massive, overcapitalized organizations of ever increasing complexity and steadily diminishing coordination and efficiency.”

Horizontal market power

S. 2098 contains no provision to deal with problems created when one owner owns (or acquires) too many power plants, also known as horizontal market power. Since utilities or their affiliates continue to own most of the power plants serving a city or a region (even in states with deregulation), they can manipulate the price of electricity to the detriment of consumers (who may have to pay higher prices) and competitors (who may be unable to enter or survive in manipulated electricity markets). Prohibition of utility holding company abuses

S. 2098 has no provision prohibiting holding companies from owning both regulated and non-regulated companies. As long as regulated and non-regulated businesses are part of the same holding company system, ratepayers of the regulated business will likely end up paying cross-subsidies (in the form of higher rates) to the non-regulated affiliates. Competitors suffer because they have to compete against affiliates receiving cross-subsidies. This could greatly harm independent providers of electricity, energy efficiency services, appliance sale & repair, or mechanical, electrical, and plumbing services.

Cross-subsidies between regulated and non-regulated affiliates have plagued electricity consumers since the first utility holding companies were established in the 1890s. To end cross-subsidies once and for all, President Franklin D. Roosevelt wanted PUHCA to prohibit utility holding companies from owning non-regulated subsidiaries, but his vision was defeated by the utility lobby prior to PUHCA's enactment. Public Citizen recommends that Congress follow President Roosevelt's advice and make PUHCA stronger by prohibiting the ownership of nonregulated businesses by utilities (and conversely, prohibit the ownership of regulated companies by non-regulated companies).

Since S. 2098 would repeal PUHCA, the bill would remove laws that prohibit the pyramiding of utility holding companies. The abuses of consumers and shareholders at the hands of the pyramid utility holding companies of the Roaring Twenties are vividly described by the Roosevelt administration:

By the pyramiding of holdings through numerous intermediate holding companies and by the issue, at each level of the structure, of different classes of stock with unequal voting rights, it has frequently been possible for relatively small but powerful groups with a disproportionately small investment of their own to control and to manage solely in their own interest tremendous capital investments of other people's money.

For all this concentration so dangerous to his democracy, the American consumer pays the bill. With a large and often unsound capitalization to support, many holding companies have not been able to be satisfied with reasonable dividends on the securities of their operating companies. They have compelled the consumer to bear the burden of various fees, commissions, and other charges which they levy against their subsidiaries (Report of the National Power Policy Committee, 74th Congress, 1st Session, House Doc. No. 137, March 12, 1935).

New loopholes added to PUHCA in 1992 already allow U.S. utility holding companies to purchase foreign utilities that have layers and layers of pyramided holdings. For example, Texas Utilities Company, which has about 340 subsidiaries and affiliates worldwide, has acquired foreign companies with layers and layers of holding companies and minority controlling interests. Below is a portion of TU's holdingsindentation means that a company is a subsidiary:

Texas Utilities Company

TXU United Kingdom Holdings Company

Lone Star Gas International, Inc.

TXU International Holdings Limited

TXU Europe Limited

TXU Finance (No. 2) Limited

TXU Acquisitions Limited

The Energy Group Limited

TXU Europe Group plc

TXU Europe Power Limited

Anglian Power Generators Limited

As the pyramid shows, 9 layers, each a holding company, separate Texas Utilities Company from its Aglian Power subsidiary, a structure comparable to the pyramids of the giant utility holding companies of the 1920s and 30s. Many other U.S utility holding companies have acquired foreign corporations with comparable levels of pyramiding.

S. 2098's repeal of PUHCA would greatly accelerate the construction of pyramids so detrimental to consumer and shareholders interests alike.

WORKER PROTECTIONS

Since 1990 nearly 150,000 utility workers have been laid-off as utilities prepared for deregulation and the frenzy of mergers that have accompanied it. These lay-offs, along with cutbacks in worker training, have made it much harder for utilities to keep the lights on: fewer workers are available to do needed maintenance or to restore service after blackouts. Cut-backs in training could result in more workers killed or injured, especially those who work directly on power lines or power plants. In order to improve the reliability and safety of the nation's electric power industry, a provision should be added to S. 2098 requiring power plant

STATEMENT OF THE NATIONAL ASSOCIATION OF HOME BUILDERS

The National Association of Home Builders (NAHB) and its 200,000 members have enjoyed a long-standing relationship with the utility industry. As you can imagine, the issue of electric power deregulation and its potential impact on our members and the customers that we serve is of major concern to the home building industry. As an industry comprised primarily of small businesses, and as one of the most regulated industries in the nation, home builders are very sensitive to regulations or barriers that stifle competition, increase home buyer costs, or unfairly favor one interest over another.

SUMMARY

NAHB supports deregulation, provided it is done in a fair and comprehensive manner and housing affordability is not negatively impacted.

In general, NAHB is supportive of S. 2098, the "Electric Power Market Competition and Reliability Act," introduced by Senator Frank Murkowski, Chairman of the Senate Energy and Natural Resources Committee. Specifically, NAHB supports states being allowed the freedom to administer deregulation on their own terms. NAHB believes state involvement is very important. Å federal structure by nature does not adequately consider local and regional concerns that might better be addressed by individual states.

NAHB is also pleased that S. 2098 mentions the importance of energy programs for low-income families and energy efficiency programs. These are important benefit programs that must be continued under any federal deregulation legislation. Further, NAHB remains very concerned with_any deregulation proposal which gives even more regulatory power to the Federal Energy Regulatory Commission.

What S. 2098 does not address is the possible added infrastructure costs for new home construction under federal deregulation. This is an important issue that must be addressed in any federal deregulation bill.

Specifically, NAHB believes the utility industry, legislators and regulators need to adopt an economic and regulatory framework that provides safeguards to ensure the following: (1) residential customers should not pay higher rates; (2) housing affordability must not be negatively impacted; and (3) programs beneficial to home buyers should not be eliminated.

Infrastructure concerns could be costly to potential U.S. homebuyers if not addressed properly in federal electricity deregulation legislation.

INFRASTRUCTURE COSTS

Topping the list of NAHB's priorities is to preserve housing affordability. Under a deregulation scheme, NAHB's primary concern is what will happen with infrastructure costs and the price of new homes. A vast majority of states incorporate the cost of infrastructure into the overall rate base. These infrastructure costs include distribution lines, transformers, meters, etc., all of which are required for new residential development. These costs are currently not separated out as a connection charge to the lot or new home. The utility absorbs these costs. The manner in which hook-up fees and transmission of electricity will be paid is a question of utmost importance to the building industry. For example, in California, where deregulation is furthest along, developers have paid for these hook-up fees since the 70's. In Califor

nia, these types of utility hookup fees have added as much as $3,500 to the cost of a new home. These costs, that in most states are spread across the rate base, could be levied directly on the home builder/buyer under federal deregulation.

Even a small increase in costs of building a new home could significantly hurt the home building industry—more than 40,000 potential home buyers are forced out of the market with every $100 increase in the purchase of a median-priced home. Guaranteed distribution and transmission of energy service needs to be a key area addressed in any deregulation effort, otherwise infrastructure costs and hook-up fees will fall to the home builder and developer and eventually to the home owner. This cost would deprive thousands of families from the American dream of home ownership. NAHB suggests that language be included in any federal deregulation legislation addressing these infrastructure concerns. Further, NAHB suggests that a Government Accounting Office (GAO) report be commissioned studying whether or not deregulation would effect the price of homes. NAHB would be pleased to work with Chairman Murkowski and other members on the Senate Energy and Natural Resources Committee to address this issue and develop a proper study.

Another concern is that deregulation of the electric utility industry could also raise home prices through increased impact fees and increased property taxes. For years, utilities have paid substantial sums in state and local taxes based on the value of their assets. If changes in deregulation cause the value of those assets to decline, their tax payments will decline as well. As these contributions decrease, localities could turn to higher property taxes or impact fees on new homes to compensate for the loss in tax dollars. This would result in an increase in housing costs.

RESIDENTIAL CUSTOMER COSTS

NAHB is concerned that large industrial and commercial customers will be able to negotiate agreements with the lowest cost providers, thereby creating higher costs for residential customers to compensate for the loss of revenue. It is important to not just protect "customers," but, specifically, to protect "residential customers" who may be put at a disadvantage in deregulation. The threat exists that newly emerging energy brokers, not bound by geographic boundaries but able to provide services to anyone, anywhere, will attempt to appeal to the larger industrial customer by offering them lower prices. This could mean that most home builders, the majority of which are small businesses, would not be offered the same competitive prices of the larger user.

NAHB supports legislative provisions permitting retail electric consumers to aggregate purchases of electric energy without licensing requirements. Residential consumers need this purchasing power to help "level the playing field" in a new competitive market. This type of provision allows purchasers with common interests to come together and shop for their energy.

BENEFICIAL ENERGY PROGRAMS

NAHB supports beneficial energy and innovative programs and are concerned about their continuance under federal deregulation. We are pleased that S. 2098 addresses the importance of low-income and energy efficiency programs in Section 103 of the bill. NAHB believes there are important energy programs that must be preserved as we move towards deregulation. Continuing these programs is of utmost importance if we are to encourage innovative energy technology in the future. For example, energy assistance programs for low-income consumers and energy efficiency-related efforts in the residential sector, including voluntary energy-efficiency programs and rebates to builders and homeowners are important and should be continued. The bulk of the expenses associated with these important programs are currently paid for by electric utilities, which recover these costs in the rates they charge.

It is also important that builders and utilities be allowed to continue to use brand names established for voluntary energy programs. A case in point would be that oftentimes there are utilities that offer incentives if a homeowner puts in a ground source heat pump. These energy efficient systems are new, but expensive technology. A ground source heat pump can cost $6,000 to $7,000 more than a standard residential unit. The utility pays for the well drilling, which is costly, and then oftentimes offers a rebate for the equipment to the homeowner. These kinds of incentives are important if new, innovative energy technologies are to become marketable. The economic pressures of retail competition will make it difficult for electric utilities to continue to recover rebates and incentives in their rates. This scenario could dramatically alter the strong relationship that has been built up over decades between home builders and their local utilities. Home builders have worked jointly with their local utility for decades to make homes more energy efficient and more

affordable to the average American. It is important that a mechanism is in place to maintain these incentive programs. The state of California, recognizing the need for these types of incentive programs, mandated public benefits funds be earmarked for such initiatives. There needs to be a concerted effort to preserve these benefits in a deregulated industry.

There are other ways incentives can be offered in a deregulation bill aside from continuing utility rebates and incentives. NAHB would support language allowing for a tax credit for new and existing homes that meet higher energy efficiency levels. NAHB has long supported voluntary energy efficient measures. NAHB is pleased that S. 2098 would allow states to consider these programs in their states if there is a need and benefit.

CONCLUSION

NAHB believes federal deregulation legislation must provide strong buffers against rising costs for the potential homebuyer. This issue could have a profound affect on the lives of virtually every person who hopes to own a home. NAHB requests that the Senate Committee on Energy and Natural Resources carefully address the impact of infrastructure costs on affordable housing and support the continuation of important lowincome and energy efficiency programs under federal utility deregulation.

STATEMENT OF ROBERT H. LAMB, WASHINGTON REPRESENTATIVE FOR PJM

INTERCONNECTION, L.L.C.

PJM is the nation's largest independent system operator (ISO), serving the most robust and liquid electric energy market in North America. I now submit prepared remarks on behalf of PJM for the printed record of the April 27, 2000 hearing.

PJM is a success story. According to Morgan Stanley, the global financial services firm, more energy is traded at the Western Hub within PJM than anywhere else in the nation. Through its collaborative processes, PJM and its market participants already are planning the region's transmission enhancements, and more than 60 new generation projects are currently being planned for additions to the grid. In 1999, PJM cleared nearly $1.8 billion of electricity transactions, without any disputes. With this real-world experience, it should be intuitively obvious that large, independent regional organizations like PJM do indeed work.

As the independent entity responsible for the reliable operation of the largest North American control area (larger than all of England), PJM strongly supports comprehensive legislation that clarifies and affirms Federal jurisdiction for all uses of the interstate system, a truly open and non-discriminatory interstate transmission system, large sustainable regional bulk-power markets, and mandatory reliability standards developed in accordance with accepted due process standards. PJM, however, has the following concerns: (1) the proposed reliability legislation lacks explicit deference to the proper local jurisdictional prerogatives of the States, and (2) there is a need to update, modify, and clarify the reliability provisions in view of the Federal Energy Regulatory Commission (FERC) publication on December 20, 1999 of Order No. 2000 regarding regional transmission organizations (RTOS) and the experiences of the six already approved ISOs in the United States (California ISO, ERCOT, Midwest ISO, ISO New England, New York ISO, and PJM), and the two similar organizations in Alberta and Ontario, Canada. Collectively, those organizations already represent a large proportion of the North American electrical grid.

Although PJM supports the formation of an Electric Reliability Organization (ERO) to establish mandatory, national reliability standards, PJM believes that effective, approved system operators should be granted the rebuttable presumptions in the reliability legislation, including that which relates to variations from otherwise applicable national reliability rules. This is not an effort to balkanize the grid; to the contrary, it is an effort to recognize the critical role of system operators such as ISOs and RTOs in maintaining regional reliability.

RTOS

Chairman Hoecker of FERC-in the fresh aftermath of Order No. 2000-laid out to Chairman Bliley of the House Committee on Commerce his views on electric restructuring legislation approved on October 27, 1999 by the House Subcommittee on

Energy and Power (H.R. 2944, as amended); 1 he singled out for special disapprobation Sec. 103 thereof for its unsatisfactory approach on RTOs. He correctly observed that the provisions of Sec. 103 were "inadequate to advance RTO formation, and in some respects are counter-productive."2 He went on to highlight, and elaborate on, several major deficiencies with Sec. 103;3 we agree with his perceptive assessments. Of course, the House language was formulated prior to the issuance of the Order No. 2000, but aside from closely held letters to Chairman Bliley in response to his November 30, 1999 requests for comments, no House hearing forum likely will be available for critical examination of the product of the House bill vis-à-vis the result of the final RTO rulemaking. Accordingly, it is important that the Senate take cognizance of Chairman Hoecker's viewpoint on the RTO section in the House bill because of possible accretion of elements thereof in its own work product and the chance that a conference committee ultimately will have to resolve differences between the House and Senate approaches if the legislative process this year so dictates.

In his April 27th testimony, FERC Chairman Hoecker stated that the RTO provision in Sen. Murkowski's bill (S. 2098, Sec. 104) "arguably diminishes current authority under the FPA [Federal Power Act] 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 cooperativelyowned transmitting utilities."4 He further indicated that the bill should reinforce what he believes is the current ability of FERC to require RTO participation by public utilities and should extend the authority to non-public utilities as well.5 He also stated that S. 2098 "applies restrictive standards for analyzing RTOs, which may or may not be appropriate criteria for future RTOs as the industry evolves." »6 Commissioner Breathitt and Commissioner Massey also expressed concern about S. 2098's restrictive standards for analyzing RTOs and the lack of explicit authority for FERC to order utilities to join RTOS.7 All of those Commissioners were generally supportive of the RTO provisions of S. 1047 (Administration bill) and S. 1273 (Sen. Bingaman). PJM does not take issue with any of the above observations and suggestions for S. 2098. It is ironic and unfortunate that S. 1047 and S. 1273-both introduced before the finalization of Order No. 2000-were more prescient and accommodative of Order No. 2000 than S. 2098, which was introduced on February 24, 2000 (tracking an earlier draft bill publicly released by Sen. Murkowski on October 8, 1999).

Before moving specifically to the North American Electric Reliability Council (NERC) reliability provision, it is worthwhile to examine the reliability-related aspects of FERC's unanimous Order No. 2000 because, as the testimony of Commissioner Massey pointed out: "Grid reliability is one of the unsung benefits of the RTO institution." In the Introduction and Summary to that Order, FERC mentioned that "Regional institutions can address the operations and reliability issues now confronting the industry. [and] could: (1) Improve efficiency in transmission grid management; (2) improve grid reliability; (3) remove remaining opportunities for discriminatory transmission practices; (4) improve market performance; and (5) facilitate lighter handed regulations." 10 The exclusive short-term reliability characteristic of RTOs is commented on extensively in pages 282-323 of the Discussion portion of the Order and is ratified in the Regulatory Text found on pages 701 and 711-712.

It is important to recognize that, under Order No. 2000, an RTO has specific recourse to the FERC in case any externally established standards "hinder it from providing reliable, non-discriminatory and efficiently priced transmission service.” 11 This is a vital safety valve for an RTO; in effect, it not only provides a pathway for a presumption of validity (with FERC's acquiescence) for regional rules and standards, but also provides an RTO the opportunity to assure that is in accord with its mandatory characteristics and functions as outlined in Order No. 2000. It is crucial that FERC interpret this mechanism in such a way that the RTO could apply

1 December 23, 1999 Letter to Rep. Tom Bliley from James J. Hoecker, Chairman of FERC. 2 Id., Appendix A, at 1.

3 Id., Appendix A, at 1-2.

4 Testimony of Chairman James J. Hoecker, at 27-28.

5 Id. at 28.

6 Id.

7 Testimony of Commissioner Linda Breathitt, at 5-6; Testimony of Commissioner William L. Massey, at 5.

8 Testimony of Hoecker, at 28; Breathitt, Id. at 5; Massey, Id. at 5.

9 Id. at 4.

10 FERC Order No. 2000, at 3.

11 Id. at 712.