5.4. ERMUSR 03-20-2007Elk River ^~-~
Municip al Utilitie s
13069 Orono Parkway
Elk River, MN 55330
March 9, 2007
To: Elk River Municipal Utilities Commission
Jerry Takle
Jerry Gumphrey
Jim Tralle
From: Bryan Adams
Subject: APPA Position Papers
phone: 763.441.2020
Fax: 763.441.8099
Jerry Takle and I had an opportunity to attend the APPA legislative rally in Washington
D.C. Attached are copies of APPA's position papers for your review. Jerry and I will
update you at our meeting about our legislative visit.
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~~' American Puhlic Power Association ^
FEBRUARY 2007
® FERC Authority to Ensure
~ Effective Wholesale Competition
^
® Federal electricity policies should promote effective competition supplemented by effective
regulation as necessary in wholesale electricity markers for the benefit of consumers and the
well-being of our economy, and to do so in ways that recognize the regional diversity in those
markets. "To do this, the Federal Energy Regulatory Commission (FERC) must use its new
and existing authorities under the Federal Power Act to, among other things: allow market-
. based rate sales only by sellers that cannot. exercise market power, requiring cost-based rates
and/or mitigation measures if needed; ensure transparent market information; remedy
market power abuses in a timely manner; address the rising costs and accountability problems
that exist in organized markets run by Regional Transmission Organizations (RTOs) and
Independent System Operators (ISOs); and ensure long-term access to power supply and
transmission rights in all regions.
Because of continuing problems that. members of the .Arrrerican Public Power ASSOC1aClon
(APPA) have experienced in regional wholesale power markets (especially markets in
RTO/ISO regions), APPA has instituted the Electric Market Reform Initiative (EMRI) to first
. assess and then address market failures and other serious challenges facing public power
systems across the country. In February of 2007, a series of studies commissioned by EMI2I
assessing the situation in RTO/ISO run markets were released. These studies indicate that.
there arc: indeed significant problems in these rnarkets that need to be addressed by FERC.
Congress can also play a role in addressing these problems by working with FERC to ensure
. that electricity markets are functioning properly.
~ '1 1
Despite congressional and FERC actions intended to create effective competition in
wholesale electricity markets, the results have been disappointing. The Energy Policy Act of
. 1992 opened wholesale markets to independent power producers, which in turn underscored
the need for open access by these new market participants to the bulk transmission lines
largely owned by vertically integrated investor-owned utilities. In 1996, FERC issued its Open
Access Transmission Tariff (OATT) regulations to address this issue. Subsequently, FERC and
some electricity industry stakeholders pushed for an even more aggressive model that would
. structurally separate transmission from generation -that of RTOs or ISOs. (Please refer to
APPA's primer "Understanding Electricity Markets" for a more detailed discussion of
RTOs/ISOs, which may be found on APPA's website at v,~~w.APPAnet.org.) Several regions
adopted this model and instituted RTOs/ISOs to operate their bulk transmission systems.
Also during the 1990x, over 20 states restructured their retail electric markets. However, the
. trend of states restructuring their retail markets ended after the western electricity crisis of
2000-2001.
As RTOs/ISOs have developed, they have instituted centralized bid-based (i.e., auction)
markets that make transmission and generation available to the highest bidder. As these
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RI'Os/ISOs have fully implemented their bid-based markets over the last several years, costs
have substantially increased, the ability of buyers to obtainlong-term sources of power supply
has waned and the bureaucracies of the RTOs/ISOs have grown. At the same time, in both
RTO and non-RTO regions, many believe that certain stakeholders have exercised market
power and have engaged in market manipulation that has not. been adequately addressed
either by the RTOs/ISOs or by the FERC.
Iiz the last few years, FERC has begun to recognize that greater oversight of RTOs/ISOs and
the markets they run is needed. One example of FERC's increased scrutiny is the December
16, 2005 Final Rule on RTO, ISO and public utility (investor-owned utility) accounting, which
APPA supported as a first step toward ensuring greater RTO cost effectiveness and
accountability to customers. However, FERC needs to exercise even more rigorous oversight
of RTOs and ISOs and the markets they run. FERC must also complete the implementation
proceedings needed for net-buyer utilities in RTO regions to access long-term power supply
sources using long-term financial transmission rights, as contemplated in the Energy Policy
Act of 2005 (EPAct 2005).
Following is an overview of several of the major initiatives FERC has undertaken to address
some of the problems in wholesale electricity markets.
Market Based Rates and Mitigation of Generation Market Power
In 2004, FERC adopted two new generation market power "screens" (criteria used to
determine whether or not a generator has market power), and is applying those screens on
an interim basis to all public utilities with market-based rate authority. ("Public utility" is the
term for investor-owned, for-profit utilities and other generation sellers regulated by FERC
under the Federal Power Act (FPA), as opposed to the "publicly-owned" not-for-profit utilities
comprising APPA's membership.) Under FERC's interim tnarket-based rate policy, investor-
owned utilities, power marketers, and independent power producers that fail either of FERC's
interim generation market power screens zntzst either provide more detailed analyses to prove
that they do not have generation market power or propose mitigation measures to ensure
they cannot exercise such market power. Sellers that fail the screens and cannot show FERC
they do not have market power must mitigate their rates or sell wholesale energy at cost-based
rates instead of market-based rates.
In May of 2006, FERC issued a notice of proposed rulemaking (NOPR) to reexamine its
policies for granting public utilities authority to make wholesale sales of electric energy,
capacity or ancillary services at market-based rates, as opposed to cost-based rates (which
allows for sales based on the actual cost of the power supply plus a reasonable profit margin).
APPA has filed comments with FERC on the NOPR, noting that the Commission should "err
on the side of caution" in allowing sellers to charge market-based rates because the risk of
market power is greater in the electricity market than in other markets, and the ability to sell
at these rates is "a privilege, not an entitlement." FERC is currently reviewing all of the
comments and will issue new market-based rate rules in 2007.
Strengthening the Open Access Transmission Tariff (OATT)
In May 2006, FERC issued a NOPR to consider reforms to the OATT regulations issued in
1996 in Order No. 888. FERC believes a number of changes may be needed to ensure open
access tariffs fully mitigate the transmission market power of FERC-regulated public utilities.
The Order No. 888 OATT is used outside of RTO regions, and attempts to ensure chat access q~~,';
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to the bulk transmission grid is fair to all ~a~holesale market participant_ti.
In initial comments on Lhe NOPR Filed in August 2006, APPA told FERC that discrete
changes are needed to the OP:I"T, especially in the areas of transmission planning and joint
transmission Facilities ownership, along with vigorous enforcement of the tariff's provisions.
APPA said that afull-scale overhaul, however, is not neededIn September of 2006, APPA filed
reply comments on the NOPR in which it urged the Commission to "not excuse RTOs from
ih~e requirement to demonstrate that their non-OA'IT transmission regimes are consistent
with or superior to OA'1 T ser~~ce," among other things. Finally, in llecember 2006, APP:
filed supplemental comments on the issue of whether GATT transmission providers should
be required to administer generation redispatcll markets. APPA argued that such markets
^~
i would be complex, difficult for transmission providers owning generation to administer, and
would not yield substantial improvements in OAT"T transmission service. FERC is expected to
issue a final rule on OATT reform in the first part of 2007.
PUHCA and the Energy Policy Act of 2005
EPAct05 repealed the Public Utility Holding Company Act of 1935 (PUI-ICr1). At the same
time, Congress enhanced FERC and state utility commission access to holding company
books and records. In addition, Congress expressly ensured that, with the repeal of FUIICA,
FERC would retain its authority to require just and reasonable rates, prevent cross-
subsidization, and issue such rules as are necessary to protect consumers with regard to
® holding company affiliates. On llecember 8, 2005, FERC issued a Final Rule to implement
these new authorities (now known as PUHCA 2005).
APPA believed that FERC made agood-faith effort in crafting this Final Rule. Nonetheless,
inJanuary 2006 APPA joined the National Rural F,lectric Cooperative Association (NRECA) in
. seeking rehearing on certain aspects of the Final Rule, including FERC's decision not to
include concrete measures to avoid cross-subsidization of unregulated business activities by
regulated public utilities and to forego the requirement that public utilities file all relevant
cost allocation agreements. In April of 2006, FERC made some limited changes in its
rehearing order, but it did not grant the substantive relief APPA and NRECA had sought. In
. response to further rehearings filed by organizations on the opposite side of the issues from
APPA and NRECA, FERC issued another order in July of 2006, in which FERC ruled that a
^ holding company may exclude the revenue of out-of-state exempt wholesale generators,
foreign utility companies, and qualifying facilities when determining whether the holding
company qualifies as a "single-state holding company system." APPA and NRECA sought
rehearing of this nrling, arguing that it creates a loophole that allows large interstate holding
companies to avoid regulatory scrutiny as long as their regulated public affiliates operate
. primarily in one state. This rehearing application is still pending as of this writing.
Market Manipulation Authority under the Energy Policy Act of 2005
EPAct05 substantially expanded FERC authority to prohibit and to impose penalties for
market manipulation. The statute prohibits the submission of false information to a federal
. agency regarding the price of electricity or availability of transmission capacity with the intent
to fraudulently affect the data being compiled by that agency. There is a blanket prohibition
on deliberately using a manipulative contrivance or device in connection with the purchase
or sale of electric energy or transmission service subject to FERC's jurisdictionThe FPA now
permits substantial civil and criminal penalties of up to $1,000,000 per occurrence and five
. years in prison if these prohibitions are violated. The market manipulation provisions
contained in EPAct05 are applicable to all wholesale market participants, including public
r
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power systems to extent that such systems engage in FERGjurisdictional activities.
In January of 2007, FERC imposed its first round of penalties with these new authorities
based on self-reports made to the FERC by the utilities that committed the offenses. In total,
five investor-owned utilities agreed to pay approximately $22.5 million in fines.
Merger Review Authority
EPAct05 modified FERC's merger review authority to provide the Commission with authority
over the merger of t~~o or more holding companies, as well as the acquisition or sale of
generation facilities by investor-owned utilities. The merger review provisions now apply to
transactions with a value in excess of $10,000,000 and FERC must act on merger applications
v`~thin 180 days of filing. (FERC may issue an order extending time for action on the
application another 180 days.) FERC shall approve the proposed disposition, consolidation,
acquisition or change in control if it finds that the transaction will be consistent ~~ith the
public interest and will not result in cross-subsidization of non-utility affiliates.
FERC sought comments on how it should implement these new merger authorities. APPA's
comments recommended that FERC should revisit its regulatory framework for reviewing
merger transactions, to reflect post-PUHCA repeal structural realities, and that on a case-by-
case basis, FERC should include express protections against cross-subsidization in merger
approvals. A final rule implementing FERC's merger re~~iew authority was released in
December 2005, and APPA and NRECA sought rehearing in January of 2006 urging FERC to
strengthen the cross-subsidization protections in the rule and to "rethink its regulatory
framework to deal with these new structural realities." FERC's April 2006 order on rehearing
added some additional protections against cross-subsidization based on APPA's and NRECA's
concerns. FERC has also indicated that it will hold a technical conference on the broader
issue of its merger re~~iew policy in 2007.
Long-term Transmission Rights
Ensuring access to long-term transmission rights (LTTRs), especially in RTO/ISO regions,
was a high priority for APPA during consideration of EPAct05, and was ultimately included in
the statute. After EPAct05's passage, ensuring timely and fair implementation of LTTRs in
RTO regions became a top pnoriry as well. In February of 2006, FERC issued its proposed
rule on LTTRs, which APPA largely supported. APPA noted in its comments that its members
in RTO regions "are experiencing increasing problems securing new long-term baseload and
renewable generation resources and power supply contracts, due in part to their inability to
hedge for a substantial period of time the transmission congestion costs associated with such
resources." In July of 2006, FERC issued its final rule on LTTRs, requiring RTOs that oversee
organized markets to make LTTRs available to their transmission customers and to file
compliance plans by January 29, 2007. APPA filed for rehearing of the final rule on a few
limited issues, including the issue of which load serving entities ("CBEs") should obtain
LTTRs on a pnoriry basis. Having obtained favorable clarifications fiom the Commission in a
November 2006 rehearing order, APPA has concluded its work in this docket. Individual
APPA members in RTO regions are now participating in the various LTTR implementation
dockets.
Market Transparency
EPAct05 contained provisions on electricity market price transparency. In 2006 FERC held
meetings with stakeholders, a workshop and a technical conference to determine the
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appropriate way to implement these provisions, but has not yet issued any proposed rule. In
its comments filed afterthe technical conference, APPA noted that the purpose of the
transparency provisions was to make rnarkets work more effectively. Therefore, FF.RG should
not focus solely on price indices as determinants of price transparency. Instead, "t.he
Commission should broaden its focus to consider how greater availability of market
information can improve. price transparency and help address problems in natural gas and
electricity-markets."
. ~ • , 1 1
FERC has adequate authority to ensm~ejust and reasonable wholesale rates and to obtain
information needed to oversee wholesale markets, but needs to exercise this authority more
rigorously. Congress can also play a role in encouraging FERC to utilize its existing
authorities, especially in the context of RTOs/ISOs.
APPA supports FERC's initiatives to address generation market power issues through it_s
rnarket-based rate policy review, and its implementation of the market manipulation and
long-term transmission rights provisions under EP.Act05.
APPA did not support the repeal of PUHCA included in EPAct05, holding to the position
that the preservation of PUHC,A and more active enforcement by the Securities and
. Exchange Commission (SF.C) was crucial to achieve effective wholesale competition in the
electric utility markets for the benefit of consumers and the public interest. On the other
. hand, APPA strongly supported the market manipulation prohibition and the enhanced state
and federal access to holding company books and records included in EPAct05, as well as
FERC's enhanced authority over holding company and generation-only mergers. APPA
believes that these authorities - if fully enforced -will help to offset the potential for the
exercise of market power created by PUHCA's repeal. T
L~
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~~ American Public Power Association
FEBRUARY 2007
~' Regional Transmission Organizations
There are currently six operational Regional Transmission Organizations/Independent
System Operators (RTOs/ISOs) under the jurisdiction of the Federal Energy Regulatory
Commission (FERC): ISO New England (ISO NE); the New York ISO (NY ISO); the PJM
Interconnection (PJM); the Midwest ISO (MISO); the California ISO (CAISO); and the
Southwest Power Pool (SPP). (The ERCO'T ISO in Texas is not FERC jurisdictional, so it will
not he discussed in this fact sheet.) It is doubtful whether additional RTOs will form in the
-rest of the country in the foreseeable future. This document will give a brief description of
the history of the six RTOs, discuss each RTO, and summarize APPA's position on RTOs.
(For a more detailed discussion of RTOs/ISOs and regional electricity markets, please refer
to APPA's "Understanding Electricity Markets," available on our website at www.APPAnet.org.)
In April 1996, FERC issued its landmark Order Nos. 888 and 889. In Order No. 888, FERC
directed the electric utilities under its jurisdiction (primarily investor-owned utilities) to
provide open and nondiscrimiriatory access to their transmission lines in order to help bring
down the cost of electricity through increased wholesale competition. FERC also encouraged
the formation of ISOs, and set out certain functions they should perform. In Order No. 889,
FERC required jurisdictional utilities to establish electronic bulletin boards, called "Open
Access Same Time Information Systems" (OASIS), to help manage the non-discriminatory
flow of electrons across transmission systems.
As regional power markets began to develop, one thing quickly became clear: in regions
where a few incumbent utilities owned and controlled a large portion of the region's
transmission assets, competitive markets were slow to develop. Moreover, new transmission
facilities were not being built at the same rate as new generation (and almost all of that
generation was non-utility owned and natural gas-fired). Therefore, on December 20, 1999,
FERC issued Order 1\`0. 2000, in which FERC encouraged all transmission owners to
y
.! voltmtarily develop and join RTOs. APPA members at first viewed RTOs with guarded
optimism because RTOs had the potential to: provide non-discriminatory access to
"
"
transmission systems; reduce transmission rate
pancaking
across individual utility systems;
and plan for and oversee the construction of new transmission facilities. RTOs were to have
independent governance, encompass an appropriate regional size and scope, maintain
operational authority over their transmission facilities, and coordinate system reliability.
Order No. 2000 required FERGjurisdictional transmission owners to submit an RTO plan by
October 15, 2000, and targeted December 15, 2001, as the date by which all RTOs would be
operational. But since there was still no obligation to join an RTO under Order No. 2000,
RTOs did not form in a number of regions. This led to FERC's subsequent push in 2002 to
standardize RTO functions and markets across the nation and to require jurisdictional
utilities to participate in them. This FERC initiative, called "Standard Market Design" (or
SMD) spawned significant opposition in Congress and further stalled RTO development in
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regions of the country that did not. yet. have them (primarily the Pacific Northwest, the South,
and the desert Southwest).
A Brief Description of the Scope and Function of the Six RTOs: In regions with operating RTOs,
market participants buy and sell a variety of electricity products and services in RTO-run
markets. Typically, these products and ser-~ices are not actually furnished by the RTO itself;
instead they are sold by market participants through market structures that the RTO
administers. For example, in RTO regions with centralized markets for electric energy (PJM,
NYISO, ISO-NE and MISO [CAISO?]), the RTO operates the day-ahead and real-time
markets through which market participants buy and sell spot electric power. The RTO does
not own the power plants that generate the power bought and sold in the market. But the
RTO develops the rules it uses to administer the markets, decides which generators will run
and at what levels, grants (or denies) the transmission services needed for transactions to
occur, and runs the billing systems for payments for power.
Much of the controversy over RTOs centers on the use of markets to manage transmission
line congestion and balance generation output against customer load (demand). Most RTOs
manage congestion on their transmission systems (where demand for transmission service in
a specific direction exceeds the capacity of the needed lines) by charging a premium to
transmission customers using those lines. The premium is based on the difference in spot
power prices at the desired point of receipt into the transmission system and the desired
point of delivery. This congestion pricing system is known as "locational marginal pricing"
(LMP). These RTOs also operate day-ahead and real-time spot power- markets. The prices
for power in these markets are set every hour based on the bids that sellers submit to the
RTO. The RTO takes all bids in ascending order, and stops with the last incremental bid
needed to supply power to buyers in that time irrt.erval. The price all sellers in that time
interval receive, however, is based on the last bid the RTO accepted-this is known as a
"single clearing price" market. RTO markets with these features are called "Day 2" markets.
(The CAISO does not yet use afull-fledged "Day 2" market, but has filed with FERC to
implement one. SPP began operating an real-time energy imbalance market on February 1,
2007. )
Beyond these basic similarities, each RTO has individual characteristics:
CAISO: Operates only in California, but it is fully FERGjurisdictional. Some public power
systems in the state have chosen not to turn over operational control of their transmission
facilities to the CAISO, but all public power systems are impacted by the CAISO's spot market
prices and provision of transmission ser~zce, due to the web of business relationships among
market participants in the state.
ISO NE: Operates in Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, and
Connecticut. ISO I~iE proposed to add a new locational generation capacity market (called
Locational Installed Capacity or LICAP), which engendered great controversy in the region.
However, most parties have now agreed to a settlement which replaces the LICAP proposal
with a Forward (:apacity Market (FCM). The Commission has approved the FCM settlement,
but some parties, including the state of Maine, continue to oppose it.
MISO: Operates in all or parts of Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan,
Minnesota, Missouri, Montana, Nebraska, North Dakota, Pennsylvania, South Dakota,
Virginia, Wisconsin and Manitoba, Canada. There have been complaints about MISO's high
rates, and the investor-owned utilities in Kentucky have requested and obtained FERC
permission to withdraw their transmission facilities from MISO's control. `~
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i
NY ISO: Operates only in New York, but is fully FERGjurisdictional. New York City is a very
u ansmission-constrai~~ed area within the N'Y ISO, which requires substantial mitigation of the
NY ISO power markets.
~t PJM: Operates in all or parts of Delaware, Illinois, Kentucky, Maryland, Michigan, New Jersey,
North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of
® Columbia. PJM has a very large footprint, but faces substantial transmission constraints
between its eastern and western regions. American Electric Power and Allegheny Power have
both proposed to build substantial high voltage transmission projects from Western to
Eastern PJM that they assert will help to ease transmission congestion in tY~e region.
SPP: Operates in all or parts of Arkansas, Kansas, Louisiana, Mississippi, I~~lissouri, New
Alexico, Oklahoma and Texas. SPP has approached RTO formation and market
development on a slower and more conservative track than many other RTOs. It does not
operate LMP-based day-ahead and real-tune markets, but implemented areal-time energy
r1 imbalance market in February 2007.
I~ ' ' ' ' 1 1
APPA members in RTO regions report substantial problems that impair their ability to
provide reasonably priced and reliable long-term service to their own electric consumers.
Among the problems they have experienced:
1 Exposure to very high spot market energy prices that are in many hours based on bids
® submitted by natural-gas or oil fired generation, when many power sellers in fact use other,
lower cost fuels. These high spot market prices in turn make power sellers unwilling to
enter into longer-term bilateral contracts with buyers at prices that reflect their own
production costs.
1 In RTO-administered electricity markets, prices are often volatile and unpredictable, even
in regions with longstanding markets. Some market participants, especially LSEs that need
electricity to serve end-use customers, have complained that volatile prices complicate their
operational and financial planning. As rate caps end and retail prices are deregulated in
many states, price volatility also exposes retail consumers to large financial burdens when
prices increase or unexpectedly spike at high levels.
1 RTO market mitigation and monitoring regimes that may not prevent the exercise of
generation market power by sellers and thus may fail to assure reasonable power prices.
1 Financial transmission rights (FTRs) that were designed to provide LSEs a hedge nn their
exposure to congestion costs by giving them an offsetting stream of dollars during the
hours when they must pay transmission congestion costs, but which often fail to provide
the needed level of protection from congestion charges. Until recently, these rights have
been exclusively short-term (no more than one year at a time). LSEs therefore had very
little certainty about their ability to manage congestion costs from one year to the next.
That uncertainty has biased LSE power supply planning toward correspondingly short-term
power supply arrangements (which limit an LSE's exposure to congestion costs, but may
force it to forgo the efficiencies and savings of longer-term arrangements). FERC has
developed rules under which RTOs are required to provide long-term financial rights, and
the subject RTOS are now filing their own long-term rights proposal. It remains to be seen
whether these longer term rights will in fact give LSEs a stable and useful hedge over long
time periods.
1 RTOs themselves do not have the ability to construct transmission facilities. Rather, they
must rely on their member transmission owners. Many of these transmission owners have
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been unenthusiastic about constructing transmission facilities needed to alleviate
congestion, due to factors such as retail rate freezes, license plate transmission rates and, in
some instances, the desire to protect their own generation from ~vt~olesale competition.
(One way to foster construction of new transmission facilities would be to encourage other
utilities serving load in the region, including public power systems, to jointly participate in
new transmission construction projects.)
RTO planning regimes can place too much reliance on transmission owners' own
individual transmission plans, and make artificial distinctions between transmission
facilities needed for "reliability" and facilities needed for "economic" reasons. RTO
planning horizons are often too short to support construction of needed "back bone"
transmission projects. Some RTOs, such as PJM, have recognized the shortcomings of their
planning regimes, and are mo~~ing to modify them.
The costs for the development and operation of RTOs have substantially increased. In
2005, RTU participants paid just over $1 billion in RTO operational and administrative
costs. Personnel, administrative, hardware and software costs appear to run out of control,
without sufficient appreciation of the impact of these costs on electric consumers. In
addition, RTO customers, including APPA members, must ramp up their own internal
operations, adding staff, hardware and software, simply to cope with these new markets,
protocols and requirements.
1 Independent RTO boards lack direct accountability to the industry participants in the
RTO's region and to the electric consumers the RTU ultimately serves. The Boards also
rely too heavily on the recommendations and advice of RTO staff. ,
1 While one of the primary goals of RTO markets is to promote investment in new and more
efficient generation and transmission facilities, this has generally not occurred.
The goals of federal electricity policies should be to promote effective competition in
wholesale electricity markets supplemented by effective regulation as necessar}S for the
benefit of consumers and the well-being of our economy, and to do so in ways that recognize
regional diversity in those markets. FERC has the ability to use its existing and new
authorities (pro~rided in the Energy Policy Act of 2005) to improve electricity markets. FERC
can, among other things: allow market-based rate sales only by sellers that cannot exercise
market power; ensure transparent market information; remedy market power abuses in a
timely manner; address RTOs' cost and accountability problems; and promote joint
ownership of transmission in both RTO and non-RTO regions to he]p strengthen regional ~,
transmission systems. Congress sltould also consider joint ownership when allocating federal E`
resources to help enhance the bulk transmission system or to rebuild transmission lines. 1 ~
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^ ~ American Public Power Association ^
FEBRUARY 2007
°~ Tax-Exempt., Financing and Public Power
,.
As units of state and local government, public power utilities are authorized to issue tax-
exempt bonds to construct and improve the infrastructure necessary to pro~lde electricity
and other essential ser~~ces, such as advanced communication services. Electricity is the
oxygen of the nation's economy; crucial to its continued health. Continued access to, and
flexibility in the use of, tax-exempt bonds is essential to enable public power utilities to
continue to provide these ser~rices, and to do so in acost-effective manner.
Tax-exempt municipal bonds are the basic tool used by stales, cities, counties, towns, school
districts and other governmental entities to fund the capital improvements necessarv to
provide needed facilities and ser~~ices. The ability to sell debt with interest exempt from
federal income taxes has been a significant benefit to state and local government borrowers,
including public power utilities, in providing essential public facilities and ser~iccs.
The nation's public power utilities are units. of state and local government created to pro~dde
essential ser~aces subject to local control. "They have financed their electric utility
infrastructure- generation, transmission and distribution facilities-just as local governments
have financed other municipal activities: through the issuance of tax-exempt bonds. Public
power utilities have over ?~80 billion in outstanding tax-exempt bonds.
These bonds must be paid back over time (depending on the specific parameters of the bond
issuance) and the issuers must remain creditworthy All three of the major credit rating agencies
-Standard and Poor's, :~Ioody's, and ritch -say that the outlook for the public power sector is
stable and its credit rating is strong. For example, in~anuary 2007, Fitch said that its average
public power system rating is "A" for wholesale systems and "A+ for retail systems.
r
Traditionally, our federalist system of government has respected the right of state and local
governments to pursue activities that are in the public interest and the interest of the citizens
they serve. Congress has promoted and protected the right of government to issue municipal
bonds for "government-ovmed and operated projects and acti~~ities." .Public power systems
are just that -governmentally owned and operated systems similar to other local
infrastructure projects such as water systems, prisons, libraries, schools, hospitals, and
transportation lines.
AI'PA urges Congress to continue to enable public power utilities to finance electricity
infrastructure and other essential ser~~ces, such as advanced communications ser~~ices, with
tax-exempt bonds.
In addition, APPA believes that Congress should improve the use of this financing tool by:
1 Providing adequate flexibility in the ability of public power utilities to partner with private
entities in the financing and use of certain facilities. Congress should repeal the special
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$15 million private use limitation that applies only to publicly-owned electric and gas
utilities.
1 Congress should reject proposals to eliminate the ability to advance refund (refinance at a
lower interest rate) bonds because they would simply result in increasing the cost of
electricity. Congress should instead support the ability of issuers to have an additional
opportunity to advance refund outstanding bonds in order to lower electricity
infrastructure costs and ultimately the rates to customers.
1 Because electricity markets are continuing to experience significant problems in market
design and function, as well as extreme price volatility, Congress should allow public power
utilities to be able to increase self-reliance through the development of new infrastructure
financed with tax-exempt bonds.
1 Finally, Congress should not ~~ew the ttse of tax-credit bonds as an alternative to tax-exempt
bonds for financing state and local government acti~dties, but should instead view tax-credit
bonds as a targeted way to achieve specific public policy goals -like increasing renewable
energy production that will result from the use of tax-credit bonds in the Clean Renewable
Energy Bond (CREB) program. f
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American Public Power Association
FEBRUARY 2007
Climate Change
F,missions of greenhouse gases and the linkage of those emissions to global climate change is
the most significant environmental issue confronting the electric utility.industrv. In 2005 and
}~ 2006 (the 109th Congress), action occurred in both the regulatory and legislative arenas on
this issue. On the regulatory front in 2005, the electric utility sector began implementation of
the memorandum of understanding (MOU) with the Department of Energy (DOE) on
voluntary approaches to greenhouse gas emissions (Gf3G) reductions. In 2006, DOE finalized
its update of the voluntary GIIG reporting program under 1605 (b) of the Eners~~y~ Policy Act
of 1992.
In Congress, heated debate over global climate change occurred in the context of enacUnent
of the Energy Policy Act of 2005 (EPAct05). The final bill did not impose new requirements
on emissions of GHGs, but did include language on voluntary actions to reduce such
~, emissions. I-Iowever, interest in the issue was building despite opposition to mandatory
programs by the Kepublican leadership, as evidenced by the Senate's adoption during
consideration of EPAct05 of a "Sense of the Senate" provision that stated that Congress
should "enact a comprehensive and effective national program of mandatory, market- based
limits and incentives on emissions of greenhouse gases that slow, stop, and reverse the growtl-i
t~ of such emissions at a rate and manner that will not significantly harm the U.S. economy and
1!1 w111 not encourage comparable action by other nations that are major trading partners and
key contributors to global emissions." Therefore, momenhrm had been building on the issue
before the new Democratic leadership in the 110th Congress put it at the top of the
leadership agenda in both the IIouse and Senate. However, the leadership change has
clearly heightened the interest in and accelerated the timeline for action mandatory GHG
reduction legislation.
~ '1 1
In December of 2004, the American Public Power Association (APPA) joined several other
electric power sector organizations in signing a memorandum of understanding (MOU) with
the U.S. Department of Energy (DOE) that established a framework for the voluntary
reduction of greenhouse gas emission intensity (greenhouse gas intensity measures the ratio
of greenhouse gas emissions to economic output) through 2012. The agreement and the
resulting program, called Climate VISION, requires participants from all energy sectors to
make a meaningful contribution to the President's goal of reducing the GHG intensity in the
United States by 18 percent by 2012.
The IOU specifically calls upon the power sector to reduce its GHG intensity by the
equivalent of three to five percent over the next decade. It also promotes incentives and
policies that would "provide investment stimulus on an equitable basis to all segments of the
power sector in order to accelerate and maintain America's critical energy infrastructure."
The Edison Electric Institute, Large Public Power Council, National Rural Electric
Cooperative Association, Electric Power Supply Association, Nuclear Energy Institute, and
Tennessee Valley Authority joined APPA in signing the document. For its part, APPA pledged
to work with its members to help them achieve GHG emissions reductions through voltmtary
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21
efforts. At the end of 2006, A.I'PA worked with all of the signatories to the MOU and DOE to
compile a progress report to dernorrstrate the success of the Climate Vision Program. The
progress report was released in February of 2007.
In the 109th Congress, the issue of climate change was debated and addressed legislatively,
including in the Energy Policy Act of 2005 (EPAct05), but the debate and provisions signed
into law supported incentives and voluntary approaches as opposed to a mandatory regime.
The Senate also adopted the "Sense of the Senate" mentioned above offered by then-Ranking
Member of the Senate Energy and Natural Resources Committee Jeff Bingaman (D-NM) and
former Chairman Pete llomenici (R-NM). As a follow up to the Sense of the Senate, the two
Senators issued a white paper focusing on the design elements of a mandatory market-based
greenhouse gas regulatory system. Two months following the release of the white paper,
Senators Domenici and Bingaman held a one day conference and invited several energy
industry witnesses to provide comments on the paper. The discussions primarily focused on
how a mandatory cap-and-trade program should be implemented if Congress imposed strch a
regime.
1n the few short weeks since the 110th Congress has convened, a slew of climate change bills
that would impose a mandatory regime have been introduced or put forward for review in
draft form, including a bill by new Senate Energy and Natural Resources Committee
Chairman Bingaman incorporating comments he received on his white paper. However,
there are several other bills that are likely to be considered seriously as well. These include:
the Global Warming Pollution Reduction Act, introduced by Senator Sanders (I-VT) and co-
sponsored by Environment and Public Works Committee Chairman Boxer (D-CA); the
Climate Stewardship and Innovation Act of 2007, introduced by Senators McCain (R-AZ) and
Lieberman (I-GT); the Utility Cap and Trade Act of 2007, introduced by Senator Feinstein
(D-CA); and a draft cap-and-trade bill to be introduced by Rep. Tom Udall (D-NM) that
includes a "safety-valve" provision that would allow fora "time-out" from implementation of
the program if the U.S. economy is suffering.
In addition, Senate Majority Leader Harry Reid (D-NV) introduced S. 6, the National Energy ,
and Environmental Security Act of 2007, which lays out his goals on climate (but is not
intended to provide any details on how to achieve those goals). The bill states that: "It is the
sense of Congress that Congress should enact, and the President should sign, legislation to
enhance the security of the United States by reducing tl~e dependence of the United States
on foreign and unsustainable energy sources and the risks of global warming by, (1)
requiring t-eductions in emissions of greenhouse gases; (2) diversifying and expanding the
use of secure, efficient, and environmentally-friendly energy supplies and technologies; (3) A
reducing the burdens on consumers of rising energy prices; (4) eliminating tax giveaways to
large energy companies; and (5) preventing energy price gouging, profiteering, and market
manipulation."
While neither Speaker of the House of Representatives Nancy Pelosi (D-CA) nor Chairman of
the House Energy and Commerce Committee John Dingell (D-MI) have introduced
legislation as of this writing, both have released statements indicating what their plans are on
the climate change issue irr the 110th Congress. In mid January, Speaker Pelosi announced
that she planned to create a special select committee devoted exclusively to climate change
issues. This is not intended to be a legislative committee, and Speaker Pelosi has indicated
that it is not her plan to take jurisdiction on this issue away from the House Energy and
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Commerce Committee or other committees with jurisdiction over various aspects of climate
change.
Lipon becoming Chairman of the House F,nergry and Commerce Committee, Congressman
Dingell stated his belief that the Committee was not as far along as its counterpart in the
Senate, and therefore he would hold several Committee hearings to educate Members more
comprehensively nn the issue. On famiarv 12, 2007, >\4r. Dingell issued a memorandum to all
committee Members in which he noted that it is critically important that i\~lembers of the
Committee gain a full appreciation of the scientific and substantive implications of climate
change policy so that the Members can develop and, if at all possible, enact a sound and
effective public policy that is environmentally and economically responsible.
On Januan~ 17, 2007, Chairman Dingell and Congressman Rick Boucher (D-VA) issued a
second memorandum to committee Members in which they informed the committee of an
"~ invitation that both Dingell and Boucher sent to former Vice President Al Gore requesting
-that he appear before the Committee to discuss, among other things, the causes of climate
change, the consequences of climate change, private sector climate change action and
federal climate change programs. A date has not yet been set for this hearing.
AI'YA continues to support voluntary programs to reduce greenhouse gas (GHG) emissions
combined with an aggressive R&D program to develop technological solutions. Ho~ti~ever, it is
apparent d~tat legislauve action is highly likely in the not too distant future. Given this
situation, AI'PA has formed a CEO Climate Change Task Porce of approximately 30 CEOs
fl-om public power systems across the country- large and small, and with a variety of
generation resources - to assess the situation and pro~~ide additional guidance to the APPA
membership, staff and Congress. 1
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~~ American Public Power Association
FEBRUARY 2007
Plug-In Hybrid Electric Vehicles
Our nation's dependence on imported oil makes us extremely vulnerable to foreign oil
!!~~
producers - a ~~lnerability that was further exposed during hurricanes Katrina and Rita.
Since the hurricanes, the price of oil has been on a cycle of sudden price spikes that
eventually come down, but with the average price nonetheless steadily increasing. This cycle,
and in particular the price spikes, have had an adverse effect on our economy.
Environmentally, pressures are mounting to reduce pollution from the combustion of fossil
.fuels in all sectors of our economy.
Fortunately, there are tremendous opportunities to reduce pollution in our transportation
sector while ac the same time creating additional efficiencies in the electric utility sector.
These factors, among others, have created an excellent opportunity for the advancement of
flexible fuel plug-in hybrid electric vehicles (PHEVs). The deployment of PHEVs can help us
address several of the most important issues facing America today, including national security,
economic security, air pollution, the use of renewable energy and climate change.
..
Hybrid electric vehicles (HEVs) on the market today, such as Toyota's Prius, combine an
internal combustion engine with an electric motor. yti~hile these are more efficient than
regular internal combustion engine vehicles, their batteries are charged primarily by the
gasoline engine. By design, the battery cannot be charged from the electric grid and in any
case is too small to enable the vehicle to travel several miles in the electric-only mode. In
contrast, PHEVs would have a larger battery pack that could travel 30 or more miles (the
average roundtrip commute for Americans) before the internal combustion engine takes
~i
Ill; over. This battery pack could be charged from any regular household outlet so owners would
have the convenience of a refueling station at home.
In addition, internal combustion engines are a major source of air pollution. The widespread
use of PHEVs would dramatically reduce automotive tail pipe emissions. Obviously, if the
electricity used to charge the PHEV batteries is generated from fossil fuels, some emissions
wRll occur, but these are likely to be considerably lower, and easier to address, than the total
emissions from millions of mobile sources. Further, there are no emissions from electricity
produced by hydropower, solar, wind and nuclear facilities.
Finally, recharging PHEV batteries from cleaner sources of power, including in particular
non-carbon dioxide emitting sources of electricity, and substituting clean "electric" miles for
gasoline miles, would reduce emissions of carbon dioxide and help address the issue of global
climate change.
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The comprehensive energy legislation passed in 2005 (EPAct05) included tax credits for the
purchase of hybrid automobiles and light trucks, generally, but did not specifically address
PHEVs. In the aftermath of hurricanes Katrina and Rita, however, interest. in PHEVs
increased and several bills were introduced that included additional incentives for alternative
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25
!1
fuel vehicles, such as PI-IEVs. Specifically, Rcpresentative~ack Kingston (R-GA) introduced
H.R. 4409, the Fuel Choices for American Security Act of 2005, in early December 2005 with
strong bipartisan support. In the Senate, Senator Evan Bayh (D-IN) introduced similar '~,
legislation, S. 2025, the Vehicle and Fuel Choices for American Security Act. In addition, a
well-attended briefing for congressional staff was held on PHEVs in November 2005. In 2006, ;~
H.R. 6203, the Alternative Energy Research and Development Act, was passed by the House.
The bill included the language, with a few minor changes to the text, from H.R. 5538, the
Plug-In Hybrid Electric Vehicle Act of 2006, which was introduced b}' Representative Lamar ;~
Smith (R-TX). H.R. 6203 authorized $150 million for PHEVs Research and Development
and Demonstration through 2008.
Because of other issues included in H.K. 6203 that were more controversial than the PHEVs
provision (and given election-year constraints), the Senate did not pass a similar bill before
adjournment of the 109th Congress. Representative Judy Biggert (R-IL) plans to reintroduce
this bill in the 110th Congress and include the plug-in hybrid electric vehicle language from
Representative Lamar Smith's bill. Mr. Smith also plans to reintroduce his legislation as a
stand alone bill. In mid January of 2007, Senator Evan Bayh (D-IN) introduced a broad bill
to "promote the national security and stability of the United States economy by reducing the ,
dependence of the United States on oil through the use of alternative fuels and new
technology," S. 339, that has 24 bipartisan cosponsors and includes language to promote
PHEVs. In addition, Senate Energy and Natural Resources Committee Chairman Bingaman
(D-NIv1) has discussed a plan to reduce our dependence on foreign sources of energy that
~n~ll include provisions on PHEVs, but has not yet introduced a bill as of this writing. Finally,
President Bush in his State of the Union address on January 23, 2007, mentioned the need to
"press on" with battery research for PHEVs. Clearly, there is great interest in promoting this
technology in Congress and the Administration, but it will ultimately take research dollars to
achieve the technological breakt}lroughs necessary to make PHEVs affordable for average
Americans.
L~
Over the past four decades, APPA has supported the development of electric vehicles. In
1966, APPA adopted the first of many resolutions in support of electric vehicle and advanced
battery research and development. In 2005, APPA members passed a resolution specifically
supporting PHEVs. Today, APPA continues its long tradition of support for electric vehicles,
and now specifically plug-in hybrids, and will support all reasonable programs designed to
promote their development. Through the "Plug-in Partner" program, APPA is working with
h
f PHEV
f
s to t
e
its o
Austin Energy on a national grassroots campaign to highlight the bene
automotive industry and lawmakers.
In addition, APPA will work to encourage Congress and the Department of Energy to pursue
advanced battery technologies to further improve the performance and consumer appeal of
plug-in electric hybrid vehicles in any appropriate legislative or administrative action. t
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t' American Public Power Association
FEBRUARY 2007
Comparable Incentives for Public Power
Development of Clean Resources
*~~ There is strong and growing support for ina-eased energy production from renewable and
~~ clean energy resources. Congress has consistently provided privately-owned energy companies
- with tax-code based incentives for such im~estments (i.e. the Section 45 production tax
'~~ credit). Not-for-profit public power systems and rlaral electric cooperatives, which together
serve 25 percent of America's electric consumers, have sought and will continue to seek,
~~ comparable incentives for this type of development.
~' The Renewable Energy Production Incentive (REPI) program was created in
1992 to provide a comparable incentive to produce renewable energy for these not-for-profit
~_
electric utilities, but it depends on annual appropriations and has never received sufficient
funds to achieve this objective. Today, the demand for the program has far outpaced its
funding. REPI has been and remains a valuable program, but it cannot meet the needs of all
not-for-profit utilities seeking to promote the use of renewable energy. And the problem for
these utilities is becoming more acute as states adopt renewable encr-gy portfolio standards
*~ Congress sought to address this situation by enacting the Clean Renewable Energy Bond
(GREW) program in the Energy Policy Act of 2005 (EPAct05). Under this program, public
power systems and rural electric cooperatives have a financial incentive somewhat
comparable to the production tax credit provided to for-profit companies. Combined with
continued funding for REPI, the CREW program will enable a broader swath of the not-for-
profit electricity sector to invest in these cleaner technologies.
_ ~ ~ ~
Most cleaner and renewable generation resources are generally less mature technologies and
`i~ therefore usually more expensive to construct and operate than traditional generation
resources. The federal government has therefore recognized the need to pro~~ide incentives
to encourage the construction of these facilities. Since consumer-owned utilities operate on a
notfor-profit basis and incur no federal tax liability, traditional production tax credits simply
do not work for them. Yet the nearly 3,000 public power utilities and rural electric
cooperatives collectively serve 25 percent of the nation's electricity customers. 'T'hese utilities
are often ideally situated in terms of both geography and size to integrate clean and
renewable technologies into their systems. Many of these utilities enjoy a proximity to wind,
landfill gas and other resources. Furthermore, the smaller size of many consumer-owned
utilities makes renewable generation, which tends to be smaller in terms of electricity output,
an attractive alternative to large-scale facilities such as nuclear and coal.
In recent years, public power customers have increasingly demanded access to power from
clean, renewable facilities. Beyond consumer demands, many states have set forth renewable
portfolio standards (RPS) that apply to all utility sectors. Nonetheless, renewable resources
(exclusive of hydropower) still account for less than two percent of the nation's overall
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29
generating portfolio. After exploring various options, APPA and NRECA (the national trade
association representing rural electric cooperatives) recommended that Congress endorse the
"taxable tax r.rcdit bond" approach. This financing mechanism, which is contained in the tax
code fur other purposes, allows not-for-profit entities to issue interest free debt for the
development of qualified renewable energy facilities. APPA and NRECA then worked for
inclusion of the taxable tax credit bond, known as Clean Renewable Energy Bonds (CREBs),
pro~~sion in EPAct05. The provision was ultimately signed into law, but because of budgetary
constraints, a cap was put on the amount of bonds that could be issued. Like the limits
imposed on the REPI program, this limit means that not all applicants will receive CREB
funding. Therefore it is important to note that the REPI and CREB programs are
complementary, and must both continue to receive support from Congress.
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The CREB program was included as part of the tax title of EPAct05, which was signed into law
in August of 2005, and the U.S. Treasury issued its preliminary guidelines on the program in
December of 2005. In November of 2006, the Internal Revenue Service (IRS) notified issuer-
applicants about CREB allocations, but did not release indi~~dual recipient information to the
public. However, we do know that many APPA applicants did not receive allocations because
of the cap described above and because the allocation methodology pro~~ided funds starting
with the smallest requested amount until the allowed amount was exhausted could be
improved.
Regardless of the imperfections in the program (which APPA wall work to rectify in future
legislation), it has broad support in Congress as evidenced by the recent approval of an
extension of the CREB program through December 31, 2008. The extension of the program
was included in a broader tax package signed into law in December 2006, and authorizes an
additional $400 million of CREBs to be issued. IRS is expected to issue a notice about a new
application process for the additional CREB allocations in 2007.
Reauthorization of the REPI program was also achieved in EPAct05, acid on August 14, 2006,
the Department of Energy (DOE) issued its final rule on the reauthorized REPI program.
For FY 2007, the House has passed legislation that funds the REPI program at $4.96 million,
the same amount requested by the Administration in its Fl' 2007 budget. The Senate
Appropriations Committee has approved $4.946 million for the REPI program for FY 2007.
But as of this writing in January of 2007, Congress has not finalized the Energy and Water
Development appropriations bill. Until they do, REPI is being funded at the FY 2006 level,
which is $4.96 million.
Investment tax credits are not limited to a specific dollar amount. To be truly comparable, ~
the CREB program should likewise not be subject to a dollar limit. Therefore, Congress M
should extend the CREB program beyond 2008, and ensure that all qualifed facilities that
apply for the program receive full funding for their projects, at the same time as it extends
the production tax credit and investment tax credit for the for-profit utility sector. Congress
should also continue to fund the REPI program at higher levels than have been requested by
DOE in the past. 1
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FEBRUARY 2007
Railroad Competition
Electric utilities must rely on rail transportation to move the vast majority of coal from the
mine mouth to the power plant. While domestic coal is a relative]}' low-cost fuel, its economic
benefits for power production are being threatened by the increasingly lower quality and
higher costs of rail service resulting in part from railroad industry consolidation and the
absence of effective regulatory oversight.
Many coal-burning electric utilities can receive coal shipments from only one carrier and are
thus subject to t}te monopoly power of the railroads. As a result, these rail customers do not
have the ability to negotiate the terms of their rail transportation in an open and competitive
market. 'T'hese rail customers are charged higher rail rates while those rail customers vv~rh
competitive options are given competitively priced rates. Over the past several years, rail
customers have also experienced numerous service and reliability issues. Legislative remedies
are required to enhance competitive transportation and improve the rail customer protection
mechanisms and enforcement implemented by the Surface Transportation Board (STB).
Absent congressional action, electric utilities and the communities they serve will continue to
be subject to unnecessarily higher rates and poorer service for coal transportation.
~ 1 1
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Approximately 50 percent of the nation's electricity is generated from coal, the vast majority
of which is transported by rail. A substantial amount of that coal has only one available
railroad transportation option for at least some portion of its shipment. Thus, a large amount
of the coal used to generate electricity in this country is "captive" to a single railroad for
~^ transportation, and the transportation costs for shipping that coal reflect the monopoly
power of the carrier and are frequently unreasonably high.
The monopoly power of the railroads over captive shippers has grown dramatically in the last
two decades. Since 1980, the industry has been reduced from 42 major carriers to five. In
1995, Congress abolished the Interstate Commerce Commission (IGC) and gave the newly
created STB authorit}~ over the rail industry for mergers, rate and service disputes, and
construction, operation and/or abandonment of railroad lines. Since its creation, the STB
has failed to use the legal and regulatory mechanisms at its disposal to protect railroad
customers from monopolistic practices by the railroads. As a result, many rail customers have
simply foregone filing rate cases at the STB due the low probability of success as well as the
high costs of filing and litigation. The filing fee alone at the STB is $160,000 for a coal rate
case. By comparison, federal courts only require a $100 filing fee for complaints.
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In October of 2006, the General Accountability Office (GAO) issued a report titled Freight
Railroads: Industry Health Has Improved, but Concerns about Competition and Capacity Should Be
Addressed"which validated rail customer concerns. Among other things, a lack of competition
in the national railroad industry; the inadequate STB efforts to ensure rail customer access to
competition and to protect rail customers from monopoly abuse; the failure of the STB to
collect adequate data from the railroads on all of their annual revenues from rail customers;
continued
~1
and concerns over the ability of the national rail svstem to provide sufficient, reliable service
in the future. ~Nhile the railroads will argue that any rail customer legislation is an attempt at
re-regulation, the goal of rail customers is not re-regulation, but rather a national rail policy
that will ensure reliable rail transportation and reasonable rates for all rail customers -
particularly for those rail customers without access to competitive transportation alternatives.
Because of the entrenched policies at the STB and the long record of inaction, legislation is
needed to institute stronger protective mechanisms at the S`I'B and allow for competitively
priced rates for rail customers. Legislation to address the concerns of rail customers was
introduced in 2005 in both the House and Senate and is expected to be reintroduced in the
first several weeks of the 110th Congress, with some changes. The upcoming legislation is
expected to require railroads to quote rates to their customers, upon request, between any
two points on their system where traffic can originate, terminate or be interchanged, and to
remove "paper" barriers that prevent short line railroads from connecting to more than one
major railroad (e.g., ensuring that contracts between the major railroads and short-line
carriers allow short-line carriers to engage in competition w2thout being penalized). The
legislation is also expected to contain a clear statement of the railroads' "obligation to serve"
given that their function is essential to many sectors of the economy, and give the STB the
power to enforce that obligation to serve while also empowering and directing the STB to
r<1ke action to investigate railroad practices that the STB believes to be abusive of railroad
market power. Additionally, the bills will seek to develop a workable rate challenge process at
the STB.
In addition, last Congress, legislation was introduced in both the House and Senate to
eliminate the exemptions from antitrust law that the railroads currently enjoy -including
those under mergers and acquisitions, collective ratemaking and private antitrust lawsuits.
These bills are expected to be reintroduced for the 110th Congress in the coming weeks.
1
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Irr the spring of 2006, the railroads began to express interest in receiving a federal Investment M
Tax Credit (ITC) of 25 percent to apply to new investment in rail infrastructure. Given that
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the railroads have reported record profits in recent months with continued service reliability
problems, an additional federal subsidy for infrastructure improvement should not come
without guarantees that dollars will be spent to enhance reliability, especially in captive
shipper corridors. APPA and captive shipper groups like Consumers United for Rail Equity
(CURE), of which APPA is a member, have indicated that we would be willing to support an
ITC for the railroads only if STB reforms providing relief for rail customers are enacted at the
same time. In the 110th Congress, some Members in the House and Senate have indicated
their intention to support railroad ITC legislation. APPA will continue to work with CURE to
ensure that these efforts do not advance without STB reform measures.
APPA supports legislation that encourages structural and policy changes to promote
competitive transportation alternatives for rail customers and improvements in the rail
customer protection mechanisms that are implemented by the STB. APPA opposes
enactment of a federal ITC for the railroads without these STB reforms. APPA also supports
legislation removing the antitrust exemptions for the railroads. 1
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i91
FEBRUARY 2007
~ The U.S. Federal Power Program
'~ , .
~~~ The federal Power Marketing Administrations (PNLAs) provide millions of Americans scr<~ed by
public power and rural cooperative elecMc systems with lowcost hydroelectric power produced
at federal dams operated by the U.S. ;~rTny Corps of Engineers and the Bureau of Reclamation.
The PMAs were specifically created to market federally-generated hydropower with a right of
first refusal granted to not-for-profit entities including public power systems and rural electric
cooperatives. The rates paid to the PMAs by their public power and rural electric cooperative
customers cover all of the costs of generating and transmitting electricity and of repayment
ruith interest of the federal investment in these hydropower projects. None of the costs are borne try
taxpayers. Power rates also help to cover the costs of other activities authorized by these
multipurpose projects such as navigation, flood control, water supply, environmental
programs and recreation.
Because the PMAs are part of the U.S. electricity market and because they are federal entities,
,~ congressional and administrative action has in the last 10 years primarily addressed increased
federal oversight of PMA facilities and potential ways in which the U.S. Treasury could receive
additional funding from the PMAs and their customers.
:~ 1 1
There are four Power Marketing Administrations -Bonneville Power Administration (BPA),
Western Area Power Administration (WAPA), Southwestern Power Administration (SWPA)
and Southeastern Power Administration (SPPA). These entities market wholesale electric
power to approximately 1,200 public power systems and rural electric cooperatives in 33
states.t They also sell power to a number of other public agencies and federal installations as
well as to for-profit, investor-owned utilities in years with high water flows.
In accordance with federal law, PMA rates are set at the levels needed to recover the costs of
the initial federal investment (plus interest) in the hydropower and transmission facilities.
The PMAs annually review their rates to ensure full-cost recovery. If a deficit is projected,
rates are adjusted to eliminate any deficit. PMA power is generally low-cost in relation to
other sources of electricity because hydropower is a renewable resource and most dams were
constructed long ago when material and labor costs were much lower than today. Private
utilities that generate electricity predominantly with hydropower also enjoy similarly low rates.
As one of the few providers of cost-based wholesale power, the PMAs serve as a yardstick against
which consumers, regulators, and policymakers can measure the profit margin embedded in
the cost of power from other sources. This is a key piece of market information needed to
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t The following states receive a portion of their power from the PMAs. I3PA: Washington, Oregon, Idaho,
Montana (part). WAPA: Arizona, California, Colorado, Iowa, Kansas (part), Minnesota, Montana (part),
North Dakota, Nebraska, New Mexico, Nevada, South Dakota, Texas (part), Utah, Wyoming. SWPA:
Arkansas, Kansas (part), Louisiana, Missouri, Oklahoma, Texas (part). SL;PA: Alabama, Florida, Georgia,
Illinois, Kentuck}', Mississippi, North Carolina, South Carolina, "Tennessee, Virginia.
continued
33
further the goal of a healthy and competitive marketplace. "The PM.As also help to ensure
market diversity and lower the risks associated with market consolidation of generation assets.
Most importantly, they assist in keeping power rates low for millions of electric consumers.
The annual appropriations process involves issues of importance to the PMAs. The PNIAs
must receive yearly funding levels from Congress for purchasing and wheeling power that will
then be paid for by the PMA customers through their receipts. Also, PMA customers must
continue to address the almost yearly efforts by the Office of Management and Budget
(OMB) to increase the rates of PN1~~ customers so that more money will flow to the Treasury.
In FY 2007, OMB proposed a rate increase (incorporated in the Administration's budget) for
BPA by stipulating that any "profits" BPA makes over a certain amount because of high water
years need to go to debt repayment rather than to reducing customers' rates. This would
have the effect of raising rates for BPA's customers indefinitely. OMB also proposed to raise
the. interest rate for new projects at facilities in the SEPA, S4VI'A and WAPA territories -this
proposal is known as "Agency rate."
In a change from past OMB initiatives on the PMAs, these proposals can be implemented
administratively, without the need for congressional approval. Therefore, Congress has to act to
block the implementation of the proposals rather than choosing not to act on an OMB
proposal as in years past. The BPA proposal was blocked for one year in an emergency
"supplemental" spending measure passed in 2006, but the Agency rate proposal must still be
addressed. Language blocking the proposal was included in the Senate committee-passed
version of the FY 2007 Energy and Water Development Appropriations bill, however, the Energy
and Water bill was not completed before adjournment of the 109th Congress, and as of this
writing is awaiting action in the current 110th Congress (it will likely get rolled into a broader
omnibus bill or continuing resolution). We expect similar proposals to the BPA rate increase
and Agency rate to be included by ONIB in the Administration's FY 2008 budget request.
APPA has also worked to limit the ability of the Bureau of Reclamation to impose security costs
at federal dams only on water and power customers given that the heightened security measures
benefit all project beneficiaries. Also, security costs have continued to rise since 9/11 with no
predictability and little oversight. In the House, a bill was introduced in September of 2006 by
then-House Water and Power Subcommittee Chairman Radanovich (R-C.~1) and then-Ranking
Member Napolitano (D-CA) to amend the Safety of Dams Act to limit the amount of funds to
be paid by water and power customers to 15 percent and to provide additional congressional
oversight. A similar bill was introduced in the Senate in December 2006 by Senators Hatch (R-
UT) and Cantwell (D-W.~1), among others. Although the bill was not considered before
Congress adjourned, the groundwork has been laid for this Congress, and the bill is expected to
be reintroduced by new House Water and Power Subcommittee Chair Napolitano and new
Ranking Member Cathy McMoms-Rodgers (R WA) as well as by Senators Cantwell and Hatch.
APPA supports the continued existence and federal ownership of the PMAs, the sale of
federally-generated hydropower at cost-based rates, and increased customer involvement in
funding critical operation and maintenance activities. APPA also continues to strongly
oppose any action by Congress or the Administration that would modify the federal power
program in ways that could result in substantial, unjustified electric rate increases for APPA
members, create adverse economic impacts, or reduce competition. f
w •~~
~.- . .
~~ ~ American Public Power Association `
FEBRUARY 2007
Advanced Communications Services
tq ~ Revolutionary changes over the past decade in telecommunications and information
~l technology are driving the need to overhaul federal communications laws. In the 109th
m Congress, the House of Representatives passed a bill that amended the Communications Act
of 1934 to address advanced communications ser~~ces, and the Senate Commerce, Science
and Transportation Committee also passed a broader telecommunications overhaul bill that
was not considered by the full Senate before Congress adjourned at the end of 2006.
Included in both the House and Senate bills was a provision to protect the ability of
municipalities to provide advanced communication services (known as the municipal
broadband provision).
In the 110th Congress, the 1-douse Energy and Commerce Committee and the Senate
*~ Commerce, Science and Transportation Committee are again expected to consider the issue
r~ of telecommunications reform, but with the change in leadership in both chambers of
Congress, the new chairmen of these committees will prioritize different issues than their
predecessors in many cases. However, the change in leadership is not expected to impact the
broad bipartisan support for the municipal broadband pro~~ision.
~I ~ 1 1
'~ ~ 1
Over 600 public power systems now provide some kind of advanced communication ser~~ce,
whether for internal or external purposes. This is a 10-fold increase since Congress last acted
on communications policy in 1996, and the number of public power systems pro~~iding or
'~ planning to provide services continues to increase. The services delivered by public power
systems include high-speed Internet access, cable televrzsion, local and long-distance
telephone, and voice-over-Internet-protocol (Noll ).
Approximately i0 percent of public power systems in the U.S. are located in cities with less
than 10,000 residents. Many of these public power systems were established due to the failure
of private utilities to provide electrical service to smaller communities or to provide such
service at a reasonable price. In these cases, communities formed public power electric
utilities to do for themselves what they viewed to be of critical importance to their quality of
life and future economic prosperity. Today, public power systems are meeting the new
demands of their communities by providing broadband services where no other providers wZll
do so, and facilitating competition where service is inadequate or too expensive. However, in
a number of states, units of local government, including publicl}'-owned electric utilities, have
been restricted, or even prohibited, from pro~~iding such services. Large, incumbent cable
television and telephone companies have successfully pushed legislation in 14 states that
r.~
•~1 prohibitor limit public power systems from entry into the communications and cable
television markets.
To address this issue, Congress included a provision in both the House and Senate versions of
ld
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wWW.APPAnet.Org
~' continued
37
of state prohibitions. In the 110th Congress, Senators Lautenberg (D-NJ) and McCain (R-
A7) plan to reintroduce, with minor changes, their Community Broadband Act (S. 1294 from
the 109t.h Congress). The essential language in S. 1294 was rolled into the major Senate
telecomrnunications bill (the Communications, Consumer's Choice, and Broadband
DeployTrrent Act of 2006) passed by the Senate Commerce, Science and Transportation
Committee last year. The ne~v Lautenberg-McCain bill will be the vehicle for action in the
Senate on municipal broadband -whether considered as a stand-alone bill or rolled into
broader legislation.
As Congress continues to debate important policy issues such as broadband deployment,
competition in the communications marketplace, and VoIP, in the 110th Congress, it should
recognize the important role that local governments, including those that also own their
electric utility, can play in achieving the goal of universal broadband deployment. Because of
state actions mentioned above to limit or prohibit public power systems from providing
advanced communications services, Congress must adopt legislation that affirms the right of
units of local government to decide how best to serve their residents.
Units of local government -and in particular communities that also ov`~r their own electric
utility -can play a positive role in enhancing their communities through providing
communications services, particularly high-bandwidth broadband services. APPA supports
federal legislation, such as that included in S. 1294 in the 109th Congress, that protect the
ability of municipalities to provide advanced communications services. APPA opposes any
federal legislation that would prohibitor restrict the ability of public power systems to provide
advanced communications ser~rices or require public power systems to get the permission of
incumbent communications companies to pro~~de such sen~ices. ?
www.APPAnet.orq
~~
UTILITIES ASSOClATIi
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