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71–502CC 2001

CONGRESSIONAL PERSPECTIVES ON ELECTRICITY

MARKETS IN CALIFORNIA AND THE WEST

AND NATIONAL ENERGY POLICY

HEARING

BEFORE THE

SUBCOMMITTEE ON ENERGY AND AIR QUALITY

OF THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

MARCH 6, 2001

Serial No. 107–8

Printed for the use of the Committee on Energy and Commerce

(

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

COMMITTEE ON ENERGY AND COMMERCE

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

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES ‘‘CHIP’’ PICKERING, Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

TOM DAVIS, Virginia

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

STEVE BUYER, Indiana

GEORGE RADANOVICH, California

CHARLES F. BASS, New Hampshire

JOSEPH R. PITTS, Pennsylvania

MARY BONO, California

GREG WALDEN, Oregon

LEE TERRY, Nebraska

JOHN D. DINGELL, Michigan

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

TOM SAWYER, Ohio

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

MICHAEL F. DOYLE, Pennsylvania

CHRISTOPHER JOHN, Louisiana

JANE HARMAN, California

DAVID V. MARVENTANO, Staff Director

JAMES D. BARNETTE, General Counsel

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

SUBCOMMITTEE ON ENERGY AND AIR QUALITY

JOE BARTON, Texas, Chairman

CHRISTOPHER COX, California

STEVE LARGENT, Oklahoma

Vice Chairman

RICHARD BURR, North Carolina

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN SHADEGG, Arizona

CHARLES ‘‘CHIP’’ PICKERING, Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

ED BRYANT, Tennessee

GEORGE RADANOVICH, California

MARY BONO, California

GREG WALDEN, Oregon

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

(Ex Officio)

RICK BOUCHER, Virginia

RALPH M. HALL, Texas

TOM SAWYER, Ohio

ALBERT R. WYNN, Maryland

MICHAEL F. DOYLE, Pennsylvania

CHRISTOPHER JOHN, Louisiana

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

BART GORDON, Tennessee

BOBBY L. RUSH, Illinois

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

JOHN D. DINGELL, Michigan

(Ex Officio)

(II)

C O N T E N T S

Page

Testimony of:

Aderholt, Hon. Robert B., a Representative in Congress from the State

of Alabama ..................................................................................................... 86

Bartlett, Hon. Roscoe G., a Representative in Congress from the State

of Maryland ................................................................................................... 77

Bereuter, Hon. Doug, a Representative in Congress from the State of

Nebraska ........................................................................................................ 73

Bono, Hon. Mary, a Representative in Congress from the State of California .............................................................................................................. 11

Calvert, Hon. Ken, a Representative in Congress from the State of California .............................................................................................................. 78

Capito, Hon. Shelley Moore, a Representative in Congress from the State

of West Virginia ............................................................................................ 83

Davis, Hon. Susan A., a Representative in Congress from the State of

California ....................................................................................................... 33

DeLay, Hon. Tom, a Representative in Congress from the State of Texas . 70

Filner, Hon. Bob, a Representative in Congress from the State of California .............................................................................................................. 8

Ganske, Hon. Greg, a Representative in Congress from the State of

Iowa ................................................................................................................ 48

Honda, Hon. Michael M., a Representative in Congress from the State

of California ................................................................................................... 35

Inslee, Hon. Jay, a Representative in Congress from the State of Washington ............................................................................................................. 23

Issa, Hon. Darrell E., a Representative in Congress from the State of

California ....................................................................................................... 25

Radanovich, Hon. George, a Representative in Congress from the State

of California ................................................................................................... 14

Sherman, Hon. Brad, a Representative in Congress from the State of

California ....................................................................................................... 19

Stenholm, Hon. Charles W., a Representative in Congress from the State

of Texas .......................................................................................................... 52

Thompson, Hon. Mike, a Representative in Congress from the State of

California ....................................................................................................... 28

Watts, Hon. J.C., Jr., a Representative in Congress from the State of

Oklahoma ...................................................................................................... 45

Woolsey, Hon. Lynn C., a Representative in Congress from the State

of California ................................................................................................... 81

Material submitted for the record by:

Baca, Hon. Joe, a Representative in Congress from the State of California, prepared statement of ...................................................................... 94

Cunningham, Hon. Randy ‘‘Duke,’’ a Representative in Congress from

the State of California:

Prepared statement of ............................................................................... 95

Prepared statement of ............................................................................... 96

DeFazio, Hon. Peter A., a Representative in Congress from the State

of Oregon, prepared statement of ................................................................ 98

Gephardt, Hon. Richard A., Democratic Leader, and Hon. Martin Frost,

Chairman, Democratic Caucus, prepared statement of ............................. 105

Hunter, Hon. Duncan, a Representative in Congress from the State of

California, prepared statement of ................................................................ 106

Larson, Hon. John B., a Representative in Congress from the State of

Connecticut, prepared statement of ............................................................ 107

Luther, Hon. Bill, a Representative in Congress from the State of Minnesota, prepared statement of ..................................................................... 109

Otter, Hon. Butch, a Representative in Congress from the State of Indiana, prepared statement of .......................................................................... 110

Ryun, Hon. Jim, a Representative in Congress from the State of Kansas,

prepared statement of ................................................................................... 111

Sandlin, Hon. Max, a Representative in Congress from the State of Texas,

prepared statement of ................................................................................... 111

(III)

(1)

CONGRESSIONAL PERSPECTIVES ON ELECTRICITY MARKETS IN CALIFORNIA AND

THE WEST AND NATIONAL ENERGY POLICY

TUESDAY, MARCH 6, 2001

HOUSE OF REPRESENTATIVES,

COMMITTEE ON ENERGY AND COMMERCE,

SUBCOMMITTEE ON ENERGY AND AIR QUALITY,

Washington, DC.

The subcommittee met, pursuant to notice, at 1 p.m., in room

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

presiding.

Members present: Representatives Barton, Largent, Whitfield,

Ganske, Shimkus, Shadegg, Radanovich, Bono, Walden, Tauzin (ex

officio), Boucher, John, Waxman, Markey, Strickland, Barrett, and

Luther.

Staff present: Jason Bentley, majority counsel; Miriam Erickson,

majority counsel; Hollyn Kidd, legislative clerk; Karine Almian,

professional staff; Rick Kessler, minority counsel; and Sue Sheridan, minority counsel.

Mr. BARTON. If the subcommittee could please come to order, if

the audience would take your seats, we have approximately 30

Members who want to testify.

Today we are going to receive testimony from Members of Congress, both sides of the aisle, perhaps several Senators from the

other body, on the situation in California and the West and the

general energy policy. I am looking forward to this. It is obvious

there is a lot of interest, given the number of Members that asked

to come before the subcommittee and testify.

This subcommittee will continue to review what has happened

and is happening in California and the surrounding Western

States. We want to learn from the lessons of California’s retail restructuring attempt, its efforts in the wholesale market and its responsibility in attempting to manage supply and demand for the

State and the reactions at various times to the problems that

began last summer and continue to this day.

The lessons that we can learn from what has happened out West

will help other States as they decide whether or not to open their

retail electricity markets.

We also want to conduct oversight over the general interstate situation in the West, both in the wholesale market—and consider

what legislation, if any, might be needed at the Federal level in

that area. I hope that the members of the subcommittee will think

2

not just short term and State specific, but longer term and more

generally what is going on.

The development of additional generation capacity in this country should not be discouraged. In fact, it needs to be encouraged,

in my opinion. The people that produce power should be kept interested in selling in the markets that need that power and encouraged to do so. We should also look at transmission capacity and

what, if anything, we need to do at the Federal level to expedite

additional transmission capacity for our country.

Finally, some thought needs to be given to the consumers, the

high prices that they have to shoulder and sometimes the inability

of the market to send the appropriate price signal at the appropriate time.

On our second, panel, we are going to look at the broader issue

of national energy policy. We have approximately 15 Members to

testify on that issue, including the Republican Whip and the Republican Conference Chairman. We are going to hear testimony

from Members representing all parts of the country. This is a good

thing, because we do have regional energy markets, and if you

have regional markets, there are going to be regional differences of

opinion and regional differences in emphasis in the areas of our

country.

The subcommittee is going to conduct a number of hearings this

spring as we attempt to put together a comprehensive energy policy for this country. The ability of the Members of Congress who

are not on our committee to come forward and give their perspective before we put together a proposal, I think is very important

and is very beneficial to the subcommittee. So I appreciate all the

Members who have asked to testify.

With that, I would see if the full committee chairman would like

to give an opening statement.

Chairman TAUZIN. Go to the other side first.

Mr. BARTON. We will be honored to go to Mr. Markey. Usually

I yield to the full committee chairman, but if he wants to defer to

the distinguished member from Massachusetts, that is fine by me.

Mr. MARKEY. I thank the chairmen very much, both of you.

Thank you so much for having this great hearing today, hearing

from our congressional colleagues.

President Bush has suggested that the solution to the California

energy crisis is to drill for oil in the pristine Arctic National Wildlife Refuge. He makes this recommendation despite the fact that

only 1 percent of California’s electricity comes from oil-fired power

plants. In fact, 67 percent of all the oil we consume in America, 13

million barrels a day out of the 20 million barrels we consume, just

goes into gasoline tanks. So I think if you are looking for the problem, it is right there in every vehicle we are driving every day, not

trying to pretend it is an electricity crisis, because it is not.

The Republican leadership has introduced a bill to reduce foreign

oil dependence, and they want to reduce it from 56 percent today

to 50 percent 10 years from now. That is their goal, only down to

50 percent in terms of our foreign dependence, which ultimately

undermines quite simply the futility of taking that approach, if all

we do is reduce the dependence on foreign oil down to 50 percent,

3

Because we consume 25 percent of the oil today, but we have only

3 percent of the world’s reserves.

Seventy-six percent of those reserves are in OPEC, and there is

not a lot we can do about that, unless we look at fuel economy

standards. Sending in the oil rigs to scatter the caribou and shatter

the Arctic wilderness is what I call the Unimog energy policy. You

might have heard about the Unimog. It is a proposed new SUV

that will be 9 feet tall, 7.5 feet long, 3.5 inches wider than a

Humvee, weighs 6 tons and gets 10 miles per gallon. Or is that 10

gallons per mile? I don’t know. But it is heading in the wrong direction. That is not the big announcement that should have been

made by the auto industry last week—A new breakthrough: They

are even bigger; they are even more efficient at guzzling gas.

It perpetuates a head-in-the-haze attitude toward polluting our

atmosphere with greenhouse gasses and continuing our reliance

upon OPEC oil for the foreseeable future. That is the bad news

about that announcement. It is saying we are going to become more

dependent.

Now that our energy roles have forced us to think about the

interaction of energy and environmental policy, it is a good time to

say ‘‘no’’ to the Unimog energy policy and ‘‘yes’’ to a policy which

moves us away from gas-guzzling SUVs and automobiles to cleanburning fuels, hybrid engines and much higher efficiency in our energy consumption. And we can do it. If we just improve our fuel

economy standards by 3 miles per gallon, we will be able to save

all the oil that we would produce out of the Arctic refuge.

As a matter of fact, in 1987, 13 years ago, the average fuel economy in the United States was 26 miles per gallon. Today, 13 years

later, it is 24 miles per gallon. In other words, in this technologybased economy, in this country that prides itself on its mastery of

technology, we have gone backwards by 2 miles per gallon in the

last 13 years, which is the height of technology innovation in our

country’s history. So just using existing technology on the shelf already, we would be able to save 3 miles per gallon, and more, if

we made the commitment to do so.

There is 26 to 38 trillion cubic feet of natural gas at Prudhoe

Bay. I support going for it. Let’s get that 26 to 38 trillion feet.

Mr. BARTON. The gentleman’s time has expired.

Mr. MARKEY. The same thing is true across the board. We just

need a common-sense policy.

I thank the chairman.

Mr. BARTON. I thank the gentleman from Massachusetts.

The gentleman from Louisiana, Mr. Tauzin, for a brief opening

statement.

Chairman TAUZIN. Thank you, Mr. Chairman.

Mr. Chairman, I want to commend you for holding this important hearing on the power situation in the Western third of our

Country as you and the committee explore a new national energy

policy for the entire country.

There was a gentleman in the Carter administration, named Bob

Freeman, who once postulated a truth profundity. He said that energy would last us forever if we just didn’t use it, and it was upon

that basis that much of the energy policy of the Carter years was

4

formulated. And I hear that again echoed today in this room, that

if we simply stop using it, everything will be okay.

In California, electric generating capacity dropped 2 percent in

the last 10 years. Demand went up 14 percent. Now, we can stick

our heads in the sand and believe that demand won’t go up in this

country, that the high-tech economy we are building doesn’t require

more energy; or we can face the real truth, and that is that when

consumers need energy in this economy, this Nation needs to respond by making it available.

Of course we ought to have conservation and conservation ought

to be part of our plans. But recognizing growing demand, Mr.

Chairman, requires us to recognize that supplies are critical and

that keeping this country secure in its supplies is as important as

keeping California secure in the supply of energy.

We have had a previous hearing of this subcommittee—and I

want to thank you for that—on the California regulatory experience. I think we understand a lot of those issues better today. You

and I went to California. We had a chance to talk firsthand with

the generators and the utilities and the regulators in California;

and I think we also have a much better idea about what has to be

done to make that market work.

Frankly, I must say that having been there with you, I am very

skeptical about the road that California itself is taking in trying to

solve the problem for Californians, but I am also very pleased that

you going to hear from other Members of Congress today, and that

you are giving them a forum to voice their concerns and their opinions, because I think each will bring a new perspective to our understanding of the California situation.

California, as we said earlier, is a huge part of this country, 12

percent of our GDP, and you can’t have a crisis in that big a part

of our country without it being a crisis for America. And we need

to collectively find the answers. We are realizing more and more

that electricity problems of one State are never confined to that

State’s boundaries. They are regional problems, and that is why

this Western hearing is so important, because the whole Western

region has been affected.

We should be cautious about quick fixes in one State that can

have unintended consequences for its neighbors, but I am confident

that given the chance, mark-based approaches with an emphasis on

supply are the long-term solution. The experience of States like

Pennsylvania, Texas and Ohio, with the electricity markets that

are working, should demonstrate to us that these markets can and

will work.

I want to urge all of our colleagues, those who are coming to testify and those who serve you on this great subcommittee, to look

at the experience of the States where it is working, just as you look

at the State of California where it has failed, and learn the differences and to help instruct the Nation on making good policy that

can make good energy markets work again for the country.

Joe, thank you for this hearing. I wish you well again.

Mr. BARTON. Thank you, Chairman Tauzin. We appreciate your

attendance.

I am told the gentleman from Louisiana does not wish to make

an opening statement since he was here before. The gentleman

5

from California, Mr. Waxman, is recognized for 3 minutes for an

opening statement.

Mr. WAXMAN. Thank you very much, Mr. Chairman. I am going

to be very brief because we have a very long and distinguished list

of Members of the House and, I understand, maybe even from the

Senate that will come and talk to us today about this energy issue.

The energy problems in California, as Chairman Tauzin noted,

are not going to be just a California problem; it is a problem for

the West and it is going to be a problem all around this country

if we have the expression, ‘‘we want market forces to work’’; that

is what we were told in California, market forces were going to

work in California and consumers would benefit. Instead, we have

seen that California has clearly a dysfunctional market.

We in the delegation met with Federal Energy Regulatory Commission Chairman Curt He ́bert. During that meeting Mr. Hebert

discussed how dysfunctional this California energy market is, and

he said it was broken with regional and national ramifications.

Well, what we are waiting for is if, as he said, California cannot

put things right on its own, we want to know what the policy is

going to be from this administration and from the FERC.

I am interested in hearing what our colleagues have to say. I

look forward to working with all of them and this new administration in dealing with this problem, but let no one think that what

has happened in California will happen only in California. It is

happening elsewhere, and it will continue to happen elsewhere if

we have a blind faith in what is called market forces and deregulation without making sure that the market is really functioning and

that there is in fact a market to function.

I yield back the balance of my time.

Mr. BARTON. I thank the gentleman from California. We appreciate his interest in this issue. It is very important to his constituents. We really are pleased you are going to be involved in the debate.

The gentleman from Illinois, Mr. Shimkus, for a brief opening

statement.

Mr. SHIMKUS. Mr. Chairman, I too will be brief.

I think one of the big lessons we have learned so far is you can

deregulate the industry if you are inherently an energy exporter.

It is very tough to deregulate if you are an energy importer. Then

you constrain yourself to other forces which—then the consumer or

the market has no control.

When we talk about energy, we are talking about a broad portfolio of fuels, not really petroleum based, mostly natural gas, coal,

nuclear. Those make up the energy portfolio that creates electricity

for our use. Really one of the answers on the national scale is to

have a wide range of choices, and where I beg to differ with my

friend from California, the market will determine the most efficient

use of these fuels. Make no mistake about it, if government intervenes and tries to have the fuel of choice, which is what we have

seen with natural gas, then the market will be distorted. Then you

will have government intervention through legislation that distorts

the market.

6

So I think we need to keep our clean air regulations, but we need

to explore a broad base of fuels and let the market make the most

efficient use for our consumption.

The transmission grid is another thing we are going to be highly

involved in. Even in Illinois, it should be a regional approach, because even though the Illinois utilities were in a transco, many of

them are leaving. We in essence may have three RTOs or transcos

in the Midwest area where, for more efficient operation, you will

probably need to get that down to one. We will be working with

FERC to do that.

An interesting issue, very emotional. I look forward to it.

Thank you, Mr. Chairman.

Mr. BARTON. I thank the gentleman from Illinois.

Does the gentleman from Kentucky wish to make an opening

statement?

Mr. WHITFIELD. Mr. Chairman, thank you very much.

For those of us that have listened to the testimony and have read

the articles about what is going on in California, I think many of

us would conclude that if California had set out to determine a way

to make energy more expensive, they probably could not have done

a better job than what they did.

I was reading an article just recently that said neither Governor

Davis nor the State legislature seemed ready to do the one thing

that would solve the energy problem, and that is free retail rates.

In fact, Governor Davis admitted as much a few weeks ago saying,

‘‘Believe me, if I wanted to raise rates, I could solve this problem.’’ So I look forward to the testimony of the Representatives from

California and recognize that what is happening in California does

have the potential to affect our entire country on this important

issue.

Mr. BARTON. Thank you.

Does the gentleman from Oregon wish to make a brief opening

statement?

Mr. WALDEN. Mr. Chairman, the current energy crisis is not just

a California problem, it is a regional problem. The Northwest is already feeling the drastic consequences of high electricity markets.

We are now at the epicenter of the perfect storm of electricity, high

energy prices and low water levels behind our dams.

As you know, Mr. Chairman, over 70 percent of the Pacific

Northwest is powered by hydropower. That means in a bad water

year, like we are in right now, the Northwest has got to go to market to supplement its energy needs. As anyone can see, given the

crisis facing California, this is the worst time to purchase energy

from this spot market. These high energy costs are now being

passed down to our farmers, small business people, schools, seniors, anybody purchasing power.

Some businesses have already begun to close. Farmers are now

being bought out of their energy contracts for pumping. While it

might help some of these farmers this year when they have low

commodity prices and high energy costs, it sure raises havoc with

the community in which they farm. The implement and seed and

fertilizer dealers will not be able to continue without the farmers

farming. If something doesn’t happen soon to calm that storm,

more trouble will follow.

7

I know that Oregon is not the only State to experience these

types of problems.

Mr. Chairman, I remain concerned about the impact of some of

the California utilities’ inability to pay the bills for the power they

have purchased from utilities in my region and the impact that

may have on our ratepayers; and I look forward to hearing the

comments of all the witnesses.

Mr. BARTON. Does the gentleman from Oklahoma, the vice chairman, wish to make a brief statement?

Mr. LARGENT. Just a brief one, Mr. Chairman. I would like to

enter my full opening statement for the record and also commend

to the panel an article that appeared in the Los Angeles Times October 10, 2000, on ‘‘Transmission Grid Funding Tangled Up by

Power Crisis in California.’’ I would like to enter that into the

record as well.

[The information referred to is retained in subcommittee files.]

Mr. BARTON. Without objection, so ordered.

Mr. LARGENT. I would just say I look forward to the testimony

of our panels before us. This is an important part of the process

as we move forward to doing what we can at the Federal level to

untangle the grid as it exists today.

[The prepared statement of Hon. Steve Largent follows:]

PREPARED STATEMENT OF HON. STEVE LARGENT, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF OKLAHOMA

Mr. Chairman, thank you for holding this afternoon’s hearing. I’m looking forward

to listening and learning our House colleagues’ perspective on the energy crunch

that has hit California and the ancillary impact it has had on the surrounding

states.

I’ve said previously and I’ll repeat it today, California took a bold and forward

looking step when it decided five years ago to restructure the state’s electric utility

industry. Unfortunately, the implementation of its deregulation plan was based on

the presumption that wholesale rates would remain low. It was a very faulty presumption.

Wholesale rates did not remain low—in fact, wholesale prices reached historic

highs. Consequently, PG&E and southern California Edison were unable to recoup

their costs for the purchase of power on the spot market because consumer’s retail

rates remain capped.

The result—a dysfunctional market, two very large investor-owned utilities on the

verge of bankruptcy, the state of California floating a $10 billion bond issue to ensure that PG&E and So. Cal Edison can continue to purchase power, and the very

real possibility of a state-wide owned transmission system.

Mr. Chairman, since December I’ve heard several people use the ‘‘perfect storm’’

analogy to describe California’s electricity crisis. At this point, I would ask for unanimous consent to insert into the record a ‘‘Dear Colleague’’ I sent on October 13,

2000. The title of the ‘‘Dear Colleague’’—‘Forecast: Storms Ahead! The perfect

storm’.

The text of the ‘‘Dear Colleague’’ is only a few sentences:

‘‘Dear Colleague:

Increased demand, stagnant supply, and a congress stuck in neutral. Are these

three elements combining to create ‘‘the perfect storm’’?

California is only the first ‘‘weather pattern’’ showing up on doppler radar pointing to the growing crisis in our national electric delivery system.’’

On the reverse side of the ‘‘Dear Colleague’’ was an October 11, 2000 article from

the Los Angeles Times chronicling the lack of investment of the transmission grid.

I take no pleasure in predicting California’s electricity problems. I wish I had

been wrong. But Mr. Chairman, with your leadership, I’m confident that this subcommittee will help lay the foundation to alleviate some of California’s energy problems. I look forward to working with you and all interested parties on this worthy

endeavor.

8

Mr. BARTON. Seeing no other members present, the Chair would

ask unanimous consent that all members not present be given the

requisite number of days to submit a formal opening statement in

the record.

Hearing no objection, so ordered.

We want to welcome our first panel.

If everyone testifies who signed up, we are going to have about

30 people today. I will start out with some of the best and brightest. By seniority, Mr. Filner of California, you are recognized for

5 minutes. Your statement is in the record in its entirety.

Welcome to the subcommittee.

STATEMENT OF HON. BOB FILNER, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF CALIFORNIA

Mr. FILNER. Thank you, Mr. Chairman, for giving all of us the

opportunity to testify before this distinguished committee. I particularly thank you for coming to San Diego last summer. You recognized the crisis could spread and you brought your subcommittee

there, and we appreciate that very much.

I represent San Diego, California, which was ground zero in this

whole tragic episode. We were the first part of California to fully

deregulate. That is, our retail prices and our wholesale prices were

deregulated and within the space of 1 month, retail prices doubled;

within the space of 2 months, they tripled. Panic literally ensued

in San Diego, and I think you witnessed part of it, Mr. Chairman.

Scores of small businesses closed, almost right away. There was a

sense that people could not keep up with these prices either as individuals, families or as businesses.

I want to tell the committee that in San Diego, this was not fundamentally a crisis of supply and demand. There were tight supplies, but the summer was less warm than the previous one, the

demand had actually gone down from the previous summer, and

the costs doubled, tripled, and were heading even higher. There

was no cost relationship to these higher prices. The natural gas

price, the higher gas price, had not yet entered the picture. In fact,

at the request of our San Diego delegation, FERC investigated the

situation and found these prices to be unjust and unreasonable,

and, therefore, illegal.

Mr. Chairman the prices that we are paying in California are illegal. And yet FERC took no sanctions against the perpetrators of

those illegal rates, and by not taking action, basically said, ‘‘Go in

and rob the State blind, then rob the region blind, and then rob the

country blind.’’

The utilities in the northern and central parts of our State are

facing bankruptcy, bankruptcy coming about because of the illegal

prices that they have to pay. Mr. Chairman—at this moment, the

State of California is paying for the cost of electricity $2 million an

hour, $45 million a day, $1.2 billion a month. The energy cartel

which is responsible for this has taken $20 billion out of our State

in the last 6 or 7 months, and we are being bled dry.

As we heard from the Representative from Oregon, this has become a regional problem. Washington, Oregon, Idaho and New

Mexico are now paying these higher prices. It will be a national

problem shortly.

9

The President has announced he is going to take a hands-off policy and let the markets work, as we have heard from several members today. I will tell this committee, there ain’t no market in California, there ain’t no market in the Western region. There is a

small energy cartel which controls the prices, and in fact they manipulated the market to their benefit.

I do have legislation, Mr. Chairman, H.R. 268, which not only orders the FERC to set cost-based rates for electricity in our region,

but says that the excessive costs over what is found to be just and

reasonable shall be refunded to the consumers of California. I am

joined in this bill by Congressman Hunter of California, who unfortunately could not be with us today. It is in his district that the

tragic shooting took place. I know that we all mourn for those families.

This is the only way, Mr. Chairman, that California will be made

whole, to refund the money to the utilities of California and the

consumers of San Diego. I think the administration has to act to

do that.

I agree with the chairman of the full committee, we do need more

generating capacity and the Governor is working on that very diligently. And, yes, we need more conservation; and, yes, we need to

work on renewable resources. But the market is not there. The

market has been manipulated. There is evidence of illegal withholding of power. There is evidence of falsifying transmission documents to raise prices. There is evidence of laundering electrons

through other States when there was a cap in California.

Just a couple days ago, Mr. Chairman, a television station in San

Diego ran a story which they showed that Duke Energy, a member

of the energy cartel that I speak about, removed its largest turbine

from production in its San Diego plant 50 percent of the time during the recent Stage 3 alert in California. During 32 days of our

Stage 3 alert, the plant removed from service its largest turbine,

taking out 222 megawatts of power.

We had the power, Mr. Chairman, there was no shortage. They

removed it illegally.

I believe that the FERC must take action to restore price stability for the 3 year transition period during which we are building

new capacity, and they must take sanctions. Just yesterday, Mr.

Chairman, I filed charges against this energy cartel for grand larceny, theft, fraud, attempted murder, and violation of antitrust

rules. This cartel is stealing our economic future, they are robbing

our bank accounts, they are killing off our businesses; and I think

this committee ought to concentrate on bringing this energy cartel

to justice.

[The prepared statement of Hon. Bob Filner follows:]

PREPARED STATEMENT OF HON. BOB FILNER, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF CALIFORNIA

Mr. Chairman and Colleagues, thank you for this opportunity to testify about the

ongoing electricity crisis in the western United States. I would like to thank you,

Mr. Chairman, for following this issue since last summer when you convened a special hearing of this subcommittee in San Diego, California. At that point, only San

Diego was affected and I testified that this was a harbinger of things to come.

San Diego was the first region to be affected by this so-called deregulation crisis

because retail electricity rates were uncontrolled and in the space of one month,

10

rates doubled. Another month passed and rates were triple what they had been just

two months earlier.

This situation became a California crisis when two utility companies became overburdened with debt due the difference in the wholesale price they paid for power

and the retail rates they were allowed to charge their customers.

This situation became a regional problem when the supply of electricity to the

states of Oregon and Washington was reduced and rates were increased. Now, Oregon and Washington were forced to join California in paying more for less electricity. It appears that other states, such as Idaho and New Mexico have been or

soon will be affected.

This situation has now become a national problem and it is imperative that this

Congress, this Presidential Administration, its Justice Department and its Federal

Energy Regulatory Commission (FERC) must act immediately to stop the abuse, the

exploitation that is being perpetrated upon the American people.

This Congress must act now, by immediately approving my legislation H.R. 268,

the Electricity Consumers Relief Act of 2000. This legislation would require that the

Federal Energy Regulatory Commission set cost-based rates for electricity if it

makes the legal finding that wholesale rates are ‘‘unjust and unreasonable.’’ The

FERC made that finding in a report issued last November. In addition, my legislation would require that the energy producers and marketers that profiteered from

these illegal rates be required to provide restitution for their ill-gotten gains to

western region consumers.

This Administration must act immediately by ordering its two agencies, the Justice Department and the FERC, to comply with their mandates to protect the American public. The FERC is mandated to ensure that rates are ‘‘just and reasonable,’’ and the Justice Department is mandated to ensure that the electricity cartel is operating in compliance with our laws.

The FERC has already found that rates are ‘‘unjust and unreasonabl’’—therefore

illegal, but it has refused to act.

Just last week, the California Independent System Operator (ISO) released a report in which they found that California ratepayers were overcharged by the electricity cartel $562 million over a two-month period. That is half a billion dollars in

just two months! In addition, the ISO found that two-thirds of the costs charged by

the electricity cartel in January 2001 were ‘‘excessive.’’ We have been told that the problems in the western region were simply a matter

of ‘‘lack of supply to meet an increasing demand.’’ If this were true, then why are

rates higher in the winter when demand was one-third less than last summer? The

electricity cartel blamed the lack of supply on plant closures for ‘‘routine mainte- nance.’’ I find it hard to believe that it was necessary to shut down 25-33% of our

electrical generating capacity for ‘‘routine maintenance.’’ Well now, there is evidence that shutting down electrical production was to create

a ‘‘shortage’’ of electricity was simply another example of unethical and criminal behavior on the part of the electricity cartel. And I believe it is imperative that the

Justice Department uses all of its powers to investigate what is criminal fraud and

negligence by the electricity cartel.

A couple of days ago, the San Diego ABC-affiliate, KGTV Channel 10, ran a story

in which the plant manager of the Duke Energy plant in my district admitted that

its largest turbine, Generator #4, was removed from service 50% of the time during

the recent Stage III alert in California. Let me repeat, during our 32 days of Stage

III alert in California, this plant removed from service its largest turbine 50% of

the time! This meant that 222 Mw of power was shut down for no good reason!

In addition, the Duke Energy plant completely shut down its second largest generator during the entire 32 days of Stage III alert. To make maters worse, as soon

as the Stage III alert was declared, the output of a generator that was in operation

was reduced by 12 Mw.

The Stage III alert caused severe disruptions to businesses and families in San

Diego. Workers at the Kyocera plant, the National Steel & Shipbuilding Company

(NASSCO) were sent home—without pay—and their family life was thrown into turmoil because we had a ‘‘power shortage.’’ It turns out that we had no such power

shortage—in fact, we had power to spare. Yet prices continue to skyrocket, causing

small businesses to fail, forcing senior citizens to choose between heating their

homes and purchasing food, and gouging all consumers with the artificially inflated

cost of electricity.

Mr. Chairman, it is imperative that all of us—Congress, the Administration, Justice Department and FERC—comply with our mandate to protect the public! FERC

must immediately set cost-based wholesale rates and launch an investigation into

this apparent price-fixing and market manipulation. The Justice Department must

investigate and bring charges against the electricity cartel for criminal fraud and

11

anti-trust violations. And our Congress must act to hold the cartel accountable and

to provide the relief that Americans so desperately need and deserve.

Thank you for allowing me the opportunity t address you today and I look forward

to working with this panel to protect and serve the American public.

Mr. BARTON. We thank you, Congressman Filner. We will put

you down as undecided on the cause of the problem in California.

Mr. FILNER. Was that a question? Do I have another 5 minutes,

sir?

Mr. BARTON. I am going to go to the gentlelady from California,

a member of the subcommittee, Congresswoman Bono. Your statement is in the record in its entirety. We recognize you for 5 minutes to summarize it.

STATEMENT OF HON. MARY BONO, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF CALIFORNIA

Ms. BONO. Mr. Chairman, thank you for agreeing to hold this important hearing on California’s continuing energy crisis. It is comforting to know you are ready and willing to assist our State in this

time of need.

As you well know, over the past decade this committee and our

government have been focused on the new economy. The high-tech

revolution has dominated our agenda while the old economy, like

electricity and other energy concerns, have been put on the back

burner. It is becoming abundantly clear that you need the old economy to run the new economy.

Despite numerous warnings from those in the industry, our country refused to develop a sound policy that addressed both the generation and transmission of energy. Even after the energy crisis of

the 1970’s, our country was focused on short-term solutions rather

than long-term planning. The State of California embarked on a

deregulation plan which, as we have heard often, had several

shortcomings. Combined with uncooperative weather and increased

use in neighboring States, California was faced with the worst possible scenario.

Further complicating this problem was the fact that even the

basic economic laws of supply and demand were left unconsidered.

Our State did not build any substantial new power plants the last

decade, and just as importantly, since 1975, studies indicated that

annual utility investments in the U.S. power transmission system

have fallen by more than half.

Now, due to this lack of a dependable supply, we in California

are faced with the nearly inevitable situation of rolling blackouts.

In the month of July, temperatures in the city of Coachella average

106 degrees; during the summer we even top off at 120 to 126 degrees. Make no mistake, with temperatures this high, blackouts are

not a question of quality of life; rather, they can be a matter of life

or death.

Therefore, we must confront two critical issues, the price of energy and the availability of energy. According to the 1990 census,

the median household income for California’s 44th Congressional

District was $29,000. A family of four who earns about $2,500 a

month before taxes cannot afford an electricity bill of $500 to $600

a month during the summer.

12

While we choose to live in this climate and realize the cost of

cooling our homes will be higher than in other parts of the State,

there comes a point when these costs become unrealistic. As we attempt to understand what brought about these increases on the

wholesale market, we must again turn toward California’s flawed

effort at deregulation.

With the California Power Exchange offering suppliers the highest market clearing price and not the actual bid, we saddled ourselves with unnecessary cost, and despite FERC’s December 15th

order to change its methodology, the PX continued with its practice. Undoubtedly, the loss system set up by the State of California

fed this vulture culture we have witnessed on the wholesale markets.

But even more critical this summer will be the availability of

power. While I applaud the Governor’s efforts to bring on generating facilities as soon as possible, I wonder whether or not these

facilities indeed will be ready by this summer and whether or not

the State will have the capacity to transmit this new power. If not,

I am deeply concerned as to our state of readiness to handle an

emergency such as the one we might be faced with.

The transmission of power is also of major importance. In fact,

two of California’s recent rolling blackouts were blamed on the bottleneck at Pad 15, a 90-mile transmission corridor linking the

northern and southern sections of the State’s power grid.

The inability to shift power within our own State is very disconcerting. We should work on finding a means to encourage capital spending on the grid. If utilities are allowed to receive a higher

rate of return on transmission investments, we can make great

strides in shoring up this foundation.

But while we work to rebuild our ability to generate and transmit energy, part of the short-term solution lies in our ability to conserve energy. I commend the Governor for embarking on an aggressive conservation effort. California is second only to Rhode Island

in per capita electricity use. Still, I think we have the ingenuity

and determination to improve further on this effort.

However, the full bounty of any conservation effort will not materialize unless consumers are sent nominal price signals. We cannot

continue to live in a world of smoke and mirrors while shifting

costs along in another manner. Sooner or later, the bills will catch

up with us.

While the merits of price control State ownership of transmission

lines are being debated, the truth remains that neither adds a single megawatt of power to the grid. Only by encouraging an increase

in supply, can the affordability of price and the consistency of service improve.

Mr. Chairman, while this hearing is focused on the electricity crisis in California, I would also like to commend you for having the

foresight to conduct a hearing last week on the national shortage

of natural gas. Since most new generating facilities in California

are gas powered, the gas shortage is inevitably tied with our ability

to power our State. It is my hope that we do not ignore the difficult

choices our country must make to provide a dependable source of

natural gas.

13

It would seem then that we have many angles to address—price,

availability of electricity and natural gas, and the transmission of

both these sources of energy. As we move forward to face this challenge, I am heartened by the fact that our country and our State

have consistently risen to the task. If we have the courage to make

the difficult choices today, we can pave the way for a successful

and prosperous future.

Now, I am going to take a breath. Thank you, Mr. Chairman.

[The prepared statement of Hon. Mary Bono follows:]

PREPARED STATEMENT OF HON. MARY BONO, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF CALIFORNIA

Mr. Chairman. Thank you for agreeing to hold this important hearing on California’s continuing energy crisis. It is comforting to know that you are ready and willing to assist our state in this time of need.

As you well know, over the past decade, this committee and our government have

been focused on the new economy. The high tech revolution has dominated our

agenda while the old economy, like electricity and other energy concerns, has been

put on the back burner. It is becoming abundantly clear that you need the old economy to run the new economy.

Despite numerous warnings from those in the industry, our country refused to develop a sound policy that addressed both the generation and transmission of energy.

Even after the energy crisis of the 1970’s, our country was focused on short-term

solutions rather than long term planning.

The State of California embarked on a deregulation plan which, as we have heard

often, had several shortcomings. Combined with uncooperative weather and increased use in neighboring states, California was faced with the worst possible scenario.

Further complicating this problem was the fact that even the basic economic laws

of supply and demand were left unconsidered.

Our state did not build any new substantial power plants the last decade. And

just as importantly, since 1975, studies indicated that annual utility investments in

the U.S. power-transmission system have fallen by more than half.

Now, due to this lack of a dependable supply, we in California are faced with the

nearly inevitable situation of rolling blackouts.

In the month of July, temperatures in the City of Coachella average 106 degrees.

During the summer, we even top off at 120 to 126 degrees.

Make no mistake, with temperatures this high, blackouts are not a question of

quality of life, rather they can be a matter of life or death.

Therefore, we must confront two critical issues: the price of energy and availability of energy.

According to the 1990 Census, the median household income for California’s 44th

Congressional District was $29,049.

A family of four who earns around $2,500 a month before taxes cannot afford an

electricity bill of over $500 to $600 a month during the summer. While we choose

to live in this climate and realize the cost of cooling our homes will be higher than

in other parts of the state, there comes a point when these costs become unrealistic.

As we attempt to understand what brought about these increases on the wholesale market, we must again turn towards California’s flawed effort at deregulation.

With the California Power Exchange offering suppliers the highest market clearing

price, and not the actual bid, we saddled ourselves with unnecessary costs. And despite FERC’s December 15 order to change this methodology, the PX continued with

this practice. Undoubtedly, the lawful system set up by the State of California fed

this ‘‘vulture culture’’ we have witnessed on the wholesale market.

But even more critical this summer will be the availability of power.

While I applaud the Governor’s efforts to bring on generating facilities as soon

as possible, I wonder whether or not these facilities will indeed be ready by this

summer and whether or not the state will have the capacity to transmit this new

power. And if not, I am deeply concerned as to our state of readiness to handle an

emergency such as the one we might be faced with.

The transmission of power is also of major importance. In fact, two of California’s

recent rolling blackouts were blamed on the bottleneck at Path 15, a 90-mile transmission corridor linking the northern and southern sections of the state’s power

grid. The inability to shift power within our own state is very disconcerting.

14

We should work on finding a means to encourage capital spending on the grid.

If utilities are allowed to receive a higher rate of return on transmission investments, we can make great strides in shoring up this foundation.

But while we work to re-build our ability to generate and transmit energy, part

of the short term solution lies in our ability to conserve energy. I commend the Governor for embarking on an aggressive conservation effort. California is second only

to Rhode Island in per capita electricity use. Still, I think we have the ingenuity

and determination to improve further on this effort.

However, the full bounty of any conservation effort will not materialize unless

consumers are sent nominal price signals. We cannot continue to live in a world of

smoke and mirrors while shifting costs along in another manner. Sooner or later,

the bills will catch up with us.

While the merits of price controls and state ownership of transmission lines are

being debated, the truth remains that neither adds a single megawatt of power to

the grid. Only by encouraging an increase in supply come the affordability of price

and the consistency of service.

Mr. Chairman, while this hearing is focused on the electricity crisis in California,

I would also like to commend you for having the foresight to conduct a hearing last

week on the national shortage of natural gas. Since most new generating facilities

in California are gas powered, the gas shortage is inevitably tied with our ability

to power our state. It is my hope that we do not ignore the difficult choices our

country must make to provide a dependable source of natural gas.

It would seem then, that we have many angles to address: price, availability of

electricity and natural gas and the transmission of both these sources of energy.

As we move forward to face this challenge, I am heartened by the fact that our

country and our state have consistently risen to the task. If we have the courage

to make the difficult choices today, we can pave the way for a successful and prosperous future.

Mr. BARTON. Thank you, Congresswoman.

Congressman Inslee, we had a spot for you at the dais, and since

you weren’t here, we let Mr. Issa take it. If you will squeeze in,

we will give you a chance on this panel.

We are trying to go by seniority and by members of the committee. It is going to be confusing. I think Mr. Radanovich would

be the next and then Mr. Sherman, Mr. Inslee, and then Mr.

Istook.

Mr. Radanovich, your statement is in the record in its entirety.

You are recognized for 5 minutes.

STATEMENT OF HON. GEORGE RADANOVICH, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA

Mr. RADANOVICH. Thank you, Mr. Chairman, and again, thank

you for holding this hearing today and for also coming out to California a couple of weeks ago to get apprised of our situation.

The California Central Valley district that I represent has experienced both rolling blackouts and the beginnings of rate increases

which will affect us for years to come. The California electricity disaster is not behind us; the worst is yet to come. The State of California continues to hemorrhage while we are transfusing blood into

the victim, but we have not yet done what is necessary to stop the

bleeding at its source.

To describe this crisis simply as a rare one-time event or a perfect storm is also to fail to recognize that California and the rest

of the Nation have serious and fundamental problems in our energy policy. For government officials to say that they did not or

could not see the storm coming is to deny their responsibility in

this disaster.

There are many warning flags in the record to show that responsible officials should have been aware of the forces of increasing deVerDate 11-MAY-2000 13:39 Oct 02, 2001 Jkt 010199 PO 00000 Frm 00018 Fmt 6633 Sfmt 6602 E:\HEARINGS\71502 pfrm01 PsN: 71502
15

mand for energy and restrictions on the supply of energy were to

clash at a price point that was unsupportable. Past low natural gas

prices may have postponed the day of reckoning and recent lowwater years may have accelerated that day, but the day was inevitable.

The California electricity disaster was preventable under a different public policy. A more rational energy policy of encouraging

supplies to meet demand at low prices instead of a policy of restricted supplies at high prices to limit demand the answer. The

root cause of the failure was the unwillingness of government officials to admit and explain that policies have price consequences.

For example, encouraging conservation requires higher and higher

energy prices to encourage more and more savings.

California is already the second lowest energy per capita consuming State in the Nation, and no doubt will be the lowest once

more industry leaves the State because of high energy prices. Clean

air is an important goal, but it requires the investment in technologies that add to the cost of producing energy. Economics dictate

if we do not allow the construction of new facilities, the increasing

competition for the existing resources makes them more valuable.

California regulators have for decades taken advantage of strategies to delay the unacceptable cost impacted on consumers of these

policies. These strategies have included eating into the generation

reserves to satisfy demand for new capacity, gambling on the hope

of low spot market prices, depending on out-of-State resources that

have competing demands, and delaying rate impacts through the

use of artificial consumer rates.

The most recent failed strategy was to hope that deregulation

would provide lower prices forever. Deregulation is an essential

tool for the eliminating and avoiding of unjustified costs, but does

not control the price point. Under deregulation, pricing will settle

high or low depending on the policy that affects the availability of

supply.

So where do we go from here? I was happy to hear the States

of Pennsylvania and Ohio understand that successful deregulation

requires extensive citizen involvement and effective government

deregulators that constantly monitor the markets so that appropriate mid-course corrections are taken in a fairly timely manner.

I was also happy to hear that they understand that sustainable low

energy prices are a result of abundant supplies and not of deregulation itself.

In California, I hope we have also learned the very important lesson about price volatility in both the gas and electricity markets

and that consumer protection from that volatility is essential. It is

unacceptable to pass on all the market risk to consumers, who are

in no position to mitigate much of that risk.

Unfortunately, the California PUC put energy consumers in the

same position as those who choose to live without health insurance.

As long as you don’t get sick, it is the lowest cost approach. But

when you do get sick, you face enormous bills. Adequate consumer

protection could have been provided in the deregulated model by

requiring that consumers be required contracts with terms of either

a fixed price for some period of time, or at a variable price with

escalation caps, as much as mortgages are purchased at fixed rates

16

or adjustable rate mortgages, and prior notification of price

changes. If these consumer protections had been required in California, I believe the utilities, energy marketers and the new producers would not have accepted the flawed restructuring scheme

that was put in place.

These market participants also would have then been motivated

to reduce their risk so as to gain market competitiveness by building new power plants, encouraging demand management and diversifying the energy mix.

Unfortunately, California seems to have fallen back on the regulated model, which previously failed to protect consumers as the

only way to provide consumer protection. The serious flaws of the

regulated model, where an inefficient bureaucratic planning agency

determines the marketplace, have been temporarily forgotten, until

we are forced to relearn them.

I would ask for additional minute, if I may.

Mr. BARTON. If you can make it a quick minute.

Mr. RADANOVICH. Sure.

I am encouraged by the actions of Governor Davis and President

Bush to expedite the permitting of new power generation and

transmission facilities in California. This indicates that the Governor also understands the true answer to the consumer’s need for

energy at reasonable cost lies primarily with an increasing supply.

However, expedited permitting must produce results and not become a faster process for regulators to simply say no.

It is also important to understand that building a large number

of gas-fired power plants will not bring down the cost of energy unless there is an ample supply of inexpensive gas to fire the plants.

The United States must aggressively and responsibly develop its

own gas resources to assure a low-cost supply. There is an arrogance in the view that it is acceptable to develop the gas resources

off the coast of Sable Island in Canada to meet the needs of New

England, but it is not acceptable to develop the same resources off

our own coast. If ANWR were located in Canada, would it be equally environmentally concerned? We must develop our own resources

in an environmentally responsible way and not take undue advantage of other countries to meet our domestic needs.

Thank you, Mr. Chairman, for your interest in the issue. I look

forward to this hearing.

[The prepared statement of Hon. George Radanovich follows:]

PREPARED STATEMENT OF HON. GEORGE RADANOVICH, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF CALIFORNIA

Thank you, Mr. Chairman, for holding this hearing today on the electricity disaster in California. The California Central Valley district I represent has experienced both the rolling blackouts and the beginnings of rate increases, which will affect us for years to come.

I speak today on behalf of the consumers in my district who recognize that they

are the ones who will carry the burden of more blackouts and much higher electricity prices because of the actions, sometimes lack of actions, and decisions of government officials that led to, or at best failed to prevent, the disaster. Higher electricity prices and blackouts have a devastating impact on low and fixed income citizens. Because energy is a part of everything we do, the impact is seen not only in

higher energy bills, but also in loss of jobs, higher rents, higher food bills, and higher bills generally. These bills will only grow larger either by rate increases or tax

increases. We haven’t seen the largest portion of this problem yet.

17

The Central Valley district I represent comprises the two largest agricultural producing counties in the nation. As a result, it continues to be affected by the stagnation of agricultural commodity prices over the past years. Higher bills cannot be

readily passed on or absorbed.

The California electricity disaster is not behind us, the worst is yet to come. The

State of California continues to hemorrhage. We are transfusing blood into the victim, but that we have not yet done what is necessary to stop the bleeding at its

source. To describe this crisis simply as a rare, one-time event, a ‘‘Perfect Storm,’’ is also

to fail to recognize that California, and the rest of the nation, have serious and fundamental problems in our energy policy. For government officials to say they did

not or could not see this storm coming is to deny their responsibility in this disaster.

There are many warning flags in the record to show that responsible officials should

have been aware that the forces of increasing demand for energy, and restrictions

on the supply of energy, were about to clash at a price point that is unsupportable.

Past low natural gas prices may have postponed the day of the reckoning, and recent low water years may have accelerated that day, but the day was inevitable.

The California electricity disaster was preventable under a different public policy.

A more rational energy policy of encouraging supplies to meet demand at low prices,

instead of a policy of restricted supplies at high prices to limit demand, was the answer. The root cause of the failure was the unwillingness of government officials to

admit and explain that policies have price consequences. For example, encouraging

conservation requires higher and higher energy prices to encourage more and more

savings. California is already the second lowest energy-per-capita consuming state

in the nation and no doubt will be the lowest once more industry leaves the state

because of high energy prices. Clean air is an important goal, but it requires the

investment in technologies that add to the cost of producing energy. Economics dictate that if we do not allow the construction of new facilities, the increasing competition for the existing resources makes them more valuable.

California regulators have for decades taken advantage of strategies to delay the

unacceptable cost impact on consumers of these policies. These strategies have included:

• eating into generation reserves to satisfy the demand for new capacity, • gambling on the hope of low spot market prices, • depending on out-of-state resources which have competing demands, • and delaying rate impacts through the use of artificial consumer rates.

The most recent failed strategy was to hope that deregulation would provide low

prices forever. Deregulation is an essential tool for eliminating and avoiding unjustified costs, but it does not control the price point. Under deregulation, prices will settle high or low depending on the policy which affects the availability of supply.

So where do we go from here? I was happy to hear from the States of Pennsylvania and Ohio that they understand that successful deregulation requires extensive citizen involvement; and effective government ‘‘deregulators’’ that constantly

monitor the markets so that appropriate mid-course corrections are taken in a timely manner. I was also happy to hear that they understand that sustainable low energy prices are a result of abundant supplies and not of deregulation itself.

In California, I hope, we have also learned a very important lesson about price

volatility in both the gas and electricity markets, and that consumer protection from

that volatility is essential. It is unacceptable to pass on all the market risks to consumers who are in no position to mitigate much of that risk. Unfortunately, the

California PUC put energy consumers in the same position as those who choose to

live without health insurance. As long as you don’t get sick, it is the lowest cost

approach. But when you do get sick, you face enormous bills.

Adequate consumer protection could have been provided in the deregulated model

by requiring that consumers be provided with contracts at terms of either a fixed

price for some period of time, or at a variable price with escalation caps, much as

mortgages are purchased as fixed rate or as ARMs; and prior notification of price

changes. If these consumer protections had been required in California, I believe the

utilities, energy marketers and new producers would not have accepted the flawed

restructuring scheme that was put in place. These market participants also would

have then been motivated to reduce their risk so as to gain market competitiveness

by building new power plants, encouraging demand management, and diversifying

the energy mix.

Unfortunately, California seems to have fallen back on the regulated model, which

previously failed to protect consumers, as the only way to provide consumer protection. The serious flaws of the regulated model, where an inefficient bureaucratic

planning agency determines the market place, have been temporarily forgotten until

we are forced to relearn them.

18

I am encouraged by the actions of Governor Davis and President Bush to expedite

the permitting of new power generation and transmission facilities in California.

This indicates that the Governor understands that the true answer to the consumers need for energy at a reasonable cost lies primarily with increasing supply.

However, expedited permitting must produce results, and not become a faster process for regulators to simply say ‘‘No.’’ It is also important to understand that building a large number of gas fired power

plants will not bring down the cost of electricity unless there is an ample supply

of inexpensive gas to fire the plants. The United States must aggressively and responsively develop its own gas resources to assure a low cost supply. There is arrogance in the view that it is acceptable to develop the gas resources off the coast of

Sable Island, Canada to meet the needs of New England, but that it is not acceptable to develop the same resources off our own coasts. If ANWR where located in

Canada, would we be equally environmentally concerned? We must develop our own

resources in an environmentally responsible way and not take undue advantage of

other countries to meet our domestic needs.

In summary, a lesson of the California electricity disaster is that our energy policy must focus on meeting the energy needs of America’s consumers at a reasonable

cost. We must provide the consumer adequate protection from higher and higher

prices by developing all of our energy resources in a responsible manner.

Mr. Chairman, there are things the Federal government can do now to help California start immediately on the path to correct the fundamental problems instead

of compounding the problem. I have developed and propose for your consideration

the attached letter to the Governor offering to assist wherever it is feasible to resolve the California crisis. However, we must be asked to provide the assistance, as

clearly this crisis requires a largely State initiated solution.

Thank you again Mr. Chairman for interest in this issue and holding this hearing.

I look forward to working with you in developing a national energy policy for the

benefit of our Nation.

Mr. RADANOVICH. I also have a letter to Gray Davis on possible

ways that the Federal Government might be able to help in this

if he is so inclined to ask. I would like to submit that for the

record.

Mr. BARTON. Without objection.

[The letter follows:]

U.S. HOUSE OF REPRESENTATIVES

WASHINGTON, D.C.

March 3, 2001

The Honorable GRAY DAVIS

Governor, State of California

Sacramento, CA 95814

DEAR GOVERNOR DAVIS: I am writing to discuss the California energy situation.

The fundamental problems that led to the California electricity disaster cannot be

corrected with simple, quick, crisis driven actions which avoid or postpone the more

difficult decisions that are also necessary. Addressing the fundamental problems

will require constant hard work, attention, openness, and reporting for several years

to come. An extraordinary, expedited process must be implemented now to bring together all the parties, especially consumers, to a common table to establish a comprehensive plan of action and make sure it is implemented successfully. I encourage

you to involve consumers especially so they understand and agree with the future

vision for meeting electricity needs in California, what it will cost, and how it will

benefit them. As you know, time is of the essence.

The federal government can participate beneficially, in a collaborative and expedited manner, in such an extraordinary process. For the near-, mid- and longerterms, until the situation is fully corrected, it can assist by providing:

—enhanced market monitoring to prevent abuses;

—a third party view of the reasonableness of proposed bilateral contracts to spur

negotiations;

—coordination of federal reviews of power generation facilities to expedite permitting and construction;

—expertise to identify and correct the flaws in the current restructuring scheme to

help California establish an effective path to the future;

—accelerated input on its designs for a Regional Transmission Organization (RTO)

in the West, including California, to establish a more effective wholesale market;

19

—expedited analysis of Path 15 and other transmission ‘‘bottlenecks’’ to maximize

the flow of lowest cost power;

—anticipatory FEMA assistance, until adequate electricity supplies are brought online, to reduce the impact of brownouts and blackouts.

I will work with you to help obtain this federal participation and assistance in

setting California on an effective path to a future of low-cost and abundant electricity for its citizens. Thank you for your attention to this pertinent matter.

Sincerely,

GEORGE RADAVOVICH

Member of Congress

Mr. BARTON. The gentleman from California, Mr. Sherman. Your

statement is in the record. You are recognized for 5 minutes.

STATEMENT OF HON. BRAD SHERMAN, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF CALIFORNIA

Mr. SHERMAN. Thank you, Mr. Chairman, for holding these hearings. I want to commend my colleagues from California. They have

presented much useful information that I will try to avoid repeating. I agree with most of what they have said on both sides of the

aisle.

I would point out that this was a crisis that the smartest people

in the country did not see. The smartest people on Wall Street

were not selling PG&E or SoCal short, and the executives for these

two large utilities were not objecting to the structure of the situation as recently as a year ago. This caught a lot of us by surprise.

This problem is perhaps greater—— Mr. BARTON. Congressman Inslee, you might want to go down

there where that microphone is.

Mr. SHERMAN. I will miss you.

Mr. BARTON. I am sorry.

Mr. SHERMAN. The problem is perhaps greater than we realize.

It could push California into a recession. That could pull the Nation into a recession.

Beyond the economics, people will die in California and the West

this summer. Some will die because of crime caused by rotating

blackouts. Some will die in overheated apartments without air conditioning.

This problem is not only one of electrical generation, it may also

be one of natural gas supply in California. I do not think that we

will have a supply crisis nationwide, but in California, we use natural gas to generate electricity, and we may not have enough of it

to even fire up the limited number of plants that we have.

I am here to support one small step toward conservation which

will be the least controversial thing Congress could do to help this

crisis, and the quickest thing that Congress can do, and that is to

allow California and other Pacific time zone States to adjust daylight saving time in order to conserve energy. I ask this committee

as quickly as possible to have a markup on H.R. 704, a bill I proposed to this Congress roughly a month ago—actually less than

that—and which has cosponsorship from such diverse members as

Mr. Filner and Mr. Doolittle.

What this bill would do is simply allow California to alter its

daylight savings time and allow other Pacific States to do the

same. This is in response to a resolution passed by the California

legislature last year asking for this freedom. I think people on both

20

sides of the aisle will believe that we ought to let the Federal Government allow California to respond to this crisis.

My own suggestion to the State government is, if this power is

available, we should go to double daylight saving time from May

1st until Labor Day. This is a period of time when even if we were

on double daylight savings time, it would be light at 7 a.m. in the

morning. It is also a period of time when children are not going to

school except during May, when, as I say, it would be lighten well

before 7 a.m., and it is the period of time when we are going to

face the greatest energy crisis since the electrical availability crisis

will be greatest when the days are warmest.

The other States in the Pacific time zone are given the same

freedom, first because they also have an energy crisis that they

share with us, and second, because many of these States want to

remain in sync with California, and that is perhaps why the bill

is cosponsored by Shelley Berkley of Nevada.

Now, daylight saving time will save between 1 and 2 percent of

our energy. This is as a result of a recent study done by the California Department—California Energy Commission and is consistent with quite a number of studies done by the U.S. Department of Transportation. As a matter of fact, daylight savings time

was initiated for the purpose of saving energy during World War

I and has been reemployed several times during other energy crises

such as World War II and the 1970’s.

In addition to the reduction in energy usage, that energy usage

reduction will take place just at the right time; that is to say,

roughly between 5 and 7 in the evening or 5 and 8 in the evening

when energy demand is at one of its peaks during the day. This

is because when people go home, they will not have to turn on all

the lights in their home in order to make it light; they need simply

raise the curtain. It is when people first begin arriving home when

homes are operating and using electricity and businesses are still

open using electricity as well. It is one of the times we need to reduce energy usage.

In addition, studies show, including a 1975 study from the Department of Transportation, that daylight saving time of this type

would reduce crime and that it would reduce traffic accidents as

well.

I would hope that this committee would move forward as quickly

as possible on what, as I mentioned before, would be the one thing

I think we could do that is noncontroversial and we can do quickly.

Thank you.

[The prepared statement of Hon. Brad Sherman follows:]

PREPARED STATEMENT OF HON. BRAD SHERMAN, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF CALIFORNIA

Mr. Chairman, thank you for giving me the opportunity to testify before the subcommittee this afternoon.

We all recognize that the crisis facing California is a complex problem that no single action will resolve. I would like to discuss one step Congress can take to give

California an additional tool with which to combat this crisis: authorizing California

to adjust it’s time to conserve energy.

H.R. 704—THE EMERGENCY TIME ADJUSTMENT AUTHORIZATION ACT

Last year, the California State Legislature passed Assembly Joint Resolution

(AJR) 56 asking Congress to permit California to move immediately to daylight savVerDate 11-MAY-2000 13:39 Oct 02, 2001 Jkt 010199 PO 00000 Frm 00024 Fmt 6633 Sfmt 6621 E:\HEARINGS\71502 pfrm01 PsN: 71502
21

ing time (DST) in order to help solve the energy crisis. Congress has yet to act. California State Senator Betty Karnette has reintroduced the resolution during the current legislative session and she asked me to introduce legislation at the federal level

to allow California to lengthen daylight saving time.

H.R. 704, the Emergency Time Adjustment Authorization Act (ETAAA), which I

introduced on February 14, 2001, would authorize California and the other Pacific

Time Zone states to adjust their time if the State Legislature of a State finds that

an adjustment would lead to energy reduction. If one State makes a finding that

an adjustment would lead to energy reduction and adjusts its time, the other States

in the time zone could make an adjustment without making a similar finding. The

bill extends this authority to the Pacific Time Zone states until December 31, 2003.

Mr. Chairman, as Congress considers H.R. 704, there are a number of important

points to remember about the bill: (1) H.R. 704 does not require California or the

other States to make adjustments to their time; (2) it does not mandate what adjustment the States must make; (3) the bill is temporary in nature, to allow California to deal with the crisis at hand; (4) historical and contemporary analyses of

the effects of daylight saving time indicate that extended daylight saving time does

indeed save significant energy, in addition to other ancillary benefits. In short, it

gives a temporary authorization to the California and the other western states to

adjust their time to deal with a very specific problem.

H.R. 704 Gives the Authority and the Responsibility to the State Legislatures

The President has indicated that the energy crisis is a State issue which demands

a State response. H.R. 704 does not require California or the other States to make

adjustments to their time. Rather, the bill authorizes the States to adjust their time

if they make a finding that such an adjustment would ‘‘help alleviate the energy

crisis.’’

H.R. 704 gives the State legislature a tool it needs to address the energy crisis,

specifically, the authority to adjust the time in a manner which benefits the state

the most. The State legislature is the appropriate body to consult with the transportation authorities, broadcast corporations, school districts and other interested parties in the State regarding the adjustment of time.

There is No Congressional Mandate for Action

The Emergency Time Adjustment Authorization Act authorizes action; it does not

require it. The Legislature has asked for this authority, so it is likely that they

would use this authorization. By granting the authority without giving the State a

mandate, the bill provides California with the tools to ease the burden. The bill

opens the doors for action; it does not tell California which door to walk through.

My suggestion to California is double daylight saving time—standard time plus

two hours—from May 1 to Labor Day. Under this plan, it will be light by 6:52am

during the school year and well before 7:30am in the August and pre-Labor Day period. Also, the warm Summer months are when we will have the greatest electrical

shortage.

The Authority to Adjust the Time is Temporary and Specific in its Rationale

The authority that the bill grants to the States is temporary and its purpose is

limited in nature. The bill gives the States the authority to adjust their time until

December 31, 2003.

Other Pacific Time Zone States

H.R. 704 gives other Pacific Time Zone States the same authority as California.

These states face many of the same electrical shortages as California. Even if they

did not, some Pacific Time Zone States may feel the need to keep time with California. I am pleased that Representative Shelley Berkley of Nevada is a co-sponsor

of my bill.

BRIEF HISTORY OF THE EFFECTS OF DAYLIGHT SAVING TIME

Mr. Chairman, throughout the history of daylight saving time, Congress has adjusted daylight saving time to conserve energy in times of crisis. The energy crisis

that grips California calls for this unusual, but not unprecedented, step to ease the

burden on the California power grid.

When daylight saving time (DST) was first enacted by Congress in 1918, its purpose was to conserve resources for the war effort. During World War II, the United

States observed daylight savings time year-round from 1942 to 1945 for the same

reason. And, in the 1970’s, Congress extended daylight saving time in response to

various energy crises.

22

Following the extension of daylight saving time in 1974, Congress directed the Department of Transportation (DOT) to conduct a study on the effects of the extended

daylight saving time. The DOT study released in 1975 made a number of conclusions. The following list is not inclusive of the entirety of the report’s conclusions.

• DST saves energy. DOT estimates that observing DST in March and April saved

the equivalent in energy of 10,000 barrels of oil each day—totaling 600,000 barrels each year in 1974 and 1975.

• DST saves lives and prevents traffic injuries. DST allows more people to

travel home from work and school in the daylight, which is much safer than

darkness. And, according to the DOT report, except for the months of November

and December, DST does not increase the morning hazard for those going to

school and work.

• DST prevents crime. Because people get home from work and school and complete more errands and chose in daylight, DST seems to reduce people’s exposure to various crimes, which are more common in darkness than in light.

DST Saves Energy

DST saves energy because it alters the time at which demand for electricity is

at its peak. One of the peak demand periods for electricity occurs between 5pm-8pm,

when the sun sets and people come home from work. As people come home from

work, their first inclination is to turn on a light. If people come home and it is light

outside, there is less of an inclination to turn a light on. But pushing the sunset

back one hour does not save the energy alone. Energy savings is realized because

even with the time adjustment, people tend to go to sleep at the same time under

daylight saving time as standard time. And, in the morning, whether it is light out

or not, lights are turned on. People get ready for work and school. And, it takes the

same amount of time to get ready to go to work or school under daylight saving time

as it does under standard time.

Data analyzed by the DOT and the California Energy Commission (CEC) support

the claim. The 1975 DOT report estimated that year-round DST resulted in approximately 1% reduction in energy consumption.

In response to the resolution passed by the California Legislature and the introduction of H.R. 704, the California Energy Commission (CEC) is reviewing data on

the conservation benefits of daylight saving time. The following information is preliminary and the final review should be completed in the very near future.

• According to CEC econometric analysis, DST would save California about 500

MWh in the Spring months.

• Results of the CEC study on DST’s ancillary benefits during the Spring months

are consistent with the 1975 DOT report.

DST Saves Lives and Prevents Traffic Injuries

DST saves lives and prevents traffic injuries. DST allows more people to travel

home from work and school in the daylight, which is much safer than darkness.

And, according to the DOT report, except for the months of November and December, DST does not increase the morning hazard for those going to school and work.

The 1975 DOT report states that ‘‘after the nation goes on DST there is one hour

more of darkness in the morning and one hour less in the evening.’’ The DOT hypothesized that there should be an increase in morning fatal accidents and a decrease in evening fatal accidents. Since there are more fatal events in the evening,

DST should produce a net decrease in the total number of fatal accidents.

According to the report, as a result of DST, there was a net reduction of .7% in

fatal motor vehicle accidents during the DST period, March and April 1974, compared to the non-DST period March and April 1973. It is estimated that 50 lives

were saved and 2,000 injuries avoided during this two month period as a result of

DST.

The report found DST negatively effected the rate of school children fatalities in

November and December only. In fact, the report demonstrated that DST reduced

the number of school children fatalities by between 18%-40% in March, April and

October 1974.

DST Prevents Crime

The 1975 DOT study included the results of a study that was conducted on Los

Angeles and Washington, DC by the Law Enforcement Assistance Administration

(LEAA). While the data on Los Angeles were inconclusive, the Washington DC data

show consistently less violent crimes (-10%—-20% difference) for DST periods when

compared with similar periods of standard time. Statistics on other crimes were less

significant and less reliable.

23

AVERAGE SUNRISE AND SUNSET TIMES

The following chart describes the average sun rise and sun set times in Los Angeles for year-round Standard Time (ST), year-round Daylight Saving Time (DST) and

year-round double Daylight Saving Time (DDST). Bold indicates the average sun

rise and sun set under current law. The average time does not take into effect the

effect of partial DST in April and October. The table treats April and October as

being on DST the entire month.

Average Sunrise and Sunset Times for Standard Time, Daylight Saving Time and Double Daylight

Saving Time

Month Sun Rise

(ST)

Sun Set

(ST)

Sun Rise

(DST)

Sun Set

(DST)

Sun Rise

(DDST)

Sun Set

(DDST)

January ................................................................. 6:57am 5:08pm 7:57am 6:08pm 8:57am 7:08pm

February ................................................................ 6:38am 5:36pm 7:38am 6:36pm 8:38am 7:38pm

March .................................................................... 6:02am 6:01pm 7:02am 7:01pm 8:02am 8:02pm

April ...................................................................... 5:22am 6:24pm 6:22am 6:24pm 7:16am 7:24pm

May ....................................................................... 4:52am 6:48pm 5:52am 7:48pm 6:52am 8:48pm

June ...................................................................... 4:42am 7:05pm 5:42am 8:05pm 6:42am 9:05pm

July ........................................................................ 4:53am 7:04pm 5:53am 8:04pm 6:53am 9:04pm

August .................................................................. 5:15am 6:38pm 6:15am 7:38pm 7:16am 8:38pm

September ............................................................. 5:37am 5:59pm 6:37am 6:59pm 7:37am 7:59pm

October ................................................................. 5:59am 5:19pm 6:59am 6:19pm 7:59am 7:19pm

November .............................................................. 6:26am 4:50pm 7:26am 5:50pm 8:26am 6:50pm

December .............................................................. 6:51am 4:46pm 7:51am 5:46pm 8:51am 6:46pm

CONCLUSION

Mr. Chairman, giving California the option to adjust the time in California will

not by itself solve the energy crisis, but it will help. I hope you will act soon on

H.R. 704 which already has 14 bipartisan co-sponsors from California and Nevada.

I thank you for the opportunity to testify on this important issue.

Mr. BARTON. We thank you. We will look into that. When Congressman Boucher, the ranking Democrat gets here, we will check

with him. It looks like an idea whose time may have come. We will

work on that.

We now recognize the gentleman from Washington State, Congressman Inslee. Your statement is in the record. You are recognized for 5 minutes.

STATEMENT OF HON. JAY INSLEE, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF WASHINGTON

Mr. INSLEE. Mr. Chairman, Members, thank you for letting me

join you.

I am here to report two disasters out in the Seattle neck of the

woods where I hail from. First, as of you have heard about, the 6.8

earthquake in Seattle last week. I want to report to you the Federal Government has done a good job responding to that natural

disaster. FEMA is there on the job trying to deal with people’s

problems. Things are okay with the earthquake when it comes to

the Federal Government.

But in the energy price disaster, these obscene price hikes we

have seen which are driving people to food banks, which are taking

people’s jobs, which have the potential to ripple through the whole

U.S. economy and drive us over the brink—the cliff potentially of

recession—the Federal Government has been a pathetic disaster in

itself in refusing to come to the aid of the West. It has done so despite the fact it has got a tool at its disposal. Short-term wholesale,

cost-based electrical Western energy caps that we ought to adopt

24

in short order in this country to prevent that disaster from occurring.

To me, it is remarkable, the difference in the Federal Government that has helped so well in our earthquake and so poorly in

the larger-scale disaster of these electrical rates; and it boggles my

mind why that has been taken off the table, Mr. Chairman, and I

will tell you why.

The rate hikes that we have seen that people are experiencing

are unprecedented in the U.S. economy. People are experiencing

residential rate increases of 50 percent already, and they could go

to 80 to 100 percent this year. I will give you a sample of three

conversations I had last week.

I went to the food bank and talked to people who were working

two jobs. They have never been in a food bank before, but by gum,

they are there now because of these energy prices have spiked so

high.

I talked to a fellow on a ferry boat whose uncle was losing a job

as a longshoreman because the aluminum industry is going to heck

in a handbasket because of these enormous price hikes.

The third and perhaps most disturbing to all of us are the words

of Alan Greenspan when he testified last week at Financial Services, who pinpointed these energy prices as one of the greatest danger signals to the U.S. economy. This is a national problem, not

just a Western United States problem, and the Federal Government has failed to act.

Now, what can they do? FERC at this time has a congressionally

established plan already. The tool is already in the Federal toolbox.

The tool says that if you have got unreasonable prices, FERC can

establish some meaningful short-term wholesale price tariff so you

have a cost-plus profit system in this country on a short-term basis.

This is already law, and the administration, to date, failed to even

consider it.

How should you do it? Let me tell you why the administration

has been loath to even consider this to date. They have been concerned that it would end up being a long-term rather than a shortterm price cap. I think that is a legitimate concern, and we can establish a price cap that is limited either as to a specific time, No.

1, or to a trigger mechanism which will have the cap expire when

certain conditions exist. For instance, it has been suggested that

we have the cap expire when utility reserves get to a certain level.

We can deal with this to make sure it is short term.

The second criticism of this proposal has been it will be a disincentive for the creation of new generating capacity. That also is

a legitimate issue, but we deal with that very simply by this: We

exempt new generating capacity from the price cap. We exempt it,

or we exempt long-term contracts. There are many ways to deal

with this price cap.

But I will tell you what we believe we need right now. The whole

U.S. Economy and the people I represent are going to food banks

because of their energy prices. We need the administration to sit

down in a bipartisan fashion to fashion a wholesale short-term

price cap which will not be a disincentive for the creation of new

generating capacity, which will have some means to make sure it

25

is short term, to act as a circuit breaker for what is going on in

the U.S. economy. We just need a circuit breaker.

I am also here to tell you this is not the panacea to our energy

problems. But to relieve these small businesses suffering on a

short-term basis, it is necessary, if you don’t want to see this economy continue to go downhill.

I encourage you all to join us. I have sent a letter today with 25

Members asking the administration to discuss this with us. It does

not take legislative action. It simply needs the administration to

take a look at how severe this problem in the West is and get a

little bit creative on how to deal with the problem.

Thank you, Mr. Chairman.

Mr. BARTON. We appreciate your input.

We would like to hear from Congressman Issa. I apologize for

saying Issa; I am told it is Issa. Your statement is in the record.

You are recognized for 5 minutes.

STATEMENT OF HON. DARRELL E. ISSA, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF CALIFORNIA

Mr. ISSA. Thank you, Mr. Chairman. For the record, Rush

Limbaugh is getting it wrong too. It is the nature of a name like

mine. Since you have been so kind as to put my entire statement

into the record, I will not read from it nor repeat it.

I would like to urge this body to think federally, to think longterm. First of all, deregulation has not been proven to be a failure

because California has not had deregulation. Second of all, for deregulation or any other free market system to work, you must tear

down barriers to entry. California did not do this.

It takes so long to get a permit and, in fact, self-help permits,

what is normally called ‘‘distributed power’’ has been all but prohibited in California. So between the long times necessary and a

grid which was closed to many of the potential 10 or less, sometimes even more, 15 or 20 megawatt producers, by closing that,

they in fact closed a huge amount of supply. I believe that this

body can easily get caught up in what is both the administration’s

job and, in fact, the State of California Governor’s and legislature’s

job.

One of those problems is in fact to deal with the production of

energy and in fact to look at its own internal regulations that have

been barriers to entry. California today imports electricity. Much of

that electricity directly or indirectly comes from non-natural gas,

fossil fuel production. It comes from hydroelectric, something which

California has been in fact reducing by determining that in hydroelectric versus fish, the fish win. That is not wrong—not that preserving the environment is wrong, but buying power from other

States, so that in fact you shift that which you are not willing to

do in your own State to other States, is a mistake.

States which produce clean coal in fact are supplying electricity

directly or indirectly to California, a State that essentially, other

than the limited amount of nuclear and a limited amount of hydroelectric, allows only natural gas.

Today, with the shortage of natural gas as we bring on power,

we are faced with an absence of sufficient natural gas. There is sufficient natural gas around the world if we had the willingness to

26

bring in liquefied natural gas. California has not been willing to,

and I do not expect them to.

The present natural gas generators without scrubbers typically

put out about 15 parts per million of the prohibited pollution, while

diesel and other liquid distillates put out about 25. In many parts

of the country, those generators, which are not allowed to be operated here, are operating. Around the world, those that are not allowed to operate here are operating. California has taken an attitude that its air must be clean while in fact it is polluting other

parts of the country.

This is not to disparage my own State. I live in a wonderful State

and one that shows a lot of promise for the future in leading the

country. However, if you in fact were to encourage price caps to be

on for a long length of time, in all fairness to my colleague, it is

one thing to limit the price of water right after an earthquake, but

a year later, if no one has dug a well, it is not fair to keep that

price artificially low.

California has had artificially low prices for a long time. In fact,

I would propose, in addition to legislation which my office is working on, to free up the ability to have distributed power, thus alleviating some of the demands on the grid. It will be easier in California.

I would suggest certain other ideas which our office has been

working on. Energy self-sufficiency could include Federal buildings

within California providing their own distributed power, something

that circumvents the State’s willingness to do that, and military installations which have been barred from producing their own

power.

I have spoken with several of the base commanders. They are

certainly willing to reduce their costs and increase their likelihood

of a steady supply if this body will in fact empower them to

produce their own rather than buying off the economy, which has

been the tradition.

Additionally, tribes such as the Pechanga Native Americans in

my district are now putting in their own power generation because,

in fact, they can do it, and they can do it without the limitations

the State has placed.

These and other solutions are possible, but energy self-sufficiency

has to be a two-way street. I encourage this body to press the State

of California to participate in these solutions.

Thank you very much, Mr. Chairman.

[The prepared statement of Hon. Darrell E. Issa follows:]

PREPARED STATEMENT OF HON. DARRELL ISSA, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF CALIFORNIA

Thank you, Mr. Chairman for giving Members the opportunity to testify before

your Subcommittee on a subject that is so crucial to our districts. I respectfully ask

to revise and extend my remarks and that my full testimony be entered into the

record.

Let me start out by expressing my appreciation for your leadership and hard work

that you’ve shown, Mr. Chairman, on the California energy crisis. I know you have

traveled to California twice in the past six months and continue to meet with all

parties involved, so you already have an understanding of the complexity and the

urgency of the situation.

I would like to point out some simple truths and lessons that can be learned from

this experience, and then share with the Subcommittee several initiatives that I’m

27

working on that are a small but important part of the solution to the energy problems facing California.

We find ourselves facing a crisis today because of an historical lack of leadership

and the absence of a comprehensive energy policy. From the Governor’s office to the

state Public Utilities Commission to the state Energy Commission, and even the

state legislature, these public officials over the last two decades failed the California

energy consumer. They failed to plan for the increased demand for electricity; they

failed to diversify the state’s energy portfolio; they failed to invest in transmission

and generation capacity; they failed to provide electricity consumers with real

choice; they failed when they only restructured the wholesale market while shielding ratepayers from price signals that would trigger necessary conservation; and finally, they failed to take responsibility for problems the state created this past summer. And now, nearly a year into the crisis, the state response is sluggish at best— with state officials scrambling to pursue missed opportunities and avoiding responsibility.

Rather than allowing energy consumers to see the true cost of electricity and send

the appropriate price signals to conserve, state politicians continue to shift the cost

to state taxpayers—spending billions of dollars to shield themselves from the political fallout. Only yesterday, Mr. Chairman, a state Senate Committee voted to extend retail rate caps through 2003, further undermining a struggling utility that is

prohibited from passing the true cost of energy to its user.

Much of the state activity in resolving this issue has centered on price caps and

rate freezes, and many of the Members testifying today are advocating a temporary

‘‘time out.’’ This is not the right answer. Before considering a rate freeze or price

cap, several objectives must be met.

First, it must be linked with a long term plan demonstrating that the supply of

electricity will keep pace with demand and that the state will ensure for the proper

infrastructure to achieve this plan. Second, the state must make tough choices in

diversifying our energy portfolio. I applaud efforts to increase the use of renewable

energy, but renewable energy is only a partial solution. Reliance on natural gas has

a cost. We must take another look at nuclear energy, hydropower, and other resources. Third, California needs to do a better job of working with and coordinating

with the other western states. What happens in one state dramatically affects another; in fact, ratepayers in surrounding states have seen their electricity bills increase considerably more than those in California. The West must have a single energy strategy. Finally, a deadline must be included with any freeze or cap. It must

not continue indefinitely, otherwise we lose the incentive to make the tough choices

we face to work through the crisis.

We all have a responsibility to roll up our sleeves and begin the hard work necessary to ensure that California and the West move towards an energy solution. It

will take state, local and federal officials to work together through the regulatory,

permitting and siting processes to expedite the building of new generation and

transmission capacity and significant investment in improving existing infrastructure. It will take individual initiative to conserve energy and act responsibly.

While California has the bulk of responsibility and the greatest ability to respond

resides with the state, there are several positive steps that the Federal government

can do to help California. I have been working with Representative Heather Wilson

from New Mexico in developing a legislative package to promote energy self- sufficiency. That’s the message I bring to you today—energy self sufficiency. Let’s empower people in California to help themselves out of this crisis. The technology exists today to allow businesses, municipalities, even individuals, to generate their

own energy—to become self-sufficient—and in many cases to produce excess power,

which can be put on the grid for other users. This micro-turbine and small natural

gas turbine technology is clean, quiet, and efficient. It provides a solution for high

tech companies that might otherwise leave the state because of concerns about the

reliability of California’s energy supply, and increases generating capacity while reducing the strain on the grid.

There are several artificial barriers to the proliferation of this technology. The

utilities have historically resisted the move to energy self-sufficiency with high fees

for connecting to the grid and technical roadblocks. The bill that I intend to introduce with Rep. Wilson will establish the right of distributed generation users to

interconnect to the grid, establish national technical standards for interconnection,

determine fair and reasonable costs to interconnect, include a tax incentive to purchase distributed generation units, and authorize the Department of Energy’s R&D

program on alternative technology. I look forward to working with this Subcommittee in moving this bill through the legislative process.

Other positive initiatives that can be worked on at the federal level include enhancing energy self-reliance in federal buildings and installations. There are several

28

military bases that have the proper pipelines and grid infrastructure to have independent generators, but a provision in law that requires them to purchase energy

from the private sector prevents a move to self-sufficiency. Minor language included

in the upcoming Defense Department authorization bill could make this happen.

Distributed generation demonstration projects at federal buildings would also alleviate some of the burden on the grid. The Pechanga Indian tribe in my district is also

taking proactive steps. Local tribal leaders met with FERC to see what would be

necessary to build a 50-megawatt power plant on their reservation. It turns out that

tribes don’t need permission from the federal government to become energy self-sufficient. I encourage Members and officials to work with their tribes to find ways to

become more self-reliant and energy efficient at the local level. These are all modest

initiatives, but they send a message. If we’re going to make consumers and businesses make tough decisions to conserve and reduce consumption, the federal government must do its part as a user of the grid and a major consumer of electricity.

In meetings with local communities and city councils over the February District

Work Period, many came to me with local infrastructure projects, several of which

were energy dependent. I told them that they had to include plans to either reduce

their energy needs or create new energy sources—again, emphasizing that we’re all

in this together. One city has a methane source from a landfill that they are simply

venting into the atmosphere. A small generation facility could produce energy from

that waste gas and have an added clean air benefit.

Mr. Chairman, there are no easy answers. It takes strong leadership to make

these tough decisions. Absence of leadership will only exacerbate and continue the

energy crisis. It is time for the Governor, state regulators, and the state legislature

to get their heads out of the sand and lead. It is time for those of us in Washington

to roll up our sleeves and do what we can to encourage this effort.

The American people have a history of solving problems where government has

failed to do so. We have a responsibility and an obligation to let them help us out

of this crisis. As you move forward in addressing this crisis, please make energy

self-sufficiency and distributed generation a part of the solution.

Again, Mr. Chairman, thank you for allowing me the opportunity to share my

thoughts with you. I look forward to working with you and my colleagues on these

critical issues.

Mr. BARTON. Thank you, Congressman Issa.

We would now like to hear from another Californian, Congressman Mike Thompson. Your statement is in the record and you are

recognized for 5 minutes.

STATEMENT OF HON. MIKE THOMPSON, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF CALIFORNIA

Mr. THOMPSON. Thank you, Mr. Chairman and members. I want

to thank you for allowing me to testify. I think the fact that we are

having this hearing today is emblematic of the importance that we

all see in solving this energy crisis that not only affects California

but will affect the entire Nation. I have a statement that I would

like to submit.

Mr. BARTON. Without objection.

Mr. THOMPSON. Thank you. And I would like to just make some

brief remarks today.

It is important to note that this California energy crisis is not

just a California crisis. It is a crisis that could affect the whole

country, and failure to adequately ensure reliability of supply at affordable rates in California could have an economic ripple that goes

across the entire United States and hurts, where California in the

past has really been the engine that has driven this economic boom

that we have all benefited from.

In my district, we have had tremendous impact from the energy

problems, both on individuals and on businesses. I have had timber

operations that have been disrupted. I have had a pulp plant that

has been shut down and a particle board plant that has been shut

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down. One dairy in my district had to throw away thousands of

gallons of milk because the rolling blackout stopped them from

being able to process this milk. I have a senior center that may

have to close its doors permanently because it can’t afford to pay

its energy bill and the ongoing energy costs of keeping those doors

open.

I have small electrical generators who have been selling power

to PG&E for a number of years, and I have two in one small county

in my district that together are owed $26 million from PG&E for

electricity that they have generated, sold, and not been paid for.

Not only has this hurt this individual business but any of you can

imagine the economic impact of taking $26 million out of a county

in your district. And individuals have experienced such trouble and

such costly bills that they are just too numerous to mention.

I think it is important to note that everybody has focused on trying to solve this problem. State level, Federal level, everybody has

some idea as to how it can be dealt with. Everything from energy

conservation to seeking out long-term contracts, to the State of

California buying transmission lines, to the expediting of building

permittings for generators. But the fact remains, there is only the

Federal Government can take action that will provide immediate

relief, and that action would be in the area of temporary cost-based

price caps. Anything else is a long-term solution, and individuals

and businesses in California cannot wait for long-term solutions.

We need to step up to the plate and help solve this issue.

I would encourage this committee to take swift action on the

Eshoo-Hunter bill and to encourage, to demand that FERC take

swift action. They have already found that generators have been

charging unjust and unreasonable prices. They have a responsibility to all consumers, businesses or individuals, to take action immediately, to intercede in this effort and to provide some relief.

I would like to thank the committee. I have my testimony here

that I would like to submit and appreciate your convening this

hearing.

[The prepared statement of Hon. Mike Thompson follows:]

PREPARED STATEMENT OF HON. MIKE THOMPSON, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF CALIFORNIA

Mr. Chairman and Members of the Subcommittee, thank you very much for the

opportunity to testify today. The fact that you are holding this hearing shows how

important the resolution of the current energy crisis is for California and the United

States.

The current situation in California will have far reaching consequences for the

country as a whole, as Federal Reserve Chairman Alan Greenspan recently noted.

Failure to adequately ensure reliability of supply at affordable rates in California

could have a huge ripple effect on the economy of our entire nation.

In my Congressional District, the crisis has disrupted timber and lumber operations in Humboldt County including lay-offs at the Louisiana-Pacific’s Samoa pulp

plant and costly interruptions at Louisiana-Pacific’s particle board plant. Blue Lake

Forest products had to move its one daytime shift of 92 employees to the graveyard

shift. Electrical producers in my district also are feeling the crunch. One small generator is owed $19 million by PG&E.

The crux of California’s current problem lies with the wholesale market, where

costs have been allowed to skyrocket to unprecedented levels. Last week, former

Federal Energy Regulatory Commission (FERC) Chair Elizabeth Moler—who was

initially appointed to the Commission by President Reagan—said that the FERC

should intervene more strongly in California’s energy crisis, including imposing temVerDate 11-MAY-2000 13:39 Oct 02, 2001 Jkt 010199 PO 00000 Frm 00033 Fmt 6633 Sfmt 6621 E:\HEARINGS\71502 pfrm01 PsN: 71502
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porary price caps on wholesalers. I, along with many of my California colleagues

from both sides of the aisle, share this view.

Unfortunately, FERC has failed to take timely and necessary action to stabilize

the market despite its findings on November 1, 2000 that wholesale rates being

charged to California utilities were ‘‘unjust and unreasonable.’’ FERC’s failure to

fulfill its most basic mission—ensuring reasonable rates for consumers—has allowed

the crisis to fester. In my view, the commission acted in an unjust and unreasonable

manner when it refused to impose temporary, cost-of-service based caps on wholesale prices.

I am a cosponsor of the legislation (H.R. 238) introduced by Reps. Anna Eshoo

and Duncan Hunter that would expand the authority of the Secretary of Energy to

stabilize wholesale electric prices during periods of unjust and unreasonable rate increases. This new parallel authority with FERC, will help ensure that the Federal

government has to authority to act in times of an energy crisis if FERC fails to do

so. FERC’s recent action—or should I say inaction—demonstrates that this legislation is clearly needed. I hope you, Mr. Chairman, and the other Members of the

Committee will support the bill’s swift passage and enactment.

I recently requested the General Accounting Office (GAO) to investigate the

causes of the energy crisis and to present and evaluate what can be done to increase

electrical supplies in the West. As a part of this investigation, the GAO is to conduct

a feasibility study on building or reconstructing power plants on military bases for

civilian use. Twenty-three of our colleagues joined me in making this request and

we look forward to sharing the report’s findings with the Members of the Energy

and Commerce Committee.

Both long-term and short-term solutions must be developed and implemented. On

the state level, California has been purchasing its own power in an effort to stabilize

prices and ensure supply. It has stepped up conservation efforts, leading to an impressive eight percent drop in energy consumption in February. Further, the state

is working quickly to bring new generating facilities on line and has proposed to

purchase transmission grids owned by the debt-ridden utilities in order to stabilize

the market. Still, despite these initiatives, California remains in danger of power

outages when demand for electricity climbs this summer.

We should remember that this is a regional energy crisis. It is true that California

has not built enough new generation and transmission to keep up with the demand.

But California is not alone. New generating facilities and transmission lines have

not kept pace with demand throughout the West. Further, the Pacific Northwest is

also facing a possible shortage of electricity this summer because low rainfall this

winter will require dam operators to dip into reservoirs for water to turn turbines.

Regional problems demand regional solutions, which can only be accomplished by

the Federal government.

Congress and the Administration, with the support and leadership of President

Bush, have the authority to forge solutions across state boundaries. As the President noted in his February 27th address to Congress, he has formed a task force

headed by Vice President Cheney to address the crisis as part of a national energy

strategy and is working with the State of California to streamline permitting procedures for new power plants. These two actions, while helpful in crafting long term

solutions to the crisis, do not go far enough or fast enough. To avert severe blackouts and price spikes this summer, the Federal government needs to act quickly and

more forcefully, including the imposition of interim cost-of-service-based rate caps

across the Western region. These temporary caps will stabilize the market until sufficient power and transmission sources are developed.

As the committee is well aware, this crisis isn’t just about electricity. There is an

emerging natural gas crisis in California and across the United States. Over the

past year, natural gas prices have skyrocketed 59% nationwide and have tripled in

California. Natural gas storage is at record lows and experts agree that one of the

major causes of this crisis is an increase in demand and a lack of supply. The dramatic price increases are especially alarming since all the new generation coming

on line in California is natural gas powered.

The price increases are passed directly on to consumers and are hitting my constituents hard. I recently received a letter from Mr. and Mrs. Frank Kelly of Napa.

They sent me a list of their gas bills starting in September 1999 when they were

paying $20 a month. In December 2000, their bill was $475. Ms. Karen O’Rourke

of Orleans owns a RV park. She is faced with a mostly vacant park and a gas bill

of $685. Mr. and Mrs. Shields of Fairfield, Mr. Bolling of Eureka, Mr. Carrell of

Mendocino and Mr. Blankenship of Ukiah are seniors living on fixed incomes. They

have to make the choice between buying food to eat, medication to live or heat for

their homes. These letters are just a few examples of the people who are suffering

through this energy crisis. Again, this energy crisis is not unique to California—I’m

31

sure many of you have also heard about the difficult choices facing your constituents.

To help determine why supplies are so low and, in turn, why prices are so high,

I have introduced H.R. 712. This bill commissions the National Academy of Sciences

to investigate and determine the cause of recent price spikes in natural gas. First,

the study will examine whether the drastic increase in natural gas prices is from

the usual market fluctuations or whether it can be attributed to other causes. Second, the study will determine if federal or state policies that might have contributed

to the shortage of supply. And, third, the study will examine the scientific feasibility

of a federal natural gas reserve system. This system would be modeled after the

Strategic Petroleum Reserve to be used in times of decreased supply and price emergencies.

On February 28, 2001, Pacific Gas and Electric (PG&E) announced that market

prices for natural gas will decline an average of 16% on consumer bills over the next

month. While this looks promising, we must remember that the newly approved

power generation plants coming on line in the next few years in California are all

powered by natural gas. In addition, California’s population has increased 13.5%

over the last 10 years and continues to grow.

We also must continue to do what we can to ease the burden on those less fortunate. That is why I support Representative Ed Markey’s Emergency Energy Response Act of 2001. I also have signed onto letters to the Appropriations Committee

and to President Bush. The legislation and the letters ask for an increase in funding

of the Low-Income Home Energy Assistance Program (LIHEAP) and Weatherization

funds.

I invite you to join with me in cosponsoring H.R. 712. By determining the dimensions and causes of the high price of natural gas, we can work towards a solution

that will ensure an adequate, reliable and affordable supply of natural gas.

Again, I thank you for the opportunity to testify before the Subcommittee. I ask

that my testimony be submitted for the record and am pleased to answer any questions.

Mr. BARTON. Thank you Congressman.

The Chair would recognize himself for 5 minutes. We are going

to have one round of 5-minute questions and then we will go to the

next panel.

Which of you gentlemen could give me an indication what the

baseload generation capacity is in California and what is the baseload demand? Congressman Inslee.

Mr. INSLEE. These are off the top of my head, but it is about

45,000 megawatts available in the California market, and there is

a real interesting fact, because while there are 45,000 megawatts

available, there has only been 30,000 essentially on line at any

given time. So there has been about 15,000 megawatts capacity of

the California generators on any given day that has not been on

line, and we can only account for about half of that being down due

to maintenance or potentially emission standard issues.

So there is about anywhere in a given today from about 6- to

8,000 megawatts of capacity that has not been on line that are sort

of AWOL and no one has come before us to——

Mr. BARTON. Do you know what the baseload demand is? Over

that?

Mr. INSLEE. It is around 32,000 or—no, wait a minute. You can

check me on that.

Mr. BARTON. I am told the demand is about 20 percent higher

than the supply.

Mr. INSLEE. The demand is infinite, regardless of price.

Mr. BARTON. Average prices. I am not talking about peak demand, I am talking the baseload intrastate generation capacity is—

let’s forget—is less than the baseload demand.

Mr. ISSA. Mr. Chairman, it is about 45 as a normal demand. If

California threw everything out the window we can produce about

32

52 peak. Peak. The Congressman has a point, which is at any given

time there is quite a bit down for both maintenance, which is expected, remembering that some of this 52 potential includes

peakers and it includes a lot of systems which don’t run efficiently

if you tell them that you are going to produce at a certain amount.

Mr. BARTON. My point is if we are going to look at solutions, and

I agree that we should, that the chronic problem is more demand

than supply intrastate, and it is exacerbated because the California

law didn’t have a planning mechanism for additional supply. It

was—they just forgot about it, or what. So the price cap solution,

obviously there would be some short-term benefit or should be

some short-term benefit to wholesale price cap, but I don’t see that

that helps the long-term solution.

Mr. THOMPSON. If I may, everything that we have been talking

about now has been long term. There is an attempt to expedite the

permits, to bring on new generators. There are new generators on

line, and anywhere from within the next 2 to 4 years to come on

line. So the needed supply numbers are projected on being there

within the next 2 to 4 years.

Mr. BARTON. I understand that.

Mr. THOMPSON. The price cap point they alluded to was in the

immediate. The only way to deal with the exorbitant price that is

being charged is to apply on a temporary basis to correspond with

the new generators coming on line these cost-based caps.

Mr. BARTON. But if we go down that trail and don’t restructure

the retail price, if you maintain for lack of a better definition, a

below-market retail price and you put in wholesale price caps on

top of that, don’t you just extend the problem around the region,

around the country, because a rate, a cost-based wholesale price

cap, if somebody has power generating capacity outside the region,

and they can make more by selling it somewhere else, i.e. Somewhere else other than California, you have not done anything. I

mean, California has adopted wholesale price caps at the State

level several times in the last 12 months and it doesn’t appear to

have done anything. So I just—I don’t—I kind of understand the

general theory, but I don’t understand the application and practice

because it just simply hasn’t worked.

Mr. INSLEE. Mr. Chairman, could I address that?

Mr. BARTON. Sure.

Mr. INSLEE. I think It is analogous. It is a very important point

you make that wholesale price caps are not the long-term solution

either to a price or supply issue. I think that is an important point.

What we are suggesting is we adopt a short-term, well-defined system of wholesale price cost-based caps that have this very important feature, and I hope it is not lost in this. You exempt from the

cap new generating capacity, so that there is no disincentive for the

creation of additional generating capacity which we clearly need in

addition to conservation. It is akin to the situation where you have

the India earthquake. We want people to drill new wells, but you

don’t want people to charge $500 a quart for water.

What we are suggesting is, we tell existing generators on a shortterm basis you can’t charge $500 a quart for water during the

emergency part of this economic and natural disaster, because it is

a combination of California’s deregulation debacle and our waterVerDate 11-MAY-2000 13:39 Oct 02, 2001 Jkt 010199 PO 00000 Frm 00036 Fmt 6633 Sfmt 6602 E:\HEARINGS\71502 pfrm01 PsN: 71502
33

short years in the Northwest, but we are going to allow you to go

out and encourage you to go out and build new wells, and we’re

going to exempt that from the price cap. And this is why, frankly,

the administration has failed to even consider price caps, because

they haven’t thought about the fact that we cannot create a disincentive if we exempt them from the cap. That is what we need

this administration to consider and I hope the committee can in

some way urge them to do so.

Mr. ISSA. I think, Mr. Chairman, you made a very valid point

and you hit it right on. California already, with what it produces

internally, it can decide what it is going to allow those prices to be.

When we talk about power that could come into California or go

to some other State, we already have the western States paying a

premium for the sins of California. If in fact the Federal Government just automatically says without a long-term strategy that is

signed onto that is amenable to the other States and the rest of the

country, if we simply say, sure, we will protect you from your past

errors for a period of 1, 2, or 3 years, those years could go well beyond that. And in the meantime, any sensible commodity seller is

going to move their commodity to a place where they can get a better price, and right now California is trying to get a below-market

price.

Mr. BARTON. My time has expired. We have been joined by the

two other members who wanted to give testimony. Normally once

we start questions we continue it, but this is an unusual hearing

in that it is a members’ hearing. So we are going to go to Congresswoman Davis for her statement and then Congressman Honda and

then we will go to Mr. Strickland for questions.

Your statement is in the record in its entirety and you are recognized for 5 minutes, Congresswoman Davis.

STATEMENT OF HON. SUSAN A. DAVIS, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF CALIFORNIA

Mrs. DAVIS OF CALIFORNIA. I appreciate the opportunity to comment on the electricity prices in California and I appreciate I just

came in during the last questioning and would be happy to engage

in that afterwards.

As you have heard from previous speakers, deregulation on electricity prices was intended to create competition in a free marketplace and to result in reducing the price of electricity. However, in

the dysfunctional market, prices were manipulated by a handful of

producers and this resulted in soaring prices unrelated to the cost

of production.

Despite repeated requests and suits, the Federal Energy Regulatory Commission has refused to exercise its mandated authority

to assure that power rates are just and reasonable, either by making cost-basis temporary caps we have just been discussing on existing generators, or by fining those companies which have egregiously manipulated the market.

The ironic consequence, I think, of this manipulation may well

be an increase in municipal ownership of utilities. As Members of

Congress, we need to look at some actions we can take to foster environmentally and economically sound municipally owned generators. And there are four areas which I would like to cite for you.

34

The first would be to increase the tax credit incentives for renewable source generators; and, second, to assure adequate safe natural gas pipeline capacity; third, to support refinery-level cleansing

of diesel fuel; and finally, in addition, to meet the personal impacts

of the crisis, to provide some temporary cost-of-living housing increases for our military families to cope with the escalating energy

costs.

The city of San Diego and the county of San Diego, the San

Diego County Water Authority, and some other municipalities are

now setting options to build new facilities. In January I initiated

a meeting among city and county leaders and State and Federal

legislators to discuss some options. Our staffs continue to meet to

share information. Either individually or through joint powers

agreements, local governments can benefit from tax-free bonds to

capitalize plants and potentially could receive preference for Federal hydropower projects.

I am pleased to report that the projects that have been put forward include some exciting additions to the renewable resources

market, and these include a project approved by the county of San

Diego to construct a biomass generator at a closed county landfill

site. San Diego sewage treatment facilities already are using waste

gas for generation in excess of their needs. They have plans for fuel

cell and photovoltaic pilot projects to capture other sources of renewable energy.

Although the effect of each project is small, together they add to

total generation and carry out our responsibility to invest in new

nonpetroleum-based power generation.

In addition, the San Diego County Water Authority had already

received authority to build power plants and transmission lines.

We will be able to operate hydroelectric generators using water

stored behind the new Olivenhain Dam which is under construction. Because we generally think of San Diego County as being

water poor, it is exciting to realize that even here some hydroelectric power can be produced.

Because the regulations limit where the Water Authority can sell

power, it is important that all new sources of power be enabled to

sell power to the distributing agency, which in that case would be

San Diego Gas and Electric Company.

Renewable energy sources for generation of power such as these

deserve our support, with expanded tax credits for development,

and several traditional projects are being considered. My colleague,

Duncan Hunter, who unfortunately has not had a chance to address you yet today, would have told you about the Marine Corps

Air Station Miramar proposal which he has been pursuing. Another

project has been proposed by a local energy company for a 750-

megawatt natural gas power generating plant to be sited near a

city landfill. The city of San Diego was exploring this option along

with other government entities to create some publicly owned utilities to serve the entire county.

In addition to these proposals, small cogeneration plants are

being built to serve the 35,000 population of our State universities.

Because these projects use petroleum resources, they require a supply of natural gas or clean diesel fuel of sufficient quantity at naVerDate 11-MAY-2000 13:39 Oct 02, 2001 Jkt 010199 PO 00000 Frm 00038 Fmt 6633 Sfmt 6602 E:\HEARINGS\71502 pfrm01 PsN: 71502
35

tionally comparable prices. Congress must be certain that natural

gas pipelines are safe and that they are sufficient.

It would also serve us well to give incentives to promote cleaning

diesel fuel to the lowest sulfur levels at the refinery stage, thus reducing the need for adding scrubbers to newly constructed turbines. It would enable diesel refined in California to be used as

available to meet responsible air quality. This goes both for power

plants and for use in diesel trucks. And while these proposals

clearly address near- and long-term goals, it is critical that we address the immediate needs—— Mr. BARTON. Could you summarize, Congresswoman?

Mrs. DAVIS OF CALIFORNIA. Sure—of some of our most vulnerable

citizens. And that is why I wanted to cite the effects of the cost of

gas and electric utilities on our military families in San Diego and

suggest to you perhaps that we respond to this issue by increasing

housing allowances for a limited period of time for military living

in the area where basic utility costs have more than doubled as a

first step to meeting the challenge to adequately support our military personnel there in the San Diego region.

Thank you very much for the time and appreciate your questions.

Mr. BARTON. Thank you for your testimony. We now go to Congressman Honda. Your statement is in the record. We would recognize you for 5 minutes.

STATEMENT OF HON. MICHAEL M. HONDA, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA

Mr. HONDA. Thank you, Mr. Chairman, members of the committee. Thank you for inviting me to testify today and for your decision to hold this hearing on California’s electricity crisis.

I can assure you that my constituents in California’s 15th Congressional District welcome this discussion and look forward to the

committee’s consideration of important legislation that might provide short-term relief and long-term incentives to bolster California’s electricity supply.

Like all Members from California, I receive letters and phone

calls from almost every segment of my constituency expressing concern over rising electricity prices and rolling blackouts. Almost 2

weeks ago, I invited a number of individuals representing various

organizations, companies, and communities to my office to discuss

the devastating effects that California’s energy crisis is having on

Silicon Valley residences and businesses. The attendees included

representatives from nonprofits, chambers of commerce, high-tech

companies, health care organizations and schools. Each offered a

unique perspective and eloquent case for stronger Federal action.

I would love to detail all their stories, but for brevity’s sake I will

just concentrate on two areas: high-tech and education.

You know that Silicon Valley is comprised, in part, by high-tech

companies that operate machinery and computers that are incredibly sensitive to fluctuations in electrical currents. This is especially true for semiconductor companies and co-location facilities.

When a blackout interrupts work at a high-tech company, millions

of dollars in unfinished products can be lost and it can often take

huge financial investments to return operations to normal working

order.

36

When rolling blackouts swept through the San Francisco Bay

Area in mid-January, the Silicon Valley Manufacturing Group reported that approximately 60 of its members had been directly impacted. The manufacturing group estimated that 100,000 Silicon

Valley employees were unable to work and tens of millions of dollars were lost.

The Bay Area is accustomed to addressing quality-of-life concerns, and the issue of energy is no exception. Governor Davis announced just 2 days ago that California businesses and consumers

cut their energy consumption by 8 percent in February. This is a

dramatic cut and I compliment Californians for the great sacrifices

that they are making. But I must say I am impressed with the resolve of high-tech companies to be part of the solution. I am especially pleased to see the significant efforts made by high-tech companies aimed at reducing electricity demands.

But the high-tech sector recognizes it cannot be a substitute for

the role of government. The State of California and the Federal

Government must also stand firmly on the side of sound energy

policy.

While the media has given a great deal of attention to the private sector and the crisis, the media has paid considerably less attention to the detrimental effects that higher electricity prices have

had on our schools. One school district in our valley estimates they

will pay $136,000 more for electricity this fiscal year. And this next

year the numbers are even more startling. The school district will

increase its budget for electricity by $500,000. These dollars come

out of the district’s general funds, meaning that schools in this district will have fewer funds to hire teachers, pay for school books

and upgrade education technology.

These numbers are even more striking when you consider that

the school district has already implemented strong conservation

measures. In fact, the average energy cost per square foot is almost

25 percent less than the cost per square foot at an average K-12

California school district. To save money, some schools have even

considered limiting operating hours from 8 a.m. to 3 p.m. Such a

decision would preclude a school from offering after-school activities, as well as a suitable environment for teachers to prepare for

the next day’s lessons.

As a former educator, I am disheartened that schools are forced

to adopt such measures, especially when many of our schools have

little money to invest in energy-efficient devices. I know that Congressman Mark Udall has shown exemplary leadership on this

issue, and I hope that the committee will follow his lead and look

more closely at how the Federal Government can further encourage

school districts to deploy these technologies in their schools.

My goal today in testifying is not just to communicate to you the

challenges that are faced by my constituents. Rather, I offer their

stories to you as further evidence that the Federal Government

must act to bring down skyrocketing electricity prices and help prevent further blackouts. We have a role, and I join my colleagues

in expressing my great dismay that the Federal Energy Regulatory

Commission has been so reluctant to act.

I urge this committee to consider carefully and expeditiously legislation introduced by Congresswoman Anna Eshoo and legislation

37

offered by Congressman Filner. The chief aim of each bill is to establish cost-of-service-based rates or regional caps for wholesale

electricity based on the determination that current prices are ‘‘unjust and unreasonable.’’ Mr. BARTON. Congressman, could you summarize?

Mr. HONDA. Certainly. Just to close, what we are really looking

at is trying to make sure that there is a short-term cost mechanism

and then a long-term strategy to solve the problem California is

facing.

And finally, I want to voice my support for increased funding and

emergency supplemental appropriations for LIHEAP, as well as the

energy and weatherization programs.

Thank you, Mr. Chairman.

[The prepared statement of Hon. Mike Honda follows:]

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

THE STATE OF CALIFORNIA

Mr. Chairman, Congressman Boucher and Members of the Committee, thank you

for inviting me to testify today and for your decision to hold this hearing on California’s electricity crisis.

I can assure you that my constituents in California’s 15th Congressional District

welcome this discussion and look forward to the Committee’s consideration of important legislation that might provide short-term relief and long-term incentives to bolster California’s electricity supply.

Like all members from California, I’ve received letters and phone calls from almost every segment of my constituency expressing concern over rising electricity

prices and rolling blackouts.

Almost two weeks ago, I invited a number of individuals—representing various organizations, companies and communities—to my office to discuss the devastating effects that California’s energy crisis is having on Silicon Valley residents and busi- nesses. Attendees included representatives from non-profits, chambers of commerce, high

tech companies, health care organizations, and schools. Each offered a unique perspective and an eloquent case for stronger federal action.

I would love to detail all of their stories, but for brevity’s sake and more importantly—because of the Committee’s strict time limit, I will only share with the committee the effects that this crisis is having on two important sectors in my district:

high tech and education.

As many of you know, Silicon Valley is comprised, in part, of high tech companies

that operate machinery and computers that are incredibly sensitive to fluctuations

in electrical currents. This is especially true for semiconductor companies and colocation facilities. When a blackout interrupts work at a high tech company, millions

of dollars in unfinished products can be lost and it can often take huge financial

investments to return operations to normal working order.

When rolling blackouts swept through the San Francisco Bay Area in mid-January, the Silicon Valley Manufacturing Group reported that approximately sixty of

its members had been ‘‘directly impacted.’’ The Manufacturing Group estimated that

100,000 Silicon Valley employees were unable to work and tens of millions of dollars

were lost.

The Bay Area is accustomed to addressing quality of life concerns and the issue

of energy is no exception. Governor Davis announced just two days ago that California businesses and consumers cut their energy consumption by 8% in February.

This is a dramatic cut and I compliment the Californians for the great sacrifices

they are making.

But I must say I am impressed with the resolve of high tech companies to be part

of the solution. I’m especially pleased to see the significant efforts made by high

tech companies aimed at reducing electricity demand.

Companies that have already reduced energy consumption through implementing

energy reduction plans have pledged to further reduce consumption during peak

times. In addition, many of these companies are educating their employees on electricity reducing steps that can be implemented at work and at home.

But the high tech sector recognizes it cannot be a substitute for the role of government. The State of California and the federal government must also stand firmly

on the side of sound energy policy.

38

While the media has given a great deal of attention to the private sector and the

crisis, the media has paid considerably less attention to the detrimental effects that

higher electricity prices have had on our schools. One school district in Silicon Valley estimates that it will pay $136,000 more for

electricity this fiscal year. Next fiscal year, the numbers are even more startling.

The school district will increase its electricity budget by $500,000. These dollars

come out of the district’s general funds—meaning that the schools in this district

will have fewer funds to hire teachers, pay for school books and upgrade education

technology.

And these numbers are even more striking when you consider that this school district has already implemented strong conservation measures. In fact, the average

energy cost per square feet is almost 25% less than the cost per square feet at an

average K-12 California school district.

To save money, some schools have even considered limiting operating hours to

8am to 3pm. Such a decision would preclude the school from offering after school

activities, as well as a suitable environment for teachers to prepare for the next

day’s lessons.

As a former educator, I’m disheartened that schools are forced to adopt such

measures, especially when many of our schools have little money to invest in energy

efficient devices. I know that Congressman Mark Udall has shown exemplary leadership on this issue and I hope the Committee will follow his lead and look more

closely at how the federal government can further encourage school districts to deploy these technologies in their schools.

My goal in testifying today is not merely to communicate to you the challenges

facing my constituents. Rather, I offer their stories to you as further evidence that

the federal government must act to bring down skyrocketing electricity prices and

help prevent further blackouts.

I join a number of my colleagues in expressing great dismay that the Federal Energy Regulatory Commission has been so reluctant to act. I, therefore, urge this

committee to consider carefully and expeditiously legislation introduced by Congresswoman Anna Eshoo and legislation offered by Congressman Filner. The chief

aim of each bill is to establish cost-of-service based rates or regional caps for wholesale electricity based on the determination that current prices are ‘‘unjust and unreasonable.’’ Clearly, instituting price caps is an unusual measure and one that should not be

implemented carelessly. But I contend that in the case of California’s electricity

market, regional price caps or cost-of-service rates are appropriate and warranted.

I hope and expect that the Committee will further explore the importance in further diversifying electricity supply with affordable renewable energy sources. I also

believe that the federal government can play a stronger role in offering incentives

to companies and homeowners that install devices that promote energy efficiency.

On a related note, I urge the Committee to retain strong federal environmental

laws governing the process for electrical generating plant construction, while at the

same time exploring ways in which the process can be streamlined. The California

energy crisis must not be an excuse to rollback hard fought environmental laws.

Finally, I want to voice my support for increased funding—including emergency

supplemental appropriations—for LIHEAP, as well as the Energy and the Weatherization Programs.

But I fear that federal action may be stalled by the mistaken perception that California’s energy crisis is California’s problem. I hope this is not the case because the

consequences of California’s electricity crisis are already rippling through the West

and the detrimental effects this crisis has on California—the sixth largest economy

in the world—will ultimately hurt our national prosperity.

Thank you.

Mr. BARTON. We are now going to resume our questions. The

gentleman from Ohio, Mr. Strickland, is recognized for 5 minutes.

Mr. STRICKLAND. Thank you, Mr. Chairman. As I listened to my

colleagues from the West, I could say to them that many of my constituents in southern Ohio are facing high costs of energy, electricity—not so much electricity currently but certainly natural gas.

I think we have a looming disaster facing our economy, a disaster

that could drag us down into a deep recession.

What this does, I think, or it should do is impress upon this Congress that we need a national energy policy that is comprehensive

and inclusive and includes all forms of energy. And I see my friend

39

from California shaking his head. We believe in the use of coal. We

believe in the use of nuclear energy. We believe in more ethanol

use. We need to get on with that. But the fact is that would be a

longer-term solution, and what we face is in an immediate crisis.

Now, Mr. Inslee, your comments indicated, I believe you said

that some of the generating capacity in California was AWOL.

What are some of the plausible explanations for that?

Mr. INSLEE. Well, there are many. And basically there is 45,000

megawatts available. There has only been 30,000 on any given day

on line.

Mr. STRICKLAND. Why?

Mr. INSLEE. That is a really great question and we have written

a letter to the General Accounting Office, Peter DeFazio and I, to

get a report on that. There is an explanation for about half of that

missing 15,000. There are long-term or short-term maintenance requirements. They are down for a legitimate reason, and these generators are required to report the reasons when they are down. But

that leaves about 6- to 8,000 megawatts that are AWOL, that are

missing. There is no explanation they are not on except this—the

ability to jigger and gain the market, to increase prices by withholding generating capacity. And there is a significant reason to believe that that has gone on.

In fact, I am certainly not the wisest head on that. There was

a study done, which I will provide to the members of the committee, by a professor of MIT who studied the market just last year

and concluded that there was a likelihood that, in fact, gaming had

gone on, that generating capacity was withheld from the market to

drive up these prices, and that is obviously very disturbing.

Now, one way to deal with that is a short-term wholesale price

cap, to deal with this. And I should repeat, these are—there is

nothing wrong with profits in America, healthy, great, we all aspire

to them. But these were extraordinary profits not taken because

they have developed a new technology or that they have taken a

great investment risk which is now paying off, it is simply that

they were there in the midst of a natural disaster, water-short year

in the Pacific Northwest and the collapse of the California market,

due to some political mistakes that were made.

So I have to tell you this is disturbing. We asked the General Accounting Office to have an investigation of this. It should be investigated. Appropriate sanctions should be taken if there is a finding

there is inappropriate conduct, but even if there is not, even if

somehow some mysterious explanation arises, the one thing we do

know, abundantly clear, there are profits being taken in this industry that are beyond any imaginable returns in this industry ever

for any reason, and I have got people going to food banks because

of it.

Mr. BARTON. Would the gentleman yield on that point?

Mr. STRICKLAND. I would.

Mr. BARTON. Is it not true that 30 percent of the plants in California are at least 30 years old and over 20 percent are at least

40 years old? So the older plants might tend to have a little bit

higher-than-normal maintenance.

Mr. INSLEE. Yes. In fact, in typical years, only about 2,000

megawatts are down at any one time. This year there is a legitiVerDate 11-MAY-2000 13:39 Oct 02, 2001 Jkt 010199 PO 00000 Frm 00043 Fmt 6633 Sfmt 6602 E:\HEARINGS\71502 pfrm01 PsN: 71502
40

mate explanation of about 7- to 8,000 being down for exactly the

reasons that you point out, but there are still another 6- to 8,000

megawatts where there is no explanation.

Mr. BARTON. My understanding is that California has been in a

Stage 1 reserve, or 3, for about the last 6 months. So that as it begins to ease, some of these plants that were being given routine

maintenance, they might legitimately be out of service simply to

catch up on deferred maintenance. I don’t know that, but that is

at least a plausible explanation to the—— Mr. STRICKLAND. Sure. And if I could reclaim my time, the reason I asked the question is that your comment implied some possible guilt on the part of the companies to increase profits, and it

seems as if the size of this crisis facing the country should encourage us to try to find an answer to that, without any opinion going

into the research. You know, I just think we need to know that.

Now, one other question and I ask this question because many

of us in the Midwest are fearful that what is happening in California—you know, California is a trend setter, proudly so, cultural,

arts and so on and so forth. But we are afraid that California may

be a trend setter in terms of blackouts and high prices, and I think

there has to be a national response.

Now, I know that you had a chance to speak briefly with the

President at the Democratic retreat. Have you spoken with other

members of the administration and, if so, what has been the response?

Mr. INSLEE. Well, unfortunately, it has been disappointing. And

let me tell you, I have been very—before expressing disappointment in this administration, I want to express some praise. They

have done a good job for the one disaster in Seattle, which is the

earthquake last year. We have got a good response from the administration in that, but after that it is very disappointing. I spoke to

the President. He came to our bipartisan retreat, or our retreat in

Pennsylvania. I spoke to him about this issue. I proposed this price

cap to him. He expressed a disinclination, to put it mildly, to do

so. But I said there is a way to do this, Mr. President, which will

not be a disincentive for new generating capacity; and he said, if

that is true, you and your group go talk to the Vice President.

So for the last 3 weeks I have been attempting to get a meeting

with the Vice President’s task force to discuss this, and we have

been told they won’t meet with us, and that is very disappointing

to me in today’s air of bipartisanship. So we have written a letter

today, signed by 25 members up and down the West Coast, including at least one good Republican, asking for a meeting to discuss

this issue. And I hope that they will avail us that opportunity, because I think it is very important not to allow ideology to stand in

the way of good solutions.

Mr. STRICKLAND. Mr. Chairman, my time is up. I want to thank

you, and I want to thank you, and I really believe that this is not

an issue that we can deal with in a partisan way. This is—— Mr. BARTON. I agree.

Mr. STRICKLAND. This is an issue that has got to have all of us

working together because it affects all of us, and I think the answer is going to take, you know, the best minds among us to figure

out the best approach. Thank you.

41

Mr. ISSA. Mr. Chairman, could I respond quickly to that?

Mr. BARTON. Actually, you can respond in writing. But we have

got a whole other panel of Congressmen and Congresswomen already here. So we are going to try to expedite the questions on this

panel, but if you want to put it in writing, Congressman Issa, we

would love to have it.

Congressman Shimkus would be recognized. And I want to let

Congressman Bono and Congressman Radanovich know, since they

testified, we can’t let the witnesses ask themselves questions, you

know, that it was the greatest testimony you ever heard, so.

Mr. HONDA. Mr. Chairman, I just want to thank you for this opportunity and I feel very comfortable with the mindset that Congressman Strickland had laid out. So I thank you for the opportunity.

Mr. BARTON. Mr. Shimkus for 5 minutes.

Mr. SHIMKUS. Thank you, Mr. Chairman. A couple questions, and

I was going to ask Mike but he has left. Congressman Davis, you

were a member of the California General Assembly; is that correct?

Mrs. DAVIS OF CALIFORNIA. Yes, I was.

Mr. SHIMKUS. Part of the hearings that we have had already and

part of the news article that I have quoted a couple of times, part

of the problem dealt with long-term—that California did not go into

long-term contracts.

Mrs. DAVIS OF CALIFORNIA. Right.

Mr. SHIMKUS. Some of the debate as to why California did not

deal with long-term contracts that the State went into under the

PURPA, under the renewable—the clean producing technologies

which created exorbitant prices for the producers because they

were forced to purchase these long-term contracts.

Could you—I have heard that, you know, through articles and it

has been raised in hearings. In your discussions, was that part of

the reason why California in their deregulation bill did not go into

for the retail long-term contracts.

Mrs. DAVIS OF CALIFORNIA. The experience was that in the long

term, that it would not be helpful to consumers. But clearly I think

there were so many parts to that plan that misfired or really didn’t

materialize in the way that people anticipated, and of course one

of those is they didn’t expect all the generation to be out of State.

Mr. SHIMKUS. But to go back to the issue then, the PURPA requirement to purchase renewable clean energy producing over a

long-term contract was not advantageous to the consumers based

on the electricity prices, is that correct to say, and that is why

there was a fear of going into any long-term contracts?

Mrs. DAVIS OF CALIFORNIA. Well, at the time, they really felt that

it would be not necessarily better purchasing on the spot market

per se, but that there were problems in the long term with doing

that.

Mr. SHIMKUS. Was there anything else that you personally as a

legislator thought that was good about the plan? You supported it;

is that correct?

Mrs. DAVIS OF CALIFORNIA. Right at that time, as you know, it

was unanimous and everybody was really at the table at that time,

and I think that they believed that this would lower electricity

42

rates, but again there were so many things that changed in the interim that weren’t really anticipated.

Mr. SHIMKUS. Congressman Issa.

Mr. ISSA. Yes, there was some dissension; it just wasn’t in the

legislature. The PUC had a 3-to-2 vote with Commissioner Jessie

Knight and one other pushing very hard not to bar the energy companies from buying long term, and so basically that is what created

more of this problem than anything else.

One of the problems in California is the legislature and the three

members who voted to require buying on a daily market. They

made the assumption that, well, you can buy cheaper and, just like

anything else, if you want to get a hotel room in Las Vegas after

2 in the morning, if there is one available you can get it for and

amazingly low price. On the other hand, if there is a convention in

town, guess what? Even the penthouse at the best hotel may not

be available, and if it is, it may be $10,000 a night because it is

available and nothing else is.

This is exactly the problem California got into is they thought

they were smart when they bought short. Now that, in fact, short

is more expensive, they have a reluctance to buy long, and even the

Governor’s proposal to spend billions, 10 billion plus dollars in ensuring buying, he is buying the baseload. Rather than saying let

the companies buy their own baseload long term, we are going to

guarantee the additional purchase. If the Governor were to buy $5

billion worth of future excess capacity in addition to the 52,000

megawatts that are available, in fact he would be driving down the

price, and this is exactly the opposite of what the Governor is

doing.

Mr. SHIMKUS. And let me ask each of you—and if you can answer

it briefly because my time’s going to run up. This is going to be my

last question. If we cap—there are two parts of the equation. There

is the supply and then there is the demand. If we cap wholesale

rates, like California capped the retail rates for individual consumers, how do you encourage conservation with a capping of

rates? How do you affect the other side of the equation, not just

the supply but the demands?

Mr. INSLEE. I tell you one thing you can do is you can adopt variable pricing. Variable pricing has a higher cost during peak hour

is one way, and we are going to have the first utility in the country

doing that this year up in the Puget Sound area, and I hope this

committee will look at that issue carefully.

Mr. SHIMKUS. We had energy deregulation debate. We think

there is going to be metering and people are going to buy based

upon peak hours so you would say that there should be some rate

changes for the consumer.

Mr. INSLEE. Yes.

Mr. SHIMKUS. To help conservation.

Mr. INSLEE. Yes, and I believe there ought to be and need to be

some price increases at the retail level in certain circumstances,

but if the ones we have experienced of 50 to 100 percent in a 12-

month period are so shocking to the economy, they can’t deal with

it.

Mrs. DAVIS OF CALIFORNIA. I think one of things we didn’t deal

with was deal with the demand side, and this is where we can do

43

that both on the commercial and residential end. After this experience, people have an understanding now of how they can utilize

their own utilities at home in a different way. So it is not my opinion that this is going to, if we do wholesale caps, that people would

start using more electricity than they need or not conserving.

The real difficulty, and I think perhaps there was a little confusion about the wholesale versus the retail caps, we do think that

had the FERC capped the wholesale rates plus a profit, a reasonable and just profit early on, we would not have had to even step

in on the retail prices, but that was the only thing we could really

control in California. And San Diego, of course, experienced this before everybody else did and it was difficult for us to get a across

the sense of panic really among residents over this.

Mr. SHIMKUS. But your deregulation——

Mr. BARTON. The gentleman’s time has expired. We need to go

to our next and last questioner in this round, the Congressman

from Kentucky, Mr. Whitfield, for 5 minutes.

Mr. WHITFIELD. Thank you, Mr. Chairman. I think all the evidence indicates that most of the price spikes occurred within the

area of natural gas. It hasn’t really happened that much in coal or

nuclear that I know of.

Now, some of you have made some rather serious allegations in

my view. I know Mr. Filner has gone, but the words have been

mentioned that prices were manipulated, there was illegal withholding of power, falsification and so forth. And Chairman Hecker,

who happened to be a Democrat over at FERC, had asked for a report and analysis of the western markets on the wholesale rates.

And as some of you have indicated, FERC has the legal authority

to put caps on interstate rates if they are found to be unreasonable.

And in that report which was issued in November of 2000, they

said they found no evidence of market power abuse.

So that is the agency. The Federal Government has the authority

to do this. So assuming that what they say is true and they are

not going to act, are you all, particularly Ms. Davis and Mr. Inslee,

despite the fact that maybe there is no proof of anything, are you

still advocating that there be a cap on wholesale rates?

Mr. INSLEE. Mr. Whitfield, yes, I am advocating that, whether or

not there was withholding generated or not, and I don’t know that

for sure. I want to make sure you understand we have asked the

GAO to investigate this. I can’t tell for sure there was or not. I

think there was enough to cast some suspicion in that regard, but

I am advocating that for this reason. The FERC also, in that very

same report I think you are referring to, found ‘‘the Commission

has found in this proceeding that the existing market structure and

market rules, in conjunction with an imbalance of supply and demand in California, has caused and until remedied will continue to

have the potential to cause unjust and unreasonable rates for

short-term energy during certain time periods.’’

Now, to me, it is absolutely stunning that the Federal organization charged with the responsibility of assuring reasonable rates

makes that finding and then does nothing, zippo, nada, to solve

this particular problem, you know, whether there was withholding

generating, but I do know people are being gouged for their elecVerDate 11-MAY-2000 13:39 Oct 02, 2001 Jkt 010199 PO 00000 Frm 00047 Fmt 6633 Sfmt 6602 E:\HEARINGS\71502 pfrm01 PsN: 71502
44

trical prices today with unreasonable prices that are not required

for the cost of producing that power.

Mr. ISSA. Mr. Whitfield, just to maybe shed a little light on this,

the FERC Commissioner, or Chairman, met with the California

delegation, bipartisan Republican and Democrat, and I think he explained this very very well. And the words the Congressman is saying are absolutely correct, but the finding is not that there was

wrongdoing on behalf of the industry. The finding is there was

wrongdoing on behalf of the California legislature and the people

of California, and they created an environment in which they

bought badly. And the change that needs to happen for the most

part needs to happen in California, and they are beginning to

change the rules so they buy smarter. And for the Federal Government to say you bought badly and you paid less for a time, but now

when you are paying more we are going to prohibit that and claim

there was some wrongdoing, would be folly.

Mr. WHITFIELD. Well, I mean I personally agree with you that

what California did is almost unbelievable when you look through

the process, but, Mr. Inslee, you made the comment, which makes

a lot of sense, that if you institute short-term caps on wholesale

rates and exempt new generators, that that could help solve the

problem; except it is my understanding that in the State of California, if you are a new generator, then you are going to have to

bear part of the cost of the stranded cost of the existing utilities

to come in, plus you are going to have to reduce your rates to meet

their initial 10 percent reduction of their retail rates.

Mr. INSLEE. Could I address this? This has to come down to, I

think, the role of the Federal Government. I don’t pretend with all

my friends in California to say that every decision made there in

retrospect was the right decision. What we are here to say, though,

that the Federal Government is the only government right now

who can care for my constituents, and simply sort of throwing

rocks at California constantly is not going to solve this problem. We

need a western statewide grid solution only this body, and the administration has the capability in my view of providing that and

I urge you to do so.

Mr. WHITFIELD. So you would be in favor of overriding that aspect of California law.

Mr. INSLEE. I will leave that to you and California in that regard,

but in one shape or another we need a wholesale price cap that is

grid systemwide in the western United States short term.

Mr. BARTON. Time of the gentleman has expired. Congressman

Walden, I am told, does not want to ask questions, is that correct?

We are going to excuse this panel. We thank you for your testimony. There may be some written questions but we obviously appreciate the input into this problem. We will have a specific hearing on California when we have experts come, hopefully later this

month.

We would now like to welcome our second panel of Congressmen.

We are going to recognize you basically in seniority, with some exceptions for committee members. And Congressman J.C. Watts,

who has a leadership meeting, will be allowed to go first. So, J.C.,

if you will come forward. If it was up to me I would recognize Texans first, since we have Mr. Stenholm, but we are going to do this.

45

So we are going to recognize Congressman Watts, and then we will

go to Congressman Ganske who is a member of the committee, and

then we will start by seniority, and I think it would be Mr. Bereuter and Mr. Stenholm, and then after that I am lost, but I am sure

that you all will help me.

So, gentlemen and lady, welcome to the subcommittee. Congressman Watts, your statement is in the record. You are recognized for

5 minutes to elaborate on it.

STATEMENT OF HON. J.C. WATTS, JR., A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF OKLAHOMA

Mr. WATTS. Thank you, Mr. Chairman, and thank you for accommodating my schedule, and I want to thank my colleagues for allowing me to go first.

Chairman Burton and members of the committee, thank you for

the invitation to testify before you here today on an issue that is

critical to the national security and continued prosperity of our Nation. This issue I speak of is the need for a comprehensive national

energy policy that will ensure that the standard of living we enjoy

today in America will continue in the future for our children and

for our grandchildren. The last 8 years have seen a lack of such

a policy and it is now time for that to change.

The energy issue is a critical national security issue. Currently

we are importing about 57 percent of the oil used in this country,

with 23 percent of that coming from the Persian Gulf region. Unless we take action, that number is forecast to increase to 64 percent in the year 2020. By contrast, our total imports were only 35

percent in 1973 when the Arab oil embargo created gas lines here

at home. As recently as 1991 we went to war with Iraq not only

to liberate Kuwait, but also to assure Saudi Arabia and the Persian

Gulf States and our European allies that the United States was

committed to the security of that region. Unfortunately, the last 8

years have seen such a weak-handed foreign policy toward Iraq

that a nervous Saudi Arabia is now reaching out toward Iran.

America cannot be so vulnerable to the leaders of OPEC.

Our reliance on imported oil weakens our national security, and

it must be reduced through the implementation of a comprehensive

national energy policy.

The energy issue also is an economic issue. As the former chairman of the Oklahoma Corporation Commission, the governing body

in Oklahoma that regulates oil and gas, I am well aware of the essential role that energy plays in our economy. Without affordable,

abundant, and reliable energy available, the wheels of our economic machine will slow and eventually halt. We must not allow

that to happen.

Some people think that our new Information Age economy is less

reliant upon energy than our old economy based on manufacturing.

Nothing can be further from the truth. All of these Internet computer systems, e-businesses, and software firms require electricity

to keep them running. The Internet and the systems associated

with it consumes approximately 8 percent of the electricity used in

the United States. In addition, all of those wonderful things ordered on the Internet still require transportation to reach the consumer, transportation that is 97 percent fueled by petroleum prodVerDate 11-MAY-2000 13:39 Oct 02, 2001 Jkt 010199 PO 00000 Frm 00049 Fmt 6633 Sfmt 6602 E:\HEARINGS\71502 pfrm01 PsN: 71502
46

ucts. And, yes, America still does make products in factories that

rely on energy to light the lights, run the conveyor belts, and heat

the buildings.

Energy is essential to the production side of our economy. Energy

is also essential to the consumption side of our economy. There is

no greater detriment to consumer confidence than not knowing

what your utility bill will be at the end of the month. No working

family in America is going to buy a new car, a washing machine

or computer when they are uncertain of the cost of their monthly

utility bill.

Every person that has ever had an economics class knows the

theory of supply and demand. Our energy supply is dwindling

while our energy demand is growing. The Department of Energy

predicts a growth in total energy consumption of 32 percent by

2020; 390 megawatts in new electrical generation capability will be

required to meet that increased demand. This is the equivalent of

constructing 40 new 500-megawatt power plants per year for the

next 20 years.

Our oil refinery infrastructure is in no better shape. Currently

our domestic refineries are running at 95 percent capacity and

there has not been a new refinery built in the United States for

the last 20 years. The nuclear industry that provides 20 percent of

our electrical generation capability has been stagnant for years but

offers the potential for large amounts of emission-free electrical

power. The siting and permitting process required of the nuclear

industry should be streamlined. The hydroelectric plants operating

today must be maintained for the future.

Clearly the energy infrastructure in our country is in decline.

The transmission lines used to transport electricity around the

country are now operating at their maximum and building new

ones is next to impossible to do due to a myriad of Federal, State

and local regulations. Pipeline construction is similarly difficult in

the regulatory environment we see today. Without an investment

in infrastructure, improvement, it will not matter how much our

supply is increased because it will not be able to reach the users.

Beyond our infrastructure needs, we must increase the supply of

energy in this country. When I say energy, I mean all types of energy: oil, natural gas, coal, nuclear, hydroelectric, geothermal and

renewables. No one source has the single answer. The domestic oil

and natural gas industry must be kept alive and thriving.

Mr. BARTON. Can you summarize?

Mr. WATTS. Environmentally responsible access to Federal lands

should be pursued. And let me say in conclusion, we have an energy crisis bearing down on us, and it is our duty to do something

about it, and I hope we can look at the Energy Department, all of

us can look at a comprehensive national energy policy that will

chart a sensible course that can be followed by many for many

years to come.

And with that, Mr. Chairman, I thank you.

[The prepared statement of Hon. J.C. Watts, Jr. follows:]

PREPARED STATEMENT OF HON. J.C. WATTS, JR., A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF OKLAHOMA

Good afternoon... Chairman Barton and members of the subcommittee, thank you

for the invitation to testify before you today on an issue that is critical to the naVerDate 11-MAY-2000 13:39 Oct 02, 2001 Jkt 010199 PO 00000 Frm 00050 Fmt 6633 Sfmt 6621 E:\HEARINGS\71502 pfrm01 PsN: 71502
47

tional security and continued prosperity of this great nation. The issue I speak of

is the need for a comprehensive National Energy Policy that will ensure that the

standard of living we enjoy today in America will continue in the future for our children and our grandchildren. The last 8 years has seen a lack of such a policy and

it is now time for that to change. It is our duty as Members of Congress and it is

our duty as mothers and fathers to step forward and provide the necessary leadership on this critical issue.

The energy issue is a National Security issue. Currently, we are importing about

57 percent of the oil used in this country, with 23 percent of that coming from the

Persian Gulf region. Unless we take action, that number is forecast to increase to

64 percent by 2020. By contrast, our total imports were only 35 percent in 1973

when the Arab oil embargo created gas lines here at home. As recently as 1991, we

went to war with Iraq not only to liberate Kuwait, but also to ensure Saudi Arabia,

the Persian Gulf states, and our European allies that the United States was committed to the security of that region. Unfortunately, the last eight years has seen

such a weak-handed foreign policy toward Iraq that a nervous Saudi Arabia is now

reaching out towards Iran. Friends, our great country cannot afford to be so vulnerable to the whims of the leaders of OPEC. Our reliance on imported oil weakens

our national security and it must be reduced through the implementation of a comprehensive National Energy Policy.

The energy issue is also an economic issue. As the former Chairman of the Oklahoma Corporation Commission—the governing body in Oklahoma that regulates oil

and gas, public utilities, and trucking—I am well aware of the importance that energy plays in our economy. Energy is the grease that keeps the large wheels of our

economic machine in motion. Without affordable, abundant, and reliable energy

available, that machine will slow and eventually halt. We must not allow that to

happen. Some people think that our new Information-age economy is less reliant

upon energy than our old economy based on manufacturing. Nothing could be further from the truth. All of these Internet computer systems, e-businesses, and software firms require electricity to keep them running. The Internet, and the systems

associated with it, consumes approximately 8 percent of the electricity used in the

United States. In addition, all of those wonderful things ordered on the Internet still

require transportation to reach the consumer. Transportation that is 97 percent

fueled by petroleum products. And yes, America does still make products in factories

that rely upon energy to light the lights, run the conveyor belts, and heat the building. Energy is essential to the production side of our economy.

Energy is also essential to the consumption side of our economy. There is no

greater detriment to consumer confidence than not knowing what your utility bill

will be at the end of the month. No working family in America is going to by a new

car, washing machine, or computer when they are uncertain of the cost of their

monthly utility bill. Opening your electricity bill should not be like playing Russian

roulette!

Our current energy problems are no more complex than a lesson of Economics

101. Every person that has ever had an economics class knows the theory of supply

and demand. That is our problem. Our supply is dwindling while our demand grows.

The Department of Energy predicts a growth in total energy consumption of 32 percent by 2020. 393,000 Megawatts of new electrical generation capability will be required to meet that increased demand. This is the equivalent of constructing 40 new

500-megawatt power plants per year, for the next 20 years. Our oil refinery infrastructure is in no better shape. Currently, our domestic refineries are running at

a 93 to 95 percent utilization rate, and there has not been a new refinery built in

the United States for the last 20 years. Even if we had the oil, it would be difficult

to refine it into usable fuels to run our cars and heat our homes. Clearly we have

a problem that we must get to work on before rolling blackouts become a norm in

the most powerful and technologically advanced country in the world.

The systematic approach to any problem requires that the problem be fully understood prior to trying to solve the problem. I applaud President Bush for appointing

an Energy Task Force headed by Vice President Cheney and I applaud Senator

Murkowski and my friends in the Senate for their leadership on this issue. I especially applaud your leadership and Chairman Tauzin’s leadership on this issue. Now

is the time for us to assume the mantle of leadership and move forward on this critical issue.

We must increase the supply of energy in this country. When I say energy, I mean

all types of energy: oil, natural gas, coal, nuclear, hydroelectric, geothermal, and renewables. No one source has the single answer. The domestic oil and natural gas

industry must be kept alive and thriving. Measures such as the Independent Energy

Production Act, H.R. 805, which I co-sponsored and was recently introduced, helps

those independent and marginal well producers weather the ups and downs of the

48

market. A look at environmentally responsible access to Federal lands should be

pursued. Coal is abundant in the United States and currently serves as the fuel for

51 percent of our electrical generation. Clean coal technology needs to be supported.

The nuclear industry that provides 20 percent of our electrical generation capability

has been stagnant for years, but offers the potential for large amounts of emissionfree electrical power. The siting and permitting process required of the nuclear industry should be streamlined. The hydroelectric plants operating today must be

maintained for the future. Renewable sources such as geothermal, solar, wind, and

others offer great promise for the future. Continued support of these developing energy sources will secure our future.

The American demand for energy is large and growing. While conservation will

never solve our problems, it will certainly go a long way to help. We can probably

all remember the cars of the 1970s that achieved 5 miles per gallon. Today, the family mini-van gets 25 miles per gallon. When I was in high school, I remember every

light switch had a sticker on it reminding us to turn out the light when we left the

room. Today, I see office buildings here in Washington D.C. ablaze with lights at

10:00 at night. There is either some very dedicated public servants working late,

or they simply forgot to turn out the lights on their way out. We have become a

nation of ‘‘super-consumers’’ who believe that energy will always be available if we

are willing to pay a fair price for it. The people in California have learned a different lesson. We have not yet reached the maximum efficiencies that can be

reached. Vehicles, appliances, electronic devices, homes, buildings, and heating systems can all be made for efficient. Programs to assist low-income people to weatherize their homes should be supported. We as the government need to lead the way

by establishing rigid energy conservation programs in government office buildings

and in the fleets of vehicles that governments at all levels operate. Industry should

be encouraged to replace old inefficient systems with new, more efficient systems.

Great gains can be made in energy conservation when it becomes economically viable. We should take measures to make this happen.

Finally, the energy infrastructure in our country is in decline. I have alre1ady

mentioned that no new refineries have been built in the United States in the last

20 years. Additionally, no construction permits for nuclear plants have been granted

since 1979. The transmission lines used to transport electricity around the country

are now operating at their maximum and building new ones is next to impossible

due to a myriad of Federal, state, and local regulations. Pipeline construction is

similarly difficult in the regulatory environment we see today. Without an investment in infrastructure improvement, it will not matter how much our supplies increase, because it will not be able to reach the users.

In conclusion, we have an energy crisis bearing down on us and it is our duty

to do something about it. While the free and competitive market can solve many

of our problems, there is also a role for government. The government helped create

the problems we now face, so we in the government must now work with the industry to solve these problems. The solution will not happen overnight. There will be

bumps in the road. However, the development of a comprehensive National Energy

Policy will chart a sensible course that can be followed for many years to come. The

American people are counting on us.

Thank you.

Mr. BARTON. Thank you. And your experience at the State level

on the Oil and Gas Commission in Oklahoma will be invaluable as

we put this policy together. I understand you have to go to a meeting at 3. So anytime you need to leave, feel free to do so.

Now, welcome to a member of the subcommittee and the full

committee, Congressman Ganske. Your statement is in the record.

You are recognized for 5 minutes to elaborate.

STATEMENT OF HON. GREG GANSKE, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF IOWA

Mr. GANSKE. Thank you, Mr. Chairman. Well, as we look at a

national energy policy and as we are looking as a committee at the

bill, an energy bill, it is clear that we need to get adequate supplies

of natural gas and oil and to reduce our dependence on imports, as

my colleague J.C. Watts has just talked about. I think we also need

to focus on renewable sources of energy, and that is mainly what

49

I want to talk about and provide the committee with an example

of how regulations can run amok and can prevent us from using

some of our cleanest sources.

It is no surprise that I have been strongly in favor of renewable

energy sources like ethanol, along with colleagues such as Mr.

Shimkus on the committee. But I want to focus on a situation that

really has to deal with one of the main problems the committee will

be facing, and that is the NIMBY situation, the ‘‘not in my backyard’’ syndrome that is, I think, preventing us from developing new

sources, but also the sources for transportation of both natural gas

and the location of new sources. And so I am going to provide the

members of this panel with an example from California, and I

know my California colleagues may be interested in this.

There is a recent example, as an example of the obstacles to new

generation, it is the failure to build a geothermal plant on U.S.

Forest Service land at Telephone Flats in northern California near

Medicine Lake.

With the written consent and support of the Forest Service, the

Bureau of Land Management leased these lands to private companies in 1981 pursuant to the Geothermal Steam Act of 1970 which

was passed by Congress to ensure and encourage the BLM to lease

federally owned geothermal resources for commercial production

and use.

The proposed geothermal plant, while on Federal land, is hardly

in an area that hasn’t seen other uses. In the immediate area are

paved grounds, developed campground and picnic areas, numerous

privately owned cabins, a boat ramp and an active pumice mine.

Motor boats are used regularly in the summer. Snowmobiling is a

major activity in the winter, and substantial logging has occurred

and continues to occur in that area.

The Forest Service and the BLM compiled numerous documents

for this project, covering the range of environmental acronyms. In

its first environmental assessment of 1981 the Forest Service concluded that, ‘‘geothermal exploration will not create any environmental impacts which cannot be avoided.’’ As a result, developers

constructed numerous roads and well pads at the site and drilled

several dozen test wells to assess the commercial viability of the

geothermal resource.

The two Federal agencies completed a supplemental environmental assessment in 1984 and approved additional leasing, noting

contrary to, quote, coal, oil and gas-fired electric generating plants,

geothermal power is one of the few alternatives remaining capable

of contributing to energy demands without creating serious environmental impacts, unquote.

When a geothermal developer proposed further exploratory drilling in 1995, the BLM and Forest Service prepared another environmental analysis and issued a finding of no significant impact to the

environment, approving the project.

The company then submitted its plan of operation in 1997 to construct and operate its geothermal plant. So the agencies prepared

an environmental impact statement. The draft and final EIS adopted by the agencies approved proceeding with the project, with certain mitigation measures. But both reports concluded that denying

the project would conflict with the company’s leasing rights.

50

While everything seemed on track to approve this environmentally friendly geothermal plant, then the problems began. The

preferred route for the transmission line and access road were

found to be unacceptable because forestland would be disturbed.

The second alternative, a much longer transmission line, was also

found to be unacceptable because of its possible impact on a nesting area, although mitigation measures were readily available. And

one of the three native American tribes in the area complained that

the entire project would interfere with what they described as a sacred area of vision quests, although the other two tribes did not oppose the project.

After nearly 4 years of study, the record of decision which was

finally issued last year, turned down the project, citing, ‘‘the need

to protect the visual and cultural values associated with the

uniquely and highly significant historic properties of Medicine

Lake.’’ In a prime example of bureaucratic statement of the obvious, quote, selection of the no action alternative was the most effective measure to eliminate the impacts on the cultural and social

environments——

Mr. BARTON. Could the gentleman summarize, please?

Mr. GANSKE. To summarize, Mr. Chairman, after 20 years, no

geothermal plant, and a clear lack of a national energy policy, leaving California facing an electricity crisis. This was an opportunity

to bring 50 megawatts of clean renewable electricity to 50,000

homes in power-starved California. It didn’t happen. The developer

followed every rule and regulation. The judge has already told the

government not to bother trying to dismiss this case, and we are

left without a very clean source of energy, and it all relates to ‘‘not

in my backyard.’’ we need to do something to fix this.

[The prepared statement of Hon. Greg Ganske follows:]

PREPARED STATEMENT OF HON. GREG GANSKE, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF IOWA

America needs a comprehensive energy policy. You don’t need to look far from

home to realize the challenges we face. My constituents face energy bills this winter

two or three times the rate of a year ago. A national energy policy might not prevent

such price surges, but I feel it would go along way toward tempering them.

We need legislation to provide adequate supplies of natural gas and oil and to reduce our dependence on foreign imports. But we must also focus on renewable

sources of energy.

One of my first initiatives this year was to author bipartisan legislation to promote the use of ethanol. Twenty-six Members, from both parties, joined me in introducing the ‘‘Clean Air and Water Preservation Act of 2001’’ to call for an end to the

use of MTBE. MTBE is a chemical used to decrease automobile pollution and to improve air quality. Unfortunately, it is also a ground water contaminant. The Environmental Protection Agency warns it may even cause cancer. My legislation phases

out the use of MTBE and replaces it with ethanol which burns cleaner, without

harming our water away as Pennsylvania and Florida have joined me in cosponsoring the legislation. Even though, they don’t grow supply. The bill is good public

policy, which is why members from as far very much corn in those states, they recognize ethanol is a cleaner fuel alternative. Americans should not have to face a

false choice between clean air and clean water. With corn based ethanol, we can

have both.

In addition to ethanol, we must also include hydroelectric power, solar power,

wind generation, biomass, geothermal power and measures to promote conservation

and innovation. I feel very strongly about renewable sources, but they alone are not

the solution. We also need to look at developments in ‘‘clean-coal’’ technology, and

as I mentioned previously, we must ensure our domestic supplies of natural gas and

oil are sufficient.

51

It is not enough just to talk about renewable resources, we have to create an environment that fosters their development. We must remove obstacles and champion

them to make them an important player in a diversified energy mix.

One recent example of the obstacles to new generation is the failure to build a

geothermal power plant on U.S. Forest Service land at Telephone Flat in northern

California, near Medicine Lake. With the written consent and support of the Forest

Service, the Bureau of Land Management (BLM) leased these lands to private companies in 1981 pursuant to the Geothermal Steam Act of 1970, which was passed

by Congress to encourage the BLM to lease federally owned geothermal resources

for commercial production and use.

The proposed geothermal plant, while on federal land, is hardly in a pristine area.

In the immediate area are paved roads, developed campground and picnic areas, numerous privately owned cabins, a boat ramp, and an active pumice mine. Motor

boats are used regularly in the summer, snowmobiling is a major activity in the

winter, and substantial logging has occurred and continues in the area.

The Forest Service and BLM compiled numerous documents for this project, covering the range of environmental acronyms. In its first Environmental Assessment

in 1981, the Forest Service concluded that ‘‘geothermal exploration will not... create

any environmental impacts which cannot be avoided.’’ As a result, developers constructed numerous roads and well pads on the site and drilled several dozen test

wells to assess the commercial viability of the geothermal resource.

The two federal agencies completed a Supplemental Environmental Assessment in

1984 and approved additional leasing, noting that, contrary to ‘‘coal, oil and gas

fired electric generating plants... geothermal power is one of the few alternatives

remaining capable of contributing to... energy demands without creating serious environmental impacts.’’

When a geothermal developer proposed further exploratory drilling in 1995, the

BLM and Forest Service prepared another environmental analysis and issued a

Finding of No Significant Impact to the Environment (‘‘FONSI’’) approving the

project. The company then submitted its Plan of Operation in 1997 to construct and

operate its geothermal plant, so the agencies prepared an Environmental Impact

Statement (‘‘EIS’’). The draft and final EIS adopted by the agencies approved proceeding with the project, with certain mitigation measures, but both reports concluded that denying the project would conflict with the company’s lease rights.

Everything seemed on track to approve this environmentally friendly geothermal

plant. Then the problems began. The preferred route for the transmission line and

access road were found to be unacceptable because forest land would be disturbed.

The second alternative, a much longer transmission line, was also found to be unacceptable, because of its possible impact on a nesting area, although mitigation measures were readily available. And one of the three native American tribes in the area

complained that the entire project would interfere with what they described as a

sacred area of ‘‘vision quests.’’ Although the other two tribes did not oppose the

project.

After nearly four years of study, the Record of Decision, which was finally issued

last year, turned down the project, citing ‘‘the need to protect the visual and cultural

values associated with the uniquely and highly significant historic properties in the

Medicine Lake’’ area. In a prime example of a bureaucratic statement of the obvious,

‘‘the selection of the No Action Alternative was the most effective measure to eliminate the impacts on the cultural and social environments in the... area.’’

The result after 20 years? No geothermal plant and a clear lack of a national energy policy, leaving California facing an electricity crisis. Here was a golden opportunity to bring 50 megawatts of clean, renewable electricity to 50,000 homes in

power-starved northern California. It didn’t happen. California will continue to experience blackouts. The developer followed every rule and regulation. It paid dearly

for the geothermal lease rights, and it’s now in court seeking damages from the U.S.

Government of at least $50 million—and the judge has already told the Government

not to bother trying to dismiss the case.

California’s experience in trying to build a geothermal plant is only one example

of the obstacles new energy sources face, but I hope it is an instructive one as we

work to build a national energy policy that is comprehensive, inclusive and designed

to build a bridge to an America which is secure in its energy needs. Thank you Mr.

Chairman.

Mr. BARTON. We thank the gentleman. If we could let the whip

come forward, Mr. DeLay, and let him go and then we will, I don’t

know—Doug, are you senior to Mr. Stenholm? Which of you all are

the senior man?

52

Mr. BEREUTER. We came in together.

Mr. BARTON. So we go by alphabetical order or Texas order.

Which do we do here?

Mr. STENHOLM. Mr. Chairman, if I might, I will just submit my

statement for the record and save you 5 minutes because I have

to be someplace at 3 o’clock.

Mr. BARTON. Well, I was actually looking forward to listening to

you. We will go with Mr. DeLay and if Charlie wants to stay for

5 more minutes, We will be glad to go with Mr. Stenholm.

Mr. DELAY. I will be glad to defer to him if he has to go.

Mr. BARTON. Well, then let’s let Congressman Stenholm go right

now, then DeLay and Bereuter.

So, Congressman Stenholm, you are recognized for 5 minutes, if

you wish it.

STATEMENT OF HON. CHARLES W. STENHOLM, A

REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS

Mr. STENHOLM. This will cost me big time, Mr. Chairman.

Mr. BARTON. Just a vote on the tax bill or something.

Mr. STENHOLM. Thank you, Mr. Chairman. I will indeed summarize my comments and I thank you for holding this hearing. I

thank this committee for making an effort once again for developing a national energy policy, something that I have been interested in for 22 years. And I believe this year, and this Congress

with this administration, we are going to get it done.

You know, I represent not only the cotton patch but also the oil

patch. And, you know, there is an old saying in agriculture as well

as the oil patch, and that is low prices always bring high prices.

And in my district when prices were at $10 dollars a barrel and

$2 per thousand cubic feet of natural gas, no one, including my own

constituency, was concerned about the low prices. But my constituency is no different than California or any other State today. The

high prices that we have now have become rather disruptive to

home owners and agriculture, et cetera, and it is important that we

begin to focus on the solution. We know what the problem is—Mr.

Watts outlined the problem very very well. Now what we need, we

need improved access.

Mr. Ganske stated a moment ago, when most of the remaining

natural gas to be found in the United States lies on land owned

by the United States taxpayers, it is time for us to begin having

access. We know with modern technology that we can in fact develop safely, environmentally sound oil and gas production, coal

production, all other sources of energy. It can be done and it is time

for the ‘‘not in my backyard’’ syndrome to end.

Improved technology requires research and I hope that in our

budget deliberation this year we will provide for continued research

and development of finding even newer and better ways to develop

found energy. Consumer needs must be taken into consideration

and programs like LIHEAP do need to be fully funded in order to

take care of the short-term problem.

We, as part of a national energy policy, need to be looking at alternative energy sources, and I come to you today as ranking member of the House Agriculture Committee. I want to share with you

the impact it is having on agriculture. You know this, everyone

53

should know this: High prices for natural gas electricity are causing many farmers to go to dry land farming because you cannot afford to produce food and fiber with these costs and sell it for what

we are having to sell our agriculture products.

I have been working for the last several years on developing a

partnership between the oil and gas industry and agriculture, because you cannot produce food and fiber without oil and gas. You

cannot produce oil and gas without food and fiber, and therefore it

needs to be a natural partnership.

We all have our environmental concerns, we all have those who

believe that somehow, some way, we can produce in abundance

without drilling, without building power plants, or without doing

any of the things that promote new sources. However, I am happy

to say to you today that we are on the verge of building meaningful

kinds of coalitions.

I believe that it is going to be very possible this year to get the

kind of bipartisan support that we do need to do all of the things

necessary in developing alternative energy sources. Ethanol, I support. I didn’t used to support it. I have done a 180 degree turnaround because it was very difficult for me to convince my independent oil and gas producers that having the government subsidize their competition when they were going broke. I couldn’t do

that. But now we are finding a realization we need to develop all

of the energy sources we have in this country and therefore, working together, we can do so.

I also encourage one thing additional and that is to take another

look, which so far the Ways and Means Committee has not done,

at using the Tax Code to provide incentives for domestic oil and gas

producers, as well as developing alternative energy sources. That

is not in the President’s proposal. That is not in anybody’s proposal

that I am hearing talked about that will fit within the number we

are talking about. That is why some of us are having a little difficulty with the manner in which we are going about our budget

business, and that is something we will talk about another day.

But I thank you. Again, I appreciate the majority whip for his

indulgence with me today. I know it will, in fact, cost me dearly,

but it will be a price I will be more than willing to pay if he and

I are working together on that, which, Mr. Chairman, you and he

and a lot of other folks in this room would like to see done. I thank

you very much.

[The prepared statement of Hon. Charles W. Stenholm follows:]

PREPARED STATEMENT OF HON. CHARLES W. STENHOLM, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF TEXAS

Thank you Mr. Chairman, and I thank the members of the committee for allowing

me to come and be here today. I commend you for holding this hearing today on

the development of a national energy policy. I have become increasingly concerned

about this Country’s lack of a national energy policy and what impact that failure

has on both producers and consumers. The state of our energy industry has far

reaching economic, geographic and political ramifications and we ignore it at our

own peril. My hope is that this hearing can begin a process of developing a comprehensive national policy for this vital industry.

CURRENT CONDITIONS

Cold weather and ever-hotter gas prices have meant an expensive winter in

Texas. The pinch, which consumers have felt in both electric and gas bills is, in

54

part, due to supply and demand as well as to the weather. Gas prices remained static for several years, hovering in the $2 per thousand cubic feet range. That, along

with oil prices that remained low as well, discouraged drilling.

Oil Production

Oil prices, on a long slide, dipped to $10 and under in late 1998 and early 1999.

The average dip in oil prices lasts about six months, and this recent one lasted three

times as long. The price collapse forced many oil and gas companies to sell equipment, layoff employees, and shelve exploration and production plans. A number of

energy companies went out of business as a result.

In my District, the 17th District of Texas, which also is known as the ‘‘oil patch,’’ claims for unemployment from the oil and gas industry quadrupled from 1,171 to

4,730 between December 1997 and 1998. During this time, the lost oil wellhead

value dropped $5.79 million and the value of oil to the Texas economy dropped almost $1 billion.

The number of producing wells declined by 2,855 during this time as well. In my

home county of Jones, oil production in December 1997 was 83,706 barrels, in December 1998 it was 69,966 barrels, and in December 1999 it had declined to 58,534

barrels. That’s a decline of 25,172 barrels per month from December 1997 to December 1999, or a decline of 30%.

Oil production in the United States is on the decline as we are operating from

a mature resource base that makes the cost of production high as evident in Chart

1 from the Energy Information Administration. Total domestic crude oil production

has declined from 8.7 million barrels per day in 1986—the first oil price collapse— to 5.9 million barrels per day in 1999. We must recognize that a healthy domestic

oil production industry is also essential for a healthy domestic natural gas industry,

because they are inherently intertwined.

Gas Production

Much of the nation’s natural gas comes from oil wells. Many of the nation’s independent producers, particularly hard hit by the industry down turn, focused on finding natural gas. When prices are below the cost of exploring and producing crude,

these small independent producers cannot stay in business, causing a ripple effect

throughout local communities as schools and hospitals in Texas rely on a strong oil

and gas industry for revenues. Over the past several years, we warned that critically low prices have the potential to turn into a price shock. Unfortunately, this

is a lesson that we should have learned many times over in the last two decades.

Production of both oil and gas declined in 1999 and, despite high prices paid to producers now, has not climbed to pre-collapse levels.

As indicated in Chart 2, oil and natural gas producers are responding. In April

of 1999, only 126 rigs were drilling for oil and 362 rigs were drilling for natural

gas, nationwide. By January 2001, rigs drilling for natural gas more than doubled

with 878 rigs in production and the rig count for crude oil double as well (240 rigs

in production). However, wells generally take three months to a year to come on

line, so, with temperatures lower than normal nationwide, prices likely will not go

down significantly for several months.

Despite a doubling of rigs in production, demand for natural gas is far out-weighing supply. According to a study conducted by the National Petroleum Council, the

natural gas demand will increase by slightly more than 30% over the next decade

(see Chart 3 submitted with this testimony). The U.S natural gas demand has

grown from 19 Thousand Cubic Feet (TCF) in 1990 to approximately 22 TCF in

1998, or about 2% per year, and has continued to represent about one quarter of

the nation’s fuel needs.

Some may see it as a blessing that we are moving out of a season of high winter

heating costs but, unfortunately, this will not alleviate the price pinch as we are

moving into the spring and summer months with an average increase in transportation and cooling costs.

LOOKING FORWARD

If ever there was a time of dramatic demonstration, the compacted experience of

the last three years with its highs and lows illustrates the need for our Nation to

take responsibility of its energy future. We do need a free market for the production

of energy, but it cannot be a ‘‘free’’ market dominated by foreign producing countries

that do not necessarily have our best interests at heart. Former Senator Lloyd Bentsen of Texas once said that when America imported more than half of its crude and

petroleum products, it would have reached a peril point. We are now there!

In formulating a national energy policy, it must be in the context of a continuously improved understanding of how energy demands of the 21st Century challenge

55

the energy infrastructures of the 20th Century, of how the new economy is affecting

the competition for the capital needed to improve and upgrade our energy infrastructures, and of how the government’s incentive structure and statutory frameworks should evolve to meet emerging energy needs. As policymakers, we can focus

on the role of oil and gas in power production, producer incentives—including making more federal lands available and access to capital using tax incentives (an issue

that the Ways and Means Committee should consider)—and conservation measures.

And the impact of price on demand has not come to its full effect. The combination

of increased production and price-induced conservation might balance supply and

demand at a more comfortable price level.

Improving Access

At the same time we promote protection of our treasured environments as a high

priority, it is imperative that we also consider enhancing our recovery and wildcat

exploration by examining our federal lands, both onshore and offshore, for possible

responsible exploration. From 1997 to 1999, oil well completions for drilling for new

reserve declined by 54%, but by providing financial incentives and access to capital

to increase domestic oil production and exploration, we can encourage the discovery

of new domestic oil and gas reserves. The Bureau of Land Management oversees

264 million acres of Federal land and 300 million acres of subsurface mineral resources. (Refer to Chart 4) These lands contain subsurface resources amounting to

eight percent of the natural gas and five percent of the crude oil produced annually,

in addition to resources like coal, forest products, grazing forage, and rights-of-way

for pipelines and transmission lines. Of the total $1.4 billion in annual revenues

these lands bring, nearly $835 million (60%) is generated by royalties, rents, bonuses, sales, and fees from oil and gas operations. The total direct and indirect economic output of oil and gas production is estimated at nearly $12 billion annually.

Chart 5, which I have submitted with this testimony, depicts resource estimates

in restricted areas in the lower 48 states of the United States where enhanced, environmentally sound production could occur if these areas were to be opened up to

drilling. Access to the resource base and to rights of way for infrastructure is critical

for sustainable supply. Chart 5 estimates that slightly over 200 TCF, or 15% of the

Lower 48 unproved resource base, is either off limits or is available with significant

restrictions.

Of the almost 1,500 TCF of the Lower 48 resource base cited in Chart 5, approximately 47% is owned by the Federal Government. Offshore drilling moratoria have

virtually closed activity in the Eastern Gulf, Atlantic and Pacific coast waters, all

under Federal jurisdiction. Policy makers need to understand the importance of this

resource base in meeting the nation’s growing gas demand.

Chart 6 shows the decline profile for gas wells for their given year of completion—

where the younger the vintage, the sharper the rate of decline. There are two key

reasons for this increasing rate of decline:

1) The new field discoveries tend to be smaller in size; and

2) Drilling and completion technological advances have enabled higher flow rates,

resulting in shorter reserve lives versus older vintages.

This further indicates that drilling rates and better access to lands will have to

increase to meet projected demand.

Skilled Workers

With increased drilling comes an increase in the need for skilled workers to build

and run rigs used in production. The oil and gas industry has been experiencing a

skilled worker shortage for some time. This shortage is a direct philosophical product of the volatility found in the oil and gas industry. By stabilizing the market,

skilled workers are more likely to stay in the business instead of seeking jobs where

the pay is steadier and the risks are much less. Additionally, we should consider

utilizing our colleges and universities to establish federally qualified training centers to ensure workers have the best training and skills to safely operate drilling

equipment.

Improved Technology

It is important to note that technology has advanced to a point that we can assess

and develop resources in these areas more efficiently, and with less environmental

impact, than ever before.

In recent decades, new technologies have been key to finding and extracting recoverable oil and gas resources—located in deeper and more remote locations, in more

challenging geologic formations, in more difficult terrain, in smaller pockets, under

sensitive wetlands, and far out at sea.

56

By maintaining federal funding in research and development for technological improvements either at high-end research labs or as a supplement to kick-start industry venture capitalism, we could really help bring new initiatives along like we have

seen in the past with horizontal drilling, new methods to plug wellheads, and improved drill bits. Our nation has come to expect the benefits of fossil-based fuels and

products, but also a cleaner environment. Ongoing research and development will

be the lead force in continuing to protect the environment during exploration and

production. Great strides have been made, but more opportunities remain.

Consumer Needs

We need to consider measures to help restore market stability with domestic

crude oil and natural gas prices maintaining a level where domestic producers can

compete in a global market. However, our national energy policy must recognize

both producer and consumer issues. We need to consider the use of incentives to

encourage consumers to make energy efficient improvements to their homes and

purchase energy efficient automobiles as well as further promote and fund the LowIncome Home Energy Assistance Program (LIHEAP).

Alternative and Renewable Energy Sources

As part of a national energy policy, we also need to further improve and expand

other avenues of energy, including wind, solar, hydroelectric, and other renewable

energy resources as well as alternative sources such as nuclear energy. If we are

to achieve energy independence, we must research and develop all sources of energy.

Wind Energy—The U.S. wind industry has successfully financed and built wind

plants capable of generating 1700 Mega Watts of power. These plants now produce

more than 3.1 billion kilowatts per hour per year. Based on this performance, the

industry is developing a corporate structure that has increasing access to some of

the same capital markets as electric utilities. Many rural communities, including

some in the 17th District of Texas, are taking advantage of the wind’s clean energy

to provide their electrical needs or for pumping water when they are unable to be

tied to a utility grid, lack conventional resources, or simply want to be independent

of utility bills. This demand for wind energy is helping expand the industry as well

as helping provide a cleaner environment while operating in harmony with farming,

ranching, forestry, and other open space operations. Research and development play

a key role in advancing wind technology. These organizations include national laboratories and facilities for testing new hardware.

Since the 1980’s, wind energy production has increased its efficiency by a remarkable 80%—from 25 cent per kilowatt-hour to 4.5 cents per kilowatt-hour. Through

expected equipment and manufacturing efficiencies, the industry anticipates the

cost of wind energy will fall to 3 cents per kilowatt-hour or less in the next few

years. It is important that we continue to support the wind energy production tax

credit (PTC) for this environmentally friendly form of renewable energy that produces no greenhouse emissions.

Solar—Solar resources will remain infinitely available for as long as the solar energy system continues to exits—in other words, for the rest of Earth’s history, a period of approximately five billion years. In order to use solar resources, we need continued research and development for improved technologies that can be applied locally. The use of solar resources leads to the operation of countless small-scale installations, involving a shift away from a few large-scale investments towards countless small investments and away from remote delivery of energy towards regional

and individual energy subsistence. Solar energy is an important component contributing clean power to the nation’s energy mix.

Nuclear—The recent rolling blackouts in California may change forever how the

public and policymakers think about U.S. energy policy. Many are comparing the

recent energy crisis to that of the 1973 oil embargo—a time when soaring fossil fuel

prices revealed the pitfalls of foreign oil dependence. One of the most compelling

reasons for the recent focus on energy security is that supply has not kept up with

demand. And, as a reliable, low-cost producer of large quantities of base-load power,

nuclear energy promises to figure prominently in this important component of the

nation’s energy security providing emission-free electricity sources.

In terms of public health consequences, the safety record of the U.S. nuclear

power industry has been excellent. However, we need to address two major issues

if the nuclear power industry is going to grow at a rate comparable to demand.

First, we need to address the issue of what to do with the byproducts of nuclear

power. There are solutions to this problem that could be responsibly put in place,

and it is up to Congress to act on legislative proposals such as Yucca Mountain. Second, we need to continue to streamline the licensing process so that safety and siterelated issues are resolved before capital is invested.

57

AGRICULTURE’S ENERGY NEEDS

I also come before you today as the Ranking Democrat on the House Agriculture

Committee. I want to share with you not only the impact that energy price and

availability have on agriculture, but also how America’s farmers and ranchers can

play a role in meeting our energy needs.

As you can see from Chart 7 that is attached to my testimony, agriculture utilized

1.7 quadrillion BTUs in 1998, which equals about 2 percent of the total energy consumed in the United States that year. This chart includes the direct energy consumed in various forms as well as the energy utilized by farmers and ranchers in

the indirect forms of fertilizer and pesticides.

Keith Collins, USDA’s Chief Economist, recently testified before the Agriculture

Committee regarding the state of the U.S. agricultural economy. In his testimony,

Dr. Collins indicated farmers’ production expenses increased by 4 percent or $7.6

billion in 2000, and that higher fuel and oil prices accounted for over 1⁄3 of that increase. To put that increase in perspective, he recounted that farm production expenses had risen only one percent from 1997 to 1999.

Particularly hard hit were farmers who utilize irrigation to produce their crops,

since not only were natural gas and electrical prices two to three times higher than

the previous year, but drought in many parts of the country forced producers to

water more times at that increased cost. This may mean in a few cases that producers who actually had a crop to harvest in some regions of the country may have

been worse off than their neighbors who didn’t irrigate and had no crop to harvest.

For 2001, cash production expenses are forecast to increase $1.5 billion to a record

level of $179.5 billion for the sector. Fuel prices are expected to remain close to last

year’s level, however, the recent spikes in natural gas prices have led to much higher fertilizer prices, which will have a major impact on producers’ bottom lines and

even what they plant this year.

The recent spikes in natural gas prices have wreaked havoc in the domestic fertilizer industry. While natural gas prices appear to have moderated, albeit at a

higher price, and the availability of fertilizer for spring pre-planting application is

less in question, there is no doubt that farmers will be paying much higher prices

for nitrogen fertilizers this spring. As an example, anhydrous ammonia prices went

from an average price of $200 per ton in 2000 to $334 per ton at the beginning of

January.

As Chart 8 shows, nitrogen fertilizer is utilized on a range of agricultural commodities. Although application rates are lower for rice, soybeans, wheat, cotton and

corn, the nitrogen that is applied accounts for 20-30 percent of the cost of production

for those crops, as opposed to 5-10 percent of the cost of production for the listed

fruits and vegetables.

The increase in natural gas and electrical prices is also impacting the floral and

horticulture industries as well as poultry producers who utilize natural gas to heat

and circulate air in their greenhouses and chicken houses.

Agricultural producers cannot pass along higher costs. An increase in energy and

energy-related input costs not only increases farmers’ direct out of pocket expenses,

but also results in lower prices from the market as the purchasers of their commodities try to recoup the higher costs they are paying for transportation, processing

and marketing.

As Congress has had to pump billions of dollars into the farm economy to prevent

disaster, there is no doubt that the picture is not improving in the short term, especially with agriculture’s reliance on energy in various forms and the impact that

higher energy prices will continue to have on agriculture’s bottom line.

HOW AGRICULTURE CAN HELP

American agriculture can provide a ready source of raw materials to help meet

our domestic energy needs. I was pleased that ‘‘The Biomass Research and Development Act of 2000’’ was enacted into law during the last session of congress. I hope

that this legislation will continue the close working relationship that developed between the Energy and Agriculture Departments over the last several years to continue the research and development of all types of agricultural and forestry products

and waste materials into energy sources.

Now the Congress must do its share and continue to fund the ongoing work and

new research that needs to be done in the areas ranging from cellulosic feedstock

enhancement that would allow the expansion of ethanol production into areas where

corn is not as readily available, to finding ways to utilize animal manure for energy

production on and off the farm as well as continuing to address the remaining questions in corn ethanol production, such as the transportability issue.

58

Any national energy strategy must include incentives for additional renewable

fuel utilization. Over the last 20 years, we have made great progress in promoting

the use of ethanol at both the state and federal level. I believe the time is right

to also promote the use of biodiesel. It is a fuel that can be made from vegetable

oils (which we currently have a surplus of) as well as recycled oils and animal fats.

The fuel has passed vigorous environmental, health and engine testing. Soybean

growers have spent over $25 million of their own money, with little government assistance, to successfully commercialize this fuel.

Biodiesel blends are being used to meet the requirements of the Energy Policy Act

(EPACT) due to the efforts of your colleagues here on the Energy and Commerce

Committee, Karen McCarthy and John Shimkus. I am told the changes their legislation made in the EPACT program have resulted in biodiesel being used as a flexible,

safe way to help meet the requirements of the program. I am also reminded the legislation passed in 1998 resulted from a compromise with the natural gas industry

and was supported by most members of the Committee.

This proves to me that our energy policies should be comprehensive and framed

to encourage the development and use of many viable fuels. The answers to our energy dependence and power generation problems can best be met by broadening our

base of energy resources. I personally feel strongly that fuels like biodiesel and ethanol can be and should be a part of a national energy program.

Additionally, there is a tax situation with ethanol that needs to be addressed by

our colleagues on the Ways and Means Committee. Currently those states, mainly

in the Midwest, which utilize ethanol the most are penalized in the amounts they

receive for highway improvements and construction from the Transportation Efficiency Act for the 21st Century or TEA-21 bill passed by Congress in 1998. I do not

believe that we should be penalizing these states for using a homegrown product,

corn, to meet their energy needs.

I hope the Committee will be innovative and creative as you shape our country’s

next energy program. We can no longer rely on the same old policies and program.

We must look for additional sources and resources to complement our traditional

sources of energy. I look forward to working with the leaders of the Committee to

make certain that renewable fuels made from our abundant agriculture and forestry

resources are a part of the answer to our energy challenges.

CONCLUDING REMARKS

America needs a balanced-forward-looking energy policy based on the proposals

that have been put before this Congress. We need a responsible approach that will

infuse our energy sector with both efficiency and competition, seeking to protect

America against emergencies in the energy market.

Appendix

LIST OF CHARTS

Chart 1 Crude Oil Production by Source 1970-2020—Courtesy of DOE/EIA and DOI

Chart 2 Natural Gas Rig Counts—Courtesy of National Petroleum Council

Chart 3 U.S. Natural Gas Demand—Courtesy of National Petroleum Council

Chart 4 Government Lands—Courtesy of National Petroleum Council

Chart 5 Resource Estimates for Restricted Areas—Courtesy of National Petroleum

Council

Chart 6 U.S. Production History—Courtesy of National Petroleum Council

Chart 7 Estimated farm energy use, 1998—Office of Chief Economist/Office of Energy Policy & New Uses, USDA

Chart 8 U.S. Ammonia Price—CF Industries

Chart 9 Midwest Anhydrous Ammonia FOB Prices—Office of Chief Economist/Office of Energy Policy & New Uses, USDA

Chart 10 Nitrogen Application Rates—Office of Chief Economist/Office of Energy

Policy & New Uses, USDA

Chart 11 Direct energy expenditures as percent of total production expense, 1998—

Office of Chief Economist/Office of Energy Policy & New Uses, USDA (Recent

increases in fuel prices would revise these estimates upwards by nearly double

since 1998)

70

Mr. BARTON. Thank you. We now go to the distinguished majority whip, who is coordinating the various jurisdictional issues between the committees on energy policy. It is a job that is going to

be difficult, but I know that he is up to it.

Your statement is in the record. You are recognized for 5 minutes.

STATEMENT OF HON. TOM DeLAY, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF TEXAS

Mr. DELAY. Thank you, Mr. Chairman. I am here representing

the leadership, and we are here to help you.

Over the course of the campaign, Mr. Chairman, President Bush

insisted that the country needed to make fundamental changes in

our energy sector. He pointed out and pointed to warning signs and

inefficiencies that threatened the safe and dependable energy supply that our economy and national security demand. Subsequent

events have now vindicated the President’s perseverance. That is

why we are here today.

As we all know, we have serious problems within the American

energy sector, and it is past time that we took stock of our position.

We have seen things recently that offer a clear position. We have

seen things that give us a clear lesson. There are artificial barriers

in place that are preventing us from producing the steady, dependable energy supply that the American consumers expect, and this

problem has brought consequences, because we must remember

that our economic strength depends on our energy security. So it

is our job as Congress to remove those barriers.

A great source of pride among the men and women that work for

the companies that make up our various energy sectors is the satisfaction that they take in providing a secure dependable energy supply to American families and businesses. Unfortunately, their ability to supply consumers with steady energy at a fair price has been

compromised by burdensome regulation and inefficient government

policy.

Of course, everyone also wants clean air and water, and fortunately this is not an ‘‘either/or’’ proposition. I am certain that by

applying common-sense standards to the restrictions hampering

energy development and exploration, we can create both deep and

reliable sources of energy and the infrastructure to deliver that energy to our consumers.

Taken together, these improvements will once again provide the

energy security Americans want and expect, but first we must face

the challenges that lie ahead. The upheaval in California clearly

demonstrates that energy issues are not simply a State-by-State

problem. California’s troubles lay the predicate for a Federal role

in enhancing energy security. A comprehensive solution cannot ignore the shortcomings of either energy generation or transmission.

California’s supply shortcomings are harming other States, and

California is damaging neighboring States in two ways: First, consumers in surrounding States are paying higher rates to subsidize

the increased demand caused by California’s inability to meet its

own needs. Second, California’s neighbors are compromising their

own energy security by drawing down resources that historically

provide the energy needs during periods of peak demand.

71

For example, States like Idaho traditionally allow their lakes and

dammed rivers to rise during the winter and spring to ensure a

steady supply of hydroelectric power for periods of peak demand

over the summer. This year the mountain States are being forced

to squander those water resources to produce power for California

instead of storing up water for the dog days of summer. Because

when the hot weather hits, California may very well have succeeded in exporting the rolling blackouts and brownouts it brought

upon itself to its neighbors.

We now have the technology and the experience to provide energy security for the American people without trading environmental degradation for efficiency, but this will not happen unless

we first adopt a comprehensive plan to create a dependable energy

supply. What we need is a national energy strategy that considers

all of our potential sources of supply and all the challenges that are

constraining the market for energy in America today.

I have listed in my testimony, Mr. Chairman, many issues that

we have to resolve, and I will just leave that for the record. Many

of them have already been talked about, such as expanding our

supply by encouraging a variety of sources, increasing our refinery

capacity.

I want to say, Mr. Chairman, I represent a lot of the refining capacity, in fact, most of the refining capacity in this country. We

have not built a new refinery in 30 years. In 1981, we had 315 refineries. Today, we have only 155, and that has to change.

I also listed many other issues that we have to talk about, including what Mr. Stenholm was talking about. We have to reform

our Tax Code.

So on the Speaker’s direction as the leadership’s energy point

man, Mr. Chairman, I am looking forward to working with you,

with the chairman of the full committee, Mr. Tauzin——

Mr. BARTON. Who was here.

Mr. DELAY. He is right behind you.

—and the President and Vice President Cheney, my good friend,

J.C. Watts, and the committees of jurisdiction, as we work together

to develop a comprehensive energy strategy that balances regulation with the imperative for energy security.

I thank you.

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

PREPARED STATEMENT OF HON. TOM DELAY, HOUSE MAJORITY WHIP

Over the course of the campaign, President Bush insisted that the country needed

to make fundamental changes in our energy sector. He pointed to warning signs and

inefficiencies that threaten the safe and dependable energy supply our economy and

national security demand. Well, subsequent events have now vindicated the President’s perseverance. That’s why we’re here today.

We have serious problems within the American energy sector. And it’s past time

that we took stock of our position. We’ve seen things recently that offer a clear lesson: There are artificial barriers in place that are preventing us from producing the

steady, dependable energy supply that American consumers expect. And this problem has broader consequences. Because we must remember that our economic

strength depends on our energy security. So, it’s our job as a Congress to remove

those barriers.

A great source of pride, among the men and women that work for the companies

that make up our varied energy sector, is the satisfaction that they take in providing a secure, dependable energy supply to American families and businesses.

72

Unfortunately, their ability to supply consumers with steady energy at a fair price

has been compromised by burdensome regulation and inefficient government policies.

Of course, everyone also wants clean air and water. Fortunately, this is not an ‘‘either or’’ proposition. I’m certain that, by applying common sense standards to the

restrictions hampering energy development and exploration, we can create both

deep and reliable sources of energy and the infrastructure to deliver that energy to

consumers. Taken together, these improvements will, once again, provide the energy

security Americans want and expect. But first, we must face the challenges that lie

ahead.

The upheaval in California clearly demonstrates that energy issues aren’t simply

a state-by-state problem. California’s troubles lay the predicate for a federal role in

enhancing energy security. A comprehensive solution can’t ignore shortcomings in

either energy generation or transmission.

California’s supply shortcomings are harming other states. California is damaging

neighboring states in two ways. First, consumers in surrounding states are paying

higher rates to subsidize the increased demand caused by California’s inability to

meet its own needs. And second, California’s neighbors are compromising their own

energy security by drawing down resources that historically provide their energy

needs during periods of peak demand.

For example, states like Idaho traditionally allow their lakes and damned rivers

to rise during the winter and spring to ensure a steady supply of hydroelectric

power for periods of peak demand over the summer.

This year, the mountain states are being forced to squander their water resources

to produce power for California instead of storing-up water for the dog days of summer. Because when the hot weather hits, California may very well have succeeded

in exporting the rolling blackouts and brownouts it brought upon itself to its neighbors.

We now have the technology and the experience to provide energy security for the

American people without trading environmental degradation for efficiency. But this

won’t happen unless we first adopt a comprehensive plan to create a dependable energy supply. What we need is a national energy strategy that considers all of our

potential sources of supply and all of the challenges that are constraining the market for energy in America.

Among the issues we must resolve are:

• Expanding supply by encouraging a variety of sources to produce the energy necessary to meet our growing needs, including oil, nuclear, clean coal, natural gas,

and renewables. • Increasing our refining capacity. We haven’t built a new refinery in 30 years. In

1981 we had 315 refineries. Today we only have 155. That must change. • Providing access to our domestic resources at home to reduce our dependence on

foreign supplies. And yes, that includes opening up Alaskan reserves and approving Lease Sale 181 in the Gulf of Mexico. Today the energy industry can

extract oil and gas while treading lightly on the environment.

• Developing an adequate system of electricity transmission. We need to not only

increase electricity generation by building new plants in underserved states like

California, we need to also build the transmission facilities that will create a

reliable electrical grid. If we can do that, electricity will become a true commodity and consumers will benefit through enhanced reliability and more competitive prices.

• Reforming our tax code to promote capital investment in energy technologies and

infrastructure.

• Streamlining the regulatory process to promote a free and competitive marketplace in pricing, technology, energy efficiency and selection of fuels and energy

suppliers.

• Promoting energy technology development and long-range research and development initiatives.

On the Speaker’s direction as the Leadership’s energy point man, I’m looking forward to working with the President, Vice President Cheney, my friend J.C. Watts,

and the committees of jurisdiction as we work together to develop a comprehensive

energy strategy that balances regulation with the imperative for energy security.

Mr. BARTON. I thank the distinguished whip. I knew we had good

staff, but I didn’t know they were that good. The committee chairman is staff now.

We are going to go to Congressman Bereuter of Nebraska. His

statement is in the record in its entirety.

73

We recognize you for 5 minutes.

STATEMENT OF HON. DOUG BEREUTER, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF NEBRASKA

Mr. BEREUTER. Chairman Barton, Congressman Boucher, members of the subcommittee, thank you for holding the hearing on the

concept of national energy policy. I think you are trying to make

that concept a reality. Of course, I think almost all of us are totally

supportive of that.

I want to bring to your attention just one or two of the particular

problems affecting my constituents and State, and then try to move

to a couple of solutions that perhaps may not be offered or given

much support necessarily by other Members.

I am sure you aware of many of the challenges facing the country. The most immediate energy concern for most of my constituents is a dramatic increase in natural gas prices. Individuals, small

businesses, nonprofits are paying hundreds of dollars more per

month on natural gas than they did last year. Some of our businesses are on interruptible contracts, which means they may soon

have to stop their production lines and other kinds of business activities.

The CRS report that just came out lately, quoting a reputable

source, suggests that we have 58 years’ worth of technically recoverable natural gas in this country. While the number of wells being

drilled has gone up dramatically in the last half of 2000 versus the

first half of 1999, we obviously have some big problems.

I have written to Chairman of the Federal Trade Commission,

Robert Pitofsky, twice on this subject, in fact early last July, and

received what I considered to be only pro forma responses. So I

would like to see some attention to this issue. Mr. Stenholm has

already mentioned a particular problem in the farm sector, but it

goes beyond that, since most of the fertilizer used today is natural

gas-based and some of the firms producing it similarly have not

produced what is necessary for this spring. So it is one more particular problem faced by the agricultural sector.

Now I would like to make a couple of comments about solutions.

I think, of course, that a strong national energy policy has to include an emphasis on renewable sources, such as wind. I don’t say

this is a huge part of it, but it is an important part of it. I want

to make sure that we do not ignore some of those areas as you

move ahead. One of them I want you to focus on, if you will, is

wind as an energy source. I think it is important as a potential

source.

It is important to the rural communities. The source of energy

is especially important to the Great Plains region from the Dakotas

to Texas, as well as parts of the American West like Wyoming and

parts of California. According to the American Wind Energy Association, my State ranks sixth in potential, maybe much higher, according to other sources.

Mr. Chairman, Texas ranks No. 2 in potential source for wind for

energy.

Mr. BARTON. A lot of hot air down there in Texas.

Mr. BEREUTER. Yes. Well, Oklahoma has a lot too, but it is mostly in tornadoes.

74

Quite simply, much more needs to be done to promote the use

of wind energy, which I believe is vastly underutilized in this Nation; but at the same time, it is much more likely to soon be costeffective.

One of the current incentives to promote wind energy is the use

of investment in production tax credits. While I agree this is a useful tool, I would emphasize here that these credits, unfortunately,

do not provide any benefit for publicly owned electrical utilities.

That is certainly an important deficiency, one particularly important to my State since we are the only all public power State in

the Nation.

There are several options which could provide public power with

incentive to pursue renewable sources such as wind, but others as

well. I understand that Congresswoman McCarthy, a member of

the subcommittee, is also interested in pursuing legislative options

to provide incentives for public power entities to produce more renewable sources of energy, and I would be pleased to work with her

and other members of the subcommittee.

Also there are at least several options that could be considered

that would provide renewable energy incentives for public power

beyond that. One possibility would be to establish a tradable investment and production tax credit program in the Internal Revenue Code for publicly owned electrical utilities that produce electricity from eligible renewable energy projects. Participants in this

program could receive credits for electricity generated from wind,

solar, geothermal, hydro and biomass, including the conversion of

landfill methane gas to energy.

As I approach the last 30 seconds of my time, I want to emphasize that I continue, of course, to be in support of energy-producing

from biomass, especially in the ethanol area. It is, I think, one

more important way that we can supplement our energy and make

us a little less dependent upon foreign sources. Increasing the use

of ethanol creates a win-win-win situation for consumers, farmers

and the environment. Analysis released last month by renowned

economist John M. Urbanchuk, executive vice president of AUS

Consultants, found that greater ethanol use also has positive implications for our Nation’s economy.

I close by saying, I endorse Congressman Ganske’s legislation,

which would address the MTBE problem now causing major problems in our groundwater resources.

Thank you very much for listening to my testimony.

[The prepared statement of Hon. Doug Bereuter follows:]

PREPARED STATEMENT OF HON. DOUG BEREUTER, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF NEBRASKA

Chairman Barton, Congressman Boucher and Members of the Subcommittee: I

would like to begin by thanking you for the opportunity to present testimony regarding the concept of a comprehensive national energy policy. I commend you for holding this hearing on an issue of such critical importance to the nation. During my

testimony, I would like to mention briefly one or two of the particular energy problems affecting my constituents and also offer some specific areas of solutions designed to reduce our dependency on foreign energy sources.

It is obvious that the U.S. is facing problems throughout the energy sector. Each

month seems to bring the focus on a new crisis. It’s unfortunate that the previous

administration displayed such an appalling lack of leadership on developing a comprehensive energy policy which would have led to greater energy self-sufficiency for

the U.S. As a result, higher energy costs threaten to slow the economy and cause

75

hardships for farmers, motorists, businesses and homeowners. Although we have

clearly lost much time, it’s now important that we examine the causes for the current problems, but more importantly search for both short-term and long-term solutions.

I understand that the previous panel addressed the energy problems which have

been afflicting California and other states throughout the West. I would like to emphasize that energy problems do not respect state borders. For instance, the ripple

effect has begun to affect communities in Nebraska which use power from the Western Area Power Administration. I encourage the Subcommittee to work to resolve

these problems. I would also like to stress that Nebraska is unique in that it is an

all public power state and I believe that any energy legislation must take its situation into account.

I’m sure that the Subcommittee is well aware of the many energy challenges facing the country. The most immediate energy concern for most of my constituents

is the dramatic increase in natural gas prices. Individuals, small businesses and

non-profits are paying hundreds of dollars per month more for natural gas than they

did last year. While I believe it would be helpful to review the effectiveness of the

Low-Income Home Energy Assistance Program (LIHEAP), it also important for Congress to determine whether other options can be made available for those who do

not qualify for this program. More must also be done to encourage the development

of a more stable and affordable natural gas supply. Because of these concerns, I

have contacted the Chairman of the Federal Trade Commission, Mr. Robert

Pitofsky, to request an investigation of the dramatic increase in prices. This is my

second such request for an investigation by the FTC. I originally contacted Mr.

Pitofsky already in July 2000 and again early this year about this subject, but I was

unsatisfied by what appeared to be a pro forma response.

I would also like to mention a component of the natural gas problem that has not

received as much attention. Farmers are facing a shortage of nitrogen fertilizer

along with expected and attendant price increases with spring planting fast approaching. This shortage is due to much higher natural gas prices, the major cost

component of producing all basic fertilizer products. As a result of the rising natural

gas costs, some fertilizer companies have reduced or halted production at their facilities. For those agricultural producers able to locate fertilizer supplies, the prices

will be drastically higher than in previous years. With farmers already facing low

prices for their crops, such an increase in fertilizer expenses is likely to cause even

further problems in rural America. In addition to rising fertilizer costs, farmers also

face the prospect of increased energy expenses related to agricultural activities such

as irrigation and field work.

I would like to begin my comments on energy solutions by focusing on an issue

which I believe has received inadequate attention. A strong national energy policy

must include the promotion of renewable sources such as wind. The cost of producing energy from wind turbines has decreased substantially in recent years, but

more should be done so that this form of clean power can reach its potential. Increasing the use of power from wind would not only reduce our nation’s reliance on

foreign sources of energy, it would also benefit our rural communities which are now

confronting extremely difficult times. Wind turbines don’t use much space, but farmers would still be able to derive much-needed income by leasing a small portion of

their land to electric utilities.

This source of energy is especially important for the Great Plains region from the

Dakotas to Texas, as well as other parts of the American West—Wyoming and parts

of California. According to the American Wind Energy Association, Nebraska has

the sixth greatest wind energy potential among all fifty states. Other research reports place it even higher—near the top. Chairman Barton may be interested to

know that Texas ranks number two.

Quite simply, much more must be done to promote the use of wind energy, which

I believe is vastly under-utilized in this nation but, at the same time, much more

likely soon to be more cost-effective. One of the current incentives to promote wind

energy is the use of investment and production tax credits. While I agree that this

is a useful tool, I would emphasize here that these credits unfortunately do not provide any benefit for publicly-owned electric utilities. That is certainly an important

deficiency—especially to Nebraska since we are currently the only state that is

served exclusively by public power systems. There are several options which could

provide public power with the incentive to pursue renewable sources such as wind.

I understand that Congresswoman McCarthy, a member of this subcommittee, is

also interested in exploring legislative options to provide incentives for public power

entities to produce more renewable sources of energy and I would be pleased to

work with her and other members of the Subcommittee on this important issue.

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Also, there are at least several options which could be considered that would provide renewable energy incentives for public power. One possibility would be to establish a tradable investment and production tax credits program in the Internal

Revenue Code for publicly owned electric utilities that produce electricity from eligible renewable energy projects. Participants in this program would receive credits for

electricity generated from wind, solar, geothermal, hydro and biomass, including the

conversion of landfill methane gas to energy.

Another legislative option would be to provide targeted tax-free bonds for use by

public power utilities to pursue renewable and environmental projects. The subcommittee may also want to consider legislation to create a program of credits or

incentives that provide benefits for public power utilities equivalent to existing and

new renewable energy tax production and investment credits available to private

electric utilities.

There is currently only one incentive program available for public power interested in promoting the use of renewable energy. The Renewable Energy Production

Incentive program permits direct payments to publicly and cooperatively owned utilities for electricity generated by certain renewable means. Unfortunately, this program has not been adequately funded. In addition, not all eligible projects receive

equitable funding. However, since it is the only program of its kind currently available, I support its reauthorization as well as its reform to provide greater funding

and fairness.

Clearly, one of the keys to developing a sound national energy policy is to focus

on efforts to reduce our dependence on foreign sources. I want to state emphatically

that ethanol must be an integral part of any energy policy which Congress considers.

Increasing the use of ethanol creates a win-win-win situation for consumers, farmers and the environment. An analysis released last month by renowned economist

John M. Urbanchuk, Executive Vice President of AUS Consultants, found that

greater ethanol use also has positive implications for our nation’s economy. The

study found that quadrupling the use of ethanol over the next fifteen years would

save American consumers $57.5 million (1996 dollars). This is the equivalent of

nearly $540 for each household in the U.S. In the process, more than 156,000 new

jobs would be created throughout the economy by 2015.

Greater use of ethanol is clearly needed to reduce our increasing reliance on foreign oil. Last year, the U.S. imported nearly 60 percent of its crude oil. The U.S.

Department of Energy’s Energy Information Agency now projects that figure to grow

to nearly 70 percent by 2010. This is clearly unacceptable. Fortunately, part of the

answer is growing in our own backyard in the form of corn, sorghum and other renewable feedstocks.

Another factor pushing the need for greater ethanol production is the realization

that the use of MTBE must be phased-out quickly because of the threat this petroleum-based fuel additive poses to our nation’s groundwater and drinking water supplies. I am cosponsoring legislation introduced by Representative Greg Ganske

which would ban MTBE within three years and encourage refiners to replace it with

ethanol. I understand that there are other legislative approaches which may be

helpful in promoting the use of ethanol. Now is the time for action.

It’s clear that ethanol producers are up to the challenge if given the appropriate

opportunities and incentives. A study prepared for the Governors’ Ethanol Coalition

last year found that the ethanol industry has the capability of doubling in size by

2004 and tripling by 2010 without disruption in supply or increasing consumer

costs. I am pleased that the current chairman of the Governors’ Ethanol Coalition

is Governor Mike Johanns of Nebraska. He has been an effective advocate on behalf

of ethanol and its importance to our nation.

A related issue is the general promotion of plant biomass as an energy source.

I believe it holds great potential for replacing natural gas as a source of electricity

and steam and as well as the production of fuels such as ethanol. There is exciting

work going on which is leading to more efficient collection and conversion of biomass

into a sustainable matter. There are tremendous environmental and economic reasons to promote biomass energy resources. I encourage Congress and the Department of Energy to aid in these research efforts.

Again, Chairman Barton, Congressman Boucher, and Members of the Subcommittee, thank you for this opportunity to present my views. You have a daunting

challenge ahead as you work to develop legislation to ease the nation’s energy problems. However, it is obviously a necessary task and I look forward to working with

you as we seek solutions.

Mr. BARTON. We appreciate it.

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Now, the Chair has tried to figure out who is senior. We think

it is Mr. Bartlett, senior, and then Congressman Calvert and Congressman Woolsey are coequally senior. If we are wrong about that,

we apologize.

Mr. BARTLETT. We are all the same class.

Mr. BARTON. You are all the same class?

Ms. WOOLSEY. I just look younger than the rest of them.

Mr. BARTON. I was about to say that.

Given you are all in the same class, we are going to go with Mr.

Bartlett, Mr. Calvert and Congresswoman Woolsey.

Mr. Bartlett, you are recognized for 5 minutes.

STATEMENT OF HON. ROSCOE G. BARTLETT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MARYLAND

Mr. BARTLETT. Thank you very much.

I would like to spend a few moments adding my voice to those

who have urged the need for a national energy policy. I would like

to call your attention to the world energy assessment by the United

Nations. Although you may not agree with the conclusions they

draw, I think we can use the data that they compile.

They have used a number of sources of estimates of the amount

of recoverable oil which we know of. That amounts to about 1,000

billion barrels of oil. You can make assumptions as to what is out

there that we haven’t found, and you can make assumptions with

a 95 percent level, a 50 percent level, and a 5 percent level of assurance. Even the most wildly optimistic levels do less than double

that.

Now, if you take that 1,000 billion barrels of oil and say we are

today using about 80 million a day, and that is roughly what we

use——

Mr. BARTON. Eighty million. We don’t use 80 billion a day.

Mr. BARTLETT. Eighty million. We, the world.

Mr. BARTON. Just a few zeros. It does count.

Mr. BARTLETT. We, the world, use about 80 million barrels a day

in the world. A year is roughly 400 days long, and to keep the

arithmetic simple, if you multiply 80 million times 400, you get 32

billion. The 32 billion divides roughly 30 times into 1,000 billion.

So according to these data, we have about 30 years at present-use

rates of known reserves of oil in the world.

I now would like to put a couple of graphs up here that come

from this same document. These are very illustrative. About half

of this is history, and the other half of it is a projection for the future.

What you can see here is that we started out in——

Mr. BARTON. Why don’t you turn that, Congressman, so the cameras can see it.

Mr. BARTLETT. We started out in 1800 essentially using wood.

We went to 1900, and in 1900 we were using essentially coal.

There were some other things used, but that was the major source

of our energy. Now in 2000, it is mostly oil. The question mark is

what we will be using a century from now.

As you can see from these graphs, they make two different assumptions. One is that nuclear will play a meaningful role, and the

other is, we won’t use nuclear. That is the fundamental difference

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between these two graphs. But as you see, in the year 2100 we are

going to be getting more than three-fourths of our energy from nuclear, solar, others, which includes hydro and so forth, and biomass.

This speaks to an urgent need for research on renewables and alternatives. This is all that remains. There is not an infinite

amount. God in his wisdom knew—I am sure he knew how profligate we would be in the use of fossil fuels, but he didn’t put a

limitless amount there and our only challenge is to go find it.

There is a limited amount of fossil fuels in the world, so we desperately need a program which focuses on research on renewables

and alternatives.

Several of those relate to agriculture, an industry in big trouble.

Biomass, biodiesel, ethanol from corn and the exciting possibility of

getting it from cellulose with a new bioengineered organism, these

all will really help our farmers who are in trouble.

We need to exploit geothermal in those few places where we can

in this country. Hydro, wind and solar, all of these provide opportunities to produce electricity at a local level to avoid the enormous

line losses that we have when you move electricity. If you move liquid through a pipe, what comes out at the other end will be what

you put in. When you put electricity into a line, if you move it long

enough, nothing will come out the other end of the line; there are

enormous losses. If we have a better distributive system, we can

avoid many of those losses.

We need to focus on efficiency, we need to focus on conservation.

I am not talking about shivering in the dark. There are things we

can do in conservation which are really meaningful, which will not

depreciate our lifestyle. We have 2 percent of the known reserves

of oil in the world, 2 percent. We use 25 percent of the world’s oil.

We now import 56-or-so percent of all the oil we need.

I submit when we have only 2 percent of the known reserves of

oil in the world and use 25 percent, it doesn’t make any sense to

immediately go out and find that 2 percent that we have and pump

it. I know this is a rainy day, but I suspect in the future there will

be an even rainier day, and this says nothing about the enormous

petrochemical industry we have. As Charlie Stenholm mentioned,

all of nitrogen fertilizer comes from gas today.

I really encourage the development of a long-term energy policy

which focuses on getting energy from sources other than fossil fuels

to the extent that we can.

Thank you.

Mr. BARTON. Thank you, Congressman Bartlett. We appreciate

that input and that scientific evaluation. Very helpful.

Congressman Calvert, who I believe is a subcommittee chairman

on the Resources Committee this year.

Mr. CALVERT. Yes.

Mr. BARTON. You are recognized for 5 minutes.

STATEMENT OF HON. KEN CALVERT, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF CALIFORNIA

Mr. CALVERT. Chairman Barton, Ranking Member Boucher,

thank you for holding today’s hearing. I would like to submit my

full written statement for the record.

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Mr. BARTON. Without jokes.

Mr. CALVERT. America’s unprecedented economic growth and

prosperity, of course, rests on affordable energy, and gasoline in my

State of California is still about $2 a gallon, and in some parts

even higher, so our energy crisis continues to plague our State and

certainly is well-publicized throughout this country. This Congress

and this administration finally are working together and must develop a comprehensive energy plan that securely meets our growing

demand, based upon a sound portfolio of energy sources.

For the foreseeable future, we will need to rely on our own domestic fuels that provide the bulk of the base-load electricity, and

that is coming basically from fossil and nuclear fuels. Nuclear,

which Mr. Bartlett mentioned just now, is quite frankly our most

reliable and cleanest form of energy. Since nuclear energy does not

burn fuel, it does not produce greenhouse gasses. Also, efficiency

improvements in 1998 alone—this is interesting—adds the equivalent of six to seven nuclear plants to the Nation’s electricity grid.

To put this in a perspective, the 1 percent increase in nuclear efficiency called for in Senator Murkowski’s energy bill would be 22

times the total generation of solar and twice the total wind generation in 1999—just a 1 percent increase in efficiency on nuclear.

We need to reconsider the numerous fossil fuel plants also in the

short term that have been shut down in California. Such plants are

immediate sources of sorely needed electricity and may be our

quickest way to provide relief to our citizens in California in the

short run. I understand the environmental problems, but we need

those plants back on line as quickly as possible until alternatives

are found.

America’s unprecedented economic growth and prosperity rest

also on an affordable supply of energy and water. As chairman of

the Resources Subcommittee on Water and Power, I intend to hold

hearings to examine contradictory Federal regulations that prevent

hydroelectric production on Federal lands, not to mention gas and

oil. I will also investigate Federal-State cooperation regarding

water quality and quantity. Today the water crisis in California is

real, and I predict may be more severe than the electricity crisis.

That crisis will spread also to the rest of the country.

The challenge we face in formulating a comprehensive energy

policy is how to balance costs and benefits in order to minimize the

environmental effects and yet provide the energy we need to prosper by growing the economy, creating jobs and creating wealth.

I know that in California we have some significant problems, and

it was talked about by various of the panelists. I would like to

point out these problems are really systemic throughout the United

States. There are 35 million people in California, and we produce

a tremendous amount of electricity; but by far, we are the largest

economic generator in the country, about 15 percent of the GNP

comes from the State of California. The computer industry, the entertainment industry, agriculture, all No. 1 in the country in California, utilize a tremendous amount of electricity. So I hope we

think about that.

As far as ethanol, I would also point out, which is very important, and I am somewhat supportive of ethanol production here in

the United States; but the requirement to utilize ethanol as a reVerDate 11-MAY-2000 13:39 Oct 02, 2001 Jkt 010199 PO 00000 Frm 00083 Fmt 6633 Sfmt 6602 E:\HEARINGS\71502 pfrm01 PsN: 71502
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placement for MTBE in California scientifically is not necessary.

We should, even though we may use it and utilize it, it should not

be required within California to use that as oxygenate when it is

technically not necessary in order for us to meet our clean air objectives without it. Because it gives us flexibility potentially to find

other alternatives to ethanol, at the same time, I think there would

not be enough ethanol to replace MTBE in California, which is an

equivalent of adding about 10 percent of California’s fuel supply.

With that, I want to thank the chairman and the ranking member, and I look forward to working with all of you on these issues.

And certainly renewables are important and all of the alternative

energies are important, but also we need to look at nuclear as an

alternative to really meet the energy demands of the future.

Thank you, Mr. Chairman.

[The prepared statement of Hon. Ken Calvert follows:]

PREPARED STATEMENT OF HON. KEN CALVERT, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF CALIFORNIA

Mr. Chairman, thank you for holding today’s hearing on ‘‘Congressional Perspectives on Electricity Markets in California and the West and National Energy Policy’’.

America’s unprecedented economic growth and prosperity rests on an affordable

supply of energy. While gasoline prices continue to hover around 2 dollars per gallon

in some parts of California the energy crisis continues to plague my state. The time

has arrived for this Congress and this Administration—working together—to develop a comprehensive energy plan that securely meets growing demand based on

a sound portfolio of energy resources.

We can all agree that reducing emissions is a good idea—and there are several

ways to do it; through energy efficiency and with renewable and nuclear energy. I

continue to advocate the pursuit of greater efficiencies and reduced energy consumption in our industrial processes, in our transportation sector and in our communities

and homes. The University of California, Riverside, CE-CERT has a number of innovative programs to reduce energy demand and improve the environment. For example, they have a hydrogen-vehicle fleet demonstration at the campus. These advances not only save energy, but also prevent greater dependence on oil imports

while improving the environment.

Deploying renewable energy is part of the ‘‘cleaner, greener’’ future. Renewable

energy should be integrated where the economics make sense. For example, in my

district, both the county and the city of Riverside collect methane gas from a municipal landfill and the sewage treatment plant to produce nearly 5 megawatts of electricity—enough to power facilities at the landfill and the treatment plant with some

left to sell to the grid.

However, renewable energy sources and energy efficiency measures are not going

to be enough to meet growing energy demand in our nation—necessary for economic

growth and wealth creation. The DOE’s own Energy Information Administration

predicts that even if we triple renewable energy supplies over the next twenty years,

renewable energy will only maintain its current share of supply. For the foreseeable

future, we will need to rely on domestic resources that provide the bulk of base-load

electricity—fossil and nuclear energy.

Today, nuclear energy is our most reliable and cleanest form of domestic energy.

Since nuclear energy does not burn fuel, it does not produce greenhouse gases or

other emissions, such as sulfur dioxide, that pollute our air. I mentioned earlier the

importance of achieving greater efficiencies in energy production. An outstanding

example of this is our nation’s nuclear plants. Though no nuclear power plants have

been built in the U.S. over the last 20 years, efficiency improvements in 1998 alone

added the equivalent of six to seven nuclear plants to the nation’s electricity grid.

To put this in perspective, the 1 percent increase in nuclear generation efficiency

called for in Senator Murkowski’s energy bill would be 22 times the total generation

by solar and twice the total wind energy generation in 1999.

We also need to reconsider the numerous fossil fueled plants that have been shut

down in California because they did not meet emission standards. These plants represent immediate sources of sorely needed electricity and may—in the short term—

be our quickest supply. And in North America as a whole, where an enormous

amount of natural gas resides, fossil fuel exploration on millions of acres, mostly in

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the western states, has all but halted. In fact, several million acres in California

and the Rockies were taken out of production on the last day of the Clinton Administration. Fortunately, President Bush has delayed the implementation of these last

minute designations until May 12th in order to allow his Administration time for

review.

As a senior member of the House Resources Committee, I plan to examine contradictory federal regulations which prevent environmentally-friendly fossil fuel exploration and production on federal lands.

As I began today, I stated that America’s unprecedented economic growth and

prosperity rests on an affordable supply of energy. But, in the West, it also rests

on WATER. The House Resources’ Subcommittee on Water and Power, which I

chair, recognizes the interconnection of these two valuable resources. As Chairman,

I intend to hold hearings on the role of not only federally-produced energy in the

West, but also on the importance of federal-state cooperation when it comes to

water—both quantity and quality. Today the water crisis in California is real,

though not widely know, and it will likely be a crisis for much of the nation in the

not so distant future.

Every energy source has risks, costs and benefits yielding a unique set of problems and opportunities. The challenge we face in formulating a comprehensive energy policy is how to balance the costs and benefits in order to minimize environmental effects and yet provide the energy we need to prosper by growing the economy, creating jobs and creating wealth.

Thank you Chairman Barton and Ranking Member Boucher. I look forward to

working with you on all these issues as this Congress forges a National Energy

Strategy.

Mr. BARTON. I want to thank you, and your leadership is going

to be very important in this issue.

The Chair would now recognize the gentlelady, Congresswoman

Woolsey. The Chair wants you to know that I knew what your

name was. My staff didn’t know, but I knew. So I apologize for its

being misspelled.

Ms. WOOLSEY. You are not the only one that misspells it like

that.

Mr. BARTON. It wasn’t me.

Your statement is in the record. You are recognized for 5 minutes

to elaborate.

STATEMENT OF HON. LYNN C. WOOLSEY, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF CALIFORNIA

Ms. WOOLSEY. Thank you, Mr. Chairman. Thank you for the opportunity to testify today.

As a Californian, I am echoing my colleagues who testified earlier about our State’s energy crisis. It is a very serious problem.

But I am here today wearing a new hat for me as the Science Committee’s ranking member on the Energy Subcommittee where Roscoe Bartlett is the Chair. I look forward to working with him on

energy in the future.

But I want to emphasize the need for a national energy policy

to include renewable energy sources, energy efficiency, and conservation.

Since passing the National Energy Policy Act in 1992, Congress

has generally ignored energy issues. But the power problems in

California, as well as the increased price of natural gas and oil

throughout the United States, have brought energy back to the top

of our Nation’s agenda.

The energy shortage we are experiencing in California is proof

enough, however, that Congress must raise the stakes in search of

alternative energy sources. Obviously, what we are doing is not

82

good enough. We can no longer ignore wind, we can no longer ignore solar, fuel cell and geothermal energy sources.

At last week’s Science Committee hearing on the role of renewable energy sources and energy efficiency, our witnesses, each one

of them an economic and policy analyst, spoke about the increased

role renewables and energy efficiency must play in meeting our Nation’s long-term growing energy demand.

As Congress forges a long-term energy policy, it is absolutely imperative that we make a true commitment to alternative energy

sources, to efficiency and to conservation. Otherwise, we will not

prevent future energy crises.

Measures of this kind can and do work. For example, in my district, which is just north of the Golden Gate Bridge, north of San

Francisco, several Marin County communities, including Mill Valley, San Raphael and Novato, are currently installing new energyefficient traffic lights that only use 10 to 20 percent of electricity

that current lights do.

In Sonoma County, the city of Santa Rosa is working on a project

to send 11 million gallons of reclaimed waste water to The Geyser’s

geothermal plant each day. When this project is completed, The

Geyser’s steam fields will continuously displace 85 megawatts of

fossil energy. That is just by using reclaimed waste water.

The Sonoma County Transit Department is building a landfill

gas conversion facility that allows excess landfill gas to be used as

an alternative fuel for their buses.

Encouraging measures like these all across our country will

make a huge difference in meeting our energy demands in the future.

Like my constituents and like many of my colleagues, I strongly

believe there is an important role for the Federal Government to

encourage clean, efficient and renewable technologies as part of our

national energy portfolio.

As this Congress embarks on developing a national energy policy,

this committee, your committee, Mr. Chairman, along with the

Science Committee and the Ways and Means Committee, can

broaden our horizons by getting out of the box, by encouraging policies for the future.

I look forward to working with this subcommittee to develop and

move a comprehensive legislative agenda that prominently features

renewable energy sources and energy efficiency and conservation

measures as an integral part of our national energy policy.

Thank you, Mr. Chairman.

[The prepared statement of Hon. Lynn Woolsey follows:]

PREPARED STATEMENT OF HON. LYNN WOOLSEY, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF CALIFORNIA

Mr. Chairman, thank you for the opportunity to testify today. As a Californian,

I’m echoing my colleagues who testified earlier about our state’s energy crisis . . . it’s

a serious problem.

I’m pleased to be here wearing a new hat as the Science Committee’s Ranking

Member on the Energy Subcommittee. Specifically, I want to emphasize the need

for a national energy policy to include renewable energy sources, energy efficiency

and conservation.

Since passing the National Energy Policy Act in 1992, Congress has generally ignored energy issues. But the power problems in California, as well as the increased

price of natural gas and oil throughout the country, have brought energy back to

83

the top of our nation’s agenda. The energy shortage we’re experiencing in California

is proof enough that Congress must raise the stakes in search of alternative energy

sources. Obviously, what we’re doing isn’t good enough. We can no longer ignore

wind, solar, fuel cell and geothermal energy sources.

At last week’s Science Committee hearing on the role of renewable energy sources

and energy efficiency, our witnesses—all economic and policy analysts—spoke about

the increased role renewables and energy efficiency must play in meeting our nation’s long-term, growing energy demand. As Congress forges a long-term energy

policy, it’s imperative we make a true commitment to alternative energy sources, efficiency and conservation to prevent future energy crisis.

Measures of this kind can work. For example, in my district, several Marin County communities—including Mill Valley, San Rafael and Novato—are currently installing new energy-efficient traffic lights that use only 10-20 percent of the electricity used by current bulbs. In Sonoma County, the City of Santa Rosa is working

on a project to send 11 million gallons of its reclaimed wastewater to the Geysers

geothermal plant each day. When completed, the Geysers steam fields will continuously displace 85 megawatts of fossil energy. The Sonoma County Transit Department is also building a landfill gas conversion facility that allows excess landfill gas

to be used as an alternative fuel for their buses. Encouraging measures like these

all across our country will make a difference in meeting our energy demands.

Like my constituents and many of my colleagues, I strongly believe there’s an important role for the federal government to encourage clean, efficient and renewable

technologies as part of our national energy portfolio. As this Congress embarks on

developing a national energy policy this Committee with the Science Committee and

the Ways & Means Committee, can broaden our horizons by getting ‘‘out of the box’’ and encouraging policies for the future. I would look forward to working with this

Subcommittee to develop and move a comprehensive legislative agenda that prominently features renewable energy sources, energy efficiency and conservation measures as part of a national energy policy.

Thank you.

Mr. BARTON. Thank you, Congresswoman.

We now want to hear from one of our newer members, Congresswoman Capito from the great State of West Virginia.

Your statement is in the record. You are recognized for 5 minutes.

STATEMENT OF HON. SHELLEY MOORE CAPITO, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF WEST

VIRGINIA

Ms. CAPITO. Thank you, Mr. Chairman.

Mr. BARTON. Make sure that microphone is on.

Ms. CAPITO. I am new, remember.

Thank you, Mr. Chairman, Ranking Member Boucher and members of the subcommittee. I appreciate your holding this day of

hearings, and I am grateful for the invitation to speak.

Mr. Chairman, the signs of an impending energy crisis are no

longer just on the horizon. In 1999, an OPEC-imposed reduction in

oil supply forced United States consumers across the country to

pay record prices at the pump. In the year 2000, restricted supplies, combined with the poor distribution system, resulted in staggering price increases for home heating oil in the Northeast. During the summer of 2000 and continuing into the fall, California’s

electricity emergency is forcing many utilities into potential bankruptcy.

Regrettably, we do not have a workable energy policy in place to

help us address our current energy crisis and, perhaps more importantly, to help us prevent future problems. However, I do believe

that help is on the way.

As you know, President Bush has asked Vice President Cheney

to lead the development of a national energy policy designed to

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help the Federal, State and local governments, as well as the private sector, promote dependable, affordable and environmentally

sound production and distribution of energy for our future.

Mr. Chairman, as you and the members of the subcommittee

work with the President’s task force, I would strongly encourage

you to consider our 275-billion-ton reserve of recoverable coal. To

put this number into perspective, the reserve is one-quarter of the

world’s coal. It is equal to more than half of the combined energy

of the world’s proven reserves of oil and gas. It is 36 times as large

as America’s domestic reserve of natural gas and 46 times the domestic reserve of oil.

As you know, estimates of energy reserves are counted in British

thermal units, also known as BTUs. For further context, approximately 1 BTU of every 6 BTUs available to do the work of the

world is in the U.S. coal reserve. If all of America’s coal were converted to electric power at the current efficiencies of generating

plants, it would develop 495 trillion kilowatt hours of the energy,

which is the lifeblood of our modern economy.

In 1999, the U.S. generated 1.9 trillion kilowatt hours with coal,

which equates to approximately 51 percent of all power. In terms

of domestic energy, coal represents 40 percent of all fossil fuel energy production, and 90 to 95 percent of all fossil fuel reserves.

My State of West Virginia is one of America’s leading coal States

and the estimate of our recoverable coal is 20 billion tons. Further

estimates reveal that West Virginia coal alone is the rough equivalent of more than twice the energy in America’s recoverable gas reserves and three times the proven oil reserves.

Coal is America’s low-cost fossil fuel and is a secure energy

source that can and does provide economic and energy security to

all Americans, especially West Virginians. Advanced technologies

for generating electrical power through coal are more efficient than

the current processes. Higher efficiencies mean that more power

can be generated with less coal.

The 495 trillion kilowatt hour potential of the reserve will expand as new technologies are put into place. Advanced pulverized

coal generation and the generation technologies in the U.S. coal

demonstration program all perform significantly better than required by the most stringent clean air standards.

Therefore, with the advancement of clean coal technology and a

working partnership with all parties involved, I am certain we will

be able to create a national energy policy that will benefit every

American.

It is essential that we include coal in any policy that will determine the way we proceed down this path. I am here today to show

my support to the working men and women in the Nation’s coal industry.

Again, thank you, Mr. Chairman. I look forward to working with

you and the subcommittee members on this issue. As we all know,

energy will continue to drive our lives and coal is an essential part

of that driving force. Thank you for giving me this opportunity.

[The prepared statement of Hon. Shelley Moore Capito follows:]

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PREPARED STATEMENT OF HON. SHELLEY MOORE CAPITO, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF WEST VIRGINIA

Thank you Mr. Chairman, Ranking Member Boucher, and members of the Subcommittee. I appreciate your holding this day of hearings, and am grateful for the

invitation to speak.

Mr. Chairman, the signs of an impending energy crisis are no longer just on the

horizon. In 1999, an OPEC imposed reduction in oil supply forced U.S. consumers

across the country to pay record prices at the pump. In 2000, restricted supplies

combined with a poor distribution system resulted in staggering price increases for

home heating oil in the Northeast. And during the summer of 2000 and continuing

into the fall, California’s electricity emergency is forcing many utilities into potential

bankruptcy.

Regrettably, we do not have a workable energy policy in place to help us address

our current energy crisis’s and, perhaps more importantly, to help us prevent future

problems. However, I do believe that help is on the way. As you know, President

Bush has asked Vice-President Cheney to lead the development of a national energy

policy designed to help the federal, state and local governments as well as the private sector promote dependable, affordable, and environmentally sound production

and distribution of energy for the future.

Mr. Chairman as you and the members of this subcommittee work with the President’s task force, I would strongly encourage you to consider our 275-billion ton reserve of recoverable coal.

To put this number into perspective, the reserve is one quarter of the world’s coal,

it is equal to more than half of the combined energy of the world’s proven reserves

of oil and gas, it is 36 times as large as America’s domestic reserve of natural gas

and 46 times the domestic reserve of oil.

As you know, estimates of energy reserves are counted up in British thermal

units, also known as Btus. For further context, approximately one Btu of every six

Btus available to do the work of the world is in the US coal reserve.

If all of America’s coal were converted to electric power at the current efficiencies

of generating plants, it would deliver 495-trillion kilowatt-hours of the energy,

which is the life-blood of our modern economy.

In 1999, the US generated 1.9 trillion kilowatt-hours with coal, which equates to

51% of all power. In terms of domestic energy, coal represents 40% of all fossil fuel

energy production and 90 to 95 % of all fossil fuel reserves.

My state of West Virginia is one of America’s leading coal states and the estimate

of our recoverable coal is 20 billion tons. Further estimates reveal that West Virginia coal alone is the rough equivalent of more than twice the energy in America’s

recoverable gas reserves and three times the proven oil reserves.

Coal is America’s low-cost fossil fuel and is a secure energy resource that can and

does provide economic and energy security to all Americans.

Advanced technologies for generating electric power through coal are more efficient than the current processes. Higher efficiencies mean that more power can be

generated with less coal. The 495-trillion kilowatt-hour potential of the reserve will

expand as the new technologies are put in place.

Advanced pulverized-coal generation and the generating technologies in the US

Clean Coal demonstration program all perform significantly better than the most

stringent clean air standards—the New Performance Standards of the United

States.

Therefore, with the advancement of clean-coal technology and a working partnership with all parties involved, I am certain that we will be able to create a National

Energy Policy that will benefit every American.

It is essential that we include coal into any policy that will determine the way

we proceed down this very tricky path. I am here today to show my support to the

working men and women in the nation’s coal industry.

Again, thank you Mr. Chairman, I look forward to working with you and the Subcommittee members on this issue. As we all know, energy will continue to drive our

lives, and coal is an essential part of that driving force.

Thank you. I will be happy to take any questions.

Mr. BARTON. Thank you, Congresswoman.

It looks as though Congressman Markey has brought help with

him. Is this the help we keep talking about that is on the way? You

brought some of your constituents from the great State of Massachusetts?

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Mr. MARKEY. These represent the superior seniors from my alma

mater, Malden Catholic High School.

Mr. BARTON. Welcome to the subcommittee. You have got a distinguished alumnus in Congressman Markey. He will be on his

best behavior because you are here. We appreciate your being here.

We now want to go to Congressman Aderholt. Your statement is

in the record. You are recognized for 5 minutes to elaborate on it.

Congressman Inslee, if you want to take Congresswoman

Woolsey’s place, you will be our cleanup hitter.

STATEMENT OF HON. ROBERT B. ADERHOLT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ALABAMA

Mr. ADERHOLT. Thank you for allowing me to testify today on behalf of my constituents, and particularly thank you for allowing me

to speak on behalf of my constituents in Alabama. Many of the constituents I represent have been particularly hit hard by high natural gas prices this winter.

Mr. BARTON. With the disappearance of this panel, if you want

to come around to the main part of the table—we let one of them

go, and they all just bailed out on us.

Mr. ADERHOLT. This testimony, I hope will help to illustrate

some of the impact that high natural gas prices have had recently

on consumers in Alabama and throughout the Nation, and outline

some possible solutions. I have been concerned about the dramatic

increase in the price of natural gas that has burdened Alabama

consumers over the past few months.

In my own hometown of Haleyville, my most recent winter gas bill was over $400 for 1 month. That was well over twice the

amount for the same period last year. A $200 or more monthly increase is particularly a major burden

for those across our Nation who live on fixed incomes. This increase

in prices has hit them especially hard. This price increase causes

the amount of income available for other necessities such as food,

medicine and other utilities to be greatly reduced. Without these

life necessities, these people and their families are at risk of co-related illnesses, hunger, homelessness, just to name a few of the potential problems.

This situation also affects businesses and their bottom line.

When their costs are passed along to consumers, this, in turn, increases prices for everyone.

As an example of these dramatic price increases, one poultry

grower informed me that in November and December 1999, propane costs represented 17 percent of his gross receipts. During the

same period in 2000, this same grower used 61 percent of his gross

receipts for propane needs. While it is true this has been an unusually cold winter, the costs appear to have been due not only to increased consumer demand; there has in fact been a shortage which

has made prices higher.

Evidence of this shortage in the propane market is evidenced by

the fact that from January 1999 to January of 2000, U.S. propane

exports to Mexico increased from 50,000 barrels per day to 85,000

barrels per day. It seems very likely that these increased propane

exports have driven up propane prices at the same time that increased demand for propane is occurring.

87

As has been brought to my attention, the U.S. Department of Energy has estimated that residential customers will pay 40 to 50

percent more for their gas service this winter. This situation is

made worse by the fact that the cost of delivering propane to consumers in rural areas is higher than in urban areas.

In Alabama, I have discussed with the State public service commission the importance of natural gas suppliers and propane dealers not cutting off any resident or business who needs extra time

to pay their bills. I am especially concerned about seniors who are

on fixed incomes, that they do not get cutoff.

Second, I want to applaud the efforts of our colleague from Mississippi, Congressman Chip Pickering, who serves on this subcommittee, for his bill, H.R. 396, which would allow the Secretary

of Agriculture to provide assistance to poultry and livestock producers and greenhouse operators who have incurred economic

losses due to the increased energy prices in 2000 and 2001. While

Representative Pickering’s bill is under the jurisdiction of the Agriculture Committee, I certainly urge all of my House colleagues to

join as cosponsors of this important legislation.

I believe that there are several very important questions to be

answered, all of which will fall under the jurisdiction of this subcommittee. With the increasing reliance on natural gas by electric

utilities for power generation, I urge this subcommittee to examine

whether or not recent price spikes for electricity in California may

have impacted the market price of natural gas supplies nationwide.

Also, I urge this subcommittee to investigate the possibility of price

gouging by refiners and also the impact on prices of our exports of

propane to Mexico in recent years.

As you know, Mr. Chairman, I have written to you and the other

members of the committee in more detail regarding these questions, and I respectfully ask you to insist that the Department of

Energy and others involved in this process answer these questions.

Finally, in addition to these short-term solutions, I believe that

there is also a long-term problem that reveals the need for a sound

energy policy. Of course, it goes without saying that this subcommittee is urged to work with the administration to make sure

that we put a comprehensive national energy policy together so we

can avoid problems like this in the future.

Thank you for allowing me to come share these thoughts with

the subcommittee today. I look forward to working with you.

Mr. BARTON. Thank you, Congressman. When you came into the

room earlier, I should have asked you to come to the dais at that

time. I apologize.

Mr. ADERHOLT. That is fine. Thank you.

[The prepared statement of Hon. Robert B. Aderholt follows:]

PREPARED STATEMENT OF HON. ROBERT B. ADERHOLT, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF ALABAMA

I want to thank Chairman Barton and the Members of the Subcommittee for allowing me to testify today on behalf of constituents in the North Alabama district

that I represent. Many of these constituents have been particularly hard hit by high

natural gas prices this winter. This testimony will help to illustrate some of the impact that high natural gas prices have recently had on consumers in North Alabama

and throughout the Nation, and outline some possible solutions.

I have been concerned about the dramatic increase in the price of natural gas that

has burdened Alabama consumers over the past few months. In my own hometown

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of Haleyville, my most recent winter gas bill was well over $400 for one month, over

twice the amount over the same period last year. A $200 dollar monthly increase is particularly a major burden for those across our

nation who live on a fixed income—this increase in prices has hit them especially

hard. These price increases cause the amount of income available for other necessities such as food, medication, and other utilities to be greatly reduced. Without

these life necessities, these people and their families are at risk of cold-related illnesses, hunger, or homelessness, to name just a few potential problems. This situation also affects businesses, and their bottom line. When their costs are passed

along to consumers, this in turn increases prices for everybody.

As an example of these dramatic price increases, one poultry grower informed me

that in November and December of 1999, propane costs represented 17 percent of

his gross receipts. During the same period in 2000, the same grower used 61 percent

of his gross receipts for propane needs.

While it is true this has been an unusually cold winter, the costs appear to have

not been only due to increased consumer demand. There has in fact been a shortage

which has made prices higher. Evidence of this shortage in the propane market is

evidenced by the fact that from January 1999 to January 2000, U.S. propane exports to Mexico increased from 50,000 barrels per day to 85,000 barrels per day. It

seems very likely that these increased propane exports have driven up propane

prices at the same time that increased demand for propane is occurring.

It has been brought to my attention that the U.S. Department of Energy (DOE)

has estimated that residential customers will pay 40 to 50 percent more for their

gas service this winter. The situation is made worse by the fact that the cost of delivering propane (often referred to as the fuel of rural America) to consumers in

rural areas is higher than in urban areas.

In Alabama, I have discussed with the State Public Service Commission the importance of natural gas suppliers and propane dealers not cutting off any residents

or businesses who need extra time to pay their bills. I am especially concerned that

seniors on fixed incomes do not get cut off.

Secondly, I want to applaud the efforts of our colleague from Mississippi, Rep.

Chip Pickering, who serves on this Subcommittee, for his bill, H.R. 396, which

would allow the Secretary of Agriculture to provide assistance to poultry and livestock producers and greenhouse operators who have incurred economic losses due

to increased energy prices in 2000 or 2001. While Rep. Pickering’s bill is under the

jurisdiction of the Agriculture Committee, I urge all of my House colleagues to join

me as cosponsors of this important legislation.

I believe there are several very important questions to be answered, all of which

fall under the jurisdiction of this Subcommittee. With increasing reliance on natural

gas by electric utilities for power generation, I urge this Subcommittee to examine

whether or not recent price spikes for electricity in California may have impacted

the market price of natural gas supplies nationwide. Additionally, I urge the Subcommittee to investigate the possibility of price gouging by refiners, and also the

impact on prices of our exports of propane to Mexico in recent years. As you know

Mr. Chairman, I have written to you in more detail regarding these questions, and

I respectfully request you insist on that DOE and others involved in this process

answer these questions.

Finally, in addition to these short term solutions, I believe that this is also a longterm problem and reveals the need for a sound energy policy. I urge Members of

this Subcommittee to work with President Bush and his Administration to make

sure that we put together a comprehensive national energy policy, so we can avoid

problems like this in the future. Thank you for this opportunity to offer my concerns. I look forward to continuing to work with you to address the impact of high

natural gas prices on rural America.

Mr. BARTON. I think we have seen this witness before once today.

I don’t think we have ever had a witness testify on two separate

panels in the same day, so this is an historic event.

Congressman, your statement is in the record in its entirety, and

you are recognized for 5 minutes to testify on it.

Mr. INSLEE. Thank you, Mr. Chairman. My mother will note that

I have created history here. It will surprise my father and please

my mother.

The reason I came back is I was really talking about short-term

issues before, and I would like to make three points on a long-term

energy policy for the country. I am cleanup hitter, so I think it is

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incumbent on me to deliver some good news. I have two pieces of

good news.

Before I get to that, I want to tell you the bad news. I just urge

the committee to acquaint itself with one chart when you draft our

energy future, if I can just share this chart with you. It is basically

showing the carbon dioxide concentrations in the atmosphere beginning with the dawn of the Industrial Age to the present, and

then you can see where that line is going in the future.

I really believe, in drafting a national energy policy, this chart

has got to play a major role in our decisionmaking. The reason is

that this chart is unambiguous, certain and indisputable. All scientific folks agree with this chart, that CO2 levels in the atmosphere are going up dramatically, and probably unless this committee and this Congress and we act internationally, it is going to

double in the next century.

The result of that is a profound increase in the global tendency

to trap energy in the atmosphere because of the presence of what

are called global climate change gasses, and CO2 is the predominant one. Energy comes in, like a greenhouse, in ultraviolet rays,

but infrared light—excuse me, I have them reversed—does not go

out through the CO2. It is a blanket and it is doubling and it is

getting thicker and it is indisputable.

I just think whatever we do and whatever discussions we have

in this committee, I just hope you will discuss this phenomenon

about what we are going to do about it, because it means, indisputably, we are going to have some changes in our climate. As you

know, an international panel of scientists about a month ago came

back with very disturbing news that this process is accelerating

faster than most people anticipated even 2 or 3 years ago. So I just

urge the committee to think about this in our deliberations.

That is the bad news.

The good news is there are some great things happening on the

horizon. Solar power prices have come down 50 percent since 1995.

Wind power prices have come down 45 percent in the last decade.

Interestingly enough, wind power for every doubling of amount of

wind in the field, the price comes down 15 percent. There is very

positive technology coming on-line if we can spur it through Federal action to help us out.

The third piece of good news, I hope, Mr. Chairman, you can help

me pass the Home Energy Generation Act, a little act that will

have a national net metering policy that I have introduced with

many others, which would simply require the utilities to accept

home generation of electricity to feed back onto the grid so your

meter will run backwards essentially while you are contributing

energy to the grid. It is one small thing we can do to boost renewable energy sources at the home level.

Thank you very much for this historic opportunity, Mr. Chairman.

Mr. BARTON. You gave us back almost 2 minutes, Congressman.

The Chair has no questions. The Chair would recognize Mr. Boucher.

Mr. BOUCHER. No questions.

Mr. BARTON. Mr. Largent?

Mr. LARGENT. No questions.

90

Mr. BARTON. Mr. Barrett?

Mr. BARRETT. No questions.

Mr. BARTON. Mr. Shadegg? Welcome back to the subcommittee.

We appreciate your being here.

Mr. SHADEGG. Thank you, Mr. Chairman. I will be brief. I want

to begin, I could not be here earlier, but I want to commend you

for holding this hearing. As you know, I went to Pasadena, California, with you some 2 weeks ago to look at the California energy

crisis. I think it is indeed an energy crisis, but it is an energy crisis

which is largely of our own creation.

I listened to my friend, Mr. Calvert—I notice virtually all of the

witnesses except Mr. Inslee have decided to depart, so there is almost no one to question, but we will make comments about some

of the testimony nonetheless.

Mr. Calvert noted that many of the California problems are systemic throughout the country, but I think that is not completely

correct. In part, when you look at the California energy crisis that

we examined, Mr. Chairman, when we were there, it is clear that

some of the contributing factors to that crisis are man-made and

were conscientious efforts to ignore, quite frankly, reality.

The failure of California to build additional production is quite

obvious. As a matter of fact, for example, in the last decade, the

amount of electricity generated in California actually decreased

from 208,350 gigawatts in 1990 to 205,246 gigawatts in 1998. That

shows that that State over a 10-year period actually lost production

capacity. That should not come as any surprise in light of the fact

that at least since the imposition of their retail price caps, we had

an artificial market where we had retail price caps, but no wholesale price caps. That kind of policy sends exactly the wrong message.

I commend you, Mr. Chairman, for the meetings we conducted in

California, in Pasadena, for what I was able to learn there, and for

the hearing today. I have to say I felt the testimony there was

much more informed than some of the testimony we heard here

today.

Mr. Ganske, I was going to comment upon the fact that he is

right about the ‘‘not in my backyard’’ syndrome, and I wanted to

bring a couple of facts to the attention of the subcommittee with

regard to that syndrome, the ‘‘not in my backyard’’ syndrome, impending directly on the California energy crisis. These are the facts

I wanted to bring forward.

The Los Angeles Times poll taken in Southern California in the

L.A. Area and released on February 18 showed that—this is February 18, less than a month ago, a full 57 percent of Californians

do not believe that there is a shortage of electricity. They are, pretty clearly, Mr. Chairman, living in La-la Land.

Now, perhaps we can’t blame them, because we imposed artificial

price caps holding down the retail price as a seriously low level. Indeed, electricity prices in most of the Western United States have

gone up by 20 percent over the last few years. In California, they

have gone up by zero percent. So perhaps we should not be surprised that 57 percent of Californians in this poll don’t believe

there is a shortage of electricity. But I think we have a crisis of

knowledge when we have that kind of ignorance.

91

I would like to illustrate that that then has public policy implications.

Mr. BARTON. Is there a question in here somewhere?

Mr. SHADEGG. There is no question, Mr. Chairman. I need to just

get a few things in the record.

I commend Mr. Inslee for coming forward. I would be happy to

ask Mr. Inslee from his earlier testimony, he advocated price caps

and we might talk about that in just a moment.

But the consequence of the ignorance of this electricity shortage

can be shown in one more symptom, and that is the L.A. Times in

an editorial yesterday—the day before yesterday, on Sunday, excuse me—said a sense of public urgency is lacking. That might be

a monumental understatement, Mr. Chairman.

They go on to say, one indicator is a municipal vote on Tuesday—that is, today—on whether a new power plant should be built

in Southgate. Polls show currently that that vote is currently at

about a 50-50 level. It may or may not pass. This is in a State

which is literally thousands of megawatts short of electricity at

peak times of being able to meet their demand. Fifty-seven percent

don’t believe there is a crisis, and only roughly half may vote to

build this new power plant in Southgate.

There are a number of issues I think we need to address. I wanted to commend Mr. Calvert for his commentary on ethanol. While

I think ethanol is a technology we need to pursue, we should have

learned from our policy last time around.

Last time around we mandated oxygenates and essentially mandated MTBE. We now know it is causing a serious problem to our

water table. I hope this committee and this Congress does not

make the same mistake by mandating ethanol. As Mr. Calvert

pointed out in his testimony, you can in fact creatively produce

very clean gasoline and improve air quality without mandating a

particular solution. I would urge this committee not to do that.

I will conclude by asking indeed one question of Mr. Inslee.

Mr. BARTON. In your last 4 seconds.

Mr. SHADEGG. To please you, Mr. Chairman, my concern is, and

two questions:

One, when—— Mr. BARTON. One question.

Mr. SHADEGG. One question. Two questions in one.

When has any temporary rate cap imposed by the Federal Government in fact ever been allowed to expire; and what is it about

a rate cap that you think would cause either the encouragement of

additional production in the Western United States to meet the demand that we have, or the encouragement of reduced consumption

and greater conservation by the people in the State of California?

Mr. INSLEE. Well, the first question, there have been many times

where various public entities in this country have imposed some

control over prices—many, many times, going back to President

Nixon’s time. Some were successful, some were not. But there have

been many times where price caps have been imposed and then removed. I think this should be one of these. I want to reiterate, it

can and should be short-term. We can fashion a way to do that.

The second part, as far as the creation of new generation, again

I would suggest that we exempt new generation capacity, thereby

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sending price signals to new generators who make investments to

indeed have higher prices for new generating capacity-produced

electricity.

But I will tell you, it is going to be a disincentive for creation

of that new electricity if the economy goes to heck in a handbasket,

and I am really afraid that is what is going to happen if we don’t

act.

Mr. BARTON. Thank you, Congressman.

For the last word, Congressman Markey for 5 minutes.

Mr. MARKEY. Thank you, Mr. Chairman, very much.

Mr. Inslee, it is reported there is going to be a 4 percent cut in

the Department of Energy’s budget. Since it is quite clear the areas

that they are going to protect, it is projected there will be a 30 to

35 percent cut in energy efficiency grants and a 40 to 45 percent

cut in renewables on research and development and a 20 percent

cut in fossil fuels R&D.

Do you think that would be a good idea?

Mr. INSLEE. I am a specialist in rhetorical questions, so I can

handle this one.

Mr. MARKEY. Thank you. I am always glad when someone can

recognize a rhetorical question.

Mr. INSLEE. You know, I really am disturbed and disappointed

by that. I will tell you why, Congressman.

Last week I actually heard some—what I thought, very encouraging signs from the administration. Some of the comments from

our new EPA Administrator, Governor Whitman, I thought were

very encouraging where she recognized the necessity of dealing

with global climate change issues, where she recognized the necessity of working on new technologies. That was very, very encouraging to me as a voice from the administration.

But this proposed actual slashing of budgets for renewable energy to me incredibly manifests ignoring clear science. Where we

have got a chart like this we are looking at, which is going to demand that we reduce our amount of carbon dioxide loading of the

atmosphere, we are not going to have a choice. Whether you are

a Democrat or Republican, 10 years from now you are not going to

have a choice, but to reduce our carbon dioxide loading the environment. It is very disturbing.

As you know, just maybe to answer the next question——

Mr. MARKEY. No, let me ask the next question. There is a certain

‘‘Carnack’’ quality to your answering my next question, I realize

that, but just so that we do square up before you answer it, it

would be on the remarkable fact that there was actually a 60 percent increase in natural gas production on Federal lands from 1992

when Bill Clinton took over until today, and in fact there was a 62

percent increase in offshore drilling from 1992 to 1999, and natural

gas production in deep waters increased 80 percent over just the

last 2 years.

Is it surprising to you to learn that, notwithstanding all the criticism of the environmental movement in the Clinton administration,

there has been such a dramatic increase in the production of energy on public lands in just the last 8 years?

93

Mr. INSLEE. I must actually admit to my ignorance. I have not

heard those numbers. I have learned something today, and it

proves it pays to come to this committee.

Mr. MARKEY. Thank you. Let me see if I can continue to broaden

your education.

Mr. BARTON. Your constituents may be so young they may not

know who Carnack was.

Mr. MARKEY. How many of you know who Carnack was?

Mr. BARTON. That is what I thought.

Mr. MARKEY. Wow. Let me ask you, where is Jay Leno from? Andover. See, they know that. He is from the Andover High School.

So they know what happened when they got rid of this guy from

Nebraska, we got a good guy from Andover in there.

You know, another very interesting fact that people are unaware

of is Jeb Bush’s opposition to drilling 100 miles out at sea off of

the Florida coast, even though there is a consensus we should drill,

and there is loads of energy out there. What do you think about

Jeb Bush opposing drilling in areas where there is a consensus

reached by Democrats and Republicans that we should go out

there?

Mr. INSLEE. I think it is most enlightened and very encouraging,

and we hope there is a familial line of communication which will

extend that far to the Northwest part of our States up to the Arctic

refuge. We hope that that policy will be forthcoming. I have to tell

you——

Mr. MARKEY. Do you consider him an environmentalist? Is he an

extremist for taking that position?

Environmentalists actually support drilling in this water. In

other words, this is not being opposed by environmentalists, but actually supported. Do you consider him to be an environmental extremist for taking that position?

Mr. INSLEE. Hardly, and I think it is consistent with what Americans think. I got to tell you, since last week’s discussion of the Arctic refuge, I have had more and more people come up to me in the

street—truck drivers, teachers—just come up to me unprovoked

and say, don’t let them get into the Arctic refuge. It has been actually interesting to me. I have heard more about that from my constituents than perhaps any issue in the last 2 months. I hope that

America’s sentiment is listened to in this regard.

It is not going to be a solution. As you know, CAFE standards

are going to solve a lot more problems. Mark.

Mr. BARTON. This will have to be the last illuminating question.

Mr. MARKEY. To some of these kids, CAFE is on Highland Avenue, so we will have to explain what CAFE is as well.

The final question would be on Prudhoe Bay, the fact that there

is 32 to 38 trillion cubic feet of natural gas ready for development—

with, by the way, the support of the most liberal Democratic environmental members of the United States Congress—and yet there

has been no progress as of yet by the oil and gas industry in drilling and bringing it down.

Before we go to the Arctic refuge, which is a sacred,

untrammeled, wild, wild wilderness preserve, what do you think

about that? What recommendations could you make to the oil and

gas industry about first going to the Prudhoe Bay area?

94

Mr. INSLEE. I am going to give you a very honest answer, not a

cheeky one.

I really do believe that this country is not going to open up the

Arctic refuge. I believe that is very much the public sentiment. I

believe that the public will come to agree with us that it is not a

solution to this problem, long- or short-term. Honestly, if John, a

friend of mine in the industry, asked me, I would say, that is not

a place we are going to go. That would be my honest, candid, frank

and right answer.

Mr. MARKEY. Thank you.

Mr. BARTON. We appreciate your honesty, candor and frankness.

This subcommittee hearing on this particular issue for the Members’ testimony is over. We will have future hearings in the very

near future.

[Whereupon, at 3:54 p.m., the subcommittee was adjourned.]

[Additional material submitted for the record follows:]

PREPARED STATEMENT OF HON. JOE BACA, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF CALIFORNIA

Chairman Barton and Ranking Member Boucher:

I appreciate the opportunity to testify before this subcommittee, concerning California’s energy situation.

The energy crisis is upon us. Deregulation is broken, and California must dig

itself out of this hole. We need a stable supply of electricity at a reasonable rate

if we are to keep the gold in the Golden State.

Without a consistent supply of power that we control, we will always be at the

mercy of out-of-state interests who seek to turn a profit on the backs of consumers.

Without control, our whole economy will suffer. It is essential that we maintain our

standard of living and our competitive edge. We need to ensure that new industries

wish to locate in California.

That is why I met recently with President Fox of Mexico and obtained an agreement from him to supply California with an additional 50 megawatts of power, doubling the amount of power supplied by Mexico to California. This will be enough to

serve another 50,000 homes.

Mexico will give us the additional megawatts, but we need the infrastructure and

additional power lines. The problem is the United States lacks the required infrastructure. We really need to work on our side. We need to secure additional appropriations for infrastructure.

We need to get in the ball game. That is why I supported Governor Davis’s direction to state and local agenices to expedite the review and licensing of new power

generation facilities, and I supported his request that federal agencies do the same.

I appreciate that in response to the Governor’s request, the President will be

accellerating federal permit reviews, consistent with federal law and continued protection of public health and the environment.

It is time to enact a national energy policy. That is why I joined my colleagues

in signing a letter to President Bush recently, urging him to meet with us. Together

we will roll up our shirt sleeves and figure out how to solve these problems.

The national energy policy should include new ways to map how power flows

through our nation, to help us identify, in real time, where we need new facilities

and transmission lines. The technology exists to do this having been applied by Los

Alamos labs to other areas, such as our highway transportation system.

I am co-sponsoring legislation to prohibit out-of-state electricity producers from

charging excessive rates (H.R. 238, Hunter, and H.R. 268, Filner). We must protect

consumers and businesses in our state. This is about fairness. This is about ensuring that people can make ends meet.

I have also worked on the following measures to address the crisis:

• Letter from California Democratic Congressional Delegation, requesting that the

Federal Energy Regulatory Commission (FERC) take immediate action to address the energy crisis on the western region of the country.

• Letter to the United States General Accounting Office requesting a presentation

and evaluation of what can be done to increase the electricity supplies in the

west as an action to address the energy crisis in the western region of the country.

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• Letter and phone call to President Pro Tem John Burton’s office supporting the

letter from George Miller to Senator Burton in support of SB 33X, to assist the

state of California with the energy crisis by purchasing transmission lines.

• Letter to President Bush requesting increased funding for the Low Income Home

Energy Assistance Program (LIHEAP), the weatherization assistance program,

and the state energy program.

While a solution is being formulated, as energy consumers, we must be as efficient

as possible with this commodity. We must encourage family and friends to turn out

the lights when not in use, reduce the use of outside and decorative lighting, turn

our thermostats down at night, make full use of the sun to light and heat our home

during the day, close the drapes at night and chimney vent when not in use.

We should not be interested in assigning blame, only in finding ways to resolve

the crisis. While state lawmakers are working on a resolution, I am concerned about

the human impact of the crisis: how are these stage three alerts affecting the elderly, infirm, low income residents in particular?

Our focus should be on information dissemination. For instance, many low-income

families are not aware of the care program which provides a 15% discount off their

electric bills if they meet the qualifications and income guidelines. We are also sharing conservation tips for all consumers, but targeting seniors in particular.

I am concerned with how this energy crisis will affect our economy—both in the

growth and development of small business, as well as the increase in rates to all

consumers.

We need to provide for America’s long-term needs, whether through conservation

or new production. The continued health of businesses depends upon reducing price

swings for energy.

I am concerned that proposed budget cuts may harm our long-term national interests, taking funds away from renewable energy research. We need to explore all energy alternatives.

The time to act is now. We will work hard, we will succeed.

PREPARED STATEMENT OF HON. RANDY ‘‘DUKE’’ CUNNINGHAM, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF CALIFORNIA

Subcommittee Chairman Barton, Ranking Member Boucher, and Members of the

Subcommittee, I rise today to speak in support of federal efforts to assist California

in addressing our ongoing energy crisis.

Mr. Chairman, California needs relief. In Congress, you will find no greater proponent of capitalism and free markets than myself. However, due to the current crisis I support temporary price caps on wholesale electricity in the Western United

States. We need relief.

I would urge you to listen to FERC commissioner, William Massey, who said,

‘‘Runaway prices, like we have out West in electricity markets, are both unlawful

and politically unacceptable. Consumers see these prices as a blatant rip-off, and

I fear that we are on the verge of a political backlash . . . I believe we need a temporary timeout in western electric markets. I would cap bids into the spot markets . . . Without some price mitigation, not only the utilities but the state of California may go broke.’’

My constituents are suffering. Consumers, businesses, schools, and local governments are the victims of actions and powers beyond their control Furthermore, if

we are not afforded relief, we will likely see a consumer outrage that will harm any

future effort to bring competitive markets to electricity producers and utilities.

Last week, the California delegation met with FERC Chairman Hebert who expressed his continued opposition to price caps. This outright opposition to temporary

price caps, which could provide us the opportunity to get back on our feet, is harmful to the people of California and America.

Mr. Chairman over the last year, we in California we have been overcharged by

power companies. The California Independent System Operator (ISO) has issued a

report showing that we were overcharged $555 million in December and January

alone. This has been accomplished by power generators taking advantage of energy

shortages to increase prices. This report by ISO, which runs the electricity grid, said

that when it needed to buy last-minute power to avoid blackouts in December and

January, energy producers raised rates to outrageous levels, and the ISO had no

choice but to pay them.

Those energy shortages came amid an unusually high number of shutdowns of

power plants, which are owned by energy companies. Many people are asking about

the timing of these shutdowns and their potential connection to the extraordinary

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price hikes. Currently, the ISO has filed a motion with the FERC for refunds of

those overcharges. The FERC has 60 days to respond.

I would urge all my colleagues to examine this report of gross overcharges. And

should FERC not act, we must.

I know this isn’t a popular position for us to take; and it is certainly a deviation

from my free-market beliefs. However, we need relief in California. While this is a

state created problem, the people of California are looking to the federal government

for relief.

Mr. Chairman, I support the legislation sponsored by my colleague, Mr. Hunter,

for temporary price caps. I urge the committee to consider solutions that will provide relief to the people of California while we try to solve this problem.

Mr. Chairman thanks for holding this hearing today. I appreciate the opportunity

to share my concerns with you.

PREPARED STATEMENT OF HON. RANDY ‘‘DUKE’’ CUNNINGHAM, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF CALIFORNIA

Subcommittee Chairman Barton, Ranking Member Boucher, and Members of the

Subcommittee, I rise today to speak in support of an important component of a National Energy Strategy, specifically the Energy Efficient Buildings Incentives Act

(H.R. 778).

California, specifically San Diego’s North County has become the poster child for

energy problems in America. Last winter and summer we were hit hard by a failed

regulation proposal combined with a lack of instate generation. This combination

created shortages and extreme price fluctuations.

As many of you know, this problem is ongoing. This winter has been tragic and

included rolling blackouts. Earlier today, you heard from many members about this

ongoing problem. Many regions across the country face severe challenges to their

electric grid, with California being the extreme example. In addition, all across

America the situation is likely to get a whole lot worse before it gets better.

New York may have serious disruptions in electricity distribution this summer

and the Central U.S. may again experience similar problems to those of last year.

More troubling, this summer California may have more than a price problem. We

may actually be unable to get power at any price.

The problem is an imbalance between supply and demand, which has driven up

the price of electricity several-fold compared to last year. This has resulted in increased prices for consumers, and compromised the financial stability of utilities and

businesses.

The nation is in desperate need of a comprehensive energy policy. We must have

a policy that looks at the supply side, new avenues of production and generation,

as well as the demand side, innovative conservation alternatives. These policies

should consider the costs and risks to consumers and businesses. They should also

provide incentives for economic growth and environmental protection.

I have no illusions that developing a national consensus on a comprehensive energy policy will be easy. But, I am fairly confident that we will pass bi-partisan legislation, which will meet our growing need for energy.

I believe one major piece of the comprehensive energy policy will be an expanded

effort to increase energy efficiency by end users. Energy efficiency was an important

part of President Bush’s energy strategy of 1991 and has been the cornerstone of

a number of state efforts.

To this end, Mr. Markey of Massachusetts and I have introduced the Energy Efficient Buildings Incentives Act (H.R. 778). This is a companion to Sen. Bob Smith’s

S. 207 in the Senate. This legislation is designed to give new impetus to energy efficiency in buildings. This avenue shows the greatest short-term as well as long-term

promise.

Increasing energy efficiency is one of the few policy tools that can make an immediate difference. Within a matter of months after passage of this legislation, manufacturers and building designers will be able to provide significantly increased energy efficient technology to families and to businesses.

These new technologies will help in two ways: first, the consumers who utilize

them will immediately see lower energy bills. Second, as homes and businesses become more efficient, we will see reduced price pressure on fuels, and prices will

come down.

The sooner we can introduce energy efficiency into the marketplace, the sooner

consumers and businesses will start to see solutions to their energy problems.

Congress has passed several important pieces of bipartisan energy legislation over

the past 15 years. These laws provide for more competitive energy markets.

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They also provide for federal standards on the efficiency of appliances and equipment, and for federal assistance to states considering building efficiency standards.

They also provide tax incentives on the production side of the energy equation.

Utilities have also learned over the past 20 years how to develop incentives that

can encourage energy efficiency. Utilities have been very successful in promoting improvements in energy efficiency.

However, there are two powerful difficulties when it comes to encouraging stateof-the-art improvements in energy efficiency, and that is why we need to work

through the tax code.

The first problem is that energy-consuming devices are produced for national markets, but utilities only serve a single region.

Even if a utility offers attractive incentives for, say, an advanced new air conditioner, manufacturers will not be inclined to produce the product because their production has to be geared to national or even global demands, not those of a single

region. National incentives will solve this problem.

The second difficulty is timing. A major commercial building often takes over 2

years to construct. If the architect learns that the utility is offering an incentive for

energy efficiency, the first question he or she will ask is: will the incentive still be

available in 30 months when my building is finished?

Most utilities will have to answer that they cannot ensure that this is the case.

Therefore, the architect will refrain from making the commitment to energy efficiency.

The efficiency investments that will be made are for minor changes in the design

at the last minute that can be implemented during a period when the incentive is

known to be available.

H.R. 778 addresses both of these problems and sets the stage for unleashing a

wave of new technology that can provide major advances in energy efficiency in the

easiest manner.

HR 778 provides incentives for enhanced energy efficiency in buildings, because

buildings account for over $300 billion a year in energy costs and account for over

a third of pollution emissions in the United States.

There are opportunities for new technology to save from 30% to 50%, and maybe

even more of energy costs, while enhancing the productivity of workers in the buildings and increasing the comfort of families at home.

HR 778 targets the entire set of building-related energy systems, including: Nonresidential buildings, commercial buildings such as offices, stores, warehouses, etc.,

as well as public buildings such as schools, and rental housing.

Homes, including single-family, multi-family, and manufactured homes. Heating,

cooling, and water heating equipment; and solar photovoltaic and water heating

equipment. It provides incentives based on energy performance, not on cost.

This structure is different from the energy efficiency tax incentives of the 1970’s,

which were based on cost and are perceived by many to have failed. These targets

are ambitious but realistic.

If they were less ambitious, there would be a risk of paying for energy efficiency

investments that would have happened anyway. If they are too ambitious, no one

would claim the tax incentive, which would fail to accomplish the purpose of the

energy policy.

The bill provides tax incentives for a fixed time period and are intended to be temporary through the end of taxable year 2007. Six years should be sufficient to provide financial reasons for manufacturers to invest in plants producing efficient

equipment.

This should also be enough time for designers and contractors to get additional

education and training in energy efficient design, construction practices, and to establish competitive markets for more efficient buildings and equipment.

At the end of 6 years, I anticipate that the markets for energy efficiency will be

strong enough that these tax incentives will no longer be needed. I believe that

these incentives can transform the markets for energy efficient buildings over these

6 years, as several utility-sponsored programs have done in the past.

This is because they rely on market forces, and establish a level playing field for

competition between different industries and different companies.

HR 778 will reduce energy demand and bring quick relief to the power grid, which

will help alleviate electric supply problems. That is why HR 778 is so broadly endorsed by utilities, including all of California’s major electric utilities and many national power generators as well.

But the legislation also has significant environmental benefits to the nation. It

will reduce America’s greenhouse gas pollution emissions, as well as air pollution

emissions, by 3% by the year 2010.

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That is why this bill is endorsed by the nation’s major environmental organizations. We have worked hard to deliver a bill that has both bipartisan support in

the congress and support from the business and environmental community.

Although the primary motivations for this bill are to help solve America’s energy

policy problems and reduce emissions, there are also large economic benefits of the

bill.

By reducing energy costs for businesses, which are tax-deductible, it will actually

increase revenues to the Treasury over a 5-year period.Energy efficiency can be an

excellent investment, with returns of 25% per year and better. By stimulating such

investment, this bill will save businesses and families over $40 billion on net by

2010.

The benefits of this bill grow over time, as more and more energy-efficient buildings are constructed and the technologies for efficiency get cheaper and better due

to competition.I want to close by saying that the solution to California and America’s energy problems is not found on the supply side alone. We must address demand, and our bill will do that.I want to thank you for the opportunity to come before the Committee today. After swift enactment, we can all enjoy lower energy bills

and a better environment.

PREPARED STATEMENT OF HON. PETER A. DEFAZIO, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF OREGON

INTRODUCTION

Chairman Barton, Ranking Member Boucher, and Members of this Committee, I

appreciate the opportunity to testify here today on an issue that is of critical importance to the economy, the environment, and the quality of life in the Western

United States—the errant electricity ‘‘market.’’

Let me be clear at the outset, the energy debacle in the West is not just a regional

problem requiring regional or state-specific solutions. Rather, the misguided energy

deregulation wave set in motion by the U.S. Congress in 1992 is a threat to the

well-being of the entire nation and will require leadership from the highest positions

of power in our national government to solve.

Unfortunately, the White House, the Department of Energy (DOE), and the Federal Energy Regulatory Commission (FERC) seem content to let the bloodletting and

obscene profiteering continue unimpeded. I guess we shouldn’t be surprised since

the chief beneficiaries of this massive transfer of wealth from taxpayers to energy

companies just happened to contribute huge financial sums toward the election of

the current Administration.

There is no excuse for the Administration and Congress to continue abdicating

their responsibility to help solve the energy crisis.

By way of background, I have been deeply involved in energy issues for more than

two decades. In the late 1970s-early 1980s, I helped lead a group of residential ratepayer activists in halting the Washington Public Power Supply System’s (WPPSS,

pronounced ‘‘Whoops’’) nuclear power plant investments. These investments were

such a colossal misjudgment that ratepayers in the Northwest are still paying for

it. I fought President Reagan’s attempt to push energy deregulation on unwilling

consumers in 1987. I was also one of only two Conference Committee members and

one of only 60 members of the House to vote against the 1992 Energy Policy Act.

This law is responsible for allowing California and other states to get us into the

mess we’re discussing today.

I will address the specific problems facing California and the Northwest shortly.

But first, I want to provide some brief historical context for the current debate and

describe the fundamental shortfalls of a deregulated energy market, which will continue to wreck havoc across the United States until policymakers come to their

senses.

HISTORICAL CONTEXT FOR ELECTRICITY DEREGULATION DEBATE

The last time the United States had a deregulated electricity market was in 1932.

Astute students of history will recognize this was during the Great Depression. Is

that a coincidence? Perhaps, but it certainly did not help restore stability to the

economy. Deregulation ended with the collapse of the ‘‘Insull Empire’’ (a huge multistate conglomerate similar to today’s Enron). The collapse threatened to blackout

the entire industrial heartland of the Midwest.

Franklin Delano Roosevelt described the situation in his 1933 book, Looking Forward. Since his words sound eerily relevant to today, it is worth quoting him at

length:

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‘‘Through lack of vigilance in state capitals and in the national government,

we have allowed many utility companies to get around the common law, to capitalize themselves without regard to actual investment made in property, to pyramid capital through holding companies and without restraint of law.

The investing public did not realize then, as it does now, that the methods

used in building up these holding companies were wholly contrary to every

sound public policy...They did not realize that some subsidiaries had been

milked and milked to keep alive the weaker sisters in the great chain. They did

not realize that there had been borrowings and lendings, an interchange of assets, of liabilities, and of capital between the component parts of the whole.

They did not realize that all these conditions necessitated terrific overcharges

for service by these corporations.’’ 1

Similarly, in a letter to Congress, President Roosevelt wrote:

‘‘[The holding company] is a corporate invention which can give a few corporate insiders unwarranted and intolerable powers over other people’s money.

In its destruction of local control and its substitution of absentee management,

it has built up in the public-utility field what has justly been called a system

of private socialism which is inimical to the welfare of a free people.’’ 2

The same could be said of today’s runaway holding companies like Enron,

Dynergy, and others who have transferred billions in wealth from subsidiaries operating in California to the parent corporation while the subsidiaries then plead poverty to government officials and demand a taxpayer bailout. Seven out-of-state

power producers operating in California had after-tax profits totaling $4.7 billion

from April to December of 2000. For example, Duke Energy made $1.3 billion.

Dynergy, $373 million. Enron, $928 million. And Reliant, $613 million. 0

Fortunately, in the 1930s, Congress quickly came to the rescue after the collapse

of the Insull Empire in the 1930s through the creation of the New York State Power

Authority in 1931, the Federal Public Works Administration in 1933, the Bonneville

Power Administration in 1937, as well as enactment of the Tennessee Valley Act

of 1933, the Public Utility Holding Company Act of 1935, the Federal Power Act of

1935, and the Rural Electrification Act of 1936. These laws set up the mixed federal

and state regulatory structure that provided affordable, reliable electricity for the

next 60 years, thus setting the stage for the economic boom years that soon followed.I fear this Congress and this Administration will not have similar foresight.

FUNDAMENTAL MISCALCULATIONS OF DEREGULATION PROPONENTS

In discussions of energy policy, I often read or hear the line ‘‘no one could have

foreseen the current problems.’’ I beg to differ. I and a small number of energy deregulation critics predicted just this sort of disaster.

Actually, it is not widely known, but even the U.S. Department of Agriculture

(USDA) predicted problems for rural America due to energy deregulation in a January 1999 report. This report was leaked to the press and subsequently buried in the

bureaucracy under pressure by the DOE. The full report has still never been released. But, the conclusions in the leaked portion are as startling as they are instructive. The USDA projected electric rates would increase for residents of 19

states, including my home state of Oregon. The report also noted, ‘‘Economic growth

will slow under competitive pricing by up to one-half percentage point in those

states that experience increases in electric utility rates under competitive pricing.’’ 4

Let me take a step back for a minute, beginning in the mid-1930s and for more

than 60 years, utilities were regulated monopolies with a statutory and regulatory

duty to serve customers. In return, utilities were allowed to charge rates to recover

their investments in infrastructure and operational costs while also being allowed

a reasonable profit (so-called ‘‘cost-based-plus rates’’).

I agree there are a lot of things markets do very well. Reasonable price competition tends to allocate social and economic resources more efficiently than a command and control economy. Innovation is rewarded. Consumers are offered a broad

array of choices.

But, we know—or ought to know—that unregulated and under-regulated markets

have significant shortcomings. These markets lead directly to monopolies, price fixing and other uncompetitive practices. Markets also aren’t very good at accounting

for environmental costs.

And, in the world of electricity, universal service was not a natural goal of the

market, but rather had to be achieved through regulation. The same could be said

of energy conservation today.

As I’ve repeatedly stated, the fact that free markets are good doesn’t mean that

freer markets are always better. That is certainly true for the generation, transmission and distribution of electricity.

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In 1992, with little scrutiny or public attention, Congress adopted and President

George H.W. Bush signed the 1992 Energy Policy Act. This legislation delegated tremendous power to FERC to mandate transmission and wholesale competition and

opened the door for states to deregulate retail electricity. In 1996, FERC adopted

sweeping rules mandating transmission deregulation and ushered in a new market

in which independent energy generators could sell power to the highest bidder— with no responsibility to serve residential consumers.

Deregulation was based on two principal arguments. First, proponents argued

consumers were demanding to ‘‘choose’’ their energy provider the same way they

choose their long-distance phone provider. Second, they argued deregulation would

create a more efficient and innovative marketplace that would not only bring huge

savings to big business, which was pushing the scheme, but to all consumers.

The first point was sheer fabrication. In hundreds of town halls, I was never once

asked by a constituent that they be given the right to shop around for an electricity

provider. And, why should they? When they flipped the switch, the lights came on.

When they turned on the hot water, it flowed. When they received their electricity

bill, it was reasonably priced. This lack of consumer interest has been borne out in

states that have deregulated. In California, less than one percent of residential and

small-business customers have opted to switch providers. Other states have experienced similar results.

On the second point, not surprisingly, what sounds logical in an economics textbook doesn’t work when put into practice.

Of course, when we talk about deregulating the electric utility industry, we aren’t

talking about creating a truly unregulated free market. Electricity will still remain

essentially a natural monopoly, with barriers to market entry extremely high. Besides the obvious downside of three or four competing sets of wires running down

every residential street, there are equally obvious inefficiencies from this kind of

competition.

Rather, ‘‘deregulation’’ essentially replaces one rule book that was designed to promote social, environmental, and reasonable profit goals with another set of rules designed to create winners and losers while padding the bottom line of a few large

corporations.

WHAT’S WRONG AND NOT WRONG IN THE WEST?

The media, energy experts, and many of my colleagues in Congress point to a host

of causes of the California energy crisis, which has spread north to my home of Oregon and elsewhere in the Northwest and West.

As is probably clear from what I’ve said so far, I place much of the blame on the

1992 Energy Policy Act and the state-level deregulations that followed.

Let me address some of the most common sources of blame as described by deregulation proponents, which may contain a small nugget of truth, but are largely

based in myth perpetuated by rigid ideology.

Consumer Price Caps:

No one disputes the California State Legislature passed a deregulation law (AB

1890) in 1996 that included a retail rate freeze over the transition period, set to expire before March 31, 2002. Under the deregulation law, small consumers were

guaranteed immediate rate reductions and promised future decreases. The quid pro

quo was that the utilities could collect from consumers the ‘‘stranded costs’’ of unprofitable investments made under the regulated regime. At the time the rates were

frozen, they were substantially higher than market rates. Thus, for several years

the price caps people are pointing to now as destroying competition were actually

artificially high price floors. The frozen rates, that many argue need upward revision, were 50% higher than the average energy costs and have produced $17.6 billion in excess revenue for two of the major energy companies. 5

The only area to truly deregulate both wholesale and retail prices was San Diego.

For those who preach we can solve the ills of energy deregulation with still more

deregulation apparently learned nothing from the unmitigated disaster in San

Diego. As required by the original California deregulation legislation, price caps in

the San Diego area were lifted after San Diego Gas and Electric’s stranded costs

were recovered from consumers. Thus, consumers in the San Diego did feel the full

impact of the volatile energy market the past summer. The sudden and staggering

increased energy expense caused consumers and businesses in that conservative

part of the State to angrily demand immediate relief. In September, the California

State Legislature capped San Diego rates once again in response to the ratepayer

revolt.

One argument against price caps is that they impair the free market to send price

signals to consumers to conserve. The run-up in prices in San Diego, which at times

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reached 150 percent, should have caused a drastic reduction in energy use. In reality, the runaway prices resulted in only a 9 percent curtailment of energy consumption. 6 Given the essential nature of energy for homes and businesses, a certain

static level of demand exists regardless of the price. Economists refer to this as price

inelasticity. An essential good which is price inelastic does not dramatically respond

to increases in price. Another way of putting this is if we have a 50 percent increase

or 350 percent increase in residential utility bills, consumers can only conserve so

much in the short-term and invest in energy efficiency for the long-term. One study

found that—if all costs were passed on to consumers, the average residential month- ly consumer, who paid approximately $55 a month before deregulation, would have

paid approximately $600 a month when prices spiked in California this winter.’’ 7

I don’t know about your district, but there aren’t too many people in the 4th Dis- trict of Oregon who could afford a $600 monthly ‘‘price signal.’’ I would urge those who merely blame California for not ‘‘fully’’ deregulating because residential rate caps were maintained to go tell their own constituents in a

town hall meeting that a $600 monthly bill is actually good for them because the

price signal will cause them to conserve energy and help bring demand and supply

into line. If anyone on the Committee is willing to do this, I’d be interested in a

report back on what happens.

The free market model which should send price signals is further complicated by

a concentration of power in the hands of a limited number of energy producers and

marketers. Without any type of protection, the incentives lie with profit-oriented

utilities who can withhold energy generation, see market-prices increase, and then

deliver huge returns to shareholders.

In short, I think it is irrational and uninformed to argue that rate freezes, intended to protect consumers, are wholly or partially responsible for the California

energy crisis. Further, I disagree with those who advocate for dramatically increased rates for Pacific Gas and Electric (PG&E) or Southern California Edison

(SCE) customers.

California’s Utilities are Bankrupt:

California’s investor-owned utilities claim they need approximately $12 million

from either ratepayers or taxpayers to cover the expenses they incurred in the high

wholesale energy market. An investor-owned utility in Oregon recently received a

$2 million billing from the California Power Exchange (PX) to cover SCEs debt.

SCEs assets have not been frozen nor has there been an effort to collect from the

parent corporation. While no one can dispute a huge difference in the price California utilities paid for energy and the price they charged for energy, the need for

a bailout deserves some serious scrutiny.

First and foremost, it is important to note that PG&E and SCE did not completely

divest themselves of all their generation capacity. Of the generation assets they

sold, they received approximately three times book value. 8 The generation the investor-owned utilities retained was sold according to the rules of the California

Power Exchange. During the first eight months of 2000, PG&E and SCE generated

approximately $3 billion in revenues from generation they owned and sold through

the California PX. The California restructuring plan allows the utilities to add those

excess revenues to their stranded cost recovery fund. 9

In addition to the fuzzy math dealing with stranded costs and revenues from retained generation, PG&E and SCE are wholly-owned subsidiaries of PG&E Corporation and Edison International. According to an audit commissioned by the California

Public Utility Commission, PG&E transferred $4 billion to its parent corporation between 1997 and 1999. In addition, for the first nine months of 2000, PG&E transferred an additional $632 million to corporate headquarters. We see similar trends

with SCE. The parent companies are refusing to use their vast resources to assist

their subsidiaries. In the case of PG&E, the parent corporation created a ring fence

in late December to shelter itself from the debts of its subsidiaries. 10

PG&E and SCE supported the California deregulation law. One would assume

that they also understood and assumed the risk inherent with the structure of the

deregulated market, such as continually operating in the spot market. The audits

of their financial situation revealed that both utilities made a series of business decisions which accelerated their current financial difficulties.

While the investor-owned utilities are crying poor, independent energy generators

are raking in huge revenues from the inflated market. Financial Times Energy Insight evaluated the revenue flow from four out-of-state generators and found a fivefold increase in revenues. 11

The take home message here is that we need to look closer at the real accounting

behind the claims of PG&E and SCE. It is quite possible that the culmination of

stranded cost recovery and record revenues from independent generators negate the

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need to raise consumer rates or impose an undue burden on taxpayers for a utility

bailout.

Market Manipulation:

Proponents of deregulation claim increased demand is the cause of power shortages. However, the facts disputes. For example, Data from the California ISO shows

power demand during the last six months of 2000 was actually lower in four of

those months—July, August, October and December—than in the same period in

1999. Demand was only slightly above 1998 levels. 12 In addition, ‘‘there have been

blackouts when demand was less than 30,000 megawatts, approximately 15,600

megawatts less demand than the peak amount of electricity needed in California in

the summer.’’ 13

In addition to need for more scrutiny for utility bankruptcy claims, I also think

Congress needs to exercise oversight on claims of market manipulation. Many critics

of California’s energy suppliers argue that suppliers are deliberately withholding

generation to manipulate market prices. While the Federal Energy Regulatory Commission (FERC) recently released a study which failed to document collusion, other

independent investigations are coming to opposite conclusions. Personally, I am

skeptical whether the methodology used by FERC, which included phone calls, only

three visits to plants in California, and visits to company headquarters in Texas,

was rigorous enough to reach a final conclusion about market manipulation.

An independent analysis of the potential market manipulation coauthored by an

MIT Economics Professor concluded that there is considerable empirical evidence to

support a presumption that high prices experienced in the summer of 2000 reflect

a withholding of supplies from the market by suppliers. 14 The Wall Street Journal

also reported that a Stanford economics professor who is a member of the Independent System Operators market-monitoring committee suspects market manipulation. 15

Last month, the California Independent Systems Operator (ISO) reported 30 unplanned shutdowns. I recognize that all plants have to perform maintenance, and

that a substantial amount of maintenance was deferred. However, in other deregulated wholesale markets, including New England, there is a documented increase

in unscheduled maintenance. Based on New England ISO data, Synapse Energy Economics found that following deregulation, the average amount of generating capacity out of service each weekday increased by 47%. The same study indicates that

forced steam plant outages, which account for a substantial amount of New England’s power supply, doubled following deregulation. It shouldn’t then be surprising

that wholesale spot market rates reached all time highs following deregulation. 16

Whether energy providers are deliberately manipulating the market or not, no one

can dispute that in a deregulated market, generators have no duty to serve consumers. They also have no mandate to keep adequate resources in reserve. According to the California Energy Commission, the California Energy Grid typically had

between 15 to 20% of excess capacity. Commission analysts project that a deregulated market will only result in a reserve margin of 7%. 17

I support a wholesale energy market which prices power at cost, with a reasonable return margin, and requires energy producers to keep excess generation in reserve. Economics 101 will tell you that deregulation will not accomplish these goals.

Under a deregulated system, what incentive exists to build excess generation to hold

in reserve? When supplies are tight, prices go up as do profits. No rational executive

would then build reserve generation to drive prices and profits down. That’s heresy

to free market ideologues.

Environmental Restrictions:

Several weeks ago as I was traveling through my district I listened into a local

talk radio program. The host kept asserting that environmental extremists were responsible for a power shortage in California by opposing new construction of power

plants and imposing air quality standards on existing plants. I can only assume the

talk show host was referencing plant siting processes and clean air requirements.

While this makes for sensational talk show banter, it does not reflect reality.

Take for instance the comments of major energy producers in California. In a January 25th Los Angeles Times article, the spokesman for a California energy marketer, Reliant Energy, stated that claims air quality restrictions were holding back

output were ‘‘absolutely false.’’ In reality, only 100 megawatts of generation from a

city-owned utility in Glendale, California was curtailed due to air quality concerns.

The city utility still had plenty of power available to serve its customers and transmission constraints limited their ability to ship extra megawatts to Northern California. 18

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Critics of government regulation also point to long citing processes and opposition

by environmental and community organizations to new plants as inhibitors to new

energy generation. In the Coyote Valley, south of San Jose, the Sierra Club, American Lung Association, the NAACP, and Chamber of Commerce all supported the

construction of a 600 megawatt Metcalf Energy Center. It was not environmentalists who opposed this site, it was Cisco Systems and the San Jose City Council. 19

California has 6,278 MW of new generation approved and ready for distribution by

2001, with an additional 6,734 MW currently under consideration. The price signals

have already been sent. What’s the use in further gouging consumers?

The bottom line is that there are a lot of problems with the California deregulation framework. Environmental opposition is not one of them.

California Is An Anomaly:

To date twenty-three state legislatures have approved some form of wholesale

and/or retail deregulation. 20 Pennsylvania and Massachusetts are often pointed to

as success stories for deregulation. The Pennsylvania plan is geared more towards

retail deregulation than wholesale deregulation. The plan does not require generators to sell assets, allows long-term contracting, and freezes consumer rates. The

highly acclaimed consumer choice program has only resulted in 11 percent of Pennsylvania consumers choosing a different energy provider. 21 The Pennsylvania plan

also required consumers to pay utilities around $10 billion in stranded costs and

capped residential retail rates for at least 10 years. That’s not deregulation. Like

San Diego, it is likely prices will spike when the caps are withdrawn.

Massachusetts has also deregulated its electricity system, but high prices promoted FERC to impose rate caps for the New York and New England grid last

year. 22 Interestingly, Massachusetts consumers are moving towards municipal aggregation in an effort to have more control over their energy supply and price. 23

We all agree there are better models for deregulation than California. However,

if every deregulated state imposes rate freezes for consumers and other regulations

to make the ‘‘market’’ work, I wonder, why deregulate in the first place?

This fundamental question might explain why several states, including Idaho and

Utah have put their deregulation plans on hold. The promise of lower and more reliable energy from deregulation has yet to be realized. Instead, consumers and energy

companies outside of deregulated states are beginning to feel the impact of volatile

energy markets though higher energy costs and difficulty attracting capital for new

investments.

Future:

Last month I attended the Western Governors Association meeting on the West

Coast energy crisis. Eight of eleven Western Governors advocated for a short-term

return to cost plus energy rates until the West Coast energy markets returned to

normal. Many of the panelists, including FERC Chairman Curt Hebert and executives from Enron, Dynergy, and Edison Electric adamantly opposed these rate caps

seeing them as the cause instead of the cure to these prices. Let’s be honest here

for a minute. Everyone in this room knows that the exorbitant increases in energy

will negatively impact consumers, small business, and big industry. Politicians will

make accommodations to protect those interests. So in California, the state is bailing out utilities by entering into long-term contracts with marketers. In the Northwest, local utilities and federal power marketing agencies are paying industry to not

use power. While folks are saying let the free market work what I see is a privatization of the profits and a socialization of the risks. Energy generators continue to

profit from the volatility and uncertainty of the wholesale market while taxpayers

and ratepayers bail out business interests. Is this really the free market working?

For years the Northwest and California have had a symbiotic relationship which

has minimized the need to overbuild the energy infrastructure. In cold winter

months, the Pacific Northwest has imported California power while returning the

favor as California’s temperature rises in the summer. When California’s markets

went berserk, the Pacific Northwest had to purchase power in that inflated market.

Utilities in Washington and Oregon have already raised rates between 15 and 50%.

Given a drought and federally imposed salmon recovery constraints, the Bonneville

Power Administration is proposing between and 60 and 160% rate increase. This is

in addition to what has already been approved. While I recognize that Northwest

energy rates are some of the lowest in the county, a doubling of rates in a two year

time frame is crippling.

The California crisis is clearly affecting Washington, Oregon, Montana, Idaho, Arizona, and New Mexico. Policymakers in Congress and the Administration can not

continue to sit idle while businesses are losing millions of dollars in revenues and

consumers are experiencing financial distress caused by increased energy costs.

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WHAT IS THE SOLUTION?

Let me briefly touch on what will not solve the energy crisis in the West. I find

it totally disingenuous and incredibly insulting that Secretary Norton and others are

using the West Coast energy crisis as an excuse to develop oil in the Arctic National

Wildlife Refuge. There is absolutely no correlation.

Drilling in general will not solve the crisis, which is not fundamentally about demand.

So what is the solution?

I have introduced legislation, HR 264, to repeal FERC orders 888 and 889. This

would return the U.S. to the pre-1992 system of regulated utility monopolies and

cost-based-plus pricing. Support is building for re-regulation, which is the best longterm solution. To those who say we’re already too far down the deregulation road,

I would offer the analogy provide by Jude Noland in a recent column in the newsletter Clearing Up, ‘‘That’s like saying you can’t turn around when you come to a ‘road-closed—bridge out’ sign on the highway.’’ I would urge my colleagues to support HR 264.

If Congress is not ready to admit energy deregulation was a mistake, there other

short-term and long-term steps that can be taken to mitigate the unfolding disaster.

First, temporary price caps must be imposed in the West. Despite President

Bush’s rhetoric about the need for California to solve its own problems, temporary

price caps can only be imposed by his Administration through FERC. FERC Commissioner William Massey supports price caps and has reminded his colleagues, so

far without success, that FERC has a statutory obligation to ensure prices are ‘‘just

and reasonable.’’ Prices should be based on the cost of generation, plus a reasonable

profit. Profits made through unreasonable pricing should be refunded to ratepayers.

Second, we must dramatically expand federal investment in alternative and renewable energy. My region is already contributing to this effort. The Bonneville

Power Administration just announced a five-year, $200 million investment in conservation and renewable energy efforts. Solar and wind generation, fuel cell technology, and biomass all have the potential to produce vast amounts of clean, reliable, affordable electricity. Congress should mandate a certain percentage of electricity generation come from renewable sources.

Third, conservation efforts must be expanded. Oregonians have already gotten

price signals and are trying to do our share. Consumption in Oregon and Washington declined by 2-4 percent in December and January. Even Californians cut energy usage by 8 percent last month. The conservation effort should also include increasing CAFE ́ standards.

Fourth, Congress must reinstate the ban on Alaskan oil exports. I have introduced

legislation, H.R. 660, with Representative Hooley to do just that.

Fifth, Congress must expand assistance for those who have been hardest hit by

volatility in energy markets. This should include increased funding for LIHEAP, the

Weatherization Assistance Program, and the State Energy Program.

Sixth, Congress should impose a Windfall Profits Tax on energy companies whose

rates are found not to be ‘‘just and reasonable.’’ This would remove the incentive

for market manipulation.

Finally, Congress should create incentives and/or remove barriers to promote public and municipal power. When much of California was suffering through rolling

blackouts, the 30 percent of Californians with municipal power were not hurt. In

fact, the public power agency in Los Angeles had a surplus of power to sell. While

rates in San Diego soared to $138.50, prices in L.A. were around $50 a month. Government is often demonized, but energy generation and distribution is one activity

public agencies in California have done with more reliability and at a lower cost

than the private market.

Again, I appreciate the opportunity to share my views with you. I would be happy

to answer any questions you might have.

Endnotes

1 Roosevelt, Franklin. Looking Forward. The John Day Company. New York. 1933. Pages 148-

149. 2 Higley, Charlie. ‘‘Disastrous Deregulation.’’ Public Citizen. December 2000. www.citizen.org 3Public Citizen. ‘‘Billion-Dollar Bailout Would Still Allow Profiteering Power Producers to Call

the Shots.’’ January 24, 2001. www.citizen.org 4 U.S. Department of Agriculture, Office of the Chief Economist. Electric Utility Deregulation:

Rural Effects. January 1999. 5The Utility Reform Network. ‘‘Cooking the Books.’’ October 18, 2000. www.turn.org 6 ‘‘Why San Diego, Where Rates Rose First, No Longer Conserves Energy.’’ The New York

Times. January 31, 2001. www.nytimes.com 7 Hauter, Wenonah and Tyson Slocum. ‘‘It’s the Greed Stupid! Debunking Ten Myths of Utility

Deregulation.’’ Public Citizen. January 2001. www.citizen.org

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8 California Energy Commission. ‘‘Electric Divestiture in California.’’ December 29, 1999.

www.energy.ca.gov 9 ‘‘Review of PG&E Company Financial Condition for the California Public Utilities Commission.’’ Barrington-Wellesley Group. January 30, 2001. ‘‘Report to California Public Utilities Commission.’’ KPMG. January 29, 2001. 10 Ibid. 11www.latimes.com/business/reports/power/latlprofits001209.htm 12Public Citizen. ‘‘The Facts Are In: Electricity Demand in California Was Lower Four of Past

Six Months Than in 1999.’’ January 19, 2001. www.citizen.org 13 Hauter, Wenonah and Tyson Slocum. ‘‘It’s the Greed Stupid! Debunking Ten Myths of Utility Deregulation.’’ Public Citizen. January 2001. www.citizen.org 14 Joskow, Paul and Edward Kahn. ‘‘A Quantitative Analysis of Pricing Behavior in California’s Wholesale Electricity Market During the Summer 2000.’’ Http://web.mit.edu/pjoskow 15 ‘‘For Power Suppliers, the California Market Loses Its Golden Glow.’’ The Wall Street Journal. January 25, 2001. 16Synapse Energy Economics for the Union of Concerned Scientists. ‘‘Generator Outage In- creases.’’ January 7, 2001. 17 California Energy Commission. ‘‘Summer of 2001 Forecasted Electricity Demand and Supplies.’’ November 20, 2000. 18 ‘‘Bush’s Idea of Easing Smog Rules Won’t Help, Experts Say.’’ The Los Angeles Times. January 25, 2001. 19 ‘‘Turning on the Juices.’’ The San Francisco Chronicle, web edition. January 30, 2001. 20 www.eia.doe.gov/cneaf/electricity/chglstr/regmap.html 21 http://puc.paonline.com 22 www.state.ma.us/dpu/restruct/competition/index.htm#BACKGROUND 23 www.appa.org

PREPARED STATEMENT OF HON. RICHARD A. GEPHARDT, DEMOCRATIC LEADER AND

HON. MARTIN FROST, CHAIRMAN, DEMOCRATIC CAUCUS

We want to thank the Committee on Energy and Commerce and the Subcommittee on Energy and Power for calling this hearing today. Since early 2000, we

have been reminded that unstable energy prices and supplies pose a tremendous

threat to even a strong economy. The situation in California and the sharp rise in

home heating costs this winter, underscore that energy is one of the most important

issues facing the Congress this year. High prices and unreliable supplies have an

immediate affect on the quality of life of every family and the success of every business. Our goal should be to attack this problem on all fronts, and to do so in a manner that provides the most help to consumers today. The energy proposals put forward by the Bush Administration fail on both points.

We cannot endorse an energy policy that relies solely on drilling in the Artic National Wildlife Refuge as the answer to all that ails us. We cannot endorse an energy policy that ignores conservation, shortchanges research and development, and

limits the funds for weatherization and low-income energy assistance. We hope we

can work together, Democrats and Republicans, North and South, East and West,

to forge a policy that will reflect national realities in the 21st Century.

The Democratic Caucus Energy Task Force will work in tandem with and in cooperation with our Democratic colleagues on this Committee and the other committees with jurisdiction over the various components of energy policy. It is also our

hope to work with Vice President Cheney and other Republican leaders to find common ground on energy policy to benefit American families.

We recognize that our current energy situation is the result of a myriad of interconnecting factors that cannot be resolved with a quick fix. However, we do believe

there are short-term solutions that can help consumers in the months ahead.

It is for that reason we must seriously question the priorities of the new Administration when their budget affectively cuts the Department of Energy’s (DOE) nondefense programs over ten percent. During the Fall campaign, President Bush called

for a doubling of funds for the low income weatherization program. His budget unfortunately falls $40 million short of that goal in 2002 alone—and $450 million short

over ten years. In fact, the Bush plan simply restores the program to the level it

was at under the Clinton Administration, before it was severely cut when Republicans took control of Congress in 1995. Absent these shortsighted cuts, DOE has

estimated that an additional 250,000 homes would be weatherized today. These

250,000 families—who get nothing under the Bush tax plan—would be saving hundreds of dollars per family per year.

Despite his campaign statements in support of the LIHEAP program, that helps

the low-income families pay their heating and cooling bills, the Bush Budget is silent on LIHEAP funding. The only reference to LIHEAP in the budget notes how

LIHEAP funds can be diverted to the weatherization program. It raises the question

whether the Administration plans to pay for its increase in weatherization at the

expense of LIHEAP. Today, despite record high prices and recent winter storms,

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fewer than one in three eligible families get LIHEAP assistance because the program is not fully funded.

In this regard, we encourage this Subcommittee to take up and pass H.R. 683,

the Emergency Energy Response Act of 2001, which was introduced by Congressman Markey and and Congressman Frost and which is supported by a wide range

of Members of the Democratic Caucus. This legislation substantially increases funding for LIHEAP and weatherization, increases funding for state energy programs,

requires federal facility managers to immediately evaluate opportunities to increase

energy efficiency and installation of renewable energy projects, and which strengthens the Federal Energy Management Program, which promotes greater energy efficiency in the federal government’s use of energy. This is a constructive first step

and we urge to act on it soon.

We believe the Congress must address infrastructure deficiencies, the new relationships between the states and the federal government, tax policies that can encourage production and construction of new facilities to produce energy, policies that

can reduce the demand for oil, as well as how we can ensure an adequate supply

of fuels to produce the energy this country needs.

For example, natural gas is the fuel of choice for most new electricity generation

plants coming on line or in the planning stages. Reserves of this fuel are all but

depleted, but at the same time there is an abundant supply waiting to be tapped.

In the vicinity of Prudhoe Bay on the Alaskan North Slope there is an estimated

32 to 38 trillion cubic feet of natural gas ready for development—all in an area that

does not compromise the environment. While the infrastructure to bring this fuel

south has yet to be put into place, this is an area well worth exploring considering

that the U.S Geological Survey has estimated that with additional exploration, the

potential could be double the current estimate.

The Bush budget is silent on improving the integrity of our pipeline systems,

other than to propose to continue to charge pipeline owners tens of millions per year

to cover the cost of an inadequate federal safety inspection system. Pipeline accidents killed 17 people last year. These mishaps contributed to major energy supply

disruptions in multiple regions of the country. This failed safety system costs money

and costs lives.

President Bush campaigned as a supporter of conservation and renewable energy,

but his energy budget will compel major cuts in these programs. In fact, the Bush

budget states that any increase in solar and renewable programs will only come if

drilling is allowed the Arctic Wilderness. Even if this controversial drilling proposal

became law, solar and renewable programs would have to wait another three years

before getting even a dime even by the Administration’s own estimate.

According to the Rocky Mountain Institute, since the 1970’s, America has saved

more than twice as much energy through conservation and improved efficiency than

was produced from new sources. Despite that fact, the Bush Administration’s ‘‘comprehensive energy policy’’ described in their budget does not even use the words

‘‘conservation’’ or ‘‘efficiency.’’ This is a particularly glaring omission when many

meaningful conservation and efficiency measures can be put in place as quickly as

it takes to change a light bulb. We do not need to tell the consumers in California—

or in other parts of the Country facing tight energy supplies and rolling blackouts

this Summer—there is nothing we can do to help when we could be taking the lead

on making our economy more energy efficient today.

This is just the beginning of a vigorous debate on energy policy. Democrats intend

to join in a constructive dialogue to find real solutions to our energy problems. Solutions that help working families and truly contribute to making us energy independent. In the months ahead, we look forward to working with this Subcommittee

and the other Committees of the House to formulate a policy that will benefit all

Americans.

PREPARED STATEMENT OF HON. DUNCAN HUNTER, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF CALIFORNIA

Chairman Barton, members of the Subcommittee, I would like to extend my appreciation for the opportunity to be here today to provide testimony on the electricity crisis currently impacting my home state of California. Further, I thank you

for your continued willingness to examine this matter and I know that you share

the view that this crisis must be given every priority if we are expected to help reestablish a properly functioning power market in California.

Mr. Chairman, I believe that one of the prevailing themes that the Subcommittee

will receive today is that the electricity problem in California is an emergency, and

it is a crisis that is bigger in proportion than any natural disaster our State has

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ever experienced. The startling element associated with this problem is the staggering amount of life savings and business capital that is gone forever. This is

money that could go to mortgage payments, to educate children, and in the case of

small businesses, money that has already left our local economies that may have

otherwise served to further stimulate our State’s financial growth.As you know, one

of the central issues to this dilemma is the inability to establish enough power generation in California to meet our ever-increasing electricity needs. To help remedy

this situation, I am introducing separate pieces of legislation that would provide the

authority to expedite and expand the siting and operations of electricity producing

facilities of all sizes. More precisely, my legislation would provide the following:

1) the statutory authority necessary for the President to suspend all applicable

siting and emissions compliance requirements for the purpose of establishing

new electricity generation capacity in any State experiencing a power crisis; and

2) the ability for any individual or business, during designated times of emergency,

to operate any independent source of generation, with any sort of fuel available,

until the emergency has subsided.

Mr. Chairman, I recognize the profound and ambitious nature of these proposals,

but I believe that this level of action is more than warranted. In the absence of a

properly functioning market, which has allowed for the major power generators selling into California to establish a monopoly that is every bit as effective as anything

John D. Rockefeller could have conceived, our cities, businesses and private citizens

must have the ability to develop electricity independence.

In closing, I would implore this Subcommittee to consider all proposals designed

to establish and expand all possible sources of electricity generation. Our consumers

cannot, under any circumstances, be expected to be held hostage by an electricity

market that has witnessed price increases which have exceeded 9,000 percent in a

matter of hours.

Thank you, Mr. Chairman, and members of this Subcommittee, for the opportunity to provide this testimony. I am confident that if we pursue this matter in

an aggressive and expedited manner, we can provide California with the resources

necessary to help stabilize its electricity industry before the existing crisis deteriorates any further.

PREPARED STATEMENT OF HON. JOHN B. LARSON, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF CONNECTICUT

Mr. Chairman, I would like to thank you for calling this hearing to allow members to discuss the current California energy crisis and other issues generally related to energy efficiency. I am sure that throughout the day you will be hearing

testimony from many Members about the problems in California at this time and

the desperate situation individuals and business have been subjected to. However,

I hope to bring before the Committee and my colleagues from the western United

States a potential solution to many of the current energy problems facing California

and its neighboring states.

The problems in California did not develop in a vacuum. Ever since the people

of the First District of Connecticut first sent me to Congress I have been fighting

with the help of many of my colleagues to begin a serious debate about energy policy

reform in this country. Since I was sent here in 1998, energy prices in New England

have risen over 200 percent for home heating oil, and natural gas, diesel, and gasoline have also all seen significant increases. That is why we have been fighting so

hard for programs like the Strategic Home Heating Oil Reserve now established in

New England to head off emergency in the heating oil market, and increased

LIHEAP assistance for eligible individuals.

Fortunately for Connecticut’s consumers and businesses and unlike California,

electricity prices have remained stable during this time because Connecticut allows

for long-term contract purchasing of power under its deregulated electricity market,

and provides incentives that make generating electricity more attractive than attempting to purchase it on the open spot market. However, it is only a matter of

time before the overall inflation of energy costs, particularly those related to electricity generation, will catch up with the northeast as well. As the California situation is reminding us, there are no real short-term solutions for long-term problems.

That is why I introduced HR 5585, the Energy Independence Act, toward the end

of the 106th Congress, to begin to address these issues and the fundamental weaknesses beginning to show in America’s energy infrastructure. I am working to reintroduce the legislation targeting development of fuel cell technology again soon,

and I believe that this technology and my legislation could provide immediate and

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beneficial effects improving the energy and environmental outlook of California and

the United States as a whole.

Specifically, my legislation would invest approximately 1⁄60 of the nation’s total

yearly expenditures in 1999 and 1⁄120th of 2000’s expenditures on foreign oil to develop and demonstrate fuel cell technology that can power our homes, businesses,

and vehicles over the next five years. My bill calls for a $1 billion 5-year investment

that should eliminate our reliance on foreign energy sources by 2010 and improve

world environmental conditions by reducing overall consumption of fossil fuels and

the harmful chemical emissions they produce. It authorizes a federal purchase programs for commercially available stationary fuel cell power systems and demonstrations of new Proton Exchange Membrane (PEM) technology for residential, commercial and transportation applications including transit vehicles. In addition, it would

establish a grant program for states and local municipalities to help local communities incorporate this new technology into their overall energy portfolios.

I believe that government action is necessary at the state and federal level to help

defray the high introductory costs of fuel cell technology at this time and accelerate

their commercialization. A federal tax credit, such as the one proposed by my colleague Nancy Johnson, as well as grant programs for federal facilities and municipalities will increase volume and thereby reduce overall costs, making the technology more available so its many benefits can be enjoyed by the general public.

State and federal government purchases of fuel cells represent another means to deploy the technology while enhancing public safety and ensuring critical energy loads

are served with reliable, clean energy sources. The government can also help to

eliminate barriers to distributed generation so fuel cell technology can compete with

existing power generating sources.

The government must play a role in this transition for several reasons. First and

foremost, it will provide for the security of the country in both economic and military terms by eliminating our reliance on foreign energy sources. Second, we have

a responsibility to our seniors and to other people living on fixed incomes to see that

they have opportunity to live within their means without being forced to choose between putting food on their tables, gas in their cars, buying oil to heat their homes,

or buying electricity to power their homes. Third, there is the opportunity within

the government’s infrastructure to most easily begin a widespread integration of

this technology. Fourth, the spread and use of this technology has the opportunity

to create a contribution in economic growth and in job creation every bit as significant as the development of the high tech industry during the last decade. Further,

as government regulations increasingly call for stricter clean air and other pollutions limits, fuel cells can provide an effective way for states and communities to

meet these new environmental challenges.

Many people would argue that the problems in California stem from underestimating projected energy demands and a deregulation program that failed because it capped retail sales to consumers and prevented long term contacting. Regardless of the cause, California must increase its power generating capability by

thousands of megawatts, an increase it is expected to take 1-3 years to deploy, select, and become operational.

There are clear benefits in using fuel cell technology to address the California energy situation that can also be applied in other areas throughout the country. First,

as a distributed generation technology, fuel cells address the immediate need for secure and adequate energy supplies, while reducing grid demand and increasing grid

flexibility. Fuel cells can be used by electric utilities to fill load pockets when and

where new large-scale power plants are impractical or cannot be sited. Fuel cell systems also avoid the costly and environmentally problematic installation of transmission and distribution systems. Commercially manufactured fuel cell power plants

can be sited in a few months period of time and can provide continuous, reliable

power without the need to roll back existing environmental requirements.

Second, Fuel cell power plants provide a constant source of power that can be

used for base load applications. Unlike other environmentally favorable solutions,

fuel cells can be used as a continuous source of base power—independent of timeof-day or weather—for critical facilities, thereby offloading current strains on existing demand.

Third, fuel cells represent an environmentally favorable solution, with near-zero

emissions—positively impacting the State’s air quality objectives, particularly as

compared to less efficient, polluting alternatives. When operating at its rated power,

a single 200 kW PC25 fuel cell power plant, manufactured by International Fuel

Cells (IFC) and currently the only commercially available unit, eliminates an average of more than 40,000 pounds of air pollutants including NOX and SOX and two

million pounds of CO2 emissions per year otherwise emitted by typical US combustion-based generators.

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Fourth, fuel cells are a highly efficient technology that uses an electro-chemical

reaction to generate electricity and are inherently more efficient than combustionbased systems. In the electricity-only mode of operation, the IFC PC25 unit achieves

approximately 40 percent efficiency. When the waste heat from the fuel cell is utilized, the system’s efficiency reaches 87 percent. In addition, fuel cells can be installed at the point of use thus eliminating transmission line losses and enhancing

their overall efficiency, providing power at the point-of-use, thereby alleviating the

load on the existing transmission and distribution infrastructure, and eliminating

or minimizing the need for additional investment in the existing transmission and

distribution network.

Fifth, the use of fuel cells helps to diversify California’s and the country’s energy

market. Fuel cells can operate with a variety of fuel sources, but most commonly

use natural gas. For example, fuel cell systems have been developed that use anaerobic digester gases from wastewater treatment facilities as their source of energy.

These applications are particularly significant since they avoid the flaring of methane—a potent greenhouse gas that contributes to global warming—and the need to

use a fossil fuel energy source. This employment of fuel cell technology is currently

in use at the Rancho Las Virgenes Composting facility in Calabasas, California outside of Los Angeles, the first installation of its kind in California and the fourth

in the United States. Similar systems also manufactured by International Fuel Cells

in South Windsor, Connecticut, are also operating in Germany and Japan. A total

of Eight PC25 units are currently operating in California, including power plants

at a hospital in Riverside, a hotel in Irvine, a jail in Santa Barbara, and the South

Coast Air Quality Management District Headquarters outside Los Angeles in addition to the one in Calabasas.

Finally, the compact size, low noise and near zero emissions allows a fuel cell system to be readily absorbed into communities and neighborhoods. Unlike many other

forms of power generation, fuel cell power plants are good neighbors to concerned

citizens. For example, a PC25 installation in New York City is located inside the

Conde Nast skyscraper at 4 Times Square, where it provides 5 percent of the building’s electrical needs and the waste heat is used to run the air conditioning. The

fuel cell system also provides critical backup power in case the grid fails.

While fuel cells cannot supply enough power in the short term to solve the entire

power supply needs of California, they can be deployed strategically to ensure that

critical services and operations have a secure, reliable, efficient and clean source of

energy. High priority should be given to the installation of fuel cells in assured

power applications involving emergency services, public safety, health care, communications and data processing operations. Leading industry officials have assured

me that 20 to 40 megawatts of new fuel cell power supply could be available to California for such applications in the next 18-24 months.

In conclusion, I believe that implementation of fuel cell technology could significantly improve California’s immediate energy needs and their extraordinary efficiency would improve the overall national energy portfolio. This technology has been

with us since it was first used to power the Gemini and Apollo spacecraft, and is

still powering NASA’s fleet of space shuttles. It has finally matured to a point where

stationary power plants are providing reliable commercial power today and is prepared to demonstrate its advantages to the general public in clean, quiet, and efficient residential, bus, and car applications.

Fuel cell technology presents us with an extraordinary opportunity, at a critical

time in this country’s development. I believe we stand now on a fundamental crossroad in this country where we have the ability to provide for the economic and national security of the nation by integrating this new technology into our economy.

As you move forward with potentially compatible programs under your jurisdiction,

I urge you to consider integrating fuel cell technology to meet your energy and energy efficiency requirements. Your leadership at this critical juncture in our nation’s

history can profoundly improve the security and independence of every American,

and provide a safer, more secure, more productive, and cleaner environment for generations to come. We must not allow this opportunity to be lost.

Thank you again Mr. Chairman and members of the Subcommittee for you efforts

in this important area.

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

THE STATE OF MINNESOTA

Thank you Mr. Chairman for holding this hearing today so we can all better understand and learn from the events in California over the past few months. I am

pleased that there are so many members from the West Coast testifying today and

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offering their unique perspectives on the issue. I come from Minnesota, a state that

has not moved toward restructuring legislation at the state level. This committee

would be well served to continue these types of hearings in an attempt to analyze

what some states did better than others as they moved toward a restructured market. This type of analysis should prove helpful as this committee attempts to

produce a comprehensive national energy policy. Thank you Mr. Chairman, I look

forward to the testimony.

PREPARED STATEMENT OF HON. BUTCH OTTER, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF INDIANA

Thank you, Chairman Barton and Ranking Member Boucher, for inviting me to

testify today before the Energy and Commerce subcommittee about the growing energy crisis we now face in the West. Let me say it again—this is an energy crisis

in the West—not just in California. While almost all of the media and legislative

attention has focused on California citizens’ inability to meet their growing demand

for electricity, I am here representing 600,000 people in an area of Idaho that is

on the forefront of this growing crisis. And, it’s time for straight talk.

I read recently that California’s three major electric utilities have accumulated

debts totaling $1 billion. This debt includes millions of dollars owed by California’s

utilities to Idaho Power Company, and other major power producers in the Pacific

Northwest. That is money that will undoubtedly be made up through huge rate increases to families, rural towns, farmers, and industries that provide jobs to thousands of Idaho citizens. At this point, Idaho power users could face rate increases

from 24 to 55 percent in the next few months. Farmers, already suffering from

record low agricultural prices for their products, will also face additional costs to

pump irrigation water this spring and summer. Mills and factories have already

been forced to shut down or lay off workers because of they high electricity costs.

Meanwhile, water and snowpack levels in Pacific Northwest reservoirs—the same

water that is necessary to irrigate crops, improve endangered fish runs, provide for

recreation, and which generates electricity—is at a dangerously low level. Federal

dams are now spilling water that should be available for the region’s needs later.

Mr. Chairman, the current drought and power crisis have demonstrated the importance of hydropower to the energy needs of the west. Hydropower is cheap, clean

and renewable, all elements we need in our 21st century needs. California receives

24 percent of its energy capacity from dams. In the entire West more than 25,000

Megawatts (MW) of capacity are supplied by non-federal facilities. These hydropower supplies, however, are threatened by the Federal Energy Regulatory Committee’s (FERC) stringent re-licensing process.

In 1986 Congress mandated that FERC give ‘‘equal consideration’’ to environmental and economic factors during relicensing. Unfortunately, equal consideration

has been interpreted to consider economic factors last during relicensing. Since 1987

the average FERC relicensing has caused 10 percent of peak generating capacity to

disappear.

I believe that steps must be taken to ease the FERC relicensing project in order

to protect our energy supplies. Mr. Chairman, you and Mr. Towns deserve to be congratulated for your efforts last Congress to bring regulatory reform. I look forward

to working with you and my fellow Idahoan Senator Craig to make FERC reform

a reality.

FERC reform is good for the environment. Right now every watt of power lost

from hydro projects is replaced by the burning of fossil fuels. FERC relicensing will

enable power producers to make more extensive use of mitigation banking, enhancing the environment while protecting energy supplies.

In addition to regulatory streamlining, we must take steps to expand our hydroelectric capacity. The United States Department of Energy estimates there are more

than 10,000 MW of generating capacity that can be added at existing dams. Tax

credits for producing renewable electricity and adding generating capacity to dams

that lack it will enable us to meet more of our energy needs in a safe and environmentally friendly way. Currently Bonneville Power Administration (BPA) is paying

farmers $75 per megawatt hour not to use their electric pumps. Surely that money

would be better spent on generating the extra power to keep our farms and businesses in operation. Renewable energy credits could be extended to wind, solar and

nuclear plants as well. All of these additional sources of power will help alleviate

the current crisis, and help build a long-term and stable national energy policy.

Thank you again Chairman Barton for asking me to testify.

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PREPARED STATEMENT OF HON. JIM RYUN, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF KANSAS

I want to thank the Chairman and subcommittee members for holding this important hearing on current energy issues and for providing members the opportunity

to testify on our nation’s energy policy. I am grateful for the opportunity to speak

on behalf of my constituents in the Second District of Kansas and to offer my perspective on our need for a comprehensive energy policy.

As we all know, this winter season has been especially difficult for natural gas

customers. Senior citizens and others on fixed incomes simply can not keep up with

the cost of rising natural gas bills. For example, at a January hearing before Kansas

lawmakers a seventy-seven year-old man from my district who suffers from cerebral

palsy testified that he simply could not afford to pay his $636.72 gas bill. Another

constituent gave lawmakers a copy of her January electric and gas bill totaling

$1,785.09. Mr. Chairman, I know these stories are not uncommon to the rest of the

country. They also underscore the vital importance of the Low-Income Home Energy

Assistance Program.

In addition, our nation’s farmers are also affected by the impact of skyrocketing

natural gas prices. Farmers will especially feel the impact this spring when they

will have to pay up to one-third more to fertilize spring crops. The high cost of natural gas has forced several fertilizer plants to curb production or shut down temporarily. Fertilizer companies use natural gas to produce ammonia, which is converted

into nitrogen fertilizer. America’s farmers are already faced with low commodity

prices. They can not afford to endure high natural gas prices.

Clearly, a combination of factors has contributed to high natural gas prices. Increase in demand caused by a hot summer and cold winter combined with a decrease in drilling as a result of low commodity prices two years ago contributed substantially to high natural gas prices.

However, while supply and demand will always control prices, we can support and

promote a national energy policy intended to curtail high energy costs in the future

by increasing supply.

This winter has proven the danger of our heavy reliance on natural gas. Prices

for natural gas have soared faster than any other energy source. It is vital that we

take advantage of additional sources to supply our energy needs. Clean coal, for example, is certainly a viable alternative to natural gas for electric generation. A comprehensive energy policy should include support for clean coal technologies.

In addition, we need an energy plan that promotes domestic oil and gas production and decreases our dependence on foreign suppliers. Unfortunately, the energy

policy we inherited from the previous administration failed to reduce our dependence on foreign oil as we remain 56 percent dependent on foreign sources for our

oil supplies. Clearly, we cannot continue to bow to the demands of the OPEC cartel

and remain subject to oil supply interruptions. That is precisely why we need to increase exploration of our own domestic resources.

Alaska’s Arctic National Wildlife Refuge alone contains at least 16 billion barrels

of recoverable oil. Opening this area to oil exploration, development and production

that is done in an environmentally sensitive manner would greatly increase our domestic supply and help meet growing demand. In addition, we could increase domestic production of natural gas by easing restrictions on national forests and other

Federal lands that contain natural gas reserves.

Moreover, we can encourage energy conservation by extending the wind tax credit

to include electricity produced from biomass, agricultural and animal waste, incremental hydropower, geothermal, landfill gas and steel cogeneration. We can also explore more opportunities for nuclear power production as it serves as a one of the

cleanest sources of energy.

I am pleased by efforts made in my state of Kansas to provide immediate relief

to natural gas consumers faced with exorbitant energy bills. However, we in Congress must provide the leadership in implementing a long-term energy policy that

meets the growing energy needs of our nation while reducing our dependence on foreign supplies.

I want to thank you, Mr. Chairman, and the Committee for the opportunity to

testify on this very pressing issue and for hearing my views. I look forward to working with you in the future to promote a sound energy policy for our nation.

PREPARED STATEMENT OF HON. MAX SANDLIN, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF TEXAS

First, I would like to start by thanking Chairman Tauzin and Subcommittee

Chairman Barton and Ranking Member Boucher for calling a hearing to receive tesVerDate 11-MAY-2000 13:39 Oct 02, 2001 Jkt 010199 PO 00000 Frm 00115 Fmt 6633 Sfmt 6621 E:\HEARINGS\71502 pfrm01 PsN: 71502
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timony from Members of Congress on current energy issues. There are few topics

of greater importance to my constituent’s than soaring energy prices and the instability of domestic energy supplies. Although Texas has not experienced the type of

energy crisis now occurring in California, high natural gas prices, combined with a

colder than normal winter, produced steep increases in residential heating bills—

increases that eat up a large share of East Texan’s incomes. I know that several

members from the California delegation can testify with greater certainty as to the

true impact of what is now occurring in their state. Rather than speak to the situation in California directly, I would like to pull-back, and talk briefly about what I

feel are a few key things Congress can do to promote domestic energy sources and

thus strengthen our economic and energy security.

My district is home to some of the oldest oil and gas production wells in Texas.

In fact, I doubt that there is any part of my nineteen county district that has not

been surveyed, drilled, or plugged for oil and gas over the last century. As a member

of Congress representing an energy producing part of the country, I look at the

problems in California and throughout the United States as an opportunity to have

a serious discussion on energy issues. It was because of the last energy shock, a

quarter century ago, that Americans were forced to think about energy as anything

but an uninterrupted resource, immune from political, economic, and natural events.

That crisis produced actions from policymakers, consumers, and energy producers

that significantly altered our nation’s energy strategy. This year, as the issue of energy is once again front and center in America’s consciousness, Congress has an opportunity to realign an energy policy that is adrift and does not meet our needs.

The United States is a country dependent on fossil fuels and will be for the foreseeable future. Petroleum and natural gas currently account for approximately 65

percent of the nation’s energy supply and, in fact, natural gas demand is expected

to increase by more than 30 percent over the next decade. Although many want to

wish this fact away, doing so will not improve our current situation, and will actually cause greater long-term damage.

Another reality is that our dependence on foreign oil imports is greater than at

any time in our history. Foreign oil imports have grown to 56 percent of crude oil

needs, and the Department of Energy projects our energy dependence will grow in

the years to come—reaching 65 percent by 2020. In 1973, foreign oil only accounted

for 35 percent of our needs. We are going in the wrong direction.

As demand for oil and natural gas increases our ability to control these critical

resources is eroded by a failure to strengthen the domestic energy sector. Although

the United States remains the second or third largest producer of petroleum, it is

operating from a mature resource base that makes the cost of production higher

than in competitor nations. The United States has approximately 600,000 oil wells

in operation today. Nearly 500,000 of those wells produce less than 3 barrels of oil

per day—making our oil the most cost sensitive and price sensitive oil in the world.

(Compare this to Saudi Arabia where the average oil well produces more than 5,000

barrels of oil per day!)

What can be done to encourage and strengthen our domestic oil and gas industry?

We must begin working on ways to draw people back into the domestic energy

sector. Domestic independent oil producers—the producers who account for 60 percent of oil production in the lower 48 states onshore, produce two-thirds of our natural gas, and drill 80 percent of the natural gas wells—are essential to limiting U.S.

reliance on foreign oil and developing domestic natural gas. Unfortunately, foreign

countries that export oil to the U.S. have used crude oil price volatility to remove

‘‘high costs’’ U.S. marginal oil production and gain a bigger piece of the market

share in the U.S. We have the opportunity to reverse this trend.

Reforming our tax code to provide incentives for domestic production and exploration will promote our national interests by removing the barriers to capital access

that are causing the mass exodus of independent producers from the domestic oil

and gas industry. These reforms include:

Marginal Well Production Tax Credit: This credit will allow a $3 barrel tax

credit for the first 3 barrels of daily production from an existing marginal oil well

and a $.50 per Mcf tax credit for the first 18Mcf of daily natural gas production from

a marginal well. Without such safety nets, thousands of U.S. well and tens of thousands of U.S. jobs they support will be lost when prices fall.

Inactive Well Recovery: We should consider providing producers with a federal

income tax exemption for bringing back into production abandoned, idled, and

plugged wells.

Geological and Geophysical Costs: By allowing current expensing of geological

and geophysical costs incurred domestically, domestic producers can benefit from

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the same tax incentives for research and development that we provide to other industries.

Eliminate the Net Income Limitation on Percentage Depletion: Once wells

are plugged and abandoned, access to the remaining resource is often lost forever.

Eliminating the net income limitation on percentage depletion would encourage producers to keep marginally economic wells in production and enhance optimum oil

and natural gas resource recovery.

Enhanced Oil Recovery: By expanding the definition of methods qualifying for

the EOR tax credit, we can encourage conservation measures to expand recovery of

existing crude oil reservoirs and promote new drilling activity.

Tax Treatment of Delay Rentals: We should consider clarifying that delay

rental payments are deductible, at the election of the taxpayer, as ordinary and necessary business expenses. Given the disagreement over the legislative history and

the likelihood of costly and unnecessary litigation to resolve the issue, clarification

would eliminate administrative and compliance burdens on taxpayers and the IRS.

These bipartisan proposals to modify the tax code can augment the inflow of capital and reinvestment of cash flow crucial to the expansion of this industry. Independent producers are still recovering from the low oil prices of 1998-99 that resulted in the loss of 65,000 jobs and a 10 percent decline of domestic oil production.

Now is the time to replace counterproductive tax actions with policies that will encourage production and shield the industry when prices again decline.

Mr. Chairman, I am hopeful that Congress will take up these pro-growth tax reform proposals in the 107th Congress. In past Administrations, Democratic and Republican, various public officials have taken an ad hoc pledge to pursue energy independence for the nation, but this commitment quickly fades into complacency once

the crisis-of-the-moment begins to subside. We must not allow this to happen again.

We have an opportunity to implement policies that would encourage, rather than

discourage, U.S. oil and gas production and make our domestic energy industry

more efficient. I sincerely hope that individuals of good faith can work together in

implementing significant parts of this agenda.

Mr. Chairman, thank you for the opportunity to comment today on these important matters and I look forward to working with you and other Members’ on these

issues.

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