Deregulation and Restructuring of the Electric Utility Industry Study Committee Minutes
	November 23-24, 1998 Third and Fourth of Five Meetings

MEMBERS PRESENT

MEETING IN BRIEF

Organizational staffing provided by Mark Johnson, Senior Legal Counsel
Additional staffing and minutes prepared by Jan Johnson, Legal Counsel

1. Background.
2. Administrative Matters.
3. Panel Presentation: Regulators.
4. Panel Presentation: Consumer Issues.
5. Market Power Issues.
6. Regional Marketing Areas.
7. Illinois Experience.
8. Panel Presentation: Renewable Energy Sources and Conservation Issues.
9. Transition Costs and Benefits -- Stuart Ormsbee, IUB.
10. Panel Discussion: Stranded Costs.
11. Presentation: Mid-continent Area Power Pool (MAPP).
12. Physical Infrastructure Issues.
13. Year 2000 (Y2K) Issues.
14. Federal Initiatives: William Smith, IUB.
15. Written Materials on File With the Legislative Service Bureau.

COMMITTEE BUSINESS

1. BACKGROUND.

The Deregulation and Restructuring of the Electric Utility Industry Study Committee was established by the Legislative Council to "review the action of other states in deregulation and restructuring the electric utility industry and other states' experiences in enacting legislation for this purpose. [The Committee shall c]onsider the potential impacts of deregulation and restructuring upon electric utilities and commercial, business, and residential consumers. [The Committee shall also d]evelop recommendations regarding deregulation and restructuring of this industry.

The Council authorized five meetings for the Committee. The Committee held its first and second meetings on October 19 & 20, 1998, and the third and fourth meetings on November 23 & 24, 1998. The fifth and final meeting is presently scheduled for December 14, 1998.

2. Administrative Matters.

Call to Order. The meeting was called to order on November 23 at 10:08 a.m. at the Iowa Utilities Board by Co-chairperson Rants.

Approval of Minutes. Revised minutes of the October 19-20 meeting were distributed to the Committee. Co-chairperson Representative Christopher Rants moved that the revised minutes be approved as distributed. The motion was seconded and passed unanimously.

Next Meeting. Co-chairperson Rants moved that the Committee meet on December 14, 1998, in order to review the proposed draft of restructuring legislation to be jointly proposed by various stakeholders in the restructuring process. The motion was seconded and passed unanimously.

Adjournment. The meeting adjourned at 3:24 p.m. on November 24, 1998.

Remarks by the Co-chairperson. Co-chairperson Rants made brief remarks at the close of the November 23rd meeting day regarding his attendance at a recent conference on electric utility restructuring hosted by the National Conference of State Legislatures (NCSL). He noted that presentations had been made to support the fact that "green" energy, or energy that is more environmentally beneficial than other energy forms, has been preferred by consumers even in noncompetitive markets. Co-chairperson Rants expressed his hope that such optimism could be sustained in Iowa.

3. Panel Presentation: Regulators

a. Ron Polle, Office of the Consumer Advocate. Mr. Polle expressed the view of the Office of the Consumer Advocate that Iowa would be ill-advised at this time to pursue electric utility restructuring. He noted in support of this conclusion that before a choice of utility suppliers could be offered to consumers, many actions would have to be taken by a number of different parties. To accomplish an effective restructuring, the process should not be rushed, and it could take several years before the first customer could be offered a choice among electricity suppliers. Moreover, current legislative funding levels are inadequate for quick resolution of all of the related issues.

Restructuring will also cause regulators to have much more work. For example, the Iowa Utilities Board (IUB) would need to develop administrative rules on many topics, including a code of conduct for suppliers, rules for disconnection of service, and prohibitions and penalties for "slamming," (i.e., unauthorized or deceptive switching of a consumer's supplier) among other topics. The IUB would also have to "unbundle" electricity prices, so that generation and transmission costs could be separately calculated and appropriately charged. In addition, the IUB would be responsible for overseeing the calculation and litigation of stranded costs (i.e., the unrecovered portion of investment costs), which Mr. Polle predicted would be the single most complicated, contentious issue before the IUB in many years. The IUB would also need to examine applications for licensing of suppliers, because licensing will not provide the same level of protection presently available for consumers. The IUB will have a lesser ability to police new suppliers in a competitive market, as compared to a regulated market, because the new suppliers' contact with the state will be less than that of regulated suppliers, the state will not be regulating the price or other aspects of the new suppliers' business, and the state will have less leverage over new suppliers. Nevertheless, customers need to be adequately protected. Customers need to know who is able and willing to be a supplier, and need to be able to compare suppliers on a price basis.

Mr. Polle noted that the Office of the Consumer Advocate will be monitoring market developments to determine the answers to such issues as whether growth in the market is occurring, whether consumers have complaints, whether all of the market powers issues are adequately resolved, whether slamming is a frequent occurrence, and whether discrimination occurs in relation to the offering of electric service, among other developing, and as of yet, unknown, issues.

b. Bob Haug, Executive Director, Iowa Association of Municipal Utilities. Mr. Haug noted the prevailing view that deregulation of the electric utility industry will produce better prices, but cautioned that for such a result to occur, the Legislature must accurately identify and address the relevant issues. Iowa is already among states with lowest utility rates.

Mr. Haug then explained the role of municipal utilities in the restructuring process. A municipal utility is regulated by a city council or a board of trustees, not by the IUB. Its citizen owners are affected by its operations. The function of a municipal utility, like that of a regional electric cooperative (REC), is to serve the area that it covers. In contrast, the function of an investor-owned utility (IOU) is to maximize the return to its investors. Restructuring will therefore require the creation of different rules for the different types of participants.

c. Bob Swindell, Iowa Association of Electric Cooperatives. Mr. Swindell explained that regulation of the electric utility industry currently involves regulation of wires, or transmission functions, as well as regulation of retail markets. In a deregulated retail market, however, Mr. Swindell indicated that the RECs' position is that there should be as little regulation as possible. The laws and rules associated with deregulation should not result in overburdening new entrants to the market, or else such laws and rules will function as barriers to entry into the deregulated market. The RECs have a large interest in having new entrants in the retail market. However, with regard to regulation of the wires, or transmission functions, the RECs believe that the current regulations are working, and therefore recommend little change in this portion of the electric utility industry.

d. Questions From Legislators. Senator Patrick Deluhery asked Mr. Polle if restructuring offers any benefits to Iowans. Mr. Polle indicated that the Office of the Consumer Advocate believes that restructuring offers no net benefits to the state as a whole.

Representative Kay Chapman followed by asking whether the fact that restructuring is an expensive and time-consuming process is actually an argument for starting now, so that the process could be completed. Mr. Polle responded in the negative, noting that in order to receive the full benefit of restructuring, all surrounding states should act together, and that so far, Illinois, with high-cost power, is currently the only one that has started the process. Representative Chapman then asked Mr. Polle if his office is advocating a regional concept. Mr. Polle stated that it is simply a fact, not an argument. Representative Chapman also asked Mr. Polle if restructuring legislation should include a prerequisite to implementation that the surrounding states enact restructuring legislation by a certain date, similar to what the Legislature had required when enacting regional banking legislation. Mr. Polle replied in the affirmative.

Senator Mary Lundby then asked Mr. Polle for an estimate of the time required to implement restructuring legislation. Mr. Polle indicated that his best estimate would be a period of at least two years. Senator Lundby then asked whether some states might choose not to restructure. Mr. Polle stated that such a result is possible. Illinois is the only contiguous state with such high electricity prices that customers want lower prices and therefore are eager for the deregulation process. Wisconsin and Minnesota are more like Iowa, with relatively low electricity prices, and thus may not have the same incentive to restructure. Senator Lundby also asked whether REC viability is jeopardized if Iowa delays the restructuring process. Mr. Polle answered negatively, noting that the drive to restructure the electric utility industry in Iowa is primarily by IOUs, who see a deregulated market as a venue for increasing profits. Therefore, Mr. Polle stated that he does not believe that delaying the restructuring process would endanger REC viability.

Representative Clyde Bradley asked Mr. Polle whether he knew of any studies showing a cost disadvantage resulting from restructuring. Mr. Polle noted that some studies show that restructuring will allow IOUs to increase their profits from the generation of electricity, but that these studies do not account for certain costs associated with the restructuring process such as public education, programs for low-income consumers, and certain other items. Representative Bradley also asked whether the potential loss of public utilities is serving as another driving factor for restructuring. Mr. Polle indicated that the merger frenzy in the last year is not really a factor, and that the mergers would have occurred even if regulation were expected to continue. Mr. Polle emphasized that for competition to work, however, the market must have a large number of suppliers, or an unregulated oligopoly will result.

Co-chairperson Jensen asked if the RECs would continue to provide electricity to rural areas in a deregulated market, and the panelists replied in the affirmative. However, Mr. Polle noted the need for increased budgets for the IUB and the Office of the Consumer Advocate when deregulation is implemented.

Representative Chapman asked Mr. Polle whether part of the pressure for restructuring in Iowa is the existence of higher rates in Illinois. Mr. Polle answered yes. Representative Chapman then asked about the pressure to deregulate in Indiana, where the electricity rates are even lower than in Iowa. Mr. Polle indicated that the same pressure exists, but that Indiana has adopted a cautious approach to restructuring.

Senator Lundby asked what market barriers the restructuring legislation should address in order to encourage the existence of more municipal utilities. The panelists suggested addressing the ability of a community or county to aggregate customer loads. Senator Lundby also asked whether any existing regulations would prevent RECs from expanding. The panelists noted that some tax issues may exist, but expressed greater concern for the potential regulations in a restructured industry, such as high bonding requirements that would be a barrier to entry for small entities.

4. Panel Presentation: Consumer Issues.

a. Lisa Stump, IUB. Ms. Stump outlined relevant consumer protection issues in electric utility restructuring, and what had been done in other states, based on restructuring laws in 10 states that have enacted restructuring legislation.

Default Provider. First, Ms. Stump explained that states made provisions for a default provider for customers who had not made a choice among electricity suppliers. Under most legislation, the default supplier is usually the consumer's incumbent provider, but some states have established a bidding process, with assignment of the consumer to a particular supplier. Another issue that arises is service to a customer when no provider is "attracted" to the customer. In such cases, legislation may provide for a "provider of last resort," a supplier that must furnish electricity to such a consumer at a reasonable price. Such service is regulated and tariffed according to reasonable cost recovery. Or, a state may provide for "distribution and transmission" utility service. This service involves an obligation to connect consumers to electric utility service, and involves traditional regulation except for the unbundling of competitive service. It may include rate caps during a specified transition period.

Transition Approach. "Standard offer service" is an option which can be established for customers. This option provides the consumer an opportunity to choose a regulated rate during a limited transition period instead of choosing a supplier which will charge a market rate. The bill for standard offer service would include a comparison of the regulated rate to market rates as a means of educating the customer about choice of electric service.

Licensing. With regard to licensing of electricity suppliers, some legislation requires bonding, and other requirements may also be mandated. These requirements are meant to address the problems that some states have had with reliability of suppliers and related issues. Some legislation similarly addresses the regulation of suppliers through rules on such subjects as notice of cancellation, the right to rescind, renewal issues, disclosure, and slamming, among other issues. For example, some states require disclosure of certain information prior to initiation of service. Billing forms may have to be presented according to a standardized format, or the fuel mix of the provider may have to be disclosed. With regard to various forms of unfair business practices such as the "slamming" and "cramming" (i.e., addition of unauthorized charges to a consumer's bill) practices that have developed in the deregulated telecommunications market, some states require written authorization from the consumer to change suppliers, including third-party verification, and others have a "do not call" list to insulate consumers who request such protection from solicitation by suppliers. In order to prevent redlining and other forms of discrimination, some states prevent the imposition of late fees, or regulate deposits. One state requires an explanation for the denial of service.

Consumer Education. All existing laws require some form of consumer education, generally by a neutral source. Funding for such education may be provided via a legislatively imposed special charge, or by a special appropriation. Some states have provided their utility commission with new powers, such as the power to order restitution. Privacy issues are also regulated, including the information that can be released to suppliers, and accessibility of consumer billing and usage information. Legislation may also continue or establish programs for assistance of low-income consumers and establish forms of competitively neutral funding, such as a charge on distribution bills.

b. Ron Polle, Office of the Consumer Advocate. Mr. Polle noted that the view of his office is that restructuring of the electric utility industry would be harmful to consumers as a whole at this time. Customers who are likely to receive the least benefit from restructuring are residential or other low-use consumers.

Possible Approaches. The Office of the Consumer Advocate has created a consumer bill of rights that should be considered in any restructuring efforts, in order to reduce the risk of harm that restructuring poses to consumers. Consumers have a right not to be harmed by restructuring legislation. The Consumer Advocate's Office recommends that current prices be capped for at least 10 years for residential and small business customers. If prices are lowered as a result of restructuring, as suppliers contend will happen, then a price cap should not harm suppliers. In addition, consumers have the right to participate in a robust competitive market. Such a market cannot be legislated; it must develop. The market must be monitored for a period of time following the implementation of initial restructuring efforts, and the Legislature should have the opportunity to make adjustments to the legislation based on such monitoring.

Consumer Issues. Consumers also have the right to accurate and easy-to-understand information related to choice issues, such as prices and usage. Consumers should have the right to keep certain information private, with the right to grant approval prior to the release of such information to suppliers. Consumers also have the right to universal service at reasonable prices. An unregulated market will not guarantee reasonable prices. The consumer's delivery company must be a provider of last resort, and capped standard offer service should be available. When the price protection period ends, the regulated delivery company should be required to use its best efforts to secure quality, lowest-cost electricity for the consumer, because it has more leverage than the consumer to get the lowest price for reliable power.

These elements are among the minimum standards that suppliers should be required to meet. An enforcement mechanism should also be included in any restructuring legislation. Moreover, Mr. Polle emphasized that these elements are not intended to represent an exhaustive list of consumer interests, but should merely serve as guideposts.

c. Susan Weinstock, Utilities Issues Team Leader, American Association of Retired Persons (AARP). The AARP is concerned about consumer protection in the electric utility restructuring process. Ms. Weinstock cautioned that Iowa should be careful in approaching restructuring, because Iowa residential electricity rates currently hover slightly above the national average residential rate. Industrial users in Iowa experience rates slightly below the national average. Residential users do not have enough market power to get the lowest rates. However, all customers need affordable rates. Standard offer service is a necessary part of any restructuring efforts, and such service should be competitively bid. In addition, the quality of electric service must be maintained, or improved beyond the levels currently experienced. Significant penalties should be imposed if a supplier fails to meet quality standards.

Stranded Costs. Consumers should not have to pay for all stranded costs. Individual hearings are necessary on each asset for which a supplier claims stranded costs. In addition, consumers must be protected against unreliable providers. Existing deceptive practice and consumer protection laws should be made applicable to suppliers' activities in restructuring legislation. Legislation should also protect customer information, requiring authorization by the consumer prior to disclosure to suppliers. Consumer education by a neutral third party should be mandated in order to assure wise choices by consumers in a deregulated market. Disclosure of price and other supplier information should be required in order to aid consumers in comparison shopping among suppliers. In conclusion, Ms. Weinstock noted, there should be no restructuring if consumers would not benefit.

d. Questions by Legislators. Co-chairperson Rants asked Mr. Polle if the Office of the Consumer Advocate is suggesting that default providers should be the incumbent providers, and Mr. Polle answered in the affirmative. Co-chairperson Rants then asked why the default supplier position should not be subjected to a competitive bidding process. Mr. Polle indicated that costs associated with any bidding process would be passed on to customers, and that some customers do not want to change providers. Co-chairperson Rants also asked whether out-of-state providers of electricity should have a physical business location in Iowa. Mr. Polle answered in the affirmative, and Ms. Stump stated that for some services, a supplier would need a physical business location in Iowa.

Co-chairperson Rants asked Ms. Stump if any states had offered choice of suppliers to residential customers before industrial customers. Ms. Stump answered that according to her research, no state had approached the issue in that manner. Some states have used a "flash cut," giving all customers choice at the same time; other states used a phase-in approach, starting with the largest customers, and progressing in phases to the smallest customers. Co-chairperson Rants also inquired about the consumer education process in Pennsylvania. Ms. Stump indicated that it was overseen by an advisory board. Co-chairperson Rants asked whether other states limited the sharing of consumer data between an affiliated distributor and a supplier. Ms. Stump answered yes, noting that states had imposed strict codes of conduct which limited interaction between a supplier and its affiliates. Co-chairperson Rants asked Ms. Weinstock if the AARP would recommend a rate cut for consumers if restructuring legislation was introduced in Iowa. Ms. Weinstock stated that the AARP would take a position that would ensure that consumers receive the benefit of restructuring, noting that in California, consumers did not receive the benefits from restructuring. Co-chairperson Rants then asked Ms. Weinstock if AARP members would participate in aggregation, and whether the AARP would be an aggregator of electricity customers. Ms. Weinstock indicated that AARP customers would likely participate in aggregation, but that the AARP had not determined if it would be an aggregator. Ms. Weinstock also stated that her organization would like to see the IUB promote aggregation of customers, possibly using an opt-out system.

Co-chairperson Jensen asked Ms. Weinstock who should pay for the utilities' stranded costs. Ms. Weinstock stated that such costs should be shared, but that each asset should be individually reviewed before deeming it a recoverable stranded cost. Value estimates calculated by the utilities on the assets are often "gross" values, and the utility should be required to justify its calculations.

Senator Deluhery asked Ms. Stump if restructuring legislation should include standard offer service. Ms. Stump stated that some states did maintain the option of bundled electricity service for a period of time, until customers become more familiar with the choice process, and that such standard offer service rates are often capped. In addition, standard offer service may be available only to residential, or low-use, consumers by the terms of the legislation, and that return to standard offer service by a consumer who has elected to choose a supplier may be limited. Senator Deluhery asked Mr. Polle how the Legislature should proceed with the restructuring issue if such restructuring would produce no net benefit to Iowans at this time. Mr. Polle stated that the Legislature should not proceed with restructuring, but that if it does, there are at least certain minimum protections for consumers which should be included. Senator Deluhery asked how a supplier could be made to provide electricity to a consumer in a free enterprise system. Ms. Stump noted that other states had used the concept of "provider of last resort" to address this problem. Ms. Weinstock qualified, however, that a problem may exist with such a designation, and that the Legislature would not want all residential customers to be allocated to a supplier of last resort. Senator Deluhery reflected that he believed that the issues involved in the restructuring debate are similar to those in many other legislative subjects, such as pensions and banking. Ms. Stump emphasized that allowing for sufficient time in developing adequate rules is a critical part of any legislative proposal.

Representative Bill Brand asked Mr. Polle if the Office of the Consumer Advocate has been participating in the process of drafting proposed legislation along with other interested stakeholders, and Mr. Polle indicated that they have. Representative Brand then asked Mr. Polle to comment on price caps as a form of consumer protection. Mr. Polle stated that price caps protect consumers from harm. Current consumer protections should be continued in any restructured market. Representative Brand asked if this concept had been presented to the stakeholders' group, and Mr. Polle indicated that it had, but that opinions on the issue differ. Some parties recognize that the concept must be part of any package, but not all agree that it should be. Representative Brand then inquired about low-income assistance programs. Ms. Stump stated that currently, there is no state funding for such assistance. The state receives some federal money for heating assistance for low-income consumers, as well as moneys from voluntary customer contributions to the fund. Representative Brand asked if trend data existed for such funds, and Ms. Stump answered that it probably did exist. Ms. Weinstock emphasized that the state should mandate such funding in a restructured market.

Senator Lundby asked about the repository for customer information following restructuring. Ms. Stump stated that in most states, the delivery service provider retained such information. Senator Lundby asked about controls on the use of the information, and Ms. Stump noted that the use of the information would be regulated. Furthermore, she noted that supplier codes of conduct would have to be backed by authority of the IUB to impose penalties when supplier conduct exceeded the boundaries established in the codes of conduct.

Representative Chapman inquired about the cost of enforcement. Ms. Stump opined that the process would potentially be expensive, and that it may be as much or more expensive for the IUB to regulate a restructured market than to regulate the current market structure.

Senator Lundby asked about the standard of service for suppliers. Ms. Stump stated that the IUB is currently reviewing this issue, and that it is not a requirement to have a physical business location and staff in Iowa. It will be hard to attract providers to Iowa in any event, and the IUB does not want to add unnecessary requirements that would discourage potential suppliers. The IUB is trying to strike a balance on such issues. Senator Lundby noted that telephone fees have decreased since the deregulation of the telecommunications industry, and asked Mr. Polle if such a result could also be expected for electric utilities. Mr. Polle stated that for such a result to occur, enough suppliers must enter the market. The question is, will enough suppliers want to supply in Iowa? If the answer is no, we can expect no price decreases.

Representative Bradley asked Ms. Stump about public benefit charges and mandated reductions. With regard to the former, Ms. Stump stated that they were variable with usage, and with regard to the latter, the IUB has not taken a position.

5. Market Power Issues.

Background Presentation by Lisa Stump, IUB. The definition of market power is the ability of one supplier to be able to control the price in the market. The Legislature can take one of three approaches in addressing market power, either a prevention/mitigation approach, a remedy/penalty approach, or a combination of the two approaches.

Vertical market power is the joint control of generation, delivery, and marketing functions. Retail sales are presently regulated by the states, while the wholesale market is subject to federal regulation. In restructuring, the federal government regulates transmission activities, and states regulate customer services and distribution functions. Generation of electricity is regulated by the market in a restructured environment. Other states have utilized different approaches to vertical market power issues in restructuring. First, divestiture of generating assets may be mandated, encouraged with incentives tied to stranded cost recovery, or simply allowed. Structural separation, involving separate corporate subsidiaries for regulated and competitive functions, has also been used in some states. Finally, functional separation for regulated and competitive functions is the minimum approach used to address vertical market power issues.

Other states have used several market structure remedies, as well. In some states, an independent system operator controls transmission functions, in others it is controlled by an independent transmission company (a "transco"), and in still others, transmission functions are controlled via a power exchange.

Horizontal market power is the ability of an entity to control production prices due to market concentration. Short of ordering divestiture, it is very difficult to regulate current market power. To prevent future market concentration, policy can be used to control mergers. The market power of an incumbent provider can be controlled by limiting use of the company's name and logo, and by addressing customer inertia through such actions as requiring bidding for the position of default provider, for example.

Questions by Legislators. Representative Chapman inquired about potential First Amendment problems in regulating use of a name or logo of a company. Ms. Stump replied that when that issue had been raised in response to proposed limitations in California, the utilities board did not proceed with such limitations.

Representative Metcalf asked about structural separation issues. Ms. Stump stated that currently the IUB tries to prevent cross-subsidization, and anticompetitive behavior. The Legislature should also add a code of conduct to address structural separation issues in any restructuring legislation, and should establish remedies for violation of the code of conduct.

6. Regional Marketing Areas.

Ohio Legislative Proposal: Presentation by Dr. Ken Rose, National Regulatory Research Institute. Dr. Rose outlined the regional marketing area approach to restructuring as proposed in legislation introduced in the Ohio House and Senate. Dr. Rose noted that Ohio's approach was similar to proposals that had been made in other states, including Mississippi, Missouri, and Nevada. A regional market area approach essentially divides current utility service territories into smaller units, called regional market areas (RMAs). The concept was originally borrowed from Title 7 of the Energy Policy Act, which allowed states to use RMAs, but did not precisely define their use. RMAs would be aggregate pools of a mix of retail customers (residential and industrial), and would exist in addition to retail competition. No consumer would be forced into an RMA. The public utility commission would select a supplier for each RMA. The current legislative proposal establishes each RMA for five years, with two bids for competition.

The precise composition and customers of the RMA have not been determined, but, in general, it must be large enough to provide aggregation benefits to members, and the administrative burden associated with the RMA must not be so great as to discourage new entrants from the market. An RMA should not have too many "undesirable" customers, and each RMA should be comparable in size and customer mix.

With regard to inclusion of consumers in an RMA, customers are first allowed to choose a supplier. Customers who do not choose a supplier are placed in an RMA. A customer can later opt out of the RMA, but may be required to pay a fee that approximates the real cost to the RMA of making the switch. RMA boundaries would be based on the location of existing lines and the avoidance of bottlenecks in transmission. Bidding for RMAs could be like FCC multiple-round auctions, which are open-bid auctions, or RMAs could be allocated by a sealed bidding process. Bidders should be required to meet minimum qualifications. Incumbent utilities would have the opportunity to convince their customers to choose them and therefore not become part of the local RMA. For customers who do become part of the RMA, the incumbent utility can urge that they return to their service.

RMAs limit horizontal market power and speed the provision of benefits from competition. The benefit of an RMA approach is that it overcomes the initial customer inertia which follows restructuring, therefore giving the incumbent utility the majority of customers by default. Studies show that many customers would stay with the incumbent company, even if offered a substantial price discount to switch suppliers. Experience with the AT&T divestiture also supports this conclusion. The Federal Communications Commission (FCC) used a random assignment process to combat the problem, but it was perceived as arbitrary, and disliked by many consumers.

Questions by Legislators. Representative Metcalf asked how the proposal addressed stranded costs, and Dr. Rose responded that they were not addressed by the RMA proposal, but were dealt with separately.

Co-chairperson Rants asked about cooperatives' participation in RMAs. Dr. Rose stated that a coop could opt in, as could a municipal utility. Home rule in Ohio is very strong. Co-chairperson Rants asked if the proposal included an environmental portfolio. Dr. Rose indicated that it includes only a requirement for a certain percentage of renewable energy sources.

Co-chairperson Jensen asked if Iowa utility territories are comparable to those in Ohio. Dr. Rose noted that some areas in Ohio were too large to promote competitive bids. Smaller territorial units are preferable for an RMA concept.

7. Illinois Experience.

Presentation: Mr. Jim Monk, President, Illinois Energy Association. The Illinois experience with restructuring occurred in three stages: educational, legislative, and implementation. The focus of this presentation was on Illinois' legislative phase, which took approximately one year.

Approximately 85 percent of Illinois utility customers are serviced by just two providers, Commonwealth Edison and Illinois Power. Illinois is a high-cost state, as compared to electricity rates in other states. The two biggest providers of electricity are nuclear-powered, and have higher costs. Therefore, rate reductions for Illinois' residential customers were the key to the passage of the restructuring legislation. For Commonwealth Edison customers, the rate reduction was 15 percent in 1998, and will be an additional 5 percent in 2000. The restructuring law set up a transition process, which began with the 1998 rate reductions. The next step in the process is in 1999, when industrial users are permitted to choose their utility.

The legislative process in Illinois was lengthy, compared to the legislative process that would occur in some other states. Mr. Monk opined that the restructuring legislation was the most important bill in most legislators' careers because it impacted all constituents. Joint legislative committees dealt with the issue initially, followed by a special house committee. Constituent benefits were the motivating factor for the ultimate passage of the legislation, in what was otherwise a very political environment. Funding for utility bill assistance for low-income consumers was eventually addressed by a per meter charge that supplements federal money received by the state for such assistance. The new law begins to address environmental issues related to utility operations, as well as labor issues such as the displacement of workers as a result of utility restructuring. The law was largely the result of collaborative effort by various stakeholders in the restructuring process; approximately 90 percent of the law was produced by utility companies working with other groups that would be affected by restructuring.

Questions by Legislators. Co-chairperson Rants asked why residential customers in Illinois were scheduled to be last in choosing their electricity supplier, and whether the residential consumer would have any effective choice available at that point. Mr. Monk stated his belief that a lot of activity will occur in the residential markets, because many people in Illinois do not like their utility. Co-chairperson Rants asked whether the Illinois law requires an environmental portfolio. Mr. Monk stated that utility disclosure of energy sources is mandated by the law, plus the law establishes a fund for research and development on renewable energy sources and "clean" coal that is funded with a per-meter charge. In addition, the utility companies contributed to a research and development fund for energy efficiency. Co-chairperson Rants asked if the meter charges are imposed on low-income consumers, too. Mr. Monk stated that a charge of 40 cents per month is imposed on all meters.

Representative Metcalf inquired about the public right-of-way fee for electricity. Mr. Monk stated that it was a carryover from telecommunications activity, but that it does not override franchise agreements. Representative Metcalf asked if this situation operates as an inequity. Mr. Monk indicated that he did not think so. Representative Metcalf asked if major revisions or adjustments to the legislation are anticipated. Mr. Monk explained that a technical correction bill already went through the Illinois Legislature, but that the Legislature was inclined to resist any substantive changes for the present, until the legislation has been given some time to be implemented.

Representative Bradley asked Mr. Monk if, based on the Illinois experience, there is anything he would recommend that Iowa not do in the restructuring process. Mr. Monk answered no. He further offered that there had been much concern in Illinois that the federal government would act on the restructuring issue and preempt state effort. Mr. Monk stated that he is concerned for states that still have not acted on the restructuring issue, because their efforts could be preempted if federal legislation is soon undertaken. He expressed his hope that states which acted on the issue prior to any potential federal action would be exempted from applicability of the federal law (i.e., grandfathered), but acknowledged that there is no guarantee of such protection.

Senator Lundby asked about current rates in Illinois. Mr. Monk stated that Illinois' rates are still high in comparison to other midwestern rates, but that they are comparable to the average rates in other large cities.

Senator Deluhery asked how Illinois rates had become so high. Mr. Monk explained that the use of nuclear power plants for generation of electricity caused the high prices. He noted that the incident at Three Mile Island caused additional building and safety requirements in other nuclear power plants, which increased building costs associated with such plants. Co-chairperson Rants noted that nuclear generation accounts for about 60 percent of the electricity in Illinois, compared to a national rate of approximately 20 percent.

Representative Bradley asked if restructuring would result in a decrease in residential utility rates, even in a state like Iowa. Mr. Monk responded that such would not necessarily be the case, depending upon the particular conditions in the state.

Senator Michael Gronstal asked about Iowa's ranking in terms of residential rates, and was told that Iowa ranked in the highest one-third of residential rates.

Co-chairperson Rants asked about Illinois' approach to stranded costs. Mr. Monk indicated that Illinois had adopted a lost revenue approach, like the federal government. Under this theory, the party that caused the stranded cost must pay for it in restructuring. Illinois decided, as a matter of policy, that rather than debating the valuation of utility assets, they would permit utility companies to recover only 65 percent of their stranded costs.

8. Panel Presentation: Renewable Energy Sources and Conservation Issues.

Nancy Lange, Izzak Walton League. Ms. Lange noted that Iowa has a longer history than other states, including Illinois, in addressing energy efficiency and other environmental goals with respect to utility operations.

The utility industry is the largest single source of air pollution in the United States. In Iowa, 85 percent of the energy produced by utilities comes from coal. Iowa's coal plants are aging, however, because most of them were built before 1980. Some of these coal plants were "grandfathered" from coverage under the Clean Air Act, under the assumption that the plants would be retired within 10 to 20 years after passage of the Act. However, the old plants have not been retired. New plants are at an economic disadvantage, and that has encouraged the continued operation of the older plants. Coal plants in the area are operating at about 55 percent of their full capacity. The "dirtiest" plants are encouraged to run first, because of the lower cost associated with their operations. Under full competition in a restructured market, the University of Iowa has predicted that emissions could and/or would increase because of this factor.

Ms. Lange stated that the goal should be environmental comparability, where all generators are subject to equal environmental standards, regardless of their power source.

Sharon Tahtinen, Department of Natural Resources (DNR). Ms. Tahtinen began by noting that it is important for the state to support clean and renewable sources for energy in the restructuring process. Chapter 473 of the Iowa Code demonstrates the state's historical commitment to energy efficiency. Ms. Tahtinen then reviewed programs in this area that the DNR deemed as successful.

Floyd Barwig, Iowa Energy Center (IEC). Mr. Barwig stated that IEC was created by the Iowa Legislature in order to focus on energy efficiency and renewable energy and related education, among other issues. The IEC works with all Iowa colleges and universities. The salary budget of IEC is capped. Grantees of IEC funds work with private partners around the state. The focus of projects funded by IEC is on industrial efficiency improvement in Iowa, residential efficiency improvement issues, and national educational issues. Mr. Barwig reviewed some of the recent projects funded by IEC, including hog operation efficiency issues, wind and solar resource assessment, and use of biomass. Mr. Barwig also noted the existence of the Alternate Energy Revolving Loan Program, which functions like an endowment to develop alternative energy resources in Iowa.

Questions by Legislators. Senator Lundby asked if the DNR had been participating in the discussions among the group of stakeholders in the restructuring process, and Ms. Tahtinen responded in the negative. Senator Lundby then asked Ms. Lange about the emissions of Iowa's coal plants. Ms. Lange replied that Iowa's plants are some of the worst in the nation (per capita), though the emissions are not in violation of any existing law or permits.

Representative Metcalf asked Ms. Tahtinen whether the Oil Overcharge Fund is scheduled to exist for a finite time. Ms. Tahtinen stated that it is, but that it involved the use of revolving loans that function like an endowment. Representative Metcalf also asked the panel about Iowa emission standards. The panelists confirmed that state emission standards are no greater than federal emission standards.

Co-chairperson Jensen asked Mr. Barwig whether IEC had funded any private wind plants. Mr. Barwig replied that IEC has helped with construction of approximately seven such plants.

Representative Bradley asked the panel if Iowa has excess capacity in coal-burning plants, and was told that the state does.

Senator Deluhery asked if restructuring would diminish Iowa's commitment to environmental issues. The panelists indicated that such a result need not necessarily occur, if legislators seized the opportunities within restructuring to retain the gains of the past. However, the panelists concurred that dangers exist if the Legislature allows the market to address the issue.

Senator Lundby asked if the DNR has any recommendations on restructuring, and was told that the Department will make recommendations in the future.

9. Transition Costs and Benefits -- Stuart Ormsbee, IUB.

Overview. Mr. Ormsbee made a comprehensive presentation on transition costs and benefits. Transition costs are defined as the costs associated with the investments and contractual obligations of a utility that may not be recoverable by the utility in a restructured environment. Investments in generation sources, power contracts, and public purpose programs are examples of investments and obligations which may involve such unrecoverable costs. Some of these investments may be very costly, especially those undertaken in the 1970s, when public policy initiatives caused an increase in construction and operation costs. Other reasons for unrecoverable costs may be related to improvements in efficiency since construction of facilities, or the result of overestimated demand growth forecasts.

Transition costs will exist if utility revenues are less in a restructured market than they would have been in a regulated market. In comparison, transition benefits will exist if utility revenues are greater in a competitive market than they were in a regulated market.

Categories. Transition costs and benefits can be grouped into several general categories. The first category involves those investments or obligations related to the generation of power, or to the purchase of power. There are several different approaches to the valuation of these investments. The investment can be valued according to its original cost less the amount of accumulated depreciation, which would be the approach in a regulated utility market. In a competitive market, other alternatives are more appropriate, including asset valuation, lost revenue, or an asset sales approach. Asset valuation is calculated according to the expected present value of the profits an asset can generate under its best use. Each asset is valued separately. If total costs exceed market value, transition costs result. This approach is data intensive, and is complex to calculate. Moreover, it may not be the best way to calculate costs. A second alternative is a lost revenue calculation, which is the difference between the revenue that the utility could expect in regulated and competitive markets. This approach requires little data, and involves simple calculations. However, it does not link costs to specific benefits. An asset sales approach uses an actual sale price to determine the market value of an asset. This approach allows investors to determine the future value of an asset. However, the uncertainly inherent in the status of the deregulated utility market may affect the market value of the assets, and some may be difficult to sell, especially if joint ownership of assets is a consideration.

Other states that have addressed the restructuring process are allowing for recovery of cost obligations under approved power contracts. With regard to investments in generation facilities, some states have left the determination on calculation of transition costs to the state utility commission. Restructuring legislation has not always specified which method of valuation is required. Each valuation approach has been used in at least one state.

Regulatory Assets and Liabilities. Costs and revenues that have been deferred by a utility as a result of regulatory action, but that would have been immediately and completely recognized in a competitive market, are termed regulatory assets and liabilities. For the most part, states that have addressed the restructuring issue have left the determination of such costs and revenues to the state utility commission.

States have recognized that unfunded nuclear decommissioning costs should be recoverable by utilities in the restructuring process. Some states have authorized a separate charge towards compensation for such costs; some states include it with other costs in arriving at a total calculation of transition costs.

Start-up Costs. Start-up costs are the costs that a utility incurs when making the transition from a regulated to a competitive market, such as employee retraining or outplacement costs, costs associated with necessary changes to billing systems, and legal expenses associated with restructuring. Each state has deemed different costs as recoverable by the utility.

Mitigation of transition costs by utilities is an important concept. Utilities are expected to minimize their costs. States have taken different approaches to the mitigation requirement. For example, mitigation might involve the renegotiation of or the buying out of an existing power contract, cost control by the utility, the closing of an uneconomic plant, acceleration of depreciation, or a delay in the start of competition among utilities. Securitization is the process of reducing uneconomic costs by issuing securities with lower finance rates to replace existing debt instruments. Securitization requires an accurate estimate of transition costs, and is usually supported by specific legislative language.

State Approaches. Other states have used various recovery mechanisms in relation to transition costs. A competitive transition charge (CTC) is a charge to all customers to pay for transition costs. This mechanism is used when transition costs are high. An exit fee is a charge only to customers who choose a new utility. The exit fee mechanism is generally used when transition costs are low. Other mechanisms have also been utilized.

Some states have imposed limitations on the recovery of transition costs. For example, a state may require that there be no shifting of costs between different classes of customers, that transition costs not serve as the basis for an increase in rates, or that a utility not accelerate depreciation.

Staff Model. The IUB staff model was created for the purpose of estimating the costs or benefits related to the generation function in Iowa if restructuring occurred. The preliminary analysis completed a few years ago suggested that Iowa would experience transition benefits as a result of restructuring the electric utility industry.

The model is a bottom-up, administrative approach, based on a net lost revenue calculation (i.e., the cost minus the revenue, in a competitive market). Iowa's IOUs are most likely to buy or sell power in a competitive market. The model anticipates hourly changes in the price of electricity. The model does not account for line losses or transmission constraints. The model encompasses a multiyear analysis. For all scenarios contemplated by the model, sizable transition benefits result.

The utilities have expressed differences of opinions regarding the model results. The IUB acknowledges that an accurate estimate is extremely difficult to calculate.

Questions by Legislators. Senator Deluhery inquired about "greenfield" costs. Mr. Ormsbee indicated that because the federal government is not presently accepting any nuclear waste, even for plants that have stopped operating, there is no actual cost data available for use in calculation of nuclear decommissioning costs.

Senator Lundby asked whether the IUB's model suggests that transition benefits will exceed stranded costs. Mr. Ormsbee replied in the affirmative, with the caveat that the model results were related to generation only. For example, the model does not include nuclear decommissioning costs. Furthermore, it is presently unknown what will be deemed stranded costs as a result of any restructuring legislation.

Senator Gronstal asked about the effect of recommissioning the Duane Arnold Energy Center. Mr. Ormsbee indicated that the cost effect is unknown at this time.

Co-chairperson Rants inquired about other factors that were not included in the model. Mr. Ormsbee stated that start-up and other costs were not included. Co-chairperson Rants then asked if residential prices would be lower or higher than current rates. Mr. Ormsbee indicated that the model suggested that the rates would be lower in the early years of restructuring, but over time, may increase to rates that were higher than in a regulated market. The model predicts that, over time, all customer classes will experience rate increases. Co-chairperson Rants asked what assumptions were made as part of the model. Mr. Ormsbee stated that the model assumes free competition and equal access by providers (i.e., no market power concerns). Co-chairperson Rants then asked about the difference in rates for early versus later years. Mr. Ormsbee explained that the change in price reflects no change in assumptions, but prices start to increase when there is a need for new generation capacity in the region. In the early years of restructuring, one factor contributing to lower prices is the lower costs of existing generation facilities. New generation facilities tend to increase market price.

Representative Bradley asked if the model could be used for current decision making. Mr. Ormsbee stated that it could not be. Representative Bradley asked if the model was shared with various stakeholders in the restructuring process and with other states, for the purpose of refining the model in the future. Mr. Ormsbee indicated that the model was being shared with various utility companies, but is not yet being shared with other states. Representative Bradley asked if similar modeling had been done in other states. Mr. Ormsbee stated that Pennsylvania and Texas had undertaken similar modeling efforts, but that no state uses their model to determine actual calculations. Models are only used generally to estimate whether costs or benefits will result from restructuring.

Representative Brand asked about the effect of market prices on the existence of transition costs. Mr. Ormsbee agreed that it would be difficult for transition costs to result from the model, even under a range of anticipated market prices. Representative Brand further asked if, in general, the only costs are short-term costs, and the benefits of restructuring are long-term. Mr. Ormsbee agreed with that summary, noting that other state models often look only at a snapshot of current data, but that it is important to look farther into the future when determining overall costs or benefits. Representative Brand inquired about the allocation of the benefits to customers, and whether any models existed related to such allocation. Mr. Ormsbee replied that there are no models related to that issue, because the states that have moved forward with the restructuring process are those with high costs rather than benefits. Standard offer service is one way to return benefits to consumers.

10. Panel Discussion: Stranded Costs.

Eliot Protsch, President, Alliant Utilities. Mr. Protsch noted that the focus of his presentation would be on costs associated with nuclear energy, because that area will likely involve stranded costs. Mr. Protsch then gave a review of operations at the Duane Arnold Energy Center (DAEC), the only nuclear power plant operating in Iowa. The facility has a record of excellence in operation that is much better than other nuclear plants. DAEC is a small plant, however, and its size creates high overhead. He also noted that in comparison to other forms of generation, the pollution figures associated with nuclear energy are very low. Mr. Protsch also detailed the increasing investment in the plant since its initial construction and explained that in the event of restructuring, Alliant would seek to recover any costs that it would have recovered in a regulated market.

Naomi Czhura, MidAmerican Energy. Ms. Czhura stated that MidAmerican Energy believes that restructuring will produce stranded costs, in spite of the predictions suggested by the IUB model. MidAmerican Energy has hired a consultant to make calculations related to this issue. She cautioned that changes in the underlying assumptions can make great changes in the results.

With regard to generation, MidAmerican Energy favors the use of a lost revenue approach because it looks at the stranded cost issue on a year-by-year basis. Use of an actual sales approach would be difficult in Iowa because of the prevalence of joint ownership of power plants. MidAmerican Energy advocates 100 percent recovery for any costs imposed by regulation, as well as the costs of restructuring labor contracts and any nuclear decommissioning costs. For other costs, MidAmerican Energy would support recovery based on a graduated scale.

At least one problem with the IUB model is that it does not account for transmission constraints, which are severe in some areas. Another problem is that the assumption regarding dispatch of units does not reflect actual practice, and that error results in an overestimate in the model of coal plant usage.

Bob Latham, Latham & Associates. The business of Latham & Associates is to advise energy purchasers. Mr. Latham is presently representing the Iowans for Choice in Electricity (ICE) Coalition with regard to restructuring issues. The Coalition seeks freedom of choice among electricity suppliers, with minimal regulatory constraints. Mr. Latham noted his agreement with MidAmerican Energy's analysis of the cost figures used by the IUB in the model, although he would like to believe restructuring will produce transition benefits. With regard to mitigation issues, however, Mr. Latham noted his agreement with the IUB's analysis. He opined that consumers can expect the use of natural gas (specifically, the use of combined cycle) to increase. He is presently seeing five-year fixed-price contracts for power, with some load control and energy efficiency provisions. He has observed a willingness by out-of-state providers to provide to small municipal utilities, noting a recent case involving 20 bidders. Mr. Latham also noted that farmers are off-peak users and would be attractive to an aggregator.

Duane Armstead, General Manager, Greenfield Municipal Utilities. Mr. Armstead believes that the IUB needs legislative authority to calculate and allocate the costs in the restructuring process. The Iowa Association of Municipal Utilities (IAMU) believes costs should be shared between shareholders and ratepayers, and that all categories of costs should be accounted for. However, Mr. Armstead noted that different rates of sharing should be established for different costs. Few costs are the result of regulatory mandates. If the shareholders bore the risks, then they should receive the related benefits. Current customers of municipal utilities and RECs should have to pay their share before choosing another supplier.

Dennis Murdock, Manager, Central Iowa Power Cooperative (CIPCO). The cost of new generation has been relatively high in the past, compared to new technology. He noted that RECs have long-term purchase contracts, or investments, which were entered into in anticipation of a regulated market. He indicated a desire for a mechanism for adequate treatment of stranded costs. Coops have tax issues associated with potential penalties for prepayment of certain costs associated with mortgaged amounts. He opined that federal legislation is necessary to deal with this problem. Nonrecovery of stranded costs will rest on consumer users/owners of coops.

Ron Polle, Office of the Consumer Advocate. The Office of the Consumer Advocate believes that the Legislature should not presume that stranded costs will result from restructuring. The Office believes that stranded costs should be deemed to exist only after an affirmative finding by the IUB, and after litigation, that there are net stranded costs. Only then should customers have to pay for stranded costs. He noted that the best evidence presently available suggests that the utilities have no stranded costs. The IUB model supports this conclusion, and so does evidence in the Office of the Consumer Advocate from the most recent MidAmerican Energy rate case. Mr. Polle also noted that the price paid by CalEnergy for MidAmerican Energy stock, including a premium over book value for the generation portion of MidAmerican Energy's business, is also evidence supporting this conclusion. Iowa contains a tremendous amount of low-cost generation potential that can offset any stranded costs.

Mr. Polle suggested that there should be symmetry between treatment of costs and benefits. Customers should get credit for a percentage of benefits equal to the percentage of stranded costs that they are required to pay.

Questions by Legislators. Co-chairperson Jensen reflected that the price of electricity will not influence the use of power by consumers.

Representative Bradley asked about potential litigation on stranded cost issues, and Mr. Polle explained that such litigation would occur before the IUB. Representative Bradley asked if benefits to stockholders are a form of mitigation. Mr. Polle noted that currently, the price of electricity reflects its cost. However, when the market sets the price of electricity, companies with low costs can reap the benefits of restructuring.

Senator Lundby asked Mr. Protsch how the costs associated with nuclear decommissioning should be paid. Mr. Protsch suggested that it could be built into a wires charge, that utilities could be permitted to charge market prices at the start of restructuring (i.e., no price-controlled period), that utilities could take all undepreciated investments and determine which were prudent investments and then reflect it in a transition charge to some or all customers, or that the Legislature could create another mechanism. Senator Lundby then asked how investors would pay for their share of any stranded costs. Mr. Protsch stated that an investor could receive no dividend, could take a write-off, or that the Legislature could provide for another method, depending on what the future price is estimated to be. Such calculations would have to be part of a total package.

Senator Gronstal asked about the recommissioning of DAEC. Mr. Protsch noted that two other nuclear plants are just starting the process of recommissioning and are seeking a 20-year license. This process is being initiated approximately 10 to 12 years before their current license is scheduled to expire. DAEC may or may not be relicenseable. The current rates presume that decommissioning will occur in 2014. Senator Gronstal reflected that shareholders could possibly have a great asset if DAEC were recommissioned.

Senator Lundby asked the panelists about future closings of coal plants. The panelists replied that peak-load gas plants are the only plants currently in the future construction plans. Other future action will be postponed until market changes resulting from restructuring are more clear. This uncertainty means that large baseload coal plants will continue in operation for the present.

11. Presentation: Mid-continent Area Power Pool (MAPP).

Mike Gahagan, Chief Operating Officer, MAPP. MAPP was formed in 1965 as a voluntary organization to address issues related to electricity transmission and generation adequacy. MAPP executed a formal agreement in 1972. In 1996, more members were added, many of which were "nontraditional" parties related to electricity transmission and generation activities. It is part of a larger international organization, the North American Energy Reliability Council.

North America contains three electrical interconnection areas: Eastern, Texas, and Midwestern. Each of these interconnection areas can function independently. Establishment of a regional tariff allowed the imposition of a single price for transmission of electricity across region, rather than a series of charges.

MAPP has two primary responsibilities: monitoring for reliability, including the approval of bulk energy transfers, and planning of the area transmission system. MAPP addresses the planning in 10-year plans, which are completed every other year. These plans identify where to construct new transmission capability. MAPP has also facilitated development of a power and energy market (i.e., provided a forum for such activity). As a result, electricity will soon be traded as a commodity on the Minneapolis Grain Exchange.

The MAPP region contains 16 control areas. MAPP provides a regional view of power activity and availability. Within their own area, each control area is fairly free to do as it wants with its power, provided that it does not adversely affect other parts of the region.

Questions by Legislators. Senator Deluhery asked whether federal legislation had encouraged the development of MAPP. Mr. Gahagan explained that the New York City blackouts had stirred public interest in the reliability of electricity. Utilities were given the option of policing themselves, with the unspoken threat that the federal government would step in if the utilities did not do so.

Co-chairperson Jensen asked if there was a greater concern for blackouts as more states deregulated their electric utility industry. Mr. Gahagan indicated that deregulation did not necessarily pose such a threat, but that the system will have to be reanalyzed, because the system is increasingly being used in ways not contemplated when it was originally designed. Mr. Gahagan then related a recent problem which arose with a large power transfer to the east coast.

Senator Deluhery asked how MAPP dealt with issues like acid rain. Mr. Gahagan indicated that MAPP was very involved with environmental issues until about 1984. Then MAPP's member companies began to address such issues individually. Currently, however, MAPP is looking at Y2K issues (i.e., the potential problems in computers and related technology arising from the date change in the year 2000).

12. Physical Infrastructure Issues.

Brent Gale & Jim Eberwig, MidAmerican Energy. Electricity transmission occurs via an interconnected system. MAPP is in the Eastern interconnection area. Today, the system is being used differently than for what it was designed. Remote buyers and sellers are now connecting to each other, which utilizes a bigger part of the system.

Each control area is surrounded by metering. Mr. Eberwig then described the transmission system in the MAPP region, and noted that there is no "real time" metering of every consumer.

A 1981 Iowa law (Code chapter 476A) provides that a generation facility cannot be built in Iowa unless it can produce both kilowatt-hours and revenue. If a public utility wants to build a new facility, it must also demonstrate that there is no other alternative but to build. New generation facilities bring new jobs with good pay, revenue, and downward pressure on generation prices. It is currently difficult to make firm sales of megawatts. At least one plant was built in Illinois instead of Iowa because of this law.

Lisa Stump, IUB. Ms. Stump explained certain factors related to production capacity. Many plants only run during peak summer usage. Nuclear plants run consistently because they are difficult to start up.

Questions by Legislators. Representative Metcalf asked if consumers could anticipate reliability problems under restructuring. The panelists explained some of the problems contributing to pricing spikes in the Chicago area over the summer. The problem lasted one day. They noted that the energy market always has been, and always will be, volatile.

Ms. Stump noted that midwestern weather makes the midwest system volatile. The market contains much uncertainty. A competitive market creates more price spikes. No one is currently building additional generation capacity. If there is any reason to go forward with restructuring now, it is to alleviate the uncertainty that is impacting the market, because the midwest will need additional generation capacity by 2001 or 2002.

Senator Gronstal asked why more plants did not run at a higher capacity. The panelists explained that the utilities cannot sell all energy produced when they are operating at full capacity.

13. Year 2000 (Y2K) Issues.

Terry Harrmann, Alliant Utilities. Mr. Harrmann indicated that the Year 2000 problem has two components: information technology and embedded systems. Mr. Harrmann's presentation focused on embedded (chipboard) systems. The relevant areas in the chipboards are difficult to locate, and are not labeled. Consumers must develop contingency plans in the event these systems fail because of the Y2K problem.

Mike Gahagan, MAPP. MAPP is requiring contingency plans for all power grids in the event of failure. Potential contingency plans include setting back the clock or calendar to a point that the system operated sufficiently, using a manual override, or using some other technique to make the system operable.

14. Federal Initiatives: William Smith, IUB.

Mr. Smith indicated that Congress could preempt the states at any time on restructuring issues. He noted that there will be key changes in relevant House and Senate committees in the new Congress.

The Clinton Administration's proposal encourages states to implement competition, though states may opt out. The plan also addresses consumer protection issues, reliability, and public benefits such as environmental portfolios and low-income assistance.

15. Written Materials on File With the Legislative Service Bureau.

a. Presentation Handout, Consumer Protections in a Restructured Industry, Lisa Stump, Iowa Utilities Board (IUB).

b. Presentation Handout, Market Power in a Restructured Electricity Industry, Lisa Stump, IUB.

c. Personal Background, Mr. James Monk.

d. Summary of Illinois' Electric Service Customer Choice and Rate Relief Law of 1997.

e. Presentation Handout, Policy Options for Iowa in a Restructured Electric Utility Industry.

f. Presentation Handout, Stranded Cost Issues Associated with Nuclear Energy, Alliant Utilities.

g. Presentation Handout, Transition Costs and Benefits, Stuart Ormsbee, IUB.

h. Presentation Handout, The Year 2000 Project Plan, Alliant Utilities.

i. Brochure, FYI: Year 2000, Alliant Utilities.

j. Information Packet, FYI Year 2000, Alliant Utilities.

k. Presentation Handout, Federal Initiatives, William Smith, IUB.

l. Position statement: Consumer Protections/Consumer Bill of Rights, Office of Consumer Advocate.

m. Written Statement of Remarks, Susan Weinstock, AARP.

n. Written Statement of Remarks, Duane Armstead, Greenfield Municipal Utilities.

o. Written Statement of Questions & Answers, Eileen Doherty, NCSL.

p. Written Statement of Remarks, Bob Haug, IAMU.

q. Written Statement of Remarks, Dennis Murdock, CIPCO.

r. Update on Restructuring Activities in the States as of September 1, 1998, NCSL.

s. The Great Ratepayer Robbery, How Electric Utilities Are Making Out Like Bandits at the Dawn of Deregulation, Safe Energy Communication Council, Fall 1998.

t. Chart: Capacity Factors for Electric Utility Generating Units in Iowa, IUB.

u. Chart: Reserve Margins, IUB.

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