chasing wholesale power at rates approved by the FERC, as contrasted to the utilities or other choices for cheaper power. This is the essence of the Pike County doctrine.

However, the Supreme Court has not yet ruled on its validity. The recent Supreme Court Mississippi Power and Light decision contains broad dicta concerning the preemptive effect of the Federal Power Act on the State's ability to review the prudence of utility wholesale power purchases.

Based on this decision, San Diego Gas and Electric has challenged our State's commission's authority to review wholesale power purchases over the southwest power link, and our right to disallow imprudently incurred costs from the retail rates.

Thus, even outside of the context of the multi-state holding company, where FERC has set the wholesale power rate and allocation of power among multistate subsidiaries, Mississippi Power and Light has resulted in claims that the Federal Power Act bars a State regulatory body from review of the prudence of wholesale purchasing decisions.

Therefore, PUHCA reform must be premised on legislation ensuring the right of each State commission to review the prudence of wholesale purchasing practices of each distribution utility subject to its authority.

Absent jurisdictional preemption, our commission exercises broad powers to regulate purchasing relationships between a utility and its subsidiary or affiliate. We review all such transactions to determine whether or not it is reasonable for the ratepayers to pay these costs.

When we find the utility conducted itself imprudently or unreasonably, we can and we do disallow costs. This ensures that utility shareholders, rather than the ratepayers bear the financial consequences of imprudent or unreasonable decisions by the utility.

California law gives us this power under our broad authority to set just and reasonable utility rates. Our commission has, in fact, adopted disallowances for purchase power cost between California utilities and their subsidiaries. We have severely limited the dividends accruing to a holding company when it is milking a subsidiary's retained earnings.

California law also prohibits utilities from issuing stocks and bonds for nonutility or affiliate purposes. This empowers us to prevent many financial problems which might otherwise arise.

It is important to keep in mind, however, the California legislation is more empowering in some cases than the laws of other States. The issues of buy-sell arrangements between affiliates has been a problem for decades. The problem does not arise just in the area of independent power production. This is one reason that our commission already has the tools to control these problems. We can require competitive bidding, prohibit transactions outright, impute reasonable costs if abuses have occurred. But first, we have to uncover those abuses.

We also have the broad authority to examine financial and other records of affiliates. Our statute empowers us to review any entity's financial information deemed necessary to evaluate the appropriateness of a regulated, California utilities transaction, with an affiliate, wherever located.

Our commission has the power and the tools to audit and reform affiliate self-dealing, cross-subsidies, and other potential abuses. But one other important factor must be considered. That is the enormous burden that the PUHCA exemption for electric wholesale generators will place on State commissions.

One can reasonably anticipate that once PUHCA restrictions are eased, the number of transactions to be audited will skyrocket. Discovering the abuses will take an enormous number of hours of regulatory time, scores of staff, and increased enforcement budgets. So we must formulate the practical ability to use our regulatory goals in order to achieve our mutual goals.

In conclusion, I support reform of the Public Utility Holding Company Act. But the reform must affirm the State's power to review the prudence of wholesale power purchases at rates set by FERC. When coupled with the proper regulatory oversight, the results will be increased efficiencies for the utilities and independent power producers, lower costs for the consumer, and a sounder environment.

I urge the passage of title XV of S. 341 with the modifications I have recommended here. Thank you for the opportunity to speak to you.

[The prepared statement of Ms. Eckert follows:]

Title XV of S.341

March 14, 1991

Testimony of Patricia M. Eckert, President, California Public Utilities Commission before Senate Committee on Energy and Natural Resources.

Good afternoon. I am Patricia Eckert, President of the California Public Utilities Commission. I am privileged to testify before you on Title XV of Senator Johnston's bill, S. 341. The California Public Utilities Commission regulates some of the nation's largest utilities which are not affiliated with registered holding companies. While our Commission has not yet taken a formal position on either S. 341 or S. 570 (introduced on behalf of the administration), I applaud the efforts of both the administration and Senator Johnston to develop a National Energy Strategy. I support the substance of S. 341's Title XV, with a few modifications.

I. PUHCA Reform Is Directed to Enhanced Competition in Wholesale Power Markets

The California Public Utilities Commission is an innovator in designing methods to create greater competition in wholesale power markets. We are highly supportive of efforts to allow greater competition in these markets. Independent power producers (IPPs) can potentially offer energy at lower prices than utilities can achieve through building their own generation or from purchasing bulk power from other utilities. But, states still must retain the option to permit utilities to build their own power plants as part of the assessment of the most prudent generating sources for a given state. Independent power producers can, and often do, perform better than utilities in producing energy in a more cost-effective manner. Additional benefits accrue to consumers and society as a whole due to the production of energy in an environmentally sound manner. Consideration of all available options for generating sources will result in lower capital costs for new generating capacity, a broad range of generating technologies, improved generating efficiencies and reduced risks to consumers of cost overruns for new generating capacity. The ultimate result is lower electricity prices.

Our Commission has observed a shift in regulatory emphasis to more competitive markets coupled with increased oversight powers under state and federal laws since the Public Utility Holding Company Act of 1935 was enacted. Certain reform of the Public Utility Holding Company Act (PUHCA) is a necessary step to enhance the evolution of wholesale power markets. We believe California is on the leading edge in "non-price bidding" concepts which identify the best bidder to serve all consumer interests not necessarily just the lowest price bidder. But, to prevent utilities from exercising a de facto veto of competitive bidding, Title XV's "opt-out" declaration provision should be eliminated.

March 14, 1991

Bidding assures an equitable marketplace in which all types of generating sources compete. Ultimately the market decides, through bidding for resources, those bid components which society values most and, in some cases, whether to avoid some types of generation. In order for this process to evolve, reform of PUHCA is essential. Reform will also produce increased investment opportunities in the global market and the export of goods and services by America's electric supply industry.

Under current PUHCA strictures, development of independent power generation has not been prevented completely. Creative ownership arrangements have resulted in some development of IPPs without subjecting the owners to PUHCA regulation. But, PUHCA provisions do bar development of more than one non-qualifying facility (QF) generating unit by a single corporate entity. And, PUHCA has impeded large scale development of multiple generating units by a single owner, such as a utility. Whether such large scale development is necessary to meet California energy needs will eventually be determined by market forces. It is interesting to observe that California has no non-QF independent power producers at this time. So, our market cannot act as efficiently as it might.

II. PUHCA Reform Must Protect the Rights of State Commissions To
Exercise Effective Oversight of Retail Rates

I support added safeguards in Title XV to provide ratepayers protection from the increased level of affiliate transactions which will inevitably result from PUHCA reform. Our Commission's power to review wholesale power purchasing decisions is vital to California's ability to exercise appropriate oversight of our partially competitive markets. This authority is crucial to ensure that only reasonable expenses are included in retail electric rates charged to California ratepayers. The National Association of Regulatory Utility Commissioners (NARUC) reviewed earlier PUHCA reform legislation and determined that its "savings provision" was inadequate and did not address the potential preemptive scope of FERC decisions approving rates for IPPs. Present Title XV contains this "savings provision". I agree that the "savings clause" provides little in the way of reassurance to the states, since it reserves to the states only "such power as a State regulatory authority may have." For that reason, I support the four provisions in the 1989 NARUC "Resolution on Reform of the Public Utility Holding Company Act" as well as the recent NARUC "Resolution Endorsing Legislation to Amend the Federal Power Act to Reform State/Federal Jurisdiction". Copies of these resolutions are appended to my testimony.

The jurisdictional authority of the states to review wholesale purchases for prudence must be clarified and affirmed by Congress as PUHCA reform occurs. Our Commission's authority to review wholesale power purchasing decisions and administration of wholesale power contracts will be increasingly critical if utilities are allowed to purchase wholesale power from their own affiliates. The Commission firmly believes that it is not preempted under the Federal Power Act from review of utilities' prudence when purchasing wholesale power at rates approved by the FERC as contrasted to the utilities' other choices for cheaper power. This is the essence of the Pike County doctrine. However, the Supreme Court has not yet ruled on its validity.

The recent Supreme Court Mississippi Power & Light decision contains broad dicta concerning the preemptive effect of the Federal Power Act on the states' ability to review the prudence of utility wholesale power purchases. Based on this decision, San Diego Gas & Electric Company has challenged our state commission's authority to review wholesale purchases over the Southwest Powerlink and our right to disallow imprudently incurred costs from retail rates. Thus, even outside of the context of the multistate holding company, where FERC has set the wholesale power rate and the allocation of power among multistate subsidiaries, Mississippi Power & Light has resulted in claims that the

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March 14, 1991

Federal Power Act bars a state regulatory body from review of the prudence of wholesale purchasing decisions. Therefore, PUHCA reform MUST be premised on legislation ensuring the right of each state commission to review the prudence of the wholesale purchasing practices of each distribution utility subject to its authority.

III. State Commissions Possess The Power To Police Affiliate Transactions Absent jurisdictional preemption, our Commission exercises broad powers to regulate purchasing relationships between a utility and its subsidiary or affiliate. We review all such transactions to determine whether or not it is reasonable for the ratepayers to pay the costs. When we find the utility conducted itself imprudently or unreasonably, we can and we do disallow costs. This ensures that utility shareholders, rather than ratepayers, bear the financial consequences of imprudent or unreasonable decisions by the utility. California law gives us this power under our broad authority to set just and reasonable utility rates.

Our Commission has, in fact, adopted disallowances for purchased power costs between California utilities and their subsidiaries. We have severely limited the dividends accruing to a holding company when it is "milking" a subsidiary's retained earnings. California law also prohibits the utilities from issuing stocks and bonds for nonutility or affiliate purposes. This empowers us to prevent many financial problems which could arise. It is important to keep in mind, however, that California legislation is more empowering than laws of many other states.

The issue of buy-sell arrangements between affiliates has been a problem for decades. The problem does not arise just in the area of independent power production. This is one reason that our Commission already has tools to control the problem. We can require competitive bidding, prohibit transactions outright, and impute reasonable costs if abuses have occurred. But first, we must uncover the abuses.

We also have broad authority to examine financial and other records of affiliates. Our statute empowers us to review any entity's financial information deemed necessary to evaluate the appropriateness of a regulated California utility's transaction with any affiliate, wherever located.

Our Commission has the power and the tools to audit and reform affiliate self-dealing, cross-subsidies and other potential abuses. But one other important factor must be considered. That is the enormous burden that the PUHCA exemption for electric wholesale generators will place on state commissions. One can reasonably anticipate that, once PUHCA restrictions are eased, the number of transactions to be audited will skyrocket. Discovering the abuses will take an enormous number of hours of regulatory time, scores of staff and increased enforcement budgets. So we must formulate the practical ability to use our regulatory tools in order to achieve our mutual goals.

IV. I Conclude Reasoned Reform Is Essential

In conclusion, I support reform of the Public Utility Holding Company Act. But, the reform must affirm states' powers to review the prudence of wholesale power purchases at rates set by FERC. When coupled with proper regulatory oversight, the results will be increased efficiencies for the utilities and independent power producers, lower costs for consumers and a sounder environment. I urge the passage of Title XV of S. 341 with the modifications I have recommended.