Energy Markets:

PPA President Richardson talks electricity language in upcoming energy legislation

E&E Daily senior reporter Mary O'Driscoll and editor Colin Sullivan ask Alan Richardson, president of the American Public Power Association, about why Congress should update the electricity language in the energy bill, why municipal utilities support President Bush's Clear Skies legislation and what federal energy regulators should do to ensure utilities do not exercise market power.

Transcript

Colin Sullivan: Welcome to OnPoint, I'm Colin Sullivan. Today we're joined by Mr. Alan Richardson, the CEO and president of the American Public Power Association and Mary O'Driscoll, senior energy reporter for E&E Daily and Greenwire. Mr. Richardson thanks for joining us.

Alan Richardson: Thanks Collin. It's nice to be here.

Colin Sullivan: This week your members are in town to talk, to go up to Congress and talk about their issues on Capitol Hill. Can you talk about what issues, what points they're trying to make with members of Congress when they're meeting this week?

Alan Richardson: Sure. Every year the American Public Power Association hosts a legislative rally about this time of year. This year we have record of attendance, I think we have 650 or 700 members from the 2,000 member systems across the country that will be coming to Washington, D.C., to talk with members of Congress and members of the administration, to Federal Energy Regulatory Commission folks. Top issues on our agenda include, of course, the comprehensive energy bill in general and in particular the electricity title and some issues or concerns that we have with respect to that. Another issue that is very high on our agenda is the Clear Skies legislation. We support the administration's legislation there. We will be talking to our members in the House and the Senate to express that support. We believe Senator Inhofe will be joining us this morning, Wednesday morning, to sort of rally the troops and encourage them to go up and talk to their members of Congress. Telecommunications is another issue. We expect, we read the telecommunications laws and a lot of publicly owned utilities are now getting involved in providing that infrastructure to bring their communities into the 21st century in terms of broadband access. So those are top issues legislatively and then of course we have some issues, concerns with things the Federal Regulatory Commission has been doing. We'll be meeting with them to address those as well.

Colin Sullivan: Now you mentioned Clear Skies and right now it looks like there might be a deadlock in the EPW Committee. It may never get out of committee unless they bring it straight to the floor. Can you talk about some swing votes that maybe you're targeting? Are you targeting specific members, try to get them to come down on the side of --

Alan Richardson: Well, you know, certainly the Democrat that's most frequently talked about as being a potential swing vote or someone that could be influenced to help work a compromise to get past what appears to be gridlock is Senator Baucus. He's been saying, you know he's concerned about carbon emissions, global warming. He's been saying he's not necessarily committed to mandatory controls, there's not a commitment to mandatory controls, but there needs to be something in the Clear Skies legislation that addresses carbon emissions. So how that shapes up is likely to determine whether they get past that 9-9 gridlock in committee.

Mary O'Driscoll: I wanted to ask you about the energy bill. You said in a recent speech that you would really like for Congress to be able to revisit the electricity title of the energy bill. Why is that? What would you like to see revisited?

Alan Richardson: Mary, you know, that bill has origins that go back to like Chairman Schaefer from Colorado. He had legislation for retail choice by a date certain, I forgot whether that date certain was initially 1998 or 2000. How we were going to restructure the energy. How we were going to promote competition so that we can displace regulation with competition and a lot of the ideas that are currently in the electricity title really date back to that mindset of promoting competition in the electric utility industry, including the repeal of the Public Utility Holding Company Act. Well, a lot has changed in the last few years. The American Public Power Association and my members were very, very strong supporters of regional transmission organizations to rationalize the transmission grid and ensure access. Now in the last couple of years we've seen those institutions change direction and focus to be market makers as opposed to facilitators of the use of this infrastructure. So just as we've changed our views, we think it would be wise, probably won't follow our advice, but it would be wise for Congress to go back and take a look at the electricity title and see what really is necessary in today's environment. I mean, things have happened that haven't really been addressed in the energy, electricity bill, including the collapse of Enron.

Mary O'Driscoll: Well, I guess the collapse of Enron, I guess, was addressed in some way, I guess maybe as regarding PUHCA I think that was kind of tied to PUHCA. You don't want to see PUHCA repealed?

Alan Richardson: We do not want to see PUHCA repealed or at least if it is repealed we would like to see a substitute, we would like to see something put in its place to ensure protection of consumers and investors.

Mary O'Driscoll: Right. Well, PUHCA of course being the Public Utility Holding Company Act.

Alan Richardson: I'm sorry.

Mary O'Driscoll: Well, that lovely obscure 1935 law.

Alan Richardson: Fall into that, fall into that lovely name, right.

Mary O'Driscoll: The --

Alan Richardson: This is the 70th anniversary of that lovely and some say antiquated, we say still relevant, piece of federal legislation.

Mary O'Driscoll: Well now, doesn't the legislation call for bringing some of those duties there at the Securities and Exchange Commission which administers PUHCA, taking some of those and giving those to the Federal Energy Regulatory Commission? I mean, isn't it just a --

Alan Richardson: No, it's not just a transfer. There are, the holding company act is a relatively unique federal statute in the sense that it imposes some absolute prohibitions on things a corporation can do or cannot do if it's in the electric utility business, so just the fact that it's there, I kind of equate it to a New Deal dam, I mean, it was a New Deal proposition. It's like a New Deal dam where you have torrents and destruction of holding companies prior to the construction of the holding company act. The holding company act stilled the waters and created a very stable utility structure because it prohibited transactions between affiliates and manipulation of the marketplace, manipulation of consumers. It prohibited diversification into non-utility businesses, all of which were at the disadvantage of consumers. So those are prohibitions. If the Holding Company Act is repealed, those prohibitions go away as well. So you can transfer some of the authority to the Federal Energy Regulatory Commission to look at the bad practices that holding companies can engage in and it's a corporate structure that kind of facilitates those behind the scenes transactions. But it doesn't displace the absolute prohibitions on diversification, geographic location. I mean now utilities and utility holding companies are supposed to be in a single region. If the act goes away, you get more of the Enrons buying the Portlands, you know, New York authority, New York utility buying a company in Texas or Tucson. So you divorce the ownership from the utility and you diminish the ability of regulators to control what's happening.

Colin Sullivan: Now your members have also been very critical of the regional transmission organization process of FERC. Can you talk about what their complaints are about that process as it's going on?

Alan Richardson: We have, of course I think the regional transmission organizations were, in our mind, initially developed to be of an appropriate geographic scope, they had a rational market structure in terms of geography, and they were to engage and facilitate in long-range planning for the development of new transmission facilities and to ensure access by all parties on the transmission grid, I mean those were, and they were to do so in a cost-effective manner. I mean that was our vision of what regional transmission organizations should do. What's happened is they have evolved into entities that are not facilitators of grid access, but market makers. They're trying to make markets out of anything that they can and that's part of the problem. There's some things in our industry that we think really shouldn't be markets, including transmission. We don't think you should auction off transmission for example or ancillary services, reserves, anything that they think has a monetary value they think can be captured and done more effectively by markets as opposed to utilities or utility regulators and we're not so certain that that's the case, particularly in the electric utility industry.

Mary O'Driscoll: Why not? This is kind of the push that's been generally accepted that, at least in this area, competition really does make the markets work. It does make everything work more efficiently, which lowers prices for consumers. So why wouldn't there be market forces --

Alan Richardson: You know that works really well with widgets, it doesn't necessarily work well with electricity. We have yet to see the cost benefits, the savings for consumers. I mean, we had great promises. We heard great promises of deregulation and market forces lowering rates and improving service and we haven't seen it. We, I mean, you know, the 2000 publicly owned utilities most of whom are dependent upon the wholesale market. So we're buyers and we're looking at the marketplace and we're not seeing these cost savings. Industrial customers in the Pennsylvania, Maryland, New Jersey grid, the PJM area are not seeing these. These are other customers who depend on that market to work and to work to their advantage and to help lower their rates and we're not seeing that. One of the things, several concerns that we have about the regional transmission organizations, they're not, their costs have skyrocketed and they're not terribly accountable to the people that are paying those costs. I mean, these institution's entities are, in fact, FERC-jurisdictional, in other words, they are subject to FERC's oversight and control and FERC has a responsibility to ensure that the costs that they are passing on, that we have to pay, are just and reasonable and that hasn't happened. We've seen their costs skyrocketing. They're not really accountable to their customers. They take actions that are inconsistent with the desires of the customers that they serve. Independence is great, but perhaps they're a bit too independent and they need to be a little more closely monitored.

Mary O'Driscoll: Don't you have recourse to go to FERC then? I mean, what kind of, you know, to take the complaint to FERC that they're not doing what they should be doing?

Alan Richardson: We're making some traction with FERC in terms of costs, the Federal Energy Regulatory Commission has a notice of inquiry out. The costs of the regional transmission organizations which we hope makes them more accountable and reigns in the sort of unrestrained spending that we've seen. Another issue of concern that we have with respect to the regional transmission organizations is the fact that they're built on reliance on short-term markets to set prices and to stimulate development. We're in the business not for the short-term. Public power systems have been around for 125 years and we expect to be around, hope to be around for another 125 years. We're in this business not for profit, but a purpose and we're in the business for a long time and we have a very long-term perspective and the facilities that you build for providing electric service are long life facilities. Transmission lines last 50 years, generation can last 30 to 50 years, but to support those investments you need long-term access to transmission. Not only need the access, but you need to know what the price is going to be over that long-term period of time and that's where the uncertainty is for us. We have neither long-term guarantees of transmission access and great uncertainty as to what the price is going to be, which makes our life very difficult and makes it difficult for us to pursue the business model that we have demonstrated over 125 years has been successful and has been recognized by Wall Street over the last three or four years with very, very stable credit ratings as being a successful model in today's environment.

Mary O'Driscoll: Right. Well now, you did a report recently calling for FERC to make a midcourse correction with this RTO policy, saying that this all-or-nothing RTO policy that they're pursuing has just really got to stop. And really, your position is that there will be no more RTOs actually formed. You know, you got the Midwest RTO that's supposed to start it now in April. It's been put off again for another month, but that there really won't be any more formed, yet there's one that's kind of in the works now in the Pacific Northwest. Which has been kind of one of --

Alan Richardson: Right.

Mary O'Driscoll: Those areas where there's been the most resistance to it, so --

Alan Richardson: Our position is, and our paper says, we think it's rather unlikely that we're going to see more regional transmission organizations. I'm very much aware of what's happening in the Northwest and there's controversy about that. I know that one of the things that is very worrisome, even to those entities that are looking at Grid West is the extent to which FERC imposes its market design, which has a short-term focus when we're a long-term industry. To the extent that they feel that that's going to happen they become much more reluctant to move forward with the further exploration of Grid West.

Mary O'Driscoll: Right.

Alan Richardson: But the commission has also recognized our concerns about the long-term nature of the industry and how they have to accommodate entities like public power systems that need long-term assurances and the independent generators that need long-term assurances. I mean, the merchant model of new generation where somebody goes out on spec and builds a power plant thinking the market will, he can unload all that energy on the short term market. That was a disaster. So the companies that are surviving, the Cal Pines and the others, are thinking now this is a long-term business. I want to, I need to be in this for the long term, but to do that I've got to have some long-term contracts and to get those long-term contracts I have to have long-term transmissions. So, there seems to be a, you know, we're coming back to reality in the sense that people are beginning to say, you know, "Economic theory is great, but what is it that makes this industry work?"

Colin Sullivan: Now the current chairman of FERC has had sort of a controversial reign as FERC chairman, Pat Wood. He's been there following the California power crisis, following the blackout in the Northeast, following the Enron collapse. Are you satisfied with his performance and when his reign comes to an end in June, would you support him coming back to FERC?

Alan Richardson: Well his reign, his term does expire, many of the points that we raise in our paper, are issues that he has advanced so we have disagreements with some of the things that he has proposed. On the other hand, he's been very supportive. He was very supportive of public power and its role in the industry when he was at the Texas commission. He's been very supportive of public power and our views at the Federal Energy Regulatory Commission. He sort of regards us as the canary in the coal mine. You know, if we flop over, then he knows that his policies really have gone wrong. Well, we haven't quite flopped over that far, but he's hearing our concerns and as I said there are some things that the commission is doing now including looking at long-term transmission rights and a cost accountability of the RTOs that we favor.

Colin Sullivan: So, Pat Wood then has struck the right balance between public and private power? He's done a good job in your assessment? You're happy with Pat Wood's performance?

Alan Richardson: You know, I don't, I don't think it really falls into public versus private so much as it does, how much can we rely on the markets and how much do we have to rely on the regulators? Our concern is with over reliance on the markets and not enough concern for what the role of regulation, in my view, has to be in an industry like the electric utility industry, which truly is unique in the sense that it's a real-time product, you can't store it, everybody has to have it, it's simultaneous in generation and consumption and that there are only a limited number of players and so it can be easily manipulated at the expense of consumers.

Mary O'Driscoll: I wanted to ask about FERC has embarked on this investigation into market power and the utility's ability to exercise market power. They are trying to update the test and whatnot. Are you pleased with what you've seen so far? They've tagged what, six major utilities for indications that they do have market power, yet you protested, your association joined some other groups in protesting what, I guess the scope of what FERC was doing. Can you get into that a little bit?

Alan Richardson: Yeah, are we pleased? Yeah, I think we've gone from an environment where utilities needed to pass a test in order to sell power at market-based rates, which, you know, market-based rates is kind of ironic. You know, the market was supposed to produce lower rates, I'm digressing here but, as opposed to cost of service rates and now all the companies want market based rates, but it's clear that they want market-based rates not because they are lower than cost of service rates. So that tells you a little bit about what's been happening in the rhetorical game on restructuring. As far as the commission's activities, they went from a position where virtually every utility that wanted to sell power at market-based rates went through a test and passed the test. The test being do you have market power or not and nobody had market power so everybody could sell at market-based rates. Well now they've come back with a test where a few companies have failed and those companies are not particularly pleased, but the commission, to its credit, is moving forward to try to find the right balance so that you have a test that truly does measure the ability of utilities to exercise market power and increase their rates and if they have that ability then they have to sell at cost-based rates. We have some concerns about the scope of their current inquiry and whether they're looking at all elements of market power or just generation market power. We'd like to see if, if they're going to open inquiries on utilities we think they should look at all of the activities of each, it's transmission, ownership and the amount of generation and its ability to manipulate the market as opposed to focusing on just one issue. So that was really the issue behind our --

Mary O'Driscoll: Well, should the commission then have waited while it, they did say they're going to look at the other market power tests rather than just the generation market power test that they're giving right now.

Alan Richardson: It should take, it should look at all the issues as opposed to saying we have three or four issues that are important, but we're only know look at one issue and you public power systems, if you're concerned about some other aspect where you think they're exerting market power, you've got to come to us and ask us to open an inquiry on that issue. It just doesn't seem to be terribly efficient, and it puts the burden on those of us who are least able to carry it as opposed to requiring those who want the privilege of selling power at market-based rates to demonstrate that they can't manipulate the market and to do so in a cross support fashion.

Colin Sullivan: One last thing. Can I get you to play Nostradamus for a second? What's your prediction for what happens to electricity this year on the Hill?

Alan Richardson: Well, I will give you an absolute prediction that it will be passed by the House of Representatives.

Mary O'Driscoll: That was easy.

Alan Richardson: Right. I think it's going to be difficult in the Senate, and I think everybody acknowledges that it's going to be difficult in the Senate. It's not so much for the electricity issues that are of concern to us. I don't know how many of those issues will change as the process moves forward, but it's the issues that we've all been struggling with and they've been struggling with, you know, Arctic National Wildlife Refuge drilling, waiver of liability for the gasoline additive MTBE and whether that is in or out that's a high priority for Mr. DeLay and equally high, but from the other direction, from some senators, Republican senators in the Northeast. The cost of the bill and the deficit hawks, we're concerned about that. Last year, how costly is it going to be? Is it a budget buster and can it overcome those obstacles? So there are a lot of issues I think that need to be overcome and you know it's anyone's guess. I don't think it any easier, frankly, this year to get a bill through the House, easy to get it through the House, maybe something comes out of the Senate. Does it come out of conference committee in a fashion that can be passed by the Senate? I'm not so sure.

Colin Sullivan: What about Clear Skies, same assessment for the Senate?

Alan Richardson: Right now I'd say the same assessment. It's looking like it's a 9-9 tie in the committee through the leadership in the Senate, as I understand it, has said if it's a tie, they won't use extraordinary methods to bring it on to the floor.

Colin Sullivan: Right.

Alan Richardson: Even if it gets out of the, you know, if they could strike some compromise in the Senate it's not clear then what would happen in the House, because the House is pretty strongly supportive, Republican and Democratic leadership in the energy committee, with respect to the Clear Skies approach and the three pollutant proposition as opposed to including carbon controls.

Colin Sullivan: OK. Well, we're out of time. Mr. Richardson thanks for joining us. Mary O'Driscoll thanks for being here. I'm Colin Sullivan for E&ETV and join us tomorrow for another edition of OnPoint.

[End of Audio]

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