INTRODUCTION

Independent merchant plants, co-generators, and Public Utility Regulatory Policy Act (PURPA) plants have introduced a new breed of competitors that demonstrate that electric generation service is no longer a natural monopoly and should be open to competition. Efforts to restructure the electricity industry are gaining momentum. Various states are pursuing and implementing legislation to restructure their local utilities. There have been serious federal legislative proposals to promote restructuring that, if implemented, would complete the transition to competitive generation, customer choice and open access between 2000 and 2010. The contemplated changes to the electricity industry would take place concurrently - generation to end-use - and have broad and serious implications for all affected. The mechanics and timing of restructuring the electric industry will have a profound effect on the shape of energy markets well beyond that of electricity.

The anticipated cost savings that American consumers and the US economy are expected to realize from restructuring the electric utility industry are significant. Those savings are predicated on the basis that:

1) there is significant under-utilized low-cost power generation capacity that is blocked from reaching consumers by the traditional monopoly franchise territory protections, and

2) providing customer choice and increasing competition for traditional utility services will improve efficiency and lower costs.

The members of the Natural Gas Supply Association (NGSA) agree with these premises and support both federal and state initiatives to accomplish these objectives. Because of NGSA's leadership in restructuring the natural gas industry, our members are acutely aware of the importance of the details of managing the transition to a more competitive energy marketplace.

Gas producers sell approximately 22% of net gas production into the power generation market, which consumes approximately 4.5 TCF (trillion cubic feet) per year. Additionally, there are markets where gas and electricity compete head-to-head. Consequently, the impact of electricity industry restructuring on natural gas producers will include changes in gas demand patterns, gas market structure, prices and load profiles. Natural gas industry participants must respond positively to such new marketplace conditions to ensure that gas stays competitive. NGSA members are confident that the gas industry will aggressively respond to this challenge.

However, it is vitally important to ensure that legislative and regulatory changes to the structure of the industry provide the opportunity for all competitive market participants to respond on fair terms. Such changes must include non-discriminatory access to unbundled transmission and distribution systems and must fully support customer choice of suppliers and services.

For example, if Congress mandates the use of renewable energy sources in electricity markets, as some propose, economically competitive electricity would be precluded from competing in the market by higher-cost electricity from mandated renewable sources. The proposed mandates also pose a significant threat to the development of new merchant plants, forestalling new gas-fired capacity that many expect to be built in a competitive market. NGSA is concerned about the economic consequences of replicating past national policies that attempted to dictate market outcomes, such as policies the natural gas industry experienced in the 1970's and 1980's. Congress and federal agencies have since corrected some of those errors. It is unnecessary to experiment with renewable energy mandates to realize that market distortions and economic losses would result from unwarranted intervention in the marketplace.

The contemplated changes to the structure of the energy industry will also require the identification and implementation of existing and new regulatory policies and legislative provisions that will protect consumers and competitive suppliers from familiar and possibly new types of monopoly behavior. Thus, the Natural Gas Supply Association offers the following detailed recommendations to those formulating state and federal electricity-industry restructuring plans. Based on our experience restructuring the gas industry, the members of NGSA believe it is necessary to adopt these recommendations as core elements of legislation and regulation to make a rapid and smooth transition to a fully competitive electricity marketplace, free of distortions and the undue influence of monopoly power.

POLICY SUMMARY

NGSA members support comprehensive, balanced initiatives to restructure the U.S. electricity industry. Such actions have the potential to:

• Make the electricity industry more competitive, efficient and innovative, thereby reducing consumer electricity prices, stimulating economic growth and improving customer service.
• Save U.S. industry and consumers billions of dollars.
• Create opportunities for new, cost-competitive and environmentally attractive power generators and additional service providers.

• Non-discriminatory access to and by all consumers and all electricity suppliers. NGSA supports a uniform, federally coordinated schedule by which comparable access must be in place. NGSA also supports provisions that grandfather state restructuring plans that effectively achieve retail competition and guarantee retail open access in a timely manner.
• Open access to frilly unbundled transmission and distribution systems, services and rates. The FERC should be directed to: expand interstate market access beyond Orders 888 and 889; regulate independent systems operators (ISOs) and power pools; and ensure consistency in state and regional transmission management initiatives.
• Protection for existing bilateral contracts, while prospectively repealing Section 210 of the Public Utilities Regulatory Policies Act (PURPA).
• Conditional repeal of sections of the Public Utilities Holding Companies Act (PUHCA) without amendment.
• A process to minimize the adverse impact of stranded cost recovery on consumers, competing generators, marketers, and service providers.

• Attempts to limit competition through unnecessarily prolonged implementation schedules.
• Re-opens or conflicts with the Clean Air Act Amendments of 1990. EPA recently proposed new Air Quality Standards for Ozone, fine Particulate Matter and Regional Haze and proposed rules to limit power-plant nitrogen oxide (NOx) emissions in 22 states of the Ozone Transport Assessment Group (OTAG) region with the express purpose of reducing long-range NOx and ozone transport. On their proposed schedule, these regulatory developments obviate the need for Congress to address in legislation any generation-related environmental issues.
• Mandates use of specific fuels, such as renewables, to generate electricity.

Non-Discriminatory Retail Market Access and Customer Choice
 

NGSA strongly supports the federal coordination and implementation of non-discriminatory open access to electricity transmission and distribution services, and retail electricity markets. Open access should permit companies to site and connect new merchant generating stations to the grid on a purely competitive basis and provide consumers the ability to self-generate without penalty. The issues that must be addressed are: the development, management and structure of transmission system operators; the resolution of federal I state jurisdiction issues; the determination of dispatching procedures, mechanisms and commercial practices; and the determination of the physical access requirements for plant tie-ins and service provider switching. Comprehensive legislation should:

• require open-access connection of both supply and end-use markets,
• allow suppliers and consumers to bypass utility transmission and distribution, and prohibit exit fees.

• Competition within the natural gas commodity marketplace has significantly enhanced reliability, expanded markets and exerted downward pressure on the price of natural gas.
• Government mandates force private enterprise to allocate resources inefficiently, raising costs and distorting the supply/demand balance of competitive markets. The negative experience of the natural gas industry with government mandates has been extensive. Wellhead price controls led to significant market distortions and gas supply shortages in the I 970s. Based on the incorrect perception that gas reserves were running out, Congress enacted the Power Plant and Industrial Fuel Use Act of 1978, which precluded the use of natural gas in power plant operations. With the removal of price controls and the repeal of the Fuel Use Act, the supply of inexpensive natural gas has become abundant, and gas has become a fuel of choice for electricity generation based on economic, environmental, and engineering considerations.
• A government mandate for a particular energy source would be inconsistent with the direction of the electricity industry and would increase costs to consumers, undercutting the consumer benefits of electricity industry restructuring.

NGSA opposes the stand-alone repeal or reform of PURPA. NGSA supports the protection of existing contracts and the sanctity of bilateral negotiated contracts. NGSA opposes any attempt to force the cancellation or re-negotiation of such contracts. However, NGSA does support the prospective repeal of section 210 of PURPA as part of properly structured comprehensive electricity restructuring legislation.
 
Prospective & Conditional PUHCA Reform
 
As part of a comprehensive restructuring bill, NGSA supports the conditional repeal of certain provisions of PUHCA. The conditional repeal of PUHCA proposed by the SEC in June 1995 may form a good starting point for Congress and should be seriously considered. However, if Congress decides to take independent action to repeal or reform PUHCA, NGSA would strongly oppose any non-PUHCA related amendments to such a bill.
 
Grandfathering State Restructuring Plans
 
NGSA supports comprehensive federal electricity restructuring legislation that includes a provision to grandfather state electricity restructuring plans that guarantee retail open access, customer choice, and effectively promote competition.
 
Expanding Interstate Market Access
 
FERC Orders 888 and 889 have established certain wholesale market reforms. However, there are numerous remaining barriers that restrict consumers' ability to access power directly from the market. NGSA supports federal and state efforts to pursue market reforms beyond FERC Orders 888 and 889 to eliminate barriers for consumers to gain access to or participate in the electricity markets. Bringing additional liquidity, depth, and competition to the market requires expanding the access to and scope of the interstate market to include new participants. Restructuring legislation should direct the FERC and/or PUCs to achieve this end.
 
Support EPA's Existing Authority on Environmental Issues
 
New regulations proposed by EPA, when finalized, will substantially reduce the emissions from the power generation sector and eliminate the competitive imbalance between generators that currently exists due to regional differences in attainment or plant grandfathering under the Clean Air Act. In addition, the schedule for the rules to take effect is consistent with the range of dates considered for implementing retail electric competition, making the emissions reductions and associated plant costs concurrent with retail choice.
 
In the event that environmental issues are raised in the legislative debate on electricity:

• NGSA has long supported environmental policies that: are necessary, are supported by science and economics, promote source compliance flexibility, and utilize market trading mechanisms to achieve the desired air quality goals at the lowest cost afforded by the marketplace. However, it is not necessary to address air quality concerns in restructuring legislation. In fact, any legislative effort in this regard would likely be duplicative of or in conflict with existing statutes and regulations that are well on the way to achieving our nation's air quality objectives. In addition, tying an environmental requirement to retail competition would likely forestall consumers' realization of the benefits of competition.
• NGSA opposes the inclusion of an environmental title in electricity legislation.
• NGSA opposes the reopening of the Clean Air Act.
• NGSA opposes mandates for energy production or use of any type.

All current utility services that can be unbundled, should be unbundled, discretely priced and offered to customers and any market participant on a non-discriminatory basis. Each service should be evaluated separately by the Commission(s) to determine whether such services can be offered competitively. The regulated utility should provide only services that unregulated, non-affiliated participants cannot offer competitively.
 
After unbundling, all remaining utility monopoly services should continue to be regulated. Parties requesting utility service should be able to choose selectively from among the unbundled utility service(s).
 
Rapid & Certain Pace of Restructuring
 
Restructuring should be implemented as fast as is practicable. The transition to a competitive electricity market and unbundled utility services should be manageable, but certain. This certainty provides clarity and motivation for all parties involved in the process. To do otherwise would deter market entrants and confuse customers. The lack of certainty essentially protects incumbents' ability to exercise their monopoly power during an undefined period of change.
 
Clarification of Regulatory Jurisdiction
 
Legislation should clearly distinguish between federal and state jurisdiction. Legislators and regulatory agencies should anticipate regulatory "gaps" created by the reform or repeal of existing federal and state statutes. These authorities should take the steps necessary to protect consumers and market participants from market power abuses, cross subsidies, etc., such that a frilly competitive market develops from electric industry restructuring efforts.
 
Avoid Granting Duplicative and Conflicting Regulatory Authority To ISOs
 
States should not be granted new (independent) authority over interstate energy transportation, sales or the operation of ISOs. This authority appropriately resides with the FERC and should remain there. It is vital to the development of the market that ISOs and other interstate energy commerce organizations conduct business on a consistent and non-discriminatory basis. To ensure this, ISOs must remain regulated by FERC. Furthermore, FERC's authority over all transmission facilities as well as reliability should be clarified. States should be directed to cooperate with FERC to ensure that interstate system reliability is maintained.
 
Shift Merger Authority From FERC To The Dept. Of Justice
 
Merger review and approval authority should be transferred to the Department of Justice from FERC. Furthermore, DOJ should be instructed to seek assistance, expertise and review in consultation with FERC on regulated energy company mergers that have interstate implications.
 
Extend Federal Eminent Domain To Electric Transmission Facilities
 
The Natural Gas Act provides interstate gas pipeline companies eminent domain for the purpose of constructing interstate gas transmission pipelines. This has been very important to the development of an interconnected and efficient gas transmission system. By extension, it has enabled the development of a more competitive and reliable gas industry. This right should be extended to interstate electricity transmission companies. Legislation should ease the ability of electricity transmission companies to expand and improve the efficiency of interstate transmission lines by granting eminent domain rights for locating new and improving existing facilities.
 
Do Not Restrict Sales From Tax-Exempt Financed Generators
 
NGSA recognizes that facilities built with tax exempt financing enjoy a competitive advantage over generators that made un-subsidized investments at risk. Similar advantages accrue to generators that built plants using rate-payer funds. However, restrictions of such facilities' sales of electricity are not recommended due to the inability to expediently determine an equitable solution to this problem and the impending delay of customer choice and competition that would result.
 
Allow Federal Power Marketing Authorities To Make Competitive Power Sales
 
Upon the expiration of a wholesale PMA contract, all (incremental) power sales from the PMA should be performed on a competitive basis.
 
No Mandates: Nuclear Power "Must Run" Provisions 

NGSA supports the development of a competitive electricity generation market. Must run provisions would amount to nothing more than a mandate for nuclear-fueled units. NGSA firmly opposes mandates for any source of generation.

Establish Utility Affiliate Separation Rules And Codes Of Conduct
 
The law should require the complete physical and operational separation of unregulated marketing (or other) affiliates from the regulated utility and impose comprehensive and enforceable rules of conduct for affiliate transactions with other affiliates and/or the regulated utility. FERC and PUCs should be directed to monitor and enforce non-discriminatory access to and pricing of all utility facilities and services under their jurisdiction, including the establishment of complaint procedures and customer help lines. Furthermore, state PUCs and FERC should be empowered and required to conduct routine management audits of utilities and their affiliates to determine compliance with the separation guidelines and rules of conduct within their jurisdiction.
 
The penalties for the abuse of affiliate rules should fit the offense. Severe and/or conscious infractions of affiliate separation rules and codes of conduct should be penalized by suspending the utility's marketing affiliate from marketing and providing other unregulated services in the utility's franchise territory and should include appropriate fines and other remedies. The Commission should routinely monitor utility I affiliate relationships and their transactions through regular management audits. The Commission should be empowered and required to initiate a disciplinary action without the requirement that another company or customer file suit or request intervention.
 
Regulated utilities should not be permitted to provide any unregulated services. A utility's separated affiliate should be allowed to compete for unregulated portions of the market.
 
Bypass Pilot Programs
 
There have been many pilot programs nation-wide, all with distinct variations on their implementation. Each has provided the industry and the regulators with meaningful lessons. Thus, there is now sufficient experience from which to draw. Legislators and regulators should seriously consider proceeding without further experimentation. Additionally, pilot programs are, by nature, limited in size and scope. Therefore, pilots cannot replicate fully the effects of competition and unbundling.
 
Minimize Stranded Costs
 
Legislation should direct the states and FERC to implement a process to minimize the adverse impact of stranded cost recovery on consumers. Stranded costs should be minimized because they negatively affect consumers and partially defeat the purpose of restructuring itself. Stranded costs raise the cost of delivered electricity to consumers, distort the market value of electric power to consumers and delay the consumers' realization of the benefits of a competitive market. Utilities should have the opportunity to justify and recover an equitable portion (determined in public proceedings) of prudently incurred, net-verifiable and non-mitigatable stranded assets.

• All potential stranded costs should be closely evaluated by the appropriate federal or state authority and verified. Each potential stranded cost should meet prudent, used and useful criteria. Such costs must be determined to have been caused by the unbundling and restructuring proceeding, not otherwise.
• The utility should also be required to take all reasonable steps to mitigate those costs. The remaining contracts and/or assets/liabilities should be sold at auction or by another nondiscriminatory sale mechanism to establish their true market value. Any remaining negative balance could then be considered stranded.
• Exit fees directly contradict the basic tenets of customer choice, penalizing consumers who switch suppliers or self-generate. They act as a barrier to competition. Therefore, exit fees should be disallowed.
• Securitization should be minimized since it in effect reduces utility obligations through tax avoidance. It also creates an irrevocable debt commitment of the ratepayer that cannot be modified as the market conditions, which cause the stranded costs, change. Scrutiny is necessary when evaluating whether to securitize any "stranded investments."