Governor Paul Patton's Senate Testimony on FERC's Standard Market Design
10/17/02

The following testimony, presented to the United States Committee on Energy and Natural Resources on September 17, 2002, is Kentucky Governor Paul Patton's response to the 600-plus page Federal Energy Regulatory Commission's Standard Market Design (SMD) proposal.

Good morning, and thank you Chairman Bingaman, Senator Murkowski and other committee members, for allowing me the opportunity to speak about one of the most important energy issues to ever impact the nation; the Notice of Proposed Rulemaking (NOPR) recently published by the Federal Energy Regulatory Commission (FERC) to impose a standard market design for electricity in the United States. Let me first state that I realize it is FERC’s responsibility and that of the Congress to support policies that are in the best interest of the entire nation. I respectfully submit that FERC’s proposed rules do not meet that criteria. 

This proposed rule is moving us toward an energy policy that benefits a few at the expense of many. While we see potential benefits to a vibrant wholesale market with clear rules to prevent market power abuses, our concern is that this rule is too broad and has implications far beyond the wholesale market. 

In Commissioner Brownell’s statement quoted in last Sunday’s press, she acknowledges that this rule will primarily benefit states that have restructured retail electricity markets. Presently, only 15 states have restructured. Thirty-five states have chosen not to remove jurisdiction from their state regulators at this time, choosing instead a system that works, and provides safe and reliable service. This NOPR represents a slippery slope that states, like Kentucky, fear is heading to mandated deregulation of the retail electricity market. 

In my brief comments today, I want to impress upon you three major points regarding FERC’s standard market design. 

The first point is that the FERC rule will have unforeseen and unintended consequences that will not benefit, but in fact harm many states. 

The second point is that I am concerned about FERC policies regarding who pays for transmission upgrades and expansions. 

The third and final point is that we need a cooperative effort in developing a healthy wholesale electricity market that benefits the entire nation, not a mandate to be handed down from FERC. Further, any final rule must take into account the unique regional differences, and individual state interests in electricity markets. 

First, the Notice of Proposed Rulemaking (NOPR) that FERC has issued to establish a standard electricity market design will have unforeseen and unintended consequences. This is a policy change that cannot be taken lightly. Kentucky is the model for cost-based regulation. We have created and paid for generation and transmission systems adequate to meet our need for at least the next ten years. We have maintained low-cost power through responsible corporate management and careful regulatory oversight. For states that have a system that is working well, the negative impact of the proposed rule will be the greatest. 

This proposed rule was fashioned around the presumption that discrimination exists against certain transmission users. However, the remedy proposed by FERC greatly exceeds the perceived problem. It does not cure discrimination. If anything, it reverses discrimination so that Kentucky and states that have low-cost electricity are penalized to benefit those that do not. 

FERC requires Kentucky ratepayers to fund the development of the Regional Transmission Organizations (RTO). We’re concerned with the possibility that Kentucky ratepayers may be required to pay additional costs for services of no benefit to them. Even worse is the possibility that Kentucky ratepayers might be required to pay for resolution of unforeseen problems created by FERC’s proposal. 

At my request, and the request of other state regulators and governors around the nation, FERC has granted an additional 30 days to file comments on the rule. We appreciate the additional time. Still, we are concerned about the many uncertainties, including unforeseen and unintended consequences. FERC itself left a vast amount of uncertainty in its NOPR, asking for comments on at least 100 points. Kentucky has more questions than that regarding the actual impact of this rule. Yet, even with all of the unanswered questions and uncertainty, FERC is trying to move this rule forward very quickly. The speed of this process seems unwarranted and even dangerous. 

We have seen first hand the impact of unintended consequences when we rush to make these kinds of dramatic market changes. The people of California are still reeling from unintended consequences associated with a restructured market. Furthermore, the traditionally low-cost power states surrounding California are likewise still suffering from the consequences of the failed restructuring initiative. The residual effects were felt far beyond the borders of California. 

It’s obvious that others share these concerns. The House Appropriations Committee passed language requiring the Department of Energy to do a cost benefit analysis of the proposed rule. We support the cost benefit analysis and believe it is a vitally important step before any FERC mandated changes to the nation’s electricity market are allowed to take effect. The concerns of individual states and unique regional differences must be considered in the analysis as well. 

Second, I am concerned about FERC policies regarding who pays for transmission upgrades and expansions. 

To states that have ensured adequate generation and transmission facilities through responsible planning, the issue of paying for transmission expansion is of utmost importance. These states have maintained adequate facilities to accommodate their transmission, and do not believe it is fair to have their ratepayers pay for transmission expansion to accommodate the wholesale market. 

I received a letter from Chairman Wood regarding the Southern Governors’ Association’s (SGA) concerns about this very issue. An SGA resolution opposed FERC’s move toward socializing the costs of transmission system expansions and upgrades and urged FERC to adopt a “participant funding” policy where those who benefit pay. In the letter, Chairman Wood says that in fact, FERC has made the switch to “participant funded” transmission upgrades. We are pleased that FERC has made this change in its policy but we are concerned that we may be saying the same words but not talking about the same thing. To clarify, let me give you some background information. 

First, as you know, Congress deregulated the wholesale electricity market in 1992. Since that time, the FERC policy has been that the “cost causer” must pay for any directly caused upgrades or expansions of the transmission system. Beginning last summer, FERC attempted to reverse this policy, and move toward “rolled-in pricing.” This means that all ratepayers on the transmission system must bear the cost whether they directly benefit or not. 

Second, while we are pleased that FERC has agreed with us that participant funding is “the most effective policy for the future,” the reality is that in practice, that is not the way this rule will be implemented. The NOPR does not make participant funding available for two years, and even then, it’s only available to those in an RTO. Worse than that, it’s ultimately the RTO that decides who bears the cost. For states whose utilities are not members of any RTO, participant funding is not even available, and customers in those states will be penalized. In Kentucky, where several utilities have joined RTOs, we still have concerns. Kentucky is in the Midwest region because of our utilities’ decisions to join the Midwest Independent System Operator (MISO) and PJM. As a state with very different interests from those of other states in our region, we cannot attain a comfortable level of assurance that our ratepayers will be protected in a decision made by the RTO. Let’s be clear, Kentucky ratepayers have already been penalized by FERC decisions. 

MISO filed an agreement to exclude native load from paying an administrative cost-adder associated with the RTO. However, in Opinion 453, FERC rejected that agreement, and required retail bundled load to pay the administrative cost-adder. FERC believes native load customers benefit from the RTO. We strongly disagree. This issue will ultimately be decided after a lengthy and costly appeal. 

FERC’s decision demonstrates two things to Kentucky. First, that FERC does not respect a negotiated agreement made by a regional body such as the MISO. FERC rejected the agreement in Opinion 453. What assurance do states have that FERC won’t also reject future decisions made by the RTOs? Second, FERC believes all customers benefit from enhanced transmission services designed to accommodate a wholesale market. In fact, in Chairman Wood’s letter to the Southern Governors, he states as much, saying that “… [a] regional approach to power markets will benefit all electricity customers . . . .” 

If “those who benefit pay” is the policy embraced by FERC, and FERC believes that all customers benefit, then it follows that FERC will find that all customers should pay for expansions and upgrades. 

Yes, Chairman Wood may have “tossed a bone” to those of us in states that do not support rolled-in pricing. However, the devil is in the details. How FERC defines benefits of transmission upgrades can easily turn participant funding into rolled in pricing. There are still an awful lot of unanswered questions. Who determines who benefits and how much? Is it a direct or indirect benefit? What is the timeline associated with these benefits? 

The third and final point is that we need a cooperative effort in developing a healthy wholesale electricity market that benefits the entire nation, not a mandate to be handed down from FERC. Any final rule must take into account unique regional differences, and individual state interests. 

FERC continues to say that they want consistency and certainty in the wholesale electricity market so that companies can attract investment for infrastructure building, technological improvements, and the development of a robust wholesale market. However, this rule creates anything but certainty. 

In today’s uncertain economic environment, consumer confidence is low, investors are leery, and capital for power plant investment has virtually dried up. In this environment, we fail to understand how the rule, as proposed, creates the consistency and certainty that FERC is looking for. FERC has asked for comments on at least 100 points, creating serious uncertainty for states, industry, and investors. The rule, as proposed, removes jurisdiction and local oversight from states like Kentucky that have regulated successfully for over 65 years. According to Jonathan Raleigh, a top Wall Street analyst with Goldman Sachs, “the best performing stocks in the utility industry have been those with fully regulated (state) service territories . . .in the mind of investors regulatory change has only hurt companies and investors.” Let’s be frank, this rule does anything but add more certainty and consistency in the electricity market. 

This NOPR is an unprecedented usurpation of state jurisdiction by FERC. Instead of issuing national mandates, FERC should instead be reaching out in a cooperative effort with state officials to figure out how to make the electricity market work to the advantage of all. That includes utilities, marketers, and please let us not forget –consumers. This rule will impact all customers, from our large energy intensive industrial customers, to your constituents who pay their electricity bills every month. These consumers will find their needs served best not by FERC policy makers, but by state regulators who live and work among them. 

Any effort of this magnitude must be approached, not through a federal directive, but with a thoughtful, cooperative effort, with all of the stakeholders at the table. In this spirit, the National Governors Association Task Force on Electricity Infrastructure issued a paper entitled “Interstate Strategies for Transmission Planning and Expansion.” This paper introduced the idea of Multi-State Entities or MSEs, which would preserve state siting authority. FERC makes reference to this concept in the rule, but proposes an advisory only committee. Again, our concern is that our voice would be lost as one voice in a wide regional group. While FERC has given a nod to the notion that “one size does not fit all” by allowing regional differences, a regional voice is not a substitute for the ability of a state to do that which it does best, protect the interest of its citizens. 

Kentucky seeks to cooperate with FERC to find a solution. We appreciate Chairman Wood’s willingness to work with the states. In the same spirit of cooperation, I am organizing a national conference to be held next month in Louisville, Kentucky. The conference is called “Standard Market Design: A National Discussion with Energy Policy Decision Makers” and Chairman Wood has graciously agreed to be one of our Keynote Speakers. We have also put together a variety of national speakers to address the impact of the rule on unique regional electricity markets. It is my hope that by bringing together this diverse group of people, we can work together to gain a better understanding of differing viewpoints, and develop policy recommendations that states can make to FERC in order to ensure that all interests are addressed and protected. 

In conclusion, let me reemphasize the three major points of my comments. First, that the FERC rule will have unintended consequences; second, that those who benefit from new transmission lines pay for them; and finally, that we need a cooperative effort to ensure that individual states are not harmed by this rule. 

I would like to thank you again for the opportunity to be here and to address you regarding Kentucky’s grave concerns with FERC’s NOPR. I hope I have conveyed the message that Kentucky does not desire to be obstructionist. We have participated in the process, and want to continue to participate in this process in good faith. We want all the voices to be heard. One size does not fit all, and a rush to judgement can only bring unnecessary harm. In Kentucky, we have taken a measured and thoughtful approach to regulating the electric industry. We hope that the national policy makers will learn from the lessons of the past, and avoid the temptation of imposing a national rule that does not benefit everyone equally, and in fact will harm individual states. 

I urge Congress to support the action of the House Appropriations Committee and evaluate the results of the cost benefit studies so that you know the actual impact on regions and individual states before implementing this rule. 

Thank you for your time and your attention. 

Kentucky Association of Electric Cooperatives, Inc. 4515 Bishop Lane * Louisville, KY  40218 502-451-2430 * FAX: 502-459-3209 Terms of Use