U.S. GOVERNMENT PRINTING OFFICE

73–595 PS WASHINGTON : 2001

THE CALIFORNIA ENERGY CRISIS:

IMPACTS, CAUSES, AND REMEDIES

HEARING

BEFORE THE

COMMITTEE ON

FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

JUNE 20, 2001

Printed for the use of the Committee on Financial Services

Serial No. 107–26

(

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: (202) 512–1800 Fax: (202) 512–2550

Mail: Stop SSOP, Washington DC 20402–0001

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HOUSE COMMITTEE ON FINANCIAL SERVICES

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa

MARGE ROUKEMA, New Jersey, Vice Chair

DOUG BEREUTER, Nebraska

RICHARD H. BAKER, Louisiana

SPENCER BACHUS, Alabama

MICHAEL N. CASTLE, Delaware

PETER T. KING, New York

EDWARD R. ROYCE, California

FRANK D. LUCAS, Oklahoma

ROBERT W. NEY, Ohio

BOB BARR, Georgia

SUE W. KELLY, New York

RON PAUL, Texas

PAUL E. GILLMOR, Ohio

CHRISTOPHER COX, California

DAVE WELDON, Florida

JIM RYUN, Kansas

BOB RILEY, Alabama

STEVEN C. LATOURETTE, Ohio

DONALD A. MANZULLO, Illinois

WALTER B. JONES, North Carolina

DOUG OSE, California

JUDY BIGGERT, Illinois

MARK GREEN, Wisconsin

PATRICK J. TOOMEY, Pennsylvania

CHRISTOPHER SHAYS, Connecticut

JOHN B. SHADEGG, Arizona

VITO FOSSELLA, New York

GARY G. MILLER, California

ERIC CANTOR, Virginia

FELIX J. GRUCCI, JR., New York

MELISSA A. HART, Pennsylvania

SHELLEY MOORE CAPITO, West Virginia

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

PATRICK J. TIBERI, Ohio

JOHN J. LAFALCE, New York

BARNEY FRANK, Massachusetts

PAUL E. KANJORSKI, Pennsylvania

MAXINE WATERS, California

CAROLYN B. MALONEY, New York

LUIS V. GUTIERREZ, Illinois

NYDIA M. VELA ́ ZQUEZ, New York

MELVIN L. WATT, North Carolina

GARY L. ACKERMAN, New York

KEN BENTSEN, Texas

JAMES H. MALONEY, Connecticut

DARLENE HOOLEY, Oregon

JULIA CARSON, Indiana

BRAD SHERMAN, California

MAX SANDLIN, Texas

GREGORY W. MEEKS, New York

BARBARA LEE, California

FRANK MASCARA, Pennsylvania

JAY INSLEE, Washington

JANICE D. SCHAKOWSKY, Illinois

DENNIS MOORE, Kansas

CHARLES A. GONZALEZ, Texas

STEPHANIE TUBBS JONES, Ohio

MICHAEL E. CAPUANO, Massachusetts

HAROLD E. FORD JR., Tennessee

RUBE ́ N HINOJOSA, Texas

KEN LUCAS, Kentucky

RONNIE SHOWS, Mississippi

JOSEPH CROWLEY, New York

WILLIAM LACY CLAY, Missouri

STEVE ISRAEL, New York

MIKE ROSS, Arizona

BERNARD SANDERS, Vermont

Terry Haines, Chief Counsel and Staff Director

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C O N T E N T S

Page

Hearing held on:

June 20, 2001 .................................................................................................... 1

Appendix:

June 20, 2001 .................................................................................................... 47

WITNESSES

WEDNESDAY, JUNE 20, 2001

Dobson, James L., CFA, Managing Director, Deutsche Banc Alex. Brown ........ 37

Ellig, Jerry, Ph.D., Senior Research Fellow, Mercatus Center, George Mason

University ............................................................................................................. 33

Hunt, Hon. Isaac C. Jr., Commissioner, U.S. Securities and Exchange

Commission ........................................................................................................... 14

Jackson, Hon. Alphonso, Deputy Secretary, U.S. Department of Housing and

Urban Development ............................................................................................. 16

Smith, Vernon L., Ph.D., Regent’s Professor of Economics; Director, Economic

Science Laboratory, University of Arizona ........................................................ 30

Wolak, Dr. Frank A., Professor of Economics, Stanford University; Chairman,

Market Surveillance Committee, California Independent System Operator .. 35

APPENDIX

Prepared statements:

Oxley, Hon. Michael G. .................................................................................... 48

Cantor, Hon. Eric ............................................................................................. 50

Miller, Hon. Gary G. ........................................................................................ 52

Waters, Hon. Maxine ........................................................................................ 54

Dobson, James L. .............................................................................................. 152

Ellig, Dr. Jerry .................................................................................................. 109

Hunt, Hon. Isaac C. Jr. .................................................................................... 57

Jackson, Hon. Alphonso ................................................................................... 67

Smith, Vernon L. (with attachments) ............................................................. 73

Wolak, Dr. Frank A. ......................................................................................... 136

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Inslee, Hon. Jay:

Heidi Willis, Seattle City Council member, prepared statement ................. 187

Paul L. Jaskow, Professor, MIT, prepared statement ................................... 169

Maloney, Hon. C.:

Letter to Federal Energy Regulatory Commission, May 9, 2001, and

response ......................................................................................................... 167

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THE CALIFORNIA ENERGY CRISIS:

IMPACTS, CAUSES, AND REMEDIES

WEDNESDAY, JUNE 20, 2001,

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, DC.

The committee met, pursuant to call, at 10:04 a.m., in room

2128, Rayburn House Office Building, Hon. Michael G. Oxley,

[chairman of the committee], presiding.

Present: Chairman Oxley; Representatives Barr, Kelly, Weldon,

Biggert, Green, Miller, Cantor, Hart, Capito, Tiberi, LaFalce, Waters, Sanders, C. Maloney of New York, Watt, Bentsen, J. Maloney

of Connecticut, Lee, Mascara, Inslee, Schakowsky, Moore, S. Jones

of Ohio, Ford and Crowley.

Chairman OXLEY. The hearing will come to order.

This hearing of the Committee on Financial Services is beginning—and without objection, all Members’ opening statements will

be made part of the record in order to permit us to hear from our

witnesses and engage in a meaningful question and answer session. I’m encouraging all Members to submit their statements for

the record.

The Chair recognizes himself now for a brief opening statement.

Our hearing today represents the Financial Services Committee’s

continuing obligation to conduct oversight on the state of the U.S.

economy.

Today, we explore the impact and causes of the California energy

crisis, and discuss steps this committee can take to help prevent

it from being repeated.

The California energy crisis has the potential to become an

American economic crisis. Already in both California and throughout the West, high prices, drought conditions, and lack of investment in infrastructure have caused serious disruption to the lives

of American families and workers.

In the Pacific Northwest, aluminum mills have shut down because they cannot afford the cost of electricity. Predictably, this has

led to a decline in U.S. aluminum production.

According to the Silicon Valley Manufacturing Group, its’ nearly

200 members lost over $100 million in a single day of rolling blackouts in June of last year.

The State of California accounts for over 16 percent of U.S. commodity exports and nearly 25 percent of industrial equipment and

computers, electronics and instruments exports.

Declines in the ability of that State to manufacture and trade

these products will increase the U.S. trade deficit.

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I could cite similar statistics, but they all have the same point.

The California energy crisis is not only bad for California, it’s bad

for America.

There’s no question that when a State must issue the largest municipal bond offering in history in order to purchase electricity,

there is something seriously wrong with the system.

Our hearing today will explore what went wrong and provide insight into how to avoid such pitfalls in the future.

Part of the purpose of this hearing is also to remind ourselves

that this is not a new dilemma. The last major energy crisis in the

1970s led to our becoming a much more energy efficient country.

Energy intensity, or the amount of energy used to produce a dollar’s worth of GDP, has declined some 42 percent, meaning that the

U.S. has grown significantly more energy efficient over the last two

decades.

This has occurred despite the fact that personal energy use has

increased over that same period.

We’ll hear today from the Department of Housing and Urban Development on the steps they have taken to contribute to this dramatic increase in energy efficiency, and what more there is to be

done.

It has been proven time and time again that truly competitive

markets, free from overly burdensome Government intrusion, supply goods and services better than any of the alternatives.

One securities law that has outworn its usefulness is the Public

Utility Holding Company Act of 1935. Though not implicated in

causing the current situation in California, PUHCA has nevertheless proven to be an unnecessary burden to creating a healthy electricity infrastructure.

We are honored to have with us today Commissioner Isaac Hunt,

Jr., to explain why the SEC has long called for the repeal of this

out-dated legislation.

This current crisis provides us an opportunity to confront the

mistakes of the past and remove barriers to building a better future.

I look forward to hearing from all of our witnesses today as this

committee works to do its part to ensure that America’s energy infrastructure becomes increasingly healthy and competitive.

That completes the Chair’s opening statement.

[The prepared statement of Hon. Michael G. Oxley can be found

on page 48 in the appendix.]

I now turn to our friend, the gentleman from New York, the

Ranking Member, Mr. LaFalce.

Mr. LAFALCE. I thank you very much, Mr. Chairman, for convening today’s hearing.

The energy crisis, especially the crisis facing the Western States,

is truly a national concern, and it is appropriate that we focus our

committee’s attention on it today.

And it’s particularly fitting, since our committee has in fact

played a most significant role on energy issues in the past, primarily through its jurisdiction over the Defense Production Act and

Loan Guarantee Authority.

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Notably, our House Banking Committee played the central role

in the Economic Stabilization Act of 1970, which included authorities governing energy prices.

Our committee also played a central role in the Energy Security

Act of 1980 that was created pursuant to the creation of a special

ad hoc Energy Task Force, chaired by a member of our committee

at the time, Mr. Ashley.

And that Act established the Synthetic Fuels Corporation as well

as a host of other energy production guarantees. So, our committee

has had a very, very important historical central role on energy

issues.

Today, I would like to comment briefly on three issues: Reform

of the Public Utility Holding Company Act, solutions to the shortterm crisis in the West, and the need for a long-term energy plan.

I look forward to Commissioner Hunt’s testimony on the Public

Utilities Holding Company Act, the PUHCA, which some advocate

raises difficult issues. Stand-alone repeal of PUHCA, or even granting the SEC exemptive authority, arguably amounts to a significant deregulation of the energy sector.

Yet, currently a deregulated marketplace appears to be reeking

havoc on the consumers and taxpayers of California and other

Western States. PUHCA may need to be revisited to reflect the realities of today’s marketplace. But PUHCA reform should be a very

careful effort and one that is highly sensitive to maintaining protections for energy consumers as well as investors.

More central to the current energy crisis in the West are the actions of the Federal Energy Regulatory Commission. As many of us

see it, the FERC’s most recent action to control prices may be a

step in the right direction.

Real price caps were desperately needed in the Western States

months ago, and are no less desperately needed today. FERC’s action on Monday moves us closer to effective price caps and should

help moderate the price spikes of the Western markets.

However, the plan also maintains a fundamental weakness by

tying price controls to the production costs of the most expensive

producer.

I’ll be interested in hearing the views of today’s experts on that

issue.

If any good has come of the current energy crisis, it has been to

focus public attention on the need for an effective, long-term national energy policy. The Administration has offered its own longterm plan, but some of us are troubled in that it appears, at least,

to offer less to energy consumers than to energy producers.

We surely need a serious bipartisan effort to address both the

short-term impact of the current energy crisis on consumers while,

at the same time, developing solutions to our Nation’s long-term

energy problems.

And if we can make any contribution to such an effort here

today, I hope it will be one driven by desire for sound policy and

a balanced interest in protecting consumers, taxpayers, and the environment, while allowing for fair industry profits.

I thank the Chair.

Chairman OXLEY. The gentleman’s time expires.

Are there further opening statements?

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The gentlelady from California, Ms. Waters.

Ms. WATERS. Thank you very much, Mr. Chairman, for calling

this hearing.

The issues surrounding the California energy crisis are extremely

important to me and my constituents and the entire country, as

well.

This is a very timely issue as a number of Californians are expected to experience rolling blackouts today and throughout this

week as temperatures to continue to climb.

To highlight this issue, tomorrow’s episode of the Tonight Show

will be dedicated to energy conversation. It will be taped virtually

in the dark without studio lights, TV monitors, amplifiers or other

power sources.

NBC says the idea came up when the network, like most other

businesses in California, was asked to turn off lights and computers whenever possible.

I hope other businesses will follow this example. The amount of

power used on one episode of the ‘‘Tonight Show’’ equals a month’s

worth of power at a normal family home.

In 1999, California paid $7 billion for its energy generation. Last

year, even though demand was down due to conservation, the price

was $32.5 billion. This year the price for approximately the same

amount of electricity is estimated to be $70 billion.

In the short space of 2 years, costs have increased tenfold. California does not have a demand problem; in fact, per capita, Californians use the lowest amount of power, and recent conservation efforts have reduced consumption even further.

What California has is an artificial supply problem, a problem

caused by power generators taking power generation off-line for socalled maintenance. Over the past 6 months, the number of turbines closed for maintenance has vastly exceeded that of previous

years.

For example, outage rates in March 2001 averaged almost 14,000

megawatts, four times higher than in March 2000.

In April 2000, the power generators took approximately 3,300

megawatts off-line for maintenance. In April 2001, they took almost 15,000 megawatts off-line on an average day.

This practice is currently being investigated on the State level

and deserves Federal scrutiny as well. Finally, after essentially ignoring the California crisis for months, the Federal Energy Regulatory Commission—FERC—has responded to the situation and

their order goes into effect today.

However, their actions were akin to putting a butterfly bandaid

on a gushing wound. On Monday, FERC expanded its April 26th

order to apply 24 hours a day throughout the West. The new formula will be based on the cost of fuel plus an allowance for profit.

And these limits will remain in effect around the clock, a step in

the right direction. While the order does close some loopholes in the

April Order, such as prohibiting generators from exporting energy

to neighboring States and importing it back at higher prices, there

are still outstanding issues.

The prices will be determined by the most inefficient, highest

cost generator. The nature of this order does nothing to discourage

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generators from withholding power in order to ensure that the

least efficient unit sets the market clearing price.

In addition, I am concerned that FERC has failed to order refunds of the more than $6 billion in potentially illegal overcharges.

Instead, FERC has directed public utility buyers and sellers to try

and reach settlement with a FERC Administrative Law Judge.

FERC is clearly abandoning its mandate to ensure that rates are

just and reasonable and to order refunds when rates do not meet

that standard.

This is why I’m a cosponsor of HR 1468, which was introduced

by my colleague, Jay Inslee. The Energy Price and Economic Stability Act forces FERC to do its statutorily mandated job of ensuring fair electricity rates. This legislation directs FERC to establish

cost-of-service-based rates for electric energy and instructs FERC

to order refunds of illegal rates and charges.

I urge all of my colleagues to support this crucial legislation.

This crisis is having a major effect on some of my constituents and

consumers throughout the West, many of whom who have seen

their utility bills triple. Some have bills of more than $1,000; others are scrimping on

food and medicine to keep their power on. And the Low Income

Heat and Energy Assistance Funds, even combined with another

$120 million from California, can only provide help for less than 10

percent of the 2.1 million households who qualify for energy assistance.

On the other hand, while consumers suffer, corporations are just

thriving. This crisis has proven to be a boon for some. A number

of executives at the largest power companies have collected tens

and even hundreds of millions of dollars through stock sales driven

up by the California energy crisis. Enron Chair Kenneth Lane garnered $123 million in option

transactions last year, which was ten times what he made in 1998.

Jeffrey Skilling, Enron’s chief executive, netted more than $62

million in options gain last year.

Peter Cartwright, Chairman and CEO of Calpine, netted almost

$12 million through the exercise of options earlier this year.

Many of these energy millionaires have found their way to Washington. This Administration has an unprecedented number of high

level appointees with a background in the energy industry. Besides

the President and Vice President, even Condoleezza Rice was on

Chevron’s board of directors for almost a decade.

Commerce Secretary Don Evans served as CEO of a Texas Oil

Company.

Chairman OXLEY. Could the gentlelady sum up please.

Ms. WATERS. Interior Secretary Gail Norton began her career at

a conservative think tank funded by a number of energy companies.

Mr. Chairman, I do have more, but I’m anxious to hear from our

witnesses. I thank you for the opportunity to have this opening

statement, and I will yield back the balance of my time.

[The prepared statement of Hon. Maxine Waters can be found on

page 54 in the appendix.]

Chairman OXLEY. The gentlelady yields back.

The gentleman from Washington State, Mr. Inslee.

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Mr. INSLEE. Appreciate it, Mr. Chair.

I just want to say, I’m glad we’re having this hearing, because

I think it’s clear that the FERC action a couple of days ago, although welcome in the sense that they finally threw us a rope, they

threw us a rope that’s about half as long as it’s going to take to

save us in the West.

And I want to point out that this is not a California problem, this

is a West Coast problem. In the State of Washington, we could lose

43,000 jobs this year alone, because of the 300, 500 percent price

spikes that we’ve had in the wholesale electrical markets.

And after studying the FERC order, it’s very obvious that it’s

going to come up short for two reasons.

Number one, in picking the highest priced electricity in the West

Coast, the least efficient plant, probably the dirtiest plant, as being

the bellwether for the price we’re going to set. Anybody would

flunk economics 100 who would want to use that incentive mechanism to the market for several reasons.

Number one, it’s like saying you want to control prices of cars,

but you pick the price of a Rolls Royce Silver Cloud as your benchmark.

Second, it sends a signal to the markets to start up your least

efficient plants first.

Why should we send a signal from the U.S. Government to generators to generate their most expensive electricity first? It doesn’t

make sense.

Second, it has absolutely no action, meaningful action to bring

the refunds to the consumers who have lost billions, and that’s

with a B, billions. California spent $7 billion a couple of years ago

in electricity. Next year they may spend $70 billion to give refunds

to the consumers who are owed it.

And I just want to ask FERC—I wish they were going to be here

at this meeting—if these prices are wrong, if they are unconscionable, if they’re illegal in July, why weren’t they in January, February, March, April, May and June?

And if they were, why is the Federal Government doing nothing

to get refunds for the Americans that have them coming to them?

So we think this FERC order is seriously deficient. We are going

to push efforts to the floor. I hope Members in this committee will

sign our discharge petition in the tone of bipartisanship. Peter Farrow, the Peter, Paul and Mary singer, sang both to the Republican

caucus and to the Democratic caucus this week. I think that should

bring us together on this and hopefully we’ll get a vote on this.

So I just want to tell the committee we will continue to push this

issue.

I also want to put in the record, if I may, Mr. Chairman, the

unanimous consent to put in statements by MIT Professor Dr. Paul

Joskow who is in favor of a price mitigation strategy, Seattle City

Council member Heidi Wills, who has seen the devastation these

prices have caused the City of Seattle, and Dr. Alfred Kahn, who

also has a very important viewpoint on price mitigation.

Thank you.

[The information referred to can be found on page 169 in the

appendix.]

Chairman OXLEY. Without objection.

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The gentleman’s time has expired. Are there further opening

statements?

The gentleman from Vermont.

Mr. SANDERS. Thank you, Mr. Chairman.

Let me just pick up on some of the points that Ms. Waters and

Mr. Inslee made. The bottom line is that the energy crisis in California is not only a disaster for millions of people in that State, it

is a potential disaster for every single American in terms of what

it will do to our national economy and our standard of living.

The bottom line is that at a time when corporate profits are soaring, when, as Ms. Waters just read, there are obscene, beyond belief, take-home pay for CEO executives of energy companies at the

same time as low-income people do not know how they’re going to

pay their electric bills. The time is long overdue for the United

States Congress to begin to stand up for ordinary people and have

the guts to take on these large companies, which have acted in an

absolutely outrageous way under deregulation, and have given the

word ‘‘greed’’ a new meaning.

It is no secret that this country does not have a serious energy

policy, and given all of the technology out there, all of the wisdom

out there, it is an absolute disgrace what we are not doing to protect consumers and to protect our environment.

Let me just make some suggestions, which are incorporated in

legislation which I will be introducing that will lead us into the

right direction.

Number one. In my State, where the weather gets a lot colder

than it does in Los Angeles, we have thousands of homes that are

not adequately weatherized because the people don’t have the

money to do that. Heat goes right out the door or right out the windows.

We have got to significantly increase the weatherization programs in this country. That’s a very important national investment.

Number two. We have got to significantly increase the Low-Income Heating and Energy Assistance Program, because there are

millions of Americans today who cannot afford to pay their energy

bill. They need immediate help and they need that help right now.

We need to provide a refundable tax credit to low-to-middle income consumers, and non-refundable tax credit to small businesses

who purchase energy efficient appliances and homes through the

Energy Star program.

We’ve got to raise, and here is it an absolutely scandalous what

we have not done, the corporate average fuel economy, the CAFE

standards, to at least 45 miles per gallon for cars and 34 miles per

gallon for light trucks over the next decade.

It is amazing to me that while Congress puts hundreds of millions of dollars into Detroit, it is Toyota and Honda that come up

with the new cars. The technology is out there for cars to get 60,

70, 80 miles to a gallon and millions of us are driving cars that get

15 or 20 miles per gallon, wasting huge amounts of fuel.

We have got to, in the immediate crisis, impose a windfall profits

tax on the oil, gas and electric industry to stop these absolute ripoffs that Ms. Waters was just talking about a moment ago.

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We have got to require 20 percent of the Nation’s electricity to

come from renewable sources of energy by 2020. New wind energy

being developed in Denmark, in France, in Germany, and of course

the United States is moving forward, but not fast enough.

In fact, wind energy, to everybody’s perhaps surprise, is the fastest growing new source of energy online in the world. And it is nonpolluting.

We have got to require replacement tires to be as fuel efficient

as the original tires on new vehicles. We’ve got to provide at least a $6,000 tax credit to Americans who buy ultra-efficient cars made

in the United States.

These are common sense approaches which will go a long way to

break our dependence on Middle East oil, develop new sources of

energy renewable means. I think we are long overdue in moving in

that direction.

I would yield back the balance of my time.

Chairman OXLEY. The gentleman yields back.

The gentleman from California, Mr. Miller.

Mr. MILLER. Thank you, Mr. Chairman.

I want to thank you for holding this hearing, and I really look

forward to listening to the witnesses today testifying before the

committee.

For the last 8 years, our Nation has failed to address our energy’s outlook with a cohesive and comprehensive national policy. Instead of becoming more independent, we have increased our reliance on foreign sources to provide oil for meeting our everyday

needs.

Oil imports rose from 32 percent in 1992 to 55 percent last year

alone. The previous Administration was put into the unfortunate

position of sending our Secretary of Energy to the Middle East to

beg for greater oil output from the very countries we defended from

Saddam Hussein just a decade ago.

Furthermore, special interests have seriously limited our ability

to meet the growing demand that an increasingly larger population

and the increased use of electronic information age technology have

created.

Radical environmentalists have lobbied for years to stop the construction of any new power production facilities. They protest the

use of power generators that burn fossil fuel due to the air quality

standards. Furthermore, they attack the nuclear plants for inadequate storage facilities for spent fuel. They object to hydroelectric

because of a presumed effect on fish populations, wind turbine facilities because of the potential hazard to birds, and solar energy

generation because of the amount of habitat that is replaced by

power cells.

It seems no matter the source of power, these radical environmentalists find some reason to oppose any type of electric generation.

In the balance, they hold the public general welfare hostage. In

my home State of California, no new power plant has been built

for over 10 years. During the same period of time, California’s population has increased 11 percent to 33 million people. As well, California’s become the world’s hub for e-commerce which has created

an even greater demand for electric supply.

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Now we’re facing the reality of these failed policies as Californians are forced to import energy from other States. The problems

in California are precursors to many of the problems this Nation

will face if a comprehensive policy is not put into place.

New and more efficient plants with environmentally sensitive

technology would reduce the amount of fuel required to run them

while helping meet the needs of the new economy. This, coupled

with updating the infrastructure that would transmit the power,

would allow California and the country to meet their energy challenges.

Recent electricity shortages have lured suppliers, while reducing

political obstruction, to construct new facilities. Creating a new

power surplus will drive rates down, will also force suppliers to

produce energy using the cheapest, most efficient means available.

Moreover, price caps would not cap consumption into a major

problem. For example, California’s been able to conserve 11 percent

more energy in April when compared to the same month last year,

but still faces rolling blackouts. The problem is energy shortages,

not prices.

As we witnessed during the mid-1980s and mid-1990s, as energy

costs fall, our economy swells. I don’t think we can stress that

point enough. A strong energy policy which includes reliable, sustainable and cost-efficient electricity is a backbone of a strong economy.

California has continued to be a driving force in America’s economy. We must make certain that the power is available to our

State in the future.

I’ve been involved in the building industry for over 30 years, and

one thing I’ve found is, because of regulation and the process we’re

put through to get entitlements to build homes in the United

States, we have artificially driven the prices through the roof on

housing; we’ve done the same thing with energy.

We had a major recession in 1990 and in 1989. In 1990, house

prices in California were probably 20 percent above where they

should have been, not based on the market itself, but based on the

lack of adequate supplies being given to the market to deal with

the impact of the people.

We are having the same situation on energy with electricity, and

we need to resolve it with more, more production.

Thank you.

[The prepared statement of Hon. Gary Miller can be found on

page 52 in the appendix.]

Chairman OXLEY. The gentleman’s time has expired.

Are there further opening statements?

The lady from Illinois, Ms. Schakowsky.

Ms. SCHAKOWSKY. Thank you, Mr. Chairman.

I appreciate that the committee agrees that California’s energy

situation has implications for all of us, and that the Federal Government has a role and a responsibility to participate in the process to help California and to ensure the energy problems of the

West do not extend themselves to the rest of the country.

That being said, Mr. Chairman, while it’s appropriate for this

committee to examine the issues affecting California and the West,

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I believe our discussion needs to be widened to include problems

facing consumers throughout the country.

As you know, the Midwest has also experienced severe energy

difficulties over the past year. This past winter, natural gas prices

for consumers in my district tripled, and for the second summer in

a row, consumers in the Midwest and especially Chicago are paying

way above the national average for gasoline.

Like the California crisis, these issues have been ongoing for

some time and discussion of ways to bring relief and prevent future

problems for the Midwest are also worthy of this committee’s attention.

I would like to say that I think to blame environmentalists, who

for years have been pushing for sound alternative energy policies,

and have met only with resistance from a Republican-dominated

Congress, is really a false accusation, I believe.

And I hope now we can put these differences behind us and move

forward with a rational energy policy.

I understand that our HUD and SEC witnesses will discuss the

Public Utility Holding Company Act, PUHCA, as well as energy

conservation efforts.

I just want to make clear my strong view that any discussion of

a possible repeal or revision of PUHCA should also include our colleagues in the Energy and Commerce Committee and must include

a bipartisan agreement that any proposal for change to existing

regulation should include, as a priority, strong measures to ensure

the utmost protection for consumers.

I’m pleased that our HUD witness is here today. However, I do

not think we can have a complete discussion about conservation efforts at HUD without first addressing the serious budget shortfalls

at the agency.

I have concerns that the Administration’s overall request for HUD is nearly $2 billion below last year’s level and that the capital

improvement fund, from where conservation and efficiency improvements would be funded, is down 25 percent or $700 million

below last year’s level.

These shortfalls have serious ramifications for public housing in

particular, and I hope our witness can address these concerns during the hearing.

Again, Mr. Chairman, I want to thank you for convening this

hearing and look forward to our witnesses’ testimony.

Chairman OXLEY. The gentlelady’s time has expired.

The gentlelady from West Virginia is recognized for opening

statement.

Ms. CAPITO. Thank you, Mr. Chairman. I appreciate you holding

this hearing today and I want to thank our witnesses for being

here and providing us with their testimony.

The energy crisis in California has been devastating to communities across the Western United States, but its effects are being

felt across many industries and throughout the rest of the United

States.

Our Nation has been blessed with an abundance of natural resources from which energy can be produced. I feel that this unfortunate situation in California is one that need not be repeated, and

we must to work to ensure this.

11

At a time when we have the technology to produce more energy,

particularly with coal, in a much cleaner more efficient way, we

need to devise the long-term solutions to help prevent situations

like this from reoccurring.

However, that does not address the continuing struggles in the

West. We are seeing the prices of services rise, and the funds to

pay for these services depleting.

Today, it costs more to operate businesses, drive our cars, and

cool our homes. Unfortunately, the demand for energy is not decreasing. Companies are being forced to close and vital members of

our Nation’s work force are losing their jobs.

With California’s economy representing 13 percent of the total

U.S. gross domestic product, it cannot survive under these conditions.

A poorly thought-out deregulation plan has severely damaged the

world’s sixth largest economy, and I’m hopeful that hearings such

as these will provide us with some insight into how we can avoid

problems. I look forward to working with the Members of this committee as well as members of our panels to learn more about this

situation.

Again, thank you, Mr. Chairman, for calling us here today. I

yield back the rest of my time.

Chairman OXLEY. The gentlelady’s time has expired.

The gentlelady from California, Ms. Lee.

Ms. LEE. Thank you, Mr. Chairman. I want to thank you and our

Ranking Member Mr. LaFalce for calling this important hearing.

We know that the American economy, of course, is one of the central concerns of this committee. And the West Coast energy crisis

has emerged as perhaps the most important economic issue of the

year.

California, of course, is the epicenter of the crisis and it is one

of the world’s largest economies. Its economic well-being is critical

to the financial health of the Nation as a whole.

Many consumers in California have been confronted with skyrocketing bills that bore little relationship to the alleged laws of

supply and demand. The State itself, and therefore California taxpayers have been forced to spend billions of dollars to keep energy

flowing into the State.

Now, when Minority leader Dick Gephardt and other Members

of Congress came to Oakland, California, to my District several

weeks ago, they saw the face of this crisis. They heard from small

business owners who face potential bankruptcy.

They heard from school administrators who have been forced to

divert money from much needed textbooks, teacher’s salaries and

instructional supplies to pay energy costs.

They heard from persons with disabilities for whom blackouts

are really nightmares and rising bills are an impossible expense.

They also heard from the people of California who have been

paying the price of this crisis for the last year.

Now, months ago, the Federal Energy Regulatory Commission officially determined that Californians had been charged unjust and

unreasonable prices. It’s only within the last week, though, that

the FERC has begun to impose price mitigation measures. I think

12

that’s what they call it. And even these fall short of the needed solution.

California’s businesses and consumers have not only faced escalating prices, they have experienced blackouts that endanger

health and safety and the regional economy.

We should be asking very hard questions about the causes of

these blackouts. Considerable evidence indicates that power generators may have manipulated supply in order to increase prices.

This issue really does demand full investigation.

We need national wholesale price controls. We need rebates immediately, rebates for consumers and institutions that have been

forced to pay these unjust and unreasonable rates. And we need to

spur our economy by investing renewable energy, and we need innovation and not stagnation.

I want to thank you, Mr. Chairman, for these hearings, and I

look forward to hearing from our witnesses in terms of how they

view this crisis, which is devastating California, not only California, as I said, it’s the epicenter, but it’s moving to the rest of

our country, as we know.

Chairman OXLEY. The gentlelady’s time has expired.

The gentleman from Georgia, Mr. Barr.

Mr. BARR. Thank you, Mr. Chairman.

Mr. Chairman, Washington really is a wonderful place. It never

ceases to amaze me. I have a news release here dated June 18 from

the Federal Energy Regulatory Commission and the thing is five

pages long of single-spaced type, and it’s just full of all sorts of bureaucratic gobbledegook. But only in Washington, only in the world

of Washington can somebody—and I presume that FERC put this

thing out probably with a straight face—in the first paragraph,

they say they’re instituting curbs on prices, and then in the very

next paragraph, they say this is a market-oriented principle.

Well, it may be a market-oriented principle in a State-run market economy, but not in an economy such as we have always had

in this country.

And then it goes on, it talks about attracting additional investment. Well, it would be very interesting to see how you attract any

investment, much less additional investment, when investors already have been beat up in California, because there are no incentives for them to invest.

So, now we have additional curbs on prices or price mitigation

or whatever nonsense they call it, but it is price caps, it is price

control, and they think that this is going to solve the problems in

California.

It’s not going to solve the problems in California. The Governor

of California has caused these problems and now he’s coming to the

President and coming to the Congress and coming to these other

regulatory bodies to try and shift the blame away from himself and

away from his colleagues who, for year after year after year, have

taken away incentives for energy investment, have put price caps

on that are unrealistic, and have placed all sorts of limitation on

the development of energy sources.

Now it’s fine to talk about new energy sources and alternative

energy sources, but when you have limitations on the development

of known energy sources, it seems kind of ludicrous to say, ‘‘Well,

13

let’s forget about that, and let’s go on to talk about new energy

sources.’’ The problems that California is facing are immediate. They are

not of the Federal Government’s making, they are the making of

the Government leaders in California, and I’m very sorry that

FERC is now getting involved in sort of a process of let’s share the

misery rather than helping to really come to grips with what California has done with regard to restrictions on prices, restrictions on

investment, restrictions on development of energy sources.

So this really will be an interesting hearing to begin getting into

some of these issues, Mr. Chairman, and I appreciate your taking

the leadership on trying to at least get some of the facts out.

Chairman OXLEY. The gentleman’s time has expired.

The gentleman from North Carolina, Mr. Watt.

Mr. WATT. Thank you, Mr. Chairman. I appreciate the Chairman

calling the hearing.

I’ve been watching this situation from a distance with a great

deal of interest, because we are the United States, and even if this

only affects California and the West, it would be a matter of extreme importance to us, but also because it could have some important implications for the rest of the country and could spread to the

rest of the country.

One of the concerns I’ve had about this is if we don’t do something decisive to address the situation in the West, we increase the

likelihood of problems in the rest of the country and increase the

probability of it having implications in North Carolina and in Georgia and other places.

One of the concerns with the FERC Order, therefore, is that to

enter an order that finds that there has been substantial abuse, yet

does not retroactively give people relief for the abuse that has

taken place before the order was entered, would seem to me to encourage the same kind of activity possibly in other parts of the

country.

And so I’m extremely concerned that even if this order were sufficient to solve the problem prospectively, what message have we

sent to folks who have abused, corporations that have abused the

system retrospectively.

I’m not a big supporter of price controls or Government intervention, but I do know that there are some areas of critical, essential

public services and when I see the President inject himself into the

airline situations, I can’t imagine we would think that electricity

would be less essential than airline service.

There are some essential services where the Government has a

role and I think this is one of them, primarily because there has

been a long history of cost-of-service-based electricity rates in California, and at least in part, the deregulation of the industry has

not been properly done, so you really kind of need to step back to

where you were, while you try to figure out how you move forward

to better solution.

So, I appreciate the Chairman calling the hearing and look forward to any words of wisdom that our witnesses may have about

retrospective remedies for people who have already been abused,

and prospective solutions to this problem.

Thank you, Mr. Chairman.

14

Chairman OXLEY. The gentleman’s time has expired, and we’ll

now turn to our panel of witnesses.

Appearing on the first panel is SEC Commissioner Isaac C.

Hunt, Jr. Commissioner Hunt was confirmed by the Senate on January 26, 1996. Prior to being nominated to the Commission, Commissioner Hunt was Dean and Professor of Law at the University

of Akron Law School, and he’s also had experience with the Carter

and Reagan Administrations.

Joining Commissioner Hunt is Deputy Secretary Alphonso Jackson, of the Department of Housing and Urban Development. Secretary Jackson comes to the Department after serving most recently as President of American Electric Power-TEXAS.

Mr. Jackson has also served as President and CEO of the Housing Authority of Dallas, and Chairperson of the District of Columbia Redevelopment Land Agency Board.

Thank you, gentlemen, for both appearing before the committee

today. And Commissioner Hunt, we’ll begin with your testimony.

STATEMENT OF HON. ISAAC C. HUNT JR., COMMISSIONER, U.S.

SECURITIES AND EXCHANGE COMMISSION

Mr. HUNT. Thank you, Mr. Chairman and Ranking Member LaFalce and Members of the committee.

I am Commissioner Hunt of the U.S. Securities and Exchange

Commission. I’m pleased to have this opportunity to testify before

you on behalf of the SEC about the current energy problems in

California and the Public Utility Holding Company Act of 1935.

As I will discuss, because neither of the holding companies that

own the major California utilities is registered under the Act, and

because the Act is not an impediment to the construction of new

generation facilities, the SEC’s administration of the 1935 Act has

not had any direct impact on the California situation.

Nevertheless, the SEC continues to support efforts to repeal the

1935 Act and replace it with legislation that preserves certain important consumer protections or to amend the Act to grant the SEC

broad exemptive authority.

Before discussing the current problems in California and the

SEC’s position on repeal or amendment of the 1935 Act, it is useful

to review both the history that led Congress to enact the Act in

1935, and the changes that have occurred in the electric industry

since then.

During the first quarter of the last century, misuse of the holding

company structure led to serious problems in the electric and gas

industries. Abuses arose including inadequate disclosure of the financial position and earning power of holding companies, unsound

accounting practices, excessive debt issuances and abusive affiliate

transactions.

The 1935 Act was enacted to address these problems. In the

years following the passage of the Act, the SEC worked to reorganize and simplify existing public utility holding companies in order

to eliminate the problems that Congress identified.

By the early 1980s, the SEC concluded that the 1935 Act had accomplished its basic purpose and that many aspects of it had become redundant with other Federal and State regulations.

15

In addition, changes in the accounting profession and the investment banking industry have provided investors and consumers

with a range of protections unforeseen in 1935.

Because of these changes, the SEC unanimously recommended

that Congress repeal the 1935 Act based on its conclusion that it

was no longer necessary to prevent the recurrence of the abuses

that led to the Act’s enactment.

For a number of reasons, including the potential for abuse

through the use of a multi-State holding company structure, related concerns about consumer protection, and the lack of a consensus for change, repeal legislation was not enacted during the

early 1980s.

Because of continuing changes in the industry, however, the SEC

continued to look at ways to administer the statute more flexibly.

In response to continuing changes in the utility industry during

the early 1990s, then-Chairman Arthur Levitt directed the SEC

staff in 1994 to undertake a study of the 1935 Act that culminated

in a June 1995 report.

The report again recommended repeal of the 1935 Act or amendment of the Act to give the SEC broad exemptive authority to administer the Act. The June 1995 report also outlined and recommended that the Commission adopt a number of administrative

initiatives to streamline regulation under the Act.

The SEC has implemented many of these initiatives. The utility

industry has continued to undergo rapid change since publication

of the report.

Congress facilitated some of these changes. Specifically, the Energy Policy Act of 1992, through statutory exemptions to the 1935

Act, allows holding companies to own exempt wholesale generators

and foreign utilities, and allows registered holding companies to

engage in a wide range of telecommunication activities.

Today, the electricity shortages, price increases and rolling blackouts in California represent one of the most severe problems in the

electric industry.

Specifically, in California, acute supply shortages, opposition and

legal impediments to new power plant construction, and high natural gas prices have driven wholesale electricity prices to extraordinary levels.

The two largest California utilities have not been allowed to pass

wholesale price increases through to consumers and, as a result,

are experiencing severe liquidity problems. One of the utilities has

declared bankruptcy; the other has stated publicly that it may also.

Neither the 1935 Act nor the Commission’s administration of the

Act has had any direct impact on the situation in California. Although we have monitored the situation in California, neither of

the major utilities in the State is part of a holding company system

registered under the Act.

As a result, the SEC, under the 1935 Act, does not directly regulate the two companies that have experienced the most severe financial problems.

Additionally, and perhaps more importantly, a shortage of supply

in electricity is undoubtedly a significant contributor to California’s

problems.

16

Since the passage of the Energy Policy Act of 1992, the 1935 Act

has not been an impediment to investment in or construction of

generation facilities.

The Energy Policy Act facilitated the entry of new companies and

hence new sources of capital into the generating business by permitting any person to acquire ‘‘exempt wholesale generators’’—

EWGs—without the need to apply for or receive SEC approval.

However, a registered holding company may not finance its EWG

investments in a way that may have a substantial adverse impact

on the financial integrity of the holding company system.

The Energy Policy Act gave the FERC the responsibility to determine whether an entity may be classified as an EWG. After obtaining EWG status, an EWG is not considered an electric utility company under the 1935 Act and, in fact, is exempt from all provisions

of the Act.

Prior to passage of the Energy Policy Act, a generation facility

would have been a public utility——

Ms. KELLY: [PRESIDING]. Excuse me, Mr. Hunt. I’m going to ask

if you would please sum up. You are well over your time.

Mr. HUNT. Yes, ma’am.

Although the 1935 Act has not played a significant role in California’s energy problems, the SEC continues to recommend that

Congress repeal the 1935 Act subject to appropriate safeguards.

And short of repeal, the SEC believes that amending the 1935

Act to provide the Agency with broad exemptive authority will ensure that the goals of the Act can be achieved without being an impediment to the development of the gas and electric markets.

Thank you, Madam Chair.

[The prepared statement of Hon. Isaac C. Hunt, Jr. can be found

on page 57 in the appendix.]

Ms. KELLY. Thank you very much, Mr. Hunt.

We next go to Mr. Jackson.

Welcome, Mr. Jackson.

STATEMENT OF HON. ALPHONSO JACKSON, JR., DEPUTY

SECRETARY, U.S. DEPARTMENT OF HOUSING AND URBAN

DEVELOPMENT.

Mr. JACKSON. Chairman Oxley, Ranking Member LaFalce and

other distinguished Members of the Financial Services Committee,

thank you for the opportunity to appear before you to discuss——

Ms. KELLY. Mr. Jackson, would you please pull that microphone

closer to you? It’s difficult for some people to hear.

Mr. JACKSON. Can you hear me now?

Ms. KELLY. Yes. Much better. Thank you.

Mr. JACKSON. Chairman Oxley, Ranking Member LaFalce and

other distinguished Members of the Financial Services Committee,

thank you for the opportunity to appear before you to discuss the

President’s Energy Policy and specifically ways the Department of

Housing and Urban Development supports the energy policy and

conservation.

Housing policy and energy policy are inextricably linked. No one

knows this better than I do. I served as Executive Director and

Chief Executive Officer of three major public housing authorities in

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this country, and lately I’ve served, before coming here, as President of American Electric Power.

The President’s energy policy is one that I believe takes into consideration the importance of energy in this country. HUD has already taken steps to respond to the rising energy costs at HUD-assisted housing. These include making $105 million in operating funds available

to lessen the impact of higher utility rates on public housing authorities, raising payment standards for Section 8 vouchers, and reimbursing owners for increased utility costs and project-based Section 8 certificates.

The President’s Energy Policy directs the Environmental Protection Agency and the Department of Energy to promote the increase

of energy efficient technology in housing, especially through increased promotion of the Energy Star initiative.

HUD will work closely with the Environmental Protection Agency and the Department of Energy in implementing the President’s

objectives of improving energy efficiency in housing. This will not

involve the establishment of any new programs, but rather the better use of existing programs.

While there have been a variety of efforts over the years to improve the energy efficiency of assisted housing, as well as older unsubsidized housing, those efforts have lacked a coherent framework

and focus.

With the announcement of the President’s Energy Policy, we now

have the necessary framework for promoting increased energy efficiency in housing. HUD is committed to giving this issue the priority attention it deserves, ensuring that we make significant

progress in conserving energy in housing.

HUD’s effort to increase the energy efficiency of housing will

focus in four key areas: increasing energy efficiency in HUD-assisted rental housing; expanding the use of energy efficient mortgages; providing technical assistance to non-profit, community-and

faith-based organizations; and supporting the use and development

of new technology.

If I may, I would like to comment on the legislation.

HUD currently provides $28 million for capacity building by organizations such as the Enterprise Foundation, LISC and Habitat

for Humanity.

Secretary Martinez and I both support local flexibility, especially

with Community Development Block Grant funds. Funding under

the public services cap can include childcare, crime prevention and

drug abuse funding.

Funding energy-efficient programs at the expense of other worthwhile programs would be a difficult decision for local communities.

Increasing the cap at the discretion of local communities to pay for

energy efficiency programs, however, is a good option and allows

local communities to make determination of funding priorities.

Our FHA mortgage incentive for energy efficient housing proposal would implement a new type of energy efficient mortgage by

authorizing the Department to reduce the premium for homes that

are particularly energy efficient.

However, the Department already has an Energy Efficient Mortgage program. Before authorizing a new efficient energy mortgage

18

program, it is vital that we examine what lessons we can learn

from the current one and carefully examine what the administrative burden of the new program variant and whether it is justified.

If the committee remains interested in this proposal, we strongly

recommend that before authorizing a new type of energy mortgage,

Congress and the Administration review our experience with the

current program and examine whether loans secured by homes

that exceed a particular threshold of energy efficient standards are

in fact less risky.

The proposed legislation for higher mortgage ceilings for solarenergy properties would allow FHA to insure 30 percent higher

mortgages for both single family and multifamily mortgages for

property with solar power.

Currently, FHA has the authority to insure mortgages for solarenhanced property that are up to 20 percent higher than other

mortgages.

This increase, while not necessarily one that would be widely

used, could have a positive impact on properties whose cost is significantly higher because of the inclusion of solar technology.

We believe that the Policy Development and Research—PD&R— that occurs in HUD is already active in research on building technology and energy efficiency.

As HUD implements the President’s Energy Policy, we will reform these efforts.

We would be happy to work with the committee to determine

what demonstration of energy efficient technology would be appropriate. At that time, we can opine more specifically as to whether

new legislation is needed to authorize such demonstrations.

While including consideration of energy conservation and projects

restructured under the Multifamily Assisted Housing Reform and

the Affordability Act of 1997, is appropriate, the Department is

concerned that the inclusion of this provision may require an appropriation in order to make the energy improvement that might

be necessary.

HUD’s 5-year energy plan was first presented in 1992. It has

been updated several times.

We would be happy to provide the report and other information

to the committee. The additional information requested by Congress under this proposed legislation would include, among other

things, clarification of energy issues under programs created since

1990. The further requirement that HUD publish an immediate update is consistent with the requirements already made by the recent Executive Order.

Again, thank you for the opportunity to address you on this important issue. I would be happy to answer questions by any Member of the committee.

Thank you.

[The prepared statement of Hon. Alphonso Jackson, Jr. can be

found on page 67 in the appendix.]

Ms. KELLY. Thank you very much, Mr. Jackson, and we will be

happy to accept the report if you would like to bring it to the committee.

We move now to some questions. And I have a couple of questions for Mr. Hunt.

19

Mr. Hunt, in your testimony, you’ve stated that the—and I’m

going to use the acronym PUHCA, I’m just simply going to call it

PUHCA.

You’ve stated that the PUHCA is redundant and should be repealed. It is unusual for a regulator to suggest that its authority

be ceded to some other regulator.

Why do you, at the SEC, support this reduction in that regulatory turf?

Mr. HUNT. Several reasons, Madam Chair.

First, we think that the ills that PUHCA was enacted to address

have been essentially solved by action of the committee under

PUHCA.

Second, we believe with the advent of better State regulation of

utilities and with the enactment of the bill that established the

FERC, that adequate Federal and State level regulation of utilities

is essentially in place.

We would suggest some amendment of the power of FERC to

give them more adequate access to the books and records of utility

companies but, by and large, we think that because of FERC, because of adequate State regulation, because of improvements in accounting, because of improvements in investment banking, because

of improvements in disclosure of all kinds of companies, including

public utility companies under our supervision, that the 1935 Act

is simply no longer necessary.

Ms. KELLY. Thank you.

I’m wondering about, as an alternative to the repeal of PUHCA,

you think that we should give the SEC that same general exemptive authority that it has under the other Securities laws.

Mr. HUNT. Yes, ma’am.

Ms. KELLY. Do you want to tell us how that authority is administered under those laws currently so we can better understand what

you’re talking about with regard to this suggestion?

Mr. HUNT. Well, we try to use our exemptive authority flexibly

within the spirit of the statutes, and keeping in mind always the

primary view of protection of investors, and we would hope to use

the exemptive authority under the 1935 Act in the same way.

Ms. KELLY. One final question, and then I’ll move on.

I want to know why the SEC’s current exemptive authority

under Section 3 of PUHCA is inadequate?

Mr. HUNT. Because of changes in the industry and our need to

interpret and administer the Act more flexibly with the rapid

changes in the industry, we think that a broader exemptive authority is needed so that the 1935 Act does not create impediments to

the development of the utility industry. We think we need either

broader exemptive authority or that, as we’ve testified several

times before this committee, that the Act should be repealed.

Ms. KELLY. Thank you.

Mr. Jackson, your biography indicates you’ve had experiences as

the CEO of three public housing authorities. What efforts did you

undertake in energy efficiency while you were in those positions?

Mr. JACKSON. It was belief that if we were going to instrument

and institute energy efficiency, that we had to do it while we were

developing new housing and/or renovating housing. We had to also

20

consider the energy efficient facilities that we used, such as the

washer and dryer system and the electrical system.

And so we made every effort to make sure that the installation

that was done in each one of those respective new or rehab developments was done at the highest energy efficiency level that we

could.

Ms. KELLY. Mr. Jackson, I just chaired a subcommittee hearing

down in New Orleans, and I understand that the Section 8 program provides an energy subsidy.

Can you tell me why the New Orleans Section 8 recipients are

suing HUD over the energy subsidy? Do you know about that?

Mr. JACKSON. No, not at this time, but I will be happy to get that

for you.

Ms. KELLY. If you could get that information for me, I’d be very

interested in that.

We move next to Ms. Waters.

Ms. WATERS. Thank you very much.

My question is for Mr. Hunt.

Mr. Hunt, you have given testimony that really supports the

SEC while the position for further deregulation in the form of

PUHCA repeal.

Now you don’t have oversight in California at this time, and you

think the States should have more authority to regulate rather

than have you involved.

If that is so, California’s precisely in that position. California deregulated and we have a crisis. How do you support deregulation

in the form of PUHCA repeal, given the California situation?

Mr. HUNT. Well, Madam Congressman, we think that adequate

supervision does exist through State regulation, and as I said,

through the Federal regulation in the form of the FERC.

I don’t know all the details of the deregulation system in California and how California got to this crisis. I have read some matters about the deregulatory system there and of course lack of generating power there, but I still don’t think that the SEC’s role

through PUHCA, given the fact that the principal utilities are

intra-state and non-regulated by us, I don’t see how the SEC’s involvement through PUHCA could have changed the landscape in

California in any way.

Ms. WATERS. Do you believe that FERC has sufficient authority

to intervene in some shape, form, or fashion, when you have rolling

blackouts and the situation could get worse, given that we have

come to appreciate reasonable cost energy in this country, it’s a

way of life.

And we don’t want to see a situation where the haves and the

have-nots, one can have energy and the other cannot, because they

can’t afford to pay for it.

You heard some of the testimony today about energy bills being

as high as a thousand dollars for people on fixed incomes and lowincomes and low wage jobs.

So what do we do to protect against that kind of harm and that

kind of risk?

Mr. HUNT. Well, first I think that the FERC, by and large, has

the authority to do what the SEC has done under the Public Utility

Holding Company Act of 1935 or PUHCA, which is to review interVerDate 11-MAY-2000 12:39 Sep 26, 2001 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 73595.TXT HBANK1 PsN: HBANK1
21

system transactions between utility holding companies and their

utility operating subsidiaries.

That is our principal interaction with FERC and what FERC

does. In terms of the way FERC supervises the deregulatory process in California or other States, and sees to it that other generating power facilities are established, we have very little to do with

the FERC’s activity in those areas.

Ms. WATERS. Do you have access to the generating company’s

records?

Mr. HUNT. Yes, ma’am, we do, of registered holding companies,

yes, ma’am.

Ms. WATERS. Of the holding companies, that’s right.

Are you able to see and make a real determination about whether or not they are operating at full capacity?

Mr. HUNT. I don’t think we can see that from the books and

records. What we can see from the books and records are such

things as, you know, inter-system loans, upstream loans, the pass

through of non-utility costs to consumers.

Ms. WATERS. Who is best able to see and know definitely whether or not these companies are operated at full capacity and whether

or not, when they go off-line for so-called maintenance, it’s really

absolutely necessary?

Mr. HUNT. I would think it would be the State regulatory authority and the Federal Energy Regulatory authority.

Ms. WATERS. Thank you very much.

Mr. MILLER. [Presiding.] Thank you, Ms. Waters.

Ms. Waters mentioned that California deregulated, and we did

that approximately 5 years ago, and she’s absolutely correct. But

we only deregulated the delivery side of energy in California. We

never deregulated the production side.

Currently in California, the Governor has mentioned he has

signed permits for 10 or 13 power plants, but the problem with

that is that those power plants have all been in process for a minimum of 41⁄2 years, because you can’t get a permit approved

through the State of California in less than 41⁄2 years if it’s fasttracked, and 5 years under normal process.

In fact, I read in an article he had just signed authorization for

a plant to be built in San Jose, but that plant was permitted, I believe, 3 years ago and local municipalities would not allow the

plant to be located in their jurisdiction.

The problem we have in California is not only do you have to

deal with the process in Sacramento of getting a permit, but once

you’ve accomplished that and you’ve invested millions and millions

of dollars in getting that permit, then you have to go beg the locals

to allow you to locate that plant within their jurisdiction. That’s

the problem in California.

Mr. Jackson, you mentioned some things that are very important, I believe, and I just commend the Secretary on his approach

to the housing issues. And you talked about energy efficiency and

such.

Now, California has the most energy efficient program of any

State in the Nation. I mean, since the 1980s, we’ve had Title 24

requirements which require a builder to go deal with air infiltration, the type of windows—whether it’s single-glaze, dual-glaze, the

22

actual floor coverings in a home, material you put on a fireplace,

where you draw the combustion for a fireplace from.

You have to count the load of your air conditioners so you provide the minimum requirement necessary to cool and to heat a

home.

I mean, we in California go far beyond any other State in environmental policy and regulation, yet, as I stated earlier, the problem in California, due to the high prices, is the production site.

And the problem is, years ago in California, government decided

that local agencies had purview and oversight over developers and

builders when they came in for applications. So we decided we

would create the sequel which is the California Environmental

Quality Act, which applied only to government, because we thought

government needed somebody to oversee them too on the environmental issues.

But what happened was radical environmental extremists again

sued in court and had CEQA applied to the private sector. And as

you know, prior to that occurring, subdivision map acts said that

local municipalities in government had to respond and make a decision on a track map within 58 days, and if they didn’t 59 days

later, it was approved by law.

Now with CEQA in California, you can drag it out to 15 or 20

years and yet never make a decision on provided housing in California dealing with the demand.

We have done just the same thing with energy as we have done

with housing in California specifically.

Now, Mr. Hunt, because of PUHCA, exempt companies are limited in where and how much they can invest in energy production

for fear of triggering PUHCA and basically having to register.

For instance, Med-America Energy owned by Berkshire Hathaway, which is Warren Buffet, would have invested, but PUHCA

was a concern, and they did not invest in energy in California.

And, Mr. Hunt, you said PUHCA had no direct impact on California, but it certainly had a chilling effect on investment within

California.

Can you address that?

Mr. HUNT. Well, I think that in the instance of the company

owned by Berkshire-Hathaway, which is outside of California, I

think the fear was that if that company had invested in one of the

utilities in California, it would have become a utility holding company subject to the jurisdiction of the SEC under the 1935 Act.

When that occurs, then the extent to which a registered public

utility holding company can invest in other non-utility businesses

is restricted by the provisions of the 1935 Act.

So indirectly, to the extent that some companies might have

wished to invest in the now-exempt California utilities, the 1935

Act certainly was an indirect impediment to that investment.

Mr. MILLER. Ms. Waters, you expressed your anger at the prices

in California for energy, and there’s one thing that has a greater

impact on my life than anything else, and it’s my wife. And trust

me. She pays our electricity bill and that is one ticked-off woman

right now.

And I’m as mad as anybody about the prices in California for energy. What angers me more is the housing crisis we are facing, Mr.

23

Jackson, and the energy crisis we are into, Mr. Hunt, are directly

associated with Government mandates, regulations, and processing.

And that’s what I think we need to deal with that we have yet

to deal with that we’re trying to put, once again, a bandaid over

the problem instead of curing the cause of the need for a mandate.

Ms. WATERS. Will the gentleman yield?

Mr. MILLER. My time has expired.

Mr. Watt.

Mr. WATT. Thank you, Mr. Chairman.

Mr. Hunt, you indicated in your testimony, I believe, that while

you supported repeal of PUHCA, you thought that in connection

with that, there needed to be some consumer protections implemented.

Did I misunderstand you?

Mr. HUNT. No, sir. I think I said that in connection with the repeal of PUHCA, there probably needs to be more power given to

the Federal Energy Regulatory Commission so that they can have

greater access to the books and records of intra-interstate holding

companies to make sure that nothing is going on in that holding

company with respect to inter-system transactions that would

harm consumers or ratepayers.

Mr. WATT. I’m not clear on whether I misunderstood what you

said. I thought you said that in connection with the repeal or

amendment, there needed to be further consumer protections of

some kind.

Mr. HUNT. Yes, sir. That’s the access to the books and records

that we would suggest that FERC be given.

Mr. WATT. OK. That was the question I was going to ask, what

are those consumer protections, and you’re saying—— Mr. HUNT. Access to the books and records of the utility holding

companies on the part of FERC.

Mr. WATT. OK. And would you recommend that, in conjunction

with that access, if some impropriety is found by FERC, that they

be given enforcement authority to enforce those consumer protections if they find some impropriety?

Mr. HUNT. If they don’t have it now, I would certainly suggest

that they be given it.

Mr. WATT. Do you think they have some enforcement authority

now?

Mr. HUNT. I really don’t know that, Mr. Congressman, the extent

of their enforcement authority.

Mr. WATT. You heard my opening statement. One of the concerns

I expressed was that they had basically made a finding that consumers were being taken advantage of.

Presumably, if that was the case now, it was the case for at least

several months leading up to now, would you think they would

have the authority, under current regulations, under current law,

to retroactively provide relief for the people who have been taken

advantage of up to this point?

Mr. HUNT. Mr. Congressman, I really would have to defer on

that.

Mr. WATT. You’ve got some people behind you. Are they on your

staff? They are shaking their heads yes. Maybe they’re not on your

staff?

24

Mr. HUNT. No, they are, they are.

Mr. WATT. OK.

Mr. HUNT. We don’t examine the FERC’s enforcement authority,

but our staff people who work in the utility regulatory system

think that FERC does presently have the authority to do that.

Mr. WATT. And if they don’t have that authority, would you think

it would be appropriate if we, if PUHCA were repealed or amended

to give FERC that authority?

Mr. HUNT. If PUHCA were amended or especially if PUHCA

were repealed, and if FERC doesn’t presently have that authority,

I would think it appropriate to give it to them.

Mr. WATT. OK.

Mr. Jackson, given the substantial increase in energy costs,

which I think we can kind of take legislative notice of in California

all across the country, do you think it would be appropriate to increase in this supplemental appropriations bill, Emergency Supplemental Appropriations Bill, funding for LIHEAP?

Mr. JACKSON. For which now? I’m sorry.

Mr. WATT. The Low Income Heating and Energy Assistance Program.

Mr. JACKSON. That is not a HUD program.

Mr. WATT. I didn’t ask you that. I said, do you think it would

be appropriate to increase it, given the substantial increases in energy costs that have taken place since the last appropriation was

done?

Mr. JACKSON. Well, Congressman, we have addressed that issue

at HUD with our public housing authorities in the sense that we

have increased it by $105 million to address the——

Mr. WATT. Where’d you get the money from to do that, Mr. Jackson?

Mr. JACKSON. From the pay reprogram.

Mr. MILLER. Your time has expired, Mr. Watt.

Mr. WATT. I’m sorry.

Mr. JACKSON. We did reprogram the money.

Mr. WATT. It would be nice to know, if he doesn’t have time to

answer it now, where that money came from.

Mr. JACKSON. We reprogrammed it.

Mr. WATT. Reprogrammed it from where? That’s what I’m trying

to find out.

Mr. JACKSON. Unspent moneys at HUD.

Mr. MILLER. We will try to come back, and I think we’ll have

more time when the other Members have a chance.

Ms. Capito.

[No response.]

You have nothing?

Mr. Bentsen.

[No response.]

Ms. Schakowsky.

Ms. SCHAKOWSKY. Thank you.

Mr. Jackson, the President’s budget only proposes a $150 million

increase in the public housing operating budget, and that money is

supposed to go to addressing increased energy costs.

25

Some estimate that it would take at least $300 million to deal

with high energy costs. What analysis has HUD done to ensure

that $150 million is going to be adequate?

Mr. JACKSON. HUD basically bases its assumption on the Department of Energy, and we are very clear that might occur. But our

position is that we have already allocated $105 million, and to

date, just about half of that money has been used.

So we’re very, very sensitive to the need that if it occurs, we will

address that issue. But our assumptions are based on the Department of Energy.

Ms. SCHAKOWSKY. Well, if I could have some documentation of

that, I would appreciate it.

In Chicago, the public housing authority may have to divert

money from their $1.5 billion, 10-year redevelopment program to

pay for higher energy costs.

I wonder if HUD has any proposal to help make up for that lost

funding?

Mr. JACKSON. I think, Congresswoman, as I’ve said, we’ve reprogrammed $105 million of our money to address higher energy costs,

and if we see that more are necessary, we will be very sensitive to

that.

Ms. SCHAKOWSKY. What does that mean?

Mr. JACKSON. We will have to address the needs.

Ms. SCHAKOWSKY. And where will that come from?

Mr. JACKSON. That has not occurred yet, so I’m not sure I can

answer that question for you.

Ms. SCHAKOWSKY. It would seem to me that one way that we

could help prevent future energy crises is to make public housing

more energy efficient.

The President, however, would cut the Public Housing Capital

Fund by $700 million, and that comes on top of a $22-billion backlog in repairs that will prevent public housing authorities from

making much needed capital improvements.

In light of these cuts, what is HUD’s plan to increase public

housing energy efficiency?

Mr. JACKSON. Congresswoman, I would beg to differ with you. I

think that having ran three major housing authorities, I have probably the best understanding of capital budgets and comprehensive

grants.

And if you remember some 8 years ago, Congress made the decision to cut $500 million out of the Capital Grant budget, and at

that time it was called Comprehensive Grants.

What occurred was that the backlog was so far behind that it

served as an instrument to make sure that the housing authorities

began to spend their capital money.

We have the same problem with backlog today. We give them 18

months to spend the money. We have a tremendous backlog at this

point in time.

It would be my position, and the Secretary’s position, that if that

money is expended within the next 18 months to 2 years, we would

have to come back to see you.

I seriously doubt that is going to occur, because other than a few

housing authorities in this country, we have a number of major

26

housing authorities in urban areas that are far behind in the

spending of their capital funds.

Ms. SCHAKOWSKY. So I can say to my people in Chicago that they

have plenty of money to make—— Mr. JACKSON. I can tell your people in Chicago right now at this

point in time, the capital funds spending is behind, and we’re working with them to make sure that we do it in a very efficient and

effective manner.

Ms. SCHAKOWSKY. And so we have, in your view, completely sufficient money to make the kind of capital improvements that we

need?

Mr. JACKSON. Yes, we do. And if we don’t, I’ll be happy to come

back and discuss that with you.

Ms. SCHAKOWSKY. Well, I appreciate that.

Let me just ask Mr. Hunt. I was looking at your testimony,

which you were not able to complete and I know a number of people have talked about consumer safeguards, and you talked about

appropriate safeguards.

If I could just ask this question, you’ve talked about how FERC

ought to have information about Federal oversight of affiliate

transactions, and so forth.

But I’m wondering if you feel that—then you say, however, that

the SEC would recommend either just a separate review of PUHCA

or larger energy reform legislation.

If you’re saying on the one hand, we have to make sure that

FERC has adequate authority, and on the other hand, just a

straight repeal of PUHCA would be fine with you, how do you reconcile those two things?

Mr. HUNT. Ma’am, I think what the testimony says is that we

favor the repeal of PUHCA and whether it is done on a stand alone

basis or done as a broad reform of the energy regulatory system is

a matter for the Congress to decide.

We also say that, so that’s part of the equation.

The other part is that we do think if PUHCA is repealed, that

the FERC ought to be given additional authority to access the

books and records of utility holding companies.

Ms. SCHAKOWSKY. But even if it were, you would support repeal?

Mr. HUNT. Yes, ma’am.

Chairman OXLEY. Mr. Ford.

Mr. FORD. Thank you, Mr. Chairman.

Mr. Watt, did you want to—I guess Mr. Watt doesn’t want to, because he left.

As we speak—thank you, Mr. Chairman—as we speak, we all

know that Governor Davis is on the other side of the Hill testifying

before the Government Affairs Committee with Senator Lieberman.

And we all know what his request is.

And for those of us not from California, I hale from Tennessee,

Mr. Hunt and Secretary Jackson, we are all concerned. As Congressman Watt mentioned, I’m certain that all my colleagues on

the committee as well as even those in the committee room feel

that if California, as Governor Davis says so well, ‘‘contracts pneumonia,’’ the rest of us will get a really bad cold.

In the effort of trying to avoid a really bad cold, perhaps I don’t

understand the testimony. A lot of these energy issues are new to

27

all of us in the Congress. I don’t have a wife like my friend, Mr.

Miller, but as the person who pays the bills in my house, I get a

little ticked off having to pay higher utility bills as most Americans

do.

Secretary Jackson, I understand that HUD doesn’t play a role in

these issues, but you will certainly be confronted with this challenge, and I appreciate the answer that you provided to the Congresswoman.

But I would remind you that we also have a responsibility to answer to those constituents, and as much as you and others at the

Department may be experts in housing matters and public housing

matters in particular, when constituents call us, we are expected

to at least be aware of the challenges and have asked you those

questions.

So I appreciate the passion in which you answered the question,

but I hope you would appreciate as well the we have that charge,

the same charge that you have, because we are elected, not appointed, to serve the constituents and the people of this country.

That being said, the imposition of price caps, Mr. Hunt, and perhaps you’ve answered this in your remarks and I just haven’t

heard it, but I take it you are opposed to price caps in the form

that Governor Davis is asking for?

Mr. HUNT. I didn’t say anything in my testimony about price

caps, Congressman. That’s in the purview of FERC. That’s not

something that the SEC has anything to do with.

Mr. FORD. The SEC has no position or thoughts on the idea of

price caps as proposed by Governor Davis?

Mr. HUNT. We have not formulated an official SEC position with

respect to price caps on utility rates, no, sir.

Mr. FORD. To your knowledge, are you all in the process of developing any position on the Governor’s——

Mr. HUNT. No. We think that’s not really within our purview either under the Public Utility Company Act, and certainly not under

the other securities acts that we administer. We think that’s something for the State regulatory authorities and the FERC on the

Federal level to deal with.

Mr. FORD. I would assume that the Department of Housing and

Urban Development has not developed a response—would be the

Administration’s response most likely you would adhere to, Secretary Jackson.

I have no further questions, Mr. Oxley. Thank you.

Chairman OXLEY. The gentleman yields back.

The gentleman from Texas, Mr. Bentsen.

Mr. BENTSEN. Thank you, Mr. Chairman.

Let me say at the outset, while I think PUHCA is probably an

outdated piece of legislation, I’m not quite sure I understand the

nexus between this and what’s going on in California.

And I think you laid that out subtley in your testimony, Mr.

Hunt.

But answer this for me, because I think it’s interesting. In your

testimony, you talk about PUHCA and you also talk about the Energy Policy Act of 1992, which allowed for exempt and non-exempt

companies to acquire exempt wholesale generators.

28

It’s interesting to me, if I understand this correctly, this would

have been about the same time that then-California Governor Wilson was pushing the California Energy Deregulation Plan through

the legislature. And if I understand that plan correctly, they precluded State regulated holding companies from having their own

generating capacity and required them to divest of generating capacity which, if I understand correctly, is part of the problem that

they have right now in California is that the utilities themselves

just became conduits for power more so than conduits in generating

entities.

I don’t know if that’s your understanding of what happened

there, but I think it is a little ironic.

Mr. HUNT. We think that your characterization is correct, sir,

yes.

Mr. BENTSEN. And I mean again it has really nothing to do with

the SEC or the Public Utility Holding Company Act.

Mr. HUNT. That’s right.

Mr. BENTSEN. But it is rather ironic that Governor Wilson would

have been pursuing this, or whoever, the California legislature at

the time, was sort of going in the opposite direction of where the

Federal Government was going in providing that.

And I think that tells a lot about the sort of mistake that was

made in part in the California deregulation scheme that only deregulated part of the market and not the entire market.

Other than that, the issue of, in the footnotes you talk about the

issue of the potential for monopoly power, but I guess the question

of monopoly—well, even with the repeal of the Public Utilities

Holding Company Act, would the Securities & Exchange Commission have some regulatory authority over publicly held companies

as it relates to their activities in the capital markets?

Mr. HUNT. Oh, certainly, sir.

Mr. BENTSEN. And FERC would have some control, and then

State regulators presumably would have some control. And then

with respect to monopoly concerns, I would presume that the Justice Department and the Federal Trade Commission would have

some issues that they would have control.

Would that be your understanding?

Mr. HUNT. I think that’s right. Clearly, we would have control

over the issuance of securities and their accounting and their disclosure to their investors, as with any publicly-held company, and

I would assume that as to the monopoly concerns that the agencies

you mentioned would have that traditional jurisdiction.

Mr. BENTSEN. Mr. Chairman, I don’t really have any other questions, although I am glad to see my fellow Texan, Mr. Jackson, is

here, formally with the Dallas Housing Authority and, years back,

at Texas Southern University as well—I think the Board of Trustees, Chairman of the Board of Trustees I believe at one point,

which is in Houston.

And I appreciate his testimony and I will say in looking at your

testimony, Mr. Jackson, that while there’ve been some questions

about the Administration’s eagerness to pursue conservation as a

part of a long-range energy strategy, I do see, at least in the HUD

statement, that you all look for energy efficiency in conservation,

and I appreciate that.

29

With that, I yield back the balance of my time.

Chairman OXLEY. The gentleman’s time has expired.

The gentlelady from Ohio is recognized.

Ms. JONES. Thank you, Mr. Chairman. Mr. Chairman, Mr. Ranking Member, thank you for putting this hearing together.

Like my colleagues though I’m not from California, it is an issue

that significantly impacts the area that I represent.

I would like to say hi to Mr. Hunt. I know him from another life.

He was the Dean of the Law School of the University of Akron

when I was judging back in Ohio. It’s good to see you again, Mr.

Hunt.

Mr. HUNT. It’s good to see you, ma’am.

Ms. JONES. Real quickly, I guess my initial questions actually are

going to go to you, Mr. Jackson. Additional dollars for Section 8

housing. What about the people in public housing operated under

HUD auspices that don’t receive Section 8 dollars, that are not in

renovated housing that has been adapted for energy efficiency?

What do we do for those folks?

Mr. JACKSON. I think that’s a very excellent question, Congresswoman, because I think when you get to the Midwest and the

Northeast, you have that serious problem, because they have not

been renovated.

I don’t think the problem exists so much in the Southwest/Southeast because most of them are very new. I think what we must do

is go in, in the process, if they’re not renovated, when there are serious problems, to make sure that not only do we correct those serious problems that are inside the units, but we try to make them

energy efficient at the same time.

That has not always been the case. I have to be very honest with

you. But I think now that many of the housing authorities in the

Midwest are seeing that, especially with the high spiraling energy

costs, that we must go in and not just service the area that we are

required, but to make the necessary repairs around the doors,

around the windows, to make sure that they are sealed well and

keep the heat out and keep the cold out.

Ms. JONES. Because in reality, those are the situations where you

read the story about a family burns up in a house, because they

have a candle burnt sitting in the middle of the hallway or they

are using kerosene lamps or doing something in order to be warm

or to warm themselves when they really don’t have in place longterm solutions for energy in their homes.

Am I reading correctly that you do weatherization classes for

people in public housing or suggestions of energy efficiency? Is that

one of the President’s proposals?

Mr. JACKSON. Yes. I think that’s very important. When I was in

Dallas, and in St. Louis, we did that. It might sound very strange,

but——

Ms. JONES. What was that thing that you provided a body with

hair spray and hair dryers?

Mr. JACKSON. No. We are assuring them in many cases. For example, in St. Louis, we did not have enough maintenance people,

so what we did was we took the resident counsels from each one

of those respective housing authorities and said, ‘‘You can help us

in this process if you would do this on a Saturday morning,’’ and

30

we would send two maintenance or three maintenance persons out.

They would work with them and seal the windows, especially of the

senior citizens and the elderly.

Ms. JONES. You provide the supplies and the supervision then?

Mr. JACKSON. Yes.

Ms. JONES. OK. Let me back up again to Mr. Hunt.

Thank you, Mr. Jackson.

Mr. HUNT. Oh, I guess it was three, four, seven, I don’t know

how many, maybe in the last 7 to 10 months, Mr. Hunt, it was not

electricity, but it was gasoline that was an issue in the State of

Ohio and then around Indiana, Kentucky, Pennsylvania. All the

gasoline was cheaper, but for in Ohio.

And the argument was that Ohio was imposing something upon

the way in which gas was produced or the like that caused Ohio

to be in this particular situation. I’m still waiting for the response

on why Ohio, Indiana, I mean Indiana and all these other surrounding States, gas was cheaper than Ohio.

But let me impose what this suggestion upon the situation with

the electricity or this example upon the situation with electricity in

California.

Is it or is, if you know, electricity in the States surrounding California much cheaper than California electricity?

Mr. HUNT. Do we know that?

Ms. JONES. Anybody know that? Am I asking the wrong people.

Mr. HUNT. We think it’s a region-wide problem in terms of the

Western part of the country.

Ms. JONES. Sure.

Mr. HUNT. But essentially in California.

We think that—our understanding is that the generating facilities are most lacking in California.

Ms. JONES. My time is up, and if you’ll forgive me, next panel,

for leaving. The issue in Cleveland right now is steel and I have

a steel meeting, so I’ve got to leave.

Thank you very much, Mr. Chairman. I yield.

Chairman OXLEY. The gentlelady yields back.

Gentlemen, thank you for your testimony. We appreciate your

being here with us again. Thank you.

Could we have our second panel come forward.

Let me introduce our next panel, three professors and a market

analyst.

Professor Vernon Smith is a Ph.D. Economist from the University of Arizona. With him are Dr. Jerry Ellig from George Mason

University’s Mercatus Center, and Dr. Frank Wolak from Stanford

University. We are also pleased to have with us Mr. James Dobson,

Managing Director of Deutsche Banc Alex. Brown.

Gentlemen, thank you for appearing before the committee, and

Dr. Smith, please begin.

STATEMENT OF VERNON L. SMITH, Ph.D., REGENT’S PROFESSOR OF ECONOMICS; DIRECTOR, ECONOMIC SCIENCE

LABORATORY, UNIVERSITY OF ARIZONA

Mr. SMITH. Good morning.

First of all, Chairman Oxley, Congressman LaFalce and Members of the committee, thank you for allowing me the opportunity

31

to address you on the impact and causes of the California energy

crisis.

My name is Vernon Smith. I’m currently the Regent’s Professor

of Economics and Director of the University of Arizona’s Economic

Science Laboratory. I will be employed there for 4 more days.

Later next month, my colleagues and I will be moving to Northern Virginia to become affiliated with George Mason University

and its Mercatus Center.

This statement is based largely on my joint work with Stephen

Rassenti and Bar Wilson, also of the Economic Science Laboratory,

but who could not be here today. They’re back home doing the

work.

I think a brief way in which I can approach my response is to

have you begin by looking at Figure 1. I want to work from the figures.

I want to first say that the energy crisis didn’t begin in California if, by the crisis, we mean price spikes. Those price spikes

began in the summer of 1988 in the Midwest, and the East in the

summer of 1999, 2000, and they are likely to come back in the

summer of 2001.

Although the earlier price spikes have, to some extent, of course,

attracted new capacity, and it’s very hard to predict what the effect

of that increased capacity is.

In Figure 1, what we see here is the normal change in the consumption of electric power over the daily cycle and over a week.

Notice that the peak consumption is about twice, or a little over

twice the off-peak consumption.

This graph is somewhat exaggerated by the fact that we do not,

at the retail level, price hourly. We do not price on a time-and-day

basis.

As a result, people do not have an incentive to conserve on-peak,

they don’t have an incentive to shift to off-peak, and that tends to

exaggerate this cycle.

Now, in Figure 2, we see how the marginal cost of producing

power varies throughout the typical day and week. This is not a

recent graph. This is early 1980s. This is a hot August week in

Chicago and in the Midwest. But you can pull this graph out in the

1970s or the 1960s or any time and also anywhere around the

world, and you’ll see a similar pattern.

Now this is the wholesale cost. This is the cost that the distributor is paying hourly throughout the day. That distributor,

back in the 1980s, and as is still true today, is reselling that power

at a constant rate throughout the day.

Now, in the early 1980s, the retail rate would have been in the

Midwest, I think, would have been around 6 to 7 cents a kilowatt

hour. About half that would be energy.

All right, now imagine in Figure 2, that you draw a line at 3

cents, a horizontal line at 3 cents. That is the price the distributor

is getting from the—the regulated price the distributor is getting

from the resale of that power.

That means all of those peaking costs that are above that line,

in effect, are peak consumption.

The off-peak, which is much below that, people are paying more

than it costs. In effect, you are taxing the off-peak user. This, I

32

want to argue, is the crux of the problem in electric power not only

in California, but in the rest of the United States.

When you deregulate the wholesale market, you expect it, you

want it to reflect the variation in costs of producing power, and

that’s what happened in wholesale markets. But we did not deregulate the retail price and this in California caught the utilities in a

bind.

Figure 3 shows a very bad week in the week of June 26th, 2000

in California. These are the California PX prices, the spot prices,

and you see they are varying all the way from about maybe $15

off-peak for megawatt hour—that’s 11⁄2 cents—up to $1100 a megawatt hour, that’s a $1.10 per kilowatt hour.

But they’re reselling that power for around 12 cents. They raised

that now, I believe it’s 13 cents on average.

And this gives you an idea of the extent to which peak users are

being subsidized and off-peak consumers are being taxed implicitly.

Now the California prices were not always this high, and in fact,

if you look in April 1, 1998, you’ll notice that the pattern of prices

varied from 25 cents per megawatt at 1:00 o’clock, zero at 2:00, 25

cents at 3:00 in the morning, and it went up to $5 a megawatt,

that’s a half-a-cent per kilowatt and so on, and peaked out around

25 cents.

Now why do we have these sharp changes in price? And as I say,

they are not unusual to California, they occur also in Australia,

New Zealand and other places around the world.

I and my colleagues were involved as consultants in the move to

decentralize the electric power industry in New Zealand and in

Australia.

Now I have here on Figure 5, a chart of the actual asking prices

submitted by generators in the Australian electricity market, and

notice the base load guys are coming in there at zero. We actually

proposed that the base load guys had the opportunity to bid a negative amount.

And the reason is that the base load generators cannot be shut

off. They cannot be ramped up and down as demand varies. And

actually, if you have the supply of base load power exceeding the

demand, you’ve got to shut down somebody. And if they are able

to state how much they are willing to pay to the system to stay on,

you have a further opportunity there for rationing among those

base load units.

But notice here, this is targeting 8:00 p.m. at night, the demand

there is around 7800 megawatts and that yields a price of $15 Australian per megawatt. If the demand were moved up to around

8100, notice that the price would have jumped to $45. If it goes up

to around 8200, it goes to about $55 and $60 and so on.

Chairman OXLEY. Dr. Smith, could you sum up, please?

Mr. SMITH. Yes. So this is a natural sort of way in which these

markets work.

All right. Now what we propose is more voluntary interruption

of demand at the retail level, and the pricing at the retail level, the

prices should reflect the true costs that are coming in from—in normal times at least—from the wholesale market.

33

Now we find that with only 16 percent of peak demand interruptible to end users in our experiments, the time of day prices can be

substantially lowered and price peaks eliminated.

Basically what happens there is that whenever the asking prices

are high from the generator side, the buyers interrupt how much

of that demand they are going to take, and what they have. They

do this by having voluntary interruption contracts with their customers.

By a rolling sort of selective voluntary power interruptions,

blackouts of whole neighborhoods can be avoided except under extreme weather conditions when they are unavoidable.

The California crisis is a direct consequence of a failure to introduce time-of-day retail prices that reflect highly variable time of

day wholesale prices and generator costs.

What must change is the cultural mindset of local utility managers and their customers, which has been inherited from State

regulation. This mindset is that all retail demand must be served

without regard to the differences in individual consumers’ willingness to pay for energy.

This mindset will change, we believe, with full cost time-of-day

pricing and have the effect of incentivizing customers to prioritize

their use of energy.

The effect of these changes will be to create a far more efficient

and smoothly functioning market that will not require Government

intervention.

It will enormously benefit the environment by reducing the

growth in demand for energy and transmission capacity, and thereby reducing air pollution and unsightly power lines.

Thank you, Mr. Chairman. I look forward to answering whatever

questions you and your colleagues have.

[The prepared statement of Dr. Vernon Smith can be found on

page 73 in the appendix.]

Chairman OXLEY. Thank you.

Dr. Ellig.

STATEMENT OF JERRY ELLIG, Ph.D., SENIOR RESEARCH

FELLOW, MERCATUS CENTER, GEORGE MASON UNIVERSITY

Dr. ELLIG. Thank you. I’d like to thank the Chairman and Congressman LaFalce for the opportunity to testify today.

My name is Jerry Ellig. I’m a research fellow at the Mercatus

Center at George Mason University, and I should mention my

views are only my own; I’m not speaking on behalf of the University today.

As I read about what’s happening in California and watch the

ensuing policy debate, it really hits home in a personal way. And

the reason it does is not just because I have family in California,

but also because I grew up in Ohio during the natural gas shortages of the 1970s.

The school that I attended for high school in the winter of 1976-

77, actually shut down for a couple of weeks, because there wasn’t

enough natural gas to go around.

Then something bad happened. We went back to school, but not

in our school—in the area of a local department store that had previously housed their Christmas merchandise. So customers coming

34

in, instead of seeing inflatable Santa Clauses and tinsel, now saw

a bunch of geeky high school kids talking to the walls as we practiced for debate class.

Chairman OXLEY. Where did this all take place?

Mr. ELLIG. Excuse me?

Chairman OXLEY. Where did this all take place?

Mr. ELLIG. Oh, in Ohio, in Cincinnati.

Chairman OXLEY. Oh, in Cincinnati. You were in high school in

1976?

Mr. ELLIG. That’s right. I lost my hair after that.

[Laughter.]

Mr. ELLIG. Now for us this was an adventure. For a lot of families in Ohio where the principal wage earner was at home because

factories were also closing down, it wasn’t funny, and so I can attest to having some personal experience with the disruption you

have in people’s lives when you have these types of energy shortages, whether it’s gas shortages or electricity blackouts.

In the time I have left, I want to mention two things, make two

basic points.

First, I’ll talk a little bit about the roots of the California crisis

and the California wholesale market.

And second, talk about what this tells us about retail electricity

restructuring and the wisdom of retail competition in electricity.

In California, the big problem in California is an imbalance between supply and demand. And on the demand side, there are really two things to keep in mind.

The first is that the utilities’ demand for power is artificially inflexible. The reason it is artificially inflexible is because utilities

must supply as much power as customers want at a regulated

price, and it has the types of effects that Vernon Smith so eloquently just explained.

The other thing you need to remember about demand in California is that it has been steadily growing, not because Californians

are wasting energy, but because the California economy has been

growing, the population’s been growing, and when you get population growth, economic growth, you’re going to use more energy

even if your State is leading the Nation in conservation.

Now, over on the supply side, we have largely, in a lot of ways,

a fixed supply. You’ve probably heard the news reports. California’s

built no new power plants in 10 years, no new major transmission

facilities in 10 years. Fixed supply, gradually increasing demand,

summer of 2000, gradually increasing demand hits the fixed supply, you get price spikes.

Now some folks have said, wait a minute, the price spikes are

not just explained by natural supply and demand. There is also artificial manipulation of the market going on because generators are

withholding capacity and shutting down plants, claiming they are

performing maintenance when really they’re just trying to reduce

supply and increase price.

Given the nature, the amount of judgment involved in maintenance decisions with power plants, I don’t know if we will ever

know for sure what’s going on. But I do think it is worth noting

that if a generating company wanted to manipulate the market,

35

the California wholesale market was set up in ways that would be

conducive to that kind of behavior and would encourage it.

When you have artificially inflexible demand, the rewards are

greater if you can jack up the wholesale price a bit, because demand is not going to drop off in response to the price increase.

In addition, we have—well, a number of other problems that I’ll

skip over, but are in my testimony.

Second issue. What does this tell us about the wisdom of retail

competition? I think the principal thing that the California experience tells us about the wisdom of retail competition or about retail

competition in electricity is that the devil is in the details and it

is very easy to get it wrong and fail to create retail competition

even when that is your goal.

I don’t think that needs to discourage us and I don’t think the

lesson is that retail competition is a bad idea. If we want to see

that California is the outlier, rather than the typical example of retail competition, we need look no further than Pennsylvania, which

has had a very highly successful retail electric restructuring where

20 percent of Pennsylvania retail customers have opted for supplier

rather than utility. In some utility territories, you have as many

as a third of the customers who have switched suppliers, so it really is possible to create effective retail competition without creating

the types of price spikes and blackouts that we’ve experienced in

California.

It’s also the case that California looks especially atypical if you

compare it to our experience in other industries where we’ve undergone regulatory reform and deregulation, where again, generally

the result we’ve gotten is lower prices, expanded supply. We

haven’t had shortages, we haven’t had the price spikes.

So the bottom line is there are certainly problems in California’s

market that can be dealt with through redesign of the market, and

we should not take California as a typical example of what happens when you move to retail competition in electricity.

[The prepared statement of Dr. Jerry Ellig can be found on page

109 in the appendix.]

Chairman OXLEY. Thank you, Dr. Ellig.

Dr. Wolak.

STATEMENT OF DR. FRANK A. WOLAK, PROFESSOR OF ECONOMICS, STANFORD UNIVERSITY; CHAIRMAN, MARKET SURVEILLANCE COMMITTEE, CALIFORNIA INDEPENDENT SYSTEM OPERATOR

Mr. WOLAK. Thank you very much for the opportunity to speak.

I address three issues in my written testimony.

The first is the fundamental cause of the California crisis and its

implications for long-term regulatory oversight of electricity markets.

The other is the likely effectiveness of FERC’s recent market

power mitigation policy for California.

And the last is the need for a long-term Federal energy policy.

I’ll focus here just on the first two.

I think it’s been well-documented that one of the major problems

in California is that the vast majority of its purchases were on the

day-ahead and shorter-term energy markets.

36

And I think that this is an important change and I want to explain the implications of this for the performance of the market.

And in particular, what also happened in California when the restructuring took place is that the assets of the incumbent utilities,

at least half of the assets, were sold off without what are called

‘‘vesting contracts.’’

And what vesting contracts do is effectively give the seller of the

plant the right to purchase back a significant fraction of the output

of the plant that it sells at a regulated price for a long-term period.

What this effectively does is creates a hedge on the wholesale

market, so that the firm that has a retail obligation can purchase

energy, at least that amount of energy, at a fixed price.

And it is this fundamental lack of hedging that is, I think, the

fundamental cause of the California crisis. In particular, one thing

that I’ll just go through is talk about how the forward contract obligation of a firm can exert an enormous influence on the bidding behavior in competitive markets.

And a general result from virtually all markets around the world

is that in markets where generators have a lot of forward contract

cover, spot prices tend to be low and price volatility tends to be

low.

And in markets where generators are exposed to the spot market, meaning they have no forward commitments to supply electricity, average prices tend to be higher and price volatility tends

to be higher.

And the difference in performance of the market, when you have

a lack of contract cover, is certainly exacerbated by the conditions

that occurred in California in the summer of 2000 where roughly

2000 to 3000 megawatts of imports disappeared as a result of

hydro conditions in the Pacific Northwest.

So this only exacerbated both the level and volatility of prices in

California.

And this relationship between forward market positions and spot

market outcomes has essentially led to the creation of a new segment of the electricity industry, and that’s called power marketers.

And what power marketers do is effectively sell commitments to

electricity which impact the incentives of their affiliated generation

to participate in the market.

And in the former regulated regime, the way you made money

in the industry was to effectively produce your product at a lower

cost and deliver it to consumers at a lower cost than the regulated

retail rate.

In this new regime, the way firms make money is effectively

trading on their expectations of the spot price of electricity at the

date of delivery. And moreover, because the firm owns plants, it

has the ability to influence the spot price that it sold these forward

commitments to clear against.

And moreover, to be a successful participant in this new regime,

you don’t even need to own generation, you just need to know how

generators will behave, in other words, how they will impact the

spot price.

And a good example here is Enron, which has a very profitable

business in California despite the fact that it owns no generation.

37

And so really what restructuring has done, if I was going to say

the one lesson I’d like to get across here, is that it’s changed the

nature of the electricity industry to a standard commodity market

like pork bellies.

And as a consequence, I think that it should be regulated in the

same way as these markets. For example, the CF Commodity Futures Trading Commission model I think is far more appropriate,

rather than a public utilities commission or the FERC approach of

essentially looking at the cost of production.

And this perspective, I think, also implies a way to fix the California problem. The over-reliance of California on the spot market,

the cost-based bid caps that the FERC has implemented create all

the incentives that various of the previous speakers have alluded

to.

However, regulatory intervention on the forward market will effectively set up the incentives for generators to participate in the

market and not withhold capacity from the market, operate their

plants in an efficient manner, and maintain their facilities in top

working order.

And moreover, because there’s a large contract cover that’s available to consumers, they will be protected from spot price risk and

realize the full benefits of competition.

Thank you very much.

[The prepared statement of Dr. Frank Wolak can be found on

page 136 in the appendix.]

Chairman OXLEY. Thank you, Dr. Wolak.

Mr. Dobson.

STATEMENT OF JAMES L. DOBSON, CFA, MANAGING

DIRECTOR, DEUTSCHE BANC ALEX. BROWN

Mr. DOBSON. Mr. Chairman, Ranking Member and esteemed

Members of the committee, good afternoon and thank you for the

opportunity to testify before you on the California energy crisis.

My name is Jay Dobson. I’m a research analyst responsible for

analyzing the U.S. electric power industry for Deutsche Banc Alex.

Brown.

High electricity prices have dominated the headlines in many

areas of the United States over the last 12 months, most notably

in California.

The energy crisis in California is the result of an incomplete deregulation plan and extremely short generating supply. The deregulation plan in California essentially deregulated the wholesale

market, but left the retail market regulated with fixed electricity

prices.

Further, the incumbent utilities were encouraged to sell many of

their electricity generating plants. This forced the companies to

purchase electricity in the wholesale market without the ability to

recover their costs from consumers.

This incomplete deregulation plan might have worked in a market with adequate or excess generating supply. However, as a result of the very poor hydroelectric conditions in the Northwestern

United States, and the fact that no material amount of electricity

generating capacity has been added in California over the last 10

38

years, a shortage of supply has developed, and wholesale electricity

prices have materially exceeded retail electricity prices.

This has caused a financial crisis for the incumbent electric utilities in California, and caused retail electricity prices to rise by 40

percent.

The long-term solution to this problem is the addition of new

generating supply. The recent high wholesale prices of electricity

have caused generators to announce almost 25,000 megawatts of

new electricity generating capacity in California between now and

2006.

This is a 45 percent addition to existing generating capacity in

the State and clearly indicates that the competitive wholesale markets for electricity are working.

More than half of this capacity will be available by 2003. Nationally, including California, electricity generation developers have announced the addition of 370,000 megawatts of new capacity over

the next 5 years, a 49 percent addition to the existing capacity.

Although some economic impact of rising electricity prices is unavoidable, we believe that the focus should be on managing the impact in the short-term, but encouraging supply additions in the

long-term.

This is an extremely precarious balance, though. The short-term

desire to control prices could derail the new supply additions in

certain areas of the United States. This could support higher electricity prices in the intermediate term.

In our opinion, the most critical action State and Federal legislators and regulators can take is to ensure the development of a competitive market for electricity. Avoid the temptation to cap electricity prices in the near term.

Actions to ensure the enforcement of current law should be more

than adequate to control price spikes.

Importantly, avoiding the near-term temptation to cap electricity

prices will deliver a much larger and longer term benefit to consumers. The economic benefit associated with the development of

excess generating capacity in the United States will drive electricity prices sustainably lower.

Further, as many of the new generating resources are significantly cleaner and more efficient than existing electricity generating capacity in the United States, an environmental benefit will

accrue to consumers and the Nation in conjunction with lower

prices.

California is among the more than 20 States in the United States

that have legislatively deregulated the electric power industry.

However, California is different in several critical ways and the

problems with deregulation appear most acute here.

We would point to the States of Pennsylvania and Massachusetts, among others, as examples of where deregulation of electricity markets has worked. The successes, coupled with the prospect of declining electricity prices and more efficient electricity-generating supply should keep the United States on the road to fully

deregulated electricity supply markets.

Consumers do not want many of the risks the previous regulated

electricity markets provided. The transition process to a deregulated market has provided its own risks, as evidenced in California.

39

However, full deregulation of the electricity markets will allow

the wholesale and retail markets to develop remedies to these problems. The generators proposed addition of 370,000 megawatts of

new generating supply in the United States over the next 5 years

convinces me of this.

In summary, we believe the Federal and State legislators and

regulators should continue to encourage the development of a competitive electricity market and the addition of new capital to the

electricity industry. New electricity generating capacity, as well as

new electricity transmission capacity will go a long way to delivering to consumers the benefit originally promised to them in electricity deregulation; significantly lower electric prices.

Thank you again for the opportunity to testify before you on this

critical energy issue.

I look forward to answering your questions.

[The prepared statement of James L. Dobson can be found on

page 152 in the appendix.]

Chairman OXLEY. Thank you, and thank you all, gentlemen.

Let me ask all of you, from a layman’s standpoint, I’ve had some

background in energy in the other committee I served on for several years. And was involved in the Clean Air Act and other energy

issues and environmental issues at that time.

Let me start with you, Dr. Wolak. It’s my understanding that in

the last several years, California’s supply of electric energy has actually decreased by 5 percent; at the same time there’s been a 24

percent increase in demand.

Is that correct?

Mr. WOLAK. No. At most, demand has increased probably over

the past 3 years about 10 percent, and there have been some supply additions coming online in the last 2 to 3 years. True, no new

large facilities, but certainly a lot of smaller facilities have been

coming on line.

Chairman OXLEY. And how would you quantify that? What kind

of an increase have we seen in California in terms of electric energy supply?

Mr. WOLAK. The difficult part in California is the fact that we

are an integrated system and effectively historically rely on between 20 and 25 percent of our consumption is imports. So there’s

roughly a carrying capacity into the State of on the order of 12,000

megawatts into the State, and so a lot of the energy comes in

through imports.

Chairman OXLEY. Is that a policy decision made by the political

leaders of California?

Mr. WOLAK. Well, it actually is just a good economic decision in

the sense that if you look in the surrounding areas of California,

California pays an average retail price, say in 1998, of on the order

of 10 cents per kilowatt hour.

People to the North of us pay an average price of about 41⁄2

cents. The Southwest pays an average price at that time of about

71⁄2 cents. So you live around cheap power and they’ve got lots of

it, so it makes sense to essentially buy what you can from them.

Now the bad news is that when they grow, for example, like Nevada on the order of 50 percent in a 10-year period, or Arizona on

40

the order of 20 percent in a 10-year period in population, they tend

to consume all the power and leave very little for you to consume.

So in that sense, that’s what got California into the position that

it was in, very few imports available to sell into the State.

Chairman OXLEY. Do any of the other panelists have a different

view of that discussion I just had with Dr. Wolak?

Mr. ELLIG. I think part of the reason you hear somewhat different figures is people are quoting different start years and different end years, whether it’s the past 3 years or the past 10 years,

but that’s—I think we all pretty much agree on the trend.

Chairman OXLEY. Let me ask you, beginning with Mr. Dobson,

what would be the economic impact on investment if the Congress

were to enact price caps on energy costs in the State of California?

Mr. DOBSON. It would have a very negative impact. As I pointed

out in my testimony and my comments, about 25,000 megawatts of

new additions have been announced. Now, as you pointed out in

some of your comments, these have not been sited yet, and that remains the challenge. However, I would expect more than half of

that to be abandoned if, in fact, price caps were legislated by the

Congress.

Chairman OXLEY. More than half would be abandoned?

Mr. DOBSON. More than half would be abandoned.

Chairman OXLEY. Dr. Smith.

Mr. SMITH. There’s not only the impact on investment, but the

price caps also are not going to help with the problem of conservation at the consumer level. And that’s why it’s very important, I

think, to pass through the wholesale prices and also allow retail

competition, so that you’ll get an adjustment not only on the supply

side, but also on the demand side.

Chairman OXLEY. Dr. Ellig.

Mr. ELLIG. Well, I know the last time we tried to do wholesale

price controls in the energy industry on the Federal level, when I

wasn’t sitting on a department store floor trying to go to school, I

was sitting in my car waiting for gas at a gas station. And in both

cases, the regulated price was too low.

You know, in theory, maybe you can find some price that’s lower

than the current price, but high enough that it doesn’t discourage

investment, but I’m not convinced we know enough to figure out

where that price is.

Chairman OXLEY. And so you would suggest that the market

mechanism is the best way to determine that?

Mr. ELLIG. Well, I think rather than focusing on the level of

prices and talking about how to cap them, we ought to be asking

what is it about the way the structure of the market is set up

that’s led to these high prices, and then fix the market structure

rather than trying to overlay price controls on top of a market

structure that’s messed up.

Chairman OXLEY. Dr. Wolak.

Mr. WOLAK. I guess there are several layers of the answer to the

question. But the first is that during the first 2 years of the market, there was a price cap on the energy market on the order of

$250 per megawatt hour, and during that time, roughly all the capacity that is alluded to came to the State of California, and was

wanting to be built.

41

So I think that a price cap set at a high level has almost no effect

whatsoever on investment behavior.

Then the next is that this sort of capping prices is in the form

of saying that I’m going to put you back to cost-of-service regulation. I think it’s also important to bear in mind that under costof-service regulation, we have a long history of gold-plating by utilities subject to cost-of-service regulation. So if anything, there’s an

incentive to over-invest, because of cost-of-service regulation, not

an under-incentive to invest because of cost-of-service regulation.

So, effectively, the final issue is just as I think all economists

would agree, capping a price at a level below the point where competitive supply crosses competitive demand certainly is going to result in a shortage. But capping a price at a level that’s above where

competitive supply crosses competitive demand should have no effect whatsoever on the market.

Chairman OXLEY. The gentleman’s time has expired.

The gentlelady from New York, Mrs. Maloney.

Mrs. MALONEY. I ask permission to put my opening statement in

the record, and also two letters that I wrote to the FERC on the

energy situation in New York.

Chairman OXLEY. Without objection.

[The information referred to can be found on page 167 in the

appendix.]

Mrs. MALONEY. I really would like to ask Mr. Wolak about Vice

President Cheney’s comments when he said that energy conservation amounts to a personal virtue, but is not necessarily critical to

a national energy strategy.

Would you comment on the economic impact of successful conservation efforts? Doesn’t conservation in the form of cars that use

less gas, and lights that burn longer with less power centrally contributing to greater levels of economic efficiency, and why are we

really investing more in new technologies to come up with other

sources of energy so that we’re not so dependent on other countries.

Could you just comment on conservation and efforts in that area

and new technologies. We’re not really looking at new ideas of ways

to conserve energy or create energy.

Mr. WOLAK. I certainly completely agree.

I think that if energy was priced the same way that other products were priced, we would find that there would be very strong incentives of the form that Vernon Smith discussed of firms wanting

to move away from peak periods to reduce the energy bill and effectively move their consumption to off-peak periods to essentially

keep the same level of energy consumption.

And, I think, a good example of the potential for conservation

and just load shifting to really work to benefit consumers is that

if you take the total amount of energy that’s consumed in California during the year 2000, and you divide that number by the

total number of hours in the year, that gives you an average number of megawatts of capacity that you use. And that number is on

the order of 27,000 megawatts.

I should also say that the amount of capacity that is located in

California is 45,000 megawatts, so if somehow we could get consumers through these price signals and through these conservation

measures, to shift their loads, we wouldn’t need to build any new

42

power plants in California. The only reason to build them would be

simply to replace the existing plants that we have with more efficient technology.

So, there’s lots of low-hanging fruit, I think, on the conservation

side, and, if you provide people with economic incentives to do it,

they will benefit and we will not have to build as many power

plants to serve us, and we will get the proper incentives for renewables to develop.

Because, if I face high prices, then in peak periods I may want

to substitute with a renewable technology during those periods.

Mr. SMITH. May I speak to that question?

Mrs. MALONEY. I would really like to request that anybody that

has any ideas of ways that we could have economic incentives for

people to conserve energy, if they would submit it to the record.

But I want to get one more question to him before, and then I’ll

just open it up to anyone else who would like to respond.

But, one of the things that frustrates me is that I don’t see any

new ideas for new technologies, new conservation, a lot of things

that we can do. What he said, just with certain incentives, we could

have not even had this crisis.

But I want to get back to some of the FERC action. The action

that they took on Monday suggests that the FERC Commissioners

have at least partially gotten the message about the need for price

caps, yet they chose to maintain a price control mechanism tied to

the most expensive energy producer.

And could you, Mr. Wolak, explain the logic of this approach, and

will this approach effectively guard against future price gouging.

And then anyone else who would like to comment.

But could you comment on that, Mr. Wolak?

Mr. WOLAK. I certainly can’t comment on the logic of the approach since it doesn’t make much sense to me.

But I certainly think that the same sorts of problems that occurred during the spring and winter of 2001 can once again occur

because the mitigation measure also allows generators to pass

through any input cost increases that it can cost justify.

So, if they somehow managed to have increases in the price of

natural gas, through perhaps not prudently procuring their natural

gas supplies, generators have the ability to simply pass that

through in the prices that they bid into the energy market and receive those prices.

So, the mitigation plan provides little incentive for generators to

wisely procure their natural gas. Moreover, it provides little incentives for them to maintain their facilities and particularly little incentive to maintain their most efficient facilities, because those are

the ones that are cheap and they certainly wouldn’t want those to

be setting the market clearing price; instead, they would prefer to

have the expensive facilities setting the market clearing price.

So in some sense, the incentive is to maintain the inefficient facilities very well so they can set the price and don’t maintain the

efficient facilities, because you don’t want them to set the price,

which is a very peculiar set of incentives to set up.

Chairman OXLEY. The gentlelady’s time has expired.

Mrs. MALONEY. Thank you, Mr. Chairman.

Chairman OXLEY. The gentlelady from California, Ms. Waters.

43

Ms. WATERS. Thank you very much.

This may have been discussed prior to my returning to the committee. While I understand there has been testimony in opposition

to so-called price controls, that it is not a good idea, it prevents investment, that’s not the way the marketplace should work, all of

that, all of that, I would like to know at what point do you believe

there is a crisis and there should be intervention in order to protect

the citizens of California or any other place who experiences the

kind of crisis that we are experiencing now, protect them so that

they have the ability to have access to electricity, to energy, and

not have to suffer the huge increases or blackouts.

At what point would you consider Government should intervene

and place real price caps on if necessary?

Each one of you?

Mr. DOBSON. I would argue, in response to the question, I am

simply not convinced price caps is the appropriate intervention.

The energy crisis, in my opinion, stems from a supply problem, certainly at peak periods.

Absent near-term conservation, price caps are not going to solve

the problem.

Ms. WATERS. OK, I got that point, and we only have so much

time. I don’t want to be rude.

Do you know how the information, where the information is,

whether or not we have adequate information at the State level to

understand whether or not all of these plants are operating at full

capacity, and have you been able or has anybody been able to determine whether or not the maintenance shutdowns are absolutely

necessary, or whether or not somehow they have been created in

order to force the whole question of supply as you are describing

it?

Mr. DOBSON. I do believe that the Federal Energy Regulatory

Commission and the State regulatory bodies of each State, including California, have the ability to acquire that information.

And yes, I do believe that——

Ms. WATERS. Is that public information?

Mr. DOBSON. Yes, I believe it is.

Ms. WATERS. Have you seen it?

Mr. DOBSON. I’ve seen parts of it, not all of it.

Ms. WATERS. Do you know how it is collected?

Mr. DOBSON. It is collected from the generators themselves.

Ms. WATERS. The generators supply us with that information?

Mr. DOBSON. Yes.

Ms. WATERS. I don’t know a lot about how the grid works. Can

you tell me if the grid crosses State lines and in the reporting, is

that information in each State, is it available to California, all of

the information from the grid?

Mr. DOBSON. I’m not aware if the grid information is available.

I was speaking specifically of the generators availability and maintenance schedules.

Ms. WATERS. Could anybody else help me with what I’m trying

to determine here about access to information that would absolutely document the needed maintenance and/or whether or not

these plants are operating at full capacity and whether or not we

44

have access to all of the information to make a determination about

these things?

Mr. Wolak.

Mr. WOLAK. I guess the thing that I would say is that the analogy to a generating facility and a sick day is quite apt. That, in

other words, generating facilities are extremely complex pieces of

equipment. There’s no way for anyone to know if really a generating facility can run or not.

For the same reason that when you call in to your boss and you

say, ‘‘I’m sick today,’’ he knows whether you’re really sick or not,

or if you are going to go to the beach. And moreover, he doesn’t

send a doctor to your house because he knows that if he does, the

human body is a sufficiently complex piece of equipment that you

could fake some disease that the doctor would have no way to ever

learn is really, in fact, a disease that prevents you from working.

Ms. WATERS. Do we have inspectors or monitors?

Mr. WOLAK. It’s exactly the same thing with the generating facilities. You send that independent engineer and these are 30-yearold facilities. Just think if you have a 30-year-old house, which I

have, everyday there’s five things I could fix, but I don’t fix.

And moreover, if you run the facility—and you shouldn’t be running the facility; it could probably explode and create health hazards—so for the same reason that you don’t make the worker work

when he says he’s sick, it’s the same thing. You don’t make the

generator work when he says he’s sick.

Ms. WATERS. We have to take their word for it?

Mr. WOLAK. You have to take their word for it. So what you do

instead is the same thing that you would do in the case of the

worker. You say, ‘‘Look, if you’re going to take a sick day, then you

have to replace yourself with someone else.’’

In other words, the risk of you calling a forced outage or you calling a sick day is that you have to replace yourself, and in the same

sense that’s the same way we can solve the problem with the generators, is that if a generator says that he’s, ‘‘sick’’ today, or he’s

out today, then it is his obligation to supply the power that you

need. And he must scramble, as opposed to the ISO scrambling, as

is currently the case.

And this is something that FERC is certainly aware of, but has

done nothing to solve. I mean, they still maintain that, you know,

there is no problem with a verifiable forced outage.

But my viewpoint certainly is, given the economic incentives, if

it’s a good day to take a sick day and it allows me to raise the

price, I certainly will. I mean, that’s simply what I would do if I

was a profit maximizing firm as certainly these firms are.

Chairman OXLEY. The gentlelady’s time has expired.

The gentleman from New York, Mr. Crowley.

Ms. CROWLEY. Thank you, Mr. Chairman and thank you to the

panel.

When the President announced his energy plan through the Vice

President, there was a big thud that hit the table, and it really

hasn’t moved since then. I think it was an embarrassment to the

Administration. Certainly the American people, I think, were somewhat embarrassed by it as well.

45

Very little discussion of better management or conservation or

innovative fuel sources and more emphasis on the production and

consumption of fossil fuels and use of electricity and other forms

of the production of electricity.

In fact, Matthew Warburton of UBS Warburg told CNBC that

the energy service providers should benefit from President Bush’s

energy plan while, at the same time, there were no short-term winners.

That means the consumers back in New York and especially in

California, but in my home State of New York as well, the seniors

or those on fixed incomes are the short-term and long-term losers,

according to this plan.

The announcement from FERC on Monday that they have determined that price fixing has taken place in California, do you believe that one, the utilities that have been fixing the prices and

have been gouging their customers ought to be held accountable

and forced to send rebates to the consumers?

What is your position? I understand the FERC’s position. What

is the position of the panel?

Does anyone want to chime in?

Mr. DOBSON. It would certainly be my position that this should

be investigated, as I know the attorney general and others are

doing in the State of California. And if proven that, in fact, these

were unjust and unreasonable prices, and the FERC has the authority to, in fact, force refunds, although I have not seen the complete data set looking at the information provided by some of the

generation companies, none of that appears evident to me.

Mr. ELLIG. There are probably two things we need to keep in

mind when we talk about this, because first off, when we talk

about refunds, some of the power producers who might have to give

refunds are sitting there saying, ‘‘What refunds? We haven’t been

paid yet.’’ Second, I think we also ought to keep in mind, when we’re talking about price gouging, just and reasonable prices, that there are

a lot of different ways of trying to figure out what is a just and reasonable price.

And FERC has one way, and if you go Professor Wolak’s website

and look at some of his research papers, there are other ways of

doing it, and the figures don’t always agree.

So I guess before going to the refund issue, I’d want to raise my

hand and say, well, wait a minute, I’m a little bit reluctant to accept somebody, either FERC’s or somebody else’s determination as

to exactly what’s just and reasonable and what is not, as a matter

of economic analysis, trying to figure out what’s going on in the

market.

I realize as a matter of law what they say goes, but in really trying to figure out what’s going on and whether refunds or whatever

are justified, I’m skeptical that the methods that they’re using to

calculate it make sense.

Ms. CROWLEY. Welcome to the free market and energy sector. We

have limited time.

We’ve seen what the market has done in respect to prescription

drugs to seniors, and unfortunately see the same thing happening

in the energy sector.

46

In New York, we had a real problem when home heating oil just

rocketed not last winter, but the winter before, and seniors in my

district were forced to make decisions as to whether they were

going to pay their rent, purchase their foods, or purchase their prescription drugs, or pay their home heating oil bill. It was a real crisis.

I support the opening this was a short term solution to help drive

the market.

I’d also like to hear what your positions are on that issue, as well

as the fully funding and establishing a Northeast home heating oil

reserve, and what affect that could have on the market, particularly in the Northeast and other regions of the country that experience potential price hikes during the winter months of home heating oil.

Mr. WOLAK. I would just like to comment on your previous question in a sense that just to tell you that FERC has no standard for

determining whether rates are just and reasonable, so it’s a moot

point. That’s sort of the fundamental problem with the electricity

market, that they sort of pushed people out of the airplane without

a parachute, that we’ll sort of tell you when we’ve seen them, but

we won’t tell you how we see them, see that they are.

So I think the first step would be for Government Oversight to

say, ‘‘Look, you at least must specify a methodology for determining

whether rates are just and reasonable,’’ so that the monitors, such

as myself, who is on one of the market monitoring committees for

the California ISO, can essentially say, ‘‘Look, we’ve applied your

methodology and here’s what it yields,’’ and so that also market

participants can know what sorts of prices may be worthy of refunds at the start.

But, the sort of current plan of saying we don’t specify any methodology nor do we tell you what the exercise of market power is in

a market that would constitute unjust and unreasonable rates, it

makes trying to find it impossible, because you don’t know what it

is.

Ms. CROWLEY. No positions on a Northeast home heating oil reserve?

Chairman OXLEY. The gentleman’s time has expired, and we

want to bring this to a close.

Gentlemen, thank you for your testimony. It’s good to have you

all here and the hearing is adjourned.

[Whereupon, at 12:30 p.m., the hearing was adjourned.]

(47)

A P P E N D I X

June 20, 2001

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