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[Senate Hearing 107-144]
[From the U.S. Government Publishing Office]

                                                S. Hrg. 107-144 (Pt. 3)

                         NATIONAL ENERGY ISSUES

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

   TO RECEIVE TESTIMONY ON PROPOSALS RELATED TO REMOVING BARRIERS TO 
      DISTRIBUTED GENERATION, RENEWABLE ENERGY AND OTHER ADVANCED 
  TECHNOLOGIES IN ELECTRICITY GENERATION AND TRANSMISSION, INCLUDING 
  SECTION 301 AND TITLE VI OF S. 597, THE COMPREHENSIVE AND BALANCED 
 ENERGY POLICY ACT OF 2001; SECTIONS 110, 111, 112, 710, AND 711 OF S. 
388, THE NATIONAL ENERGY SECURITY ACT OF 2001; AND S. 933, THE COMBINED 
  HEAT AND POWER ADVANCEMENT ACT OF 2001 AND TO RECEIVE TESTIMONY ON 
 PROPOSALS RELATING TO THE HYDROELECTRIC RELICENSING PROCEDURES OF THE 
 FEDERAL ENERGY REGULATORY COMMISSION, INCLUDING TITLE VII OF S. 388, 
  TITLE VII OF S. 597; AND S. 71, THE HYDROELECTRIC LICENSING PROCESS 
                        IMPROVEMENT ACT OF 2001

               PROPOSALS RELATED TO GLOBAL CLIMATE CHANGE

                COMPREHENSIVE ELECTRICITY RESTRUCTURING

                               __________

                             JULY 19, 2001

                             JULY 24, 2001

                             JULY 25, 2001

                             JULY 26, 2001

                               __________

                                 PART 3

                       Printed for the use of the
               Committee on Energy and Natural Resources

                                 ______

                    U.S. GOVERNMENT PRINTING OFFICE
76-057 PDF                  WASHINGTON : 2001

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               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                  JEFF BINGAMAN, New Mexico, Chairman
DANIEL K. AKAKA, Hawaii              FRANK H. MURKOWSKI, Alaska
BYRON L. DORGAN, North Dakota        PETE V. DOMENICI, New Mexico
BOB GRAHAM, Florida                  DON NICKLES, Oklahoma
RON WYDEN, Oregon                    LARRY E. CRAIG, Idaho
TIM JOHNSON, South Dakota            BEN NIGHTHORSE CAMPBELL, Colorado
MARY L. LANDRIEU, Louisiana          CRAIG THOMAS, Wyoming
EVAN BAYH, Indiana                   RICHARD C. SHELBY, Alabama
DIANNE FEINSTEIN, California         CONRAD BURNS, Montana
CHARLES E. SCHUMER, New York         JON KYL, Arizona
MARIA CANTWELL, Washington           CHUCK HAGEL, Nebraska
THOMAS R. CARPER, Delaware           GORDON SMITH, Oregon

                    Robert M. Simon, Staff Director
                      Sam E. Fowler, Chief Counsel
               Brian P. Malnak, Republican Staff Director
               James P. Beirne, Republican Chief Counsel
                         Deborah Estes, Counsel
                     Mary Katherine Ishee, Counsel
                     Shirley Neff, Staff Economist
                 Leon Lowry, Professional Staff Member
                    Bryan Hannegan, Staff Scientist
             Howard Useem, Senior Professional Staff Member

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearings:
    July 19, 2001................................................     1
    July 24, 2001................................................   109
    July 25, 2001................................................   169
    July 26, 2001................................................   261

                               STATEMENTS
                             July 19, 2001

Bettenberg, William, Deputy Director, Office of Police Analysis, 
  Department of the Interior.....................................    58
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................     1
Birnbaum, S. Elizabeth, Director, Government Affairs, American 
  Rivers.........................................................    78
Boyd, Robert T., Vice President, Enron Wind Corporation..........    21
Craig, Hon. Larry E., U.S. Senator from Idaho....................     2
Demeter, Christian P., Chief Executive Officer, Antares Group, 
  Inc............................................................    25
Garman, David K., Assistant Secretary, Energy Efficiency and 
  Renewable Energy, Department of Energy.........................     5
Gray, Gerald J., Vice President for Policy, American Forests.....    90
Hall, Mark, Vice President, External Affairs, Trigen Energy 
  Corporation....................................................    29
Keil, Julie, Director of Hydro-Licensing and Water Rights, 
  Portland General Electric Company..............................    95
Murkowski, Hon. Frank H., U.S. Senator from Alaska...............    12
Robinson, J. Mark, Director, Office of Energy Projects, Federal 
  Energy Regulatory Commission...................................    68
Starrs, Thomas J., J.D., Ph.D., Senior Partner, Kelso Starrs and 
  Associates, L.L.C..............................................    36
Thomas, Hon. Craig, U.S. Senator from Wyoming....................     4

                             July 24, 2001

Bingaman, Hon. Jeff, U.S. Senator from New Mexico................   109
Blake, Francis, Deputy Secretary of Energy.......................   113
Burns, Hon. Conrad, U.S. Senator from Montana....................   127
Campbell, John B., Vice President, AG Processing, Inc., Omaha, NE   138
Cassidy, Frank, President and COO, PSEG Power LLC, Newark, NJ....   143
Domenici, Hon. Pete V., U.S. Senator from New Mexico.............   133
Gebolys, Gene J., President, World Energy Alternatives, LLC, 
  Chelsea, MA....................................................   149
Hagel, Hon. Chuck, U.S. Senator from Nebraska....................   110
Hill, Gardiner, CO2 Program Director, BP..............   146
Johnson, Hon. Tim, U.S. Senator from South Dakota................   136
Landrieu, Hon. Mary L., U.S. Senator from Louisiana..............   132
Lyons, James R., Professor, Yale School of Forestry and 
  Environmental Studies, New Haven, CT...........................   151
Murkowski, Hon. Frank H., U.S. Senator from Alaska...............   111
Risbrudt, Christopher, Acting Associate Deputy Chief for Programs 
  and Legislation, Forest Service, Department of Agriculture.....   116

                             July 25, 2001

Ayers, Jeffrey D., Senior Vice President and General Counsel, 
  Aquila, Inc....................................................   184
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................   169
Blake, Francis, Deputy Secretary of Energy.......................   170
Burns, Hon. Conrad, U.S. Senator from Montana....................   182
Cook, David N., General Counsel, North American Electric 
  Reliability Council............................................   245
Craig, Hon. Larry E., U.S. Senator from Idaho....................   177
Dushaw, James L., Director, Utility Department, International 
  Brotherhood of Electrical Workers..............................   225
English, Glenn, Chief Executive Officer, National Rural Electric 
  Cooperative Association, Arlington, VA.........................   204
Hamilton, David, Policy Director, Alliance to Save Energy........   228
Murkowski, Hon. Frank H., U.S. Senator from Alaska...............   175
Nugent, William M., Commissioner, Maine Public Utilities 
  Commission, and President, National Association of Regulatory 
  Utility Commissioners..........................................   219
Rouse, James B., Associate Director of Energy Policy, Praxair, 
  Inc., and Chairman, the Electricity Consumers Resource Council.   235
Rowe, John W., President and Co-Chief Executive Officer, Exelon 
  Corporation, on behalf of the Edison Electric Institute........   189
Thilly, Roy, Chief Executive Officer, Wisconsin Public Power, 
  Inc., on behalf of the American Public Power Association.......   195
Ward, Stephen, Public Advocate, State of Maine, and President, 
  the National Association of State Utility Consumer Advocates...   240

                             July 26, 2001

Bingaman, Hon. Jeff, U.S. Senator from New Mexico................   261
Breathitt, Linda, Commissioner, Federal Energy Regulatory 
  Commission.....................................................   280
Brownell, Nora Mead, Commissioner, Federal Energy Regulatory 
  Commission.....................................................   292
Craig, Hon. Larry E., U.S. Senator from Idaho....................   262
Hebert, Curt, Jr., Chairman, Federal Energy Regulatory Commission   274
Landrieu, Hon. Mary L., U.S. Senator from Louisiana..............   302
Massey, William L., Commissioner, Federal Energy Regulatory 
  Commission.....................................................   283
Salisbury, Jennifer, Secretary of Energy, Minerals and Natural 
  Resources, State of New Mexico, on behalf of the Western 
  Governors' Association.........................................   263
Wood, Patrick III, Commissioner, Federal Energy Regulatory 
  Commission.....................................................   288

                               APPENDIXES
                               Appendix I

Responses to additional questions................................   313

                              Appendix II

Additional material submitted for the record.....................   317

 
                         NATIONAL ENERGY ISSUES

                              ----------                              

                        THURSDAY, JULY 19, 2001

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:30 a.m., in 
room SD-366, Dirksen Senate Office Building, Hon. Jeff 
Bingaman, chairman, presiding.

           OPENING STATEMENT OF HON. JEFF BINGAMAN, 
                  U.S. SENATOR FROM NEW MEXICO

    The Chairman. We have a two-part hearing today. In the 
first half we will discuss legislative proposals to address 
some of the barriers that currently inhibit the market 
penetration of distributed generation technologies, including 
distributed power from renewable energy.
    This cluster of clean and efficient technologies includes 
fuel cells, wind, photovoltaics, and microturbines. In contrast 
to electricity produced at large central powerplants, which 
travels over transmission and distribution lines to reach the 
ultimate consumer, distributed generation is smaller in scale 
and produces electricity at or near the site where it is to be 
used.
    Distributed power is automatically 7 to 10 percent more 
efficient than central station power, because that is how much 
electricity is lost in the transmission process. It has become 
an increasingly attractive option for customers who demand a 
power source with high reliability and who want to control 
their peak demand or to use renewable energy.
    The second half of the hearing will address hydroelectric 
relicensing legislation. Non-Federal hydropower represents 5 
percent of all electric power generated in the United States. 
It provides a far greater percentage of the electric power 
generated in California, in the Pacific Northwest, and in New 
England. Relicensing of non-Federal hydropower projects 
involves many stakeholders and raises significant energy and 
resource protection issues.
    Now we have been working with Senator Craig to try to craft 
legislation to provide an appropriate balance on these issues. 
We look forward to the testimony to help flesh out all the 
issues involved.
    Let me call on Senator Craig for any opening statement that 
he has.
    [The prepared statement of Senator Bingaman follows:]
 Prepared Statement of Hon. Jeff Bingaman, U.S. Senator From New Mexico
    Good morning.
    We have a two part hearing today. In the first half we will discuss 
legislative proposals to address some of the barriers that currently 
inhibit the market penetration of distributed generation technologies, 
including distributed power from renewable energy.
    This cluster of clean and efficient technologies includes fuel 
cells, wind, photovoltaics and microturbines. In contrast to 
electricity produced at large central power plants, which travels over 
transmission and distribution lines to reach the ultimate consumer, 
distributed generation is smaller scale and produces electricity at or 
near the site where it will be used.
    Distributed power is automatically 7 to 10% more efficient than 
central station power because that is how much electricity is lost in 
the transmission process. It has become an increasingly attractive 
option for customers who demand a power source with 99.999 percent 
reliability, want to control their peak demand, or to use renewable 
energy.
    While some electric utilities view DG as competition, many can see 
its benefits. Here's what one CEO of a major electric and gas utility 
has to say about distributed generation. ``NiSource believes that as 
the PC was to the mainframe, distributed generation will be to 
traditional power generation. Distributed generation will create a new 
electric industry by mitigating transmission gridlock, diminishing the 
need for siting and funding new generating stations, easing the strain 
on distribution, providing for premium or back-up support services and 
improving the emissions profile of generation portfolios.'' (Gary 
Neale, CEO of NiSource, Inc., ``Utilities Benefit from Distributed 
Generation'', utilitybusiness.com, January 2001.)
    This hearing will also explore the potential for increasing the 
contribution renewable energy can make to our energy supply portfolio. 
Renewable energy resources are plentiful throughout the United States 
as the maps on this chart from the President's National Energy Plan 
demonstrate. New Mexico for example has abundant wind, geothermal, and 
solar resources which can be particularly important for those who live 
far from existing power lines or gas pipelines. I should also note that 
eight of the ``Big 12 Wind States'' are represented on this committee. 
(ND, SD, MT, NE, WY, OK, CO and NM).
    The second half of the hearing will address hydroelectric 
relicensing legislation. Non-Federal hydropower represents 5 percent of 
all electric power generated in the United States, but provides a far 
greater percentage of the electric power generated in California, the 
Pacific Northwest, and New England.
    Relicensing of non-Federal hydropower projects involves many 
stakeholders, and raises significant energy and resource protection 
issues. I have been working with Senator Craig to try to craft 
legislation that will provide an appropriate balance on these issues, 
and I look forward to today's testimony to help further flesh out some 
of the issues involved.

        STATEMENT OF HON. LARRY E. CRAIG, U.S. SENATOR 
                           FROM IDAHO

    Senator Craig. Well, Mr. Chairman, thank you very much. I 
do appreciate the work that is going on in an effort to address 
these important issues. I am, as you know, particularly 
interested in the panel that will address the hydro-licensing 
reform.
    I appreciate your support in helping to resolve the 
problems currently and pending through an effort to create an 
efficient review of the non-Federal hydroelectric licensing 
applications at FERC.
    Mr. Chairman, Congress has been reviewing FERC's hydropower 
relicensing program for the better part of 4 years. The 
Senate's hearing record on this issue is replete with evidence 
that FERC's process lacks balance, is costly, cumbersome, and 
often convoluted. And a few examples, I think, include a 
typical project can take 8 to 10 years, as compared to a gas 
fired project that takes 18 months.
    Federal resource agencies set environmental conditions 
without equal consideration of projects, economies, the energy 
benefits, the flood control, the navigation and other values 
protected by different Federal statutes. The inability of FERC 
to act as a referee to reconcile these conflicting requirements 
and a process that often results in higher and higher cost with 
major loss in project operational flexibility that adversely 
affect the ability to meet critical peak loads has to be a 
major concern of this committee.
    We have learned with this painstaking review, Mr. Chairman, 
that the commission's hydroelectric licensing process does not 
produce optimum decisions because of, in the words of some 
courts, this rather unorthodox system of shared authority that 
is sanctioned by the Federal Power Act is a problem. I have 
introduced legislation, as you know, in the 105th, 106th and 
now the current Congress to address the problem. The latest 
iteration of that legislation is S. 71.
    Like its previous forms, it does nothing to erode the 
environmental principles established by Congress in the 
Electric Consumers Protection Act of 1986. It emphasizes, or, I 
should say, reemphasizes, the Federal Power Act's requirement 
for balance in government review of licensing applications.
    Indeed, Mr. Chairman, S. 71 underscores the requirement 
mandated in the Electric Consumers Protection Act that the 
Federal Government equally consider all of the issues 
associated with hydropower projects throughout the Nation. The 
precise language added to section 4(e) of the Federal Power Act 
by the Electric Consumers Protection Act reads in part as 
follows: ``In deciding whether to issue any license under this 
part of any project, the commission, in addition to the power 
and development purposes for which licenses are issued, shall 
give equal consideration to the purposes of energy, 
conservation, the protection mitigation of damage to and 
enhancement of fish and wildlife.''
    Mr. Chairman, what is often overlooked is that Congress 
separated the word power from the word development. Development 
purposes under the Federal Power Act include navigation, 
irrigation and flood control, words that define issues of 
commerce, food production, and safety. What is truly 
astonishing, Mr. Chairman, is the fact that, under current 
practice and policy, Federal resource agencies have no legal 
requirement to consider effects on commerce, food production, 
and public safety when developing conditions for hydro 
projects.
    In my judgment, this is an absurd statutory requirement 
that simply cannot stand. Congress must require that Federal 
resource agencies consider these issues before developing and 
issuing conditions that will be imposed on licensed projects.
    Well, Mr. Chairman, I have more to say, and I will add it 
to the record. But I think very clearly what we are all wanting 
to achieve is accountability. And that has to be the 
cornerstone of a responsible government and a responsible 
government process. Federal resource agencies must be held 
accountable, not only for the protection of fish and wildlife, 
but also for public safety and commerce consequences of the 
conditions they ultimately impose on hydro projects.
    We are going to hear from witnesses this morning on this 
issue, both the pros and cons of the issue, and legislation 
that I have introduced and the cooperative effort that we are 
working under now to try to see if we cannot resolve this to 
make the process at least in the whole less costly, more 
predictable and, I would trust, more accountable.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much.
    Let me ask if Senator Thomas has any opening statement.

         STATEMENT OF HON. CRAIG THOMAS, U.S. SENATOR 
                          FROM WYOMING

    Senator Thomas. Thank you, Mr. Chairman. I will just try 
and be very brief. I am very much interested in this hearing 
and what you are doing.
    Welcome to the Assistant Secretary. Nice to see you, sir.
    I think it is a good idea to talk about this approach to 
some of our electric needs. I do, however, want to share with 
you that I hope we can also focus on that portion of our 
electric production that is most important, that brings us the 
most, and that is what comes from larger generator plants. And 
so I hope we do not get diverted entirely over into these other 
things, which are there in the future but are not really--we 
need to be talking about the kind of fuels we are going to use 
for generation.
    If coal is our longest lasting fuel and one that can be 
most used there, are we going to be able to use it in this 
distributed generation? I do not think so. So we ought to take 
a look at that, it seems to me.
    We ought to have more research, perhaps, on the ones that 
are providing generation now. I mean, you look out there at 
wind, and I am all for that. I think we ought to be looking at 
it. But here all these are, and here is 40 megawatts, you know, 
when we are really knocking about 2,500 is what we really ought 
to be having somewhere.
    A power grid. We have to be talking more about the power 
grid. I think it is up to us to deal with a nationwide one. Who 
is going to own it? You mentioned the efficiency of distributed 
generation. Perhaps that is the case. Maybe we ought to be 
looking at line loss. There is line loss. But I have to tell 
you, I think a 2,500 megawatt generator is probably more 
efficient than a 15 or 20 in most any circumstances. And so we 
have to take a look at those things.
    I think we have to look at the re-regulation thing. We have 
not talked about that much in terms of distribution and what we 
are going to do with electricity.
    So I guess my point is, I think this is very important, and 
I am very much a part of it. But when we are talking about 
resolving the demands for power needs this year, next year, 
five years from now, this is not going to be the total answer. 
And we also need to be looking at that base supply that I think 
is so very important. So I am interested in what you are doing 
here.
    The Chairman. Well, thank you very much. I appreciate that 
statement.
    Secretary Garman, you are a regular here. You are here as 
much as you used to be when you worked here. But we are very 
glad to see you again. Why do you not go right ahead?

   STATEMENT OF DAVID K. GARMAN, ASSISTANT SECRETARY, ENERGY 
     EFFICIENCY AND RENEWABLE ENERGY, DEPARTMENT OF ENERGY

    Mr. Garman. It is a pleasure to be here. Thank you for this 
opportunity to testify on legislative provisions designed to 
address some of the barriers that exist to the deployment of 
distribution generation and renewable energy technologies. The 
time is right for us to be thinking about these issues, not 
only because energy supplies and price issues are so acute, but 
because we have to confront important decisions about an aging 
electricity and energy infrastructure.
    Half of the installed transformer banks in the United 
States are reaching retirement age. More than two-thirds of our 
boilers in electrical plants are at least 30 years old and more 
than 40 percent are 40 or more years old or older. Electric 
energy losses are increasing as we try to push more power 
through transmission and distribution systems where, at their 
maximum, losses can be 10 times higher than normal.
    The decisions we make over the next several years will 
strongly influence the energy supply, energy security, economic 
strength and environmental future of our country for years to 
come.
    With regard to the legislation before the committee today, 
we are likely to support much of it provided it is part of a 
balanced, comprehensive approach that also addresses energy 
efficiency, supply, and infrastructure issues, as in the 
national energy policy document.
    At this time, I would like to address each of the major 
provisions under consideration. First, with respect to 
renewable energy resource assessments, these are extremely 
useful tools that are used by developers, landowners, local 
officials to determine their options and renewable resource 
potential.
    [Chart.]
    You can see some representations of very large-scale 
efforts here in this chart. And we have to continue, and in 
some cases intensify, our efforts in these areas. A suggestion 
about the legislation: The requirement in the legislation that 
has us do these things on an annual basis could divert 
resources from other high-priority efforts.
    In the case of solar, wind and geothermal, the resource 
really does not change that much from year to year. And 
updating these assessments once a decade using 30-year averages 
is probably adequate. So we request that the language be 
modified to allow the department to undertake these assessments 
on an as-needed basis, taking into account market conditions, 
cost, available technology to do them, and other relevant 
factors.
    Second, with respect to Federal renewal purchase 
requirements that are in the legislation before us, section 602 
of S. 597 would require from 3 to 7.5 percent of the Federal 
Government's electric power be purchased from renewable energy 
resources. We share the view that the Federal Government offers 
significant potential as the Nation's largest electricity buyer 
in this area. And we support the establishment of goals.
    Just a couple of weeks ago, the Secretary of Energy 
announced that the Department, through Bonneville Power 
Administration, would sign pre-development agreements for seven 
new wind power projects to provide an additional 830 megawatts 
of generating capacity in the energy-strapped West. This 
initiative would provide us with enough electricity to power 
270,000 homes and would represent about 20 percent of increase 
in the Nation's wind power supply.
    So we are working to make these purchases for ourselves and 
our customers of our power marketing administrations. And we 
are doing it because it makes good economic and environmental 
sense. However, because the choice of purchasing renewable 
power does not yet exist in many areas of the country, absolute 
percentage purchase requirements, such as those contained in 
the bill, could unduly benefit the seller in a Federal power 
purchase negotiation.
    Therefore, until such time that retail competition and 
greater purchaser choice is available, we urge that the 
committee express renewable energy use goals rather than 
absolute requirements in their legislation. We also recommend 
that section 602 be modified to add renewable energy 
derivatives, such as renewable energy credits or green tags, 
under the definition of renewable energy source.
    Third, with respect to residential renewable energy grant 
program, as I think is proposed in S. 389, we recognize that 
higher initial capital costs are often a barrier to the 
purchase of renewable energy systems. But rather than a grant 
program, as proposed in the Murkowski bill, we favor the 
alternative approach, a tax credit, as recommended in the 
national energy policy document.
    Fourth, with respect to interconnection standards, the 
administration supports the concept of uniform and enforceable 
interconnection requirements that will apply to both 
distribution and transmission systems. We have been working for 
the past couple of years supporting industry through the 
Institute of Electrical and Electronic Engineers, or IEEE, to 
develop voluntary national interconnection standards.
    As we proceed with the consideration of legislation, it is 
important to take into account potential jurisdictional issues, 
particularly with regard to providing backup service and the 
requirement that distributed facility owner-operators pay costs 
associated with the interconnection. Those are issues that have 
traditionally been under the purview of State utility 
regulators. In the legislation, you might want to consider 
providing some guidance about how the State utility regulator 
can act to determine the reasonableness of cost terms and 
conditions related to interconnection standards.
    Fifth, net metering. The administration supports the 
concept of net metering, but recognizes that these decisions 
have also historically fallen under State jurisdiction. As with 
interconnection standards, net metering will improve the 
economic viability of wind, geothermal, solar and other 
renewable and distributed energy projects.
    To conclude, because I see the red light, today's energy 
system was designed in a regulated environment around central 
power stations. It was not designed to send real pricing 
signals to consumers, nor was it designed to accommodate 
distributed generation or consumer choice. Our shared challenge 
is to transform that system into a more efficient one that can 
do all of these things and more.
    Fortunately, with some of the tools of the information age, 
we are starting to envision just how a more open, flexible, and 
responsive market might be created. The provisions in the 
legislation under consideration today are thoughtful attempts 
to address some of the key obstacles to the widespread adoption 
of renewable and distributed generation technologies, as cited 
in the President's National Energy Policy. And we look forward 
to working with the committee and the staff on this 
legislation.
    I will be pleased to answer any questions that the 
committee has either this morning or in the future. Thank you.
    [The prepared statement of Secretary Garman follows:]
  Prepared Statement of David K. Garman, Assistant Secretary, Energy 
         Efficiency and Renewable Energy, Department of Energy
    Thank you for the opportunity to testify on S. 597, Title VI; 
Sections 710 and 711 of S. 389; and S. 933. These legislative 
provisions propose to address some of the barriers that exist to the 
deployment of distributed generation and renewable technologies.
    The President's National Energy Policy (NEP) contains a discussion 
of distributed energy technologies particularly relevant to today's 
hearing. Interconnection standards, net metering, land-use zoning codes 
and other barriers to distributed generation are discussed in chapter 
six of the NEP. Other barriers to distributed generation are also 
highlighted; including the difficulty of permitting some combined heat 
and power projects.
    By removing barriers related to interconnection standards, net 
metering, purchases of renewable energy, and combined heat and power, 
we can increase the efficiency of our electric system by making 
distributed energy resources more practical in the marketplace. Because 
distributed resources put electricity generation closer to its point of 
use, they can help overcome some of the generation, transmission and 
distribution problems we are experiencing today in some areas of the 
country.
    This is a critically important time, not only because energy supply 
and price issues are acute, but because demand is growing even as we 
confront important investment decisions with respect to an aging 
electricity infrastructure. For example:

   Half of the installed transformer banks in the U.S. are 
        reaching retirement age;
   More than two-thirds of our boilers and electric power 
        plants are at least 30 years old, and more than forty percent 
        are 40 years or older;
   Electric energy losses are increasing as we try to push ever 
        more power through our electric power transmission and 
        distribution system where, at maximum capacity, losses can be 
        ten times higher than normal;
   By 2009, 6 of the country's 10 electricity regions--serving 
        about 65 percent of U.S. customers--will fall below the 
        traditional power industry standard of a 10 percent ``safe 
        reserve'' capacity margin without substantial increases of new 
        power generation; and
   By 2020, EIA estimates that U.S. electricity requirements 
        will more than double from today's 700,000 megawatts to 
        approximately 1,500,000 megawatts.

    The decisions we make over the next few years will strongly 
influence the energy supply, energy security, economic strength, and 
environmental future of our country for years to come. Our goal should 
be to replace and expand our domestic energy supplies, develop advanced 
and highly efficient systems to deliver this energy, and improve end-
use energy efficiencies. As we revitalize and expand our national 
energy infrastructure, renewable and distributed energy technologies 
can help reduce transmission system congestion and energy losses by 
placing energy generation at or near the point of consumption.
    With respect to the specific provisions in legislation before the 
Committee today, I would note that they are all thoughtful and well 
intentioned. With some modifications, we are likely to support many of 
them if they are part of a balanced, comprehensive approach that also 
addresses energy efficiency and infrastructure issues as contained in 
the National Energy Policy document.
    At this time I would like to address each of the major provisions 
under consideration.
     renewable energy resource assessment [sections 601 of s. 597, 
                           and 711 of s. 389]
    Section 601 of S. 597 and Section 711 of S. 389 call for an annual 
assessment of renewable energy resources. These sections focus on 
development of a renewable resource inventory that would create a 
useful tool for project developers, landowners, and state and local 
elected and appointed officials to determine their resource potential 
as well as future development options.
    We have already developed some renewable energy resource 
inventories that have been used to site wind farms and other renewable 
energy projects. However, the requirement in the legislation that these 
be done on an annual basis would divert resources from other high 
priority efforts. In the case of solar, wind and geothermal, for 
example, the resource does not change appreciably from year to year. 
Updating these resource assessments once a decade using 30-year 
averages is probably adequate. Biomass, on the other hand, might 
benefit from more frequent updates due to changes in annual crop yields 
and types.
    Also, a solar resource assessment is far different than a 
geothermal assessment, which in turn is different than a wind or 
biomass assessment. Current approaches to doing these assessments cost 
up to $5 million each and take from two to three years to complete. We 
hope to employ new technologies to reduce costs and/or enhance the data 
collected. We request that the language be modified to allow the 
Department to undertake these assessments on an as-needed basis after 
periodic reviews, taking into account market conditions, cost, 
available technology, and other relevant factors.
          federal purchase requirement [section 602 of s. 597]
    Section 602 of S. 597 would require from 3 percent to 7.5 percent 
of the Federal Government's electric power be purchased from renewable 
energy resources.
    We share the view that, as the nation's largest single energy user, 
the Federal Government offers a significant potential market for 
renewable energy products, and the Administration supports the 
establishment of goals for this purpose. The existing goal pursuant to 
Executive Order 13123 is that 2.5 percent of the federal government's 
electricity use should be derived from specified renewable resources by 
the year 2005.
    Last month, Secretary Abraham announced that the Department of 
Energy, through the Bonneville Power Administration, would sign pre-
development agreements for seven new wind power projects to provide an 
additional 830 megawatts of generating capacity in the energy-strapped 
West. This initiative would produce enough electricity to meet the 
needs of nearly 270,000 homes, and it represents an approximately 20 
percent increase in the nation's wind power capacity.
    Just this week, I signed a letter of intent to purchase renewable 
power under the EPA's Green Power Partnership for the National 
Renewable Energy Laboratory. It is my hope that more than 7 percent of 
the power supplying this facility will be from renewable resources by 
the end of the year, the bulk of it coming from new resources. So we 
are working to make these purchases for ourselves and for the customers 
of our power marketing administrations, and we are doing it because it 
makes good business and environmental sense.
    However, because the choice to purchase renewable power does not 
yet exist in many areas of the country, absolute percentage purchase 
requirements such as those contained in section 602 of S. 597 could 
unduly benefit the seller in a federal power purchase negotiation. 
Therefore, until such time that retail competition and greater consumer 
choice is available, we urge that the Committee express renewable 
energy use goals rather than absolute requirements in legislation. 
Moreover, these goals should be for electricity used, not just 
electricity purchased as some federal entities might have the ability 
to generate electricity from their own renewable resources on federal 
land. Finally, the renewable power purchase costs should be reasonable.
    Section 602 limits hydroelectric generation to include only the 
capacity achieved from increased efficiency or additions of new 
capacity at an existing hydroelectric dam. We believe all hydroelectric 
can be properly termed renewable energy. However, if the purpose is to 
promote new renewable generation, we recommend modifying the language 
in order to avoid precluding Federal power purchases either from an 
existing dam that presently has no hydroelectric capability that could 
be developed, or hydroelectric power from any new facility that might 
be developed.
    We also recommend that section 602 be modified to add ``renewable 
energy derivatives, such as renewable energy credits or green tags'' 
under the definition of ``renewable energy source.''
   residential renewable energy grant program [section 710 of s. 389]
    Residential renewable energy systems dependent on solar or wind are 
free of the fuel price volatility problems associated with conventional 
energy technologies. However, higher initial capital costs are often a 
barrier to wider acceptance and usage of these systems. Section 710 of 
S. 389 would establish a Residential Renewable Energy Grants program, 
which would provide incentives for the purchase and installation of 
residential renewable energy systems.
    Because such a grant program would be subject to annual 
appropriations, the uncertainty of consistent appropriations would send 
confusing signals to the market. Small manufacturers offering 
residential renewable energy systems would find it difficult to 
anticipate appropriations levels and subsequent demand. Thus, they 
would face difficulty planning capital expenditures to ensure that 
enough systems would be available in the marketplace.
    The alternative approach of a tax credit, as recommended in the 
National Energy Policy document, is not subject to the uncertainty of 
the annual appropriations process and would send a stronger, more 
certain signal to the market. Specifically, we believe that a 15 
percent tax credit for residential solar, up to a maximum of $2000, is 
a superior approach to a grant program that may or may not be funded on 
a consistent basis.
 interconnection standards [section 603 of s. 597 and section 4 of s. 
                                  933]
    The Administration supports the concept of uniform and enforceable 
interconnection requirements that will apply to both distribution and 
transmission systems.
    Distributed electricity generation can offer customer benefits such 
as increased reliability, uninterruptible service, energy cost savings, 
and on-site efficiencies. However, adding new small grid-connected 
generating facilities to an existing electricity grid developed around 
centralized generation will require innovative approaches to managing 
and operating new distributed energy resources. Customers, vendors and 
developers of these new technologies cite interconnection barriers 
including technical, institutional and regulatory policies as some of 
the principal obstacles separating them from commercial markets.
    Current interconnection requirements vary from state to state. In 
addition, except in the few states that have enacted legislation or 
regulations to address the interconnection of distributed energy 
resources with the utility system, interconnection standards can also 
vary from utility to utility. A national interconnection standard would 
reduce uncertainty, lower costs, and facilitate deployment of modern 
distributed generation technologies such as fuel cells, photovoltaics, 
wind, and microturbines. It would also remove one of the barriers to 
combined heat and power, a technology that has the potential to double 
the efficiency of our energy production by utilizing the heat that 
would normally be wasted by combustion technologies or fuel cells in 
the process of generating electricity.
    The Department has been supporting efforts by industry through the 
Institute of Electrical and Electronic Engineers (IEEE) to develop 
voluntary national interconnection standards. This effort has been in 
effect for the past several years and has involved extensive working 
group deliberations involving staff from electric utilities as well as 
equipment manufacturers and distributed energy project developers. The 
technical standard being developed by the IEEE could very well provide 
a basis for the rule making process called for in both bills and, at 
the minimum, should be referenced to ensure that the progress that has 
been made by this group is not lost or duplicated unnecessarily.
    In addition, there are potential jurisdictional issues that should 
be considered, especially with regard to providing back-up service and 
the requirement that the distributed facility owner or operator pay 
costs associated with the interconnection. Such service and rate issues 
traditionally have been the jurisdiction of State utility regulators. 
In this regard, the legislation perhaps should provide clearer guidance 
about how the State utility regulator can act to determine the 
reasonableness of costs, terms and conditions. We also should be aware 
that several States have already established rules which not only 
address the technical requirements for interconnection, but also 
address in some detail the related business terms and conditions and 
allocation of costs. These generally treat small distributed generation 
projects very favorably, exempting them, for example, from the costs of 
engineering studies or liability insurance. We would not want any 
Federal legislation to undo this progress.
                  net metering [section 604 of s. 597]
    The Administration supports the concept of net metering, 
recognizing that these decisions have historically fallen under state 
jurisdiction. As with interconnection standards, net metering will 
improve the economic viability of wind, geothermal, solar and other 
renewable and distributed energy projects, help meet our growing 
electrical demand and cut power bills for small businesses and families 
across the country.
    To increase the economic viability of a distributed renewable 
energy project, an effective net metering provision should ensure a 
fair market price for power generated on site, and remove the burden 
for an on-site generator to procure, install and maintain additional 
equipment. Section 604 of S. 597 has attempted to address those issues.
    We would note, as a technical observation, that the definition of 
``net metering service'' is overly specific. In some cases, multiple 
meters need to be used to correctly account for time of use charges or 
when electronic meters (which do not spin backwards) are in use. 
Consequently, we suggest striking the words ``through the same meter 
through which purchased electricity is received.''
    Additionally, under subsection (a) (2), the Committee might wish to 
consider removing fuel cells as part of the definition of a ``renewable 
energy resource'' and creating a separate clean energy category. Fuel 
cells in and of themselves are not a renewable resource, but rather 
fuel cells utilize hydrogen that can come from a variety of sources. 
While cost-effectively producing hydrogen in large quantities from 
renewable resources is a long-term DOE Hydrogen Program objective, most 
fuel cells today use either a reformate or hydrogen extracted from a 
fossil fuel such as natural gas. Using fuel cells in combined heat and 
power mode increases fuel use efficiency for electric generation from 
33 percent efficiency to more than 70 percent efficiency. Thus, you 
might want to consider a separate category for other specified high 
efficiency residential energy systems such as fuel cells and other 
micro combined heat and power.
 access to transmission by intermittent generators [section 605 of s. 
                                  597]
    The Administration supports the goal of ensuring fair access to 
transmission by intermittent generators such as wind and solar energy. 
I am informed that the Federal Energy Regulatory Commission is actively 
looking at this matter, and thus we should avoid being overly 
prescriptive in the statute to give FERC needed flexibility to address 
this problem.
                               conclusion
    Today's electricity system was designed in a regulated environment 
around central power stations. It was not designed to send real pricing 
signals to consumers, nor was it designed to accommodate distributed 
generation or consumer choice. Our shared challenge is to transform 
that system into a more efficient one that can do all that and more. 
Fortunately, with some of the tools of the information age, we are 
starting to envision just how a more open, flexible, and responsive 
market might be created.
    The provisions in the legislation under consideration today are 
serious and thoughtful attempts to address some of the key obstacles to 
the widespread adoption of renewable and distributed generation 
technologies cited in the National Energy Policy. We look forward to 
working with this Committee and its staff on legislation in this area. 
I will be pleased to answer any questions you may have in this regard 
both this morning and in the future.

    The Chairman. Thank you very much. Let me ask about a 
concept that I have become increasingly focused on here just in 
the last few weeks, as I have studied this whole set of issues. 
And that is a proposal that has been kicking around now for 
several years, to try to impose something in the nature of a 
fossil fuel efficiency standard so that we would not be picking 
as between one source of power versus another.
    We would essentially be saying that it is in our national 
interest to have power produced efficiently. And whether that 
was from a large generating plant that Senator Thomas referred 
to that produces 2,500 megawatts or a small plant and whether 
it used coal or whether it used natural gas or whether it used 
some other source, our interest is seeing that there is more 
efficiency.
    This chart that you brought the other day and that you have 
again, typical electricity losses, I think makes the point very 
persuasively that an awful lot of what goes in in the way of 
fuel to produce power and heat winds up being lost in 
conversion. And it seems to me that we have a real interest as 
a Nation in reducing that inefficiency and promoting more 
efficiency.
    Is this something you have looked at or you have any 
position on?
    Mr. Garman. Well, I have in the context of climate change. 
I remember when former Senator Bennett Johnston was kicking 
around a very similar idea. And there are some interesting 
notions to it. And it is intriguing in the sense that driving 
efficiency upward is a good goal. But there are a couple of 
cautions.
    One has to be very careful in looking at the intersections 
of existing environmental statutes with an efficiency goal. You 
could kind of think of it as cafe standards for fossil fuel 
powerplants in a way, where you have good performers and bad 
performers, but your goal would be to drive the efficiency 
level upward.
    You have to look very carefully at the interaction with 
existing environmental laws. For example, the Clean Air Act 
requirement that you drive down the oxides of nitrogen requires 
you to use selective catalytic reduction that actually uses a 
lot of energy and, similarly, the impact of new source review. 
Right now, new source review is an impediment, a regulatory 
impediment, to trying to drive efficiency in a plant upward 
because you are afraid to make your plant more efficient 
without triggering new source review.
    The Chairman. Well, would that not be a--I mean, could you 
not argue that if we were to adopt a fuel efficiency standard, 
that would then bring pressure to bear to change the new source 
review process?
    Mr. Garman. It easily could, because if you did not, if you 
failed to consider the existing environmental laws, if you on 
one hand had one law that says we want you to make your plant 
more efficient, and you had another law that said we are going 
to force you to use selective catalytic reduction, you know, 
imposing an energy penalty and making your plant less 
efficient, you really squeeze this plant. So you would have to 
deal with some of those aspects to be successful.
    The Chairman. Okay. I think those are very good comments. I 
appreciate those. Let me ask about your comments here about the 
Department of Energy support for the IEEE process to develop 
uniform technical standards for interconnection. I obviously 
favor anything being done on a voluntary basis that we can get 
done on a voluntary basis.
    I am just wondering, though, when we expect this standard 
to be promulgated and implemented. And is there something that 
we should be doing in the Congress or in the administration to 
see to it that it happens sooner rather than later?
    Mr. Garman. We are watching this very carefully. The IEEE 
is trying to promulgate this standard during this calendar 
year. I think they are going to miss it. I think they will 
probably promulgate the standard very early in the next 
calendar year.
    They are working on a variety of technical requirements and 
is an important point. Texas, New York, California, Delaware, 
Vermont and others have implemented or are considering a 
distributed generation rule. And they are looking to the IEEE 
with a view of adopting those standards when it is ready. I 
think the States are looking for some uniform guidance in this 
area. And they will take advantage of it when it is available.
    In terms of--you know, the one thing that we want to be 
very careful with in the context of Federal legislation is that 
the States have done some very good things on distributed 
generation. Some of them have said, we are not going to charge 
pre-interconnection study fees for people who want to do 
distributed generation, and we are not going to charge stranded 
charges for distributed generation.
    So we want to be very careful not to undo with Federal 
legislation some of the very good things that have been done at 
the State level.
    The Chairman. Are you confident that the IEEE standard that 
is being developed is not going to undo some of those good 
things?
    Mr. Garman. No, because it is just a technical standard, as 
I understand it, in and of itself. It looks at items such as 
voltage regulation, distribution, frequency disturbances, 
harmonics, and other kinds of technical aspects of the actual 
interconnection.
    The Chairman. So if the IEEE were able to get a uniform 
technical standard, is it your thought that we should look at 
having a uniform set of provisions built on the best practices 
that have been adopted in the States?
    Mr. Garman. At the technical level, perhaps. I am a little 
concerned about the one-size-fitting-all aspect. Different 
areas and different utilities have different situations. And I 
am not certain that a Federal uniform standard that deals with 
some of the ancillary nontechnical issues, like cost of service 
charges, backup power provisions, and some other things that 
probably should be handled at a more local level.
    The Chairman. Okay. Thank you very much.
    Senator Murkowski.

      STATEMENT OF HON. FRANK H. MURKOWSKI, U.S. SENATOR 
                          FROM ALASKA

    Senator Murkowski. Thank you very much, Senator Bingaman.
    And good morning, David. How are you?
    Mr. Garman. Good morning, Senator.
    Senator Murkowski. Recognizing that the purpose of the 
hearing today is to address FERC's hydroelectric licensing 
process and those related so-called distributed generation, it 
is my opinion that we are going to have to make some changes in 
procedure. I gather that over the next decade we are going to 
be looking at about 200 existing projects with a capacity of 
some 24,000 megawatts come up for relicensing.
    There is probably going to be some new projects proposed. 
And many of these are going to be out west. As a consequence, I 
would appreciate, and perhaps you have already commented--and 
if you have, I apologize. But nevertheless, I think it is fair 
to say that FERC's licensing and relicensing process needs a 
significant and dramatic improvement. It takes too long, costs 
too much. Decision making is scattered among different Federal 
agencies. And the end result is often a reduction of the 
project's ability to produce power when needed.
    We were able, through your efforts and others, to get a 
five megawatt exemption in our State of Alaska simply because 
the cost of pursuing FERC licensing could almost run as high as 
a quarter of the project cost, as we saw in Cordoba, I believe. 
I am wondering if we could address through FERC some changes 
and still maintain the adequate oversight of something like a 
one-stop-shopping procedure that would balance the competitive 
interests. This has been advocated for some time by both the 
Democratic and Republican Chairman of FERC. But I am aware that 
it is controversial.
    I think Senator Craig, Larry Craig, has introduced such 
legislation, which would restore balance by requiring the 
Federal resource agencies, the Department of the Interior, 
National Marine Fisheries, and the Forest Service, to consider 
the economic, as well as the energy, impact on the mandatory 
terms they impose on FERC licensed projects. This certainly 
seems reasonable to me, because, you know, we have a tremendous 
conflict from time to time by these agencies based on their 
philosophical role or turf areas or so forth.
    We have seen situations in Glacier Bay National Park where 
you are familiar with the opportunity to have a small hydro 
project in a wilderness or, in effect, have extended diesel 
generation provide the necessary power source. And you get into 
the merits of, well, now what are you better off with, and are 
you breaking a covenant by making exception for carving out 
this small hydro. And it is a terrible, terrible, costly, 
lengthy process. And we do not seem to be able to get to a 
level where somebody can make a decision and move on with it.
    And we all support renewable energy as part of the overall 
energy mix. But when we consider proposals, I think we have to 
be mindful of the consequences. And I wonder what your comments 
are on that.
    And then I will conclude with a reference to PURPA. Of 
course, it was enacted to promote alternative energy generation 
without adversely affecting consumers. That was--of course, 
hindsight is 20/20. And PURPA probably could not be enacted 
today knowing what we know now. Some have seen the opportunity 
to take advantage of PURPA and simply finance their project 
based on the take or pay clause. And as a consequence, that was 
not what it was intended to do.
    Accordingly, before we act on these provisions, we want to 
be sure that we have full understanding of the potential long-
term consequences for consumers and customers as well. So I 
guess among our concerns with witnesses later is to judge the 
various proposals on the benefit to the consumers by reducing 
price. Do they reduce regulation and do they streamline 
regulation?
    I would appreciate any comments you might care to make. And 
I am holding an article that appeared in the New York Times 
today. It says, ``California's new problem is suddenly a 
surplus of energy.'' We seem to go from feast to famine around 
here.
    I guess any forecasts you could care to make, commenting on 
whether this is a temporary euphoria or simply a misprint, 
would be appreciated.
    Mr. Garman. You have raised a number of questions. Let me 
start with hydro. And while I was not invited or asked to talk 
about the hydro bill, I do have a comment about it. Currently, 
hydro produces nine percent of our electricity. Our total 
renewable production is around 11 percent.
    My goal, of course, is to increase the use of renewable 
energy. It would be a terrible thing to see the amount of 
renewable energy that we generate decline during our watch. I 
could triple wind, double solar. But if the problems associated 
with hydro relicensing drove down hydro, we could have a net 
loss of renewable energy in this country during my tenure. And 
that is the last thing that I want to see.
    So I applaud the Congress, as you work, try to work, 
through this problem, because it is incredibly important that 
we solve it to keep hydro a viable resource.
    You alluded to PURPA, which is not a very elegant way of 
dealing with the renewable energy issue. A more elegant way, 
and the focus of our efforts, frankly, is research and 
development to bring down the cost of renewable energy 
resources and make them competitive in the marketplace. We have 
a tremendous success story with respect to wind. Wind energy in 
some areas of the country is competitive head-to-head with gas.
    And the focus of our effort will continue to be to focus 
research and development in our national lab to bring down the 
cost of these technologies so that they can compete head to 
head in the marketplace.
    And I see the red light. So I had better stop there.
    Senator Murkowski. And you are not going to comment on 
California?
    Mr. Garman. I am not going to be a forecaster because I 
would be in a different line of work.
    Senator Murkowski. You would be in the fortune-telling 
business.
    The Chairman. I would just point out, it is not feast to 
famine, it is famine to feast.
    Mr. Garman. That is fair enough.
    The Chairman. Senator Thomas.
    Senator Thomas. Thank you. You know, we talk about these 
things that you cannot help but wonder, since our job is to, I 
think, is to try and set policy so that the private sector will 
have a basis in which to operate. You talked about efficiency. 
If you go ahead and get some competition, if you have an 
electric grid where people can enter to compete, then they are 
going to be efficient, because the market will drive that.
    So I guess my question basically is, what do you see as the 
division between our energy that is placed here on probably our 
future things, as opposed to the more immediate needs? And we 
are not going to be able to fill the need with the growth in 
demand, I do not think, do you, with wind energy?
    Mr. Garman. Well, you know, wind has an important role to 
play.
    Senator Thomas. Sure.
    Mr. Garman. But you are right. Currently, the wind 
generation and solar together is producing a very tiny fraction 
of our total energy.
    Senator Thomas. That does not mean it is not important and 
that we ought not to do it. But I think we need to--I think we 
are sometimes letting ourselves get a little diverted away from 
doing the things that we can do now to meet our needs, as we 
look at things that are at this point a little in the future.
    For example, you talked about the efficiency and the line 
loss. Is there not an opportunity to reduce line loss 
considerably and perhaps even reduce the need for transmission 
lines by making the capacity of those lines much higher? Is 
that not a possibility?
    Mr. Garman. There are those possibilities. And also, the 
possibility of employing new technology, such as the super 
conducting cables that we have in place today under the streets 
of Detroit in one example, in an R&D program, in a 
demonstration program, that we have going on. There are 
technologies that can address some of these issues.
    Senator Thomas. I guess that--and I am like you, I am all 
for these--I always remember somebody saying we never run out 
of fuel in our history. We always found something different. 
And we will find something different. But I hope we do not 
divert our attention entirely from doing what needs to be done 
to meet needs as we look at the future.
    This distributed--I was just reading something from home 
that is kind of interesting, Mr. Chairman. In the new methane 
gas fields, they need electricity. And it is very difficult to 
build lines in there. So they are using generators in a 
distributive way. This lady, she is complaining about the 
noise. ``I think my horses are going deaf,'' she says, ``from 
all the noise of these generators that are around doing this 
small part.'' Kind of interesting.
    At any rate, thank you. I hope we can divide our focus to 
the future and what we need and not get out of line with doing 
the things that have to be done.
    Mr. Garman. But if I could just make one point, because 
this is an important point. Because so much of our electricity 
infrastructure is nearing the time of its retirement, this is 
an important time to think about the future. And it is an 
important time to think about the way we can refashion our 
energy delivery system to allow for a more perfect market and 
allow market forces to really come into play.
    Right now, market forces are not really allowed to come 
into play. We have----
    Senator Thomas. In some places.
    Mr. Garman. Well, yes. But for instance, there is a big 
difference in time of use power. Peak power obviously costs a 
lot more than base load power. And yet the bill that consumers 
get in most areas of the country, the overwhelming majority of 
the country, is one flat rate. If consumers had a market signal 
that would allow them to differentiate the cost of peak power 
and the cost of non-peak power, they might be inclined to do 
some load shifting and some other things that would save them 
money.
    Senator Thomas. The fact of the matter is, for most 
residences the cost is not the power, the cost is the 
distribution. You are not going to change--now a large user, 
what you are saying is, of course, exactly right. But I am a 
little concerned that, you know, you are right about the fact 
that we have not upgraded facilities. But largely because we do 
not have a policy that encourages people to invest. And if we 
continue to act like we do not need these basic facilities, 
then we are not going to have the investment in them. And I 
think we are going to find ourselves in real problems.
    Anyway, thank you.
    The Chairman. Senator Hagel.
    Senator Hagel. Mr. Chairman, thank you. And I am glad my 
distinguished colleague from Wyoming with the write up of the 
lady's horses. We have the same problem in Nebraska. It is a 
real problem.
    It is nice to see you again, Mr. Secretary.
    Mr. Garman. Good to see you, Senator.
    Senator Hagel. Picking up a bit on what Senator Thomas was 
talking about, could you develop a bit what you see as long-
term possibilities in the sense of, as you have laid out this 
morning in your testimony, potential for renewables? But 
Senator Thomas was getting into an area that I think is pretty 
important. How much tax incentive, government incentive, 
dynamic will be required in the out-years to develop 
renewables, such as solar and wind? Are we kidding ourselves a 
little bit here on it is all kind of interesting and new and 
fresh, and we must pursue it absolutely?
    But have you lined out at all over the next 25 years asking 
the ultimate question when and if these renewable sources of 
energy, of power production, will be able to stand on their own 
in fact in the marketplace, as the Senator from Wyoming talked 
about? Develop that a bit for us.
    Mr. Garman. Okay. And it is a very complicated question 
because there is no one or two policies that we can pursue 
that, by themselves, will make a huge impact in renewable 
energy. We actually have to do a lot of things. Some of you may 
have seen, for instance, the solar house on the mall not too 
long ago. That solar house was destined for a place, an 
electric cooperative, in Loudoun County, where there was an 
interconnection standard and that metering allowed.
    Suddenly here is a homeowner that found it to be in his 
economic self-interest, because there were--a lot of the other 
aspects were in place. We will not know what the real potential 
for renewable energy generation is until we understand fully 
and have taken steps on interconnection and net metering in 
part, because that is really, I believe, going to be the thing 
that helps bring them into fruition.
    And, of course, you know, we are understandably--I have 
watched this committee in the past try to make the decisions 
about electricity and transmission generation and restructuring 
the electricity supply system. And as Senator Thomas pointed 
out, there has been very little incentive to invest in some of 
these things until some of these basic decisions are made.
    So it is--you know, I cannot give you a number and say we 
will--I can tell you that our R&D efforts are designed to bring 
down the costs in anticipation of the time where we have a 
distribution system that is more friendly to renewable systems 
and distributed generation system. But I cannot tell you how 
much they are going to come into the marketplace until that 
system is fixed.
    Senator Hagel. Will you be coming forward with proposals? 
You mentioned in your testimony here ``distributed generation 
is a new concept and has therefore faced a number of regulatory 
and institutional barriers.'' Will we see from the Department 
of Energy your suggestions, policies, to deal with those in 
order to get to what you have just laid out on the untapped 
potential for these new renewable resources?
    Mr. Garman. We are studying that. But again, we are also 
going to school a little bit on the States, as I mentioned 
earlier, New York, California, Delaware, Vermont, Texas, and 
others. We are looking particularly closely at Texas.
    Senator Hagel. Is that an accident or----
    Mr. Garman. No. Actually, Texas has been working on its 
restructuring. It has done some groundbreaking work on 
renewables. Most of the new wind generation that has been put 
into place in the past year has been done in Texas. So, 
frankly, we are looking at Texas very closely and some of the 
things that they have done. And I will tell you that the 
Department has actually reached out to some of the talent that 
was a part of that and brought them in-house.
    Senator Hagel. Well, Texas had a pretty good governor, I 
think----
    Mr. Garman. Yes, sir, I agree with that.
    Senator Hagel [continuing]. At one time. Your projections 
of growth in the renewable areas, you mention specifically 
biomass, landfill gas, geothermal, wind power, would you 
develop that a bit in where you see the Department of Energy 
going with trying to frame those in a way that connect the 
reality of the development and what you will do in the way of 
coming forward with policy recommendations?
    Mr. Garman. I do not want to be in a position of trying to 
tell the committee that we are going to be in a position 
anywhere in the foreseeable future where fossil fuels do not 
provide the overwhelming majority of our energy. That is not 
what I am--I do not want to leave you with that impression, 
because those are the realities that we face. We are working 
mainly through research and development to bring down the cost, 
to let these things come into the marketplace on their own 
accord.
    Again, I cannot give you a good estimate. And my crystal 
ball--any more than I can predict what the energy prices in 
California are going to be. And it is our goal within my 
office, of course, to increase the power generated from 
renewable energy resources. And, frankly, I am given about $400 
million a year to do that. And most of that effort goes toward 
research and development to bring down costs and make those 
things available in the marketplace, and that is our goal.
    Senator Hagel. It is considerably more than Senator 
Murkowski gave you when you worked up here. Best regards to the 
secretary. Thank you.
    Mr. Garman. Yes, sir.
    Senator Murkowski. Mr. Chairman, if you would yield, I have 
had the opportunity to visit Texas, some of their wind 
facilities. And as has been pointed out, they have a State 
provision that requires, I think, 5 to 6 percent of their 
energy to come from renewables. So what the utilities have done 
is simply accepted that.
    But the return on investment does not suggest that it is a 
money maker. They have subsidize it with their other source 
power. In other words, there are cheaper sources of power. But 
they have made a conscientious commitment to proceed with 5 
percent or 6 percent alternative. And it is primarily in wind 
power. It works, but the cost return to the utilities is 
something that is subsidized within the rate structure. And 
that is just the way it is.
    So the point is, there is no free ride here just because 
the wind is free, or the hot air around here.
    The Chairman. Senator Smith.
    Senator Smith. Thank you, Mr. Chairman. I would like to 
give special welcome to Julie Keil from Portland, Oregon, who 
is with the Portland General Electric Company. She works on 
hydro relicensing and water rights. And I am glad that she is 
here to testify.
    Mr. Secretary, I apologize, I was not here during your 
testimony, but I wonder if you spoke to the future of wind 
power. The reason I ask this question is where I live in 
eastern Oregon there is a lot of wind. And Florida Power and 
Light is putting in a huge wind system there. But on the Oregon 
side, it has all been halted due to a ground squirrel. Are you 
finding that----
    The Chairman. Ground squirrel?
    Senator Smith. The ground squirrel, yes.
    The Chairman. Do you need more ground----
    Senator Smith. Well, I guess the bottom line is, are you 
having difficulty getting windmills development sited around 
the country?
    Mr. Garman. There have been instances, and you mentioned 
Oregon. I know that there is one instance where a wilderness 
study area has precluded development of a very promising wind 
site in Oregon. It is something that we are beginning to work 
very closely with the Department of the Interior on. There are 
tremendous geothermal resources, for instance, in Nevada, all 
on public lands. There are tremendous wind resources around the 
country on public lands. And gaining access to do the necessary 
study and validation is proving to be pretty difficult. And one 
of the recommendations in the President's national energy 
policy is to try to work cooperatively with the Department of 
the Interior and break through some of those issues.
    Senator Smith. Do you see wind as a renewable?
    Mr. Garman. Yes, sir.
    Senator Smith. And what is the resistance? What is 
developing against that now? I cite the ground squirrel in my 
State, but what are the other resistances to wind?
    Mr. Garman. There have been in the past, particularly in 
California, concerns about birds. But I think a lot of these 
have been addressed. Candidly, we actually did some research, 
worked with the Audubon Society and were able to demonstrate 
that the wind resource was not as damaging to aviary 
populations as had been thought at one time.
    Wind has advantages and disadvantages. One of the 
advantages is you can get a lot of it up relatively cheaply and 
quickly. One of the disadvantages is that it is an intermittent 
resource. And whenever you have an intermittent resource, you 
have issues with both transmission and others that come into 
play, as with any intermittent resource. So it has advantages 
and disadvantages.
    It is, of course, immune from fuel price changes. And wind 
has actually, in some areas of the country over the past year, 
become the cheapest available. But when natural gas prices came 
back down, wind was no longer in that position. So there are 
advantages and disadvantages that can be exploited.
    Senator Smith. Are you aware of a situation in the Pacific 
Northwest with the Bonneville Power Administration and their 
desire to have bonding authority increased so as to improve 
transmission lines?
    Mr. Garman. Not as much as I need to be to answer the 
question that I think is coming.
    Senator Smith. Just so you put on your radar screen, there 
is a lot of new production going in right now. It is wind. It 
is also natural gas. But, frankly, there is a big bottleneck in 
terms of just wheeling this to markets. And so the need for 
this bonding authority is critical. And it is being bottled up 
in the Congress by the Appropriations Committee, who wants to 
evaluate it annually and make it subject to annual 
appropriations. And no one is going to invest in such a system.
    And, frankly, it is of little value to put in new 
production, if you cannot get the power to the markets that 
need it. And so I really think the Department of Energy needs 
to talk to OMB fast, because this is really dumb what is 
happening right now.
    And I know there are objections to public power, but this 
is an old issue in some parts of our country, and in my part 
especially. It is not going to go away, and we need to make 
sure that the power that is produced, either privately or 
publicly, can get to markets. And I hope that we will have the 
support of the administration on this, because we can put in 
lots of renewables in Oregon, but it does not do any good if we 
are running over the old lines.
    And I will tell you my suspicion, that there is opposition 
to this in some private sectors, who are able to game the 
system, to drive up prices, because there is a bottleneck. And 
we ought not to be creating that artificial situation.
    I wonder if the administration will support classifying 
hydropower as a renewable.
    Mr. Garman. We consider hydropower a renewable resource. 
Absolutely.
    Senator Smith. No plans to tear out Snake River dams?
    Mr. Garman. I think that would come under the jurisdiction 
of the Department of the Interior.
    Senator Smith. It would.
    Mr. Garman. But no plans in the Department of Energy, I can 
assure you of that.
    Senator Smith. The Star Program, are you familiar with 
that? It would certify buildings and appliances and----
    Mr. Garman. Energy Star, yes. In fact, this afternoon we 
are welcoming Canada into the Energy Star Program.
    Senator Smith. You will be pushing that----
    Mr. Garman. Yes, sir.
    Senator Smith [continuing]. As the Government? Thank you.
    I recently toured a plant, a cold storage plant, in 
Portland, Oregon, that is generating remarkable efficiencies of 
40 to 50 percent above industry averages. And they have worked 
with Portland General Electric to do this. And I would 
encourage your consideration of any Federal policies that could 
encourage marketers to do those kinds of things. We have to 
start valuing the saving of a kilowatt as much as the use of a 
kilowatt.
    I look forward to hearing what Julie has to say about that 
and commend it to your attention, as well.
    Thank you, Mr. Chairman.
    Senator Murkowski. May I ask my colleague from Oregon a 
question? You know, we had a discussion that I observed the 
other day regarding the sucker fish. And you brought up a 
squirrely issue relative to the squirrels having some objection 
to wind power. And I never quite got the connotation of whether 
the squirrely aspect was related to those who objected. But I 
wonder if you could bridge the gap to explain what the wind has 
to do with the squirrels.
    Senator Smith. I wish you could explain that to me.
    Senator Murkowski. You brought it up. I am just curious.
    Senator Smith. I went home, and this big wind project is 
probably 20 miles from my home in eastern Oregon. You can 
literally see it from my home. And I suppose if there is any 
objection to windmill farms is that some people do not find 
them very attractive.
    But there is, under the Oregon Endangered Species Act, a 
listing of the ground squirrel. So I do not know that they know 
the difference between the Washington and the Oregon border, 
but all of the production has gone to the Washington side now 
because of the listing of the ground squirrel and apparently 
the effect of the windmill on the ground squirrel.
    Senator Murkowski. Maybe you could put bark on the tower so 
the squirrel could climb up.
    Senator Smith. Well, I think it has to do with the 
vibration of the blades and how that might affect the ground 
squirrel. So that is what I am told.
    Senator Murkowski. I appreciate but do not understand the 
explanation.
    [Laughter.]
    The Chairman. Senator Craig, did you have questions for 
Secretary Garman?
    Senator Craig. I do not. Dave, I am sorry I missed your 
testimony. I had to run out. I am back. I will only add that 
what the Senator from Oregon has talked about, about Bonneville 
Power bonding, is critical, not only for Oregon, Washington, 
Idaho and Montana, but we spent a lot of time bailing 
California out in the last while by sending a lot of energy to 
them over some of these lines. And they have returned energy 
during their surplus times, believe it or not. There once was 
that situation.
    The point is it is a regional situation that needs to be 
addressed in the overall energy package. And I am as concerned, 
as is the Senator from Oregon, that we have an OMB that somehow 
has not communicated with the White House that there is a 
concerted energy effort underway by the part of this 
administration and by this government. Thank you.
    Senator Smith. I think they are asking that it be increased 
by $2 billion of bonding authority. This is all money that I 
guess to be accounted a certain way that is of concern to OMB.
    Senator Murkowski. Counted and paid back.
    Senator Smith. It is all paid back by rate payers. But the 
truth of the matter is you cannot plan to these kinds of 
capital expenditures if they are subject to annual review.
    The Chairman. But you are willing to cap it.
    Senator Smith. Oh, of course. Absolutely. But I would just 
follow up, if I may, Mr. Chairman, on Senator Craig and just 
say that I really think this is important for the 
administration to get right. They need to be seen on the west 
coast as helping on energy issues. And I want to highlight that 
I think some take advantage of the bottleneck on wheeling of 
energy. And that is wrong. And we need to make sure that we 
have the infrastructure there that can keep power flowing and 
keep it affordable and available.
    And for some reason, it is being held up, and I do not like 
it.
    Mr. Garman. Senator, I will follow up with Valerie of your 
staff this afternoon on this issue.
    Senator Smith. Thank you.
    The Chairman. Well, thank you very much for your testimony. 
It is very useful.
    And we will move on to the second panel at this point.
    Mr. Garman. Thank you, Mr. Chairman.
    The Chairman. Oh, I am sorry. I did not see Senator Graham 
come in here. Go right ahead, Senator Graham. Did you have 
questions of Secretary Garman?
    Senator Graham. No questions and no opening statement.
    The Chairman. Okay. Well, then we will move to the second 
panel.
    Let me go ahead and introduce this panel. We have Mr. 
Robert Boyd, who is the vice president at Enron Wind 
Corporation. We appreciate you being here very much.
    We have Mr. Demeter, is that correct?
    Mr. Demeter, Mr. Chairman.
    The Chairman. Demeter, excuse me. Mr. Demeter, who is the 
chief executive officer with Antares Group, Inc.; Mr. Mark 
Hall, who is the vice president for external affairs with 
Trigen Energy Corporation; and Mr. Thomas Starrs, who is the 
senior partner with Kelso Starrs and Associates in Vashon, is 
that right, Vashon, Washington?
    Thank you all very much for being here. Why do we not--if 
each of you could--we will introduce your entire statement into 
the record. If you could take about five minutes each and tell 
us the main points you think we need to understand about what 
you are testifying about.
    Mr. Boyd.

         STATEMENT OF ROBERT T. BOYD, VICE PRESIDENT, 
                     ENRON WIND CORPORATION

    Mr. Boyd. Thank you, Mr. Chairman. I appreciate the 
opportunity to be here today.
    The Chairman. Would you pull that microphone right in front 
of you? That way you do not have to lean over.
    Mr. Boyd. Okay. I just want to be able to see my notes.
    The Chairman. Thank you.
    Mr. Boyd. I am from California, and I am happy to hear the 
power situation is improving. And it is nice to lights and air 
conditioning for a change.
    The Chairman. Good.
    Mr. Boyd. My company, Enron Wind Corp., is a wholly owned 
subsidiary of Enron Corporation of Houston, Texas. And we 
manufacture wind turbines, and we build wind powerplants, and 
we operate and maintain them. I was happy to hear that there is 
so much interest in wind, and I hope that I can shed some light 
on some of the questions that you all had.
    Wind energy is really the most rapidly growing renewable. 
And the reason for that is because we have been driving the 
cost down. In the early eighties, it was over 25 cents a 
kilowatt hour. Now we are down between, well, 4 to 6 cents 
without a tax credit in a very good site. So we have done a 
good job of getting our cost down.
    A lot of that is due to having a wind production tax 
credit, which has been helpful in getting our costs close to 
the conventional technologies. The other thing has been the 
good efforts of the Department of Energy. They have helped 
considerably in some of the research and development efforts. 
And they have a fine lab out in Colorado that has equipment 
that most manufacturers would not have that can do testing. So 
appreciate their efforts.
    Wind is going to grow here. I think we probably will double 
this year the amount of wind in the United States. And over the 
next five years worldwide wind is estimated to grow by about 
40,000 megawatts, which is considerable.
    Why wind energy?
    The Chairman. After this year, how many megawatts of power 
will we be producing from wind energy in this country?
    Mr. Boyd. I think that we will be close to 5,000. 
California, for example, about 2 percent of our electricity 
comes from wind. And now that is spreading to other parts of 
the country.
    I think it has been alluded to that wind does not have any 
fuel. And as such, we can give a fixed price contract for 20 
years or whatever to the power buyer. And what that is then is 
a hedge against price increases in different fossil fuels. And 
it helps somebody plan.
    Also, you know, it takes away the price volatility and 
potential of tax increases. There can--and I look at taxes like 
some of the air quality credits and things that you have to 
have in different parts of the country.
    Another area that is benefitting from wind energy is the 
agricultural sector in the United States. And the reason for 
this is that wind is primarily in a lot of the unsettled or 
unpopulated parts of the country. And a landowner that has wind 
on its property is going to get a significant amount of money, 
if he has many turbines. It can amount to about $4,000 for each 
turbine. And that is considerably more than he would make on a 
per acre basis for his crops.
    The other thing is the property tax benefits that these 
rural communities derive. There is one county in Texas, 
Culbertson County, I think, that gets about 25 percent of their 
tax revenues from two wind projects in their county.
    What are some of the things that can help wind and bring 
down some of the barriers that we face? The wind production tax 
credit has been the most successful. Yesterday in the Ways and 
Means Committee there was a billion passed out that has a 5-
year extension of that credit. And we would appreciate your 
support when it comes over here to the Senate.
    The second thing is, you were talking about a Federal 
purchase requirement in your bill. We would like to see that 
broadened to a renewable portfolio standard. This is the type 
of thing that has been used in Texas. And what this does is 
allow a seller of power to offer a certain amount of renewable 
energy. And they can do it either by putting in a plant, they 
can buy the power from a renewable plant, or they can buy a 
credit from somebody that has more renewables than they need.
    This is, as I say, what Texas has been doing. They are 
going to put in about 800 megawatts of wind this year, which 
represents about an $800 million investment in the State of 
Texas primarily in rural lands.
    Transmission has been talked about here today. And this is 
a key issue for all electric generation. There is a recent EPRI 
study that said that between $10 million and $30 million are 
going to be needed just in the West alone in the next 10 years 
to keep the system stable. And we look at wind as--or not 
wind--but transmission as being similar to the Federal highway 
system. And we should be addressing it, perhaps, in that way to 
make sure that we have adequate transmission around this 
county.
    Public benefits fund. We would encourage that, too. 
California's program has resulted in a lot of projects ready to 
be developed. Unfortunately, the market situation out there 
right now does not let us finance them. The assessment of 
renewable resources, the Secretary addressed, and we think that 
is a very valuable program.
    Also, small wind turbines are also important. I think it 
was Mr. Thomas who mentioned the diesel generator sets in the 
gas fields. In Oklahoma, they have actually used small wind 
turbines to do the same thing with batteries.
    One other thing on the transmission, too, that I forgot to 
mention is that FERC had a decision a week or so ago creating 
four regional RTOs around the country. And we would support 
that. We think that is a good thing to do.
    I have been personally somewhat disappointed to see what 
has been happening in the West with each area going their own 
way, because we are an interdependent system out there, and we 
trade power all over the West. And it makes sense that we have 
the RTO as a western RTO.
    And I guess I had better conclude, because I got the red 
light. We would love to see the United States move towards a 
more competitive marketplace, and not only in the wholesale 
level, as we have done, but on the retail level as well. We 
want to see customers have a choice. And we believe that when 
they do that they will choose renewables.
    Thank you.
    [The prepared statement of Mr. Boyd follows:]
         Prepared Statement of Robert T. Boyd, Vice President, 
                         Enron Wind Corporation
                              introduction
    Enron Wind Corp. (Enron Wind) is pleased to offer testimony on 
removing barriers to wind energy development in the United States.
    Enron Wind is a wholly owned subsidiary of Enron Corp. The company 
has been in business for over two decades and has installed over 4500 
wind turbines comprising more than 1,600MW of electric generation 
capacity. As a manufacturer of wind turbines, our current product line 
ranges from 600kW to 1.5MW with new 3.2MW onshore and 3.6MW offshore 
models under development. During 2001 our U.S. facility in California 
will manufacture 300 1.5MW turbines which will be deployed in Texas, 
Wisconsin, New York and Pennsylvania.
                         status of wind energy
    Wind Energy has become the most rapidly growing renewable 
technology because it has moved rapidly down the cost curve from over 
25 cents/kWh in the early 1980's to between 4 and 6 cents today in good 
sites without a tax credit. The major factors on the federal level 
driving down the cost of wind have been the creation of a U.S. market 
by using the Wind Production Tax Credit (PTC) to help equalize costs 
with conventional generation technologies and technological advances 
made possible through DOE cost-shared research and development and 
deployment programs. State renewable power requirements have also 
helped wind energy growth. The American Wind Energy Association 
estimates that installed wind capacity will almost double in the U.S. 
this year. BMT Consult ApS estimates that close to 40,000MW of wind 
will be installed throughout the world between 2001 through 2005.
                            why wind energy?
    Wind energy is close to becoming competitive with conventional 
fuels. With additional R&D funding and the continuation of the 
Production Tax Credit for the next five years wind should become price 
competitive with conventional generation technologies. One primary 
advantage of wind technology is that because it burns no fuel long term 
fixed price contracts can be offered. This is a hedge against both fuel 
price volatility and potential pollution or CO2 taxes. We 
have certainly learned the value of fuel diversity during the energy 
crisis and we should put that lesson into practice by adding non-fuel 
dependent technologies like wind into our electric generation mix. A 
balanced portfolio approach helps mitigate risk.
    The agriculture sector has been impacted significantly during the 
energy crisis and the value of wind energy should not be overlooked in 
the rural farming communities. Some of the best wind resources are 
found in sparsely populated areas used for farming and ranching. The 
landowners benefit by receiving significant land rent payments which 
far outstrip the value of agricultural income on a per acre basis. The 
host Counties also receive additional property tax revenues with very 
little increase in the services they must provide.
               recognition of the barriers to wind energy
    We appreciate the chairman and ranking member's consideration for 
renewables in drafting their bills. Energy policy is a very complex 
issue in the U.S., but renewables must be a part of our long-term 
strategy to satisfy U.S. energy needs. The issues we have highlighted 
below are those we view to be most significant in the future 
development of wind energy.

1. Wind Production Tax Credit (PTC)

    By far the most important issue for wind energy is the extension of 
the Wind Production Tax Credit which has been included in your bills. 
The PTC has helped wind become more competitive with conventional 
generation technologies while we continue to reduce our costs. The PTC 
is vital to the long-term success of wind energy. This program has been 
the most effective tool in increasing the use of wind energy in the 
country. The extension of the PTC is a priority for this year as it 
expires on December 31, 2001.

2. Renewable Portfolio Standard

    A federal purchase requirement is also a part of S. 597. The 
federal government can play a leadership role as a consumer of clean 
renewable energy. There has been a particular interest from the 
military in using renewables on their bases for energy security 
reasons. We would like to see the purchase requirement expanded to a 
nationwide Renewable Portfolio Standard (RPS) which would require all 
power sellers to have some percentage of their electricity be 
renewable. This is a quasi-market based program which offers choices to 
the sellers in how they satisfy the requirement. Power sellers would 
have the option of owning renewables, buying and reselling renewable 
power or buying tradable credits from renewable sellers. There are 
several states with this type of program. Under the Texas RPS program, 
over 800MW of wind will be added this year. This will be an $800 
Million investment in rural Texas.

3. Transmission

    Transmission is a key issue for all electric generation, including 
wind power. Transmission upgrades and new lines are needed throughout 
the country. EPRI recently released a study which concludes that $10 to 
$30 billion needs to be invested in the western states transmission 
grid over the next 10 years just to bring the system to a stable 
condition. Wind energy, like hydro facilities and mine mouth coal 
plants, is often found in areas remote from load centers. We must have 
adequate access to transmission facilities on a non-discriminatory 
basis to reach the markets where wind power is needed. Transmission of 
electricity is much like the interstate highway system for the 
transportation of goods. We need a national electric grid just as we 
need a national highway system to get goods to market. FERC's decision 
last week to create four Regional Transmission Organizations (RTOs) is 
vital to the development of that national grid. We strongly urge 
Congress to support the FERC's RTO plans.
    Intermittent resources such as wind have some difficulty accurately 
scheduling their deliveries and penalties can result from transmission 
providers for not meeting schedule. Wind generators are working to 
develop methods to better forecast delivery schedules, but we are not 
there yet. Your prohibition of such penalties is vital to future wind 
energy development.

4. Public Benefits Fund

    We support the proposed Public Benefit Fund for renewables. Some 
states have adopted this type of program, which has been successful in 
bringing more renewables on line. The cost for renewables is spread 
over all the electricity purchasers in proportion of how much they use. 
Projects then bid for funding which is awarded to the lowest cost bids. 
California's program has resulted in a significant amount of new 
renewable projects under development. Federal funding would ensure that 
all states have the opportunity to participate in renewable 
development.

5. Assessment of Renewable Energy Sources

    The Department of Energy has done wind resource assessment in the 
past. It has proven valuable in siting wind projects around the 
country. We believe there are similar DOE programs for most renewable 
resources. The key to their being successful is adequate funding.
                               conclusion
    The U.S. has begun to move toward a competitive electricity market. 
Many states have already opened the door to competition, some with 
better results than others. There are many ways this committee and the 
Congress can help steer this emerging competitive market. We would hope 
to see competition not only at the wholesale level but at the retail 
level as well. The retail customer should be able to choose his 
supplier and product, which should include renewables. We appreciate 
your consideration of the renewable issues that the bills before this 
committee have already addressed. We request that you also consider 
some of the other issues we have raised in this testimony.

    The Chairman. Thank you very much.
    Mr. Demeter, why don't you go right ahead?

  STATEMENT OF CHRISTIAN P. DEMETER, CHIEF EXECUTIVE OFFICER, 
                      ANTARES GROUP, INC.

    Mr. Demeter. Thank you. Mr. Chairman, members of the 
committee, I thank you for the opportunity to address you today 
on legislative proposals related to removing barriers to 
distributed generation, renewable energy, and other advanced 
technologies.
    In general, I am encouraged by the proposed actions 
contained in the legislation that we are discussing here today. 
Congress, working with the administration, can enhance 
competition in energy markets now by removing market barriers 
to renewables, allowing them to compete fairly. This is why I 
am supportive of legislative language in title 3 of S. 597, 
which calls for a review of existing regulations and standards 
that act as barriers to market entry for emerging energy 
technologies.
    Renewable energy technologies, such as biomass, geothermal, 
wind, solar, and hydro, have met important measures of success 
relative to declines in the cost of electricity production. 
Other factors out of control of the renewables energy industry, 
such as changing market conditions, the ability of competing 
technologies to also improve, and existing barriers to market 
entry, account to much of the difficulty in expanding market 
share.
    Although commercial success of renewables in terms of 
market penetration has perhaps not lived up to expectations, in 
fact, performance of these technologies is higher, and costs 
have been lower than expected in this document, Resources for 
the Future, a study that was released a couple years ago.
    Title 4 of S. 597 contains other provisions which would 
help to enhance market acceptance of renewables and distributed 
generated systems. Section 601 calls for an assessment of 
renewable energy resources available in the United States. This 
information is important to both policy makers and to private 
developers. Accurate knowledge of the quality, quantity, and 
location of these resources is important to public decision 
making.
    The private sector may also fail to carry out the optimal 
amount of energy investment because of lack of knowledge about 
resources. I know from my own personal business experience that 
it was only 2 years ago that the Department of Energy's Energy 
Information Administration included biomass supply curves in 
their national energy modeling system. We helped them develop 
that data.
    Section 602 of S. 597 seeks to advance provisions of 
Executive Order 13123 to encourage Federal procurement of 
renewable energy. Although that executive order set a positive 
tone, section 602 would do much more by mandating Federal 
procurement. The United States has done this in the past to 
stimulate the demand for transistors and to expand the supply 
of uranium. The advantage to this approach is that the 
government can include the cost in the budget so the commitment 
to the program can be reviewed annually.
    We are working on a project currently in central New York 
which can take waste biomass to produce low sulfur diesel 
fuels, a home heating oil substitute, or a liquid turbine fuel 
for the production of electricity. In fact, General Electric is 
working with us on the latter. A Federal contract to buy 
electricity from renewable resources such as this would help us 
to seed that market.
    A policy to encourage renewable energy use at Federal 
facilities, as outlined in this section, would overcome many of 
the weaknesses of the existing executive order and compensate 
for some of the past adverse effects of barriers to entry for 
renewables.
    S. 933 is particularly important legislation, as we attempt 
to enhance competition in energy markets and electricity 
markets. Antares Group is currently working with a project 
developer on a combined heating power project using a 
proprietary distributed generation technology. As we proceed 
with the development of this project, we are encountering many 
of the issues described in S. 933.
    To avoid high standby or backup charges by the utility, our 
project would incur from a 30- to 50-percent charge in addition 
of added capital expense in order to create a redundancy in the 
system. If after this increased cost for redundancy is incurred 
and the utility company charges us an exit fee for leaving the 
grid, our project quickly becomes uneconomic as we could no 
longer afford to provide our on-site customer with less 
expensive heat and power.
    Should we choose to stay on the grid and the project 
developer wants to make a business of expanding a market for 
this new DG technology, we face the potential for site-by-site 
interconnection studies, which can quickly become costly. A 
consistent interconnect standard would further develop 
distributed generation and combined heat and power 
technologies, be they renewable based or not.
    It would also make more sense to be able to negotiate 
reasonable standby charges and not to have our customers 
charged onerous exit fees. Although this bill does not 
completely correct these problems, the potential exists through 
this legislation to encourage States and municipal authorities 
to not impose excessive fees on small generators.
    Section 604 of S. 597, net metering, and section 111 of S. 
388, innovative financing, contain language which will help 
consumers of electricity become competitors in the electric 
supply business, thereby enhancing competition further. My 
company recently installed a small 12 kilowatt distributed 
solar cell array on a county office building in Maryland to 
convert sunlight to power. The system reduces county energy 
costs by about $2,500 a year and emits no pollution.
    The county government, the U.S. Department of Energy, and 
the States of Maryland and Virginia provided funds for a total 
cost of about $78,000 for the system. While the fuel is free, 
the high up-front capital costs would have killed this deal 
without the Federal support. But rather than providing outright 
grants of Federal funds for these systems, I think a more 
efficient method would be to develop innovative financial 
mechanisms and allow customers who generate electricity to sell 
electricity to the grid at market rates in times of peak 
demand.
    In conclusion, I support the proposed legislative changes 
be discussed here today. They are key components to ensuring 
market acceptance of renewable energy and a viable renewable 
energy industry.
    Thank you, Mr. Chairman, members of the committee. I would 
be happy to answer any of your questions.
    The Chairman. Thank you very much.
    [The prepared statement of Mr. Demeter follows:]
 Prepared Statement of Christian P. Demeter, Chief Executive Officer, 
                          Antares Group, Inc.
    Mr. Chairman and members of the Committee, thank you for the 
opportunity to address you today on legislative proposals related to 
removing barriers to distributed generation, renewable energy and other 
advanced technologies in electricity generation and transmission, 
referred to in S. 388, S. 597, and S. 933. My name is Christian 
Demeter, and I am Chief Executive Officer of the Antares Group 
Incorporated in Landover, Maryland. I work daily with engineers, 
economists, scientists, and lawyers taking a systematic approach to 
solving energy problems. I founded Antares Group nine years ago with 
the objective of assisting private-sector developers in commercializing 
advanced energy technologies, renewable and otherwise, and advising 
state and Federal clients on where and how emerging technologies can 
enter the market.
    My interest in energy dates back to 1973 and the first oil embargo. 
I clearly recall the difficulties then of utilities meeting peak demand 
in summer months, intermittent threats of gasoline or home heating oil 
shortages, closing of aluminum plants in the Northwest, and the 
inability of new homeowners to get natural gas connections. At that 
time, the nation responded by embarking on a significant set of energy 
policies. It seems now we are facing similar challenges in the energy 
sector. In general, I am encouraged by the proposed actions contained 
in the legislation we are discussing today.
    My remarks emphasize the need for Congress to pass legislation to 
ensure that private and public investments made in renewable energy R&D 
are successfully commercialized in the marketplace. Much of this 
legislation emphasizes the need to reduce institutional barriers and 
thus costs of renewable technologies in the marketplace. Competition 
among all energy technologies is good if society is the ultimate 
beneficiary of reduced costs. Congress working with the Administration 
can enhance competition in energy markets now by removing market 
barriers to renewables allowing them to compete fairly. This is why I 
am supportive of the language in Title III of S. 597 which calls for a 
review of existing regulations and standards that act as barriers to 
market entry for emerging energy technologies and for recommendations 
for changes in laws or regulations which may impede market development.
    Renewable energy technologies such as biomass, geothermal, wind and 
solar, have met important measures of success relative to declines in 
cost of electricity production. Other factors out of the control of the 
renewable energy industry such as changing market conditions, the 
ability of competing technologies to also improve, and existing 
barriers to market entry, account for much of the difficulty in 
expanding market share. A recent study performed by the not-for-profit 
research organization, Resources for the Future (RfF), found that 
although commercial success of renewables in terms of market 
penetration has not lived up to expectations, in fact, performance of 
these technologies is higher and costs have been lower than expected. 
To their credit, the competitive energy sources such as mature fossil 
technologies continue to innovate and thus produce a moving and 
declining cost baseline. Fossil technologies have also benefitted from 
energy policy in the form of deregulation in the oil and natural gas 
pipeline and railroad industries.
    Title IV of S. 597 contains other provisions which would help to 
enhance market acceptance of renewables and distributed generation (DG) 
systems. Sec. 601 calls for an assessment of renewable energy resources 
available within the United States. The language is substantially 
similar to Sec. 112. of S. 388. This information made publicly 
available is important to both policymaker and developer. In most 
cases, the sunlight, wind, water, and even biomass on public lands are 
public resources. Accurate knowledge of the quality, quantity, and 
location of these resources is important to public decision making. The 
private sector may also fail to carry out optimal energy investment 
because of lack of knowledge about resources. I know from my own 
business experience that it was only two years ago that the Department 
of Energy's Energy Information Administration began incorporating 
biomass supply curves into their National Energy Modeling System 
because they previously did not have the data. My company developed the 
data for them under contract to the National Renewable Energy 
Laboratory.
    Sec. 602. of S. 597 seeks to advance provisions of Executive Order 
13123 issued in June 1999, to encourage Federal procurement of 
renewable energy. Although agencies were encouraged to purchase 
electricity generated from renewable energy, that electricity would 
have to be priced at or below existing alternatives. Thus although E.O. 
13123 sets a positive tone, Sec. 602 would do much more by mandating 
Federal procurement. Through long-term contracts, government can 
guarantee companies a market of any size. The United States has done 
this in the past to stimulate the demand for transistors and to expand 
the supply of uranium. The advantage to this approach is that the 
government can include the costs in the budget so the commitment to 
such a program can be reviewed annually. We are working on a project in 
central New York which can take waste biomass, i.e., wood chips, paper 
mill sludge, segregated municipal solid wastes; and convert them to a 
platform chemical called levulinic acid which can be combined with 
ethanol to produce an ultra-low sulfur diesel fuel, a home heating oil 
substitute, or a liquid turbine fuel for electricity production. 
General Electric Company is working with us on the turbine fuel's 
market potential. A Federal contract to buy electricity from renewable 
sources such as this would help seed the market. Although I oppose 
mandating private purchases of electricity generated from renewable 
sources, a policy to encourage renewable energy use at Federal 
facilities as outlined in Sec. 602 would overcome the weakness of the 
E.O. 13123 and compensate for the past adverse effects of barriers to 
entry for renewables.
    S. 933 and a related item, Sec. 603, Interconnection Standards of 
S. 597, is particularly important legislation as we attempt to enhance 
competition in electricity markets. Antares Group is currently working 
with a project developer on a combined heat and power (CHP) project 
using a proprietary distributed generation technology. To my knowledge, 
not even the DOE is currently funding such technology. The technology 
is similar to steam turbine technology, but it can convert lower-
temperature and pressure steam into electricity more economically than 
currently available technologies. The project will have a total cost of 
about six million dollars and generate both heat and power at about 10 
MWe equivalent.
    As we proceed with developing this project, we are encountering 
many of the issues described in S. 933. To avoid high standby or backup 
charges by the utility, our project will incur $2-$3 million of 
additional capital expense in redundant systems. If we were to incur 
the cost of redundancy to avoid high standby charges then leave the 
grid, we could not reduce our customer's cost of heat and power as much 
as planned. If after this increased cost for redundancy were incurred 
and the utility company charged an exit fee for leaving the grid, our 
project becomes uneconomic as we could no longer afford to provide our 
on-site customer less expensive heat and power. Should we choose to 
stay on the grid and the project developer wants to make a business of 
expanding the market for this new DG technology, we face the potential 
for site-by-site interconnection studies which can quickly become 
costly.
    A consistent interconnect standard would further develop DG and CHP 
technologies, be they renewable based or not. It would also make more 
sense to be able to negotiate reasonable standby charges, not have our 
customers charged onerous exit fees particularly after stranded costs 
have already been recovered in electricity rates. Although this bill 
does not completely correct these problems, the potential exists, 
through this legislation, to encourage states and municipal authorities 
to not impose excessive fees on small generators.
    Sec. 604 of S. 597 (net metering) and Sec. 111 of S. 388 
(innovative financing) contain language which will help consumers of 
electricity become competitors in the electric supply business thereby 
enhancing competition further. For example, my company recently 
installed a small 12kW distributed solar cell array on a county office 
building in Maryland to convert sunlight to power. This is the 
equivalent of about three average home systems. The system reduces 
county energy costs by about $2,500 per year and emits no pollution. 
The county government which owns the building paid half the cost of the 
system. The U.S. Department of Energy and the States of Maryland and 
Virginia provided additional funds for a total project cost of about 
$78,000 or about $6,500 per kW. While the fuel is free, the high up-
front capital costs would have killed the deal without the Federal 
support - in this case, it would take almost 40 years to payback based 
solely on capital costs. Rather than providing outright grants of 
Federal funds for these systems, a more efficient method would be to 
develop innovative financial mechanisms and allow customers who 
generate electricity to then sell electricity to the grid at market 
rates in times of peak demand.
    In conclusion, I support the proposed legislative changes being 
discussed here today and appreciate this Committee's attention to 
addressing our Nation's energy needs while we also move toward more 
competitive electricity markets. Along with Federal funding of long-
term R&D, Federal energy policies discussed here today are key 
components to ensuring market acceptance of renewable energy 
technologies and a vibrant renewable energy industry.
    Thank you, Mr. Chairman and members of the Committee for this 
opportunity to present these views. I look forward to answering your 
questions.

    The Chairman. Mr. Hall, why don't you go right ahead?

   STATEMENT OF MARK HALL, VICE PRESIDENT, EXTERNAL AFFAIRS, 
                   TRIGEN ENERGY CORPORATION

    Mr. Hall. Good morning. Thank you, Mr. Chairman and members 
of the committee, for having me here this morning to testify 
predominantly in support of S. 933 that is before the committee 
and also to address other legislative proposals to address 
barriers to combined heat and power and distributed generation.
    My company is Trigen Energy Corporation. We are based in 
New York, but we have operations in 22 States and the District 
of Columbia. And more than half of those projects would be 
characterized as distributed generation or combined heat and 
power projects, and in some cases both.
    CHP, which is combined heat and power, CHP and modern 
distributed generation provide significant economic and 
environmental benefits. And to the point that was raised 
earlier, there has been quite a lot of analysis by both the 
private sector and the U.S. Environmental Protection Agency and 
the U.S. Department of Energy that backs up the very 
significant environmental benefits, as well as the economic 
benefits that can be derived from more widespread deployment of 
combined heat and power and distributed generation.
    In addition, the point that was raised earlier about being 
in the here and now versus thinking about that which might come 
in the future, combined heat and power and distributed 
generation is very much in the here and now. And although we 
certainly do face a shortfall of electric capacity in the near 
term and in the future, it is going to be much more efficient, 
to the extent that we are going to continue to rely very 
heavily on fossil fuels, to leverage modern technologies that 
can produce both electricity and thermal energy much more 
efficiently than just producing electricity alone.
    To answer the question that was not directed to me earlier, 
but to the Secretary, a 2,500 megawatt powerplant will never be 
as sufficient as a smaller scale combined heat and powerplant 
and modern distributed generation that recovers the heat simply 
because all fossil-based electric generation produces excess 
heat. And if we can find ways to use that, then we reduce the 
need to burn fossil burn someplace else in the economy where 
the heat is needed.
    And with the lone exceptions of hydroelectric and solar 
energy, which are going to be topics widely discussed today, 
all other forms of generation will have that leftover heat. And 
so the issue is, as we are going to continue to be reliant on 
fossil fuels into the near term certainly, and to a large 
extent the large term, we need to find ways that we can most 
efficiently use our fossil fuel resources. And if we can use 
our fossil fuel resources more efficiently, then we should be 
able to reduce our overall cost.
    That brings us to those things that do not relate directly 
to fuel cost and technology that do stand in the way of the 
more widespread deployment of these technologies. And 
interconnection is high on the list of those issues that need 
to be addressed and need to be addressed in a thoughtful way at 
the Federal level that is symbiotic with those activities that 
need to be taken at the State level.
    I think interconnection is a very well-known and very well-
researched barrier to distributed generation and 
interconnection. There is a DOE report that was published in 
May 2000 entitled Making Connections that memorializes an array 
of instances where interconnection barriers--where developers 
have come up against interconnection barriers in various 
projects. It documents cost, lost environmental benefits, et 
cetera. And to the extent that this committee has not seen that 
DOE report, a request could be made of DOE or we could 
certainly make it available to you as well.
    I think it is also important to recognize that S. 933 is 
the result of a pretty lengthy process of ongoing dialogue that 
included not only members of this committee and members of the 
Senate, but a lot of interested stakeholders in this issue. And 
as it was characterized to me, there was a search high and low 
to find someone that could represent an opposing viewpoint 
today on the need for a uniform interconnection standard.
    And I do not think that you will hear from one today, 
because I think we have struck the right balance in this 
language that will allow everybody to get what they need at 
both the distribution and the transmission level, and also to 
assure that backup power, which is sort of the hand-in-glove 
partner on interconnection, that backup power is also made 
available to those entities that are going to be 
interconnecting with the transmission and distribution system.
    To reiterate a comment made earlier, S. 933 focuses on 
technical interconnection standards. It does not address the 
process for interconnection. That is left appropriately at the 
State level, where local conditions should dictate the 
appropriate process.
    I would also just like to highlight that we are also very 
supportive of the provisions in a couple of the other bills 
that are before the committee this morning, the subject of this 
hearing, S. 597, section 301, and section 112 of S. 388, both 
which require the cataloging of additional barriers, many of 
which you have heard about and many of which are discussed in 
more detail in my testimony that you have before you.
    I would like to close by thanking you again for your 
interest in these issues. And I am certainly available to 
answer any questions.
    The Chairman. Thank you very much.
    [The prepared statement of Mr. Hall follows:]
  Prepared Statement of Mark Hall, Vice President, External Affairs, 
                       Trigen Energy Corporation
    Mr. Chairman and members of the Committee, thank you for allowing 
me to testify before you today on Senate Bill 933 and other legislative 
proposals to remove barriers to combined heat and power (CHP) and other 
forms of distributed generation (DG). My name is Mark Hall, and I am 
the Vice President of External Affairs for Trigen Energy Corporation, 
based in White Plains, NY. Trigen owns and operates some of the most 
efficient power plants in the world. We accomplish this by deploying 
CHP, DG and leveraging other modern technologies in innovative ways.
    Trigen currently owns, operates or otherwise manages fifty-one 
plants located in twenty-two states, and the District of Columbia. 
Trigen is the proud recipient of many prestigious awards recognizing 
our innovation, leadership in the energy industry and commitment to 
environmental protection. This includes two awards from U.S agencies: 
the Energy Star Award from the U.S. EPA in recognition of our 
leadership in CHP projects and the Climate Protection Award from the 
U.S. EPA for corporate leadership in reducing greenhouse gas emissions. 
But more important than awards recognizing our environmental 
stewardship is the fact that we would not be selected to design, build 
own or operate on-site CHP projects for our customers if we were not 
able to provide substantial economic and reliability benefits in 
addition to outstanding environmental performance. The nearby 
University of Maryland College Park is an excellent example. Trigen and 
a partner were selected by the University to build and operate a new 
state-of-the-art CHP facility for the campus as well as to manage the 
on-site utilities while working with the campus staff to improve 
overall efficiency. The project is expected to save the University of 
Maryland system $6 million dollars per year while reducing regional 
nitrogen-oxide emissions by 9,800 tons per year and carbon dioxide 
emissions by 3.5 million tons over the 20 year life of the contract. We 
were the recipient of the 1999 Project Award from the National Council 
for Public-Private Partnerships because of our ability leverage 
technology in ways that were both economically and environmentally 
beneficial to all parties.
    Despite these economic and environmental benefits, there are a 
variety of institutional and regulatory barriers that prevent CHP from 
achieving its full potential. These barriers inappropriately reduce the 
economic viability of CHP projects, slow their development and 
implementation and in some cases simply make them impossible to 
complete. S. 933 is an attempt to remove the interconnection and backup 
power barriers and allow Trigen and other companies to increase the 
beneficial application of CHP. Although S. 933 covers some of the 
issues, there are additional factors that must be addressed to fully 
remove the barriers. The cataloguing and systematic treatment of these 
barriers as suggested in S. 597 Sec. 301 A & B and S. 388 Sec. 112 are 
also critically important.
    Mr. Chairman, Trigen's plants and employees are at work every day 
showing how efficient energy production is both good for business and 
good for the environment. By removing the barriers to utilizing CHP and 
other highly efficient DG, Congress can reward investors, benefit 
consumers, strengthen our economy and clean up our air.
    The issues you have asked this panel to address are of critical 
importance to all of us. Energy sector competition is already upon us, 
with the States leading the way. The Federal government must rise to 
the task of addressing the barriers to competition that inherently lend 
themselves to national legislation, matters that cannot be responsibly 
dealt with in a piecemeal, State-by-State manner.
    S. 933 is the result of many months of thoughtful work that 
reflects the benefit of numerous parties working together to arrive at 
consensus language that addresses the need for a uniform nationwide 
interconnect standard. S. 933 marks a critical step in efforts to 
improve the environment and electricity markets by encouraging the 
deployment of CHP and other DG. I would like to point out that H.R. 
1945 is the companion bill to S. 933 from the House of Representatives. 
Trigen offers its full support of both.
    In addition to addressing why there is a critical need for uniform 
nationwide interconnection standards, I would also like to highlight 
five other issues that must be addressed if we want to remove the most 
formidable barriers to deploying CHP and other highly efficient DG 
technologies. They are: Backup power as related to PURPA repeal, 
clarifying tax depreciation schedules, establishment of investment tax 
credits, rethinking new source review and establishing output-based 
standards. First, I will address interconnect standards and the 
immediate need for S. 933.
                            interconnection
    The National Energy Policy proposal recently released by the White 
House, like similar proposals of the last Administration, recognizes 
the economic and environmental benefits of CHP and other highly 
efficient DG systems. One formidable barrier to taking advantage of 
those benefits is the lack of uniform nationwide interconnection 
standards.
    The current process for determining the appropriate technical 
requirements for the interconnection of new energy projects with the 
distribution or transmission system is often unnecessarily lengthy and 
expensive and the specific requirements can vary arbitrarily from state 
to state, utility to utility, site to site. Incumbent utilities that 
may not want to face competition may attempt to cloak anti-competitive 
behavior in the guise of technical disagreement over interconnection. 
We recognize that it is essential for interconnections to be safe and 
reliable, but interconnection standards can be both safe and reliable, 
and uniform. Bringing uniformity to interconnection through a uniform 
nationwide technical standard will reduce uncertainty, lower costs, and 
facilitate deployment of modern CHP technology, across the country. 
Interconnection language must be sufficiently broad to help all 
generators connect to the distribution and/or transmission grids. S. 
933 provides for interconnections at both levels. The language does not 
pick winners and losers, but maximizes flexibility for determining 
whether the facility is connected to the transmission grid or the 
distribution grid. In addition, it is important that the language does 
not unnecessarily infringe upon States' rights to manage their 
respective distribution grids. The benefits of uniformity require that 
the standards apply to all states.
    I think it is important to give you an example of the 
interconnection problem. Trigen has a great deal of experience 
interconnecting various sized generators with the distribution and 
transmission grid. We have done it literally dozens of times. 
Technically, it is a pretty straightforward task but in practice it can 
be a slow painful process that raises costs and delays projects that 
otherwise could be delivering important economic and environmental 
benefits. In 1998, Trigen approached a utility to request 
interconnection for a 703 kW generator to be installed in a downtown 
office building. The small system would supply the building's electric 
load and air conditioning. Yet, two years later, we were still 
negotiating with the utility over so-called ``technical'' issues. 
Months after receiving our initial request for interconnection, the 
utility asked that Trigen design a different, specialized 
interconnection. Trigen completed the new design at a significant 
additional cost. The utility rejected the design. In response, Trigen 
offered to use guidelines developed by Consolidated Edison in New York 
City, even though the ConEd guidelines were disproportionately 
burdensome and expensive given the very small size of the installation. 
The utility agreed, but after Trigen complied with these requirements, 
the utility imposed further ``technical'' restrictions on Trigen's 
ability to operate the facility. It took over two years to resolve this 
issue. The barrier related costs of completion were over $88,000.
    One would strongly suspect that this was anti-competitive behavior 
masquerading as technical disagreement which successfully prevented the 
unit from operating for two years. This is but one of countless 
examples. In fact, DOE published a report in May of 2000 entitled 
Making Connections that memorialized this example and numerous others 
from across the country. S. 933 would address many of the 
interconnection barriers highlighted in that report. Passage of S. 933 
will help manufacturers of CHP and DG technology achieve a plug and 
play economy of scale, lower costs and encourage investment in CHP and 
DG technology.
           the shortcomings of s. 597 regarding interconnect
    Like S. 933, S. 597 recognizes the need for a uniform interconnect 
standard. However, S. 597 falls short of addressing the entire scope of 
that need. S. 597 calls only for a standard for interconnect to the 
distribution grid. Failure to address transmission interconnect would 
result in an enormous lost opportunity to ensure all the same benefits 
S. 597 seeks to achieve at the distribution level. Stream-lining 
interconnect at the transmission level will be one more encouragement 
to investing in larger scale DG like on-site CHP plants whose 
efficiencies can bring immediate large scale reductions in fuel 
consumption and emissions.
    In addition, S. 597 does not include a provision addressing the 
right to back-up power at just and reasonable rates. Most CHP and DG 
assets require back-up power as insurance to the DG/CHP customer that 
they will have electricity in the event the DG/CHP asset has scheduled 
or unscheduled down time. Without a guaranty of affordable back-up 
power many DG/CHP projects will never get off the ground. I will 
address this issue in more detail below.
    Finally, S. 597 includes limiting language that the DG asset must 
be designed to serve retail customers ``at or near the point of 
consumption''. S. 933 does not include any such limitation. If we want 
to encourage the deployment of highly efficient CHP and DG assets we 
should not place any limitation on what customers are served or where 
it can be located in order to take advantage of uniformity.
   backup power and the prospective repeal of purpa's ``must-sell'' 
                               provision
    Hand-in-glove with the issue of interconnection standards is the 
availability of reasonably-priced back-up power. Historically, back-up 
power was guaranteed at just and reasonable rates to facilities that 
met either the Qualifying Facility or Small Power Production Facility 
definitions under PURPA. However, as technology and markets have 
evolved, the need for back-up power at rates that are just, reasonable 
and not unduly discriminatory is important to a wide-range of projects 
that might not meet these historic definitions, regardless of whether 
the project is interconnected to the transmission or distribution grid. 
S. 933 remains respectful of state authority by allowing States to 
determine the just and reasonable rate for back-up power at the 
distribution level. The Bill also ensures that until there are open 
markets where a facility can competitively purchase backup power, the 
local utility must provide such backup power at nondiscriminatory 
rates.
    CHP and other DG systems rely on the ability to purchase backup 
power from the grid in the event that they temporarily fail to operate 
or must shut down for maintenance. Under current PURPA laws the local 
utility ``must sell'' backup power to qualified stand alone CHP 
facilities. Many proposed restructuring bills would repeal both the 
``must buy'' and the ``must sell'' requirements of Section 210 of 
PURPA. The ``Right to Back-up Power'' provision of S. 933 is a safety 
measure that will ensure back-up power at just and reasonable rates if 
the ``must sell'' provision of PURPA is repealed and there is no open 
access to purchase of electricity in a given state. Elimination of 
PURPA's ``must sell'' requirement without the protection of the right 
to back-up power will leave new entrants and existing DG at the mercy 
of the local utility, subject to discriminatory pricing or outright 
denial of back-up power.
                       tax depreciation schedules
    The current tax code, based on an somewhat obsolete view of the 
energy industry, currently does not allow depreciation of CHP and DG 
technologies in ways that reflect those assets physical and economic 
lives. This inappropriate treatment can discourage investments in CHP 
and DG technology. For example, the IRS allows a gas turbine located 
inside a building for on-site generation use to be depreciated over a 
39-year period while the same gas turbine used for transportation 
(e.g., on an airplane) depreciates in one quarter of the time. The 
moving parts of the turbine used for electricity and heating may be 
replaced as many as five times while the owner continues to depreciate 
the original investment. Shortening the time over which this equipment 
depreciates would remove an impediment to investment in what is 
otherwise an efficient and environmentally beneficial technology.
    New and small turbines have different physical properties and will 
generally operate under quite different conditions than large turbine 
units employed by traditional electric utilities and, consequently, 
will have different service lives. Further, the competitive marketplace 
will force energy suppliers to replace or ``upgrade'' standing 
equipment before it fails, since installation of more efficient 
technology offers lower costs to customers and the opportunity to hold 
or capture market share for competitive energy suppliers. We expect 
that energy generation equipment will come and go in the marketplace in 
a manner that strongly resembles that of modern computers assets which 
outlive their economic lives long before they cease to work properly.
    Congress should direct the Internal Revenue Service (IRS) to set a 
depreciation schedule of seven (7) years for industrial and utility 
facilities and ten (10) years on Building CHP (BCHP) assets, which 
reflects the true technical and economic life of most systems. I have 
attached to this testimony, recommended modifications to the Internal 
Revenue Code from the U.S. Combined Heat and Power Association 
(Attachment A).* Trigen is a member of the USCHPA and supports all of 
its recommendations.
---------------------------------------------------------------------------
    * Attachments A and B have been retained in committee files.
---------------------------------------------------------------------------
             combined heat and power investment tax credit
    Tax credits are typically offered by the Federal government to 
obtain public benefits by prompting private parties to make capital 
investments that they would not so readily make otherwise or to 
overcome other short-term barriers to otherwise feasible activities. As 
such, an investment tax credit (ITC) is a good short-term mechanism to 
promote CHP systems, which offer very significant public and private 
economic and environmental benefits, but can often be more difficult 
for the private sector to deploy than electric-only projects because of 
the complexity inherent in assembling a ``thermal load'' or set of 
heating/cooling customers.
    Congress should direct the IRS to provide a ten (10) percent ITC 
for met thermal energy distribution systems at district energy CHP 
facilities. I have attached to this testimony, recommended 
modifications to the Internal Revenue Code form the US Combined Heat 
and Power Association (Attachment A). Trigen supports all of its 
recommendations.
                           new source review
    The new source permitting program known as New Source Review (NSR) 
was developed over 20 years ago to reduce air pollutant emissions. At 
the time the focus was on reducing smokestack emissions and NSR focuses 
primarily on requirements for end-of-pipe, add-on control technologies. 
Add-on controls reduce emissions but add cost and reduce efficiency.
    Over the last 20 years, we have learned that a much better approach 
to pollution control is to entirely avoid the generation of pollution 
through lower emitting processes and reduce their impact through 
increased efficiency. Pollution prevention (P2) and increased 
efficiency reduce emissions while also reducing capital and operating 
costs. They result in processes that are cleaner and cheaper with lower 
demand on all natural resources. This is clearly the direction that we 
need to move in order to achieve a vital economy and a healthy 
environment and CHP is perhaps the best example of this opportunity.
    Unfortunately, NSR does not give any credit for efficiency and 
gives little or no credit for pollution prevention. It is constantly 
driving projects away from these positive approaches and back to the 
old sidetrack of add-on controls. It discourages the application of 
existing P2 technologies and the development of new technologies. U.S. 
companies have learned that they should not invest in the development 
of cleaner and higher efficiency technologies because they will not be 
able to permit them. This is a multidimensional loss to the U.S. 
economy. In contrast, our foreign competitors have made great strides 
in these areas, which are reflected in their high efficiency use of 
energy.
    As an example, several of our recent projects have been based on a 
particular small gas turbine generator. As an electric generator only, 
the turbine is less than 30 percent efficient. However, our CHP 
applications using that same piece of equipment are anywhere from 80 to 
over 90 percent efficient. Put another way, we provide more than three 
times as much energy to the customer from the system for the same 
amount of emissions and energy input.
    It is only common sense that our regulatory system should recognize 
this energy and environmental benefit. But it doesn't. In the eyes of 
NSR, there is no difference between the two systems. Since NSR is a 
cost-based system, it is requiring us to duplicate capital investment 
to use add-on controls where we have already provided a reduction 
through efficiency. In many cases, the project ``won't pencil'' if we 
have to pay twice, and a beneficial project is cancelled.
    This fundamental flaw of NSR is only one of several ways in which 
the regulation has outlived its usefulness. The program relies on a 
variety of highly technical standards to determine which new or 
existing units will be required to apply emission controls. Over the 
years, these standards have become more and more arcane and 
contentious. The very high cost and uncertainty involved in the 
application of NSR to both new and existing units has created a huge 
disincentive for operators to maintain and improve the performance of 
these units. By holding out for the maximum possible improvement at all 
times, the program has discouraged even the normal improvement that 
should happen without regulation. By excluding the effects of pollution 
prevention and efficiency, it has excluded the best possible solutions 
from consideration and left us with proliferating lawsuits as the only 
result.
    Because CHP, by definition, produces two types of energy output 
(steam & electricity) from one fuel input, its treatment under NSR is 
especially difficult. The system sometimes tries to force us to combine 
our facilities with those of our clients in ways that are commercially 
impossible. In other cases it deprives us of credit for emission 
reductions that are legally verifiable and creditable.
    Output-based regulation, which relates the emissions to the useful 
energy produced is another regulatory concept that would help to 
address these problems. There has been growing acceptance of this 
approach as a way to send the proper signals through environmental 
regulation. Unfortunately, it seems to be difficult to integrate this 
approach into the structure of NSR.
    We have been working with the EPA for more than three years to find 
appropriate ways to achieve the universally recognized benefits of CHP 
within the NSR structure. I am sorry to report that our progress to 
date has been limited. In large part this is due to the fundamental 
structure of the program. In the end, we are forced to conclude that, 
at least for the generation of heat and power, the NSR program is a 
grandfathered regulation that has outlived its usefulness and needs to 
be replaced with a more modern and efficient regulatory structure. We 
believe that a properly designed cap and trade program that provides 
guaranteed emission reductions over the entire sector would provide 
better environmental results and encourage new, more efficient 
technology. I have attached a copy of a multi-pollutant strategy 
(Attachment B) that Trigen and four other energy companies have 
developed as a substitute for NSR as it applies to heat and power 
generation.
                         output-based standards
    Currently, efficiency is measured by an input-based standard that 
measures fuel consumption as opposed to energy output. Under this 
approach, the efficiency of CHP is not recognized. By way of example, 
for every one unit of fuel consumed by a CHP plant two units of energy 
are produced--steam and electricity. CHP is twice to three times more 
efficient than a typical central generation plant that only produces 
one unit of energy for every one unit of fuel consumed because it is 
not capturing the heat off the combustion process.
    The establishment of output-based standards would allow facilities 
to count their fuel to end use energy efficiency toward their 
environmental compliance requirements. Output-based standards encourage 
efficient and inherently cleaner plants. Trigen has been an active 
participant in numerous venues established to develop output-based 
standards. Trigen seeks establishment of progressive regulations that 
replace BACT and LAER with a cap and trade program coupled with a 
universal allowance allocation of pounds of pollution per megawatt hour 
of electricity produced and pounds per megawatt hour of thermal energy 
produced.
                               conclusion
    Given the inevitability of competition in the electricity market, 
and both national and global trends that will guide the future of 
energy production in this country, I believe that emerging technologies 
are serving and will serve an indispensable purpose in meeting goals of 
energy efficiency and environmental demands. I urge this committee to 
pass S. 933 and to take a proactive stance on addressing the other 
concerns I have raised here today. We would also like to reiterate our 
support for Sec. 301 A & B of S. 597 and Sec. 112 of S. 388. I thank 
the committee for the opportunity to appear before you. Thank you, Mr. 
Chairman.

    The Chairman. Mr. Starrs.

  STATEMENT OF THOMAS J. STARRS, J.D., Ph.D., SENIOR PARTNER, 
              KELSO STARRS AND ASSOCIATES, L.L.C.

    Mr. Starrs. Thank you, Mr. Chairman, members of the 
committee. My name is Tom Starrs. I am a partner in the energy 
and environmental consulting firm of Kelso Starrs and 
Associates.
    My business focuses on the design, analysis, and 
implementation of legal and regulatory incentives for the 
development of renewable energy technologies, particular solar 
and wind energy. I also serve on the board of directors of both 
the American Solar Energy Society, which is a national, 
nonprofit membership organization dedicated to the advancing 
the use of renewable energy, and the Schott Applied Power 
Corporation, which is one of the largest distributors of 
renewable energy equipment in the United States. I very much 
appreciate the opportunity to testify before you this morning.
    I am going to focus my testimony on a few details of the 
bills that are currently before this committee, specifically 
interconnection standards, net metering, and business 
practices. Starting with interconnection standards, we have 
heard quite a bit about this already from the other witnesses, 
so I will not belabor this. But this is perhaps the most 
significant barrier to the broader commercialization of 
distributed technologies.
    The problem, the absence of national technical standards 
for the interconnection of these facilities, arises because 
utilities historically have had substantial discretion over 
interconnection requirements and have often used that 
discretion to develop requirements that varied considerably 
from one utility to the next without any appropriate technical 
or economic justification.
    These utility-specific requirements were of relatively 
little concern for the developers of large-scale generating 
facilities whose projects were big enough that they could 
justify the cost of hiring consulting engineers and attorneys 
to negotiate project-specific requirements for their 
facilities. However, for smaller systems, just as residential, 
rooftop, solar electric systems, or farm-scale wind energy 
systems, these costs are an absolute deal breaker.
    The solution to this problem as we have already heard 
today, is the adoption of national standards developed by 
appropriate authorities, such as the Institute of Electrical 
and Electronics Engineers, or IEEE, the Underwriters 
Laboratories, or UL, and the National Fire Protection 
Association, which writes the national electrical code.
    The States are already pursuing this approach. As figure 1, 
which is attached to my testimony, indicates, over 20 States 
have passed laws or enacted regulations requiring the 
development of standardized interconnection requirements for at 
least some categories of distributed generation facilities. I 
am delighted to see that this is the approach adopted in both 
S. 597 and S. 933.
    Section 603 of S. 597 requires the FERC to establish 
safety, reliability and power quality rules for distributed 
generation facilities. It also--and I think this is 
particularly important--states that the FERC may prescribe 
different rules for different classes of facilities, which I 
think is essential for recognizing the distinction between 
residential and small commercial-scale facilities for which we 
should be striving to achieve as close as we can to plug and 
play-type simplicity, and larger commercial- or industrial-
scale facilities for which some project-specific engineering 
may be appropriate. Section 4 of S. 933 similarly calls for the 
FERC to develop reasonable and appropriate technical standards 
for interconnection.
    With respect to net metering--Mr. Garman mentioned this 
morning, and a couple of the other witnesses have mentioned it 
as well--net metering is a simple, inexpensive and easily 
administered mechanism for encouraging the use of small-scale 
distributed generation. Net metering allows utility customers 
to spin their meter backwards when they produce more 
electricity than they need to power their own lights and 
appliances.
    Under existing Federal law, the PURPA law, utilities are 
already required to interconnect with certain distributed 
generation facilities and to purchase the excess electricity 
produced by those facilities. But under PURPA, the utility 
purchases that excess electricity at an administratively 
determined avoided cost price, which is usually a fraction of 
the retail price the consumer pays for power.
    Net metering provides a modest economic incentive for 
eligible facilities by crediting them for this excess 
electricity at the retail rate. Now metering policies have been 
tremendously popular at the State level. Just 5 years ago, only 
fourteen States allowed net metering, and most of those 
requirements were adopted pursuant to State implementation of 
the Federal PURPA law.
    Today, the total stands at 34 States which 4 new States, 
Arkansas, Georgia, Hawaii, and Wyoming, enacting net metering 
laws just this year. And figure 2, which is attached to my 
testimony, shows how much inroads we have made on the net 
metering issue with respect to the penetration among the 
States.
    In most cases, these laws were enacted by legislation. 
Although in a few cases, net metering policies have been 
adopted by regulation and, in most cases, with broad bipartisan 
support. In my home State of Washington, for example, the 1998 
net metering law passed unanimously in a then Republican-
controlled legislature and was signed into law by a Democratic 
governor.
    Of the bills currently before the committee, only S. 597 
currently includes a net metering provisions. Section 604 of S. 
597 requires utilities and other retail electric suppliers to 
offer net metering services to customers using renewable energy 
resources with a maximum generating capacity of 100 kilowatts 
for residential customers and 250 kilowatts for commercial 
customers.
    I want to mention one other element of the net metering 
language in S. 597. It includes a provision prohibiting 
utilities and other retail electric suppliers from 
discriminating against net metering customers by imposing 
additional fees or charges or otherwise treating them 
differently from non-net metering customers in the same 
customer class.
    This is an important provision that should be retained 
because it prevents suppliers from imposing charges that would 
circumvent the intent of net metering, which of course is to 
encourage these facilities.
    The third area I want to touch on today is the area of 
business practices. None of the proposals before the committee 
address this fundamental barrier to the interconnection of 
distributed facilities, the failure to adopt simplified 
interconnection agreements and routine procedures for 
processing interconnection requests. Again, the goal should be 
plug and play simplicity, at least for the smaller scale 
facilities, in order to eliminate unnecessary delays and 
inappropriate expenses.
    For guidance on this subject, I would urge the committee to 
consider language in a bill introduced in the House by 
Congressman Jay Inslee, H.R. 954, entitled the Home Energy 
Generation Act. Mr. Inslee's bill also includes net metering 
and interconnection requirements but goes further in requiring 
the FERC to develop ``consumer friendly contracts'' for the 
interconnection of distributed generating facilities up to 250 
kilowatts. A comparable provision would be an appropriate 
addition to any bill coming out of this committee.
    Thank you very much.
    [The prepared statement of Mr. Starrs follows:]
 Prepared Statement of Thomas J. Starrs, J.D., Ph.D., Senior Partner, 
                  Kelso Starrs and Associates, L.L.C.
    Mr. Chairman, members of the committee, ladies and gentlemen: My 
name is Thomas Starrs. I am a senior partner in the energy and 
environmental consulting firm of Kelso Starrs & Associates LLC, based 
on Vashon Island, Washington. My consulting practice focuses on the 
design, analysis and implementation of legal and regulatory incentives 
for the development of renewable energy technologies, with a focus on 
solar and wind energy. I also serve on the Board of Directors of both 
the American Solar Energy Society, a national non-profit membership 
organization dedicated to advancing the use of renewable energy; and 
the Schott Applied Power Corporation, one of the largest distributors 
of renewable energy equipment in the United States. I am the author of 
over thirty publications regarding renewable energy and distributed 
energy policy. In addition, I have made invited presentations on energy 
policy to numerous national organizations, and to legislative 
committees, public utility commissions, and state energy offices in 
over a dozen states. This is my first time testifying before the U.S. 
Senate. The opinions I offer here are my own and not necessarily those 
of any of the organizations with which I am associated. I very much 
appreciate the opportunity to testify this morning on this important 
element of our nation's energy future.
                   overview of distributed generation
    Continuing technology innovation is creating new market 
opportunities for decentralized or `distributed' power generation. The 
distributed generation paradigm emerged in the early 1990s out of 
research suggesting that the use of small-scale electric generating 
facilities dispersed or ``distributed'' throughout the utility network 
provided technical and economic benefits to the electricity system that 
were not available from traditional central-station generation.
    A number of studies--including several sponsored by utilities--have 
identified direct, measurable economic benefits of having generation 
sources located close to the end user.\1\ Distributed generation 
reduces energy losses in transmission and distribution lines, provides 
voltage support, reduces reactive power losses, defers substation 
upgrades, defers the need for new transmission and distribution 
capacity, increases reliability of electricity supply and reduces the 
demand for spinning reserve capacity.\2\ In fact, several studies have 
concluded that under many circumstances (particularly where the 
utility's distribution system is operating near capacity) non-
traditional distributed benefits are comparable in scale to traditional 
energy and capacity benefits.\3\
---------------------------------------------------------------------------
    \1\ See D. Shugar, Photovoltaics in the Utility Distribution 
System: The Evaluation of System and Distributed Benefits, Pacific Gas 
& Electric (July 1991); R. Lambeth & T. Lepley, Distributed 
Photovoltaic Evaluation by Arizona Public Service, 23rd IEEE PV 
Specialists Conference (May 1993).
    \2\ Howard J. Wenger, Thomas E. Hoff & Brian K. Farmer, Measuring 
the Value of Distributed Photovoltaic Generation: Final Results of the 
Kerman Grid-Support Project, Conference Proceedings, First World 
Conference on Photovoltaic Energy Conversion (December 1994), p. 793.
    \3\ See E. Prabhu, Finding High Value for Grid-Connected PV: 
Southern California Edison's Innovative Solar Neighborhood Program, 
American Solar Energy Society Annual Conference (1995); J. Oppenheim, 
PV Value Analysis: Progress Report on PV-COMPACT Coordinating Council's 
Consensus Research Agenda, American Solar Energy Society Annual 
Conference (1995); H. Wenger, T. Hoff & B. Farmer, Measuring the Value 
of Distributed Photovoltaic Generation: Final Results of the Kerman 
Grid-Support Project, First World Conference on Photovoltaic Energy 
Conversion (1994); D. Keane, Grid-Support Photovoltaics: Summary of 
Case Studies, Pacific Gas & Electric (1994).
---------------------------------------------------------------------------
    The increasing availability of distributed technologies will 
provide residential, commercial and industrial customers with 
economically viable options for using locally-available energy 
resources to meet their own electricity needs. In addition, I believe 
the public interest is best served by encouraging the use of solar 
energy, wind energy, and other environmentally-preferred renewable 
energy resources in distributed applications.
    Where the distributed technology is fueled by a renewable resource, 
it offers the additional benefit of displacing fossil-fuel generation 
or other generation technologies with greater environmental impacts. 
Solar and wind energy are the quintessential distributed resources, 
allowing homeowners, businesses and industries to capture additional 
economic value from two natural resources that flow freely and nearly 
ubiquitously over the Earth. The use of solar and wind energy requires 
no mining or processing of natural resources, no shipping or pipelining 
of a fuel, no combustion, and no pollution control. Rather, these 
resources require only the technology needed to capture and convert the 
available sun or wind into electricity or other forms of useable 
energy. Solar electric and wind energy technologies can be located 
anywhere the sun shines or the wind blows, and can be used to generate 
power on any scale, from watts to megawatts.
    From its modest start in the research and development departments 
of utilities a decade ago, distributed generation has emerged as one of 
the most-discussed aspects of the electricity industry. Electric and 
gas utilities are investing in distributed technologies; venture 
capital is pouring into companies focusing on distributed generation; 
and utility regulators are exploring the policy implications of 
integrating distributed generation into existing electric utility 
systems.
         advantages and disadvantages of distributed generation
    A recent report from the Worldwatch Institute lists eight benefits 
of distributed generation (which it refers to as ``micropower'' 
technologies). The following table describing these benefits is from 
the Worldwatch paper, with an additional column I prepared explaining 
their applicability to solar and wind energy.
      

                   EIGHT HIDDEN BENEFITS OF MICROPOWER
------------------------------------------------------------------------
                                                      Applicability to
           Benefit                 Description         solar and wind
------------------------------------------------------------------------
Modularity..................  By adding or          Solar and wind
                               removing units,       technologies are
                               micropower system     among the most
                               size can be           modular, available
                               adjusted to match     from watts to
                               demand.               megawatts
------------------------------------------------------------------------
Short Lead Time.............  Small-scale power     Solar and wind
                               can be planned,       systems have
                               sited and built       shorter lead times
                               more quickly than     than any other
                               larger systems,       generating
                               reducing the risks    technologies
                               of overshooting
                               demand, longer
                               construction
                               periods, and
                               technological
                               obsolescence.
------------------------------------------------------------------------
Fuel Diversity and Reduced    Micropower's more     As non-depletable
 Price Volatility.             diverse, renewables-  renewable
                               based mix of energy   resources, solar
                               sources lessens       and wind energy are
                               exposure to fossil    freely available
                               fuel price            and cannot be
                               fluctuations.         exhausted,
                                                     eliminating their
                                                     vulnerability to
                                                     fuel price
                                                     fluctuations
------------------------------------------------------------------------
``Load-Growth Insurance''     Some types of small-  Solar energy is well
 and Load Matching.            scale power, such     correlated with
                               as cogeneration and   electricity demand,
                               end-use efficiency,   particularly for
                               expand with growing   summer-peaking
                               loads; the flow of    utilities whose
                               other resources,      peak is driven by
                               like solar and        air conditioning
                               wind, can correlate   demand
                               closely with
                               electricity demand.
------------------------------------------------------------------------
Reliability and Resilience..  Small plants are      Solar and wind
                               unlikely to all       energy systems use
                               fail                  modular components
                               simultaneously;       that are easy to
                               they have shorter     repair and replace,
                               outages, are epsier   and can be
                               to repair, and are    dispersed over the
                               more geographically   landscape
                               dispersed.
------------------------------------------------------------------------
Avoided Plant and Grid        Small-scale power     Solar energy systems
 Construction, and Grid        can displace          can be sited in
 Losses.                       construction of new   locations designed
                               plants, reduce grid   to maximize these
                               losses, and delay     benefits
                               or avoid adding new
                               grid capacity or
                               connections.
------------------------------------------------------------------------
Local and Community Choice    Micropower provides   Solar and wind
 and Control.                  local choice and      energy development
                               control and the       is usually the
                               option of relying     preferred choice of
                               on local fuels and    local communities,
                               spurring community    and small-scale
                               economic              applications often
                               development.          can be permitted
                                                     without
                                                     environmental
                                                     impact review
------------------------------------------------------------------------
Avoided Emissions and Other   Small-scale power     Solar and wind
 Environmental Impacts.        generally emits       energy systems
                               lower amounts of      produce no
                               particulates,         emissions and have
                               sulfur dioxide and    a minimal
                               nitrogen oxides,      environmental
                               heavy metals and      impact
                               carbon dioxide, and
                               has a lower
                               cumulative
                               environmental
                               impact on land and
                               water supply and
                               quality.
------------------------------------------------------------------------
Source: Seth Dunn, Micropower: The Next Electrical Era, Worldwatch Paper
  No. 151 (Worldwatch Institute, July 2000), p. 33 first two columns);
  third column by the author.

    By contrast, there are relatively few disadvantages of distributed 
generation. The principal one is that distributed generation remains 
more expensive than central-station generation. For example, while 
installed cost of new central-station generating facilities is between 
$500 and $1,000 per kW, the cost of combustion-based distributed 
technologies ranges from $600 to $1,500 per kW, and the cost of cleaner 
non-combustion technologies such as solar cells, wind turbines, and 
fuel cells range from $900 to $10,000 per kW.\4\ It appears likely, 
however, that with mass production the cost of many distributed 
technologies will drop significantly, making them more competitive with 
central-station generation.
---------------------------------------------------------------------------
    \4\ S. Dunn, Micropower: The Next Electrical Era, Worldwatch Paper 
No. 151 (July 2000), pp. 19 & 24.
---------------------------------------------------------------------------
    The second disadvantage of distributed generation is that most 
fossil-fueled distributed technologies are not currently as clean as 
their central-station counterparts, which means that distributed 
generation does not necessarily represent an improvement in the 
environmental characteristics of the electricity industry. According to 
the U.S. Environmental Protection Agency, the electricity industry in 
the mid-1990s was responsible for approximately:

   72% of sulfur dioxide (SO2) emissions;
   33% of nitrogen oxide (NOX) emissions;
   32% of particulate matter (PM) emissions;
   23% of emissions of mercury, a toxic heavy metal, and
   36% of all human-caused emissions of carbon dioxide, the 
        most dominant `greenhouse' gas.\5\
---------------------------------------------------------------------------
    \5\ Comments of the U.S. Environmental Protection Agency to the 
Federal Energy Regulatory Commission, Promoting Wholesale Competition 
Through Open Access Non-Discriminatory Transmission Services by Public 
Utilities, August 7, 1995, p. 7.
---------------------------------------------------------------------------
    Innovations in larger-scale generating facilities, such as 
combined-cycle gas turbines (CCGTs), have resulted in substantial 
reduction in emissions per kilowatt-hour from these facilities. Unless 
and until distributed technologies can match the environmental 
performance of these larger-scale facilities, increased use of 
distributed generation may not provide any incremental improvement in 
the environmental characteristics of the electricity industry. For 
example, recent studies prepared for the California Air Resources Board 
and the Energy Foundation \6\ indicate that the diesel-fueled internal 
combustion engines used in some distributed applications are 60-100 
times more polluting than CCGTs. Even fuel cells, when powered by 
hydrogen extracted from natural gas, may offer little if any 
environmental advantage over CCGTs.
---------------------------------------------------------------------------
    \6\ See Air Pollution Emission Impacts Associated with Economic 
Market Potential of Distributed Generation in California, Prepared for 
the California Air Resources Board and the California Environmental 
Protection Agency by Joseph Iannucci et al., Distributed Utility 
Associates (June 2000); and Can We Have Our Cake and Eat It Too?: 
Creating Distributed Generation Policy to Improve Air Quality, Prepared 
for the Energy Foundation by James Lents, Center for Environmental 
Research and Technology, University of California, Riverside 
(Distribution Draft November 2000).
---------------------------------------------------------------------------
    It is important for policymakers to understand that not all 
distributed technologies are equal from an environmental perspective, 
and that among distributed generating technologies, only solar 
photovoltaic and wind energy systems currently offer clear 
environmental benefits compared to other newer, more efficient 
generating resources. Policymakers should recognize and account for the 
significant differences in the environmental characteristics of various 
distributed technologies in determining to what extent these 
technologies deserve support. Rules encouraging the use of distributed 
technologies without regard for their environmental performance may do 
a disservice to the public. As a result, public policies should favor 
those distributed technologies that offer significant environmental 
benefits relative to other generating technologies.
           the public interest in a distributed energy future
    The transition to a distributed energy future is likely to result 
in an electricity system that is less polluting and more efficient, 
reliable, and resilient.
    Distributed technologies are the electrical equivalent of the 
personal computer. Computing power used to be concentrated in large-
scale mainframe computers with access via ``dumb'' terminals at the 
end-user's location. The last two decades have seen a near-complete 
transition to microcomputers or minicomputers, each able to operate 
independently but also frequently linked to other computers to create 
electronic networks of information. Similarly, the generation of 
electric power has been concentrated in large-scale central-station 
facilities with the power transmitted, for the most part 
unidirectionally, to end-users. Increased reliance on distributed 
generation ultimately will result in a complex web of generating 
sources, with power flowing in multiple directions through the 
distribution system. Although for the foreseeable future this 
transition will not be complete, in that distributed generation will 
supplement rather than replace existing central-station generation, 
some industry analysts believe that new central-station plants on the 
order of 1,000 MW (typical of large nuclear and coal-fired power 
plants) will soon be unheard of.
    Much of the promise of the transition to a distributed energy 
future stems from potential improvements in the efficiency of energy 
conversion and in the environmental performance of the energy supply 
system. On-site generation allows the capture of waste heat, increasing 
the overall systems efficiencies of many combustion and non-combustion 
distributed technologies, including fuel cells, to as much as 80-90 
percent. In addition, some distributed technologies--with the 
exceptions noted earlier--offer substantial environmental benefits 
relative to existing energy conversion technologies. The Worldwatch 
Institute notes that micropower technologies that rely on cogeneration 
and cleaner fuels--either renewable energy or the cleanest of the 
fossil fuels, natural gas--have 50 to 100 percent fewer emissions, on a 
per-kilowatt basis, of particulates, nitrogen and sulfur oxides, 
mercury, and carbon dioxide than traditional fossil-fuel generation.\7\
---------------------------------------------------------------------------
    \7\ Micropower, pp. 36-37.
---------------------------------------------------------------------------
    The threat of human-caused climate change alone is reason enough to 
encourage the structural changes necessary to support a distributed 
energy system. Under a business-as-usual approach, the construction of 
new generating facilities would triple the carbon emissions from the 
electricity sector in developing nations alone. Widespread adoption of 
distributed renewable generation could reduce these projected emissions 
by 42 percent.\8\
---------------------------------------------------------------------------
    \8\ Micropower, p. 37.
---------------------------------------------------------------------------
    A distributed energy future also will help to resolve reliability 
and power quality concerns. Electricity reliability problems recently 
have reached crisis proportions, turning energy issues into front-page 
headlines for the first time in over two decades. Transmission 
constraints and capacity shortages in some regions have resulted in 
power disturbances and outages. An outage in Chicago during the summer 
of 1999 cut power to 2,300 businesses, including the entire Board of 
Trade on a mid-week afternoon.\9\ Supply problems in San Diego 
contributed to a doubling and even tripling of electricity prices 
during the summer of 2000.\10\ These problems increasingly are seen not 
as isolated instances, but as indications of a power supply system that 
has eroded as demand has grown.
---------------------------------------------------------------------------
    \9\ Micropower, p. 38.
    \10\ Testimony of San Diego Mayor Susan Golding to the Board of 
Governors of the California Independent Systems Operator (ISO) 
Regarding Wholesale Electricity Rate Price Caps (August 1, 2000).
---------------------------------------------------------------------------
    Contributing to reliability and power quality concerns are the 
increasing demands placed on the electricity system by the digital 
economy. Utilities traditionally sought to provide ``three 9's'' of 
reliability--99.9 percent availability, equivalent to about eight hours 
per year of outages. However, the proliferation of computers and other 
electronic equipment that is highly sensitive to even momentary 
disruptions in power has created a demand for ``six 9's'' or even 
``nine 9's'' of reliability. The existing distribution system is unable 
to provide this level of performance, forcing e-commerce companies and 
other participants in the digital economy to look elsewhere for their 
reliability needs. Among the options to which they turn is distributed 
generation, where innovations in power electronics, storage systems, 
and communications networks have enabled distributed technologies to 
meet the most stringent needs for power quality and reliability.
          barriers to increased use of distributed generation
    A recent report prepared for the National Renewable Energy 
Laboratory describes the barriers to distributed generation encountered 
in 65 different case studies, ranging from a 300 Watt solar electric 
system to a 26 MW gas turbine project.\11\ I was one of the authors of 
that report. In it, we identified and described a wide range of 
technical, business practice, and regulatory barriers encountered by 
the developers and owners of the distributed generation facilities.
---------------------------------------------------------------------------
    \11\ B. Alderfer, M. Eldridge and T. Starrs, Making Connections: 
Case Studies of Interconnection Barriers and Their Impact on 
Distributed Power Projects, National Renewable Energy Laboratory, 
Publication NREL/SR-200-28053 (May 2000).
---------------------------------------------------------------------------
    Technical barriers arise from utility requirements intended to 
ensure engineering and operational compatibility between the utility 
grid and the distributed generator. Most of these requirements focus on 
the utilities' safety, power quality, and power reliability concerns. 
For solar and wind energy systems, the most prominent technical barrier 
is the failure to adopt uniform technical standards for interconnection 
to the utility system. Although applicable standards for solar 
photovoltaic systems have been approved by the Institute of Electrical 
and Electronics Engineers (IEEE 929-2000), the Underwriters 
Laboratories (UL 1741), and the National Fire Protection Association 
(NEC Article 690), these standards have yet to be adopted in most 
states.
    Business practice barriers consist of contractual and procedural 
requirements for interconnection of distributed generation facilities. 
Among the most common complaints of owners and developers of 
distributed generation facilities is the absence of simple, 
standardized procedures among local jurisdictions and utilities for 
processing permitting and interconnection requests. According to the 
NREL study, more than 25% of the case studies cited project delays 
greater than four months. Many facility owners and developers also 
objected to application and interconnection fees that were seen as 
arbitrary and disproportionate. In one extreme case, the owner of a 
single-module solar electric system expected to produce approximately 
$40 per year worth of electricity was asked to pay up to $400 in 
application and processing/inspection fees, thereby offsetting ten 
years' worth of anticipated energy savings.\12\
---------------------------------------------------------------------------
    \12\ Making Connections Report, Case #26, pp. 77-78.
---------------------------------------------------------------------------
    Regulatory barriers include rate and tariff issues, including the 
imposition by utility regulators of backup or standby charges on 
distributed generation facilities; distribution wheeling charges for 
the delivery of power to wholesale or retail customers other than the 
utility itself; exit fees to discourage efforts to reduce dependence on 
utility power through self-generation or even demand-side management; 
and administratively determined buyback rates that do not reflect the 
economic benefits of distributed generation or clean power generation. 
For example, solar energy advocates had to appeal to the California 
Public Utilities Commission to prevent a utility from imposing a 
standby charge on net metering customers that would have offset nearly 
90 percent of the anticipated energy savings from a 1 kilowatt solar 
electric system.\13\
---------------------------------------------------------------------------
    \13\ Making Connections Report, p. 24.
---------------------------------------------------------------------------
    Another fundamental barrier to a distributed energy future is the 
apparent absence among U.S. policymakers of the political will needed 
to support the infrastructure investments necessary to enable the 
widespread adoption of distributed technologies. Upgrades to the 
distribution system are essential for proper integration of distributed 
technologies into existing electricity networks. However, many 
utilities, instead of embracing the opportunity to create the 
electrical equivalent of an ``open architecture'' system, hesitate to 
make the necessary utility investments, perhaps fearing the loss of 
physical or economic control over the electricity system. Similarly, 
many utility regulators appear reluctant to allocate the costs of 
bolstering the distribution system among all customers, perhaps fearing 
the lack of public support for such expenditures. Although these issues 
are just starting to be addressed among the states, early evidence 
suggests that much of the cost of making the transition to a 
distributed energy future will be shouldered by private developers of 
distributed generation facilities, even while the benefits of a 
renewed, more resilient distribution system accrue to the public.
          comments on proposals currently before the committee
    Today's witnesses have been asked to focus their testimony on 
certain sections of five bills currently before this Committee: S. 597, 
S. 388, S. 933, S. 388 and S. 71. In the interest of time, I have 
further narrowed my testimony to the sections of these bills that are 
likely to shape the future development of markets for distributed 
generating technologies. The three topics I will discuss in some detail 
are the development of interconnection standards for distributed 
generating technologies, net metering, and business practices.
Interconnection Standards
    One of the most significant barriers to the broader 
commercialization of distributed technologies is the absence of 
uniform, national technical standards for the interconnection of 
distributed generating facilities. The problem arises because utilities 
historically have had substantial discretion over interconnection 
requirements, and have often used that discretion to develop 
requirements that vary considerably from one utility to the next 
without appropriate technical or economic justification. These utility-
specific requirements were of relatively little concern for the 
developers of larger-scale generating facilities, whose projects were 
big enough that they could justify the cost of hiring consulting 
engineers and attorneys to negotiate project-specific interconnection 
requirements for their facilities. For smaller systems such as 
residential `rooftop' solar electric systems or farm-scale wind energy 
systems, these costs are an absolute deal-breaker.
    Utilities play a tremendously important role in our society by 
maintaining the safety and reliability of the grid, and as a result 
they have legitimate concerns about the interconnection of non-utility 
generating equipment to their networks. On the other hand, utilities 
face a conflict of interest because they have an economic incentive to 
discourage customers from generating their own electricity: the more 
customers self-generate, the less those customers are buying from the 
utility.
    The solution to this problem is the adoption of national standards 
developed by appropriate authorities, such as the Institute of 
Electrical and Electronics Engineers (IEEE), Underwriters Laboratories 
(UL), and the National Fire Protection Association (which writes the 
National Electrical Code, or NEC). The states are already pursuing this 
approach: As figure 1 indicates, over 20 states have passed laws or 
enacted regulations requiring the development of standardized 
interconnection requirements for at least some categories of 
distributed generating facilities.
    I am delighted to see this approach adopted in both S. 597 and S. 
933. Section 603 of S. 597 requires the Federal Energy Regulatory 
Commission (FERC) to establish safety, reliability and power quality 
rules for distributed generating facilities. It also specifically 
states that the FERC may prescribe different rules for different 
classes of facilities, which I think is essential for recognizing the 
distinction between residential- and small commercial-scale facilities, 
for which we should be striving to achieve `plug-and-play' simplicity; 
and larger commercial- or industrial-scale facilities, for which some 
project-specific engineering may be appropriate. Section 4 of S.933 
similarly calls for the FERC to develop ``reasonable and appropriate'' 
technical standards for the interconnection of distributed generating 
facilities. I commend Senator Bingaman and Senator Jeffords, as well as 
their co-sponsors, for recognizing the importance of this issue in 
their bills.
Net Metering
    Net metering is a simple, inexpensive, and easily-administered 
mechanism for encouraging the use of small-scale distributed 
generation. Net metering allows utility customers to spin their meter 
backwards when they produce more electricity than they need for their 
own lights and appliances.
    Under existing federal law (the Public Utility Regulatory Policies 
Act of 1978), utilities are required to interconnect with certain 
distributed generating facilities, and to purchase the excess 
electricity produced by those facilities. But under PURPA, the utility 
purchases that excess electricity at an administratively-determined 
`avoided cost' price, which is usually a fraction of the retail price 
the customer pays for power. Net metering provides a modest economic 
incentive for eligible facilities by crediting them for this excess 
electricity at the retail rate.
    Net metering policies have been tremendously popular at the state 
level. Just five years ago, only 14 states allowed net metering, and 
most of those requirements were adopted pursuant to state 
implementation of the federal PURPA law. Today the total stands at 34 
states, with four new states--Arkansas, Georgia, Hawaii and Wyoming--
enacting net metering laws just this year (see figure 2). In most 
cases, these laws were enacted by legislation (although in a few cases 
net metering policies were adopted by regulation), and in most cases 
with broad bipartisan support. In my home state of Washington, for 
example, the 1998 net metering law passed unanimously in a then-
Republican controlled legislature and was signed into law by a 
Democratic Governor.
    Of the bills currently before this Committee, only S. 597 currently 
includes a net metering provision. Section 604 of S. 597 requires 
utilities and other retail electric suppliers to offer net metering 
service to customers with eligible on-site generating facilities, 
defined as those using renewable energy resources with a maximum 
generating capacity of 100 kilowatts for residential customers, and 250 
kilowatts for commercial customers.
    I respectfully suggest that this Committee revisit the question of 
these system size limits, which I believe are too large in the case of 
residential customers, and too small in the case of commercial 
customers. For residential customers, a size limit of 10 kilowatts 
should be more than adequate for all but the largest homes. For 
commercial customers, on the other hand, a limit of 1,000 kilowatts (or 
1 megawatt) would be more appropriate. California expanded its net 
metering law to include facilities up to 1 megawatt earlier this year, 
and the response has been tremendous, with a number of utility 
customers pursuing the installation of larger-scale facilities. This 
size limit also enables the use of utility-scale wind turbines (which 
typically are sized around 1 megawatt) in distributed applications, 
allowing large customers to capture some of the economies of scale 
associated with these larger wind turbines, where they have the wind 
resources available to support the use of these turbines.
    Three other elements of the net metering language in S. 597 deserve 
mention:
    First, it includes a provision prohibiting utilities and other 
retail electric suppliers from discriminating against net metering 
customers by imposing additional fees or charges, or otherwise treating 
them differently from non-net metering customers in the same customer 
class. This is an important provision that should be retained because 
it prevents suppliers from imposing charges that would circumvent the 
intent of net metering.
    Second, it includes a provision requiring utilities and other 
retail electric suppliers to provide a carryover credit for any excess 
generation during a billing period, with the kilowatt-hour credit 
appearing on the bill for the following billing period. This provision 
is particularly valuable for resources such as solar and wind energy, 
which are subject to seasonal variations that may cause customers to 
produce more than they need to offset their own use in some months, and 
less than they need in other months.
    Third, it spells out specific technical requirements for 
interconnection of net metering facilities, based on IEEE and UL 
standards and NEC requirements, which dovetails nicely with the 
requirement in the bill that interconnection standards be developed for 
all distributed technologies. These requirements are consistent with 
those already in place in over a dozen states.
Business Practices
    None of the proposals before the Committee address another 
fundamental barrier to the interconnection of distributed generating 
facilities: the failure to adopt simplified interconnection agreements 
and routine procedures for processing interconnection requests. Again, 
particularly for small-scale facilities, the goal should be to attain 
``plug and play'' simplicity that eliminates unnecessary delays and 
inappropriate expenses. Unfortunately, many utility customers across 
the country have had the experience of contacting their local utility 
seeking information on interconnection procedures, only to be ignored 
or rebuffed or otherwise discouraged. In response, some states have 
explicitly required the development of simplified agreements and 
specific timelines for the processing of interconnection requests.
    For guidance on this subject, I would urge the Committee to 
consider language in a bill introduced in the House by Congressman Jay 
Inslee, H.R. 954, titled the ``Home Energy Generation Act.'' Mr. 
Inslee's bill also includes net metering and interconnection 
requirements, but goes further in requiring the FERC to develop 
``consumer-friendly contracts'' for the interconnection of distributed 
generating facilities up to 250 kilowatts (see Section 215(i)). A 
comparable provision would be an appropriate addition to any bill 
coming out of this Committee.
Conclusions
    Twenty years ago, the telecommunications industry in the U.S. was a 
cumbersome, heavily regulated business dominated by regulated 
monopolies that demonstrated little appetite for innovation. Today, the 
telecommunications industry is highly competitive and highly 
innovative, with consumers able to choose among a remarkable array of 
products offered by many different manufacturers. One of the key 
elements in that transformation was overcoming the telephone utilities' 
institutional resistance to interconnecting facilities and equipment 
from competing providers into the wireline network under fair, non-
discriminatory terms and conditions.
    The electricity industry in the U.S. is in the early stages of a 
similar transformation. The traditional paradigm of large, central-
station generating plants feeding a network of high-voltage 
transmission lines and local distribution systems in a geographic 
region, all owned by a single, vertically-integrated company, will 
evolve in the coming decades to a complex web of interconnected 
facilities for generating and storing electricity, owned by many 
different companies and even individuals. The utilities' role will 
shift to the management of electricity flowing in every direction 
through the network. Fortunately, this transition has the potential to 
provide substantial benefits for all Americans, including a more 
efficient, more responsive, more reliable, and more environmentally-
benign electricity system. But our nation's ability to make this 
transition efficiently and smoothly is threatened by the same 
reluctance on the utilities' part--except that it is the electric 
utilities this time--to integrating these facilities into their 
distribution networks. The bills cuurently before this Committee can 
help overcome this reluctance and encourage the utilities to embrace 
this new era.
    I would like to thank Senator Bingaman and the others members of 
the Committee for expressing interest in distributed technologies and 
in demonstrating leadership by proposing specific initiatives to 
encourage the development of viable, competitive markets for these 
technologies.
    Thank you for the invitation to appear before you today. I would be 
happy to answer any questions the Committee may have.

    The Chairman. Well, thank you very much. I think all of 
this is very good testimony.
    Let me ask the same question I asked Secretary Garman a few 
minutes ago. And that is, on the issue of fossil fuel 
efficiency, that is a concept, I know, that has been kicking 
around Washington for a long time and think tanks for a while.
    I would be interested in knowing whether any of you have 
looked at this, whether you think it would make sense for us to 
consider adopting a fossil fuel efficiency standard in order to 
try to ensure that the fossil fuels used in power generation in 
this country are, to the extent possible, used efficiently and 
that we incentivize investment in more efficient power 
production at every stage as we move forward.
    If any of you have thoughts about that, I would be anxious 
to hear them. Mr. Hall?
    Mr. Hall. Thank you, Mr. Chairman. I think the underlying 
premise of the fossil fuel efficiency standard is to come up 
with another way of thinking about energy production, its 
pollution prevention characteristics and the way that that 
relates to environmental regulations. So like what Mr. Garman 
said this morning, I think it is very important that we retain 
the connection between a fossil fuel efficiency standard or 
some other form of modernized environmental regulation along 
the lines of what I have included in my testimony this morning 
to replace new source review with a program that recognizes 
that there are better ways to address our environmental 
permitting of energy facilities in the country, that the 
addition of a fossil fuel efficiency standard without 
addressing the underlying environmental regulatory issues would 
add an additional layer of regulation, as opposed to 
simplifying our overall regulatory approach, which I think the 
fossil fuel efficiency standard is intended to do, similar to 
the proposal that you see in my testimony from the Clean Power 
Group.
    So my only comment is, to the extent that this committee 
would be able to address the underlying environmental 
provisions, that would be great. I do not believe that you are 
in a position to do that. So I would not encourage you to 
pursue the fossil fuel efficiency standard without the ability 
to address new source review at the same time.
    The Chairman. Anybody else have a thought? Mr. Demeter?
    Mr. Demeter. Mr. Chairman, I think it is an intriguing 
idea. I agree very much that we have to deal with new source 
review issues. Several projects which I am involved in, working 
with power companies to co-fire biomass fuels with coal, have 
dragged a bit because of the threat for new source reviews, 
these modifications being looked at perhaps major 
modifications.
    Even though we are not increasing the capacity of these 
boilers, and in fact we are reducing emissions, the NSR has 
been a barrier to this particular renewable energy and this 
particular conversion technology. So NSR is integral here.
    It also brings up another issue in terms of how renewable 
energy might be considered in this. I would have to look at 
exactly how you would calculate the energy in and the energy 
out. Perhaps on the energy out side you would give credits to 
some of the renewable energy production involved in the 
equation.
    And also, I think that it would be, again, just off the top 
of my head, worth at looking at how there might be interference 
with existing allowance markets, sulfur dioxide NOX 
emission traits. There might be an impact there on how those 
markets operate. It would require a little more thought at this 
point.
    The Chairman. Okay. On wind projects, Mr. Boyd, let me ask 
you, is there something needed? Should we be legislating some 
change in Federal law with regard to use of Federal lands for 
wind farms or wind power generation? I have anecdotes repeated 
to me in New Mexico where people have been looking for sites to 
locate wind farms and have felt that the delay in getting 
authority or permits to use Federal land were such that they 
really did not consider that option and instead went to private 
land. Have you encountered that problem at all, or do you think 
that is a problem worth worrying about?
    Mr. Boyd. My company has not really encountered the 
problem, but I know of some other companies that have. I think 
the biggest problem is that you trigger a NEPA review, which is 
at minimum a year and sometimes longer, depending on the agency 
that you are dealing with and how good they are at permitting.
    But certainly it is something worth looking at. I think 
that we have a lot of Federal lands that could bring income 
into the treasury, if they were used for wind energy.
    The Chairman. Okay. Mr. Starrs, let me just ask you a final 
question. The previous administration set a goal for the solar 
industry, to have a million solar roofs installed by 2020. Do 
you know if there anything going on to try to achieve that goal 
at the current time, or has this sort of gone by the board? 
What is your view on that?
    Mr. Starrs. Well, I know that under the prior 
administration there were a number of regional partnerships set 
up across the country. And I know that those regional 
partnerships are still in place. And there has been a lot of 
good work that has come out of the efforts at the Federal level 
in conjunction with these regional partnerships to support 
local and regional efforts to develop solar.
    I do not think that there has been any particularly strong 
statement of support by the current administration with respect 
to continuing the funding of that program. So I do not think 
there is a lot going on right now.
    Senator Craig.
    Senator Craig. Thank you, Mr. Chairman. I will be brief.
    But I want to thank all of you gentlemen for your 
testimony. I think our business here is to get the basket of 
energy full again. And that means with all different types of 
resource. And our business should not be to pick and choose but 
to create the flexibility to allow that to happen in the 
marketplace where there is a disadvantage or a disincentive to 
try to stop that.
    Mr. Boyd, I understand, or I think I understand, having 
talked with folks of your company and others that are in the 
business of wind, that this tax credit on a 5-year increment is 
critical, is it not?
    Mr. Boyd. Yes, sir.
    Senator Craig. Anything less than that probably deters the 
installation of wind.
    Mr. Boyd. Well, what happens is that we have to go out in 
the market to finance projects. And you know how skittish the 
financial community can be. And if we have short-term increases 
or extension when we do go out, people get nervous that the 
project will not get done in time for the credit. So they are 
unwilling to lend. So a longer extension, the 5-year program, 
we feel would be very helpful.
    Senator Craig. Are most of your projects now of the new and 
larger turbine design?
    Mr. Boyd. Yes. Our turbine, current-sized turbine, that we 
are building is a 1.5 megawatt. We will be putting 300 of those 
in, primarily in Texas, Pennsylvania, New York, and Wisconsin.
    Senator Craig. The wind also blows in Idaho.
    Mr. Boyd. I know. I lived in Idaho for 8 years.
    Senator Craig. Well, if you lived over in that southeastern 
toe of the boot that I see represented on that particular 
diagram, it seems there might be some opportunities there.
    Mr. Boyd. Yes. We are looking at Idaho.
    Senator Craig. Thank you.
    Gentlemen, thank you all.
    The Chairman. Senator Dorgan.
    Senator Dorgan. Mr. Chairman, thank you very much. I regret 
I was not here for the first part of the testimony today. But I 
really appreciate this hearing. I agree with Senator Craig that 
we have to produce more. I do not necessarily agree that we 
just let the market decide what we do here. I think in some 
respects, especially with respect to----
    Senator Craig. That is not really a constructive idea, the 
market.
    Senator Dorgan. Well, that cranky little Judge Judy makes 
$7.4 million a year on television. And the Chief Justice of the 
Supreme Court makes $180,000. So much for the market.
    Senator Craig. Then you and I are miscast.
    [Laughter.]
    Senator Dorgan. I think the market is a wonderful allocator 
of goods and services, but there are perversions in the market 
that require sometimes corrections and adjustments and 
incentives and stimulus. And I think with respect to renewable 
sources of energy and limitless sources of energy, I think we 
need to have public policies to stimulate it beyond market 
forces, stimulate it and give it an opportunity and an seed bed 
and some nurturing.
    And so again, while the market--I did not mention $255 
million for a shortstop in major league baseball in the market 
analysis. But wind energy is something that we are working on 
in North Dakota. And the charts from the Department of Energy 
say that we are number one in wind energy potential. North 
Dakota is the Saudi Arabia of wind.
    [Laughter.]
    Well, that is what they say, especially when I am home, I 
might suggest.
    [Laughter.]
    And we are very anxious to make good use of the wind energy 
potential, but limit it by transmission capabilities. And so we 
have to marry the opportunities that exist in some of these 
areas with the ability to transport the energy where the energy 
is needed. And I was interest in some of the discussions about 
wind energy. Mr. Boyd, I know that your company is very 
involved and very active around the country in these areas.
    But I think distributed generation, biomass, wind energy, a 
whole series of technologies that have always kind of been 
relegated as an afterthought by some. I think they can provide 
significant new sources of energy for our country. And I think 
the testimony that all of you have given is important 
testimony.
    We need to produce a piece of legislation that does use the 
market in an effective way and that always provide stimulus 
beyond the marketplace and other areas so that we have a 
balanced energy package. And we need to produce more fossil 
fuel and renewables and efficiencies. And a whole series of 
things need to come together in a balanced energy package. And 
your contribution, I think, in this hearing called by the 
chairman is a very significant contribution.
    Might I just ask one question? The issue of transmission, I 
assume all of you recognize that from a number of sources of 
energy that you describe in your testimony, the ability to 
transport that energy to where it is needed, except with 
respect to the testimony of Mr. Hall, I believe, which I find 
interesting.
    The chairman and I, and also Senator Craig, sat in a 
briefing on that subject within the last week or so. And I 
think you make some good points about the loss of efficiency 
and so on and some things we can do in that area in the power 
heat generation.
    But again, can you just again respond on the issue of the 
transmission capability? Mr. Boyd, you know. I mean, you are 
involved in wind. You know North Dakota is number one in the 
country, right?
    Mr. Boyd. Yes, sir.
    Senator Dorgan. And so you are not there because of 
transmission problems. Why are you not building wind turbines 
on the prairies of North Dakota?
    Mr. Boyd. Because we cannot get the power out of the State 
into the markets that need it. It is pretty simple.
    Senator Dorgan. But were it not for that, you would be 
there building some wind turbines and some blades.
    Mr. Boyd. Yes, because, you know, wind energy, the better 
the wind, the cheaper the cost. So we would certainly be there.
    Senator Dorgan. Can you give us just a description of how 
the new, more efficient wind turbine technology has improved 
our capability and brought down costs?
    Mr. Boyd. Well, the major way it has is just the increase 
in size. It turns out that the economics for wind are such that 
the cost that you pay to get larger is less than what you can 
generate from the turbines. So you make more revenues from 
larger turbines. And the cost is not in the same ratio.
    The second thing is that we have a power electronic system, 
which allows you to have variable speed. And that way you can 
get more power out of the turbine. We used to absorb a lot more 
of the forces into the frame of the machine. Now we are able to 
take those through and generate power.
    Senator Dorgan. Mr. Chairman, could I just good naturedly 
observe that there is no solar energy in these rooms. We always 
keep the drapes closed, presumably for television coverage. And 
even when there are no television cameras present, in every 
hearing room in the U.S. Senate we, who participate, have this 
gray pallor because we continue to have the drapes closed. And 
I hope that perhaps we can reform that as well.
    The Chairman. Well, I think that is a very good suggestion. 
We have talked about that once before. Why do we not try to fix 
that? We will try to fix that.
    Thank you very much.
    Senator Smith.
    Senator Smith. Thank you, Mr. Chairman. I wonder if any of 
you can comment upon the administration's proposal of offering 
up to $1,500 for residential solar power, whether you think 
that would be helpful and stimulating, solar power as a 
renewable.
    Mr. Starrs. Senator Smith, I can respond to that. The short 
answer is yes, that it would be helpful. And as Senator Dorgan 
just noted, I think that these kinds of modest incentives have 
played a role in the past in encouraging the development of 
some of these cleaner, locally available energy generating 
technologies. And solar is certainly no exception.
    In fact, comparable incentives that have already been 
adopted at the State level in some States are driving very, 
very substantial increases in the market for solar energy 
systems. California in particular has a rebate program in place 
that has spurred tremendous growth in the market there. And as 
we speak, there are solar electric systems going in in 
residences and businesses all over the State of California at a 
rate that is really unprecedented.
    Senator Smith. Mr. Boyd, can you talk to me about the 
windmill farms you are doing? What have you done to mitigate 
vibration and impact on wildlife and birds?
    Mr. Boyd. Well, the major thing that we have done is do 
biological studies before we put in a project to make sure that 
we are not going to affect the population of animals and birds 
that are in the area. That did not happen in some of the early 
projects in California. And we learned from that mistake.
    Senator Smith. And in doing that, you are doing that in 
private land.
    Mr. Boyd. Yes.
    Senator Smith. But you think the environmental impact is de 
minimis or----
    Mr. Boyd. Yes, I really do. I think the major impact of 
wind turbines is probably visual, as you mentioned. In terms of 
affecting the land, these larger turbines, you do not have very 
many of them on a piece of land. Wind turbines are kind of land 
intrusive more than land intensive.
    Senator Smith. That is all, Mr. Chairman.
    The Chairman. Thank you very much.
    Senator Carper.
    Senator Carper. Welcome. Thanks for joining us today. I am 
a new member of the committee. Some of these folks have been 
here for years; I have been here for days. And some of what you 
talked about, frankly, I do not fully understand. And I am 
going to ask us to go back, a couple of you, and ask you to 
give me a primer on some of what you have been taking about.
    Mr. Boyd, I missed your testimony entirely. I have another 
committee that is meeting at the same time. Could you just 
start off by taking a minute or so and just tell me, among the 
things that you said, I know a lot was important, but just hit 
me with some of the highlights, please.
    Mr. Boyd. Well, the wind is the fastest growing renewable 
technology in the world today. And that is primarily because 
the price has been driven down so it is as close to being 
competitive with other generation technologies. The growth that 
we will see will probably double, almost double, in the United 
States this year. Over the next 5 years, we will see about 
$40,000 megawatts go in around the world. Europe is much 
farther ahead in terms of deploying wind energy than we are 
here in the United States.
    Senator Carper. Why is that?
    Mr. Boyd. Because they have given a lot of incentives to 
wind energy. Germany, for example, has what they call a feed 
law. They pay 90 percent of the retail rate to people to put in 
wind. Other countries have different types, but pretty good 
incentive programs.
    The have decided that wind is a technology that they want 
to supply. I think in the case of Denmark now they are about 20 
percent is wind energy.
    Senator Carper. What kind of potential do you see in our 
country for utilizing wind energy?
    Mr. Boyd. Well, it is unlimited. I mean, in terms of 
resource, we could easily duplicate what the power generation 
capacity of the United States is right now. That is not likely 
to happen, because wind will just be a part of the mix; it is 
not going to take over the world.
    Senator Carper. In terms of what we should be doing in this 
country, in this body, to encourage the harnessing of wind 
energy, just, again, what further should we do?
    Mr. Boyd. Well, I think I mentioned two things in my 
testimony. Number one is we have a wind production tax credit, 
which is very valuable to us in terms of getting our costs 
down.
    Senator Carper. How would that work?
    Mr. Boyd. For each kilowatt hour of win energy, you get a 
tax credit of 1.5 cents. So this lowers the effective cost of 
wind energy when you sell it.
    Senator Carper. Would that credit have had to have been 
higher 5 or 10 years ago, in order to make wind competitive?
    Mr. Boyd. I am sorry, the question again?
    Senator Carper. Would that credit have had to have been 
higher 5 or 10 years ago, in order for wind to be competitive?
    Mr. Boyd. Actually, the credit was in the Energy Policy Act 
of 1992. That is when it started. And there was a time where it 
went away, and then it was reinstated. And it could have been 
higher. I think it would have been helpful if it was higher at 
the time. But, looking at the other side, I think that the 
technology had time to catch up with the market. So I do not 
think that it hurt us that badly.
    Senator Carper. Okay. Thank you.
    Anybody else want to comment in response to any of the 
questions I asked Mr. Boyd?
    Mr. Starrs. I would just like to mention one issue that has 
not really come up much, Senator Carper, and that is that, as 
Senator Dorgan mentioned, there may be reasons to encourage or 
discourage certain technologies. And one of the things that we 
have not really emphasized adequately, I think, is the 
importance of fuel diversity.
    Although we have somewhat diverse electricity resource base 
in this country today, the fact is that almost all of the new 
generating capacity coming on line is fueled by natural gas. 
And I think the evidence from the last 6 months or so 
adequately illustrates the fact that natural gas prices and 
other fossil fuel prices can be highly volatile.
    And one of the reasons that I think it does make good 
public policy sense to encourage the development of renewable 
technology, such as solar and wind energy, is that they are 
really immune from those sorts of supply price volatility 
issues. And even if they are at the margin incrementally more 
expensive--and as we have already heard, wind may not be. But 
even if they are, I think there is a strong public interest in 
encouraging the broader diversification of our energy resource 
base.
    Senator Carper. Thank you.
    Now for the primer for me. Probably everybody in the room, 
Mr. Chairman, understands what these fellows were talking about 
when they talked about interconnection standards and 
distributed generating facilities and net metering policies. I 
may be the only person who does not fully understand those 
terms.
    But for my benefit, alone perhaps, for my benefit alone, 
give me a primer on what we mean by interconnection standards. 
How are they relevant to this discussion? What should I 
understand about them, distributed generating facilities and 
net metering policies, those three?
    Mr. Starrs. Mr. Carper, let me jump in because I actually 
had a bit of testimony that I did not get to address in this 
context. And I think I am going to explain by offering what I 
hope is a useful analogy to the telecommunications industry.
    Twenty years ago, the telecommunications industry was a 
cumbersome, heavily regulated business dominated by regulated 
monopolies that had little appetite for innovation. Today, the 
telecom industry is highly competitive and highly innovative 
with consumers able to choose among a remarkable array of 
products from many different manufacturers. And one of the key 
elements in that transformation was overcoming the telephone 
utilities' traditional reluctance to allow competing companies 
to interconnect their equipment under fair and reasonable terms 
and conditions.
    The same kind of transformation is happening in the 
electricity industry today. The traditional paradigm of large 
central station generating plants feeding a network of high 
voltage transmission lines and local distribution systems, 
which are all owned, have been owned, by a single vertically 
integrated company is changing.
    And it is going to evolve in the coming decades to a 
complex web of interconnected facilities for the generation and 
storage of electricity that are owned by many different people, 
including residences, residential customers, and businesses, 
with the utilities role shifting to one of basically managing 
the flow of energy through the network.
    I believe that this transition has the potential to provide 
substantial benefits for all Americans, including greater 
efficiency, more responsiveness, more resilience, and a more 
environmentally benign electricity system.
    But probably the single biggest obstacle to that, to moving 
towards this new energy system, is the same reluctance on the 
utilities' part, except this time it is the electric utilities, 
to integrate these facilities into their distribution networks. 
And that is the basis for our interest in having the Senate and 
the Congress address this issue of interconnection standards.
    Senator Carper. That was helpful. That was helpful.
    Mr. Hall.
    Mr. Hall. If I could just add one additional element to 
that, which is that, unlike in the telecommunication debate, 
where there were not lots and lots of different companies that 
were controlling access to the distribution and transmission 
system in this case, the way that we have historically 
addressed interconnection, or those that wanted to 
interconnect, was a utility-by-utility activity.
    And there are certainly many cases of utilities that have 
been very open and willing to allow people to interconnect 
where they saw that there was value for them. But there is just 
as many cases, if perhaps not more, where they felt that the 
ability to disagree or the perceived disagreement over 
technical elements of the physical interconnection were used to 
drive the costs up for people that wanted to connect such that 
it became uneconomic to go forward with that project.
    Senator Carper. Okay. Mr. Chairman, is there going to be 
another round for this panel, or is this it?
    The Chairman. Well, we have two additional panels. And so I 
think this is it.
    Senator Carper. All right. Thank you very much.
    The Chairman. Senator Cantwell.
    Senator Cantwell. Thank you, Mr. Chairman.
    And, again, thank you, panelists, for being here today. And 
I apologize, too, for missing the earlier part of the hearing, 
given another markup in a committee that I serve on. I have 
read through some of your testimonies, and obviously some of 
you have mentioned in here the very fortunate focus of our new 
economy and the closeness of distributed power marrying up very 
well in the sense of having that power be uninterrupted power 
and close to the source. It ties in very well with a lot of the 
computing advances we have made.
    I did not see too much in--I saw mentioned in Mr. Starrs's 
testimony about hydrogen fuel cells. I do not know if you could 
comment on--I mean, a lot of the comments on developing 
standards, a uniform standard, at the national level have been 
focused on wind and solar and other comments. But any comments 
on the hydrogen fuel cells as it relates to us coming up with 
the standard processing for metering?
    Mr. Starrs. I will touch on that, Senator Cantwell. Fuel 
cells is a technology with tremendous promise. And I think that 
has been reflected in some of the recent efforts in the States 
to encourage these new energy technologies. For example, many 
of the recent net metering laws, which I mentioned earlier, 
and, by the way, which also tend to include interconnection 
standards, have made fuel cells an eligible technology. So 
there are maybe a dozen or so States right now----
    Senator Cantwell. Which States?
    Mr. Starrs. Well, they include Washington and Oregon. I 
cannot give you a complete list, but I am most familiar with 
ones in the Northwest, where I do most of my work. And so in 
those States fuel cells are eligible for these streamlined 
interconnection procedures that we have been discussing.
    Senator Cantwell. Any of the other panelists want to 
comment?
    Mr. Demeter. I would just add, Senator Cantwell, that, yes, 
fuel cells would be a technology that would benefit from all 
the issues that we have been discussing today. They tend to be 
a little more expensive as a conversion device than some 
others. So they require, I think, a little more Federal 
investment in the R&D side, as well as other policies.
    And when you mention hydrogen fuel cells, it is not only 
hydrogen gas that we are talking about here, but it is anything 
that carries hydrogen with it. Ethanol, for example, can be 
used. Another chemical derived from biomass, ethyl-levlionate, 
can be used as sources in these fuel cells. But the fuel cell 
device itself would benefit from much of what we have talked 
about today.
    Mr. Hall. And if I could just add, the language in S. 933 
for interconnection is really a technology agnostic or 
technology neutral standard for interconnecting any kind of 
technology to the distribution or transmission system. So in 
the case of the interconnection and the provision of backup 
power, it is not necessary to differentiate between one 
technology and another.
    Senator Cantwell. As we go through this process of marking 
up legislation, and there is riot of bills here, including the 
chairman's--and thank you, Mr. Starrs, for your detailed 
description about the positive aspects of a variety of pieces 
of legislation on this--we obviously have industry standard 
organizations like the IEEE and UL and NEC. And then we have 
FERC. And obviously, we are in these various pieces of 
legislation directing or saying let us direct FERC to move 
faster.
    So what do you think is the relationship in us moving 
forward on these in the sense of not an over-reliance on FERC, 
but not--it sounds like we will not get there unless we have 
some national standard. And yet these standard bodies probably 
have been the best--I am assuming. I would like your comment on 
that--have been the best in actually coming up with and 
eliminating the concerns and problems so that State standards 
could be established.
    So do these bills have the right balance in that equation?
    Mr. Starrs. That is a very good question, Senator. And I 
think it is a delicate balance to allocate the jurisdiction, 
the authority, between the FERC and the States on these topics. 
As we have heard from various speakers this morning, including 
Mr. Garman, there have been a number of States that really have 
demonstrated very substantial leadership on this topic and have 
really stepped out to the forefront and have established 
policies that are very encouraging while still being fair and 
balanced to these new technologies.
    So----
    Senator Cantwell. But in--I am sorry to interrupt.
    Mr. Starrs. Sure.
    Senator Cantwell. But in those cases, these standard-
setting bodies probably have led the way and legislatures have 
been adopting them correct, as opposed to legislators really 
getting into the details----
    Mr. Starrs. Absolutely.
    Senator Cantwell [continuing]. Or a utility commission 
getting into the details. I am assuming that they have----
    Mr. Starrs. That has generally been the case. Although I 
will note that sort of the most important of the proceedings of 
the IEEE--IEEE is currently in the process of developing a 
standard called IEEE 1547, which is a broad standard for all 
distributed technologies. And that standard is not yet in 
place.
    So the States that have had to--well, who have been 
interested in stepping out in this issue, have not been able to 
rely on an IEEE standard with respect to these broader 
technologies. Now there is another IEEE standard called IEEE 
929 that is in place for, this is a technical issue, but for 
what are called invertor-based technologies, which include 
solar electric, some small wind systems, fuel cells, some gas 
turbines, and so on.
    And that IEEE 929 standard has been called out in many of 
these State laws as the basis for the technical standards that 
have been adopted there.
    So, some of the States have incorporated those national 
standards explicitly by reference. Others have not. I think the 
main issue is that we have a good start among the States in 
adopting these national standards, or the work that has been 
done by these national authorities. But I think that some of 
the manufacturers of equipment in this room and elsewhere would 
agree that it is still very cumbersome to have sort of the 
piecemeal adoption of different requirements in different 
States. And that is the main driver, the main interest, in 
having national standards.
    And so an equipment manufacturer can build something in 
Ohio or in Oregon or wherever and know with confidence that 
that equipment is eligible to be interconnected in any State in 
the country without having to go through a lot of State-
specific or, even worse, utility-specific hoops.
    Mr. Hall. If I could just add to that, I think it is 
important to recognize that, first, IEEE is a voluntary, 
develops standards on a voluntary basis. And that process 
normally is a long process. I have not personally been involved 
with the IEEE process, but there--well, I do have someone from 
my company that has been involved in it. A lot of these 
standards often can take many, many years to evolve.
    And but for the investment by the Department of Energy in 
accelerating the development process of this particular 
standard, we would be much further away than we are right now.
    Correct me if I wrong, Tom, but the places where we do have 
standards that have been established in places like Texas and 
New York, those have been driven by the commissions, 
commission-driven stakeholder processes that do not rely on 
these sort of voluntary standard setting bodies. So it is in 
those cases that they have actually been driven by State 
legislatures or State commissions or some other legislative or 
regulatory body to make sure that they could move forward in a 
timely fashion.
    And it is for that reason that I think we really do strike 
the right balance here between what we need FERC to do, which 
is to be in a position to affirmatively say we are going to 
have uniform interconnection standards, we are either going to 
get it out of IEEE or we are going to get it out of another 
process that is equitable and open, but addresses the issues 
that we need to address so that we can move on. Otherwise we 
could be held hostage to a voluntary process that could take a 
very, very long time, some of those processes which evolve very 
slowly under normal circumstances.
    Senator Cantwell. Thank you.
    I see my time has expired, Mr. Chairman.
    The Chairman. Thank you very much. Why do we not go ahead 
and dismiss this panel? The second part of this hearing is on 
hydroelectric relicensing. Let us take about 5 minutes here 
while we bring forward the witnesses from panel three and panel 
four and ask them all to sit here at the front table. And we 
will commence again here in 5 minutes.
    [Recess.]
    The Chairman. Why do we not go ahead here? If the witnesses 
could take their seats, I would appreciate it.
    This portion of the hearing, as I indicated, is on 
hydroelectric relicensing. Our first two witnesses are from the 
administration. One is Mr. William Bettenberg, who is the 
Deputy Director of the Office of Policy Analysis in the 
Department of the Interior. And the second is Mr. Mark 
Robinson, who is the Director of the Office of Energy Projects 
with the Federal Energy Regulatory Commission.
    We appreciate you being here very much. And why do you not 
go ahead and begin? And then we will introduce the other three 
witnesses once you have completed your testimony.
    Mr. Bettenberg, why do you not start? If you would take one 
of those microphones and put it right in front of you, that 
would be a help.

  STATEMENT OF WILLIAM BETTENBERG, DEPUTY DIRECTOR, OFFICE OF 
          POLICE ANALYSIS, DEPARTMENT OF THE INTERIOR

    Mr. Bettenberg. Thank you, Mr. Chairman. It is a pleasure 
to be here today to present a statement on behalf of the 
Department of the Interior. I have been working with Secretary 
Norton on energy issues for more than 5 months now and can 
assure you that she takes very seriously her charge to 
efficiently and effectively balance national interests and 
natural resource and environmental preservation with energy 
needs, and to do so through timely, cooperative, and efficient 
processes.
    You have my statement for the record. Let me simply 
highlight several sections of it.
    The committee has held several hearings on the hydropower 
licensing process, and many of you are quite familiar with it. 
For the sake of newer members, I thought I might simply point 
out, on page 2 of my statement I identify the primary roles of 
the Interior Department under the Federal Power Act. Basically 
under section 4(e) we set standards related to protecting lands 
and resources that Interior administers. Under section 18 we 
share with NOAA authority for setting conditions for fish 
passage. And then under section 10(j) we make other 
recommendations.
    On pages 3 and 4 we have summarized some results of a study 
that we did a few months back regarding processing times. And I 
would note that while applications are due 2 years in advance 
of license expiration, the average license process takes about 
4\1/2\ years. There is clearly room for improvement there.
    Out of 157 licenses issued over the past 6 years, it turns 
out that Interior and NOAA established conditions on about one-
quarter of them. So there are about three-quarters that do not 
include Interior conditions. This included 4(e) authorities in 
only 9 cases.
    Interestingly, whether Interior establishes conditions or 
not, there is essentially no difference in the amount of time 
taken in the licensing process. FERC reached this same 
conclusion in their 603 report.
    On pages 4 through 6 the statement describes the 
interagency task force process and highlights commitments in 
that forum to improve the licensing process. We think these 
represent very substantial improvements on the part of all of 
the agencies that were involved in that. I would like to note 
here that I suspect that Mr. Craig's prodding and proposed 
legislation had a lot to do with Interior and the other 
agencies paying much closer attention to problems with the 
licensing process and working to improve it.
    On pages 7 and 8 the statement identifies key steps in the 
Department's undertaking or examining to continue to improve 
the process. I would like to draw your attention to three of 
those steps.
    At the top of page 7 we point out that Interior and 
Commerce have committed to filing preliminary conditions within 
60 days after FERC says the project is ready for environmental 
analysis, a modified condition 60 days after the close of the 
comment period on the draft IS. Interior agencies are available 
to work iteratively with applicants and others throughout the 
process.
    At the top of page 8 I cite the commitment to develop an 
interagency consistency mechanism. This recommendation is 
included in the President's national energy policy. For step 7 
on page 8, I note that Interior is currently reviewing 
mechanisms and criteria for its exercise of conditioning 
authority. This will include examination of higher level review 
mechanisms and consideration of various factors to be 
considered in making conditioning decisions.
    On pages 8 through 11 the statement reviews some key 
aspects of the bills under consideration. Let me just highlight 
three of those. S. 597, as well as the Tauzin bill marked up by 
the Energy and Commerce Committee 2 days ago, provided that 
parties can propose an alternative set of conditions and sets 
criteria for their acceptance. We find this useful, but point 
to the need to have some deadlines for this filing and to limit 
it to the applicants. Also with the filing, we need to include 
substantial evidence to back it up.
    On pages 9 and 10 we commend on the core process provisions 
of S. 71 and S. 388. Basically, we have concerns with the 
timetables in those processes and a few other issues as well. 
On coordinated environmental reviews in S. 71 and S. 388, we 
think those are promising, but need to overcome some problems 
with FERC's ex parte rules in order to be cooperators in their 
need for process while protecting our standing in their 
proceedings.
    Finally, on the last two pages we provide five additional 
areas where we think legislation could be helpful. These cover 
settlements, studies, deadlines, basin-wide assessments, and 
Indian trust responsibilities. We are available to work with 
the committee on these bills and legislation generally in 
search of improvements to the licensing process.
    Mr. Chairman, that concludes my summary. I will be pleased 
to respond to questions.
    The Chairman. Thank you very much.
    [The prepared statement of Mr. Bettenberg follows:]
 Prepared Statement of William Bettenberg, Deputy Director, Office of 
              Policy Analysis, Department of the Interior
    Good morning. My name is William Bettenberg. I am Deputy Director 
of the Office of Policy Analysis in the Department of the Interior and 
currently serve as the Hydropower Coordinator for the Department, as 
well. On behalf of Secretary Norton, I wish to reaffirm the commitment 
of the Department of the Interior (Department or Interior) to improve 
and streamline the hydropower licensing process. The Secretary takes 
very seriously her charge to efficiently and effectively balance 
national interests in natural resource and environmental preservation 
with energy needs, and to do so through timely, cooperative, and 
efficient processes. I will present the views of the Department on 
hydropower issues and legislation, and I have also been asked to speak 
to the practices of the U.S.D.A. Forest Service (USDA/FS) today.
    In this review, I will address S. 597, the Comprehensive and 
Balanced Energy Policy Act of 2001, S. 388, the National Energy 
Security Act of 2001, and S. 71, the Hydroelectric Licensing Process 
Improvement Act of 2001, all as they relate to hydropower. Because of 
its relevance, I will also refer to the Energy Advancement and 
Conservation Act of 2001 as marked up by the House Energy and Commerce 
Committee on Tuesday.
    The President's National Energy Policy (NEP) supports actions to 
streamline and improve the hydropower licensing process. I am pleased 
to report to you on the status of the progress being made by the 
resource agencies in effecting such improvements, to share with you the 
positions of the resource agencies on the legislation being considered 
by this Committee, and to suggest several additional legislative steps 
that could improve the licensing process. To begin, I will provide the 
Committee with some background on hydropower and a description of the 
responsibilities of resource agencies in the hydropower licensing 
process to place the issues in context.
                             a. background
    Hydropower represents about 7 percent of annual generation and is 
almost always the lowest-priced source of electricity when compared to 
any other means of producing electricity. While subject to the vagaries 
of river flows and droughts, hydrogeneration plays a unique role in 
meeting power demands. While often presenting serious problems for fish 
migration and spawning, hydropower avoids production of air pollutants 
and a variety of other concerns compared to the use of other energy 
resources.
    About 45 percent of hydropower generation is administered by the 
Department's Bureau of Reclamation, the Corps of Engineers (Corps), and 
other Federal agencies. Non-federal projects account for the remaining 
55 percent of hydropower generation and about 4 percent of the nation's 
total electricity supply. The use of navigable rivers for non-federal 
hydropower is conditioned through licenses issued by the Federal Energy 
Regulatory Commission (FERC). These licenses also contain conditions 
set by Interior bureaus and the USDA/FS to address effects of the 
hydropower projects on Federal and Indian lands, by the U.S. Fish and 
Wildlife Service (FWS) and the National Oceanic and Atmospheric 
Administration (NOAA) with regard to fish passage, by the Corps with 
regard to navigation, and by States with regard to water quality. The 
process for obtaining a license can be time consuming and contentious. 
The licensing process, however, is itself complex. From the standpoint 
of the resource agencies--Interior, Agriculture and Commerce--it is 
important to ensure that appropriate safeguards are put in place, 
particularly given the fact that hydropower licenses authorize the use 
of public resources for 30 to 50 years. We believe substantial advances 
have been made recently in improving the process; more can be done and 
we are working together on that.
Federal Power Act
    The resource agencies have the important assignment under the 
Federal Power Act (FPA) to participate directly in the hydropower 
licensing process. Our participation is intended not to interfere with 
licensing, but to ensure that key resources for which the resource 
agencies are responsible are protected when navigable waterways are 
used for hydropower generation.
    Since enactment of the FPA in 1920, it has been the responsibility 
of the Departments of the Interior and Agriculture to establish 
conditions for non-Federal hydropower licenses as necessary to protect 
the lands and resources that we administer. These lands include Federal 
reservations such as Indian lands, National Wildlife Refuges, Bureau of 
Reclamation projects, National Forests, some units of the National Park 
System, and certain lands and projects managed by the Bureau of Land 
Management. This responsibility includes protecting the structural 
integrity of Department of the Interior dams and canals, meeting trust 
responsibilities on behalf of Indian tribes and individuals, and 
otherwise assuring compatibility with the purpose for which the Federal 
reservation was made. These conditions are set pursuant to section 4(e) 
of the FPA.
    Also, since 1920, FWS and NOAA (or their predecessor agencies) have 
had responsibility for establishing the terms for safe passage of fish 
at licensed hydropower facilities. This authority is somewhat analogous 
to conditions set by the Corps to ensure passage of boats for 
navigation. Most hydropower facilities received their original licenses 
roughly 30 to 50 years ago; many of those facilities had actually been 
put in place many decades before then, long before the advent of 
national concern for environmental resources including fish, or 
widespread recognition of the cumulative impact of dams on fish 
resources. Of the dams licensed by FERC, only 9.5 percent include 
upstream fish passage; only 13 percent included downstream fish passage 
other than over the spillways or through the turbines.\1\ This 
responsibility for establishing conditions for fishways is carried out 
under section 18 of the FPA.
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    \1\ Environmental Mitigation at Hydroelectric Projects, Volume II, 
Idaho National Engineering Laboratory, January 1994, DOE/ID--10360(V2).
---------------------------------------------------------------------------
    These agencies also make recommendations to FERC for other 
environmental protections which they believe should be considered for 
inclusion in hydropower licenses. These include additional 
recommendations for protection, mitigation, and enhancement of fish and 
wildlife resources, as well as recommendations related to recreation, 
cultural resources, and irrigation. This is done under sections 10(a) 
and (j) of the FPA.
Hydropower License Conditions Frequency, Timeliness, and Contested 
        Cases
    The licensing process has often been complex and resource intensive 
for all parties, including energy producers, property owners, 
recreationists, fisherman, and conservationists. Recently, the 
Department examined all licenses issued between 1994 and 2000, and 
found that the average processing time, from the time an application is 
filed with FERC to the time a license is issued, is just over four and 
a half years. A copy of that analysis is attached to this testimony. 
There are many steps that contribute to this lengthy process:

   The average time from filing by the applicant to acceptance 
        of the application by the Commission is about one year;
   The average time from acceptance of the application by the 
        Commission to the declaration by the Commission that the 
        project is Ready for Environmental Analysis (REA) is about 11 
        months; and
   The average time to conduct the environmental analysis and 
        issue the license is a little over 2.5 years following issuance 
        of the REA notice.
   Even after the license is issued, there are often motions 
        for rehearing with the Commission, and sometimes even 
        challenges in court.

    Ninety-one percent of new licenses at existing projects covered by 
the Department's analysis (144 of 155) were issued after the existing 
license expired, and 61 percent were issued more than one year after 
the expiration date. Clearly, there is room for improvement in this 
process.
    Many of the recent reform proposals have focused on federal agency 
conditions. While attention to the conditioning process is warranted, 
we believe that it may be too narrowly focused. Departmental conditions 
are issued less frequently and contested less frequently than may be 
commonly supposed. For the 157 new and existing projects licensed from 
1995 through 2000, the Department established section 4(e) conditions 
for only 9 projects--about six percent of the projects licensed by FERC 
during that period.\2\ Section 18 fishway conditions were established 
by FWS or NOAA for 32 projects, or 20 percent of the 157 projects 
licensed. When these Interior numbers (both section 4(e) and 18) are 
combined with those for NOAA, they still only account for about 25 
percent of the projects licensed during the period studied.
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    \2\ Note that this differs from the 10 cited in the attached 
letter; the difference is that a proposed National Park Service 4(e) 
condition was converted to a settlement term.
---------------------------------------------------------------------------
    Interestingly, the process of Interior bureaus and NOAA 
establishing conditions does not appear to have lengthened the overall 
licensing process. The Department's analysis found that there was no 
significant difference between the time it took to process license 
applications for which mandatory conditions under Sections 4(e) and 18 
of the FPA were established, and the time to process those for which 
prescription authority was not exercised. FERC corroborated this 
conclusion in their May 8th Section 603 report.\3\
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    \3\ Report on Hydroelectric Licensing Policies, Procedures, and 
Regulations, Comprehensive Review and Recommendations Pursuant to 
Section 603 of the Energy Act of 2000, prepared by the staff of the 
Federal Energy Regulatory Commission, May 2001 (cited hereafter as FERC 
603 report), p. 38.
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    Also interesting is that of the 157 licenses issued during this 
period, 57--slightly more than one-third--were contested by the 
applicants; only 13 of those contested included Interior and NOAA 
conditions. The 13 challenges to Interior and NOAA conditions represent 
8 percent of the licenses issued. There were no contests of USDA/FS 
conditions at FERC during this period. Our understanding is that no 
relicensing applicant has rejected a license due to the setting of 
conditions by the resource agencies.
    What these numbers point to is that the length of the hydropower 
licensing process and the extent of contested licenses are less a 
function of the processes by which the resource agencies establish 
conditions, or even the nature of those conditions themselves, than 
they are a more pervasive artifact of the overall hydropower licensing 
process. The net needs to be cast more broadly to effectively 
streamline the process.
Recent Progress on Improving the Hydropower Licensing Process
    In 1998, the Federal agencies responsible for key parts of the 
Nation's hydropower licensing process created the Interagency Task 
Force to Improve Hydroelectric Licensing Processes (ITF) to develop 
practical ways to improve the licensing process across all the 
agencies. The ITF was a coordinated effort between FERC, the 
Departments of Interior, Commerce, and Agriculture, the Environmental 
Protection Agency, and the Council on Environmental Quality. To ensure 
review and comment on the ITF work products by all stakeholders, the 
ITF convened an advisory committee comprised of industry, non-
governmental organizations, tribes, and local, State, and Federal 
agencies. Numerous recommendations were developed and commitments made 
in a series of agency guidance documents that are posted on the 
www.doi.gov/hydro website. Most significantly, the commitments include:
    (1) the commitment of the Commission to alert the public and other 
agencies of proposed hydropower licensing actions to expedite issuance 
of notices and improve overall communication among Federal agencies;
    (2) the commitment of the Commission and resource agencies to 
changes that will facilitate better coordination among Federal agencies 
and enable all interested parties to understand and more efficiently 
work within the National Environmental Policy Act (NEPA) process;
    (3) the commitment of the Commission and resource agencies to 
provide basic guidelines on how to identify resource issues, identify 
and conduct necessary studies during the pre-filing stage, resolve 
disputes over studies, and address issues related to post-filing 
studies, making the licensing process more efficient and eliminating 
disputes early in the process. For example, the resource agencies have 
committed to identifying in any study request the nexus between study 
requests and licensing conditions and recommendations, on the one hand, 
and project operations and resource impacts on the other. In addition, 
in developing its conditions and prescriptions, the Departments have 
committed to reviewing alternatives including those submitted by the 
license applicant, and selecting the least cost alternative which meets 
the Department's management goals;
    (4) the commitment of the Commission and resource agencies to 
streamline the process by which they coordinate section 7 consultation 
under the Endangered Species Act and integrate it into the licensing 
process in order to facilitate timely licensing actions;
    (5) the commitment of the Departments of the Interior and Commerce 
to the publication of review procedures for their exercise of mandatory 
conditions under sections 4(e) and 18 of the FPA, and the Commission's 
commitment to identify and follow consistent procedures in implementing 
recommendations that it receives under section 10(j) of the Federal 
Power Act; and
    (6) the Commission's and resource agencies' guidance and 
recommendations for all participants in the newly evolving alternative 
licensing process.
    In the coming year we expect to realize further reductions in 
processing time as a result of continuing administrative reforms. 
Recent initiatives such as those stemming from the ITF have affirmed a 
commitment to collaborative processes, to setting and meeting 
deadlines, and to providing timely notifications. The Commission has 
already reported a noticeable reduction in the number of Additional 
Information Requests which they have had to issue.\4\ The Department 
and NOAA are committed to adhering to set deadlines for establishing 
their conditions under sections 4(e) and 18; preliminary requirements 
are provided within 60 days of FERC's REA notice, and any needed 
modifications are provided within 60 days of the close of the Draft 
NEPA document comment period. All reserve the authority to make final 
modifications when the final Environmental Impact Statement (EIS) is 
completed and reviewed, but changes at this point are rare.
---------------------------------------------------------------------------
    \4\ Personal communication with FERC staff.
---------------------------------------------------------------------------
    Both the Department and NOAA also now require that the conditions 
be the least-cost means of achieving the objectives. FWS and NOAA are 
also working on a fishway policy that will provide clearer guidance for 
the prescription process and improve consistency between the 
Departments of the Interior and Commerce. We are optimistic that the 
implementation of these and other administrative reforms will 
facilitate the licensing process.
    The established expiration dates for licenses make the licensing 
workload predictable. Over the next decade, about 220 FERC hydropower 
licenses will expire. These projects have a combined capacity of about 
22,000 megawatts, or 20 percent of the Nation's installed hydropower 
capacity. The relicensing process is focused primarily on bringing the 
30 to 50 year old projects into balance with current national 
standards. It also serves to remind operators to consider upgrades to 
their generating capacity. Compliance with current standards comes at a 
price, though the effect on generation is not as large as one might 
expect. FERC's estimate of the average annual generation loss due to 
new conditions established through licensing is 1.59 percent.\5\ This 
is substantially less than the annual variation in generation caused by 
changes in hydrologic conditions. This year's extreme drought in the 
Northwest is expected to adversely affect generation in that region by 
25 percent, and national hydroelectricity production by 4 percent.
---------------------------------------------------------------------------
    \5\ FERC 603 Report, p. 50.
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      b. implementation of the president's national energy policy
    The Administration's National Energy Policy report included 
recommendations for hydropower reform. The Report recommended that the 
President encourage FERC, and direct Federal resource agencies, to 
pursue administrative and legislative reforms to make the licensing 
process more clear and efficient, while preserving environmental goals. 
More specifically, the NEP report called for federal resource agencies 
to reach interagency agreement on conflicting mandatory license 
conditions before they submit their conditions to FERC for inclusion in 
a license, and for FERC to adopt appropriate deadlines for its own 
actions during the licensing process.\6\
---------------------------------------------------------------------------
    \6\ President's National Energy Policy Report, May 2001, p. 5-18.
---------------------------------------------------------------------------
    The Department intends to implement the National Policy Group's 
recommendations by taking the following steps to continue to streamline 
the Department's actions and increase the consistency of decision-
making and transparency of process for establishing hydropower 
licensing conditions:
    1. The Department will continue implementation of an accelerated 
decision and documentation schedule for establishment of mandatory 
conditions and prescriptions. The Departments of the Interior and 
Commerce have implemented the commitments made in the ITF including, 
particularly, implementation of deadlines for filing preliminary and 
modified conditions and prescriptions with FERC: within 60 days of 
FERC's REA Notice and within 60 days after the close of the Draft NEPA 
comment period, respectively. These deadlines expedite the Department's 
timing for developing conditions and dovetail with FERC's existing 
regulations and NEPA process. These commitments also include better and 
more consistent documentation of the basis for the conditions. These 
commitments are just beginning to be applied in individual proceedings. 
Interior has been conducting a review of guidance on these and other 
recently implemented measures to identify additional steps to 
streamline licensing decisions and to make those decisions and the 
decision process more transparent.
    2. The Department will continue implementation of public input 
processes. Departmental procedures contain provisions for participants 
in the licensing process and the general public to comment on 
departmental conditions, and require the Department to set forth the 
rationale for the preliminary conditions and prescriptions. They also 
provide for the review and signature of modified conditions and 
prescriptions at a level at least as high as the State director, 
regional director, or regional administrator. This approach encourages 
greater collaboration among agencies and licensees earlier in the 
process, thereby avoiding needless delays and costly litigation.
    3. The Department will increase consistency and transparency in 
fishway prescriptions. A joint Fishway Policy of the Departments of the 
Interior and Commerce was proposed to standardize general agency 
practices and procedures for developing fishway prescriptions. This 
proposed policy was intended to help facilitate consultation among the 
Departments, license applicants, and other interested parties in 
developing fishway prescriptions, and to ensure a consistent and 
effective fishway prescription process. The proposed policy outlines an 
interactive, collaborative process for arriving at fishway 
prescriptions. By providing clear guidance on how the fishway 
prescription process works, it was intended that the policy would 
improve predictability, ensure uniformity, and reduce uncertainty for 
applicants. The public comment period on the proposed Fishway Policy 
closed in February 2001. The agencies are in the process of reviewing 
and responding to the comments received. Particular attention in this 
review is being paid to the definitions of ``fish'' and ``fishway.'' 
The proposed definitions generated substantial comment and controversy.
    4. The Department will continue to work with other agencies and 
process participants to identify additional opportunities for 
streamlining and process improvements. The Department will identify 
additional opportunities for streamlining and improving license 
processes with other agencies as well as continue efforts to identify 
improvements through collaborative, multi-stakeholder forums such as 
the National Review Group convened by the Electric Power Research 
Institute (EPRI). Representatives from industry, environmental 
organizations, FERC, and the three resource agencies are currently 
participating in an EPRI-sponsored forum examining some of the more 
difficult process issues.
    5. The resource agencies will develop an interagency consistency 
mechanism. Pursuant to the NEP, Interior will work with other resource 
agencies to develop a streamlined, interagency, issue-resolution 
process to resolve any inconsistencies that might develop between 
agencies in making recommendations or in establishing conditions. I 
expect that we will get this completed yet this year.
    6. Interior will issue more specific guidance and a hydropower 
licensing handbook to its bureaus and field offices to standardize and 
expedite its processes for establishing conditions and making 
recommendations. Initial training of management and field staff in new 
processes and commitments from the ITF process was just completed this 
spring. These will be reinforced with regular training sessions, 
specific departmental guidance, and a hydropower licensing handbook to 
better standardize the process, document considerations and expedite 
decisions throughout the Department. These are expected to be completed 
and implemented before the end of the year.
    7. Interior will examine alternative review mechanisms and criteria 
for its exercise of conditioning authority. Two issues that have 
received substantial comment involve the extent of the factors to be 
taken into account in establishing mandatory conditions and 
opportunities to contest those conditions. In the first case, the 
question is how project economics and other factors should be taken 
into account in the decision process. All three resource agencies now 
require that the least-cost alternative condition or prescription that 
achieves the agencies' objectives be adopted. Our bureaus also report 
that they take project scale and economics into account when 
establishing their conditions. This latter element is less transparent, 
however, and is being reviewed. Recent administrative changes and the 
anticipated fishway policy also provide an iterative process for 
consideration of alternative conditions and prescriptions proposed by 
project applicants and others, and consideration of those 
recommendations at the regional director level. This approach is also 
being reviewed and alternatives will be considered. For instance, it 
has long been the practice of USDA/FS to provide iterative comment and 
appeal opportunities regarding its mandatory conditions through both 
the FERC process and its own NEPA appeals process. As we see it, there 
are many alternative approaches to be considered in addressing these 
issues that would be consistent with agency responsibilities and good 
environmental practice, and they will be examined. We have had 
preliminary discussions about them, but have substantial work ahead of 
us.
                 c. discussion of legislative proposals
    There are a number of bills before this Committee and a bill marked 
up by the House Committee on Energy and Commerce on Tuesday dealing 
with hydropower licensing. Also, I should note that the issues 
identified below may not be an exhaustive list of all of the concerns 
of the agencies with provisions of various bills. Rather than take them 
up sequentially and in detail, I would like to address them more 
topically. Our sense is that members of Congress may be converging in 
their approaches. We would like to work constructively with both Houses 
and members on both sides of the aisle to produce legislation that will 
improve the hydropower licensing process.
    1. Alternative Conditions: All of the bills share one thing in 
common--they have as a major element a means of petitioning the 
resource agencies to modify their proposed conditions. Indeed,this is 
the core element of the bills. Both Sec. 701 of S. 597, and Sec. 201 of 
the House bill accomplish this, with minor variations in wording, by 
providing opportunity for a petitioner to propose an alternative set of 
conditions. Generally, if the alternative is at least as effective in 
meeting the objectives as that proposed by a resource agency, and less 
costly, then it must be adopted. Implicitly in S. 597 and H.R. 2458 and 
explicitly in S. 71 and S. 388, the basis of the decision must be 
documented. The House bill also provides a requirement to establish by 
regulation a means of resolving disputes if the decision on the 
petitioners' proposal is contested.
    We do not believe this approach can substitute for the give and 
take between applicants, agency resource personnel and others in 
attempting to examine alternatives and to fine tune the establishment 
of conditions, including reassessing goals, while proposals are being 
formulated. Once conditions are proposed by the resource agencies, 
however, we find the approaches in these bills to provide a reasonable 
balance between agency actions and an applicant's ingenuity, and they 
allow sufficient flexibility to craft a well-considered and expeditious 
review process. We would like to work with the Committee on wording--
for instance, we believe proposal of the alternative condition should 
be limited to the applicant--but can generally endorse this approach. 
We also believe that there should be a time requirement for 
presentation of the alternative condition. Under the Department's and 
NOAA's current policies, draft conditions are due within 60 days of 
FERC's issuance of the REA notice and proposed final conditions are due 
within 60 days of the close of the comment period on a draft NEPA 
document. None of these bills specify a time period for filing 
alternative proposals, suggesting that alternatives can be proposed 
possibly after the NEPA process and long after the resource agencies 
have provided their conditions and prescriptions. All stakeholders 
should be consistent in early and full disclosure of alternative 
preliminary terms and conditions, both pre- and post-filing of 
licensing, and one party should not be given special approval or 
exemption to file alternatives late. Also, to help maintain an 
expedited process, we have attempted to nest the process for 
establishing conditions within the timetable established by the FERC 
regulatory process. Any proposed alternative conditions process should 
attempt to similarly minimize the amount of delay in FERC's process.
    Sec. 4 of S. 71 and the comparable section of S. 388 use a 
different approach, setting a requirement that conditions be 
established three months before an application for a license is 
submitted and establishing an expedited appeals process before an 
administrative law judge. If the administrative law judge doesn't 
render a decision within 6 months, the condition is converted into a 
section 10(j) recommendation. If the administrative law judge upholds 
the agency decision, it appears that it can still be overturned by 
FERC, though under more stringent criteria. This section also requires 
that all conditions be subjected to ``substantiated'' scientific review 
and establishes an extensive list of reviewable criteria that must be 
considered on the record in setting conditions.
    We think it would be extremely difficult, costly, and problematic 
to develop appropriate preliminary conditions, weigh and document the 
consideration of all of the factors set out in amended Sec. 32, subject 
the conditions to scientific peer review, and publish them three months 
before an application is filed. Currently, as documented earlier in 
this statement, it takes FERC approximately two years after the filing 
of a license application to conclude that the application is complete 
and that it is ready for environmental analysis. The filing of a final 
license applications formally commences the licensing proceeding, as 
well as FERC's preparation of environmental review of the application. 
Accordingly the final license applications contain the complete project 
proposal, from which the agencies measure the impacts of the proposed 
project on resources of concern. The Department's conditions are based 
upon the need to mitigate against such impacts. Among other things, 
many of the studies required to make condition and prescription 
determinations may not have been completed by the time of filing. We 
are also concerned that none of the factors to be weighed include 
protection of the resources for which the reservation was made or the 
need for fish passage.
    Also, the caseload and backlogs of the administrative law judges in 
Interior, at least, lead us to believe that it would be unlikely that 
review decisions could routinely be issued within 6 months. Indeed, the 
provision may create an incentive for the applicant to effect delay in 
the appeals process for the purpose of defeating the possibility of 
conditions. The effect is likely to be that all or most conditions are 
downgraded to the status of Sec. 10(j) recommendations.
    Additionally, the peer review requirement raises an additional 
concern in the case of Indian trust property held by the United States, 
and could conflict with the Secretary's role as a trustee. This is 
particularly problematic when the issue involves cultural resources or 
financial conditions.
    2. Coordinated Environmental Review Process: Amended Sec. 33 of S. 
71 calls for a single environmental review process. Subject to several 
reservations, we support such a single review process. Generally, the 
Department and NOAA rely on FERC's NEPA process, though somewhat 
reluctantly. We have not been willing to join that process as a 
cooperator because we would lose our right to intervene to contest a 
FERC license decision (among other things, this has particular 
relevance to decisions affecting Indian reservations). USDA/FS conducts 
its own NEPA review, but would be willing to use FERC's NEPA process if 
they could be treated as a cooperator in the development of the EIS 
without losing their right to intervene. In both cases, the agencies 
would want to assure that issues important to their decisions are 
covered in the single NEPA analysis.
    The executive branch agencies routinely conduct joint NEPA reviews 
for the purpose of assessing the effect of various alternatives before 
making decisions. FERC's interpretation of its ex parte communication 
requirements as an independent regulatory agency, however, has led FERC 
to insist that becoming a cooperator in their NEPA review comes at the 
cost of losing intervention rights. None of the resource agencies has 
been willing to pay this price. However, the resource agencies believe 
the intervention issue could and should be remedied so that a single, 
cooperative NEPA review could be conducted. We are willing to work with 
the Committee on language for that purpose. We would also like 
clarification in amended Sec. 33(b) that the broadly stated 
``environmental review'' references reviews under NEPA, and would not 
be construed to eliminate the right of the agencies to conduct 
environmental studies and assessments as they develop their Sec. 4(e) 
and 18 conditions, and 10(j) recommendations.
    3. Disposition of Hydroelectric Charges: Sec. 702 of S. 597 changes 
the disposition of charges collected from licensees for the 
government's cost of administering hydropower licensing programs and 
for the occupation of government lands. Collected revenues would go 
directly to the agencies to reimburse them for their expenses or to 
protect and improve certain environmental resources in the reservation 
areas covered under Sec. 4(e). The administration is reviewing this 
provision, and it may have scoring implications.
    4. Relicensing Study: Sec. 703 of S. 597 directs FERC, in 
consultation with the Departments of Commerce, Interior, and 
Agriculture, to study all licenses issued since 1994, analyzing: the 
length of time that FERC has taken to issue new licenses, the 
additional cost to the licensees attributable to new license 
conditions, the change in generating capacity attributable to 
conditions, the environmental benefits achieved by conditions, and 
litigation arising from conditions. The Department recently offered to 
conduct a somewhat similar study jointly with FERC (see attachment, 
page 9).* The length and complexity of the licensing process make it a 
challenge to analyze and to determine the causes of specific outcomes. 
For this reason, we suggested applying an analytic technique known as 
``event history analysis'' to the problem. We believe that this study 
would benefit from having all four agencies (FERC, Commerce, Interior, 
and Agriculture), as well as EPA, intimately involved in its execution. 
We find ``consultation'' as practiced by FERC as an independent agency 
to be much less inclusive than we expect of ourselves when we consult 
with other parties as executive branch agencies. Hence, we recommend 
amending section 703 to provide for the study to be done ``jointly'' 
rather than ``in consultation.''
---------------------------------------------------------------------------
    * The attachment has been retained in committee files.
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    5. FERC Data: Sec. 202 of the House bill would require FERC to 
revise its data collection procedures to provide much improved 
information about the licensing process. We suspect this section 
resulted from consideration of a recent report of the General 
Accounting Office indicating that systematic data for management 
decision-making on the licensing process was not available. We at 
Interior have been frustrated similarly by the lack of consistent time-
series and other analytic data that would help us better understand the 
causes of process delays and uncertain schedules, and would welcome 
this requirement. We would suggest, however, that the requirement be 
bolstered by requiring that the data be made available to the public 
and the resource agencies routinely and regularly. It would also be 
useful to seek public and interagency comment on the most useful data 
to maintain.
                         d. interior proposals
    Although we acknowledge the complexity of the process, the 
Department is optimistic about the prospects for improvement. We are 
encouraged by the administrative reforms now being implemented by FERC 
and the resource agencies. We expect the cumulative effect of these 
initiatives to significantly improve the timeliness of the licensing 
process, the quality and cost-effectiveness of the decisions made 
through that process, and the promptness with which mitigation is 
implemented. Although the recent Interagency Task Force did not address 
all of the issues of concern, we believe that remaining issues are 
amenable to resolution through administrative reform. However, we have 
identified areas which warrant consideration for legislative action.
    Settlements: One of the great reforms of the past decade for the 
relicensing process was FERC's establishment of an alternative 
licensing process designed to bring participants together well before 
the license filing deadline to develop project conditions in a 
cooperative manner. While resource intensive at the front-end, 
substantial time and cost savings often result once the application is 
filed, and appeals and litigation are substantially reduced. The 
Department has participated in several landmark settlements within both 
the traditional and alternative processes and is committed to resolving 
complex licensing matters through settlement. Several recent FERC 
decisions, however, have created a high level of uncertainty as to 
which parts of an agreement become enforceable terms of the issued 
license. Because FERC maintains that its enforcement jurisdiction 
extends only to the licensee, it will not enforce any settlement 
provision that binds parties other than the licensee, such as 
provisions governing dispute resolution and management committees. This 
has impacted the Department's ability to effectuate meaningful 
settlements. Industry and NGOs share the view that uncertainty as to 
which elements of a settlement will ultimately be included as 
enforceable license terms is a deterrent to successful negotiations. We 
believe that it would be helpful if Congress authorized and required 
FERC to enforce settlement provisions entered into voluntarily by the 
parties. Doing so will help ensure the enforceability of settlements, 
thereby providing certainty, reducing litigation and streamlining the 
FERC licensing process.
    Studies: One of the more contentious and difficult to resolve 
issues is the extent and nature of the studies required to be completed 
by license applicants. FERC, States, and the resource agencies rely on 
the information generated by these studies to make decisions regarding 
potential license conditions. Unfortunately, licensees often fail to 
complete required studies in a timely manner or, alternatively, their 
timely studies fail to contain necessary data. In either case, delays 
in the process result. Applicants, on the other hand, complain that the 
studies can be expensive and that FERC and the resource agencies ask 
for more information than is necessary. In addition, FERC and the 
resource agencies also occasionally disagree about what studies need to 
be completed. In an attempt to address these conflicts, the Department, 
through the ITF process, has agreed on criteria designed to minimize 
its study requirements and ensure that they are based only on 
information needed for the decisions at hand. Still, issues remain. The 
Department would welcome a dialogue with Committee staff on whether a 
fair and expeditious approach could be developed--legislatively or 
administratively--that would reduce the level of contention surrounding 
this issue, while assuring that adequate information is provided in a 
least-cost, but timely manner.
    Deadlines: To ensure that the Department exercises its conditioning 
authorities without delaying the licensing process, the Department has 
adopted and is implementing tight schedules for submitting it 
conditions that coincide with deadlines contained in FERC's 
regulations. Through those regulations, FERC imposes strict deadlines 
on all participants in the licensing process except itself. The result 
is that both licensees and resource agencies are forced to provide 
information to FERC in a timely manner, only to wait indefinitely for 
FERC to respond. FERC's lack of deadlines is particularly problematic 
for resource agencies because, in many instances, FERC's eventual 
response triggers another set of deadlines to which agencies must 
respond. In these instances, because resource agencies are unable to 
predict FERC's actions, they are at a disadvantage in attempting to 
anticipate the timing of actions they may need to take in the future. 
The Department is of the view that the establishment of both deadlines 
and clearer process schedules for FERC would help streamline the 
licensing processes by establishing expected completion dates for 
various steps in the process, as well as help the resource agencies 
allocate resources. This proposal is entirely consistent with the 
National Energy Policy which recommended that FERC should be encouraged 
to adopt appropriate deadlines for its own actions.
    Basin-wide Assessments: FERC has a general policy encouraging the 
use of basin-wide assessments for the purpose of relicensing multiple 
projects in the same river basin. This policy is not applied in most 
cases, however. Instead, FERC typically treats each individual project 
licensing in a serial fashion according to the order in which 
individual project licenses expire. The resource agencies believe that 
there is opportunity for both efficiency and resource protection gains 
in the licensing process from basin-wide permitting. Studies can be 
consolidated and conditions, if needed, may be amenable to a more 
distributed approach. The resource agencies view is that Congress 
should require a basin-wide approach unless FERC can demonstrate that 
it is clearly not in the public interest to employ such an approach as 
compared to processing each license in the river basin individually. 
This might reasonably be limited to basins where the project licenses 
expire within 7 years of one another, with allowance for extension of 
the earlier licenses to the termination date of the later licenses. Our 
review of the data indicates that this would cover all of the licensed 
facilities in most river basins.
    Indian Trust Responsibility: Finally, executive branch agencies 
separately address the manner in which their decisions affect Federal 
trust and treaty responsibilities to Indians. Normally, this is done in 
NEPA analyses and records of decision. It is our view that this 
practice should apply to FERC decisions, and that Congress should 
require FERC to include in its FPA process specific and separate 
consideration of project effects on trust property, and its trust 
responsibility.
    Mr. Chairman, this concludes my prepared remarks. Again, we are 
available to work with the Committee on legislation to improve the 
licensing process. I will be happy to answer any questions you or other 
Committee members may have.

    The Chairman. Mr. Robinson, why don't you go right ahead?

   STATEMENT OF J. MARK ROBINSON, DIRECTOR, OFFICE OF ENERGY 
         PROJECTS, FEDERAL ENERGY REGULATORY COMMISSION

    Mr. Robinson. Thank you, Mr. Chairman, Senators. My name is 
Mark Robinson, and I am Director of the Office of Energy 
Projects at the commission. I have provided written testimony, 
so I will be very brief this morning. I will touch on S. 597, 
S. 388 and S. 571.
    First of all, you have to understand that the licensing 
process at the Commission is a result of the laws that we work 
under the regulations and the policies that the Commission 
sets. The resulting licensing process is one of distributed 
decision making. There are fully five different entities that 
can set conditions that are not subject to review by the 
Commission that must be placed in those licenses.
    As a result of that, it puts the Commission staff in the 
role of trying to facilitate agreements, negotiate 
understandings that can be logically incorporated into a 
license and make sense, a license that can be issued and we can 
conclude that it is in the public interest. We do a good job of 
that. We have been doing a good job of that, but it is not 
easy. It takes time, and it costs money. No one would say that 
negotiating those types of agreements across the types of 
issues that we have to address in licensing is a quick or cheap 
process.
    As a result, in looking at the legislation that is being 
considered by yourselves, I look for two elements to see 
whether or not it would address the primary criticism of 
licensing process, basically that it takes too long and it 
costs too much. Those two elements that I am looking for go to 
are there time frames placed upon the agencies involved in the 
process for concluding their actions and giving their 
recommendations, their conditions, to the Commission.
    The second element is, are those conditions that everyone 
has the opportunity to provide to the Commission all held to 
the same standard? Are they driven by the same considerations? 
In other words, are they broadly considered? Are they public 
interest determinations across those conditions, or are they 
driven by just a single purpose?
    If the legislation goes to those points, I think that will 
go a long way to addressing the criticism that we receive of 
taking too long and costing too much. Turning directly to the 
three pieces of legislation that we have here, if I look at S. 
597, the Comprehensive and Balanced Energy Policy Act, it 
provides for a new process, another process.
    It looks at how we can get alternative conditions in place, 
something that goes on right now through the normal process, I 
should say, but this would formalize it and give us some 
additional process that we would have to go through.
    It does not set time constraints on any of the agencies. 
And it does not require that those conditions be viewed in the 
same way that we have to at the commission in the broad public 
interest aspect. So it would not, I think, address the 
criticism. It takes too long and costs too much.
    If I look at S. 71 and S. 388, it does in fact put 
constraints upon all the agencies involved to provide their 
information on a time frame. And also, it requires those 
agencies to take a broad look at those conditions in 
determining whether or not they are, in fact, appropriate, that 
it does meet that criteria that I spoke to earlier and would 
address it takes too long and costs too much.
    In closing, I would like to say that all three pieces of 
legislation go well beyond what I have discussed here. It is in 
my testimony. But I would like to repeat something that our 
Chairman said recently. We have as an objective to issue 
licenses that fully protect the environment. We try to maximize 
the production of power that we can get from those projects. 
And certainly in today's environment, that is understandable. 
And we try to do it at minimum cost.
    We will continue to do that regardless of what regulatory 
model that we act under, be it the distributed decision-making 
process that we have now or some other one. But it is extremely 
hard. And we are, I believe, doing our best to try to do it 
efficiently and quickly.
    Thank you very much.
    The Chairman. Thank you very much.
    [The prepared statements of Mr. Robinson and Mr. Hebert 
follow:]
  Prepared Statement of J. Mark Robinson, Director, Office of Energy 
             Projects, Federal Energy Regulatory Commission
    Mr. Chairman and Members of the Committee:
    My name is Mark Robinson, and I am the Director of the Office of 
Energy Projects at the Federal Energy Regulatory Commission. I 
appreciate the opportunity to appear before you to discuss proposed 
legislation relating to the Commission's hydropower licensing program. 
As a member of the Commission's staff, the views I express in this 
testimony are my own, and not those of the Commission or of any 
individual Commissioner.
    My testimony today will provide a brief overview of the hydropower 
licensing program. I will then focus on three proposed pieces of 
legislation: S. 597, the Comprehensive and Balanced Energy Policy Act 
of 2001; S. 388, the National Energy Security Act of 2001; and S. 71, 
the Hydroelectric Licensing Process Improvement Act of 2001. Because S. 
71 is incorporated in its entirety in S. 388, I will address the 
subject matter of S. 71 during my discussion of S. 388.
                 1. the commission's licensing program
    The Commission currently regulates over 1,600 hydropower projects 
at over 2,000 dams pursuant to Part I of the Federal Power Act (FPA). 
Non-federal hydropower projects are required to obtain Commission 
authorization if they are on lands or waters subject to Congress' 
authority. Those projects represent more than half of the Nation's 
approximately 100 gigawatts of hydroelectric capacity and over 5 
percent of all electric power generated in the United States. 
Hydropower is an essential part of the Nation's energy mix and offers 
the benefits of an emission-free, renewable energy source.
    The Commission's hydropower work generally falls into three 
categories of activities. First, the Commission licenses and relicenses 
projects. Relicensing involves projects that originally were licensed 
30 to 50 years ago. The Commission's second role is to manage 
hydropower projects during their license term. This post-licensing 
workload has grown in significance as new licenses are issued and as 
environmental standards become more demanding. Finally, the Commission 
oversees the safety of licensed hydropower dams. This program is widely 
recognized for its leadership in dam safety.
    The Commission is in the second year of a 10-year period (CY2000 to 
CY2010) during which 218 applications for hydropower relicenses are due 
to be filed. The Commission has already received 84 of these relicense 
applications. This group of projects has a combined capacity of 
approximately 22,000 megawatts (MW), or 20 percent of the Nation's 
installed hydroelectric capacity. Approximately forty percent of these 
218 projects will have filed their relicense applications by the 
beginning of 2002.
    Over the last three decades, the enactment of numerous 
environmental, land use, and other laws, and new interpretations of 
certain provisions of the FPA, have significantly affected the 
Commission's ability to control the timing of licensing and the 
conditions of a license. Under the standards of the FPA, projects can 
be authorized if, in the Commission's judgment, they are ``best adapted 
to a comprehensive plan'' for improving or developing a waterway for 
beneficial public purposes, including power generation, irrigation, 
flood control, navigation, fish and wildlife, municipal water supply, 
and recreation. The Electric Consumers Protection Act of 1986 (ECPA) 
amended the FPA to require the Commission to give ``equal 
consideration'' to developmental and non-developmental values.
    While the Commission's responsibility under the FPA is to strike an 
appropriate balance among the many competing developmental and 
environmental interests, various statutory requirements give other 
agencies a powerful role in the licensing process. Among others, those 
requirements include:

   Section 4(e) of the FPA, which authorizes federal resource 
        agencies such as the Departments of Agriculture and the 
        Interior to impose mandatory conditions on projects located on 
        Federal reservations they supervise.
   Section 18 of the FPA, which authorizes the Departments of 
        Commerce and the Interior to impose mandatory fishway 
        prescriptions.
   Section 10(j) of the FPA, which in essence establishes a 
        presumption for inclusion of Federal and State fish and 
        wildlife agencies' recommendations to protect fish and 
        wildlife.
   Section 401 of the Clean Water Act, which authorizes States 
        to impose mandatory conditions as part of the State water 
        quality certification process.
   The Coastal Zone Management Act, which requires that 
        projects affecting coastal resources be consistent with State 
        management programs.
   The Endangered Species Act, which directs the Departments of 
        the Interior and Commerce to propose measures to protect 
        threatened and endangered species.
   The National Historic Preservation Act, which requires 
        Commission consultation with Federal and State authorities to 
        protect historic sites.

    There have been three important court decisions concerning the 
roles of the Commission and the resource agencies under these statutes.

   In PUD No. 1 of Jefferson County v. Washington Department of 
        Ecology, 511 U.S. 700 (1994) (Jefferson County), the Supreme 
        Court held that a State acting under the CWA could regulate not 
        only water quality (such as the physical and chemical 
        composition of the water), but water quantity (that is, the 
        amount of water released by a project), as well as State-
        designated water uses (fishing, boating, etc.). It is important 
        to note that the Court specifically acknowledged that its 
        decision did not address the interaction of the CWA and the 
        FPA, since no license had been issued for the project in 
        question. Its decision therefore did not discuss which 
        regulatory scheme would prevail in the event of a direct and 
        critical conflict.
   In American Rivers [I] v. FERC, 129 F.3d 99 (2nd Cir. 1997), 
        the Court held that the Commission lacked authority to 
        determine whether conditions submitted by State agencies 
        pursuant to Section 401 of the Clean Water Act were beyond the 
        scope of that section. The court held that challenges to such 
        conditions were to be resolved instead by the courts.
   Finally, in American Rivers [II] v. FERC, 187 F.3d 1007 (9th 
        Cir. 1999), the Court ruled that the Commission lacked 
        authority in individual cases to determine whether 
        prescriptions submitted under color of Section 18 of the FPA 
        were in fact fishways. As in the Second Circuit case, the Court 
        held that challenges to a fishway prescription were to be 
        resolved by the courts, not the Commission. (On December 22, 
        2000, the Departments of the Interior and Commerce issued a 
        joint Notice of Proposed Interagency Policy on the Prescription 
        of Fishways. The Commission staff filed comments noting that 
        the unilaterally-developed policy would define the term 
        ``fishway'' in an extremely broad manner that in staff's view 
        is inconsistent with the definition of that term enacted by 
        Congress in the Energy Policy Act of 1992).

    As a result of these judicial rulings, if the Commission were to 
conclude that one or more mandatory conditions would render a project 
inconsistent with the public interest, its only recourse would be to 
deny the license application. Not only is this a blunt instrument, but 
in most relicense proceedings denial is not a viable alternative.
                 2. the commission's licensing process
    The Commission currently uses two different processes in licensing: 
the ``traditional'' process and the ``alternative'' process. Under the 
alternative process, pre-filing consultation and environmental review 
can be integrated and proceed concurrently, in a collaborative manner, 
thereby dramatically shortening the processing time for an application.
    Earlier this year, Commission staff submitted a report of the 
hydropower program to Congress, as required by Section 603 of the 
Energy Act of 2000 (the Section 603 Report). In the report, the staff 
found that using the traditional process takes approximately 23 months 
longer than the alternative licensing process.
    Further, for the traditional process, the average cost of 
application preparation is $109/kW, and the cost for protection, 
mitigation, and enhancement measures is $264/kW. In contrast, for the 
alternative licensing process, the average costs for application 
preparation and protection, mitigation and enhancement measures are 
$39/kW and $58/kW, respectively--substantially lower than for the 
traditional process.
    The Commission has worked to improve the licensing process by 
making its regulations more clear and specific, enhancing opportunities 
for stakeholder participation, and providing flexibility to license 
applicants and others to design collaborative efforts that meet the 
needs of all participants. In addition, Commission staff routinely 
holds ``outreach'' meetings throughout the country to inform all 
stakeholders about the licensing process, and has taken an active role 
in facilitating settlements and introducing alternative dispute 
resolution procedures. The staff has also participated in Interagency 
training on hydropower licensing, and in the which shares ``lessons 
learned'' in the hydropower licensing process.
                      3. the proposed legislation
A. S. 597
    S. 597 contains three provisions regarding the relicensing of 
hydroelectric projects, which I will discuss in turn.
    i. Section 701 would amend FPA Section 4(e) to provide that, where 
a licensee proposes an alternative to a mandatory condition proposed by 
the Secretary with supervision over a reservation on which a hydropower 
project is located, the Secretary shall accept the alternative 
condition, if the Secretary determines that the alternative would 
provide equal or greater protection than the original condition, is 
based on sound science, and will either cost less than the original 
condition or will result in a smaller loss of generating capacity than 
would the original condition.
    I support the idea of greater interaction between the resource 
agencies and licensees in the development of environmental measures, 
which Section 701 could encourage. However, given that this section 
leaves to the resource agencies the discretion as to whether to accept 
an alternative condition proposed by a licensee, I am uncertain that 
this measure would have much impact. The resource agencies already 
possess the ability to change their mandatory conditions if the 
applicant convinces them that an alternative is preferable.
    In addition, this proposal appears too limited to the extent that 
it only requires consideration of measures from applicants that provide 
``equal or greater protection'' than the condition deemed necessary by 
the resource agencies. This would mean that the agencies would not have 
to consider, for example, an alternative that cut costs by 90 percent 
or that sharply increased capacity, but had 99 percent of the 
environmental protection. Also, the proposal does not provide for 
consideration of a measure's effect on other project purposes such as 
flood control, irrigation, and recreation.
    Finally, while as a general matter I support proposals to increase 
communications among interested parties to a licensing proceeding, I am 
concerned that, individually and especially in the aggregate, such 
processes may add burdensome, time-consuming steps to the licensing 
process, increasing its costliness and further delaying Commission 
action.
    ii. Section 702 would amend the FPA to provide that the Commission 
pass on directly to federal resource agencies that portion of the 
annual charges collected by the Commission that is attributable to the 
costs incurred by those agencies in administering Part I of the FPA.
    Commission staff included in the Section 603 report a 
recommendation similar to Section 702. Chairman Hebert has supported 
that recommendation, and I do so as well. Ensuring that Federal 
agencies recover appropriated funds spent for the licensing process 
would support the federal agencies' participation in that process.
    However, I am concerned that, as drafted, the bill would allow the 
Federal resource agencies to use annual charge funds not only to 
administer Part I of the FPA, but also for environmental enhancements, 
including measures that have no nexus to the project. This greatly 
expands the current scope of the annual charges provision, which I 
believe is intended to cover administrative costs, not to pay for 
environmental measures.
    iii. Section 703 provides that, within six months of the date of 
enactment of the legislation, the Commission shall submit to Congress a 
study, prepared in consultation with the Secretaries of Commerce, the 
Interior, and Agriculture, analyzing the length of time for issuing new 
licenses, the additional cost to licensees attributable to new license 
conditions, the change in generating capacity attributable to new 
license conditions; the environmental benefits achieved by new license 
conditions; and litigation arising from relicensing proceedings.
    Commission staff is always prepared to submit to Congress whatever 
information Congress deems necessary. I note, however, that the first 
three items are discussed in the recent Section 603 report. With regard 
to the environmental benefits achieved by new license conditions, 
Commission staff has begun reviewing methods for determining the 
effectiveness of license conditions. There does not appear to be a 
general agreement as to how to quantify environmental benefits (and, 
indeed, the value of particular benefits may vary from project to 
project), it would be difficult, if not impossible, to develop useful 
figures regarding the benefits of individual license conditions. 
Litigation arising from relicensing proceedings (which occurs in only a 
minority of cases) tends to be based on the facts of each case, and may 
not lead to general conclusions. Thus, I am uncertain that the proposed 
additional study will yield useful results.
B. S. 388 (including S. 71)
    i. Section 724 of S. 388 would amend the FPA with the respect to 
mandatory license conditions submitted by the Secretaries of the 
Interior and Commerce under Sections 4(e) and 18 of that Act, and by 
Federal agencies supervising lands on which project works are located. 
The bill would require them to take into consideration various factors, 
including the impacts of proposed conditions on economic and power 
values, electric generation capacity and system reliability, air 
quality, drinking water, flood control, irrigation, navigation, or 
recreation water supply, compatibility with other license conditions, 
and means to ensure that conditions address only direct project 
environmental impacts at the lowest project cost. The Departments would 
be required to provide written documentation for their conditions, 
submit them to scientific review, and provide administrative review of 
proposed conditions.
    Section 724 would also provide for the Commission to establish a 
deadline for the submittal of mandatory conditions in each case, to be 
no later than one year after the Commission issues notice that a 
license application is ready for environmental review. If an agency 
fails to submit a final condition by the deadline, the agency loses the 
authority to recommend or establish license conditions. The Commission 
must conduct an economic analysis of conditions proposed by consulting 
agencies, and, upon request of license applicants, must make a written 
determination whether such conditions are in the public interest, were 
subjected to scientific review, relate to direct project impacts, are 
reasonable and supported by substantial evidence, and are consistent 
with the FPA and other license conditions.
    I support the purpose of the bill, which is to promote sensible and 
timely decisions by all agencies involved in licensing matters. 
Reasoned decision-making with respect to mandatory conditions must be 
the responsibility of the resource agencies, given the Commission's 
very limited discretion with respect to such conditions. As Congress 
considers any legislation, however, it should be careful to ensure that 
any procedures that could add time or expense to the process are 
justified by improved outcomes.
    Several portions of Section 724 of S. 388 are consistent with the 
recommendations in the Section 603 Report. For instance, having the 
resource agencies consider economic as well as environmental impacts 
would lead to better-informed determinations on what mandatory 
conditions are in the public interest. The Commission is required to 
take into account a range of public interest factors for matters within 
its discretion. The requirement for resource agencies to document their 
decision making is essential for due process. See Bangor Hydroelectric 
Co. v. FERC, 78 F.3d 659 (D.C. Cir. 1996). Establishing reasonable 
deadlines for submission of conditions (as the Commission's regulations 
now provide) could help make the licensing process more timely. These 
sensible requirements should make licensing more timely and efficient, 
while supporting well-reasoned licensing decisions.
    As Commission staff recommended in the Section 603 report, I 
believe that the best way to rationalize the hydropower licensing 
process would be to retain the authority of Federal resource agencies 
to impose mandatory license conditions, but to make that authority 
subject to a statutory reservation of Commission authority to reject or 
modify the conditions based on inconsistency with the Commission's 
overall public interest determination.
    In addition, Commission staff recommended that Congress provide 
that the Commission license be the only federal authorization required 
to operate the project, e.g., special use authorizations for projects 
on Forest Service lands and similar authorizations would be eliminated. 
A single administrative process would be established by the Commission 
to address all Federal agency issues in a licensing case, with 
schedules and deadlines established by the Commission, and with one 
administrative record compiled by the Commission in consultation with 
the other Federal agencies. The Commission would prepare a single NEPA 
document. The Federal agencies would not be required to adopt the 
Commission's conclusions, but would have to provide for the record 
their own analysis and conclusions based on the evidentiary record. The 
agencies' analyses and conclusions would be included in the record of 
the Commission's order acting on the application, and judicial review 
would be obtained by seeking rehearing of the Commission's order.
    These measures, if enacted, could shorten the license process, give 
greater certainty to licensees and other participants, and ensure that 
the FPA's public interest standards are used in developing all parts of 
a license.
    Staff recommended that, should Congress not allow the Commission to 
determine whether mandatory conditions imposed by other Federal 
agencies are in the public interest, Congress could nonetheless improve 
the mandatory conditioning process by requiring resource agencies to 
consider the full panoply of public interest values, support their 
conditions on the record, and provide a clear administrative appeal 
process. The Section 603 Report supports this by noting that the costs 
for protection, mitigation, and enhancement measures for licenses 
containing Section 4(e) and 18 mandatory conditions ($590/kW) were 2.7 
times the costs for licenses that did not contain those conditions 
($218/kW). The Commission staff does not routinely highlight 
disagreements with mandatory conditions. However, the report concluded 
that, in the 12 percent of cases where staff did so, many of the 
resource agencies' conditions were substantially more expensive than 
conditions that staff thought adequate to protect environmental 
resources. Requiring agencies to better document and support mandatory 
conditions could help ameliorate this problem.
    ii. Section 725 of S. 388 provides that the Commission shall be the 
lead agency for environmental review under the NEPA, and that other 
Federal agencies will not perform additional environmental review.
    As noted above, Commission staff has recommended that the 
Commission prepare the sole NEPA document in licensing proceedings. At 
the same time, I do not want to eliminate the ability of individual 
agencies to perform the environmental review that they need to support 
their portion of the licensing process in a timely fashion.
    iii. Section 726 of S. 388 would require the Commission to prepare 
and submit to Congress a study of the feasibility of establishing a 
separate licensing procedure for small hydroelectric projects. As a 
general matter, Commission staff does not support differing regulation 
based on the size of hydroelectric projects. A project with a small 
capacity can have a significant impact both at the project site and 
beyond its immediate environs. Pursuant to the mandates of the Federal 
Power Act, the Commission evaluates that impact, and, in rendering a 
licensing decision, gives equal consideration to development interests 
and environmental resources in determining whether, and with what 
requirements, to authorize hydropower development. The Commission's 
current licensing ``exemption'' program for projects 5-MW or less, 
pursuant to Sections 405 and 408 of the Public Utility Regulatory 
Policies Act of 1978, has demonstrated the difficulty of establishing 
diminished requirements for this group of projects. Of course, we are 
prepared to study this matter and report back to Congress.
                             4. conclusion
    Commission staff is well aware of the importance of hydropower, and 
of the significant role the Commission plays in licensing and 
overseeing crucial hydropower projects. We also recognize that the 
hydropower licensing process can be long and costly. The Commission and 
its staff will do everything we can to improve that process. At the 
same time, we are prepared to work with Congress and other agencies to 
craft legislative solutions. Together, we can develop the efficient, 
comprehensive licensing process that our Nation's energy needs demand.
    Thank you. I will be pleased to answer any questions you may have.
                                 ______
                                 
  Prepared Statement of Curt L. Hebert, Jr., Chairman, Federal Energy 
                         Regulatory Commission
    Thank you for the opportunity to provide a statement for the record 
on recent bills designed to remove barriers to distributed generation, 
renewable energy, and other advanced technologies in electricity 
generation and transmission. I appreciate this opportunity to share my 
views on this important topic.
    Specifically, my testimony provides comments on: sections 110 and 
112 of S. 388 and section 301 of S. 597 dealing with federal agency 
reviews and reports; section 603 of S. 597 and the entirety of S. 933 
concerning interconnection standards; section 604 of S. 597 regarding 
net metering for renewable energy and fuel cells; and section 605 of S. 
597 concerning transmission service to intermittent generators.
                 i. federal agency reviews and reports
A. Annual Reports on Availability and Capacity of Generation
    I support efforts to monitor more effectively the adequacy of our 
nation's electricity generation resources. Section 110(a) of S. 388 
would require the Secretary of Energy, in consultation with the 
Commission and other entities, to provide an annual report to the 
President and Congress, on the ``availability and capacity of domestic 
sources of energy generation to maintain the electricity grid in the 
United States.'' The section goes on to state that the report should 
``specifically'' evaluate ``grid stability.''
    Evaluation of the availability and capacity of generation entails 
an analysis of whether local utilities have access to enough 
electricity generating facilities; whether there is adequate high 
voltage transmission facilities to move electric energy from those 
generating facilities economically over long distances; and whether 
there are sufficient lower voltage distribution lines to deliver the 
power to customers in a local area. Evaluation of grid stability is 
different and entails an analysis of whether all these facilities are 
operating within safe limits and in a coordinated manner. Section 110 
appears to focus on monitoring availability and capacity of generation; 
therefore, the references to ``grid stability'' may be inadvertent.
B. Regulatory Reviews
    Section 112 of S. 388 and section 301 of S. 597 would both require 
each federal agency to review its regulations every five years for 
potential barriers to market entry of emerging energy technologies. 
While federal regulation should not thwart the development and use of 
advanced energy technologies, the same objective may be achievable in a 
less burdensome way. First, the regulations of many agencies have 
little or no effect on entry of emerging energy technologies, and these 
agencies could be exempted from this review requirement with no adverse 
effect on market entry. Second, if the first review is conducted 
properly and does, in fact, result in the removal of any unnecessary 
barriers to entry, there may be no need to incur the cost of additional 
reviews every five years.
    As for my agency, I can assure the Committee that the Commission is 
continually reassessing its regulations and policies to encourage the 
development of emerging energy technologies. More generally, the 
Commission is continually reassessing its regulations and policies to 
promote market entry and the removal of regulatory barriers to enhanced 
competition in the wholesale supply and interstate delivery of energy 
products and services. For example, on March 14, 2001 and May 16, 2001, 
the Commission issued orders removing regulatory obstacles and 
providing incentives to increased energy supply and reduced demand in 
California and the rest of the West.
                     ii. interconnection standards
A. Interconnection With Transmission Facilities
    Section 4(f) of S. 933 would amend the procedures for obtaining 
interconnection with transmission facilities contained in section 210 
of the Federal Power Act (FPA). S. 933 would add a new streamlined 
process for a ``generating facility,'' defined as any ``facility that 
generates electric energy,'' to obtain interconnection with a 
``transmitting utility,'' defined as any entity that ``owns, controls, 
or operates an electric power transmission facility that is used for 
the sale of electric energy.'' S. 933 calls for the Commission to 
promulgate a rule establishing technical standards for interconnection. 
After promulgation of that rule, a generating facility would be 
entitled to interconnection so long as it complied with the rule and 
paid the just and reasonable cost of the interconnection, which could 
in some circumstances be determined by a nonfederal regulatory 
authority.
    Reviewing applications for the interconnection of generators to 
transmission facilities has become a growing workload for the 
Commission, and I am interested in considering ways of making the 
review process more efficient. The development and implementation of 
broad regional transmission organizations will, in turn, promote the 
development of standardized and nondiscriminatory interconnection 
procedures. Moreover, the Commission recently announced that it intends 
to evaluate the importance of developing standardized interconnection 
procedures.
    S. 933 requires the Commission to promulgate a rule establishing 
``technical'' standards for interconnection under the new streamlined 
process but does not specify what is meant by ``technical.'' While one 
interpretation is that the term refers to safety, reliability, and 
power quality matters (as in S. 597), I do not read the S. 933 
requirement to limit the scope of the standards that may be included in 
the rule (other standards might address priorities for obtaining 
interconnections, requirements for appropriate studies, etc.). If the 
bill is intended to define the term narrowly, however, this should be 
clarified. Further, I do not interpret this provision of the bill as 
affecting any Commission authorities to address interconnection matters 
under other FPA provisions, and recommend that the bill be so 
clarified.
    In addition to creating the new process for obtaining 
interconnection with a transmission facility discussed above, S. 933 
would also make a number of changes to the existing process for 
obtaining such interconnection. Most significantly, S. 933 would 
clarify the Commission's authority to decide interconnection matters 
based on a paper hearing. I support this proposal.
    S. 933 would also amend the criteria for evaluating an application. 
Under the existing language of section 210 of the FPA, the Commission 
may grant an application if it is in the public interest and it would 
either encourage overall conservation, optimize efficiency, or improve 
reliability. S. 933 would allow the Commission to grant an application 
if it were in the public interest and promoted competition. I support 
this change. The use of more general language allows the Commission to 
continue to consider conservation, efficiency and reliability, while 
focusing the Commission on competitive goals that will truly benefit 
consumers.
    However, I am concerned that S. 933 appears to remove some of the 
Commission's current authority under sections 210 and 212 of the FPA to 
establish rates for transmission interconnections for nonpublic 
utilities. S. 933 would allow nonfederal regulatory authorities to 
determine costs (is, establish rates) for interconnections to nonpublic 
utility transmission facilities. This removal of the Commission's 
authority could result in disparate treatment of new generating 
facilities, depending upon where on the transmission system they seek 
to interconnect and the nonfederal authority that has jurisdiction over 
the particular transmission facilities involved. In short, rather than 
ensure fair, nondiscriminatory pricing rules for all interconnections 
on the interstate transmission grid, this legislative change may result 
in some facilities being treated in an unduly preferential or 
discriminatory manner. (Also, the title used in S. 933, ``Effect of 
FERC Lite,'' is ambiguous.)
    Finally, S. 933 directs that the owner of the generating facility 
``pays the costs of the interconnection.'' This could be interpreted as 
requiring the Commission to assign all costs of an interconnection 
directly to the owner of the generating facility. However, another 
feasible approach would be to allocate these costs among all customers 
benefitting from the addition of generation facilities, and this 
approach may help expedite generation additions. I believe the 
Commission should retain the flexibility to adapt its rate policy on 
this issue as appropriate.
B. Interconnection With Local Distribution Facilities
    Section 603 of S. 597 and section 4(b) of S. 933 would both amend 
section 210 of the FPA to provide procedures for interconnection with 
local distribution facilities. S. 597 addresses only interconnection of 
``distributed generation facilities,'' which are defined as electric 
power generation facilities ``designed to serve retail customers at or 
near the point of consumption.'' S. 933 addresses interconnection of 
all ``generating facilities,'' which, as mentioned above, are defined 
as any ``facility that generates electric energy.'' As in section 4(f) 
of S. 933 regarding interconnection to transmission facilities, these 
sections concerning interconnection to local distribution facilities 
call for the Commission to promulgate a rule establishing standards for 
such interconnection. After promulgation of that rule, a generating 
facility, or under S. 597, a distributed generation facility, would be 
entitled to interconnection so long as it complied with the rule and 
paid the just and reasonable cost of the interconnection.
    As an initial matter, I must point out that S. 933 defines the term 
``local distribution utility'' as an entity that owns, controls, or 
operates an electric power ``distribution facility'' instead of ``local 
distribution facility.'' This distinction is important given the 
Commission's jurisdictional authorization under section 201 of the FPA, 
which distinguishes between ``transmission'' and ``local distribution'' 
facilities. I recommend that in order to avoid confusion the definition 
of ``local distribution utility'' use the term ``local distribution 
facility'' and that conforming changes be made elsewhere in the 
legislation.
    These provisions also appear to depart from the previous allocation 
of jurisdiction between the federal and state governments. Since the 
enactment of the FPA, regulation of transmission in interstate commerce 
by public utilities has been the exclusive responsibility of the 
Commission, while regulation of local distribution has generally been 
left to state and local authorities. Similarly, wholesale sales of 
electric energy in interstate commerce by public utilities have been 
subject to the sole jurisdiction of the Commission, whereas state and 
local authorities have had exclusive jurisdiction over retail sales. 
The issue of the appropriate federal role in regulating interconnection 
with local distribution arises in both bills, but is particularly 
significant in the case of S. 597, which applies only to generators who 
intend to serve retail, rather than wholesale, customers.
    Moreover, S. 597 specifically calls for the Commission's local 
distribution interconnection rule to establish requirements on 
``safety, reliability, and power quality.'' However, the Commission has 
no current expertise in these matters. Congress should consider whether 
the responsibility could be better met by another agency, such as the 
Department of Energy.
    Finally, S. 597 fails to identify which regulatory authority would 
determine whether costs were just and reasonable. If legislation on 
local distribution interconnection were adopted, it should include 
clarification, like that in S. 933, that the justness and 
reasonableness of costs would be determined by an appropriate 
regulatory authority.
         iii. net metering for renewable energy and fuel cells
    Section 604 of S. 597 would amend title VI of the Public Utility 
Regulatory Policies Act of 1978 to require retail electric suppliers to 
provide net metering service to residential and commercial customers 
that have small renewable-energy generators on site. Section 604 calls 
upon the Commission, after consultation with state regulatory 
authorities and nonregulated local distribution systems, to develop 
control and testing requirements for such metering systems. As 
discussed above, state and local authorities, rather than the 
Commission, have traditionally regulated local distribution, including 
retail metering. The Commission has no current experience or expertise 
on the mechanics of net metering. Congress should consider whether the 
responsibility could be better met by another agency, such as the 
Department of Energy.
    In addition to requiring the Commission to develop standards for 
net metering, S. 597 would also require that net metering systems 
comply with ``all applicable safety, performance, reliability, and 
interconnection standards established by the National Electrical Code, 
the Institute of Electrical and Electronics Engineers, and Underwriters 
Laboratories.'' These different sets of standards may or may not be 
fully compatible.
          iv. transmission service to intermittent generators
    Section 605 of S. 597 would amend the FPA to require the Commission 
to ensure that transmitting utilities do not penalize wind- or solar-
powered generators ``for characteristics that are (1) inherent to 
intermittent energy resources; and (2) are beyond the control of such 
generators.'' Section 605 goes on to specify that prevention of such 
penalization would necessitate the Commission, at a minimum, to ensure 
that these intermittent generators: (1) are not penalized for 
scheduling deviations; (2) are assessed embedded costs only on the 
basis of kilowatt-hours generated, rather than capacity; and (3) are 
offered ten-year contracts for nonfirm transmission service.
    The Commission would be allowed to exempt a transmitting utility 
from the ban on penalizing scheduling deviations if that utility could 
demonstrate that scheduling deviations by intermittent generator 
customers were likely to have a substantial adverse impact on 
reliability. However, there would be a rebuttable presumption of no 
adverse impact where intermittent generators collectively constituted 
20 percent or less of the total generation interconnected with the 
transmitting utility's system.
    I agree with the concept that wind- and solar-powered generators 
should be able to compete on a level playing field with other types of 
generators. However, the issue of how best to address these difficult 
issues in today's new electricity markets is still evolving. As we move 
forward in developing any market rules that accommodate all forms of 
generation, including intermittent energy sources, we need flexibility 
to ensure that those rules work in a fair and nondiscriminatory 
fashion. In my opinion, legislation that would prescribe ratemaking in 
the degree of detail provided in section 605 may not be appropriate.
                            v. other issues
    S. 597 and S. 933 call for the Commission to promulgate a number of 
rules. Section 603(f) of S. 597 and sections 4(b) and 4(c) of S. 933 
would require that when promulgating these rules, the Commission would 
establish an advisory committee. The Commission is already subject to 
the notice and comment requirements of the Administrative Procedures 
Act when it promulgates rules. These requirements should provide 
adequate opportunity for involvement of interested persons and 
qualified experts, and the additional time and expense of conducting a 
parallel process under the Federal Advisory Committee Act may not be 
warranted.
                             vi. conclusion
    I support the Senate Energy and Natural Resources Committee's 
efforts to address potential barriers to the entry of alternative 
technologies into the electricity markets. As discussed above, certain 
revisions may be appropriate to the specific language of S. 388, S. 
597, and S. 933. However, the Commission is committed to working with 
you to address those concerns and to offer any other assistance that 
you may need.

    The Chairman. Let me just introduce the other three 
witnesses we have on this subject. Ms. Elizabeth Birnbaum is 
the director of government affairs with American Rivers. Thank 
you for being here. Mr. Gerry Gray is the vice president with 
the Forest Policy Center with American Forests here in 
Washington. Thank you for being here. And Ms. Julie Keil is the 
director of hydro-licensing and Water Rights with Portland 
General Electric Company. Thank you for being here.
    Why don't you each go ahead and summarize your testimony, 
if you would, please.
    Ms. Birnbaum.

   STATEMENT OF S. ELIZABETH BIRNBAUM, DIRECTOR, GOVERNMENT 
                    AFFAIRS, AMERICAN RIVERS

    Ms. Birnbaum. Good afternoon, Mr. Chairman and members of 
the committee. My name is Liz Birnbaum. I am the director of 
government affairs in American Rivers, a national river 
conservation organization with more than 30,000 members 
nationwide.
    We also chair the Hydropower Reform Coalition, a consortium 
of more than 80 conservation and recreation organizations from 
around the country with a combined membership of more than 
800,000. We appreciate the opportunity to testify here today.
    Our organizations strongly oppose any efforts to diminish 
environmental protections in hydropower licensing, either 
directly or through misguided process reforms. While we have 
participated in and encouraged administrative efforts to make 
the licensing process more efficient, we strongly disagree with 
the proposition that the faults in the process lie with State 
and Federal natural resource agencies.
    The two remaining in efficiencies are FERC's unwillingness 
to develop a single cooperative environmental review process 
involving all State and Federal agencies and the licensees' 
incentives to delay relicensing and withhold necessary 
information regarding environmental impacts of their projects. 
We appreciate the chairman's efforts to find ways to streamline 
the licensing process without causing additional environmental 
harm, but we would like to see further improvements to address 
these remaining problems.
    I would like to talk about three basic themes today. One, 
protect the public trust resources threatened by hydropower 
operations; two, improve the process without causing harm; and 
three, oppose rolling back environmental protections in the 
current licensing structure.
    First, I think that all the participants in this process 
will acknowledge that hydropower relicensing is a natural 
resource issue, a rivers issue, not simply an energy issue. The 
improvements made through relicensing at hydropower dams will 
have huge implications for hundreds of species, thousands of 
river miles, and millions of dollars in recreational 
opportunities for decades to come.
    In contrast, these decisions have a relatively small impact 
on energy generation, electric rates or industry viability. By 
requiring dam owners to build passage for fish, protect 
critical riparian habitat, adjust river flows to conform to a 
more normal pattern, and provide recreational access and 
opportunity, we can protect and restore valuable fisheries, 
native species diversity, recreational amenities, and natural 
ecosystem functions. At the same time, we can enhance economic 
opportunities, such as recreation, tourism, and ecological 
services.
    Because original licenses were issued before the enactment 
of modern environmental statutes and prior to our understanding 
of the impacts of dams on river ecosystems, virtually none of 
these dams meets modern environmental standards before 
relicensing. If awarded a license, a utility can monopolize a 
river for half a century with little oversight. We must take 
this once in a lifetime chance to set conditions that require 
hydro operators to modernize the way they operate their dams on 
our rivers.
    We are encouraged by the chairman's bill. And subsequent 
negotiations by his staff have begun to take a more rational 
approach to hydropower legislation. We will be happy to 
continue working with staff to meet the goals and reducing the 
time and cost of obtaining a license while improving 
environmental quality.
    The chairman's provision to allow alternative licensing 
conditions is a new benefit for the industry that we find 
reasonable, so long as it does not delay the licensing process 
and is available to all parties to the proceeding. We support 
the chairman's proposals to directly reimburse Federal resource 
agencies for licensing costs, to improve the collection of 
electric charges, to require development of cooperative process 
among FERC and the Federal resource agencies, and to address 
the key problem with the current relicensing process, 
inadequate information.
    Determining the necessary studies should be the province of 
the responsible resource agencies and not subject to the 
interpretations and biases of FERC. We would strongly oppose 
any provision that would require complex formal hearings.
    Such a requirement would not streamline the licensing 
process; it would only make it longer and more costly and would 
leave the public at a distinct disadvantage against the well-
heeled resources of an electric generating corporation.
    While the chairman's legislative proposals will not further 
harm environmental quality, they are not likely to improve it 
significantly either. Therefore, we would urge some additional 
provisions that would improve the licensing process for 
environmental purposes: Grant shorter license terms or more 
flexible conditions within license terms; limit and condition 
the issuance of annual licenses; institute a royalty fee for 
the private use of public rivers; and reauthorize the office of 
public participation in the statute.
    The one thing that must be avoided in hydro-licensing 
legislation is the roll-back of existing environmental 
protections. In developing a balance of authorities in the 
Federal Power Act, Congress determined that some basic 
environmental protections must be afforded at every dam and 
should not be balanced away to promote cheap hydropower. Expert 
Federal and State resource managers established conditions 
based on substantial evidence to protect public trust 
resources. These basic protections form a floor above which 
FERC can balance license conditions in the public interest.
    Shifting these responsibilities to FERC would be 
inefficient and would change the standards for licensing. State 
and Federal agencies have considerable expertise in the 
relicensing arena. They work in the field on a specific river, 
as opposed to the FERC staff, who spend most of their time in 
Washington. There is little reason to believe that 
consolidation with FERC would either make the process faster or 
improve the outcomes.
    The good news is that relicensing provides significant 
protection to rivers with a low cost to power production. 
According to FERC's recent report, relicensing has reduced the 
average per project generation only 1.6 percent. Such losses in 
relicensing over the next 10 years would result in a .04 
percent reduction in the Nation's overall electricity 
generation.
    In any case, the amount of lost generation is significantly 
less than the 5 percent average fluctuation of energy demand 
caused by factors such as weather, fuel prices, and advances in 
technology.
    The losses in generation are comparable to those caused by 
installing a scrubber on a coal-fired plant. Being a good 
environmental steward is a legitimate cost of doing business. 
Unlike other industries, such as offshore oil development, 
mining or timber, hydropower licensees pay nothing for the use 
of public resources, our rivers. After 30 to 50 years, the 
initial capital investment in these projects is fully 
amortized. Asking that these dams make some small investment in 
environmental quality after decades of profitable operation is 
a reasonable and minor request. Paying for these changes 
continues to leave hydropower as the cheapest source of energy 
nationwide.
    In the scramble to find a magic bullet for the energy 
crises, we should be careful not to over rely on our nation's 
already troubled rivers. Through careful and deliberative 
evaluation involving the expertise of a range of agencies, we 
can bring hydropower dams up to modern environmental standards 
without compromising power generation.
    Thank you for the opportunity to speak.
    The Chairman. Thank you very much.
    [The prepared statement of Ms. Birnbaum follows:]
        Prepared Statement of S. Elizabeth Birnbaum, Director, 
                  Government Affairs, American Rivers
                              introduction
    American Rivers, a national river conservation organization with 
more than 30,000 members nationwide, strongly opposes any efforts to 
diminish environmental protections in hydropower licensing either 
directly or through misguided process reforms. We do support efforts to 
make the hydropower licensing process work better for all stakeholders 
and eliminate historic inequities in this complex regulatory process. 
These comments are also joined by the Hydropower Reform Coalition. The 
Hydropower Reform Coalition is a consortium of more than 80 
conservation and recreation organizations from around the country (see 
attachment). The Coalition was formed in 1992 with the purpose of 
improving river health and recreational opportunities through the 
licensing, relicensing, and regulatory enforcement of hydropower dams 
under the jurisdiction of the Federal Energy Regulatory Commission 
(FERC). Coalition members are national, regional and local conservation 
organizations, and together have a combined membership totaling more 
than 800,000.
    I would like to talk about three basic themes today, geared 
primarily toward the hydropower title of the Chairman's Energy Bill and 
subsequent discussions about revisions to that title, FERC's recently 
released report to Congress pursuant to Section 603 of the Energy Act 
of 2000, and the Administration's energy plan released in May:
    1. Protect our public trust resources--Hydropower harms rivers, but 
a strong process for relicensing can result in significant improvements 
to environmental quality;
    2. Improve the process without causing harm--The Commission should 
work cooperatively with federal and state agencies to improve licensing 
through administrative changes that seek a unified process, acknowledge 
diverse, multiple authorities and improve environmental quality. If 
FERC is unwilling to undertake this cooperative effort, Congress should 
require FERC to do so.
    3. Oppose environmental roll-backs--The current balance of 
authorities in hydropower relicensing is appropriate and effective; 
some proposed changes to that balance would threaten environmental 
quality.
                    hydropower affects public rivers
    Hydropower relicensing is a natural resource issue--a rivers 
issue--not simply an energy issue. The improvements and changes made 
through relicensing at hydropower dams will have huge implications for 
hundreds of species, thousands of river miles, and millions of dollars 
in recreational opportunities for decades to come. In contrast, these 
decisions have a relatively small impact on energy generation, electric 
rates, or industry viability.
    American Rivers and members of the Hydropower Reform Coalition are 
not anti-hydropower. We simply wish to ensure that these dams are 
operated to protect and restore river resources using best available 
technologies and best management practices. While decommissioning is a 
popular topic these days, we believe that dam removal will be the 
exception and not the rule.
    As early as 1908, President Teddy Roosevelt understood the need to 
safeguard our nation's rivers and helped to devise a system of periodic 
review to protect these national treasures.

          ``The public must retain control of the great waterways. It 
        is essential that any permit to obstruct them for reasons and 
        on conditions that seem good at the moment should be subject to 
        revision when changed conditions demand.''

    More than 75 years later, the 9th Circuit Court of Appeals in 
Yakima Indian Nation v. FERC found that:

          ``Relicensing is more akin to an irreversible and 
        irretrievable commitment of a public resource than a mere 
        continuation of the status quo. Simply because the same 
        resource had been committed in the past does not make 
        relicensing a phase in a continuous activity. Relicensing 
        involves a new commitment of the resource . . .''

    The impacts of hydropower dams on public trust resources are well 
known and well documented. The President's own plan acknowledges and 
catalogues the impacts of hydropower dams on natural resources.

          ``Hydropower, although a clean energy source, does present 
        environmental challenges. Unless properly designed and 
        operated, hydropower dams can injure or kill fish, such as 
        salmon, by blocking their passage to upstream spawning pools. 
        Innovations in fish ladders, screens, and hatcheries are 
        helping to mitigate these adverse impacts. Ongoing dam 
        relicensing efforts are resulting in community involvement and 
        the industry's application of the latest technologies to ensure 
        the maintenance of downstream flows and the upstream passage of 
        fish. These efforts also have been successful in identifying 
        and removing older, nonfunctioning dams and other impediments 
        to fish movements.'' (President's Plan, 3-8)

    Because original licenses were issued before the enactment of 
modern environmental statutes and prior to our understanding of the 
impacts of dams on river ecosystems, virtually none of these dams meets 
modern environmental standards before relicensing. By requiring dam 
owners to build passage for fish, protect critical riparian habitat, 
adjust river flows to conform to a more natural pattern, and provide 
recreational access and opportunity, we can protect and restore 
valuable fisheries, native species diversity, recreational amenities, 
and natural ecosystem functions. At the same time we can enhance 
economic opportunities such as recreation, tourism, and ecological 
services.
    The widespread recognition of the environmental impacts of 
hydropower projects affirms the need for a careful review process that 
addresses some of the sins of the past. If awarded a license, a utility 
can monopolize a river for half a century with little oversight and no 
motivation to make environmental improvements. It's imperative to take 
this once-in-a-lifetime chance to set conditions that require hydro 
operators to modernize the way they operate their dams on our rivers.
                relicensing--an important balancing act
    Because rivers are public resources with many competing interests 
and significant environmental issues, the licensing process for 
hydropower dams involves multiple stakeholders. Unlike most electricity 
generating technologies, hydropower does not have ``end of pipe'' 
standards to ensure that the dam's operations do not unduly damage the 
environment. This is because every dam and every river is different, 
and generic standards cannot be applied to each project. The Federal 
Power Act (FPA), although commonly considered an energy statute, also 
occupies an important role in environmental protection. The statute was 
amended in 1986 to require FERC to give ``equal consideration'' to 
power (electricity generation) and non-power (fish and wildlife 
protection, recreation, etc.) benefits of the river. The economics of 
the hydropower facility should be taken into account by FERC in this 
balancing process.
    In developing this balance, Congress determined--and rightly so--
that some basic environmental protections must be afforded at every 
dam, and should not be balanced away to promote cheap hydropower. Under 
these statutory requirements, expert federal and state resource 
managers establish conditions based on substantial evidence to protect 
public trust resources. Just as there are mandatory ceilings on 
emissions from fossil-fuel plants, these basic resource protections 
form a floor above which FERC can balance license conditions in the 
public interest.
    Sometimes referred to as mandatory conditions, these requirements 
assure that:
    (1) Fish can be passed upstream and downstream of a dam (FPA 
Section 18);
    (2) If the private dam is located on federally owned land, other 
purposes of the federal land are protected (FPA Section 4(e)); and
    (3) The dam complies with state-developed water quality standards 
(CWA Section 401).
    Both fish passage and federal lands protection have been part of 
the relicensing process since enactment of the Federal Power Act in 
1920.
    The current structure of the Act, which sets fishways apart as a 
special consideration, is in keeping with the law and practice that 
came to us from Europe at the time of settlement. Requiring millers--
dam owners--to provide fishways at their own expense dates back many 
hundreds of years, based on the recognition that fish are equally 
important to commerce.
    The provision under Section 4(e) of the Federal Power Act that 
grants authority to land management agencies to ensure that projects on 
their lands meet current management goals and objectives is simple and 
based on common sense. Projects that are located on federal or tribal 
lands are already getting the benefit of cheap rent. In order to 
adequately manage the lands entrusted to them, federal land management 
agencies must have a say over how these projects are operated.
    The protection of water quality is a responsibility that has been 
delegated to the states under the Clean Water Act (CWA). Section 401 of 
the act ensures that private hydro projects will not interfere with 
state standards, by requiring that each federally licensed project 
receive a certification from the state where it is located, 
demonstrating that the project is consistent with the standards, 
including the designated uses for each water body. The Supreme Court 
has confirmed that standards may be numeric or narrative and include 
chemical, physical, and biological parameters.
    Any effort to shift these responsibilities to FERC would be 
inefficient and would fundamentally change the standards upon which we 
base these decisions. State and federal agencies have already developed 
significant expertise in the relicensing arena and work in the field on 
a specific river--as opposed to FERC staff who spend most of their time 
in Washington. In addition, FERC's mandate for ``equal consideration'' 
might mean that these basic environmental protections would be assured 
only if they did not affect a utility's bottom line. Considering recent 
GAO findings, there is no evidence that consolidation with FERC would 
improve the process in any event.
               facts don't support the claims of a crisis
    If we are worried about hydropower's impact on the environment, 
then where do we turn for energy? The good news is that changes to dam 
operations derived from relicensing can provide significant protection 
to rivers with almost no cost to power production. According to FERC's 
own report, relicensing has resulted in an average per-project 
reduction in generation of only 1.6% and an increase in capacity of 4%. 
Based on this track record, we can reasonably expect similar results 
from projects due to be relicensed over the next ten years (these 
represent 2.5% of the annual generation of the US). Such losses in 
relicensing would result in a 0.04% reduction in the nation's overall 
annual generation. In any case, the amount of ``lost'' generation is 
significantly less than the 5% average fluctuation of energy demand 
caused by factors such as weather, fuel prices, and advances in 
technology.\1\ We should not forget that these losses in generation are 
derived from comparing a baseline of operation that had NO 
environmental conditions to one with modern environmental standards--
the losses in generation are comparable with those caused by installing 
a scrubber on the smokestack of a coal-fired plant. We need not trade 
healthy rivers for power production. We can have both.
---------------------------------------------------------------------------
    \1\ The mean net generation of electric utilities and non-utility 
power producers for 1990 to 1996 is 3,203,998 million kilowatt-hours, 
with a standard deviation of +/-159084.6 million kwh or 
+/-4.96%.
---------------------------------------------------------------------------
    Being a good environmental steward is a legitimate cost of doing 
business. Should the federal government guarantee profitability for 
hydropower utilities? If a project is already unprofitable because of 
market forces or because it is run poorly, should it be exempted from 
any environmental conditions? The answer to these questions is clearly 
no. According to the courts, ``There can be no guarantee of 
profitability of water power projects under the Federal Power Act; 
profitability is at risk from a number of variable factors, and values 
other than profitability require appropriate consideration.'' \2\
---------------------------------------------------------------------------
    \2\ Wisconsin Public Service Corp. v. FERC, 32 F.3d 1165, 1168 (7th 
Cir. 1994).
---------------------------------------------------------------------------
    Unlike other industries such as offshore oil development, mining, 
or timber, hydropower licensees pay nothing for the use of public 
resources--our rivers--and are not required to post any kind of bond to 
ensure that at the end of the projects useful life there is money to 
properly dispose of it. After 30 to 50 years, the initial capital 
investments in these projects are fully amortized. The only costs left 
to the licensee are basic operations and maintenance (the lowest of any 
electricity source) and environmental protection measures. Asking that 
these dams make some small investment in environmental quality after 
decades of profitable operation is a reasonable and minor request. 
Paying for these changes continues to leave hydropower as the cheapest 
source of electricity nationwide.
    It is simply a false threat to suggest that dams are being 
surrendered or abandoned due to the cost of environmental regulation. 
Since 1996, only three operating licenses have been surrendered--each 
because the facilities fell into disrepair or were damaged by flooding. 
According to FERC, since1993 ``no licensee has refused to accept or 
surrender their license citing project economics.'' \3\
---------------------------------------------------------------------------
    \3\ Written supplemental testimony of Doug Smith, FERC General 
Counsel, before the Senate Energy and Natural Resources Committee, 10/
27/99.
---------------------------------------------------------------------------
    The Administration's own energy plan confirms that the principal 
factors limiting hydropower development have nothing to do with 
environmental regulation. The President's report explains that, 
``Hydropower generation has remained relatively flat for years. The 
most significant constraint on expansion of U.S. hydropower generation 
is physical; most of the best locations for hydropower generation have 
already been developed. Also, the amount of hydropower generation 
depends upon the quantity of available water. A drought can have a 
devastating effect on a region that depends on hydropower. In fact, 
this year's water availability has been a contributing factor in 
California's electricity supply shortages.'' (President's Plan, 5-18)
    In the scramble to find a magic bullet for the energy crisis, we 
should be careful not to over-rely on our nation's already troubled 
rivers. Through careful and deliberate evaluation involving expertise 
of a range of agencies, we can bring hydropower dams up to modern 
environmental standards without compromising power generation.
                    solutions in search of problems
    Over the past several years, a number of legislative proposals have 
been put forward by members of the electric utility industry and most 
recently by FERC. We have consistently opposed those efforts. The 
common element of those reform bills has been to blame the resource 
agencies for costs and delays and to consolidate greater authority with 
FERC. We believe that these reforms address the wrong problem and 
therefore offer a poor solution to inefficiencies with hydropower 
regulation. Until recently, these proposals have been based on little 
more than anecdotal evidence and industry assertion. While, the 
publication of FERC's 603 Report offers new data and presents the first 
comprehensive look at the relicensing process in several years, it has 
been soundly criticized by the Government Accounting Office (GAO), 
federal and state agencies, and the environmental community, and offers 
no rigorous evidence or statistical verification for the claim that 
resource agency participation in the process creates major costs and 
delays.
                     critique of ferc's 603 report
    In November 2000, Congress required FERC within six months ``to 
undertake a comprehensive review of policies, procedures, and 
regulations for the licensing of hydroelectric projects to determine 
how to reduce the cost and time of obtaining a license.'' Congress 
specified action by the Commission, but the report filed in May 2001 
was explicitly a product of Commission staff (Report pg. 5). While it 
is entirely appropriate for staff to assist the Commission in the 
development of this report, we are troubled by the fact that the 
persons with decision-making authority--the Commissioners--have no 
ownership of this document.
    Congress also required the Commission to consult with other 
appropriate agencies, yet no draft was provided to those agencies for 
comment despite repeated pleas for cooperation. Although FERC includes 
agency comments in its appendix (as well as those from members of the 
public), it does not address these recommendations with any 
thoroughness, fails to include their recommendations or alternatives, 
and fails to provide any explanation of the consultation process.
    We are also troubled by an April report by the Government 
Accounting Office (GAO), which strongly criticized the Commission for 
failing to keep adequate records of its regulatory activities.\4\ 
According to GAO's report, until FERC does a better job collecting data 
on the cost and timing of its process, ``FERC will not be able to reach 
informed decisions on the need for further administrative reforms or 
legislative changes to the licensing process.'' (pg. 17) This opinion 
was restated during a hearing of the House Energy and Commerce 
Committee along with a more specific GAO critique of the 603 Report.
---------------------------------------------------------------------------
    \4\ Licensing Hydropower Projects: Better Time and Cost Data Needed 
to Reach Informed Decisions About Process Reforms, U.S. General 
Accounting Office GAO-01-499, May 2001.
---------------------------------------------------------------------------
    In light of the GAO's indictment of FERC's data and record keeping, 
let me highlight several conclusions in FERC's report about timing and 
cost, some of which appear reasonable, others suspect.
Timing Data
    The report suggests that Section 4(e) and 18 requirements by the 
federal resource agencies are not a major cause for relicensing delays 
(Report pg. 38). This is supported by an independent analysis by the 
Department of the Interior, which draws the same conclusion. The report 
does identify state agencies as being associated with significant 
delays, but it fails to show whether these delays are within the sphere 
of influence of those agencies or whether they are a victim of industry 
procrastination and delay. Other evidence would suggest the latter.
    We do know that license applicants have caused significant delay of 
the relicensing process by failing to provide complete license 
applications. Of the 157 relicensing applications filed by industry in 
1993, only nine provided sufficient scientific information about 
project impacts, forcing FERC to issue hundreds of additional 
information requests in the other 148 cases.\5\ The need to conduct 
further studies to complete their applications was a significant reason 
that there were major delays in these relicensings.
---------------------------------------------------------------------------
    \5\ Barnes, FERC's ``Class of '93'': A Status Report, Hydro Review 
(Oct., 1995).
---------------------------------------------------------------------------
    FERC's median time to respond to requests for administrative appeal 
or rehearing is 13.6 months, with a minimum of 6 months and a maximum 
of 62 months--more than 5 years. Other types of petitions also go 
unaddressed by the Commission for months or years. For instance, in one 
case environmental groups filed a petition to the Commission to 
initiate consultation under Section 7 of the Endangered Species Act 
four years ago and have yet to receive any response. In these 
situations, parties are prohibited from seeking judicial review until 
FERC acts, but cannot force FERC to act. In the meantime the 
environment continues to be harmed and legislative interpretations go 
unanswered.
Cost Data
    FERC's section on costs is even more problematic. The report 
considers costs of the relicensing process to be limited to only those 
of the licensee and the agencies. They do not consider the cost to the 
public whether due to direct participation, or through the attendant 
impacts to the environment. They also offer no measure of what costs 
should be measured--no standard of analysis.
    Cost is closely linked to time. Due to the lengthy term of original 
hydropower licenses, those issued before the era of environmental 
consciousness have been largely insulated from the responsibility of 
paying for the environmental cost that they impose on society. No other 
major source of power--coal, nuclear, gas, or oil--has been so 
privileged. All these others have confronted their environmental 
obligations, and begun to internalize the costs. For hydropower, 
Congress has designated the issuance of a new hydropower license as the 
time when the maldistribution of costs and responsibilities is to be 
corrected.
    Delays in the process often save the project owners money in the 
short-run by maintaining status quo terms and conditions that allow the 
postponement of expenditures for mitigation. These savings come at an 
enormous expense to the environment, the public, and the tribes because 
of delayed mitigation, and provide a perverse incentive on the part of 
licensees to drag their feet and stonewall. Thus, it is often in the 
interest of the public and the environment to minimize licensing time--
but finding ways to make the process more efficient should not override 
the need to protect other public interests in public resources.
    FERC's main evidence in support of its recommendation for ``one-
stop shopping''--eliminating mandatory conditioning by other federal 
agencies--is the fact that projects with mandatory conditions incur 
higher mitigation costs per kilowatt of capacity. However, consistent 
with the criticisms outlined in the GAO report, this turns out to be a 
very superficial analysis. Do the two groups of projects analyzed 
(those with mandatories and those without) display any other 
differences? Are projects without mandatories smaller? Less 
controversial? Have they done less damage to the environment? In order 
to make any sense out of these numbers, one would have to organize the 
projects so that the only significant difference between the two groups 
is that one group had mandatory conditions and one did not. In any 
case, one must question whether FERC is suggesting that it would 
dramatically reduce those costs if it were the agency in charge? How 
would such efficiencies be found? Would that mean a reduction in 
environmental protection? FERC offers no specifics as to how the 
Commission would reduce costs to licensees but still maintain the same 
level of environmental protection.
Clean Water Act
    In its 603 report recommendation on Clean Water Act Section 401, 
FERC demonstrates a complete misunderstanding of the Clean Water Act 
and a total disregard for state delegated authority. Water quality is 
inextricably linked to water quantity. The Clean Water Act requires the 
protection of physical, chemical and biological components of a water 
body. Protection of ``designated uses'' is a fundamental component of 
the Clean Water Act. Designated uses ensure that waters will be 
``fishable, swimmable, and boatable''--uses that require that water be 
present in the waterway. Yet the Commission advocates limiting the 
definition of ``clean water'' to apply to only a few simple parameters, 
excluding water quantity and designated uses.
One Stop Shopping--A Common Theme But a Bad Idea
    At no time in its history has the Commission had sole decision-
making authority in hydropower licensing. The Federal Power Act has 
always been clear. The courts have consistently confirmed this 
plurality of decision-making over the past 10 years. The problem is not 
the multiple actors but FERC's unwillingness to cooperate and cede 
authority.
                     committee drafting principles
    American Rivers and the Hydropower Reform Coalition have been 
highly critical of hydropower legislation coming out of this committee 
over the past several years; however, we believe that the Chairman's 
bill and subsequent negotiations by his staff have begun to take a more 
rational approach. We will continue to work with his staff to ensure 
than any legislation developed by the Committee will meet the goals of 
reducing the time and cost of obtaining a license while improving 
environmental quality.
    While we continue to believe that the Chairman's legislative 
proposals will not further harm environmental quality, they are not 
likely to improve it significantly either. There is a great deal for 
industry to cheer about in this package. The requirement that resource 
agencies accept cheaper alternative mandatory conditions provided that 
they meet or exceed the resource management goals is generous and 
unprecedented. There is also a great deal in this package that should 
benefit everyone and lead to real streamlining. Proposals to require 
issuance of draft and final decisions from both FERC and the agencies 
are welcomed and should make things run more smoothly. There are fewer 
meaningful benefits to the environment but we look forward to working 
with staff on a number of the proposals below that we believe will make 
significant improvements.
Alternative Conditions
    A provision that requires consideration of alternative mandatory 
conditions for addressing costs does not benefit environmental 
interests but it does not directly hurt them either. Unless a 
permissive administration with a bias toward energy development were 
willing to forgo critical environmental, recreational, and cultural 
resources, the standards currently under discussion for accepting 
alternative conditions would guard adequately against diminishing 
environmental protections. Such a provision does have the potential to 
create additional delays in the licensing process, and to that extent 
could harm environmental interests by deferring implementation of all 
environmental measures. We would urge that the provision be expressly 
coordinated with the agencies' existing processes for proposing and 
finalizing mandatory conditions and with draft and final NEPA analysis 
of the licensing decision in order to minimize delay.
    In addition, any provision that provides an opportunity to offer 
alternative conditions must contain provisions for participation of all 
stakeholders and not be limited to the licensee. Public participation 
has become a fundamental tenet of the hydropower licensing process and 
is consistent with every other procedure in the Federal Power Act. This 
section should also include a reciprocal provision that allows not only 
proposals for conditions that are equally protective but cost less but 
also proposals that are more protective but cost the same. This would 
not present a significantly greater burden on the resource agencies and 
would still be limited to consideration of alternative conditions, 
subject to the same requirements of substantial evidence, and leave 
significant discretion to the Secretary.
    We do not support inclusion of a new and undefined standard of 
``sound science.'' The current standard of ``substantial evidence,'' 
which is the one that must be met by FERC and is defined under the 
Administrative Procedures Act, is common and well-understood. ``Sound 
science'' would simply open up a whole new round of litigation. We are 
also unclear about the definition of electric ``reliability'' and 
believe that the term should be understood and defined before using it 
in statute. We would object to any definition that led to new peaking 
operations of a hydropower facility.
Disposition of Licensing Charges
    Lack of resources and funding is the biggest contributor to 
resource agency difficulties with in the relicensing process. The 
Chairman's proposals to directly reimburse federal resource agencies is 
a critical first step in remedying this problem. The 1992 Energy Policy 
Act directed FERC to charge licensees a fee to cover the costs of 
agency participation in the relicensing process. However, this program 
has not gone forward as Congress originally intended. While those fees 
are being charged, the moneys are not making their way back to those 
agencies. This simple change will remedy the problem.
    The same amendment in 1992 also directed the reimbursement of state 
fish and wildlife agencies. FERC has taken no steps to collect or 
distribute those funds. We believe that this is a necessary 
improvement. We would also support including state water quality 
agencies in the Commission's cost recovery program.
    Industry has requested clarification of which agency costs are 
eligible for reimbursement. We support their position that those 
charges should not include FERC appeals or litigation costs and should 
instead be limited to participation in the relicensing process.
    The other major component to the amendments to collection of 
electric charges is returning the fees collected for the use of public 
lands back to the respected land managing agency for protection and 
restoration of headwaters. We strongly support this idea but offer two 
significant amendments to improve upon what the Chairman has already 
accomplished.
    The first addresses the need to charge a fair market price for the 
use of public lands. Currently industry pays only a token fee for the 
use of federal lands an average of $30 per acre. This does not 
accurately reflect the value of these mostly riparian lands, nor does 
it reflect the financial benefits derived from using these public 
resources. This fee is based upon twice the linear right-of-way fee 
charged for pipelines and power lines. We recommend the following 
amendment to address this problem:

          Section 10(e) of such Act is amended by inserting after ``for 
        recompensing it for the use, occupancy, and enjoyment of its 
        lands or other property'' the following: ``, based on the fair 
        market value of such lands or other property, as determined by 
        the Secretary of the Department administering such lands or 
        other property.

    The funds dedicated to this restoration fund are limited to those 
currently earmarked for the Treasury, or 12.5% of the total collected. 
Currently 50% of the funds collected for the use of federal lands are 
dedicated to the Reclamation Fund, which benefits water development 
projects in the West. We believe that it is inappropriate for those 
moneys to be used for projects unrelated to licensed hydropower 
projects. Because hydropower projects on federal lands are located 
throughout the country and not simply in the West, we also believe that 
payments to the Reclamation Fund are inappropriate. For these reasons, 
we offer the following amendment in lieu of diverting payments to the 
Treasury:

          Section 17(a) is amended by replacing, ``the reclamation fund 
        created by the Act of Congress known as the Reclamation Act, 
        approved June 17, 1902'' with, ``a revolving fund to be 
        administered by the Secretary of the department upon whose 
        lands the project resides''.

    The rest of the provision about where the money should go and how 
it should be used requires no further amendments.
Resource Studies
    We strongly support language to address an important problem with 
the current relicensing process--inadequate studies and information. He 
who controls the information controls the process, and without being 
able to require an applicant to provide certain types of information 
and studies, agencies are at a distinct disadvantage when developing 
conditions that meet their statutory mandates. To date, FERC has show 
an unwillingness to require studies by the license applicant other than 
those needed for FERC's own purposes. This leaves the resource agencies 
without the information necessary to meet their obligations.
    Inadequate information is a leading cause of delays in hydropower 
licensing proceedings. As mentioned above, of the 157 relicensing 
applications filed by industry in 1993, only nine provided sufficient 
scientific information about project impacts.\6\ The resulting delays 
have significantly harmed environmental quality by issuing annual 
licenses and delaying implementation of modern environmental 
conditions.
---------------------------------------------------------------------------
    \6\ Barnes, FERC's ``Class of '93'': A Status Report, Hydro Review 
(Oct., 1995).
---------------------------------------------------------------------------
    In our view, studies and information requested by a federal agency 
with authority under FPA Sections 4(e) and 18 or a state agency with 
authority under the Clean Water Act or the Coastal Zone Management Act 
should be the province of those agencies and not subject to the 
interpretations and biases of FERC. The current ambiguity over who 
determines what studies are ``reasonable and necessary'' simply creates 
a struggle about who has final say over study requests. We oppose any 
provision that leaves this determination with FERC.
Joint Agency Procedures
    Cooperation among FERC and state and federal resource agencies will 
greatly improve the efficiency of the relicensing process. Under a 
charter signed in October 1998, the four principle federal agencies 
involved in relicensing--FERC, Interior, Agriculture, and Commerce--
formed an Interagency Task Force to Improve Hydroelectric Licensing 
Processes (ITF). This committee was established to coordinate federal 
and state mandates. In July of 1999, the ITF established a Federal 
Advisory Committee to provide a forum for non-federal entities 
consisting of industry, states, tribes and environmental groups, to 
review and provide feedback on the activities of the ITF.
    This forum concluded its work at the end of 2000, publishing six 
guidance documents covering a broad range of issues that confront 
hydropower regulation. The process also resulted in several rulemakings 
and formal policy changes within each of these agencies. We believe 
that these reforms represent significant steps forward in improving the 
relicensing process, but they have not been given much time to work. 
Additional reforms, particularly by FERC, are still desirable. American 
Rivers supports a licensing process that is structured around NEPA with 
draft and final decisional documents, complete information for all 
participants, flexible but reliable timeframes, and transparency of 
analysis.
    Unfortunately, as an independent agency, FERC cannot be compelled 
by the administration to make administrative or regulatory changes. 
This fact was recently confirmed by the President's energy plan. ``The 
NEPD Group recommends that the President encourage the Federal Energy 
Regulatory Commission (FERC) and direct federal resource agencies to 
make the licensing process more clear and efficient, while preserving 
environmental goals.'' (President's Plan emphasis added, 5-18 and 5-
22). While the President can ``direct'' federal resource agencies to 
act, just as his predecessor did through the efforts of the ITF, he can 
only ``encourage'' FERC. Congressional action is necessary. To date, 
FERC has been unwilling to undertake major changes to its licensing 
process other than those that reduce its own costs and time such as the 
ALP. If FERC were required to issue a staff draft license decision 
document along with its draft NEPA document, parties would have a 
meaningful and substantive document upon which to comment and the 
Commission would be able to better share its NEPA document with other 
agencies instead, of treating it as a draft decision.
    We oppose any provision that would requires complex, formal 
hearings. Such a requirement would not streamline the licensing 
process--it would only make it longer and more costly. The public does 
not have the resources to participate in such formal adjudicatory 
proceedings, leaving the public at a distinct disadvantage against the 
well-healed resources of an electric generating corporation.
               additional legislative changes to consider
    American Rivers continues to believe that legislation is 
unnecessary to improve the licensing process for hydropower dams; 
however, if the Senate insists on moving forward with a legislative 
package, we believe that it should include provisions that will improve 
the environmental status quo. We offer the following additional 
elements that should be included:

   Grant shorter license terms or more flexible conditions

    Some members of the Coalition believe that the Commission and 
Congress should consider reducing the maximum term for license renewal 
from 50 to 15 years in an effort to improve the licensing process. 
There are several reasons to suggest this dramatic change. First, 
energy policy has changed since the Federal Power Act (FPA) was first 
enacted in 1920. The nation is no longer developing new hydropower on 
the same scale or investing significant financial resources in capital-
intensive development. In fact, we now find ourselves in an 
increasingly competitive marketplace with short investment horizons and 
rapid exchange of assets. Fifty-year license terms are not consistent 
with these changes.
    Second, our knowledge of complex ecosystems and engineering is 
expanding and evolving at a phenomenal pace, enabling us to make more 
informed and effective decisions about resource management and energy 
production, but also requiring that management change when new 
information is developed. Licenses that lock in management decisions 
for 50 years preclude agencies from applying this ever-growing 
knowledge and understanding as it emerges. In contrast, shorter license 
terms allow modification of management decisions on a more regular 
basis to accommodate new information.
    Finally, the varied interests competing for use of our nation's 
rivers continue to increase. Hydropower is compatible with some of the 
interests, incompatible with others. Licenses of 15 years would provide 
FERC an opportunity to revisit on a more regular basis the uses to 
which our rivers are put in light of changing values.
    These factors have led some to conclude that shorter license terms 
would certainly lead to improvements in the licensing process. With a 
reduced term, stakeholders would not treat licensing as a ``once in a 
lifetime'' opportunity, but instead would view it as an ongoing 
process. This would be far more conducive to adaptive management, 
allowing greater flexibility in license conditions with regular 
monitoring and more frequent opportunity for technical advances. 
Therefore, we offer the following amendment:

          Section 6 and section 10(i) of The Federal Power Act are each 
        amended by striking ``fifty years'' and inserting ``thirty 
        years for original licenses and not more than 15 years for new 
        licenses'';
          Subsections (d) and (e)(1) of such Act are each amended by 
        striking ``twenty'' and inserting ``5''.
          Section 15(e) of such Act is amended by striking ``not less 
        than 30 years, nor more than 50 years'', and inserting, ``not 
        more than 30 years for original licenses and not more than 15 
        years for new licenses''.

    While the reduction of the license term is arguably a dramatic 
proposal, we still believe that a more regular review of license 
conditions than the current 30 to 50 years would diminish the stakes of 
each subsequent review and would be more consistent with other 
regulatory proceedings such as those for municipal solid waste 
facilities or thermal power plants.
    Toward that end, we recommend that FERC be directed to institute an 
adaptive management program that would specifically allow states to 
ensure compliance with changing water quality standards on a regular 
basis or to allow federal agencies to revisit endangered species 
protection measures on a more regular basis. While at first blush this 
would seem to require additional work, we believe that once the initial 
relicense is issued following 30 to 50 years of unfettered operation, 
subsequent proceedings would be less cumbersome, involving mere 
refinements. We offer the following amendment as an example of this 
concept.
    Section 15(e) of such Act is amended by adding after the last 
period, ``all licenses issued shall be reviewed every five years by the 
Commission with the cooperation of relevant state and federal agencies 
who are authorized to recommend or prescribe license conditions, and 
pursuant to such review, the Commission and state and federal agencies 
shall reopen the license as necessary to adequately and equitably 
protect, water quality standards, new endangered or threatened species 
listings, and address other circumstances unforeseen in the original 
license.''

   Limit and condition the issuance of annual licenses

    As noted earlier, annual licenses provide an incentive for 
licensees to delay the licensing process by allowing continued 
operations without regard to current environmental standards. To 
minimize this incentive, FERC should require interim terms and 
conditions to be incorporated into annual licenses, limit the duration 
and number of annual licenses, and raise the standards for obtaining an 
annual license. Without a backstop to the process, licensees may allow 
things to drag on and avoid doing studies in order to receive annual 
licenses on old terms and conditions. Short of a Commission policy or 
rule to this effect, Congress should compel the Commission to take 
steps in this direction. We offer the following amendment as an example 
of this concept.
    Paragraph (1) of section 15(a)(1) of The Federal Power Act is 
amended by replacing, ``of the existing license,'' with, ``required to 
meet state water quality standards'' and inserting at the end of the 
subsection, ``Notwithstanding other sections under this Act, the term 
of any new license issued under this subsection shall be reduced by one 
year for each annual license issued by the Commission.''.

   Institute a royalty fee for the private use of public rivers

    Hydropower continues to be one of the least costly forms of 
electricity on the market, largely because hydropower generators do not 
pay any costs for fuel. However, rivers belong to the public and the 
public should therefore be compensated by dam owners for the ability to 
profit from this resource. In the natural resources arena the concept 
of a royalty payment is consistent with oil and gas leasing, mineral 
leasing, and timber harvesting. These industries pay a royalty while 
still mitigating for their impacts to the natural environment. 
Hydropower should do the same. A small royalty payment of 3 mils per 
kilowatt hour would have little effect on power prices and would 
provide a return to taxpayers for the use of a public resource. A 
portion of those fees could be returned to the state where the project 
resides for river restoration, parks development, and other public 
benefits. We offer the following language as a proposed amendment:
    Section 10(e) of The Federal Power Act is amended by adding the 
following at the end thereof:
    ``In addition to the annual charges under the preceding provisions 
of this subsection, the Commission shall require the licensee of each 
project under this part to pay to the United States for deposit into 
the General Fund of the Treasury a royalty in the amount of 3 mills per 
kilowatt hour of electricity generated by the project. Such royalty 
shall be paid at such times and in such manner as the Commission shall 
prescribe. Fifty percent of the amount of such royalties received with 
respect to licensed projects in each State in each fiscal year are 
authorized to be appropriated to the State for purposes of fish and 
wildlife enhancement projects in such State.''

   Reauthorize the Office of Public Participation

    The licensing process significantly taxes the resources of the 
general public. These stakeholders represent a wide array of interests, 
have differing levels of understanding of the process, and sometimes 
lack the technical expertise to meaningfully participate in all aspects 
of the licensing process. In collaborative proceedings, when non-
governmental organizations are often expected to set forth coordinated 
positions, managing such a diverse group of interests and making 
difficult decisions can be quite challenging and often leads to delay.
    Congress should reauthorize funding for FERC to provide the public 
with compensation for ``. . . reasonable attorney's fees, expert 
witness fees, and other costs of intervening or participating in any 
proceeding before the Commission . . .'' consistent with 16 U.S.C. 
Sec. 825q. We offer the following amendment to Section 319(b) of the 
Federal Power Act:
    Paragraph (2) is amended to read as follows:

          ``(2) The Commission shall reimburse any person granted 
        intervener status in any proceeding under Part I of this Act 
        for reasonable attorney's fees, expert witness fees, and other 
        costs incurred by such person to intervene and participate in 
        such proceeding.''

    Paragraph (4) is amended to read as follows:

          ``(4) There are authorized to be appropriated to the 
        Commission to carry out this section such sums as may be 
        necessary. If, during any fiscal year, the Commission 
        determines that the reimbursement for costs referred to in 
        paragraph (2) cannot be provided because of insufficient 
        appropriations, the Commission shall establish a reasonable 
        schedule of fees that license applicants shall pay to the 
        persons referred to in paragraph (2) to reimburse such persons 
        for such costs.''
                               conclusion
    Our nation's rivers and fisheries are facing a crisis of slow but 
steady extinction. Resource agencies with expertise in these areas are 
in the best position to address this threat. We can find better ways to 
generate hydropower and new sources of energy but we cannot bring back 
species once they have gone extinct. Reforms of the hydropower 
licensing process must focus on improved relations among the agencies 
and appropriate incentives for licensees rather than on reduced 
protections for our river resources. We applaud the Chairman for his 
efforts in this direction and encourage the Committee to follow his 
lead.

    The Chairman. Mr. Gray.

    STATEMENT OF GERALD J. GRAY, VICE PRESIDENT FOR POLICY, 
                        AMERICAN FORESTS

    Mr. Gray. Thank you, Mr. Chairman, members of the 
committee. I am Gerry Gray, vice president for policy at 
American Forests. American Forests is the oldest national 
citizens' conservation group in the country. Our mission is to 
help people improve the environment with trees and forests. And 
we do this through programs that provide information, tools and 
resources to both urban and rural community groups across the 
country.
    The need for greater public and private investments in the 
protection, restoration and maintenance of watersheds is a very 
important concern to both us and many of our partners across 
the country. I am delighted to be here today to present some of 
our views on a specific section of S. 597, the Comprehensive 
and Balanced Energy Policy Act. That section deals with 
providing a portion of hydroelectric charges back to the 
reservation where these projects are for watershed protection 
activities.
    I have several points I would like to make. First, there is 
a great need for investment in watersheds. These are the 
natural assets, the capital, that provides the water resource, 
the ecological service to society. These assets are being 
degraded. There has been a lack of investment in them. And we 
need to find mechanisms to reinvest in these watersheds.
    There is also a need to reinvest in the rural communities, 
the human and social capital that will provide the ability for 
these communities to help sustain these watersheds. We called 
this a community-based approach. And it integrates the needs of 
the communities with the help of the watersheds. And we think 
it is the best way to approach some of these concerns.
    Section 702 contains critical elements of the community-
based approach, which I will discuss later. But we do believe 
it needs to increase the amount of funding to really address 
the needs of these watersheds. To highlight the need for 
investment in watersheds, I would like to discuss the Sierra 
Nevada ecosystem project for a second. This 1996 study was one 
of the first in the Nation to look at large-scale ecosystems.
    And it found that the Sierra Nevada system produces about 
$2.2 billion worth of commodities and services from natural 
resource production activities, primarily related to water, 
timber, recreation, tourism, grazing, and other agricultural 
activities.
    About 60 percent of that value was from water, about $1.5 
billion a year. The study further found that of all of those 
activities, only water did not provide resources to Federal and 
local governments to reinvest in the maintenance of those 
watersheds. The SNEP report referred to the lack of funding for 
watershed maintenance as an under-investment problem. And it 
concluded that a massive and directed investment of time and 
money is needed to sustain and enhance the Sierra Nevada 
ecosystem and communities. It also concluded that there needs 
to be additional mechanisms to promote investment to maintain 
these important Federal lands watersheds.
    On a smaller scale in the northern part of the Sierra, the 
Feather River watershed, about 3.2 million acres and its 71-
percent federally managed as national forest-national parks, 
had some similar analysis. And it found that there, too, water 
was the most significant economic resource from the watershed. 
And yet the watershed continued to be degraded, and there was 
no reinvestment in maintaining watershed health.
    Further research showed that with investments in improving 
watershed health, they could both increase water storage and 
improve water supply from the watershed. A group called the 
Feather River Coordinated Resource Management Group, a 
consortium of 21 local, regional, and national entities has 
developed a number of initiatives over the past 15 years to 
look at ways to improve watershed health and productivity.
    Recently it put together a list of short- and long-term 
activities that are necessary to maintain watershed health in 
the Feather River. And these activities mirror pretty much 
those outlined in section 702 of the bill. And we would call 
this a community-based approach once again, because it attempts 
to strengthen the ties between ecosystem health or watershed 
health and community well-being.
    These elements include activities to analyze and assess 
watershed conditions and trends, to highlight on-the-ground 
priorities dealing with endangered or threatened resources, 
roads issues, soil erosion and other things. It includes a very 
innovative multi-party monitoring process to ensure 
accountability and learning through these efforts, and to build 
trust among the diverse interests at the local level. And it 
includes a skill training or job training component to help 
build local capacity to undertake these types of watershed 
improvement activities.
    Finally, I would like to mention that we are very much in 
support of this innovative mechanism to redirect these funds 
from hydroelectric charges to watershed maintenance activity 
directly in these watersheds. Our estimate, however, is that it 
will provide less than about $1 million a year to all the 
national forest lands across the country, just insufficient to 
really accomplish a great deal.
    Therefore, we call this a very positive first step, but we 
believe that we need to look for additional mechanisms to 
increase both public and private investment in watershed 
protection.
    We would urge Congress and the Federal Government to 
examine the economic value of these ecological services being 
provided in these watersheds on Federal lands to identify the 
beneficiaries of those values, both within and beyond the 
boundaries of the watersheds, and to look for new mechanisms 
through which the beneficiaries of these activities can invest 
their fair share in watershed restoration and maintenance.
    Thank you very much, Mr. Chairman.
    The Chairman. Thank you very much.
    [The prepared statement of Mr. Gray follows:]
   Prepared Statement of Gerald J. Gray, Vice President for Policy, 
                            American Forests
    Mr. Chairman and Members of the Committee:
    I am Gerry Gray, Vice President for Policy at American Forests, the 
oldest national citizens' conservation organization in the U.S. The 
mission of American Forests is to help people improve the environment 
with trees and forests. We do this through programs that provide 
information, tools, and resources to urban and rural communities to 
protect, restore, and maintain healthy ecosystems. Over the past five 
years, we have worked with many partners in forest-based communities to 
advance understanding of community-based approaches to ecosystem 
management. The need for greater public and private investment in the 
protection, restoration, and maintenance of watersheds has been an 
important concern of our partners across the country, in various 
landscapes and ownership contexts. I am delighted to be here today to 
present our views on Section 702 of the Comprehensive and Balanced 
Energy Policy Act.
    My comments are based in part on American Forests' national policy 
agenda for ecosystem restoration and maintenance. One of our major 
policy goals is ``to increase public and private investment in 
ecosystem restoration and in building the capacity of communities to 
maintain healthy ecosystems.'' My comments are also based on a paper 
that I recently co-authored with Leah Wills of Forest Community 
Research and Plumas Corporation in northern California. The paper, 
entitled Exploring Reinvestment from a Community-based Watershed 
Perspective,\1\ presents the view that watersheds, or ecosystems, are 
capital assets that are being degraded and need investment so they can 
continue to provide ecological services critical to the environmental, 
social, and economic well-being of communities.
---------------------------------------------------------------------------
    \1\ In Gray, G., Enzer, M., and Kusel, J. 2001. Understanding 
Community-Based Forest Ecosystem Management. Haworth Press, Binghamton, 
NY.
---------------------------------------------------------------------------
    Key points I would like to make today are:

   There is a great need for investment in the protection, 
        restoration, and maintenance of watersheds. Water resources 
        provide tremendous economic values, and there has been a lack 
        of investment in maintaining the capacity of watersheds--the 
        natural capital--to continue providing these natural resources 
        and economic benefits.
   There is also a need to invest in communities--especially 
        their human and social capital-to protect, restore, and 
        maintain healthy watersheds.
   We believe that a community-based approach--an approach that 
        integrates the needs of the watersheds, or ecosystems, and 
        communities--is the best approach to maintaining watershed 
        health.
   Section 702 contains critical elements of a community-based 
        approach. It directs a continued annual flow of financial 
        resources toward a range of essential activities that will help 
        build capacity in rural communities and provide for analysis, 
        planning, implementation, and monitoring of projects that will 
        improve watershed health.

    We would like to thank the Chairman for including this provision in 
the Comprehensive and Balanced Energy Policy Act of 2001. This 
provision demonstrates federal leadership in recognizing the need for 
increased watershed investment, identifies an innovative source for 
funding, and promotes a community-based approach for planning and 
implementing the resource management activities.
                   the need for watershed investment
    Water-supply issues are becoming critical in many areas of the arid 
West, while in the East and South, water-quality concerns are driving 
new ecosystem management approaches. California's extremely high water 
values provide a dramatic example of the need for investment to 
maintain the capacity of ecosystems to provide these resources. This 
example is highly relevant to discussion of Section 702 because 
significant portions of California's key watersheds, particularly the 
headwaters of major waterways, are located on federal lands, such as 
national forests and national parks. The example is not unique to 
California, however. The U.S. Forest Service has increasingly been 
recognizing the importance of national forests as the source of water 
supplies, particularly drinking water, for many of our nation's major 
metropolitan areas. The agency's growing emphasis on water is 
illustrated by its recent large-scale watershed initiative, which 
focuses on learning how to protect and manage twelve pilot watersheds 
through collaborative efforts with other federal, state, and local 
entities.
    The California water example makes a strong economic case for 
maintaining the environmental health of watersheds upstream of large 
water and hydropower supply dams. The largely federally managed 
watersheds of California are critical for catching, storing, and 
channeling low-sediment flows of otherwise dispersed precipitation into 
elaborate and expensive water supply and hydropower production 
facilities. Combining the natural (watershed) and manufactured 
(engineered) infrastructure enables water and hydropower purveyors to 
produce billions of dollars of wealth through water and power sales. 
Affordable water and hydropower, in turn, support a vast array of other 
economic endeavors in California, most notably a multi-billion dollar 
agricultural economy.
    Although national policy has long recognized the value of federal 
lands as producers of high-quality water, neither national nor state 
policy has developed a way to foster investment in maintaining these 
water-supply watersheds. The 1897 Organic Act that clarified the role 
of the national forests focused on two primary purposes: ``securing 
favorable conditions of water flows, and to furnish a continuous supply 
of timber'' for the nation. Since then, a variety of mechanisms has 
been developed to obtain revenues from timber, recreation, forage, and 
other resource production activities and reinvest them in restoration 
and maintenance of federal lands. Examples of these mechanisms include 
direct payments to local jurisdictions, off-budget trust funds, yield 
taxes, and user fees. However, a limited amount of funding from these 
mechanisms has been directed toward the maintenance of federal lands 
for water production (quality and quantity). Support for watershed 
maintenance has only been provided through direct federal 
appropriations, and this amount has been insufficient to protect 
watershed health.
    The congressionally authorized and funded Sierra Nevada Ecosystem 
Project (SNEP) developed estimates of the economic values of natural 
resource activities in the Sierra Nevada ecosystem. As one of the 
nation's first efforts to estimate economic values for a large-scale 
ecosystem (20 million acres), the 1996 SNEP study broke new ground. The 
study examined and compared the value of natural resource production 
activities related to water, timber, recreation and tourism, and 
grazing and other agriculture. It found that the Sierra Nevada 
ecosystem produces approximately $2.2 billion worth of commodities and 
services annually and that water accounts for $1.5 billion--more than 
60 percent of the value. Most of the water values accrued to users of 
hydroelectricity and municipal and agricultural water supplies, 
virtually all of who were located outside the boundaries of the Sierra 
Nevada ecosystem. Water production activities generated no funding to 
help to federal and local governments maintain watersheds or 
communities. The SNEP report referred to the lack of funding for 
watershed maintenance as an ``under-investment problem'' and concluded 
that ``a massive and directed investment of time and money'' is needed 
to sustain and enhance the Sierra Nevada ecosystem and communities 
(SNEP, p. 1057). The report also concluded that ``additional mechanisms 
to promote reinvestment are necessary to maintain and enhance the 
Sierra Nevada ecosystem so that it can continue to provide the socially 
desirable outputs.''
           a community-based approach to watershed management
    Over the past 15 years, the Feather River Coordinated Resource 
Management (FR-CRM) group, a consortium of 21 local, regional, and 
national entities, has developed a number of initiatives exploring 
collaborative approaches to watershed management in the Feather River 
watershed. Their initiatives seek to strengthen local capacity, 
identify watershed reinvestment mechanisms and priorities, and forge 
alliances with groups beyond the watershed's boundaries. They have 
explored multi-issue, multi-scale approaches to investing in watershed 
management through efforts with regional networks, such as the 
California Urban Forest Advisory Council, the California Brownfields 
Communities working group, and the Regional Council of Rural Counties, 
and national networks. They have also worked with the Communities 
Committee of the Seventh American Forest Congress, a national network 
of organizations focused on the interdependence of forests and 
communities.
    The 3.2 million-acre Feather River watershed is the northernmost 
drainage in the Sierra Nevada; 71 percent is federally managed as 
national forests and national park land. The watershed delivers 4.6 
million acre-feet of unimpaired flow to the famous 1,330.1 MW 
``Stairway of Power,'' currently owned by Pacific Gas and Electric 
Company (PGandE) and the California Department of Water Resources. 
PGandE serves 600,000 customers using the Feather River hydrosystem as 
part of its electrical supply grid. The Feather River watershed 
historically supported a premier timber management and woods products 
industry, and ``Feather River Country'' is increasingly attractive for 
recreational developments. Recent research shows that investments in 
improving watershed health could increase the water storage in and 
supply from the watershed. Dr. Jeff Romm, an economist at the 
University of California at Berkeley, found that ``in certain 
conditions, riparian and meadow restoration actually can enhance water 
storage more efficiently than dam augmentation.'' And, Dr. Linda Bond, 
a consulting hydroecologist in Sacramento, and Dr. Rick Kattelmann, a 
hydrologist at the Forest Service's Pacific Southwest research station, 
estimated that investing in watershed health improvements could provide 
at least an additional 250,000 acre-feet or, 7 percent more useable 
water annually, to downstream water users. These watershed-specific 
analyses mirror SNEP's earlier Sierra-wide findings and document water 
as the most economically important output from the Feather River 
watershed, yet the environmental health of the watershed continues to 
degrade.
    In 1995, the FR-CRM began an initiative to identify the most 
effective short- and long-term reinvestment activities for maintaining 
the health of the Feather River watershed. Based on the group's years 
of experience, it concluded that a wide range of watershed management 
activities need to be funded under an effective reinvestment program. 
These activities include: watershed rehabilitation projects, planning, 
economic incentives, critical habitat protection and enhancement, 
stewardship education, project effectiveness monitoring and watershed 
trend monitoring, resource condition assessments, job training and 
development, and testing and evaluation of best management practices, 
with some money set aside for unallocated expenses, such as 
contingencies or emergencies. The breadth of the activities recognizes 
that reinvestment efforts must integrate environmental and economic 
concerns by developing comprehensive assessment information at the 
outset of projects and comprehensive monitoring information at the 
conclusion.
    Beyond identifying its local reinvestment priorities, the FR-CRM 
has also developed white papers for community forestry and watershed 
groups as a means of moving reinvestment strategies forward on a 
broader, regional basis. Its most in-depth work was sponsored by the 
Collaborative Learning Circle, a regional consortium of community 
forestry and watershed groups in the Pacific Northwest. The list of 
watershed management activities developed through this initiative is 
very consistent with the activities identified in Section 702 for the 
protection of water resources.
                        comments on section 702
    Given the need I have described for investment in watershed 
protection, restoration, and maintenance, we are pleased with 
provisions in Section 702 that direct federal funds from the proceeds 
of hydropower charges directly to watershed protection activities on 
federal lands. Our understanding is that the amount of funding 
available from these proceeds will not be very large, however. Based on 
annual proceeds of hydropower fees on the national forests in FY 2000, 
we anticipate that the 12\1/2\ percent that would be directed toward 
watershed protection will amount to less than $1 million per year under 
the current fee structure for hydropower facilities. This amount of 
funding, although helpful, will not accomplish a great deal in 
addressing the needs of watersheds throughout the nation. Therefore, we 
support the provision as a positive step, but we believe Congress and 
the federal government should do more to generate revenues for 
investment in watershed protection, restoration, and maintenance. We 
believe that greater investment is needed, to ensure that watersheds 
are not degraded, and that those who derive economic benefit from a 
watershed, or ecosystem, should pay their fair share of the maintenance 
costs. With respect to water resource issues, we believe it is critical 
for the federal government to examine the economic value of the 
ecological services being provided by federal-land watersheds, to 
identify the beneficiaries of those values, both within and beyond the 
watershed boundaries, and to identify mechanisms through which those 
beneficiaries can invest their fair share into watershed restoration 
and maintenance activities.
    The watershed protection activities in Section 702 comprise 
important elements of community-based approaches, which seek to 
strengthen ties between ecosystem health and community well-being. 
These elements include assessment activities to understand watershed 
conditions and trends; on-the-ground activities to address high-
priority resource needs; multiparty monitoring of water protection 
activities to ensure accountability and learning, as well as build 
trust among diverse interests involved in the process; and job training 
to help develop a skilled workforce and job opportunities in rural 
communities. The provisions that allow the appropriate federal agency 
to make grants or enter into cooperative agreements or contracts with 
non-profits, small businesses, or other cooperative entities within or 
near watersheds are also important to meet the goal of building 
community capacity.
    Finally, I would like to suggest two specific changes to the list 
of watershed protection activities:

   For item (F), add ``riparian and upland forests'' to the 
        list of land areas on which activities for erosion control and 
        restoring hydrologic function might be done. The condition of 
        these forest areas can greatly impact the health and function 
        of a watershed.
   For item (E), add ``on public and private lands'' to the 
        language. It is important for watershed assessments to include 
        all lands within a watershed to fully understand investment 
        needs and priorities.

    Thank you for the opportunity to testify on this legislation. I 
would be happy to respond to any questions.

    The Chairman. Ms. Keil, why don't you go ahead?

STATEMENT OF JULIE KEIL, DIRECTOR OF HYDRO-LICENSING AND WATER 
           RIGHTS, PORTLAND GENERAL ELECTRIC COMPANY

    Ms. Keil. Chairman Bingaman and other members of the 
committee, thank you for the opportunity to testify today. I am 
the director of hydro-licensing and water rights for Portland 
General Electric Company, a modestly sized investor owned 
utility based in Portland, Oregon. We own five FERC license 
projects. These form the cornerstone of our resource portfolio 
that allows us to provide efficient and economical services to 
our customers.
    Senator Smith was kind enough to mention before our 
aggressive conservation efforts. The portfolio includes that 
along with large investments in wind and the other resources 
that you heard about this morning.
    I have appeared before Congress twice before on this topic. 
I have a sincere hope that the next time I do it I will be here 
to discuss with you all the benefits that we see from the 
changes that you have enacted this session. The time has become 
only more urgent for us to enact these changes. Over the next 
15 years, one-half of the non-Federal hydro capacity, nearly 
29,000 megawatts of energy, must undergo the relicensing 
process. PGE alone, despite our modest size, we are relicensing 
nearly 600 megawatts all before the year 2006.
    Unlike the previous Congresses that I spoke before, the 
current discussion is based on a deep and, I think, well-
informed record before you, based on my testimony and the 
testimony of others. It is consensus driven and, most 
importantly, bipartisan in nature. We are hopeful that this 
spirit of bipartisanship will produce a balanced bill this 
year.
    I want to especially thank Chairman Bingaman and Senator 
Craig, along with my home State Senators, Wyden and Smith, for 
their commitment and efforts to try and reach consensus. But I 
must emphasize that absent legislative reform of the FERC 
relicensing process, hydro's role in the Nation's energy supply 
is in jeopardy.
    As you have heard today, hydropower is our largest and most 
commercially viable renewable resource. And I want to emphasize 
again that it would be a shame to increase other renewables to 
the detriment of hydro. You need to rely on that base that was 
talked about earlier.
    More than any other form of power produce, it also provides 
a myriad of other benefits, including recreation, flood 
control, and irrigation. It is also emissions free, which, in 
the time of ongoing concern over greenhouse gases, cannot be 
overlooked.
    All across the West, utilities are struggling to keep the 
lights on and to provide the reliable power that is the engine 
of economic growth. The margin for error these days is 
perilously thin. In these circumstances, hydro's unique 
reliability attributes have taken on increased importance. 
Unlike most thermal power projects, hydropower projects can be 
turned on and off almost instantaneously. This is a critical 
component of a system that must exactly match generation to 
load every minute of the day and every day of the week.
    While we are committed to other renewables and to 
conservation, none of those sources provide the flexibility and 
system support that hydropower projects provide for us in the 
West. Despite these benefits, America is in danger of losing 
significant hydropower capacity and operational flexibility at 
a time when it is most needed. Characterized by excessive costs 
and delays, the Federal hydro-licensing system threatens to 
reduce generation capacity and operational flexibility in 
projects throughout the Nation.
    You might well ask, how did we get to this point? Simply 
put, the process fails to balance the environmental impacts of 
hydro projects with the crucial energy and non-energy values of 
the resource. It suffers, as Mr. Robinson mentioned, from 
dispersed decision-making authority and an inability to balance 
competing values. The net result is that no one has the 
authority to speak on behalf of the public interest in general, 
no one has the authority to make that final balance.
    In relicensing our largest hydro project, Pelton Round 
Butte, 11 agencies, each with a single mandate and mandatory 
conditioning authority over some or all of the project, have a 
role to play and have been involved. No one is responsible for 
making their various mandates consistent. No one has the 
authority to look at the broader picture and make sure that 
important energy benefits are considered in the exercise of 
those mandates. To call the process a three-ring circus does 
not do justice to the complexity that we face.
    To take the analogy one step further, in my role I juggle 
many interests. I am responsible for providing reasonably 
priced and reliable service to PGE's customers. I must also 
ensure that the company's investors get a fair return on their 
investment in the company. And I must negotiate terms and 
conditions, which is what I do on a daily basis, which reflect 
PGE's deeply held environmental stewardship ethic.
    Our goal in relicensing is to make the environmental 
footprint of the project as small as possible while still 
maintaining a viable project.
    My agency counterparts, on the other hand, often juggle 
only one ball, the protection of natural resources. This 
fundamental disparity is at the core of the hydro-licensing 
conundrum. You will find attached to my written testimony many 
other examples of how the process fails, and I would strongly 
encourage you to read that attachment.
    You will undoubtedly hear the argument that the problems 
with hydro-licensing can be resolved solely through 
administrative means. I have to disagree. And I do have 
firsthand experience in this arena. I have served 3 years as a 
member of the Federal Advisory Committee that advised the 
Interagency Task Force and on a parallel level have been deeply 
involved in the National Review Group founded by EPRI, which 
has explored many different for administrative reforms.
    The problem is they simply do not address the fundamental 
problem with the system. The system as it is now benefits no 
one. It certainly does not serve the interests of energy 
production and, I would strongly argue, ill serves the 
environment as well, as environmental protection delayed is 
protection denied.
    To craft a process that truly advances all interests, 
energy and environment, legislative solutions are necessary. 
For the hydro industry, our number one priority is to reinject 
balance into the licensing process, to make sure, if you will, 
that everyone has more than one ball to juggle, that everyone 
in the process must balance and consider competing and 
difficult interests.
    Our other priorities include scientific administrative 
review of mandatory conditions, deadlines for timely 
submission, coordination of the environmental review process 
under NEPA. The two legislative proposals you have before you, 
S. 71 and S. 597, both address these needs in a variety of 
ways. The question that we face now is, can these two 
approaches be merged in a way that will allow us to wisely make 
the most difficult of decisions: How do we provide for the 
energy needs of today while protecting and enhancing precious 
environmental resources for the future?
    The industry stands ready to work with the committee and 
with other interests, and we want to encourage you to continue 
the bipartisan efforts to date. Keeping the lights on in the 
Northwest and throughout the Nation is not a partisan issue. 
And it demands your prompt attention.
    Thank you.
    [The prepared statement of Ms. Keil follows:]
Prepared Statement of Julie Keil, Director of Hydro-licensing and Water 
               Rights, Portland General Electric Company
    Chairman Bingaman, Ranking Member Murkowski, Members of the 
Committee, thank you very much for giving me the opportunity to appear 
before you today to discuss legislation that has been introduced in the 
Senate that would improve the Federal Energy Regulatory Commission's 
hydroelectric relicensing process.
    I appear before you today in two capacities. First and foremost, I 
am Director of Hydro Licensing and Water Rights for Portland General 
Electric Company. PGE is an investor owned utility based in Oregon, 
serving more than 700,000 customers in the Portland metropolitan area 
and the Willamette Valley. PGE owns 5 FERC-licensed hydroelectric 
projects. The capabilities of these projects form the cornerstone of 
our ability to provide efficient and economical service to our 
customers.
    I am also here representing the hydropower industry. As a former 
President of the National Hydropower Association, I have participated 
over the years in hundreds of discussions with industry colleagues and 
non-industry stakeholders as to the challenges and opportunities facing 
hydropower in the 21st century. I am a member of the Federal Advisory 
Committee (FACA) that worked with the Interagency Task Force towards 
administrative improvements to the hydro relicensing process; 
similarly, I am a member of the EPRI National Review Group that has 
also explored administrative relicensing process reform. In addition, 
Portland General is an active member of the Hydroelectric Licensing 
Reform Task Force, a coalition of public and investor-owned hydropower 
generators drawn from the memberships of the American Public Power 
Association, the Edison Electric Institute, and the National Hydropower 
Association. As such, my testimony today reflects the sentiments of a 
broad cross-section of the hydropower industry.
    PGE is also a member of WaterPower: The Clean Energy Coalition, a 
group of over 660 consumer, labor, environmental, farming and other 
organizations that recognize the need to improve the hydro relicensing 
process. At the local level, PGE has been a key participant in numerous 
state task forces aimed at improving the process of state participation 
in the relicensing of hydro projects.
    The issue of hydro relicensing improvement is not new to this 
committee. In oversight and legislative hearings held before this 
committee during the previous two Congresses, a detailed record has 
been compiled as to the complexity, costs, delays, and conflicting 
mandates inherent in the FERC relicensing process. The energy crisis 
that currently plagues California and the Pacific Northwest has only 
underscored the need for and importance of Congress acting as soon as 
possible to reform the relicensing process so as to preserve consumer 
access to clean, reliable, and cost-efficient hydropower.
    The urgency surrounding this issue has not dissipated with the 
passage of time. In fact, with each passing year the stakes increase 
considerably. Today, as we look at the next 15 years, one-half of all 
non-federal hydroelectric capacity--nearly 29,000 MW of power (enough 
to serve 29 million homes)--must undergo the FERC relicensing process. 
This includes 240 projects in 38 states, much of it in Western states 
where power supply is a major concern. Portland General alone is in the 
process of relicensing nearly 600 megawatts, all before 2006. We are 
not unusual in this respect.
    What has changed, however, is the bipartisanship that now 
characterizes efforts to improve the relicensing process. All of us 
within the hydropower industry are encouraged by this shift towards a 
bipartisan consensus on hydro relicensing. The fact that both 
Republican and Democratic-sponsored Senate energy policy packages 
introduced earlier this year contain sections on hydro relicensing 
improvement is a testament to the important consumer benefits to be 
gained from relicensing reform. We are hopeful that this spirit of 
bipartisanship will produce a balanced, comprehensive, substantive bill 
this year. I want to especially thank Chairman Bingaman and Senator 
Craig, and my home-state Senators Wyden and Smith, for their commitment 
to this issue and good-faith efforts to date at trying to reach 
consensus. The fact is, hydropower has played--and must continue to 
play--a key role in our nation's energy policy; and absent legislative 
reform of the FERC relicensing process, that role is in jeopardy.
    Hydropower accounts for about ten percent of the nation's 
electricity and over 80 percent of its renewable energy. The benefits 
of hydropower, and its continued importance to our nation's 
environmental and energy policy objectives are well documented. 
Hydropower is not only our largest, renewable energy resource; it is 
low cost and efficient; it is a purely domestic resource; and it 
provides Americans with abundant recreational opportunities, as well as 
many flood control and irrigation benefits. It is also an emissions-
free resource, which in a time of ongoing concern over greenhouse gases 
cannot be overlooked. In 1999, hydro displaced the emissions of 77 
million metric tons of carbon; that is the equivalent of removing 62.2 
million passenger cars, nearly 50% of the current fleet, from our 
nation's roadways. In addition, emissions-free hydropower generation 
helps us avoid significant amounts of Nitrogen Oxide (NOX) 
and Sulfur Dioxide (SOX), which are major contributors to 
decreased air quality.
    As California and the West continue to grapple with an energy 
supply insufficient to meet growing consumer and industrial demand, it 
is another of hydropower's attributes that has taken on increased 
importance: its reliability. The management of the nation's electric 
grid depends upon fast, flexible generation sources like hydropower to 
meet peak power demands and to restore service after a blackout. 
Hydropower's ability to go from zero power to maximum output quickly 
and predictably makes it exceptionally good at meeting changing loads 
and providing ancillary electrical services.
    Despite these multiple benefits, our supply of hydropower is waning 
and America is in danger of losing significant hydropower capacity and 
operational flexibility at a time when it is most needed. As we face 
rising energy prices, increased levels of pollution, energy shortages 
and reliability concerns, we must consider ways to counter these 
trends. In short, now is the time for policymakers at the federal level 
to fix the hydro relicensing process, for it is this process that poses 
the greatest threat to the future viability of this important resource.
    As documented in recent Congressional hearings and most recently by 
FERC in its Section 603 Report, the relicensing process suffers from 
dispersed decision-making authority and an inability to balance 
competing values. The bottom line is that costs, delays, and 
conflicting mandates inherent in the process threaten to reduce 
generation capacity and operational flexibility throughout the nation. 
As we lose megawatts and operational flexibility, we must rely on less 
efficient generation sources that both cost more and produce greenhouse 
gas and other emissions.
    How did we get to this point? Why such a dysfunctional process? 
While there is no shortage of explanations, most of it can be boiled 
down to one unfortunate reality: the relicensing process fails to 
properly balance the environmental impact of hydro projects with the 
crucial energy and non-energy values of the resource.
    Since 1986, FERC has been required, under the Federal Power Act, to 
give ``equal consideration'' to a variety of factors when issuing hydro 
project licenses and relicenses. This balancing authority requires FERC 
not only to consider the power, economic, and development benefits of a 
particular hydro project, but also to consider energy conservation and 
the protection, mitigation of damage to, and enhancement of fish and 
wildlife. In other words, under Federal law, FERC has the 
responsibility and authority to strike a balance between power and 
environmental values. If this were the provision of the Federal Power 
Act that governed in this situation, relicensing might have a chance to 
succeed. The courts, however, have interpreted the Federal Power Act so 
as to prevent any balancing from taking place. The courts, in effect, 
have given Federal resource agencies unilateral authority to set 
``mandatory'' conditions on FERC relicenses. FERC has no opportunity to 
question the basis of mandatory conditions set by the agencies, or to 
fit those conditions into the final license.
    This would not be a problem if federal resource agencies, when 
imposing a mandatory condition, considered the many factors that FERC 
is required to examine pursuant to the Federal Power Act. However, this 
is simply not done. While all of the agency personnel with whom I have 
worked over the years have been intelligent, well-intentioned people, 
their statutory mandates simply do not permit them to look beyond the 
narrow resource areas they are charged to protect. The net result is 
that no one is balancing. No one has the authority to look at the big 
picture of how hydro fits into our national energy policy. I go back to 
my earlier observation: in today's energy-short climate, where every 
megawatt counts, this is a situation that must be remedied, and 
remedied soon.
    A brief example from my experience may serve to illustrate. In 
relicensing PGE's Pelton Round Butte Project, 11 agencies each with a 
single focus and mandatory conditioning authority over all or part of 
the project have been involved. No one is responsible for making their 
various mandates and authorities consistent. As importantly, no one has 
the authority to look at the broader picture and make sure that 
important energy benefits are considered in the exercise of those 
mandates. To call the process a three ring circus does not do justice 
to the complexity we face.
    Attached to my written testimony is a compilation of recent 
relicensing experiences, reflecting the problems many of our hydropower 
colleagues have witnessed first hand with the current relicensing 
process.* For example, the National Marine Fisheries Service last year 
imposed a fish passage requirement on the Enloe Dam project license in 
Washington that was contrary to the wishes of a Congressionally 
authorized regional collaborative planning council. Look at 
PacifiCorp's North Umpqua project in Oregon where the relicensing 
process took over 10 years. Even though a settlement was recently 
reached in this proceeding, relicensing process improvements could have 
resulted in smoother settlement negotiations, at far less cost and 
resulted in investments being made in environmental improvements rather 
than in study upon study upon study.
---------------------------------------------------------------------------
    * The attachments have been retained in committee files.
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    Some have suggested that the problems with the FERC relicensing 
process can be solved solely through administrative, rather than 
legislative means. I disagree. And I draw that conclusion having 
invested considerable time and energy in recent years in search of 
substantive administrative remedies. As I mentioned earlier, for the 
last three years I have been a member of the Federal Advisory Committee 
(FACA) that worked with the Interagency Task Force towards 
administrative improvements to the hydro relicensing process; 
similarly, I am a member of the EPRI National Review Group that has 
also explored administrative relicensing process reform. While the EPRI 
NRG and an ITF successor group continue to explore administrative 
reform, I have come to the following conclusion: properly developed and 
implemented administrative remedies can certainly help on a number of 
fronts and should be encouraged. But taken alone, administrative 
reforms can not fully address the fundamental and substantive problems 
with the process.
    These thoughts were echoed in a letter that was sent earlier this 
year to members of this Committee, signed by me and the other 5 
industry FACA representatives, expressing the following assessment of 
the ITF's work product. In that letter we said:

          While the [ITF] reports themselves are helpful, they do not 
        resolve the fundamental conflict inherent in the existing 
        system of government oversight of hydropower projects, nor will 
        they assure maintenance of this reliable and low-cost source of 
        electricity . . . The reforms necessary to achieve substantive 
        improvements in the licensing of hydroelectric facilities can 
        best be obtained through legislation addressing the Federal 
        Power Act.

    Let me say once again: legislative fixes are necessary if we are to 
reform the hydroelectric relicensing process in a manner satisfactory 
to most stakeholders.
    So, what legislative fixes are needed? For the hydro industry, the 
number one priority is to re-inject balance into the relicensing 
process--a balance between environmental protection and the all-
important energy and non-power benefits of hydro projects. Both of the 
legislative proposals that are before this Committee address this need, 
albeit in different ways and to varying degrees.
    S. 71, the ``Craig bill'', which also serves as Title VII of S. 
388, requires agencies to take into consideration project benefits, 
including economics and power values, system reliability, air quality 
and flood control, and requires the agencies to document consideration 
of these factors. It does not require agencies to subordinate their 
natural resource responsibilities to these factors, it simply requires 
them to take other factors into account. The hydro industry supports 
this concept and believes it would secure the requisite balance that is 
lacking in an environmentally compatible manner.
    Title VII of S. 597, the Bingaman bill, seeks balance through 
introducing the concept of an alternative mandatory condition. The bill 
requires agencies to adopt applicant-drafted alternatives that provide 
equal or greater environmental protection; are based on sound science; 
and will either cost less to implement than the original condition or 
result in less loss of generating capacity than the original condition. 
We support this concept with the following qualifications:
    i) it is important that the environmental standard not be too 
restrictive so as to disqualify what might otherwise be the most 
effective approach to achieving an environmental goal;
    ii) since a mandatory condition does not generally impact capacity 
at a project, the criteria for an alternative should be ``less loss of 
electric generation, capacity or operational flexibility;''
    iii) if an alternative must be based on sound science, then a 
Secretary's rejection of an alternative should also be based on sound 
science; and
    iv) in the case of a disputed issue of material fact, there is a 
need for a hearing on the record.
    With these changes, the ``alternative condition'' language of the 
Bingaman bill could be an effective and useful tool to encourage 
innovative approaches to regulations without sacrificing important 
environmental outcomes.
    On a related note, some have suggested that any party should be 
allowed to propose an alternative mandatory condition. We disagree. 
Allowing any party to do so would not only clog the system with dozens 
upon dozens of alternatives, but it also ignores the fact that other 
parties will already have had ample opportunities to propose license 
conditions in the proceeding. At the end of the day, it is the 
applicant who must decide whether to accept a license with the 
condition or to reject it; accordingly, it is the applicant and the 
applicant alone who should have the opportunity to put forth a least-
cost alternative.
    Other industry legislative priorities include:
Scientific Review of Mandatory Conditions
    Industry believes that mandatory conditions should be grounded in 
the best available scientific evidence. As such, federal resource 
agencies should be required to subject each condition both to 
appropriately substantiated scientific review based on best available 
and current empirical data or field-tested data and to peer and public 
review. The Craig bill gets us there, requiring a scientific basis for 
all conditions and peer review. As for the Bingaman bill, our above-
mentioned qualifications to the alternative condition section would 
insert a requisite grounding in ``sound science.''
An Objective Administrative Review Process for Mandatory Conditions
    Usually, under the current relicensing regime, federal resource 
agency field biologists are the ones who draft mandatory conditions, 
without any opportunity given for an objective administrative review. 
In order to shed greater light on the formulation of mandatory 
conditions, federal resource agencies should be required to:

   provide notice of draft conditions;
   provide an opportunity for a hearing on the record;
   consider all comments received; and
   include comments in the documentation submitted to the 
        Commission as evidence.

    The Craig bill provides for administrative review of contested 
conditions before the issuance of a final order. This review could both 
improve and shorten the relicensing process by eliminating the 
likelihood for post-license litigation. While such administrative 
review is absent from the Bingaman bill as introduced, we are pleased 
that Chairman Bingaman and his staff have indicated a willingness to 
revisit such concepts in a revised bill.
Establishment of Deadlines for the Timely Submission of Mandatory 
        Conditions
    We must get away from excessively lengthy relicensing proceedings--
some taking more than 26 years. Under current FERC regulations, 
resource agencies are already required to meet deadlines for submission 
of conditions; rarely, however, do agencies adhere to these deadlines. 
To be effective, these deadlines must be codified through amendment to 
the Federal Power Act. The Craig bill sets firm deadlines for the 
submission of draft and final mandatory conditions, which is a concept 
we support. While the Bingaman bill does not set such deadlines, we 
support the notion of FERC issuing an estimated schedule for all 
subsequent actions by the applicant, FERC, resource agencies and other 
parties--a notion that Chairman Bingaman and his staff are currently 
considering.
Coordination of the Environmental Review Process Under NEPA Into One 
        Document
    Finally, there is a palpable need for greater coordination among 
agencies with jurisdiction over the hydro relicensing process. This is 
especially the case in the area of environmental review. In order to 
avoid duplication of efforts, we would recommend legislative efforts, 
such as those contained in the Craig bill, to confirm FERC's 
responsibilities as lead agency for environmental reviews of hydro 
projects under NEPA, including a requirement that FERC set deadlines 
for submitting input on environmental review by Federal, state and 
local agencies. NEPA coordination is currently absent from the Bingaman 
bill, but is under consideration by Chairman Bingaman and his staff; we 
would encourage its inclusion in any final legislation.
    The question then for this Committee is, can elements be drawn from 
the Craig bill and the Bingaman bill in a way that would substantively 
address the problems with the current process in a manner fully 
compatible with environmental law? In answering this question, the 
hydropower industry encourages Chairman Bingaman and Senator Craig, and 
all the members of this Committee, to sit down and forge consensus 
legislation. The hydropower industry stands ready and willing to assist 
in this effort as needed. What is most important, is that the 
extraordinary work done by Senators Bingaman and Craig to date not fall 
prey to partisanship. The energy supply problems in my region, and 
throughout the nation, are not partisan issues and demand prompt 
attention. Accordingly, I urge the Committee to continue its good faith 
efforts and pass consensus language on hydro relicensing reform this 
summer.
    In conclusion, I would like to offer the following thoughts on the 
relationship between energy priorities and natural resources. The river 
and fisheries resources administered by hydro project operators are 
very important ones, and essential and long-lasting commitments are 
being made in relicensing processes. Portland General and the 
hydropower industry as a whole take seriously their role as stewards of 
the rivers we are privileged to use. Licensees go to great lengths to 
involve stakeholders and members of the public in licensing and 
relicensing processes. These consultations take years and, without 
question, natural resource issues constitute the bulk of those 
discussions. Ultimately, the majority of direct and indirect 
expenditures made by licensees are spent on environmental protection, 
mitigation and enhancement measures.
    Some rhetorically argue that the hydropower industry wants to 
``roll back'' environmental regulations in this process. That is 
absurd. With hydropower process improvements, resource enhancement and 
protection will continue. But they must continue in a process that also 
recognizes and protects the value of the product that is the subject of 
the relicensing in the first place. We can and must achieve balance in 
this arena. We strongly believe that healthy rivers and hydropower can 
coexist and we continue to work toward that end.
    Time is short. As we look to self-sustaining energy strategies, now 
is the time for policymakers to better incorporate hydropower into the 
nation's energy mix. We urge you to pass hydro relicensing improvement 
legislation this Session. It is a goal that can benefit hydro 
producers, the environment and consumers, and one that all Americans 
should support.
    Thank you.

    The Chairman. Thank you very much.
    Thank you all for your testimony. Let me just ask one 
question here and then defer to Senator Craig. Mr. Robinson, 
you indicated in your testimony that under the court rulings 
that have come down, that if the Commission were to conclude 
that one or more of the mandatory conditions that have been 
imposed would render a project inconsistent with the public 
interest, then the commission's only course would be to deny 
the license application. Am I correctly understanding what you 
said?
    Mr. Robinson. yes.
    The Chairman. Has there been any circumstance where that 
has occurred, where an agency has imposed a mandatory condition 
which you felt was so out of line that you went ahead and 
denied a license application?
    Mr. Robinson. I think the very scenario that you bring up 
is one that goes to some of our longest running relicensing 
actions. It is really not a viable option to deny a license at 
relicensing. We are not sure where the project would go. So 
what we have to do is to continue to try to facilitate a set of 
conditions that will allow for a sustainable project and one 
that does meet that public interest standard. And sometimes 
that takes a number of years.
    The Chairman. So instead of denying the license, you wind 
up just prolonging the pre-licensing process.
    Mr. Robinson. Well, we continue to work with all the 
parties that are providing conditions to try to get a license 
that meets that public interest standard. And that does at 
times--from project to project can take some time. I would note 
that we are the only agency that is required to balance all 
those conditions and meet that standard when we issue that 
license. And sometimes that is a difficult standard to meet, 
when you are receiving mandatory conditions that do not have 
that same standard of review.
    The Chairman. Okay.
    Senator Craig.
    Senator Craig. Thank you, Mr. Chairman. And to all of you, 
thank you for your valuable testimony. Obviously the issue of 
licensing hydro projects is of great concern to all of us and 
to all of you who are here. We appreciate your testimony.
    First of all, Mark, I want to thank you and one of your 
colleagues, John Katz, Office of General Counsel.
    Mr. Chairman, recently we had a very difficult situation in 
Idaho, and these gentlemen facilitated in a settlement process 
between a investor-owned utility and a Federal agency that was 
most helpful. And that was greatly appreciated by Idaho. And 
Idaho consumers and rate payers, I suspect, were collectively 
the beneficiary of that.
    Mark, there have been many studies recently that address 
loss of generation. Some say it is 4 percent, some say it is 8 
percent. Mr. Bettenberg referenced that as it relates to the 
consequence of FERC's current process. Are there other effects 
in the relicensing process that is aside from the loss of 
generation that have not received the appropriate attention?
    Mr. Robinson. I think the answer is yes. In fact, I know 
the answer is yes. The easiest thing to determine, when you 
look at a relicense, is the effect on generation, the effect on 
capacity. Those are numbers that you can pick out pretty 
quickly.
    What you cannot do as easily, and in fact no one has really 
attempted to do this, is what the effect of relicensing and 
changed conditions on how the project operates, what that does, 
the ability of that project to factor into the reliability of 
the system, to provide for peak load requirements, and to just 
be a flexible component of the electric generating system that 
that project exists within.
    That is, for a hydropower project in particular, is so 
interrelated to changing hydrological conditions that it is 
hard to separate it out. But there is no doubt that, when you 
take a project that has been operating with great flexibility 
within an electric system and you put a condition on it that 
says you will now operate what is called run of river, in other 
words, no longer adjust the reservoir elevation to satisfy 
power demands, that you have reduced its ability to be a factor 
in system reliability and peak load demand. That has not really 
been studied.
    Senator Craig. I think we can all focus on numbers or 
percentage of loss of generating capability. And that is 
probably whey we have gone that route instead of the ability to 
operate some flexibility.
    Mr. Robinson. That is correct.
    Senator Craig. Mr. Bettenberg, your colleague sitting next 
to you today filed some lengthy written testimony with the 
committee. Have you had a chance to review that testimony?
    Mr. Bettenberg. I read it over quickly last night. Yes, 
sir.
    Senator Craig. Have you had a chance to read Mr. 
Bettenberg's, Mark?
    Mr. Robinson. Yes, sir.
    Senator Craig. Is there anything in Mr. Bettenberg's 
testimony that you would like to address or that you believe 
needs to be clarified in order for this committee to be more 
fully and completely informed on the issue? And I am talking 
generally about agency responsibility. That is a question of 
you, Mark.
    Mr. Robinson. Okay. There were a couple points, and I will 
try to be brief on them. And I heard them repeated at----
    Senator Craig. The reason I am following this line of 
questioning, Mr. Chairman, because I am using all of the other 
testimony as a template to question Mark based on how FERC sees 
these kinds of relationships.
    Mr. Robinson. Okay. One of the statements that was made is 
that there is no difference in the time required to relicense 
between a project that contains mandatory conditions and those 
that do not. If you look grossly at the statistics, in fact, 
that is correct. However, given the number of projects we 
relicense and the number of different things that can cause 
delay, one delay masks another.
    In the grand scheme of things, the issuance of a section 
401 certificate under the Clean Water Act really drives the 
train in about 40 percent of our projects. I mean, that is the 
cause of the largest delay. But inside of that, inside of that 
delay, clearly the receipt of 4(e) conditions, which runs about 
17 months on the average, when the commission has asked for 
those within about 2 months, leaving you about a 15-month delay 
on average when we receive 4(e) conditions, it is a delay. And 
a delay is a delay is a delay. And we cannot do anything about 
that.
    So to say that there is no difference between the two 
really does not look at it in fine enough detail. And what we 
found, what we did, is that you have about a 15-month period in 
there, on average, where we do not receive 4(e) conditions, 
just as an example. That is one instance.
    The second thing I would like to bring up is the commitment 
in the testimony, and again as expressed here, that conditions 
will be provided within 60 days after we establish a notice 
that says we are ready for your condition, which is consistent 
with our regulations and what we would like to see those 
conditions come in.
    And then a second commitment, that they will come in with 
their modifications to those conditions 60 days after the draft 
NEPA document, and then a commitment to come in after the final 
EIS with their ultimate conditions. Well, that is three bites 
at the apple. We would like to have those conditions 60 days 
after we establish that we are ready for those conditions.
    Senator Craig. Let me go to a similar line of questioning 
with the testimony that was given by Ms. Birnbaum. Did I do 
that right, Liz? Thank you.
    Have you had the opportunity, Mark, to review Ms. 
Birnbaum's testimony, either her testimony filed here today or 
she recently gave some, I think it was June 27, before the 
House? And I was fascinated by many parts of her testimony, but 
particular with her discussion of the Federal Resource Agency's 
mandatory conditions and how they are used by Federal agencies 
to, in her words, ``form a floor above which FERC can balance 
license conditions.''
    Do you have any thoughts in relation to that concept? I 
thought that was an interesting statement as it related to the 
overall process.
    Mr. Robinson. Yes, sir, I do. It projects a visual in my 
mind. If you look at it as you set the floor from which you 
balance, it projects one type of image. The actual image is 
this: If you have a--if you can think of it as a scale, like 
a--I am a biologist. So I will say a triple beam balance type 
of a scale, which is a long stick with a point in middle where, 
you know, you balance things.
    What really happens is, you come in one side of that 
balance, and you set those conditions. Well, that will move 
that up and down on one side. Once those are set, it is pointed 
to, and it also sets the other side of the balance. Those non-
developmental--I am sorry, those developmental types of issues, 
like power production, irrigation, safety, those things someone 
mentioned from the table earlier.
    So it does not exactly set the floor; it actually sets the 
point that you are going to have on the power production sides 
by setting the point that you are going to have for the 
environmental protection.
    I hope that was somewhat clear.
    Senator Craig. Well, I think I understand it. Because that 
was my frustration, agencies coming in with mandatory 
requirements, I understand that. But it does change the 
circumstance----
    Mr. Robinson. It certainly does.
    Senator Craig [continuing]. Under which an ultimate license 
can be formed and ultimately a project operated.
    I will return to you. I have more questions.
    Mr. Robinson. Go right ahead.
    Senator Craig. All right. Let me give you an opportunity, 
Mark, to respond to what I considered to be a very charge that 
Ms. Birnbaum made.
    And certainly, Ms. Birnbaum, you, too, can respond.
    And this came from her June 27 testimony in the House. She 
asserts that, again in her words, ``FERC over relies on what is 
characterized as the public interest.'' And you certainly have 
mentioned that today, Mark. ``But is little more than best 
professional judgment clouded by institutional biased.''
    I believe that was your quote, Ms. Birnbaum.
    She continues in her testimony to assert that the 
Commission's decisions are often made in a black box and are 
arbitrary and capricious. I guess I would have to say, do you 
know what she is talking about here? Has American Rivers ever 
formally raised this with the Commission and given particulars 
so that it could respond to those kinds of allegations?
    Mr. Robinson. I did notice that in her statement. It did 
not escape me, I tell you. I am quite surprised at that.
    Senator Craig. Well, they are not fighting words, but they 
certainly are illustrative of a process or a condition.
    Mr. Robinson. I am surprised at those statements. We have 
worked with American Rivers and others for a number of years to 
develop the process that we have now. And I cannot believe that 
anybody at this table would say that the FERC licensing process 
is anything other than one of the most public-intensive, 
public-involvement, above-the-table, transparent regulatory 
systems in place here in D.C. today.
    We have--and as a result of that, you get an enormous 
amount of process, and you get more time, more cost, which of 
course now generates the criticism that we have. But that is 
the truth of it.
    And I would like to just go one step farther, if I could, 
because another criticism we hear from American Rivers, and 
hopefully I can address it and maybe will never hear it again, 
but we might, is that the expertise only exists with the 
agencies. There are two aspects of the expertise that come into 
play in licensing a hydropower project on the environmental 
side. And it is more than the environment, but just on the 
environmental side.
    One set of expertise rests with the agencies. There is no 
doubt about it, and we rely on it. And we would propose nothing 
that would diminish that input to the process. That is what 
goes on with those resources locally. They know where the fish 
are. They know where the elk range. And we have to have that 
information to make good judgments and good decisions about 
these projects.
    The other set of information is what does a hydropower 
project do to those kinds of resources? We have without doubt 
the greatest concentration of environmental expertise. There 
are 80 more people just like myself with advanced degrees in 
environmental sciences that exist back at the Commission, who 5 
days a week and at least 8 hours a day work on hydropower 
licensing from an environmental perspective. They are 
professionals. We have that expertise, and we know what 
hydropower projects do to those resources.
    If you combine those two, we have the best possible chance 
of issuing a license that meets the public interest standards. 
Neither one can stand alone. And hopefully American Rivers will 
appreciate that and make note of that from this point forward.
    Senator Craig. Liz, in fairness to you, certainly you are 
entitled to respond.
    Ms. Birnbaum. Thank you. I wanted to comment on the 
elements of my earlier testimony that you commented on. The 
institutional bias referred to, as is pretty clear, based on 
the fact that FERC simply does not deny hydropower licenses. 
They are a licensing agency. And they are supposed to be 
deciding whether or not a hydropower project should be placed 
where it is proposed. In fact, they do not deny licenses. They 
are much more of a hydropower promotion agency.
    Now under those conditions, Congress has put a number of 
constraints and in 1986 determined that there needed to be more 
of a requirement that FERC balance non-power interests, as well 
as power interests, because it recognized that FERC's general 
approach is to grant licenses.
    On the black box perspective, although FERC's public docket 
is very often, what happens at FERC is very much behind closed 
doors. FERC does not, for example, publish a draft decision, 
even a staff draft, before they come out with the final 
decision on a license. And then as virtually everybody who has 
had to deal with the FERC rehearing process knows, once a 
petition for a rehearing is filed, nobody knows how, when, or 
why a decision will be made. The statute requires that it be 
done within 30 days.
    Typically FERC issues a decision accepting the request for 
a rehearing solely for the purpose of further consideration. 
And then a final decision does not come out for 6 months to 
several years.
    All of that is a black box. Nobody knows what is going on 
inside of it.
    Senator Craig. Well, I understand the process, and I 
appreciate some of the reasons and some of them economic as to 
why those decisions are made in that light. You have made the 
absolute statement that FERC has never denied a license. Do you 
want to repeat that?
    Ms. Birnbaum. I actually do not know whether FERC has ever 
denied a license for sure, but I know that they do not in 
general. The Corps of Engineers----
    Senator Craig. I know of a few, and I will bet Mark could 
come up with others.
    Ms. Birnbaum. You know, the Corps of Engineers grants 
thousands of wetlands permits and occasionally denies one. FERC 
has been known to go back and tell people that they needed to 
file a different application for a different license. But in 
general, FERC is strongly biased towards granting license 
applications.
    Senator Craig. Again, Mark, for years now, many opponents 
of hydro have asserted that FERC's licenses once issued are 
immutable for periods of 30 to 50 years. First of all, is that 
true? And what can the Commission do when environmental 
resources are threatened as a consequence of changed 
circumstances at the projects?
    Mr. Robinson. Since about 1975, licenses issued by the 
Commission have included what have commonly become known as 
reopener provisions.
    These are provisions that allow the commission, if there 
are changed circumstances or unanticipated consequences of 
licensing that appear during the course of the 30- to 50-year 
license to go back in and, on its own merits or at the request 
of the Department of the Interior or Commerce, I believe, make 
adjustments to that license for the protection of fish and 
wildlife, for the addition of recreational resources, and for a 
number of other environmental types of conditions.
    That really, around, I will say, 1991 or so, was 
highlighted through what is known as the Platte River decision, 
where we were asked to go in and make rough and ready changes 
to a project, by the courts, to facilitate whooping crane 
habitat.
    Since that time, we have had about 50 other reopener 
actions at the Commission, where we have gone back in during 
the course of the license and modified those projects. We have 
about 15 of those 50 pending right now. All but 3 or 4 of those 
others that we have already treated were typically handled by 
again negotiation with the licensee and the agencies that were 
involved in coming up with a solution where the licensee would 
come in and amend their project to take care of whatever 
problem was there.
    So we have a completed a large number of these. But it is a 
provision that we include in all licenses now to ensure, if we 
have changed circumstances or unintended consequences, we can 
go back and make adjustments to those projects, recognizing 
that we do that with great--I mean, there has to be the ability 
to rely on those licenses by the people who are developing 
these projects and investing their money.
    But we also know that we have balance that with making sure 
that we know when a new species is listed, endangered species 
is listed, that we can go in and make some adjustments to that 
project to satisfy the endangered species concern.
    Senator Craig. You say it is a provision within the license 
now. Is it a relatively new provision? How long have you been 
doing this?
    Mr. Robinson. I think it has been about since 1975 that 
almost all of them include it. Right now it is very few 
licenses that remain that do not include that provision.
    Senator Craig. But historically speaking, and I know that 
Ms. Birnbaum referred to that, I think what she said was 
historically accurate in a sense, but I had understood there 
was flexibility now, based on certain circumstances.
    Mr. Robinson. We have been making use of the reopener 
provision with much greater frequency since about 1991, about 
ten years.
    Ms. Birnbaum. May I comment on that?
    Senator Craig. Yes, please.
    Ms. Birnbaum. Although FERC has indeed used the reopener 
provision where licensees have been willing to come in and 
amend their licenses, some of the good actors who recognize 
that they need to deal with new endangered species listings, 
there are also some notable cases in which they have declined 
to reopen licenses where they have reopener clauses, when new 
species have been listed, and even where there have been die-
offs of endangered stocks of fish. And they have declined to 
reopen those licenses.
    Senator Craig. Okay. Mr. Chairman, I have other questions, 
but you have been very generous with time. And it is late, and 
this panel has been held longer than I think they probably 
thought they would be here. I will submit some questions in 
writing. And thank you very much.
    The Chairman. Thank you, all, very much. I think it has 
been very useful testimony. And we will conclude the hearing.
    [Whereupon, at 12:25 p.m., the hearing was recessed, to be 
reconvened on July 24, 2001.]

                         NATIONAL ENERGY ISSUES

                              ----------                              

                         TUESDAY, JULY 24, 2001

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:42 a.m. in room 
SD-106, Dirksen Senate Office Building, Hon. Jeff Bingaman, 
chairman, presiding.

           OPENING STATEMENT OF HON. JEFF BINGAMAN, 
                  U.S. SENATOR FROM NEW MEXICO

    The Chairman. The committee will come to order. This is one 
of several hearings we have had both this year and in the last 
Congress on the science of climate change, but in the past we 
focused on the science of climate change, the cost of 
implementing the Kyoto Protocol, and appropriate research and 
development agenda to ensure technologies are developed to 
reduce and eventually eliminate greenhouse gases from energy 
sources. The committee has not held a hearing specifically on 
measures undertaken by the private sector to actually reduce 
emissions. I think this focus on a pragmatic and proactive plan 
to reduce greenhouse gas emissions is certainly timely today.
    We are all aware that the administration has removed the 
United States from substantive participation in the 
international negotiations that have been occurring in Bonn. 
Agreement was reached on rules for the Kyoto Protocol yesterday 
that include, as far as I can tell from press reports, all of 
the flexibility mechanisms that the U.S. Government and U.S. 
industry has long argued were critical to a cost-effective 
strategy.
    The meeting of the parties in Bonn will continue through 
the end of the week as the details of the implementation are 
being worked out. Unfortunately, those details will be worked 
out without our involvement.
    The two major criticisms of the protocol, first that the 
market mechanisms essential to avoiding economic harm were not 
clearly defined, and second that developing countries were not 
required to take on defined commitments, those two criticisms 
should in my view not have resulted in the administration 
walking away without a serious effort to remedy those defects. 
It appears to me from the press reports I have seen that the 
first criticism that market mechanisms essential to avoiding 
economic harm were not clearly defined, that criticism is well 
on its way to being addressed.
    The second criticism, that developing countries were not 
required to make defined commitments I think also is in flux. 
According to testimony that the committee received last month, 
China has reduced its greenhouse gas emissions, or taken 
actions to reduce greenhouse gas emissions from the levels they 
otherwise would have achieved by as much as a third during the 
past 20 years.
    That same testimony indicated that our own greenhouse gas 
emissions since the signing of the Rio treaty have increased 
substantially.
    While the Congress has debated the subject, many members of 
the business community have been taking actions to reduce 
greenhouse gas emissions. They are now seeking to build on this 
experience through development of a clear legal framework for 
domestic emission reductions.
    Establishing risk parameters will enable the private sector 
to make informed investment decisions and minimize cost. There 
is no simple, universal answer for meeting the challenges of 
climate change. The study that the Department of Energy came up 
with, the Scenarios for a Clean Energy Future, written by five 
of our national laboratories, makes the case that a vigorous 
program of energy technology research, development, 
demonstration, and deployment, coupled with an array of public 
policies and programs to overcome market failures and 
organizational barriers, can be an effective public response to 
the Nation's energy-related challenges.
    Such policies could significantly reduce inefficiencies, 
reduce oil dependance, reduce air pollution and greenhouse 
emissions at essentially no net cost to the U.S. economy. That 
is the conclusion of this report that I referred to. I urge my 
colleagues on the committee to review the report if they have 
not done so. We need to develop a set of public policies that 
will set up the necessary infrastructure to leverage our 
resources to accomplish that goal.
    I am obviously interested in hearing what the panelists' 
views are on how policy changes, coupled with the 
implementation of efficient new technologies and practices, can 
move us forward in our effort to reduce greenhouse gas 
emissions. Let me call on Senator Murkowski for any comments he 
has, and then we will go to the witnesses.
    [A prepared statement from Senator Hagel follows:]
   Prepared Statement of Hon. Chuck Hagel, U.S. Senator From Nebraska
    Mr. Chairman, I want to thank you for holding this important 
hearing today on climate change.
    The timing is very appropriate, coming on the heels of the Bonn 
negotiations on the Kyoto Protocol. I believe the outcome of those 
negotiations clearly indicates that the U.S. should take action 
domestically to address the challenge of climate change, because the 
path the international community is taking is veering further and 
further from the interests of the United States.
    The agreement reached in Bonn underscores President Bush's position 
that the Kyoto Protocol is not in America's national interest. It 
severely restricts the use of market mechanisms by reducing the use of 
emissions trading, placing severe discounts on the use of carbon 
sequestration efforts and including other measures that reduce a 
nation's flexibility. The participation of developing nations wasn't 
even discussed. The Bonn agreement moves the Kyoto Protocol further 
from the provisions established by a 95-0 Senate vote on the Byrd-Hagel 
resolution, and further away from any treaty that could ever be 
ratified by the U.S. Senate.
    The United States is committed to addressing the issue of climate 
change. But we will not subjugate the economy of the United States, 
which would have global implications, to an international agreement 
that would have little to no impact on reducing global greenhouse gas 
emissions. By completely leaving out any commitments from the 
developing countries, the Kyoto Protocol is no solution for a global 
challenge.
    The United States will also work to take domestic actions to 
enhance our knowledge of climate change, to develop technologies 
necessary to address this challenge and to reduce greenhouse gas 
emissions. I am working with my colleagues on this committee, Senators 
Murkowski and Craig, to develop legislation which would do this.
    I look forward to hearing from today's witnesses on various 
approaches that can help us reduce our greenhouse gas emissions. We 
need to look at a wide variety of voluntary measures that can be 
undertaken now, and the technology we can develop in the future that 
will allow the United States to take significant steps to reduce our 
greenhouse gas emissions without wreaking havoc on our economy.
    We also must continue our efforts to increase scientific 
investigation into climate change in order to close the gaps that exist 
in our knowledge of this extraordinarily complex issue. The actions we 
take should be grounded on a sound scientific base.
    I would like to note the presence of a fellow Nebraskan this 
morning, John Campbell of Ag Processing Inc. I have worked with John on 
numerous issues, particularly renewable fuels, and I believe he will 
have some interesting things to say about how ethanol and biodiesel can 
help us reduce greenhouse gas emissions.
    Again, thank you Mr. Chairman for holding this timely hearing. I 
look forward to the testimony from our witnesses.

      STATEMENT OF HON. FRANK H. MURKOWSKI, U.S. SENATOR 
                          FROM ALASKA

    Senator Murkowski. Thank you, Mr. Chairman. Good morning. 
It is a pleasure to begin another week with hearings on various 
aspects of our energy legislation. With regard to Kyoto, I 
think we have gone from bad to worse, relatively speaking. On 
the other hand, the timing of the hearing is appropriate, given 
the decisions that were made in Bonn.
    As we look at finalizing the operational rules for the 
Kyoto Protocol, it is my opinion that the partial agreement 
reached by negotiators this past weekend has made a flawed 
treaty, if you will, even worse.
    Now, we do not have all the details relative to the 
administration's views on this, but I expect we will shortly. 
The negotiators basically placed more restrictive rules on 
market mechanisms like emission trading, which basically 
increases the cost to the economy. It is beyond me that they 
would exclude nuclear power as part of the solution. Evidently, 
the environmental ministers of many of the European countries 
are so fearful that somehow--we have some feedback in the room, 
Mr. Chairman.
    The Chairman. I do not think it is feedback. I think 
somebody is watching the soap operas towards the back of the 
room.
    Senator Murkowski. Either that, or they are listening to 
the news, which may be better news than we are making.
    The Chairman. You have got someone fixing it? Okay. We will 
proceed.
    Senator Murkowski. Well, we will proceed anyway. I wonder 
who has got jurisdiction over the Energy Committee? Clearly 
somebody does.
    In any event, it is beyond me that those that are looking 
for relief on global warming would exclude nuclear energy, and 
evidently some of the developing nations are fearful--and 
perhaps our witnesses can give us a little explanation on 
this--that somehow the developed nations would dump the nuke 
waste into the environments of the developing nations, but if 
you are looking for relief on global warming, why, nuclear 
clearly has a role, and I think that in itself, exclusion of 
nuclear power, I am told that the French have decided to remain 
neutral on it, and they are some 80, 85 percent dependent on 
nuclear energy.
    They limited use of carbon sequestration to reduce net 
emissions to the atmosphere. We all know we could assimilate an 
awful lot more carbon by encouraging second growth forestry. 
Old growth does not assimilate carbon sequestration at the same 
rate that second growth timber does. They cut a series of 
political deals. I think that sets a bad precedent for future 
efforts to limit emissions.
    It is kind of interesting, we note China's reduction. China 
made the reduction outside the global warming climate change 
debate. One of the things that we were quite critical of was 
the Three Gorges Dam, the development of that, and that in 
itself will make a significant case to reduce emissions. I 
think that dam alone was supposed to replace about 36 500-
megawatt coal-fired plants, to give you some idea, as we 
criticize China's efforts to reduce emissions, of the trade-off 
here.
    The result of the discussion in Bonn I think probably takes 
us further away from the Byrd-Hagel resolution, which--I do not 
know if Hagel is with us this morning. I think it passed 95 to 
zero.
    Global participation by all nations was not even on the 
agenda for discussion, and decisions on rules made the Kyoto 
Protocol more expensive and less effective. These recent 
actions on the international level I think only confirm the 
President's wisdom to reject the flawed Kyoto Protocol and seek 
an alternative way forward to reduce emissions of greenhouse 
gases while providing the energy that we are going to need.
    Kyoto is not the only game in town, as many in the 
international community would have you believe. Today's 
witnesses are voluntarily reducing their emissions without the 
Kyoto Protocol in force, and they are developing promising new 
options, including carbon sequestration to reduce emissions to 
the atmosphere. There are several policy actions we can take to 
foster more of these voluntary activities and make sure that 
they yield quantifiable reductions, and I hope the witnesses 
will provide us with their views.
    For example, I believe we can improve the Department of 
Energy program for reporting voluntary greenhouse gas emission 
reductions by turning it into a robust registry that allows 
companies to register baselines and actions taken to reduce 
emissions. This registry can be used as a scorecard for our 
efforts to reduce emissions in a cost-effective manner.
    We should also invest in more energy research and 
development to develop the energy technologies of tomorrow, 
that is, energy without emissions, and to develop a range of 
tools, including carbon sequestration, that we can use to 
manage our risks. A lot of that is planting more trees. I 
proposed this last year, and Senators Byrd and Stevens have 
included this proposal in their legislation.
    I think we should focus on the potential to avoid emissions 
in developing countries through energy transfer technologies. 
As I said earlier, we have the technology. We can assist those 
countries.
    This is clearly the right way forward, not the flawed Kyoto 
Protocol made worse by decisions made in Bonn. Several of us 
are working on legislation to help manage the risk of climate 
change and provide an alternative for Kyoto, and I certainly 
encourage those Senators who are sincerely concerned about this 
effort to join us.
    Thank you.
    The Chairman. Thank you very much.
    Our first panel is Hon. Francis Blake, who is the Deputy 
Secretary of Energy here in Washington. He is a frequent 
visitor to our committee, which we are very pleased about, and 
Mr. Christopher Risbrudt--is that the correct pronunciation?--
who is the Acting Associate Deputy Chief for Programs and 
Legislation with the U.S. Forest Service. I thank you both for 
being here. Mr. Blake, why don't you go right ahead.

         STATEMENT OF FRANCIS BLAKE, DEPUTY SECRETARY 
                           OF ENERGY

    Mr. Blake. Thank you, Mr. Chairman and members of the 
committee, and thank you for inviting me here this morning. I 
would like to submit my testimony for the record and just 
briefly summarize it, if that is all right.
    The Chairman. That would be fine, and your full statement, 
both of your statements will be included in the record.
    Mr. Blake. The issue you are considering today is of 
tremendous importance. At our current rate and pattern of 
energy consumption, DOE estimates that U.S. carbon dioxide 
emissions will increase at an annual average growth rate of 
about 1.4 percent through 2020. We are going to need a 
concerted effort to reverse this trend, and technology is going 
to have to play a central role.
    For that reason, President Bush created the National 
Climate Change Technology Initiative. He has directed the 
Secretary of Commerce to evaluate the current state of climate 
technology research and make recommendations for improvement. 
He has tasked the Department of Energy, in coordination with 
other agencies:
    First, to strengthen the basic research at our national 
labs, looking to the development of advanced mitigation 
technologies;
    Second, to enhance public-private partnerships and expedite 
innovative and effective reduction technologies;
    Third, to make recommendations for funding of demonstration 
projects; and
    Fourth, to develop improved methods for measuring and 
monitoring greenhouse gas emissions.
    We are already well underway in that effort. Recently, we 
announced a grant to the Nature Conservancy, studying land use 
practices for studying carbon more effectively. We have made a 
couple of awards to consortiums of companies that are looking 
to develop new technologies for capturing and sequestering 
CO2 from oilfields and from fossil fuel combustion 
plants.
    Across the Department, we have multiple programs aimed at 
reducing the energy intensity of our economy, that is, the Btu 
consumed per dollar of GDP, and reducing the carbon intensity, 
that is, the amount of carbon per unit of energy.
    We have major research and development programs focused on 
efficiency improvements and in reducing CO2 
emissions through greater use of lower carbon fuels and, of 
course, through renewables. Geothermal, wind, nuclear, solar, 
these are all technologies that promise tremendous 
opportunities for reducing our greenhouse gas emissions, and I 
know from our discussion last week and the support of this 
committee on further research and development efforts, that we 
share a number of perspectives on how we can move forward and 
address this important issue.
    I look forward to answering any questions and working with 
this committee on the legislation that you have before you. 
Thank you very much.
    [The prepared statement of Mr. Blake follows:]
    Prepared Statement of Francis Blake, Deputy Secretary of Energy
    Mr. Chairman and members of the committee, I welcome the 
opportunity to testify on S. 597, the Comprehensive and Balanced Energy 
Policy Act of 2001; S. 388, the National Energy Security Act of 2001; 
and S. 820, the Forest Resources for the Environment and the Economy 
Act.
    In June 2001, the President announced his commitment to develop an 
effective and science-based approach to addressing global climate 
change. A cornerstone of that commitment is the deployment of existing 
technologies and the development of new technologies that can increase 
energy supply, promote energy efficiency, and reduce greenhouse gas 
emissions.
    The Energy Information Administration is projecting that U.S. 
carbon dioxide emissions from energy consumption will reach 1,800 
million metric tons of carbon equivalent in 2010, and continue to rise 
to 2,000 million metric tons of carbon equivalent by 2020, an average 
annual growth rate of 1.4 percent. We will need a concerted effort to 
reverse this trend.
    While many different policy approaches to greenhouse gas reductions 
may be considered, none can be successful without a continuing supply 
of new, more economically and environmentally sound technology. Prudent 
technology research and development reduces the costs of new 
technologies, and expands economic opportunities while lowering 
emissions. Accompanying public policy can provide incentives for 
technology investment, diffusion and deployment.
    Public support for reducing greenhouse gas emissions depends on 
combining economic growth with environmental protection. Both can occur 
if new, lower-emitting, cost-effective technologies are profitable and 
economically efficient. Forcing costly and less productive technologies 
into the economy reduces economic growth and inevitably drains public 
support for emissions limitations. No climate change strategy, no 
matter how flexible and efficient, can support robust economic growth 
unless lower cost and higher productivity technologies reducing 
greenhouse gas emissions are readily available.
    Because greenhouse gas emissions come from many sectors of the 
economy, a broad range of technologies will be needed. Such a portfolio 
of technologies could include energy efficient technologies, lower 
carbon-emitting technologies, carbon capture, storage and sequestration 
technologies, and new technological discoveries yet to be made.
    To assure that we can meet our technology needs to reduce 
greenhouse gas emissions, the President created the National Climate 
Change Technology Initiative and directed the Secretary of Energy, the 
Secretary of Commerce and the Administrator of the Environmental 
Protection Agency to: 1) evaluate the current state of U.S. climate 
change technology research and development and make recommendations for 
improvements; 2) provide guidance on strengthening basic research at 
universities and national laboratories, including the development of 
the advanced mitigation technologies that offer the greatest promise 
for low-cost reductions of greenhouse gas emissions; 3) develop 
opportunities to enhance private-public partnerships in applied 
research and development to expedite innovative and cost-effective 
approaches to reduce greenhouse gas emissions; 4) make recommendations 
for funding demonstration projects for cutting-edge technologies; and 
5) develop improved technologies for measuring and monitoring gross and 
net greenhouse gas emissions. The National Climate Change Technology 
Initiative also will enhance coordination across federal agencies and 
among the federal government, universities, and the private sector. We 
are now at work implementing the President's initiative and will be 
able to report back to the President later this year.
    We are making progress on other fronts as well. In mid-July, the 
President announced new agreements that involve DOE. The first is an 
agreement with the Nature Conservancy to study land use and forestry 
practices for storing carbon more effectively in Brazil and Belize. The 
second is with an international team of energy companies to develop a 
new set of technologies for reducing the cost of capturing and 
sequestering carbon dioxide from fossil fuel combustion plants. There 
are other Federal agencies, notably the Environmental Protection Agency 
and the Department of Agriculture, with programs that address climate 
change through technology research and development and deployment.
    The Administration is engaging on the international front as well. 
As we speak, the United States is participating constructively in 
international discussions on climate change at the continuation of the 
Sixth Conference of the Parties to the Framework Convention on Climate 
Change in Bonn, Germany.
    At the Department of Energy, we have multiple programs aimed at 
addressing climate change both indirectly through improvements in 
energy efficiency and R&D on renewable energy sources, and directly 
through R&D programs aimed at sequestering carbon. Our programs, many 
in partnership with industry, address: efficiency improvements in end 
use, distribution, transmission, and generation of electricity; 
increased use of energy-efficient electro-technologies; reducing 
CO2 emissions through increased efficiency of coal and gas-
fired plants; promotion of greater use of lower carbon fuels such as 
natural gas, nuclear, or renewable energy; transportation actions, 
including greater use of natural-gas-powered and electric vehicles; 
recovery of methane from landfills and coal seams; and the use of fly-
ash as a cement substitute.
    We've enjoyed numerous successes over the years and I'd like to 
highlight a few examples.
    DOE-sponsored technology advances in wind power has led to an 
eight-fold drop in cost, to about five cents per kilowatt-hour in areas 
with the best resources. In these locations, wind is competitive with 
many traditional generation technologies. Geothermal power plants, once 
restricted to the geysers area in northern California, are now 
operating throughout California and in Nevada, Utah, and Hawaii. 
Scientific advances have enabled successful geothermal power plant 
construction and operation in these four states. Installed geothermal 
power plant capacity now exceeds 2,800 megawatts. Over 400,000 
geothermal heat pump applications have a total thermal capacity of 
3,600 megawatts in the United States. Biomass power has grown to 350 
U.S. power plants providing 7000 megawatts of power. New technologies 
that boost the efficiency and cleanliness of biomass power are now 
being tested. Through technology advances achieved by DOE research and 
development, the performance of renewable technologies has increased 
while the costs have dropped dramatically. Combined with a more 
detailed knowledge of renewable energy, these advances have accelerated 
the market for renewable technologies.
    Starting from a few research and development firms supported by 
federal funding, the U.S. photovoltaics industry has developed into a 
thriving business with annual sales of $500 million. Thin-film 
photovoltaic cells are now doubling as rooftop shingles. DOE research 
on thin-film photovoltaic cells and a growing interest in integrating 
photovoltaic cells into buildings have resulted in this new building 
material that generates electricity-using sunlight. The energy 
generated from a building's rooftop shingles can provide power both to 
the building and to the utility's power grid. Several demonstration 
projects, including a solar rooftop system showcased at the Southface 
Energy and Environmental Resource Center in Atlanta, Georgia, have 
proven that these innovative shingles can provide clean electricity.
    Geothermal heat pumps are one of the most cost-effective heating 
and cooling systems available. A typical system can reduce energy 
consumption by 23 to 44 percent compared to traditional heating and 
cooling systems. While geothermal heat pumps are typically more 
expensive to install, their greater efficiency means the investment 
maybe recouped in three to ten years. Experience has shown that use of 
geothermal heat pumps can be beneficial to electric utilities and their 
customers.
    DOE's appliance standards program for clothes washers, furnaces, 
air conditioners, water heaters and fluorescent lamp ballasts helps 
reduce carbon emissions by reducing demand for electricity generated by 
fossil fuels.
    Nuclear energy will continue to play a significant role reducing 
greenhouse gas emissions. DOE's research program on fuel improvements 
for light-water nuclear reactors created a technology that currently 
enables 50 percent more energy to be extracted from each unit of 
nuclear fuel, with prospects for greater increases in the future. This 
technology, called ``extended burnup,'' is now being implemented 
worldwide in water-cooled reactors. Its widespread use also has several 
other independently valuable consequences, such as increasing the 
output of nuclear power systems, which do not produce greenhouse gases. 
Extended burnup reduces fuel cost for each operating reactor by several 
million dollars per year and permits utilities to extend the time 
interval between refueling outages from 12 months to 18 or 24 months. 
Also, by more fully using each unit of nuclear fuel, the amount of 
spent nuclear fuel that must be stored today is reduced by one-third.
    The President's National Energy Policy will build on these 
successes. The Policy addresses conservation, energy efficiency, and 
cleaner sources of energy. In particular, the President's clean coal 
initiative builds on the success of prior public-private partnerships 
in clean coal technology. From 1986 to 1993, government and industry 
sponsored 38 first-of-kind clean coal technology projects in 18 States. 
Before this program, only a few options existed for reducing pollutants 
released from coal, and almost all were expensive. DOE's Clean Coal 
Technology Program changed that. Today, because of the clean coal 
investment, 75 percent of U.S. coal-fired power plants now use, or are 
installing, low-cost, low-polluting burners to reduce smog-forming 
nitrogen oxides. Power plants can now turn coal into a gas and remove 
virtually all of its smog- and acid rain-forming impurities, creating a 
fuel that rivals natural gas in environmental cleanliness. Also like 
natural gas, coal gas can power ``combined cycle'' arrangements of gas 
and steam turbines that boost fuel efficiencies and reduce greenhouse 
gases.
    I would like now to turn my attention to the several energy policy 
bills that are the topic of the hearing today.
    In examining these three bills (S. 388, S. 597, and S. 820), it is 
clear that we share common goals though there are, of course, 
differences in the relative emphasis placed on different goals. I 
think, for instance, that we can all agree on the importance of energy 
research and development and the role of new technology in helping us 
to blunt the horns of our energy and environmental dilemma. There 
appears to be a consensus on the importance of public investment in 
energy efficiency. And there are several areas where the need for 
updating the regulatory regime under which energy is produced, 
transported, and sold is manifest.
    Consistent with the emphasis on R&D and technology in the energy 
bills under consideration, we are, as I mentioned earlier, working on 
the President's National Climate Change Technology Initiative, which 
will help us define a technology future that explicitly addresses 
climate change. In addition, DOE, in partnership with USAID and the 
Department of Commerce, has been working on the Clean Energy Technology 
Exports initiative, which originated in Senate report language 
accompanying the FY2001 Energy and Water Development Appropriation Bill 
and is a component of the President's National Energy Policy as well as 
being reflected in Section 111 of S. 597. The goal of the initiative is 
to facilitate private sector efforts to launch clean-energy 
technologies into international markets by improving the government's 
role in clean energy research, development, demonstration, and 
deployment.
    In closing, the Administration welcomes the committee's efforts to 
address our Nation's climate change challenge and its strong support of 
the Department's energy science, research and technology development 
programs. The legislation under consideration by the committee is 
ambitious and many of its provisions would have consequences that must 
be weighed carefully before enactment. In this regard, I request that 
the Department be given the opportunity to continue to work with the 
committee on those provisions in the bill that affect DOE's programs.
    Mr. Chairman, that ends my testimony and I would be happy to answer 
any questions the committee may have at this time.

    The Chairman. Thank you very much.
    Mr. Risbrudt, please go right ahead.

  STATEMENT OF CHRISTOPHER RISBRUDT, ACTING ASSOCIATE DEPUTY 
CHIEF FOR PROGRAMS AND LEGISLATION, FOREST SERVICE, DEPARTMENT 
                         OF AGRICULTURE

    Mr. Risbrudt. Thank you.
    Mr. Chairman and members of the committee, thank you for 
the opportunity to appear before you today to discuss S. 820, 
the Forest Resources for the Environment and the Economy Act. 
My name is Chris Risbrudt, Acting Associate Deputy Chief for 
Programs and Legislation.
    The administration agrees with the goals of S. 820, to 
promote sustainable forestry in the United States and encourage 
carbon sequestration on Federal, State, and nonindustrial 
private lands, and would like to examine the bill in more 
detail and work with the committee on an acceptable bill.
    On June 11, the President announced a series of initial 
steps, including plans for advancing the science of climate 
change, advancing technologies to address climate change, and 
promoting cooperation in the Western Hemisphere and beyond. The 
Cabinet is continuing to work on this issue, and is considering 
approaches that will tap the power of markets, help realize the 
power of technology, and ensure the widest possible global 
participation. Secretary Veneman is actively engaged in this 
process.
    The concepts and ideas contained in S. 820 will receive 
serious consideration by the administration as we move forward 
in developing an overall approach to address the serious 
problem of climate change. Although there is much debate about 
how to address climate change and the specific impacts of 
climate change on the global environment, there is general 
agreement that atmospheric CO2 levels are 
increasing. Increasing forestland area, greater adoption of 
agroforestry by agriculture, and improving forest and rangeland 
management and productivity can help reduce the rate of 
CO2 accumulation.
    Trees are efficient at sequestering large amounts of 
CO2. Simply put, trees store carbon in their stems 
and branches, as well as below-ground in their root systems. In 
fact, about 50 percent of the dry weight of a tree is carbon. 
We believe that in forest ecosystems carbon accumulates over 
time on the forest floor and in the soil due to woody debris, 
leaves, and roots. Storing, or sequestering this carbon in 
forests removes it from the atmosphere while providing other 
environmental and economic benefits.
    Approximately half of the land in the contiguous United 
States is devoted to agriculture. Due to this extensive 
agricultural land base, incorporating tree planting into a 
small portion of these lands through windbreaks and riparian 
forest buffers could result in an enormous amount of carbon 
sequestration, as well as promoting conservation and economic 
diversification.
    The goals and objectives of S. 820 fit within the construct 
of existing forest programs, and would give the agency more 
tools to manage the national forests and grasslands, provide 
assistance to State and private landowners through the 
Cooperative Forestry Assistance Act, and continue cutting-edge 
research and development activities.
    Through research and development, the Forest Service would 
continue to develop the science and technology needed to 
understand, manage, enhance, monitor, and estimate forest 
carbon stocks, including the above-ground, below-ground, and 
forest product pools. The administration would like to review 
its program across the Agricultural Research Service, 
Cooperative State Research, Education and Extension Service, 
the Department of Energy, the Forest Service, and the National 
Science Foundation to evaluate what is now being done and the 
best means to gather this information in the least burdensome 
way.
    In closing, Mr. Chairman, the administration appreciates 
the effort and thoughts that have gone into developing S. 820. 
The ideas contained in this bill warrant serious consideration. 
However, the bill will affect direct spending. The 
administration recommends that the activities called for by 
this bill be funded through discretionary appropriations.
    The forest-based initiatives articulated in this bill would 
contribute to sustainable forestry and carbon storage on 
Federal, State, and private lands. The administration is 
developing a comprehensive plan for addressing climate change, 
and welcomes this input. We would ask that, as Congress 
develops its own ideas on methods to address this global 
problem, it also considers opportunities to encourage 
agroforestry and improve the management of agricultural soils 
to increase carbon sequestration.
    Thank you for the opportunity to comment today. I would be 
pleased to answer any questions that you or members of your 
committee may have.
    [The prepared statement of Mr. Risbrudt follows:]
  Prepared Statement of Christopher Risbrudt, Acting Associate Deputy 
   Chief for Programs and Legislation, Forest Service, Department of 
                              Agriculture
    Mr. Chairman and members of the committee: Thank you for the 
opportunity to appear before you today to discuss S. 820, the Forest 
Resources for the Environment and the Economy Act. I am Chris Risbrudt, 
Acting Associate Deputy Chief for Programs and Legislation.
    The Administration agrees with the goals of S. 820 to promote 
sustainable forestry in the United States and encourage carbon 
sequestration on federal, state, and non-industrial private lands, and 
would like to examine the bill in more detail and work with the 
committee on an acceptable bill.
    On June 11, the President announced a series of initial steps, 
including plans for advancing the science of climate change, advancing 
technologies to address climate change, and promoting cooperation in 
the Western Hemisphere and beyond. The Cabinet is continuing to work on 
this issue and is considering approaches that will tap the power of 
markets, help realize the promise of technology, and ensure the widest-
possible global participation. Secretary Veneman is actively engaged in 
this process.
    The concepts and ideas contained in S. 820 will receive serious 
consideration by the Administration as we move forward in developing an 
overall approach to address this serious problem.
    S. 820 would amend the Energy Policy Act of 1992 to authorize a 
role for the Secretary of Agriculture in the Climate Change program 
relating to carbon sequestration on forested lands. S. 820 would direct 
the Secretary of Agriculture to:

   Report to Congress on carbon storage and the potential to 
        increase carbon storage on national forests through management 
        actions, and the contribution of U.S. forestry to the global 
        carbon budget;
   Establish a Carbon and Forestry Advisory Council to advise 
        the Secretary on developing guidelines for accurate voluntary 
        reporting of greenhouse gas sequestration from forest 
        management actions; evaluating the potential effectiveness of 
        the guidelines; and estimating the effect of the proposed 
        implementation on carbon sequestration and storage;
   Review and advise the Secretary of the Department of Energy 
        on existing voluntary reporting guidelines for greenhouse 
        gases;
   Establish incentives for States, non-industrial forest land 
        owners, and nonprofit entities for forest management activities 
        and carbon sequestration through a revolving loan program; and
   Establish reporting requirements for State, non-industrial 
        forest landowners, and nonprofit entities that participate in 
        the revolving loan program for carbon sequestration.
                               background
    Although there is much debate about how to address climate change 
and the specific impacts of climate change on the global environment, 
there is general agreement that the atmospheric CO2 levels 
are increasing. Increasing forestland area, greater adoption of agro-
forestry by agriculture, and improving forest and rangeland management 
and productivity can help reduce the rate of CO2 
accumulation.
    Trees are efficient at sequestering large amounts of 
CO2. Simply put, trees store carbon in their stems and 
branches as well as below ground in their root systems. In fact, about 
50% of the dry weight of a tree is carbon. We believe that, in forest 
ecosystems, carbon accumulates over time on the forest floor and in the 
soil due to woody debris, leaves, and roots. Storing or sequestering 
this carbon in forests removes it from the atmosphere, while providing 
other environmental and economic benefits.
    Existing forests produce benefits because actively managed forests 
produce fiber at the same time that they are storing carbon. Active 
forest management results in a mixture of age-classes and younger, 
faster growing forests produce fiber and store carbon at a faster rate.
    Approximately half of the land in the contiguous U.S. is devoted to 
agriculture. Due to this extensive agricultural land base, 
incorporating tree planting into a small portion of these lands through 
windbreaks and riparian-forest buffers could result in an enormous 
amount of carbon sequestration as well as promoting conservation and 
economic diversification. Other federal programs, such as the 
Conservation Reserve Program or the Environmental Quality Incentives 
Program encourage the planting of trees and shrubs in agricultural 
settings.
    The goals and objectives of S. 820 fit within the construct of 
existing Forest Service programs and would enable the Agency to fully 
utilize its authority to manage the national forests and grasslands, 
provide assistance to State and private landowners through the 
Cooperative Forestry Assistance Act, and continue cutting edge research 
and development activities.
    Through R&D (Research and Development), the Forest Service would 
continue to develop the science and technology needed to understand, 
manage, enhance, monitor, and estimate forest carbon stocks, including 
the above-ground, below-ground, and forest product pools. The 
Administration would like to review its program across Agricultural 
Research Service (ARS), Cooperative, State, Research, Education & 
Extension Service (CSREES), Department of Energy (DOE), Forest Service, 
and the National Science Foundation (NSF) to evaluate what is now being 
done and the best means to gather this information in the least 
burdensome way.
    The new incentives and revolving loan program would fit neatly into 
existing Cooperative Forestry Programs. These programs provide 
technical and financial assistance to private landowners for 
reforestation and other forest management activities that result in 
enhanced forest productivity, improved environmental quality, and 
ultimately, increased carbon storage. The Rural Communities Assistance 
programs would also help rural places develop and sustain economic 
diversification and a market-based infrastructure.
    In particular, the proposed revolving loan program is essentially 
the same as the existing Smart Growth Partnership Program, a program 
that is part of the conservation spending category. That program 
provides funding to Intermediate Relending Program (IRP) entities at 
low interest rates so that these entities can establish revolving 
loans. The purpose of funding the IRP's is to help landowners manage 
and develop woodlots and forests to protect these lands from 
development.
    The recent release of the President's Climate Change Review Interim 
Report and the National Energy Policy complement these goals. We 
commend the sponsors of this bill for their recognition of the 
important role of our Nation's forests in carbon sequestration and 
recognizing that long-lived forest products, such as construction 
materials and furniture, are important carbon stocks that can be 
estimated and managed as part of active forest management programs that 
increase overall carbon storage. Estimates of carbon pools that do not 
include forest products currently in use and in landfills are 
inaccurate and misleading.
    The bill should be clarified to reconcile the potential conflict 
between carbon sequestration and ecosystem restoration. In many parts 
of the country, particularly the Interior West, the health of our 
national forests and public lands has deteriorated due to the excessive 
growth of small diameter thatch. The result is high carbon density, but 
low ecological health, not to mention high risks of catastrophic fire 
damage. The bill needs to consider how, in various circumstances, 
increasing carbon sequestration in a forest may run counter to other 
important goals.
                              suggestions
    The Administration would recommend a technical change to the title 
of the bill by removing the reference to ``national forests derived 
from the public domain.'' Unless this change is made, the initiatives 
in the bill would not apply to national forests in the east and south 
that were established from acquired lands.
    We would also like to work with you to clearly define the intent of 
term ``watershed.''
    Because S. 820 amends the Energy Policy Act of 1992, which is 
administered by the Secretary of Energy, there are several places in 
the bill where it is not clear whether the authority or requirement 
referring to ``the Secretary'' refers to the Secretary of Energy or the 
Secretary of Agriculture.
    The Administration would recommend several clarifications in 
Section 4 of the bill, because the authority and administration of 
several paragraphs is confusing. Section 4 of the bill amends 42 U.S.C. 
13385 and requires the Secretary of Agriculture to undertake a review 
of the guidelines for the voluntary collecting and reporting of 
information on sources of greenhouse gases established by the Secretary 
of Energy, Administrator of the Energy Information Administration, and 
make recommendations for amendments and refinements of the guidelines. 
The Administration would recommend redrafting the requirement for the 
Secretary of Agriculture to complete public involvement on any 
recommended changes before recommending them to the Secretary of 
Energy. Instead, perhaps a collaborative approach to public involvement 
might be more useful.
    It is also unclear from the construction of Section 4 whether the 
Secretary of Agriculture or the Secretary of Energy is ultimately the 
keeper of carbon storage information generated by States and non-
industrial forest landowners participating in the revolving fund 
program. The language of the bill needs to be clarified concerning the 
role of the Administrator of the Energy Information Administration, 
Department of Energy and the role of the Department of Agriculture in 
data collection and storage.
    Throughout Section 4 of the bill, which amends the Global Climate 
Change Title of the Energy Policy Act administered by the Secretary of 
Energy, the existing law refers to requirements and authorities of the 
Secretary of Energy. This becomes problematic in Section 5 of the bill 
where the question arises concerning the Forest Carbon Cooperative 
Agreements and Loan program, whether ``The Secretary'' mean the 
Secretary of Energy or ``The Secretary of Agriculture?''
    The interactions with the State Foresters and activities on non-
industrial forest lands are similar to language in the Cooperative 
Forestry Assistance Act that is within the authority of the Secretary 
of Agriculture. The Administration would recommend that Section 5 of 
the bill be redrafted to amend the Cooperative Forestry Assistance Act 
of 1978 (16 U.S.C. 2101-2114, 16 U.S.C. 1606) to clarify the 
administration of the State and non-industrial private land carbon 
sequestration program to the Secretary of Agriculture through the Chief 
of the Forest Service. This would speed implementation of the incentive 
programs and movement of funds and direction through existing processes 
and authorities under the Cooperative Forestry Assistance Act.
    We commend your intent to be consistent with Executive Order 13112 
on Invasive Species by identifying eligible tree species. This approach 
provides important environmental safeguards while offering landowners 
opportunities for increased productivity, increased local income, and 
increased carbon sequestration that would not otherwise be realized. 
This also provides the landowner with opportunities to take advantage 
of science and technology advances in woody cropping systems that can 
provide bioenergy feedstocks, thereby offsetting the use of fossil 
fuels.
                                summary
    In closing, Mr. Chairman, the Administration appreciates the effort 
and thoughts that have gone into developing S. 820. The ideas contained 
in this bill warrant serious consideration. However, the bill will 
affect direct spending; the Administration recommends that the 
activities called for by this bill be funded through discretionary 
appropriations. The forest-based initiatives articulated in this bill 
would contribute to sustainable forestry and carbon storage on federal, 
state, and private lands. The Administration is developing a 
comprehensive plan for addressing climate change and welcomes this 
input. We would ask that, as Congress develops its own ideas on methods 
to address this global problem, it also consider opportunities to 
encourage agro-forestry and improve the management of agricultural 
soils to increase carbon sequestration.
    Thank you for the opportunity to comment today. I would be pleased 
to answer any questions you or members of your committee may have.

    The Chairman. Thank you very much. Let me start by asking 
Secretary Blake, I have been concerned as I read the newspapers 
about the action in Bonn. I have been concerned about the same 
issue that Senator Murkowski discussed in his opening comments, 
and that is the apparent decision that nuclear energy would not 
be looked on, or a power producer of nuclear energy would not 
be looked on as part of what a country would be given credit 
for, or part of the framework that has now been agreed to in 
Bonn.
    I had thought that this meeting in Bonn would have been an 
excellent opportunity for us to lobby for the consideration of 
nuclear power as part of what is included there, and we missed 
that opportunity. Am I misreading the situation, or what is 
your view on that?
    Mr. Blake. Excuse me, I am not familiar with the background 
of the treaty negotiations myself, and I am just getting a note 
confirming that nuclear energy is out of the Clean Development 
Mechanism and Joint Implementation.
    I think your broader comment is whether that is an 
appropriate conclusion for the Protocol. I think we would share 
Senator Murkowski and your concerns on that approach.
    The Chairman. What was the judgment made--perhaps you are 
not the right person in the administration to ask, but what was 
the judgment that caused us to not want to be there lobbying 
for inclusion of nuclear power?
    Mr. Blake. I think we were there assisting throughout the 
discussions. We had a team there. Whether that team discussed 
the nuclear issue specifically I just do not know. I would not 
be the right person to ask on that.
    The Chairman. The Department of Energy was in no way 
involved in any of that?
    Mr. Blake. Yes, we were. Yes, we were. We had a number of 
representatives there. What I cannot tell you is whether that 
issue was specifically raised by any of our representatives 
there with some of the other delegates.
    The Chairman. If it was raised, since we had withdrawn from 
the negotiations we were really not at the table to make 
suggestions, were we? How were we participating?
    Mr. Blake. I think we were able to make suggestions, but as 
you say, we were not at the table as such.
    The Chairman. Well, as I say, it seems to me that is an 
unfortunate result which I do not know if it could have been 
avoided had we been at the table, but I certainly am concerned.
    Similarly, as I understand it, the framework that has now 
been described, or the agreement that has now been described 
there in Bonn, they are still working through the details for 
the rest of this week on that, and again we are not there 
participating in any of those negotiations. I am right about 
that?
    Mr. Blake. Again, we have people there who are there to 
help in the discussions, and certainly provide the U.S.'s 
views.
    The Chairman. We are observers, and there if someone asks 
us for our opinion, is that our essential position?
    Mr. Blake. Well, we have the Convention itself, and then 
there is the Protocol, and there are two sets of discussions, 
and I think on the Convention we are more directly engaged than 
on the Protocol. That is my understanding.
    The Chairman. But the Protocol is the one they are now 
working out the details of, is that correct?
    Mr. Blake. That is correct.
    The Chairman. So that is the part we are not engaged in.
    Mr. Blake. Well, I think we are engaged. We are there 
helping the other countries and certainly providing what is the 
U.S. position.
    The Chairman. Let me also ask, one of the concerns I had: 
the President, of course, has issued the energy plan for the 
country, and one of the concerns I had when I read it, there 
was much in there I agreed with, but there was also a lack of 
attention to the issue of climate change, as I saw it. It did 
not seem to be integrated into that plan.
    We in this committee are going to try to put together a 
comprehensive energy bill as the administration has urged, and 
I am anxious that we try, as best we can, to integrate policies 
that we can agree upon on climate change into that energy bill. 
It seems to me the best opportunity that we have in this year, 
and maybe in this Congress, to do that. Do you have a position, 
does the administration have a position on whether we should be 
trying to address these issues as part of a comprehensive 
energy bill?
    Mr. Blake. I think when you look at the administration's 
energy plan, probably 50 percent of the recommendations have a 
direct bearing on carbon dioxide emissions, whether it is 
energy efficiency renewables, increased research and 
development. So there is already attention through the plan on 
this question both of the energy intensity of our economy, as 
well as the carbon intensity of the fuels that we use.
    The Chairman. So the emphasis that is in your plan on 
research and development and on renewable sources of energy, 
you see that as essentially the climate change component.
    Mr. Blake. The President has also directed us, to review, 
on all of the efficiency and renewable portfolio. For example, 
what we are doing, what we need to be doing, and we are taking 
a top-to-bottom review of that, as well as directing us on the 
R&D efforts that more particularly focus on our carbon dioxide 
reduction program.
    The Chairman. This internal working group, the 
administration's got on climate policy or climate change, will 
it have anything in the way of a recommendation that this 
committee could consider as we put together comprehensive 
energy legislation, or what is your intention with regard to 
that?
    Mr. Blake. Well, there are a number of aspects to it, as I 
indicated. The Department of Commerce has been tasked with 
looking at the state of climate change research, and I think 
they will be coming up with some response to the President on 
that, if I understand the time frame correctly, in August.
    We are also working on the R&D technology side of that, the 
efforts underway. I think we are working on an as soon as 
possible report-out date, but I cannot give you a specific 
time.
    The Chairman. There are a couple of items I wanted to 
particularly just mention which I would appreciate you looking 
at that are not related to climate change, as such. One is the 
Strategic Petroleum Reserve. Last week, we sent this letter to 
Secretary Abraham urging that he initiate a full management 
review of the operating cost of the Strategic Petroleum 
Reserve. We are spending $160 million per year to maintain the 
reserve, and it seemed to us that was an excessive amount, so I 
would like--I hope you folks are working on getting us a 
response to that.
    Mr. Blake. Mr. Chairman, when we got your letter I met with 
Director of that office last week, and we have begun the full 
review.
    The Chairman. Okay. Thank you very much.
    One other item that we are just sending you a letter on 
today, these are the remaining oil overcharge refunds. The 
Department of Energy is still, as I understand it, sitting on 
about $250 million of refunds that are due to the public for 
oil overcharges that occurred about 20 years ago. I understand 
a significant portion of those refunds are owed to utilities. 
We are sending Secretary Abraham a letter today on the subject. 
I would appreciate you looking at that as well and seeing if 
you could give us a status report.
    Mr. Blake. I will do that, yes, sir.
    The Chairman. All right.
    I think I have probably used all of my time. The timers are 
not working here. I do not know if anyone has failed to turn 
them on, but I think I have probably used all my time.
    Senator Murkowski.
    Senator Murkowski. Thanks very much.
    I would like for the record to note the submission of 
positions by the American Petroleum Institute and NEI, the 
Nuclear Energy Institute, into the hearing today, and I would 
ask unanimous consent that the statements be entered into the 
record as submitted, and as if read.
    I think it is important to note that as far as the 
submission of the Nuclear Energy Institute, it covers a letter 
to the governments around the world indicating the important 
role nuclear power plays in meeting the challenge of reducing 
emissions, and further states the continued safe, effective use 
of nuclear electricity and of advanced nuclear power technology 
are an integral part of the international effort to manage 
risks from global warming. The letter is signed by 93 CEO's 
from around the world. These are leaders in the nuclear 
industry worldwide.
    You know, it is just incomprehensible to me why at this 
meeting in Bonn they would simply ignore the role of nuclear 
energy. That is why it is my feeling there is a tremendous 
inconsistency here with getting on with just how we are 
seriously going to reduce emissions and ignore the role of 
nuclear energy.
    There is also a letter submitted by the American Petroleum 
Institute which basically suggests that the petroleum industry, 
refining industry and so forth, have made substantial 
reductions in emissions as a consequence of greater awareness 
and concentration of capital into reducing emissions through 
technological breakthroughs, and I think that is an important 
contributor as we recognize our obligation here in America to 
try and do our share in reducing emissions.
    Another item that I wanted to bring up, Mr. Blake is, there 
is a bill around here--I do not know whether it is S. 556--I 
think Senator Lieberman and Senator Jeffords are sponsors, but 
I understand that the EIA has indicated in a recent study that 
multipollution legislation for the utility sector as proposed 
under this legislation would lead to about an $80-billion 
higher annual electric cost by the year 2010, nearly a 30-
percent cost increase per kilowatt hour, and it would require 
massive early retirement of coal-fired generation as a 
consequence of eliminating that as one of the major sources.
    I think coal provides about 50 percent of our energy, and I 
would ask you if this is your analysis? Is this the reason why 
the administration opposes caps on CO2 emissions 
from powerplants?
    Mr. Blake. Certainly the EIA study, which did analyze the 
costs for a multi-pollutant approach, and particularly 
CO2, pointed out the economic impacts. As you 
indicated, they are about $80 billion higher electricity costs 
in 2010, and average retail prices up over 40 percent. In 
addition, and perhaps even more importantly in terms of the 
Protocol, I think the concern was the lack of participation of 
the developing countries. For example, from 1990 to 2010 the 
increased emissions from developing countries not included 
would more than double the reductions that the United States 
would have been making. So for all of this dislocation of the 
economy the net environmental benefit seemed very questionable.
    Senator Murkowski. Senator Bingaman brought up a point that 
I wanted to follow up on a little bit concerning SPRO, because 
you remember our experience under the last administration when 
we had the heating oil crisis in the Northeast Corridor about a 
year ago, a little bit more than that, we were concerned about 
relief, and we pulled 30 million barrels out of the Strategic 
Petroleum Reserve and then found that we did not have the 
refining capacity to refine that in an expeditious manner, and 
I think we got about 3 million barrels or so of refined product 
from that pull of 30 million barrels out of SPRO.
    I certainly agree, $160 million per year seems an awful lot 
of money to manage a program for reserves, but I would 
appreciate it if you would provide us with an analysis of just 
how fast we can move oil out of SPRO, reminding all of us that 
it is crude oil, it is not refined product, and if we need it 
in a hurry we still have to move it to a refinery, and if all 
we do is offset an equal amount of that that we import we have 
not accomplished much.
    Is there any change in that, based on your recollection, 
because my understanding is our refineries are running at very, 
very high capacity now, so if we had to pull out SPRO, would we 
have gained anything?
    Mr. Blake. Senator, you are correct, and we can do the 
analysis. As you indicate, the issue is not just the 
withdrawal, it is the refining, and whether the refining 
capacity is available, which was an issue the last time.
    Senator Murkowski. Let me ask one more question relative to 
the President's national energy plan. Does it not, in effect, 
identify and highlight the reduction of greenhouse gases from 
the concept of business as usual through some specifics that 
are in this legislation, like cleaner fossil fuels, clean coal 
technology, expanded nuclear energy and dependence, improved 
energy efficiencies, enhanced alternative fuels, so is it not 
really true that the President's energy plan does address 
climate change specifically?
    Mr. Blake. Yes, sir, in the sense that a number of the 
recommendations, as I indicated, were exactly to the point of 
cleaner burning fuels and lowering the energy intensity of the 
United States. That is exactly correct.
    Senator Murkowski. I think as we come off this question of, 
well, gee, the rest of the world went ahead and signed on and 
the United States did not, and therefore, why is it the United 
States taking a position contrary to the views of some that we 
ought to be a leader, and I think we are going to have to wait 
for the administration to come back with their analysis, but it 
seems to me that to go in seriously with a commitment to try 
and do something about emissions and then eliminate the one 
technology that provides substantial relief, and that is 
nuclear energy, shows in itself the weakness and the fallacies 
associated with those that were basically responsible for the 
agenda, and I am just very disappointed that they started in 
with the premise that they were going to eliminate nuclear 
energy, so I think the administration certainly did the right 
thing saying we are not going to be a party to it, we are going 
to provide the leadership and technology and make it available 
to the developing countries and the rest of the world as well.
    Thank you.
    The Chairman. Senator Feinstein.
    Senator Feinstein. Thanks very much, Mr. Chairman. Good 
morning, Mr. Blake. I wanted to make a couple of comments to 
you. I just came out of an election last year in California. 
California is the fifth largest economy on earth. I had very 
good business support.
    I talked about global warming. Global warming was one of my 
top priorities for reelection, and I won the reelection by over 
1\1/2\ million votes. Californians I believe want action. This 
Senator finds the U.S. absence from the Kyoto Protocol both 
deplorable and I think really arrogant.
    About a year-and-a-half ago, I spent the day at Scripps 
Institute, talked with all of their senior scientists. I came 
away believing without a doubt that climate change is a real 
phenomenon. You have expressed that in some of the figures you 
put forward in your written paper, but when it comes to really 
taking the actions that are necessary, I find us really 
backwards.
    I am staggered by the fact that we are 5 percent of the 
population and we consume 25 percent of the energy of the 
world, and recently some have pointed out that in my State in 
the next 100 years we are going to lose the entire Sierra 
Nevada snow pack, and that is the drinking water for 22 million 
people. It is the water for the largest agricultural-producing 
State in the Nation, and for I think the largest segment of 
high tech.
    Californians are not afraid of doing what we need to do 
with respect to retard global warming. The transportation 
sector is responsible for one-third of it. Senator Snowe and I 
have introduced legislation, as you know, to bring SUV and 
light truck standards up to that of sedans within 6 years after 
passage of the bill. That would save 10 percent on oil imports, 
about a million barrels of oil a day, and it would keep 240 
million tons of carbon dioxide from entering the atmosphere a 
year.
    Scientists have told me that it is the most effective 
single stroke that the United States can take to really do our 
share in reducing global warming. In view of what you say in 
your paper, particularly about the 1.4 percent annual growth 
rate of carbon emissions to the year 2020, I know the 
administration's position has been, let us wait to see the 
report of the National Academy of Sciences on bringing SUV's 
and light trucks up to that of sedans, but I feel very strongly 
supportive of the chairman's comments, and that whatever comes 
out of this committee has to really be forceful. We have to be 
leaders in this area. If we do not, and if we do not take the 
steps now, I do not think we are ever going to be able to catch 
up.
    My question to you is, have there been any discussions in 
the administration on Senator Snowe's and my bill on SUV light 
trucks beyond the wait-and-see attitude, and secondly, are you 
willing to take any steps to revisit the standards on air 
conditioners and energy efficiency standards for other devices?
    Mr. Blake. Senator, first on the issue of the NAS study and 
CAFE standards, the administration's position is and remains 
interested in removing the moratorium on DOT's development of 
new standards, awaiting the report on the NAS--although a draft 
was released to the press, the formal report has not been 
forwarded--and then to balance the recommendations of that 
report with the factors of safety and the environment and 
consumer interest. That remains the administration's position.
    On appliance standards, on air conditioners, increasing the 
appliance efficiency requirements for air conditioners, we took 
a very serious look at increasing where it is now 10 SEER, and 
it was proposed to go to 13, and we are suggesting 12, so it is 
still an increase.
    One of the basic reasons for staying at 12 versus 13 was 
the concern that actually 13 was going to be counterproductive, 
that it would discourage certain kinds of purchases of 
efficient equipment, and we would actually be better off from 
an efficiency perspective with the 12 standard.
    Senator Feinstein. I think I have just time for one more 
question.
    What other recommendations would you have, other than fuel 
efficiency, assuming we can come to some agreement on that, as 
to what Congress could do, kind of looking for bold strokes to 
really play a major role in what I think is the largest 
environmental problem we have?
    Mr. Blake. I believe that the research and development 
opportunities here are the single most interesting and most 
effective role both Congress and the administration can play.
    I would hope, in response to your earlier comments, when 
you see some of the things that we are looking at, carbon 
sequestration technologies that take--I mean, a lot of these 
are still on the drawing board. For example, to take 
CO2, put it in storage, have a biological agent 
react it to methane, and the methane is used again for power 
production. These are ideas on the drawing board that we are 
looking at funding. We think this dramatically changes the 
nature of this discussion. Instead of a forced march, where 
basically the compliance mechanism is shift from coal to 
natural gas, which has a lot of other implications, we look at 
a much broader suite of technological solutions.
    This committee had a hearing on the research and 
development issues last week. I think there is a lot of common 
ground on that, and some enormous progress that can be made 
there.
    The Chairman. Senator Burns.
    Senator Burns. Thank you very much, Mr. Chairman. I have a 
statement I just would put in the record at this time.
    [The prepared statement of Senator Burns follows:]
   Prepared Statement of Hon. Conrad Burns, U.S. Senator From Montana
    I'd like to welcome the witnesses here today and thank the Chairman 
for holding this hearing. This is the third hearing we've held in this 
committee on global climate change, and finally we have reached the 
place where we are ready to begin talking about where to go from here.
    One of the big concerns in this debate has been carbon dioxide, how 
much should we produce, whether it should be regulated, and its role in 
climate change overall. I would ask that any time we look at 
legislation or a change in policy we do two things: first, make sure 
the response made is firmly rooted in science rather than emotion; and 
second, resist the urge to write a new rule and build a bigger role for 
government at every turn of this debate. Instead, I would suggest we 
maximize the role of the free market and provide the incentives for 
businesses and individuals to do whatever we'd like them to do.
    I have said it before and I'll say it again. We need solid science 
to make decisions about global climate change or any other issue of 
this type that affects us as a country. We have had an entire hearing 
on the basic science aspects of this research. In addition, I think it 
is important we understand the wider implications of any plan to reduce 
carbon dioxide. The plans I have seen would have huge effects on the 
United States economy, and that is something we need to understand 
before we rush into anything.
    One of the most interesting studies I have seen was a recent report 
by the Energy Information Administration which predicted the increase 
in energy prices if carbon dioxide were added to a multi-pollutant 
strategy which would be enforced by the EPA. The study found that 
energy prices would increase 2 cents per kilowatt because of 
restrictions which would hit the energy industry so hard. Two cents may 
not seem like a lot when you look at it one kilowatt at a time, but 
imagine the larger effects on manufacturing and even our clean 
industries which rely heavily on computer technology. You need 
electricity to run all that, and the more expensive it gets, the bigger 
drag you will have on this economy.
    The Senate recognized this in 1997 when it passed S. Res. 98 by a 
vote of 95-0. Every Senator voting that day agreed that the United 
States should enter into a global climate change treaty it should be 
done globally, and with the least cost possible to the United States 
economy. The Kyoto Protocol does neither of these, especially after 
last week when the negotiations were taken up and severe limits were 
put on emissions trading and carbon sequestration.
    Carbon sequestration is a very interesting concept. I have a lot of 
farmers and foresters alike in Montana who would like to know what this 
means for them. I don't know yet, and I don't know if anyone does. I am 
interested to hear the opinions of our witnesses today on what further 
research is needed to implement any system of carbon sinks here in the 
U.S.
    We have several pieces of legislation from this Congress, and a few 
from last Congress that I expect to see again, that I am interested in 
learning more about. As with any issue, there are some good ideas out 
there, and some that I fear would cripple our American prosperity with 
little hope of solving any real problem.

    Senator Burns. In the area of sequestration, Mr. Blake, I 
am wondering if the administration is taking a look at--you 
know, our farmers and ranchers are very much interested in that 
and want to play a role in that, our forests, and of course you 
have the U.S. Forest Service here today who wants to play a 
role in that. We can capture some of that carbon from the 
atmosphere. How can these be used as a part of the larger plan 
to reduce the total carbon in the atmosphere?
    Mr. Blake. Senator, my response, I defer to the gentleman 
to my left as well, but we are looking within the Department at 
technologies for biomass use in fuel-burning so that you get 
the advantage--if you did, for example, a 5-percent co-fire in 
a coal plant with biomass switch grass and the like, you get a 
5-percent reduction in CO2 emissions. You get the 
benefit of the carbon sink, and growing it, and then you have 
got a benefit in burning. I think it has a very interesting 
potential role to play in the overall carbon dioxide reduction 
program.
    Senator Burns. Give me your thoughts on coal bed methane.
    Mr. Blake. I think the same principle applies there. It is 
a new technology that would allow substantial reductions of 
CO2.
    Senator Burns. That is about all the questions I have. I 
was going to listen to their testimony and I had to step out 
for a second, but I did want to ask those couple of questions.
    You know, I am not real sure that agriculture cannot play a 
role in capturing--maybe if industry is going to get credits 
for taking so much carbon dioxide and using it, why would not 
agriculture be--it could be handled the same way, and looked at 
the same way. After all, we feel, in growing crops, there is a 
necessity to have a little of it. We cannot cut it all out 
because it grows things, but we ought to get some credit for 
that also.
    So thank you, Mr. Chairman.
    The Chairman. Thank you very much.
    Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman.
    First, Mr. Risbrudt, let me thank you for the generally 
supportive comments that you made of the legislation that 
Senator Craig and I authored, the Forest Resources for the 
Environment and the Economy Act, and I will have a couple of 
questions for you on that in just a minute.
    Mr. Blake, you look at what the world is saying today about 
the United States and this question of global climate change. I 
mean, today, people are reading headlines all over the globe, 
United States isolated, United States out in the cold, United 
States only looks on--I mean, I could just kind of go on, one 
after another, and like several of my colleagues I just think 
this country cannot afford to be a bystander in this issue, and 
my question to you is, how does the administration envisage 
finding common ground at this point with the close to 180 other 
nations?
    I mean, it is not clear to me how, out of all these various 
and sundry processes that we are following, the studies but not 
participating and the like, how do you all envisage getting to 
common ground so that we can do what Senator Craig and I did, 
and actually make some progress?
    Mr. Blake. Well, that is a very broad question that I am 
not sure I am fully competent to answer in terms of the larger 
geopolitical concerns.
    Senator Wyden. Well, give me a sense of how out of all of 
this bystanding, which is where we are today, we are actually 
going to do what Senator Craig and I did, which is come up with 
a practical proposal? I mean, I think it would be helpful if we 
even had some general sense of how the administration was going 
to get there from here.
    Mr. Blake. What we are doing now is doing the basic review 
of our technologies, and what roles our technologies can play 
in providing answers to carbon dioxide removals. I think these 
are going to be of dramatic interest to our allies, may well 
set out a path that convinces them the U.S. position is 
correct, and looks to what the developing countries can do, 
what opportunities there are there, what are our opportunities 
here. I say, things that are on the horizon that make a great 
deal of sense for the entire world to be working towards.
    Senator Wyden. I do not want to doubt your sincerity here, 
but I think the proposition that out of this research you are 
going to get something that convinces 180 countries that they 
are essentially wrong and we are right is a very dubious 
proposition.
    And again, I want to work with you all in a bipartisan way. 
We have shown in this committee again and again--Senator Craig, 
Senator Burns and I put in a significant energy bill 
yesterday--that we want to work in a bipartisan way, but you 
have got to give us some material to work with, and I will not 
belabor it at this point.
    Mr. Risbrudt, a question for you. I do appreciate your 
generally supportive comments this morning on the forest 
resources legislation. What is left in your mind for Senator 
Craig and I to do? I would rather not walk out of the room 
uncertain about what is left to do.
    I gather that you all would like to see some kind of 
appropriation which is invariably written for this kind of 
exercise, but are there other things that Senator Craig and I 
should be trying to do, but what in your mind is left in order 
to actually get this signed into law?
    Mr. Risbrudt. I think the general outlines of the bill are 
very good, Senator. We are really just asking for some fine-
tuning of the portions of the bill that will make it work 
better for the administration.
    Senator Wyden. Which provisions are most in need of fine-
tuning, in your mind?
    Mr. Risbrudt. Since it is amending the 1992 bill that is 
directed specifically at the Secretary of Agriculture, we think 
we need to review the bill to make sure it is clear which 
Secretary we are talking about in this bill. It needs to be 
clear to us whether it is the Energy Secretary or the 
Agriculture Secretary that is getting new authorities, for 
example, so it is clarifications, I believe.
    Senator Wyden. That seems very reasonable, and Mr. 
Chairman, I will not go any further. I think that is the kind 
of cooperation we need throughout this process, and that was 
the point of my question, Mr. Blake.
    Mr. Risbrudt leaves me, on a bipartisan bill, with a sense 
of what we need to do, and he thinks that it is substantively 
by and large a good bill. There needs to be some clarification 
in going back to the 1992 statute. That certainly makes a lot 
of sense to me.
    But what I leave with respect to the big picture, Mr. 
Blake, is the stark paradox between these headlines of all over 
the world have the United States basically sitting this issue 
out, and your discussion of how we are going to do some 
research into various technologies and then we are going to 
convince 180 people they are wrong and we are right, and I 
think we need to do better.
    Mr. Chairman, thank you.
    The Chairman. Thank you.
    Senator Craig.
    Senator Craig. Thank you very much, Mr. Chairman.
    Gentlemen, I am pleased you are here this morning, and Mr. 
Chairman, thank you for holding the hearing.
    From Buenos Aires to Kyoto, was it politics, or was it 
science? My guess is that Kyoto was formed a great deal under 
politics because the science could not come together and Kyoto 
was falling apart, and the Vice President had to run to Japan 
and tack it back together for all of the politics involved.
    It is important that that be said this morning in the 
context of this hearing, and the comments that are coming from 
some of my colleagues. Is it wrong or misguided to argue that 
something is wrong or misguided, and therefore say so? Is that 
a statement of leadership, or a statement of arrogance?
    I think what George W. Bush has proven is that his 
statement is a statement of leadership, not a statement of 
arrogance. Now, Mr. Chairman, I say that because I and others, 
including yourself and Senator Murkowski, have spent a great 
deal of time with this issue, more time on this issue than I 
have spent on a good many others in the last several years, so 
it is not by accident that two of the pieces of legislation, 
one just referred to by my colleague from Oregon, S. 820, is a 
part of my effort and Senator Wyden's effort, and S. 1776, 
which is a much more comprehensive effort, to try to bring the 
science together, create the modeling that we can agree to and 
not rely on foreign modeling to result in the kinds of 
conclusions that we can base public policy on.
    I went so far as to spend a week at The Hague, the last 
stop before the one that is now involved in Germany. I learned 
a lot about the politics of Europe, but not much about the 
science, because I will tell you, The Hague was a great deal 
more about politics and how do we scheme, as a group of 
Europeans and other nations of the world, to try to control the 
U.S. economy, and if we can squeeze it and stifle it in the 
name of something green, we win, they lose.
    Well, I was there to protect sequestration, and I spent 
long hours arguing with the U.S. delegation not to compromise 
or give away one of the very tools we have and can improve upon 
as a part of a total package, Mr. Chairman, when it relates to 
climate change.
    I know that everyone looks for the silver bullet on this 
issue. They fail to recognize that all of the bits and pieces 
put together that we have been working on collectively for the 
last long while, including the Clean Air Act and a good many 
others, and a lot of new technological applications, have 
resulted in a dramatic reduction in the rate of CO2 
emissions as it relates to a unit of production in this 
country. We are doing very well today, but that is not to 
suggest we cannot do a lot better.
    But to drive ourselves toward Kyoto was, in itself, a 
folly, and the Senate in S. Res. 98 in 1997, with an expression 
of 95 to zip, said so, and yet we still want to maul this issue 
to death for the politics of it because somehow we think it 
will gain us votes.
    I am very proud that President Bush called it for what he 
saw it to be, and is now recognizing the importance of creating 
new dynamics and new paradigms to lead this issue, and I must 
tell you that if the Prime Minister from Japan stays where he 
is, we win and the politics loses.
    Now, I will have to admit, Mr. Chairman, that in that 
process this President by his action has created a major 
international void that needs to be filled, and that is what is 
going on right now. The working group, the major effort to 
analyze all of the bits and pieces is an effort to put 
leadership into the science of this issue and not the politics 
of this issue, and I say bravo, Mr. President.
    Now, you and I and others have met with that working group. 
They are looking at all of the pieces of legislation we have 
collectively put together and I hope we can get there. We must 
get there. You and I and others know that we have a problem out 
there. The science is converging on the issue of warming, but 
it is not converging on why, because the modeling is faulty, 
and if we can come up with the right kind of models--and, Mr. 
Chairman, we have the tools.
    We have Mr. Blake's supercomputers that are sitting idle at 
this moment on this issue because we have not brought the 
science together to program them to do the modeling necessary 
to give us accurate figures instead of Canadian figures or 
German figures. We ought to do that. That is part of what S. 
1776 does. It brings the science together, and it allows us to 
begin to shape the issue.
    Now, a part of that issue, and why I defended so vigorously 
sequestration, and why I convinced people like Frank Loy and 
others who were involved in the last meeting in The Hague not 
to cut a bad deal when a good deal was possible, and thank 
goodness they did not cut a bad deal, was to take away or tie 
behind our back some of our tools.
    You are going to have others talking about sequestration 
this morning, but S. 820 works at that in a vigorous way, and I 
am glad, Chris, that you have talked about that this morning 
and looked at the dynamics of forest management. We need to 
look at agriculture and rangeland management not in a nonactive 
way, but very much an active way.
    Nonactive forest management last year put more carbon into 
the atmosphere out over Idaho and Montana than we have seen in 
decades. Last year, for all of you who are interested, we 
burned more public land acres in the United States than ever in 
the history of the United States, and that was water vapor and 
carbon going into the atmosphere, because when forests grow, 
they collect carbon. They are carbon.
    When they burn, they release it, and to understand that 
inactive management creates monstrous fuel-loading that results 
in ultimate carbon releases does not solve a problem. Active 
growing, multidiverse forests, intermediate stands, all kinds 
of uneven age stands creates the dynamics of an active forest 
that sequesters huge volumes, potentially 300-plus million 
metric tons. I think it is called a million metric tons of 
carbon equivalent is the figure we use, Mr. Chairman.
    Well, that is the issue here. Gentlemen, thank you. Or, at 
least that is the issue from my perspective. We have an 
opportunity to come together, but I do not see the United 
States standing this one out, Mr. Chairman. I see it creating 
an opportunity to lead us into true science and ultimate 
policy, instead of just the raw politics of economic control.
    Thank you.
    The Chairman. Thank you very much.
    Senator Landrieu.

       STATEMENT OF HON. MARY L. LANDRIEU, U.S. SENATOR 
                         FROM LOUISIANA

    Senator Landrieu. Thank you, Mr. Chairman. First let me 
thank you for continuing to emphasize the importance of the 
issue of climate change in the context of our national energy 
policy. I think that is clearly the right approach, a 
comprehensive approach, and I really commend you for keeping it 
in the forefront of our discussion as we move forward to 
develop an energy policy that we can clean up our air and our 
water with and also grow with and expand and recognize the 
potential, or appreciate, experience the potential of this 
great economic expansion for our Nation and the possibilities 
for the world, so I thank you for that.
    I just want to make a few brief points and then just ask 
one question. One, I want to add my voice to those who have 
expressed disappointment in the sort of lack of focus on the 
nuclear issue, and how that worked out at the Bonn conference.
    I am hoping and thinking and believing that nuclear should 
be part of our energy policy and strategy, that we need greater 
capacity generated by nuclear, or through nuclear in this 
country and in the world, and so I want to add my voice to the 
disappointment and hope that we can continue to make progress.
    I know because we are not signers we are not at the table 
in the details of the negotiation, but I again want to commend 
Senator Domenici for his work on this area. I look forward to 
working with him on several bills that have been introduced, 
and believe that while there are challenges still with the 
waste issue, nuclear is a road that we should travel if we want 
to make significant headway in reducing the warming of the 
earth's atmosphere.
    No. 2, I am also happy to see the focus on natural gas, and 
the role that natural gas can play in helping us meet our 
challenges with our climate, and in particular want to submit 
and will to the record the front page article of the New York 
Times this week about the significance of moving forward with 
an energy policy, looking for new production sources for 
natural gas, and then the transmission part of that, to meet 
the goals that we are discussing this morning.
    A third brief point before I get to my question is, I want 
to acknowledge, since sometimes the energy companies get beat 
up pretty badly around here, I want to acknowledge that there 
has really been a sea change in the industry recently, and that 
every major oil company is part of a United Nations 
International Petroleum Industry Environmental Conservation 
Association.
    I think almost every major company is involved in this 
effort, and I want to particularly acknowledge Chevron and BP-
Amoco and Texaco, just to name a few. I am somewhat 
disappointed that Exxon-Mobil continues to drag their feet a 
little bit, but other than that company, most of the other 
companies are really stepping forward with some very 
constructive solutions and ideas, and I do believe that the 
less political rhetoric we can bring to this subject and the 
more we can bring industry and the environmental community 
together to really meet our goals--and I wanted to acknowledge 
them for the record and thank them for their good work.
    Now, my question is to you, Mr. Risbrudt, whether you are 
familiar, if you could comment, maybe, on the additional work 
that we are doing on carbon sequestration, and how we could 
verify the actual increases in the carbon sequestered through 
this process. Do you agree that more research needs to be done, 
or what could you elaborate a little bit on that point, because 
I was party to a wonderful press conference that we had this 
last week with one of our major power companies, and in a grand 
area that was set aside in Louisiana.
    It was one of the first models, the Catahoula Wildlife 
Preserve, where this private-public partnership was modeled, 
and I was very supportive of the idea conceptually, I think it 
is quite good, but the real, I guess where the rubber hits the 
road is, can we be confident that we are actually meeting the 
goals of this public-private partnership, so do you agree that 
more research needs to be done on this particular point, or 
what are your views at this time?
    Mr. Risbrudt. I think more research would be appropriate.
    The Forest Service has a national inventory system called 
the Forest Inventory and Assessment System, where we sample the 
Nation's forests on a 5-kilometer grid, and we try and do that 
on a 10-year cycle, to measure the amount of vegetation that is 
there, and we are also using that to measure the changes in 
carbon sequestration.
    On a project-by-project basis, that is a little different 
issue. We probably do not want to be the verifiers of small 
projects relative to the national forest system, but we would 
be very supportive of the research in the methods and protocols 
for verifying that on those projects, yes.
    Senator Landrieu. Well, do you think someone needs to be in 
charge of monitoring the outcomes of these smaller projects? 
What would your suggestion be if you all are not in the 
position to monitor that?
    Mr. Risbrudt. I think maybe with partnerships with the 
States through our State and private branch. Each State has a 
State Forester that we provide technical and financial 
assistance to private landowners through the State Forester's 
organization, and so I would suggest in partnership of the 
States and possibly other organizations we could deal with that 
issue.
    Senator Landrieu. Okay. Thank you, Mr. Chairman.
    The Chairman. Thank you very much.
    Senator Domenici.

       STATEMENT OF HON. PETE V. DOMENICI, U.S. SENATOR 
                        FROM NEW MEXICO

    Senator Domenici. Mr. Chairman, thank you very much for the 
hearings. I personally was very late, and I apologize for that, 
but I gather that you have had more success today, that a 
number of Senators have come down to listen to this issue, and 
I am glad to be last and try to take only a few minutes.
    First, for those who were talking about implementing Kyoto, 
and why our President is saying he will not, I remind everyone 
that the U.S. Senate voted 95 to zero not--saying at that time, 
do not send us the treaty, because we will not ratify it. Now, 
that is 95 percent of the then-sitting U.S. Senate, which must 
mean it is bipartisan.
    It actually was led by a Democrat, partnering up with a new 
Senator from Nebraska when this resolution was adopted, do not 
bother to send it to us because we will be not ratify it.
    Now, Mr. Chairman, I went to see how many of the Senators 
are still in the Senate, and there are 78. Seventy-eight of the 
sitting Senators today were among the 95 who said Kyoto is not 
the right way to do it, and I guess inherently saying it is not 
good for America, there may be--there must be a better way.
    Now, I am not terribly impressed with the French leader 
constantly lecturing us. I wish a Senator could be along, 
anyone, and every time he tells our President what to do, maybe 
the Senator could say, don't you know 95 out of 100 Senators 
said this was not good for America? It is not George Bush. He 
took over way after the signing of this resolution of 
nonapproval.
    Secondly, it is most interesting, for being what it is 
supposed to be, the Kyoto agreement and all attendants to it 
did not mention nuclear power. It is as if there were two 
worlds. There is a world that wants to solve the problem their 
way, and their way does not include even mentioning nuclear 
power.
    I think for some it renders it susceptibly invalid, 
susceptibly impossible that the countries could follow it and 
not find out that there are much better ways than they have.
    My last, third observation at the top end of this is, while 
Kyoto only attempts to put restraints on the industrialized 
nations, clearly it is also a restraint on worldwide growth. It 
will put a restraint. That means that some of the very poor 
countries in this world that we say are free of Kyoto will have 
no energy source of any significance unless we move ahead with 
research to develop better, clean sources at reasonable prices 
for them, too.
    So I have on my own, to the extent that it is possible, I 
have lined up as many Senators as I can, and we are going to 
begin talking about America post Kyoto. We are going to start 
talking about growth and prosperity beyond Kyoto.
    We are going to start talking about growth and prosperity 
for the poor countries of the world post Kyoto, because the 
vision is, if you can move ahead with some of these clean 
technologies, included among them are hydrogen and nuclear, set 
up in a totally new generation, much less toxic, easy to manage 
the toxicity, along with extraordinary efforts at clean coal, 
and then fit those into the world market with a goal--with a 
goal--there will not be a Kyoto problem in X number of years. 
Somebody might want to keep a tab on CO2, but it 
will not be relevant, because the world as it grows will not be 
using energy that pollutes the atmosphere and causes global 
warming.
    So every time I come here, I do not help our chairman by 
asking questions. I did one day on part of this subject which I 
am very concerned about, that is the subject of waste 
management, which we are working on, too.
    But with that, I stand willing to work with this President, 
with Democrats, Republicans, to try to get before the American 
people an international plan that we would lead that could set 
a 10-year and a 20-year goal, and put the standards that are to 
be achieved right in the goals, and then say to American 
scientists pooled with those around the world, marry up the 
brethren that are in business and produce this kind of new, 
clean technology within X number of years.
    I think that is a marvelous thing to run up alongside a 
Kyoto agreement that has created so much animosity, some of it 
not right, but much of it right, and such accusations that if 
you are not for that, you are not for the environment in the 
world, those kinds of statements are just not true. Do you 
think all 95 Senators when they voted not to do this, not to 
enforce it, do you think they were all up there saying I want 
to vote for a bad environment for my children and 
grandchildren? Of course not. They knew fairly well that this 
was a very different approach, and that maybe it would hurt 
America rather than gain a lot, and maybe we could do a better 
job another way.
    Thank you, Senator Bingaman.
    [The prepared statement of Senator Domenici follows:]
       Prepared Statement of Hon. Pete V. Domenici, U.S. Senator 
                            From New Mexico
    Mr. Chairman, your hearing today focuses on legislative proposals 
to mitigate greenhouse gas emissions. I appreciate your holding this 
series of energy-related hearings to develop future legislation. The 
nation will be well-served when we respond to the challenge of the 
President's National Energy Policy with new legislation, and this area 
should be part of that response.
    Today, I'd like to remind this committee that the Senate is already 
moving rapidly to reduce our greenhouse gas concerns through the strong 
Energy and Water Development Appropriations bill that we just finished 
last Thursday. In addition, I'd like to share with this committee a 
vision that I've developed for a national response to move beyond 
debates over details of the ill-conceived Kyoto Protocol towards 
actions to truly help the world achieve prosperity through clean 
energy.
    The Energy and Water bill passed the Senate last Thursday by a 97-2 
margin. It represents a major step in fulfilling the President's 
commitment to a balanced and diversified energy policy--particularly in 
the area of expanding the supply of clean energy from renewable sources 
and nuclear power.
    I've heard some argue that the President's Policy doesn't address 
the possible threat of global warming. Those who have read the Policy 
shouldn't make that statement. The Policy has strong support for clean 
energy sources.
    Renewable sources are encouraged in many ways, including tax 
credits for wind, biomass, solar, and the purchase of clean fuel 
vehicles. The Policy supports a major research program in clean-coal 
technologies, advocates increased funding for renewable energy R&D and 
recognizes nuclear energy for its very positive environmental benefits.
    It is in these last two areas, renewable energy and nuclear energy, 
that the Energy & Water bill takes a major step in implementing the 
President's national energy policy.
    The renewable energy programs are funded in this bill at $435 
million. That's $60 million and 16% above the current year level. 
There's no question that renewable sources can and should play a larger 
role in our energy supply, and this budget will accelerate progress 
towards that vision.
    Nuclear energy received significant increases as well in this bill. 
I strongly agree with the President's National Energy Policy in its 
recommendation supporting the expansion of nuclear energy in the United 
States. Nuclear plants offer emission-free power sources, help maintain 
diversity of fuel supply, enhance energy security, meet growing 
electricity demand, and protect consumers against volatility in the 
electricity and natural gas markets.
    The bill strongly supports a number of nuclear energy R&D programs, 
including one devoted to reducing the quantity and toxicity of spent 
nuclear fuel--called ``transmutation''. It's vital that we identify 
national strategies for that spent fuel, failure to do so will stand as 
a serious roadblock to nuclear energy's important contributions.
    As a final thought on energy security, Mr. Chairman, I want to 
share with you and my colleagues a vision, which is encompassed in that 
Appropriations bill and which I've shared with President Bush.
    I strongly believe that we need to reach beyond the debate over 
Kyoto with a blueprint that provides the tools to combat global 
warming.
    I'm convinced that we can have growth and prosperity in America 
without global warming.
    And I'm equally convinced that we can help provide those same 
benefits for the world.
    I propose that we provide worldwide leadership to eliminate the 
threat of global warming by a commitment to prosperity and growth 
through clean energy.
    And I further propose that we accomplish this goal through 
partnerships with our friends and allies, especially those in 
developing countries.
    I've specifically urged the President to lead this new initiative, 
to accelerate our own research and to build international partnerships 
for joint development of all the clean sources of energy--renewables, 
clean fossil fuels, nuclear energy, and hydrogen-based fuels. Then as 
we transition to improved technologies in the future, our partner 
nations will also be building up their energy infrastructure with the 
latest and cleanest technologies.
    With the new Energy and Water Appropriations bill and the 
President's Policy, our nation will develop energy supplies that 
provide us with clean, reliable, economic energy far into the future. 
But we should be looking beyond our own borders.
    We should be seizing every opportunity to help the developing 
nations around the world achieve much higher standards of living. They 
simply can't do that without reliable electricity supplies.
    Each nation will make their own choices for fuel sources, 
exploiting their own strengths. We have abundant natural gas--and it 
will make a huge contribution to a cleaner future for our country. But 
every nation needs diverse energy supplies, not a reliance on one 
source. Other nations may be well positioned to exploit their solar or 
wind resources--through this program nations can make the choices best 
matching their circumstances.
    The leadership shown by Senator Byrd on clean coal technologies 
matches this vision very well. Some other nations have immense coal 
resources, through this vision they can benefit from our investment in 
clean coal technologies.
    We can leave the poorest countries to their own resources to 
develop whatever energy they can, or we can offer substantial help to 
partner with these nations to help them develop sources that are not 
only reliable and reasonably priced, but also clean.
    It's strongly in our self interest to do this. After all, we all 
share the same air. And in addition, countries with strong economies 
are our best choice for trading partners.
    Mr. Chairman, I hope my vision for a world with abundant clean 
energy options is accepted by this committee. As we work toward the 
comprehensive energy legislation called for in the National Energy 
Policy, I hope that this vision can help to guide our discussions.

    The Chairman. Senator Johnson.

          STATEMENT OF HON. TIM JOHNSON, U.S. SENATOR 
                       FROM SOUTH DAKOTA

    Senator Johnson. Thank you, Mr. Chairman. I would ask 
consent to simply submit a full statement for the record and 
only comment briefly that headlines all across the world this 
morning are screaming that the United States is isolated from 
the rest of the world by the decision the Bush administration 
has made relative to the Kyoto treaty.
    I do not believe that a Kyoto debate in this committee is 
particularly fruitful at this time. I would observe that as I 
recall the 95 to nothing vote in the U.S. Senate on the Byrd 
amendment that it had to do with whether poor countries also 
ought to be included in the Kyoto protocol, rather than up or 
down directly on the Kyoto treaty, but in any event, whether we 
participate or do not participate, the harsh reality exists 
that the United States, with 4 to 5 percent of the population, 
produces 25 percent or so of the greenhouse gases in the world, 
and so whether in one context or another, we have an enormous 
obligation to move forward, I think aggressively, with 
strategies designed to address that issue.
    The thrust of the hearings today, as I understand it, were 
intended to focus in particular on the views of the private 
sector with respect to pending legislation before the 
committee, including provisions for reduced greenhouse gas 
emissions, and for that reason, and with my particular interest 
that I have in biofuels, I would withhold from any further 
questions of this panel and thank them for their participation, 
but expedite movement onto the private sector panel, and I 
yield back.
    [The prepared statement of Senator Johnson follows:]
 Prepared Statement of Hon. Tim Johnson, U.S. Senator From South Dakota
    Mr. Chairman, this is a timely hearing as it coincides with the 
latest round of meetings and agreements on global climate changes in 
Bonn. Unfortunately, the United States did not choose to engage in 
substantive discussions in Bonn. This was a lost opportunity because 
the challenges facing the world on emissions and climate change are 
real and extremely important. Scientific studies are showing more 
connection between our energy uses and their impact on the environment 
and well-being of the globe. Any legislation we pass must maintain and 
improve the delicate balance between increasing our energy needs and 
improving our environment.
    I am particularly interested in the role that biofuels can play in 
helping to reduce emissions. As many of you know, Sen. Hagel and I have 
introduced legislation, S. 1006, the Renewable Fuels for Energy 
Security Act of 2001, that would require that a certain percentage of 
all transportation fuels include a renewable fuels component. Not only 
would this help to reduce our dependence on foreign oil but it would 
also reduce emissions and improve our air quality.
    Studies have shown that increase of biofuels would be beneficial to 
the environment. The Department of Energy released a report in 1999 
which stated that the use of ethanol as a transportation fuel reduces 
greenhouse gas emissions. The report stated that the energy effects per 
gallon of ethanol blended in gasoline could be significant--as much as 
a 95% reduction in petroleum use, with an approximate 25% reduction in 
greenhouse gas emissions and 45% reduction in fossil energy use. 
Renewable fuels currently constitute 0.7% of the total U.S. consumption 
of gasoline. The figures from the DOE report demonstrate increasing the 
renewable percentage to 5%, as would be required by the Hagel/Johnson 
bill, would greatly improve our air quality.
    Moreover, an important but often overlooked fuel is biodiesel. 
Diesel fuel is used to power big trucks and buses but emits high level 
of particulates and harmful gases. Biodiesel, however, can have improve 
this situation. Biodiesel production is small but has been growing 
steadily. Like ethanol, biodiesel improves our air quality and 
environment. Biodiesel is four times as efficient as diesel fuels in 
utilizing fossil energy. The overall emissions of carbon dioxide from 
biodiesel are 78% lower than regular diesel while particulate matter 
emissions from biodiesel are 32% lower than regular diesel.
    In addition, with the new EPA rules requiring dramatically lower 
amounts of sulfur in diesel fuel by 2007, the market prospects for 
biodiesel, an intrinsically low sulfur fuel, are very bright for 
helping to meet this requirement.
    Mr. Chairman, the increased use of biofuels is a small component of 
the overall effort to improve our environment and reduce emissions. But 
it is an important effort that must be pursued. It is a prime example 
of how we can maintain and improve the need to fuel our transportation 
sectors while improving our quality of life. Renewables fuels can help 
to fill our existing transportation needs while making the environment 
safer. Differences exist on how we can increase the use of renewable 
fuels in a way that is economically viable. But I am confident that we 
can do so in a way that benefits everyone. The fact that we can improve 
our quality of life while also strengthening our energy security shows 
means it is worth pursuing. The increased use of biofuels is the type 
of initiative that has been envisioned in Bonn and Kyoto and should be 
included in our long-term energy strategy.
    Thank you, Mr.Chairman and I look forward to the testimony.

    The Chairman. Thank you very much. Unless anyone has a 
burning issue, I think I will move to the second panel. Thank 
you both very much for your testimony.
    Let me introduce the second panel as they come forward, 
please. Mr. John Campbell, who is the vice president for 
industrial products and government relations with Ag 
Processing, Inc., in Omaha, Nebraska, Mr. Gardiner Hill, who is 
with BP, he is the CO2 program director, Mr. Jim 
Lyons, who is a professor at the Yale School of Forestry and 
Environmental Studies, Mr. Frank Cassidy, who is the president 
and chief operating officer of PSEG Power in Newark, New 
Jersey, and Mr. Gene Gebolys, who is the president of World 
Energy in Chelsea, Massachusetts.
    Why don't we just start and go right across, starting on 
the left-hand side and right across the panel here, and if each 
of you would take 5 or 6 minutes to summarize the statement, 
and we will include your full statement in the record, so thank 
you very much for being here.

        STATEMENT OF JOHN B. CAMPBELL, VICE PRESIDENT, 
                 AG PROCESSING, INC., OMAHA, NE

    Mr. Campbell. Thank you, Mr. Chairman. Ag Processing is a 
regionally federated cooperative. We are owned by farmers in 
several Midwestern States. Our primary business in soybean 
processing, feed manufacturing, and the traditional value-added 
businesses out there. However, we in 1995 got into the biofuels 
business. We built a 30-million-gallon ethanol plant and 
expanded it to 50 million gallons, and then in 1996 jumped into 
the biodiesel business, which is a soybean-oil-derived additive 
oxygenate, essentially, for diesel fuel, and have been in that 
business since that time, so we are highly interested in 
whatever value we can bring to our farmer members through the 
efforts that we are making to reduce greenhouse gas emissions 
as part of our normal business activities.
    As you know, renewables are going to be a part of the 
national energy strategy. With respect to agriculture, though, 
I think renewables need to be considered in the context of not 
only the direct greenhouse gas emission reductions through 
displacement or replacement or enhancement of fossil fuels, but 
also in the context of viewing agricultural production as part 
of that system.
    We have talked a lot about sinks. The literature on sinks 
is very dramatic when it comes to agriculture. Farmers and 
ranchers effectively own the greenhouse. We talk about 
greenhouse gases. Well, that terrestrial ecosystem between what 
the public sector owns in forests and what the private sector 
owns in farmland and pastureland is essentially the foundation 
of the greenhouse. We have enormous potential to sequester 
greenhouse gases.
    Part of this potential is enhanced or discouraged by 
Federal farm policy. What we got in 1996 was called Freedom to 
Farm, and in Freedom to Farm, farmers gained new flexibility to 
use crop rotations, and what that has done is brought on 
several, many millions of acres of soybean land, and what 
soybean and corn rotations do is reduce nitrogen use, they 
increase soil organic matter, or have the potential to, there 
is all kinds of side environmental benefits from the use of 
these crop rotations.
    Agriculture is currently engaged in practices that are 
already reducing greenhouse gases. Biofuels is one of them. Our 
company alone, if you look at the ethanol and biodiesel that we 
produce, are probably saving on the order of 300 million pounds 
of CO2 equivalent per year.
    When you look at the soils that these fuels are grown on, 
the national estimate for carbon sequestration in agricultural 
croplands is 5 billion tons of CO2. I mean, these 
are enormous figures. Some scientists estimate that soil 
sequestration alone could meet the hypothetical Kyoto targets 
entirely for a 12- to 24-year period.
    Now, after that period you reach a point of saturation 
where you cannot really absorb any more carbon, and it becomes 
a--you reach equilibrium, but agricultural land has released 
about 50 percent of the soil organic carbon through traditional 
tillage. As we bring modern tillage and enhanced tillage 
mechanism and practices to farmland, we can gain back probably 
half or more of that soil organic matter.
    It is just like forests. The politics of soil and cropping 
sequestration has not fit with the agenda, so what we have 
essentially is we are in disagreement. There was more of a 
consensus about the reforestation benefits of sinks, but 
agricultural sinks are still out there in Never-Never Land as 
far as the negotiations and the protocols are concerned.
    The same is true with a lot of the other things we do in 
agriculture. Just modern farming technology alone has reduced 
the use of nitrogen fertilizer inputs, as an example. In Iowa 
alone, where we have most of our processing plants, the 
nitrogen fertilizer reductions in that State are the equivalent 
of planting 1 million acres of trees, and these have been 
voluntary efforts. They have happened because economics has 
pushed farmers to reduce inputs, become less energy-intensive, 
and increase soil organic matter as a part of natural farming 
technologies.
    I see the red light flashing. I will conclude by saying 
this committee has a mission, a critical mission in developing 
a national energy strategy. There is a bill pending before your 
committee Senators Johnson and Hagel have introduced to 
increase renewables. That bill alone would be worth about 16 
million metric tons of CO2 equivalent if it were 
implemented. If you combine that with measures in the farm bill 
or other places to enhance and encourage and incentivize 
sequestration activities, the compliance potential is enormous, 
and along with forestry measures, gives the United States 
options to voluntarily reduce greenhouse gas emissions in a 
very significant way.
    I thank you.
    [The prepared statement of Mr. Campbell follows:]
        Prepared Statement of John B. Campbell, Vice President, 
                     Ag Processing Inc., Omaha, NE
    Thank you and good morning Mr. Chairman. On behalf of Ag Processing 
Inc. and Ag Environmental Products LLC, I appreciate the opportunity to 
testify and commend the committee for holding this hearing. I know your 
time is short and that you have many witnesses so I will highlight this 
testimony and ask that the complete text be entered for the record.
    Mr. Chairman, most people associate AGP with the regional 
cooperative that crushes more soybeans and refines more soybean oil 
than any other farmer-owned cooperative in the world. While that may be 
nice bragging rights, our farmer and local cooperative manager Board of 
Directors wanted to go farther and do more.
    Popular buzzwords in rural America today are ``value-added'' and 
``farmer-owned''. Other than sounding nice, what do these phrases 
really mean? For our cooperative it means doing what we have always 
done but also striking out in new directions. In 1986 it meant building 
our first soybean oil refinery so that we could add value to soybean 
oil. Throughout the years it has meant expanding our overseas and 
domestic customer base. It has meant expanding plants and building new 
ones to keep up with the growing soybean and livestock industry. It has 
meant introducing the first and only component pricing program for 
soybeans.
    More specific to this hearing, our Board decided in 1995 to build a 
grain ethanol plant in Hastings, Nebraska. That particular plant 
started out as a 30 million-gallon plant and has been expanded to 50 
million gallons. A year later we jumped into the biodiesel market by 
building the first dedicated soydiesel plant in the Midwest at Sergeant 
Bluff, Iowa.
    The preceding is given as background not to toot our own horn, but 
to let the committee know that ``value-added'' and ``farmer-owned'' are 
not just cliches at AGP. We have put our money where our mouth is. Many 
in the soybean industry thought we had lost our senses when we started 
into the biodiesel business. There was no biodiesel industry. There 
were no customers. Nobody in the government had even heard of 
biodiesel. All there was back in the early 1990's was a small group of 
farmers in Missouri, a couple of academics, a couple of entrepreneurs 
and AGP.
    Today, as you can see, things have sure changed. Biodiesel and 
ethanol are the flavors of the week. Renewable and green energy have 
gained credence as energy costs soar. America is reawakened to our 
reliance on energy and our vulnerability to supply and demand changes.
    I am not here to claim that renewables can alter fundamental energy 
balance issues. I am here to say the renewables can make a difference. 
If we add up a lot of small differences--be they slightly larger 
domestic oil production, slightly larger refinery capacity, slightly 
more conservation and a small portion of the market reserved for 
renewables--we can begin the process of reversing the trend toward ever 
increasing dependence on unstable and sometimes hostile regions of the 
world for our economic well-being.
    Mr. Chairman, the topic that I was invited to discuss before the 
committee regards the nexus between greenhouse gasses and renewable 
fuels. As a producer of renewable fuels, both ethanol and biodiesel, 
our cooperative is highly interested in whatever value we might be able 
to bring to our farmer-owners through credits for reductions in 
greenhouse gas emissions.
    Agriculture and renewable fuels go hand in hand and must be 
considered a multi-dimensional path to both fossil fuel emission 
reductions and greenhouse gas sinks should the United States embark on 
a voluntary or incentivized path toward reductions in greenhouse 
gasses.
    To put things in perspective it is helpful to state the current 
understanding of global CO2 respiration. Scientists estimate 
that on an annual basis about 9 billion tons (Pg.) of CO2 
are emitted. (6.4Pg. from fossil fuels, 1.1Pg. from land use change and 
1.6 Pg. from deforestation.)
    Where does the CO2 go? Scientists estimate that 3.4Pg. 
goes into the atmosphere, 2.0Pg. is absorbed by forest growth and 
2.0Pg. is absorbed by the ocean. The ``missing'' 1.6Pg. is thought to 
be absorbed by the ``terrestrial biosphere''--meaning mainly soils and 
non-forest plants. The object of those concerned about climate change 
is to reduce the atmospheric loading. That may be accomplished by 
reductions in emissions or increased retention in oceans, forests and 
soils (otherwise known as ``sinks'').
    No other industry has as much to offer, at so cheap a price, in the 
effort to reduce greenhouse gasses as agriculture. After all, we are 
the stewards of the natural carbon cycle when we grow plants. We farm 
hundreds of millions of acres that take in CO2, as plant 
matter is grown and act as storage for carbon dioxide--the major 
greenhouse gas. To say it simply, farmers and ranchers own the 
greenhouse in America. Agriculture can make a huge difference in how 
much greenhouse gas is emitted.
    For example, the greenhouse gas emission reductions from burning 
biodiesel and ethanol are greatly enhanced if the grain and oilseed 
feedstocks are grown in a crop rotation using the best available 
tillage and farming technologies. Not only would fossil fuel emissions 
be reduced through replacement with a renewable, but also 
CO2 (carbon dioxide) would be sequestered in the soil as 
organic matter builds. In addition, NOX (nitrous oxide) 
emission can be reduced through nitrogen fertilizer management and crop 
rotations.
    These agricultural practices are encouraged or discouraged by 
Federal farm policy. The ``Freedom to Farm'', or FAIR Act of 1996, as 
it is officially known, changed the way government and farmers 
interact. No longer does government control what farmers produce by 
telling them where, what and how much of each crop they may plant. 
Government also gave up attempting to manipulate grain prices by 
holding reserves and idling land.
    Farmers are now free to make planting and management decisions 
based on the market. American agriculture has embraced the change with 
gusto. Millions of acres have been freed up and are being switched by 
farmers every year to the type of crops they want or need to grow.
    One of the great benefits of this new policy has been the shift 
toward crops like soybeans that are less energy intensive and 
chemically dependent. The shift to soybeans also means an increase in 
crop rotations that are recognized as good for the environment.
    Way back in 1985, rotations were one of the main benefits Senators 
Boren of Oklahoma and Boschwitz of Minnesota highlighted with their 
``decoupling'' bill. That bill was the predecessor to Freedom to Farm.
    The farm lobby was generally opposed to decoupling and is now 
similarly concerned about the Kyoto agreement and other attempts to 
reduce greenhouse gasses.
    Some studies suggest that the cost of attaining the goals of the 
Treaty would fall heavily on agriculture--with some projecting 
reductions in net farm income exceeding 20 or even 40 percent.
    Agriculture will be in tough shape if some of the policy options 
suggested come to pass. The Commerce Department estimated that a 25 
cents per gallon fuel tax would need to be imposed--other estimates are 
much higher. However, an even more important consideration for 
agriculture are the areas of manufactured inputs, fertilizers and 
chemicals. These are energy sensitive products. For example, energy in 
the form of natural gas typically accounts for 75 percent of the cash 
cost of manufacturing anhydrous ammonia, a basic feedstock or 
ingredient for all nitrogen fertilizer products.
    Obviously, we cannot cut farmers loose from farm bill supports and 
then hang them on the tree of global warming.
    Agriculture should be viewed as a key part of the solution to 
global warming. The fact that the Kyoto negotiators could not come to 
terms with how to treat agricultural sinks gives a hint of their 
enormous potential. One study reports that agricultural soils alone 
could capture enough CO2 to offset any further increase in 
the atmospheric inventory for 12-24 years. That is why Treaty 
negotiators could not agree on the treatment of agricultural sinks.
    Take ethanol for example. Argone National Laboratory published a 
study in January 1999 that demonstrates that the use of corn-based 
ethanol significantly reduces both greenhouse gas emissions and fossil 
energy use. According to the study, every gallon of grain-based ethanol 
used in 10 percent blends with gasoline achieves:

   90-93% reduction in petroleum use.
   12-19% reduction in greenhouse gas emissions, and
   40% reduction in fossil energy use.

    Another study published by Argone in December of 1997 indicated 
that 10 percent blends of ethanol resulted in net greenhouse gas 
savings on the order of 2-3 percent. (If all gasoline were a 10% 
ethanol blend, greenhouse gas emissions would be reduced 2-3%.)
    The same is true for biodiesel. According to the Institute for 
Local Self-Reliance the energy balance for biodiesel 1:2.5 meaning two 
and one half times more energy is produced than consumed in the full 
life cycle production of biodiesel from soybeans. The greenhouse gas 
reductions are even greater than those for ethanol because less 
fertilizer is used as well as less energy in the conversion process to 
fuel.
    In May of 1998 the USDOE/USDA released the Biodiesel Lifecycle 
Inventory Study. The study concludes that the total fossil energy 
efficiency ratio (i.e. total fuel energy/total fossil energy used in 
production, manufacture, transport, and distribution) for diesel fuel 
and biodiesel shows that biodiesel is four times more efficient in 
utilizing fossil energy.
    The overall lifecycle emissions of CO2 from biodiesel 
are 78 percent lower than the overall CO2 emissions from 
diesel. ``The reduction is a direct result of carbon recycling in 
soybean plants,'' notes the study. The biodiesel results are more 
dramatic than ethanol because of the dramatically reduced need for 
nitrogen fertilizer and the lower energy costs of conversion to fuel. 
Basically, the soybean plant does almost all the work.
    Farm management is another area of potential. Farmers continue to 
become more efficient with the use of inputs. Since 1988, national 
nitrogen use for corn has dropped from 137 lbs. to 127 lbs. per acre; 
phosphorous use dropped from 63 to 56 lbs. per acre.
    In Iowa, average nitrogen use dropped from 90 lbs. to 73 lbs. per 
acre in 1995.
    Why is this important in the climate change debate? Nitrous oxide 
is a more potent greenhouse gas than CO2. Nitrous oxide has 
a carbon dioxide equivalent of 270 times a carbon dioxide molecule. 
Nitrous oxide emission reduction in Iowa has been estimated at 37,908 
tons, or 10.2 million tons of CO2 equivalent. These 
reductions were at no loss in yield and $363 million in production 
input savings.
    Let's put this in perspective. The savings in nitrogen fertilizer 
use--on a voluntary basis--in Iowa alone are the equivalent of planting 
nearly one million acres of trees.
    Now lets examine carbon sinks. Trees, for example, are referred to 
as carbon sinks. They take carbon from the atmosphere and store it in 
their trunks, branches and roots. Projects have already been approved 
as part of ``joint implementation'' strategies whereby utilities in one 
country pay to plant trees in another country in order to reduce their 
net carbon loading impact.
    Soils are also a carbon sink. And who controls soils in this 
country? The same people who own the wetlands, endangered species 
habitat and a good portion of the forests--farmers and ranchers.
    If the United States is about to embark on a program to reduce 
greenhouse gasses why not incentivize farmers to fill up their sinks?
    Typical farmland has about a 2 percent organic matter content. 
Farms that utilize no-till or minimum till have around 4 percent and 
grasslands have about 6 percent organic matter content.
    Said another way; our 30 million acres of Conservation Reserve 
Program (CRP) tripled in carbon value. The tens of millions of acres of 
no-till and minimum till are on their way to doubling their organic 
carbon content. Hundreds of millions of acres with lower organic matter 
content could store enormous amounts of greenhouse gas components.
                 soil management and tillage practices
    Soils act as a gigantic carbon sink. Just as plants and trees use 
CO2 gasses, soils capture carbon as roots grow underground.
    The carbon sequestration ability of farmland is enormous. For 
example, the average organic matter of a traditionally tilled acre is 2 
percent. Through the use of no-till or minimum-till methods the organic 
matter can be increased to 4 percent over 20-30 years. Some scientists 
believe soil organic carbon could be restored to 6 percent or above on 
cropped ground. The CO2 equivalent of greenhouse gasses 
saved would be around 65 tons per acre. That is 39,000 tons of 
CO2 equivalent sequestered on a 600 acre farm verses the 
previous tillage practice.
    Why is that important? It could mean dollars in farmers' pockets.
    I have seen estimates that CO2 could be worth $70/ton. 
That is $2.7 million worth of CO2 gas credits on a 600-acre 
farm.
                       other management practices
    Increasing soil organic matter through farming practices is just 
one of many greenhouse gas reduction options. Others include:

   More efficient nutrient applications. (10-15 tons 
        CO2 equivalent/acre)
   Reduced fuel and energy use for production, drying and 
        processing of crops. (3-5 percent annual reductions = .02 tn./
        a./yr. = 8 ml.tn.CO2/yr.)
   Manure management for methane--especially from large units.
   Growth and use of fuel crops such as ethanol and biodiesel. 
        (current ethanol use saves 4.4 ml.tns. CO2/yr.)
   Growth and use of trees in marginal areas such as buffer 
        strips or CRP. (1.4 tns. CO2/a./yr. of trees in 
        growth phase).

    The private and public sectors are already engaged in creating a 
mechanism to trade greenhouse gas credits. If the world is headed down 
this road, agriculture needs to become fully engaged in figuring out 
how to take financial advantage of the resources they control.
    We have to spread the word that planting trees is fine and good but 
incentivizing farmers to increase the organic matter of soils could do 
in 5-10 years what it would take a forest to do in 40-50 years.
    So where is this all leading? As I said before, the science about 
greenhouse gasses and global warming and what impact human activity has 
on all this is pretty incomplete.
    What we need to focus on is the fact that the previous 
Administration signed an agreement to cut our greenhouse gas emission 
to 7% below 1990 levels. This means cuts of 20-25 percent of the 
business as usual baseline in the out years. President Bush, while not 
supportive of the Treaty, recently stated his support for voluntary 
measures to reduce greenhouse gasses.
    If we in agriculture do not get inventive and imaginative on this 
issue I am confident we will bear a good portion of the costs. Rather 
than get stuck with the bill, I hope that we work together with 
Congress, the Administration and other industries to see how we can 
contribute to the plus side of the ledger on greenhouse gasses.
    If greenhouse gas reduction strategies are imminent, agriculture 
needs to figure out a way to benefit from the contributions we make and 
the increased contributions we could make if the incentives were 
structured properly.
    What would happen for example if utilities were required to 
purchase 5 percent of their energy needs from renewable sources as part 
of electricity deregulation legislation?
    Or, how about a carbon credit on income taxes for the extra carbon 
a farmer or rancher stores with their new production practices?
    What about giving renewable industrial products a tax incentive 
based on the amount of greenhouse gasses they displace?
    Mr. Chairman, this committee is tasked with one of the most 
important missions in decades--formulate and gain approval of a 
National Energy Strategy. This strategy will be considered in an 
environment where climate change issues are also a high priority. Your 
committee has the opportunity for the proverbial ``two birds with one 
stone'' kill.
    Legislation has been proposed by Senators Hagel and Johnson and 
referred to this committee. The bill establishes a renewable standard 
for transportation fuels. Transportation fuels also happen to be the 
leading source of increased greenhouse gas emissions. With one fell 
swoop we could reduce our dependence on foreign oil and strike a blow 
for greenhouse gas reduction.
    I urge your favorable consideration of this and other measures that 
would encourage renewable fuels and simultaneously reduce greenhouse 
gas emissions.

    The Chairman. Thank you very much.
    Mr. Cassidy, why don't you go right ahead.

        STATEMENT OF FRANK CASSIDY, PRESIDENT AND COO, 
                   PSEG POWER LLC, NEWARK, NJ

    Mr. Cassidy. Thank you, Mr. Chairman, and members of the 
committee. I am pleased to be here today representing my 
company, PSEG, and our coalition, the Clean Energy Group.
    PSEG is a diversified energy holding company based in New 
Jersey, with assets and operations overseas as well as in the 
United States. We serve over 5 million energy consumers in the 
United States and abroad. The other Clean Energy Group members 
are Consolidated Edison, Key Span Energy, Northeast Utilities, 
Connective, Exelon, PG&E National Energy Group, and Sempra 
Energy.
    This coalition shares a number of significant attributes 
and principles. We operate and are developing powerplants in 
almost every region of the United States. We operate coal, gas 
and oil-fired fossil fuel generating plants as well as nuclear-
powered facilities. We believe in responsible environmental 
stewardship and we are committed to working cooperatively with 
the environmental community, government, and other stakeholders 
to promote adoption of progressive policies to provide 
meaningful environmental improvements on an economically sound 
and sustainable basis.
    There is no question that the issue of carbon dioxide 
reductions presents a tremendous challenges for our industry. 
However, members of our coalition share the view that the 
scientific evidence on climate change has progressed to the 
point where prudent action on reducing greenhouse gas emissions 
is warranted. We also share the concerns expressed by members 
of Congress, President Bush and his administration about the 
necessity of maintaining a secure, diverse, reliable, and 
affordable electric energy supply.
    The Clean Energy Group believes we can make progress on 
reducing carbon dioxide and other greenhouse gas emissions 
without bankrupting the economy or eliminating coal as a viable 
fuel supply. This testimony is not about reducing carbon 
dioxide emissions through efficient operations and technology, 
although my company has reduced its greenhouse gas emissions by 
7 percent since 1990. It is about the legislation we believe is 
necessary to properly incentivize these reductions going 
forward.
    One of the key questions that I and my industry colleagues 
confront is how best to accommodate the requirement for 
environmental improvement as we make business decisions that 
affect the lives and livelihood of hundreds of thousands of 
investors and involve billions of dollars. The Clean Energy 
Group believes the best way to provide the business certainty 
on which to base these decisions is through an integrated 
environmental strategy and a multipollutant approach that 
includes carbon.
    We have developed a legislative proposal that would deliver 
significant reductions in powerplant emissions of nitrogen 
oxide, sulfur dioxide and mercury, and implement mandatory 
carbon dioxide reductions in a manner that would not compromise 
the reliability, fuel source diversity, or affordability of the 
Nation's electric energy supply.
    The legislation calls for mandatory emissions caps to be 
achieved on established timetables, and the use of emissions 
trading and other cost-effective, creative, and market-based 
compliance techniques such as multisource trading and an all-
source allocation for credits that will allow industry to meet 
the emission caps efficiently and at low cost.
    I have attached a copy of the Clean Energy Group's 
legislative proposal to my written testimony, and we look 
forward to discussing it with interested members at any time. 
We believe the legislation will provide real and significant 
environmental benefits. However, there is also a strong 
business rationale for an integrated approach and for 
establishing a clear policy on carbon reductions now. Our 
industry needs to know what the future environmental 
requirements will be in terms of the amount of reductions and 
the timetable.
    Our view is that the best and most prudent course of 
action, and the one that will foster investment in new energy 
technologies in the electric infrastructure our country needs 
is a comprehensive program that establishes clear, unambiguous 
environmental targets and timetables over the next 15 years.
    We also believe that such a program should be mandatory. If 
the goal is to provide business certainty, our view is that 
only a mandatory program in which all participants in the 
electric generating industry are required to internalize the 
cost of making necessary reductions will work. This is 
especially relevant in the highly competitive wholesale power 
market in which even small cost differentials can provide 
material competitive advantage for those who choose not to 
participate in a voluntary program.
    Again, I am honored by the opportunity to make this 
statement, and we look forward to working with Congress and the 
administration to craft policies under which our industry will 
make substantial environmental progress while it fulfills its 
mission of providing secure, reliable, and affordable electric 
energy.
    I would be happy to respond to any of your questions.
    [The prepared statement of Mr. Cassidy follows:]
Prepared Statement of Frank Cassidy, President and COO, PSEG Power LLC, 
                               Newark, NJ
    Mr. Chairman and members of the committee, I am pleased and honored 
to appear before you this morning to represent my company, PSEG, and 
our coalition, the Clean Energy Group.
    PSEG is a diversified energy holding company based in New Jersey 
with assets and operations overseas as well as in the United States. 
The subsidiary I head, PSEG Power, is an independent power producer 
with more than 17,000 megawatts of electric generating capacity in 
operation, construction, or advanced development. PSEG's other 
subsidiaries include Public Service Electric and Gas Company, one of 
the nation's largest electric and gas utility companies, and PSEG 
Global, which develops and operates energy production and distribution 
facilities internationally. As an entity, PSEG serves more than five 
million energy customers in the U.S. and abroad.
    The Clean Energy Group members are Consolidated Edison Company, 
KeySpan Energy, Northeast Utilities, Conectiv, Exelon Corporation, 
Northeast Utilities, PG&E National Energy Group, Sempra Energy, and my 
company, PSEG.
    Members of our coalition share a number of significant attributes 
and principles:

   We operate and are developing power plants in almost every 
        region of the United States.
   We operate coal, gas, and oil-fired fossil-fueled generating 
        plants and nuclear-powered facilities.
   We believe in responsible environmental stewardship.
   We are committed to working cooperatively with the 
        environmental community, government, and other stakeholders to 
        promote adoption of progressive policies that provide 
        meaningful environmental improvements on an economically sound 
        and sustainable basis.

    There is no question the issue of carbon dioxide reductions 
presents tremendous challenges to our industry. However, members of our 
coalition share the view that the scientific evidence on climate change 
has progressed to the point where prudent action on reducing greenhouse 
gas emissions is warranted.
    We also share the concerns expressed by Members of Congress, 
President Bush, and his Administration about the necessity of 
maintaining a secure, diverse, reliable, and affordable electric energy 
supply.
    The Clean Energy Group believes we can make progress on reducing 
carbon dioxide and other greenhouse gas emissions without bankrupting 
the economy or eliminating coal as a viable fuel supply.
    One of the key questions I and my industry colleagues confront is 
how best to accommodate the requirement for environmental improvements 
as we make business decisions that involve billions of dollars and 
affect the lives and livelihoods of hundreds of thousands of investors 
and employees.
    The Clean Energy Group believes the best way to provide the 
business certainty on which to base these decisions is through an 
integrated environmental strategy and a multi-pollutant approach that 
includes carbon.
    The Clean Energy Group has developed a legislative proposal that 
would deliver significant reductions in power plant emissions of 
nitrogen oxide, sulfur dioxide, and mercury, and implement mandatory 
carbon dioxide reductions in a manner that will not compromise the 
reliability, fuel-source diversity, or affordability of the nation's 
electric energy supply.
    The legislation calls for mandatory emissions caps to be achieved 
on established timetables and use of emissions trading and other cost-
effective, creative, and market-based compliance techniques such as 
multi-source trading and an all-source allocation for credits--
including renewables, hydro, and nuclear--that will allow industry to 
meet the emissions caps efficiently and at low cost. Use of these 
mechanisms would be scaled back over time--and on a specific schedule--
as the transition to a less carbon-intensive energy infrastructure 
gains momentum.
    I've attached a copy of the Clean Energy Group's legislative 
proposal to my written testimony. We would look forward to discussing 
it with interested Members and staff at any time.
    We believe the legislation will provide real and significant 
environmental benefits. However, there also is a strong business 
rationale for an integrated approach and for establishing a clear 
policy on carbon reductions now.
    Our industry needs to know now what the future environmental 
requirements will be in terms of the amount of reductions and the 
timetable.
    The issue boils down to one of business certainty for both the 
electric power industry and the capital markets we turn to for 
financing of new generating projects. We don't want to confront a 
situation in which we are forced to waste or put at risk large-scale 
investments predicated on one set of requirements only to have the 
rules changed a few years down the road.
    Our view is that the best and most prudent course of action--and 
the one that will foster investment in new energy technologies and the 
electric energy infrastructure our country needs--is a comprehensive, 
program that establishes a clear, unambiguous environmental targets and 
timetables over the next fifteen years.
    We also believe such a program should be mandatory.
    Clean Energy Group companies have participated in a number of 
voluntary programs in the past that have been useful tools for the 
industry. However, if a goal is to provide business certainty, our view 
is that only a mandatory program in which all participants in the 
electric generating industry are required to internalize the cost of 
making necessary reductions will work. This is especially relevant in 
the highly competitive wholesale power market in which even small cost 
differentials can provide a material competitive advantage for those 
who choose not to participate in a voluntary program.
    Again, I am honored by the opportunity to make this statement on 
behalf of my company and the Clean Energy Group. We look forward to 
working with Congress and the Administration to craft the policies 
under which our industry will make substantial environmental progress 
while it fulfills its mission of providing a secure, reliable, and 
affordable supply of electric energy. I would be happy to respond to 
your questions.

    The Chairman. Thank you very much.
    Mr. Hill, why don't you go right ahead.

STATEMENT OF GARDINER HILL, CO2 PROGRAM DIRECTOR, BP

    Mr. Hill. Thank you.
    Mr. Chairman, and members of the committee, good morning. 
My name is Gardiner Hill, and I am the director of BP 
CO2 program worldwide based here in the United 
States. I am also joined today by my colleague, Jeff Morgham, 
who is the manager of our emissions trading program.
    I have been asked to focus today on carbon sequestration 
and emissions trading. I am delighted to have this opportunity 
to share with you BP's ideas on the role of sequestration, to 
address the concern around greenhouse gas emissions and climate 
change.
    BP is no stranger to the topic of climate change. We began 
our no-regrets policy several years ago in a speech given in 
May 1997 by John Browne, our chief executive officer. In that 
speech, we announced a voluntary no-regrets policy which began 
with, among other things, the creation of emissions baseline 
data across all of our facilities, and the commitment with 
Environmental Defense to develop an emissions-trading program 
across our assets worldwide.
    Later in September 1998, we announced targets and 
timetables for a reduction in BP's greenhouse gas emissions of 
a 10-percent figure below the 1990 baseline by 2010. As of 
today, we are halfway there in meeting this target, having 
reduced our emissions by 5 percent. On top of that, our 
emissions trading system has exchanged 5 million tons of 
greenhouse gases. This has been achieved by our employees by 
actively identifying a number of innovative solutions, and the 
majority of these solutions have actually been good business 
sense.
    What has become clear is that there is no one silver 
bullet. There is no one-size-fits-all in how business must 
address the issue of climate change. The most common emission 
reduction approaches being considered today typically include 
improvements in energy efficiency, land use practices such as 
forest management and biofuels, and sequestration technology 
for CO2 separation, capture, and storage.
    BP believes that geologic storage offers enormous potential 
for safe and permanent sequestration of carbon dioxide. To put 
this into some perspective, geological storage has the 
potential to close the entire gap which exists between 
projections of future emissions and emission levels required to 
stabilize atmospheric concentrations at 550 parts per million. 
This technology builds on the oil and gas industry's 
considerable experience of safely injecting, storing and 
monitoring gases in geological formations.
    Carbon sequestration can broadly be broken down into three 
main categories, capture, transportation, and storage. In the 
area of capture, we are looking at technologies which remove 
the carbon before or after the combustion process, as well as 
innovative combustion technologies to produce a concentrated 
stream, which is easier to capture.
    In the area of transportation, we are looking at the 
relationship between purity and pipeline material requirements.
    Lastly, as to storage, we are currently examining 
geological formations of how CO2 can be permanently 
and safely stored in existing oil and gas reservoirs. An 
additional benefit of this application is increased production 
from current fields.
    Today, carbon sequestration projects are small in size and 
scope. The main hurdle is cost. BP is working hard on 
developing new technologies to substantially reduce the cost of 
CO2 separation, capture, and geological storage. In 
one such program, BP is a partner in an international industry 
effort called the CO2 Capture Project. The project 
has nine oil and gas companies from the USA, Canada, EU, and 
Norway.
    The CO2 Capture Project was recently announced 
by the White House and the U.S. Department of Energy as a type 
of project that will be important in the development of new, 
lower cost technologies. The recent announced funding support 
from the DOE recognizes the importance of forming public-
private partnerships, and we look forward to working with them 
on this exciting program.
    Equally as important as the specific technology development 
are strategies for enabling the effective application. What BP 
has learned is that market-based mechanisms such as greenhouse 
gas trading can be effective at spurring innovation and action. 
For example, in BP's internal emissions trading system, each 
business leader is accountable for delivering the emissions 
target, which is directly tied to his performance review and 
his rewards. At the end of the year, a business must have 
permits in hand to match their actual emissions.
    Trading between business lines has allowed BP to implement 
CO2 reductions in the most cost-effective manner. 
Essential to any trading system are clear goals, clear methods 
of establishing baselines, and clear incentives for taking 
early action.
    Mr. Chairman, I would like to conclude by saying that BP 
believes that technology has a fundamentally important role in 
the solutions set for climate change. Carbon sequestration is 
one example that offers the potential for providing a minimum 
of 30 years of permanent storage at today's emission rates. We 
believe the recently announced DOE partnership is essential in 
expediting and improving the potential for these technologies.
    Lastly, we believe that voluntary market-based mechanisms 
have enormous potential to bring early emissions reductions 
forward in the most cost-effective manner. Indeed, we would 
urge the Congress to consider a policy which would reward these 
early actors for these reductions they voluntarily choose to 
make.
    On behalf of the men and women of BP, we thank the 
committee for the opportunity to appear before you today. I 
look forward to working with the committee in the future as you 
pursue policy solutions to deal with climate change.
    Thank you.
    [The prepared statement of Mr. Hill follows:]
 Prepared Statement of Gardiner Hill, CO2 Program Director, 
                                   BP
    Mr. Chairman and members of the committee, good morning. My name is 
Gardiner Hill and I am the Director for BP's CO2 Program 
worldwide based here in the United States. I have been asked to focus 
today on our efforts on carbon sequestration and emissions trading. I 
am delighted to have this opportunity to share with you BP's ideas on 
the role of sequestration to address the concern around greenhouse gas 
emissions and climate change.
    BP is no stranger to the topic of climate change. We began our no 
regrets policy several years ago in a speech given in May of 1997 by 
John Browne, our chief executive officer. In that speech we announced a 
voluntary, no regrets policy, which began with the creation of 
emissions base line data across all of our facilities, a pilot 
sequestration project in the Bolivian Rainforest with the Nature 
Conservancy, a challenge to grow our solar business ten fold in ten 
years, and the commitment with Environmental Defense to develop an 
emissions trading program across our assets worldwide. Later, in 
September 1998, we announced targets and timetables for a reduction in 
BP's greenhouse gas emissions of 10 percent below a 1990 baseline, by 
2010.
    As of today, we are halfway there in meeting this target by 
reducing our emissions by five percent. On top of that, our emissions 
trading system has exchanged five million tons of greenhouse gases. 
This has been achieved by our employees proactively identifying a 
number of innovative solutions. Many of these solutions have actually 
made good business sense. I'd be delighted to provide the committee 
with some specific examples.
    What has become clear is that there is no one silver bullet, i.e. 
no one-size-fits-all in how business must address the challenge of 
climate change. The most common emission reduction approaches being 
considered today by active members in the industrial community 
typically include: improvements in energy efficiency, land use 
practices such as forest management and biofuels, and sequestration 
technology for CO2 separation, capture and storage.
    BP believes that geologic storage offers enormous potential for 
safe and permanent sequestration of carbon dioxide. To put this into 
perspective, geologic storage has the potential to close the entire gap 
which exists between projections of future emissions and emission 
levels required to stabilize atmospheric concentrations at 550ppm--a 
level considered by some as sufficient to avoid dangerous interference 
of the world's climate. This technology builds on the oil and gas 
industry's considerable experience in safely injecting, storing and 
monitoring gases in geologic formations.
    Carbon sequestration can broadly be broken down into three main 
areas: capture, transportation and storage. In the area of capture we 
are looking at technologies which remove the carbon before or after the 
combustion process as well as innovative combustion technologies to 
produce a concentrated stream which is easier to capture. In the area 
of transportation we are looking at the relationship between purity and 
pipeline material requirements. Lastly, as for storage, we are 
currently examining geologic formations and how CO2 can be 
permanently and safely stored in existing oil and gas reservoirs. An 
additional benefit of this application is increased production from 
current fields.
    Today, carbon sequestration projects are small in size and scope. 
The major hurdle is cost. BP is working hard on the development of new 
technologies to substantially reduce cost of CO2 separation, 
capture and geologic storage. In one such program, BP is a partner in 
an international industry effort called the ``CO2 Capture 
Project.'' The project has nine major oil and gas companies from the 
USA, Canada, EU, and Norway. The CO2 Capture Project was 
recently announced by the White House and the U.S. Department of Energy 
(DOE) as the type of project that will be important in the development 
of new, lower cost technologies. The recently announced funding support 
from the DOE recognizes the importance of forming public-private 
partnerships and we look forward to working with them on this exciting 
program, which holds much promise for the future.
    Equally as important as the specific technology development, are 
strategies for enabling the effective application. What BP has learned 
is that market based mechanisms such as greenhouse gas emissions 
trading can be effective at spurring innovation and action. In BP's 
internal emissions trading system the group emissions target, is held 
by each of our business managers throughout the company. Each business 
leader is accountable for delivering the emissions target which is 
directly tied to his performance review and rewards. At the end of the 
year, a business must have permits in hand to match their actual 
emissions. Trading between businesses has allowed BP to implement 
CO2 reductions in the most cost effective manner. Essential 
to any trading system are clear goals, clear methods for establishing 
baselines and clear incentives for taking early action.
    Mr. Chairman, I would like to conclude by saying that BP believes 
that technology has a fundamentally important role in the solutions set 
for climate change. Carbon sequestration is but one example that offers 
a potential to provide a minimum of 30 years of permanent storage at 
today's emissions rates. We believe the recently announced DOE 
partnership is essential in expediting and proving the safety and 
potential for this technology. Lastly, we believe that voluntary market 
based mechanisms have enormous potential to bring early emissions 
reductions forward in the most cost effective manner. We would urge the 
Congress to consider policy which would reward those early actors for 
those reductions they voluntarily choose to make. On behalf of the men 
and women of BP we thank the committee for the opportunity to appear 
before you today and look forward to working with the committee in the 
future as you pursue policy solutions to deal with climate change.
    Thank you for the opportunity to share our thoughts on the 
importance of technology in connection with climate change.

    The Chairman. Thank you very much.
    Mr. Gebolys.

           STATEMENT OF GENE J. GEBOLYS, PRESIDENT, 
          WORLD ENERGY ALTERNATIVES, LLC, CHELSEA, MA

    Mr. Gebolys. Mr. Chairman, and members of the committee, 
thank you for the opportunity to share the views of one company 
striving to make the promise of renewable fuels the reality in 
America today.
    Mr. Chairman, just 2 days ago the lead story in the Sunday 
New York Times heralded: ``Allies Tell Bush They Will Act Alone 
on Climate Accord.'' Another front page story that same day in 
the same newspaper reported: ``Boom in Natural Gas Drilling 
Cannot Match Soaring Demand.'' Everywhere we turn today, it 
seems that the need to find new energy solutions is becoming 
more urgent even as our existing options seem less suited to 
the task.
    Even as this global pressure to change intensifies, a new 
and perhaps more pragmatic approach to energy diversification 
is emerging. In both vehicle and fuel formats, hybrid 
technologies are beginning to take center stage. In the vehicle 
sector, gasoline hybrid electric vehicles have recently been 
introduced.
    Practical-minded consumers as well as socially minded 
health and environmental groups have quickly embraced these new 
cars and buses because they offer great efficiency without 
great discomfort or inconvenience. With less fanfare, but 
perhaps far greater impact, the same type of transformation has 
been taking place in alternative fuel consumer markets as well.
    Fuels, too, are going hybrid. Ethanol, and more recently 
biodiesel, have become increasingly popular because they 
augment our existing energy infrastructure rather than replace 
it. Biodiesel, which can be used as a one-for-one replacement 
for diesel, is most often used in blends ranging from 2 to 20 
percent. As such, anything that can be powered by diesel can be 
powered by a biodiesel blend. This ease of use and versatility 
has enabled this technology to realize faster initial market 
penetration than any other fuel.
    Biodiesel blends are being used in existing diesel 
vehicles, and they are being dispensed through our existing 
fossil fuel infrastructure. This ease of use also makes for 
ease of distribution. Energy stalwarts such as Gulf and BP have 
begun making biodiesel blends available to their customers. 
Growth in demand is leading to greater availability, and in 
kind, greater availability is leading to greater use.
    It has not been easy, and we have only begun to make our 
mark, but I am proud to report that World Energy, AGP, and 
others are making enormous strides in advancing the new hybrid 
renewable fuel frontier. With offices in Massachusetts, 
Florida, and California, and distribution outposts in virtually 
all areas of the country, World Energy is actively promoting 
biodiesel throughout the Nation.
    Last month alone, World Energy sold more biodiesel than we 
did in all of 1999. By midyear 2001, we had exceeded our sales 
totals for all of the previous year, and by year end we expect 
a fourfold growth over last year's totals. When the U.S. 
Department of Energy recently announced that biodiesel was the 
fastest-growing form of alternative energy in the United 
States, it came as no surprise to us.
    I am here today to testify to the fact that renewable 
hybrid fuels can work in the United States, and I am here to 
support legislative initiatives that will enable us to advance 
practical and cost-effective measures to gradually increase the 
use of renewable energy into the Nation's energy portfolio. The 
struggle to introduce a cleaner renewable fuel in to the 
Nation's diesel supply is no fad. Since 1994, World Energy and 
its predecessor, Twin Rivers Technologies, have been pioneers 
in bringing biodiesel to America. Far earlier, the Europeans 
had embraced this straightforward technology as a way to 
provide increased energy security, cleaner air, agricultural 
support, and domestic energy stabilization.
    Now, with global warming surfacing as the leading 
environmental topic of our time, the question has begun to 
change from, ``is global warming occurring?'' to ``what can we 
do to stem the growth of greenhouse gases?'' There is certainly 
no single answer to that question, but certainly a component of 
the answer must lie within the lessons we are learning about 
the growing popularity of hybrid vehicles and hybrid fuels. 
That lesson is that if we are to begin to make progress, we 
must find solutions that are easy to introduce, and those that 
provide a wide spectrum of benefits. Under any definition, a 
greater reliance on hybrid renewables meets this criterion.
    According to the National Renewable Energy Lab, life cycle 
emissions of CO2 for biodiesel are 78 percent lower 
than conventional diesel. According to a recent USDA study, 
even relatively modest increases of the use of biodiesel will 
have a significant impact on farmer income. A recent EPA study 
found that more than 75 percent--75 percent--of all cancer risk 
associated with outdoor air contaminants relates directly to 
diesel exhaust. Meanwhile, biodiesel exhaust has been found to 
be completely nontoxic.
    I cite these numbers not to suggest that we should or even 
that we could replace all diesel with biodiesel. The point is 
simple. Fossil fuel resources, vehicles, and infrastructure 
dominate our energy landscape today. Further, we are likely to 
depend on this same infrastructure well into the future. With 
this reality as a starting point, we must begin thinking about 
our existing energy infrastructure as a medium for a 
diversified energy supply, rather than as an obstacle to it.
    Today, Senators Hagel and Johnson have given us the 
opportunity to do just that. S. 1006 provides us the 
opportunity to get started. This is the renewable portfolio 
bill, and this bill is good for air quality, good for energy 
security, good for farmers, good for public health, and good 
for America. The time for hybrid renewables has come. This bill 
gives us the opportunity to get started. I urge you to pass it.
    Thank you for the opportunity to be here.
    The Chairman. Thank you very much.
    Mr. Lyons, we are glad to see you back here.

STATEMENT OF JAMES R. LYONS, PROFESSOR, YALE SCHOOL OF FORESTRY 
            AND ENVIRONMENTAL STUDIES, NEW HAVEN, CT

    Mr. Lyons. Thank you very much, Mr. Chairman. It is 
certainly a pleasure to be back before the committee and have 
an opportunity to address you today on the important issue of 
global climate change. What I would like to do briefly this 
morning is touch on a few things. First of all, I think it is 
important to emphasize why we need to be concerned not only 
about the opportunities for sequestration of carbon in 
agriculture and forestry, but the impacts of climate change on 
our agricultural production systems and on America's forests.
    I would like to talk a little bit about the opportunities 
to increase sequestration opportunities in agricultural and 
forestlands, and then raise some important considerations as 
you look at policies to promote the use of these lands for 
sequestration purposes, and time permitting, maybe I will offer 
a few comments on S. 820, introduced by Senators Craig and 
Wyden.
    Let me emphasize that although many reports, including the 
most recent National Assessment Synthesis Team report, 
emphasize that generally carbon fertilization should increase 
production in agriculture and forestry, there are some dramatic 
and important regional and localized impacts that need to be 
considered.
    Overall, if there is an increase in fertilization as a 
result of CO2 and an increase in agricultural 
production, that may not necessarily be good news for America's 
farm sector. In fact, according to the NAST report, increased 
production could result in an estimated $4 to $5 billion 
reduction in producers' profits, which represent a 13 to 17 
percent loss of income for America's farmers, and as the 
Agriculture Committee today is attempting to mark up another 
disaster bill for agriculture, I think it is fair to say we do 
not need to try and increase production any further and 
exacerbate low commodity prices.
    For forests, while productivity might increase in certain 
areas, there are dramatic regional effects. For example, again 
according to the NAST report, seasonal severity of fire hazard 
would be projected to increase about 10 percent over the next 
century under several of the more popular models that project 
impacts of carbon on terrestrial ecosystems. This translates 
into small decreases in fire hazard in the northern plains, but 
a 30-percent increase in fire hazard for the Southeast and for 
Alaska.
    Also, as one might imagine, there will be dramatic changes 
in the forest landscape. Trees favoring cooler climates would 
move northward, some species would probably disappear in their 
entirety. While that may not seem significant for those of us 
from New England, who have come to enjoy the fall foliage, we 
would see a dramatic change in what occurs there, and it would 
be interesting if, in fact, as a result of the disappearance of 
Aspen, Aspen, Colorado no longer had any Aspen, and those are 
some of the real potential effects of change over time.
    With regard to sequestration potential, let me emphasize as 
a part of our preparation for the first COP-6 at The Hague, we 
prepared some estimates of the opportunities for sequestration. 
We found, for example, that managed forests had the potential 
to remove 288 million metric tons of carbon equivalent under a 
business-as-usual scenario, that croplands had the potential to 
sequester another 16 million metric tons per year, and that 
pasturelands could, in fact, sequester about 8 million metric 
tons per year, so there is a significant benefit and 
opportunity associated with sequestration for agriculture and 
forestry.
    Generally speaking, as management practices improve the 
organic content of soils through changes in tillage practices, 
and the establishment of permanent cover, that sequestration 
benefit will increase.
    Others on the panel have already addressed some of the 
other potential opportunities in agriculture such as the 
production of biomass for energy crops which can serve multiple 
benefits, particularly reducing air pollutants and also, 
depending on cropping practices for crops such as switch grass, 
also help to maintain soil organic matter and improve 
sequestration.
    With regard to forest opportunities, many of the 
opportunities are associated with improvements in management 
practices associated with marginal lands, with improving and 
increasing agroforestry activities, and improving management on 
private industrial and nonindustrial and forestlands.
    For example, it is estimated that 23 to 45 million acres of 
marginal lands may be available for conversion to forests in 
the United States. Much of this is in the East and the 
Southeast, and the estimates indicate that potential gains from 
this conversion could be as much as 50 million metric tons per 
year.
    Now, some utilities have been creative and are already 
capitalizing on those opportunities, and in fact in projects 
currently underway in Louisiana, Arkansas, and Mississippi, the 
planting of these marginal lands is actually leading to 
creation of new habitat opportunities and creation of new lands 
that might be added to the national wildlife refuge system.
    Opportunities to increase sequestration rates on forest 
lands are probably greatest on private forest lands, and I want 
to emphasize there that probably the most limiting factor right 
now is simply knowledge and information and resources to help 
private nonindustrial landowners which manage two-thirds of the 
forestlands in the United States with the opportunity to do a 
better job managing the resources.
    Finally, with regard to some key considerations in the use 
of agriculture and forestlands for carbon sequestration, I 
would emphasize the following, Mr. Chairman. First of all, I 
think it is important, as you look at new policies, that 
emphasis be placed on the development of sound scientifically 
based and viable standards for measuring carbon sequestration.
    Ideally, a single, internationally acceptable standard 
should be developed that provides the means to credit or debit 
carbon sequestered in accordance with a given management 
practice or land use change. I would note that the 
International Panel on Climate Change, IPCC, is currently 
studying this issue, and established a program to develop 
standard for methodologies to estimate anthropogenic emission 
of greenhouse gases by sources and removals by sinks.
    A second important consideration is the need to recognize 
that the value of carbon cycles for farm and forestland will be 
a function of policy and markets. Values must be viewed 
separately from the science of determining what impacts land 
use changes and management activities have in terms of their 
effect on carbon cycles. Clearly, one of the impediments to 
establishing values for carbon associated with changes in 
management practices and land use is the uncertainty associated 
with regulation of carbon emissions. Frank Cassidy has already 
addressed this issue.
    I think it is critically important that that uncertainty be 
addressed. The best way to do that would be passage of 
legislation and the development of regulations to establish 
requirements for reductions in greenhouse gases domestically. 
That would open a wide range of opportunities for investors, 
farmers and ranchers and forestland owners, utilities and 
others to use private markets to address global climate change 
concerns.
    In turn, this would likely spur additional investment in 
carbon sequestration activities, particularly if mechanisms 
exist to trade carbon sequestration credits for emission 
reduction targets.
    Now, some of these markets are already developing on an 
experimental basis. I know you are aware of the Chicago Climate 
Exchange, but they are largely speculative. I think if we want 
to get to the point of promoting emission trading, or carbon 
trading, if we want to spur private investment in sustainable 
forestry and agriculture activities, and if we want to 
encourage investment in bioenergy and related technologies, 
then we need to cure the issue of uncertainty that certainly 
clouds where we are, and I would suggest to you that S. 556, 
introduced by Senator Jeffords and a number of his colleagues, 
the multi-pollutant bill, might be a good place to start.
    The last key consideration I think is that efforts to 
enhance carbon sequestration activities on farm and forestlands 
cannot be viewed in isolation. Through certain management 
practices and land use changes, carbon sequestration values can 
increase, and significant additional environmental benefits 
would accrue, benefits such as improved water quality, wildlife 
habitat, improvements in air quality and the environment 
overall, and if some value were established for carbon that 
might spur investment in these sequestration-enhancing 
activities, then private money might be invested where 
currently landowners and the taxpayer through financial 
assistance programs are footing the entire bill.
    Now, of course, the reverse is also true. Efforts to 
enhance sequestration through practices that improve forest 
productivity should not be permitted to do harm to water 
quality, wildlife habitat, and the like. I would argue that the 
full environmental budget for these activities needs to be 
taken into account.
    So in establishing any rules for measuring carbon 
sequestration, perverse incentives that enhance carbon values 
but lead to conversion of old growth forests or the loss of 
biologically important natural resources or the conversion of 
entire ecosystems should be disallowed.
    If you like, Mr. Chairman, I would offer just a few 
comments on S. 820. I want to commend Senator Craig and Senator 
Wyden for their efforts in bringing this to the fore and 
bringing a focus to the opportunities to promote sequestration 
of carbon through better utilization of America's forests. I 
would offer the following comments, though, for their 
consideration.
    First, I think it is important that carbon sequestration 
potential for all forest lands in the United States be 
accurately assessed and reported upon. It is not clear to me 
from the text of the bill if the bill simply focuses on public 
lands. I think it should take into account private lands as 
well, because that is actually where the greatest potential 
exists, with so many lands in private ownership, and so many of 
those lands frankly more productive in terms of their forest 
potential.
    Second, in lieu of the Carbon and Forestry Advisory Council 
established by the bill, what I would suggest is an independent 
scientific panel be established under the rules of the Federal 
Advisory Committee Act. The reason for this is simple. I think 
the charge given to this advisory panel is largely technical 
and scientific in nature, and not fully consistent with the 
qualifications that are required for that panel in the bill.
    Third, as I noted above, I think it is important for any 
methodologies devised in accordance with that legislation be 
consistent with other methodologies for measuring carbon 
emission and sequestration rates developed in the United 
States, and they have to be applicable internationally as well. 
I think that amplifies the need to have scientific expertise in 
that advisory panel.
    Fourth, I think consistent with the stated purposes of the 
bill, it is important that recommendations stemming from any 
required study and actions of the advisory council give full 
consideration to other environmental consequences associated 
with enhancing carbon, and that is noted in the bill. I think 
it should be emphasized.
    And finally, I want to commend the authors for recommending 
the establishment of cooperative agreements and loan program to 
provide for additional investment in forest stewardship in the 
United States. However, I might suggest that the management 
activities provided for by these funds in forest management 
plans that would be developed be managed through existing 
forest stewardship activities, and perhaps through the existing 
forest stewardship program.
    With that, I will cease, Mr. Chairman, and again I want to 
thank you for the opportunity to appear before the committee 
today.
    [The prepared statement of Mr. Lyons follows:]
    Prepared Statement of James R. Lyons, Professor, Yale School of 
           Forestry and Environmental Studies, New Haven, CT
    Mr. Chairman, Senator Murkowski and members of the committee. My 
name is Jim Lyons and I am honored to appear before you today to 
discuss proposals related to global climate change and measures to 
mitigate greenhouse gas emissions. I am currently Professor in the 
Practice of Resource Management at the Yale School of Forestry and 
Environmental Studies in New Haven, Connecticut.
    It is a pleasure to return to this room to address you today. I 
want to commend you and your leadership in investigating the many 
issues associated with the nation's current energy concerns, most 
especially the issues associated with climate change that we will 
discuss today. I also want to commend you for your introduction of S. 
597, the Comprehensive and Balanced Energy Policy Act of 2001. Mr. 
Murkowski, it is also a pleasure to be with you again and similar 
commendation is due you in your efforts to provide leadership on energy 
issues through introduction of S. 388, the National Energy Security Act 
of 2001. I look forward to our discussions this morning.
    My testimony this morning will focus on three aspects of the 
climate change debate. First, I will briefly summarize some of the 
concerns raised regarding the potential impacts of climate change on 
forestry and agriculture. Second, I will address the role that forests, 
crop and rangelands play in mitigating the effects of CO2 
through carbon sequestration and how these functions can be enhanced. 
Finally, I will discuss some important considerations in the use of 
forest and agricultural lands as carbon sinks, and the need to be 
mindful of the greater ecological considerations of changes in policy 
intended to enhance the value of forests and agricultural lands as 
sinks.
       the impacts of climate change on agriculture and forestry
    A number of studies have assessed the likely impacts of increasing 
global climate on the nation's forests and agricultural lands. For 
example, the U.S. National Assessment of Climate Change, released last 
November, noted that ``The impacts of climate change will be 
significant for Americans, [but] the nature and intensity of impacts 
will depend on the location, activity, time period, and geographic 
scale considered.'' (NAST, 2000). According to the National Assessment 
Synthesis Team (NAST) report, nationally, agriculture and forestry are 
likely to benefit in the short term due to climate change and rising 
CO2 levels. The reason is assumed CO2 
fertilization effects. But a closer look at the regional and more 
localized effects of increased climate leads to greater concern.
    Results of the Assessment suggest that the productivity of many 
major crops will likely increase nationally. Pastures, too, will 
benefit. However, for some crops, particularly wheat, rice, oats, hay, 
sugar cane, potatoes, and tomatoes, yields will either increase or 
decrease depending upon the scenarios analyzed. For example, as noted 
by the NAST report, ``while wheat yields are likely to increase at the 
national level, yields in western Kansas, a key breadbasket region, are 
projected to decrease substantially under the Canadian climate model 
scenario.''
    The Pew Center on Global Climate Change report, ``Agriculture and 
Global Climate Change'' (Adams, 1999) warns that other factors such as 
precipitation and temperature can act to affect crop yields, in 
addition to the effects of increased CO2. With regard to 
climate change effects on livestock, the authors noted that warmer 
summer temperatures might impact livestock production (e.g., low milk 
production) and suppress livestock appetites, leading to lower weight 
gain.
    An interesting analysis of the economic effects of overall 
increased crop yields suggests that while consumers might benefit 
slightly from greater commodity production and slightly lower food 
prices, the effects of producers' profits could be substantial. As 
noted by the NAST, ``The estimated $4-5 billion reduction in 
producers'' profits represents a 13-17 percent loss of income, while 
the savings of $3-6 billion to consumers represent less than a 1 
percent reduction in the consumers' food and fiber expenditures.'' 
(NAST, 2000).
    For forests, modeling indicates that forest productivity increases 
are likely to occur as a result of increased atmospheric 
CO2, but that these increases will be tempered by local 
variability in moisture and nutrient availability. Other environmental 
factors also are affecting forest productivity. For example, ``current 
ozone levels . . . have likely decreased production by 10 percent in 
the Northeast forests and 5 percent in southern pine plantations.'' 
(NAST, 2000)
    As in agriculture, regional variations in response to climate 
change may be more striking and disturbing. For example, the NAST 
reported that ``seasonal severity of fire hazard is projected to 
increase about 10 percent over the next century over much of the U.S. 
under both the Hadly and Canadian climate scenarios.'' (NAST, 2000) 
This translates into small decreases in fire hazard in the northern 
plains, but a 30% increase in fire hazard for the southeastern U.S. and 
Alaska (emphasis added).
    Potential changes in the range and distribution of tree species 
could also result from increasing global climate. Trees favoring cooler 
climates are likely to shift to the north while some alpine and sub-
alpine spruce-fir could possibly be eliminated. In the northeast, a 
transition could occur from the present maple, beech, and birch tree 
species to oak and hickory. Aspen and eastern birch communities could 
contract dramatically in the U.S. and largely shift to Canada. As a 
result, the fall foliage of New England could be dramatically different 
than we're accustomed to knowing and Aspen, Colorado could find itself 
without aspen if these predictions hold true.
    With changes in forest types would come changes in associated plant 
and animal species. As noted in the Pew Trust report, ``Ecosystems and 
Global Climate Change'', ``The effects of climate change on ecosystems 
and species are likely to be exacerbated in ecosystems that already are 
under pressure from human activities, including air and water 
pollution, habitat destruction and fragmentation, and the introduction 
of invasive species.'' (Malcolm, 2000). The NAST report notes that, 
``Invasive (weed) species that disperse rapidly are likely to find 
opportunities in newly forming communities.'' (NAST, 2000).
    And how might we respond to these changes? With limited knowledge 
of ecosystem structures and functions, adaptation to changing climate 
regimes would be extremely difficult. As noted by the Pew Trust report, 
``Even the seemingly simple task of reintroduction plants into former 
parts of their range has met little success so far.'' (Malcolm, 2000).
    In short, the effects of increasing CO2 levels and 
increases in global climate, though regional or localized, may be 
substantial and dramatic. These findings were recently verified by the 
National Academy of Sciences report, ``Climate Change Science: An 
Analysis of some Key Questions'' which was prepared in response to a 
White House request for assistance in its ongoing review of U.S. 
climate change policy. The Committee noted,

          The impacts of these climate changes will be significant, but 
        their nature and intensity will depend strongly on the region 
        and timing of occurrence . . . [O]n a regional basis the level 
        and extent of both beneficial and harmful impacts will grow. 
        Some economic sectors may be transformed substantially and 
        there may be significant regional transitions associated with 
        shifts in agriculture and forestry. . . . The possibility of 
        abrupt or unexpected changes could pose greater challenges for 
        adaptation. (NAS, 2001)
            agriculture, forestry, and carbon sequestration
    Crop, pasture, and forest lands can play a significant role in 
mitigating the effects of climate change precisely because of their 
ability to sequester or absorb carbon in CO2.
    Last summer, an analysis was conducted of the capability of 
forests, croplands, and pasture to sequester carbon to determine what 
role these so-called ``sinks'' might play in helping to mitigate the 
effects of increasing CO2 emissions. This analysis provided 
the foundation for the U.S. position on the role of sinks in mitigating 
global climate change at the COP VI in the Hague, Netherlands.
    As of 1997, managed forests in the United States removed between 
278 and 341 million metric tons of carbon equivalent (MMTCE) per year, 
with an estimate of central tendency of 310 MMTCE per year. During 2008 
to 2012, the first commitment period under the Kyoto Protocol, managed 
forests are projected to remove between 245 and 331 MMTCE per year or 
an average of 288 MMTCE. Much of this uptake occurs in the 
Southeastern, Pacific Northwest, and Northeastern regions of the 
country.
    Based upon these estimates, managed forests in the U.S. currently 
remove about 17 percent of total U.S. greenhouse gas emissions per year 
on a carbon-equivalent basis or about 21 percent of fossil fuel-related 
CO2 emissions. Assuming business as usual, during the period 
2008-2012, managed forests in the U.S. could remove from 12 to 16 
percent of total U.S. greenhouse gas emissions on a carbon equivalent 
basis.
    Cropland soils in the U.S. are projected to remove between 9 and 24 
MMTCE per year during the commitment period with a central tendency of 
16 MMTCE per year. Assuming business as usual, grazing land soils will 
remove between 3 and 23 MMTCE per year from 2008-2012 or 8 MMTCE, on 
average, per year.
    So it is clear that forests, crop lands, and grazing lands can 
serve an important role as sinks for carbon. It is also clear that 
opportunities exist to increase carbon sequestration for each, through 
improvements in management and changes in land use.
    For example, for grazing lands changes in management that improve 
carbon sequestration potential include improved productivity through 
the use of fertilizer or manure management, management to improve plant 
community stability, and noxious weed control. On croplands, conversion 
to conservation tillage and practices such as no-till leave the soil 
surface undisturbed, and thus increase soil organic carbon. 
Establishment of vegetated buffer strips along waterways and wind 
breaks can also enhance sequestration rates with the added benefit of 
reducing soil erosion, providing wildlife habitat, and improving water 
quality.
    For forests, opportunities to enhance sequestration through 
forestry are also available. Richard Birdsey, Director of the USDA 
Forest Service's Global Change Research Program, recently briefed 
Senate staff on some of these opportunities. Included were:
     1. afforestation of marginal cropland and pasture
     2. reducing conversion of forestland to nonforest use
     3. improving forest management
     4. reducing harvests
     5. increasing agroforestry
     6. substituting renewable biomass for fossil fuel energy
     7. more efficient use of raw materials
     8. increasing paper and wood recycling
     9. planting trees in urban and suburban areas, and
    10. improving energy efficiency in wood production.
    I would like to focus, briefly, on the opportunities to increase 
carbon sequestration on crop and forest lands, particularly as these 
opportunities are associated with changes in management practices and 
land use.
    For crop and rangelands, improvements in the organic content of 
soils through changes in tillage practices and the establishment of 
permanent cover are key elements in efforts to increase carbon 
sequestration. USDA's Environmental Quality Improvement Program (EQIP) 
assists producers in applying improved conservation measures on working 
lands and is one tool that can help increase carbon sequestration 
potential. Agricultural programs like the conservation reserve program 
(CRP), the wetlands reserve program (WRP), and the conservation reserve 
enhancement program (CREP) all serve to increase sequestration 
potential by providing for the maintenance of permanent cover on lands 
which are ``set aside'' from normal agricultural production for 
extended periods of time. Where farmers elect to plant trees on these 
set-aside lands, sequestration is further increased.
    Still other opportunities exist to enhance agriculture's capacity 
to assist in reducing the effects of global climate change. For 
example, an experimental program authorized last year has provided 
opportunities for producers to grow ``energy crops'' such as 
switchgrass which can be co-fired in coal fueled utility plants. This 
renewable source of energy is currently being used in a demonstration 
project in the Chariton Valley in Iowa. There, a coalition of twenty 
organizations is working with an investor owned utility and about 150 
farmers to replace 5 percent of the coal currently burned in a 740mW 
coal fired power plant. Currently, 6000 acres are dedicated to energy 
crop production with plans to increase to 50,000 acres.
    Other sources of biomass, in addition to switchgrass, are currently 
being evaluated to determine their potential to serve as a renewable 
source of energy. Probably best known is ethanol where seven percent of 
the corn crop is currently dedicated to fuel production. Estimates are 
that even at this level of production, ethanol increases net farm 
income by more than $4.5 billion, generates 192,000 jobs, and results 
in net federal budget savings of over $3.5 billion.
    Biomass crops have the benefit of being carbon neutral, thus 
benefiting global warming from two perspectives. Their production, 
particularly in the case of switchgrass, which requires no soil 
tillage, maintains soil carbon over extended periods of time. And their 
use as an alternative for coal reduces greenhouse gas emissions as well 
as other harmful air pollutants.
    Further opportunities exist to enhance the value of agriculture in 
addressing climate change. More efficient use of livestock manure and 
recapture of methane for energy production provides an important means 
of converting a ``waste'' problem into an energy-producing opportunity. 
Similarly, improvements in technology are providing important 
opportunities to use biomass to produce feed products, specialty 
products, and polymer products.
    As noted in a March 14, 2001 issue of Chemical Week Magazine, 
Cargill Dow, a startup company created by Cargill Incorporated and the 
Dow Chemical Company, is building a world-scale facility in Blair, 
Nebraska which will produce a new family of polymers called polyactides 
(PLA). It will employ 33 people by 2005 and produce 300 million pounds 
per year of PLA which will be used to produce packaging and fiber 
products. PLA is the first family of polymers derived entirely from 
annually renewable resources. According to representatives of Cargill 
Dow, these products will be cost and performance competitive with 
traditional fibers and packaging materials.
    For forests, opportunities for increasing carbon sequestration 
potential are greatest in a number of areas. These include the 
reforestation of marginal lands, agroforestry activities, and 
improvements in management of private industrial and non-industrial 
forests and public forests.
    Nearly one-third of the U.S. land base is forested. Of this, nearly 
two-thirds is in private non-industrial ownership.
    Afforestation of marginal crop and pasture pasturelands provides 
one important opportunity to expand this forest land base and increase 
sequestration. It is estimated that between 23 and 45 million acres of 
marginal lands may be available for conversion to forest. Most of this 
is in the east. The potential gains from this conversion according to 
USDA Forest Service estimates are approximately 50 MMTCE/year.
    As evidence of the value of this practice, in 1995, 41 utilities 
established a non-profit corporation--the UtiliTree Carbon Company--
which is engaged in a number of international and domestic forestry 
projects. The projects range from a mix of rural tree planting, forest 
preservation, and forest management activities. Examples include a 
series of bottomland hardwood projects in the Lower Mississippi River 
Valley in Louisiana, Arkansas and Mississippi on lands recently 
acquired by the U.S. Fish and Wildlife Service for addition to the 
National Wildlife Refuge System. The projects would reestablish the 
bottomland hardwood forests on approximately 2,400 acres. It is 
estimated that the projects will sequester an estimated 9 tons of 
CO2 over the first five years and 600 tons per acre after 70 
years. In Western Oregon, a project that will plant trees on 300 acres 
if unforested non-industrial timberland, will include a long-term 
sustainable forest management plan and sequester approximately 200,000 
tons of CO2 over the life of the project. A dozen or more 
electric utility companies are involved in urban forestry and energy 
conservation programs through American Forests' Global ReLeaf and Cool 
Communities programs.
    Agroforestry opportunities to incorporate tree planting into 
agricultural landscapes also hold great potential to increase carbon 
sequestration. Windbreaks, shelterbelts, and riparian forest buffers 
can further efforts to reduce erosion, improve wildlife habitat, and 
minimize polluted runoff for agricultural lands. Recently, for example, 
the state of Maryland announced that it was approaching completion of 
its goal of planting 600 miles of riparian buffers to trees along the 
Chesapeake Bay and its tributaries.
    Opportunities to increase sequestration rates for non-industrial 
private forests are also significant. While industrial forest lands are 
generally more productive, more intensive management of non-industrial 
forest lands through such activities as regeneration, thinning, 
improved stocking, fertilization, and low-impact harvesting can 
increase their productivity. Forest Service researchers estimate that 
the growth potential of many forest stands is well below their 
biological potential and that more intensive management can increase 
productivity and with it, rates of carbon sequestration. Impediments to 
achieving this potential include landowner knowledge of the 
opportunities, limited technical and financial assistance, and poor 
markets.
    On public forests, particularly national forest system lands, 
additional opportunities exist to increase forest productivity and 
reduce the quantity of woody debris and fuels that heighten risk of 
wildfire. As reflected in the USDA Forest Service's wildfire strategy, 
treatment of fuel loads is a top priority for reducing future wildfire 
risk. Millions of acres of national forest system lands proximate to 
urban landscapes and communities are in need of treatment. Through an 
aggressive program of thinning and fuel removal, these lands can 
provide biomass to generate power and the means to improve forest 
health and productivity, further contributing to their potential to 
sequester carbon. According to the USA Biomass Power Producers 
Alliance70 percent of the biomass fuel consumed in the U.S. is from 
forest-related activities. In fact, sixteen of California's 28 
operating biomass power facilities are dependent, to some degree, on 
fuels derived from public lands.
 key considerations in promoting the use of farm and forest lands for 
                          carbon sequestration
    Finally, I would like to focus on some important considerations as 
you develop new policies that might seek to enhance the use of farm and 
forest lands to sequester carbon or produce biomass as a means of 
mitigating the impacts of global climate change.
    Of paramount concern is the development of sound, scientifically-
based, and viable standards for measuring carbon sequestration. 
Ideally, a single, internationally-accepted standard would be developed 
that provides the means to credit (or debit) carbon sequestered in 
accordance with a given management practice or land use change.
    Extensive work has been done to attempt to develop such 
measurements for forestry. Winrock International has done extensive 
work in this arena, dating back to 1992. The system they devised is now 
being used to measure and monitor carbon in several private projects. 
Less progress has been made in developing similar measures for 
agricultural applications. The International Panel on Climate Change is 
currently studying this issue and has established a program to develop 
standards for methodologies to estimate anthropogenic emission of 
greenhouse gases by sources and removals by sinks.
    If methodologies are successfully established, these measures of 
sequestration could serve as a valuable addition to current efforts to 
measure and certify sustainable forestry in the U.S. Thus, sustainable 
forestry might also be defined as forest management activities which, 
in sum, have no negative impacts in terms of climate change. A valuable 
lesson to be learned from the experiences of those involved in the 
development of methodologies for measuring sustainable forestry would 
be to assure third party verification and certification of the results.
    To his credit, President Bush has called for improving cost-
effective measurement of land-based emission reduction and carbon 
sequestration projects. In announcing this initiative, the 
Administration noted,

          A fundamental challenge in attracting private sector 
        investment to land-based greenhouse gas emission reduction or 
        carbon sequestration projects in the ability to accurately 
        quantify the net changes. Private sector investors are 
        reluctant to participate in projects without reliable and 
        credible quantification of the uncertainties associated with 
        different land management practices.

    A second important consideration is the need to recognize that the 
value of carbon per acre for farm and forest land will be a function of 
policy and markets. Values must be viewed separately from the science 
of determining what impacts land use changes and management activities 
have in terms of their effects on carbon cycles.
    One of the clear impediments to establishing values for carbon 
associated with changes in management practices and land use is the 
uncertainty associated with regulation of carbon emissions. If 
preliminary reports from Bonn, Germany are true regarding agreement on 
principles for implementation of the Kyoto protocol, then one part of 
this hurdle may be overcome--at least on an international scale. What 
the implications may be for carbon values and markets in the U.S. is 
unclear. What is clear, however, is that removal of this uncertainty 
through passage of legislation and the development of regulations to 
establish requirements for reductions in greenhouse gases domestically, 
would open a wide range of opportunities for investors, farmers and 
ranchers, forest landowners, utilities, and others to use private 
markets to address global climate concerns. In turn, this would likely 
spur significant investment in carbon sequestration activities, 
particularly if mechanisms existed to trade carbon sequestration 
credits for emission reduction targets. While private markets are 
currently developing, such as the Chicago Climate Exchange, they are 
largely speculative, based on the assumption that some emission 
reduction requirements will eventually be put in place. If we want to 
get there sooner, if we want to spur private investment in sustainable 
forestry and agricultural activities, if we want to encourage 
investment in bioenergy and related technologies, then we need to cure 
the uncertainty that currently clouds this issue.
    A third key consideration is that efforts to enhance carbon 
sequestration activities on farm and forest lands should not be viewed 
in isolation. Through certain management practices and land use 
changes, carbon sequestration values can increase and significant 
additional environmental benefits can accrue. The benefits to water 
quality, wildlife habitat, air quality and the environment, overall, 
can be substantial. And, if some value were established for carbon that 
might spur investment in these sequestration-enhancing activities, then 
private money might be invested where currently, landowners and the 
taxpayer, through financial assistance programs, now pay.
    Of course, the reverse is also true. Efforts to enhance 
sequestration, through practices that improve forest productivity or 
promote the production of biomass, should not be permitted to do harm 
to water quality, wildlife habitat and the like. The full 
``environmental budget'' for these activities needs to be taken into 
consideration. Efforts to promote carbon sequestration through 
investments in forests, crop and range lands need to be viewed in their 
larger environmental context. In establishing the ``rules'' for 
measuring carbon sequestration, perverse incentives that enhance carbon 
values but lead to the conversion of old-growth forests, the loss of 
biologically-important natural resources, or the conversion of entire 
ecosystems should be disallowed.
                        some comments on s. 820
    Before I close, Mr. Chairman, I would like to offer a few comments 
on S. 820, the ``Forest Resources for the Environment and the Economy 
Act.'' I commend Mr. Wyden and Mr. Craig for taking the initiative to 
introduce this legislation and to encourage further thinking about the 
role that national forests can play in helping to address global 
climate change concerns.
    First, I believe it is important that the carbon sequestration 
potential for all forest lands in the United States be accurately 
assessed and reported upon, not simply national forest system lands. It 
was not clear to me if the report required by this bill would include 
industrial and private, non-industrial forest lands as well as native 
American lands and other public lands. If not, I believe it should do 
so.
    Second, in lieu of the carbon and forestry advisory council 
established by the bill, I would suggest that an independent scientific 
panel be established under the rules of the Federal Advisory Committee 
Act. I recommend this because I believe the functions required of the 
council are largely technical and scientific in nature and not fully 
consistent with the qualifications and expertise required in the make-
up of the council.
    Third, as I noted above, it is important that any methodologies 
devised in accordance with this legislation be consistent with other 
methodologies for measuring carbon emissions and sequestration rates 
developed for the United States and be applicable in an international 
context. This amplifies the need to provide strong scientific input and 
guidance in fulfilling the requirements of S. 820.
    Fourth, consistent with the stated purpose of the bill, it is 
important that any recommendations stemming from the required study and 
actions of the advisory council give full consideration to the other 
environmental concerns associated with efforts to enhance carbon 
sequestration. Sequestration efforts should not be viewed in isolation. 
Trade-offs and co-benefits associated with identified management 
practices and land use changes should be clearly identified.
    Finally, I commend the authors for recommending the establishment 
of cooperative agreements and a loan program for forest carbon 
activities on non-industrial private forest lands. I would suggest that 
the management activities provided for by these funds and the forest 
management plans that would be developed should be incorporated into 
ongoing forest stewardship program activities. In addition, I strongly 
support the notion of cancellation of these loans in return for 
donation of permanent easements that would protect the forest carbon 
reservoir, provided the affected lands continue to be managed under a 
plan that is consistent with all applicable environmental laws.
                                summary
    Mr. Chairman, tremendous opportunities exist to expand the use of 
farm and forest lands to assist in U.S. efforts to address the effects 
of global climate change. These lands can serves as sinks for carbon, 
as the sources of biomass for renewable energy production, and, at the 
same time, provide opportunities to improve water quality and wildlife 
habitat.
    Carbon sequestering and biomass production activities can provide 
new sources of income for landowners. In addition, should markets 
develop for carbon as a result of changes in domestic and/or 
international policy, new sources of capital are likely to provide the 
funds for improved management activities.
    Effective means of measuring, monitoring, and verifying the carbon 
sequestration benefits of management practices and land use changes 
need to be developed. In addition, the uncertainty associated with 
making investments in carbon sequestration activities needs to be 
eliminated. This can best be done through the establishment of clear 
requirements for reductions in CO2 emissions through the 
enactment of legislation currently pending before the Congress.
    Finally, any strategies for enhancing carbon sequestration 
opportunities on farm and forest lands need to take into consideration 
both the potential environmental benefits and costs. Generally, 
management activities that improve carbon sequestration are likely to 
provide significant conservation benefits as well. This provides an 
exciting opportunity to promote mutually beneficial conservation and 
carbon sequestration activities as components of sustainable forestry 
and agricultural programs. However, a rush to promote land management 
practices that enhance carbon sequestration or other activities 
intended to address global climate change at the expense of other 
environmental values would be a poor investment.
    Mr. Chairman, thank you again, for the opportunity to appear before 
you today.

    The Chairman. Thank you very much.
    Mr. Hill, let me ask you, on the emissions trading 
activity, I am unclear just in trying to understand what our 
exit from the negotiations in Bonn, what the effect of that is. 
Your company is an international company. You have undoubtedly 
been following the discussions in Bonn about establishing an 
emissions trading program. Do you know how this would affect a 
decision you might make on reducing emissions in the United 
States, versus reducing emissions from an operation you might 
have in Europe, or how does that work, as you understand it?
    Mr. Hill. Mr. Chairman, that is certainly an issue I think 
we are going to have to understand very deeply. At this time it 
is too early for us to have really sat down and thought about 
that. That is something we will be looking at over the coming 
months.
    One thing I will add, that our own internal program remains 
unaffected by that. Each year we have a target set within our 
business, and as I mentioned in my testimony, each business 
leader is then responsible for meeting that target.
    What we will have to check is that we are operating within 
the legal framework that is set out in any particular country 
or any particular treaty that has been subsequently introduced, 
but as we understand it today, the program we have within the 
company will remain intact.
    The Chairman. Let me ask Mr. Cassidy, and first let me 
congratulate you and this group that you are part of, the Clean 
Energy Group, for your legislative proposal. There is another 
group that I am also familiar with called the Clean Power 
Group. Are you familiar with them?
    Mr. Cassidy. Vaguely, Mr. Chairman.
    The Chairman. Okay. That is another group of companies that 
have come together and have developed a proposal, but I gather 
from your comments you are not familiar with their proposal and 
would not be able to comment on it relative to your own.
    Mr. Cassidy. I am not, I am sorry, Mr. Chairman.
    The Chairman. We might ask just for the record if I could 
try to get you a description of the outline of what they are 
talking about and get your reaction to it.
    Mr. Cassidy. We would be happy to provide that. I can also 
provide you, Mr. Chairman, with a comparison of our proposal to 
the Jeffords bill which has been referred to several times here 
today.
    The Chairman. That would be very helpful if you could.
    Mr. Cassidy. Sure.
    The Chairman. If we could understand more clearly why you 
think yours is the better proposal, that would be useful.
    What do you see--Mr. Cassidy, let me ask another question 
of you. What do you see as the major impediments to developing 
new coal-fired generation capacity at this time in this 
country?
    Mr. Cassidy. If I look at the development of new generation 
over the last 10 years or so, it has been almost entirely 
natural gas-based, and that has largely been as a result of the 
cost differential between natural gas and coal, not being able 
to overcome the capital cost disadvantage of coal.
    Today, with natural gas dependence being an issue for our 
energy security, as well as the price of natural gas, coal has 
started to become a lot more attractive, and in fact my company 
has been looking at developing new coal-fired plants.
    Also, we were able today, with the technologies that have 
been developed, to be able to produce coal-fired plants that 
are extremely clean in terms of nitrogen oxides, sulfur 
dioxide, and mercury.
    The big impediment, as we see it, is the uncertainty 
surrounding the future of carbon. It is very difficult for us 
to make a decision which has a 20- or 30- or 40-year life span 
with no real certainty about how carbon is going to be 
regulated going forward, and that is thus an inability for us 
to predict how that investment is going to turn out.
    The Chairman. Thank you very much.
    Mr. Lyons, let me ask you about this agreement that has 
been developed in Bonn, or is being developed, as you 
understand it. How does the agreement promote the use of sinks 
to meet these greenhouse gas emission targets? Are there ways 
in which the agreement they are coming to there is going to 
advantage or disadvantage us relative to these so-called carbon 
sinks?
    Mr. Lyons. Well, Mr. Chairman, I have to qualify my 
comments by saying I only pulled down a copy of the text, or at 
least the draft text, off the web last night, so I have only 
had a brief opportunity to review it.
    As I understand, there is some recognition for credits for 
agricultural sinks, opportunities for use of reforestation and 
afforestation in what is called the Clean Development 
Mechanism, and then there is limited credit provided for forest 
sinks, according to an appendix to the document.
    The cap for U.S. forest sinks would be about 28 million 
metric tons per year. Unfortunately that is about where we 
were, at least with regard to forests, in our discussions in 
The Hague, and I know Senator Craig and I spent many a long 
night discussing the potential for incorporating sinks into the 
discussions we had while we were in The Hague.
    What is unclear, and certainly I am not an expert in 
international treaty law, is what the ramifications are for the 
United States should we not participate, and how this sink 
proposal would affect us.
    I mean, to some degree I would characterize it as a lost 
opportunity. We were in The Hague arguing strongly for 
inclusion of additional credits for sinks, given the high 
potential for U.S. forests to serve as sinks for carbon. 
Unfortunately, the agreement seems to have ended up where we 
left off in The Hague, so the implications are not clear, 
although there is some recognition for sequestration as a part 
of the larger package.
    The Chairman. Thank you very much.
    Senator Craig.
    Senator Craig. Mr. Chairman, let me take off from your last 
question to query Mr. Lyons on that issue. I, too, have got a 
copy now--I think it has been pulled off the net--that gives us 
an understanding of where the group may well be as it relates 
to sinks, and Jim, if we take your figures, 288 million metric 
tons in the forest, and if we include croplands at 16, and 
pasture at 8 then 312, somewhere in that range, and I 
understand, though, that the 28 figure, using the formula that 
apparently they are using, would give us less than 1/10th of 
the existing U.S. capacity, potentially, to absorb carbon.
    Now, it is interesting that Canada, with their vast 
forests, got 11, Japan got 13. Japan probably got 13, and I am 
told by those who were there that Japan was able to bargain up, 
and there was willingness to allow them to bargain up. It was 
something about a vote they might get if they kind of included 
Japan a little more. I think it was true of the Russian 
Federation.
    When you look at Russia, at 17 metric tons of carbon per 
year in the their vast steppe lands and their vast forests, 
this is not very reflective of a desire to use sinks and carbon 
sequestration as a right and proper tool based on current 
science, not based on the new science of measurement that is 
evolving as it relates to sinks.
    So I think maybe I am as frustrated as you are by at least 
the current figures and how they get to the formula. My guess--
as you know, we were about to bargain away at 35 percent of 
capability when we were at The Hague. My guess is this is less, 
or somewhere near that figure.
    Anyway, I bring that up only to say that based on what I 
read now, and what we know now, it is interesting what they are 
doing, with or without us.
    I also find out, just to add to the record, Mr. Chairman, 
under article 12, called Clean Development Mechanism--here is a 
real fascination, and this is subparagraph 2, to recognize that 
parties included in Annex I are to refrain from using certified 
emission reductions generated from nuclear facilities to meet 
their commitments under article 3.1.
    That is the exclusion of new nuclear, probably the cleanest 
source of nonemitting energy sources there are today, and it is 
fascinating that they would exclude it as a measurement. To me, 
that is a statement of politics, not of good science, or the 
reality of a problem and how you meet that problem. I do not 
know how to meet it otherwise. I was not there, and should not 
react.
    But let me come to you, Mr. Hill, because I think all of us 
recognize what BP is trying to do, and we applaud it. What you 
have done voluntarily and collectively as a multinational 
company is to be applauded.
    Given your estimate of the potential for carbon 
sequestration, I guess I would ask you what is your view of the 
decision taken in Bonn this past weekend that appears to limit 
the use of sinks under the Kyoto Protocol?
    Now, do not take my interpretation. I trust that you have 
some working knowledge of where they were.
    Mr. Hill. I only have a very basic working knowledge of 
that, and my area of expertise is indeed in the technology area 
of carbon capture, separation, and storage.
    What I can talk about is the experience that BP has had. As 
you have said, we have taken a lot of preventative measures, 
and what we have established is that we need to have the 
flexibility to investigate and learn from all types of 
sequestration, and by limiting that, and limiting the amount of 
tons you can bring to the table, could have an impact on 
reducing the costs in line with the way you would like to 
reduce costs.
    So I think I would have a concern that in any event, if we 
are limiting the flexibility we have in the area of 
sequestration, that could have an impact on how much we are 
able to just cause the flexibility we have to offset 
CO2.
    Senator Craig. Given your experience with internal trading 
programs, would BP support the development of a national 
registry for emissions reduction, and would you use such a 
registry?
    Mr. Hill. I think our track record shows that we are 
extremely supportive of open and transparent data, so we would 
support mechanisms where we can actually report our emissions.
    Senator Craig. BP has said we could store 30 years of 
emissions in geologic reservoirs, is that accurate?
    Mr. Hill. Right. In fact, these are not BP numbers. these 
are numbers that have been determined independently by 
research, and the numbers indicate that there is the capacity 
in geological formations to store something in the order, at a 
minimum, of 30 years of emissions as they currently exist 
today.
    Senator Craig. How does that relate to U.S. capacity?
    Mr. Hill. How does that relate to U.S. capacity? I do not 
actually have the split-down. That was actually a global figure 
that was quoted, and I do not actually have the split-down into 
U.S. capacity versus the rest of the world, but that is 
something I can actually forward to you in a written statement.
    Senator Craig. I would appreciate that.
    Mr. Chairman, my light is on. I would like to ask a 
question of Mr. Cassidy, if I might.
    Mr. Cassidy, how do you respond to the Energy Information 
Administration's study on multiple pollutant legislation? By 
that, I mean they say that the costs of approaching multiple 
pollutant legislation in relation to CO2 means 
generally higher energy costs. Their figures are $80 billion 
electrical cost to the United States annually, a 50 percent 
reduction in coal generation.
    Now, that is the price per kilowatt hour of electricity up 
from 6.2 to about 8.5 cents, about a 30 to 40 percent increase 
based on a multiple pollutant strategy, and you know, this 
committee, in a bipartisan way, looks at the Energy Information 
Administration as a fairly neutral agent of measurement and 
information for us. How do you react to that?
    Mr. Cassidy. Senator, we have done quite a bit of analysis 
of the EIA's report, and first off I would say that the 
scenario that they analyzed was one where there was a very 
sudden carbon cap imposed with very little chance for a 
transition into it, limited flexibility mechanisms, and no 
trading involved, very different than the proposal which we are 
proposing both in terms of timing and the amount of 
flexibility.
    I guess I would also comment that if you look back 20 years 
ago at some of the estimates of the effect on electricity cost 
that the Clean Air Act was going to have, we heard some of 
these same kinds of statements, and it has turned out that the 
actual cost to implement the Clean Air Act has been a small 
fraction of what was estimated at the time.
    Senator Craig. Is it not true, though, that mandatory 
CO2 reduction would help the Clean Energy Group 
companies from a competitive standpoint? Would it not just 
inflict higher cost on your competitors?
    Mr. Cassidy. I would say that that is absolutely true, that 
we believe that part of what we are trying to do with this 
proposal is to level the competitive playing field and to 
assure that all competitors are internalizing the costs of 
emissions control.
    Senator Craig. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Senator Johnson.
    Senator Johnson. Thank you, Mr. Chairman. Thanks to this 
panel. Mr. Campbell and Mr. Lyons demonstrate that there is 
life after public service, indeed. We are glad to have them 
here, and Mr. Campbell, again thank you for participating in 
this committee's first field hearing in Sioux Falls, South 
Dakota here this past month.
    I have a particular interest in the biofuel side of things. 
It seems to me that both in the case of ethanol and in the case 
of biodiesel, an issue that Mr. Campbell and I discussed a bit 
at the previous hearing has to do with the classic chicken-and-
egg issue here, and that is a reluctance on the part of the 
private sector to make significant investments in the 
production of either biodiesel or ethanol absent some at least 
minimal assurance of what the market is going to be over a 
longer period of time. It takes a significant amount of time to 
recover the investment for these plants.
    There has been some going forward of production capability 
in this country, and I am grateful for that, but a high level 
of uncertainty about the ultimate market. Currently, only about 
7/10ths of 1 percent of motor fuel contains a biofuel product. 
Senator Hagel and I are suggesting that we slowly ramp that up 
to about 5 percent by the year 2016.
    That is a long window, and we do not suggest that this is 
going to displace all the petroleum in the world, but 
nonetheless we would create by a matter of national policy a 
volume of market that the private sector could respond to, and 
I wonder, if Mr. Campbell, would you care to comment about that 
chicken-and-egg problem that we currently have?
    Mr. Campbell. Certainly from an investment perspective it 
is very difficult to responsibly make 20- and 30-year 
investments without the investment climate being more certain.
    In renewables, we are constantly at the mercy of whatever 
Congress decides to do, whether it be extending the excise tax 
exemption or other EPACT-type strategies. It is a highly 
unstable environment. However, I do see some change in at least 
the political support for renewables. I see that as a positive 
step.
    I also see, at the ground level, at least a change in the 
attitude of the petroleum industry. Certainly we see statements 
from the top level that is supportive of renewables. We see 
hundreds of millions of dollars of investment going into 
renewables, but yet there is still the political fight. There 
is still the political fight going on, and it needs to stop. We 
need to come to closure on whether renewables are going to have 
a place in the energy spectrum or not, and if they are, what is 
it? We set up a framework, and we go forward, and I think that 
is what your bill does. Other pieces of legislation address 
that issues as well.
    Senator Johnson. Mr. Gebolys, a lot of attention is given 
to ethanol around here, but biodiesel also holds great prospect 
I think for the country. We have some experience in that area 
in particular.
    One of the problems we have had with biofuels has been the 
shortage of outlets, places where consumers can buy the fuel. 
Where are we in terms of the availability of biodiesel fuel in 
terms of stations around the country?
    Mr. Gebolys. Biodiesel has come a long way in a short 
period of time, as you know, Senator, because you were very 
instrumental in leading the effort to make biodiesel an 
eligible fuel for compliance with the Energy Policy Act that 
was signed into law with the Energy Conservation 
Reauthorization Act in late 1998, so biodiesel as a viable 
alternative fuel in America has only been around for 2\1/2\ 
years.
    Given that, we are now--we have distribution in most major 
cities in the United States. Diesel fuel is distributed very 
differently than gasoline. It does not get distributed at your 
corner filling station. It largely is filled through central 
fueling sites, and generally most diesel fuel is used by big 
fleets, and therefore the challenge to introduce biodiesel into 
the American mainstream petroleum supply is somewhat less 
challenging than is getting other alternative fuels into the 
mix.
    Biodiesel, also by virtue of the fact that it goes into 
existing vehicles, can go into anything. It can go into 
stationary diesel generators, and it can go into virtually 
anything.
    So the real challenge here, as John Campbell had said, is 
how do we create a movement in which the folks that will be 
buying this know that it is going to be available and know that 
there is a motivation to buy. Where there is an appetite for 
biodiesel, we can satisfy that appetite, literally within a 
week, and are doing that all over the country.
    All major cities must have access to biodiesel now, and 
really it is just a matter of getting the word out, getting the 
product out, and putting in more stable sources of supply and 
demand.
    Senator Johnson. Does using a biodiesel blend require any 
changes to the vehicle, or can any diesel use biodiesel?
    Mr. Gebolys. Yes. That is really what sets biodiesel apart 
from anything else in this framework. Biodiesel can go into 
anything without any change at any blend level. There is no 
thing like it that we have encountered in the past.
    There is a real temptation to lump biodiesel in with 
ethanol, but there is a pretty significant difference in the 
sense that ethanol at higher volume levels has to go into 
specifically designed vehicles, and therefore the--the 
challenge to get biodiesel into the mainstream in America is 
enormous. It is just smaller than anything else.
    Senator Johnson. I think you raise a good point. Ethanol 
fuels up to about a 10-percent blend can go into any vehicle, 
and you can burn ethanol blend one day and not burn it the next 
day. The same with biodiesel.
    Now, if you get to the E-85 ethanol blends, the very high 
ethanol, that does require a dual technology, and we have had 
some controversy about Federal policy in that regard, but at 
the lower percent blends, ethanol and biodiesel are the same in 
that way.
    The red light is on, but let me just ask you, we have had 
some very great success in the State of South Dakota, where the 
Black Hills National Forest has had its Federal forest fleet 
use biodiesel in its diesel vehicles with great satisfaction. 
The only complication they had was that they were being 
requested to blend it themselves rather than buying preblended 
biodiesel. Is there any complication with the pre-blended 
biodiesel? Is this just part of the early stages of the 
industry, or is there a problem with transporting a preblended 
biodiesel fuel?
    Mr. Gebolys. There is no problem at all. In fact, I am very 
happy to report to you that working with our friends at BP we 
are delivering preblended B-20, which is 20-percent biodiesel 
products, throughout the State of Ohio. The entire Ohio 
Department of Transportation is using biodiesel, and everybody 
that receives those shipments, whether it is small or large 
shipments, are getting preblended product, and unless someone 
told them they would not know any difference from getting their 
regular diesel fuel, so I guess in short, the answer is, we are 
getting there, and in South Dakota we will be getting there, 
too.
    It is just a matter of, we have only been at this game for 
a couple of years, and in the event that we are able to get 
enough support that says this industry is going to continue to 
be supported, and there is going to be a continued interest in 
us continuing to make these kinds of investments, you will see 
the AGP's and the World Energies of the world being joined by 
the BP's and the Gulf Oil's of the world, and we will be moving 
further and further down the road.
    Senator Johnson. Thank you.
    The Chairman. Thank you very much. Due to the late hour, I 
think I will postpone additional questions and just do those 
for the record as a follow-up. Senator Craig said he had an 
additional question, so I will defer to him.
    Senator Craig. Mr. Chairman, with your admonishment as it 
relates to time, I will follow suit, but I did want to thank 
Jim Lyons for his comments as it relates to the Craig-Wyden 
bill, and hope that you will stay tuned, Jim, as we work to get 
that into public policy and continue to give us your thoughts 
and advice on it.
    Let me ask the one question in closing. Do you believe that 
carbon sequestration necessarily--does it mean, as it relates 
to forests, a lock-up, or does it mean that we can include a 
sustainable use pattern on these forests?
    Mr. Lyons. I think the answer to that, Senator Craig, is 
that it means a mix of practices to suit particular conditions 
and needs. In some places it means retaining the carbon that is 
already stored in trees vertically there. In other places it 
means a much more aggressive management strategy such as the 
Forest Service is attempting to do in dealing with the high 
levels of fuels, particularly near communities at risk. That, I 
think, affords tremendous potential to produce biomass as a 
renewable energy source, and also to accelerate sequestration 
opportunities through reforestation and improvement of forest 
health in those areas.
    Senator Craig. Thank you. To all the panelists, thank you 
very much. Mr. Chairman.
    The Chairman. Senator Johnson, did you have any other 
questions?
    Senator Johnson. Just one last question. Just to expedite 
this, but I did want to ask either Mr. Campbell or Mr. Gebolys, 
there has been a lot of testimony, a lot of science on record 
about the environmental benefits of biodiesel.
    There have been some individuals who have raised an issue 
about nitrogen oxide, and I wonder if either of you would care 
to comment about that particular issue.
    Mr. Gebolys. Yes. Biodiesel has--it is amazing how many 
different areas it helps. One area that in and of itself it 
does not help is reductions of oxides of nitrogen. The broader 
issue there is, does biodiesel lead to increased or decreased 
smog. Smog results from the presence of hydrocarbons and oxides 
of nitrogen coming together in the presence of sunlight. 
Biodiesel does reduce hydrocarbons, and does, in fact, have 
overall smog reduction potential.
    We are working very hard in the industry to come up with a 
liquid solution to the NOX issue, so that we can 
unequivocally across the board address the issues relating to 
all pollutant categories, but at this point oxides of nitrogen 
is not one of them.
    Senator Johnson. Is biodiesel an all-season fuel?
    Mr. Gebolys. It is absolutely an all-season fuel. the 
Michigan Department of Transportation ran its snow plows on it 
all year last year, and I am happy to report that the folks in 
Michigan got up and down the highways there just fine.
    Senator Johnson. Very good. Mr. Chairman.
    The Chairman. Well, thank you all very much for your 
testimony. We appreciate it very much, and that will conclude 
the hearing.
    [Whereupon, at 12:03 p.m., the hearing was recessed, to be 
reconvened on July 25, 2001.]

                         NATIONAL ENERGY ISSUES

                              ----------                              

                             JULY 25, 2001

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:35 a.m., in 
room SD-366, Dirksen Senate Office Building, Hon. Jeff 
Bingaman, chairman, presiding.

           OPENING STATEMENT OF HON. JEFF BINGAMAN, 
                  U.S. SENATOR FROM NEW MEXICO

    The Chairman. Why don't we go ahead with the hearing. 
Senator Murkowski is on his way. If, at some point during the 
hearing this morning, we get twelve members, we're going to 
interrupt the testimony, or the questioning, to do a very short 
business meeting to try to take action on Dan Brouillette to be 
the Assistant Secretary of Energy for Congressional and 
Intergovernmental Affairs, but we will see whether the 
membership arrives that allows us to do that this morning.
    We're here to begin to address what I believe is one of our 
most important issues coming before this committee this year. 
That is the restructuring of the Nation's electricity markets. 
Over the last few years, we have received several warnings that 
this issue does require attention. Three years ago, there were 
severe price spikes in wholesale electric markets--electricity 
markets in the Midwest and the West.
    Last year, beginning in California and spreading to much of 
the rest of the West, prices began to spiral out of control. 
Prices have come to levels that are not as high as they were 
only a few weeks ago, but they still remain high.
    We were warned that prices could rise again if weather 
turns hotter in the remainder of the summer and that prices may 
be high this winter in the Northwest, unless there is unusually 
high rainfall.
    Supplies of electricity are so short and demand is so high 
that we have seen blackouts in California. We are further 
warned that this pattern could emerge in other parts of the 
country. New York and New England are mentioned. We are warned 
that reliability of delivery is threatened in the South and in 
the West.
    During the 105th Congress and the 106th Congress, I 
introduced legislation intended to facilitate the development 
of competitive wholesale markets in electricity. Senator 
Murkowski also introduced legislation with that same purpose.
    The Clinton administration introduced legislation that 
introduced wholesale and retail markets as well. The current 
administration came into office announcing its intent to deal 
with energy issues and mentioned electricity among those.
    I believe that the warnings have been frequent and regular 
enough. I believe we need to act. This is an opportunity for us 
to do that; to set the stage for action. I circulated a White 
Paper that contains a legislative proposal. Leon Lowry, on our 
staff here, developed that. It's intended to address what I 
believe are the critical issues to ensure that the country 
continues to have the most reliable, affordable, clean 
electricity delivery system in the world, and I hope that that 
White Paper can represent a good starting point for the 
committee. I know that the administration is looking at a 
legislative proposal as well, and I look forward to working 
with Senator Murkowski and the other members of this committee 
to see if we can work with the administration to get something 
actually done in this area.
    Why don't we go ahead with the testimony, and we have a 
great many witnesses this morning. So, if Secretary Blake will 
come forward. He starts all of our hearings. It seems that way, 
I'm sure, to him and to us as well, but we welcome him back; 
and why don't you go ahead and summarize your comments and then 
I'll have a few questions of you.
    If you'd like to go ahead.

         STATEMENT OF FRANCIS BLAKE, DEPUTY SECRETARY 
                           OF ENERGY

    Mr. Blake. Thank you, Mr. Chairman, and members of the 
committee. I would like to submit my testimony for the record 
and just briefly summarize it.
    First, you and this committee should be commended for 
taking up comprehensive electricity legislation. We need to 
learn from the lessons of the past year and revise our 
electricity laws that were written in the 1930's, and are no 
longer responsive to the needs of the 21st century.
    Mr. Chairman, we agree with the statement in your White 
Paper, that to prevent the problems in California and the West 
from appearing elsewhere, it is essential that the structural 
defects in the market be cured. Electricity legislation is 
needed to make these markets more competitive to lower prices 
and to assure adequate and reliable supply.
    The legislation should focus on core Federal issues that 
are beyond the State authority. Mr. Chairman, there's a great 
deal of agreement between the legislation that you're now 
considering and the administration's views of the critical 
areas requiring Federal legislation.
    First, our transmission system. We're in the midst of a 
planned increase of probably about 25 percent in generating 
capacity, yet only 4 percent increase in planned transmission 
capacity additions. The current system has bottlenecks and 
reliability issues that need to be addressed and we support 
legislation that, among other things, would aid in the siting 
of transmission facilities.
    Second, the reliability of the system is a matter of 
Federal concern and their need to be enforceable reliability 
standards.
    Third, on consumer protection, we need to make sure that, 
as we move forward with the competitive industry, consumers are 
adequately protected and given the data they need for informed 
decision making.
    Fourth, we need to reform and clarify some important roles 
and responsibilities in the current Federal-State structure. 
For instance, clarifying the authority of States to impose fees 
to fund public purpose programs. We also need to move forward 
with the repeal of the Public Utility Holding Company Act, 
PUHCA, a law that has largely outlived its usefulness, and is 
now preventing the flow of needed capital into the utility 
sector. And we need to reform PURPA, the Public Utility 
Regulatory Policies Act.
    As these acronyms indicate, much of the needed legislation 
is very technical in nature, but it is still extremely 
important. The committee is doing a great service in addressing 
these issues and we look forward to working with you. I would 
be glad to answer any questions from you or other members of 
the committee. Thank you.
    [The prepared statement of Secretary Blake follows:]
    Prepared Statement of Francis Blake, Deputy Secretary of Energy
    Mr. Chairman and Members of the Committee, I welcome the 
opportunity to testify before you today on comprehensive electricity 
legislation.
    I commend you for holding this hearing. Earlier in the year, many 
believed there was little likelihood the Congress would consider 
electricity legislation. The view was that the California electricity 
crisis would discourage both the Administration and the Congress from 
dealing with electricity legislation. Your hearing disproves this 
common wisdom.
                need for federal electricity legislation
    The Administration recognizes the need for the Congress to pass 
comprehensive electricity legislation. The National Energy Policy 
included a recommendation that the ``Secretary of Energy propose 
comprehensive electricity legislation that promotes competition, 
protects consumers, enhances reliability, promotes renewable energy, 
improves efficiency, repeals the Public Utility Holding Company Act of 
1935, and reforms the Public Utility Regulatory Policies Act of 1978.'' 
We are working to that end.
    Since 1995, the Congress has been grappling with electricity 
legislation. Initial efforts sought to require states to open their 
retail electricity market by a date certain. Subsequent legislation 
focused on promoting competition in electricity markets and 
complementing state retail competition programs.
    We clearly need to revise Federal electricity laws to recognize 
changes in electricity markets. The principal Federal electricity law--
the Federal Power Act--was written in 1935. At the time, there was 
virtually no interstate commerce in electricity, there was no 
interstate transmission grid, electricity markets were local, power 
plants were built right next to consumers, and electricity generation 
was perceived to be a natural monopoly.
    Today, the transmission grid is both interstate and international, 
electricity markets encompass entire regions, almost all wholesale 
electricity sales are in interstate commerce, and the natural monopoly 
in generation has long since been disproved.
    Mr. Chairman, your white paper describes the changes that have 
taken place in the electricity industry since 1935, and concludes: 
``The business of supplying electricity has changed. So must the 
regulatory and legal framework within which it operates now change.'' 
We could not agree more. The Administration believes the time has come 
to make changes to Federal electricity law to reflect changes that have 
occurred over the past 66 years, and the sweeping changes that are 
underway in the industry.
    The California electricity crisis demonstrates that mistakes made 
by a single state can extend to an entire region. The impact of the 
California electricity crisis on the West has been significant. The 
Bonneville Power Administration recently announced a 46 percent 
increase in its wholesale rates. That increase was caused in large part 
by the California electricity crisis, which drove up electricity prices 
throughout the West.
    The Administration believes it is essential that Congress pass 
comprehensive electricity legislation. Electricity legislation can make 
electricity markets more competitive, lower prices, and assure ample 
and reliable electricity supplies.
    The Administration believes that electricity legislation should 
focus on core Federal issues that are beyond State authority.
    Before I review these core Federal issues, I want to make it very 
clear that the Administration respects the state role in electricity 
regulation. For example, the Administration does not support proposals 
to require that states open their retail electricity markets by a date 
certain.
Regulation of Interstate Commerce
    Electricity markets are increasingly regional in nature. Under the 
Constitution, states have no authority to regulate interstate commerce 
and regulation of interstate commerce is a Federal responsibility. The 
California experience shows that actions taken by one state can have 
regional consequences.
Transmission
    Assuring that our transmission system can deliver reliable 
electricity supplies is a core Federal issue. As the National Energy 
Policy noted, investment in new transmission capacity has failed to 
keep pace with growth in demand and with changes in the industry's 
structure. Since 1989, electricity sales have increased by 2.1 percent 
per year, yet transmission capacity has increased by only 0.8 percent 
per year. There is widespread recognition that there is a need to 
expand the transmission system, remove bottlenecks, and provide for 
open access. Since the transmission system is both interstate and 
international, regulation of the grid is a Federal responsibility.
    There are various reasons why transmission constraints exist. In 
some cases, the problem is a lack of economic incentive. The national 
energy policy proposes a solution to that problem: encouraging the 
Federal Energy Regulatory Commission (FERC) to develop incentive rates 
to promote transmission expansion. FERC has great flexibility under 
current law to set transmission rates at a level to attract investment. 
Recently, FERC has shown flexibility in considering non-traditional 
transmission rates. For those reasons, it is not clear legislation is 
needed to address transmission pricing.
    In other cases, the problem is the siting process itself. Under 
current law, transmission siting is an exclusively state function. That 
law was written 66 years ago, at a time when power plants were located 
right next to customers, and decades before transmission lines 
interconnected states and regions. Congress did not provide for 
transmission siting by the Federal government because it did not 
foresee the transmission system would develop into not only an 
interstate but also an international grid.
    Much has changed since 1935. The transmission grid is the 
interstate highway system for electricity. It should not be a system of 
local toll roads.
    Electricity legislation can remove transmission bottlenecks by 
providing for siting by the Federal government of transmission 
facilities used for interstate transmission. Legislation could provide 
for Federal siting of transmission facilities in certain limited 
circumstances.
Reliability
    Ensuring the reliability of the interstate transmission system is 
also a Federal responsibility. Since the 1960s, the reliability of our 
transmission system has been based on voluntary compliance with 
unenforceable reliability standards. That is no longer tenable, and 
Federal legislation is needed to provide for enforceable standards 
developed by a self-regulating organization subject to FERC oversight.
Market Power
    In our view, the debate about market power often starts with a 
misunderstanding about FERC authority under current law. Under the 
Federal Power Act, FERC is responsible for ensuring that rates charged 
by public utilities are just and reasonable. As a general matter, the 
ability to set rates is the ability to prevent the exercise of market 
power. An exercise of market power generally entails charging rates 
that are higher than those produced in a truly competitive market. For 
that reason, FERC can prevent the exercise of market power through its 
authority over wholesale rates and by ordering refunds of unjust and 
unreasonable rates.
    A discussion of market power issues must start with a recognition 
of FERC's authority under existing law, and a determination of whether 
existing FERC authority to address market power is inadequate.
    Legislation is needed to address some issues in this area. For 
example, the Administration agrees with the Chairman that legislation 
is needed to clarify FERC authority to approve holding company mergers 
as well as mergers and asset dispositions involving generation 
facilities.
Consumer Protection
    Consumer protection is another core Federal issue. Electricity 
markets are regional in nature, and are no longer confined neatly 
within individual States. For that reason, there is a need for 
electricity legislation that: protects consumers against ``slamming'' 
and ``cramming,'' strengthens the bargaining power of consumers through 
aggregation, protects consumer privacy, and ensures that consumers have 
the information to make informed decisions to meet their needs.
Federal Electric Utilities
    Another core Federal issue is defining the role of Federal electric 
utilities such as the Tennessee Valley Authority (TVA) and Bonneville 
Power Administration in competitive electricity markets. Obviously, 
states have no authority over Federal electric utilities. Legislation 
is needed to provide open access to transmission systems operated by 
the Federal electric utilities and ensure that one set of rules governs 
the entire interstate transmission system.
Reform of Federal Electricity Laws
    There is a need to reform Federal electricity laws, such as the 
Public Utility Holding Company Act of 1935 (PUHCA) and the Public 
Utility Regulatory Policies Act of 1978 (PURPA). With respect to PUHCA, 
each of the past four presidents have supported PUHCA repeal, and 
earlier this year the Senate Banking, Housing, and Urban Affairs 
Committee reported out legislation to repeal PUHCA by a vote of 19 to 
1. PUHCA repeal is an idea whose time came a long time ago. There is 
also a need to repeal the PURPA mandatory purchase obligation 
prospectively.
Jurisdiction
    The jurisdictional boundaries between the Federal and state 
regulatory roles have blurred as the electricity industry has changed. 
The Federal Power Act was enacted to fill a regulatory gap when the 
Supreme Court found that states lacked legal authority under the 
Constitution to regulate interstate commerce in electricity.
    One jurisdictional issue is state authority to charge public 
purpose fees. The Administration believes that states are in the best 
position to develop public purpose programs to suit their needs. One 
state may prefer to develop strong low income assistance programs, 
while another may elect to encourage aggressive conservation. States 
have different needs, and need the flexibility to craft programs to 
suit those needs. These programs can be funded through the distribution 
charges--an area where states have exclusive jurisdiction--or charges 
on retail sales of electricity.
    Electricity legislation can clarify the authority of states to 
impose fees to fund public purpose programs that meet their needs and 
avoid bypass of state fees. We believe this is a better approach than 
imposing a Federal tax to fund a Public Benefits Fund. One concern 
relating to a Public Benefits Fund that has not received much attention 
is that of equities in allocating funds. There is no assurance that tax 
revenues raised in one state to finance a Public Benefits Fund will not 
be spent in other states.
    By no means is this intended to be an exclusive list and there are 
other issues that may be appropriate to address in Federal electricity 
legislation.
                               conclusion
    We have a rare opportunity to learn a lesson from the California 
experience and act to prevent a future electricity crisis. The Congress 
normally passes energy legislation in the wake of a crisis, and it is 
rare for it to act to prevent an energy crisis.
    Mr. Chairman, the Congress has been slowly reforming Federal 
electricity laws for over twenty years. This process began with the 
Public Utility Regulatory Policies Act of 1978, which the encouraged 
the development of independent power producers. This process continued 
with enactment of the Energy Policy Act of 1992, which provided greater 
access to the transmission system and further encouraged the 
development of independent power producers. The time has come for 
Congress to take another step, a bigger step, one that can make 
electricity markets more competitive and result in lower electricity 
prices, and ample and reliable electricity suppliers.
    The Administration looks forward to working closely with the 
Committee to develop comprehensive electricity legislation.
    I appreciate the opportunity to testify before you today.

    The Chairman. Well, thank you very much, and I am aware 
that you are, as you indicated, the committee--or the 
administration is working on legislation which addresses many 
of these same issues and we are anxious to work jointly with 
you to try to come up with something that we can all be behind.
    Do you have a timetable for actually getting legislation to 
the committee that we would be able to consider?
    Mr. Blake. We are working on that now, Mr. Chairman. I 
don't have a specific timetable for you. I hope that it will be 
in the near term. There's obviously a lot of coordination 
within the Federal branch that is still required.
    The Chairman. Just as I'm sure you are aware, we are going 
to try to start a markup next week and do a section--not the 
section that relates to electricity restructuring, but a 
different part of the bill--of a comprehensive bill, and then 
come back in September; and probably the second week, we are 
back in September, go on with that markup. And so, if we had 
your bill in time to be considered before that, that would be 
very useful.
    Do you think that Federal siting authority for transmission 
lines can be meaningful without clarifying the jurisdiction 
over those lines?
    Mr. Blake. I think it is useful to clarify the jurisdiction 
as part of that. Yes, sir.
    The Chairman. So, you think we need both? We need to 
clarify the jurisdiction of the lines, but we also need to vest 
some authority, at FERC, for the siting of those transmission 
lines?
    Mr. Blake. I think your White Paper said it well on the 
issue of a Federal eminent domain and the siting issue, which 
is that, by itself, that doesn't solve the problem, but having 
some backstop authority in the Federal Government for eminent 
domain is, we believe, needed.
    The Chairman. Do we need to be doing something to ensure 
adequate reserve margins in order to ensure reliability of 
supply? Is that something that should be addressed specifically 
in legislation?
    Mr. Blake. Well, I think the reliability standards that we 
believe should be made enforceable, presumably, but also 
address reserve margins as well.
    The Chairman. We have this proposal that some sort of 
regional authority, either a pooling of State authority, or 
dependence on regional transmission organizations be given 
siting authority with the Federal Government sort of providing 
a backstop to that. Is that the right formulation as you 
understand it, or as you would have us pursue it?
    Mr. Blake. I think there are a number of issues associated 
with the siting question.
    First, is a large number of States, I believe over 25, 
actually by State law, cannot consider the benefits that are 
external to the State in making siting decisions. I think there 
is also a role for regional planning, whether setting up a 
regional structure as part of the question of siting will be 
positive in that I think we are still reviewing.
    The Chairman. Does FERC's authority to address market power 
need to be extended to public power entities?
    Mr. Blake. If I understand the question, let me phrase it 
as I would understand it, which is the rate making authority 
that FERC would have over power generation supplied by public 
power.
    The standards that FERC exercises for that are, for 
example, in what I'm familiar with, which is BPA, quite 
different and the standards that would apply to BPA, and I 
don't think you would want to disrupt that. I think you would 
want BPA's standard setting continue to be governed under the 
same--on the generation side--on the same approach that it is 
now governed.
    The Chairman. Let me defer to Senator Murkowski for any 
opening statement he has, then any questions.

      STATEMENT OF HON. FRANK H. MURKOWSKI, U.S. SENATOR 
                          FROM ALASKA

    Senator Murkowski. Thank you very much. I apologize, but I 
had an earlier meeting this morning. I want to thank our 
witness, who has become a regular.
    I think the discussion today is certainly timely on PUHCA 
and PURPA and reliability, and as you know, in the last 
Congress, and from previous bills, we have pretty much covered 
the issues previously, but I think it is appropriate to have 
the new administration reflect their views, and as a 
consequence, I want to commend Senator Bingaman and his 
professional staff.
    Now, I'm going to refer to the memorandum Senator Bingaman 
has circulated, to some extent, in my statement, because I 
think it represents, collectively, the corresponding views--my 
own, as well as his. There are some exceptions.
    One of the concerns involves a major shift in jurisdiction 
from the States to FERC. Particularly, over retail 
transmission, giving new authorization to FERC as I believe is 
the intent of the chairman; and one facet focuses on the 
electric power system, which, in the White Paper, proposes to 
pay for social programs through a so-called public benefits 
fund. As I understand the fund's purpose, is that it should 
support such programs as low income assistance, research and 
development efficiency, conservation investment, renewable 
resource investment, universal services and other public good 
programs that are left behind by the transition to a 
competitive industry.
    I'm going to keep an open mind on this, but I think it is a 
pretty tall order to try and encompass that kind of a 
responsibility on the electric power system, and I would look 
forward to hearing from those representing the utility 
companies and others relative to this, because, in fairness, 
without actual language, it is pretty difficult to gauge the 
extent of the proposal, so I just point that out, since it is 
extraordinarily broad and we will see the legislative language. 
But, I'm a little skeptical about increasing FERC's authority, 
particularly when it comes at the expense of the States. I've 
always felt that the State' politics is local, in a sense, 
motivating people and Senator Bingaman and I have had 
discussions on this before and we could never quite come to 
grips with it. But, we will try it again.
    I think events in California demonstrate how important 
electricity is to our economy and our way of life. Certainly 
price reliability, security, we're all aboard on that. But, 
most importantly, California demonstrates the following: I 
think the real folly of trying to bend the laws of supply and 
demand through the heavy hand of government regulation. 
California's problems are not the result of a failure to 
conserve. California is the second in the Nation in 
conservation. California's problems are directly traceable to 
government interference in the market, in my opinion, not by 
the failure of competition.
    California did not deregulate. Instead, California mandated 
powerplant divestiture. California mandated 100 percent 
reliance on a spot market. California refused to allow cost 
pass-throughs. California failed to allow new potential 
powerplants and transmission launch to keep up with growing 
demand. The permitting time was just abominable, and so the 
experience in California makes me a bit weary of two things.
    First, I do not support more government control over the 
marketplace, no matter how good or politically popular it 
sounds at the time. And second, I do not support a one size 
fits all program. Suppose FERC had approved the California 
model for the entire United States. There's a little food for 
thought there.
    Having stated my philosophical view, let me also observe 
that, because my State is not connected to the interstate grid, 
it has very little effect on my State or my constituency, so 
perhaps I can claim to be somewhat, to a degree, objective on 
this point.
    Accordingly, I'm very interested in the views of other 
members of the committee who live in States that would be 
directly affected and I will note that I will have a series of 
questions for the witnesses to respond to, regarding the issues 
raised in the memorandum of the chairman of July 20. But, I 
would simply ask the Honorable Francis Blake to comment very 
briefly on the idea of giving expanded authorities to FERC in 
the shifting jurisdiction from States to FERC and whether the 
administration has a position on that.
    Mr. Blake. Well, I think as we understand the proposal, 
certainly as outlined in the White Paper, much of what's 
involved there is a clarification of the jurisdictional roles. 
For example, on bundled transmission rates and FERC's authority 
to look at the bundled rate and then separate out the part that 
is State versus the part that is interstate and Federal, I 
think, in principle, we certainly agree with the notion that 
States are better able to make a number of decisions, but we 
also have to recognize that it is an interstate transmission 
grid. There are critical concerns in terms of open access that 
have to be taken into account.
    Senator Murkowski. An eminent domain, I assume, is one?
    Mr. Blake. We see the need for eminent domain as a 
backstop, again, relying principally on the local decision 
making and understanding that that is not the solution, but as 
a backstop it can be helpful.
    Senator Murkowski. As you know, when we introduced our 
comprehensive bill on our side sometime ago, we had a good deal 
of debate about eminent domain and, as ours differentiates from 
Senator Bingaman, who included eminent domain. I was of the 
opinion that this was an obligation of the States to step up to 
reality, but I reserve the right, that if the States didn't, we 
would have to go to the other extreme, and that is to include 
eminent domain. So, I'm still open on that issue.
    The Chairman. Thank you very much.
    Senator Johnson, do you have questions of Secretary Blake?
    Senator Johnson. No.
    The Chairman. Senator Smith?
    Senator Smith. I have no questions.
    The Chairman. Senator Craig?

        STATEMENT OF HON. LARRY E. CRAIG, U.S. SENATOR 
                           FROM IDAHO

    Senator Craig. Mr. Chairman, thank you. First, let me thank 
you for putting out some dates to schedule a markup on a 
comprehensive energy policy for our country and the work that 
this committee has been underway and that you picked up and are 
now carrying on. The House is doing their work, we must do our 
work, and I think probably one of the more valuable debates 
we'll have this year on the floor of the U.S. Senate, for the 
sake of our country and its future, is an energy policy that 
will finally begin to direct this country and our energy needs.
    Francis, a couple of thoughts to add to the comments of the 
ranking member and the chairman. I was a bit of the dog in the 
manger when it came to eminent domain, recognizing that States 
should be a player here, and that private property is a bit 
sacred, and the Federal Government shouldn't be running 
roughshod.
    There are a lot of good reasons, and I understand when we 
built the interstate highway system, we needed the right of 
eminent domain. Let's work to see if we can't create a balance 
of the State rule there. I think that's awfully important.
    At the same time, we understand that the current electrical 
gridding system in our country is a bunch of country roads that 
kind of run together and we probably, in a truly deregulated 
system, if that's where we get, do need an interstate system to 
tie it all together so that marketers can, in fact, move their 
product without limitation or restriction.
    Speaking of transmission, one of the things that we need to 
get right, and somehow we're not getting it quite right, yet, 
with the administration, with OMB, is borrowing authority for 
the Bonneville Power Administration. We're talking about 
Oregon, Washington, Idaho, western Montana, a tie to 
California; and clearly the need to modernize, as a part of a 
total energy package for our country.
    The country believes that all you have to do is modernize 
and add new technology and we'll solve this problem. There is 
some truth to that. To take a 40-plus year old system and 
modernize it, as we need to do with Bonneville, and Bonneville 
represents about 75 percent of the Northwest's transmission 
capacity, we've got some new stuff wanting to come on line out 
there, but it can't get to the consumer, because Bonneville 
can't act quickly enough, or it doesn't have the resources to 
do so.
    As you know, we need borrowing capacity and we need the 
administration to be with us on that as we move this issue, to 
be able to create that kind of flexibility to modernize this 
system. And that's just a piece of this greater puzzle we're 
all trying to put together here called a national energy 
policy, both for the publics and the privates and the national 
perspective when it comes to electrical generation.
    One of my frustrations, departing from the issue of 
borrowing capacity now, Francis, a good example, Mr. Chairman, 
of what happens when you create total national authority or 
have national overriding power, insensitive, or less sensitive 
to State needs. When President Clinton, in his final days here, 
created a Federal order to sell power to California, what he 
did was he ordered the Pacific Northwest to open its penstocks 
and generate electricity out of its hydro system and, draining 
a reservoir in a drought cycle when the West, especially 
Oregon, Washington, and Idaho knew they were in trouble, is not 
such a good move.
    President Bush, when he got to town, found the need to 
renew it because he really didn't quite grasp it yet, but 
finally did and said we'd not renew it again, and, as we know, 
the reservoir behind the great Grand Coulee Dam, Lake 
Roosevelt, is now probably at the lowest it's been since the 
dam started filling all these years ago.
    That's what happens when there appears to be a national 
interest, but you don't incorporate regional and/or State 
interests in decision making processes. And while I respect the 
FERC, and see its role, I'm not sure that we give it the right 
of everything, or the power to bring about those kinds of 
decisions in many instances, and I think the publics are 
independent here and, as it relates to rate--and we need to see 
it kept that way.
    But, that was a policy that, from this perspective in 
Washington, and inside the Beltway, sounded good, but out in 
Oregon, Washington, and Idaho it was hurting us. Not that we 
weren't going to get paid. We were willing to contribute to the 
disaster in California. At the same time, it was creating a 
future disaster for Idaho, Oregon, and Washington, and that's 
what we deal with, when we look at it from a national 
perspective only. States do play a role, should play a role. 
Let's work on the borrowing capacity for Bonneville and see if 
we can't incorporate that into the broader picture so that we 
can retain and--that expanded capacity out there in a very 
rapidly growing area of the county.
    Francis, thank you.
    Mr. Blake. Senator, thank you.
    The Chairman. Senator Cantwell, did you have questions of 
Secretary Blake?
    Senator Cantwell. Thank you, Mr. Chairman, I would just 
like to add my concern and comments to the Senator from Idaho 
in regards to BPA borrowing authority and the critical nature 
of that, when there's so much transmission capacity that is 
currently available to us, but could be an integration of 
between 8,000 and 12,000 megawatts of new supply, and yet the 
administration has not been supportive of that. I don't know if 
you have any comments on that or----
    Mr. Blake. Senator, in comment to that question, and also 
Senator Craig's comments, I have reviewed the BPA plans. This 
is critically important. It is in the President's energy 
policy.
    As you say, there are 8 to 12 gigawatts of potential 
capacity that are going to need some new transmission lines. 
The view, at this time, is that BPA is adequately--has adequate 
authorization, through at least '03, and that was the response 
that the administration gave. But it was not at all intended to 
suggest that the needed upgrades on the transmission lines, 
needed upgrades on the hydro facilities--that we don't agree 
with that.
    Senator Cantwell. Well, but it puts BPA at a position of 
not being able to plan for the future. I mean, this 
infrastructure can't come on line without a commitment of the 
resources, in this case, bonding and the Federal Government 
putting up a commitment to that, so I'm not sure I understand 
the administration's position, on one hand saying they support 
it, but not coming up with the resources to back it.
    Mr. Blake. It may have been more the mechanism for the 
support rather than the support, because I believe the 
statement of the administration's position also said, yes we 
recognize that this is important, there is an analysis underway 
on the spending required. It appears to be that it's covered 
through 2003. To the extent more money is needed after that, we 
will address it.
    Senator Cantwell. I think that there's a disagreement on--I 
think that a commitment of resources through 2003 is committed, 
and to get new capacity on line, this new bonding authority 
must be in place. So, without it, it isn't that the project is 
continuing, there are other things where those resources are 
committed, so we're obviously, in the Northwest, very 
concerned, given the impacts that my colleague from Idaho----
    Senator Craig. Will the Senator yield?
    Senator Cantwell. Yes.
    Senator Craig. I think the concern we're talking about 
here, Francis, in the overall picture, if we're looking at 5-
year construction projects, how do you commit to a long-term 
plan when you only have a couple of years worth of authority? 
And my guess is the perspective there is--yes, there is short 
term availability and short term needs and short term 
capability, but there's not long term capability for extended 
construction programs of the kind we're talking about.
    Mr. Blake. I understand that concern.
    Senator Cantwell. And I would just add that I think your 
putting the rate payers in the Puget Sound area and other parts 
of Washington who've seen 50 percent rate increases--I mean, 
you're basically telling them that, within the Department of 
Energy, you don't agree on the budget assessments of one of the 
groups within that agency, and so what we'd like to see is OMB 
and the Department of Energy sit back down with Bonneville and 
come to conclusion on what the transmission needs are for the 
future, that we'll get this power on line and make the long 
term commitment, and Mr. Chairman, I hope that as we go through 
our process on the energy bill, that we take a very close look 
at this and what we need to do to make sure that this message 
is clear about getting more transmission capacity on line in 
the Northwest.
    The Chairman. Thank you very much.
    Senator Thomas.
    Senator Thomas. Thank you, Mr. Chairman.
    Mr. Blake, it seems to me that we have all these issues and 
so on, but we don't seem to have yet developed an overall 
picture of where we want to go. It would seem to me that it 
would seem like we need an interstate grid of some kind, 
probably with the RTOs attaching to that, but we don't seem to 
focus on that. We get all diverted into different kinds of 
things. But if that's where we're going, it seems to me that 
that's one of the things that we really need to look at. And 
your testimony here indicates you want incentives for building 
transmission. Now do you think that lends into an overall plan?
    Mr. Blake. I think when you think about transmission issues 
you have basically three issues: access, siting, and pricing. 
The access issue is largely addressed by FERC. The siting issue 
we've been discussing in terms of the backup of Federal eminent 
domain. And then pricing, incentive based rates, as indicated 
in the President's policy, we think is very important to 
incentivize the----
    Senator Thomas. I'm sure it's very important. I don't agree 
with that. It seems to me like that's just working with what we 
have. That's just dealing with the current situation. And we've 
got to do better than that. We've got to look for some kind of 
a system, probably with a third party operator, with some kind 
of a national grid, which is a little different than we have 
not.
    I mean we're wondering why people haven't invested. Well, 
they haven't invested because they don't know where we're 
going, they don't know where we're going to be. There's not 
investment in generation because we've talked about re-
regulation and so on, but we have pretty much decided that 
wholesale power is going to be deregulated and we're going to 
be buying it all over. We've got more market generators now 
than we do for their own system, but we don't have a system to 
transmit it. And it seems to me we'd be thinking in just a 
little broader sense than what we're doing here.
    And, in fact, you say here that the President's policy has 
said to the Department we want legislation from you, but I 
don't think we're going to get there by simply continuing to 
look at where we already are and making little bitsy things. Do 
you have a broad plan?
    Mr. Blake. We are also, as directed by the President, doing 
an overall transmission study that I think is addressing 
exactly the point that you were raising, which is going to look 
at where the constraints are in the system now, what we need to 
do to address those constraints, and move towards a more 
effective national system. I would still say parts of the 
answers are in the legislation you're considering on access 
issues and siting issues and pricing issues.
    Senator Thomas. I think it's fairly clear we've made some 
changes in generation. If you're going to have that kind of 
generation and encourage people to build generation facilities 
to put it in the market, you got to have a way to get it there. 
You talk about California and Washington all the time. Well, 
you can make power, but there's no way to get it there. And I 
don't think we want to have a national system that does 
everything but we ought to have a national responsibility for 
an interstate system that ties into RTOs that are run locally. 
Isn't that the concept that we want to pursue?
    Mr. Blake. Senator, I think we're going to take a national 
look and we're going to--but I don't think there's any intent 
at this point to move more broadly than beyond the RTOs, the 
regional transmission organizations that the parties----
    Senator Thomas. How do you--I don't understand how you can 
defend that. If you're moving power, how can you just deal with 
RTOs and talk about a national grid?
    Mr. Blake. I think RTOs themselves are going to be--moving 
to a regional organization will be a challenge in itself before 
taking the next step and moving to a national organization.
    Senator Thomas. I'm not sure I agree with you. I'm not sure 
that's the next step. If you're going to be talking about 
shortages of power in different parts, like the Northwest, then 
the RTO isn't the answer. You got to move stuff often within 
the RTOs. Well, I'd just urge you to take a broader look and 
just kind of--rather than stand where we are, which is where I 
sense you are.
    The Chairman. Senator Bayh, did you have questions of 
Secretary Blake?
    Senator Bayh. Thank you, Mr. Chairman. Just a few brief 
comments. Just a few brief comments, Mr. Secretary Blake, and 
then two brief questions, Mr. Chairman.
    First, Mr. Chairman, I'd like to salute you for your 
leadership on this very, very important issue of electricity 
restructuring and the energy issue in general. It's one of the 
few issues that in Congress we'll address that affects every 
consumer and every home across our entire country.
    It's also going to be vitally important to our economic 
competitiveness. As we look at those overseas with whom we 
compete and what they're doing in their energy markets, it's 
important that we stay up ahead of the curve with regard to our 
own electricity efficiency and production capabilities to 
insure affordable and reliable energy sources for our 
industries and producers across our country.
    Finally, I'd just point to the savings. The estimates have 
varied anywhere from 20 billion to several tens of billions of 
dollars more than that for both residential customers and 
business customers, possibly achieved through electricity 
restructuring. That is of the same magnitude as the tax cut 
that was recently enacted and could do a lot to help spur our 
economy.
    For all these reasons, Mr. Chairman, I salute you for your 
leadership. I am a strong proponent of electricity 
restructuring. I believe that in the long run markets are more 
likely to deliver the outcomes that we seek in a highly 
regulated structure, but of course we have to have safeguards, 
as the recent experience in California has demonstrated. We 
have to make sure that we not just do it, but do it correctly, 
learning from both our experience and our mistakes. But the 
recent experience in California, we might say the recent 
mistakes in California, should not dissuade us from going 
forward and getting it right for the entire country for the 
economic competitiveness benefits to be accrued, as well as the 
savings to consumers across the board.
    Mr. Chairman, I look forward to working with you on this 
important issue. It's something that I think could benefit our 
country if done correctly for a long, long time to come. It's 
one of these few once in a generation opportunities we have, 
and I thank you for your leadership. I had a chance to briefly 
review the White Paper. I think it's an excellent starting 
point and I commend you for your work in that regard.
    Two very brief questions, Secretary Blake. I noticed in 
your testimony you say the administration believes it's 
essential that Congress pass comprehensive electricity 
legislation, and that the National Energy Plan in fact calls 
for this also. Will the administration be sending us a 
proposal?
    Mr. Blake. We are working on legislative language now, as I 
mentioned, to the chairman. It is going through the process. 
We'll have an internal review process within the 
administration. And I hope that we will have something----
    Senator Bayh. Do you have a time frame for us?
    Mr. Blake. I don't, but I--the chairman just gave us a time 
frame.
    Senator Bayh. Good. Well, it's--I endorse the chairman's 
time frame. How about that, Mr. Chairman?
    Finally, my last question. It's a rather small item, but 
when Secretary Abraham was before us I asked and I followed up 
with a letter; this was back in June; asking if he could update 
us on the Department's review of energy efficiency programs. I 
know you all have a lot going on over there, but now that we've 
confirmed a legislative liaison I would respectfully ask that 
perhaps that letter could be responded to and we could get an 
update on the review of the efficiency programs. Many of us 
believe that that's an important component of comprehensive 
energy strategy. So if you could put that somewhere on the list 
for our new----
    Mr. Blake. We will get an immediate response to you, and 
the review is underway.
    Senator Bayh. I couldn't ask for more than immediate. So I 
appreciate that very much, Mr. Blake. Thank you for your 
presence today.
    The Chairman. Senator Hagel.
    Senator Hagel. No questions.
    Senator Burns. If the Senator could hold, could I just ask 
to cast my vote in favor of the nominee.
    The Chairman. We will have the record show that you favor 
the nominee.
    Senator Burns. And I have a statement for this hearing and 
I'm going to go back to another hearing. And I think that you--
--
    The Chairman. We'll include your statement and we 
appreciate your attendance.
    [The prepared statement of Senator Burns follows:]
   Prepared Statement of Hon. Conrad Burns, U.S. Senator From Montana
    Mr. Chairman, thank you for calling this hearing today. Since the 
Energy Policy Act of 1992, legislation dealing with the structure of 
our electric utility industry has barely seen the light of day. Even 
more significant is that legislation opening up some of our nation's 
most significant supply sources to production didn't see the ink of the 
President's pen in the eight previous years. I'm hopeful that today we 
can focus this debate on what needs to be done in this Committee to 
prepare for electric restructuring.
    There are obviously issues that arise when we discuss the Public 
Utility Holding Companies Act (PUHCA) and Public Utility Regulatory 
Policies Act (PURPA), many of my-constituents and I have serious 
concerns with the proposal to place Rural Electric Cooperatives and 
public power providers under FERC jurisdiction.
    The members of this Committee have heard me say this before, but I 
think it particularly applies to today's hearing on electricity 
restructuring. We cannot have a significant federal deregulation or 
restructuring bill until we have the transmission grid available to 
support it. If we truly want to address the long term energy needs of 
this country, and truly want a more competitive market, transmission is 
the first issue for Congress to deal with.
    Over the next ten years, demand for electric power is expected to 
increase by about 25 percent, and more than 200,000 megawatts of new 
capacity will be required. Under current plans, electric transmission 
capacity will only increase by four percent.
    California may think they can escape the need for building new 
transmission lines, by instead building plants closer to the source. 
However, I've heard that in one year of the high fuel costs paid this 
past year, the fuel costs alone would have paid for the transmission 
lines.
    Our large energy deposits are located great distances from urban 
centers where the electricity is needed. Urban areas are continuing to 
expand geographically thus making it difficult to build high capacity 
generation plants near the areas of high demand. Furthermore, the 
environment around and near populated areas cannot sustain even the 
cleanest of new high capacity power plants in their air emissions.
    Strategically, our nation is the most dependent upon its electrical 
distribution system. Several nations and non-state actors are actively 
considering this dependency for possible targeting of asymmetrical 
warfare/terrorist tactics. The lack of diverse interstate transmission 
networks raise the likelihood that a natural or man-made event could 
deprive electricity to major sectors of our nation for days or even 
weeks.
    These challenges and national security interest can all be 
satisfied by increasing our nation's high capacity interstate electric 
transmission network. We can bring life to the economies of rural 
western states by creating energy at the mine-mouth. In addition, we 
will provide energy for the economies of the larger cities without 
adding to the stresses of urban sprawl. The safety of each and every 
American will also be in mind when we make our electricity 
infrastructure less vulnerable to terrorist attack.
    It's a very simple choice here folks. To my friends representing 
rural America--it means jobs and tax revenues for schools. To my 
friends representing inner cities--it means cleaner air and a reliable 
energy supply for business. To all of us, it means a stronger American 
economy and energy infrastructure safer from terrorist activities.

    The Chairman. Senator Hagel had no questions.
    Senator Dorgan.
    Senator Dorgan. Mr. Chairman, I'm in the same situation as 
Senator Burns. I have a Commerce Committee hearing going on and 
I'm trying to get to several places, and I regret that I missed 
Secretary Blake's presentation.
    This is, in my judgment, one of the most important elements 
of an energy policy. We have the capacity in our State, for 
example, to produce a substantial amount of additional energy 
using late night coal, especially wind energy potential as 
identified by the Department of Energy, but if we can't find 
ways to transmit that energy and move that energy, its 
production is irrelevant to the rest of the country. So 
transmission issues are critically important. And I appreciate 
this hearing and your leadership, Mr. Chairman.
    Let me ask, Mr. Blake, you were discussing the RTOs 
earlier, I believe with Senator Thomas. What is the 
administration's position on the reliability language that a 
number of organizations have developed and has been kicking 
around legislation here? Do you have--are we pretty much agreed 
on reliability language, do you think?
    Mr. Blake. We support enforceable reliability standards. I 
think we'd want to work with the committee on the particular 
language in the legislation.
    Senator Dorgan. You will obviously provide us----
    Mr. Blake. Yes, sir.
    Senator Dorgan [continuing]. The discussion about the 
language that you want to work with us on?
    Mr. Blake. Yes, sir.
    Senator Dorgan. Let me ask you about the issue of 
technology and transmission. I mean there are a couple ways to 
enhance transmission capabilities. One is to build additional 
lines; the other is to upgrade lines; the other is to invest in 
new technology, composite conductors and so on. Tell me your 
evaluation of technology being able to substantially address 
some of our transmission issues.
    Mr. Blake. There is some very interesting technology that's 
under development that will improve both the throughput of the 
lines, allow additional capacity on what we already have. That 
has a lot of advantages very obviously, and we're working to 
fund a number of those technologies.
    Senator Dorgan. What is the most promising, do you think?
    Mr. Blake. Well, there is--super conductivity is one area. 
I'm aware of another area that I think is being worked on in 
the Northeast that involves basically moving from analog 
switching to digital switching on the transmission lines, which 
will allow a dramatically increased throughput on the line. And 
that that's under--it's actually in testing now in New York 
State, I believe.
    Senator Dorgan. I wonder if you--if I might, Mr. Chairman, 
ask Mr. Blake to have your technical people provide the 
committee with their assessment of the potential of these 
technologies, what you're looking at, how much money you're 
investing in them, and the work that's going on. I think that 
would be helpful to us.
    Again, Mr. Chairman, I regret not being able to be at the 
entire hearing because of the Commerce Committee hearing, but I 
think this is a critically important issue and I look forward 
that we can work together on this committee to address it. 
Thank you.
    The Chairman. Thank you very much.
    Secretary Blake, thank you very much for testifying again 
today, and we will allow you to leave and call panel 2 forward 
please.
    Let me introduce this panel. It's a very distinguished 
panel. We appreciate them being here.
    Mr. Jeffery Ayers, who is senior vice president and general 
counsel for Aquila, Inc., which is located in Kansas City, 
Missouri.
    Mr. John Rowe, who is a--not a frequent testifier here, but 
one that we always welcome. He is the co-CEO and president of 
Exelon Corporation in Chicago.
    Mr. Roy Thilly, who is the chief executive officer, 
Wisconsin Public Power. Thank you for being here.
    Mr. Glenn English, thank you very much for being here. He's 
the chief executive officer for the National Rural Electric Co-
op Association.
    Why don't we just go across the table in the order that I 
introduced you there and if you'll take 5 or 6 minutes and 
summarize your main points. We would include the full 
statements you have prepared in the record.

   STATEMENT OF JEFFREY D. AYERS, SENIOR VICE PRESIDENT AND 
                 GENERAL COUNSEL, AQUILA, INC.

    Mr. Ayers. Mr. Chairman, Senator Murkowski and members of 
the committee, my name is Jeff Ayers. I am the senior vice 
president and general counsel for Aquila, Inc. based in Kansas 
City, Missouri. Aquila is a provider of risk management, a 
developer of powerplants, and a wholesale supplier of 
electricity, natural gas and coal in North America and Europe.
    I'm here today representing Aquila and the member companies 
of the Electric Power Supply Association, or EPSA, the National 
Trade Association, representing competitive power suppliers, 
including independent power producers, merchant generators and 
power marketers.
    Mr. Chairman, we commend you for your far-sighted White 
Paper. It provides a strong template for a national 
transmission policy.
    While we addressed many issues in our written testimony 
which I would like to submit for the record, I would like to 
concentrate my comments on the following three key points that 
are critical for the development of a sound national 
transmission policy.
    First, FERC oversight for the electric transmission grid 
must include all owners of interstate transmission assets.
    Second, a clear deadline for all transmission owners, 
including non-FERC jurisdictional owners to join regional 
transmission organizations must be set.
    Third, uniform interconnection rules for new sources of 
power supply must be adopted.
    Unless a sound national transmission policy develops, Mr. 
Chairman, I can assure you that private capital will not 
provide the $56 billion that a recent EEI study estimated is 
necessary for transmission upgrades and investment in the 
current decade. The interstate transmission grid is the 
lynchpin of our national electricity infrastructure. In order 
to attract private capital to fix our national transmission 
system, the structural defects in the wholesale market must be 
cured. This magnitude of capital investment will require a 
consistent FERC-led approach throughout the Nation and 
innovative incentives.
    Regarding my first point, FERC oversight must cover all 
owners of interstate transmission assets, regardless of whether 
private companies, public power, cooperatives, or the Federal 
Government hold these transmission assets. The industry needs 
clear and consistent rules that apply to all owners of 
transmission assets to insure a fair and even playing field.
    Second, Congress must set a clear deadline for all 
transmission owners, including currently non-FERC 
jurisdictional owners, to join RTOs. We are supportive of the 
White Paper's call for legislation to support FERC's authority 
to order transmission owners to join RTOs. We also support 
FERC's recent effort to organize large, regional RTOs that 
reflect the way power flows. Pricing for transmission should 
prohibit multiple charges as power flows from one transmission 
system to the next, commonly known as pancaking. And each use 
of the transmission grid must be required to take service under 
a single open access transmission tariff.
    Regarding my third point. The power industry must have 
clarification of interconnection rules for new sources of power 
generation. We cannot overemphasize how important this issue is 
for investment and construction of new generation. For 
companies interested in expanding electric generation capacity 
which is critical to expanded supply throughout the country, 
the physical interconnection of the generation plant to the 
power grid has become too often a choke point for project 
development. Ad hoc interconnection standards create 
uncertainty, extensive delays, and unexpected or unreasonable 
costs for developers. We need to assure the right of new 
generation to interconnect on a nondiscriminatory basis to 
transmission facilities. We must provide a clear avenue for 
FERC review of interconnection policies.
    Federal legislation should require FERC to promote 
competitive markets by providing clear, consistent rules 
applied evenly to all market participants. This committee began 
addressing open wholesale electric policy in 1978 with PURPA, 
and in 1992 with EPAct. It is now time to finish what was 
started a quarter century ago, creating a national grid under 
FERC oversight for the open, nondiscriminatory movement of 
wholesale power. The result will be a reliable, affordable 
supply of electricity that fosters the creation of new 
technologies and attracts the necessary private capital for 
infrastructure that insures a robust marketplace for the 
future.
    Thank you. And I would be happy to answer any questions.
    [The prepared statement of Mr. Ayers follows:]
     Prepared Statement of Jeffery D. Ayers, Senior Vice President 
                   and General Counsel, Aquila, Inc.
    Mr. Chairman, Senator Murkowski and members of the Committee, my 
name is Jeffrey Ayers. I am the Senior Vice President and General 
Counsel for Aquila, Inc. (NYSE: ILA). Based in Kansas City, Missouri, 
Aquila is a provider of risk management services including weather and 
plant outage protection, and a wholesale supplier of electricity, 
natural gas and coal in North America as well as a developer of power 
plants. It also provides wholesale energy services in the United 
Kingdom and continental Europe. Aquila is an 80% owned subsidiary of 
UtiliCorp United (NYSE:UCU), an international energy company with more 
than 4 million customers across the U.S. and internationally.
    I am here today representing Aquila and the member companies of the 
Electric Power Supply Association (EPSA). EPSA is the national trade 
association representing competitive power suppliers, including 
independent power producers, merchant generators and power marketers. 
EPSA members provide reliable, competitively priced electricity from 
environmentally responsible facilities in U.S. and global power 
markets. On behalf of the competitive power industry, I thank you for 
this opportunity to respond to legislative proposals to address 
electricity markets.
    We believe that the keys to a secure energy future are well-
functioning, competitive energy markets and a national infrastructure 
that is robust and efficient. While EPSA's vision of the future 
ultimately demands a national, competitive retail market for 
electricity, there is a broad consensus that additional federal action 
is needed today to promote truly competitive wholesale power markets, 
and your white paper provides an outstanding set of principles upon 
which to draft legislation for federal policy.
    One of the crucial lessons from the electricity crisis in the 
Western states is that no market can function without adequate supply 
or without transmission policies--the ``rules of the road''--that are 
fair and consistent to all market participants. Appropriate reform of 
the regulatory framework that governs the interstate transmission grid 
is essential to ending the crisis in the West and avoiding these same 
pitfalls elsewhere.
    Competitive power suppliers stand ready to commit hundreds of 
billions of dollars of private sector investment to increase the supply 
of electricity. This new investment in efficient, cleaner technologies 
is desperately needed not only in the West, but nationwide. Since 1990, 
the competitive power supply industry has accounted for more than half 
of all the power generation capacity brought online in this country, 
and we expect this percentage to increase as competitive wholesale 
markets develop.
    More and more, however, EPSA companies view their investment 
decisions as contingent upon the continued development and regulatory 
reform of the interstate transmission grid. I can also assure you, Mr. 
Chairman, that the financial community will not provide the $56 billion 
that EEI estimates is necessary for transmission upgrades and 
investment in the current decade, unless reform occurs. This magnitude 
of investment will require a consistent, FERC-led approach, throughout 
the nation, and innovative financial incentives. In addition, even with 
new generation supply, there will be no long-term remedy to the 
situation in the West and elsewhere without critical changes to 
transmission regulatory policies and expansion of the interstate 
transmission grid.
    Federal energy policy must recognize power flows from state-to-
state and region-to-region on a regular basis. The interstate 
transmission grid is the linchpin of our electricity infrastructure and 
regulation of that grid needs to be uniform, predictable and capable of 
fostering regional and national wholesale power markets. Although I 
will comment on a wide range of policies outlined in the White Paper, 
we will focus much of our attention on proposals to reform and improve 
the regulation of the interstate transmission grid.
                       transmission jurisdiction
Clarification of Federal/State Authority over the Interstate Grid
    We agree that the division of authority between state and federal 
regulatory organizations must be clear and consistent, and cannot be 
allowed to Balkanize the wholesale power market. Today, there is too 
often ambiguity as to whether a transmission asset lies within state or 
federal jurisdiction. While a state role in retail markets should be 
maintained, more uniform and efficient regulation of the interstate 
transmission grid--with consistent, predictable regulatory oversight at 
the federal level--is essential.
    As the White Paper makes clear, these rules must cover all owners 
of interstate transmission assets, regardless of whether these assets 
are held by private companies, public power, co-operatives or the 
federal government.
Assurance of a Robust Interstate Transmission Grid
    The White Paper affirms FERC's authority to order utilities to join 
Regional Transmission Organizations (RTOs). We are supportive of FERC's 
recent bold step to organize large, regional RTOs to reflect the way 
power flows. FERC's action was a very important step, but we urge you 
to go further. The transmission system is sporadically open to 
competition, and barriers to new plant development are slowing the 
infusion of critical investment for increased generation supply. 
Congress must set a clear deadline for all utilities to join Regional 
Transmission Organizations (RTOs). RTOs should be large and conducive 
to competition. Pricing for transmission should preclude ``pancaking'' 
(multiple charges as power flows from one transmission system to the 
next), and each use of the transmission grid must be required to take 
service under a single open access transmission tariff. Also, Congress 
should also explicitly require currently non-FERC-jurisdictional 
entities that own interstate transmission assets to join RTOs.
Standardized Interconnection to the Transmission Grid
    The White Paper endorses a clarification of interconnection rules 
for new sources of power generation. We cannot overemphasize how 
important this issue is for investment and construction of new 
generation. For companies interested in expanding electric generation 
capacity (critical to affordable power rates throughout the country), 
the physical interconnection of the generation plant to the power grid 
has become too often the ``choke point'' for project development. Ad 
hoc interconnection standards create uncertainty, extensive delays and 
unexpected or unfair costs for developers. Legislation needs to affirm 
the right of new generation to interconnect on a non-discriminatory 
basis to transmission facilities, provide a clear avenue for the 
federal review of interconnection policies, and establish a timely 
remedy, if necessary, for any abuse.
    We will comment briefly on the remaining policy proposals of the 
White Paper:
                              reliability
    We support establishing a national framework for electric grid 
reliability that will assist, not impede, the growth of robust, 
competitive power markets. EPSA has been an active participant in the 
NERC ``consensus'' process. We are engaged today in an effort to update 
the legislative proposal from last Congress and hope that this effort 
will succeed. A national self-regulating reliability organization must 
have adequate representation from all segments of the industry, be 
consistent with existing and future market structures, and be subject 
to federal oversight.
                         rates and market power
    Federal legislation should require FERC to promote competitive 
markets by providing clear, consistent rules applied evenly to all 
market participants--and addressing any abuse of market power. EPSA 
believes strongly that the development of a pro-competitive framework 
for transmission regulation and the adoption of reforms identified 
earlier in this statement will go far towards reducing the risks of 
abusive market practices and protecting electricity consumers. In 
addition, market participants should be encouraged to use risk 
management mechanisms, such as long-term contracting, to reduce their 
exposure to price volatility. The California experience has 
demonstrated the effects of a prohibition of basic risk management 
tools.
                      regional planning and siting
    Expansion of the interstate transmission grid must occur in a 
timely fashion and fully reflect the best interests of the whole 
region. Siting issues remain an enormous roadblock to critically needed 
facilities. Any transmission expansion provision should encourage the 
construction and siting of much-needed transmission lines and ensure 
that costs are fairly borne by all users of transmission. We reiterate, 
however, that additional transmission assets and an expanded 
transmission grid will do little to prevent future bottlenecks if there 
is no concomitant regulatory reform of this same grid.
                            other provisions
   PURPA--If PURPA is amended as part of a comprehensive 
        federal electricity bill, there must be explicit recognition 
        and preservation of existing PURPA contracts. We also endorse 
        your efforts to guarantee the recovery of PURPA contract costs 
        as appropriate federal policy. However, such cost recovery must 
        be explicitly related to the honoring of existing contracts. 
        Moreover, EPSA urges the repeal of the ownership restrictions 
        on PURPA Qualifying Facilities (QFs). In 1992, the Congress 
        placed no such restrictions on Exempt Wholesale Generators 
        (EWGs) and the time has come for similar treatment for QFs.
   PUHCA--EPSA supports the repeal of PUHCA as part of 
        comprehensive federal legislation.
   Public Benefits Fund--If a Public Benefits Fund is included 
        in federal legislation, its costs and benefits should be 
        allocated so that no market participant is favored over any 
        other. We would urge you to avoid a provision that places the 
        costs of such a fund solely on generators. Given that some 
        generators operate pursuant to long-term contracts, it is not 
        clear that the costs of such a fund will have a balanced and 
        fair impact on all sources of generation and operators. If the 
        Committee endorses a Fund, its costs should be truly non-
        discriminatory.
   Renewable Energy--Renewable energy plays a vital role in 
        energy markets today and this role will increase in the future. 
        EPSA believes that federal legislation should recognize the 
        value of fuel diversity and continued investment in a broad 
        range of energy resources. The full range of renewable 
        technologies, including solar energy, wind, landfill gas, 
        biomass, geothermal and waste-to-energy should be supported in 
        any renewable provisions. EPSA has also endorsed the extension 
        and expansion of tax credits for renewable power resources.
   Tax Provisions--The White Paper identifies a number of 
        changes in tax law that are important to the development of 
        competitive markets. Federal legislation is also needed to 
        resolve uncertainties associated with the tax treatment of 
        assets associated with interconnection. Although tax issues are 
        not under the direct purview of your Committee, one issue 
        (referred to generally as ``Contributions in Aid to 
        Construction'') should be addressed in federal electricity 
        legislation. IRS policies since 1988 have generally held that 
        interconnection costs should not be classified as income to a 
        utility. However, the IRS is now studying this issue and has 
        opened the door to possible revisions in this policy. This, in 
        turn, has caused significant financial uncertainty for our 
        members who make the investments in capital necessary to 
        establish interconnections and to build power plants. The 
        Energy Policy Tax Act of 2001 should be amended to clarify that 
        the costs of interconnection, which are essential for power 
        plant developers to supply power to the electric grid, should 
        not be treated as taxable income to transmission owners. 
        Treating the costs of interconnection as income to the 
        transmission owning utility increases the cost of connecting to 
        the transmission grid and impedes construction of new 
        generation. As a consequence, electricity consumers face higher 
        costs, whether due to shortages of available electricity or 
        higher tax bills to new plant developers.

    EPSA appreciates this opportunity to provide you with comments on 
the White Paper. We applaud your leadership on this matter, and 
appreciate all the time and energy that the Committee has dedicated to 
this matter over the past few years. We believe that appropriate 
federal legislation can finish the job that this Committee began in 
1978 with PURPA and in 1992 with EPAct to create a national grid under 
FERC oversight for open, non-discriminatory movement of wholesale 
power. This action is necessary to ensure a reliable, affordable supply 
of electricity, to foster the creation of new technologies, to attract 
the necessary capital for this infrastructure and to ensure a robust 
marketplace for the future.

    The Chairman. Thank you very much for your testimony.
    Mr. Rowe, why don't you go right ahead with your comments.

  STATEMENT OF JOHN W. ROWE, PRESIDENT AND CO-CHIEF EXECUTIVE 
 OFFICER, EXELON CORPORATION, ON BEHALF OF THE EDISON ELECTRIC 
                           INSTITUTE

    Mr. Rowe. Thank you, Mr. Chairman.
    I'm delighted to be here today and am pleased that you are 
continuing the tradition of this committee in active 
involvement in these very important issues. My company serves 
about 5 million retail customers, principally in Illinois and 
Pennsylvania, but we have generation investments in most parts 
of the country and are involved in issues of transmission 
access in both parts of the--in most parts of the country.
    I am submitting prepared testimony today on behalf of the 
Edison Electric Institute, of which I am the past chairman. In 
that written testimony I comment on the White Paper which you 
released recently, which in my opinion is a very accurate 
summary of the issues we're dealing with on the proposed S. 388 
and on the Cheney task force report.
    In my opinion, you and your colleagues here have a set of 
issues which are of very great importance, a set of problems to 
solve which are sometimes painful to address, and a set of 
opportunities which are large indeed. For as I cautioned 
members of my industry, we are dealing with issues like energy 
supply and energy conservation and environmental effects which 
involve investments of tens or scores of years and which 
involve effects on reliability and the economy and the 
environment of tens or scores of years. And in that context, 
there is simply no alternative to seeking a broad, bipartisan 
energy policy.
    We have been greatly fortunate in this country for most of 
the past two decades in having plentiful, cheap natural gas and 
improving technologies to burn it. They have allowed us to put 
off some of the difficult issues which face us all. We cannot 
continue to put off those issues, however. The supply issues, 
the jurisdictional issues, the environmental issues must be 
addressed to the best of this committee's capability, and of 
course to the best of folks like the rest of us capability in 
both contributing to your decisions and in acting upon them.
    I believe we ought to start with supply, for we all fool 
ourselves if we think there are any substitutes for adequate 
supplies. No system of regulation, no system of jurisdiction 
will work if we don't have adequate supplies to start with. 
Natural gas has been, as I have said, the fuel of choice for 
new electric generation due to its favorable economics and 
environmental qualities. And I commend many of you for the work 
you've done on making natural gas more available, and 
particular Senator Murkowski on his constant work in this 
regard. But as we have seen from the vicissitudes of the 
marketplace in the past 6 months, we cannot rely on natural gas 
alone.
    We must have stable policies for nuclear power and for 
coal. I strongly believe that this Nation must live up to its 
commitments to build a permanent waste repository for nuclear 
fuel; and I certainly hope Congress will choose to extend the 
Price Anderson Act, which are the two key activities in the 
nuclear area.
    In the coal area, I submit respectfully that more work 
needs to be done with respect to environmental standards for 
existing coal fired powerplants. EEI is actively negotiating 
with members of the environmental community on proposals to 
present to all of you. I also believe that the combination of 
the President's action on the proposed Kyoto Accord (phonetic) 
and the recent concessions made in Europe with respect to the 
treatment of sinks for carbon dioxide create a climate in which 
this committee can begin to address the CO2 issue on 
a long-term basis.
    With respect to transmission, we believe that we must 
continue to encourage RTOs, that we must have reliability 
standards, and that we must have favorable tax treatment for 
the transmission of the--for the transition of transmission 
assets to such RTOs. Chairman Bingaman, your White Paper is 
very helpful in this respect.
    We, of course, believe that PUHCA and PURPA must be 
repealed, but we also believe that in a time when energy 
remains intensely regulated we are not getting true free market 
decisions in the development of energy conservation. Thus, we 
at my company support a broad range of energy efficiency 
standards. The EEI and our company support the proposals which 
have recently passed the House Energy & Commerce Committee and 
the House Ways & Means Committee. We believe that requiring new 
buildings and new appliances to have state-of-the-art energy 
efficiency technology is important.
    In sum, we respectfully ask this committee to grasp these 
hard issues and to formulate rules in which the marketplace can 
continue to evolve to provide both a more reliable supply and a 
cleaner supply of energy for your constituents and our 
consumers.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Rowe follows:]
 Prepared Statement of John W. Rowe, President and Co-Chief Executive 
                      Officer, Exelon Corporation
    Mr. Chairman and Members of the Committee:
    My name is John W. Rowe. I am the President and Co-Chief Executive 
Officer of Exelon Corporation. Exelon, formed last year by the merger 
of Unicom Corporation and PECO Energy, is headquartered in Chicago, 
Illinois. We serve over five million customers principally in Illinois 
and Pennsylvania, which have both restructured their electricity 
markets.
    I am testifying today on behalf of the Edison Electric Institute 
(EEI), which is the association of U.S. shareholder-owned electric 
utilities and industry affiliates and associates worldwide. We are 
pleased to have the opportunity to testify before the Committee on the 
development of a comprehensive national energy policy. My testimony 
today includes comments on Chairman Bingaman's recently released White 
Paper on Electricity Legislation which includes a comprehensive 
legislative proposal, as well as S. 388, the ``National Energy Security 
Act of 2001,'' S. 597, the ``Comprehensive and Balanced Energy Policy 
Act of 2001,'' and the Administration's National Energy Policy 
Development Group (NEPD Group) Report, released on May 17 (the ``Cheney 
Task Force Report'').
    The electricity industry is in the middle of a sometimes painful 
transition from an industry composed of highly regulated integrated 
utilities with monopoly service territories and cost-based pricing, to 
an industry with competitive power generation markets, market-based 
pricing and a wide diversity of market participants. New institutions 
are emerging, such as regional transmission organizations. It remains 
our firm belief that market-oriented restructuring of the electric 
industry remains the best opportunity we have to provide consumer 
benefits and to develop reliable new sources of supply. We must work 
together to make competitive markets work.
    To accomplish the goal of a competitive market-oriented electricity 
industry, EEI strongly supports passage of a comprehensive national 
energy policy that achieves the following objectives: (1) assures a 
stable and diverse supply of fuel sources, consistent with responsible 
environmental goals; (2) facilitates the ability of utilities and other 
generators to build adequate, competitive generation to meet consumer 
demand; (3) enables regional transmission organizations (RTOs) and 
other transmission-owning utilities to expand the Nation's transmission 
grid; (4) enhances energy efficiency and conservation initiatives; and 
(5) helps protect lower income consumers.
    We are pleased, Mr. Chairman, that you have announced your 
intention to ask the Committee to consider comprehensive legislation 
designed to ensure the integrity of our Nation's electricity supply 
infrastructure. While EEI has not had an opportunity to develop a 
detailed position on the White Paper on Electricity Legislation which 
you released last week, Mr. Chairman, I feel safe in saying that most 
utility executives that I know would support your effort to enact a 
comprehensive proposal.
    Let me highlight each of the objectives we believe should form the 
basis for comprehensive legislation.
              (1) assure a stable, diverse supply of fuels
    Maintaining a diversity of fuel supply options is essential for 
affordable and reliable electricity. No individual fuel is capable of 
providing the energy required to meet all of our Nation's electricity 
demands. Policy makers and regulators should work together to maximize 
the development and viability of all our fuel sources. And, they should 
reconcile conflicting energy, environmental and other public policy 
goals.
    Right now natural gas is nearly always the fuel of choice for new 
generation. That is unlikely to change soon. But, gas prices rose to 
painfully high levels in recent months and may do so again. A sustained 
change could affect the economics of the fuel choice for new 
generation.
    We must enable the continued operation of our nuclear fleet by 
completing a permanent spent fuel repository and by renewing the Price-
Anderson Act.
    Given President Bush's rejection of the Kyoto accord, it is 
appropriate for this Committee to reexamine what this Nation's policy 
should be on a going forward basis. Many of us--including myself and my 
company--believe it is time for the federal government to limit 
CO2 in a ``no regrets'' way. I also believe that we need to 
revisit the standards for SO2, NOX, and mercury 
so that decisions on life extensions for existing coal-fired plants can 
be made on a sound economic basis.
        (2) assure adequate, competitive electricity generation
    Rapid economic growth, combined with the increasing electrification 
of our homes, businesses and industries, has strained our energy 
infrastructure. Between 1995 and 1999, U.S. electric demand increased 
by 9.5 percent, while total electricity generation additions rose by 
only 1.6 percent. This has resulted in a decline in utility reserve 
margins.
    The dramatic increase in electricity prices we have seen in 
California is proof positive of what happens when capacity does not 
keep up with demand. Responsible public officials must support the 
siting and construction of generating facilities to ensure reliable and 
adequate electricity supplies; otherwise consumers will pay a very high 
price.
    Congress can facilitate the availability of adequate generation by 
removing federal roadblocks that hinder development of sufficient and 
affordable generation capacity. These barriers include the Public 
Utility Holding Company Act (PUHCA) and the Public Utility Regulatory 
Policies Act (PURPA).
Public Utility Holding Company Act
    Comprehensive national energy legislation should repeal PUHCA. 
PUHCA repeal is included in the Chairman's White Paper, in S. 388, and 
in the Cheney Task Force Report. The Securities and Exchange Commission 
(SEC), which administers PUHCA, also calls for PUHCA repeal. Clearly 
there is a consensus in favor of PUHCA repeal.
    PUHCA is an outmoded 1935 statute that acts as a barrier to 
competition. PUHCA restricts the flow of capital into new generation 
and limits the number of new suppliers in electricity markets by 
prohibiting exempt wholesale generators from selling directly to retail 
consumers. PUHCA also acts as an impediment to the formation of RTOs--a 
problem I will discuss in greater detail later.
Public Utility Regulatory Policies Act
    Comprehensive national energy legislation also should repeal 
PURPA's mandatory purchase obligation, protect existing contracts and 
provide for the recovery of federally mandated (``FERC'') 
jurisdictional PURPA costs. Again, repeal of PURPA's mandatory purchase 
obligation is included in the Chairman's White Paper, in S. 388, and in 
the Cheney Task Force Report. Clearly there is a consensus in favor of 
repealing PURPA's mandatory purchase requirements.
    PURPA has failed to achieve one of its primary goals, to encourage 
the development of renewable energy resources. Even though PURPA was 
enacted 23 years ago, only 2 percent of the electricity generated in 
this country is from non-hydroelectric renewable energy resources.
    PURPA is also anti-competitive and anti-consumer. PURPA's mandatory 
purchase obligation forces utilities to purchase power they may not 
need at above-market prices even when more efficient and less expensive 
generating resources are available. As a result, utility consumers pay 
more than $8 billion a year in above-market electricity prices.
Distributed Generation/Net Metering
    Distributed generation involves the use of small generation 
facilities built at customer locations to serve some or all of a 
consumer's energy needs, which also can deliver surplus power to the 
distribution network. Distributed generation is becoming a viable 
option to meet consumers' electricity needs. This is especially true 
for consumers who can use distributed generation to hedge against price 
volatility, those who place a premium on reliability and power quality 
and for consumers who are in isolated, hard-to-serve areas.
    Recognizing the growing utilization of distributed generation 
facilities, EEI's member companies have been working with proponents of 
distributed generation to reach a compromise on legislation that will 
facilitate the interconnection of distributed generation to the grid 
while addressing issues relating to jurisdiction, backup power 
requirements and cost recovery. Again, the Chairman's White Paper 
recognizes the need to develop interconnection standards for 
distributed generation. We support doing so.
Market Power
    California's electricity crisis has increased the focus on FERC's 
market power authority. I personally believe that FERC already has 
adequate authority to address the market power issues posed by public 
utilities that are already subject to its jurisdiction under the 
Federal Power Act. Under Sections 205 and 206 of the Federal Power Act, 
FERC has the authority to regulate prices for wholesale power and 
transmission services charged by investor-owned utilities, and to order 
refunds when it finds those prices unjust and unreasonable.
    FERC has utilized its existing authority in a series of orders that 
impose just and reasonable standards appropriate to different kinds of 
markets. FERC is actively discussing revisions to its market power 
analysis for its market-based rate standards with regard to 
jurisdictional utilities. However, FERC lacks comparable authority over 
federal, state and municipal utilities, as well as electric 
cooperatives, which are engaged in interstate commerce.
    Government-owned utilities and electric cooperatives argue that the 
rates they charge for wholesale power sales and transmission services 
should not be subject to FERC's ``just and reasonable'' standard 
because they are not-for-profit entities. However, we believe their 
not-for-profit status is irrelevant when they engage in wholesale sales 
and provide interstate transmission for others.
    No solution to any regional price issues can occur as long as a 
significant number of energy suppliers in those markets are outside of 
FERC's jurisdiction. Thus, a comprehensive energy bill should extend 
FERC's ``just and reasonable'' rate standard to all electricity 
suppliers by making all utilities subject to Sections 205 and 206 of 
the Federal Power Act. The Chairman's White Paper includes such a 
proposal.
             (3) expand the electricity transmission system
    Like the Nation's generation capacity, our transmission capacity 
has not expanded to keep pace with demand. The current situation is 
comparable to a country road trying to carry the traffic of an 
interstate highway. All segments of the electricity industry are 
imposing tremendous demands on the transmission system to carry more 
and more transactions across even greater distances. As a result, the 
transmission system is facing significant increases in congestion. 
Between 1999 and 2000, transmission congestion grew by more than 200 
percent. In the first quarter of 2001, transmission congestion was 
already three times the level experienced during the same period in 
2000.
    Annual investment in transmission has been declining by almost $120 
million a year for the past 25 years. Transmission investment in 1999 
was less than half of what it had been 20 years earlier. Maintaining 
transmission adequacy at current levels would require about $56 billion 
in investment during the present decade. The Electric Power Research 
Institute (``EPRI'') estimates it will cost up to $30 billion to bring 
the western regional transmission system back to a stable condition and 
$1 billion to $3 billion a year after that to maintain this condition 
in the face of continued growth.
    How do we ensure sufficient transmission capacity to help assure 
the success of competitive electricity markets? We believe the 
following proposals should be included in a comprehensive national 
energy policy.
Transmission Siting Authority
    EEI supports granting FERC a backstop role to help site new 
transmission lines when states are unable or unwilling to act on new 
transmission line applications. The Cheney Task Force Report recommends 
developing legislation to grant FERC siting authority for new 
transmission. S. 2098, introduced by Senator Murkowski and Senator 
Landrieu in the 106th Congress, included FERC transmission siting 
authority if a state failed to act on an application within a year. 
Such an approach would give states the first opportunity to act on 
transmission siting applications. EEI would not favor the portion of 
the transmission siting proposal contained in the Chairman's White 
Paper that provides for regional compacts because it could create yet 
another bureaucracy governing our industry. RTOs are emerging as 
regional planning entities. Establishing yet another regional 
bureaucracy would be counter-productive.
    It made sense in 1935 when the Federal Power Act was adopted to 
leave transmission siting authority with the states, since transmission 
lines were generally local in nature. Now, however, our transmission 
system is being asked move large amounts of energy across long 
distances and across state lines. Under these circumstances, it could 
be increasingly difficult to obtain the necessary siting permits from 
affected states, which may receive few direct benefits and thus have 
little incentive to approve construction.
    Under this proposal, FERC would be given the authority to issue a 
certificate of public convenience and necessity for a transmission 
line. Eminent domain authority will rest with the holder of the 
certificate. Electric utilities that are issued such certificates by 
the states also may exercise the power of eminent domain if they are 
unable to acquire the rights-of-way through other means.
    Federal electric utilities that own transmission, including the 
Tennessee Valley Authority, Bonneville Power Administration and the 
other power marketing administrations, already have such authority. In 
addition, FERC has this authority for transmission for hydroelectric 
facilities.
Innovative Pricing
    Current returns on transmission are too low to attract the huge 
amounts of capital needed to fund investments in transmission 
expansion. A comprehensive national energy policy should include 
direction to FERC to utilize innovative transmission pricing 
incentives, including rates of return more appropriate with the higher 
levels of investor risk in a restructured electricity industry. These 
incentives must be available to all transmission owners; not just to 
owners who have made transmission improvements and not just to RTO 
operators--which is the current FERC policy. The Cheney Task Force 
Report called for DOE to work with FERC to encourage the use of 
incentive ratemaking proposals.
Reliability
    As NERC testified recently before this Committee, it is seeing 
increasing violations of its reliability rules. A voluntary reliability 
regime lacks the enforcement authority needed in a competitive 
electricity market. A comprehensive national energy policy should 
include provisions to establish a self-regulating reliability 
organization, with FERC oversight, to develop and enforce reliability 
rules and standards that are binding on all market participants. We are 
extremely pleased that the Chairman's White Paper, S. 388, and S. 597 
include these provisions and that the Cheney Task Force Report calls 
for such legislation. This Committee approved and the Senate passed a 
similar bill last year.
PUHCA
    As I mentioned earlier, PUHCA also acts as a barrier to the 
formation of interstate independent transmission companies. 
Shareholder-owned utilities and FERC are working quickly to meet FERC's 
goal, established in Order No. 2000, of having RTOs operational by the 
end of 2001.
    PUHCA is an impediment to this effort. An RTO could be required to 
become a registered holding company and subject to PUHCA restrictions 
and additional regulation. As our companies attempt to raise financing 
for these newly formed RTOs, they are discovering that PUHCA's 
restrictions are a significant concern to Wall Street firms and a 
barrier to investment.
Federal Lands Issues
    A comprehensive national energy policy should provide for the 
coordination of transmission siting activities among multiple federal 
land management agencies. FERC should be designated as the lead agency 
for any environmental analysis necessary to site transmission lines. A 
FERC decision to grant a transmission line a certificate of public 
convenience and necessity should be conclusive as to the need for the 
facility for the purposes of any other permits that might be necessary 
to build the line. A comprehensive national energy policy also should 
include provisions to help reduce delays associated with transmission 
permit processing and approval by requiring federal land management 
agencies to develop and implement uniform regulations and practices to 
utilize qualified third-party contractors to assist in these 
responsibilities.
Transmission Tax Issues
    A number of tax law changes are critical to expanding our 
transmission infrastructure. Chairman Bingaman's White Paper correctly 
highlights the need for changes to the tax code to expand our 
transmission infrastructure. Also, we commend Senator Murkowski for 
including in S. 389 the tax compromise agreement reached between EEI, 
LPPC and APPA last year. This agreement would (1) grant ``private use'' 
relief for government-owned utilities that provide open access to their 
transmission systems, (2) grant tax relief for the sale or spin-off of 
transmission facilities to form FERC-approved RTOs or independent 
transmission companies that are part of a FERC-approved RTO, (3) allow 
continued contributions to nuclear decommissioning trust funds in a 
restructured electricity market and (4) remove the tax on contributions 
in aid of construction.
    We also support the provisions included in both S. 389 and S. 596 
that would shorten the depreciable life for transmission facilities. 
Chairman Bingaman's White Paper addresses these issues as well, though 
the tax relief is limited to spinoffs of transmission systems; it 
should cover sales as well.
             (4) enhance energy efficiency and conservation
    Wise energy use and improved energy efficiency and conservation can 
reduce demand for energy and can help lower consumers' energy bills. 
Today, the U.S. economy uses 42 percent less energy to produce one 
dollar of gross domestic product when compared to 1970 energy intensity 
levels. However, there still is obvious room for improvement, beginning 
with public sector facilities.
    I would like to call the Committee's attention to the conservation 
and efficiency provisions in legislation passed in the last two weeks 
by the House Energy and Commerce and Ways and Means Committees. They 
have broad support in both the utility and conservation/efficiency 
communities.
    New metering technologies that enable consumers to respond to 
variable energy prices can help reduce energy costs and consumption. 
Utilities are working closely with their customers, particularly larger 
energy users, to install real-time meters so consumers will know when 
to reduce or modify their energy usage to help reduce peak demands for 
electricity. We also support tax incentives for real-time metering, as 
contained in H.R. 2511, the Energy Tax Policy Act of 2001.
    The federal government is the largest single user of electricity in 
the world. Utilities work closely with their federal customers to 
improve their energy efficiency. S. 388 includes provisions 
specifically intended to help achieve this goal. The Cheney Task Force 
Report also calls for reducing energy use in federal facilities. EEI 
believes that any legislation to promote greater energy efficiency in 
federal facilities should ensure the continued viability of utility 
incentive programs as well as Energy Savings Performance Contracts 
(ESPCs). Section 605 of S. 388 would continue this policy as well as 
enhance it.
    We support including provisions in a comprehensive energy bill to 
establish a federal grants program to local school districts to improve 
energy efficiency of school buildings. Both S. 388 and S. 597 contain 
such provisions.
    We support the inclusion of provisions to expand and extend the 
authorization for state energy conservation programs, as called for in 
S. 388. In addition, we support federal funding for enhanced research 
and development programs, as outlined in S. 597. And, while tax issues 
fall outside of this Committee's jurisdiction, we also support tax 
incentives to purchase energy efficient homes, appliances and vehicles.
    The Cheney Task Force Report calls for increasing public awareness 
of Energy Star-labeled products and for expanding the scope of 
appliance standards programs, where appropriate. We support both of 
these initiatives.
    Many of these issues are included in the Chairman's White Paper; we 
would be pleased to work with the Committee staff to help develop 
specific proposals for the Committee's consideration.
                   (5) protect lower income consumers
    We believe comprehensive energy legislation should expand and 
increase funding for the Low Income Home Energy Assistance Program 
(LIHEAP). We are pleased that S. 388 and S. 352, introduced by Chairman 
Bingaman, call for increased funding for the LIHEAP program. In 
addition, the Chairman's White Paper and the Cheney Task Force Report 
both call for a higher funding level for LIHEAP.
    Similarly, funding for the low-income weatherization assistance 
program should be increased to assist low-income families with lowering 
their energy bills through increased energy efficiency and 
conservation. Again, S. 388, S. 352, the Chairman's White Paper, and 
the Cheney Task Force Report support additional financial support for 
this program.
                               conclusion
    Our country needs a comprehensive national energy policy. The 
bedrock principle upon which the policy should be based is the 
encouragement of competitive electricity markets. Action is needed to 
ensure our country has affordable and reliable electricity for years to 
come. Congress has been debating electricity issues for six years. In 
the meantime our Nation's electricity infrastructure has not kept pace 
with the growing demands of our new economy. California's woes have 
clearly sounded an alarm bell that must be heeded by the Congress. The 
time to act is now. We look forward to working with this Committee to 
achieve these objectives.
    I would be pleased to answer any questions the Committee may have.

    The Chairman. Thank you very much for that statement.
    Mr. Thilly, why don't you go ahead.

  STATEMENT OF ROY THILLY, CHIEF EXECUTIVE OFFICER, WISCONSIN 
  PUBLIC POWER, INC., ON BEHALF OF THE AMERICAN PUBLIC POWER 
                          ASSOCIATION

    Mr. Thilly. Mr. Chairman, Senator Murkowski, members of the 
committee, I'd like to thank you for the opportunity to testify 
today.
    I'm here on behalf of the America Public Power Association, 
which represents the interest of the Nation's 2,000 public 
power utilities. We have submitted formal testimony that 
addresses the issues point by point.
    In summary, we believe the White Paper is excellent. And 
Public Power would like very much to work with the committee 
and its staff to turn the ideas in the White Paper into 
legislation. We are very pleased that the White Paper 
recognizes that public power systems are different than many 
other players in the industry, and seeks to achieve the paper's 
objectives without unnecessarily or unduly interfering with the 
local control of community owned systems. Any extension of 
Federal jurisdiction to local public power systems is a very 
sensitive matter.
    In terms of differences, I note that the White Paper states 
that the regulatory compact; that is, the obligation to serve; 
has been severed in States that have adopted retail competition 
programs, and also that utilities are no longer building 
generation as utilities. And I agree with that in general, but 
it's important to recognize that Public Power's compact with 
its communities and with its customers is and will remain very 
much intact. Public power systems, regardless of State 
deregulation programs, will continue to provide highly reliable 
electric service on a cost basis, not whatever the market will 
bear, to the residents and the businesses of their communities 
over the long term. That's why we're here.
    Also, public power systems, a number have commenced 
construction or announced construction of new generation 
dedicated to their customers. We strongly support the 
development of a vigorously competitive wholesale market 
because we believe it will benefit all customers, and that 
vigorous competition at wholesale is obviously essential for 
retail competition programs to work. But I would caution the 
committee to recognize that the competitive model will not work 
today in some places, and clearly will not result in just and 
reasonable prices because we lack the transmission 
infrastructure that's necessary for the market to work. 
Deregulation in a highly constrained market would be a 
disaster.
    In my State, we are highly constrained and we have a highly 
concentrated market. Our transmission import capability is down 
to about 15 percent. California, I think, has 30 percent import 
capability. One entity controls 54 percent of our generation. I 
think in California the largest generator controls about 11 
percent of the generation, and yet there are market power 
problems. The consensus within Wisconsin, I think across the 
board, is that deregulation in this circumstance today would 
result in higher prices, significantly higher prices. And this 
is not a unique situation.
    Unfortunately, transmission is becoming more and more 
constrained across the country. This week there were firm 
transmission curtailments in Iowa. I don't think there have 
ever been firm curtailments in Iowa in the past. And we have 
seen more and more curtailments in our State. The weakness of 
the transmission system is a significant threat to the 
objective to achieve robust, competitive markets.
    And the White Paper correctly focuses on transmission as 
the key. We need strong, independent regional transmission 
organizations, and Congress needs to affirm FERC's authority in 
this regard or we'll be in litigation indefinitely in trying to 
create those organizations. But we also need to build, and we 
need to build a significant amount of new transmission.
    The APPA supports Federal eminent domain authority, but we 
also recognize the real interest, important interest of States 
in siting. So I think the idea of enabling the States to come 
together in regional compacts to jointly approve projects that 
are in RTO plans, regional plans, based upon regional need and 
reliability, is very important and very--an excellent idea. 
There needs to be a Federal backstop, however, that if the 
States don't pick up the ball in this regard regionally that 
the FERC will have siting authority.
    I was--we were very pleased to see that the White Paper 
does not advocate incentive transmission rates, as were 
mentioned earlier today. There is, of course, a chorus from 
transmission owners on the need for incentives, and I've never 
met a utility that thought its return was adequate. But the 
problem is not really--the problem is the disincentive for a 
vertically integrated system to build transmission.
    A weak transmission system protects generation. In most 
vertically integrated systems, major investment is in 
generation. Building new transmission opens that generation up 
to competition. And transmission's got to compete in that 
environment with other investments that don't have that down 
side, and I think it's lost consistently in the last 10 years. 
Trying to force construction through incentives in this 
circumstance is a no win proposition for consumers.
    In Wisconsin, companies have now divested their 
transmission into a for profit transco that is a single purpose 
company. It has an obligation to build for a robust market. 
There is no internal competition for capital, and the only way 
for this company to grow is to build additional facilities. I 
think these incentives will provide much better planning and a 
much more robust construction program. And I would urge you to 
look at RTOs in terms of the authority to build and to bid out 
construction to passive investors so we put competitive 
pressure on the cost of new transmission.
    Finally, the other key issue is the Public Utility Holding 
Company Act repeal. I would simply caution the committee there 
that any repeal will clearly lead to much more consolidation in 
the industry and of complex affiliate transactions, and 
consolidation will threaten the objective to achieve 
competitive markets. So we need to be very, very careful there. 
We need to extend the authority to include acquisitions of 
generation as well as mergers of holding companies.
    In closing, I'd like to thank Senator Murkowski personally 
for his very important leadership in helping public power and 
private power forge a historic compromise on tax issues. Thank 
you.
    [The prepared statement of Mr. Thilly follows:]
      Prepared Statement of Roy Thilly, Chief Executive Officer, 
                      Wisconsin Public Power, Inc.
    Thank you, Chairman Bingaman and Ranking Member Murkowski. On 
behalf of the American Public Power Association, I am pleased to appear 
today to discuss electricity restructuring.
    I am the Chief Executive Officer of Wisconsin Public Power, Inc., 
and past Chair of the APPA Board of Directors from June 1999 through 
June 2000. APPA represents the interests of more than 2000 publicly 
owned electric utility systems across the country, serving about 40 
million customers. APPA member utilities include state public power 
agencies and municipal electric utilities that serve some of the 
nation's largest cities. However, the vast majority of these publicly 
owned electric utilities serve small and medium-sized communities in 49 
states, all but Hawaii. In fact, 75 percent of our members are located 
in cities with populations of 10,000 people or less.
    Public power systems' first and only purpose is to provide 
reliable, efficient service to their local customers at the lowest 
possible cost. Public power exists for a purpose, not a profit. Like 
hospitals, public schools, police and fire departments, and publicly 
owned water and waste water utilities, public power systems are locally 
created governmental institutions that address a basic community need: 
they operate to provide an essential public service, reliably and 
efficiently at a reasonable, not-for-profit price. Publicly owned 
utilities also have an obligation to serve the electricity needs of 
their customers. And, because they are governed democratically through 
their state and local government structures, public power systems 
operate in the sunshine, subject to open meeting laws, public record 
laws and conflict of interest rules. Most, especially the smaller 
systems, are governed by an elected city council, while an elected or 
appointed board independently governs others. Democratically governed, 
not-for-profit, obligation to serve--the importance of these unique 
characteristics has been highlighted by the recent events in the West. 
Under California's restructuring law, public power was able to retain 
its obligation to plan for and serve the electricity needs of our 
consumer-owners. As a consequence, municipal utilities retained their 
power plants dedicated to serve native load customers, and they engaged 
in long-range planning to satisfy demands that exceeded their own 
generation resources. This gave public power utilities the ability to 
mitigate market risk for their customer-owners.
    Understanding the underlying structure and mission of public power 
is essential in crafting balanced electricity legislation that will 
maintain industry diversity. This diversity has helped many public 
power communities in the West endure the electricity crisis with bumps 
and bruises rather than broken bones. We believe the entire nation has 
been well served by this diverse mix of publicly, privately and 
cooperatively owned utilities combined with federal institutions 
including the Tennessee Valley Authority and the federal power 
marketing administrations. In restructuring our industry, every effort 
should be made to ensure the preservation of this diversity.
    wholesale competition first--the role of the federal government
    The rush to restructure the electric utility industry in several 
states has truly put the cart before the horse. Retail choice programs 
adopted by states and localities cannot succeed without truly 
competitive wholesale markets. (This is certainly one of many lessons 
learned from what has happened in California.) The fundamental 
characteristics of a competitive market include, among other things: 
access of buyers to numerous sellers; mitigation of market power; ease 
of entry into the market for new participants; a sufficient number of 
participants to impose discipline on all; and transparency of 
information.
    APPA has supported legislative efforts to make the wholesale 
electric market more competitive for decades. APPA was one of the major 
supporters of the transmission access provisions of the Energy Policy 
Act of 1992. On numerous occasions over the past few years, we have 
testified in support of additional legislation to ensure that the 
promises of wholesale competition become reality. In our view, 
comprehensive federal restructuring legislation must, at a minimum, 
achieve the following objectives:

   Promote more effective wholesale competition by providing 
        sufficient federal authority to ensure non-discriminatory 
        access to regional transmission facilities at fair and 
        comparable rates.
   Promote the maintenance and expansion of the nation's 
        transmission facilities including, where necessary and subject 
        to appropriate limitations, the exercise of federal eminent 
        domain authority.
   Establish policies to maintain the reliability of the 
        nation's electricity industry through competitively neutral 
        means.
   Eliminate market power in generation and transmission by: 1) 
        Providing for truly neutral management of the nation's 
        transmission system--allowing for federal oversight to ensure 
        RTO development, independence and effectiveness, 2) Clearly 
        articulating FERC's role in monitoring the wholesale market, 
        directing FERC to investigate and mitigate market power, and 
        enhancing its power to accomplish this difficult task, and; 3) 
        Strengthening FERC's merger review process to allow for 
        consideration of a proposed merger's impact on the development 
        of competition.
   Eliminate the tax-related impediments to competition for 
        municipal utilities imposed by the private use restrictions on 
        tax-exempt bonds while retaining local control over municipal 
        decisions.
   Consider changes to PUHCA only in the context of providing 
        reasonable substitutes to protect consumers and promote 
        competition.
         appa comments on chairman bingaman's ``white paper on 
                       electricity legislation''
    APPA believes that Chairman Bingaman's White Paper memorandum of 
July 20, 2001, represents an excellent starting point for industry 
restructuring legislation. Many of the principles are absolutely 
essential to the creation of truly competitive wholesale markets. The 
remainder of my testimony will focus on these topics following, for the 
most part, in the order in which they are delineated in the white 
paper. I will reference existing legislation as appropriate.
                       transmission jurisdiction
    Local control is one of the most fundamental aspects of public 
power. However, it is difficult to envision effective wholesale 
markets, which, as noted, APPA strongly supports, without some degree 
of federal involvement in public power transmission that is part of the 
regional grid. APPA members have struggled with the problem of 
balancing the retention of local control with the recognition that 
transmission is a matter of interstate commerce.
    The White Paper recommends that ``FERC [transmission] jurisdiction 
should be extended to public, cooperative and federal utilities. Such 
jurisdiction should not extend to setting transmission rates for these 
entities, but should require that rates set by these transmitting 
utilities should be comparable to those that the public power utilities 
charge to themselves.'' While publicly owned utilities with 
transmission facilities are not anxious to be subjected to FERC 
jurisdiction, the limited jurisdiction contemplated in this portion of 
the White Paper is an acceptable compromise and is consistent with a 
resolution adopted by APPA in 1998.
    The White Paper states that ``[l]egislation should affirm FERC's 
authority to order utilities to join regional transmission 
organizations.'' Presumably, this authority would extend to all 
``transmitting'' utilities regardless of ownership. For the most part, 
publicly owned utilities have been anxious to participate in RTOs that 
are consistent with the specific criteria set forth by FERC in Order 
No. 888. In fact, FERC commissioners and various FERC orders have 
specifically addressed public power participation, not to encourage 
public power systems to join but rather to encourage private utilities 
to let them join on fair and reasonable terms.
    FERC has indicated that it believes it currently has the authority 
to order jurisdictional utilities to participate in RTOs, and we agree 
that Congress should affirm this authority. FERC should be required to 
condition market-based pricing for jurisdictional utilities on becoming 
part of a large, regional RTO.
    It is not clear from the White Paper whether FERC authority to 
order RTO participation would apply only to jurisdictional utilities, 
or whether this would extend to publicly owned utilities as well. If 
the latter, then deference should be provided to publicly owned 
utilities, similar to the restraints on FERC jurisdiction over 
transmission noted above. Specifically, APPA recommends that FERC 
authority to order publicly owned utilities to join a regional 
transmission organization should be limited to situations in which FERC 
finds that (1) the publicly owned transmission owner has (a) engaged in 
undue discrimination in the provision of transmission services, or (b) 
abused its control over transmission so as to disadvantage competitors; 
and (2) that the FERC open access transmission tariff has not and is 
not likely to remedy the problem. In such cases, APPA agrees FERC 
should be authorized to require the publicly owned utility at issue to 
surrender control of its transmission to an independent regional 
transmission organization that meets FERC RTO criteria. We also believe 
Congress, in clarifying FERC's authority to order utilities to join 
RTOs, should take into consideration the cost consequences of such 
action. Clearly, RTOs should decrease, not increase, total transmission 
costs. Cost shifts and increases have been a very significant problem 
for public power systems in California. Obviously, it would be 
imprudent for a public power system, which has financed transmission 
with public funds, to join an RTO that will significantly increase the 
cost of power to its customers. Some cost shifting may be inevitable, 
but any FERC action in this area should be premised on the principle 
that adverse cost consequences for utilities ordered to join RTOs 
should be held to the minimum possible, and this is particularly 
important with respect to public power systems that have constructed 
their facilities with public funds.
    The White Paper also recommends clarification of the Federal Power 
Act to ensure that ``FERC has jurisdiction over all transmission, 
whether bundled or unbundled. Once jurisdiction has been clarified, the 
Commission can use its existing legal authority [to] determine which 
facilities are transmission in interstate commerce and which are 
distribution facilities and thus state jurisdictional.'' (We assume 
that ``state jurisdictional'' includes ``local jurisdictional'' in the 
case of publicly owned utilities.) In some respects, this statement is 
similar to H.R. 2944, legislation reported from the House Subcommittee 
on Energy and Power in the last Congress. That measure authorized FERC 
to determine whether particular facilities were transmission or 
distribution based on function. We supported that aspect of H.R. 2944. 
We disagreed with another aspect of the same section of H.R. 2944 
because, while it attempted to establish a bright line between federal 
and state regulatory jurisdiction, it compromised FERC jurisdiction by 
failing to allow sufficient FERC regulation over the transmission 
component of bundled retail sales. We support the clarification of 
interconnection rules suggested in the White Paper including a 
sufficient reservation of local authority to address system-specific 
issues. Not addressed here, however, is the issue of who bears the cost 
of interconnection. We are concerned over a possible trend to shift 
onto the bulk power grid costs that should be borne by generation 
owners. We do not believe it is appropriate to force all users of the 
interstate grid to assume interconnection costs driven by the decisions 
of individual generators.
    It is not clear whether the provisions in the White Paper would 
apply to utilities within Electric Reliability Council of Texas 
(ERCOT). FERC does have limited jurisdiction over utilities in ERCOT 
under section 211. The need for further expansion of FERC jurisdiction 
over ERCOT utilities is not readily apparent, at least until ERCOT is 
interconnected through AC facilities with other regions. APPA's 
policies with respect to FERC jurisdiction have generally been adopted 
with the understanding that they would not apply to ERCOT unless or 
until public utilities in that region become jurisdictional through 
interconnections.
                              reliability
    APPA urges the Committee to require mandatory involvement by all 
industry participants in a national compliance program to ensure 
continued reliability of the high voltage electric transmission grid. 
The Administration's National Energy Policy report also calls for 
enactment of mandatory reliability standards by an independent body and 
overseen by FERC to ``address the problems created by increased demands 
on the transmission system that have resulted from changes within the 
industry brought on by wholesale competition.'' In their respective 
energy policy bills, Chairman Bingaman and Ranking Member Murkowski 
have included reliability language supported by APPA and other industry 
stakeholders.
    Even though the United States has the most reliable electric system 
in the world, the crisis in the West has demonstrated the delicate 
balance between reliability and the markets within which the electric 
grid must operate. Consequently, great care needs to be taken to ensure 
that the current level of reliability is not sacrificed in any 
restructuring of the industry. As the industry has become more 
competitive, more participants have been executing an increasingly 
larger number of transactions every day. The focus of most of these 
transactions is on short-term costs rather than system stability. While 
the current voluntary system of compliance with reliability standards 
worked reasonably well in the regulated environment in which the 
industry previously operated, it will not continue to provide the 
necessary safeguards in a competitive market.
    Currently, reliability standards are established and monitored by 
the North American Electric Reliability Council (NERC), which is a non-
profit organization that monitors the electric utility industry's 
voluntary compliance with policies, standards, principles, and guides, 
and assesses the future reliability of the bulk electric systems. The 
NERC Board of Trustees has approved and begun the transformation of 
NERC to the North American Electric Reliability Organization (NAERO), 
in which participation and adherence to standards and practices would 
be mandatory. Federal legislation is required to give NAERO the 
enforcement tools necessary to ensure compliance and achieve a system 
that properly balances reliability with market pressures and decisions. 
An industry-wide effort to forge a compromise on such legislation 
resulted in the language being advanced by the Chairman and Ranking 
Member and by Members in the House.
    APPA has worked actively on the NERC consensus proposal, and we 
continue to support it. However, we could also support simplifying that 
proposal so long as the basic tenets are adhered to. We do have 
concerns about reliability being delegated exclusively to RTOs, some of 
which may be for-profit entities, that would not only set the rules, 
but must comply with them.
    An item of particular importance to APPA in the consensus 
reliability legislation is a sentence developed during negotiations in 
late 2000. The sentence would clarify that FERC is granted oversight 
authority over public power systems in the regulatory title only for 
the purposes of enforcement of reliability standards. Public power 
systems support oversight with regard to reliability standards but this 
provision should not be used by FERC to impose additional regulation at 
a later date. Through an oversight, this sentence was not included in 
reliability legislation pending in Congress. We would appreciate it if 
the sentence were added to your draft bill.
      rates and market power, market transparency rules and puhca
    We have combined three different areas of the White Paper to 
address in this portion of our testimony because, from our perspective, 
they are interrelated and all must be addressed to achieve the goal of 
workably competitive wholesale markets. Here again, we believe there 
are some extremely important lessons to be learned from California. 
These include:

   Market structure is critical to market performance.
   Market power is a very real problem that must be addressed.
   Markets need rules and market monitors to enforce them.
   Market monitors need data.

    There are many aspects of the White Paper that we endorse. We agree 
that, where feasible, ``legislation should require the FERC to promote 
competitive markets.'' From our perspective, however, the paramount 
role of a regulatory agency must be to protect the public interest and 
the interests of consumers. Competition is a means to this end, not the 
end itself. In California and throughout the West over the last year, 
we believe FERC was so focused on promoting competition that it 
completely lost sight of its obligation to permit only just and 
reasonable wholesale rates, and its responsibility to ensure consumers 
were protected from abuses of market power. We hope that, in clarifying 
FERC's mission, Congress will provide that, first and foremost, FERC 
must protect the public interest and the interests of consumers.
    We support the proposition in the White Paper that, if markets are 
allowed to set rates, FERC must ensure that such markets are workably 
competitive. This begs the question, however, with respect to the 
methodology used to make such a determination, and also doesn't specify 
how rates should be established in markets that are not competitive. 
APPA believes market based rates for jurisdictional utilities should 
only be approved on a finding that the applicant will not possess 
market power and that effective and sustainable competition will exist 
in that market. The analysis must include an examination not only of 
the resources available to individual applicants and whether such 
assets could be used to set the market clearing price, but also of the 
effect of transmission constraints and how those assets fit into the 
broader market structure. Location-specific constraints must be taken 
into account, as should requirements for grid reliability. Further, and 
frequently ignored in traditional market analysis, is the time-
sensitive nature of electricity. In some markets, an entity controlling 
a very small amount of generation can exercise market power.
    FERC should be given other ``tools'' in addition to those it 
already has to address market power problems. It should, for example, 
require jurisdictional utilities to submit market power mitigation 
plans for approval or modification. Its merger review process should be 
revised to require that merger approval be granted on an affirmative 
finding that the proposed merger is in the public interest as opposed 
to the current standard which only requires that the merger be 
consistent with the public interest. In reviewing mergers, FERC should 
be required to consider whether they will promote effective wholesale 
competition, or undermine it. FERC should also have the authority to 
require shared access to essential assets, including reserve/risk 
sharing mechanisms, on a non-discriminatory basis and with just and 
reasonable rates. Further, FERC should be able to preserve the 
integrity of the market through preliminary relief in order to prevent 
irreparable harm pending issuance of a final order.
    The White Paper states that ``all sellers (which we assume includes 
public power sellers) into such [competitive] markets should be clearly 
subject to market rules and market mitigation measures ordered by the 
Commission. It should be made clear that normal transactions, not into 
market-based rate setting institutions, by public power entities should 
continue to be non-jurisdictional.'' As consumer-owned utilities, 
APPA's members certainly believe that no market participant should be 
able to abuse market power to the detriment of end users. Until the 
debacle in the West, application of this principle to public power 
systems in wholesale markets has not been an issue, and therefore this 
specific issue has not been addressed by APPA. However, publicly owned 
utilities in California and elsewhere in the West have stated that they 
would voluntarily abide by market rules applicable to jurisdictional 
utilities. The exclusion for ``normal'' transactions is clearly 
appropriate, but the extent to which sales by public power systems into 
market institutions would be subject to FERC oversight is unclear and 
could be problematic. APPA is confident that, if FERC clearly defines 
in advance the rules applicable to jurisdictional utilities who are 
responsible for the vast majority of all such transactions, public 
power systems will live within that framework without the need for any 
expansion of FERC jurisdiction.
    As this particular element of the White Paper is given additional 
consideration, it is important for members of the Committee to keep in 
mind that publicly owned utilities are units of local government. They 
have their own unique set of legal requirements imposed by state and 
local laws as well as under contracts or, more specifically, bond 
covenants. Accounting principles, that apply to governmental entities 
are not the same as those that apply to private, for-profit 
corporations. Power sold, whether through bi-lateral contracts or into 
the spot market, is publicly owned property. Public power systems have 
a fiduciary responsibility to ensure that they and their customer-
owners receive reasonable compensation.
    The White Paper notes that ``legislation must ensure transparent 
information on market transactions and should grant clear authority to 
the Energy Information Administration and the FERC to collect and 
publish appropriate data, while protecting proprietary information.'' 
APPA agrees and strongly supports this proposition with the important 
clarification that ``proprietary information'' warranting protection 
must be narrowly circumscribed. APPA would, in fact, encourage that 
congressional direction be absolutely clear that data must be collected 
and made public. Claims of confidentiality of data based on commercial 
sensitivity are already being made to limit data collection or 
dissemination. There is a danger that commercial sensitivity arguments 
will completely undermine the legitimate right of the public to this 
data. Transparency of market information is a fundamental prerequisite 
of competitive markets and necessary to protect consumers. (We would 
note that disclosure is required under the security laws, and such 
disclosure has had a salutary effect on the markets. If the SEC's rules 
did not exist today, almost every company that is subject to SEC 
regulation would claim that much of the information they are required 
to disclose today is in fact proprietary.) Congress should be very 
clear in telling EIA and FERC that close calls should be resolved in 
favor of transparency, not secrecy.
    We believe consideration of PUHCA repeal should logically be 
undertaken within the context of the discussion of market power. This 
is recognized within the White Paper, which states that PUHCA should be 
repealed ``only if FERC is given enhanced authority to address market 
power problems, and both FERC and the states are given greater access 
to the books and records of holding companies to prevent affiliate 
abuses.''
    While these are appropriate pre-conditions to PUHCA repeal, APPA 
does not believe they are sufficient.
    In addition to the recommendations regarding authority for FERC to 
address market power issues, APPA would recommend specific authority 
for FERC to review mergers of utility holding companies as well as the 
disposition of generation assets by jurisdictional utilities and 
acquisition of natural gas companies. The FERC lacks the clear 
authority to review the former. While we believe it has the authority 
and responsibility to review the latter, it has recently declined to do 
so. This action has come at precisely the same time that utilities and 
utility holding companies are swapping assets like trading cards. A 
utility with a significant presence in generation in one region sells 
those assets, then buys similar assets in another region. Such 
transactions can clearly lead to the concentration of significant 
amounts of generation in specific geographic markets, yet no one is 
examining what consequences these asset trades will have on 
competition.
    FERC and state commission access to books and records of holding 
companies to prevent affiliate abuses is an inadequate substitute for 
the protections provided consumers, state commissions and others under 
PUHCA. As a practical matter, many state commissions don't have the 
resources to examine the books and records of today's extremely complex 
utility holding companies and all of their subsidiary companies. And 
even if they do, it isn't clear what remedies they can impose when the 
keeper of the funds--the parent holding company--may exist outside of 
the jurisdiction of specific state utility commission.
    Advocates of PUHCA repeal have argued that the statute is no longer 
necessary, that it is redundant with other statutes, and, incredibly, 
that it is an impediment to competition. S. 206, the Public Utility 
Holding Company Act of 2001, reported out of the Senate Banking 
Committee earlier this year, provides, in the statement of findings and 
purposes, the following:

   Developments since 1935, including changes in other 
        regulation and in the electric and gas industries, have called 
        into question the continued relevance of the model of 
        regulation established by that Act.
   Limited Federal regulation is necessary to supplement the 
        work of State commissions for the continued rate protection of 
        electric and gas utility customers.

    The Attorney General of California strongly disagrees with these 
two statements. Earlier this month, he filed a petition with the 
Securities and Exchange Commission (the agency with responsibility to 
enforce PUHCA) for review and revocation of PG&E Corporation's 
exemption from PUHCA. As stated in the petition ``PG&E Co. [the 
electric operating utility] has now filed for bankruptcy after 
upstreaming billions of dollars from the utility to the utility holding 
company--the precise type of behavior identified in PUHCA as a primary 
basis for the law.'' He concludes his petition as follows: ``All of the 
primary evils addressed by PUHCA are relevant to PG&E Corp. [the 
utility holding company], including movement of capital and assets from 
its utilities to the holding company and affiliated, wholly-owned 
subsidiaries as well as massive investments in out-of-state non-utility 
activities and properties. The Commission has the chance, indeed the 
obligation, to address potential holding company abuses by PG&E Corp. 
before additional damage is done. The current crisis in California has 
been a catalyst for closer scrutiny of federal and state regulation of 
the utility industry. This crisis highlights the fact that Commission 
enforcement of PUHCA is still needed.''
    Clearly, times have changed since PUHCA was enacted in 1935. 
Utilities have changed. Human nature hasn't. The abusive practices that 
gave rise to PUHCA 65 years ago have been more difficult to accomplish, 
because of the existence of PUHCA's restraint on corporate structure 
and behavior, but have not disappeared entirely. It may be that some 
elements of PUHCA need to be revised. But the opportunity for the 
California Attorney General, and perhaps others similarly situated in 
the future, to have a forum at FERC or the SEC in which they can 
examine the financial transactions within a monstrously complex 
interstate holding company structure to determine whether electric 
consumers have been abused, must not be eliminated.
                      regional planning and siting
    APPA supports federal eminent domain authority to form a more 
cohesive and functional national approach to the expansion of the 
transmission grid. The more certainty that exists in transmission, the 
better our members are able to serve their customers. However, 
permitting private parties to use this extraordinary tool of government 
should be undertaken very carefully, permitting the maximum possible 
involvement of state and local governments. It could, for example, be a 
last resort remedy. It should also be exercised in a manner that 
ensures the optimal expansion of the grid, which will require regional 
transmission planning. Finally, facilities constructed when this 
authority is exercised must be dedicated to serve the general public 
interest, including the lowest reasonable rates for transmission 
service. We believe that the White Paper's suggestion that regional 
siting compacts be authorized and encouraged is definitely worth 
pursuing. These compacts should recognize RTO orders and regional 
needs. FERC should be available as a backstop if states do not deal 
with siting issues jointly on a regional-needs basis.
                            other provisions
    APPA offers the following comments with respect to the ``other 
provisions'' in the White Paper.
    1) Repeal PURPA's mandatory purchase requirements with certain 
replacements--interconnection standards for distributed generation. 
APPA does not oppose the repeal of PURPA's purchase requirements, so 
long as stranded cost recovery is addressed using FERC's current 
process. APPA strongly supports increased use of distributed resources 
and efforts at the federal level to promote such use. We therefore 
encourage the committee to pursue legislative language on transmission 
and distribution interconnection policies that provide FERC the 
authority to order the use of standardized technical interconnections 
while at the same time preserving local authority to require any 
additional measures necessary for system reliability, safety, or other 
factors deemed to be in the public interest. A positive step has been 
taken with the introduction of S. 933 by Senator Jeffords, which for 
the first time addresses the concern of local utilities.
    2) Incentives for renewable resources. In preparing its recently-
published report on public power's renewable profile, entitled ``Shades 
of Green,'' (copies of which were previously sent to all members of 
this Committee) , APPA discovered that public power systems have a 
higher proportion of renewable, non-hydropower generation than other 
segments of the industry--but we still have more work to do. APPA 
therefore applauds the idea of creating market-based incentives for all 
segments of the industry. I'll discuss comparable incentives for public 
power systems in the section on tax provisions below.
    3) Public Benefits Fund. APPA believes such programs are better 
suited to state and local initiatives as opposed to federal 
legislation.
    4) Tax Provisions. An area of great importance to public power 
systems is their treatment in the tax code. Tax exempt bonds issued to 
finance generation, transmission and distribution facilities owned by 
public power systems carry with them restrictions on the amount of 
private use allowed for those facilities. While sound tax policies 
warrant certain restrictions on private use of public facilities, such 
policies must change with changing times. These private use 
restrictions, which were manageable several years ago, are now 
unreasonable in the new competitive environment and need to be modified 
to conform to the goal of enhancing greater competition. The 
restrictions are contrary to the goals of the Energy Policy Act of 
1992. The public power community and the Investor Owned Utilities have 
worked together to come up with language to remedy this situation and 
certain tax code problems that they are encountering as a result of 
industry changes. Ranking Member Murkowski has taken the lead to 
address this problem with his bill, the Electric Power Industry Tax 
Modernization Act, S. 972, which provides greater flexibility to 
publicly owned utilities to accommodate industry changes. APPA 
sincerely appreciates Senator Murkowski's leadership on this issue. We 
hope that the Finance Committee will act soon to address this vital 
issue.
    Finally, I would like to mention one other tax related issue. It is 
clear that additional generation is needed in this country. It is also 
clear that such generation should come from non-traditional renewable 
energy sources as well as from better and cleaner utilization of our 
nation's most abundant resource, coal. Traditionally, Congress has 
turned to tax credits to provide incentives to industry to achieve 
socially desirable goals. If the goal is to promote renewable energy 
and clean coal technology development and utilization by the electric 
utility industry, then incentives must be provided that work for all 
elements of the industry. Tax credits can be utilized by IOUs, which 
serve about 75 percent of the nation's electric consumers, but cannot 
be used by not-for-profit publicly and cooperatively owned utilities 
that serve the balance. As a policy matter, it seems to make little 
sense to refuse to provide comparable incentives to ensure that 100 
percent of the nation's utilities are encouraged to develop these 
resources. We have recommended ``tradable tax credits'' for publicly 
and cooperatively owned utilities. These tradable credits could be sold 
to tax paying entities at a discount to help them reduce their own tax 
liability. This concept has been developed by municipal public power 
systems and the rural electric cooperatives and is supported by the 
entire electric utility industry. APPA commends Chairman Bingaman for 
including tradable tax credits language in his comprehensive bill S. 
597. We hope this proposal receives favorable action in the Senate 
Finance Committee.
    Thank you again for inviting me to testify and I will be happy to 
answer any questions you may have.

    The Chairman. Thank you very much.
    Mr. English, why don't you go right ahead.

 STATEMENT OF GLENN ENGLISH, CHIEF EXECUTVE OFFICER, NATIONAL 
     RURAL ELECTRIC COOPERATIVE ASSOCIATION, ARLINGTON, VA

    Mr. English. Thank you very much, Mr. Chairman. I 
appreciate that.
    My name is Glenn English. I'm the chief executive officer 
of the National Rural Electric Cooperative Association, which 
is a service organization for some 34 million consumers who own 
their own electric utility as cooperatives. We're situated in 
some 46 States all across this country.
    Very quickly, Mr. Chairman, I want to hit some high points 
and then focus on one particular area of my testimony. Electric 
cooperatives strongly support the efforts of Congress to 
replace the North American Electric Reliability Council with a 
new entity that has the authority under the Federal Energy 
Regulatory Commission for oversight to develop and enforce 
mandatory reliability standards. Electric cooperatives applaud 
the chairman and the ranking member in the administration for 
recognizing the importance of fuel diversity.
    Electric cooperatives, however, oppose the expansion of 
Federal energy regulatory jurisdiction over rural electric 
cooperatives, the reason being that many small electric 
cooperatives, this is additional Federal regulation in addition 
to rural utility service which would duplicate and become 
extremely burdensome and expensive for them. And electric 
cooperatives applaud the chairman for recognizing the need for 
additional market power oversight.
    But, Mr. Chairman, the one thing that we feel is the most 
critical element as far as any kind of coming to grips with the 
energy difficulties that this country is facing is in the area 
of transmission. When you really look at transmission, unless 
the transmission system works, unless it has the ability to 
move power around this country under the 1992 Energy Act, then 
much of the rest of the debate and discussion that we're having 
really doesn't mean a great deal, because the system just won't 
work. So for that reason, we would strongly urge that this 
committee focus its attention on the development of an 
interstate highway system approach to remove the transmission 
restraints that exist today.
    Now up until this point, Mr. Chairman, what I think this 
committee has heard so much about, as has the Congress, has 
been the focus on the risk of building transmission. And as a 
result of that, the risk needs to be offset with incentives or 
with other means in which to compensate those who would build 
transmission for that risk. Mr. Chairman, it's my understanding 
that the Federal Energy Regulatory Commission has such 
authority now. And we don't see a great deal of transmission 
being built in this country and I think there are a host of 
different reasons as to why that is taking place.
    In addition to looking at compensating for the risk, I 
would suggest that this committee focus its attention on how 
they might reduce the risk of building transmission in this 
country; how in fact we can make it easier, how in fact we can 
focus our attention on certain areas of development, so that we 
in fact can develop a true interstate type of system for the 
electric utility industry to transmit its power.
    I think that without question, Mr. Chairman, that we have 
to understand that any competition that exists will likely take 
place on the generation side. And in those States that in fact 
pass it, on the retail side. When you look in the area of 
transmission, this may be the one impediment for competition 
working either on the wholesale or the retail side. And we've 
seen examples of that. You mentioned in your testimony earlier, 
or in your statement earlier this morning about price spikes 
and the difficulties in California. And I think virtually 
everyone understands that those problems are transmission 
related. And certainly if we continue to focus our attention 
elsewhere, this congestion and these difficulties will 
continue.
    We've got to understand, however, there are those who 
benefit by congestion and by the impasses that exist in the 
existing system, people who in fact make a great deal of money 
out of the difficulties that exist in the system and will 
resist the changes. That's the reason that we strongly believe 
that local entities, whether it's through some kind of joint 
planning group or whether it's through RTOs, should in fact 
take the lead in determining and identifying what portions of 
the existing transmission system should be part of an 
interstate system. And they should have the opportunity to 
focus their attention on what is the best way to link up the 
various regional systems that exist, link up the various 
elements that would be included in any kind of interstate 
transmission system.
    We also think this makes great sense from a regulatory 
point of view. The Federal Energy Regulatory Commission does 
not have unlimited resources, either in manpower or in funds. 
And it should be understood that those resources should be 
focused on where they'll do the greatest amount of good. By 
obviously identifying certain segments of the existing 
transmission system and also focusing on how to connect up 
those systems with other systems that are identified in other 
regions, that we in fact can make a great deal of sense from 
making sure that the limited resources of FERC are focused 
where they'll do the most good.
    But we think that what can be done, Mr. Chairman, is to 
focus on reducing risk, focus on in fact giving the people of 
this country the opportunity to keep their transmission costs 
as low as they possibly can, to do so by building transmission 
systems at cost with a modest return for the investment. This 
is a system that has served this country well in the past. It's 
one that we think will serve us well as we develop a truly 
interstate transmission system in this Nation today.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Mr. English follows:]
Prepared Statement of Glenn English, Chief Executive Officer, National 
         Rural Electric Cooperative Association, Arlington, VA
                           executive summary
   NRECA supports the development of an Interstate Highway 
        system approach to relieve transmission constraints; the 
        current transmission system cannot reliably handle the dramatic 
        increase in transactions since enactment of the Energy Policy 
        Act and FERC order 888, four years ago.
   NRECA supports the efforts of Congress to replace the North 
        American Electric Reliability Council (NERC) with a new entity 
        that has the authority under the Federal Energy Regulatory 
        Commission (FERC) oversight, to develop and enforce mandatory 
        reliability standards. This much-needed legislation should be 
        passed immediately.
   NRECA applauds the Chairman, Ranking Member, and the 
        Administration for recognizing the importance of fuel 
        diversity.
   NRECA opposes the expansion of FERC jurisdiction over rural 
        electric cooperatives. For many small electric cooperatives 
        this additional federal regulation would be duplicative and 
        overly burdensome.
   NRECA commends the Chairman for recognizing the need for 
        additional market power oversight.

    The National Rural Electric Cooperative Association (NRECA) is the 
national service organization that represents 930 rural electric 
systems providing central station service to approximately 34 million 
consumers in 46 states. Of these rural systems, 60 are generation and 
transmission cooperatives, which are owned by and serve approximately 
695 of 870 distribution cooperatives. Kilowatt-hour sales by rural 
systems amount to 9% of total electricity sales in the United States, 
approximately 45% of the electricity sold by cooperatives is purchased 
from others.
                        transmission reliability
    North America needs the new electric transmission equivalent of the 
interstate highway system. The current transmission system cannot 
reliably handle the dramatic increase in transactions since the 1992 
Energy Policy Act. Transmission deficiencies are contributing to 
wholesale and retail electric market failures that are harming 
consumers.
    NRECA strongly opposes the argument that the transmission problem 
can be fixed only if utilities are offered enough money through 
incentive transmission rates or other financial incentives. NRECA 
believes that high rates of return are not an acceptable means of 
attracting investment in transmission. The incentive approach only 
increases costs for consumers, the people who were supposed to have 
seen lower prices from competition, without guaranteeing that 
transmission will be built.
    Moreover, high transmission costs do not strengthen wholesale 
electric markets, they severely curtail them. The high rates act as 
``toll gates,'' narrowing generation markets and protecting the 
monopoly power of local generators.
    NRECA believes the best approach is to lower the risk of building 
transmission instead of raising rates of return and increasing costs to 
consumers. Congress should direct FERC to ensure that any entity that 
builds a qualifying transmission project recovers its costs. To qualify 
for guaranteed cost recovery, NRECA believes that transmission projects 
must:

   be identified through a regional joint-planning process that 
        coordinates and has oversight for the reliable operation of the 
        regional transmission system
   be constructed according to best engineering practices
   be operated by the relevant Regional Transmission 
        Organization (RTO)
   offer service pursuant to traditional cost-of-service 
        principles, with the cost-of-service analysis taking into 
        account the low risk provided by FERC's obligation to assure 
        cost recovery.

    By mitigating risk, spreading the cost of new facilities broadly, 
and enabling new competitors to build transmission, NRECA's approach to 
new transmission helps to ensure that the interstate highway system can 
be built at the lowest possible cost to consumers.
                          electric reliability
    Since 1968, the electric utilities of the United States, Canada, 
and part of Mexico have worked together through NERC to develop 
voluntary standards that have provided North Americans with the most 
reliable energy in the world.
    The introduction of restructuring, however, is putting pressure on 
the voluntary system. Under regulation, regulators have placed a 
premium on reliability and utilities were guaranteed to recover 
reasonable reliability-related expenses. In a competitive environment, 
however, investor-owned utilities are rewarded for cutting costs and no 
one has the authority to ensure that those cost-cutting measures do not 
degrade the reliability of the bulk transmission system.
    It is necessary for Congress to replace NERC with a new entity that 
has the authority, under FERC oversight, to develop and enforce 
mandatory reliability standards.
    For that reason, NRECA supported S. 2071 in the 106th Congress. 
That language would require FERC to approve a new North American 
Electric Reliability Organization that would have the power to ensure 
the reliable operation of the interstate bulk transmission grid. NRECA 
believes that similar legislation needs to be enacted as soon as 
possible.
                             energy supply
    NRECA strongly supports a national energy policy that recognizes 
the importance of fuel diversity. The recent increase in natural gas 
and petroleum prices clearly demonstrates the important role that coal, 
nuclear energy, and other fuels continue to play in North America's 
energy portfolio. NRECA supports the full development of all needed 
U.S. energy and power resources including hydro, nuclear and fossil in 
a manner that strengthens fuel diversity while balancing appropriate 
environmental considerations. That national energy policy should also 
provide financing for research and development and incentives to fully 
utilize domestic resources. These programs should be made available to 
all segments of the industry on an equitable basis.
    NRECA supports the development and implementation of clean coal 
technologies and renewable resources. We advocate continued funding for 
research, development and demonstration to continue to reduce the cost 
of power from these clean sources of energy. Clean coal and renewable 
resources should be an integral part of a total energy package.
    NRECA also believes in the future of nuclear power and is a strong 
supporter of this ``emission-free'' source of energy. Nuclear power is 
a safe, efficient source of electricity, with an adequate supply of 
fuel. Nuclear power currently provides 20 percent of the nation's 
electricity at affordable and stable prices. With spiking prices in 
natural gas and oil, nuclear power plants offer a stable, levelized 
source of electricity. NRECA supports the relicensing of existing 
operating reactors, and encourages the Department of Energy to begin 
accepting the spent nuclear fuel, as DOE promised and contracted for 
under the Nuclear Waste Fuel Act. NRECA supports the development of the 
Yucca Mountain Repository. NRECA also supports continued development of 
future safer and cheaper nuclear reactor technologies as well as the 
improved Nuclear Regulatory Commission (NRC) licensing programs to 
support future development. NRECA believes that the Price Anderson Act, 
due to expire in 2002, should be extended.
                           ferc jurisdiction
    NRECA opposes efforts to subject electric cooperatives to the 
jurisdiction of FERC (under Federal Power Act (FPA) Sections 205 and 
206, 16 U.S.C. 791a, et seq. by including them within the definition of 
``public utility'' in Section 201(e) of the FPA). Electric cooperatives 
are owned and controlled by their consumers so there is no conflict 
between shareholders and customers requiring governmental economic 
regulation.
    Similarly, the federal agencies that provide reliable, low-cost 
electrical power are already regulated by Congressional oversight and 
are under the authority of the Secretary of Energy. Moreover, electric 
cooperatives were formed in response to the national need to extend 
electric service at the lowest possible cost to primarily rural areas 
under a program providing that federal governmental oversight would 
only be through the Rural Utilities Service (RUS). NRECA's position was 
confirmed in the Dairyland case, decided by the Federal Power 
Commission (FERC's predecessor) more than 30 years ago, which held that 
electric cooperative borrowers from the RUS are not ``public 
utilities'' as defined in Section 201(e) of the Federal Power Act. 
NRECA opposes efforts to subject the RUS-borrower electric 
cooperatives, involuntarily, to FERC jurisdiction under FPA Sections 
205 and 206, which continues to be good public policy. NRECA also 
recognizes the important regional federal power issues that are part of 
this restructuring debate in the Pacific Northwest and have supported 
previous efforts to establish a ``Northwest Title'' in restructuring 
legislation. NRECA supports legislative efforts to exclude from FERC 
jurisdiction:

   RUS borrower electric cooperatives,
   not-for-profit, consumer-owned utilities, and
   federal power marketing agencies.
                              market power
    Market power is a problem that must be confronted in the move 
toward a more competitive marketplace. Insufficient federal oversight 
and authority exists for distinguishing between pro-competitive and 
anti-competitive mergers and acquisitions. Under the Public Utility 
Holding Company Act (PUHCA), only one regulatory entity--the Securities 
and Exchange Commission (SEC)--has comprehensive authority to protect 
consumers against registered holding company abuses. The elimination of 
PUHCA or substantial changes to the Act without offsetting consumer 
protections will result in greater monopoly power for these holding 
companies and their utility subsidiaries, and higher electricity costs 
for consumers.
    Congress should adopt rigorous merger and acquisition guidelines at 
the federal level that will prevent the accumulation of market power by 
one or a few dominant firms. These changes would include:

   Placing the burden of proof on entities seeking to transfer 
        generation or seeking ``mega-mergers'' of existing monopolies 
        to demonstrate that the acquisitions will enhance competition 
        and benefit consumers through lower rates, increased 
        reliability and expanded services, while reducing regulatory 
        burdens on pro-competitive mergers and ventures.
   Providing regulators (FERC) with tools to protect consumers 
        and enhance competition, including the authority to impose 
        structural solutions that remedy or prevent public utilities 
        from accumulating or exercising undue market power.
   Strengthen the antitrust provisions in the Federal Trade 
        Commission Act and Federal Power Act to prevent market power 
        abuses, and deny approvals for mergers and acquisitions that 
        lessen competition.
   Authorizing FERC to impose civil penalties for market power 
        abuses.

    In closing, I appreciate the opportunity to testify before the 
Committee and look forward to working with you to address these 
important issues.

    The Chairman. Thank you very much. I think all the 
testimony has been very useful. Let me ask just a few 
questions.
    Mr. Rowe, let me ask you first. In your written statement 
that you gave us I understand you oppose a new layer of 
regulation at the regional level in these decisions on siting 
of transmission lines. Is there some other way that we can have 
those decisions made at the regional level that would make more 
sense from your point of view; more dependence on RTOs, for 
example? What is--could you maybe elaborate on your views as to 
how siting decisions ought to be made and where that authority 
ought to be?
    Mr. Rowe. Surely, Mr. Chairman.
    It is obvious to us, as your White Paper makes clear it is 
to you, that the transmission system is the regional 
superhighway for the competitive marketplace we're all trying 
to work on. And in that sense, we believe that FERC has the 
essence of it in its emphasis on strong, large, regional 
transmission organizations. We think it will help to have those 
be quite large. We think strengthening FERC's authority in that 
respect is positive. We believe that making the RTOs for profit 
businesses is positive. We believe that the reference in your 
White Paper to making it easier from a tax point of view to 
create transcos and RTOs is positive. And we believe as these 
regional entities are created they will allow for some of the 
goals that your White Paper seeks in terms of input from the 
different States without creating, you know, one more layer of 
process.
    The Chairman. All right. Thank you very much.
    Mr. Thilly, let me ask you about the issue of obviously one 
of the things we promote in this White Paper is that sales by 
public power entities into the market rate generating 
institutions should be subject to the same rules as other 
sales. Can you help us figure out where the line needs to be 
drawn between sales that should be subject to market rules 
established by FERC, how we separate those sales from other 
sales that should not be subject to these rules set by FERC?
    Mr. Thilly. I hope so. I think that we generally agree with 
the characterizations in the White Paper. As I understand it, 
what that means is where there is a RTO developed market or a 
power exchange market that has been approved by FERC, that all 
participants will have to adhere to the rules of that market, 
including any circuit breakers or price caps that exist. And we 
certainly, I think, agree with that. We believe that will 
happen with or without legislation.
    We would certainly also oppose the notion of full cost of 
service regulation for public power systems. There has been no 
call for the need for that that I know of in the last 50 years. 
And the--those--so we see no need there. But we do believe that 
in the formal institutions that are established for a 
competitive market, that the rules would apply to all 
participants in those markets.
    The Chairman. Okay. Mr. English, you state in your 
testimony that you oppose extending FERC jurisdiction over 
cooperatives. FERC has already declared that it has some 
jurisdiction over your members in the West by subjecting them 
to the market mitigation plan that they issued on the 18th of 
June. Have your members given you reason to believe that that 
order goes too far in including what would otherwise be normal 
transactions between co-ops?
    Mr. English. I think, Mr. Chairman, that many of our 
members would challenge whether or not FERC does have that 
authority. And that may be an issue that the court would have 
to decide. That seems to be an open question.
    The point is though that we recognize there's a problem in 
the West. And electric cooperatives fully understand that they 
have a moral obligation and responsibility to help out. And so 
they are in fact cooperating and working with that order as if 
it was in fact a point of law. But, you know, we're not 
conceding the fact that there is an open question as to whether 
they do have that jurisdiction and certainly--but we right now 
feel that the bigger question is responding to the problem in 
the West.
    The Chairman. Okay. One of the points we make in the White 
Paper is our belief that it's necessary to include all 
transmission under the same rules. Do you believe there are 
some ways that we could work to build in protections for the 
smaller co-ops that you represent, members that do not have 
transmission systems, so that they can--they would be agreeable 
to that kind of a explicit grant of authority to FERC?
    Mr. English. Well, as I stated in my testimony, we're very 
concerned about particularly some of our smaller cooperatives. 
But not just exclusively smaller cooperatives, but the 
distribution cooperatives that under the interpretation, more 
lenient interpretation of some of the regulations, would 
encompass some 400 distribution cooperatives, which I don't 
think either FERC or certainly the Congress intended to be 
included. There's also this question of the relationship 
between the cooperative, the management and employees of the 
cooperative and those consumers, and it is that self-governance 
regulation.
    The real issue here, I think before us, is the question of 
what portion of the transmission system that electric 
cooperatives owns truly plays in any kind of interstate 
commerce. And as we begin to define and to narrow that in, you 
know, that's probably where the open issue is.
    But with this particular point, that's the reason we think 
an interstate designation or an interstate type system that is 
focused on moving power across this country is where FERC 
should be focusing its attention. And certainly if that is the 
case, obviously any transmission that doesn't fall under that 
category would either be left up to the States, or in the case 
of electric cooperatives, our own self-governance.
    The Chairman. We'd be anxious to work with you as we try to 
refine some language that'll keep the protections that you 
think are essential, but also provide that we do have one set 
of rules for transmission around the country.
    Mr. English. Thank you.
    The Chairman. Senator Murkowski.
    Senator Murkowski. Thank you very much, Mr. Chairman.
    Mr. Thilly, relative to your statement, you indicated there 
isn't enough transmission. We certainly agree with that. But 
you also said that you are opposed to incentive pricing, as I 
recall, for transmission. How do you get there from here?
    Mr. Thilly. I believe that there is adequate capital in the 
market that--to finance the new construction that's needed at a 
reasonable rate of return, 12 percent by FERC, with a 
reasonable depreciation schedule. That that capital is there, 
that there are investors that are looking for that solid and 
very safe return.
    Senator Murkowski. Why hasn't it been done?
    Mr. Thilly. Because we've been relying on vertically 
integrated utilities to build the transmission. And when they 
make that transmission investment they may realize the return, 
but they also expose their generation to competition and loss. 
And it's that offsetting, or that down side of construction 
that is the problem.
    Senator Murkowski. Mr. Rowe, would you agree with that?
    Mr. Rowe. I'm afraid I totally disagree with it. I have 
been unable to discern why there is so much opposition to 
incentive regulations with transmission, when the total cost of 
transmission is a relatively small portion of the end price of 
electricity and when proper incentives for greater throughput 
on transmission lines and greater access to transmission lines 
can help so much in making the competitive generation market we 
all want effective.
    I mean I believe that building transmission in today's 
economic and political world is a difficult and risky business. 
And it just isn't as easy to do as 12 percent sounds. In my 
company, we are putting our transmission where our mouth is, 
not only by joining the Alliance RTO, but yesterday our board 
voted to authorize us to be the first company in that RTO to 
announce its intention to sell its assets to the RTO if an 
independent operator can be found.
    Senator Murkowski. Well, it appears then that the need's 
been there. You've not chosen to do so because the incentive 
hasn't been adequate. And, you know, we have two views on 
what's adequate, but clearly the marketplace is going to 
determine where they're going to direct their capital.
    And it seems to me that it's pretty obvious here. We've got 
a problem, we need to increase capacity. In order to get it we 
can jawbone about whether 12 percent return on equity is 
adequate and therefore they ought to do it, but, you know, you 
can't force them to do it if they can deploy their capital at a 
better return. And so am I missing something here, Mr. English?
    Mr. English. I think you are, Senator.
    Senator Murkowski. My time's short, so I want to----
    Senator Murkowski. I'll make it very, very quick then. As I 
said, I think you put your finger on it, it is the question of 
risk. And the question is how you're going to deal with this 
risk. Are in fact we going to provide additional rewards for 
taking the risks, or do we reduce the risk? What we have not 
explored is reducing the risk.
    Senator Murkowski. What we need to do is increase the 
transmission.
    Mr. English. And that's exactly getting to the point. The 
issue is how do we take hold of this. And I think that we do 
have to make it a national priority to designate existing 
transmission systems and making the connections within the 
regions as interstate systems. That's where we put our energy 
and that's what we're really focused on.
    Senator Murkowski. Is that going to be sufficient for Mr. 
Rowe to invest his capital?
    Mr. English. At this particular point, already as I 
mentioned in my testimony, that the Federal Energy Regulatory 
Commission has the opportunity to provide for that kind of 
incentives, if you wish. What I'm suggesting is that you also 
give them the opportunity to reduce the risk, to provide for a 
guarantee return if they build that transmission. In other 
words, let's have competing options to them.
    Senator Murkowski. Well, this is a little different than 
Mr. Thilly's statement.
    Mr. English. Exactly, it is.
    Senator Murkowski. Mr. Rowe, do you want to jump in here?
    Mr. Rowe. Well, I think our decision to propose the sale of 
our transmission reflects two judgments. One is that it is not 
a strategically opportune asset for us under the present rules. 
And two, in independent hands, it has more chance of getting 
favorable economic rules. So again, I would respectfully submit 
that we're putting our capital behind our words.
    Senator Murkowski. Mr. Ayers, do you want to jump in to 
this?
    Mr. Ayers. Yeah. I would add that in this case, if you look 
at transmission, it's very much up front costs for 50 years of 
transmission being there with not a lot of operating costs. So 
from a business proposition of wanting to finance this, you 
have to look at what the return and the value of that 
transmission over 50 years. And that has changed over the last 
few years. You've got to be able to determine whether you will 
still need the transmission over that time frame. And the risk 
profile of someone investing and wanting to line up financing 
has changed. And in order, I think in today's market, it's 
necessary to look at incentive in order to have that 
transmission built.
    Senator Murkowski. Well, it seems that we have reached a 
significant point relative to just how we're going to increase 
transmission and whether we can do it without incentives, 
pricing incentives. The market is going to have to make that 
determination.
    My final question is to Mr. Thilly and Mr. English relative 
to your support for giving FERC authority to order the IOUs to 
join a transmission organization. And I think you support 
giving FERC additional market power authority and so the 
question comes to mind, shouldn't public power and cooperatives 
be subject to basically the same rules?
    Mr. English. I'll take a crack at that first, Senator.
    Senator Murkowski. Very short.
    Mr. English. First of all, we support the voluntary 
approach with regard to RTOs. The second thing is that we think 
there ought to be incentives for people to participate in RTOs, 
since we're talking about incentives and that makes sense. And 
the third thing is that RTOs have to be independent and open, 
and everyone has to have the opportunity to participate in it. 
We don't think that's been the case to this point.
    Mr. Thilly. We strongly support RTOs. And it's important 
that public power participate. Public power is at the table. A 
number are. The difficulty has been it is not prudent for a 
public power system to join if it's going to dramatically 
increase its costs, which is what the situation in California 
has been.
    Senator Murkowski. All right. Well, I thank you. And hope 
that we can understand here the implications in the White Paper 
suggest that public power would remain more flexible in setting 
its own rate structure, but by the same token, be 
nondiscriminatory. But by setting its own rate structure, there 
are--there has to be a safeguard and a balance for 
efficiencies. And that gets a little out of our area of 
responsibility, but is certainly in the public interest.
    The Chairman. Senator Carper.
    Senator Carper. Thank you, Mr. Chairman. Mr. Chairman, a 
number of years ago Mr. Craig and Mr. Thomas and Mr. English 
and I worked together in the House of Representatives. We all 
served together for a number of years. And I just want to say 
welcome. It is great to see you, Glenn. And you had a 
reputation then for being clear thinking, plain spoken, get 
right to the point. And I'm pleased to say that he hasn't 
changed in that respect.
    I'm a new member of this committee. I've been on it for all 
of about 14 days. And some of the people that have already 
served here have forgotten more than I'm likely to ever know. 
So I'm just struggling to come up to speed. I feel like 
somebody who's walked into a party about 11 o'clock at night 
and everybody else is three sheets to the wind and I'm trying 
to figure out where the bar is.
    [Laughter.]
    Senator Carper. It would be helpful for me--and just keep 
in mind I'm still trying to understand all of the acronyms that 
we're talking about here. But what would be helpful for me is 
for each of you to take a minute or so and with respect to 
interconnection standards, with respect to transmission 
capability and capacity, where do you agree. What we've got to 
figure out is how to develop some consensus here. And in those 
two areas especially, if you could just tell me where do you 
all agree in a way that would be helpful for us in formulating 
some bipartisan approach here.
    Glenn.
    Mr. English. If I could take a very quick crack at that, 
Senator. And let me just say I've always been struck by your 
wisdom and your candor, and I see that that hasn't changed and 
delighted that you're here. I think you've got an excellent 
view of what's taken place in the energy industry, let me also 
say, with the 14 days you've been here.
    Very quickly this. I don't think that you have to choose. I 
don't think that you have to choose. Let's have a little 
competition. Isn't this what this is all about? We talk about 
competition in the electric utility industry. We've got 
incentive pricing that's already available to the Federal 
Energy Regulatory Commission. Let's give them the other option 
of reducing risk, then let's let them make the choice.
    Let's go even beyond that. We're talking about joint 
planning groups, we're talking about RTOs. Let's let them get 
into this act and decide what's best in their region. You know, 
we wholeheartedly agree that we need to bring all the 
interested parties together in an RTO or whatever else you want 
to call it for that region, and let them make the decision.
    Let them play the role and identify what portion of the 
transmission system within that region that truly should be a 
part of an interstate system. And then let's let them say 
here's the best way to link it up with neighboring systems as a 
part of the grid. And then let's give the Federal Energy 
Regulatory Commission the authority then to say yes, that makes 
sense. We agree with that, and give their blessings. And we 
move on and we go to a competitive process, and let's see which 
way this thing goes out.
    What we're suggesting to you is if you can reduce the risk, 
if you can do that by in fact guaranteeing the return and by 
the very nature that any of this new construction that's taking 
place or any upgrades that are taking place in the transmission 
system. In fact, if that's a part of an interstate system, 
you're going to have the traffic to get the return. And that's 
what you're really telling the investors, you're going to be 
guaranteed that return. And then let's stretch it over an 
extended period of time, and say 30, 35 years.
    We've been in the construction and transmission business 
for some time. That's normally what our--we've got a record on 
that kind of stuff. We're not interested in getting in and 
building transmission, by the way, if you're looking at this as 
the electric co-op way of approaching it. What we're really 
interested in is making sure that we have low cost 
transmissions, you're able to move power. So if you're going to 
have competition and make some sense in this country, the 
transmission system in itself is a conveyance, just like the 
interstate highway system. And we're not interested in adding 
more toll booths, we're not interested in adding a lot of 
unnecessary cost. Let's make this as least costly as we can for 
the American people.
    But we're not saying hey, let's exclude the whole 
opportunity to have incentive pricing. If FERC comes to the 
conclusion that's what they need, give them that chance. But 
let's give them both opportunities. That's all we're asking.
    Mr. Rowe. Senator, I believe that----
    Senator Carper. Let me just say something. I've heard a lot 
of people testify over the years. I really like the way that 
you speak slowly. No kidding, it's just----
    Mr. Rowe. My wife says I follow my mother in that respect 
and it has little to do with learning.
    Senator Carper. Give your mom our best if she's still 
around.
    [Laughter.]
    Mr. Rowe. I think there are three large issues on which 
those at this table and those who govern us fundamentally 
agree. We need more supplies of energy, we need them to be 
cleaner and consistently so, and we need the energy to be used 
efficiently. I believe that around those principles detailed 
legislation can be hammered.
    I think those at this table agree on the importance of 
reliability standards for the regional transmission 
organizations and for people who are participating in the 
supply marketplace. I believe we agree on the importance of 
regional transmission organizations. I believe we agree on the 
fundamental principles of open access. Those are the--about the 
furtherest (sic) list we all probably agree on, but with a 
little work you can get some more out of us.
    Senator Carper. Good. Okay. Thank you, Mr. Rowe.
    Please.
    Mr. Thilly. I agree with what Mr. Rowe just said. I think 
that's very accurate. There are differences obviously, the one 
that has been identified this morning on incentive rates. And, 
you know, maybe if we step back from that one, I agree with Mr. 
English.
    The FERC has authority to set transmission rates and can do 
a number of things, but it has to be just and reasonable within 
the Federal Power Act. If we're talking and if an incentive is 
just and reasonable, then we already have the authority to do 
it. It's going beyond that to authorize incentives that would 
not pass the just and reasonable test that we have very 
significant problems with.
    Mr. Ayers. I would also agree with Mr. Rowe's comments. I 
think that's a good, accurate summary.
    I would like to add with respect to you mentioned 
interconnection requirements; that I would hope that everyone 
would agree here that the current process for interconnection 
and the ability for new powerplants to connect to the grid is a 
time frame that does not work. Just to give you an example of a 
recent experience we've had, in a process that should take 120 
to 180 days, this process took over 600 days to negotiate and 
place the necessary requirements to interconnect to the grid. 
And clearly I think that is not a process that is going to 
allow new generation to be built and come on line in this 
country.
    And so with respect to that, I think that is clearly an 
area I would hope most people would agree we need some 
different standards. Maybe there may be open issues on what 
those are, but the current process doesn't work.
    On transmission, I think I would support all of Mr. Rowe's 
comments.
    Senator Carper. All right, good. Well, thank you. Thank you 
all very much.
    The Chairman. Thank you very much.
    Senator Craig.
    Senator Craig. Then we all agree that transmission is the 
number one problem in today's current electric markets of this 
country?
    Mr. Ayers. Yes.
    Senator Craig. Is that correct, Mr. Rowe?
    Mr. Rowe. It is. I would say transmission and diversity of 
generation supply are about equal, but they're together the 
number one problem.
    Senator Craig. Mr. Rowe, in reading your testimony, while 
you touched on it in passing, as it related to sequestration in 
your testimony you say something a bit more bold. Let me read 
it. ``Given President Bush's rejection of the Kyoto Accord, it 
is appropriate for this committee to re-examine what this 
nation's policy should be on a going forward basis. Many of us, 
including myself and my company, believe it is time for the 
Federal Government to limit CO2 in a no regrets way. 
I also believe that we need to revisit the standards of 
SOX and NOX and mercury so that decisions 
on life extension for existing coal-fired plants can be made on 
a sound economic basis.''
    With that statement, my question--one of my questions would 
be what is an appropriate CO2 limit that the Federal 
Government could mandate that wouldn't be arbitrary?
    Mr. Rowe. I think there are so many uncertainties in this 
area that almost anything is arbitrary, and yet something 
probably should be done. It is my personal opinion that the 
Kyoto Accord went too far and involved promises by some 
governments that they had no intention of meeting. At the same 
time, I think the gathering weight of evidence on the long run 
carbon issue is more impressive all the time.
    There is an engineer at Illinois Institute of Technology 
named Henry Linden who's been on the board of BAS Corporation; 
I think he's retired now; but he's done several papers on 
preliminary steps that can be taken. And if you would permit 
me, sir, I would like to offer one of those papers for the 
committee, because I think there are ways, particularly as we 
increase efficiency and increase the use of natural gas, that 
we can take steps to reduce carbon and do them without some of 
the economic consequences that the Kyoto Accord would have had, 
at least before the recent steps in Europe this week.
    Senator Craig. Well, I agree with you that technology is 
leading us toward reduction. But is it not true that if we were 
to set a cap, and that were arbitrary, we would be picking 
winners and losers? And that means a heck of a lot of lawsuits 
around the country.
    Mr. Rowe. I smile just a little, because----
    Senator Craig. And I guess my follow-up question would be 
as the CEO of a company, are you a winner or you a loser?
    Mr. Rowe. We are the largest nuclear generator in this 
country.
    Senator Craig. Ah, the winner.
    Mr. Rowe. And therefore----
    Senator Craig. Maybe that's why you were bold.
    Mr. Rowe. Well, that may be why my suggestion wasn't bold 
at all, Senator. But we believe that as this country evolves, 
coal must have a continued role. I think that's essential. But 
I think most new coal will replace existing coal in a cleaner 
fashion, and we believe that gas and nuclear and efficiency 
have to have increasing roles if we take the global warming 
issue seriously.
    Senator Craig. Well, you had mentioned, I believe in your 
comments, that you sensed what they did in relation to 
sequestration to be a positive.
    Mr. Rowe. Yes, I do. It's my understanding that this 
government argued in the original Kyoto negotiations to allow 
more credit toward the carbon goals if you promoted 
sequestration programs. In my own previous company, we had some 
experience investing in tropical forests as carbon 
sequestration tools. And it's very clear that today, carbon 
sequestration in forests of the like can be a cheaper way of 
limiting carbon in some circumstances than some attempt to 
remove it from the initial process.
    I still don't believe there are a lot of ways to burn 
carbon without creating carbon dioxide. So to me, adding more 
credit for sequestration, as happened last week, was a partial 
response to the U.S. position. I'm not saying whether it was an 
adequate one. And one that we should take seriously, because it 
also tends to reduce some of the international wealth transfer 
issues that I think haunted the original Kyoto Accord.
    Senator Craig. I was curious about that, because it limits 
us by their formula to about 28 mmpces, or whatever that term 
is. And we have a capability based upon reasonable estimates, 
both forest, farmlands, pasture lands, upwards of 300 million 
metric tons of carbon sequestration on an annualized basis.
    It also, I noticed, was interesting that they were trying 
to buy a Japanese vote, so they gave them a good deal more than 
they otherwise had the capability of sequestering. It appeared 
to me that their charts were a good deal more political than 
they were real.
    Mr. Rowe. I have always felt that, Senator. I'm quite 
certain that you're right on that. And I commend you and 
Chairman Bingaman and others on this committee for brokering 
with this issue with the interest of this Nation so deeply at 
heart.
    Senator Craig. Well, I thank you for those observations. 
I'm just not sure that we have yet determined what levels of 
CO2 are harmful and/or beneficial. I think you and I 
would collectively agree that more is not good.
    And in the long term, our technology is clearly leading us 
toward reductions. And if we benefitted in that direction or 
incentivized it in that direction, a good deal more will come. 
I'm not quite sure that we need to play the politics of 
capping. My guess is there's a greater risk there than there is 
a reality.
    Mr. Rowe. As somebody who's in business, as my colleagues 
at this table have suggested, I always like incentives better 
than caps, Senator.
    Senator Craig. Oh, by the way, the red light's on, but did 
you check--you need to check the paragraph that Bond did on 
nuclear. They did you in.
    Mr. Rowe. It's always been a hard slog, sir, but we're a 
lot better off in this country because we have what we have.
    Senator Craig. Well, we will try to deal you back in. Thank 
you.
    The Chairman. Senator Thomas.
    Senator Thomas. Thank you. You know, as I sit and listen, 
it sounds like maybe sometimes we don't recognize some of the 
fairly significant changes that have taken place in generation, 
where almost in the past always the generation and the 
transmission was designed to fit your service area. And so but 
that's changing. Now we got people selling generation, getting 
into the marketer. And so you have to have a different kind of, 
seems to me, a different kind of a transmission system.
    Mr. Rowe, you sort of indicate let's keep on doing what 
we're doing. Give us a little tax break. It doesn't seem to me 
that that's enough difference. What's wrong with the idea of 
having an interstate highway system that connects RTOs, do 
something about having a third party operator. You pay for it 
when you use the system. Over some bonding and over some time 
you do that. So you're not expecting a generator or a 
distribution system to do the transmission.
    Mr. Rowe. I think that works. Forgive me if I were 
inarticulate, because I think you have it exactly right. You 
described correctly, as does the chairman's White Paper, the 
history of generation and transmission being tied together. To 
make what we're talking about work it does need to be a 
competitive interstate highway system. That's why we support 
strong, large, regional transmission organizations. And that's 
why our board voted yesterday to express its intention to sell 
our transmission assets to the RTO if it has an adequate 
transmission operator that would meet your standards. We agree 
exactly.
    Senator Thomas. But an RTO is not an interstate national 
system.
    Mr. Rowe. But if there are, as FERC contemplates, four or 
five big ones, then it becomes simpler and simpler to regulate 
the connections between them. I mean the issue is whether we 
get there in one step, or two or three. But it has to be a 
broad interstate system, and the question is only how big are 
the regions such that you get operating efficiency. I suspect 
you wouldn't want the whole U.S. transmission system----
    Senator Thomas. Well, we already have regions pretty much 
established. That's not a new idea. But we need to move, be 
able to move it.
    Mr. English, would you support a system that's a third 
party operator with the funding coming back from bonding or 
whatever by people who pay to get on, and everyone pays the 
same rate and so on?
    Mr. English. I think there's merit in that, in the concept. 
As having--as Senator Craig and you and Senator Carper and I 
have worked in the other body for many years, I'm also very 
sensitive and aware of the politics. That obviously becomes a 
great deal more difficult politically.
    What I'm focusing on now and suggesting is we need 
something in the short-term. We need something that can be done 
right now. We need some kind of focus in this country on the 
transmission system so that you got the physical infrastructure 
to do these other things that we talk about. And until that 
infrastructure's in place, quite frankly, there's no way the 
rest of this works.
    And so what I'm suggesting is this: I think you're on the 
right track with regard to the interstate system. I think 
you're absolutely correct with regard to obviously what an RTO 
needs to do as far as the operation of that system, is where I 
understand you're coming from. But at this point, I would 
suggest that we need immediate action on the whole concept of 
designating we're going to build an interstate highway 
transmission system in this country, the equivalent of that, 
and we're going to start upgrading existing systems that are 
part of that, just as we did the interstate highway system, and 
to move forward on it.
    Senator Thomas. That's fine. Except I sense that we don't 
have a vision of where we want to be. If you're going to do 
something that is going to be as complicated as this, you had 
better get a pretty good vision of where you want to be when 
it's over, so that what you do in the interim leads to that. 
And we've talked about interstate movement and this and that, 
but we haven't had a notion of how those things fit into an 
ultimate vision of where we are.
    Now, Mr. Ayers, you're primarily generators; right? You're 
not distributors?
    Mr. Ayers. No. We do wholesale marketing.
    Senator Thomas. So your whole life depends upon your 
ability to move your product?
    Mr. Ayers. That's correct.
    Senator Thomas. And you would support, I would suppose, 
wouldn't you, an intestate system that would move among the 
RTOs and be a third party operator, and you would pay to get on 
there just like everybody else?
    Mr. Ayers. Absolutely. And I think the recent FERC activity 
of four large RTO systems is a step in that direction. There 
are some natural marketplaces in the United States currently, 
and to design the RTOs around where those natural marketplaces 
exist as a starting point is a good step that could lead then 
eventually to combining even those RTOs.
    Senator Thomas. Well, again, I hope that we can kind of 
devise in our mind where we want to be in 15 years, or 
whatever, so that as we move, why what we do will accomplish 
that. I sense that--and FERC, frankly, doesn't impress me as 
being a group that looks out in the future very much. They're 
pretty much--and I'm not critical of it. Their designed to deal 
with today's problems. And someone has to take a little more 
vision and then let them implement, it seems to me. Thank you 
all for being here.
    The Chairman. Well, let me thank the whole panel for your 
excellent testimony. We appreciate it very much.
    We will take a 5-minute break. And during that time, if the 
people who are on panels 3 and 4 could all come forward or be 
available when we start up again, we will combine those two 
panels and go ahead with the balance of the hearing.
    [Recess.]
    The Chairman. Why don't we get going again. We have got six 
additional witnesses we want to hear from each of them. Let me 
just start over here at the left-hand side of the table.
    We have Mr. William Nugent, who is the president of the 
National Association of Regulatory and Utility Commissioners, 
NARUC. We're very pleased to have Commissioner Nugent here.
    Mr. James Dushaw, who is the director of utility department 
for the International Brotherhood of Electrical Workers, IBEW. 
Thank you very much for being here.
    David Hamilton, who is the policy director for the Alliance 
to Save Energy. In the spirit of full disclosure, I'm 
associated with that organization, which I have been for many 
years.
    Mr. James Rouse, who is the chairman of ELCON in Danbury, 
Connecticut. We very much appreciate you being here.
    Mr. Stephen Ward is the president of the National 
Association of State Utility Consumer Advocates. Thank you very 
much for being here.
    And Mr. David Cook, who is general counsel for the North 
American Electrical Reliability Council, NAERC, in Princeton, 
New Jersey.
    So thank you all for being here. If you'd each take 5 or 6 
minutes and give us your perspective on the proposals that 
we're considering here on the committee. Let me state at the 
outset that your full statements will be included in the 
record. And if you could just summarize the main points that 
you think we need to be aware of, I'd appreciate it. 
Commissioner Nugent, why don't you start out.

  STATEMENT OF WILLIAM M. NUGENT, COMMISSIONER, MAINE PUBLIC 
 UTILITIES COMMISSION, AND PRESIDENT, NATIONAL ASSOCIATION OF 
                REGULATORY UTILITY COMMISSIONERS

    Commissioner Nugent. Thank you, Mr. Chairman. And thank you 
for the courtesy that you've shown to me on this and my 
previous opportunities to appear here. I appreciate your 
including the comments in the record, the written comments.
    Let me talk about briefly some--an overview on this. And 
that is let me offer you some caution. This is an 
extraordinarily complex subject. I'm sure you're aware of that. 
But we have been wrestling with this for some time trying to 
figure out the proper way to do this, and I would look forward 
to working with you and members, other members of the committee 
and staff to work our way through this.
    Electricity is not gas----
    The Chairman. Let me just say by way of response, I agree 
with you. We have got to approach it with caution, but that is 
about all we've approached it with so far for the last two or 
three Congresses. I think we also need to try to act. And so 
we're anxious to get your input as to how to do that 
responsibly.
    Commissioner Nugent. I will not dispute the utility of 
acting on this.
    First of all, gas is not electricity. On previous 
appearances here I have been complimentary of the FERC and the 
manner in which it has sited transmission. It has done so 
expeditiously and enabled us to get important new 
infrastructure into Maine. But gas and electricity differ in 
important respects.
    In gas, you pick up a commodity from wherever it happens to 
be coming out of the ground, you transport it to end users who 
decide the manner in which they're going to do it. In 
electricity, you do have alternatives to that. You can generate 
at some distant place and then deliver it, but there are 
important tradeoffs with the siting of generation and the 
manner in which this articulates with the retail markets.
    I think those differences make it important that State 
regulators work closely with the FERC, and that entire 
authority for transmission siting, generation and generation 
siting, if that enters your plan, not be reposed solely at the 
Federal level. There are a whole lot of fine points here that 
will tend to get missed in that particular approach.
    I believe in addition, that the proposals that are under 
discussion here load an awful lot on FERC. And I have questions 
about the capacity of that staff. It's not that they're not 
bright people and that they're not working hard, but there is 
an enormous additional volume of work. First of all, these are 
very difficult matters of first impression for them to think 
their way through and come to reasonable solutions. I think 
what you do have in State regulators is a body of people who 
are already committed to the public interest, who are there and 
available and knowledgeable about the local situations who can 
work with the FERC to offer a decent solution to these things.
    Now going down in the specifics, let me add a third one, 
because it occurs late in the White Paper, and that is the 
question that the White Paper raises about transmission, 
transferring assets into either an affiliated interest or 
freeing them entirely. There is a very, very big question there 
of at what value. These are assets that have been constructed 
over time with important support from rate payers.
    And I don't say this should be the solution, but it may be 
instructive. Maine, in going to retail competition in 
electricity, mandated a separation that the vertically 
integrated utilities sell their generation assets and continue 
to operate as wires company. It was our concern that we provide 
a level playing field for all sellers of generation within 
Maine; that the wires company not favor any particular provider 
of generation. That has worked well. We have attracted more 
competition in Maine than any other State. We have about 40 
percent of our load that has gone to competitive suppliers. So 
the proof is in the pudding in that regard.
    But the point for this White Paper is that in directing the 
vertically integrated utility to divest itself of its 
generation assets, we--they were fully compensated for the book 
value of those assets. The value of those assets in excess of 
book went to rate payers, in return for which rate payers 
assumed the responsibility of 100 percent of stranded costs. 
There was a tradeoff, but I think it was an equitable solution 
to that.
    One of the concerns that I have is that if the assets go 
to--transmission assets go into the--a separate, unregulated or 
less tightly regulated entity, the question is what are the 
rates of return, where is the equity for an investment over 
time that rate payers have made? I'm not going to--I can't, in 
the few minutes we have here, fully discuss at great length 
this kind of an issue. I want to flag it for you and suggest 
that it's worthy of very careful investigation in the future, 
which we will do with staff or any of the members who wants to 
do it.
    But I've done my--gone through my 5 minutes and I've 
probably got 18 more pages, and I'm going to rely on the 
written testimony to do that. And I'll be happy to answer any 
questions, either now, in writing, or at any time you wish. 
Thank you for the courtesy.
    [The prepared statement of Commissioner Nugent follows:]
  Prepared Statement of William M. Nugent, Commissioner, Maine Public 
Utilities Commission, and President, National Association of Regulatory 
                       and Utility Commissioners
    Mr. Chairman and Members of the Committee:
    Good morning. My name is William M. Nugent. I am a Commissioner on 
the Maine Public Utilities Commission and President of the National 
Association of Regulatory Utility Commissioners, commonly known as 
NARUC. I respectfully request that NARUC's written statement be 
included in today's hearing record as if fully read.
    NARUC is a quasi-governmental nonprofit organization founded in 
1889. Its membership includes the state public utility commissions for 
all states and territories. NARUC's mission is to serve the public 
interest by improving the quality and effectiveness of public utility 
regulation. NARUC's members regulate the retail rates and services of 
electric, gas, water and telephone utilities. We have the obligation 
under State law to assure the establishment and maintenance of such 
energy utility services as may be required by the public convenience 
and necessity, and to ensure that such services are provided at rates 
and conditions that are just, reasonable and nondiscriminatory for all 
consumers.
    I greatly appreciate the opportunity to appear again, on behalf of 
NARUC, before the Senate Energy and Natural Resources Committee.
    Today, I have been asked to comment on S. 388 and S. 597 from the 
107th Congress and S. 1273 and S. 2098 from the 106th Congress. 
Additionally, I have been asked to comment on a White Paper containing 
a legislative proposal for the Committee. I believe NARUC witnesses 
have testified a number of times, during the last Congress, and are on 
record with regard to S. 1273 and S. 2098, therefore I will limit my 
remarks to S. 388, S. 597, and the White Paper.
                       transmission jurisdiction
    NARUC supports legislation affirming State authority to regulate 
retail power delivery regardless of the facilities used (transmission 
or distribution). We oppose the expansion of FERC jurisdiction to 
include unbundled retail transmission service. It is our position that 
States should retain authority to establish retail transmission rates 
unless the State tariffs violate Federally determined open-access, non-
discriminatory, competitive transmission policies. FERC should continue 
to have ratemaking authority for interstate wholesale transactions and 
should have jurisdiction over transactions between suppliers and retail 
customers located in different States. However, States should be 
authorized to form voluntary regional bodies to address regional 
transmission system issues and FERC should be required to defer to 
States acting on a regional basis.
    States have an important stake in how retail services over 
transmission facilities are provided. Transmission facilities were 
approved by state governmental entities, and importantly have been paid 
for by retail customers. However, we are keenly aware of the interstate 
commerce implications of transmission service and we believe that the 
issue of transmission jurisdiction is correctly being adjudicated 
before the Supreme Court. Therefore, NARUC would respectfully recommend 
that Congress follow precedent and allow the Court to rule on this 
issue prior to taking legislative action.
    States should be primarily responsible for expeditiously handling 
retail complaints alleging undue discrimination in the market place. 
Appeals by market participants could then be made to FERC.
    NARUC supports legislation leading to voluntary formation of 
Regional Transmission Organizations (RTOs), with deference given to 
States in RTO development and to States acting collectively on a 
regional basis. Congress should develop a mechanism for States to 
address ongoing concerns in RTO functions after the initial RTO 
development period. State interests include reliability, market 
monitoring, pricing, congestion management, planning and interregional 
coordination. Additionally, Congress should provide for a State 
commission advisory role in RTO governance that allows for deference to 
State commissions that reach consensus concerning governance issues 
within a region.
    NARUC supports legislation establishing national interconnection 
and power quality standards, developed and adopted by appropriate 
technical standards organizations, such as the Institute of Electrical 
and Electronics Engineers, Inc., for generating facilities by a date 
certain. However, the States should have the ability to adopt these 
rules or more tailored rules that a State chooses.
    NARUC further supports legislation removing federal barriers to 
State implementation of net metering. The most critical barrier 
involves the current lack of jurisdictional clarity over net metering. 
The Federal Power Act has been alleged to preempt State net metering 
programs, slowing development of this promising new approach to 
promoting competition and resource divesting.
    For the reasons I just iterated, NARUC has serious concerns with 
the White Paper section on transmission jurisdiction and must 
respectfully oppose legislation based upon the language included in 
this section of the White Paper.
                              reliability
    NARUC continues to support the NERC process and legislation that 
establishes mandatory compliance with industry-developed reliability 
standards and provides explicit authority to FERC and the States to 
cooperate to enforce those standards. NARUC also supports legislation 
that includes workable mechanisms to support energy efficiency programs 
that enhance reliability.
    The reliability of the nation's electric system is one of the most 
important issues in this debate, and NARUC believes that Federal 
legislation must indeed address reliability. Enforcement of operational 
standards and criteria should be supervised by the FERC in cooperation 
with the States through existing state authority, joint boards, or 
other mechanisms. Enforcement of compliance with planning and system 
adequacy standards should rest first with the States and regional 
bodies. Congress should explicitly affirm the public interest in 
transmission grid reliability and the need for mandatory compliance 
with reliability standards.
    Federal legislation should also facilitate effective decision-
making by the States and recognize the authority of the States to 
create regional mechanisms including but not limited to inter-state 
compacts, or regional reliability boards, for the purpose of addressing 
transmission reliability issues. NARUC cannot support reliability 
language that fails to provide a continuing role for States in ensuring 
reliability of all aspects of electrical service, including generation, 
transmission, and power delivery services or results in FERC preemption 
of State authority to ensure safe and reliable service to retail 
consumers. State officials will be held accountable by the public when 
the lights fail to come on. Additionally, because of this 
responsibility, State officials and State regulators are particularly 
concerned with the ability to promote actions that ensure uninterrupted 
electricity service.
    NARUC believes that Congress should expressly include in 
legislation: (1) A savings clause to protect existing State authority 
to ensure reliable transmission service, and (2) a regional advisory 
role for the States. Therefore, NARUC supports the reliability 
provisions on these points found in S. 388 and S. 597 and commends both 
you, Mr. Chairman, and Senator Murkowski for including these two 
provisions in your respective bills.
                         rates and market power
    Congress should not preempt jurisdiction in the States to address 
market power concerns, including the authority to require behavioral 
and structural remedies to address excessive market power. NARUC 
advocates a continuum of options, such as accounting conventions and 
codes of conduct, for the mitigation of market power, and urges 
Congress to preserve State flexibility to use these options as needed.
    Legislation should clarify: 1) the authority of the States to 
require and police the separation of utility and non-utility, and 
monopoly and competitive businesses, and to impose affiliate 
transaction and other rules to assure that electric customers do not 
subsidize non-utility ventures; 2) that States have authority to 
require the formation of appropriate State, territory, and regional 
institutions where necessary to ensure a competitive electricity 
market; 3) as market power abuse may require the application of well-
tailored structural solutions, legislation should clarify the States 
are authorized to require divestiture where appropriate and necessary; 
and 4) that State regulators have authority to ensure effective retail 
markets and should eliminate any barriers to the exercise of that 
authority by the States.
    We believe these legislative suggestions should be included in both 
S. 388 and S. 597. Additionally, NARUC is concerned that the White 
Paper implies preemption of State market power jurisdiction by 
remaining silent on any role for the States.
                      regional planning and siting
    The main impediment to siting energy infrastructure is the great 
difficulty in getting public acceptance for needed facilities. Quite 
frankly, this tells us that no matter where siting responsibility 
falls, with State government or the Federal government, siting energy 
infrastructure will not be easy and there will be no ``quick fix'' to 
this situation.
    NARUC believes that the States should do more to improve upon the 
tremendous success story of the nation's electricity infrastructure. 
States exercising jurisdiction over the siting and certification of 
transmission facilities should not discriminate against interstate 
facilities, meaning that in general, interstate facilities should be 
sited, certificated, and otherwise regulated under the same standards 
and procedures as intrastate facilities.
    NARUC is strongly opposed to Federal eminent domain and siting 
authority. However, NARUC supports voluntary regional bodies that 
permit the States in which an interstate transmission facility is 
proposed to be sited, to issue certificates authorizing the 
construction of the proposed facility through collective 
decisionmaking. If States choose to retain certification authority for 
themselves, there should be agreed upon mechanisms to resolve disputes 
where individual States involved have come to conflicting and/or 
inconsistent determinations in their respective deliberations. These 
voluntary regional bodies could: address siting of transmission; 
identify regional bulk power market needs for State siting agencies to 
consider in their respective deliberations; and, plan for the 
construction of new interstate transmission facilities.
    Congress should affirm that States have the primary authority to 
establish, operate and govern these voluntary regional siting bodies, 
and the Federal Energy Regulatory Commission (FERC) could act as an 
appropriate ``backstop'' authority where States or regions fail to act. 
Additionally, Congress should provide an explicit grant of authority to 
the States and FERC to act in cooperation.
    Because the White Paper develops a necessity for FERC siting 
authority we must strongly oppose the provisions of this section that 
contemplate such authority going to FERC. While NARUC is supportive of 
the concept of a voluntary regional approach, NARUC is equally in 
opposition to the proposal found in the White Paper that contemplates 
FERC preemption of the regional bodies and the non-voluntary nature of 
the White Paper proposal. Additionally, as a matter of public safety, 
the States should continue oversight of maintenance requirements.
                       market transparency rules
    Many regional electric markets throughout the country have 
experienced price spikes of unusual and unexpected proportions. These 
price spikes have led to curtailment or shutdown of operations of some 
large industrial customers and to increased prices for smaller 
commercial and residential customers.
    The high market price volatility has raised concerns about the 
integrity of the markets, leading to calls from numerous participants, 
consumers and policy makers for heightened monitoring of these markets 
by regulatory bodies. In order to identify corrective policy options to 
assure the public of the competitiveness and efficiency of the 
developing wholesale electricity market and its prices, regulatory 
bodies need access to data such as production for generating plants, 
transmission path schedules and actual flows.
    The electric industry restructuring efforts of the Federal 
government and the various States are based upon an assumption that 
wholesale markets are workably competitive. To that end, policy makers 
must have the ability to provide confidence to an already skeptical and 
uneasy public that the market is not being ``gamed.'' This confidence 
can only be provided if regulators are able to access the data 
necessary to ensure that the market is functioning in a truly 
competitive fashion. To the extent data is currently shared among 
market participants for purposes of reliability, it should also be 
available to regulators and the public.
    NARUC supports legislation recently introduced by Senator Wyden and 
co-sponsored by Senator Burns as an effective way to ensure both 
Federal and State regulators have the information necessary to 
adequately monitor wholesale electricity markets and to assure proper 
access to such information. NARUC believes this legislation would 
provide great benefits to the market and its customers and should be 
included in any comprehensive energy bill.
                            puhca and purpa
    NARUC has adopted resolutions that support Congressional action to 
address the Public Utility Holding Company Act (PUHCA) and the Public 
Utility Regulatory Policies Act (PURPA) provided certain conditions are 
met. In the case of PUHCA, we believe that Congress could substantially 
streamline the statute (while providing State commissions and FERC 
enforceable access to holding company books and records, such as in 
sections 814 and 815 of S. 389) only as part of a broader legislative 
effort to restructure the utility industry. With respect to PURPA, we 
would support prospectively repealing the utility mandatory purchase 
requirements, conditioned upon the development of competitive electric 
markets and as part of broader restructuring legislation, not as a 
stand alone initiative.
    As a general matter, it is NARUC policy that neither PUHCA nor 
PURPA should be repealed on a stand-alone basis or in a vacuum. NARUC 
believes that relief from these statutes should be contingent upon the 
development of competitive markets as determined through a State 
commission supervised restructuring program.
    I wish to address a specific concern with S. 388. Section 803 is 
intended to protect prior PURPA contracts by preempting State 
ratemaking authority. Specifically, it restricts the ability of State 
commissions to require utilities to take steps to mitigate stranded 
costs that may result from above-market contracts. Section 803 of S. 
388 would leave little incentive for utility companies to minimize 
costs passed through to customers, holding harmless utilities and 
qualifying facilities.
                  consumer information and protection
    As we have seen in restructured telecommunications markets, the 
movement to competition in retail energy markets will require State 
regulators to be especially vigilant on such consumer protection issues 
as slamming (unauthorized switching of consumers to alternative service 
providers) and cramming (charging consumers for services they did not 
request).
    Complaints to State commissions about utility service quality and 
about specific practice have burgeoned in recent years. Most States 
have expanded their customer service programs. Many State legislatures 
have adopted tough new laws to protect customers from practices such as 
slamming and cramming. Through NARUC and the National Regulatory 
Research Institute, State commissions have worked together to develop 
creative and effective new customer education and protection programs. 
NARUC has strongly supported policies to provide consumers with price 
and environmental impact information concerning their electricity 
consumption. These efforts strengthen competition, especially for small 
business and residential customers by giving customers the confidence 
they need to participate in energy markets and by keeping the bad 
apples out of the energy market barrel.
    Federal restructuring legislation must not interfere with State 
efforts to protect consumers, either by preempting State authority or 
precluding States from adopting more protective standards in areas 
where Federal standards apply.
                            public benefits
    NARUC continues its insistence that public benefits programs must 
be included in any federal legislation, however we believe that further 
study of societal costs and benefits is warranted prior to NARUC 
supporting any particular implementation or funding mechanism for the 
continued support of public benefits programs.
                             tax provisions
    NARUC has taken no position on the tax provisions described in the 
White Paper or in S. 388 and S. 597.
    In conclusion, I would like to thank the Chairman, the Ranking 
Member and the Committee for giving me an opportunity to appear on 
behalf of NARUC. On the jurisdictional issues where consensus is 
difficult to reach, such as siting RTO membership and retail 
transmission, we would urge the Committee to defer to the courts and 
FERC to wrestle with these issues. In other critical areas such as 
enforceable reliability standards, uniform interconnection rules and 
development of market monitoring tools, we urge the Committee to move 
forward with legislation to serve the goal of establishing workably 
competitive and transparent wholesale power markets.
    Thank you for your attention, and I look forward to any questions 
the Committee may have.

    The Chairman. Thank you very much for your testimony.
    Mr. Dushaw.

  STATEMENT OF JAMES L. DUSHAW, DIRECTOR, UTILITY DEPARTMENT, 
        INTERNATIONAL BROTHERHOOD OF ELECTRICAL WORKERS

    Mr. Dushaw. Thank you, Mr. Chairman. I guess it's enough to 
say the IBEW, the International Brotherhood of Electrical 
Workers, is the union that represents the majority of the 
unionized electric utility employees in the Nation, some 
220,000 more in Canada, and working in all aspects of the 
industry and in all types of ownership, Federal, municipal, 
investor owned, coop.
    It should be clearly understood, Mr. Chairman, that the 
IBEW doesn't believe that average Americans, workers and 
families are calling for commoditization and restructuring of 
the industry. They are becoming aggravated with the risks and 
they're becoming more apparent. Not to mention what has been a 
huge transfer of wealth taking place. Those real energy costs 
take a bigger bite out of workers' household budgets.
    This morning, I want to briefly address the relationship 
between the American electric utility worker and the 
reliability of the utility system, I think a faction that has 
been overlooked up to this point. Some energy marketers would 
have us believe it's been said their reliability or it should 
be just a function of the marketplace. Some have urged that the 
Nation should not afford ``a gold plated system'' as they 
believed the earlier compact had delivered.
    Obviously, we would have to accept less reliability as a 
quid pro quo for competition. IBEW workers take serious issue 
with all these philosophies. They see that for the overwhelming 
majority of Americans, reliable electric power is an essential 
service, not just to market commodity.
    Beginning in 1990, in the advent of competition, electric 
utilities, mostly the large IOUs, began to downsize their 
companies to look good in the Wall Street Journal and to gain 
more efficiencies. The Energy Information Administration 
documents the cascade of the utility downsizing over a 10-year 
period that has resulted in more than a 27 percent smaller 
electric utility operations workforce. These are not 
administrative personnel. These are hands on work force people. 
That trend continues to this day and I think is a cause for 
serious concern.
    Now what do these numbers actually mean in terms of real 
world reliability experiences? Well, the report of the U.S. 
Department of Energy Power Outage Study Team uncovered several 
factors common to the eight major outages of the summer of 1999 
which were the object of this study. The IBEW measured several 
of the findings as attributable to cutbacks in the work force 
and lack of maintenance as budgets were compressed in order to 
meet the challenges of competition. The Keystone Study released 
just last month found that from 1994 to 1999 Pennsylvania 
utilities decreased their work force by about 6,500 people. 
Perhaps coincidentally at this same time period, customer 
complaints more than doubled.
    Electric utility outages not including major storms lasted 
on average, in Pennsylvania, 30 minutes longer in 1999 than 
they did in 1994. During the 6 years examined by the study, 
Pennsylvania's utilities reinvested just 5 percent of their 
profits in Pennsylvania's utility systems. The rest amounting 
to more than $15 billion was spent elsewhere off in another 
State or even in other countries. Consumers and workers do not 
appear to have gained ground and investment trends raised 
questions about the long term adequacy and safety of 
Pennsylvania's utility infrastructure.
    With competition, the economic players pushing electric 
restructuring have no allegiance to the broader public 
interest. Evidence, how all the deal makers ducked 
responsibility when California went sour. Nobody seemed to be a 
part of that deal in the end now. The market is not designed 
nor equipped to address reliability issues for the average 
consumer. We believe it will take a proactive public sector 
working with the appropriate government entities to safeguard 
reliability.
    Common sense tells you that if the customer base for 
electricity is growing, and it is, and the work force that 
supplies that electricity is shrinking, cut to the bone and 
then some, we've got problems and things are going to get worse 
before they get better because there are other negative factors 
that impact the worker reliability equation.
    I've shown you a work force dramatically diminished in 
numbers. Add that to the fact that the average utility worker 
is in their 1940's, mid-1940's, and top that with the fact that 
almost all utilities stopped funding apprentice and training 
programs about 8 to 10 years ago. In other words, we're facing 
a generation gap. There are few trained workers anywhere in the 
United States to step up and fill the jobs that even now are 
going begging. Some utilities are hiring directly now from 
Canada now. These are trained workers.
    Utility employers have cannibalized each other's work 
forces until there's nobody left to hire. So where will this 
new skilled work force come from? Obviously, the training of 
this new utility work force will continue to be a key 
reliability issue. At the end of the policy chain, there is 
somebody with hands on responsibilities to make the system 
work. These people have huge responsibilities for reliability 
and require training typically 5 years for a trained worker as 
a lineman at this hands on stuff.
    Well, the IBEW and the EEI in accordance with the National 
Skills Standards Act of 1994 have been working with each other 
and with the National Electric Cooperative Association and the 
American Public Power Association that's trying to come to some 
sort of an approach to this. So the IBEW here urges Congress to 
assist this process by endorsing guidelines for model codes and 
standards for training and reliability.
    Basically, the idea is is that Congress would in some way 
urge the Secretary of Energy to facilitate development of codes 
and standards for worker training and also for reliability. 
There are innumerous standards that the industry has invested a 
lot of time and money and effort in developing but it is not 
homogenized or coordinated in any way.
    So we would urge that Congress take a hard look at urging 
the Secretary of Energy to develop guidelines in both of these 
areas, worker training and reliability, to put forth for 
adoption voluntarily by the States. In other words, we bring 
the best in the industry together to develop the best possible 
approach to this. Thank you.
    [The prepared statement of Mr. Dushaw follows.]
   Prepared Statement of James Dushaw, Director, Utility Department, 
            International Brotherhood of Electrical Workers
    Good morning Mr. Chairman, and Members of the Committee:
    My name is Jim Dushaw and I am the Director of the International 
Brotherhood of Electrical Workers Utility Department. Thank you for 
inviting the IBEW to comment this morning.
    Of the 95% of investor-owned electric utilities that employ union 
members, the International Brotherhood of Electrical Workers represents 
98% of those workers. We also represent the largest number of unionized 
employees working for municipal and rural cooperative employers, and 
the IBEW represents workers at federal electricity facilities, such as 
TVA and Bonneville Power. Of the three-quarter million membership of 
IBEW, more than two-hundred-fifty thousand of them are utility workers, 
who are covered by some 1400 collective bargaining agreements in the 
U.S. and Canada.
    It should be clearly understood from the outset that the IBEW does 
not believe that average Americans, workers and families, are calling 
for the commoditization and restructuring of electricity and, indeed, 
are becoming aggravated with the risks that are becoming more apparent; 
not to mention the huge transfer of wealth taking place, as real energy 
costs take a bigger bite out of household budgeting.
    This morning I will briefly address the relationship between the 
American electric utility worker and the reliability of the electric 
utility system. Some energy marketers would have us believe that 
reliability is, or should be, just a function of the market. Some have 
urged that the nation should not afford a ``gold-plated system'' as 
before the drive to restructuring. Others would have us accept less 
reliability as the quid pro quo for achieving competition. The IBEW 
utility workers take serious issue with all of these philosophies. For 
the overwhelming majority of Americans, reliable electric power is an 
essential service--not a market commodity.
    Beginning in 1990, in anticipation of the coming competitive 
marketplace, electric utilities, mostly the large IOU's, began 
downsizing workforces in order to cut costs and gain the edge they 
believed would secure success, or at least survival, in the 
marketplace. The Energy Information Administration documents the 
cascade of utility downsizing over a 10-year period that has resulted 
in a 27% smaller workforce overall--and that trend continues to this 
day.
    What do those numbers actually mean in terms of real-world 
reliability experiences?
    The report of the U.S. Department of Energy Power Outage Study Team 
uncovered several factors common to the eight major outages of summer 
1999, which were the object of their study. The IBEW measured several 
of the findings as attributable to cutbacks in the workforce and 
maintenance.
    The Keystone Study, released last month, found that from 1994 to 
1999, Pennsylvania utilities decreased their workforce by about 6,500 
people. Perhaps coincidentally during this same time period, customer 
complaints more than doubled to over 10,000. Electric utility outages 
(not including major storms) lasted, on average, 30 minutes longer in 
1999 than they did in 1994.
    During the six years examined by the study, Pennsylvania's 
utilities reinvested just 5% of their profits in Pennsylvania's utility 
systems. The rest, amounting to more than $15 billion, was spent 
elsewhere (often in other states or even in other countries). The study 
concluded that utility CEOs (with 76% pay hikes in that time frame), 
and the electric utilities themselves have prospered most as 
deregulation has moved forward. Consumers and workers ``do not appear 
to have gained.'' And investment trends raise questions about the long-
run adequacy and safety of Pennsylvania's utility infrastructure.
    Pennsylvania has been touted as the poster child of electricity 
deregulation. Residential customers have indeed enjoyed lower 
electricity rates--mandated by a legislated price cap (recently 
extended for up to five years). No one in Pennsylvania has had to 
suffer free-market electricity prices.
    With competition, the economic players pushing electric 
restructuring have no allegiance to the broader public interest. 
Evidence: how all the dealmakers ducked responsibility when California 
went sour. The market is not designed nor equipped to address 
reliability issues for the average consumer. We believe it will take a 
proactive public sector working with the appropriate government 
entities to safeguard reliability.
    Common sense tells you that if the customer base for electricity is 
growing, and it is, and the workforce that supplies that electricity is 
shrinking, cut to the bone and then some, we've got problems. And 
things are going to get worse before they get better, because there are 
other negative factors that impact the worker/reliability equation.
    I've shown you a workforce dramatically diminished in numbers; add 
to that the Edison Electric Institute statistic that the average 
utility worker is in their forties, and top that with the fact that 
almost all utilities stopped funding apprentice training programs about 
8-10 years ago. In other words, we're facing a generation gap--there 
are few trained workers anywhere in the U.S. to step up and fill the 
jobs that even now are going begging. Utility employers have 
cannibalized each other's workforces until there's nobody left to hire.
    So where will this new, skilled workforce come from? Obviously, the 
training of this new utility workforce will continue to be a key 
reliability issue. Sooner or later it may, of necessity, become an 
important regulatory issue.
    The IBEW and Edison Electric Institute, in accordance with the 
National Skills Standard Act of 1994, have been working with other 
industry stakeholders to develop skills standards for electric utility 
workers.
    The IBEW urges Congress to assist this process by endorsing 
guidelines for model codes and standards for training and reliability.
    A national training standard would require every employer in the 
electricity industry to employ only workers certified to that standard, 
and to train them to that standard if they were not. This would 
increase system reliability because industry across the board would be 
required to employ workers who are trained to established minimum 
levels, know their jobs, and be able to do the work efficiently and 
safely.
    Congress envisioned that the 1992 Energy Policy Act would create a 
vibrant robust wholesale electricity market, which would lower bulk 
power prices and benefit all consumers.
    The ensuing years have brought forth everything but. The electric 
power industry has become destabilized to the degree that industrial 
customers feel they must buy their own electricity generators to insure 
supply! Reliability has become a function of the market all right--go 
to the market and buy your own generator!
    To summarize, system reliability depends in great measure upon a 
trained, experienced and adequate workforce. Presently, the aging 
workforce has been diminished by layoffs, working longer hours on 
systems poorly maintained, with no relief in sight. Training programs, 
buttressed with national skills standards, and having mechanisms to 
attract and retain qualified workers, are critical to the maintenance 
and expansion of the national electrical systems.
    Additionally, Mr. Chairman, the IBEW recognizes your remarkable 
effort to distill the vital issues needed to be addressed in order to 
begin to calm the industry. Among these, we would rank accelerated 
development and investment in the combined U.S. transmission grid 
system as most important.

    The Chairman. Thank you very much for your testimony.
    Mr. Hamilton.

STATEMENT OF DAVID HAMILTON, POLICY DIRECTOR, ALLIANCE TO SAVE 
                             ENERGY

    Mr. Hamilton. Mr. Chairman, my name is David Hamilton. I'm 
policy director of the Alliance to Save Energy, a bipartisan 
non-profit coalition of business, government, environmental and 
consumer leaders dedicated to improving the efficiency with 
which our economy uses energy. And considering your familiarity 
with the organization, I'll leave that at that.
    But I appreciate the opportunity today to testify in 
support of the creation of a public benefits fund, a mechanism 
designed to help attack energy waste in our Nation's electric 
systems, save taxpayers money, increase the availability and 
the reliability of the nation's electricity supply, improve 
services for low income Americans, reduce environmental 
pollution, and help meet our future electricity needs more 
cheaply, quickly, and cleanly.
    One might say, Mr. Chairman, that 2001, considering the 
huge amount of coverage and the swirling debates over energy 
issues could be described as 2001, an energy odyssey. We have 
heard in different places that we have an energy crisis. We've 
heard that we don't have an energy crisis. We've heard that 
California's problems have been the result of the lack of 
Arctic oil and that actually California's attempts to save 
energy have been the cause of their problems.
    It's been very difficult to sort out exactly what the truth 
is in the swirling issues of energy but what we do know is that 
we're at a point at which we need to make decisions and move 
forward. And the one thing that most parties seem to agree with 
is that energy efficiency needs to be an elemental component in 
a balanced energy program.
    The Vice President, the President, leaders of Congress and 
both parties have expressed that, but coming up with policies 
that are agreeable, that actually aggressively dip into energy 
waste, have been more elusive to come by and there's been a 
general resistance to the policies that either take a lot of 
resources or that require producers of products to make their 
products much more efficient.
    I'm here to testify in support of your proposal to create a 
public benefits fund, Mr. Chairman. There are a number of 
conditions in the system and in the economy right now which 
make this a wise and sound thing to do, including rampant 
energy waste in the system, lack of guidance for consumers as 
to how to save energy while their bills are rising, large 
decreases over the past decade in public benefit spending, 
we've got reliability problems that have affected most regions 
of the country over the last several years, and a dearth of 
substantive measures to achieve greater energy efficiency.
    The bottom line, Mr. Chairman, is that the Alliance to Save 
Energy estimates that the public benefits fund that you 
recommend can displace up to a 130,000 megawatts over the 
next--by 2020. That's more than 400 300-megawatt powerplants 
and nearly one-third of the needed capacity increases estimated 
by the Energy Information Administration in 1999. We believe it 
could cut America's energy bills by $135 billion.
    Public benefits programs have a long and fruitful history 
of success. I'll point up a couple of examples. The Vermont 
legislature could not agree on utility restructuring. What they 
could agree on was that they needed to do spending on energy 
efficiency and over the last 10 months of the year 2000, they 
spent a little over $5 million on energy efficiency programs 
and were able to displace six megawatts of winter peak and over 
two megawatts of summer peak at a cost of 2.6 cents per 
kilowatt hour at a time when the wholesale price in Vermont was 
over 5 cents a kilowatt hour. When we make the claim that 
energy efficiency can deliver electricity resources, you know, 
quickly, cheaply and cleanly, this is the kind of thing we 
mean.
    Savings in Vermont over 10 months amounted to $17 million 
on a $5 million investment and a 220 percent return on 
investment in a very short period of time. These investments 
are out there and waiting to be capitalized on and reaped.
    The Rand Corp. did a study on California energy efficiency 
programs from 1977 to 1995 and came up with again startling 
conclusions that they--the commercial and industrial programs 
returned over approximately $1,000 per capita over that time 
period for $125 per capita expenditure. At the same time, it 
prevented a 40 percent increase in stationary source air 
pollution by not having to go to powerplants and perhaps most 
indicative of the ancillary economic benefits of increased 
energy efficiency of taking capital away from unproductive uses 
like keeping the lights on and putting them into productive 
uses like innovation and investment, the 3 percent of the 
California gross State product in 1995 was the result of 
lowered energy intensity that the multiplier effect for taking 
money out of unproductive and putting it into productive uses 
is greater than in most cases.
    And in a year of hand wringing over what we can do in the 
short term, these programs remain out there. Now public 
benefits programs have been decreased by 43 percent since the 
early 90's. Part of that is the restructuring in States where 
separating generation, distribution and transmission where you 
don't have a single interest in building less generation that 
you used to.
    You've got States that have promoted deregulation and feel 
that they have less authority to require utilities to do 
spending than in the past. But in any case, we have less than 
half the resources to do this kind of spending at a time when 
we need a great deal more of those kind of resources.
    Finally, there--all we've heard about, the difficulties of 
the transmission system and how to insure reliability, there is 
another way to look at it. And if you can--rather than thinking 
about what is the next weakest link in the chain, think about 
lightening the load at the end of the chain so that, you know, 
ultimately the system is more secure because you're less likely 
to reach that critical point because you've saved energy.
    The red light's on and those are my basic points. Thank you 
very much, Mr. Chairman.
    [The prepared statement of Mr. Hamilton follows.]
        Prepared Statement of David Hamilton, Policy Director, 
                        Alliance to Save Energy
    Mr. Chairman and Members of the Committee, thank you for the 
opportunity to testify before you today in support of the creation of a 
Public Benefits Fund, a mechanism designed to help attack energy waste 
in our nation's electric system, save taxpayers money, increase the 
availability and reliability of the nation's electricity supply, 
improve services for low-income Americans, reduce environmental 
pollution, and help to meet our future electricity needs more cheaply, 
quickly, and cleanly.
    My name is David Hamilton. I am Policy Director of the Alliance to 
Save Energy, a bi-partisan, non-profit coalition of business, 
government, environmental, and consumer leaders dedicated to improving 
the efficiency with which our economy uses energy. Senators Charles 
Percy and Hubert Humphrey founded the Alliance in 1977; we are grateful 
to have you as our Chairman, Sen. Bingaman, and, as you know, the 
current Vice Chairs are Sen. James Jeffords and Rep. Ed Markey.
    Over sixty companies and organizations currently support the 
Alliance to Save Energy under our well-known Alliance Associates 
Program. If it pleases the Chairman I would like to include for the 
record a complete list of the Alliance's Board of Directors and 
Associates, which includes many of the nation's leading energy 
efficiency manufacturers and end users, electric and gas utilities, 
research organizations, state energy programs, and others providing 
cost savings and pollution reduction to the marketplace.
    The Alliance has a long history of researching and evaluating 
federal energy efficiency efforts. We also have a well-established 
history of supporting and participating in efforts to promote energy 
efficiency that rely not on mandatory federal regulations, but on 
partnerships between government and business and between the federal 
and State governments. Federal energy efficiency programs at the 
Department of Energy (DOE), the Environmental Protection Agency (EPA), 
and other agencies are largely voluntary programs that further the 
national goals of environmental protection, as well as broad-based 
economic growth, national security and economic competitiveness.
             summary: energy efficiency in an energy crisis
    Mr. Chairman, the economic and political developments surrounding 
energy issues that have occurred this year could--in cinematic form--be 
titled ``2001: An Energy Odyssey.'' The vast media coverage of energy 
issues and the resultant spin have some pundits predicting a full blown 
energy crisis requiring the dismantling of our infrastructure of 
environmental regulations, while others denounce a crisis mentality as 
an opportunistic spin on a few price and supply blips. California's 
unusual situation has had people blaming the rolling blackouts and 
financial woes that have occurred on everything from the lack of oil 
from the Arctic National Wildlife Refuge, to California's aggressive 
efforts to save energy in the 1980s and early 1990s,
    Whatever the final resolution of these questions, we are at a 
political point at which we need to make decisions about how we proceed 
in the future to provide clean, cheap, reliable energy supplies to our 
nation. Mr. Chairman, nearly everyone in this debate--either sooner or 
later--has advocated the nation's need to pursue aggressive energy-
efficiency measures as part of a balanced energy bill. The President 
and Vice-President have, after initial equivocation, now include energy 
efficiency and conservation in their discussions on energy policy 
options. House and Senate leaders on both sides of the aisle have done 
the same. Public opinion polls have demonstrated overwhelming support 
for making energy-efficiency a key, active component of any energy 
plan.
    Mr. Chairman, developing sound policies to accomplish this goal has 
proven somewhat more elusive. While the President's energy plan 
contained excellent arguments for improving energy-efficiency, the 
actual details of the plan failed to provide methods to substantially 
reduce America's energy use in transportation, electricity, or home 
heating fuels. Similarly, the bill expected to reach the House floor 
next week--with the exception of the tax title--fails to produce 
meaningful energy-efficiency improvements. Although we anticipate that 
the provisions of the tax title will help to reduce energy use in the 
residential sector, the Alliance feels that much more can and should be 
done by Congress to take advantage of this golden opportunity to 
promote energy efficiency. Member's have focused their concerns on 
possible costs to consumers and industries--however we have strong 
analytical evidence that demonstrates the overall savings with the 
implementation of aggressive energy efficiency measures and policies.
    If we are to actually improve energy-efficiency and achieve the 
``balanced'' energy policy that nearly all interests claim to seek, Mr. 
Chairman, we need to have the will to commit resources to where they 
are needed and to carry out these improvements. The Alliance to Save 
Energy regards the creation of a public benefits fund as a critical 
element in any energy plan that hopes to bridge the electric system of 
today with a deregulated market of tomorrow. Mr. Chairman, we cannot 
just do what is easy in a national energy plan. We have to have the 
commitment to take ambitious steps to capture the benefits of energy-
efficiency for the budgets of Americans, our environment, our national 
security, and our economy.
                      why a public benefits fund?
    Mr. Chairman, the concept of a public benefits fund is designed to 
solve a number of the problems with the way we generate, transport, and 
sell electricity in the United States that are not currently being 
effectively addressed. A public benefits fund will pull together 
resources through which states can--in a targeted, flexible fashion--
attack pockets of energy waste, seize opportunities to employ renewable 
energy, improve electric services for low-income Americans, and develop 
targeted mechanisms for providing electricity cleanly and cheaply.
    We praise your introduction of this provision in your own 
legislation and see it as a logical and critical compliment to other 
measures in your bill to further the deregulation of the electricity 
industry.
    The current conditions that warrant the creation of a federal 
public benefits fund are:
    1. Rampant energy waste in the electricity system;
    2. Lack of guidance for consumers in identifying ways to save 
energy;
    3. Large decreases over the past decade, in spending on public 
benefits programs;
    4. Problems with the reliability of the electric system in the 
Western, Mid-Western, and Eastern United States over the past three 
years; and
    5. A dearth of substantive measures to achieve greater energy-
efficiency in the electric system.
                    what is a public benefits fund?
    As created in S. 597 and in other legislation introduced in the 
last Congress, a public benefits fund would be created through the 
imposition of a non-bypassable charge on electricity entering the 
transmission grid. The fund would be collected and administered by an 
independent fiscal agent. The monies collected in the fund would then 
be redistributed to the state and tribal governments for specific uses 
to promote public benefits that are not addressed through the interests 
of power generators, or transmission and distribution utilities.
    Proposals to date have varied as to the level of the charge, how 
the money is administered, and the specific public purposes qualifying 
for funding under the proposal. Some are set up as matching funds for 
public purpose expenditures, others leave the distribution scheme to 
the Secretary. Some contain caps on the amount of money that can be 
collected, while others set out a procedure by which states apply for 
funding according to their previous year's expenditures.
    Twenty-three states now have public benefits programs--ways of 
conglomerating resources to be targeted toward saving energy and other 
public purposes. These states are: Arizona, California, Connecticut, 
Delaware, District of Columbia, Illinois, Maine, Maryland, 
Massachusetts, Montana, Nevada, New Hampshire, New Jersey, New Mexico, 
New York, Ohio, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, 
West Virginia, and Wisconsin. Some of these programs are funded by 
wires charges, some are funded by direct state appropriations or other 
methods.
    A federal public benefits fund is needed to augment state resources 
devoted to these public purposes, and to spur the creation of public 
benefits programs in the more than one-half of the states that do not 
undertake them now.
                     the bingaman proposal (s. 597)
    S. 597 would levy a one mill per kilowatt-hour charge on generators 
of electricity. This charge would be collected as the electricity 
enters the transmission system. Such a minor charge would raise a 
significant amount of money for the fund--estimates run as high as $3.4 
billion each year given current levels of usage. The Alliance to Save 
Energy estimates the residential share of the cost to be approximately 
$1.00 per month. An independent fiscal agent appointed by the Secretary 
of Energy on a monthly basis would collect the monies monthly from 
transmission utilities and disbursed in block grants to states and 
tribes. Imported electricity will also be assessed the one mill charge.
    The specific public purpose programs delineated in the Bingaman 
proposal include:

   low-income assistance;
   improvement of electric facilities for rural or remote 
        communities;
   electricity demand reduction;
   greenhouse gas mitigation projects (must be 50 percent cost-
        shared);
   new renewable energy capacity or efficiency improvements to 
        existing renewable energy capacity;
   increased efficiency of hydroelectric dams or providing 
        additional capacity at existing dams.

    The Secretary of Energy would be charged with developing a formula 
to allocate public benefit funds among the states and tribes based on 
the number of low-income households and the average annual cost of 
electricity to households in those jurisdictions. In addition, the 
Secretary would be responsible for developing criteria that delineate 
what are and what are not public purpose programs as guided by the 
legislation. The states and tribes may either receive and administer 
the monies themselves, or they may designate a separate entity to 
perform that function. If enacted, the fund in S. 597 will remain in 
existence until December 31, 2015.
    The bottom line, Mr. Chairman, is that the Alliance to Save Energy 
estimates that the public benefits fund in your legislation can 
displace up to 130,000 MW of electric capacity by the year 2020! That 
is equivalent to more than 400 300-MW power plants, and nearly one-
third of needed capacity increases by 2020 estimated by the Energy 
Information Administration in 1999. We believe it could cut America's 
energy bills by $135 billion, and bring with it significant reductions 
in both criteria air pollutants and greenhouse gases.
                   comments on the bingaman proposal
    1. Greenhouse gas mitigation needs further definition. In addition, 
we don't believe it is appropriate for a state to spend its entire 
share of the fund in this area only, so we would favor a cap on the 
amount of the fund available for this purpose.
    2. As opposed to other proposals, this public benefits fund does 
not include a state match. A match or partial match provides 
significant incentive for a state to maximize its efforts on public 
purpose programs, and thus stands to save more energy than the program 
outlined here. While we acknowledge political constraints in this area, 
we support continued consideration of measures to maximize state 
participation.
    3. The legislation leaves the determination of what is an eligible 
public purpose program up to the Secretary. This provides less public 
accountability than other mechanisms. We urge that the proposal include 
opportunity for public input and comment to the criteria developed by 
the Secretary.
  capturing energy waste in the electric system cleanly, cheaply, and 
                                quickly
    Public benefits programs have been startlingly successful at 
attacking energy waste on a local and regional basis. During the decade 
leading up to 1994, demand side programs in the nation were able to 
displace 30,000 MW of electric capacity--or the equivalent of 100 300-
MW power plants. This substantial savings was achieved for a utility 
cost of less than $0.03 per kilowatt hour, considerably less than many 
wholesale rates for electricity then and now.
    Take the Vermont experience in 2000. Several years ago, the Vermont 
Legislature took up utility restructuring legislation. Like the state 
of Wisconsin, after a tough political fight over deregulation ground to 
stalemate, what they decided they could agree on was to initiate 
investments in energy-efficiency. To do this, the state set up an 
``energy-efficiency utility,'' run by a private contractor and 
accountable to the Vermont Public Service Board. During the final 10 
months of 2000--while undergoing all the additional burdens of setting 
up a major project--Efficiency Vermont was able to displace 2.1 MW of 
summer peak power and 6.3 MW of winter peak. All for a cost of $0.026 
per kilowatt hour. This rate was achieved at a time when wholesale 
rates in Vermont are more than $0.052 per kWh. In 10 months, the 
Vermont effort netted $17.7 million in saved electricity against 
expenditures of $5.4 million--a 227 percent return on investment in the 
first year of operation.
    In this year of hand-wringing over what we can do in the short term 
to relieve the burden of high energy prices and supply constraints, 
Vermont provides an example of high returns in a very short period of 
time.
    In March 1999, the Rand Corporation published a study of the 
results California utility energy-efficiency investments between 1977 
and 1995. The Rand study came to some remarkable conclusions, Mr. 
Chairman. Rand concluded that energy-efficiency efforts paid back into 
the state's economy at roughly $1000 per capita on investments of $125 
per capita over that period. In addition, the energy saved prevented a 
40 percent increase in stationary source air pollution by avoiding the 
construction of many new power plants. Most startling of all, Mr. 
Chairman, might be that Rand estimates that 3 percent of the California 
gross state product in 1995 was produced due to lowered energy 
intensity in the state over the preceding period. An entire year's 
worth of healthy economic growth, derived from taking money out of 
relatively unproductive uses like keeping the lights on, and made 
available for productive uses like investment and innovation.
    I could spend the entire hearing recounting success stories 
achieved by demand-side energy-efficiency investments, Mr. Chairman. 
The message is, however, that these programs work, and we need more of 
them in more places.
consumers need additional guidance and help to lower their energy bills
    Inherent in a wide variety of public benefits programs, Mr. 
Chairman, is consumer education and in many cases, actual subsidies for 
the purchase of energy-efficient equipment for home owners. While 
residential consumers will pay as much as an extra dollar per month for 
electricity under the public benefits fund contained in S. 579, public 
benefits programs give them the tools to save a much greater amount 
than that on their electricity bills. For example, rebates offered for 
compact flourescent light bulbs can create substantial savings for 
consumers, while public education programs like the aggressive 
marketing of the Energy Star label in New York is giving consumers 
direction in targeting the purchases of appliances, refrigerators, and 
other energy-gulping devices toward the most energy-efficient options.
    In many cases, the public information extends well beyond 
electricity into other areas of home energy use. The spike in natural 
gas prices last winter resulted in millions of Americans scrambling to 
pay substantially higher home energy bills. The double duty now 
expected of natural gas supply to meet the home heating needs of over 
50 percent of American families and to power the lion's share of new 
electric generation will likely continue to be an issue in coming 
years. Public benefits programs can step in to substantially meet this 
need for information and even provide discounts to induce consumers to 
buy more efficient equipment.
    Along with making it easier to build more plants and transmission 
facilities, we must make it easier for consumers to trim their own 
energy use. The public benefits fund contained in the legislation is an 
excellent mechanism to achieve this.
           resources for public benefits: shrinking over time
    In the 1980s and early 1990s, Mr. Chairman, States justified their 
public benefits programs on the basis that saving energy to augment 
electricity supply was largely cheaper for utilities and ratepayers 
than building new generation. In addition, saving energy avoided the 
environmental downside of burning fossil fuels, could be deployed in a 
relatively short period of time, and reduced--rather than increased--
strain on transmission and distribution infrastructure.
    In addition, in many states a process known as Integrated Resource 
Planning (IRP) was employed to determine the best way to meet demand 
growth for the state or region. That involved actually considering 
alternatives like cost, environmental values, time of deployment, and 
overall load considerations before deciding on a course to expand 
capacity. In this context, many States required utilities to expend 
resources on public purpose programs and made those expenditures 
recoverable in rates. National expenditures for public benefits reached 
an estimated high of $3 billion in the early 1990s. Unfortunately, 
these impressive numbers have been steadily declining due to changes in 
the utility industry and lack of attention by States and spending on 
public benefit funds has fallen to an estimated $1.7 billion this year.
    Fast forward, Mr. Chairman, to the mid-to-late 1990s when States 
were involved in a frenzied effort to go in the other direction, away 
from considering options for the development of the electric system and 
toward market competition for electricity. In addition to the loss of 
rational comparison of alternatives, many States also no longer felt 
they could compel utilities to undertake public benefits programs when 
the overall direction of the market was toward deregulation. Finally, 
the widespread separation of generation, transmission, and distribution 
resources away from the traditional vertically integrated utility 
erased the inherent interest of utilities in meeting demand in the 
cheapest way. Distribution utilities no longer cared where the power 
came from, as long as they could get it cheaply, and generators had no 
desire to be constrained from building plants. In addition, almost all 
players braced for fierce competition in the industry and believed that 
payouts for public purpose programs would constitute both a hindrance 
to their competitive position and investments that might pay off for 
others, but not for them.
    All this brings us to today, where we are in a suspended transition 
to competition--some states have struck restructuring agreements, some 
have not begun the process, and still others have begun the process 
only to stop dead in their tracks. Major jurisdictional, environmental, 
physical, economic, and other questions need yet to be answered before 
the seamless national highway for electricity purchases--envisioned by 
those who originally espoused the brave new world of competitive 
electricity markets--can be realized. Sorting out all of these concerns 
is likely to take many years.
    In the meantime, Mr. Chairman, the need for the achievement of 
energy efficiency is greater than ever to help stabilize supply and 
price, reduce air pollution and greenhouse gases, and ease the need for 
massive infrastructure replacement. Public benefits programs are high-
yield, short term investments that provide nearly as much in ancillary 
benefits as in their considerable economic returns. The 43 percent 
reduction in public benefits spending since the peak in the early 1990s 
represents a critical missed-opportunity for the American consumer, 
environment, and economy.
                 cheaper, quicker, cleaner reliability
    Rising consumption of electricity in the United States has created 
a situation where peak demand for power is straining generation, 
transmission, and distribution capacity in many regions of the country. 
We have a variety of tools to address this problem. The one most 
pursued by regional power pools and organizations to date has been to 
focus on the weakest link in the chain that fails and to replace it, 
whether it is the transformer, transmission line, or the substation. 
Building new generation won't cure a transmission bottleneck or make a 
piece of equipment withstand the greater strain of a demand spike. Mr. 
Chairman, unless we are to replace our entire electricity 
infrastructure, this way of managing reliability will always sink to 
the next weakest link. The weakest link has to be addressed, of course. 
When a link breaks we have to fix it.
    But a better way to proceed, Mr. Chairman, is to reduce the strain 
on every link by lightening the load at the end of the chain. In many 
of the reliability incidents and price spikes we have observed over the 
past several years, the difference between a small increase in price 
and a major spiral has been a small amount of electricity in real 
terms. Energy-efficiency should play a major role in ensuring that the 
supply of electricity meets the demand. It is in policy-makers' 
interest and the interest of consumers to avoid being faced with 
rolling blackouts, severe price increases, and other disasters. The 
public benefits fund can contribute to the reliability of the system in 
a cheaper, quicker, cleaner, more targeted way than a wholesale drive 
to build more generation.
    Earlier, I outlined how pursuing greater energy-efficiency is no 
longer in the interest of generators or distribution utilities. That 
does not apply in cases where the reliability of the system is in 
question. We can look to California to supply the lesson that when 
power is scarce, or the ability to get it to the right place at the 
right time is impaired, the distribution utility faces significant 
exposure to price gouging by generators. Energy saved through a public 
benefits fund increases the stability of the system, thus lessening the 
risk to all parties in the regulatory and distribution process for 
electricity.
  a balanced energy policy: we must address waste in the electricity 
                                 system
    A federal public benefits fund is an aggressive, credible method by 
which to capture energy savings in the electric system. This is the 
kind of ambitious program that can deliver the kind of energy-
efficiency resources that will create a legitimately ``balanced'' 
national energy policy.
    Mr. Chairman, if we pass by this huge potential for energy savings, 
we will be denying electricity consumers the assistance they need to 
control their own energy use, the savings to the economy and their 
individual bills that is ripe for the taking, and the opportunity to 
have their electricity needs met without the environmental damage 
caused by the construction of more power plants than we really need.
    Thank you for this opportunity to testify in support of the public 
benefits fund proposal in S. 597. I'd be happy to take any questions 
you might have.

    The Chairman. Thank you very much for that testimony.
    Mr. Rouse, why don't you go ahead.

   STATEMENT OF JAMES B. ROUSE, ASSOCIATE DIRECTOR OF ENERGY 
POLICY, PRAXAIR, INC., AND CHAIRMAN, THE ELECTRICITY CONSUMERS 
                        RESOURCE COUNCIL

    Mr. Rouse. Thank you, Mr. Chairman. I am the Associate 
Director of Energy Policy for Praxair, a large energy intensive 
producer of industrial gases which is in Danbury, Connecticut, 
and I appear before you today as chairman of ELCON, the 
National Association of Large Industrial Consumers of 
Electricity which is based here in Washington.
    Let me say with some pride, Mr. Chairman, that the major 
concerns of ELCON members are nearly identical to those set 
forth in your White Paper issued July 20. That is market power, 
repeal the PUHCA reliability, transmission grid governance, and 
the two additional categories, regional planning and siting and 
market transparency rules.
    ELCON strongly supports FERC authority to promulgate rules 
for the independent operation of the grid and to compel 
utilities to turn over control of the transmission facilities 
to large regional independent organizations or regional 
transmission organizations or RTOs. FERC's recent July 12 order 
anticipates what the White Paper propounds and what you 
included in the last Congress and S. 1273, Mr. Chairman. 
Reliability will always be of paramount importance. ELCON was 
an active participant in the NERC process and supported the 
consensus language on reliability contained in S. 2071 last 
year. In addition to the creation of new statutorily authorized 
self-regulating organizations, any legislation must guarantee 
non-discriminatory access to the grid and clarify the current 
uncertainty about Federal and State jurisdiction over 
transmission.
    Market power will continue to be of intense interest as 
you've heard earlier today. Where buyers and sellers are able 
to engage in commercial transactions for supply sourcing, the 
FERC will encourage the development of a workably competitive 
market through setting of rates, terms and conditions for the 
transmission of that power through--and through the oversight 
of RTOs.
    In turn, RTOs will have an independent market surveillance 
function to monitor such markets for potential design flaws, 
gaming behavior and the exercise of market power. That function 
currently exists in the RTOs that have already been approved.
    ELCON is also pleased to note the reference to ``demand 
response mechanisms'' in the White Paper. ELCON has proposed 
that FERC add a ``ninth function'' to the list of the eight 
functions in Order 2000. This would require that markets for 
customer load response be integrated with other FERC real time 
markets.
    Regional planning and siting of new transmission capacity 
poses a challenge for you as legislators and policy makers 
alike. ELCON believes that Congress should delegate to the FERC 
the same authorities under the Federal Power Act with respect 
to the siting of interstate transmission as FERC is currently 
authorized under the Natural Gas Act with respect to interstate 
natural gas pipelines.
    As for transmission planning, expansion, and siting, ELCON 
believes that any FERC siting authority could be seated to the 
regional transmission organizations rather than creating a 
duplicative entity such as a regional compact.
    The RTOs can or can also oversee regional reserve 
requirements, maintenance obligations and market monitoring 
functions as I mentioned earlier. As with all other RTO 
functions, FERC maintains its oversight role in this area.
    Market transparency will clearly be a requirement for the 
new regime and market participants will need real time 
information on the regulated services including transmission 
capacity, ancillary services, and line loading. The Energy 
Information Administration and numerous commercial entities 
should guarantee an abundance of non-proprietary market 
information to encourage the efficient operation of the system 
and also vigorous commercial activity among the participants.
    Mr. Chairman, I would like to briefly address two of the 
other provisions in the White Paper. Regarding the repeal of 
PUHCA, in such eventuality, we need clear authority vested in 
the FERC to prohibit anti-competitive practices involving 
regulated utilities and their unregulated affiliates. And we 
argue that optimally PUHCA repeal should not be effective until 
competition on a nationwide basis is achieved.
    And finally while on the subject of repeal of laws 
beginning with the words public utility, any repeal of the 
mandatory purchase provisions of section 210 of PURPA must 
preserve the Federal guarantee of backup power at just and 
reasonable rates and those States without reasonable real 
customer choice. And there must remain the requirements for 
interconnect to the grid for all co-generators just as there 
would be for other suppliers of electricity.
    Mr. Chairman, for the reasons set forth at greater length 
in my written testimony, we believe this committee and this 
Congress must enact strong comprehensive Federal legislation to 
achieve workably competitive electricity markets and ELCON 
stands ready as it has for a quarter century to represent its 
members, to engage in the debate as we have and to propose 
policy alternatives and to participate in this momentous shift 
in the provision of an essential service which is electricity.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Rouse follows.]
  Prepared Statement of James B. Rouse, Associate Director of Energy 
Policy, Praxair, Inc., and Chairman, the Electricity Consumers Resource 
                                Council
    Good morning, my name is James B. Rouse, associate director, energy 
policy for Praxair, Inc. Praxair is a large industrial gases company, 
producing atmospheric gases: oxygen, nitrogen, argon and rare gases; 
our process gases include hydrogen, helium and carbon dioxide. For us, 
electricity is a raw material, constituting up to 70% of our operating 
costs. We operate in some 44 countries and are the largest industrial 
gases producer in North and South America. I am here today as chairman 
of the Electricity Consumers Resource Council, or ELCON. ELCON, 
established in 1976, is the national association representing large 
industrial users of electricity. ELCON's member companies come from 
virtually every segment of the manufacturing community.
    ELCON's members operate in a competitive, international environment 
and require an adequate and reliable supply of electricity at 
competitive prices in a vibrant interstate marketplace. Large users of 
electricity know very well that the decisions made in this Committee 
and by Congress will have a direct impact on their businesses' well 
being as well as business decisions. ELCON greatly appreciates the 
opportunity to testify. ELCON and its member companies favor 
competition over regulation and have long advocated truly open and 
fully competitive electricity markets, including retail access 
guaranteeing that all consumers have the right to choose their supplier 
of electricity and electricity services. We also believe that, just as 
is true for other energy products, a large national or even 
international market with consistent rules and standards is optimal for 
the sale and purchase of electricity. When it comes to electricity, we 
are dealing with a commodity sold in interstate commerce. Our existing 
electricity system clearly transcends state lines. We need a national 
framework and a strong federal bill. Consumers should benefit from a 
large, seamless interstate electricity market.
    ELCON members continue to support competition. However, we would 
assert that we do not have true competition anywhere. Several states, 
in attempting to restructure, has simply deregulated, or in some cases 
reregulated, existing monopolies. The failures to date, and California 
is perhaps the most egregious but there are others, represent failures 
of reregulation and failures of state legislative plans that included 
too many political compromises. The experiences in California and 
elsewhere cannot and should not be described as failures of 
competition.
    The major concerns of ELCON members are nearly identical to those 
set forth in the chairman's ``White Paper on Electricity Legislation'' 
issued July 20, 2001. As we identified those issues in testimony before 
this committee on April 20, 2000, they are the linked issues of Market 
Power, Repeal of the Public Utility Holding Company Act (PUHCA), 
Reliability, and Transmission and Grid Governance. The White Paper adds 
two other categories: (1) Regional Planning and Siting; and (2) Market 
Transparency Rules. Customer choice and retail access are wonderful 
goals, but they are worthless if the transmission system, which will 
remain monopolistic for many years, does not allow for the free and 
non-discriminatory movement of electricity from seller to buyer. Given 
that owners of monopoly transmission facilities will still exercise 
market power--that is monopoly power--I cannot emphasize too strongly 
that regulation is needed to ensure that the owners of the transmission 
system do not use their position to the detriment of real competition.
    We concur with the White Paper that FERC must have the authority 
and be required both to (1) promulgate rules for the independent 
operation of the grid and (2) compel utilities to turn over control of 
their transmission facilities to independent Regional Transmission 
Organizations, or RTOs. Such rules should preserve the reliability of 
the grid and encourage the sale and transportation of electricity from 
any seller to any buyer in an open, competitively neutral, and 
nondiscriminatory manner.
    FERC's recent order of July 12 on the RTO issue is a major FERC 
initiative. FERC, for the first time, has clearly set forth its policy 
that there should be large, regional RTOs: One to comprise what is now 
the Western Interconnect; and three that comprise the Eastern 
Interconnect. FERC has established mediation dockets to bring the 
utilities together to establish RTOs for the Northeast and Southeast. 
But we believe that utility membership in an appropriate RTO should not 
be voluntary as provided for in Order 2000, but mandatory, and that 
legislation should affirm FERC's authority to order utilities to join 
regional transmission organizations. As an aside, in the last Congress, 
the provisions of S. 1273, offered by Chairman Bingaman, best addressed 
the question of RTOs. It granted FERC the authority to oversee the 
creation of an RTO and compel utilities to turn over control of their 
transmission facilities. Senator Bingaman deserves special praise for 
being the first to introduce this concept in his earlier legislation, 
and we are pleased he has reintroduced that same idea in this Congress.
    ELCON has been an active participant in the NERC process and 
supported the consensus language on reliability contained in S. 2071 
last year on the condition that it be considered as part of a 
comprehensive bill and not on a stand-alone basis. This position is 
based on sound policy. While we recognize the need to establish a new, 
statutorily authorized self-regulating reliability organization, such 
action will barely begin to address reliability. Legislation to reduce 
the potential for reliability problems must do more than simply provide 
accreditation to a new oversight body. It must establish a framework 
for appropriately-sized regional transmission organizations, it must 
guarantee non-discriminatory access to the grid, and it must clarify 
the current uncertainty about federal and state jurisdiction over 
transmission. Moreover, it cannot give new market regulating authority 
to those who now have, directly or indirectly, substantial market 
power. We concur that legislation should require sanctions and 
penalties for failure to comply with rules developed by a new electric 
reliability organization and that the entire framework is subject to 
federal oversight. ELCON is continuing to work with various 
stakeholders in an effort to develop new language. It is becoming 
increasingly clear that the ``consensus'' language approved in February 
1999 is too complicated, too prescriptive, and too long. There have 
been several new proposals put forth even in the last few weeks that 
offer improved ways to establish a new electric reliability 
organization.
    Market power is a subject of intense recent interest, growing out 
of the wildly fluctuating rates and volatile supply situation in the 
West. Market power arises from several sources. Where there is an 
imbalance in supply and demand, market power is often held by a few 
producers who can demand higher rates during periods of shortage. Where 
there is transmission congestion, the owner and operator of the grid 
can favor his own generation affiliate in denying access to competitive 
sources. Where the integrated system favors the native load utility 
over competing generators, new entrants are discouraged. Where an 
artificial power exchange is created for non-market purposes, true 
competition is thwarted.
    Markets will eventually be workably competitive when there is an 
adequate generation supply in all sections of the country and where 
that supply can move freely over a transmission system under control 
and supervision of large RTOs. Transmission rates, terms and conditions 
will be set by the RTOs and administered by the RTOs, subject to FERC 
oversight. Any market operated by an RTO or on behalf of an RTO should 
be subject to an independent market surveillance function to monitor 
such markets for potential design flaws, gaming behavior and the 
exercise of vertical, horizontal or localized market power. This 
includes markets for transmission services, ancillary services and 
power exchanges.
    The White Paper posits that legislation should require the 
Commission to take into account the impact of ``demand response 
mechanisms'' on rates. ELCON has proposed that FERC add a Ninth 
Function for Customer Load Response (CLR) curtailment service (in 
addition to the Eight Functions set forth in Order 2000). This would 
require that markets for CLR be integrated with other FERC real-time 
markets. This would also ensure that such markets are reasonably 
standardized in each RTO. Participation in the CLR market should be 
voluntary and open to any customer.
    Regional Planning and Siting for new transmission capacity poses a 
challenge for policymakers. ELCON believes that Congress should 
delegate to FERC the same authorities under the Federal Power Act with 
respect to the siting of interstate transmission facilities as FERC is 
currently authorized under the Natural Gas Act with respect to 
interstate natural gas pipelines. ELCON agrees that a regionally based 
approach to transmission planning, planning and siting is desirable. 
However, the RTOs, rather than some new regional regulatory compact, 
should be delegated with that responsibility, or as the White Paper 
states, FERC should ``cede such authority to appropriately constituted 
regional entities,'' which should be RTOs. They would also establish 
and monitor regional reserve requirements, maintenance and market 
monitoring functions noted above.
    Besides the ongoing operation of the grid, RTOs should play a major 
role in the planning of new and upgraded transmission facilities, as 
required under Order 2000, but which authority would need be augmented 
and reaffirmed in legislation. Regulated transmission providers are 
entitled to a reasonable opportunity to recover all costs associated 
with their prudently incurred investments, plus a return on those 
investments that are deemed used and useful. Working through RTO 
processes, transmission providers will be assured that all needed 
expansions and upgrades will be fully compensated according to FERC 
rules.
    Market Transparency Rules are integral to the successful operation 
of a workably competitive market. While proprietary information on 
commodity pricing will continue to receive the protection it deserves, 
market participants need real-time information on the regulated 
services, including transmission capacity, ancillary services and line 
loading. This will be necessary for buyers, sellers, grid operators and 
regulators to assure that markets are indeed workably competitive on a 
continuing basis. Short-term operational planning and long-term 
capacity planning are both well-served by adequate information, 
furnished by both the Energy Information Administration and also by an 
expected plethora of commercial entities who are already vying for 
customers in anticipating of the opening of markets.
    The White Paper also addresses other ``Other Provisions.'' 
Regarding the repeal of PUHCA, we first emphasize that PUHCA is the 
only federal consumer protection statute for electric utility 
customers. We believe that, if PUHCA is repealed, we need clear 
authority vested in FERC to prohibit any potential anti-competitive 
practices involving regulated utilities and unregulated affiliates. 
Rules are needed to address the operational unbundling of generation, 
transmission, system control, marketing and local distribution 
functions. State and Federal regulators must have complete access to 
all books and records of all regulated entities and entities owned or 
controlled by regulated entities. In addition, we argue that, 
optimally, PUHCA repeal not be effective until all states have retail 
access or until competition on a nation-wide basis is otherwise 
achieved.
    The White Paper calls for repeal of the mandatory purchase 
requirements of the Public Utility Regulatory Policies Act (or PURPA) 
of 1978. Many ELCON members cogenerate and sell electricity to 
utilities as Qualifying Facilities (or QFs) pursuant to PURPA. Despite 
its bad press, as long as consumers are held captive to monopoly 
utilities, PURPA is an essential law. It has produced a broader, more 
efficient base of electricity generation. Due to PURPA, electricity 
capacity was added in smaller increments, thus not burdening users with 
paying for generators that proved to be much larger than necessary. And 
entrepreneurs with private non-regulated capital funded generation.
    That having been said, the ``mandatory purchase'' provisions of 
PURPA are an anachronism in a truly competitive market and should be 
recognized as such. With regard to existing PURPA contracts, be they at 
market or above today's market, no one is suggesting that such 
contracts be rescinded. Existing PURPA contracts are and should be a 
non-issue. The impact of repealing the mandatory purchase provisions of 
PURPA on a prospective basis is virtually non-existent. The number of 
new, uneconomic PURPA-based contracts being signed today based on the 
often above market ``avoided cost'' formula is close to nil. In 
addition, the much-maligned avoided cost principle is not to blame. If 
properly implemented, it harms no one. Some states, for their own 
reasons, set avoided cost at artificially high levels. Again, this is 
no longer the case.
    I hasten to add, however, that even without the use of these 
mandatory purchase requirements, the majority of new capacity being 
brought on line is from non-utility generation and that has been the 
case over several years. PURPA has succeeded in demonstrating that 
electricity can be generated by non-utility sources in an efficient, 
reliable, and environmentally favorable manner. Some 25 years ago 
utilities vehemently disputed what is now fact.
    While the mandatory purchase provisions are no longer necessary in 
a truly competitive electricity market, it is important to note that 
PURPA and Section 210 are much more than simply mandatory purchase 
requirements, including its requirements that utilities interconnect 
with cogenerators. However, I cannot overemphasize the importance of a 
federal guarantee for back-up power at just and reasonable rates in 
states that remain non-competitive. Without such a guarantee, 
cogenerators would be captive to unregulated monopolies that could 
charge what they wish, and the cogenerators would have no alternative. 
In states without real customer choice, retaining the federal guarantee 
for back-up power now in PURPA is essential if there is to be any 
investment in cogeneration capacity.
    Over the past three decades, the growth of electricity-dependent 
businesses and industry has been remarkable. In just the past five 
years, we have seen demand far outstrip supply in many regions. While 
the economy has become ever more electricity dependent, our 
infrastructure, market mechanisms and regulations have not kept pace. 
We need strong, but not excessive, federal regulatory authority to 
guarantee that electricity is available throughout the nation on a non-
discriminatory basis. It is up to this Committee and other oversight 
bodies to ensure that such regulation is not over-reaching, that it is 
encouraging and not hindering true competition.
    In conclusion, ELCON and its member companies favor a strong 
federal bill so that all electricity consumers can enjoy the benefits 
of competition. California notwithstanding, competition is coming. But 
the reality is that we face a long transition period before we get 
there. Truly comprehensive Federal legislation is needed to achieve 
workably competitive electricity markets. States will continue to have 
an important role, but that role does not extend to the regulation of 
interstate commerce. And electricity is clearly interstate commerce. 
That is why this Committee and this Congress must enact strong, 
comprehensive federal legislation. ELCON stands ready as it has for a 
quarter century to represent its members, to engage the debate, to 
propose policy alternatives and to participate in a momentous shift in 
the provision of an essential service, electricity.

    The Chairman. Thank you very much for that testimony.
    Mr. Ward.

STATEMENT OF STEPHEN WARD, PUBLIC ADVOCATE, STATE OF MAINE, AND 
 PRESIDENT, THE NATIONAL ASSOCIATION OF STATE UTILITY CONSUMER 
                           ADVOCATES

    Mr. Ward. Chairman Bingaman, it's an honor, it's a 
privilege to appear on this panel today on behalf of NASUCA, 
the National Association of State Utility Consumer Advocates 
for whom I serve as president. I've also served as Public 
Advocate in the State of Maine since 1986.
    Just since April of last year when I testified before this 
committee on behalf of NASUCA, NASUCA's representatives have 
testified on four occasions before committees of the House and 
the Senate of this Congress pertaining to electric 
restructuring and we are very happy to be invited here today.
    In April 2000, the testimony I presented to this committee 
included a consumer checklist of 12 items which we regarded as 
the litmus test for desirable outcomes from a consumer's 
perspective and I have attached that consumer checklist to the 
written testimony which I furnished the committee.
    Since 1996, NASUCA has adopted 16 resolutions that concern 
restructuring of the electric industry and the creation of 
competitive retail markets. Of these 16 resolutions, 10 
directly address the topics that are in the White Paper which 
has been circulated by the committee.
    I am pleased to state that NASUCA's resolutions provide 
strong support for most of the proposals in the White Paper. 
For example, NASUCA's membership in 40 States across the 
country strongly endorses the grant of FERC authority to NERC 
or to North American Electric Reliability Organization, the 
successor, to insure reliability in the Nation's electric grid 
and to impose penalties when they are appropriate. NASUCA has 
been a supporter of the NERC legislation that is before this 
Congress.
    Similarly, NASUCA has adopted resolutions in 1998 and 1999 
that echo the White Paper's endorsement of functional 
independence for independent system operators, for RTOs, and 
for NERC from the preferences of any market participants. It is 
a critical principle in our view to assure that consumers, 
marketers, sellers and electricity markets all have confidence 
that the grid is being operated without bias or without 
preference.
    Linked to this principle is the White Paper's proposal that 
PUHCA not be repealed unless FERC receives enhanced authority 
to address market power problems with particular authority to 
examine the books and records of affiliates within a holding 
company structure. We strongly support those suggestions.
    It's been NASUCA's long term position on PUHCA repeal that 
the removal of PUHCA protection should not occur without 
development of adequate FERC oversight in competitive markets.
    The principle underlying all of these resolutions is this. 
The elimination of regulatory controls is not the same thing as 
creating competitive markets. Until markets are workably 
competitive, regulatory oversight is critical throughout any 
transition period. Likewise, NASUCA has supported PURPA repeal 
but only when markets are workably competitive.
    In a resolution adopted last month at its midyear meeting 
in Santa Fe, NASUCA took a further step and urged FERC not 
simply to approve market-based rates whenever they are filed 
with the commission in the case of any market that's 
dysfunctional such as those in California. But instead to 
require once more a cost basis for just and reasonable rates. 
Until markets in States like California are workably 
competitive, FERC should rely on the tried and true standard of 
just and reasonable rates and not leave customers at the mercy 
of a market-based rate.
    That same resolution also called for FERC to address the 
problem of market power and to force generators who exercise 
market power to disgorge the profits associated with its use.
    NASUCA strongly supports the grant of additional authority 
to FERC to pursue market mitigation and other market power 
remedies. Without those remedies, in the long run, consumers 
can only lose in wholesale markets that are dysfunctional in 
markets that are subject to gaming.
    NASUCA has also adopted resolutions that are fully 
consistent with the White Paper proposal on a public benefits 
fund. We strongly support the implementation of a Federal fund 
for vulnerable populations, low income in particular, and in 
support of renewable generation and in support where necessary 
of energy efficiency. In fact, NASUCA's members have been for 
years strong supporters of energy efficiency efforts as an 
alternative to new generation siting and to some extent 
transmission siting.
    With respect to the FERC, the proposal for FERC 
jurisdiction over bundled transmission prices, and the proposal 
for a Federal power of eminent domain for transmission line 
siting, I have to report that NASUCA has no resolutions on 
either of those points so I cannot present any consensus NASUCA 
position today.
    Finally, with reference to the White Paper's concluding 
discussion about tax benefits and tax code changes, NASUCA has 
adopted a resolution urging Congress to mandate the flow 
through to retail customers in rates of any tax benefits 
associated with generating units when they are sold. In a State 
like Maine which divested its generating units, it turned out 
that the tax benefits, the excess deferred income taxes, the 
investment tax credits were captured by shareholders in a one 
time windfall rather than being flowed through to rate payers.
    This really is a billion dollar loophole and it is 
incumbent I think on Congress to make some firm action in 
amendments to the tax code.
    In conclusion, the White Paper advances a series of 
propositions which NASUCA supports. We urge your serious 
consideration of the White Paper and are grateful for the 
chance to contribute to this discussion. Thank you very much.
    [The prepared statement of Mr. Ward follows.]
 Prepared Statement of Stephen Ward, Public Advocate, State of Maine, 
and President, National Association of State Utility Consumer Advocates
    Chairman Bingaman, distinguished members of the Committee on Energy 
and Natural Resources: I am Stephen Ward and have served since 1986 as 
Maine's Public Advocate representing utility consumers before Maine's 
Public Utilities Commission, before FERC, the FCC and the courts. I 
also have served since March of 2000 as President of NASUCA, the 
National Association of State Utility Consumer Advocates. NASUCA 
consists of organizations charged by statute with the representation of 
utility consumers and currently has members in 40 states. I also serve 
as an appointed member of NERC's Market Interface Committee.
    It is an honor and a privilege to appear on this distinguished 
panel and I thank you for the extending this invitation to NASUCA and 
its 43 member offices for whom I am testifying today. Just since April 
of last year when I testified on behalf of NASUCA before this 
Committee, NASUCA's representatives have testified on four occasions 
before committees of the House or Senate on matters pertaining to 
electricity restructuring. We are very happy to be invited once more to 
provide the consumer's perspective at these hearings, as I will attempt 
to do again today. In April of 2000 in my testimony before this 
Committee, I presented NASUCA's ``Consumer Checklist'' of necessary 
safeguards in any federal restructuring legislation. Because of 
turnover on this Committee I thought it might be useful to provide a 
copy of the ``Consumer Checklist,'' which is attached to this 
testimony.
    The Chairman's White Paper on Electricity Legislation seems to me 
to an auspicious start in the process of marking up comprehensive 
energy legislation. That is because the White Paper takes a broad 
overview of the history and current functioning of utility electricity 
markets, focusing as much on the forest as the trees. This is 
appropriate in the case of a commodity like electricity that has so 
many unique characteristics. Unlike virtually any other commodity, it 
cannot be stored and therefore must have production match usage in 
every moment of the day. Electricity is a commodity that, over the 
years, has been heavily freighted with the public interest, benefiting 
from the exercise of eminent domain in the construction of its 
transmission lines and being subject to multiple expectations for 
affordability, for low-income support and for protections against 
disconnection. But most importantly, electricity is a commodity which 
virtually every citizen, every family, every business depends on as a 
necessity of life. For all of these reasons, it makes great sense to 
proceed cautiously and with great care in undertaking fundamental 
changes in this industry, by means of federal legislation. I urge you 
not to hurry as you take up this task.
    The White Paper also provides a very convenient framework for 
discussion and analysis of key issues, laying out the issues in several 
general areas (including ``Other Provisions'' and ``Tax Provisions''). 
Since many of these issues correspond to proposals that have been 
debated by NASUCA's membership in 40 states around the country, I can 
provide commentary on some of the White Paper's proposals from NASUCA's 
perspective. In other cases, NASUCA has adopted no resolution that is 
directly germane to a proposal in the White Paper. In such cases, I 
will note the absence of a NASUCA Position.
    Since 1986, NASUCA has adopted 16 resolutions that directly address 
the restructuring of the electricity industry and the creation of 
competitive choices for consumers--large and small. Of these sixteen 
resolutions, ten directly address desirable or necessary features of 
federal law or regulation, as opposed to policy proposals that are 
entirely within the scope of state jurisdiction. Probably the most 
vexing aspect of any effort to transform a system of vertically 
integrated utilities into a system relying in part on competitive 
markets, it seems to me, is the inter-mixture of state and federal 
responsibilities. As the Committee is fully aware, aspects of the 
electric industry (such as retail pricing) have been entirely under 
state jurisdiction since the first decades of the last century. It is 
equally so that, since enactment of the Federal Power Act in 1935, 
other aspects (such as interstate transmission pricing) have been 
completely under federal jurisdiction. Any comprehensive effort to 
restructure this industry must tread lightly on these jurisdictional 
dividing line.
    The White Paper proposes to reconfigure jurisdiction over all 
transmission-related questions so as to make FERC's jurisdiction pre-
eminent. For a near-majority of states today where transmission rates 
are bundled together with distribution and generation rates, however, 
this proposal does represent a departure from the status quo. NASUCA 
has no formal resolution addressing the question of whether bundled 
transmission prices should be set by FERC in a way that pre-empts state 
action. Due to the multiplicity of views within NASUCA, on the part of 
states like Maine that have undertaken comprehensive restructuring and 
as well for states in low-cost regions that have no incentive to 
restructure, it is doubtful that NASUCA will ever adopt a final view as 
to whether FERC authority over transmission should properly supersede 
state authority. In any event, I won't offer one today.
    Similarly, NASUCA has no formal position as to whether public, 
cooperative and federal entities like TVA, REA cooperatives and 
marketing authorities should be subject to FERC oversight under the 
Federal Power Act. Speaking just for myself, however, it appears to me 
to be difficult to establish workable protections against market power 
and against malfunctions that jeopardize the reliability of the grid 
without establishing broad and consistent authority within FERC across 
all types of utilities public and private. NASUCA has taken a strong 
stance in favor of granting FERC authority to require electric 
utilities to join Regional Transmission Organizations and, to the 
extent possible, enabling public entities like TVA likewise to 
participate in the operation of regional RTO's. A NASUCA resolution, 
adopted two years ago, recognizes the primacy of FERC jurisdiction over 
RTO development but urges collaboration with state PUC's in formulating 
common agendas for managing transmission congestion and developing new 
transmission facilities.
    With respect to the reliability proposals in the White Paper, 
NASUCA has strongly supported the creation of an independent NERC 
(North American Electric Reliability Council) that is not dependent on 
the short-term preferences of any user of the transmission system. With 
NARUC and other parties, NASUCA has endorsed the stand-alone NERC 
legislation that is pending before Congress. In a 1998 Resolution, 
NASUCA unanimously supported enactment of ``federal legislation that 
would clarify FERC authority to review the reliability requirements 
imposed by NERC (or any successor national organization) and to ensure 
that such requirements are adopted and implemented in a manner that 
benefits all consumers.'' Key among the interests that NASUCA has 
advanced in three of its resolutions is the principle that for RTO's, 
for ISO's and for NERC, Congress or FERC should assure the operational 
independence of grid managers from players in national and regional 
electric markets. One good reason for guaranteeing this independence is 
to enable grid managers to act impartially with sanctions and 
penalties, as an enforcement entity in the event of malfeasance or grid 
disruption rather than merely as a scheduler of transaction in a 
regional market. For this reason I applaud the White Paper's 
suggestions on this point.
    The White Paper's third major area addresses ``Rates and Market 
Power'' and does so in a manner that, to me, may be too optimistic in 
endorsing market-based outcomes. This section of the White Paper 
doesn't appear to focus on what is unfortunate reality today: 
competitive markets are not generating just and reasonable prices in 
many hours of the year in Western markets, and in some hours of the 
year in New York and New England markets. In view of the price spikes 
and blackouts that have plagued California, I think it is premature to 
base a discussion of rates and market power entirely on the hope that 
markets can be made workably competitive. NASUCA addressed these issues 
in a resolution adopted at its mid-year meeting last month. That 
resolution urges FERC not to rely on market-based rates in situations 
where markets are not functioning adequately but, instead, to use its 
powers under the Federal Power Act to set just and reasonable rates 
based on a cost analysis or other appropriate means of mitigation. In 
essence, the resolution urges FERC not to accept the prices produced by 
any market as necessarily just and reasonable but to investigate for 
evidence of market power and marketing anomalies. Possibly the 
difference between NASUCA's position and the White Paper is a question 
of degree, or merely a matter of emphasis but, to my mind, this nuance 
is an important one.
    The final portion of the ``Rates and Market Power'' section 
concerns market mitigation measures as ordered by FERC. We agree that 
market mitigation (i.e. following up on evidence of market power or of 
marketing anomalies with a formal investigation and, where warranted, 
an enforcement action) is a critical aspect of discipline that keeps 
bidders honest and helps markets function. To my mind, this mitigation 
function is a key aspect of ISO operations, and shouldn't necessarily 
reside at FERC rather than in the regions. At present, both ISO-New 
England and the New York ISO have authority to reset any price that is 
excessive or that results from market power. I don't think it makes 
sense to take away such authority as already exists.
    With respect to regional planning and siting, NASUCA has no 
specific resolution that addresses the exercise of eminent domain for a 
project under federal jurisdiction. As a general matter, it makes great 
good sense to promote the coordination of state and federal siting 
authority, wherever possible. But I doubt that NASUCA's members would 
endorse the proposal that FERC receive eminent domain authority for 
electricity comparable to what already exists for gas pipelines--and 
certainly not unanimously. As a matter of practice, all of NASUCA's 
resolutions are adopted by consensus, so I would be very surprised to 
see a unified NASUCA position on a matter as controversial as a federal 
transmission line siting.
    The White Paper discusses the potential repeal of PUHCA and PURPA 
on terms that are very close to NASUCA resolutions adopted in 1996 and 
1997. NASUCA has explicitly endorsed adoption of a renewable portfolio 
standard as a device for creating diversity in the nation's supply mix 
and supporting new, non-polluting sources of generation. Historically, 
NASUCA's members have been defenders of PURPA as a technique for 
injecting competition into the closed operations of electric utilities. 
NASUCA also has repeatedly testified in opposition to PUHCA repeal--at 
least until new systematic protections against affiliate abuse and cost 
shifting within holding companies are in place. Competition in 
wholesale markets is too powerful a force to operate without the 
structural restraints that PUHCA has imposed since 1935, in my opinion. 
The last thing that we should be doing today is to assume that the 
absence of regulation is the same as vigorous competition. As the 
nation learned from Sam Insull 80 years ago, the absence of regulation 
leads directly to unregulated monopoly power.
    The White Paper also endorses the creation of a Public Benefits 
Fund from which financial support can be drawn for a variety of 
purposes including low-income assistance, conservation programming, and 
R&D activities. States like Maine, since 2000, have had in place a 
state-mandate for ratepayer-supported public benefits programs. They 
should not see federal legislation disturbing or replacing these 
mechanisms. Having said this, however, I am confident that NASUCA's 
membership today would endorse the same approach as was adopted in a 
1998 resolution: any comprehensive federal electricity legislation 
should beef up support for ratepayer-funded weatherization, and for 
targeted low-income support assistance in addition to the support 
already provided through the LIHEAP and DOE Weatherization programs. It 
is critical that, as markets evolve, the ability to afford electricity 
not separate ``the haves'' from ``the have-nots.'' We cannot tolerate 
having the nation's most vulnerable populations become the casualties 
of competition.
    Finally, and before closing, I should turn to the last substantive 
set of issues raised in the White Paper, concerning changes in the tax 
code. While it is true that the federal tax law is beyond the purview 
of this Committee, it also is the case that tax policy establishes 
long-lived incentives that directly affect investment decisions and, in 
the case of utility plant, can affect the bottom-line earnings of 
investors. Missing from the list of ideas that appear in the White 
Paper's final paragraph is a proposal that NASUCA endorsed by 
resolution last year and that also has received support from NARUC and 
the American Public Power Association. The proposal is to require that 
any tax benefits (so-called Excess Deferred Income Taxes and 
unamortized Investment Tax Credits) that are on the books of an 
electric utility for generating units that are divested by operation of 
state law or sold voluntarily should be flowed-through to ratepayers in 
lowered distribution rates and not be captured by the utility's 
shareholders. Such a one-time windfall for shareholders was never 
envisioned when the tax rate was lowered in 1986, was not sought by the 
utilities and EEI at that time, and cannot be justified today. We urge 
the Committee to recommend action to close this billion dollar 
loophole.
    In sum, it should be clear that NASUCA has formally endorsed many 
of the specific proposals that appear in the White Paper. Dating back 
to 1996, NASUCA's resolutions have anticipated key impacts on consumers 
that may result from industry restructuring if regulators and 
legislators are not vigilant. You are to be congratulated for the 
breadth and depth of the White Paper's proposals. NASUCA as an 
organization will make every effort to assist you in your deliberations 
as you refine these proposals.
    Thank you again for the opportunity of testifying today on behalf 
of the nation's electricity consumers.
                              (attachment)
            NASUCA Consumer Checklist for Federal Electric 
                       Restructuring Legislation
 No Federal Preemption: Permit, but don't require, retail 
        competition.
 Stranded costs: Stranded cost issues should be left to the 
        states.
 Market power: Allow FERC to remedy abuses of market power.
 Transmission and ISOs: Allow FERC to require ISOs and remedy 
        transmission problems.
 Reliability Standards: Allow FERC to review reliability.
 Consumer Protection: Establish minimum federal standards for 
        consumer protection.
 Universal Service: Adapt universal service standards and 
        principles, buy requirement.
 Aggregation: Aggregation of customers should be encouraged.
 Renewable Energy: Remove any barriers to net energy metering.
 Mergers: Expand FERC merger authority and require a net be 
        benefit to consumers.
 PUHCA: Competition first, then remove regulatory impediments.
 PURPA: Competition first, then waiver of Section 210 must-buy 
        requirement.

    The Chairman. Thank you very much.
    Mr. Cook.

         STATEMENT OF DAVID N. COOK, GENERAL COUNSEL, 
          NORTH AMERICAN ELECTRIC RELIABILITY COUNCIL

    Mr. Cook. Thank you, Mr. Chairman. I am general counsel for 
the North American Electric Reliability Counsel. NERC commends 
your leadership and this committee's attention to the 
critically important issue of the reliability of the bulk 
electric system.
    NERC urges the Congress to enact reliability legislation in 
this session of Congress. NERC in a broad coalition of State, 
consumer and industry representatives are supporting 
legislation that would transform the current system of 
voluntary operating guidelines into a set of mandatory 
transmission system reliability rules promulgated and enforced 
by an industry based self-regulatory reliability organization 
with FERC oversight in the United States.
    The NERC legislative proposal has been included in both S. 
388 and S. 597. It has also been introduced in the House. I'm 
pleased to note that within the past 2 weeks, the Western 
Governor's Association sent a letter to this committee in 
support of the pending NERC legislative proposal.
    For more than 30 years, this country has depended upon 
voluntary compliance with reliability rules. The system has 
worked very well and we have had an extremely reliable electric 
system but the reliability rules have no enforcement mechanism. 
Peer pressure has been the only means available to achieving 
compliance.
    As good as that system has been, the voluntary system will 
not serve as well for the future. Here's why. The grid is now 
being used in ways for which it was not designed. There has 
been a quantum leap in the number of hourly transactions and in 
the complexity of those transactions.
    Transmission providers and other industry participants that 
formerly cooperated willingly are now competitors. The rate 
mechanisms that in the past permitted utilities to recover the 
costs of operating systems reliably are no longer in place or 
are inadequate given increased risks and uncertainties.
    The single vertically integrated utility that formerly 
performed all reliability functions for a particular area is 
being disaggregated. Meaning that reliability responsibilities 
are being divided among many participants. Some entities appear 
to be deriving economic benefit from bending or violating the 
reliability rules. Construction of additional transmission 
capacity has not kept pace with either the growth and demand or 
the construction of new generating capacity meaning the 
existing grid is being used much more aggressively.
    The result of all of this is that the transmission grid is 
being increasingly stressed. NERC is seeing more congestion on 
the grid for more hours of the day. NERC is also seeing 
increased violations of its reliability rules.
    Here are the goals for the NERC reliability legislation. 
Mandatory and enforceable rules that apply to all operators and 
users of the bulk power system in North America. The rules 
would be fairly developed and fairly applied by an independent 
industry self-regulatory organization with oversight by FERC in 
the United States.
    The proposal must respect the international character of 
the interconnected North American Electrical Transmission 
System. Regional entities will have a significant role in 
implementing and enforcing compliance with those reliability 
standards with delegated authority to develop appropriate 
regional standards.
    The White Paper distributed in advance of this hearing 
proposes the following criteria for the reliability provision. 
Legislation should authorize a system for assuring reliability 
of the grid that is mandatory, that requires sanctions and 
penalties for failure to comply with the rules that 
institutions for that purpose develop, and that is subject to 
Federal oversight.
    The NERC legislative proposal included in both S. 597 and 
S. 388 satisfies those criteria and NERC agrees with those 
criteria but they are not the only relevant criteria. Two 
others are necessary.
    First, the bulk power system is a single very large machine 
that spans the international border. The reliability 
legislation must provide a mechanism for setting a single set 
of reliability rules that are acceptable to regulators on both 
sides of the border. Without having one set of regulators 
impose its decisions on how the grid will be operated across 
the border, the NERC legislative proposal satisfies this 
criteria and by having a standard set in a single forum with 
active participation by all interested parties on both sides of 
the border, subject to appropriate oversight by the respective 
regulators on each side of the border.
    Second, the bulk power system is technically very complex 
and demands a high degree of coordinated activity in order to 
assure reliable operations. The reliability legislation must 
provide a means for harnessing the collective engineering 
expertise and collective market expertise of the industry in 
fashioning a set of reliability rules that are compatible with 
well-functioning competitive markets and also assure the 
reliable operation of the transmission grid to support those 
markets.
    An industry self-regulatory organization provides an 
effective and efficient mechanism for bringing that industry 
expertise to bear on the task of setting the standards 
necessary to assure the reliable operation of the bulk system. 
FERC oversight in the United States assures that the self-
regulatory organizations' processes are fair and that the 
reliability rules work in harmony with FERC's evolving 
competitive market and RTO policies.
    Although a broad coalition of State, consumer and industry 
representatives are supporting passage of the NERC legislative 
proposal, that support is not universal. NERC and its 
supporting coalition are continuing discussions with those who 
are not now supporting the legislation to determine whether 
changes to the proposal could broaden the base of support even 
further.
    One of the criticisms in the legislative language in the 
proposal now is that it is longer and more detailed than may be 
appropriate for a legislative enactment. NERC is exploring 
whether a shorter less detailed bill that nonetheless retains 
the essentials needed for creation of an independent industry 
self-regulatory organization will command at least the same 
level of support as exists for the current version. Any shorter 
version of reliability legislation must still satisfy the 
legislative goals that I mentioned above.
    Those discussions are continuing and we will keep the 
committee informed as to their outcome. NERC commends the 
committee for attending to the critical issue of assuring the 
reliability of the interconnected bulk system as the electric 
industry undergoes restructuring. NERC urges prompt action on 
pending legislation that would allow for the timely creation 
and FERC oversight of a viable self-regulatory reliability 
organization.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Mr. Cook follows.]
 Prepared Statement of David N. Cook, General Counsel, North American 
                     Electrical Reliability Council
                                summary
    The North American Electric Reliability Council (NERC) urges 
Congress to enact reliability legislation in this session of Congress. 
NERC and a broad coalition of state, consumer, and industry 
representatives are supporting legislation that would transform the 
current system of voluntary operating guidelines into a set of 
mandatory transmission system reliability rules, promulgated and 
enforced by an industry-led reliability organization, with FERC 
oversight in the U.S. NERC firmly believes steps must be taken now to 
ensure the continued reliability of the electricity transmission system 
if the Nation is to reap the benefits of competitive electricity 
markets. The changes taking place as the electric industry undergoes 
restructuring are recasting the long-established relationships that 
reliably provided electricity to the Nation's homes and businesses. 
Those changes will not jeopardize the reliability of our electric 
transmission system IF we adapt how we deal with reliability of the 
bulk power system to keep pace with the rest of the changes that the 
electric industry is now experiencing.
    NERC is a not-for-profit organization formed after the Northeast 
blackout in 1965 to promote the reliability of the bulk electric 
systems that serve North America. It works with all segments of the 
electric industry as well as consumers and regulators to ``keep the 
lights on'' by developing and encouraging compliance with rules for the 
reliable operation of these systems. NERC comprises ten Regional 
Reliability Councils that account for virtually all the electricity 
supplied in the United States, Canada, and a portion of Baja California 
Norte, Mexico.
                              reliability
    Reliability means different things to different people. For the 
consumer it could mean, ``Does the light come on when I flip the 
switch?'' Or, ``Does a momentary surge or blip re-boot my computer or 
cause me to lose a whole production run of computer chips I was 
manufacturing?''
    To NERC, reliability means making sure that all the elements of the 
bulk power system are operated within equipment and electric system 
thermal, voltage, and stability limits so that instability, 
uncontrolled separation, or cascading failures of that system will not 
occur as a result of sudden disturbances such as electric short 
circuits or unanticipated failure of system elements. It also means 
planning, designing, and operating each portion of the bulk power 
system in a manner that will promote security in interconnected 
operations and not burden other interconnected systems.
                          how the system works
    California's experience with electricity has focused peoples' 
attention on electricity issues in ways they never have in the past. 
Because of that increased awareness, we can draw on the California 
experience to understand more about how the bulk electric system really 
works. California is not an island; it is part of a much larger 
grouping of electric systems that we refer to as an Interconnection. 
The North American grid is divided into three Interconnections that are 
connected to each other by way of direct current ties. The Western 
Interconnection includes not only California, but also the rest of the 
United States from the Rocky Mountains to the Pacific coast, as well as 
the Canadian provinces of British Columbia and Alberta, and a portion 
of Baja California Norte, Mexico. The Eastern Interconnection includes 
not only most of the United States east of the Rocky Mountains, but 
also Canadian provinces from Saskatchewan through the Maritimes. The 
third Interconnection comprises the Electric Reliability Council of 
Texas. Attached to my testimony is a map depicting the three 
Interconnections. The map also shows the ten NERC Regional Reliability 
Councils.
    Each Interconnection is a single very large machine. Power flows 
freely throughout the grid in each of these Interconnections--there are 
no valves or switches. With very limited exceptions, there is no 
ability to direct, or route, power flows over a particular line; 
instead, power flows over all lines in the system, according to the 
laws of physics. All generators within an interconnection are 
magnetically linked, in effect as though all the generators are on a 
single shaft--all rotating at the same speed (think of a tandem 
bicycle--the front and back pedals are linked together by a chain, and 
rotate at the same speed; if one rider takes his feet off the pedals, 
the other rider has to work harder to maintain the same speed). What 
happens on one part of an interconnection affects the entire rest of 
the interconnection. The frequency of the system in British Columbia is 
the same as the frequency in Arizona, and also at all points in 
between. When the frequency declines, because a large generating unit 
trips off, the rest of the generators automatically and instantaneously 
work harder to serve the customer demands.
    The interconnected nature of electric system operations makes 
possible the transfer of power from one area to another for economic 
reasons as well as sharing resources in emergencies. California is a 
summer-peaking area, and it normally imports surplus power from the 
Pacific Northwest in the summertime to augment its own generating 
resources. By contrast, the Pacific Northwest is a winter-peaking area, 
and it normally imports surplus power from California in the 
wintertime. Over the past year, this pattern of mutually beneficial 
exchange has been disrupted. Load has grown throughout the West, and 
other areas in the West have less power to export to California. In 
addition, the Pacific Northwest and California both depend 
substantially on hydroelectric power. Severe drought conditions this 
year have seriously depleted the ability of the hydroelectric plants to 
produce energy. Power exchanges can also take place between 
Interconnections, but the capability to do so is limited by the 
capability of the direct current ties that exist. For example, the 
Western and Eastern Interconnections can exchange up to about 1,850 MW 
in either direction, and the Texas and Eastern Interconnections can 
exchange about 850 MW.
    California has also demonstrated the limits on the transmission 
system. Path 15 is a major transmission link between Southern and 
Northern California. Earlier this year, on some days the California 
Independent System Operator had to curtail firm load in Northern 
California, even though additional generation was available in Southern 
California to meet the load. Path 15 was loaded to its maximum safe 
reliability limit and there simply was no way to move additional energy 
into Northern California without risking the reliability of the entire 
Western Interconnection.
    Interconnected operations also mean that a disturbance occurring in 
one part of an Interconnection can have adverse effects throughout the 
Interconnection. The 1996 Western outage that affected San Francisco, 
Los Angeles, and the desert Southwest and shut down the Diablo Canyon 
nuclear power plant started with a tree contacting a power line in 
Idaho. And whether an individual state chooses to open up to retail 
competition or not, the electric systems in those states are still 
connected together, and dependent on one another, as part of one 
Interconnection.
    The grid is generally operated in a first contingency mode, that 
is, so that the grid can withstand the loss of any single transmission 
line, generator, or transformer and remain stable and secure. That 
means that all the remaining transmission lines will still be operating 
within their own limits and that the failure of a particular element 
won't cause a cascading, uncontrolled failure of the entire grid. When 
a large transformer or generator fails or lightning strikes a power 
line, as happens as a matter of course, the grid must be able to absorb 
that loss without causing other elements to fail. Operating in this 
manner preserves the stability of the grid, but it does sometimes place 
necessary limits on the amount of power that can be moved from one part 
of the grid to another.
    This is the area where NERC's rules operate, setting the standards 
by which the grid is operated from moment to moment, as well as the 
standards for what needs to be taken into account when one plans, 
designs, and constructs an integrated system that is capable of being 
operated securely. The NERC standards do not specify how many 
generators or transmission lines to build, or where to build them. They 
do indicate what tests the future system must be able to meet to ensure 
that it is capable of secure operation. Up to now, NERC's rules have 
generally been followed, but they have not been enforceable. As more 
entities become involved in the operation and use of the bulk electric 
systems, and use these systems to full competitive advantage, NERC is 
seeing an increase in the number and severity of rules violations. 
Hence the voluntary approach is no longer adequate for maintaining the 
reliability of the bulk power system. Just as the rest of the electric 
industry is changing, the reliability infrastructure must change, too.
    voluntary reliability rules will not work in a more competitive 
                           electric industry
    NERC's formation was the electric industry's response to 
legislation that had been introduced in the Congress following the 1965 
blackout in the Northeast that would have given the then Federal Power 
Commission a central role in the reliability of the bulk electric 
system. Instead of adopting that legislation, the country opted for a 
voluntary industry-led effort. For more than thirty years, this 
voluntary system has worked very well, and we have had an extremely 
reliable electric system. But the reliability rules or standards have 
no enforcement mechanism. Peer pressure has been the only means 
available to achieving compliance.
    As good as that system has been, the voluntary system will not 
serve us well for the future. Here's why:

   The grid is now being used in ways for which it was not 
        designed.
   There has been a quantum leap in the number of hourly 
        transactions, and in the complexity of those transactions.
   Transmission providers and other industry participants that 
        formerly cooperated willingly are now competitors.
   Rate mechanisms that in the past permitted utilities to 
        recover the costs of operating systems reliably are no longer 
        in place, or are inadequate given increased risks and 
        uncertainties.
   The single, vertically integrated utility that formerly 
        performed all reliability functions for an area is being 
        disaggregated, meaning that reliability responsibilities are 
        being divided among many participants.
   Some entities appear to be deriving economic benefit from 
        bending or violating the reliability rules.
   Construction of additional transmission capacity has not 
        kept pace with either the growth in demand or the construction 
        of new generating capacity, meaning the existing grid is being 
        used much more aggressively.

    Not dealing with the reliability side of the business as the 
industry restructures would be like the airlines switching to jet 
airplanes without increasing the length of the runways.
              what's happening now: demand and generation
    A number of factors have contributed to our present circumstance. 
First, demand has been steadily increasing. The consensus projection 
for the average annual growth in both peak demand and energy use over 
the next ten years is a relatively modest 1.9%. (Figure 1.) * 
``Demand'' is a measure of the highest aggregate load that all 
customers place on a system at a particular point in time. ``Energy 
use'' is a measure of the total amount of electricity that all 
customers use over a certain period of time (e.g., one year). The 
projected growth in demand is similar to the projections of the last 
several years. High and low bands around the base forecast show a range 
of the forecast uncertainty to account for weather, economic growth, 
industry deregulation, and other factors. Both peak demand and energy 
projections are substantially below the actual growth rates experienced 
over the last ten years as demand has been driven by extreme weather at 
peak times and a strong economy. Actual demand and energy growth rates 
experienced in the United States over the last ten years have been 
closer to the projected high band rate of about 3% for both demand and 
energy.
---------------------------------------------------------------------------
    * Retained in committee files.
---------------------------------------------------------------------------
    Second, in many parts of the country merchant generators are now 
building new plants to meet that increased demand, in response to the 
increased prices that we have been seeing in the wholesale electricity 
markets. During the past ten years, generating capacity increased at 
the rate of less than 1% per year, even while demand was growing at the 
rate of 2.7% per year. That picture is changing, although in some parts 
of the country supplies will be tight for the next few years. Over 
20,000 MW of new merchant capacity came on line to serve demand in the 
United States for the summer 2000. This year, New England has added 
another 2,300 MW. The Electric Reliability Council of Texas has added 
more than 6,000 MW. The East Central Area Coordination Agreement has 
added more than 4,000 MW since last summer. A crucial 600 MW is being 
added within New York City and Long Island. While that story is not 
being repeated everywhere, even California is expected to have 
significantly increased reserve margins within a few years.
                   what's happening now: transmission
    The same is not true for transmission. Over the last ten years, 
circuit-miles of high voltage transmission lines (230 kV and above) 
increased at only 0.75% per year. Over the next ten years we are 
projecting that circuit-miles of high voltage transmission will 
increase a total of just 4.2%, or a rate of less than 0.5% per year. 
Stated another way, in North America ten years ago we had a little less 
than 200,000 circuit-miles of high voltage transmission lines. Right 
now we have about 200,000 circuit-miles of those lines. And ten years 
from now we are projecting that we will have just a little over 200,000 
circuit-miles of high voltage transmission lines. For the most part, 
the transmission dollars that are being spent today are to connect new 
generation to the grid--they are not going to build major new lines to 
strengthen the grid's ability to move large blocks of power from one 
part of the country to another. That lack of additional transmission 
capacity means that we will increasingly experience limits on our 
ability to move power around the country and that commercial 
transactions that could displace higher priced generation won't occur. 
And, it will mean that areas experiencing supply shortages, like 
California has, won't be able to count on other areas with ample 
generating resources to help.
    Moreover, the existing grid is being pushed harder and is being 
used in ways for which it was not designed. Historically, each utility 
built its system starting in the city-centers, because the early 
generating stations were located close to load centers. As the cities 
grew, the electric systems grew with them, spreading outward from the 
center. The weakest part of the electric grid is generally at the 
places where one system abuts another. Initially utilities installed 
connections between two systems for emergency purposes and to share 
generating reserves to keep costs down. Gradually those 
interconnections were strengthened so that adjoining utilities could 
buy and sell electricity when one had lower cost generation available 
than did the other. But the systems were not generally designed to move 
large blocks of power from one part of the country to another, across 
multiple systems. Yet that is the way business is being conducted 
today. The volume and complexity of transactions on the grid have grown 
enormously since the advent of open access transmission.
    Electric industry restructuring adds to the challenge. In the past, 
a vertically integrated utility had complete responsibility for all 
aspects of its electric system, from planning and building the 
transmission system, through assuring that sufficient generation was 
constructed, to operating and maintaining the transmission and 
distribution systems, all to serve consumers in a designated area. With 
restructuring, there may no longer be a designated group of consumers 
for which to plan service. Instead, responsibilities to construct and 
maintain generation, transmission, and distribution are being divided 
among multiple entities and, in some cases, those responsibilities may 
be falling between the cracks. Regional Transmission Organizations may 
provide a means to reintegrate some of these functions. But the RTO 
proposals that have been filed to date vary considerably in the extent 
to which the RTO has the authority to plan and expand the transmission 
system, not only to connect new generation, but to meet broader needs 
of regional reliability.
    The result of all this is that the transmission grid is being 
increasingly stressed. That stress shows up in two ways. First, NERC is 
seeing more congestion on the grid, for more hours of the day. Last 
summer in the Eastern Interconnection there were substantial transfers 
of power from north to south. Cooler temperatures in the north meant 
that surplus generation could be sent to the south where the 
temperatures were hot and natural gas prices were high. On many days 
security coordinators had to invoke NERC transmission loading relief 
procedures to curtail transactions that were overloading transmission 
facilities between north and south. For generation sellers, these 
curtailed transactions resulted in lost business. Buyers were forced to 
replace these transactions with higher priced power, or in some cases, 
to cut off power to certain ``interruptible'' customers. In addition, 
what do not show up are the transactions that merchants or marketers 
decided not to engage in because of the likelihood they would be 
interrupted. Today, we know that those same transmission facilities are 
fully subscribed for the coming summer, meaning we could see a repeat 
of last year's pattern if we experience similar weather conditions and 
fuel prices.
    Second, NERC is seeing increasing violations of its reliability 
rules. As I mentioned earlier, the grid is generally operated in a 
first contingency mode, that is, so that the grid can withstand the 
loss of its largest element and remain stable and secure. Last summer 
there were a number of instances where operators allowed facilities to 
remain loaded above their known security limits for extended periods of 
time, placing the grid at prolonged risk of major failure. Some 
entities have made the economic judgment that it is less costly to them 
to violate the rules than to follow them. We have seen entities 
improperly ``leaning on,'' or taking power from, the Interconnection, 
causing unscheduled and unmanageable flows and potential voltage 
problems. As the limits of the system are reached and transactions must 
be curtailed, we are beginning to hear suggestions to relax the 
reliability rules to allow higher flows to occur. In an interconnected 
system, however, taking increased risks to allow some entities to 
realize short-term economic gain affects not only the system where the 
limit occurs, but also all the systems in the same Interconnection. For 
example, in the 1996 outages in the Western Interconnection, customers 
far away from the initiating problems were interrupted for significant 
periods of time.
    what's needed to assure bulk power system reliability in a more 
                     competitive electricity market
    We need legislation to change from a system of voluntary 
transmission system reliability rules to one that has an industry-led 
organization promulgating and enforcing mandatory rules, backed by FERC 
in the U.S. In August 1997, NERC convened a panel of outside experts to 
recommend the best way to ensure the continued reliability of North 
America's interconnected bulk electric systems in a competitive and 
restructured electric industry. On a parallel track, in the aftermath 
of two major system outages that blacked out significant portions of 
the West in July and August 1996, the Secretary of Energy convened a 
task force on reliability, chaired by former Congressman Phil Sharp. 
Both groups came to the same conclusion: The current system of 
voluntary guidelines should be transformed into a system of mandatory, 
enforceable reliability rules, AND the best way to accomplish that was 
to create an independent industry self-regulatory organization, 
patterned after the self-regulatory organizations in the securities 
industry, with oversight in the United States by the Federal Energy 
Regulatory Commission.
    NERC and a broad coalition of state, consumer, and industry 
representatives have been pursuing legislation to implement those 
recommendations. That coalition includes the American Public Power 
Association, the Canadian Electricity Association, the Edison Electric 
Institute, Institute for Electrical and Electronics Engineers--USA, the 
Large Public Power Council, the National Association of Regulatory 
Utility Commissioners, the National Association of State Energy 
Officials, the National Association of State Utility Consumer 
Advocates, the National Electrical Manufacturers' Association, the 
National Rural Electric Cooperative Association, the Northwest Regional 
Transmission Association, the Transmission Access Policy Study Group, 
and the Western Interconnection Coordination Forum.
    On June 18, 2001, that coalition sent a letter to this Committee, 
the House Energy and Commerce Committee, and the Administration in 
support of the NERC legislative proposal embodied in both S. 388 and S. 
597. On July 13, 2001, the Western Governors Association also sent a 
letter to this Committee, the House Committee, and the Administration 
in support of the pending NERC legislative proposal.
                    goals of reliability legislation
   Mandatory and enforceable reliability rules
   Apply to all operators and users of the bulk power system in 
        North America
   Rules fairly developed and fairly applied
   Independent, industry self-regulatory organization
   Oversight within U.S. by FERC
   Must respect the international character of the 
        interconnected North American electric transmission system
   Regional entities will have a significant role in 
        implementing and enforcing compliance with these reliability 
        standards, with delegated authority to develop appropriate 
        Regional reliability standards.
                      the committee's white paper
    The Committee has invited comment on whether the criteria set out 
in the white paper that the Committee distributed are the appropriate 
criteria for a reliability measure. The white paper states the 
following criteria for the reliability provisions:

          Legislation should authorize a system for assuring the 
        reliability of the grid that is mandatory, that requires 
        sanctions and penalties for failure to comply with the rules 
        that institutions for that purpose develop, and that is subject 
        to federal oversight.

    The reliability title that is included in both S. 597 and S. 389 
satisfies those criteria. But those are not the only relevant criteria. 
The reliability provisions must also take account of two other factors. 
First, the bulk power system is a single, very large machine that spans 
the international border. Because it is a single machine, it must be 
operated under a common set of rules on both sides of the border. The 
reliability legislation must provide a mechanism for setting a single 
set of reliability rules that are acceptable to regulators on both 
sides of the border, without having one set of regulators impose its 
decisions on how the grid will be operated across the border. The NERC 
legislative proposal satisfies this criterion by having the standards 
set in a single forum with active participation by all interested 
parties on both sides of the border, subject to appropriate oversight 
by the respective regulators on each side of the border.
    Second, the bulk power system is technically complex and demands a 
high degree of coordinated activity in order to assure reliable 
operations. The reliability legislation must provide a means of 
harnessing the collective engineering expertise and collective market 
expertise of the industry in fashioning a set of reliability rules that 
are compatible with well-functioning competitive markets and also 
assure the reliable operation of the transmission grid to support those 
markets. NERC's standing committees, subcommittees, and working groups 
involve literally hundreds of experts in ongoing activity to develop 
standards and monitor activity to assure the reliable operation of the 
grid. An industry self-regulatory organization provides an effective 
and efficient mechanism for bringing that industry expertise to bear on 
the task of setting the standards necessary to assure the reliable 
operation of the bulk power system. FERC does not now possess and is 
never likely to achieve anything approaching that level of technical 
sophistication. Having FERC itself set the reliability standards 
through its rulemaking proceedings, even if based on advice from 
outside organizations, converts matters that ought to be resolved by 
those with technical engineering expertise and commercial expertise 
into matters that are the province of the lawyers. These complex rules 
need to be worked out together by all segments of the industry. FERC 
was created for the purpose of economic regulation. It also has strong 
competence in assuring fairness and openness of process and regularity 
of proceedings. The combination of industry technical expertise to work 
on substantive reliability rules and FERC oversight to assure due 
process is an effective and efficient way to address the issues.
    ferc should not be given the job of promulgating and enforcing 
                         reliability standards
    Because of FERC's limited jurisdiction and authority, because of 
the international character of the North American grid, and because of 
the technical expertise required to develop and oversee compliance with 
bulk power system reliability standards, this is not a job that can 
simply be given to FERC. FERC does not have clear authority over 
reliability matters. Legislation that would have given FERC's 
predecessor, the Federal Power Commission, plenary authority over 
reliability matters was introduced in Congress following the Northeast 
blackout in 1965, but that legislation was not passed. Instead, the 
electric industry took on responsibility for assuring the reliability 
of the interconnected bulk power system. NERC was formed in 1968 to 
lead that industry effort.
    The most direct statement in the Federal statutes on this subject 
is found in section 209(c) of the Public Utility Regulatory Policies 
Act, and it provides only for the making of recommendations with 
respect to industry reliability standards:

          The Secretary, in consultation with the [Federal Energy 
        Regulatory] Commission, and after opportunity for public 
        comment, may recommend industry standards for reliability, to 
        the electric industry, including standards with respect to 
        equipment, operating procedures and training of personnel, and 
        standards related to the level or levels of reliability 
        appropriate to adequately and reliably serve the needs of 
        electric consumers. The Secretary shall include in his annual 
        report--
                  (1) any recommendations made under this subsection or 
                any recommendation respecting electric utility 
                reliability problems under any other provision of law, 
                and
                  (2) a description of actions taken by electric 
                utilities with respect to such recommendations. (16 
                U.S.C. Sec. 824a-2, emphasis added)

    FERC also lacks jurisdiction over approximately one-third of the 
transmission facilities in the United States. It lacks jurisdiction 
over facilities owned by municipalities and state agencies, rural 
electric cooperatives that have Rural Utility Service financing, the 
Federal power marketing administrations (such as the Bonneville Power 
Administration and the Western Area Power Administration), the 
Tennessee Valley Authority, and utilities within the Electric 
Reliability Council of Texas.
    As discussed above, a further impediment to FERC's acting directly 
on reliability matters is that the grid is international in nature. 
There is strong Canadian participation within NERC now, and that is 
expected to continue with the new organization. Having reliability 
rules developed and enforced by a private organization in which varied 
interests from both countries participate, with oversight in the United 
States by FERC and with oversight by Canadian regulators in Canada, is 
a practical way to address the international character of the grid. 
Otherwise, U.S. regulators would be dictating the rules that Canadian 
interests must follow--a prospect that would be unacceptable to them. 
There are also efforts under way to interconnect more fully the 
electric systems in Mexico with those in the U.S., primarily to expand 
electricity trade between the two countries. This is one element of the 
President's National Energy Policy. With that increased trade, the 
international nature of the self-regulatory organization will take on 
even more importance, further underscoring the necessity of having such 
an organization, rather than FERC, set and enforce compliance with 
overall grid reliability standards.
    Having an industry self-regulatory organization develop and enforce 
reliability rules under government oversight also takes advantage of 
the huge pool of technical expertise that the industry currently brings 
to bear on this subject. FERC does not now have the technical expertise 
and resources to take on that effort, and it would not be cost-
effective for it to do so. FERC's strong competence lies in assuring 
fairness and openness of process and regularity of proceedings. The 
combination of industry technical expertise to work on substantive 
reliability rules and FERC oversight to assure due process is an 
effective and efficient way to address the issues.
            status of reliability legislation and rtos/isos
    Last year, the Senate adopted the NERC legislation as S. 2071, but 
the bill died in the House. Senator Smith reintroduced that legislation 
this year (S. 172). In addition, the NERC legislation (including 
provisions addressing coordination with regional transmission 
organizations (RTOs)) has been included as part of both Senator 
Bingaman's bill (S. 597) and Senator Murkowski's bill (S. 389). Similar 
language has been introduced in the House of Representatives by Mr. 
Wynn (H.R. 312).
    The pending legislation addresses the role of both independent 
system operators (ISOs) and RTOs, as well as the role of state 
commissions. Independent system operators and regional transmission 
organizations fall within the defined term ``system operator'' in the 
pending legislation. As system operators, both ISOs and RTOs would be 
obligated to comply with established reliability rules, just as other 
kinds of system operators and other users of the bulk power system 
would be obligated to comply with those rules. In Order No. 2000, FERC 
stated that RTOs must perform their short-term reliability functions. 
An RTO is directed to notify the Commission immediately if 
implementation of those or any other externally established reliability 
standards would prevent it from meeting its obligation to provide 
reliable, non-discriminatory transmission service.
    The issue of coordinating the reliability-related activities of the 
new electric reliability organization envisioned by this legislation 
and RTOs arose during last year's legislative efforts. NERC worked with 
FERC, PJM, the California Independent System Operator and several 
others to address that issue. We agreed to specific language to address 
that issue, and that language has been incorporated in both Senator 
Bingaman's bill (S. 597) and Senator Murkowski's bill (S. 389). It is 
also included in the bill pending in the House of Representatives (H.R. 
312).
    The NERC reliability legislation also addresses the role of state 
commissions. The legislation gives the new electric reliability 
organization authority to set and enforce rules for only the bulk power 
system. Eighty percent of power outages take place on local 
distribution systems, and those remain wholly under state jurisdiction. 
Language has been included to make clear that issues concerning the 
adequacy and safety of electric facilities and services, matters 
traditionally within the purview of state commissions, remain with the 
state commissions. The new reliability legislation specifically would 
not preempt actions by a state commission with respect to the safety, 
adequacy, and reliability of electric service within that state, unless 
the state's actions were inconsistent with reliability rules adopted by 
the new reliability organization. Those provisions were worked out with 
representatives of the states. Both Senator Bingaman's and Senator 
Murkowski's bills contain that language.
    NERC strongly urges you to adopt legislation containing these 
reliability provisions in this session of Congress. That will enable 
the industry and the regulators to develop an independent self-
regulatory organization and infrastructure to enforce the reliability 
rules and keep the grid secure.
              current industry discussions of legislation
    Although a broad coalition of state, consumer, and industry 
representatives are supporting passage of the NERC legislative 
proposal, that support is not unanimous. Just as NERC and its coalition 
worked with state regulators in 1999 and with the RTO representatives 
last year, NERC and its supporting coalition are continuing discussions 
with those who are not now supporting the legislation to determine 
whether changes to the proposal could broaden the base of support even 
further. One of the criticisms of the legislative language is that the 
proposal is longer and more detailed than may be appropriate for a 
legislative enactment. NERC is exploring whether a shorter, less 
detailed bill that nonetheless retains the essentials needed for 
creation of an independent industry self-regulatory organization will 
command at least the same level of support as exists for the current 
version. Any shorter version of reliability legislation must still 
satisfy the legislative goals that I mentioned above. Those discussions 
are continuing.
    FERC's recent RTO orders do not change the need for Congress to 
enact reliability legislation. Those orders, even assuming their goal 
of fewer, larger RTOs is ultimately realized, do not address any of the 
reasons why we are seeking that legislation. Those orders cannot confer 
jurisdiction that FERC does not now have, either over reliability 
matters or over non-jurisdictional entities. Those orders do not 
address in any way the international nature of the interconnected grid. 
Furthermore, they do not provide FERC with the resources or technical 
competence to undertake the task of setting and enforcing reliability 
rules itself. Even if FERC's vision were someday completely realized, 
there would be six (not four) RTOs in the United States. Northeast, 
Southeast, Midwest, Florida, ERCOT, and West. The Canadian provinces 
and Mexican states are not accounted for. It is also questionable 
whether all non-jurisdictional transmission-owning entities will join 
an RTO. Finally, there is the question of the time it will take for the 
RTOs that FERC envisions will actually come into being. With the 
additional uncertainty generated by those orders as to who will 
ultimately operate and plan transmission, it is more important than 
ever that an industry-led self-regulatory organization be created to 
establish and enforce reliability standards applicable to the entire 
North American grid, regardless of who owns or manages it. Because FERC 
will provide oversight of the self-regulatory organization in the U.S., 
FERC can ensure that the self-regulatory organization's actions and 
FERC's evolving RTO policies are closely coordinated.
                               conclusion
    NERC commends the Committee for attending to the critical issue of 
assuring the reliability of the interconnected bulk power system as the 
electric industry undergoes restructuring.
    A new electric reliability oversight system is needed now. The 
continued reliability of North America's high-voltage electricity 
grids, and the security of the customers whose electricity supplies 
depend on them, are at stake. An industry self-regulatory system is 
superior to a system of direct government regulation for setting and 
enforcing compliance with grid reliability rules. Pending legislation 
would allow for the timely creation and FERC oversight of a viable 
self-regulatory reliability organization. The reliability of North 
America's interconnected transmission grid need not be compromised by 
changes taking place in the industry, provided reliability legislation 
is enacted now.

    The Chairman. Thank you all very much for that excellent 
testimony. Let me just follow up, Mr. Cook. You pointed out a 
concern which I have had with the legislation that was 
consensus legislation from your group in that it was not 
simple. It's a lot of detail in there and more detail than is 
common for legislative provisions. I'm encouraged to hear that 
you're working to see if something a little more streamlined 
could be adequate to the purpose and agreeable to your members.
    Since this committee is going to be trying to mark up 
legislation when we come back in September, will you have 
anything by the time we come back in September that we could 
work with.
    Mr. Cook. I certainly hope we can, Mr. Chairman. I think 
your indication of the timetable will provide a spur to the 
efforts of that group to come together. It is certainly my 
intention to be able to come back to you with something. I 
believe it is possible to streamline that language and still 
retain the essence of the proposal we are supporting.
    The Chairman. Thank you. Commissioner Nugent, let me ask on 
this issue of regional authorities, you suggest that regional 
authorities over planning and siting of transmission should be 
voluntary and that FERC should have this backup role. Are there 
going to be areas where there is no regional entity that 
develops and if so, what do we do about that?
    Commissioner Nugent. The very fairly widely across the 
country but across the country it is apparent that there is 
cooperation among the State commissions. I think you are likely 
to have a strong response. If you feel the response from State 
commissions is inadequate, I would consider if I were you where 
you are in perhaps making that a stronger requirement. I don't 
think we ought to be establishing parallel organizations. Let 
me suggest how this might work.
    A witness, Mr. Rouse, suggested that responsibility for 
developing some transmission planning and so on be delegated by 
the FERC to the RTOs. Frankly I would think RTOs if they come 
into full play are the place we ought to do that planning and 
develop the details on that and they would suggest it for 
subsequent review by a regional organization. That regional 
organization ought to operate within the framework of advising 
the FERC on the outcome of it. I would think that the FERC 
would be wise to give great deference to the detailed solutions 
developed by those regional organizations and ultimately 
implement them as long as they're consistent with the policies 
that you set here and are further elaborated by the FERC. Is 
that your response?
    The Chairman. Yes, that's helpful. Mr. Ward, in your 
testimony, you suggested additional protections for consumers 
are necessary before we repeal PUHCA as I understand it. 
Particularly protections against costs subsidy and cost 
shifting. Do you think that FERC would need additional 
authority above what we talk about in this White Paper? Have 
you had a chance to really look at the White Paper from that 
perspective as to whether we are contemplating enough authority 
for FERC at the present time?
    Mr. Ward. I haven't made a study of the Federal Power Act 
from that perspective in terms of analyzing whether PUHCA's 
repeal would necessitate amendments to the Federal Power Acts 
to provide that kind of protection for consumers from cross 
subsidies. So I can't give you a legal opinion.
    I certainly think the White Paper is moving in the right 
direction in saying that any PUHCA repeal should be 
conditional. It should not be flash, cut, shift into 
unregulated holding company arrangements.
    The Chairman. All right. Mr. Dushaw, would eligibility for 
training programs and retraining programs for displaced workers 
be something that should be considered under this public 
benefits fund in your view? Does that solve some of the 
problems that you alluded to in your testimony about some of 
the downsizing and displacement of workers in this industry?
    Mr. Dushaw. It would be extremely helpful. I don't know--I 
can't say, Mr. Chairman, whether the downsizing has hit bottom 
or not. I rather doubt it. I think the industry is going to 
take on a different character with a lot of outsourcing of work 
but retraining for those who are displaced under a definitive 
program would be most helpful. But really what's needed in 
terms of reliability is training of tomorrow's work force and 
putting some characteristics on that training.
    The Chairman. Okay. Well, thank you, I understand, 
Commissioner Nugent, you have a plane you have to catch and we 
would excuse you at this point. Thank you very much for coming.
    Commissioner Nugent. Thank you.
    Senator Wyden. Mr. Chairman.
    The Chairman. Senator Wyden, did you have a question of 
Commissioner Nugent before he left?
    Senator Wyden. I did and just very briefly, Commissioner, 
as you know Senator Burns and I have been very involved in the 
effort to try to get more information to the public at a time 
when clearly energy is being commoditized and we've got trading 
floors in this country, the ENRON trading floor, the Reliant 
Energy, Dynergy, and Duke Energy and these huge trading floors 
and yet it's not really possible for people to get good 
information. Not proprietary confidential issues but basic 
information in order to make these markets work better. I just 
would like to know whether you think that that is generally 
important for State regulators whether regulators now have 
access to all of the data that they need to assure that 
electric power systems are functioning properly and whether you 
think on balance, this is a constructive effort that Senator 
Burns and I are making?
    Commissioner Nugent. It is clearly a constructive effort 
that you and Senator Burns are making here, Senator. Let me--
there's really two pieces to that. There are data out there 
that we do get but we're facing delays of 90 days to 6 months 
which are intended to protect market so the timely delivery of 
the data that has been typically available is of great concern 
to State regulators.
    The second question is we're learning on this, too, and 
doing investigation to find out just what it is that we have to 
learn to be able to give the public the judgment that the 
markets are operating fairly. So we're not even fully sure yet 
what the data are that we will ultimately need to be able to 
track it. It is absolutely critical I think to the extent that 
at least at the State level, that the schemes to go forward 
with retail power markets are based on wholesale markets, that 
the public have the assurance that the watchdogs that they 
employ on their behalf to scrutinize the operation of the 
market which of necessity requires access to the data have 
access to those data and be able to scrutinize them and respond 
to them.
    Senator Wyden. Are there any concerns--as you know my staff 
has been working very closely with your organization. Are there 
any concerns that you all have at this time about the direction 
Senator Burns and I have been going?
    Commissioner Nugent. I would probably take it yet a step 
further and that is I would also make some sensitive 
information, one that might be used on the part of someone if 
it was available in the full public domain to be able to gain 
the system. I would make that available to State commissions 
under protective order. I mean you gentlemen are lawyers. You 
know what restrictions there are on that. We have a long 
history of accepting sensitive information, protecting that 
information and utilizing it in the public interest. I think an 
appropriate addition to make those--that access available would 
be useful.
    Senator Wyden. Well, you've got to get a plane and Mr. Ward 
has been very helpful. I just think that this is exactly what 
is needed right now, given the direction that we're going in 
terms of the energy field. Energy is being commoditized. It is 
clearly being subject to a whole host of markets and if people 
really believe in fair competition, they've got to want to get 
this information out.
    And what we do in our legislation, Mr. Nugent, Senator 
Burns and I give FERC the authority to delay or withhold 
information release when immediate release could result in 
market manipulation but have taken the position that you 
reflected, that as a general rule there is no good reason to 
delay or withhold access to this information from regulators to 
the public as long as everybody gets access to it and that to 
me is what you need to make markets work.
    So I'll let you run to the plane and thank you very much 
for the cooperation you've shown us and Mr. Ward as well. Your 
organization has been very helpful and I thank you, Mr. 
Chairman.
    The Chairman. Thank you very much. Did you have other 
questions of any of the other witnesses?
    Senator Wyden. No, Mr. Chairman.
    The Chairman. Let me thank Commissioner Nugent but also all 
of the rest of you. I think the hearing's been good. The 
testimony is very useful to us and we will take it into account 
as we try to move forward with legislation.
    The hearing is adjourned.
    [Whereupon, at 12:15 p.m. the hearing was recessed, to be 
reconvened on July 26, 2001.]

                         NATIONAL ENERGY ISSUES

                              ----------                              

                        THURSDAY, JULY 26, 2001

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:48 a.m. in room 
SH-216, Hart Senate Office Building, Hon. Jeff Bingaman, 
chairman, presiding.

           OPENING STATEMENT OF HON. JEFF BINGAMAN, 
                  U.S. SENATOR FROM NEW MEXICO

    The Chairman. Why don't we go ahead and start the hearing. 
This is the second day of hearing intended to prepare the 
committee to address the pressing needs we have seen clear 
evidence of in our electricity markets.
    If there's one thing we should learn from what happened in 
California and the west coast is--this past year--is that a 
functional wholesale market in electricity is important and 
necessary. Another thing we probably learned is that we do not 
have one, at least in the West. So as I indicated yesterday at 
our hearing, I believe the time for studying these issues is 
drawing to a close. It's time for the committee and the 
Congress to act to ensure that electricity markets work to 
provide dependable, affordable clean energy essential to the 
Nation and to our economy.
    We're happy that today we have two panels. The first is our 
Secretary of Energy, Minerals and Natural Resources from the 
State of New Mexico representing the Western Governors 
Association. Jennifer Salisbury made an effort to be here for 
the hearing yesterday and was not able to get here due to the 
plane difficulties. I wish the FERC would solve that problem 
for us as well.
    And then our second panel is made up of the FERC 
Commissioners. I look forward to hearing from all of them as to 
their views as to the legislative proposal that we have put 
forward in the form of a White Paper, whether that provides the 
necessary tools that they would need to adequately do their 
job. I've been encouraged by the direction of some of the 
recent orders that have come out of FERC, and we'll have a 
chance to ask about those orders as well.
    Let me ask Secretary Salisbury to come forward if she would 
right now and summarize your main points, we will include your 
full statement in the record, but if you could give us a short 
version of what you think it's essential that we know, 
particularly from the perspective of the Western Governors 
Association, that would be very useful. Thank you.
    Senator Craig. Mr. Chairman?
    The Chairman. Yes. Oh, excuse me, I forgot to have an 
opening statement. Go ahead.
    Senator Craig. That's all right. I have a brief one.
    The Chairman. Go right ahead.

        STATEMENT OF HON. LARRY E. CRAIG, U.S. SENATOR 
                           FROM IDAHO

    Senator Craig. I'm going to have to leave here at 10 
o'clock, and I apologize, because this is a most important 
hearing, and I'm glad to see a full force FERC here and in 
attendance.
    Let me say, Mr. Chairman, that on April 10 at the height of 
the problems in California and the Western Pacific Northwest 
region of our country, Senator Feinstein was working hard to 
find a solution. A Senator from Oregon was working hard--many 
of us were--to get ourselves through the summer and at the same 
time deal with what was a most dysfunctional market.
    On April 10, at that time, the FERC came to Boise and 
listened to the 11 Western States. New Mexico was there. And it 
was obvious to all of us who were in attendance and who stayed 
throughout that hearing that we did, in fact, have a broken 
market in the West at that point in time.
    California had failed to act in ways that they now have 
acted. FERC had not yet acted but was finding bases from which 
to act under the law to begin to help shape. And you've 
mentioned in your opening statements that, in fact, they have 
acted, and I agree with you. I think some of those decisions 
and orders that are out and effective or before us for comment 
have also helped shaped the market in a substantially improved 
way. What is a broken market is a market that is now appearing 
to function. Although certainly damaged, it is beginning to 
work in a much better basis.
    During that whole period, of course, what I was concerned 
about--I think what the Western States and Oregon and 
Washington and Idaho were concerned about--and Montana--was how 
we cope in this situation with a hydro-based system in a 
drought environment. Well, it looks like we may work our way 
through that this summer now thanks to everyone working 
together and thanks to the FERC looking at it, sensitizing 
themselves and moving in decisive ways.
    That doesn't mean that we have now solved the problems. It 
certainly doesn't, because there clearly is a supply situation 
out there and a transmission system that needs rapid 
improvement. All of those things are a part of what we will 
look at. I am pleased that you are holding this hearing today, 
and I think it's very important that we stay fully engaged with 
the FERC. They have substantial authority in these most 
important areas, and they are using it in many ways that I 
think are positive. In some ways I don't agree with, but at the 
same time, they're doing what we expected them to do and what 
the law requires them to do. Thank you.
    The Chairman. Thank you very much. I think rather than have 
opening statements by the other members, let me just--we'll add 
a couple of minutes onto each member's questioning time so that 
they can make any additional statements that they would like.
    Secretary Salisbury, why don't you go right ahead with your 
testimony.

STATEMENT OF JENNIFER SALISBURY, SECRETARY OF ENERGY, MINERALS 
 AND NATURAL RESOURCES, STATE OF NEW MEXICO, ON BEHALF OF THE 
                 WESTERN GOVERNORS' ASSOCIATION

    Ms. Salisbury. Thank you very much, Mr. Chairman. As the 
chairman mentioned, I'm here on behalf of the Western 
Governors' Association. The Western Governors' Association is 
composed of the 18 Western States, including all the States 
represented here this morning, as well as the territories of 
Guam, the Commonwealth of the Mariannas, and American Samoa.
    The WGA, if you didn't already know, operates by consensus 
and through policy resolutions adopted at its meetings. So what 
I testify about today is directly related to a policy that has 
been formally adopted by the member governors.
    Before I address the three items discussed in the 
chairman's White Paper, I would like to reemphasize the 
uniqueness and separateness of the power grids serving North 
America. The one serving the West--the Western 
interconnection--fully integrates the Western States, Western 
Canada and Northwest Mexico.
    There are few ties currently between the Western 
interconnection and the other two interconnections. This means 
that what happens in the West--a power outage in New Mexico, 
for example--will not impact Connecticut.
    The grids have evolved differently as well. The Western 
grid is defined by long distances between load centers, whereas 
the Eastern grid more resembles a tight-knit network.
    Other differences are apparent. Unlike the East, as you all 
well know, in the West, vast tracts of land are owned by the 
Federal Government. This obviously creates different 
transmission siting issues. The point I'm trying to make is 
that we hope the legislation that this committee crafts will 
recognize these differences that already exist, because we 
don't believe one-size-fits-all legislation will work.
    Now let me turn to three specific issues raised in the 
White Paper and on which the Western governors have taken a 
specific position.
    First, the White Paper states that the FERC should have 
jurisdiction over all transmission, whether bundled or 
unbundled. To the extent this means the FERC would now have 
jurisdiction over all retail access questions, Western 
Governors would oppose.
    Western Governors have taken the position that such issues 
as to whether a State should go forward with retail access, not 
go forward, and the timing when certain classes of consumers 
are offered retail access, are best left to the States. In 
other words, these are State prerogatives.
    Second, Western Governors support a new approach to setting 
and enforcing reliability standards. This approach is embodied 
in the consensus legislation advanced by the North American 
Reliability Council or NERC. Governors recognize that voluntary 
compliance, which has worked so well in the past, will not 
continue to work well in the new environment we've entered.
    Yes, FERC must be given enforcement oversight, but that 
does not mean that it should have absolute authority in setting 
the standards. Instead, Western Governors have enunciated three 
principles that should guide reliability legislation.
    One, deference must be given to standards adopted within 
and for the Western interconnection. Two, implementation and 
enforcement of standards must be delegated to the West. Three, 
States must have a role. The NERC consensus legislation 
contains all three of these principles. Our bottom line, retain 
the central provisions of last year's bill that provides for 
deference, delegation and a State's role.
    Stated another way, we oppose proposals to centralize 
decisions at FERC. The agency lacks the time, the resources, 
expertise and first-hand knowledge of the conditions in the 
West to manage reliability of the Western power grid. Besides, 
the process that we're advocating we think will work with our 
international partners.
    As a footnote, Western Governors support efforts to ensure 
the availability of information on loads, facilities and 
generation. Better data should mean better reliability of the 
grid.
    The third issue that I'd like to discuss, Western Governors 
have been proactive in addressing transmission needs of the 
Western interconnection. They understand adequate transmission 
is critical to maintaining the reliability of the grid as well 
as enabling competitive wholesale electricity markets.
    The White Paper discusses the need for Federal eminent 
domain in order to build new transmission. Western Governors 
oppose giving FERC this authority. Siting has already been a 
State issue. In addition, we don't believe there's sufficient 
evidence to even support the need for centralization of land 
use type decisions. No Western State in our knowledge has ever 
denied a permit for interstate transmission lines.
    It's also important to note that the major challenge facing 
siting issues in the West rests with Federal land managing 
agencies. The Federal Government, as you all know, owns 
significant portions of land in Western States--45 percent in 
California, 83 percent in Nevada, and 34 percent in my own 
State of New Mexico.
    The President has issued an executive order directing 
Federal agencies to expedite energy related projects. We 
believe this could go a long way towards solving any problems 
that currently exist to site transmission on Federal lands.
    While Governors don't believe the case has been made for 
Federal jurisdiction, Western Governors still recognize there 
is a need for States to examine their own siting and permitting 
processes. Doing so should result in higher quality and more 
timely decisions on transmission line proposals.
    To reiterate, Governors firmly believe that granting FERC 
siting authority--even as a backstop--is not needed in the West 
and should not be part of the committee's legislation.
    In summary, we applaud the White Paper for highlighting the 
challenges of today's electricity markets. And to reiterate, 
first, Western Governors oppose giving FERC jurisdiction over 
bundled transmission. Second, support reliability legislation 
similar to that which passed the Senate last year. And third, 
Western Governors oppose granting FERC eminent domain authority 
for transmission lines.
    That concludes my testimony, Mr. Chairman. I would be happy 
to answer any questions.
    [The prepared statement of Ms. Salisbury follows:]
Prepared Statement of Jennifer Salisbury, Secretary of Energy, Minerals 
 and Natural Resources, State of New Mexico, on Behalf of the Western 
                         Governors' Association
    Thank you Mr. Chairman. I am the Secretary of Energy, Minerals and 
Natural Resources of the State of New Mexico. I am representing the 
Western Governors' Association. I also sit on the Board of Directors of 
the Western Interstate Energy Board, the energy arm of the Western 
Governors' Association, and am a member of the Committee on Regional 
Electric Power Cooperation (CREPC) CREPC is unique in North American in 
that it includes all of the state and provincial agencies with electric 
power responsibilities within an entire interconnection.
    In crafting legislation, the Committee should keep in mind that 
North America is served by three essentially electrically-separate 
power grids. Within the Western Interconnection, the western states, 
western Canadian provinces and northwest Mexico are fully integrated. 
However, there are few ties between the Western Interconnection and the 
other interconnections. Generators are synchronized within 
interconnections but not between interconnections.
    The geography of the system is important, because it defines the 
practical maximum extent of the power markets and the impacts of power 
outages. An event in British Columbia cause blackouts in Arizona, but 
an outage in Arizona cannot impact states in the Eastern 
Interconnection.
    The Eastern and Western grids have developed different features. 
The western grid is defined by long distances between load centers and 
often between generation and load centers. The Eastern grid more 
resembles a tight-knit network of transmission. As a result, the 
maintenance of stable voltage in the system is often the constraining 
factor in the operation of the Western grid, while the thermal limits 
of lines is the typical constraining factor in the Eastern grid.
    As a result of these differences, institutions and practices \1\ to 
address electric power issues have evolved differently in the West than 
to the East.
---------------------------------------------------------------------------
    \1\ For example, the Western industry has relied on rating the 
capacity of transmission paths under different system conditions and 
limiting the use of paths to their rated capacities. Because paths are 
not similarly rated in the Eastern Interconnection, the industry relies 
on Transmission Loading Relief (TRLs) in the East to force users to cut 
back power transfers when reliability is threatened.
---------------------------------------------------------------------------
    Another reality differentiating the East and the West is the vast 
ownership of land in the West by federal agencies. This land ownership 
pattern creates different transmission facility siting challenges than 
in the East.
    We recommend that federal legislation recognize these electrical, 
geographic and institutional differences and resist the temptation to 
adopt federal government-centric, one-size-fits-all ``solutions.'' I 
think the experience in western power markets over the past year has 
illustrated the limits of policy made in Washington, D.C. for the West.
    Mr. Chairman, your ``White Paper on Electricity Legislation'' 
provides a good overview of current public issues resulting from the 
new electricity markets. I will address two items in your white paper--
reliability and regional planning and siting--and will cite the 
position of Western governors on other issues raised in the white 
paper. My comments are based on existing policy of the Western 
Governors' Association in Resolution 00.009 ``A Competitive and 
Reliable Western Electric Power System'' (see http://www.westgov.org/
wga/policy/00/00009. htm) and the recommendations that emerged from an 
Energy Policy Roundtable the governors held in February (see http://
www.westgov.org/wga/press/energy agree.htm0 and a Transmission 
Roundtable held in May (see http://www.westgo.org /wga/initiatives/
energy/review draft transmission.htm).
                              reliability
    The electric reliability system in the West has worked remarkably 
well over 30 years. The system of voluntary standards set by the 
Western Stations Coordinating Council, the only regional reliability 
council in the Western Interconnection, has been effective in keeping 
the lights on. This system has included investor-owned utilities, 
municipal utilities, rural cooperatives, public utility districts, 
federal power marketing administrations, as well as Canadian and 
Mexican utilities. State public utilities commissions have relied on 
these regional standards in their decisions. However, with the 
emergence of competitive electricity markets it is well recognized that 
we cannot rely on voluntary compliance with standards into the future. 
Since 1997, western governors have urged the enactment of federal 
reliability legislation to provide a legal underpinning for enforcing 
reliability standards. As a stop-gap measure, the West hat implemented 
a system of contracts to make standards enforceable. Most control areas 
in the West have executed the contracts, a few have not. However, such 
a contract enforcement system is not a long-term substitute for federal 
legislation.
    In 1997 and again last year, Western governors called for a new 
approach to setting and enforcing reliability standards that includes a 
public process for setting standards, review of standards by states, 
application of standards to all users of the grid, enforceable 
sanctions for non-compliance with the standards, mandatory membership 
by operators of the gild in regional reliability councils, and joint 
state/federal government oversight of the processes used to establish 
and enforce reliability standards. In 2000, the governors urged the 
``organization of regional advisory bodies of affected states and 
Canadian provinces to advise regional and North American organizations 
and the Federal Energy Regulatory Commission (FERC) and appropriate 
Canadian and Mexican regulatory authorities . . . FERC should defer to 
the advice of such regional advisory bodies when advisory bodies cover 
an entire interconnection.''
    Through extensive on-going collaborative efforts between the 
Western states/provinces and the Western electric power industry, three 
principles have been developed that guide our views of federal 
reliability legislation.

          (1) Deference must be given to standards adopted within and 
        for the Western Interconnection.
          (2) The implementation and enforcement of standards must be 
        delegated to the West.
          (3) States must have a role in the process.

    On July 11, 2001, WGA Chairman Governor Kempthorne conveyed to the 
Committee the governors' views on federal reliability legislation. (See 
attached letter.) \2\
---------------------------------------------------------------------------
    \2\ The letter can be found in the appendix.
---------------------------------------------------------------------------
    The Western states, provinces and industry have worked over the 
past three years to streamline and consolidate existing industry grid 
management institutions into one new entity, the Western Electricity 
Coordinating Council. The governors have called for the expeditious 
establishment of the new institution. FERC is scheduled to act on the 
proposed WECC this week and, assigning FERC approval, WECC will be 
operational later this year. The new institution is designed to rapidly 
implement the provisions of federal reliability legislation.
    Through extensive work with the North American Electric Reliability 
Council (NERC), the central elements of what the West needs are 
included in the NERC consensus legislation that the Senate passed last 
year. The NERC language provides for deference to standards that cover 
an entire interconnection. It provides for delegation of implementation 
and enforcement functions to a regional entity, such as the WECC, that 
is much closer to the issues then a North American body or FERC. It 
provides for a state advisory role and enables FERC to defer to such 
advice when given on an interconnection-wide basis. This approach 
builds on substantial existing technical expertise in the industry and 
states and does not require the establishment of a large new federal 
bureaucracy.
    In WGA Resolution 00-009, the governors said: ``Federal agencies 
and federal legislation should facilitate effective decision-making by 
the states and empower the states, with the cooperation of other 
regional stakeholders, to create regional mechanisms, where 
appropriate. to address transmission, reliability, market power and 
other regional concerns. FFRC should be required to defer to the 
decisions of such bodies.'' The regional advisory body concept is a 
stop in this direction.
    We strongly urge this Committee to retain the central provisions of 
last year's bill that provide for deference, delegation and a state 
role.
    We oppose proposals to centralize decisions on reliability at FERC. 
The agency has neither the time, resources, expertise nor first-hand 
knowledge of conditions to the West to efficiently manage the 
reliability of the western power system.
                      regional planning and siting
    Western governors have been proactive in addressing the 
transmission needs of the Western Interconnection. They recognize that 
an adequate transmission system is necessary to maintain the 
reliability of the gird and enable competitive wholesale electricity 
markets. At their February 2, 2001 Energy Policy Roundtable, the 
governors highlighted the need for an adequate energy delivery 
infrastructure. On May 9, 2001 the governors held a transmission 
roundtable and focused on three questions:

          1. What transmission enhancements are needed in the West?
          2. How can needed transmission enhancements be financed?
          3. How can needed transmission enhancements be expeditiously 
        permitted?

    The governors recognize that we cannot wait until Regional 
Transmission Organizations are in place and functioning before 
beginning to answer these questions. The uncertainty created by federal 
policies has led to a near-moratorium on transmission investment.
    As a step toward addressing the question of what transmission 
enhancements are needed, western governors established a work group 
headed by Jack Davis, CEO of Pinnacle West, and Commissioner Marsha 
Smith of the Idaho PUC, who also chairs the Committee on Regional 
Electric Power Cooperation, to develop a ``conceptual'' transmission 
plan. This plan is designed to begin to scope out the transmission 
needs of the region. It is the beginning, not the end of needed 
analysis. Such a global view is needed, given that most transmission 
work now being done is driven by narrow transmission requests made of 
utilities under Section 211 of the Federal Power Act. The conceptual 
plan should be completed in the next week and presented to Western 
governors at their meeting in August.
    There is much discussion in the Committee's white paper and 
elsewhere of the need for federal eminent domain in order to enable new 
transmission to be constructed. The record in the West provides no 
evidence supporting the need for new centralization of land use 
decisions that are more properly made in the West based on intelligent 
tradeoffs of needs and values. To our knowledge, no western state his 
ever denied a permit for an interstate transmission line. In the West 
at least, the idea of federal domain is a solution looking for a 
problem. As this Committee knows, federal primacy in natural gas 
pipeline siting and safety has not been a panacea for ensuring a well-
functioning energy infrastructure.
    The major challenge of siting of transmission in the West rests 
with federal land management agencies. The federal government owns vast 
tracts of land to the West (e.g., the federal government owns 83% of 
the land in Nevada, 65% of Utah, 63% of Idaho, 53% of Oregon, 50% of 
Wyoming, 46% of Arizona, 45% or California, 36% of Colorado, 34% of New 
Mexico, 29% of Washington, and 28% of Montana.) Federal land management 
agencies operate under a myriad of laws.
    Because few new transmission lines have been proposed in the West 
over the past decade, siting add permit review processes have become 
rusty. The President's Executive Order 13212 directing federal agencies 
to expedite energy-related projects provides needed direction. However, 
the agencies also need adequate resources to execute their 
responsibilities.
    States also need to reexamine their siting and permitting processes 
to enable higher quality and more timely decisions on transmission line 
proposals. Such timely action is essential in the faster-moving 
competitive electricity market.
    The draft Conceptual Transmission Plan that the governors ere 
reviewing recommends that all siting review processes be streamlined 
and coordinated to enable timely construction of transmission. State 
review processes should address both local and Western Interconnection 
needs, and federal agency review processes should be coordinated 
internally as well as with State and Tribal authorities.
    To advance these goals, the Committee may want to:

          (1) Authorize the establishment of joint siting processes 
        among states and federal land management agencies;
          (2) Direct federal agencies to participate in joint review 
        process and ensure that states can, at their request, be 
        cooperating agencies in all transmission project EISs; and
          (3) Fund these cooperative siting processes.

    Granting FERC siting authority, even as a backstop, is needed in 
the West and should not be part of the Committee's legislation.
                    other issues in the white paper
    The existing policies of the Western Governors' Association do not 
address all of the issues in the white paper. Following are the 
policies of Western governors that bear on the other issues raised in 
the white paper.
    Transmission Jurisdiction: The governors believe that all segments 
of the Western industry, including investor-owned utilities, public 
power, federal power marketing administrations, power marketers and 
brokers, and independent power producers, should participate in the 
competitive wholesale market (Resolution 00-009).
    Western Governors have urged the Western electric power industry, 
in cooperation with Western states and the federal government, to: 
support the formation of cost-effective Regional Transmission 
Organizations to maintain and enhance system reliability; examine and 
mitigate market power; and facilitate efficient power transactions in a 
restructured industry. (Resolution 00-009) Western states have made it 
a priority to work with the industry to resolve issues that arise at 
the boundaries of RTOs. However, as FERC was told at a meeting in March 
2001, western states do not believe that a FERC-mandated west-wide RTO 
is the most efficient means of achieving a seamless transmission system 
throughout the Western Interconnection.
    The governors have supported the elimination of release to 
distributed generation, including barriers to interconnection to the 
grid (February 2 recommendations from the Energy Policy Roundtable).
Rates and Market Power
    Western governors have urged the federal government to work with 
states to develop effective approaches to mitigate market 
power.(Resolution 00-009). Western governors have called for sending 
consumers more accurate and timely price signals. Such price signals 
are an effective means of mitigating market power. (Recommendations 
from February 2 Energy Policy Roundtable). Closer collaboration between 
FERC and the western states in decisions on whether to authorize 
market-based rates and the degree to which western markets were 
competitive may have helped to mitigate the crisis over the past year.
Member Transparency Rules
    Three of the recommendations from the governors' Energy Policy 
Roundtable addressed the urgent need to improve the quality of 
information for policy makers and market participants. The governors 
are encouraging the creation of a centralized Western interconnection-
wide database that tracks prospective demand, and tracks generation and 
transmission facilities under construction, that are permitted, in the 
permitting process, or under consideration. They support efforts to 
ensure the availability on loads, transmission, and generation where 
necessary for ensuring the adequacy, efficiency and reliability of the 
grid. They have identified an immediate need to assess natural gas 
supplies and deliverability in the West.
    A federal government-only information system may not provide states 
or market participants sufficiently detailed or timely information to 
ensure efficient electricity markets.
Additional Issues
    Consumer protection: Western governors have urged Western public 
utility commissions and Attorneys Generals to examine whether new 
measures are needed to protect electric consumers in a more competitive 
market and educate consumers on their rights and risks under a 
competitive electric system.
    Tax provisions: Western governors have written the Treasury 
Department urging that the tax-exempt status of public power entities 
not be jeopardized if such entities provide their existing transmission 
assets to an independent system operator.
                               conclusion
    The Committee's white paper correctly highlights the challenges of 
the new realities of electricity markets. Congress needs to address 
these challenges. However, Congress needs to avoid imposing a federal-
government-only approach to these challenges.
    Federal legislation must recognize the fundamental electrical 
realities of separate and international power grids. This is 
particularly critical in the West where the transmission system in 
western states, western Canada and northwest Mexico is highly 
integrated.
    Federal legislation must also recognize that the Federal Energy 
Regulatory Commission does not have the time, resources, expertise or 
local knowledge to single-handedly manage the western electric power 
system. The legislatively simple solution of ``give FERC more 
authority'' will not result in an electric power system that meets the 
needs of the West at lowest cost.
    We urge the Committee to:

   Approve federal reliability legislation similar to that 
        which passed the Senate last year that provides for deference 
        to decisions made in the Western Interconnection, delegation of 
        implementation responsibilities to a Western reliability 
        organization, and a role for states through the establishment 
        of State Advisory Bodies.
   Not grant FERC eminent domain for transmission lines.

    The Chairman. Thank you very much for your testimony. 
Before I begin any questions, let me just see if Senator 
Murkowski had any opening statement he wished to make.
    Senator Murkowski. No, Mr. Chairman, I really don't. I 
believe this is pretty much a continuation of what we began 
yesterday, and I think it's very important. As I indicated 
previously, I believe pretty much in market competition, not 
more regulation and not shifting jurisdiction from the States 
to the FERC.
    I can't help but make another attempt to alert my 
colleagues and the general public. This is a clipping, Iraq 
missile nearly hits U.S. spy plane yesterday. U.S. U2 spy plane 
was attacked by the Iraqis, and the missile almost hit the 
aircraft--said that it exploded behind the pilot and was done 
without the sophistication of an on-target radar with this 
aircraft at 70,000 feet.
    My point is, Mr. Chairman, it's just a matter of time 
before Saddam Hussein is going to take down one of our 
aircraft. We've had over 230,000 sorties over Iraq supporting a 
no-fly zone. The irony of that is that we're now importing not 
750,000 barrels a day but a million barrels a day from Iraq. I 
find that unconscionable in relationship to what it's costing 
American taxpayers and the lives that we're putting at risk 
when we clearly have an opportunity next week in the House and 
later on in the committee to address the merits of reducing our 
dependence on imported oil by stimulating domestic production 
here in the United States and particularly in my State of 
Alaska. And there's absolutely no question--no question at 
all--that we don't have the scientific technical capability to 
do it safely. Thank you.
    The Chairman. Thank you. Let me ask a few questions on the 
basis of the testimony you've given us. On this issue of 
eminent domain, your position--the position of the Western 
Governors--is that there should be no eminent domain authority 
at FERC and also that there should be no eminent domain 
authority at any regional--in any regional organization. What 
is your thought as to whether or not States should be 
encouraged or directed in some way to abide by decisions of 
regional organizations as to transmission?
    Ms. Salisbury. Mr. Chairman, this is a little bit difficult 
for me this morning. I apologize, but I'm only reflecting what 
we've taken a stated positive position on. It's my 
understanding that the issue that you just raised will be 
addressed at the August meeting. We--it's an interesting idea. 
We just have not formally talked about it.
    I think, at least at this time, we don't believe there's 
been a case stated for giving--for jurisdiction--for changing 
the system so much. It would really be a huge change in the 
policies that we've all operated under for a long time.
    The Chairman. Let me ask about these bottlenecks that we 
here in the committee have been hearing about--bottlenecks in 
the Western transmission system. This notorious path 15 line, 
for example, some witnesses have mentioned as many as 43 
constraining points in the Northwest that constrain the ability 
to move power around adequately.
    If there's no need for any additional authority at either 
the Federal or regional level, what is preventing the 
resolution of these problems? I saw something in the news this 
morning about Secretary Abraham had come out and said that the 
Department of Energy was going to take the--had taken the 
initiative to try to get this line 15--path 15 line--fixed.
    You say there's no evidence that there is a need for 
putting additional authority at FERC or anywhere but at the 
State level, how do you explain these constraint points?
    Ms. Salisbury. Well, I think there are constraints, and I 
would say that the Western Governors would argue that we need 
to reexamine all of our process that we've developed to try to 
get at more coordination, better coordination, and work--and 
this may be what the chairman was talking about a little bit 
earlier, some sort of regional groups to get at this in a 
better way.
    What I was referring to, though, is that, at least at this 
point, the States have never denied a permit for an interstate 
transmission line--at least in the West they have not. And so 
to argue that the FERC now needs to be given jurisdiction over 
this issue doesn't seem to be appropriate.
    The Chairman. Do you think the fact that the States have 
not denied permit applications is clear evidence that there's 
no need for any more general planning or siting authority?
    Ms. Salisbury. Mr. Chairman, I think the Western Governors 
would say yes, there is no need for existing authority for 
eminent domain. Planning, I don't believe we've taken a 
position on that.
    The Chairman. Okay. Senator Murkowski.
    Senator Murkowski. I'd like to expand on that, because I 
want to make sure that we understand this for the record. In 
your statement, you state--and I quote--``The White Paper 
states''--and you're referring to the White Paper that majority 
has proposed--``The White Paper states that FERC should have 
jurisdiction over all transmission whether bundled or 
unbundled.'' And then you say, ``To the extent this means that 
FERC would now have jurisdiction over all retail access issues, 
Western Governors would oppose.'' And you expanded in your oral 
statements, and again, you address your justification that the 
systems work, and you've been able to accommodate the request. 
Is that the only reason or are there others that you would deem 
to oppose any effort to have FERC have jurisdiction over all 
transmission?
    Ms. Salisbury. Mr. Chairman, Senator Murkowski, the 
transmission--the bundled and unbundled--Western Governors have 
always taken the position that retail access issues, whether to 
grant retail access, the timing of retail access, is a decision 
that's better left to the States.
    So to the extent that turning over jurisdiction for 
transmission--this is different from the siting issue, the 
bundled and the unbundled--and it would back door retail access 
questions to FERC, Western Governors have taken a position 
opposing this.
    Some States in the West do not want retail access. Just as 
an example, my own State of New Mexico had passed a bill a year 
or so ago, and this past year, because of the situation in 
California and elsewhere in the West, delayed implementation of 
retail access for 5 years.
    Senator Murkowski. I want to point out simply that this, I 
think, is one of the fundamental differences that exist in the 
two bills that have been submitted as comprehensive bills by 
Senator Bingaman and myself, and we do appreciate the fact that 
I happen to agree with you starts the morning off all right for 
me. But nevertheless, we should point out our differences, 
because those are the areas that we're going to have to work 
towards compromise and a resolve.
    The Chairman. Thank you very much.
    Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman. Yesterday, Miss 
Salisbury, the president of the National Association of 
Regulatory Commissioners endorsed legislation that Senator 
Burns and I have introduced that would make it easier for the 
States to get key information about electric power production, 
transmission past schedules and flows that are so essential to 
making markets work.
    I think this legislation very much tracks the kind of 
comments that you've made, and it would just be helpful if we 
could get your thoughts on the idea on the need for more market 
transparency and more information on these issues.
    Ms. Salisbury. Mr. Chairman, Senator, the Western 
Governors, at a meeting that it had--a roundtable meeting that 
it had in February--as one of its--I guess the--what it 
released as far as additional steps that needed to be taken, 
did state affirmatively, and I will quote, ``that Western 
Governors support efforts to ensure the availability of 
information on loads, transmission and generation when 
necessary for ensuring the adequacy, efficiency and reliability 
of the grid.''
    We recognize, and I think the Senator's already stated he 
recognized that there is definitely a need for more, better, 
quicker data to make decisions. And I think the Western 
Governors would work with that and probably support 
legislation.
    Senator Wyden. We'll work closely with you. Mr. Chairman, I 
too have to go on to a hearing. I just wanted to make a brief 
statement about a matter that involves FERC. As our colleagues 
know, I put up on my web site various oil industry documents 
that describe some very troubling refinery practices that deal 
with this price manipulation issue.
    Today with FERC, we're going to be looking at whether 
electricity or natural gas supply was manipulated to inflate 
the price. FERC has asserted that there is no evidence now of 
price gouging.
    Given that, I'm troubled by the fact that the network news 
the other night reported on a secret FERC investigation that 
found that two companies were keeping powerplants out of 
service to raise electricity prices.
    It was also reported that FERC sealed the records and that 
the documents would not be released, and in fact, Commissioner 
Massey, who is here today, opposed sealing the documents. So I 
hope to get back, Mr. Chairman, but if I don't, I just want to 
be on record as saying that I hope that FERC will work with 
this committee to provide these documents that the network news 
is now saying provide tangible evidence of manipulation of 
supply and electricity prices. I think it's important for the 
committee to decide these matters themselves after we make 
arrangements to look at it in a way so that if there are 
propriety issues that those matters can be protected. And I 
can't stay this morning, but the reason Senator Burns and I 
have introduced this legislation is that we've got to prevent 
gaming, and getting more information out will help prevent 
gaming. But until that time, when you've got FERC sealing 
records and you've got people with credibility like 
Commissioner Massey saying that they're opposed to sealing the 
records, I think this committee's got an obligation to dig 
further. And I thank you, Mr. Chairman, for the extra time to 
make the point that normally I wouldn't have done on Miss 
Salisbury's watch.
    The Chairman. Thank you very much.
    Senator Thomas.
    Senator Thomas. Thank you, Mr. Chairman. Thank you, Miss 
Salisbury. I agree with you, certainly, on the bundled 
transmission oversight and those kinds of things. Is California 
part of this governors group?
    Ms. Salisbury. It certainly is, Mr. Chairman, Senator, and 
California's actively participated on these electricity issues.
    Senator Thomas. Was there an appeal to FERC and to the 
Federal Government to do things a little bit contradictory to 
what Governors have agreed to?
    Ms. Salisbury. Well, Mr. Chairman, Senator, I think we've 
tried really hard in the policy resolutions to reflect the 
positions on these issues that I've raised. There has--there is 
no policy resolution on the price cap issue, and I think that's 
where maybe the Senator's going is that there is a divergence 
of opinion on whether price caps are appropriate, and some 
Western Governors have said they are, and some have said they 
are not.
    Senator Thomas. Right, I understand. Well, the point, 
though, is if you know--if you want to keep the jurisdiction 
and the decision making locally, which I agree to, then you 
can't turn to somebody else when you have a problem to come in 
and resolve it. So I believe--what does the--do the Governors--
have they talked some about strengthening the transmission 
within the RTO, within the Western area? Obviously transmission 
is one of the difficulties. We would like to ship more power 
from Wyoming outside of the State--transmission there. The 
Governors have any idea where they want to go? Do they have a 
plan? Do they have any vision of the future?
    Ms. Salisbury. Mr. Chairman, about, oh, I don't know, 2 or 
3 weeks ago--maybe it's been a little bit longer than that--
Western Governors did meet on the transmission issue 
specifically. They're just about ready to release a report. 
It's not available yet, and that's why I don't feel free to 
discuss, because--and I apologize again that I'm constrained by 
what I testified to----
    Senator Thomas. I understand.
    Ms. Salisbury [continuing]. Yes, very concerned. It will be 
an issue that's addressed at the meeting--the annual meeting--
that the Governors hold in August.
    Senator Thomas. Well, I'm just hopeful that not only do you 
have a report on what the situation, but more importantly, do 
we begin to have some vision as to what we think needs to be 
done and to begin to make recommendations as to how we do it.
    Would you think that generally a interstate national grid 
that would bring together the RTOs of the various regions and 
allow for the movement of merchant power to move nationwide? 
Would that be something the Western Governors would agree to?
    Ms. Salisbury. Mr. Chairman, Senator, I don't know at this 
time. I understand that it is enormously expensive to do that, 
because there are not many ties now between and among the three 
grids. And so I think what the Governors are trying to do, and 
it's reflected in the policies, is to deal with the reality as 
it exists today in our new markets.
    Senator Thomas. I'm sure that's true, and I'm getting to 
almost have a thing about this. But that's what we're doing is 
reflecting now on where we are. The reason for reflecting where 
we are is to try and determine where we need to go to solve the 
problem. And I guess that's what I'm really interested in us 
doing. And I'm going to have to go to another hearing too, so I 
hope the FERC folks will also, instead of just talking about 
where we are and what we do next week, what is it that we need 
to do over time to be able to deal with our obvious problem? 
And that is, we're changing the way we do electricity. We're 
changing from the idea that you used to generate almost 
entirely for your own service area. Now you're generating 
independently, and if that's going to work--and we think it 
is--they you have to be able to move the product and get it 
into the places where it goes. But I don't hear people talking 
about what's the resolution to that. And I wish--and I hope 
you'll take that back to the Governors and say look guys, we 
need--or ladies or whoever they are--we need a little bit of 
vision of where we're going. And thank you so much for being 
here. I appreciate it.
    The Chairman. Senator Feinstein.
    Senator Feinstein. Thanks very much, Mr. Chairman. If I 
may, I'd like to welcome you very much. Miss Salisbury, may I 
reserve my time for the FERC Commission?
    The Chairman. Sure.
    Senator Feinstein. Thank you very much.
    The Chairman. Senator Cantwell, did you have questions?
    Senator Cantwell. Likewise, Mr. Chairman.
    The Chairman. Senator Landrieu.
    Senator Landrieu. Likewise, Mr. Chairman.
    Senator Murkowski. You're getting off easy.
    The Chairman. Senator Murkowski.
    Senator Murkowski. I won't take much time.
    Unfortunately, Senator Wyden isn't here, and I didn't want 
to interrupt him, and then he had to go to a hearing. But I 
think it's important to keep these things in perspective. The 
allegations associated with consciously taking down plants and 
profiteering and so forth, we can be critical of one phase, but 
somebody's got to stand up for the other points that are 
relevant. And I'm looking at an article here that was forwarded 
to me, breaking news, and it says--reports--`State grid 
operator behind plant's output swings.'
    I don't know the facts here--maybe we can get into them 
when FERC comes in--but, you know, there's a general 
assumption, I think, that's left an impression that somehow the 
utilities are responsible for taking a plant down, 
profiteering--whatever the allegation might be. We don't get a 
chance to go in, and I don't think it's our job to point 
fingers.
    But nevertheless, I think it's important to point out that 
in this particular article, the operator of the State's power 
grid has acknowledged that it was responsible for swings in 
production at a powerplant that Governor Gray Davis held as an 
example of price gouging by out of State energy companies.
    Let's be fair, and let's make sure that the media--which 
has an obligation as an investigative agency--does balance on 
these things. Just to point out one way--and I'm a little 
frustrated here--we can spend a lot of time witch hunting 
around here, but we have a shortage of supply in this country, 
and doing this kind of witch hunting, I think is necessary for 
FERC and the appropriate agencies, but it's up to us to 
increase the supply of energy, and I think we should spend a 
little more energy doing that.
    I'm sorry that you had to hear my tirade. It has nothing to 
do with you, but I agree with your testimony and the Governors 
and certainly wish you a good day and thank you.
    Ms. Salisbury. Thank you.
    The Chairman. Well, thank you very much for testifying. We 
appreciate it.
    Ms. Salisbury. Thanks, Mr. Chairman and members of the 
committee. I'm happy that they were interested in hearing from 
the Western Governors.
    The Chairman. Thank you. Do the Eastern Governors have the 
same opinion, do we know?
    Ms. Salisbury. They could?
    The Chairman. Could you arrange it?
    Ms. Salisbury. I won't even attempt that one.
    The Chairman. Why don't we ask the second panel--the FERC 
Commissioners--to please come forward, and we will hear their 
testimony. If each of you could come up, we'd appreciate it.
    Senator Murkowski. Mr. Chairman, I'm going to have to 
excuse myself. I have to introduce a couple of nominees at the 
agriculture hearing this morning at 10:30, so I wanted to wish 
my friends from FERC hello. Although we're not real close 
friends, I want to make sure the records notes that. Got to be 
careful around here. And furthermore, I would hope that they 
would respond to the question by the Senator from Oregon, since 
I probably won't be here to ask it.
    The Chairman. All right, we will ask them to do that. Why 
don't we start out--I think probably the way to proceed is to 
start with Commissioner Hebert as the Chairman and hear his 
views. And if he could just--I think as always here in the 
committee, we will take all written statements you have and 
include them in the record, so if you could just summarize the 
main points you'd like to make. And then maybe after 
Commissioner Hebert, Commissioner Breathitt, Commissioner 
Massey, Commissioner Wood, Commissioner Brownell--why don't we 
do that? Go right ahead. Mr. Chairman, thank you for being 
here.

    STATEMENT OF CURT HEBERT, JR., CHAIRMAN, FEDERAL ENERGY 
                     REGULATORY COMMISSION

    Mr. Hebert. Thank you, Senator Bingaman, Mr. Chairman. I 
appreciate that. Members of the committee, Mr. Chairman, good 
morning and thank you for the opportunity to speak today on 
legislative proposals relating to restructuring of the electric 
utility industry.
    The guiding principle for restructuring legislation should 
be to provide a foundation for the development of robust 
wholesale competition in the electric industry. This would 
provide electric customers with supply sufficient to meet their 
energy needs at the lowest reasonable cost.
    The Commission remains committed to developing market-
oriented policies that promote the addition of necessary 
transmission and generation and that allow for the detention 
and remedying of any anti-competitive behavior.
    Legislation should help ensure that transmission owners and 
operators have economic incentives to operate and expand the 
transmission grid to meet the needs of all consumers and other 
market participants.
    Order 2000 encourages the formation of regional 
transmission organizations--as we call them, RTOs. The industry 
has responded positively with innovative efforts to develop 
efficient and non-discriminatory RTOs, because they make 
economic sense, not because of a legal mandate.
    We need to rely on competition instead of traditional 
regulation wherever possible. Existing laws that hinder 
competition, such as PUHCA and PURPA, need to be modified or 
repealed. And I noticed that was mentioned in the White Paper, 
and I think that is absolutely on target.
    The Commission has no direct statutory authority to 
promulgate and enforce a set of mandatory reliability 
standards. Possible approaches to reliability include enforcing 
standards through identified performance-based measures or 
through voluntary contracts. Congress should understand, 
however, that mandatory reliability rules alone are not enough 
to ensure reliability of the grid.
    Finally, the problems experienced in California and the 
West were not caused by any inadequacies in the Federal Power 
Act regarding rates and power. Preventing such problems in the 
future is not dependent on adding to the Commission's authority 
or obligations.
    Consistent with existing statutory authority, the 
Commission has issued dozens of orders in recent months that 
have acted to transform the market institutions and rules that 
help produce higher prices and create reliability uncertainty.
    The Commission has made it clear that it will actively 
monitor the competitive operation of wholesale markets and that 
it will remedy any form of anti-competitive conduct that it 
detects. And the Commission has acted decisively to lower and 
stabilize electricity prices.
    Indeed, just yesterday the Commission sought to bring 
regulatory and investment certainty to Western markets by 
issuing an order on refunds for prior months. Specifically, the 
Commission adopted a price methodology for determining refunds 
or offsets based on its earlier price mitigation orders and a 
report from its Chief Administrative Law Judge and established 
separate evidentiary proceedings for spot market purchases in 
California and in the Pacific Northwest.
    Market participants need to understand that the cloud of 
refund uncertainty which has inhibited the type of investment 
in supply and deliver infrastructure that is essential to 
keeping rates low and ensuring competitive options in the long 
term, will lift at some point.
    It is important to recognize the primary source of recent 
problems in Western energy markets. Demand kept growing, but 
supply did not, Mr. Chairman. The long-term solution to these 
problems is to have the balancing of supply and demand done by 
the marketplace--not by the Federal Government.
    I am happy to support legislative initiatives that serve to 
develop truly competitive markets that will serve the interests 
of all market participants. Thank you for your time, and I look 
forward to your questions.
    [The prepared statement of Mr. Hebert follows:]
   Prepared Statement of Curt Hebert, Jr., Chairman, Federal Energy 
                         Regulatory Commission
                              I. Overview
    Mr. Chairman and Members of the Committee, good morning. Thank you 
for the opportunity to speak today on legislative proposals relating to 
restructuring of the electric utility industry.
    Our fundamental electric utility laws were enacted during the Great 
Depression. These laws made sense in their time, when competition in 
the industry was more a theory than a reality. These laws were meant to 
provide a regulatory substitute for competition. Today, however, these 
laws often have the ironic effect of preventing the development of 
competition, harming the very consumers they were supposed to protect.
    I believe the guiding principle for restructuring legislation 
should be to provide a foundation for the development of a robust 
wholesale competition in the industry, thereby providing electric 
customers with supply sufficient to meet their energy needs at the 
lowest reasonable cost. This principle requires different approaches in 
the transmission and generation parts of the industry.
    Transmission will have to remain regulated for the foreseeable 
future. However, transmission must become a stand-alone business and 
respond to the market. Legislation should help ensure that transmission 
owners and operators have economic incentives to design, build, 
operate, and expand the transmission grid to meet the needs of all 
consumers and other market participants.
    In contrast, in the wholesale power sector, we need to rely on 
competition instead of traditional regulation wherever possible. 
Existing laws that hinder competition need to be modified or repealed. 
While the Commission stands ready to intervene in power markets when 
market rules or other factors lead to unjust and unreasonable prices, 
legislation reducing the existing barriers to entry will minimize the 
need for such efforts in the future.
                     ii. transmission jurisdiction
    In 1996, the Commission adopted Order No. 888, requiring all public 
utilities to offer nondiscriminatory, open access transmission service 
over facilities they own, control or operate. This service has been a 
major factor in the growth of wholesale competition in the past few 
years. Most wholesale buyers and sellers now have many more trading 
options than they had in the past.
    In late 1999, the Commission adopted Order No. 2000, encouraging 
the formation of regional transmission organizations (RTOs). The 
industry generally responded positively, with innovative efforts to 
develop large, efficient and nondiscriminatory RTOs. The Commission, 
too, has worked hard to give the industry timely and constructive 
guidance on the development of RTOs. If properly constituted and truly 
independent, RTOs can help address and eliminate remaining obstacles to 
competition and make the markets more efficient, for the benefit of 
electricity consumers in all states. Indeed, RTOs support wholesale 
competition and, where states choose to pursue it, retail competition. 
But even in the absence of retail competition, consumers will benefit 
from increased competition in wholesale markets. For example, RTOs can 
be structured to eliminate ``pancaking'' of transmission rates, better 
manage transmission congestion, and facilitate transmission planning 
across a multi-state region. There is still a lot of work to do, but I 
remain confident that we will reach our RTO goals.
    I see no need for enactment of legislation allowing FERC to mandate 
the formation of RTOs. The industry is already forming RTOs because 
they make economic sense, not because of a legal mandate. If RTOs did 
not make economic sense, then nothing would be gained by requiring 
their formation. I am particularly pleased to see that transmission 
owners, with the urging of (rather than a directive from) the 
Commission, increasingly are reaching the conclusion that a particular 
type of RTO a stand-alone, truly independent transmission company will 
best serve the interests of consumers and the market as a whole.
    Some argue that the Commission's jurisdiction should be expanded to 
include all transmission by non-public utilities. However, proposed 
RTOs in various parts of the country are making efforts to include the 
facilities of non-public utilities. If the industry succeeds in 
including the facilities of non-public utilities in RTOs, there may be 
no need for legislation broadening Commission jurisdiction over non-
public utilities. The priority for Congress now should be to reduce or 
remove any legislative barriers to RTO participation by non-public 
utilities.
    I also do not see a need for legislation requiring FERC to adopt 
uniform rules on interconnections. The development and implementation 
of broad RTOs will, in turn, promote the development of standardized 
and non-discriminatory interconnection procedures. A truly independent 
RTO has every incentive to maximize throughput and no incentive to 
hinder the interconnection of new generation.
                            iii. reliability
    The recent changes in the electric power industry have increased 
the incentive for, and frequency of, violations of reliability rules 
adopted by the North American Electric Reliability Council (NERC). 
Unfortunately, NERC lacks authority to enforce its rules. As a result, 
the issue confronting the industry is whether federal action on 
reliability is necessary.
    The Commission has no direct statutory authority to promulgate and 
enforce a set of mandatory reliability standards. While reliability 
issues sometimes fall within the Commission's ratemaking jurisdiction, 
the Commission in those cases does not decide whether the reliability 
of service is acceptable per se. Rather the Commission decides whether 
the rates, terms and conditions of service are just, reasonable and not 
unduly discriminatory or preferential from a commercial perspective.
    The lack of federal authority to address reliability issues, and 
increasing concern about the shortcomings of the traditional voluntary 
approach to reliability issues, have led some in the industry to seek 
other approaches. One approach to enhance reliability and promoting 
customer accountability is to give energy providers an incentive to 
provide reliable, efficient service. Conventional pricing methods do 
not provide adequate incentives. It is my preference to afford 
utilities some type of performance-based measure of accountability to 
their customers and their regulators. Consistent with its existing 
authority, the Commission could tie earnings and profits to 
reliability-based and performance-based criteria.
    Another approach that has been pursued is enforcing reliability 
standards through contracts. Public utilities may voluntarily include 
reliability-related provisions in contracts or tariffs filed with the 
Commission because they affect or relate to the rates, terms and 
conditions of jurisdictional service. If reliability provisions in 
Commission-jurisdictional contracts are accepted and on file with the 
Commission, the Commission can enforce the reliability-related 
provisions against public utility parties to the contracts.
    A system of such contractual arrangements has been established by 
utilities in the Western Systems Coordinating Council (WSCC), the 
regional reliability council for the Western United States. The 
effectiveness of the WSCC arrangement and the Commission's ability to 
enforce it have not been fully tested. But, a voluntary contractual 
regime is not the simplest or most effective means of establishing and 
adequately enforcing reliability standards. It depends solely on the 
willingness of public utilities to make voluntary filings and, even 
then, it may not capture the electric facilities of non-public 
utilities. Reliability is at risk to the extent that not all market 
participants are covered by the same requirements.
    Another approach to ensuring reliability is enacting federal 
legislation. This year, on May 17, the Administration released its 
National Energy Policy Report. The Report recommends that the President 
direct the Secretary of Energy to work with the Commission to improve 
the reliability of the interstate transmission system and to develop 
legislation providing for enforcement by a self-regulatory organization 
subject to the Commission's oversight.
    I believe a legislative approach may be preferable to the 
contractual approach discussed above. I take no position, however, on 
whether the legislation should be based on the proposal supported by 
NERC or any other version of reliability legislation.
    Congress should understand, however, that mandatory reliability 
rules alone are not enough to ensure the reliability of the grid. In 
its Order No. 2000 on RTOs, the Commission set out at length the need 
for an RTO to ensure reliability in each region. In particular, RTOs 
must have the authority to ensure the short-term reliability of the 
regional grid and must be responsible for planning, and for directing 
or arranging, necessary transmission expansion and upgrades that will 
enable it to provide efficient and reliable transmission service.
    As discussed below, we also need to find ways to encourage and 
facilitate the construction of new transmission facilities. And, of 
course, we must have adequate generating resources. The Commission is 
continually reassessing its existing regulations and policies to 
promote market entry and the removal of regulatory barriers to enhanced 
competition in the wholesale supply and interstate delivery of energy 
products and services. For example, on March 14, 2001 and May 16, 2001, 
the Commission issued orders removing regulatory obstacles and 
providing incentives to increased energy supply and reduced demand in 
California and the rest of the West.
                 iv. power sales rates and market power
    While not the focal point of today's hearing, the problems recently 
in the electricity markets in California and the Western United States 
are an inescapable background to some of the legislative proposals now 
being considered. Those problems have led many to argue that the 
Commission needs additional statutory authority or obligations to 
ensure that wholesale prices remain just and reasonable.
    I disagree. Since I became Chairman in January of this year, the 
Commission has used its existing authority firmly and effectively to 
mitigate prices in Western markets. The Commission has issued dozens of 
orders this year involving wholesale markets in California and the 
West. As a result of those orders and other factors, prices in those 
markets are continuing to decline substantially.
    The problems in California were not caused by any inadequacies in 
the Federal Power Act regarding rates and market power, and preventing 
such problems in the future is not dependent on adding to the 
Commission's authority or obligations. Instead, such arguments merely 
distract us from the primary source of the problems: demand kept 
growing, but supply did not.
    The long-term solution to these problems is to have the balancing 
of supply and demand done by the marketplace, not the government. While 
the Commission has acknowledged and addressed the need for short-term, 
market-oriented price mitigation in California and the West, these 
measures must not become permanent crutches. We must find market-driven 
ways to promote new sources of supply and transmission, and encourage 
appropriate conservation by consumers. Price mitigation should continue 
no longer than absolutely necessary, and should be replaced as soon as 
possible by full reliance on market-based outcomes.
              v. regional transmission planning and siting
    Since the Commission adopted its open access requirements in 1996, 
the use of the interstate transmission grid has grown dramatically. 
Also, wholesale markets have become much more regional than local, 
encompassing large multi-state areas. Unfortunately, however, the grid 
has not been expanded commensurately. Thus, the grid increasingly is 
pushed to its operational limits, and transmission constraints 
frequently prevent the most efficient use of generation facilities. The 
institutional structures for planning and expanding the grid are not 
meeting our needs.
    In planning grid expansions, we need to move toward a more regional 
approach. I believe RTOs can fulfill this role. By definition, RTOs 
will encompass large trading areas. An RTO-based planning process will 
allow all market participants within these areas to express their needs 
and concerns. Since RTOs must be independent of market participants, 
all participants will be assured of a nondiscriminatory planning 
process. RTOs that are based on the model of a stand-alone, for-profit 
transmission company will be particularly motivated to expand the grid 
when appropriate to maximize transmission throughput, and thus, 
transmission revenue.
    The authorization and siting of grid expansions has generally been 
performed under state law. While some argue that state authorities are 
too parochial to perform this responsibility well in today's regional, 
multi-state markets, I am not so persuaded. However, a federal backstop 
role may be appropriate in certain circumstances. For example, Congress 
could reasonably decide to establish a federal siting process, subject 
to certain limitations, if an RTO is unable to obtain siting 
authorization from a State within a specified time.
                     vi. market transparency rules
    In the past, utilities had little or no reason to keep their costs 
and transactions confidential. Utility prices were fully regulated on a 
cost-plus model, and competition was generally insubstantial. In 
today's competitive markets, however, confidentiality of price and 
customer information can be critical to a utility's success.
    The Commission has seen increasing struggles among industry 
participants on how to reconcile the need for confidential information 
in competitive markets with a statutory and regulatory framework 
premised on full disclosure of cost and price information. It is not 
yet clear to me how best to reconcile these tensions. One approach the 
Commission has used is to require disclosure of bids in centralized 
trading markets, but only after a lag of several months. Other 
approaches may be feasible, too, so long as they reasonably balance the 
needs of competitors to preserve commercially-sensitive information 
with the needs of regulators and the public for information to ensure 
that jurisdictional rates remain just, reasonable and not unduly 
discriminatory or preferential.
                         vii. other provisions
A. PUHCA
    The Public Utility Holding Company Act (PUHCA) requires registered 
holding companies to submit to extensive regulation by the Securities 
and Exchange Commission. PUHCA also generally requires holding 
companies to operate an ``integrated'' and contiguous system. As a 
result, PUHCA encourages concentrations of generation ownership and 
control in local markets that are inconsistent with competition and 
discourages asset combinations that could be pro-competitive. PUHCA may 
also provide a significant disincentive for investment in independent 
transmission companies that would qualify as RTOs. Under PUHCA, any 
entity that owns or controls facilities used for the transmission of 
electric energy--such as an RTO--falls within the definition of a 
public utility company, and any owner of ten percent or more of such a 
company would be a holding company and potentially could be required to 
become a registered holding company. This could serve as a significant 
disincentive for investments in independent transmission companies that 
qualify as RTOs.
    PUHCA was enacted primarily to undo harms caused by byzantine 
holding company structures that no longer exist. In the decades since 
PUHCA was enacted, utility regulation has increased substantially, 
under the Federal Power Act, federal securities laws and state laws. 
PUHCA has outlived its usefulness, and now does more harm than good. 
PUHCA should be repealed.
B. PURPA
    The Public Utility Regulatory Policies Act (PURPA) was enacted in 
the late-1970s, in the aftermath of that decade's energy crises. The 
legislation's goal was to remove impediments to the use of cogeneration 
and renewable-based generation, and promote their use by allowing such 
generators to require utilities to buy their power at the utilities' 
avoided costs.
    Today, the impediments addressed in PURPA are gone (although other 
impediments may exist, such as the need for grid expansion). Also, 
PURPA's ``forced sale'' requirements are no longer necessary, in light 
of the availability of open access transmission, to promote the 
development of competition, and more often serve to distort competitive 
outcomes. Congress should repeal PURPA, while ``grandfathering'' 
existing PURPA contracts.
                            viii. conclusion
    We need less, not more, regulation in the generation business. 
However, we will continue to regulate transmission for the foreseeable 
future, while encouraging transmission to become a stand-alone business 
and respond to the market. Congress must focus on removing impediments 
to the competitive restructuring that is taking place. Outdated laws, 
such as PUHCA and PURPA, are hindering effective restructuring. The 
best way for Congress to help electricity consumers is to promote 
wholesale competition through the legislative changes described above.

    The Chairman. Thank you very much for your testimony.
    Commissioner Breathitt, why don't you go ahead.

  STATEMENT OF LINDA BREATHITT, COMMISSIONER, FEDERAL ENERGY 
                     REGULATORY COMMISSION

    Ms. Breathitt. Mr. Chairman and members of the committee, 
thank you for inviting me to appear before you this morning to 
discuss the need for Federal electricity restructuring 
legislation, and in particular, the committee's White Paper on 
electricity legislation.
    The committee is to be commended for advancing the 
discussions on how best to achieve the restructuring that is 
needed in the U.S. electric industry in order to arrive at 
competitive and efficient wholesale and retail electricity 
markets.
    I believe that Federal electricity restructuring 
legislation is needed to address important and unresolved 
issues in the electric industry and to enable the FERC to 
advance its goals of achieving fair, open and competitive bulk 
power markets.
    In order to achieve these overarching goals, Federal 
legislation must address several specific policy areas. The 
White Paper correctly identifies many of these key elements.
    Regarding transmission jurisdiction, I agree with the 
conclusion in the White Paper that the Commission's 
jurisdiction to require open access should be extended to 
public, cooperative and Federal utilities. I have said that 
before in this committee in April, 2000.
    I also agree with the White Paper's premise that 
legislation would be needed to affirm the Commission's 
authority to order utilities to join RTOs. If the Commission 
determines that it must resort to mandatory RTO participation, 
such legislation would allow the Commission and the industry to 
avoid costly and time-consuming litigation of our authority in 
this area.
    Regarding reliability, I believe that legislation is needed 
to replace the current voluntary system with one in which a 
self-regulated independent reliability organization with 
oversight by the Commission establishes and enforces mandatory 
reliability rules.
    Such a change is necessary to ensure a reliable and 
competitive bulk power market in the evolving electric power 
grid and the ever-increasing transactions going over it.
    On the issue of transmission siting, I would go further 
than the white paper goes. I agree with the basic premise that 
the goal of a national transmission grid may be unattainable 
absent a new approach. I believe legislation is needed to grant 
the Commission eminent domain authority over the siting of 
electric transmission facilities similar to the authority the 
Commission exercises with respect to the siting of interstate 
gas pipelines.
    I'm not advocating that we have siting authority for 
electric distribution lines or powerplants. The States are best 
suited to that. My written testimony goes further into my 
rationale for not exactly agreeing with the regulatory compact 
approach.
    Finally, I agree with the White Paper's conclusion that 
current tax code restrictions will prevent public power 
entities from engaging in certain restructuring efforts, and I 
believe the tax code's private use restrictions on the 
transmission facilities of public power entities financed by 
tax-exempt bonds may prevent the transfer of operational 
control over these facilities to a for-profit transmission 
company.
    So I believe it's crucial that public power entities 
participate fully in RTOs, and new legislation should help 
eliminate these tax restrictions.
    In conclusion, Mr. Chairman and members, I urge Congress to 
focus its attention over the coming months on these and related 
policy areas in order to achieve competitive and properly 
functioning electric markets that will ultimately provide real 
benefits to American consumers. Thank you for inviting me this 
morning.
    [The prepared statement of Ms. Breathitt follows:]
  Prepared Statement of Linda Breathitt, Commissioner, Federal Energy 
                         Regulatory Commission
    Mr. Chairman and Members of the Committee, I appreciate this 
opportunity to appear before you today to discuss proposals relating to 
comprehensive electricity legislation. Today's hearing is timely 
because there is a real need for Federal legislation to address 
important and unresolved issues in the electric industry, such as 
reliability, jurisdiction, transmission siting, and tax restrictions. 
In addition, legislation is needed to ensure that the Federal Energy 
Regulatory Commission has sufficient authority to continue its efforts 
to establish fair, open and competitive bulk power markets.
    The ``White Paper on Electricity Legislation'' prepared by Chairman 
Bingaman provides a good starting point for a discussion of these 
legislative needs and objectives. I believe the White Paper correctly 
identifies many of the key elements that federal legislation should 
address, including: (1) transmission jurisdiction; (2) reliability; (3) 
transmission siting; (4) market rules; (5) PUHCA and PURPA issues; and 
(6) tax code restrictions. Congress must focus its attention on these 
and related policy areas in order to achieve competitive and properly 
functioning electric markets that will ultimately provide real benefits 
to American consumers.
                       transmission jurisdiction
    The White Paper suggests that the Commission should have 
jurisdiction over all transmission, whether bundled or unbundled, and 
that the Commission's jurisdiction should be extended to public, 
cooperative and federal utilities. This is an essential element for any 
proposed energy legislation.
    Full, non-discriminatory open access to transmission services is a 
necessary condition for the development of competitive wholesale bulk 
power markets. However, certain impediments to full open access remain. 
One such impediment is that a significant portion of the nation's 
transmission grid is owned and operated by utilities not subject to 
FERC's open access requirements. I would support legislation that 
extends the Commission's open access regulatory authority to non-public 
utilities that own, operate, or control transmission facilities, 
including Federal Power Marketing Administrations, the Tennessee Valley 
Authority, municipal utilities, and cooperatively-owned utilities. I 
note that S. 1273, introduced in the 106th Congress by Senator 
Bingaman, would extend Commission authority in this manner. I have 
previously stated this sentiment in testimony before this Committee on 
April 27, 2000.
    The Committee's White Paper also calls for legislation affirming 
the Commission's authority to order utilities to join regional 
transmission organizations (RTOs). In the Commission's Order No. 2000, 
issued on December 20, 1999, we concluded that the Commission has 
sufficient authority, pursuant to the Federal Power Act, to order a 
public utility, on a case-by-case basis, to participate in an RTO upon 
finding, and where supported by the record, that the public utility is 
engaging in unjust, unreasonable, unduly discriminatory or 
anticompetitive practices, and that participation in an RTO is a 
reasonable remedy for such behavior. However, the FPA is not express 
with regard to the Commission's authority to order utilities to 
participate in RTOs. Therefore, I agree with the premise in the White 
Paper that legislation is needed to affirm the Commission's authority. 
If the Commission determines that it must resort to mandatory RTO 
participation, such legislation would allow the Commission and the 
industry to avoid costly and time-consuming litigation of the 
Commission's authority.
    Finally, the White Paper states that interconnection rules should 
be clarified in order to ensure that new sources of generation are able 
to interconnect to the transmission system. I agree with the contention 
that interconnection-related issues need to be addressed. In recent 
orders we have stated our intent to evaluate in the near future the 
importance of standardizing interconnection policies and procedures.
                              reliability
    The White Paper contends that legislation should authorize a system 
for assuring the reliability of the grid that: (1) is mandatory, (2) 
requires sanctions and penalties for failure to comply with reliability 
rules, and (3) is subject to federal oversight. I believe that the 
voluntary reliability system, which has been in place for over three 
decades, should be replaced with one in which a self-regulated 
independent reliability organization, with oversight by the Commission, 
establishes and enforces mandatory reliability standards. I believe 
such a change in the manner in which the reliability of the 
interconnected grid is overseen and managed is required in order to 
ensure a competitive bulk power market. S. 2071, a stand-alone measure 
to promote the reliability of the nation's transmission system which 
was approved by the Senate during the 106th Congress, established such 
a self-regulated independent reliability organization, with oversight 
by the Commission. S. 388 and S. 597, introduced in the current 
Congress, include similar provisions. I wholeheartedly support these 
provisions.
                          transmission siting
    I agree with the basic premise articulated in the White Paper that 
the goal of a national grid may be unattainable absent a new approach 
to transmission planning, expansion, and siting. Currently, under the 
Federal Power Act, the Commission has no role in the permitting and 
siting of new transmission facilities. I believe that shortages of 
transmission are no longer just single state issues; instead, these 
shortages have become interstate commerce issues that must be addressed 
by the federal government.
    The White Paper proposes to use federal eminent domain as a 
backstop to a cooperative, regionally-based approach to transmission 
and siting issues. In essence, the proposed legislation would grant 
FERC eminent domain authority, which we, in turn, would be allowed to 
cede to regional regulatory compacts. My primary concern with this 
approach is that it could result in costly and inefficient duplication 
of processes, records, and efforts by the various decisional 
authorities involved in transmission siting. As we have seen with the 
Commission's hydro power licensing program, for example, it is very 
difficult to build speed into a process over which several entities 
exercise jurisdiction. While the Commission has made great progress in 
streamlining cumbersome processes in this regard, I would caution the 
Committee about initiating a new regime for transmission siting that 
could easily be mired in bureaucratic wrangling.
    My recommendation would be for FERC to be granted Federal eminent 
domain authority similar to the authority the Commission exercises with 
respect to the siting of interstate natural gas pipelines under the 
Natural Gas Act. The Commission could build into its implementation of 
such legislation procedures to ensure cooperation and regional input. I 
believe this more centralized approach is necessary from an efficiency 
standpoint, and will result in less bureaucracy, more timely decisions, 
and lower costs for transmission providers and consumers. Furthermore, 
I am not advocating that the Commission should have siting authority 
for electric distribution lines or power plants. I believe the states 
are best suited to make those determinations.
                       market transparency rules
    The White Paper asserts that FERC and the Energy Information 
Administration should be granted clear authority to collect and publish 
appropriate transactional data, while protecting proprietary 
information. I strongly believe that transparency acts as an effective 
deterrent to market power by allowing regulators and the public to 
monitor the marketplace for abuses. The lack of accurate, timely, and 
easily accessed pricing information can impede competition and 
liquidity; and for that reason, I have supported many FERC initiatives 
aimed at expanding the range of publicly available transactional 
information. I am pleased that the Committee recognizes the 
relationship between strong market transparency rules and effective 
regulation.
                         puhca and purpa issues
    The White Paper proposes the conditional repeal of both the Public 
Utility Holding Company Act (PUHCA) and the mandatory purchase 
requirements of the Public Utilities Regulatory Policy Act (PURPA). The 
repeal of PUHCA would be subject to the Commission being given enhanced 
authority to address market power problems, and both the Commission and 
the states being given greater access to the books and records of 
holding companies. The repeal of PURPA's mandatory purchase requirement 
would be subject to new provisions that would remove disincentives for 
renewable generation sources. I support the prospective repeal of PUHCA 
on the condition that the Commission and state authorities have 
sufficient access to books and records of all companies in a holding 
company system. I also support an unconditional prospective repeal of 
the mandatory purchase requirement in Section 210 of PURPA.
                         tax code restrictions
    Current tax laws impede certain public power and cooperatively-
owned utilities from fully participating in the development of regional 
transmission organizations. One such example is the Internal Revenue 
Service Code's ``private use'' restrictions on the transmission 
facilities of public power entities financed by tax-exempt bonds. Such 
restrictions may prevent the transfer of operational control of 
existing transmission facilities financed by tax-exempt bonds to a for-
profit transmission company. I believe it is crucial that public power 
and cooperative entities, which constitute such an important part of 
the nation's electric system, participate fully in RTOs. In fact, in 
Order No. 2000, the Commission stated explicitly that a properly formed 
RTO should include all transmission owners in a specific region, 
including municipals, cooperatives, Federal Power Marketing Agencies, 
Tennessee Valley Authority and other state and local entities. 
Participation by these entities will enhance the reliability and 
economic benefits of RTOs.
    The Committee's White Paper notes that tax code restrictions will 
prevent public power entities from engaging in certain structural 
changes and states that these provisions should be repealed. I agree 
with this finding and urge Congress to take the necessary steps to 
eliminate these and other impediments to the formation of fully 
functioning RTOs and electric markets.
                               conclusion
    Comprehensive federal electric legislation is needed to address 
important and unresolved issues in the restructuring of the electric 
industry. The Commission must have sufficient authority to advance its 
goals of achieving fair, open and competitive bulk power markets. 
Current impediments to the development of such markets must be removed 
as quickly as possible so that the intended benefits of restructuring 
for the American consumer ultimately may be realized.

    The Chairman. Thank you very much.
    Commissioner Massey, why don't you go ahead?

 STATEMENT OF WILLIAM L. MASSEY, COMMISSIONER, FEDERAL ENERGY 
                     REGULATORY COMMISSION

    Mr. Massey. Thank you, Mr. Chairman and members of the 
committee. It's my pleasure to appear before you this morning. 
Thank you for the invitation.
    I found the White Paper to be exceptionally well done, Mr. 
Chairman. I thought it provided a very persuasive rationale for 
a number of legislative changes. I'm tempted to say I endorse 
it word for word and just shut up, with one exception. I would 
grant siting authority to FERC similar to what we have with 
respect to natural gas pipelines.
    Over the past 5 years, we've sited about 12,000 miles of 
new interstate pipelines that will serve the market well. No 
similar expansion of the transmission grid on the electric side 
has occurred, and it's in many States extraordinarily difficult 
to site transmission.
    Until this problem is solved, we're simply not going to 
have well-functioning markets that benefit consumers. But let 
me mention a few issues that are highlighted by the White Paper 
that I strongly agree with.
    We need one set of rules for all interstate transmission. 
Thirty percent of the facilities are exempt under existing law 
because they're TVA facilities, muni facilities and so forth. 
That creates a patchwork that does not support a competitive 
market.
    No. 2, all transmission, whether bundled or unbundled, 
should be subject to FERC jurisdiction. That does not mean that 
we have to have the decision-making authority over retail 
access. Simply giving us jurisdiction over all transmission 
does not mean that a State has to move to retail choice, nor 
does it mean that FERC can order a retail choice.
    We need clear authority to form and shape RTOs. We're 
making a lot of progress in this area. I think if the industry 
got a strong, clear message from Congress that the formation of 
large RTOs is in the public interest, it would be 
extraordinarily helpful in getting this done quickly.
    Likewise, I believe Congress should send a clear message 
that we need nationwide standardized generation interconnection 
policies and practices. Interconnection legerdemain is anti-
competitive and makes it difficult for generators to get sited. 
I think this is a difficulty for generation in many areas of 
the country. It's a particularly difficult problem for 
distributed generation as well. So I support the White Paper in 
this respect.
    I agree with my colleagues that Congress should create a 
framework for mandatory reliability standards in the industry. 
I makes no sense in this competitive era to have an industry 
that is governed by voluntary standards for reliability. I 
think that is a big problem.
    In the area of rates and market power, I would amend 
section 206 to give the Commission clear authority to order 
refunds whenever it finds that rates charged were unjust and 
unreasonable. As you could see in yesterday's order, section 
206 means that we cannot go back to June, July, August, or 
September of 2000 and order refunds even though it was very 
clear that prices during those months were unjust and 
unreasonable. The restrictions of section 206 prohibit us from 
doing so.
    The Commission needs civil penalty authority if we're going 
to be the tough cop on the beat. We have some civil penalty 
authority with respect to the natural gas industry. We need it 
for the electric power industry. In the merger area, we need 
authority over generation mergers, over holding company 
mergers, and over all vertical mergers regardless of how they 
are structured.
    I would give the Commission direct authority to mitigate 
market power. Right now our authority is generally a 
conditioning authority, and it's a substantial authority. Part 
of the problem is political will. It's not legal constraints. 
But it would be helpful if the Commission had direct authority 
to mitigate market power.
    It would be helpful if the Congress expressed its interest 
promoting in markets that have a high degree of demand 
responsiveness. I do not believe that we're ever going to deal 
with the issue of market power effectively or high prices 
effectively until there is a robust demand response when prices 
get high. Congress should recognize this fact and direct FERC 
and the States to work together to solve this problem.
    I've given you my thoughts on transmission siting. I know 
that's a very contentious issue, and it is the one issue on 
which I have some disagreement with the White Paper. Otherwise, 
I agree with what the White Paper says about PUHCA and PURPA 
repeal, its comments on renewable resources, providing 
information to consumers, and the repeal of tax provisions that 
inhibit structural changes in the market. Thank you, Mr. 
Chairman.
    [The prepared statement of Mr. Massey follows:]
 Prepared Statement of William L. Massey, Commissioner, Federal Energy 
                         Regulatory Commission
    Mr. Chairman and Members of the Committee on Energy and Natural 
Resources, thank you for the opportunity to testify on comprehensive 
electricity restructuring legislation. Let me state at the outset that 
I have reviewed Chairman Bingaman's excellent White Paper and agree 
with all of its recommendations, save one: I would recommend that 
Congress transfer jurisdiction over the siting of interstate 
transmission to the Commission, an agency with explicit interstate 
responsibilities.
    With notable exceptions such as PURPA and EPACT, the legal 
framework that governs the electricity industry is now more than sixty 
five years old and assumed an old fashioned cost of service regime. 
Simply stated, the Commission does not have all of the tools it needs 
both to promote large regional markets and to protect the public 
interest. I would like to underscore a number of legislative changes 
that are critical to achieving the goal of well functioning competitive 
markets that yield substantial consumer benefits.
                       transmission jurisdiction
A. One Set of Rules
    Congress should place all interstate transmission under one set of 
open access rules. That means subjecting the transmission facilities of 
municipal electric agencies, rural cooperatives, the Tennessee Valley 
Authority, and the Power Marketing Administrations to the Commission's 
open access rules. These entities control 30% of the nation's 
electricity transmission grid. Their current non-jurisdictional status 
has resulted in a patchwork of rules that hinder seamless electricity 
markets. Markets require an open non-discriminatory transmission 
network in order to flourish.
    In addition, all transmission, whether it underlies an unbundled 
wholesale, unbundled retail, or bundled retail transaction, should be 
subject to one set of fair and non-discriminatory interstate rules 
administered by the Commission. This will give market participants 
confidence in the integrity and fairness of the delivery system, and 
will facilitate robust trade by eliminating the current balkanized 
state-by-state rules on essential interstate facilities.
B. Regional Transmission Organizations
    While the Commission has made substantial progress in forming the 
Regional Transmission Organizations that are critical to the 
competitive market place, our hand would be strengthened by a clear 
declaration by the Congress that these institutions are in the public 
interest and should be formed. One appropriate action would be to give 
the Commission clear authority to order the formation of such 
institutions in compliance with Commission standards. I firmly believe 
that large RTOs consistent with FERC's vision in Order No. 2000 are 
absolutely essential for the smooth functioning of electricity markets. 
RTOs will eliminate the conflicting incentives vertically integrated 
firms still have in providing access. RTOs will streamline 
interconnection standards and help get new generation into the market. 
RTOs will improve transmission pricing, regional planning, congestion 
management, and produce consistent market rules. We know for a fact 
that resources will trade into the market that is most favorable to 
them. Trade should be based on true economics, not the idiosyncracies 
of differing market rules across the region. A clear message from 
Congress would certainly speed the formation of these critical 
institutions.
C. Generation Interconnection
    I would recommend that Congress direct the Commission to adopt 
uniform nationwide standards that streamline the process of 
interconnecting generators to the grid. The Commission has taken some 
steps in this direction by encouraging utilities to file their 
interconnection rules, but more must be done. Generation siting 
decisions should not depend on how easy it is to hook up in a 
particular region or with a certain transmission provider. Standardized 
and uniform rules promulgated by the Commission are necessary.
                              reliability
    We need mandatory reliability standards. Vibrant markets must be 
based upon a reliable trading platform. Yet, under existing law there 
are no legally enforceable reliability standards. The North American 
Electric Reliability Council (NERC) does an excellent job preserving 
reliability, but compliance with its rules is voluntary. A voluntary 
system is likely to break down in a competitive electricity industry.
    I strongly recommend federal legislation that would lead to the 
promulgation of mandatory reliability standards. A private standards 
organization (perhaps a restructured NERC) with an independent board of 
directors could promulgate mandatory reliability standards applicable 
to all market participants. These rules would be reviewed by the 
Commission to ensure that they are fair and not unduly discriminatory. 
The mandatory rules would then be applied by RTOs, the entities that 
will be responsible for maintaining short-term reliability in the 
marketplace. Mandatory reliability rules are critical to evolving 
competitive markets, and I urge Congress to enact legislation to 
accomplish this objective.
                         rates and market power
A. Refunds
    I believe the Commission needs additional authority to properly 
address the issue of refunds for unjust and unreasonable wholesale 
electricity prices. Section 206 of the Federal Power Act limits a 
refund effective date to not earlier than 60 days after a complaint is 
filed or an investigation is started. Whether the Commission can order 
refunds retroactively from the refund effective date is an issue that 
is still before the Commission. I note, however, that in an order 
issued November 1, 2000, the Commission observed that the Federal Power 
Act and the weight of court precedent strongly suggest that retroactive 
refunds are impermissible. I recommend clear statutory language that 
would allow the Commission to order refunds for past periods if the 
rates charged are determined to be unjust and unreasonable. Limitations 
on how far back in time the Commission can order refunds may be 
appropriate.
B. Civil Penalties
    I recommend that the Commission be given authority to assess civil 
penalties against participants that engage in prohibited behavior in 
electricity markets, such as anticompetitive acts and violations of 
tariff terms and conditions. If the Commission is to be the ``cop on 
the beat'' of competitive markets, we must have the tools needed to 
ensure good behavior. Refunds alone are not a sufficient deterrent 
against bad behavior. Simply giving the money back if you are caught is 
not enough. The consequences of engaging in prohibited behavior must be 
severe enough to act as a deterrent.
C. Mergers and Consolidations
    To ensure that mergers do not undercut our competitive goals, the 
Commission's authority over mergers involving participants in 
electricity markets must be strengthened in a number of ways. 
Consolidations of market participants can have adverse consequences to 
the functioning of electricity markets. The Commission's detailed 
experience with electricity markets and its unique technical expertise 
can provide critical insights into a merger's competitive effects. The 
Commission's authority to review mergers should be strengthened to 
ensure that all significant mergers involving electricity market 
participants are reviewed.
    I recommend that the Commission be given direct authority to review 
mergers that involve generation facilities. The Commission has 
interpreted the FPA as excluding generation facilities per se from our 
direct authority, although that interpretation is currently before the 
courts. It is important that all significant consolidations in 
electricity markets be subject to Commission review. For the same 
reason, the Commission should be given direct authority to review 
consolidations involving holding companies.
    I am also concerned that significant vertical mergers can be 
outside of our merger review authority. Under the current section 203 
of the FPA, our merger jurisdiction is triggered if there is a change 
in control of jurisdictional assets, such as transmission facilities. 
Consequently, consolidations can lie outside of the Commission's 
jurisdiction depending on the way they are structured. For example, a 
merger of a large fuel supplier and a public utility would not be 
subject to Commission review if the utility acquires the fuel supplier 
because there would be no change in control of the jurisdictional 
assets of the utility. If the merger transaction were structured the 
other way, i.e., the fuel supplier acquiring the utility, it would be 
subject to Commission review. Such vertical consolidations can have 
significant anticompetitive effects on electricity markets. Those 
potential adverse effects do not depend on how merger transactions are 
structured, and thus our jurisdiction over those transactions should 
not depend on how they are structured. Therefore, I recommend that the 
Commission be given authority to review all consolidations involving 
electricity market participants.
D. Market Power Mitigation
    Market power still exists in the electricity industry. The FERC, 
with its broad interstate view, must have adequate authority to ensure 
that market power does not squelch the very competition we are 
attempting to facilitate. However, the Commission now has only indirect 
conditioning authority to remedy market power. This is clearly 
inadequate. Therefore, I recommend legislation that would give the 
Commission the direct authority to remedy market power in wholesale 
markets, and also in retail markets if asked by a state commission that 
lacks adequate authority. For example, such authority would allow the 
Commission to order structural remedies directly, such as divestiture, 
needed to mitigate market power.
E. Demand Responsiveness
    Markets need demand responsiveness to price. This is a standard 
means of moderating prices in well-functioning markets, but it is 
generally absent from electricity markets. When prices for other 
commodities get high, consumers can usually respond by buying less, 
thereby acting as a brake on price run-ups. If the price, say, for a 
head of cabbage spikes to $50, consumers simply do not purchase it. 
Without the ability of end use consumers to respond to price, there is 
virtually no limit on the price suppliers can fetch in shortage 
conditions. Consumers see the exorbitant bill only after the fact. This 
does not make for a well functioning market.
    Instilling demand responsiveness into electricity markets requires 
two conditions: first, significant numbers of customers must be able to 
see prices before they consume, and second, they must have reasonable 
means to adjust consumption in response to those prices. Accomplishing 
both of these on a widespread scale will require technical innovation. 
A modest demand response, however, can make a significant difference in 
moderating price where the supply curve is steep.
    Once there is a significant degree of demand responsiveness in a 
market, demand should be allowed to bid demand reductions, or so called 
``negawatts,'' into organized markets along with the megawatts of the 
traditional suppliers. This direct bidding would be the most efficient 
way to include the demand side in the market. But however it is 
accomplished, the important point is that market design simply cannot 
ignore the demand half of the market without suffering painful 
consequences, especially during shortage periods. There was virtually 
no demand responsiveness in the California market. Customers had no 
effective means to reduce demand when prices soared.
    It would be helpful for Congress to send a message that instilling 
a significant measure of demand responsiveness into electricity markets 
is in the public interest. I would recommend that legislation strongly 
encourage FERC and state commissions to cooperate in designing markets 
that include demand responsiveness. This would help to ensure just and 
reasonable wholesale prices and would be an effective market power 
mitigation measure.
                          transmission siting
    I would recommend that Congress transfer to the Commission the 
authority to site new interstate electric transmission facilities. The 
transmission grid is the critical superhighway for electricity 
commerce, but it is becoming congested due to the increased demands of 
a strong economy and to new uses for which it was not designed. 
Transmission expansion has not kept pace with these changes in the 
interstate electricity marketplace.
    Although the Commission is responsible for well functioning 
electricity markets, it has no authority to site the electric 
transmission facilities that are necessary for such markets to thrive 
and product consumer benefits. Existing law leaves siting to state 
authorities. This contrasts sharply with section 7 of the Natural Gas 
Act, which authorizes the Commission to site and grant eminent domain 
for the construction of interstate gas pipeline facilities. Exercising 
that authority, the Commission balances local concerns with the need 
for new pipeline capacity to support evolving markets. We have 
certificated well over 12,000 miles of new pipeline capacity during the 
last six years. No comparable expansion of the electric grid has 
occurred.
    I recommend legislation that would transfer siting authority to the 
Commission. Such authority would make it more likely that transmission 
facilities necessary to reliably support emerging regional interstate 
markets would be sited and constructed. A strong argument can be made 
that the certification of facilities necessary for interstate commerce 
to thrive should be carried out by a federal agency.
                       market transparency rules
    I agree with the White Paper's recommendations in this area.
                        miscellaneous provisions
    I agree with the remainder of the White Paper's recommendations 
with respect to the repeal of PUHCA and PURPA, and with respect to 
renewable resources, information to customers, a Public Benefits Fund, 
and the repeal of tax provisions that inhibit structural changes in the 
market.
                               conclusion
    I stand ready to answer questions and to assist the Committee in 
any way. Thank you for this opportunity to testify.

    The Chairman. Thank you, very much.
    Commissioner Wood, why don't you go ahead.

  STATEMENT OF PATRICK WOOD III, COMMISSIONER, FEDERAL ENERGY 
                     REGULATORY COMMISSION

    Mr. Wood. Thank you, Mr. Chairman, Senator Feinstein. I 
think in reading the White Paper, it just occurs to me that 
anywhere you plant the flag is going to be a battleground, so 
you might as well go ahead and plunge deep in the pro-
competition, pro-customer territory and plant it deep. And 
that's where they'll start nibbling.
    I think issues like transmission siting, FERC's 
jurisdiction over bundled rates, reliability--all these are 
going to be fought, so we might as well plant the flag deeply 
where it ought to end up for the good of the public. And I 
applaud this paper and am heartened when I read it, and I read 
it after I read the President's energy strategy and look at a 
bi-partisan, almost seamless web of how to get from the battle 
raging around your feet to a vision of the future that is 
sustainable and makes this a country that we're proud of.
    I was young FERC staffer here in 1992 when the President's 
father signed the Energy Policy Act, and there weren't a whole 
lot of electric provisions in that act, but there were a few. 
And those were pretty clear in my mind. I think they're clear 
as I read them now, nine years later, about the vision of 
Congress at that point to get to a competitive power market 
from coast to coast.
    We've got a long way to go to get there. I think the 
legislation authority--and my colleague Bill Massey just said 
this--the legal authority is there. The reaffirmation of that 
by the current Congress would certainly strengthen the 
Commission's hand in doing the difficult tasks of converting 
the vision into reality. And so in that regard, while I do 
believe the Commission has relatively broad power to enact the 
vision of a competitive market that works for the benefit of 
both investment and of the customer, any affirmation of that by 
this Congress would certainly help.
    The specific issue of an RTO--I guess I've thought about it 
in a little bit different framework than some of the debate has 
gone, and so I want to just throw that into the discussion. An 
RTO--Regional Transmission Organization--of which--as this 
Commission laid out 2 weeks ago--there would be five in this 
country--the four FERC jurisdictional and the one in Texas--
that they would have really four principal goals. And they 
would fall under one roof, which I think is the distinction 
between some of the talk on reliability being over here and 
siting authority here.
    I think the Regional Transmission Organization is a 
recognition of the realities of physics reflecting the 
interstate nature of most of the power grids in this continent 
and the political sensitivities to not federalize every problem 
but to look instead at an in-between step, which is an 
empowered regional organization, as our prior witness talked 
about, which dealt with the issues unique to that region of the 
country.
    So the four things I would see these RTOs doing--which are 
largely captured by the Commission's order last year in Order 
2000--are first of all, implementation of the NERC type 
reliability functions, not as a stand-alone group but as part 
of what an RTO does. It looks at the day-to-day reliability of 
the grid to make sure that lines don't get overloaded, that 
sufficient voltage support is existing around the entire grid. 
Secondly, that competitive open access of the 1992 act is part 
of the reality there.
    Those two things sometimes come in conflict. The 
reliability needs and the competitive open access needs some 
time are in tension. And I think those need to be dealt with 
under the same roof so that those balances and trade offs and 
analyses can be made together.
    Thirdly and importantly as we've seen particularly out in 
the West, a goal of the RTO should be resource adequacy. We're 
not just talking about whether there are enough power plants. 
That's certainly a big part. But also; are there sufficient 
natural gas pipelines? Is there sufficient access to coal 
resources or to renewable resources? Is there--as we've talked 
about many times before this committee and at the Commission--
is there sufficient demand side participation in the market. 
Bill just mentioned that in his comments as well.
    The fourth goal of the RTO should be transmission planning. 
Is the grid robust enough? At that point, I guess I would vary 
a little bit from both the white paper and my colleagues to say 
that the RTO really is the one in charge of making sure the 
grid works. So if the RTO thinks there needs to be a 
transmission line from this part of Montana to that part of 
Idaho, theirs should be the dispositive voice. It has to go 
through regulatory approval at the State level--or the FERC as 
a backstop I'm relatively indifferent to--but if the RTO is the 
one directing where transmission planning goes for the 
foreseeable future, that is the appropriate body that balances 
the right interest.
    So putting these all under one roof makes a lot of 
difference, I think. In diagnosing the California problem, one 
of the things that hasn't been talked about was the multi-
headed master. You have the PUC here, the Energy Commission 
here, siting authorities here. You have a couple of FERC 
jurisdictional entities--the ISO and the PX--over here. You 
have a reliability council, the Western Systems Coordinating 
Council. A bunch of independent organizations that no matter 
how many times you tell them to work together, they really have 
their own institutional kind of inertia and don't work together 
well.
    I think the ``it's their problem'' approach has been really 
just been frustrating, and we're part of the problem, I will 
confess. But I do think that a vision of the world that puts 
these under one body to which both you and we can hold them 
accountable for the fulfillment of a broad panoply of market 
goals is a very important vision. And I applaud my colleagues 
for the vision that we took two weeks ago to really set that 
future up. It's going to need some backstopping from Congress 
without question.
    I just think if a dozen countries in Europe can pull 
together, overcome language and cultural differences to put 
together an international grid, we certainly ought to be able 
to do this. And I look forward to working with you all to get 
there.
    [The prepared statement of Mr. Wood follows:]
 Prepared Statement of Patrick Wood, III, Commissioner, Federal Energy 
                         Regulatory Commission
    Mr. Chairman and Members of the Committee, thank you for the 
invitation to appear this morning. I share the view that the nation 
needs a robust, affordable, reliable electricity sector. Almost ten 
years after Congress laid out a vision of competitive power markets in 
the 1992 Energy Policy Act, the goal is largely unfulfilled. There are 
some well-functioning competitive power markets in the nation, but most 
of the nation's customers are not in them.
    I believe the FERC has sufficient statutory authority to do much to 
fulfill Congress' vision already, but, based on personal experience as 
a state regulator in Texas, a ringing legislative reaffirmation of this 
goal, either through clarifications or changes in the law, or more 
informally, through hearing such as this one, will speed the advent of 
coast-to-coast competitive power markets.
    To address the points in the Chairman's recent White Paper.
                      1. transmission jurisdiction
    It would simplify and clarify FERC's ability to create truly open, 
competitive electric markets if FERC has clear authority over all 
interstate transmission. Unless every transmission owner participates 
in Regional Transmission Organizations (RTOs) of some sort, there will 
remain barriers of legality, cost, and time that will slow the entry of 
new generators and increase the wholesale and retail costs of 
electricity. This should not be viewed as a raid on state jurisdiction, 
but a necessary step to provide some needed certainty for investment in 
this crucial industry. Transmission is a critical component of the 
electric power industry, but on average, it only makes up about 5-7 
percent of the total retail cost of electricity. Having one agency 
making the calls on cost recovery and nondiscriminatory treatment of 
customers makes a lot of sense.
    I wholeheartedly agree that interconnection rules and procedures 
should be standardized, to minimize the cost and barriers for new 
generation. A related issue is how costs of new interconnection should 
be borne my colleagues and I have already agreed to address both of 
these issues more globally in the near future. I also believe the FERC 
has a leadership role to play in establishing interconnection rules and 
procedures for small-scale, distributed generation as well.
                             2. reliability
    Maintaining grid reliability is a basic duty of utilities. Over the 
years, industry members have devised a number of standards that govern 
reliable operation of the grid. More often, in recent years, pure 
reliability standards have come under some tension with the needs of a 
robustly competitive marketplace. Combining the responsibility for 
balancing reliability and competitive open access in the regional 
transmission organizations makes a lot of sense. FERC should be given 
clearer authority to enforce (either through the RTOs, or directly, if 
necessary) all rules against any party who fails to adhere to the 
standards.
                       3. rates and market power
    Without question, FERC should promote competitive markets; I doubt 
an additional legislative mandate is required. Workable competition in 
a market is a prerequisite for deregulation of an electricity market, 
and adequate infrastructure and balanced market rules are the defining 
characteristics of workable competition. FERC has a number of tools 
already to ensure that these events occur in the correct sequence, but 
one additional tool might be helpful: the ability to assess 
administrative penalties for violations of the law or Commission rules. 
(This would also encompass reliability infractions mentioned above).
    Vigilance is the price of liberty. FERC must watch over these 
markets as the cop on the beat walks through neighborhoods to keep them 
safe. In recent weeks, the FERC has made notable strides toward meeting 
this challenge but more work will be required. We must have ongoing, 
aggressive, sophisticated market surveillance together with RTOs and 
state regulators. We must couple this with the understanding of how to 
know when a market is working properly, how to diagnose when and how 
markets go awry, and how to intervene in ways that are effective 
without destabilizing future investment in the sector.
    Markets work far better when all buyers and sellers see accurate 
price signals. Because this necessarily involves both state and federal 
regulators, coordination is necessary to pursue a host of customer-
focused goals: demand-side resource participation in power markets; 
combined heat and power and classic energy conservation measures; 
access to advanced technologies such as real-time and demand-metering, 
distributed generation, and energy storage; and other measures that 
give customers more control and options over their energy use and its 
costs.
                    4. regional planning and siting
    Transmission investment is more than just who sites the facility; 
it involves a full and engaged process of planning, consultation and 
execution. Placing the responsibility for regional transmission 
planning in the hands of RTOs makes a lot of sense as RTOs will have 
the clearest view of what new transmission is needed to facilitate 
competition and enhance reliability. A proper balance of state and 
federal responsibility might go something like this: the regional RTO 
makes a pure engineering determination that a specific need exists for 
certain amounts of transmission in certain portions of the grid. Either 
a competitive process or a direct designation is used to determine who 
will build such a facility. Then the relevant state or states focus on 
line routing and environmental issues, ideally through a multi-state 
regional regulatory process. Given the urgent need for many new 
transmission lines to relieve reliability constraints or economic 
constraints in the national grid, some time limit for action could be 
placed upon these state-specific approvals--for instance, if a state or 
regional transmission authority has not acted upon a transmission 
project within one year of the filing date, then the case should be 
sent up to FERC for formal review.
                      5. market transparency rules
    Workable markets rest on a foundation of good, accessible and 
timely information. If there is too little information available to 
market participants, players' decisions may be poorly founded and risks 
and their costs increase as they leave money on the table. Other 
information crosses the line into strategic, business-critical data 
that helps individual competitors more than it helps the market as a 
whole. Overall, we need to create market rules and authority that 
assure the collection and fair dissemination of market-supporting data 
on market transactions. But we should rethink which data we need and 
how we collect, process and use these data it does no good if we 
collect the wrong information, or collect it so late and hold it for so 
long that it has no value to market participants. I do not have any 
specific recommendations at this time, but I will be working with my 
fellow commissioners and staff at FERC to better understand what we 
need to do to improve market information and transparency.
                           6. tax provisions
    It is important that tax laws are not used as excuses by certain 
market players to not move aggressively toward competitive power 
markets. In that regard, proposals to address public power and 
cooperatives' private use restrictions and investor-owned utilities' 
current disincentives to transfer transmission assets to RTOs should be 
addressed in legislation.
                                7. other
    I have been of several minds about the best location of customer 
protection duties such as customer information labeling and slamming/
cramming prevention. Rather than house these duties at the Federal 
Trade Commission, I think they might fit better at the FERC. This would 
be good not only for the issue, but for the FERC. As state commissions 
do, FERC would benefit from being closer to the people directly 
impacted by our regulation. It also makes ``good government'' sense to 
have one federal agency overseeing electric matters, not several. A 
regulator that has all aspects of an industry under its umbrella can 
generally be more effective and efficient in balancing the many 
interests involved.

    The Chairman. Thank you very much.
    Commissioner Brownell.

 STATEMENT OF NORA MEAD BROWNELL, COMMISSIONER, FEDERAL ENERGY 
                     REGULATORY COMMISSION

    Ms. Brownell. Thank you, Mr. Chairman. The good news about 
responding to such a well thought out paper is that it's easy 
to agree. You've made our job easier, and being last in a list 
of smart colleagues makes it that much easier.
    I just want to comment on a couple of things. The first is 
why we must change. I really applaud the efforts of the 
committee to grapple with the issues of transforming energy 
markets. Balancing competing agendas and leading the charge is 
neither easy nor neat.
    Many people have asked you and raised with us why we have 
to change at all. And I think we have to remind ourselves that 
this country has enjoyed a standard of living that is 
unparalleled precisely because it has been willing to take 
risks, embrace change and leverage its intellectual assets.
    It would be a tragedy to let jurisdictional differences, 
regional differences, get in the way of a vision that would 
make us miss the opportunities created by the advances in 
technology that have transformed so many other industries. 
Without a coherent integrated national energy policy and its 
associated legislative and administrative changes, we will 
disadvantage our industries, our environment, and our 
constituents.
    I want to quote from the New York Times yesterday from a 
professor commenting on the changes in New York. 'Every process 
of change reaches a point where it all comes together and 
accelerates exponentially, and we've reached that point with 
electricity. In 5 years we won't even recognize the landscape.'
    Frankly, if you do your job and we do our job, I hope we 
don't recognize the landscape next year. Let me comment on just 
a couple of the high points of your White Paper and a couple of 
additions.
    As my colleagues have said, and I think Pat articulated 
extremely well, the critical nature of RTOs to a variety of 
issues--planning, reliability, long-term vision, and in fact, 
building out an infrastructure, which is so critical in 
creating the certainty that will attract the investment to do 
that.
    We may debate on what they should look like and how they 
should work, but we must get to those, because you can 
understand that they are fundamental to any transformation of 
the market. And we can structure regulatory oversight 
committees. We can have regulatory compacts. But we must 
empower the FERC, by reaffirming its power to create these RTOs 
and the rules that regulate them.
    Part of the change that we are seeing and certainly 
recommending such as the repeal of PURPA and PUHCA, will also 
require us to strengthen our market monitoring. And I would 
like to suggest that, in fact, we will need additional tools, 
and we may come to you and ask for those tools. We do need 
civil penalties. We need to have the ability to cause pain, and 
we need to stop whatever abuses may be happening in the market 
as quickly and as efficiently as possible.
    Part of that is also empowering us to get additional 
information from all the entities playing in the market. I 
think--I have not seen the legislation that's been introduced, 
but transparency is important, is critical, and everyone must 
be willing to share those documents.
    I would also add that one of the regional opportunities for 
cooperation is for us to develop market monitoring systems and 
share them with both the States and the regions. States are 
really resource poor and may not be able to develop the tools 
that they need to look at what's happening in their own market. 
So I think there are lots of opportunities for us to work 
together there.
    We've talked about standardized interconnections and 
uniform business rules. The market doesn't work unless everyone 
has to play by the same rules, and we are truly disadvantaging 
the introduction of new technologies by the lack of 
interconnection standards. So I would--we have certainly all as 
a group I think committed to moving forward with those 
principles--but I think it's important that you speak on those 
principles.
    I appreciate the concerns that some of the regions have 
expresses and certainly some of your members have expressed 
about he cost benefit analysis of RTOs. And it may be that the 
committee wants to empower DOE or some other entity to support 
an independent evaluation of cost benefit analysis among the 
regions.
    We need to get comfortable. We are comfortable that those 
benefits are there and benefits that we have not yet seen. But 
it's certainly important that everyone understand what these 
benefits may bring over time. And it may take time. I 
understand we're asking people to change their way of thinking 
and change their way of doing business. We know why we have to 
do it. Let's perhaps provide people with better information 
about what the costs really will be. Thank you.
    [The prepared statement of Ms. Brownell follows:]
Prepared Statement of Nora Mead Brownell, Commissioner, Federal Energy 
                         Regulatory Commission
    Mr. Chairman and Members of the Committee, good morning. Thank you 
for opportunity to testify before you today on the various energy 
restructuring legislation pending before your Committee. I strongly 
believe that the goals of any new legislation involving energy 
restructuring should be to facilitate the development of competitive 
regional energy markets and the removal of any barriers, regulatory or 
otherwise, to the development of such markets, while allowing the 
Commission to perform effective market monitoring. We must also create 
a regulatory environment which ensures reliability and investment in 
infrastructure.
    I want to applaud the efforts of this Committee to grapple with the 
issues of transforming energy markets. Balancing competing agendas and 
leading the charge for change is neither easy nor neat. Many people 
wonder why we have to change at all, particularly after events of the 
past year. We must remind ourselves that this country has enjoyed a 
standard of living that is unparalleled precisely because it has been 
willing to take risk, embrace change, and leverage its intellectual 
assets. It would be a tragedy to ignore the opportunities created by 
the advances in technology that have transformed so many other 
industries like communications and transportation. Without a coherent, 
integrated national energy policy and its associated legislative and 
administrative changes, we will disadvantage our industries, our 
environment and our constituents. I urge us all to share a sense of 
urgency to do what needs to be done to move forward. There are many 
ways to address the issues of transforming markets. I will address some 
of the most important.
    The Public Utility Holding Company Act (PUHCA), enacted during the 
Depression, and the Public Utility Regulatory Policies Act (PURPA), 
enacted during the Carter Administration, are impediments to 
restructuring that, in my opinion, should be repealed. Among other 
things, PUHCA requires that utility holding companies that are required 
to register (because they do not meet any one of the exemptions 
enumerated in the statute) submit to heavy-handed regulation by the 
Securities and Exchange Commission, including seeking permission for 
many activities that companies engage in during the ordinary course of 
their business. PUHCA also subjects holding companies to requirements 
that they operate an ``integrated'' and contiguous system and does not 
adequately address the relatively new phenomenon of ``convergence'' 
mergers between gas and electric utilities. While PUHCA was a necessary 
reaction to abuses that existed a half-century ago, it has outgrown its 
purposes, and equally important, no longer reflects the utility 
industry of today, including the rapid rise of non-vertically 
integrated energy companies.
    As just one example of PUHCA's perverse effects, because of the 
provisions for foreign utilities, the statute causes foreign companies 
to buy here and U.S. companies to invest overseas. Investment decisions 
should flow from economics, not from an outdated statute.
    PURPA also needs repeal. PURPA requires utilities to buy from 
alternate energy sources at what are frequently quite high prices. 
PURPA was enacted in response to a perceived need to reduce dependence 
on oil for electric generation, and it was thought that this kind of 
subsidy would help accomplish that result. Now, 22 years later, when a 
gas-fired generator can be on-line in less than two years, and many 
advances are being made in distributed generation, PURPA's subsidies 
for certain types of generation no longer is rational.
    Having stated that I believe that PUHCA and PURPA should be 
repealed, I also believe that we should listen to the concerns of 
those, like the rural CO-OPs, who are asking us to replace the 
safeguards, however flawed, that these statutes were intended to 
provide. It is a change in approach that I have in mind. Instead of 
relying on heavy regulation, safeguards should be a product of a market 
oriented approach. We must do everything possible to encourage advances 
in technologies, particularly renewables, and investment in 
infrastructure in order to bring them to market as quickly and 
efficiently as possible. We must also do everything possible to promote 
transparency and uniform business rules in order to guard against 
manipulation. We must do everything possible to enhance our market 
monitoring and enforcement capabilities in order to react and remedy 
any market abuse. Responses must swift and certain.
    There are a number of ways to accomplish this changed approach. I 
strongly support legislation affirming the Commission's authority to 
require the formation of RTOs and to shape their configuration 
according to the characteristics outlined in Order No. 2000. Large, 
regional, independent RTOs can improve grid reliability by facilitating 
transmission planning across a multi-state region, create better 
pricing mechanisms such as eliminating ``pancaking'', improve 
efficiency through better congestion management, and attract investment 
in infrastructure by facilitating regional consensus on the need for 
construction. RTOs play an important role in assuring reliability. I 
recognize that markets do have different characteristics and I do not 
dismiss those differences. We must work collaboratively with the 
stakeholders to determine where those differences are real and where 
they are merely the basis for barriers to entry. Ultimately, however, 
large regional RTOs must be formed in a timely manner.
    I also strongly endorse creating standardized interconnection rules 
and uniform business rules. Where rules are standardized, there is less 
room for manipulation. I believe that all interstate transmission 
facilities should be under one set of open access rules, including the 
facilities owned and/or operated by municipals, cooperatives, the 
Tennessee Valley Authority, and the federal power market 
administrations. These entities, which together control approximately 
1/3 of the nation's transmission grid, currently enjoy non-
jurisdictional status. Placing all facilities under the same set of 
rules will eliminate disparities in treatment that operate as 
disincentives to open access, and better ensure seamless electricity 
markets.
    I must emphasize that it is imperative that we place all 
transmission, whether related to unbundled wholesale, unbundled retail, 
or bundled retail transactions, under one set of non-discriminatory 
open access rules. Our experience since the issuance of Order No. 888 
indicates that it is no longer necessary to segregate the transmission 
for native load. Having all transmission under one set of rules will 
eliminate a patchwork of state rules regulating ``retail transmission'' 
and better ensure a properly functioning and transparent transmission 
grid. We must ensure, however, that we do not interfere with state 
oversight of retail and consumer responsibilities.
    I believe that the Commission must be given ultimate authority over 
the siting of transmission facilities. At the time that the Federal 
Power Act was enacted, it was appropriate to defer to the individual 
states for siting transmission facilities within their borders. Times 
have changed, however, and today, there have been major technological 
advances in transmission that have created interstate superhighways. 
State-by-state siting of such transmission superhighways is an 
anachronism that impedes transmission investment and slows transmission 
construction. It is possible for one state to veto a desperately needed 
transmission project. The best solution to this dilemma is through an 
interstate regional compact or properly functioning RTO, with 
significant input of the states, to be the first stop for siting 
approval. However, at some point, it may be necessary for the 
Commission to make the final determination. Therefore, I would suggest 
that the Commission act as a backstop. In other words, grant the 
Commission siting authority over interstate transmission comparable to 
the interstate natural gas pipeline siting authority in Section 7 of 
the Natural Gas Act after we have determined ``need'' on the basis of 
an evidentiary record. This is one way in which interstate transmission 
expansion can keep pace with generation.
    A final piece to the puzzle is the market monitoring and 
enforcement capabilities. The Commission's ``tool kit'' must be 
strengthened to facilitate the Commission's expanded role in monitoring 
for, and mitigating, market power abuse. I believe that the Commission 
needs to develop and expand its market monitoring expertise. The 
Commission can tap the existing expertise of other federal agencies, 
and perhaps even private organizations, that are experienced in market 
monitoring. It can also seek consultants with expertise in electronic 
trading and market simulation. In either case, it comes down to 
funding. As the markets we regulate change, we must be prepared to 
change our regulatory tools. The Commission should be given sufficient 
funding to ensure that it can hire, train, and retain personnel skilled 
in market monitoring and market power mitigation or buy expertise on a 
short-term basis as needed. Legislative solutions must be coupled with 
the Commission's ability to acquire the necessary talent that can 
implement its new responsibilities.
    I am also of the opinion that market monitoring should not solely 
be the Commission's responsibility. We should involve the states in a 
serious discussion of whether combined state and federal action is 
necessary when market power abuses are occurring in both retail and 
wholesale markets. It should involve the RTOs. I intend to explore such 
creative approaches as the development of regional oversight 
committees, which work with existing regional coordination councils or 
other similar entities, including state regulators, to better assist 
the development of workably competitive markets. We should explore the 
development a coordinated system whereby we share standardized 
information thereby reducing both the administrative and cost burden on 
the respective agencies and stakeholders. We must leverage our 
resources in concert with the states, particularly with regard to 
information sharing. Further, we must be certain we are asking the 
right questions. We must clear about what constitutes market power. We 
must understand the changing nature of the transactions (e.g., on-line 
trading). We must use the information effectively.
    I believe that the Commission must have timely and reliable data 
and information to have an effective market monitoring program. There 
are many different players in the energy markets, many that have not 
traditionally been subject to our jurisdiction. A significant amount of 
relevant information about the operation of markets is in the 
possession of these entities. At times, there has been a reluctance to 
cooperate and provide the necessary information. It may be appropriate 
to clarify that the Commission has the authority to seek the 
information necessary to perform its statutory responsibilities from 
either jurisdictional or non-jurisdictional sources. Transparency is 
impossible without the involvement of all market participants.
    Naturally, the necessary companion to market monitoring is 
enforcement. There has historically been a reluctance to apply 
traditional antitrust doctrine, including penalties, to electric and 
gas markets, since they were not competitive markets, but were subject 
to pervasive regulation and sanctioned monopoly structures. That should 
no longer be the case as we move further and further down the path to 
de-regulation and restructuring. The enabling statutes the Securities 
and Exchange Commission and the Federal Communications Commission 
provide for a range of enforcement measures, such as civil penalties, 
which I believe may be appropriate for the Commission. I would suggest 
consideration of a significant civil penalty to indicate to market 
participants that we take violations of the Federal Power Act and 
Natural Gas Act seriously, and are prepared to remedy such violations 
above and beyond our refund authority, which is statutorily limited. We 
must also act swiftly and with certainty to respond to market abuses. 
Markets are fragile and prolonged problems will destroy the market and 
the confidence of consumers.
    The work that you have done is quite extensive and I could probably 
expound forever, but I believe these are some of the most important. 
Thank you for asking for my input on these critical issues. I stand 
ready to assist your Committee in your deliberative process. I again 
thank the Committee for this opportunity to testify.

    The Chairman. Thank you. Thank you all very much for the 
excellent testimony. One thing I wanted to inquire about is the 
statement that Secretary Salisbury, who was just ahead of you 
as a witness here, testified to saying that the Governors--the 
Western Governors--were opposed, as I understood her testimony, 
to any siting authority being provided at FERC and one of the 
reasons she gave was that there are no applications, as far as 
they can tell, no instance where an application to build 
transmission lines has been turned down. Is that your view of 
things, or is this--and is that--is that really an adequate 
indicator of whether or not the job of getting an adequate 
transmission system in place is being carried out? Is the fact 
that State commissions have not turned down applications a 
determinative on that issue? Commissioner Hebert, do you have a 
view on that?
    Mr. Hebert. Mr. Chairman, with all due respect, I will be 
glad to comment on what you told me. I was not here to hear her 
testimony. I did read her testimony before I came here.
    I don't think whether something has been done or not done 
is ever determinative on why something beyond that should be 
done or not done. Whether or not we move forward with siting 
authority, I don't know. This year, I guess I've testified 
before this committee a half a dozen times, and I have 
repeatedly said, it is my thought that as we move forward with 
regional transmission organizations, that those organizations 
would have some input and would certainly be, I think, in the 
best position to decide what has to be done when it comes to 
interstate siting of transmission. FERC can always be the 
backstop, but it is very important as we deal with State 
commissioners, which mean, in the end, that we deal with State 
Governors as well, that we at least give some deferential 
period to them and allow them to act.
    If there have been no applications that have been denied 
for transmission, it at least means that the ones that have 
been applied for have been dealt with, hopefully, 
appropriately.
    What it does not suggest or, better, what it does not 
answer, is whether or not the proper incentives and 
opportunities are out there to promote such filings for 
certificates of eminent domain and moving forward with siting.
    I don't think we have appropriately done that at FERC. I 
don't know that the States have done that, but we certainly 
have to do a better job ourselves at FERC to try to make people 
understand that what is best for America is as much of a 
seamless grid as possible that physics and economics will 
allow, and you've got to build out the transmission system to 
do that. We need investment in those systems. But just because 
the Federal Government gets siting of electric transmission 
does not necessarily mean it will be done right.
    The Chairman. Commissioner Breathitt.
    Ms. Breathitt. Mr. Chairman, I have one comment to add to 
this discussion. When I was chairman in Kentucky at the PSC, we 
had several instances where applications were withdrawn, so the 
Commission never ended up acting, and I haven't done any 
research on my own to see how many applications have gone 
forward in the States for transmission siting, but I do know 
anecdotally that they take a long time, but I also don't know 
how many applications never make it to the decisional stage and 
are withdrawn because of siting difficulties and problems.
    The Chairman. Okay. Anybody else want to comment on that?
    Mr. Hebert. Mr. Chairman, if I may, I would be glad to get 
the staff to look into whether or not what Commissioner 
Breathitt has just spoken to has happened and give you some 
information on that.
    The Chairman. Yes. Anything you could tell us. I guess my 
sense is that what we're talking about in terms of having an 
adequate national transmission system, we may not be able to 
say that we have an adequate national transmission system as 
long as nobody files an application to improve it. I mean, it 
may be that there is a responsibility beyond just sitting back 
and waiting for a permit to be requested.
    Mr. Massey. May I comment, Mr. Chairman?
    The Chairman. Yes. Go ahead.
    Mr. Massey. It may be that applicants are discouraged and 
frustrated and feel like it's so difficult to get transmissions 
sited in many, many parts of the country that it's not worth 
filing the application. I think there's a great sense of 
frustration in the industry out there that it's very difficult 
to get transmission facilities sited, and there are examples in 
various parts of the country of how difficult it is for a State 
to grapple with a proposed transmission project necessary for 
the interstate market, but that may not provide direct benefits 
to that particular State. It seems to me, that is the 
fundamental difficulty here. We're moving to regional markets. 
We need at least regional solutions, as your bill proposes, and 
I would take it a step further and say there ought to be 
Federal siting. There ought to at least be some way to break 
the logjam. If facilities are necessary for regional markets to 
thrive, then it seems to me that is precisely what your White 
Paper is all about. If those facilities are necessary, there's 
got to be a way to break the logjam and to get them sited. 
Maybe a Federal backstop role.
    The Chairman. Mr. Wood.
    Mr. Wood. The problem that hasn't been addressed is, who's 
doing the applying for? Today it's regulated utilities who 
really are going through a tremendous gauntlet to do something 
that they probably won't get direct corporate benefit from, as 
in days of old, but they're helping build an international or 
an interregional grid, basically tying from their utility to 
another utility, so that a competitor, somebody they don't even 
care about or really like, can benefit from it. So, I mean, 
there's not a tremendous incentive in the first place. Now, 
some utilities actually are trying to look broadly and think, 
``I don't want to impede anybody,'' but it's not in their 
natural corporate interest to do anything to beef up the grid 
kind of around the edges. They just want to make sure it's good 
in downtown Houston, around the edges, but not really tying the 
whole grid. It's the problem we had back in the ERCOT region, 
with our utilities--it's hard to go through landowners. It's 
hard to take the PR hit for new wire construction. These guys 
are all trying to get into the retail market, so they don't 
want to have their corporation have a bad image with 
landowners. There are a lot of incentives to just not filing in 
the first place, which is where Linda was going with her 
response.
    Mr. Hebert. Mr. Chairman, if I might add one thing to that, 
and I think Commissioner Wood pointed out something that is 
really extremely important to talk about as you move forward 
here. The complexity of the issue has changed. For instance, 
ERCOT is a great example. When you take a transmission line and 
you run it from Austin to Houston, Texas knows they're going to 
benefit from that line. When you take it and you run it from 
Idaho to Montana, the question arises as to who benefits, how 
much, and what is the cost of such benefit? So, the complexity 
of the issue as to the siting of that transmission has changed, 
which is going to make it more difficult.
    Ms. Brownell. I would add Mr. Chairman, that it speaks to 
the need, then, for a new approach, and as controversial and 
difficult as this is, it's pretty clear to me that when the 
market has identified, as it clearly has, that there is need 
for additional transmission in a number of places, and no one 
is stepping forward to build that, that there are lots of 
signals out there that suggest, ``do not apply.''
    The Chairman. Okay.
    Senator Feinstein.
    Senator Feinstein. Thanks very much, Mr. Chairman, and I'm 
very pleased to see all the Commissioners here. I want to thank 
them because I wrote to them a letter awhile ago and asked for 
any suggestions they might have with respect to improving FERC, 
giving it additional authority.
    I want to just speak bottom line for a minute. My 
observation of FERC is that it has been a toothless tiger. I 
would oppose any increased jurisdiction until FERC really had 
the regulatory authority that's adequate and effective to do 
its job, and that means, Senator Wyden referred to the CBS 
Report. I spoke about the Williams A.E.S. issue on the floor 
some months ago. I find it unconscionable that the public will 
never really know, because all the evidence is sealed in that 
case, that a company that has admitted to telling operators at 
a plant owned by A.E.S. that Williams could provide a financial 
incentive to extend the outage. That's unconscionable. It's 
unconscionable that all this stuff is sealed, and I believe 
that you can never do the job you're meant to do unless you 
have the real disincentive to abusive behavior on the part of 
the companies, and I--well, to make a long story short, I'm 
very grateful Mr. Wood, Mrs. Brownell came in yesterday and we 
spent some time. Commissioner Massey, you took some time and 
really very thoughtfully addressed my concern. I'd like to 
enter into this record a copy of your letter to me dated July 
13, and I think your letter really gets to the heart of the 
issue in terms of the things that I'm interested in, which is 
giving the FERC the teeth it needs to deal with what has been a 
swashbuckling industry with very little real customer loyalty 
we have found in California, and I want to work with the 
chairman and other members of this committee to include some of 
Commissioner Massey's concepts wherever we can.
    I'm very heartened to hear that three Commissioners have 
now said that they would support civil penalties to insure that 
there is an adequate penalty for bad behavior, and I hope that 
that will be part of our energy bill, and that the FERC will 
move expeditiously in that direction.
    Secondly, the natural gas market. FERC has very little 
authority to oversee natural gas markets. Virtually everybody 
in California's bill has gone up two-thirds over the natural 
gas issue. The natural gas issue has actually caused 
refinancing of companies, has caused employees to lose their 
jobs, has caused companies to go in for refinancing. I pointed 
out at an earlier hearing, C&H Sugar, whose average gas bill 
was $450,000 a month, at one point was paying $2 million a 
month. They had to let employees go. They had to shut down. 
They had to go in for bridge financing. That shouldn't happen, 
and FERC ought to have the authority to move like this and see 
that it doesn't happen, and they do not today.
    So, I want to see that there is transparency in these 
markets among the various players in multiple States.
    Thirdly, I think FERC should be given oversight over online 
trading of natural gas and electricity. In many cases, it's the 
only trading entity that knows the prices sellers are willing 
to bid and buyers are willing to pay for a given energy 
commodity, and I've heard many allegations that these 
transactions drove up the price of natural gas at the 
California border and elsewhere this past winter.
    Fourth, as Commissioner Massey's letter points out, FERC 
needs direct authority to mitigate market power. FERC doesn't 
have the tools to prevent excessive power costs, and it's my 
hope that FERC will reevaluate the criteria it uses to permit 
market rates in the wholesale marketplace, and also in retail 
markets, if asked by a State commission. The aim of this 
clearly is to prevent manipulation and to encourage responsible 
competition.
    Fifth, FERC doesn't have sufficient authority to review 
mergers. I agree with Commissioner Massey that involve 
generation firms. Significant mergers dependent upon how they 
are structured, Commissioner Massey points out, are outside of 
FERC jurisdiction. That's just an invitation to structure your 
merger this way and get out of FERC jurisdiction.
    Additionally, I am very concerned that FERC does not have 
the needed authority to regulate transactions and agreements 
among holding companies and their subsidiaries or between 
affiliated companies. I think if the Congress is to repeal both 
PUHCA--well, particularly PUHCA, FERC should be given the 
authority to deal with these complex interactions. I'm very 
pleased three Commissioners have also talked about and agreed 
on the transparency of data, as well as changing FERC's refund 
authority for electricity rates, which I think is 
extraordinarily important.
    The San Diego marketplace went through, you know, a six 
time increase in rates. It was incredible what happened. Rates 
were way up. The wholesale rates were way up at 3 a.m. in the 
morning, and yet the present rule doesn't allow you to go back 
to include your refunds to that entire regional area. That's a 
mistake. We ought to change it.
    Now, California's present position is that it will fight 
any inclusion in an RTO, and the reason is, because it feels 
it's been a victim and it doesn't have recourse for remediation 
of abuse. Until FERC can provide this recourse--or can provide 
remediation of abuse, I can do nothing but support California 
in this regard. You know, if you can solve that problem, then I 
think California will change its mind and perhaps join a 
regional transmission system.
    I'd like to ask this question, particularly as it relates 
to the secrecy of the settlement agreements, that as long as 
they're secret, serve as no disincentive to any other company 
to go out and try the same thing. I mean, they're going to 
profit much more than they're going to have to settle. I'd like 
to ask this question of the Commission: Do you believe that the 
results of investigations and the evidence should be made 
public in this regard? Let's start with the Chairman. Mr. 
Hebert.
    Mr. Hebert. I think we should follow the practice of 
settlements, which is, follow the stipulation of the 
settlement. As an attorney, I will tell you that there is much 
to be gained from settlement processes, especially when it 
comes to expediting putting things behind us. As you know, 
we've become a litigious society, so anything we can do to move 
us forward in that regard I think is beneficial.
    I do, however, understand your concern in wanting to know 
what the information was behind that. Do let me say this, 
though: I actually see AES Williams as something very positive 
that I think you should all know about, and that is this. 
There's been much in regard to FERC's inability to do things 
outside of the 60-day period. I have testified time and again 
that, in fact, this Commission has tools in regard to behavior 
that it deems to be illegal through anti-competitive behavior, 
contractually against the contract, filed tariffs, filed rates, 
anything in that regard. As you know, the AES Williams 
settlement was one that dates back previous to the 60-day 
period. It was in the summer of 2000, so I understand your 
concern. I understand wanting to see the information. Senator, 
you and I have met several times and I truly believe the 
settlement process does bring benefits, and I do think it is a 
good indication that FERC is, was, and will continue to be, 
vigilant even 24/7 outside of that 60-day period.
    Senator Feinstein. The problem is, all we've got is, we 
have to take your word for it.
    Mr. Hebert. I understand.
    Senator Feinstein. There's no way to examine what happened, 
and, you know, I'm not saying I doubt your word, but I'm 
saying, it isn't good enough in this kind of situation.
    Mr. Hebert. I understand that.
    Senator Feinstein. So, I wonder if I could just hear 
quickly from other Commissioners. I just want to know, ``yes'' 
or ``no''----
    Mr. Hebert. Well, that's fine.
    Senator Feinstein [continuing]. Do you think this 
information should be made public? Mrs. Brownell, let's begin 
and go right down the line.
    Ms. Brownell. Okay. Senator, I agree with the Chairman that 
the settlement process is important and critical. I wish all 
the California participants would get back there and try and 
settle what we've been trying to help them with, but the 
reality is, you're right. The environment is, at this point, so 
poisoned, and the credibility of many of the participants is so 
damaged that, for me, I believe it is important that the 
appropriate enforcement actions with the appropriate record 
built, need to be made public so that we can, frankly, build 
back our own credibility and that of the market participants, 
because everybody is not guilty.
    Senator Feinstein. Commissioner Massey.
    Mr. Massey. Senator, in the California debate, I have 
always felt that the question of withholding was a core 
question. We had before us a live case with very interesting 
evidence, and I think the public interest would have been well 
served by having that record made public.
    Senator Feinstein. Ms. Breathitt.
    Ms. Breathitt. Yes. Senator, I wanted to add that--this 
particular case--had the Commission chosen to open the 
settlement to the public could have caused the parties to 
renege on the settlement which resulted in about $8 million and 
could have gone to trial, and when we go to trial, withholding 
cases are very, very difficult to prove. So, this was much more 
complicated than saying, ``Yes, let the information out,'' 
because it could have ended up going to trial, and then we 
could have ended up with--we could have ended up losing, 
because withholding cases are so hard to prove.
    We have a tough enforcement chief at the Commission. I 
would like for you to meet her sometime. She made a very 
compelling argument for upholding the confines of this 
settlement. I spent a lot of time on this case.
    Senator Feinstein. All right. I had an answer to Mr. 
Hebert.
    Mr. Wood.
    Mr. Wood. I would tell him it's better to lose, and I don't 
know if this was one of those cases, because I wasn't here 
looking as close as Linda, and Curt, and Bill did at the 
evidence, but the--sometimes the evidence says more than even a 
judge can conclude, and I think that's where you're going. A 
few heads on the stakes around the campfire make all the 
animals behave a lot better in the forest, and I think this may 
well be, certainly in the front end of the transition of the 
competition. Maybe in the more mature market you would do 
private settlements.
    Senator Feinstein. All right. I appreciate that. We don't 
quite have three Commissioners, but if it were in legislation, 
perhaps we might get it done, so I will press for that because 
I strongly believe that the lesson learned is as important as 
the penalty in this case, and you can't learn the lesson unless 
everybody knows clearly what it is that you did.
    The other point I'd like to make to you, Mr. Chairman, is, 
I have real concerns right now about extending FERC 
jurisdiction over all transmission rate making and access 
issues, wholesale and retail. I don't want to get into a war 
right now with the co-ops and the munis, and as you know, we 
have--we'll have their very strong opposition. I know when we 
tried to put together our cost-based rates legislation, I think 
it could end up defeating anything that we might be able to do, 
so my emphasis is on giving this Commission teeth, bringing 
sunshine to the debate, seeing that they have civil penalties, 
seeing that they can give the refunds way back, seeing that 
they can move expeditiously. I don't want to see another time 
when the Chairman of the Commission has to bring in 16 boxes 
and put them before us and say, ``This is why we can't do 
something.'' And I'd just like to respectfully suggest that we 
direct our policy to that end. Let's get them so that they can 
function in what has been a swashbuckling marketplace in an 
effective and appropriate manner.
    I thank you very much.
    The Chairman. Let me just clarify. I don't think that in 
our legislation, our White Paper, we're not suggesting that 
we're trying to get FERC into the business of retail rate 
making and distribution. We're trying to give them authority so 
that the transmission system works, and anybody who is involved 
in the transmission of power we think should be subject to 
their jurisdiction.
    Senator Feinstein. Now, that's a fine point that we need to 
talk about a little bit.
    The Chairman. I agree.
    Senator Feinstein. Thank you.
    The Chairman. Senator Landrieu.

     STATEMENT OF THE HON. MARY L. LANDRIEU, U.S. SENATOR 
                         FROM LOUISIANA

    Senator Landrieu. Mr. Chairman, I appreciate it. I'm sorry 
I had to step out for a meeting with constituents, but I've 
been following both these hearings, yesterday and today, with 
great interest and have read and reviewed a lot of the 
testimony, and I guess it's appropriate to follow up on the 
Senator from California's comments and the Chair, to say that I 
am prepared and will be dropping legislation on this Electric 
Transmission Improvement Act. The Electricity Transmission 
Improvement Act is what we're calling it, a clear, straight-
forward name. We tried to think of something a little more 
creative, but--but we've been so busy, but I want to thank you 
all for your testimony today, and in writing, about the 
importance of trying to develop in this Nation, despite the 
obvious pockets of objection and push-back that will come, the 
need to open up this transition grid. Based on the very good, I 
think, white paper that our chairman has produced about the 
history of the way our electricity system was developed in this 
Nation and how it was, not regional but very parochial, and 
while it served this Nation in a great and terrific manner for 
so many decades, clearly it is apparent, and through the 
testimony that you have given, you've helped make it even more 
apparent that we need a new regime, and so this bill attempts. 
It doesn't go as far as some people want us to go, Mr. 
Chairman, and it doesn't go far enough in other people's mind. 
But just to summarize that this open access issue is addressed 
by giving States and the RTO's the opportunity to do what they 
need to do and, if not, it's sort of a backdrop for FERC to 
step in and to provide the transmission grid that this Nation 
desperately needs as a foundation of our economic growth in the 
future.
    There is some strong language on siting. We would give FERC 
clear jurisdiction to be a backdrop. If siting States and 
regions can't do their siting within 180 days, the bill says 
that FERC can then step in and try to put down rules and 
regulations for siting of the power lines. It also establishes 
incentives for the transmission grid to be increased. Our 
demand has grown four fold and the capacity for transmission 
has only been a very small percentage. I mean, it's outstripped 
it four to one. This bill attempts to address incentives for 
the transmission grid, and then the interconnection standards. 
We have a patchwork. It's a process now. It will give FERC the 
opportunity to make more standard those provisions.
    So, I look forward to--I'm going to probably drop this bill 
in looking for co-sponsors, and based on some of the testimony 
I've heard today, I think we can build a consensus around a 
piece of legislation on the transmission grid which, Mr. 
Chairman, I hope will serve as a key component of our whole 
energy policy, because in hearing, after hearing, after 
hearing, there is enough testimony on the record to indicate 
that we just have got to move a little--a lot further than we 
are today.
    So, I commend this for my colleagues and look forward, 
Senator Feinstein, to working with you. I know that munis and 
co-ops have some reservations, of course, because their 
interest has been very parochial, and for good reason. That's 
the way the system was designed, but we need to create an 
interstate highway system just like the highway system that our 
automobiles and trucks and business people, large and small, 
can bring their products to market, can move goods, can create 
the kind of economy, and our electricity system is no less 
needy of that kind of system, and we have developed over the 
century a very good partnership between States and local 
governments and the Federal Government to create this 
interstate system for our, you know, transit. We need to have 
the same sort of cooperative effort in designing this system 
for our electricity and the flow of power. Whether it is 
produced from clean coal, nuclear, oil, gas, or alternatives, 
whatever this committee decides and Congress decides is the mix 
of supply, you still need an open transmission grid to get it 
from the source to the consumer, and I think it's a very 
important component, and I just encourage us all to--I'm going 
to lay this bill down as, hopefully, some sort of--hopefully--a 
compromise to build on some common ground, and I'm going to 
ask, not today, but for each of you all to submit in writing 
your thoughts about what is in here, what is not in here, and I 
look forward to working with you all to provide you the legal 
authority you need to help us to do that.
    With respect to all the regions and to all the States, and 
to the munis and the co-ops, we have just got to make this 
highway work for our country.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much.
    Senator Cantwell.
    Senator Cantwell. Thank you, Mr. Chairman.
    Let me begin by commending FERC's decision yesterday to 
establish a special evidentiary hearing into what have been 
skyrocketing electricity prices that have plagued the Northwest 
for the last year. As you are well aware by now, Washington 
State has been hard hit by the Western energy crisis, which has 
really taken an enormous toll on our consumers and businesses, 
and a variety of sector of our State economy.
    I believe that this new evidentiary proceeding will confirm 
what has seemed to be obvious to many residents in my State, as 
they've seen as much as a 50 percent increase in their utility 
bills, that there have been, in fact, unjust and unreasonable 
rates.
    In addition, I am pleased that the Commission has at least 
taken notice of the structural differences between the 
Northwest and California energy markets. While we, in the 
Northwest, rely on bilateral forward contracts rather than a 
centralized ISO, our prices have moved in lock step with those 
charged in the California spot markets.
    Now that we, in the Northwest, have been given the 
opportunity to plead our case, I hope that the customers of our 
hardest hit utilities will ultimately see refunds for those 
unjust and unreasonable rates, whether through FERC or through 
a settlement process that might play out here in the next 
several weeks.
    The truly daunting reality for the pacific Northwest is 
that we have not yet seen the worst of this issue, given that 
Bonneville Power Administration has a 46 percent rate increase 
to take place later this fall, and that our peak energy usage 
in the Northwest doesn't really occur until the winter heating 
season, so it is my hope that refunds for our region can either 
alleviate some of the pain our residents have already felt, or 
prevent them from having more pain inflicted upon them.
    Along those lines, I hope that FERC will also take into 
account that fact that many northwest utilities, especially 
BPA, have gone to extraordinary lengths in helping with the 
California crisis, even, at times, to the detriment of the 
reliability within our own region, and some of those have not 
been repaid by the sales to the California entities.
    I'm very appreciative of the steps that FERC has taken in 
showing a commitment to help right the wrongs visited upon the 
Northwest by last year's--by the last year's runaway prices, 
and I'm pleased today that the Commissioners have, I think, 
finally acted to highlight the need to restructure our 
electricity system so that energy suppliers will never be able 
to create the sort of dysfunctional atmosphere in which we have 
all been so impacted by.
    I would like to, if I could, ask the Commissioners, Mr. 
Chairman, about a couple of things specific to the order, and 
then some broader questions as it relates to our hearing this 
morning, but first I noticed in the hearing--the order document 
from yesterday, on page 38, regarding the Pacific Northwest 
proceedings, that the proceeding is--and I'm reading from the 
document--``The proceeding is intended to facilitate the 
development of factual record on whether there have been unjust 
and unreasonable charges for spot market bilateral sales in the 
northwest for the period beginning December 25, 2000 through 
June 20, 2001.''
    So, if members of the Commission could comment on that, I'm 
assuming in that recognition that there is, in fact, a 
different market functionality in the Northwest, that spot 
market bilateral sales in the Northwest basically include some 
of the longer term contracts, or depending on how you wanted to 
find them, shorter contracts that were sales made during this 
time period that are different than how you have been viewing 
the California situation and California refunds.
    Mr. Hebert. Well, the problem that you get into with the 
Pacific Northwest is, they don't have a 24-hour spot trading 
market, as does California, and you pointed that out, and 
that's correct. This Commission has been very focused on trying 
to make certain that at the most opportune times for market 
manipulation, that FERC intervenes. That is exactly what the 
price mitigation was all about. I continue to believe that that 
24-hour period is what this Commission should be focused on.
    Now, not having a 24-hour spot product that you trade in 
the Pacific Northwest presents some difficulty in establishing 
facts when it comes to establishing what the refund criteria, 
if any, would be, so that is what that language is in there 
for. I think you will find, as you talk to the other 
Commissioners, there is some agreement and there is some 
disagreement as to what direction we should go in there, so I 
think it would be fair to let them answer, as well.
    Ms. Brownell. Senator, I think if you also look at the 
footnote on page 43, it acknowledges that, in fact, there are 
differences, and it is our hope that what those differences are 
may be clearer from the evidentiary proceeding, and the 
Chairman is right, there is still discussion and debate going 
on, but it was clear to me--I can speak for myself--that there 
are differences and we need to look at that in a different way. 
Where that evidence takes us, however, remains to be seen, so 
we implore the parties to get it all out and make their case.
    Mr. Massey. Senator, it seems to me that the dysfunctional 
California markets had a huge impact on the Pacific Northwest 
that played out through bilateral contracts, and our order says 
explicitly that what is a spot market sale in the Pacific 
Northwest may be different. We may define it differently, and 
we tell the judge to accept evidence on that question.
    My own view is that contracts in the range of a month or 
even longer would qualify as spot sales in the Pacific 
Northwest, and I said that yesterday. For the record, our order 
intends to open this issue up, but it is somewhat ambiguous 
about what a spot market sale is. In the Pacific Northwest, 
we're counting on a record to be developed.
    Senator Cantwell. Commissioner Wood or----
    Ms. Breathitt. Senator, I would just like to read one 
sentence from the order that says, ``We direct all parties to 
the Puget Sound Complaint proceeding to participate in the 
proceeding and to focus on settling past accounts related to 
spot market sales in the Pacific Northwest.'' We tried to be as 
precise as we could about what that means to the Northwest. I 
am confident that the proceeding will at least give parties if 
not the perfect result that they wanted, will give them the 
forum in which to settle these past accounts which is due 
process and it should be fair.
    Mr. Wood. Your specific question about what is spot 
market----
    Senator Cantwell. Well, my specific concern is that the 
Northwest utilities and Northwest consumers who have seen 
prices go from $26 a megawatt during this time period to $500 a 
megawatt are not penalized on coming up with a solution simply 
because they don't run an ISO like California, and because--and 
I guess I think it speaks somewhat to the potential limitations 
or concerns about FERC moving forward if we can't make 
decisions that recognize the differences between these markets 
when unjust and unreasonable rates have occurred. So, I'm 
taking your order as to mean that you are--that the judge has 
discretion to determine that there are longer term contracts 
that could attract the spot market and that these contracts, 
just because they didn't operate under an ISO functionality are 
unjust and unreasonable during this time period.
    Mr. Wood. I think clearly the intent of the footnote 74 
that I believe Nora referenced a moment ago, which reads, 
``What is a spot market sale for bilateral transactions in the 
Pacific Northwest may differ from what is a spot market sale in 
the California ISO and PX organized spot markets'' was really 
an indication that there's plenty of room to look at this a bit 
differently in the Northwest proceeding.
    Senator Cantwell. Thank you. If I could, following up on 
this issue, as we look at the larger restructuring issue, part 
of the challenge for us in the Northwest being 78 percent hydro 
dependent and the fact that we have the worst, or second worst, 
drought on record, part of this is planning for the future, 
having--then going out to the spot market, which was seeing 
exorbitant prices obviously made it a very complex year for us. 
How, in looking at these issues on restructuring, what are some 
of the Commissioners' ideas on further safeguards, whether 
through FERC or whether through different entities, to make 
sure that the planning process, given a hard environmental 
hydro years, would be a way, or for anybody who may not be 
hydro related, but are forced to go out on the spot market and 
higher peak times.
    Mr. Massey. Senator, let me say--and this may be 
politically unpopular in the Pacific Northwest and in the 
West--but I think the ultimate solution is a single RTO for the 
Western interconnection that plans for the entire Western 
interconnection. This is the way to solve that problem.
    Senator Cantwell. And what functionality would--I mean, we 
obviously are hearing a lot about an RTO and I think if you 
said today to people in the Northwest, ``Hitch your wagon to 
the California ISO and let's create a regional situation,'' I 
don't think people would be very comfortable with that. I'm not 
even sure California would be comfortable with that.
    The issue is, what can we do to require utilities to have 
more predictability for hard economic times? And, of course, we 
want to assume that there's a stable market operating and, yes, 
that's a larger question about how we--what are the safeguards 
or the empowerment as we've heard discussed from our colleagues 
today, everything from transparency to the transmission grid, 
but what is that certainty on backup plans? I equated to FDIC 
insurance that banks have, and when there's a run on a bank, 
they have a backup plan on how they're going to deal with it so 
that consumers are protected. So, what is our equivalent in 
this situation?
    Mr. Wood. Traditionally in the regulated environment, there 
is a requirement on every utility to have 15 percent, or some 
percent, more under contract or under ownership of generation 
than it needed for the hottest or coldest, whichever the 
climate is, day of the year, so that it always had that 
insurance policy on top of what it needed.
    In the more competitive markets, those regulatory mandates 
have taken more the format of a tradeable right that a 
generator can sell for the obligation to deliver power 3 years 
from now for that 15 percent, or whatever it may be, and that's 
sold to a retail provider today. California did not have such a 
requirement at all. Looking back, I think everybody is kicking 
themselves that there wasn't a build-ahead requirement, but in 
the Eastern markets, in fact, we were dealing with orders just 
this week, looking at what they call installed capacity, ICAP, 
it has various other names, but they are probably not the 
perfect mechanism out there yet, but it's one of those probably 
critical lists of five things we've got to do to put into 
regional planning across the country to make up for what 
happened out there.
    Hydro is unique because it can go away pretty fast, unlike 
natural gas. Three years ago, we had--with the merger of 
railroads, we had some coal dislocations. Gosh, who would have 
thought coal would have become undependable for awhile, but 
we've probably got to factor in the probability of 
unavailability for each one of these resources when we're 
figuring out that 115 percent. In hydro this year, at 46 
percent of what it was two years ago, looks--it's pretty 
variable and I think in future planning, we've got to account 
for that.
    Ms. Breathitt. Senator, what I would add to what my 
colleagues have just said is--and you're probably doing this in 
the Pacific Northwest because you are 76 percent dependent on 
hydro which is so--which succumbs so to weather, and snow, and 
rainfall, that the Pacific Northwest look at diversifying its 
energy portfolio so you, over time, reduce the dependency on 
perhaps hydroelectricity to include perhaps more natural gas, 
more clean coal, more renewables, coupled with demand reduction 
and conservation. That would be--and then picking up on Pat 
Wood's comment of a reserve margin, which I'm sure--I think you 
have in the Northwest with the WSCC.
    Senator Cantwell. Yes, but a 15 percent reserve, which most 
of these people had, didn't last them very long.
    Mr. Hebert. Let me get a couple of things that I think 
are--you should definitely know about. I do think the single 
RTO for the West is critically important. What we have all 
learned from this--understanding Senator Feinstein's concerns 
about how we do that--I am certainly sympathetic to that, but 
it's important that we do all learn from this. I mean, it's one 
thing to listen; it's another to learn, and let's learn, and 
what we have learned is, in fact, that the Northwest and 
California help and hurt one another, depending upon their 
actions.
    Having said that, if you have an RTO that is set up so as 
to plan in such a way that it will have as much free-flowing 
transmission as possible, it will have the installed capacity 
that is necessary to get it through the bad years, I think 
that's very important, but it also brings up a couple of other 
things, and Commissioner Breathitt touched on it.
    The fact that you are so dependent on one single source 
leads you down that path a little bit. I will tell you that due 
to the dependence on hydro and the fact that hydro is such a 
cheap, in the end, or less expensive form of energy, not to 
mention all the very positive things when it comes to 
emissions, but it has made it very tough for gas and pipelines 
to come out there and compete. When you have very good hydro 
years, the pipeline companies don't do very well, so you might 
want to think about, and certainly it's something that I 
continue to talk about, incentives for the pipes so that we're 
not so dependent. Now, that is not to say that you can do with 
less hydro, because I think quite the opposite. I think you 
need as much hydro as you've got, and I think you need to 
squeeze every megawatt possible out of that hydro, but I think 
you also need some gas and maybe some clean coal technologies, 
anything that is going to bring you additional capacity.
    Having said that, you're in a period where the relicensing 
of those hydro facilities is critically important. It is also 
critically important that that be expedited and it not be 
weighed down and it not be stopped through a regulatory 
framework. We are committed to that. We will continue to do 
that, and, hopefully, we will help the Northwest get on their 
feet. I think you do know and understand that we are committed 
to that.
    Senator Cantwell. I don't think that we've ever missed an 
opportunity, when the Secretary of Energy was here, to 
encourage him in his dialogues and discussion with Canada, 
British Columbia and Alberta about the large reserves of 
natural gas that they have there that could be an aid to the 
West.
    Commissioner Brownell, do you want to comment on that?
    Ms. Brownell. Senator, I do. I certainly think that my 
colleagues have covered the gamut of opportunities to address 
the issues in the Northwest, but I want to comment on the 
concerns that you have expressed, Senator Feinstein have 
expressed, about a Western RTO.
    We recognize that there are dramatic dysfunctionalities in 
the markets, and we recognize that we need to fix those 
incrementally before we suggest that a westwide RTO would be 
perfectly suited to addressing these problems. So, we also need 
to understand that there are different levels of maturity in 
different markets that require different responses. The 
Northeast, being that much more mature, is probably more ready 
for an RTO on a larger scope than the West is. But I do think 
it's important because we're looking at a planning function 
that is very clearly more critical than we ever knew of, as we 
begin to move forward in thinking in terms of regional planning 
and how we might get there, both in the short term and the 
longer term. So, we can't let today's problems make us--force 
us into decisions that, for the long term, are not good, and 
therefore that planning function at the RTO level, I think, is 
critical.
    Senator Cantwell. Well, and I just want to note that within 
the region that the reciprocal agreements that we have with 
Washington--the Northwest has with California now on power that 
have worked well for many years, but the issue is creating a--
making sure there's a functional market and what the unique 
impacts are within each region.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much.
    Senator Feinstein, I know you had a matter you wanted to 
follow up on. Why don't you go ahead and do that.
    Senator Feinstein. Thanks very much, Mr. Chairman.
    I may have misspoke by saying that we didn't have three 
votes on the Commission to make investigative data public. My 
staff informs me that I missed something, Ms. Brownell, that 
you said you would support it.
    Ms. Brownell. I would. I mean, retroactively, I could not 
undo a settlement, but going forward, I absolutely would 
support it.
    Senator Feinstein. That's good. Then we have three votes 
for that, as well. So, I would like to, if I understand it, as 
the Commission this question. There are three votes, as I 
understand it, on additional authority with respect to--well, 
making--moving up, the Rule 206 rule on refund authority to the 
date of filing the complaint. Is that a correct assessment?
    Ms. Breathitt. I think that's what I said in my letter to 
you.
    Senator Feinstein. Yes, right, and I think others--
Commissioner Massey, you suggested that----
    Mr. Massey. I would go further back than that. I think FERC 
ought to have the refund authority any time it determines that 
prices are unjust and unreasonable, going back retroactively 
with some reasonable limitation, of course.
    Senator Feinstein. All right.
    And Commissioner Wood.
    Mr. Wood. I have not spoken on it, but I would agree with 
what Commissioner Breathitt just said, that certainly on the 
date of filing, from that day forward is a pretty clear signal 
to the person you're filing against that their behavior is 
under potential refund obligation.
    Senator Feinstein. Now, I haven't asked this question, but 
how about making it retroactive?
    Mr. Wood. Prior to the date of the complaint? We had this 
discussion yesterday at the Commission meeting with a bright 
woman on our staff talking about what do we have today? If they 
had violated a tariff, and from this point forward, I think all 
the market based pricing certificates that we've granted that I 
think some of you have not been real happy that we've granted 
on the market basis, could have a conditional amendment that 
would provide a sort of a hook, that, in fact, you have 
violated a preexisting tariff. That's a little different and 
that would give you the ability to go--if you broke something 
that you promised you wouldn't break 10 years ago and you broke 
it eight months ago, when you file a complaint really doesn't 
matter. If it's a new issue, like what we saw with the San 
Diego Gas and Electric filing last August, then that becomes 
subject to a specific new complaint, so the bottom line is, we 
do have more authority to go back currently than we had 
expressed in the section 206 complaint, but it has not been 
found, and I think we looked for a way to look for it to go 
back before August of last year. Going forward, we can 
condition certificates so that there is an earlier-in-time-
bright-line point.
    Senator Feinstein. Obviously the reason I'm raising this is 
that the San Diego situation just sort of stands out there like 
a----
    Mr. Wood. Right.
    Senator Feinstein. It's almost unfair.
    Mr. Wood. I agree with the----
    Senator Feinstein. I'm trying to see if the Commission can 
take any action in that regard,
    Mr. Massey. I agree with you. Any time prices are 
determined to be unjust and unreasonable, there ought to be 
refunds available. It's unconscionable that we cannot go back 
to last June--June of 2000--and order refunds for prices that 
were clearly out of control and unjust and unreasonable, and 
that is an issue that needs to be addressed. I think the first 
complaint was probably filed in late June or early July. By the 
time we got around to addressing it with the 60-day buffer 
zone, it was October 2, but that's a good 4 months of out of 
control prices with no remedy, that's number one.
    No. 2, the Commission allowed sales at market based prices 
with virtually no conditions attached to that certificate. 
There was a condition against affiliate abuse. There was no 
condition in those tariffs against withholding a generation. 
That seems unbelievable to me, but there was absolutely no 
condition.
    Mr. Hebert. We have since changed that.
    Mr. Massey. We have since changed it for the Western 
interconnection as of April 26, 2001, but there ought to be a 
national standard, and as the Commission updates its market 
based pricing standards, and there's probably a majority of the 
Commission that's willing to do that, we ought to include the 
conditions that are necessary to protect the public interest.
    Senator Feinstein. Well, I'd like to ask you to do so. I 
think that would remedy a major inequity if this could go back 
into the year 2000 which, after all, it was in the early point 
there where some of the biggest spikes were, you know, where 
some of the most egregious happenings took place, and nothing 
is going to happen, so it's sort of like the old adage of 
closing the barn door after the horse is out and I'd like to 
make the request that the Commission--and we will do so in 
writing, as well--take a look at that.
    If anyone would like to respond, please.
    Mr. Hebert. Yes. I have actually a response and a couple of 
questions, one to something you mentioned a little while ago on 
market power, and the other on your question as to the 
settlement, and I want to make sure I understand your question 
properly and the direction that you believe the majority of the 
Commission may be taking.
    Is it your understanding, then, that the majority of this 
Commission will not accept settlements that do not disclose the 
reason for those settlements and the facts of that case?
    Senator Feinstein. Of course, now, you're putting it in the 
negative.
    Mr. Hebert. No. I'm just asking.
    Senator Feinstein. What I'm saying is, that the--this is a 
public Commission that the evidence on which you base decisions 
should be made public so that everyone can look at it. I mean, 
this is not something that's operating in the private sector. 
This is a public sector effort, and as such--see, there's no--
part of what I'm aiming at is to create a disincentive for bad 
behavior, and the disincentive is, everybody is going to know 
about it, the credibility and integrity of the company is 
affected. I think that's appropriate in this kind of case.
    Mr. Hebert. I want you to know, I do not disagree with 
anything you're saying as to the importance of people seeing 
things, but I will tell you, for someone who has committed many 
hours of--every day in the last 6 months to try to turn this 
thing around, that every now and then the opportunity to trade 
certainty for uncertainty versus protracted litigation is so 
strong that I think this Commission must do that, and I think 
we will see that again in the future, and it is my hope that 
this Commission will not turn its back on accepting settlements 
to give certainty to this industry to try to turn things 
around. That is my only thought.
    The other thing--I guess you can come back to it, because 
it doesn't have anything to do with this--has everything to do 
with market power that you brought up, and I'd like to comment 
on that.
    Senator Feinstein. Fine. Fine.
    Ms. Breathitt.
    Ms. Breathitt. Senator, I was just sitting here listening 
and thinking. The question in my mind is, is the embarrassment 
factor going to achieve our goal of stopping withholding? Is 
that going to be more effective than going to trial?
    Senator Feinstein. May I answer that?
    Ms. Breathitt. Yes, because I don't know the answer to 
that, and I think that's what you're asking.
    Senator Feinstein. The answer, I think--all right. I think 
Mr. Wood answered that question. It may be worth going to 
trial, even if you lose, to let all of this be out there.
    Ms. Breathitt. I was just trying to think through whether 
the embarrassment factor gets us where we want to go as opposed 
to proving actual instances and having a legal predicate upon 
which to move forward.
    Senator Feinstein. I can tell you, over and over in the 
California situation. As you know, ENRON had to be subpoenaed 
and resisted providing data, and I gather they're now going to 
do it, and everything is a fight. Everybody on the other side 
says, ``Oh, there's no smoking gun. We did nothing wrong.'' 
Well, look, in my heart of hearts, I know plenty was done that 
I would consider wrong, but you can't get to it unless you've 
got somebody that--unless a whistle blower comes forward.
    Now, you can't have this kind of situation that, for 
justice, the only hope is a whistle blower, which is, today, 
the situation in California. There has to be the ability of the 
regulatory authority to make these things public, and currently 
there is not, and that's why I think we had such egregious 
behavior on the part of the generators, because it was no lose 
for them, and if you combine this with the lack of 
transparency, when it's the--when the online dealing takes 
place and the natural gas at the border--I mean, you've got a 
very complicated and an impossible situation for anybody really 
to sort out.
    Mr. Hebert. It is perplexing, because I guess somehow I 
haven't heard what I thought I've heard, because I have been 
thinking over the last couple of months that, with all 
deliberate speed and almost at all cost, we should put the 
California and the Northwestern matter behind us, try to get 
that settled, and I guess now what I'm confronted with is, if 
tomorrow this Commission is presented with a settlement with 
all parties in California and the Northwest, and all those 
parties agree that they want to settle as to the amount, but 
they do not want to disclose why that amount was there and what 
the activities behind that were, you're saying you would rather 
this Commission say no to that, that we want the ALJ to hear 
the case, perhaps a hearing before the Commission, and 
inevitably, surely, before the full Circuit----
    Senator Feinstein. No.
    Mr. Hebert [continuing]. Which is a much longer duration. I 
mean, that's the trade-off.
    Senator Feinstein. It is also costly for the companies. I'm 
not sure that this really is the trade-off. I'm not sure. I 
understand it in the private sector when there's a lawsuit and 
the parties come together and they have a settlement and that 
settlement is a secret settlement, but this isn't the private 
sector.
    Mr. Hebert. I don't disagree with that.
    Senator Feinstein. I have a real problem because of what 
has been going on with the State legislature has been trying to 
do, and the difficulty in being able to do it. Now there's 
someone you can go to all in secret, you can work out your 
deal, nobody ever knows what really happened. That's wrong, Mr. 
Hebert. It's wrong, particularly, when you have companies 
laying off people because they can't afford the rates. I mean, 
I remember talking to the Sempra people about what was 
happening at 3 a.m. in the morning.
    Mr. Hebert. I'm not disagreeing the right and the wrong of 
that with you. What I'm disagreeing with you about is the 
opportunity for this Commission to provide certainty and get 
settlements and issues behind it and move forward. That is all 
I'm disagreeing with you about.
    Mr. Massey. May I comment, please? It seems to me that the 
difficulty this Commission faced over the whole past year is 
our credibility. Were we actually doing what needed to be done? 
Were we tough-minded enough? Were we serious enough to solve 
this problem? And in that context, a big case involving 
withholding, with very interesting evidence, comes before us 
and we bury the evidence and it hurts our credibility and makes 
it look like we're conspiring with the industry. Your comment 
is dead on. We would have been better off to spread that 
evidence on the record through litigation. That would have been 
much more valuable than the $8 million that we got.
    Senator Feinstein. My time is up. I want to thank the 
Commission.
    The Chairman. I'm going to have to terminate the hearing. I 
want to thank all Commissioners. I think it's been very useful 
testimony. I think you've brought out some very useful points 
and we want to stay in close touch with the Commission to work 
with them in developing legislation that is in the best 
interest of the country.
    Thank you all very much.
    [Whereupon, at 11:52 p.m. the hearing was adjourned.]
                               APPENDIXES

                              ----------                              

                               Appendix I

                   Responses to Additional Questions

                              ----------                              

                         Portland General Electric Company,
                                     Portland, OR, August 31, 2001.
Hon. Jeff Bingaman,
Committee on Energy and Natural Resources, Democratic Staff, U.S. 
        Senate, Washington, DC.
    Dear Chairman Bingaman: In response to your letter of August 20, 
2001, I am enclosing my responses to the questions submitted by the 
office of Senator Larry Craig.
    Thank you for the opportunity to provide additional information.
            Very truly yours,
                                                Julie Keil,
                                         Director, Hydro Licensing.
        Responses of Julie Keil to Questions From Senator Craig
    Question 1. Ms. Keil, I have read some testimony containing 
anecdotal evidence reflecting the apparent Department of the Interior 
belief that since no licensee has refused to accept or surrender a 
license immediately after issuance, these licensees must have economic 
value.
    When your Company, or any utility company considers refusing to 
accept a new license for an existing project don't you have to factor 
in the costs of tearing down that project and is it fair to say that 
licensees are often confronted with simply choosing the lesser of two 
economic disasters?
    Answer. When confronted with a license that it believes to be 
uneconomical, a licensee faces an impossible choice. It can either 
continue to produce electricity at the site, a losing proposition. Or 
it can surrender the license, also a losing proposition. The cost to 
surrender a license and remove a project can be enormous. In addition, 
agencies frequently demand additional mitigation for the removal 
itself, adding to the burden. In today's regulatory environment, there 
is little assurance that surrender and removal costs can be recovered 
in a utility's rates.
    Question 2. In reviewing all of the 246 relicense proceedings in 
which a license was issued or declined between October, 1986 and 
January of this year, FERC, in its 603 report, found an average annual 
generation loss of 4.3%. Some may claim that this figure is 
insignificant. I disagree. In today's megawatt-thirsty climate, that is 
a significant amount of power that is being lost. However, as a 
licensee, you are familiar with other factors that impact a project's 
economic viability. Can you describe what peaking power is, and how the 
loss of that flexibility affects revenues and the stability of the 
electric grid?
    Answer. Electrical systems must exactly match generation and demand 
on an instantaneous basis. Needless to say, demand is variable. It 
varies throughout the day; in most service areas there is a morning 
peak and an early evening peak in usage. In addition, demand varies 
seasonally. Historically, for example, the Pacific Northwest has been 
considered to be a ``winter peaking'' system, due to low use of air 
conditioning and the relatively high use of electric space heat.
    Peaking power, then, is the ability of the grid to respond to these 
peaks in use, both daily and seasonally. Hydro, with its ability to 
store electricity in the form of water in reservoirs is the most 
flexible and economic way to meet peak loads. Units at hydroelectric 
projects can be stopped and started more quickly than thermal units and 
with less damage to the machinery.
    If operational flexibility is lost at hydroelectric projects, it 
must be replaced with other resources. Often this replacement 
generation is gas fired, which is a much more expensive way of meeting 
this system need.
    If the flexibility of hydro projects is lost to the system and is 
not replaced, the result is that the system can no longer meet peak 
loads, which can result in blackouts.
    Question 3. Some within the environmental community have criticized 
the hydro industry as ``a solution looking for a problem.'' From your 
perspective, having invested millions of dollars in your own 
relicensing efforts, how do you respond to that statement? Are you 
searching for a problem?
    Answer. PGE has invested many thousands of dollars and hours of my 
time to seek reform of the system under which we currently license and 
relicense hydroelectric projects. It serves no one well. It costs too 
much, raising the cost of a critical service to our customers, and it 
takes too long, increasing uncertainty and delaying important 
environmental protection and enhancement measures. While we believe 
that the process should permit every interest to be represented, at the 
end of the day, someone has to make a decision.
    Question 4. I wonder if you could talk a little about the role that 
hydropower plays in the Western electricity grid and, specifically, how 
the current hydro licensing process currently hinders, or might hinder, 
your abilities to provide consumers with a reliable, reasonably priced, 
supply of electricity?
    Answer. As I discussed above, hydropower is critical to a reliable, 
reasonably priced electricity system. It provides 70% of the capacity 
in the Pacific Northwest and accounts for approximately 24% of 
California's total electrical generation capacity. Flexibility and 
capacity are often victims of the relicensing process. The benefits are 
hard to quantify and almost impossible to see in surveys of licensing 
outcomes. The seemingly innocuous demand for ``natural'' river systems 
and hydrographs threatens to strip the system of this valuable 
component.
    I think it is worthwhile pointing out that the flexibility of hydro 
power projects is important to the viability of other renewable 
resources. Wind power, for instance, requires back up from the hydro 
portions of the grid in order to make a useful contribution to 
electricity supply.
    Question 5. American Rivers claims that hydro licensing improvement 
would ``upset the delicate balance between hydroelectric generation and 
wildlife habitat and river front economies.'' In your opinion, does 
this ``delicate balance'' exist?
    Answer. No, I do not believe that a delicate balance exists. It is 
perhaps true that when projects were originally constructed, the focus 
was on providing electricity rather than environmental protection. Now, 
however, the pendulum has swung too far in the other direction. The 
relicensing process is driven by agencies with mandatory conditioning 
authority who have no ability, under their existing statutory 
authorities, to consider the cost of their demands to the electric 
system to residential customers or to businesses. Licensing decisions 
should be made in the public interest, in its broadest sense.
    Question 6. In recent press releases, American Rivers has stated 
that ``our rivers are already giving us all the electricity they can.'' 
Do you agree with that statement?
    Answer. No, I do not agree. There are many opportunities for 
project improvements and additions that would have little or no 
environmental impact. In addition, there are many dams that are not 
currently equipped with generation capability. The uncertainty and 
expense of the licensing process is a major factor in our failure to 
capture these opportunities.
                                 ______
                                 
                      Federal Energy Regulatory Commission,
                                Washington, DC, September 10, 2001.
Hon. Jeff Bingaman,
Chairman, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.
    Dear Mr. Chairman: Thank you for your August 20, 2001 letter 
forwarding questions from Senator Ron Wyden, for the record of your 
Committee's July 19, 2001 hearing on proposals relating to the 
Commission's hydro relicensing procedures. My answers to those 
questions are enclosed.
    I hope that my responses are helpful. If you need additional 
information, please do not hesitate to let me know.
            Sincerely,
                                          J. Mark Robinson,
                               Director, Office of Energy Projects.
[Enclosure.]
     Responses of J. Mark Robinson to Questions From Senator Wyden
    Question 1. The Idaho National Engineering Laboratory released a 
study finding there are potentially thousands of megawatts of untapped 
hydropower at existing hydro facilities. This untapped power could 
become available by installing additional turbines or more efficient 
turbines. Given the relatively minimal environmental impacts of these 
improvements and the need for alternatives to gas-fired plants, 
streamlining the process for licensing improvements to existing hydro 
facilities is one of the greener alternatives available to help meet 
the region's needs. What, if anything, is the Commission doing to 
streamline the process for installing additional turbines or more 
efficient turbines at existing dam sites?
    Answer. The Commission is taking steps to ensure that this occurs. 
In 1991, the Commission initiated a program for capacity and efficiency 
upgrades at existing projects through streamlining its procedures and 
minimizing pre-filing requirements, with the objectives of promoting 
domestic energy production, encouraging utilities to evaluate 
investment in energy efficiency and making more efficient use of the 
nation's existing hydroelectric resources. The Commission ultimately 
revised its regulations (18 C.F.R. Sec. 4.201(b)), so that many 
capacity upgrades are considered routine maintenance that do not 
require Commission approval. Many licensees have already taken 
advantage of this opportunity, and continue to do so when it is 
economically practical.
    On March 14, 2001, the Commission issued its Removing Obstacles To 
Increased Electric Generation And Natural Gas Supply In The Western 
United States Order (Docket No. ELO1-47-001). One key component of the 
order was increasing generation at existing Commission-licensed 
hydropower projects, consistent with protecting environmental 
resources. The Commission stated that installation of additional 
turbine generators was one way of providing additional generation at 
existing hydropower projects. The Commission also called for 
conferences to be held in the Western Systems Coordinating Council 
region focused on improving the energy situation in the Western states.
    Commission staff held conferences in Portland, Oregon, and 
Sacramento, California. As a result of the conferences, the Commission 
received four applications to amend licenses by adding small 
hydroelectric turbine-generator units to existing facilities. The 
Commission has authorized two of these amendment proposals, a 70-
kilowatt (kW) turbine-generator unit at the Pelton-Round Butte Project 
No. 2030 and a 437-kilowatt turbine-generator unit at the LaGrande 
development of the Nisqually Hydroelectric Project No. 1862. Two 
additional proposals to install small hydroelectric units at the Rock 
Island Project No. 943 (700 kW) and the Rocky Reach Project No. 2145 
(800 kW), both located on the Columbia River, are currently pending at 
the Commission.
    Question 2. The Commission's report to Congress under Section 603 
of the Energy Act of 2001 recommends that the Clean Water Act be 
amended to limit water quality certification to a subset of water 
quality parameters. Does FERC believe that it knows better than the 
states as to how to protect and restore water quality for a state?
    Answer. FERC believes the states are properly the leaders in 
setting water quality standards such as the physical and chemical 
composition of water. However, to the extent that the Federal Power Act 
requires the Commission, in issuing hydropower licenses, to balance the 
various beneficial public uses of waterways, including power and 
development and environmental uses, the Commission continues to work in 
partnership with the states, as well as with other federal agencies, 
Indian tribes, non-governmental organizations, and other stakeholders. 
Commission staff believes that all of these parties have valuable 
contributions to make to the licensing process.
    Pursuant to the Clean Water Act, the states play an important role 
in establishing objective standards for the physical and chemical 
composition of water (dissolved oxygen content, pollutant-levels, 
temperature, etc.). Commission staff is concerned that, to the extent 
that states utilize their authority under the Clean Water Act to 
require conditions beyond the physical and chemical composition of 
water, such as those dealing with recreation and fish and wildlife 
requirements, it makes it difficult, if not impossible, for the 
Commission to perform the balancing required by the Federal Power Act.
    Question 3. The report suggests that states be prohibited from 
requiring ``instream flows.'' Does FERC believe that good water quality 
can be achieved without water quantity? How do you achieve water 
quality standards for temperature without increasing flows?
    Answer. Clearly water quality and quantity are related, however, 
the determination of flow requirements can be an issue that does not 
have water quality impacts. Water quality is generally addressed with 
numeric temperature and dissolved oxygen criteria in certifications. 
Water quantity requirements often bear no relationship to these water 
quality standards, but rather are designed to address particular uses 
of the waterway, such as fish habitat or boating.
    In fact, there are a number of ways to meet water quality standards 
without imposing water quantity requirements. For example, many 
reservoirs stratify thermally, particularly during the summer when high 
river water temperatures are of concern. In such cases, cooler summer 
water in the rivers downstream may be achieved through selective 
withdrawal of cold, deep reservoir water, rather than necessarily 
increased flows. This method may allow for a smaller amount of water to 
be released to meet water temperature standards, and result in water 
being available for other purposes, such as filling a reservoir for 
summer recreation use or peak generation. Similarly, if project works 
are integral with the dam (i.e., there is no bypassed reach), selective 
withdrawal into the turbines may eliminate the need to require spillage 
to meet water quality standards. Likewise, myriad aeration techniques, 
such as turbine venting, can be used to meet dissolved oxygen standards 
downstream, without requiring additional flows.
    It is nevertheless true that providing sufficient quantities of 
water for beneficial public uses is extremely important, and balancing 
the use of water is studied carefully by Commission staff in all 
hydropower licensing proceedings. Indeed, the Commission includes 
minimum flow conditions for purposes such as fish and wildlife, 
recreation, and aesthetics in virtually every license it issues.
                              Appendix II

              Additional Material Submitted for the Record

                              ----------                              

                            Western Governors' Association,
                                     Washington, DC, July 11, 2001.
Hon. Jeff Bingaman,
Chairman, Senate Committee on Energy and Natural Resources, Dirksen 
        Senate Office Building, Washington, DC.
Hon. Frank Murkowski,
Ranking Minority Member, Senate Committee on Energy and Natural 
        Resources, Dirksen Senate Office Building, Washington, DC.
    Dear Senators Bingaman and Murkowski: We urge the Congress to 
support the rapid enactment of federal electricity reliability 
legislation that provides for delegation and deference to decisions 
made within an electrical interconnection and authorizes the 
establishment of state advisory bodies. Such provisions are embodied in 
the consensus legislation prepared by the North American Electric 
Reliability Council. This legislation has bi-partisan support. The 
provisions passed the Senate last year and are included in numerous 
bills in this Congress. Western governors expressed our support for 
such legislation a year ago in the attached resolution. We reiterated 
our position in the recommendations from the February 2, 2001 Western 
Governors' Association Energy Policy Roundtable and again during a 
Western Governors' Association Transmission Roundtable on May 9, 2001.
    The enactment of federal reliability provisions that reflect the 
position of Western governors is vital to assuring reliability in the 
Western Interconnection. We urge you to support rapid action to enact 
such legislation.
            Sincerely,
                                           Dirk Kempthorne,
                          Chairman, Western Governors' Association.
[Enclosure.]

                        POLICY RESOLUTION 00-009

        A Competitive and Reliable Western Electric Power System
                         Approved June 13, 2000
SPONSORS: Governors Johnson and Geringer
                             a. background
    1. The Western electric power system is experiencing fundamental 
change driven by customer demands for choice, lower cost generation, 
and state and federal regulatory reforms to enhance the competitive 
wholesale Western electricity market.
    2. The Western electric power industry is central to the region's 
economy. As the regional power outages of July 23, and August 10, 1996 
highlight, the Western economy is dependent upon a reliable supply of 
electricity. Annual expenditures for electric power in the West are 
over $700 per capita or $63 billion. This is more than the gross output 
of the agriculture, forestry, and fisheries sectors combined.
    3. The Western region has the second highest regional average 
electricity rates in the nation. But retail rates vary greatly from 
state to state. The Western region contains states with the lowest 
retail rates in the nation, as well as states with rates significantly 
higher than the national average.
    4. The Western electric power industry is very diverse. Investor-
owned utilities, publicly-owned utilities, and federal power marketing 
administrations all play major roles in supplying electricity and 
providing transmission in the region. Seventy investor-owned utilities 
provide nearly 70 percent of the West's electric supply. Nearly 1,000 
publicly owned systems, including public power districts, rural 
electric cooperatives, municipals, and regional, and federal systems, 
provide about 30 percent of the West's electricity. Non-utility power 
suppliers, power marketers and brokers, and load aggregators are adding 
to the diversity of the electric power industry.
    5. Past Western state utility policies have been instrumental in 
(a) cutting the cost of energy services through cost-effective 
conservation investment, (b) expanding the production of electricity 
from abundant Western renewable resources such as wind, geothermal and 
solar, (c) fostering industry-sponsored research and development, and 
(d) helping low-income consumers pay their electricity bills. However, 
the methods by which these policies promoting social objectives have 
been implemented may not be sustainable in a competitive industry. New 
approaches will be required.
    6. The federal government has acted to open access to the high 
voltage transmission system, a necessary step in promoting wholesale 
competition. In 2000, Congress is expected to consider legislation that 
could expand competition in the wholesale electric power industry.
    7. Nearly every Western state is evaluating or has acted on 
regulatory or legislative proposals that would change the existing 
structure of the electric power industry.
    8. The Western electric power system is increasingly challenged by 
load growth and expanding power sales across the transmission system. 
Recent analyses show an increasing probability of power outages in the 
next few years.
                     b. governors' policy statement
    1. Western Governors support expanded competition among electricity 
generators to lower electricity costs to Western consumers. Impediments 
to increased competition among generators need to be removed. The 
Governors believe that all segments of the Western industry, including 
investor-owned utilities, public power, federal power marketing 
administrations, power marketers and brokers, and independent power 
producers, should participate in the competitive market, at least at 
the wholesale level. The decision whether to require or allow 
participation in a retail competition program, and the form and timing 
of participation in retail competition should depend upon 
determinations made at the state and local levels. Western Governors 
also support further implementation of access to the Western 
transmission grid on a non-discriminatory basis.
    2. Western Governors recognize that the Western electric power 
system is a highly integrated interstate grid. In order to maintain or 
enhance reliability, this ``interstate highway of electrons,'' which 
moves at the speed of light, requires a high level of coordination 
among those using the grid, as well as the cooperation of those in each 
state and in the federal government charged with the responsibility for 
oversight of the various elements of the system.
    3. The transition to a more competitive market must ensure 
continued reliability and safety in the provision of electric power 
service. Western Governors encourage private sector solutions that 
promote system reliability. New approaches to establishing and 
enforcing regional reliability criteria need to be adopted. These new 
approaches should include federal legislation that, consistent with the 
Governors' policy statement 10 below, provides for:

          a. Use of a public process for setting reliability criteria.
          b. Review of proposed reliability criteria by states.
          c. Application of reliability criteria to all users of the 
        grid.
          d. Enforceable sanctions for non-compliance with reliability 
        criteria.
          e. Mandatory membership by operators and users of the 
        transmission grid in regional reliability organizations.
          f. Deference by a North American electric reliability 
        organization to interconnection wide standards and practices 
        developed in the West.
          g. The organization of regional advisory bodies of affected 
        states and Canadian provinces to advise regional and North 
        American reliability organizations, the Federal Energy 
        Regulatory Commission (FERC) and appropriate Canadian and 
        Mexican regulatory authorities on the governance of a regional 
        reliability organization, proposed reliability standards and 
        their enforcement, and fees to support system reliability 
        activities. FERC should defer to the advice of such regional 
        advisory bodies when the advisory bodies cover an entire 
        interconnection.

    4. To protect reliability in a competitive market, Western 
Governors urge the expeditious establishment of a single Western 
Interconnection Organization that promotes efficient electricity 
markets, ensures reliability, increases the effectiveness of the 
institutional support structure, eliminates overlap or duplication of 
effort among grid management organizations and provides for a clear 
determination of authority and responsibility. States should be members 
of the Board of Directors of the organization.
    5. Western Governors also support the development of new market 
mechanisms to enable retail consumers to receive appropriate price 
signals so that they can effectively participate in the power market 
and thereby help ensure system reliability at the lowest reasonable 
cost possible. The Western Governors also recognize that exporting 
efficient, low-cost generation will enhance reliability.
    6. Western Governors urge the Western electric power industry, in 
cooperation with Western states and the federal government, to support 
the formation of cost-effective Regional Transmission Organizations to 
maintain and enhance system reliability, examine and mitigate market 
power, and facilitate efficient power transactions in a restructured 
industry.
    7. Western Governors support the adoption of ``system benefit'' 
charges to continue appropriate support of social purposes, including 
acquisition of cost-effective energy conservation, research and 
development, expanded use of renewable energy resources, and low-income 
assistance.
    8. Western Governors urge the federal government to work with the 
states to develop effective approaches to mitigate market power.
    9. Western Governors urge Western state public utility commissions 
and Attorneys General to examine whether new measures are needed to 
protect electricity consumers in a more competitive market and educate 
consumers of their rights and risks under a competitive electric 
system.
    10. Western Governors urge the federal government to refrain from 
adopting preemptive legislation that would impose a ``one-size-fits-
all'' approach to the restructuring of the electric power industry that 
fails to recognize the unique characteristics of the Western electric 
power industry. No action by Congress or FERC should abridge the 
existing powers and authorities of state and local governments. Any 
action taken by Congress should enable states to restructure the 
electric industry, but not impose a mandate on states to do so. 
Congress should ensure that federal institutions, such as the power 
marketing administrations, participate in regional actions to promote 
competition, such as the creation of Regional Transmission 
Organizations system operators. Additionally, any federal legislation 
must retroactively include state actions to establish retail 
competition.
    11. Federal agencies and federal legislation should facilitate 
effective decision-making by the states and empower the states, with 
the cooperation of other regional stakeholders, to create regional 
mechanisms, where appropriate, to address transmission, reliability, 
market power and other regional concerns. FERC should be required to 
defer to the decisions of such bodies.
                   c. governors' management directive
    1. The Committee on Regional Electric Power Cooperation (CREPC), a 
joint working committee of the Western Interstate Energy Board and the 
Western Conference of Public Service Commissioners, is directed to work 
with the Western industry and the federal government to achieve the 
policies set forth herein. CREPC is to report on the progress in 
implementing these policies.
                                 ______
                                 
                                  Nuclear Energy Institute,
                                     Washington, DC, July 18, 2001.
Hon. Frank H. Murkowski,
U.S. Senate, Hart Senate Office Building, Washington, DC.
    Dear Senator Murkowski: This month, the United States will continue 
to negotiate an appropriate global response to the issue of climate 
change at the Sixth Conference of the Parties in Bonn, Germany. Nuclear 
energy is the most effective technology to reduce greenhouse gas 
emissions in the industry sector. I enclose for your consideration a 
letter from the international nuclear energy industry asking that you 
support nuclear energy as part of the solution to reducing greenhouse 
gases and other air pollutants.
    Each year, the use of emission-free nuclear electricity around the 
world avoids billions of tons of carbon dioxide, the most prevalent 
greenhouse gas. Nuclear energy technology reduces more carbon dioxide 
emissions than any other method in the U.S. voluntary program to reduce 
this greenhouse gas. In the United States alone, nuclear energy 
accounts for nearly 70 percent of all emission-free electricity 
production. Overall, nuclear energy is a source of electricity 
production for one out of every five homes and businesses in the United 
States.
    On behalf of my colleagues in the global energy industry who have 
signed the enclosed letter, I encourage you to support a global 
recognition of the need for expanded nuclear energy production to avoid 
greenhouse gas emissions. Nuclear energy is part of the solution for 
any regime that seeks to improve our air quality.
            Sincerely,
                                             Joe F. Colvin,
                                                 President and CEO.
[Enclosure.]

             An Open Letter to Governments Around the World

                              11 July 2001

    World demand for electricity will continue to increase as 
population grows and countries develop and expand their industrial 
base. All methods of electricity generation have some impact on the 
environment. As representatives of the international business 
community, we recognize our global challenge is to minimize this impact 
while satisfying the electricity needs of all peoples of the world.
    Nuclear power plays an important part in meeting this challenge 
because it provides much needed electricity, protects the environment, 
and supports sustainable development. Prevention and management 
technology needed to protect all affected environmental media is either 
in use or available. And nuclear electricity generation avoids the 
emission of greenhouse gases, thus playing a key role in limiting 
potential climate change, particularly in the developed world where 
significant emissions reductions are sought.
    Continued safe, effective use of nuclear electricity and further 
development of advanced nuclear power plant technology are an integral 
part of the international effort to manage risk from global warming. We 
encourage you to support policies that give every country engaged in 
greenhouse gas control programs the right to access all technologies as 
needed, including nuclear electricity.
    Nuclear is a necessary and uniquely effective part of the solution. 
Parties to the UN Framework Convention on Climate Change should 
acknowledge nuclear electricity as an acceptable energy and 
environmental resource that successfully avoids greenhouse gas 
emissions. This will ensure that global-emission control programs are 
flexible and preserve the right of individual countries to make their 
own energy and development choices.
    [Note: This letter has been signed by 93 CEOs and leaders of the 
nuclear industry world-wide].
                                 ______
                                 
                                     Forest Stewards Guild,
                                       Sante Fe, NM, July 27, 2001.
Senator Jeff Bingaman,
Hart Office Building, Washington, DC.
    Dear Senator Bingaman: On behalf of the Forest Stewards Guild, I 
would like to submit comments regarding the Forest Resources for the 
Environment and the Economy Act (S. 820) for consideration by the 
Senate Energy and Natural Resources Committee. The Guild is an 
organization of practicing foresters and other resource management 
professionals. The mission of the Guild is to promote ecologically 
responsible resource management that sustains the entire forest across 
the landscape.
    Carbon sequestration is increasingly recognized as a critical goal 
of forest management, and we applaud the Senate's initiative to promote 
this goal and institute effective steps for monitoring success. S. 820 
has a number of merits that constitute critical steps in developing a 
productive national approach to carbon sequestration. However, the bill 
also proposes a number of features that can potentially subvert truly 
effective carbon storage efforts and/or sidetrack and impair national 
policy on carbon storage.
    In particular, we would call your attention to the following:
    Section 2 contains problematic language and definitions. In 
particular, ``Forest Land'' is defined in such a way as to enable the 
classification of virtually any land in the country as forest land. 
This definition should establish a time frame for the presence of 
forest land within at most several decades in order to more effectively 
focus efforts.
    In Section 4, in the Definitions proposed in the language for the 
new Sec. 1600 of Title XVI of the Energy Policy Act of 1992, in items 2 
and 3, forest products are included as potential carbon stores. While 
some forest products may be appropriately classified as carbon stores, 
this classification requires much more explicit guidelines and 
standards for ``durability,'' or the length of time that carbon would 
be stored. For instance, there is a considerable gulf between how long 
carbon will effectively be stored in a paper bag or even a sheet of 
plywood as opposed to a framing timber. Moreover, standing timber is 
generally easy to keep track of, while forest products can be highly 
mobile--how can we effectively monitor the durability of many forest 
products that may undergo accelerated decay due to fire, demolition, 
rot and many other processes?
    In Section 4, item 5(b), there is a proposed requirement that the 
Secretary of Agriculture report within a year on the amount of carbon 
in the National Forest system, potential benefits to water and wildlife 
as well as the global carbon budget, and an assessment of impacts of 
forest management factions on a comprehensive range of forest 
management objectives. Given the inadequacies of current national 
timber inventories and federal monitoring performance, these reporting 
requirements seem unreasonable at best. A rough estimate of amount of 
carbon being stored on the national forests would be a tall order on 
its own, but would at least provide a clearer focus.
    Section 5, item (c)(1), on eligible carbon activities lacks a 
definition of ``sustainable management activities.'' There is a wide 
diversity of perspective on this issue within the nation and the 
professional forestry community--this term provides little guidance for 
prioritizing loan monies. The lack of rigorous standards, definitions, 
and guidelines for actual forest management practices in the bill 
leaves the door open for a wide range of activities whose inputs may 
actually increase carbon outputs rather than storage. Reliance on 
chemical herbicides, pesticides, fertilizers, heavy machinery, and so 
forth carry a carbon ``cost'' of their own. These costs are typically 
heaviest in short-rotation tree plantation systems. Such costs are 
substantially minimized or eliminated through approaches to forest 
management that rely on significantly less industrial inputs. 
Interestingly, the argument in favor of short-rotation tree plantation 
systems as opposed to long-rotation natural forest management is 
typically an economic one--yet this bill seems to target the former 
system as opposed to the latter as if in need of government subsidy. If 
the short rotation systems are not paying off economically, perhaps 
they should be eschewed, in as much as they are largely devoid of 
ecological value as well.
    Section 5 also emphasizes under-producing or understocked forest 
lands, while it lacks any mention of forest lands being managed with 
activities that maximize carbon storage for the longest possible time. 
This is a very important point, given that late successional forest 
stands and old growth store considerably more carbon than tree 
plantations, but often carry additional costs to land owners who manage 
for them that tree plantations do not. Moreover, the current emphasis 
of the bill seems to reward past poor management, while overlooking the 
investment of time and energy by landowners who have developed and are 
maintaining well-stocked, mature timber stands through good management.
    A fundamental decision needs to be made as to whether the objective 
of this bill is to store carbon or support pre-commercial timber 
harvest activity that may or may not result in significant benefits for 
carbon storage. Because the focus of the bill is ostensibly carbon 
storage, we would urge the Senate to clearly set priorities for the 
nation on this issue. By emphasizing short-rotation tree crops as the 
answer-to-carbon sequestration, this bill in its current state would 
set an inappropriate trajectory for carbon storage efforts--one that 
has already met with significant global resistance. The Guild believes 
that the best all-around way to store carbon and provide ecological and 
long-term economic benefits is to manage forest stands on a long 
rotation basis, using site-appropriate species mixes. The bill should 
be revised to directly address, prioritize, and offset the costs 
carried by landowners managing for long rotations and maximum carbon 
storage. Support to forest management approaches that result in less 
carbon storage, such as short-rotation industrial tree plantation 
management, and the mass production of forest products of limited 
durability, should be de-emphasized. If economics are driving decisions 
to pursue short rotation forest management systems, then they should 
pay for themselves without taxpayer subsidy.
            Sincerely,
                                              Mary Chapman,
                                                          Director.
                                 ______
                                 
                                   State of Oregon,
                                    Office of the Governor,
                                          Salem, OR, July 30, 2001.
Hon. Jeff Bingaman,
Chairman, Committee on Energy and Natural Resources, Washington, DC.
Re: Written testimony on S. 71, subtitle C of title VII of S. 388, and 
title VII of     S. 597

    Dear Mr. Chairman: Thank you for the opportunity to comment on 
three bills related to the licensing of hydroelectric projects. I 
regret that Oregon was unable to testify in person at the July 19, 2001 
Subcommittee hearing, but offer this letter and its attachment as 
written testimony for the record.
    The bills and respective titles on which you requested comment 
include: S. 71, The Hydroelectric Licensing Process Improvement Act of 
2001, introduced by Senator Craig; subtitle C of title VII of S. 388, 
The National Energy Security Act of 2001, introduced by Senator 
Murkowski; and title VII of S. 597, the Comprehensive and Balanced 
Energy Policy Act of 2001, introduced by Senator Bingaman.
    Of the three bills, I believe that S. 597 holds the most promise 
for improving the licensing process. S. 597 makes two process changes 
whose merits are clear, and requires further study of ways to improve 
the licensing process. The process changes should enhance the quantity 
and efficiency of power production and promote the health of rural 
economies without adversely affecting natural resource protection. The 
study requirement is consistent with GAO findings that existing 
information is inadequate to determine the best way to improve the 
licensing process. Further comments on this bill are included in the 
attachment to this letter.
    The provisions of S. 71 and subtitle C of title VII of S. 388 are 
substantially the same. Although these two bills may prevent some loss 
of power production and reduce some costs to power producers, I believe 
they will do so at a cost to taxpayer's and natural resources that is 
not in the public interest. My concerns are explained further in the 
attached statement.
    I hope you find these comments useful, and encourage future 
collaborative approaches to improving the licensing process.
            Sincerely,
                                   John A. Kitzhaber, M.D.,
                                                          Governor.
[Enclosure.]
     Statement of Hon. John A. Kitzhaber, M.D., Governor of Oregon
    Content of this Statement: This document details some of the 
reasons that I do not believe S. 71, The Hydroelectric Licensing 
Process Improvement Act of 2001 and subtitle C of title VII of S. 388, 
the National Energy Security Act of 2001 are in the public interest. 
The statement also explains my support for the two process changes 
proposed by S. 597, the Comprehensive and Balanced Energy Policy Act of 
2001, and proposes some modifications to the study provision of that 
bill.
    Importance to Oregon: Hydroelectric licensing is important to 
Oregon because the outcome of relicensings over the next ten years will 
have important implications not only for consumers, but also for the 
State's land, air, and water resources. In the next ten years, more 
than ten hydropower projects within the state will be involved in the 
relicensing process. Although these relicensings should not 
significantly affect the short-term scarcity of energy faced by many 
Western states, we recognize the importance of hydroelectric power in 
the state's energy portfolio. Hydropower is important as a source of 
renewable energy that can track demand.
    Just as the energy produced by hydropower is important to the 
state, the quality of the natural resources that are impacted by 
hydroelectric projects is also important. The quality of natural 
resources is fundamental to both the State's economy and our identity 
as Oregonians. A 1995 consensus report by more than 20 Northwest 
economists found that protection of the natural environment is critical 
for maintaining the economies of the northwest states. They found that 
businesses are drawn to the Northwest because employees want to move 
there, and that people want to move there because of the quality of the 
natural environment.
    Most of the projects with expiring licenses in Oregon were 
constructed in an era when economic development was given priority over 
protection of natural resources. These projects do not meet modern 
environmental standards. Some examples of the impacts caused by these 
projects include: dams form impoundments that can dramatically impact 
the river system by precluding movement of fish, changing water 
temperature, and trapping and altering sediment transport; penstocks or 
power canals on many projects divert water out of the natural channel, 
bypassing miles of river that receive very little water; and turbines 
kill some of the fish passing through them.
    The Public Interest: Oregonians are interested in developing and 
maintaining a diverse economy, while protecting the natural resources 
that traditionally served as the base for both our economy and our 
quality of life. We necessarily view hydropower in a context that 
includes economic and social values beyond just those related to power 
production. We believe that the Federal Power Act (FPA), as modified by 
the Electric Consumers Protection Act (ECPA) also recognizes this need 
to accommodate diverse values.
    The FPA gives FERC responsibility to balance power-related 
interests, but limits its ability to ``balance away'' certain resource 
protection requirements that are best evaluated in contexts broader 
than just power production. Under the FPA, resource agencies with 
mandatory conditioning authority set a ``floor'' of natural resource 
protection, above which FERC is free to make economic tradeoffs to 
ensure an efficient and plentiful power supply. The agencies who 
provide the floor for the energy sector are the same ones who provide 
the floor for other economic activities such as agriculture, forestry, 
and urban development. This promotes a level playing field across 
sectors. To encourage local involvement and decision-making, these 
authorities are vested in federal and state agencies according to their 
respective expertise and geographic scope.
    In Oregon, State and Federal agencies have used their respective 
authorities in a collaborative and productive manner. While we haven't 
always agreed on every issue, better outcomes have resulted from our 
discussions. Oregon state agencies have relied on specific expertise 
that the federal agencies bring to the licensing table, such as fish 
passage design and geomorphologic process evaluation, to assist us in 
making better recommendations for protection and mitigation measures at 
a project. FPA Section 18 fishway authority has been a critical federal 
tool for helping meet state goals, and Section 4(e) authorities can 
serve to backstop state recommendations under FPA Sections 10(a) or 
10(j). For this reason, the three bills under discussion are of 
particular interest with respect to protection of Oregon's fish and 
wildlife resources.
    Specific Concerns with S. 71 and subtitle C of title VII of S. 388: 
Although the goals of these two bills are laudable, I believe the 
provisions of the bills will create inefficient use of government 
resources and will result in undesirable reductions in natural resource 
protection.
    As an example of the inefficiency the bills will produce, one 
section requires that agencies such as NMFS and USFWS consider diverse 
factors such as economic values, air quality, irrigation, and drinking 
water supply when writing license conditions. Unfortunately, these 
agencies have neither the expertise, nor the information required to 
evaluate such factors. There are other agencies who already have 
responsibility and expertise to evaluate and condition for those 
factors. For example, the Oregon Department of Environmental Quality 
has obtained federal delegation under both the Clean Air and Clean 
Water Acts to protect air and water quality. It is neither practical or 
useful for other agencies to make their own independent determinations 
concerning these issues during licensing.
    As another example of inefficiency, another requirement of these 
bills is that consulting agencies must take into account the mandatory 
conditions of other agencies. While this seems reasonable, the bills 
later add a process requirement that conditions be submitted to the 
applicant 90 days prior to the filing of a license application. At this 
point in the process agencies cannot know how the applicant proposes to 
operate the project under the new license, nor how it should best be 
conditioned. Agencies don't have enough information to determine their 
own conditions--much less to conform them to other agencies' mandatory 
conditions. The likely outcome is that conditions would have to be 
written and fully justified twice, creating extra work with little 
payoff.
    In addition to the above-mentioned problems, the two bills will 
result in inadequate protection of natural resources. By requiring 
federal resource agencies to meet untenable process standards and to 
base their conditions on a balance of factors outside their expertise 
and traditional jurisdiction, the bills will greatly diminish those 
agencies' ability to write defensible conditions. Defensible conditions 
are important for a number of reasons, including the fact that the 
bills provide that these conditions may be contested by the applicant 
to an outside reviewer. The difficulty is compounded by a stipulation 
in the bills that if the outside reviewer does not act within 180 days, 
the conditions lose their mandatory character and may be regarded as 
discretionary by FERC. Because the resource agencies have no ability to 
ensure timely action on the part of the external reviewer, this is a 
serious loophole.
    When the process requirements of S. 71 and S. 388 are combined with 
their focus on economics, the bills effectively remove the natural 
resource protection floor provided by ECPA, and reduce the ability of 
agencies to balance the burden of resource protection across sectors, 
leaving others to repair damage caused by the hydropower industry. 
Where this damage can't be repaired, it may deprive future generations 
of the opportunities and quality of life that is their proper heritage.
    S. 71 and subtitle C of title VII of S. 388 have other troubling 
provisions. This document doesn't address them all, but presents two 
science issues as further examples: 1) the bills require that agencies 
base their conditions on ``current empirical data or field-tested 
data.'' This limitation precludes use of historical data and 
statistically modeled projections and is therefore inconsistent with 
good science. Good science makes use of all accurate data and available 
statistical tools. 2) The requirement that conditions be subjected to 
peer review is unrealistic and unnecessary. ``Peer review'' normally 
refers to the process a scientific article goes through before being 
published in a scientific journal. In order to meet this requirement, a 
whole new consulting industry would be needed. Such review would be 
costly and would delay issuance of licenses. The review is not needed, 
because review is already provided within agencies and among the 
parties to licensing processes.
    Comments on S. 597, The Comprehensive and Balanced Energy Policy 
Act of 2001: The two process changes made by this bill should minimize 
generation and revenue losses, help agencies better perform their jobs, 
and give a boost to some rural economies.
    The provision that allows applicants to contest a condition that 
they believe is inefficient to the agency that prescribed the condition 
has several merits. It retains authority in the agency where the 
expertise and responsibility resides, provides an avenue to ensure that 
project improvements are made as inexpensively and efficiently as 
possible, and ensures that improvements are adequate to meet resource 
protection standards. However, I would like to propose one slight 
amendment: In order to provide the prescribing agencies with the 
information they need to make scientifically sound decisions on 
alternative measures, such as alternative fishways, I recommend that S. 
597 be amended to include the language in H. 2587, which requires the 
applicant to provide supporting evidence to the prescribing agency when 
an alternative is proposed: Additionally, I recommend that this section 
clarify that supporting information should be provided during the pre-
filing consultation process currently in place under FERC rules. These 
changes are consistent with the Federal Power Act, in that applicants 
are required to conduct studies necessary for determining appropriate 
mitigation for project impacts at licensing.
    The provision that directs fees paid to FERC away from the general 
Treasury, and to the agencies that work on the projects should increase 
the ability of agencies to participate early and adequately in 
licensing processes. The authority granted to spend some of the funds 
on job training, and for rural community and project-environment 
improvements should further the effectiveness of dollars spent on 
mitigation.
    The provision that requires FERC to gather more information should 
prove useful. However, I suggest that the data for collection include 
characterization of the reason for delays associated with Clean Water 
Act compliance. FERC's 603 Report identified issuance of Clean Water 
Act Section 401 Certificates as a major source of delay in the 
licensing process. Apparently, FERC did not investigate the reason for 
the reported delays, but attributed them to state requests that 
applicants withdraw and refile their applications.
    In fact, the idea that applicants withdraw their Clean Water Act 
certifications to give states more time to act is both 
counterintuitive, and contrary to our experience. In a comment letter 
to FERC during the development of the report, the Oregon Department of 
Environmental Quality expressed frustration with the fact that the 
State has no recourse when applicants withdraw and refile their 
applications for certification. The letter also mentioned that of the 
[then] five applications for 401 Certification received by the State in 
the current relicensing class, all have been incomplete. Two were 
withdrawn at the applicant's initiative to serve the applicant's 
purposes, and two were denied because of incompleteness. One 
application has been withdrawn and resubmitted twice. The (third) draft 
of that application was acknowledged by the applicant to be incomplete 
upon submittal.
    There is a need to determine whether delayed issuance of 401 
Certifications is due to applicant failure to provide necessary 
information in a timely manner, or whether states are the cause of the 
delay. Once this information is known, further analysis will be needed 
to determine the reasons for the delays, regardless of the degree to 
which various parties are responsible.
    Finally, I'd like to note that asking FERC to identify and solve 
problems with the licensing process when FERC is a key player in that 
process is less than desirable. I believe that the task would be better 
assigned to an outside agency with expertise in program evaluation such 
as the General Accounting Office, and that the timeframe for the study 
should be increased to one year to allow for a more thorough analysis. 
The study would be even further enhanced if state agencies were listed 
among those to be consulted during study development.
                                 ______
                                 
 Statement of Dr. William T. Hogarth, Acting Director, National Marine 
  Fisheries Service, National Oceanic and Atmospheric Administration, 
                         Department of Commerce
    This Statement provides the views of the National Oceanic and 
Atmospheric Administration (NOAA) on S. 71, the Hydropower Licensing 
Process Improvement Act of 2001, and S. 597, the Comprehensive and 
Balanced Energy Policy Act of 2001. It also provides recommendations 
for legislation to improve the hydroelectric relicensing process.
 role of the national oceanic and atmospheric administration (noaa) in 
                         hydropower relicensing
    The National Oceanic and Atmospheric Administration, via the 
National Marine Fisheries Service (NOAA Fisheries), is responsible for 
conserving and managing anadromous and marine fish resources and their 
habitats, in accordance with several statutes, as discussed briefly 
below.
    The Federal Power Act (FPA) provides the Secretaries of the 
Interior and Commerce with the authority to prescribe fishways at 
hydropower projects licensed by the Federal Energy Regulatory 
Commission (FERC), and provides NOAA Fisheries, FWS, and state resource 
agencies with the authority to submit recommendations for fish and 
wildlife habitat protection. The Magnuson-Stevens Fishery Conservation 
and Management Act requires Federal agencies to consult with NOAA 
Fisheries if their actions may adversely affect essential fish habitat. 
The Fish and Wildlife Coordination Act requires Federal agencies to 
consult with NOAA Fisheries and FWS if their action modifies a water 
body. The National Environmental Policy Act provides a mechanism that 
enables NOAA Fisheries, other resource agencies, and other stakeholders 
to provide comments on Environmental Assessments and Environmental 
Impact Statements prepared for hydropower project licensing decisions. 
Finally, the Endangered Species Act requires Federal agencies to 
consult with NOAA Fisheries or FWS if their action may affect listed 
species or their habitats.
           hydropower effects on fish and associated habitat
    Although hydropower is cleaner than fossil fuel and nuclear power, 
it is not free from adverse environmental effects, and can have 
significant impacts on anadromous fish and their habitats. Pacific and 
Atlantic salmon, shortnose sturgeon, American shad, and many other fish 
species depend on access to upriver habitat to complete their 
lifecycles. Habitat alteration, impeded fish passage, degraded water 
quality, and compromised flows are significant adverse effects of dams 
on river systems.
    Many dams were constructed before their effects on river systems 
were fully understood, and before key environmental laws were in place. 
Many lack adequate fish passage and other environmental protection 
measures, and will have to come into compliance with current 
environmental laws and FPA mandates upon relicensing. Fortunately, 
these impacts can-be greatly reduced by including state-of-the-art fish 
passage facilities and other measures to ensure adequate resource 
protection. Given the large number of license expirations in the next 
decade, there is an unparalleled opportunity to modernize projects and 
provide fish and habitat protection measures.
                         national energy policy
    The new National Energy Policy provides recommendations to the 
White House and Congress to improve hydropower licensing, and addresses 
issues that relate to NOAA Fisheries' role in the licensing process. 
The Department agrees that the process can be improved, and has worked 
to develop administrative reforms and legislative recommendations to 
achieve a better, more efficient licensing process. These reforms are 
discussed below.
                     recent administrative reforms
    NOAA Fisheries has been working with FERC, other Federal resource 
agencies, and stakeholders to streamline and improve the hydropower 
relicensing process. These efforts include participating in the 
Interagency Task Force to Improve Hydropower Licensing Processes (ITF), 
developing a proposed interagency policy on section 18 Fishway 
prescriptions, and participating in the National Review Group (NRG) of 
the Electric Power Research Institute (EPRI). Through these cooperative 
efforts, we have made considerable changes to the process that will 
improve hydropower relicensing.
Interagency Task Force to Improve Hydropower Licensing Processes
    The ITF was formed in October 1998 to develop practical ways to 
improve the licensing process. It was a coordinated effort between 
FERC; the Departments of Commerce, the Interior, Agriculture, and 
Energy; the Environmental Protection Agency; and the Council on 
Environmental Quality. Seven ITF reports recommend substantial 
administrative measures to make hydropower licensing more efficient. 
The Department of Commerce (Department) has committed to implementing 
these reforms, as have the other member agencies. Federal agencies held 
a series of implementation workshops throughout the country, and 
continue to ensure that the reforms are administered agency-wide.
Section 18 Fishway Interagency Initiative
    On December 22, 2000, The Departments of Commerce and the Interior 
published a proposed Interagency Policy on section 18 fishway 
prescriptions. NOAA Fisheries and the Fish and Wildlife Service are 
continuing to work on this document which will provide clearer guidance 
for the prescription process and improve consistency between the 
Departments of Interior and Commerce.
Electric Power Research Institute National Review Group (NRG)
    The NRG is a working group consisting of representatives from the 
hydropower industry, environmental interests, states, FERC, and four 
Federal agencies (NOAA, EPA, USDA, and DOI). During 1999 and 2000, this 
group met regularly and developed a report, ``Hydro Relicensing Forum: 
Relicensing Strategies,'' that provided a set of voluntary best 
practices for all stakeholders in hydropower relicensing. The NRG is 
proceeding with a new phase of meetings to pursue further collaborative 
means of improving the licensing process.
                   noaa comments on s. 71 and s. 597
    S. 71 and S. 597 contain several provisions that would affect the 
way NOAA Fisheries takes part in licensing and relicensing by FERC of 
non-federal hydropower projects. Some provisions are already addressed 
by administrative reforms, some represent positive steps toward an 
improved relicensing process, and others would add delay to the 
process. Listed below are common themes in the bills.
Alternative Fishways
    Section 701 of S. 597 allows licensees to propose an alternative 
fishway prescription, and directs the Secretary of the appropriate 
Federal agency and FERC to accept the alternative, if the Secretary 
determines that it provides equal or greater fish passage, is based on 
sound science, and will either cost less to implement or result in less 
loss of generating capacity than the fishway prescription deemed 
necessary by the Secretary. The Department recommends that the licensee 
proposing the alternative fishway be required to provide substantial 
evidence supporting the alternative fishway. Supporting evidence is 
necessary to allow the Secretary to make a reasoned decision. In 
addition, the Department recommends that the licensee be required to 
submit alternative prescriptions early in the pre-filing stage, and no 
later than 60 days following submission of preliminary prescriptions. 
This would prevent a situation in which the Department, the licensee, 
FERC, and other parties spend years developing a fishway prescription 
only to have that work negated by an alternative presented late in the 
process. Further, the bill text should be changed to indicate that it 
would be an applicant, not necessarily a licensee, submitting the 
alternative fishway. The Department also notes that the ITF 
administrative reforms already commit NOAA Fisheries to considering the 
least cost alternative, if it provides adequate fish passage.
Deadlines
    S. 71 imposes deadlines and penalties that may have detrimental 
effects on NOAA trust resources. Section 4 removes NOAA Fisheries' 
authority to prescribe fish passage if NOAA Fisheries misses a deadline 
for submitting final conditions. Although a lack of reasonable 
deadlines often leads to delay in the licensing process, NOAA Fisheries 
believes that this severe penalty is not productive to the process and 
ultimately compromises the health of fish and habitat resources. The 
Department has nothing to gain by missing deadlines and, in fact, the 
longer a licensing proceeding takes, the longer the fish and associated 
habitats are without protections.
Relicensing Study
    Section 703 of S. 597 requires FERC to conduct a study of all new 
licenses issued for existing projects since January 1, 1994. NOAA 
Fisheries supports this provision but suggests that the data gathering 
should continue beyond one year to ensure accurate and useful data 
reporting. We also suggest that FERC develop the study methodology in 
consultation with the Federal resource agencies. This data could be 
used in the future as a basis for modifying the licensing process to 
increase efficiency and decrease cost. The General Accounting office 
noted that FERC's record keeping and reporting mechanisms are 
inadequate, and section 703 could greatly improve the current system of 
maintaining records.
Coordinated Environmental Review Process
    Section 33 of S. 71 establishes a single National Environmental 
Policy Act (NEPA) process, to be conducted by FERC, and bars consulting 
agencies from performing individual NEPA reviews. NOAA Fisheries 
supports a single, consolidated NEPA review, and already relies on 
FERC's NEPA analysis that includes our recommendations and fishway 
prescriptions. The Department would like to have the option of being a 
cooperating agency with FERC. However, FERC's interpretation of its ex 
parte communication requirements concludes that by becoming a 
cooperator in the NEPA process, an agency forfeits its right to appeal 
a license decision. NOAA Fisheries believes that FERC should be 
provided with a legislative exemption from ex parte communication 
prohibitions, for the specific case of allowing agencies to become NEPA 
cooperators without losing their right to appeal licensing decisions. 
This would improve the entire licensing process by allowing a 
collaborative approach.
                noaa fisheries proposals for legislation
    NOAA Fisheries submits the following recommendations for 
legislation to improve the licensing process. As stated previously, 
NOAA Fisheries has already implemented several administrative reforms 
that make a better, more efficient licensing process, and recommends 
the following legislative measures to further improve the process and 
encourage more efficient utilization of our natural resources.
1. NEPA cooperator/intervenor status
    Participation of the resource agencies as cooperators in NEPA 
development would improve the relicensing process by 1) allowing FERC 
and other resource agencies to work together on resource protection 
issues, 2) decreasing the likelihood of future intervention and/or 
appeal by cooperating agencies, and 3) making the relicensing process 
more efficient.
    FERC interprets its ex parte rules such that Federal agencies 
cooperating on developing NEPA documents are precluded from intervening 
in the proceeding for which the NEPA document is developed. To preserve 
the right to subsequent appeal, Federal agencies currently choose to 
not participate in the NEPA process as a cooperating agency.
Recommendation
    NOAA Fisheries recommends amending the Federal Power Act section 
797(c) by adding the following to the end of the paragraph, ``Any work 
with the executive departments and agencies of the federal government 
as cooperating agencies on an environmental assessment or environmental 
impact statement in the NEPA process, developed pursuant to the 
National Environmental Policy Act, is exempt from ex parte 
communication prohibitions. Executive departments and agencies of the 
federal government may become NEPA cooperators without losing their 
right to intervene and appeal licensing decisions.''
2. Deadlines
    FERC's regulations implementing the Federal Power Act provide a 
number of deadlines for participants in the licensing process. However, 
FERC itself has no deadlines, which often causes delay in the process. 
The National Energy Policy specifically encourages FERC to adopt 
internal deadlines. Particular areas of concern for resource agencies 
include lack of a deadline for completion of the final environmental 
analysis or environmental impact statement, and lack of a deadline for 
FERC to complete its analysis of requests for rehearing.
Recommendation
    NOAA Fisheries recommends that Congress require FERC to promulgate 
regulations that provide deadlines for itself.
3. Annual licenses
    FERC's ability to easily issue annual licenses contributes to delay 
because there is little incentive for an applicant to complete the 
licensing process by the time the old license expires. These annual 
licenses have no new conditions for resource protection and are merely 
extensions of the expired license. Delays may postpone the costs of 
implementing new resource protection measures, but harm fish and 
associated habitat, and increase uncertainty for all involved.
Recommendation
    NOAA Fisheries recommends that Congress require FERC to amend its 
regulations to place strict limits on the issuance of annual licenses. 
Specifically, FERC should develop guidelines to determine situations in 
which there is a demonstrated need to grant an annual license. These 
situations could include new information becoming available, a need to 
provide a supplemental environmental analysis or environmental impact 
statement, or other circumstances beyond the control of the applicant. 
In addition, NOAA Fisheries recommends that Congress provide the 
appropriate resource agencies authority to provide interim mandatory 
conditions in annual licenses, for resource protection purposes. These 
interim conditions should be measures that require minimal capital 
expenditures, such as minimum stream flows, or other measures to 
protect fish and associated habitat.
4. Studies
    Disagreements between NOAA and applicants about studies are a major 
source of delay. NOAA has committed, via the ITF documents, to provide 
a clear link between study requests, project impacts, and resource 
management goals and objectives; and to take cost into consideration.
Recommendation
    NOAA recommends that Congress require FERC to amend its prefiling 
regulations to require applicants to conduct requested studies in a 
timely fashion, if NOAA Fisheries and other agencies submit study 
requests that provide a clear nexus between studies, project impacts, 
and resource management goals and objectives.
                               conclusion
    The hydropower licensing process is complicated, and can take years 
to complete. An abundance of license expirations in the next several 
years demands that the process become efficient and effective for all 
stakeholders. Administrative and appropriate legislative reforms such 
as those outlined above can create an efficient and effective process. 
Additionally, incentives to replace older power generating units with 
new energy efficient ones should help increase power production with no 
harm to the environment.
    Thank you for the opportunity to provide testimony on these 
important issues.
                                 ______
                                 
 Statement of Donald Sampson, Executive Director, Columbia River Inter-
                  Tribal Fish Commission, Portland, OR
    Thank you for the opportunity to offer testimony regarding Senator 
Bingaman's hydroelectric relicensing bill, S. 597, and Senator Craig's 
hydroelectric relicensing bill, S. 71. My name is Donald Sampson; I am 
the Executive Director of the Columbia River Inter-Tribal Fish 
Commission (CRITFC) in Portland, Oregon. I believe we share common 
desires to find solutions to our national energy problems that are 
affordable and environmentally sound. The CRITFC tribes are developing 
a tribal energy vision and have the expertise and the resources 
available in the Northwest to alleviate the region's energy shortages. 
Additionally, tribes and tribal lands across the nation hold vast 
resources and stand ready to offer solutions to the nation's energy 
problems. At the same time, the tribes are prepared to be good stewards 
of the land and plan for the long-term sustainability of the national 
economy through wise energy planning.
    Formed by resolution of the Nez Perce Tribe, the Confederated 
Tribes of the Umatilla Indian Reservation, the Confederated Tribes of 
the Warm Springs Reservation of Oregon, and the Confederated Tribes and 
Bands of the Yakama Nation, the Columbia River Inter-Tribal Fish 
Commission provides coordination and technical assistance to ensure 
that the resolution of outstanding treaty fishing rights issues 
guarantees the continuation and restoration of our tribal fisheries 
into perpetuity. Since 1979, CRITFC has contracted with the BIA under 
the Indian Self-Determination Act (Public Law 93-638) to provide this 
technical support. The tribes' technical experts have identified where 
federal and state resource managers have fallen short in protecting and 
restoring the habitat and production of all salmon stocks. Wy-Kan-Ush-
Mi Wa-Kish-Wit, the Spirit of the Salmon, the tribes' restoration plan, 
the only gravel-to-gravel salmon restoration plan in the Columbia 
Basin, identifies threats to salmon, proposes hypotheses based upon 
adaptive management principles to address those threats, and provides 
specific recommendations and practices that must be adopted by natural 
resource managers to meet treaty obligations. Wy-Kan-Ush-Mi Wa-Kish-Wit 
can be viewed at www.critfc.org. These four tribes have rights reserved 
by treaty with the United States of America \1\ to take fish destined 
to pass the tribes' usual and accustomed fishing places. This right 
covers fish originating in the Columbia River Basin. Protection and 
enhancement of those streams that provide spawning and rearing habitat 
and migration corridors for these fish are of critical importance to 
the tribes and the region. The CRITFC provides technical and legal 
support to the tribes to carry out those goals.
---------------------------------------------------------------------------
    \1\ Treaty with the Yakama Tribe, June 9, 1855, 12 Stat. 951; 
Treaty with the Tribes of Middle Oregon, June 25, 1855, 12 Stat. 963; 
Treaty with the Umatilla Tribe, June 9, 1855, 12 Stat. 945; Treaty with 
the Nez Perce Tribe, June 11, 1855, 12 Stat. 957.
---------------------------------------------------------------------------
    In 1855, the United States entered into treaties with the Nez Perce 
Tribe, the Confederated Tribes of the Umatilla Indian Reservation, the 
Confederated Tribes of the Warm Springs Reservation of Oregon, and the 
Confederated Tribes and Bands of the Yakama Nation to ensure the mutual 
peace and security of our peoples. For the four tribes' cession of 
millions of acres of land, the United States promised to protect and 
honor the rights and resources the tribes reserved to themselves under 
those treaties. Those resources, among them our most treasured 
resource, the salmon, are being destroyed largely by hydroelectric 
projects on the Columbia and Snake Rivers. The salmon are also 
imperiled by relicensing processes at those dams that seek to delay 
necessary environmental analysis and changes to hydro structures and 
operations under the Federal Power Act. Existing license holders, who 
use process and delay to shortchange environmental protections 
necessary to insure the continued existence of salmon, are trampling 
upon our rights, our culture and our religious beliefs that are tied to 
the salmon.
    The Treaty Tribes grow weary when our expertise to protect our 
treaty resource is ignored, when our input in public processes is 
ignored, when our negotiations lead to settlements and those 
settlements are ignored, when our good faith efforts to cooperate and 
participate in decision-making forums are ignored, and when the 
treaties signed by the U.S. Government are ignored in order to protect 
the unreasonable economic interests of dam owner/operators. The 
Columbia River Treaty Tribes will strongly oppose any effort to 
expedite the dam relicensing process that will lessen environmental 
analysis and protection of salmon at hydro projects as well as any 
effort to diminish tribal and public input during relicensing. The 
Columbia River Treaty Tribes will oppose any effort to cripple the 
jurisdiction of the federal agencies that have the trust responsibility 
to protect reservation lands and fish and wildlife through mandatory 
license conditions. Any compromise of the Department of Interior's 
authority under Section 4(e) of the Federal Power Act to protect 
reservation lands and treaty resources will obstruct the obligation of 
the United States to ``secure'' our treaty rights. Any compromise of 
fish and wildlife agencies' authority under Section 18 of the Federal 
Power Act to prescribe fishways to protect treaty resources will also 
be seen as an attempt to interfere with our treaty rights. Reducing 
cost and time in relicensing at the expense of the public, the natural 
resource or the federal agencies with jurisdiction will be seen as an 
abrogation of duty and the treaties entered into between the tribes and 
the United States government.
    With that being said, the CRITFC tribes are developing a Northwest 
Tribal Energy Vision that will simultaneously provide the region with 
affordable energy solutions while taking energy policy and development 
off the backs of salmon and off the Columbia and Snake Rivers. Our 
energy solutions complement the national recommendations of the Inter-
Tribal Energy Network. Tribes currently have twenty percent of the 
Nation's energy resources on their lands. However, on average, tribal 
citizens spend more of their income on energy, have the highest 
percentage of homes without electricity, have the least control over 
quality of service, and are experiencing two to three times the 
national population growth. Northwest Treaty Tribes, along with the 
aforementioned impacts, are losing their treaty-reserved salmon 
resources to poor energy planning and policy.
    Through the national Inter-Tribal Energy Network, draft legislation 
has been introduced that will help the nation address its energy 
shortages through development of tribal energy resources that are cost 
effective and offer opportunities for joint partnerships; will help 
tribes serve tribal members with reliable energy; will foster economic 
development on tribal lands and promote sovereignty and self 
sufficiency. The draft legislation envisions establishing an Office of 
Indian Energy in the Department of Energy. Critical to this 
recommendation is significant funding made available to the Office of 
Indian Energy for tribes to ascertain their energy resources and the 
best way to develop those resources. Also vital is the ability to bring 
resources on-line in an expedited fashion using interagency cooperation 
while protecting environmental quality.
    The Northwest Tribal Energy Vision is premised on the idea of 
promotion of energy development that will serve Northwest energy needs 
while protecting the tribes' treaty-reserved resources. It allows for 
faster siting of projects with enhanced value on tribal lands; allows 
for distributed generation opportunities to meet rural loads; allows 
for opportunities for transmission siting on tribal lands; and 
addresses key fundamental concepts to protect the tribes' treaty 
rights. Energy policy and development must not continue to diminish the 
tribes' treaty-reserved resources. Energy policy and development must 
get off the Columbia and Snake rivers. Energy policy must get off the 
backs of salmon. Our treaty-reserved resources continue to be 
sacrificed for the sake of bad energy planning.
    The current energy problem exists because of poor planning. Poor 
planning has pushed salmon to the brink of extinction and will cause 
further environmental degradation. Salmon's rapid decline has been 
known for decades and yet new energy development to meet demand has 
lagged. Substantial generation in California has been curtailed in 
order to drive up prices, but it could alleviate immediate pressures to 
run the Columbia River without regard to salmon if that generation was 
made available at a reasonable price. The lack of adequate 
precipitation is always a potential limiting factor and contingencies 
have not been developed to adequately mitigate for that risk. As 
American Rivers has so aptly pointed out in their testimony, the facts 
simply don't support FERC's claims that there is either an energy 
crisis or a hydroelectric relicensing crisis. We must not lose the 
protections built into our system of laws to care for our public 
resources. The current hydroelectric relicensing bills would cast aside 
the public resource protections that have served us well for decades.
    The tribes are concerned that the hydroelectric power industry is 
not availing itself of the opportunities during relicensing to make 
their projects more responsive to the public interest. There are 
innovations that will both protect our waterways and deliver power, but 
the industry seems more intent on maximizing their profits at the 
expense of the public resource. Congress must take into account the 
needs of the public waterways to remain healthy, to protect the public 
trust, to respond to the nation's need for a diverse energy plan and 
the federal government's responsibility to honor its treaties to the 
Columbia River Treaty Tribes. Congress must not maximize the profits of 
the hydro license holders at the expense of our nation's public 
waterways; must not maximize the profits of an industry that has made 
billions of dollars while paying no fee for the use of the public 
resource.
    The current hydro relicensing bills tend to focus on the resource 
agencies for costs and delays in the relicensing process. The bills 
tend to consolidate authority with FERC. FERC's claimed ability to 
assume the authorities of the resource agencies is unsupported by 
recent analysis by the GAO and counter to the reasoning for mandatory 
conditioning authority set forth in the Federal Power Act (FPA). It 
also abolishes the system of checks and balances necessary within our 
system of government to protect the public interest and consolidates 
the authority within an agency that often takes little notice of 
petitions, complaints, comments, analyses and dialogue. The FERC does 
not have the expertise of the resource agencies to determine conditions 
for hydro licenses.
    While we often talk specifically about salmon and the Northwest, 
our input can be generalized to the entire nation; the future direction 
of hydropower raises fundamental questions concerning the health of our 
public waterways. We must make extremely careful decisions today, as 
they will affect us for the next 50 years and beyond. We risk losing 
important species as a result of our decisions. We risk losing our 
heritage as a result of decisions made today. We are asking for vision, 
for forward-looking farsightedness. We are rushing headlong into public 
resource over-appropriation in the guise of so-called wise economic 
use. This over-appropriation only serves to set up frustration among 
competing users, leads to depletion and exhaustion of the public 
resource, causes environmental degradation for which mitigation 
measures are inadequate, and denies significant benefits to future 
generations.
    In our treaties--signed by the United States and ratified by this 
body, the Congress--our tribes were promised the right to fish for 
salmon now and forever into the future. Yet we are currently faced with 
amendments to the FPA which give unreasonable influence to those that 
can afford to stack the record for decsionmaking in their favor by 
using exorbitant financial resources and self-interested lobbying 
efforts. This does not protect the public resource or our treaties. The 
current bills offered by Senators Bingaman, Craig and Murkowski provide 
for less protection of public resources while hamstringing the federal 
agencies that are charged with protecting those public resources.
    States and federal agencies are in the field where the dams are and 
have the expertise necessary to protect the public resources in their 
charge. These agencies should be better funded to provide the input 
necessary under the law. Their responsibilities are outside of FERC's 
area of expertise. Shifting their authorities to FERC would concentrate 
decisionmaking in Washington, D.C., instead of in the states where the 
dams exist, and it would preclude open and honest discussions in local 
communities. If anything, the FPA should be amended to allow for more 
balanced competition for hydro licenses. Competition for licenses 
should award the entity that is the most able and willing to protect 
the public's resources in the long run while providing cost-effective, 
reliable power.
                           specific comments
Senator Craig's Bill, S. 71
    Despite continued voluntary fishery closures and reductions by the 
tribes, and significant reductions in the other ocean and in-river 
fisheries, anadromous fish stocks continue to decline. Recent analysis 
by the National Marine Fisheries Service indicates the Mid-Columbia 
River stocks are declining at a rate similar to the Snake River stocks. 
Snake River stocks are projected to be functionally extinct by 2016. 
That is only three or four life-cycles away. Many of the stocks in the 
Columbia River Basin are listed under the Endangered Species Act as 
threatened or endangered. Many more stocks are on their way to being 
listed under the ESA. A number of stocks have already gone extinct. 
Dams on the Columbia and Snake Rivers and tributaries have been and 
continue to be the major factor in this decline. While hydropower has 
brought energy benefits to the country, there was very little foresight 
as to the environmental consequences when the dams were built. Dams 
cause significant damage to aquatic and riparian environments by 
altering the physical, chemical and biological processes of river 
systems. We have learned much since these dams were first licensed. And 
now that dams are in the relicensing cycle, we must apply what we have 
learned to make the dams more suitable to what we now understand. S. 71 
will make it more difficult, if not impossible, for federal and state 
agencies to ensure that the operators of hydroelectric power facilities 
adequately mitigate for or minimize their impacts.
Section (b). Factors to be considered
    S. 71 attempts to redefine the public interest standard articulated 
in the Federal Power Act and by the Supreme Court \2\ in Sections 
(b)(1) A, B, and C. These sections fall short of the recognized public 
interest standard, mentioning only that the consulting agency must 
consider the impacts of the condition on economic and power values, 
electric generation capacity and system reliability, air quality 
(including consideration of the impacts on greenhouse gas emissions), 
and drinking, flood control, irrigation, navigation, or recreation 
water supply. Conspicuously missing from this list are many of the 
resources for which the resource agencies are required to protect by 
law. Project applicants are not required to report economic information 
about their projects. How will a resource agency measure economic 
impacts of their conditions without economic project information? The 
answer is that the analysis will be meaningless. S. 71 does not mention 
the original purposes of Sections 4(e) and 18 of the FPA; to protect 
and utilize reserved lands and to ensure that fish can pass and survive 
hydroelectric projects. These proposed amendments would require the 
resource agencies to ignore the resource they are required to protect 
while obliging the agency to look more closely at the factors in 
Sections (b)(1) A, B, and C. The consulting agencies would be required 
to do more process in areas where they do not necessarily have 
expertise. This would expend precious financial resources in a time 
when agencies are already underfunded.
---------------------------------------------------------------------------
    \2\ Udall v. Federal Power Commission, 387 U.S. 428 (1967). ``The 
test is whether the project will be in the public interest. And that 
determination can be made only after an exploration of all issues 
relevant to the `public interest,' including future power demand and 
supply, alternate sources of power, the public interest in preserving 
reaches of wild rivers and wilderness areas, the preservation of 
anadromous fish for commercial and recreational purposes, and the 
protection of wildlife.'' Udall, at 450.
---------------------------------------------------------------------------
    Then S. 71 would require the FERC to do the same analysis if 
requested by the applicant under Section (h)(1). The public interest 
standard would be based on (b)(1) Sections A, B, and C and not on the 
original meaning of the public interest standard as defined by the 
Supreme Court. This would result in duplication of effort, waste of 
resources, and a fundamental shift from protecting natural resources to 
protecting the hydropower owner's financial opportunities.
    It would also undermine the purpose of Section 100) of the FPA. S. 
71 would require FERC to balance recommendations made by state and 
federal fish and wildlife agencies under 100) to protect, mitigate and 
enhance fish and wildlife and their habitat using the new public 
interest standard as described in sections (b)(1) A, B, and C. This is 
unacceptable.
    These provisions in S. 71 and similar bills in the House and Senate 
would change the FPA substantially so that the resource agencies could 
no longer protect the resource needs or trust responsibilities to the 
tribes and the public. The underlying resources must be protected and 
the FPA recognizes this. This bill would require undue procedural 
burdens on the resource agencies that would subordinate their statutory 
obligations under the FPA.
Section (b)(2). Documentation
    This section requires the consulting agency to create written 
documentation outlining how it has complied with Section (b) above. 
Courts have long held that mandatory conditions must be supported by 
substantial evidence in the FERC record. This renders Section (b)(2) 
unnecessary and duplicative. The Columbia River Treaty Tribes oppose 
this section.
Section (c). Scientific Review
    This section requires each mandatory condition to be based on 
current empirical data or field-tested and to be subjected to peer 
review. The addition of scientific review would produce further delays 
in an already lengthy process. It is also duplicative because the 
federal agencies presently consider results of peer reviews and base 
their decisions on the best available science. Additional review would 
be costly and time consuming. The federal agencies already directly 
involve applicants when developing fishway prescriptions. Applicants 
can provide their own scientific analysis and peer reviews and the 
federal agency gives that information appropriate consideration in 
final decisions. S. 71 would lengthen the process unnecessarily. The 
Columbia River Treaty Tribes oppose this section.
Section (e). Administrative Review
    This section would require the resource agency to submit their 
mandatory conditions to the applicant at least 90 days before the 
applicant has filed its application for a new license. This begs the 
question, how can agencies write license conditions for a project that 
has no application and how can the agency know when 90 days will run? 
Without an application on file, FERC will not have begun to scope their 
environmental analysis. This makes it unreasonable to require agencies 
to submit conditions at this stage of the process.
    The section also allows the applicant to obtain review by an 
Administrative Law Judge (ALJ) or other independent review panel to 
determine the reasonableness of a condition or whether the condition 
complies with the new public interest standard set forth in Section 
(b)(1) A, B, and C. The use of an ALJ or other independent reviewing 
body to determine the reasonableness of a proposed condition is 
inappropriate because they will not have the resource agencies' 
expertise nor the mandated authority to protect the resources under the 
FPA. Furthermore, it is infeasible for resource agencies to provide 
conditions 90 days before the applicant files for a license because the 
agency will not have the necessary information to make the proper 
conditioning decision. Of course, this would also mean the ALJ or 
reviewing body would not have information available on economic or 
energy values for the project as required in this section.
    Additionally, under this section, if the ALJ or reviewing body 
takes longer than 180 days to make a decision, this section states that 
FERC can treat the condition as a recommendation. This invites 
manipulation of the process by the applicant to overturn the resource 
agencies' mandatory conditioning authority. Fish passage measures would 
be frustrated in clear contradiction to the purpose of the Sections 
4(e) and 18 of the FPA as well as the public interest standard as 
recognized by the Supreme Court. The Columbia River Treaty Tribes 
oppose this section.
Section (f). Submission of Final Condition
    This section sets a deadline of up to one year for submission of 
mandatory conditions after FERC gives notice the license application is 
ready for environmental review. The deadlines imposed by this section 
do not take into account FERC's own NEPA analysis timelines. The result 
of FERC missing the deadline would affect the fishery resources 
negatively. A mandatory condition could not be finalized if FERC had 
not completed a draft NEPA analysis within the one year deadline and 
FERC's analysis is often delayed more than a year. Now, the resource 
agencies have the opportunity to modify prescriptions based on 
information developed during FERC's NEPA analysis. The deadlines 
imposed by this section would change this capability.
    Furthermore, the default option in (f)(3) would deny the consulting 
agency the ability to make mandatory conditions if the deadline is not 
met. Fishery resources could suffer considerably if deadlines beyond 
the control of the resource agency are not met. Again, this measure 
puts the burden on the resource and particularly fish and wildlife. 
This would encourage applicants to delay providing information to the 
resource agencies and increase the possibility of missing deadlines and 
causing default. The Columbia River Treaty Tribes oppose this section.
Section (g). Analysis by the Commission
    This section would require FERC to conduct economic analysis of 
each mandatory prescription to determine whether it would make the 
project uneconomic as well as require FERC under (g)(2) to measure all 
10(j) recommendations against the new public interest standard list 
proposed in (b) A, B, and C and the new scientific review in (c). This 
would require the resource agencies to duplicate analysis covered in 
FERC's NEPA analysis. While it is appropriate for the resource agencies 
to base their recommendations and conditions on their expertise, the 
resource agencies do not have access to the types of information that 
FERC applies to balancing. To require the resource agencies to comply 
with this section will deplete their already limited resources, 
duplicate effort, and require the agencies to go outside their area of 
expertise. The new public interest standard set forth in S. 71 does not 
comport with established Supreme Court law or with the FPA. The 
Columbia River Treaty Tribes oppose this section.
Section (h). Commission Determination of Effect of Conditions
    This section again contravenes the public interest standard as set 
forth in the FPA and by the Supreme Court. The ability of an applicant 
to request a determination that a mandatory condition meets the new 
public interest standard set forth in (b)(1) renders the broader public 
interest subservient to the needs of the owner. This is unreasonable 
and a threat to the resources the federal agencies are obligated to 
protect. The Columbia River Treaty Tribes oppose this section.
Section on Conforming and Technical Amendments
    This section amends Sections 4(e) and 18 of the FPA. This section 
is unnecessary because Sections 4(e) and 18 of the FPA should not be 
revised. To do so under S. 71 would be to reverse needed environmental 
regulation of hydropower projects and cripple the resource agencies' 
ability to protect the resources they are obligated to protect by law. 
The Columbia River Treaty Tribes oppose this section.
Coordinated Environmental Review Process
    This section mandates that FERC shall conduct a single consolidated 
environmental review and that the resource agencies shall not perform 
any environmental review performed by FERC. Resource agencies must 
conduct environmental analysis to determine the nature and 
applicability of the conditions they may impose. It is inappropriate to 
prohibit the resource agencies from performing any environmental review 
of the conditions they may require. The Columbia River Treaty Tribes 
oppose this section.
    This section also grants FERC the ability to set deadlines for 
submission of comments on the environmental documents. This section is 
unnecessary because the Council on Environmental Quality already 
provides deadlines for comments on NEPA documents.
Study of Small Hydroelectric Projects
    The FERC already has a procedure for streamlined review of small 
hydro projects. Where this section diminishes the role of the resource 
agencies it is unsupportable. Small hydro can have huge impacts on fish 
and wildlife and this section should not impair the resource agencies' 
ability to protect the natural resources within their responsibility.
                    senator bingaman's bill, s. 597
Section 701, Alternative Conditions
    The tribes are very concerned whenever jurisdiction is taken away 
from the federal agencies with mandatory conditioning authority or 
whenever more process is required of these federal agencies without the 
necessary funding or expertise to carry out the mandate. This provision 
would create excessive strain on the federal agencies to determine 
which alternative condition was best. This could produce significant 
delays in the relicensing process. It also creates the opportunity for 
entities with unlimited funds to manipulate the process with multiple 
alternative conditions that the federal agency would then have to, 
corroborate. This creates a situation of the haves overpowering the 
have nots. This would not protect the public resource or the public 
interest, only those that have the deepest pockets. The sound science 
provision would lead to confusion and litigation. The substantial 
evidence standard should be retained in all provisions of this law. In 
general, the tribes oppose this section.
Section 703, Resource Studies
    Determinations on which studies and information are necessary to 
make decisions under Sections 4(e) and 18 of the Federal Power Act 
should remain with the resource agencies empowered to protect the 
resource. These determinations should not be given to the FERC. The 
resource agencies have the expertise to protect the resources in their 
charge and the trust responsibility to protect tribal lands and 
resources.
Section 704, Joint Agency Procedures, Relicensing Study
    The tribes do not oppose this section per se. However, this study 
should not be used to change the nature and extent of the mandatory 
conditioning authority of the resource agencies. Current hydroelectric 
licensees have used the public waterways for decades and have reaped 
great financial benefit. Now that relicensing is taking place, it is 
time for evaluation of the public resource. Additional protective 
measures are necessary. The treaty resources of the CRITFC tribes need 
the protections promised under the Federal Power Act as carried out by 
their trustees, the federal resource agencies. Attempts to change this 
recognized duty is tantamount to abrogation of the tribes' treaty 
rights. As we have seen the tribes' and the public's resources 
decimated by hydroelectric projects, it is time we thought about 
shorter license duration with more flexible license conditions in order 
to protect the tribes' treaties and the public interest. It is time to 
change our heavy reliance on hydroelectric power and develop a more 
sensible, more diverse electric energy future that does not overburden 
our nation's waterways. The tribes are committed to planning for that 
future and have developed a Northwest Tribal Energy Vision for the 
Columbia River that can restore the health of our rivers while 
maintaining a reliable and affordable electric energy system. This kind 
of forward planning is possible in all regions of the nation. We would 
be glad to share this vision and planning with the Committee.
                               conclusion
    There is an existing statutory framework for hydroelectric dam 
relicensing that is sound and workable. S. 71 and S. 597 propose many 
``reforms'' that either do not make sense, elicit delay as a tactic by 
the applicant, create delay within the framework of the bill, create 
new unneeded procedural hoops, and take away authority and expertise 
from federal agencies. For these reasons, the Columbia River Treaty 
Tribes oppose S. 71 and S. 597. Wherever shortcomings may exist in the 
current process, solutions should be crafted administratively and with 
substantial public input. The federal government must protect the 
public resource of our waterways. Further degradation is unacceptable 
and will be vigorously opposed by the Treaty Tribes. Again, thank you 
for this opportunity to provide the views of the Columbia River Treaty 
Tribes on this proposed legislation; please contact me, staff at the 
CRITFC, or staff at one of CRITFC's member tribes for additional 
comments.
                                 ______
                                 
             Statement of the American Petroleum Institute
    The American Petroleum Institute is a national trade association 
representing 400 companies engaged in all aspects of the oil and 
natural gas industry. Our members have a unique perspective on the 
issue of potential climate change because of the unique role we play in 
society. First, we have been heavily involved in efforts to improve the 
energy efficiency of our operations and these efforts contribute to 
avoiding greenhouse gas emissions. Second, our members have significant 
experience at decision-making in highly uncertain environments with 
relatively long-time frames--not unlike the climate change issue. And 
third, our members are technological innovators and are actively 
involved in research and development on many new technologies that 
result in new efficiencies.
    Two central elements of the climate change issue are complexity and 
uncertainty. These elements are echoed in the recent report of the 
National Academy of Sciences, Climate Change Science: An Analysis of 
Some Key Questions. While this insightful report addressed a large 
number of specific aspects of the issue, a key finding for those with 
the difficult task of developing policy and legislation is the 
following:

          Because there is considerable uncertainty in current 
        understanding of how the climate system varies naturally and 
        reacts to emissions of greenhouse gases and aerosols, current 
        estimates of the magnitude of future warming should be regarded 
        as tentative and subject to future adjustments (either upwards 
        or downwards).

    The National Academy of Sciences also sought to ``articulate more 
clearly the level of confidence that can be ascribed to those 
assessments [of climate change] and the caveats that need to be 
attached to them. This articulation may be helpful to policy makers as 
they consider a variety of options for mitigation and/or adaptation.''
    Based on API's unique perspective and the cautions suggested by the 
National Academy of Sciences, we recommend these principles for a sound 
approach to the long-term issue of potential climate change:
   Advance scientific understanding of potential global climate 
        change in order to calibrate and adapt future policies 
        accordingly;
   Promote advanced, energy-efficient technologies and 
        sequestration options as part of a long-term, low-cost 
        strategy, without government selection of ``winners and 
        losers'';
   Remove regulatory impediments to the rapid adoption of 
        energy-efficient technologies and capital stock turnover;
   Identify and expand cost-effective, near-term voluntary 
        actions to mitigate greenhouse gas emissions;
   Avoid damage to economic growth posed by mandatory policies 
        involving unrealistic near-term emissions targets and 
        timetables or energy consumption taxes;
   Export advanced, energy-efficient technologies to the 
        developing world through financing incentives and reduced 
        export barriers, while protecting property rights;
   Promote global participation to address this challenge most 
        cost-effectively.
    Following these principles, common sense efforts should be able to 
identify a wide range of near- and long-term opportunities that address 
cost-effective methods to mitigate emissions, improve our understanding 
of climate science, and accelerate the research, development and 
dissemination of advanced energy technologies on a global basis.
    API and its members are already undertaking actions reflecting 
these principles. For example, in early 1999, in response to findings 
that there were wide variations in the ways that API member companies 
estimated greenhouse gas emissions data, API established a Greenhouse 
Gas Estimations Methodology Working Group to develop a consistent 
industry methodology.
    This extensive effort reached a milestone earlier this year when 
API published a new Compendium of Greenhouse Gas Emissions Estimation 
Methodologies for the Oil and Gas Industry. The Compendium was the 
result of intensive work by API and it member companies and documents 
calculation techniques and emission factors available for developing 
greenhouse gas emission inventories for carbon dioxide and methane. The 
estimation techniques cover the full range of oil and gas industry 
operations--from exploration and production through refining to product 
marketing--including emissions from transportation of crude oil, 
natural gas and petroleum products.
    This Compendium:
   Provides examples of the types of greenhouse gas emission 
        sources that should be considered in developing an inventory;
   Describes the segments of the oil and gas industry that 
        should be involved in developing an inventory and provides an 
        expansive list of potential emission sources for each industry 
        segment;
   Describes in general terms the calculation techniques that 
        can be used in developing an inventory and the technical 
        considerations pertaining to standard conditions and common 
        unit conversions;
   Presents specific methodologies that can be used for 
        developing an inventory, with extensive exhibits to demonstrate 
        preferred and alternative calculation methods; and
   Provides case studies, using the methodologies provided to 
        develop illustrative inventories for typical oil and gas 
        industry facilities.
    A copy of the Compendium is attached * to this submission and 
demonstrates the scope and complexity of the oil and gas industry 
efforts to estimate emissions at the facility and company level. The 
Compendium is available in paper and CD-ROM versions and is currently 
in a one-year test phase. Based on the results of that test phase, the 
Compendium may be revised if necessary. To our knowledge, this is the 
first industry-wide, detailed effort of its kind.
---------------------------------------------------------------------------
    * Retained in committee files.
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    API member companies are also undertaking a wide variety of actions 
to address potential climate change issues. Among the many actions our 
members are undertaking are the following:
   Participation in a variety of government programs such as 
        Natural Gas STAR for operational efficiencies, Vision 21 for 
        ultra-clean integrated energy plants, and Energy Star Buildings 
        program to improve commercial building efficiency.
   Research options for handling quantities of associated 
        natural gas that is produced where there is no market for the 
        gas. Alternatives to venting and flaring include conversion to 
        liquids as well as reinjection.
   Expanding corporate energy management programs and 
        institutionalizing efficiency efforts company-wide.
   Undertaking co-generation technologies at refineries and 
        similar facilities to generate electricity and process heat/
        steam simultaneously for substantial increases in efficiency.
   Research and testing of geologic sequestration of carbon 
        dioxide to verify under what circumstances carbon dioxide 
        storage is safe and reliable.
   Capturing carbon dioxide from the production of synthetic 
        natural gas from lignite and using it for reinjection to 
        enhance oil recovery while reducing carbon emissions.
   Supporting projects that use forests to sequester carbon 
        dioxide and simultaneously provide a wide range of other 
        environmental and ecological benefits.
   Providing funding for expansion of fundamental research on 
        climate change.
   Undertaking research and development projects for more 
        efficient capture of carbon dioxide from turbine exhaust, plus 
        sequestration options for carbon dioxide.
   Undertaking basic research on fuel cells to significantly 
        increase automotive efficiency and reduce greenhouse gas 
        emissions.
   Supporting research on other automotive technologies such as 
        direct-injection diesel.
   Undertaking research, development and marketing of renewable 
        technologies like solar power and geothermal power.
    We note that API's recommended principles for climate policy and 
the many actions being taken by API and its members include 
similarities to provisions of the proposed legislation being addressed 
by this Committee. For example, one provision seeks federal agency 
review of regulations and standards to determine if they act as 
barriers to market entry for emerging energy-efficient technologies 
such as fuel cells, combined heat and power, or distributed generation. 
Another provision supports research and development efforts to improve 
the efficiency and safety of natural gas transportation and 
distribution, and for distributed energy resources. Another looks 
closely at forest resources and carbon sequestration, including the 
methodologies for reporting, monitoring and verifying voluntary carbon 
storage activities. Finally, another would seek better information and 
understanding of the costs of different options to mitigate U.S. 
greenhouse gas emissions, particularly those that are cost-effective, 
voluntary and technologically feasible.
    Climate change is an issue of extreme complexity and uncertainty. 
It involves our evolving understanding of natural climate and man's 
potential impact on climate, and unknowables about population levels, 
standards of living, technologies and energy supplies, not just in the 
U.S. but globally--and not just in the next 10 or 20 years, but 100 or 
more years into the future. Finding an approach that promotes a 
flexible and creative global path, without locking-in excessive short-
term costs, is a tremendous challenge. We support your efforts to find 
that path.
                                 ______
                                 
              Statement of Hancock Natural Resource Group
    The Hancock Natural Resource Group (HNRG) is a wholly owned 
subsidiary of John Hancock Financial Services. HNRG has been in 
business for 15 years and is the world's largest forestry investment 
management organization. It currently manages about 3 million acres of 
forest land, valued at $2.7 billion in the United States, Canada and 
Australia.
    HNRG has been active in the area of carbon sequestration for the 
past year. In June of 2000 we announced the establishment of a new 
carbon program to design financial products related to carbon 
sequestration by forests for business and institutional investors. Our 
program is now in operation and currently offering two financial 
products, one in the United States and one in Australia. These 
investments are based on pooling equity by private investors and 
establishing a portfolio of reforestation projects on areas of marginal 
agriculture land across the United States and Australia, respectively.
    We believe strongly that forests provide an important range of 
environmental services to society, including water quantity and quality 
regulation, wildlife habitat and conservation, and carbon 
sequestration. We are encouraged at the growing trend for these 
environmental services to be linked with emerging commercial 
environmental markets. In particular the emphasis on utilizing the 
power of the marketplace to find low cost solutions to reducing net 
greenhouse gas emissions will significantly enhance the attractiveness 
of forest investment.
    In bill S. 820, there are really three key elements. The first is 
to improve our ability to account for the carbon sequestration 
occurring in U.S. National Forests. The recent reductions in timber 
harvesting from those forests will likely lead to an extension of 
carbon storage, and it is important that the U.S. government be able to 
monitor those changes.
    The second area relates to the establishment of an Advisory Council 
to oversee the development and implementation of guidelines for carbon 
accounting in forests. A body such as this is critically important to 
creating consistency in the measurement and verification of carbon 
stock changes in forests.
    Finally the bill establishes the basis for cooperative agreements 
and Federal-State loan programs to non-industrial private landowners to 
encourage reforestation and improved forest management practices. This 
should have the effect of assisting with the cost of reforestation or 
improved management by small private landowners who otherwise would not 
have the resources to undertake these important activities.
    In general, HNRG is supportive of the aims and mechanisms included 
in bill S. 820, although our primary recommendation would be for a 
strengthened role for the private sector in funding and managing the 
emerging business of carbon sequestration. Much of the basis of future 
efforts to address climate change will rely on the ability of private 
capital to invest in new technologies and methods of carbon 
sequestration. Emissions trading markets will stimulate this 
investment, as the value of carbon emissions and sequestration will 
become transparent. Thus capital investment will be able to factor in 
additional revenue from carbon trading.
    While enhanced carbon sequestration in U.S. National Forests will 
contribute substantially to national efforts to reduce net greenhouse 
gas emissions, it is unlikely to play a role in a future emissions 
trading regime. Unless the government intends to auction carbon credits 
from national forests, actions by private sector investors will be 
needed to generate sufficient carbon offsets to create market liquidity 
and to reduce the price of traded emissions reductions.
    Governments can stimulate early private investment in this area by 
establishing standards for carbon accounting, by establishing legal 
registries for carbon credits, and by recognizing that any credits 
registered will be usable in future emissions trading regimes. In most 
cases the single most important constraint to the investment of private 
capital in carbon sequestration is the uncertainty of what will count 
against a future regulatory or trading regime.
    Government loans to private landowners should also be designed to 
stimulate the private production of carbon credits for use in future 
emissions trading regimes or against future carbon dioxide emission 
regulation. In most cases, we expect that the carbon stocks being built 
up through enhanced reforestation or forest management activities will 
be pooled by financial intermediaries. This pooling approach will help 
to address risk factors in regards to fire, insect and disease damage, 
or climatic events.
    In carbon pooling however, the participants will need to have 
ownership of the rights to the carbon sequestration in their forests. 
Where a government lien encumbers those rights it will make it 
difficult for intermediaries to register the carbon sequestration 
credits and sell them on the market. Another key point for a robust 
emissions trading regime is the need for the sellers of carbon 
sequestration credits to be financially strong. Markets recognize this 
through financial ratings. In many cases the financial rating of a 
financial intermediary will have a bearing on the price paid for the 
carbon sequestration credits by the market. Carbon pooling entities 
that reduce risk factors and underwrite the long term guarantee of the 
permanence of the credit will lead to a higher price being paid for 
credits.
    In summary, we believe that the government can stimulate greater 
private investment in carbon sequestration by creating standards for 
carbon accounting and creating early certainty of the future value of 
carbon sequestration credits. As with many areas of private investment, 
the reduction of risk and uncertainty is paramount to creating investor 
confidence.
    Thank you for the opportunity to provide these comments.
[Attachment.]
 Key Principles for Carbon Sequestration Component of a U.S. National 
                 Climate Change Action Registry Design
                           a. general points
    1. The registry should create confidence in the business community 
that any legally registered credits will apply against any subsequent 
national regulation of carbon dioxide emissions
    2. The registry should create a standardized definition and 
measures for ensuring that all tons of carbon dioxide whether from 
sequestration, certified reductions or other offsets are treating as 
equal and exchangeable.
    3. The registry should be voluntary, but should create limits on 
what types offsets and credits will be included in the registry.
    4. For carbon sequestration, the concepts of additionality, 
permanence and leakage should be addressed.
                           b. specific points
    1. Modular design, with standards established for each module. For 
Sinks the modules could be:

          i. Reforestation
          ii. Agricultural soil sequestration
          iii. Extending carbon sequestration in existing forests
          iv. Conservation of forests with documented threats of 
        deforestation

    2. Each form of offset should have sufficient rigor in its 
definition, baseline, measurement accuracy, inventory control, and 
verification to be fungible. In other words a tonne of any form of 
sequestration must meet a threshold which makes it the same as any 
other ton.
    3. Addresses permanence by linkage of credits to pools or entities 
that can demonstrate the rights or ownership of carbon in the areas 
having been used as the basis for registration. This means that an 
entity who wishes to produce carbon credits from forests, must have 
some demonstration of unique ownership, and carries the ongoing 
responsibility for those credits. While the total stock of carbon can 
vary from place to place the sum of the carbon stocks, minus any 
baseline stocks, must be protected or offsets purchased.
    4. Addresses sustainable development by having the endorsement of 
the government in the country where the project is located.
    5. Addresses additionality as follows:

          i. For reforestation, must provide air photos to demonstrate 
        that the area was cleared land, under non-forest land use 
        before reforestation.
          ii. For agricultural soil sequestration, must demonstrate 
        statistically the soil carbon content to a depth of 1 m. 
        Credits are provided only for statistically demonstrated 
        increases.
          iii. For existing forests, must identify the land area 
        concerned and present a statistically robust estimate of carbon 
        stocks.
          iv. For conserving forests threatened by deforestation, this 
        must be substantially documented, independently reviewed on a 
        case by case basis, endorsed by the national and/or sub-
        national government authorities and then protected. In these 
        areas, the issue of leakage must be specifically addressed. If 
        ever in future the forests are cleared or otherwise impacted 
        these credits must be fully bought out of the system. These 
        forests are the most difficult to integrate into the system, as 
        they are based on some intangible decisions. These forests must 
        also address the issue of leakage, where protecting one area 
        simply leads to accelerated deforestation elsewhere.

    6. Baseline year: This should be 1990, or point of project 
commencement. Where land use change is occurring, the year 1990 should 
be used to prevent clearing and reforesting of forest being eligible 
for crediting.
    7. Definition of product. A standard based on an Environmental 
Management System or Total Quality Management System can be used for 
each form of sequestration credit. These systems require documentation 
of policies, planning, inventory, modelling, continuous improvement 
systems, etc. They can be the basis of verification and auditing of 
carbon stocks.
    8. The product is a ton of sequestration, vintaged by the year in 
which it is activated, and serialized. The tons are certified by the 
registry based on independent verification of the estimates by 
accredited third parties.
    9. The registry must list serial numbers of tons, by vintage years, 
and additionally indicate the land base associated with those tons. It 
should encourage pooling, by also ensure that the linkage between which 
tons link to which land pool is clear. It should also provide for 
extinguishment of the tons in emissions trading, ``green product'' 
promotions, or other purposes.
    10. The governance of the system should be based on a steering 
committee of government, business, academics and conservation movement 
specialists in this area. The steering committee would endorse the 
standards for each module, would accredit verifiers, would accredit 
carbon pool managers, would oversee registry operations, would resolve 
disputes, and would approve policies for ongoing auditing of the carbon 
stocks in the registry. The steering committee could be appointed by 
the Secretary of Commerce or another government figure.
    11. Ultimately the register should include both emissions and all 
forms of offsets in a fully fungible system that would underpin 
regulation and/or trading.
    12. Entities placing offsets into the registry, must also be 
accredited by the steering committee. The key criteria would be 
expertise, systems, financial solvency, and good character.
    13. In the event that a carbon pool manager became bankrupt, the 
registry would immediately take control of the carbon rights associated 
with the pool.
    14. The ultimate accountability for the carbon stocks and the 
credits is with the carbon pool manager. Any decision by the steering 
committee, subject to appeal, can require the carbon pool manager to 
make good on carbon stock shortfalls, or provide additional 
documentation or reverification of the carbon stocks at any time.
    15. The steering committee, subject to government approval, may 
also enter into bi-lateral arrangements with carbon pools in other 
countries or with international carbon pools, assuming accounting, 
verification, documentation and third party government endorsement.
    16. In the event that the government changes rules or standards in 
a way that impacts negatively on the carbon pool managers, compensation 
will be payable.
    17. The operation of the registry will be funded by government for 
a five year trial period, and then the registry will fund its own 
operations by a fee for registration of new credits.
                                 ______
                                 
   Statement of Sharon Kneiss, Vice President for Regulator Affairs, 
                  American Forest & Paper Association
    The American Forest & Paper Association appreciates the opportunity 
to provide testimony to today's meeting of the Subcommittee on Energy 
and Air Quality.
    The American Forest & Paper Association represents more than 240 
member companies and related associations that engage in or represent 
the manufacturers of pulp, paper, paperboard and wood products. 
America's forest and paper industry ranges from state-of-the-art paper 
mills to small, family-owned sawmills and some nine million individual 
woodlot owners.
    The U.S. forest products industry is vital to our Nation's economy. 
We employ 1.5 million people and rank among the top ten manufacturing 
employers in 42 states, with an estimated payroll of $51 billion. Sales 
of U.S. forest and paper products top $250 billion annually in the 
United States and export markets. Products from America's forest and 
paper industry represent more than eight percent of our country's 
manufacturing output.
                       s. 820 and forestry issues
    AF&PA has been engaged in the issue on the role of forests and 
global climate for more than a decade. We have sponsored research 
through the technical research arm of the industry, supported efforts 
of the U.S. Forest Service and cooperated with many agencies on 
programs to improve the understanding of forests and their role in 
mitigating carbon dioxide buildup.
    Senate bill 820 introduced by Senator Wyden (D-Or) and co-sponsored 
by Senator Craig (R-ID) represents a good first step in bringing the 
issue of forest carbon sequestration to the forefront of America's 
potential response to programs that will reduce the build-up of carbon 
dioxide concentrations in the atmosphere. Forests provide enormous 
benefits. Only recently has carbon dioxide removal by forests been 
recognized as a major co-benefit to the environment in addition to 
wildlife habitat, water quality, recreation, aesthetics and other 
resource amenities. As Congress proceeds to create forest carbon 
sequestration economic and environmental opportunities, the AF&PA 
membership believes that forest management must be a driving force in 
improving forestland health and productivity. Incentives that encourage 
forest stewardship, improve land management practices and prevent the 
further conversion of forestland to other uses will provide multiple 
benefits including carbon storage. It is important to not lose sight of 
the contribution that existing managed forests make in the global 
carbon cycle. They contribute mightily to the global carbon balance and 
should not be taken for granted or dismissed. I will come back to these 
concepts at the end of this section. However, I would like to take the 
opportunity to comment more directly on the concepts contained in S. 
820.
    S. 820 is much broader than assessing ``opportunities to increase 
carbon storage on national forests derived from the public domain.'' It 
includes recommendations on amending the Department of Energy's 1605(b) 
reporting guidelines, incorporates opportunities for non-industrial 
private forest landowners to take advantage of loan programs, 
establishes an advisory board to provide recommendations to the 
Secretary of Agriculture on carbon storage from management actions, 
defines terms and concepts and emphasizes the development of project-
based accounting systems.
    The provisions that would amend the carbon monitoring and 
verification guidelines under Title XVI of the Energy Policy Act of 
1992 should examine and compare existing project-based guidelines to 
determine which methods are most accurate, cost-effective, transparent 
and verifiable. Because carbon may become a market commodity to buy and 
sell, it is important that the trading system be based on sound 
technical footing. A ton of carbon in one part of the country or the 
world must be equivalent to a ton of carbon measured in another region 
of the country or the world.
    Monitoring and verification of carbon on a project specific basis 
is essential. The private sector needs certainty when investing in 
carbon sequestration projects. Certainty in this case includes 
verification of the carbon offset credits, value of the carbon credits 
and a proper accounting system to ensure valid carbon transactions.
    AF&PA notes that a national accounting system is critically 
important but is not addressed in the legislation. Presently, the U.S. 
Forest Service (USFS) provides estimates of carbon sequestration on all 
managed forestlands in the United States, including public and private. 
These estimates are based on forest inventory data collected through 
the Forest Inventory & Analysis Program of the USFS. Carbon projections 
are estimated by using a combination of sophisticated timber supply, 
area projection, wood use and carbon content models. These estimates 
must provide a reliable prediction of current and future carbon 
sequestration in the forest strata including soils, understory, 
overstory, and trees. The models are the basis for estimating the long-
term storage of carbon in wood and paper products and in landfills. 
This is extremely important information particularly when there is a 
lack of reliable published research estimates. The failure to account 
for the long-term storage of carbon overestimates worldwide carbon 
dioxide emissions by ten percent.
    Understanding the existing forest base can shed important light on 
how to improve existing forest management practices for the retention 
of carbon and what opportunities exist to enhance the existing forest 
land base to store more carbon. AF&PA suggests increasing funding 
levels to the Forest Inventory & Analysis (FIA) Program contained 
within the USFS Research program as specified in USFS/National 
Association of State Foresters Memorandum of Agreement and endorsed by 
the Second Blue Ribbon Panel on FIA. This data collection and analysis 
program, recently amended in the 1998 Farm bill by Congress, called for 
annual data collection with a completed cycle in each state every five 
years. We strongly support this effort. It provides the underlying data 
not only for carbon sequestration but also provides the core 
information on forest resource trends. It is not possible to separate 
site-specific project level accounting from the implications of what 
occurs outside of a project boundary. Altering forest management 
practices, reducing harvest levels or preserving forest acreage in a 
specific location could have an impact on forestlands outside the 
project boundaries. This is known as leakage. AF&PA agrees that 
harvesting and regeneration will be displaced to other locations. A 
comprehensive national model such as the one developed by the USFS must 
be well funded to monitor trends in forest sequestration and carbon 
storage reservoirs to understand the impacts this will have on 
atmospheric carbon dioxide levels and carbon storage in forests. We 
urge that the USFS Research program be adequately funded to conduct 
regular updates of forest carbon sequestration and develop the 
appropriate software and model links to improve the accuracy and 
technical elements. The model, known as FORCARB, was the basis for the 
U.S. State Department's submission to The Hague at the Conference of 
the Parties negotiations in November 2000 on the Kyoto Protocol.
    While S. 820 does begin a process for establishing project specific 
guidelines to determine carbon sequestration, the development of a 
carbon market trading system, issuance of carbon credit certificates 
and other carbon credit banking systems need to be considered. For the 
private sector to make these types of investments there needs to be 
certainty on the regulatory rules, financial market rules and 
transferability of credits must be known. We have to ensure the 
government does not subsidize activities that could undermine private 
investments. The payback periods are long and extend beyond the normal 
three to five year return period for most private capital investments. 
It is important that a free market system develop with appropriate 
verification procedures that ensure the credibility of the carbon 
financial instruments.
    There are a couple of other considerations AF&PA believe are 
important for your subcommittee and the Senate to consider as domestic 
and international policies are developed to determine what market 
opportunities forests will have in reducing atmospheric concentrations 
of carbon dioxide. The role of this nation's existing forests has been 
dismissed because of an assumption that they are removing carbon 
dioxide from the atmosphere ``anyway.'' Given the dramatic changes in 
forest ownership, stewardship, population increase and urban and 
suburban growth and development over the past decade makes the 
continuity of forest land use less than a certainty. According to 
figures developed by the USFS, existing forests currently remove 
seventeen percent of total U.S. greenhouse gas emissions per year. We 
believe that with active and sustainable forest management of the 
existing forest base, these figures can increase and assist the nation 
in a balanced approach to stabilizing or reducing atmospheric carbon 
dioxide buildup. The committee should seriously consider how the 
forests of today can be more actively managed to increase carbon 
sequestration and prevent emissions through and improved productivity. 
To this end, we would urge the Committee to increase funding for forest 
productivity research in tree physiology, biotechnology and soil 
productivity as outlined in a compact with the Department of Energy in 
the Agenda 2020 industry partnership program.
    It is also important to briefly mention the significant inequities, 
lack of incentives and scientific misunderstanding of how the Kyoto 
Protocol (KP) undervalues and creates significant distortions for 
existing forests and what it could mean for the United States. Under 
the terms and conditions of the Protocol, only new forests established 
after 1990 on lands not in previous cover would be eligible for carbon 
credits. However, the carbon credits accrued would only be for the tree 
growth between 2008 and 2012. If you established a ``new'' forest today 
the only carbon credits potentially awarded would be for the 
incremental growth during that time period. While the nation would not 
receive any carbon credit for existing forests to achieve the KP 
targets the U.S. would be obligated to maintain the same level of 
carbon stock as in 1990 or further reduce emissions to meet the agreed 
upon international targets. There is no possibility to receive credit 
to absorb carbon dioxide from the atmosphere but significant 
liabilities and disincentives. This is neither a fair or balanced 
carbon accounting system. In addition, the KP ignores the scientific 
validity and positive contribution that existing forests have on 
atmospheric carbon dioxide levels. The other misunderstanding and 
scientific misconception of the KP is the role of avoiding tropical 
deforestation. Under the KP, ``avoidance of deforestation'' is 
considered a carbon sequestration activity. AF&PA and the forest 
research scientific community would consider these activities to be an 
avoidance of emissions, not sequestration. Most of these tropical 
ecosystems are in highly mature states and older age class structures. 
They are more likely to leak carbon as these stands breakdown. Under 
the rules being considered for the KP, these existing systems would be 
awarded carbon credits for avoiding deforestation. Again, from a 
scientific viewpoint a growing and sustainably managed forest can 
remove significantly more carbon dioxide from the atmosphere than the 
mature systems although we recognize these forests as repositories of 
huge quantities of carbon. The inequities in awarding credits for 
``new'' forests or for ``avoidance of deforestation'' will have adverse 
consequences and spill over effects for the existing forest base and we 
think this should receive considerable thought.
    We have more specific comments on the bill regarding the make-up of 
the advisory council membership, loan programs, financial incentives to 
grow carbon and land. We would be willing to sit down with you and 
members of the committee to discuss these at your convenience.
                                 ______
                                 
    Statement of Dr. Aaron Rappaport, Forests and Climate Campaign 
                  Coordinator, American Lands Alliance
    Mr. Chairman and Members of the Committee, the American Lands 
Alliance is grateful for the opportunity to submit testimony for the 
record of your July 24 hearing on issues and legislation connected with 
the problem of global warming. We are also grateful for interest on the 
part of the Committee in the issue of forest carbon sequestration and 
commend Senator Wyden and Senator Craig for their efforts to develop 
legislation to encourage such activities.
    I would like to note at the outset that some of the most difficult 
and contentious environmental issues in the United States today involve 
the protection of habitat for threatened and endangered species on 
private land. American Lands believes carbon sequestration offers a 
partial escape from the current gridlock around these habitat issues. 
Both the protection of natural ecosystems and long rotation forestry 
reduce emissions of carbon dioxide (CO2). If these benefits 
were officially recognized by American climate policy then voluntary 
landowner conservation activities would be eligible for the financial 
rewards that are generally proposed to encourage a decrease in our 
nation's CO2 output.
    Such a mechanism for encouraging badly needed conservation 
activities has the added benefit of potentially involving little or no 
net cost to the federal treasury. In most climate policy proposals, 
over-emitters of CO2 provide the funds to encourage others 
to under-emit, through mechanisms such as balanced tax incentives and 
disincentives.
    In this context I will confine the rest of my testimony to comments 
on the legislation that Senator Wyden and Senator Craig have developed, 
S. 820 or the ``Forest Resources for the Environment and the Economy 
Act''. Since the July 24 hearing date, this bill has been combined 
virtually unchanged with Senator Brownback's ``Carbon Conservation 
Incentive Act'', S. 785, into S. 1255, the ``Carbon Sequestration and 
Reporting Act''. Thus, comments on S. 820 remain applicable to S. 1255.
                      specific comments on s. 820
    In general S. 820 as currently written appears to not focus on 
creating the incentives for voluntary landowner conservation activities 
that carbon sequestration is capable of providing. Indeed, the bill 
appears to go so far as to exclude the creation of reserve areas, such 
as riparian buffers to protect salmon streams, from eligibility for its 
revolving loan program. Even if such habitat protection is eligible, 
the bill's emphasis is clearly strongly in favor of reforestation 
rather than the creation of fish and wildlife reserve areas and the 
promotion of long rotation forestry.
    To more fully achieve the conservation potential of carbon 
sequestration policy, we suggest the following changes:
    1. The Purposes section should emphasize the protection of habitat 
for species listed under state and federal endangered species acts. 
Similarly, the definition of a Forestry Carbon Activity in the bill 
should require that these have a positive impact on habitat for listed 
species.
    2. The list of governmental entities involved in the revolving loan 
fund should broaden beyond the Secretary of Agriculture and State 
Foresters to include the U.S. Fish and Wildlife Service, the National 
Marine Fisheries Service, and their state equivalents.
    3. A broader set of stakeholders should have representation on the 
Forest Carbon Advisory Council that S. 820 establishes. As currently 
construed the Council fails to include representatives from such 
stakeholders as the commercial and recreational angling industries, the 
tourism industry, and municipal water boards. On the governmental side 
of the Council, we believe it wise to include representatives from the 
National Oceanographic and Atmospheric Agency, U.S. Fish and Wildlife 
Service, the National Marine Fisheries Service, and their stateside 
counterparts. As an alternative, the Council could be redesigned to be 
a technical advisory panel made up of independent academic scientists.
    4. The bill should establish a legal standard to prevent both its 
loan fund and guidelines from encouraging environmentally destructive 
silvicultural methods. These include the heavy application of 
fertilizers, pesticides, and herbicides, and the use of monoculture 
plantations and genetically engineered trees.
    5. Sections of S. 820 that appear to directly exclude the creation 
of forest reserves from the bill's revolving loan program should be 
changed. Currently, loan funds may only cover costs associated with 
planting trees (Section 5 (c)(8)) and only projects that allow ``a 
variety of sustainable management alternatives'' (Section 5 (c)(1)(C)) 
qualify for loans. Thus, the single activity of reserve-creation 
appears to be ruled out.
    6. More weight should be given to forest protection in the bill's 
basis for establishing a formula to govern the distribution of loan 
funds. As currently written this basis appears strongly weighted 
towards tree planting rather than forest protection. (See Section 5 
(b)(8)(B)(ii).)
    7. Loan funds should be fully available for states that lack large 
areas of federal forest. Indeed, the need for forest conservation is 
even more acute in these states than in those containing abundant 
federal land. As currently written, the bill virtually excludes states 
with little federal forest from eligibility for loan funds by awarding 
these preferentially to states that have experienced significant 
declines in timber industry employment due to decreases in logging on 
federal lands. (See Section 5 (b)(8)(B)(iii).)
    8. The bill should call for forest greenhouse gas accounting 
standards that include all greenhouse gasses, rather than just 
C0CO2. This would ensure that NOCOx emissions 
from the use of fertilizers are properly accounted for.
    9. The bill should raise its standard for canceling loans in return 
for permanent conservation. We commend Senators Wyden and Craig for 
this section of the bill but urge that the current standard, which is 
protection ``at a level above what is required under applicable 
federal, state, and local law'', be raised considerably to better 
achieve the double win for landowners and the environment that carbon 
sequestration could provide.
    10. The bill should recognize that immediate emissions reductions 
are more valuable than future ones. This is recognized by, for 
instance, ton-year carbon accounting methods.
    In conclusion, I would like to thank the Committee Members once 
again for this opportunity to testify and for their interest in forest 
carbon sequestration.
                                 ______
                                 
 Statement of David Silverstein, on Behalf of the Southern Appalachian 
                  Biodiversity Project, Asheville, NC
    I am writing on behalf of the Southern Appalachian Biodiversity 
Project to urge the U.S. to not replace old growth stands of forest 
with young Kyoto stands, and oppose the construction of more dams, as 
part of the Clean Development Mechanism designed to meet the goals of 
the Kyoto Protocol.
    A myriad of scientific studies now indicate that old growth forests 
are far more efficient at sequestering carbon than younger, monoculture 
tree farms. See, for example, Ernst-Detlef Schulze, Christian Wirth and 
Martin Heimann in the 22 Sep 2000 issue of Science, at pp. 2058-2059. 
Schulze et al., found that ``the accumulation of carbon in a permanent 
pool increases exponentially with stand age.'' This will ``continue to 
contribute to a stable part of soil organic carbon unless disturbed by 
harvest or fire.'' Thus, ``replacing unmanaged old-growth forest by 
young Kyoto stands, as well as the harvesting of previously unmanaged 
old-growth forest stands as part of forest, management, will lead to 
massive carbon losses to the atmosphere mainly by replacing a large 
pool with a minute pool of regrowth and by reducing the flux into a 
permanent pool of soil organic matter. Hannon et al. have demonstrated 
that cutting of old growth forests will release carbon sequestered over 
the course of 200 years in some cases. M.E. Hannon, W.K. Ferrell, J.F. 
Franklin, Science, Vol. 247, pp. 699-702. In that study, Hannon et al. 
determined that nearly 70% of the carbon accumulated in a tree from 
sequestration is emitted into the atmosphere within 10 years after the 
tree is cut down. Even if old growth stands are cut down and replaced 
by young Kyoto stands, it can take decades before enough carbon is 
absorbed by the new stand to equal the pulse of carbon re-released into 
the atmosphere when larger, older trees are cut. In fact, Schulze et 
al. demonstrated that, with increasing life-span of the stand, 
proportionally more carbon can be transferred into a permanent pool of 
soil carbon (passive soil organic matter or black carbon). Since ``time 
without disturbance is required to channel carbon through its cycle 
into a nonactive pool of soil organic carbon and the production of 
black carbon depends on biomass'', old growth forests play an 
invaluable role in the sequestration of carbon.
    Also, the best scientific information available indicates that dams 
cause as much or more greenhouse gas emission as burning fossil fuels. 
The June 1st edition of New Scientist magazine reported that much of 
the greenhouse gas is generated by organic matter washed into a 
reservoir and from the decay of submerged forests. Since ``stagnant 
water produces the worst emissions because the decaying vegetation'', 
the reservoirs release carbon dioxide and methane. According to that 
study, a reservoir will produce more methane than the river did before 
the dam was built. ``Greenhouse gases are emitted for decades from all 
dam reservoirs in the boreal and tropical regions for which 
measurements have been made. This is in contrast to the widespread 
assumption that such emissions are zero,'' the Commission added.
    Thus, the promotion of management practices that replace old growth 
stands with fast growing tree farms, and the building of new dams, we 
will actually contravene the anticipated aim of the Kyoto Protocol. In 
general, over-emphasizing carbon sinks will not adequately address the 
global warming problem. According to Professor John Shepherd, director 
of Britain's Tyndall Centre for Climate Research, shifting the emphasis 
to carbon sinks is diverting the talks from the main issue of cutting 
emissions. Carbon sinks only partially compensate for fossil fuel 
emissions; it has been estimated that sometime within the next century 
our forests will serve as a net carbon source rather than a net sink. 
According to Shepherd, the maximum that could be absorbed by carbon 
sinks would only be equivalent to a quarter of that needed by 2050 to 
prevent major rises in global temperature. If the anthropogenic 
production of greenhouse gasses continues to increase at current rates, 
then it will be inevitable that we will saturate and overwhelm our 
carbon sinks and will be powerless to stop or reverse global warming. 
Rather than creating more loopholes for polluting industries, SABP 
demands-that the U.S. argue forcefully for the reduction of carbon 
emissions from fossil fuel consumption, preserve all of our old growth 
forests, and allow the younger, less developed forests to achieve old-
growth status.
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