May 20, 1999

Mr. Chairman, today’s hearing explores some of the most contentious and controversial issues in the debate over legislation to restructure the electric utility industry.

Stranded costs have been an important element of nearly every state retail competition plan to date. In all but one state, stranded cost recovery has been an essential part of the bargain. (The exception, New Hampshire, is tied up in litigation over this issue.)

When states address stranded costs, there are no difficult jurisdictional issues to resolve. Retail rates have long been considered a matter for the states, and state competition plans bring together all of the affected parties – consumers, utilities, and state regulators – in the same forum at the same time. Negotiations ensue and parties have a natural interest in identifying and accommodating each others’ concerns.

But at the federal level, the issue of stranded costs poses quite a dilemma. Federal legislation to mandate or simply encourage retail competition – directly or indirectly – can give rise to stranded costs. While it may seem logical to require that such problems be addressed in the same legislation, the states have serious questions about federally-mandated treatment of stranded costs. There are further and significant legal and policy questions about how Congress might provide for recovery of stranded costs that are currently recoverable in state-regulated retail rates.

All of this is very puzzling, and the stock conclusion among those who would mandate retail competition is to require the states to adopt competition, and then courteously "defer" to their expertise in cleaning up the resulting mess. I question the wisdom of this approach, and I’m sure this issue will figure prominently in the Committee’s further consideration of restructuring legislation.

With respect to the environment, there have been a number of major developments since this Subcommittee last visited these issues in March 1996. Since that time, 18 states have restructured their electricity industry; the Administration, the former Subcommittee Chairman, and many others have introduced federal restructuring legislation, including legislation specifically addressing environmental issues; and EPA and FERC have had key actions under the Clean Air Act and the Energy Policy Act overturned by the Courts.

Two fundamental questions are raised when we consider the environmental issues that relate to utility restructuring. First, what are the environmental consequences -- whether intended or not -- of specific deregulation proposals? Second, should there be an explicit environmental component of restructuring legislation, and what should it consist of?

As to specific issues, one is the role of renewable energy technologies in a competitive market. Those who would like to see the federal government continue to support the use of such technologies have argued for the inclusion of a "Renewable Portfolio Standard" (RPS) in federal restructuring legislation, that would require a certain percentage of any supplier’s electricity be generated by renewable sources.

This approach has gained support from the Administration, the former Chairman of this Subcommittee, some states, and many others. Many oppose this concept for a variety of reasons, but even among those who have adopted this approach, there is a fair amount of disagreement over the details of a renewables standard. Should providers be required to have two, seven, ten or twenty percent of their electricity supply be from renewable resources? Should the required percentage increase over time, and if so, what is the appropriate rate of increase? Should an RPS be a permanent fixture in law or should it sunset after a number of years? Should an RPS count waste-to-energy or hydroelectric projects as renewables? Should TVA, the PMA’s, municipal utilities and rural cooperatives be covered by the RPS? I hope the panel will share their views on these matters today.

Another issue is whether or not restructuring legislation should require electricity providers to disclose certain information about their generation sources and their impact on the environment. This is often called "green labeling." Some states, some sectors of the industry, and others have supported it, but here, too, there are disagreements about the scope and depth of the information that should be disclosed, how it should be disclosed, and by whom. I am interested in how or if our panelists think green labeling should be pursued.

A third issue is the future of programs to promote energy efficiency and conservation, or what we call demand side management. While many states require utilities to undertake programs that promote energy efficiency, the fate of these programs is unclear in a competitive electricity market. One proposed solution is a charge that would be placed on all customers and used to fund energy efficiency and conservation programs. The Administration’s legislation proposes that the revenue from such a charge be placed into a "public benefits fund" that would be disbursed to states so that they can pay for energy efficiency and conservation programs. This prompts a number of questions. How would the rate be calculated initially? Could it be adjusted and, if so, when and how? I ‘d also like to get a better understanding of the formula that would be used to redistribute such funds to the states, whether some states would benefit more than others, who would administer such a grants program, and the cost of administration.

The fourth environmental topic that we are being asked to look at is the impact of deregulation on utility emissions and whether federal electricity restructuring legislation should be used as a pretext to further reduce emissions of pollutants and control greenhouse gases.

The Executive Branch has not always spoken with a unified voice on these matters. For instance, FERC in issuing its wholesale competition orders, declined to address these issues. The Administration’s bill, on the other hand, is advertised both as a vehicle to pay the costs of the Kyoto Accord and a vehicle that would achieve a portion of the emissions reductions under Kyoto and the Clean Air Act. EPA has issued a SIP call that would impose a strict "cap and trade" program on utility NOx emissions under authority they already believe they have, yet the Administration’s electricity bill contains legislative language to "clarify" that EPA can implement a NOx trading program. This is very confusing and leaves me with many unanswered questions that I hope our witnesses can shed some light upon.

I am also interested in hearing our witnesses’ views on the implication of the recent ruling by the DC Circuit that called into question EPA’s implementation of the Clean Air Act. I have not fully reviewed the decision yet, but I suspect it will drive more people to conclude that federal restructuring legislation is the best avenue for curing the problems raised by the courts.

I hope our panelists can shed light on the reasoning behind their positions on this issue. I have heard both economic and environmental reasons for addressing emissions issues on a restructuring bill. I am not sure that there is agreement even among supporters of tighter emissions controls that something needs to be done in the context of a federal restructuring bill. For instance, Governor Whitman of New Jersey, an advocate of increased restrictions on coal-burning utilities, chose to pass on addressing these issues in the context of utility restructuring, while the Governor of Texas just endorsed the inclusion of emissions caps in their electricity deregulation legislation. While some companies and environmentalists support pollution and carbon controls in federal legislation, others who are equally concerned about emissions have stated their belief that these matters are more germane to the Clean Air Act and should therefore be addressed in that forum. Still others have stated their concern that restructuring legislation not be "held hostage" to environmental issues.

Mr. Chairman, a significant number of interests will try very hard to turn electricity restructuring into a debate over Clean Air Act issues. They may succeed. But we need to consider whether emissions provisions are better addressed in restructuring legislation or as amendments to the Clean Air Act. How would any new emissions provisions in a restructuring bill work along side programs being implemented under the Clean Air Act? Given the North American Electric Reliability Council’s concern about the potential adverse effects of EPA’s SIP call on reliability, what impact would additional emissions restrictions and federally mandated competition have on reliability?