TESTIMONY OF
CODY L. GRAVES

BEFORE THE SENATE AGRICULTURE COMMITTEE

REGARDING ELECTRICITY INDUSTRY RESTRUCTURING AND ITS EFFECT ON RURAL ELECTRIC COOPERATIVES

Mr. Chairman, I want to thank you for giving me the opportunity to address the Senate Agriculture Committee regarding electricity industry restructuring and the effect it will have on rural electric cooperatives. I am Cody Graves, and until last week, I was Chairman of the Oklahoma Corporation Commission. The Oklahoma Corporation Commission is a three-member panel elected statewide that regulates public utilities, oil and gas production and exploration and transportation in the state of Oklahoma. As a member of the Oklahoma Corporation Commission, I also served on the National Association of Regulatory Utility Commissioners Electricity Committee. Currently, I serve on the Harvard Electric Policy Group and the Consumer Energy Council of America Research Foundation's Electric Utility Restructuring Forum.

I am here today to discuss recent developments in electricity industry restructuring in Oklahoma. Specifically, I will address the potential effects this restructuring will have on rural electric cooperatives in my home state. While many low cost statesare waiting on federal legislation to develop a competitive marketplace in electricity, Oklahoma has decided to move forward decisively. our legislature recently passed Senate Bill 500, the Electric Restructuring Act of 1997, introduced by Senator Kevin Easley, and on April 25, it was signed into law by Oklahoma Governor Frank Keating.

Our view of restructuring is centered around the fact that Oklahoma is a low cost state. When prices charged by electric providers are among the lowest in the nation, the issues driving restructuring are different from those found in states where prices are much higher. We want to proceed cautiously to ensure all of our consumers and industry are represented in the process.

More than two years ago, the Oklahoma legislature created the Joint Electric Utility Task Force to examine restructuring issues. This Task Force revealed a multitude of issues that would require legislative and regulatory review before restructuring can become a reality.

As introduced, Senate Bill 500 called for full retail customer choice by January 1, 1999. In the eyes of many, it did not give adequate time for the Corporation Commission, industry and consumers to develop a reasonable and responsible framework for the opening of electricity markets.

The final version of Senate Bill 500 passed by the Oklahoma legislature is a fair and equitable piece of legislation that will allow a competitive marketplace and retail choice in the electricity industry.

The new Oklahoma law gives the Oklahoma Corporation Commission a clear mandate to move quickly over the next four years to develop a regulatory framework appropriate to allow for competition in the electricity industry. The law directs the Oklahoma Corporation Commission to study and propose both regulatory and statutory changes to the legislature on how to best restructure the electricity industry.

This Act recognizes that it will take some time to unwind the over 60 years of public policy that have resulted in our current electricity industry. The Act provides the mechanisms needed to ensure electricity restructuring occurs in Oklahoma in a timely manner while safeguarding the current economic advantages we enjoy. The magnitude of this legislation's impact on Oklahoma's economic future cannot be understated. The changes that will flow from this legislation will materially affect Oklahoma's economic prosperity well into the 21st Century.

The new law mandates that the Oklahoma Corporation Commission and the Oklahoma Tax Commission undertake five studies covering more than 40 restructuring issues. The studies will result in the development of the road map for restructuring in Oklahoma. The first study regarding the creation of an independent system operator (ISO) is the cornerstone for restructuring. Each subsequent study builds on that ISO cornerstone. The technical issues study will provide the regulatory and legislative solutions that will address system reliability, unbundling of generation, transmission and distribution and market power. The financial issues study will suggest solutions to issues such as stranded investment, access fees and utility financing. The consumer issues study will address such vital consumer protection issues as distribution service territories, the obligation to connect and licensing of retail electric energy suppliers.

The issues of tax equity will also be studied and solutions developed to make sure that Oklahoma's state, county and local government needs are continually met and that the Oklahoma electric customer is not inappropriately taxed for electric energy use. It is important to know that under the Act, customer choice will not occur until tax parity is achieved. In Oklahoma, taxation may be the most difficult aspect of deregulation to resolve.

When restructuring is completed in Oklahoma on or before July 1, 2002, the necessary regulatory and legislative solutions will be in place to ensure that rural electric cooperatives, investor-owned utilities, entrepreneurs and all of our citizens will benefit from these efforts.

The reason I have gone into such detail about the process of passing this legislation is that it is very important to consider each and every aspect of deregulation and the implications deregulation will have for all parties. In Oklahoma, the rural electric cooperatives played a vital role in each step of this long procedure. In fact, deregulation legislation would not have passed without the efforts of the rural electric cooperatives.

In Oklahoma, rural electric cooperatives serve over 375,000 meters and have over 104,000 miles of wire. The rural electric cooperative customer base ranges from residential customers to such large operations as Braum's Dairy Farm and Republic Gypsum. Most large loads for rural electric cooperatives in Oklahoma are oil wells. Many of these oil wells are low-producing stripper wells that are so important to Oklahoma's economy. Rural electric cooperatives serve some of Oklahoma's most important employers.

In Oklahoma, the rural electric cooperatives were the first to press for competition. The rural electric cooperatives knew change in the industry was inevitable and plunged into the debate as proponents of competition.

During the debate about deregulation in Oklahoma, the rural electric cooperatives' main stipulation in any agreement was the existence of firm boundaries. Senate Bill 500 contains a firm boundaries requirement. Firm boundaries will be the first step in eliminating exorbitant stranded costs. Furthermore, naming a provider of last resort will ensure safety and reliability and prevent the duplication of facilities.

While not every rural electric cooperative is currently ready for a deregulated, competitive environment, most are ready, willing and able to compete. Some rural electric cooperatives will look at deregulation with fear and trepidation. However, if deregulation is done in the proper manner and rural electric cooperatives jump into the negotiations as they have in Oklahoma, deregulation can work successfully for the cooperatives. By becoming a part of the process, Oklahoma cooperatives have ensured they will be providing service to their customers well into the next millennium. Rural electric cooperatives must be involved in deregulation negotiations to ensure their concerns are heard. Rural electric cooperatives cannot sit back and deny that regulation will happen. Rural electric cooperatives must be willing to move forward and make the necessary changes to thrive in a competitive marketplace. If they do not, cooperatives will not be able to survive.

In fact, rural electric cooperatives that are ready for competition will not only be able to stay alive. They will have opportunities to enter new areas of customer service. Rural electric cooperatives will be able to enter into partnerships with the telecommunications, cable and energy industries. The new partnerships provide rural electric cooperatives with tremendous opportunity for growth and expansion.

The time has come to embrace the principle of competitive restructuring. I support the concept of customer choice, and I believe we must have a reasonable transformation of our electric industry from one of monopoly regulation to one of competition. Restructuring the electricity industry will be valuable to all consumers in the long run if it is allowed to occur properly.

We must guard against the "one size fits all" approach that is all too often advocated at the federal level. To be sure, there are appropriate areas for federal guidance and legislation. Primary among them is the issue of regional transmission policy. How should states work together to develop seamless regional markets? Additionally, Congress must consider the changes in RUS policies necessary to allow rural electric cooperatives to make the transition to competition.

Congress should not become bogged down in the quagmire of stranded costs. What may be a reasonable, prudent and necessary expense in California may not be the same in New Hampshire. Those kind of fact-specific decisions can best be made on the state level. If each state is allowed to proceed with deregulation, the concerns of all stakeholders are more likely to be heard. Furthermore, if every rural electric cooperative approaches deregulation with the same fervor for competition as Oklahoma's cooperatives and is prepared to face the challenges of an open marketplace, rural electric cooperatives will certainly be able to survive and succeed in a deregulated environment.

This is a critical time in the development of state and federal electricity restructuring policy. During this time of fundamental change in the electricity utility industry, I am pleased to be a part of the process. I would like to commend the chairman for the effort he and his staff have expended to hold this hearing. Change is never easy. However, by working together in a cooperative fashion, I know that state and federal policy makers can and hopefully will make the right choices.