undue discrimination against customers in other states, in the name of protecting bundled retail customers or local distribution. That would have uneconomic and anticompetitive consequences.

A recent appellate court decision illustrates perfectly why we have concerns about the ability of the Commission to ensure non-discriminatory transmission_access_ if States retain authority over bundled retail transmission. Northern States Power Co. v. FERC, 176 F.3d 1090 (8th Cir. 1999) (NSP), if interpreted and applied broadly, could allow the States to establish preferential terms and conditions for the bundled transmission services they regulate compared to the terms and conditions available to other transmission users. In effect, one State could set rules for the use of interstate transmission to favor electric consumers in its state to the detriment of electric consumers in another State. I recommend that the Committee either must: (1) be clear that states are preempted from using jurisdiction over bundled retail transmission to discriminate against customers in other states or to interfere with interstate bulk power markets; or (2) establish FPA jurisdiction over all transmission, including bundled retail transmission, to ensure universal comparability and nondiscrimination in the provision of transmission services in interstate commerce. If, however, the Congress decides to allow States the jurisdiction over bundled retail transmission, I urge it to add the following provision to FPA Section 201(a):

In regulating the transmission of electric energy under any provision of this part [Part II of the FPA], the Commission shall have exclusive authority to establish rates, terms and conditions of transmission service that are just, reasonable and not unduly discriminatory or preferential, including rates, terms and conditions that prevent or eliminate undue discrimination or preference associated with a public utility's or transmitting utility's own uses of its transmission system to serve its wholesale and retail electric energy customers.

The Congress also should clarify that, if States order retail customer choice programs, the Commission has the authority to order whatever transmission service is necessary to move the power from the seller, across intervening States, to the ultimate State that has the retail choice program. This will require an amendment to section 212(h) of the FPA, which otherwise could be construed in some circumstances as precluding the Commission from ordering transmission to accommodate State retail customer choice programs.

Lastly, you heard two weeks ago that the issue of whether we should have jurisdiction over bundled transmission is a transitional issue that will eventually be resolved as the result of the spread of RTOs and state consumer choice legislation. This assumes that the courts do not explicitly overturn our current interpretation of the Federal Power Act. However, this suggestion neglects the consequences of waiting for time to take its course. In the interim, there would continue to be gaps in the Nation's transmission grid that are subject to dual regulation and there would continue to be litigation over the related issues, for example, whether retail load served under the ISO format rather than the transco format has, indeed, been unbundled. The industry needs clarity on these issues as soon as possible or the transition to competitive markets will be delayed and impaired.

PUHCA Reform

PUHCA requires some utilities to comply with restrictions that are not compatible with bulk power competition. Additionally, in some instances, PUHCA encourages concentrations of generation ownership and control in local markets that are inconsistent with competition and discourages asset combinations that could be pro-competitive. Thus, PUHCA should be amended or repealed, with one major caveat. Reform legislation should ensure that both the Commission and States have adequate access to the books and records of utilities and their affiliates, to protect against affiliate abuse and ensure that captive consumers do not cross-subsidize entrepreneurial ventures. Also, if PUHCÀ is not repealed, it should be amended to restore FERC's ability to adequately regulate the rates of utilities that are members of registered holding company systems, closing the regulatory gap created by the court decision in Ohio Power Co. v. FERC, 954 F.2d 779 (D.C. Čir. 1992).

PENDING LEGISLATION

I now turn to the eight bills that are pending before this Committee and that are the subject of this hearing. The Administration's bill, S. 1047, appropriately addresses the issues that I have identified as critical to establishing a competitive wholesale power market. Senator Bingaman's bill, S. 1273, also goes a long way toward producing the best wholesale market outcomes. The bill introduced by Senators Murkowski and Landrieu, S. 2098, is helpful in a number of respects but I

believe its RTO provisions may prevent the Commission from pursuing fair, efficient, and transparent bulk power markets through the formation of RTOs. The remaining five bills being discussed today also fail to address some critical issues or contain provisions that, in my estimation, will inhibit important pro-competitive developments such as the formation of RTOs. I will comment primarily on the elements of these bills that affect the major activities within the Commission's current jurisdiction-transmission and wholesale sales of electric energy in interstate commerce. While I would be pleased to provide the Committee with detailed technical comments on each bill if the Committee requests, I will comment more generally on each bill today.

S. 2098 (Introduced by Senators Murkowski and Landrieu)

S. 2098 authorizes transmitting utilities to apply to the Commission to create, implement, or participate in RTOs and directs the Commission to approve such applications when it finds that they comply with eight specified standards. Unfortunately, this provision arguably diminishes current authority under the FPA to take certain actions to cure undue discrimination in the provision of service by transmission-owning public utilities, and also leaves the Commission without tools to provide for RTO participation by public or cooperatively-owned transmitting utilities. The Commission in its RTO rule concluded that it currently has the authority to require RTO participation by public utilities, i.e., primarily traditional investorowned utilities, where there is a record of undue discrimination or where it is necessary to remedy anticompetitive effects. S. 2098 should be amended to reinforce this authority and to provide the same authority with respect to non-public utilities (e.g., public power entities).

The RTO provision in S. 2098 further applies restrictive standards for analyzing RTOS, which may or may not be the appropriate criteria for future RTOs as the industry evolves. For example, it contains a presumption that ownership of 5% of the voting interests in an RTO does not convey control over the RTO. I do not recommend that Congress legislate such rigid criteria which may be inconsistent with competitive wholesale power markets of the future.

S. 2098 amends the FPA to provide Federal eminent domain authority for new transmission lines when proposed in accordance with a regional planning process. I believe that this would ease the way for additional investment in the transmission grid and increase the likelihood of the transmission grid operating near its optimal level. While I recognize that such an amendment might be controversial, I would note that Federal eminent domain authority already exists under the Natural Gas Act and that the Commission has had years of substantial experience siting natural gas pipelines. Similar steps to remove obstacles to transmission siting may be needed as the transmission grid is used for a growing number of interstate bulk power transactions.

Nevertheless, Federal eminent domain represents a very strong limitation on current state authority. I therefore support as more palatable a general approach that would allow the Commission to facilitate the siting of critical facilities and would provide for a more direct Federal role where states are deadlocked or decisions are otherwise stymied. My hope is that RTOs can facilitate regional planning of, and support for, transmission expansions and thus avoid or reduce the need to rely on the type of Federal authority contained in S. 2098.

S. 2098 repeals the requirement in PURPA that electric utilities must purchase electricity from qualifying facilities, but does so prospectively only. It does not affect rights and remedies under existing contracts. Assuming an increasingly competitive environment, I agree that it is unreasonable to impose a "mandatory purchase" requirement. However, I recommend that the provision in the bill be clarified so as not to preclude voluntary buy-outs or buy-downs of uneconomic PURPA contracts where appropriate.

S. 2098 allows transmission users to obtain open access transmission services over the facilities of non-public utilities in interstate commerce. S. 2098 also provides for establishment of mandatory reliability rules, developed by a self-regulating organization with appropriate Federal oversight of rule development and enforcement. As I stated above, these are important goals. However, the provision in S. 2098 that sets forth the reliability role of State and local authorities (state savings clause) is written too broadly. It would not protect the national interest in preserving the reliability of the interstate grid, which serves customers in multiple states, and would likely lead to conflicts between neighboring states.

S. 2098 repeals PUHCA, but amends the FPA to provide the Commission and State commissions with access to needed holding company (and affiliate) books and records. As I testified above, this access to books and records is an essential corollary to the repeal of PUHCA.

S. 2098 does not give the Commission additional tools for addressing market power. For reasons I described above, the Commission needs these tools to ensure effective competition in wholesale markets and, upon request by State authorities, in retail markets.

S. 1047 (Administration's Bill)

S. 1047, the non-tax portions of the Administration's proposed restructuring bill, constitutes a comprehensive legislative proposal. I believe the bill provides an excellent framework for Federal electricity legislation.

For example, the bill would bring all transmission facilities in the lower 48 States within the Commission's open access transmission rules by extending FPA section 205 and 206 jurisdiction over transmission services provided by Federal, municipal and cooperatively-owned utilities.

S. 1047 would reinforce FPA authority to promote regional_management of the transmission grid through regional transmission organizations. It would amend FPA section 202 to expressly permit the Commission to establish an entity for independent regional operation, planning, and control of interconnected transmission facilities and to require a utility to relinquish control over operation of its transmission facilities to an independent regional system operator. I interpret the bill's reference to "entities for the purpose of independent operation, planning and control" of transmission facilities as not precluding transcos or other forms of regional transmission organizations. It would nevertheless be helpful to have this clarified. Appropriately, however, before taking such action, the Commission would have to find, among other things, that: the action is appropriate to promote competitive electricity markets and efficient, economical, and reliable operation of the interstate transmission grid; the utility transferring control of its transmission facilities will receive just and reasonable compensation; and adequate reliability of the facilities will be maintained. These preconditions should address the legitimate concerns of the transmitting utilities.

S. 1047 would address electric reliability by amending the FPA to give the Commission the authority to approve and oversee an Electric Reliability Organization tasked with developing mandatory reliability standards. The bill provides that: (1) the reliability rules will be mandatory and will be enforceable; (2) the industrybased process for developing new standards will be open; and (3) the Commission will have an appropriate oversight role to ensure that the reliability standards are sufficient to preserve reliability and are non-discriminatory, but will defer as appropriate to the technical expertise and stakeholder process of the industry organization. This approach strikes an appropriate policy balance.

As to merger review, the bill would clarify FPA jurisdiction over the merger or consolidation of electric utility holding companies and generation-only companies. These reforms would help guard against gaps in FPA merger review.

Further, the bill would authorize the Commission, upon petition from a State, to remedy market power in retail markets. It also would amend the FPA to authorize the Commission to remedy market power in wholesale markets outside the context of merger review. As market-based rates become more widespread, the ability to structurally remedy horizontal market power in generation markets, especially where transmission constraints limit the number of market participants, becomes even more important. Providing a Federal backstop to address market power where States have identified, but cannot remedy, a market power problem would support States seeking to pursue retail competition policies.

I believe these provisions, taken together, address the major areas in which further legislation is needed to move us to fully competitive wholesale power markets and to support States that choose to develop retail competitive power markets. S. 282 (Introduced by Senators Mack and Graham)

S. 282 repeals, prospectively, the existing requirement found in the Public Utility Regulatory Policies Act (PURPA) that electric utilities must purchase power from qualifying facilities. It does not interfere with existing contracts or affect existing obligations. S. 282 requires the Commission to promulgate regulations that ensure that utilities may pass through, and not be required directly or indirectly to absorb, the stranded costs associated with purchases from qualifying facilities under contracts existing before the date of enactment.

As competitive bulk power markets have emerged, contracts entered into in prior years under PURPA have become uneconomic because they contain, as a result of PURPA, rates that are above current market prices. In this increasingly competitive environment, it is unreasonable to impose a "mandatory purchase" requirement that could result in sales of power at an above-market price. S. 282 recognizes the changes in competitive markets by repealing the mandatory purchase obligation

prospectively. Importantly, it does not interfere with existing contracts. However, I recommend that it be clarified not to preclude utilities from buying out or buying down high-cost PURPA contracts where appropriate. I personally believe that repeal of this PURPA provision should be accompanied by reasonable legislation to support renewable energy resources.

S. 516 (Introduced by Senator Thomas)

Among other changes, S. 516 would deregulate the prices for sales of electricity at wholesale, exempting the rates for such sales from Commission regulation under Parts II and III of the FPA. Deregulated prices can be justified only where the seller lacks or has mitigated market power. While the Commission has allowed marketbased rates for the vast majority of public utilities, many of these utilities own monopoly transmission facilities and at this time the Commission is persuaded it must continue to monitor for the exercise of market power and affiliate abuse. Also, transmission constraints can limit the ability of new competitors to sell power into certain areas and allow sellers already within such areas to exercise market power. In instances where markets are not working or when there are instances of affiliate abuse, the Commission needs continued authority to regulate wholesale power rates. Without FPA authority to regulate wholesale rates, bulk power purchasers could face costly price increases where conditions do not permit competition, and these increases, in turn, would likely be passed through to consumers.

S. 516 would place all entities that own, operate or control facilities used for the transmission of electricity in interstate commerce under FPA section 205 and 206 jurisdiction with respect to wholesale transmission service. As stated earlier, I believe that it is vitally important to place all owners of transmission facilities in the integrated grid under the same open access rules.

S. 516 also provides for establishment of mandatory reliability rules, developed by a self-regulating organization with appropriate Federal oversight of rule development and enforcement. As I stated above, these are important goals. However, the provision in S. 516 relating to the reliability role of State and local authorities (state savings clause) is written too broadly. It would not protect the national interest in preserving the reliability of the interstate grid, which serves customers in multiple states, and would likely lead to conflicts between neighboring states.

S. 516 does not address two other areas in which I believe legislation is needed: RTOS or market power mitigation. As I described above, the Congress should address these areas to ensure that consumers receive the full benefits of competition. S. 1273 (Introduced by Senator Bingaman)

Consistent with some of the bills discussed above, S. 1273 extends section 205 regulation of transmission service to PMAS, TVA, municipal utilities, and cooperatives still owing debt to the Rural Utilities Service. This amendment would fill the gaps in the availability of open access transmission service nationwide, and thus allow customers to receive the full benefits of competitive bulk power markets. S. 1273 amends the FPA to allow the Commission to order transmission service to ultimate consumers where the seller is permitted or required by State law to make such sales. S. 1273 further amends the FPA to allow States to require electric utilities to provide unbundled local distribution service on a not unduly discriminatory basis. These amendments provide important clarifications of Commission and State authorities.

S. 1273 would amend the FPA to authorize the Commission to order the formation of “regional transmission systems," and to order transmitting utilities within such regions to participate. The bill would authorize the Commission to appoint an oversight board (composed of a fair representation of all of the transmitting utilities participating in the regional transmission system, electric utilities and consumers served by the system, and State regulatory authorities within the region) to oversee the operation of the regional transmission system and to ensure that the independent system operator formulates policies, operates the system, and resolves disputes in a fair and non-discriminatory manner. S. 1273 also provides for the oversight board to appoint an independent system operator to operate the regional transmission system. I interpret this provision as not precluding transcos or other forms of regional transmission organizations. This operator is not permitted to own generating facilities or sell electricity, and may not be subject to the control of, or have a financial interest in, any utility with the region.

The Commission believes it is essential to form regional grid management institutions that provide for independent, regional operation of the grid. All transmission facilities in a region should be under the control of a single, independent operator. I understand S. 1273 to promote goals and mechanisms similar to Order No. 2000. However, I do not believe that legislation should dictate the organizational form of

these new institutions. Rather, there should be flexibility for ISOs, transcos, combinations of the two, or other forms or organization.

S. 1273 contains a reliability provision directing the Commission to establish and enforce national electric reliability standards, and permitting the Commission to designate regional councils and one national council. This provision, while less detailed than the reliability provision contained in other bills, adequately meets the needs for fundamental reliability legislation.

S. 1273 amends the FPA to provide for Federal siting of new transmission facilities. The bill also would authorize the Commission, when necessary or desirable in the public interest, to order utilities to enlarge or improve their existing facilities (unless doing so would unreasonably impair the ability to render adequate service). Before issuing such an order, the Commission would need to comply with the requirements of the National Environmental Policy Act, and would need to refer the matter to a joint FERC/State board for advice and recommendations on the need, design, and location of the proposed facilities.

The construction of new transmission facilities represents an important means of obtaining the efficiency benefits of greater electricity competition in many circumstances. The construction of new facilities may also have reliability benefits for the State or locale in which the facilities are located and other States and locales as well. At present, State-by-State planning and siting are the norm. However, as new transmission facilities are used increasingly to support regional reliability and markets, States. may have difficulty balancing local impacts with broader, regional benefits.

I believe the answer to this dilemma rests with creation of institutions that have a regional perspective on the planning and development of new facilities, and that take into account the interests of all affected market participants and States. This type of institution could adopt a broad perspective on decision making on proposed transmission expansions and fairly balance local and regional concerns and benefits, as well as the suitability of constructing new transmission facilities compared, for example, to developing new generation. RTOs could perform this planning function, recognizing that their role would only be advisory to State siting authorities under existing law. However, as I stated in my comments on S. 2098, I believe that some steps to remove obstacles to transmission siting may be needed because the transmission grid is carrying a much larger number of interstate bulk power transactions. I support a general approach that would allow the Commission to facilitate the siting of critical facilities and would provide for a more direct Federal role where States are deadlocked or siting decisions are otherwise stymied.

S. 1284 (Introduced by Senator Nickles)

S. 1284 would repeal PUHCA. As I testified above, I believe any repeal of PUHCA must be accompanied by a grant of additional authority to FERC and State commissions to access needed holding company (and affiliate) books and records.

S. 1284 repeals the requirement in PURPA that electric utilities must purchase electricity from qualifying facilities, but does so prospectively only. It does not affect rights and remedies under existing contracts. As I noted above, in this increasingly competitive environment, it is unreasonable to impose a "mandatory purchase" requirement at anything other than the market price.

S. 1369 (Introduced by Senator Jeffords)

S. 1369 requires the Secretary of Energy to establish a National Electric System Public Benefits Board, which will include a representative from the Commission. The Board is required to establish an account, funded by a Commission-established nonbypassable wires charge, that is to provide matching funds to States for the support of State public purpose programs.

S. 1369 also provides that non-hydroelectric generation facilities must use an increasing percentage of renewable energy sources in generating electricity. The bill requires the Commission to establish standards and procedures under which generation facilities certify their use of renewable energy sources. It also requires the Commission to establish a system of renewable energy credits.

I generally support mechanisms to encourage renewable energy resources, so long as they are consistent with competitive wholesale energy markets and do not impede fair access to interstate transmission.

S. 1369 requires electric companies to allow a retail electric customer to interconnect and employ a net metering system that measures the difference between the quantity of electricity supplied by an electric company to a customer-generator and the quantity generated by a customer-generator and fed back to the electric company. S. 1369 requires the Commission to adopt rules on electrical safety, power quality and interconnections for net metering systems that use non-photovoltaic