IB10006: Electricity: The Road Toward Restructuring

Amy Abel and Larry Parker

Resources, Science, and Industry Division

September 7, 2001

CONTENTS

• SUMMARY
• MOST RECENT DEVELOPMENTS
• BACKGROUND AND ANALYSIS
• Transmission Issues
• Stranded Costs
• Environmental Questions and Proposed Responses
• Calls for Additional Electric Regulatory Reform
• PUHCA
• PURPA
• Retail Wheeling
• Recent Developments in California
• Price Caps
• LEGISLATION

SUMMARY

The Public Utility Holding Company Act of 1935 (PUHCA) and the Federal Power Act (FPA) were enacted to eliminate unfair practices and other abuses by electricity and gas holding companies by requiring federal control and regulation of interstate public utility holding companies. Prior to PUHCA, electricity holding companies were characterized as having excessive consumer rates, high debt-to-equity ratios, and unreliable service. PUHCA remained virtually unchanged for 50 years until enactment of the Public Utility Regulatory Policies Act of 1978 (PURPA, P.L. 95-617). PURPA was, in part, intended to augment electric utility generation with more efficiently produced electricity and to provide equitable rates to electric consumers. Utilities are required to buy all power produced by qualifying facilities (QFs) at avoided cost. QFs are exempt from regulation under PUHCA and the FPA.

Electricity regulation was changed again in 1992 with the passage of the Energy Policy Act (EPACT, P.L. 102-486). The intent of Title 7 of EPACT is to increase competition in the electric generating sector by creating new entities, called "exempt wholesale generators" (EWGs) that can generate and sell electricity at wholesale without being regulated as utilities under PUHCA. This title also provides EWGs with a way to assure transmission of their wholesale power to its purchaser. The effect of this Act on the electric supply system is potentially more far-reaching than PURPA.

On April 24, 1996, the Federal Energy Regulatory Commission (FERC) issued Orders 888 and 889. FERC believed these rules would remedy undue discrimination in transmission services in interstate commerce and provide an orderly and fair transition to competitive bulk power markets. Order 2000, issued December 20, 1999, established criteria for forming transmission organizations.

Comprehensive legislation involves three issues. The first is PUHCA reform. Some electric utilities want PUHCA changed so they can more easily diversify their assets. State regulators have expressed concerns that increased diversification could lead to abuses including cross-subsidization. Consumer groups have expressed concern that a repeal of PUHCA could exacerbate market power abuses in a monopolistic industry where true competition does not yet exist.

The second is PURPA's mandatory purchase requirement provisions. Many investor-owned utilities support repeal of these provisions. They argue that their state regulators' "misguided" implementation of PURPA has forced them to pay contractually high prices for power that they do not need. Opponents of this legislation argue that it will decrease competition and impede development of renewable energy.

The third is retail wheeling. It involves allowing retail customers to choose their electric generation supplier. Currently, this is under state jurisdiction, and 24 states and the District of Columbia have moved toward retail wheeling. However, some have argued that the federal government should act as a backstop to ensure that all states introduce retail wheeling, preempting state authority if necessary. Several stand-alone bills have been introduced in the 107^th Congress, but no comprehensive bills have been introduced.

MOST RECENT DEVELOPMENTS

The House Energy and Commerce Committee, Subcommittee on Energy and Air Quality, held a hearing on July 27, 2001. Subcommittee Chairman Barton announced that draft electricity legislation will be put together in September 2001. The Federal Energy Regulatory Commission (FERC) issued an order on July 12, 2001, requiring mediation talks to begin on the formation of four Regional Transmission Organizations (RTOs). On July 9, 2001, settlement talks to determine rate refunds for the California electricity market ended without an agreement. As required by the FERC's June 19, 2001 order, Administrative Law Judge Curtis Wagner filed his report and recommendations for rate refunds on July 12, 2001[96FERC 63,007]. On June 19, 2001, FERC imposed a "price mitigation plan" for the entire Western United States. (See also the CRS Electronic Briefing Book on electricity restructuring, including state activities.)

BACKGROUND AND ANALYSIS

Historically, electricity service has been defined as a natural monopoly, meaning that the industry has (1) an inherent tendency toward declining long-term costs, (2) high threshold investment, and (3) technological conditions that limit the number of potential entrants. In addition, many regulators have considered unified control of generation, transmission, and distribution as the most efficient means of providing service. As a result, most people (about 75%) are currently served by a vertically integrated, investor-owned utility.

As the electric utility industry has evolved, however, there has been a growing belief that the historic classification of electric utilities as natural monopolies has been overtaken by events and that market forces can and should replace some of the traditional economic regulatory structure. For example, the existence of utilities that do not own all of their generating facilities, primarily cooperatives and publicly owned utilities, has provided evidence that vertical integration has not been necessary for providing efficient electric service. Moreover, recent changes in electric utility regulation and improved technologies have allowed additional generating capacity to be provided by independent firms rather than utilities.

The Public Utility Holding Company Act (PUHCA) and the Federal Power Act (FPA) of 1935 (Title I and Title II of the Public Utility Act) established a regime of regulating electric utilities that gave specific and separate powers to the states and the federal government (see CRS Report RS20015 ). A regulatory bargain was made between the government and utilities. In exchange for an exclusive franchise service territory, utilities must provide electricity to all users at reasonable, regulated rates. State regulatory commissions address intrastate utility activities, including wholesale and retail rate-making. State authority currently tends to be as broad and as varied as the states are diverse. At the least, a state public utility commission will have authority over retail rates, and often over investment and debt. At the other end of the spectrum, the state regulatory body will oversee many facets of utility operation. Despite this diversity, the essential mission of the state regulator is the establishment of retail electric prices. This is accomplished through an adversarial hearing process. The central issues in such cases are the total amount of money the utility will be permitted to collect and how the burden of the revenue requirement will be distributed among the various customer classes (residential, commercial, and industrial).

Under the FPA, federal economic regulation addresses wholesale transactions and rates for electric power flowing in interstate commerce. Federal regulation followed state regulation and is premised on the need to fill the regulatory vacuum resulting from the constitutional inability of states to regulate interstate commerce. In this bifurcation of regulatory jurisdiction, federal regulation is limited and conceived to supplement state regulation. The Federal Energy Regulatory Commission (FERC) has the principal functions at the federal level for the economic regulation of the electricity utility industry, including financial transactions, wholesale rate regulation, interconnection and wheeling of wholesale electricity, and ensuring adequate and reliable service. In addition, to prevent a recurrence of the abusive practices of the 1920s (e.g., cross-subsidization, self-dealing, pyramiding, etc.), the Securities and Exchange Commission (SEC) regulates utilities' corporate structure and business ventures under PUHCA.

The electric utility industry has been in the process of transformation. During the past two decades, there has been a major change in direction concerning generation. First, improved technologies have reduced the cost of generating electricity as well as the size of generating facilities. Prior preference for large-scale -- often nuclear or coal-fired -- powerplants has been supplanted by a preference for small-scale production facilities that can be brought online more quickly and cheaply, with fewer regulatory impediments. Second, this has lowered the entry barrier to electricity generation and permitted non-utility entities to build profitable facilities. Recent changes in electric utility regulation and improved technologies have allowed additional generating capacity to be provided by independent firms rather than utilities.

The oil embargoes of the 1970s created concerns about the security of the nation's electricity supply and led to enactment of the Public Utility Regulatory Policies Act of 1978 (PURPA, P.L. 95-617). For the first time, utilities were required to purchase power from outside sources. PURPA was established in part to augment electric utility generation with more efficiently produced electricity and to provide equitable rates to electric consumers.

In addition to PURPA, the Fuel Use Act of 1978 (FUA, P.L. 95-620) helped qualifying facilities (QFs) become established. Under FUA, utilities were not permitted to use natural gas to fuel new generating technology. QFs, which are by definition not utilities, were able to take advantage of abundant natural gas as well as new generating technology, such as combined-cycle that uses hot gases from combustion turbines to generate additional power. These technologies lowered the financial threshold for entrance into the electricity generation business as well as shortened the lead time for constructing new plants. FUA was repealed in 1987, but by this time QFs and small power producers had gained a portion of the total electricity supply.

This influx of QF power challenged the cost-based rates that previously guided wholesale transactions. Before implementation of PURPA, FERC approved wholesale interstate electricity transactions based on the seller's costs to generate and transmit the power. As more non-utility generators entered the market in the 1980s, these cost-based rates were challenged. Since non-utility generators typically do not have enough market power to influence the rates they charge, FERC began approving certain wholesale transactions whose rates were a result of a competitive bidding process. These rates are called market-based rates.

This first incremental change to traditional electricity regulation started a movement towards a market-oriented approach to electricity supply. Following the enactment of PURPA, two basic issues stimulated calls for further reform: whether to encourage nonutility generation and whether to permit utilities to diversify into non-regulated activities.

The Energy Policy Act of 1992 (EPACT, P.L. 102-486) removed several regulatory barriers to entry into electricity generation to increase competition of electricity supply. Specifically, EPACT provides for the creation of new entities, called "exempt wholesale generators" (EWGs), that can generate and sell electricity at wholesale without being regulated as utilities under PUHCA. Under EPACT, these EWGs are also provided with a way to assure transmission of their wholesale power to a wholesale purchaser. However, EPACT does not permit FERC to mandate that utilities transmit EWG power to retail consumers (commonly called "retail wheeling" or "retail competition"), an activity that remains under the jurisdiction of state public utility commissions. PURPA began to shift more regulatory responsibilities to the federal government, and EPACT continued that shift away from the states by creating new options for utilities and regulators to meet electricity demand. (For additional background on EPACT and PURPA, see CRS Report 98-419.)

The question now is whether further federal legislative action is desirable to encourage competition in the electric utility sector and if so at what speed this change would occur. Currently, 24 states and the District of Columbia have moved toward retail wheeling (23 states and the District of Columbia have enacted restructuring legislation, and New York has issued a comprehensive regulatory order) (see map below). Issues discussed in this brief include repeal or alteration of both PUHCA and PURPA, transmission access and FERC's Orders 888, 889 and 2000, stranded costs, environmental impact, and issues related to utility diversification.

Transmission Issues

In addition to creating a new type of wholesale electricity generator, Exempt Wholesale Generators (EWGs), the Energy Policy Act (EPACT) provides EWGs with a system to assure transmission of their wholesale power to its purchaser. However, EPACT did not solve all of the issues relating to transmission access. As a result of EPACT, on April 24, 1996, FERC issued Orders 888 and 889. In issuing its final rules, FERC concluded that these Orders will "remedy undue discrimination in transmission services in interstate commerce and provide an orderly and fair transition to competitive bulk power markets." Under Order 888, the Open Access Rule, transmission line owners are required to offer both point-to-point and network transmission services under comparable terms and conditions that they provide for themselves. The Rule provides a single tariff providing minimum conditions for both network and point-to-point services and the non-price terms and conditions for providing these services and ancillary services. This Rule also allows for full recovery of so-called stranded costs with those costs being paid by wholesale customers wishing to leave their current supply arrangements. The rule encourages but does not require creation of Independent System Operators (ISOs) to coordinate intercompany transmission of electricity.

Order 889, the Open Access Same-time Information System (OASIS) rule, establishes standards of conduct to ensure a level playing field. The Rule requires utilities to separate their wholesale power marketing and transmission operation functions, but does not require corporate unbundling or divestiture of assets. Utilities are still allowed to own transmission, distribution and generation facilities but must maintain separate books and records.

FERC estimated that Orders 888 and 889 will result in an annual cost savings of $3.8 to $5.4 billion. FERC also expects other non-quantifiable benefits, including better use of existing institutions and assets; technical innovation; and less rate distortion.

On December 20, 1999, FERC issued Order 2000 that described the minimum characteristics and functions of regional transmission organizations (RTOs) http://www.ferc.fed.us/news1/rules/pages/rulemake.htm. In FERC's NOPR, four primary characteristics and eight functions are described as essential for Commission approval of an RTO. The required characteristics are: the RTO must be independent from market participants; it must serve a region of sufficient size to permit the RTO to perform effectively; an RTO will be responsible for operational control; and it will be responsible for maintaining the short-term reliability of the grid. The required functions of an RTO outlined in Order 2000 are: it must administer its own transmission tariff; it must ensure the development and operation of market mechanisms to manage congestion; it must address parallel flow issues both within and outside its region; it will serve as supplier of last resort for all ancillary services; it must administer an Open Access Same-Time Information System; it must monitor markets to identify design flaws and market power and propose appropriate remedial actions; it must provide for interregional coordination; and an RTO must plan necessary transmission additions and upgrades.

Order 2000 does not require RTO participation, set out RTO boundaries, or mandate the acceptable RTO structure. RTOs will be able to file with FERC as an independent system operator (ISO), a for-profit transmission company (transco) or another type of entity that has not yet been proposed. Although RTO participation is voluntary under Order 2000, FERC built in guidelines and safeguards to ensure independent operation of the transmission grid. RTO's are required to conduct independent audits to ensure that owners do not exert undue influence over RTO operation.

FERC Order 2000 required the existing ISOs to submit to FERC by January 1, 2001, a plan to describe whether their transmission organization meets the criteria established in the RTO rulemaking. Electric utilities not currently members of an ISO had to file plans with FERC by October 1, 2000. The order does not mandate RTO formation, but if an individual utility opts not to join an RTO, the utility is required to prove why it would be harmed by joining such an entity.

On July 12, 2001, FERC issued several orders requiring utilities to enter into talks to form four Regional Transmission Organizations. Even though FERC Order 2000 did not set out RTO boundaries, in effect the July 12, 2001 order does. In the past, utilities and some state utility commissioners have argued against large RTOs, stating that currently the expertise is not available to integrate a large geographic region with multiple control centers and power pools. Those in favor of large RTOs, including Commissioners Wood and Brownell, argue that the most efficient operations of the transmission system would take place with large RTOs. Talks have begun between the affected parties.

On May 14, 1999, the United States Court of Appeals for the Eighth Circuit ruled in a case between FERC and Northern States Power. The court held that the Commission over stepped its authority when it ordered Northern States Power Company to treat wholesale customers the same as it treats native load customers in making electricity curtailment decisions. This decision raises federal-state jurisdictional questions, particularly a state's right to guarantee system reliability. Four bills, H.R. 312, S. 172, S. 388, and S. 597, provide for an Electric Reliability Organization to prescribe and enforce mandatory reliability standards. Six ISOs are already in operation but have not been approved as RTOs. Others are in various stages of formation.

Stranded Costs

With the introduction of competition, utilities have been concerned that construction costs that they incurred under their monopoly service territory agreements may not be recovered and will be "stranded" by consumers leaving their system for less expensive power elsewhere. Stranded costs are defined by recovery proponents as those costs that were legitimately and prudently incurred under the "old" regulatory regime that are not economically recoverable under the "new" competitive regime that is being entered. Alternatively, opponents characterize stranded costs as unrecoverable business investments that were known to the utilities. Examples of stranded costs include uneconomic nuclear power plant investments and above-market electricity supply contracts under PURPA. The magnitude of potential stranded costs is uncertain. FERC estimates total retail and wholesale stranded costs to be as high as $200 billion. The issue of stranded costs has been one of the larger transitional issues facing the electric utility industry as it moves towards competition. However, utilities in states that have moved towards competition have allowed for the recovery of stranded costs. In addition, in states that have required divestiture of generating capacity, many utilities have received payments in excess of the facilities' book-value.

FERC Order 888 allows public utilities and transmitting utilities to fully recover stranded costs from those customers wishing to leave their current supply arrangements. "We [FERC] continue to believe that utilities that entered into contracts to make wholesale requirements sales under an entirely different regulatory regime should have an opportunity to recover stranded costs that occur as a result of customers leaving the utilities' generation systems...."

This "fairness" argument is countered by others who argue that ratepayers should not have to pay for the uneconomic decisions made by some utilities. In addition, they argue that stranded cost recovery would delay the benefits of a more competitive generating sector for many years and be a disincentive to the creation of that more competitive generation sector. According to them, the competitive market handwriting has been on the wall for many years, and utilities have simply chosen to ignore it. However, if any cost recovery is determined to be justified under specific circumstances, opponents of stranded cost recovery argue that the regulatory body should not allow 100% recovery, but rather require some sharing of the burden with the stockholders of the individual utilities. For additional information on stranded costs, see the Legal page of the Electricity Restructuring Electronic Briefing Book at http://www.congress.gov/brbk/html/ebele11.html#tsc

¹ Arizona, Arkansas, California, Connecticut, Delaware, District of Columbia, Illinois, Maine, Maryland, Massachusetts, Michigan, Montana, Nevada, New Hampshire, New Jersey, New Mexico, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Texas, and Virginia, West Virginia.

² New York.

³ None.

⁴ Alaska, Colorado, Florida, Indiana, Iowa, Kentucky, Louisiana, Minnesota, Mississippi, Missouri, North Carolina, North Dakota, South Carolina, Utah, Vermont, Washington, Wisconsin, and Wyoming.

⁵ Alabama, Georgia, Hawaii, Idaho, Kansas, Nebraska, South Dakota, and Tennessee

Source: Energy Information Administration
http://www.eia.doe.gov/cneaf/electricity/chg_str/regmap.html

Environmental Questions and Proposed Responses

The electric industry is a major source of air pollution as well as of greenhouse gases. Therefore, changes underway are being closely examined for their potential environmental effects. At issue is whether proposed legislation to restructure the industry should include environmental protections.

The Clean Air Act regulates emissions of conventional air pollutants from electric utilities. While it has historically focused on new construction in applying its most stringent standards, several current and prospective regulations would significantly increase controls on existing, coal-fired facilities. These controls may diminish the attractiveness of renovating older, more polluting facilities, but the effectiveness of the regulations in coping with a restructured industry remains to be seen. In addition, greenhouse gas emissions are not regulated, so any increases in carbon dioxide would not be controlled under existing authorities.

Thus the environmental effects of restructuring depend on whether, for conventional air pollutants, the existing regulatory regimen will work effectively as the industry structure changes. For some pollutants, such as sulfur oxides, a nationwide emissions "cap" seems secure; but for others, particularly nitrogen oxides, the state-led implementation process may have difficulty coping with regional disparities in emissions. For carbon dioxide, any controls would be contingent on future ratification of the Kyoto Agreement to curtail emissions and on domestic legislation.

Several bills that deal with these environmental issues have been introduced in the 107^th Congress. For a summary of these bills, see CRS Report RS20894 (pdf).

Calls for Additional Electric Regulatory Reform

PUHCA

One argument for additional PUHCA reform has been made by electric utilities that want to further diversify their assets. Currently under PUHCA, a holding company can acquire securities or utility assets only if the SEC finds that such a purchase will improve the economic efficiency and service of an integrated public utility system. It has been argued that reform to allow diversification would improve the risk profile of electric utilities in much the same way as in other businesses: The risk of any one investment is diluted by the risk associated with all investments. Utilities have also argued that diversification would lead to better use of under-utilized resources (due to seasonal nature of electric demand). Utility holding companies that have been exempt from SEC regulation argue that PUHCA discourages diversification because the SEC could repeal exempt status if exemption would be "detrimental to the public interest."

State regulators have expressed concerns that increased diversification could lead to abuses, including cross-subsidization: a regulated company subsidizing an unregulated affiliate. Cross-subsidization was a major argument against the creation of EWGs and has reemerged as an argument against further PUHCA reform. In the case of electric and gas companies, non-utility ventures that are undertaken as a result of diversification may benefit from the regulated utilities' allowed rate of return. Moneymaking non-utility enterprises would contribute to the overall financial health of a holding company. However, unsuccessful ventures could harm the entire holding company, including utility subsidiaries. In this situation, utilities would not be penalized for failure in terms of reduced access to new capital, because they could increase retail rates.

Several consumer and environmental public interest groups, as well as state legislators, have expressed concerns about PUHCA repeal. PUHCA repeal, such groups argue, could only exacerbate market power abuses in what they see as a monopolistic industry where true competition does not yet exist. The National Rural Electric Cooperative Association also opposes stand-alone changes to PUHCA. (For further information on PUHCA, see CRS Report RS20015.)

Stand-alone PUHCA repeal legislation has been introduced in the 107^th Congress, but not comprehensive electricity restructuring legislation. S. 206, S. 388, and H.R. 1101 would repeal PUHCA and give FERC additional authority.

PURPA

H.R. 381, S. 388 and S. 552 would prospectively repeal §210 of PURPA, the mandatory purchase requirement provisions. Proponents of such stand-alone bills--primarily investor-owned utilities (IOUs) located in the Northeast and in California--argue that their state regulators' "misguided" implementation of PURPA in the early 1980s has forced them to pay contractually high prices for power they do not need. They argue that, given the current environment for cost-conscious competition, PURPA is outdated. The PURPA Reform Group, which promotes IOU interests, strongly supports such bills by contending that the current law's mandatory purchase obligation was anti-competitive and anti-consumer.

Opponents of these types of bills (IPPs, industrial power customers, most segments of the natural gas industry, the renewable energy industry, and environmental groups) have many reasons to support PURPA as it stands. Mainly, their argument is that PURPA introduced competition in the electric generating sector and, at the same time, helped promote wider use of cleaner, alternative fuels to generate electricity. Since the electric generating sector is not yet fully competitive, they argue, repeal of PURPA would decrease competition and impede the development of the renewable energy industry. Additionally, opponents of PURPA repeal argue that a repeal would create less competition and greater utility monopoly control over the electric industry. The Electric Generation and the National Independent Energy Producers also want comprehensive legislation to look at all aspects of electricity regulation. State regulators are concerned that this legislation would prevent them from deciding matters currently under their jurisdiction. The National Association of Regulatory Utility Commissioners has opposed legislation that would allow FERC to protect utilities from costs associated with PURPA contracts.

Retail Wheeling

Many analysts believe the next logical step in restructuring is retail competition. Encouraging competition in the electric supply system is already occurring as some states allow generating utilities to arrange for transmission of electricity from its sources to a retail consumer whether or not this transaction occurs within their service territory. EPACT expressly prevents FERC from ordering retail competition (retail wheeling). Such transactions remain under state regulatory control; FERC's open access Orders address wheeling at the wholesale level only. However, it is clear that FERC hopes that its Orders will pave the way for states to permit retail customers to shop for their electricity needs anywhere they want, rather than being limited to buying electricity from their local utility.

Indeed, who should determine the pace of boundaries of retail wheeling efforts is a fundamental issue. Electric service is a vital component of a modern economy; thus, national interests are at stake in what direction the restructuring debate takes. Concerns about economic efficiency and the treatment of various participants (such as electric utilities) may suggest to some that the federal government provide direction to current state initiatives. In contrast, others argue that the states, which have traditionally had responsibility over retail electricity issues, have the expertise and experience necessary to handle the situation (more so than the federal government) and that the national interest in electricity supply is neither threatened by state initiatives nor a justification for federal preemption of states' rights. Currently, retail choice is under state jurisdiction, and 24 states and the District of Columbia have moved toward retail competition. Congress may consider whether expanding federal jurisdiction is warranted in the continuing evolution of the electric utility industry or whether a "wait and see" attitude toward state proceedings is more appropriate at this point.

Recent Developments in California

California continues to experience a marked decrease in reliability of electricity supply as well as retail price spikes in the San Diego region. This is partly due to California's restructured electric markets, increased demand, generating plant outages and lack of new transmission and generating capacity. San Diego Gas and Electric (SDG&E) is the first utility in California to move completely to competitive retail electricity prices since the company's stranded costs have been recovered.

Price Caps

Several bills have been introduced that would impose wholesale price caps in California, a return to cost-of-service wholesale rate regulation or demand-based time-of-use rates. Cost-of-service rate regulation allows for recovery of generating costs plus a reasonable rate of return. Those in favor of price caps argue that competition does not yet exist in California's wholesale generating sector and wholesale prices do not reflect what would be expected in a functional market. In addition, it is argued that generators in California are exerting market power by intentionally withholding generating capacity to increase wholesale prices. Those opposed to price caps, including President Bush, argue that price caps would discourage investment in new generating facilities and would further distort the wholesale electricity market. For further discussion on price controls, see CRS Electric Utility Restructuring Briefing Book

H.R. 264, H.R. 268, H.R. 1468, S. 80, and S. 287 would impose cost-of-service regulation for wholesale sales of electricity. H.R. 238 and S. 26 would impose an interim regional wholesale price cap or cost-of-service based rates. S. 597 and S. 764 would require either cost-of-service based rates or load-differentiated rates. In addition, H.R. 1941, H.R. 1974, H.R. 2274, H.R. 2757 and S. 1068 would give FERC wholesale refund authority. This would allow FERC to order wholesalers to provide refunds to consumers if it is determined that unjust and unreasonable rates have been charged.

On June 18, 2001, the Federal Energy Regulatory Commission (FERC) extended its price mitigation Order of April 26, 2001 to include the 11 states in the Western System Coordinating Council (WSCC). FERC's new Order provides for a two-tiered rate structure for the day-ahead and hour-ahead spot market. If California enters a Stage 1 electricity emergency (reserves fall below 7%), the spot market clearing price for California will be based on the bid from the least efficient gas-fired plant located in California that is needed by the Independent System Operator (ISO). All sellers into the California ISO spot market will receive the spot market clearing price. For sellers outside of California, California's spot market clearing price is the maximum price, but sellers can bid and receive less than the spot market clearing price. Generators, but not power marketers, will have the ability to justify their cost if it exceeds the established spot market clearing price. When operating reserves are above 7% in California, the maximum price that can be charged is 85% of the spot market clearing price set during the most recent Stage 1 emergency. For a chronological listing of important events in the California electricity situation, see the Chronology in the CRS Electronic Briefing Book.

LEGISLATION

H.R. 238 (Hunter)
Amends the Department of Energy Organization Act to direct the Secretary of Energy to impose an interim regional wholesale price cap, or cost-of-service based rate, upon sales of electric energy at wholesale in interstate commerce whenever FERC determines that the rates being charged are unjust or unreasonable. The governor of any state may opt out of the price limitation. Certain small power producers and cogenerators would be exempt from the price caps. Introduced January 20, 2001; referred to Committee on Energy and Commerce.

H.R. 264 (DeFazio)
Directs the Federal Energy Regulatory Commission (FERC) to return to wholesale interstate electric rate regulation that was in place prior to Orders 888 and 889. Introduced January 30, 2001; referred to Committee on Energy and Commerce.

H.R. 268 (Filner)
Amends the Federal Power Act to require FERC to order rate refunds when wholesale electric rates are found to be unjust, unreasonable, unduly discriminatory or preferential. FERC is directed to issue an order setting the maximum price, based on the seller's costs, for electricity sold at wholesale in the Western Systems Coordinating Council if the FERC determines that rates are unjust, unreasonable, unduly discriminatory or preferential. Introduced January 30, 2001; referred to Committee on Energy and Commerce.

H.R. 312 (Wynn)
Creates an Electric Reliability Organization (ERO). Amends the Federal Power Act to provide for the establishment of mandatory reliability standards to govern the operation of the bulk-power system. Grants the ERO disciplinary and enforcement powers. Grants FERC approval and enforcement jurisdiction. Introduced January 30, 2001; referred to Committee on Energy and Commerce.

H.R. 381 (Stearns)

Prospective repeal of §210, the mandatory purchase requirement provision, of the Public Utility Regulatory Policies Act of 1978 (PURPA). Introduced January 31, 2001; referred to Committee on Energy and Commerce.

H.R. 954 (Inslee)
Amends the Federal Power Act to require local distribution companies to provide net metering for certain qualified electric energy generation systems. Introduced March 8, 2001; referred to Committee on Energy and Commerce.

H.R. 971 (Walden)
Amends §202(c) of the Federal Power Act. Requires the federal or a state government to guarantee payment to an energy supplier if the Secretary of Energy requires the sale under §202(c) of the Federal Power Act. Introduced March 8, 2001; referred to Committee on Energy and Commerce.

H.R. 979 (Hunter)
Authorizes the President and the Governor of a state to suspend certain Clean Air Act requirements and certain citing requirements that apply to fossil fuel fired electric power plants during times of electric power shortage if it is determined that this shortage could present a threat to public health and safety. Introduced March 13, 2001; referred to Committees on Energy and Commerce, Resources, and Transportation Infrastructure.

H.R. 1045 (Wilson)
Amends §210 of the Federal Power Act to require local utility distribution facilities to provide interconnection with distributed generation facilities. Requires the distributed generation facility to pay for costs directly related to interconnection. Provides tax incentives for distributed energy resources. Requires the Secretary of Energy to develop and implement an accelerated research and development program for distributed energy technologies in cooperation with the Environmental Protection Agency. Introduced March 15, 2001; referred to Committees on Energy and Commerce, on Ways And Means, and on Science.

H.R. 1075 (Hunter)
Allows all available electric generating resources to operate regardless of compliance with Part C or D of Title I of the Clean Air Act when the Secretary of Energy or FERC determines that a State's electricity supply is not more than 110% of demand. Introduced March 15, 2001; referred to Committee on Energy and Commerce, Subcommittee on Energy and Air Quality.

H.R. 1101(Pickering)
Repeals the Public Utility Holding Company Act of 1935. Requires that all holding companies and their affiliates provide access to their books and records to FERC and state public utility commissions. Introduced March 20, 2001;referred to Committee on Energy and Commerce, Subcommittee on Energy and Air Quality.

H.R. 1468 (Inslee)
Existing power plants in the Western United States would be subject to cost-of-service based rates through March 1, 2003. This bill would not apply to power plants that began producing electricity on or after January 1, 2001. Introduced April 4, 2001; referred to Committee on Energy and Commerce, Subcommittee on Energy and Air Quality.

H.R. 1647 (Barton)
A bill intended to help the Western states manage the current electricity situation. In part, establishes a means for consumers to sell conserved power through 2003. Authorizes the Western Area Power Administration to spend $220 million to expand Path 15 in California. The Secretary of Energy would be authorized to establish electric power transmission corridors across Federal lands. Allows PURPA generators to sell power on the open market if payment under a contract with a utility has not been made. Governors could petition EPA for a temporary delay of certain air emission requirements for new plants.

Introduced May 1, 2001; referred to Committee on Energy and Commerce, Subcommittee on Energy and Air Quality. Hearings held May 1, 2001 and May 3, 2001.

H.R. 1664 (Ose)
Allows the Secretary of Interior or the Secretary of the Army to waive any restriction on certain Western generating facilities when an emergency electric power shortage has been declared by the Governor of a state. All waivers would expire no later than December 31, 2001. Introduced May 1, 2001; referred to the Committees on Resources and Transportation and Infrastructure.

H.R. 1874 (Hunter)
Allows a Governor, during a declared power emergency, to allow individuals or businesses located within the state to operate any type of power generation available using any fuel available. Introduced May 16, 2001; referred to Committee on Energy and Commerce, Subcommittee on Energy and Air Quality.

H.R. 1941 (Ose)
Amends §206(b) of the Federal Power Act and grants FERC wholesale electric rate refund authority. Introduced May 22, 2001; referred to Committee on Energy and Commerce.

H.R. 1974 (Ose)
Expands FERC's April 26, 2001 Order that monitors and mitigates California's wholesale electric market (95 FERC 61,115) to apply to the entire Western Region. Removes FERC's limitation of applying when reserves are 7.5% or less. Nonjurisdictional utilities are encouraged to comply. This provision expires September 30, 2002. The Secretary of Energy or FERC may not issue an order to require a seller of electricity to sell power in any State in the Western region unless there is a reasonable assurance that the seller will be paid. Amends §206(b) of the Federal Power Act and grants FERC wholesale electric rate refund authority. Introduced May 23, 2001; referred to Committee on Energy and Commerce.

H.R. 2141 (Thompson, M)
Directs the President to: (1) authorize the Secretary of Defense to use all qualified electric generators during electric power emergencies in the Western Systems Coordinating Council (WSCC) to generate electricity for Department of Defense (DOD) facilities, or to provide additional electric energy for sale at cost for consumption or for resale; (2) direct the Secretary to develop a plan in the event of power emergencies to deploy available mobile electric generation facilities owned or operated by DOD; and (3) coordinate implementation of this Act with the WSCC, as well as with State and local air quality management agencies.

Instructs the Secretary to require all facilities under the Secretary's jurisdiction to implement energy conservation measures. Authorizes the President to exclude any electric generation facility in order to ensure military readiness or facility availability to respond to natural disasters. Introduced June, 12, 2001; referred to Committees on the Armed Services and Energy and Commerce.

H.R. 2274 (Eshoo)
Requires the refund of "unjust or unreasonable" rates and charges for certain sales of electric energy in the Western United States. Payment of refunds is enforceable in U.S. District Court. Introduced June 21, 2001; referred to Committee on Energy and Commerce.

H.R. 2399 (McCarthy, K)
Directs the Administrator of the General Services Administration to identify all potential electrical capacity at Federal facilities throughout the country available from existing installed backup generators. Introduced June 28, 2001; referred to the Committee on Transportation and Infrastructure.

H.R. 2757 (Harman)
Directs FERC to order refunds for charges and rates that occurred between October 2, 2000 and June 20, 2001 that FERC determines to be unjust and unreasonable. Requires FERC to use one of two methodologies for the purpose of determining reasonable rates. Introduced August 2, 2001; referred to Energy and Commerce Committee.

H.R. 2814 (Sawyer)
Amends the Federal Power Act and requires FERC to promulgate rules and standards for performance-based or incentive rates for electricity transmission. Creates an Electric Reliability Organization (ERO). Gives FERC authority to develop voluntary Regional Transmission Organizations (RTOs). RTOs are given an exemption from PUHCA. Requires FERC to prepare an annual report of transmission constraints. Allows FERC to issue certificates of public convenience and necessity for transmission facilities if states have not ruled on siting applications within two years. Any holder of a certificate of public convenience may exercise the right of eminent domain, enforceable in district courts, or state courts. Introduced August 2, 2001; referred to the House Energy and Commerce and Ways and Means Committees.

S. 26 (Feinstein)
Companion legislation to H.R. 238. Amends the Department of Energy Organization Act to direct the Secretary of Energy to impose an interim regional wholesale price cap, or cost-of-service based rate, upon sales of electric energy at wholesale in interstate commerce whenever FERC determines that the rates being charged are unjust or unreasonable. The governor of any state may opt out of the price limitation. Certain small power producers and cogenerators would be exempt from the price caps. Introduced January 22, 2001; referred to Committee on Energy and Natural Resources.

S. 80 (Boxer)
Similar to H R. 268. Amends the Federal Power Act to require FERC to order rate refunds when wholesale electric rates are found to be unjust, unreasonable, unduly discriminatory or preferential. FERC is directed to issue an order setting the maximum price, based on the seller's costs, for electricity sold at wholesale in the Western Systems Coordinating Council if the commission determines that rates are unjust, unreasonable, unduly discriminatory or preferential. Introduced January 22, 2001; referred to Committee on Energy and Natural Resources.

S. 172 (Smith, Gordon)
Establishes a reliability organization and standards for transmission of bulk power. Standards would be enforceable by FERC. Introduced January 24, 2001; referred to Committee on Energy and Natural Resources.

S. 206 (Shelby)
Repeals the Public Utility Holding Company Act of 1935. Requires that all holding companies and their affiliates provide access to their books and records to FERC and state public utility commissions. Introduced January 30, 2001; referred to Committee on Banking, Housing, and Urban Affairs. A hearings was held on March 29, 2001. The bill was ordered to be reported, with amendments on April 24, 2001. Report 107-15 was filed on May 9, 2001.

S. 221 (Boxer)
Establishes in the Treasury a State Electricity Reserve Loan Fund. These interest-free loans are to be used by states to construct electric generating facilities that will only supply electricity to the grid during periods of electricity emergencies, as declared by the Governor of a state. Introduced January 30, 2001; referred to Committee on Energy and Natural Resources.

S. 286 (Feinstein)
Establishes the Small Business Energy Expense Assistance Fund to provide interest-free loans to small businesses in the state of California which meet certain energy use criteria. Introduced February 8, 2001; referred to Committee on Banking, Housing, and Urban Affairs.

S. 287 (Feinstein)
Requires FERC to impose cost-of-service based rates on wholesale electric sales by public utilities in the Western energy market. Introduced February 8, 2001; referred to Committee on Energy Natural Resources.

S. 388 (Murkowski)
Comprehensive energy policy legislation. Title VIII establishes an Electric Reliability Organization (ERO) and prospectively repeals the mandatory purchase requirement under §210 of the Public Utility Regulatory Policies Act of 1978. Effective one year after enactment, the Public Utility Holding Company Act of 1935 (PUHCA) is repealed. The Federal Energy Regulatory Commission and State Public Utility Commissions are given access to holding company's books and records as well as to the books and records of their affiliates. Introduced February 26, 2001; referred to Committee on Energy and Natural Resources.

S. 389 (Murkowski)
Comprehensive energy policy legislation similar to S. 388. Includes tax provisions. Introduced February 26, 2001; referred to Committee on Finance.

S. 408 (Boxer)
Amends the Small Business Act to provide disaster loans that is likely to suffer economic injury as a result of a significant increase in the price of electricity. Introduced February 27 2001; referred to Committee on Small Business.

S. 552 (Gramm)
Prospective repeal of the mandatory purchase requirement under §210 of the Public Utility Regulatory Policies Act of 1978. Introduced March 15, 2001; referred to Committee on Energy and Natural Resources.

S. 597 (Bingaman)
Comprehensive national energy policy. In part, establishes an Electric Reliability Organization. Establishes a federal public benefits fund from which block grants may be disbursed to states and tribal governments to carry out public purpose programs such as energy assistance to low-income households, demand reduction measures and greenhouse gas mitigation projects. Provides consumer protections for retail electric consumers. Imposes load-differentiated demand rates or cost-of-service based rates for wholesale electricity sales in the Western energy market until FERC determines that the market for electricity in the Western energy market reflects just and reasonable rates. These rates would not apply to states that have retail rate caps. Limits the ability of the federal government to require a sale of electricity or natural gas unless there is a guarantee that the seller will be paid. Introduced March 22, 2001; referred to Committee on Energy and Natural Resources. Committee consideration and markup session held on August 2, 2001.

S. 764 (Feinstein)
Instructs FERC to impose cost-of-service based rates or demand-based time-of-use rates in the Western region. The Secretary of Energy or FERC may not issue an order to require a seller of electricity to sell power in any State in the Western region unless there is a reasonable assurance that the seller will be paid. Introduced April 24, 2001; referred to Committee on Energy and Natural Resources.

S. 900 (Durbin)
Establishes the Consumer Energy Commission to conduct a nationwide study of significant price spikes in major U.S. consumer energy products during the 10 years preceding the date of enactment of this Act, and report its findings to Congress. Introduced May 20, 2001; referred to Committee on Energy and Natural Resources. Hearing held on July 12, 2001.

S. 933 (Jeffords)

Amends the Federal Power Act to require FERC to develop procedural guidelines and technical standards for: (1) the interconnection of a generating facility with the distribution facilities of the local distribution utility; (2) the interconnection of a generating facility with the transmission facilities of a transmitting utility; and (3) offers to sell backup power by a local distribution utility and by a transmitting utility to an interconnected generating facility. Introduced May 22, 2001; referred to Committee on Energy and Natural Resources.

S. 1068 (Boxer)
Requires FERC to order refunds, including interest, for sales of electricity that have been identified by FERC to be unjust or unreasonable. This applies to sales that occurred between June 1 2000 and June 19, 2001. Introduced June 21, 2001; referred to Committee on Energy and Natural Resources.

S. 1231 (Wyden)
Amends the Federal Power Act to instruct the Federal Energy Regulatory Commission to promulgate regulations requiring each system operator to establish a standardized information system that provides access (including access on the Internet) to: (1) bulk-power system operating data for all users of the bulk-power system, State regulatory authorities, and the public; and (2) market-bid data for designated persons. Provides for protection of commercially sensitive data upon petition of a bulk-power system user. Restricts disclosure of bidder identity to duly authorized state and federal regulatory agencies. Introduced July 24, 2001; referred to Committee on Energy and Natural Resources.

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