Statement of Robert Haug
Executive Director
Iowa Association of Municipal Utilities

Before the Committee on Agriculture, Nutrition and Forestry
U. S. Senate

July 8, 1997

Restructuring the Electricity Industry: The Impact on Rural America

The Iowa Association of Municipal Utilities (IAMU) represents 543 Iowa communities that operate electric, gas, water, or communication utilities. On behalf of our members, I am pleased to present these comments on restructuring the electricity industry.

Iowa has 137 municipal electric utilities. Of these, nearly half serve fewer than 1,000 customers. Municipal utilities also serve many farm customers. For example, Senator Grassley's farm in Black Hawk County is served by Cedar Falls Utilities.

Iowa's municipal electric utilities are in a strong competitive position to continue to provide excellent service to their communities in a restructured marketplace. However, we are concerned about the impact of restructuring on Iowa as a whole and on other rural areas in the nation. Electric industry restructuring is an issue of grave importance to Iowa and to the U.S.; but restructuring presents special risks to the nation's rural areas. It is clear that unless care is taken in making major changes to a huge sector like the electric industry, there could be big winners and big losers. Rural areas cannot afford to lose ground in this restructuring.

Many rural Americans are skeptical of deregulation

Rural states like Iowa have already experienced deregulation in the railroad, airline, and telephone industries. The impact of deregulation in those industries has not been thououghly positive. For most Iowa consumers, farmers and businesses, deregulation has meant reductions in availability of rail and air service and increases in rates. Deregulation of the telecommunications industry has also had its down side for rural communities, where current service providers seem reluctant to invest in new technology in order to concentrate on larger and more competitive markets.

A measure of the dissatisfaction and frustration that many Iowa communities have for their telephone and cable TV providers can be found in recent elections to establish municipal communications utilities. Voters in 14 of our member cities supported new municipal systems by electoral margins averaging 86.9 percent. The last two elections provide an interesting window on voter sentiment. At Laurens, only a single vote was registered against establishing a municipal communications utility. At Spencer the yes vote was 91%, despite a campaign that saw the local pro-municipal citizens group outspent by 130 to 1. The incumbent utility spent over $205 for each "no" vote. (Exhibit 1)

Municipal telecommunications elections are scheduled in several other Iowa communities and at least six cities have taken preliminary steps to establish new municipal electric utilities. We think these trends demonstrate consumer doubt that the market will bring them the best service at the lowest price. Instead, these consumers seem to favor local community control of these critical services. And while no one would dispute the essential importance of telephone service to individuals and business, restructuring of the electricity industry carries even higher risks for individuals and business than telecommunications deregulation.

Restructuring of the electricity industry is the subject of several bills that have been introduced in both houses of Congress. It has also been the subject of an investigation by the Iowa Utilities Board (IUB) that has extended for more than two years. The IUB review process has included input from a broad-based advisory committee, public comments from nine town meetings, and staff research. An IUB staff report on the inquiry, issued last January, concluded that there is no compelling reason for Iowa to move quickly to retail competition. We believe that conclusion is right for Iowa and for much of the nation.

Municipal utilities' competitive position

Iowa's municipal electric utilities have a unique perspective on industry restructuring. We face neither high risks nor substantial rewards. Like our rural electric friends, we exist to provide reliable, low-cost service for our customer-owners. Municipal utilities in Iowa have low rates, strong public support, and virtually none of the potential for stranded costs that make many other utilities resistant to proposals for retail competition.

Low rates. Iowa is considered a low-rate state, even for investor-owned utilities. Nevertheless, residential rates of Iowa's investor-owned utilities average more than 36 percent above those of municipal electric utilities. What's more, transmission access provisions of the Energy Policy Act of 1992 are beginning to yield more competitive wholesale power supplies, lowering our costs for purchasing power.

Strong public support. The elections for new city communications systems are just one example of the public support for community-owned, locally-controlled, not-for-profit utilities. A 1996 editorial in the Adair County Free Press illustrates the well-earned reputation for efficient operation enjoyed by Iowa's municipal utilities. "Greenfield has a well-run municipal utility," the paper said. "Best of all, Greenfield municipal utilities has an office here. These are real people. You can talk to them behind the counter or on the phone. Further, they will be here tomorrow and next month and next year." In another example of public support, Spencer Municipal Utilities was named 1995 Corporate Citizen of the Year by that city's newspaper, The Daily Reporter. I believe the public supports municipal utilities because they trust their local elected and appointed officials.

Low risk of stranded costs. For considerably more than half our members who own no generation or who own only peaking or backup generation, there is virtually no risk in allowing our customers to search out alternative power supplies. If generation costs really do go down, these utilities that buy energy at wholesale are in a position to pass along power cost savings to customers or reduce purchases to offset lost customers. Even for our members who own base load generation, restructuring risk is low, because most are joint owners of very low-cost units with other municipal, investor-owned, and rural electric utilities.

Iowa Citizens' Energy Alliance

If municipal utilities face little risk in industry restructuring, why are we concerned with the speed and direction of restructuring that many now advocate? In short because we share a widely-held view that a rapid move to retail competition presents enormous risks to consumers. Over a year ago, our association joined with organizations as diverse as the American Association of Retired Persons, the Iowa Farm Bureau Federation, the Iowa Federation of Labor, and the Izaak Walton League of America to form the Iowa Citizens' Energy Alliance. We are committed to a common sense, step-by-step approach to restructuring the electricity industry. A list of other Alliance members and a set of principles we agree should guide industry restructuring in Iowa are attached. (Exhibit 2)

Risk factors for rural Americans

As attractive as it sounds when couched in terms of "customer choice," retail competition poses many risks, especially for low-rate rural states like Iowa, Indiana, Minnesota and Wisconsin. For example, Iowa's sound state policies regarding development of electric generating resources and good management by the state's utilities have combined to place industrial rates among the lowest in the nation. Under these conditions, retail wheeling may cause our rates to rise, as regional disparities are reduced by the market. Consider that average industrial rates are 42 percent higher in Illinois than in Iowa and that industrial customers of Commonwealth Edison pay rates 66 percent higher than industrial customers of IES. Industrial customers of New York's consolidated Edison pay 222 percent more than the average Iowa industry. Similar customers of California's PG&E pay 88 percent more. The point is, to enjoy Iowa's low rates now, industry must come to our state. When retail competition is allowed, out-of-state industries can receive lower rates by simply importing our electricity.

A recent study from Kansas confirms our concern about the negative impact of competition on rural customers. The study commissioned by three rural electric cooperatives estimated that rates could go up in rural Kansas by as much as 35 to 85 percent.

Another risk of a rapid transition to retail competition is that costs may be shifted from the largest industrial users to residential, commercial, and small industrial customers. Municipal utilities invest a great deal of time and effort in economic development and we have seen more growth from strengthening small and medium-sized Iowa businesses than from the big national and multinational industries that are demanding retail wheeling now.

Holding company mergers pose another threat in restructuring, namely, the consolidation of anti-competitive market power. In Iowa alone, we have gone from 7 investor-owned utilities to 3 (soon to be two) in just over seven years. Across the country there have been over twenty mergers announced between large investor-owned utilities since passage of the Energy Policy Act in 1992 – ten of them in 1996 alone. We think it's fair to ask how reducing the number of competitors – particularly through expansion of utility holding companies – will help create a vibrant competitive market. Compounding the market power risk associated with mergers, Congress seems poised to repeal the already weakened Public Utility Holding Company Act. At a minimum, that action should be deferred until competitive structures are in place.

Some of our concerns about mergers and market power are being addressed. For example, the Federal Energy Regulatory Commission (FERC) has moved to change the way in which regional transmission facilities are controlled. Recently the FERC signaled that divestiture of generating assets may be required in mergers of large utilities. While these are positive steps, Congress and state legislatures must understand that new institutions and procedures intended to limit market power will not be built overnight and their effectiveness is not yet known.

Another risk of restructuring is diminished levels of customer service. To justify claimed merger savings or to otherwise reduce costs in anticipation of retail competition, many utilities already have cut back on personnel and maintenance. In rural communities across Iowa, utility service centers have been closed. Unlike service from the local municipal utility crew, service crews for many investor-owned utilities are now dispatched from distant service centers. For consumers in rural Iowa, lengthy service delays may be too high a price for restructuring. In the case of utility gas customers, longer service response time presents a risk to life and property and must not be tolerated.

The loss of system reliability is another risk, closely related to diminished customer service. Simply put, consumers who are used to having light and power when they flip a switch or push a button may not have the same certainty of reliability we now enjoy. There is evidence that profit already is replacing reliability as the key decision point in utility operations. Last summer we saw two major outages in the western United States that left millions of customers without power. Although restructuring proponents try to place the blame elsewhere, the critical fact in those cases was that normal maintenance was neglected and power lines sagged into trees along major transmission lines.

Another example of diminished system reliability recently took place in our own region. Last September, winds downed transmission lines in Manitoba, causing a loss of generator support. The problem was not corrected for nearly an hour – far longer than industry standards allow. The delayed restoration occurred as one utility after another waited for the next guy to drop electrical loads that would have restored the system. No one wanted to act first and threaten their own revenues – a clear example of profit-driven engineering. You probably won't hear about these risks from utility engineers, it's the folks in marketing who now call the shots. Nor will you hear from independent power marketers, who view any question about reliability as a threat to their business. Nevertheless, the risks are real and must be addressed as a precondition to restructuring.

More reliability problems are being predicted in anticipation of industry restructuring. Illinois and eastern Wisconsin face possible brown-outs or rolling black outs this summer. In this case, the immediate cause is that five nuclear power plants have been down – two in Wisconsin; three in Illinois. In the transition to retail competition, we must be confident that concern for profit does not drive decisions about the safe operation of high-cost nuclear power facilities.

These examples of the risk that industry restructuring places on system reliability come as we have begun to deal with wholesale competition enabled by passage of the Energy Policy Act of 1992. Risks will only increase when utilities become retail competitors.

A final risk factor that merits mention here is the potential negative impact on the environment. Through state regulatory policies and a variety of federal programs, utilities have made some limited progress in encouraging development and deployment of energy efficient technologies. However, just the expectation of industry restructuring has caused a retrenchment from energy efficiency programs. Iowa has recently repealed legislative mandates for energy efficiency spending by utilities. Utilities are also backing away from energy efficient appliance rebates and other utility-funded programs aimed at reducing demand for electricity.

Other environmental impacts will depend on the extent to which price alone determines the mix of electric generation facilities available to energize the nation. An unregulated market for generation will not price external environmental costs. Furthermore, the market may not provide long-term economic security that comes from having a mix of fuel types. If natural gas-fueled generation is priced below coal, nuclear, or wind, who will build the higher-cost alternatives? What risks will over-dependence on a single fuel mean to our economic security.

A price-driven market will also make it more difficult for the U.S. to significantly reduce our disproportionate contribution to global climate change. This potential limit on public policy comes at the very time when there is growing scientific consensus on the issue and only a handful of scientists – mostly in the employ of coal companies and utilities – continue to deny human impact on climate change.

Winners and losers in industry restructuring

There are other players in the debate over industry restructuring who have more at stake than municipal utilities. Potential winners include large industries, who want to use their market clout to leverage the best deals for energy. For industries with operations in many states, it doesn't matter if rates they pay in Iowa or Indiana go up, as long as their overall costs are cut. Low-rate utilities and energy marketers are also among potential winners. Their goal is to take below-market, regulated generating assets away from the customers who have paid for them and sell the output in higher-priced markets. Finally, winners include high-rate states, who can mitigate their own regulatory failures and management errors by sharing their neighbors' more efficient resources.

Expected losers in restructuring of the electricity industry include residential, commercial and small industrial customers who lack the market clout of national and multinational giants. High rate utilities and their investors are also at risk, though the few states that have pioneered in restructuring have provided for recovery of "stranded" above market investments. It appears that taxpayers will take the hit for the investment errors of stockholders and utility executives. Finally, low-rate states, like Iowa, are also expected to be losers. Even many proponents of retail competition concede that our rates may rise as a result of industry restructuring.

Some Conclusions and Recommendations

It seems fair to conclude that the electricity industry will be restructured along the line of transportation and communications industry. The key questions seem to be how quickly will it be done, will states be given latitude to adopt variations on the theme or will the mandate come from Congress, will we have the wisdom to foresee the abuses of deregulation or recognize them when they occur, and if we do, will we have the political will to do something about them.

The electricity industry is huge, the stakes are high, and there are many opportunities to get restructuring wrong. It's worth noting that the industry has $200 billion in annual sales. It is larger than either the telecommunications or auto industries. In restructuring an industry this large, there will be winners and losers. It won't be Lake Wobegon, where all the rates are below average.

What can Congress do to raise the odds of a successful transition from regulation to competition? Congress should adopt "do-no-harm" as a guiding principle for restructuring. This means avoiding a too-rapid transition. High-rate states should be allowed to experiment first. We can wait to learn from those states with reason to move ahead first. There is no need for Congress to mandate action by the states.

Second, Congress should not prematurely abandon its policy goal of developing a fully-competitive wholesale market for electricity. In the Energy Policy Act of 1992, Congress recognized the value of increasing competition for generation of electricity. It did so by requiring owners of transmission facilities to allow others access to their lines. Implementation of that policy shows very promising signs, with new transmission institutions already in place in some regions. The policy goal has yet to be fully realized, however, as existing generation has to be freed from long-term contracts. Demand also needs to catch up with excess generating capacity, so that new non-utility entrants can challenge the least efficient utilities with new facilities. Now, excess generation is finding niches in the wholesale market and in retail wheeling pilot projects – at levels that are at or even below the cost of production – creating the illusion that dramatic cost reductions are in store for everyone. New independent non-utility generators must also be given opportunity to emerge in the wholesale market.

Third, Congress needs to promote and strengthen institutions that will enable real competition to take place. This includes giving adequate regulatory authority to the Federal Energy Regulatory Commission (FERC) and the Justice Department to create and maintain vigorously competitive regional electricity markets. For example, the FERC must have clear authority to make sure regional transmission systems are not used by owners to block competition. Mergers that increase concentration of generation ownership should be blocked if they do not achieve clear public benefits. And secret contracts that benefit large users at the expense of residential consumers, farmers, and smaller business and industry should be prohibited.

Finally, we ask Congress to maintain room for public power in a restructured industry. Abraham Lincoln once said that "[t]he legitimate object of government is to do for a community of people whatever they need to have done, but cannot do at all in their separate and individual capacities." Voters in communities across the nation have chosen to establish their own municipal electric utilities for well over 100 years. That choice is critically important now as we move toward the uncertainties of a deregulated electricity industry. Some restructuring proponents want Congress to remake municipal utilities as weakened and ineffective images of private utilities by eliminating local government's access to tax exempt financing or by ending our historic partnership with the federal government on multipurpose hydroelectric projects. When the people choose public power, they deserve the real thing – community-owned, locally-controlled, not-for-profit municipal utilities that will meet their needs for essential electricity service.

Thank you for the opportunity to present these views to the Committee.Exhibit 1. Elections for City Communications Utilities in Iowa Cities CityYear% ApprovalCityYear% ApprovalCedar Falls199470%Akron199491%Hull199497%Rock Rapids199483%Sibley199491%Bancroft199485%Hawarden199496%Harlan199571%Grundy Center199693%Coon Rapids199687%Manning199686%New London199677%Laurens199799%Spencer199791% Exhibit 2. Iowa Citizens' Energy Alliance Principles for Restructuring of the Electricity Industry in Iowa The organizations listed below urge state officials and policy makers to carefully consider changes in the structure and policies that guide operation of the electricity industry. We urge that the following principles be met before implementation of any restructuring plan: 1. Changes in the structure of the electricity industry in Iowa must not be undertaken without full and informed public debate. 2. Benefits of restructuring plans should be measured primarily in terms of economic and social consequences within the state of Iowa. 3. The results of restructuring should be reasonably predictable and should ensure that all customers have access to electrical service at fair and reasonable prices. 4. Restructuring should be consistent with the goals of protecting the environment, cost effective energy efficiency programs, and cost-effective sustainable energy technologies. 5. Restructuring should maintain adequate staff levels and training to ensure safety, reliability, customer service, and planning standards. 6. The State of Iowa should maintain oversight of the electric utility industry. American Association of Retired Persons Iowa Association of Municipal Utilities Iowa Citizens Action Network Iowa Coalition for Housing and the Homeless Iowa Community Action Association Iowa Environmental Council Iowa Farm Bureau Federation Iowa Federation of Labor, AFL-CIO Iowa League of Cities Iowa Renewable Energy Association (I-Renew) Iowa State Conference - International Brotherhood of Electrical Workers Iowa Sustainable Energy for Economic Development Coalition Iowa Utility Workers Conference - International Brotherhood of Electrical Workers Izaak Walton League of America Missouri Basin Municipal Power Agency North Iowa Municipal Electric Cooperative Association Union of Concerned Scientists