TESTIMONY BY GOVERNOR PAUL E. PATTON
SENATE COMMITTEE ON ENERGY AND NATURAL RESOURCES
STANDARD MARKET DESIGN (SMD) HEARING
September 17, 2002 - 9:00 a.m.

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 recently published by the Federal Energy Regulatory Commission (FERC) to impose a standard market design for electricity in the United States.  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.  Specifically, we are very concerned that this may put us on the path towards mandated retail restructuring. FERC Commissioner Nora Brownell, was quoted in last Sunday’s press acknowledging that this rule will primarily benefit states that have restructured electricity markets.  Presently, only 15 states have done so.  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 proposed rule 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. 

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 that benefits the entire nation, and takes into account the unique regional differences in electricity markets, not a mandate from FERC.

The first of the three concerns that I have is that FERC’s proposed rule will have unforeseen and unintended consequences.  This is a policy change that cannot be taken lightly.

Kentucky is a model for cost-based regulation.  We have done it successfully, and our efforts have yielded adequate generation and transmission capacity for the future.  This rule was written to address perceived discrimination against certain transmission users.    This rule doesn’t fix that.  If anything, it reverses discrimination so that Kentucky and states that have low-cost electricity are penalized to benefit those that do not.

Kentucky consumers will pay more for their electricity as a result of this rule.  Given our lack of dependence on the wholesale market, our consumers will see little to no benefits.  Chairman Wood has pointed out that the rule allows states to keep their low cost power through long-term contracts.  Kentucky has two recent experiences which clearly indicate that suppliers are unwilling to commit to long-term contracts at the existing cost to service rates, if they can realize greater profits on the wholesale market.  

FERC itself left a vast amount of uncertainty in its proposed rule, asking for comments on at least a hundred points.  Even so, this rule is on a fast track.  Per our request, along with others, FERC has granted an additional 30 days for comment, which we appreciate.  Still, the speed with which FERC wants to move forward and implement these rules is alarming.  We have already seen what happens when markets undergo dramatic change too quickly.    People in California and the surrounding states are still reeling from the unforeseen and unintended consequences of the failed California restructuring effort.

The recent action by the House Appropriations Committee requiring a cost-benefit analysis of the proposed rule indicates other members of Congress share this concern. 

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 do not believe it is fair to have their consumers pay for transmission expansion to accommodate the wholesale market.

The Southern Governors passed a resolution opposing socialization of transmission expansion and upgrades, and endorsed participant funding, meaning those who benefit from the expansion pay. 

Chairman Wood responded to the media and by letter to the Governors stating that FERC in fact agreed that (quote) “participant funding . . . was the most effective policy for the future.” 

We are pleased that FERC has realized this.  We’re saying the same words, let’s just make sure we’re talking about the same thing. 

The proposed rule does not make participant funding available for two years, and even then, it’s only available to those in an Regional Transmission Organization (RTO).  Worse than that, it’s ultimately the RTO that decides who bears the cost. 

In Kentucky, where several utilities have joined RTOs, we still have concerns.  We have participated in negotiating agreements with the RTO.  However, we are troubled by the fact that FERC has rejected at least one such agreement on RTO costs.  This  demonstrates that FERC does not respect a negotiated agreement made by a regional body. 

Also of concern is a statement in Chairman Wood’s letter to the Southern Governors saying that (quote) “… [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, where everyone pays for new transmission.  However, the devil is in the details. How FERC defines benefits of transmission upgrades can easily turn participant funding into rolled in pricing

The third and final point is that we need a cooperative effort that will benefit the entire nation, not a mandate handed down from FERC.

FERC continues to say that they want consistency and certainty in the wholesale electricity market.  In today’s economic environment, we fail to understand how this rule, as proposed, creates the consistency and certainty that FERC is looking for.  The rule as proposed removes jurisdiction from states like Kentucky that have regulated successfully for over 65 years. 

Rather than issuing national mandates, FERC should be reaching out in a cooperative effort to ensure that the electricity market works 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 best served, not by FERC policy makers, but by state regulators who live and work among them. 

Any effort of this magnitude must be approached with all of the stakeholders at the table. While FERC has given a nod to the notion that “one size does not fit all,” a regional voice is not a substitute for the ability of a state to do what it does best, protect the interest of its citizens.

I would like to thank you again for the opportunity to be here.  I hope I have conveyed the message that Kentucky does not desire to be obstructionist, but we do want all voices to be heard. 

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 to adopt a national rule that does not benefit everyone. 

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.