Mr. SHARP. I thank our two panels for their exceptionally insightful testimony, and we will be delighted to hear from our first panel. We are pleased to have with us Ms. Catherine Cook, General Counsel for the Federal Energy Regulatory Commission; Ms. Marianne K. Smythe, Associate Director of the Division of Investment Management with the Securities and Exchange Commission; and the Honorable Ashley Brown, Commissioner with the Ohio Public Utilities Commission. Ladies and gentlemen, I think you are familiar with our processes here. We will make your written testimony a part of your record and would appreciate your oral summary at this point. Ms. Cook, we have you listed first. We would be delighted to hear from you. STATEMENTS OF CATHERINE C. COOK, GENERAL COUNSEL, FEDERAL ENERGY REGULATORY COMMISSION; MARIANNE K. SMYTHE, ASSOCIATE DIRECTOR, DIVISION OF INVESTMENT MANAGEMENT, SECURITIES AND EXCHANGE COMMISSION; AND ASHLEY C. BROWN, COMMISSIONER, OHIO PUBLIC UTILITIES COMMISSION Ms. Cook. Thank you, Mr. Chairman, and thank you for inviting me to this hearing concerning independent power producers and the Public Utility Holding Company Act of 1935. You have also asked me to comment on Edison Electric Company's legislative proposal. I will do so. We all know what we mean when we speak of the Public Utility Holding Company Act of 1935; however, the term "independent power producer" apparently means different things to different people. To the Federal Energy Regulatory Commission, which was, I believe, the first to use the term, or at least the first to capitalize it, an independent power producer is a generating entity other than a PURPA-qualifying facility that is unaffiliated with the franchised utility in the area in which it sells power and for other reasons lacks significant market power. To Edison Electric Institute, on the other hand, the term "independent power producer" would appear to include a subsidiary of a franchised utility selling within the utility's service area. To EEI, such a subsidiary would be an independent power producer regardless of whether or not it had market power. When the Commission coined the term "independent power producer" in the proposed rule, it was describing but not creating an emerging kind of non-traditional power producer. In fact, the Commission had already allowed pricing flexibility and relaxed power act regulation in several specific cases. It had been attempting, in other words, to deal with the phenomenon that is already here and to encourage it. Non-traditional power producers, without significant market power, can continue to receiving pricing flexibility and relaxed power act regulatory treatment from the Commission, the Federal Energy Regulatory Commission, whether or not the 1935 Act is amended or whether or not the 1935 Act is interpreted to narrow its coverage of holding companies. However, relaxed power act regulation will not do the complete job. The 1935 Act will prohibit or discourage many investors from becoming power generators. For some, the full force of the 1935 Act's requirements regarding registration, corporate simplification, financing, accounting, recordkeeping, reporting may just be more than they are willing to bear. For others, the geographic and business limitations may foreclose participation. A registered holding company in Ohio, for example, would not be able to compete in California, nor would companies such as Westinghouse and General Electric, large power plant vendors that would be logical entrants into the power generation market. They would not be willing to enter if the price was divestiture of their non-power related business. So what should be done? Under section 210(e) of the Public Utility Regulatory Policies Act, Congress has already given FERC authority to exempt one group of non-traditional power producers' qualifying facilities from the 1935 Act. Our experience does not indicate that investors or consumers have suffered. Quite the contrary. But qualifying facilities are not the only power producers that lack significant market power. It makes sense to accord similar treatment to other non-traditional power producers without significant market power. The Commission is trying to promote the most efficient production and allocation of wholesale electric energy and is attempting to provide the lowest cost reliable energy to consumers. It is doing this by encouraging additional supply options for utilities. That is, the Commission is attempting to broaden beyond PURPA the range of fuels, plant sizes and technologies that can compete in the generation market. The Commission is encouraging the development of these supply options by capitalizing on entrepreneurs' willingness to take risks. Investors are willing to invest in generating facilities without the protections of cost of service regulation and a service franchise. The Commission's proposal is designed to make it possible to reward suppliers of electricity for success and to hold them accountable for failure, and by so doing, to increase supply options for utilities and to help provide low cost, reliable energy to consum ers. Carefully crafted relaxation of the strictures of the 1935 Act will further this proposal. Thank you very much, Mr. Chairman. [Testimony resumes on p. 76.] [The prepared statement of Ms. Cook follows:] STATEMENT OF CATHERINE C. COOK, GENERAL COUNSEL Mr. Chairman, Members of the Subcommittee: Thank you for the opportunity to testify today on the relationship between independent power producers (IPPs) and the Public Utility Holding Company Act of 1935 (PUHCA). My testimony today addresses the effect of the Public Utility Holding Company Act on independent power producers and on the Federal Energy Regulatory Commission's electric initiatives in general. Before updating you on the Commission's electric initiatives, the impact of PUHCA on the development of IPPS, and proposed amendments to PUHCA, I would like to respond to the specific questions you asked me to address. 1. (a) First, Mr. Chairman, you ask whether amendment of PUHCA is "necessary to successful implementation" of the Commission's IPP proposal. The answer turns on what one means by successful implementation. The Commission can promulgate a final rule and IPPs can be developed without amendment of : PUHCA. PUHCA is not an absolute bar to the development of powerplants by "independent" power producers. Indeed, I will refer later to generation facilities that have already been developed that would be classified as IPPs under our proposal. Currently, investors can and do gerrymander their corporate structures so as to be able to participate in powerplant projects without becoming subject to PUHCA. This can only go so far, however. Thus, while the Commission's IPP proposal is not predicated on PUHCA reform, the full potential of IPPS cannot be realized without amendment of PUHCA. Because many potential investors will recognize that they will not be able to avoid regulation under PUHCA, they will avoid becoming IPPs. 1. (b) In addition, you ask whether the discussion draft of the Edison Electric Institute (EEI) is the "optimal amendment to PUHCA," and inquire as to other possible legislative approaches. The EEI draft amendment to PUHCA defines IPPs in one major way much more broadly than the Commission did in its proposed rule. The EEI amendment would exempt generation subsidiaries that sell entirely at wholesale regardless of whether the generation subsidiary has significant market power. The Commission, however, has proposed to relax Federal Power Act (FPA) regulation for independent power producers only when they lack significant market power. A narrow amendment to relax the PUHCA regulation or to narrow the reach of the statute with respect to these producers would further implementation of the IPPS proposal. We defer to the Securities and Exchange Commission (SEC) on the larger issue of whether PUHCA should be amended as EEI proposes to exempt most public utilities from its reach. However, in two respects the EEI definition of an IPP appears more narrow than the Commission's proposed definition. First, by excluding existing facilities from its definition of an IPP, the EEI proposal could cause problems for QFs that, for whatever reason, might lose at some future time their 3 qualifying status under the Public Utility Policies Act (PURPA). Second, EEI's proposed definition of an IPP would exclude any person making any retail sales of electricity. This exclusion may deprive industrial IPPs of relief from PUHCA when generating facilities are owned by a subsidiary and some power is used for on-site industrial purposes. Similarly, taking "generation" out of the definition of an "electric utility company" under PUHCA regardless of sellers' market power would provide a broader degree of relief than necessary to encourage independent power producers as defined by the FERC. On the other hand, lifting the size and technical limitations from the definition of a qualifying facility under the FPA and the PURPA has several drawbacks. The Commission has used its authority under PURPA section 210(e) to exempt qualifying facilities from regulation under both PUHCA and the FPA. Lifting the size and technical limitations on qualifying facilities could therefore result in the elimination of regulation under the FPA, as well as PUHCA, regardless of sellers' market power. It would also extend utilities' obligations regarding QFs to a whole new category of power producers, including utilities' obligation to offer to purchase power at the purchasing utilities' avoided cost. 2. You ask whether the SEC, the states, and FERC have the resources to accommodate changes that might occur as a result of EEI's proposed legislation. I do not know with respect to |