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75–757CC 2002

NATIONAL ELECTRICITY POLICY: FEDERAL

GOVERNMENT PERSPECTIVES

HEARING

BEFORE THE

SUBCOMMITTEE ON ENERGY AND AIR QUALITY

OF THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

SEPTEMBER 20, 2001

Serial No. 107–76

Printed for the use of the Committee on Energy and Commerce

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house

COMMITTEE ON ENERGY AND COMMERCE

W.J. ‘‘BILLY’’ TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES ‘‘CHIP’’ PICKERING, Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

TOM DAVIS, Virginia

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

STEVE BUYER, Indiana

GEORGE RADANOVICH, California

CHARLES F. BASS, New Hampshire

JOSEPH R. PITTS, Pennsylvania

MARY BONO, California

GREG WALDEN, Oregon

LEE TERRY, Nebraska

JOHN D. DINGELL, Michigan

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

TOM SAWYER, Ohio

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

MICHAEL F. DOYLE, Pennsylvania

CHRISTOPHER JOHN, Louisiana

JANE HARMAN, California

DAVID V. MARVENTANO, Staff Director

JAMES D. BARNETTE, General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON ENERGY AND AIR QUALITY

JOE BARTON, Texas, Chairman

CHRISTOPHER COX, California

STEVE LARGENT, Oklahoma

Vice Chairman

RICHARD BURR, North Carolina

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN SHADEGG, Arizona

CHARLES ‘‘CHIP’’ PICKERING, Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

ED BRYANT, Tennessee

GEORGE RADANOVICH, California

MARY BONO, California

GREG WALDEN, Oregon

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

(Ex Officio)

RICK BOUCHER, Virginia

RALPH M. HALL, Texas

TOM SAWYER, Ohio

ALBERT R. WYNN, Maryland

MICHAEL F. DOYLE, Pennsylvania

CHRISTOPHER JOHN, Louisiana

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

BART GORDON, Tennessee

BOBBY L. RUSH, Illinois

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

JOHN D. DINGELL, Michigan

(Ex Officio)

(II)

3

C O N T E N T S

Page

Testimony of:

Blake, Hon. Francis, Deputy Secretary, U.S. Department of Energy .......... 32

Breathitt, Hon. Linda K., Commissioner, Federal Energy Regulatory

Commission ................................................................................................... 60

Brownell, Hon. Nora Mead, Commissioner, Federal Energy Regulatory

Commission ................................................................................................... 65

Massey, Hon. William L., Commissioner, Federal Energy Regulatory

Commission ................................................................................................... 68

Wood, Hon. Pat, III, Chairman, Federal Energy Regulatory Commission .. 52

Material submitted for the record:

Breathitt, Hon. Linda K., Commissioner, Federal Energy Regulatory

Commission, letter dated February 7, 2001, enclosing response for the

record ............................................................................................................. 105

Brownell, Hon. Nora Mead, Commissioner, Federal Energy Regulatory

Commission, letter dated November 1, 2001, enclosing response for

the record ....................................................................................................... 100

Massey, Hon. William L., Commissioner, Federal Energy Regulatory

Commission, letter dated November 1, 2001, enclosing response for

the record ....................................................................................................... 102

White Paper on Electricity Legislation dated July 20, 2001 ........................ 90

Wood, Hon. Pat, III, Chairman, Federal Energy Regulatory Commission,

letter dated October 29, 2001, enclosing response for the record ............. 95

(III)

(1)

NATIONAL ELECTRICITY POLICY: FEDERAL

GOVERNMENT PERSPECTIVES

THURSDAY, SEPTEMBER 20, 2001

HOUSE OF REPRESENTATIVES, COMMITTEE ON ENERGY AND COMMERCE, SUBCOMMITTEE ON ENERGY AND AIR QUALITY, Washington, DC.

The subcommittee met, pursuant to notice, at 2 p.m., in room

2123, Rayburn House Office Building, Hon. Joe Barton (chairman)

presiding.

Members present: Representatives Barton, Ganske, Norwood,

Shimkus, Shadegg, Bryant, Walden, Tauzin (ex officio), Boucher,

Hall, Sawyer, Wynn, John, Waxman, Markey, Barrett, Luther, and

Strickland.

Staff present: Sean Cunningham, majority counsel; Jason Bentley, majority counsel; Andy Black, policy coordinator; Peter Kielty,

legislative clerk; Sue Sheridan, minority counsel; and Erik Kessler,

minority professional staff.

Mr. BARTON. The subcommittee will come to order. We are going

to start the hearing and immediately recess until we get the ranking minority member or a minority member, but I do want to start

on time. So we are in session subject to a quorum, and the Chair

would note that there is an absence of a quorum at this time.

[Brief recess.]

Mr. BARTON. The subcommittee will now come to order and the

Chair would note that there is a quorum. The Chair would recognize himself for an opening statement.

This is the subcommittee’s first hearing since what I call ‘‘Day

of Decision’’ which was Tuesday, September 11. As Chairman of

this subcommittee, I think for all members of the subcommittee, we

want to offer our condolences to all of the families who had people

injured, killed, or who are missing.

We want to give special prayers to Congressman Vito Fossella of

this subcommittee who had a large number of constituents at the

World Trade Center. He has one of his staffers, Ms. Julie Walker,

who has a cousin who is missing and is yet unaccounted for. So we

are with all of those in our prayers and in our thoughts.

As a result of last Tuesday, our Nation’s focus has fundamentally

shifted. The issues before this subcommittee and this Congress and

this country that were so important on September 10 are not nearly as important today. We must pay much more attention to our

national security, and that includes our energy infrastructure.

This subcommittee stands ready to help the President and the

administration, on a bipartisan basis, to guarantee to the largest

2

extent possible the security and safety of our infrastructure and

the people that use that infrastructure and maintain it. Energy is

the lifeblood of our Nation’s economy. We have to do everything we

can to protect our power plants, transmission assets, pipelines, terminals, production facilities, and the list is endless.

I have already spoken with the full committee chairman, Mr.

Tauzin, who is with us today; at the staff level with Mr. Dingell;

the ranking Democrat, Mr. Boucher, who is here; and we were as

a united subcommittee, ready and willing to help. If there is legislation that the President feels is needed, we will do our very best

to act quickly in a bipartisan fashion without partisanship. We are

ready to hold public and private briefings or hearings necessary to

help the President and the American people on the immediate

issues that are within our jurisdiction.

Today we are going to go ahead with a hearing that is important

to the future of our electricity industry. This is a hearing that has

been planned for several months and the decision was made to go

ahead with it, although we know that, as I said, the focus has

changed. We have our Deputy Secretary of Energy, Mr. Blake, with

us and we want to thank him.

We also have on the second panel, I think, all the current commissioners of the Federal Energy Regulatory Commission, including its new chairman, Mr. Wood, and we want to thank you for

being here, as well as Ms. Brownell who is a new commissioner in

the purple, and our two stalwarts, Ms. Breathitt and Mr. Massey,

who are still doing yeoman’s work at the Commission.

When we discuss electricity restructuring, the goals are the

same. We want to use restructuring and do restructuring in such

a way that we increase the supply of electricity, that we improve

the effective operation of our transmission grid and that we also increase the capacity of our transmission grid.

There are a number of questions that we are going to ask today.

We want to give the Deputy Secretary and the Commission the opportunity to enlighten us on their thoughts concerning regional

transmission organizations, better known as RTOs; whether that

needs to be a voluntary system, a mandatory system. If we need

to give FERC the authority to mandate participation; exactly how

should we go about getting that adequate and full participation? Is

there a magic number of RTOs for the country? Is 4 the magic

number? Is 6 the magic number? Is 8 the magic number? Is there

a magic number.

What do we do to encourage private sector investments in new

generation and transmission. How important and to what detail

should Congress be prescriptive in legislation determining how to

set the structure of RTOs, if any.

Those are some of the questions that we are going to offer today

for consideration to the administration and to the FERC Commission. Again I want to thank our witnesses, the Deputy Secretary

and the FERC commissioners, and we look forward to hearing from

you.

[The prepared statement of Hon. Joe Barton follows:]

3

PREPARED STATEMENT OF HON. JOE BARTON, CHAIRMAN, SUBCOMMITTEE ON ENERGY

AND AIR QUALITY

This is this Subcommittee’s first hearing since last Tuesday. Let me first offer my

own condolences to all those who were injured, or who have family or friends missing. I want to specifically offer my thoughts to Congressman Vito Fossella of Staten

Island, whose district was heavily affected, and to his energy staffer, one of my favorites, Julie Walker, who is missing a cousin. My prayers are with you all.

As a result of last Tuesday, our Nation’s focus has fundamentally shifted. We

must pay more attention to security—of the American people and of our critical infrastructure. This Subcommittee will help Congress and the Nation promote the security of our assets. Energy remains the lifeblood of our economy. We must do all

we can to protect our power plants, transmission assets, and pipelines.

I will work with Chairman Tauzin, Ranking Member Dingell and Ranking Member Boucher, as well as other Subcommittee Members, to determine how this Subcommittee can help. If Federal agencies need legislation to deal with this emergency, we will review their requests quickly and without partisanship. We will hold

whatever briefings or hearings necessary to help the President and the American

people on immediate issues within our jurisdiction. We will also work together on

an appropriate pace to resume our traditional legislative activities.

This hearing on the future of our electric industry was planned before the events

of last Tuesday. But it is even more timely now. I appreciate this star cast of witnesses coming at such a crucial time. Deputy Secretary Blake, thank you for returning, and for offering the Subcommittee an energy security update in your testimony,

as well as your perspective on national electricity policy. As I have said, we stand

ready to help in any way.

I want to also welcome the Commissioners of the Federal Energy Regulatory Commission. In addition to frequent guests Bill Massey and Linda Breathitt, I see we

have two new characters—both familiar faces. Nora Brownell was well known for

her work on the Pennsylvania Public Utilities Commission, and you have been helpful to this Subcommittee before on electricity issues. Welcome to the Commission

and to Washington.

Finally, I want to welcome my good friend, another Texas Aggie, Pat Wood. Thank

you for accepting this mission, and I’m glad you are here at such a crucial time.

I look forward to working with you, and I commend to you a Subcommittee Membership, both Republican and Democrat, who are good people to work with and take

their responsibilities seriously.

Our goals with electricity restructuring should be many. Among them are:

1. Increasing the supply of electricity

2. Improving the effective operation of our transmission grid

3. Increasing the capacity of our transmission grid.

Among the many questions you have each been asked to discuss, I am particularly

interested in your thoughts concerning Regional Transmission Organizations

(RTOs).

• Is the current voluntary system adequate in getting full participation?

• What is the magic in 3 RTOs in the Eastern interconnect and 1 RTO in the Western interconnect?

• Also, how can we encourage private sector investment in new generation and

transmission?

• Finally, how prescriptive does Congress need to be concerning enforceable standards for reliability?

Thank you again for being here during a busy time.

Mr. BARTON. The Chair would now recognize the ranking member on the minority side, Mr. Boucher of Virginia, for an opening

statement.

Mr. BOUCHER. Thank you very much, Mr. Chairman. I share

your commitment to taking such steps as it is appropriate for this

subcommittee to take as we seek to address the national security

needs that now confront the Nation, and I want to compliment the

chairman on his very appropriate statement in that regard and his

comments on that subject.

With today’s hearing, we examine the areas in which strengthening is needed in the Nation’s electricity system and how Congress can promote that strengthening through appropriate legislaVerDate 11-MAY-2000 10:19 Apr 09, 2002 Jkt 010199 PO 00000 Frm 00007 Fmt 6633 Sfmt 6602 E:\HEARINGS\75757 pfrm04 PsN: 75757
4

tion. It is proper that we begin this examination through the assistance of the witnesses we have present today from the U.S. Department of Energy and from the Federal Energy Regulatory Commission. And I want to extend a welcome to the witnesses.

I also went to take the opportunity of these remarks this morning to note the singular persistence of Chairman Barton in his

longstanding efforts to address this particular set of energy policy

challenges. During the last Congress he drafted and built a broad

base of support for a major electricity restructuring measure, and

while all members of the subcommittee found provisions in his

measure both to like and dislike, he received universal approval

from the members for the collaborative and the bipartisan process

that he undertook as his comprehensive measure was constructed

and brought to this subcommittee for markup. I am pleased that

the chairman has indicated that a similarly inclusive process will

be undertaken for the electricity legislation that it is our goal to

consider this year.

Some issues that were central to the debate last year are simply

no longer on the agenda. For example, in the wake of the California experience, there appears to be no appetite today for the enactment of a national requirement for access to transmission lines

to accommodate retail competition. I think that, unlike the last

Congress, when the lack of agreement on a retail wheeling mandate stalled the consideration of this subcommittee’s bill at the full

committee, we are unlikely to give serious consideration to retail

competition matters as a part of our conversation this year.

Instead, our debate will now focus on transmission issues relating to system adequacy, reliability, and appropriate access for electricity generated for the wholesale market. We will ask how best

to assure a proper allocation of existing capacity, and whether and

by what means the Federal Government should encourage the construction of new capacity.

We will also inquire regarding the proper balance between Federal and State authorities for the regulation of the transmission

grid. And in conducting this phase of the inquiry, I think that we

should be mindful that some of the most fundamental questions regarding the balance between State and Federal jurisdiction will be

argued before the Supreme Court on October 3, with the anticipation that a Supreme Court decision may be forthcoming on these

very important matters during the spring of next year, or perhaps

earlier.

We will also be asking a number of other important questions.

Does the Federal Energy Regulatory Commission, which is under

new leadership, believe that it has sufficient authority under the

Federal Power Act and other statutes to fulfill its responsibilities?

And, if not, what precise new statutory authority does the FERC

need and to what purpose would those new authorities, if granted,

be applied?

Does the administration believe that a time has now arrived for

the passage of a comprehensive electricity measure and, if so, does

the administration have legislative proposals for this subcommittee

to consider?

As we determine the best path forward, we also invite the consultation of all externally interested parties, and we would very

5

much welcome the advice and recommendation of stakeholders as

we consider legislation.

I look forward to working with Chairman Barton and with all

members of this subcommittee as we take the steps this fall to

strengthen our Nation’s electricity system.

Finally, I want to extend a word of welcome to today’s witnesses

and offer a particular welcome and congratulations on their appointments to Chairman Wood and to Commissioner Brownell of

the Federal Energy Regulatory Commission. We very much look

forward to hearing from them and from the other commissioners as

well.

Thank you, Mr. Chairman and I look forward to today’s testimony.

Mr. BARTON. We thank you, Mr. Boucher.

The gentleman from Louisiana, Mr. Tauzin is recognized for an

opening statement.

Chairman TAUZIN. Thank you Mr. Chairman. Let me thank you

for continuing during these most unsettling days at our Nation’s

Capitol these most important hearings on the Nation’s continuing

efforts to improve its electricity policy and to establish a more reliable and secure general energy program for our country.

You made the point, but let me make it again: This tragedy last

week touched every one of us. One of my good friend’s—Russell

Keen from Lake Charles, Louisiana—son was in an elevator in one

of the buildings in New York at the time the second plane hit and

the elevator crashed downward. He survived that, along with another gentleman and two ladies who worked with him. And you

may have seen him on CNN. The ladies escaped through a 15-inch

crack in the space that they could come out of the elevator. Russell

Keen, Jr. didn’t make it out. In fact, the firemen who were arriving

at the scene to help get him out of that elevator were probably lost

along with him as the building came down at that moment.

We think of him and we think of the firemen and all at the Pentagon and the unfortunate passengers who were aboard those

planes today. And we pray for them and we pray for our country.

But we also recognize that perhaps the most important thing we

can do for all of them is to continue the work of this committee and

the Congress in securing our national security. And part of that is

in energy and is in the electric grids in the systems that keep our

country strong and powerful and powered.

In that regard, this hearing is just one more step in a long series

of hearings, Mr. Chairman, that you have already embarked upon

to examine the reliability of the Nation’s infrastructure.

I want to thank your ranking member for his excellent statement

as well, as usual. The cooperation and understanding that we have

with you and Members on the other side as we go forward in this

area are going to be critical if we are to address legislation to the

floor. And I want to thank you again, Rick, for that effort.

And I also want to thank the ranking member of the full committee, Mr. Dingell, who, as you know—I want to make this announcement to all the members—last week joined me in a letter

not only to the FERC and also to DOE, but to every agency under

our jurisdiction, inviting them to communicate with us in an internal review as to all the agency operations, to examine those agency

6

operations, the security of those operations, and the potential

vulnerabilities of any of those assets so that we might work collaboratively to better protect and insure for our Nation’s security those

assets.

As that information comes back to us, it is beginning to filter

back. I have also assigned our vice chairman, Richard Burr, to the

job of working with each one of our subcommittee chairs, including

Mr. Barton, and the committees response to those evaluations delivered to us by all the agencies, some of whom are testifying today.

Obviously, some of the specific legislative proposals and some of

the findings in that review are not ready for public discussion, and

we will not have that today. But internally, our committee is working with these agencies and all the agencies under our jurisdiction

in that process. And I have asked Mr. Burr to coordinate that effort, and all the subcommittee chairs have been instructed to work

with Mr. Burr in that effort.

As you know, our vice chairman serves on the Intelligence Committee and is a member of the Special Committee on Terrorism and

has a very special knowledge of the potential threats that might

continue to exist within our country. So our committee will continue with this work without necessarily holding public hearings on

it. And more importantly, we will move forward in this public

arena with the work of our committee, particularly this important

work in securing the Nation’s electric grids.

Again, I want to thank this subcommittee for the work it has already put into beginning to establish for America a more competitive and reliable system of electricity. We have witnesses today

from the FERC, who are returning members of course, Commissioners Massey and Breathitt, and I want to thank both of them

and the chairman for the excellent cooperation the FERC extended

to us as they assisted in a way we found suitable with the crisis

that was building in California. I think our committee and the

FERC’s effort in that regard as we worked together, with a few

good breaks from the weather and from the Almighty, helped to

stave off some very serious consequences in California, and I want

to thank the commissioners for there efforts during that time.

I also want to welcome, of course, the new chairman, Pat Wood

and the new commissioner, Ms. Brownell, to the service of the

Commission. Mr. Wood comes from my neighboring State. I have

come to know him in some of the telecommunication battlefields

that have been waged around some of the big issues that I chaired

as the Telecommunications Subcommittee Chair, and he brings a

wealth of talent and capabilities to the office of chairman of the

Federal Energy Regulatory Commission. We are delighted, Pat, to

welcome you to the committee. Ms. Brownell, likewise, for your extraordinary experience in communications and finances. I know

that you will bring indeed a great new talent to the Commission.

We welcome you both.

To Deputy Secretary Blake, I know this is your second visit. You

appeared on the Price-Anderson Act, but I want to thank you again

for the excellent relationship already building between the Secretary and your office and our committee.

As the Secretary announces the administration’s position on

emergency electric grid concerns, I want you to know that the

7

chairman of this subcommittee and the full committee is prepared

to work with you to expedite that before we leave session this year.

Again, Mr. Chairman, you have done incredible work and this

committee has done incredible work. I think we honor again the

lives of our fellow citizens who were lost last week by demonstrating that we are going to carry on this Nation’s business and

we will secure this Nation’s power grids and its power systems, and

that the work you do will help immeasurably to that end. And I

yield back the balance of my time.

[The prepared statement of Hon. W.J. ‘‘Billy’’ Tauzin follows:]

PREPARED STATEMENT OF HON. W.J. ‘‘BILLY’’ TAUZIN, CHAIRMAN, COMMITTEE ON

ENERGY AND COMMERCE

I would like to thank Chairman Barton for continuing—during these unsettling

days—with these important hearings into our Nation’s Electricity Policy.

I should note at the outset that the tragic events of last week make it critically

important that we continue to examine the reliability of our Nation’s energy infrastructure (and I use that term ‘‘reliability’’ in a broader sense than just electricity).

Several months ago, the Committee embarked upon this review, and most recently

Ranking Member Dingell and I sent letters to the FERC and DOE, along with the

other agencies within our jurisdiction, requesting specific legislative proposals that

will enable them to respond fully to the recent attacks. I’m sure our audience will

understand if our witnesses are not able to discuss publicly, at this time, what some

of those recommendations may contain.

As we move forward, however, we must also maintain focus on vital long-term

policies. The electric power industry is an essential component of our Nation’s en- ergy infrastructure. And, as legislators, it is up to us to put in place a legal structure that outlines our vision for a 21st Century version of this industry.

For the past century, the power industry has consisted of heavily regulated,

vertically-integrated monopolies. Yet the industry is changing, opening to competition. We now see on a daily basis that competitive wholesale power markets are the

superior model. Over the past decade, for example, the number of wholesale power

transactions has increased 400% while wholesale prices have steadily declined.

Technologies have reduced the cost of generating electricity as well as the size of

generating facilities.

To carry this success further, we in Congress need to ensure that American consumers have access to the most efficient, cleanest and most affordable electric power

the market is able to produce—irrespective of who produces it. Whether you’re in

a state that allows retail choice or you rely on your utility to go out into the wholesale market to buy your power, there are better sources of electricity available today

because of competition.

To extend competition’s great benefits, we must still overcome certain, anticompetitive barriers. We still do not have the seamless interstate networks of transmission needed to support truly efficient wholesale markets. Because of this, consumers aren’t fully enjoying the benefits and savings of competition. We’re also not

building new transmission infrastructure, in part because of regulatory uncertainty,

but also because we can’t get it sited.

We have made tremendous leaps in recent years in technology and our ability to

process information. It’s time we make sure that technology is applied to generating,

transmitting, distributing and using electricity.

I am anxious to hear today what our governmental witnesses have to say about

the direction of our Nation’s electricity policy. This is Deputy Secretary Blake’s first

visit to our Committee—and I congratulate you on your appointment and look forward to hearing the Administration’s views. For Chairman Wood and Commissioner

Brownell, this is their first time appearing before the Energy & Air Quality Subcommittee, also, and I welcome you both. For Commissioners Massey and Breathitt,

I welcome you back.

Thank you once again, Mr. Chairman.

Mr. BARTON. We thank the gentleman from Louisiana. We are

not going to limit members on their opening statements. I don’t

think this is a day to adhere to regular protocol. But we would encourage members to attempt to be somewhat precise in their comments.

8

The gentleman from Ohio, Mr. Sawyer is recognized for an opening statement.

Mr. SAWYER. Mr. Chairman, I appreciate what you just said and

will attempt to do precisely that. In that regard, let me associate

myself with your remarks, those of Mr. Boucher and the chairman

of the full committee, particularly with regard to the observations

of the latter two regarding your leadership of this effort in the last

Congress.

Just by way of observation, I remember 7 and even 5 years ago

when we were still talking largely about deregulation, and today

we are almost always refer to restructuring, and the growth in the

recognition of the importance of the transmission grid and how we

go about the business of growing and nurturing and maintaining

a modern structure for a working set of regional markets in this

country continues to be central to our discussions.

In that regard, I thank you for your openness to ideas from both

your left and your right, and look forward to our continuing to

work together this year.

[The prepared statement of Hon. Tom Sawyer follows:]

PREPARED STATEMENT OF HON. TOM SAWYER, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF OHIO

Thank you, Mr. Chairman. I am grateful that we have the chance to take up

these hearings again after last week’s horrendous events. Those events are, of

course, at the front of our minds, but we must also try to continue with the important work that we must do in this committee. I believe that no effort to solve this

country’s energy problems will be effective if we do not also tackle electricity issues.

That is why I am glad that we will have the chance to hear from Deputy Secretary

Blake and all the FERC commissioners. I hope that we can learn more about what

we should be doing at the federal level to finish the job of restructuring this country’s electricity system.

With the Energy Policy Act of 1992, Congress altered the direction of the electricity industry. We now have widespread merchant generators, long-distance wheeling of electricity across transmission lines, and the development of a new business

organization: the regional transmission organization. We started down this road,

away from the vertically integrated local utilities of old, but today we still do not

a have a clear vision of where, ultimately, we are headed. The transition that started over a decade ago is far from complete, nor is it clear what the final form of the

transition will be.

It would be understandable to look at the example of California, or to see the slow

progress in some other states and think that perhaps we should try to go back to

the old way of doing things. I myself supported such a temporary retreat to allow

California to redraft its rules to allow for a functional retail market. But a broader

return to vertical utilities would be neither feasible nor wise.

Rather, we in the federal government should marshal the will to put together the

kind of federal framework that will allow the retail electricity markets that are developing in some of the states to work properly. A significant part of that effort will

be to provide the regional transmission systems that will allow for the easy flow of

electricity between markets. Without such a measure the promise of competitive

wholesale and retail electricity markets will not be realized.

I look forward to the testimony of these witnesses and the work that we have

ahead of us in this committee.

Mr. BARTON. We thank the gentleman for those kind words. The

gentleman from Illinois, Mr. Shimkus is recognized for an opening

statement.

Mr. SHIMKUS. Thank you, Mr. Chair. I would ask unanimous

consent that the full opening statements be submitted into the

record. And would just——

Mr. BARTON. Without objection.

9

Mr. SHIMKUS. [continuing] like to add that what we do here is

important, and we have all followed the energy debate. It is even

more so important now as some—we have new national security

concerns. The transmission grid needs to be part of the entire discussion as we talk about energy security.

I will be concerned with looking at the siting issues and we have

to address the States rights issue, the private property rights issue,

regional coordination and, as I got in trouble for a while ago, talking about Federal land siting. I think that is doable, and there is

a lot more Federal land than pristine national parks that are available out there to help us grow the grid.

RTOs has been a big issue on my plate and I know there is a

proposal for maybe four nationally in Illinois. We had a time when

there are three right now—or parts of three. It is very, very confusing. And I am open to a debate on discussion on how we need

to move in that direction. Again, the most important thing is that

power generation and transmission is really critical to the livelihood of us as an economic power, and even more important in these

tough times that we are experiencing right now. Hopefully we can

move with due diligence and work together to move something that

will be beneficial for the country.

And with that, Mr. Chairman, I yield back my time.

Mr. BARTON. We thank the gentleman. The Chair now recognizes

the ranking member of the full Science Committee, one of the most

distinguished members of this committee, a veteran of World War

II where he flew fighter planes, I believe in the Pacific, but I

wouldn’t swear to that; one of the very best examples of what a

Congressman is really all about, and working for his constituents

in his State, the very honorable Ralph Hall of Texas.

Mr. HALL. Thank you, Senator. Mr. Chairman, thank you for

your tenacity and your pursuit of a decent bill. You have really

worked hard on it. And I associate myself with Chairman Tauzin,

and when he tells me that he has gotten together with former

Chairman Dingell, I always have a real sense of satisfaction as well

as some kind of a pang of fear until I have read the small print.

But you get those two together, that is great leadership, combined

with our Chairman.

I will be brief, too. I certainly thank Francis Blake for her time

of planning to get here, being here, and then testifying and then

answering questions that we will submit later.

I just basically want to say that while terrorist attacks are foremost on our minds, I think it is important that we also think offensively rather than defensively about the future of the bulk power

transmission system, that is something that I have great concern

over, and the overall architecture of electrical restructuring. It is

reasonably clear what the structure of the distribution companies

will be and it is also reasonably clear as to what the structure of

the generation sector is going to be. What is not clear is what the

structure of the transmission sector will be. And I think it is fair

to say that some of the best minds in the industry have changed

their minds about what it should look like, probably more than

once.

I think our overreaching goal should be that whatever legislation

we eventually write will not prohibit the evolution of the transVerDate 11-MAY-2000 10:19 Apr 09, 2002 Jkt 010199 PO 00000 Frm 00013 Fmt 6633 Sfmt 6602 E:\HEARINGS\75757 pfrm04 PsN: 75757
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mission sector. The wisdom of also the Deputy Secretary and the

chairman and members of the FERC is certainly going to be very

welcome.

I would be remiss if I didn’t take an opportunity to welcome a

fellow Texan, as others have welcomed him. While this is Pat

Wood’s first appearance before this subcommittee as chairman of

the FERC, he has been before us before. We all know him. He is

very capable. He was a logical selection and also a guy capable of

personal friendship. I think it is good to have someone like that

that we can reach. I yield back my time.

Mr. BARTON. We thank the gentleman from Texas. The distinguished gentleman from Georgia, Mr. Norwood, is recognized for an

opening statement.

Mr. NORWOOD. Thank you very much Mr. Chairman. I would like

to commend you for holding this hearing today to obtain important

input from Federal Governmental entities on the subject of electricity as part of a continuing coordination to craft a real, coherent

national energy policy. I appreciate your selection of witnesses and

an opportunity to hear their perspective on a variety of issues

today. Especially, Mr. Chairman, I appreciate your remarks and

your opening statement; and, Chairman Tauzin, they are very easy

to align yourself with those remarks and I think all of us on this

committee do.

It is a time when I think you are doing the right thing. I think

we need to stand up, though we are in pain, and we need to move

forward with the people’s business. And I think the thing that you

could do, or we could do, that would most please the terrorists is

us not to deal with the people’s business. And this is a time when

it sort of like reminds me of my old football coach who used to say,

sometimes you just have to play hurt.

And though we are all hurting for the American people and so

many people that have been associated with this disaster, we need

to move on with the American people’s business while at the same

time we very quietly and steadily, with a steel resolve, prepare to

deal with Osama bin Laden and other terrorists around the world.

Clearly our electricity system is changing, Mr. Chairman. One

thing, however, that is not is the need to protect reliability. Over

the last 10 years, through measures enacted by both the Congress

and the FERC, this country’s electricity network has undergone

significant changes. Evolving from what used to be historically

small wholesale power sales that insured reliability, today’s current

wholesale megamarket allows many different buyers and sellers to

transfer power back and forth from one end of the grid to the other.

In fact, the wholesale market alone is approximately 400 percent

larger today than it was just 10 years ago. With a growing and

ever changing market, Congress certainly faces new challenges to

maintain reliable operability of the system.

Reliability is even more on my mind in the wake of last week’s

malicious attack on both the World Trade Center towers and the

Pentagon, just a few miles from here. In fact, I have probably, like

many of you, wondered about many potential targets that might

exist in the minds of evil folks responsible for such heinous and incomprehensible acts. The several substations, many transformers,

and a number of transmission lines located near the twin towers

11

were either destroyed or heavily damaged, leaving thousands of

residents without power. I am certain that other members of this

committee have considered the widespread damage that could potentially be left by a similar well-designed attack against specific

and critical points of the energy infrastructure within the United

States.

As we all know, secure and reliable operation of our oil refineries, pipelines, transmission networks, and generating facilities

are of paramount interest to the security of this Nation. With many

of my constituents working at the Savannah River site just across

the Savannah River that borders my district, and that work at our

nuclear power plant at Vogtle, this is a major concern of mine. On

a national scale, effects could be catastrophic.

I am pleased to see that the witnesses are prepared to discuss

safety and security measures that have been put in place to guard

against and prevent against such a scenario.

Thank you very much, Chairman Barton, for your leadership of

this committee. I, for one, appreciate the fact that you are moving

forward today.

Mr. BARTON. Thank you. Thank you. The gentleman from Texas

wishes to be recognized out of order to make a correction to his

opening statement.

Mr. HALL. Yeah. Mr. Chairman, I just had a note from Chairman

Tauzin that, ‘‘Ralph, you have been out of Texas so long, you can’t

tell the difference between one Francis and another.’’ And I think

I have always been told that it is better to remain silent and be

thought a fool as to open your mouth and remove all doubt. But

I want to tell you that the next time I see Francis will be my second time, and when they kept alluding to Mr. Blake, I kept looking

at these three ladies and trying to figure out which one you were.

I yield back my time. And I will always remember Francis Blake.

Mr. BARTON. The gentleman from Louisiana, who has one of the

strategic petroleum reserve facilities in his district, is recognized

for an opening statement.

Mr. JOHN. Thank you, Mr. Chairman. First of all, let me commend you on your tenacity and your leadership with this committee, not only with this hearing here today, but since we commenced this Congress and began focusing on energy-related issues.

I think these issues are very important. And also the chairman and

my fellow Louisianan, Mr. Tauzin, for his leadership. And of course

on our side, Mr. Boucher and Mr. Dingell.

I believe that the events that took place just over a week ago

have really shed a whole new light on energy and on its role in our

national security. You know, I believe in the area of electricity you

have to have three components that must work well together. You

must be able to recover the natural resource through exploration

and production, you must be able to generate, and you must be

able also to transmit the power. And I think that those three components must work very well together.

But in light of all of the issues that we have addressed up to this

point relative to energy, I think with the actions that happened

just last week, it gives us a whole new focus; and we will debate

and redebate the role that energy, especially, electricity will play

in our national security.

12

So I look forward to the testimony from the Department of Energy and also from the Federal Energy and Regulatory Commission

because this is a new era; not an old issue, but a new era with a

new focus as we move on from here.

So, thank you Mr. Chairman. I appreciate it.

Mr. BARTON. We thank the gentleman from Louisiana. We would

recognize the distinguished gentleman from Tennessee, Mr. Bryant,

for an opening statement.

Mr. BRYANT. Thank you, Mr. Chairman, for your series of hearings and your continuation of bringing very qualified people before

this committee, subcommittee, to listen to testimony or to give testimony to us.

Three quick points I would like to make. We are all commenting

about the events of September 11, and I simply want to say, obviously I would echo everything that has been said, but I want to

say, beyond that, I hope we are very careful as a Department and

as a Congress and the entire administration; and I hope, too, that

the media will be responsible in the discussion, the dissemination

of any kind of information regarding our electricity system in particular, but our entire power system, our natural gas pipelines and

so forth, but today electricity and discussing those in detail and

particularly just laying out for the public and everybody to see

what is out there and where there may be vulnerabilities or weaknesses.

Too often we are seeing today so-called experts, retired military

people, on television disclosing in their opinion what we will do as

a military strategy, and there aren’t that many out there, and laying it out in detail or disclosing that we are separating the President and Vice President for security reasons, and we are sending

one to Camp David. And if you need directions we will be happy

to, you know, go to our Web site and we will tell you.

So again, in this particular area of security, I hope we can keep

that in mind and limit—and I hope we don’t ask the type of questions that will bring out responses that, you know, where are we

weak and where are we vulnerable and so forth. At least make

them do some work if they are going to do it.

Second point, Mr. Secretary. I want to thank you on behalf of my

constituents for you and the Department, those there that very

quickly acted, what we used to call sui sponte in the court, on your

own to, when we first heard of these people raising the price of gasoline, price gouging that occurred, going out on your own initiative

and making that determination that there was no supply problem,

and warning—putting out that word to people who could then warn

these people that we would not accept that type of conduct under

these circumstances. And again, I think that was something that

really worked.

I know in my State of Tennessee that occurred around and that

lasted about 1 day until we got the Secretary letter out to our Governor and other people in our State with enforcement power. So I

thank you for that.

And my third point and final point is that as one from the Tennessee Valley Authority region, I have been very conscious of how

we look at any legislation that involves deregulation. And I want

to commend your—particularly the folks that I have dealt with in

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your Department in this issue, who have been very open and responsive to the work that we are trying to do as a part of that process of potentially deregulating the wholesale of electricity around

this country. We have worked hard with the stakeholders in the

Tennessee Valley over the last 2 years to develop consensus language, something that we can all live with. Nobody is completely

happy with it.

But again, the various parties have compromised and that consensus language was a part of the bill—well, basically that consensus language was a part of the bill that passed out of the subcommittee last year, and should anything move in the nature of a

deregulation bill this year, we are going to be seeking that same

language. And again we have worked with people in your Department on this. While we don’t see exactly the same on every point,

there are just a few minor differences out there, and we will continue to work.

And again, I would encourage you to work with us on that and

I just thank you for the work that you have done with us in the

past and would yield back the balance of my time.

Mr. BARTON. I thank the gentleman from Tennessee and recognize the distinguished gentleman from Maryland, Mr. Wynn, for an

opening statement.

Mr. WYNN. Thank you very much, Mr. Chairman. I too would

like to comment and commend you on your ‘‘tenacity,’’ I think was

the word used by one of my colleagues, in pursuing these issues

and bringing together very effective, I believe, hearings on this subject.

I am particularly interested in the witnesses from FERC and

particularly with respect to the July 12 order which directed the

combination of—I believe it was four RTOs in the northeastern region, including the PJM which serves my own State of Maryland.

I basically have two issues that I am anxiously looking forward

to hearing about. The first is, what is the problem that they were

attempting to address in this order? There is a reference to seams

in the transmission system that needed to be smoothed out. I think

that is very delicate and diplomatic language. But I would specifically like to know what was the problem they are trying to correct.

And then I think second and, more importantly, I would like to

know the basis for their authority; because I believe it is Ms.

Woods that suggests that—Mr. Wood. Excuse me. That was bad.

All right, Mr. Wood. What I want to know is, you make reference

to perhaps the need for clarification of that authority which suggests that you are not sure, the Commission is not sure whether

in fact you have the authority to order these mandatory RTOs. And

my own public utility commission in Maryland which has worked

with PJM and had great success, we have had very good levels of

reserves, we are wondering why—whether you have the authority

to do this.

So if you would elaborate on that, I would certainly appreciate

it. And again, Mr. Chairman, I thank you for convening the hearing and relinquish the balance of my time.

Mr. BARTON. I thank the gentleman. We now recognize the distinguished gentleman from Iowa, Congressman Ganske, for an

opening statement.

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Mr. GANSKE. Mr. Chairman, the tragic events of last week have

changed our focus today. I believe the Deputy Secretary will address security issues related to last week’s attack and response by

the Department of Energy. I would encourage him to advise us on

steps which could be taken to further the Department’s ability to

help secure our Nation’s power supplies either in today’s forum or

in future communications.

We all have an obligation to assure that our power supply is safe

and secure. Special attention must be paid to facilities such as our

national dams and nuclear power plants. And I know the Department is aware of and sensitive to these concerns.

I would like the Deputy Secretary’s assessment that all necessary and proper steps are being taken to provide for appropriate

security precautions. The transmission system in our country is

just as important as the production facilities in guaranteeing a consistent and uninterrupted flow of power to our cities, towns and

rural communities. Recent events have magnified the concerns we

have with our power supply. But even before those events, there

were steps which needed to be taken to improve our power grid and

our transmission capabilities.

Our electricity power grid is an essential part of the national

economy. With the slowdown in the economy, it is appropriate for

us to move forward on this issue. I yield back my time.

Mr. BARTON. We thank the next Senator from Iowa for those

comments. Mr. Waxman of California.

Mr. WAXMAN. Have you done everybody?

Mr. BARTON. I think so, Henry. I think you are next.

Mr. WAXMAN. Thank you very much, Mr. Chair. Today the subcommittee is going to hear testimony from the Department of Energy and the commissioners of the Federal Energy Regulatory

Commission regarding the national electricity policy.

I am uncomfortable about turning to this issue so quickly after

the tragic events of last week. Today’s testimony raises a number

of very controversial issues and I would prefer to focus on actions

that bring us together rather than immediately jumping into divisive policy debates. Having said that, I can see that the chairman

is intent on moving forward, and we cannot down play or gloss over

the very significant policy disagreements that underlie electricity

legislation.

First, we must insure that we do no harm. California electricity

restructuring legislation was hurried through the State legislature

and the flaws became evident only much later. Many other States

have since acted with equal speed, and I am not sure that anyone

fully understands how those laws will turn out. So we must be

careful. And we also must learn from recent experience.

As California and other western States struggled through their

electricity crisis over the past year, the Department of Energy sat

on its hands. The Secretary even embarked on a public relations

campaign to convince the American people that the Federal Government could not meaningfully assist western families. FERC refused to help until it was confronted with the very real possibility

of congressional action. Throughout the West, we became painfully

aware of how Federal inaction could harm consumers and the

States.

15

Ultimately President Bush ended up endorsing FERC action to

restrain runaway electricity prices. But for those of us from the

West, that action came too late to prevent major economic hemorrhaging.

I remain concerned that FERC’s actions did not go far enough.

And we now begin to discuss legislation on electricity policy. As we

do that, it is clear that we need to insure that FERC is more responsive to consumers. It must become more effective at addressing

market power and preventing market manipulation. We cannot

allow the intransigence of one commissioner to prevent meaningful

Federal action when it is desperately needed. Western States are

certainly opposed to greater authority at FERC, at the expense of

the States.

And I would like to submit for the record two letters from the

Western Governors Association, dated September 6 and September

12 on this issue.

Mr. BARTON. Without objection.

[The information referred to follows:]

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Mr. WAXMAN. Additionally, there are a number of other critical

issues that must be addressed in the context of electricity restructuring. For example, we must take energy conservation seriously.

DOE has estimated that investments in energy efficiency have generated a 30 to 1 rate of return. Efficiency and load management

measures also directly improve system reliability by reducing demand and strain on our delivery systems. But with the deregulation of the industry, utility investments in energy efficiency and

load management programs have dropped by roughly 50 percent

since 1993. We must reverse this trend.

We must also seek to spur investment in distributive generation

and renewable generation. This approach will best protect the environment while also creating a more secure electricity infrastructure. I look forward to hearing today’s witnesses and hope we can

act in a thoughtful bipartisan manner.

Thank you Mr. Chairman.

Mr. BARTON. Thank the gentleman. I will just comment on your

opening statement. I think it is well taken. We really thought

whether we ought to do this hearing or not. It was not an easy decision. But since this does impact energy security, the Chair’s decision was to go ahead and do the hearing, and then work with the

minority to determine what specific hearings on more specific energy security issues could be scheduled, whether they be open hearings or private briefings. So I think your opening statement was

well taken.

I want you to know it is not a trivial decision to do what we are

doing today. The gentleman from Oregon is recognized for an opening statement.

Mr. Walden.

Mr. WALDEN. Thank you very much, Mr. Chairman. I appreciate

your holding this hearing today. I will keep my remarks brief. I

think you can really sum it up in about three words: reliability, security, and self sufficiency. And if there was ever a time for us to

explore all three of those, this is it.

Clearly, in the wake of the events of last week and the roller

coaster of our economy today, it is more clear than ever that we

need to have self-sufficiency when it comes to our energy policy;

that we need to make sure that the grid is secure and reliable.

I think the other issue we need to continue to focus on is domestic production, especially of natural gas and oil. With the industrial

downturn that is underway, we are seeing prices come down both

in terms of electricity in the western market as well as prices of

natural gas. That is a false security from the price side, because

when our economy does turn around, we are going to have the

same shortages we had before we went into this downturn and yet

we probably won’t have any additional supply.

So I think we now need to focus on how do we add to supply,

how do we add to distribution, how do we make sure our sites are

secure. Otherwise, about the time we try and crawl up on out of

this economic downturn, we are going to run smack dab into high

energy costs, rolling blackouts, and the lack of energy and higher

costs certainly for consumers.

So I thank you for the hearing. I appreciate your willingness to

work with us on the Northwest title. And I also want to thank the

30

full committee chairman for his efforts on the price gouging issue

as well. It is an unconscionable act in my mind if we do have businesses out there who engage in price gouging. They, in my mind

are aiding and abetting the goals of the terrorist organization, and

I say that without regret.

Thank you, Mr. Chairman.

Mr. BARTON. Thank the gentleman. The gentleman from Arizona,

Mr. Shadegg, is recognized for an opening statement.

Mr. SHADEGG. I thank you, Mr. Chairman, and I do commend

you for holding this hearing today. I also appreciate your remarks

indicating the thoughtful consideration that went into whether or

not we should go forward.

Since the events of last Tuesday, I have urged my constituents

that, as much as possible, America needs to get back to life as normal. I have urged them that our airplanes must fly and we must

use them. Our sports teams must play and we must attend. Our

commerce must continue and we must participate. I think that is

extremely important. And in that regard, this Congress has work

to do. And I think we should be doing our work in every area.

I would say, however, that there is a new element brought to this

debate. It seems to me that security now becomes vastly more important and something we should focus on, something that perhaps

we should have been focusing on to a greater extent before last

Tuesday’s events.

I commend the full committee chairman for the effort he is undertaking to survey all of the agencies that we oversee and to have

them come back to us with information with regard to security efforts or measures that they could take and anything this committee

could do legislatively to assist in those efforts.

With regard specifically to the energy issue, I would associate

myself with the comments of others who have pointed out that this

is a long-term crisis. We recognize that, for example, the California

energy crisis that we struggled with over the last several months

did not occur in a day. It occurred because people did not look farsightedly into the future. They, for example, stopped building

power plants when they were needed. They underestimated the demand increase that was a part of the overall economy.

And so I think it is very appropriate that this committee do its

job. There is work that needs to be done in assessing our production capacity and whether we have enough new power plants coming on line. There is work to be done in assessing our transmission

facilities. Those are clearly deficient. So I think we should be doing

what we can do.

At the same time our economy is in fact struggling, and I think

with regard to any dramatic restructuring I think we have to proceed with some additional element of caution at this point in time,

as I am sure every member of this committee is aware. And I commend the chairman for his comments indicating that he is much

aware of that, and I yield back the balance of my time.

Chairman TAUZIN. Will the gentleman yield briefly?

Mr. WALDEN. Certainly.

Chairman TAUZIN. I thank the gentleman. I asked the gentleman

to yield simply to inform the members who perhaps were not here

when we started that next week we are scheduling intense private

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briefings from some of the more important agency heads under our

jurisdiction, including the Department of Energy, who will have a

chance to privately discuss some of the things we are finding. So

all of the members should be prepared. Next week, I think next

Tuesday is the day we are trying to do it, to schedule these hearings. So stay in touch and we will inform on you the date and time.

Mr. SHADEGG. Reclaiming my time, that was precisely what I

was complimenting you for, Mr. Chairman, and so I appreciate that

and yield back the balance of my time.

Mr. BARTON. Seeing no other members present who have not yet

had an opportunity to make an opening statement, the Chair would

ask unanimous consent that all members not present have the opportunity to put their opening statements in the record. Hearing no

objection, so ordered.

[Additional statements submitted for the record follow:]

PREPARED STATEMENT OF HON. MIKE DOYLE, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF PENNSYLVANIA

Mr. Chairman, thank you for convening this hearing to further examine our current national electricity policy and to identify what steps should be taken to improve

the efficiency, reliability and competitiveness of our facilities and markets. While

the events of September 11th remain omnipresent and are at the forefront of Congressional priorities, we can ill-afford to ignore the critical role that electric power

plays in our national security.

As we are all aware, Congress passed the Energy Policy Act of 1992 during the

Persian Gulf War and it would appear that Congress is once again charged with

the responsibility of responding in like fashion. The House has already accomplished

a great deal with the passage of H.R. 4 and we should proceed with the task at

hand regarding comprehensive electricity policy.

Obviously, we need to focus on structural and jurisdictional matters. I am personally interested in amending the Federal Power Act to enhance the advancement of

combined heat and power. But like many of my colleagues I am most eager to discuss the security of our systems. We will hear in greater detail from Secretary Blake

that the attack on the Pentagon had no direct impact on the Washington metropolitan energy infrastructure and that outside of lower Manhattan our energy infrastructure was not affected. Without question this is good news and should help to

calm concerns. But we also know that security issues have become a top priority

at our nation’s nuclear power plants and water treatment facilities. And we also

know that numerous reviews that have examined potential terrorist acts that could

debilitate our nation’s infrastructure identify damage to electric power among the

top physical threats.

Our schedule of regular order may feel a bit awkward, but is important that we

move ahead with completing the work on all facets of our national energy policy.

I appreciate Chairman Barton’s efforts in this regard and look forward to working

with all members of the Committee in reaching this imperative goal.

Thank you Mr. Chairman.

PREPARED STATEMENT OF HON. BILL LUTHER, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF MINNESOTA

Thank you Mr. Chairman for holding this wide-ranging hearing designed to hear

the views of the Administration and the FERC with regard to the electric power industry. Coming from a state that has not adopted deregulation at the state level,

I urge a deliberative approach to any mandated federal legislation. I also urge that

any proposal considered by this committee have the best interests of electricity consumers in mind including the promotion of conservation and renewable and innovative energy sources. Considering the tragic events of last week, I am also interested

in any comments or views from the Administration with regard to energy security

issues and would urge this subcommittee to begin looking at this subject in greater

detail. Thank you Mr. Chairman.

Mr. BARTON. We would like to welcome our first witness, the

Honorable Deputy Secretary of Energy, Mr. Francis Blake. If you

32

would come forward. Welcome back. We are glad to have on you

on this very busy day. We know how pressing your duties are as

the chief operating officer of the Department of Energy. We are

going to give you 10 minutes to summarize your written testimony.

If you need a little bit longer, or take a little bit less, that is fine.

Welcome to the committee, and your full statement is in the record

in its entirety.

STATEMENT OF HON. FRANCIS BLAKE, DEPUTY SECRETARY,

U.S. DEPARTMENT OF ENERGY

Mr. BLAKE. Thank you Mr. Chairman, members of the committee. I would just briefly summarize my statement, and in light

of all of your opening comments, I thought I would just start with

a few observations on the security of our energy infrastructure.

Last week’s terrorist attack did not disrupt our energy infrastructure. With the exception of the devastation in lower Manhattan, the electricity grid was unaffected. Trading in oil and gas proceeded largely without disruption. And under the circumstances,

the energy markets have remained remarkably stable, with the exception of a few isolated instances of price gouging and price

spikes.

At DOE we have an emergency operation headed by General

McBroom, a retired Air Force major general, who led combat units

during the Gulf War and has planned and executed responses to

numerous emergencies and natural disasters. Our operation team

works with other Federal agencies, State and local government,

and industry to respond in the event of emergencies.

Let me give you just a sense of the process. Last week on the

electricity grid, the National Electric Reliability Counsel, NERC,

issued the highest threat advisory to their electrical industry security coordinators who, in turn, notified all the electrical control centers, who, in turn, notified all 3,000 individual utilities around the

country and Canada and in Mexico. Representative security measures taken include increased guards, restricted access, moving system operators to alternate control centers, and taking appropriate

cyber security measures.

At DOE, we were in regular contact with FERC and the National

Infrastructure Protection Center of the FBI. Cooperation and communication with the industry with other forms of government have

been excellent. But we are going to look for ways to improve and

we are in the process of evaluating lessons learned. I look forward

to keeping the committee informed. And obviously, we will have an

opportunity next week and to keep you advised as we go forward

with our assessments.

Now, let me turn to today’s specific topic, the comprehensive electric legislation. We are very pleased that the committee is considering comprehensive electric legislation. The Federal Power Act

was written in 1935 at a time when there was virtually no interstate commerce in electricity. Electricity markets were local, and

power generation was considered a natural monopoly. Today the

transmission grid is both interstate and national, and the notion of

a natural monopoly in generation is a thing of the past. The administration believes we need to modernize our electricity laws. Comprehensive legislation can make wholesale markets more competiVerDate 11-MAY-2000 10:19 Apr 09, 2002 Jkt 010199 PO 00000 Frm 00036 Fmt 6633 Sfmt 6602 E:\HEARINGS\75757 pfrm04 PsN: 75757
33

tive, lower prices, improve reliability and benefit consumers. The

administration very much respects the role of the State in electricity controlling legislation, but we also believe that there are a

few core Federal issues. And in that respect, we believe the goals

of comprehensive legislation should be first to make the markets

more competitive, finish the job of opening the transmission system

and remove transmission bottlenecks, lower barriers to entry for

new electricity supply, for example, through uniform interconnection standards, promotion of reliability to enforceable standards developed by self regulating organizations, increased protection for

the consumers through uniform information disclosure requirements, promotion of additional investment, for example, in repealing the Public Utility Holding Company Act.

We also believe legislation can help promote energy efficiency, for

example, by developing realtime pricing programs and giving

FERC authority over demand options.

There are additional elements in this legislation. I won’t go

through them all item by item, but we very much applaud the committee’s attention to this legislation, and we look forward to working with you. Thank you very much.

[The prepared statemment of Hon. Francis Blake follows:]

PREPARED STATEMENT OF HON. FRANCIS BLAKE, DEPUTY SECRETARY OF ENERGY

Mr. Chairman and Members of the Subcommittee, I welcome the opportunity to

testify before you today on national electricity legislation.

LAST WEEK’S TERRORIST ATTACK

Before I address the subject of this hearing, I would like to briefly address the

energy issues arising out of the vicious and cowardly attack on our country last

week.

The terrorist attack on our country had a significant impact on the energy infrastructure in lower Manhattan. The fire and building collapses destroyed two substations located under the World Trade Center as well as power transformers, circuit breakers, underground cable and other distribution equipment. Multiple transmission lines were damaged, resulting in the outage of a third substation. Con Edison is restoring limited temporary service by deploying mobile generators and reconfiguring portions of the effected distribution system. New power lines are being

installed above ground to replace damaged underground cable. Normal electricity

service in areas where there is limited physical damage is being restored, but restoration to areas where there is significant damage will take much longer. There

also has been a disruption to natural gas service in lower Manhattan. The attack

on the Pentagon had no impact on the energy infrastructure in the Washington,

D.C. area.

Last week’s attack raises issues relating to the security of our energy infrastructure. Outside of lower Manhattan, our energy infrastructure was not affected, and

there were no specific threats to oil refineries, oil and gas pipelines, electric transmission lines, and generation facilities, including nuclear power plants.

Notwithstanding, the security of our energy infrastructure was upgraded in the

wake of the attack. Commercial nuclear power plants were placed on their highest

alert status, the North American Electric Reliability Council, an industry organization responsible for maintaining bulk power system reliability, recommended that

transmission operators implement heightened security measures, pipeline owners

were put on high alert after the attacks, and security at oil refineries was upgraded.

As you know, there were isolated reports of gasoline price gouging in the wake

of the attack last week. In response, the Secretary of Energy determined there was

no supply disruption to justify reported prices and issued a public statement that

these high prices were unjustified. The Federal Trade Commission also threatened

to take enforcement action. Gasoline price spikes receded in wake of these actions.

The Department is conducting an assessment of the security of our energy infrastructure. When this assessment is complete, the Department will recommend appropriate action.

34

NEED FOR FEDERAL ELECTRICITY LEGISLATION

I commend you for holding this hearing. Earlier in the year, many believed there

was little likelihood Congress would consider electricity legislation. The view was

that the California electricity crisis would discourage both the Administration and

Congress from dealing with electricity legislation. Your hearing disproves this common wisdom.

The Administration believes the opposite is true—the electricity crisis in California and the West demonstrates the need for Congress to act. This experience

shows there is a need to make wholesale electricity markets more competitive, to

strengthen the transmission grid, to increase electricity supply, to protect consumers, and to improve reliability. The California electricity crisis is a dramatic

demonstration of problems that exist under the status quo—problems that Congress

should address.

The Administration recognizes the need for Congress to pass comprehensive electricity legislation. The National Energy Policy included a recommendation that the

‘‘Secretary of Energy propose comprehensive electricity legislation that promotes

competition, protects consumers, enhances reliability, promotes renewable energy,

improves efficiency, repeals the Public Utility Holding Company Act of 1935, and

reforms the Public Utility Regulatory Policies Act of 1978.’’ Since 1995, Congress has been grappling with electricity legislation. Initial efforts

sought to require States to open their retail electricity market by a date certain.

Subsequent legislation focused on promoting competition in electricity markets and

complementin—not commanding—State retail competition programs.

We clearly need to revise Federal electricity laws to recognize changes in electricity markets. The principal Federal electricity law—the Federal Power Act—was written in 1935. At the time, there was virtually no interstate commerce in electricity, there was no interstate transmission grid, electricity markets were local,

power plants were built right next to consumers, and electricity generation was perceived to be a natural monopoly.

The Federal Power Act was enacted to fill a regulatory gap, out of recognition that

States cannot regulate interstate commerce. Initially, the Federal role was modest,

since there was very little interstate commerce in electricity. As interstate commerce

in electricity expanded, it was only natural that the Federal role would also expand.

Today, the transmission grid is both interstate and international, electricity markets encompass entire regions, almost all wholesale electricity sales are in interstate

commerce, and the natural monopoly in generation has long since been disproved.

The Administration believes the time has come to make changes to Federal electricity law to reflect changes that have occurred over the past 66 years, and the

sweeping changes that are underway in the industry. The Administration believes

there is a need to modernize our electricity laws.

The Administration believes it is essential that Congress pass comprehensive electricity legislation. Electricity legislation can make wholesale electricity markets

more competitive, lower prices, strengthen the transmission grid, increase electricity

supplies, protect consumers, and improve reliability.

I want to make it very clear that the Administration respects the State role in

electricity regulation. For example, the Administration does not support proposals

to require that States open their retail electricity markets by a date certain. It believes that it is a State responsibility to determine whether and when to open retail

electricity markets to competition. At the same time, the Administration recognizes

that since 1935 the Federal government has been charged with responsibility over

wholesale electricity markets and the transmission of electricity in interstate commerce.

The Administration believes that electricity legislation should focus on core Federal issues that are beyond State authority.

Regulation of Interstate Commerce

Electricity markets are increasingly regional in nature. Under the Constitution,

States have no authority to regulate interstate commerce and regulation of interstate commerce is a Federal responsibility. The California experience shows that actions taken by one State can have regional consequences.

Transmission

Assuring that our transmission system can deliver reliable electricity supplies is

a core Federal issue. As the National Energy Policy noted, investment in new transmission capacity has failed to keep pace with growth in demand and with changes

in the industry’s structure. Since 1989, electricity sales have increased by 2.1 percent per year, yet transmission capacity has increased by only 0.8 percent per year.

There is widespread recognition that there is a need to expand the transmission sysVerDate 11-MAY-2000 10:19 Apr 09, 2002 Jkt 010199 PO 00000 Frm 00038 Fmt 6633 Sfmt 6621 E:\HEARINGS\75757 pfrm04 PsN: 75757
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tem, remove bottlenecks, and provide for open access. Since the transmission system

is both interstate and international, regulation of the grid is a Federal responsibility.

There are various reasons why transmission constraints exist. In some cases, the

problem is a lack of economic incentive. The national energy policy proposes a solution to that problem: encouraging the Federal Energy Regulatory Commission

(FERC) to develop incentive rates to promote transmission expansion. FERC has

great flexibility under current law to set transmission rates at a level to attract investment. Recently, FERC has shown flexibility in considering nontraditional transmission rates. For those reasons, it does not appear legislation is needed to address

transmission pricing.

In other cases, the problem is the siting process itself. Under current law, transmission siting is an exclusively State function. That law was written 66 years ago,

at a time when power plants were located right next to customers, and decades before transmission lines interconnected States and regions. Congress did not provide

for transmission siting by the Federal government because it did not foresee the

transmission system would develop into not only an interstate but also an international grid.

Much has changed since 1935. The transmission grid is the interstate highway

system for electricity. It should not be a system of local toll roads.

Electricity legislation can remove transmission bottlenecks by providing for siting

by the Federal government of transmission facilities used for interstate transmission. The Administration believes legislation should preserve State transmission

siting authority, but should provide for Federal siting of transmission facilities that

are in the national interest, based on effects on reliability, interstate commerce in

electricity, and on competition in wholesale electricity markets. We believe Federal

siting decisions should rely in large part on recommendations made by regional

siting boards.

We also believe that Federal electricity legislation should grant FERC authority

to require State and municipal utilities and rural electric cooperatives to provide

open access to their transmission systems, in the same manner as jurisdictional

transmitting utilities. This is a step towards establishing one set of rules to govern

the transmission grid.

Reliability

Ensuring the reliability of the interstate transmission system is also a Federal responsibility. Since the 1960s, the reliability of our transmission system has been

based on voluntary compliance with unenforceable reliability standards. That is no

longer tenable, and Federal legislation is needed to provide for enforceable standards developed by a self-regulating organization subject to FERC oversight.

Market Power

The Administration believes that FERC needs to be able to mitigate market

power. However, the debate about market power often starts with a misunderstanding about FERC authority under current law. Under the Federal Power Act,

FERC is responsible for ensuring that rates charged by public utilities are just and

reasonable. As a general matter, the ability to set rates is the ability to prevent the

exercise of market power. An exercise of market power generally entails charging

rates that are higher than those produced in a truly competitive market. For that

reason, FERC can prevent the exercise of market power through its authority over

wholesale rates and by ordering refunds of unjust and unreasonable rates.

In our view, a discussion of market power issues must start with an understanding of FERC authority under existing law and a determination of whether existing FERC authority to address market power is inadequate.

Legislation can strengthen FERC authority to address market power. For example, the Administration believes legislation should amend the refund provisions of

the Federal Power Act and provide that refunds are effective on the date of complaint, not 60 days later. The Administration believes there is a need to increase

the penalties for criminal violations of the Federal Power Act and expand the scope

of the civil penalty provisions to include any violation of the Federal Power Act, not

just the provisions added by the Energy Policy Act of 1992.

The Administration believes that FERC should retain its authority to approve

mergers and asset dispositions, given its expertise on the electricity industry. We

also believe it is appropriate to clarify FERC authority to approve holding company

mergers and mergers and asset dispositions involving generation facilities.

Electricity Supply

The lack of uniform interconnection standards appears to have contributed to the

difficulty in developing independent power plants in some regions of the country.

36

Federal legislation can help assure adequate electricity supplies, by providing for

uniform interconnection standards and reforming FERC authority to issue interconnection orders.

Consumer Protection

Electricity markets are regional in nature, and are no longer confined neatly within individual States. For that reason, there is a need for electricity legislation that

protects consumers against ‘‘slamming’’ and ‘‘cramming,’’ strengthens the bargaining

power of consumers through aggregation, protects consumer privacy, and ensures

that consumers have the information to make informed decisions to meet their

needs.

Federal Electric Utilities

Another core Federal issue is defining the role of Federal electric utilities like the

Tennessee Valley Authority (TVA) and Bonneville Power Administration in competitive electricity markets. Obviously, States have no authority over Federal electric

utilities. Legislation is needed to provide open access to transmission systems operated by the Federal electric utilities and ensure that one set of rules governs the

entire interstate transmission system. There is a need for other specific TVA and

Bonneville reforms. I assure the Subcommittee that the Administration intends to

work closely with the Congressional delegations from these regions on these reforms.

Reform of Federal Electricity Laws

There is a need to reform Federal electricity laws, such as the Public Utility Holding Company Act of 1935 (PUHCA) and the Public Utility Regulatory Policies Act

of 1978 (PURPA). With respect to PUHCA, each of the past four presidents has supported PUHCA repeal. PUHCA repeal is an idea whose time came a long time ago.

There is also a need to repeal the PURPA mandatory purchase obligation prospectively.

Jurisdiction

Federal legislation should also clarify Federal and State jurisdiction. One jurisdictional issue is State authority to charge public purpose fees. The Administration believes that States are in the best position to develop public purpose programs to suit

their needs. Some States may prefer to develop strong low-income assistance, while

others focus on rural assistance, while still others concentrate on conservation.

States have different needs, and need the flexibility to craft programs to suit those

needs. These programs can be funded through the distribution charges—an area

where States have exclusive jurisdiction—or charges on retail sales of electricity.

Electricity legislation can clarify the authority of States to impose fees to fund

public purpose programs that meet their needs and avoid bypass of State fees. We

believe this is a better approach than imposing a Federal tax to fund a Public Benefits Fund. One concern relating to a Public Benefits Fund that has not received

much attention is equities in allocating funds. There is no assurance that fees raised

in one State to finance a Public Benefits Fund will not be spent in other States.

Energy Efficiency and Renewable Energy

A stable power supply should consist of a clean and diverse portfolio of domestic

energy supplies—including renewable and alternative supplies—that are available

right here in the United States. The National Energy Policy includes several recommendations on ways that new and emerging technologies can help us provide for

increased generation of electricity while protecting the environment, as well as on

ways to increase use of renewable and alternative energy supplies. These recommendations should be considered as electricity legislation is developed.

By no means is this intended to be an exclusive list and there are other issues

that may be appropriate to address in Federal electricity legislation.

CONCLUSION

We have a rare opportunity to learn a lesson from the California experience and

act to prevent a future electricity crisis. Congress normally passes energy legislation

in the wake of a crisis, and it is rare for Congress to act to prevent an energy crisis.

Mr. Chairman, Congress has been slowly reforming Federal electricity laws for

over twenty years. This process began with the Public Utility Regulatory Policies

Act of 1978, which the encouraged the development of independent power producers.

This process continued with enactment of the Energy Policy Act of 1992, which provided greater access to the transmission system and further encouraged the development of independent power producers. The time has come for Congress to take anVerDate 11-MAY-2000 10:19 Apr 09, 2002 Jkt 010199 PO 00000 Frm 00040 Fmt 6633 Sfmt 6621 E:\HEARINGS\75757 pfrm04 PsN: 75757
37

other step, a bigger step, one that can make electricity markets more competitive

and result in lower electricity prices, and ample and reliable electricity suppliers.

The Administration looks forward to working closely with the Committee to develop comprehensive electricity legislation.

I appreciate the opportunity to testify before you today.

Mr. BARTON. We thank you. The Chair would recognize himself

for the first 5-minute question round. Has the Department decided,

Mr. Secretary, whether to put forward an electricity legislative

package of its own?

Mr. BLAKE. We are developing legislative principles and we

should be able to share those within the week.

Mr. BARTON. But legislative principles may not be the same as

legislative language; is that correct?

Mr. BLAKE. I think we look forward to working with this committee and your staff on the language itself.

Mr. BARTON. It is my understanding that the administration has

made a decision to encourage the Senate to move companion to

H.R. 4, the Comprehensive Energy Enhancement Act that passed

the House in early August. Is that true or not true?

Mr. BLAKE. That is my understanding.

Mr. BARTON. If that happens and our colleagues in the Senate

that act, obviously, we would attempt to have a conference between

the House and the Senate in the very near future. Does the administration have a position on whether we should attempt to put in

an electricity restructuring component in a conference between the

House and the Senate on the pending bill that has passed the

House?

Mr. BLAKE. We would like to see—I am not entirely sure I understand the question.

Mr. BARTON. It is a good thing if you don’t entirely understand

the question.

Mr. BLAKE. We would like to see that as part of the overall—— Mr. BARTON. Regular order for us, to move the electricity restructuring bill as a stand-alone through subcommittee, full committee,

to the floor and the Senate have a separate conference. But if the

House and the Senate are going to adjourn in the middle of October, which is a possibility, we might want to speed up the electricity component into a bill that has already cleared the two legislative Chambers.

Mr. BLAKE. I understand. We would support prompt action on it.

Mr. BARTON. Does the administration have a position on the

thorny issue of mandatory RTOs versus voluntary RTOs? And if

you do, can you enunciate that position today?

Mr. BLAKE. I think the administration’s view is FERC has the

authority that it now needs.

Mr. BARTON. So the administration would be silent on—— Mr. BLAKE. Yes.

Mr. BARTON. But is willing to take instruction from the subcommittee if we have a different view?

Mr. BLAKE. Always.

Mr. BARTON. Remember the answer to that now—always. We

don’t have you under oath, but that is a very good answer from the

chairman’s viewpoint. In your opinion, given what happened last

week, would it be helpful to have a restructuring package in any

bill that the President signs on energy? Would that, in your opinVerDate 11-MAY-2000 10:19 Apr 09, 2002 Jkt 010199 PO 00000 Frm 00041 Fmt 6633 Sfmt 6602 E:\HEARINGS\75757 pfrm04 PsN: 75757
38

ion, tend to enhance our ability to react and prevent future terrorists’ attacks or to minimize the damage? Do you have a position on

that?

Mr. BLAKE. I think there are linkages between reliability and security that we need to think through, particularly in light of the

attacks last week. And that is something we are, in the process in

the department are doing now. And I think this legislation would

be helpful.

Mr. BARTON. I am going to yield the balance of my time and let

Mr. Boucher ask questions. Thank you.

Mr. BOUCHER. Well, thank you very much, Mr. Chairman. And

Mr. Blake, welcome. We are glad to have you with you us this

afternoon. Let me ask a question of you concerning the violence between State and Federal regulatory with regard to transmission. I

presume you are familiar with the contents of the Federal Energy

Regulatory Commission’s order 888?

Mr. BLAKE. In a general sense.

Mr. BOUCHER. That order asserted FERC authority over the

transmission component of unbundled transactions for transmission and the sale of electricity in States that are open to retail

competition. And no sooner had the FERC issued that order that

it was sued from both directions. It was sued by one set of parties

claiming that the FERC did not have the statutory authority to go

as far as it went. And then it was sued by a group of energy marketers claiming that it had not only the statutory authority, but a

legal mandate to go even further and to assert jurisdiction over

transmission even in States that are closed to retail competition

and even with regard to bundled transactions.

And I have a series of questions for you concerning that circumstance. First, a procedural question. The U.S. Supreme Court

is scheduled to have arguments on October 3 on both of these lawsuits. And we can probably anticipate a decision from the Supreme

Court either later this year or perhaps at the latest in the spring

of next year on this rather complicated set of jurisdictional questions that really go to the heart of the balance between Federal and

State authorities.

And so as the first question, I would be interested in knowing

whether you would advise us, given the uncertainties of the legislative process and the potential perhaps that even an effort to legislate in one direction or the other should it not be successful, might

have some bearing on the Court’s interpretation of these statutory

authorities. I wonder, if given those circumstances, you have any

advice for us on whether we would be well advised to wait until

the Supreme Court has rendered a judgment on these questions or

whether we should go forward and attempt to pronounce what we

believe the proper measure of FERC authority in these situations

should be?

Mr. BLAKE. Since the Supreme Court will be looking to try to discern Congress’s intent, if prior to that decision Congress can clarify

that intent and can make clear in the administration’s view that

FERC did have the authority to issue that order, that would be

preferable from the administration’s perspective.

39

Mr. BOUCHER. So your advice would be go forward and legislate

in our own time and make our own decisions, notwithstanding the

impending decision of the Supreme Court on these matters?

Mr. BLAKE. Yes, sir.

Mr. BOUCHER. Could you pull that microphone a bit closer. I am

having a little bit of trouble. I heard your answer to Chairman Barton’s question with regard to the authority of the FERC with respect to regional transmission organizations. And I would just like

to ask for some clarification with regard to one aspect of that. Your

basic advice is don’t legislate on this subject. I think I heard that

clearly. Was I correct in that interpretation?

Mr. BLAKE. We think FERC has the authority now as appropriate.

Mr. BOUCHER. There are really two aspects to that FERC authority, and this is the question I want to pose to you. The FERC has

issued several orders with regard to regional transmission organizations. One of those orders encouraged investor-owned utilities to

seek memberships in RTOs.

Another of the orders, the most recent order, addresses the structure of RTOs and imposes some Federal requirements with regard

to structure. Do you believe that the FERC has sufficient authority

to order a particular structuring of RTOs? Does the FERC have

sufficient authority, for example, to buttress the order that it

issued recently addressing structure? And do you believe that the

FERC has authority to order participation in RTOs by the investorowned utilities? And as a further question, do you believe that the

FERC should order participation in RTOs by investor-owned utilities?

Mr. BLAKE. The first response is I would also be interested in

Chairman Woods’ answer to those questions.

Mr. BOUCHER. We are going to ask him the same question.

Mr. BLAKE. I am sure. I would not hold myself out as an expert

on where the boundary lines are of FERC’s authority. From the administration’s perspective, as we look at the RTO structuring, and

what we see in the larger sense, is adequate authority in the current statute and a view that that is best resolved at the technical

level through the comment process and the input from the stakeholders, the exact process that FERC is going through now.

Mr. NORWOOD [presiding]. The time has expired.

Mr. BOUCHER. Let me thank you very much, Mr. Blake. We appreciate your participation here. Mr. Chairman, I would like to ask

that the record of this hearing remain open for an appropriate time

within which we might submit some additional questions in writing

to Mr. Blake concerning the administration’s position on this complex and very important set of issues. I do have some additional

questions and I will send them to you, Mr. Blake.

Mr. NORWOOD. So ordered. I would like to recognize the chairman of the Commerce Committee, Mr. Tauzin.

Chairman TAUZIN. Mr. Blake, we have noted that since the NES

was adopted, the National Energy Strategy that opened the wholesale markets in electricity, the wholesale market, has increased by

400 percent and prices have steadily declined in the wholesale market during that period of time. Is it this administration’s position

that the NES and wholesale marketing changes the laws we made

40

in that period of time that worked successfully and were a model

for what we should go forward with?

Mr. BLAKE. I think the opening of the wholesale market has

worked, on the whole, very successfully.

Chairman TAUZIN. The second question—I know we just went

through a pretty technical series of questions, but I want to get

something perhaps even more basic than that. The whole of the

electric laws in America, electric policy laws, pricing and transmission, have been built around the notion that electricity gets

transmitted from a point of origin to the point of use. That isn’t the

way the system really works, is it?

Mr. BLAKE. No.

Chairman TAUZIN. Explain to this committee and the listening

audience how it really works.

Mr. BLAKE. The actual electrical flow is often quite different than

what is called the contract path flow. And part of this restructuring

legislation, I think, is an effort to match——

Mr. NORWOOD. Mr. Blake, would you try to speak directly into

that microphone.

Chairman TAUZIN. We are doing some nice work in this room

and it will be a lot better when you come back.

Mr. BLAKE. Your question goes to the point of to better match

what is actually happening as we move to regional and national

grid structure.

Chairman TAUZIN. And it is in the Nation’s interest that we

move to regional and national grids, is it not, in the same way that

we move to national pipeline systems so that buyers could deal directly with producers and actually negotiate better prices and delivery terms; is that correct?

Mr. BLAKE. That is absolutely correct.

Chairman TAUZIN. And if it is correct, it requires us to rethink

policy in the light of reality. There was a great article written

about the notion that if you think of electricity grids as lakes of

electricity—and it doesn’t matter where the water comes in, you

are only going to take it out from where you are. You are not going

to pipe it across the lake to get to that water that was introduced

to the other side of the lake. You are going to take water from the

lake wherever you are. But the policy, the pricing structures, the

regulatory structures, are all built around the notion that we have

pipelines running across the lake going from point of production to

the point of use and delivery, when that isn’t the way the systems

works or electrons work. And basically the argument that our committee has made, and I hope the administration will join us in, is

that it is time for us to think about making our policy and our pricing and our delivery and our markets look like the physics, the reality of the way electricity is introduced and the way it is used

within a grid; is that correct?

Mr. BLAKE. Yes, sir.

Chairman TAUZIN. So I hope you are going to be very supportive

of this committee’s efforts to find a way to move us from this almost dark-age view of the way electricity functions in a society to

the way it really does function and the way it should operate in a

free market. And in doing that, we have to worry about a transition and we have to worry about the fact that this old system of

41

pricing and of delivery and regulation have created situations

where some people are paying much too much for electricity, and

other people are paying quite a good price. Isn’t that our political

dilemma how we move from that old system to a new one where

there is more uniformity in the market price?

Mr. BLAKE. Greater liquidity will help and that is what the legislation is designed to promote.

Chairman TAUZIN. And if I could echo the chairman’s concern,

this is pretty tough business. I mean, we don’t really have consensus yet whether the RTOs ought to be mandatory or voluntary.

This is the kind of transition stuff we are talking about. And we

are going to need the guidance of the new administration in that

area, and I know you said you would take guidance from us and

you know we need those principles so we can come to some recommendations that make sense. I understand the chairman is

going to very soon release a working draft so we can begin the intricate discussions of how to make that transition to this working

marketplace.

In that regard, I would hope that the administration, as well as

all our friends in the industry, take that as a cue that time is running on this issue. And we may not dispose of it in the next couple

of weeks, but it will be disposed of relatively soon at this committee

level. I would encourage you to work very hard toward a consensus

that Chairman Barton and indeed Mr. Boucher pointed out, yet

need to be resolved. Thank you.

Mr. NORWOOD. Thank you, Mr. Chairman. I recognize Mr.

Shimkus for 5 minutes.

Mr. SHIMKUS. Thank you, thank you, Mr. Chairman, and Mr.

Blake it is good to have you. What elements of a comprehensive

electricity package, if any, are so critical to the security of our Nation that they should be enacted into law immediately, i.e., in the

next several weeks or at the end of this year?

Mr. BLAKE. On the physical security of the infrastructure?

Mr. SHIMKUS. Just the whole restructuring debate.

Mr. BLAKE. On the physical security side, we are, as I indicated,

now looking and taking another look at those sets of issues and

hope to give you some recommendations or the result of our review

very soon, but I am not in a position today to respond to that. On

the reliability issues, I think there is a wide consensus that one of

the things you want to move toward are standards that are enforceable through private organization, much like, you know, the

stock exchange or something like that.

Mr. SHIMKUS. As a basis of the comments on the FERC, which

we will get a chance to talk to next, is it your position that they

currently have the authority to do what needs to be done under

their jurisdiction? What is the administration’s position on FERC’s

authority to order divestiture?

Mr. BLAKE. I am just being advised they can condition mergers

which would be consistent with the similar authority of Justice or

FTC. But they can’t order divestiture on their own.

Mr. SHIMKUS. Do you see that as an important element in restructuring?

42

Mr. BLAKE. I don’t think we would support an independent authority different than what regular antitrust reviewing authorities

have.

Mr. SHIMKUS. So you feel that that is not needed?

Mr. BLAKE. Right. Exactly.

Mr. SHIMKUS. And don’t worry. Joe used to do that to us all the

time. So you are in good hands. Your testimony also goes on to list

some legislation reforms that could strengthen FERC’s ability to

address the market power issue, you know, in the chairman’s comments on how we price and it is not a pipe delay that is the analogy I have been taught. But then people would turn back to the

old regional monopoly standard of saying, well, those—when there

was a lake, there was, you know, one producer and one—and the

consumer and it was all one happy family. When we deregulated

into the wholesale aspects of selling of power, now we have to

change how we account for—how do we allow the grid to operate

hopefully more effectively and efficiently.

And we just have come out of a—dealt a blow with some movement by the administration, some movement by the State, some interest by us on what occurred on the western grid and the western

prices in California. So talk to me about the market procedure authority.

Mr. BLAKE. The administration’s view is largely—the principal

issue around market power does go to the rates charged. You would

retain—there is no change in FERC authority on just and reasonable rates. The only changes we see on market power are really

more along the edges.

You mentioned the merger authority. We see some value in clarifying some of that authority that they have over mergers and

divestitures. But the larger issue that you are going to, I think we

see is already encompassed within the statute.

Mr. SHIMKUS. Do you feel that an expansion of the transmission

grid would ease up some of those market power concerns and open

up the ability to contract and receive power? I mean, that is probably the best way to address the market power concerns if I am

having an expanded grid.

Mr. BLAKE. It would definitely help in terms of getting low cost

power to more places, the better access that you have.

Mr. NORWOOD. I thank the gentleman.

Mr. SHIMKUS. Let me just finish. That is one of the important

things of addressing the States’ rights issue, the property rights’

issue and the coordination across State lines which will be a tremendous hurdle to overcome on regional RTOs and transmission

grid.

Mr. NORWOOD. I thank the gentlemen and I yield myself 5 minutes for questioning.

Mr. Blake, I want to talk a minute about RTOs just for a second.

Could you describe for us some of the criteria that you have used

in determining what type of RTO structure might work best?

Mr. BLAKE. Congressman, that is really a matter that we feel lies

within the expertise of the Commission. And the Department has

not yet taken a position on here, you know, what is the size of the

RTO.

43

Mr. NORWOOD. Haven’t you stated publicly that you thought we

needed more and larger RTOs?

Mr. BLAKE. We publicly supported BPAs——

Mr. NORWOOD. I want to ask you another question and I want

to keep in mind what Congressman Bryant said. I don’t want to

know how to make the clock, but I want you to make me feel better

because I felt like your response wasn’t enthusiastic when the

question came up about what DOE is doing or talking about to protect our infrastructure.

Now I want to emphasize to you, I don’t want to hear every little

detail, but I want to go away from here feeling better that you are

at work on this problem. So I want to give you another opportunity

to make me feel better that you guys are giving serious consideration to what a lot of us are very concerned about.

Mr. BLAKE. Yes. You should feel comfortable. We actually, as I

mentioned in my opening comments, we have around the clock,

emergency operation center, that is designed to respond directly to

emergencies. On the broader issue of the security of our energy infrastructure, we are taking the lessons learned over the last week

and we are in the process of identifying vulnerability assessments,

what are the right responses and we should be to give you a more

detailed answer on that than I am in a position to give today.

Mr. NORWOOD. How long do you think it might be before you

could give us a more detailed answer?

Mr. BLAKE. I think the answer is going to have a lot of different

elements to it, but we will be in a position next week.

Mr. NORWOOD. Is this something you are going to tell me or you

are going to be going public with?

Mr. BLAKE. I think there are elements that we would not go public with.

Mr. NORWOOD. But parts of it will be?

Mr. BLAKE. Yes.

Mr. NORWOOD. Part of the concern here is that we have—we

don’t want to tell everybody how we are going to make the clock,

but we also have to comfort the public, that is close to a lot of DOE

facilities that there are changes being made in view of what happened on the 11th.

Mr. BLAKE. So with respect to the DOE facilities themselves—

and I was responding more toward our look across the entire energy infrastructure, which is quite a large undertaking. With respect to the DOE facilities themselves, we have had them in highest alert throughout the last week. We are again, as we think is

prudent to do, after any event, making a reassessment, always

looking at how we can do things better and how we can assess the

risks and threats correctly but I can absolutely assure we have

highest confidence around the security of those facilities.

Mr. NORWOOD. Do you agree with me that security at some of

these facilities over the last 10 years has perhaps not been taken

as seriously as it has been 10 years prior to that?

Mr. BLAKE. I am not in a position to respond historically. I can

tell you how seriously we take it now, and we take it completely

seriously.

Mr. NORWOOD. And we are in the process of considering how to

upgrade that security.

44

Mr. BLAKE. We are——

Mr. NORWOOD. If you didn’t have anything to work with, then

just making that alert doesn’t get the job done.

Mr. BLAKE. No, sir. We have excellent security systems around

these facilities.

Mr. NORWOOD. We could talk later, couldn’t we? We need to do

lunch. That will work. My time has expired. Mr. Chairman——

Mr. BARTON. You are doing good.

Mr. NORWOOD. I also got to leave.

Mr. BARTON. I recognize——

Mr. NORWOOD. Mr. Ganske, you are recognized for 5 minutes for

questioning.

Mr. GANSKE. Thank you, Mr. Chairman.

Mr. Blake, I want you to share with us a little bit what happened at the Department of Energy on Tuesday, September 11.

When did you find out that we had a multiple terrorist attack on

the United States?

Mr. BLAKE. I don’t know the specific time, but it was clearly in

the—9 to 10 o’clock in the morning—9:15, sometime around there.

We went down to—as I said, we have an emergency response center. We went down to our emergency response center. We assessed

the advisability of increasing the security status at all of our DOE

facilities. We did that. We obviously——

Mr. GANSKE. What time was that?

Mr. BLAKE. Congressman, I can provide that to you for the

record. But it would have been in the morning of the 11th.

[The following was received for the record:]

45

46

Mr. GANSKE. Well, was it within 15 minutes of the second airplane hitting the World Trade Center?

Mr. BLAKE. Congressman, let me provide that on the record for

you.

Mr. GANSKE. When you say we go to the highest alert, what does

that mean?

Mr. BLAKE. Actually, it is what we call condition 2. There is a

condition 1 that would apply in the circumstances of a direct attack.

Mr. GANSKE. What does that mean? What does condition 2

mean?

Mr. BLAKE. Condition 2 means full readiness. And in the case of

our facilities, it is extra guards. As you know, in the case of our

facilities, we have nuclear material. It is securing the nuclear material. It is restricting access. There are a set of steps that are well

known, thought out in advance that go into place automatically on

that——

Mr. GANSKE. Does that communication go out from the emergency center——

Mr. BLAKE. Yes, sir.

Mr. GANSKE. [continuing] to all of the DOE facilities?

Mr. BLAKE. Yes, sir.

Mr. GANSKE. And then they have in place plans for that level of

alert. Who makes that decision?

47

Mr. BLAKE. In that instance,—in that particular instance, it was

the Secretary. I mean we had a briefing and decided to go to the

higher alert status.

Mr. GANSKE. Explain to me, then, the chain of information that

the Secretary would get for that—for making that decision or for

getting the information from other agencies?

Mr. BLAKE. If I understand the question, we do have our intelligence operations. They are in communication with the intelligence

operations of other parts of the government, including the FBI.

Mr. GANSKE. So does the FBI have a call list? Who makes that

decision to call you?

Mr. BLAKE. Sir, I am not sure who makes the decision. The FBI

doesn’t—the FBI informs us of key data and information.

Mr. GANSKE. Would you be waiting for that information before

you would make a decision to call an alert?

Mr. BLAKE. And it would depend on the circumstances. In this

particular case, I don’t believe we waited for a particular piece of

data from the FBI or from anyone else.

Mr. GANSKE. I think much has been made of the fact that there

are many different agencies that deal with security issues. Yours

is one as related to the nuclear power plants and things like that,

weapons production facilities, things like that. Is there an overall

communications coordinating governing body for this type of—for

an emergency like this?

Mr. BLAKE. There is the national infrastructure protection center, run by the FBI. And just as a clarification, the security status

for nuclear plants—commercial nuclear plants is decided by the

NRC, although we are—as is the case on that Tuesday, we were

in communication with them.

Mr. GANSKE. Is part of your ongoing evaluation in terms of a response looking at the issue of interagency communication? Is

that——

Mr. BLAKE. That would be one of the things we would look at.

There was no issue.

Mr. GANSKE. I am not saying there was a problem.

Mr. BLAKE. But that is one of the things we look at. Yes, sir.

Mr. GANSKE. How do you—at DOE, do you have responsibility for

security at, say, large dams, like the Hoover Dam? Who has responsibility for security like that?

Mr. BLAKE. I would think that would be with the Corps of Engineers. I believe they maintain—and the Bureau of Reclamation.

Mr. BARTON. I couldn’t hear your answer.

Mr. BLAKE. Corps of Engineers and the Bureau of Reclamation.

Mr. BARTON. Gentleman’s time has expired. If you have one more

question—— Mr. GANSKE. There are a lot of questions that I think we are

going to be dealing with.

Mr. BARTON. We are going to do private briefings and we may

do some public hearings, so there will be plenty opportunity for

questioning. The gentleman from Ohio is recognized for 5 minutes

for questions.

Mr. STRICKLAND. Thank you, Mr. Chairman. Mr. Deputy Secretary, on September 18, in the Federal Register, the Department

of Energy issued a notice of intent to prepare an environmental imVerDate 11-MAY-2000 10:19 Apr 09, 2002 Jkt 010199 PO 00000 Frm 00051 Fmt 6633 Sfmt 6602 E:\HEARINGS\75757 pfrm04 PsN: 75757
48

pact statement for the depleted uranium hexafluoride conversion

facilities. I note in that publication, that there is an indication that

the preferred alternative would be a 2 conversion facility plan. But

there is also a list of alternatives laid out, for example, 1 plant, instead of 2 plants and all the way down to doing nothing and simply

maintaining the cannisters as they exist now.

Now I compare that with the law, which says, the Secretary of

Energy shall prepare and the President shall include on—for fiscal

year 2000, a plan and proposed legislation to ensure that all

amounts accrued on the books of the United States Enrichment

Corporation for the disposal of depleted uranium hexafluoride will

be used to commence construction of not later than January 31,

2004, and to operate an onsite facility at each of the gassiest diffusion plants at Paducah, Kentucky and Portsmouth, Ohio to treat

and recycle depleted uranium hexafluoride.

I am puzzled that it seems that the law was very clear in calling

for two facilities to be built; one at Paducah and one at Portsmouth. And this notice in the Federal Registry implies that there

may be other acceptable alternatives. And I was wondering if you

could speak to that seeming contradiction.

Mr. BLAKE. Congressman, I am not familiar with that, so let me

provide a response to you on the record.

Mr. STRICKLAND. If you would, I would certainly appreciate it,

sir.

[The following was received for the record:]

The Department recognizes that P.L. 105-204 requires the Department to develop

a plan for construction and operation of a facility at each of the gaseous diffusion

plants for the disposition of depleted uranium hexafluoride. It also required that the

Department’s actions regarding the conversion of depleted uranium be consistent

with the National Environmental Policy Act (NEPA). Under NEPA, an agency must

examine reasonable alternatives for accomplishing the underlying goal of the proposed action, the conversion of DOE’s uranium hexafluoride, as well as a ‘‘no action’’

alternative. Since Public Law 105-204 did not specify that DOE was to implement

a specific approach but only to develop a plan for one, and even though DOE has

identified the construction of conversion facilities at both Portsmouth and Paducah

as its current preferred alternative, DOE is obligated by law to consider and analyze

other alternatives that would allow DOE to accomplish the goal of converting the

depleted uranium hexafluoride before it can proceed with construction of any facility.

Mr. STRICKLAND. Second question, sir, in the National Energy

Policy Report, there is an inclusion of a recommendation that DOE

and EPA review the so-called New Source Review Program, including administrative interpretations and implementations of that

program. I was wondering if you could tell me when that review

is likely to be completed, or if it has been completed and will the

administration move forward with administrative reform of that

program, which many believe, and certainly I believe to be broken?

Mr. BLAKE. Sir, I know that the review is ongoing. It was obviously the events of the last week that have thrown it off schedule

a little bit. But I know they are working on that. And that the administration’s intent is to propose improvements to that program.

Mr. STRICKLAND. Thank you. I would just urge you to make sure

that the NSR not be interpreted or used in a way as to discourage

routine maintenance. I know maintenance—I have been told by

both industry folks as well as members of the labor unions that

maintenance is essential in terms of energy efficiency and pollution

49

decreasing and workplace safety. I think this is an important issue

that is facing the industry. Certainly, I have written letters to the

department about it in the past and it is something that I would

hope the department would move expeditiously to deal with. With

that, Mr. Chairman, I yield back the remainder of my time.

Mr. BARTON. Thank the gentleman. And the gentleman from Oregon is recognized for 5 minutes.

Mr. WALDEN. Is that closing bell on the Stock Exchange, which

only dropped 310 points today? Mr. Chairman, I just have a couple

of questions as they relate regionally for the Secretary to—specifically the northwest, since we are somewhat unique out there with

the Bonneville Power Administration. Can you describe for me the

administration’s view about congestion in our distribution system

in the northwest?

Mr. BLAKE. For the transmission system, as pointed out in the

energy policy and the President’s energy policy, we see the need to

have additional transmission in the northwest. There is a great

deal of power generation that is planned to go on line, and that will

need access to the transmission grid.

Mr. WALDEN. And presently, I am told there are some 40 choke

points in the northwest in the power grid, the way it is configured.

Is that pretty much——

Mr. BLAKE. I know there are a number of them. I don’t know if

40 is exactly the right answer.

Mr. WALDEN. And what do you think it is going to take and what

is the administration’s view on trying to build out that system?

Mr. BLAKE. We are, at the Department, are working with Bonneville to try to understand exactly what would be required for construction activity on the new lines. It will be a substantial—be a

substantial investment.

Mr. WALDEN. And it is my understanding that the ratepayers of

that region will pay back whatever the borrowing authority is with

some level of interest?

Mr. BLAKE. That’s correct.

Mr. WALDEN. Is it the administration’s position that it is not a

subsidy then?

Mr. BLAKE. I hope we will be able to work out the increased borrowing authority issue.

Mr. WALDEN. I am curious about as we go down this road on

changing energy policy in the country, what, if any, requirements

there would be to make sure that—using the lake analogy that

there are streams flowing in, or do people sort of migrate away

from certain sectors of the industry to go to the more profitable sectors?

Do you see or envision any kind of wholesale energy reform legislation—any kind of requirement for supply, surplus capacity?

Mr. BLAKE. I think the only way that would come in is through

reliability standards. And as I mentioned, one of the elements of

the legislation would be enforceable reliability standards.

Mr. WALDEN. And you would see some sort of requirement then

for capacity production?

Mr. BLAKE. It will differ region to region. But to the extent that

is part of the reliability concerns in that region, yes.

50

Mr. WALDEN. Because that is an issue that I have. It seems like

if we evaluate the situation in California, it didn’t seem like they

were adding a lot of supply, at the same time, doing great conservation efforts, but also increasing demand. And so I get concerned about creating a system where you have these choke points

that could result, in effect, congestion pricing that would create

wonderful profit centers at areas of congestion. I have yet to figure

out how the consumer benefits from that.

Mr. BLAKE. Exactly one of the things that the legislation should

attempt to address is eliminating those kinds of bottlenecks that

allow that pricing.

Mr. WALDEN. And is there a sequence between getting those

eliminated before we go into opening the market up that ought to

occur? Are you looking at that?

Mr. BLAKE. One of the things we are doing in response to the energy policy is conducting a national grid assessment, trying to identify where are the key choke points in the system and then identify

the national interest in removing those choke points.

Mr. WALDEN. The other issue in terms of my region, we are fortunate in having a very effective hydropower system which is the

most renewable, first of all, and cheapest, second of all, electric

power system. And I know with hydro relicensing coming up, there

is wide range of estimates about how much power generation capacity will be lost through that process because of the various laws

involved and could be, some say, a couple of percent, to 6 or 8 percent loss. Where do you see us going on that on hydro relicensing?

Mr. BLAKE. Again, the energy policy identified exactly that as an

issue. DOE, in conjunction with other agencies because there are

a number of other Federal agencies that have more direct authority

over this, such as FERC and others, are trying to look at how we

improve the hydro relicensing process.

Mr. WALDEN. I know my time is up, Mr. Chairman. Thank you

very much.

Mr. BARTON. Gentleman from Arizona is recognized for 5 minutes.

Mr. SHADEGG. I appreciate your testimony here today and I really want to focus on just two points and see if I can’t coax you into

elaborating a little bit further. You have mentioned reliability legislation. And in response to my colleague’s, Mr. Walden’s questions,

you referenced enforceable reliability standards. Can you give the

committee a broad outline of what the administration is seeking in

terms of reliability legislation and go perhaps deeper into the issue

of enforceable reliability standards?

Mr. BLAKE. I think the notion that the administration has is that

you have entities like NERC that have set reliability standards and

these standards should be made enforceable. FERC would be able

to delegate some measure of enforcement authority so that you

would have a structure similar, as I mentioned, to what you have

with the stock exchange.

Mr. SHADEGG. And do you see the administration coming forward

with that in the immediate future?

Mr. BLAKE. Excuse me?

Mr. SHADEGG. How soon can we expect to see specifically what

the administration——

51

Mr. BLAKE. I think next week.

Mr. SHADEGG. With regard to enforceable reliability standards,

how—do you have any idea specifically what enforcement measures

would be in place? Would you be able to order plants to take specific steps? Can you go into any further detail on that?

Mr. BLAKE. I haven’t thought through and I don’t know that we

are going to have specific proposals on where—what level of enforcement authority. I think that is something we want to work

through on the details with the committee.

Mr. SHADEGG. Second, in reference to I believe your opening remarks, a set of principles you anticipate revealing, as you know,

Senator Bingaman recently revealed a set of principles. Are you in

a position today to give us a highlight of how the principles you anticipate releasing will differ from those he released?

Mr. BLAKE. I think there will actually be a good deal of common

ground between our principles and what is in Senator Bingaman’s

bill, making wholesale power markets open through open transmission access, strengthening FERC authority in the areas on market abuse, lowering buyers on electricity supply through interconnection standards. Some of the areas of disagreement, there are

provisions in his bill for, as I understand it, sort of a national surcharge that would get placed through the transmission grid that

we have a problem with and some other issues. But we are largely

along the same lines as Senator Bingaman.

Mr. SHADEGG. Do you think it will be substantially similar with

that one exception? Are there others that you can identify for us

now?

Mr. BLAKE. We will in the process next week. We will give you

a good breakout of where we differ from Senator Bingaman’s legislation.

Mr. SHADEGG. Thank you for your testimony and yield back the

balance of my time.

Mr. BARTON. Mr. Boucher, any further questions?

Mr. BOUCHER. No questions.

Mr. BARTON. The only question I have, in our California specific

legislation, we put in an authorization for Federal funding to buy

out and build out Path 15. It is my understanding that the Department of Energy has put that out for proposal and there have been

a number of bids put forward by private companies to build the

Path 15 connection in northern and southern California. Could you

elaborate on that briefly.

Mr. BLAKE. Mr. Chairman, I am actually recused from that because one of the companies that has responded to it was General

Electric. But I know prior to recusing myself that there were, in

fact, private entities that expressed interest in responding to that.

Mr. BARTON. Is there somebody in DOE that has not recused

that could give us an answer on the record so that could be part

of the hearing record?

Mr. BLAKE. We will do that.

Mr. BARTON. We thank you for your time and when you go back

to the Department of Energy, there is a high degree of probability

that you and others are going to be asked at a minimum to brief

this subcommittee and full committee on some of these issues that

Mr. Ganske and Mr. Norwood raised next week. So we need to get

52

a list of the availability of your ability to come brief this subcommittee.

Mr. BLAKE. Look forward to doing that. Thank you very much.

Mr. BARTON. I would like now to bring forward our second panel.

We have the distinguished FERC commissioner starting with their

distinguished chairman, Honorable Pat Wood, Texas Aggie, from

my home State; Commissioner Linda Breathitt; Commissioner Bill

Massey; and our new commissioner from Pennsylvania, Commissioner Brownell. Ladies and gentlemen welcome to the subcommittee.

We will put everyone’s testimony in the record in its entirety and

start with the Chairman, Mr. Wood. And we will give you 7 minutes and then we will go right down the row and give Commissioner Breathitt and Commissioner Brownell and Commissioner

Massey the opportunity to also speak for 7 minutes, if they so wish.

Welcome to the subcommittee, Chairman Wood.

STATEMENTS OF HON. PAT WOOD III, CHAIRMAN; HON. LINDA

K. BREATHITT, COMMISSIONER; HON. NORA MEAD

BROWNELL, COMMISSIONER; AND HON. WILLIAM L. MASSEY,

COMMISSIONER, FEDERAL ENERGY REGULATORY COMMISSION

Mr. WOOD. Thank you, Chairman Barton. I guess in light of the

events of last week, we all think first and foremost about security

and reliability issues. And as a former State regulator, we have all

had to deal with things like hurricanes, wildfires, encroachments

on utilities, the Y2K issues, shortfalls in hydroelectricity. That is

a continuing issue; certainly earthquakes. But this one is different.

This one is a longer term issue that doesn’t have a date-certain

ending, and I think requires a very different mindset than one we

had 10 days ago.

I should say, as Deputy Secretary Blake did, that the utilities

have performed very well as a supporting cast in this tragedy. The

measures that have been implemented across the industry certainly in hydroelectric dams, in oil, natural gas and refined product

pipelines in the production area for both power and natural gas, including, certainly, the all important nuclear power stations, transmission substations, transmission transformers, transmission lines

in general.

In fact the Commission weighed in last week—all four of us pretty soon after the event wanted to make clear to the industry that

our policy statement that expenditures spent to enhance and increase the security of the facilities that we have regulatory authority over would be able to be treated expeditiously for rate recovery.

Bottom line is don’t let cost and don’t let the worry about how

you are going to get your money back be a reason why you cut back

on any needed and prudent security measures. So we weighed in

on that as well.

But the bottom line, we have got a very open and a very dispersed system for energy in this country. That is both a blessing

and a curse; a curse in that it is so open and so visible. Every map

for aviators or for geology or whatever shows you where our transmission lines are and where fuel pipelines cross and where railways go by and carry coal to your power plant, where power plants

53

are. They are extremely visible. Again, that is also a plus because

it is so dispersed, it is so everywhere, that there is a lot of give in

our very reliable power delivery system.

I think total prevention against attack is a promise I cannot

make. But insulation of the public and industry from its negative

effects is something that we can actually do better. Redundancy of

pipelines, of transmission lines, of power production facilities and

others is our best bet. Redundancy used to be a big picture, a big

fixture on the scene here in the country. Then what we knew would

be a multi-year transition in the electric power industry began in

1992 with the Energy Policy Act. To me, as I believe Mr. Wynn

asked, the authority that the Commission has to move forward on

the initiatives that it has had since 1992 was clear in that Act. Retail issues are left to the States. Wholesale issues are the job of the

Fed. and it is our job collectively to make markets work.

I think, Mr. Boucher, you put it pretty well in your opening

statement that I made note of that. We are, next week, hearing Supreme Court review of a decision that I believe, Bill, you were the

only one on the Commission at the time that it was made 5 years

ago about the balance between States and Fed.

So my discussions, and certainly probably every answer in response I will give particularly on the RTO issues is yes, there is

clear authority in the statute to remedy unjust and unreasonable

and discriminatory actions for the use of the grid. And we will

move forward on that as I think you all or your predecessors in

1992 wanted us to do.

But bottom line, it would help the Commission. It would help the

people of this country significantly if there is any doubt raised by

anybody that comes before the committee about this that the committee clarify it, that the Congress and President clarify that this

happens so we don’t spend 5 years making lawyers rich, but keeping money out of the pockets of people who could benefit from competition.

I say that with all due respect as a lawyer. But I do view that

we have been treading water for 9 years. The swimmer is tired. We

need to get on the other shore. People on the dock are waiting for

us to come on across. FERC is committed today to providing the

necessary leadership to set forth the clear path to end this overly

long transition. It is important for us to work with our brother and

sister regulators at the State level. They are the front line. And we

know that people that might oppose competition might try to drive

a wedge between us and our brother and sister regulators, but they

won’t succeed.

It is our job, as you expect us to do, to provide clear rules for

business investment in this industry. It is important to make those

rules clear as to how money gets repaid to the investor. Cost recovery is very important. So for us it is important to get investment

dollars back in this bedrock industry. That is how we get the redundancy. That is how we get the security.

That is potentially going to be an issue for a very long time, as

this threat continues to be dealt with. I should add, in light of the

home State of the Chair, under then-Governor Bush’s strong leadership, we did provide this certainty in Texas in the past 6 years.

And there was investment. There has been tremendous investment

54

both in the power delivery system and the power production system. And I think that is certainly the ground upon which you can

build a successful deregulated system. Without it, I think you are

building a house on sinking sand. And in doing so, I want to make

sure that you all know we will ensure the reliable, safe and competitive marketplace that Congress said it wanted in 1992.

And I conclude by saying the Nation’s customers deserve no less.

[The prepared statement of Hon. Pat Wood III follows:]

PREPARED STATEMENT OF PAT WOOD, III, CHAIRMAN, FEDERAL ENERGY REGULATORY

COMMISSION

I. INTRODUCTION AND SUMMARY

Mr. Chairman and Members of the Subcommittee: Good afternoon. Thank you for

the opportunity to speak today on the role of competitive wholesale power markets

in providing affordable, reliable electricity for customers, and the role of the Federal

government in ensuring the continuing development of the industry. As an initial

matter, I would like to talk about the issue that has been on my mind since the

tragic events of September 11, 2001. Then, I will discuss the important near-term

steps necessary for achieving a seamless nationwide power market that will provide

customers the reasonably-priced and reliable service they deserve.

Our Nation has been unalterably shaken by the terrorist attacks of September 11,

2001. Fortunately, our electric system remained secure during and after the attacks.

The attacks did not disrupt service in a broad regional area. Utilities quickly implemented their heightened security procedures. Many of these procedures are still in

effect. And our existing independent transmission system operators (ISOs) in the

Northeast were vitally involved in monitoring and maintaining transmission grid reliability in the stricken region.

A key question I have pondered is, can the electric power system sustain a terrorist attack? To be frank, in the face of an organized, well-financed, wide-spread

effort to do harm, such a dispersed, highly visible and open system could suffer

damage. The industry and its regulators are on alert and are taking many precautions, and the industry is working hard to anticipate and forestall such damage.

Last week, the Commission issued a policy statement to its regulated industries

stressing the importance of security measures and our willingness to consider exceptional cost recovery for unprecedented security-related expenses and investments.

While we must continue to take all appropriate security measures for existing infrastructure, our best insurance policy is redundancy. The electric power industry

has had a long history of building sufficient additional infrastructure to handle unplanned contingencies. Over-design of the grid for double or triple failure contingencies and construction of excess generation capacity (reserve margin) have been

historically effective ways to assure reliable performance through redundancy.

The extended and uncertain path of industry restructuring since the passage of

the 1992 Energy Policy Act, though, has taken its toll on investment in infrastructure. Investors have not been eager to invest capital where rules are unclear and

cost recovery is uncertain. This under-investment in critical energy infrastructure

undermines the potential for competitive markets to yield significant customer benefits (as we have seen in California) and diminishes our reliability safety margin as

well.

This will not change until we who work on behalf of the public declare an end

to inaction, clarify the rules for the future and get through this transition.

Some have argued for federalization of all of these issues; others have advocated

leaving it at the state level. I believe, however, that the solution lies in recognizing

that electric power markets are regional in their nature. For that reason, the Commission has been promoting the formation and development of a small number of

regional transmission organizations (RTOs). These institutions, once formed, will assure reliable minute-by-minute grid operations, optimize fair use of the ‘‘electric

highway’’ by all users, plan for the future transmission needs of the region and ensure that long-term supply stays ahead of long-term demand.

What was a good idea for promoting competitive markets ten days ago is imperative for a reliable national power grid today. Handling the basic RTO duties is challenging and expensive, but it’s even more costly to society if these duties are on a

utility-by-utility basis (if at all), as they are today. The costs of planning and executing the level of security and infrastructure protection that will be needed in the

days and years ahead will be significant and will require expertise and sophisticaVerDate 11-MAY-2000 10:19 Apr 09, 2002 Jkt 010199 PO 00000 Frm 00058 Fmt 6633 Sfmt 6621 E:\HEARINGS\75757 pfrm04 PsN: 75757
55

tion that most individual utilities or even small, sub-regional groups of utilities cannot possess. This level of security and its cost demand a size and scope that only

a large, region-wide organization with intentional redundancy and access to resources can provide.

Although the Commission decided in past years to move forward with RTO formation on a voluntary basis, the Commission can go further and require them. This

may be a moot point if the industry moves assertively forward to form RTOs that

cover the nation’s regional power markets. To the extent, however, that any party

challenges this forward progress in courts, then Congress should make clear its intent that these organizations are its preference. This will save the industry four

years in the courts, will ensure customers get the billions of dollars of savings that

a competitive power market can deliver during that time, and most importantly, will

rebuild to secure and reliable levels a bedrock industry that has suffered inadequate

investment in the past decade.

II. BACKGROUND

A. The Industry’s Past

In the early decades of the industry, the transmission grid was much less developed than it is now, interconnections between utilities were fewer, and power supply

was a local business. Government, customers and even utilities recognized that,

based on the technology at the time, regulated monopolies were less costly than the

turmoil of door-to-door competition. So, for many years after its inception, the electric utility industry was regulated comprehensively on a cost-of-service basis.

By the 1970s, however, the industry began to change. The energy crises of that

decade led Congress to enact the Public Utility Regulatory Policies Act (PURPA).

PURPA encouraged the development of non-utility generators using cogeneration,

renewable fuels or small power technologies. Regulated utilities were required to

buy power from these non-utility generators so long as the latter met PURPA’s ownership and efficiency criteria. The rates for sales by the non-utility generators were

based, not on their costs, but on the costs avoided by their utility buyers. Many regulated utilities began, for the first time, to face strong competition for the opportunity to generate the power needed by their retail customers. This also stimulated

dramatic efficiency improvements in generation technology.

In the 1980s, the Commission further encouraged the development of competition.

If a generator demonstrated that it and its affiliates lacked market power, the Commission allowed it to sell at market-based rates instead of cost-based rates. If the

generator or its affiliates owned or controlled transmission facilities (a source of

market power), the Commission authorized market-based rates only if other sellers

were allowed to use the transmission facilities to compete for sales to wholesale customers.

In 1992, Congress enacted the Energy Policy Act, strongly endorsing competition

in wholesale markets. Congress authorized an exemption from the requirements of

the Public Utility Holding Company Act (the 1935 companion to the Federal Power

Act) for companies selling power exclusively at wholesale. Congress also authorized

the Commission to order utilities, on a case-by-case basis, to provide transmission

service.

In 1996, the Commission adopted its Order No. 888, requiring all public utilities

to offer nondiscriminatory, open access service over transmission facilities they own,

control or operate. As a result of this service, most wholesale buyers and sellers now

have more trading options than they had in the past.

These efforts by Congress and the Commission laid the groundwork for more competition in wholesale power markets. However, events in California and the West

over the last eighteen months, and the notable lack of progress in other areas of

the country outside the Northeast are strong proof that more needs to be done.

Every day I hear from someone in the industry about the uncertain investment climate created by vague rules or incomplete policies, and that uncertainty does not

help us achieve our societal goals.

B. The Industry’s Future

Our goal is a seamless national power marketplace, and the Commission has chosen to realize this goal through the creation of regional transmission organizations.

An RTO is an entity that is independent from market participants and operates

(and also may own) the transmission grid for a large region of the country. A wellfunctioning RTO will serve a multi-faceted role, including transmission planning, assuring reliability of service and adequacy of supply, facilitating transparent power

markets and monitoring behavior of market participants.

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In late 1999, the Commission adopted its Order No. 2000, encouraging the formation of RTOs. If properly constituted and truly independent, RTOs can promote

wholesale competition and, where states choose to pursue it, retail competition.

RTOs can broaden the size of markets by eliminating ‘‘pancaking’’ of transmission

rates. RTOs can offer ‘‘one-stop shopping’’ for transmission service across a large region, better manage transmission congestion and reliability, and facilitate transmission planning across a multi-state region. By doing so, RTOs will allow buyers

and sellers to have more trading choices than they now have and deliver lower energy costs and greater short- and long-term reliability on the electric grid.

The Commission has endorsed the ultimate formation of four RTOs in its jurisdictional markets, three in the eastern United States (one in the Northeast, Southeast

and Midwest) and one in the western United States. (The fifth RTO, the Electric

Reliability Council of Texas Interconnection, is not in interstate commerce and is

not under direct Commission jurisdiction.) However, we recognize that many obstacles must be overcome to reach this goal. In this regard, market participants in the

Northeast and Southeast recently completed mediation on RTO formation, and the

progress made during those discussions is encouraging. In the Midwest, two proposed RTOs have agreed on a framework for coordinating their services.

The issue now is whether, and how, more can be accomplished in the short-term.

Perhaps the most difficult issues are in the western United States, because of the

past eighteen months of problems in that region’s markets. However, utilities and

elected officials in the western United States have a strong tradition of region-wide

cooperation and, in my view, this tradition will eventually support the formation of

a region-wide RTO.

For Congress at this time, the guiding principle should be to reaffirm the development of a reliable and competitive wholesale market, thereby assuring customers of

a supply sufficient to meet their energy needs at the lowest reasonable cost. This

principle requires different approaches in the transmission and generation segments

of the industry.

Transmission will have to remain regulated for the foreseeable future. Lawmakers

and regulators should help ensure that transmission owners and operators have economic incentives to design, build, operate, and expand the transmission grid to meet

the needs of all customers and other market participants.

In contrast, in the wholesale power sector, we need to rely on competition instead

of traditional regulation wherever possible. Existing laws that hinder competition

need to be modified or repealed. While the Commission stands ready to intervene

in power markets when market rules or other factors lead to unjust and unreasonable prices, legislation reducing the existing barriers to entry and providing regulatory clarity will minimize the need for such efforts in the future.

Before addressing these issues in detail, however, I will discuss the events of last

week as they relate to the Commission’s responsibilities and, in particular, how they

relate to RTOs.

III. EFFECTS OF THE TERRORIST ACTIONS ON ENERGY SUPPLY

Our Nation’s electric system remained secure during and after the September 11

terrorist attacks. Two substations in New York were crushed in the destruction of

the World Trade Center towers. An additional substation was damaged. The local

utility and its suppliers are working to replace the substations quickly.

Following the terrorist attacks, all electric utilities and generators have been in

a heightened security condition. Understandably, utilities do not publicize their specific activities and precautions. However, many rely upon procedures developed over

the past several decades, including the Y2K preparedness plans. Generating stations implement higher security levels, normally unmanned substations and facilities are manned, and security centers go into ‘‘lock down’’ with regard to access. In

some areas, there may be greater reliance on local generation over imports. Some

utilities also check ‘‘black start’’ units (combustion turbines and hydro facilities used

to restore power quickly) to make sure they are readily available, and test backup

communications systems. Additionally, NERC put the nation’s twenty-one grid security coordinators on full alert for several days.

The three ISOs operating the regional grids in the Northeast serve as security coordinators in their regions and were vitally involved in monitoring and maintaining

grid reliability. Since late last week, security coordinators have participated in a

daily secure telephone conference call with representatives of the U.S. Department

of Energy and the North American Electric Reliability Council (NERC) regarding security threats to the electrical system. These calls will continue for some time.

Last week the Commission assured the companies we regulate (transmission-owning public utilities as well as gas and oil pipelines) that we will welcome applicaVerDate 11-MAY-2000 10:19 Apr 09, 2002 Jkt 010199 PO 00000 Frm 00060 Fmt 6633 Sfmt 6621 E:\HEARINGS\75757 pfrm04 PsN: 75757
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tions to recover prudently incurred costs necessary to further safeguard the reliability and security of our energy supply infrastructure. The Commission’s aim was

to prevent uncertainty about companies’ ability to recover these costs, especially for

those operating under frozen or indexed rates. The Commission stated that companies may propose a separate rate recovery mechanism, such as a surcharge to current rates or some other cost recovery method.

In the aftermath of last week’s events, the media reported sharp price increases

for gasoline in some regions. We have not seen comparable increases for natural gas

or wholesale power, and prices for these commodities remain in the same range they

have been in recent weeks. The increasingly-important power and natural gas trading operations across the country maintained their activities, even though the important NYMEX commodity operation in New York City was directly affected by the

attacks there.

Last week’s attacks prompted some to question whether we should continue to require transparency of transmission information to all potential transmission users.

We require transmission providers to make available to traders an electronic bulletin board type service showing how much power can be moved from one grid location to another so they can reserve transmission capacity for trades. However, this

requirement does not reveal the grid design, the locations of secure facilities, or important operational procedures. Thus, I do not believe our current transparency

rules increase the vulnerability of the transmission grid to potential terrorist attacks.

Some also have asked whether having RTOs would help or hurt in the case of

a terrorist attack. As I noted earlier, the three existing ISOs in the Northeast,

which are precursor organizations to the RTOs we are trying to encourage, were

critical to maintaining transmission grid reliability during and after the September

11 attacks. I therefore believe that last week’s events demonstrate the effectiveness

of RTOs and strengthen the need for RTOs. An RTO can develop a comprehensive

security plan for a large area, drawing on a broader array of electrical and human

resources. Joint security plans for fuel supply controls, grid operation, and telecommunications can be coordinated with multi-state emergency authorities. Further, only one or two major control centers must be hardened for protection. Such

modifications are less costly than similar modifications for many smaller control

centers. Centralized authority and communications involve fewer parties, facilitating quick decisionmaking and dissemination of vital instructions. In a large RTO,

one standard communications protocol can be used instead of having numerous protocols for many utilities.

IV. OTHER RELIABILITY RISKS

In addition to the national security issues outlined above, there are other reliability risks that need attention. The recent changes in the electric power industry

have increased the incentives for, and frequency of, violations of reliability rules. As

a result, the issue confronting the industry is whether federal action on reliability

is necessary.

A number of credible parties have argued that the Commission cannot enforce reliability standards for users of the grid. Congress should remove any doubt in this

crucial area and provide explicit authority. Cooperation among utilities ensured a

reliable electric supply in the past, but with many new players now using the grid,

mandatory reliability rules administered by the RTO and enforceable under government authority are called for. I have seen drafts from several parties in this regard

and believe the simplest solution may be the best. In 1999, Texas Governor Bush

signed into law the following provision: ‘‘The commission may delegate authority to

the [ERCOT ISO] to enforce operating standards within [ERCOT].’’ PURA sect.

39.151(i)

Absent clear federal authority to address reliability issues directly, the shortcomings of the traditional voluntary approach to reliability issues has driven some

in the industry to seek other approaches. One option is to enforce reliability standards through contracts. Public utilities may voluntarily include reliability-related

provisions in contracts or tariffs filed with the Commission because they affect or

relate to the rates, terms and conditions of jurisdictional service. If reliability provisions in Commission-jurisdictional contracts are accepted and on file with the Commission, the Commission can enforce the reliability-related provisions against public

utility parties to the contracts.

A system of such contractual arrangements has been established by utilities in

the Western Systems Coordinating Council (WSCC), the regional reliability council

for the Western United States. The effectiveness of the WSCC arrangement and the

Commission’s ability to enforce it have not been fully tested. But a voluntary conVerDate 11-MAY-2000 10:19 Apr 09, 2002 Jkt 010199 PO 00000 Frm 00061 Fmt 6633 Sfmt 6621 E:\HEARINGS\75757 pfrm04 PsN: 75757
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tractual regime is not the simplest, fastest or most effective way to establish and

adequately enforce reliability standards. It depends solely on the willingness of public utilities to make voluntary filings and, even then, it may not capture the electric

facilities of non-public utilities. Reliability is at risk to the extent that not all market participants are covered by the same requirements.

Federal legislation is a better option. On May 17, 2001, the Administration released its National Energy Policy Report. The Report recommends that the President direct the Secretary of Energy to work with the Commission to improve the

reliability of the interstate transmission system and to develop legislation providing

for enforcement by a self-regulating organization subject to the Commission’s oversight.

I believe a legislative approach is preferable to the contractual approach discussed

above. I support streamlined legislation that gives the Commission authority to

adopt and enforce reliability rules, and to give deference as appropriate to organizations that develop such rules. I believe that RTOs should play the central role not

only in transmission access and planning but also in reliability, and that the Commission can and should defer to these organizations once they are up and running.

But the Commission should retain oversight and enforcement responsibilities to assure that the nation’s reliability needs and rules are effective and honored by industry participants.

Congress should understand that mandatory reliability rules alone are not enough

to ensure the reliability of the grid. In its Order No. 2000 on RTOs, the Commission

set out at length the need for an RTO to ensure reliability in each region. In particular, RTOs must have the authority to ensure the short-term reliability of the regional grid and must be responsible for planning, and for directing or arranging,

necessary transmission expansion and upgrades that will enable it to provide efficient and reliable transmission service.

V. TRANSMISSION JURISDICTION

There are several other transmission-related steps Congress can take to promote

competition in wholesale markets. First, Congress should strengthen the Commission’s ability to create truly open, competitive wholesale electricity markets by recognizing that ‘‘separate but equal’’ transmission is inherently unequal. Transmission

of electric power is interstate commerce and should be fairly recognized as such.

And all users of transmission service should be treated equally, provided they pay

for it. Further, there will remain barriers of cost, time and uncertainty that slow

investment in generation and increase the cost of electricity. One need look no further than Chairman Barton’s home state to observe the positive impact that having

clear rules from a single regulator has had on needed investment and expansion of

the grid.

Second, as stated in the introduction, it would significantly speed the advent of

competitive markets if Congress clarified the Commission’s authority to promote

large RTOs. The Commission is moving aggressively to promote the formation of

RTOs but a clearer statement of Congressional intent could help avoid years of

lengthy litigation.

Third, it is important that federal tax laws not be used as excuses by certain market players to resist or hinder development of competitive power markets. In that

regard, Congress should address the private use restrictions affecting public power

and cooperatives and the tax disincentives for investor-owned utilities to transfer

transmission assets to RTOs. The provisions passed by the House earlier this year

in this regard are very important to ensure that expected customer benefits from

competition are not offset by tax payments.

Fourth, explicit Congressional support for standardization of rules and procedures

for interconnecting all new generation, including but not limited to small-scale distributed generation, would avoid years of costly litigation. This is a high priority

goal of the Commission currently. Standardization will help minimize the costs and

barriers for new generation, and clarification of the Commission’s authority in this

area will forestall the uncertainty of litigation about jurisdiction. The timely expansion of generation capacity achievable in this way will facilitate new entry into the

markets and reduce prices for customers.

VI. OTHER ISSUES

A. Market Monitoring and Enforcement

Competitive markets do not just happen; they require ongoing oversight. In the

context of wholesale power markets, the foremost component of effective oversight

is regular monitoring of prices. When price changes are inconsistent with the operVerDate 11-MAY-2000 10:19 Apr 09, 2002 Jkt 010199 PO 00000 Frm 00062 Fmt 6633 Sfmt 6621 E:\HEARINGS\75757 pfrm04 PsN: 75757
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ation of competitive markets, market monitors must inquire further and ensure that

market participants are not engaging in anticompetitive behavior.

The Commission has required or authorized the existing ISOs to perform certain

market oversight functions, such as data collection and initial analysis. In the future, this role should be performed by RTOs.

The Commission itself must make a stronger commitment to market monitoring.

As Chairman, one of my goals is to work with my colleagues to strengthen the Commission’s market monitoring efforts. We must be vigilant and timely if we are to

be effective. We intend to make that happen by changing our priorities and reallocating our resources. I will provide more detail to the Committee in the near future

on our efforts in this regard.

Congress also can help. While the Commission can require refunds and impose

civil penalties in certain circumstances under the FPA, both authorities are limited.

Currently, on refunds, section 206 of the Federal Power Act allows the Commission to require refunds for a 15 month period beginning 60 days after the filing of

a complaint or publication of the Commission’s initiation of an investigation. Section

5 of the Natural Gas Act does not contain a similar refund provision but permits

rate changes on;y prospectively. Section 206 of the FPA also allows the Commission

to change rates prospectively upon completion of the complaint or investigation proceeding.

Electric utility customers would benefit if the Commission had additional authority to order refunds. Congress should authorize refunds from the date of filing of

the complaint or publication of the Commission’s initiation of an investigation. Either of these events provides notice to market participants that their transactions

may be modified after-the-fact, and allows market participants to modify their trading activity or knowingly accept the risk of rate uncertainty.

Congress also should expand the Commission’s authority to impose civil penalties.

Existing section 316A of the FPA allows the Commission to assess civil penalties

of up to $10,000 per day for the violation of limited provisions of the FPA (sections

211, 212, 213 or 214) or of any rule or order issued under those provisions. This

section could be extended to cover any violation of Part II of the FPA or any rules

or orders issued thereunder.

B. Price-Responsive Demand

Effective markets balance supply with customer response, allowing for lower

usage as prices rise. But in regulated retail electric markets, with their uniform

rates, utilities have no choice but to buy or produce power, whatever the cost, and

customers do not receive price signals about the true value of the energy they are

using. The Commission will be working with the Department of Energy, RTOs and

others to establish price-responsive demand mechanisms that reach a variety of customer groups and allow them to reduce their energy demand when prices are too

high. This will reduce overall peak load levels, peak energy prices and supplier market power. I believe the Commission’s present authority in this area is sufficient;

but, to the extent this is questioned, statutory clarification would speed the implementation of this important demand-side mechanism.

C. PUHCA

The Public Utility Holding Company Act (PUHCA) requires registered holding

companies to submit to extensive regulation by the Securities and Exchange Commission. PUHCA also generally requires holding companies to operate an ‘‘integrated’’ and contiguous system. As a result, PUHCA encourages concentrations of

generation ownership and control in local markets that are inconsistent with competition, and discourages asset combinations that could be pro-competitive. PUHCA

may also provide a significant disincentive for investment in independent transmission companies that would qualify as RTOs. Under PUHCA, any entity that

owns or controls facilities used for the transmission of electric energy—such as an

RTO—falls within the definition of a public utility company, and any owner of ten

percent or more of such a company would be a holding company and potentially

could be required to become a registered holding company. This discourages investments in independent transmission companies that qualify as RTOs.

PUHCA was enacted primarily to undo harms caused by byzantine holding company structures that no longer exist. In the decades since PUHCA was enacted, utility regulation has increased substantially under the Federal Power Act, federal securities laws and state laws. PUHCA has outlived its usefulness, and now does more

harm than good. PUHCA should be repealed.

D. PURPA

As noted earlier, PURPA was enacted in the late-1970s in the aftermath of that

decade’s energy crises. The legislation’s goal was to remove impediments to the use

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of cogeneration and renewable-based generation, and promote their use by requiring

utilities to buy this power at the utilities’ avoided costs.

Today in many parts of the country, the impediments addressed in PURPA are

gone (although other impediments may exist, such as the need for grid expansion).

Also, PURPA’s ‘‘forced sale’’ requirements are no longer necessary to promote the

development of competition, in light of the availability of open access transmission,

and more often serve to distort competitive outcomes. Congress should repeal

PURPA but ‘‘grandfather’’ existing PURPA contracts. To provide a smoother transition for parties which made investments under the expectations created by PURPA,

it may be appropriate to limit its repeal to those states where all generation entities

have the ability to sell their output to the widest possible range of customers.

E. Transmission Siting

Since the Commission adopted its open access requirements in 1996, the use of

the interstate transmission grid has grown dramatically. Also, wholesale markets

have become much more regional than local, encompassing large multi-state areas.

Unfortunately, the grid has not been expanded commensurately. Thus, the grid increasingly is pushed to its operational limits. The risk of possible terrorist attacks

against our energy infrastructure makes even more urgent the need for additional

transmission capacity to protect against contingencies. Moreover, transmission constraints frequently prevent the most efficient use of generation facilities. The institutional structures for authorizing construction or expansion of transmission lines

do not meet our needs.

Congress should provide a mechanism for ensuring timely action on transmission

siting applications. It would add certainty to the siting process if a time limit were

placed upon state-specific approvals, and a multi-state Section 209 Joint Board

(drawn from states within the relevant RTO region) were set up as a backstop if

the regulatory time limit (e.g., one year) is not met. To recognize the fact that the

overwhelming number of transmission siting issues are dealt with expeditiously by

states, it would be appropriate to limit this provision only to those projects deemed

critical by the Secretary or by the RTO (unless the states find regional transmission

siting so efficient and effective that they choose to send more projects up to the regional board for handling) .

VII. CONCLUSION

Well-functioning power markets depend on three key elements: adequate infrastructure, clear and balanced rules that allow efficient trading among market participants, and effective market oversight. Our goal is to use the authority and resources of the Commission to pursue this three-pronged strategy to facilitate robust

wholesale electric competition that benefits customers across the country.

The Commission will continue to regulate transmission for the foreseeable future,

while encouraging transmission to become more responsive to the needs of the market. The Commission also intends to monitor wholesale markets more proactively

to anticipate many problems, and take aggressive actions where unforeseen problems occur, instead of waiting in the expectation that markets will always self-correct.

It has been a slow nine years since the President’s father signed the 1992 Energy

Policy Act into law. Its promises of a competitive electric power marketplace are still

largely unfulfilled, and the slow transition is beginning to take its toll in unacceptable ways. I pledge to you my complete dedication to the task of making up for lost

time and welcome your support.

Mr. BARTON. Thank you, Chairman.

I would now like to hear from Commissioner Breathitt for 7 minutes.

STATEMENT OF HON. LINDA K. BREATHITT

Ms. BREATHITT. Good afternoon, Chairman Barton and members

of the subcommittee, Mr. Boucher. Thank you for the opportunity

to appear today to discuss the role of the Federal Government, and

in particular, the Federal Energy Regulatory Commission in the

continuing development of our Nation’s electric and natural gas industries. In my written testimony, I have outlined major issues

confronting the Commission today, and I also have made some recommendations for legislation that I believe will assist the CommisVerDate 11-MAY-2000 10:19 Apr 09, 2002 Jkt 010199 PO 00000 Frm 00064 Fmt 6633 Sfmt 6602 E:\HEARINGS\75757 pfrm04 PsN: 75757
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sion in its paramount objective to promote fully competitive wholesale electricity markets. In this regard, FERC’s emphasis in the

near future will be to complete the development of regional transmission organizations with clear responsibilities, independence and

sufficient scope.

Since the Commission began promoting RTOs as a means to remove barriers and impediments present in wholesale markets, I

have been fully committed to the goal of RTO implementation.

Order 2000 remains the guiding document for achieving these

goals. Although some are impatient with the pace, the voluntary

approach is working. State commissions and other stakeholders

throughout the country have devoted considerable time and resources to see that RTOs get up and running.

Another area where the Commission will be concentrating its attention is the consideration of a generic rulemaking proceeding on

transmission interconnections. I believe interconnection rules

should be clarified and standardized to ensure that new sources of

generation are able to interconnect to the transmission system, and

I also believe that we must carefully consider the associated cost

responsibilities.

Also most important in the development of competitive markets

is reliability. As the Deputy Secretary also said, I believe the current voluntary system, which has been in place for over 3 decades,

should be replaced with one in which a self-regulated organization

with oversight by the Commission enforces mandatory reliability

standards, and I would welcome legislation in that regard.

On another legislative matter, I support the repeal of PUHCA

conditioned upon the grant of enhanced authority by the Commission to address market power problems and assurance that both

FERC and the States would have greater access to books and

records of holding companies. I also support the repeal of the mandatory purchase requirements in Section 210 of PURPA, subject to

new provisions that would remove disincentives for renewable generation sources.

Transmission siting is another area I think where Congress could

assist us. You have heard my thoughts on transmission siting. I

will briefly tell you that I recommend still that FERC be granted

Federal eminent domain authority over interstate lines in order to

centralize planning expansion and siting, but not power plants and

not distribution. In addition, I think FERC could improve its oversight capabilities with clear authority to collect and publish transactional data while protecting proprietary information. And I also

recommend expansion of our authority to remedy violations of law.

Finally, in light of the tragic events of September 11, I would like

to recognize that the heightened security concerns of the Nation’s

energy industry may bring before the Commission new issues,

some of which we may not be able to anticipate. Should matters

within our jurisdiction arise out of last week’s events, I assure the

subcommittee that I stand ready as I know my colleagues do, to do

whatever is necessary to resolve them consistent with the public interest. Thank you.

[The prepared statement of Hon. Linda K. Breathitt follows:]

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PREPARED STATEMENT OF HON. LINDA BREATHITT, COMMISSIONER, FEDERAL ENERGY

REGULATORY COMMISSION

Mr. Chairman and Members of the Subcommittee: I appreciate this opportunity

to appear before you today to discuss the Federal Energy Regulatory Commission’s (FERC) role in developing competitive wholesale power markets and its role in ensuring the continuing development of our Nation’s electric power industry. As requested by the Subcommittee, my testimony addresses the following issues: (1) significant changes in the electric power industry; (2) the Public Utility Holding Company Act of 1935 (PUHCA) and the Public Utility Regulatory Policies Act of 1978

(PURPA); (3) the status of Regional Transmission Organization (RTO) formation; (4)

FERC’s role in the siting of electric transmission facilities; (5) FERC’s role in overseeing wholesale electricity markets; (6) FERC’s refund authority; and (7) measures

undertaken to protect the integrity of the Nation’s electric power infrastructure.

Where appropriate, my testimony includes comments on legislation that I believe is

needed to assist FERC in continuing the development of competitive wholesale markets.

In 1996, with the issuance of Order Nos. 888 and 889, FERC established the foundation for competitive wholesale power markets in the United States. With these

rules, FERC ordered all transmission-owning public utilities to file nondiscriminatory open-access tariffs, thereby opening up interstate transmission. FERC’s goal

was to ensure that customers have the benefits of competitively priced generation.

With the issuance of Order No. 2000 in December 1999, FERC continued its effort

to create open and fair competitive markets. Order No. 2000 focused on the formation of Regional Transmission Organizations (RTOs). The Commission found that

RTOs may eliminate undue discrimination in transmission services that can occur

when the operation of the transmission system remains in the control of verticallyintegrated utilities. The Commission also found that RTOs can improve grid reliability, improve market performance, and facilitate lighter-handed regulation. Much

of FERC’s emphasis in the near future will be to complete the development of RTOs

with clear responsibilities, independence, and sufficient scope.

Since the Commission began promoting RTOs as a means to remove barriers and

impediments present in wholesale electricity markets, I have been fully committed

to the goal of RTO implementation. When the Commission deliberated over how to

attain the objective of RTO formation, we decided to adopt an open collaborative

process that relied on voluntary regional participation. In a series of orders issued

on July 12, 2001, the Commission dramatically departed from the voluntary approach we pursued in Order No. 2000 by directing the formation of four specific

RTOs for the United States, excluding Texas.

I dissented on this aspect of the July 12 orders. My concern was that this decision

on RTO formation departed from the basic philosophies embodied in Order No.

2000, and that any such action should be preceded by a formal notice-and-comment

rulemaking. This path would allow the Commission to make a reasoned decision informed by the views of all interested parties—most importantly, state commissions.

Apart from the departure from the voluntary nature of Order No. 2000, I have

further concerns with July 12 orders’ determinations regarding RTO scope and timing. I certainly favor the development of large RTOs reflecting natural markets. I

am not, however, convinced that four RTOs would meet the noble goals of Order

No. 2000 any better than six or seven—or even eight—RTOs of sufficient size. In

addition, I believe that the Commission’s July 12 decisions demonstrate little regard

for the status and timing of RTO formation efforts in various regions of the country.

The process of merging markets as RTOs are formed is revealing itself to be a highly technical and complex endeavor. It is my view that the Commission should recognize this in developing realistic expectations.

I also felt it necessary at the time to comment on the majority’s assertion that

forming larger RTOs will result in lower wholesale prices, and do so now. This is

a laudable goal, and as such, I embrace it. However, the promise of lower wholesale

electricity prices is one that I, as a federal official, am not willing to make to consumers at this time. Competitive markets should produce lower prices; but we have

not yet reached that level of market development. Consequently, I have urged my

colleagues to be more circumspect in promising lower prices. Consumers and ratepayers of electricity are going through a trying time at present. We need to be honest and up front as to the benefits and, yes, sometimes the struggles, of moving toward competition.

Of utmost importance in the development of competitive energy markets is reliability. I believe that the voluntary reliability system, which has been in place for

over three decades, should be replaced with one in which a self-regulated independent reliability organization, with oversight by the Commission, establishes and

63

enforces mandatory reliability standards. I would support legislation which authorizes a system for assuring the reliability of the electric grid that: (1) is mandatory,

(2) requires sanctions and penalties for failure to comply with reliability rules, and

(3) is subject to federal oversight. In my view, such a change in the manner in which

the reliability of the interconnected grid is overseen and managed is required in

order to ensure a competitive bulk power market. I would wholeheartedly support

the establishment of a self-regulated independent reliability organization, with oversight by the Commission.

I believe that interconnection rules should be clarified in order to ensure that new

sources of generation are able to interconnect to the transmission system. FERC has

stated its intent to evaluate in the near future the importance of standardizing

interconnection policies and procedures in a generic proceeding. I fully support such

standardization. A related issue is who should bear the costs of new interconnections and upgrades. These pricing decisions need to be made carefully and with consideration of the multiple factors at issue. Any changes in cost responsibility for

interconnections should be accomplished through a formal rulemaking, where all affected parties have an opportunity to express their views.

There has been significant discussion among industry participants concerning the

conditional repeal of both PUHCA and the mandatory purchase requirements of

PURPA. If PUHCA is repealed, I urge that such repeal be conditioned upon the

grant of enhanced authority to the Commission to address market power problems,

and assurance that both the Commission and the states would have greater access

to the books and records of holding companies. I also support repeal of the mandatory purchase requirement in Section 210 of PURPA, subject to new provisions that

would remove disincentives for renewable generation sources.

Another issue that arises in the context of FERC’s goal to encourage competition

in wholesale electric markets is the Commission’s role in the siting of transmission

facilities. I fear that the goal of a national grid may be unattainable absent a new

approach to transmission planning, expansion, and siting. Currently, under the Federal Power Act, the Commission has no role in the permitting and siting of new

transmission facilities. I believe that shortages of transmission are no longer just

single state issues; instead, these shortages have become interstate commerce issues

that must be addressed by the federal government.

There have been proposals to use federal eminent domain as a backstop to a cooperative, regionally-based approach to transmission and siting issues. In essence,

FERC would be granted eminent domain authority, which we, in turn, would be allowed to cede to regional regulatory compacts. My primary concern with this approach is that it could result in costly and inefficient duplication of processes,

records, and efforts by the various decisional authorities involved in transmission

siting. As we have seen with the Commission’s hydropower licensing program, for

example, it is very difficult to build speed into a process over which several entities

exercise jurisdiction. While the Commission has made great progress in streamlining cumbersome processes in this regard, I would caution the Subcommittee

about initiating a new regime for transmission siting that could easily be mired in

bureaucratic wrangling.

My recommendation would be for FERC to be granted federal eminent domain authority similar to the authority the Commission exercises with respect to the siting

of interstate natural gas pipelines under the Natural Gas Act. The Commission

could build into its implementation of such legislation procedures to ensure cooperation by the states and regional input. I believe this more centralized approach is

necessary from an efficiency standpoint, and will result in less bureaucracy and

more timely decisions for transmission providers and consumers. Furthermore, I am

not advocating that the Commission should have siting authority for electric distribution lines or power plants. I believe state governments are best positioned to

make those determinations.

I also have a concern that there is not sufficient investment in transmission facilities. In my opinion, the transmission system is not keeping pace with the growing

demand in the bulk power market. The difficulty associated with siting is one reason for this. Others are that the industry is increasingly unwilling to make transmission-related investments given the uncertainties that exist in an industry still

in the midst of restructuring, as well as the risk of earning inadequate returns on

new transmission investments. The Commission must do its part to ensure that its

transmission pricing policies incorporate an allowance for reasonable returns on investments. Independent transmission companies as well as merchant transmission

companies need certainty to develop their plans.

In order to provide effective oversight of wholesale electricity markets, FERC is

preparing itself to operate in today’s fast-paced commercial environment. A critical

element of market oversight is the availability of market information is a usable forVerDate 11-MAY-2000 10:19 Apr 09, 2002 Jkt 010199 PO 00000 Frm 00067 Fmt 6633 Sfmt 6621 E:\HEARINGS\75757 pfrm04 PsN: 75757
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mat. There is clearly a relationship between strong market transparency rules and

effective regulation. I strongly believe that transparency acts as an effective deterrent to market power by allowing regulators and the public to monitor the marketplace for abuses. The lack of accurate, timely, and easily accessed pricing information can impede competition and liquidity; and for that reason, I have supported

many FERC initiatives aimed at expanding the range of publicly available transactional information. With a view toward legislative action, I recommend that FERC

and the Energy Information Administration be granted clear authority to collect and

publish appropriate transactional data, while protecting proprietary information.

These goals are not inconsistent with one another.

The Subcommittee has asked for comment on the authority of the Commission to

remedy violations of law. I believe that it would be helpful for the Commission to

have some additional authority to prevent the exercise of market power. In my comments to H.R. 1941, ‘‘The Electric Refund Fairness Act of 2001,’’ I indicated my support for legislation that would expand the refund authority set forth in section

206(b) of the Federal Power Act. I did, however, emphasize that, in addition to the

objective of protecting consumers, I believe it is important for regulators to seek to

minimize uncertainty of energy transactions. For example, I would not advocate

granting the Commission authority to reopen and order refunds on past transactions. That said, I would welcome legislation amending the FPA to allow the Commission to order refunds as of the date formal notice of a complaint is issued. All

interested persons would be on notice that transactions are the subject of complaint

or investigation, and that rates may change and refunds may be ordered as a result.

Customers would have the added protection of an earlier refund effective date. I

would also advocate lengthening the refund effective period beyond the current fifteen months; I have suggested twenty months after the refund effective date would

be appropriate. Both goals of protection and certainty would be met under this

framework.

In addition, I believe an amendment to the FPA to give the Commission authority

to assess penalties, in addition to refunds and interest, could act as a powerful deterrent against the abuse of market power. However, I believe that, in the interest

of certainty, a statutory upper limit to any such penalties should be included. Further, I would suggest that any limits on new penalty authority should be high

enough to be effective and withstand the passage of time.

Finally, in light of the tragic events of September 11, 2001, the Subcommittee has

asked for comment on the security of the Nation’s energy infrastructures. FERC’s

role in the security of the energy transportation and supply infrastructure is very

limited. However, the Commission’s dam safety program extends to every jurisdictional hydroelectric facility, and each has in place an emergency action plan. In the

event of emergency, these plans trigger procedures designed to minimize the impact

of a breach on downstream property and homeowners. While jurisdictional pipelines

and transmission owners are subject to certain reporting requirements, FERC does

not have the authority to prescribe or monitor pipeline and electric transmission security. However, our staff is in contact with pipeline and transmission companies,

many of which are operating under heightened security procedures.

The Commission’s regulatory purview is largely economic; and in this regard, we

recognize that the entities under FERC’s jurisdiction may incur extraordinary expenses as a result of the terrorist attacks that have taken place. In particular, electric, gas, and oil companies have begun to adopt new procedures and install new

facilities to further safeguard the electric power transmission grid and gas and oil

pipeline systems. The costs of such additional security measures remain unclear. In

order to reduce the uncertainty about company’s ability to recover expenses, the

Commission issued a Statement of Policy on September 14, 2001, to assure the industry that our policy favors recovery of such costs.

In closing, I emphasize that comprehensive federal electric legislation is needed

to address important and unresolved issues in the restructuring of the electric industry. The Commission must have sufficient authority to advance its goals of

achieving fair, open and competitive bulk power markets. Current impediments to

the development of such markets must be removed as quickly as possible so that

the intended benefits of restructuring for the American consumer ultimately may be

realized.

Mr. BARTON. Thank you, Commissioner. We now want to welcome our new commissioner, Commissioner Brownell from the

great State of Pennsylvania, former PUC Commissioner there. Welcome to the subcommittee and ask you to summarize your remarks

in 7 minutes.

65

STATEMENT OF HON. NORA MEAD BROWNELL

Ms. BROWNELL. Thank you very much, Mr. Chairman, and members of the subcommittee. I am pleased to be here today. The

events of the past week have, of course, caused all of us to rethink

our priorities, both professionally and personally. But I am encouraged by your continued focus on energy markets and infrastructure. While it would be easy to be diverted, I believe this is a major

economic issue that is costing consumers hundreds of millions of

dollars. It is limiting the growth potential of our business community in our country. The economic development of this country rests

on the efficient and innovative energy markets and a fully developed infrastructure.

Each day of delay raises the cost in ways I do not think we are

effectively measuring. Today I would like to focus on the economic

issues. I will talk about the importance of RTOs for future investment as well as for security. A couple of facts: Generation reserve

capacity has declined from 22 percent in 1990 to less than 15 percent in the year 2000. New generation is clearly needed. New investment in transmission capacity is less than one half of 1 percent

per year over the next 10 years; not keeping up with the pace of

growth. Transmission constraints are growing. In the year 2000,

there were an estimated $73 million in additional costs in central

California; $580 million for the first 9 months in PJM New York

and New England; $19 million in central east interface in New

York in August alone.

It is clear that the costs are growing, but it is also clear that unless and until we create regulatory and legislative certainty, the investment will not flow. I would like to quote just a few members

of the investment community, ‘‘An Electric Fall Outlet’’ by Christine Upenski and Deborah Coy from Schwab Markets. I quote,

‘‘When the FERC on July 11 launched an effort to jumpstart the

RTO process, RTOs are expected to be the basis of regional markets for power and an improvement over single State or small regional systems. FERC’s leadership on this issue could help build

regulatory certainty needed to free up investment and transmission

assets and market institutions that many companies see as necessary to reach full growth potential.’’

In a letter from J.P. Morgan, speaking of the importance and interests of the private equity sector of that company, they speak of

this as an attractive business opportunity and the importance of

private equity in constructing new assets to relieve transmission

constraints and enhanced power flows and aggregating assets to

create the critical mass necessary to provide the level of public

service envisioned by FERC in its RTO policies.

But they go on to say that unless we can create some certainty

and fairness in the structure and the organization of the markets

that private equity will not flow. That is an example of everything

we see from the analyst community, from the lending community

and for the private and public capital market.

So it seems clear to me that at a time in this country when our

economy needs the infusion of capital in ways that we never

thought about before it is important that we fulfill our responsibilities and address the concerns of the investment community and

66

save the consumers the hundreds of millions dollars that are being

wasted.

Just a moment on security issues. Every crisis management expert that I have ever consulted identify a number of essential ingredients for successful response in a crisis: accurate, timely communication, standardized and predictable protocols and response

mechanisms, contingency planning, backup and redundancy features and the ability to identify and isolate vulnerabilities that

serve as core features of crisis management.

I was in probably the largest commercial fire at our banking institution in Philadelphia, and we were up and running in 24 days

because the crisis management plan that I had had all those elements.

I worked for Governor Dick Thornburg in the aftermath of TMI,

and one of the clear messages to us was that when those things

were lacking it was difficult to respond to the crisis. I think RTOs

respond to those in ways that the existing market structure may

or may not. It is easier to communicate and organize among 4, 6,

8 or 10 large, well-planned organizations than it is with scattered

organizations who do not have central planning functions and who

do not have contingency plans and redundancies.

There are many things that we need to do. We need to address

market monitoring interconnection standards. We need the ability

to impose civil penalties. We need changes in the tax laws. We

need to address the issue of transmission siting. There is much for

you to do, and there is much for us to do. But we feel, with my

colleagues, a sense of urgency and a renewed dedication to resolve

the issues, to work with the States and the other stakeholders to

bring an energy market and the efficiency that competition can

bring to this country.

Thank you.

[The prepared statement of Hon. Nora Mead Brownell follows:]

PREPARED STATEMENT OF HON. NORA MEAD BROWNELL, COMMISSIONER, FEDERAL

ENERGY REGULATORY COMMISSION

Mr. Chairman and Members of the Subcommittee: Thank you for the opportunity

to share my thoughts on the direction that our nation’s electric restructuring policy

should take. Over the past 10 days, I, like most Americans, have reassessed what

is important in life, as an individual, an American, and a public servant. One thing

that is obviously important is that we carefully consider the security of the nation’s

electric grid. I am eager to work with you and my colleagues to take every appropriate step to ensure that our energy infrastructure remains free from hideous acts

of sabotage like those we witnessed last week.

Our energy production and delivery systems are among the best in the world and

their safety and security are vital to our continued economic growth and development. We are proud of our energy industry’s planning, communication and response

in this crisis. Three days after the attacks on the World Trade Towers and the Pentagon, the Commission issued a Statement of Policy that provides the energy industry with regulatory assurance on energy infrastructure reliability and security matters. Specifically, the Commission has assured cost recovery for prudently incurred

expenditures that electric, gas and oil companies incur to adopt new procedures, update existing procedures and install facilities to upgrade the safety of their electric

power transmission grid and gas and oil systems. I believe that our action is a good,

responsive measure. It reassures the industry to undertake what is necessary and

prudent. The Commission will continue to encourage jurisdictional entities to be

proactive when it comes to securing the nation’s electric grid.

I also believe that the time is ripe for participants in the energy industry (including government) to review their response plans. The energy industry has evolved

and is much more complex. As part of a continuous process of review and evaluation

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of crisis management and response, I think some consideration should be given to

the need for periodic operational audits of our energy providers and the organizational structures which manage them to assess, among other things, reliability, safety, security and communication protocols.

While we must take steps to protect the security of our nation’s energy infrastructure, we must also get on with the other business of planning for the future, so that

the forces of terror are not allowed a greater toll than they have already taken from

this country. This nation’s energy policy is at a critical juncture. Fear of change

must not deter us from finishing the job of transforming an outdated, inefficient

electricity industry into the economically competitive, technologically vibrant marketplace that American consumers deserve.

One necessary step in transforming electricity markets is the development of Regional Transmission Organizations (RTOs). Large, independent RTOs can improve

grid reliability by facilitating transmission planning across a multi-state region, create better pricing mechanisms such as eliminating ‘‘pancaking’’, improve efficiency

through better congestion management, and attract investment in infrastructure by

facilitating regional consensus on the need for construction. Moreover, the development of large RTOs can enhance the security of the electrical grid.

Every crisis management expert that I have ever consulted identifies a number

of essential ingredients for a successful response to a crisis:

• Accurate, timely communication

• standardized and predictable protocols and response mechanisms

• contingency planning

• back-up and redundancy features and

• the ability to identify and isolate vulnerabilities all serve as core features of crisis

management.

Critical to the execution of any management plan is that all affected players know

the plan, forward and back. It should be second nature; often there is no time to

consult the play book. I believe that a large, fully functioning RTO is positioned to

be a critical link in crisis management and ensuring reliability.

With large RTOs there will be a centralized chain of command and standardized

processes. We also expect that RTOs would tend to have modern, forward looking

control systems that generally exceed the capabilities of smaller systems. As a result, inefficiencies of non-standardized protocols and operation of the grid are reduced. There are no surprises. Emergency situations are better addressed from this

efficiency of response. An RTO has the ability to ascertain and communicate system

status and response plans more quickly than 20 or so control area operators. This

is, I believe, what every crisis manager looks for. To this end, I believe that large

RTOs are in a position to be flexible to accommodate security needs (a single control

area operator may not be required).

In addition, the RTO may serve as a central point for information. Accurate, timely information is critical to the assessment of the situation. Concerns that the Commission’s goals of transparent market information and our OASIS system reveal too

much information are misplaced. Information posted on OASIS does not include operating data, status of generation, or operational characteristics of transmission

lines. Much of the information we seek to make publicly available is information

necessary for the growth of markets; and is not sensitive information regarding energy management systems.

In sum, RTOs play an important role in assuring reliability. Congress should affirm FERC’s authority to require the formation of RTOs and it should do so now.

In addition to the formation of RTOs, we must take other steps if we are to transform the electricity industry. The Public Utility Holding Company Act (PUHCA) was

necessary to address abuses that existed a half-century ago. However, that statute

has not only outlived its usefulness, it is actually thwarting needed development of

our electricity resources by subjecting registered utility holding companies to heavyhanded regulation of ordinary business activities and to outdated requirements that

they operate ‘‘integrated’’’ and contiguous systems. One of PUHCA’s perverse effects

is that it causes foreign companies to buy here and U.S. companies to invest overseas. For a myriad of reasons, PUHCA should be repealed.

The Public Utility Regulatory Policies Act (PURPA) also needs repeal. PURPA

was enacted out of concern over dependence on oil for electric generation. Now, 22

years later, a gas-fired generator can be on-line in less than two years, and many

advances are being made in distributed generation. Therefore, PURPA’s subsidies

for certain types of generation are no longer appropriate and more importantly stifle

the nation’s economy.

I also believe that changes in tax laws must be considered to allow companies to

effectively restructure and transform themselves and to attract new investment.

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We also need to develop uniform business rules. Where rules are standardized,

there is less room for manipulation. I believe that all interstate transmission facilities should be under one set of open access rules, including the facilities owned and/

or operated by municipals, cooperatives, the Tennessee Valley Authority, and the

federal power market administrations and regardless of whether they are used for

unbundled wholesale, unbundled retail, or bundled retail transactions. I also believe

that we should develop standardized generation interconnection policies. Having all

transmission under one set of rules will ensure a properly functioning and transparent transmission grid. It will reduce transaction costs, improve efficiency, and

allow for competition. GISB successfully accomplished this goal in the gas industry

and is poised to do so in the electric industry.

Furthermore, we must revise the way in which transmission facilities are sited.

State-by-state siting of such transmission superhighways is an anachronism that

impedes transmission investment and slows transmission construction. An RTO, or

regional structure, with significant input of the states, should be the first stop for

siting approval. However, at some point, it may be necessary for the Commission

to make the final determination. Therefore, I suggest that the Commission act as

a backstop and be given siting authority over interstate transmission comparable to

the interstate natural gas pipeline siting authority in Section 7 of the Natural Gas

Act.

Finally, the Commission must have an expanded role in monitoring for, and mitigating, market power abuse. The Commission must hire, train, and re-train personnel skilled in market monitoring and market power mitigation or buy expertise

on a short-term basis, as needed. We must seek out experts to assist us in our new

role. We must also act swiftly and with certainty to respond to market abuses. Markets are fragile and prolonged problems will destroy the market and the confidence

of consumers. Therefore, I believe strengthening the Commission’s market monitoring and enforcement capabilities must be a top priority. As markets change, market monitoring and enforcement capabilities become an even more critical piece of

the regulatory puzzle. Effective market monitoring also includes modeling for the

future, so we can more effectively anticipate where investment in infrastructure is

needed.

Let me offer a few suggestions that may help the Commission develop an effective

market monitoring and enforcement program. There are many different players in

the energy markets, many that have not traditionally been subject to our jurisdiction. A significant amount of relevant information about the operation of markets

is in the possession of these entities. At times, there has been a reluctance to cooperate and provide the necessary information. It may be appropriate to clarify that

the Commission has the authority to seek the information necessary to perform its

statutory responsibilities from either jurisdictional or non-jurisdictional sources.

With regard to the Commission’s enforcement capability, the enabling statutes of

the Securities and Exchange Commission and the Federal Communications Commission provide for a range of enforcement measures, such as civil penalties. I believe

that providing the Commission with similar authority would send a powerful message to electricity market participants that we take violations of the Federal Power

Act just as seriously.

The list of tasks for you in Congress and for us at the Commission is long but

it is critical that we move forward. The cost to our country grows each day. Lack

of investment in infrastructure (new transmission investment represents an average

growth rate of less than one-half of one percent per year over the next decade),

delays in the development and introduction of new technologies, uncertainty in and

lack of confidence from capital markets impacts companies’ values and thwarts transition. We need clarity and resolution. At the Commission we are working on a business plan—a blue print for the future. Our plan sets forth an aggressive set of actions to resolve the uncertainties of the marketplace. We are committed to delivering to America’s consumers the promise of an efficient, reliable, innovative energy

future.

I hope that this information is useful to you. If I can be of further assistance,

please do not hesitate to contact me.

Mr. BARTON. Thank you, Commissioner.

We now want to hear from Commissioner Massey. Your statement is in the record in its entirety. We would ask that you elaborate in 7 minutes.

STATEMENT OF HON. WILLIAM L. MASSEY

Mr. MASSEY. Thank you Mr. Chairman.

69

Mr. Chair, Mr. Boucher, members of the subcommittee, my colleagues have laid out a number of the issues quite well, so I will

be brief.

Developing competitive, efficient wholesale markets based on a

reliable transmission platform is a highly desirable goal. There are,

however, a number of barriers to creating robust markets, including grid operation influenced by merchant interests, fractured grid

operation, and a jurisdictional patchwork of rules governing the

grid.

Necessary grid expansion is simply not keeping pace with the requirements of robust wholesale markets. The lack of uniformity in

generation interconnection standards among regions and utilities

poses unnecessary barriers to entry by new, efficient, reliable generators. There has been inadequate monitoring and policing of

evolving markets. Demand responsiveness that could act as a break

on price run-ups is generally absent from electricity markets. Vibrant markets require a reliable trading platform, yet there are no

legally enforceable reliability rules.

The Commission does not have all of the tools it needs both to

promote large regional markets and to protect the public interest.

A number of legislative changes are critical to achieving the goal

of well-functioning wholesale markets that yield substantial consumer benefits, and that is what I think we all want.

All interstate transmission should be placed under one set of jurisdictional rules. The FERC should have authority to order the

formation of RTOs and to site electric transmission facilities necessary for interstate commerce to flourish. Insuring that necessary

transmission facilities are sited and built would be a huge step toward meeting our reliability goals.

Congress should promote the formation, the adoption of uniform

nationwide generation interconnection standards. This would be

another critical step toward reliability. The barrier to entry posed

by confusing interconnection standards should be eliminated. Refunds should be authorized if rates are determined to be unjust and

unreasonable, at least back to the date of the initiation of a complaint.

The Commission should have authority to assess civil penalties

against prohibitive market behavior. Its authority over utility

mergers should be strengthened in a number of ways, and direct

authority to remedy market power should be provided.

The Commission and State commissions should be strongly encouraged to insure that electricity markets include demand responsiveness. And, finally, the promulgation of mandatory reliability

standards for bulk power markets must be authorized by Congress.

I believe that confidence in market structure, confidence that the

market is based upon a solid RTO platform that has clear authority

for reliability planning, for an entire region, that is following mandatory reliability rules, will spur investment in the generation and

transmission infrastructure necessary for a reliable system. And

Congress can take steps to increase industry confidence that the

necessary infrastructure can get sited in a timely fashion.

Mr. Chairman, I think it is obvious that I believe that there is

a strong Federal role that is required to solve these problems. I

have been engaged in this activity at the Commission now for 8

70

years, moving toward a market structure that benefits consumers;

and I must say I have a sense of impatience about it. I would like

for us to move forward aggressively with Congress’s help to solve

these problems.

Thank you.

[The prepared statement of Hon. William L. Massey follows:]

PREPARED STATEMENT OF HON. WILLIAM L. MASSEY, COMMISSIONER, FEDERAL

ENERGY REGULATORY COMMISSION

Mr. Chairman and Members of the Subcommittee on Energy and Air Quality:

Thank you for the opportunity to testify on the role of competitive wholesale power

markets in providing affordable reliable electricity to American consumers and the

role of the Federal government in ensuring the development of the power industry.

HISTORICAL AND STATUTORY BACKGROUND

The electric power industry has undergone significant economic and technological

changes that have rendered inadequate the current statutory scheme for regulatory

oversight. In order to shorten my testimony, I am attaching a White Paper recently

made available to the Senate Committee on Energy and Natural Resources by

Chairman Bingaman. The White Paper provides excellent description of the historical development of the electric power industry and the role various statutes have

played in that development.

The development of competitive efficient wholesale markets is a highly desirable

goal. This is primarily a federal responsibility, and achieving this goal will benefit

our nation’s consumers and economy. There are, however, a number of barriers to

the creation of robust markets, including grid operation influenced by merchant interests, fractured grid operation, and a jurisdictional patchwork of rules governing

the grid. Almost a third of the grid is not subject directly to the FERC’s open access

and nondiscrimination requirements. Necessary grid expansion in not keeping pace

with the requirements of robust wholesale markets. This means that cheaper power

cannot always reach the customers who want it. The lack of uniformity in generation interconnection standards among regions and utilities poses unnecessary barriers to entry by generators that could provide cheaper power for consumers. There

has been inadequate monitoring and policing of evolving markets. Demand responsiveness could act as a brake on price run ups, yet is generally absent from electricity markets. Vibrant markets require a reliable trading platform, yet there are

no legally enforceable reliability standards.

With notable exceptions such as PURPA and EPACT, the legal framework that

governs the electricity industry is now more than sixty five years old and assumed

an old fashioned cost of service regime. Simply stated, the Commission does not

have all of the tools it needs both to promote large regional markets and to protect

the public interest. I would like to underscore a number of legislative changes that

are critical to achieving the goal of well functioning competitive markets that yield

substantial consumer benefits.

Transmission Jurisdiction

A. One Set of Rules

Congress should place all interstate transmission under one set of open access

rules. That means subjecting the transmission facilities of municipal electric agencies, rural cooperatives, the Tennessee Valley Authority, and the Power Marketing

Administrations to the Commission’s open access rules. These entities control 30%

of the nation’s electricity transmission grid. Their current non-jurisdictional status

has resulted in a patchwork of rules that hinder seamless electricity markets. Markets require an open non-discriminatory transmission network in order to flourish.

In addition, all transmission, whether it underlies an unbundled wholesale,

unbundled retail, or bundled retail transaction, should be subject to one set of fair

and non-discriminatory interstate rules administered by the Commission. This will

give market participants confidence in the integrity and fairness of the delivery system, and will facilitate robust trade by eliminating the current balkanized state-bystate rules on essential interstate facilities.

B. Regional Transmission Organizations

While the Commission has made substantial progress in forming the Regional

Transmission Organizations that are critical to the competitive market place, our

hand would be strengthened by a clear declaration by the Congress that these instiVerDate 11-MAY-2000 10:19 Apr 09, 2002 Jkt 010199 PO 00000 Frm 00074 Fmt 6633 Sfmt 6621 E:\HEARINGS\75757 pfrm04 PsN: 75757
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tutions are in the public interest and should be formed. One appropriate action

would be to give the Commission clear authority to order the formation of such institutions in compliance with Commission standards. I firmly believe that large

RTOs consistent with FERC’s vision in Order No. 2000 are absolutely essential for

the smooth functioning of electricity markets. RTOs will eliminate the conflicting incentives vertically integrated firms still have in providing access. RTOs will streamline interconnection standards and help get new generation into the market. RTOs

will improve transmission pricing, regional planning, congestion management, and

produce consistent market rules. We know for a fact that resources will trade into

the market that is most favorable to them. Trade should be based on true economics, not the idiosyncracies of differing market rules across the region. A clear message from Congress would certainly speed the formation of these critical institutions.

C. Transmission Siting

I would recommend that Congress transfer to the Commission the authority to

site new interstate electric transmission facilities. The transmission grid is the critical superhighway for electricity commerce, but it is becoming congested due to the

increased demands of a strong economy and to new uses for which it was not designed. Transmission expansion has not kept pace with these changes in the interstate electricity marketplace.

Although the Commission is responsible for well functioning electricity markets,

it has no authority to site the electric transmission facilities that are necessary for

such markets to thrive and product consumer benefits. Existing law leaves siting

to state authorities. This contrasts sharply with section 7 of the Natural Gas Act,

which authorizes the Commission to site and grant eminent domain for the construction of interstate gas pipeline facilities. Exercising that authority, the Commission balances local concerns with the need for new pipeline capacity to support

evolving markets. We have certificated well over 12,000 miles of new pipeline capacity during the last six years. No comparable expansion of the electric grid has occurred.

I recommend legislation that would transfer siting authority to the Commission.

Such authority would make it more likely that transmission facilities necessary to

reliably support emerging regional interstate markets would be sited and constructed. A strong argument can be made that the certification of facilities necessary

for interstate commerce to thrive should be carried out by a federal agency.

Adequate grid facilities are essential to robust wholesale power markets. I am

confident that transmission will be built in sufficient quantities if siting authority

is rationalized, rate jurisdiction is clarified, and adequate cost recovery mechanisms

and risk-based rates of return are allowed.

D. Generation Interconnection

I would recommend that Congress direct the Commission to adopt uniform nationwide standards that streamline the process of interconnecting generators to the

grid. The Commission has taken some steps in this direction by encouraging utilities

to file their interconnection rules, but more must be done. Generation siting decisions should not depend on how easy it is to hook up in a particular region or with

a certain transmission provider. Standardized and uniform rules promulgated by

the Commission are necessary.

Rates and Market Power

Ensuring just and reasonable prices must be addressed far differently as we move

to competitive markets than under the monopoly structure. It is more complex now.

The basis nature of our regulatory tasks is moving from reviewing cost-based prices

charged by individual sellers to ensuring good performance by markets. I believe

that the Commission’s current regulatory tools are inadequate to the new task.

A. Refunds

I believe the Commission needs additional authority to properly address the issue

of refunds for unjust and unreasonable wholesale electricity prices. The Commission

has concluded that section 206 of the Federal Power Act does not allow the Commission to require refunds of unjust and unreasonable rates charged prior to a date 60

days after a complaint is filed or the Commission initiates an investigation. I recommend that section 206 be amended to allow the Commission to order refunds for

past periods if the rates charged are determined to be unjust and unreasonable.

Limitations on how far back in time the Commission can order refunds may be appropriate.

72

B. Civil Penalties

I recommend that the Commission be given authority to assess civil penalties

against participants that engage in prohibited behavior in electricity markets, such

as anticompetitive acts and violations of tariff terms and conditions. If the Commission is to be the ‘‘cop on the beat’’ of competitive markets, we must have the tools

needed to ensure good behavior. Refunds alone are not a sufficient deterrent against

bad behavior. Simply giving the money back if you are caught is not enough. The

consequences of engaging in prohibited behavior must be severe enough to act as

a deterrent.

C. Mergers and Consolidations

To ensure that mergers do not undercut our competitive goals, the Commission’s

authority over mergers involving participants in electricity markets must be

strengthened in a number of ways. Consolidations of market participants can have

adverse consequences to the functioning of electricity markets. The Commission’s

detailed experience with electricity markets and its unique technical expertise can

provide critical insights into a merger’s competitive effects. The Commission’s authority to review mergers should be strengthened to ensure that all significant

mergers involving electricity market participants are reviewed.

I recommend that the Commission be given direct authority to review mergers

that involve generation facilities. The Commission has interpreted the FPA as excluding generation facilities per se from our direct authority, although that interpretation is currently before the courts. It is important that all significant consolidations in electricity markets be subject to Commission review. For the same reason,

the Commission should be given direct authority to review consolidations involving

holding companies.

I am also concerned that significant vertical mergers can be outside of our merger

review authority. Under the current section 203 of the FPA, our merger jurisdiction

is triggered if there is a change in control of jurisdictional assets, such as transmission facilities. Consequently, consolidations can lie outside of the Commission’s

jurisdiction depending on the way they are structured. For example, a merger of a

large fuel supplier and a public utility would not be subject to Commission review

if the utility acquires the fuel supplier because there would be no change in control

of the jurisdictional assets of the utility. If the merger transaction were structured

the other way, i.e., the fuel supplier acquiring the utility, it would be subject to

Commission review. Such vertical consolidations can have significant anticompetitive effects on electricity markets. Those potential adverse effects do not depend on

how merger transactions are structured, and thus our jurisdiction over those transactions should not depend on how they are structured. Therefore, I recommend that

the Commission be given authority to review all consolidations involving electricity

market participants.

D. Market Power Mitigation

Market power still exists in the electricity industry. The FERC, with its broad

interstate view, must have adequate authority to ensure that market power does not

squelch the very competition we are attempting to facilitate. However, the Commission now has only indirect conditioning authority to remedy market power. This is

clearly inadequate. Therefore, I recommend legislation that would give the Commission the direct authority to remedy market power in wholesale markets, and also

in retail markets if asked by a state commission that lacks adequate authority. For

example, such authority would allow the Commission to order structural remedies

directly, such as divestiture, needed to mitigate market power.

E. Demand Responsiveness

Markets need demand responsiveness to price. This is a standard means of moderating prices in well-functioning markets, but it is generally absent from electricity

markets. When prices for other commodities get high, consumers can usually respond by buying less, thereby acting as a brake on price run-ups. If the price, say,

for a head of cabbage spikes to $50, consumers simply do not purchase it. Without

the ability of end use consumers to respond to price, there is virtually no limit on

the price suppliers can fetch in shortage conditions. Consumers see the exorbitant

bill only after the fact. This does not make for a well functioning market.

Instilling demand responsiveness into electricity markets requires two conditions:

first, significant numbers of customers must be able to see prices before they consume, and second, they must have reasonable means to adjust consumption in response to those prices. Accomplishing both of these on a widespread scale will require technical innovation. A modest demand response, however, can make a significant difference in moderating price where the supply curve is steep.

73

Once there is a significant degree of demand responsiveness in a market, demand

should be allowed to bid demand reductions, or so called ‘‘negawatts,’’ into organized

markets along with the megawatts of the traditional suppliers. This direct bidding

would be the most efficient way to include the demand side in the market. But however it is accomplished, the important point is that market design simply cannot ignore the demand half of the market without suffering painful consequences, especially during shortage periods. There was virtually no demand responsiveness in the

California market. Customers had no effective means to reduce demand when prices

soared.

It would be helpful for Congress to send a message that instilling a significant

measure of demand responsiveness into electricity markets is in the public interest.

I would recommend that legislation strongly encourage FERC and state commissions to cooperate in designing markets that include demand responsiveness. This

would help to ensure just and reasonable wholesale prices and would be an effective

market power mitigation measure.

Reliability

The industry needs mandatory reliability standards. Vibrant markets must be

based upon a reliable trading platform. Yet, under existing law there are no legally

enforceable reliability standards. The North American Electric Reliability Council

(NERC) does an excellent job preserving reliability, but compliance with its rules

is voluntary. A voluntary system is likely to break down in a competitive electricity

industry.

I strongly recommend federal legislation that would lead to the promulgation of

mandatory reliability standards. A private standards organization (perhaps a restructured NERC) with an independent board of directors could promulgate mandatory reliability standards applicable to all market participants. These rules would

be reviewed by the Commission to ensure that they are fair and not unduly discriminatory. The mandatory rules would then be applied by RTOs, the entities that

will be responsible for maintaining short-term reliability in the marketplace. Mandatory reliability rules are critical to evolving competitive markets, and I urge Congress to enact legislation to accomplish this objective.

PURPA and PUHCA Repeal

PURPA and PUHCA are statutes that may have outlived their usefulness and I

would support their repeal in the context of broad restructuring legislation that ensures robust competitive power markets. I would support repeal of PURPA if there

is a mechanism enacted to promote the development of renewable resources, such

as a reasonable portfolio standard. I would support PUHCA repeal if state and federal regulators are given explicit authority to review the books, records and accounts

of utilities when necessary to ensure just and reasonable rates.

Security of the electric power infrastructure

The recent acts of terrorism against our Nation underscore the absolute importance of ensuring that our infrastructure is a secure as possible. The Commission’s

primary jurisdiction is over the rates charged by jurisdictional companies. To that

end, I would note that last week the Commission issued a statement of policy assuring the industries we regulate that they may recover all prudently incurred costs

to safeguard the infrastructure.

Conclusion

I stand ready to answer questions and to assist the Subcommittee in any way.

Thank you for this opportunity to testify.

Mr. BARTON. Thank you, Commissioners.

The Chair would recognize himself for 5 minutes for questions

only.

Chairman Wood, on July 12, the debate about RTOs at the

FERC, I have received quite a bit of negative feedback, quite frankly, from the incumbent investor-owned utilities about some of the

things that the Commission was attempting to do. And one of the

questions that I was asked was why the FERC felt compelled to try

to force everybody into 1 of 4 RTOs. What is so magical about four

RTOs nationwide instead of a larger number if it seemed to work

better geographically?

74

Mr. WOOD. Chairman Barton, I think one of the—I think the

best way to kind of come at that is compare what it would be like

with 10 or 12 to the Tower of Babel, or to Europe prior to its confederation. You don’t really get to a national power grid with five.

I mean, I am counting ERCOT, of course, as a fifth. So I really

think of five when people say four.

Mr. BARTON. I kind of count that way, too.

Mr. WOOD. Okay. So we have got a problem we share, too. And

five may be too many. It was interesting in talking to the President

after our vote because it was right after Vice President Cheney

talked about the seamless Nation grid that it looked like five was

a little too balkanized. Of course, then after that you get the call

that maybe we should have stuck with 12 or 15.

At the end of the day, setting up the infrastructure to do reliability, competitive, open access transmission, planning, and supply/demand balance, which is what these organizations do, is not

cheap. Right now, it is over in some regard 2,000 separate entities,

the utilities in the country that do these things individually, the

160 some odd controllers that aggregate this a little bit more, the

10 NERC regions which aggregate just the reliability part of that.

But, you know, that is better than nothing. But they are expensive.

And I think as one who has been in front of, with ERCOT, this

problem in the past, you don’t want to see these replicated or duplicated where one will do well.

I think certainly in light of the reliability issues in the last week,

to have hardened bunkers to maintain the reliability of the grid,

to have duplicate or triplicate facilities to make sure that they are

all secure so that you can really run and manage a grid through

an event like last week or anything that may come our way, 4 or

5 of these is a balance, a good economic balance for what the customers have to pay. Ten or 15 or 20 start to look like wasting the

customers money. And so——

Mr. BARTON. But, I mean, there is some number—well, I mean

larger than four but smaller than 20 that—sure, you know, the

draft that we are going to release sooner or later on electricity, you

know, it is going to have a requirement, a time period for people

to join an RTO and give the industry an opportunity to put its RTO

where its mouth has been, so to speak, that they will join if we give

them enough time. And if that turns out to be 7 or 8, if they actually make sense geographically and have the correct interconnects

and at the seam, I mean, that would—would that not satisfy some

of your concerns if it is done properly and they appear to work and

all that, as opposed to cutting it up into four quadrants?

Mr. WOOD. Fair enough. And I would say, just so it is clear, the

core issue here is to get to a seamless national market—— Mr. BARTON. Exactly.

Mr. WOOD. [continuing] and we could go about that a couple of

ways. One is to make large groups that solve their own problems

within themselves. Another is to do a generic market standard design, which we may do. We are going to talk about this at our

meeting next week. We are going to talk about the different ways

to get to yes on RTO.

But the large regional RTOs I think are, for the reasons I stated

before, a pragmatic way to go forward. But, quite frankly, you

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could be like McDonalds; and a hamburger in Boston is the same

as a hamburger in Arlington, if the standards for producing that

hamburger are the same across the country.

Mr. BARTON. There ain’t no Whataburgers in Boston.

Mr. WOOD. They do have a few Mickey D’s. They usually don’t

understand me when I try to go order up there, but that is their

problem not mine.

But, in any event, if you have 50 different outlets for electricity

on the wholesale level, or 12 or 8 or 4 or 1, they are all working

off the same rules. I guess as a practical matter it doesn’t really

matter if we have got four or——

Mr. BARTON. I have got one more question for Mr. Massey, and

then I am going to go to Mr. Boucher, and we will do a second

round if there is enough interest to do it.

You mentioned in your testimony, Commissioner, the need for

civil penalties to enforce FERC decisions. The draft that we are

going to release has a provision for that. As we have talked about

it, there are a lot of people that would be potentially subject to

such civil penalties. To say that is redundant because the FERC

has to approve everything and you have the power to enforce your

decisions without civil penalties. So how do you answer that comment about giving you civil penalties to enforce your actions?

Mr. MASSEY. Well, I agree with comments that Chairman Wood

has made on a number of occasions supporting civil penalties. Just

paying the money back—if you engage in bad market behavior,

simply paying the money back is not a sufficient deterrent. I think

we need a big stick to deter bad market behavior, and that is my

view on it. We would use it judiciously, but we ought to be able to

use it when we need it.

Mr. BARTON. Do any other commissioners have a comment on

that one?

Ms. BREATHITT. I supported civil penalties. I said that we ought

to have an upper limit so there is some certainty as to how far we

go monetarily, that it is just not open-ended.

Mr. BARTON. Okay.

Ms. BREATHITT. But that it should be sufficient enough to be a

deterrent.

Mr. BARTON. Okay. Mr. Boucher is recognized for 5 minutes for

questions.

Mr. BOUCHER. Thank you, Mr. Chairman.

Mr. Wood and other members of the Commission, you probably

heard Mr. Blake earlier testify that, in the opinion of the administration, you already have sufficient authorities to do what you

should properly be doing with regard to regional transmission organizations. And when asked the direct question, should we legislate

additional authorities for you, his answer was no. Now, I think you

may have a different view, and I would like to give you this opportunity, if you choose to do so, to differ with Mr. Blake and explain

what additional authorities you would like to have conferred upon

you by statute to legislate or to act with regard to RTOs, either

from the standpoint of addressing the structure of RTOs or from

the standpoint of requiring that investor-owned utilities become

members of RTOs. So here is your opportunity to make your case

for why you should have additional authorities.

76

Mr. Wood, would you like to begin?

Mr. WOOD. Thank you, Mr. Boucher.

My core answer is I think it is clear, but some other folks may

have some smudges on their eyeglasses, so why don’t you get some

Kleenex and let’s wipe it off of theirs as well. Because that is going

to take us 5 years to have a court do that. And, for me, that—Mr.

Blake didn’t come at it from that and the—but as one who has got

the Supreme Court looking at an order passed 5 years ago by our

Commission just now, this week, that tens of billions of dollars that

are going to be out of customers’ pockets if we let the legal process

work its way through what some claim is dubious authority or

questionable authority—and so I would, on that basis, do it.

I think we should and will move forward regardless, because I

think you all or your predecessors gave us that authority in 1992.

It actually has been in the act since 1935 with section 206. But,

in any event, I think you would be doing a good job for the folks

of the United States to expedite this transition.

Mr. BOUCHER. Would you like to have the clear statutory authority to be able to order that IOUs join RTOs?

Mr. WOOD. Yes, sir. And perhaps even more than that.

Mr. BOUCHER. What more than that?

Mr. WOOD. Well, if you want to go beyond the public utility in

the act and say we are not going to regulate everything else about

public power but we are going to want you guys to put, if you have

transmission—and not too many of them do, but the ones that do,

including the Federal agencies that are regulated directly by Congress—that their transmission be part and parcel of these broad organizations so that it is a seamless national highway for electricity.

Mr. BOUCHER. Okay. I have some other questions. Let me just

ask if there are members who disagree with anything that Commissioner Wood said. Everyone is in agreement.

Let me turn to the question of order 888 and the set of issues

relating to your authority over transmission that are addressed in

order 888. These are the matters that are now pending before the

Supreme Court with arguments, I think, next week and a decision

in the not-too-distant future to be anticipated.

When we asked Mr. Blake if he thought that we should legislate—what authorities we believe you should have over transmission, his answer was that we should go forward and not wait

for the Supreme Court. My first question to you is, do you agree

with that opinion? And if we have a particular point of view with

regard to what your authority should be, should we announce that

in statutory form?

The second question that I have for you is, what should we do

in this area, assuming that we legislate? Order 888 basically says

that FERC has authority over the transmission component of

unbundled transactions in States where the State is open to retail

competition. You got sued upon that order from some parties saying that you went too far, from other parties saying that you

should have done more and that you should have extended your

order and in fact were required in their opinion to extend it not

just to that set of circumstances but also to those instances where

in closed States you have bundled transactions.

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My question to you is this: No. 1, as I indicated, should we legislate on this now, or should we wait and see what the court resolves? And assuming that you think we should legislate now, what

should we do?

The draft that was reported from this subcommittee last year essentially confirmed your authority as announced in order 888, and

it drew the line at that. It didn’t go any further. Do you think we

should go further? Should we give you the authority to assert jurisdiction in closed States with respect to unbundled transactions?

Mr. WOOD. Yes, sir. Order 2000, really, which is the RTO order,

really, even though it is voluntary for people to participate, it really

is broader and subsumed; and 888 is subsumed in that as a practical matter. The RTO has elevated transmission to a regional

multistate—i.e., interstate—commerce commodity now. All transmission, it is not separate but equal, but it is one type of transmission, so it is kind of an either/or. I mean, clearly ratifying 888

or going further and saying 888 should apply more broadly and not

create two classes of transmission customer but treat everybody the

same as a transmission customer, then order 2000, the prior question you asked, were the committee to move on the direction of

2000 as we discussed just in the last question, I think it would subsume the questions you raise in 888.

Mr. BOUCHER. Let me ask you a direct question. Would you like

to have the statutory authority to assert jurisdiction over transmission in States that are at the present time not open to retail

competition and, with respect to those transactions, where transmission is bundled with the sale of the electricity itself?

Mr. WOOD. The transmission is an interstate product. It should

be handled at one forum. Otherwise, investment won’t happen. I

think we have all heard that. Even Mr. Blake talked a little bit

about that. So, yes, to answer your question.

Mr. BOUCHER. Mr. Massey, would you like to comment?

Mr. MASSEY. Mr. Boucher, I was on the Commission when we

voted for order 888; and, frankly, that was a political compromise.

There were very strong arguments that we had not only the authority but the obligation to go further and assert jurisdiction over

all transmission, whether bundled or unbundled. That doesn’t

mean we are determining whether a particular State moves to retail choice. That is a separate issue that would stay with the State.

But the question is whether the transmission that underlies all

transactions ought to be subject to the same terms and conditions,

and I think it should.

The interstate highway system analogy is not perfect. But let’s

assume you are traveling on the Beltway from Virginia into Maryland, and all of a sudden there is a sign over the Beltway that

says, ‘‘all cars not licensed in the State of Maryland exit immediately. Congestion ahead. Beltway reserved for Marylanders.’’ We

would not stand for that. And yet that is possible now on the transmission grid.

Some States believe that they can reserve the transmission grid

for bundled transactions and give them a higher priority. And I believe that all transmission ought to be subject to the same set of

rules. So I would encourage Congress to act. If I knew which way

the Supreme Court would come out, I might state a different anVerDate 11-MAY-2000 10:19 Apr 09, 2002 Jkt 010199 PO 00000 Frm 00081 Fmt 6633 Sfmt 6602 E:\HEARINGS\75757 pfrm04 PsN: 75757
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swer, but I would encourage Congress to act and to provide that

we must exercise jurisdiction over all transmission.

Mr. BOUCHER. Yes. Ms. Breathitt, please. Thank you, Mr.

Massey. Ms. Breathitt.

Ms. BREATHITT. I think the Supreme Court is going to rule, as

you said, fairly quickly. And you also mention that you may only

be in session a few more weeks, if you adjourn in the October timeframe.

Mr. BOUCHER. I wouldn’t count on that.

Ms. BREATHITT. Well, I would see no harm in—you know, I think

it is going to be difficult getting energy legislation through in a

short timeframe. I don’t see any harm in waiting for the Court.

On the issue of bundled sales over interstate transmission, I

think I have testified as long as a year ago that I am in favor of

full authority over interstate transmission. I think there is a way

to make sure that native load is handled through firm transmission

contracts and, quite frankly, utilities making sure that they have

access to the right amount of generation, whether they own it still

in vertically integrated utilities, or whether they contract for it. So

I think there is a way to take care of native load.

Mr. BOUCHER. Okay. Ms. Brownell.

Ms. BROWNELL. I would certainly like to add I certainly agree

with my colleagues. And I think that if you address this issue—and

I would not wait for the Supreme Court—respectfully to the Supreme Court. I think we have to move forward. But I think that

clarity on this issue might resolve some of the jurisdictional warfare that seems to be, I think, confusing the debate and might

move us forward on some other issues.

I don’t think you can have multiple masters. I think that authority has to be clear. There are other issues that require new regional

compacts and regional structures that we do need to work out with

the States, but I think it would help out everyone if you moved

swiftly and clearly.

Mr. BOUCHER. Thank you very much.

I want to thank each of you for those cogent answers, and we

will certainly consider your advice.

Thank you, Mr. Chairman.

Mr. BARTON. Before we yield to Mr. Shimkus, I just—editorially,

you know, the Constitution gives the Congress, I think, supremacy

over the Supreme Court when we choose to do that. And I am often

un persuaded by the sagacity of the Supreme Court’s arguments,

so I am willing to tread on that ground if we have time to tread.

The gentleman from Illinois is recognized for 5 minutes.

Mr. SHIMKUS. Thank you, Mr. Chairman.

I do appreciate the commissioners’ presence, and I think we have

had a good discussion. It has helped focus back on some of the

work that we have to do.

Mr. Massey, Commissioner Massey, you mentioned in your testimony—and I am going to use this to lead into some other questions. I am from Illinois, so I have a lot of commodity products. I

have corn, soybeans and the like. And in your testimony you mentioned that, you know, electricity is one of the few commodity products that you use the product and then you find out how much you

are charged. Can we ever change that? Is there a way to know

79

what we are purchasing and have four contracts like we do in corn

and soybeans? I know the big consumers may get an opportunity

to do that. But will we as individual consumers have an opportunity to do that?

Mr. MASSEY. Someday, yes. I think the technology is emerging to

do that. Clearly, the large consumers can do that now. I think the

key is for a significant number of consumers, perhaps the larger

ones, to be able to see the price in real time and respond accordingly.

Frankly, I think that if we get markets designed appropriately,

there will be wholesale aggregators of demand reduction that will

aggregate demand reduction offers and bid megawatts into the

market. I believe a megawatt of energy not produced is just as valuable as a megawatt.

Mr. SHIMKUS. Yes, we had some of those megawatt debates a few

short months ago.

I want to go back again, Commissioner Massey, on your analogy

of the interstate highway system. But isn’t the debate that the

chairman had mentioned earlier, isn’t it more like the PJM pool

where it is just like across State lines—highly charged transmission grid out there and it is already across the State lines? And

we are drawing out of that. We are—the consumers are drawing

out of that pool of electrons that are floating around in the transmission grid. How do we deal with the debate if my friends in the

co-ops and munis that they are not part of that interstate grid of

highly charged particles that are across State lines?

We can go to everyone. We will give you a chance to answer that.

Mr. MASSEY. Well, I think they are part of it—at least, in terms

of physical flows. They aren’t legally, because they are not subject

directly to the same set of open-access rules as the investor-owned

utilities are. Roughly a third of the grid is not subject to those

rules. So there is a patchwork that makes it much more difficult

to get the market rules right.

I would encourage Congress to resolve that problem, because certainly they are a part of the physical flows right now. We just don’t

have direct authority to require their transmission assets to comply

with the same set of rules that the assets of the investor-owned

comply with.

Mr. SHIMKUS. Anyone else want to add? I know it hasn’t been addressed. We have all kind of dodged that issue. But it is not an

issue that we as individual members will be dodging once we talk

to our friends from these—our communities.

Ms. BROWNELL. Well, I don’t think any of us want to dodge it.

I have spent a lot of time in Pennsylvania and since I have been

here talking to the co-ops, and they have very specific concerns.

But I think if some of those concerns could be addressed vis-a-vis

protections for them that I think they would be willing to work

with us because I think they do understand that we can’t have this

patchwork and they are part of the whole.

In Pennsylvania in our experience we did not regulate the co-ops;

and we certainly did not order them, for example, to retail competition. But we worked so closely with them that in the end they

wanted to follow the rules that we set up for the market and did

and joined us, and we worked with them to make sure that it

80

worked and to make sure that their consumers were afforded the

same protections that others were.

So I think this is something that we can, by listening and being

very specific about what their needs are, I think we can address

them in other ways. Because it is important that everyone be part

of the whole in order for this national grid to work.

Mr. SHIMKUS. Let me jump in and we can continue with this

same answer, but I want to—two things just popped into my mind.

Also with the exclusion of co-ops and munis is the inability to

incentivize or to penalize. And incentivize the aspect of, if we are

going to have an expansion of the grid, how do we develop a system

by which there is a return on investment to the IOUs or the RTO

to expand the grid? Where is the capital to do that to begin with?

So I mean I think that is part of the other debate on this national network, penalize and incentivize, and if we can continue

down or whoever wants to jump in—my time has expired so after

this, Mr. Chairman, I will just yield back my time after the answers.

Mr. BARTON. We let both the chairman and the ranking member

take a little extra time, so if you want a little extra time you can,

and we will give Mr. Wynn extra time, too.

Mr. SHIMKUS. Then I will just finish up by seeing if anybody

wants to respond to those questions.

Mr. WOOD. I think that the current state of play for RTOs is

pretty attractive to parties that are smaller, even smaller IOUs

that are required to do it. Co-ops and munis are advantaged by a

large and vibrant wholesale market. A lot of them don’t generate

100 percent of the power that their customers need, so they have

to go out on the market and buy it. So if there is a robust electric

highway out there to drive on to go get power and bring it back

home, that is good for the customers of the co-op and the muni.

So my experience not only in Texas but to date here in the Commission has been that the transmission-dependent utilities, again,

a large number of which are public power entities, like RTOs and

support them and see the advantages of wholesale markets working right for their own customers. So I think the incentives are

there. When you have got good juicy carrots, you don’t need so

many sticks; and I think the carrots are really juicy for this particular segment of the industry.

The ones that it is not so juicy for are large, that are self-reliant

on their own generation, so they don’t need power from the outside.

They don’t need to use the grid of everybody else to get power. So

they are a harder group to work with. But there are other virtues

that they see to RTOs that bring them to the party.

So it might be better to ask them directly, but I personally have

not seen that that segment and that hole in-the-grid regulation authority of the FERC is that big a deal. So while it might make good

legal sense as a practical matter, getting these things set up to deliver the benefits that we know in fact are in the business of trying

to quantify so people really do understand that RTOs are good. But

that is a job we have to do.

We have to make it evident to you and all and to the public that

these are better than the world we are leaving behind, not just for

the competition issues but for the reliability and security issues we

81

were talking about today. They deliver good benefits to customers.

I think that case is what we will be making over the months to

come at the FERC to you and to the public, because the public

needs to be confident about this. You all need to be confident about

this. But the co-ops are one part of the public that I hope and believe will see the advantages if they haven’t already.

Ms. BREATHITT. Congressman, one quick comment. As municipals

and cooperatives compete for transmission rights with everybody

else, if their former provider is no longer able to do that, they are

telling me that they need to be able to get firm transmission rights

in order to serve their load and in that—they see that as a problem.

Mr. SHIMKUS. Thank you, Mr. Chairman. I yield back my time.

Mr. BARTON. We will put the new chairman down as a big juicy

carrot guy, as opposed to a big stick guy.

Mr. WOOD. Oh, I know a few sticks as well.

Mr. BARTON. Oh, okay.

The gentleman from Maryland, Mr. Wynn, is recognized for 5

minutes.

Mr. WYNN. Thank you, Mr. Chairman.

Mr. Wood, let me—excuse me, Commissioner Wood, I would like

to apologize if I missed your testimony earlier on this subject. But

could you explain to me exactly what is the basis for your contention that FERC has authority to mandate RTOs? It is stated in

your testimony somewhat as a conclusion, but I would like a reference as to exactly what the authority is.

Mr. WOOD. Yes, sir. It would be section 206 of the Federal Power

Act.

Mr. WYNN. 1935?

Mr. WOOD. Yes, sir.

Mr. WYNN. And would you kind of——

Mr. WOOD. Summarize? The Commission, on its own motion, if

it observes that any rule, regulation or practice of a public utility

is unjust, unreasonable, unduly discriminatory, it is really the discriminatory or preferential, we shall establish that after the hearing and order and do so——

Mr. WYNN. Okay. So you had——

Mr. WOOD. [continuing] which we have not proposed to do at this

time.

Mr. WYNN. Okay. Well, that was my next question. If the contention is it is somehow discriminatory conduct in the northeastern region, was there ever a hearing on this?

Mr. WOOD. We have not—as I mentioned, we have not had a

hearing, and we have not mandated that all the utilities up there

form an RTO. They have come before, they have joined with strong

encouragement from the Commission in an RTO voluntarily, and

were asked to mediate, joining their own organizations together so

that we can have a more regional approach to that. But, so far, we

have not done a section 206 hearing.

Mr. WYNN. But, actually, you ordered mediation, literally forcing

them into this, or the litigation which I believe is pursued.

Mr. WOOD. Well, I would just say procedurally ordering someone

into mediation does not come into the conclusion that we are going

to 206 hearing. We have got a report back from the mediator just

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about 2 days ago which I have not reviewed at this point. So we

will see at that point if we need to go forward in a different manner. But——

Mr. WYNN. In the absence of a full-blown hearing, evidentiary

hearing, what is the basis for concluding that or justifying this mediation order?

Mr. WOOD. As you pointed out in your question I believe earlier,

sir, or opening statement and as I responded to Mr. Barton a moment ago, the seams issues, which was the word for the Tower of

Babel. We have got PJM, for example, of which I believe Maryland

is a part——

Mr. WYNN. Yes, that is correct.

Mr. WOOD. [continuing] is right next door to the New York independent system operator, which is one the three power grids that

we were saying talk to each other and see what you can do to get

to one.

On a given day in the summer, because the rules are different

between the two power grids, some are more—the New York grid

is a little more positive for generators on one side and negative for

generators, depending on the state of play, people would take their

power out of the PJM grid to sell into New York, rather than just

treat it as a seamless grid because the rules are different there,

being arbitraged. And that is clearly not in the public interest. So

what do we do about it?

Mr. WYNN. Now you said—I understand you are kind of speaking

broadly. But where are those examples or anecdotes cited?

Mr. WOOD. We have had orders before the Commission just in

my short term here, sir. We have had several instances where—

just dealing with the border between New York and PJM. In fact,

there is one I was reading as recently as last night. There are tons

of what I call border issues there, and those are what we call

seams.

Mr. WYNN. Could you forward those?

Mr. WOOD. Yes, sir, I would be glad to.

Mr. WYNN. The other issue is, you suggest that—you imply that

probably you don’t have the authority, because you ask Congress

to clarify the authority. That is on page 4 of your testimony, acknowledging that there is literally 4 years worth of litigation pending and in order to avert this Congress ought to make clear, which

implies that it is not clear that you have this authority.

Mr. WOOD. It is clear to me. It is not clear to some parties. And

all it takes is one person to sue us to tie this up in court. And, yes,

sir, in that regard I probably should have been clearer in my testimony. But at the bottom of page 3 I do say that although we have

decided to go forward voluntarily on a volunteer basis we can go

further and require them. And then at this point I point out that

some parties may not agree with that.

Mr. WYNN. Okay. So you think there may be room for clarification.

Just one quick question. It is my understanding that PJM has

significant reserves, about 19 percent, and in New York it is substantially lower. Is that correct?

Mr. WOOD. I believe that is—I am not sure about the numbers,

but I know that PJM is in better shape than is New York. New

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England I think is in better shape than New York. So the two

bookends are in better shape than the book.

Mr. WYNN. So the bookends would be disadvantaged, theoretically at least, through the merger merging with a less successful

or a less well-managed center section. Isn’t that true?

Mr. WOOD. Well, disadvantaged, I guess.

Mr. WYNN. Our reserves would be less if we merge with an independent that is operated——

Mr. WOOD. One that is lower, that is true. But I think——

Mr. WYNN. That would jeopardize the citizens of Maryland who

really have done no wrong in this case.

Mr. WOOD. Well, I don’t agree. I mean, I think that economic sale

there that is now available to somebody that is a tax-paying citizen

of Maryland can now sell power more easily to New York and bring

revenue back to the State. So I think the reserve margin may go

down but then that may also result in more investment in power

plants in the region generally.

Mr. WYNN. Well, a lower reserve margin doesn’t seem to me to

be a good thing. It certainly has not been a good thing in California

and has led to forcing people to spot markets and other things, generally resulting in higher price to the consumer, which is why I am

kind of pursuing this because I don’t see this as advantageous to

Maryland. It may be advantageous to New York. Obviously, there

is a difference of opinion here.

I think my time is up, and I won’t belabor the point. Thank you,

sir. I relinquish what little time I have.

Mr. BARTON. Everybody else has taken another time. If you want

to ask another question or two, you have got that opportunity.

Mr. WYNN. Well, thank you, Mr. Chairman. I appreciate that. I

think I have really covered this ground. Thank you, Commissioner.

Mr. BARTON. The Chair would recognize himself for the second

5-minute round.

I want to in a similar vein kind of piggyback on Congressman

Wynn. In our bill that passed the subcommittee in the last Congress, we took the NERC reliability proposal and put it in the statutory language in the bill. The bill never became law. We are going

to release a draft in the very near future, and at the request of the

administration, or at least some people working with the administration, we are not being quite as prescriptive. We are basically

giving the FERC the authority to come up with some reliability

standards subject to certain terms and conditions, but we are not

taking verbatim the NERC proposal that we had in the bill last

time.

Without having that opportunity to see the draft, does the Commission think that we should continue to be prescriptive like in

2944? Or do you think it might be more appropriate in light of

what has happened in the last 2 years to give the FERC a little

more flexibility on reliability issues? And that is a pretty hypothetical question.

Mr. WOOD. Well, it is pretty easy to answer.

On the top of page 12 of my testimony I mention that a corresponding issue was dealt with by then Governor Bush and the

Texas legislation with one sentence. So I think it is substantially

shorter than the draft that I have seen or the bill that was passed

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before. You can make it pretty clear that Congress wants the Commission or its designee to enforce reliability standards and have

the authority, as I believe the bill talked about, have the authority

over a lot of other things other than the ones we have now, have

authority to either penalize or yank certificates of people who

aren’t playing by the rules.

And this is a governmental function. I think that there is no way

around that, that the enforcement or police side of what we do

probably should not be delegated to a private or quasi public organization.

Mr. BARTON. Any of the other commissioners wish to comment on

that?

Ms. BROWNELL. I absolutely agree with Pat. I would also point

out, and I think you were getting there, is that we are in a different place now than we were 2 years ago. I think the vision of

perhaps responsibilities of the RTOs has changed. We have learned

a great deal about market structure and what kinds of responsibilities are required to make it work. And I think that, while it might

have been appropriate 2 years ago, it is no longer appropriate. In

fact, I am advised that a number of the members of the coalition

that endorsed that have, in light of changes, actually changed their

mind.

I also think it is very important to remember the distinction between what a governmental authority and what we do delegate to

what I sometimes call the fourth branch of government, which is

in my mind is not a great public policy.

Mr. MASSEY. Mr. Chairman, my view is the answer is probably

somewhere in between one sentence and 56 pages or whatever it

is. I know that there is some concern that Congress needs to grant

through legislation a measure of antitrust protection if a bunch of

utility representatives are going to get together and come up with

reliability standards that are mandatory because they will have a

commercial impact. So I know that concern exists; and a one-sentence provision might not solve that problem. There may be other

nits and gnats that need to be worked out. So my answer is somewhat different than my colleagues.

Mr. BARTON. Okay. We spent most of the spring trying to put together a bill to help California help itself, which was an almost impossible task as it turned out. But we did move a bill through subcommittee. We didn’t move it through full committee. As it turned

out, God helped California because the weather was pretty mild.

But apparently the FERC commission also helped California, so I

am going to give you all an opportunity to pat yourselves on the

back, if you wish to.

What did y’all do at the Commission—and, of course, part of the

time Commissioner He ́bert was chairman and we didn’t have Mr.

Wood and Mrs. Brownell. That calmed things down out there. Because apparently they are not out of the woods yet, but they are

at least moving in the right direction. So give y’all a chance to comment on what has happened in California that you feel like the

FERC can take credit for doing a good job.

Ms. BREATHITT. I think a major factor was eliminating the tariff

that forced 100 percent of the entire load of California to be bought

and sold in the spot market. I think that has not gotten as much

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notice as it deserves, but eliminating, just eliminating the tariff

that allowed that, which forced sales to be bought and sold with

a more fixed price was a huge factor. And of course, later, price

mitigation plans I think were a huge factor. The ability to monitor

outages, the mandatory sell arrangement for any megawatts that

weren’t already committed into long-term contracts was very important. So there were a number of things that the Commission did

that have not gotten the recognition and notice that they deserved.

Mr. BARTON. Well, you do a good job. You are seldom recognized.

Ms. BREATHITT. Over 60 orders.

Mr. BARTON. When you do a bad job you are always recognized.

That is just one of the rules in Washington. The fact that we

haven’t seen you folks in the headlines means you are doing a pretty good job.

Ms. BREATHITT. And I agree it was a factor of weather and conservation. But certainly those 60 orders which fed on each other

over a number of—7 months certainly had an impact.

Mr. BARTON. Okay. Mr. Massey, you were a big player in that.

Do you want to comment?

Mr. MASSEY. I think Commissioner Breathitt has summarized it

very well, Mr. Chairman.

Mr. BARTON. Okay. The gentleman from Virginia is recognized

for 5 minutes.

Mr. BOUCHER. Thank you, Mr. Chairman.

One of the more far-reaching recommendations that the administration made in its energy strategy submitted to us earlier this

year is that your Commission be given the same kind of authority

to site electricity transmission lines that you currently have with

regard to the siting of natural gas transmission lines. That at the

end of the process, if there are delays in the States of exercising

their authority to site the transmission lines, that you would be

able to implement an eminent domain authority and make the final

decision and be sure that the line be sited.

I will confess to a certain amount of reservation about this recommendation. I would like for those of you who support this recommendation to tell me why you do and why it is necessary. And

if there are those among you who oppose the recommendation or

have some equivocal view with regard to it I would like to hear

from you, also.

To the extent that you support this recommendation, I would

very much like to have some real examples of problems that have

arisen and the siting of transmission lines under existing State authorities that would merit this rather dramatic shift of authority

in this sensitive matter to your Commission. These recommendations are proposed at the State level. The environmental community is very concerned about this. There is a quantitative difference

between siting electricity transmission lines and natural gas transmission lines when it comes to the effect that these lines have on

the environment. So it is truly a major proposal, one I think we

have to consider carefully; and I would like to have your views and

particularly examples of why this may be necessary.

Mr. Wood.

Mr. WOOD. Mr. Boucher, I would acknowledge that this proposal

certainly makes the transmission, 888, States rights and Federal

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rights issues kind of minor by comparison. The human side of me

said that is why I left the last job, was to get away from that. It

was the worst part of being a State regulator, and I am amazed

that States continue to fight for it.

But as far as, you know, the bigger picture, it is a turf issue.

That is understandable. The citizens generally want to be heard by

somebody that is closest to them, so that involves local and State

people.

So I think certainly from the discussions that I have either been

part of or heard about within the administration and then the

Commission that this is something to approach pretty delicately

and actually probably pretty restrictedly for a small universe of

lines that really are a national significant impediment to competition type of lines. There are a number of different ways to go from

a ‘‘we site everything from the transmission like a hundred feet

through your backyard’’ to ‘‘we do absolutely nothing whatsoever.’’

In between there a lot of places to rest, and I could spend all day

giving you different places to do that.

I would be more than happy, if the committee is interested, to

gin up some examples of proper ways to land on that issue to try

to balance the national needs and the local needs.

As to examples, I have asked the same question myself because

I have walked in the shoes of the people that are being complained

about, not being able to make decisions, and the list is relatively

short. The list that I have seen, actually all ended up getting resolved, one of them after 13 years, I should say, and I believe involves your own home State.

Mr. BOUCHER. That one is not quite resolved yet. It is on its way

to being resolved. And it hasn’t been quite 13 years. Maybe 11.

Mr. WOOD. All right. I knew it was a double digit.

Mr. BOUCHER. It has been a while.

Mr. WOOD. It has. That is 1 of 7, Mr. Boucher, that I have seen

on the list from the industry when I have asked for it.

Mr. BOUCHER. Is that the worst example, by the way?

Mr. WOOD. It depends what your definition of worst is. Length

of time, that is probably it.

Again, the question sometimes is what never got filed in the first

place because they knew there would be no way. To which my response is, well, if you knew there would be no way, then there is

probably a reason why it shouldn’t be built.

But the world has changed just in the last 10 years. The need

for a national highway, if you had told somebody in the mid-1940’s

about the interstate highway system, they would have said, well,

we don’t need that so why on the earth does the Federal Government get involved? But we have moved now to an interstate highway system, whether we know it or not; and I think that and that

alone is really what is invoking the need to talk about this issue.

Mr. BOUCHER. If you have a list——

Mr. WOOD. I will get that for you.

Mr. BOUCHER. [continuing] that cites these examples, I really

would like to see that.

Mr. WOOD. It was instructive. But in the litany of things that

are, you know, must have today, I would not put that on the list.

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I would—you are asking me as Uncle Santa Claus what do I want

or what do we need for the good of the public——

Mr. BOUCHER. Well, I have had two reassuring answers here

coming in both ears, and I thank you.

Mr. WOOD. With the same twang.

Mr. BOUCHER. Let me offer other commissioners an opportunity

to comment on this.

Ms. BROWNELL. I agree with Pat. It is a tough issue. I have done

stranded costs, and I don’t necessarily want to do siting. But I do

think it is an issue that we need to understand.

It was interesting to be with the Western Governors Association

this summer and watch them grapple with this issue, and it was

pretty clear to me that they recognized that it is not just a State

issue, that it is a regional issue. Ideally, I think we need to look

at some new regional structures, perhaps to make these decisions

and make recommendations, and perhaps it is regional Governors

who have an overriding look at economic development issues.

But I think you have to consider very strongly that the reason

you don’t have lots of examples is because many State commissions

have sent very clear messages just not to come calling. In Pennsylvania, the last time we had a transmission siting application, and

I wasn’t there, but I am told that we had 900,000 comments in a

State of 12 million people. That is a lot of attention and very difficult to deal with the political pressures and really look at the

larger picture.

So somehow we have to get into the next generation of this answer, and we have to be able to answer the question of the environmental impact.

But, once again, with real markets, there are also the introduction of new technologies that might address some of these issues,

but we will never see them unless we get moving on the larger picture.

Mr. BOUCHER. What kind of new technologies? I am curious.

Ms. BROWNELL. I think that there are some potential out there

to enhance existing transmission that may address some of the constraint issues.

And, by the way, I forgot to mention that DOE is doing a study.

We are taking a look at transmission constraints where they are

and getting a better handle of what the cost is, and we might be

doing a cost-benefit analysis longer term to say the price of building this transmission is X and the mitigation is Y, but the cost of

not doing anything is thus. The Governor of Nevada feels quite

strongly about that kind of look, and he is feeling that impact.

So I think we are making progress. I wouldn’t necessarily act tomorrow, but we should not take this off the table and wait for a

long period of time to address the issue.

Mr. BOUCHER. Okay. Mr. Massey.

Mr. MASSEY. Mr. Boucher, if I could just put the issue in context.

If there is congestion on the system that needs to be resolved in

some way, there are three ways to do it.

Way No. 1 is a demand reduction, which we all need to be working on. You can free up transmission facilities by reducing demand,

which is the environmentalists’ favored approach, of course, and it

is a good approach.

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No. 2 is to site a generator which can change the flows and eliminate the congestion. So transmission investment is not always the

answer, but sometimes it is. And when it is, it is not always laying

a wire. There is a new technology, the F.A.C.T.S. technology, called

a thyrister which is, as I understand, a computer chip that allows

the lines to be loaded with much more confidence. So a line now

that is loaded in a way that doesn’t use all of its capacity could be

loaded much more up to capacity because of confidence that this

computer chip can control the flows.

But when a wire is necessary, the problem is FERC can determine that certain facilities are necessary for interstate markets to

work well, but we cannot ensure that those facilities are built. Now

there is something about that that doesn’t make sense. You can

have facilities that had to be built in a certain State, and yet the

argument that the facilities would benefit that State may be a

weak argument. But everyone knows the facility would benefit the

broad regional market as a whole and benefit other States. So it

is very, very hard for that particular State to site those facilities.

This is a problem that has to be solved if markets are going to

work. Perhaps Federal backstop authority would work. We don’t

have to do all the environmental work. Perhaps working with the

States to solve this problem. But I am convinced that it is a very

serious problem that has to be solved.

Mr. BOUCHER. Well, those are helpful answers.

Ms. BREATHITT. Very quickly. When we came before you 2 or 3

times in the last 6 months, we all learned that California had not

built power plants for 10 years. I think the evidence that you are

asking for is pretty clear to me. Transmission infrastructure is not

being built. I don’t want to see the same wake-up call that we all

faced with respect to California with getting more and more of

what we call transmission loading relief calls throughout the country. So it is not being built. That is pretty good evidence.

Mr. BOUCHER. But in all fairness now, aren’t there a number of

reasons that we are not having an adequate investment in transmission infrastructure, which are rate of return issues to the utility

itself? Has nothing to do with siting concerns?

Ms. BREATHITT. It is applications that just aren’t being put forth

to siting boards, but the return issue and the uncertainty of whether or not there is going to be adequate return on this investment.

Mr. BOUCHER. Well, thank you. Those are helpful answers and

let me just take the opportunity to express our appreciation for

your spending as much time as you have with us today.

Mr. BARTON. This will be a final question and I will let you all

go, I promise. We are probably going to be asked by the administration in the next week to really work to get the energy package

that is already out of the House, if something similar gets out of

the Senate, to go to conference and move that before we adjourn,

if we adjourn, in mid October.

I thought we would be in session until mid November or maybe

even early December, so I could go through the normal process on

the electricity and then put out a draft and then change it then

maybe put out a second draft and then change it and then go to

markup, subcommittee, full committee and have it ready to go to

the floor. That may not be possible if—so, you all deal with these

89

electricity issues everyday. If the President wanted to push the

Congress on an energy package on his desk by mid October and if

the President decides that electricity should be a component of

that, do you feel like that the issues that are still not a consensus

are close enough to consensus that if we work together, administration and legislatively and bipartisanly, that we can forge a consensus in the next 3 weeks? Is that possible? That is a real question. That is not rhetorical. I want to hear what you all think about

it.

Mr. WOOD. Well, we haven’t met as a body since I have taken

over as Chair, but I hope we would provide some incentives in the

near future so that the settlement would happen down here. So the

ground is fertile for people to come together with at least knowledge of what the alternative would be. So we will do our best on

the fronts that are in our pocket to provide some clarity as soon

as we can. Now 3 weeks is pretty tight. I think to be straight up,

the bill you all passed before the last break, the tax provisions in

that for both public power and IOUs participating in RTOs, if enacted, will make anything we need to do on RTOs a moot point. I

think we will have instant migration to RTOs and a very fast forwarding of that agenda.

Mr. BARTON. You are saying that we are closer to consensus than

some of the parties are telling us now?

Mr. WOOD. Carrots, even if they are sticks painted orange, they

tend to work a whole lot better than just thou shalts.

Mr. BARTON. I like them to be maroon, but that is a personal

preference.

Mr. WOOD. Maroon is good. The steps you took that facilitated

that decision certainly came out of the House on a pretty strong

vote. I would say that is an important provision. And I know that

the fiscal tag on that was not in the scope we are talking about

around this town the last couple of weeks. So I—that is just one

observation of what may be one of the most prickly issues from our

earlier discussions, Chairman Barton, is the RTO issue. The siting

issue has a life of its own, and certainly maybe if the tax provisions

handle the RTO issue, then we do talk about siting.

Mr. BARTON. The other commissioners?

Mr. WOOD. PURPA and PUHCA, and that requires a statutory

change.

Mr. BARTON. We can do statutory changes. That is what we are

all about.

Ms. BREATHITT. Public power being scrambling for generation resources and transmission resources is huge. There needs to be, I

think, more discussion of how to get over those hurdles and also

State commissions need to be, I think, very much involved in how

we move forward with RTOs and the eminent domain question on

transmission siting.

Mr. BARTON. Ms. Brownell.

Ms. BROWNELL. I think if we can get done in the next couple of

weeks, what we intend to do at the FERC, and you and the administration send a strong message that you are determined to get this

done, and that it is critically important to get this done, I think we

will achieve some kind of consensus. But understanding that you

are dealing with as you know better than I, very big competing

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agendas. So perfect consensus? It is not a perfect world. I don’t

think we will ever get it. But I think we can get enough there and

provide the carrots—I am more of a stick person myself—to make

it happen. So would it be tough? Yes. Can we do it? Absolutely.

Mr. MASSEY. Mr. Chairman, I wouldn’t minimize the task that

you have before you, but I would note that Mr. Blake seemed to

endorse the bulk of the Bingaman legislation. So if you use that as

a starting place, I think a lot of the disagreement goes away. And

if there is a common agreement that the goal is large vibrant, robust, wholesale power markets based upon the RTO platform, I

think a lot of the disagreement melts away.

Mr. BARTON. Well, I want to thank the Commission for taking

out of a very trying time to come over and testify before the subcommittee. It is my intention to work out some final details of the

proposed draft and let the minority look at that as quickly as possible tomorrow. And if that is done in a satisfactory way, it is a

possibility we could release the draft for public review late tomorrow, and if not, sometime early next week. So we are adjourned

and we do, again, thank the Commission for their attendance.

[Whereupon, at 5:15 p.m., the subcommittee was adjourned.]

[Additional materal submitted for the record follows:]

July 20, 2001

To: Members, Committee on Energy and Natural Resources

From: Jeff Bingaman, Chairman

Subject: White Paper on Electricity Legislation

SUMMARY

There are many lessons that can be drawn from the recent and continuing electricity crisis in California and the West. The clearest one is that the market institutions that have developed are not adequate to the task. If we are to relieve the current problems in that region and prevent their appearance in other regions it is essential that the structural defects in the market be cured.

The Federal Energy Regulatory Commission (FERC) and state regulators currently have some tools to relieve these problems. Many of the structural defects in

the market, however, are either beyond the jurisdiction of either FERC or state regulators, or are intractable for other reasons, both political and economic.

Congress has a clear duty to address this situation as part of comprehensive energy legislation. Our task must be to look at the economic foundations upon which

this industry is based, to review the market institutions that are developing, and

to assess the adequacy of the legal and regulatory institutions that are in place to

ensure that these markets function properly. Such an assessment must lead to a

legislative solution that will match the regulatory structure to the market institutions that they are intended to govern and give adequate authority to resolve market defects, without interfering unduly in those markets. This Committee has laid

the foundation for much of this work in previous Congresses. We must now move

forward with a legislative solution. To leave electricity legislation for another day

would be to ensure that the problems faced now in the West will be replicated

across the country.

The business of supplying electricity has changed. So must the regulatory and

legal framework within which it operates now change. Those changes must reflect

the realities of the market. In order to understand how laws regulating electricity

should be changed, it is necessary to understand why the system worked the way

that it did, and what has changed to make it necessary to change the laws governing that system.

This paper contains a short summary of the history of the industry and its legal

structure, a discussion of the developments that necessitate the change of that legal

structure, and an outline of the elements that I believe are essential to a legislative

solution for electricity that is in the broad national interest.

I plan to use this outline as a framework for my questions in our electricity hearings next week. I encourage you to provide me with your thoughts and suggestions

91

on this outline and any other elements of electricity legislation that you believe

should be treated in the comprehensive energy legislation we are about to mark up.

A BRIEF HISTORY

Electricity has been supplied in the U.S. by regulated monopolies for nearly a century. Vertically integrated utilities, with state-granted monopoly franchises, have

sold electricity that they generated, over wires that they own, to customers to whom

they have the exclusive right to sell. The legal structure for regulation of this industry has been based on this framework, both at the federal and the state levels.

The reason that the normal pattern of business—customer choice in a competitive

market—has not been followed in the electric industry is because with the technologies that have been available, a monopoly could sell power more cheaply and

efficiently than a multiplicity of competitors.

Samuel Insull, Thomas Edison’s personal secretary and founder of Commonwealth

Edison in Chicago, developed some basic understandings at the beginning of the last

century that set the mold for the sale of electricity. The multiplicity of suppliers in

Chicago meant duplication of facilities that raised costs. Many suppliers, with separate sets of distribution wires, and separate small generators could not take advantage of the economies of scale that would result from allowing a single seller to

serve the city. Insull convinced the city’s leaders to grant him a monopoly to sell

power. In return he would serve all customers and allow the city to set his rates,

as long as they assured him of a reasonable return on his investment.

Thus was born the regulatory compact that became the pattern for electric companies throughout the United States. States and cities granted monopoly franchises.

Utilities developed their own generation resources, built distribution systems and

sold electricity to their customers under these exclusive franchise rights. States developed public utility commissions to regulate rates.

In the 1920s, this system began to get out of control. Large holding companies

that owned many utilities developed. The regulatory systems developed to control

the electric monopolies were soon unable to function adequately. Since corporate

structures were so complicated, and holding companies operayed in many states,

local or state public utility commissions were unable to keep track of revenues,

which could be shifted from one company to another, or to a parent holding company

in another state.

To further complicate matters, it became clear that states did not have jurisdiction to control wholesale electricity transactions across state lines. The Supreme

Court, in a case involving the sales from a Rhode Island utility to Attleboro Steam

and Electric Company in Massachusetts, ruled that states could not regulate interstate sales of electricity.

Abuses in the electric industry were rampant. Assets were shifted from state to

state. Sales were unregulated. Stocks were peddled from door to door. A complex

and mostly unseen structure of financing was funding the whole tottering structure.

Retail customers, since they were captive customers of the franchise monopolies,

had no protection from these abuses.

When the Roosevelt administration came to power in 1933, among its first initiatives were responses to the abuses that had created the electricity debacle. In 1935,

legislation was signed into law that was aimed at these problems. The Public Utilities Act of 1935 had two titles, the Public Utility Holding Company Act (PUHCA)

and the Federal Power Act. The former was intended to deal with corporate structure abuses and the latter to regulate transactions in interstate commerce.

PUHCA broke up the industry into manageable chunks and focused it on its core

business—the provision of monopoly electricity service—by requiring utilities either

to operate primarily in a single state or to be regulated stringently at the federal

level by the Securities and Exchange Commission (SEC). Utilities were also forbidden to engage in businesses that were not directly related to their monopoly electric

service without explicit approval by the SEC. The sprawling empires of interconnected corporations owning electric utilities were broken up. Companies were required to choose between their other businesses and the electric industry.

The Federal Power Act gave the Federal Power Commission authority to regulate

transmission of electricity in interstate commerce, wholesale rates for electricity,

dispositions of utility assets—primarily mergers—and certification of hydro-electric

facilities. Government owned facilities were not subject to regulation. The Commission was explicitly denied jurisdiction over generation facilities and over distribution

in intrastate commerce.

With the passage of the Public Utilities Act, the framework for the sale of electricity was set. Regulated monopolies sold electricity to captive customers and were

protected from monopoly abuse by an overlapping framework of regulation at the

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state and federal levels. Rates for electricity, both at the state level for retail sales

and at the federal level for wholesale sales, were set by regulators and based on

the costs to the utilities to build, maintain and operate generation, distribution and

transmission facilities plus a reasonable return on investment. As technological developments furthered the economies of scale and scope on which this industry’s efficiency depended, electric rates fell. In fact, electric rates, in real dollar terms, declined from the turn of the century until the late 1960s.

In the late 1960s and early 1970s, however, things began to change. Utilities,

which had seen steady rapid growth of demand throughout the first half of the century, built for a continuation of that level of demand growth. Plants grew larger and

larger. It is certain that the oil crisis of the early seventies forced fuel prices up,

causing reductions in demand. Reduced demand left utilities with excess capacity.

Customers had to pay for that excess. For the first time in history, electricity prices

began to rise. Many public utility commissions would not allow utilities to recover

the cost of building excess capacity from their consumers.

At about this time, technological developments began to change the underlying economics of the utility monopoly structure. The economies of scale and scope that had

lead to the creation of utility monopolies began to change. Before this time large

central station coal plants were the most efficient way to produce electricity. Natural gas generators had been expensive and inefficient. Development of new combustion turbines that burned natural gas far more efficiently and at the same time

were far less expensive to build meant that small gas plants could compete with

large coal plants. Technologies of transmission meant that electricity could be

shipped for far greater distances than in the past. New switching technologies and

computerization of the control systems meant that regional transmission grids were

possible.

The first legislative response to these technological and economic changes was the

Public Utility Regulatory Policies Act of 1978 (PURPA). That law created the first

non-utility generators. In order to encourage alternative generation resources, such

as wind, solar, biomass and cogeneration, PURPA freed these types of generators

from the restrictions of PUHCA and required utilities to buy electricity from them

at rates equal to the cost avoided for the construction of new facilities, as determined by state regulators.

The result was a fairly gradual change in the way new resources were acquired.

From the middle of the 1980s through the middle of the 1990s, over half of the new

generation that came on line in the U.S. was from these non-utility generators. The

wholesale electricity business was no longer the exclusive province of utility monopolies.

In 1992, Congress, seeing the success of the non-monopoly generation sector,

changed the law to further allow development of a competitive wholesale electricity

industry. The Energy Policy Act of 1992 (EPACT) exempted generators who sold exclusively at wholesale from PUHCA. It also gave FERC (the successor organization

to the Federal Power Commission) the authority to require utilities to allow their

competitors to use their transmission lines to sell electricity. For the first time ever,

wholesale buyers of electricity could shop freely.

RECENT DEVELOPMENTS

Changes since the passage of EPACT have been rapid and dramatic. Today utilities no longer build generation for their sales to their retail customers, but buy

those supplies from the wholesale market. Some states have removed the restrictions that require retail monopolies, and allow their customers to pick their own

generation suppliers. Other states have begun the process that will lead to dependence on competitive retail markets. Supplies of electricity depend to a greater degree

than ever before on regional market institutions. Virtually all wholesale electric

rates are based on the market, and not on cost of service.

The FERC has implemented the changes in the law primarily through two major

rules, Order No. 888 and Order No. 2000. Both orders deal with the transmission

system and its uses for competitive sales of electricity. Order No. 888, issued in

1996, requires all jurisdictional owners of transmission to file tariffs stating the

rates, terms and conditions for use of their transmission systems by others buyers

and sellers. Those rates, terms and conditions must be comparable to those that the

utility gives to itself and its affiliates. This order also encourages the development

of independent system operators of the transmission system. Order No. 2000 extended this encouragement. This order required all jurisdictional utilities to file proposals to turn control of their transmission facilities over to independent regional

transmission organizations (RTOs) or to explain why they were not doing so by January of 2001.

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All utilities have complied, but not all proposals have been found to be acceptable

to the Commission. FERC has issued orders in many of the filings, either giving

conditional approval, or rejecting the filings as not meeting the characteristic and

functions of the Order.

The thrust of these orders comes from the Commission’s understanding that a

competitive market that will produce just and reasonable rates for electricity cannot

exist until the essential facilities for trade in electricity, i.e., the transmission system, is operated and controlled on a regional basis, and by entities who have no

vested interest in outcomes in the generation market and so have no incentive to

manipulate the use of the transmission system for the benefit of their generation

affiliates.

The transition to a competitive industry is well under way. However, not all has

been smooth. The last few years have seen severe price spikes in the Midwest and

South. There is a clear and pressing crisis in prices and supply in the West and

particularly in California. The North American Electric Reliability Council reports

that there may be problems with prices and supply in New York, New England and

the Central South. They also report that there are serious transmission constraints

that may threaten reliability and supply in the West and the Central South. The

institutions on which the country now relies for delivery of affordable, dependable

electricity service are showing the strain of adapting to the new market circumstances.

A LEGISLATIVE PROPOSAL FOR THE COMMITTEE ON ENERGY AND NATURAL RESOURCES

To meet the challenges of the new realities of electricity markets, Congress must

make some important legislative changes. A balanced and comprehensive, rather

than a piecemeal, solution is imperative. These changes that I believe are needed

can be grouped under five primary headings: 1. Transmission Jurisdiction; 2. Reliability; 3. Rates and Market Power; 4. Regional Planning and Siting; 5. Market

Transparency Rules. These provisions should be complemented by appropriate

changes to the tax code to allow a transition to a modern transmission grid.

1. Transmission Jurisdiction

Congress should clarify that FERC has jurisdiction over all transmission, whether

bundled or unbundled. Once jurisdiction has been clarified, the Commission can use

its existing legal authority determine which facilities are transmission in interstate

commerce and which are distribution facilities and thus state jurisdictional.

FERC jurisdiction should be extended to public, cooperative and federal utilities.

Such jurisdiction should not extend to setting transmission rates for these entities,

but should require that rates set by these transmitting utilities should be comparable to those that the public power utilities charge to themselves.

Legislation should affirm FERC’s authority to order utilities to join regional transmission organizations.

Interconnection rules should be clarified in order to ensure that new sources of

generation are able to interconnect to the transmission system.

2. Reliability

Legislation should authorize a system for assuring the reliability of the grid that

is mandatory, that requires sanctions and penalties for failure to comply with the

rules that institutions for that purpose develop, and that is subject to federal oversight.

3. Rates and Market Power

Legislation should require the FERC to promote competitive markets.

Legislation could require FERC to, where markets are depended on to set rates,

ensure that those markets are workably competitive. A slightly more prescriptive

formulation could authorize the Commission to allow market-based rates for transactions that are entered into freely by participants in a workably competitive market, or rates that result from market institutions such as power exchanges or other

bid mechanisms. Where such workably competitive markets do not exist, the Commission should take such actions as are otherwise consistent with its authority that

it deems necessary to foster competition.

All sellers into such markets should be clearly subject to market rules and market

mitigation measures ordered by the Commission. It should be made clear that normal transactions, not into market-based-rate setting institutions, by public power

entities should continue to be non-jurisdictional.

Legislation should also clarify that the Commission may take into account in assuring just and reasonable market-based rates the effect of demand response mechanisms on those rates.

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4. Regional Planning and Siting

A national transmission grid is a necessity, but cannot occur without a new approach to transmission planning, expansion, and siting. Federal eminent domain, by

itself, is not likely to lead to an effective approach to meeting this need. What is

needed is to use federal eminent domain as a backstop to a more cooperative, regionally based approach to transmission and siting issues.

Legislation should authorize regional regulatory compacts that are charged with

exercising jurisdiction over transmission planning, expansion and siting. In this context, it would be necessary to grant FERC siting authority, but allow it to cede such

authority to appropriately constituted regional entities.

A more extensive authority for regional entities would be to allow such bodies to

exercise all or some jurisdiction previously exercised by states, but that, by reason

of the regionality of markets, would be in danger of being preempted by the FERC.

Such other authorities might include jurisdiction over regional reserve requirements, maintenance requirements and market monitoring functions.

PUHCA protections should be replaced by giving FERC jurisdiction over mergers

of holding companies that own utilities and over acquisitions of generation assets.

5. Market Transparency Rules

Legislation must ensure transparent information on market transactions and

should grant clear authority to the Energy Information Administration and the

FERC to collect and publish appropriate data, while protecting proprietary information.

OTHER PROVISIONS

A balanced and comprehensive legislative solution should also:

• Repeal PUHCA, but only if FERC is given enhanced authority to address market

power problems, and both FERC and the states are given greater access to the

books and records of holding companies to prevent affiliate abuses.

• Repeal PURPA’s mandatory purchase requirements, but only if it is replaced with

provisions that remove disincentives for renewables or make their place in the

market less sure. Such provisions should include clarification of energy imbalance rules for intermittent generation; interconnection rules for distributed generation; interconnection rules for combined heat and power facilities; and standards to accommodate net metering of renewable resources. Legislation must also

develop a market incentive structure to encourage the development of renewable resources.

• Require that sellers of electricity provide adequate information to customers to

allow them to make reasonable choices, including information about prices, alternatives, and environmental characteristics of the generation being sold, to

the extent practicable. The Federal Trade Commission should also be directed

to develop rules to prevent such unfair trade practices as slamming and cramming, and inappropriate disclosure of consumer information.

• Provide for the continuation of programs that traditionally have been borne by

utilities through a Public Benefits Fund. The fund should provide support for

such programs as low income assistance, research and development, efficiency

and conservation investment, renewable resource investment, universal service,

and other public good programs that are being left behind by the transition to

a competitive industry.

TAX PROVISIONS

Certain provisions of the tax code create a disincentive for participants in the

market to engage in certain of the structural changes that are necessary. These provisions should be repealed. The tax code should be amended to allow utilities to spin

transmission assets off into separate corporations and to remove tax restrictions on

participation by public power utilities and cooperative utilities. While such provisions are not jurisdictional to this Committee, they represent an essential component of a functional electricity policy and should be pursued through the committees

of jurisdiction.

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