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Thank you, Mr. Chairman, for the opportunity to
testify today. I am David L. Sokol,
Chairman and CEO of MidAmerican Energy Holdings Company, a global energy
company based in Des Moines, Iowa. I
was pleased to testify before the Subcommittee earlier this year on the topic
of barriers to competitive generation, and am appreciative that the
subcommittee has allowed me to come back.
MidAmerican is a diversified, international energy
company headquartered in Des Moines, Iowa with approximately $11 billion in
assets. The company consists of four
major subsidiaries: CE Generation
(CalEnergy) a global energy company that specializes in renewable energy
development in California, New York, Texas and the West, as well as the
Philippines; MidAmerican Energy Company, an electric and gas utility serving
the states of Iowa, South Dakota, Illinois and a small part of Nebraska; Northern
Electric, an electric and gas utility in the United Kingdom, and Home
Services.com, a residential real estate company operating throughout the
country.
As head of a company that includes both regulated
utility assets and independent, competitive generation assets, in addition to
experience participating in the already-deregulated energy markets in the U.K.,
I hope I bring a balanced perspective to the consideration of these issues.
For the last three years, MidAmerican has taken a
leadership role in attempting to build support for reasonable, middle ground
solutions to modernizing the electricity industry.
In that spirit, I will attempt in my testimony to
point out some areas of potential compromise that could resolve outstanding
disagreements over the few remaining areas of dispute in this legislation. It is time for all stakeholders to engage to
help resolve these issues. To do
otherwise only serves the interest of those who seek to gain advantage from the
existing inefficiencies in the system at the expense of energy consumers.
Mr. Chairman, in addition to your leadership in this
area, I have been impressed by the commitment of both Secretary Abraham and the
Democratic leadership of the Senate to ensuring that electricity modernization
is a core component of our national energy strategy. They recognize that attempting to create a twenty-first century
energy policy without modernizing electricity laws is akin to trying to install
a high-speed rail system on seventy year-old tracks.
Before providing comments on H.R. 3406, I would like
to explain why I believe moving forward with this legislation is so critical.
As the head of a company that provides the electric
load that feeds industry, jobs and production, I have seen a steady downward
trend for much of the year that has accelerated in recent months. I do not share the view of some who believe
that this recession is destined to be relatively brief and comparatively
painless.
Congress does, however, have it in its power to take
steps that will spur the economy and reassure investors and consumers. Passing real comprehensive energy
legislation – a bill that contains electricity modernization as a fundamental
component – is vital to that effort.
This perhaps could be one of the most important stimulus measures this
committee can pass for American economic recovery.
With regard to the bill, I’d like to comment
section-by-section:
Title I: Electric Supply
Subtitle A –
Interconnection, Net Metering and Demand Management
MidAmerican supports this section.
I believe
distributed generation should be an integral part of our energy future and will
deliver significant benefits to consumers and the environment. The provisions
in H.R. 3406 refine the principles of a stakeholder compromise between transmission
and distribution owners and independent generators that will bring greater
clarity and certainty to the interconnection process.
I know that there is some concern about addressing
distribution interconnection in this section, but members should be aware that
this section only mandates that a national technical standard be established
where feasible and that generators pay the reasonable costs of
interconnection. I would recommend a
technical change to the bill to clarify the section on back-up power that we
will provide to the committee staff.
The language on net metering should not overturn
existing state net metering policies, but should establish minimum standards to
encourage states to adopt policies to promote remote generation with renewables. Net metering will create some cost shifting
to customers who are not net metered under the rate design used by most
utilities today. These costs are for
services that would otherwise be billed based upon the net metered customer’s
meter registration, but net metering eliminates that registration. Such costs include transmission and
distribution service, billing and other customer services, taxes and system
benefits charges. Determining the means
for recovering these shifted costs is best left to the states.
Subtitle B –
Provisions Regarding the Public Utility Holding Company Act of 1935
MidAmerican strongly supports repealing PUHCA and
replacing it with comprehensive provisions to enhance regulatory access to the
books and records of all utility holding companies.
PUHCA is the most substantial impediment to new
investment in energy infrastructure, keeping billions of dollars of new capital
out of this industry. The SEC, FERC,
state regulators, the Administration and the Democratic leadership of the
Senate have all endorsed PUHCA repeal as a necessary piece of the national
energy strategy.
PUHCA places a set of arbitrary and often
counter-productive limitations on investments in the regulated energy
industry. It keeps new capital and new
ideas out of the industry at a time when transmission infrastructure alone
requires tens of billions of dollars in new investment. PUHCA requires the concentration of utility
assets because of its physical integration standard, increasing concerns about
market power.
PUHCA is an impediment to bringing new capital and new
infrastructure into California’s market because no entity that owns more than
ten percent of any utility in the eastern two-thirds of the country could make
a significant capital investment in those companies or in regulated assets such
as new transmission without running afoul of PUHCA. And, finally, PUHCA provides a “first bite” advantage to
foreign-owned corporations seeking to acquire American utility assets.
Replacing PUHCA with up-to-date provisions that
provide state and federal regulators with enhanced access to the books and
records of all utility holding companies is, in the words of your former
colleague, Sen. Tom Carper of Delaware, “a no brainer.”
Subtitle C –
Provisions Regarding the Public Utility Regulatory Policy Act of 1978
MidAmerican strongly supports these provisions and
notes that prospective repeal of PURPA’s Sec. 210 mandatory purchase
requirement with full guarantee of cost recovery has long enjoyed bipartisan
support.
Through our CalEnergy subsidiary, MidAmerican owns
geothermal energy facilities that are QF producers. While PURPA has played an important role in opening up wholesale
electricity markets, there have been cases where QF contracts anticipated
higher levels of “avoided costs” than market conditions actually produced. At the same time, I’m pleased to note that
the recent settlement in California between QF producers and one of the state’s
largest utilities will provide consumers clean, renewable electricity at a
fraction of the cost of many of the long-term contracts for conventional
generation signed by the state.
Virtually every state in the country is looking at
more market-based methods of promoting renewable energy, and the PURPA Sec. 210
mandatory purchase requirement has become outdated.
Subtitle D –
Redundant Review of Certain Matters
Section
141 of the bill eliminates the redundant review of multiple
agencies over utility mergers. While I
understand that there is significant opposition to this section, I would
recommend at a minimum establishing some reasonable time limit on FERC merger
review.
Placing a time limit on merger consideration would not
in any way prejudice the outcome of FERC’s proceedings, but it would provide
the markets with greater certainty in making judgments on transactions.
Title II: Transmission Operations
Section
201 embodies the “FERC lite” compromise bringing
non-jurisdictional utilities under limited FERC oversight. MidAmerican was one of the first
investor-owned utilities to endorse the compromise and supports this section.
“FERC lite” brings all owners of transmission
facilities that are used in interstate commerce under FERC jurisdiction for the
purposes of establishing terms and conditions of service. FERC would also be given the authority to
ensure that rates charged by currently non-jurisdictional utilities to users of
their transmission systems are comparable to the rates those utilities charge
themselves.
This is a major step forward in the creation of a seamless
transmission grid while recognizing the different financial structures of
different transmission owners.
Many non-jurisdictional transmission owners have
already moved to place their assets in regional transmission organizations to
ensure that their customers are not isolated from regional electricity
markets. TRANSLink, the independent
transmission company that MidAmerican has joined in the Upper Midwest, includes
both public power entities and a large regional rural cooperative.
Section
202 on regional transmission organizations, or RTOs, includes
many items that have been sought for years by advocates of a more transparent
transmission system: 1) a date certain
for RTO participation 2) placing all uses of the system under the same tariff
and 3) independence requirements and minimum standards for RTOs. The principle underlying the language is
sound – mandatory participation with flexible implementation.
At the same time, I understand that this section has
received some criticism that it is too cumbersome and prescriptive. I suggest that work continue on this section
as the bill moves through the process in order to refine the sound concepts you
have laid out.
Title III – Transmission Reliability
Section
301 is a streamlined version of the reliability language that
has been included in earlier bills.
This language has broad stakeholder support. MidAmerican supports and prefers this approach, but could also accept
the section on reliability in the Daschle/Bingaman bill. The most important thing is to get a
mandatory, enforceable reliability system in place.
In recent years, as markets have become more
competitive and transmission capacity more constrained, pressures on the
transmission network have multiplied.
We were fortunate that mild weather in much of the country last year
prevented any recurrences of the reliability problems we had seen in previous
years, but voluntary compliance with reliability rules by organizations that do
not have enforcement authority is not a viable long-term system.
Title IV – Transmission Infrastructure
Section
401 addresses two priority issues for improving the
transmission infrastructure – encouraging FERC to develop incentive rates for
investments in new infrastructure and requiring FERC to conduct a rulemaking on
pricing to ensure adequate capitalization of stand-alone transmission entities.
Transmission costs are pennies on the dollar of retail
electricity rates, but the cost of inadequate transmission capacity can be
enormous. We need to get new transmission
built to improve reliability, security and market efficiency. Incentive rates are one way to help get new
transmission in the ground.
Congress also should direct FERC to review its
transmission pricing policies to ensure that these policies will support
stand-alone transmission entities.
Rates of return must be adequate to attract capital to these new
entities or else the system will deteriorate.
Legislation should not dictate what rate of return that FERC provides
for transmission, but FERC needs to look at this issue as it moves forward with
RTOs.
These provisions are sound policy and should be
non-controversial.
Some of the other policy directives toward FERC I
would characterize as desirable, but not absolutely essential. Non-binding language may be appropriate.
Section
402 on transmission siting is very important. Reforming siting of interstate transmission
lines is an issue that only Congress can address. Every electricity consumer has a stake in fixing transmission
bottlenecks. My first instincts are
usually unfettered protection of property rights, but there must be some way to
ensure that vital transmission infrastructure gets built.
There are several problems here. When a proposed new transmission line or
upgrade crosses through a number of states, not every state will benefit
equally – some will not benefit at all.
In other cases, because of complex transmission flows, a constraint in
one state can only be addressed only by improving facilities in an entirely
different state. Finally, a number of
states are constitutionally prohibited from using their own eminent domain
authorities for facilities that do not primarily benefit the public in their
own states.
The formula you have outlined would do the job. MidAmerican also has been involved in talks
with state regulators about an approach that would establish joint
federal-state boards under Section 209a of the FPA to address interstate
transmission issues such as new transmission line construction. If that approach would resolve concerns
expressed by others about this section, I would encourage the Committee to
explore it.
Title V – Federal Utilities
I understand that these three sections represent
consensus approaches developed by stakeholders in the affected regions. While I am not an expert on these issues, I
commend you and the representatives of these regions for your hard work and the
compromises you have developed.
Titles VI and VII – Consumer Protection and Related
Matters
MidAmerican supports these sections. Consumer protection should be foremost in the
Committee’s mind as it moves forward with electricity modernization. Nothing will turn consumers against the
marketplace faster than abusive practices such as slamming and cramming. H.R. 3406 includes provisions in these areas
that are very similar to those proposed by both the Clinton and Bush
Administrations, as well as the bill introduced last week by Senators Daschle
and Bingaman.
The bill’s provisions clarify states’ authority to
order retail electric competition and the rights of consumers in open states to
aggregate their purchases. The bill
protects state public purpose programs, increases criminal penalties for
Federal Power Act violations and expands FERC refund authority.
In addition to these provisions, regulatory
transparency and access to books and records provide the most important
consumer protections. Under the PUHCA
repeal section of this bill, both FERC and state commissions have explicit
statutory authority to review the books and records of every utility holding
company, not just the limited number of companies currently covered under PUHCA.
It’s probably not often that private sector witnesses
come before this committee and ask you to pass legislation increasing the
ability of regulators to look at their books.
But regulatory transparency, protection against cross-subsidization and
consumer protection all make sense.
Laws that arbitrarily keep investment and investors out of critical
industries don’t.
Mr. Chairman, there’s one other topic I’d like to
address before I conclude – the problems at Enron. No one should make the Enron situation an energy issue – it is an
issue of poor investments and the misuse of accounting. Energy markets are functioning fine without
Enron.
One of the untold stories of the Enron collapse is how
little impact this has had on the regulated entities that are the direct
providers of most electricity and natural gas to consumers. Most regulated entities took steps to limit
their exposure to Enron in the weeks leading up to the company’s collapse. While lenders and traders face liabilities
as a result of their relationships with Enron, utilities managed their
potential exposure well.
I find it particularly ironic that some are trying to
claim that the collapse of Enron shows that we shouldn’t repeal PUHCA. For years, Enron was one of the most vocal
opponents of PUHCA repeal, working to keep highly regulated, established,
asset-backed companies out of emerging energy markets.
Enron is not, and never had been, subject to
PUHCA. And, for the most part, because
of the nature of its business, it was not subject to many forms of state and
federal regulation to which public utilities would continue to be subject under
this bill.
State and federal regulators possess extensive
authority over utility companies in terms of the rates of return on investment
that they allow. State regulators have
complete authority over what costs they will allow to be recovered in rates,
and the language of this bill clarifies that they have a federal right to
review the books and records of any utility under their jurisdiction.
This Committee has a great history on matters of
oversight and investigations, and I applaud Chairman Tauzin for announcing his
intention to hold hearings on this matter.
I also believe Representative Markey has raised valid questions about
oversight of electricity trading markets that deserve the Committee’s
attention.
I would recommend focusing on the following areas:
1)
Did this situation involve abusive
accounting practices?
2)
Did outside auditors meet their
professional obligations?
3)
Were both the letter and intent of the
law followed?
4)
Is there adequate oversight of the
trading side of the energy business and what federal agency should have primary
jurisdiction over these markets?
I believe the Committee should review these questions
thoroughly and ensure that measures to address any abuses are implemented
properly. Given the scale of this
situation, I believe that if legislation is needed, there will be adequate
incentive for Congress to act. The
Subcommittee should not, however, turn away from the task of doing its part to
aid the economic recovery by modernizing our electricity laws and
infrastructure because of problems at one company, no matter how high profile.
Thank you and I’ll be happy to answer any questions
you may have.
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