2.

FERC's authority to order wheeling under Sections 211 and 212 of the Federal Power Act should be strengthened and expanded. FERC should have the authority to mandate wheeling by any utility which uses its transmission system to buy or sell electricity in competitive wholesale markets, if FERC found that the utility had unreasonably withheld transmission services with anti-competitive purpose or effect. These wheeling orders should be fair to the utility customers who own the transmission system and not jeopardize the reliability of the system.

C. Prohibit Hybrids of Rate-Based Facilities

PUHCA amendment should exclude hybrid EWGs where a part of the facility is
rate-based and a part is not. This would help prevent cross-subsidy which might be
more difficult to detect when a facility, wholly-owned by a utility, is partially in,
and partially out, of rate-base.

Easing Unnecessary Regulatory Burdens

a. Permit State Option of Limited Retail Sales

Incidental retail sales by EWGs should be allowed to the extent permitted under
state law. Under existing law, some states permit QFs to make limited retail sales.
A similar distinction was adopted by Congress as part of the Clean Air Act
Amendments' definition of an independent power facility.

b. Exempt EWGs From State Utility Law Where Appropriate

EWGs without utility ownership interest should be given the same exemption given to QFs from state utility statutes regulating financial and corporate matters.

This would give independents relief from the state utility statutes which impose financial and corporate organizational restraints on entities which fall within the state "utility" definition.

Until such time that wholesale transmission reforms make markets truly competitive, additional protections are appropriate. A protection which Congress should consider is to limit ownership in a wholesale generator by franchised utilities to 50 percent or less. This recommendation is intended to follow the limitations on utility ownership of generation facilities which exist now under PURPA and PUHCA. Under current PURPA rules, a utility's economic interest in a QF is limited to 50 percent after commercial operation. Under current PUHCA rules, a utility holding company may own 100 percent of a generation facility until the date of commercial operation, at which time its interest would have to be reduced to 10 percent or less (in the case of more than one facility). Increasing utility ownership to 50% would provide the utilities the same ownership for EWGs as for QFs.

C.

Title XV Can Be Strengthened to Promote International Sales

Companies should be permitted to own EWGs abroad without restriction. EWG facilities should be permitted to be located outside the United States without restriction or condition. This

would allow US owners of EWGs or QFs who wish to own or control generation facilities as part of a holding company structure outside the United States to do so without coming under the jurisdiction of the PUHCA.

NIEP believes that PUHCA reform structured to prevent abuse of market power and promote free and fair competition offers maximum flexibility to utilities, on behalf of their ratepayers, and the states which regulate them, to select the kind of power which best meets their needs. Participation in wholesale generation markets is voluntary. Utilities who need new capacity, in conjunction with their state regulators, would be free to decide whether or not they

In short, PUHCA reform will give utilities additional supply options to consider in meeting their ratepayers' needs without closing any existing ones. By exempting wholesale generators from regulation under PUHCA, Title XV of S.341 will create the opportunity for competition in power markets to flourish. We believe that the legislation can be strengthened and perfected by adopting provisions to protect more fully against anti-competitive and anti-consumer abuses. The goal of increased efficiency through competition could quickly be subverted if measures are not in place to protect markets against entities possessing market power. We also recommend that the legislation explicitly provide for an exemption for independents which wish to own and operate electric facilities abroad.

Reform of PUHCA will lead to greater efficiency, save consumers billions of dollars over the next decade, and make our industrial and manufacturing sectors more competitive internationally. It will also allow independents to invest in and operate plants overseas. It will give regulators better market information in protecting ratepayers and give utilities more options in meeting their supply needs.

We look forward to working with Members of Congress in achieving a more efficient and secure energy future for the United States.

The CHAIRMAN. Thank you very much, Mr. Elston.
Mr. Hempling.

STATEMENT OF SCOTT HEMPLING, ON BEHALF OF THE ENERGY
PROJECT, ENVIRONMENTAL ACTION FOUNDATION

Mr. HEMPLING. Thank you very much, Mr. Chairman.

I appreciate this opportunity to appear before you again and I commend you and the committee for initiating this historic debate. Mr. Chairman, the generation and transmission sectors in our industry are marked by systematic, anti-competitive practices. If we want to enhance competition, we must address those practices.

Title XV assumes them away. Worse, title XV rewards anti-competitive practices by freeing the practitioners to expand into new territories without review.

Our industry also is marked by great uncertainty over the quality and predictability of regulation. No one is sure who has jurisdiction over which types of transactions. No one is sure if regulators have the tools they need to monitor a rapidly restructuring industry.

Title XV assumes this problem away as well. We cannot assume strong competition in an industry which is anti-competitive. We cannot assume reliable regulation in an industry which is fast becoming unregulated. Broader legislation is difficult to imagine.

I turn now to some specific problems presented by title XV. Title XV would permit any company in any line of business to buy wholesale generators, as many as they desire, anywhere they desire, using almost any type of financing they desire, and face no advance review.

This regime would produce five major problems. The first is the self-dealing you have heard much about today. Title XV would multiply the abusive self-dealing, which has occurred under PURPA, as utilities acquired qualifying facilities outside the rules of the Public Utility Holding Company Act.

Second, self-dealing of another kind. The ownership by construction contractors, fuel sellers, and others who would self-deal with the wholesale entities which they control.

Third, evasion of State regulation. Given the current uncertainty over Federal/State jurisdiction, utilities still can use corporate form to avoid State regulation at the very point in history when States are using innovative methods to encourage efficiency and reduce costs.

The opt-out provision, which is newly in this proposal, enables a utility who is unsure of its ability to meet competition to decide unilaterally to prevent that competition simply by filing a declaration. That provision, not only erases traditional State regulation, it authorizes a violation of the fundamental utility obligation to operate at least cost.

Fourth, title XV would enable the use of transmission monopolies to create generation monopolies. Title XV fails to distinguish between two types of entities. The true independents, such as those represented by Mr. Elston, who are entrepreneurs who raised and risked their own capital, unassisted by control of a distribution or transmission monopoly on the one hand. And on the other hand,

entities which are financed, owned, and controlled by utilities with monopolies over transmission facilities.

Mr. Chairman, transmission facilities are the highways of commerce in this industry. We will not have competition generation on a permanent basis if competing sellers cannot move their products to market, or if buyers cannot access the least expensive product. Fifth, title XV would permit the unlimited mixing of utility and nonutility businesses. A key component of consumer protection in today's industry, is the separation of utility and nonutility businesses, although there are some exceptions. Title XV would breach that wall.

I would like now to rebut two separate arguments that I have heard in favor of title XV. First, proponents of title XV argue that State regulators can detect and correct all consumer and competitive abuses. State regulators disagree.

Speaking of consumer's power company in Michigan, the Hon. Ronald Russell of the Michigan Public Service Commission recently explained how "Corporate structure and transactions between corporate affiliates can be manipulated to embrace the concept of competitive generation while insuring that all competitive advantages reside with the holding company affiliates."

Commission Russell concluded that, "The situation can only get worse if revisions to the Holding Company Act encourage all of our electric utilities to emulate consumer's power company. The key to mitigating utility abuses is to prevent them from happening in the first place."

Second, we have heard about trends towards voluntary transmission access. Mr. Chairman, transmission access cannot develop on a consensual basis when the negotiations are between monopolists and their captives. Moreover, I believe utilities interests in voluntary transmission access will last only as long as the excess generating capacity it is intended to market. There will be less transmission access when there is less generation excess.

Now, Mr. Jordan and Mr. Smith, as I understand it, support the statutory status quo. Under that status quo, utilities use their control over transmission to lock out their competitors. Under that status quo, utilities, some of them, criticize independent cogenerators, then they self-deal with affiliated cogenerators, costing ratepayers hundreds or millions of dollars. Some change, clearly, is necessary.

But title XV is not that change. The appropriate change should have six, simple components: preclude self-dealing; grant transmission access rights to the most efficient deals, subject, of course, to transition rules which protect the native load customer; limit mergers and acquisitions to the least-cost proposals; rationalize State and Federal jurisdiction; require least-cost planning at the Federal Energy Regulatory Commission; and limit investment by utilities in nonutility enterprises.

In conclusion, Mr. Chairman, the question is not whether we should have more competition in generation markets. Everyone agrees with that proposition, except some utilities who fear competition. But we must not confuse more competitors with more competition.

Some, in this debate, cast the issues as a debate over two worlds, the world of competition represented by utilities supporting title XV. And the world of no competition represented by the utilities opposing title XV.

There are, in fact, three worlds. No competition, unfair competition, and fair competition. I believe title XV is unfair competition. It authorizes monopolization, a temporary rivalry among entities with growing market power. Title XV may add competitors in the short run, but it will not add competition in the long run.

Mr. Chairman, I appreciate this opportunity to present my views. [The prepared statement of Mr. Hempling follows:]