ML20138C410
| ML20138C410 | |
| Person / Time | |
|---|---|
| Issue date: | 04/24/1997 |
| From: | NRC COMMISSION (OCM) |
| To: | |
| References | |
| REF-10CFR9.7 NUDOCS 9704300109 | |
| Download: ML20138C410 (226) | |
Text
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UNITED STATES OF AMERICA i.
NUCLEAR REGULATORY COMMISSION i
Title:
BRIEFING ON ELECTRIC UTILITY
- RESTRUCTURING - PUBLIC MEETING i
- Location: Rockville, Marylaad i I
! I i
Date: Thursday, April 24,1997 Pages: 1 - 143 i I
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, DISCLAIMER l This is an unofficial transcript of a meeting of the United States Nuclear Regulatory Commission held on Aoril 24, 1997 in the commission's office at one White Flint North, Rockville, Maryland. The meeting was
, open to public attendance and observation. This transcript has not been reviewed, corrected or edited, and it may contain inaccuracies.
The transcript is intended solely for general f informational purposes. As provided by 10 CFR 9.103, it is I
not part of the formal or informal record of decision of the matters discussed. Expressions of opinion in this transcript do not necessarily reflect final determination or beliefs. No pleading or other paper may be filed with the Commission in any proceeding as the result of, or addressed to, any statement or argument contained herein, except as l the Commission may authorize.
.a e , , 6, y-l 1 j 1 l UNITED STATES OF AMERICA '
2 NUCLEAR REGULATORY COMMISSION l
3 - - -
4 BRIEFING ON ELECTRIC UTILITY RESTRUCTURING S - - -
l 6 PUBLIC MEETING l
7 l
1 8 Room 1F16 i 9 11555 Rockville Pike 1
10 Rockville, Maryland ,
1 11 1 12 Thursday, April 24, 1997 13 l 14 The Commission met, pursuant to notice, at 9:00 15 a.m., Shirley A. Jackson, Chairman, presiding.
16 l
17 BEFORE:
18 19 SHIRLEY A. JACKSON, Chairman 20 GRETA J. DICUS, Commissioner 21 KENNETH C. ROGERS, Commissioner 22 NILS J. DIAZ, Commissioner 23 EDWARD McGAFFIGANi JR., Commissioner 24 25 ANN RILEY & ASSOCIATES, LTD.
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1 STAFF AND PRESENTERS SEATED AT THE COMMISSION TABLE:
i 2 JOHN C. HOYLE, Secretary 9
5 3 KARYN D. CYR, General Counsel 4 LEONARD JOSEPH CALLAN, EDO 5 DAVID MATTHEWS, Chief, Generic Issues and l 6 Environmental Projects Branch, NRR j
1 7 ROBERT WOOD, Senior Financial Analyst, NRR g 8 MARYLEE SLOSSON, Deputy Director, Division of i
l 9 Reactor Program Management, NRR
! 10 SUSAN TOMASKY, General Counsel, FERC
, 11 BRUCE B. ELLSWORTH, Commissioner, New Hampshire i
12 Public Utilities Commission, President, NARUC l~
13 ROBERT W. GEE, Commissioner, Texas Public j 14 Utilities Commission, Chair, NARUC Commission on 15 Electricity
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, 16 EMMIT GEORGE, JR., Commissioner, Iowa Utilities 17 Board, Chair, NARUC, Subcommittee on Nuclear 18 Issues, Waste Disposal 19 E. LINN DRAPER, JR., Chairman, President and Chief 20 Executive Officer, American Electric Power 21 Service Corporation 22 JOE COLVIN, President and Chief Executive Officer, 23 NEI 24 PHIL HARRIS, President, PJM Interconnection 25 Association ANN RILEY & ASSOCIATES, LTD.
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1 STAFF AND PRESENTERS SEATED AT THE COMMISSION TABLE:
2 (continued]
3 JAMES ASSELSTINE, Managing Director, Lehman 4 Brothers l
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1 PROCEEDINGS 2 (9:00 a.m.]
3 CHAIRMAN JACKSON: Good morning, ladies and 4 gentlemen.
5 The historic change to a competitive market for 6 the electric power industry is having far-reaching 7 consequences and presents many challenges for the nuclear 8 power industry. As restructuring proceeds and the business 9 environment changes, our licensees and the NRC must ensure 10 that economic pressures do not erode nuclear safety and must 11 assure the adequacy of decommissioning funding.
12 To ensure that the NRC is taking the right actions 13 at the right time in the appropriate manner, it is important 14 that we gain an understanding of the changes and emerging 15 issues that are occurring as a result of these momentous 16 changes. To address the significant issues and concerns, 17 the NRC has brought together economic regulators and 18 representatives of the nuclear industry as well as our own 1 l
19 staff to prosent their roles and perspectives on the future l 20 of the electric power industry with the transition to a 21 competitive market.
22 Yesterday, we focused in a Commission meeting, 23 public meeting, on transmission reliability and security. I i
24 Today, we will focus on other issues associated with 25 electric utility restructuring and economic deregulation. l ANN RILEY & ASSOCIATES, LTD.
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1 The restructuring of existing utilities raises a number of
- 2 complex issues. We are seeing proposed legislation at the 3 federal and state levels and many new financial l
4 arrangements.
j 5 The NRC needs to keep itself abreast of 6 developments and be able to respond to legislative proposals j 7 and financial changes which-include mergers and
- 8 acquisitions, antitrust issues, stranded cost recovery and
- 9 the introduction of independent system operators.
a 3 10 I would like to welcome the NRC staff and the l
11 members of the two panels that will be speaking today on i
12 these issues, i
13 On the first panel, after the staff speaks, will 14 be Susan Tomasky, General Counsel for the Federal Energy 4
j 15 Regulatory Commission; Commissioner Robert Gee, Chair of the 4
4 16 NARUC Committee on Electricity; Commissioner Bruce 17 Ellsworth, President of NARUC; and, commissioner Emmit i
18 George, Chair of the NARUC Subcommittee on Nuclear Issues ~
4 4
19 and Waste Disposal.
i 20 I am also pleased and will welcome them again at i
! 21 the time, to welcome the members of the second panel, j 22 Mr. Joe Colvin, President and CEO of the Nuclear Energy 23 Institute; Dr. E. Linn Draper, Chairman, President and Chief 24 Executive Officer of Electric Power Service Corporation; 25 Mr. Phil Harris, President of PJM Interconnection ANN RILEY & ASSOCIATES, LTD.
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1 Association; and Mr. James Asselstine, former Commissioner, 2 now Managing Director of Lehman Brothers.
3 If the Commissioners have no opening comments, 4 Mr. Callan, please proceed.
5 MR. CALLAN: Good morning, Chairman and 6 Commissioners.
7 Chairman, as you just noted, we are the first of 8 several panels to brief the Commission on the status of 9 ecor.omic deregulation and restructuring of the electric 10 utility industry. As you know, the NRC staff has, at the
, 11 Commission's direction, underJs. ken several initiatives to 12 address the NRC's concerns about the potential health and ,
1 13 safety impacts of economic deregulation of its power reactor 14 licensees. Our briefing will update you on the status of 15 our initiatives and will highlight several issues currently i 16 of concern to the NRC and other participants in the l 17 deregulation process.
18 This is our first briefing to the full Commission 19 since July 30, 1996.
20 With me this morning are Marylee Slosson, the 21 Deputy Director of the Division of Reactor Program 22 Management in the office of NRR, David Matthews, a branch 23 chief, who works for Marylee Slosson, and Robert Wood.
24 I will now turn the briefing over to David 25 Matthews.
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7 1 David.
2 MR. MATTHEWS: Thank you, Joe, and good morning.
3 I am only going to spend a couple of minutes by 4 way of brief summary and an outline of the staff's intended 5 remarks.
6 If I could have the first slide, please?
7 As Mr. Callan indicated, we briefed the full 8 Commission in July of last year with regard to a seven point 9 action plan that the staff had undertaken starting in 10 February of 1996. Today, we did not intend to go by rote 11 through the individual items of that action plan because we 12 view that that progress is generally well known. We have 13 briefed the status of that action plan in many fora over the 14 last few months. We did, however, want to focus on what we 15 view to be the accomplishments that have been afforded l 16 through those efforts within the last year or 18 months.
17 I want to concent at this time, as an outgrowth of 18 our last briefing in July, the Commission raised an issue to 19 the staff for us to consider in connection with this general 20 area of restructuring and that was the issue of non-owning 21 operators who -- proposals had been offered associated with 22 the operation of plants by people who had not previously 23 been listed on the license and weren't licensees.
24 The staff has, at the Commission direction, 25 undertaken a separate review of that issue and a paper {
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1 presenting some policy considerations is in preparation and 2 is due to the Commission here in the next month or two.
3 CHAIRMAN JACKSON: You will not be speaking 4 specifically to that today?
5 MR. MATTHEWS: Right, although we will indicate 6 that that is one of.the " emerging issues," because of the 7 unique arrangements that are materializing. It is not one 8 that we are prepared to speak to in detail at this time.
9 With that, I want to indicate that Bob Wood will 10 carry us through the presentation and he will focus on the 11 accomplishments of the last 12 or 18 months. He will also 12 briefly review what is the continuing NRC's involvement and 13 review in restructuring activities that are taking place in 14 the recent past, as we speak today and in the near future. :
15 He will also mention what we see to be some emerging issues 16 that the NRC certainly has to keep an eye on and then 17 particularize it to a few issues that we think the NRC has 18 to be actively involved in addressing in the hear future and l
l 19 ': hen he will provide a summary and conclusions.
20 MR. WOOD: Thanks, Dave.
21 Slide number 2.
22 Chairman Jackson, Commissioners, I am happy to be j 23 here.
24 CHAIRMAN. JACKSON: We are happy to have you.
25 MR. WOOD: We issued the action plan, as Dave ANN RILEY & ASSOCIATES, LTD.
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1 mentioned, back last February with seven elements. Most of 2 those elements are on here. I will try to be very brief in 3 summarizing them. As you all remember, we issued an 4 advanced notice of proposed rulemaking in April on 5 decommissioning funding assurance and that now is coming 6 close to final internal completion and will be coming up to 7 the Commission as a proposed rule.
8 CHAIRMAN JACKSON: When do you anticipate that?
9 MR. WOOD: It will probably go to the EDO's office 10 within a day or two.
11 CHAIRMAN JACKSON: So, in May?
12 MR. WOOD: Sometime in May.
13 CRAIRMAN JACKSON: Okay.
14 MR. WOOD: The administrative letters that we 15 issued to all of our power reactor licensees last June 16 reminded them of their obligation to inform us of any 17 activities that might be considered direct or indirect 18 transfer of control of the license under our 50.80 reviews 19 and we have gotten a few responses back on that from time to 20 time since then.
21 We issued a draft policy statement on September 22 23. We extended the comment period once because of interest 23 expressed by the public. The final policy statement is now 24 under staff review.and is moving along internally and will 25 be up to the Commission sometime later in June, I believe.
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w n 4 e-10 1 The draft standard review plans that were issued 2 in concert or prepared in concert with a draft policy 3 statement were published or notice of availability was 4 published in the Federal Register on December 27. As you 5 may remember, the standard review plans concern both the 6 financial qualifications, review process and the 7 decommissioning funding assurance review process as it 8 stands now and there is a separate standard review plan on 9 the antitrust review process. We got six comments back on 10 that and will be revising the standard review plans based on 11 those comments.
12 We have ongoing staff level liaison function that 13 I think is going along very well with FERC and with the 14 state PUCs through the NARUC committee framework. And, 15 finally, we have work going on with the Financial Accounting 16 Standards Board endorsing right at this point what they call 17 an exposure draft which is a draft proposal which would give 18 us information on the status of decommissioning funds.
19 Finally, we have an ongoing evaluation of our 20 50.80 process and our general financial qualifications 21 framework and I will get into that a little bit more.
22 CHAIRMAN JACKSON: When do you expect your review 23 of the FASB exposure draft?
24 MR. WOOD: Well, we have a guide which has been 25 prepared which endorses the exposure draft. We are at the ANN RILEY & ASSOCIATES, LTD.
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4 o s v 11 1 mercy, of course, of FASB's schedule. My understanding is 2 that FASB will probably either be issuing another exposure 3 draft because of issues raised for non-nuclear facilities 4 that also have long lives and have costs associated with 5 their ultimate disposal. So they may do that in the second 6 quarter of this year, which we are in now, of course. I 7 understand that at the earliest, the final FASB guide or 8 regulation wouldn't be coming out until December of this 9 year.
10 CHAIRMAN JACKSON: This relates to reporting 11 requirements?
12 MR. WOOD: This relates to reporting requirements 13 and the status of decommissioning and how people or 14 companies would deal with the ultimate liability to get rid 15 of that obligation.
16 Slide 3, please.
17 We believe that we have fairly well summarized the 18 current process that we use by issuing the standard review 19 plans. We will, of course, be changing the standard review 20 plans as we change the regulations that underlie them. As I 21 mentioned earlier, we have been reviewing all restructuring 22 proposals under our 50.80 transfer of license requirements.
23 So far, we haven't seen any divestitures of assets. Most of 24 the things we have.seen so far have been mergers or 25 formations of holding companies.
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v t b O-13 1
We do expect to see future issues where 2
divestiture is raised. We also expect to see future issues '
3 where proposed purchases by foreign entities may occur.
4 Basically, our review is basically 5 straightforward.
As you know, we have a dichotomy in our :
6 regulations for power reactor licensees between those that i 7
are defined as electric utilities in our regulations ir the ,
8 definition section and then nonelectric utilities. And l 9
electric utilities have, because of their historic access to 10 ratepayers through regulated races, have a little bit lower 1 11 threshold to meet than nonelectric utilities. We do 12 ascertain in our reviews that a licensee would remain an 13 electric utility and if they don't they would have to comply 14 with the more rigorous standards that pertain to the 15 electric utilities.
16- For holding companies, what we are concerned about i 17 is as holding companies are formed over our existing 18 licensees that there may be transfers of assets away from 19 our licensees to a parent or affiliated company. So we have 20 been getting commitments from licensees that they will 21 inform us if there are any significant transfers of assets 22 so that we will at least know about it and take appropriate j 23 action if we need to. l i
24 CHAIRMAN. JACKSON: Let me ask you two questions.
I 25 One, in terms of obtaining the commitments to inform the NRC l
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-O d r s 13 1 when significant assets are moved, are those commitments 2 made a part of the license or the license transfer?
3 MR. WOOD: We do have, in recent -- in the last 4 year or so made them as license conditions. Prior to that, 5 there was less consistency on that approach and we had 6 obtained letters. One thing in this broader review of our 7 financial qualifications framework, I think we are certainly 8 looking at the feasibility of whether to make that a 9 requirement in the regulations rather than doing it through 10 the license condition process, 11 CHAIRMAN JACKSON: If you were to do that, would 12 that require a separate rulemaking or you would be doing 13 this in the rulemaking coming forward in May?
14 MR. WOOD: It won't be part of the rulemaking 15 coming forward in May. It would be a separate rulemaking.
16 This rulemaking would look at more of the general l 17 qualifications process. The rulemaking that is coming 18 forward in May is looking specifically at decommissioning 19 funding assurance and the impacts of deregulation on that.
20 CRAIRMAN JACKSON: As a general practice today, 21 you are making these commitments license conditions going 22 forward? j 23 MR. WOOD: Right.
24 CHAIRMAN JACKSON: And the second question has to 25 do with consideration of foreign ownership issues. How well i
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1 prepared are we in terms of reviewing those? ,
2 MR. WOOD: I think we have to do some more work on i
l 3 what the standards are. I think at this point part of the .
i 4 problem is, you know, clearly any entity that owns over 50
, l l 5 percent of a licensee and is foreign would raise -- would ,
! 6 probably be in contravention of the Atomic Energy Act. Just 7 as clearly, if there is a de minimis amount, under say 5 8 percent, it would be highly unlikely where they could 9 exercise any form of control.
10 But you have a gray area in between that you would 11 have to evaluate. In most cases, foreign companies aren't '
12 going to exercise control with 10 or 20 percent of voting 13 stock but not always. So we would have to look at each r 14 particular situation, I think.
15 CHAIRMAN JACKSON: I guess I am really asking two 16 questions. One is, how well prepared are we in terms of 17 being able to look at what may be less than obvious 18 situations? That's number one.
19 Number two, how well prepared are we to move 20 quickly relative to those reviews?
21 MR. WOOD: You know, I think we could make a 22 review and I don't think it would be on the critical path; 23 it would be on the general review that we would look at and 24 it would take, like most reviews do now, in the order of 25 three to six. months and it would be another element we would ANN RILEY & ASSOCIATES, LTD.
Court Reporters 1250 I Street, N.W., Suite 300 Washington, D.C. 20005 (202) 842-0034
a o s v 11 1 mercy, of course, of FASB's schedule. My understanding is 2 that FASB will probably either be issuing another exposure 3 draft becaase of issues raised for non-nuclear facilities 4 that also have long lives and have costs associated with 5 their ultimate disposal. So they may do that in the second 6 quarter of this year, which we are in now, of course. I 7 understand that at the earliest, the final FASB guide or !
8 regulation wouldn't be coming out until December of this 9 year.
l 10 CHAIRMAN JACKSON: This relates to reporting j 11 requirements? !
\
12 MR. WOOD: This relates to reporting requirements !
13 and the status of decommissioning and how people or l
14 companies would deal with the ultimate liability to get rid l
15 of that obligation.
16 Slide 3, please.
17 We believe that we have fairly well summarized the 18 current process that we use by issuing the standard review 19 plans. We will, of course, be changing the standard review i 20 plans as we change the regulations that underlie them. As I 21 mentioned earlier, we have been reviewing all restructuring l 22 proposals under our 50.80 transfer of license requirements.
23 So far, we haven't seen any' divestitures of assets. Most of l 24 the things we have seen so far have been mergers or 25 formations of holding companies.
ANN RILEY & ASSOCIATES, LTD.
Court Reporters l 1250 I Street, N.W., Suite 300 ,
Washington, D.C. 20005 I (202) 842-0034
. ~ . - .
v r D o-12 t 1 We do expect to see future issues where {
2 divestiture is raised. We also expect to see future issues 3 where proposed purchases by foreign entities may occur. t 4 Basically, our review is basically l
5 straightforward. As you know, we have a dichotomy in our F 6 regulations for power reactor licensees between those that l
l 7 are defined as electric utilities in our regulations in the 8 definition section and then nonelectric utilities. And 9 electric utilities have, because of their historic access to 10 ratepayers through regulated rates, have a little bit lower .
11 threshold to meet than nonelectric utilities. We do 12 ascertain in our reviews that a licensee would remain an 13 electric utility and if they don't they would have to comply 14 with the more rigorous standards that pertain to the 15 electric utilities.
16 For holding companies, what we are concerned abcut 17 is as holding companies are formed over our existing 18 licensees that there may be transfers of assets away from 19 our licensees to a parent or affiliated company. So we have 20 been getting commitments from licensees that they will 21 inform us if there are any significant transfers of assets 22 so that we will at least know about it and take appropriate 23 action if we need to.
24 CHAIRMAN. JACKSON: Let me ask you two questions.
25 One, in terms of obtaining the commitments to inform the NRC ANN RILEY & ASSOCIATES, LTD.
Court Reporters 1250 I Street, N.W., Suite 300 Washington, D.C. 20005 (202) 842-0034
so s +
13 1 when significant assets are moved, are those commitments 2 made a part of the license or the license transfer?
3 MR. WOOD: We do have, in recent -- in the last 4 year or so made them as license conditions. Prior to that, 5 there was less consistency on that approach and we had 6 obtained letters. One thing in this broader review of our 7 financial qualifications framework, I think we are certainly 8 looking at the feasibility of whether to make that a 9 requirement in the regulations re.ther than doing it through i 10 the license condition process.
11 CHAIRMAN JACKSON: If you were to do that, would 4
12 that require a separate rulemaking or you would be doing 13 this in the rulemaking coming forward in May?
14 MR. WOOD: It won't be part of the rulemaking 15 coming forward in May. It would be a separate rulemaking.
16 This rulemaking would look at more of the general 17 qualifications process. The rulemaking that is coming 18 forward in May is looking specifically at decommissioning 19 funding assurance and the impacts of deregulation on that.
20 CHAIRMAN JACKSON: As a general practice today, 21 you are making these commitments license conditions going 22 forward?
23 MR. WOOD: Right.
24 CHAIRMAN. JACKSON: And the second question has to 25 do with consideration of foreign ownership issues. How well ANN RILEY & ASSOCIATES, LTD.
Court Reporters 1250 I Street, N.W., Suite 300 Washington, D.C. 20005 (202) 842-0034
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- 1 prepared are we in terms of reviewing those?
) 2 MR. WOOD: I think we have to do some more work on i
j 3 what the standards are. I think at this point part of the
! 4 problem is, you know, clearly any entity that owns over 50 i
5 percent of a licensee and is foreign would raise -- would i
6 probably be in contravention of the Atomic Energy Act. Just
{
- 7 as clearly, if there is a de minimis amount, under say 5 l 8 percent, it would be highly unlikely where they could j 2
9 exercise any form of control.
l 10 But you have a gray area in between that you would ,
11 have to evaluate. In most cases, foreign companies aren't
?
12 going to exercise control with 10 or 20 percent of voting 13 stock but not always. So we would have to look at each I i 14 particular situation, I think.
15 CHAIRMAN JACKSON: I guess I am really asking two 16 questions. One is, how well prepared are we in terms of 17 being able to look at what may be less than obvious 18 situations? That's number one. l 19 Number two, how well prepared are we to move l 20 quickly relative to those reviews?
21 MR. WOOD: You know, I think we could make a 22 review and I don't think it would be on the critical path; 23 it would be on the general review that we would look at and 24 it would take, like most reviews do now, in the order of l l
25 three to six months and it would be another element we would l
ANN RILEY & ASSOCIATES, LTD. ,
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- 15 1 look at.
2 At the same time, I think we want to look at 3 resolving, if we can, some sort of benchmarks or milestones 4 below which we wouldn't have to look at at all or above 5 which we would clearly have to look at.
CHAIRMAN JACKSON:
How close are you to developing 6
7 such thresholds?
8 MR. WOOD: We are starting on that but we haven't 9 gone very far into it.
10 MR. MATTHEWS: Let me make a comment that it is an l 11 element that is req; ired of us and we have looked and 12 addressed it in each SER that we have issued associated with 13 the proposed restructuring or change in ownership. So it is 14 an essential element because it is a prohibition in the 15 Atomic Energy Act. We just have not seen one that would 16 challenge our judgment in that regard. Namely, there just 17 hasn't been a case in which we have uncovered any foreign 18 ownership.
19 So it is an explicit part of our review and we 20 have been addressing it in each instance. Where the 21 challenge will come is the first time that we see one with 22 some material ownership and then we are going to have to
.23 evaluate its significance. To say that we have criteria 24 would be a strong overstatement; we don't.
25 I believe it is something that could be factored ANN RILEY & ASSOCIATES, LTD.
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O 4 h 16 1 in, appreciating that i
it might take some additional time, 2
into our standard review plan. That may be an appropriate 3
l mechanism to do it. But it is one of those many emerging.
4 issues that the staff has yet to articulate any clear 5 standards on.
6 MR. WOOD: Yes, we do have a statement in the !
7 current standard review plan that went out on foreign 8
ownership but it is very broad and very general and that was !
9 the best we could do, given the time constraints at that l 10 time. We are going to have to revisit that. i I
11 CHAIRMAN JACKSON:
I Commissioner McGaffigan.
12 COMMISSIONER McGAFFIGAN: On the definition of 13 electric utility, as states go about passing retail l 14 competition statutes, will that move utilities from being an i 15 electric utility under our definition into the other l l
16 category at some point in time?
17 MR. WOOD: It all depends on the specific state
{
18 proposal.
19 COMMISSIONER McGAFFIGAN: So you are going to have 20 to audit each state proposal?
21 MR. WOOD: Well, yes. And in the proposed rule 22 that will be coming up we do try to address the issue of 23 those states that do have dedicated nonbypassable charges 24 that take care of decommissioning funding. We would want to 25 handle that in our regulations so that I think the staff's t
1 i
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se 4 c e 15 1 look at.
2 At the same time, I think we want to look at 3 resolving, if we can, some sort of benchmarks or milestones 4 below which we wouldn't have to look at at all or above 5 which we would clearly have to look at.
1 6 CHAIRMAN JACKSON: How close are you to developing 7 such thresholds?
8 MR. WOOD: We are starting on that but we haven't 9 gone very far into it. i 10 MR. MATTHEWS: Let me make a comment that it is an ;
11 element that is required of us and we have looked and 12 addressed it in each SER that we have issued associated with 13 the proposed' restructuring or change in ownership. So it is 14 an essential element because it is a prohibition in the i 15 Atomic Energy Act. We just have not seen one that would i
16 challenge our judgment in that regard. Namely, there just !
17 hasn't been a case in which we have uncovered any foreign 18 ownership.
{
19 So it is an explicit part of our review and we !
20 have been addressing it in each instance. Where the 21 challenge will come is the first time that we see one with l 22 some material ownership and then we are going to have to l l
l 23 evaluate its significance. 'To say that we have criteria i 24 would be a strong overstatement; we don't. j 25 I believe it is something that could be factored ANN RILEY & ASSOCIATES, LTD. !
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1 in, appreciating that it might take.some additional time, 2 into our standard review plan. That may be an appropriate 3 mechanism to do it.. But it is one of those many emerging 4 issues that the staff has yet to articulate any clear 5 standards on, j
6 MR. WOOD: , Yes, we do have a statement in the l 7 current standard review plan that went out on foreign l l
l 8 ownership but it is very broad and very general and that was ]
9 the best we could do, given the time constraints at that I 10' time. We are going to have to revisit that.
11 CHAIRMAN JACKSON: Commissioner McGaffigan. j i
12 COMMISSIONER McGAFFIGAN: On the definition of 13 electric utility, as states go about passing retail 14 competition statutes, will that move utilities from being an 1
15 electric utility under our definition into the other ,
16 category at some point in time?
17 MR. WOOD: It all depends on the specific state ,
i 18 proposal.
19 COMMISSIONER McGAFFIGAN: So you are going to have 20 to audit each state proposal?
21 MR. WOOD: Well, yes. And in the proposed rule 22 that will be coming up we do try to address the issue of '
23' those states that do have dedicated nonbypassable charges 24 that take care of decommissioning funding. We would want to 25 handle that in our regulations so that I think the staff's ANN RILEY & ASSOCIATES, LTD.
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-e 4 e a 17 1 thinking is for that purpose they would still be considered 2 an electric utility even though for other purposes they may 3 not be. So you could have a divergence.
4 COMMISSIONER McGAFFIGAN: Depending on how 5 decommissioning funds are handled in the state statute?
6 MR. WOOD: Right.
7 COMMISSIONER McGAFFIGAN: Have we conveyed that 8 tentative position to the states?
9 CHAIRMAN JACKSON: We just did, if we did not 10 before.
11 [ Laughter.]
12 COMMISSIONER McGAFFIGAN: Fair enough.
13 MR. WOOD: You would have -- you could be 14 considered to be an electric utility from the point of view 15 of decommissioning funding assurance if states had 16 mechanisms for that. Whereas, the same entity might not be 17 for general financial qualifications to operate the plant.
18 Slide 4, please.
19 The emerging issues as we see that, I am not going 20 to mention any more about grid reliability and ISOs. You 21 had a very detailed meeting yesterday afternoon on that 22 subject.
23 We do see some issues with respect to unique 24 ownership and operating arrangements which gets back to 25 Dave's earlier remarks about non-owner operators and how ANN RILEY & ASSOCIATES, LTD.
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a , ow '
l 18 1 1 they might play out in some of our considerations.
i 2 CHAIRMAN JACKSON- What are some of the issues 3 that you are considering?
4 MR. WOOD: I think I will really -- if I may, I 5 will use the recent Maine Yankee Entergy agreement as kind 6 of a template for what we have done and we looked at that 7 proposal particularly. Because Maine Yankee had retained 8 responsibility and ultimate authority to shut the plant down 9 and control over ultimate spending, we didn't see any real 10 problems with that.
11 Other proposals may come along that may not have 12 all those elements in them and we may raise our level of 13 concern as a result. There again, I think we have to be 14 concerned about future partnership forms and we are just not 15 sure what those are. I think we would certainly be 16 concerned about -- that the licensee has to maintain control 17 in some way or that whoever takes the authority gets put on 18 the license.
19 There, as you know, there are two issues involved 20 in this, in this 50.80 transfer process. It is both 21 financial qualifications and technical qualifications. We 22 do have to look at those.
23 As Dave mentioned, we will be addressing this 24 whole issue in more detail in the paper that will be coming 25 up to the Commission in the near future.
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-o o e o 19 1 CHAIRMAN JACKSON: You mentioned the issue with l 2 respect to future partnership forms of whoever takes on the authority. You mean the operational authority?
l 3
4 MR. WOOD: Right.
5 CHAIRMAN JACKSON: Gets put onto the license?
6 MR. WOOD: Right.
7 CHAIRMAN JACKSON: Was Entergy put onto the 8 license?
9 MR. WOOD: No, because of Maine Yankee's retaining 10 of the ultimate authority and control, we did not do that in 11 that case.
12 CHAIRMAN JACKSON: Okay.
13 Commissioner McGaffigan.
14 COMMISSIONER McGAFFIGAN: Are we going to suggest 15 templates for partnership forms that will pass muster? Are 16 we going to do this sort of case by case and let a body of 17 case law build up so that people will recognize what we 18 approve and what we don't approve?
19 MR. WOOD: I think we probably are going to end up 20 doing it case by case because I don't think we can visualize 21 at this point all the potential permutations of what might 22 ccme in.
23 We do have antitrust issues that we are going to 24 look at, of course, statutiorally required to do so. As I 25 did mention earlier also, we have seen a number of state ANN RILEY & ASSOCIATES, LTD.
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s a e n 20 1
- 1. initiatives now where, in most' cases, they have provided for 2
a secure source of revenue streams, at least for 3 ' decommissioning.
! There is also the broader issue of
- 4 i l
resolution of stranded costs in general, including recovery 5
of capital costs, which I think we are probably less i 6
concerned about unless.it gets to the point where the lack 7
of that recovery stresses a utility -- a licensee enough !
8 financially that they would have trouble running the plant 9 safely. .
1 10 l
As I mention also, a lot of these approaches that l 11 thi states are using in terms of nonbypassable charges seem 12 to be a good surrogate for the existing approach to rate 13 regulation and rate recovery. If that process continues to i
i 14 hold, I think we will be in pretty good shape. Of course, l
l 15 we don't have a crystal ball and some states may not choose
! 16 to go that route.
i 17 CHAIRMAN JACKSON: So a key to avoiding our having 18 to take direct action with reopect to our licensees is the 19 issue of nonlypassable charges?
20 MR. WOOD: I believe so, yes, 21 CHAIRMAN JACKSON: Okay.
i 22 MR WOOD: Next viewgraph, please.
23 There are a number of issues that we have 24 already -- Dave has already covered and I have touched on 25 the issues that have to be addressed and possibly resolved.
l t
i ANN RILEY & ASSOCIATES, LTD.
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3 , --+ c - -
o 4 .
21 1 As I mantioned earlier, there is this broad look that we are 2
initiating now in terms of the general 50.80 review process 3
and even our -- the. financial qualifications review process h
under 50.33(f) and we will be at come point coming up v 4
5 the policy options on that for the Commission's 6 consideration.
CHAIRMAN JACKSON:
At some point, what does that 7
8 mean?
MR. WOOD:
Sometime this summer, I believe.
9 CHAIRMAN JACKSON: Okay.
10 MR. WOOD:
We have a concern, we have gotten 11 i 12 several comments both on the draft policy statement and the 13 standard review plans and the regulatory information 14 conference earlier this month on industry's concern about 15 having very specific defined NRC position on what we expect 16 in our financial qualifications review. We thought we did 17 that in the policy statement and in the standard review 18 plans. I think they want an even firmer line in the sand.
19 I am not sure how we can do that, given that we 20 don't really know what is going to happen in the future and 21 there are many variations on restructuring but we will be 22 considering that, of course.
23 We are, of course; concerned about the 24 acceptability of the level of decommissioning funding 25 assurance that might come out in some state restructuring ANN RILEY & ASSOCIATES, LTD.
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. . . ~
1 22 approaches and we will have to look at those as they 2 develop.
We are concerned also about the availability of 3
funding assurance mechanisms to nonelectric utilities as 4
they get kicked out of this category into being a 5
nonelectric utility, 6
they would no longer be allowed to put 7
money aside annually over the projected life of the reactor; they would have to come up with some sort of guarantee 8
mechanisms for any unfunded balance.
9 To do that, they would either have to prepay or use a surety bond or a letter of 10 credit or a guarantee coupled with a financial test. It is 11 12 not clear in all cases where those would be available to those licensees that need them.
13 Finally, we are looking at the possible need for 14 federal legislation in various areas of restructuring 15 .
CRAIRMAN JACKSON:
16 Which areas do you feel need perusal with respect 17
-- are you perusing with respect to the need for federal regulation?
18 MR. MATTHEWS:
Let me speak to the issue of 19 federal legislation.
20 It is one that we have become increasingly involved in, in concert with Karen's staff.
21 We met with the Department of Energy within the 22 last few weeks and received an explicit invitation to 23 24 participate with them in even to the point of drafting legislative proposals in concert wich their staff We are 25 proceeding next week to sit down for our first meeting to ANN RILEY & ASSOCIATES, LTD.
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___-- --- - - --- -- ~~ ~ ~ ~ ~
.-*a n * '
21 1 As I mentioned earlier, there is this broad look that we are !
2 initiating now in terms of the general 50.80 review process !
l 3 and even our -- the financial qualifications review process !
i 4 under 50.33 (f) and we will be at some point coming up with !
1 5 the policy options on that for the Commission's t
6 consideration. ..
7 CHAIRMAN JACKSON: At some point, what does that j 8 mean?
- 9 MR. WOOD: Sometime this summer, I believe.
10 CHAIRMAN JACKSON: Okay. l 11 MR. WOOD: We have a concern, we have gotten i 12 several comments both on the draft policy statement and the 13 standard review plans and the regulatory information ,
14 conference earlier this month on industry's concern about i 15 having very specific defined NRC position on what we expect l
16 in our financial qualifications review. We thought we did 17 that in the policy statement and in the standard review 18 plans. I think they want an even firmer line in the sand. l 19 I am not sure how we can do that, given that we 1
20 don't really know what is going to happen in the future and i 21 there are many variations on restructuring but we will be ,
l 22 considering that, of course.
23 We are, of course; concerned about the !
24 acceptability of the level of decommissioning funding 25 assurance that might come out in some state restructuring ANN RILEY & ASSOCIATES, LTD.
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l
s a a ca 22 1 approaches and we will have to look at those as they 2 develop. We are concerned also about the availability of l
3 funding assurance mechanisms to nonelectric utilities as 4 they get kicked out of this category into being a 5 nonelectric utility, they would no longer be allowed to put 6 money aside annually over the projected life of the reactor; 3 l
7 they would have to come up with some sort of guarantee l 8 mechanisms for any unfunded balance. To do that, they would 9 either have to prepay or use a surety bond or a letter of 10 credit or a guarantee coupled with a financial test. It is 11 not clear all cases where those would be available to 12 those lio.t. sees that need them.
13 Finally, we are looking at the possible need for :
j 14 federal legislation in various areas of restructuring.
15 CHAIRMAN JACKSON: Which areas do you feel need !
t 16 perusal with respect -- are you perusing with respect to the 17 need for federal regulation? ;
18 MR. MATTHEWS: Let me speak to the issue of 19 federal legislation. It is one that we have become 20 increasingly involved in, in concert with Karen's staff. l t
21 We met with the Department of Energy within the 22 last few weeks and received an explicit invitation to 23 participate with them in even to the point of drafting 24 legislative proposals in concert with their staff. We are 25 proceeding next week to sit down for our first meeting to ANN RILEY & ASSOCIATES, LTD.
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A e u o 23 1 examine the alternatives.
2 So we have just at this point in time come up with 3 some areas to discuss with them jointly and I will just give 4 you the flavor for what those areas are. These aren't in 5 any order of preference; they are just areas that have been 6 raised by the staff and outside interest as being an area 7 'where there may be a need for federal legislation to 8 backdrop or give a statement of congressional intent or 9 support as state-specific and FERC initiatives in the !
10 restructuring area go forward.
11 I sa.y it that way because I don't believe we have 12 identified, with the possible exception of one area any 13 areas that we think we need bolstering in terms of our 14 regulatory authority in this area as we move forward in the 15 sense that we have some large gap. I look to Karen tc 16 correct me on that statement if that is not true. So it is 17 along the lines of providing support.
18 One area is bankruptcy priorities, as you may see 1
19 bankruptcies coming out of some of these restructurings, 20 particularly those in the Chapter 11 category. We certainly 21 would like to see some support for the view that 22 decommissioning funding would have a priority associated 23 with any such cases, even in advance of preferred creditors.
24 So that is one of the -- one of the areas for discussion.
25 Certainly, the treatment of decommissioning funds ANN RILEY & ASSOCIATES, LTD.
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s a e n ,
24 1 in the overall context of stranded costs as we have 2 discussed here is important. Given the variability of some 3 of those proposals,.some statement of federal intent in that 4 regard, possibly deferring to an agency such as ours and 5 FERC to address that issue, might be a possible proposal.
i 6 The antitrust area is one that we think it is 7 worth examining. There have been calls for us to remove 8 ourselves from the antitrust arena given the number of 9 people that do look at that area. One of the consequences 10 of an antitrust or the removal of antitrust review 11 responsibilities from the Atomic Energy Act as it applies to 12 the NRC's responsibilities is that we have a number of 13 licensees, those licensed since 1970, that have existing 14 antitrust license conditions and we would have to do an ,
15 assessment of what the impact of removing our statutory 16 authority in that area would be on those existing conditions <
17 so the issue is not as simple as just eliminating the review 18 requirement. That is one that is at least ripe for ,
19 discussion. l 20 CHAIRMAN JACKSON: Have we begun to take that 21 look?
22 MR. MATTHEWS: We have gone so far as within the 23 next few weeks you will see a NUREG document published that 24 will at least collate all of the existing antitrust license 25 conditions in one location in order to at least have a 7dni RILEY & ASSOCIATES, LTD.
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se . . .
25 baseline of reference to begin that assessment. That is a 1
2 companion piece to the one we issued very recently which, 3 for the first time,. collated a current listing of all of the 4 known owners of nuclear power plants and their operators, as 5 reflected in today's licenses as well.
6 We felt when we entered into this 18 months ago 7 that we had our data distributed throughout licenses and, 8 although it was retrievable, it certainly wasn't immediately 9 accessible so that is the foundation we have laid for those 10 two reviews.
11 One area I will mention that certainly is worthy i i
of possible.further discussion is the grid reliability 12
)
13 issue. It wasn't explicitly addressed by DOE when they ;
14 discussed this issue with me several weeks ago but it is one 15 I think the staff has to consider for possible -- let's put 16 it this way. Putting it on the table in the short term, and 17 I look to other members of the staff to support me in that 18 regard as we go forward with DOE. My intent was to give DOE 19 a call, in fact, this morning and ask them if that is i 20 something that would be appropriate in their view to add to 21 the agenda. ,
22 CHAIRMAN JACKSON: Commissioner McGaffigan?
23 COMMISSIONER McGAFFIGAN: May I follow up on the 24 question on the case-by-case review? I interpret what you l 25 said later as industry would prefer to have a little more ANN RILEY & ASSOCIATES, LTD.
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s e a u 26 1 certainty.
2 Have you considered doing a reg guide saying here 3 is one possible approach?
We do that in other areas. If 4
you divert from the reg guide, you know, you are into case-5 by-case country but if you stick to a reg guide or we 6
endorse some NEI or whatever document, FSAB document, then 7
you are in good shape, has that been thought about in the 8 restructuring area?
9 MR. WOOD: Yes, in fact we thought we did that 10 with the standard review plan and we did have a specific 11 framework for reviewing financial qualifications and --
12 CHAIRMAN JACKSON:
Does that standard review plan 13 have an associated reg guide?
14 MR. WOOD: No, no it doesn't.
15 But I think it had enough detail that it provided how we actually do review and 16 the benchmarks that we do use --
17 CHAIRMAN JACKSON:
Might you be able to promulgate 18 out of it a reg guide?
19 MR. WOOD: We certainly could.
20 CHAIRMAN JACKSON:
Certainly, they are companion 21 pieces, aren't they?
22 MR. WOOD: We certainly could. It may be somewhat 23 redundant, but --
24 CHAIRMAN. JACKSON: To try to lay, as Commissioner 25 McGaffigan says, on the table at least an acceptable ANN RILEY & ASSOCIATES, LTD.
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-o
- i 4 27 1 approach?
2 MR. WOOD: Yes.
3 We only got six comments back on the standard 4 review plans and, even among those six comments, they were 5 all from industry, and there was some divergence of opinion 6 as to the process that we were using and in a couple of 7 cases I felt that they basically agreed with it but wanted 8 some fairly minor modifications to it and in other cases 9 they felt it didn't go far enough in laying out a specific 10 position.
11 The last bullet on page 5, I think we pretty much 12 covered earlier in our remarks so I won't belabor that.
COMMISSIONER DIAZ: Let me ask a loaded question 13 14 on this instance. Since this is a new global economy, has 15 somebody even asked a question is it -- will the Atomic 16 Energy Act be changed in this respect?
17 MR. WOOD: Yeah, I think clearly there have been 18 some initiatives on the part of, or consideration at least on the part of industry and others to amend the act in that 19 20 way to eliminate that prohibition.
21 COMMISSIONER DIAZ: How hard would that be?
22 MR. WOOD: I'm sorry?
23 COMMISSIONER DIAZi How hard would that be?
24 MR. WOOD.: I don't know how high on Congress's 25 priority list it would be.
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e a a n-28 1
COMMISSIONER McGAFFIGAN: Do we know whether other 2
nations have similar -- I know from Congress it is usually 3
df everybody else will allow American utilities to own, then 4 it is one thing. If there are prohibitions on American 5
ownership, then there is a tendency to want to be --
6 MR. WOOD: Clearly, there are a number of U.S.
7 utilities that have invested in overseas utilities so, 8 obviously, the prohibitions --
9 CRAIRMAN JACKSON: Do they own nuclear assets?
10 MR. WOOD:
I think in a couple of cases they do.
11 You know, certainly this prohibition was part of the 12 security efforts at the beginning of the Cold War so, from 13 that standpoint, some of the reasons for it may be obviated.
14 CHAIRMAN JACKSON: Have we thought through what 15 would be an appropriate NRC position? You know, what the 16 policy considerations are or should be that would guide a 17 stance that we might take on the issue?
18 MR. WOOD: I don't think we have thought it out in 19 any detail on this point.
20 COMMISSIONER DIAZ: I think it might be worthwhile 21 to start thinking.
If we start getting into this area to 22 have some idea which way we would go.
23 CHAIRMAN JACKSON: We have to start thinking about 24 which way we would.go.
25 COMMISSIONER DIAZ: Yes.
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4 # o 4 29 1 [ Laughter.]
2 MR. WOOD: Slide 6, please.
3 In our summary and conclusions, we have noticed 4 kind of a divergence of states. There has been some 5 acceleration or quite a bit of acceleration in several 6 states in terms of taking deregulation initiatives.
7 However, other states don't.-- and those are generally 8 states with lower cost power, don't seem to have it as high 9 a priority. So most states are at least in the study phase 10 but some states are moving ahead quite a bit more rapidly 11 than other states.
12 We believe that we have taken, through our action 13 plan and.some other initiatives, those actions that would 14 cope with these changes that are going on. I think we 15 believe that our current regulatory framework and 16 requirements are adequate to cope with the changes that are 17 going on, both with respect to providing assurance for 18 plant -- safe plant operations and also for safe 19 decommissioning.
20 But, obviously, we are going to have to be on our 21 toes and continuing to monitor the situation as it develops.
22 I think because of that, because each state's approach is 23 somewhat different and unique, that we have got to look at 24 how each state and.their licensees in those states approach 25 the problem and make the determination as to whether they ANN RILEY & ASSOCIATES, LTD.
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. . _ _ _ _ . . . _ _. _ __ _. ~_ _ _ ____. _ _ _ _ _ _ . _ _ _
3 s a *. w.
1 30 1 actually in fact do provide adequate assurance for i 2 operations and decommissioning. i 4
3 That concludes my prepared remarks.
4 CHAIRMAN JACKSON: Commissioner Dicus had a
- 5 question.
6 COMMISSIONER DICUS: Yes, I wanted to address that 7 with you a little bit. On your comments which you have made 4
l 8 on the rate at which economic deregulation appears to be l,
9 accelerating and I think it is, and there are indications it
, 10 may go at an even faster rate. My base question follows up i
l 11 on a comment or a question the Chairman had a little bit 4
12 earlier and I want to broaden it a bit.
i
- 13 Are we as an agency, and you have addressed this a i s
j 3
14 little bit, but do you really think we as an agency are 1
15 prepared or looking down the road far enough for this
- 16 accelerating rate that we can stay in front of the curve?
17 Because I think this is an area we clearly do not need to
- 18 fall beyond -- behind the curve.
4 19 MR. WOOD: Right.
- 20 COMMISSIONER DICUS
- And things like evaluating 1
1 21 some of these unique ownership operator arrangements that 4
l 22 .come up.on a case-by-case basis, I tend to agree at this ;
23 point in time that is probably what has to occur. But when 24 three or four of these things start occurring very quickly, 25 that is very time consuming to do it.
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% - - - ,- , w
4 4 % a 31 1 My question, what are you planning, where are we l
2 in ensuring we are thinking six months ahead, a year ahead or whatever so that.we can keep pace? Another part of the 3
4 question would be for example, I think I read in some of the 5 documents that we were going to be somewhat dependent if not 6 entirely dependent on the FASB standard to tell licensees 7 how to do the reporting or accounting for some of the 8 financial arrangements and that standard is clearly not 9 coming down the pike for quite some time. Can we wait for r 10 that or do we not need to go ahead and be prepared on the 11 front end so that everyone knows what is expected of us?
12 I know it is a very broad question. Maybe it is 13 more of a statement than a question but I need to know where 14 we are with this.
15 MR. WOOD: I think there are two things in answer 16 to your question. The first is, we do have the default 17 framework now on this dichotomy between electric utility 18 licensees and nonelectric utility licensees and it really l
l 19 does depend on the rate treatment they receive. We need to l
! 20 fine tune that definition. But the basic definition and the i i i
21 basic concept, I think, is there. ,
22 So I think with that and, you know, for 23 decommissioning and with our historic approach to l
l 24 inspections for operating plants and maintaining safety that l 25 way, I think we will be in pretty good shape. That doesn't i
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.-u 4 < e s 32 1
mean that we can't do more but I think while we are looking 2
at these things we have that already in place.
3 With respect to the FASB standard, there were two 4
elemento in the action plan and there was one element that 5
was trying to do something short of rulemaking to get 6
information on the status of decommissioning funds It .
was 7
almost serendipitous the way FASB's standard came out just 8
about the time of that proposal and we decided that we would 9
try to hook onto that as a good vehicle for getting that 10 information. But it wasn't the only approach we had.
11 A second element in the action plan was to 12 consider a reporting requirement that we would put in our 13 regulations and that is considered in the proposed rule that 14 you will be getting in a while.
15 So if the FASB standard doesn't go through, we 16 still have that if you agree that that is an appropriate 17 thing to do.
We can have that approach too.
18 COMMISSIONER DICUS:
What about resources? If we 19 get into this much more intensive effort with acceleration, 20 where do we stand with resources to cover it?
21 MR. MATTHEWS:
Although that wasn't an item 22 specifically identified in the action plan, it was obvious 23 when the action plan was spawned that it was going to demand 24 additional resources, not only from the standpoint of the 25 immediate tasks that we had undertaken but as has happened ,
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4 4 s e 33 1 there are many collateral issues that have arisen.
2 The list that I keep on my desk of things that I 3 need to look into or that the staff needs to review that we 4 haven't had time to review gets longer by the day.
5 CHAIRMAN JACKSON: Where do we stand on the human 6 resources?
7 MR. MATTHEWS: We've got two additional staff members that have been hired, authorized. One is on board, 8
9 one will be here May 5. We have a third staff member who is 10 expected to be selected and hopefully come on board by the 11 end of the summer.
12 CHAIRMAN JACKSON: At least one or more of these 13 will be individuals with the kind of financial backgrounds 14 that we need to do this?
15 MR. MATTHEWS: We would hope they all have that 16 kind of background. They were specifically --
17 CHAIRMAN JACKSON: Well, at this stage of the 18 game, we'll take --
19 MR. MATTHEWS: No , I understand. But we have some
- 20 very qualified people that responded to our request. These 21 were people outside the NRC. The first two individuals that
! 22 we have hired came from the industry. One had a recent l
l 23 history with Entergy and Mid South in the financial planning
(
l 24 and strategic planning area and another was an engineering 25 economist most recently working with New York Power ANN RILEY & ASSOCIATES, LTD.
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s e s c 34 1
Authority but prior to that with PSE&G so they come from i
2 that background and have been involved are familiar with the 3
kind of issues we are talking about in their current jobs 4 before they came to work for us.
5 CHAIRMAN JACKSON: Okay.
6 Commissioner Rogers?
7 COMMISSIONER ROGERS: No , I have no more 8 additional questions.
9 CHAIRMAN JACKSON: Commissioner Diaz, Commissioner 10 McGaffigan?
11 Thank you very much.
12 We will call the federal and state regulatory 13 panel. Thank you.
14 I think we will begin with Ms. Tomasky, the 15 General Counsel of the Federal Energy Regulatory Commission.
16 Good morning and thank you for coming.
17 MS. TOMASKY: Thank you, Madam Chairman. It is a 18 pleasure to be here.
19 CHAIRMAN JACKSON: You have to press the button.
20 Thank you. l l
21 MS. TOMASKY: Madam Chair, members of the 22 Commission, I appreciate very much the opportunity to come 23 here today and share with you some information about the 24 recent activities of the Federal Energy Regulatory 25 Commission. I think everyone in this room, perhaps everyone l
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- 4. d v i 35 1 in the country well knows that the FERC is strongly 2 committed to developing competitive markets for electricity.
3 Toward that end, we.have initiated fundamental changes in 4 our approach to regulation.
5 These changes we expect will encourage the 6 development of competition in wholesale power markets and we 7 believe will provide very significant benefits to consumers.
8 We also believe that our rules will ensure a fair and 9 rational transition to a competitive and reliable wholesale 10 marketplace.
11 We understand that the NRC is vitally interested 12 in the potential effects of these changes on the nuclear 13 power industry. You have asked that I provide you an 14 overview today of what the Commission has been doing and I 15 would like to talk about four major policy areas of the 16 Commission's activities. These are our requirements for 17 open access transmission service, the recovery of stranded 18 costs, recent actions with respect to market-based rates for 19 wholesale sales of electricity and our merger policy.
20 I am sure you have a number of very specific 21 questions concerning the intersection of our programs and 22 yours and I look forward to discussing those specific issues
! 23 with you in questions after the overview and after we have 24 heard from other panelists, if you like.
25 The centerpiece of the Commission's electricity ANN RILEY & ASSOCIATES, LTD.
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4 a i 3 36 1 policy initiatives is Order Number 888. In Order 888, the 2
Commission has required all public utilities under the 3
Federal Power Act to file nondiscriminatory open access 4 transmission tariffs. Under these tariffs, transmission 5
owning public utilities are required to provide transmission 6
service to wholesale buyers and sellers on the same terms 7
and conditions that apply to the transmission owner itself.
8 In other words, the transmission owning utility can no 9
longer restrict access to its transmission system to favor 10 its own generation.
11 To ensure that access to the transmission system 12 is not subject to manipulation, the Commission in Order 889 13 has also required public utilities to functionally separate 14 their power marketing and transmission functions. A public 15 utility is also required to have in place an Internet 16 accessible computer information system known as an OASIS.
17 This permits perspective transmission customers to know what 18 transmission capacity is available on the system and at what 19 price.
20 Open access transmission is now a fact of life 21 across the industry. There are a number of many difficult 22 issues yet to be resolved.
I am sure we will be discussing 23 many of them today because they do affect the nuclear 24 industry.
However, there is little dispute, I think, over 25 the fundamental principle of open access. Most ANN RILEY & ASSOCIATES, LTD.
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av o e 37 1 jurisdictional utilities have timely implemented their open 2 access tariffs and they are really busy figuring out.how to 3 do business in an open access environment.
4 Let me now then turn to another critical element 5 of the Commission's open access policy, which is the 6 treatment of stranded costs. In the coming competitive 7 marketplace we believe that utilities sellers ultimately are 8 going to have to compete on the same basis as other sellers.
9 But we are also aware that in the past utility investment 10 6ecisions including nuclear investment decisions were made 11 under wholly different expectations and within a different 12 regulatory framework. That is, of course, the cost-based 13 regulatory framework with which you are familiar and with 14 which for many years we have regulated the utility industry.
15 There is no question that a competitive 16 marketplace and, in particular, the Commission's 17 requirements for open access create the prospect that 18 customers are going to depart the system. The consequence 19 of them leaving the system is that some of the costs 20 associated with the utilities providing power to their 21 traditional customers can be stranded. There is no question 22 that the stranded cost issue, which is the price tag for l
l 23 open access in our view, is'the most hotly contested issue 24 associated with Order 888.
25 In Order 888, the Commission studied thousands of l ,
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pages of comments on this issue from over 400 commentors and 2
we came to the conclusion very firmly stated several times 3
in various iterations of the rule that utilities should be 4
given an opportunity to recover all verifiable and prudently 5 incurred stranded costs. In our view, stranded costs 6
associated with the rule are costs that occur when a 7
customer departs the system and then uses the supplier's 8
transmission system to access new supplies.
9 Recovery of stranded costs from a particular 10 customer is going to be determined on a case-by-case basis 11 under the Commission rules and, as.a result, many of the 12 questions I think we will likely explore today about what 13 stranded cost recovery really means ke expect to evolve in 14 the case-by-case process. As a general matter, the utility 15 will bear the burden of demonstrating that it had a !
16 reasonable expectation of continuing service beyond the term 17 of a contract in order to receive what we call the extra 18 contractual stranded cost recovery.
19 But I think it is important to note that the 20 Commission in Order 888 did not abrogate existing 21 requirements contracts so that customers who are obligated 22 contractn l'v to stay on the system would do so and continue 23 to bear their cost responsibility. Again, on a case-by-24 case basis, the Commission could consider opening up those 25 contracts and, in that context, we would expect to deal with ANN RILEY & ASSOCIATES, LTD.
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- 39 1
the stranded cost issues if we were going to permit the j i
customer to depart that system early. l 2 )
3 Clearly, we think that a fair transition to i as the f 4 competition includes stranded cost recovery but, )
5 prior panel's discussion, I think, made very clear, the vast :
6 majority of stranded costs are likely to be generation costs 7 incurred to serve retail load that will be stranded as a 8 result of state retail choice programs and, as a result, the 9 vast majority of the challenges involved in dealing with 10 stranded cost issues are going to fall to the states.
11 We have done a number of things in Order 888 that 12 we think accommodate the states' move to retail access if 13 they chose to do so and we have certainly encouraged the 14 state commissions to address these issues up front as they 15 proceed with retail choice.
16 Let me mention briefly the FERC's policies 17 governing market-based rates for wholesale sales of 18 electricity. For several years now the Commission has been 19 ruling on applications of wholesale sellers including power 20 marketers to sell electric power at market-based rates. We 21 have some complicated proof procedures that are required for 22 utilities who need to demonstrate the lack of generation 23 market power in order to sell from existing generation but 24 we do have a number of utilities including some nuclear 25 utilities who are selling off system at market-based rates.
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We generally expect this trend to continue. Our 2
review process for market-based rates really has to do with 3
issues of generation market power, whether or not we believe 4
that if a seller sells into a particular market it is likely 5
to dominate that market and therefore it will be able to 6
elevate the price for a sustained period of time. If we are 7
satisfied that generation market power is not present, we 8
will permit -- or it has been mitigated, we will permit the 9
seller to move to market-based rates.
10 Let me mention one last area which is the 11 Commission's actions with respect to its merger policy which 12 your staff had indicated that you had an interest in.
13 In December 1996, the Commission issued a 14 statement of policy that will govern future review of 15 applications for public utility mergers. We are doing a 16 fairly brisk business in merger application review recently.
17 It is certainly something that many in the utility are 18 understandably turning to and is something that business 19 typically turns to under -- when economic circumstances 20 change in order to realign themselves in order to face new 21 challenges.
That is something that our Commission certainly 22 expects from the utility industry.
23 We do not want to' discourage that. At the same 24 time, mergers that.actually reduce the number of sellers in 25 a marketplace do have the possibility of raising competitive ANN RILEY & ASSOCIATES, LTD.
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41 1 concerns. We have worked for a number of years attempting 2 to open up these marketplaces to a variety of sellers so it 3 is natural that we would want to look at these mergers to be 4 satisfied that the anticompetitive effects are not so 5 significant that the merger should be disapproved.
6 The merger policy statement lays out the criteria ,
7 by which we are going to evaluate these mergers in some 8 detail. I think it provides expedited procedures for 9 mergers that don't raise competitive concerns and it also .
10 provides hearing and other procedures and certainly a more :
11 scrupulous inquiry where our initial screen suggests there 12 are concerns.
13 The last issue I want to mention, Madam Chair, has 14 to do-with the issue of reliability which I know you have 15 addressed extensively yesterday. The FERC very much 16 supports the efforts of the North American Electric 17 Reliability Council to take the lead on reliability issues.
18 There are some challenges, unquestionably, that 19 restructuring of the utility industry will pose and we have 20 certainly encouraged NERC to take the lead in attempting to j 21 address them.
22 The Chair of our Commission recentlp testified 23- before Congress on these issues and she stressed in 24 particular her concern with the fact that NERC membership is 25 not mandatory. She recommended that Congress ought to put ANN RILEY & ASSOCIATES, LTD.
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+ r >s 42 1
the FERC in the position of ensuring that NERC standards do 2
become mandatory and to be able to provide mechanisms for 3 enforcing those standards and for compliance. We do not 4
have a specific proposal on this issue and we have again 5
continued to encourage the efforts of NERC to open up its 6
memberships to all the likely participants in power markets 7 so these issues can be addressed.
l 8 That concludes my general remarks. Madam Chair, l 9 members of the Commission, I would be happy to answer !
10 questions.
11 CHAIRMAN JACKSON: Thank you very much. I think I I i
12 would like to ask you a couple of questions.
13 With respect to FERC's position on the stranded 14 costs issue, and you mentioned a case-by-case approach and
- 15 your prepared, submitted remarks spoke of FERC as being a i
16 forum for stranded cost disputes, would you expect to have j 17 explicit consideration of decommissioning funding costs as !
1 18 part of your consideration of stranded cost issues?
19 MS. TOMASKY: We certainly would, Madam Chair.
1 20 The Commission did mention in Order 888 and in our rehearing i
21 order that we believed that nuclear decommissioning costs 22 were appropriately considered to be stranded costs and would 23 be dealt with on a case-by-case basis. I would imagine as 24 those case unfold we would continue to observe the 25 traditional relationship with your Commission. I do not ANN RILEY & ASSOCIATES, LTD.
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43 '
{ 1- imagine that our Commission has any interest in second-2 guessing issues of how decommissioning occurs.
3 We have traditionally looked at, in determining l
1 4 how decommissioning costs are put into rates now, we have
, 5 traditionally looked at issues, the estimates, and those are 1
6 frequently litigated amounts. We actually just set for 7 hearing a case involving Connecticut Yankee in which we i j 8 expect those issues to be resolved.
9 That was not a classic stranded cost case, a I t j 10 restructuring stranded cost case in the sense that departing ;
i 11 customers were leaving the system and therefore we were
! 12 being asked to address how to tread nuclear decommissioning 13 costs in that context. But I have every confidence that our i 14 Commission takes that very seriously and we would expect l 15 those issues to be worked out along with others in these l 16 proceedings.
17 It is, admittedly, a somewhat more difficult issue than simply attempting to figure out what the present value 18 l 19 is of a remaining obligation, reduce it to a current form i 20 and then decide how it is going to be paid. We under and i 21 that there are uncertainties.
j 22 But I just want to stress that we had enormous j 23 success in the natural gas restructuring with settlement of
} 24 many of these issues. We have in fact in front of us a case 25 with NEPCO that is currently in hearing and I understand I
a ANN RILEY & ASSOCIATES, LTD.
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o y > 9 44 1 that technical conferences with an eye or a hope for 2 settlement are going on and that many of those -- that 3 indeed involves a dramatic restructuring of the buyer / seller
- 4 relationships for that company and we are very hopeful that 5 these issues will be resolved.
6 CHAIRMAN JACKSON: Do you have a position with 7 respect to the issue of foreign ownership control or 8 domination, as you know, the different business forms occur?
9 MS. TOMASKY: Our Commission doesn't have a 10 position with respect to that. If I could interpret a bit 11 from our merger policy statement, I can say that it is 12 something that gave us very little concern. We believe and i 13 fully expect that ownership is going to move all over the r 14 place, quite frankly, with respect to the electric utilities 15 and we think that the movement of capital is a pretty good 16 thing.
17 We do not attend to issues of national security as i
18 you do. Not that we don't think they're important but we 19 understand it is your job, not ours. And those are the 20 kinds of things that would inform those kinds of concerns.
21 What we have dealt with in the context of foreign 22 investment have been issues of reciprocity with respect to 23 transmission access. Those are policy concerns that are 24 pertinent to us and our considerations.
25 We also understand, obviously, that the SEC ANN RILEY & ASSOCIATES, LTD.
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45 1 regulates sort of quantities of investments and there are 2 issues with respect to foreign holdings under the Public 3 Utility Holding Company Act but that is not something that 4 our commission has gotten into and, quite frankly, given our 5 focus on competitive concerns and concentrations of ,
6 generation market, it may well be that the farther away the 7 melging entity is from the utility the better our Commission 8 likes it.
9 CHAIRMAN JACKSON: You mentioned that FERC should 10 have the authority to make, for instance, compliance with 11 NERC standards mandatory.. This is on the issue of grid 12 reliability, et cetera.
13 Have you proposed, and I think maybe you did 14 address this but I am going to ask again, specific 15 legislative language that relates to any kind of a federal 16 backstop for NERC's activities and actions?
17 MS. TOMASKY: We have not proposed specific 18 legislation. We have certainly recommended to the 19 Department of Energy that they address these issues and I ,
20 would expect that the Chair of our Commission who we expect 21 to be headed that direction will carry that general policy 22 initiative with her.
23 I do understand that it has been very much on 24 DOE's mind. There,are lots of debates that go on about how l
25 much authority we do and don't have. We had suggested that l
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. v vY 46 1 we be the repository for it because we have certainly 2 attempted to recognize NERC standards in the context of our 3 open access tariffs and, in recent discussions with DOE, as 4 they were talking about downsizing, they seemed to want some 5 of the interconnection authority that they have, or at least 6 they were discussing the possibility of interconnection 7 authority with the FERC. It is a job we think we can do.
8 We do not have specific legislation in mind and I assume 9 that the ultinate formulation will work its way through with 10 the Administration interagency review process.
11 CHAIRMAN JACKSON: Do you have any specific 12 positions with respect to Isos, their formation, membership, 13 mandating their formation, et cetera?
i 14 MS. TOMASKY: Our Commission was encouraged, in 15 the context of Order 888, to mandate ISOs as a means to 16 remedy undue discrimination. In essence, to separate the i 17 generation function from the transmission function. We 16 decided not to do that.
19 We went a regulatory path that we call functional 20 unbundling where we required that as an operational matter 21 that the generation and transmission functions be separated 22 within a utility and impose standards of conduct to be 23 imposed by employees to ensure that that separation was 24 effective. Nevertheless, the Commission has strongly 25 encouraged the formation of ISOs and the investigation of ANN RILEY & ASSOCIATES, LTD.
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t v w .
47 1 ISOs, particularly in the context of the reform of tight 2 power pools, which is going on in several regions of the ,
3 country.
4 We have ordered the tight power pools to 5 restructure their transactions to unbundle transmission and l l
6 generation transactions and also to address other aspects of l 7 our undue discrimination rules and most of them are turning 8 to some form or the other of ISOs to go forward. There are 9 legitimate -- you know, ISOs are a dream in pursuit of 10 realization in a lot of parts of the country and we think a 11 very useful dream. There are legitimate debates over 12 whether an ISO makes sense except on a broad regional basis i
13 and certainly in terms of pricing efficiencies and l 14 operational efficiencies, we see a lot of benefits in ISOs. ;
1 15 We have been asked to mandate it. We have !
I 16 declined to do so, so far. The issue of mandating ISOs j i
17 arises in several merger cases we have and that is another l 18 context in which we would examine them. So I guess the 19 short way of saying it, we think they are a good thing and 20 we are doing our best to encourage them but we haven't :
21 mandated them yet.
22 CHAIRMAN JACKSON: Okay. Let me ask you one last 23 question for the time being.
24 We are North America.
25 MS. TOMASKY: Yes.
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1 CHAIRMAN JACKSON: And that implies '
l 2 interconnectivity of the electrical network to the north and j 3 to the south. Are there any government-to-government 4
activities or initiatives that need to occur to deal with 5 the issue? Again, I am thinking from our point of view )
6 having to do with the interconnectivity and its effect on i
7 the reliability of the grid.
8 MS. TOMASKY: Well, first of all, we absolutely 9 agree with you and I think while we do not believe, I think !
I 10 that there are specific issues associated with restructuring 11 and reliability that are critical, clearly exchange of 12 information is absolutely essential.
13 We would like to see and have taken some steps to 1
14 try to encourage the Canadian provinces and the publicly 15 owned utilities up there to make open access a rule of law 16 for them as well. We -- in particular, if they are trying 17 to do business in the United States and marketing their 18 power down here.
19 We have essentially imposed a reciprocity 20 requirement, a do-unto-others requirement, in effect. If 21 they want to do business down here, they have to make their 22 transmission systems available. We would like to see l
23 dialogue on those issues.
l 24 'With respect to reliability, it seems to me that !
25 NERC is quite aware of the interconnection issues and we 1
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- 49 1 have, although we have challenged NERC in a number of 2 significant respects to open up their membership, to attempt 3 to evolve their standards to meet some of the new and i
4 different issues associated with restructuring, for example, 5 the' multiplicity of sellers that they will be facing moving 6 power into the grid, the issues that I know have been 7 identified by you, Chairman Jackson, over the question of 8 incentives for maintenance.
9 But we ultimately believe that NERC needs to take 10 the lead and that the FERC has appropriately a follow-up 11 role in enforcement.
12 CHAIRMAN JACKSON: Commissioner Rogers, Dicus, 13 Diaz?
14 COMMISSIONER DIAZ: Based on what little I know 15 about Mexico's grid and rates, has a thought come through 16 about the difficulty there would be to bring Mexico into 17 some common standard as far as free market? Because they i
18 really don't.
19 MS. TOMASKY: I know about this, Commissioner, 20 only anecdotally, actually. We have had some conversations 21 with Mexican officials who have come to our Commission 22 seeking sort of structural advice on how to deal with rate 23 regulatory issues.
24 I know that they are attempting to make some '
25 progress but I understand it is a very difficult and slow ANN RILEY & ASSOCIATES, LTD.
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. r i i 50 1 process there. They have very significant infrastructure 2
issues that would'make -- that have raised some concerns 3 about interconnection with the United States. I also know l 4 that there is a lot of interest in simply locating power i 5 plants along the border to move power into the United States I
6 and that that has created some environmental controversies, i 1 7 But I do not know of a systematic approach to 8 these issues other than, I think, the very good faith I 9 efforts of Mexican regulators tc try to develop a regulatory l 10 system for them that makes sense. '
11 COMMISSIONER DIAZ: Thank you. (
12 CHAIRMAN JACKSON: Commissioner McGaffigan?
i 13 COMMISSIONER McGAFFIGAN: To follow up on the i 14 Chairman's question, you basically are proposing that NERC >
15 membership be made mandatory in this country and that there 16 be an enforcement and compliance mechanism that is also 17 mandatory through NERC. My recollection yesterday is that 18 we have most of Canada and just a little piece, around 19 .
Tijuana or whatever, of Mexico in NERC. ;
20 Does Canada have to do the same thing in terms of 21 mandating NERC membership and mandating that if we want to f
22 ideally get the system, mandating a compliance structure? I (
23 think to just be more specific in following up the 24 Chairman's question. I 25 MS. TOMASKY: To be fair, Commissioner, I don't ANN RILEY & ASSOCIATES, LTD. l Court Reporters 1250 I Street, N.W,, Suite 300 !
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4 4 , .
51 We 1 know that we have or that Chair Moler has formed a view.
- 2 certainly have been reluctant to tell Canada what to do in l 3 terms of handling these issues. But I certainly see the 4 benefits of symmetry are certainly attractive. ;
5 The issues aren't going to change when you go 6 north of the border. I do not know that Canada is facing 7 the same questions associated with restructuring but I would 8 also emphasize that the reliability issues that have come to 9 attention recently are not necessarily associated with 10 restructuring. The outages that happened in the West, for 11 example, have nothing to do with the Commission's l 1
12 restructuring initiatives or, for that matter, the proposed 13 restructuring initiatives in California.
14 So the reliability issues are there. They don't 15 stop at the border and it strikes me that the prudent thing f 16 to do would be to engage in discussions with the Canadian .
17 government if our administration decides that is the right course, to let them know what is going on and to suggest to :
18 19 them that comparable requirements on the other side could be l 20 useful. i
- i l
21 COMMISSIONER McGAFFIGAN: The other question I l 22 have is you regulate wholesale transmission and you are very I 23 careful to point out that on the retail side, that's the 24 states' responsibility. Although in a paragraph you didn't !
25 read, you said there is work to be done on the federal / state i
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- r v9 52 j' 1 relationship.
2 If you go to the decommissioning cost issue', when 3
you look at an individual. case, are you looking at the part -
4 of decommissioning costs which you say in your statement is '
5 the smaller part that relates to wholesale and what is the !
6 mechanism for looking at the total, the totality of
]
7 decommissioning costs? If you are regulating 10 percent and !
j 8 the states are regulating 90 percent, how does that work?
9 i-MS. TOMASKY: The answer -- the simple answer to i i 10 your question is, yes, we have the small piece of it. The J
11 larger answer to'the more important piece of your question, j 12 which is how does it all work together, is we've got to !
i 13 figure that out.
I j 14 We actually have jurisdiction over transmission in i
j 15 interstate commerce, which would actually include unbundled i 16 retail transmission. But with respect to stranded costs,
- 17 the critical jurisdictional issue under Order 888 is
- 18 jurisdiction over the generation.
19 We basically regulate wholesale sales and, as a 1 1
20 result, costs incurred to serve wholesale requirements 21 customers and coordination customers are the basically are
{
1
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e 22 the kinds of utility costs that we are talking about and i 23 that we regulate. It is a small piece of the pie. There is 2
l 24 no question about that.
4 l 25 With respect to some utilities, some nuclear
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na w e 53 ,
I 1 utilities have structured themselves as wholesale suppliers 2 and, in those cases, those issues come before us entirely 3 and we would handle --
4 COMMISSIONER McGAFFIGAN: Connecticut Yankee is 5 that sort of case, isn't it?
6 MS. TOMASKY: Yeah, the NEPCO case is an example 7 of that. There are -- most of the utilities around the 8 countries, however, are not structured that way. State 9 commissions can intervene in our proceedings. We have ;
10 indicated that in the context of state restructuring 11 proposals, we would give considerable deference to what the 12 states do.
13 I don't think there Is going to be a big overlap i
14 but there may well be questions of how to deal with gaps in i 15 the numbers between what the states would do and what we 16 would do.
17 The Commission traditionally on costs, we have 18 dealt with these things strictly as cost allocation issues.
19 It is not, in that sense, a new rate issue for the 1
20 Commission. Generation facilities are often shared and we 21 do an allocation that we think makes sense and states do an t 22 allocation that they think makes sense and sometimes it adds 23 up to more than 100 percent'and sometimes it adds up to a 24 bit less.
25 We are probably going to have to pay a bit more ANN RILEY & ASSOCIATES, LTD.
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attention to that number in the context of nuclear j 2
decommissioning and I would expect that to certainly be 3 something that would be pursued. I also do expect, though, 4
that as you have seen, that most of these restructuring 5
proceedings that states undertake are going to, if they are 6
done with the full cooperation of the utilities and the 7
local parties, they are going to end up with a solution to 8
these issues and something that our Commission could easily 9
defer to if there were a settlement or at least something 10 approaching a settlement that appeared to make sense.
11 CHAIRMAN JACKSON: At this point, is FERC 12 considering any additional actions or any legislative 13 changes that would clarify the issues? I guess I am trying 14 to get you to elaborate a little even beyond what you have 15 already done on the clarification of questions of state 16 versus federal responsibilities.
17 MS. TOMASKY: There are some issues that I 18 don't
-- don't necessarily go to the issues of stranded 19 costs that we have been interested in having dealt with in 20 legislation.
I think that it would probably be useful for 21 me to elaborate a bit on the kind of jurisdiction that FERC 22 is asserting under 888 because it is a matter of some 23 controversy. It is not categorically true that we would 24 never deal with retail stranded costs. Essentially what we 25 said was that stranded costs arising from the departure of a ANN RILEY & ASSOCIATES, LTD.
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- 55 l'
wholesale customer is our job.
2 If we had indicated that there is a gray area, 3 which is what happens when a previously retail customer 4 leaves the retail system, becomes a wholesale customer 5 through a municipalization or something like that, and 6 strands retail assets, in that circumstance, our Commission 7 has determined that it would assert primary jurisdiction 8 with respect to the recovery of those stranded costs.
9 The theory for doing that is that we believe that 10 the stranded costs are the result of the availability of 11 open access tariffs that the Commission created. If there 12 were not open access tariffs available, the municipalization 13 and the opportunity to leave the system would not be i
14- available. And on that basis, the Commission has indicated j 15 it would assert primary jurisdiction there although, of 16 course, if a state had already acted to deal with the l
17 stranded cost recovery in some fashion we wouldn't permit 18 double recovery on the part of the utility, we would deal 19 with it through some sort of crediting mechanism.
20 With respect to what we call pure retail stranded 21 costs which are occasioned by a state retail access program, 22 we have indicated that the only instance in which we would 23 step in would be to fill a regulatory gap where the state 24 commission determined it lacked authority to deal with this.
25 I should point out that all of the states that have been l
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pursuing retail access programs thus far have understood 2
that the stranded cost issue was an important one and one to 3
deal with and dealt.with up front and so there hasn't been 4
any occasion for peopl: Lo come to us and say, it's time for 5 you to get involved.
6 We also tried to make clear in 888 that we weren't 7
a forum for second guessing the substantive decisions of the 8
state but, simply, a forum to deal with stranded costs if 9 the state lacked the authority to do so. So that is the 10 context, sort of the detailed context that I have sort of 11 broadly summarized before.
12 CHAIRMAN JACKSON: Right, thank you.
13 You know, FERC and the NRC have established a -- I 14 could have called it NURC but it would have caused 15 confusion -- a valuable working relationship and it has 16 allowed us to share safety concerns with you as you make 17 your economic regulatory decisions. And it has been 18 effective, we think, to the NRC in addressing areas of 19 mutual interest.
20 But do you see any additional steps that might 21 need to be taken to assure that areas of shared concern are 22 incorporated in our respective policies and are there any 23 areas of overlap or duplicative review that you think could 24 be eliminated to provide more efficient and effective 25 regulatory oversight in these areas?
l I
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t V . e 57 1 MS. TOMASKY: Well, I totally agree with you, 2 Chairman Jackson, that we have taken the most important step 3 which is that we are now talking to each other a lot and our 4 staffs continue to talk and I know the discussions that have 5 happened recently where we just explore issues and come to 6 an understanding have actually revealed, I think, that there 7 are fewer problems than people might think in ensuring that 8 your responses to competition and our responses to 9 competition are entirely consistent.
10 I think that in terms of potential overlap, I 11 think that when we get into case-by-case determinations of 12 stranded costs and decommissioning that the NRC undoubtedly 13 has a vital interest and we would expect to hear from you 14 from those cases, in those cases, and we certainly would 15 value your contribution and your judgments very highly in 16 those cases. We have, I am sure you well know, rigid rules 17 about ex parte communications and things like that but, 18 within, we can certainly work out appropriate ways for you 19 to contribute your views in those cases and I think it would 20 be very useful. Yes, there is always a potential conflict, 21 potential for conflict, but I think that they are completely 22 reconcilable.
23 There has been a lot of talk in terms of overlap 24 about your antitrust review and our competition review. I 25 do not have a judgment as to whether or not one or the other ANN RILEY & ASSOCIATES, LTD.
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58 1 l l is duplicative. I know we think ours is pretty valuable and 1 i 1 2 we would like to hold onto it. As to whether or not you '
l 3 believe that your antitrust review remains appropriate, let 4 '
me emphasize that we have never found it to conflict with l
5 the exercise of our jurisdiction in any way.
6 I think that my understanding of some of the open {
7 access license conditions with respect to transmission have l l
8 probably been overtaken by our open access tariffs. I !
l understand most of them to be company and perhaps even I
9
! 10 transaction specific and our open access tariffs which are 1 1
11 available to all comers are probably the best way to move 1
12 power right now under a tariff. I think that is what most l 13 people are doing.
14 I think that, ultimately, you are in the best 15 position to judge and to recommend to the Congress the l l 16 enduring validity of your antitrust considerations.
17 CHAIRMAN JACKSON: Thank you.
( 18 Further questions?
l 19 I think we will -- we don't mind if you stay.
1 j 20 MS. TOMASKY: I'm happy to stay. Thank you.
21 CHAIRMAN JACKSON: I am going to turn to 22 Mr. Ellsworth, president of NARUC, to talk about your part 23 of the presentation.
24 MR. ELLSWORTH: Thank you very much Chairman 25 Jackson, members of the Commission. On behalf of NARUC, we l l
i 4 l
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- 59 1 appreciate the opportunity to come and share with you our 2 overview of the status of restructuring among our members.
3 If it is acceptable to you, the presentation this 4 morning will be made by Commissioner Gee of Texas, who 5 chairs our Committee on Electricity. Commissioner George 6 from Iowa who chairs our subcommittee on nuclear issues and 7 I will stand ready to answer any questions that you may have 8 of us following Commissioner Gee's presentation.
9 CHAIRMAN JACKSON: Thank you.
10 MR GEE: Thank you, Chairman Jackson and members 11 of the Commission.
12 It has been almost a year since the NARUC 13 leadership had an opportunity to visit with you to talk 14 about restructuring activities and I think it is fair to 15 say, as you know, based upon the presentation of your staff 16 this morning, much has occurred.
17 CHAIRMAN JACKSON: Yes. And I must say, I have to 18 insert, and you knew I was going to zing you on this, 19 because I think when we met you said nothing much is going 20 to happen for a while.
21 [ Laughter.]
22 CHAIRMAN JACKSON: So I just had to put that onto 23 the table.
24 MR. GEE: There is a lesson there; never say 25 never.
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< w u 1 60 1 In fact, a great deal has occurred and I would 2 like, in a few brief moments today, just to hit the high 3 points or our prepared statement so that we can entertain 4 questions that I know that you have of President Ellsworth 5 as well as Commissioner George with respect to what has 6 happened.
7 Since we last met with you, the National 8 Association of Regulatory Utility Commissioners has adopted 9 a statement of principles to guide our member commissions in 10 the path of restructuring and that is accompanied in our 11 prepared remarks today. It sets out some guideposts as a 12 recommendation for our member commissions to follow as they 1 13 go about the process of restructuring. You will note that 14 it touches upon such critical matters as maintenance of l
15 reliability in a restructured market, the need for states to j 16 address fairly and equitably the concerns related to l l
17 stranded costs as well as maintaining the imperatives of 18 continuing to provide universal service to all customers.
19 Since we last met, 10 states have adopted statutes 20 or the state commissions already have proposed reforms to 21 restructure the retail markets. Nine of these 10 have acted 22 within the last 10 months. This represents fully one-third 23 of our nation's population which is now being subjected to 24 significant restructuring of these retail markets.
25 I am told and my information that we provided to ANN RILEY & ASSOCIATES, LTD.
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1 you so indicates that all states except one in the United 2 States are at least considering or have already adopted 3 reforms of retail markets. That single state that has not 4 done so, I believe, is Tennessee which, as you know, is 5 generally made up of the Tennessee Valley Authority, which 6 is not subject to state regulation.
7 Generally, restructuring has occurred initially 8 from what are known as high-cost states, that is states that t
9 have a great deal of embedded generation cost that are above 10 current market prices. The process began generally in the 11 northeastern states as well as California. Since then, 12 however, a number of what are known as low-cost states have 13 also begun taking the initiative.
14 I would update our prepared remarks to inform you 15 that since we prepared our remarks the state of Oklahoma, 16 its legislature, both the house and the senate, have 17 approved a bill that would open up their retail markets by 18 the year 2002. It is anticipated that their governor will 19 probably sign that into law within the next 30 days. Also 20 the legislature of the state of Montana also has adopted 21 restructuring legislation, also to provide for retail 22 competition by the year 2002.
23 Those two states are generally known as low-cost 24 states. They have.some flexibility by way of moving to open 25 up the retail markets primarily because they bear minimal ANN RILEY & ASSOCIATES, LTD.
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1 stranded cost concerns. Neither state, I am told, has any 2 nuc.'. ear power capacity and I believe that they are moving 3 forward to open up their retail markets in order to provide 4 competitive opportunities because they see that that is 5 generally the trend that is occurring in those states that 6 have higher cost responsibility.
7 My own state is also within the category of states ,
8 that are low cost. There are bills that are being actively l 9 debated and considered as we speak in my state legislature 10 and the time frame that is under discussion is around 2001 ,
11 and 2002 by which my own state may open up its retail )
i 12 markets.
l 13 Turning to the critical issue of stranded costs, 14 as I indicated, NARUC's position is that its member i 15 commissions should all address fairly and equitably the 16 concerns raised by utilities with respect to their having l
17 incurred verifiable stranded costs that would be rendered 18 uneconomic in a competitive market. With respect to the 19 nuclear industry, as you know, those stranded costs
-20 generally fall in two categories, those representing 21 embedded fixed plant costs and decommissioning costs.
22 The critical question being addressed at the state !
23 level as they move about restructuring is to what extent 24 should such costs be placed -- the recovery of such costs be 25 placed at risk in the market or snould there be other ANN RILEY & ASSOCIATES, LTD.
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L ' n' = e 63 1 mechanisms to make more certain the cost recovery for those 2 concerns.
3 I am pleased to report and I believe your staff 4 alluded to this that two states that have addressed the 5 question of decommissioning cost recovery, California and i 6 Pennsylvania, have opted to maintain the revenue stream for 7 collection of those costs through a nonbypassable wires r
8 charge. I am told that in California that is already 9 explicitly provided for in their statute. ,
10 In the Pennsylvania case, the statute provides the 11 commission to make a determination of the extent to which 12 those costs should be included in a nonbypassable wires 13 charge. That decision, as I understand, is still pending.
14 It has not been made yet but it is certainly something that 15 is critical on the agenda within the state of Pennsylvania [
16 to address.
17 I think it is fair to say that in my conversations 18 individually with state regulators as to the activities j 19 going on in their commissions, each of them places a very [
20 high priority on the continued recovery of decommissioning 21 costs under any restructured scheme. In terms of critical 22 issue priority, I would say that is probably at the highest 23 level, among the highest levels if not the highest level in 24 all of the restructuring discussions.
25 Additionally, measures to address the fixed cost ANN RILEY & ASSOCIATES, LTD. ,
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- 1 recovery concerns associated with restructuring have also 2 been addressed by either the state commissions or the
{ 3 legislatures. One means of addressing a potential
- 4 uneconomic fixed plant cost is to accelerate those costs.
5 j That is a measure that has been undertaken in California. I I 4
6 believe also South Carolina has opted for that approach to 7 ease the transition. !
B In my own state, even though our legislature has I 9 not yet decided to open up its retail markets, our j 10 commission has made a decision in one major utility case to 11 permit acceleration of potentially stranded costs on a 1 12 current basis to ease the transition to the potential 13 competition in retail markets.
14 Another measure being used to provide for better 15 means of cost recovery is the concept of securitization. I 16 know you have a presentation on that later today. Suffice 17 it to say'at least two states have already adopted that 18 approach.
19 The state of California has adopted an approach !
\
20 whereby the state has enacted a statute that provides for 21 the backing, the assurance of a revenue recovery through a 22 competitive transition charge. That would enable the 23 utility to sell an asset of'a revenue stream representing a 24 share of these uneconomic costs in order to be able to 25 recoup a measure of cash in order to buy down those ANN RILEY & ASSOCIATES, LTD.
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65 1 uneconomic costs.
2 The state of Pennsylvania also has adopted a 3 similar approach and it is my understanding that this 4 approach is being under -- is under consideration in a 5 number of states and state legislatures where restructuring 6 is being contemplated.
7 Also, again, returning to the issue of 8 decommissioning, NARUC itself as an association is placing a 9 high priority on attempting to provide its members guidance 10 with respect to the treatment of decommissioning costs na 11 restructured environment. We are currently within NARUC 12 attempting to put together a dialogue on decommissioning 13 cost recovery in a restructured market.
14 As part of that dialogue, we have directed our 15 staff to come up with an issues list and to make 16 recommendations on what would be the proper forum by which l 17 we could gain a broad-based cross-section of representation 18 of all interests to see if a consensus can be reached within i
19 a collaborative forum to make some recommendations that our 20 member commissions could use as guide posts. Your staff is 21 part of that process within the NARUC staff. We welcome 22 their participation, we think it is critical.
23 Commissioner Emmit George is leading that process
! 24 and I am sure he can fill you in on the details. We do l
25 anticipate that that dialogue will be getting under way ANN RILEY & ASSOCIATES, LTD.
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1 within a matter of the next few months. i 2 Finally, in closing, let me address some of the 1
3 matters with respect to the concerns of reliability.and also 4 with respect to adoption of the approach, as we have seen, j 5 of adopting an independent system operator. I know that you
)
6 devoted a great deal.of time to the question of reliability j 7 in your workshop yesterday and I won't cover new ground. 1 l
l 8 NARUC has not yet taken a position endorsing the
! 9 concept of an independent system operator. There have been 10 a number of our member commissions that are active in NARUC 11 that have individually endorsed the concept of an 12 independent system operator that is truly independent from l 13 the ownership and control of transmission owners.
l l 14 One of the critical concerns in moving toward '
15 adoption of an ISO approach is the question of what is truly l 16 independent and I know that that is a matter that is under ;
17 debate in various forums since there is no common model of l 18 what an independent system operator ought to look like.
I 19 Another concern I have heard is the question of 20 how does reliability mesh, the imperatives of reliability 21 mesh with the desires to shift control and operation away l 22 from those that own the transmission grid to a new entity I
l 23 that does not have ownership but may well have 1
24 responsibility for.also playing a part in maintaining 25 reliability through dispatch decisions. That is also an
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67 1 issue that I know is being addressed in a number of areas 2
where the discussion of how the shape of an ISO is to occur, 3
how can reliability be maintained consistent with the need 4
to attain a measure of independence of control of the grid 5 apart from ownership.
6 In my own state, in Texas, we adopted a rather 7 simplified approach to that because we have a reliability 8 council thht is wholly contained within our state. We 9 simply allowed our reliability council to become the 10 independent system operator. That approach has worked well f
11 thus far but we are closely monitoring that to ensure that 12 all concerns of the users of the grid are met and are 13 handled in a manner which is perceived by them, anyway, to 14 be done in a fair and nondiscriminatory basis.
15 Again, let me thank you for the opportunity to 16 address you today. As I indicated previously, we appreciate 17 the continued participation of your staff in NARUC's efforts 18 to give us guidance on the imperatives of your Commission as I
19 we attempt individually to try to address these critical 20 concerns of restructuring our retail markets.
- 21 I am available to answer questions as are 22 President Ellsworth and Commissioner George.
23 Thank you.
i 24 CHAIRMAN JACKSON: Thank you.
I 25 Let me preface my questions to you with a comment ANN RILEY & ASSOCIATES, LTD.
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which I probably should have prefaced everything with today.
2 And that is that in a certain sense we have a nice, clean 3 task.
You know, we.are health and safety regulators and so 4
we are trying to ensure that our issues are dealt with 5
because if they aren't then that triggers the need for us to 6
take some action the way we can, which is with respect to 7 our licensees.
8 In doing that,.and this is as much a comment as a 9
question to you, have you considered that in a certain 10 sense, in mandating competition, that to the extent that 11 there aren't either transition or overarching strategies for l 12 dealing with what are health and safety related issues, that
)
13 in the end you propagate into how competitive an environment 14 you will or will not have?
i 15 What am I saying? I am saying, for instance, if 16 we take the issue of decommissioning costs, that that is 17 something that absolutely we have a responsibility to ensure 18 is available. It is ultimately a health and safety issue l 19 and it is an issue that impacts your individual states.
20 That is, to see the nuclear facility is completely and 21 appropriately and safely decommissioned. i 1
22 If, in fact, there aren't strategies to either 23 create continuing revenue streams and the like, that 24 triggers requirements we have to place on the nuclear 25 utilities. If that is the case, one could argue that that ANN RILEY & ASSOCIATES, LTD.
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- 69 1 puts them at a competitive disadvantage. I am dealing 2 strictly with the narrow issue of decommissioning costs as 3 opposed to the larger issue of stranded costs. But it is 4 something that is an absolute health and safety requirement.
5 So I just kind of give you that, you know, in the 6 background.
7 So my question, first question to you is, what 8 are -- you mentioned NARUC guidance to its members with 9 respect to decommissioning costs. What are the key elements 10 of that guidance as it has evolved to this point?
11 MR. GEE: Right now, our efforts are only 12 informative because we are attempting to catalogue the host 13 of different policy concerns related to restructuring as 14 they may affect decommissioning costs.
15 I can say that among them would include, 16 automatically with or without restructuring, the sufficiency l
17 of decommissioning cost funding and whether, in a 1'
18 restructured environment, which might lead potentially to 19 premature retirement of plant, whether we would aggravate l 20 what might already be an insufficient level of funding that l
21 has been accrued in a going-forward basis. That is of deep 22 concern to many of us who have not yet made the 23 restructuring call in our individual states and would like l 24 to look, by way of. example, to what is being done in other 1
i 25 states to address both the sufficiency of existing funding ANN RILEY & ASSOCIATES, LTD.
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as well as maintaining a common level of guaranteed funding 2
in a restructured environment, such as the adoption of an 1
3 approach as in California, for instance, and whether that is l 4 1 the way that most states ought to be headed as they open up !
5 their markets for retail competition and decide that a 6
measure of generation is going to be placed within the 7 market and susceptible to market forces.
8 We are hopeful that we can identify these issues 9
and then from that make recommendatione to our member 10 commissions who have not yet made restructuring decisions l
11 that they can then take back to their respective state 12 legislatures who, ultinately, are the ones that have the say 13 so, whether or not to open up retail markets, and that those 14 recommendations can be given sufficient weight or a heavy i 15 !
degree of weight in any restructuring proposal that is 1 16 ultimately adopted by state legislature.
17 Commissioner George, I think, can speak more 18 specifically on some of the issues that have already come up 19 on the screen with respect to decommissioning funding that 20 our staffs, our respective staffs, are looking into.
21 MR. GEORGE: I think that the issue that brought 22 this to our attention and I dictated that we needed to 23 address the notion of decommissioning in a generic sense was 24 the conference in Ft. Meyer last January, 25 There was a presentation there by one of the ANN RILEY & ASSOCIATES, LTD.
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N k 8 e 71 1 speakers with regard to the tax credit associated with 2 decommissioning and if there is accelerated decommissioning, 3 as has occurred in California, that a company would not be 4 able to recover the accelerated cost but would have to only 5 take the depreciation over the planned life of the facility.
6 That raised the question that there are a number 7 of issues surrounding decommissioning that commissioners 8 will have to face as we go forward with this process. Manv 9 states have not taken any action or addressed these issues 10 in any way while several have actually gone through 11 legislation.
12 But what I suggested is that we needed to sit down 13 and identify all of the issues and, in terms of the guidance 14 that Commissioner Gee suggests NARUC gives to its 15 membership, that that guidance is or at least in this 16 instance will be an identification of what the issues are 17 and a discussion of what the potential resolutions might be, 18 leaving to the state commissions or state legislatures the 19 policymaking decisions in the final analysis as to how they 20 might proceed.
21 It is an opportunity and an effort to inform as 22 opposed to direct what is done at the state level.
CHAIRMAN JACKSON: What kind of time line are you 23 24 operating on to come forward with this guidance?
25 MR. GEE: We initially thought that we might start ANN RILEY & ASSOCIATES, LTD.
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this process prior to our summer meeting in July. Whether 2
that occurs or not really will depend on our full 3
electricity committee which this matter will be presented to 4 within the next 30 days. We have actually discussed it at 5
that level but a formal presentation will be made to them in 6 the next couple of weeks.
7 CHAIRMAN JACKSON: This is an example of where 8
there is a nexus between the issue. You know, your 9 consideration in the economic realm, such as a tax credit 10 for decommissioning costs, and how that might get impacted 11 by an accelerated amortization schedule for decommissioning 12 funding because that, in fact, is something that we would 13 have to consider for those entities that no longer meet our 14 definition of an electric utility. In a certain sense, it 15 is already built into our existing regulatory framework.
l 16 So I would urge you in a timely manner to move 17 along with what guidance you might come forward with for 1
18 your members because we are going to move along in terms of 19 what we have to do but we are not looking to put those 20 utilities that happen to own nuclear assets at a competitive 21 disadvantage relative to those that are not.
22 At the same time, we have a health and safety l 23 responsibility. But I think it is a shared responsibility 24 that, in the end, you also have. Because the nuclear assets 25 in your states were built under certain presumptions about ANN RILEY & ASSOCIATES, LTD. l Court Reporters 1
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i cost recovery and the like. But, in the end, wa have to do l 2 what propagates into our regulatory regime.
3 Mr. Ellsworth?
4 MR. ELLSWORTH: Madam Chairman, if I can take off !
5 my NARUC hat for a minute and put on my New Hampshire hat, 6 although we recognize your legal responsibility for health 7 and safety, I assure you that we have at the state level at 8 least a moral obligation because it was we who assisted or 9 participated in the bringing of those power plants on line 10 in the first place. So if there were health and safety 11 problems, it would be our reputations as much as yours if 12 there was a failure.
13 I can tell you in New Hampshire even in the 14 absence of the specific principles that we at NARUC are 15 working toward, that the state regulators have principles of 16 their own in mind to assure the decommissioning costs are 17 going to be covered. We have state laws to require that 18 decommissioning costs are identified and provided for. We ,
19 in our restructuring orders, have made provisions to assure 20 that they are nonbypassable.
21 So even in the transition, states have those 22 issues very much in mind and have health and safety very 23 much at the forefront of those decisions.
24 CHAIRMAN. JACKSON: Are any of you dealing with the 25 issues of where in the creditor queue decommissioning costs ANN RILEY & ASSOCIATES, LTD.
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e . , n 74 1 should stand or where in the queue they should be relative 2 to bankruptcies in your states?
3 MR. GEE: .That is a very good question. I will 4 give you as honest an answer as I can give you.
5 Ironically, it has not come up yet, even though we 6
have had a bankruptcy in our state of an electric utility 7 that had some nuclear generation. And the same, I know, 8 holds true with Commissioner Ellsworth.
9 You have before you two commissioners from the two 10 states where there have been major utility bankruptcies. I 11 don't recall, frankly, the question of exactly where the 12 priority of decommissioning funding falls within this 13 bankruptcy queue priority. I do know that the way the 14 restruct' u red bankruptcy occurred in our state, it did set 15 out a list of priorities and I would have to go back and 16 check the record, and I can provide that information to you.
17 But I do know that while the bankruptcy was 18 pending and ultimately after it emerged from bankruptcy, 19 there was no immediate concern that the impaired financial 20 integrity of this particular company was going to harm the 21 continued and safe operation of the nuclear power plant. I 22 believe that it owned a fractional share of this plant.
23 CHAIRMAN JACKSON: Right. I think that's the 24 reason.
25 MR. GEE: Seventeen percent, I believe, of Palo ANN RILEY & ASSOCIATES, LTD.
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- r. > e 75 1 Verde was held by El Paso Electric.
2 MR. ELLSWORTH: In terms of collection of l decommissioning costs, my recollection, in our bankruptcy, l 3
4 because we have a separate statute that requires the 5 collection of those costs that the bankruptcy did not affect 6 the collection of those costs.
7 CHAIRMAN JACKSON: Does --
8 MR. GEORGE: Commissioner Jackson? ;
9 CHAIRMAN JACKSON: Yes.
10 MR. GEORGE: If I might comment, Iowa does not 11 have a utility in trouble but I think that the priorities 12 that are set with regard to a bankruptcy are set by i 13 Congress. States have some provision with regard to 14 personal effects that are protected from bankruptcy but the 15 state laws are all preempted.
16 CHAIRMAN JACKSON: Right.
17 Does NARUC endorse the concept of mandatory NERC !
l l 18 membership by whomever operates transmission facilities?
19 MR. GEE: We have not taken a position on that
! 20 specific matter. What we have said, and I think our 21 statement of principles does indicate and, in fact, it is 22 probably the one of the first principles there, is continued l 23 reliability above all else must be maintained in a [
l >
l 24 restructured economic market.
(
25 We have been working very closely with our i
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utilities to ensure that no matter what economic decisions 2
we make with respect to opening up market opportunities to 3
new entrants, that the imperatives of reliability must 4
continue to be met and, to the extent that there is a cost 5
associated with maintaining that reliability, we will make ;
6 efforts to ensure that, if need be, those costs are commonly i 7
borne and shared by all rather than simply subject to i 8 i recovery in a competitive market.
l 9 i But, no, we have not officially taken a stance on !
10 recommending mandated membership in NERC.
11 CHAIRMAN JACKSON: You mentioned with respect to 12 the ISO concept a goci question is what is truly 13 independent. And you talked about how reliability would 1 14 mesh with the shift of control to, you know, an entity l 15 without ownership.
16 Do you view the efforts going on in terms of the 17 Midwest ISO to be a potential model for how to address the 18 issue?
1 19 MR. GEE: I am not that familiar with that i
20 particular ISO and the discussions that they have been 21 having other than what I generally read through the trade 22 press to be able to respond adequately to your question.
23 As I indicated, the concept of an ISO varies from 24 region to region and what we are seeing grow out of this 25 process is a variety of different approaches. I do know ANN RILEY & ASSOCIATES, LTD.
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77 1 that a common concern that I have heard is who is ultimately 2 responsible for making sure that the grid is maintained and 3 whether reliability.is -- whether the grid ultimately 4 continues to have the same degree of reliability when you 5 'try to divorce control and ownership.
6 CHAIRMAN JACKSON: Does it present the state 7 utility commissions with an inherent conflict of interest in 8 the sense that, you know, to truly have an independent 9 system operator may require some transference of regulatory i 10 authority with respect to grid management, planning, et ]
i l 11 cetera?
12 MR. GEE: I think that is a very good question. I 13 think, in fact, it does pose a question of to what extent ;
14 can a state commission or a state regulator have sufficient 15 jurisdiction to cover what is essentially a regional entity 16 that is making control and operations decision across the 17 grid. I do know that generally the FERC has been authority 18 that has asserted jurisdiction over the ISO approval process 19 so I would anticipate that there is some regulatory 20 oversight but I also know that individual states may also l
l 21 have different imperatives in making sure that their segment ,
22 of the grid is maintained in an adequate fashion and that j i 23 reliable service continues to be provided and that states, [
24 for example, have jurisdiction over the siting of new 25 transmission or additional transmission facilities. That is l ;
l
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a province that has traditionally been held within state l 2 jurisdiction.
3 CHAIRMAN JACKSON: I accept that if you are 4 I talking about regional grid management, there are issues 5 having to do with congestion? i I
6 MR. GEE: Yes. l 7
CHAIRMAN JACKSON: Vulnerability of the grid that 8
plays in the large to planning, which may be beyond a given i 9 state interest.
10 MR. GEE: I agree. And I think that the questions 11 that you raise point up the unfortunate infirmities of the 12 existing state / federal scheme that, in fact, the Federal 13 Power Act and the respective state statutes are not well L
14 suited to what is essentially now becoming more and more a 15 regional market which is beyond the individual authority of 16 f a state and certainly something which is going to have to be {
17 l l
balanced with a need for continued federal oversight. <
\
! 18 CHAIRMAN JACKSON:
4 What is the resolution of this i 19 dichotomy?
20 MS. TOMASKY: There is -- you very accurately, I 21 think, describe a natural tension that occurs as we are 22 moving forward on a couple of different fronts. The first 23 really has to do with the tension between the desire for 24 separation for business purposes between generation and 25 transmission and when you get into the retail side ANN RILEY & ASSOCIATES, LTD.
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a . . .
79 1 distribution, and the desire to make sure that the people 2 who are in charge actually are enough in charge that they 3 can make the decisions necessary to turn the lights on and 4 keep them on.
5 I think that we are going to be engaged, as ISO 6 proposals come before us, in a very nitty gritty debate that 7 will come to us in filings from people on all sides over 8 very specific issues about management and control of the 9 transmission systems and we will have to decide. Everybody 10 who has an interest in that is going to have to participate 11 and tell us.
12 We have already begun to see circumstances in 13 which marketers, independent sellers who are interested in ,
14 maximum separation will tell us that specific kinds of j 15 decisionmaking need to be separated from the sellers. We ;
16 have also had utilities tell us that that is not going to l i
- 17 work.
18 From a reliability perspective, I think that our 19 Commission has tended to be, in the end, although we test 20 the assumptions and the claims of the utilities, I think in i i 21 the end we care most about reliability and so far we haven't i l 22 done anything, I don't think and I don't think we would be l !
, 23 inclined to make a specific decision that would impair that. ,
24 Although we would have a tendency to question claims, to be j l 25 sure that we are not facing a situation where someone claims ANN RILEY & ASSOCIATES, LTD. I Court Reporters 1250 I Street, N.W., Suite 300 Washington, D.C. 20005 *
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80 1 it is reliebility and it's not.
2 You are absolutely right about the regional 3
planning issue and I know it is something our colleagues in 4 the states are dealing with. Our Commission at times in the 5 past has encouraged the formation of regional transmission 6 groups but we have been, I think, disappointed that RTGs 7
have not assumed a more prominent role in regional planning 8
because we do think that there are enormous efficiencies to 9 be gained in managing congestion and managing planning from 10 that perspective.
11 L'It it is a legitimate issue of concern for the 12 state, citing issues for state concerns. They involve a 13 host of environmental and power supply issues that states 14 have been traditionally in charge of.
15 I do know that folks at NARUC are talking about it 16 a lot and they understand it is a tension. It hasn't gotten 17 much play at this point in the congressional debate but I 18 think it is a very, very important and difficult issue.
19 CHAIRMAN JACKSON: Mr. Ellsworth?
20 MR. ELLSWORTH: Let me just offer my perspective 21 and it is a personal one and it is limited to NEFOOL and our 22 New England experience.
23 It is my personal opinion that no one can run the 24 transmission grid as well as the utility industry itself 25 can. It is my opinion that the value of the ISO is not ANN RILEY & ASSOCIATES, LTD.
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- l 81 l 1 necessarily to run the system but it is to make sure that 2 the system is open to everybody and I think that is the i 1
3 direction that we have gone.
4 There has been an opportunity in New England for
)
5 the regulatory community to participate in the organization 6 and establishment of the ISO to make sure that that 7 independence is maintained. The regulatory community has 8 opted, although it has been invited, not to be a part of the 9 ISO but to monitor it closely and be a close part of it, to 10 see that it is being done openly and properly. I think 11 that's the way it should be.
12 In terms of siting, New Hampshire has had a number 13 of siting issues before it and a number of the siting 14 projects that have been brought to the state's attention, 15 and we have a separate siting law that looks at each one, a i
l 16 lot of those projects have not been for the sole purpose of 17 benefitting the state of New Hampshire. But our law 18 requires that we have the region in mind and each one of our 19 decisions has had that region in mind.
1 20 Having said that, though, I can tell you that our 21 state is not pr. pared to relinquish siting authority to 22 someone else beyond our control.
1 23 CHAIRMAN JACKSON: Commissioner Rogers?
24 COMMISSIONER ROGERS: I have no additional 25 questions.
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o e e a 82 1
CHAIRMAN JACKSON: Commissioner Dicus? '
2 COMMISSIONER DICUS: No. '
3 CHAIRMAN JACKSON: Commissioner Diaz?
4 Commissioner McGaffigan?
5 .
COMMISSIONER McGAFFIGAN: I do have two.
6 i Given the importance of decommissioning costs, I i 7-read through your NARUC principles and I couldn't find any 8 reference to it. I mean, stranded costs get mentioned
-9 toward the end. .
10 Are you going to consider reissuing the principles 11 at some point with some bolstered discussion of the 12 importance of taking care of decommissioning costs?
13 MR. GEE:
t I don't know if we would necessarily 14 amend our statement of principles. The statement of 15 principles was adopted almost a year ago before some of our +
16 states and state legislatures began acting on 17 decommissioning.
18 COMMISSIONER McGAFFIGAN: Right.
19 MR. GEE: It does address, within the context of 20 the statement, the need for states to weigh the concerns of 21 stranded costs and to make sure that stranded costs are 22 addressed in a fair and equitable fashion. So we would --
23 just using the perspective of that language, we have 14 regarded that as broadly inclusive, to include the questions 25 occasioned by decommissioning cost recovery.
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83 1 The separate question of.how to recover 2 decommissioning costs and whether they are sufficient, I i 3 think, is something.that is going to be the subject of our 4 dialogue and what would happen out of that is if we can 5 reach a consensus within the national association to make a I 6 recommendation to our member commissions, that would then be 7 reflected in a resolution that we would then take up by our I
8 executive committee and would formally become a position of (
9 the association which would have the strength of essentially ;
10 being a part of the statement of principles by virtue of a 11 second resolution. i 12 So the short answer is the association will have 13 an opportunity to examine more specifically all of the host 14 of policy issues with respect to decommissioning cost 15 recovery and then take up through the form of a resolution a l 16 position that would be given equal weight as though it were l 17 part of the original statement of principles.
18 COMMISSIONER McGAFFIGAN: The other issue I just f
19 want to clarify, tax code issues came up in the discussion !
20 and is there any need in terms of in the decommissioning 21 cost area of looking at the interaction of how these costs >
22 are recovered with the federal or state tax codes?
23 I am just trying to understand when plants are ,
24 prematurely retired, is Connecticut Yankee or Zion or l
t 25 whatever have been or are going to be, was that foreseen in t"
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o < > s 84 1 the tax code and are there problems that come up in the tax 2 code that we haven't previously foreseen?
3 MR. GEORGE: I don't think ,it was anticipated in 4 the tax code and I think it will require attention in terms 5 of legislation. I think the reason it was raised at our 6 January meeting was to solicit support from NARUC in terms {
l 7 of making the tax change. l 8 Our response was that we should probably talk i
9 about the entire issue of decommissioning in such that we l
10 can respond not only to the tax issue but the other issues l 11 that are associated with it.
12 COMMISSIONER McGAFFIGAN: Thank you.
13 CHAIRMAN JACKSON: Yes.
14 MS. TOMASKY: I did want to mention that we did 15 deal with this issue briefly but we somewhat directly in ;
16 Order 888, the question of deductibility of nuclear 17 decommissioning costs in particular and stranded costs was 18 raised before us and we were asked to clarify that if 19 someone is recovering stranded costs that that is part of 20 the utility's cost of service and it was suggested to us if l 21 that were the case that that would help shore up continued 22 deductibility of those costs. Indeed, we did make that 23 clarification.
24 Now, I can't testify whether or not that is 25 sufficient for the IRS for those purposes but we did make ANN RILEY & ASSOCIATES, LTD.
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85 i 1 that clarification at the request of some utilities.
CHAIRMAN JACKSON: Thank you. Thank you very 2
3 much.
4 Let me call the industry panel' and to thank them in advance for their patience. I think the next time, if we 5
6 have another meeting on this subject, we will begin with the 7 industry panel.
8 Let me make a comment that I was going to make as 9 part of my closing remarks while the groups are changing.
10 That is particularly I am thinking of the various regulatory 11 entities, that I would ask you not to finesse or back away 12 from the issues related to decommissioning costs and grid 13 reliability and security from the point of view of the 14 public health and safety implications or figuring it into 15 and taking a more direct and proactive stance because we are 16 not going to back away from it.
17 So I would just like you to keep that in the back 18 of your mind.
19 Mr. Colvin, I thank you, and Mr. Draper, 20 Mr. Harris and Mr. Asselstine. And however you wish to 21 structure this. We're all ears.
22 MR. COLVIN: Madam Chairman, thank you and good 23 morning.
24 I would like to really begin with Dr. Draper's 25 presentation and followed by mine and work down in that ANN RILEY & ASSOCIATES, LTD.
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e a 4 8 86 1 order, if that is acceptable?
2 CHAIRMAN JACKSON: Sure. '
s 3 MR. COLVIN: Thank you.
4 DR. DRAPER: Good morning, Chairman. Thank you 5 for the opportunity to be here. Members of the Commission.
6 This is I guess the second time I have appeared on this :
7 subject, the first being about 18 months ago at the first of 8
these sessions and we appreciate the chance to talk about 9 the important subjects. I 10 l In terms of regulatory actions, the starting point l 11 is tna NRC's action plan and initial draft of proposals to 12 positica the NRC for the restructuring of the electric power 13 business. The draft policy statement, the advanced notice l 14 of proposed rulemaking on decommissioning and the draft !
15 standard review plans published last year raise some of 16 NRC's major concerns and allowed the industry to provide its )
17 perspective on these important issues.
18 I am here today representing a cross-section of 19 the electric power industry. As a member of the NEI 20 executive committee and since last June as Chairman of the 21 Edison Electric Institute, I will address the electric 22 industry's policy objectives as restructuring proceeds and 23 outline the more specific goals and objectives established s
24 by the nuclear power industry. Joe Colvin will then discuss i 25 some of the more significant nuclear regulatory issues. 1 i
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1 I think it is fair to say that the restructuring 2 of the electric power industry is proceeding more slowly at j 3 the federal level and more quickly at the state level than
! 4 many people expected even a year ago. At the federal level, 5 I believe the 105th Congress and the Administration are
- \
6 beginning to recognize that we-must approach electricity 7 deregulation and restructuring carefully and deliberately )
8 because the economic and social costs of mistakes would be i
9 very high. l 1
10 The national interest demands that we get it I 11 right. We must ensure that all consumers of electricity, 12 large and small, will benefit from restructuring in terms of {
1 13 cost, service and reliability. We must ensure that the !
i 14 transition to competition recognizes past regulatory l 15 commitments, providing for the opportunity for the recovery 16 of prudent, legitimate stranded commitments through the )
17 Federal Energy Regulatory Commission and the states.
18 For policymakers, the first step is to establish 19 broad areas of responsibility, what decisions should be made 20 at the federal level, what authority should be reserved to 21 the states and what determination should be left to the 22 market.
23 We believe the federal government should 24 articulate general. principles and guidance and address those 25 issues that only the federal government can address such as ANN RILEY & ASSOCIATES, LTD.
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l 88 1 possible amendments to the Atomic Energy Act, repeal of the I
2 Public Utility Holding Company Act, the Public Utilities 3 Regulatory Policy Act, which are major impediments to 4 competition.
l 5 Recognizing that states have differing 6 circumstances, we continue to think that the majority of the 7 issues are best handled at the state level. We believe that 8 some issues, corporate structure, for example, should be 9 left to the market. Government-imposed divestiture, in 10 particular, we believe, would be inappropriate.
11 Turning to the state level, based on what we have 12 seen in states like California and Pennsylvania which have 13 significant nuclear capacity, we are generally encouraged by 14 the responsible manner in which state government officials, 15 regulators, legislators and governors are approaching 16 restructuring. We are particularly encouraged by the 17 explicit recognition in both California and Pennsylvania 18 that nuclear plant decommissioning is a public health and 19 safety imperative and decommissioning funding must be 20 assured.
21 We recognize that decommissioning funding 22 assurance is one of NRC's major concerns and rightly so. We 23 believe the NRC can and should take considerable comfort in 24 the way the states.have handled this issue so far. Let me 25 assure you that the nuclear industry also regards ANN RILEY & ASSOCIATES, LTD.
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Ls s o 89 1 decommissioning as a national public health and safety 2 imperative and considers assurance of decommissioning .
3 funding is one of our highest priorities.
4 Let me turn now to the nuclear industry's major 5 goal as restructuring proceeds and the objectives we have 6 formulated to the achievement of that goal.
7 The goal is very simple, to maintain the excellent 8 safety performance and ensure that nuclear plants are not 9 placed at a competitive disadvantage as restructuring of the 10 electric power industry proceeds. To reach these goals, the 11 industry has established four specific objectives. These i 12 are not in any particular order; they are equally important 13 to us.
14 First, we must provide the industry with maximum 15 possible certainty and clarity about future nuclear 16 regulatory requirements as companies consider restructuring 17 options such as consolidation of nuclear operations, 18 ownership transfers and the like.
19 Second, we want to ensure that companies have 20 maximum possible flexibility to reposition their nuclear 21 generating assets without subjecting those nuclear units to 22 unnecessary economic penalties or financia' stress.
23 Obviously, NRC regulations and requirements, l
24 particularly in the area of financial assurances, will play I
( 25 a major role here.
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Third, in federal or state legislation, the 2
industry believes that nuclear utilities should have a I 3
reasonable opportunity to recover stranded costs, including 4
unrecovered capital and unfunded decommissioning 5 obligations.
6 ;
Finally, we believe it is appropriate to undertake 7
a critical examination of certain provisions of the Atomic 8
Energy Act, to determine whether the conditions.that 9 justified those provisions still prevail. If conditions 10 have changed then we believe that the Atomic Energy Act 11 should be clarified or amended. i 12 Joe will cover several specific nuclear regulatory 13 issues. NRC requirements and regulations are one of the 14 critical factors that will influence the nuclear industry's 15 business decisions going forward, including the degree of 16 flexibility available to licensees as they consider how best 17 to position their nuclear plants for a competitive 18 environment. One of the major tasks as we move forward will 19 be to define those issues in areas which involve nuclear 20 safety and are thus within NRC's purview and those critical 21 issues that fall outside NRC's statutory mandate.
22 Recovery of statutory commitments is a critical 23 issue that falls outside NRC's statutory mandate. Various 24 NRC officials have. expressed concern recently about recovery 25 of those stranded commitments. Although recovery of AJR4 RILEY & ASSOCIATES, LTD.
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i4 e o gy 1 standard commitments is one of the industry's major issues 2 and although we would welcome NRC's support for the general 3 principle that companies should be allowed a reasonable 4 opportunity to recover prudent, legitimate and verifiable 5 stranded commitments, we don't believe recovery of stranded 6 commitments is a legitimate NRC safety issue.
7 Recovery of stranded commitments involves whether 8 or not a company will be able to meet its fiduciary 9 obligations to its shareholders and bondholders. It is 10 entirely separate from operating economics which will 11 determine whether or not a nuclear plant or any power plant 12 will continue to operate.
13 We believe the public interest is best served if l
! 14 the NRC focuses on results, on answering the key question, 15 what are we trying to achieve. The answer, we would assume, I
16 is to continue to ensure the adequate protection of public l 17 health and safety.
l l 18 So how do we separate the success path for this 19 objective? The NRC might have started this process by 20 articulating the issues on its mind regarding nuclear power 21 plants operating in a restructured competitive market. Now 22 the NRC must engage the industry in a substantive discussion 23 about whether or not those issues are important and then 24 develop practical mechanisms and techniques to address the 25 important issues.
l l
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Let me now turn the microphone over to Joe Colvin, 2 NEI's president and CEO, for the second half of our 3
presentation after which we will be happy to answer your 4 questions. 1 5 MR. COLVIN: Madam Chairman, commissioners, good 6 morning again.
7 As Linn indicated, I would like to spend a few 8
1 moments and talk about some of the specific aspects of the 9 Commission's interest related to restructuring that are 10 !
specific to the nuclear energy industry and that need the 11 Commission's attention. j l 12 The U.S. nuclear energy industry is a mature l 13 industry and it is a natural evolution for it, as part of l 14 the larger electricity industry, to move toward deregulation l ,
l 15 and associated restructuring. Restructuring presents unique 16 challenges for the industry and for the agency that l 17 regulates it, but it also presents opportunities for 18 positive change. It is forcing us to look at the most 19 efficient ways to meet our respective responsibilities.
20 Our number one goal, of course, is to maintain 21 excellence and safety performance while ensuring that 22 restructuring does not place nuclear power plants at a 23 competitive disadvantage and Linn outlined the industry's 24 four key objectives related to restructuring. I would like 25 to elaborate on those just a bit.
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t - e o 93 1 As he mentioned, one of the industry's objectives 2 is to ensure as much clarity and certainty as possible, in 3 particular concerning future regulatory requirements for 4 plant ownership, license transfer and related issues.
5 Another objective which is closely related is to ensure that 6 utilities have the flexibility to reposition their nuclear 7 generating assets without undue regulatory burdens.
8 The industry needs as much certainty as possible 9 in advance concerning what financial assurance and 10 requirements in that area will be necessary and acceptable 11 to the NRC to fulfill its safety responsibility.
12 This is essential to allow consolidation of 13 nuclear units into new operating entities, ownership 14 transfers and other restructuring arrangements. Regulatory 15 requirements must allow utilities the flexibility to make 16 the changes they deem best in order to compete. If they 17 cannot reposition their nuclear generating assets without 18 lengthy regulatory proceedings, nuclear energy will not be 19 able to compete with generating sources that are not 20 similarly burdened. In order to provide the clarity and 21 certainty, we believe changes are needed in the license 22 transfer process as well as how the atomic safety and 23 licensing board proceedings'are conducted.
24 Any requested license amendment involving a change 25 in ownership or control of a commercial nuclear power plant ANN RILEY & ASSOCIATES, LTD.
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involves NRC reviews and likely, in most cases, will involve 2 a formal hearing. l Certainly, the NRC and its licensing l 3
boards must fully explore the important safety issues that I 4 might be raised.
5 We believe changes are needed to ensure that the 6
existing process does not give competing factions an open-7 ended opportunity to manipulate the NRC's regulatory process 8 to the disadvantage of the nuclear power plant operators and 9 owners and to the NRC's disadvantage as well. We believe l
10 the Commission should provide direction to its licensing
- 11 boards to ensure that their inquiries are limited to issues 12 that arise within the context of the proposed license 13 amendment or transfer being sought. The boards should also 14 ensure that a clear safety basis exists for issues that i
15 intervenors seek to raise in NRC proceedings.
16 The industry also believes it is time to reexamine 17 certain provisions of the Atomic Energy Act to ensure its 18 applicability to a mature industry. In particular, the
'19 requirement for NRC to conduct antitrust reviews and the 20 current restrictions on foreign ownership of nuclear power 21 plants that have been discussed earlier today, in our view, 22 need to be eliminated. Antitrust and market power 23 considerations are already examined extensively in cases 24 involvin.g mergers and acquisitions, transmission tariffs and 25 other corporate restructuring by the Federal Trade ANN RILEY & ASSOCIATES, LTD.
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e . . e 95 1 Commission, the Department of Justice, the Securities and 2 Exchange Commission, the Federal Energy Regulatory 3 Commission and state regulatory commissions. The Act's 4 current restrictions on foreign ownership of nuclear power 5 plants represent an unnecessary impediment to responsible 6 foreign entities that are willing and eager to invest in 7 commercial U.S. facilities.
8 We believe the NRC should examine the Atomic 9 Energy Act and initiate legislation where appropriate to 10 amend the act. The industry will work with you to support 11 necessary legislative changes.
12 Another objective involves the recovery of 13 investment and, in particular, recovery of decommissioning 14 and stranded costs. While Linn thoroughly discussed this, I 15 would like to add that the industry continues to encourage 16 the NRC to support legislative or regulatory proposals that 17 would allow nuclear plants to recover decommissioning costs 18 and other prudently incurred costs that may become stranded 19 in transition to a competitive environment.
20 I have discussed several of the industry's 21 objectives related to restructuring. But the fundamental 22 issue important to restructuring is the regulatory process.
23 In scheduling these two days of briefings, the NRC invited 24 comments on how it.can best address issues related to
! 25 restructuring.
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}
1 I believe the agency would provide tremendous 2
value to its customer, the American public, by creating a 3 more efficient, safety-focus regulatory process. Regulatory 4
requirements must have a clear nexus to safety, the NRC's 5
statutory mandate and the industry's highest priority. l 6
As I mentioned earlier, the U.S. nuclear industry 7 is a mature industry and is a benchmark for the rest of the !
8 world's nuclear programs. Overall, U.S. nuclear power 9
plants are performing at very high levels of safety, i
10 reliability and cost efficiency and the NRC has ample 1 11 regulatory mechanisms to address any safety issue that might I 12 arise at any plant. Yet even top performing plants are 13 struggling today with a regulatory process that has become 14 excessive, a process that tends to regulate to the lowest 15 common denominator and that frequently extends, in our view, 16 beyond the agency's safety mandate.
17 In regulating the cost of service environment, the 18 cost of excessive NRC requirements is recovery with the 1 i
19 approval of the state regulators and, frankly, consumers I i
20 have paid for meeting requirements that in some cases do not 21 have a clear link to improving plant safety. In a !
22 competitive market, NRC and the utilities must reexamine the !
23 cost / benefit relationship of regulation more closely. !
24 Today, the rules are changing. The industry and
- 25 the NRC have the responsibility and, in fact, the ANN RILEY & ASSOCIATES, LTD.
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4 e e t 97 1 opportunity as well to reexamine how nuclear power plants 2 are regulated. In a regulated industry, inefficient or 3 excessive regulation can place nuclear power plants at a 4 competitive disadvantage and the NRC's regulatory process 5 must be clearly defined and sharply focused on safety. I 6 When it is not, it creates confusion and '
7 misunderstanding for both the industry and the regulator 8 about what each other's respective responsibilities are.
9 This has a tremendous impact on how nuclear energy is viewed 10 by the Congress, policymakers, the public, the financial 11 community and it creates the economic uncertainties for 12 companies that own and operate these plants.
13 The top performing plants in the United States 14 today both in safety and operational performance are 15 typically the most cost efficient as well. They are 16 competitive today but, in light of the uncertainties in the 17 current regulatory process, even these utilities face i
18 significant challenges and the risk of being placed at a i 19 competitive disadvantage.
20 As I indicated earlier, I think restructuring 21 presents many challenges but it gives us a lot of 22 opportunities to ensure that we continue the economic and 23 environmental benefits of nuclear and they will continue to 24 be realized by our. nation.
25 Thank you.
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1 MR. HARRIS: Thank you, Madam Chairman. We are 2 pleased to be here this morning to present to you some of ,
)
3 PJM's perspective on some of the restructuring issues. We !
4 think we do have a specific and unique perspective to be 5 able to do this.
1 6 PJM is the oldest tight power pool in the world. !
l 7 We are also the largest and most sophisticated entity of its ]
8 kind in the world. Over the past two years, for example, we ,
1 9 have had 48 different countries come to visit PJM and we are 10 larger than most countries in the world trying to implement I
11 these solutions.
I 12 Over four years ago, we became a separate company J 13 that administered this power pool, separate and distinct 14 from the member companies, so we have crossed those 15 problems. On February 28 of this year, the FERC approved i 16 operations in PJM for the nation's first bid-based energy 17 market. They also approved in operations for PJM the first I
18 multiple company, multiple state regional transmission I 19 tariff administered by a single entity and this is the first 20 of its kind in the world.
21 We also have, within Pennsylvania and New Jersey, 22 beginning this year, substantial pilot programs on retail 23 choice and these programs will be in place over the next 24 three years.
25 We also have effective right now a pure ANN RILEY & ASSOCIATES, LTD. ,
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e - e e 99 l 1 independent board running PJM. One of the FERC mandates for
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2 having an independent board was that you have expertise on i i
3 that board in the operations of the power grid. We are 4 pleased that two of our board members, one, Dr. Richard 5 Leahy, Dean of Engineering at Rensselaer Polytechnic, who is 6 a nuclear expert in.his own right, and another one, Mr. Lynn 7 Eury, former executive vice president and chief operating 8 officer of Carolina Power and Light, is on our board and 9 brings us some special nuclear perspectives.
I 10 In operations of PJM, if you look at the total 11 number of units, there is only one other entity that l
12 operates as many units as we do to maintain grid l
( 13 reliability. But part of that is our history in knowing how 14 to deal with the complexities of separate operations with a 15 separate control center with multiple companies in multiple 16 states.
17 We have 13 nuclear facilities of over 13,000 18 megawatts that we have ts P al with. One of the things that 19 we have, for example, in learning in practice of how to deal 20 with is the coordination between a central operator between 21 the local control center and the nuclear facility. We have l
j 22 procedures and plans in practice that we rehearse on 23 emergency procedure drills,' procedures in plans and practice 24 on emergency restoration that we coordinate.
25 One of our key committees in PJM, for examplo, is l ANN RILEY & ASSOCIATES, LTD.
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a nuclear coordination committee that can consist of the !
2 plant operators, plant managers from each of the nuclear l t
3 power plants, the operators of the local control centers and 4 my operations staff. They meet regularly on the nuclear 5
coordination issues involved in this kind of an environment. l 6
As we began to go along and look at how we are 7
going to proceed to the future -- next slide, please -- one '
8 of the things that the states had wanted to maintain was the 9
benefits of this kind of arrangement that has been enjoyed 10 by this region over the years. Just energy alone last year 11 was going to be $100 million savings for that year alone.
12 The states of Maryland, the states of New Jersey, have 13 looked at PJM in separate analysis and said the annual 14 savings of being able to operate over multiple states, 15 multiple jurisdictions, multiple companies as essentially a 16 dispatch entity has savings in excess of $1.2 billion a 17 year. As we move ahead, we want to be able to maintain this 18 kind of savings and yet be able to ensure that competition 19 takes place in a robust way, which is national policy.
20 Next slide, please.
21 In looking at the power grid, what I wish to draw 22 to your attention here is the real interest, if you look at 23 the daily load shape, which I put up here for a typical 24 winter for PJM is,.one, the size. Our minimum load of 25 26,000 megawatts is larger than the peak of every other JJRJ RILEY & ASSOCIATES, LTD.
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entity in the world except for eight. We will ramp, which 1
2 is the way that you move each hour, often over 4,000 3 megawatts an hour, which is larger than 115 other control 4 areas in North America.
5 In operations of this power grid, however, we have 6 to pay attention as to what's happening instantaneously. In 7 looking at it from that perspective is why we would suggest 8 to you that there are four cornerstones to look at, 9 cornerstones you may think are kin to a SALP report on power 10 grid operations, based on our experience.
11 Quite simply, we are flying an airplane that never 12 lands and you just can't stand still, the power grid, to 13 solve the problems of restructuring.
14 If you look at what takes place in restructuring, 15 you have a central operator, as I mentioned, where a 16 separate and distinct entity that operates an energy market 17 and a regional transmission tariff and the control area for 18 this grid. We are not technically an ISO at this point.
19 All the government structures ara still being debated among i 20 the participants. But as transmission is separated from the 21 load entities, as you get into retail choice and generation l 22 becomes fully competitive, there are certain things that i
l 23 have to be maintained in that functionality.
24 As you look at the different functionality and you 25 look at what is transpiring 24 hours2.777778e-4 days <br />0.00667 hours <br />3.968254e-5 weeks <br />9.132e-6 months <br /> a day, seven days a f
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e . *
- 102 I week, it is a daunting task. For example, every three-and-i 2
- a-half seconds we have dispatch signals sent back and forth 3
between all the generation plants and our control center.
4 Every 10 seconds, we share over 500 data points from the
$ 5 control areas around us and as far away as Canada to make 6
sure the integrity and security of the power grid of the 7 Northeast is in place.
}
8 Every 14 seconds, we have nearly 10,000 9
a telemetered values sent in across the system that we look at 10 to maintain the status, to make sure the system is still 11 secure. Every 30 seconds, we have over 800 flows analyzed
- 12 on a full load flow that are checked against their limits on 1
13 the system to see if they are still in place.
14 Every 10 minutes, we have thermal contingencies 15 analyzed for nearly 1,200 points on the system to make sure 16 they are still in place and within their limits. Every 10 17 minutes we analyze the 300 worst voltage conditions on the 18 system and we take the top 15 expected contingencies and do 19 full load flows on those and that takes place every 30-20 minute interval, 24 hours2.777778e-4 days <br />0.00667 hours <br />3.968254e-5 weeks <br />9.132e-6 months <br /> a day, seven days a week.
21 So if you look at it from this unique perspective 22 of a fully functioning and operating central operator over 23 multiple states, multiple districts and a very large entity, 24 we think that there are four cornerstones to look at as you 25 evaluate restructuring, whether it is occurring in this ANN RILEY & ASSOCIATES, LTD.
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- e. . 4 103 1 country or the other countries that came by and worked with
' 2 PUM.
3 The first of these is you have to look at the 4 capability to reliably operate the grid. We can do that now 5 but the capability is extended because you have to have 6 capability to reliably operate the grid in a rapidly 7 changing environment. What the environment is going to be 8 next year when you get into full competition is going to be 9 different two years from now so your capability to operate 10 in the context of that is a must, as you restructure.
11 The second thing is information exchange.
12 Information exchange is critical. There is an interesting 13 article in the Electricity Journal this week talking about 14 how information exchange may be the Achilles heel as people 15 take self-interest and protective interest on the 16 information. Information is our lifeline. Without all the 17 information necessary, we can't operate the grid reliably.
18 Authority. You have to have authority to maintain 19 steps to maintain security of the system and it needs to L6 20 clear and it needs to be stated. Within PJM, for example, 21 each local control center has clearly stated authorities and 22 what they need to do to protect the integrity of their 23 system on a local basis, including their nuclear facilities.
24 That is directly coordinated with the authority that my 25 dispatchers have in order to operate and be able to shed
- ANN RILEY & ASSOCIATES, LTD.
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o . 4 e 104 1 load within the system.
2 In the new operating agreement we are operating in 3
right now, the president, myself, has clear authorities to 4
direct an emergency, declare an emergency and direct all 5
actions of entities out of that emergency. It is very 6
important that those authorities are clearly stated and 7
carried out when you have emergency conditions. i 8
And, finally, if all of these things are met, the 9
important thing is that as you go forward, you have 10 predictable behaviors. Without having predictable behaviors 11 that you can make sure that you are going to have in the i I
12 grid, then you will have problems and you will have faults. !
13 All of these are building blocks to ensure that that will 14 take place.
15 If we look at the first one, capability to '
16 reliably operate the grid, I can't under stress the 17 importance of this in training. In PJM, we have five 18 percent of our budget in training. We train all the system 19 operators throughout the grid.
20 In starting up the bid-based energy market and the 21 regional transmission tariff that FERC approved for us on 22 February 28, from that time to date we have trained over 23 1,000 people. Over 400 operators have been trained and over 24 600 market participants. We have conducted training classes 25 throughout the mid-Atlantic region, we have conducted ANN RILEY & ASSOCIATES, LTD.
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e > . o 105 1 training classes in Houston, Texas, for the marketers down 2 there on how to participate in this market.
3 I can't underscore the value of having 4 comprehensive training programs. NERC is very concerned 5 about this also and, as you probably heard yesterday, they 6 were talking about certification of training programs, 7 certification of operators and so forth. We support all of
)
l l 8 these and think they are a must.
9 It is sl important that you have all of the 10 communications telemetering and so forth in place. For PJM, l
11 this stuff is already in place.
l 12 In other areas, as they develop into the various 13 functionalities, like in California, they have many elegant 14 consultants and firms that are ensuring that whatever 15 processes and procedures come in place, the hardware and the 16 software and so forth will work. Again, you are flying an 17 airplane that can't land. You can't stand it down so the 18 systems have to be in place and have to work as they change l 19 and as they go forth.
20 The emergency procedure drills are extremely 21 important, particularly as new players come in and come out.
22 PJM conducted an exhaustive emergency procedure bill before 23 we began our bid-based market and regional tariff that l
1 24 involved not only the states but Department of Energy and 25 also involved the market participants to make sure that ANN RILEY & ASSOCIATES, LTD.
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. . 4 e 106 1 should something have happened after we began our new energy 2 market that everyone was qualified and understood what would 3 take place during the emergency procedures.
4 Twice a year, we also conduct system restoration 5 after a blackout. We simulate a blackout of the entire East 6 Coast and go through restoration procedures that are heavily 7 involved. It takes about two days to go through the drills 8 but we found them exceedingly productive.
9 Madam' Chairman, we would certainly welcome any of 10 this Commission or the staff to come by and observe our 11 drills and procedures as we go forward.
12 Information, as mentioned, you know, may be the 13 Achilles heel. As market participants begin to do their 14 thing and as generation becomes unbundled, it has to be 15 crystal clear and understood in whatever form that the 16 information to the grid operator has all the information 17 they need in order to operate the grid reliably. There is 18 many elements of these but I just want to highlight three 19 that would have to be put into the proper context of 20 whatever restructuring takes place in whatever portion of 21 the country.or the world.
22 One is there is certain before-the-fact 23 information. In order to get the grid in a position to 24 operate reliably, you have to have data and information on 25 what is transpiring, what is taking place and so forth so ANN RILEY & ASSOCIATES, LTD.
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4 e a 0 107 1 you can plan for the next day and up to the next week's 2 events. As we learned in January of '94, fuel levels, for 3 example, are very important, as we begun to run out of fuel 4 in January of '94 and the emergencies we had there.
5 Sometimes we wonder, when we get into a full J j
6 generation market, that could be extremely market sensitive 7 to know what the fuel levels are. Well, those are elements 8 we feel have to have contractual rights to make sure we have 9 all that information before the fact so we can make sure the l 10 grid is positioned reliably.
11 You have transactions, as I elucidated earlier, 12 real time transactions of things you have to do as you 13 operate the grid hour by hour, day by day. And then you 14 have after-the-fact. You have to have all the information 15 necessary to analyze reliably and productively a fault 16 should it occur to determine what are the lessons learned.
17 And, as your industry knows very well, root cause analysis 18 is the key to be able to go forward and learn from mistakes 19 that will be made and to do this you must have exhaustive 20 amounts of data.
21 .We have found in PJM our historical database right 22 now is in the terabytes and growing on the amount that we 23 have to capture and keep in' stored level and I think the 24 ability for a central entity to be able to capture that, 25 store it, have it available for others to look at and so ANN RILEY & ASSOCIATES, LTD.
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- 4 s 108 1
forth is critical to the success.
2 This next slide on ISO functions, a little bit !
3 busy and I won't go into that. But, again, we would 4
certainly welcome you to come and tour the center and we 5 will spend more time on this. But I just wanted to point 6
out, this is the operations that take place on the floor. i 7
And you will see up at the top two separate networks. We l l
8 are in place, operating today with a bifurcated information 9
system where we have information that goes on what is termed 10 the OASIS for all the market participants. And, since we 11 operate both, the pool in and of itself does not participate 12 in the market; we strictly administer the market and make 13 sure it is operated according to the rules. !
l 14 We have a separate information network that 15 concerns all of the security data. i And I think as this !
16 thing gets into place and works throughout North America 17 that we will be able to solve those information requirements 18 so we can operate the grid reliably. Confidentiality 19 agreements have been stressed and other sorts of things are 20 being put in place to ensure that this kind of l
21 communications can continue.
22 The third element has to do with clear authority.
23 I had mentioned authorities that we currently have in PJM i 24 but authorities must be tied to the developing role of 25 sanctions. One of my worst nightmares is that even though ANN RILEY & ASSOCIATES, LTD.
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t .' . .
109 1 you might have sanctions with penalties on the sanctions, a 1 i
2 party could take a commercial position that the penalty or 3 the sanction is just a cost of doing business and when you 4 are dealing with a real time system where you have to i
5 make -- where you have a product that is instantaneously 6 generated and consumed, you can't have someone making a l
7 commercial interest when you need that plant on or off or 8 whatever condition it may be, f 9 So second guessing and self help is something that f
10 could obviate the authority. So as these sanctions are I 11 developed and put in place throughout North America and are i t
12 looked at for what the requirements are for various entities 1E to comply with those, could be the one that will make sure ,
i 14 the authority is clear and crisp or the one that could 15 undermine it. i 16 Finally, we deal, have to deal with predictable
?
17 behaviors. We think that as the restructuring is taking i
18 place through various places throughout this country and the :
19 world, everyone is very concerned with reliability. I have 20 not come across one individual from the most avid marketer 21 to the most conservative that is not saying that reliability 22 must stay in place. Everyone recognizes the severe impacts t
23 of an outage and, certainly; in this region for PJM that 24 serves arguably the world's political capital and in our hip ;
t 25 pocket has a city that on any given day can have 12 million f
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, . < r 110 1 people in 10 square miles, you know that we have to have 2 reliability for this area. It is extremely important and 3 everyone is very sensitive to that.
4 But these four cornerstones,-we feel, are what 5 needs to be developed and, as you look at the various 6 restructuring options, you need to ensure that the 7 capability is there and there are ways to measure the 8 capability through training, exper.ence and so forth, to 9 make sure that takes place, certification.
10 Information is necessary and chat comes through 11 the contracts that you have. The authority is there, which 12 is clear and crisp through the sanctions, the mandatory 13 rules and guides and so forth that have to be in place.
14 And, finally, with all of these together, we feel 15 that it can be a vibrant and a healthy new industry as it 16 moves forward and will meet the terms and conditions of 17 reliability that we all expect.
18 Thank you, Madam Chairman.
1 19 CHAIRMAN JACKSON: Thank you very much.
20 Rather than addressing specific questions at this l
21 point, I am going to let Mr. Asselstine make his 22 presentation and then we can have a discussion.
23 MR. ASSELSTINE: Thanks, Chairman Jackson. I l
24 What I would like to do this morning and in the l 25 next few minutes is just touch on a few topics that I l
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s s a s 111 1 addressed before the NARUC meeting when I was on a panel 2 with Commissioner Rogers and 1 thought I would touch.briefly 3 on some of the changes that we have seen as the competitive 4 framework is developing both at the federal level and at the 5 state level, talk about stranded cost recovery and 6 securitization which we view as a useful concept or tool 7 that can assist the utilities in recovering their stranded I 8 costs, offer a few comments on disaggregation and then close 9 with just a few points on the effects of competition on the 10 operation of nuclear plants in the country.
11 If I could have my first slide, please?
12 At the federal level, there are a number of )
l 13 legislative initiatives that are either being considered or 14 potentially could be considered over the course of this year i 15 and next year. Certainly the industry has strongly 16 advocated repeal or modification of the Public Utility 17 Holding Company Act and also some of PURPA requirements that 18 utilities purchase power from independent power producers, t
19 As you have heard already today, nuclear 20 decommissioning cost recovery is certainly a potential i 21 candidate for legislation at the federal level and, finally, l 22 there are a series of broader industry restructuring 23 proposals that have been introduced both in the Senate and i
24 in the House that cover a fairly broad range, including 25 l legislative proposals that would provide more of a one-P P
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112 1 size-fits-all federal solution for retail competition and 2 stranded cost recovery to other proposals that would be more !
3 of a safety net to help ensure the states all reach the same $
4 ultimate objective in terms of retail competition.
5 If I could have my next slide, please?
a 6 As you have heard, there has been a very 4 7 substantial amount of activity at the state level.
- We 8
expect that trend to continue over the course of this year ,
j 9 and on into next year. By around the end of this year we \
l 10 expect that many, if not most of the higher cost states in I 11 the country, will have instituted industry restructuring ,
[ 12 plans and proposals and we are also seeing, although we are 1
l l 13 at a relatively earlier stage in the process, a growing l j 14 convergence among many of those state plans to include the 15 points that I have outlined here.
j 16 First, a reasonable transition period of on the l 17 order of five years to get to full retail competition. i 18 Second, the opportunity, although clearly not a guarantee, j 19 for stranded cost recovery. Third, the phase-in of retail l
20 competition over the transition period. Fourth, in many
- 21 instances the institution of a wholesale competitive market 4
22 to try to capture some of the incremental efficiencies and ;
23 ' cost savings from competition as we are working through the 24 transition period. The use of independent system operators 25 and I think you have heard a fair amount of that yesterday l ANN RILEY & ASSOCIATES, LTD. l Court Reporters 1250 I Street, N.W., Suite 300 Washington, D.C. 20005 (202) 842-0034
g , . e 113 1 and today. And, finally, in a number of states, the use of 2 securitized financing as a tool to accelerate competition !
3 transition charge recovery. l 4 If I could have my next slide, please?
5 We have listed here a number of states where we 6 expect to see activity. We have seen two states thus far 7 that have enacted comprehensive statutory frameworks for 8 industry restructuring. Those are California and l
9 Pennsylvania. A number of other states are actively engaged i i
10 in the process and, with few possible exceptions, our l 11 expectation is at this point that those frameworks will be 12 balanced and reasonable.
13 If I could have my next slide, please?
14 I have summarized a few of the key points from the 15 California statute. We do view the California legislation 16 as a fairly significant milestone in the transition to a 17 more competitive environment in the utility industry in the 18 country and we expect that it will continue to serve as a 19 model for state consideration in a number of other states. ;
20 I am not going to go through all of the elements in the 21 California statute.
22 A few that I would point to, first, the phase-in 23 of direct access or retail competition subject to the 24 implementation of a nonbypassable competition transition 25 charge that would be paid oy distribution customers.
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e . e o 114 1
If I could have the next slide, please?
2 Second, and a trend that we are seeing among a 3
number of other states, emphasis on some near-term rate 4
reductions to provide some tangible benefits in many 5
instances, particularly for small customers, at the outset 6
of the process so that customers will see some near-term 7
benefits from the competitive marketplace and, finally, the 8
use of securitized financing as a mechanism to accelerate at 9
least a portion of the recovery of stranded costs by the 10 California utilities.
11 If I could have the next slide, please?
12 On stranded cost recovery, there are just a few 13 points that I would make. First, in terms of the magnitude 14 of the problem and the role that nuclear power plays in the 15 problem, there are basically three sources of stranded 16 costs. Those are, first, investment in above-market 17 generation, and that is really a sunk cost recovery 18 question.
Second, above-market power purchase obligations, 19 which is really an ongoing operating expense for the 20 utilities. And, third, deferrals, regulatory assets and 21 funding of social programs such as demand-side management.
22 There are a variety of estimates of the magnitude 23 of the problem.
Moody's Investor Service has put out a 24 recent update of their -- in 1996 of their estimate and they 25 continue to believe that the total amount of stranded costs ANN RILEY & ASSOCIATES, LTD.
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4 o .
- 115 1 for the industry are about $136 billion.
2 A few other factors pointed out by Moody's, and I 3 think you have heard a bit of this already. Stranded costs 4 tend to be concentrated by region. The Northeast, the West 5 and portions of the Midwest are the regions that have the 6 largest concentration of stranded costs. Also the greatest 7 exposure in general is with the lower rated companies and 8 that is also not surprising since those were the companies 9 that had large plant construction programs under way in the 10 1980s.
11 A few key points in terms of stranded costs.
12 First, not all stranded costs are for utility-owned 13 generation. There are very substantial exposures to 14 stranded costs for power purchase obligations and we see 15 this probably most clearly in California and in New York.
16 Second, not all generation related stranded costs 17 are nuclear. There are some expensive coal units around 18 that were built in the '80s and those are a portion of the 19 stranded cost problem as well. ;
20 But, third, I think it is fair to say that nuclear 21 units and, particularly, many of the large current 22 generation units that were licensed in the 1980s do ,
23 represent a substantial component of the problem.
1 24 When we look at stranded cost recovery, and 1 1
25 actually if you could go back one slide, I think, great -- I ANN RILEY & ASSOCIATES, LTD.
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. . 4 e 1
116 '
1 when we look at stranded cost recovery, we see it really as l 2 a function of three components. The first of those is where
(
3 are the utility's rates today and where will those rates be '
4 during the course of the transition period as you move to I 5 full retail competition?
6 Second, if.you use securitization as a tool for 7 stranded cost recovery, what benefits can you derive from !
8 securitization? I 9 And, finally, what a lot of regulators are !
10 referring to these days as mitigation savings. What other 11 cost reduction savings can you wring out of the business? !
12 Those are really the three components.
I 13 If I could move to the next slide, please?
14 This chart really just shows the revenue path for 15 California for the California statute. I think the 16 significance here is simply to point out that there are some 17 immediate cost savings that can be achieved in California 18 and we expect will be achieved through the use of 19 securitized financing. Those cost savings will cover most 20 but probably not all of the 10 percent rate reduction that 21 was mandated for small customers in California to begin on 22 January 1, 1998.
23 Over the course of the five-year transition 24 period, the continued benefits from securitization as well 25 as some of the other cost savings that the California ANN RILEY & ASSOCIATES, LTD.
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117 I 1 companies will achieve really provide the mechanism for 2 recovering a substantial portion of their stranded costs and 3 most stranded costs.really are expected to be recovered by 4 the end of the transition period. With few exceptions, i I
5 unrecovered stranded costs at that point would become the j 6 obligation or liability of the shareholders. l 7 There is one significant benefit in California 6 that is a big plus for the California utilities. That is, 9 the structure of their independent power contracts. Those )
10 contracts move to a substantially lower cost over the next 11 couple of years. By keeping rates at current levels or 10 12 percent lower for small customers, the utilities will be a
13 able to keep those savings and apply them to stranded cost 14 recovery. Unfortunately, that is not a financial benefit
- 15 that exists in any other part of the country.
16 If I could have the next slide, please? l 17 In terms of securitization itself, let me start 18 with just a brief description of what it is. It is really 19 the use of an asset-backed financing which is a nonrecourse 20 financing to the utility. Therefore, not a direct i 21 obligation of the utility. This financing would have very 22 high credit quality, AAA credit ratings and that credit 23 quality would be derived from a statutory authorization to 24 impose an irrevocable and nonbypassable charge on the 25 utility's distribution customers which would then be used to ANN RILEY & ASSOCIATES, LTD.
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e . -e e 118-1 repay'the debt. These bonds would not be obligations of the 2 state or obligations of the utility but would really be 3 -backed by that statutory ability to. collect revenues.
4 The utility would transfer their stranded costs 5 for securitization to a trust which would issue the bonds 6 and the utility would receive the cash proceeds from the 7 sale of the bonds. Those cash proceeds would then be used 8 by the utility to reduce their costs, typically by retiring 9 their existing debt and also by repurchasing some of their 10 existing common equity.
11 When we look at securitization, we really see six 12 benefits from it for the utilities and for their ratepayers.
13 The first of those is you can accelerate stranded cost 14 recovery and, effectively for the portion that is 25 securitized, you immediately recover those stranded costs.
16 The second and related benefit is that the utility 17 no longer bears any risk or uncertainty in terms of stranded 18 cost recovery.for the portion that is securitized.
- 19. Third, the securitization permits the financing of 20 at least some stranded costs over a longer time period than 21 otherwise might be permitted. In California, for example, 22 securitized financings are likely to be over 10 years. The 23 normal period for stranded cost recovery is five. So it 24 gives the utilities the ability to extend out stranded cost 25 recovery over a longer period of time for at least a portion ANN RILEY & ASSOCIATES, LTD.
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_ ~ . _ . _ . _ _ _ . . _ _ . _ _ - _ _ _ _ _ . _ . _ . . . _ _ _ _ _ . _
e o . .
119 1 of those costs.
2 Fourth, there are economic savings that can be 3 provided and translated into rate reductions. Those rate 4 reductions really help, I think, allow the states arrive at 5 a reasonable transition period for competition. Those 6 savings are really as a result of shrinking the utility's 7 capital structure. In effect, what the utility is doing is 8 taking assets that are currently on their books, financed 9 roughly half with equity and half with debt,. refinancing 10 those very efficiently with 100 percent debt financing using 11 the guarantee of recovery of the revenues.
12 Finally, there should be benefits to the utility 13 through recovering their stranded costs in terms of 14 enhancing their credit quality.by removing the uncertainty L
15 for stranded cost recovery. !
i 16 If I could have the next slide, please?
l l 17 Just a moment on disaggregation and I think, at i 18 that point, .I probably will stop given the lateness of the 19 hour.
20 There are a variety of stages in terms of changes r 21 that will take place in the organizational structure within 22 the industry. Most utilities have already established 23 strategic business units and the states are moving rapidly 24 to unbundle rates and separate rates out for the different 25 categories of the business.
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120 1 As we move forward with competition, it is likely -
2 that utilities will either separate their businesses into 3 separate subsidiaries within a holding company structure or, 4 ultimately, potentially sell or spin off some of their 5 assets.
6 If I could have the next slide, please? !
7 In terms of spinoff of the assets, we tend to 8 think that most utilities would continue to prefer either 9 functional unbundling or structured unbundling within a 10 holding company system. Nevertheless, market power concerns 11 are likely to drive utilities more toward disaggregation 12 and, ultimately, utilities may agree to sell or spin off j 13 assets in order to achieve unregulated status for their I 14 generation. We see a number of examples of this at this 15 point both in California, in New England and also in New 16 York with Niagara Mohawk.
-17 I think with that, .I am going to stop at this 18 stage and turn it back over to you, Chairman Jackson.
19 CHAIRMAN JACKSON: Thank you very much.
l 20 In fact, I will begin with a comment and then a 21 question to you, Mr. Asselstine.
22 As you are aware, the NRC does not see its role as 23 directing how the amount or components of stranded costs are 24 to be defined or recovered. In fact, we will stop talking 25 about it and spend our time talking about decommissioning ANN RILEY & ASSOCIATES, LTD.
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e o . o I 121 1 funding since that is our' issue.
2 But it is essential that we fully understand what I
3 decisions are being made in establishing those definitions i 4 and how they impact the availability of resources both for l 5 operation but especially for decommissioning of nuclear 6 power plants. And the concept of securitization as you have 7 outlined it rests on an economic regulatory structure that 8 ensures a stream of revenue from ratepayers.
9 Can you -- you focused a lot on California but can ;
10 you extract from what you said two or three key issues you 11 think have to be clearly addressed, either in state 12 legislatures, by state legislatures or orders from PUCs or .
13 others so that the revenue streams are, in fact, assured 14 that would back this approach?
15 MR. ASSELSTINE: Sure.
16 There are a few key ingredients that are really 17 necessary and I think our belief and this is true I think !
18 for most of the firms that are involved in the asset-backed 19 financing business, is that you really do need, in order to '
20 obtain the highest credit quality rating for these bonds, 21 AAA ratings, you really are going to need the statutory ;
l 22 underpinning to support these transactions.
23 The key legislative components that we are looking
! 24 for is the statutory creation of the ability to recover 25 stranded costs. Second, the authorization to impose a l l
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, t
122 1 nonbypassable and irrevocable charge so that once the bonds !
2 are issued, you really know that the revenues will be there l 3 until'the debt is fully repaid. Third, what is called a 4 true-up mechanism and that is a tool to ensure that as you 5 move through the term of the debt, you have the ongoing l 6: ability to adjust the size . of the charge to make sur ~ that 7 you continue to collect enough money so that all of the debt 8 is repaid. And a final provision is really a state covenant 9 that the state will agree both at the legislative level and 10 at the regulatory level not to do-anything to disrupt or 11 impair the revenue stream that would be used to recover the 12 cost of this financing. 4
)
13 Those are really the core elements. At the 14 legislative level, there are also a corollary set of 15 requirements that we would look for in terms of the j l
16 individual state commission orders that. implement the 17 legislation which basically track the same components.
18 If you have those elements, institutional :
19- investors who invest in the asset-backed market would look :
20 at this as a very stable and dependable asset class and they 21 would be willing to invest in these securities in the 22 amounts that are likely to be available. And as we look out I 23 over the next say three or four years, we see a potential 24 size for this market of on the order of $50- to $100 25 billion.
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+ , . .
123 1 CHAIRMAN JACKSON: You talked about the 2 establishment of a trust. Can you elaborate a little bit 3 more on the role that a trust plays in this financing 4 approach and, in your opinion, having been an NRC 5 commissioner, is this a critical factor in ensuring that 6 funds, particularly.for decommissioning, would be available l 7 when they are needed?
8 MR. ASSELSTINE: In terms of the asset-backed 9 financing, the trust is really a special entity, it is a :
1 10 special purpose vehicle which only exists to receive the 11 transition cost asset and to issue the debt and then collect i 12 the money and repay the debt. The objective here is to 13 ensure that it is bankruptcy remote, that nothing can be 14 done to impair the availability or access of those funds.
15 On decommissioning costs, I think the point that I 16 would make, I am actually quite encouraged. We are at an 17 early stage in developing the competitive frameworks through 18 many of the states but I am encouraged so far that state 19 regulators and legislators have really recognized that l 20 decommissioning is a safety issue, it is an obligation and a l 21 requirement that has to be met and there has been a pretty 22 clear willingness to impose the same kind of nonbypassable 1
23 and irrevocable charge to be paid by distribution customers 24 to meet ongoing decommissioning funding obligations over the 25 remaining operating life of the plant.
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. . . e 124 1 We have seen that in the statute in California, we 2 have seen the statutory authorization to the Pennsylvania 3 commission to deal with it and, although the Pennsylvania 4 commission hasn't acted at this point, I would expect that 5 they would follow the same path as in California and 6 recognize that this cost should be recovered along the same 7 lines as any other stranded cost. Perhaps this is a 8 separate item.
9 As long as the states continue to do that, that 10 ought to provide a fair amount of comfort to all of us, both 11 investors and to the Commission, that the decommissioning 12 funding requirements will continue to be met even if the 13 structure of the industry changes.
14 CHAIRMAN JACKSON: Can you just speak for a moment 15 in terms of what the financial impact you think would be, 16 the relative financial impact of the spinoff or sale of 17 assets as compared to a holding company?
18 MR. ASSELSTINE: That is a very interesting 19 question and I think all of us, both the utilities, those of 20 us who follow utilities from the financial side, the rating 21 agencies, are beginning to struggle with how do you evaluate 22 the individual pieces of the business as the utilities 23 restructure themselves. The next four or five years are 24 going to be a fairly interesting time in this industry and I 25 think, literally, you are going to see the shape of many ANN RILEY & ASSOCIATES, LTD.
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125 1 utilities change fairly significantly. f l
2 We have started to look at the individual 3 components. If you take the average vertically integrated 4 U.S. electric utility which has a single A credit quality ;
i 5 today, what you tend to see is a capital structure that is 6 roughly 50 percent equity, 50 percent debt, which reflects a blended business risk position for that consolidated entity.
7 8 We tend to believe and our informal conversations with the 9 rating agencies tend to confirm that if you looked at the i
10 distribution part of the business, the risk profile of that t 11 business is probably lower than the vertically integrated 12 utility. It will continue to be a regulated monopoly. In 13 all likelihood we are going to see performance-based .
14 ratemaking for that part of the business. So utilities will 15 have an incentive to lower their costs, they will be allowed 16 to keep at least a portion of any economic savings that they I 17 are able to achieve.
18 Given the lower business risk profile of the 19 distribution business, it ought to be possible to maintain 20 single A credit quality by increasing leverage, for example, 21 to say a debt-to-total-capitalization ratio of on the order 22 of 60 percent rather than 50 percent. You can also probably 23 operate that business with lower cash flow coverages or 24 earnings coverages.for your interest requirements than you ;
j 25 would normally see for a vertically integrated utility. !
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126 1
I think generation fa the flip side of the coin.
2 The generation business is likely to be a competitive 3 market-priced business.
If stranded cost recovery goes as t 4
we expect it to, at the end of the transition period we 5
should have most of the generation assets marked either at 6
market or very close to the market price that those asseEn 7
need to have to be able to compete effectively in the 8 marketplace. But it will be a competitive market, your 9
revenues will depend upon your ability to sell power at 10 competitive prices and therefore that business probably has '
11 a higher risk profile. I i
12 Our rough cut there is that you probably won't be i 13 i able to leverage that businesE as much as the vertically 14 integrated utility. Perhaps the right capitalization is a 15 40 percent debt to total cap of larger equity component for l l
16 that business and you may need higher cash coverages of 17 interest along the lines of other commodity-based kinds of 18 industries in the country.
i 19 If you begin to parse out nonnuclear and nuclear 20 generation, I think that the equation shifts even more 21 dramatically as you look to the nuclear units. Again, if we 22 get through stranded cost recovery, what you really are 23 focusing on in the nuclear units is an avoided cost issue, 24 how competitively can those plants operate, and I agree with 25 the comments that Linn and Joe made.
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127 l' Well run, larger nuclear units in this country i 2 should be able to compete very effectively. If you look at j 3 the top quartile performers in the industry, those plants !
l 4 can generate power taking into account fuel and O&M costs of )1 5 well below 2 cents per kilowatt hour. That is a very 6 competitive price, in my view, given where the market is I
7 likely to be in virtually any part of the country.
8 If you go down the performance scale and look at 9 plants in the lower quartile of the industry, I think there 10 may be a different story there and my suspicion is those 11 plants'are really going to have to move up more toward the 12 mid range or the higher portion of the industry if they are 13 going to be able to compete effectively on a long-term 14 basis.
15 You also have problems with smaller, single-unit i 16 sites like a Connecticut Yankee where I think even if it is 17 basically a sound plant, the economics may weigh against the [
18 plant on a variable cost basis. !
i 19 CHAIRMAN JACKSON: Well, one thing that seems to , !
i 20 come out of what you are saying, though, is the question of f 21 who or what kind of entity securitizes the stranded costs in 22 the sense that since you are basically talking debt 23 financing here, this whole issue of cash, higher or lower 24 cash covenants is part of -- coverages, rather, as part of i
25 some kind of covenants could be harder to securitize that r
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128 1 debt could be impacted, you are basically saying, by the 2 structure of the company?
3 MR. ASSELSTINE: Well, I think as long as you have 4 the statutory provisions you can deal with the stranded cost 5 problem regardless of the organizational structure of the 6 company. Where the organizational structure will really 7 come into play, I think, is on an ongoing basis what 8 financial capabilities will the company really need to 9 compete effectively and how do you factor that in also on 10 the generation side in terms of where they are going to have 11 to be able to produce power to be competitive with other 12 sources.
13 CHAIRMAN JACKSON: Okay, thank you.
14 I just have a quick question for Mr. Harris. In 15 your discussion of restoration procedures, you have specific !
16 protocols with respect to nuclear plants.
17 MR. HARRIS: Yes, ma'am, we do.
18 CHAIRMAN JACKSON: Could you just give a few words 19 to say something about that?
20 MR. HARRIS: Well, we have the protocols embodied 21 in our operating procedures in accordance with the NERC 22 protocols and guidelines. They have a high priority for 23 restoration.
24 CHAIRMAN JACKSON: Okay.
25 MR. HARRIS: In our emergency restoration where we ANN RILEY & ASSOCIATES, LTD.
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129 1 black out the grid, one of the things we look at is how 2 quickly can the units come back on. One of the things that 3 we are looking at and having discussions, for example, is if 4 you assume a total blackout how quickly, in an emergency 5 condition, can you get the plants back on line.
6 That hasn't been totally solved but, for PJM, for 7 example, in our drills, assuming they can come back readily 8 will make the difference in having the grid back on line 9 within 24 hours2.777778e-4 days <br />0.00667 hours <br />3.968254e-5 weeks <br />9.132e-6 months <br /> as opposed to five days. So this is 10 something that is continually looked at as we do these 11 drills and rehearsals. It is very important to us.
12 CHAIRMAN JACKSON: You talked about before the 13 fact, real time and after the fact communication and you 14 spoke about intra and interregional communication from an 15 after-the-fact point of view. Are there key elements from a 16 before-the-fact point of view in terms of interregional 17 communication as far as the interface with other regional 18 grids and issues of degradation of voltage on the grids? i 19 Are there some operating or governing protocols in that 20 area?
21 MR. HARRIS: Yes, ma'am. In the NEPOOL, PJM, New
,22 York Power Pool, Ontario Hydro, Hydro Quebec area, we have 23 protocols for us, Allegheny Power System and Virginia Power.
24 For years we have shared data. We have over 500 data points 25 that we share every 30 seconds that we share amongst ANN RILEY & ASSOCIATES, LTD.
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i 130 1 ourselves automatically that is folded into the analysis 2 that we do on the power grid. It is a very robust and 3 probably the most robust sharing of data in and amongst the 1 4 region in the whole of North America.
5 CHAIRMAN JACKSON: Do you see any of that as being "l 6 unnecessarily threatened by any of the competitive 7 pressures?
8 MR. HARRIS: No, ma'am, I do not. I see it being 9 enhanced, actually, with the advent of security centers i
10 which I think you were briefed on yesterday.
11 CHAIRMAN JACKSON: Okay. Commissioner Rogers?
12 COMMISSIONER ROGERS: Well, we have heard so much 13 today that I think we are pretty well saturated. l 14 I just want to make a remark for Mr. Colvin and l
15 that is I think some of his observations are very 16 interesting but I think they need to be more explicit and 17 today at this time is not the time to do that. But I think 18 when you are talking about the need for more efficient 19 safety-related regulation, then I think it is important for 20 you as a representative of the industry to be more explicit, 21 exactly what you are talking about, because I firmly believe 22 that no changes of any sort are going to come about unless 23 there is a very clear identification of exactly what you are 24 talking about and why. But I wouldn't expect an answer to 25 that right now.
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- e o e 131 1 CHAIRMAN JACKSON: Right. '
2 MR. COLVIN: All right, I understand.
3 [ Laughter.] .
4 CHAIRMAN JACKSON: Right.
5 Commissioner Dicus.
6 COMMISSIONER DICUS: But some day.
7 A question, two real quick ones, I think, to 8 Mr. Harris. I think I heard you say this, I'm not sure, but l t
9 you believe in mandatory membership in NERC?
10 MR. HARRIS: We think that that is a wise goal.
11 We do not know whether it is achievable when you have full 12 generation competition, people can choose their directions.
13 What we do believe in, however, is the contractual l 14 conditions to do business in our pool contractually 15 obligates you to obey the rules of NERC and MAAC, the 16 regional council we are in, and the directions of the ;
17 control center.
18 By having a contractual relationship that captures ]
19 that, we think we can cover that gap. It would be laudable !
20 if we get to that point but I don't know if in the full 21 generation context you can without some sort of legislative 22 mandate, 23 COMMISSIONER DICUS: That was my follow-up 24 question If it isn't done by contract, then do you think 25 it has to be done by legislation? l l
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e . . e 132 1 MR. HARRIS: Yes, ma'am.
2 CHAIRMAN JACKSON: Commissioner Diaz.
3 COMMISSIONER DIAZ: I have three small questions 4 and maybe some comments.
5 I listened to Mr. Colvin and it follows up on the 6 comments by Commissioner Rogers that I wrote in here, the 7 industry is requiring a defined, stable, safety-focused 8 regulatory infrastructure and you need that for an 9 undefined, deregulated electric marketplace. It seems to be 10 a very tough issue.
11 And then, you know, reasserting what Chairman 12 Jackson, Commissioner Dicus said, I think this coming years, 13 maybe starting now, the value of frequent in-depth 14 communications and advanced probing of this area will be 15 very necessary because we realize that the industry needs 16 some framework but the situation is continuously changing.
17 I think that will require maybe an added incentive for us to 18 be very aware of what your concerns are and those need to be 19 very well stated.
20 If you want to comment to that, fine.
21 MR. COLVIN: Commissioner Diaz, if I might provide 22 one example, to leave the Commission with a concept of what 23 we are discussing, and I might use the discussion that we 24 have had on grid stability and grid reliability over the 25 past seems probably like days to the participants.
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e . > e 133 1 But if we tie that to the issue of station 2 blackout, I think that this is an issue which the Commission 3 is rightly looking at and needs to look at and assure itself 4 that the safety from the grid reliability standpoint is, in 5 fact, assured.
6 At the same time, however, if you look at the 7 process by which we implemented the safety requirements, the 8 implementation of the station blackout rule, there is a !
9 basis, a safety basis which is based upon risk and if you 10 just take a simple look at that and its assumptions, as 11 decided by the rule, you can quickly come to the conclusion 12 that we would have to have more than 50 grid disturbance ,
13 events in a year to be even starting to penetrate the basis 14 under which that regulation was implemented by the i 15 Commission. And you will recall that grid disturbance is 16 only one small portion of the real concern about initiating 17 events, the loss of off-site power. The main disturbance 18 and concern is from a loss of off-site power initiation 19 event is a plant-centered event. So that is the largest 20 portion. '
21 So we are really looking -- I think there are many i 22 indicators that we have here to look at where we have in the !
23 past envelope.from a safety basis the real risk to public 24 health and safety. The Commission dealt with that l 25 appropriately, the industry dealt with that appropriately, i
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- 134 1
the Commission monitored that activity and, unless there is 2
a significant change that goes outside, puts us outside the 3
envelope under which that safety case was made, then there 4
is no reason to go through and review that safety case and 5 reevalaa:e and reanalyze that.
6
<. So I just encourage the Commission from a process 4 7 :
standpoint, I think you have in that situation we have the !
8 ability to determine today that we are in full compliance l 9 with the Commission's safety risk and would do so for some 10 time to come unless grid reliability got to a very 11 significant point of where it was unreliable. I think you 12 have heard the discussions from Mr. Harris and others today I 13 to that we are putting in a lot of steps to ensure that 14 doesn't occur.
15 So I was somewhat disappointed in yesterday's 16 discussion of that, that that question was not addressed i l
17 fairly quickly and fairly easily because, in fact, it is a 18 fairly simple matter _to look at the bounding conditions as 19 an industry on what the safety case is.
20 So it is from the process standpoint and if that 21 process now entails each licensee to go reevaluate and 22 reanalyze, I think that is an area where the licensee's 23 resources as well as the Commission's is not well focused 24 because the safety,is -- it is easy to determine that that 25 is assured. So it is in that context that my comments ANN RILEY & ASSOCIATES, LTD.
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135 1 should be taken.
2 COMMISSIONER DIAZ: Thank you.
3 The second point was on the Atomic Energy Act. I 4 think we realize that foreign ownership is really becoming ;
5 an issue and I think that the fuel cycle market is going to 6 become an issue on that and that is another aspect that we 7 are going to really need to look at because it is not only P
8 uranium now; it is uranium and plutonium and it is i
9 enrichment abroad and it becomes an issue that I think the i i
10 industry needs to bring if they are going to be going into 11 that area so we can get an early look at it.
i 12 To accelerate, you talk about grid reliability and 13 I had a comment and maybe a question for Mr. Asselstine. !
14 When we wrote, you know, the Atomic Energy Act and the !
15 Commission got charged with maintaining national security, 16 it actually meant something. It meant that we were going to 17 control special nuclear materials, that we were going to 18 make sure that technologies that were critical to the 19 proliferation insues were controlled and all those kinds of f
20 things that were clearly identified. !
21 Now, you know, we are shifting into an area which ;
22 practically national security is established also in terms 23 of grid reliability and the economics of the country. In -
i 24 that sense, you know, the issue of base plants and nuclear 25 power plants become like a stationary component that has ANN RILEY & ASSOCIATES, LTD. I Court Reporters l 1250 I Street, N.W., Suite 300 -
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e . , e 136 1 additional importance in determining what national security is as far as economics and grid reliability.
2 l
3 Have you dealt with this issue in any way that 4 identifies what a clear contribution of nuclear power plants 5 is in this area?
r 6 MR. ASSELSTINE: I think to some extent. I think 7 my reaction would be certainly if you look at the number of 8 units.that we have and the role that those units. play as 9 base load generating units, they are a pretty essential ,
10 component of the system, now and in all likelihood going to l
11 have to continue to be for the most part under a competitive l 12 system.
13 That is partly why I am encouraged by the :
14 information, at least, that we have available to us that if 15 you have well run plants, those plants should.be competitive 16 on a long-term basis under virtually any scenario and, at 17 this stage at least, our own assessment is that relatively 18 few plants should really be vulnerable to early shutdown if 1
19 they are able to achieve the kind of performance levels that j 20 are being achieved by the stronger performers within the i 21 industry and you shouldn't see large-scale or at least the 22 risk of large-scale shutdowns of the units simply due to )
l 23 competition.
24 Again, if you break the pieces down, if 25 decommissioning costs are dealt with as a separate matter, ANN RILEY & ASSOCIATES, LTD.
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9 9 e 6 137 1 if you deal with stranded cost recovery so that you get the 2 capital investment in the plant down to a reasonable level 3 relatively quickly,.then you are left with a variable cost 4 analysis. If you run the plants well, they should be 5 competitive on a variable cost basis going forward. If they 6 aren't, then those plants are likely to be as vulnerable or 7 more vulnerable in a truly competitive marketplace.
8 I spoke at another meeting a week or so ago 9 looking at the economic effects on nuclear issues and one of 10 the points that I made was if you begin to separate nuclear 11 out as part of your generation, you need to focus not only 12 on decommissioning costs but also on what happens if you 13 have an extended shutdown of the unit.
14 Somebody in the audience said, basically, you 15 really don't have to worry about that because in a truly 16 competitive marketplace if you have a nuclear generating 17 company and the unit is down for two years, you know what 18 the answer is going to be. That unit won't resume 19 operation.
20 So, if anything, the competitive pressures, I 21 think, are going to put more emphasis on the challenge of 22 running plants well and efficiently and the strong 23 performers are going to be the ultimate survivors.
24 COMMISSIONER DIAZ: Thank you.
I 25 CHAIRMAN JACKSON: Commissioner McGaffigan?
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- . e o 138 1 COMMISSIONER McGAFFIGAN: I hate to do this but 2 just three quick questions and I think the answers can be 3 answered quickly.
4 You talked, Mr. Draper, about the need for 5 flexibility in repositioning nuclear assets. You heard the 6 staff earlier say that they are going to basically look at 7 those issues on a case-by-case basis. And if you are 8 looking for flexibility, maybe we have to be case by case.
9 How do we square what you are saying and what the 10 staff said earlier?
11 DR. DRAPER: I am not sure they are inconsistent.
12 It seems to me that we don't want undue delay" "a don't 13 want artificial constraints on the way the organizations can 14 be configured as we go forward because one thing we do know 15 is as we go forward people will wish to array their assets 16 in quite different ways from the way they are now.
17 So it seems to me that case by case is fine as-18 long as it is done expeditiously and there are no artificial 19 constraints.
20 COMMISSIONER McGAFFIGAN: And that gets to 21 Mr. Colvin's point about the expeditious nature of the 22 licens.ing board processes. But how do we give the licensing ]
23 board, if we don't have reg' guides, you know, some template 24 that says, this is.okay? How do we give them some way to I i
25 judge when something comes in?
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- 139 i
- 1 MR. COLVIN
- Well, I think we'need, and let me j 2 follow up on your question if I might. I think we need to 3 3 look at some templates or some models and we have done that
- 4 in part with the staff to date to look at some of those. We b +
- 5 have identified a lot of other questions that came up. 'I 6 mean, the whole issue of ISO and its nexus to safety and 7 grid reliability came out of one of those earlier j 8 discussions so I thought that was very healthy, so we are
- 9 going to work with the staff.
- 10 I think from, just following up on Linn's comment,
,. 11 if you think about the various arrays and the combinations '
f 12 and permutations that you can have, it seems to me the way I 13 we've got to start that is not trying to identify all of '
l l 14 those but to try to identify some bounding conditions. What :
i j 15 are the major factors that are important to the NRC from its '
16 safety perspective that relate to the financial ability of l 17 the utility to operate within the financial constraints that 18 ensure its safety? If we could identify those in a fairly '
19 direct way, I think they are somewhat, and at least in the 20 industry's view, somewhat mushy is probably the best way to 21 talk about it.
22 I mean, they are up there in the eye of the 23 beholder and I think we ought to figure out a way to work 24 together to have the dialogue in this type of forum or
?
25 whatever forum is appropriate to more crisply define those !
i i
i ANN RILEY & ASSOCIATES, LTD. I Court Reporters 1250 I Street, N.W., Suite 300 Washington, D.C. 20005 l (202).842-0034 l
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140 1 and do those from the safety perspective.
2 COMMISSIONER McGAFFIGAN: A second question that 3 we have avoided today and I will just ask you.
4 Decommissioning costs we treat as if we know what they are 5 and we have now gone through some decommissionings and as I 6 understand it we have been surprised on the up side as to 7 what the actual costs are. I think at the moment, people 8 just lay aside whatever money we have said might be needed 9 without even a final rule on decommissioning, which we are 10 simultaneously working on.
11 If this is the last chance to get decommissioning 12 costs treated as stranded costs, is anybody looking at 13 whether the numbers are right at the moment? Any of you can 14 answer that.
15 MR. COLVIN: Let me take a crack at that. We have i i
16 worked hard on that issue with the Commission to try to l
17 define that. Mainly, the uncertainties in the 18 decommissioning costs come primarily from uncertainties in 19 low-level waste disposal cost. And given our failure from a 20 national policy perspective to cite low-level waste 21 compacts, then it is all a very interrelated problem.
22 I will say that there are some good methods that 23 are out there and to come up with the best estimates that 24 are available today and then bound those from an uncertainty 25 about the cost of low-level waste disposal. So I think we ANN RILEY & ASSOCIATES, LTD.
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141 1 can get there, here from there. I think that there are 2 discussions in those areas about periodically truing up, I 3 think was the word that Mr. Asselstine used to true up those 4 features. Through that process, we will have to make the 5 appropriate adjustments.
6 'It is a true health and safety issue. It is an 7 issue which I think all parties agree needs to be dealt with r 8 through nonbypassable or overall charges, wire charges. We r
9 just need to figure out the mechanism to deal with that. So 10 I am confident that we can do that.
11 COMMISSIONER McGAFFIGAN: My last question is more e l
12 a comment. I took during Commissioner Rogers' noting 13 Mr. Colvin's statements about need to align our regulatory l
14 framework to safety and the future, and I think it goes to ,
15 sort of a fundamental issue, if these folks are going to be 16 in a competitive environment, they are going to have to be ,
17 agile. That is what all the Microsofts and the successful ,
18 American corporations have to be agile.
19 In the past, we had a ponderous industry dealing >
20 with a ponderous regulator and I think there is sort of a 21 challenge to us to figure out how to be a more agile )
22 regulator while they are trying to be more. agile companies l 23 while also preserving safety. So there is a real 24 fundamental issue there but we don't have time today to talk 25 about it, I don't think.
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. . , e 142 1 I'll leave it at that.
2 CHAIRMAN JACKSON: Well, picking up on that, I !
3 would like to thank the NRC staff and members of the two 4 panels representing regulators and the various industr- l l
5 sectors for taking the time to come today to brief tnc I 6 Commission on the developments in the electric utility '
7 restructuring.
8 The Commission will continue to gather information 9 about developments in this area and interact with the 10 various sectors to be able to adequately address safety 11 concerns that might arise as a result of any of_the issues.
12 I concur with. Commissioner McGaffigan's comments and my only 13 parenthetical remark is that presumably we are on that path.
14 It may not be fast enough for everybody and it may not l 15 cover everybody's issues all the time. So if we are not on 16 that path, it is our fault.
17 So I would like to think that the actions that are 18 already under way, some completed, as well as the meetings 19 like the ones we have had today and the one on grid 20 reliability contribute to both a comprehensive and a 21 cohesive understanding of the evolving environment which 1 22 should allow us to respond effectively and in a timely 23 manner to carrying out our public health and safety mission.
24 So we do.welcome your input and thank you again 25 and so that we all can continue to enjoy the benefit of a ANN RILEY & ASSOCIATES, LTD.
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143 1 safely operated, soundly and fairly regulated nuclear 2 generated electricity along with the economic benefits of 3 deregulation. I think we have gotten some good input that 4 our staff should fold into any proposed rulemakings or any 5 other initiatives that are ur. der way.
6 So unless.my fellow commissioners have any closing 7 comments, we are adjourned.
8 [Whereupon, at 12:18 p.m., the briefing was 9 concluded.]
10 11 12 13 14 15 i
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CERTIFICATE This is to certify that the attached description of a meeting of the U.S. Nuclear Regulatory Commission entitled:
TITLE OF MEETING: BRIEFING ON ELECTRIC UTILITY RESTRUCTURING - PUBLIC MEETING Rockville, Maryland !
PLACE OF MEETING:
DATE OF MEETING: Thursday, April 24, 1997 i
was held as herein appears, is a true and accurate record of the meeting, and that this is the original transcript thereof. J taken stenographically by me, thereafter reduced to r typewriting by me or under the direction of the court ,
reporting company i i
Transcriber: /' Jut u mp ,hf t.[7u fc h id Reporter:
Jon Hundley
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1 INDUSTRY RESTRUCTURING lSSUES i Remarks By E. Linn Draper, Jr. )
Chairman, President and Chief Executive Officer American Electric Power Service Corp.
To the Nuclear Regulatory Commission 1
Washington, D.C. 1 April 24,1997 l
4 Thank you Chairman Jackson ... members of the Commission ... we appreciate !
l l the opportunity to take part in this session on restructuring of the electric ;
- i power industry, j l
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I am particularly pleased to be here this morning because i participated in the first l of these commission briefings on restructuring in December 1995, as the l
Chairman may remember.
j In terms of regulatory actions, the starting point is the NRC's Action Plan and ,
initial draft proposals to position the NRC for the restructuring of the electric power business.
The draft policy statement, the advance notice of proposed rulemaking on l 1
decommissioning, and the draft standard review plans published last year l surfaced some of the NRC's major concerns, and allowed the industry to provide its perspective on these issues.
I am here today representing a cross-section of the electric power industry; as a member of the Nuclear Energy Institute's Executive Committee and, since last June, as chairman of the Edison Electric Institute.
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I will address the electric utility industry's policy objectives as restructuring proceeds, and outline the more specific goals and objectives established by the nuclear power industry. Joe Colvin will then discuss some of the more significant nuclear regulatory issues.
I think it's fair to say that restructuring of the electric power industry is proceeding at the federal level- and more quickly at the state level- than many people expected even a year ago.
At the federal level, I believe the 105th Congress and the Administration are beginning to recognize that we must approach electricity deregulation and restructuring carefully and deliberately, because the economic and social costs of mistakes are very high. The nationalinterest demands that we get it right.
We must ensure that all consumers of electricity -large and small- will benefit from restructuring, in terms of cost, service and reliability.
We must ensure that the transition to competition recognizes past regulatory commitments by providing for the recovery of, legitimate stranded commitments through the Federal Energy Regulatory Commission and the states.
For policy-makers, the first step is to establish broad areas of responsibility -
what decisions should be made at the federal level, what authority should be reserved to the states, and what determinations should be left to the market.
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3 We believe the federal government should articulate general principles and guidance, and address those issues that only the federal government can ;
address - such as possible amendments to the Atomic Energy Act and repeal of the Public Utility Holding Company Act and sections of the Public Utilities Regulatory Policy Act, which are major impediments to competition.
Recognizing that states have differing circumstances, we continue to think the majority of issues are best handled at the state level.
And we believe that some issues - corporate structure, for example - should be left to the market. Government-imposed divestiture, could impede the development of an efficient, competitive market and, thus, should be avoided. ,
1 Turning to the state level, based on what we have seen in states like California ,
and Pennsylvania which have significant nuclear capacity, we are generally encouraged by the responsible manner in which state government officials - ,
regulators, legislators and governors - are approaching restructuring, i We are particularly encouraged by the explicit recognition in both California and Pennsylvania that nuclear power plant decommissioning is a public health and safety imperative, and that decommissioning funding must be assured.
We recognize that decommissioning funding assurance is one of the NRC's >
major concerns, and rightly so. And we believe the NRC can, and should, take consicierable comfort from the way states have handled this issue so far.
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i Let me assure you that the nuclear industry also regards decommissioning as a national public health and safety imperative, and considers assurance of '
decommissioning funding as one of our highest priorities.
l Let me turn now to the nuclear industry's major goal as restructuring proceeds .
[slida 1] and the objectives we have formulated to enable achievement of that ,
goal.
l Our goals are very simple: (slide 2) to maintain excellence of safety performance and ensure that nuclear power plants are not placed at a competitive disadvantage as restructuring of the electric power industry proceeds.
To reach these goals, the industry has established four specific objectives.
These are not in rank order. All are equally important.
First. (slide 3) we must provide the industry with maxi. mum possible certainty and l clarity about future nuclear regulatory requirements as companies consider l restructuring options - including consolidation of nuclear operations, ownership transfers, and the like.
Second, (slide 4) we want to ensure that companies have maximum possible l flexibility to reposition their nuclear generating assets, without subjecting those nuclear units to unnecessary economic penalties or financial stress.
Obviously, NRC regulations and requirements - particularly in the area of financial assurances - will play a major role here.-
.'. , .. 3 Third, (slide 5) in federal or state legislation, the industry believes that nuclear utilities should have a reasonable opportunity to recover stranded costs, including unrecovered capital and unfunded decommissioning obligations.
Finally, (slide 6) we believe it is appropriate to undertake a critical examination of certain provisions of the Atomic Energy Act to determine whether the conditions that justified those provisions still prevail. If conditions have
' changed, then we believe the Atomic Energy Act should be clarified or j amended.
t Joe Colvin will cover several specific nuclear regulatory issues { Slide 7}.
NRC requirements and regulations are one of the critical factors that will influence - ,
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the nuclear industry's business decisions going forward; including the degree of flexibility available to licensees as they consider how best to position their l nuclear power plants for a competitive environment.
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l One of the major tasks as we move forward will be to define those issues and areas which involve nuclear safety and thus are within NRC's purview, and ;
those critical issues that fall outside the NRC's statutory mandate.
Recovery of stranded commitments is a criticalissue that falls outside the NRC's statutory mandate. Various NRC officials have expressed concern recently ]
about recovery of stranded commitments.
Although recovery of stranded commitments is one of the industry's major issues, and although we would welcome NRC's support for the general principle that companies should be allowed a reasonable opportunity to recover, legitimate,
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and verifiable stranded commitments, we do not believe recovery of stranded commitments is a legitimate NRC safety issue.
Recovery of stranded commitments involves whether or not a company will be able to meet its tiduciary obligations to its shareholders and bondholders. It is entirely separate from operating economics, which will determine whether a nuclear power plant - or any power plant - will continue to operate. j e
We believe the public interest is best-served if the NRC focuses on results, on answering the key question: What are we trying to achieve? !
The answer, we would assume, is "to continue to ensure adequate protection of public health and safety". $
So how do we separate the success path for this objective? The NRC might have started this process by articulating the issues on its mind regarding )
nuclear power plants operating in a restructured, competitive market.
l Now, the NRC must engage the industry in a substantive discussion about whether or not those issues are important, then develop practical mechanisms and techniques to address the important issues.
Let me now turn the microphone over to Joe Colvin, NEl's president and CEO, for the second half of our presentation, after which we will be happy to answer your questions.
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Industry Restructuring SSueS Remarks By E. Linn Draper, Jr.
l Chairman, President and Chief Executive Officer American Electric Power Corp.
i Slide 1
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l Nuclear Industry Goal l
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\ Maintain excellence in
\ safetyperformance, and l ensure that nuclearpowerplants s
! are notplaced at a competitive j disadvantage as restructuring of the electric power industryproceeds. .
- Slide 2 .
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Industry Restructuring Objectives i = Provide the industry with maximum l possible certainty and clarity about future j nuclear regulatory requirements as companies consider restructuring options-- ,
I including consolidation of nuclear j operations and ownership transfers.
Slide 3 i
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l Industry Restructuring l
Objectives I
3., . 7 g .: ,.,o, r j ., .
= Ensure that companies have maximum possible flexibility to reposition their l nuclear generating assets, without l subjecting those nuclear units to unnecessary economic penalities or j financial stress.
1 Slide 4 -
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! Industry Restructuring Objectives i
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= Ensure that nuclear utilities have a reasonable opportunity to recover stranded costs, including unrecovered capital and unfunded decommissioning. obligations.
Slide 5
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Industry Restructuring l
Objectives j - 4 kn reunourt a p4in m"n o
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l = Undertake a critical examination of certain i provisions of the Atomic Energy Act to
!. determine whether the conditions that justified those provisions still prevail.
Slide 6 .
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Industry Restructuring l
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Objectives l
l = Clear regulatory requirements
= Flexibility l = Recovery of stranded costs
= Review of Atomic Energy Act l
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I Slide 7
PRESENTATION OUTLINE e NRC RESTRUCTURING ACCOMPLISHMENTS e NRC REVIEW OF LICENSEE RESTRUCTURING e EMERGING ISSUES e ISSUES TO BE RESOLVED e
SUMMARY
& CONCLUSIONS I
NRC RESTRUCTURING ACCOMPLISHMENTS :
- ACTION PLAN ISSUED IN FEBRUARY 1996.
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- ADVANCE NOTICE OF PROPOSED RULEMAKING (ANPR) ON DECOMMISSIONING FUNDING ASSURANCE.
- ADMINISTRATIVE LETTERS. '
- DRAFT POLICY STATEMENT PUBLISHED SEPTEMBER 23,1996.
FINAL POLICY STATEMENT UNDER STAFF REVIEW.
- DRAFT STANDARD REVIEW PLANS (SRPs) NOTICED FOR PUBLIC COMMENT IN FEDERAL REGISTER ON DECEMBER 27,1996.
- STAFF-LEVEL LIAISON ACTIVITIES WITH STATE AND FEDERAL RATE REGULATORS.
- OTHER -- FINANCIAL ACCOUNTING STANDARDS BOARD (FASB)
- INITIATIVE & s 50.80 PROCESS REVIEW.
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NRC REVIEW OF LICENSEE RESTRUCTURING '
e SRPs HAVE DEFINED / SUMMARIZED CURRENT REVIEW PROCESS.
e NRC REVIEWS ALL RESTRUCTURING PROPOSALS UNDER s 50.80 REQUIREMENTS.
e NRC ENSURES THAT RESULTING LICENSEE REMAINS AN
" ELECTRIC UTILITY" OR COMPLIES WITH ADDITIONAL REQUIREMENTS FOR NON-ELECTRIC UTILITIES.
e FOR HOLDING COMPANIES, STAFF CONTINUES TO OBTAIN COMMITMENTS TO INFORM THE NRC WHEN SIGNIFICANT ASSETS WILL BE MOVED FROM A LICENSEE TO A PARENT OR AFFILIATE.
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EMERGING ISSUES e GRID RELIABILITY /ISOs.
e UNIQUE OWNERSHIP AND OPERATOR ARRANGEMENTS.
e ANTITRUST.
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e STATE APPROACHES TO SECURE ADEQUATE REVENUE STREAMS FOR DECOMMISSIONING.
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O ISSUES TO BE ADDRESSED e MODIFICATION TO s 50.80 REVIEW PROCESS AND OTHER REVISIONS TO FINANCIAL QUALIFICATIONS FRAMEWORK.
e BALANCING INDUSTRY REQUEST FOR DEFINED NRC POSITION ON ADEQUACY OF FINANCIAL ASSURANCE WITH UNCERTAINTY AND VARIETY OF CURRENT AND FUTURE STATE APPROACHES.
e ACCEPTABILITY OF LEVEL OF DECOMMISSIONING FUNDING ASSURANCE PROVIDED BY SOME STATE RESTRUCTURING APPROACHES.
e AVAILABILITY OF FUNDING ASSURANCE MECHANISMS TO NON-ELECTRIC UTILITIES.
j e EVALUATION OF NEED FOR FEDERAL LEGISLATION.
e FOREIGN DOMINATION AND CONTROL -- PROHIBITION IN ATOMIC ENERGY ACT.
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SUMMARY
& CONCLUSIONS
- ALTHOUGH DEREGULATION APPEARS TO BE ACCELERATING OVERALL, SEVERAL STATES WITH NUCLEAR PLANTS HAVE NOT YET INITIATED EXTENSIVE DEREGULATION INITIATIVES.
- THE NRC HAS INITIATED A SERIES OF ACTIONS THAT, TOGETHER WITH ITS CURRENT REGULATORY FRAMEWORK, SHOULD PROVIDE ADEQUATE ASSURANCE OF FUNDING OF OPERATIONS AND DECOMMISSIONING OF POWER REACTORS.
- THE NRC WILL CONTINUE TO EVALUATE ITS LICENSEES IN THE CONTEXT OF EACH STATE'S DEREGULATION POLICIES AND PROGRAMS TO DETERMINE WHETHER THEY PROVIDE ADEQUATE FUNDING FOR OPERATIONS AND DECOMMISSIONING.
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- l WRITTEN STATEMENT OF THE NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS BEFORE THE NUCLEAR REGULATORY COMMISSION BRIEFING ON ELECTRIC UTILITY RESTRUCTURING L
~ APRIL 24,1997 l The National Association of Regulatory Utility Commissioners (NARUC) is pleased to l
submit this written statement to support the oral statements to be presented by three of its l
l members: Commissioner Bruce B. Ellsworth of New Hampshire, NARUC President,
! Commissioner Robert W. Gee of Texas, Chair of NARUC's Committee on Electricity, and Commissioner Emmit George of Iowa, Chair of NARUC's Subcommittee on Nuclear Issues.
We respectfully request that the NARUC's written statement be included in the Nuclear Regulatory Commission's record of the Briefing.
The NARUC is a quasi-governmental nonprofit organization founded in 1889. Within its membership are the govemmental bodies of the fifty States engaged in the economic and safety regulation of carriers and utilities. The mission of the NARUC is to serve the public interest by seeking to improve the quality and effectiveness of public regulation in America.
More specifically, the NARUC is comprised of those State officials charged with the duty of regulating the retail rates and services of electric, gas, water and telephone utilities operating I
l within their respective jurisdictions. We have the obligation under State law to assure the establishment and maintenance of such energy utility services as may be required by the l
public convenience and necessity, and to ensure that such services are provided at rates and conditions which are just, reasonable and nondiscriminatory for all consumers.
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1 2 The Association greatly appreciates the opportunity to submit this statement in conjunction with the NRC's Briefing on Electric Utility Restructuring. The NARUC j recognizes the compelling need for the economic regulators within its membership to work i
closely with the Commission and its staff during this time of unprecedented change in the
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electric utility industry. We applaud the Commission for seeking to understand the critical l role that State commissions are playing in the transition to a more competitive electric
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utility industty. For its part, the NARUC again pledges to cooperate fully with the NRC i
1 j as it reviews its responsibility to ensure the safe operation of the nation's nuclear generating capacity in the new economic environment.
i j The States' Historical Role in Changes to Utility Regulations 2
The Association has a unique perspective to bring to the Commission's Briefing ,
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! inasmuch as the existing structure of the investor-owned electric utility industry is
! predominantly a creature of State economic regulation. Historically, the industry was one of l the three basic " natural monopolies" (along with telephony and natural gas delivery) which i was the product of decisions made in almost every State to certificate a single company to provide service to all retail customers in an exclusively franchised service territory. In 1 i exchange for the insulation from competition that this exclusivity provided, electric utilities
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l were subjected to a regulatory regime which limited their profits and earnings to levels found j just and reasonable by their regulators. Until 1992, this system of regulated monopoly service providers was left unchanged because it was viewed as the most economically efficient means 1
of providing essential services to retail consumers at reasonable rate levels. The result has L
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3 been to produce the most economical electricity rates among those Westem industrialized nations not heavily dependent on hydropower sources of energy.
J Times and fashions change, of course, and now the electric utility industry is the last of the three to undergo a transformation from monopoly franchise to market participant, and !
I like the transformation of those industries, States are again leading the charge to restructure l retail electric markets. Indeed, while the idea of injecting market forces into regulated industries began to be debated in universities and think tanks, actual tests of such theoretical debates began in various States -- first in the formerly regulated transportation industries (notably airlines and motor carders) and then the fixed utilities, beginning with natural gas wellhead pricing in the producer S tates, then telephony, and now electricity. In each case, the States performed their critical duty to act as laboratories to test theories and new practices to determine how the forces of competition could be brought to bear to improve rates and services to customers while maintaining the important principles of reliability, safety, and environmental sensitivity that the prior regulatory model had fostered.
What's Happening Today in the States And the testing of theory and practice continues apace. Last year, NARUC's President testified before the Congress on the state of the States, and reported then that one State commission (California) had authored a comprehensive restructuring program while another (New Hampshire) had begun a pilot program to test the application of an unbundled retail electric system on a limited basis. Today, ten States have had either laws adopted or their State commis.sions propose comprehensive refonns to their retail electric utility structures
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l aimed at promoting greater competition by offering customers a choice of suppliers. Many other State commissions have made restructuring recommendations to their respective State legislatures. All but one of the fifty States, either through their regulatory commissions, 1 i legislatures or both, are considering or implementing policies to provide greater competitive I
options for retail electric consumers. I Some have argued that this level of activity is too slow, others too fast. Regardless, it is apparent that the pace of change has quickened: Nine of the ten States that are.far down the path to opening their local markets to competition have chosen to do so only in the last l
nine months, and customers residing in these States represent over one-third of the nation's population. Stated another way: More than one-third of the nation's population live in States i that have chosen within the last year to move to open-access, customer choice markets.
Moreover, given the level of activity in the many of the remaining States, it is not at all l
implausible to expect that very soon (by 2000), the majority of utility customers will have the l ability to choose competitive power suppliers, that is, to buy power generated by someone other than the distribution utility that provides the delivery service.
- Despite this level of activity, however, it is important to recognize that State l
commissions and legislatures are acting with great care and precision to ensure the reliability of retail electric services and the universality of both services and benefits resulting from j restructured markets. The States' intentions, and the NARUC's hope, is that we all can leam from these and other initiatives about what works and what does not in a controlled environment without causing collateral damage to the broader consuming public through the fine tuning and re-engineering of State-level implementation plans that is sure to occur.
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Status of State Initiatives Against this general background, we can provide the Commission more specific information on the activities transpiring in the various States as it relates to restructuring the industry, as well as NARUC's views of these restructuring efforts.
States on the leading edge of restructuring include Arizona, California, Maine, Massachusetts, New Jersey, New Hampshire, New York, Pennsylvania, Rhode Island, and Vermont. Three States -- California, Pennsylvania and Rhode Island -- recently encted into law, and are currently implementing, electric restructuring plans. Last year, the State of New Hampshire began its phased implementation of customer choice programs through its limited pilot program. A Final Order by the New Hampshire Public Utilities Commission laying out a complete restructuring program was issued on February 28 as directed by its State legislature. Other State commissions, like those in Arizona, Massachusetts, and Vermont, have proposed comprehensive retail market restructuring programs. Still others, like Maine, Texas and New Jersey, have forwarded restructuring recommendations to their respective legislatures for consideration. Various State legislatures, like those in Colorado, Connecticut, Montana and Oregon, are considering restmeturing legislation that most often have included State commission or Governor recommendations. Attached hereto is a " scorecard" prepared by our affiliated research arm -- the National Regulatory Research Institute -- which shows the status of State restructuring activities through the end of March.
Other States have decided either not to move forward with plans to restructure local markets, or to move at a slower pace. These States, whose customers generally benefit from low-cost power supplies, are genuinely concerned about the possibility that their inexpensive I
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power supplies will be sold elsewhere in an unbundled, competitive environment, causing their local customers to pay more for power than now purchased through the existing cost-based regulatory system.
Within the contest of restructuring initiatives, while many of the initiatives being implemented or contemplated take various forms and are at various stages, those approved address important issues in very similar ways and are to be completed in relatively similar timeframes. For instance, some of the issues States have contemplated or addressed in their restructuring plans are customer choice through retail wheeling; rate reform through the adoption of performance-based ratemaking structures and economic development rates; elimination of exclusive retail service territories; recovery of stranded costs; and the continued l provision of public purpose programs.
More specifically, we are now able to discern the following trends in State legislative L
and regulatory initiatives:
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Stranded Costs The first trend States are addressing relates to recovery of utilities' prudently incurred, verifiable, non-mitigatable costs left uneconomic due to new, competitive pressures. Since the vast majority of these costs are scheduled to be recovered in retail rates, this issue has landed -- and rightly so -- in the laps of State commissioners who are in the process of developing policies that reduce the size of the stranded cost problem and fairly allocate the costs that will not be recoverable in the competitive market.
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7 in looking at the stranded cost problem, we need to keep in mind a few important factors. First, not all utilities are threatened by the competitive market. Many utilities, including utilities owning nuclear plants, are reiatively low-cost producers capable of facing competitive alternatives. Second, if State commissions are allowed to continue to set the pace of restmeturing, utilities can be provided time to reduce the level of costs that are strandable before competitive forces begin to dictate the market's operation. Finally, in order to address exactly who pays for stranded costs, State commissions are now in the process of developing cost recovery mechanisms, such as nonbypassable, competitively neutral wires charges and exit fees that are adapted to local market conditions and past regulatory decisions.
At this point is important to note that the States have been particularly sensitive to one category of costs that nuclear utilities confront - the cost of decommissioning. The NARUC believes that based upon the decisions thus far made, the States can be expected to ensure that decommissioning expenses are funded. In this regard, we note that in their respective restructuring policies, both Califomia and Pennsylvania specifically addressed decommissioning funding as part of the Competitive Transition Charge (CTC). This policy will ensure that all customer classes support this necessary cost of service. We continue to support the NRC's efforts to closely monitor this situation, along with the ownership and financial issues raised in the Commission's recently-issued proposed policy statement.
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8 Unbundling Second, electric utilities will be required to offer services competitively at both wholesale and retail on an unbundled basis, requiring changes to the vertically integrated utility structure. Such changes may range from functional unbundling (wherein a utility offers its generation, transmission and distribution services priced and provided separately), to corporate restructuring (wherein the utility establishes separate corporate subsidiaries to provide generation transmission or distribution services), to more comprehensive structural reform involving spin-offs of ownership of generation, transmission or distribution. At this time, we know of no State that has ordered or required divestiture of a line of business such as generation, although utility companies in both New England and California have agreed to sell generating capacity on a voluntary basis as part of a larger restructuring package.
Pricing -
The third area of change involves pricing. With implementation of retail customer choice, the likely result will be a movement from a cost-based system for pricing generation services to a system based on contracts between power suppliers and customers, presumably priced at market. We expect to see consideration of performance based models that use price caps (as in California) in place of traditional cost based models, although during the transition to full competition, some States are considering programs which allow retail customers to choose a standard-offer service provided at traditional cost of service. With respect to transmission and distribution, it is likely that the FERC (with respect to transmission services) and the States (with respect to distribution) will continue to rely on cost based models, given that in each case, transmission and distribution will remain monopoly services.
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Regionalization A fourth trend is the regionalization of electric markets. Increasingly, transmission planning will be conducted on a regional basis to meet the needs of multi-State bulk power markets. Such transmission systems, serving region-wide power pools, may be operated by independent system operators (ISOs) and similar perhaps to the New England ISO currently being developed by the NEPOOL and State regulators, and the California ISO, which has
'been given preliminary approval by FERC and the California commission. Bulk power markets will be priced regionally as well.
Public Henefits A fifth trend is the preservation of public benefit programs. States are developing groundbreaking mechanisms to continue providing public purpose programs that local f
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[ consumers desire regardless of the stmeture of the market. Such programs include those which support low-income assistance, energy conservation, use of renewable energy, and research and development. All State programs being considered or implemented ensure continued universal service.
Implementation Issues States that have begun to implement electric restructuring programs are also experiencing challenges that need to be resolved before retail open-access policies are fully put into practice. Such implementation issues include: establishing customer choice education programs, and securing requisite funding to carry out such programs, to ensure the success of newly restructured markets; creating meaningful consumer protection programs to ,
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10 safeguard against potentially abusive practices; developing the terms and conditions of services with which market entrants must comply; deploying irriovative real time pricing and metering technologies for the benefit of ajl retail customers.
One very large implementation issue concerns the question of industry market power, particularly in light of the ongoing trend of mergers and acquisitions. We understand the NRC's concern that changes in plant ownership, creation of holding companies and generally increased corporate complexity present new challenges to the Commission's regulatory programs. The State commissions share these concerns, both as it relates to questions of safety and system reliability, but also, to the impact of industry consolidation, aggregation of market power, and affiliate self-dealing will have on the economic well-being of retail customers.
The NARUC's View On State and Federal Restructuring Initiatives While State restructuring activities were ongoing, and Congress became interested in looking to comprehensively restructure the industry legislatively, the NARUC spent most of 1996 deliberating over how the Association should respond to State restructuring efforts around the country, how the NARUC could help such efforts move forward and what measures proposed at the Federal level could be supported. In July of last year, the NARUC adopted its " Principles to Guide the Restructuring of the Electric Industry" (also attached to this statement). The Principles support States' market restructuring initiatives to provide customer choice along with programs that ensure the continued provision of adequate, safe, reliable and efficient energy services at fair and reasonable prices at the lowest long-term cost
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to society. Also, the Principles reiterate the NARUC's position that States should decide j
whether, when and how to restructure local markets, i These Principles also support:
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a Enabling customers to make informed choices among electricity suppliers;
- Maintaining or improving network integrity;
- Ensuring customer access to reasonably priced services, including adequate protections l for low-income customers; I
- Protecting consumers from anti-competitive behavior, undue discrimination, poor service and unfair billing and disconnection policies;
= Ensuring the maintenance or improvement of public benefit and environmental programs through existing or new mechanisms;
= State determinations of retail stranded cost recovery mechanisms; and
- State determinations of retail electric restructuring policies, and authorization for States to create regional mechanisms to address transmission, reliability, market power and other regional concems.
Conclusion l
It was just about a decade ago that respectable voices were. raised in great alarm imploring the industry to build, and State and Federal decision makers to approve, many large i base-load power plants -- particularly nuclear -- to forestall the supply crunch that was seen i
i as inevitable in the late '80s and into the early '90s. Of course, it didn't happen. Needless to say, forecasting the future of the electric industry is perilous business. The best (and safest) l place to start is what should happen in the near term. The States are now performing their l
1 l historic role as laboratories to test how the words " greater competition for retail consumers" can be tumed into real-world services that customers will buy. As the FERC moves forward in its implementation of Order 888, the State commissions and legislatures must be allowed to continue to experiment with retail access, including customer choice initiatives. As the l consequences of competitively based wholesale markets become clearer, States are beginning
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l 12 to put in place complementary retail policies which are adapted to regional market conditions.
State commissions are developing and implementing compatible retail policies which provide for stranded cost recovery, preserve reliability, prevent the stranding of "public goods," ensure consistency with environmental values, minimize cost shifting, and most importantly, improve i
economic efficiency. Over time, States will work together, as some are now doing, to devise and implement regional institutions to adapt their regulatory responsibilities to the reality of regional power markets. I While these activities are underway on the economic front, it will remain a critical factor that the economic regulators -- FERC and the State commissions -- understand and take into account the policies developed by the safety regulators -- the NRC. And of course, the dialogue must go in both directions as the Commission comes to grips with the effect changing wholesale and retail power markets can be expected to have on the ownership, operation and decommissioning of nuclear generating stations.
In closing, the NARUC is pleased with the heightened level of discussions between l NARUC and the NRC at both the Commissioner and te staff levels. We are particularly l
grateful for the role Commissioner Kermeth Rogers zod his staff have played in acting as a liaison to NARUC. We look forward to the continuation of a productive relationship with the Chairman and newly appointed Commissioners in the months ahead.
Thank you.
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, http://www.nrri.ohin-state.edu No Discuss, Staff Not, Guide. Dn R Conini. Final Trial or Utilley State A ppres e Letts. Bill Bir Failea erCourt E ter.
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Resoluti:n Adopting
" Principles to Guide the Restructuring of the Electric Industry" WHEREAS, State commissions and legislatures, the Federal Energy Regulatory l Commission (FERC) and the Congress are in the process of developing and implementing new l policies to move the electric industry to reliance on greater competition in the marketplace; andli WHEREAS, It is appropriate that the National Association of Regulatory Utility l Commissioners (NARUC), as the national representative of the State regulatory commissions, adopt principles providing guidance to State and Federal decisionmakers to ensure that this transition serve the interests of consumers, providers, the national economy and the public good; now, therefore, be it ,
RESOLVED, That the Executive Committee of the National Association of Regulatory Utility Commissioners (NARUC), convened at its 1996 Summer Meeting in Los Angeles, California, hereby adopts the attached " Principles to Gmde the Restmeturing of the Electric Industry" and urges that State and Federal regulatory commissions and legislatures be guided by these principles as they develop and implement new policies to gevern the regulation, '
organization and operation of the electric utility industry.
Sponsored by the Ad Hoc Committee on Electric Industry Restructuring and the Committees on Electricity, Energy Conservation and Gas Adopted July 25,1996 Reported NARUC Bulletin No. 32-1996, page 10 I
1
i . . .
NARUC Principles To Guide The Restructuring of the Electric Industry Introduction to the NARUC Princioles As the nation's electric industry becomes more competitive, decision-makers should be guided by certain principles. Since its inception, regulation has sought to safeguard the public interest and to ensure economic efficiency. These goals should remain.
1 l
General Principle i Consumers should have access to adequate, safe, reliable and efficient energy services at fair and reasonable prices at the lowest long-term cost to society. l Structural changes in the industry should be encouraged when they result in improved economic emciency and serve the broader public interest. 1 This geneml principle should remain the goal for all restructuring proposals. ;
Many of the specific principles listed below will be in tension and will require ;
balancing in light of this general principle.
Commentarv The general principle describes the overarching goals of public policy in providmg energy i services to the' nation's consumers. These goals should remam, regardless of the market structure through which services are delivered. This general principle encourages policy-makers to consider the effects that restructuring initiatives will have on the long-standing goals of regulation and public policy, and to develop mechanisms (market-based or otherwise) i that will preserve the beneficial public interests of the current electric system. The principle also recognizes that restructuring holds the potential for additional benefits to society, in the form of increased economic efficiency, and that it is incumbent upon policy-makers to seek to l capture those benefits when doing so is consistent with the broader public interest." l 8By economic efficiency we mean efficiency in the production and consumption of goods and services. Societal welfare is improved as economic efficiency is increased,-
which is to say that scarce resources are put to their most highly valued uses and are used most efficiently in production. There are several components of economic effic:3.ncy: (a) allocative efficiency (when society's resources have been organized for productiu purposes in such a way that it would be impossible to reorganize them to benefit one pany without.
making another party worse off); (b) productive efficiency (a given quantity of output is produced at the lowest possible total cost); and (c ) other production efficiencies (associated with management of the production process). Furthermore, this notion of efficiency is not limited to merely static efficiency, but also includes dynamic efficiencies (such as innovation and technological development) that arise over time from the stimulus of competition in an environment in flux.
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Specific Principles NETWORK INTEGRITY ;
The safety, reliability, quality and sustainability of electric service should be maintained or improved in a restructured electric industry.
Market-based decisions, driven by economics and competition alone, could jeopardize critical safety and reliability and long-term strategic resource and facilities planning. Public policy should ensure the integrity of the electric grid and encourage prudent long-term resource planmng, acquisition and utilization.
i Commentarv Restructunng should not jeopardize the safety, reliability or quality of electric service. The importance of a reliable electric system cannot be overemphasized. Consumers now rely on ,
very high service quality; their well-being, and the country's economic growth, require that it '
be maintained. No changes in the electric utility industry or the regulatory regime should be allowed to compromise reliability, even if the intention is to lower consumer prices, except where a lower level of reliability is freely chosen by a customer and does not impair service to other customers (e.g., interruptible service).
As the industry moves toward a more competitive model, traditional means of ensuring a diverse long-term power supply may give way to more market-based mechanismr. Policy-makers should' carefully monitor this transition and should be prepared to create new ,
mechanisms to assure that state goals in these areas are being properly addressed in such markets.
Any restructuring plan should be designed to preserve sufficient latitude and flexibility foi the State's to take actions, consistent with federal policy, to ensure that safety, reliability and quality concerns are satisfied. Transmission system operators should have the authority and ;
means to continue the provision of safe and reliable electric service, while at the same time facilitating a competitive generation market. The integrity of the transmission system should be assured regardless of how it is operated.
UNIVERSAL SERVICE Universal senice at reasonable rates, including adequate protections for low-income customers, should be maintained.
Because electricity service is vital for health, safety and economic opportunity, universal service is a comerstone of the public interest. Customers are entitled
' to access to reasonably priced power, and to a forum for dispute resolution.
Commentarv
> Electric service is a basic need. Therefore, preserving and protecting the public interest in a ,
restructured electric industry should include assuring that consumers have access to an adequate supply of electricity to satisfy their basic needs at a reasonable price. Policy-makers 3 ,
should continue to address the needs oflow-income customers. The health and safety of all consu' mers is paramount.
Defining universal service will be a critical issue. Continuing and improving universd senice involves two goals: mamtaimng service for those who already have it and expanding service to those who de not yet have it. Continuing and expanding customer access to basic electric services should be done in a way that is both economically efficient and fair. While all customers should be entitled to non-discriminatory access to the electric system, for some customers the most efficient and affordable means of obtaining basic energy services might not be through a connection to the electric grid, but through combinations of demand-side management measures and renewable and fossil-based distributed or self-generation.
Restructurmg initiatives should be designed to accomplish universal service goals at the lowest cost to society. In order to mmunize market distortions, the price for grid connections should be cost-based, and any subsidies should be explicit.
d CUSTOMER CHOICE Customers should have the opportunity to make informed choices among electricity providers and services.
4 The potential for competition to improve economic efficiency rests on having l
l multiple service providers as well as informed consumers. Market development
'should be guided in a way that increases the role of competition among energl service providers and the role of choice for customers.
Commentary All types of customers have expressed a preference for choosing their electricity providers and services. This is particularly true for commercial and industrial customers, who maintain that increased customer choice would lower prices. Residential customers and others are also beginning to express their desire to share equally with business customers in enjoying the benefits of increased customer choice.
4 Customers acting in their own self-interest, when presented with a variety of market choices, will tend to arrange their consumption to maximize their welfare, save costs and enhance their satisfaction. Allowing customers to choose not only encourages the development of new providers who would engage in creative marketing, but also permits a dieceiefied customer to change providers. If electric industry restructurmg is guided prudently, customer choice is likely to result in a greater variety of pricing options, including innovative rate designs and lower prices, as providers compete with one another to deliver services to customers. Further, this competition will bring with it a greater incentive to provide diverse terms, conditions and payment plans in response to customer interest and needs.
While the general theme of customer choice holds appeal, markets in the electric industry i
across the country are at different stages of development and contain different potentials for cost savings and service altematives. Knowledge of local markets is the preferred basis for 4
o . . <
detemiining how customer choice can best be implemented to re panicipants. Thus, it is for the States to determine the extent of choice for customers under their regulato,ry oversight.
CONSUMER PROTECTION Consumers should be protected from anti-competitive behavior, undue discrimination, poor service and unfair billing and disconnection practices. t Regulatory processes should continue where effective competitio where monopolies and other forms of market power remam. Market power concems are particularly relevant when considering electric utility m l
acquisitions.
Commentarv 3 In a restructured industry, cenain consumer protections should be preserved, l that guard against undue disenmmation, failure to meet muumum service requirements and other unfair business practices. Inj with these issues are questions of service quality, providers of last reson and the o of distribution companies.
Policy-makers'should also assure the continued, efficient operation of the competitiv generation market. The potential for providers to amass market power sufficient them to raise prices above competitive levels will remain a central public policy concem.
Protecting against this problem may involve the development of appropriate standar entry, ownership, bidding, operation and other market behavior.
PUBLIC PARTICIPATION Industry restructuring policies should be developed in public processes with t
participation open to all.
All stakeholders should receive fair consideration in public processes.
l 1
Commentary Electric restmeturing will affect every person, either directly or indirectly. Even individuals not tied to the electric grid will be affected by restructuring and by consumer products that become available as an indirect result of restructuring. There is an inherent responsibility for policy-makers and industry to develop a strategy for public panicipation in the format restructuring policies.
In many ways, the task may seem daunting because of the breadth of stakeholders and th scope of issues. But electricity use is intenwined in our daily lives, affects the environmen and other public interests and is essential to the economic well-being of our industries and businesses. There should be a commitment to bring diverse ideas into the discussion and to 5
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address the questions and concerns of the public.
t The techniques and tools of public panicipation will vary depending on the timing of an i participants in the process. While at times the commitment to public participation ma appear to slow the restructuring process, in the long run it will result in an improved p and smoother transition. Public participation is time and resource intensive, and it is best t acknowledge these needs early in the process because it will be demanding of policy in both the regulatory agencies and indusuy. While public panicipation does not mean tha i
- all of the public must agree on the outcome of restructunng, it does mean that all memb the public should have the cyycnunity to be heard, be treated fairly and be provided wi 3
clear and accumte'information.
i I SHARED BENEFITS All classes of customers should benefit from improvements due to structural
- changes in the industry.
[ Electric industry restructuring should be done in a way that benefits all 3
- customer classes fairly and does not unduly disadvantage any customer class nor preserve any undue cross-class subsidy.
Commentarv l
Decisions conderning how and to what extent customer choice should be expanded am customer classes should be left to the States so that orderly access to the benefits of i
restructuring occurs. Given their knowledge of and experience with the local history of rate rate designs and cost allocations for all customer classes, the States can best address hcw to j alleviate undue subsidies among customer classes.
j All customer classes should have access to electricity suppliers, and applicable laws and rules 4
should require all electricity suppliers to compete fairly. Nondiscriminatory availability of service, including ancillary services, back-up power and interconnection services, should be j
assured for all finn service customer classes. '
i i
i
- PUBLIC BENEFITS The public benefits of energy efficiency, renewable resource technologies and i research and development should be maintained through existing or new l mechanisms.
Energy efficiency, renewable resource technologies and research and l
development provide significant economic and other benefits for the nation and ;
are critical to acideving a long-term, sustainable and efficient electricity future. !
Commentary Competitive markets have the potential to reduce the total costs of electricity production in the country, to lower rates if benefits accrue to customers fairly, and to stimulate innovation ;
i 6
o e a o and new investment. Nevertheless, policy-makers should rec .aize that, in certain instaues, barriers to efficient competition prevent market participants tmm correctly valuing the full costs and benefits of certain production and consumption decisions. Many aspects of utility regulation, and many utility practices, including integrated resource planrung, have been developed to address these market barriers, and have delivered significant benefits to consumers and the nation.
The development of competitive markets can be consistent with the ultimate goals of traditional utility regulation. As the economics and technology of generation evolve, new products and services can be expected to proliferate in the market. This market evolution will depend in pan on the availability of information, low transactional hurdles and the appropriate alignment of risks and rewards. However, for public policy reasons and because not all potential risks will be fully reflected in shon-term market prices,it will be necessary for policy-makers to promote and implement mechanisms that will serve the long-term needs and aspirations of the nation. To the extent that cost-effective investments in energy efficiency, renewable resources, and research and development are not fully valued in the competitive marketplace, there will continue to be a need for altemative methods for capturing the benefits that they offer.
ENVIRONMENT Structdral changes to the electric industry should maintain or improve the quality of the emironment.
The electric industry affects the environment, and environmental protection
- continues to be a high priority for society. The environmental benefits and costs of different generation, delivery and service options should be recognized through market mechanisms, where they are effective, or by regulation.
Commentarv i
The electnc industry has profound impacts upon the environment. Under the principles of traditional utility regulation and, in particular, integrated resource plannmg, it has been ;
possible for utilities and govemments to pursue environmentally responsible development l policies.
l The invisible hand of the market is powerful, but the limitations of markets are real: extemal I l
costs, by definition, are not accounted for by markets, competitive or otherwise. Historically, l regulation of electricity generation and transmission offered a means of partially, if i l imperfectly, addressing extemal costs. Restructuring initiatives should be designed to l maintain or improve society's ability to consider extemal costs when making resource and delivery decisions. There is a variety of mechanisms that policy-makers can consider in order to achieve this goal, and their ultimate choices will be guided by the particular needs of their States and regions.
7
i . . o STRANDED COSTS Existing c:mmitments cf utilities arising from past decisions made pursuant to historical regulatory and legal principles should be addressed in a fair and reasonable manner by States.
Claims to recover net, verifiable and non-mitigable costs potentially " stranded" in a restructured market should be decided by States.
Commentary In moving from traditional regulation to a market-based electricity supply system, some embedded utility costs will be above the market prices of presently available alternatives.
Because the circumstances of how these cost commitments arose are unique to state decisions, the States should determine which costs are stranded and the degree to which and manner in which they should be recovered. The States are in the best position, because of their history ;
of regulation of the electric utilities, to develop methods for verifying the legitimacy and i magnitude of stranded costs and for assessing the adequacy and appropriateness of measures proposed for mitigating stranded costs.
In order to address these costs in a fair and reasonable manner, the States should equitably {
consider utility investors' reasonable expectations along with ratepayers' expectations of access '
to the benefits of restructuring. Because of the unique character of each electric utility's j costs, financial condition, and customers, and the history and remaining lives of its physical i and regulatory' assets, only the States can tailor a fair solution to the extent and timing of :
recovery of any costs determined to be stranded. '
STATE RESPONSIBILITIES l States and state commissions should detennine retail' electric policies, including restructuring policies. l Restructuring should recognize the unique characteristics of the various States. I State legislatures and state public utility commissions are most accountable to the people and are closest to the people, problems and oppommities that l restructuring will present at the retail level. Accordingly, the policy and implementation decisions related to retail electric service should be determined by the States.
1 Commentary The restructuring of the electric utility industry cannot occur efficiently or reliably in a "one-size-fits-all" fashion. Although the electrons that flow to homes and businesses throughout the United States may, for all practical purposes, be indistinguishable, the method, quality and cost of providing electric service vary by state and region. For example, population density can affect availability, quality and cost of service.
J Throughout the years, the States have taken into account the unique problems associated with I the public they serve, and restructuring should be no different. In fact, during this time of l 8
- . - _ ~ _ = . _.- . _ . . - _ . _ . - - . - - -. -
o < a ,
i great change in the electric utility industry, States should have the opponunity to employ the expertise they have gained through the regulatory process to benefit the public. Allowing the States to detennine the retail electric policy and implementation issues associated with restructuring insures that each state is responsible for choosing a path which best recognizes the unique problems and opponunities its citizens may experience. i Federal agencies and federallegislation should facilitate effective decision-making by the States, and empower States to create regional mechanisms to address transmission, reliability, market power, and other regional concerns.
i l
6 9
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LEHMAN BROTHERS 1
Electric Utihties / .
Jim Asselstine
s Competition Expectations for 1997 m Federal legislative issues
- PUHCA/PURPA reform
- Nuclear decommissioning cost recovery
- Broader industry restructuring proposals ;
i LEHMAN BROTHEILS
_ . . . _ _ _ _ _ _ _ . - _ _ _ _ _ - - _ _ _ . _ _ - - _ . _ _ _ . _ _ _ _ _ _ - - - - _ - - - _ . - _ . . _ - - _ - - - - _ - - - - _ - - - _ - _ - - - _ - - - - - - - - _ _ . _ - - - . - - _ . _ _ - - _ _ _ - - - - - - - - - - ~ _ .
s Competition Expectations for 1997 m Substantial State legislative and administrative activity on competition m By end of 1997, many of high-cost states will have established their framework for a competitive industry a Expect continued convergence of state plans
- Reasonable transition period of about 5 years Opportunity for stranded cost recovery
- Phase-in of retail competition
- Wholesale competitive market
-
- Independent System Operator for transmission
- Use of securitized financing to accelerate CTC recovery .
LEHMAN BROTHEILS
4 s
Competition Expectations for 1997 m States with greatest activity likely to include:
- New Harnpshire Arizona '
- Possibly Texas and Ohio s With a few possible exceptions, expect state frameworks to be balanced and reasonable LEHMAN BROTHERS
k i
N ,
Competition Summary of California Legislation u Endorses / codifies key elements of CPUC's decisions i
a Creates competitive auction market (Power Exchange) !
..f i a Requires centralized control oQransmission g'rijby Independent System Operator )V k; &
e Calls for a western regional compact to protect I
system reliability a Directs phase-in of direct access, or retail competition, subject to implementation of non-bypassable :
Competition Transition Charge (CTC) ;i
[
LEHMAN BROTHERS
O s
Competition Summary of California Legislation a Provides for accelerated recovery of broad range of transition costs a Mandates rate freeze /10% rate reduction from January 1,1998 through March 31,2002 m Anticipates fu~rther rate reduJ tons beginning April 1, 2002; target of minimum 20% reduction for residential, .
small commercial customers .
m Strongly encourages utilities to sell fossil generation m Provides financing mechanism to accelerate portion of CTC recovery LEHMAN BROTHEILS
F s !
Stranded Cost Recovery and Securitization 1
I a Utdity Stranded Cost Recovery = f
(( Current Rate Schedule vs. Transition Rate Schedule
+
Securitization Effect (Depreciation / Amortization +
Cost of Capital Savings)
+ .
Cost Reductions]
b LEHMAN BROTHERS
t 4
l l
l Stranded Cost Recovery and Securitization California Model Rate Freeze -Today's Rates l
l ~~~ _
~
10% Rate Reduction
~_ _
' -----~
Revenue Requirement 1 2 3 4 5 Year LEHMm4 BROTHERS
6
\
Stranded Cost Recovery and Securitization a Benefitc of Securitization Financing for Utilities
- Acceleration of stranded cost recovery
- Shifts uncertainties for recovery to the securitized financing
- Permits financing of strai.ded costs over a longer time period Provides for rate reduction " benefits"; helps to promote reasonable transition period
- a Use of proceeds to " shrink" the utility's capital structure provides savings
- Financing should provide the utility with off-balance .
sheet accounting and credit rating treatment <
LEHMAN BROTHERS
J l
s Disaggregation Extent of Change Lesser - Greater
~
,t Credit Quality Impact ,
None None Potential Potential Rating Rating Difference Difference LEHMAN BROTHEILS i
I
Disaggregation Sale or Spin-off of Assets a Most utilities continue to prefer functional unbundling or structured unbundling within holding company structure a Market power concerns leading FERC/ State regulators to encourage or require sale or spin-off of generation a Utilities may agree to sell or spin-off generation in response to regulatory pressure or requirements, or out of necessity to achieve unregulated status for generation a Examples of sale or spin-off of generation
- California utilities
- New England Electric System
- Niagara Mohawk Power -
LEHMAN BROTHEIG
s Nuclear Issues a Stranded cost recovery issues a Cost-competitiveness of nuclear units
- Large units; multi-unit plants
- Small, single-unit plants a Decommissioning costs m NRC concerns regarding competition l
LEHMAN BROTHERS
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STATEhfENT OF SUSAN TOhiASKY, GENERAL COUNSEL l FEDERAL ENERGY REGULATORY COhihilSSION BEFORE THE '
NUCLEAR REGULATORY COhihfISSION APRIL 24,1997 hiadam Chair and hiembers of the Commission, I appreciate the opportunity to be here today to talk about the recent activities of the
. . _ Federal Energy Regulatory Commission in the area of electric utility regulation.
The electricity industry is facing fundamental changes in the way it does business. We are moving toward an environment in which power will be priced in a competitive marketplace. The FERC believes very strongly in developing competitive markets for electricity. Toward that end we have initiated fundamental changes in our approach to utility regulation. These changes will .
encourage the development of competition in wholesale power markets and provide a fair and rational transition to a competiti'te wholesale marketplace.
This morning I want to describe recent FERC policy initiatives in four major areas:
Requirements for open access transmission service; Recovery of stranded costs; Market based rates for wholesale sales of electricity, and hierger policy.
These are the essential elements of the Commission's pro-competition policies. In addition, I will touch briefly on other areas of particular concern to our Commission --
maintaining reliability of the nation's electricity delivery system and the evolving relationship between Federal and state regulators.
The centerpiece of the Commission's electricity policy initiatives is Order No. 888. In Order No. 888, the Commission required all"public utilities" under the Federal Power Act to file non-discriminatory open access transmission tariffs. Under these tariffs, the transmission owning public utility is required to provide " comparable" transmission service. Comparability assures that ,
wholesale buyers and sellers of power can obtain transmission service on the same terms and '
conditions that would apply to the transmission owner. In other words, the transmission owning utility can no longer restrict access to its transmission system to favor its own generation.
In addition, public utilities are required prospectively to "unbundle" their wholesale transactions. This means that they must transact separately with their wholesale customers for power sales, transmission senices and ancillary senices.
a ~ . e 2
To ensure that the tariffs work and that access to the transmission system is fair and not subject to manipulation, the Commission in Order No. 889 has also requirei public utilities to establish standards ofconduct that separate their power marketing and transmission functions. A public utility is also required to have in place an internet accessible computer information system -
- known as an " OASIS" -- so that prospective transmission customers will be able to know what transmission capacity is available and at what price.
Open access transmission is now a fact oflife across the industry. Certainly, there are dozens of discrete issues that the Commission will continue to resolve in panicular cases. Indeed, there are some very difficult and particularly important issues of regional significance that have yet to be resolved, including the restructuring of tight power pools. However, there is little
_ _ dispute over the fundamental principle of open access. Most jurisdictional etilities have timely implemented their open access tariffs and are busy figuring out how to do business in an open .
access environment.
Nonetheless, there are some fairly significant holes in the open access map. Order No.
888 applies only to "public utilities" under the Federal Power Act. This leave a number of transmission owing utilities exempt from the generic open access requirements of Order No. 888.
These are the publicly owned utilities, including municipally and most cooperatively owned utilities, the Federal Power Marketing agencies, and such significant transmission owners as the Tennessee Valley Authority and the Bonneville Power Administration. Whle we have attempted i through various means to encourage these utilities to implement open acces; on their own, we have met with mixed success, at best. For that reason, the Chair of our Co nmission has called upon Congress to address this issue.
I Let me turn now to another critical element of the Commission's opn access policy, which is the treatment of stranded costs. In a competitive marketplace, traditional utility sellers l
ultimately must be able to compete on the same basis as other sellers and as ;ume the same investment risk as other competing sellers. However, the Commission is well aware that in the l l
past, utility investment decisions were made under different expectations. Typically, utility l investment decisions v/ere based upon the expectation of continuing to serve existing customers (and sometimes future load within a service territory) at cost based rates.
In the context of wholesale supply arrangements, these expectatiora could arise if a utility seller made planning and investment decisions based on a reasonable expectation of continuing to serve a contract requirements customer beyond the term of a contract, in tne retail context, these expectations would typically arise when investments that were made to mee. franchise obligations are no longer necessary to serve consumers who, under a state retail choice program, are purchasing power from other suppliers.
At both the federal and state level, rates were set based upon longstanding principes providing the utility the opportunity for recovery of all prudently incurred costs and a reasonable return on that investment. In a competitive marketplace, however, utilities cre no longer
I s . < s 3
guaranteed that opportunity. Prudently incurred costs may be unrecoverable, that is, they may be stranded.
There is no question that the stranded costs issue -- the price tag for open access -- is the most hotly contested issue associated with Order No. 888. After considering thousands of pages of comments on this issue, the FERC has come down firmly on the side of allowing utilities an opportunity to seek stranded cost recovery.
In Order No. 888, the Commission stated that utilities should be given an opportunity to recover all verifiable and prudently incurred costs that are stranded when a customer departs a traditional utility supplier and uses that supplier's transmission system to access a new supplier.
,_ _ _ The Commission also indicated that it would serve as the primary fomm for stranded costs disputes arising from the departure of a retail customer who becomes a wholesale buyer and takes transmission service under a FERC mandated open access tariff.
Under Order No. 888, the recovery of stranded costs from a particular customer will be determined on a case-by-case basis. The utility bears the burden of demonstrating that it had a reasonable expectation of continuing to serve the departing customer beyond the term of the contract. If the utility meets its burden, the customer's stranded costs obligation will be a share of the utility's projected revenue stream calculated under a formula set forth in Order No. 888.
The FERC clearly believes that we can have a fair transition to competition only if utilities are permitted the opportunity to recover costs reasonably incurred under a prior regulatory regime. However, the vast majority of stranded costs are likely to be generation costs incurred to' serve retail load. The FERC has indicated that it will address retail stranded costs only if a state commission lacks authority to do so. The FERC has strongly encouraged state commissions to address this issue up front, as they proceed with retail choice programs. We hope that the states will follow the Commission's lead in providing a fair transition mechenism.
I now want to mention the FERC's policies governing market based rates for wholesale sales of electricity. For several years the Commission has been ruling on applications of wholesale sellers, including power marketers, to sell electric power at market based rates. Power marketers include both entities that are afliliated with traditional utilities and those that are not. In Order No. 888, the Commission confirmed an earlier generic finding that future, long term generation markets are competitive. We therefore permit sales from new generation to occur at market based rates, without a showing that the seller lacks generation market power.
For existing generation, however, we continue to believe that there is a significant risk that
! the seller can exercise generation market power. We do not authorize sales at market based rates unless we are satisfied that the seller lacks generation market power or its n.arket power has been successfully mitigated.
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We now have a large number of marketers, including marketers afIlliated with public I utilities, selling power at market based rates. Some of these sales are made from existing generation. We expect that this trend will continue and that, increasingly, as existing wholesale contracts expire, the price for wholesale electric energy will be set by the competitive I marketplace.
I want now to describe briefly the Commission's recent actions in the area ofmerger ,
policy. In December 1996, the Commission issued a Statement of Policy that will govern its !
future review of applications for approval of mergers involving public utilities under section 203 l of the Federal Power Act. In the Merger Policy Statement the Commissior. identified three factors that it would consider in determining whether a proposed merger is in the public interest.
. _. _ These are: the effect of the merger on competition;its effect on regulation; r.nd the existence of adequate ratepayer protection.
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The Merger Policy Statement signals the Commission's concern wit.1 the potential effects of utility mergers on the growing competitive marketplace. The Policy Statement sets out in i extensive detail an analytic screen, based on the Department ofJustice/ Federal Trade Commission merger guidelines, for determining whether a proposed merger is likely to raise l competitive concerns.
The Commission recognized that public utilities will reasonably look :o mergers and consolidations as viable strategic options for responding to their rapidly chuging business circumstances. The Commission does not generally wish to discourage such realignments. At the same time, mergers that reduce the number of sellers in a market tend to undermine the competitive conditions that the Commission is attempting to foster. The Merger Policy Statement is intended to reduce regulatory impediments, through expedited procedures, for mergers that do not raise competitive concerns and to encourage the development of marke'. power remedies for mergers that do raise competitive concerns.
We fully expect that competition will bring significant benefits to consumers without jeopardizing the highly reliable electricity service we have historically enjoyec. in this country.
Maintaining reliability in a competitive emironment does pose some new ch.llenges. However we firmly believe that these challenges can and will be met.
We support the efforts of the Nonh American Electric Reliability Council to take the lead on reliability issues. But the reliability rules-of road are not well defined. NERC is working on that, but more needs to be done. Membership in NERC is not mandatory. And there are no effective enforcement programs for making sure everyone plays by the same. mles--and for ensuring that all industry segment are involved in setting these rules. Reliability in a competitive environment is too important to be left to a voluntary regime.
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FERC should have the authority to make compliance with NERC standards mandatory for l all segments of the industry. We need the authority to resolve disputes and to impose penalties on l those who violate reliability requirements.
Finally, I would like to mention a significant challenge still ahead: which is how to make the federal / state relationship work in meeting the challenges of electricity industry restructuring.
The FERC well recognizes that our colleagues at the State commissions face enormous l challenges in moving to the world of customer choice. If a state moves to retail access, a l l jurisdictional shift between federal and state regulation occurs with respect to transmission in I l interstate commerce. However, regulation of generation and retail sales issues remain in the I hands of the states. States will therefore have the lead in fashioning retail choice programs and in
- _ _,_ resolving many of the extremely diflicult issues raised by utility restructuring.
I Various features of Order No. 888 are designed to accommodate the need for states to take the lead in designing retail customer choice programs. The FERC has stated its intent to l
exercise its own inrisdiction of unbundled retail transmission matters with deference to the views
- of state commisaous. We believe we have made great progress in working with the states in
- addressing the complex issues we are all facing and fully expect our cooperative processes to l continue.
1 I hope this presentation has been useful in providing an overview of recent policy initiatives at the FERC. I would be happy to try to answer your questions.
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CORNERSTONES FOR RELIABILITY PRESENTATION TO THE NUCLEAR REGULATORY '
COMMISSION PHILLIP G. HARRIS APRIL 24,1997
i PJM is the largest centrally dispatched control area in North America.
l
- 8.6 % OF U.S. POPULATION
- 540 UNITS ,
- 7.9 % OF PEAK (48,524 MW)
- DIVERSE FUELS
- 7.7 % OF ENERGY (250 TWH)
- 8000 MILES EHV
- 7.8 % OF CAPABILITY (56,000 MW) TRANSMISSION
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- 5 STATES A D D.C SEPARATE ENTITY SINCE 1993
- SINGLE NERC REGION
- COMPETITIVE PARTICIPANTS ,
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1 BENEFITS OF POOLING j L
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- Reduced installed capacity requirement
- Shared transmission network
- Diversity of peak, seasonal load
- Diversity of generation mix
- Shared risk and reserve
- Centralized dynamic transmission network security and reliability management
- Coordination of generation / transmission l maintenance scheduling l 7l _ _ _ _ _$100 MILLION CENTRALIZED DISPATCH SAVINGS '
4 j $1.2 BILLION NON-INTERCHANGE SAVINGS s ,mm_,_m .___ -._ _ m._--_s
. . .- - . _ _ _ _ m
! DAILY LOAD SHAPE
- LOAD (MW X 1000) 40-i
- 36
- : vs x 200 Gas, Oil, Diesel, 34 \ m Hydro Units-32- ^
30{ 175 Coal / Gas Units 28:
^125 Baseload Coal, Nuclear, NUG-Units 24 ,,,, , ,,,,,.,.,.,,,,,.
1 3 5 7 9 11 13 15 17 19 21 23 HOUR OF DAY CALVERT CLIFFS 1&2 PJM NUCLEAR OYSTER CREEK 1 PEACH BOTTOM 2&3 UNITS TMI1 SALEM 1&2 23% OF CAPACITY SUSQUEHANNA 1&2 HOPE CREEK 1 35% OF ENERGY LIMERICK 1&2 .
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P WER SYSTEM FUNCTipNS ri
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TRANSMISSION _/
E E PJM S stem Operato Sk?)a L,OAD RANSMI SiO l
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! N TRA SMISSION AVAl BLE TO DELIVER G ERATI GENE ATION TO' ME D AND l
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GENERATION AVAILABLE
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RESERVES .
TO CONTROL TRANSMISSION GENERATION
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CORNERSTONES FOR RELIABLE i
l RESTRUCTURING CAPABILITY TO RELIABLY OPERATE THE GRID
- IN A RAPIDLY CHANGING ENVIRONMENT 3 i
- INFORMATION EXCHANGE '
FOR MAINTAINING DYNAMIC SECURITY MI r-r inA l AUTHORITY ~
TO TAKE STEPS TO MAINTAIN SECURITY y"g
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PREDICTABLE BEHAVIORS SO OPERATING PLANS MATCH OPERATIONS
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'r CAPABILITY TO RELIABLY Mdad OPERATE THE GRID
. PJM HAS OPERATED RELIABLY IN THE PAST AND WILL CONTINUE TO DO SO UNDER PROPOSED RESTRUCTURING PLANS
- CAPABLE, SKILLED, EXPERIENCED PEOPLE
- IN DEPTH TRAINING PROGRAMS
- THE PJM INFRASTRUCTURE PROVIDES THE ~
APPROPRIATE SUPPORT TO MAINTAIN RELIABILITY a TELECOMMUNICATIONS, METERING
- HARDWARE, SOFTWARE
- PROCEDURES, EXPERIENCE
INFORMATION EXCHANGE +' r=-
1A1 UNIT COMMITMENT ENERGY MANAGEMENT SYSTEM
,a MARGINAL SCHEDULER M
ACCOUNTING / AUDITING C
BEFORE Tile FACT REAL TIME AFTER THE FACT E -
PLANNING STUDIES TRANSACTION REPORTS MANAGEMENT '
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OASIS SYSTEM --
M ,4,J INTRA / INTERREGIONAL COMMUNICATION OUTAGE INFORMATION 4dl p~1 ID .$. .$. 8
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ISO FUNCTIONS Interregional + O
! External Security Network r' E0 ASIS
! Control } f Participants Areas .
/ y Scheduling Support level i V V t_
Real Time -- E Marketing Center
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AUTHORITY -
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- PJM SYSTEM OPERATOR HAS ABILITY TO IMPLEMENT .
PROCEDURES NECESSARY TO PRESERVE RELIABILITY,
- INCLUDING DISCONNECTING FIRM LOAD
- PJM AND MAAC CONTRACTS / AGREEMENTS OBLIGATE PARTICIPANTS TO MEET NERC AND REGIONAL RELIABILITY POLICIES ;
- NERC IS DEVELOPING ADDITIONAL OPERATING AND PLANNING STANDARDS WITH WHICH PJM PARTICIPANTS WILL BE EXPECTED TO COMPLY a
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s PREDICTABLE BEHAVIORS
- ss PJM SYSTEM OPERATOR DEALS DIRECTLY WITH, AND ORCHESTRATES THE CONTROL OF MANY INTERRELATED ELECTRICAL SYSTEMS AND OPERATING PROCEDURES PARTICIPANTS RESPOND TO DIRECTIVES AND CONTROL SIGNALS INCENTIVES AND SANCTIONS ARE BEING DEVELOPED (ANCILLARY SERVICES) .
CORNERSTONES FOR RELIABILITY LGb REDICTABL BEHAVIORS
) AUTHORITY
/ INFORMATION +1 5~"
ana Ms CAPABILITY
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