Testimony of Glenn English
Chief Executive Officer
National Rural Electric Cooperative Association

before the United States Senate Committee on Agriculture, Nutrition and Forestry

July 8, 1997

Executive Summary: For sixty years, cooperative rural electric systems have operated under a basic business tenet--that of customer choice--the customer's ability to choose his or her electric power supplier. Some proposals for restructuring the electric utility industry now seek to invoke that same tenet of customer choice. But for sixty years, cooperative rural electric systems have been their consumers' power supplier of choice: If co-op consumers do not like their electric cooperative, they can sell it and take their business elsewhere. Cooperative electric systems neither fear nor oppose competition. It will remain to be seen how some in the investor-owned community respond when they, too, are faced with true customer choice.

A complete analysis of the tax provisions affecting the electric utility industry will reveal what is not readily discernible in the public eye: The investor-owned utilities (IOUs)—who serve 70 percent of the nation's population, including the most concentrated, easy-to-serve population centers—receive federal assistance, a great deal of federal assistance. IOUs have collected $74 billion in federal taxes from consumers that have not found their way into the Federal Treasury and may never do so. This $74 billion—according to the Treasury Department--amounts to an interest free loan that costs the taxpayers of the United States $5 billion per year. Yet, the IOUs claim that the co-ops have a huge competitive advantage.

Earlier public policy decisions forced cooperatives to become junior—albeit very minor--partners with the IOUs in nuclear power plant projects. The consequences of these public policy decisions could mean, very frankly, that in any restructuring of the electric industry, rural electric consumers would be stuck with the bill for stranded costs. The IOUs, on the other hand, have been able to write down, or wipe out, some $259 billion in failed nuclear power projects— losses which have been parsed out and borne by IOU customers, shareholders and federal and state taxpayers.

Finally, an underlying concept of rural electrification is area coverage. That means that any and all comers in a rural electric service territory are eligible for electric service from the co-op provided that extension of service meets a test of economic reasonability. Universal service is doubly important to rural electric consumers. Rural electric systems are frequently the electricity provider of last resort. Demographic data indicates that a very high percentage of rural electric consumers live on fixed incomes with very little financial flexibility. In any restructuring of the industry, all Americans—rural, urban, suburban, and inner city--must be guaranteed access to reliable, affordable and safe electric service. Rural electric systems cannot and will not accept any restructuring proposal that does not provide affordable electric power to both rural and urban consumers. * * * *

Chairman Lugar, Members of the Committee, for the record, I am Glenn English, Chief Executive Officer of the National Rural Electric Cooperative Association, the Arlington, Virginia-based association of the nation's network of 1,000 consumer-owned, nonprofit rural electric systems that provide electric service to more than 30 million mostly rural Americans in 46 states.

On behalf of electric consumers and all rural Americans, I commend you, Mr. Chairman, and the Committee for your interest in examining some of the issues raised by proposals to restructure the way an essential basic service—electricity--is delivered. Too many of those served by rural electric systems remember what it was like to be without light and power until innovative and far-sighted government policy and a healthy infusion of local effort brought electricity to the countryside through the Rural Electrification Administration (REA), now the Rural Utilities Service (RUS).

For sixty years, cooperative rural electric systems have operated under a basic business tenet that some proposals for restructuring the industry seek to invoke for all electric providers--that of customer choice. We are no strangers to this concept; in a cooperative, if consumers do not like their electric system, they can sell it and take their business elsewhere. Thus, rural electric systems neither fear nor oppose competition.

Investor-owned utilities (IOUs) attempt to portray rural electric cooperatives--which provide service to about 10 percent of the nation's population but 70 percent of the land mass--as unfairly competitive because of their federal assistance.

A critical component to the evaluation of any proposal that seeks to restructure the electric utility industry must be a full analysis of the federal assistance that all sectors of the industry receive.

Members of this Committee certainly are familiar with the federal assistance that flows to rural electric systems through the Rural Utilities Service. That assistance enables loans to be made at below-market interest rates for about 50 percent of the electric cooperatives' capital needs. The amount of assistance equals the difference between the government's rate of borrowing and the interest rates charged to rural electric borrowers. Federal assistance to rural electric systems is appropriated each year, and amounts to $25 per consumer. This year, cooperative rural electric systems will pay more than $500 million in interest on these loans.

What members of the Committee may not know is that those same investor-owned utilities--who serve 70 percent of the nation's population, including the most concentrated, easy-to-serve population centers--also receive federal assistance, a great deal of federal assistance.

IOU assistance is not appropriated and hence not in the public eye. Rather, it comes through the tax code. Investor-owned utilities have collected $74 billion--that's billion with a "b"--in taxes from consumers that have not reached the Federal Treasury and may never do so. These "taxes" come from several sources. Attached to this testimony is an accounting of those sources. The IOUs' $74 billion in taxpayer loans from the Federal government each year costs the taxpayers of the United States $5 billion--again, billion with a "b"--or $57 per investor-owned customer. This year, the IOUs will pay no interest on these loans.

The investor-owned utilities cry foul about assistance for rural electric systems, but choose to ignore their own federal assistance--the existence of which has been publicly acknowledged by their own trade association, the Edison Electric Institute, and the substance of which has been recounted by the General Accounting Office, the Congressional Research Service and others. To cap their arguments, they demand a "level playing field," in other words, the elimination of federal assistance to rural electric systems, but the continuation of the assistance to investor-owned utilities. This is not a "leveling of the playing field." This is an attempt to level the opposing players.

Let me put this comparison of federal assistance in some perspective. The average rural electric system has a consumer density of 5.8 consumers per mile of line. This compares to 35 for investor-owned utilities. Rural electric systems have revenues of $7,038 per mile of line annually, compared to investor-owned utilities' $59,355.

Rural electric systems must also make a larger investment per consumer, $1,975 per consumer, to provide adequate distribution service. This compares to $1,549 for investor-owned utilities. In 67 percent of the cases, rural electric systems have higher rates than the nearest investor-owned utility, even with all of the so-called "subsidies."

The load profile of rural electric systems is significantly different from investor-owned utilities. Only about one third of rural electric systems' electric load is commercial and industrial, while two thirds of IOU loads are industrial and commercial.

Finally, two million miles of rural electric distribution lines provide service to 70 percent of the nation's landmass, but only 10 percent of the nation's total electric consumers.

In addition, the IOUs claim that the co-ops have a huge competitive advantage. I leave it to the Committee to define that huge advantage. The IOUs would have you believe that the Southern Company is quaking in its boots at the prospect of having to compete with Snapping Shoals Electric Membership Corporation. So, compared to the IOUs, rural electric systems spend more, earn less, receive less assistance, generally have higher rates and less attractive loads, serve more territory with many fewer consumers.

The membership of NRECA has looked at electric utility restructuring and identified seven tests that should apply as a minimum to any restructuring proposal. (A copy of that resolution is attached.)

A core issue in any proposal for restructuring the industry is that of stranded cost recovery. Rural electric systems are consumer-owned. Any stranded costs that cannot be recovered from the customers that caused them to be incurred must be passed on to the remaining consumer-owners.

Some say utilities that invested in technology that has now fallen into disfavor should suffer the consequences of those decisions. To the extent that all decisions are freely and independently made, perhaps that argument carries legitimacy.

However, in the case of much rural electric generation, those decisions were strongly encouraged by federal officials and guided by public policy, absent much choice, and now rural electric consumers may be stuck with the bill.

One such example is nuclear generation, in which some rural electric systems have a relatively small ownership percentage but a huge potential liability. Faced with the inability of IOUs to provide adequate power supply in the 1970s, rural electric systems could have elected to build their own generation. However, REA officials strongly encouraged co-ops to become minority partners with IOUs in nuclear plants and provided 100 percent loan guarantee financing for these projects. The co-ops put up their money, but the IOUs ran the show. Because of their own financial stress, the IOUs welcomed co-op participation in these projects.

Beginning in 1978, G&T cooperatives borrowed some $10.5 billion to invest in IOU nuclear facilities alone. To recount in excruciating detail the history and continuing difficulties of nuclear power in the United States would take much more time than we have today.

Costs skyrocketed in the wake of Three Mile Island and interest rates soared. During that time, my chairmanship of the House Agriculture Subcommittee on Conservation, Credit and Rural Development, provided me with the vantage point to become all too familiar with the downward grip that took hold of a number of nuclear power projects. Some projects were canceled as anticipated growth failed to materialize and higher costs drove load growth down.

Wabash Valley Power Association, a rural electric G&T headquartered in Indianapolis, in 1978 committed to a 17 percent ownership in the Marble Hill nuclear plant under construction. Their commitment was for 324 megawatts of power at $797 per kilowatt. The cost of Marble Hill escalated, as construction commenced and additional commitments were required. In 1984, Public Service of Indiana stopped construction on the plant and canceled it. At the time of the cancellation, the cost for 324 megawatts of power had escalated to $1,367 per kilowatt. For its involvement in Marble Hill, Wabash Valley became saddled with approximately $525 million in debt and 17 percent ownership of a big hole in the ground. Wabash Valley subsequently sued PSI to recover its losses and received a settlement from PSI for $170 million.

The Indiana Public Service Commission's disallowal of rates sufficient to repay the debt on the nuclear plant caused Wabash Valley to face default. The federal government threatened the Wabash board with personal liability and Wabash filed for Chapter 11 protection in 1985. Wabash offered to repay the government approximately $427 million of $670 million owed, but the government declined, and went to court instead, losing every decision. Wabash is in the process of settling the claim of the government.

The Fuel Use Act of 1978 both prohibited construction of new natural gas or oil-fired generation and set a deadline of 1990 for utilities to stop using natural gas to generate electricity.

As an aside, it is ironic that natural gas now seems to be the fuel of choice to bring retail competition to the electric utility industry today. Perhaps there is a lesson in that turnaround.

Cajun Electric Power Cooperative, Baton Rouge, Louisiana, ran afoul of the Fuel Use Act. In the 1970s, Cajun had built and owned a gas generating plant with a modest cost of about $190 per kilowatt. Despite its proximity to cheap, abundant natural gas supplies, Cajun was required to turn to other fuels for its new generation due to the Act. Cajun became a 30 percent partner in the River Bend nuclear project. Initial RUS loans were supplemented and deficiency loans granted as the cost of River Bend spiraled upward. RUS loans to Cajun reached $2.8 billion, the great majority from River Bend. Cajun sued Gulf States Utilities for fraud and construction errors; the fraud suit was dismissed due to the statute of limitations; the construction suit was settled.

Due to a severe downturn in the Louisiana economy, Cajun's expensive nuclear generation exceeded its members' needs, and Cajun was unable to sell its excess power at rates sufficient to pay its capital costs. In 1988, Cajun went into default on its REA debt. Despite debt restructuring and refinancing, substantial problems, delays in the River Bend lawsuit and a slow economy continued to plague Cajun. When the Public Service Commission ordered a rate reduction, and the RUS ordered no reduction, Cajun was forced to seek protection and file for bankruptcy in 1994.

In the case of another G&T cooperative, Soyland Power Cooperative, the cost of the G&T's 20 percent investment in the Clinton Nuclear Plant for 190 megawatts of capacity rose from $1,266 per kilowatt to $7,096 per kilowatt. Despite a 7 percent reduction in Soyland's ownership share, Soyland's debt rose from the original REA loan guarantee of $233 million to nearly $1 billion by 1987. As with Soyland, most of the nuclear facilities sold to cooperatives by IOUs escalated from four to seven times the original cost estimate.

Now, some rural electric systems are caught between a rock and a hard place, and not entirely of their own doing. The REA encouraged investment in these plants. But, on seven different occasions, the U. S. Treasury refused to follow the instruction of Congress to allow G&Ts with high-interest debt to prepay, refinance or reprice their high-cost financing with the Federal Financing Bank (FFB). By mid-1986, interest rates had dropped to about 7.5 percent from well over 12 percent, and IOUs immediately began to refinance record amounts--billions and billions of dollars-- of high cost debt.

But, when rural electric co-ops wished to refinance, the Treasury, which funded rural electric loans through the FFB, refused to permit it and has continued to do so. Various obstacles put in place by the Treasury have stymied the ability of rural electric systems to do what other prudent businesses would do when interest rates fall, and that is to refinance high interest debt. On only very few occasions have rural electric systems been able to enjoy the benefits of refinancing at lower interest rates.

Many G&Ts have offered in the past to pay off all their outstanding FFB loans, totaling billions of dollars, generally at 100 cents on the dollar. However, the Treasury has refused and insisted instead on charging substantial penalties, thus making such transactions economically unattractive. Yet, between 1988 and 1991, twelve foreign governments were allowed to prepay without penalty $8.1 billion in FFB loans to finance foreign military sales.

Attached to the testimony for the record is a chronology of the continuous attempt of rural electric G&Ts to refinance high-interest debt, including Treasury's consistent record of stonewalling the statutory directives of Congress. In any restructuring of the electric utility industry, it should be noted that the ability to refinance high cost debt has certainly tilted the playing field heavily to the advantage of the IOUs.

The impact of the Fuel Use Act and the inability to refinance, reprice, buy out or do what other prudent businesses would do in a period of lower interest rates forced five G&Ts into Chapter 11 bankruptcy to resolve financial difficulties. Others, to avoid bankruptcy, have obtained debt write-downs.

Those write-downs to date have amounted to $1.6 billion. That is a great deal of money, and much of it consists of compounded interest on high-interest debt that the G&Ts could not refinance because of a balky Treasury.

Let me compare that to the IOU write-downs on nuclear generation. So far, through 1995, taxpayers have absorbed $11 billion in IOU losses for nuclear investment. Again, that is a great deal of money, and there is good news and bad news. The good news: the $11 billion represents only about 4.3 percent of the total losses of $259 billion, as consumers--many of your constituents--absorbed $218 billion of it, or 84 percent, and shareholders, $29 billion, or 11 percent. The bad news: before it's all over, you can expect that the IOUs will be asking for another $10 billion for nuclear losses from the taxpayers, another $70 billion from IOU customers, and another $29 billion from shareholders.

From the point of view of the federal government, there are two obvious choices with regard to rural electric systems' financing: force those with difficulties into bankruptcy and risk a total loss or work with them to restructure debt, to write down a lot of interest cost that wouldn't--shouldn't--have been there in the first place and capture the highest amount possible.

Federal policy led these systems into the nuclear thicket and other high cost, state of the art coal generation at high interest rates, and federal policy prohibited their seeking conventional remedies to their problematic situations. Meanwhile, IOUs were positioning themselves for competition by write downs totaling billions, tax collections that net them $74 billion and a $5 billion a year interest-free loan from the federal government. Would equity and good sense be appropriate terms to introduce at this time?

One of our IOU brethren—Entergy--has touched on another concern of rural electric systems and that is the concept of universal service. Entergy proposes to levy a "universal service" charge to recover stranded costs in its service areas. Let me assure the Committee that this is not what rural electric co-ops have in mind when they talk about universal service

An underlying concept of rural electrification is area coverage. That means that any and all comers in a rural electric service territory are eligible for electric service from the co-op provided extension of service meets a test of economic reasonability. In other words, some consumers would be asked to pay connection and extension costs beyond those that are reasonable and customary for all members of the cooperative.

All consumers have access to electric service, despite the fact that some electric loads may not be attractive to the service provider. A healthy balance and portfolio of different types of electric loads that utilize generating capacity efficiently helps to stabilize and lower rates across an entire utility system. As, frequently, the electricity provider of last resort, rural electric leaders and their consumers are all too familiar with proposals that benefit consumers of electricity in markets attractive to service providers to the detriment of others. Examples are those who live in difficult-to-service, less revenue-intensive, sparsely populated areas of rural America, as well as some high-cost, low-revenue inner city areas.

The restructuring of the telecommunication industry provides food for thought as we begin to structure a universal service fund that ensures lifeline service for the needy, essential heating and cooling assistance for those who cannot afford it. One of the principles set out in the 1996 Telecommunications Act requires the Federal Communications Commission and others to set policies to preserve and advance universal service based on a number of principles laid out in the statute. One of those principles notes that "consumers in all regions of the nation, including low-income consumers and those in rural, insular and high cost areas, shall have access to telecommunications . . . services that are reasonably comparable to those services provided in urban areas and that are available at rates that are reasonably comparable to rates charged for similar service in urban areas." The Act requires that all providers of telecommunication service should make equitable and nondiscriminatory contributions to preserve and advance universal service.

Universal service is doubly important to rural electric consumers. If rural electric systems--or for that matter any electric systems--are "cherry-picked" by energy marketers who go after the attractive loads and decline to provide service to customers who are less lucrative to serve, it is these people who will face the prospects of higher rates and less than satisfactory service. In any restructuring of the industry, all Americans, rural, urban, suburban, and inner city, must be guaranteed access to reliable, affordable and safe electric service.

Rural electric systems cannot and will not accept any restructuring proposal--federal, state, legislative or regulatory--that does not adequately and fairly address the issue of universal service.

Finally, cooperative rural electric systems comprise a strong national network of electricity providers. Although national in scope, cooperative rural electric systems are consumer oriented, progressive and favor competition. Cooperative rural electric systems were among the industry's first advocates of the wholesale competition provisions of the Energy Policy Act of 1992 (EPACT). It was the intention of EPACT that wholesale competition should go forward. We should allow the provisions of that Act to operate in the marketplace. Radical industry restructuring and calls for federally mandated retail competition is premature when the effects of increased wholesale competition have not yet been allowed to operate fully in the marketplace. Rural electric systems have other concerns regarding restructuring--market concentration, reliability, the Public Utility Holding Company Act, the Public Utility Regulatory Policies Act, and, especially, the idea that all classes of consumers, including rural electric consumers, must share any benefits of restructuring.

I would be happy to respond to any questions, either today as a part of this hearing or as questions arise among Members of the Committee as debate on this important topic proceed.

Thank you.