Chairman Bingaman To Wall Street Re: Energy Legislation

Remarks at PSEG investor forum, 'America's Energy Future ... A Washington Perspective'

July 15, 2002
12:00 AM
I appreciate the opportunity to be with you all today to share some thoughts on our efforts to pursue comprehensive energy legislation in Washington. I don’t often get the chance to come to New York and exchange views with Wall Street’s energy experts, and I appreciate the chance to do so. Washington and Wall Street are watching each other’s actions very carefully these days, so it is very timely for me to get a chance to speak with you. As financial experts, all of you recognize that stable and reliable energy production is absolutely central to economic growth. While the past few months have not seen the presence of an energy crisis in the 1970’s sense of the word – with severe oil shortages and long lines at the gas pump – there have been problems. In Western electrical markets we have seen blackouts and power shortages. We also have seen random gasoline price spikes, selective natural gas shortages and the Enron implosion with its charges of accounting abuses and market manipulation. It is clear to many that we have a need to address some serious shortcomings in our energy policies. It has been 10 years since Congress last addressed energy legislation in any comprehensive fashion, and I firmly believe that balanced and comprehensive energy legislation is key to shoring up our economy. In the Senate energy legislation, we strived to produce a bill that balances production with development and incentives for new sources of energy, while making markets more transparent for consumers and encouraging tax incentives to help the energy sector push the envelope on technology and create new jobs over the long term. We tried to take the long view, while also dealing with current “hot” issues. Our overall goal was to pursue stability and reliability in our energy sources over the long haul. As you all know better than anyone, the issues are complex. In the end, the Senate bill incorporated more than 160 amendments and ran 1,000 pages by the time it was complete. I feel good about the effort, even though I personally would have preferred even more emphasis on renewable fuels, and a serious effort on vehicle fuel efficiency. Still, the bill emerged from the Senate with a strong bipartisan vote. 88 of 100 Senators supported the bill on final passage – a strong statement by the Senate that Democrats and Republicans alike support a bipartisan approach on U.S. energy security. At any rate, we are now in conference with the House of Representatives trying to forge a compromise bill that the President can sign. While we have a tough job ahead of us, Congressman Tauzin – the Republican Chair of the Conference – and I have forged a good relationship. We are committed to doing our best to produce a bipartisan compromise bill that the President can sign before Congress leaves Washington in October for the election season. Now, if I may, I would like to speak to the electricity title of the energy bill passed by the Senate. The House energy bill had no comparable provision, so the Senate bill is our starting point for developing legislation on electricity markets. I should add that we developed this electricity title in close cooperation with the Bush Administration, who supported our efforts. The Senate electricity title is a carefully crafted compromise that attempts to forge a coherent set of policies that can take consumers, producers and regulators into a more certain – and efficient – future. It also is one that recognizes the spirit and intent of the Federal Power Act, which makes it clear that "the business of transmitting and selling electric energy for ultimate distribution to the public is affected with a public interest." My objectives in the Senate energy bill as they related to electricity were fourfold: A) To create a more robust system for generation, transmission and distribution to ensure an adequate supply of power; B) To increase the reliability of the transmission system; C) To make the system more transparent for consumers, investors and regulators; and D) To move to a more flexible and efficient system. First, let me speak to making the system more robust. The key initiatives here are the repeal of PUHCA and the inclusion of the merger and market power provisions in the bill. These provisions have the support of both Democrats and Republicans in the Senate – and the Bush Administration – as well as many utilities and other market participants. In their development, we sought input from throughout industry, from consumers and from other stakeholders. The nexus of the bipartisan compromise in this arena is that market power protections must be strengthened in the process of repealing PUHCA. It is important that any final legislation maintain both parts of this important compromise: bolstering market power protections, as well as repealing the Holding Company Act. These key market power provisions include the expansion of FERC merger authority to cover mergers of holding companies that own utilities, mergers of electric and gas utilities, and the mergers of generation-only companies. They also include the strengthening of the standards for FERC’s review of mergers, by requiring FERC to certify that mergers or acquisitions meet four tests: 1) that they are consistent with the public interest; 2) that they will not harm ratepayers; 3) that they will not impair state or Federal regulation; and 4) that they will not lead to cross-subsidy. The market power provisions also provide guidance for market-based rate review at FERC. Under this section, FERC must consider certain factors in approving market-based rates: 1) market power; 2) the nature of the market and its response mechanisms; and 3) reserve margins. The purpose for providing such guidance is not to create an exclusive list for what FERC must consider, but to provide clarity that the issues listed can and should be considered in reviewing market-based rates. The intent here is not to inject FERC into state regulatory decisions – such as creation of demand response mechanisms and reserve margin determinations – but to make clear that such factors significantly affect electricity rates in a market, and should be considered by the Commission. FERC is also required, if it finds that market-based rates are not just and reasonable, to fix the rates. This could be done by withdrawing market-based rates. It also could be accomplished by making continued approval of future actions by the utility or by the market operators conditional on actions that would relieve the situation. If we are to move ahead with legislation for more robust and competitive markets, we will have to maintain these market power provisions. There were strong forces in the Senate that believed that the protections that we were providing were not sufficient to justify the repeal of PUHCA. I believe that they are sufficient. There will also be strong forces among the House conferees who may feel that PUHCA should not be repealed even with such protections. We have reached the right compromise on these provisions, and it is my hope that we can maintain them so that we can move forward to a new regime that increases competition in our markets. Our second objective was to increase the reliability of the system. In this area, we included language that gives FERC the authority to oversee an independent reliability organization that has mandatory enforcement power. The Senate bill contains such language. There may be changes that can be made on the margin, but again, I believe this section is essential to our reliability efforts. Another initiative on reliability concerns open access transmission by public and cooperative utilities. The Senate bill makes the transmission facilities of public, cooperative and federal utilities subject to FERC jurisdiction, while allowing them to use a different rate standard than other utilities. This is a compromise that was reached during the last Congress – the so-called “FERC-light” initiative. We have provided certain exemptions for small utilities, but they are modeled on the exemptions that FERC gave to investor owned utilities in order No. 888. Our third objective was market transparency. We make it clear that FERC authority extends to other market participants – such as marketers or market operators – and that FERC is responsible for insuring the transparency of transactions by all market making entities. These are the types of disclosure requirements that are necessary for FERC, the states and the public to be able to make reasoned decisions about market prices. In the enforcement arena, we have removed certain exemptions from the criminal and civil penalty provisions contained in the Federal Power Act. Those penalties would now be applicable to all sections of the Act. It has been suggested by some that these penalties should be increased. I agree with that view, and, in the current climate, I would not be surprised to see that happen in the conference committee. We also direct the FTC to adopt rules to insure that customers can make intelligent decisions about sources of power and costs of power, and to protect electricity consumers from “slamming” and “cramming” Our fourth objective was to make the system more flexible and efficient. To increase the diversity of our energy supply we included a Renewable Portfolio Standard. Currently, two percent of the electricity in the United States is generated from renewable energy sources such as solar, wind, biomass and geothermal. Our bill will require that, beginning in 2005, this percentage of electricity produced from renewables be gradually increased until, by 2020, 10 percent of the electricity sold in the U.S. comes from renewable sources. The full Senate had a number of votes in which we were successful in opposing efforts to either weaken or remove the RPS. It was a part of the bill that many Democrats and some Republicans saw as necessary for their support of the Senate energy bill. If we are to repeal PURPA, in part or in whole, we must provide for the diversity of fuel supply – and the encouragement of clean power – that the RPS embodies. There are also a number of tax provisions that we passed as part of the Senate bill that are further efforts to achieve these objectives: -- One provision allows electric transmission companies to sell transmission assets and realize the gain over an eight year period beginning the year of the sale. -- Another provision would extend the production tax credit currently on the books through the end of 2006 for electricity produced from wind and closed loop biomass facilities, and would also extend the credit to electricity produced from other renewable sources. -- And we also propose tax credits for consumers to encourage them to purchase equipment so they can benefit from the production of renewable energy. Finally, let me also say that we view these efforts as complimenting the work that the FERC is already doing. I believe that FERC is undertaking very constructive efforts in trying to assure future robust, wholesale competition across the nation. Pat Wood has established five year objectives to get workable markets up and running. FERC’s Standard Market Design proceeding, and their movement of the country toward large regional markets are constructive steps. We want very much to complement those efforts. There is a transition under way to a new structure which will establish the rules to insure that regional markets exist and that transmission systems are designed to serve those markets. FERC has two difficult and somewhat competing challenges before it: 1. To get through the transition so that there is market stability as soon as possible, and 2. To keep the public and all concerned convinced that their interests will be protected under the new structure. Before the end of July, FERC is likely to issue their proposed rulemaking on standard market design, which is their attempt to sketch a blueprint on how we regulate and operate U.S. electricity markets. This constitutes a major effort by FERC to articulate a vision for the future. I expect that we will hold oversight hearings in the Senate Energy Committee in September to get the views of industry, consumer groups and other stakeholders to assess this effort, and to help move it forward. While the investigations into the specific practices of abusive energy companies by FERC must and should continue, we must also keep our eye on the ball for the long term. In order to achieve a vision of a U.S. economy that has a robust, viable energy sector, we will have to have a sound policy basis that assures ample infrastructure, reliable electricity supply and an increased role for renewable energy sources. In the electricity sector, I believe that means a sector that is stable, competitive, market-driven and predictable. That is the real goal of my electricity provisions – to make the road to a robust sector more predictable for everyone – investors and consumers alike. # # #