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5.3. ERMUSR 03-08-2005Elk River Municipal U 13069 Orono Parkway Elk River, MN 55330 February 28, 2005 To: Elk Ri~~er Municipal Utilities Commission Jerry Takle Jim Tralle John Dietz From: Bryan Adams Subject: MMUA & AYPA Federal Position Papers phone: 763.441.2020 Fax: 763.441.8099 Jerry Takle and myself, had an opportunity to attend the APPA legislative rally in Washington D.C. Attached for your review are the following position papers presented to our congressional legislators. ]) Transmission 2) Railroad Competition 3) Air Quality 4) Oppose the Administration's proposed rate, increases for WAPA and other PMA's ~) Protecting the interests of WAPA customers 6) Federal incentives for renewable 7) Electric utility service territories - a state issue 8) Why public po«~e4- ities ///1///1/I.~-, Minnesota Municipal Uti/itie~s Association Transmission P®sition statement The Energy Policy Act, supported by public power when it was passed by Congress in 1992, was to have promoted competition in the wholesale electric market by ensuring non-discriminatory access to the transmission network. Since that time, this effort has proved to be a much more formidable task than was first thought. r d Public power communities are finding it more difficult than ever to secure reliable and s reasonably priced wholesale power as a result of decisions made by the Federal Energy ~, Regulatory Commission (FERC) concerning the governance of the transmission network. Public power entities have also encountered serious problems in dealing with the regional o transmission organizations (RTOs) designated by FERC to manage the regional transmission grid. s In order to continue to provide their electric customers with reliable power at reasonable 3 rates, Minnesota municipal electric utilities need action by the federal government to ensure the construction of adequate transmission facilities and workable transmission policies. To assure this outcome, several actions will be needed from Congress and from FERC. w Actions Requested of Congress and FERC Enact Reliability Standards. After the massive blackout that occurred in August, 2003, there is universal agreement in the electric industry that mandatory reliability standards are necessary to ensure the future reliability of the electric system. Therefore, Congress should enact legislation establishing a system of mandatory, enforceable reliability rules ~_ that include meaningful penalties. This legislation should be enacted immediately and not `° be held hostage as part of a comprehensive energy bill. Enact Backstop Federal Transmission Siting Authority. Siting transmission facilities is often controversial and time consuming. While states rightfully have primary responsibility to authorize the construction and location of these facilities, delays in this o process could significantly disrupt construction of new facilities needed to run an efficient interstate transmission system. Congress should enact new legislation that requires the Department of Energy to regularly assess transmission adequacy and ~ empowers FERC to authorize the siting of transmission facilities needed to eliminate congestion. Grant FERC Authority to Prevent Market Manipulation. The complicated nature of wholesale market transactions and the congestion that already exists in the transmission system have tempted some transmission owners and marketers to attempt to game the system in an effort to enhance profits. To protect their customers, municipal electric utilities favor an effort to prevent such manipulation. While FERC has attempted to curb market manipulation within the limits of the Federal Power Act, that authority is not enough to prevent unscrupulous business behavior as long as it shows a profit. Congress should grant FERC clear authority to prohibit all forms of market manipulation, to eliminate barriers to civil litigation and to impose meaningful penalties for violation of market rules. Direct FERC to Adopt RTO Accountability. RTOs were originally formed to benefit consumers by adopting policies promoting non-discriminatory transmission service, regional long-term planning and timely investments in transmission facilities. Instead, they have increasingly resorted to questionable pricing practices to deal with transmission congestion rather than adopting policies designed to lower costs and to improve service. At the same time, there is a growing concern that RTOs are resisting any questioning of the economic theories underpinning these actions. Other problems with the RTOs include: spiraling RTO costs, unaccountable governance, lack of understanding of end- user needs and less than satisfactory service options. Congress should direct FERC to adopt measures that assure that RTOs and independent transmission operators are accountable to customers, achieve excellent customer satisfaction, and control costs in ways that ensure that clearly identifiable benefits will be achieved for customers. Transmission Rights. Load-serving entities such as municipal utilities have traditionally secured long-term transmission rights in order to maintain service delivery, provide accurate cost of service forecasts, and construct new generation. At present it appears that these rights are not being strictly honored, jeopardizing the ability of municipal utilities to meet their obligation to serve their customers. In fact, the Midwest Independent System Operator (MISO) has already employed a transmission capacity allocation system that fails to provide needed long-term transmission rights. Congress should urge FERC and MISO to provide long-term transmission rights to load-serving entities. Transmission-Only Companies. The creation of stand-alone transmission companies, open to participation by all sectors of the electric utility industry, would provide another impetus for the construction of needed transmission facilities. Such a company, whose only function would be the building, operating and maintaining of transmission facilities, could only grow its business by investing in transmission, making it an ideal vehicle to promote the expansion of transmission capacity. FERC should adopt policies which encourage the formation ofstand-alone, multi-ownership transmission companies. Minnesota Municipal Utilities Association February 2005 ~~~~,.~~ l~®~®~i®r~ St~terner~t Minnesota Municipal Utilities sssociation Railroad Competition Railroad transportation is the principal method of delivering coal to the electric generation facilities that provide power to Minnesota municipal electric utilities and their customers. This heavy reliance on rail has left these utilities vulnerable to market pressures caused by the declining number of competitors in the railroad industry. Utilities and all railroad customers facing these unchecked market pressures have become known as captive shippers. The consolidation of the railroad industry that has occurred over the last twenty-five years has been stunning. When Congress passed the Staggers Rail Act in 1980, the resulting industry deregulation was supposed to have ushered in a new era of competition ~° that would benefit customers. However, instead of experiencing the intended result, shippers endured a period of unprecedented consolidation as the number of class I railroad companies was reduced from 42 to 4. 3 Z The federal government has been ineffective in its effort to control these uncompetitive rail transportation practices. In 1995 Congress abolished the Interstate Commerce Commission and gave the newly created Surface Transportation Board (STB) authority over mergers, rate and service disputes, construction, and operation and abandonment of railroad lines. Since that time, the STB has declined to use its existing legal and regulatory authority to protect railroad customers from the monopolistic practices of the railroad industry. ° The lack of real competition in the railroad industry or effective regulatory oversight over industry operations has had a negative effect on all Minnesota municipal utility customers. Reviewing recent rail rate activity, it is becoming increasingly possible that - shipping costs will more than double as current contracts expire and new rates are set. Missouri River Energy Services (MBEs), supplying wholesale power to 22 member x' utilities in Minnesota, is a co-owner of the Laramie River Station (LRS), acoal-fired power plant near Wheatland, Wyoming. Upon expiration of the long-term rail shipping contract LRS had with Burlington Northern and Santa Fe Railway Company (BNSF), ' ~ MRES and its partners experienced an immediate doubling of rail shipping rates charged by BNSF to transport coal the 175 miles to Laramie River from mines in Wyoming's ~ Powder River Basin. Today, these transportation rates are costlier than the coal itself. MRES and its partners believe that BNSF is unlawfully exerting its monopoly power over these captive shippers, increasing costs to the plant by an estimated $1 billion over `° the next 20 years. Western Fuels Association, a cooperative supplying coal to its members, and Basin Electric Power Cooperative, operator of the Laramie River Station, have filed a request for rail shipping rate relief before the STB on behalf of all the owners of the LRS. Southern Minnesota Municipal Power Agency (SMMPA) supplies wholesale power to 18 member municipal utilities in Minnesota. It is a 41 % co-owner of Sherco 3, an 884MW coal-fired power plant near Becker, Minnesota. SMMPA buys coal from the Absaloka mine in Montana through Western Fuels Association. That coal is delivered by the BNSF to the Sherco 3 site. BNSF is the only railroad that serves Sherco 3. Through Western Fuels, SMMPA is working to address captive rail shipper issues prior to expiration of its current contract in 2007. Individual municipal utilities have experienced similar problems with coal shipments to their local plants. Hibbing Public Utility and Virginia Public Utilities have resorted to trucking coal from Superior, Wisconsin to their respective cities to fuel their 35 MW plants rather than deal with the prohibitive cost of rail transport. During the 108th Congress, legislation introduced in both houses (S. 919 in the Senate, H.R. 2924 in the House), would have encouraged structural and policy changes to promote competitive transportation alternatives for captive shippers and improvements in customer protection to be implemented by the STB. Major components of the legislation include: 1. Clarification of the objectives of the STB. 2. Requirements that railroads must quote rates between any two points on their system where freight can originate, terminate, or be transferred. 3. Arbitration of rate, service and other disputes. 4. Removal of "paper bamers" in sales or leases of rail line to short line or regional railroads. 5. Institute "public interest test" rather than "anti-competitive conduct" test in terminal and switching agreements. 6. Tri-Annual DOT study of rail-to-rail competition. 7. States may petition the STB to declare part or all of a state as an area of "inadequate rail competition" -triggering customer remedies. 8. Establish a Rail Customer Advocacy Office at the Department of Agriculture. This bill was supported in the last Congress by a consortium of rail consumers including the American Public Power Association, National Rural Electric Cooperative Association, Edison Electric Institute, Western Coal Traffic League, American Chemistry Council, National Industrial Transportation League, National Association of Wheat Growers, The Fertilizer Institute, American Plastics Council, Paper & Forestry Industry Transportation Committee, National Barley Growers Association, Glass Producers Transportation Council, Portland Cement Association, and others. The legislation should be reintroduced in the current Congress and passed into law. Minnesota Municipal Utilities Association February 2005 AA~Ais.~~ Position Statement Minnesota Municipal Uti/ities Association Air Quality The Clean Air Act was passed in 1970 to achieve and maintain a healthy air quality in the _~ United States. As amended, the Clean Air Act (CAA) addresses control standards for new generating plants, protection of visibility in pristine areas, and control of acid rain r precursor emissions. -' CAA currently includes multiple programs designed to reduce the emissions of certain s pollutants for power plants. The large number of programs, their conflicting compliance ~, deadlines, and the cost of pollution control technologies have increased the costs and risks associated with generating electric power from fossil fuel plants. To address this patchwork of regulatory programs, the passage ofmulti-pollutant control legislation that amends and updates CAA is the top environmental issue for the power generation sector. Considerable congressional activity is expected early in the new 109th Congress on the President's Clear Skies Initiative, anation-wide emissions reduction program which would impose limitations on three primary criteria pollutants emitted from power plants - sulfur dioxide (SOZ), nitrogen oxides (NOx), and mercury (Hg). This proposal will provide environmental certainty, replace multiple piecemeal regulations for power plants with a single set of requirements, and will rely on proven market-based emission trading to reduce costs. The initiative also uses a voluntary program to reduce emission of carbon dioxide (COz), for which no cost effective emissions reduction technology exists. A market-based program for controlling multiple air pollutants such as SOZ, NOx, and Hg will prove more effective than the current, often redundant approach to achieving air quality goals. As Congress considers clean air reforms, any legislation to alter the current regulatory scheme for power plants should include the following concepts to achieve a proper balance of economic, energy and environmental goals: T X • Limit only the emissions of SOZ, NOx, and Hg. Some members of Congress support legislation that would limit emissions of COz, which would be extremely costly and could impair the security of the nation's electricity supply. A COZ program involving continued research on climate change and voluntary reduction ' offers a better approach to dealing with this concern. • Allow plant modifications that improve efficiency without increasing emissions. The continuing debate over when New Sources Performance ,~ Standards apply to plant modifications must be clarified. New Source Review (NSR) should not be used to prevent plant owners from making modifications that would increase plant efficiency and output without increasing emissions. • Rely on regulation or legislation that provides innovative and flexible mechanisms for achieving emissions goals. Generation resources throughout the industry differ significantly based upon characteristics including coal type, technology, and installed emissions controls. Congress should incorporate flexible and innovative approaches to controlling emissions. • Base legislation and regulatory reform on science and cost-effectiveness, taking into account the impact on the reliability and security of the energy system. Environmental goals are best achieved when those goals are grounded in good science, supported by the public, and addressed in the most cost-effective manner. Recognize existing "clean plants" and "clean utilities." Ironically, some proposals would require clean plants to further reduce pollution emissions at the same reduction rate as dirty plants. If adopted, these proposals would effectively penalize the customers of the nation's already clean plants. Customers who have already paid the initial cost of improved emissions in their clean plants would be expected to pay even higher costs for incremental improvements with diminishing returns. Minnesota Municipal Utilities Association February 2005 %%V~1 Position statement Minnesota Municipal Uti/ities Association Oppose the Administration's Proposed Rate Increases for WAPA and other PMAs The Western Area Power Administration (WAPA) provides cost-based wholesale power to forty-seven communities in Western Minnesota. Because the power is generated using a public resource, it is sold on a preferential basis to municipal and cooperative electric utilities and other not-for-profit institutions as required by law. The partnership between WAPA and these communities has been in place for more than half a century, and the low-cost power provided by WAPA to these communities is essential to their economic well-being. The Bush Administration's budget proposes to raise rates annually until the rates reach "market" rates. This could lead to a rate increase of 107% in just four years! This outrageous proposal is both unfair and unnecessary. The proposal is based on a discredited GAO report that the PMAs are subsidized by taxpayers. GAO used an arbitrary methodology for calculating supposed "subsidies," as well as several other erroneous assumptions, including assumptions related to market rates. Congress has never seen fit to act on that faulty report. Power rates paid to WAPA by municipal and cooperative customers cover all the costs for generating and transmitting electricity and for repayment, with interest, of the federal investment in these hydro projects. Hydropower is the only authorized purpose of federal water resource projects that is required to repay 100 percent of the costs of construction, operation, and maintenance -plus interest. None of the costs are borne by taxpayers. Power rates also help to cover the costs of other activities authorized by these multipurpose projects such as navigation, flood control, water supply, fish and wildlife conservation, and recreation. WAPA's cost-based rates serve as a valuable yardstick to judge the reasonableness of the market-based rates of other providers. The relative stability and predictability of WAPA's rates should not be sacrificed in pursuit of some arbitrary and volatile "market" standard. The administration's proposal for drastic rate increases to WAPA customers is unwarranted, unsupported by the facts, and would cause irreparable harm to the communities that have relied on WAPA power for half a century. It should be rejected. Minnesota Municipa/ Uti/ities Association Position Statement Protecting the Interests of WAPA Customers The Western Area Power Administration (WAPA) is one of four federal power marketing administrations (PMAs). WAPA markets and delivers reliable, cost-based hydroelectric power within a 15 state region of the central and western United States. WAPA is very important to Minnesota municipal utilities, providing wholesale power allocations to 47 municipal electric utilities in the western third of the state. WAPA's 17,000-mile transmission system carries electricity from 55 hydropower plants operated by the Bureau of Reclamation, the U.S. Army Corps of Engineers and the International Boundary and Water Commission. In marketing electricity, WAPA must follow many laws, regulations and policies, some of which are unique to that agency. Included in these laws is the Reclamation Project Act of 1939, which requires WAPA to give preference in selling federal power to certain types ofnon-profit organizations including cities, rural electric cooperatives, state and federal agencies, irrigation districts, public utility districts and Native American tribes. WAPA customers in Minnesota are served by the Upper Great Lakes Region office located in Billings, Montana, which, in turn, provides electric service from the seven dams of the Pick Sloan Missouri River Program, developed as a result of Congressional authorization in 1944. There were a number ofPMA-related issues addressed in the conference committee report of last year's comprehensive energy bill (H.R. 6), but unresolved at the conclusion of the 108th Congress, that are likely to be addressed in the 109th Congress. The conference report to the comprehensive energy bill (H.R. 6) included several provisions impacting PMAs that should be part of any future legislation, including proposals to: • Authorize WAPA to accept third party funds to finance the construction of new transmission. • Require transmission-owning PMAs to provide open access to their transmission lines to other market participants at rates comparable to what they charge themselves and under terms and conditions comparable to those they apply to themselves. • Authorize FERC to have limited regulation over PMA transmission rates and access and to compel PMA participation in regional transmission organizations. New federal legislation should also include provisions to: • Authorize the Corps of Engineers and the Bureau of Reclamation to use PMA customer receipts to fund the operation and maintenance of hydropower projects on an indefinite basis. • Require PMA security costs to be paid by general budget of the Bureau of Reclamation and not borne by the PMAs and their customers. Finally, several concepts that have always been part of the national policy toward PMAs should be continued, including: • Federal ownership of PMAs • Cost-based rates • Protection of present PMA customers The 47 Minnesota municipal utilities that receive an allocation of power from WAPA are: 1. Ada 2. Adrian 3. Alexandria 4. Barnesville 5. Benson 6. Breckenridge 7. Detroit Lakes 8. East Grand Forks 9. Elbow Lake 10. Fairmont 1 1. Fairfax 12. Fosston 13. Granite Falls 14. Halstad 15. Hawley 16. Henning 17. Jackson 18. Kandiyohi 19. Lake Park 20. Lakefield 21. Litchfield 22. Luverne 23. Madison 24. Marshall 25. Melrose 26. Moorhead 27. Mountain Lake 28. Newfolden 29. Nielsville 30. Olivia 31. Ortonville 32. Redwood Falls 33. St. James 34. Sauk Centre 35. Shelly 36. Sleepy Eye 37. Springfield 38. Staples 39. Stephen 40. Thief River Falls 41. Tyler 42. Wadena 43. Warren 44. Westbrook 45. Willmar 46. Windom 47. Worthington Minnesota Municipal Utilities Association February 2005 ~~~'~ American Public Power Association FEBRUARY 2005 Straight Answers to False Charges about the Federal Power Marketing Administrations The federal Power Marketing Administrations (P;~1As) are a drain on American taxpayers The federal Power Marketing Administrations (PMAs) provide millions of Americans served b}' non-profit public power and rural cooperative electric systems with low~ost renewable hydroelectric power produced at dams operated by the U.S. Army Corps of Engineers and the Bureau of Reclamation. The power rates paid to the PMAs by their public power and rural electric cooperative customers cover all of the costs for generating and transmitting electricity and for repayment, with interest, of the federal investment in these hydro projects. None of the costs are borne by taxpayers. Power rates also help to cover the costs of other activities authorized by these multipurpose projects such as navigation, flood control, water suppl}', fish and wildlife conservation, and recreation. Since PMA rates are often lower than market-based rates, thc•c are subsidized. The power marketed by the PMAs is generally lowsr-st Fx•catrsc of the fuel source -falling water. Hydropower -unlike nuclear, gas and coal - tt:u nr~ fuel costs. It is this method of generating electricity and the fact that most of these• hcrlro projects were constructed many years ago when construction and labor cost_ti wc•rt• Irrwc•r that account for the favorable economics of PMA power. Private utilities th:u ficnerate electricity predominantly from hydropower enjoy similarly low rues. Requiring the PMAs to sell their power at market-hast•d r.ucs would better ensure the full recovery of the appropriated and other debt that is rccoycr:rhlc through the PMAs' power sales. This issue is really a question of whether the use of market-based rates by the PMAs (e.g.; they could charge whatever the market would bear for the power) to recover their costs is preferable to the current use of cost-based rates. Cost-based rates are tariffs for electric energy and capacity that are designed to recover the costs of generating or delivering the energy and capacity. In the case of investor~wned utilities, cost-based rates also include a "reasonable" return on shareholders' investments in the production facilities. Cost-based rates for public power systems, rural electric cooperatives and the PMAs do not include a profit or rate of return. Included in the rates that PMA customers pay to the PMAs themselves is an additional interest charge that goes to pa}' back the initial federal investment in the hydropower facilities. continued on the back of this p¢ge Existing federal policy has and continues to recover the federal investment in these facili- ties, with interest, so no change in policy is necessary or required. Furthermore, if the PMAS were to be required to sell their power at market-based rates, then public power sys- tems and rural electric cooperatives would be subject to daily, widespread fluctuations in wholesale power costs (that would increase retail power rates in the hundreds of cities, towns and rural areas served by these entities) and the generation of federal hydropower would occur mainly on-peak when market rates are highest, thereb}' restricting or elimi- nating off-peak releases made to benefit flood control, fish and wildlife conservation, recreation, navigation and water supply. The PMAs should be sold to the private sector to provide a cash infusion to the L.S. Treasury and to reduce the budget deficit. In commenting on a Clinton Administration proposal to sell the PMAs, the Congressional Research Service (CRS) stated that while the U.S. Treasury would receive a windfall in receipts at the time of the initial sale of the PMAs, eventually the foregone annual rc•y- enues to the Treasury from business activities of the PMAs would actually contrihute• to the deficit. "Thus, the fiscal advantage to the Federal Government of selling the P~L~.c is time- limited," CRS said. "Over the standard five-year scoring period, the Administration c•cu- mates the net receipts at $3.675 billion. Yet, if the sale were scored over a longer lx•ricxl• the net receipts would be less. In theory, if receipts were scored over the life of the• proj- ects involved, the net receipts would be zero." In other words, selling the P~t.•~.. Mc~ul<i tx• like cashing in your entire 401k plan to pay off your credit card debt - there•M (urrg~~ing the long-term benefit of the annual tax deferral and future income gencratc•d t>, ttrc• il-I k. Thu economic and budgetary value of the PMAs is the reason that the Congressiond B~dgef Officr guidelines do not allow the sale of federal assets such as the PMA.s to score as deficit n+dretaiow. The PMAs reduce competition in the electric utility industry by prodding Icw~[c..t Irele•r.-1 hydropower to preference customers -public power systems and rural ele•<tru c~M~Ix•rw- tives. Public power systems and rural electric cooperatives serve as a "}•ardstick' .+};.rrrr.t wtru h customers and regulators can compare the rates offered by investor<iMne•d uuhc,r. ,end other private generators, thereby promoting competition in the electric uuhr~ rn~fu.tn The significance of yardstick competition was discussed in a paper presented tc. the \c•w England Conference of Public Utility Commissioners Symposium in tilav 1!t!r<r. t» ata~rne~ Harvey L. Reiter. Mr. Reiter highlighted the importance of having a de~ice• tur nx•a.unng the performance of utilities in the marketplace. He explained, "...yardstick comlx•uuun. or the competition that occurs when the regulator can compare the relative• lx•rlernnanc e•. of utilities it regulates with other utilities it regulates, or with neighboring utilitie•> in other jurisdictions, places pressure on regulated utilities to perform better for fear of coming up short in the comparison process." As one of the few providers of cost-based w•hole•salc power, the PMAs serve as a yardstick against which consumers, regulators, and polic~mak- ers can measure the profit margin embedded in the cost of power from other sources. This is a key piece of market information needed to further the goal of a health}• and competitive marketplace. ^ Minnesota Municipal Uti/ities Association P'®ssti®n Statement Federal Incentives for Renewables 0 N Ul Two federal issues important to Minnesota municipal utilities should be addressed in any energy legislation passed by Congress: Tradable Tax Credit-Tax Credit Bonds. Minnesota municipal utilities have long embraced the use of renewable generation to meet the electric energy needs of the citizens of their communities. They have been motivated by the need to secure wholesale power that will result in reliable and reasonably priced service to their customers while respecting the concerns, including the social and environmental concerns, of the citizens who depend on their service and ultimately control their operations. It was for that reason, more than 50 years ago, that municipal utilities in western Minnesota began making commitments to purchase wholesale power from federal hydroelectric dams at a time when coal power would have been less expensive and, it seemed, possibly even more reliable. It is with this same sense of responsibility that municipal utilities are approaching the effort to develop wind and other renewables in order to meet a portion of their electricity needs. Minnesota law requires that municipal power agencies, G&T cooperatives and IOUs make a "good faith effort" to generate or procure 1% of the electricity needs of the retail customers in their systems from "renewable" resources by 2005, and increase the amount by 1% each year, to 10% by 2015. An added biomass mandate is included, requiring'/2% of electric sales to come from biomass sources by 2010, and 1% by 2015. Power from renewable resources and advanced technologies continues to be more expensive than power from traditional generation sources. Federal investment incentives are needed to encourage the construction of these facilities. The federal government has determined that tax policy is a viable mechanism to encourage renewables and provides private developers with the Production Tax Credit (PTC), a federal tax credit for electricity generated from qualifying renewable energy projects. However, investment tax credits made available to privately-owned utilities and energy production companies do not create incentives for publicly-owned or rural electric cooperative utilities, which serve 25% of the nation's electricity load. To address this lack of equity, the Renewable Energy Production Incentive (KEPI) program was developed. KEPI was intended to provide a comparable renewable incentive for public power systems but it has been subject to sporadic lapses in reauthorization and has been severely under-funded. This lack of certainty limits the incentives' effectiveness, and ultimately, the amount of renewable generation developed. During the last three Congressional sessions, community-owned utilities have supported legislation that would provide community-owned utilities a "tradable tax credit" which would place them in an equitable position with investor-owned utilities. Tradable tax credits would be an effective way to help diversify the nation's fuel reserves by promoting the increased development of efficient and clean energy resources -particularly in rural America. Despite strong support from House and Senate members as well as from Senate Finance Committee Chairman Grassley, the tradable tax credit concept was not able to move forward in the 108th Congress. As opposition to the tradable tax credit is unlikely to subside in the 109th Congress, APPA, NRECA and other supporters of the concept were urged by both Senate Finance Committee staff and the White House to develop a different approach. APPA and NRECA have developed the "tax credit bond" which would allow not-for-profit utilities to issue interest free debt for the development of qualified renewable energy facilities. Tax credit bonds would provide public power systems greater certainty and affordability in both planning and investing in renewable resources. In essence, the tax credit bond is a debt instrument which can be offered for qualified renewable facilities under section 45 of the tax code. Investors receive credits against their federal income tax liability instead of the traditional interest that is usually paid by the issuer. The municipal utility or cooperative is liable for the face value of the bond, and saves by owing no interest on the bond. The federal government would essentially pay the "interest" in the form of tax credits. Projects receiving funding under the Renewable Energy Production Incentive (KEPI) program would not be eligible for tax credit bond financing. Renewable Energy Production Incentive (KEPI). The KEPI program was created by the Energy Policy Act of 1992 to authorize the U.S. Department of Energy (DOE) to make direct payments to publicly- and cooperatively-owned electric utilities at the rate of 1.5 cent/kWh (indexed for inflation) for electricity generated from solar, wind, and certain geothermal and biomass electric projects. KEPI has been the only incentive available on the federal level for these utilities to make new investments in renewable energy projects. It has been instrumental in making possible public power wind projects in Minnesota. Congress implemented the program with two goals in mind: 1) to assist public power utilities in overcoming economic barriers to greater renewable energy use; and 2) to ensure equity between investor-owned utilities that receive energy tax credits and not-for- profit utilities that are unable to do so. In recent years, funds have not kept pace with energy growth, and this has resulted in many projects receiving only partial payments for energy produced. For example, since 1995, while Tier 1 projects (wind, solar, geothermal and closed-loop biomass) have received full payments, Tier 2 (landfill to energy) projects have received insufficient payments. Also, although Congress allocated $5 million for the KEPI program in the Energy and Water Development Appropriations Bill last year, this money is being used to fund current and under-funded prior year projects through FY05. Reauthorization of KEPI will again promote the development of new renewable energy facilities by publicly-owned electric utilities. During the 108th Congress, non-controversial, bi-partisan legislation was introduced that would have reauthorized and reformed the KEPI program for another 10 years and would have directed DOE to allocate 60 percent of appropriated funds to Tier 1 projects and the remaining 40 percent to Tier 2 projects during funding shortfall years. This legislation was included in last year's comprehensive energy bill. The 109th Congress should pass astand-alone KEPI reauthorization bill and allocate $13 million for KEPI for FY2006. Minnesota Municipal Utilities Association February 2005 P®siti®n statement Minnesota Municipa/ Uti/ities Association Electric Utility Service Territories - A State Issue In recent years, electric cooperatives have attempted to secure the passage of federal legislation that would have severely restricted the ability of municipal electric utilities to grow with their cities. They were unsuccessful, but similar attempts to add service territory language to federal legislation may be made in the future. There is simply no need for Congress to become involved in electric utility service territories. Like most issues relating to retail electric distribution service, service territories have long been governed under state law. Minnesota's system for regulating service territories has been in place since 1974. Our law, like that of many states, provides that a municipal electric utility may acquire the right to serve areas annexed by the city. The law also provides that the utility previously serving the annexed area must be provided with fair compensation. Here are some important facts to remember about Minnesota's service territory law: w 0 J r r T t11 x _, 0 .~ z a • The co-ops wanted the 1974 service territory law in order to obtain funding to build the Coal Creek plant. They agreed to and supported the municipal annexation provision in the law. • The co-ops have enjoyed tremendous growth in the years since the service territory law was enacted. Their growth has far outstripped that of the municipal utilities. They are the fastest-growing segment of the industry. • The co-ops are poised to capture much of the growth around communities served by investor-owned utilities, as well as those communities served by co- ops. This has been happening for some time in the Twin Cities Metro area, and is beginning to occur in other parts of the state as well. • In addition to enjoying their own rapid growth, the co-ops receive fair compensation under the law when a city purchases service rights following annexation. • Minnesota's service territory law is working exactly as it was intended, and there is no reason for Congress to become involved. Electric utility service territories are fundamentally a state issue, fully governed by the laws of Minnesota and other states. There is no justification for Congressional involvement in the service territory issue. Minnesota Municipal Utilities Association February 2005 Position Statement Minnesota Municipa/ Uti/ities Association Why Public Power? 126 Minnesota cities benefit from having a locally owned and locally operated municipal electric utility. Thirty-one cities have a municipal natural gas system. Fifty of our eighty-seven county seats are served by a municipal electric or gas system. A not-for- profit municipal electric or gas utility is a tremendous asset in these uncertain times. Here are some of the reasons why: • We have great service. We're part of the community and our policy makers, managers and workers are part of the community. Our crews are always on hand in the event of emergency. You don't need to call an 800 number to talk to us. • We're locally regulated. Members of the community who live in the community set rates and service practices. If you have a problem, you know who to talk to. • We're owned by our customers. There is no tension between the interests of customers and the interests of stockholders. Our focus is Main Street, not Wall Street. We work for you. W 0 J r T X 1 _, 0 A ,~ • We're not in it for the money. Municipal utilities are not-for-profit and therefore operated in the public interest. Our goal is long-term community benefit, not short-term gain. We work hard to save you money. • We're the yardstick for the industry. For generations, public power systems have set standards for rates and service that other utilities have had to meet. • We'll be there. Many of Minnesota's municipal electric utilities have served their communities for more than a hundred years. In an era when new competitors come and go faster that we can learn their names, you can count on us. We will be there when you need us. • We're Public Power. We're here for you!