Secretary of Energy Advisory Board
Minutes from the 17th Plenary Meeting (March 31, 1998)

1.0 OPENING REMARKS AND PERSPECTIVES

Chairman Massey opened the public teleconference at 11:00 A.M. on March 31, 1998. He explained the purpose of the teleconference was to consider the final report of the Tennessee Valley Electric System Advisory Committee, a subcommittee of the Secretary of Energy Board (SEAB). He congratulated the Committee on its ability to conduct its work and complete its final report in so short a time. Chairman Massey then introduced the Honorable Butler Derrick, the subcommittee chairman, to present its findings.

2.0 PRESENTATION OF COMMITTEE FINDINGS

Committee Chairman Butler Derrick said that it had been his pleasure to serve as Chairman of the Tennessee Valley Electric System Advisory Committee and that he wished to thank each of the committee members, who worked very hard to address the tough issues associated with bringing electric industry competition to the Tennessee Valley. He introduced each member of the Committee (see Attachment A) and expressed his personal thanks for their dedication and commitment.

He said only minor editorial changes had been made to the draft final report following the last Committee meeting, March 24, 1998. Chairman Derrick then presented the following summary of recommendations to the SEAB for approval (see Attachment A also for glossary of affiliation abbreviations):

Issue 1: Transmission and Wholesale Rate Jurisdiction

A. Transmission Jurisdiction

Agreement was reached by 'all' members of the Committee that the TVA, and all public power entities, should be subject to FERC transmission jurisdiction comparable to that imposed on other transmitting utilities.

If all transmission owners and operators do not become subject to FERC jurisdiction, then the views of the Committee members diverge. NGC, Enron, TVA Watch, TVERC and the League believe that TVA should be made subject to FERC transmission jurisdiction whether or not other public power entities are under FERC's jurisdiction. TVA, TVPPA, TVIC, AVI, IBEW and the Teamsters disagree.

B. Wholesale Rate Jurisdiction

TVA, AVI, the Teamsters and TVIC believe that TVA's rates should continue to be governed by the TVA Board of Directors, under the standards of the TVA Act.

TVPPA, the League and TVERC believe that TVA's rates should be just and reasonable and not unduly discriminatory, and that distributors should have the right to appeal rate decisions to the federal courts.

TVA Watch, NGC, and IBEW believe that TVA's wholesale rates should be subject to FERC under the Federal Power Act. Additionally, where no state regulatory body asserts jurisdiction, FERC should regulate the rates for transmission, distribution and sales made at retail by TVA.

Issue 2: Antitrust and Labor Status

A. Antitrust Status

The position of TVPPA, supported by TVA, IBEW, the Teamsters, AVI and TVIC is that TVA should be subject to the principles of the antitrust laws by coming within the coverage of the Local Government Antitrust Act of 1984. As a consequence, TVA would be subject to injunctive relief for violation of antitrust law, but not be subject to damages, treble damages, or attorney's fees. Distributors would continue to retain immunity from antitrust liability for collective dealings with TVA as an agency and instrumentality of the federal government.

TVA Watch, TVERC and the League believe that TVA should be fully and completely subject to the antitrust laws in a manner comparable to that of any other competitor in the marketplace.

B. Labor Law Status

TVA, TVPPA, TVIC, AVI and the Teamsters believe that the current structure of labor laws applicable to federal entities and to TVA have worked and that there is no reason to change that structure.

IBEW, TVA Watch, TVERC and the League believe that employees of TVA should be provided with protections commensurate with those which exist in the private sector.

Issue 3: Tax Status

A. Gross Receipts, Property Taxes and Payments "in lieu of taxes"

'All' the Advisory Committee members agree that taxes on gross receipts or in lieu of tax payments by the producer should be eliminated in favor of some form of public utility excise tax on electric distribution companies or their customers. They also agree that such taxes or payments should be reduced and equalized or made consistent with property assessments between business ownership types.

B. Income Taxes, Deferred Income Taxes and Related Issues

TVA, TVPPA, TVIC, AVI, TVERC, the League, the Teamsters, and SSEB believe the question of income taxes, deferred income taxes and related issues, is not unique to TVA and should be dealt with for the TVA region in a manner consistent with the national treatment, and that public, nonprofit entities, including TVA, should not be subject to federal or state income taxes.

TVA Watch and NGC believe that exemption from tax obligations, including federal, state and local taxes provides an economic advantage to TVA that should be remedied in federal legislation.

C. Private Use Restrictions in Municipal Power Funding

'All' the members of the Advisory Committee agree that tax treatment of existing public power bonds should not change because of retail open access. Tax favored treatment for future public power funding for facilities, that are by nature monopolies (such as transmission, distribution, etc.), should be continued.

However, tax treatment of new debt in non-monopolistic activities, such as generation, should not receive favorable treatment over all other entities in the industry.

Issue 4: Retail Regulation

'All' the Advisory Committee members agree that TVA should relinquish its role as retail regulator.

There were differences, however, as to who should replace TVA in that role. TVPPA recommends that regulatory authority should be assured at the local level in federal legislation. AVI and TVA concur.

Rural Legal Services recommends that a regional body should regulate retail distributors. In addition, RLS, TVERC and the League recommend that legislation should include authority to offer funding and technical expertise to state regulatory commissions, where necessary.

SSEB, TVA Watch, and NGC recommend that states should have the right to make their own determinations as to whether they will regulate retail distributors, as they do in the rest of the country.

Issue 5: TVA's Mission

A. General

TVA, TVPPA, TVIC, the Teamsters, IBEW, the League, TVERC and SSEB agree that TVA's mission is important to the region and the Nation and that the integrated nature of TVA's natural resource stewardship and power production activities should be continued. Further, these members agree that TVA can best continue to provide public benefits, to the Valley and the Nation as a whole, as a federal agency.

TVA, TVPPA, TVERC, AVI, IBEW, the League, the Teamsters and TVIC agree that an appropriate level of funding for non-power programs should continue.

TVPPA, TVIC and AVI also recommend that, should Congressional appropriations for non-power programs cease, those programs should not be paid for out of power revenues.

TVERC and the League recommend that in the case of such cessation of funding, an identifiable stream of revenue, such as the hydro-plant revenue, be made transparent and dedicated to the river management and non-power programs and that Congress assure oversight of continued maintenance of the multipurpose programs through creation of a new body or other mechanism.

TVA Watch and NGC believe that many of the functions performed by TVA are, and can be, provided by the private sector or other government agencies. Whether this should change is a matter of public policy and should include input from all stakeholders.

TVA Watch believes that TVA, because of its unique nature, should not be allowed to participate in competitive electricity markets without substantive change. TVA Watch also believes that TVA should not participate in foreign or domestic markets as a provider of consulting or any other services in competition with private enterprises.

In addition, TVA Watch believes that TVA should be required to fund from power revenues any hydroelectric-related programs that private utilities are currently required to fund through power revenues. Further, TVA Watch's position is that TVA's mission does not and should not involve competing with other private enterprises for the sale of power at wholesale or retail outside of the Tennessee River Valley Region, or for the sale of natural gas, fuel oil, coal or other energy products and services in any capacity in any jurisdiction. Further, as a federal corporation, TVA should be required to request competitive bids for future generation required to serve load in its historical territory.

B. Generation

TVA, TVPPA, TVERC, IBEW, the Teamsters, TVIC, the League, and AVI recommend that any new generation built should be to meet the needs of the electric power consumers in the Tennessee Valley region as defined in the TVA Act. In addition, they believe preferences for the sale of TVA power to public power entities in the Valley should be maintained and TVA should be able to sell surplus power on the wholesale market with no restrictions.

In addition, after the onset of retail choice and removal of the TVA fence, power distributors' obligations relative to TVA should be limited to the contract terms of the power agreements with TVA. Distributors should have no stranded investment obligations for any new TVA generation unless specifically agreed to by contract.

Enron, NGC and TVA Watch believe that TVA should not be able to build new generation. Their position is that if TVA should need additional capacity, TVA should acquire those resources from the market.

TVERC believes that TVA should not be allowed to expand generation except where it meets the goals of the federal government in meeting national and international environmental protection commitments and treaties, and/or assists in the development or market stimulation of new technologies having national and international significance.

Issue 6: The Fence and Anti-Cherry Picking Provisions

'All' members of the Advisory Committee believe that the fence and the exemptions from transmitting power for competitors contained in the Federal Power Act should be removed concurrently with the implementation of retail competition.

NGC believes that if retail competition is delayed, the fence and anti-cherry picking provisions should be removed immediately. TVA, TVPPA, TVIC, AVI, IBEW and the Teamsters strongly disagree.

TVA Watch believes the fence should only be removed when specific conditions related to TVA's status have been met.

Issue 7: Wholesale Power Contracts

TVPPA, TVA, IBEW and the Teamsters believe that federal legislation may be needed to
require renegotiations of all requirement contracts that prevent access to competitive open markets. These members recognize that private and publicly owned power companies face the dilemma of offering the flexibility of customer choice while protecting outstanding financial obligations.

In conjunction with this recommendation, the members suggest that specific performance dates should be established for completing contract flexibility negotiations, 12 months before the effective date of federally mandated retail competition, but not less than 12 months after federal legislation is enacted. TVA customers should be given the option, but not be required, to renegotiate wholesale electric power contracts with TVA.

TVA Watch does not support the notion of a "federally implied" requirement to renegotiate all non-TVA wholesale contracts upon implementation of federally mandated retail competition.

NGC and TVA Watch believe that wholesale power contracts that TVA has entered into with its distributors should be subject to review and approval by the FERC.

Issue 8: The Retail/Wholesale Nature of TVA

'All' the members of the Committee agree that:

• TVA should remain basically in the wholesale business;
  
• TVA should be allowed to sell at wholesale outside the fence consistent with guidelines established by federal legislation; and,
  
• TVA's existing retail customers should have the option of remaining TVA direct-served customers.
  

TVA, TVPPA, TVIC, the Teamsters, IBEW and AVI believe that TVA should be able to sell at retail inside the fence under conditions mutually agreed to between TVA and its existing distributors, and that TVA should be able to sell outside the fence at retail in order to mitigate stranded cost, as approved by the FERC.

TVERC and the League believe that TVA should be only a wholesale provider and should not be allowed to compete in retail markets inside or outside the current fence. Current direct-served customers' contracts can be extended. New large power customers within the current TVA fence should be served through distributors of TVA power.

TVA Watch and NGC believe that TVA should not be able to expand its role to serve as a retail supplier.

Issue 9: Stranded Costs

'All' the members of the Committee agree that any stranded costs resulting from Congressional action to mandate competition should be borne by those TVA or distributor customers for whom TVA incurred those costs. Some restrictions should be placed on TVA's stranded cost recovery, to include:

• FERC or some other federal authority should review and approve costs for which TVA seeks recovery after receiving input from State authorities when appropriate;
  
  
• The time period for recovery should not extend beyond October 1, 2007, unless terms to extend the recovery period are mutually agreed to by the parties;
  
  
• All stranded cost recovery revenues should be used to pay down TVA's debt; TVA should be required to collect stranded costs via a non-bypassable mechanism from all customers on a basis that does not discriminate against any particular customer or group of customers;
  
  
• TVA should be required to collect stranded costs from all customers for whom TVA had a reasonable expectation of serving, either as a direct-serve customer or through a distributor;
  
  
• TVA should be required to use its best efforts to mitigate stranded costs, including, sale of power at auction to ensure revenue optimization, selling non-performing assets, and, if approved by FERC, selling at retail outside the fence.
  

TVA Watch and NGC do not, however, believe that TVA should be allowed to sell at retail outside the fence, even with FERC approval.

NGC and the League believe that TVA and its distributors should ally themselves with other market participants who could, through innovation and broader market exposure, provide creative solutions to recovering these costs faster and in greater proportion to the total.

Following this summary of the recommendations contained in the report, Chairman Derrick said he thought that the Committee had reached agreement on as many issues as possible. He said the committee members had worked hard and, as a result, he said we now know where the disagreements are and the competing positions of major stakeholders in the region. He said he thought such a foundation would well serve national decision makers and legislators as they consider a proper next step. He then thanked the SEAB staff, namely Skila Harris and Leon Lowery, and said to Chairman Massey that his report was complete.

SEAB Chairman Massey echoed his thanks to the staff. He said that meeting so ambitious a goal in only four months was quite an undertaking. He then opened the session to public comment.

3.0 PUBLIC COMMENTS

Dennis Wamsted of The Energy Daily asked what would become of the report now. Chairman Derrick responded that the DOE will use it as a basis for considering TVA restructuring.

There being no further comments from the public, Chairman Massey closed the public comment
portion of the teleconference.

4.0 SEAB REVIEW AND COMMENT

Chairman Massey then asked the SEAB members for their comments on the report.

Ralph Cavanagh asked whether the work was complete. He said he would hate to see such good momentum lost. Chairman Derrick responded that, pending SEAB approval, the report would be forwarded to DOE for use in development of a TVA title in proposed federal legislation.

Maxine Savitz asked whether there might be aspects of the report that would be applicable to other groups, such as the Bonneville Power Administration. Chairman Derrick thought some of the findings and recommendations might be applicable (e.g., tax status and transmission).

Phil Sharp congratulated Chairman Derrick and the Committee for their success in dealing with a very contentious set of issues. Chairman Derrick said that to his knowledge many of the issues have been around a long time but this is the first time they have been laid out in such detail.

Marilyn Lloyd said that she was the only member of the SEAB that is a resident of the Tennessee Valley. She also stated that she was impressed with how the Committee had allowed the citizens of the Tennessee Valley area the opportunity to look at the impact of restructuring on TVA. She thought the facts had been clearly "put on the table." Ms. Lloyd stated that she believed that the residents of the valley could only fully realize the benefits of deregulation by pursuing the integrated management of both the river and power systems. Chairman Derrick noted that everyone on the Committee agreed that TVA has been the major force for development in the valley for a number of years.

Allen Sessoms also complimented Chairman Derrick for accomplishing so much good work in so short a time. He thought there might be lessons learned that might allow future SEAB subcommittees to complete their deliberations in less time. Chairman Derrick said that he thought one of the major factors in achieving the schedule was the desire among Committee members to get things done and coming to closure.

There being no further comments by the SEAB members, Chairman Massey said he would conclude that the Board approves the report and, on that basis, will submit it to the Secretary.

5.0 ADJOURNMENT

Chairman Massey closed the teleconference at 11:45 A.M. by thanking Chairman Derrick for delivering an excellent report on time, and thanking the SEAB Board for their participation in the teleconference.

Attachment A

Tennessee Valley Electric System Advisory Committee

List of Members & Affiliations
Butler Derrick, Chairman
George Blaylock, International Brotherhood of Teamsters - Teamsters
Terry Callender, NGC Corporation - NGC
Don Collette, Tennessee Valley Public Power Association - TVPPA
Michelle Neal Conlon, League of Women Voters, Knox County - League
Joe Fisher, Tennessee Valley Industrial Committee - TVIC
Ron Fogel, Associated Valley Industries - AVI
Joe Hartsoe, Enron
Carl Lansden, International Brotherhood of Electrical Workers - IBEW
Neil McBride, Rural Legal Services - RSL
Bill Museler, Tennessee Valley Authority - TVA
Ken Nemeth, Southern States Energy Board - SSEB
David Ratcliffe, Tennessee Valley Authority Watch - TVA Watch
Dr. Stephen Smith, Tennessee Valley Energy Reform Coalition - TVERC

Attachment B

List of Teleconference Participants

Secretary of Energy Advisory Board (SEAB) Members
Walter Massey, Chairperson
Cheryl Alexander
Ralph Cavanagh
Butler Derrick
Robert Galvin
Robert Hanfling
Marilyn Lloyd
Richard Meserve
Raymond Sanchez
Maxine Savitz
Allen Sessoms
Philip Sharp

Tennessee Valley Electric System Advisory Committee Members
Melinda Thornton (for Bill Museler, Tennessee Valley Authority)

Public Participants
Dennis Wamsted, The Energy Daily
Ted Freeman, Electric Power Alert Newsletter

Department of Energy Staff
Skila Harris, Executive Director of SEAB
Leon Lowery, DOE Staff
Richard Burrow, DOE Staff