STATEMENT BY
CYNTHIA A. MARLETTE, ASSOCIATE GENERAL COUNSEL
FEDERAL ENERGY REGULATORY COMMISSION
BEFORE THE
COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY
UNITED STATES SENATE
JULY 8, 1997
Mr. Chairman and Members of the Committee:
It is a pleasure to be here this morning to discuss electric utility restructuring and its effects on rural electric cooperatives and rural electricity consumers. My name is Cynthia Marlette, and I am Associate General Counsel for Hydroelectric and Electric at the Federal Energy Regulatory Commission (Commission or FERC). I am appearing before you as a staff witness and do not speak for the members of the Commission.
My comments today will focus on the Commission's jurisdiction over various types of electric utilities, the competitive electricity initiatives recently undertaken by the Commission and how those initiatives may affect rural electric cooperatives and consumers.
As a general matter, the Commission has little or no authority over the majority of rural electric cooperatives. It generally has no authority to regulate distribution-only utilities of any kind, including distribution cooperatives. To the extent a cooperative engages in wholesale sales of energy or transmission in interstate commerce, the Commission has only limited authority to regulate such cooperatives if they have Rural Utilities Service (RUS) financing. While some generating and transmission cooperatives have paid their RUS debt and become subject to Commission jurisdiction as public utilities, the majority are not regulated by the Commission.
However, rural electric cooperatives have long been power customer participants in FERC proceedings involving traditional investor-owned public utilities, and the Commission's policies clearly can affect cooperatives and the rural consumers they serve. As a result of the Energy Policy Act of 1992 (EPAct) and recent FERC initiatives, the electric industry is in the midst of a revolutionary transition to competitive wholesale electricity markets. As these new markets emerge, rural consumers served by cooperatives as well as other types of utilities can benefit from the lower-cost power supplies and service options that will result from wholesale competition. Additionally, some cooperatives may become competitive sellers in the new wholesale markets.
In addition to the Commission's recent initiatives to foster competition in wholesale electric energy markets, many states are actively considering or have begun retail customer choice programs that may affect the opportunities for rural consumers to benefit from competition. The FERC's role in these retail programs is limited. The Commission has no authority to order direct retail access, no authority over local distribution lines, and no authority over retail sales of electric energy. However, if a public utility is ordered by a state to provide retail access over its transmission lines, the Commission does have jurisdiction over the rates, terms and conditions of the unbundled transmission service. This jurisdiction would not attach to RUS-financed cooperatives.
Federal Power Act Jurisdiction
The Commission's primary jurisdictional responsibilities are found in the Federal Power Act (FPA). Its most pervasive jurisdiction is over public utilities. These are defined in the FPA to include individuals and corporations that own or operate facilities used for wholesale sales of electric energy in interstate commerce, or for transmission of electric energy in interstate commerce. The Commission regulates the rates, terms and conditions of public utilities' wholesale sales of energy and transmission in interstate commerce and certain of their corporate activities. It does not regulate public utilities' retail sales of energy. This is left to state or local regulation. However, if a state orders its public utilities to provide interstate retail transmission access directly to ultimate consumers, the Commission's position is that it has authority over the rates, terms and conditions of the retail transmission service.
Most public utilities are investor-owned utilities (traditional utilities with state franchise obligations, stand-alone generating companies, or power marketers). This is because the FPA specifically exempts from public utility regulation government-owned entities such as municipal utilities, state power agencies, and federal power marketing agencies. Additionally, in a 1967 decision the Commission held that rural electric cooperatives are exempt from public utility regulation if they are financed by the Rural Electrification Administration (REA), which in 1994 was succeeded by the RUS. Dairyland Power Cooperative, et al., 37 FPC 12 (1967). In 1983, the United States Supreme Court held that, in the absence of federal regulation of rural electric cooperatives' wholesale power sales, the states may regulate such sales. Arkansas Electric Cooperative Corp. V. Arkansas Pub. Serv. Comm'n, 461 U.S. 375 (1983). The Court noted that REA was a lender, not a classic public utility regulatory body, and that the FERC had disclaimed jurisdiction.
In recent years a number of electric cooperatives have paid their RUS debt and have become subject to the FERC's regulation as public utilities. As a result, the rates, terms and conditions of their wholesale power sales and transmission in interstate commerce must be found just, reasonable and not unduly discriminatory or preferential under the FPA and they must have rate schedules on file at the FERC. They are also subject to regulation of some of their corporate activities. To date, 17 cooperatives have become public utilities.
While most rural electric cooperatives are not subject to FERC regulation as public utilities, they may be subject to FERC regulation as "transmitting utilities" under FPA provisions that were amended by EPAct. If an entity sells electric energy and owns or operates transmission facilities used for wholesale sales of electric energy, it is subject to the possibility of a mandatory transmission order under sections 211 and 212 of the FPA. Sections 211 and 212 apply not only to public utilities but also to government-owned entities and RUS-financed cooperatives. This means that the Commission, upon application by an eligible wholesale power seller or power customer, may order cooperatives to provide transmission access over their wires. The Commission may also set the rates, terms and conditions of the transmission service. However, since passage of EPAct, only three applications seeking transmission services from cooperatives have been filed. One was later withdrawn, and two are pending. Recent FERC Competitive Initiatives
On April 24, 1996, the Commission issued two companion rules, Order Nos. 888 and 889, establishing the basic framework for opening up competition in wholesale interstate electricity markets. These rules are premised on remedying undue discrimination and market power in wholesale electricity markets. They will allow wholesale customers to shop for electricity from the cheapest available sources.
The open access rules require all public utilities that own, operate or control interstate transmission facilities to offer comparable, non-discriminatory transmission services to participants in wholesale electricity markets. Public utilities must do this by taking the following steps:
(1) filing an open access transmission tariff that is used not only by others but also by the utility itself for its own wholesale sales;
(2) offering customers separate rates for transmission, generation, and ancillary services;
(3) establishing an electronic transmission information system that is used not only by others but by the utility itself when it uses its transmission system for its wholesale sales of power; and
(4) developing a code of conduct that separates the utility's transmission operations personnel from generation marketing personnel.
The rules further provide utilities the opportunity to seek recovery of certain stranded costs associated with the transition to wholesale competitive markets. These are costs that were prudently incurred by a utility on behalf of customers under the old regulatory regime, and that could go unrecovered if those customers use open access transmission to leave the utility's power supply system and shop for power elsewhere.
As of July 9 of last year, all 166 public utilities that own, operate or control interstate transmission facilities either had filed, or requested a waiver of the requirement to file, an open access tariff.
Electric cooperatives that are wholesale sellers or wholesale buyers of electric energy may use the open access tariffs that FERC has ordered public utilities to file. This means that they, like other wholesale market participants, will be able to reach alternative suppliers. However, there are two aspects of the open access tariffs that may affect their ability in the near term to take advantage of emerging wholesale competitive markets.
Reciprocity
First, the open access tariffs contain what is called a reciprocity provision. Under this provision, if a customer that uses an open access tariff owns or controls transmission facilities of its own, or if its corporate affiliate owns or controls such facilities, it must either offer to provide reciprocal access over those facilities to the public utility from whom it takes open access service or obtain a waiver of the provision from the public utility or the Commission. Thus far, approximately 24 electric cooperatives have sought and obtained a full or partial waiver from the Commission. The Commission generally grants a waiver of the transmission access reciprocity obligation if the non-public utility owns only limited and discrete transmission facilities (in other words, the facilities do not form an integrated transmission grid). It generally grants a waiver of related transmission reciprocity obligations (use of an electronic transmission information network and code of conduct) if the non-public utility owns only limited and discrete transmission facilities, as discussed above, or if it is a small public utility as defined by the Small Business Administration.
The Commission also has provided a mechanism whereby non-public utilities, including cooperatives, can voluntarily submit to the Commission a reciprocal transmission tariff and obtain from the Commission a determination that the tariff meets the reciprocity condition. By doing this, the non-public utilities can avoid arguments that they are not complying with the reciprocity provision.
Stranded Cost Recovery
The second aspect of the open access rules that may affect the ability of cooperatives (or any other customers) to take advantage of new competitive markets is the potential for stranded cost charges. The rules permit a utility to seek stranded cost recovery in certain circumstances. This means that if a cooperative has been a power customer of a public utility, and if it seeks to use that public utility's open access tariff in order to shop for cheaper power elsewhere, it may face a stranded cost charge added to its transmission rate. If this charge is high, it may not be economic for the cooperative to leave the supplier's system until any stranded costs have been paid.
In addition, there is another stranded cost aspect of the open access rules that may affect electric cooperatives not in their role as customers of a public utility, but rather in their role as sellers of electric energy. As discussed earlier, while the Commission does not have jurisdiction over most cooperatives as public utilities, it does have jurisdiction to order them to provide transmission under FPA sections 211 and 212. The stranded cost provisions of the open access rules would apply to a cooperative if it were ordered to provide transmission service. Thus, if a transmission owning cooperative were ordered to provide transmission service under section 211 and faced the prospect of stranded costs, i.e., costs prudently incurred to serve the customer using the section 211 service, the cooperative could seek to add stranded costs to its transmission rate.
While the Commission's open access rules have been in effect since July 9 of last year, currently pending before the Commission is a second round of rehearings of certain aspects of the rules, including the reciprocity and stranded cost provisions. Additionally, the rules have been appealed to the United States Court of Appeals for the Second Circuit.
Wholesale Power Marketing
In addition to the Commission's open access rules, there are other Commission policies that may affect rural electric cooperatives both as power buyers on behalf of their members and as power sellers in emerging competitive markets. For example, the rules do not generically permit public utilities to sell power at market-based rates. Public utilities may seek authorization to sell power at market-based rates on a case-by-case basis, and they must demonstrate that they and their affiliates lack market power. The Commission has permitted market-based rates for generation sales by a variety of sellers, including traditional investor-owned utilities, independent generators, and independent and affiliated power marketers. These sellers will provide more competitive options to electric cooperatives as well as other distribution utilities that purchase generation at wholesale on behalf of rural consumers.
It is also possible that some rural electric cooperatives will create or become affiliated with electric power marketers who themselves are public utilities subject to Commission authority and who seek to compete in wholesale power markets at market-based rates. In the past year the Commission received two such applications from power marketer affiliates of RUS-financed cooperatives. The Commission conditionally approved the marketers' market-based rates.
Retail Competition Issues
In addition to the FERC's recent initiatives to foster wholesale competition in electric energy markets, many states are actively considering or have begun retail customer choice programs that may affect the opportunities of rural consumers to benefit from competition. Some state legislatures and state regulatory commissions have ordered utilities in their states to give transmission access directly to retail consumers so that consumers can directly shop for alternative electric energy suppliers. The FERC has no authority to order transmission access directly to ultimate consumers or to regulate retail sales of energy to consumers. It also has no authority over local distribution lines. However, in its recent wholesale open access rules, the Commission concluded that if a state orders a public utility to provide unbundled retail transmission access in interstate commerce, the rates, terms and conditions of that transmission are subject to Commission jurisdiction. As noted above, this jurisdiction would not attach to RUS-financed cooperatives.
Summary
The Commission generally has no jurisdiction over distribution-only utilities, including rural distribution cooperatives. To the extent a cooperative engages in wholesale power sales or transmission in interstate commerce, the Commission has very limited jurisdiction if the cooperative is financed by the RUS. While a number of cooperatives have paid their RUS debt and have become public utilities subject to Commission regulation of their wholesale sales and transmission in interstate commerce, the vast majority of cooperatives are not regulated by the Commission.
The Commission does have limited authority over cooperatives, including RUS-financed cooperatives, under sections 211 and 212 of the FPA. If a cooperative sells electric energy and owns or operates transmission facilities used for wholesale sales, the Commission, upon application by an eligible customer, can order the cooperative to provide transmission service to that customer.
While the Commission has limited experience with, and jurisdiction over, cooperatives, its policies clearly can affect the consumers served by rural cooperatives. Most importantly, the Commission's recent initiatives to foster competitive wholesale energy markets will provide lower-cost power alternatives to all suppliers, including cooperatives, that serve rural electricity consumers.
Competition in generation markets over time is expected to provide significant benefits to all customers and new business opportunities for utility sellers. However, like others in the industry, some rural electric cooperatives will face transition issues. Except for narrow questions of reciprocity respecting transmission service, the transition issues affecting most rural cooperatives are not within the Commission's purview. However, it is entirely appropriate for the Congress to consider whether the Federal framework within which rural cooperatives operate should be modified to adapt to the changing electricity marketplace. While the Commission has no direct authority in this area, Commission staff will continue to be available to the Committee to provide such assistance as may be useful to you in considering these matters. I would be happy to answer any questions that members of the Committee may have.