act — (a) 
Appiiaatipi. »«■• ■!«-«♦■««.■ Upon an>lication ty any parami 



D.,r„.db,G00glC 



■Mlflna to baooBB an a y 1(1 1 powar producar or affillat* ttaaraof, 
ttw n—lBiliMi ■■; by order axaapt tba «pplio«nt troM uiy 
provision of tba MOt if tha CoMaiasian finda, aftar notloa and 
oppog tu ni^ for hsariiig on ■ncfa application, that 

(1) mxm^gitian tnm audk provision will advanoa the 
public intaraat and tba intaraat of owiwwwraj 

(2) tha powar prodnoar baa antarad into a powar 
c that aatiafiaa tba raquirasanta of 



(3) if tba igpplioant is an atfillata po— r producar, 

tba afipliaaBt baa aatlsfiad any applieabla raqulra>anta of 

saotion «. 

(b) An ^plioant nndar aubsaotlon (a) of tbia aaotion that 
is or will taao^M a powar producar or an affiliate of a powar 
producar, by aoqnlring an Intarast in an allgibla facility or a 
pewar prodnoar, sball ba aligibla for axa^rtien fra« only tbosa 
provisions of tba Aet ttaat etlMrvisa would apply by raason of 
sueb aogoisltldD. 

(o) j^HaataiaUak' Witbln lao days of anaotaant of this 
tltla, tba Oo^iissian sball proBulgata rulas isplaaanting 
qipllcatian i 



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SEcnoH 5. zxBipnaN saooiBBiBirTS rtm pomR prodocbr sales. — 

Th« CflaaisBlon wbrnll not approv* uty rates, taraa or 
oonditioiw of ■ Mil* «C «l«ctrlc WMrgy mbjvet to Its 
jui-1 edict Ion by a powar prodaoar aaakliq to obtain or aaintain an 
axaaptlon nndar Kaetloii 4, nnlaaa tha r«qulr^»ants of aubaoctlona 
(a] through (o) ara satiatlad. 

(a) BiTlW tY CflMifilW Aa riMalaaliiii ha* found that 

(1) tha rataa, tara* and ooodltiona of tlia powar aalaa 
■jrawant an 5>'*t> raaaonabla and not unduly dlacrlminatory 
or prafarantlal nndar Sactlona 305 or 30« of the Fadaral 
Fowar Act (16 O.S.C. S24o and a24d) , provldad that an 
agraaaant vill not aatlafy this raqulraaant unlaaa 

(A) it waa antarad Into aa part of a co^atitlva 
proouraaant procaaa in vbloh tba aallar faced affeotlvn 
oe^^ltlen or 

(B) Ita ratea do not OKcaad tha aellar'a coat of 
•ervloe. Including a raaaonabla ratom on pmdant 
InvaatBant; 

(3) no paraen or ■nnlclpallty otharwiaa able to aell 
electricity to the purohaaing utility has baan unable to 
ooapate to sell electricity to the purchaalng utility or 
■unlcipalltlaa or parsons for raaala because of the 
purchaeing utility's failure to provide such entity 
nondiacriAlnatory transBlaalon accasa; 



D,g,;,zeclbyG00glC 



> pwrson or aunicipality lnt«rconn»ct«d vitta th* 
J ntlllty that Is othaxvlsa abl« to paxdbtm* 
•Isotriclty trom tba poiwr produe*r for r«««l* baa ba«n 
unabla to co^Mt* to naKo th* purchase bacauaa of ttaa 
purehaalng ntllltr'S tallura to provide such entity 
nondiacrlHinattny traiWKiaaion aooasa; and 

(4) the i^owar sales agreement ia not pr^ilbitad by 
BmetUm 6 of tbls Title. 

(b) opportunity for Ravlew by *.ffecte d Stata CoamlaglonBi 
Ro affected State cOEmiasion (other than a State coaaission 
covered by subsection (c}) baa found that 

(1) the poear aalaa agraa>ent waa antarad into through 
a process laoonsistent with any applicable co^Mtitive 



(3) ttta purchase Is inconsistant with any applicable 
integrated resource plan; 

(3) the power producer is Incapabla of perforMlng Its 
(rt>llgatians under the power sales contract, or bas 
affiliations whl^ l^osa an undue risk that the power 

r will net bo able to perfora sncb obligations; or 
suota State cci^aission lacks accaas to tbe books 
I of the ratall utility autajsct to its 
jorlsdiotlon, or any affiliats thsreof, or of the power 
poroduoer, to the extant nacaasary to protect against tbe 
risks sot forth In clause (3). 



D,g,;,zeclbyG00glC 



(c) llaviMt of Haolrtar^d Holiling ChtmiiI— ; NlMr« th« 
puxcb«a« !■ Bad* by an op«r>tlng mubBldiu? of r*glat«T«d holding 
oo^Mny for tlw b«iMfit of tho holding eoapany systa, subaoction 
(b) will tf Mtiafiad if nona of tha findinga sat foirth in 
aubMotinw {b)<l) threat^ (b)(4) hava bMn Hda — 

(1) whara thora is an approvad ragional intagratad 
TaaouToa plan, by an authoriaad ragional board or, in tha 
ataanoa of aucb board, by tfaa Coaaiaaion; 

(3) whara thara ia no approvad ragional intagratad 
reaourca plan, by tha CoaHiaaion. 

(d) T-ni—Mf^nq wpguiationa; Not latar than 110 daya 
aftar tha anactaant of tbia Titla, tha CoHaiaaion ahall 
proaulgata ragulationa and atandarda for i^lawanting this 
aaetlon. Ho sala )>y a powar produoar shall ba approvad by tha 
CoBBission until such standards hava bacosa affaotivs. 

stenoK 6: sEQnntDisiiTs applzcswlb to dtilitibs and dtiuty 

ftrriLIATES— (a) Advanea Baviaw of Rata il Dtilitv Acouialtlona! 
No ratail utility or affiliats thsrsof ssy acquin, diroctly or 
indiraetly, by any Bsans, nora than S par cantm of « i^owar 
producar,irtiath*r or not axaxpt, 

(1) tha Coasiasion finds that such acquisition will 
advanc* tha public intarast and tha Intarast* of censuaars. 



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■nd will n«t affect adwrsaly the cost of capital of much 
retail utility; and 

(a) no affactad Stata comHlaaion has diaapprovad aucb 
acquisition, 
(b) liinitfH™ o" »afa»ll utility OwnarahiPi 

(1) Nd applicant ahall ba aliglbla for any a](aiq>tian 
undar aaetion 4 of thia Titla if ona or aora ratail 
utilltiaa or aff lliatsa tharaof own aora than 50 par cantua 
of or axarciaa oantrolllng influanoa ovar, or, aa a raanlt 
of a propoaad acquisition, will own sora than 50 par oantua 
of or ascaroiaa cmitrolling Inflnancs ovar, any axaapt powar 



(3) If a powar producar axaapt undar aaotlon 4 tafcaa 
any action tba raault of which would raault In a violation 
of Bubaaction t(b)(l), tha Co^Uaaion aball rovoka any 
axa^tion of such ratall utility or afflliata power producer 
frantsd pursuant to thla Title. 

(0} ylwaneing by Baglstarad Holding Coapanlaa! The 
isauanca of sseuritiea by ■ ragistarad holdinQ eoapany for 
purposaa of financing tha acquisition of a potrar producar, the 
gnarantsa of saeuritiaa of a powar inodocar by a ragistarad 
holding oo^any, tha antaring into aarvioa, sales oe construction 
contracts, and tha craatien or salntananca of any other 
relationahip batwaan a power producer and a registered holding 
co^^any, Ita afflllatas, and associate ocapanlaa other than 



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acquiring or holding tb* ■oonritias or uiy otlwr cNmorship 
intorast in ofw or nor* noR-ntility po««r produoorB ■hall raaain 
■objoct to roviov ondor thn Holding Coapuy Act. 

(d) T—,..^<^. bta.««n Dttliti— »Bd Affiliate Pci«r 
proJuef i >otwitbotanding any otbor provision of this Titlo, an 
affiliated axi^t powar prodttoar shall not angaga, dlrsctly or 
indireotly, in any tranoaotioa with any afflliatod public 
utility, axo^^ ttaat tha ratail utility nay pay dividanda to. or 
rooaiva dividanda froa, auoh aKiopt affiliata powar producar in 
aoeordanca with oncii rulaa and rogulationa aa tha Candasien vay 
dosa nacoaaary to protaot ttaa financial intagrity of tba ratail 
utility and tba intaraata of ita oonauaara. 

(a) ypAlhtt'Hm of ■aBiaroeal Prafaraneaa. — til It tb»ll ba 

unlawful toe any public utility company or public utility bolding 
co^tany that ia an affiliata or aaaoclata coapany of a pewar 
producar, dlractly or indiraetly, to— 

(ft) aaKa or grant any prafaranoa or advantago to 
■uob i^owar j^reduoar with raapact to tranaaiasion 
■arvioa, powar purohaaaa, powar aalaa, coordination 
aarvieaa or intaroonnaotlena; 

(B) dany or withhold f roa aiqr paraon or 
Bunlelpality that aalla alootricity for raaalo any 
aarvloa or tba vsa of mjty prc^arty of aucti public 
ittili^ oaq^any, or public utility holding ooapany that 



,db,Googlc 



ia not dwilad or witblwld tram an affiliat* pow*r 

prodttccri or 

(C) Mitar Into any eontraot or agraoaont with any 

othar i^ubllo utility oonpany or public utility holding 

ooafMny, or oftiliata or aaaociatB eo^^any tharaof, for 

any puzpeaa probibitad in aubaaotiona (a) (1) (A) or (B) 

of thia aaotim. 

(3) Panaltiaa. — Any public utility aampasy or public 
utility holding CMvany that oauaa a or panlta to ba dona 
any BOt, aattar, or thing prohibitad or daclarad to Im 
unlawful 1^ thia aaction, or oait* to do any aot, aattar, or 
thing raquirad by thia aaotion, 

(A) ahall ba liabla to tba paraen or pajraona 
injurad tharaby for tho trablad anount o£ danagaa 
auatainad in conaaquanca of auA violation, togathar 
with raaaonabla attomay'a faaa, to ba fixad by tha 
court or Coniaaion, which attomay'a faaa ahall ba 
taxad and collactad «• part of ttaa casta in tha eaaa. 

(B) ahall ba prohibitad fro* acquiring any 
intaraat in, or fnoi oparatlng, any allglbla faoillty, 
not in axiatanca aa of tho datamination of a violation 
of thia Act, for a pariod to ba aat by tha court or 
coamiBBion, taut in no avant laaa than 5 yaara. 

<f) I^planantlng Ragulationa! Not latar than 180 daya 
aftar anactaant of thia Titla, tha ce^iiaalon ahall proKUlgata 




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■tandards that th« Co— 1 ■■ton riuill vmm In d«t«rmlning «twth*r 
tba r«quir*Bwits of this ■action ara Batlafiad. Mo aala by a 
powar produoar aball ba approvad by ttaa Co)Halaalan until aucb 
atandards hava bacowa alfaetlv*. 

sBcncai 7: 

(B) DiMwltion. imryr Of CtmaolldMtloi 
produoar or affiliate ttaaraof ahall dlapoaa of, sarTa or 
conaolidata any allglbla facility of an axa^pt powar produoar 

(1) tha applicant cartifiaa to tba CosBiaalMi tbat (A) 
it baa netiflad aacfa affaotad 8tata CMBiaaion of auch 
aetion and (B) tha action la not Inoonaiatant with any Stata 

(3) Um Comiaaion flndSf attar opportunity for 
haaring, that auch action will net tand toward a altuatien 
inoonaiatant with tba raqulraaanta for axaaptlon undar thia 
tltla or any othar provialmi of law. 
(b) ownarahlp of Ellalbla PaellltieB and Oualtfyin? 
ragjlitlti' ^^ ownarahip bg a powar produoar of ona or *ora 
aligibla facilltiaa, looatad in tha Dnitad Stataa or abroad, for 
which an axaaptlon haa baan obtainad undar aaction 4 of thia Act. 
ahall not raault in auoh powar produoar baing eonaidarad aa baing 
primarily angagad in tha ganaratim or aala of alactrle powar 



D,g,;,zeclbyG00glC 



wlthla am — alng of moUom 3(17) (C)(U) wia 3(lt>(»(U) of 
tlM Tmtvm paw ftct. 



(1) Open writtan ordar of tb« Ce^ulon or a ttat* 
cc^iiaaioBf booka uid r*ooK4a Bhall ba apan to public 
inapaotlim, and ahall ba aubjaot to aubpooM and ethar 
preoaaa ot law, to no laaaar airtant aa ooaparabla 
Information ragnirad of ratall uttlitiaa undor Kata lav or 
cosBlsalon ragulatlonai provldad . tbat trada ■aeraf and 
othar aanaltlva oo^Mrclal infozmatlon ahall ba axiapt fra 
l^ublle dlBCloBura or diacloaura to potantlal oo^atltera of 
madh afflllata pewar produoar by an affaetad ftata 

LB— laaion and aball not ba providad to a Itata aoaatMtsn 
nnlaaa aooh eo^iiaaion baa in plaoa preeaduraa for 
protacting tha oonfldantiallty of audi intormtion. 

(2) Any Dnltad Stataa dlatrlet eourt leeatad In tb« 
stata In which tba Btata lb— liaioa ratarrad to in paragraph 
(1) la looatad aball bava jurisdiction to laaua an 
Injvnctlon ooapalllng eoapllanoa with an ordar laauad by tba 
Btata ocaad^aion nndar thia aubaactlon. 

(3) Par pnrpoaaa of tbla aa baaotion, "betriu and 

(A) aa alaotrle vtlllty c 
i-agnlal-orr anttaarity imdar Ma 



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(B) any pomr prodocar ■•llinf powar at vholamtla 
t0 auota alcctrlc utility, and 

(C) any •ubaldiary ooapany, aaaoslat* ceapany, or 
afflllata of tba alactrlc utility ooapany or tba powar 
proOiwor. irtwravar looatad. If aooaaa to auch boolw and 
roeorda ara raqolrod for tba affaetlva dlsobarga of tba 
Coaalaaion'a or Stata co^d«aion's ragulatory 
raipmalbllltloa affaetlng tba provlalon of alactrlc 



stmtm Si UTBDunvi omsBsaiP STRUcruitti 

For th« pnzpoaaa of datoEmlnlng wbatbar tba Publlo Utility 
Balding coavany Act q^liaa to a paraon, a partnarabip or any 
■iailar ownorablp atructura aball ba daaaafl to ba an atfillata of 
•ach lljaltod or ganaral partnar of auob partnarahlp. 

Btentm 9i tmnshission . 

[Incorporata bara baalc prlnelplaa of B.R. 3224] 

sBcnoi 10) jtnaaoxcTiaii or oFranm ehfoscbibht of 

LIABILITIB8 UID DOTIBSt — (a) Juriadiction of violatlona of tbla 
Act or tba rulaa. raqalatiena, and ardara tbaraundar, and of all 
■uita la aqui^ and aetlena at law breugbt to aoferca ai^ 
liability or do^ oroatad by, or to anjoln any violation of, tbla 
Act or any rula, ragulaticm, or ordar tharMindar aball ba aa 



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provldsa In ■action 317 of tb* FMtaral Pav«r Act (i« O.s.c. 

82Sp.) 

(b) Any pcraen, atata. Municipality or atata co^laalon 
aggrlavad liy any act, aattar, or thing dona or a*ittatf to ba dona 
by any parson aubjaet to tha provlaiona of thla Act Bay flla a 
co^lalnt with tha ri — laaliiii nta CoaBlaalan ahall dlapoaa of 
aucb oo^ilalnt aocordlng to tba prooaduraa of Sactlon 306 of ttaa 
Fadaral Powar Act. (t< tr.s.c. 825a). Tha rallaf raquaatad by 
■uob eoiqtlalnant, and grantad by ttaa Coaaiaalon, say includa 
ravocatlon or oonditli»lng of any axa^^lon, taut only upon a 
finding, aftar nctlca and oppor t unity for haaring, that tha 
raqulraManta for axa*ptlon undar thla Tltla ara no longar 
aatlaflad. 



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usTORiao sun Raoaunoat 

A UBisunn PROPOSAL POR RESOtmcK puunixa; 

St hbgistsrxd boldiks coHPJunis 



PBOBiai* MPtL CRBUSD A QKP H StKR RBGDLUICW 

t g«l. Mog rP- *87 D.8. 354 (1988), th* D.8. Supraaa 
Cenrt •ntherisMI carula rsaloaal •laetrie uuUtjr 
boldlag ocf nJM to avoid Itst* ragnlafcioa. l^ 
-^.^. — ^^_. ^.-^ actlTitlM tztm z*tBll to 



lifting t 



Jtoglenal holding eoNpanlas mtm * i 



Ho on* today baa elaar authoritr to z«gnlato 



(1) Attar MPtl.. Stat* mi^lialiiiii ragnlatlsg 
Uta aobaldlarlaa of a raglataxad holding 
ccfany lack claar aathorltr orar ratal! 
rataa. WlUunit elaar anthorlty ovar 
xatail rataa, tbay ladt elaar anthorl^ 
to ragvlata raararca planning. 

(3) PBtC doaa not hava elaax anthorltr aitbar, 

bacaoaa Sactloa 301 of tba Padaral Powar 
Act atataa that PIRC lacka authority ovar 
ganaratlng faolUtlaa. Bran If rBXC doaa 
hara antharlty. It lacka tha Btata-bjr- 
Stata knowladga naoaaaary to ragnlata 
planning conaistant with local naada . Tat 



A* HtkU daclalcm waa an Intarpratatlon of tba Padaral 
Powar Act. rate had allocatad capacity froa a wbolasala 
ganaratlng anbaldlary of Mlddla South (now Kitargy) to Mlddla 
■onth'B foar ratall ntlllty aobaldlarlaa, Tba Court found that 
baeanaa Bataxgy aaa a cantrally plannad holding coi^any, PIRC'a 
allocatioB jralffart aach Stata Lu^laaloo trca qnaatlonlng tba 
pcodanea of any of tba ratall aubaldla r iaa In acquiring that 



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■PtL Btlll pzoTidtts fox FBRC pr—mpticn. 
SUMS tbwrafera hav« tha trorst of both worlds t 

jw— n»tnn wititinnt Bl.BnltKi. A Hllti-Stat* 

boldlnf) oa^tuqr can ^olld • plant In mm Stat* 
and ban mc allaoata tha ooata to othar 
Stataa, aivan If thoM otbax Stataa pnfax 
' • ~ -jT poME pnxehoaaa orax 



Baoauaa thia gap ataMS txtm tba Fadaral Panax Act, 
fadaxal laglalafcion ia naoaaaaxy. 

Tha MPMi pcaa^tKm pcebl«« axlsta Indmandantlr of 
Congraaaiooal pxopoaala to awaad tba Pwllc Dtillty 
Holding Coanuqr Act. nuiaa pxopoaala would 
axaeaxbat* tM pxtf>l«at by InccaaalJig tba mmibmr of 
^olaaala txanaactiena with potantial pxaawptlra 
affaet. ' 



conpaiqr would bava tba option of xaqulxing that tba 
helolng ccwpany flla a Taglanal Intagxatad zaaonxea 
plan.* Thva Stataa could volnntaax to do togathax 
lAat no ona doaa now* plan on a xagional beaia. 



A xaglooal xagulatoxy boaxd, finaail taf all of 
tba Stataa wbo ragulata a paxtlculax holding 
co^any, could appxova a apaclfio plan by 
unaniMOus veta. Tba boaxd May caxtify to mc 



' Tba pKOposala paxmit ntllltlaa to oxaata lAolaaala 
af f lliataa yltbant xarlaw undax PDHC&. Thia naw «oxld will pxoduca 
an incxaaaa in mtC-xagulatad wbelaaala txansaotlena . Many of 
tbOM txanaactiena will txiggax lEIIt pcaiaptlon. Dntll Conoxaaa 
elaaxly xaatoxaa atata xagulatioUf avaxy naw wholaaala affiliata 
cxaataa tha rlak of fnxtbax axoalon of traditional atata 
jnxisdietion. 



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•By apaelfie lasaa fox dselalon. 



_ _ . . cxmld mvlmLt. m plaa 
Of wax* Btat* coMilHlons eetild 
do •e. Fine 



xaqnlr* tb* boUlng oaapaay %o 
mold held s jTonaartlfig in idLloh 
f»rtw eoald participat* and ana 



balancing tha Intazaata of aharaholdra i 
enateaaxa. 

■aoh State aexrad by tba holding eo^panr 
pxeaalgataa ita own In-Stats plan. Tban 

althas ef twe optlona im avallablai 

(1) She holding oo^any ean fashion a aingla 
zeglcxial plan oenalstont with aaeh in- 
State plan. X£ BO stats objaota, the 
plan woold be appeared by yntc. 



■adi Itate can eertify that eaeh ether 
Stata'a plan ia oenalatant with ita own 
plan. Ihaa the aat of Stata plana ia 
daanad to be a regioaal plan and la 
app g orad by PBtCt nnllli the holding 
ceapaay arguea, and TBtC tiada, that the 
iBdlvidnal plana axe iBOOBSlataBt ox, whan 
oeoaidaxad In ocabinafciaB, do Bot aatiafy 
the atatatwey xeqalxaaeata fox a plan. 

balow for the atatntory 

n.) 

I tor at^ta- er ^nMr^.1nit.*m*^ Pl,«. 

anee f ex plans 
d Id) abora. 
Initiated by 

. __.._.„, jgin onleaa atata_ 

ware notified firat aad cboae not to initiate 
thaix own pxeeeaa thxongh a Boaxd [Path (b)) 
or wltb their own atate plana (Path (d)). 
Hexeevex, is any mc pronaetUng (Path (o)}, 
mc woeld have to dwoae aaong the plans 
befoxe It, xatber than i—nd the plan. If 
rate found that no plan befexo it aatlsf led the 
•tatntoxy xeqaixaaanta, rate woold have to 



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Uk* a iMullag rol* la laflna&eiag xhm zwgloaal 



Latcgrktad rmmenxcm plut tfonld b« » 'iMiit coat* 
•Isctxle pOTMT and MMrgy aenscrratleai plan. 

«. It mold avalnAt* « rBnga of rasonress aad 
actionaf laclodlng but aot liMitrnd to, iw*« 
allooatlon, owiMnhipf or dlapoaltloa of 
•xiatlng fscllltlao, coaatmctlon of nMr 
faellltica, aoqulaition of naw powar auppllaa, 
anarfnr coiwazTatlan, and xanawabla aaargy 

b. tbm plan would aalaet fxot thla zanga a aat of 
xaaoazcaa and actiona which will aaat anaotad 
ftttura dawind foe alactrlQltr "t tba lowaat 
•yataa coat fee tha zaglatarad holding oo^any 
aa a irtmla, balancing tha lnt«ea«ta of 



Tha plan woold aaalga xlaka and coata 
advanea , ao that Imaatora t nnniiifii ■ ■ 
ragulatora ooold aet rasponalbly. 



>lllM at ymc midar 1IMI.1 ma plan wonld ba f Had 
aa a contract at FERC> Tha contxaot would bind 
TSRCt tha holding ooapany and tha Stataa. imiaaa 
tba Stataa agraad othazwiaa, mc otmld aodlfy tha 
contxaot only nndar '<■<*-—< clrctnatancas . 

BnfTir^l *""»■ "^ fv>n«Tn^. mzMtlon of a 

zagional board to rarlaw and orazaaa iMplaawntatlcm 
of tha plan would ba wnMmui. nia goal la to 
pzodnoa a raglonal plan, not to ezaata a zaglooal 



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mmtutT OP '■*»»T-"» A. yftnuiik'fl nsvnioax 

OH BIDUT op Ui IkO KDC SBOUP OP 
BBOISnSID ILICTUC DTZLIXT BOUJIMe COMPUniB 



I «m t*Btlfying on bahalf of ftn ad hoc group of 
•Ight r*glat*r«d alcctrlc utility holding companies. Thaaa 
utility holding companies, through their operating and 
■ervlca coiq^ny affiliates, serve over 12.5 million 
consumers in twenty states, account for approximately 13.5 
p*rcant of the total electricity generation capacity of the 
United Stataa and bava ovar 90,000 anployeea. 

Hew capacity will b* naaded In the coKlng y««ra, 
and It 1« v^ to Congress to choose whether to oaend the law 
■o that soBa portion of that capacity will coaa froB exwq^ 
wbolaaale generators ("ZWGa"). The registered electric 
holding companiaa, liXa the industry generally, hold 
different viewa on the need for new corporate structures to 
encourage construction of generating facilities The 
registered companies I aa testifying on behalf of are 
united, however, behind three principles essential to any 
amendments that would alter the requirements of the '39 Act. 
These principles are: 

1. If VtnCk is to be eaeBded, elk types eC 
entitles, regardless eC evBerehlp ex 
eftlllatlen, Miat be able to pertleipete ea 
the saae besis. 

2. Tranaelssion eoeess Is a aomfi.»K Issue end 
legislation eust not UBdexout the fnadaaeatal 
obligation of enaurlng systaa reliability aiid 
protecting netive lead onsti^ars. 

1. Regulatory bnrdeae end uaaertainty slwnld net 
be inoxeaaed and eertsialy should set be 
inoreesed only for seae. 

He believe Title XV of S. 1330 aeets theee key 
principles, and we would be very concerned about further 
aDendaents to 8. 1330 that would alter the careful balance 
it achieves. 



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H« andors* t:h« «ppro4Cli adopted In S. 1230 to th* 
•xtant It allowa raglKt«r*d oaBpanlas to own CHG* on an 
aqual baaia. in i^rticular, va aupport Tltl* XV'a traataont 
of tli« Sacurlty and Exchange Coiaiaslon'a ragulatory raviaw 
procaaa for EHGa and tha laaua of nfC flnanolng. 

Contrary to tha claias of kom propononta of 
Incraaaad tranaHlaaion accaaa, tratumiaalen accaaa la an 
•xtraaaly coaplax laaua. Kandatad Intarcorawctiona without 
utility Input and propar conaidaration of local diatributlon 
or cuatoaar naada would dacraasa our fleiciblllty and 
oparatlonal authority, diractly affact our ability to 
maintain an econoaic and raliabla elactric power ayatea, and 
likely have advaraa iapacta on native load cuateaara. With 
respect to the iaaua of transaiaaion accaaa, the regiatarad 
conpaniea have different viewe. At leaat one of the 
registered coepaniea aupporta tha enactaant of trananisaion 
legialatlon which would provide rSRC with greeter authority 
to order wheeling. All of the regiatered coxpaniee believe, 
however, that any tranaaiaaion acceaa policy eust protect 
econoaic and reliability intereata of native load cuatoeer*. 
We believe that the iaaue need not be addreaaed aa part of 
changaa to the '35 Act, and to that extent believe S. 1120 
adopta tha appropriate position. 

Finally, Congress should not accept proposals for 
deregulation sliqtly for the sake of deregulation or 
alterations of regulatory authority and procedure that would 
further burden the industry by increasing tha likelihood of 
Bultiple, diaparate regulatory declslonaakers and decisions. 
Amending FOHCA to change the carefully crafted regulatory 
fraeework which has served well for the last 55 years and 
substitute Multiple declsionBakers in Multiple forums would 
not be acceptable refore. It would haaatring those subject 
to regulation ~ the coepanles now providing reliable and 
economic aarvice; and affectively bar them from a fair 
opportunity to continue competing, by creating a new favored 
class exempt from regulation. 



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TamMMrOF 



JAMES R. DOTY, QENERAL COUNSEL 
U^. SECURmES AND EXCHAHQE COMMttSKM 



CONCeRHIHQ TTTLE XV OF 8. 1220 



BEFORE THE SUBCOMMITTEE ON SECURITIES 

COMMfTTEE ON BANKINQ, HOUSING AMD URBAN AFFAIRS 

UNITCO STATES SENATE 



U. S. Securities and Exchange Cotmisslon 
450 Rtth Street. N.W. 
Washington, D.C. 20549 



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TBSTIMOirv OP JAMBS K. DOTY, CBHBIUL COCNSKL 
SECDIUTIKS JUtD BXdUUIGB COMKXSSKKI 
CONCBRNim; TITLE XV OF S. 1130 
t 17, 1»1 



8. 1320, tlM "National KnarTy Sacurlty Act of 1991, ■ la 
Intended, aaong other things, to reaove tha lapwllBBnta tha 
Public Utility Holding Coapany Act at 1915 (the "Act") praaanta 
to tha devBlop««nt of a competitive wholaaalv povar aarkat. Tha 
Couiiaaion has attaapted, within the llaita of tha Act, to 
acconaodate the developaent of indepandant power production. Tha 
CommisBion's powera, however, are saveraly lialtad by the expreaa 
languaga of the Act. 

Undar currant law, wholasala powar ganaratora ara alactrlc 
utility aasets for purpoaes of the Act because they generate 
electrical energy. Thus, if a company such as General Electric, 
which aanufacturaa generating equlpaant, wantad to own a 
vholeaale power generator, it would bs subject to all of the 
atrlctures of the Act, Including, aost significantly, divestiture 
of all bUBlReaaes not functionally related to the operations of 
the generating company, and restriction of its operations to a 
single area or region. Obviously, these atatutory consequences 
constitute a powerful deterrent to potential new entrants to the 
vholeaale generation business and present an effective barrier to 
coBpetition in powar ganaratlon. 

It la Iq^ortant to nota trtiat Uw bill doaa nst do: it doaa 
not eliainste Coaalaaion jurisdiction over existing registered 
ipublic-utility holding company systems. With respect to 
coBpaniaa in such systems, the Commission retains full authority 
over IsBuancea of securities, acquisitions of securities and 
intarasts in other businesses, affiliate transactions and public 
reporting, with reapect to exempt holding cospanieB, the 
■oquiaitlon of an exeapt wholesale generator would not remove tha 
holding co^iany system fros state jurisdiction. The bill does 
not raqulra any utility to purchase power from e wholesala 
ganarator; tha bill is permissive. Finally, tha bill doaa not 
altar tha Federal Energy Regulatory Covalaalon'a Juriadlotion 
over operating utility coapanias in both ragistarad and aiMMpt 
holding company aystaaa. 

nia commission baliavea that adaquata aafaguarda for tha 
protection of the interests of Investora ara providad in tha 
proposed legislation, in disclosure requirenents under the 
faderal securities laws, -and in the market, nia commission alao 
believes -that the Interests of consumers generally can be 
protected by other regulatory entitles: the Faderal Energy 
Bagulatory Comaiission, determining market-baaad wholeaale rataa 
for wholesale generators at the faderal level, and the various 
state utility regulatory commissions to which wbolaaala 
generators would be subject. 



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TESTIMONY OF 

JAMES R. DOTY, GENERAL COUNSEL 

U.S. SECURITIES AND EXCHANGE COMMISSION 

CONCERNING TITLE XV OF S. 1220 



SEPTQfBEB 17, 1991 
OtalrBan Dodd and McvberB of th* Subcomnitt**: 

I appraciata thla opportunity to taatlfy batora you on 
bahalt of th* Comiaaion regarding Titla XV of s. 1220, the 
■National Energy Security Act of i99i." 

ABong ita othor rasponsibilitiaB, tha Conmiaaion adainiatara 
th* Public Utility Holding Company Act of 193S (tha -Act"). Tha 
propoaed lagialation ia intendod to ranova the atatutory barriers 
that th* Act praaant* to th* dav*lop»*nt of a coapatitiv* 
wholaaal* power aarket. praaantly, th* Act ia a toraidabl* 
olMtacla to the d*v*lopn*nt of that market. 

A. The Public Utility Holding CoMianv Act of 1935 
During the flrat part of thie century, far-flung, highly- 
levaragad holding ca^>any ayatama doainatad th* public-utility 
industry. Th* co*pl*x capital atructurea of theae ayataaa nad* 
It difficult, if not lapoaaibla, for invaatora to analyze tha 
quality of earnings and the financial condition of th* coapaniaa 
In trtiich they ware inveatlng. In th* 1930a, Bany of tha holding 



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coapanias collapaad, leaving invaators with billions of dollara 

of loaaaa. 

At that ti*a, utility ragulation, as wa know It, was in its 
Infancy. Stat* utility coBBiaaiona war* althar nonaxlatant or 
sxtraaaly llaitad In powar and thars was no aaanlngful ragulation 
Of tha utility industry at tba Padaral laval. sacurltlas 
ragulation waa alailarly a naw undertaking. Wtian the Act was 
pBBSad in 1935, tha SBC waa Juat one year old, and the 
cornerstone federal securities laws, the Sacuritiaa Act of 1933 
and tha Sacuritiaa Exchange Act of 1934, were brand new. 

Fallowing axtenslva studies and hearings, the Congress 
enacted The Public Utility Act of 1935, which was coapriaed of 
two separate but complementary pieces of legislation, tha Public 
Utility Holding Coapany Act of 1935 and the Federal Powar Act 
(■FPA") . XI Congress aaaignad to tha SEC, the agency created to 
oversea public company finance, the responsibility for 
adBinistering tha Act to regulate the corporate structure and 
financing of public-utility holding c^^any syste«s. The Federal 
Power CoMKlssion, now the Federal Energy Regulatory Coaalssion 



Tha Public Utility Act of 1935, ch. 687, 49 Stat. 801, 
included Title z, irtilch is tha Public Utility Holding 
Conpany Act of 1935, IS U.S.C. 79 fl£ aaq. ■ and Title II, 
which ia designatad Parts I and II of the Federal Power Act, 
16 U.S.C. B24 at aeq. 



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("FEItC"), m» Mtablisbad to oven** tb* lnt*rst«t* tAolMul* 
power Barlut*. 2/ 

Th* Bpaciflc 9oal of tb* Act wa* to protoct inv**torK and 
eonsinavra froa ttia Byrlad abusaa ■ad* pa*sibl* by co*pl*x bolding 
colony •tructur**. 2/ The Btatut*, tta*r*for«, Mamlataa a aiapl* 
and claar ovnarsbip atrucrtiir* for public utllitl**. A Cr**- 



Congresa enactad [tha Act] to pr«v*nt finan- 
cial abuses BDong public utility holding 
canpani«B and their affiliates. It entrustad 
the {Connission) , the agency with the 
expertise in financial transactions and 
corporate finance, with the task of 
addinlsterin? the act. The [Comnission] 
carries out its duties essentially by 
Bonitoring inter-affiliate financial 
transactions and -ellKinating potential 
conflicts of Interest. Congress enacted th* 
Pt>A to regulate the wholesale Interstate aal* 
and distribution of electricity. It 
entrusted the adninlstration of the FPA . . . 
to tha FERC as the agency with tha tachnical 
expertise required to regulate energy 



L 8. Ct. 415, 



The specific abuses identified by Congress included tha 
pyramiding of voting control, excessive leverage, ■•curltlee 
issued upon the basis of fictitious and unsound aeeet 
values, intrasyeten profiteering on transfers of asaata, 
financial Dismanagement, exceasive intrasystem aanaqcment 
fees and service charges, the concentration of economic 
power not susceptible to state regulation, and the expansion 
of holding company systeas without regard to the lnt*gratlon 
and coordination of related utility prop*rti*a. gM aactlon 
Kb). 



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mtmniinq public utility Is not subjact to tli* Act. If, how«v«r, 
• utility is p«rt of • holding conpony systsa, tb« strlcturas of 
tbs Act c o w Into play. 

ttas Act's kay toraa sra broadly dafinad. A "holding 
coapwqr' Is 'any covpany irtiich diractly or indiractly owns, 
eraitrols, or holds with powar to vote, 10 ipar eantua or aora of 
tha outstanding voting sacurltias of a public-utility 
coiq^any." 1/ An "alectric utility co^tany" is "any cospany that 
owns or oparataa facilltlaa usad for ttaa gsnaratlon, 
transsiission, or distribution of alactric anargy for sala." S/ 

The Act rsquiras all coi^anias that >aat tba statutory 
dafinltlon of a "holding coapany" aithar to ragistar with tha 
CoaaiBslon or to oBstain an axe^^lon. Ganarally, holding 
coa^anias with significant aulti-stata utility oparatlons aust 
ragistar and, in so doing, subjact th«>salvas to tha stringent 
limitations tha Act isposas upon tha businassas of ragistarad 
holding cM^anias. 



iy Saction 2(a)(7)(A). This aactlon la tha "bright Una" 
standard for dataralning holding ccmpany status. Tha 
Co^ission also aay iaposa holding coapany regulation on 
"any parson" under section 3(a) (7) (B] If, after notice and 
hearing, it dateraines that such parson axarclBCB sufficient 
controlling Influence over a utility to Make it neceasary or 
appropriate In tha public Interest or for the protection of 
Invastora or conauaara to treat that person as a holding 

Lis section 2(a)(4) (daflnition of 



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Saction 11 aata forth the baaic Intaqration and 
■lapliflcation raquiraments of th« Act for ragistarad holding 
coapanias. if A kay provlalon atanding aa an obatacla to tha 
devalopaant of a coppatitlva wholaaala powar narkat la aactlon 
11(b) (l)t trtiich liaita aach raglatarad aystan to a "alngla 
Integratod public-utility ayataa." Tha Act dafinaa "Intagratad 
public-utility ayataa" in tema of a group of naturally relatad 
propartlaa within a alngle aroa or region. 2/ Section 11(b)(1) 
llMitB tha ability of raglatarad holding covpanlaa to angaga in 
buainaaa activltiaa other than their utility operations . £/ 

The Act Bubjecta reglatared holding coapanlea to reatrlctlva 
financial and operational requireaanta. Among thoae particularly 
relevant to tha davalc^aant of indapandant powar ganaratora are 
tha following: 

• Sactlona 6 and 7 : theaa sectlana require CoaMlaaion 
approval before a regiaterad coapany or ita aubaidiarlea aay 



"tha very heart of tha 
Sya.. 3B4 U.S. 17fi, IBO 

, 327 U.S. «S«, 704 
n.l4 (1946) . 

2/ Bactlon 3(a) (J9] (A) . 

£/ Under aactlon 11, generally nonutillty buelnaaeaa say be 
acquired only ic they are functionally relatad to tha 
utility oparationa of tha holding coapany ayat^. Mlehlgan 
COM, flaa Co. V. SEC. 444 P.3d 913 (D.C. Clr. 1971). 



D,g,;,zeclbyG00glC 



is«u« aost typaa at ■•curltics. Th« CowiiBslon may withhold 
approval if aitlMr th* ••curitlM or thalr terms tail to 
BMt apacifi«d qualitative standards. 2/ Saction 7 givoa 
tlia CoiHission wida latitude to rafuaa to authorica th« 
Issuonca of any aacurity not raaaonably adapted to the 
•ecurity structure of the issuer and the other cooqpanies in 
the holding coapany ayatoB, or to the aamlng power of the 
Issuer, or that is "not necaasary or appropriate to the 
econosiical and efficient operation of a buainesa in which 
the applicant lawfully Is engaged or has an interest." IS/ 

• saetlona 9 and 10 ? these sections require Comaission 
approval of the acquisition of seeuritlss or utility assets 
by a registered holding company or its subsidiaries. A key 
provision Is section 10(c)(1), which prohibits the 
CoBHlssion from approving any acquisition that would be 
datrlnantal to the carrying out of the intagratlon and 
simplification provisions of section 11. 



this section prohibits loans from an 
operating utility to a parent registered holding company and 
requires COBeission approval tor various other types of 



Eastern ntils. *saoes. . Holding Co. Act Release No. 24641 
(Hay 12, 1988). fiss generally sections 7(c), 7(d), and 
7(s). 



IHJ Section 7(d) (3). 



D,g,;,zeclbyG00glC 



intarcoapany financial tranBactioiw, such as loans fron the 
parant holding coHpany to tha utility. 

• saetlon 13 ! this ssction authorises the Conisslan 
to ragulat* sarvica, sales, and construction contracts 
batwaan oparatlnq utllltlas and othar coi^anias within the 
•asia raglstarad holding conpany syBtwa and ragulraa that 
auch sarvicas be parforaed at coat. 

• Saetlon 13 t this saction authorlzaa tha CoBBiaaion 
to raqulre tha tiling of annual, quartarly, and other 
periodic reports by registered holding conpanlea, and to 
require such reports to be certified by an independent 
public accountant. 

■ Section 15 : this section authorlzaa the Coaaisslon 
to establish the fors of accounts and prescribe unifon 
■ettaods of accounting for registered holding coBpaniea, 

Bacauaa Congress did not believe that all public-utility 
holding coapanies should be subjected to pervasive federal 
control, saction 3 authorlzaa the CoiHlssion to exeapt soaa 
holding ca*i>anies fro* registration and other provisions under 
the Act. The CoMBission is "directed" to exempt a holding 
co^any if It falls into one of five enuaaratad categories of 



D,g,;,zeclbyG00glC 



■cctlon 3(>)> 11/ Ondar tb* •o-callad 'unl*** and rnxompf claiwe 
of ••cUon 3, twwv«r, tba Ctwliilwi wiy dany an axv^tion to a 
company tb*t ■•«£• tb* objactiva erltarla of sw^ion 3 (a), upon 
d«t«r*lnlng Uwt tb* axa^ition would ti» detiisental to tb* public 
intarast or tba Intaraat of Invaators or oonauBara. la/ tba 
CoMMiasion say also taralnata an axai^lon If It finda tbat tba 
circuBatancaa that gav* rlaa to tha ax^qption no longar 
axiat. 12/ 



11/ Tha f iva catagorlaa for axeaptlon undar aactlon 3 (a) arai 

(1) tha holding company and its material public- 
Utility aubaldiarlas are all organized and carry 
on their business substantially in one atata; 

(3) tha holding co^iany ia Itaalf an oparating utility 
irttoaa operations do not axtand bayond tha atata in 
Mich tha holding company la organicad and 
contiguous atata*; 

(3) the holding company ia only incidentally a holding 
company and the utility operations ar* 
functionally related to tba holding comtany's 
primary nonutillty business; 

(4) the holding company i» only taaporarily a holding 
canpany <e.g. . a bank that acquirea title to 
pladged eecurities] ; or 

{5) -the holding coapany does not derive a material 
part of its inooma from domaatic utility 
oparatlons. 

12/ section 3(a) provides that the commiesion shall eice^Jt a 
holding company that Beats tha critaria of that section 
"unless and except insofar as it finds the exeiq>tlon 
ilal I laaiil ill to tha public interest or ths intaraat of 
Invastors or consumers." 

11/ Section 3(c). 



D,g,;,zeclbyG00glC 



Exoapt: holding caivani«B gMMrally ar* not subjact to th* 
raquir«*ant» th« Act iaposas on raglstarad holding coMpanles. 
Soctlon 9(a)(2) Is « significant •xcsption to this nils. That 
■action prohibits "any parson" who ovns fiva i^arcant or sora of 
tha voting sscurltias of a public utility — and so. Is a 
statutory "affiliata" of that caq>any — froa acquiring fiva 
parcant or aora of tha voting sscurltias of anothar public- 
utility cospany, without prior Comnission approval. 

B. Tha Application of tha Act to Wholasala Powar 



Wholasale powar generators, wtiaravar located, ara electric 
utility assets for purposes of tha Act because they generate 
alactrical energy. Xi/ Any cospany that owns or operates a 
generator is prasunptively an electric utility cospany under 
section 2(a) (3), and any cospany that owns or controls a 
generating cospany would be a public-utility holding cospany 
under ssction 2(a)(7). Thus, if General Electric (which 
manufactures ganarators) or Bums I Roe (which engineers power 
plants) were the owner of a irtiolesale |?owar generator, each 
coapeny would ba subject to all of tha strictures of tha Act, 
Including, »ost significantly, divestiture of all buainasses not 
functionally related to the operations of tha generating cospany, 
and restriction of Its ^>erations to a singls aree or region. As 
sight be expected, these statutory consaquaneas offer a powerful 

U/ ssction 3(a)(i8). 



D,g,;,zeclbyG00glC 



t to p0t«ntial Mitrant* in ttw irtwlasal* 9MMr«tlon 
Ixtminmmm and rapr«s«nt an affactiv* barrier to eo^atltion In 
pooar ganaratlm. 

Thara ara a faw narrcw axcaptlona to this raault. A coapany 
that inwaatad In a aingla whelaaala ipowar ganarator Blqht qualify 
aa an axa^>t holding ooapai^ undar ana of ttaa fiva narrowly drawn 
provialona in aaction 3(a). Tha two »oat widaly-uaad axaaptlona 
sra thoM provldad In aactlona 3(a)(1) and 3(a)(3), ganarally 
known aa tha "Intraatata axaaption" and tha 'pradcalnantly a 
public utility axa^^lon," raapactlvaly. 

Tha "intraatata aica^^ion* raguiraa, a>ong othar thlnga, 
that aacb natarlal public-utility aubaidiary coa^any ba organizad 
and carry out ita buainaaa aubatantially in tha aaaa atata in 
which tha holding eowpany la organizad. Thus, whila tha ownar of 
a wbolaaala powar ganarator could uaa tbia axaaption for projacta 
in a aingla atata, tha axaaption vould net ba available if tha 
ownar wantad to build in aavaral atataa. And av«n for a puraly 
Intrastate wholaaala powar ganarator ownar, tha Act would poaa 
■oaa regulatory problaaa. Section 9(a) would require Coaalaaion 
approval of the acquiaition of utility aacuritiea by "any parson" 
if tha Boquiaition would reanlt in that iparaon baooaing an 
"affiliata" of aora than one public utility. U/ And, aa noted 

ma, centrola, 
■ore of tha 
(continued. . . ) 



D,g,;,zeclbyG00glC 



iMlow, th* ComlBBion My not approvs m acquisition under 
•octlon 9 vmloss It matMm Um roqulaito Cindinga undor aactlon 
10. 

Tha 'pradoainantly a public utility" axa^tion likawlaa la 
not broadly uaaful. niia ■xa^>tion axtanda to a holding coai^ny 
tliBt la alao a public-utility co^kany irttoaa oparatlona do not 
axtand bayond tha atata in which tha holding coipany ia orqanisad 
and contiguoua stataa. Again, tha axaiQ>tlan would llMlt tha 
gaographlc area of operation of any paraon wlahing to own a 
ganarating coapany. Further, the axaaptlon would haapar those 
irtio typically want to finance and control each power project 
through a aeparata aubaldlary rather than hava appreciable 
utility oparatlona at the holding coapany level. Cae of such 
aeparata aubaldlarlaa la typically preferred for tax, liability, 
and other t 



Aa noted above, a coapany seeking to acquire an Intaraat in 
■ore than one wholesale power generation coapany auat clear tha 

lS/(.. .continued) 

outatanding voting securities of a coapany. Section 
3(a) (11) (A). 

16/ The other three claaaas of exaaption are slallarly 

unhelpful. Tha CoBalaalan haa Intarpratad aaction 3(b)(3) 
to require that the utility oparatlona be functionally 
related to the priaary nonutillty business of the holding 
coapany. Cities Serv. Co. . 8 S.E.C. 31B (1940); Saa 
Standard oil Co. ■ lO S.E.C. 1122, 1125 n.S (1942); 
panufactu rers Trust Co. . 9 S.E.C. 283, 288 n.S (1941). 
Section 3(9] (4), by its teras, does not apply, and aaction 



D,g,;,zeclbyG00glC 



12 

hurdles of sections • wid 10. ■•ction 9<s) rsqulrss Oosaission 
■i^rovBl of ui acquisition of sMdt intarost and links that 
approval to th« provisions of saction 10. nia standards sat 
forth in saction 10 includa raquirssants that ths acquisition not 
unduly conoantrata control of ntllity systaas, that tha purchaaa 
prica ba raastmabla, that tha porchasa not unduly ooiqpllcata tha 
capital stnictura of tha raaultinq aystaa, and, aoat troublaso** 
for Indspandant powar producars, that tha transaction sarva tha 
public intarast by tandlng toward tha aconoaie and afflclant 
davalopsant of an "intoqratad public utility systaa." 12/ 

This "intaqratlon" raqulraaant affaetlvaly foracloaaa 
parsons froa undertaking projacta in gaeqraphlcally saparata 
locations within tha Unltsd states. A person with a wtaolasale 
qenaratlon company or other utility cq^aratlona in Connecticut 
could not, tor aita^le, acquire another one in Texaa. 



Section 3(a) (39) (A) generally defines an integrated public- 
utility syataa as "a systaa . . . whoae utility assata, 
whether owned by one or sore . . . utility conpanies, are 
physically interconnected or capable of physical 
interconnection and which under normal conditiona nay be 
ecoRoaically operated as a single interconnected and 
coordinated systea continad in Ita operations to a single 
area or region . . . not so large as to iapair . . . the 
advantages of localiEed aanagenent, afCicient operation, and 
the BftectiveneBB of regulation." For a discussion of the 
integration requirsnent, ass general Iv . K.r. Ritchie, 
Integration of Public utility Holdlno CoananleH (1954). 



D,g,;,zeclbyG00glC 



Til* Act, how«v«r. May axcuse th« acquisition of foraign 
utility ^^arationB tram tba integration raquiraaant. l£/ A 
holding company axa^it undar saction 3(a) (S) say traely acquira 
feraign utility coapaniaa. 12/ Tha CoaoilaBlon has not yat 
colMidarad tha cixcuaatancas, if any, undar which othar typaa of 
holding oo^Mnlaa Bay owi an intarast in a foralgn powar 
plant. 2S./ 



C. 



Tha CoBBlBBlon has attaaptad, within tha llnlta of tha Act, 
to accommodata tha devalopaant of indapandant powar production. 
The CoiMlaaion'B powers, howaver, are constrained by tha axprass 
languaga of tha Act, and thara la no question that davalopara of 
the relatively few projects constructed to date have been obliged 



section 10(c)(2), in pertinent part, provides: "Tills 
fwragraph shall not apply to tha acquisition of securities 
or utility assets of a public-utility coapany operating 
axclusivaly eutaida tba Onitad states." 

Sam IHDBCK Bnertiv Serv. . Inc. ■ Holding Co. Act Releaaa Ho. 

35237 (Jan. *, 1991). 

There are presently pending before the CoMmisslon an 
ai^llcatlon by a rogiatarad holding coapany concerning tha 
aoquisitlan of a Portugueaa alactric-utility aubaidlary. 
Southern Co. (File Ho. T0-76B9) ; and an application by i 



D,g,;,zeclbyG00glC 



to or««t« pwnllar, iiwfflciant, and ■(> — what •rtitielal 
owiMTBblp •tmcturcs b*c«tta« of ttM Act. 21/ 

For un^ila, bacauaa ttia Act basas Its proniBption of 
control on tba owiwrahlp of voting atock, a coavany could 
purchaaa nMivotlng a o— en or prafarrad atock of an Indapandant 
powar projact and gain aoaa of tha aconaalc banafita of 
ownarablp, without bacoMlng a "holding co^^any." 22/ Or, tha 
partiaa to a projact oould aatabliah a liaitad partnarahip with 
an aicaapt holding ceapany aa tha ganaral partnar and tha aquity 
l^rticipanta as lialtad partnara. Rallaf trcm tha Act in larga 
part would turn on structuring tha liaitad partnara' intaraata ai 
ganuinaly paaalv* Invaataanta which afford tha Invaatora no 
Maaningful ability to control or Influanca tha partnarahip'a 



t of tha Public i;tllity Ragulatory 
PA-} provtdad a fraaawork tor 
initial developaent of an indapandant powar industry, which 
included exaaption Iron tha Act for >o«t ao-callad 
qualifying facilitias ('QPs*) . 16 U.8.C. 3601 s£ aaq. 
(1990). Rowevar, that axeaption is llnitad to projacta that 
nest the narrow requirananta for QF status undsr POBPA, 
generally cogenarotors and small power producara. 

San. ».fl.. ocean State Power. SEC No-Action Latter (Fab. 16, 
1988) (irtiare tha voting intaraats of certain general 
partners ware dacreased below fiva percent and ten percent, 
raspactively, these partners eowU retain larga aquity 
interests without becoelng subject to regulation aa an 
affiliate or holding coapany, ram»*etively, under tha Act) . 



D,g,;,zeclbyG00glC 



affairs. 23/ For obvious reasons, this approach is not 
attractiv* to aany invastora. 

Finally, under saction 3(d), tha CoBmisaion could axaapt a 
spacifiad class ot parsons froa tha definition of "aubaidiary 
c^ipany" or "affiliate" within the naanlng of tha kct. 21/ 

j}/ The Commission has net yet considered the status under the 

Act of the developer of a dmtestic independent power 
project. The industry haa developed largely in the 
interstices of the Act, in reliance On two no-oction letters 
issued by the staff of the Division of Investment 

Action Letter (June 30, 19S8) (staff indicated that it would 
not recomitiend enforceaent action where developer became 
general partner and circumstances indicated that the limited 
partners would not exercise such a controlling influence as 
to warrant regulation as a holding company) ; Catalyst Energy 
Co. . SEC He-Action Letter (Jan. 21, 1988) [staff indicated 
that it would not reconmend enforcement action where 
developer became limited partner and circumstances Indicated 
that the limited partner would not exercise such a 
controlling influence as to warrant regulation as a holding 
company); see alSQ Nevada Su n-Peak Ltd. Partnership. SEC Ho- 
Action Letter (Kay 14, 1991} (staff indicated that it would 
not recommend enforcement action where circumstances 
indicated that the limited partner would not exercise such a 
controlling influence as to warrant regulation as a holding 
company The relief available through the "no-action" 
process is circumscribed by the facts and circumstances of 
the particular matter. The developer of an independent 
power project has filed an application under section 2(a)(7) 
tor forsal CommlBslon deteraination of its status. Doswell 
II Ltd. partnership (File No. 31-858). 

21/ Section 3(d) provides: 

The Commission aay, by rules and regulations, 
conditionally or unconditionally exeapt any 
specified class or classes of persons from the 
obligations, duties, or liabilitlea impoead upon 
■uch persona as subsidiary companiea or affiliates 
under any provision or provisions of this title, 
and >ay provide within tha extent of any such 

(continued. . . ) 



D,g,;,zeclbyG00glC 



How«v«T, UiiB aaction, by its tcrma, could not ctfact tha broad 
axaaption frota tha Act that tha propoaad laqialation would 
pTovida for invaatora and davalopara. 

Nona of tha abova adalniatrativa "aolutiona" provldaa a 
aatiafactory raaolutlon to tha atrlcturaa found in tha Act. 
Although tha CoBaiaalon ia not awara of any indapandant powar 
projacta that hava not coaa to fruition bacauaa of tha 
inpedinants poaad by tha Act, wa cartalnly racognisa that 
structuring i^Tojacta to avoid tha Act aaana aubatantlal 
additional timm, trouble, and axpanao for wholaaala powar projact 
davalopara. 25 / 

D. Raanonaaa to SnacHic Ouaatlona 

you bava aaXad tha CoBBiaaion to addraaa cartaln quaationa 
regarding tha lapact of tha propoaad lagialation on varloua 
Mttara relating to tha Act. Aa diacuaaad abova, tha pucpoaa of 
tha Act ia to protaot tha intaraata of invaatora and conauaara of 



21/(...continuad) 

axeaption that eucta spaclfiad clasa or clasaaa of 
persona ahall not ba daaaad subaidlary cnqw>iea 
or aftiliatas within the aeaning of any such 
provision or provlalona. If and to the extent that 
it deena the axeaption neceasary or appropriate in 
tha public interest or for the protection of 
investors or conaunera and not contrary to tha 
purpoaea of this title. 

22/ Indapandant Pevalopara Finding Solutlena to PDHCA gluaiyf. 
Electric Utll. Haak, Apr. S, 1991, at 9, col. 1, quoting 
Pater Lalor of Long Lake Energy Corporation. 



49-970 0-92-11 

D,g,;,zeclbyG00glC 



17 

public-utility holding eovpany systcBB. Tb«r*far«, thos* 
questions ( No. 3 and Mo. 6) that concern Uie effect of Title 3CV 
on the nation'* energy supply and the environaent are beyond the 
purpoee of the Act and the Coaaieelon'e expertise. Accordingly 
they are not addressed in this testlnony. 

The reaalning four questions concerning Title xv of s. 1330 
are as follows; 

Oueatien I. 

The Act does not and waa never Intended to regulate utility 
rates. Rate regulation la the province of the PBRC and the state 
regulatory commissions. In the past, the Act Kay have had soae 
indirect effect on consuaer rates because It regulates the 
corporate and finenclal structure of registered holding 
coMpaniea, and transactions between such holding ci»pBnleB and 
their affiliates. 2£/ Before state utility coiuBlssians gained 



[Our] control over [registered holding] 
companies relates only to their structure, to 
their Intrasystem transactions, and to their 
finances. We have no power over their 
dealing with their customers, retail or 
wholesale. 

Sfifi Alfifi City of ^jfavette v. SEC . 464 F.Sd 941 {D.C. Cir. 
1971], aff d sub nom. Gulf States Utile, v. FPC . 411 V.B. 
797 (1973). The Act does not regulate the operations of 
utility coapanies as such, and the Commission has no 
jurisdiction over sales of energy- The FERC focuses upon 
the technological and policy Issues associated with energy 

(omttinued...] 



D,g,;,zeclbyG00glC 



th* ability to ■onltor tlwa* kinds of Ihims uid to t*k« thmm 
into account In aattlng rates, th« Act «ay hav« played sona rola. 

S. 1320 would allBlnate tha CoMiisaion'a raviaw of tha 
acquisitions by Taglstarsd holding co^mnias of wholaaaXa 
ganarators and tfould allow certain aoqulsltlons that would 
otharwlsa hava baan prohibited by ths Act. TbM lagislatlcn would 
ratain tha Act's prohibitions on cross -subs Id iiat ion and tha 
gansral regulrBnent that transactions batwaan aCClliatas ba "at 
cost." Nhila existing state and PBRC regulation has largely Bade 
these aictra safaguards redundant, thair prasenca In tha proposed 
legislation will help assure that utility custoaars are not asked 
to subeidlca businesses with no functional relation to the 
providing of electrical power. 

In addition, the Act geographically restricts ths cori^rate 
structure of public utilities. 22/ S- 1220, which would exemi^ 
wholesale generators trcm the Act's restrictions regerding 
geographic expensicn, would create the possibility of new 
interstate holding coapanies that would not be required to 
register under the Act. Hist is consistent with ths Act's 

2£/(. ■ .continued) 

generation and transaission. see general ly Welch, Functions 
of the FedBrnl Power CoaalBBlon in Relation to the 
Securltlee and Exchange Comnlaaion. 14 Geo. Haah. L. Rev. 81 

(1945). 

22/ Congress intended that the Comlesion's work be coordinated 
with and oospla*ant the work of state coaaissions. See . 
a^a^, sactlona 6(b}, 7(g}, 8, 10(f}, IS, 19 and 20(b}. 



D,g,;,zeclbyG00glC 



19 

purpo***, •■ tbere haa b««n a aigniflcant incraasa ainca 1935 in 
tha affactiva r«ach of ataCa utility ragulation. Indaad, tlia 
propoaad laqlalation providaa for incraasad atata aorutiny of tha 
coata to conaiuaara of the purchaaa Bay ratall utility coapaniaa of 
tha powar ganerated by tha wholaaala ^aneratora. 28/ It alao 
raquiraa FBRC to ravlaw power sales batwaan atflliatad irtiolaaala 
and retail coapaniaa. 29/ 



What will be tha lapaet of tbe prepeaed 
laqlalatioB upon tbe ooapatltlTa eBTlronaent for 
tbe gaaaratleB of aleotrieltyi taeludiag tbe 
availability aad reliability of traBaaiaaioB 



Although S. 1220 will axeapt irtiolaaala generator 
•cquiaitiona froa CoaaiaaioD review (including review of 
enticoBpatltiva eftecta), ifi/ the bill will not ahiald the 
•cquiaitlon froa antieoBpetitlve analyaia under other laws. 31 / 
In particular, tbe FEBC, in Ita deteraination whether to grant 

2&/ S^K ipgra , |^. 19-20. 
22/ &•■ Infra - p. 21. 

2fi/ Under section 10(b}(i}, the Coaviaelon cennot approve an 

aciiuiBltion that would "tend towards . . . the concentration 
of control of public-utility conpanlas, of a kind, or to an 
extent, detrimental to the public interest or the interaet 
of investors or conDuaers." The CoanlsBion'a analyaia under 
section 10(b)(1) includes consideration of the 
anticompetitive effects of &A acquiaition. Wfti-*-K»»a^ 
.UUla^f Holding Co. Act Rel. No. 25373 (Har. 15, 1991) and 
Ho. 25221 (Dec. 21, 1990). 

21/ For exa^tle, tha federal antitruat laws. Including the Hart- 
Scott-Rodino Antitrust I^^ovaaenta Act of 197«, will 
continue to apply. 



D,g,;,zeclbyG00glC 



30 

■ark«t-ba««d rat«c, caiwld«rs Um potential for Mitlaaapatltiv* 
bahavior. n* CoialsBion b«llav«a that tha aa^ ar tl— and 
taohnleal ability for rasolvlng antioo^atltiva laauaa Involving 
tranaaiaaien aecaaa and talk powar aupply 11« principally with 
tha FBRC. 

nia atataa, in adainlataring thalr ca^>atitiva bidding 
prograsa, can alao guard agalnat abuaaa. nia CoBHiaaion notaa 
that aection 15107 of S. 1330 a>anda POttPA to raquira thoaa atata 
ragulatory aganciea that allow elactric utllitlaa to purchaaa 
lang-tara whalaaale powar auppllaa aa a Baana of aaating 
incraaantal alactrlc daaand to parfom a ganaral evaluation 
ragardlng: (1) the coat of capital for auch utllitiaa, and any 
raaulting changaa in tha ratail rataa paid by conaiuwra that «ay 
raault troa purchaaaa of long-tem trttolaaale power in li«u of tha 
conatruction of new ganeratlon facllitlaa; (3) tha affact upon 
tha raliabillty of alactrlc aarvica that aay raault froa 
purchaaaa of long-tar* wboleaala power froa aallara with highar 
lavala of debt in thair capital atrticturaa; and (3) whether tha 
uaa by aicaapt wholaaale generatore of capital atructuraa 
oqiloying leaa than 39% equity threatana raliability or providea 
an unfair advantage tor exeapt wholaaale generatora. 32 / 

JU/ In addition S. 1230 Inetructa atate ccaoiiaalona to 

isplement procedures (or the advance approval or diaapproval 
of the purchase of long-tern wholesale power, which 
procedures reflect the results of the evaluation discussed 
above. The etates oust also rec(uire, as a condition for tha 
approval of purchaaaa of long-tera wholeaale power, that the 

(continued. ..} 



D,g,;,zeclbyG00glC 



QiMstien 4. How will ourr«nt clvotrio ntilltr iBanstry 
zagalatloBS th*t pret*et ooBsnaazs and 
mtaekboldars fzea utility abuse and ooBflleta e{ 
lataxast b« affaotad by tha propoaad lagialatloB? 

Th« propoaad lagialation would laava in plaea aubatantial 

protectiona for conauaera and stocKholdArs In tha alaotrie 

utility industry aufficiant in our viav to avoid racurranca oC 

tha abuaaa that concemad tha Congraaa In 1935. The Sacuritiea 

Act of 1933 and tha Sacuritiea Exchange Act of 1934 govarn 

financial reporting, and the diacloaure raquiraaentB and 

accounting atandarda aandatad by thoaa lawa have aubatantially 

diminlBhed riak to Inveatora. In addition, FBRC haa astabliahad 

uniform ayataaa of accounta tor bath electric and gaa utility 

coipaniaa, and iioat atatea have alao adoi^ed unifom aysteaa of 

accounta for public-utility coapaniaa operating within their 

juriadictiona. 

Today, atata utility comniaaiona ara a powerful regulatory 
farce in >oat atatea, and their national body, the National 
Aaaociation of Regulatory Utility Commissioners, la a atrang 
leader in molding national policy. At the federal level, PBSC 
playa an active role in detecting and curbing affiliate alauaea. 



32/f ■ -continued 

seller of such power haa and will continue to have acceaa to 
seurcea of fuel on term* adequate to provide a raaaonable 
aaaurance of tha aeller'a ability to perform Ita obllgationa 
under the power purchaee contract. 



D,g,;,zeclbyG00glC 



In ■hort, t)Mr« now axiat w«ll-*BtablislMd myatmaM to pravant th« 
•buaaa that concamad Congraaa ^lan tha Act wae proaulgatad. 

If B. 1220 ia anactad, tlw Coaalaalon will contlnua to 
■onltor aarvlca, aalaa and conatmction contracta, and othar 
ralatlanahipa batvaan a wholaaala ganarator and an afflllata 
ragiatarad holding company under tha Act. Horaovar, aaction 
15105 of s. 1320 prevldaa that FERC may not approva a rata or 
ctaorga for tha aala of alactric enargy at whalaaala by a 
wholaaala ganarator aa "just and raaaonabla" within tha aaaning 
of aactiona 305 and 206 of tha PP& 12/ if tha rata or oharga 
allowa tha wholaaala ganarator to racaiva an undua advantaga 
raaultlng fro* tha fact that the purcbaaar of auch alactric 
energy ia an affiliata or aaaociata company of auch %Aiolaaala 
ganarator. 

Quaatlon ■■ 

While s. 1220 will allow a ragiatared holding company to 
acquira ona or mora anaapt wholaaala ganaratora without 
ComisBion approval, any iaauanca or aala of a sacurity by a 
registered holding company for tha purpoaa of financing an exempt 
irttolaaala ganarator, or any guarantee of a aacurity of an axampt 
wholesale generator ky a raglatarad holding company, atill auat 



21/ 16 D.S.C. B34(d} and 824(a). 



D,g,;,zeclbyG00glC 



23 
IM approvad by the CoBBlsalon. In datcraining irtMtbw «r not to 
grant auch B[)|?roval, ths CesHlaalon auat praaantly avaluata under 
aaction 7(d} whetbar, avong ottwr thinga, tha propoaad aacurity 
ia raaaonably adaptad to tha aacurity atructura of tha coBpony 
iaauing tha aacurity and to other coi^niea in the ragiatarad 
ayaten. 3±/ 

Section 7 raflacta Congraaa' deaira that the traditional 
•lectric utility cc^pany have a ainpla capital atructura and 



21/ Section 7(d) provldaa that, aubject to other provlalona in 
that aaction, tha CaaBlaaion Bust approve an iaaua or aala 
o{ a aacurity unleea it finda that: 

(1) the aacurity ia not reasonably adapted to the aecurity 
atructura of the declarant and other coqtaniaa in tha 
aa>a holding company syatem 



financing by tha Iaaua and sale of the particular 
aecurity ia not neceaaary or appropriate to tha 
aconoMlcal and efficient operation of a bualneaa in 
which the applicant lawfully ia engaged or haa an 

the faaa, coMiiaalona, or other reMuneration, to 
tAoaaoaver peid, directly or indirectly, in connection 
with tha iaaua, aala, or diatribution of tha aecurity 
are not reaaonable; 

in tha caaa of a security that ia a guaranty of, or 
asBuaption of liability on, a aecurity of another 
company, the circumstances are auch as to conatitute 
the Baking of such guaranty or the aaauKption of such 
liability an improper riak for tha declarant; or 

tha taraa and conditiona of the iaaua or aala of the 
security are datriaantal to tha public Intereat or tha 
intereat of invaatora or c 



D.,r„.db,G00glC 



34 
Incvir only that anount of dabt which can ba ad«quataly aervlcsd 
by tha ^>arationc of tli* utility. Aa a Mttar ot ragulatory 
policy, tha CoMBiaaion haa generally required ragiatered holding 
conpanlea to naintain a 65% debt to 30% equity ratio on a 
conaolidated basis (with th« rewtinin? 5t typically baing 
praf arrad atock) . 

Exeipt wholeaale ^eneratora are likely to ei^loy a higher 
degree of leverage, because thay are typically project-financed 
through a substantial amount of nonrecource debt. The 
RonrocoUTse feature lisita exposure on the debt to the wholesale 
generator'a aasets only, so that the higher laval of dabt should 
not Jaopardlce the raaoureaa of the holding ce^peny. 
Neverthelasa, registered holding ccBpanlea invaating in wholeaale 
ganeratcra aay also desire to participate in their financing by 
the i^urchase of equity or debt securltiea, or by the guarantee ot 
debt securities, of wholesale ganarators. 

To facilitate such financing, 8. 1220 would aodify tha 
current standard ot review under section T(d) with respect to 
exeapt wholesale generators. Section 15101(g)(3) provides that 
irtien evaluating a regiatarad holding coapany's request to issue 
securities to finance the acquisition of an exeiqtt wholesale 
generator, or to guarantee a security of an exeapt wholesale 
generator, the Coaaisslon say find that the security does not 
■Bet the standards of section T(d}<l) and (3) only if the 



D,g,;,zeclbyG00glC 



25 

Comiaslon fixat Cind* that th* issue or >al« of >uch macurlty, 
or tha making of tha guarantaa, vould hava "a aubatantlal advaraa 
impact on tha financial Intagrity of tha raqlatarad holding 
coiVanY ayatcB." IS/ 

Purthar, whan datarmlnlng irttathar or not to approva a 
tranaaction by a ragiatarad holding company or it> aubaldiarlaa 
other than with reapaot to axampt wholeaale ganaratora, aaction 
15101(g)(4) of 8. 1220 providaa that tha Connisalon may not 
conaidar tha affact ot tha capitalization or aaminga of any 
axeiV^ whclaaala ganarator sub&iiliary upon tha ragiatarad holding 
CMq^ny ayatam unleaa the transaction, togathar with tha affect 
of auch capltallcatlon and aaminga, would hava "a subBtsntial 
adveraa impact on the financial integrity of tha registered 
holding company aystam." nieae provisions ara Intended to allow 
tha Commiaalon to i^^l^wnt a mora flexible atandard whan 
avaluating tha financial ability of a ragiatarad holding coqwny 
to Invaat In exempt trtiolasale ganaratora. 



S. 1220, in tha Ceavlaalon'a vlaw, raflacta a correct 
judgement that atrlct adherence to the integration ragulremanta 
of the Act, aa i^lamanted In tha 1930'a, cannot work in the 
competitive aconcMic markets that both the electric vholaaala 
power industry and ita raguletors both foresee for the 1990'a and 

12/ section iSi01{g}O) of Title XV of S. 1220. 



D,g,;,zeclbyG00glC 



26 

bayond. Tba approacdi ot s. 1220 should facllitat* tha 
daval^»ant oC tba wholaaala ganeration induatry, whlla retaining 
tha CMOkiaaion'a ability to pravant financing transactiona that 
iB^licata the Act'a original concvma, aach aa tha ability oC 
inveatora to aaaaaa tha financial condition of ragiatarad holding 
conpaniea. 

niank you for allowing tha COMaiaaion tha opportunity to 
oowaant on tha propoaad laglalatlon. I would ba pleased to 
reapond to any queationa tha Subcosnittaa May hava. 



D,g,;,zeclbyG00glC 



September 17, 1991 

TESTIMONY OF CLDTC^J A. LEONHARDT,CHAIRPERSON OF THE 
CONNECTICUT DEPARTMENT OFPUBUC U TILITY C ONTROL, BEFORE 

THE SECURITIES SUBCOMMTITEE, COMMITTEE ON BANKING, 

HOUSING AND URBAN AFFAIRS, US. SENATE OI ITTLE XV OF S. 1220 

OF THE NATIONAL ENERGY SECURITY ACT OF 1991 

Good morning. I am Clifton Leonhardt, Chairperson of tlw 
Connecticut Department of Public Utility Control. Appearing wiUi me today 
is ttte Executive Director of Ote Connecticut DPUC, Darcy M<£raw. I 
appreciate the opportunity to testify before you on Htle XV of Senator 
Johnston's Bill, S. 1220. Since the Oxmecticut DPUC has not taken a formal 
position on die issue of PUIK^ reform, I am speakir^ today as an 
individual. I applaud the effbrts'of Congress to improve the efficiency of ttw 
electric utility industry, and commend diis CtKnmittee for taking interest in 
this subject of national Importance. I support both the purpose and the 
substance of S. 1220 Htle XV, with certain modiiications needed to assure that 
the benefits of FUHCA reform are indeed available to consumers. The 
modifications I suggest herein represent my best thinking at ttie present time, 
but as the PUHCA refcmn debate proceeds, I am sure that my own opinuxis 
will mature and change widi reference to some important details. 

L Ovoview of PUHCA 

"As 'a specialized antitrust acf the Holding Company Act differs 
from dte general type of anti-monopoly statute in that it is 
designed to restore the effectiveness of State and Federal 
regulation, rather than the effectiveness of competition in fiie 
free market."^ 

As we ccmslder reform of the PuUic Utili^ Holding Company Act 
(PUHCA or the 35 Act), In order to capture tte benefits of competition, we 
must remember why PUHCA was enacKd in 1935, and the safeguards it has 
provided for the last 56 years. Regulation under PUHCA was instrumental in 



' TAc Piil>Uc Utility HoUUng Con^aiiy Act of I93S, report of the Securitiei 

ind Excbange CommiMion. Snbcomminee on Monopoly of tbe Senate Select 
Committee oa Snull Biujaw*. Subcoaunince Piint No. 4, Hni Coof., 2d S«m. 
(I9S2). u 1 



D,g,;,zeclbyG00glC 



breaking up the Urge pre-existing htdding companies, preventing self dealing 
abuses, and preduding complex corpoate structures ttiat tiiwart effective state 
regulation. 

The Act pioteds otunpetltian and consumers by: 

1. Frohibitine ccvporate structures that are unduly complex and, 
thus, avoia state regulation;^ 

2. Requiring diat utility acquisitions serve the public interest;^ 

3. Providing for auditing procedures and intra-system transaction 
limitadons that prevent self dealing abuses and protect investor 
interests,-^ 

4. IJmidng utilihr diversiflcalion into uiuelated business ventures 
which create risks f6r electric or gas consumers;^ 

5. Preduding utility acquisitions that monopolize new territ o ries 
or power sources, or which create risks to consumers or 
investors.' 

Under regulation by Qte Securities and Exchange Commission (SEC), 
most Investor owned utilities have organized diemselves under three basic 
models (See Exhiblls CT 1-3). Single bitegrated companies (SlCs) avoid the 
tudding company structure and PUIKZA regulation entirely, even if operating 
across more than one state. Exempt Holding Companies (EHCs), whose 
subsidiaries are predominantly intrastate or otherwise qualify for PUHCA 
exemptions under Section 3(a), are su^ect to limited SEC scrutiny. Registered 
Holding companies (RHCs) operate utility subsidiaries in more than one 
state, and are dius directly undn SEC regulation. The Cmmecticut DPUC 
currently regulates the major subsidiary of one RHC (Connecticut Light & 
Power, a subsidiary of NtHtiveast Utilities), three EHCs (United Illuminating, 
Yankee Gas, and Connecticut Energy Corp.), and orte SIC (Connecticut 
Natural Gas). 

Current utility regulatory authority is allocated between state and 
federal agencies. States have authority over retail rates, siting of transmission 
and generation fodlities, and die utility's obligation to serve its captive 



1 Section U 

^ Sudi mcquisitiom mult teod lowardi economical ind efflcieot 

developmeat of ao integrued pid)lic utility lyiiem. Section 10(c)(2) 
* Section 13 lequircf ibu inier-aniliue trantactioDi be u coil aad 

ptevenu crou lubiidizuion. Section* 14 and IS apeci^ reponing 
requiiemenu and SEC acceia to booki and recorda. 
3 Section 10)). Section ll(bKl) 

a Section 10<b)(l),(2).(3) 



D,g,;,zeclbyG00glC 



customers In a reliable, least cost manner. The FERC has authority over 
wholesale rates. The SEC has audioiity over RHCs finandal securities, 
corporate structure, and non-power Inter-affUiate transactions and over EHC 
variances from dieir exemptions. Altiiough the bri^t line between federal 
jurisdiction at the wholesale level and state jurisdiction at file retail level 
resolves who has jurisdiction over a bulk power sale by Investor owned 
utilities^, it does not resolve the preemptive eHect of FERC wholesale rate 
orders over state regulation of retail rales. 

This regulatory tension has been played out in tiie judidary, because 
Congress has not addressed the Issue directly. The filed rate doctrine, 
expressed in Narragaiaelt, requires state commissions to treat PERC-approved 
wholesale costs as reasonable (^wradng expenses for purposes of determining 
a utility's retail cost of service.^ Under tite Pike Count}/ doctrine, a state is not 
preempted from reviewing die prudence of a retail utility dedsion to 
purdiase a particular quantity of wholesale power at FERC-approved rates 
when a utility has a ditrice arnor^ power purchase options.' Questions can be 
raised as to state commission power to review wholesale purdiases between 
affiliates where diese affiliates are captive wititin the holding company 
structure and dius lack the discretion to select ottter power sources. Under 
Nantahala, state commissions are preempted fiasn trapping costs by 
preventing the full recovery in retail rates of a FERC-approved cost allocation 
among afflllates.i" The Supreme Court extended this doctrine in Mississippi, 
to hold that states are preempted from prudence review of boUt a particular 
wholesale purdiase involving FERC-approved allocations of spedfic 
quantities of power among subsidiaries of a holding company and dte 
decision of diose subsidiaries to invest In and bring on line or be a party to 



' The brigbi line piovidei thu FERC bu excliuivG jurisdiction u the 

wholesale level m lost u some ponion of the sale is in intersuie cooimerce 

and sute iction thu unduly buideni or fnutrstes (he exercise of federal 

regulatory power ii preempted. FPC v SouihtrH California Editon. 376 U.S. 20S. 

213-21« (1964) 

< naraguiftt Bltarie Co v Burkt, 119 RJ. 3S9, 3S1 A. 2d 13S8 (1977). een. 

dtnUd. 43S U.S. 972 (1978) 

' [a ihii ease, ihe Mate commiMioD did not quettioo ihe reaioDablenesi of 

the FERC approved rate, but whether the purchase wu pradeat in light of ttK 

availability of lea* expensive power from cnher loaicea. Pllu County Light A 

Power Co. v. femuytvania F.U.C.. 463 A 2d.733 (1983) 

10 Naiuahata Power A Ugb Co. v norafrurg 476 U.S. 933 (1986) 



D,g,;,zeclbyG00glC 



agreements to construct and operate a shared generation fodllty.^^ In light c£ 
the Judicial restrictions on state jurisdiction, the challenge of PUHCA reform 
is to capture the effidendes of oompetition while preserving the legitimate 
regulatory protections embodied in the '35 Act 

n. Why FUHCA Reform ia Here. 

The purpose of amendments to PUHCA should be to provide lower 
cost electricity to oonsumeis by promoting competition. First, increased 
competition in die generation sector, when equitably administered, can lower 
power procurement costs, encourage technological innovation, and have the 
potential to shift capital and operating risk from utilities to diose parties more 
willing and able to bear this burden. Second, tedmologlcal advances in the 
transmissi<m of power create the potential for interconnection effldendes 
between and among utility systems. 

The current leguIaMry structure is inadequate to accommodate the 
changes in utility industry structure that will be necessary to realize these 
effldendes. The existing regulatory model Implidtiy assumes vertically 
integrated Investor owned utilities diat eadi generate and distribute power 
{Vimarily in one state. The modem reality is ^t tiie industry is 
restructuring into multi-state generation and regional transmission entities 
that sell to distribution systems which are still generally in one state. 

The immediate problem is that PUHCA limits entry into the 
generation sector, while ttie US., even with aggressive energy conservation, 
will probaUy need 200 gigawatts of new generation capadty by 2010. 
Altiiough Connecticut's aggressive energy conservation efforts and other 
factors poatpcned our need for new capadty until after 2000, we too will 
ultimately have to build new generation. 

Under the '35 Act, a company seeking to invest in a single IFF might be 
able to qualify as an exempt ludding company under Section 3(a).i2 
However, PUHCA prevents a corpcvation from developing more tiian one 



1 > Mlssisappl Powtr A Ugla v Mhstutppl ex rtl Moon. lOS S. Q. 242S 

(19BS) 

'2 Ownen of a lingle IP? could (cek exemptioii ihraugh out of Uw five 

providoD* in Section 3(*). Tlie commonly naed esemptioDi ue Section 

3(>)(l).*liitrutite exGmpiion" ind Section 3(a)(3) "picdoinintnily a public 

utility.' 



D,g,;,zeclbyG00glC 



IFF project where the additloiud IFF projects are in difierent coipontlons and 
are located outside the developers "integrated public utility system.''^ The 
"second bite" rule effectively foredoses IFF developers that are not sin^e 
corporations from undertaking multiple projects in geographically dispersed 
locations. 1* 

Most potential entrants will not enter die generation sector if they an 
subject to extensive SEC regulation as a htdding company.*^ In addition to 
geographical restrictions, the '35 Act places extensive restrictions on holding 
company flnandng, securities transactions, diversification, and inter-affiliate 
transactions.!^ Altiioug^ FUHCA "doctors" have developed contorted 
owporate structures for IFF development, these legal acrobatics highlight dte 
need for FUHCA reform to permit greater entry Into the generation market 

To benefit the electric consumer, such entry must be equitably 
administered. All parties should have transmission access necessary to 
participate in the bulk power market as well as equal access Ki capital, and 
regulators must retain oveisi^t capability to prevent abuses. Rtnn 
Connecticut's perspective, this raises five key issues whldt address the points 
raised In Ae Senator Dodd's letter 



13 A lingle corpDradon could develop (ny number of projecu inywfaere in 
tlie connuy if ill tjie TPPt mnained within ttau lole cotpondtm, becauie 
Ittere would be no holdins company. 

1* SeclicM 9(t) require! SEC tppmytl at any acquiiilion by 'tny penon' if 
tbe Kqnisition would retult in that person owniog more tbin S% at tbe voiing 
ibaiei of more Iban one public utility. In making iu deleimination, the SEC 
will apply tbe criteria set fortb in Section 10 which include whether tbe 
acquisition will lead to concentiition of control; whether the purchase price 
is reasonable, and whether the tranaactioni serve* the public interest by 
tendini towarda tbe economic and efficient development of an integrated 
public utility lyitem. 

'^ If developers such as Wettinghouse or Bechtel were determined to be 
electric utility holding companies, they would have to spin off tbeir asset* not 
related to the operating eHlciencies of an integrated utility under Section 10. 
Cleaiiy. they would not enter the market under such conditions. 
" ' In brief, the 3S Act 1) lequiies SEC approval for *ale* of purchue* of 
secuiitle* and utility aaaeta, 2) reatricts diversification, 3) requires 
coiuervaUve financing with thitly-rive percent equity, 4) requires inter- 
t^iliaie tnniaction* to be at cost, and 5) restricts geognphic expanaion by 
requiring a single integnted system. 



D,g,;,zeclbyG00glC 



PUHCA IMann should Protect the Effectiveness of State 

Craunission Review of Affiliate Transactions; 

Any PUHCA Reform ptovldltw Transmission Access to 

Enhance Onnpetition ^lould Reconiize Ae Le^tlmate 

Economic Interests of Native Load RatKwyers; 

PUHCA Refocm should Enhance Fair Competillau not the 

biterest of "^pes of PRrticular Competitors; 

PUHCA Reform should Preserve Ote Atrill^ of the SEC and 

States to Protect Local Utilities gainst EWG Hnandal Losses. 



Tlie multi-UUicm dollar dedsion to build a new power plant, purchase 
power from an EWG, or invest In alternative sources ot energy, is Ae key 
determinant (rf electricity rates, limg term Hnandal risk, and environmental 
impacts. Tlie state's review oi these resource dedslons is the c or ner ston e ot 
its responsibility to protect retail ratepayers. Connecticut, along wiQi odier 
states, is a leader In Integrated Resource Planning policies whidi ensure that 
fliese dedsicms are made In die best interests of consumers. Without the 
unchallei^ed authcnity to review these dedsions, as represented In Pike 
County, effective state regulation oS retail rales Is impossible. The original 
intent of dte "35 Act was that SEC regulation under PUCHA should be 
complementary to state regulation, i^ PUHCA reform should reaffinn 
legitimate state authcnity in the modem setting, not undermine it 

Section 15106 of Title XV essentially codifies Oie existing judicial 
interpretation embodied in Pike CouR^ and Missiaappi. I support Oie 
provisions in Tide XV that affirm state Jurisdictional authority over 
purdtased power. However, Section I5I06 need to be modified to daiify its 
vague prior approval provisionB and remove loopholes. 

Section 15106 (d)(1) appears to codify the PiJce County doctrine 
provided duitf at the request of the regidated utility, state commissions must 
make a prlw determination of die prudence or imprudence of induding the 
power purdiase from an EWG Into retail rates. Hrst, there is no compelling 
reason why the language in Section 15106 should limit state commisrion 
authority to reviewing the prudence of power purchases only in the case of 
purchases from EWGs. Second, prior approval should mean a hearing 
process that may result in conditioiis under whidt power from EWGs may be 

1^ See geocnllr S«etloai 6(b), 8, 9((), 18. 19, wd 20(b) 



D,g,;,zeclbyG00glC 



recovered. The bill language should be modified to reflect sudt meaning. 
State commissions simply can not be stripped of tiieir ability U review the 
prudence of o ft p t rffc t B< cc^tiQn op jm qp gping bi>siq . Therefore, this section 
should clearly indicate that state commissions retain the power to review the 
prudence of utility management execution of the wholesale power contracts 
as well as future construction or opouting costs of an EWG facility because 
such fodofs impact retail rates. 

Section 15106 (d}(Z} and (dX3)(B} create a major loophole that, because 
of the proposed merger between NorQieast Utilities (NU) and Public Service 
of New Hampshire (F^<IH), is of immediate importance to Connecticut. 
Unda the current language, if PSNH purchased power from an EWG aftiliate 
and tiien subsequendy sold or interchanged this power to CL&P, the 
Omnecticut DFUC is expressly preempted from reviewing flie prudence of 
CL&rs purchase (see Exhibit CT-4}. If the purpose of these provisions is to 
permit central economic dispatch, then die language should be amended to 
preserve this benefit, while dosing the loophole. 



Since EWGs are not 'electric utilities' within the meaning of the '35 
Act, Title XV removes the oversight ability of the SEC under Sections 13, 14, 
and 15 to review the records of EWG inter-afliliate transactions.'^ Instead, 
Section 15105 extends FERCs current practice of addressing market power and 
other self dealing abuses while setting wholesale market-based rates to ttw 
additional setting of affiliate EWG rates. The self dealing abuses between 
affiliates that Connecticut is concerned about go beyond the more obvious 
preferential pricing behavior, to the subtler manipulation of non-price 
contract terms'' and the potential for cross subsidization.^ Therefore, state 



!■ SEC oveisigbt entutet thu the coiU chirgcd belweea iflltiUei uc U 
coat of lervice. FOr example, wilfaio tbe regitlered botdiag companj' itnicture 
u opendDg company chtrgei to in EWG aff]liue for Taciliiy muatenuice 
would be n con of letvice, u would EWG fuel purcli«ses from id tffiliaied 
company. 

19 In the caie of Sonthem California EdiioQ'a (SCE) noa-iundird coniraci 
with iu QF ifliUue. Kern River CogeDeruion (KRCC), KRCC wu paid for 
higher valued long term Arm capacity, when the contract tenn* pennltied 
unlimited mauiienince during on peak period! and low teiminiiion pcnaltiei 
that were more tkin to lower valued *u-iviitable' power, (tee National 
Energy Strategy. Technical Annex No.l p. 74-83 (1991/1992) 



D,g,;,zeclbyG00glC 



m need mcatm to die books end rcccrds of EWGt to prevtnt Mlf 
dealing abuaea and to review the pnidenoe of oonstrucdon and operating 
outs. 

Section 15108 addresaes many state concerns over trnim to bcx>ks and 
lecnds, but needs ta be daiifled to prevent tbe more subde manifestations of 
abuae. SptdBcMiOy, Section 15106(a} limits state conunlasions' Inquiry solely 
to the recnds of the EWG, not faiduding Om ncords at die parent company or 
ottier affiliates. As a result of the regulatory vacuum created by removing 
SEC oversight of Inter^fflliate transactlans. Section 15108 should be amended 
to provide for state commlsricns' team to th« booka and records of the 
EWCs affiliates and pareiU companies specifically <m matters concerning 
contracts with Oie EWG, aubfect to confidentiality. 

Congress should be cognizant of the additional administrative burden 
for state oversight in a more compdex modem setting. While FUHCA reform 
still requires the states to protect consumers, it does not provide a funding 
medunlsm to case fiie strained budgets of state commissions. Any PUHCA 
reform should indude a non-discriminatory funding mechanism to provide 
funds to state cmnmisslons for EWG oversight 

V. Any PUHCA Refoan ftvvldlng lyanimisslon Access te Enhance 

ConpetUon SbooM KccogniBC Uw tcg i tini al T Economic Interesia of 

Natfvt Load Ratcpaycn 

In (Kdcr to enhance OMnpetition In die generaHoi sector, transmission 
access must be provided to all new entrants to allow diem to readi buyers in 
ttie bulk power market The Connecticut DFUC supports hir transmission 
access litat recognizes die legitimate economic interests oi native load 
ratepayers, who have supported transmission facilities in ratebase. 

Transmission access should ensure that native load ratepayers are held 
haimless from dilrd party wfaeding by making those ratepayers whole for 
foregone economic transactions, and by ensuring that transmission rates are 
at least equal to incremental ooata. To prevent native load ratepayers from 
enjoying any market power from their transmission systems, compensadon 
for foregone eooncxnic transactions could be calculated by die FERC at die 



'" Crow tnlwidizaiicM involvu the proviilon of penooiiel tad lervicei 
fem the regulated ictdt eoaptaj vt the unreBulaied EWG H below coat, 
effwdvely duftias com aad risk* to nuepayen. 



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prevailing cnmperirive price levels established In the bulk power markets. 
Making flim transmission capacity available in this way enhances efficient 
otnnpetitlon, by assuring transmission capadty will go to die hi^iest valued 
use and protects against Ote exercise of maricet power. 

Mr. Chairman, dte July 1991 FERC Decision Na 364 in the proposed 
NU-PSNH merger, and the Cimnecticut DPUCs vigorous intervention in 
Qiat case on behalf of our ratepayers, underscores the importance of diis issue 
to Connecticut (see Exhibit Cr-S}.^' Our ratepayers have spent millions of 
dollars to suppwt transmission facilities, and should be able to realize Oie 
lef^timate economic benefits associated with the use of those facilities. PERC 
Dedskm No. 364 would prevent Connecticut and New Hampshire ratepayers - 
from realizing such benefits. The current legislative proposals in the U.S. 
Congress on transmission access do not yet embody folr recognition of 
legitimate ratepayer economic interests, and could permit flawed pricing 
principles similar to Oiose in FERC Dedsion No. 364. On behalf of Oie 
CcHmectlcut DPUC, 1 hope to work widi you. Senator Dodd, this Committee, 
and other members of Congress on this important transmlsslcai access issue 
in the future. 

VL FUHCA Refonn sfaonld Enhance Fair Competition, not Oie Interests of 
Faiticnlar l^pes of CompetitoB 

Simply increasing ttie number of competitors, widtmit providing equal 
opportunities to compete, does not enhance proper competition and will not 
benefit consumers. EWG status should not favor a specific type of power 
provider or aeate a privileged class of generators. As noted above, 
transmission owners need to provide fair access, not subsidies, to promote 
equally of opportunity. Smllariy, to the extent that state commissions 
determine ttut high leverage does not present Imprudent reliability or 
financial risks, simple utilities, EHCs, and RHCs should have equal access to 
the same leveraged capital structures as Omi non-traditional counterparts. 

Connecticut supports die provi^ns In Sectitm 15107 that affirm state 
authority to consider the prudence of a utility's power purchases from EWGs 



^' Nonhcaii Utilitiei Service Comptny, Opinion and Order Afflnning la 
Put. Modifying in Pul, ind Reversing in Pan Initial Decision and 
Condilionalty Approving Di^osition of Facllitiei, S6 FERC f 61^96 (1991). Tbe 
iDilial DeciMoo ii rqioned U S3 FERC 163.020 (1990) 



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vritti Mgjily krenged ci^ilal strudarea and dtc to^iact of diose purduses on 
raUability.^ To the extent Ibat sUte comndaskBis Bnd dependence on highly 
leveraged generation units to be ioqnudent, the SEC, In lla analysis under 
Section 15101 (g)0} and W, should give ttwse findings strong conslderatlc^i In 
determining whetiier EWG financing or caplullzatlon have a substantial 
adverse effect on the finandal integrity (tf die RHC 

Tide XV ahotild, however, be amended to make the linkage of EWG 
rates to competitive maricels Oi^idt, by codifying current FERC policy 
denying Q»dble pildng auduvity unless It is shown dut the seller has no 
maricet power (as nuxlifled by tlte discussion of transndssiui Issues above). 
Section 15105 should be e^nnded to allow FERC to grant any EWG market 
based rates only upon a finding of omipetitive maricet conditions (absence of 
market power). 

To create effective sanctions for antl-competiUve actions by EWGs, 
Section 15101<^ should be ej^tanded to aUow the SEC to revoke Oie 
exemption of EWGs from PUHCA under the following circumstances: 

1. The holding contpany has not established the appropriate means 
of detsmining allocation of costs between the EWG and die 
affiliate; 

2. Tlie EWG and affiliates have entered into abusive self dealing 
arrangements; 

3. The EWG enters into an affiliate sales cmtract without Oie state 
approvals required under Title XV. 

While diese modlficaliCTS serve to enhance competition. It Is 
important to note diat Con^earicmal Intent an be thwarted by inappropriate 
exdusion at existing utility generation uidts from competitive bidding 
processes (rf tiw states.^ 



2^ These bcwia tic tmt mmm of the eritecla in coasiderlag the pnxteiice 
of power poichaiei bom EWGi, and the luiguige in Section 131(t7 (SKAKiv) 
ifaoald in no we; be commied lo limit uate commiuion discKtloa. 
13 In yean put, nunr JUtci reaiicted competitive biddini to QI^ ud IPPi 
to eacovige die develajmeM of noa-atiliQ' aeneniion. However, now ihai 
eleeolc nlililies no kn^r have ■ noaopol; on biillding new geoeration. and 
PURCA nfefm wonld increase coa^Miiioa in the genentioo tector. it i« 
clearij invprapriaie Tor staias to eulnde exinins utility generation from 
competitive bidding RtTi. This preblcn ii eqtcciiUy penincal to Conneciicni, 
whose ndlltie* have (vplw c^Mcitr. and are efTectivelj ptcclndcd from 

'Uuachnaetu tranritionil ttPPi for the next two yean under the 
DPU .' ■ • 



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Protect Local Utflitta Agslnat EWG F 

Since under Tide XV, vlrtiully any budncaa could own an EWG, even 
dwM with other riaky Inveatments. If an EWG fell Into bankruptcy or 
suffend severe financial losses, Oils can have profound implications for 
dectric reliaUllty and die states' aUUty to regulate retail rales." An EWG's 
finandal losses oould push a utility holding company Into financial distress, 
and an EWG could dmply terminate service in diat it does not have a 
otdigation to serve except for its contractual promise.^ Also, fiuou^ loan 
guarantees or other meduuUsms, a htriding company could direct funds from 
its retail subsidiary, weakening its financial structure, and Increasing its cost 
of c^rilaL Therefore, Title XV should be modified to ensure fliat the SEC and 
state commissions have the authority Ki protect the financial integrity of 
utUities. 

If a holding company or Its utility subsidiary guarantee Hie securities of 
an EWG, such tiul there is a lien on assets. Section 1510I(6)(g)(4) should be 
modified to consider this Impact in the RHCs capital structure. Further, 
nothing in Section 15101 should be construed as preempting a state 
commission, acting under applicable state law, from considering the prudence 
of loan guarantees by a regulated utility subsidiary to an EWG. 



vm. 

In conclusion, I support refnm of the Public Utility Holding Company 
Act but believe fliat passage of Tide XV requires further careful and reasoned 
ddiberation. In 11^ of judidal restrictions on state Jurisdiction, the 
diallenge of PUHCA refcnm is to capture the effidendes of competition while 
preserving core regulatory protections enibodled in the original Act 
Ttansmlssian access and the protection of legitimate native load economic 
interests are key issues tiiat need to be addressed. In its deliberations over 



^* Section 13101 (1X2) definei an EWG to be in ibe exclntive t 

owBing and operating ta electrical geaentlDB racUltr. To the eiteat EWG 

divenificatkni onuide iliii coniesi li allowed, SEC regnladoa under the 33 Act 

aliould vplr. 

23 Coamct leniu ailowiog mJlity takeover and operation of the plant 

could addRH ibc leliabiUq' ptoblcm poied by ■ bankmpt EWG. bui kh tbe 

iavaet on retail ntei. 



jdbyGoOglC 



IWe XV, I know your sidKnnndttee win ttwu^tfully consider die needed 
revlskm and refinement prior to paasage at the flnt amendment of the 
Public UUUty Hcddlng Canquny Act sfaice its adoption over fifty yean ago. 



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CONNECTICUT EXHIBIT 5 

ConnactLcuc urges Che Connission to adopt a stat«m*nc 
of principlas, applicabla in subsequent proceedings, that 
will afford Connecticut's native load ratepayers confidence 
Ctiat ttiey will be made uhole for yielding the acononic use 
of the Benjed company's transmission to third-party 
wheeling. 

B. Recenunended Conc ^il^^ons 

1. native Load Safeguard CondiClona 

On rehearing the Connission should adopt the 

following Native Load Safeguard Conditions: 

mt opecetiag eaapaaiea that awn tzansalssien faailitles 
need aet sake firm traasalaslen eapaeity available to a 
cequeating pazty. If HU establishes -- 



the eepaelty is neeessezy fez zeeaenably 

foreseeable econoaic power purchases that will 
redne* the revenue tequiramant used to detazaiae. 
aative load rates, upleaa the requesting party 
•gzeea ta pay the operating company that owaa the 
facilities an increment Co the transBisaioB race 
that will recover the amount by which the coat to 
the operating ee^paay of substitute power (Czoa 
its AWn system oz ethez purchase exeaeda the eost 
of eoonony purchases it aust forego ia futiira 
tzaBaaetieaa, ez 

tbe eapaeity la nacesaazy Coz reasonably 
foreseeable oCf-systea salasr the proceeds of 
which would be credited against the Yev«&u« 
zequireaent used to detaraine native load rateSf 
unless the requesting party agrees to pay the 
operating eoapany owning the facilities aa 
increment to the transmission rata that will 
zeeover the portion of the proceeds of the 
feraqona sal* that would have beeo ee ezedtted, oz 

the use of the eapaeity would iapoae ea the VU 
opezatiag eoapany ideatifiable iaezeaeatal eosta, 
yailU the requesting pazty agraea to pay the 



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Th« MU oparating eaapany Bust er«dit aa; aueb 

traaaMiaaton rat* iaer«a«at agaiast th* ravcau* 
raquiraaaat uaad to dataraiaa aativa load rataa. 

In procaadinga to inpXaaant tha Sataquard Candltlons, 
tha COBuiaalon can cap any tr«nsniaalon rata increnant tor 
foraqona acononic tranaactlona at cocipatitiva prifia lavaXs 
•atabLishad in N«w England bulk pouar narkata. In thia way, 
racovary for tha loas of banefits froa such tranaactlona 
cannot ba atfactad by any markat powar the nargad company 
nay tiava. Tha COPUC doaa not aaak to praaarva for Ita 
nativa load ratapayara the fruits of any narlcat power that 
nay exist with or without tha nargar. 

Tha Coeaisaion aay alao vish to consider allowing a 
requesting party to elect either (i) a variable incravent to 
its transmission rate based on purchases or sales actually 
foregone in th* future, or (ii) a fixed increeent to its 
transaission rat* bas*d on NU's rsasonebL* current estimate 
of future foregone sales and purchasee. In the event the 
requesting party elects a variable transmission rate 
Inereaant, HD would b* requir*d to provid* iJocun*ntation of 
any foregone sale or purchase on which it bases such 
inereaent . 



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sonam or TesTiMom of cjuiy zimiEnuii 



nCHIGMI HUMICIPAL COOPERATIVE dtOgp 



NATiowu. Rtnuu, ELXCntlC IISOFERATIVB 



HICHISAM ELECTRIC COOPEMTIVE ASSOCUTIOH 



AKEUCJUI HUHICIPAI. POHBR - OBIO 
OHIO HUHICIPAL ELBCTBIC ASSOCIATION 



KANSAS KDHICIPM: V 
KAHSAS mmiCIPAL ELECTHIC AC 
ILLINOIS miNICIPAL ELECTRIC » 
COLORADO ASSOCIATION OF MDHICIPAL 

L ELECTRIC ASSOCIATION 



SECURITIES SOBCOHHITTEE 
COMMITTEE ON BANKING, HOUSING AND URBAN APPAIRS 



D,g,;,zeclbyG00glC 



My ntam !• eary TLimibiiii I'm Bxwcutiv* vie* Pr*sid«nt of 
the Kicbi^ui HoBicipkl Blactric Association. I'm tastifying on 
belialf of: 

— Rnnicipally and cooperatively owned utilities «rtio serve over 
1 milliCNi Hicbi^an residents and similar utilities in Florida, 
Korth Carolina, tanottylvsnla, (Miio, Minnesota, Kansas, 
Illinois, Virginia and Colorado. 

— TIM A—rlcan nAlic Power Association and the National Rural 
Electric Ooopcrativ* AssociatlMi. nt*tr ■aatear utilities 
provide 25t of tba D.S. poiMlation with electricity. 

Municipal and txMiperative utilities are concerned about the 
mxmmptloa frca the Bolding Conpany Act in S. 1330 for axeiqit 
wholesale generators (ENG's) for two reasons. First, soMa of our 
utilities buy noch of their electricity froa other utilities and 
want to prevent unnecessary iiK;reases in the electric rates they 
pay. He want real coapetltion In the pcwec purchases of the utility 
w* buy trcB and no "self -dealing" between It and affiliated EHG's. 
Second, our utilities want a fair and equal opportunity to buy froa 
EHG's that are offering «n attractive price. Any exaBptlon for 
EifG'e Must have three things to address these concerns and prosote 
true coiq>etitl<Hi. Otherwise electric rates will go up 
irily: 

1 purcAases by utilities fros affiliated EHG's, 

1 a case-by-case basis — 



Self-Dealing ! me Michigan experience shows what Is llKaly 
to happen nationwide it you pass 5. 1220 without these protections. 
Itie Act was passed partly to prevent abusive transactions between 
utilities and their affiliates that aainly drive up electric rates. 
But the 'self -dealing" transactions between Consuners Power and its 
Midland Cogeneratlon Venture (MCV) and Palisades Generating Cospany 
affiliates show a utility buying high-priced electricity fron 
largely deregulated affiliates so as to Increase the profits of its 
corporate parent. They show that the protections of the Act are 
■till needed. 

Consuners Power wants to pass on to its custoners the full 
anount It will pay its affiliates for electricity. If consumers 
power succeeds the result will be at least Se billion dollars in 
Increased rates collared to what rates would be if the affiliates' 
plants were owned and operated by Consuners Power as ordinary 
utility plants. Much of the $8 billion ends up as extra profits 
to Consuners Power's corporate parent, C3(S Energy, which owns the 
largest staKe in the affiliates. SS billion is enough to give free 
electricity to each of Consuners Power's custoners for ovey four 
years I Sons Idea of the self-dealing Is shown by the following: 



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The major abuB« on the MCV was in trying to convert a nuclear 
plant to a natural gas fired qeneratinq plant. Converting a 
nuclear plant to a gas plant is about as cost-effective as 
trying to convert the space shuttle into a Boeing 717 — it's 
far cheaper to scrap the shuttle and build the airplane from 
scratch. The MCV cost $2.3 billion, Which is paid tor in the 
rate at which it sells electricity to Consumers Power. But 
' for on«-third the coot — $800 million — Consumers Power could 
have built a convsntional gaa-flred generating plant of the 
saMe sice. But Consumers Power chose to create the HCV and 
buy electricity Iron it even though this alone would cost Its 
custOBsrs SI . 5 billion mora than building a conventional , 
regulated, utility-owned gas plant. 

Consuners Power chose the MCV "nuclear to gas" convarsion 
route because this would effectively allow it to force Its 
custoners to pay $1.5 billion more for the abandoned Midland 
Nuclear Plant than the $760 million which the Michigan Public 
Service CommisBion has ruled is all its customers should pay 
towards that plant. 

— Consumers Power rejected offers of lower-priced electricity 
from independent cogenerators in order to purchase more 
expensive electricity from its two affiliates. 

S. 1220 must be anended to have a total ban on purchases by- 
-and other significant transactions between- -utilities and 
affiliated EMG's. Michigan's experience shows the risks of 
billions of dollars in overcharges from affiliate purchases Is too 
great; self -dealing is very difficult for regulators to police 
because they are outnumbered and always playing catchup; and as 
Consumers Power has been able to argue with some success, the 
regulators lacK the authority to deal with some of the abuses. 

Case-bv-Case; Michigan's experience shows the risk of abuses 
that were not anticipated when Congress created the exemptions that 
the MCV is now trying to use. Any EWG exemptions should be granted 
on a case-by-case basis, if at all, after notice and a hearing. 
This will result in exemptions being carefully tailored and 
conditioned to the specifics of a particular situation to prevent 
abuses, including those we cannot now anticipate. 

Transmission ; Transmission is essential to competition to 
supply electricity in the sane way that access to the highways is 
essential to competition between manufacturers. Giving utility 
affiliates exemptions from the Act without giving all utilities 
equal transmission access will permit dominant transmission 
controlling utilities to foreclose competition. Their EWG 
affiliates can then sell electricity into utility controlled 
R«nopoly markets at Inflated prices that will cost the public 
billions of dollars and lead to excessive deregulated profits for 
the EWG' a. 



This can occur because the transmission lines in each region 



D.,r„.db,G00glC 



are coordinated, planned and built by the de»lnant utilities that 
own the lines. They ere usually acconpanl«d by «gr*a»ants that 
give them reciprocal transnlsslon rights over aach othar's lina». 
But the asaller utilities, who serve roughly 25t of the U.S. 
population, are largely excluded froa such planning and rights, 
you can't have true conpatitlon for alectriclty supplies from EWC's 
or others vlth this many of the players excluded. 

Our history shows this. Our utilities have been seeking the 
lowest cost sources of electricity for decades. The biggest factor 
hindering ua in this has been transmission — our utilities own few 
tranamiasion lines. The dominant utilities who own the lines would 
prefer we buy electricity from them. They deny or restrict our 
usaga of the lines to try to force us to buy from them. For 
attaMpla, although Consumers Power has a transmission rata 
available , it is good only a weak at a tine and thus can ■ t be 
counted on for long-term purchases from ENC'a or others. So 
creating EHG's will not do much to increase electricity supplies 
or competition when for decades we have had great difficulty buying 
from existing sources. Creating EWG's will help only if 
transmission, which is the limiting factor. Is addressed. 

Creating deregulated EWG's without addressing transmission may 
well Increase electric ratas to us and to all customers because 
the dominant transmission owning utilities will have great 
incentives to place their new generation in deregulated affiliates. 
Their atfllistes can then sell electricity Into the monopoly 
markets controlled by their utilities at above-cost rates. The 
dominant utilities can thus use their transmission control to 
prevent competition and to increase rates to all custoners to the 
detriment of our economic conpetltiveness and well-being. Thus the 
key to true competition in electricity supplies Is equal 
transmission access for all utilities. 

A simple way to provide equal access is to allow all utilities 
to participate equally in the current nuitiple ownership of the 
regional transmission grid, including its planning, development, 
usage and reciprocal rights. Arrangements similar to this 
currently exist In portions of Hew England, Indiana, Texas, Georgia 
and Hlsconain and various national groups are proposing similar 
plans, other ways can work, too, if they lead to all utilities 
having access to the transmission system on equal terns. And 
congress should clarify that the Federal Energy Regulatory 
Commission may order the dominant privately-owned utilltleB that 
control the transmission grids to provide municipally and 
cooperatively owned utilities transDlscion services on non- 
discriminatory rates, terns and conditions. This will give the 
smaller utilities transmission on a basis irfilch is economically and 
functionally equivalent to the use of the transmission system 
available to the dominant privately-owned utilities and their 
affiliates. 

The key to the exemption in S.1320 is equal transmission 
access. Hithout it you will not increase competition in electric 
generation and may cause unnecessary rate increases. 



49-970 - 92 - U __^ 

Digi-jzedbyGoOgle 



TESTIHOHV OF GARV ZIHMEKMAll 

C» BEBUr OP THE 

mCHICAH HIHICIPAL COOPERATIVE CROUP 

AMD 

UIERICAH PUBLIC POITER ASSOCIATION 

KATIOKAL RURAL BUCIRIC COOPERATIVE AS80CIATI0H 

AND 

PLORIDA MDHICIPAI. POKER ACEHCV 

NORTH CAKOLIHA EASTEU) POWER AGENCY 

HORTO CAROLINA HDHICIPAL POWER ASENCY HO. 1 

ELECTRICITIES OF NORTH CAROLINA, INC. 

MICHIGAN BUCTRIC COOPERATIVE A3S0CIATI0M 

ALLEGHENY ELECTRIC COOPERATIVE 

AMERICAN MUNICIPAL POMER - OHIO 

OHIO MUNICIPAL ELECTRIC ASSOCIATION 

CENTRAL MINNESOTA MlMtCIPAL POWER AGENCY 

KANSAS MUNICIPAL UTILITIES, INC. 

KANSAS MUNICIPAL ELECTRIC AGENCY 

ILLINOIS MUNICIPAL ELECTRIC AGENCY 

COLORADO ASSOCIATION OF MUNICIPAL UTILITIES 

VIRGINIA MUNICIPAL BI£CTRIC ASSOCIATION 

BEFORE THE 

SECURITIES SUBCOMMITTEE 

CCmUTTEE ON BANKING, HOUSING AND URBAN AFFAIRS 

UNITED STATES SENATE 

17, 1991 ' 



D,g,;,zeclbyG00glC 



TESTIKOHY OP GARY ZINNEnUlN 



Chainwn, HaaberB of the Coamitt**: 



Thank you for allowing >• to testify today. Ky na>« la Gary 
ZljDMT»an. I'B Exacutlva vlca Praaldant of tta* Mlehlffan Kunloi^l 
Elactrlc Aaaociation and a Bambar ol tha Staaring Comalttaa of tha 
Michigan Municipal Cooparativa Group. For tha last 17 yaars I'va 
baen In tha alactrlc utility buslnaaa, first as tha aanagar of a 
city alactric utility and than as the nanagar of powar supply 
Buthorltias that supply alactrlcity to savaral Municipal ly-ownad 
utilities. 

Today I'* taatlfylng on bahall of: 

Tha Michigan Municipal cooparativa Group and 
esaentlaily all oC Michigan's aunlclpally and 
cooperatively owned utllitiaa. Collactivaly, thasa 
utilltiea provide electricity to over 1 Killion 
Michigan residents. 

Tha AsMrlcan Public Powar Association and tha 
National Rural Elactrlc Cooparativa Association. 
These are the national associations for 
cooperatively owned and aunicipally owned electric 
utilities. Their MeMbers provide 29% of the U.S. 
population with electricity. 

Municipally and cooperatively owned utilities in 
Florida, Korth Carolina, Pennsylvania, Ohio, 

-1- 



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Kinn«Bot«, Kansas, Illlnais, Virginia and Colorado. 

Kunicipal and cooparative utilitisa ar* non-profit and ara 
owiwd by tha custoaarB thay aarva. Blactric cooparatlvaa aalnly 
provld* alactric service to people in rural areas. There are al>out 
1,000 cooparativas nationwide serving 101 at the U.S. population. 
Municipal electric utilities ara owned by a city. Village or other 
govem»«ntal unit and provide electricity In the mniclpaliCy and 
nearby areas. There are approxisataly 3,000 sunicipal utilitlea 
nationwide serving 1S% of the U.S. population. Examplea include 
the citiea of Orlando, Austin, Sacrasento and Colorado Springs. 

Municipal and cooperative utilitlea are concerned aliout the 
Holding Conpsny Act exenption in S. 1230 for two raaeona. Pirat, 
Bone of our utilities buy much of their elsctriclty from utilities 
euch aa Detroit Edison or ConsunerB Power. He want to prevent 
unnecessary increasea in the electric rates we pay. For that 
reason we want real coapetition in the power purchases of the 
utility we buy from and want to prevent "self -dealing" between that 
utility and afflliatad generatiT>g conpanles. 

Second, If Congress la going to pass S. 1220 and create a new 
class of power plants known as exempt wholesale generators (EWG) 
then we want to Bake sure that our utilities have a fair and equal 
opportunity to buy fros them. He don't want to be artificially 
prevented fron purchasing electricity from an EHC who is offering 
us an attractive price. 

Hyed for an pxeaption : By way of background there Is a range 
of views a>ong municipal and cooperative utilities on whether an 



D,g,;,zeclbyG00glC 



•x«Kpt:ion team th* Holding Coapany Act lor EWG's Is n«c«Bsary. In 
part thlK is bacause to date whan utiliti«B hav* asked for blda to 
supply thorn with alactricity nany "coganaratora" hava raspondad. 
Coganarators ar« axa^itad by a 1978 law froa the Holding coapany 
Act. Host bids have led to cogenerators ' offering 3 to 10 tisea 
aora alactricity than the utility naeda. The resulting coqietitlon 
baa lad to very attractive prices lor the purchaeing utility. 

As a result soae aunicipal and cooperative utilitias question 
whether another exemption from the Holding Coapany Act is really 
needed. This is especially the case given the risk another 
exeaption will create abuses that nay drive up electric rates. 

Instead, nany of our utilities believe that increasing all 
utilities' ability to use the electric trsnsalssion systea by 
itself will help keep electric rates down by increasing the 
conpatitlon to provide new sources of power and will help keep 
adequate electric aupplias available. It would avoid the risks of 
unnecessary rata increases caused by creating another exeaption to 
the Holding Coapany Act. 

Aaandaenta Heeded to s. 1220: However, all the utilities I'm 
testifying for agree that if Congress is going to amend the Holding 
Company Act to create "exaapt wholesale generating conpanlas" than 
at least three things hava to be present to increase competition 
and prevent alactric rates troa going up unnecessarily: 

a ban on purchases by utilities from affiliated EHG's, 
a granting of EW6 exaaptions only on a casa-by-case 
basis — no blanket exeaptiona, and 

-3- 



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proviaions for equal participation in tb« alactric 

transmlaaion systan for all utilities so as to promota 

truB conpatition. 

Titla XV of S. 1320 doas not hav* thas* protactiona. Our 

•xperianca in Michigan, aspacially with utility affiliates, ahows 

irrtiy ttiey are neadad. 

This is because Hichigan, along with California, is the 
principal stata where a utility has purchased large aaounts of 
electricity From its own "cogeneration" affiliates. Qualifying 
cogenerators are exempted fron the Holding CoMpany Act in nuch the 
sane way as EHG's would be under S. 1220. Hichigan has found 
substantial abuses and self -dealing on these purchases from 
cogeneration affiliates. California has found the same. The abuses 
ham competition and drive up electric rates. Michigan has the 
first proposed nuclear EWG in the country and it has siailar 

These experiences indicate what is likely to happen nation- 
wide if you pass 5. 1220 in its current fore. I am here today to 
describe these experiences and to indicate in light of them what 
Changes are needed to Title XV of S. 1220 to truly promote 
competition and prevent unnecessary increases in electric rates. 



D,g,;,zeclbyG00glC 



S«lf-n««llnQ 

Can»ua«ra Pomr Coapany ham clgnttd contracts to buy larg* 
mBounts of alwctriclty froa two aCtlliatas. On*, th« Midland 
CogMwratlon Vantur* (or HCV) , Conauaara Powar contands is 
dara9ulatad bacausa Ic is a cogenarator. The othar, tha Paliaadaa 
Ganarating Cm^any, ia a would-ba nuclear wholaaala ganarating 
coopany (Aidi CanauBars Powar contenda will attactlvaly ba 
dazagu latad . 

Conauaara Powar ia aaaking to paaa on to ita alactrlc 
cuatonara tha full aaount it will pay Ita atfillataa for 
alactricity. If it auccaada, baaad upon taatiaony subalttad to tha 
Michigan Public Sarvlca coaalsaion, tha result may ba up to Sa 
billion dollara in axtra rata Incraaaaa coaparad to what ratas 
would ba if tha affiliataa' plants vara ownad and oparatad by 
Conauaars Power aa ordinary utility planta. Tbaaa incraasas aren't 

Much of this $8 billion anda up as extra profits to Conauaara 
Power Coapany's corporate parent, CHS Energy, which owns tha 
largest atake in the two affiliate*. Parts of the $S billion go 
to othar conpanies that own part of the af flliatas — Bacbtal, 
Haatinghouee and Fluor-Danial to naa* a few. 

To put theas suae in parspectiva, tha $8 billion will 
accuaulate over the lite of the two contracts. But the aaounta 
ar* huge — $8 billion ia enough to give free alactrlcltv to each of 
Conauaars Power's cust^Mrs for over four years 1 Looked at another 
way 98 billion la the aaae as doubling Consuaars Power's alactric 



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rates for ovsr 4 ysars — trtiidt Bor* vividly describes the effects 
of ConsinMrs Pover's self-dealing. And, In addition to tha $8 
billion in rate increases censtuais Power has been trying to 
transfer over 53 billion in assets froB the utility to its 
corporate i^rent. 

California has had siallar problsms In power purchases by the 
Southern California Ediaon Conpany fron Its cogeneration affiliate. 

These transactions show the genaral "self -dealing" strategy 
of consiusers Power Coepany, naoely buying high-priced electricity 
froB deregulated affiliates so as to increase the profits of its 
corporate parent. One of the reasone the Holding Conpany Act was 
passed in the 1930'a was to prevent abusive transactions between 
utilities and their affiliates that nainly drive up electric rates. 
The transactions between Consumers Power Coapany and its Midland 
Cogeneration Venture and Pallsadas Generating Conpany affiliates 
show that the protections of the Holding Company Act are still 
needed and that 8. 1220 has to be amended to have a total l>an on 
transactions between utilities and their EHG affiliates. I«t ■• 
describe the two Consujurs Power affiliates and the abuses with 
each in eore detail. 

MCV ! The Midland Cogeneration Venture is a large electric 
generating plant principally owned by CMS Energy, Conauners Power's 
parent coepany. It was planned and put together by Conauaers Power 
company uaing assets froB Consumers Power's abandoned Midland 
Nuclear Plant. The MCV burns natural gas as its fuel and signed 
a long-tarB contract to sell its electricity to Consuaers Power 



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Conpany. Th* HCV has recsived Federal Energy Regulatory Comnission 
(FERC) certification as a qualifying "cogenerator" which w* and th* 
State of Michigan are challenging in the courts. It upheld such 
certification will exmipt the MCV from the Holding Company Act, 
will allow it to sell electricity at prices far higher than if It 
were a power plant owned outright by ConsuBers Power Conpany and 
will prevent the KCV's profits fron bbing regulated. 

Some idea of the self-dealing and excess costs Consumers Power 
is trying to pass on to its customers are shown by the following. 
The major atauae on the HCV was the decision to convert a 
nuclear plant to a natural gas fired generating plant as 
opposed to having consumers Power build an ordinary gas-fired 
utility plant. Converting a nuclear plant to a gas plant is 
about as cost-effective as trying to convert the space shuttle 
into a Boeing 737 — it's far cheaper to scrap the shuttle and 
build the airplane from scratch. The KCV cost S2.3 billion, 
which is paid for in the rate at which it sells electricity 
to consumers Power. But for one-third the cost — $800 Billlon- 
-Consuners Power or one of our utilities could have built a 
lal gas-fired generating plant of the same size. But 
1 Power chose to create the KCV and buy electricity 
from it even though this would cost its customers $1.5 billion 
more than building a conventional, regulated, utility-owned 
gas-fired generating plant. 

consumers Power chose the MCV "nuclear to gas" conversion 
route because this would effectively allow it to force Its 



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custoaars to pay 91. S billion aBd for tha abandoned Midland 
Nuclear Plant than tha $760 nillion which th* Michigan Public 
Servic* CoHtiasion haa rulad ia all ita cu*to»ara ahould pay 
towards that plant. It worka this wayi Con>u>ar> Povar 
■•alls" parts of ita abandonad Midland Nuclaar plant to tha 
HCV for $1.5 billion. Consuacrs than sands tha $1.9 billion 
to its unragulatad corporate parant, CMS Enargy. Tha HCV's 
$1.5 billion purehasB is rsflactad in tha high ratas Consunars 
Powar pays tha MCV for electricity and which Consuners Power 
siaply passes on to its custoners in the rates it charges 
th*B. The result is a $1.5 billion nuclaar overcharge to 
Conauaara Power's custonars. And to give you aons idea just 
how "usaful" tha nuclear plant was to the MCV, part of what 
it bought was uillionB of dollars of consulting servica* done 
years ago to see whether soil conditions beneath buildinga 
which Consumers Power still owns mot nuclear requirewentsl 
For Consumers Power's strategy with the MCV to work, it bad 
to fend off any attempts by truly independent cogenerators to 
sell it electricity at a lower price than the MCV's. And 
that's exactly what it did; Our Public Service Conmission 
held a proceeding to see who besides the HCV would offer to 
sell electricity to Consumers Power. Nearly 100 projects 
offered to sell electricity. The total amount of power 
offered was three times what Consumers Powar needed. Several- 
-includinq Janes Rivar Paper Company, Dow Chemical, and the 
owners of a retired Consumers Power generating plant— of fared 

-8- 



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C pric«B than tta* KCV. In slKilar ■Ituatlona around 
tb* country whare ut Hit las have baan otfarad far »or* 
•lactricity than thay could us* thay hava nagotiaCad for tha 
bast prio* or sat up a bid procaas to qmt tha bast pric* 
posslbla. But ConauMera Powar dj.dn't do thla. Instaad it 
rajectad out of hand tha lowar-prica offers and inslstad that 
It bad to buy fros its HCV affiliata at the hlyhaat prica 
possibly allowad by lawl 

Consuaars Power has continued to ba succasaful in holding off 
truly independent cogenarators who sight offer lower prices 
which Coneuners would have a hard tlae plausibly rejecting in 
favor of high-prlcad purchases from Its affiliates. This is 
shown by tha tact that last year over 90% ol its coganaration 
purchasaa ware free aistar conpanlas. 

Mhan our Public service Cosmlsslon reviewed the HCV contract 
it apparently felt Its hands were tied due to sobs prior 
rulings that prevented than from directly addressing tha 
Consusers Power abuses. Certainly Consuuara Powar took tha 
position that the HPSC didn't have jurisdiction to do anything 
except look at tha rate in tha contract, couldn't look at any 
abusive practices and couldn't order ConsuBars Power to buy 
fro* less expensive suppliers. The key is that the HPSC 
lowered the rata to be paid the MCV and phased It in over 
tive. ConsuBers Power has now taken the Mpsc to court arguing 
that it has to pay Bore for tha electricity from the KCV than 
the HPSC allowed. That speaks volUBea — how often have you 



D,g,;,zeclbyG00glC 



■••n a huvar 90 to court arguinq that th« price It was paying 
was too low! ConauBers Power wouldn't be arguing this axcapt 
that the nor* it pays the MCV, ttte bigger th* profits for 043 
Energy, which owns ConsuBera and nuch of the MCV, 
Conaumers Power's self-dealing with the MCV was not llnitad 
to the alactric area — the gas contracts for the KCV are also 
set up on a "sweetheart deal" basis that aay coat the aaa 
utility cuatoners of Conauaers Power aillions of dollars aach 
yaar. Consumers Power is laoth a gaa utility and an electric 
utility. Its gas utility employees made the natural gas 
purchases for the supposedly "independent" gas-fired KCV at 
the aaae tine they were purchasing natural gaa for the 
Consunera Power gas utility. The result was 10 pa Ira of long- 
tem contracts to buy gas fros gas producers in the U.S. and 
Canada — 10 for Conauners Power and 10 for the HCV. Both 
contracts in each pair were much the same except for the 
price. The Michigan Public service Comralaplon found that each 
pair of contracts was negotiated as a "pacXage deal" where 
"consuaers Power agreed to pay more than the asking price in 
exchange for a balow-the-asklng price rate for the HCV". 
Giving the lower-priced gas to the MCV Increases the HCV's 
profits and the cost of the higher -priced gas purchased by 
Consumers Power would noraally be passed on directly to Its 
gas custowars. 

The parson who supposedly represented the HCV when it 
"negotiated" its contract to sell electricity bacX to 

-10- 



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Can«uB«rB Powor coapany in tact was paid by Consuaars Powar 
during HUch of tha naqotlations. Although ha supposadly vas 
nagotiating tor tha MCV, during tha nagotiationa hs raportad 
tx> and waa diractad by a Vica Fraaidant and than by tha 
Exacutiva vica-Prasldent of Conaiuars Power Coq>any. And tha 
raaponsibility In tha nagotiationa for dacidlng what t«nu 
wara accaptabla to tha HCV reatad with tha Vlca Praaldant or 
Exacutiva Vlca-Praaidant of conauaara Powarl 
This pattam of baing on both sidaa of tha tabl* continuad 
such that whan ConauBera Powar CBna back aapty-handad after 
baing told by our Public Sarvica ComNisslon to ranagotiata 
kay aspacts ol th« KCV contract that the PSC said, "Ona aust 
wondar whsthar Consunars Powar has onca again nagotiatad with 
itself and lost." 

f flHaadep; Palisades Is a conaunars Powar nuclear plant that 
has been oparating since tha 1970*b. Consumers Power Is attampting 
to sell tha plant and related transmission lines to a sister 
company called the Palisades Generating Company, which is owned by 
Consunars Powar and two non-utility companies. Consumars Powar 
has agreed to buy the electricity fron the plant under a contract 
that runs through tha year 2006. Tha owners of Palisades 
Ganaratlng Covpany, including Consumers Powar, CHS Energy and 
Bachtel Power Corporation, have applied to the SEC for s no-actlon 
latter or other determination that they would be exempt from the 
Holding Company Act. They shouldn't get it. 

Soaa of tha specifics on this transaction are as follows. 

-11- 



D,g,;,zeclbyG00glC 



The contract aay r«sult in Consuaars Powar's custMMra paying 
ov«r $7 billion for electricity tron the plant through tb* 
yaar 2006 If th* plant achlevas the good operating levela it 
expects. The actual coat to generate the electricity, ualng 
Consunera Pover'a and Its afflliatea' coat eatimatea and 
including a reasonabla profit, ahould be around $5.5 billion. 

The more than SI ■ 5 billion diffarenca la eaaantlallv all 
excess profit. 

Much of the excess profit and corresponding excess charges to 
Consumers Power's customers relates to the amount of tine the 
plant operates. To date the plant has operated poorly — only 
about 45t of the time. Typical planta operate 65* of tha tiaa 
and good ones reach the mid-70t's. Consunera Pover claiaa 
that the plant's perforaance won't improve without an 
"incentive' to do so and wrote the contract ao that th* 
affiliate gets a bonus the more the plant exceeds a 5St lavel. 
BUT why use 55* when even an average plant reaches 65% — the 
10 percentage point difference is a guaranteed bonua. And 
Consumers Power's own documents show they believe the plant 
will operate at lovela far better than 65%. 

Moat important, Consunsrs Power will continue to operate the 
plant even after It is sold: It has already signed a contract 
to ^erate the plant for its sister company for at least three 
to five years. In Federal testisony the slater company said 
it has Qfi employees now and is expected to have only a handful 
in the future. So thia is really only a paper tranaaction — 

-12- 



D,g,;,zeclbyG00glC 



why can't: conaumcrs Pcwsr clean up its act and oparat* tha 
plant properly ogj; without its ratapayars risking paying 
billions mora? 

Powar plants are usually most expensive during their early 
years when mortgage payments and depreciation charges are 
high, and whan the buga are being worked out. They are often 
■ost economic in their later years when they are running trail 
and have been largely paid for. Here, on the Palisades plant 
ConsunerB Power wants its custonera to bear the brunt of the 
costs and risks of the plant in its first two decades and then 
wants its Bhareholders to have all the benefits of the 
remaining several decades of the plant's life. This is unfair 
and very expensive to Consumers Power's.customers, because the 
plant will likely bo useful and economic for decades after the 
proposed contract expires in the year 3006. In effect 
Consumers wants Its customers to pay for a whole jug of milk, 
but gives the customers only the skim nilk while Consumers 
Power takes the cream. 

General ; Consumers Power's self-dealing and other actions 
have united against it in Its rate cases and other litigation its 
industrial customers (CH and the like], its residential customers, 
other utilities, our Attorney General, the Consumers Power labor 
union and the Public Service Commission. None of these diverse 
groups supports S. 1220 in its present form and nost are actively 
cftposed to it or requesting changes. The opposition of these 
widely varied groups further shows the need for the kinds of 

-13- 



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a«*nd>ttnts to tba Holding Coipsny Act •x«*ptlon provisions of 
8.1220 v« ara racomanding. 

Much of irtiat I hava dascrlbad about tha MCV la aat forth In 
datail in lengthy Michigan Public Sarvlca CoMilsaion ordara. I 
hava Bttachad axcarpta fro* our Public 8«rvic« Ccvnilaaion's 
taatlMony on Holding CoMpany Act ratorw batora Raprasantativ* 
Sharp's SubcoMBittae this spring bacauae thara tha PSC included key 
■itcerptB troB their rullnga on transactions between Consunars Power 
and ita affiliates. 

CalHomla : California has had similar experlencas with self- 
daaling batwaan tha Southern California Edison Conpany and its 
cogenaration affiliates. Laat year the California Public Utility 
Comnission found that in just three years that utility paid about 
S50 alllion too nuch to one of its afflliatas and disallowad tha 
utility's attempts to pass those sums on to Its customers. Tha 
ComnisBlon noted tha conflict dua to tha fact tha utility personnel 
ostensibly negotiating tor the utility on the contract in question 
were officers of the affiliate the utility was buying from. 

And last Dacambar an Administrative Law Judga at the Federal 
Energy Regulatory Commission rejected a proposed merger involving 
Southam California Ediaon in part due to tha pracading self- 
dealing abuse, evidence suggesting other similar abuses and a 
finding that potential ranedies were inadeguata to prevent future 

Self-Dealing— BenBdv; Consumers Power's actions with its 

afflliatas and tha axpariancas in California show that it utllltias 



D,g,;,zeclbyG00glC 



•r« alloiMd to Mtgag* in transactions with unrsgulatsd aCfiliatss 
this will l*ad to aaasiva s«lf-d«aliiK[ that uniMcassarily incraaass 
■lactrie ratas. And thay show that such ■■If-daaling is vary 
dlllicult for avan tha bast-intantion*d ragulators to polioa aftar 
tha Caot. This is for acvaral raasons: With billiona ot dollars 
at stales tba tan^tatlons ar« too «r*atf Ttaa dovnsida risks froa 
gsttlng caught ara low— -your axcass profits ara takan away fro» you 
but you don't actually losa Konayi Hhat ana ragulator or lawaakar 
ersatas as a barriar clavar BanagarB, Invastaant bankars and 
lawyars can find ways around: And tha ragulators and Isglslators 
ars outgunnad and always playing catchup— plugging laat yaar'a 
loophola whila tba affiliates ara craatlng naw onaa. And S. 1320 
is Inattectual in ita provlaiona that purport to ban abuaiva aalf- 
daaling. In fact It api^ars to spaciflcally condona so«* of tha 
abuaiva practicaa we'va aaan with Consuaars Powar. 

For axaapla, S. 1320 spaciflcally allows soaa salf-daaling 
batwaan a utility and its EWG l»«caus« only "undu* advantagaa" 
grantad tha atflliata Ehg ara curtailed by tha bill. And only a 
f«w typas ot "advantagas" disqualify and BWG, naaaly only those in 
ttaa "rata or charge" paid tha EWS for electricity. 

Hhat utilitiaa such as Consuaers Power will suraly argue is 
that a utility can refuse to deal with independent ehO's and buy 
only froB its affiliates so long as It doesn't offer different 
ratea to the two. So the kinds of refusals to buy troa lower-cost 
coapetitors irtiich Consumers Pawsr has engaged in aa a key part of 
its affiliate self-dealings nay be allowed by S. 12301 There are 



D,g,;,zeclbyG00glC 



other serious problens with this part of th* bill, but tho 
pr«c«ding Is sufficient to sbow why it cannot be taken seriously. 

For these reasons we beli,-eve that any amendments^ to the 
Holding Company Act must contain an abaci ute ban on any exemptions 
for EHG's that are in any way affiliated with a utility they sell 
power to or have any significant transactions with. And the SEC 
and its staff have to be prohibited from and -running this 
prohibition by iBBuing so-called "no-action letters" or the like. 

Partial prohibitions, or exemptions only it a state allows it 
won't work. In Hicblgan we've seen that the regulators— both state 
■nd Federal — don't have the necessary legal tools to adequately 
regulate this area. Consumers power has repeatedly challenged 
attempts at the Michigan Public Service commission or the Federal 
Energy Regulatory Commission to address abuses by It or its 
affiliates on the ground that the Commissiona' don't have the legal 
authority to look into these matters. And much too often the 
Commission's or courts have agreed with Consumers Power on this. 
So in plain English our experience has shown there Is a large risk 
of utilities finding loopholes or regulatory gaps that allow abuses 
with their affiliates to go unchecked. As Michigan Public Service 
Commissioner Ronald Russell has said, Michigan's sxperiencs with 
CHS Energy and its subsidiaries show that, with complex holding 
company structures, "transactions between corporate afflllstss can 
be manipulated to embrace the concept of competitive generation 
while ensuring that all competitive advantages reside with holding 
company affiliates." 

-16- 



D,g,;,zeclbyG00glC 



Such ■ ban sbould not b* a proiilmm. It la sy undaratandlng 
that at thia point aoat utilities that want to gat Into tha 
indapandant povar buslnaaa ara willing to paaa on doing bualnaaa 
in thalr atata In ordar to ba abla to work In tha othar 49 atataa. 
Soaa of thaaa bava Indlcatad that thay don't want to do bualnaaa 
with thair own afflllataa bacause thay will ba parcalvad as 
angaglng In aweathaart daals «ven if tbat'a not tha caaa. 



D,g,;,zeclbyG00glC 



our exp«riance also shows the severe risks of a blanket 
exemption from th« Holding CoMpany Act or otbar prot«ctiv« statutes 
when entering a new area. 'Riere is a significant risk that abuses 
nay occur which were not anticipated. And the blanket exenption 
approach leaves regulators without the tools necessary to 
adequately protect custoaers. 

The HCV is a good example. If it qualifies as a cogenerator 
it has a blanket exeKiption from the Holding Company Act. This is 
due to the exemption from the Holding Company Act for all 
cogenerators contained in a 1978 law, the Public Utility Regulatory 
Policies Act or PUBPA. 

But when it was paesed PURPA was expected to mainly encourage 
scattered small projects such as windmills on top of houses, some 
small hydroelectric dams and electric generation at industries such 
as paper mills. It was totally beyond anyone's conception that it 
would be used a few years later for a project such as the HCV which 
is based on an abandoned nuclear plant, cost billions of dollars 
and was Mainly developed by a utility. But this blanket exemption 
has significantly aided Consumers Power and the HCV in actions that 
will cost the customers of Consumers Power billions of dollars. 

For that reason any exemption that Congress creates for EWO's 

from the Holding Company Act should be granted only on a case-tay- 

case basis after notice and the opportunity for a hearing. This 

. will help deter abuses that might otheirwise occur, will result in 



D,g,;,zeclbyG00glC 



•ach projact bsing rwviawMl an ita own amrit* and vill result In 
•xwqitloiw Iwing carefully tailorad and conditioned ao that in each 
particular situation the public interest is served. 

The cas«-by-case approach has verked SBOothly In ferc's ravlaw 
of applications for mtPk projects and should be adopted lor EHG's, 
given the bllllona of dollars that our experience haa shown is'at 
staks. Non-ebusive projects will gat their sxaaptions and abusive 
projects vill not. 

Transaisslon Accesa 

The stated goals of the Holding CoMpany Act aaendaents you 
have under oonsidaration are to proeote Baaningful competition In 
electricity supply, to Increase elactricity supplies and as a 
result to help keep electric rates down. This will not occur 
unless all utilities have accssa to the electric transaission 
aysten on the same tenoa that utllitlaa like Conauaars Power and 
Detroit Ediaon provide thenBelves, each other and their affiliates. 
Without aqual trans*iaalon access many utilities will be barred or 
artificially Halted from obtaining the least cost electricity tor 
their custoawrs and electric rates will go up. 

!'■ going to nainly use Michigan axaaqples in ay testimony 
because I aa CaMlliar with its' altuatlon and because aany of the 
actions of Consumers Power are so blatant. However sy testimony 
is supported by utilities In many states and by the trade 
asaociatlons for muiicipal and cooperative utilities serving 3St 
of the U.S. population specifically becauae similar situations and 
problems on tranamiaalon accaas occur nationwide. 

-19- 



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As Shown on tb« att^actaacl >ap, th« two principal utllltlcB In 
Michigan's loNcr i^nlnsula or* Detroit Edlmon and Conauvars Pouar 
CoBpany. Thalr ganaral sarvlca araaa ara shown, witbln which thay 
own Kost of tb* transBisslon Unas. Thar* ara 45 othar utllitlas 
in tha Imrar panlnsula, but to kaap things simpla Z'va only ahcnm 
two or thrae, plus tha HCV and a faw hypothatical BWG's. 

Eoual TranMlaalon Rights: Many of the larger prlvataly- 
owned utllitlas in tha country have reciprocal agraamants batwaan 
than that af Cectlvaly giva than axtansiva transBiasion rights over 
aach other's Unas. This Is tha cas* with Detroit Edison and 
Consumers Power, B>oth as batwaan than and in their agreenents with 
coBparabla adjacent utilities in Canada, Indiana and Ohio. These 
transnission rights occur In bilateral and Multilateral utility 
agreenents as Hell as in regional agreenents anong the large 
utilities In a particular area ot the country. 

But the snaller utilities, who are usually the nunlcipal and 
cooperative utllitiea, are largely excluded tron these transnission 
arrangenents, and are "landlocked" as a result. This is hamful 
enough In our day-to-day utility operations. But it is conpletely 
inconsistent with the kind of neanlngful conpetition in electricity 
supply which the Holding Conpany Act anendnents supposedly are 
intended to create. 

For exaaple, Detroit Edison and Consuners Power have 
reciprocal agreenents with each other on using each other ■ s 
transnission lines to the point that Consuners Power uses Detroit 
Edison lines to deliver electricity Iron the MCV to utilitias in 

-20- 



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Canada and has ayr— d with P»trolt edl«on to oftar to lat Ediaon 
own part of and uaa part of naw trannlaslon linaa which Conauaara 
builds. But our utilltiaa ara axcludad tron thasa agraaaants. And 
this axcluslon is unnscasaary, bacauaa in aany araas of tha country 
all utllitlaa. Including tha s>allar onaa, can usa tha transaisslon 
systsM on aqual tarms Cor sany typas of tranaactlona. 

Miehioain fi^fpi.a; As a rasult of tha agraamants batwaan tha«. 
It Datroit Bdiaon wantad to obtain alactriclty troB an EWS or 
coganarator located In Consunars Powar'a aarvlca tarrltory it 
praaumably could do bo at vary low coat, and vica varsa. But thasa 
rights do OBi. axtand to our utilltlas. So if tha City of Holland's 
mniclpal utility wanted to obtain alactricity from an EWG locatad 
in ConaunarB Powar or Datroit Edison tarritory. It night not ba 
abla to do eo at all, and it cartainly would not be able to do so 
on as favorabla taras as tha two large utilities provide each 

This Is because if an EWG in tha Edison service area la 
offering to sell at the lowest price around, the Holland Bunicipal 
utility and approxlMstaly 35 other outstate utilities asy have no 
raaaonabla way to get Detroit Edison to transnit the electricity 
for then. This is because Detroit Edison currently has no 
tranaslsBion rate available for other utilltlas generally even 
though Edison will transmit electricity for Consumer s Power 
company. And because Holland would still need to use Consumers 
Power's transnlssion lines to gat tha electricity from the Edison 
boundary to it, there is a big risk that Consumers Power would try 

-21- 



D,g,;,zeclbyG00glC 



to increase its transnission charges enough to nake a higher- 
prlced purchase froB it or Cron Its "deregulated" affiliates More 
econoaic than Holland's purchasing from the low-cost EHG. The 
example I've just given doesn't just aCCect Hichigan utilities — 
it would prevent many utilities in Indiana and Ohio from purchasing 
from this favorably priced EHG as well. They too will have to get 
■ore expensive electricity soneplace else. 

This exanple shows how if Bone utilities have nore equal 
access to transnission tines than others, the disfavored ones 
operate under a severe handicap as they try to operate and obtain 
low-cost electric suppl ies from other util ities, cogenerators , 
EWG's or even from their own plants that are located some distance 
away. And the EWG's lose the aarket for their electricity unless 
the utility where the EWa is located will buy it. 

More generally, S. 1220 as it stands now allows utilities to 
own EWG's. Without provisions in the bill for adequate 
transnisslon access what S. 1220 does is allow the dominant utility 
in an area which owns most of the transmission lines to 
dlscriMlnate In the terns on which it makes transmission service 
available in favor of its affiliate. As I just described result 
the "landlocked" snail utilities in its service area will 
effectively be forced to buy high-priced electricity from the 
dominant utility's affiliate. This will prevent lower-cost truly 
independent EWG's from selling to the landlocked utilities and will 
force the EWG's out of business. 

And due to comparable restrictions that will likely be created 



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by otbar nsaxtiy lacg* trutnlulan-oiniinii tttlliti*B, Idw-comt 
inctapcndHtt EHG's al—iibm will b* discrlBtnatad agklnst or unable 
to s«ll pCMMT to our doainant ntllity. TtM r*cult Is that hl^- 
oost ntillty-affiliatad sac'* «r* d«r*gulat*d. Tbmf do not tac* 
raal caap«tltlMt froa lowr coat truly Ind^pandant BHC's and 
•Iwetrle rata* qo np uwn acaaa » r lly for our utllltiom' cua t o — ra and 
for aoat utUity enatowra. 

florida t Another slgnlCicant axaapla of ttaa iaportanca of all 
utllltlas' having aqoal accaaa to transalaslon co»as fro* Florida. 
Florida Powar C Ll^t Ccaipany owna aoat of tha transaiaalon on the 
Atlantic ocean aida of Florida. As a result, it can sail 
electricity fra« its own generators, irtiiefa are located throughout 
■uch of Florida, as well as Irmi generating plants of other 
utilities. On behalt of Its aunlcipal >aBbarB, the Florida 
Municipal Fower Agency wants to operate city-owned generation and 
to use electricity purchased troa other sources. The Agency wanta 
to be able to coapete for the lowest cost generation in the saae 
way as Florida Power ( Light does. 

It cannot do so because Florida Power ( Light wants to iaq^ose 
on Florida Municipal Power Agency aultiple, duplicative 
transMisslon chargaa by charging the agency separately for each, 
individual point-to-point tronssission "path" to get electricity 
to Miara it is used. By contrast, Florida Power k Light Itself 
uses transeission lines on a network basis trtiera It pays once and 
can then eove electricity anywhere on the transalsslon systee. 
nirough Its control of the transelssion system, Florida Power ( 



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Light is thus prsventlng th* Florida Kunlcipal Powar Agancy Iron 
having the sane oparating opportunities that Florida Pcwar k Light 
has, tb«r*B9y advantaging itsalf in coapeting tor alactrlcity 
auppliSE txam BHG's or other sourcas and creating higher 
electricity rates for the Agancy and Its nambsr cities. 

Pannavlvania i A related exanpla cones from Pennsylvania. 
General Public Utilities ("gpu"J wants to construct new high 
voltage transnission lines to get inexpensive power fron the 
Duquesna Light Conpany, the electric utility which serves the 
Pittsburgh area. GPU will not allow the Alleghany Electric 
Cooperative, which serves electricity to its >eiibers throughout 
Pennsylvania, to help plan these new transnission lines so as to 
best serve both utilities' customers or to own a portion of the new 
facilitias, even though Allegheny is willing to pay to do so. 

GPU is thereby blocking Allegheny, a cooperatively owned 
utility, froK getting electricity froa inexpensive sources in 
neighboring regions. This monopoly control of transmission hurts 
both potential sellers and Allegheny's nember-consuners , to the 
economic advantage of GPU. 

Phonv TrananisBion; The saute result as denying transnission 
access occurs if a utility nominally makes transmission service 
available, but only on very limited terms. As an axanple, people 
who build generating plants need long-term commitments to purchase 
the power before the plant can be Bauilt. Otherwise the lenders 
won't provide the money to build It. For example, an EHG will 
typically have a 15 to 25 year mortgage. Therefore, the EHG and 

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Its lender will want a powar sales contract with us [or at least 
that many years so they can be assured the funds will be coning in 
to pay off the eortgage. Let's again assuMe that Holland, one of 
our utilities located in the Consunara Power service area, wants 
to buy froH an EHG located about 50 Miles away. Consumers Power 
does have a transalesion rate available to all utilities. But the 
good news stops there: it's a weekly rate, conauaers Power 
reserves the right to try to change the rate at any ties, and right 
now It Is nentioninq some very large Increases. 

Tb» EH6 and its lenders will squarely shift the transnission 
problea to us, saying "Holland, you buy and pay for the power at 
the EW6 plant gate and it's your expense and risk as to whether you 
can get it transmitted to your utility or what the transmission 
price will be for 25 years." 

How can Holland or any of our utilities enter into a 35-year 
contract to buy electricity from an EWG when Consuners Power only 
■akea transaisslon access available a week at tine? And when 
ConsuBers Power can try to change the rate for transBission or the 
teras at any time? And when in general we have to pay the changed 
transaisslon rate Consumers Power has proposed and abide by any 
changed terms for the years it may take the FERC and the courts to 
rule on whether the changes are legal? 

There are seme risks we'll take as municipalities or 
cooperative utilities, but transmission limitations can be 
devastating with tens or hundreds of aillions of dollars of 
payments to bs nade even if we can't get the electricity to our 

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utilltl**. N« naad asaurancas that Cha trananiaaion will b* 
Bvailabla and that th* ratas and terns for It will ba Calr so that 
w* don't find out yaars into th« transaction that tha rate is 
prohibitive or the terns such as to make it useless. These are 
reasonable requests by responsible municipal officials, co-op 
managers, Hayors, councils, voters and the like before we make 
major financial comaltments . 

This example of "phony transmission" being Made available by 
Consumer* Power Company is not unique. The same example could be 
used with other utilities. But it clearly shows how there's less 
there than meets the eye If a utility says that It does provide 
transmission access for other utilities and how such phony 
transmission will prevent the kind of competition that Title XV is 
supposed to promote. 

Transmission Self-Dealing: Finally I simply want to point out 
that in contrast to the way Consumers Power treats our utilitiee, 
it goes to great lengths to provide transmission access for its 
affiliates. 

Look at what's happened recently: 

The HCV wanted to sell large amounts of electricity to 
Canada. It would have had to move first over Consuaars 
Power's lines, then over Detroit Edison's and then into 
Ontario, but Detroit Edison refused to transmit 
electricity when the KCV requested it, apparently in i^rt 
because it was not a utility, so consumers Power turned 
around and bought the electricity Cron the Kcv, 

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iMMBdiataly resold it ta Canada , and forced D«troiC 
Edison to traiMMit it a* "Coiwumar* Powar •iBctricity" 
under the reciprocal tranamisBion agreanentB between the 
utilitiea. 

CHS Energy and the KCV have apoken widely— to Hall street 
and to utilities — about selling electricity fro« the ACV 
(or froB a huge new eitpansion planned for it) to 
utilities throu^out the Midwest. That electricity first 
has to Move over Consuners Power's lines to get there. 
Por anyone else that would be a major problen — for KCV 
it apparently is not because CHS controls both the KCV 
and consuners Power and both will dance to the CHS tune. 
Conauners Power la trying to build a new 110-Mile 
transmission line to Indiana. As utilities we are very 
skeptical whether that line Is needed. It appeared 
during a Congressional Hearing last month that the Main 
reason the line was being built was 
electricity out of state for the HCV. E 
Power has refused to submit the line to our state Public 
Service CoMmlssion for a deteminatlon of whether It's 
really necessary or not. 

consumers Power often refuses to talk with truly 
independent cogenerators or power producers about 
transmitting alectricity for them until they have a 
signed agreenent with a utility to purchase the power. 
This puts the true independents and their would-be 

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utility purchasar* in an iMpoasibls chickan and mgq 

situation. y«t aona of the documents that have turned 

up in lawsuits show that Consumera will talk with its HCV 

and Palisadss affiliates about transalssion at any tin*, 

will give thea coat estimates to build Unas and will 

antar into long-tara agraananta with tham about providing 

transmisBlon access. 

Transnlaalon and Coapetltlon; As all my axamplas illustrate. 

It soma doainant utilities can usa thair control of transmission 

networks to block generation, then passage of the proposed Holding 

company Act amandmants will deny the public the benefits of 

compatitlon and will increase electric ratea. The worst of all 

possible worlds would be deregulation without competition where 

some utilities can favor above-cost purchases from their affiliates 

and block competitors trom buying from less expensive resources. 

Tha key Is this; Transmission lines are the highways of 
commerce in the electric area. They are essential tor utilities 
to obtain and efficiently use their power supplies. They form 
regional transmission networks that have baan planned and built by 
some of the larger utilities in the region. Transaission lines 
generally are monopolies. 

But they have been developed by utilities' extensive use of 
such govammantal powers as franchises and the power of 
condannation. Thay are often Bmilt only after a regulator 
dataralnas that they are necessary for the public as a whole. They 
are paid for by the public through rates. Utilities have public 



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Alligations not to umm aon^oly control of ••■•ntial facilities 
tbay own such as transBiasion Unas in ways tliat ara injurious to 
othsr atilitias or th« public: Tba Unas ar« ussd by public 
utilitias and should ba usad for tha banaflt of tha antira public, 
not just • portion of it. The Unas ara thus a public trust and 
tha utilitias t4io own thasi should not ba abla to allow thair use 
by soM utilitias but axcluda use by other utilities for the 
cwnar's privata advanta^a. 

Coapatition can help assure adaquata alactric supplies and 
lialt price increases. But it vill not vork unlasa all public 
utilities have the ssms right to own and use tha trananiaaion Unas 
and public rights of way. Title XV of S. 1220 will not proaote 
■aanlngful ca«patltlon if certain favored utilitias can 
artificially prevent or restrict competition by other utilities. 

So you will not gat a coapetltive result from 5. 1220 when 
■any of our utilitias — who serve about 25% of tha U.S. population- 
-aren't allowed to competa at all or can only do bo on highly 
disadvantageouB taraa. 

Tranaalsslon— BaBiedv; There's a fairly easy answer to the 
tEanaNlaaion problea. Tha electric tranamission aysten Is Bade up 
of regional utility grids with the lines in each region being built 
and owned by aeveral different utilities. These dominant utilities 
work together to carefully plan and jointly use these lines to neet 
their joint needs. An axanple is Consumers Pmrer agreeing to let 
Detroit Edison own part of new Consuners Power transaission lines. 

Currently, these larger utilities typically exclude the 

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Bsaller lanaiockad utilities from participating in ragional 
transmlsBlon line planning, ownership and us* In ways that work to 
th* larger utilities' private advantage. The answer is to expand 
the current nultlple ownership of the regional transmission system 
by allowing all utilities to participate on equal terms. This is 
occurring in Michigan to a limited degree already—aa the result 
of line construction, past antitrust cases and power plant 
puriAases our municipal and cooperative utilities currently own a 
small portion of the transmission lines In Michigan. In general 
this gives our utilities the right to move electricity anywhere on 
the transmission system or from specific plants, but only up to the 
amnunt ot transmission capacity we own, which la currently 
inadequate . 

In Michigan, we have proposed that the arrangements be 
extended to give all our utilities the option to build new parts 
of the transmission system in proportion to their usage of it, and 
with corresponding obligations for costs of maintaining the syste*. 
He have shown how this would be the least -cost solution for 
Consumers Power and Its customers, for us and for the citizens ot 
Michigan as a whole. 

Due to their obvious benefits, similar arrangements currently 
exist in i^rtions of New England, Indiana, Texas, Georgia, 
Wisconsin and several other states. For the same reasons, at the 
national level various groups are currently discussing or proposing 
joint ownership or joint participation plans for transmission 
lines. 

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Joint ownership or joint participation isn't the only way to 
asaure that trananission lin«s are used in a way that is most in 
the public interest. Other ways can work iC they lead to all 
utilities' having access to the transmission systen on the equal 

In addition, ny lawyers tell ne that the Federal Energy 
Regulatory CoMKission has the authority to order utilities to 
transmit power, such as to avoid d isc r in i nation or renedy 
anticonpetltive conduct. However, they also tell ne that the 
Federal Energy Regulatory Commission and many utilities have often 
taken the position that the Conmisaion has limited authority to 
order unwilling utilities to transmit. Under the circumstances, 
Congress should clarify that the Commission nay order the major 
privately -owned utilities that control the transmission grids to 
provide municipally and cooperatively owned utilities transmission 
services over the transmission networks on non-discriminatory 
rates, terms and conditions. This will give the smaller utilities 
transmission on a basis which la economically and functionally 
equivalent to the use of the transmission systems available to the 
large privately-owned utilities and their affiliates. 

Conclusion ; The key to the so-called Holding company Act 
reforms before you is equal transmission access. With it you 
increase competition in the electric generation business and help 
keep electric rates low. Without it you simply create a class of 
would-be sellers and eliminate existing statutory safeguards, but 
do not address the artificial barriers that keep EHG ' s and 

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utilities fron being able to do business. You aay hava a f«w *or« 
competitors but by opaning th« door to BW««th«art deals aaong 
utilities and their affiliates, you may actually reduce 
conpetition. And if you then let this "narket" set the price for 
new electricity supplies, which is the direction soMe are headed 
in, the prices will be too high and electric rates will be too 
high. 

Thank you tor allowing me to testify today. t would be 
pleased to answer any questions you nay have. 



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MICHIGAN LOWER PENINSULA 
SERVICE AREAS 




INDIANA 



OHIO 



f SHOWS MY 5 OF 47 UMR POWSUA ELECIIK UIUIES 



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SUSCOmiTTEC ON ENERGY AND FWER 

TESTIMONY 
OF THE 

NICHIGM PUBLIC SRVICE COWISSIOH 

STEVEN M. FETTER, Chiiroiin 



H.R. 1301, Title IV, Subtttla A 

and 

H.R. IS«, Title IV. Subtitle A 

PUBLIC UTILITY HOLDING COMPANY ACT REFORM 

Hay I, 1991 



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UNITED STATES HOUSE OF REPRESEHTAtlVES 
COmlTTEE ON ENERGY AM) COIWERCE 
SUBCOmiTTEE OH ENERGY AM) POWER 

nses of the Michigan Public Service Comriis 
to Prehearing Questions 



Michigan's experiences demonstrate the prab1e« that can arise it a result 
of PUHCA exemptions currently available and the potential for putting 
electricity consutiwrs at risk If protections are not built Into any PUHCA 
reform. During the last several years, we have gained significant 
experience with a utility and its affiliates that have been exeapted from 
many provisions of the Holding Company Act. 

Under Section ZOl of PURPA and related regulations, public utilities or 
public utility holding conpanies nay own up to a SO percent equity 
interest in a qualifying facility (OF). See 16 U.S.C. | 796 {18)(B)[1i) 
and 18 C.F.R. 292.206. QFs are exempt from certain provisions of the 
Federal Power Act (FPA], PUHCA, and state utility law. 18 C.F.R. 292.601, 
292.602. 

Presently more than 95 percent of QF capacity in Hichigan is owned by 
utility affiliates. Because the bills before the Comoittee would provide 
similar benefits for EWGs, Hichigan's experience in regulating 
transactions between utilities and affiliated QFs is directly relevant. 

Several cases before the HPSC have denonstrated that self-dealing, 
cross-subsidization, and other anti-competitive behavior can be a major 
concern when utilities are allowed to purchase power from less closely 
regulated affiliates. The majority of the^e cases relate to a utility 
holding company, CHS Energy Corporation {CMS], its utility subsidiary. 
Consumers Power Company (Consunwrs], and its numerous other affiliates, 
Includlna a OF. the Midland Cooeneratlon Venture fHCVl.^ 



including a QF, the Midland Cogeneratlon Venture (HCV).' 



a utility holding company with approximately 60 
The largest of these is Consumers Power Company, 
wnicn is a coniDinanon eieciric and gas utility with approximate annual 
operating revenues of S1.8S billion from 1.46 million electric customers and 
Jl.OS billion from 1.35 million gas customers (1990 Annual Report). Since CHS 
Energy describes itself as "a S3 billion (sales) diversified energy holding 
company" it is clear that a substantial portion of the holding company's 
" i from the regulated utility. 



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In order to help the Henbers visualize the structure of the holding 
coMpiny being discussed, we hive included as Appendix A, an organization 
chart of CHS Energy Corporation as reported in its 1990 Annual Reports to 
the Michigan Departnent of Comnerce, Corporations and Securities Bureau. 
In addition, Appendix B identifies those directors and officers of CHS 
Energy, its affiliates and subsidiaries, who have responsibilities related 
to ttfo or Bore CMS affiliates. 

In Appendix C. w have attached t series of excerpts froa Comnission 
orders related to CMS Energy Consumers Power Company and other 
affl ates The activities of CHS Energy are highlighted here because, by 
Its own actions CHS Energy has singled itself out as by far the most 
aggressive util ty holding company in Hichigan with respect to testing tht 
limits of applicable 1aws--both state and federal. The voluna, conplexity 
and expense of litigation related to CHS Energy's activities is 
unprecedented. A disproportionate amount of Commission stiff. Attorney 
General, and other intervenor resources have been, and Continue to be, 
expended on efforts to provide proper oversight and prevent unnecessary 
rates and risk froa being assigned to Consumers Power CoMpany by CHS 
Energy. 

In contrast, we have little to report on affiliate abuses from other 
electric utility holding companies in Michigan^ because complaints with 
respect to those other companies have not been filed.* 

CHS Energy has in intrastate exemption fron the Holding Company Act. This 
exemption, in coabination with the eiEmptlon for qualifying facilities 
under PURPA, has led to a prollferat on of attempt to aaximize 
shareholder profits at potential expense to ratepayers of Consumers Power 
Company. With these exemptions, corporate structure and transactions 
between corporate affiliates hive been manipulated to attempt to ensure 



^ Other electric utility holding companies in Michigan include: 

Registered Holding Co^any— American Electric Power Company 

Subsidiaries: Indiana Michigan Power Company and Kichigan Power Company. 

Exespt Holding Coapanles—Subsidiaries 

Cliffs Electric Service Coaipany--Upper Peninsula Generating Company 
ESELCO, Inc. --Edison Sault Electric Company 

Upper Peninsula Energy Corporation-Upper Peninsula Power Company 
Wisconsin Energy Corporation--Hisconsin Electric Power Company 
WPL Holdings, Inc. --Wisconsin Power i Light Company 

* We note that, in addition to differences in reported abuses, there are 
differences in company positions regarding PUHCA reform. The two largest 
electric utilities in the state (Consuaers Power Company and Detroit Edison 
Company] have diametrically opposed positions on the issue. 



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that 111 the tdvuttoai of coaptt it Ion—without th* rUlis-reitd* with tha 
holding company or its afftliatas which ara not lubjact to rata 
ragulatlon. That is not coapetUlon. 



Drawing resources away from the utility to benefit affiliatesi 

Lack of arm's length bargaining; 

Self-dealing resulting in favoritisa to affiliates; 

Overjubicrlption of generating capacity resulting in 

inefficiencies; 

Utility assuaing risk on behalf of tffillates; 

Misuse of ratepayer funds to benefit affiliates; 

Restructuring the corporation Ai ways that are haraful to the 

regulated utility; and 

Using the holding conpany structure to iavedt appropriate 

reviews by the state regulatory coiaisslon by: 

Substantially increasing the coMplexity of cases; 

Denying access to books and records of affiliates that have 

engaged in transactions with the ut ty; 

Refusing to comply with lawful orders of the Coneission; 

and 

Engaging in a myriad of legal Maneuvers tn tha courts. 

The abuses listed above are of the sane type as those which led Congress 
to pass PUHCA in 193S. (See generally IS U.S.C. § 79a(b) PUHCA 1(b) i see 
also The Public Utility Holding Corrpany Problem, ZS Ca1. L. Rev. 517 
(1937).] Because of the danger of affiliate abuses, and its concomitant 
effect on captive ratepayers, t vould be -a serious mistake to weaken 
consumer protections related to power purchase agreements between 
utilities and affiliated non-utility generators. 

To avoid this, Michigan would recomwnd giving state public utility 
connlssions Jurisdiction over the provisions in contracts between a 
non-utility generator (whether QF or EUG] and an affiliated utility if 
both arc located in the same state. 

Specifically, we would propose adding a new subsection to Section 404 of 
H.H. 1301. as follows: 

Notwithstanding Section ZOUb) of the Federal Power Act, the 
Justness and reasonableness of a power purchase contract between 
a utility and an affiliated eitempt wholesale generator or 
qualifying facility physically located in the same state, (1) 
shall be subject to the jurisdiction of the state public utility 
cowission and shall not be subject to the jurisdiction of FERC. 



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Another approach Mould b« to utnd FWCA to prohibit triniactlons bitmen 
non-utlHty generators and affiltitid uttlities unlesi txpraiily allowtd 
by the affected state. To 4a thu, a imm tubsKtien coutd Iw added to 
Section 404 of H.R. 1301 as follows: 

HotNlthitinding any provision of the Act, no power purchase 
cootract between a utility and in aff1 ated exeap* who1eja1» 
generator df qua fyin^ fad ity physica 1y located in the same 
state shall becooe effective unlest its provisions are approved 
by the state public utility coMlsslon. 

As a third alternative, utility ownership of EWGs could be prohibited by 
adding the following proviso to the definition of 'axaapt wholesale 
generator* in Section 401 of H.R. 1301: 

But 'exempt wholesale generator' shall not include any company, 
10 percent or iiore of which conp'ny's voting, non-voting or 
ownership securities are directly or Indirectly owned by an 
electric utility eoivany to which that company Is selling 
electric energy, or by an affiliate of such an electric 
utility coapany. 

Hichl'gan 1s also concerned that a contract between a utility and an EWG 
affiliated with another utility alght be susceptible to abuses, such as 
the arranging of mutually noncoavetltlve purchases. Michigan proposes 
providing regulatory oversight of such transactions to the state in which 
the purchasing utility Is located . 

For EUGs that are not affiliated with a utility, Michigan believes that 
PUHCA should not apply. In fact, Michigan would ^0 so far as to suggest 
that, except for prudence review, pricing regulation may not be necessary 
for such transactions. Arm's length bargaining would subst tute for 
regulation. The regulatory scheme proposed here would accordingly 
encourage a truly independent generation sector and would offer more 
protection against affiliate abuses than does H.R. 1301 and H.R. 1543. 



Yes. The key word is 'independent*. Independent power producers should 
be encouraged by removing barriers to competition, whether those barriers 
are contained in law or Imposed by entitles with strong market power. 
Encouragement of independent producers should not extend however, to 
include subsidies of their activities by utility ratepayers or taxpayers. 

Although Hichlgan Is concerned about the unpredictable effects of a major 
restructuring of the electric utility Industry, It believes that the 
potential benefits outweigh the risks so long as Independent EWG-utility 
transactions will actually be subject to narket discipline and 
transactions between utilities and affiliated generators can be carefully 
scrutinized. 



jdbyGoOglC 



(a). Is tiMr* anything inherently lest reliable abogt pDwer porchased tinder 
contract than poMar smarated by the utility with the (^llgatton to 
lerva? Can contracts be Crafted to protect utilities and ratepayers froa 
the failure of an independent power project? 

JI3(a}. There Is no Inherent reason why a utility uUh the obligation to serve 
cannot structure Its povier supply portfolio to Include significant 
quantities of power purchased froa Independent generators under long tern 
contracts. A major tool that a utility can uie to mitigate risk to Its 
ratepayers and shareholders Is to nalntain a diverse mix of supply 
sources. This diversity, In combination with other factors such as 
tightly structured contracts and a close matching of demand to supply, 
should alloM a utility to continue to offer reliable service to all those 
who request service In Its franchise area. 



(b). It is Midely assumed that independent power projects will be financed by a 
higher percentage of debt than utlHty-built capacity. Is there anything 
inherently risky, from the ratepayer or shareholder's point of view, about 
depending on highly leveraged projects? 

A3{b). It should be assuaed that a prude 
EHG resulting from its leveraging h 
contracts with that EUG. 

The major risk to ratepayers and shareholders from highly leveraged 
non-utility generating projects comes when the utility's assets are used 
to guarantee or secure the debt in some fashion, whether directly or 



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IndlrMtly.' This sltuition Is Mit llksly td dccur whwi i ndn-uttllty 
g«ner«tor K affnutcd with th« purchattng utility^ 

Ragirdlast of whfther i utillty-arflllated generitor Is selling power to 
Its lifter utility or someone else, undue rtsk is attiched to »ny utility 
■host issets ire being us«d to finance a highly-leveraged project. On the 
ether hand, if atxett fr«n Investors totally unrelated to a utility are 
used to acquire financing for a non-utillty generator, a utility's 
ratepayers and thareholders can, assuming prudently crafted contracts, 
potentially be better protected from the risks of a failed generating 
plant than they would ba if the utility attaapted to build Itt dwn plant 
and failed. 

Q«. Skeptics of PUHCA rafon ai^ua that States vanr widely In their ability to 
address potential problias Involving cross 'Subsidization and affiliate 
transactions. Do yoa agrecT If so, should FUHCA legislation try to 
redress such dtsparltiati 

M. Ves. We Mould argue that the Congress wist act to ensure protection for 
all ratapayars and true compel tors from Inappropriate uses of a utility 
holding company structure by providing regulators, especially state 
regulators, with the tools necessary to protect the public interest. 

Hlchigan Is concerned that If utilities are freely allowed to enter Into 
power purchase agreeaents with affiliated generators, the states aay lack 
the regulatory resources" to prevent self-dealing, cross- subsidization, 
and other antico«pttlt1ve actions. This concern about the difficulty of 
ferreting out and preventing such abuses was an impetus Nhind PUHCA. 
(See ZS Calif. L. Rev. at 531-42.) 



^ Over -leveraging within a holding conpany system was one of the evils that 
led to the passage of PUHCA In I93S. As Uilliam Weeden of the SEC Staff 
recently explained: 

[e]ffectlve control of extensive utility system could be acquired with 
■InlHl equity Investments by s>all groups of Investors who exploited the 
subsidiary operating companies for their own gain at the expense of other 
investors and consumers. 

PUHCA in Past Context: Independent Power Meets the 'Hystic Hale .' Electricity 
Journal 24, Zb [January/February 1990). As the experience of the last decade 
demonstrates, the dangers of over-leveraging have not diminished since the 
1930s. 

^ In Its analysis of the costs and benefits of Its proposal, the 
Administration estimated that the FERC and the states together would need up to 
ZSO additional staff people to protect the public from potential abuses in a 
deregulated generating sector. Based on Michigan experiences to date, this 
estimate is probably conservative. 



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UHino STATCS HOUSE Of REPRESEHTAT^VES 
CeailttM On EiMrqy And CONHrci 

suKcmtnaoi eiocv mdkmex 

T«tt(aon> of tha 

manew rm.ic sekvice comissioi 

H.R. 1301, Tttia IV, Subtltia A 



■• DnWIHG RESOURCES AMY HUM UTILITr TO BENEFIT AFFILIATE •• 

'...folloMfng the ri-nanclsl itibilUitton ordtrt in 19BS, Caniuatrs his 
•fftcted 1 sweeping reorgsniiat on Of tts corponti structuro, creating CHS 
Energy as ts parent company CMS Enterprljos » i lubsfdfary of CHS Energy and 
sister to Consuners and several new substdtirtti, including H1dl*nd Croup 
Lfnited and HEC Development Company. Furthir, thi HCV mm «1io fonwd, *nd 
Consuitieri uni atera11y assigned Midland p1)nt assets at i booked sralua of 
4pproximate1y t1 5 billion to the MCV for purposes of developing a gas 
cogeneration plant it Ktdlind. 1n conjunction with Caw Chemical and other 
pirtntrt. In norB recent months, Consumers or tj parent company, CMS Energy, 
h*I also undertalien a seri«s of financia transactions aimed at transferring 
th* booked Hidland plant assets of Consumers (a ong with other financial and 
corporate assistance from Consumers) to the MCV wh e at the same tine 
ensuring that ■proceeds of those Midla-nd plant assets would flow baclt, not to 
Consumers but to iti claimed iJnregulated parent comparj. CMS Energy On the 
eve of expected CoMilDlon or court action relat ng to the Hidland plant 
proceeds CMS Energy purchased from Hidland Group l mited, i wholly-oi-ned 
subsidiary of Consumers, all of the capital stoclt of CMS Midland and MEC 
Oesrelopmnt, in return for Midland Group LiMittd's receipt of a debenture of 
CHS Energy in the princlpj amount of SI. 4 billion. Only after complet on of 
this trtfliiClion did the MCV transfer 1500 Million of marketable notes to HEC 
Development which also ■possesses the right to rece ve an add tional 1700 
■tnton of notes from the MCV One potent a result of these recent 
transactions s to deprive Consumers of any of the cash flow or other financial 
benefit from the transfer of Midland plant assets previously owned by Consumers 
to the HCV, which is inconsistent with our previous orders in Case No. U-7830 
Step 3A providing financial stabilization relief designed to improve Consumers' 
cash flow." 



U-7830 Step 3A et al., 3/27/90, p. B-9. 



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•• UCK OF MM'S LEHCIH SAHeAINIlN « 

'ConsuMrt Md the HCV WDuld hive thii Conntision believe thit thalr power 
purchiH igrMatnt mst be fair ind reasonable beciuse it resulted frwi 
'in's-length* negotlitiors between the parties. However, the record does not 
lupport thlj conclusion. R*tli«r, the record establishes that the Consumers/HCV 
centr4ct did not result fron ina's length negotiattoni....* 

'Hr. GlffeU described Mmself it HCV's dilof negotiator Hhlli Hr. 

Giffels conducted 'ira's length* negotiations on behalf of the K.V, lie vas 
reoortin-g to Consumers vice-president Cook....Hr. GIffe s admitted that he 
drew his paychecks from Consumers for the first six to nine months of the 
bargaining period The record shovs that most, if not all of the persons 
iisisting Hr. Gtffels in conducting hts negot itions on behalf «f"the HCV wira 
tiso being paid by Consumers ...Other HCV officials also had laportint 
continuing ties to Consumers ...the testimony revea s that Consumers had a 
doainent, controlling role in the HCV at the time of contract 

negotiations The Conniision observes that, unlike nost ira's-length 

traniictioni, Consumrs and the HCV share a conoonaHty of interast. 
Specifically, both Consuners' shareholders and the KCV partners benefit froB 
higher capacity rates and lenient contract provisions.' 

U-8S7t et a1.. t/31/S9, p. 38-102. 

'It i) ...clear that the various transactions between Consuaers and Its parent 
conpany, CHS Energy, and their aTfi iates were not effected through 
am's-length bargaining. All of these corporat ans are headed by the saiK 
individuals and by essentially the same senior staff The b urrin-g of 
corporate identities is Illustrated by Mr. HcCortnick s response when asked if 
he is the chief executive officer of CHS Midland: 'I'l not sure of that. I'm 
not denying it but !'■ really not sure.' [Tr. Z73.) 

U-7B30 Step 3A and U-SGll. 5/23/90, p. 32. 

** SELF-DEALING RESULTING IK FAVORITISH TO AFFILIATE ■■ 

'It Is apparent that the coapany's ovenhelaing corporate objective Is to 
obtain Conaission approval for as much is possible of the MCV capacity now and 
first priority for an additlona 2SC HU of HCV capacity when more capacity is 
needed, regardless of the nterests of ts ratepayers and the po1 C1es enbodied 

in F>URPA Ortt can only speculate tihether the company would be as eager to put 

Itself 'at risk' for the additional 2B0 HH of HCV capac ty if it did not own a 

substantial interest in the HCV This CORnlssion ...oust. ..consider our 

risponsibllity to balance all interests. Including those of the conpany's 
ratepayers. 



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tn bilanclng theti (ntirasts, tht CoMlttlon flitlv rajicts any suggcitton 
that th« public inttrtst •nd PURPA ir« well-$trv<d by t corporitt policy thit 
puriiMs HxlMM WV cipictty ai Itt bfgheit prlsrtty * 



■• OVEKSUUCRirTlai OF GEREJUTING WKITT RCSULTIK IH IICFFICIEMCIES •• 

*....tht coapmy's propoted ippraich for iddUtoni) HCV capacity provide* 
tlgaiflcint Opporttmitlei for tht compiny to iffect the nttd for that capacity 
1n Wiyt that are not conducive to i .rttfwMl ancrqy policy for the state. If 
the co«p(ny were lo incllneit. It could retire or derate capacity that it would 
not otherwise retire or dtratt; It could rtfust to tnttr Into nan firm 
contracts for enf-toni capacUy; tt could anforci Ita contracts wuh 
qualifying facilltias in wayi dtstgnad to prevent or d scounge the r 
cBwwr e tal oporatton; It could engage in narketing acttvitlti dalignad to 
Increase sumner peik denaf^d; tt could rofusf to promote ccniervat on and load 
•Mnagenent; and It could refute to «X«rc1st Iti rights under t( ntcrruptlbla 
rates. In short, the company's proposal 1» not wliliout igniftcant rl k% that 
ratepayers Ht11 pay for the 2S0 MW of additional KCV capacity, regardlett of 
whether there are reasonable opportunttlei to avoid the need for that 
<af)aclty Consumers' acttvltlaa to data with regard to the MCV provide no 
basis to bel eve that the coapany w111 not took additional ways to proaota the 
Interests of the HCV, and thereby Conituwr)' itockholdara, at the expense of 
Us ratapayari.* 

U-8S71 at at., 6/22/89, p. 37-38. 

■• UTIinY ASSUHING RISK OH BEHALF OF AFFILIATC •• 

*A final concern related to the 3SZ HW of capacity, as wall as the 250 MU 
of capacity, U Coniumtrs' clai* that its ratepayers art not at ritk with 
respect to that capacity. The Company acknowledges in its ancillary filing 
that If it is unable to find a market for both blocks of power, iti potential 
financial exposure to the HCV is approximately SISO ■IHion par year. As 
pointed out by ABATE and the Attorney General, that a ignificant sm of 
noney for any utility, aipecially ona that continues to obtain financial 
stabi zation rate relief froa its custoaers. It is therefore disingenuous for 
the coapany to claln that Its custoaers are not at risk under a contract that 
requires Consumers to pay for electricity fron the HCV whether there Is a 
Burket for it or not.* 

U-8871 et al.. 6/22/89, p. 40-41. 

"...■nie utility. ..signed ten direct purchase contracts under which It 

planned to buy gas during 1989 the record reflects that Consumers had also 

been authorized to negotiate gas purchase contracts on behalf of the Midland 
Cogeneration Venture Limited Partnership (HCV), and had succeeded In obtaining 
contracts on behalf of the HCV with these same ten producers 



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....First, the Cwatsslon finds that the contnctf signed by Consumrs 
ind tht HCV >«lth each of th«s« ten producers were negotiated as i package 
deal. ...Second, the record Indicates that certain beneficial aspects of the 
HCV's gas purchase contracts were liketjf obtained at the expense of Consumers' 
sales customers. For exajiple, ■ review of the MCV's sujiply contracts shews 
that. ..they did not require the HCV to purchase any Binimum volumes of gas 
during 1988 and 1939. In contrait, Consuiiers' contracts with these same 
producers obligated the utility to begin purchasing gas imnediately. This <s 
despite the fact that, accordlnti to the utility's assessment... tiklng gas fron 
these ten producers would leave Consumers significantly over -contracted until 

at least 1990 We therefore find that the utility's expected cost of gts fron 

MW direct supplies thouia be rtduced by one-half of the projected cost 
differential, or J3.730,0M." 

U-9173. Opinion and Order, 5/3/90, p. ZZ-i7. 

** RESTRUCTVmiKG HAMFUL TO REGUUTED COHPAKT •• 

* In the spirit of the extraordinary rate increase, the Connlssion expected 

that Consuaers would use a of ts management sk s, self-help and financial 
and business opportunities to strengthen US utility operations and financial 
position, and Consumers' management provided an unqualified coonitntent to 
comply with the etter and the spirit of the conditions attached to the 
extraordinary Step 3A rate rel ef. [Consuners' electric rates are still not 
based on the cost of service and will not be until Us pending rite case, Case 
No. t)-9346 s concluded.] 

'The testlnony of Consuners' and CHS Energy's officers and the D>'opasa1 
offered by Hr, Fryling during rebuttal Illustrate how far the current 
■anagewnt of the company has moved from the spirit of Step 3A Instead of 
using its resources to return the company to financial health, the company's 
Binagement lias pursued a11 conceivable egal and regulatory avenues to separate 
the benefits of improved financial health from the utility and to transfer then 
to the parent holding company, where they can be used In whatever way those 
nanagers see fit, even though Consumers has not yet achieved financial health 
and faces many near-term uncertainties that prudent nanagers would not ignore. 
What bis developed is a concerted effort to prevent the utility froa obtaining 
cash to neet Its obligation and prepare for contingencies and, instead, to use 
the cash froB Midland plant assets for non-ut Ity enterprises. The Comisslon 
would not be carrying out its appropriate regulatory responsibilities If it 
quietly acquiesces to this course of action." 

t)-7a30 Step 3A and U-9S11, 5/23/90, 



U-7a30 step 3A and U-9611, 5/23/SO, p. 33. 



D,g,;,zeclbyG00glC 



'Alio en brdl 12, 1990, unbeknowntt ts tttt ComIhIm, OS Eiwrgy 
ud Its virleut irfilUtii, including ConiuBcri Jind Us subtldlirlai, •ngigwl 
In finincli) truiKtlons thit wiu)d transfer to CHS Energy (ind Iti 
•fflltttei), rithir thu to Coniiaers, th« pmcecds related to the tnnsfcr of 
. CeasuMn' tl.S blltlon In Mld)*nd plant »»ts to the NCV.* 



^.**.EnEIT.0F.I>EARlMCS,AID.Wiailft.0F.ll£50llRCES-W^. . . 

"Tht hoiringi and prehearing conference* required 90 dayi. Hore thi 
pirtiK pirtfctpitwl *nd acre than 100 ttttneises test fted. Thi record 
conilitt of IZO voImmi of tnntcrlpt, 14,383 pagos, ind 4ZS txhibitt.... 



'The Coaafsslan'i lUrch 27, 1990 ordor coNHnclng tht eoBprthinslvo rovtew 
procaedlngi Is pnitntly thi subjtct of potUions for rtvlew filed In CHS 
Eneniv v HPSC . Inghu Circuit Court Dockit No. S0-65964-AA; Consumers Power v 
H PJC . Inghu Circuit Court Docket Ho. 90-eS9e3-AA; and 1£X v (lE^, Inghu 
Circuit Court Oocktt Ko. 9a-6S9S9-M.* 



CCMISSIOH REVIEU ** 

'The contested case proCeiS. exists to protect the rights of litigants in 
idniniitratWo proceedings. However, [It] wis nevtr intended to allow a 
regulated utility to escape regulation through regulatory delay. It is 
abundantly dear to the Conission from a review of the record In Case Ko. 
U-932Z and the legal maneuvering 1n the courts of th S state that Consumers and 
CHS Energy, have, on one hand, utilized all appropriate and som inapproprtate 
Mans to delay our review and deteminat on of Its comp1 ance with the 
financial stabl zat on conditions and the letter and spirit of our decisions 
in Case No. U-7S30 Step 3A, while at the same t me they were racing ahead with 
efforts to clrcumuent the Coimisslon's ability to thoroughly review and remedy 
any potentll! violations of the financial stabiliiation conditions.* 

U-7B30 Step 3A et al., 3/27/90, p IS. 



D,g,;,zeclbyG00glC 



MUNICIPAL ELECTRIC 



rSI^SB 



COOPBWTIVE L^^^^^^^^2^3 aiMIMCM F^ 9D3«»«1S« 



S^Kombar 16, 1991 
TtwHooorttlBCtwWophar J. D 



ConwnKtM on Bwikkig, Housing, and 

UrtMnMMs 
WasNnffon, O.C. SO51M075 

OearSenMorDodd: 

PIMM ftid flncknad tha sjmmwy and ful statemanta of the Noftheatt PuUe 
Po«w Aasodtfian mB>PA) and tha Connacbcut Mumcipel Bectrtc Energy Cooparaliva 
(CMEEra raoin^no propoaW (or tnodHylna Iha PiiJc LHWy Holdkig AQ as pnra 
raaXyat8.1220.meNalonalEnaraySeajrityAaaf1BS1. TTw rvqublta numbar of 

TTwaa aiMamanta of NEPPA and CMEEC wd b» (upportad by GabM B. Stam of 

CMEECmieailmonybelorelhBSuticonwrtttteonTuer-'- '— — ' ' ■""• "- 

again aKpreas our Ihanks to you for Iha opportunl^ to ' 



'CWtUi,^ 



Endoauraa: Sunvnaiy Statsmant and Teatknony 



D,g,;,zeclbyG00glC 




■.122a TIM MttMMl EiMfn SMurfly Ael or in 
nto xv^n* Piiiie iNMr Hoaha campny Act or 



My rwTW b QAM SMm. I an Otador of PIvnfeig wd PralKt DMitapfiMrt tar fts 
ConrwcJIciA Hunlcipd ElBctrtc Eiwrgy CoocMraliwa, which ii Ao known m "CMEEC 
btronounood "Sm MctO. l am praMnlIng ttw vtow* of CMEEC and Mvsnty ottwr 
tmiwniiMkxHlKMndoni oontuiwr-oMnad udhr mamtMn oT tha Horthaaa t PJolc Pamr 
AMOdMlon, or TtB>PA.- 



• (TDUt) •hare wtti mHd^ ggnmaon thv roto ol 
^*'"***- <M atao tww arAMJagat ■oHotfon to 



ft of tha Gualocfwfa In our feancHaa ai 



The PuUc UtnUea HokSng Company Ad of 1935 - which I oal hara tha "Hohing 
ConTiani{Jtcr- haifcr *<lyyBaraby lhetam awofl(wy*i wt*iiul i»>anaad^ 
oovintad. Th a oo nlrol oT monopol illo land anclB a h un dar owfil^it by oT th a Sa ouribea 
Eachanoa ComnriMlon. Tha taufey alw iiRNina undar tha acnjHny oT tha radaral Enaroy 
naguMory Connriailan. baoad on tha FWIaral Powar ACL 

We do not diaputa ttia apptop ria ia no a a oT re vKwIng and updating tha Ho lding 
Company AcL But wa fad hnprawmanb In the compattlva pfocaaa muat be canini to tfia 
oubconw ol changes. 

Sewaraiioroea how coma WapHyonar the i Mt two dacadaa, They aMn boundvlea 

aat out k i a xtaMng law. ElacMctt y pen w' l on fer Ira n am i Ml qn wae gnoelha a wjuaha 
pravlnca oT utW H ea . Nonfv a vrtiola daaa oT non-ulRy ganaFaiors hoa amaivd tha mna. 
&owlh in atacMQ load la ikMkv. ThafeitearaconomfiaoTacalahnwbaanaaiuniBdfor 



aleaiclty generators. Smaler genarallan faoHaa an mora akaoiw to bodi U 
non-udKy antHee. 



Howavar, creating mora oompotton does not naoaMsny craaia mofo oompatltion. 
As proposed In TMe Rttean, changes to the Holding Company A rt ma y create mor e 
competRora. However, more power producers wtt be cofrpeMng tor Imked trararrlesion 
tedMBe. IpM ye <undB tBni*«l ways, thaMuaky wl be sTthe mar^ ^^^^■■!l"f *!>« 
control access to power markets by oonT "*■ -* -^ "— ■- 

oomecttng producers and purhseers. 



war markets tiy oonlroftig aooaaa to, and uae of, the trmamiMlon Inas 
vend puThseers. 



D.,r„.db,G00glC 



TtM Bituation may be an hnpadbnant, aoonomloally and othanwiaa. to nuHtf^ 
garwratora auch aa indapandaM Pmrar Produoara (tPPa), acceaa to trarwnlaalon la 
CnmCAL to tha aucoaaahil oparaUon e* TDUa wHh thair oUgatlon to aatva at of tha 



y ba ■^linpaAnant, aeonomkajly arid otftanwiaa. VtjoiHMf 

oapandani Powaf Produoara f"***-* 

, „ _■ ____jaa lul opa ratton Ol TDUa wH h 

customara In thaIr ftwKMaa ana. LMtod trananiailon ai 

nopoaad amandmantB ID tha htoUnc 
wMeh muat be ramadtod In any ravamping d 

1) TM»Flf|aanj[loMnotad<^ 

fair compailllon. Inelaad. It peiinlls uBMea to uaa thair liBn em li Bl on monopdea lo 
datofli compatUon. 



H i* poaition o( CMEEC and NEPPA tfwt amendbu «w Hokftig Conipam Ad muat 
Inootporata legMaiiM acUon to make TTW4SMISSI0N AC^SS and CGOnoiNATION OF 
PLANNINQ ANDOF SERVICES avalabia 10 al puMc and prfvale uHHaa. Tha avalaUlly 

ba on a lono-ten 

IcUBylnduAy. 



F SERVICES avalabia to al puMe and private uHHaa. TheavalataMy 

muit be on a lono-tenn, Mr, and equitable baaia to avoid further monopdzation of tha 



• akiQla nstam can prewida taniniiMion sarvlcM more afllcianily ttian can m , 

Not only a avoidance of dupfcata tren am l BBl on ayafma neceaaafv tor accnomic reaaona. » 
Is eaaentW tor the prateoion of tha anvfewmant of haeWi and amy, and of aaathaUc and 



Under the current reguletoty achame. the TDUa have racourae only to tha Fadorat 
Eneray Regulatory Comml ea ton (FERC) on maUara ralatad to tranamMon accaaa. The 
togMabva auihort^ ol Ae F ERC to order iw tw aing and tran am lB al on santeala wwiaar. Tha 
authority la being taated and probed In lengthy, oomplex caaa^by^aae prooeeaaa, 

RwMni MgaUon In tha acquialbon of PuUte Santoe of Hew Hanpahlre by NorihaaM 

JuriadteUonal reaoluHon of quaaUo ni ifivoMng priority to trarwmlailon accaaa. Kamphealiea 
fta point that Incre iMlng Bwnu mb w and l yjwdcoinp ei^ wlihoui reaotvfcxi the laaua of 
accaaa to maikala doaa nothing to Improve competition. 



D.,r„.db,G00glC 



cofitrwy, As 



wprapOMda 
tMmttgm 



..._ _ __ _• tfMnlM vofn tfiiny 

f*raringthilrrtNMM«id«iMhlHln««is«pOTMor'mui. iTh MHk) noTKAy 
gwwr J ort ow ibaorb I m tid tr » » in ii Ml on wpadty to th» d i rtm i * of amman. TTw 
pu fch t id M ttm f ttkmar oon pgwir can be hwnpwKl ■ by i^MJIon of tt w wi d ioni 



B t eop> of wsonomicaly •. — ___ _ _ _ 

--, jft rwlWMd SMMMom invlrDnrMnM vtdtmwnlo Imum rrujrt b> jiyn 

ippfopriiH r>m Jm oi'y oi^CTiohl w il>l> noJtton* in> Mpfopn>l> dMwon of Juhmmmi 
bawotnft»lt(fcrifwidilMiwgulMBwn«llieflilniii rt ViU<l^^ 



Iho Hoidny CompBny AcL 



rMQUTM pinilno. HMrabd tttntkXL tiowwir. ii mmhUiL Eidranw owHon li raqund In 
chwiglnQ • Mwal frwnmoATwMdi ritom such plwmlng. MptcMy h the the crtlkal 
•conomyafthenK. 



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onbehtfor 
CMEEC «id th» Nortwast PuUc Pmw Anodatlon 



CommlttM on Banhkig, HoMing and UriMfi AfWra 



■I Enargy Security Act of 1991 

irlT.IWI 

I. INTROOUCnON 

Mr. Qwkwan, my nMn* k QabrW B. SWm. i «n the EMrsctor o( Ptani^ & 
Pro|sGl DBVBtoptTwnt tor the Connocticut MunleipBl Eleetrfe Energy Cooperative 
^MEEC), a )oM adkm agency that aervee the bdk power neede of putiHc power 
s>fWm in CorviactlcuL I am tattltylng today on tiahalf ol CMEEC and the Horthsatt 
Pufalc Power Aaaodatlon (NEPP^. 

My teetlmony addrasaas the consinwr and corrpedUw ooncama aasodaled wHh 
amencknanta to the Pubic UtMy Hoking Convany Act (PUHO^ as propoead In TWe XV 
of S.1220, The National Energy Security Ad of 1991. The moat Inportant oomponant of 
theaaoonaumarafxi oun») e lM wconcemtlathe M laM ty otMrtren>ml 6»i onaeceet. 

NEPPA la the regional aarvice organization rapraaanting 70 oonaunwr-owned 

electric ulHttea and ioint action agsndaa In Connacbcut, Maine, MaaiachuieBa, New 
Hampahirs, Rhode laland, and VemranL These consumer-owned utiWoa provide 
electric power to over orw mllHon ctttzana In the Northeast, and to aaveral Icey 
govenvnentii and hdustital customers. 



D.,r„.db,G00glC 



Ths pcMWon of N9PA and CUEEC fa tM «iwndmwM to th« Piilfc UWm 
HoUrq Convony Act of 1936 n Mt fan In IM XV of & 1220 muM ba aooorapanM 

•IpuUcvKlprivalsulHH. AooMt aid Mntan «■ nsKM on • tonf^win, Wr, «id 



TtwiMt twodioMwhflMaaibDduoMapvtodof luMiol, cfMnQS and unosrtrtnty 



Tlw oontuw H iwnil uiHn hBM ■ kmo. vNMooumniKl Ntkxy of pravidng 
soonoiTioHqf pnoM end nUbto poMW to vwlr ouMontm* Vmhout a oonUnuMion of 



Ml^r ol ooMuiwKRNnMl uiHm wR b0 ooRipnnriMd. 

ThB pM H Qi Of carMto oT the ■ok^JwI PURPA Twntinwi a In IgTB patwd th» 
w^farhdipandt pomrpioducw B frwfHJWygwwT^pwj.'ThwiwnanitnanHhaw 
ranAKl In nnw lirtiv B^RMtfian oanpttlen, rihou^ not nscMMrty to llw wMni 
■no n via imnnif flnvWonBo* hw VQWHon dU nooviQ to mva tha Untn^Mlon 
nMdi olTDUt «id ottMr ulHw. 

A fVMf# oofnpMnw #HOlnc uURy nouMry, prapiny hamMMd to bsnMl id 
oonwnMn. hakk pn>nlM tor nHito SMvloi M rHWXiibii priow. SuchlHtofBira 
■npcnoM Kf oonllnmd Qpovrfl^ psraouHny bt tlw NortnMiL In gimnd, ttw mMtar 
u9^ sytHfflS npnMMKl by NffPA wS baniM fcom oonpiHkin Vttw compfdbon h 
Wr lor v oompOTtara* 

Aimnvig tan^atvidvio li^Mdon 19 wM^^ nuQpt %Mn psfL wsfnustwndn 
inQMnl vMt in nwdnQ uon ttTvndrninls vft dont undontvM sAMdM nHdonwilpft md 
praiMhv owml^t. HwpnpondHiMPKtiwiiito PUHCA,f bnplMTwniKLooiAlhMw 
bwd and pmt»f mgmn imm onihe wdudon of tha uHy tndity. 7l»-nbXV 



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pfovialons purport to alwlMB c on eira i m on compaWion In genarstkxi and ths sale o( 
9l9Ctriclfy> Wi (to not INnk tfiii la Iha caaa. 

Th» poHa m bdtova to ba timnd in llto XV of the tMlonsI enargy Seeurf^ Act 
ara Bunvnarlzed balow and In tha taatlrnony whicti tokMs: 

1. 'nitoXVof&l22Odoaanotad(kiaasthecaniraln]laartrBnamiaBianacc0ss 
In promoting fair compatitlon. Instead, It pannto utilKlM to usa tMr 
transmiaslonmonopoleB to dalat oompattloa 

2. Tttia XV 01 S.1220 doas not bar utilities from sslF-dsaflng or from using 
corporate structure to avoid regulation. It does not distlnauish between 
essentlaMy norvutUity Independent Power Producers OPPe) and Affitaiwl 
Power Produceis <APPs), those producers atNated with a tradUonal uUty. 

3. TWe XV o< S.1220 doaa not addraaa how to IncofpofHapt reh easifcom the 
a&caled 'E)(empt Whdasala Ganaralors' Into least-cost planring. 

II. THEPERSPeCnVEOF'mETTUNSMISSIOMOEPENDENTlJTILJTY 

My testimony la offered from the perspeclhw of transmissionKlependent utttttes 
(TDUs). ATDUIseuUltythBtmualuBethefren en J sel onlactttiesofolhefstomeatthe 
requirementa of Ita customers. A TDU, In a traditional sense, ttks CMEEC, can be 
compleMy surrounded by another udtty that haa the ablty to pravera cr Imt access to 
ttw outside. More recently, TDUs have furwiionaly coma U encompeas thoae utHdes 
who raqUra transmission u obtain resoirces throughout a larger region, aomallma a 
well beyond the Immediate aervica territory of the surrounding utility. As the 
developmert of compedttva *marfcal8' ki bulk pmw has progressed, as has been the 
case tor New Enf^and, sales occu- on en hourly, daBy, weekly, monthly and yeaily basis 
from generation aources throughout New England and from soma of tha ac^olnlng 
provlrxiaa and itMaa, often at great economy tor ttia consumer. Accordbig to testimony 
ki the recent NU merger case, there ware roughly 1400 tran sa ction s per weak w«t*i 
NEPOOLelone. 



D,g,;,zeclbyG00glC 



ammMMmmmm 



TTw vfiil systBfre r^nwUMj by NLIH^A Hiitxjdy, In ofw oromfafltfoix aI of ita 
ctMTScMfMiQS Gf nfM|or pflndpflTli Irt ns OKMli; rofwnpv 



It oomprtng J iB u By In tw ¥rtnlMito rafkiL But unHto IHfs, vn 



wKluWal^^Mlwlrtvttor'ywdMUtcomfMtHoa' YvtMlok compettlon 
ooeure wtwi raguMon and oonnnwn of • ragUaM kwntor-owrMd 
■ystMK oom pa r— Kt Mas and aarvioa to tW of oomparably iltiMlad 
iMfghbonnQ oonaufnap-ownad utthy ayatavna* WA hava pfovidad auon 
Important oompaliton ifeioa tha baglnnlngi ottha uMy Muafey. 

Z Uha IPPa, wa oanrM oompiM fei txMt powar wpp^ martiala vAhoul fair 
aooaaa to tha trananriaalon tri^vMyai' 

3. Uka Ind^Nndv* powar pRNluoafa, wa «• dtoei oompaMn of tha larga 



Lto Ivga Invaator-ownad uHdM. wa ham ths lagri oUgrttan to maot Bl of 
tha powar aiipply naada of our ralai euatomara. Thia obttovten la a 



8. Uka Ivga Inwaalor-ownad UWaa, wa muA afficianlly ai at m bU an any ol 



& Uca (atga twaator-ownad liWaa. wa tkid tlwl tha ImparMva of attempting 
to maal tu cuatomara' naadi raMHy and eeooomtcaly maana tM wa 
muat angaga bi mora and mora houly, (My and waaMy fran w otlona and 
tonctarm oontrada In tha ragkxMl mortnt throughout Naw En^and. and 
wthNewYoil(, l^ >nnayt>anlaandBoinaofthBCanadhnPro*ioaa. 

M. ANYF^ftOkLH3ISLATIONIIUSrDeUREFMRVMCX£SALETRAN8MISSiON 
ACCESS 



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■(o(OibWB.Sn 
MIT, 1991 



Soma cWm that cartain amendmenla to PUHCA, aa prallarad in THa XV, tmM 
opan uplha markat to naw unragulaled playera and wouU - In Kaalf - craali • mora 
a Gompatttofa doaa not In 



It Is tha regional tranairtMlon nalwork wNch has tha (TMtest Impact on tha abBy 
ol c om p a U tlon to occtf. Ths trananinlon aystwns ara tha srterlaB of the electric uURy 
Industry. As the National Energy Strategy axpWns: 

UnABd access Id transrntssk» MolWfas MMtiiia the a<^^ 
ganaratlng capacity and hindvs con^ructlon of mm capacity. In 
particular, UmKaei access lirtpaiiu denlopmant of compeOhiely auppUad 



lor wholoaala powv buyara ana sallara would Incraaaa aconomic 
atndarKy by ^cllttatlna procarament of the towsst cost msourcM Aom 
both utility and nonutUlty auppllara, Qratiar access to iransm/ssfon 
AuUtto H«uW a<so Awrasse compeMfcin fri Mrfiotosato nwMs sfxi ensure 
that tha Nation's Induatrlaa, itmpa, and raaldancas hava accaaa to 
etocMcAy at tfie (Dwast feasonabto cost' 

For transmission-dependent utttttes, audi n tha aeventy entttiea In NEPPA. 
compatlliwe aBematlvea are aswerely Imlted without t r s n amts^yi acceas. Thaaauliy 
systems typlcaHy have smal aarvlce tenltortes drcumscrtoad by convnirty or long 
standing territorial boundaries. The need to obtain acoees to electric g e n ei atl on 
resources located outside their territory, and frequently beyond the territory of tha 
surrourtdlng utUtty; growing environmental awareness and the difnculttas of siting 
efflctonHy-sizsd genertflon gansraly mean that It la not faesble to sue audi genaraHng 
resources witMn smeler comnxjnlties. Also, the eoononUca of aosto ganarrily tawor 
units larger than moat smata- utHttes can prudsndy undertake lor thamaelMa. 



D,g,;,zeclbyG00glC 



iLfll^ll 17.11 

Th» • 

dl«courao« potantliMy aflldint whomiit poiwr Ir — c M o m by TDUt. ThamcMt 
wtrwn* method It to deny KOMitoth* tntlty rvquMtIng transmlMlon Mivfot. 
Anottwr nMltod liiopnnAtotwnlMlonMnlnMlinolMjIlclinSy raMMortMtIs 



n ta prioKl ■WcWiy N^ m CiM propowd p 



purohssfls from oompfltitton •* wMi iiriiifeiililnQ Ms own.f|||§ rilN pfslwnlWty 
OQitiptnd wih ttw raiM ol Mi ntiohbort. 

FUrthamura, fewwnlMlan, u*» gwMraHon. It ■ nauH monopoly. AwoUvioo 
of dupdcBte tnramluion facHliM It nooMStry tor tconomic rttaont. It It tito 
undwtttndtbly wtwitW for tho pretooUon o( tnvtronmtn m . htttth tnd taMy, 



ComptHHon Inertttti tMeitncy ki tha mwkM for tx* powar luppty. Howmw, 
tinot lr ttwnTltiion-hooi*faitiwlhb»Jcpaiitrgtrwriaan-l>tnMuniinonopoty.wt 
oannot oxpsol markat forcaa to provlda tfw n(H>dtacrfminatory aocaaa to ttta 
tranamiaalon ayatamthat la nacaaaary to aoMava trua oompadtian andaoonomlc 
afficiancy. Ttia trt namtwlon aarvtoa Ht^wwy' It a mooopoiy product d WI ma from txjfc 
poiiar»jpp>yM"taa.i»***"nui'bauiadtarthapublobBna«atmaaonal]lantaa. 

Inavltabty. ovaraitfit 01 iran tm l ttto n tarvica raquira* Itt own lagWallve and 
ragiMorytraaimanL Thagiidfcigprfcic^jlein>ii m Be (i ii6 H ihoUdba«i# a coei a . 

a TIlBMwwBriinriTV^-nil.JnnB— .fen 

An axampla of Ifw Impoftanoa of frwwMaaion acoaaa vna damanafralad In tha 
recant caao tioforo tha Fadarri Enargy RagiMory GomMMion (FERCg kwoMno iha 
propoaad margar ol Notthaaat UlHtiaa and PtMc Sanioa Compare ol Naw HarrfMhIrB. 
Ths laauea In tMa cata nrttrad on iha prolaclad alhcit of tfia propoaad marpBr on 



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compMUon in ttw NSW England uMyinduilry. TTwImportvKaafttwcMeiiavUenoad 
by thi 60-plui partes to th» procsBdnB. 

h thli caM tht FBK^ tublBct ID rehesrtna <ixnl wMb iManMng tha C0ITV8IMW 
Bllscts of tfw msQW ttM iioiaiitekin mtvIcn m b loparals ratowit pnxJucL Whis 
ttwwni —l oo sanricM can te brokarad Baperetely, tor many talara and tar al buyara of 
laranoK 



TTw praaklng ludge UartNled, vid tha FERC afllmiad, lubiact to rahaartng, ttw 
tfw rtnafriwlon nalwock la a ksy meani of aMeroWng nwrttal power. FERC DecWon 
No. 364 found that ttw proposed merger would twve a n li compa tl ttw eHecta. abeert 
Imposing condiions to nMBtfe the antlcompeinive affacis. ThtCOrvofttwaacondUona 
pertain to curant and tutm transmlsrion poldasand pracUoa. 

In New England a substertial rtfort h underway to create a regional tranamisslon 
compact agreement This ellcrt grew out of the deelre to satUa the WgaDon over the 
acquUion of Pubic Service of New Hempshire by Northeaat IMWas. 

HpartlBthad not baan raqulrad to sublact this propoaad merger to regulatory 
acnjUny, H to not Hiely th« New englend woUd ba so engaged h this aTtort to aatabWi a 
regional trsr am l aa lon compact For many, there tn^ been numereuB years ol waHng 
artd at laaat two years litigating (at great expanse) In the effort to achieve fair 
tranamisslon accaa*. Utigctlon occura and nagottaUona drag on bacauae legal 
oMgaiona are tfieJeer; II iha law had been mora deer that tran am laslon aceiw waa an 
eeeenUel part ol compeilticn wt4cti FERC muat assua, this ongoing vnH inighl now be 
owr. 

kmgme what our economy would be ■» H potato tonwrs In iMna had to ItgM 
for yeara on and to get access to regional highways to sell their product In 
Massachusalts. Al too often buyers and telars of atactrid^ In New England have been 
stymied by lack ol trsn am i ssl on ac c esi. onaroua pricing, or oven Inadaquata ladHes. 
The monmeni of electrtcHy shoiid snd moat occur as raadiy as the martM demands 



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M wM M anghMrtno and fmeMHno *B^ RtoapfMranttMlhBbUhalulttycaptil 
Invwlmflfit In tu rBowit P"l twM tottn Inttw QMivMtan poftion of tfM burinns - botti 
from uWy wid rP Muran. Whto it ora Urm InuMbnanI wh aquily (McM bttwMn 
QSfwratlon, tnnsfntMlon md dtetribution • Itw bfltanos hst vwung to QtntnBon 
kwMbiwnt RliundMr how mudi of ff«lrwMttnintmiy»w«bMnw«tMl through 
itKSft Mbtrvon to tnnflnwMion ocoms wkj mora n^onol pIvmInQ md tiwniMlGn 
oofabuoHan. Th» loolii wi lb fi JuM m tM the h«» ol b w w n ^irton leBm nnurt not 
!>• viswod In li olw t ton from renrnwl rsglonol snd kMoiwI focui on tranwnlMlon 



CM* •t«m* from II* ajthority indir 8*eban 30S ol th» P«d«ni Po«w Aol (FP^ to 
oonoRion mtfQsrt to raw vwn oonMiMwitiih0 pubic IrttfMt. 

Evon wHto FERC tm tound tranomlnlon Mntoo to bt a Iwy Jnoradtant to • 
oompotttfvs nwrkM, FERC tat oonotmod Its suinon^ nofroMiy* R oondudtt thot 
p> w wBy>m^ortyonlefbwMmhrtonoiww«topwwfcl»aanito»IOr«lielw^buyoi» 
■nd Mlara In ImltM) clrcumMnoM ouch m ■ mirgM'. Tho FERC dOM not now hsva 
•xpUctt authority in moat oaaao to ordar ttanamlialon ownara to mcra ai a Ihalr 
tmmiMlDn oapadty to aooonvnodtta ivQucaia tar tnmnilwlon Mntaa. Whaihir vid 
to whM wttntihia wutKKtf ti bnplclt in iha FPA haa baan iha tuhjaci erf conMoHno oourt 
dacWona. Aaaraault,<haCommlwlBn haa baan hidMnttoonlirtranamlwtonaooeaa. 
awn twhtra H la daarty naoaawiy to pwMB rt dwnafla to oompalWon. 

Any laQWaUva afluft toward bicraaalno compalUon In tho utHty Induairyi ba ft 
ttvouQti amandmanta to PUHCA or updiloa to fluliirirf Enargy Strataoy* muct fhat 
pretfeto FEFC wRh daar and unaqiAocal BtalubRy auttiofl^ to grant Mr and acMMa 



D,g,;,zeclbyG00glC 



Cofnpcdbon Inltw dKlrio ulH^ InduAy Is uttrraMy ibout oofwncfs tfid 
ihssooWQoodi Lrhiyli^ oonMwwrBth>niort<llolint product it tfwicmitrwtombto 
coti who* protBcUng our wwlronrMnL ThwvtOra we must avoid appnwchM to 
(>j »i t) a llU on ft tnattnantfUf/ rwrm oormmtn or thi Bnwironmart on ■! owral ba«i8. 
Wth my ohinga In Industry structure some consumers may fael somevrtiet 
d toa rtwn la gad by, tar axample, some iransl tl orMl Iocs of acoaaa snd/or Incraeaed rates. 
In tMa debate R la knpoitant to consider the stnKlural effect that the chwiga wl trnm 
and Man^l to assure that the iMmate eriect is increased affldancy and lower coets tar 
alconsunsrs. RaaiAIng temporary adverse aflscla to some consumara can and should 
be addreesed In a fsir snd squttfto manner without unduly knpedbig other partiaa. In 
plannlno tranamisslon poicy, we tharafera muat fkid a wfoy to hcreese confMlillon kt 
bi* power morkeiB whie racofytdng each uWy^ oblBillon to continue to aarve al Ra 



Mors broadly, ttnmlaaion poicy must recooF^lza the dHhrencea balwaan 
different types of transmiaakxi uaars. For example, the transmiaalon needs of 
Mependenl power producers and tranamiMiorKlapandsrt utiWea are vary dMsrenL 
TTm IPP Is a ainola generator. The IPP needs tran sm is si on to ship Its product to la 
customer. A tianamlsslon-dependent utHy la a fully functioning uti^ wkh el of the 
Inherent ull^oblgotfans to provide aervtaa to Its customers. TDUs, ■» si ulttiss. are 
reaponslble for supplying f fi tfw peeds of all Ks custorrtars. Each uHRty needs 
lranapniaalontotlatogelharamaganarillan.lrana«nlartonanddWtt)utionreeotJceeln 
a aingia Intogrolad systom. Each uHty Is bound to flnsnctslly support the regional 
trsnsmisslon sysism ttvouQfi the years, aa Ifw tranamlaiion ayaism growa to moatths 
rsgion'a Increased needs. 

Emphasizing this dMtaranca between a aingle aurmttor and a tuOy 
Me^Med sysism tslcee nothing wtHf from the IPP. PPs do nsed acoaaa V thay are to 
ba able to bring nsw competition to our indMtry. But iPPs sre a skii^ aompavnt of a 
vertloally Intogratod and vorticaly oparated eystem. They do not have the type of 



D,g,;,zeclbyG00glC 



plm*q rMporaUly «i« il uObw Iww. and »wy do not hwB Iht Mm* kM or HMd 
iwttwImTIXMtan. AAigtorPpimiBnoKjlMttutitoraUly 



Too ottan tha ootwam tor *nativa k»d* li oltod by oparatlng utWIy 
nranriHtan monopoMi H an accuM to pwpMMlB monopoly powor. TTiA o( ooun*. 
b not our potHon. A«traraninio(KlapendanluWn,\iwnpraMnla^MCfeuna(botti 
imIIm load hwmI m Iuiu Ihiii ftmand im Am traranriHion purdWMn Hid in ntany 
hutanoM ownare of Intagratod liananriaaton tooMfaa. Wa do attaxsata a balanoa 
batwaw ihoaa <i*w haw paid cr ara ti*ho to pay tor lh> a j alim (Inctodng lontHMm 
IrarwniBslan ouatomara and wtaiaada cuatoman), and fair oompadbon amoriQ ttioaa 
vita naad tha ayalam. That balanoa muat raooQnlza toa (Mhranoa balwaan bng^ann 
naada and naar-tarm naada, whia malnUMno opan accaaa to Iha ayatatn al iair and 



Ovar tha long tarmtransmiaalonownara and otharutWaa ahoUd plan fiair 
ragional ayatam to acoommodata tha liJ naada of a growing, eompaODva maricat, 
Indudino tranaaollona wfth naighboilno la^ona- Tha naada d TDUa, oltiar uflHaa* 
Ufa, QA, ato, nuai ba raoogntaad. Evaryona wto vmhIb tranvrtoaion aooaaa ahoiM 
gat a eharwa to pay tar R on a long tarm baala; at Umaa aoma ahoiid ba abia to pay laaa 
tor a dWnc^ lowsr prlorily aaniksa. Ihoaa wta oonvnll to aupport tha raoional ayaiHn 
ahoiidbaabia to obtain aq u twtont ann u a tof t ayaiwii far altran aa cdona, both long- 
and ahoct-tarni, that oocur In ttitf fnaika^ oonaMant wRh ttwlr laval of — tt"** 

Althosawho hava aifiportad dawalopmant of tha ragional tranamtaalon 
■yatam or an vAng to p^ their aha* to atnMrt ft on a long-tann baala ihouU hava 
aQuai ri^ita to uaa tha ayalam and no uHi^ ahouldba paiiiAlad to vttrimU Ita aadton 
of tha ragional tranamlMlan ayatam to gain or ratain to laatf a oompadlha advanlaga aa 
oomparad to tfia naada of othar partc^)atlng ayatama. Alltaaavitowlatitoai^pofttha 
ragjo ni i g'^ ahould pay ihalr fair ahare of addUona llitf ara oonaiatant wfth ragkrai 
planning. Ttioaa vrfw oonatnict naw ganaradon AxM ba raaponaUa to prmUa tha 
tranamlaaion nacaaaary to gat tha ganaratton to tha ragional grfd. For Inoaa laqulring 



D.,r„.db,G00glC 



. tan thfln ful um of Iho roQlonfli tranBrrtestofi systsfn, ths conospb of dltofwil prtdnQ 
•nd/or dWarent priorRy of MOMS can tw appropriaMy eppKod 

3. ^I'Mf'TwrnTranamlaalon Naada 

By *nacr twm,' wa maan tha tima whan iha praeani ImHs on transmiBaion 
capacity apply. VMtti thasa Umlts. there can be conflicting dakne to transnilasion 
pfkirtlaa. 7Mlv» kMKT la not ■ portlcutaily useful concept In reeoMng MKfi oiaImB In the 
long term. Consider a TDU tttat hss llnanclally si^iported the development of tie 
suntxjndhig utM/s Wnsmtaslon system, as ■ transmlsalon customer or wholiiiti 
power cuatomar. iris TDU mMy raqiira, in order K> angege In * longtar m twn ee cHcn 
■1 the re^onal mertcet or to Introduce e new plent to the system, tranimlaaion nspiirWy 
that tha surrounding utility would prefer to leave avallabia for Its own ahort-tarm 
opporttfiHy or aoonomy tran aa diona. m auch a caaa, you haM a trenamisaiorHMnkig 
ua^B ^rwthf ratal load potamlaly comaatlng aocaae wNh i«BinBt Is squaly ^wOve* 
wtwtasiii or If wamtaalon Iced. Sucfi conUct can tie, and In eome tew Instances hewe 
been, raeolvadlnrou^tslrBi uLellun ofllTeexisUiiy syelvn and Joint ptarviftiglo expand 
ttM ayaism s> con si de r elion of si needs require. 

Tha more stridant of the nsOM hMd dalmB oouk) aerva 10 fiMto planning 
and negotiations so dhrtslve and dHllcul! thet competition ta stilled end el regional 
conaunars loaa. Oavalopmania in tha ganarMion market haw made the concept of en 
IndMduat utility's transmlsak>n aa part of a single utility system somewhat of an 
anecfronlsm. Qsnendon end tranamiaeion edJUuiM can no longer be planned on in 
MhMuel ocmpeny beais h moat pieces, and certainly not In New England. 



There may be • time when the goal of Iraatine wiatlng tranamiaaion 
ouilomara fairly conlHcla wWi ilia goal of liil compeWon. Theee probtaiwa aliould be 
reiriawad on ■ oaieby-ceae basis. No one who ta capebto of canpedng sfnuld be 
bailed from competing. There Is a potenUai dHaranoe In tha near-tarm batman thoaa 
wtwheve had an opportunity loraaeiw and pay tor a l ong l armstske In atranarrtsston 
Orstam, end tfiose who h«M not had such an opportunity. Aa stated ebowe, this 
(Werenoe atwuicl diaappaar ow tha iong-tarm. It future tacUltlaa ara plamed to 



D,g,;,zeclbyG00glC 



ttocoiranodflto tho nssdi ct il uMra. In Sw nMr-tHii^ Ihli dMrann wH raqiAv >nd li 
t uwpUbte lo > Ittr molutlon. 



My eommonis on fren w rt Mi on aooan refer only to wholesale fmlwion, not 
retail transmistion. The overd implca U one of thete tiMi concepts an wwy dWerant 
Retal transmission raisss this question: What Is the fuxlanenttf relailonshtp bMiMan a 
uH^ and Ms nrtbe kMd customers? That k a uniquely local maBer. Federal poliv on 
wholesale transmisslan shodd not dton;pt ttie cvrent right of state commissions and 
local governments to define (1) the boundaries of uWty service tenttory end f!) the 
mutuei obi ga ttons of uUW e s and their customers. 

IV. THE NEED FOR A CLEAR DISTINCTION BETWEEN IPPa AND APPs 

Businesses with one foot In scompetitiva market and one toot in a monopoly 
maital wl always face great tncemhiee to nnlB-elocaie coets between ocmpettivB and 
noncompetitive operationa. K is natural for businesses to use avaiUile means to 
meximiiEa reltfn. 

m a tnjiy oompalMve market Improper cost sBocaflons cannot rsmsln In effect 
because customers can move to other supplers. But as transmisslort-depertdent 
uURties, we do not now have that many options. TDUs an conflnad by their Imlled- 
sarvloe boundaries. And some are too smal to buU Oielr own gsneratkxi to pioiMe 
their own attematlvas to unfavorstile and high-prteed gerteratlon soki tiy outside 
supplers. 

we Iharslars agree wHh Chakman AHday of FERC In his recent convnants to the 
Amertoan Bar Association that there must be a polcy distinction between UMy-alfiates 
and tniylrKleperKlenl power producers. CfMlnnan Aldsy stated: 

'/TJ/ansmEnton ft a naiwaf moncipoiy, vkI win Kktlf remafri ao 
tor (fte ftraaaaobfa Aftura. Thnnfon, even H the *muatt 
pmducar has no fianamJSston AsefT, As aKilala uWtf ma^ ua9 



)-970 - S? - id ^ I 

D,g,;,zeclbyCK>OglC 



Mi<0*drfl.8nm 



oontral of Its mnaailatlon KkMUm to kMp otfMr MMn Aom 



Second, avwi It a utility atOHata cant un As tnnamlaaion 
HKflWM In Mt manw, « my « 
ptoduc^F It Indaptndant If Mb §Mlaia can tr 
tubOy - arrangamanu within (ha company fo m 



That'a why wa moat ham a aapanta oatagoiy tor any powtr 
pnxlaovafmateawimatmMlorMumy. WacMthamafmaMl 
powarpnxluoan,arAPPa. 

V^'vaaaanawUarangaafpnipo tal tbyAPPa-aomaotllmn 
praaant law pmlilama ana can ba procaa a aa quleUy. But tfw 
lay point nmalna: wa mutt tcmtlnb* marfcM ptmiar Ittuat 
doaalyanyllmaatrmmiaulumylalMelmi.' 

VWi Invwlniflfit In naw planta t^)af1nQ oil and axtoUng ulHly rato baaa gradual^ 
babig dapMad, proasuraa can mount from alockholdara and Wal Olwit tor graaiar 
•amings. A uMllty'B focua can aaaHy ahift away from battar aarvlng captiva ratal 
cualomara to amphasit on thowrinB graatar protts. Baeauaa ot d hp an t a rata and 
raguiatory treatmenta among atates, utilHIos oparaUng In mora than ona atals 
JuMfcUon, and ttvough morelhanonaaubaidtory twvaaninoanlhatoalocalaooaiato 
tha Juriadlction providing the moat lavorabla rate treatment Thia poaaa atrong 



Moraowar, raguWon atraady lace NgHy oomplM uMy conxma abucturaa ttwl 
oan fruBtrate efleettve regulatory acruUny. Aa transacUona bacoma avar mora 
complcatad and ai coata flow Irom one company to anolhar, raguJatory tuattifft, 
raatraint or control d behavior wNch uiMrty erAmoe the compeiHve poaMon of (he 
company es e whole becomei more dnlicult* it may aomatlmea be hipoaaUa to 
atfitw h a ibi^ jufadoUon. Who tfMChs to aaaHiM the aama coata han not been 



D.,r„.db,G00glC 



or mora SUM? toKpoMfctotodaMnnfewoanckaMyttwIWihMnoloocurradwtwn 
vw costs n MMQ raoowrad In nuQpvJi^MScoomMVilnoonHlint ruM7 

RogulMoraand euMonwra, kidudno whoiMM customers, must tn^ ths iURir 
undsr Inw lo quastlon Ihs costs snd pnidsncy of trsnsscHons bstwssn hoUng oompsny 
sHHslss to prwwt oross subridtesHon snd knpropsr slocsMons of costs snd rannuss. 
Propossis 10 miss PUHCA shodd esraUy dslns ths snas bstMsn monopoly snd 
compstUon. TTwy shoiid dssrly bsn ssM-dssmg. And thsy should should prolMt 
SQSinst sbuss by snst^ng ttisl mi racoids of ths hoUriQ oompsny snd ss substdsriss 
«« bs sublBcllo ravtow. 

V. IMPACT ON PLANNINQ AND ENVIRONMENTAL PnOTECTXM 

A. Irtm^intmil p^mwlnf *■ Ti— i«n| ffg ^gf^tft B—OlWiB USS 

The propossd rsiMons to PUHCA con also srode the process of I rte grsl B d 
rssourcs plsnnmo Incorporstmo several put>Uc polcy goals, m recent years, the 
process Of long rsngs plarvilng to provide suflldont supply at a rsaaonaUa coat haa 
addressed demand side management as wal as mora tradMonal supply acqiisltlan 
strategies as modem utility planners examine the least cost route to serve their 
customsrs. This process has siso Incorporated othsr pubic polcy gosls such ss 
mmimizjrtB envtronmsnisl risks. Becauss msny consumsr-cmnsd ulWss fmn iMsd 
geographic bourxlarfes, the avalabWy of w 



Hovrever, the geographic scope of economically and technically leaslbla 
oompedHon wM very In the dHarant regions o( the Unilad Ststas. RogionsI ectxximic 
srx) snvlronmsnial Hsuss must be given sppropftslB ovsrrtgK by slaa rsgulaior s . The 
spproprlats division of )urlscacilon between state and federsl rsgiMora hss been at 
Issue h the dsbstsovsrlhs proposed changes to PUHCA as set forth ki Title XV. states 
d Jurisdiction over both generation sung and the location vid 



D,g,;,zeclbyG00glC 



lifMBttr 17. 1991 

Whwwver genwatlon options am dls-usodatKl from the intogratKl utHlty 
plwining procass, the siting ravlsw and aconomic and anv ir onment a l pratBdions 
asso ci a t ad ¥<tlh ilUnQ oi^w sl fl hl may ba compromlsad. Coals lo conswnsri can only ba 
kapt within raasonable txwnds by avoiding dupilcstion ol tacWas or the siting of 
genaratton which Is outside technlcalty feaaibis markeu. Someone should have 
oveisi)!^ to assure tivt ttia need tar mors powar laftdy oonaldsfad. WKImut Integra t ed 
pinring ol ganaraUon and tansniarion, the conaumer is Biaiy lo be npoaad loN^iar 



Hie pravWons of oonlracts alone may not auflica 1o protect IheabM^ of utHeato 
dslwrialabis power K a re es onsbis cost to si customefs In the fcancWse arsfc Asts 
tia case with Ql=s and SKtstlng tPPs, the oversight by FERC under the FWerd Power 
Act and by stale reguMora aaauraa ulttlaa that new antrams Mo the arena ara worthy 
contributors to tha power *uf3q>r- Tlw pubHc polcy goals assodatsd with lutt use, 
snsigy eflkJsiuy and envlrorvnenlsi protecflon are ignored by the propoaed celegory of 
"exempt wt i ole t ale genera t off* propoaed In TMe XV. 

B. Enwfcqnmartal fttJtifn||nn Prin***"* **"** Rfl IMff IllnfWJ 

TTia naad tor judicious planning of tacWlas also gains Importanoa In vlawof 
concerns about eflsets of etectromagnetio fields sssooiated with high voltage 
transmlaalon Inea. TlisabMtytoaitaandoonatnJClnewfacHeaniaybaoorwlrainadby 
ttia naad to protect cHUana from imsossasry aapostna. Rbacomse even mora oriUcsl 
that tfis sxlsting transmieslDn conldore t)e elocated eQuHsbiy and priced Wriy. 

CompBance wHh provisions of the Ctsan A^ Ad also bnpoess localy importart 
considerations on smtasions from alectrldty genereting plenla. Whie the siUng of a 
generation facMty may banallt an 'Bcampt Whoiasala Qanaralor,' tha usa of the sUs 
and/or tha allocation ol alowad amissions In tha Immadiata geographic area am/ 
preclude opdone needed by a local udtty to aanwHa load or tha needs of a local 
Induatry. Proposed amendments of PUHCA In TWa XV ramova ttie scmHny end 
HegnHon feno ptsming that cunairiy protaolsegalnstaproHartfonof ganarMk^unlls 
wtwaa need la Uy acnjUnbed. 



D,g,;,zeclbyG00glC 



By MpmHnQ ttM oonMmcUon ot gwwntora from Iht nMd to isrvs IokI, ttw 
prooMt of WPflTilBd pltntTQ or Imm-oom mourek kMBqik It irwds mon dHouL 
ImpoilHil poky ooraidinitoni iTMQr to oUKmiIkI Inthspreoiw. 

VL WHATTHSCOMMniEESHOUlCDO 

If (to Qc' ^ CongraH ii to knpraw oornpoUUon to toMR Iha cuBtonw, 
waorMwWitogcML ButCongnMihouldnolsivMttoMhinaoompMMv* 
tafidto thfouQfi IsgWtflon wNcfi lili to ttto ■ oomprihinilw ippfOttcn to 
oompMltlvB IssuM. Tito XV, as now wrtMn, «■ dhrupt comp tm on. not 
MftnooK. Ttoralora. tto totoMng ooTTMltons VB ntoMMfy: 

1. Tto notion of pwniUIno utttiM to wpsnd and nriMlonto oosti. 
and thfln dnovar and ladnaa damiQM Uatt doaa not wqik. l^afa nwat to 
iiotPUHC*— mpBeni. 



2. TTiwaahouldtoatononiittoalng.andcl— lydiftTdftowali 
tolwaan tto oonpatMwa and monopoly ildaa ottto bualnan. 

3. WanavorMlypralact against ibuMthrau(^mlM and raguMlona. 
You naad oontpaMlon. That Is why ws nssd a tonsnrisstan poicy. C ongtai 
must smpowar FERC to ansura Mr acoaaa to iha tranamlMlDn hlQhways by 
SMdlnfl Ito prindplsa of tto Msrifsy Moortisad Is^sWIon or simlsr proposals. 



by a broad coaMon oonaiaHno of Independent power producsrs. oonsumsr snd 
efwftwvnsnisi orgsnlzatlons* JnduslrW customers, and others. This Commiitae 
ahouM Inalat that Congrass anact those principles stthsr as stsnd>alone 
IsgUsdon or aa e oorxHon of chvigaB to PUHCA. 



D.,r„.db,G00glC 



A 



ConnPIRG iC^} 



TtniHOHT or juiBs -p. Lusz. mcmm diksccm 
CM«>c«tca( roBcic »tni8t RMiikaca moor 



o.s. uuTt coHHinii Of Buciaa. aoosiaa. ud anui ftrrjLias 



tat aMOMSba cmis>o»Hi« j. dodo, cmishmi 



219 Park RcMd, Waat Harlfofd. Cannaciicut 0ei19 |203|523-6S73 



D.,r„.db,G00glC 



OoDiMCtLoOt Public Ii 
Itk* to Chaak tha Chal 
laao* at raqaliCorf 
■• tlia oppoetoalCf t 
ConnPIRS la a ■ 
aavlromantal and eo 
vorka at bath tha aca< 
Oalvtcaltr «I Connaetl 
Um eoantcr t« aatabl 
1W4. ConnPIIta'a di 
evar 79.090 aaabara 



Caahy and I aa tha Siaeutln Dlractor sf tha 
t RaaaiTch Sesap, or CannPtHS. t vaold 
(oc hoiaiaj Chia iaactn) «n th* eru«lal 
taratlOA* In th* iitilltf LnSaatry and giving 
b* haia todbr a-id ««ntcLbuta ay eaaac^a. 
:awida< non-parclaafli n«n-pC9(lt 
laar pratactlon advoeaey »tq«nliatt«n that 
I and Cadaral lavala. roundad tn 1374 at tha 
eat. ConnPTRe Jotnad with Piasa thronghaat 

national lobbying ofZlea. D.8. PIUS. In 
door oacraach caapal^na ha*a Idantlflad 
iroaghouc tha atata ot Connactleut. 



. Chali 



I. BmodPCTio« 

M yOD knew, i 
capetTaa o( tha eB< 
■oaaroua lagal daclaloi 
eantury htva aicabllanad thi 
againac abualva prteln] prii 
•anetlonad aonopoly. Touar 
ragolata ictlvLclaa of and 
Jurladlettona baoaaa a (anSi 
Paaaad In 19ZS. 
eodltlad thaaa 



eonauaara of alaetrleity ar* 
a thaa by thate local utility. 
aCClraatlva acta of Congtaaa In thia 
right oC eonauaara to prataetlon 
ttcaa by utllltiaa anjoylnj pobllely 






eight of I 



I t» 



[ulaltlona by utllltUa in thatr 
intal la^at of conauaar pratastlon. 
Pubiti: Dttlltla* Holding Caapiny \et (pobca) 
>pta and haa aarvad an on* at tha plllira of 



ratapayar protaetlon In thla eoontry. 



D,g,;,zeclbyG00glC 



POBCk waa p>md tn raaponaa C9 tha antl-fraa-Backit aoraaa oC 
tha l«19-a and aarlf i»la'a tn onieh ottlltlaa aaad eraaelva 

pelelog anl oanglsaatattTa Cachnlqnaa to sMiaolldata pooar 3*tr 
nttlttr aaektta and enataaara. saeli abuatva pcaetieaa — •aeli aa 
tha 'allklaj' o( alaetrle and 9a* ottlltlaa bf paraat hsldlnj 
eoBpanla* — wara labalad tty Oengtas* ts ba atjnlEleant 
coatrlbatora to tha 1919 atoek aaritat e«ltapaa and tha aubaaqoant 
Sraat Dapraaalon. 9ach pcaetteaa and tha aatlvattona bahlod tbaa 
hava not qona aitar. Thay bar*. It anything, baeoaa aora eraaclva. 
\m apptlad S5 yaaea latar. roiCA la oat a parfaet Inatltotlon 
tar ascoapLatali^ tha goala «f tha \et> tfhieh Inslndei 

barring aipaaal»n vltlen aoaopolliaa now terrltorlaa or araataa 
riaka to eonaoaara «r Invaatorai 

raqolriiq that acqolaitlona tand toward *tha aeanoaleal ana 
•Cdelant aavalopaant «f an Intagratod pablte otllltf ayataat 
Itattlng apaeolatlon In unralatad vanturaa whara that 
apaeolatlon Lapoaaa ciaka on eonaaaara and Invaatora: 
goarding agalnat eorporata atcoctaraa Khleh lapada •Ctaetlva 
■tata ragulatlon: 

prohibiting tranaaettona batman atClllataa/ acetpt at eoati 
and aandittng aSvanca RC ravlaif at eartaln tranaastlona. 
Bouavar. bad aetora In tha thaatlLlty indoatry eonttnoa to 
Dadaraeora tha vital rola that Pin« play* In aaaurlng a 
eoapatlttva-. aCtlelant utility ayataa — ona Hhleh oparataa In tha 
publ ic Intaraat. eathar than la tha Intaraat of a t*M eoapanla* 
which [aal eonatrainad In thalr proClt-aaking ability- and ara thna - 
out to 9<it tha law. 



jdbyGoOglC 



Foe that U uhiC l« 
tha POack prsvlilona af s 
»t 1991. In th* naaa at eoapatlclv 
9, IZIO would aciraral; haapar tha I 
produeaa an aCfielant and Iniwvicli 
asaantiat peaCaetlon ot canauaara. 



\g, nr. Chalcaai, In tha C»ra aC 

tha National Snargy Sacurlty iet 

ifforta 9f 



Tha coapitttivani 



vhtch 
giiacantai 
la which t 



'rafocaaca* aaak to achlava ta tha ability to 3oalni 
•aitetlonad inaapandant pawar producaea (IPPa) and control prlcas by 
ecaatlng a elaaa «C ganaratora which will ba aiaapt (eoa cagalitlsn 
by atata atilltr eoaataaiona. 

If thara la a doobt that aaeh abaaai will aetoally taka plaeai 
thata aea aany ra«aitt aiaaptaa of waya that apaelfie utilltlaa hava 
aleaady aought to elteoaiant tha culaa undac POmCk theeogh aalC- 
daaling batwaan aCflllatad prodasaea and utilttlaa. and lapalcaant 



»t atata ragiilatocy autharity. Bash «1 
aaaa tlaka to catapayara that 
pea^at. Tha raeocd provtdaa aapla avi 
raatrletlona will raaalt in «n li 
thaaa pcactlcaa. 

Thia la not to aay that thara ha*i 
in ntlllty ayacaaa o*ar tha paat aavaci 
laaat e«at planning pragcaaa In aora than 19 
bolatac tha protactlon of eana 
of ovar-lnvaataant In eoatly and innaadad ganaratlng capacity by 



thaaa has raaiiltad In tha 

a originally daaljnad to 

Idanea that looaanlng PUaCh 

rathar than • dasraasa in 

not baan aneoucagtng tranda 
. yaara. Tha adoption of 



aaaking out t 
davalop and i 



I* ehaipaae •ours* of poui 
iforco iataqratad taaootc 



Cat* authority to 

■ auat ba protaetad — 



D,g,;,zeclbyG00glC 



-4- 

r Chan put ac ■irlea* clsk by plana aaeh ■• s. 1230. Couplad 
'itn tha eontlnoinq davalopaanC of naw eaennsleglaa and 
luiavaClona, thaaa traitd* a»n aappad ■ aright fatara.Coc an 
lEfUlant. eaapatltlva pawar grid. 

I aa aat aarlni that ?Dacft cannot b* iapcoirad. Tha aait acap 
aatliLog eha Incant aC tha «st and at PORPK'a daalgn fee 
log IPPa Into eha aarkat l« to aiiaura that nsndlaeelalnaMcr 
aataaton aeeaaa can oeear. In ardac to aatlaCr tha atatad goal 
if an aCfietant. e»Bp«tltln aatkat and ttia anaolm protaetlon tor 
canauBarsi tha PIHC auac ba abla t« otdar teanaslaalon aeeaaa toe 



agltluta x 



ibaolntaly n 



la prodaeara. 

tha aavara raatrlctlon at aalt-daallog la 
cf to pravant eha kind* of abaaaa that aalat 
indac tha preaant ayataa. Tba axaaplaa af Conauaota Powar and 

ila Ulaan ara aach atanniag In tha eeaplacltf af 
ttonai tha langtha that tha atlltclaa haira gona to 
and tha aubaagnant rtak thaaa aplaodaa bronght 



eid eagnlatloi 
on ratapayara. 



tr anal a tea lnt( 
catapafara. Ai 
tha goal at a c 
and raatcictloi 
Chang aa aegght 
totfard caatrleti 



.ring petncipla bahln^ POHCk U that tha dagcaa to 
«ac la fcaa and coapatitlva dieaetly 
it of peotactlon far eonaa'aaca and 
ELon* that wa aaka In PmCk ahould ba coMard 
■nalnaly ooapatltlT* aarkat. Tranaalaalon ac:aaa 
at aalE-daaling aea aaang thaaa. CaaTaraalfi tha 
1230 HODld aava In tha appoalta diraatloo. 
I caLlnalva aaekatar ciCa tftth appactnnity toe 



D,g,;,zeclbyG00glC 



ConnPIRS ucgo Cti* Conalttai to iai< th* )•!■ 
■Cloj PtlHCA ptOTlilona In 3. 1220 mtli wibitll 
tdi 1). pcsntblc ••It-jaaling b*t>ta*n gelltt 
aapoute eha fbrc to otlar Crananlailon ac=ai 
>ai and 3). aaeuc* th* right of atitis to pr: 
and ratapayar* undar thaic =9nfierid g 
aiatetilng pcadanea eavlaw oC acqulaitlana at povi 
aclliltiaa tn any tcatiaaetion tbat eoold aCfi 



:t thalr 
>p3ly b 



Pachapa tha aoat pstant vahlclo Cor aTidlog POHCA prataot 
and thua anaanqacing tata^yaea ia tha ability o( holding coa( 



to alalia powet porehaaai batxaan afflllataa axa 
Bholaaala ■Ouallfyliq Pacilltlaa* (QFa). milt 
Dtltttlaa tha eight to own Hhalaaala taellitla 
thaa, thalc aiaaptlsn froa ataca cagiilitLoi pu 
utility eoMlaatona in i naaely tspoaalbla poa 
■snitor tha ingoing financial aetlvttlaa of -Jt 
eoapantaa aa chay aea laandatad t9 do andat tha 
IC anpandad by ehangaa tueh aa ehoaa in a 
to aalf-daal can atop cold In Ita tcae>ca tha p 



ipcad ondat 
PUDPK hai 



L2Z3, tha 1 



Btitaa toward finding tha ehaapaat aouesa 9f 
Insraaalng dvaand. Thla uoald bi ae:oaptiahai 
atata pouae to anforca Intagntod aanagiaant ; 
oaalac cllaata for addln] naw gonaritlon tasllitlai 
by aany utltltiaa o<rar tha adsptlsn of •fflslaney < 



D,g,;,zeclbyG00glC 



l*lC-d*itln) puts iitilltU* In poaLElon at purshaslo] poKic In 
I* Htileh hi7* aany tiaaa In cha pa*t lal 






ptUt 



pcielng praeclei 
h( drLva bf Coni 
:h* baeka of Hlehlgan 
:m ComtaalM'* (HPSC 



In *ai 






loat.* 

^hoaqh ardaead t9 
I na*<] (9c aaalttani 
pr«dueaca tlOiOOO 
:i3n> according to 
IB far btddor* by C< 
-daal. HPSC ul 

iinnaadad powar. 

Canauaara Pome la but 
daallng iiaa undaralnad 
eoapatttlon and put eoi 
alaotrlciey. Though It la i 
lanjCha that i utility can c 
Tb* eodllieiclon ot ttM opp< 
praeticaa aought by tha atai 
opan ■ «leta«L Ptndara'a son 



and antl-co^atltlva 


tictlc 


. Tha Bad 


•Hra Powar to 


load an 


unnaad 


3 2S39M 


itapayar* la 


ha Htehigan Pu 


lie 


ea-o» eaa>an 


that. 


ana m 


t tfondar 


oaea again na 


otlatad 


vlth 1 


aolC and 


90 ■ co-pat It 


va btdd 


nj peocaaa ca 


pouac. Conauaaca alaccad to 


ch»rga 



[ ;lal 



abu*a Cor 



I nagetlatlon [ 
I onaeciptabla taraa put on 
raanlc aC thalr laalta 
1 tha Canaaaaca Powac 
itabla clak of paying Cor 

; of axaaplaa 9t ha4 aalf- 

ghta. thuictad 
payin) u-ifaic pcleaa Cor 
. It tlluatrataa tha 
to pad ita bottoa Una. 
lltttai ea angag* in aueh 
aalara In S. 1110 la ta 
eanaiaaar* and ratapayaca. 



D,g,;,zeclbyG00glC 



Tha aehla* 



raqulra^ 
nt 3t tm 
(flelant produsa 



atllltti 



«C ganutna coapat 
CtM meant ot tba OF anaaptlan unJac PI 
gat thale peoduct t« aac^at. Tha atti 
planntng pclclpla Banilitaa that tha aai 
fact tM otlliiaa br tha po»a; ayataa. 

f tcanaBltaloit aceaaa la oat guarantaad (oc aai 
taa. aanlelpal ana eooparitlva ayataaa. e»g«aacil 
othar vaall and ladapaodant powar pcodueara. Slnei 
• aca aonapoly (aetlttiaai FBXC ahould ba 

>a. Ha aria yoii to 

Mid glva tha Coaaiaalon till* tothotl 

ity tranaalaatsn aceaaa proalaaa 

eoata t9 canauaata. Opan tram 

I tha shaapaat pswar avitlabla : 

csapatLtton and oCCating conaai 

Krallabta tau-eoat powar al i 

ilonal iinnaada) ganaeatlng capacity 

block pcoducai 

•n. tidad by aalC-da< 



tcanaal 


alon aceaas 


lagiala 


Ion that irau 


Ho 


dlaerlaioato 


ganaeat 


on and Louae 


ntllltl 


a to parehaa 


hour, thua anhinclag 


PC lea ( 


c alaetrlelt 


conatm 


tion ot addl 



atfliMant 
yoy givan 
innlttlta tha 



Tha ability o( atllltli 
haa baan daaonatcitad all t; 



tha ability tharaby 

■nj hiva pncportad to ba buying aota ifClolanl 

in (act. thay hava baan daaling with atflllati 

aCflelant prodaeara out aZ tha varkat. I fatutn to thi 

oC Conauaaca Powart and tha uttlity'a qaloknaaa to Kh' 

Car It* iftltlita and diny aeeaaa tot noa-aI(lllata1 3i 



till 



'oa QPa whaoi 



D.,r„.db,G00glC 



Tn* thiary t 
•tsmli la^ov* tea 



■at laasaaln) PilRCh eiatrlc 
•■■lialan aeeaa* throufh <s< 
ains*. ni Lnewitiv* landi elvarly on tha i 
Ca ■tClliitis and lanylng Ic ta eoapaticar*. 
tapaalng taoghtc eontricE t*ra*> I 
•iaply purelt>ilii9 p9mr only Ctoa 
3a«Lgn anl anglnaarlng aarvtea* ta afl 
thaa tha coapaticlv* adg*. If thi' 
■oaathlng nau oc undocaa*nta4i tha 
aowavafi tha caatrletlon of teansataal 



STAn unLH 


[ON WID 


nST-COBT PLMB 


M 


± 


Tha eaaa 


foe laa 


t coat anacgy p 




ntng li 


pro-eanauaar. 


ana pea 


anvlcoaaanc ae,. 


.. 


nt.. 3. 


aupply.tha Baae aaal 




a> 


polla 


burnad aa sha 


■ pae arc 


a lane y option. 


c. 


aaploy 


alastcLcity, 


»na capt 




• 


lowat 


powac. tt la 


a uln. 


m. «l<t altuitl 


n 






tn, in. 


itiitlon oc luec 


•< 


Cui lai 


dapaada oo acrong ata 


a eagulitton <jn 


• t 


PUHCH 


t..tra=t«Ug 


to avoid cagulaClan ani 


c 


ch* US 


aubaaqiiant tfaaaEae a 


■ach ra^alitoc 


• 


uthacl 


th» PSRC - h 


■a aa^a 


C eonallactbly 


a 


a act 


auparirla* utl 


llty daa 


Inja a* caquiea' 


t>Y la«. 


aaaat craaafaea. aiehingaa of aaCTic 


•■ 


Mi o 


batMan aftll 


i.taa — 


aoaatlaaa in fa 


Buay ata 



I andac S. 1110 

daflaa coiaan 
If providing asaaaa 
y oan do ttila by 

obligatiana by 
a> at provlllng 
low pclcaa> giving 
rialnatlan uaa 

I wall dooaaontad. 



rlea Cot ttialc 



and t;ia 
y tcoa tha icacai ca 
:iilt tar atitaa to 

Tha eoaplaitty at 
lac aatlvltiaa 



D,g,;,zeclbyG00glC 



■ tit**' ability ta gat tht InCoc-iitian th*y ni(] 
elvaly ragulit*. 
T»i •i*apl*a oC Coosu>*ts ?3tf*; tni 33Jtri*;-i Call 
taonitcae* ttiic atac* raqulitlan la btlng clceuava^tt 
rtsant rtgulatsry •tcucturi. aowavar. th* Ineotpocil 
iBDgaa tn S. I2i0 m-jld stgnltlcsncly lns:>i9a turn dl 
ts »tfetif\j Bonltar tha iztiTttUa at h9L<llti 
and utllltlaii aa wall aa pca-aapc Chaa tcoa tha ravli 
Intatatata pouac pucchaa*a> no aactac what aieaaatva « 
I tha prl=a to csnauaara. 
sued davatspaanta miild, in turni tianpar ttia abll 
iCocea laaat-eoBC plana, ondac 5. 1220, iitlltias san 
Lliataa t9 avada chair lagal abllgation t3 pcovlja 
: powac to captira ciiatoaara. (gain, th< 
lea — a utiltly uotild pucKaaa pouac fcoa 
laaratori cathac than daal xttti an affilial 
>aaon aanaa. Tha ilftllaca maid pcoduea 1 

I tha parant at tha ntillty'a nl?har iToiaad e 
Lvarting tha aavln^a Ceaa eaptlva eustavaca 
Csnnactieut has baan a national laadac i 






lUy tot 



I eurrantly has i pcograaalvai coll 
E la a lonj tao pcoeaaa uhich conal 
tflelancy, and amrlconaantat eoati < 
icqy Cutara. Zha connactleut pr9=< 
isacvation attocti. and tha coopao 



aboeativt 



flight and P 



rar), Onltad tlluaioi 



D,g,;,zeclbyG00glC 



■nd th» ConairTacian tw Fouadatlon. In 1M3, tha 


two utl 


tllad coaaacvation pcogeiia inoantinq to 3»«c SJ4 


mion. 


Baciua* at It* eaucant auesaaa, proalaa Cs; t 


« futur 


aarlf atag* oC axLitanea. ConnPIftS doaa not aappoe 


th. 


•nd.n9.<:..<.t »( tha Connactlcat l.a.fsoat. pl.nnl 


g pcogc 


einaxta oppactiinlty tor contraction of rlaky, anna 


M. g. 


capacity aa anvlalonad by s. 1323. In aMitlonr ■ 


aCIaet 


coat plannlnj dapanda on atcoag ataea o*aealghc> w 


oppoaa 


chilling aeeaet that S. 1133 woald ha*a on tha ata 


a'* abl 


ovataaa ttanaactloita by It* atllltlaa. 





D.,r„.db,G00glC 



u J. SDun amcominm ON scuuTiEs 



namiONT or Mms F. ciowi 

ONBKHALFOr 

TBE DNmD ILLinilNAnNG COMPANY 

ON 

TTrLB XV OF THE ^W^ONAL DBKGT SKrUniY ACT: 
AMErtDMENT OF TBE FUBUC nnUTY HOUXNG COMPANY ACT 



D.,r„.db,G00glC 



Hy MB« 1« JuMa P. CrotM. I tm Senior Vic* Prasldutt of tlta 
Onitad Illuslnkting coapMiy (UI) ■ UI Is th« second largest 
slectric utility In tb« Stats of Connsctlcut, serving • quarter of 
our state's peculation wltb a service territory of about 33S aquars 
miles. 

I want to thank the Coaalttee for providing UI with the 
opportunity to cooiHant on Title XV of the National Energy Security 
Act and the effort undemay to refora the public Otlllty Holding 
Act (PDBCA) . we have very significant Interest in these 
developaents since we serve the greater part of Connecticut ■ ■ 
■anufacturing base, that is, enplcyers t4io are struggling to 
coipete In one of our region's worst-ever recessions. 

As you are now eware, PORCA reform is very controversial. 
Advocates of reform argue that such reform will promote additional 
power supply options and increase eo^etltlon In wholesale 
electricity markets. On>onents question the need for reform end 
caution against the demise of the vertically integrated utility 
that has, without any doubt, served this nation so well. This 
controversy threatens to split Investor-owned utilities into two 
hostile caspa. 

UI la not as yet in either oa^. UI is not a member of either 
the Electric Reliability coalition or any of the organisations that 



D,g,;,zeclbyG00glC 



- a - 

01 la not •Ittw 
• juat s«r "y«a" or }ast aar '■>«" o^^Mir. 

OZ Is tMt afraid eC ee^wtitioB. Altbeagh eaapatltlon bu 
■■da Ufa toogbar tor na aa Mplaya a , X oaa alao tall you that 
baeaaaa of ooapatltlaa, urn ara dalng a anab battar job tor our 
ottstMMra. Ceapatltifln haa hioa M a faet of Ufa for tha alastric 
utility Industzy and Uw ehallanva ia tn Hamaaa oc^iatltlaa ta 
pronota iavmvad otfialan^. aarvieat and eoordinatloB vlthout 
advaraaly attaotiav rallaUlltr or caaalnB onatanara unnaeaaaazy 
additional oxpaaaa. 

In thla ragard, DX haa aavaral eoaeama aboot tba onrrant 
inltlativa to raf ran tDBCK. Tltla XV and tha otbar propoaala 
elrealating aroond Congraaa will oraata a nav olaas of alaotrlc 
powar ganarating on^ianlaa tbat vlll ba iiw^t fron POHCA. Tba 
oatonaibia pwrpoao of thia axa^tion ia ta anriofa tha ganaratlng 
optiona availabla ta ntilltiaa. Frepo n a n ta of rafom axgua tbat 
Titlo XV will net raqolra ntilltiaa to parcfaaaa powar fron tbaaa 
daragulatad aiippliara ■" and Una vlll not foroa » raatruotoring of 
tbo olaetrle ntility t n d uatiy or raaolt In «nda* rallanoa on non- 
utility pewar prodnoara. 

OX ballovas tbia peaitlon ia tee al^^llstie. It la iBpoaalblo 
to dlveroa tbia laglalatlon and tba intradnotion of grantor nunbars 
of non-utility powar aonpliora fren tbo aabjaota of induatry 
atructura, trananiaalon aooaaa, raliabllity of aarvioo, atrandod 
invaatnant, undua eoivatltiva adwantagas aad. noat iaportantly, tba 



D,g,;,zeclbyG00glC 



pesaibillty af hi^ar rtma to r«aitentlal ahd e«MB«rela 



In ma idaal world, ■ utility would r«vi«w th« pow«r options 
availBbl« to i« and ulaot the eoabiaatlon, inoluding buildingr ita 
own plants, that aost •cencaleally utlsClas its enstoaars' wsada. 
In auch a world, sliBinating POBOk ragulstioa for aivpliara 
dadieatad to tba wholaaal* aarkat could laprovs tb« options 
aval labia to atilitlas without advarsaly af^aoting tha quality and 
cost v£ alastric aarvioa. Powar a^qtpllara would eoHpata on a laval 
playing Ciald without banaflt of ccn^atitlv* advantaqaa that ara 
unralatad to tha quality of tho coapany, fual or tachnalogy. 
Utilitiss would bs traa to chooaa powar suppliars tbst bast aaat 
thair cuatoMars' aaada, including balng abla to pay a praaiua Cor 
projact faaturas that ar« particularly attractlva, audi as 
diapatohability, rallabla aanaqaaant, and atrsngth of financing. 

Ontortunataly, this is not tha world within which alaotrio 
utllltlaa oparats. Invastor-ownod utilitiss, such as UI, ara 
aubjsct to parvaalva ragulatlon. Na ara ganarally vartically- 
intagratad utilitiaa (wa own ganaration, transaission and 
dlatributlon) that bavs basn grantad franchisas to sarva cuatoasra 
within datinsd goegraphic araas. In ratum for tha franchisa, wa 
hava accaptad an obligation to ralisbly sarva all cuatoaars within 
tha franchisa, hava our rata of ratum llaltsd, and bava virtually 
avary aspact of our activitlas olosaly scrutiniiad. 

Indaad, cartain dacislons ara not avan ours to aaka — audi as 
having to purchasa powor froa particular powar suppliars or 



jdbyGoOglC 



- 4 - 

rMtrioting tte MEtMrt ts «hiek oar •eUviU«f ean b« flMBMd 
tbrougb tha Ibwimw at dabt. Ottaw dMlsi«M. «bll* thMntieally 
within mir dlaorMloBf ax* haavlly laf lOMwad tar fadaral and atata 
ragnlaCora. For taamH», wa ara only aUa tn r«oo» M ! wipanaaa txtm 
•vr oaatoaara if anr tadaval and atat* ragolaters oooaluda that 
■nob aK pa n a aa wara pcodantly i nmir rad. In otbartfosda, rata 
ragulatora can prarw i t otllltiaa trvm raoavarlng thatr easts If 
thajT diaagraa with how ntiUtiaa bava apant thair nanay. Madlasa 
to nay, tbla «lv«a ragnlatora a frwat dael of lavaraga ovar 
ntilitlas' preeuraaant daalaiona. 

Aa a raault. It ia aort raslly aoonrata to nay that utilltiaa 
will ba traa to ch ooaa whatbar at not to biqr powar txom tha 
aappllara naant to ba a n oo iir a9ad bf POBCA raton. Tltta XV and tha 
Qthar propoaala will not rollava •laetrie utllitlaa fro* thair 
ragulatad atatua or tbalr oblifatioo to aarwa. Mor do thaaa 
propoaala eraata a fair co^atltiva traa narkat at tha Qanaratien 
laval. Tbaratera, tha Introduction of nora non-utility auppliara 
could vary wall raanlt In biaaad daclaiona thkt will raault in 
utilltiaa and thair oastoaara bacoalng boataga to hlqhly lavaragad 
non-utility qanarator* and alaotrlc rataa far abova what thay would 
otbarwlaa bava baan. 

Lat na provida you with a . taw axa^laa et bow tha currant 
•chaaa for raqulating utllitlaa eeuld raault in raeb a biaaad and 
ceatly raault. 

Plrat, thara Is tha Publle Otlllty lagttlatmry Pelielas Act at 
197I (PtntPA) . Xhla law coapallad utllitlaa to oftar to purehaaa 



D,g,;,zeclbyG00glC 



- 5 - 

power fxos a eartaln privll«g*d «!•■■ of pow«r produeara — eallad 
qualltylng Ia«illtl*a or QFs -- that produca powar utilltlng 
coganaration or raiwwabla raaourcaa. ma law haa oftan baan cltad 
aa an uiqpraeadantad auccaaa and tha pracuxaor of tha currant driva 
to axpand tba nuabar of daragulatad powar auppllara. 

niia law waa a auccaaa — but not co^lataly ao. Many 
utilltias, including DI, bava baan torcad to purehaaa powar that 
tbay did not naad or to pay rataa tar in axcaaa of tha valua of tba 
powar baing bought. In bob* easaa, ragulatory eemisaiena hava aat 
tha prica ef powar for aueh purchaaa^ far abova what could hava 
baan purebaaad in tha wholaaala narkat and abova tha coat to tha 
purchaaing utility of building ita own planta. In other oaaaa, 
atata lagialaturaa hava proaotad aalactad tachnologiaa through 
inflated prices. Thaaa abuaea have been decuwanted in Jjoth 
Congraaaional haaringa and in procaedinga before the Federal Energy 
Regulatory Coaaiaaien (mc) . Rather than raoap all of thaaa 
abuses, I would be pleased to autaait thia aaterial to tha 
Coaaittee. Suffice it to eay, however, that these abuaea continue, 
and DI la atill having to buy power froa QFa that it doea net need 
and at prices greater than the cost of producing tha powar tor 
ouraalvea. 

Advocates of FOHCA refora will try te distance POHCA rafora 
f rea the prebleae ef PDRPA by eaying that tha purchaaaa under FORPA 
ware aandatory and POHCA refora will not Mandate any purchaaaa. 

This distinetion is net aaaningful. Although tha purobaaes 
under PORPA ware aandatad, there were proteetlona written into the 



D,g,;,zeclbyG00glC 



m 



IMT that, Iwd tlMy bMB bonerad by ragulatory ee^Usslons and stata 
laglalatnrca, would hava pcotaotad vtllltiaa froa buying oapacitr 
tbay did not naad or tx<m paying aaoaaalTa rataa, Tba faot of Ufa 
that utllltlaa nort daal with ovary day la that wall naanlBg 
lagislatlen, oaeb aa roxn, im aubjaot to blaaod vplloatl«t by 
ragulatora. 

■ a c and, nany hara argnad that tha sgapotltiwo onvlronant that 
BOW ebaraetarlaoo tbo powor Industry will protaot aqainat uadua 
rallanea en non-utlllty powar oiqipllarB. Xbaaa aaaa adveeatao dta 
aa auppar t f«r thalr poaltloa tba fa^ that eeavatltlva bidding 
pregraaa bava nada tba pcoblMO with POtn a thing of tha paat. 
Tbaorotloally, bidding pcogr an a that allow all petontlal aoureoa of 
poHur to oo^ate will paod u oa tfaa noat advantagae u a rataa for 
puro fa aalng powar and alae aatlafy tba nm raatrlotloo that QF 
rataa ahould bo no nora than utllltlaa' awaldad coat, that la, tha 
rata for tba powar tbot utllltlaa would bava bought but for tbair 
purrtiaaaa Craa ora. 

Of oouraa thin aelutlon, aa wull aa tha awowod noutral i^act 
en utllltlaa of any FUMCK rafont raata upon tha aaauaptloa that 
rogulatmrs ara willing to ratraln fron Intartarlng with 
ooapatltlen. laoM it aotlon by tba Maoaantmaatta D^artaant of 
Fnbllo trtllltlaa (IBIPD) oooClma w an^loloa that thla la an 
anroallstlo aaauaptlon. Beaton adlaon Oonpany raeantly oolloltad 
propoaala fov tba pumhaaa of powar nndar a long-tam contract. 
Om ■«! EUlad that utllltlaa eoold not scrota for tba aala of 



D,g,;,zeclbyG00glC 



powar dasplt* th* fact tbat ■•vcral utillti**, including oi, ara 
aatabliahad auppliars of divara* and raliabla vtwlaaala capacity. 

Obvloualy, net paraltting utilltlas to co^ata for tba aala to 
Boaton Bdiaon abaltora froa coBpatitlon tlioaa paraittcd to 
partielpata In tba aolicltatlen and can only hava tha affact of 
raiaing tit* coat of pcwar to Boaten Zdlaon. it la squally obvioua 
to aa that alnca sany of tlio propenanta of pohca rafor* ara alao 
antltlaa that bonafit froa QF atatua, tbat tbaaa antitiaa will ba 
advocating ragulatory policies aiailar to that adcytod by tho mm 
— polioiac that will aaka it difflc«;.t far utllitiaa to CMq^at* 
with non-utility powar suppliara. In thia ragard, it ia 
intaraating to nota that cartain trada aaaociatlona rapraaanting 
non-utility powar predueara aro raportadly ' aaaarting that 
coipatitiva bidding ia driving thaic profit margina too low. 

Third, utilitiaa- ara liaitad by rogulatlon aa to tha aictant 
that thay aay tinanca tha cenatruction of »aw pow ar planta throu^ 
tha iaauanca of dabt. Ron-utility ganaratora, such aa QPa and tha 
aun>liara intandad to ba oncouragod by PDHCX rafora, ara not ao 
liaitad. Thia could craata aoaa vary aignificant problaaa. This 
raatriction will handicap utilities ability to coapata with non- 
utility aivpli*ra. Tha ability to dabt flnatiea projacta to a 
graatar dagraa than utilitiaa could raduca non-utility auppliara' 
costs by, according to toatlaeny prssantad to tha Sanata coaaittaa 
on Inargy and Natural Raaourcaa, aa au^ aa tan parcant (lOt) ~ 
thua providing sued auppliara with an undna coapatitiv* advantaga. 



D,g,;,zeclbyG00glC 



- • - 

Will tblfl ■dmnt*9* h »oo«> signltiaant? Abaolutaly. 
Bagvlators will «l««ys ba under si^niCieMit praasur* t* k*^ 
•lactrie utility ntM u lew u peuibl*. A oMt difCamitial of 
tiva to twi parowit (IM) will not ba abla to b« ignerad ~ avan 
tbough thara ■>/ wall ba biddan coats aaaociatad witb ralylng on 
non-utility aonraaa eC powwr. 

What ara thaaa Uddan eeats? A cenpla eeaa ianadiataly to 
■Ind. A utility ralying on third party aqurcaa will bava to 
pretaet agaiaat tba poaaibilitias of atvply failuroa by baving 
graatar raaarva aargiaa (Um aaoont «^ axtra ganarating eapaeity 
bald in raaarva) to aaintain ita eradit rating. Ibua, ralylng on 
noaiitility ganaratien will eoot aoooy ~ aithar to arranga for tba 
additional rao ar *— or tbrougb inoraaaad eeat e£ capital dna to 
lewar erodit rating*. rurtbanMraf dtandard C Poor baa raportadly 
annovnead tbat a utility tbat ralias an non-utility ganaratton for 
■oro tban ton poroont (10%) of Ito powor n— d o will bava all of ita 
loog-tara fin capacity payaont ebligationa aaaignad to ito balance 
abaat aa dabt, tbua furthar ineraaaing tba utility'a cost of 
capital. 

niua, tbara oro aovoral ways in wbiA tbo currant rogulatory 
rogina eeuld and probably would raault in biased daeisiens and 
undua ralianca on bigbly lovaragod non-utility power auppllara. 
tbaaa oonoama cannot tm ll^tly diaaiaaad aa naraly tba 
preteatatlons of cenpanieo tbat do not want to face tba cballangaa 
of ooapatitlMi. 



D,g,;,zeclbyG00glC 



- • - 

Indsad, at iMSt tvom Dl'a p«EBp«ctiv«, PDHC& rafora is not 
•bout irtMtlMr or not oim b«lt«v«B In eoaiMtitlen. VI do*a. Tb« 
r«al 1mu« !■ wtaaUMT cengr*aa. in anacting PORCA rafera, will also 
act to cr«at« ■ fair and truly coapatltiva wbolaaala ganaratlon 
■arkat. POHCli rafora without aueh action will aaraly axacarbata 
tha problaaa in powar procuraaant that alraady axlat. POMCA rafora 
with Buch action will net only achiava tha avowad goals of raCora, 
but eould alao aaka a algnllieant contribution to tha aiaalon of 
all utllltiaa — which la to prevlda tha baat alactrio qaaarating, 
tranaaltting and dalivary ayataa and ttia «eat aaoura, raliabla and 
acene«le aupply of alactrio Ity. 

To achlav* thla goal, howavar, any laglalation to rafor* PUHCk 
mat Blao anaura that Ail pewar producara, including Invaator-ownad 
utllltiaa, ean coapata en a laval playing tiald whara ooapatitlva 
advantagaa are not axtandad to particular' auppliara by virtue of 
thair prlvilagad legal atatua or parochial regulatory policiaa. In 
thia regard, OI raapeotfully, auggeata that any laglalation 
ragarding PUHCK Include tbe following raforaai 



nta avowad goal of PtIKCA reform ia to Ineraaae the generetlon 
optiona available to utilitlea and proaota coHpetition. nie 
aandatory purcheae obligation under PURPA and the poaaiblllty of 
ratea that are higher tban avoided coat obvloualy conflict with 
this goal. Tha aaaleat aolutlon would be to avand Pincn to 
allalnata the aandatory puirehase obligation. Thla would place QFa 



D,g,;,zeclbyG00glC 



- IB - 

on tha ■■■■ footlBV «• all otkar vowwr auppliars, «t l*«M t« tlw 
«xMat that tiMjr will only ba atal* ts mJm pew Ml«a if thar ar* 
willing aaat and aateh tbair OMifMitioa. 

Utamativaly, tbara ara otfear vaya to aiaialsa tba 
ceapatitiva dlstertioaa c a oa ad by QTa, awA aai (a) Halting 
eapaei^ payaaata to wban vtilitiaa aaad naw eapaeity aa 
aatabllahad coaalatant with utllltiaa* planning beciaonai 
(b) ragulriag aveidad eoat rataa to ba baaa d on all othar ahelaaala 
aooreaa of powar, Inelndiag tba pnrchaatwg utility'a own 
gaaaration, taking into aeeennt tha gaflitativa charaetarlatioa 9t 
pOMar, Ineladlng raliability, dJapatofaabtlity, and fual aoorea; and 
(e) prohibiting atataa froa aatting rataa tar V powar aba¥a 
utilitiaa* avoldad coat by eedifying FBtC'a atill-etayad fl 



■ena of tbaaa at igg aat ad raferaa ia tmi. Indaad, all «f tbaaa 

raforaa vara propeaad by FBIC in UM. All of tbaaa nhingaa ara 

Intandad to rafina iaplaaantatioi of POSPA witheot (Hanging tha 

thruat of PtniPA. Zndaadi tbaaa Aaagaa ara naoaaaary to anaura 

POSPA ia laplaaantad an originally anviaionad. Onfertunataiy, mc 

ban failad to eeaplata tba job. Tba Jab naada to ba eeaplatad to 

craata tha ooapatitlva ganaration aaAat upon which FOHCA rafera 

abould ba praaiaad. 

(1) Hinialaa lagalatery Cdiraiaai^'a Ability 
*e Zatarfaro Kith Tba oeapatitive 
■balaaala Oanaratiaa Barkat. 

Aa aicplainad abova, thara ara a variaty of waya ragulatocy 

coaaiaaioaa can intarfara with ooapatltivo whelaaala ganaration 



D,g,;,zeclbyG00glC 



•ftrkats. Su^ lnt«rf«r«ne« e«n rang* trom tratlon «■ blatMit aa 
that of tlM KDPU rastriction «a to who la allovad to ooapata to 
■ora aubtla intarfaranca, auch aa a ragulatora' raatrletiona 
ragarding bow utltltiaa flnanca thalr partlcipati«n In pewar 
prejacta. Obvlaualy, aa long aa utllitlaa naaln ragulatad. It 
would ba iapoaalbla to allalnata tlM i^oaaibllity of ragulatttry 
intarCaranea with tha aarkat. Howavar, Cengraaa ahould idantlCy 
and pzetaot agalnat tha aoat agragleua poaatbllltlaa. 

Claarly. Cangraaa ahould net pacalt coapatltiva aolleltationa 
to axeluda oCtwa by utllitlaa. It'a^hard to ballava clalaa that 
TOHCk rafora will not prajudga any particular fora of Induatry 
atructura if non-utillty ganaratora ara ahaltarad fro* ooapatltiwt 
froB utllitlaa. Utllitlaa mist ba allowad to ooapata with non- 
utility ganaratora. nila la trua for BMth aalf-ganaratien and 
aalaa to othar utllitlaa. Dtllitlaa ahould not hava to 33uy powar 
froa non--utility ganaratora <rtian utllitlaa oan produca tha powar 
for thaaaalvaa aora ebaaply. utllitlaa aheuld alao ba guarantaad 
an opportunity to oo^ata with non-utilitiaa Cor aalaa to othar 
utllitlaa. Any POHCA laglalation ahould ba axpraaa in thla ragard. 

Purthar, non-utillty ganaratora ahould not ba affordad a 
eoivatitiva advantaga by virtua of ragulatora* raatrictiona aa to 
tha dagraa to which utilitlaa can financa projacta through tha 
iaauanca of dabt. Sanator Conrad auggsatad an aaandaant to tha 
Sanata Enargy and Natural Raaourcaa Coaaittaa during that 
Coaalttaa'a conaldaratlon oC Tltla XV that would hava achiavad thla 
raault and protactad utilitiaa agalnat highly lavaragad projacta. 



D,g,;,zeclbyG00glC 



- 13 - 

A Conr«d »— ndMMit would bav« r*guic«d « powar mippliar mtn^t 
undar TttI* XV to rsstriot Its twa of dabt tinanoing to tlw •■■• 
•xtont ■• tbo purebMlng utility. 

Sanator Conrad's aaandaant ma net addad to Tltla XV. Altbougb 
I do not nacaaaarily andoraa tbat a—nd— nt, I i imiiiiI bla 
racognitlon of thla probl^. Z do not iMltava tbat Sactlen 1S107 
oC Tltla XV adaquataly addraaaaa thla laaua. Ul tbla aactlon doaa 
la ragutra atata ceaaiaalona to partorv a ganaral avaluatlon of tha 
atracta on ralylng on highly- lavaragad povar pro]acta. Mara 
atiidlaa will not protact ua ar our cu^tnaara. 

ma laauas mrranta additional Invaatlgatien by Congraaa. It 
vould ba unfortunata If tboaa poitar producara with tha aoat 
axparlanea and lagal obligation to aarva, invaatoc-ewBad utllltlaa, 
ara praeludad tzam balng abla to aaanlngfully eoapata with 
non-utility powar ai^pliara bacauaa thair ragulatmra handle^ thair 
ability to lavaraga invaataants in pewar projscts. 

Thara ara ■ varlaty of diffsrant approaehaa tbat abould ba 
axplorad. PURCA rafora oould raquira ragulatory ao^alaaiona to aat 
tba MUtimni uwunt of dabt lavaraging that would ba parmlaalbla aa 
part of ooapatltiva aolicltatlona of powar. Iba calling would ba 
diaerationary ~ but would than apply to avaryona allka. Including 
tha purebaalng utility. Altamatlvaly, Congraaa could ebooaa to 
laava tha dagraa of dabt financing unraatrlctad ~ but than 
guarantaa tbat utilltiaa could alao aogaga 1b unraatrlctad dabt 
financing ~ at laaat wtaan a utility haa aat up a aubaidiacy to 
davalop a powar projact on a non-r*eeuraa baaia. 



D,g,;,zeclbyG00glC 



(1) manro DtilltiM Katala T)t« maigi—t Dlaentiva 
tad katborlty «e MtumiM lew *k«T «ill VMt Tb«ir 
L«ml ObllmtioB *» Barra. iBfllnding n« IxtNit *• 
Whlsh nttlltiu Mil K»lT Ob Vea-tttllitT «t9pll«r« 

Advocatas of rafora insist that Tltla XV and tba othar 
propoaala will not forea utllltiaa to purehaa* tvom non-utility 
producara. I Itava no doubt that Sanator Jotmaton and othar 
aopportara of Titla XV ara alncara in tha baliaf that utilltlaa 
will rataln full oentrel ovar tbalr proeuzaaant pregraas daapita 
anaotaant of PUBCK rafora. 

I alao hava no doubt, for tha raaaona outllnad abova, that 
utilitiaa will ba praaaurad into purchaaing froa non-utility 
■iVpltara through tha thraat of prudanea diaallowancaa in wbolaaala 
and ratail rata oaaaa. In thia ragard, it ia notaworthy that a 
previaien originally ineludad In Sanator Johnaten'a proposal to 
rafora POHCk, that would hava paraittad utilitiaa to ^t out of 
pnrchaaing jowar froa pcwaz producara axaapt undar that proposal, 
was BB& inelodad in Titla XV. 

Obviously, thara ia a vary dalieata balfmca that auat ba 
atruok batwaan utilitiaa* naad to ba abla to aanaga thair 
oparatiena and ragnlatora* naad to raaponaibly ragulata. I aa 
eartainly net suggaatlng that ragulatora should not ba abla to 
diaallow r a eo v ary of abvioualy i^trudantly incurrad eeata. On tha 
othar hand, any lagialation to rafera PDRCA auat inoluda aoaa 
pretaetlMM against utilitiaa balng drivan into unduly ralylng on 
noaiitllity powar anppliars, as aany utilitiaa hava baan drivan 



D,g,;,zeclbyG00glC 



- 14 - 

late porchaslnf pe««r froa QP* that <ma •Itbmr net n«ed« d er pdrioed 
far tee high. 

Frutkly, X ■■ not Mire how this talanee ■bould ba etruck ~ 
bot the difficulty ef tba laeee deee net juetlfy Ignerlng this 
prebl«a. we have tlae to worii on thla leave, ttiere le no preeelng 
preblea that eoapela POKA refen iaaedlately. one appreeeh that 
ehould be eiqplered la te require requlat^ry ceaaieeioaa te 
expreealy eeoaUer the bidden coeta aaaoelated with ralylaf upon 
nen^itllity ^eneratere In paaalng upon the prudenoe ef a utllltyia 
proonroaant deolelene. Anetber epfFeaeli weuld be te require 
eeapetitlve eolieltatlMM te ei^veeely weigh the extent of debt 
levereging as part of project aalectiea criteria. 



m ie net cure that POBCA refexa leqlelation Miet addreee the 
provlelen ef traneeiaalen aervicaa. DX Isallavea that it la vitally 
laportant that PIRC abould play an active and forceful rola In 
asaurlng utllltiee and eCber wheleaele power euppllers accaea te 
tranealaalen aervleee on a non-^iaeriHlnatory beala. And, lAlla UI 
agrees with Its utility brethren that voluntary aeceaa has worked 
In tha peat, DI alee believes that In the evolving coivatltlve 
■arket there are banefita to be gained t h roug h a eera epan 
prevlalon of transeisslen services. A voluntary approach dees net 
preclude this fros oeoorrlng, bet It can allow iapedleaata te oecur 



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- IS - 

that ar* difficult and tla* oonsuaing to nrntOy through ragulatory 

proeaadinga. 

It !■ el««x, hcMMV«r, tiMt FVHCA ra£or« witbouc provlaiana 

addrMsiag trmn«iiaai«n ■ccasa and prialng la bacoaing incraaaingly 

unllkaly. 01 IsaliaYaa tha following alx (6) prlnoiplaa ara 

partleularly appropriata for tba currant atata of tha Induatry and 

atuiuld ba raflaetad In any lagialation on tranaaiaaion that ai^t 

ba anaetad. 

a Voluntary aooaaa ahould ba anoouragad wharavar 
peaaibla, providad aueb m ragi»a deaa not 
cenfar an vindua ocapatltivtL advantaga to any 
whelaaala pcNar ai^pliar. 



ghert-tara tranaaiaaion aarvioaa ahould ba 
availabla on a non-^iacriainatory baala and in 
a faahlon that doaa net giva tha tranaaiaaion 
ownar a oo^atitiva advantaga. 



a Mm purchaaar of tranaaiaaion aarvlcaa ahould 
bava an unraatrictad right to raaall or 
raaaaign tba aarvicaa. 

a Sraatar tranaaiaaion accaaa ahould f irat ba 
anoouragad through incantivaa, aapacially 
wbara ragional opan accaaa arrangaaanta can ba 
davalopad. Utbough tha carrot ia tha 
prafarrad approach, tha atiek (through tha 
lapeaition of aanstiona) aay hava to ba 
a^loyad it auch aanctiena do net work. 

In oenbluaien, PDHCk rafera, if properly purauadf could ba of 
graat benefit to tha induatry. However, to auceeed at eraating 
eoapatitien and Inoraeaing the aupply eptiona available ta 



D.,r„.db,G00glC 



- li - 

utilities, Titl* XV utd th* ethsr xmtaem prepOMla vill bav« to b« 
•xpuMtod to mMrmmm a nulMr o£ iaauaa critical to eraating a falz 
and txuly uu^ititiTa lAolooala ganaration Barkat. Kbaant anch 
axpanalon, PtnCA raCora vouU llkoly axaearbata tba problaaa of tba 
Induatxy and could raault In Htllitlaa and thalr cuatoaara baccaing 
bootoga to highly lavaragad pawig prejoeta and tuinaoaaaarily high 
alaetric ratoa. aaaponalbly porauad, DX will aoppert rtMCk cafem. 
M eurraatly draftadf OZ oppoaaa Titla xv. 



49-970 0-92-15 

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SUMMARY OF THE TESTIMONY OF DON D. SYKORA, 

PRESIDENT AND CHIEF OPERATING OFnCER, HOUSTON LIOHnNG * POWER 

BEFORE THE SENATE COMMITTEE ON BANKINO, HOUSING AND URBAN AFFAIRS 

SUBCOMMITTEE ON SECURITIES. SEPTEMBER IT, 1991 

HooMM Uthilai it Power Conpaay oppwci ■■•ndlat ih« Pnblie UtlUtr Hotdiai 
Compid]p Act (PUHCA) becawc It wo«M pMMkMMb* iatertttaof ■aracal*'*' PO<m PiodBoen 
•I the •xpcDK of icrvlcc ralUblllty aid coawawt ntet. HLAP bu tltnif IcMt experieaec with 
■araialaled pow«r prodneMi. Tk«M It «om aoa-Milltr leieration la HLAP^ lervlec area tkaa 
aoy when abe in Ik* covatry — 4,100 au(awaui — tBOBgh capacity to ■Bnerata mora clectriciiy 
than wai wad la iIm aatlra nau of Coanwtk«l la 1919. Anwndlnt PUHCA to liv* 
•oraialaied teaaiaton aeem to the alacttlciiy market woald allow then to ilpboa ca*y proTiit 
fron Iba AiMrican peopla wbik thay nadcrmiiic tha taliability of tba U^ alactricity rapply. 

Farther, the ameadneal will hav* a tiioiTicant impact oa laveMon, who wilt 
nnwittioily aname trtater riik, and on eoniBmen who will pay hiiher prlcei for leu reliable 
ctectrie Mrvice. PUHCA wai enacted to provide rininclil liability to aa iadnilry that li 
enealial to tbe aatioa"! economy. The propoied amendment will chliel out the eoraemone of 
that itability. 

PUHCA proltctt America from exploitation by hifbly leveraied boldlni companlei 
whoM irccd caaied w much dimaie to both coniomen aid Inveiton In the IVSO'i. Title XV 
of S.1I20 cvliccratei PUHCA. If idopled, Ihli amendment would create a clan of uaregDlated 
power produGcri dedicated lolely to eirnini ihoit-term proflti with no italntory obli|alion to 

There li a chomi of oppoiition to tbe propoied amendmeot A itudy pnbliahed in June 
1991 by tbe CoairetilonalReiearch Service ittteE'l/bBtevaralie may be nid about the cnrrenl 
teiolalory tyMem. It hat worked. . . . The aujor reaion why the lyilem hai worked li became 
of the intenioDi icbemct of rcinlalioa dcviicd at the lime of the eaactment of the Federal 
Power Act and the Pobiic Utility Holdini Company Act* 

A recent economic analyiiihai found that The axceiiei of tbe 1910*1 ware BOI tbe renlt 
of debt per le, but rather that in the aotoriont caaei, thoie enjoylnf the beaefili of tbe debt 
were able to ihifl %t\e illenilanl riiljf onlo alherBarliei (empbaiii added).* Similarly, loaeph 
C. Swidler. a foundioi partner of the National Economie Reiearch Auociatioa and pait 
chairnun of both the FPC and the NYPSC, warned that the Impreiiive proTliabllily of 
nnreiulaied power produeenli' a matter of juulini the financiali nod impoiiniiome of Uieii 
cotta oa the alilitiet and the taapayera,* He alio pointed out that became of tbe flaaaelai 
tirnclttre of unreiulated teneraioii, 'the Treiinry lotei lubitintlal tai ravanuca.* Amending 
PUHCA will live unrettttaled power prodncen a free ride on the backi of American 



A public opinion poll conducted by Cambridte Raportt fouad that ihrec-fifiha of all 
Amerleani believe that dereiulailoa in other induitriet bat led to hifhar pilect, lower terviee 
Duality and elimination of lervicci - a tread they feir will be true of electric comptaiei u 

wdk 

* ... a clear plurality lay electric eompaniei area't reiulated enouih. Indeed, half the 
population tbiak electricity prieei would riie if ioduitry re|ulationi ware lifted, and few 
people tea aay rMullint advaaiaie in lervice reliability.' 



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R«U*bi]iiT of KTvloe it ekatly Jeciwnlbcd by lacrcued relianec oa Boa-mtiUtr 
geaeraton who tave >a tnnlory obUfatioa to lerve. Thii coBclniioii it bone ost by rtportt 
ia the tiadt prrti. The C«lf Caul CotceentloB Anoeiitioa Newikitcr reported that 30% of 
MM atUity leacritioa wU elwaie handi ia the aext ten yrart. Aad that** if they're miU la 
bMiaetL Robert SbenNa, the Vice Chait«aa of the NatiowUI>d«peadaaiEaeT|yPraducen 
(NIEP}. admitted reeeaily Oat 'teavcdtloa eaa lo too far,* aad waraed that bob ailllty 
■eseralon any abaadoa projeeli afleT titaiai eoaiiaeti with atilitie* if their eeoaomk 
viability ii threatcaed by *BBroreNca cveal*.* Obc caa only Imigine whit their dcfiaitioa of 
*BarorMeca tttoaT ediht be. 

If PUHCA ii aaMaded et pnipoMd, aarcialited (eaeraion will reap ihort term prof iti 
by maiferriBi the liik of their othcrwiK aabeanble levcnje onto atility cooinmen. TDe 
profiu will roll in to aantalated leaenton becinie of cron mbiidiiatioB. hidden fiaancini 
aad tbk AltOnt. Theee profit* will be Batnified through the avenue of leveraie. Hoody't, 
Standard and Poor'i, and Merrill Lynch have all pnbliihed their coBceru with the ritfc) 
aeMwiaied with reliance on nnreinlated leneraiort. 

The Nttioaal Coafeienee of Stile LciUlaton. compoied of more ihia 7,100 elected 
officiili from all SO nalet. end the National AtHKiitioa of Reinlatory Utility Comminionert, 
with autre than 3S0 mcmben, htve both pasKd reioluiioni oivaiiai rettructnriai (he aatioa*! 
electric utility induitry. On the other tide of the inae, not even the lobbyini arm of the 
satDTil gai ioduetry, the Ameiieao Cai AMociatioa, can agree to rapport PUHCA amendment, 
dcapile the fervid effoia by tegOMat) of (hat ladBUry, which tcent caiy money, to force the 
AGA to rapport it. 

The propoicd PUHCA imeadnieBI doiely roemblei the last big m called improvement 
ia oiility regulation - the Public Utility Regnlalory Policial Act (PURPA). PURPA promoted 
the BoregnUted non-Btillty geaeratlcn of electricity and retiulred uiilitiei to purcbaie 
elcclTlcily from there cogeoeralon- whether they oeeded it or not. PURPA hai NOT worked, 
becauic thii wetl-inteaded fedenl legiiiatioa hai been sunipuialed is luch a way ai to nddle 
electric coBiB men with billion) of dollan in excanlve coiti. How many morc'lmprovenMBU' 
caa the coBBiry'i n tcpiycrt if f ordT Thi) committee hardly need) to be remiaded of the Ictioas 
learsed fron oar molt receoi deregBliiioa eiperimeat • the Mvingi aad loon debacle. 

The proposed PUHCA imeodmcnti will liy bire the lavingi of the American people to 
yet another waveof rapacious firms dedicated to the pursuit of short term profits. It will force 
Btilitiet to Iriosfer the wealth of their cooiumers to BBregulated geaeraton. 

Thii iia'i jD)t ao electric utility inue - it's i conramer itsue. Thii is why it ii critical 
that the Banking Committee not relioquish its juriidictioo on this iuue. This committee must 
protect eoBsumen from the grave riUi associated with aareguliied power producers. The 
Bankiog Committee must conlinBC in its role as the institution which talinces the iaieresti of 
the cooiumer and the investor to keep the Americea ecoaomy oo irack. It most eierciie its 
JBriMticlioa over Title XV of S.I220 and delete the provisioni which woald ameod PUHCA. 



D,g,;,zeclbyG00glC 



tuaaazy Btrt— i>t el John K. Lobbia 

OutltMui, PrasldMit wid Chiaf BiMcutiv* 0£fle«r 

Dstrolt Ediaon Company 

ftorm tha Subconaittaa on Sacurltiaa 

ot tha 

Coaaittaa en Banking, Houain? and Urban Affairs 

unitad Stataa sanata 

Sapta«b«r it, 1991 

Hr. Chair«an and ■aabara of tha SubooBBittaa, thank you for 
tha opportunity t - " 



Datrolt Ediaon ia tha 16th largaat elactric utility in tha 
United Stataa. It la a naabar of tha Elactric Rallabillty 
Coalition — a group of nora than 40 Invaator-ovnad utilitlaa 
aerving about 75 allllon Amaricana that oppoaaa raopaning tha 
Public Utility Holding Company Act — or PUHCA — to create a new 
category of Exempt Hholaaale Genaratora of electricity that would 
be exaapted frea the coneoaez end Investor protection provielone 
of the Act. 

My purpose here today is to regueet that thie SubOMnittee 
reeeaoMnd that the BanXing Comaittae assert jurisdiction over 
Title XV of t. 1220 for the following reeeonst 

Firat, tha Banking ComBlttaa haa alwaya axarclaad 
jurisdiction over thia lagialation. Undar tha watchful aye of 
the Banking Cotmittaa, PUHCA haa worked wail in protecting tha 
public by eliminating abusea that had been coamon in tha industry 
before tha Act waa paaaed in 1935. Some suggest the dramatic 
reduction in auch abuaea ia evidence that the Act ie no longer 
needsd I suggsst to you that. Instead, it la evidence tbet the 
Act is working. ..and Ite protections are needed. 

Seoond, tbs last aigniflcant exemption aade to POHCA was 
Bade in 1978, lAien the Public Utilitiea Regulatory Policiaa Act 
— known as PDRt>A — created a relatively narrow exemption for 
Qualified Facllltiaa In line with an energy policy of encouraging 
eltemative and renewable fuel aourcea. The Bonking Conaittea 
aeeerted very clear jurladlction at that time. The exegq^tlon now 
under consideration la considerably broader — in fact, it is 
wide open. It is difficult to understand the Committee 
ebetaining tnm jurlediotion et this tiae. 



D,g,;,zeclbyG00gIC 



- 2 - 

Third, EHCb, Ilk* Indapvndant Powar Producsra qanarally, usa 
Xavaraga axtanaivaly — typically 80* - «0% of capiCatliatlon, 
V*. about sot tor utllltiaa. Bacauaa th« coat of aqulty la 
hlghar than dabc and dabt racatvaa favorabla tax traataant, EWCa 
«r« glvan a prlca advanta^a not avallabla to utllltiaa 
Horaovar, tha hlqh laval of dabt of an EWG would ba laputad by 
bank*, rating aganclaa and financial aarkata to tha utility tbat 
oontracta with tha EM for pewar, tbaraby waakaning tha utility'a 
tliuaeial atruetiura. 

tlactrlo ntilitlaa ara tha seat capita l-intanaiva of all 
Induatriaa, with $2 invaatad far wary II o£ annual ravanua. By 
ceapariaM), tha natural g«a industry haa 10 canta invaatad par 
dollar af annual ravanua and tha ataal induatry haa 49 canta par 
dollar of anm-* 



I of lavaraga haa an 

ronrtb, alaetrie utilitiaa ara long-tara in fecuo. Tttair 
obligation to aarva, coabinad with thalr capital Intansivanaaa 
and tbair lo-is yaar planning cyclaa. aandataa that thay aaintain 
tba tlnanaial atrangth to waathar aconoaic cyclaa. 

Fifth, plaaaa eonaldar what you want fr«N utilitiaa 10 or IS 
yaars fr«a now. if additional anvlronaantal pEOtactlon and 
' uprovaaant ara part or that aganda, utilitiaa auat ba 
financially atreng to dalivar on It. 

And finally, Tltla 19 purporta to solv* a problan that 
doasn't aziat. Putura ganaratlng capacity can ba adaquataly 
provldad undar currant laws. Studiaa in 19S9 and 1991 by tha 
Otflca of Tachnclogy Aaaaaaaant and Congraaalooal Kaaaarch 
Sarvlca, raapaccivaly, conflra thia vi«w, 

tltla 15 aolvaa nothing and yat will craata a altuatien of 
-lalva dabt in ana of tha faw raaalnlng woll-eapltallsad 
^-•--t In thia country — a problaa eartalnly within tha 



I urys yon to aaaart jurladlction ao wa can hava a cd^lata 
dlaeoaalen oa thia topic and ao that, onca again, thia Coanittaa 
will guide c^angaa to noCA undar Ita watACul aya. 



D,g,;,zeclbyG00glC 



STATBKSKT OP JOHN B. LOBBIA 

CHunnM, PBBSiisin and chibp kucdtxvx offzcbr 



scBcanuTTxa on secojutibs 



cciD a M B B em BkHxzins, hcobxkg un> dkbam apfaxbs 



Hr. Chairaan and Baabara of tha Subctsalttaa. Z am Jobn B. 
Lobbla, QwlEaan, Praaidant and Chlaf Exacutlva Of£icar o£ nia 
Datrait Bdiaon Cootpany. Mtrait Bdisui provldaa alaotriolty to 
itaarly 2 million raaldantlal and bualnaaa cuatoaara. Including 
■any of oox natlon'a aoat vital Indnatriaa, In a 7 , 600-aquara- 
■ila a«rvlca araa in aoutbaaatam Kicbl^an. Na aca tha laegaat 
alactrie utility In tha Stata of Hlchlgan and tha leth largaat In 
tha Unitad Stataa. tfa bav* baan aotlvaly aagagad In tha alaotrlo 
bualnaaa In thla araa ainca 1903. 



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X n^K»tji«t> tft« larltaUoB of tta« Hahor—ltt— to d w-w— uL 
i*r< In tiM pAlic iBteTMt, till* sotoog^ttM ■boold rtcu^wiJ 
that tba — nklnj Cuialtt— fosaftlly aaaart its jurisdiction with 
nqtMt to Titl« XT of f . 1230. Aa npertcd by tba swMta'a 
n^nm OB BMTgr and VKtHral Rmovtom, Tttl* XV Hoold BBand 
ttaa Poblle Otllltr Bpldtin Oe^any Act of 1»]5, whlcb ia ■ m iil^ 
. rolorrod to •• "KBCA" aad !■ i^lnlfrad, ■ atojoct to yoor 
mpOTvlsian, by tbo Socvrltias utd tOTtango rr—lwlwi. 
Spwitlcally, Tltlo XV woold provido ■ bludnt wHiiptlMi froa tho 
Invocter «ad on— iMir protoeti«i provialcao of naCA tor holding 
eoaponioa that own iibolaaalo oloetrle pewor gonoroting facllitias 
In worm than mm atata. 

Datxoit Idioaa ia an activo waabor of tba Elaotric 
Baliabillty Coalition, a group of aora than 40 invoator-oonad, 
stata ragnlatad pnblio ntllitlaa, aacb of which ia lagally 
obllgatad to — and doaa In fact ~ provide all cooauaara in its 
sarvlca araa with alactricity in tha seat rallabla aannar 
poaalbla and at rataa ra9alat«d by atata authorltias in tha 
poblio intaraat. Datxoit Bdiaon aopporta tha tlactrie 
Rallablllty coalition in ita oppoaltiMi to raopaning FOHCk for 
tha banaflt of ao-c«ll«d axa^t wholaaala ganaraCors ("BWCa") and 
aaaoclataa Itaalt with tlta atataaant praaantad to thia 
Subccaalttaa by Sharwood R. Salth, Jr., tha CoalitlMi'a cSiairaan 
and tha Chairman and Praaidant of Carolina Powar k Light Oo^iany. 



D,g,;,zeclbyG00glC 



In ay tastlBony, Kr. CUalEMUi, I want to focus spacitically 
on on* lam*i navaly, why ttaa 8«n«t« Bonking CoMBlttaa Bhould — 
in t*Eaa of botb Coavltto* prooodant and national aconoaic policy 
— focaally aaaart Juriadlotlen ovar tba prtqmsad aaandaanta to 
POHCk. 

FUHCA provldas a rogulatory traBawork wbiob baa workad wall 
to aarva tha public Intaraat. Mithln tba laat aavaral dacadaa wa 
bava i^aovad tha ragulatory fraBaworic In otbar Induatrlaa with 
Bixsd r*aalts and in aeaa caaaa at aubatantial coat to taxpayara 
and conaimara. niia aituation ia potantially no diffarant for 
tba alaetrio induatry. You'va haard tha axguaanta proBlsing aura 
flicaa. All too oftan, tha aura fix** cauaad aora problaaa than 
tbay vara purportad to aolva. 

I baliava tbat: 

* Tltla XV of 8.1330 ia apaclal Intaraat lagislation. It 
will parait tba craatlon of aooraa of wiltiatata, 
unragulatad ganaratlng codpanlaa. 

Stata utility caBaiaaiona, undar laaat-coat praaauraa, 
will raquir* ragulatad utilitiaa to aatabliah taka-or- 
pay arrangaBanta with tbaaa onravulatad coapaniaa. 



D,g,;,zeclbyG00glC 



IbM* long-tAxa eontracts will tban bm us«d to Mour* 
tb* highly ImvrtqmA, »on-T«caur«« Clnuielng iw*dad to 
coiwtruot tbM plants. 



rimaeial inMitntloM vill trMt auch n 
obllgatloM u ntillty dtftt, whitdi will Mgatlv«ly 
iapaet tb* utility's stooka, booda mni capital liatlon. 

Thla will foroa utllltlaa and tbalr cuatn— ra to raly 
Cor futnra alactrlc aupply raaonrcaa upon tha 
construction of powar plant* by alngla-purpoaa , thinly- 
capital iiad unragulatad anlti-atata INes that bava no 
lagal obllfation to aarva tha public Intaraat. 

Thla, I autaalt, is laglalation that la foousad on tha 
abort tara, wblla tha aconoalc and aooial pregraaa of 
our nation rtaainrta utllitlaa that will hav* financial 
•trangtta to aarva for tha long tan. 

FOHCA waa anaetad by Congraaa Cor tha apaciflc purpoaa ol 
pravantlng praoiaaly what Tltla XV will parait. 

fta I Indicated, and aball axplain In graatar datail in a 
■oaant, tha banaflciariaa of thla lagialatlon will aaak to uaa 
highly lavaragad capital atructuraa to aitploit our Cadaral tax 
lawa and tap into tha aqalty baa* of utllitiaa, ona of tha faw 
•guity basaa that aurvivad tb* l9B0a. undar this schaaa, tha 



D,g,;,zeclbyG00glC 



ntllltlca would oontlmw to iMac tha priaoip*! rlvks of owning 
and opwratlng •loetric powor production and distribution 
tscilitioo, inoluding theoo CaoilltlM ownod by Indapanduit nan- 
ntllity eporatora. Tbia is a £en ot tbo ■no risk capitalin- 
that charactarizad tba 19«0a. Indoad, wltb ita diaeonnactlon of 
riak and raward, tba pn^oaad PDBCA ebangaa baar an alwwt 
dlaqulating parallal to tba atta^^ta to darogulata financial 
inatitutiona. 

m* ara atarting down this vary saaa road bars and our 
rs^octlva cwnatltuanoiaa. ba tbay ratapayara or votars or 
taxpayara, will sii^ly net nndaratand wby wa ~ tba nation 'a 
utllltlas and tba Sanats Coaaittaa wltb tba graataat financial 
aiq^artlsa and tba claaroat jurisdiction — fallsd to taka a bard 
look and aak tba difficult quastiens bafora tba fact. Our 
variouf const Itoanoias ~ yours and oura — axpaot ua to laam 
froa tba paat. Tbay will proparly hold ua acoountabla if, 
witbeut consldsrlng tba consaquancaa, wa ala^y rapaat tba nantra 
of "daragulation" ovar and ovar and ovar again. I raspactfully 
rsquast that, on tba baals of tba avidanoa I now want to praaant 
to you, tbis co^ttaa aaaart ita jurisdiction and taka that hard 
look and ask thoaa difficult guaations bafora tba Congrass acts. 

Our analysis nust bagin with KPHCA itaalt. As this 
SubooHilttaa ia wall awara. FOHCA waa anactad in 1935 in rasponaa 
to tba financial abusas of aultistats alaetrio utility balding 
oospanias, Tbasa uaragulatad aatltiaa vara ao baavlly lavaragad 



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that iA«n tlM •conoay wor««nad tb*y iMr« imabl* to ■••t thair 
obllqatloiu, to tb* datrlaant not only of thcBMlvaa taut sIm of 
tlMlr ciwtoaan and invaaton. Urn a raault, whan Congraas 
anactad PDHCA It probibitad aemm of tlia kinda at racklaaa 
financial bahavlor that gava rlaa to thla situation. 

Undar PCHCA, any co^iany that ovna Bora than a 10 paroant 
intaraat in a coi^any that ganarataa, transaita or diatritautaa 
alaotrlc anazyy for aala aust ragiatar vith, and ba aubjact to 
cagulation by, ttaa SBC nnlaaa tha holding coapany ayataa 
quallflaa for at laaat ona of flva availabla axa^tlona. Tha 
■oat l^^rtant of thaaa la tha axai^lon for co^Mnlaa with 
oparations exclualvaly within a alngla fitata. Aa Indlcatad 
aarliar, ona of tha d^dnant pra-EVHCA character la t lea of auch 
Bultlatata holding ooapanlaa waa tba uaa of Inordlnata aaonnta of 
dabt. Conaaquantly, aultiatate utility holding O^QMniaa that 
•r* ragulatad nndar maCA ara aubjact to llnltatlona on tha 
anount of lavaraga tbay can saploy. Thua, tha kay points for our 
purpoaaa bara, Hr. Chalnan, ara that tOBCk wma anactad 
conacloualy to protact oonauaars, aa wall aa Invastora In' 
••curltlea, and that Congraaa focuaad apaolfioally on tba rialM 
that axoaaaiva lavarafa pxaaantad to both groupa. Accordingly, 
aa I will axplaln In this tastlamiy, protsctlng conausara and 
Invasters fnm tha rlaka of axoaasiva lavaraga auat ba tha 
comarattHw of any aarious dabata ovar tba narita of tba propbaad 



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PrepoiMnt* of mmmdlng nmck ••• It otlwwlM. Thay elaia 
that tlaaa luiv« ohutgcd. Th*y *rgxM that FOHCk now ataiida mm 
littla Bora tttan an aiwchranistlo barriar to tha davalopaant oC 
antarprlsaa tbat, oparating on an unraatxictad anltlatata baala, 
would aijvly provida an altamativa to otllltlaa that wiabad to 
purtfUMa alactriclty for raaala rathar than oonatruct thalr owi 
'ganarating planta. Bavlng convlncad a BBJorlty of tha Sanata 
Bnargy Cmodttaa that niHCA ia alaply an nnnaoaBaaTy ragulatory 
barriar to IHOa, proponanta ot aaanding FORCA would prafar that 
you not aaaart jurladictlon ovar thia lagialatlon. In tact, 
howavar, auA a "handa-off policy by tha Banking n^li I la la 
virtually unpracadantad. Daapita tha atjwat aaductlva a^^aal of 
laglalation that ia charactarlsad by Ita aupportara «S »araly 
raaovlng an outdatad ragulatory lapadinant to conpatitlon in tha 
ganaratlon of alactric powar, tha invalva«ant ot tha Banking 
C o^ l ttaa on a Coraal baala ia naoaaaary to aanira a propar 
axamlnation eC tha coaplax financial laauas tbat ara at tha vary 
haart of tha dabata ovar FORCA rafora. 

railura of tha Banking coaalttaa to aaaart jurladlotien ovar 
litla XV of g. 1330 would ba contrary to tha Ca^U.tt«a'a own wall 
aattlad praotloaa. Uadar sanata itula XXV.l(d)(l), tha Banking 
Cc^ittaa has biatorioally axarolaad, without ohallonga, 
juriadiction ovar tba aiC and tha atatutaa tbat cellaetivaly 
ooMprlsa tba fadaral a a ow rltiaa laws. Xtaa Subconittaa aboold 
laiiiMinil that tha Banking Coanittas aaaart juriadiction bara 
bacavaa tba propoaad rVBCk aaandaanta would ■ubatantlally ourtait 



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tlM BEC'm regulatory antborlty. Tb« Crailtt— partlcip«t«d in 
tiM initial wiactamt at nHCk In 193S and an?*«rs to bav« playad 
m diract rol« In virtually avary othar subatantiv* aaandaaat to 
PORCA alnca than. As racantly aa laat yaar, for axaqrla, tha 
Banking C o Ml ttaa axarclaad jurladietlon ovar tba Caa Ralatad 
Aetivitlaa Act of 1990 (P.L. 101-572}, whidi clarlCiad tha 
application Of nHCA'a "functional ralatlonahlp" taat to natural 
gaa utility coapanlaa. Siallarly, tha Banking Coaaittaa 
axarciaad jurladietlon with raapact to • 1985 niHCk aaandaant 
ralating to tha traataant of cogena ration by gaa utility 
coapanlaa (P.L. 99-U6) i tha Saouritlaa and Bxetianga Co^laalon 
Aot of 19a7 (P.L. 100-1«1>, ralating to cartain tachnlcal 
aaandBantat and tha Sacurltlaa Jkcta AiMndaanta of 1975 
(P.L. 94-39), ralating to panaltiaa for violatlona of FOHCA. 

Moat aignlfieantly, howavar, tha BanUng Coaaittaa axarciaad 
jurladietlon In eonnootien with tha Public Otilitlaa Ragulatory 
Pollciaa Jkct of 197B (P.L. 95-617). Thia laglalatlon — conKmly 
rafarrad to aa mtPft — axa^ttad froa POHCA a naw claaa of anargy 
produoara {-Qoaliflad Paollltiaa") and raqnlrad that thalr output 
ba purcbaaad by public utilltiaa. Tha currant propoaad 
anandnanta to FVHCA ara aqnlvalant In princlpla to thoaa 
containad in tVKPk In that thay would eraata a naw class of 
alactriclty ganaratora and axa^tt that class froa FORCA. Indaad, 
tha currant proposad aaandaants will hava an avan graatar inpact 
than PDSPA. Ona of tha nain puzpoass of tha pre p e s ad anandnanta 
la to featar a graatar nunbar of indapandant powsr facilltlaa 



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tbMi asawrtadly would b« boilt und*r tlw roitPA «xav>tloii, whlob 
ia llmltad to ■■■11 powar producars and cogwtarator^. Ilia 
oiurrant FfncA propoaala would thus litoraaa* substantially tha 
awNint of tha nation's alaotrio ganarating edacity that would ba 
ownad by unragulatad aultlatata holding ooapaniaa. Koraovar, 
nndar tVRPA, no alaetrlc utility la parmlttad to own aora than SO 
parcant of a "Qualiflad Facility". Thara would ba no audi 
ewnarablp llaltatlon with ra^pact to BUG*. Thua, tha Banking 
Coaalttaa, on tha pracadant of FDRPA alona, ahould aaaort 
Jurladictlen with raapaot to Tltla xv oC S. 1330. Indaad, glvaa 
tha financial rlaka to rrwnainwra, taxpayara and aaall Invaatera 
that thia propoaad axpariaant In ao-callad daragulatlen praaanta, 
It ia difficult to fathoa how thaaa pracadanta could ba ao 
lightly caat aalda. 

As I hava atatad aarllar, Mr. Ctaalraan, tonal rafarral of 
tha pre p e a ad nnCA aBandaaata to tha Banking Coautttaa ia 
laportant not aiaply aa a mattar oC praoadant. Quit* proparly, 
tha aclmowladgad axpartlaa of tha Banking Coamlttaa with raapact 
to ooqtlax financial Battara ia not duplicatad within tha Knargy 
OoBBlttaa, which baa a dlffarant prograaaatic looua. Tha Banking 
Coaaittaa'a finanoial aiqwrtlaa ahould ba brought to baar hara 
baeauaa T^" "fl i— uaa undar Titla XV of s. laao ■« flnaneial 
laauaa and not anarov poliev concama. Lat na aieplaln why. 

At tha outsat, tbla cowilttaa abeuld raoogniia that tha 
driving foroa bahind tha puab to axaapt KiiSa fna RIBCA la tha 



,db,Googlc 



10 
daaira of projact d«v«lop«ra to build highly l*v«r«9«d facilities 
using ssparats corporations for sscb project. This rssults in 
individual prejacts baelwd with Blnlmal capital Invamtaant, with 
noiM a£ tlM parant co^wny's assats axposad in tha avant o£ 
projact Cailura. Tha usa of such ■non-raooursa" financing raisas 
tha quaatlon of why tbess who ara proaotlng tWE* ara unwilling to 
baoK tbaaa projacts with tha full faith and oradit of ttaair 
corporations . 

Of panwonnt iaportanca la ths fact that MGs will net 
cospata with ragulatad utllitlaa on tha ImsIs of Inharantly 
suparlor tachnology, managaavnt or operating skills that will 
incraasa aconoalc ef f Iclanclea. Rathar, as tha satsrlal 
subaittsd in connection with this tastisony damonstrataa, tMCa 
will "cospata" by using axtraordlnary lavals of non-racourss 
dabt that approach 90 psrcsnt or kora of total projact cost. In 
contrast, as a rssult of regulatory rsqulrsnanta and tbs 
constraints iapossd by tba capital Bsrlcats, tbs capital stmctura 
of a ragulatad utility or a rsgistsrsd holding cMvany typically 
consists of ai^xoxijutsly SO parc«>t squl^y ond 90 parosnt dsbt. 

As a rssult of ths fsdaral tax bias in favor of debt 
financing — i.e., Intarsst on dsbt Is tax dsductibls whils 
dividends on squlty are not deductible — tbe eora highly 
leveraged BMGs will have a substantial cost-ot-capital advantags. 
If this artificially Induced cost-of-capltal advantage can be 
■aintainsd, it will enable (Ms consistently to underbid 



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11 
ntllltlca for tb» cenatruotiMi of new qMwratlng plants wkils at 
tlM ■•■• tiB* paying tlialr aqulty heldara a hlghar rata of catum 
than tbot patmittod for ragulatod otllltlaa. In tbla caaa, what 
purport* to ba "daragulatlon" , upon cloaar aorutlny, aaounta, 
ratbar, to raragulatlen for ttaa banalit of a aaloot fw. 

Ordinarily tba taat-lnduoad ooat-of-caplt#l advantaga 
raaultlng froa airaaaalva lavaraga could not ba aaintalnad. For 
■oat bualn— aaa, provldora of aqnity and landara weald dTMnd 
qraatar financial ratuma to ceaponsata than for tha addad rlaks 
of hl^fiMK lavaraga. In turn, this additional 'oaaiianaatlea" to 
tbo provldora of capital would offaat. In Boat oaaaa, ttaa tax 
advantagaa that would otharwlaa roault froa avoasaiva lavaraga. 

In tlw caaa of BWSa, howorar, th* factors that oould 
noraally ba a x p actad to qiply to bualnaaaao weald not vply. 
Paralt ■■ to a]9laln why. 

■oxaally, alsetrle powar ganaratlng plant* or* subjoet to 
tba flnanelal Mumt'a rola against piling dollar of dabt npeo 
dollar of dabt. It haa baan r^^aatsdly polntsd eat, without 
Aallanga, that ttaars la a substantial anount of risk ssseclatod 
with utility plant Invsstasat. Sndi plsnts rogulra a larga 
capital Invastnant, bava a alngla put p ess, and eamwt bo aovad. 
Morsovar, past history indleatas that fual costs srs 
my rsdlotabla. Finally) thsra osn bs no oartalnty as to wbotbsr 
tba projsetad ocswuasr dawaitd, nsesssary to mi pgort tba plant. 



D,g,;,zeclbyG00glC 



13 

will IM •ttstMlnad ov*r tlw UMful lifa of tbm plut. Given ttau* 
risk f«eton, pro^*otiv* iwndars to highly 1«v«t«9m) ZNGb woold 
ordinarily i1— nJ bi^ lnt«r««t r«t«a -'■ pcrtiapa approaching 
"Junk bend" larala — in ordar to co^Mnoato thaa not only tor 
tba tlaa vain* of tbo ■onay thay provida, but also for ttaa 
graatar risk that aqeh a high dagraa of lavaraga antaila. In 
ahort, a highly lavantgad KK ahould not ba abla, abaant aoaa 
apaoial factor, to aaintain aiv coat-of-oapital adrantaga ovar a 
ragulatad utility. 

But ~ and bar* Is tha kay, Mr. OtairMUi — DPSs do 
aapact to hava juat such a ■spaoial factor" that will anabla thaa 
to avoid tb« high intaraat rataa thalr high dagraa of lavaraga 
noraally wmld raqnira. By ai^laiting this spacial factor, KWSs 
will prasarva tha tax-inducad coat-of -capital advantagas of high 
lavaraga. That is b*causa tha utilitlaa that purchasa powar froa 
EMSa will ba affaetivaly ragulrad to asauka, throng long-tars 
contracts, Many of tha risks assooiatad with (q>aration of tha 
IHC'a powar plant. Dndar thasa contracts, capacity tftargaa, 
■andatory powar purotaaaaa, fual adjustMant clausas and aimllar 
provlaiona will assura that tha mc i> guarantaad a straaa of 
IncOMS froa tha utility aufficlant to aasura landara that tha BHG 
will ba abla to r^ay Its dabts. Moraovar, tha risk of raduoad 
consuaar daaond would raaaln with tha utility as wall. Tha 
utility would net likaly ba co^ansatad by tha BHG for aaauMing 



D,g,;,zeclbyG00glC 



13 

■uoh risks iMcaua* any aucb coMpansation would In aftact aHift 
tha risk back to tha EWC and subject It to Intaraat ratas that 
would jaopardica Ita viability. 

In ahort, tha CM^atltiva viability that an EWC say hava 
will in all likalihood ba attrlbutabla si>ply to ita uaa of a 
highly lavaragad capital atructura and the ability to ahift — 
without conpenaation ~ tha rlaka and costs of auch a akawad 
capital structure to tha regulated utility and ita custoBera. 
niis is not coapatition or capitalism, Hr. Chaizsan. niare is no 
discipline of tha narketplace in auch a case that will aubstituta 
for tha restrainta of EVHCA that are to ba washed away in the 
name of daragulation. Without either ragulatory raatraints or 
marketplaca discipline, EWa will profit and leave conawMra and 
taxpayers with the bills to pay, just as did the 8tL owners, tha 
LBO aponsers and tha other high-leverage no-risk artists of tha 
1910b. 



Per the reasons X have suasaricad, if svaex 
tha aannar contasplatad by Title xv of s. i»o, EWGs operating on 
a BUltistate basis could well lead to the creation of the very 
saaa risks to consuMars that contributed so significantly to the 
decision of Congress to enact FORCA in the first Instance. The 
fact that wa hava not recently seen the kinds of widespread 
sb u s es thet were raapant before FOHCk was enacted is not svldenca 



D,g,;,zeclbyG00glC 



that tlM niacft protection* ar* not iwwtad. Hathar, it is 
«vidMKM tl»t FDBCk protactiOM ar* atill working and ahouid b« 



For tlMM roaaoM, Mr. Cbainuui, X baliava that it la 
livaratlva, in ttw pnblio intarast, for tbia fHiliiii— Ulaa to urga 
tha Banking Ccaalttaa to aaaart forKl juriadiction 0v«r any 
anandaanta to FQBCh. ma iaauaa tba Banking Ooaalttaa ahoald 
addraaa ara aalthar ^aoulativ* nor tangantial to tha poacft 
dabata. Tbay are fondanaatal attd go to th* vary haart of tba 
wiadOH oC ananding nHCk. 

If thia prepoaad lagiaUtion foaa forward, tba aobatantial 
lavala of a^iitir now inraatad by utllitiaa in alaetrle ganarating 
plants to provida aaaantial alaetrio aarvlca to oonauaara, 
bnalnaaa and induatry will naoaaaarlly ba radnead to tha axtant 
Inenawntal or r^laoaMnt capacity la buUt by highly lavaragad 
BWGa. Is tbia a oonoam to tha Banking Cewdttaa? It soat b*. 
Our ntllltlaa ara on* of tha vary faw induatrlaa that aorvlvad 
tha iMOa vitb an aqoity baaa nora or laaa atill in pUca and 
ttaara la no eorvalling raaaon now to pamlt othan to dlvart 
utility • 



rurthar, ragnlatad utllitiaa will have thair ooat of capital 
for tbalr own pcojacta Inoraaaad If tbay raly to any subatantlal 
axtant ea powar parc b aa aa froa KWGa. privats aactor rating 
•gaaclaa aoch aa Moody's hava already nada it plain that 



D,g,;,zeclbyG00glC 



15 
utilltl** wltb •ubatantlal BHC contraets say havs Um project 
lndabt«dn«B» of th« SWC attributad to tbaa. In such ■ casa, tba 
laputad dabt would raduca tha aquity-to-dabt ratio tha utility 
would ba da aaa d to hava whan it saaka to financa ita own naw 
projaeta. racad with auch a situation, tha utility would ba 
rsquirad aitbar to raiaa naw aquity at a hi^har coat than dabt 
ondar currant tax lava or pay an Intarast rata basad on a highar 
risk praalua for naw dabt, or both. Thus, to tha axtant tha 
utility la raqulrad to Incur coata to offaat tha affact at BUG 
projaet Indabtadnaaa, thoaa coata ara paaaad through to consusars 
and rsduoa tha 'aavlngs' proaiaad in tha first inatanea by UK 
aponaora. Tbara ia no fraa lunch for consumara. itathar, thay 
and up paying tha bill Cor tha ENGa. Thla financial >light-of- 
hand ahould also ba of concam to tha Banking CMnittaa. 

k third laaua that auat ba conaldarad Involvaa EWS 
contraets which shift tba dawuid and oparational rlaks of tha BUG 
facility to a utility without any coapenaation to tha utility. 
Additionally, tha EWG'a plant will not ba includad in tba 
utility's rata baaa and tha utility thus will not ba antitlad to 
aam a rata of ratum on tha plant that would coa^ansata It for 
theaa riaka. In abort, tha riak tha BHG can avoid through its 
utility contract in ordar to praaarva Ita financial Intagrity at 
90 paroant dabt lavala will ba boma by a utility that ia baing 
"decapitallEed" through rata baaa raductlona raaulting froa tha 
growth of axoasaivsly lavaragad BHGa. This too should ba of 
vital oonearn to tha Banking Cosaittaa. 



D,g,;,zeclbyG00glC 



1« 

■r. Oamirmm, tbas* «r* only illnatxattona of thft co^plax 
einuwial I B WIBB that ara at tha baart of tba dtfwta ovar FOBCk 
aaandaant. Ttaara ara maiqr oUwr laanaa that raqulr* tba 
oonaidaratioa of thla Snboa^ilttaa. Aaong tb*aa arai 

tba radnoaa ability ot utllitlaa to Mat tba InocMalng 
anyitw ntml and otbar axtanal oblifatlena that our 
aoolal ocMioarBa and aanaltivltlaa ara lapoaing en ttaaa 
if tbalr capital baa* la daplatad by tba ^reiftb of 
highly lavaragad BiKia. ma aaat caeant round ot Cloan 
Air Jknandnanta alona ara satMUtinv axpandlturas in 
oxoaoa ot a billion dollar* tor individual utllitlaa. 
Aa tbaaa Individual utllitlaa' finaneial atrongtb la 
iapalrod, ao too la thair ability to naat tbaaa 
obllgatienat 

tba aAroraa ottoot on utUity tiaaaeial atrongtb 
raaultiag tnm a loaa ot aeeoaa to tba raaldual valua 
ot SMS taeilitlaBF 

tba odvorao ottoot on raaidaatial and aaall bnainasa 
oo w Bimara whicb would raault if tVBCK aaandnant wora to 
bo eooplad with tranaoiaaion bypaaa lagialaticn wbich 
would, in taxB, foatar tba loaa of largo Induatrlal 
baaa loada to BHCa. 



D,g,;,zeclbyG00glC 



17 

For tbmmm r«««an», Nr. OuirBui, this Suboo^ltt— aust, in 
th« public int«r««t, axqa tha Banking CMBitts* to a»*art formal 
juriadiction over tha aubJKt uttar of Tltls XV of S. 1330. 
POHCA ia not an anaehroniaa tbat twa outllvad ita uaafulnaaa. It 
aarvaa tha vary i^>ortant purpoaa of continuing to protact 
eonauaara and invaatora. Anandaants to POHCA ahould raoalva, aa 
thay hava racalvad in tha past, atrict acrutiny tram tha Banking 
COMaittMS. niia, in By vlav, ia tha only way tfa can ba aura that ' 
wa do not auddanly raalita ona day in tha futura that, to our 
grwat dlamay, va hava inadvartantly racxaatad tha worat parta of 
tha paat. 

At tb« vary laaat, Kr. ChairBan, wa owa it to our raqpactiva 
conatituanciaa to taka a aarioua look at thaaa isauaa bafora wa 
anact lagialation. Ha ahould not act in tha blind hopa that thia 
axpariaant in daragulatlon will work. Hr. ChalzBan, what wa ara 
baing aakad to do ia not to aolva a protalaa, but to aorap a 
ayataa that werka, and worka wall. Aa tha Congraaaional Raaaarch 
Sarvioa racantly concludad: 

NbatavoT alaa aay ba aaid about tha currant ragulatory 
ayataa, it haa vorkad. Tha Nation haa anjoyad aany 
dacadaa of available electricity at pricea wall within 
tha non Cor [aic) IndustrialiEed world. And, thara ia 
avary indication that the syst«o will continua to 
respond to changaa in technology, utility structure and 
conauner nasds. The malor reaaon why the syatnn has 
tfgrfd la because of tha Inqenioua achema of regulation 
devised a^ t^^a time of enactment of the Federal Pgwyr 

Act and the Public DtUltv Holding Coapanv Act. That 

achaaa was forged a half-century ago in an effort to 
provide a flexible balance batvaan Federal and State 
regulation for tha purpose of assuring coopatent 
regulation and reliability of service. 



D,g,;,zeclbyG00glC 



"ll«otrlcitrt A WtM lt«aiaatory Ord*rT", Vrnprnet «C tb* 
CMi9r«s«l«Ml W»Trti 8wvic« for tlM Sous* coaoiitt** 
on liwrgy and Co—irc» at pag* 3« <19»). (^vhaals 

«dd*d.) 

SlMra la no gz«at urgwiey tbat I oui ■•• that auvgaata tha 
tadaral gawaziMant ahould diaaantla this syataa tliat baa vorkad 
— and centlnuaa to work aa wall. 



D,g,;,zeclbyG00glC 



Septeifaer 17, 1991 



The ElecCiic Reliability Coalition's 40* neobers are a diverse 
group of requlaCed, investor-ouned electric utilities. ERC nembers 
are committed to preserving (1) the systen of vertically Integrated 
electric utilltleB, subject to state regulation of rates and services 
for the protection of electricity consuaers, and (Z) the coaple* 
system of voluntary and mutually beneficial transmission services. 
The*« two factors have enabled regulated utilities to maintain highly 
reliable service at lowest possible cost. 

Title XV of S. 1220 would be by far the most significant 
alteration of the Public Utility Holding Company Act In 55 years. Th« 
Banking Committee must assert jurisdiction over this legislation to 
consider its impact on conaum«TS and investors and on th* financial 
stability of the electric utility Industry. Title XV would encourage 
pyramidal holding coaipany ownership of massive investments In the next 
generation of power plants, operating without Sec oversight and beyond 
state regulatory jurisdiction. PUCHA "reform" is a strategy for 
earning returns on new InvastBents greater than would bs permitted by 
state regulators, which can only come out of ratepayers' pockets. 

Hew holding coapanies will present several serious public 
interest problems that led to PUHCA's enactment. First, EHGs will be 
highly leveraged, utilising Cat higher levels of debt (80-90%) than 
utilities are allowed to use. Second, EHGs will not have to disclose 
intet-afflliata and other transactions, setting the stage lor 
unnecessary aark-ups In coats. Third, EHGs' profits will be 
untsgulated. 

In contrast to the approxiaately SO-SO debt-equity ratio typical 
of regulated utilities, EHGa and their holding companies will be dabt- 
rlddsn and financially unstable. Highly leveraged EHGS will have a 
significant, tax-induced artificial advantage over traditional 
utilities and will use their cost -of -capital advantage to shift the 



D,g,;,zeclbyG00glC 



aoat algniticMNt b«*lnasa risk* of el»ctcic povar production to 
otLlltlM ud tlwlc consiaacm. Daing blqh-dabt EluDclng, BMGa will 
Bitbar otCei azcaaaiva aqnlty rates of tatoto ot b* htghl; 
InefficienC, oc botk, yot atill WMI to b* pIiC«-*ca^«titiTe* with 
Dtilitles. 

Stat* lagnlatora Bay fail to conaidai all lodlract coata to a 
utility of c«lriD9 on EHC poitai. Otilitlaa aay, a a pracEical 
■attar, be luAble to opt tor utility-provided cate-baae altcrnativea 
that would be leaa coatly over the lonq tein. Uectrlc utilitiea mIU 
likely end up paying aore to buy power than It they had produced It 
tbaaaelveB. n>a consequence would be higher rataa to coaauaera. 

littee should closely exaaioe the loog-tera effects oC 
lerahip, firunced almost solely with debt and subject 
to DO dgty ot poblic earvtce. In other indnattiea. generally, the 
•Hcessiee use of debt has caused aajoi probleaa. the failure of 
electric generation ooapantes could have even aore aerioua public 
e0n*ei]iience9. 

Title IV also woDld resurrect the potential for Inflation of 
electric ratea tbroogb affiliate transactioas within unregulated 
holding coapany structures. Bven with BOdern regulatory tools. State 
coiviiBsions have not found it easy to effectively regulate 
transactioDS between jnrladictional utilitiea and unregulated 
affiliates. According to Coaalsaloner Ronald Kuasell of the Nichigan 
PDCi 

With the [EOBCA] exeaptloa, corporate 
atrnctnie ^rtd transactions between 
corporate afCiliatea, can be Banipulated to 
eflbrace the concept of competitive 
generation while ensuring that all 
coopetitivc advantages teaide with holding 
- r affilUte*. 



Title XV would pToEtMuidly change one of the cornerstonea of the 
federal ayatea of conauaer and inveator protection, altering a legal 
ftaMwotk within which the electric utility induatry has peifotaed 
well. Two of the cardinal principles of POBCA — Cull disclosure of 
electric utility costs aad profits and protection of the < 



D,g,;,zeclbyG00glC 



financial abuaes under covac ol 
ba largely lose under Titla XV. 

Ttia SubcoisBi 
consider cacefull; 
Secvica. Accocdii 



t holding conpany atructuct 



tea — and ultinately the full Coaalttaa — ahould 
the concluaionB of the Congreasional Raaeacch 
to CR81 



; else may be 

>ry system, It haa worked 

) has enjoyed many dacadaa c 

ricity at prices wall wlthii 

tdustcialiied norld. And, t 

ation that tha ayatem 

reapond to changes ii 

utility 



the currant 



CRSr echoing earl: 
racoananded that 
changes to induati 
proof" that 
parforBMnce by thi 
uncertainties, am 
daragulatory expei 
not abdicate Its 
of S. 1120 and 01 
loophoiaa In tha 



findings by tha Office of Technology Assaa 
proponenta of FUHCA exemptions and other 
' structure be required to 'bear tha burden c 
istructuring scaiehow vill result In even batt 
electric power Industry. In light of thsae 
the potential for yet another diaastrous 
Iment, ne believe that the Banking Coanitta 
.storic responsibilities to fully consider 
see this and any similar proposal to crsat 
ha Holding Coavany Act. 



D,g,;,zeclbyG00glC 



ir 17, If 91 




Ouinu, Ucetrtc teliabtlltr Coalition 



Tfala taatlaony Is aub«ltt«d on bahalf of Catolin* Pomi t 
Light Co^any and tha Electric Rallabllity Coalltlcm (BRC) . ol 
whlcb t aeive aa ciiaicBan. Carolina Power k Light Coa^any la an 
InvaatOE-ovnad electric utility aarvlng about 960r000 cuatoaars 
in a SOrOOO aquace-aile aervice teEEltory in Nocth and South 
Carolina. Our ayataa has a generating capacity of about 9(700 
■agawatta. n» use coal and nuclaac energy as ouc principal 
sources of lueli aerating 19 coal-tired generating units and 
four nuclear units, aa well as about 40 aaallar hydroelectric> 
cOMbustion turbine, and waste heat units. Our coa^any was a 
pioneer in the developawnt and use of nuclear power, having built 
the Cirat nuclear units in both North and South Carolina. 

In ay work, I have had the o|n?ortunity to serve on a nuaber 
of industry boards. Including Director and past Chairaan of the 
Edison Electric Institute (EBI)i the North Anarican Electric 
Reliability Council (NERC); the Southeastern Electric Reliability 
Council (SERC] of which I have baan Chalrnani as a Director of 
tha Institute of Nuclear Power Operations (IKPOJt and as a 
Director and past Chairvan of the Aaerican Nuclear Energy Council 



D,g,;,zeclbyG00glC 



(AMEC). I w«s • pcinclfwl witnass «nd Induatcy cootdlnatot 
during tti* lan^thy h««rlngs on th* Public Otilltr Regulatory 
Policies Act (PORPA) In 1977 and 19TB. In 19B9 and again thia 
yaai I taatillad bafote tha Sanata Energy and Natural Reaources 
Comlttee on propoaala Cor anendnent of the Public Dtllity 
Holding Coapany Act. Ky expeclenca. I ballava, haa provided ne 
with an understanding of the financial and other iasuea arising 
out of propoaala. auch as Title XV of S. 131D, to reatructure the 
electric utility Induatry. 

The Electric Reliability Coalition coDprlaes over 40 
investor -owned regulated electric utility cowpanies. ERC ia a 
diverae group of large and saall utilities located throughout tbe 
country. Soae of our HMMbera ate organised as alngle conpanies; 
others are exeopt or tegiatered holding conpanlea. All ebc 
nenbers share a conmitnent to pteaerving the exiatlng ayatem of 
vertically integrated electric utilities, regulated by the states 
in the public interest generally and for the protection of 
electricity conauaters specifically. He are equally connitted to 
preserving the Increasingly coaplex syatem of voluntary and 
mutually beneficial tranaaisaion aervlces. Together, these two 
factors have enabled regulated utilities to maintain highly 
reliable aervice at lowest possible cost. 

I urge thla Subcoonittee to recomend that the Banking 
Conittee assert jurisdiction over Title XV of S. 1120. If tbe 
Cosnittee does not asssrt fomal jurisdiction over Title Vt, we 
urge owmbers of the Conaittee to oppose Title ZV, should it 



D,g,;,zeclbyG00glC 



otharwlM raaelt Um iMat* floor, as not In eh« public 
latcrMt . 

Ttw bill HouM aMad Cti* Public Otillty Holding Ccav^ny Act 
to ctMt* • naw clMS of ■Bsaapt Nholaaal* Gcnacatoca* (IMOs), 
Craa ttom ovarsight by tha Saeurltlas and Bxchcnga CoMilasion. 
IB tha ■lalaadlng naaM of 'tafora,* Tltla KV would anceucaga 
prolifaration of holding coa^niaa to otm and control tha next 
Qanaiatien of powar planta. Tha lagialatlon would tend to 
■aparaCa tha production of aubatantial aaounta ot alactiic powar 
ttoi Ita trantBission and dlatribution. This would allow oMaive 
aaoiinta ot aatr alactric powar ganaiatlng capacity to ba ownad and 
leeatrollad -by unragulatad holding coapany structuras. Thasa 
holding ceapany atructuraa would eparata outaid* tha ragulatory 
ovaralght ot tha nc and bayond tha regulatory jurisdiction of 
tba atatas. 

Vroponanta of tha laglalation hopa. puraly and aliply, to 
caap larger (and undiacloaad) raturna on thalr invaataants In 
thaaa naw planta than would ba paraittad by stata ragulatois wara 
tha naw facilitias Inataad built by alactric utllitiaa under 
cagnlatlen. In thla way, ENS davalopara hopa to take advantage 
of tha nation's need for naw generating capacity in coaing 
yaara. DnCortunately, tha higher returns — the 'upalda' of 
unragulatad profit — can coae fron no aourca other than the 
pockets of electricity consuaers. 

Thsse new holding coaqwniea present several serious public 
intaraat problaaa that lad Congress to enact POHCA in 193S. 



D,g,;,zeclbyG00glC 



First. EMb will b* hiqhly Icvecagvdi utlliilng far higher lavels 
ol d«bt than act parnlttad to utlllClva generally or to 
cegiaterad holding co^anlsa under cucient SEC policies. Second, 
theae nonregulatad operators will not be subject to-public 
disclosure requlreinents oC inter-affiliate and other 
transactional setting the stage tot unneceasary eark-ups In 
costs. Third, BHGs' rates lor wholesale power will not be 
regulated by the states, which would otherwise control the 
profits obtained by franchissd utilities froa new generation 
In vestment a. 

POHCA amendnant Is a ptsscription Cor the creation of a 
debt-ridden and unstable electric generating industry. ENG 
advocatea are frank to adnit that they plan to use 90% or nore 
debt to build such projects. In contrast to the approximately SO- 
SO debt-equity ratio that a regulated utility would use to 
finance the same new capacity. GifG devel^Mrs want to connit as 
little corporate capital as possible to each project, and will 
use separate subsidiary corporations for each generating project, 
thereby shielding the assets of holding coapany parents and 
affiliates. This is precisely why they seek exenption fron PDHCA 
under Title XV. 

Such high levels of debt are not normal or sustainable in 
■ost industries, much less In the highly capital Intensive 
electric utility industry. But these highly leveraged GHGs will 
have a significant, tax-induced, artificial advantage over 
traditional utilitiaa. Because of the tax advantagea of debt. 



D,g,;,zeclbyG00glC 



BMCa awy ^psai to prloa powvc in tba short tcra »t 1ow«t cost 
than utlUtr-bullt altarMtivcB. As • cssult, EMOs will dsMitd 
— 4Bd probsbly gst ~ long-tars and largely unconditional 
purcbas* eo^lfsnts fro* rsfulatsd retail utilities. In 
tMlity, BK;s (fill IMS tlialr cos t-oC -capital advantage to shitt 
tba Bost siflniticant business risks of electric power production 
to fraocblaed electric utilities who buy power fron thuRf which 
risk In turn will fall upon electric constmers. 

Advocates ot Title XV insist tbat it would nerely create an 
"option' Eor utilities to buy power troa these new, dersgulated 
nca. But the Cinancial advantage to an ENG using 901 debt 
-financing is so great tbat sucb a project probably could price 
clectiicity 5-10 percent tower than the direct cost to a utility 
of building and operating equivelent capacity. (The price 
difference between power generated by gas-fired ans and new coal 
or nuclear baseload utility plant could be even greater.) As 
■■plained in the econcMlc study sub«ltted with this testlaony.V 
VfCa could either offer excessive and unjustified equity rates of 
return or be highly inefficient, or both, and still sppaar to be 
price competitive with utilities. 

BHG power, trtiile apparently less costly In the short tern 
than utility-owned capacity, would Inpose significant indirect 
costs on a purchasing utility, and thus on the utilities* 



1/ D.G. Raboy, Risk Shifting and Its Consequences in the 
electric Power industry (prepared tor the Electric 
Reliability Coalltioni Nay 29, ISfl). 



D,g,;,zeclbyG00glC 



purchasing utilities sr« villlng or Involuntary buyeis. 
Elcctciclty consuMrs will, in turn, likely pay more for reliable 
electric service. 

The pronised benefits and efficiencies o£ PtJBCA 'reCocn" 
and resulting 'competition' between highly leveraged EHGs and 
regulated utilities in power production ace Illusory. Advocates 
oC EWGs say that, with ownership and control o£ new facilities by 
unregulated holding conpantes, aignlCicant rlslci can be shifted 
from purchasing utilities and assumed by independent power 
producers. This Is not the case, however. 

The risks faced by a utility when it builds new generation 
are: (1) risk that projected demand and need for potior will not 
owteEialiset (2) risk that construction will be interrupted and 
delayed or otherwise take longer than planned; (3) ciak that 
construction costs will exceed projected levelsi (4) risk of 
operational inefficiencies; <S] risk that fuel costs will exceed 
projections; and (G) the overarching risk that, under future hoc 
"prudency review' or the 'used and useful' doctrine, state 
regulators will not allow the utility to recover construction 
costs which it has financed. Traditionally, these risks have 
been shared by utility ratepayers and utility stockholders under 
rules sst by state regulators. 

EHG advocates have publicly stated that project developers 
will not assume some of the most slgnificsnt risks, i.e., the 
risk that, due to unforeseen changes in load growth, newly 
constructed capacity may turn out to be unneeded, that due to 



D,g,;,zeclbyG00glC 



"£oTca aajeuE*" constEuction will be aoEe costly or delayad. anJ 
the Elsk that fuel prices msy rise to higher levels. Indeed, 
highly leveraged project einencing, as contenplated by BHO 
advocates, could be iaposHible if EHG developers were to retain 
significant risks for tbeit undercepi tallied projects. Instead, 
EHG advocates havs testified that utilities should sign long-term 
contracts obligating ttaeHselves to pay for the new capacity, 
'regardless of narket deaand and regardless of fuel costs." See , 
e.g. , Senate Energy and Natural Resources Conalttee, Transcript 
of Hearing on Amendment Ho. 267 to S. 406, The Competitive 
Wbolesela Electric Generation Act of 1989, November 1«, 1989, at 
■77, 1. 2-7. 

States will not relieve utilities of the public obligation 
to serve consumers singly because they are relying on GHGs for 
their supplies. However, this means that these utilities will 
reeuiin de facto guarantors of even the risks purportedly assumed 
by project developers. Significant reallocation of risk to 
outside nonregulated ventures, leading to real savings for 
consumers, a^ears inconsistent with the legal environment in 
which franchised utilities must operate. 

The Subcommittee should consider carefully the long-term 
effects of having more and more electric generation In this 
country dependent upon unregulated ownership, financed almost 
solely with debt, and subject to no duty of public service. In 
other Industries, generally, the excessive uses of leveraged 
buyouts financed by high levels of debt have caused major 



D,g,;,zeclbyG00glC 



•Iccttlc consufflera. These Includ* tb* coat oC inct«aa«d reserve 
narqina and ledundancy In supply soucces to insure against ENG 
failure and dafaultr and increased coats associated with EMQ 
povei that is not readily diapatchable oi which teaults In 
excessive dependency on any given fuel. 

State regulatoESi especially if focused on the short tera, 
may not recognise and account for all of the indirect costs to a 
utility associated with reliance on purchased power. Political 
considerations, varying frca tiae to tiM, such as ratepayer 
interest In "apparently lower cost* ENG power, or environaental 
c^qpoaition to coal or nuclear power, aay preclude the regulators 
fro* accurately evaluating the coats of BMG power. A utility 
■ay, as a practical matter, be unable to avail itself of utility- 
provided, rate-base alternatives which would be less costly over 
the long tera. 

Over tiae, regulated electric utilities could suffer fcon 
severe under investaent In favor of unregulated ENG 
construction, Hore and aore generating assets could aove beyond 
state regulators' reach, and Into pyraaldal ownership structures 
over which the SEC no longer has any control. He foresee that, 
in this "brave new world' of deregulated electricity production, 
electric utilities over tiae will be likely to end up psylng aore 
to buy power than it they had produced it theaselves. The 
consequence would be higher rates to consuners. This is likely 
to be Che case regardless of irtiether EHGs are, or ace not, 
affiliated with purchasing utilities, and regardleas of whether 



D,g,;,zeclbyG00glC 



ptoblaas. Th* failui* oC electric qen«r«tlon co^anlaa could 
have •ven sore ••tlouB public conawjuences .2^ 

Another abuse wbich Title XV would reaurrect la the 
potential for Inflation of electric rates through Inter-coapany 
transactions within unregulated holding coapany structurea, i.e.i 
Bales of power at Inflated coats or the diversion oC assets or 
revenues fro* retail utllitlea to unregulated affiliates. Kven 
with aodern regulatory tools not yet developed in 19J5, State 
connissions have not found It easy to effectively regulate 
transactions between jurisdictional utilities and their 
affiliates. Cowilssioner Ronald Russell of the Michigan Public 
Service Coaniaaion has described in clear and strong teraa that 
State's difficultlea in regulating transactions between Consumers 
Power Corporation and soma of the Qualifying Facllitiea and other 
affiliates within the 40-coapany CMS Energy Corporation holding 



Title ZV of S. 1210. as reported by the Energy and Natural 
Resources Comittee, includes a number of provisions 
intended to addreaa some of the issues I have raised. For 
example, Section 1^107 dicecca state public utility 
coMmisslons to consider whether to adopt a standard for 
electric utilities under theit jurisdiction that propose to 
purchaae poutt fros CWGs. Among other things, under this 
standard the state regulatory authority would evaluate the 
effects on a purchasing utility's cost of capital and 
consider whether the EWG's use of capital structures 
employing lesa than 2S\ equity would give It an unfair 
advantage over regulated utilities. Unfortunately, this 
provision is not ceguired and is merely voluntary — a 
state utility cotmnission could lawfully decline to adopt 
any of these factors in ita procedures for approving 
utility-EMG transactions The Banking Comsittee, we 
balievSr aust consider the adequacy of this and other 
provisions of Title XV before a gaping axei^tlon is opened 
up in the 1939 Act. 



D,g,;,zeclbyG00glC 



coiqwny Btcuctur*. See *Hho Needs Puhca?," pceunted to the 

A*erlc«n Bac Asaociation Section of Natucal Recoucces, Energy, 

end Enviconaentel tiew (Natch B, 1991). 

Coaalselonet Rueeell's leneckBf a copy of which ate 

aub«itted with thle testinony, raise queatione about the ability 

of state conBiasions effectively to protect the public interest 

and to police croaa-aubsldiietion through unregulated 

transactions within EHG balding coapany atructurea. He 

characterizes the non-atma' length sale of powet by one CHS 

generating affiliate. Midland Cogeneration Venture, to ita 

utility affiliate, Conaufflara Power, aa being "to the dettlKent of 

both the ratepayers end the non-af Ciliated cogenerators who hoped 

to aell power to the utility.* He alao notes the unprecedented 

voluaa of coi^lex litigation apewned by, aaong other thlnga, CHS 

aCfiliatea' challengea to the State cooniaalon's Jurisdiction. 

CoauiiBsionet Russell counaela against the detegulation under 

POHCA of holding coapany ownership of generating aaaets in the 

etrongeet poaaible termsi 

With the [POBCA] exeaqttion, corporate structute> 
and tranaactiona between corporate affiliatea, 
can be Manipulated to embrace the concept oE 
co^etitive generation while ensuring that all 
co^etltlve advantages reaide with holding 
affiliatea. 



The Subcoaaittee Muat recognise that Title ZV would 
profoundly change one of the cernecstones of the federal ayatea 
of conauaet and Inveetot protection, altering « legal fraaework 
wittaia iriild the electric utility induatty haa turned In an 
outstanding patCotaance. Soae biatotical perspective la in 



D,g,;,zeclbyG00glC 



ordftc. Tha origins oC today's modern acononiic raqulatory syatSM 
can b« traced to tha P«d«ial Pomi Act oZ 1935, to PDHCA, and to 
various state laws oC slailac vintage. Tha Federal Power Act 
established a national policy to assure *an abundant supply of 
electricity throughout the Dnited States' with econoay and regard 
tor tha envlconaent. A regulatory syste* was developed which 
eliminated unecononic and wasteful duplication of facilities and 
channeled coapetltion into an orderly process oC Ecanchised 
utilities responsible for providing service to all within certain 
geographic areas and subject to regulation of pricing based upon 
reasonable recovery of the costs of such service. 

At the sane tiser the Holding Ccnpany Act established 
fundamental principles of utility ownership, control and 
operation designed to protect both consuuers and investors from 
the financial consequences of undercapitalised, pyramidal 
ownership like that which characterised the unregulated system 
prior to 1935. According to the Federal Trade Conmisslon, In a 
report that was a major Impetus to Congressional action, utility 
holding company structures were unsound and "frequently a menace 
to the Investor or tha consumer or both.'" FtC, Dtillty 
Corporation, Senate Document No. 92, 70th Cong., 1st Sess. (1928) 
(quoted In Congressional Research Service, 'Electricity: A New 
Regulatory Order?,* Rouse Energy and Commerce Committee Print No. 
102-P, 102d Cong., let Seas., at CRS-167 (1991)). Two of the 
cardinal principles of PCHCA were (1) full disclosure of electric 
utility costs and profits and |2) protection oC the consumer from 



D,g,;,zeclbyG00glC 



fiiMHclal abuB«s und*r cover of a holding company structure. 

There followed a period of remarkable growth in electric 
output and a sharp decline in the real price oC electricity. 
Despite some Intervening traumatic events for the industry, we 
continue to have adequate supplies oC electric power In this 
country at reasonable costs. In fact, the real price of 
electricity In nany places has been declining over recent years 
and sone regions have large reserve margins. 

ThuSt I believe that by any standard, over many years, the 
Investor -owned electric utility industry has done an outstanding 
job in meeting the needs of electric consumere in this country by 
providing them with adequate, reliable and reasonably priced 
electricity. This has been accomplished by a large and 
Incredibly complex system of vertically integrated utilities, 
with rates of return on all Investments, including generation, 
transmission and distribution Caclllties, regulated by state 
coamlssions. Companies that opted to set up holding company 
structures to own facilities In multiple states were subject to 
SBC scrutiny of their securities and transactions, and have been 
permitted only to operate 'Integrated systems* in adjacent 
states. This fully integrated, and regulated, system produces 
economies and reliability that cannot be guaranteed under other 
forms of industry structure, especially one characterised by 
unregulated, geographically dispersed holding co^anies. 

nie experience In other deregulated industries, iC applied 
to electric utilities, clearly calls for extreme caution. The 



D,g,;,zeclbyG00glC 



•lectcic induBtcy's atructure and product /sarvic* !■ cofflpletely 
different from other industrlea in which deceguletocy experiments 
have been conducted, with very nixed reaultsi natural gas, 
telecODBunlcatlonsi airlines, trucking, health care, indeedi 
deregulation in sons Industries, especially the thrift Industry, 
has had disastrous results. Therefore, we should focus carefully 
and exclusively on the electric utility industry in deciding 
whether to take another leap into the dark waters of illusory 
"competition" with debt-financed unregulated ventures. 

In short, I believe that iC we are unsure of what the 
outcome of experimentation will be, then the prudent course of 
action is more careful study. Before major loopholes are created 
In POHCA, It is essential that the Banking Cowiittee exercise its 
historic jurisdiction and responsibility to exanine this 
legislation. To preserve reliability, reasonable costs and the 
public benefits oC the vertically integrated system. It would be 
extremely unwise to seek to alter 'incrementally' this very 
complex system in the name of "competition" or other economic 
theory without first investigating, evaluating and carefully 
determining how such changes might affect our nation's entire 
electric system over the long term . This was recoimended by the 
Office of Technology Assessment in 19B9 and most recently by the 
Congressional Research Service. 

It takes many years to plan and build base load generating 
plants and transmission lines. Large generating plants well 
maintained and modernized may have useful lives of 40 years or 



D,g,;,zeclbyG00glC 



Mora, pacislons to build oc not to bulldi onc« nad«i can h«v* 

lon^-lasting iaqwcta and tcpcrcussions on th« availability. 

reliability and coat of alactrlcity to the public. If ahoct- 

tecffl, tax-dciven cofflpariaona of fuel coati and capital coats are 

nade veraua an analysia of long-tern coata and ttendsi than 

aeeaingly expedient cboicaa nay be made today at the eapenaea of 

tiighei coata and unreliable service toaotrow. 

I hope the SubcooBlttee — and ultimately the full 

Coaaittee — > will conaidar carefully the concluaiona of the 

Congceaaional Research Satvice'a recent report on proposals to 

restructure the nation'a elactric power Industry. According to 

CRSi 

Nhatever else aay be said about the current 
regulatory aystaa. it haa mrked. The Nation has 
enjoyed aany dacada* of available electricity at 
pricaa wall within the norm for Industrialliad 
world. And, there is every indication that the 
syatea will continue to respond to changea in 
technology, utility structure, and conauaar 
naeds. The aajor reaaon vhy the system has 
worked is because of tha ingenious scheme oC 
regulation devised at the time of the enactment 
of the Federal Power Act and the Public Utility 
Holding Company Act That scheme was forged a 
halE-century ago in ah effort to provide a 
flexible balance between Federal and State 
regulation for the purpose of assuring competent 
regulation and reliability of service. 

The coordinated Federal and State regulation that 
was established in the 19303 was characterised by 
elegance, simplicity, and Elexibiiity It 
strikes s delicate balance that left the States 
with extensive retail rate authority and confined 
Federal jurisdiction to interstate bulM sales of 
power. State regulatory controla were fostered 
by Federal law through the eilaination oC 
extensive interstate holding ceapany involvaasnt 
In electric utilities. 



D,g,;,zeclbyG00glC 



Congtassioaal Rea«arch S«rvic«. aupta, at CI)S-363. Significantly, CRS 

eoucludad that: 

It ia difficult to aaa the caa« foi a 
coaprahensiva revision of electiic powai 
regulation. . . . Inatead, proponenta of 
regulatory change should be required to bear the 
burden of proof for benefits that might come froii 
dramatic change. 

Id. at CRS-364— 36S. 

In ny view. Title XV, In addition to undarnining the 
financial aoundneas of the electric power industry, would be bad 
energy policy. I want to lay to rest one argument aomatiiMa 
advanced by advocates of Holding Company Act deregulation, which 
ia that wa face sone aort of alactdc power shortage in thla 
country. Certainly, there Is no electricity aupply criais in 
thla country which mandatea the drastic restructuring of the 
electric utility industry conteaplated by this legialation. The 
highly raapected North American Electric Reliability Council 
reported in its most recent assessment that 'Electric utilitlaa 
have adequate plans for the 1990-1999 period to provide reliable 
electric sarvica to their customers." Regulated utilities will 
■aet anticipated demandi In part, by buying power from non- 
utility ganatatora which will be developed under current law, aa 
well as by enhancing performance of existing unita, building new 
utility generators, and purchasing power from nalghborinq 
utilities. Sm North Aaacicaa Electric Bellability Council, 1990 
Beliability Asaeasaant: Ibe rutuca of Balk Elactiic Syatem 
Bellability in aortb AMiiea 1990-1999, at 4. Indeed, tlw aupply 
picture appears to ba Improving. Hharaae in its 19*9 aasnaaaantf 



D,g,;,zeclbyG00glC 



HERC aatlaatad tluit total D.8. capacity margins would b« 17.6 
parcant In 199S. tha 1990 assassment projacts a higher casarva 
■argln of 18. S paccant In 199S. CC. NERC, 1989 Electricity 
Supply t Daaand For 1989-199B, at Table 8i NERC 1990 Electricity 
Supply 6 Demand For 1990-1999, at Table 9.1/ 

Finally, the Subconmittaa should be aware that attempts may 
be nada to amend Title xv of 8.1220 to give the Federal Energy 
Regulatory ConnisBion broad new powers to order utilities to 
transmit or wheel power from ENGs to the utilities own 
customers. Such mandatory transmission raquirenents are the next 
item on «any EWG advocates' agendas. These proposals will be 
touted as merely mandating transmission access £or 'wholesale* 
sales by EWGs. 

Boweveci transmission 'access' proposals are but the first 
step totMrd full-blown retail wheeling. Such a regime would 
par*it EMGs to make direct sales to> e.g.. large Industrial 
custoaars. with delivery of the power through mandated 



Even the limited and localised potential electric supply 
constraints identified by NERC's 19B9 assessment as 
potential problems have essentially vanished. MERC's 1990 
reliability assessment, at Table 8. projects that the North 
East Power Pool (MEPOOL] will have a capacity margin of 
lfi.7 parcant in 199B, double the margin projected only a 
year aarlier. 

These figures bear out the conclusion of Technical Annax 1 
to the President's National Energy Strategy. That study, 
though flawed in many cesp«cta accurately dismLss** as * 
strong or credible argument for ananding PuhCA the notion 
that there la an Impending capacity 'gap' which can only b« 
filled by daragulatcd ewGs. Sea National Energy Strategy 
Technical Annex Mo. 1 (prepublication copy, n.d.) at 4$. 



D,g,;,zeclbyG00glC 



tE«nsalHion via th« tutive utility that Corucly served the 
ouatoowt (and nay atill have to provide back-up power to It}. 
Thle result aay be attractive to some aaall nuHber oC large 
industrial consuaers of electricity, but could be very costly 
(and unnecessarily ao) for tbe small coonercial and residential 
electric consumer who would have to pay nore of the operating and 
capital coats of the electric systen. including the cost of any 
unused generating capacity. 

indeed, even sales at wholesale by ENGs to former 
requlcenents custoners of a regulated utility, such as a 
■uaiclpal utility or a rural electric cooperative, could saddle 
the generating utility's remaining customers with the costs of 
large amounts of 'stranded investment' originally incurred to 
serve that customer end, indirectly, its customers. He strongly 
oppose any system of mandatory wheeling — wholesale or retail — 
that could so Jeopardise the financial health of electric 
utilities and their snialler customers. The Federal Energy 
Regulatory Commission already has sufficient authority in unusual 
situations of public need to require irtieeling — a power rarely 
needed and rarely invoked precisely because the current voluntary 
system of wheeling based on mutual benefit to the parties (and 
their customers) works so well. 

In conclusion. Title XV raises a fundamental public policy 
queetioni would the nation's critical need for an abundant, 
reasonably priced, reliable supply of electricity over the next 
decade and beyond be well served by increased dependence on 



D,g,;,zeclbyG00glC 



hlghly-lcveiaged third-party ganaratloo C«clliti«a oimad by 
unregulated holding coapanles whoaa coats oC aervlca and .profits 
Mill ba undiaclosed and which will operate with no obligation to 
serve the public? The answer clearly Is Ho. Congress' own 
advisers have concluded that the case tor PDHCA aaendaent has not 
been ttade. The Office of Technology Asseaaoent (OTA) cautions 
that: 

[T)he costs and benefits of coapetition are very 

uncertain. . . . Actual experience is limited, 
and little analysis has been performed. . . . The 
benefits of competition are speculative and 
difficult to quantify 

Off ice oC Technology Assessaent. Electric Power tfheeling and 

Dealing, at vlll (1989). OTA concluded thati 

[Elven without legislative action, the 
coapetitlve segaent in the electric power 
Industry Is growing. . . . These trends are 
likely to continue. . . . There is no crisis 
■andating iomediate action by policymakers. 

Id. at 27. Similarly, CDS concluded that proponents of PDHCA 

exemptions and other basic changes to Industry structure should 

be required to "bear the burden of proof that such changes will 

result in even better performance by the electric power 

Industry. CDS, supra, at CRS-36S. In light of these 

uncertainties, and the potential for yet another dlaaatrous 

deregulatory esperioient, we believe that the Banking Coeailttee 

should not abdicate Its historic responsibilities to fully 

consider Title XV of S. 1220 and overaee this and any other 

proposals to create loopholes that would deform — not reform — 

the Holding Cosqtany Act. 



D,g,;,zeclbyG00glC 



rOfSTEC 



Saptmbu: 13, 



BenorBbla Cbrlatepliac Dodd 

Subconlttaa on Sacurltlw 
Coa>ittaa on Banking, Housing 
-' -rban Atfaira 

ita Dlrluan 

ton, B.C. 2 

Thank you for yonr laadarahlp 1 
Tuasday'B haaring on PUHCA raforv ia 

tha larga nuabar ot Banking Coaaittas naMiiu:> in mi.\Mnaantim, 
raflacting a high laval of intaraat In thaaa iaportant iaauaa. 
I Has aapacially plaaaad that both Chairsan Riagla and you ara 
coaalttad to watching PUHOI iaauaa •■ tha National Enarqy 
Strategy bill Bovaa through tha lagialativa procaaa. 

Uthougb Sanator Shalby aajiad tha Banking Comalttaa not 
opaat tha Bnargy Coaaittaa'a 'dallcata balanca" on PUHC* ratoni, 
wa tlnily baliava that thia 'balanca' waa badly akawad; tha 
Intaraata of conauaar* and indapvndant pouar producara wara not 
adaquataly addraaaad. conaaquantly , I urga you to aupport tha 
Fair Co^atitlon kaandaant davalopad b- "- " 













lupa and i 








sluding Di 








which ia 




loaad. 








(1) gram 


ting 






lorlty to 




utllltlai 


1 to provida 


tranaaiai 










-by-CBE 


la baalB, 


and (2) banning 


aalt-daa: 
ganarato] 


ling 


batwor 


•n 1 


1 utility 


and It 


:a affllil 


itad vholaaala 




to 1 


Cha fo. 




: of tha 


Saptant 


»r IT hai 


irlng, I did not 


an opportunity to i 


raapond to a 






lading atataaanti 


■ada by , 


athai 








■ thaaa ii 




critical 






Lob: 


Ing a aho 




>r aattlng forth ay 


aupplaaa] 


ntal 


vlawB 


on 




iasuaa 


ralaad at 


: tha haaring. 1 



D.,r„.db,G00glC 



On behalf of Da«t«c, and its largast aharaholdar, Tha Dow 
Cliemical Conpany, lat na again expreaa ny appraciation for your 
Intaraat and laadarahip on thaaa laportant laauas. Ha look 
forward to working with you further to craft PDHCA r«f om 
lagialation that will truly banafit conauMra. 

Sincaraly, 



/^■"r-^ ^^,y^. 



K«ya A. Curry, Jr. 
EncloBuraa 

cc: Subconnittaa Mambara 



D,g,;,zeclbyG00glC 



ooun or •uvPLnmnL comaim 
>■» k. cmon, jm. 

■SIOOTZVI VIC* FBBBIDMNT t» 

oanme unxoz, i>c. 
Bcfora Tlia 



On b«balf of Deatac Enargy, Inc., Kay* A. Curry, Jr., oftara 
tha following supplemental conunents on iaauaa r«iaad during tha 
haarlng bafora the s«curltiaa subcoaBlttaa concarning PUHCA 
rafora hald on Saptaobar 17, 1991t 

• ConBumer BenefltB Will Result fy om True Competition . 
Fair conpetition in the bulk power market will 
Inevitably raduca utility rates I 



TranBiiiiaaion Access 



jred by an ad hoc group Of 
Dental groups and 
independent power producers (IPPs) sucti aa Qestec is a 
narrow and targeted anendnent designed to discourage 
anticompetitive denials of transmission access and 
prevent abusive aelf-deallng in the new competitive 
bulk power market. 

Consumer Advocates. Mot Ut>lit;i es . Represent HjH epa ye t 
Interesta . Although utilities often couch their 
positions in terms of protecting consumer interests, 
the groups which truly speak for consumers are consumer 
advocacy groups such As the consumer Federation of 
Anarica and the Electricity Consumers Resource Council. 
CPA and £LCCN have been integral to developing and 
supporting the Fair Competition Amendment to improve 
transmission access and ban aelf-daallng. 

Transmission Access Works. Destsc's axparisnca in 
Texas shows that independently ganeratad powar can ba 
transmitted by utilities without adverse rallablllty 
impacts, generating substantial ravanuaa for tha 
transmitting utilities with little or no additional 
invastaant raqulred. 



D.,r„.db,G00glC 



A Ban on S«lf-D«>llM Will Mot KMt> UtllltlM Out Of 

th« Haw coi«tltlv.i Warkat. Salf-daaling rMtriotion* 
vlll almply bar a utility tiom dsallng with it* own 
POHCA-axeBpt atfillat*. TlM utility afflllata would ba 
fraa to sell power to any other utility In tb« country. 

Tfta Dlatlnct Purpoaaa of PDRPA and PDHCA Rafonn Shcni^(> 
Mot Be Confuaed . Tha aandatory purchase provlaiona of 
the Public Utili^laa Regulatory Policy Act (PUBPA) ware 
Intended to promote use of alternative generation 
technologies and cogenaration , not to reduce utility 
ratea. In contrast, utilltiaa will be under no 
obligation to purcbaae power from PUHCA-examptad IPPb, 
Conpatltlon BKong IPPa to win power contracta will 
drive prlcea down, for the benefit of ratepayers. 

IPP ff Ara Mo Mora Leveraged than Utilities . The 
fundamental aaauaptlon that IPPs are wore lav*rag*d 
than utilltiaa ie Incorrect. Conaequently, atatutory 
tastrictlona on IPP leverage are unneceasary. 



D,g,;,zeclbyG00glC 



B«for* Tba 



ni* laxq* numbmr of witn*s**s on the S«pt*Bb«r 17 panel >ade 
it difficult to coBBont on all of the iaportant PUHCA-relatad 
Isauas raised during tiM h*aring. Consoquently, I thought It 
would b« helpful to offer ay ouppleBantal coBBonto on Beveral of 
the i««u*« raised during the panel diecuaeion. In particular, I 
wantad to reapond to aaveral of tha aialaading aaaartiona Bade 
during oral raaarka, in order to avoid leaving the SubcoBaittee 
KsBbara with any Biai^reaaiona about theaa critical policy 



lataraats will I 



nare waa auch diacuaalon at tha hearing about whether PUHCA 
refoTB would be good or bad for electricity conauaara. Deatec 
fir»ly believe* that legislative refoms that will foster true 
ooiqMtltlon in the irtiolesale power aarket will inevitably lead to 



D,g,;,zeclbyG00glC 



SupplaMsntal CotOMnta of Kay» A. Curry, Jr. 
Dtt«tec Bnargy, Inc. 
P*g« 3 



10H«r utility ratss. Thus, th« question is what legislative 
raforma are needed to produce true cospetition. Aa explained in 
■y prepared taatinony filed prior to the hearing. Title XV of 8. 
1320, aa currently drafted, will not produce fair competition and 
therefore ie unlikely to result in real coneuner benefits. In 
ordeir for PUHCA reform to achieve a truly conpetitive market, at 
least two additional issues must be addreesad in this 
legislation: 

FEEC from ordering utilities to provide 
transmisBion services if such an order vould 
affect existing compBtitive relationships must be 
lifted. Instead, fERC should be granted the 
authority to order utilities to provide 
transmission services if such vould Increase 
competition in the bulk l^wer macXet, consistent 
with service reliability and with fair 
compensation for the transmitting utility. 

3. Bar Self-Dealing. Utilities that establish PUHCA- 
axenq^t wholesale generating affiliates must be 
barred from self-dealing with those affiliates. 

These changes to Title XV are the elements of the Fair 

Competition AmendHent discussed in my prepared testimony. A copy 

of tbia eimple amendment and a list of the groups endorsing the 

amendment are attached. 

Hany witnaeses representing different positione in the PUHCA 

debate suggested that their position waa baeed on protecting the 

beat interests or consumere. It must be noted, however, that the 

interests of ratepayers can best be discerned by the advocates 



D,g,;,zeclbyG00glC 



>U[9l«Mntal coBBuit* of Kays A. Curry, Jr. 
D*«t«c Knargy, Inc. 



that rapraaent conamar intaraata, not froa utility 
rai^raaantativaa frtio rapraaant utility atockholdera. 

Tha Conaukar Federation of A»aric« (a tadaratlon of ovar 340 
pro-oonauaar organlsatlona with aoaa 50 alllion Individual 
■axbara) and tha Electricity Canau>«ra Raaourca council (an 
aaaociation of 21 large induatrlal conauaera of alactriclty that 
conawM nearly S percent of all electricity aold in the n.s.) 
have been active in thia fuhca debate. Theae conauoar 
organieationa have played an integral part in tba ad hoc 
coalition of conaumar advocatea, environmental groupa, and 
independant power producara (iPPa) , auch aa Daatec, that haa 
daval^^ad and la now actively aupporting tha Fair Coapatitlon 
Aaand>ant diacuaaad in Daatac'a prepared teatiaony. in addition, 
JaMaa Leahy of tha Connecticut Public Intaraat Raaaarch Croup, a 
Connecticut-based consular advocacy organization, taatified at 
the Saptaaber 17th hearing in favor of a»andmanta to prohibit 
■atf-daaling between utititiaa and their affillatea, and to 
aapowar rERC to order transalaaion accaaa. 

XZ. Bqpandaa mtc kathozity to order VranaHiaaloB Koaeaa za Both 
Vaoaaaary and Workable. 

Mr. Sykora of Houaton Light and Power suggeatad that 

tranaalaaion accaaa waa part of Daatac'a "hidden agenda" in FUHCA 

rafoni. Our concern about utllltiaa' denial of tranaaiaaion 

sarvicaa and the anticoapetitive effacta of auch daniala are not 



D,g,;,zeclbyG00glC 



Siqn'l'^Mntal CoMHMitB of Keya A. Curry, Jr. 
D«Bt«c Energy, Inc. 
Pag* * 



hlddMt. Dttstac tiraly balievaa that PUHCA ratora will not raault 
in a coMpatitiva wholaaala powar wurlcat, with all of tha conaumsr 
banafita that auch a coivatitiva aarkat would bring, unlBag all 
powar ganerators can gat accaaa to tranaviaaion aarvlcaa ovar 
which alactric utilitiaa axarciaa monopoly control. 5iiq>ly 
■tatad, true coapatition cannot davalop vintil producara can gat 
thalr product to markat, that ia, to tha utility that wanta to 
purchaaa tha powar. 

Contrary to tha auggaationa of savaral witnaasaa, 
indepandont powar producers such as Daatac do not aaak 
tranamiaaion aarvlcaa at soma subsidizad or confiscatory rata. 
Aa currently provided by aaction 213 of the Fadaral Power Act, 
rate cannot order utilitiea to provide transmission aarvicaa 
unlaaa the transmitting utility will be fully raimburaed tor tha 
raaaonabl* casta of providing those services, including tha coste 
of any enlargaaent of transmission facilities, plus a reasonable 
rata of return. Tha dataila of how such tarlffa for transnlsaion 
aervicea ehould be set is a regulatory issue for tha FERC, not a 
lagialative isaua for Congress. 

It waa also suggaated at tha hearing that providing 
transmission services to third parties is a new phenoeenon that 
raiaas new questions alMUt how to price services and anaura 
raliabllity. In fact, transnission services are bought and sold 
by utilities all of tha time, without adverse consequences on 



D,g,;,zeclbyG00glC 



I of Kays A. Curry, Jr. 



rallability or problaaatlo prioing iaauaa. Moat ooB>only, 
ntllitias buy and ■«11 transBlaalon aarvlcas frcm •aob other «■ 
paw«r la aovad aeroaa tba powar grid. Thaaa ooat baaad rat*a ara 
tarlffa mr oontracta that ars Cilad wltb tha PBDC on a ragular 
baala. Moraovar, Daatoc baa yaara oC experience in abtalning 
tranaaiaalon sarvlcaa to Bova povar within tha araa of tiha 
Blactric Rallabllity Council of Taicaa. Daatac haa baan or ia a 
party to tha ■agawatta powar ganaratad on tha Gulf coaat to 
Houaten Ll^it and Powar. Tbia powar la tranaiilttad undar 
tranflnission aarvlca tarltta firat aatabllahad by tha Taxaa 
Public Dtlllty CCBBlaaion in 1986. Indaad, coganarated powar in 
Taxaa paya roughly SIS million par yaar for whaaling aarvicaa. 

XXI. ft Baa en aalC-IMaliBg «ill Mt ligniflnuitly ftffaet 

onortunltiaa for Dtllity kfflliataa to Fartiolpata la tba 
■ulk Powar Narkat. 

It waa Buggaatad during tha hearing that a ban on aalf- 

daaling would ag w ahow Icaap utilltiaa, with all of thair axpartiaa 

and raaourcaa in building now generating capacity, out of tha 

bulk powar Markat. Salf-daaling reatrictiona would do no auch 

thing. The aalf-dealing restriction in our Pair Coai^tition 

Aaendaant, for inatanca, would ainply bar utilltiaa fro* aattlng 

up PUHCA-axanpt generating afflliataa that would aall powar at 

■arkat-baaad rataa to their affiliated utilltiaa. mility- 

aftillatad axaapt ganeratora would be free to aall power to any 




D,g,;,zeclbyG00glC 



Buppl«B«ntal COMB«n£« of Kays ) 
Daat«o liMrgy, Inc. 
Pag* « 



non-aCCiliatad utlllti«« in tha country, leaving planty of 

opportunity for utilitiaa to profit froK thair accunulatad 

■killa. So, for Inatanca, Conaimajrs Powar could aatabllah a 

PDHCA-axai^t afClllata to ganarate and aall powar to any-utility 

in tha U.S. axcapt Conauaars Power. 

A ban on self-dealing la consistent vlth the position talcan 

by the Departaant of Energy In its National Energy Strategy: 

In a broadly coai^titive market, prospective aellera 
would face nany possible buyers; the loss of tb* option 
of selling to themselveE would not reduce the number of 
buyers appreciably. Siniilarly, the prospective buyer'a 
options would be constriined little by not being able 
to buy from an {affiliate]. Thus it appears that there 
would be little loss of economic efficiency in banning 
self-dealing and It would eliminate a major source of 
concern about posalbla adverse impacts an consuners. 

U.S. Dapartaant of Energy, Hational Energy Strataay: Analysis of 

Qptions to ftmend tha Public utilit y Holding Company fict of 1935 . 

Tecbnieal Annex 1, at 33 (Ist ad. 1991/1992). 



Several witnasaaa testified that FUHCA reform would Incraaaa 
conauaar costa, baaed on the argumant that purchases from 
"(|uallfylng facilltiee" have raised rates. These assartiona are 
■lalaadlng on several counts. 

First, It is important to understand that experiance with 
powar purchases froa alternative powar sources and coganeratlon 
facilltlas (collactivaly qualifying facllitias or QPs) under tha 



D,g,;,zeclbyG00glC 



Public Utility IMgulatary Poliojr Act (PURPA) Is not a good 
pr«dlotar Cor th« llkaly r«e* iMpact ol incraaslng poH«T 
purohsBaa froa lnd«p«nd«nt powar producara. PUBPA raquiraa tha 
local utility to ipurctiaaa powaT at a rat* aqual to tha utlllty'a 
avoldad coat, that la, tha coat tha utility would hava paid to 
ganarata tha aaoa powar. Itaaaa avoided coat rataa era 
•stablished Yiy atat* etnaiaaiona, and as you haard on Tuasday, 
thara ara soaa In tha utility Industry who baliava that aoaa 
Btataa hava sat avoided cost rates too high. In contrast, 
utilltlae ara under no obligation to purcbasa power offered by 
Independent power producers, and ar* not required to pay any 
■inlaua rate it thay do purohasa such power. Tha rats is sst in 
a free, coapetitlva ■aiicat — tha utility will take tha bast rate 
It can gat. 

Second, in tha face of tha utilitlea' objections to PURPA's 
aandatory purchase requireaent, It is Important to reaeabar that 
tha atatad CongresBlonal purpoae of PUSPA waa not to lower 
consular rates or proaota ooapatltion. Inatead, FURPA was 
anaotad In 1978 in tha aldst of an oil supply orlais with the 
purpose of proaoting the development of alternative generation 
technologies and efflclant cogeneration facilities without any 
net loss to the consuaers. In contrast, PUHCA refora ia driven 
primarily by the goal of using fair coai^tltion in the wholeaal* 
power aarket to drive down costs for the benefit of conauaers. 



D,g,;,zeclbyG00glC 



•iVPl«»«ntal CoMtmntm of Kaya A. Curry, Jr. 
Matac Bnargy, Inc. 
P«g* B 



It ia alaply illogical to judqa PURPA by Congraaaional purpoaM 

naver aacrilaad to that lagialation. Judgad by Congrasa' 1978 

purpoea of proMOting altamativa anergy and oonaarvatlon of 

povar, aost coBaentatora judga PURPA to hav* baan both aftactiva 

and aucceaaful. 

Frankly, ao«« of tti* conplaining by the utilitias about 

avoidad coats undar PURPA la simply sour grapsa. Houston Light 

and Powar purchasas 325 magawatta of coganaratad powar froa Dow. 

Soon after thaaa purchaae contracts vara nagotiatad in 1985, HUP 

•atlBated In ita Enargy Efficiency Flan that: 

tha net present value of the projected savinga to our 
eustomers, over the 10-yasr tarn of our firm capacity 
contracts vlth Dow, Diamond Shamrock and Bayou, is 
$148,707,000. This is our -eetimate of the savings 
attributable to HLtP'a succaaa in negotiating capacity 
payments at levels which are lower than our estimate of 
avoided capacity costs. 

As tha relative costs of coal and gas have shifted over the laat 

five yeara, HLtP has grown dissatisfied with the deals that it 

nagotiatad in 1985. The fact remains, however, tha HLtP 

nagotiatad a power purchase contract that it believed waa in tha 

best interests of its consumers and at a price discount oomparad 

to its own plan to build generation. 



Tha entire argument that IPFb have soae coapatitiva 
advantage due to their high debt to equity ratio is based 



D,g,;,zeclbyG00glC 



Supplaaantal Comnenta of Kaya A. Curry, Jr. 
Daatac Bnargy, Inc. 



Colaa praataa that IPPa carry Hora tfabt than utilitlaa. In fact, 
IPFb sre typically Itu lavaraged Uum utllitlea. 

IPP projecta ar* alaoat always ttnancad uaing projact 
financing, i.a.- th« dabt ia aacurad Bay tha powar plant aaaats of 
a aingla project and tha caah Clow froa the aale of tha 
•lactrteity ganaratad by tha projact ia pladgad to ratira tha 
dabt. IPP proJactB typically atart with Sa% dabt, to ba paid 
ovar a tar» of 12 to IS yaara. Thua, aa ahown in tha attached 
chart, an IPP paya down ita dabt level rapidly, with all dabt 
retired by year 15. Ovar tha courae of a 30-year power project, 
an IPP that begins with 80% debt financing haa, on the average, 
outstanding daBat of only 2«t. Even if the project ie refinanced 
at the end of the first i5-yeara, the average outstanding debt 
riaes to only 4St. 

In contrast, electric utilities use corporate debt, trtiich ia 
typically maintained at a relatively ataady leval. On average, 
investor-owned electric utilities era capitalized with 57* debt, 
and public power conpaniea ere 97% daBat financed. Thus, ^ile 
IPP projects may have debt levels higher then utilities in a few 
early years of a project, IPPa carry aubatantially less debt on 
average over the course of a project. 

Moreover, tha truly independent wholeaele generators have no 
special financial advantages relative to utility-affiliated 



D,g,;,zeclbyG00glC 



Supplanental CoBBantB of Keys A. Cuny, Jr. 
OBatac Energy, Inc. 
F«ge 10 



ganarators. Utility affillatss can usa tha sana type of projact 
Ilnanclng that IFPs typically uaa. 

Glvan that IPPa are typically leaa levaragad than utilltiaa, 
Daatac subaits that tha apacial lavaraga provisions of sactton 
15107 of 5. 1220 ars unnecasaary and ahould be dropped. 



D.,r„.db,G00glC 



IPP CAPITAL STRUCTURES • 
SHOULD LEVERAGE UMITATIONS BE LEGISLATED? 



DEBT 
DIFFERENTLY 
THAN IPPS 



Should debt calBngs, audi u thoM rcqulrtd 
tor aloctric utilidM, b* Imposad on the new 
oanoration of indapondant power producers 
(IPPsI that are axpectad to genarata an 
inereaaino ahara of rtactric power if PUHCA la 



Bacauaa of fundamental differences In utHity 
corporate debt and IPP project debt, debt 
caOlnga for IPPa ahould not bo eodlflad in 
faderrf legialation. 



UinUTIES USE Electric utIHtles Issue corporate debt, typically 

for a 30<yeer term, to finance invaatmenta. 
UOIty debt ratios have been capped by the 
Holding Company Act and atate rata ragulatora 
In order to polico utHlty practices of Issuing 
debt to maintain high dhrldanda and thereby 
inflate stock values, to the detriment of 
ratepayers and investors. 

IPPa incur relatively short-tsrm (e.g., IS-year 
term) debt committed to the construction of 
spedfle projects pursuant to non-racourse 
project flnandngs. This debt can be used for 
no purpose other then construction of the 
subject project. IPP debt therefore esnnot be 
dhrorted to (flvtdends or alsawhere to the 
detrimertt of conwmers or investors. 



D,g,;,zeclbyG00glC 



IPP CAPITAL STRUCTURES 



IPPS CARRY 
LESS DEBT 
OVER 
PROJECT 
UFE 



IPP LEVERAGE 
DOES NOT 
COMPROMISE 
REUABIUTY 



IPP projKt financings typically start with 
approxlmataly 80% dabt; projict caah flow la 
pledged to ratira that debt within 15 to 20 
yaara of a 30-yaar project Ufa. 

As shown In tha accompanying graph, avaraga 
debt over an IPP project life, assuming a 
conventional IS-year term loan. Is only 24% 
(or a maximum of 48% if refinanced for an 
additional IS-yaar term ioan). This is 
substantially lass debt than tha 57% avaraga 
dabt held by investor-owned electric utllltlas 
and tha 97% average debt held by public 
power companies. 

NO IPP OR OF HAS EVER FAILED TO MEET 
ITS POWER SUPPLY OBUGATIONS AS A 
RESULT OF FINANCIAL DEFAULT. 

Lavaraga is a financial risit only Insofar as cash 
flow is inadequate to service debt over tha 
term of a loan. Revenue to an IPP project is 
fixed by a power sales contract eliminating 
demand-related risk at the outset. 



In addition, before an IPP project is financed 
and constructed, the IPP's ability to generate 
adequate cash flow from power sales revenues 
is rigorously ravlawad by the developer, the 
purchasing utility, tha landers and the equity 
investors. Tha scrutiny of each of thast 



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IPP CAPITAL STRUCTURES iluijikhi 

hrtanMad pardM wisurM that then will b* 
•dvquata projsct rtvwiu* to ratlr* th* d«bt. 

CONCLUSION Lsglitating IPP caphaHzation raqulramanta Is 



(1) IPP proiact dabt is not aubjact to tha 
abuaaa that tha Holdng Company Act and 
Stata ragulation hava policed via dabt calllngt: 

(2) iPPa hava aubatantially iosa dabt ovar 
projact Hfa than althar invastor ownad utllltias 
or pubBc powar; and 

(3) NO IPP OR OF HAS FAILED TO MEET ITS 
POWER SUPPLY OBUGATIONS. Stabla 
damand and ravanua, togothar with axtsniive 
financial ravlaw, anMiros tha adaquacy of cash 



D,g,;,zeclbyG00glC 



a 



S 

0. 

o 
a 




D.,r„.db,G00glC 



Ride Shiftiiig and Its Consequences in the 
Electric Power Industry 

PUHCA Chafes and Ind^endeiU Power DevtiegmuM 



Dr. David a. Rabey 

Chiaf Economic oonsultant 

Patton, BoQga ( Blow 

HaahiJigten, D. C. 



D,g,;,zeclbyG00glC 



Ccn<rniNTS 



EXECUnVE SUMMARY 
I. Bockgniiind 



Elements ot Risk in Electric Power GcneraticHi 

OOBStZnOtlAB KiBk 

Xarkat Xlak 

T*k* or Pay or T*ka and Pay: Doaa It Kattvr? 

Agreaaant on shifting of Harkat Riak 

Oparatienal Klak ..... 

Farforaanca Riak ..'.......,..,,. 

rual Coat Riak 

Narkat railnraa and Oaoo^>wtaatad llak IhiftiBg . , 

Narkat Eviaanc* on Riak Shitting 

Tba Raal Coata of RlaX Shifting 

Tha Financial Harkat Failura: Nhy Would lOUa 
Partlcipata? 



m. Consequences of Uncmnpensated Risk Siiiftii% 

Vravleua n^arlaBoa vith narkat rallnra 

a^irloal xnalyala of Risk Bhiftlag Xaplleatieu . . . 

The Waightad Avaraga Coat of Capital 

IPP vrmum IOC Dmbt Rata* 

IPP vm. lOO Xgulty Iftirdla Rata* 

rha KACC Calculation 

Raquirad Annual Caah Plow 

HBiclmB Equity Ratum for loua and iPPa 

Potantial IPP Inafficioncy 

Conclusion to tha ^^irical Analyala 

AFPE7IDIX APP-i 

Xatzoduetioni Tha Baaio Madal 

R ea«h Plow Approach 

Oaar Coata and Pinancial Coats 

Dataralnatten of tha Corperata Discount Rata 

Tha Waightad Avaraga cost et Capital 

CAPK and tha Equity Buzdla Rata aPP-1 

Tha Relevant Dabt Intarsst Rata -— - 

Tbzas QoaatieBe 

Required Annual Ratum APP-I 

MaxlMua IPP Equity Return APP-I 

Potsntial Cost Inafficisncy APP-t 



D,g,;,zeclbyG00glC 



Data APP-lO 

Beonoalc Daprcclation APP-lO 

Tucw ftPP-11 

CAPM Data . .' APP-13 

OBbt Rata* APP-13 

Capital Structttra APP-14 



D,g,;,zeclbyG00glC 



EXECimVE SUMMARY 



ttala m%a^ liiv*atl«kt«a th* oo w q a itcM of obang** in tha 
Pttblia Qtility Holding Ceapuiy Aet (POBCH) ncti m thoM to 



(ZPPs) that would b* txtitt frcH FDHCA roatrietlona. m* focus 
of tho tetato en tba dMlrcbility eC mCA dung* b«> ahiftod 
froa eonecrn evor Bufflclwit futura aupply eapaeity to a dabata 
on aeenoMic affioiancy in tha qanarating aaotor. Accordingly 
thia atudy analysaa tb* aCCaeta of propoaad FQHCA eliangaa in 
ligbt of atandard aoonoailo afflolanoy erltaria. Tha ganaral 
finding* et tha atudy ara aa fellowat 



It la noncontrovaraial to atata that ZPP dabt vill hav« only 
a aMall riak praalua in intaraat rataa -- oontrary to what 
would ba aicpactad for a highly lavaragad antity in a fraa 
■arkat aatting. 

Pinancial thaory holds that as a conpany'a dabt parcantaga In 
capitaliiation Incraaaas, tha coats oC dabt and aquity ahould 
incraaae, reflecting the additional risk of financial dls- 
traas. This does not happen with ipp financing because tha 
IPP is able to shift the financial and oparating riak that 
would normally be associated with the developer of a power 
project in a traa Market setting to the purchaeing utility. 
Tba risk shifting occurs bacausa all contracts, take sOi pay 
and take lod payi will Include ninlBua capacity payaents to 
tha IPP whioh ia tha aachanisB by lAich risks ara shiftad. 

■aeauaa of tha riak shifting, tba ZPP ia abla to taka advan- 

taga of the tax advantaga of dabt without incurring subatAn- 
tlally higher intaraat costs and, tharafora, tha IPP ean 
produoa an artificial cost of capital advantaga. 

Iha riak ablttiag mnlta in • "aaAot failura- — tha utili- 
ty ia feread to baar risks without ooapanaatioo. Tba raaolt 
is a distortion of tha prloaa of alaetrieity, asking it 



D,g,;,zeclbyG00glC 



dltfieult to o h oo»« tb* aavt •oenoaloftlly •tfielwit gtmtaem- 
tlen aouriM. Dub to Ui* ■ark«t tallur«, IPP pa««r will 
■"■"-- to iM !••• wcpanBiva vhan in rvalltT it !■ not, l«ad^ 
ing to gr««t«r tot«l con«u>ar ucpandltura in ttw long zvn. 

Tb* risk* that th« utility nust bMr, but la not p«id by tba 
IPP to b*Br, Buat ahov up aoBMrtiara. Eitbar tb« utility's 
bond rating will ba dagradad and/or tb* utility will bava to 
incraaa* ita aquity. Thua, tha utillty'a -coat of capital 
will Incraaaa which will althar hava to abow up In tha rata 
baaa aa tha utility adda, raplaoaa, or aaintalna ganaration, 
trananiaaion or diatribution tacilitiaa, or will raault in 
dacapl tali tat ion of tha utility In any avant tha ratapayar 
will avantually SUffar tba conaaquancaa of unccnpanaatad 
ahiftad riaka. 

Pundanantal to tba bypotbaaia that a aarkat outooaa yialda 
tba aoat aCficlant and coat affactlva raaulca ia tha pra- 
raqulaita that all antitiaa faca tha aana potantlal for 
reward and rlaX. It ia antithatical to s fraa Karkat concapt 
to allow Boaa antitiaa to ahlft rlaka to tha vary coa^aniaa 
tbay ara coapatlnq aqainat without coapanaatlon. Tha analogy 
ia to a altuatlon whara ona aat of coapanlaa la aubaiditad by 
tba govamaant and coapatinq coapaniaa ara takad to pay for 
tha aubaidy. Th« aubaidliad coapaniaa will win any coapati- 
tion avan though thay ara laaa afficiant. Tha unaquivocal 
raault of a aubaiditad aarkat ia aconoaic inatflciancy and 
bif^ar total eoata. 

Bacauaa of tba artifialal oeat of capital advantaga preduead 
by a coabination of uncoapanaatad riak abifting and tba tax. 
advantaga of dabt, an IPP will aidvlbit ona or a eoablnatiofl 
of tha following raaulta: 

All alaa bald conatant, an IPP trill ba abla to win avary bid 

bacauaa of tha capability to artificially effar bid prieaa 5 
to 10 parcant balow ■ nativa utility. 

An IPP will ba abla to offar axorbitant aqulty rataa of 
ratum and atill raaain co^iatitlva witb a utility. IPP 
aqulty rataa could ranga aa high aa 38 paroant. 

An IPP could ba blgbly inatflciant and atill ba prica ceapat- 
itlva witb a utility. An IPP could abaorb, tor Inatanca, 
eeat evarruna aqual to 10 parcant of total projaot oeat and 
atill pay dabt and aqulty boldarc ttaalr raquirad rataa of 
raturn, having alraady undartiid a utility. 



D,g,;,zeclbyG00glC 



Zn r«e«nt jmax* MitastaiitlKl affort ham b««n wipwidwd towards 
uwlrsiBV tiM •ffleaey of eei^Mtltlon la tlw alMetrlc powar 
gancration aaetor. Initial eeneama war* tl>at axlsting lavaat^ 
ownad Btllitlas (lOV) vara nst Imrastlng aulfielanciy to aaat 
futnra eapaol^ naada. A MW altamatlva waa naadad. It waa 
•rguad, to aaat tutnra alactrlclty daaand and Ind^andant poiMr 
m^eduoara (Iff) provldad a yiabla eptlsn. 

Kaeantly tha capacity oaaoCTi ia aaaa' to hava aubaldad and tba 
dabata haa baocwa an axtanaion of tha ganaral dabata en daragula- 
t£ea. na alaotrle powar induatzy la aaan by proponanta of 
Aanga aa tba last l^aatlon ot fovamBant ragulatlon of laportant. 
Indnatrlal aaetora and tba arfuaant la aada that laeraaaad 
ooapatltlon can only laad to graatar afflelaney In ganaratlen. 
Tba pravlDua convantlonal wladoa, that alactrlclty waa a natural 
■enepelyf la challangad by aoaa aconoalata who argua that only 
tranaaiaalon and dlatrlbvtlen roiala natural ■onopollaa but 
ganaration ean b« anhanoad by coi^atltlon. Otbar •eeneoilata 
argua that ganaratlen still la a natural nonopoly. 

At tbla point, tba dabata on tba affleaey of eeapatltion in 
tba gsnsratlon aagaant Is largaly thaoratloal with nputabla 
ooenenlsta lining up on both Sldaa of tba alsla. Bat It should 
ba notad that tbesa r^utabla aeadaalc aoonoKlata that advooata 
daragnlation of tha ganaration saotor adveeata eoiplata daragn- 



D,g,;,zeclbyG00glC 



latlen-^rbar* all uUlltias and non-«tllitiM mrm fr*« to oeapata 
und«r th« ■■■■ aat of rulas. 

Under « truly eeiv«titlv* aysMs all «ntitlM would hav* tba 
■■>• rl^t to Noe*ad or fall, to antar .or axit a aarlMt and to 
divaralfy by antaring othar llnaa of taualnaaa. In a eoapatltlva 
aitnation all antltlaa would ba eovorad by tha aaaa aat of 
favamaant ragulatlona at both tba atata and fadaral lavala, 
tbara would ba no subaidisation of ona aat of antitlaa by anothar 
within tha aa^a markat, and aoat ii^ortant, all aiiti ti«» wnuia 
tiavB %he Bana ralatlonshlp to rjalc and ravard. Ona aat of 
compatitora would not ba abla to ahift financial riaka to tha 
vary ooapaniaa thay ara oo^»atlng agalnat wblla danying tbair 
coapatltora conpanaatlon for tba tMw rlaka thay mat baar. 

Should a trua daragulatlon propoaal avar aurfaoa, aeoneaiata 
and policy aakara will hava to tackla tha quaatlon of whatbar 
unfattarad coapetition In tha alaetrle ganeration aagBant will 
foatar incraaaad atficlancy and battar eonaubar wallbaino. It la 
bayond tha purviaw of thia papar to analyaa compatltlon in a 
truly eomiatitiva ganaration Markat but tha prospaet of a coapat- 
itiva ganaratlon aactor la no irtiora In algbt. Inataad, thla 
papar will fecua on tha eonaaquanoaa of currant propoaala to 
aaand tba Public Otility Holding Coapany Act (POHCA) . 
PUHCA Changes 

Raeantly propoaala hava baan introduead in tba Cengraaa to 
eraata a apaeial claaa of IPPa, known aa Zxaapt wbolaaala Ganara- 
tora (Bfe) , who would ba axaapt froa tha raatrietiona of PDHCK. 



D,g,;,zeclbyG00glC 



Ilw currant proposal, iihiA bogan lifa as t. 40< In Ulf and la 
now aodlfiad to ba Tltla XV of ttw Natleaal margy Ktratagy Jwt 

of ittl la tha 8*Mta and part of ainllar lagialatlen in tha 
Beuaa, appaara innoeuou* on ita faca although ita aitaaptlen of a 
aalaet group of potantlal ecivatitara (ZOOa aa oogpor a ta antitlaa 
would atlll ba aubjaot to POBCX if, for Inatanaa, thay ■! 1 ill ■(! 
to dlvaralty Into ethar llnas of buainaaa, and ara still aobjaet 
to POHC» ragardlng axlatlng faellitlaa in thair aarviea araas) 
would Innadiataly disqualify it as a daragulatien prepoaal . 

Although tha bill oatanaib.y naraly r«a»vaa a ragulatety 
iapadl«ant to in davalop»«nt. If nothing alaa vara to idianga tha 
ganaration landacapa would bo altarad druatically with tha 
passaga of tha PDHCA axaaption. What would r aau lt would not ba 
eoapatition in any aconoalcally aaaningtul aanaa, but ratbar tha 
antry of auhaldiiad XfPa Into tha ganaration aagnant who eeuld 
ee^pats with ZOSa, not bacauaa of any inbarant afficianoy propar- 
tiaa, but rathar bacauaa thay anjey a ayataoutie ooat of capital 
advantaga producad by a eoabinatlbn of tha tax advantaga to dabt 
and tha ability to abift aueh of tha financial riak to purAaaiag 
lOUa wltbout co^^anaation. 

nta IPPa that antar tha narkat in a poat-PDHCk changa world 
will not bo atart-upa davaiopad by antrapranaura wbo a oak vantura 
capital on Nail Straat. Thay will aithar ba tha aubaidiarlaa of 
axlatlng lOUa oparatlng outalda of tha parant'a aarviea tarritozy 
or ethar larga conatruction or Kanuf aoturing flraa with ai^arl- 
anca with ganaratlng aguipaant. 



D,g,;,zeclbyG00glC 



IIMM IPP •ntnnt* will b* abl* to c 
basis bscsnss tlw llksl^ eontractusl srrsngsaants bstwsan ZPPs 
and lODs will li^ess nsw risks on lOUs. Bsoauss tbs xpp omn 
sbift Bost ssrkst snd opsratlonal risk to tbs lOU, It osn a^loy 
Isrq* ssennts of 4«bt In its espitsl stmeturs without iwBurrJtin 

th. sub«t.n»4.1 ■i.be .nJ ■m.ttv i-lrt «•—<»■■ th.t would nofMlW 
eounfraet th» fat sJvsiitMOS to dobt. Ths nst sflsot !■ s 
systsastlc, srtiflelsl eest of oapitsl sdvsntags and/or a ■aaklao 

of flMnel»l rlak much that p^o^■ct^ that tho trmm mrVrt tiaata 
aprmally eonaldar un«eono»le r«l«tlv to othor ■ItTMtlv 
boeo— ■ttiractlva oololY b«e«u«» fln»net»l risK Is trawf rrod 
and taatoavafs stfactlvalv aubaldjga tha soultv raturn. 

lbs 100 is not eeifionaatsd Cor ths transtsr of riak bscauss 
ot tbs sxlstsncs of a financial "sarkst fsllura." niat is, tbs 
eo^lax intaraotion of stats and fsdaral rsgulatory bodias witb 
rsQulatsd lOOa and unragulatsd IPPa in a partially darsgulatad 
snvironsant rssults in a aituatlon whars In sany casss an IPP oan 
li^ioss rlAa and eoata en an lOU without eo^^ansating tha lOU. 
Ibis occura, ol courss, bscsnss tbs sarkst for gsnsrstlon in a 
post-PDHCA Changs world would in no way r^rssant an sconosist's 
cenespt of a co^kstitivs sarkst. 
nonaagnsncss of Marks* FsHurs 

■ban thsra Is a shifting of risks such tbst tbs nscsssary 
linkags batwssn risk and raward is broksn, a sarkst fallurs, not 
s eo^Mtitivs sarkst, rsaulta. Prsa sarkst semwnlsts srs wsll 
swsrs of ths eenssqusncsa of axtsmalltiss whsrs ons party sakss 



D,g,;,zeclbyG00glC 



dsoiaiena bu*d cm only « pertlsn of th* eomt* of tbea* teclaioiw 
whil* otb«r* b*ar th* rlska utd ooats of tbaa* daelKleiM. RaoMit 
writing by financlBl •cenoadsts, including Hotosl Laur«ata Barry 
lUrkowits, baa addraaaaa tba financial iiriaaa of tlM IMOs. Hoat 
notably ttaaaa aconcwlBtB azgua that tba axoaaaaa of tba 1910a 
vara ncrt tba raault ef dabt par aa, but ratbar tbat in tba 
neterioua caaaa, tboaa anjoying tba banaflta ef tba dabt vara 
abla to ablft tha attandant riaka onto ettaar partlaa. 

Tba aana •aaaaga appliaa to IPP davalopaant In tba eurrant 
contaxt. Policy nakara ahould ba eenoamad that tba pradictabla 
financial ganaa ai^t produca aarioua aconoaic inaffieianey. 
Ttala papar pradicta that tha etkangaa acugbt in raaCK will raault 
In tha tolleving avanta. nia artificial coat of capital advan- 
taga to tha IPP tbat raaulta froa unooivantatad rlak ahiftlng and 
tha tax advantaga to dabt can taka thraa fama or a ooablnatlen 
ef tha thraa. Dua to tba artificially low rogulrad annual 
ratum. In a bidding procadura with an ZOU an ZFP could ayatoHBt- 
Ically win avary bid by pricing alactric powar 9 to 10 parcant 
lowar than an ZOO whil* atill paying abaraholdars tbair raguirad 
alnlMia ratuma. Altamatlvaly, tha IPP could parloa alactric 
po wa r juat balmr tba tOU'e bid and pay agnity boldara axerbitant 
rataa ef ratum, wall in axcasa ef tba ragulrod Klniwia. Clearly 
■nch an outcona would aarloualy dlatort tha pr^>ar flew of 
invaat»ant funda in tha alactric pcwar induatry. Finally, tba 
artificial capital coat aubaldy could encourage aconoaic ineffi- 
ciency. ZPPa could abaorb eeet overruna tbat are eobetantlal 



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pertlena «f prejaet cost (lO p*re«nt of Ssfikl Fre)*et oast and 
bl^MT), pay aguity heldara tbair burdla rataa and atlll prlea 
alactrle powar just undar an lOU's bid. 

Sactlon IZ of Utla papar diacuaaaa tha rlaka inharant In tlia 
•lactrlc ganaratien aaetsr. It daaerlbaa how rlaka vould ba 
ahittad in a peat-PUBCA cbanga varld and tha Institutional 
parawatara that aaanra that iFPa will not hava to ccMpanaata jODa 
tor ineraaaad riak taking. Saetion III la an aaplrleal axaaina- 
tien eZ tha cenaaquancas of tha aarkat tailur* dascrlbod In 
saotion II. Itila ia follewad by a taohnleal Appandlx which 
daaeribaa tha aathodology usad to i^wduca tha ramlta in sactien 
III. 



D,g,;,zeclbyG00glC 



n. ir-l*tn«i»i nf Bklf In BW*F4r Pn»w 

nwr* ar* tbrsa fundaMantal ar««s oC risk that mr* ■■■ociat- 
•d with th« g*it«r*tion of alactric powar and that auat ba ae- 
eountwd for in any aeanario «h*ra an lOD is purcbasing powr trcm 
an IFF. niaaa ara oonatruction rlak, aarlcat rlak and oparations 
riak. Thia aaetion will daacriba aacb araa ot riak and diaouaa 
who baara tha burdan of aueh riaka in a pwrcbasa povar altuatien 
and nbaUiar it can ba ai^M^ad that tttara will ba eo^panutlon 
for ahlftad riaka. nia aaction concludaa with a diacnaaien of 
acanariaa undar which lOtta can ba »ada to taaar riaka vitbout 
payaant. 

ConfiniaifiiLBidt 

Construction rlak eoncama tba pOMibility that taeilitiaa 
will not ba built oh tiaa or on budgat or that apaciCicationa 
will not ba >at, laading to axtra aicpandituras in tha futura. 
Currant parcaptiona of conatruetien rlak ara baaad en prior 
axparianca with coat ovarruna and rata baaa diaallowaneos, 
ganarally aaaeciatad with eantral atatien, baaalead faellltlaa. 

It abould ba notad that to tha axtant that tha naxt ganara- 
tion et capacity additiona atraaaaa gaa turbina or ooMbinad'-eycla 
tachneleglaa, rathar than eoal-firad or nuclaar basaload facili- 
tiaa, construction riak will ba laas than in prior parioda. 
Purthar, tha ability axlats for tax. prejaet davalopar to ablft 
eenatruetlcn risk to tha eenstruotor throu^ tba naa of tumkay 



D,g,;,zeclbyG00glC 



Oiw pnpaamat eC Z?P pow«r d«wlBfiit; Josapta KworiMy, dO 
of POCI-MAtal QwMTktlng Coapwiy, Iwa argiMd In aanat* tastiao- 
ny that IPPs will b* abl* to ahict oonatructlon riak to th* 



llM rsBlity Croa Um risk standpoint !■ 
that tba risks hava baan aovad ts ethar playara, 
tba con tra ct wltb tba oonatnetec, for axa^la, 
whlA baa baan tba claaalc, larga riak on tba 
ntllltlas, coat ovamna, plant aobadulaa and 
parfoTManoa. Row, tfaat la all nndartakan by tlia 
Qontraotors, and that la algnilleantly why wa 
ean taka thasa blgbar dabt ratios, and it doas 
net raflaet any talfbar risks to tba prejset 
Itaalf. 



Of eouraa lOOs would bava tba a ana option to shift construction 
risk as an ZPP and for tbia raaaon, nany argua that conatruction 
risk la atrletly nautral batwaan J?p and lOD davalopaant. 

To tba axtant that altbar IPPa or lOUa baar any oonatnietion 
riak for tha naxt round of capacity additions ons point la 
eruelal. Xs will ba shown, bacauaa of uneoapanaatad riak abift- 
Ing ty mm In tba sarkat risk araa, oouplad with tha tax advan- 
taga of dabt, IPPa will hava a financial cuahion that will allow 
than to abaorb sora in tha way of ooat ovarruna ar dalaya and 
still ba abla to pay dabt and aqulty beldars tba raguirod inccaa 
strsaaa. That la to say, IPPa will bava laaa of an incantlva to 
dlselpllna prejacta during tha oonatruetlcn phasa than will ZOUs. 
nils la dascrlbad in aaction ZII of thia papar. 



D,g,;,zeclbyG00glC 



rer • ««v*lai»«r of •Isctric powar gwMratlon aai^Mt risk 
ralatcs to tlM-£«ar that om tc—r« vill not axlst in tb* futur* 
tor plMmad eapaelty uid thMrstora tbar* will not bo ■» oasarod 
rovonuo atroaa to eevwr tobt wtd oqnity oorvloo. Haricot risk Is 
at tho hoort ot tho risk shitting botwoon XPPo and leom and it io 
probably tba aoat aorleua risk facing any utility or noniitility 
dovolopar of oloctrle gonaratton today. It ia boeanaa of tbo 
unconpansBtad ahlftlng Of aarkat risk that ma ara abla to 
aaploy aucta high lavols of dobt in tboir capital strueturaa 
without facing axcaaaiva riak preaima in dabt intaraat ratoa. 

Ona Buat pondar trtiathar any truly ecMpatitiva aarkat could 
sustain 90 pareant dabt lavals for tba various oorporata onti- 
tlas. In no ethsr eeapatltlva induatry ara such dabt lavals 
apparant. In aanutacturing Induatrias, for inatanea, capitalisa- 
tion ratioa tand towards about 65 parcont dobt, and thaaa indua- 
trias ara lass risky than aloctrie powor. 

Thara is an anoraous aaount of risk asscelatad with long- 
gastatlen, capital -intansiva invaataants whara plant and oquip- 
aant ara highly apacializad and co^ilataly 1— obi la and fual 
costs and load ara uncartain ovar tba Ufa of tba facility. It 
is not PtiBCA that raaitlts in tba lavals of equity that axlst in 
tba alactrlc powar industry, nor ara roglstarad beldlng eeapanias 
tba only onas to hava 50 pareant oqolty ia tbair capital atnie- 
turoa. Bacausa of tba risk Inbarant in alactrlc powar, it is tba 
aarkat wbieb raquiras aueb bltfk lavala of aqulty. It a eorperata 
II 



D,g,;,zeclbyG00glC 



•ntlty in th» ■lactrie pewar induBtxy la abls to ■ostain vary 
higb lavaraqa. It Ban cply ba la ac auaa tha anoraoua rlak la 
ahlftad off of that antlty and on to ■cwaiwia alaa. Otharwlaa tba 
riak praaltm in intaraat rataa would far MioiiJ tba tax advantaga 
to dabt and, abaant any aajor aeenoiie affieianeiaa, tba lavar- 
agad antlty could not eo^ata. 

TtM aasoelatien eZ aarkat riak witb blgh loc aqulty lavals 
waa raeognisad in a report producad by tha Staff of tba sanata 
Bnargy Co^ittaai* 

A typical alaetrie utility baa a capital 
atructura with 90t dabt and 50% equity. Tliis 
raflacts tha fact that utilltiaa taava vary 
tangibla aaaata, yt m*ir Mrainga can vwy 
■ubatantially with ehangaM in mIm or ragulato- 

troa* genarally have a capital atruetura 
witb SO to 90 parcant dabt. thla raflacta tba 
fact that NUC* (Ilka utilltiaa) taava tangibla 
aaaata in tha fora of a powar plant. ||^|£ 
iapoif ntly. a HDG tYpically "" ■ long-tara 

Bflinr contract with a utility that aaaurM 

atabla ravanua^ fpr th^ HUp . [aaphaala addad] 

Tha algnifleant fact ia that tba IPP ia a wholaaala producar 
aalllng to a ratall aallar vlth an uncartaln aazkat. Iho fact 
that tha IPP baa a contract "that aaauraa atabla ravanuaa" whlla 
a utillty'a aamlnga can "vary aubatantlally with cbangaa in 
aalaa or ragulatory policy" Indieataa that an IPP can aacapa 



rat -Financial 



D,g,;,zeclbyG00glC 



■■rlMt risk by shifting It to tb* 100.' Hi* Bathod by vbidi tba 
risk Is shsd by ths ZPP Is ttas contract It has with tba lOD. 

Mocb eenfiuien axists en tha typa of eentraots that vlll 
■xlst bstwaan iPPs and lODa. Previously oontracts wars daserllaad 
aa taka SE P*y which antallad a "boll of hl^ watar" oonnetatien. 
nta isplieatien vas that tba 100 vould ba obligatad to pay for 
powar wbathar tha powar was availabla. Now noat obaarvars faal 
that IPP powar eontracta will liwolva Minisua availability 
elaus«a or ninlaus parforaanea elausaa in which tha ZOU would 
■aka capacity paynants only whan mlninun standards wara nat. 
Such contracts ara rafarrad to as taka aai pay contracts. 

Hhathar tba contracts ara "hall or high watar" Is irrala- 
vant. For aoat r^Mtabla IFP davalopars, aaatlng tba alnlaun 
availability raquiraaanta aheuld net ba difficult— aspacially 
whan gaa turBina or eanbinad-cycls tachnologias ara si^loyad. 
What is ralavant is tha inclusion of capacity payaanta. Bankars 
will raquira contracts basad on both anargy ud capacity pay- 
■ants. According to Cbarlas R. Frank, Jr., Senior Vlee President 
and Manager of Energy Project and Dtllity Financing for 6E 
Capital Corp., the contracts that wist exist would include the 

*Zt should be noted that tha axlstanca of tangible assets In 
no way pratac±a against earkat risk in tha area of electric powar 
generation. Protection against Market risk would only ooour if tba 
tangible capital ware eaaily transferable; that is, it could ba 
sold for full value in tha event of financial dlstraas. In taet, 
the capital enployed by the electrle grower induatry is "idloeyn- 
oratic." It is single purpoee capital net easily transferred te 
ether uaas. ks such, electric power capital would noraally sell at 
■udi lass than its underlying value in a distress situation. 

13 



D,g,;,zeclbyG00glC 



W* tand to favor pricing toasad on a capaci- 
ty covpanant daflnad in t«r«a of dellara-par- 
kiloMatt-par-sonth or yaar and on an anaryy 
co^Tonant daCinad In taraa of eants-par-kilowatt 

Pricing b«*ad on a singla canta-par-kilo- 
watt-hcur oo^anant la max* af£actad by output 
fluctuatlona and tanda to ba riaklar to tlto 

f Inaneiar. . . 

Tha capacity eharga ahould ccvaz- all ooata 
^Icb ara not variabla, including fixad cparat- 
Ing oostfl, tlxad tual eoota (such aa daaand 
ebargaa Cor pipalina aocaaa) and f Inanelwa 
coata. Ineludlna dabt aarviea and a fair ratum 



It ia tlia capacity paynant co^^onant, tba guarantor of dabt 
aarviea and tha aquity ratum, that predueaa tha narkat riak 
■hitting. This riak shifting occurs whathar tha contract la taka 
BE pay or taka ud pay. 

It ia for thia raaaon that rating aganclaa ara taking a naw 
look at ccntracta cthar than taka or pay ecntraeta. Standard t 
poor's, for inatanca eapltalisaa tha paynant atnan undar a taka 
or pay contract and eonaidara it a dabt aquivalant. But tha 
agancy ia alao concamad about tha afCacta oC taka and pay 
contracts :* 



'Charlas R. rranki Jr. 'Financiars of Altamativa Enargy Mow 
Hilling to Asauaa Nora Projaet Kiak" Cogiimrmtion Saptan- 
bar/Octobar, 1989 at 34. 

r's "Dtllitias Credit Cn— int" Nareb 36, l»»0 



D,g,;,zeclbyG00glC 



BtV do«a not uixply treat tbtim «■ dabt agulva- 
iMta. Btlll, ■ utility'* ersdlt quality Indi- 
eatar* eui b* advaracly iapactad ainoa ita 
ovarall fixad dtazgaa can inoraaaa draiutloally. 
Onsa tba ralatlvaly hi^ •vallabillty factora 
ara »at by tba HOG, tba baying party ia abllqat- 
ad to maka tha Minima sapaelty pay»anta whotbar 
ar not tba pow a r la actually naad... 

Ilia growing Clxad cba^aa aaaociatad wltb 
purchaaad powar alao incraaa* oparatlng lavar- 
aga. In otbar worda, tba ratio a< oaab fixad 
coata to eaab varlabla ooata eould Incraaaa as 
tba ntllity'a oparatlona ara nora dapandatit vpui 
OMitraetual ^ligvtiana aa oppo a ad to ownad 

oapacity. CaiiT»llv. th. rlmk 1. «lnntflo.i.t 
whit ralianea on thJrt-Mrtv eMomeity imMlll 
IQt of total capacity .uaoly. atP iiill »Mly»» 



aolcinn at .n ■l^^ll«t■ll flirad ehToa Bonrmam 
Mhleh Mill incofparaf eaah flnw eovaraoa at 
miaii ralianea on thira-^--^ ^.T^^t*y «eo— da 



eaaaeltv aavMnta 



Moe^'a invaatora Sazvlca takaa a ainllar approach to taka and 



^wdy'a Invaatora Sarvlea "Meody'* facial coMMBt" Angiwt, 
IHO at 5, a. 



D,g,;,zeclbyG00glC 



It ia tlw ntility'a aMnption of J— ■nd 
riak and tba ooMoa»lta n t lodclng into • long- 
tars fir* eeotraot with a ftxad-oeat oaaponmat 
vhlGta rapr aa a n ta tba. Boa:! algnlfleant drain on 
a ntlllty'a financial flaxibllity. Ona of tlw 
waya that ■oody'a diaanalona tha axtant to ahlA 
tbara has baan aroalen in flnanolal f laxlbili^ 
la by atta^ptlng ta qaatitify aacb flxad obliga- 
tiena. Spaclfleally, wa atta^t to Includa tba 
aettial Intaraat oo^ianant of oapacity or flxad 
paymant cAligatlona aaaoelatad vlth long-tarM 
purehaaad pewar eoa tra cta In a ntlllty'a flxad- 
Aarga oo vra ga oaloolatlon. In addition, wa 
eeaqputa an adjnatad-lavaraga ratio, Incloding 
tba ralatad dabt obligation aa part of total 



haraiaant m ahifti— ■» «-rt.t al-fc 

Ttiara la eonaldarabla agraaaant that KaAat rlak la ahlftad 
froa ZPPa to ZOOa in tba praaanea of a iya c tad eontraetual agraa- 
■anta. According to Glann Hclaaac of Bwrgy Nanaganant Aaaocl- 
ataa. Inc. i' 

Ibaaa oc^iltnanta typically provida tha 
indqtmdant paroducara with an aaaurad aarkat and 
a known prloa for thalr facllitlaa output. 
Ttaaaa aaauranoaa ara axtraaaly ii^ortant baeauaa 
thay ^ign tba "narkat riak" to tha utility 
rathar than tba ZPP. . . 

Undar oMitraeta wbleb provida an aaaurad 
narkat and an aaaurad prlea to iFPa, tha pur- 
chaalng uttlitiaa baar tha rlak that tha powar 
will not ba naadad In tha tutura or will ba 
unaoonealc ralativa to othar aourcoa of aupply. 
Thaaa ara tha aoat aignlflcant rlaka aaaociatad 
with invaatjaant in alactrlc ganaratlng faclli- 
tlaa. 



D,g,;,zeclbyG00glC 



Glann Jkmmeto and liw«n Carlow, tm Insurutott industry wmcu- 

tlvM, hav* net*d tb» um •tt»ott' 

ni* leng-t«TS contract vitk prlc« eartalnty and 
guarantaad aalaa raaovaa ttaa ■•rlcat rlak trtm 
Um vwitura. with an aaaurad ravanua atrAaa, 
arvan tha •■allaat davalopara finanoa boga 
projacta on a ■ 



Tba Cbairman of DoBinim Kaaouroaa and a pr^onant e£ ZPP daval- 
ojwant, Nlllia* Barry, aaaaa to agraa that th« purchasa powar 
contract ahitta aarkat rlak tiom IPPa to lOOai' 

And finally, tbara ia tha naad for powar. Do . 
yeu raally naad thia projaet? That risk la now 
boma by utllitias and tbalr euatevara and It 
veuld continus to ba boma by utilltlaa and 
thair cuatoaara... 

Itaa utility rataina ao«a riak aa I hava 
Indleatad baCora, *arkat riaka, fual prlc* 
rla3ca, and that va bava a contract with Uw 
indq>andant gsnarator that abaltara tola trra 
that riak and tharafora ba can taka on that dabt 
without adding to bla Bmainaaa riak. 

Tbm contract that tha indapandant producor 
baa with tha utility ia an aaauranca of payaant 
rwgardlaaa of aarkat daaand and ragardlaaa of 
fual prleaa baeauaa thasa two lt«>« In by judga- 
aant continua to ba utility and utility cuatoaar 
rlska. 

It Bhould ba a ralativaly uncontrovaraial elMorvatien that tha 
■oat likaly contrasting aituationa that will axiat in a poat- 
Titla XV world will raault in a ahitting of tha crucial aarkat 
riak froa iPPa to tha purchaaing utility. Ttaa utility will baar 



^anacript «upr« at 74-76. 



D,g,;,zeclbyG00glC 



trCBtlng XTP. 



lb* aoat iaportant eoavetMnt* of oparatlanM riak arc p«r(ar- 
I risk and fnal ooM risk. 



Pr«vlsiialy, Moody** Imrootor SoTTleM had argtiod that 1 
luld Bhift eparatlMW rlak to purohaalng ZOaai<* 

If an "IndManJawf tuxna out to ba unrall- 
ablo, tba aloetrle otlllty will ba tb* ona to ba 
blaaad by both ouatBaara and ragulatera. ma 
utilitias will hava glvan 19 eontrol evor tbair 
ganaratlng awmaaa and yat will eantlnu* to 
ahonldar tba Toaponaibillty for preblaaa or 
changaa in aeonaaic or lagialativa oonditiona. 
A loaa-loaa aitoation oould davalop fen th* 
utility point af viaw. 



I atatad by Standard s Poer'a, aarliari" 



D,g,;,zeclbyG00glC 



Diil«a« Stat* raoulatars utb willing to 
•ee«pt bidding ooapatition ■■ • mibstltut* for 
« utility's ebllgatlon to ••rv* (« vary unlUuly 
■vantuBllty) ewiateuetlon or opwktlng aliarteea- 
Inga by a third party gwwrator eould r«mlt in 
ragulaterlly lnyo^ad p«iwltl«a against tha 
purdtaalng utility. liallarly. If eontraetad 
purebaaad powar faila ts aatorlaliaa or prevaa 
to ba unraliabla tba utility nay ba ragulrad to 
aeealarata ita own oonatruetldn aetlvltlaa at a 
lata data, tharaby raaultlng In graatar coat 
than pravloualy antloipatad and a graatar rlak 
of ragulatory dlaallmfanea. IIm utility baa an 
obligation to aarvat tha third party preducora 



Currantly Standard C Toer'a eonaidara purcbaaad powar to t 
Inharantly nora riaky froa an oparationa atandpoint:" 

Bacauaa conatructlon, financing, and opar- 
atlng rlak aaaociatad with NDGs craata concama 
about rallablllty, StP will ganarally axpact 
blghar raaarva narglna in ooi^anlaa with aignlf- 
Icant dapandanca on third-party ganaration, 
tAiara algniflcant la dafinad aa ovar 10% axpo- 
■ura. Nhlla avaraga raaarva narglna for utili- 
tiaa ara conaldarad adaguata at 15% to 17%, 
Incroaalng a^^oaura to third -party ganaratora 
nay raquira raaarva narglna 3% to 5% hlghar than 
this avaraga to eonpanaata for hlghar rsllabili- 
ty risk. 



"standard C Poor'a at 3. 



D,g,;,zeclbyG00glC 



Moody's hu raettatlr atatad tho followingi" 

Moedr'a oa w aldara it li^Mrtaiit to nota that 
lAilla aany na planta ara Oaslgnad hf tha aa>a 
aagiaaara, koilt hf tha aaaa OMiatxuetlea flzaa 
and Btiliaa tha aaaa agalf— it aa thaaa of 
axlating oaeftral atatlon atlllty plaata, thay 
ara alae typioaUy built with laaa ayatw raOttn- 
danoy and on a tighter badgat than utility 
faeilitlaa. Zn additlen, - 



projaota eftan ara aotivatad ta taka tbair 
aqaity ant aa gaiokly aa poaaibla, parbapa to 
tha datriaant of tha prelaet avar tha ijag tara.. 
Zaanaa aaoh aa thaaa vould ba oonaidarad in tba 
analyaia of tha oparating riak aaaoclatad with 



Propenanta of IFF pow ar agraa that ZODa will and abould baar tha 
cparatiena riaka aaaoeiatad with purohaaad ptwar. Williaa Barry 
baliavaa that tha utility ahould ratain aparatlona riaki" 

And en tha otbar aida you would hava to aay 
tba utilitlaa ara taking en tha riak aa to 
wtaathar thaaa paepla actually parfen under 
contracta. So, wa have a ahifting of riaka. 

■»«! ea.t ai«t 

Fuel eeat riak reflects the fear that fuala uaad in electric 
generation will ba c oaa acre expanaiva in tha future. Charlea 
Frank, of 6E Capital Cc»p. , stataa that bis eeavany is very 
aansltlv* to fuel coat risk and that «E "f inda It auch aaaiar ta 



"Meedy'a at ■. 
■*fcai>«cript at 75. 



D,g,;,zeclbyG00glC 



financ* projaets r«latlv«ly liia*BsltlT« to wwrqy prieas."" 
This raguiraa that tha fual rlak b« ahlftad in th* aiMTvy coape- 
iMnt of th* purohaaa powar oontraot whlefa 'ahould covar ttia 
vsrlabla eeata of running ttaa plant."" 

Diacnaalona with ImraatMant bankara eontim that landara vlll 
raquira aoaa fora of fual eeat aaoalater elaiiaa In tba purchaa* 
pOMiar eentraet. naaa eocitracta may ba baaad mi ganaral indaxaa 
rattiar than ti*d to a apaciCie fual ao In that aanaa a minor part 
of tha fual coat rlak Bay raalda with tba IPP. 

Again, preponanta of changaa in POHCA argua that lOUa ahould 
baar tha fual cMt risk. Hillla« Barry arffuad tha Cellovlng In 
Sanata tastlBonyi" 

Fual prlca rlak, th* ganaral coat of fual, 
not a apaclfle contract, but la ell going to 
tripla or aoaathlng lika that, la now bom* ty 
utilitlaa and thalr euatoaara. And wa think 
that undar a good contract thay ahould contlnua 
to b* bom* by utilitlaa and thalr cuatmara. 

In ahort, oparatlona rlaka. Including parforaane* riaka and 
fual coat riaka, will b* ahiftad frcM IPPa to pnrohaaing utili- 
tlaa. 



Tha praviouB portion of thia papar baa daaeribad tha thraa 



"Frank aupra at 35. 

"M. 

"nraaaeript mpra at 74. 



D,g,;,zeclbyG00glC 



tw>a— nfl urtH* of risk asaeelatMl with •laetrie powar gMMn- 
tlon uid how tbM« riaka treuld b* alloratad nban iPFs ur* aalling 
pcMMr ts ion. OB wtgu ctlen riak la aaaantially nantral batwaan 
tba "build" and "bny" optiena. Harkat rlak ia boxna by ttw 
nUllty in tba build o|>tioa and would ba ahiCtad tram tba xrp to 
tba ion ia tba boy option. Opantlona riak ia berm by tba XOD 
in tba build eptien and would alao ba abiftad txem tha ZPP to tha 
XOO In tba buy option. 

— >-> — «^ . ,!.> Mtl^H^ 

Tba financial aarkata eontin tbat tba rlak ablftlng will. In 
faet, eeenr undar pvrdwsa pewar eentracta. xtaia la apparant in 
tba lack of aiqtaetad rlak pranluna in dabt intaraat rataa Cor 
XPM aapleying larya anoonta of dabt in tbalr oapital atruc- 
tnraa." Tbm Sanata Staff r^ert haa notad tbla phanoManoni'* 

Oneo again, tba praetlea of junk-bond financing 
la aaaantlally Irralavant to NDB financing. 
Junk bonda typically paid axtraaaly blgh Intar- 
•ct rataa and did not .hav« any atabla aouroa of 
ravanuaa to pay oft tba bonda. ^^* '***^ in- 
BBmfl tor BPgd tmiallY .bktjm aiUy i. dlightto 

currad bg MDSa tynlMlly m-rlaa only a allahtly 
haelcii by poMT —la r»v«iii— undar ■ nonta-aet 
with a utility, [aaphaala addad] 

In faet a aurvay of Invastnant bankara and rating aganey 
of f ieara indleataa tbat IPP dabt rataa would only ba 50 to lOO 
baaia peinta (ana balf to ona paroant) hlgbar tban utili^ dabt. 



D,g,;,zeclbyG00glC 



Ja««pb K»«rtMy, of P6tz-B«ti)t«l C«iMr«ting Ce^any and ■ ^ropon- 
Mit eC IFF tevalopaMit atatas, "If th*r« was any til^Mr risk, wa 
would net ba abla to finanea tha 10, 90 pareant laval Mhleh ia 
ganarally wbara tbaaa tmu] ar* flnanoad at."* 

Tha tlnaneial Murkata «r« tailing ua that IPP dabt ia not 
tarribly riaky. Hew can that ba wban tha alaetric huainaaa 
itaalC la vary riaky and tha narkat will net allow thoa* vltta 
ttltlBata raaponalbillty for providing alactrlelty te usa larga 
quantities of dabt? Risk doas not siqtly disappear. If IPP dabt 
doss not contain a aubatantlal .lak praaius it can ba for only 
ens reasan: Tha risk is shiftsd te tha purtiiaalng utility who, 
by tha way, is alae a conpatitor for tha prevision of pewar. It 
ia a fairly obvious stataaant te aay that In a truly conpatitlva 
Murkat, ae*a oa^»anias cannot as a sattar ef eeursa shift tbalr 
financial risks te tha very eeapanlas thay ara coipating against. 

It is tha shifting of financial risks without ea^>anaation te 
lOSa that allows IPPs to take en axtraordinary lavals of dabt 
without incurring tha addad risk-prssius dabt costs that sarvs aa 
a normal source of diacipllna on financial structure. There is 
nothing inbarantly wrong or avll about debt, even debt at high 
lavala. It ia only when the risks and coats aaaociatad with dabt 
ara net properly conaldarad or borne by these Baking tha dabt 
financial decisions that problass occur. Hhan individuals can 
reap the financial and tax banefita of dabt while ahlfting tha 
eeata of dabt alsswhare, then distraaa will arlaa. 



'^%ttaseript supra at ?•. 



D,g,;,zeclbyG00glC 



■ebal iMnrmmtm aMrry Harkowlta madm «net3.r UUs point ia « 
raeant laetnr* en tlM 1^»bo m of to w g a go la tbo IVtOa. Ho notod 
tbot It ma tbo ai— tdi of riak and romrd, eftan oauaad by 111 
■nitad laatitvtlana, that raanttad ia fiaaaeial crUla and atatad 
that, ■«• Bbould try to allainata aitaationa Ntaara ena party 
aakaa tba daeialena «ad raapa tba galaa ablla ■aMaon» alaa paya 
tba oaata cr anffara tba loaaa a ."* 

. In fact, tha eiaaaBlal riak ahlftlng which allowa an IPP to 
aajoy a lowar coat of sapital alao iapB»«» naw ooata on tba 
purebaalng XOO. Iliia ahiftlng of XFP dabt riak to tba pturctMaln^ 
utility eraataa a aitaation ahara m lavaraga, and tba co rro- 
•pondlng eeat of oapltal advantaga, can only ocour baeauaa of an 
offaattlng ooat of capital diaadvantaga to tba porchaaing utili- 
ty. Acoording to elan Hclaaac, for tba ■pnrcbaaing utilitlaa, 
mmb eoaaitaoata Incraaaa financial riak axpoaura and raault in a 
bi^iar coat of capital, and bigbar raguirad aquity ratioa."" 
Xkaaoto and Carlow argua that, "ta] tauainaaa taklag betb produc- 
tion and aarkat riaka would aaad aignificantly aora aguity."" 

nia coat of capital incraaaa to tha utility la dua to an 
areaion In tba ntlllty'a eradlt rating wban thara la a graatar 



''Harry M. Harkowits ■Markata and Morality" Vail Stx**t 
Joomal, Kay 14, 1»9I, p. A23. Karkowits aharad tha 1990 Nobal 
Prisa in aconoMiea with Willlan Sbarpa and Harton Millar. Thaaa 
tbraa ara tba aaalnal tbinkars in tba araa of financial aoonoNlea 
Including portfolio thaory and tba aooncaicB of financial riak. 

^loZaaac aupra at 12-2. 

"Zkaaeto and car low aupra at 11-3. 



D,g,;,zeclbyG00glC 



rallane* en ImtapMidMit powar mni/me thm iitaem^mmi iw«d tov 
•qulty in ttw eu^it«l ■tmetor* «C tlM vtllity. According to 
Kcody* Invastor ■•rrievs "[glTSBtor r«llano* on purolwsad powar, 
•ap«el«lly It oesta and rallabllity ara plaead outalda tba 
utillty'a control, la llkaly to arada quality and laad to lowar 
Koody'a ratings. o** Xtaus, -aitnationa ara llkaly to ariaa wtaitf) 
will incraaaa a ntility'a coat of capital."* IIm raaaona for 
ttaa Ineraaaad coat of capital to tha utility ara ttrafeldt" 

If oradit quality la datarioi-ating, tba utility's 
evarall coat of dabt and aquity capital will in- 
craaaa baeauaa of (a) tha talgbar coat or dabt tbat 
would ba iaauad in tba futura, and (b) tha hlghar 
riaK to tha aquity boldara baoauaa of Incraaalng 
buainasa rlak> 

Tba coat of capital advantaga to an IFF la oftaat ^ a coat of 
capital datriaant to tba purcbaaing utility. Tba situation la 
dascribad as a fif^^nqi^^ g j;t ^i7Tffl,l,t Y baoausa tba IFF la abla to 
shift riaks without payaant." To illuatrata ttaa concapt of a 
financial aarkat fallura, two diffarant acanarloa naad to ba 



"Burka supra at 6,7. 

"Jd. 

"CoKMant* Of Moody 'm Tovsstor sarvicas bmtorm thm Oaitmd 
Statas Ssnata Coaaittaa on Otax^y and Smturml Rmmouromm, rabruary 

12, 1966, p. 2. 

"jUi axtamallty occura whan tha fraa aarkat talla to account 
tor all coats and banaf Its in a particular transaction and 
tbarafcra tba actions of ona aeonealc actor afCaets tba wall-baing 
of anotbar. Anotbar way of looking at tbia concapt la to nota tbat 
an axtarnality occurs tAan ona individual is affactad advaraaly by 
tba aetlona of anotbar and tha aarkat talla to provlda tba propar 
ce^Mnsation to tba daaagad party. 



D,g,;,zeclbyG00glC 



m tte first, an ixOmpmnaaat m, NhiA la ■ Mpurat* 
OBgpod M f Mttlty, eeotraat* to salt pewar ts a ntllity. In tiia 
■■Bowd, m ntiliQ Mitfl op iti OHD ZPVt and bag* pewar trea It. 
In tlM first aoanarlo, tba in dag i da w t. m, •■ a Mparata eocpe- 
rata antity, anjeira a raal east of oapttal advaatafa. ika 
asaociatod rlak ooata ara ***•"•'" ^ to tba Zpr and ara tap na art an 
anothar oorporata antltar. tba atility. &a aaeb, tba indipanda nt 
XPP can aak* vwa of Ita eoat of capital advantata and prio* pcwor 
at a lowar prica, offar a btgbar aquity ratum or abaorb «raator 
layara of Inatficlansy and still raaain oe^atltiva. 

In tba saeand seanarie, tba utility's Ipp ean only produos a 
eest of o^ital advantaga by laposing additional eesta on tba 
parant corporation, ainea tba XPP and tba utility ara eontalnad 
in ona eorporata anti^. Tba asaoclatad riaK eosts sra <««-m-i>»^ 
to tba ccnporation, Nfaicb baa no axtaxnal placa to sfaift tba 
risk.. As such, tbara is no utt eest of eapital advantaga to tba 
corporation and it cannot prlco alsctriclty at a lower priea, 
offer a bigber egulty return or abaorb aora inaffielsnoy. 

Tba utility suffara an artificial cost of eapital dotriaant 
only if it is net oeq>ansatad far tha additional financial riaks 
•biftad to It by tba ZPP. ¥by would tba utility bear risks it is 
not paid te bear? Ibe answer to tbis questiMi ravaala uby tba 
•itoatlen la daseribad aa an "axtaznallty,* a nartet failure, as 
opposad to a funetlenlng free Mtrket. 

3C 



D,g,;,zeclbyG00glC 



In • noTBal Muscat satting th* 100 ceuU bargain with tha 
IFF or raqulra that "axtanutl" eoata ba intamalliad aa part of 
tba bidding proeaaa. A anrvay of atata bidding praeaaaaa by tba 
Mlaon Elactrie Inatituta did not abow any axaaplaa of aiq^lleit 
atta^rta to aoooont for tba financial ooata lapoaad cm lOOa by 
third party ganaratera." fltara ia no procadura to data to add 
tha financial axtamallty ta tba bid prloaa of XPPa or to lapoaa 
aquivalant capital atruotoraa. A 19*9 atudy aiqtllcltly lookad 
for 'full coat accounting" in bidding procaduraa;" 

Bnargy Hanaganant Aaaoclataa, Inc. haa raviawad 
■oat of tha co^Mtltiva bidding ayatava adeptad 
by utilitlaa acroaa tba country. Nona of tha 
avaluation procaduraa In tha bidding ayataaa 
raviawad axplicitly racogniza tha financial 
rlaka aaaociatad with cenaitaanta to purohaaa 
powar troa XFFa . Inataad , tha pr icaa bid by 
indapandant auppllara ara co^arad dlractly to 
___^_ . ^j traditionally flnancad utility 



Hot Burpriaing, whan Dalaarva Powar t Light propoaad includ- 
ing an Equity Adjuataant Factor in ita bid avaluation procadura 
to account for tha d«trl*antal affaeta en cradit rating of using 
IPP powar, it waa vigoroualy oppoaad by tha national Indapandant 
Bnargy Froducara." 

Tha lack of avidanca of an inclualon of tha coata of rlak 

"£•« Bdlaon Elactrie Inatituta Coapatitlva Bidding in tha 
Invaator-Ownad glaetrie Utility JnAiatry, July, 1990. 

■■Glann F. McXaaac supra at 12-4. 



D,g,;,zeclbyG00glC 



ablftlng in biddiag prooaduras prov*a ttat Um flnuteial wttanw- 
llty exist*. That oests ara ahiftad ts ZOOa ia ladiaputabla. 
^Mt aneh oaaCa ara aat aeeeontad for in any of tba bidding 
proeaduraa is alae indiapntabla. Tax eoata to b* aooountad for, 
tttara auat ba an o^lieit raqnlraaant in bidding prooaduraa tbat 
altbar iPPa provida i amiiiai ■! Inn tor oantraotttal rlak shifting, 
ttaa risk ceata »z* addad to tba XtP bid priea for bid avalnatlon 
purpoaaa er tba ZPPa ara not allowod to ahif t rlaka through 
eontract. niua, tba eozrant and proapaotiva ralatioaahips 
batwaan lOOa and ZPPa aMBt ba ebaraetarlsad aa »»<•>■» * alinr— . 
not coapatltlmi for ganaration. 

Tba axlstanea of this financial axtamalltr baa baan ana- 
lysod fay at Isaat ana larga Invaatnant banking bouaa. In a 
lattar to Sanater Bannat JeHnston, ThoN>a Coutfilln, Managing 
Diractor of Invaa^Mnt Banking for Karrill I^rneb statad tha 
following;*' 



D,g,;,zeclbyG00glC 



To th« Mftut that utllltisa tak* on aer*. 
riak in ccnqiatltivvly bid powar purdwaaa with- 
out obtaining offaatting rataa oC ratum, thair 
eoat of capital will incraaaa whlla tha HOS's 
ooat of capital will Im corraapondingly raduoad. 
Tha raault la a hiddan eroaa-aubaldy that aay 
produca an Inafflclant and unaconoaile raanlt. 
In a non-ragulatad, fraa aarkat anvironaant, it 
would b« laqprudant tor an invaater-ewnad utility 
to aceapt tbaaa riaka without the m^oapaet of a 
hiqfhar rata of ratum. Utllltiaa do ao currant- 
ly bacauaa of tha aubatantlal Influanca that 
ragulatora hava ovar tha conpatitiva bidding 
procaaa and othar utility ralatad oparatiena of 
tha coiqwny, and the fact that tha ragulatad 
utility alao haa a atatutory obligation to aarva 
which la not aharad by indapandant pcwar produe- 
ara. 

nia praaant conpatltiva bidding ayataa 
raaulta in a ahort-tara aubaidlBation of tha 
ratapayar bacauaa tha indqtandant powar produca- 
ra' costs of eapital and up baing artificially 
lowar than tb«y should ba, and utility stocK and 
bond holdara absorb tha loaa through aarkat 
prlea dapraclatlon aaaoclatad with tha utility's 
Incraaaad risK. Dltlaataly, ratspayara will 
covar tha coat of this cross-aubsldy whan tha 
utility finds that it naads to ralsa additional 
capital in tha financial aarXats In ordar to 
flnsnoa its ragular utility bualnaaa and tha 
utility's slsctrlc asrvloa rataa ara incraaaad 
accordingly. 



Tha financial axtamality is not lUcaly to ba aecountad for in 
•tata bidding proeaduraa. Stata POCa »ay hava a diffarant 
planning horizon than lOUs and cartalnly faca a diffarant aat of 



D,g,;,zeclbyG00glC 



IncMitlv**.** lOOSt fskrful at ar poet ^ntMney r«vl«m or oUmt 
Mmetlona, eonU •uily Im eeapallad to purebavs indqMndwit 
pe wr avMi tilwn such powar will |»x)v* botb wcpaitsiv* NhMi all 
lenv-tarB eoats ar« Zully ww id. Ibis de«s not bsui ttMt tlw 
IDC ia ignorant—it nornly nquima that rac offioiala oporating 
In * polltieal world with m fairly ahort political tina horison 
roq^oiid ratiooally and neraally te Um polltieal ineantlvaa 
Intaarant in tha atnctnra of ttaa ayataa. Utar all, it la tbaaa 
officlala Nlio ara tha final arbltara of tha aaricat for ganara- 
tion, net tha invlalhla hand of tha fraa aarkat. 

niia aaetion haa daaeribad -tha rlaka Inharant in tba alae- 
trle powar ganaratlon buainaaa and tba way aucb riaka would bo 
ahlftad froa IPPa to lODa. It baa alao illuatratad that tha rlak 
ahlfting would not ba ooapanaatad eraating a naticat failura. Zt 
la wall known aa a thaeratical aattar that axtamalitiaa raaolt 
in a loaa of aconoaic afficiancy. An a^iTical analyaia of tha 
eonaaquancaa of unoe^panaatad XPP riak ahifting ia providad in 
tba naxt aaetion. 



"tavaral yaara ago aconoalat Jaaaa Buchanan waa awardad tba 
Kobal Prisa for hla raaaarch on "Public Choica." Tba Public Oielea 
•ehool analyiaa tha Inoantiva atruetura that dictataa tba bahavior 
of govamaant offioiala. Politiciana, for inatanea, that faoa a 
two yaar alaetien cycla will rationally ba aetlvatad aora by ahort- 
tera avanta than by avanta tan or twanty yaara in tba futura. 

Tha aaaa typa of analyaia can ba diractad at offioiala aarving 
on public aarvica oovaiaaiona. 



D,g,;,zeclbyG00glC 



fh* pr*vious ■•atlon dcscrlbad how risks eui b« shiftMl by 
ZPPs to lOtM vltbout ee^puiaatien. Vxi* ■•etien «iplrically 
d*BonBtrBt*« tb* coiis*quHic«s of this typ* of murkct fallur*. 
PrCTious Ejiperfaiee wHh Market VMun 

Dnfortunatkly, axa^las •bound of Barkat dlatortloiw l«adlng 
to •eon«*ie llwtClclMney. In aoaa ammma, biasaa In tba tax coda 
lad to an inafficlant allocation of Invaataant. In othara, 
unco^anaatad risk abifting (uaually dua to ina^ropriata govam- 
»ant action in a partially daragulatad anvirenaant) lad te 
financial criaia. 

Baoant hlatory in an araa outaida of anargy aconoaiea baa 
polntad out tbat parfaetly rational aeonoaic aganta can ba 
induead te vaka daeiaiena tbat aay ba In tbalr own prlvata 
intaraata but antithatioal to aconoaic afficiancy and aocial 
vatlbaing. Tba Tax Safon Act of !»■« was tandaark laglalation 
anactad in larga part baeausa diffarantial tax traataant vas 
pareaivad aa eaualng axtraaa biaaaa in flews of invaataant. Tax 
faverad invasCaanta wara aada to tha axtant ttiat tba nation's 
o^ital stock ma viawad as akawad and inafficiant. flia tax oada 
was ballavad to ba producing difCaraneas In tba financial coats 
of capital aBong industriaa raaulting in ovar-invaataant in aoaa 
industrias and undar-invaataant in otbars. Thsaa tax-lnducad 
cost of oapital distortions wara tbeugbt te oansa Loaaas to tba 



D,g,;,zeclbyG00glC 



•cona«y In th* blllioiw eC dellU'*.'* Uthongb wmm otawrvwrs 
would urgu* that th* abj«ctiv« ms not nat, a primary goal of tha 
19I6 Act waa to r*dues tax-lndtte«d eeat of capital dlstortlona so 
that Invaatnanta vara baaad on aconoBlc narita, net on artificial 
financial biaaas. 

In Um I9«l)a crlala axlatad In tba financial aaetnr. Tba 
StL dabacl* and bad praaa aibent lavaragad buy-outa cattght tha 
attantlon of paliey aaJcara. Much of tba raaetlon took tba ton 
of mla-placad aaaaulta en debt whan In tha reality, tha problaa 
waa eauaad by partial daraqulatlen scenarlea where theea that 
benefitted fro* debt did not have to face ita ooeta. Nobel 
Laureate Barry Harkowita deacrlbea tha l»BOs< financial eriala:** 



" Sea . Jane C. Cravella "Tbe Secial Coat of Henneutral 
Taxation: Eatlaataa for Monraaidantial Capital* In Mprwciation 
latlmtion t Tha Tmxmtion of Incomm from Capital, ChaTlaa R. Rulten, 
ed. (Urban Inatituta — - Haabington, D.C., 1981), pp. 234-250; and 
Patrlc B> Handarahott and Shan-diang Hu "Govern»ent-jnducad Biaaea 
in the Allocation of tha stock of Pliced Capital in tba United 
States' in Capital, Bttiaimncy and GrMrtb, Geerge K. Von Puratenbe- 
rg, ed. (Balllnger — CaMbridge, 19«0) , pp. 333-360. 

"NarJcowita aupre. 



D,g,;,zeclbyG00glC 



Tbm 8U> •tructur* wioauTagad gaataling by 
SftL muMgaawita with 8U. funds. Th* rlska thay 
took iMT* in r*Bl aatata and junk bonds. Tb* 
9MM «ms Btrueturad so that if b«t« vur* wan on 
«v«r*g«, tbw) th» BiL »Mi«4«*«nt gainadi if tha 
lost, than Um U. S.tmxpmymr lost. 

A slailBT gaaa was availabla ts se— tnmr- 
•nca oaivaiiica. A good *)tanpl« is Fr«d Carr's 
Firat Eitaeutiva Carp. . . .Iba montiy with wbidt Hr. 
Carr bougbt junk bond* waa aoatly tha raaarvaa 
of inmranoa polioyboldara. Aa witb BUm, Trm9 
Carr b^a llttla of tba riak of tha junk bonds. 
llM risk was principally bema by tba polisy- 
heldars, who war* not wamad of tbia riak... 

Tha Gtiiaf cOMplaint about Wall Btraet in 
tha 19B0S was not about lawbraaking, but about 
highly lavaragad beati .« takaovars. J , p/of hn ^p 
tht .ImathMli .ttut, jinwiMi. ■in-ta>U.,KM,.i«M 

ni.t-»f«1v aiM to tha »«llahiHtv at laroa nanla 
of ■onav Ktinil Wlr<— *"■ «■»»■•« "^ -i««i»nw 
oould ha atuek with risk with llttla ar imhm af 
tha rawafd. without thalf taMWladoa or eanawnt. 
[e^Aaaia addad] 

Tba axtarnallty diacuaaad In this papar contalna alaaanta of 
both of ttaasa ISBOa aconowic distortions. lb* uneoavanSatad riak 
shifting rasults In a situation wbara thosa saking daclslona, IPP 
■anagaaants, do not baar tha eo^lata risk of thosa dsclsiens, 
and this ia aieacarbatad by tha artificial tax bias in favor of 
dabt and against aquity. 
Bnplrkal Anslvsh of Rkk ShiflUnf ImplJeaHoni 

This sactlon will dwwnstrata tba axtant to wtaieh tharo 
would ba an artificial cospatitlva bias in favor of IPPs undar 
agisting bidding ayataas. nta procadura is to Bodal iaportant 
financial varlablas for axlsting lODs and potantial IPP davalop- 
ars. Actual cotpor a tiona ara naad in tha siMulations. Potantlsl 
IPP davalopara ineluda pura indapandants sncli aa Lang I«ka Bnargy 

33 



D,g,;,zeclbyG00glC 



Cerperatlon and 100 mbaidiari** daalraiw at oparatiov In ethar 
aarvloa tarriterlaa. Tha ta^wical dataila et tba aaalyaia ara 
daaetrlbad In tba Appandix to thia papar. 

nia aaplrical analyala baa four at^a. Tlia firat ia te 
iaolata tba pnraly tinanclal a^acta of unooapanaatad risk 
ataittlng by calculating tba ralativa dlaoeunt ratas for ZPPs and 
lOOa. Xba naxt at^ is te uaa ataadard invastsant eriterla te 
abew bow ganaration invaataant will ba biaaad In favor of tPPa. 
Tha raqulrad annnal eaab flewa for IPPa and lODa will ba calcu- 
latad aaauaing Idaatieal faeilitiaa and coat •ttleiaaelaa. Thia 
will abow how IPPa can ■yataaatlcally undarprica lODa. Tttm naxt 
axparlaant calculataa tba aaxiaua aquity ratum an IPP could 
effar and atlll ra»aln priea eoivatltiva, aaauaing idantical 
faeilitiaa and atf Icianciaa. Tba aconoMlc lltaratura pointa out 
that whan tbara ara artificial biaaaa, aconoalc Inafficlancy 
oftan raaulta. Tha final axparlBant ralaxaa tha aaau^tion of 
•qual affielancy and aimlataa tba aaxiaua additional coat 
Inafficlancy an IPP could diaplay and atill raaaln prloa co^atl- 
tlva whlla paying aquity taoldara thalr hurdla rataa. Per thaaa 
alvulatlona a aaapla cf raal eoapanlaa wara ehoaan. Tha aaapla 
includaa aavan potantial IPPa and nlna axiating lODa. - 

Tfta waighf a l^yata^a Coat ot Capital 

Tba flrat atap in tba analyala la to daacriba bew tha 
unco^panaatad riak ahifting and tha tax advantaga tc dabt raaulta 
in a ayataaatie coat of capital advantaga for IPPa in all but tba 
■oat trivial of axaaplaa. Tha standard tinanclal rapraaantation 

34 



D,g,;,zeclbyG00glC 



of th* oMt of Capital !■ th« Walghtad Average Coat of Capital 
(MACC) . Tha UCC ia ttaa ■inlmm rata of ratum en an efter- 
corporata-tait caah flow that an Inveataant aMBt yield to ceapan- 
aete debt and equity Iwlders for putting capital at riak. it 
previdea the beaie tor the diaeeunt rate that e o rpcaratiena apply 
to after-tax eeab flows wben evaluating inveet»ent epp«»tunities. 
By definition, the mcc ie the weighted average of the required 
retiffna to debt and equity holdera. Aa audi it i ne or po rataa the 
risk preeiuns Inherent in the required returns. 

Conventional corporate tliience analyaia calculates both 
batere-tax eaeh Clowe and inceae taxee as if the inveetaent were 
financed purely with equity. The diacount rata (NACC) uaed to 
- discount the after-tax caah flow, however, reflects the deduction 
e£ intareet axpetiea. Thus, bath relative riek and the tax 
advantage of debt are reflected in the MACC. A caaparia<» of the 
HACCa for lODe and IPPa in real world aituaticma ahould ahed 
light on the question of a cost of capital advantage tear XPPs. 
Required debt ratea, equity hurdle ratea and capital etmcturea 
are required for the ea^^ariscn. 

I^ verena 1017 Debt Rmtmm 

All analyata would agree that, all else bald' eontawt. debt 
is less expensive then equity due to the tax advantage of the 
former. The Senate Staff report, previously cited, puts the issue 
in the pr^er analytical context;** 

"conway/Bauekar supra at 3. 



D,g,;,zeclbyG00glC 



If OM ecNld Iwld «11 •!•• aqual, m» m biwiiMMB 
iwad »or« d«bt, it« cost of capital would da- 
coTMiM. In tho roal world, bowv or , ono c»nBet 
hold oil olM oqual. If a bualnoM t«k«a en 
■or* dobt, this tondo tot 1) itMrouo tho risk 
of dofaultiag on dobt payaonta, and 3) Ineraaaa 
tba UBoartaintir and variability of raturna to 
aguity. Thia drivaa up tba coat of both dabt 
and aqulty, and thua drivaa up tba ovarall ooat 
of capital. 



Aa eonClraad in any atandard graduata laval financial aconowlca 
taxt, tba optlnal capital atruetura oecura "whan tha praaant 
valua of tax aavinga dua to additional borrowing ia jnat ettaat 
by incraaaaa in tba praaant valua of tba coata of distraaa."** 
Tha pravleua aaction baa daaeribad tba financial riak abifting 
and tha low laval of riak praaiua in IPP dabt rataa. Bacauaa cf 
tba riak abifting, IPPa can aaploy bi^ lavala of dabt and anjoy 
ralativaty lew intaraat rataa. X?P and lou dabt intaraat rata 
aaau^tiona ara daaeribad in tha A^andix and raportad in Tabla i 
for tba oe^paniaa in tha aaapla. 

IPP vs. ZOO BfpUty tnrOlm Xataa 

Kany proponanta of PDHCIL changaa argua that thara ia no 
inharant coat of capital advantage to IPPa bacauaa whatever tax 
advantage for dabt axiata aay be wiped cut toy tba higher equity 
ratnma «qMir«a by IPPa. Tfaia ia aoaewhat curieua. One wondara 
why, if tha Market ia aware that IPP dabt la net terribly riaky 
dua to tha purchaaa power contract , tba Murkat would net apply 



D,g,;,zeclbyG00glC 



tb* M»» logic to •qulty. kftar all, tlM mmmm atabl* rawnM 
mtrmam •ximtm for alwrabeldara as for thoaa holding dabt. Xr 
fact tha maAat doa* apply tha aaaa logic. 

Flnanoial analyata bava a ■atbodelogy to ■aasora tha risk 
aaaociatad with iRvaating in tha aqoltiaa of variona oaapanlaa.** 
It ia intaraating to ooapara ona of tha aora aggraaalva Indtyan- 
dant pewar davalopara with othar V. S. eorpontioaa that ara 
plaood in an idantical riak catagocy to thia IPP davalopar. Tha 
eovpuiy in quaatlon ia tha Long Laka Bnargy Corporation, flia 
■arkat conaidara Long Laka'a aquitiaa to hava idantical riak to 
thoaa of fbarwoed Milliaaa, Co.; Xarox Corp.; Haytag Corp.; 
Haatinghoiua Zlactric Corp. and Du. Pont Z. I. Da K«Mura k Co." 
niaaa ara not axactly high riak oparationa. In fact tha aacuri- 
tiaa of thaaa coapariiaa ara only alightly aora riaky than tha 
Standard t Poor'a 500 Indax aa a whola. 

In ganaral IPP aquity will ba fairly aainatraaa in tarma of 
riak analyaia. niia ia aapaciatly tna whan Ippa ara wholly 
ewnad aubaidiariaa of blua-chip oorporationa. Of ecuraa it ia 
larga coapaniaa auch aa Long Laka and utility aubaidiariaa that 

"Tha aathodology la known aa tha Capital Aaaat Pricing Modal 
(CAPK) . Laat yaar tha davalopar of tha CAPH raoalvad tha Mobal 
Prisa in Boonoaiea. CMH aaaauraa a coapany'a raguirad aquity 
raturn aa tha au> of a ralavant riak fraa rata of ratum plua a 
riak preaiua. nia riak praaiua. In ratum ia daf inad aa a function 
of tha variabla b*t» which aaaauraa tha ayataaatic riak of a 
coivany'a aquitiaa ralativa to tba atook aarkat mm m wtaola. 
Coai^arlng diffarant coa^any'a bataa providaa a way of gauging tha 
ralativa rialta and raquirad aquity ratuma of varloua co^anlaa. 

"Baaad on bata oaleulationa in Karrill lynett 'Saourity Xiak 
Evaluation" March, 19S1 at S8,6». All of tha eitad eeapaniaa bava 
bmtmm of 1.17. 



D,g,;,zeclbyG00glC 



wouU b* tlM MMt likely IPP d«v«lap«« If pohca c 
■■da. niar* will b« pr*ciouB faw atart-iv IPPs. 

Iquity hurdla rata* ata aaaaurad aa tba aua of a riafc fraa 
rata of ratum plua a risk praalua aa daaeribad in tha Appandlx. 
Tabla 1 (at tba and af tha aain r^^ert) diapiaya aquity burdla 
rataa Cor tlia aaapla lOOm and IPP daval^ara undar pv<«»liiy 
pMtditiona. In all likalihood, tha hurdla rataa for ZPPa will ba 
OMtaidarably lowar In a poat PDHCA-dtanga wcnrld than thoaa 
r^Mirtad for pura indapandants in Tabla l." niia ia bacauaa tha 
axiating burdla rataa ara baaad on eurrant coipatitiva and 
political conditiona. Ttiay ara aasantially tha ratum* an aquity 
invaator vould davand to invaat in « coapany that producaa 
Indapandant powar nndar PtntPA or tha raqulrad ratum on kn 
InvaatMant in a eoivany that Mic ba atala to axpand IX PDHCA 
Aangaa baooaa law. Tfaara ia conaidarabla risk undar PURPA that 
axpanaion ia raaehing ita llaita and anoraoua political uncar- 
tainty about tha daval^sant potantial for puraly indapandant 
powar net conatrainad by PURPA or PDBCK. if PtlHCA changaa bacaaa 
law both of thaaa aourcaa of riak would diaappaar and hurdla 
rataa would diviniata rapidly. Thla ia tha axpactation of rating 
agancy axacutivaa and invaataant bankara. 



'^Cba burdla rataa for lou aubaidiary IPP daval^ara ara baaad 
on pnbliahad Ba for tha lOD paranta and aight ba low ralativa to a 
poat PUHCA-changa world. (Saa tha Appandix.) Should tha parant 
bacowa haavily Involvad in IPP davalq^aant, tha hurdla rataa aay 
rlaa to aoaawbara batwaan tha lOU rataa and tha rata for a trua 
indapandant aueh aa Long Laka. 



3t 



D,g,;,zeclbyG00glC 



nw WMX Cmlaalmtiam 

TBbl* 1 also dlaplmya tbm MftCCa f^ tlM niiw lODa utd •««•» 

potwitlal IPP d*v«lap«ra. Flgur* 1 attorn tha rmng* of NkCC* for 
lOOm and IP?B 9r»phle«lly. 



rigura i 


Range of WACCs for lOUs and 1 PPs 

*l etrranx Eauily Hiirel<» nit« 


! !" 


.. 


un. 


— 


."". 


■~ 


rn 


fi 


" 




















□ ,»■ ..cc » ,«. «« 



Aa can ba aaan, in avary caaa tha m'a 1IACC la substantial- 
ly lowar than tha lOO's. For tha lOOa, FPI> Oraiv, Inc. la 
rapraaantatlva of a typical utility, falling soaawhars in ths 
■iddls for aqulty burdla ratas." In tha r«st of thia papar FPL 
will ba ooiq^arsd ta rsprassntativs IPP dsvslopsrs. FPL's NKCC is 
9 to 34 paroant highar than tha potantial IPP davalopara llatad. 



'*BU Appandix nota 4 



D,g,;,zeclbyG00glC 



Not* that cvwi with u aquity hurdl* rat« of 31.46 p«ro«nt, 
Bennavlll* ?«ei£le Cerporatien baa a lewar tOOC than all ef tha 
listad lOua. 

Tbm 9ulf battMan 100 and tPP tOOCa ia probably larger than 
that diaplayad in Tabla 1. Pint, tha ZPP aqolty hurdia rataa 
will ba lowar aftar FOHCA obangaa. Bacond, tha Tabla aaaiiaaa a 
100 baaia point dlffaranca batwaan ZPP and ZOO dabt intaraat 
rataa wbicb ia tb* uppwr bound tar ZPP riak pr*aduaa~«apaei«lly 
for larga XPP davalopara. Baaad on tba bond ratinga f^ tb* 
liatad IPP davalopara, ZPP dabt intaraat rataa will ba oloaa ta 
lOU r«tH." 

»T.<,.^ *,«..1 caah now 

Tha NACC providaa tha baaia for judging tha «t£aeta of 
uncMipanaatad riak ahiftlng and tax biaaaa but tha analyaia waat 
b* axtandad to illuatrata tha way in whicli th« artifieial blaa 
will akaw invaa^Mnt in alactrlc ganarating facilitiaa. Thia is 
don* by conducting a eaab £low analyaia baaad en standard invaat- 
■ant criteria. 

Kainstraan financial analyaia uaoa tha Mat Praaant Valua 
critorion <HPV) to judga tba affieaey of invaatnant opportuni- 



*'Conv*ra«tions with rating aganey axaoutivaa and invaatnant 
banking houaaa conf iras that tha IPP-IOU dabt rata dif farantlal ia 
batwaan 50 and 100 baaia pointa, currantly. Thasa diffarantiala 
will dacraaa* in a peat Title XV world where lerge ooiqunie* bac(»e 
the sajor ZPP daval^ara. Consider Duks/Pluor Daniel aa a 
potential IPP developer. In thia partnarabip Duka power cospany 
baa a Aa2 bond rating and Finer Corporation has an A3 rating, 
battar than aost ZOOs. if thia partnerahlp were to develop IPP 
projeeta with guarantssd siwlwus oapaeity paysants, tbs dsbt 
interest rates would be virtually Identical to an ZOO'a ratea. 



40 



D,g,;,zeclbyG00glC 



ti«a. Aft«r-cerperat*-tui caab flmn •••oeiktad with • potential 
inv««ts*nt ara diaeeiint*d by tba ncc to produoa Um praaant 
valua of tlia inooaa atraaa. IC this praaant valtta la aqual to or 
oxeaada tha coat of tha prejaet (1. a. NPV ia poaitlva), than tba 
invaataant la a foed en*. 

Tb« ainlau* annual eaah flow naoaaaary to produoa a poaitlva 
NPV la tba raqulrad annual ratum. Tbia eaah flow la that wbiA 
ia naoaaaary, axpraaaad aa a paroantaga of projact ooat, for tba 
coagpany to pay corporata taxaa, covar any capacity daoay or 
obaolaacanca, aarvloa ita dabt and pay agulty boldara at laaat 
tbalr burdla rata of ratum. A eoiyany will ealoulat* Ita 
raqulrad annual ratum and eeapara it to projaetiona of prejact 
eaah flow, nmaa projacta whara prejactad eaah flow axoaada 
raqulrad eaah flow will ba undartakan. 

k eaah flow sedal waa davalopad to coNpara raqulrad annual 
ratuma for IPPa to ttaoaa for lOUa. (Saa tha Appandlx.) In tba 
initial axparlaant it waa aaauaad that IPPa and lODa bad Idantl- 
eal oparatlng and constr-uctlon afficlanciaB and vara donaldaring 
invaataanta In idantical coubinad-cycla faoilltlaa. All non- 
capital ooata wara aaauaad to ba tha aaaa. 

eivan tbasa aasu^^iona, dlffarancaa in tha raqulrad annual 
ratuma for IPPa and lOOa would indleata tba aaqnituda of tba ■ 
artificial biaa in favor of IPP invaataant in qanarating faelli- 
tiaa. Tabla 2 at tha and of tha papar providaa tha nnaarieal 
raaulta and Pigur* 2 dlaplaya thaa qraphically. 

In Plqura 2 tha rangaa for tba aavan IPPa and nina lOOa abow 

41 



D,g,;,zeclbyG00glC 



rigor* 1 

■Knoxx 


^.V- «„^^-^^^,™_,.^,„_« ,-. 


1- 

1 

i ■- 
1" 

1 :: 




- 




— 


— 














n..rrr;" "ir^rr,:"- 



tlw ■kgnitud* oC Um ■rtificlal bias. Ming PPL *■ » r«pr«»«Bt«- 
tiva 100, if FPL w»r« coBpating for tlw oonatruction of a coa- 
binad-cycl* facility with a co^any aiallar financially to CMS, 
FPL'a raquirod annual ratum would ba 37 paroant highar Uwn 
CMS'a. If rPL vara covpating with Long Laka, FPL'a annual nat 
caab flew raquiraaant would ba 20 parcant bighar tban tbat of 
Long Laka. In ganaral lODa could raquira annual ratuma 30 to 30 
parcant higbar tban IPPa ha— d on eurrant •qultv hurdla rataa. 
In a peat-POHCA dianga world, tba llkaly gulf in raguirad annual 
ratnma would ba avan bighar aa IPP aquity burdla rataa drenpad. 

Evan with a currant aquity hurdla rata of 21.46 paroant, 
BMUMVilla Pacific Corporation would hav« a 3 parcant raquirad 
ratum advantaga ovar tba 100 witb tba lowaat raquirad caab flew 
in tba •aaqi>l«~Baltiaor« Oaa t Elaetrie. 
42 



D,g,;,zeclbyG00glC 



Of coarBm lowar raquirwl ea«b flmw sMtt that irp* will win 
•vary bid baouw tlwy eaii effar artitlalally lewar anargy and 
capacity pricaa. For axaapla, oonaidar what ttaa prioa advantaf* 
would ba if Ippa priead pow ar ao that aquity boldara wara jnat 
aaxning thair currant burdla rataa (a. 9. about 17 parcant for 
Lang Laka and IB paroant fcr Hadaon Powar Syatawa, Inc.] . If 
capital oaata ara 30 to 40 paroant of tba par kilowatt bour 
prlca, than iPPa anjoylng « 30 to 30 paroant artificial raqulrad 
ratum advantaga could prica alactrielty S to 10 parcant cfaaapar 
at curr ant aqutty hurdla r^taa . Tbua, an artificial eeat Of 
capital advantaga eraataa a aituatioa whara IPPa will ba abla to 
ayBtaaatlcally undarprice ions. Of couraa, it ia not tha maa 
tbat IPPa will prioa at tba bara Bininua. Othar peaaibilltlaa 
ara axaainad in tba naict aaetiona. 

"^''ym n^M^ Katara tor lOB« mfl iw 

In thla axpariaant it ia aaaunad that tha IPP and tha lOD 
ara bidding on idaatical coabinad-cycla tacilltiaB and bava 
idaatical conatruction and eparating coat atructuraa. Tha IPP 
■ay dacida to axploit ita artificial capital ooat advantaga by 
paying aquity beldara wall in axcaaa of tbair burdla rataa of 
ratum. Tha a axlaua aquity ratvim an IPP eould pay ia alightly 
laaa than that wbidt would raquira tba IPP tc bid an idantieal 
prica to tha lou. mia lattar aquity ratum ia calculatad hara. 
Ttaa axpariaant uaaa FPL aa tba z-aprasantatlva 100 and calculataa 
tba aanlMun aquity ratum uk IPP could efCar and atill bid an 
aquivalant prlca. Tban thia ■axiam rata ia eeaparad to tba 

41 



D,g,;,zeclbyG00glC 



■niatinn burdl« r«t*s CoT two pat«nti*l IPP ««v*lap«ra — Long IaIu 
and CHS. Tabl* 3 mhoum that Oil eoold effar aqulty rates 15.37 
p«ro«nts9« points iii_i]tBail of its carr*at burdl* rats (bots than 
twlo* tbs eurrsnt burdl* rata) and Long Laka oould oftar an 
•quity ro t wrn that is U psreoBtags points higbar than currsnt 
htirdla ratas (1.7 tiaas ths enrrsat badls rata). OK^ju^jgyg 

Miuitv i-^tura an XVP anuld ettm,' <*« mt.m'rmt.r.-IAm.r* ana till 



ttitiv with FW. «« am. a i 



int. n>ia la ahown 



graphleally in Pigur* 3. 



rlgws s 

Maximum Equi 



i for lOUs Vs. IPP« 



JIL 


■ 


r 



Tbs eonsaqusncss of ths ability of IPPs to otfsr substan- 
tially bighsr squity ratas ars significant. It will ba vary 
difficult for lOOs to attract aquity capital, not bocausa thsy 
sr* not financially sound taut baeausa lOUs snd D. B. tsxpayars 



D,g,;,zeclbyG00glC 



•T* mtaidising tb* m aqnity heldws* nturns. 

—*•-—*■' "■ *-ifflniMiif 

Maxfwt fsilaraa x««alt in •eooeale inaftieicaey. mbsidiafl 
allow eaaputi** that aatamXlj Hoold bo* b« ooapatltlv* to win 
bid« ■*—**- tlwir ■hMrteeaiags. Xn « pest-rDBC9k cttaaga werld, 
eeapanias will witat tin auiut until tlM laat on* oan just pay 
its raqnirad rat*a of ratnm to oapital holdars wm) still prio* 
ecap«titiv«ly. Sivan « snbstMitial capital auteidy, a laaa 
afticiant tin will atill ba abla to attract capital and raHin 
priea coapatitiva. 

Mbat twemm womM Imffielaney taka? To Uw axtant tbat an 
XPP aight ba at riak for eenatnetien coat aacalaticoa, tba 
artificial finanoial ouahion will giva it Ins of an incantiva tc 
diaeiplina eontraotera. It aay ba abla to abaorb graatar con- 
atruction dalaya. Sinilarly, it could abaorb graatar oparating 
Inaffieianey whattaar that takaa tha fora of raaouroa waataga, 
inafficiant daeiaieaa or bleatad MUMqaaant aalarlaa or parka. 

Tbis final axparlMant aaauaaa that tha XPP and 100 ara 
bidding for idantical ooabinad-cycla facilitiaa and tbat aacb 
mat pay thair aqalty boldara cuTT^nt hurdla rataa of ratum. 
Tha axpariaant calculataa tha aaxlaaa inaffieianey or waataga, 
ralativa to tha 100, an IPP could diaplay and atlll ba priea 
eaapatitiva. Thia waata could talca any of tba £cra« eltad abova 
or ottaara. Xt ia axpraaaad aa a lu^^ aua aqual to a paroantaga 
of original prcjact coota. Aa axplainad in tba Appandix, tba 
aiaulationa captura iaaffieiancy in tba variabla a dafinad to bo 

4S 



D,g,;,zeclbyG00glC 



« p«rew)tag* of projact ooat. For wcnplc, it t)M •ivulvtion 
finds that tlM O tor an IPP !■ lo p«re«nt, than that IPP eould 
witbatand eonatnictlon coat ararrvna that ara 10 pareant at tba 
tBUl- eonatruction coat, pay dabt and aqulty holdara thair 
raquirad ratuma and atlll raaain prlca OMvatitlva In bidding. 

Zn thia axparlBant, FPL ramaina tha rapraaantativa lOD, 
Tabia 4 displaya tha potantlal waata tor tha aavan IPPa In tba 
aai^ia. Fiyura 4 dapicta tha aitnatien gr^hlcally. 



Figsn — 


1 


j ^_ 






■1 ^ 




I 


illAil 




8 


Ullllt 









Iha iaplication ia not that thaaa e^ra^^tiona will ba laaa 
afficiant than FPL tmt that thay sauU ba. Tha financial aubaidy 
of tha IPP raaovaa an i^ortant aourca of coat diaciplina. 
Bacauaa rlaka ara ablftad without coat to tha loo and bacauaa of 
tha tax advantaga to dabt, tha IPP is ciiahionad to tha point 
wbara it could bacoaa qulta caralaaa and atill raaain coapatl- 
46 



D,g,;,zeclbyG00gIC 



tiv*. For iaatanoa Long Lak« BMrgy CorptMratlon oould •nter • 
CMVMtitiv* bid agklnat FPL Ortiiip for ■ oeabliMd-eyol« taelllty 
■af* in tlM knowladg* that vvu if manag— nt Bad* Biatakaa, tbay 
eeuld abaerb coat evarmaa of up to 11 pcreant of projaet oeat 
(an ^tion not opan to FPL) and still k*^ thair abaratMldara 
happy. 

Tlta artificial coat of capital advantaga to tha ZFP that 
raaulta fro* unooapanaatad riak ahifting and tha tait advantaga to 
dal3t can take thraa forma or a oeabinatien of tha thraa. Dua to 
tha artificially low raqulrad annual ratum, an IFF could 
ayatanatically win avary bid by pricing alactric powar 5 to 10 
parcant lowar than an ZOO whila atill paying sharaholdara thair 
raquirad nlninun ratuma. Altamatlvaly, tha IFF could prlea 
alactric powar juat balow tha XOD'a bid and pay aqulty boldaro 
axorbitant ratas of ratum, wall in axeaaa of tha raquirad 
■Inlnua. Finally, tha artificial capital coat aubaldy oould 
aneouraga aeone«le Inafflelanoy. ZFPa oould abaorb coat uvaiiuna 
that ara aubatantial portiona of projact ooat, pay aqulty holdara 
thair burdla ratas and still prlea alactric pewar jost nndar an 
lOO'a bid. 



D,g,;,zeclbyG00glC 



ill 






"J 

SI 

is 



I 



|i 



ii 



mmt mnmt 



liiiiii iigiiiiii 



liiiiil mmm 



IP 



III 



mm 

ihml 



'x-pe gggSilSIS 



i 
i 

Ii 



I 



D.,r„.db,G00glC 



E 
o 
o 

c 
a 
o 

= 4 
I fli 0. 
I 3 B 

= 5 



mi 




mm.i mMUM 



oiticjoieiaiad 




D.,r„.db,G00glC 




> 

o 

|o 

3 ^ 

CE -J 
« i 
o Q 
o -I 



D.,r„.db,G00glC 



mtm i 



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3 0)3 
'5t)£ 






Mil 



Ill 







D,g,;,zeclbyG00glC 



AFFENDK 



ThlB appwtdlx teaerlbM tte finical tetaila of tha BodMl 
ttsad to pMTfan tiM ■ianlatlen* nportad In tha bkIh body et tba 
r«port. TIM bftaio Bedal anat taa abla to ealonlata tha raqolrad 
•iHHWl r»tuma that aoat taa «amad by an 100 or an IPP for an 
invaataMnt In an ltfantlf»l g a war atlng Xaolllty. For purpoa aa at 
tbim analyaia it ia aaaiuwl tbat tba t m — taai it baing oonalAarad 
ia In a seabinad-CYola facility of identical capacity and tactiai- 
eal apaoiflcatiena tor both tba lOO and tba IPP. 

Tba baalc »ed«I la oapabl* Of baing nanlpulatad to anowar 
tliT«« quaatisnai (1.) What la tba niniMin annual raqulrad ratum 
for tba IPP and tha 100 givan Identical facilltlaa and oparating 
•nd eenatmctlon afCleiancy but diffarant capital atructuraa and 
burdla rataa for aqulty aa wall aa dlffarmit raqulrad dabt rat*>? 
(3.) Clvan Idantiml Cadlitiaa and affieianeiaa but dlffarant 
capital atructuraa and dabt intaraat rataa. «liat ia tba nayjpw 
aqulty ratum an IPP could effar and atill produca a bid prlca 
CMVatitlva witb an lOD? (3.) Olvan Idantioal plannad faoilitiaa 
but dlffarant lavala of cmiatructlcn or cparatlng affielancy, 
diffarant capital atructuraa, dlffarant aqulty burdla rataa and 
dlffarant raqulrad dabt intaraat rataa, bcH Inafflelant could an 
IPP ba and atill produoa a bid priea ee^atltiv* wltb an lOU? 



D,g,;,zeclbyG00glC 



TIm raqnirad uumwI ratnm is tlw c*mb flow, wcpr*as*d •• a 
pareMit«9*' «f ^rej*ct cost, that th« facility auat ratum In 
erdar lor tha oo^pany to pay it* taxaSi eovar any capacity daeay, 
aarvica Ita dabt and pay at laaat tba ■inl»ua raqulrad rata of 
ratum to aqulty belOara. Boanoaista rafar ta this raqulrad eaah 
flow aa tha "financial coat of eapital" whlcti la Influancad by 
tba Maigbtad Avaraga Coat of Coital (WU») but la net tba aana 
thing.' Tba atartlng point of tba analysis la tba ■leroaconcmlc 
ttaaery of tba fin and tba Nat Prasant Valna (NPV) crltarlon tcx 
Invsstnant. iiban all poaltiva and nagatlva eaab flows ars 
accountad for, a fir* will »al(a an invaatnant only If tba praaant 
valua of tha aftar-tax lnc<»a atraan la at laaat aa graat aa tba 
cost of tba lacillty. At tba aargin. In aquilibrlua, tba praaant 
valua of tha In coaa atraaa will )uat aqual tha aaaat coat. 

Heat aeonowista prafsr to daacrlbo thalr oaah flow ■edaia in 
continuous tiaa. Iha nodal a^loyad bars Is baaad on tba atan- 
dard darlvationa aa nodiflad to taka axpllelt aooount of rlaK and 
dlffaring aquity hordla rataa of ratnm. Ttim nodal was daaignad 
prinarily by foraar Aaalatant Sacratary of tba Traaaury Don 



'Tba HACC is al^^ly a walqhtad avaraga of tba fira'a raquirad 
paynanta to dabt and aquity boldara. Aa HkCC foma tba baala af 
tha fira'a diaeount rata wbldi is uaad to discount all altar- 
eorporata-tax caah flows, nia financial coat of oi^ltal is tba 
nininuB cash flow, dlaeountad by tba WACC, aftar accounting for all 
corporata tax factora and acononlc dapraclatlon. 

APP-a 



D,g,;,zeclbyG00glC 



rullwten." Xltbongh othar vu-Ul:l«a« ea this Umm axlBt, tl 
Fullarton SKtbodclogy i« ^mrnrmlly BaoiptMd and wldaly twad. 

Ifaa Fullartan aodal !■ ■ ouh flow »atel witb asBst cost 
tlM l«£t hand slda and t aoo— flam ea -Um right hand aid*, 
■quation (i) atstw tb* fixm'a aqnillhrlHa aanditilea •• it 
•ppli** to a nmr invastaant in alaotrio ganarating e^aeityi 



-|(l-t)(e- 



g - tba priea sf a naw ganarating £a«llltyi 

T •• tha oerporat* tax rata (including atata and fadaral 

taxaa); 
* S •• Um praaant valua et d^raciation daductlona par 

dollar of invaatnant; 
w " tha rata of local proparty tax «n alactrlo 

utilitiaa (daductibla against atata and fadaral 

ineeaa taxaa) i 
r - tha Inflatleo rata; 
( > tba rata of aconCMlo dapraoiattcM (incalnding 

o^Moity daeay and abaolaaaanoa} t 
e ■ tba groaa raquirad Inoawa r a t iim par yaar (groaa of 

*For a daacriptlon of tba nathodology ua Don Fnllarton "Tba 
Indaxation of Zntaraat, D^raciatlon. and Capital Gaina and Tax 
■afon in tba Qnitad Btataa,- Jonmai of Mbllo SeoBoaies, Fabruary 
Ifll, pp. 25-51 and Don Fallartaa and Tolanda. K- Maodaraon, h 
Dlaaggragata ■quilitrlnn Modal of tba Tax Diatertiona Aneng Aaaata, 
laetera, and Induatriaa," zatamatianal MaeBemlc IMwitm, May l*a». 

APP-3 



D,g,;,zeclbyG00glC 



tax but iMt eC op^rmtiaq and ■aiiitMtaitc* eosta) ; 
and 
i > tha corporata nominal pra-tax discount rata whl^ 
ia datwBliMd with rafaranca to tha Capital Awat 
Pricing Nodal (CUH) . 
Equation (1) la a ataort-ltand rapraaantation of a 'paraanant 
ralnvaataant' aodal. A oeapany would not allow a facility undar 
normal clroumatanoaa to dacay to nothing, but would rainvaat to 
maintain tha capacity and valua of tha unit. A parmanant rain- 
vaatmant medal explicitly incorp^ataa rainvaatmant In aadi 
parlod at a rata tq to maintain tha valua of tha facility. Jana 
Gravalla baa ahewn that if a firm can mako uaa of all tax 
ahlalda, than tha rainvaatmant tarms and accompanying tax tarma 
drop out of tha aquation to produea an a^qtraaalon Idantlcal to 
aquation (I).** 

In aquation (1), c and i ara unknown, c la tha par parlod 
eaah flow nacaaaary to covar all taxaa, aconoalc dapraclation and 
raqulrad ratuma to dabt and aqulty holdara aa capturad In i. 
Onoa i ia datarainad, c can ba aolvad for, glvan an aaaumad 
inflation rata and knowladga of all ralavant tax ayatama. 
gMr CMU »V* *<»— ^«^1 cwta 

Tba litaratura rafara to c aa tha 'uaar coat of capital' or 
tha "Ijq^licit rantal prica" of capital. Tba variabla to ba 
co^karad in thla analyala la tha raqulrad nat-of-aconcmle-d^ra- 



* *Saa Jana Gravalla and Craqg A. Kaanwain, 'Tha Maaanramant a 
Zntarpratation of Bffactiva Corporata Tax Katas: A Ceaaant" X 
ffotaa, Jvnm 6, 1913. 



M 



D.,r„.db,G00glC 



oiaUao r«tum wbicAi Is knoMn la tba litaratur* •• th« finutelal 
eect of eqiltal. Jbm tlnancial cost ef eftpit«l la simply th* 
user coat laaa tha raqulrad oaah Clow to MdM vf ter aeoneaio 
dai^raeiatien {to eovar r^lacsaMiit InvastBaiit} . Binoa "lika" 
Caeilitiaa ara iMing eooaUarad In tbia aaalyaia, tba financial 
coat ef capital la tba approprlata aaaaura ef a raqulrad annual 
ratum. Jb» uaar coat sf e^ltal la 4arivad by avaluatlng 
aqoatlen (1) and aelvlng for ei 

Jlia financial eoat of oapital, Cf, km tba following; 



DrtermhitlonoflheCarBorateDiacnuBtRate 

Ttaa nazt >tap in tha analyaia la to aecount for tha unknown 
i. Tbla ly a crucial atap bacauaa this varlabla ineorporataa 
tftf farant capital atrueturas and raqulrad ratuma to dabt and 
•qolty, aa wall aa tha tax advantaga of dabt. In Follarton'a 
•nalyala, tha diacount rata waa dataminad by aattinq a real 
aftar-eorporata aftar-paraonal-tax raqulrad ratum to an individ- 
ual invaatcr hr liiwrr*"*"" ond than greaalng it up by tba rala- 
vant tax tama to produea tba corporate diacount rata, tbls waa 
Wproprlata bacauaa Pullarton waa naaaurinq tha affacta of 
paraonal and eorporata tax Aangaa on a firs' a financial eoat of 




D,g,;,zeclbyG00glC 



capital, ntttra was no •ecounting for risk or dlffarlng bordl* 
rata* of rvtnm In tba analyala. 

For purpoaaa of ttila analyala, an ai^llcit accounting of 
rlak and tha raaultant dif f arancaa in dabt Intaraat rataa and 
aqulty burdla rataa la nacaaaary. Aeoordlngly, tha Capital Aaaat 
Pricing Hedal (ChPM) la uaad to prodnea aftar-corporata tax 
discount rataa, i(t-r) in aquation (1), for IPPa and lom. Tba 
diaeount rata will ba danotad r^_ and la aqual to i(l-T}. 

31ta raviaad axpraaaion fc:: tha financial coat of capital 
will ba; 



'^— -'*" 



tl-tZ) • »>- B (4) 



Tba NACC la thk aininun rata of ratum on an attar-corpo- 
rata-tax caah flow that an invoatsant auat yiald to covpanaata 
dabt and aquity holdara for putting capital at rlak. Convantion- 
al corporata financa analyaia calculataa both bafora-tax caah 
flowa and Incoaa taxaa aa if tha InvaatKent wara financed puroly 
with aquity. Tha diaeount rata uaad to diaeount tha aftar-tax 
caah flow, hcwavor, raflacta tha daductlon of Intaraat aiq^anaa. 
TbuB, tha tax advantage to dabt ia raflactad in tha HACC. 
Capital atructura la alao raflactad in tha HACC trttich ia tha 
vaightad avaraga of tha coat of aquity and tha aftar-tax coat of 
dabt: 



M 



D.,r„.db,G00glC 



mux ■ z,^ - M^, * **^«(i-i> (B) 

r, > th* ragulrsd ratuxn to aquity; 

r^ - th« tebt lnt«r*at nt«i 

M, > tlw pMTtlen of ■qoity In th« oftpitsl stmeturvf 

and 
Hi- tb« portion ec dabt in tbs Mpit«l struetur*- 

CAPH is widely «»*d to d«t«Eaiiw ■ ec^^wiy'* equity taordla 
rat*. Rm hurdl* rata, r,, is ktatad ■■ tha *u of a riak-fzaa 
rata of ratum ploa a rlak praaiia. na rlak praaiua, in torn, 
ia a function of tha company' a fi whidt ralataa tba parfoxaanca of 
a eo^^any'a aqultiaa to tha atook varkat aa a wbola. ibua, fi ia 
tba ayataaatlo saaanra of riak. A fi ot I indieataa that a 
ooapany'a acpiitiaa aabody tha aaaa riak aa tha atock aarkat aa a 
whel*. A P of, »«y, 3 would Indieata a company with eonaidarabla 
riak and it would b* ai^actad that tba OMqpany'a •quity hnrdla 
rata would contain a aubotantlal riak praaiu*. Iba actual riak 
praalua ia ealculatad to ba tba product of fi and tba ganaral 
■arkat riak praadua (for tha ateek aarkat aa • wbol*)- Rta 
aquity hurdla rat* ia daflnad aa: 

z,' Zf* *,^„[r,-r,] (() 

r, - tha rlak Cra* rata of ratnm; and 

r_ - tha rata of ratum on tha steek aarkat aa a whel*. 




D,g,;,zeclbyG00glC 



TIm riak fr*a rmtm of ratom is tba nt* mi Invastor eoold 
■am on ■ risklsaB invmtmmnt maeb m* m Tr*«Nry ■•ourlty e£ 
■ppreprlat* t«rm. TtM Aeio« aC > rlsUsaB rat* !• dl«eusa«d in 
tiM data ■•etton *■ la tba aazkat rata of r«tum and tba propar 
fa for zppa and looa. 

»h« »«lw»at ttabt lataraat Baf 

Tba intaraat rata for lOM ia atatad aftar an obaarvation of 
•xiating 100 intaraat rataa. Xt baa b««n atatad by rating aganey 
axacutlvaa and invaatawit bankara that wltti tha a]q>actad oontrac- 
tual arrangaaanta, ZPP dabt rataa vould ba 50 to 100 baala polnta 
hlghar than loti dabt. For tbia analyaia, ZPP intaraat rataa ar« 
aaauaad to ba IDO baala polnta hlghar than lOO rataa. 
Three Questions 

nta introduction to thla appandlx liatad thraa quaationa ' 
that ara tha tocua of tha quantitatlva analyaia. Ibla aaction 
daaeribaa tha aiqparlMants parfonMd to anawar thaaa quaationa. 

Kaaulrafl Annual aaturn 

e, la calculatad for 7 potantlal IPP daval^>ara and 9 axlat- 
Ing lOUa. Tha IPPa ar* a mix of jitlllty aubaidiariaa and pura 
indapandanta. Tha dltfarantiala in e^a provld* a diraet guantit- 
leatlen of tha artificial coat advantagO'^^eFfffiioewpanaatad riak 
ahltting and tha tax advantage of dabt. 

Kaaiaua IPf equity Ratura 

For purpoaaa of thla axparliwnt It ia aaauaad that IPPa and 
lOUa bava Identical oparating and cenatruction afflclanclaa and 
that all non-eapital coata ara aqual. Daflnlng a eoq^titlva bid 

APP-8 



D,g,;,zeclbyG00glC 



AS tb« •ituatlon whara ZPP margy and capacity ohargaa «z« jnat 
aqual to or lowar than thoaa aaaoeiatad with an Xoa, an IPP can 
effar an agnlty ratum up to tba point wbara IPP and lOO capital 
eest* ar« Just aqnal. Ihia oooura vbane^ (and r.^} ar« tka saaa 
Cor tka lOD and tha IPP. 

m. <beup, lae. im ebflaan aa a raprsSMitativa ZOO.** Hold- 
ing all alaa eonatant, tha aqulty rotuzn for an IPP la cnloulatad 
aa a raaldual audi that FPL'a r^ juat aquala that of tha IPP. 
ma naxlnun aqulty ratum la than co^Mrad to tha hurdla rataa 
for two potantlal ZPP davalopera. Long Laka and CMS Ganaration, 
to astlMit* tha aittant to which unca^wnaatad riak ablfting In 
coablnatlen with tha tax advantaga to dabt producaa aqulty 
rattuma in wtcaaa of tbeaa nacaaaary to coapanaata invaatora for 
tha rlak inharant In ZPP socuritlaa undar currant altuatlona. 

Potantial Coat InaffJeiiiPT 

In thia axparlnant it la aaaunad that %tom IPP mat bid 
prloaa that ara juat aqual to or lewar than an lOO'a prloaa. 
ftSBunlng Idantlcal facilitlaa, tha aigparinant ealculataa tha 
axtant to \Aii^ an IFF could Da laaa afficlant than an lOU and 
atlll pay Invaatora at laaat currant hurdla rataa whlla offarlng 
a ooapatltlva bid. 

In thia eaaa inaftlciancy could taka aavaral foraa. Through 
dalaya or coat ovsmna, ewtatruetlen could ba aora eoatly for 



**PPL'a capital coata ara In tha aid to high rang* for lOOa. 
Ita r, ta 11. 5S pareont and it* r,^ is (.71 paroant. mam tb* 
cdwica of FPL la a eenaorvativ* ena for ooapariaon with an IPP. 



D,g,;,zeclbyG00glC 



XPP*. Alt«niatlv*l]r, eparatlen of capital In plaoa could ba !■•• 
•Cfieimt or rallabla, raqoiring capital raJiindancy. To aedal 
thaaa peaaibllitiaa, additional inaffiaianey ia atatad aa a 
pareantava ef facility coat (ratarancad ta tha lOO'a facility 
coat) and ea ptug ad in tha variabla 0. To eaptura tba potantial 
Inaffieianey at a oe^wtitiva aqulllfertoa, aqaatieo (l> ia 
raatatad tor IPPa aa fellowat 

q - /(l-t) (c-ayJa-''— ^••"de * *2q - Dq |7) 



O - tba aaxiaua inaCflelancy, atatad aa a parcantaga ef 
tha original ZOO facility coat, q. 
Evaluating aquation (7) and applying algahra and noting 
aquation (3), an ZPP'a raquirad ratum baeeawa: 

lb* aolution Cor a occura ohara Cj^^ - ^mm- '^ ^ ^* 
pravicua axpariaant, PPL Sroiq), Inc. ia uaad aa tha rapraaanta- 
tiya lOO. na tor tba aavan potantial IPP davalepara ara oalcu- 



nia aeenaaic valoa et Invaatnant (which daelinaa bacauaa 
obaalaaoanoa and capacity daeay} ia aaaunad to daclina at a 
gaon at rle rata aa par tba lltaratara. Btand-alona qaa-tlrad 

APP-10 



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turbltMS bav* b*w) •■tiMtad to kav* dacay rate* of LIS parouit 
par yaar In raaaarch by Bultan and mytutt." Tba «a<Matria rata 
Cor ooabliMd-eyola staaa ganiratoga txMaa trea an axtrapolatlen 
ttaaad en Hultan and mjflcott and intacmmtioa prawldad by tba 
Cemgrassional liaaaToh ■arvioa." Tba a a a ua aJ annoal dae^ rata, 
<, ia S.6 paroant par year. 

Infoxnatlon on atata and fadaral oogpoaraf iaooM taxas la 
baaad on tha national Buraan of Boononlc Baaaareb TAXSDt Hodal as 
r^pertad in papara by Pullartoa.'* Tb» oozporata tax rata (in- 
eluding atata arid fadaral taxaa) eoaaa treai ttro aooroaa.* Prc« 
thaaa aeuroaa.T ia aat at 3I.3 pareant. Tba proparty tax rata on 
ntilltiaa alao ooaaa froa Fullarton." v ia 1.5S paroant. Ttaa 
iaflatlan rata, w, ia a a anna i1 to ba 4 parcant par yaar. 

Tba tax d^raeiation traatnant ia crucial to tba flnanelal 
coat of capital calculation. Undar tha 1II6 Tax Rafon Act, 
aaaata ara aaalgnad to a d^traciatlon elaaa baaad on thair Aaaat 
Dapraclatlon langa (ADR) elaaa livaa. Stand-alona gaa-flrad 

"charlBB R. Hultan and Frank C. H^Eoff "Tha Haaauranant of 
ZconoBic Dapraclatlon- in fiapraelation, Inflmtion, mad tba raxatioo 
0f laeoa* froa Capital, Cbarlaa R. Sultan - ad. (Urban Xnatltuta- 
Haahington, D. C, 19ai) at »S. 



"Fullarton aupra at 31, 32- 

'^farlyn A. King and Deo Pullarten, Tbm raxatian of laoom* trem 
capital (Onlvaralty of Chicago Praaa — Cbieage 19t4), p. 204 and 
Fullarton mpra at 3i. 



"Fullarton aapra at 31. 



D,g,;,zeclbyG00glC 



turbin** ttr« ■■•Ifrn*' to JU» elaaa 4S.19 whldt ba* ■ 30-y««r 
elaaa lie*." VIm aetasl tax dacaraelatiom lit* is, tharafora, 19 
yaara." If a gas tnrblna la naad aa part of a coabinad-cycla 
faelllty, bawavar, tba aatira facility ia ooatainad in lam. 4t.i3. 
Itala claaa baa a 2t-ymmz lifa, ramlting In an actual tax daprv- 
elatlon lifa of 30 yaara." m: stand-alona tnrblnaa and coa- 
binad-cycla Xacllltiaa ttaa 150 pareant daelininf balanea aatbed 
of dapraeiatian ia naad." 

Tba propar diaeoont rata f^r da^wciatlen daductlcna la not 
tba aana aa tba diseovnt rata tisad to diacount otbar cash flows. 
Tbla is baeaua* tax dapraclation daductions «ra flxad at tba tlaa 
an invastnant la nada and tbaratora arc associatad with lass 
rlak, aasunlng th* fin is and will eontinua to ba taxabla. 
Oapraciatlen daductlona ara typically discoontad at a dan rata, 
ratbar than an aquity rat*. Vba appropriat* dabt rat* is tb* 
rata a ceapany eould asm on an invastaant grada oMrporata bond 
with cash flows of slnllar cartainty to tba dspraciation daduc- 
tions. nils analysis dlat:oiints dapraclation daductions at tba 
rata of 10 pareant.** Tabla Al displays tba dapraclation dadue- 



*<1M9 DapraciatiOB Culda, Coiaaro* Clsaring Bouaa !•••, p. 
104. 

'intamal JIavamaa Ooda, Sac. i«8(a)(l}. Sac. l6S(e)(l). 

"J»a» teprociatioB Guida supra and ibtamaJ Jtavanua Coda 

^'Jntaznal Savwiua Ooda, 8*e. l6B(b) (2) (ft) . 

"fits Richard A. Braalay and Stawart C. Hyars, Principlss ot 
corporat* 7isaac* (HcGraw-flil I/Now yerk, 1MB) at 455-4S>. In tba 

(oontinuad. ..) 



.db,Googlc 



tlon caab flam and tiM praawtt valua caleulation par dollar of 
naw lnv«at*«nt in a eeatolnad eyela facility. Thia ia tiM valua 
for S in tha calculation of ^. 

'i ^ 'h- ^* ^■■*' Ml a 10 y»ar, saro auapttn Traaauzy bond 
rata in IMO and aat at S.03 paroant. Tha ovarall aarkat risk 
pr«ii(w, r^~r„ ia ealoulatad by ZU>ot«en Aaaoclataa to ba 7.5 
pareant. Ba for tba rapraaantativa ccvpanias eoaa fro* Narrill 

A aurvay et bond ratinga and aaaociatad intaraat rataa laadi 
to tha obaarvation tJtat lou dabt rataa vara aa lav aa 9. 28 
pareant and aa high aa 10.45 pareant in 19V0. Early 19V1 rataa 
fall in tha siddla of that ranga." Accordingly, lOU dabt rataa, 
rt, ara asavwad to ba 9.5 pareant for purpoaaa of thaaa aiqpari- 
■anta. A high and rlak pra*iu> of lOD baala pointa ia aaatusad 



**(... continuad ) 
' analyaia partoraad hara, tha bafpra-tait dapraclation daductiona ara 
diacountad to produca t which ia than aultipliad by r. Thua tha 
appropriate diaceunt rata ia ttaa bafora-taai dabt fata tha eeapany 
gguld aam on tha purchaaa of an Invaatjatit yrada eorporfft^ boff^- 
Xf tha tax ahialda wara tirat ealoulatad (daductiona tlvaa tha tax 
rata), than tha appropriata diacount rata for tha tax abiald eaab 
tlowa would ba an af tar-tax dabt rata. 

*terrill I^nch, Sacurity KlMk Xvalnation, Naredi 1*91. 

"Hoody'a Znvaatora Sarvica, Inc., Moody'* Public Vtllity 
Manual, 1990, and HooOy'm Bond Survy, Fabruary 25, 1991. 



D,g,;,zeclbyG00glC 



tor IPPb placing thalr dabt r«t«s at 10. S pwoMit.* Ibi* Bhould 
•eoount for both Mny rlak Fdraaitm and dlCtarwM** in ■■tiiritlas " 
batwMA XOUs and ZFPa. 

zoo invutnant ia aaaonad to ba fnndad with SO pareant daft 
and SO pareant aguity, baaad on ourrant obaarvatiena. IVP 
invaatnant ia aasanad t« ba finanoad vlth SO pareant dabt and 10 
pareant equity. 



*C«)varaatl«na vitb rmting aganey axaeutivaa and Invaatsant 
banking beuaaa continu that tha IPP-IOO dabt rata diCferaatial i* 
batwaan 90 and 100 baaia pointa, cnrrantly. fltaaa diffarantiala 
vill dacraaaa In a poat Tltla XV world wbara large eiMpaniaa baoeaa ' 
tha najor IFF developera. coneider Doke/Pluer Daniel aa a 
potential IPP davalopar. In thia partnerablp Duke Power CiMpany 
bee a Aa3 bond rating and Finer Oe rpo r a tlon haa an U rating, 
batter than noat lOOa. If tbia partnembip were to develop X?p 
projeota with guaranteed niniHa oapaeity payaante, the debt 
intereat ratea would ba virtaally identieal to an lOO'a ratea. 

APP-14 



D,g,;,zeclbyG00glC 



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D.,r„.db,G00glC 



MKSBNBVT OF XUK C< nOU 



ozxT vosnt « Lxa 



Mr. Chairaan and »■■)>«« at th« subeavaitt**, Z ■■ lUrk C. 
Sbolandar, 6*n«ral Counsal sf Kuwas City Powar k Llgbt Coai^any. 
XSRsas City Powar & Llybt Cam>any is a Badiim-aisa alaetrio utility 
and tha eorporata auecaaaar to ona of tha warld'a firat alaotrlc 
eo^pa^laa, ganarating •lactrlolty alnoa 1BB3. Baadquartarad in 
downtown Kansas City, Miasourl , tha Coivany «anar«t«a and 
diatributas alactrlcity to ovar 410,000 cuata*ar> In > 4,700 aquara 
«ila ar*a locatad in 23 coustiaa in waatam Kiaaouri and aaatam 
Kanaaa. Cuateaara includa 360,000 rasidancas, 47,600 caaaarclal 
flnw, and ovar 3,400 Industrial flms, ■unicipalitias and othar 
alactric utilitiaa. About tiio-thirds of tha Co^^any'a total kwb 
salaa ara to Miaaouri laiatoaara and tha raaaindar to cuatoaara in 

I appraciats tha opportunity to praaant ^r eoaaanta urging 
thia Subcoaaltfa to racoMwnd that tha Banlcing Coawitt— Xoraally 
aaaart its juriadletion ovar Titl* XV of », 1220, as rapertad Iqr 
tha Sonata's CoaMittoo on tnargy and Natural Sasouroaa. Titla XV 



D,g,;,zeclbyG00glC 



would provid* ■ blutkat uta^ptlon frea tiM provisions of ttaa Public 
Utility Balding Ctaq^uty Act of 1»3S ("POHCft-) for balding eoapuiios 
ovning 10 par o*nt or neiw et th* voting ooouritiM of wbolooal* 
•loetrle power gwiorotion conpanios, dotinod ■• "oxoapt wholosalo 
gonoratoTB" ("ZIK's"). Tha practical affact ot tha axaaption will 
ba to allow indapandant boldlng conpaniaa to aat up EWO'a in a 
potantially unlinitad nuabar of stataa, or utilltlaa to aatabliab 
utility afflliataa ^arating as no's outaida of thair aarvica 
araaa, without ee^^ylng wltb tba Invaator and conamar protactlon 
provialona of nsCA. For tba raasona J will Indleata in my 
atataiMnt, Z ballava it ia iaparatlva tbat tba BanlOng Conittaa 
aaaart jurisdiction ovar Tltla XV to ansura adaquata ravlaw of tha 
potantially sarious and far-raaehing af facts of tbat lagialatlen on 
tba financial baaltb of tba alaotrle utility industry and 
ultiwataly en tba prica and raliability of alactric aarvica. 

Bafora I addrasa tha nain argunants wtaicta bava baan praaantad 
in su^ort ot Titla XV, it would ba balpful to raviaw soaa ot tba 
boldlng oampanf abusaa wbieit lad to paaaaga of tha VOBCk In 193S, 
wbich at laast soaw supportars ot Titla XV taal naad not c 



• Bafera tba nHCA was paaaad, tha boldlng coMpany 
structure was a davica by irtticb state utility regulation 
waa obstructed. Control was shitted fron tbs local 
utility to tba balding oeapany owning it* stock. That 



D,g,;,zeclbyG00glC 



I oof my was oftan erganiisd under tb* Ikwa Qf 
■nottwr atat*. 

• ' Balding eoavwilaa did not conClna tha aatabliahaant 
of thair utility aobaidlarlaa to any ona raglon, but 
inataad bad eunarahip of eparating pxopactlaa throughout 
tha O.S. Ihla dilutad aanagaaant focua on tha aarvioa 
naada of tha coatoaara looatad In particular aarvioa 
araaa, and eraatad tha potantlal for hiding proflta £rca 
ragulatora In the feca of axcaaalva Intraayataa ohargaa 
for aanagaaant and anglnaarlng aarvlcaa. 

* Holding co^kanlaa vara highly lavaragad, aaanlng 
that tha bulk of tha capitalisation of tha operating 
■ubaldiariaa vao In tha fen of d«bt. Aa a raault, 
aftectiva control of those aubaldlarlaa could be 
■alntalnad with a alnlaal equity Invaataant by the 
holding co^any and ita ownara. Thla leverage (over- 
reliance on debt financing) created Intolerable financial 
rlak for the electric utility Industry. 

currently thara la a debate over whether theae or ainllar 
abuaaa would ba repeated If the POHCJh la ananded aa proposed to 
create an "exa^t" clasa of wholesale ntilitlea. Indeed, certain 
aaandBents havs been included In Title XV in an effort to prevent 
et least soee of those abuses frca happening ataoold Title XV be 



D,g,;,zeclbyG00glC 



MMCtcd inte law. (Notably, no aBandauit hmm yat baan inoludad to 
■ddroM tb» iMt of tb* preblaaa Iduitiflad abova.) Onfoirtnnataly, 
tbasa afforta ta «aand Tltla XV ta protaot eonaiaara frea a rapaat 
of liiaterleal holding eonpany abuaaa ara aoaawhat miadiractad 
bacauaa thay Ignora oartaln fundanantal quaationai why ia tba 
laglalatlon naadad in tba first plaoa and what would it da to tba 
atruotura of tba alactrlo utility induatry, and ita aftieiancy and 
raliability, if it vara anactad inte law? Cvan if tha lagialation 
oould ba "fixad" to avoid all of tba biatorieal holding eoq^any 
abuaaa, Tltla XV praaanta axtraaaly Important policy iaauaa which 
ara oftan ignorad in tba dabata ovar that lagialation. 

Ibia can ba daaonatratad by a raviaw at tha aaln arguaanta 
which hava baan aada in aivpo^ of Tltla XV. Sivportara sf Titla 
XV ganarally praaant ona or both of two prinary argunanta in 
aupport of that lagialation. Tha tirat arguaant ia that Titla XV 
ia naadad to aaaurs adaquata auppllaa of alactriclty for tha 
nation, or that at tba vary laaat it will craata naw powar aupply 
■options" tor tha nation's alaetrlo utilitias. Tba argunant goaai 
Instaad of building naw powar planta tor thaaaalvas, tha utilitias 
will. If thay cboosa, ba abla to contract with KHCa to build and 
c^arata thoaa powar planta and will ba abla to purobasa tha 
alactriclty ganaratad from thoaa plants for raaala to tha oensuaara 
locatad in thair sarvica tarrltoriaa. 



D,g,;,zeclbyG00glC 



Uttl* anridww* is pr««witia, tacNNnrar, to vupport ttala first 
niara 1> ne •laetriclty ai^^ly crisl* in this ooitntry 
whloh ■*nil«f tbm pusag* of Tltl« XV to £o»t*r ths fnrtlMr 
d«val^pM«nt of turn ind^pwidMit powar Industxy. Ttao Herth Aaoriean 
Zlactrla IMllability catmoll rvpertMd at pag* 4 of its 199Q 

R tll»blll^Y Aaws—nti Mm yutaig. of Bulle »i-^^<.- ■«<— 

ItailablHty In Worth *tI>-.. loan-ioaa that, although aenfrontsd 
with oartain riaka idantiflad in tha atn^, -•lactric ntllitiaa 
hava adaquata plana tor tha I>t0-lt99 parlod to provlda xaliabla 
alactrle aarvlca to thalr cuatoaara". Zndaad aany of tha powar 
Bivply plana ravlswad by tha WEBC inclndad pwrchaaaa of powar fros 
Indapandant non-utili^ ganaratora. nia avidanca auggaata atrongly 
that Titla X7 la net raqulrad oithar for utilltiaa to taJca 
advantaga of tha Ind^andant powar "^timt" or for tha nation to 
■aat its futura powar aiq^ly naada. 

Aa a raault. It is tha aaoond aain arjuaant in auppert of 
Tltla XV whloh should ba tha focnw of tha raal dabata. Tbla 
argiuiant la that Tltla XV la na caa aary to unlaaah tha forca* of 
co^atltlon in tha bulk powar markat tor alaetrioity (tha aarkat in 
lAlch intarconnactad utilltiaa buy and aall wholaaala povar froa 
and ta ««eh atbar} by halping to foatar a naw elaas of ind^andant 
powar producara (tha EWS'a rafarancad in Tltla XV). ma goal at 
thoaa Baking thla arguaant la to featar ooapatition batwaan toa'a 
and traditional, ragulatad local utilltiaa for tha right to build 
and eparata ganarating plants, and thua for tha right to ganarata 



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tlM •lAotrieity whlcdi i* nltiBataly aold by th* lookl otilltlM to 
tlwir r*tall cust^Mrs. In otbar words. I nt o aj of ttao tradltioiwl 
utility building and owning • mm gonorating plant nwadod to 
provid* ■•rvio* to ita cu«to— r», an Ewe- would build th* plant and 
■•11 tta« olactrieity at wholoaalo to ttio utility, lAieta would 
rosoll it to eanmaon in ita sorvioo aroa. To tbo oxtont thia 
eeeurrod, contracts Cor wholaaala powor with thaaa "axaapt" 
ganarating coapanioa would raplaoo diroct ownarahip o£ now 
ganarating capacity by local utilitlaa. 

This clala that Title XV ia tba nacoasaxy tint st^ towards 
foataring co^^atitlon for tha right to build and control naw 
ganarating capacity at courss ispliss that othar atapa will ba 
nacaaaary to acco^tlisb that goal. Hot suxpriaingly tbeaa who 
advocata incraasad co^atition in th* bulk powax markat oftan 
advocate tha follcming additional stspsi 

1, Kandatory eo^Mtitlva bidding for tha right to 
build and own naw ganarating capacity, to bs 
adsiniatarad by tha raspsotiv* atata ragulatory 



Mandatory transsisaion accasa, to ba adainiatarad 
by tha radaral Enargy Ragulatory covslaaion. 



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3. Balwntlon oC «bol««al* pdc* rsQulatlaa by tlM 
F«d«rml liwrnr >*gnlatar7 O^visaion for ■*!«• of 
pmrar and anargy taking plaoa tn tb« n«wly ofmtmi 
ec^r«titlv« saiiut tor nmti bulk powar anfplimm. 

CMtolnad with th* paaaaga of Tltla ZV, thmmm proposals WMUd 
raault In tha afXaetlva daragolatlon of tha narkat for nav bulk 
pewar aiqtpliaa of alaotriclty. Km a raault, it la al^ly 
lapeaalbla to cenaidar tba Ivpact abich Tltla XV weuld hava en tha 
financial atability of tba nation's alaotrio utility industry 
without racogniaing that that lagislatien is not baing proposad In 
a vacuus, but is baing prc^osad slaultanaoosly with othar Inportant 
policy initiativas, tha conbinad affact of which would ba a far- 
raaching rastmctnring of tha alactric utili^ industry. And it is 
this proposad rastructurlng wbleli glvaa rlsa to tha kay Issua 
ragarding Tltla XVi would daragulation of tha bulk powar karkat 
for alactrlcity, and tlia foataring of cospatition bstwaan EHG's and 
loenl ragulatad alactric ccsvanlaa for tha right to own and control 
naw ganarating eapaci^, bansfit tha ultimata conavwars of 
alactrlcity, without harming tha long-run financial atrsngth or 
raliabillty of tha alaotrlo utility Industry? nia anpportars of 
Tltla XV sasura us that banaflts would flow fro* that coapatitien, 
and that this would occur without jaopardirlng tha financial hoalth 
or raliabillty of tba slactric utility industry. Unfertunatsly, 
thay baaa thalr aasurancas on cartain unsupportad umBUnDS- 



jdbyGoOglC 



Tb«B« asN^tloiw ar* that eeopatitisn will aaanra that n«w 
•lactrlc 9«iwraticHi faclliti«a will ba providad by tha aoat 
afflciant ai^llara, Audi that tha raaulting coat of qanaratlon, 
and tha ultimata prica for alactrlc aarvlca, will ba lovar. 
Rewavar, it ia not ■■(• to uKa tbaaa aaauqttiona. Xndaad, tha 
•ffort to craata a daragulatad, fully co^Mtitiva bulk powar 
Karkat, with paaaaqa of Tltla XV aa tha first atap towarda that 
Qoal, oould vary wall raaolt In »ora eoatlv. 1m« rallabla alaetrle 

Harvic^ providad by a financially waalcanad alactrlc utility 
Induatry. 

To undaratand bow « daragulatad, ce*patitlv« aarkat for naw 
bulk powar auppllaa could hava this affact In tha alactrlc utility 
industry, it la flrat nacaaaary to undaratand tha ourrant Induatry 
atructura. Control araa alactrlc utllltlaa today raflact a 
vartical lnta7r ;at;iiat of tha gaitaratlMi, tranaMlaaien and 
diatrlbutlon functiona, bacauaa thay build and own tha najority of 
tha facilltiaa nacaaaary to alaultanaoualy ganarata alactrleity, 
tranaait it to lead cantara, and fliatrihuta to ratall cuatoaara. 
Tbaaa vertically intagratad utllltlaa ara in turn intarconnactad 
with aach othar by high voltage tranaaiaaion tacllltlaa which wara 
conatructad ae that tha utllltlaa could provide eaoh etbar with 
rallabillty back-up, allowing the* to raly on each othar In tiaaa 
of aeergency. Thla peralta the* to reduce the e>ount of generation 
raaarvaa which aach woald etharwlae have to conatruot if they 
operated on a etand-alone, isolated baala. Tha axiatance of these 



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tzMwalvalen lnt«reann«etian> alao wwblaa Uw utllitiaa t» cngaga 
in bulk paif«r tratwkctioiu vlth aacb othar to aav* on ganarktian 
ooats, oCt«n rafarrad to ■• "acono^f" or ■ofiportiuiity'* 
tranaactloiw. (For axaapla, purchaaaa ax* sad* fr0> naighboring 
utllltiaa, in liau of aalC-gaiMrating, ¥lMn tboa* purctiaaaa «ra 
!•■• axpanalva than aalC-ganaratlon, audi as whara coal-fizad 
ganaratlon ia aval labia to r^laca sora axpanaiva oll-firad 
ganaeation. } In othar words, currantly, tbara ia sa&CdlluUfin 
aaeng utilitiaa through powar pooling rathar than full-blown 
CMV^titien. 

niia intarutllity coordination haa not baan an aeeidant- In 
Caot, it ia tha diract raault of tha public policy which haa baan 
•atabliahad for tha alactric utility industry by Congraaa. Saotion 
303(a) of tha radaral Powar Jict, wtalA fortunataly baa not xat baan 
ntparaadad by a diftarant axpraaaion of public policy, iapoaaa a 
duty on tha Tadaral Bnargy Ragulatary CoBaiaaion to "proapta and 
anoouraga" voluntary iataroonnaotlon and eoo rdinatiow aaong 
utilitiaa. 

Ihia public policy favoring intarutillty ooordlnatlon (net 
co^Mtitlcui) haa baan axtraaaly anccaaaful. Tor tha nation «■ a 
Nbola, aavinga frea all powar pooling and othar ooordinatiwi 
activitiaa wara aatinatad to ba tl5 billion in 198«, in a atudy in 
which V Coapaiv pairtieipatad. (Caaaaaa, Uicaa and Branca, 
a— "t^*™ "*""*" ■IMl.-TranMlMiaB — CdUlH. 9o. 37-03, 



D,g,;,zeclbyG00glC 



Xntsmatlenal Cenfarwtca on Larv* Higli Volt«9« Electric Systaas 
(19M), p. 1.) 

Dnfortunatkly, any affert to rastructura tb* vlactric utility 
industry, to vartically disint*grat« it te fostor tha davalopaant 
of a soparata, fully co^atltiva Barkat for naw bulk povar 
ganaration raaourcaa, would joopardisa many of tha affieiancias 
capturad fro* tha vartical intagratlm and intarutllity 
coordination axhibitad in tha currant industry atructura. Lat mm 
first diacusa tha liq^act on coordination. 

Baaantial to tha auooaaaful eparation of tha intai^onnaetad 
powar ayataBa of this country la tha open axchango of information 
■aong utilltiaa. Such axchangad information inoludaa projactad 
loada and apaclflca about tha daaign and operation of propoaed new 
generation and trenniBaion faoilitiae. Studiaa of load flow, 
stability, and production costs are conducted requiring aharad 
Infonutlen conoamlngi (1) generator heat rates, outage rates and 
aaintananca s^iedules, (2) transvlsslon line ratings, (3) projected 
OtM ceeta, including fuel costs, (4) planned generation end 
traneBlssion additions end retlreeents, (5) peak load foracaats, 
and (6) projected finance costs, without the free flow of this 
kind of Infonetion, it would be lapossibla to develop the kinds of 
regional plans currently developed within power pools, micb of 
that exchange of InforMetion, however, would be discouraged if 
utllitlae were pitted against each other (through their EWS 

10 



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•nbaidiariaa) tn * Ctaiy eM|r«titlvB bulk p«t*r Kulwt. Jatj 
ntllltr will bm raluetant to •xdung* Infenutlon with ui Miti^, 
IM It u) EHO or anethMT utility, tb»t would hm that infanatlon 
for es^prtltlv* pozpo***. You oaimot ooapst* *md ooerdlnat* at tbo 
MB* tlB*, and It would ba niurttallstle to axpaet utllitlaa to try 
to do vo with any dagraa at anthualaaa. 

Thla la not a trlvoloua eoaoam. Zndaad, th* North tatarloan 

Uactrie Raliabllity CouncU In Ita lU2JBalUblU£X_Aaiuaailt 

axpraaaad tha wtmm ooncam (p. 41) i 

On* advara* raault o< daragulatlon la llkaly to ba 
.raduoad oooparatlon and oeaounleatlon aaong ntllltlaa as 
a raault of baing forcad Into cDi^atltlva altuatlona. 
,nM rallabl* ^aration of the intarowina e tad ganaratlon 
and tranaalaalen ayatowa ha* baan poaalbla only with tha 
doaa eeoparatloti and axdianga of infonutlon aaong tha 
ayataa plannara and maratora of tha vmrlooa utllitlaa, 
Any raduoad eoordlnatlon of planning and oparatlon aa a 
raault of daragulation would advaraaly affaot 
raliabllity. 

/wqr m^ raduction in coordination activity would not only affaot 

^ raliabllity, but would hava dlract coat lapacta aa wall. h 

J raduetlM) In coordination would ultiaataly raqulra individual 

Cjitilltiaa to incraaaa tbair own ganaratioh raaarva raqulraaanta. 

Coapatltiva eenaidarationa would not poa* tha only threat to 
ocmtinuad coordination aetivitlaa, and tha aavinga tbay prednea, if 
\tha industry la raatructurad to craata a aaparata, fully 
coapatitiva bulk powar varkat. Tha aar* prolitaration of Kwe'a 
which would follow anaetaant of Tltla XV, and th* iaplaMntatlon of 
tb* etbar policy initiatlvaa I llstad aarliar, would laoraas* 
11 



D.,r„.db,G00glC 



gr*atly th* CM^laicltY af ooordlnation aotlvltiac. A« J^ui A. 

CasassB put it r«c*ntly ('Pr** lUrlut Bl*etrieltyi Potential 

I^act« en Utility Pooling and Coordlnatlan', Publle ntinti*« 

Fortnliihtlv. Fabruary IB, 1968): 

Aaong tha diaadvantagaa la that an incraaaa in tha nuabar 
Of participanta aakaa tha daciaion-aaking procaaa aucb 
»ora difficult. Fast pool axparianca haa daarly abown 
that tha ability to arxtva at dacialona rapidly dacraaaaa 
vith incraaaaa In tha nuab^ of participants. 

Tha aoat aarloua difficulty, hovavar, vlll ba tha 
participation in pool actlvitlaa of organiiations lAlch 
do not hava tha raaponaibility to aupply cuatoaara, irtie 
do not oparata a tranaaiaaion and diatribution ayataa, 
and whosa only eoncam la tha aconoaio lapaot on thair 
ganaration plant. Tha aaintananca of ovarall avtaa 
aconomv and avataa rallabilltv undar much aituationa will 
bacona vary difficult. Tha alnlaigation of total avataa 
,.„.f win f.,.. fft h. th. „M.r-H-um „f mrm. .^.h.^. »f 

tha groi^p . [Eaphaala addad. ] 
If tha raai^naa to thla incraaaad co^ laxity and conflict of 
intaraata ia withdrawal froa coordination actlvitlaa by alactrlo 
ntilitiaa, tha raault, again, would ba a raduction in tha 
rallability banafita providad by auch actlvitlaa and an incraaaa in 
tha ganaration Invaataant (raaarvaa) and fual ooata which would 
hava to ba incurrad by individual utilitiaa. 



Tha potantial less ef intarutillty coordination, and tha 
reliability and cost savings such coordination haa produced, wAld 
not be the only risk posed by any effort to deregulate the bulk 
power aarket to foster eoapetition. As I auggeated earlier, 
benefits currently obtained by vertical ^ntagratlon would alao be 
jeopardiied. Wban tha ganeratlen, tranaaiaaion and distribution of 
electrioity are all provided within tha aaaa coapany, power aupply 



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!■ prlaarily not obt&liMd Mttaznally by eantnet, but 1> prevldad - 

intanwlly within tba coapMiy, and ttw coats o£ oontracting for 

tbkt power and ef ■onitoriug and •nforevMnt of thoaa oentraote ar* 

•voidad. (Obviously, a ot^pany doasn't bava to ana itaslf to 

Taaaura parfiorBanoa. } With daragulation of tba bulk powar markat, 

r-^a graatar and graatar paroantaga of povar aupply would ba cbtainad 

/ by contract with ms'a as tha industry baoaaa vartioally 

^di ■ intagratad . 

For powar aupply contracts with iWG'a, I»oth tba potantial for 
opportunisB by tha ZWC and tba rasultlng cost of contract 
anforcanant would ba quita higb. I say tbia not bacauaa of any 
baliaf that EHG's will ba unusually untrustworthy or opportunistic. 
Tha i^otantial tor ^pertnnisn (and omitract anforevMnt coat) will 
Stan fron tha potantially advaraarial aceao«lc ralattonahip with 
tha EHG, aa auggaatad 1^ Casassa In tha pravious quota, and tha 
inharant difficulty of antieli^tlng, and raaolving, diaputas In a 
contract govaiming tha ^araticn of an aasat lika an alactric 
ganarating unit, givan tha co^laxity of tha transaction and tha 
■agnituda of tha Invastnant in tha unit and Ita langtby oparating 
HC». Accordingly, it is iaavltahla that thara would ba costly 
I contract diaputas at aona point during tha contract tana. Nith no 
jlagal duty to aarva, any financially troublad ms would ba ta^ptad 
I to walk away f ron an uiq^rof itabla aarviea providad undar a contract 
1 with a purehaaing utility, or to saak ranagotiatton to gat a prloa 
not originally bargalnad for. For axanpla, if tha contract ba co »as 

IS 



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■of fiolanUy WMOoaaala to tb* SNB, thava 1> no qtMstlon but that 
tlM me would atta^t to limka tha fnrni Mlmn olansa Inavitably 
to ba eentainad within tba eo«xtr«ot or would inrelta tha doctrina o2 
ooaBareial £raatraUaa of parpow (Saction 3SS, Fwtntt F*"* "* 
^iontraefca 3d} In an affect to obtain a ranagotlatlon of tba daal. 

ttagardlaaa of tha validity of its lagal aryunanta, howavar, 
tha ZKO would hava oonaidarabla lavaraga to obtain ita prica 
daaanda, glvan tha "lock-in" of fact daaoribad by Joakow and 

SchHlanaaa in thalr book MMT*m*m »or Powar-i An AMlyla at 

Maetric Dtilltv Daripilaticiii (1H3) at pp. 111-112: 

Nhan durabla tranaaction-apoclfic aaaata ara involvad in 
a transaction [aoeh as a ganaratlng plant] , tbara ia a 
natural asy^aatxy batwaan tba poaltlon of tha biddar 
bafers a eontraet ia oignad {«x anta) and aftar tha 
Bsaata axa in placa (ax post) . In tha bidding ataga 
ttaaxa >ay ba wmag biddara vying to supply. Aftar tha 
contract la algnad and aaaata aza in plaiM, howavar, tha 
aany-biddara sltaation la tranafozaad into a situation of 
bllataral axcbanga. Mora al^ly daaeribad aa a lock-in 
affaet, thla genarally af facta tba babavior of both 
l^rtias to a co ntra ct. Moat isportant it provldas an 
important condition for costly opportunistic babavior by 
ana or both partlas to a ctmtraot. 

In othar worda, baoauaa tha powar supply contract with an BHG 

would invelva sncti a significant "tranaactlon-apaeific aaaat" ~ 

tha naw ganaratlng plant — tha pnrctasslng utility will ba "lockad- 

in" to tha contract onca tba plant is built bacausa it will 

abaolutaly raqulra tha ganarating c^^acity providad by that plant, 

Aftar all, tha plant is balng built as a substituta for tb« utility 

Iralldlng tha aaaa plant to help aast tha daaand for alactriclty by 

ita cuatoaan which tha ntility is obllgatad to naat 

14 



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instantaiMously ■• it occurs. In that situation, th* supposMdly 
c«ip«titlva natura of m daragulatad bulk povax aarkat vould not 
■■rva aa a raaliatlc check on opportuniatle babavioT by tha EHG 
iMcauaa of tha iapoaalbllity of conatructing subatltuta ganaratlng 
capacity en short notlca. Of coursa, EHC's would not ba aqually 
vulnarabla to opportunistic bataavlor by tha purchaalnq utility fro* 
tha "lock- In" affaot daserlbad by Joakov and Scbnalansaa, 
particularly if an unconditional swidatory transaiaaion accass 
obligation vara iapasad on alaotrio utllltias, vhlA aai^ 
proponants of daragulatlon ara advocating apaclfically to provlda 
ZHG's aeoass to utilitlas ethar than tha initial purchaaing 
utility. (Soaabov, only tha purchaaar naada to ba diacipllnad, not 
tha sallar.) Paradoxically, such mandatory tranaaiastan accaaa 
would only sarva to anhanca tha lavaraga which tha EWS has ovar tha 
purchasing utility, incraaalng its ability to angaga In 
opportunistic babavlor. 

It is thia "loek-ln" aftact, and tb« potantial for opportunisa 
to which It givas risa, which halps distinguish tha slaetrlc 
utility induatry troa othar induatrlaa lAlch hava racantly 
nndargona soaa fora of daragulatlon in an atfort to hamass "aarkat 
foreas' to ragulata supply and prlca. Tha alia of tha invastaant 
raquirad to construct naw ganaratlng capacity, and tha significant 
laad tlaaa raquirad for tha oonstructlon itsalt, will pracluda tha 
davalopaant of soaa sort of a disciplining "spot aarkat" for 
ganarating capacity to which a purchasing utility could laaadiataly 



D,g,;,zeclbyG00glC 



wlcNw to mn IM •xhlbltlng 
egp o r tun iatio bduiviar. Snrplaa gwMrating capacity alaply will 
not b« oonstmotad an ^•eolation for audi a apot aai^eat. Itila 
■aana that tba I In aal of no a -parforBanca by a nholaaala auppliar la 
■ncfa Bora aarieoa to an alaotrie utility than in othor Induatriaa, 
givan tha ntill^'a Obllqatloa to gaaarata alactTicity to aarva 
aiaotrlo lead t m»»iii*»«»*»™ i ^ as It oeenra. For thta raaaon, any 
utility purtftaalag a >i«nifieaiit aBOoat of gansratlng capacity froa 
Blie'a will hava ko pccvida graatar ganaratlng raaarvaa than If it 
had built and ownad t^a ganaratlng capacity for itaalf. In ita 
Haxeb 3«, 1990 '•—■"*■'' miiI antltlad "irtilltiaa' Rlaka In 
PorAaaing Pomt", Standard a Poor'a aatinatad that Ineraaalng 
rallanca on IHB'a Bay raquira ganaratlng r aaarv a Barglna 3% to 5% 
highar than tha c ur ran t industry avaraga raaarva narglna of 15% te 
' 17% to cea^anaata for thia bigbar rallabllity rlak. 

Dp to thla point, I hava dascrlbad two aouveaa of additional 
coat vhicti would raaolt froa tha vartlcal dlalntagratlon which 
weald aeooaqwty ladnatKy raatrocturlng — tha algniflcant contract 
anforotaant coats whUi ntilttiaa would ba forcad to Ineur and tba 
eeats of tba additional ganaratlng rasarvaa which thay would hava 
to provide It th^r relied en a algniflcant anount ef XHS generating 
capacity. I hava allttfad to another coat which could ba even Mora 
significant ~ tte increased prices which the purchasing utility 
would be required to pay over the texs of the relevant oontract if 
It is f oread to aooede to denanda for price eoneeaslens by a 

l« 



D,g,;,zeclbyG00glC 



flnuiot«lly troublvd ZHC. 8u^ an lnor*B«« In prlc* would eceur, 
in any anrant, vpon tb* tarainatlra or wviratlen of th« eontraot 
with tba BII6. (Mton tbo contract ia tazalnatad or axpiraa, tba 
purchaalng utility would hava to Clnd raplacaaant pewar or »irt*i»fl 
tba contract with tba IWS. Praauaably, that could ba obtalnad only 
at tha than pravalllng aarkat prlca.) Amc Ineraaaa In prloa, 
howavar, whatbar tram a foread ranagotiation of tba contract during 
tha contract tarm, or frea tha aequlaitlon of raplacanant powar 
upon Its tarmlnatien, rspraaanta an obvloua loaa of whatavar 
bargain tha purchaalng ntili^ thought It waa gattlng whan it 
Initially contracted with tha ms aa a aubatltuta for building tba 
ganarating plant tor itaalf. JLnd, it la praciaaly thla potantial 
for anch a loaa of bargain which nalMa it lapoaalbla to concluda 
that any contract with an EHC rapraaanta a "laaat-cost" altamativa 
to tha utility building tha ganarating eiqwcity for itaalf. 

Onfortunataly, tha thraat to rallabillty, and coat ef 
incraaaad ganaration raaarvaa, raaultlng froa laaaanad intarutllity 
coordination, and tha contract anforcaaant coata (and rlak of 
contract ranagctiation) raaultlng froa vartlcal dielntagratlon of 
tha Induatry, ara not tha only coata likaly to ba ii^oaad on tha 
nation's utilltlaa in tha aftarBath of induatry raatrueturlng. Tha 
utility purchaalng a aignlf leant portion of ita ganaration 
raquiraaanta fma ZKB'a la going to wind iqp with a highar coat of 
capital. Any apparant prica advantaga ef farad by an BM would 
prlaarily ba tha raault of bow tha IH6 ganaration projact would ba 

17 



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rinii¥T«1 Iitd«g«nJwit powar proj*ct« az* gMMrally bt9hly 
lavcragad, being tinaaaad witb «q> to 90% dabt. Ihls l«v«raglng 
vould giv« tba UK an appaTwit east •dvantag* a*«r « traditional 
ragulatad utility, wboaa capital liation Kuat contain a 
atgnificantly BBallar pozoantago of dabt, and a higbar paroantaga 
o£ Bora eeatly aq^ty. 

' Rewavar, ■oeta bighly Ivvazagad financing would ba avallabla to 
tha-BWS cnly if tta ntili^ otfarad to incur aoaa "taka-or-pay" 
obligation in ita contract witb tba IPP, or oCtarad alnilar taema 
to provlda tba WHO with an aaaurad karkat at a knotm prica. Ibia 
would affaetlvaly aaaign wudi cX tba aarket riak of tba Zhc prejact 
to tba utility, wbidi would oorraapondlngly Inoraaaa Its eoat of 
capital. (Markat riak la tba riak that tba ganarating edacity 
will not ba naadad, or that It will prova unaconoaic, and tbua will 
ba undarutiliaad. } In otbar worda, tba EK contract would ba 
traatad aa tba aquivalant of dabt to tha utility, naanlng that ita 
equity capital would ba raqnlrad to back up tba bighly lavsragad 
financing of tba ms ^rojaot. 



Importantly, it ia net auffleiant to raapond to thla c 
witb tha argunant that tha utility would hava had to abaoA tha 
aaaa markat rlaka If it had built tha powar plant for itaalf . Thla 
argunant ovarlooka tha fact that wban tha utility builds tba plant 
for itaalf it Is allowad a ratum on its invastnant which 
prasuaably '"TiTitgTi^tt it for assuning thaaa rlaka. Bowavar, Wban 

It 



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• eoBtraet vlth an BM la nib*U,tttt«d for dlraot ntili^ owiMrahlp, 
no Mich ratum ia aaziiad, imlaaa atata ragulatora allow apaelfie 
ecapanaatlnq adjuataaiita to tba ratnm allowad on tha utlllty'a 
za»atnlng Invaatamta. aivan tha eurrant ragulatory cliaata, tba 
proapacta for auob apaelflc, coapanaatlng adjuataanta to allowad 
raturna ara alia at baat. 

It ia likaly that tba nation'a alaotrlo ntllitiaa vould ba 
raqulrad to abaortt avan otbar ooata it tba Induatzy ia raatruoturad 
in an a£fert to craata a a^Mrata, fully coapatitiva aarkat for 
bulk powar atqtpliaa In whiob EHG'a would partielpata. Aa I 
■antionad aarliar, ona aapact of tha daragulation acanarlo now 
advoeatad 1^ aany proponanta of induatry raatructurlng la aandatory 
tranaaiaaion aceaaa. Although tranaaiaaion accaaa raquiraaanta ara 
not (yat?) part of Titla XV of S. 1230, thara la lagialation whtcb 
la currantly baing eonaldarad In congraaa which Includaa 
tranaaiaaion accaaa raqulraaanta, along with tha aaandaanta to 
PUHCK confeainad in Tltla XT. (8«a, for axaivla, H.R. 3835 
aubaittad by Sapraaantativa Tausln.) I bava alludad to ona of tha 
ratlonalaa for tbaaa tranaaiaaion accaaa raqulraaanta— tha 
pareaivad naad to craata "aacondary aarkata" to idiich mca could 
raaort upon tba taralnatien or a^qiiratlen of tbalr eontraota with 
thair Initial purchaaara. If tha currant varaiena of tba 
tranaaiaaion accaaa lagialatlon now baing propoaad in Congraaa vara 
to ba anactad Into law (along with tha provialona of Tltla XV) , tba 
nation'a alactric utilitiaa will prdiably ba raqulrad to absorb 



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e»5 

owrtaln r*al oo«ta — oolafd vlth prdvldlog tnnaKlsslon Mnrt^aa 



Currantly, ntllitl** BlnlBis* tlM eoaU ot both their 
qaiurfttion utd I ■■■■■■[■■lin by pluming both jelnUy. nw siting 
of q«nar>ting plmatm in rttlation to prlaary axpaetad load contors 
la ooordlnatod vitb tho pluming of tho tranaalaslen systoa. 
ObvlouBly, this ooold still bo scoeaplishod In a oosipotitivs 
bidding progroH by spoclfylng te tba bidding EKS's whoro tho pluit 
Is to bo built. Boifovvr, ony raqulnasnt to provld* transaisslon 
sorvless to BK'b, te slleH Uwa ta shop tholr gonsrstlng c^Mclty 
around in ssoondary Barksts, oould raqulra tho purchasing utility 
to aiqwnd tbs e^aoity of Its transMlssion systan spooiCically to 
provida thosa tranaaission urvlesa. Many utilltlas aay not ba 
abla to do this, howsvar, givan conatralotB on ttas construotlen of 
now truiaHisaien capacity dna to Incraaaing urbanisation and 
half^tanwl local onvironaantal coaoams. Tha Fadaral Snargy 
Itagulatory Coaalsalen has aada it alaar in racant caaaa wbara It 
baa liq^eaad tranaalaaian aoeaaa oondltions that, irtiara aucdi 
constraint* on tranaaisaiaa ayataa aiq^ansion do occur, th* utility 
should ba raqnlrad to torago aaUng aeono^ transactions with othar 
utilltlas, which diractly banafit its own aarvlc* araa custoaars, 
in erdar to provida tba transaisaimi oapaeity naadad to airport tha 
long-tara transactions ot third partiaa (Including ind^andant 
powar preduoara). 



D,g,;,zeclbyG00glC 



I notad •urllar that ttas sblllty to aaX* Umb* •eotixmy 
tranMictlena !■ wm of th* bancfits which utllitlas cuxrantly 
obtain troa int«rutili^ ooordination. Aa « r««ult, any 
r«quira»*nt that tha*« •ccnoay tranaactlons b* foragon* to provide 
fira tranaBiBBlon ••rvic* to third parties would r«pr«a«nt • vary 
raal coat aaaoclatad with providing thoaa aarvicaa. (Beonoaiata 
rafaz to Buch foragona altamativa Isanafita aa "opportunity 
coat*".) Yat, ttaara la vary raal douM that tha FBRC la inclinad 
to allow tha utility to charga tha antlty raquaating tha fira 
tranaaiaaion aarvlca for tha loaa of thoaa banaflta for Ita natlva 
load cuatoaara. Claarly, to tha axtant utllitiaa ara not allowad 
to racovar auch opportunity coata Zroa tha antity raquaating tha 
tranaaiaaion aarvloe, tha trua aCtact on atflclancy oC tha 
auppoaadly coapatitiva bulk i^owar sarkat will ba aaakad. And, tha 
financial haalth of tha natlon'a alactric utllitiaa will ba furthar 
jaopardiiad aa thay ara raquirad to abaorb yat anothar coat 
raaulting froa daragulation, with conauaara ultiaataly baing 
raquirad to pay tha prica. 

Dnfortunataly, tha tranaaiaaion accaaa lagialation which ia 
currantly panding in Congraaa would not raquira tha rERC to allow 
opportunity coata to IM includad In tha pricaa chargad for 
tranaaiaaion aarvicaa. Evan mora aarloua ia tha fact that that 
lagialation would actually paralt tha note to ordar tranaaiaaion 
accaaa in ordar to foatar tha davalopaant of a fully eoapatltlva 
bulk powar aarkat, avan it it laopardltad tha rallabllltv of tha 

11 



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tT»"—t«»t<m feilltl—. u long m tha FZRC ewtoludMd that tlM 
loss o2 rallablllty was not ■^indiM'. This la a parfaet axaapla of 
tha vary xaal sacritieaa which could ba sada In tha blind purault 
of daragulatlon In tha alactric ntlli^ induatcy. 

niara ara cartain conoloaiona whlA ara inaacapabla trca tha 
pracadlng raviaw of tha klnda of Inaffldanclaa and coata irtilcli 
could raault froa tha currant afforta to eraata a aaparata, 
daragulatad tMMpatitlva «arkat tot naw bulk pow a r auppllaa e£ 
alactrlclty. Tlrat of all . it is aii^ly Inappropriata and 
irraaponaibla to aaaaaa away all of thaaa potantlal ooata and 
Inaftlcianoiaa «han d^Mting tha potantial for anhanclng tha 
•f ficiancy of tba bulk powar aarkat for alactrlclty by daragulating 
it. It ia an *»h1<-1mV quaation wbathar alactrlclty la atill aoat 
afficlantly providad by tba protetypioal vartically intagratad, 
ragulatad utility whicdi particlpataa in Intarconnaetad powar pools, 
or Hhathar full ccapatitien ia a aaparata, daragulatad bulk powar 
■arkat offara any nat afflcianey gain, without jaopardlslng 
rallabillty. Tbia ia not a dabata batwaan two oopating rallgloua 
faiths, although It oftan aounda lika ona. 



ra do not yat bava aufficiant lAforaation to 
dafinitlvaly answar tha aaplrioal quaation I juat poaad, although 
It ahould ba claar froH ■/ coBBanta that I auapact tha nation will 
ba woraa Off froa tba daragulatlen acanarlo earrantly baing 

II 



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pr^oKvd. A« « r«aiilfc, it la cntlraly pzwaatur* to start 
jjpl— ntlng th* deregulation ■eonarlo bx onactlng into law its 
various ssiMots plsc—sl, sucb as Tltla XV and aandatoEy 
transKlsslon acoass. f'*"***'^ bafora you laap is still good advlca, 
particularly lAsn you b*v« pliity °t tisa to do tha looking. Jlb I 
■antionad aarllar, thars Is no isnadiata national alaotriolty 
supply crisis justifying hasta. 

Sticdi if tha nation doas rush to judgaant on thasa issuas, 
bsfora adsguata analysis has baan brought to baar, and it tha risks 
I hava idantifiad in ay ccHMnts vatariallsa, tha eonsaqusnca to 
tba nation will ba profound and far-raachlng. Hot only tflll tha 
finanoial haalth of tha slactric utility industry ba unnacassarlly 
jaopardlsad, but tha rallability of alactric sarvica, so aasantial 
to consuaar wall-baing, vlll ba dagradad at tha aa>a tisa its cost 
will rlsa. 

Tor all of thasa raasons, I urga this Subco— ittaa to 

racMnand that tha Banking Coaaittaa toraally assart its 

jurisdiction ovar Titla XV of S. 1320 and to iaitiata tha raviaw 
thasa Issuas daaand. 



D,g,;,zeclbyG00glC 



taaiomUi Assoczknov or usuiatost utzlztt coianssioKiB* 

1102 XMIIBSTail "■"■■■"■If COHMZUIOI ■OILDXVa 

P.O. BOX n*, iKsnaovoM, d.c. aoo4< 
(101) ■9s-aa«a 



I TO umD TO 
ptnue oTZt-zn Ktuixaa ocanunt ler or »» 

inaviaxeau or tztlb xt or s. tsio) 




D,g,;,zeclbyG00glC 



Chairnan Dodd and Menbers of the SubcanBitCee: 

The Hational Association of Regulatory Utility Comnissioners 
(HARUC) appreciates this opportunity to subnit written testimony on 
anendnents to the Public Dtillty Holding Company Act contained in 
Title XV of 5. 1220, 'The Hational Energy Security Act of 1991." 

Ae the representative of the State regulatory commissions 
lesponaible for regulating the retail rates and service* of these 
electric companies, the NftSUC is concerned that the passage of 
Title XV not frustrate the ability o£ these coBunissionB to ensure 
that utility purchases of wholesale power are in the public 
interest. Our basic position with respect to this legislation is 
based on the attached resolution that was adopted by the HARUC in 
19B9 (see Attachment tl) 

In reporting S. 1220 to the Senate floor, the Committee on 
Energy and Natural Resources recognized the need to protect State 
regulation by including in Title XV Section 15106, entitled "State 
Authority.' This provision would amend Section 209 of the Federal 
Power Act tPPA] to provide that as a general matter, wholesale rate 
orders of the Federal Energy Regulatory Commission (FSRC) would not 
preempt State authority to determine the prudence of the purchase 
of wholesale power from the perspective of the retail utility 
nailing the purchase. 

The HARUC strongly supports this aspect of Section 15106 . 
HoweveFi in addition to protecting State prudence authority, the 
section includes two additional provisions which should be deleted 
or revised. First , Section 15106 amends Section 209 of the FPA to 
include a "provided" clause which would give a utility the right to 
requite State commissions to "preapprove' the prudence of the 
utility' s decision to accept an offer from an exempt wholesale 
generator lEHG) to sell power; second, the section would preempt 
State prudence regulation of wholesale power sales and allocations 
which occur within a registered holding company system, except for 
wholesale purchases from EWCs, which would not be preempted . 

He object to the "preapproval" provision for at least three 

o First, some States now preapprove the prudence of a 
variety of utility actions. Including wholesale power 
purchases, under the provisions of State law and regulations. 
However, requiring Nationwide preapproval through Federal 
legislation would constitute an unprecedented intrusion into 
State ratemaking authority. Despite its increasing interest 
in utility issues (as exemplified by the 1978 enactment of the 
Public Utility Regulatory Policies Act (PURPA)], Congress has 
never dictated to the State commissions how they should decide 



D,g,;,zeclbyG00glC 



o Second, thla piovlaion leaves the pceappcoval decision up 
to the utilities, and not the State comaiaelone. A* « ceault, 
by thia legislation. Congress has delegated to utilities the 
right to dictate a State coaniaaion's agenda. Thia too Is 
unprecedented. 

o Third, by Uniting the preapproval requirement to 
purchases fro«i BHCs, and no other wholesale suppliers, this 
provlalon discriaii nates against a source of supply uhlch 
ironically enough. Title XV seeks to promote. In our view. 
Congressional creation of new categories of power suppliers, 
subject to new and different regulatory rules, runs directly 
counter to the philosophy of the bill as well as current 
regulatory trends which seek to evaluate all supply and demand 
options on an even-handed basis. 

In short, the NMIDC strongly opposes this effort to prescribe 
State regulatory policies and procedures, and urges that the 
language be removed. 

The provision of Section 15106 which preempts State prudence 
reviews within the context of registered holding company systems 
has similar defects: 



pur< 

o Second, by preempting State jurisdiction over the retail 
rates of the retail utility subsidiaries of registered holding 
companies, this provision both displaces State regulatory 
authority and places the Interests of millions of retail 
ratepayers at risk of higher utility rates. 

o Third, the HASUC strongly believes that multistate 
transactions of registered systems are most appropriately 
regulated at the regional level. However, since the Energy 
Committee failed to include provisions in its bill to 
authorize the establishment of regio 
and instead preempted the States, 
oppose this aspect of Section 1510( 

In addition to opposing the preemptive aspects of Section 
15106 of S. 1230, we believe a more comprehensive treatment of 
registered holding company systems is needed. The NADUC has called 
for amendments to the PPA authorising the creation of regional 
regulatory approaches to holding company issues in a resolution 
adopted by the Association's Executive Conaiittee earlier this year 
(see attachment 12) . A legislative proposal to address this 
qusstion has been Jointly dratted by the Arkansas Public Service 



D,g,;,zeclbyG00glC 



CoiBiaaion And Entergy, a regiatered holding co«pany, and will 
poaaibly be offered a* a floot aaiendMent to Title XV. The nardC 
support* this approach in concept, but ha* not yet developed an 
official poaition on the specific eleaents of the Arkanaaa /Entergy 
propoaal. He urge the >embera of this Subccoaittee to support a 
regional approach to the very real regional regulatory issues that 
POHCA refora raises. 



o Section 15103 . This section, entitled -Prevention of 
Stranded Tnveitaent,* prohibits the FERC from approving a 
wholesale sale froa an EHG if it anticipates that the State 
coBniasion regulating the utility purchasing the power will 
renove from retail rate base generating plant owned by the 
utility. m other words, this section would prohibit FERC 
front approving EHG sales which it believes a State conmission 
will use to offset generation fron existing capacity. The 
NARUC opposes thla provision as both unnecessary (i.e. there 
is no evidence that State connaiBBions would "atrandy 
inveBtment in existing capacity) and unworkable (i.e. how will 
FERC determine what a State coiimlssion will do in the future, 
short of mind reading?}" 

o Section 15107 . This section anends Section 111 of PURPA 
to require each State commission to conduct hearings and make 
written determinations on whether or not to adopt regulatory 
standards on (1) the effect on retail rates of utility 
decisions to rely on wholesale power purchases rather than 
construction; (2) the effect on reliability of wholesale power 
purchases from sellers with debt levels higher than the 
purchasing utility; {3) whether EHGs with less than 35% equity 
will harm reliability and competition; {4} procedures for 
advance approval of wholesale power purchases which reflect 
the results of 1-3; and {5} whether wholesale sellers of power 
have reliable sources of fuel. Because this section amends 
Section 111 of PUHFA, State commissions are not required to 
reach any specific substantive result in these evaluations. 
This section is a ccHnpromise from earlier amendments which 
would have established mandatory limitations on financing, 
fuel supply reliability, and debt/equity ratios. The NABDC 
opposed both the earlier amendments and the cowprdniie that 









such provisions 


are 


unnecessary 


(becaut. State commission. 


1 take these matters 






iderati* 




inistrati 




ause 






resources would be required to 


hold 


a serii 


IS of hearings, i 




.sions etc.). 





Section 1510B . This section provides "affected" State 



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coamisBlons with a right of acceas to the books and iBcords of 
EHGs. An "affected" co^iBaion requlates (1) the rates of the 
purchasing utility: oi 12) a utility affiliated with the EWG, 
including affiliation via a holding covpany. The MARUC 
supports this proviaion but urges that the aection be amended 
to provide access to Qut-of-State books and records ol? non-EWC 
utility" affni a tea as well . 

Finally, we wish to coanent on the linkage of transalsaion 
access with PHHCA reform legislation. The NARUC has not taken a 
position on the linkage of these two najor legislative inltlativesf 
however, we believe that if the Congress does decide to incorporate 
language concerning wholesale trans>isalon issues in Its PUHCA 
letorm packagei there ahould be a recognition of the need Cor 
reforming the way in which the Nation's current transmlsilon 
infrastructure is regulated today. He believe that this reform is 
needed to avoid unnecessary delay in building new transmission 
capacity and in achieving the Baxiaum efficiency fron the systen 
that is now in place. At its Suaowr Committee Meeting this July, 
the NARUC Executive Committee adopted a resolution outlining what 
we believe to be the major policy questions that need to be 
addressed in transmission legislation (see attachment 13). 

In conclusion, the HARDC believes that legislation amending 
the 193S holding coapany act affords Congress the opportunity to 
decide some' fundamental questions concerning the balance between 
Federal and state jurisdiction over traditional electric utilities 
and the new entrants to the power industry that this legislation 
would allow. The answers to these questions will largely determine 
the ability of this legislation to meet its stated goal of 
increasing competition and economic efficiency in the electric 
power industry so that consuaers will ultimately benefit. 



D.,r„.db,G00glC 



ATTACHMENT *1 



WHEREAS, Legislalion is pending before Ibe Senate Committee on Energy and 
Natural Resources, S. 406, to amend the Public Utility Holding Company Act of 1935 
(PUHCA); and 

WHEREAS, The legislation would create a new category of electric generator called 
Exempt Wholesale Generators (EWGs) which would not be subject lo the regulaioiy 
restrictions imposed on holding con^anies by PUHCA; and 

WHEREAS, The purpose of this bill is to greatly reduce the barriers to enity for 
holding companies, including electric utilities, to enter wholesale markets and sell power 
to distribution utilities for resale to consumers; and 

WHEREAS, The addition of new EWGs to wholesale markets subject to regulation 
by the Federal Energy Regulatory Commission (FERC) will erode State control of an 
increasingly large percentage of the cost of electrical service, particularly if the FERC and 
the Federal Courts continue to hold, in reliance on Mississippi Power & Light v. Mississip pi 
fx rel. Moore. 487 U.S. f 19881. thai State commissions have severely limited jurisdiction 
to review Ihe passlhrough of purchased power costs in retail rates; and 

WHEREAS, By pemiiiting unrestricted utility ownership of EWGs, the legislation 
creates the opportunity for utihlies to cross-subsidize I2ieir construction and operation of 
wholesale power facilities through their retail distribution rates, particularly utilities owning 
and operating EWGs which sell power to affiliated distribution companies; and 

WHEREAS, The substance of this Resolution is reflected by the Resolution of Ihe 
same Title adopted by the NARUC Executive Committee on July 27, 1989; now, therefore, 

be it 

RESOLVED, That Ihe National Association of Regulatory Utility Commissioners 
(NARUC), convened in its lOIst Armual Convention in Boston, Massachusetts, strongly 
opposes amendment to the Public Utility Holding Company Act of 1935 unless provisions 
are included which specifically preserve the legal authority of the respective State 
commissions lo insure thai the sale of power by new entrants into wholesale markets is in 
Ibe interest of retail ratepayers. Such provisions must: 

(1) Ensure the right of each Slate commission to review the prudence of the 
wholesale purchasing practices of each distribution utility subject lo the Slate 
commission's authonQf; and 

(2) Preserve the ri^t of each State commission lo conduct bidding programs and 
least cost plamiing; to determine the appropriate mix of generation, as a 
matter of fiiel and technology choice and as a matter of ownership; to take 
actions to insure system reliability; to restrict or prohibit afiiliaie transactioDs; 



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and to approve or dts^prove the transfer of assets bom a utili^ to another 
party, free from preemption under Federal statutes or the Commerce Qause; 

Provide a right of access, enabling Slate conunissions to review the books and 
records of holding companies and all holding con^ny subsidiaries, including 
non-regulated businesses that transact business with the retail distribution 
coii^>any or EWG entity; and 

In the case of an integrated multi-Stale utility holding company, authorize 
regional compacts for those Slates who have junsdiction ovei retail 
subsidiaries of the holding company for the sole purpose of regulating the 
allocatioQ of costs and/or tbe prudence of wholesale power purchases l^ the 
holding company. 



Sponsored by tbe Committees oo Electricity, Energy Conservation, 

and Finance and Technology 
Adopted November IS, 1989 



J-970 0-92-20 

D,g,;,zeclbyG00glC 



KTTACSHBHT 12 



FKtaral Powar Ad to Ralonn SMa/FWaraf JurtK«cllon 

WHEREAS, In anaOing tfw Fvlem POH«r Act m 183S. Congnas granted ffw 
FMam PO¥¥»r Commlsalon, pndacasaoe to tfM FtOenl Energy RegmaHxy Commission 
(FERC). lurtscHction to reguleie the wholeeele aele end tnnsmteton ol electrictfy In 
/nfwslala commerce whHe preserving SUM /urtaMMin over focsf ntas and sarvteas o( 
uHimes: end 

WHEREAS, In 1964. the U.S. Supreme Court held In Feder^ PcMmr Comfn/^ g/Qfi 
y . Saathem CalHomla EOsan Co.. 378 U.S. 205 (1964) (the CoOaa case) that Federal 
furisdlcilon over wholesale sales Included endrefy imrasiXa wholesale transacOons, 
thereby extinguishing State InirasMe wholesale aOhor^, and 

WHEREAS, In e aeries of decisions culminating In As decision In lullsslsslppi 
PowerAUght </. Mississippi ex nl. Moore. 4B7 U.S. 354 (1983), the Supreme Court has 
sharply restrlOBd the auOiorlly ot the States to regul^a the passthrough In retail ra^s of 
e utility's FERC-regulated costs ot power purchased at wtnleaale: and 

vni£tlEAS,De^3lta these decisions, the bulk of electric power costs and ra^ are 
d^ermlned tf/ Sbia nouMtcvv comntissfOns, fricftxttv ffw costs dl tadlltles used to 
prwide wholesale sales and bartsmfsslon servloe for which FERC astaUisftas rsias and 
conditions of service. Moreover, Slates retain exdustm jur^iScdon wer the siting of 
transmission facilities usad tor txstfi ftitsr and Mrsstata sarvfca,- and 

WHEREAS, In recerU years, tfw electric utility Industtyhas undergone sutetantfaf 
Changs as a result ol Increased reliance on wftotoso/s powsr suppliers, liKludIng non- 
utility generators, grea^ regional coordination of power supply plannlrtg and c^iaraOons, 
mergers and consolidations of uOllty operaOons In multiple /urlsdlctlons, and Increased 
trartsmlsslon access tty tiilrd parties. As a result, tfM FPA's jurisdictional allocation at 
authority is no longer consls^iht with the marmer In which the Industry now operates; 
now, therefore, be It 

RESOLVED, That ttte EMCuBve CommlUee of tf» National Association of 
Regulatory tMHy Commissioners flWnJC), convened at HsWInterMeeOng In Washington, 
D.C., hemby oaBs upon Congress to amend (Ae Federal Pw/er Act in order to reform 
Sla^andFederaljurlsdK^onover^oaricutilliytransactionstoconfonntoUieoperational 
re^Hy ca V)e Industry: and be H further 



1. Jurisdiction over tfw retail rates and servlcea of elec t ric utSIUes shall remain 
wW% the States. Sur^ jurisdiction must be strengSiened to alBrm the authorSy of 
the Sta^s to regiMe the passBiroughotpurcliasedpiwer costs In the retail rates 



D,g,;,zeclbyG00glC 



2. JartadkHon onr M natata wAotosifs sates sfid tansmlssfcin rates, tenns vid 
concHOom stxxM be nlumed to the Slate ngiJatofy commlBalona: 

3. JurismcOor ow muUstala nnaacOons (IrKAxUng sysUm cost ^location, txjik 
pmnr purctasas and sates, amission oJKwance allocations, and use d 
tnnsmlsslon^clllile«)wlihlnnglstendholdlngcompenysirstemaoperailngshoukl 
be lodgeH Jn regional legulaioiy todies autttortud ty Cong/ess and astebf/sAsd 
on a purely voJunory basis tv the States m wtilch the systems operas. In the 
event such reglentl bodies are not lomied, or If formed, decline lo regulate given 
Issues, lurtsdlcaon ^Ml be lodged m the r&C SKcepl 10 Oie exUnt the elaanc 
uWlty subsidiaries ci such holdlr)g compertiea are aiMnpt from f^RC farlsfllctlon 
over such Issues pursuant to Section 201 ot the Fader^ Power Act, lSU.S.C.sac. 
B24, or successor prtMislort(s). JurlsrScOon wer mulSstate transoctfons of otfisr 
uHltty systems should ^so ba merclsad by such voluntarily-established region^ 
bodies, but without delault tij FEflC. 

4. Congress shatMauthorlzattiBcreaaonol multistat compacts consistent with 
basic prlndplea ol administrative e/tlclerKy artd talmess. Slates wMch ro/untariiy 
tarm such compacti would collactively determine nilesolgavorT}ar}ce and Internal 
fxocedutes; and be It further 



1. Stales exercising lurisdictlon over tite siting and carVflcation ol transmission 
faculties should not tSstMnlnata against Irtlerstatehcilltles, meaning titat Interstate 
laclimes shctM be sited, certificated, and odtenrise regulated under ttta same 
standards and procedures as Intrastate facilities. 

2. states should retain JurisrSctlon to make all tactual determinations cortcernlng 
transmission sitirtg. Judicial rwkw ol such determln^lons, wfietiier In Stam or 
Federal courts, should not be de nam, assuming the States have conducted 
evidentiary proceedings. 

3. Congress sttould authorize ttie creation of multlstate cort^iacts which permit 
willing Stems to: 

a. Identify regional bulk potmr market needs tor State siting agencies to 
consider In their respective dellberatkxis; and 

Ij. Plan Ibr ffw constivctlon ot new IrTterstate transmission facilities. 

4. Congress should further authorlie tfw creation of multistate compacts which 
permit wilting States In which an Interstate tiansmlsslon facility Is proposed to Ix 
sited: 



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a. TbteaweaiWe ai waMffMrtitigtfwconWfucitanofiftttpnapcwBtfiteflHK 
or 

b. It States choosa to main carMteatfon anhoriy far ffwm s afra s , lo agna 
uponandamploftinac^tanlsinlorallnal,blf>dlngnaoluOonofapmpo»ecS 
facility slBna when iha indMdual Statas innlifaci hain conn to contt^ 
and/or mcenalatant dstennftMWm m thair raapacUva cMbaratfont. 



Sponsorad tv Itta Commlltaa on Bactrtdty 

ActoptBa Fatxuaiy 27, IWT 

R^oftBd NARUC BulMfn No. 9-1991. pages 22-23 



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■SIKMXI, Elactric utility transnlaBlon, IntarconiMCtion and 
whMllnq policlas ara baaad upon an outdatad Fadaral regulatory 
systam vtilch haa raaultad in an irrational jurisdictional 
allocation of authority undar which tha Stataa axarcisa 
juriadictlon ovar tha aiting and coat racovary oC trananiaaion 
tacilitias, whila tha Fadaral Enargy Ragulatory coauission (FERC) 
claim* axclusiva jurisdiction ovsr trananlBalon pricing, and tarns 
and conditions; and 

RZIRUS, By tha 197B anactMht Of tha Public Utility 
Ssgulatory Policlaa Act, tha PERC's 19B5 Hotlca of Inquiry (NOI) on 
transnisslon issues, and tha raport of tha FERC Transmission Task 
Force, tha Fadaral govammant has atCamptad to develop coherent 
CranBBisslon policies, thus far unsuccessfully; and 

mnRIAS, The National Association of Regulatory utility 
Commissioners (HARUC) supported Federal efforts to generically 
address transmission access and pricing policies, including the 
FERC ■ s generic HOI , although ve are troubled by the lack of a 
collaborative approach; and 

wmwiAt, The FERC has announced its intention to conduct 
Federal/state Horkshops In the Fall to consider, inter alia , ways 
in which FERC and State transmission policies and decisions can be 
better coordinated; and 

WHIRBASf Legislation is now pending in the Congress which 
would amend the Federal Power Act to provide FERC greater authority 
to order interconnection and wheeling, over utility objections, 
under pricing and access terms which may affect the interests of 
the ratepayers; and 

■nSEXS, This legislation, while useful in framing this 
necessary debate, may be premised on the false assuinption that the 
FERC now has or should have exclusive jurisdiction over all issues 
of transmission access and pricing, including transactions which 
are intrastate in nature, without regard to the fact that under 
current regulatory procedures, the States are responsible for 
authorizing utilities to recover residual costs from native load 
ratepayers; and 

WRBRBXS, At its 1991 Hlnter Meeting, the NARUC Executive 
Committee adopted a resolution which, inter alia , called for 
congressional legislation (1) to provide state commissions with 
clear jurisdictional authority to regulate intrastate transmission 
transactions; (2) to authorize the voluntary formation of regional 
bodies to regulate regional transmission planning, siting, pricing, 
and access Issues; and (3) to establish nan -discriminatory 
standards for interstate siting Issues; and 

There Is a critical need for Federal/State 



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SESOLTSD, That the Executive CoBBitt*« Of th« National 
Association of Rsgulatory Utility Commissionsrs (HARUC) , convened 
at its Stumer Meeting In san Francisco, California, raafflms Ita 
exiating resolution on transBlssion issues described above, and 
hereby adopts the following principles vith respect to 
adnlnlBtr stive and legislative Initiatives to reform slsctric 
utility transmission policies: 

begin addressing 

2 . Congress should require that the FERC and the state 
coEsissions conduct a joint, comprehensive sxamination of the 
current status of the transmlaaion system on a regional and 
national basis through the use of a new FGRC/State Joint Board 
mandated by Congress, Including an analysis, and possible 
reconmendatlons, on ths respective jurisdictional 
responaibilitiss of the States and FERC, and principles of 
transmission pricing. The Joint Board would report to the 
Congress ths results of Its inquiry within IB months of its 
establishment; 



should be present in any 



should be 



b. Regional trananission transactions should be 
regulated by voluntary regional bodies, as described in 
the earlier NARUC resolution; 

c. Any authority to mandate transmission should 
prohibit federally mandated retail wheeling and include 
adequate protection for the Interests of retail native 
load ratepayers; 

d. Congress should provide FERC and/or Interstate 
compacts with sufficient latitude to determine rates and 
access for interstate transmission services; 

e. Any authority granted FERC to order the construction 
or expansion of transmission facilities should not 
preen^t State or regional authority. Such jurisdiction 
should be concurrent. 



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legislation advances in the 102nd 
congress, the HARUC intends to join those utilities, consuner 
groups, and independent power firms supporting transmission 
reform in shaping appropriate legislation which includes the 
above principles. NARuc is particularly appreciative of the 
willingness oC the sponsors of H.R. 2224 to work with us as 
they consider this legislation; 

6. The HARUC strongly suggests that the bills address and 
acco«modate these principles. sine* th« currently pending 
transmission bills do not appropriately address the above 
natters, the NARUC cannot support them as now drafted. 

Sponsored by Committee on Electricity 

Adopted July 24, 1991 

Reported HASUC Bulletin Ho. 31-1991, pages 14-16 



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am 



saptodMT 17, 19S1 



Tha Honorabl* Oirlatapbar J. Dadd 



Attaohad la ■ atataaane ty Haaen Hillridi, Praaldant and 
biaf Sxacutiva Otfloar, KiB Bntarprlaaa, aubalttad on babalf □ 
■cific Oaa and Blactric Coapany. Plaaaa includa ttaa afataaant- 
n tfaa raoord for tfaa Saptaabar it, 1991, baarlng of Uia 



zci Bonorabla J. Bwinatt John 
HonOTBbla Halcola Hallop 

Bonorabla J<din Sayaour 



D.,r„.db,G00glC 



STATEMENT OF PACIFIC OAS AND ELECTIUC COMPANY (PG&E) ON 

TTTLE XV OT THE NATIOTIAL ENERGY SECURITY ACT <» 1991 

TO AMEND THE PUBUC UTttJTY HCMJJING COMPANY ACT 

Submined n ihe Commitiee oa Buildng. Housing and Urbtn Dtvelopmeoi 

Securiiies Subcomminee 

U.S. Senue 

by 

MuaaWiUtich 



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EXECirnVE SUMMARY 

Tbe Pacific Gu uid Elecoic Compiny (PG&E) nippom puuge of Title XV of ibe NiHmmI 
Energy Securily An of 1991 (S. 1220) ind iB provisioiu for Public Utility Holding Con^iny 
Act (PUHCA) reform. PG&E supports PUHCA lEfonii bodi at a buyer of power bom 
indepeDdent producers and as an owno- of a confnny which producei and sells power to odier 
uCililies. 

The proposed anwidmemi to PUHCA, wtudi would create "exempt wholesale itDaaton'. hive 
been a source of nnuidcnble coniniveisy within tbe electric power indusny. One issue in tbe 
debate coaccma financial risk. Some opponents of PUHCA reform atsen that the alkfcaiioo of 
risk in power sales agreements between utilities and indepeodeac power producan is inninsiciDy 
tnii-cotiqwtitive and will 6uJ to provide a ieast-coit eleciric power supply. This aigumem is 
advanced deqttle the hct that such agreements are being f cu^d between buyers and seUen in 
a wholesale power nuilcet thai is intensely competitive. This testimony **<■*"-! tlie iiaue of 
liik lUocaiion b etween uiiliqf buyers and independent power sellers in the wbdesale electtic 
power maikeL 

The cooctusiom which emerge from die discussion are: (1) ttiat electric utilities and indqxadent 
power producers are sophisticattd buyers and sellers engaged in conqtlex transactioas; (2) that 
die power contracis ibey negotiate shift substantial risks related lo power plant pniject 
development consituctiao. operatioD and flnance fnxn utility customers and sharehiddes lo 
independent prodocers: (3) thai risks remaioing with utilities are generally apprapriaB, in 
panicular the retail maritet risk of utility cunomer elecnicity demand; and (4) that, overmU. 
cooOBCts foi [he pumhase and sale of electricity in a competitive wholesale power mnkei leailt 
in an efficient and etiuiiaUe allocation of risk between utility customers, utility stiaidiokki*, mm! 
independent power producers. 



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PG&E SUPPORTS PASSAGE OF TTVLE XV (ff S. 1220 

The Pacific Gh ud Electiie Compuij' (FGAE) nippoit* puH|e of Title XV of (be Noliaad 
Energy Secmity An of 1991 (S. 1220) ind its pioviiioni for Public Udlily Holding Cocnpany 
Act (PUHCA) lefonn. 

POAE hu the penpe c iiwe both of ■ ntiliqi buyw of electric powtt ind of tn indqwident powg 
prodncer. PG&E is the mtioii's tinest invcttoc-owned cooibiauioa gu ind electric niility, 
Mrving lO millioa people in notibmi and cental Califbnit. Ai a utiliiy, PG&E bnyi 
tqiproxiinaiely 4,200 meiawatit ol cqwdty bom lnde|iendeni power producen t^xming PuUic 
Utility Etegalatny Policy Act (PURPA) QnaH^g Facilities Ct^i")- In 1990. PG&E ptnefaaied 
14,070 millioa kilowan bom of electiicity bom Ibeae bcilities, nfGcient to proviik 19 percent 
of iti eiectnc en^gy leqiuiemeno. 

PO&E itio hai wben wti al w p et i et K e »s a normoliiy. independent geoeratorifareuiii in wboUy- 
owned nbaidiaiy, PG&E Enietpriiet. PG&E Enterpiiiet it participtting. thrm^ iti Genendng 
Copnpaay ■*""». in 13 prajeca whicb, when conntoed, will provide moie than ZOOO 
megawanaof capaci9toatilitieiautiidePG&E*SKrnceatea. Tlie Generating Omqiany's aim 
if to becooK cae of tbe natioo'i leading indqwndem mp^ien of powa to util~ 



The proposed amendments to PUHCA, vtaeti would create 'exen^ wholewle genoaton', bavc 
been a source of coniideiable cooooveny within ihe electric power industry. One issue in the 
debate concerns financial risk. Some opponents of PUHCA lefonn asscn itwi the allocation of 

ri.lfin pi«i»^»lw.^iPi^iii>iil. lv.«mi.|.T.iirilitU««iwllll.*>JM.iwlMlp.»j»i^pi»wliiri.^ 

aoti-compeiitive and wiU &i] to provide a leastcott elenrlc power supply. This argument is 
advanced despite the &ct that snch agreements aie being forged b e t w e en buyen and sellen in 
a wholesale power market that is imeniely conqietitive. If PUHCA is refonned. will risk be 
aUocated efSckai^ and equiaUy berween independent power producers and electric utility 
bnyot? Win risk be allocated in a manner which helps ensure chat American consumen - large 
and small - will have anifde supplies of deciric power fix reasooabte prices? 

In considering bow finaitcial risk aUocation and ibe prc^xKed PUHCA lefbtmi affect ibe 
reliabiliqr and cost of electric power supply, die Comminee and the Congiess should conskler 



D,g,;,zeclbyG00glC 



Second, what cluncieritiiet would a wholcMk decnic pawn mHkei hn« widi regHd 
10 rittc in onter lo provide rditblc \eut cott electric power to utiliiiei tai (heir 



Tliitd. do exudng power nlei comncti n iprop riM dy aUacMe cmk. ibki wd wwM i lt T 



INDEFENDeNT POWER AS A irnLTTY SUPPLY OPTION 

Every refion of (be UniKd Sttiei will need new electric genoadoa captKity btton 2000. The 

nrmilwi v^ ni*r* fur «i<Hirinfi«l r«p«Tty hf m if jj i nnm jnH ?fl(in, iiirlni«lm. »pl)Kif|nnm >f Ahtft^ff 

plum, will mi|e fitun 110,000 MW and ISOJXX) MW. dqwadisf oa bow qnkddy (bnaid (or 
electridiy finwi. The i n d ep e n d en t, or ttott-miliiy, stgamat of dK power induMiy if already 

^f^H^H.^i^^^ imiippjy « l»fjf pnmnnnf riii«ri<-m«i>ri priTWflly aririi PITBPA r^iMtityit,^ lltnl\Aff 

The ntal """"'^ electric genenting capKity in ihe United Siatei pceseatly ap pma cli ea TOOJOO 
MW, of trtDch Independent genenton now account for Iran dnn 26JX)0 MW, or almoK 4 
pefcenL New generating capacity under eonanxxian or advanced devlopmeot ii 69,000 MW, 
of wtakh independent! account ftor 30JOO MW or 44 petcent. Several recent KudlBi conckide 
that intlep en dei it power ptodocen coidd (apply half of the additJonal f™"'*"! capaciiy dw 
United Statei will need by 2000. If dui occon, independent ptoducoi will rep reieiu about 12 
pocent of tool U.S. generating capacity by 2000. 

Tbe independent power indusify baa evolved condnuoualy since Coogieu puKd PURFA in 
1978. During dw fim decade of [be induttiy. independent ptodocen and utiliiiea typically 
entered into power cootiacts with ;Kicei bued on idministmivdy-deteRniiied ftwwiwri of 
utilitiea' "avoided costs" of building and operating new power plants. Indepeodeot pcoduoen 
ptincipaUy''con^ted" against projecnofii of uiili^ avoided costi. Mcecon^cticiaaBmoagDoa- 
utiliv generator! was very limiied (diongh coan|>eti(ion for plant sites and fjoancmg did odat). 

Today, indqiendeat power companies compeie among dietnselvea, as well ai againsi niil^ 
proxies, in Mder to obtain utility power conitaci!. Utilities have awarded contracts for 12JW0 
MWof capacity in conqiedtive bidding since 1986. Indepcadeat prodnoers have won mote than 
SOpoccntof^eie bids, with utilities and demand side proposals winning the remainder. Aieol 
of 23 stans have initiated proceedings or established procedures to include com p e titi ve biddbg 
as an integral part of developing new ekcnic generating opacity. Many of these pro ctdur ta 




Tbe record of compeddve bidding lo date suggest 

willing to bid aggressively. Since 1989, bids to supply utility capaciiy have a 



D,g,;,zeclbyG00glC 



. Under PURPA. QFs are exenqn from complumce witb PUHCA. This exenptiaii niKle possible 
the tniliil developineiii of indqicDdcDi power. But the nandards for the QF exetapooa tte now 
Mtificiallr ntnicdnf choice of fuels, pltoi siie ind ownership nracnnc. 

Ctevaoa of "Exenqit Wbolesaie GcDemois" through PUHCA refonn will increase the technology 
ml owDcnhq) optioiis duu independent producen can utiliie to meet the needs of their irtiolessk 
utililv customen. Such lefoim is now esseniiMl if we are to evolve Grom monc^oliud to 
competitive power geaention mukets in the United States. It will not mean the cad of 
cogeneratioD or renewable technology. It will mean that these technologies will be used where 
(bey aie the most competitive in terms of price, reliatalior, and environinenial impact. 



RISK ALLOCATION IN ELECTRIC POWER SUPPLY TRANSACTIONS 

The emergence of m independent power industry has provided electric utilities wUh a new power 
supply option. RaAer than developing, financing, conmucting, owning and operating the power 
plants which produce (he elecnicicy they transmit and lell u retail customers, utilities uc able 
10 buy it from independent finm. These independent power companies compete against each 
Other fat the li^t to supply uiiUties with a pan of (heir power requirements. Thos, utilities now 
have a choice between prodncing themselves w buying in a competitive wholesale maritet the 
power ifaey idl to their millions of retail customers. 

When a utility produces itself the power it sells at retail, it assumes a varieiy of risks related to 
generating plant ownership. The utility and its regulaton allocate these risks among equipment 
and service suppliers, customers, and investora. When a utility buys wholesale power from an 
ind^endeni producer, the utility and independent power producer agree on the appropriate 
allocation of risks between the independent producer and the udliiy. The independent producer 
and purchasing utility then absorb or pass on various risks they have agned to assume. This 
agrffiiifntis niitwM li M '"''^''™'"'»"fr°'P"^''"*"^"'*''^pf™*^ When power is purchased 
from a coti^ietidve wholesale madcet, the allocadon of risk, at well as the price, is dcKmiined 
by tnaiket conditioas at die time the panics enter into die transactioa coupled with conq)etidve 
u procedures adopted by state regulators. 



WhedMT a utiliq> proposes U generate power itself or buy it from an independent supplier, die 
slate regulatory commission and FERC genenlly share authority to oversee the transaction, 
including detemiinatiMi of need tot power, pricing and risk allocation. Most <rf the legulatoiy 
andurity (or diis purpose resides in state commi