testimony. It is our sincere hope that the members of this Committee, as well as your colleagues in the Senate and the House, will review and consider these positions for inclusion in any electric restructuring legislation.

NARUC's positions reflect the best thinking, and some tough compromises, of experts from low cost and high cost states, urban and rural states, states that have restructured and states that have not yet done so. These are the same kinds of compromises that the Congress will be required to make in order to pass legislation. I have been asked to comment on eight pieces of legislation that have been referred to the Committee: S. 282 introduced by Senator Mack; S. 516 introduced by Senator Thomas; S. 1047 introduced by you Mr. Chairman, on behalf of the Administration; S. 1273 introduced by Senator Bingaman; S. 1284 introduced by Senator Nickels; S. 1369 introduced by Senator Jeffords; S. 2071 introduced by Senator Gorton; and S. 2098 introduced by you Mr. Chairman.

A. Legislation should not include a date-certain federal mandate

On the threshold issue of a Federal mandate, NARUC does not support the provision in Section 101 of S. 1047 that requires states to implement retail competition no later than January 1, 2003. A Federal mandate is unnecessary (given the pace at which state commissions and legislatures are now moving) and unwise (given the need for each state to address restructuring issues at a pace that makes sense in light of its individual economic, demographic, climatic and yes, political circumstances). We appreciate the Administration's eagerness to get on with the transition as quickly as possible, but if implementation of the pioneering state programs proves that the benefits of customer choice are as compelling as the proponents of a Federal mandate believe, states will embrace pro-competitive policies, as many currently are, at a pace that makes sense for their particular circumstances. For the same reasons, NARUC also opposes provisions in Sections 4, 5 and 10 of S. 1284. Many states that have not moved forward with restructuring are concerned that their consumers will be harmed rather than helped by restructuring. It is their opinion that their rates will increase rather than decrease under a restructured environment because the incumbent utilities will seek to sell cheap power in the open retail market, where profits will be larger than what they are currently allowed under a regulated rate. These incumbent utilities would also be able to increase the price in the home state by selling generation that was previously too expensive to run because the new market price would be higher than the old regulated price.

The "opt out provision" in S. 1047 does little to alleviate our objection to the mandate. This language is vague as to how the "opt out" should occur and under what circumstances. Additionally, the "opt out" notice must be filed with the Federal Energy Regulatory Commission (FERC) by January 1, 2002. What is the purpose of filing the notice with FERC? Will FERC approve the "opt out" or will they simply keep the notice on file for use as a clearinghouse of information for suppliers? Neither S. 516, S. 1273 nor S. 2098 includes a date certain mandate. However S. 516 and S. 2098 are more closely aligned with NARUC's preferred approach. B. Legislation should grandfather state restructuring programs

NARUC strongly supports "grandfathering” the legislative and regulatory actions of those states that have elected to implement retail competition. The "grandfathering" of state restructuring plans that were in place prior to enactment of any Federal legislation is critical in the states that have moved to provide retail open access, especially in legislation as prescriptive as S. 1047. There have been delicate compromises reached to produce consensus in these states. Once these compromises are reached, such as stranded cost recovery mechanisms, the States and the stakeholders should not be forced to renegotiate a consensus that has been working prior to a Federal mandate.

In addition, Federal preemption could harm those states that already have retail consumers participating in burgeoning open access markets. In essence, without a grandfather provision Congress would be changing the rules for an immature market, causing confusion at best and the failure of an undeveloped market at worse. C. Legislation should not include "reciprocity" requirements, restricting access to markets that are open

S. 516, 1047, 1273, 1284 and 2098 all include reciprocity provisions that restrict power sales into competitive retail markets. NARUC opposes any provisions prohibiting utilities in non-retail access_states from making sales in states that require retail access. A federally mandated reciprocity provision is contrary to the very purpose of retail access, which is to create an open market to allow consumers the

1 Attachments 1, 2, and 3 have been retained in committee files.

widest possible choice. In the case of a state with retail access, a reciprocity provision limits the number of suppliers that are available to help increase competition and thereby lower prices. A reciprocity requirement would remove potential suppliers of lower cost power and improved service. In a state without retail access, a reciprocity provision might eliminate opportunities for off-system revenues that could be used to reduce customers' rates.

In addition, reciprocity restrictions would tend to force states that have not yet elected to open up their retail markets to do so. This policy is inconsistent with NARUC's previously stated position that states should continue to have the authority to respond to the unique circumstances under their jurisdiction with regard to restructuring.

In short, if the purpose of electric restructuring is to save money for electric consumers in competitive retail markets, then a reciprocity provision should not be in the bill.

D. Legislation should support the development of cooperative federalist mechanisms to promote reliability

The reliability of the nation's electric system is one of the most important issues in this debate, and NARUC believes that Federal legislation must indeed address reliability. NARUC supports legislation establishing mandatory compliance with industry-developed reliability standards and providing explicit authority to FERC and the states to cooperate in the enforcement of those standards. Enforcement of operational standards and criteria should be supervised by the FERC in cooperation with the states through existing state authority, joint boards, or other mechanisms. Enforcement of compliance with planning and system adequacy standards should rest first with the states and regional bodies. Congress should explicitly affirm the public interest in transmission grid reliability and the need for mandatory compliance with reliability standards.

Federal legislation should also facilitate effective decision-making by the states and recognize the authority of the states to create regional mechanisms including but not limited to inter-state compacts, or regional reliability boards, for the purpose of addressing transmission reliability issues. In addition, we would support legislation that includes workable mechanisms to support energy efficiency programs that enhance reliability.

S. 516, S. 1047, S. 1273, S. 2071 and S. 2098 all address reliability. Unfortunately, S. 1047 and S. 1273 do not provide the states with an explicit role in ensuring that reliable service to retail customers can be preserved. NARUC cannot support reliability language that fails to provide a continuing role for states in ensuring reliability of all aspects of electrical service, including generation, transmission, and power delivery services or results in FERC preemption of state authority to ensure safe and reliable service to retail consumers. State officials will be held accountable by the public when the lights fails to come on. Additionally, because of this responsibility, state officials and state regulators are particularly concerned with the ability to promote actions that ensure uninterrupted electricity service.

NARUC believes that Congress should expressly include in legislation: (1) A savings clause to protect existing state authority to ensure reliable transmission service, and (2) a regional advisory role for the states. Therefore, NARUC supports the reliability provisions on these points found in S. 2098 and S. 516 and commends both you, Mr. Chairman, and Senator Thomas for including these two provisions in your respective bills.

S. 2071 includes a regional advisory role for the states as well as a "place holder" for state Savings Clause language. NARUC respectfully offers our assistance to Senator Gorton as he develops language for the Savings Clause provision. To that end, consistent with our support for S. 2098 and S. 516, NARUĆ, the North American Electric Reliability Council (NERC), and other interested stakeholders have been engaged in discussions to produce consensus legislative language for a state Savings Clause. We hope this will bridge the gap between the various proposals currently before this Committee. When we have completed our discussions we will provide our consensus language to the Committee for its review and consideration.

E. Transmission and RTO jurisdiction should be addressed through clarifying federal and state roles and authorizing new regional entities

NARUC supports legislation affirming state authority to regulate retail power delivery regardless of the facilities used (transmission or distribution). We oppose the expansion of FERC Jurisdiction to include unbundled retail transmission service. It is our position that states should retain authority to establish retail transmission rates unless the state tariffs violate Federally determined open-access, non-discriminatory, competitive transmission policies. FERC should continue to have ratemaking

authority for interstate wholesale transactions and should have jurisdiction over transactions between suppliers and retail customers located in different states. However, states should be authorized to form voluntary regional bodies to address regional transmission system issues and FERC should be required to defer to states acting on a regional basis. We believe this proposal is an important step forward in coordinating FERC and state commission responsibilities. We will continue to work with FERC and other stakeholders to resolve these issues.

States have an important stake in how retail services over transmission facilities are provided. Transmission facilities are often emotional local land use issues, were approved by state governmental entities, and importantly have been paid for by retail customers. However, we are keenly aware of the interstate commerce implications of transmission service and we are willing to work with all affected parties to find an equitable and workable solution on this issue.

States should be primarily responsible for expeditiously handling retail complaints alleging undue discrimination in the market place. Appeals by market participants could then be made to FERC.

NARUC supports legislation leading to voluntary formation of Regional Transmission Organizations (RTOs), with deference given to states in RTO development and to states acting collectively on a regional basis. Congress should develop a mechanism for states to address ongoing concerns in RTO functions after the initial RTO development period. State interests include reliability, market monitoring, pricing, congestion management, planning and interregional coordination. Additionally, Congress should provide for a state commission advisory role in RTO governance that allows for deference to state commissions that reach consensus concerning governance issues within a region.

Concerning formation of RTO's, we applaud FERC for the flexibility contained in Order 2000. The rule strikes a reasonable balance between calls for more direct FERC involvement in the development and supervision of regional transmission markets and the need for the parties within a region to be able to adapt transmission access, governance and pricing policies to the wide variety of conditions in the states. We are particularly pleased that the Commission's rule recognizes the important role that voluntary RTOs can play in maintaining the reliability of the existing transmission network and in planning for the future needs of a growing economy. Additionally, we commend FERC for their effort to include state commissions in the development and implementation of the Order.

One provision found in Section 104 of S. 2098 which is of major concern to NARUC provides a Federal right of eminent domain for siting of transmission facilities. NARUC is opposed to Federal preemption of state siting authority.

F. Federal legislation should backstop state public benefits programs

Introduction of retail competition may threaten our ability to continue to provide public benefits long considered a responsibility of vertically integrated public utilities. S. 516, 1047, 1273, 1369, and 2098 all recognize the necessity for public benefits provisions. The degree to which the bills address public benefits issue varies greatly. NARUC supports the inclusion of workable mechanisms to support state and utility public benefits programs such as energy efficiency, renewable energy technologies, research and development, and low-income energy assistance.

NARUC believes the best approach for Congress to follow during the transition to a competitive market is to establish a Federal/state trust, funded by a nonbypassable, competitively neutral customer charge. The fund would be administered by an independent entity. A state would qualify for Federal matching funds by designating its own program and funding mechanism. In general, S. 1369 is closest to our position on the public benefits fund.

Any restructuring legislation should make a national commitment to the continued commercialization and supply of renewable energy. NARUC is still considering specific forms this commitment could take. However, if national standards for renewable energy are mandated then NARUC does support the use of tradable credits as one market-compatible mechanism, among others, to meet the national interest in renewable energy supply. However, consistent with any adopted national standards for renewable energy supply, states should be afforded maximum flexibility to structure, apply and supplement standards within the state in a way that best promotes the unique resource, technology and economic goals of each state. This overall approach to public benefits reflects compromise between state commissioners "in the trenches" of electric restructuring, who have experience with a variety of approaches.

F. PUHCA and PURPA should be reformed as part of comprehensive legislation NARUC has adopted resolutions that support Congressional action to address the Public Utility Holding Company Act (PUHCA) and the Public Utility Regulatory Policies Act (PURPA) provided certain conditions are met. In the case of PUHCA, we believe that Congress could substantially streamline the statute (while providing state commissions and FERC enforceable access to holding company books and records) only as part of a broader legislative effort to restructure the utility industry. With respect to PURPA, we would support prospectively repealing the utility mandatory purchase requirements, conditioned upon the development of competitive electric markets and as part of broader restructuring legislation, not as a stand alone initiative.

Legislation introduced by Senator Mack, S. 282, would prospectively repeal PURPA's mandatory purchase obligations as a stand-alone measure. While I appreciate the interests of Senator Mack, as a general matter, it is NARUC policy that neither PUHCA nor PURPA should be repealed on a stand-alone basis or in a vacuum. NARUC believes that relief from these statutes should be contingent upon the development of competitive markets as determined through a state commission supervised restructuring program.

I will address a specific concern with S. 1273. Section 10 is intended to protect prior PURPA contracts by preempting state ratemaking authority. Specifically, it restricts the ability of state commissions to require utilities to take steps to mitigate stranded costs that may result from above-market contracts. Section 10 of S. 1273 would leave little incentive for utility companies to minimize costs passed through to customers, holding harmless utilities and qualifying facilities. In addition, we also have concern with Section 5 of S. 282 and Section 202 of S. 2098, which would preempt state ratemaking authority, and state authority to mitigate stranded costs, by giving the authority to FERC.

H. States should continue to have the ability to address stranded cost recovery

States should retain Jurisdiction to address the recovery of costs for power sales and delivery service provided retail customers regardless of the facilities used. This means that technical definitions as to the character of facilities as transmission or distribution investments should not impinge upon the ability of state commissions to exercise authority over retail transactions. This issue is of critical importance to ensure that states have the option of imposing non-bypassable charges to fund stranded cost payment. In the absence of this assurance some customers could bypass the local distribution system thus leaving a smaller customer base responsible for stranded cost payment.

I. Based on national standards, states should be able to implement distributed generation and net metering policies appropriate to their circumstances

NARUC supports legislation establishing national interconnection and power quality standards, developed and adopted by appropriate technical standards organizations, such as the Institute of Electrical and Electronics Engineers, Inc., for generating facilities by a date certain. However, the states should have the ability to adopt these rules or more tailored rules that a state chooses.

NARUC further supports legislation removing federal barriers to state implementation of net metering. The most critical barrier evolves the current lack of jurisdictional clarity over net metering. The Federal Power Act has been alleged to preempt state net metering programs, slowing development of this promising new approach to promoting competition and resource divesting.

J. Consumer protection is a critical and growing state commission responsibility in more competitive utility markets

As we have seen in restructured telecommunications markets, the movement to competition in retail energy markets will require state regulators to be especially vigilant on such consumer protection issues as slamming (unauthorized switching of consumers to alternative service providers) and cramming (charging consumers for services they did not request).

Complaints to state commissions about utility service quality and about specific practice have burgeoned in recent years. Most states have expanded their customer service programs. Many state legislatures have adopted tough new laws to protect customers from practices such as slamming and cramming. Through NARUC and the National Regulatory Research Institute, state commissions have worked together to develop creative and effective new customer education and protection programs. These efforts strengthen competition, especially for small business and residential customers by giving customers the confidence they need to participate in energy markets and by keeping the bad apples out of the energy market barrel.

Federal restructuring legislation must not interfere with state efforts to protect consumers, either by preempting state authority or precluding states from adopting more protective standards in areas where Federal standards apply.

Concerning aggregation 2 of retail consumers, NARUC urges Congress to affirm state authority to establish the terms and conditions for aggregated service, including recognition of state licensing, registration and consumer protection policies.

III. CONCLUSION

The states are now performing their historic role as laboratories to test how the words "greater competition for retail consumers" can be turned into real-world savings and services for customers. State commissions and legislatures must be allowed to continue to experiment with retail access and other restructuring initiatives. As the consequences of competitively-based wholesale markets become clearer, states are putting in place complementary retail policies that are adapted to regional market conditions. State commissions are developing and implementing compatible retail policies that preserve reliability, prevent the stranding of “public benefits," ensure consistency with environmental values, minimize cost shifting, provide for stranded cost recovery, and most importantly, improve economic efficiency. Over time, states will work together, as some are now doing, to devise and implement regional institutions to adapt their regulatory responsibilities to the reality of regional power markets.

When Congress chooses to act, any Federal restructuring legislation should preserve broad state authority to implement these policies flexibly in response to the conditions in local retail markets. The development of retail customer choice should be implemented in a manner that respects these differences. In our view, that can only happen if decisionmakers closest to these conditions-state commissions and legislatures-have the flexibility to adapt pro-competitive policies to the needs of local retail consumers. In the weeks and months ahead, my colleagues and I look forward to working with Congress, with our colleagues at the FERC, and with all interested parties to develop workable policies that support an efficient and environmentally sound electric services industry that meets the needs of all retail customers.

Thank you for your attention. I look forward to your questions.

Senator THOMAS. Thank you, commissioner. You really whipped it up there at the end.

[Laughter.]

Mr. ROWE. And I am out of breath, Mr. Chairman.
Senator THOMAS. Mr. Cook.

STATEMENT OF DAVID N. COOK, GENERAL COUNSEL, NORTH AMERICAN ELECTRIC RELIABILITY COUNCIL

Mr. Cook. Thank you, Mr. Chairman and members of the committee, and good morning. My name is David Cook. I am general counsel for the North American Electric Reliability Council, or NAERC. NAERC is very pleased to have this opportunity to present its views on why legislative action is needed now to assure the continued reliability of the high voltage transmission system of North America.

Several of the bills before you, including S. 2098, S. 2071, S. 516, and S. 1047, would authorize creation of a self-regulatory reliability organization to develop and enforce mandatory reliability rules. The Federal Energy Regulatory Commission would oversee this organization in the United States to make sure the self-regulatory organization and its affiliated regional entities operate fairly and effectively, working with a broad consensus of industry, from Enron to the National Rural Electric Cooperative Association, NAERC de

2 Aggregation is the process by which an entity puts consumers together into a buying group. This allows entities that use small amounts of electricity to purchase electricity with the buying power of a large user.