Public Citizen | Energy Program | Energy Program - Comments Electricity Competition and Reliability Act

The Honorable Thomas J. Bliley
Chairman, House Commerce Committee
2409 Rayburn House Office Building
Washington, D.C. 20515

I am writing to provide you with comments on the Electricity Competition and Reliability Act (H.R. 2944), which recently was approved by the House subcommittee on energy and power.

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Public Citizen has been very critical of state efforts to deregulate retail sales of electricity. As predicted, all the benefits of deregulation are going to investor-owned utilities in the form of multi-billion dollar bailouts, and to large industrial and commercial customers who have the clout to negotiate lower electricity prices. Meanwhile, residential and small commercial customers are receiving few if any benefits electricity in many deregulated states is still more expensive than the national average. Competition in wholesale electricity markets has been stymied as investor-owned utility holding companies continue to manipulate the transmission system to favor their own power sales (or those of affiliates). Small and large businesses are facing unfair competition as utility holding companies cross-subsidize their unregulated subsidiaries with revenues and resources provided by captive ratepayers. Hundreds of thousands utility workers have lost their jobs, which is negatively affecting the reliability of the electric power system since fewer hands are available to do needed maintenance or to restore service after blackouts. Old coal-fired power plants have belched out millions of tons of pollution, which is literally killing thousands of people each year, while ruining lakes, rivers, forests, and farmlands.

In short, state-led deregulation has created unregulated monopolies to the detriment of consumers, competitors, workers, and the environment. Public Citizen urges you to advance federal legislation that fixes the problems created by the poor laws passed by states that are deregulating their electric utilities.

H.R. 2944 now contains provisions that would allow investor-owned utilities to sock ratepayers for more billions in the form of "wholesale stranded costs." Utilities would receive a bailout anytime someone else used the utility s transmission lines to serve customers formally served by the utility. Another provision would allow investor-owned utilities to recover stranded costs due to municipalization. Stranded costs would be calculated based on the "remaining useful life of the generation assets owned or power purchased under contract& ." Just as state legislators are allowing one of the largest corporate bailouts in history, so too would federal legislators. Utilities should be forced to eat their bad investments in nuclear power and other over-priced assets. Ratepayers and taxpayers have suffered enough gouging at the hands of the electric power industry. These stranded cost provisions should be stripped from the bill.

H.R. 2944 also contains a provision that would allow nuclear utilities to continue receiving a reduction in taxes for amounts paid into their decommissioning funds. This provision would continue giving taxpayer subsidies to nuclear utilities that have already received billions in subsidies. This provision should be replaced with a provision that eliminates the tax deduction for nuclear utilities.

Although H.R. 2944 as amended contains provisions regarding electricity supplier disclosure, consumer privacy, and unfair trade practices, each of these provisions could be strengthened so that consumers are better protected. For example, disclosure provisions in other bills provide more detail about what information should be given to consumers. The consumer privacy provision may have been made weaker by allowing companies to share private information with affiliates. The provision regarding unfair trade practices should be strengthened to include third-party verification, in which a third party calls a customer to make sure that he or she requested to have their service changed.

Although H.R. 2944 contains a provision that would allow customers to combine their buying power, Public Citizen prefers a provision that supports the establishment of "community choice" or "opt-out" aggregation, in which a municipality could automatically aggregate the electric demand of its residences and businesses; those who wish to purchase their own electricity or to join another buying group would be free to "opt-out" of the community choice group. The provision, as currently written, appears to preclude opt-out aggregation. Without community choice (opt-out) aggregation, many residential consumers may never benefit from the increased buying power that aggregation affords.

H.R. 2944 should be improved by adding a provision that creates a "public benefit fund," which would provide federal matching funds for state programs that support low-income customers or customers living in expensive-to-serve communities, such as rural areas. A public benefit fund should also provide matching federal funds for state programs that promote energy efficiency and renewable energy.

Federal legislation should also include a provision that encourages each state to create a Citizen Utility Board. CUBs in the District of Columbia, Illinois, New York, Oregon, and Wisconsin have already saved ratepayers billions of dollars. CUBs in deregulated states would help protect consumers from unsafe or inadequate service, fraudulent advertising, and other anti-consumer abuses.

In addition to these suggestions, consumers and electricity suppliers both would benefit if federal legislation would create national standards for the following areas national standards would reduce customer confusion while making it easier for a supplier to serve customers in different states:

H.R. 2944 fails to address the toxic pollution produced by about 500 coal-fired power plants exempt from provisions of the Clean Air Act. These "grandfathered" power plants not only produce more than half the nation s electricity, they also produce about one-third of the pollution that causes smog, one-third of the pollution that causes global warming, and two-thirds of the pollution that causes acid rain.

A lethal loophole in the Clean Air Act allows grandfathered coal plants to produce electricity without using equipment that reduces pollution, making electricity from the old plants less expensive. In contrast, new power plants must use modern equipment to reduce pollution, making electricity from new plants more expensive. This gives the old plants an unfair competitive advantage against cleaner power plants at the expense of public health and the environment.

More importantly, recent studies show that, as a result of state-led deregulation, many grandfathered power plants are producing far more pollution today than they did in 1992. The pollution from grandfathered coal plants is literally killing thousands of Americans each year, while reducing the health of lakes, rivers, forests and croplands.

To eliminate this lethal loophole, federal electricity legislation must include a provision that requires each and every power plant to meet the same standards for pollution, especially for carbon dioxide, sulfur dioxide, nitrogen oxides, soot, mercury, radiation, and other hazardous and toxic emissions.

In addition to provisions that clean up old coal-fired power plants, H.R. 2944 should also include the following provisions:

H.R. 2944 as amended does nothing to combat the monopoly power currently enjoyed by most of the nation s investor-owned utilities, even those located in states that have passed deregulation laws. Provisions need to be added that ensure all suppliers have open access to the transmission system, enable federal agencies to create truly competitive electricity markets, and protect consumers and businesses from abuses by utility holding companies.

With regard to open access to the transmission system, H.R. 2944 would make open access more difficult by codifying the loopholes within FERC s Order 888. As you know, the intent of Order 888 is to provide all transmission users with open access to the transmission system at rates comparable to the utility s. However, loopholes in Order 888 allow utilities to give themselves preferential transmission service by reserving more transmission capacity than they need, and by engaging in other activities that are keeping competitors from using transmission lines. In contrast, competitors are having transmission service taken away from them, or are forced to pay more for transmission service received, or are unable to get any transmission access in the first place. By codifying the loopholes of Order 888, Section 101 would achieve the exact opposite of the intent of Order 888.

Also, Section 101 would allow utilities and state commissions to reclassify transmission as distribution, and the FERC would have little authority to stop them. Currently, several utilities are attempting to reclassify (or "refunctionalize") transmission lines as distribution lines. This would allow the utilities to continue controlling the lines they would not fall under the jurisdiction of regional transmission organizations (RTOs) or even FERC. With exclusive control of reclassified transmission lines, utilities could shelter vast amounts of their retail market from new entrants. To the detriment of wholesale competition, section 101 would encourage reclassification.

With respect to the provisions dealing with Regional Transmission Organizations, Public Citizen believes the provisions in H.R. 2944 completely miss the mark. Given that the Eastern, Western, and Texas Interconnections are natural monopolies, Public Citizen recommends that all of the transmission facilities of each Interconnection should be owned and operated by three non-profit public transmission companies (one for each Interconnection). Having non-profit public transcos own and operate the nation s three transmission systems would provide consumers with the most efficient, lowest-cost transmission service, eliminating the conflicting incentives created when for-profit companies own transmission facilities. As long as utility holding companies are allowed to own transmission systems along with power plants and electricity marketing firms, there can never be reasonably priced, open-access to the transmission system, there will never be a reduction of ineffective regulation, and there will never be true competition in wholesale or retail electricity markets.

In contrast, H.R. 2944 would encourage the formation of for-profit transcos masquerading as RTOs. FERC would not be able to change anything in a utility s filing to create an RTO if it met the standards set forth in the legislation, FERC would have to accept it (nor can FERC change existing RTOs or ISOs). This could lead to RTOs comprised of one utility, even though the goal of an RTO is to bring as much transmission under one roof as physically possible. Unless RTOs are large enough, utilities would still be able to manipulate their transmission systems in ways that discriminate against new entrants (pancaked rates, schedule imbalance penalties, insufficient transmission capacity, just to name a few).

One of the standards that an RTO would have to meet is "independence." Thanks to a new loophole created by amendment #1E offered by Rep. Charles Pickering, utilities or their affiliates could own the RTO and power plants and power marketing firms. In other words, the standard for independence in H.R. 2944 is now meaningless. Unless the RTO is truly independent from anyone who generates power or sells it in wholesale or retail markets, the RTO will be manipulated to favor the owner s affiliates over those of a competitor.

With regard to the expansion of interstate transmission facilities, although utilities are required to provide interconnections to the transmission system to those requesting it, utilities could still hook up their own power plants to the grid ahead of everyone else. Other provisions would allow utilities to receive "incentives" for joining RTOs. Whenever utilities use the word "incentives," they really mean "super profits" they want more money to do what they were supposed to do anyway. Also, large electric customers would be able to negotiate their own rates for transmission service, throwing out nearly 100 years of precedent that all customers with similar needs should pay the same price for a regulated service, such as transmission (i.e., non-discriminatory rates).

Under the provisions in H.R. 2944, FERC has to approve all mergers within 180 days, which is not enough time for large, complicated mergers. Completely absent are provisions needed to give FERC jurisdiction over mergers involving holding companies; requirements that mergers either increase competition or at least do not lessen it; and that mergers provide provable net benefits to consumers.

On a related issue, H.R. 2944 repeals the Public Utility Holding Company Act of 1935, even though the logic of PUHCA is still valid today. PUHCA was signed into law in response to the wave of mergers and consolidations that gripped the industry during the Roaring Twenties. One of the goals of PUHCA was to reorganize the ownership of utilities into systems that "are physically interconnected or capable of physical interconnection and which under normal conditions may be economically operated as a single interconnected and coordinated system& ."

The utility mergers that occurred during the Roaring Twenties did not result in "interconnected and coordinated" systems. The large holding companies of the day owned utilities scattered throughout the U.S. and the world, making it mostly impossible for the economic interconnection of systems. Since the holding companies owned systems that did not result in an "interconnected and coordinated system," holding companies could not deliver to consumers the promise of lower electricity rates.

President Franklin D. Roosevelt s administration was very concerned about the inefficiencies that dominated the industry prior to the enactment of PUHCA:

The growth of the holding-company systems has frequently been primarily directed by promoters dreams of far-flung power and bankers schemes for security profits, and has often been attained with the great waste and disregard of public benefit which might be expected from such motives. Whole strings of companies with no particular relation to, and often essentially unconnected with, units in an existing system have been absorbed from time to time. The prices paid for additional units not only have been based upon inflated values but frequently have been run up out of reason by the rivalry of contending systems. Because this growth has been actuated primarily by a desire for size and the power inherent in size, the controlling groups have in many instances done no more than pay lip service to the principle of building up a system as an integrated and economic whole, which might bring actual benefits to its component parts from related operations and unified management. Instead, they have too frequently given us massive, overcapitalized organizations of ever increasing complexity and steadily diminishing coordination and efficiency (Report of the National Power Policy Committee, 74th Congress, 1st Session, House Doc. No. 137, March 12, 1935).

The enforcement of PUHCA reorganized the industry into utility systems that were able to provide benefits to consumers that can only be achieved by "interconnected and coordinated" operation. Between 1938 and 1951, average monthly bills for ratepayers dropped 10 to 14 percent, mostly due to the benefits of "interconnected and coordinated" operation.

The logic of PUHCA and the words of the Roosevelt administration are still relevant today, especially given the wave of dubious mergers sweeping the industry. If utilities cannot be connected to each other into a single "interconnected and coordinated system," few savings will result to the consumer.

For example, the proposed merger between American Electric Power Company (Columbus, Ohio) and Central and South West Corporation (Dallas) will not be able to provide savings to consumers because their two systems cannot be operated as an "interconnected and coordinated system," especially since the proposed merger is between a utility in the Eastern Interconnection (AEP) and a utility that is partly in the Texas Interconnection (CSW).

Similarly, the proposed merger between New Century Energies (Denver) and Northern States Power Company (Minneapolis) involves utilities in the Western Interconnection (NCE) and the Eastern Interconnection (NSP); it would be nearly impossible to connect these utilities into a single interconnected system. Although the following utilities are all located in the Eastern Interconnection, the proposed merger between Unicom (Chicago) and PECO (Philadelphia), and the proposed merger between Carolina Power & Light Company (Raleigh) and Florida Progress Corporation (St. Petersburg), involves utilities that cannot be operated as an interconnected and coordinated system. Since these mergers all appear to violate PUHCA (the logic of which is based on the physics and economics of electric power systems), consumers are not likely to see lower electricity prices as a result of these mergers.

In short, Public Citizen believes that PUHCA is still valid today: If merging utilities cannot be connected into a "single interconnected and coordinated system," few savings will result to the consumer and, therefore, the merger should be prohibited.

H.R. 2944 contains no provisions to deal with problems created when one owner owns (or acquires) too many power plants, also known as horizontal market power. Since utilities or their affiliates continue to own most of the power plants serving a city or a region (even in states with deregulation), they can manipulate the price of electricity to the detriment of consumers (who may have to pay higher prices) and competitors (who may be unable to enter or survive in manipulated electricity markets).

H.R. 2944 has no provision prohibiting holding companies from owning both regulated and non-regulated companies. As long as regulated and non-regulated businesses are part of the same holding company system, ratepayers of the regulated business will likely end up paying cross-subsidies (in the form of higher rates) to the non-regulated affiliates. Competitors suffer because they have to compete against affiliates receiving cross-subsidies. This could greatly harm independent providers of electricity, energy efficiency services, or other services.

Cross-subsidies between regulated and non-regulated affiliates have plagued electricity consumers since the first utility holding companies were established in the 1890s. To end cross-subsidies once and for all, President Franklin D. Roosevelt wanted PUHCA to prohibit utility holding companies from owning non-regulated subsidiaries, but his vision was defeated by the utility lobby prior to PUHCA s enactment. Public Citizen recommends that Congress follow President Roosevelt s advice and make PUHCA stronger by prohibiting the ownership of non-regulated businesses by utilities (and conversely, prohibit the ownership of regulated companies by non-regulated companies).

With respect to retail reciprocity, an amendment offered by Rep. Cliff Stearns stripped out the provision that would prohibit regulated utilities from competing in deregulated states. Without this provision, utilities such as the Southern Company can continue charging its captive customers rates inflated with cross-subsidies in order to subsidize forays into deregulated markets.

In order to improve the reliability and safety of the nation s electric power industry, a provision should be added to H.R. 2944 requiring power plant owners to ensure that workers have the necessary skills to safely perform their jobs. The provision should require that all power plants comply with standards established by the Occupational Safety and Health Administration. The provision should require new owners of power plants to rehire the current power plant workers at similar wage rates and benefits.

Thank you for your consideration of our comments. Please call me if you have any questions or concerns about these comments.

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