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67–633CC 2001

ELECTRIC UTILITY INDUSTRY RESTRUCTURING:

THE CALIFORNIA MARKET

HEARING

BEFORE THE

SUBCOMMITTEE ON ENERGY AND POWER

OF THE

COMMITTEE ON COMMERCE 

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

SEPTEMBER 11, 2000

Serial No. 106–167

Printed for the use of the Committee on Commerce

(

2

COMMITTEE ON COMMERCE 

TOM BLILEY, Virginia, Chairman 

W.J. ‘‘BILLY’’ TAUZIN, Louisiana 

MICHAEL G. OXLEY, Ohio 

MICHAEL BILIRAKIS, Florida 

JOE BARTON, Texas 

FRED UPTON, Michigan 

CLIFF STEARNS, Florida 

PAUL E. GILLMOR, Ohio 

Vice Chairman 

JAMES C. GREENWOOD, Pennsylvania 

CHRISTOPHER COX, California 

NATHAN DEAL, Georgia 

STEVE LARGENT, Oklahoma 

RICHARD BURR, North Carolina 

BRIAN P. BILBRAY, California 

ED WHITFIELD, Kentucky 

GREG GANSKE, Iowa 

CHARLIE NORWOOD, Georgia 

TOM A. COBURN, Oklahoma 

RICK LAZIO, New York 

BARBARA CUBIN, Wyoming 

JAMES E. ROGAN, California 

JOHN SHIMKUS, Illinois 

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 

RON KLINK, Pennsylvania 

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 

JAMES E. DERDERIAN, Chief of Staff 

JAMES D. BARNETTE, General Counsel 

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

SUBCOMMITTEE ON ENERGY AND POWER

JOE BARTON, Texas, Chairman 

MICHAEL BILIRAKIS, Florida 

CLIFF STEARNS, Florida 

Vice Chairman 

STEVE LARGENT, Oklahoma 

RICHARD BURR, North Carolina 

ED WHITFIELD, Kentucky 

CHARLIE NORWOOD, Georgia 

TOM A. COBURN, Oklahoma 

JAMES E. ROGAN, California 

JOHN SHIMKUS, Illinois 

HEATHER WILSON, New Mexico 

JOHN B. SHADEGG, Arizona 

CHARLES W. ‘‘CHIP’’ PICKERING, 

Mississippi 

VITO FOSSELLA, New York 

ED BRYANT, Tennessee 

ROBERT L. EHRLICH, Jr., Maryland 

TOM BLILEY, Virginia, 

(Ex Officio) 

RICK BOUCHER, Virginia 

KAREN MCCARTHY, Missouri 

TOM SAWYER, Ohio 

EDWARD J. MARKEY, Massachusetts 

RALPH M. HALL, Texas 

FRANK PALLONE, Jr., New Jersey 

SHERROD BROWN, Ohio 

BART GORDON, Tennessee 

BOBBY L. RUSH, Illinois 

ALBERT R. WYNN, Maryland 

TED STRICKLAND, Ohio 

PETER DEUTSCH, Florida 

RON KLINK, Pennsylvania 

JOHN D. DINGELL, Michigan, 

(Ex Officio) 

(II) 

3

C O N T E N T S 

Page

Testimony of: 

Barr, Gregory, Vice President, Power Generation, Solar Turbines, Inc ...... 46

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

Commission ................................................................................................... 111

Byron, Jeffrey D., Energy Director, Oracle Corporation ............................... 26

Guiles, Edwin A., Chairman, San Diego Gas and Electric ........................... 132

He ́bert, Hon. Curt L., Jr., Commissioner, Federal Energy Regulatory 

Commission ................................................................................................... 114

Hoecker, Hon. James J., Chairman, Federal Energy Regulatory Commission ................................................................................................................. 104

Kean, Steven J., Chief of Staff, Enron Corporation ...................................... 146

Keese, William J., Chairman, California Energy Commission ..................... 16

Lynch, Loretta M., President, California Public Utilities Commission ....... 129

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

Commission ................................................................................................... 122

Shames, Michael, Executive Director, Utility Consumers’ Action Network 32

Sladoje, George, President and CEO, California Power Exchange Corporation ................................................................................................................. 58

Smutny-Jones, Jan, Executive Director, Independent Energy Producers ... 41

Stout, John, Vice President, Southwest Region Commercialization, Reliant Energy ..................................................................................................... 140

Tyler, Roy, Owner, Tyler’s Taste of Texas ...................................................... 24

Winter, Terry, President and CEO, California Independent System Operator ................................................................................................................. 52

Material submitted for the record by: 

Blalack, Ken, letter dated September 6, 2000, enclosing material for 

the record ....................................................................................................... 177

Fraser, George, General Manager, Northern California Power Agency, 

prepared statement of ................................................................................... 184

(III) 

(1)

ELECTRIC UTILITY INDUSTRY 

RESTRUCTURING: THE CALIFORNIA MARKET 

MONDAY, SEPTEMBER 11, 2000

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON COMMERCE, SUBCOMMITTEE ON ENERGY AND POWER, San Diego, CA 

The subcommittee met, pursuant to notice, at 9 a.m., in room 

310, County Administration Center Building, 1600 Pacific Highway, San Diego, California, Hon. Joe Barton (chairman) presiding. 

Members present: Representatives Barton and Shadegg. 

Also present: Representatives Bilbray, Filner, and Hunter. 

Staff present: Catherine Van Way, majority counsel; Ramsen 

Betfarhad, economic adviser; and Sue Sheridan, minority counsel. 

Mr. BARTON. The Subcommittee on Energy and Power of the 

Commerce Committee, U.S. House of Representatives field hearing, 

the situation in the electricity markets in California, will come to 

order. 

Before we have opening statements, a few housekeeping announcements, and then we want to hear from Commissioner 

Dianne Jacob, who is going to formally welcome us, I believe, to 

San Diego County. 

This is a formal hearing of the subcommittee, so we have an official record. We have got the 16 witnesses that have been scheduled 

to testify. Their statements will be in the record in their entirety. 

We will allow the Congressmen to ask questions. 

Because of the sensitivity of this issue, we’ve got a number of 

Congressmen here from the local area who are not on the committee. They will have full rights to question, make opening statements. Those rights will be honored after the subcommittee members who are in attendance will be heard. 

With that, I would like to ask Supervisor Dianne Jacob to come 

forward, because I’m told that she has a welcoming statement for 

the subcommittee. 

Ms. JACOB. Good morning, Mr. Chairman and members of the 

committee. I’m here on behalf of the Board of Supervisors and 3 

million people and businesses in the San Diego region. And believe 

me, they are absolutely thrilled and delighted and very thankful 

that you have come to San Diego to hear our plight, and particularly to our local Congressmen, Congressman Hunter and Bilbray 

and Filner, for being here today also for their help and support on 

this issue. 

I’d like to set the tone for you, perhaps share in a very vivid way 

our plight to start the hearings today. San Diego County, without 

2

question, is in a state of emergency, and we are on the brink of 

human and economic disaster, and there’s no question about it. 

Over the last 3 months, our electricity rates have jumped from 

some 3.2 cents per kilowatt hour to over 21 cents per kilowatt 

hour. That means doubling and in other cases tripling the prices 

paid for electricity in this region from just a few weeks ago, and 

with no real end in sight. 

Many residents and businesses, frankly, just can’t afford to pay 

these exorbitant rate increases that have been thrust upon our region basically without warning. The increases place an incredible 

burden on San Diego residents and many particularly who are elderly and on fixed incomes. 

The several local residents such as the 100,000 mostly senior citizens who live in mobile home parks have no choice but to pay their 

full electricity bill or face eviction, because it’s a pass-through. 

Many of these people have had to make some tough choices, such 

as buying food or medicine or operating life-saving medical devices 

or to pay their electricity bill. Those are not choices that these folks 

or anybody should be faced with. On the other hand, the San Diego region is a $100 billion economy. We rank 37th in the world as far as an economic powerhouse. 

And these skyrocketing rates threaten to cripple our vibrant economy in this region. 

Businesses have already begun to cut back hours, to lay off workers, and to add surcharges to their prices. And the ripple effect has 

only begun. As the first region in the Nation to experience truly 

electricity deregulations, San Diegans unquestionably are the guinea pigs in a bold new experiment. And so far, the experiment has 

failed, and we need a course correction. 

People are suffering. Businesses are hurting. San Diego is in a 

crisis. The people and businesses in San Diego are innocent victims. We did not cause the problem, and we should not have to pay 

the price. Deregulation so far has not worked in San Diego, for several reasons, including, but not limited to, a lack of market competition which has basically caused an unregulated monopoly to 

exist. 

Also, a California public utilities commission that has failed to 

provide aggressive oversight and actions to protect consumers, a 

power exchange that is required to set market price based on the 

last highest bid, and the inability of the energy service providers 

to be able to purchase electricity from any and all available 

sources. 

I am hopeful that the information that you receive today will 

help not only in addressing the problem in San Diego, but also in 

preventing a similar situation from occurring throughout California 

and in other States throughout the Nation that are moving toward 

a deregulated electricity market. 

If this problem cannot be solved for 3 million people in San 

Diego, what are the consequences for the 30 million Californians or 

others throughout the United States? 

In response to the crisis, the County Board of Supervisors and 

several city councils, including the city of San Diego, declared a 

state of emergency, and we’ve asked our State Legislators, the Governor, State regulators, and others to take immediate action to proVerDate Aug 2, 2002 06:03 Aug 07, 2002 Jkt 010199 PO 00010 Frm 00006 Fmt 6633 Sfmt 6633 E:\HEARINGS\67633.TXT pfrm12 PsN: 67633
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vide consumers with immediate relief until permanent solutions 

are found to reduce and stabilize electricity rates in San Diego. 

In response, legislators and regulators have put in place a 6.5 

cent rate cap for most San Diego consumers. While the action is a 

welcome action, it is only a temporary stop-gap measure, and in 

and of itself, this rate cap is simply an installment plan with a big 

balloon payment at the end of 2003. 

We must begin immediately to assure that San Diego consumers 

are held harmless for the accumulated debt in this balancing account and the more daunting task of deciding what additional actions must be taken to ensure that the energy market throughout 

California and markets throughout the Nation offer consumers a 

reliable and reasonably priced electricity supply. 

I’m certain that you’re going to hear from panelists today that 

there is a need to increase power supplies to drive down market 

prices. While this is extremely important and badly needed, we also 

know that the additional power supplies are unlikely to come on 

line anytime soon enough. 

And meanwhile, the debt resulting from the 6.5 cent rate cap will 

continue to grow each day. Under the legislation signed by the 

Governor, the debt is estimated to be as high as $800 million at 

the end of 2003 with interest, I might add. 

And unless investigations determine culpability and those who 

are blamed are required to pay, are forced to pay, the innocent people and businesses in San Diego will be forced to pay the $800 million balloon payment, and we cannot afford it, and that is absolutely not fair. 

Therefore, I ask you to use your power to convince the Federal 

Energy Regulatory Commission to impose lower caps on generators 

throughout the western region as soon as possible. This action 

would reduce or eliminate the huge accumulation of debt as a result of the difference between that 6.5 cent rate cap and that current outrageous market rate for electricity. 

Believe me, 21 cents a kilowatt hour is not a just and reasonable 

rate for electricity. This action will give us some real—some real, 

not artificial—temporary relief while we work on these permanent 

solutions. 

On August 17, the Board of Supervisors hosted a conference, 

bringing together deregulation experts to provide us with some recommendation as to what actions need to be taken to solve the current prices. 

The Board is expected to adopt an action plan later this month 

based on those recommendations, and we will be forwarding these 

to the Governor, Members of the State Legislature, State and Federal regulators. And I would also be happy to make sure that your 

committee is given a copy of our plan after the Board takes action. 

Again, I want to thank you all very much for being in San Diego 

today. I look forward to working with you, as the rest of my colleagues on the Board do, too, to return San Diego’s electricity 

prices to a reasonable and fair level while protecting consumers 

throughout California and the Nation from having a similar crisis 

as we have here. Happy to answer any questions you may have. 

And again, thank you once again. 

4

Mr. BARTON. Thank you, Supervisor. We appreciate those remarks. 

Is Mayor Golding here or her representative? Okay. Well, before 

Supervisor Jacob leaves, we want to thank you and your staff and 

the county staff for all the courtesies that have been extended to 

the subcommittee in arranging for the location and the room and 

all of the equipment and things like that. We really appreciate 

that. 

The Chair would recognize himself for an opening statement, and 

then all other members of the committee, and then the visiting 

Congressmen will also be recognized. 

We are here today in the second field hearing of the Energy and 

Power Subcommittee. Our first field hearing was done in Nashville, 

Tennessee, last spring on the situation in the Tennessee Valley authority and all of the issues that are involved in that region of the 

country. 

We are here today because Congressman Bilbray, who is a member of the full committee, formally requested to both myself and to 

the full committee Chairman Tom Bliley of Virginia, that we come 

to San Diego County and firsthand get a look at the situation that’s 

developed as a result of restructuring here in California. 

As Congressman Bilbray has told me, the electricity customers 

here in the San Diego area, by and large, are paying some of the 

highest prices in the country for their electricity. Without talking 

to the California legislators that passed the bill several years ago, 

I can state unequivocally that that was not the goal of the great 

State of California when they restructured their electricity industry. 

I want our hearing today, if at all possible, to be helpful. It 

should be a fact-finding exercise to determine exactly what is happening here in California, what the State of California might do to 

alleviate the problem, and what role, if any, the Federal Government, either on the regulatory side at the Federal Energy Regulatory Commission, or the legislative side in the U.S. Congress, 

should do to try to help solve the problem. 

I personally am a very strong believer in the rights of States, and 

I’m a strong believer that free markets will work well for consumers if they’re properly structured. I believe that Congress 

should not tell California or any other State how or when to deregulate its energy markets. I think the Congress can be helpful, 

though, if we actually do listen, listen to the experts, perhaps convene experts to first understand exactly what California has done 

and how this fits into the national picture. 

I want to commend California for its effort to restructure its electricity industry. California’s initiative encouraged many other 

States to act. No other State has identically restructured its electricity system like California has, and there are many experts outside the State that have questioned some of the things that California has done and commented on the potential problems that 

these steps might create. 

One area of concern is California’s complex and lengthy permitting process, stringent environmental laws, and its history of what 

I would convey as general opposition to new power projects. BeVerDate Aug 2, 2002 06:03 Aug 07, 2002 Jkt 010199 PO 00010 Frm 00008 Fmt 6633 Sfmt 6633 E:\HEARINGS\67633.TXT pfrm12 PsN: 67633
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cause of all of these factors, no major new power plants or transmission lines have been built in the State in the last 10 years. 

The one statistic that I have been told—and I’m not sure that 

this is the gospel—but I have been told that the State of California’s peak load requirement is approximately 46,000 megawatts. 

Unfortunately, the State of California has a generating capacity of 

only 38,000 megawatts. 

That means that California, if these facts are true, if these numbers are true, is a net importer of almost 15 percent of its electricity. This puts an upward pressure on prices in the best of circumstances. 

In the past 3 years alone, the facts that have been presented to 

me indicate that California’s demand for electricity has risen about 

5300 megawatts. Supply has only risen 600 megawatts. The good 

news is that 25 project applications, with a total generating capacity of 15,000 megawatts, have been submitted since 1997. 

The bad news is that the State has only approved 5 projects, 4 

of which, thankfully, are in construction, and that only 1400 additional megawatts will be available by next summer. If supply does 

not equal demand, the market will naturally produce higher prices. 

I understand that the State Legislature has recently passed and 

the Governor has signed a new law about permitting and siting, 

but I have been told that while these are steps in the right direction, it doesn’t go far enough because these new legislative initiatives only apply to a small percentage of the pending projects. 

No other State requires its distribution utilities, including San 

Diego Gas and Electric, who is going to testify later today, to purchase all of their power through the centralized power exchange or 

PX, an independent system operator or ISO. 

Even more puzzling is the requirement apparently to force most 

power purchases to the day before or the actual day the electricity 

is consumed. Often, all purchasers must pay a market clearing 

price, which is the highest price of the last peak power needed 

rather than the average price. 

The more I learn about the rules for purchases from the California Power Exchange, the independent system operator, the less 

I like them and the more it appears to me that they may be part 

of the problem. 

If distribution utilities in California were allowed to enter into 

long-term fixed-price bilateral contracts, price volatility would be 

lower, and average prices should be lower. 

The ability to hedge power prices through the centralized exchange or individually would also help reduce retail prices. I’m told 

that under existing California regulations, such hedging is not allowed. 

It is always easier in hindsight to point out the flaws of a new 

system. Based on my preliminary analysis, it appears that the 

rules promulgated by the—what I’m told is called the Pease Bill 

are imperfect and have caused many problems. Now is the time to 

look at reforming these rules so that prices hopefully will moderate 

in the future. 

Let me turn a minute to what Congress can do to help California. We can continue to encourage wholesale competition as we 

started in 1992 with the Energy Policy Act. We can require all utilVerDate Aug 2, 2002 06:03 Aug 07, 2002 Jkt 010199 PO 00010 Frm 00009 Fmt 6633 Sfmt 6633 E:\HEARINGS\67633.TXT pfrm12 PsN: 67633
6

ities to interconnect with any generator using one agreed-upon 

Federal standard for interconnection. We can require incentive 

rates to get more transmission capacity built. We can remove restrictions that discourage public power and rule electric co-ops from 

opening their markets and competing. And we can compliment 

State actions, making the State restructuring more effective without telling States what to do. 

Federal legislation which passed my subcommittee last year, 

which hopefully in a reform process, will come before the subcommittee and the full committee in the next Congress, does many 

of the things that I’ve just outlined. It won’t solve the problems 

overnight, and there’s some things that California must do itself. 

I’m confident that California can correct the current situation. 

First and foremost, Californians need to agree on the rules and regulations that allow new power plants and transmission lines to be 

built in a reasonable timeframe. 

When supply of power is more in line with the demand for power, 

prices will moderate. 

I look forward to hearing the testimony today, and I want to 

thank, again, Congressman Bilbray for requesting the subcommittee to come to California and hear what the facts are. 

With that, I would recognize Congressman Bilbray for an opening statement. 

Mr. BILBRAY. Thank you, Mr. Chairman. Mr. Chairman, allow 

me to say with a little pride, I want to welcome you to our little 

corner of paradise, San Diego, that at the moment seems to be 

going through electricity Hell. 

I want to also thank you and Chairman Bliley for taking the 

time and the effort and the resources to hold this hearing, a hearing that is not only absolutely essential to the citizens and the consumers of San Diego County, but I think is essential for the rest 

of the Nation to learn from mistakes that occurred here in California and have severely impacted the consumers of San Diego. 

I want to thank the County Board of Supervisors and their staff 

for providing this room that I am not a stranger to and the facilities for this hearing. 

Mr. Chairman, I think that you’ve been briefed on the crisis before the San Diegan consumers, the tripling in the last year of the 

consumer rates, the absolute devastating impact on small business 

and senior citizens on fixed incomes and families who are struggling to try to pay their energy bills while paying all the rest of 

their bills. 

And the big question is why. How did this happen, and how can 

it be corrected here in San Diego, and how can it be avoided in the 

rest of the Nation. And that’s why I’m very, very pleased that 

you’re here as someone who has really taken a leadership role. 

In the national energy dereg, I think that as an old history 

major, you learn real quick the saying that those who do not learn 

from history are doomed to repeat it, and I think you are here 

today in no little way to learn to make sure that the mistakes 

made in California do not occur in the rest of the country. 

Mr. Chairman, last week our committee held major hearings on 

the Firestone tire issue. And you saw people piling in and disVerDate Aug 2, 2002 06:03 Aug 07, 2002 Jkt 010199 PO 00010 Frm 00010 Fmt 6633 Sfmt 6633 E:\HEARINGS\67633.TXT pfrm12 PsN: 67633
7

cussing that item, and you saw a lot of people talk about that hundreds of Americans were affected, even to the point of death. 

And though there has not been any documented deaths related 

to this issue, I want to point out that with all of the attention that 

the Firestone tire issue got last week in Washington that affected 

hundreds of people, this is an issue that affects millions in San 

Diego County and, if it is not corrected, could affect 32 million people of California. And if it is not learned from the mistakes, could 

affect the 200-plus million people of the United States. 

The difference is, last week we spent time watching private sector and government officials point fingers at different business 

community and different business elements to find blame. I don’t 

think we need to do that today. This is a mistake that rests mostly 

in the hands of those of us in government, one way or the other. 

I think that those in government who are involved in this mistake know it was a mistake, are open to it and are open to correcting the problem. So I think that in this hearing, we have the 

challenge of moving beyond finger-pointing and moving toward 

finding solutions and not problems. We all know where the problems lie. 

I have major questions, as you do. Interesting to hear that under 

the terms of a proposal that was supposed to be deregulation, it appears to me that a public oversight body that was abandoned and 

a new group called the PX or the Energy Exchange, which was basically a group of providers and generators with distributors, were 

the ones who were going to determine price for the consumers of 

San Diego County and the State. 

I have major questions about was this deregulation or reregulation under a different title. I have major questions about what’s the 

ability of the Federal Government to step in at this time to protect 

the consumers right now with real long-term protection. 

I would like to know what the FERC can do, what the Federal 

Government can do to come in and to initiate what the law says 

is supposed to be fair rates. And I think, as the chairwoman of San 

Diego County said quite clearly, no one in their right mind can 

point to what the San Diego consumer is paying today and say that 

it is fair. 

And so the big challenge is, where can we find what the State 

needs to do to correct their side of the problem, but what we can 

do to help the State to get themselves out of this problem, but most 

importantly—I would have to say this as an old lifeguard. What we 

need to do is figure out not why somebody went swimming, not 

why somebody got caught in a terrible situation, but how we can 

get in and help rescue them and get them back on good fiscal and 

fair soil and good rates. 

So I would like to say, Mr. Chairman, thank you very much for 

being here, and I’d just ask us to try to work together to find those 

answers so that the consumer on the bottom line is treated fairly, 

as our Federal and State laws specifically say. 

And again, thank you very much for taking the time. And I 

would like to thank my colleagues for being here because I know 

there’s a lot going on all over this country, and it’s nice to see that 

those of us in San Diego have finally gotten some attention to the 

8

fact that our crisis here is something the Nation needs to listen to 

and learn from and help correct. And I yield back, Mr Chairman. 

Mr. BARTON. Thank you, Congressman Bilbray. And again, we 

are very appreciative of you calling the issue to our attention and 

asking us to come to California. 

The Chair would now recognize the Congressman from Arizona, 

the Phoenix area, Congressman John Shadegg, a member of the 

subcommittee, for an opening statement. 

Mr. SHADEGG. Thank you, Mr. Chairman. In deference to the 16 

witnesses we have here today, I’ll try to keep my remarks brief. I 

would request unanimous consent to insert my entire written opening statement into the record. 

Mr. BARTON. Without objection. 

Mr. SHADEGG. Let me begin by commending you for holding this 

hearing. We in the West face a number of issues that are very, very 

important to us. This is a critical one for all the people of the San 

Diego region and a critical issue for all of the people in the Southwestern United States. 

I also want to commend my colleague on the full committee and 

my colleague on the subcommittee, Mr. Bilbray. He is consistently 

in the lead in taking care of issues for the people of California, and 

we have looked at his work with regard to gasoline and the problems that are now being caused to our water table, and indeed in 

Arizona try to follow some of the lead he’s made on that issue. And 

again, on this issue, I commend you, Brian, for holding this hearing. 

Everyone in San Diego knows that most Arizonans are Zonis. 

That is, when summer comes, we all come here to get out of the 

Arizona heat. And having spent a part of the weekend here in Arizona—I mean here in San Diego in the San Diego area, I can assure you that this is a delightful place, and I understand why 

many of my constituents spend time here. 

The issue of electricity deregulation is an important one for the 

Congress and for the people of California and for the people of the 

Nation. My goal here today is to try to listen and try to learn from 

California’s experience to try to find out what has gone wrong and 

to try to make sure that, as we in Arizona pursue electricity deregulation, and as we in the Congress do so on a national level, 

that we can learn from the process that was adopted here, perhaps 

recognize some of the errors that were made. 

I commend California for having had the courage to get out into 

the restructuring field. The goal, as the chairman indicated, of restructuring is not to produce higher prices, but rather to produce 

both lower prices and better service. And I believe we can go in 

that direction. 

I join you, Mr. Chairman, in your comments about deference to 

State and to State discretion in this area. I do not see the Federal 

Government as being the be all and end all for structuring the electricity market and for imposing on the various States a one-sizefits-all process. 

So I think it is a great opportunity today to learn from California, to learn what they have done right and perhaps what they 

have done wrong. I also concur with Mr. Bilbray and his plea that 

9

we not so much spend today looking at who is to blame, but rather 

what is to blame and how we can fix it. 

With that, Mr. Chairman, I’ll conclude only by saying that having spent the morning and the evening here last night and enjoyed 

the weekend, one of the tempting recommendations that this committee ought to come forward with, in my opinion, is that we move 

the capital from Washington, DC to San Diego, because I like it 

here much better than Washington. 

Mr. FILNER. Second. 

Mr. BARTON. Well, that may be a move in the right direction. I’m 

not sure we’d get this far west, though. 

Mr. SHADEGG. You’d probably go along with Texas, wouldn’t you, 

Mr. Chairman? 

Mr. BARTON. Somewhere closer to the Mississippi, anyway. 

The Chair would now recognize the gentleman from San Diego 

County, Congressman Filner, of Congressional District 50, which 

just as an aside, Texas and New York are the second largest delegations in the Congress, and we each have 30. So it says something 

about the strength of the California delegation. Congressman Filner is number 50, and I’m told that Congressman Hunter represents District 52. So that’s a lot of folks from out here. 

Congressman Filner is on the Transportation Committee. His 

district is in San Diego County, and obviously he’s got an interest 

in this issue. So welcome to our subcommittee and our full committee, and you’re recognized for an opening statement. 

Mr. FILNER. I thank the chairman, and I do have an opening 

statement for the record that I’ll try to summarize. As the other— as all of us from San Diego join in, we welcome you here. We thank 

you for being here. It’s important that you’re here, and I appreciate 

the courtesy of being allowed to sit on the committee with you. 

Mr. Shadegg’s statement about moving the capital will appear in 

the Phoenix papers tomorrow, so we thank you for the compliment. 

Let me, in my opening statement, make my attitude clear on 

this. No. 1, this State should never have deregulated in the situation where you have monopoly control of a basic commodity. It’s absolutely predictable that this would have occurred under this situation, and now we are struggling for ways to correct it. It should 

never have happened to begin with. We have a basic commodity. 

We have a monopoly. It doesn’t mix for the consumer. 

Let me also say that I think we ought to be focusing—as the 

chairwoman of the County Board of Supervisors pointed out, we 

have a short-range problem which deals with the suffering, the 

fear, the panic of hundreds of thousands of people in this county, 

people facing going out of business, people facing the possibility of 

life-and-death decisions. That has to be corrected immediately. And 

we have the long-range solution, which others on this body have referred to. 

Let me say in terms of the first one, the State legislature—excuse me—under the leadership of some of our representatives here, 

State Senator Alpert, Assemblywoman Davis, I think produced a 

bill that went as far as possible in terms of what was achievable 

at the State level. 

But as the supervisor—the chair of the supervisor has pointed 

out, this is a deferment of a bill that will become due at the end 

10

of the 2 or 3-year period. What we must do is get rid of that potential. 

Several people said, ‘‘What can FERC do? What can the Congress 

do?’’ Let me tell you, when you hear from the FERC commissioners, 

they will tell you, as I’ve read their testimony, that they are not— they do not have the authority to roll back prices retroactively. 

They have the authority to impose some caps. They do not have 

the authority to roll back prices retroactively. Which means that 

our consumers are still on the hook. I hope the chair will consider, 

when he gets back to Washington, HR-5131, a bill which I introduced last week, which was referred to this committee, Mr. Chairman, which directs the FERC to roll back wholesale prices in the 

western region to the prices they were before deregulation. 

And it orders the wholesalers to refund the price over that level 

to the consumer. That is the only way, I would submit, Mr. Chairman, that this Congress can—that the consumers will not suffer. 

It’s what Congress has the authority to do. We must give FERC the 

authority to roll back those prices. My bill is called Halt Electricity 

Price Gouging in San Diego Act or HELP San Diego, and we should 

help it now. 

So I hope, Mr. Chairman, you’ll be considering this. I hope my 

colleagues from San Diego County will join me in sponsoring this 

legislation. It’s only a retroactive roll-back that will prevent our 

small businesses and our individuals from facing a balloon payment of who knows how much at the end of the 2 or 3 years. 

Just one brief statement in terms of our long-range solution. I 

applaud again the chairwoman of the board of supervisors for asking her body to look at local control of electricity industry, the socalled municipalization of power. 

I think the only way that we in San Diego are going to get control of our own energy future is take the generation decisions out 

of the hands of monopoly and put it under the hands of our own 

people. We should be looking at that right away. 

My colleagues referred to that we are the poster children for the 

rest of California, that if we don’t act to avoid the problems, 32 million people will be affected. I would like to amend that because 

probably close to 10 million Californians do have their own electricity utilities. The city of Los Angeles has their own power company, basically. The city of Sacramento. 

So there are millions of Californians that are not going to suffer 

this future because they have control of their own pricing. So let 

us look to those areas and begin to looking at local control of our 

own energy future. I thank the Chair. 

Mr. BARTON. We thank you, Congressman Filner, for your remarks. Now recognize Congressman Duncan Hunter, whose suite 

is next to mine. His office is right next to mine in the Capitol. Congressman Hunter is a subcommittee chairman of the Armed Services Committee and has done tremendous work in providing for a 

national defense and is a recognized expert in that area. Welcome 

to the Energy and Commerce Committee, and we’d recognize you 

for an opening statement, Congressman Hunter. 

Mr. HUNTER. Mr. Chairman, thank you and thank you so much 

for coming on this mission, which I hope to some degree will be a 

rescue mission. 

11

You know, I left my district in east county a few minutes ago to 

get over here and had a chance to talk to some of my small businessmen, as we’ve all been doing, and our consumers. And I think 

one part of the factual base that you’re going to receive this morning is that this is an emergency, and it’s a crisis that is bigger in 

proportion than any natural disaster San Diego has ever had. 

The amazing part of this is the amount of life savings, money 

that could go to mortgage payments, go to educate children, and in 

the case of small businessmen, the capital base for many small 

businesses has already left or is in the process of leaving within 

the next couple of months. 

You’ll hear businessmen who will talk about small machine 

shops going from a $25,000-a-month electricity bill to $90,000 a 

month. And that is consistent across the industry and the small 

business base in San Diego County, and I think you’ll hear that 

testimony today. 

What we have right now is quite unusual, to say the least. 

You’ve got this exchange where literally the real time energy costs 

can be bid up and have been bid up to what our staff calculated 

out to be 9,000 percent increases, where you have to go in and for 

the next several hours buy electricity from the lowest bidder. 

And this is similar to having the oxygen supplier in a hospital 

literally 5 minutes before a life-saving operation being allowed to 

auction off his oxygen. There is no competition. This is not a competitive situation, and it’s not a competitive situation because we 

lack the one most important element in a competitive situation, 

and that’s a consumer with some choice. 

A consumer can’t walk across the street and buy that other loaf 

of bread at a lower price. They have one socket that they can plug 

their electrical appliances into, literally, or a few, and they are totally captives of the situation. 

So you’ve got the patient laying there ready to be operated on, 

literally with their life savings at stake, and you have a system 

where the suppliers can auction off in real time that life-saving 

commodity, and it’s gone up again to 9,000 percent of what it was 

just a few hours earlier. That is—and I’m speaking about the $90 

per kilowatt hour costs that have occurred. 

You know, I’ve got FERC’s—the Federal law here in front of me 

that FERC operates under, and it says—and I quote—any such 

rate or charge that is not just and reasonable is hereby declared 

to be unlawful. That was put there for a reason. 

In my estimation, although this is a State law that we’ve—and 

a State deregulation, the Federal Energy Regulatory Commission 

not only has jurisdiction, but they have a charge to cap these rates, 

and they haven’t done it. 

So I think that the only thing we should come away from this 

hearing with the agreement that 9,000 percent increases are not 

just and reasonable, and the overall 400 or 500 percent increases 

that we’ve seen, the 21 plus cents per kilowatt hour charges, are 

not just and reasonable, and the Federal Government should act, 

even though this has been a State—this has been a State creation. 

Second, I think for San Diego County, it’s clear to us we’re going 

to lose our industrial base here. And we’re not going to attract a 

high-paying industry and good jobs because the one thing that 

12

businesses big or small want to avoid is unpredictability. And the 

situation that we have right now is one where there is total unpredictability. 

A machine shop that’s thinking of moving to San Diego County 

or a major aerospace concern has to look at what’s happened with 

this incredible volatility of our prices for energy and conclude, like 

some of our businesses now that are paying $100,000, $200,000 a 

month more than they were for electricity alone just a few months 

ago, that it’s a risky business to locate in San Diego County. 

So we have to have stability. The only way we can achieve that 

stability right now, because of this incredible situation where you 

bid the oxygen off just before the operation, so to speak, is to have 

a district, a municipal district in San Diego County operated by a 

subdivision of the State. 

And the proposal that I made on this a couple of weeks ago to 

the County of San Diego was to the effect that we take one asset 

that we have right now, which is a 36-inch natural gas line at 

Miramar Marine Corps Air Station. We also have a plug-in to the 

power grid at that location. 

We buy some of the new high-tech equipment, like the General 

Electric LM-6000 generators that generate for Sacramento right 

now at 3.5 cents per kilowatt hour, or some of the machines that 

our own company, Solar Turbines, has in San Diego County. Their 

machines can handle 17 to 20,000 homes per machine or the equivalent. And we build our own power station. 

And by doing that, we establish predictability and stability for 

the industrial base, the small business base and the consumer base 

in San Diego County. So that—under the current law, that, to me, 

appears to be the only way off this extremely volatile exchange, 

which literally is robbing San Diegans right now of their life savings. And in cases of businesses, of their total cash reserves in just 

a period of a few months. Thank you for being with us, and I look 

forward to a good hearing. 

Mr. BARTON. Thank you, Congressman Hunter. 

That concludes the opening statements. All members of the subcommittee who are not present that wish to put a written statement in the record, the Chair would ask unanimous consent that 

that be allowed. Hearing no objection, so ordered. 

Mr. FILNER. Mr. Chairman, may I ask a question of procedure? 

Mr. BARTON. Sure. 

Mr. FILNER. I take it we—the public—this is a hearing, so there 

is no public testimony that’s allowed? 

Mr. BARTON. There is no sign-in sheet for people that just show 

up today, no, sir. 

Mr. FILNER. I mean, I would hope if we—if we sometime—if we 

conclude the hearing in some reasonable fashion, that members of 

the public be allowed to speak. But more specifically, one member 

came in to me this morning and said he thought he had been on 

the agenda. He happens to be the business manager of the local 

IBEW union here, International Brotherhood of Electrical Workers, 

a major stakeholder in all of this, and was surprised that he was 

not on the agenda. Is there any way we can either add him or get 

his statement for us? 

13

Mr. BARTON. Well, we have 16 witnesses scheduled. We can certainly get a written statement and let both staffs of the committee 

look at it, and I’m sure we can put that into the record. 

Mr. FILNER. I would hope, if we have time, that we might hear 

from those who have big stakes in this that we have not scheduled 

in advance, depending on your time. I know that you have time 

constraints, Mr. Chair. 

Mr. BARTON. Well, we will not be allowed to add witnesses to the 

panels today, but we can certainly, again, take a written statement, let both staffs look at it, and I would be surprised if we 

couldn’t put that written statement into the record. 

And my guess is that members of the California delegation could 

certainly meet individually with representatives that are not on the 

formal witness panels. And based on that, perhaps do another 

hearing at a future date in Washington. Thank you. 

We’d now like to call our first panel forward. We have Mr. Roy 

Tyler, who is the owner of Tyler’s Taste of Texas, which seems to 

me to be an oxymoron in California, but we’ll see. Mr. Jeffrey 

Byron, who is the Energy Director of the Oracle Corporation. Mr. 

Michael Shames, the Executive Director of the Utilities Consumers’ Action Network. 

Mr. Jan Smutny-Jones, who is the Executive Director for Energy—Independent Energy Producers. Mr. Greg Barr, who is Vice 

President for Power Generation for Solar Turbines, Incorporated. 

Mr. William J. Keese, who is Chairman of the California Energy 

Commission. Mr. Terry Winter, who is the President and CEO of 

the California Independent System Operator. And Mr. George 

Sladoje who is President and CEO of California Power Exchange. 

Welcome, gentlemen. I believe that Congressman Hunter and 

Congressman Bilbray both want to give a little bit more formal introductions to some of these panelists. We’d recognize Mr. Bilbray. 

If you want to give us a little more detail about one of the witnesses. 

Mr. BILBRAY. Yes, Mr. Chairman. 

Mr. BARTON. You’ve got to flip that little switch. He’s been here 

a long time. He knows. 

Mr. BILBRAY. It’s been a while since I—I was just trying to make 

sure I’m on. Oh, there it is. 

Mr. Chairman, it’s my pleasure to introduce Mr. Barr, who is the 

vice president of Power Generation for Solar Turbines. Solar Turbines actually has been keeping me informed of the challenges of 

the small generator being able to get on line or the medium-sized 

generator being able to get on-line onto the grid to be able to provide alternative to the large traditional power generators. 

The vice president has been very, very innovative of not only the 

ability to produce fair and cost-effective alternatives to traditional 

power sources, but also very environmentally friendly and economically viable power. 

And so I’d like to welcome the vice president and thank him for 

being here. And I’d like to say sincerely, thank you for all the time 

you’ve taken trying to educate this member of the Congress committee. 

In fact, I—the chairman of the full committee has said that my 

appointment on the task force, the special task force, was because 

14

they figured I’d listen to your facts and figures enough to where if 

anybody knew how to address this issue of interconnection and the 

whole concept of allowing more people on line, you were able to 

educate me on that, and I want to thank you very much for that. 

Mr. BARTON. Congressman Hunter, do you want to give us a little more formal introduction on—— Mr. HUNTER. Sure. And I know we’ve got to get going here, Mr. 

Chairman, but I just wanted to let you know, we have Roy Tyler, 

who is my—— Mr. BARTON. Turn your microphone on, please. 

Mr. HUNTER. Thank you, Mr. Chairman. Roy Tyler, who has a 

business in San Diego County, I think, will have a great description of what happens when you mix an entrepreneur who came to 

San Diego with just a few bucks in his pocket with 20-hour work 

days and the creation of three restaurants now that are nationally 

recognized as being some of the finest in the Nation, and you have 

a chance to juxtapose that against this incredible disaster that has 

befallen all of us small business folks. 

And Roy was just, I might say, on national television with one 

of the best dinner theaters in the United States of America, has 

had great publicity as a result of that. Brought a loot of entrepreneurial skills from Texas and applied them to California and 

helped all of us in doing that. 

So I welcome Roy, and I welcome also all the panelists who are 

with us here today. Now let’s go to work. 

[Additional statements submitted for the record follow:]

PREPARED STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF MICHIGAN

I commend the Subcommittee for holding this hearing to examine the results to 

date of California’s experiment with electricity deregulation. This presents something of a moving target, however, since the California legislature enacted two new 

laws modifying the original deregulation statute and a third is pending. 

Representative Bilbray has rightly noted that ‘‘sometimes governments make mistakes, and this is one of them.’’ It is fortunate that California’s problems have not 

yet spread to the rest of the country and that other states have been left to make 

their own judgments about what is in their citizens’ best interests. In retrospect, 

Members of Congress should breathe a sigh of relief that they did not jump on the 

bandwagon for a federal retail competition mandate, a concept promoted in several 

bills referred to the House Commerce Committee, before fully grasping its consequences. 

The bill reported almost a year ago by this Subcommittee wisely did not include 

a federal mandate. Unfortunately, I was unable to support my good friend Chairman Barton’s effort because it contained a number of other ill-conceived measures 

which did not seem likely to benefit the average consumer. In particular, the bill 

was weak on market power issues, limiting the Federal Energy Regulatory Commission’s authority to review mergers and set transmission policy. The bill also took an 

overly friendly approach towards the federal power agencies, preserving the public 

power preference for present Bonneville Power Administration customers which 

Rep. Bilbray has rightly questioned in recent weeks. 

In short, while the Subcommittee recognized the folly of forcing deregulation on 

the states through a federal mandate, no alternative has emerged that would address concerns about market power. Nor is it clear that federal legislation could resolve the sort of problems California has experienced, first and foremost being the 

lack of adequate generation capacity. 

The testimony presented today will doubtless prove helpful to Congress when it 

convenes next year and takes up the electricity restructuring debate once again. The 

States are our laboratories and there will be much to learn from the California experience. One lesson from California’s experience is look before you leap—a caution 

that applies equally to state and federal legislatures. I hope that California can 

straighten out its current difficulties and achieve the benefits of competition. In 

15

terms of the role of Congress in the restructuring debate, however, it is imperative 

that we learn from the states’ experiences and enact new federal electricity laws 

only when it is clear that the effect on consumers will be positive. 

PREPARED STATEMENT OF HON. TOM CAMPBELL, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF CALIFORNIA

The problems encountered in the Bay Area and in San Diego point out the danger 

of partial deregulation of electricity generation. Until complete wholesale deregulation occurs in the US, a step requiring federal law, the promise of lower prices from 

deregulation in California may not result. 

From both an economic and environmental perspective, I believe the solution is 

to focus attention on fostering renewable energy and energy efficiency. This will 

shift us away from dependency on fossil fuels, which are inherently subject to large 

and unpredictable shifts in price. 

In the long run, fully competitive electricity production is in the nation’s and California’s interest. However, recent events have highlighted some systemic changes 

that must be made in the way full deregulation is pursued. I strongly advocate 

these changes. 

Here are the main points: 

1. Increase Supply 

New electricity-generating capacity must be created, and I believe it is necessary 

to build new cleaner, power plants. Among these, there should be several that are 

not vulnerable to the fluctuations in price seen in fossil fuels. 

A government-provided fiscal incentive is necessary to induce the construction of 

facilities that generate electricity from renewable sources. This incentive should be 

financed by a surcharge on electricity from non-renewable sources. 

Recently, I took the opportunity to testify in favor of the siting of a new electrical 

generating facility in Silicon Valley. Many neighbors were upset with me, but could 

not see how I could call for more supply of energy to California but demand it be 

built elsewhere. 

We also need to build more transmission capacity to bring electricity into our 

state. Without that, Californians will be captive to the providers of electricity located in California only. 

2. Decrease Consumption 

The waste of energy in California is still one of the largest causes of shortage. 

We need to lighten the load on the power grid; for example, a full 30% of the peak 

energy consumed is due to A/C use. 

The U.S. Department of Energy should move at once to upgrade minimum efficiency standards substantially for new air conditioners by at least 30%. California’

Public Utilities Commission must provide all consumers with enhanced information, 

on-line and otherwise, on the largest sources of wasted energy. 

We need to extend California’s incentives for long-term energy efficiency investment, as proposed in bipartisan legislation that is now on the Governor’s desk. And 

we should take the relatively simple steps that consumers can take to reduce that 

waste. 

We should also require real-time metering for all industrial and large commercial 

users, now, including commercial users, do not know the cost of the energy they are 

using in real time, so they have no incentive to ration their use by time, or to invest 

in conservation. 

3. Meet the Demands of the ‘‘Gap’’ Between Producers and Suppliers 

Wholesale price caps already exist. Retail price caps set at the inflation-adjusted 

level before deregulation are needed as an interim measure. They should continue 

at least until several months after national electricity markets are fully competitive. 

Relying on the supply and demand to keep down prices, before national sources 

of energy production and transmission became available for San Diego, proved inadequate to prevent a hugely damaging price-hike here. 

I expect that eventually competition will bring prices down; but as long as deregulation has only partially been implemented, the potential for distortion is great. The 

key to future price stability remains the reduction of our dependency on fossil fuels 

while we continue to foster renewable energy and focus on energy efficiency. 

I thank you for the opportunity to submit this testimony, and I look forward to 

working with the Congress toward a more cohesive strategy that assures that our 

energy supplies are both readily available and reasonably affordable for consumers.

16

Mr. BARTON. And I’m told that Congressman Filner wants to 

make one special introduction. 

Mr. FILNER. I’d like to welcome Mr. Michael Shames, who is the 

executive director of what we call UCAN, Utility Consumers’ Action 

Network. He is the one person in this county who has exercised an 

independent stance, an independent expertise on what is going on. 

And I will tell you, when this crisis broke, there was virtually no 

public official who did not call Michael Shames. And I want to 

thank him for maintaining your expertise and your independent 

judgment throughout many, many, many years. And we look forward to hearing your perspective on this today. 

Mr. BARTON. Well, gentlemen, we want to welcome you to the 

panel. Now, we’ve got 16 witnesses, and each of you are very important. We can’t tell you how much tugging and hauling we had 

to do to narrow it down to 16, but we are going to have to ask that 

your opening statements be in the range of 5 minutes. And we 

have a little egg timer, so I’m going to click you at 5 minutes. If 

it takes another minute or so to wrap up, that’s fine. I apologize 

in advance for having to be that constraining. 

I’m told that Mr. William Keese has a pending engagement 

somewhere else, so I’m going to start with you, Mr. Keese, and 

then we’ll just go back to Mr. Tyler and start down the road. So 

we’ll get your statement first, and then if you need to leave, you 

would be excused. Hopefully, you could stay for some questioning. 

Mr. Keese. 

STATEMENTS OF WILLIAM J. KEESE, CHAIRMAN, CALIFORNIA 

ENERGY COMMISSION; ROY TYLER, OWNER, TYLER’S TASTE 

OF TEXAS; JEFFREY D. BYRON, ENERGY DIRECTOR, ORACLE 

CORPORATION; MICHAEL SHAMES, EXECUTIVE DIRECTOR, 

UTILITY CONSUMERS’ ACTION NETWORK; JAN SMUTNYJONES, EXECUTIVE DIRECTOR, INDEPENDENT ENERGY PRODUCERS; GREGORY BARR, VICE PRESIDENT, POWER GENERATION, SOLAR TURBINES, INC.; TERRY WINTER, PRESIDENT AND CEO, CALIFORNIA INDEPENDENT SYSTEM OPERATOR; AND GEORGE SLADOJE, PRESIDENT AND CEO, CALIFORNIA POWER EXCHANGE CORPORATION 

Mr. KEESE. Mr. Chairman, thank you, and I will stay around 

through what’s the noon hour. I was elected chairman of the National Association of State Energy Officials yesterday, and I’m 

chairing a 3-day meeting in Redondo Beach starting this morning 

dealing with the high fuel prices in the northeast, dealing with the 

high gasoline prices across the country, and dealing with this issue 

on a national basis. 

I do appreciate being here in San Diego, particularly on behalf 

of this administration and Governor Davis, who has indicated that 

deregulation can work. Deregulation is not working, but deregulation can work, but we must all, everyone involved, work together 

to find the solution. 

As you mentioned earlier, the California legislature passed two 

bills this year. Passed actually 10 bills, the Governor has signed 

two of them. And I’d like to just refer to those two briefly. 

17

Bill 8970 has granted the Energy Commission $50 million to give 

grants in energy efficiency and renewal generation to try to bring 

more power on before June 1 of next year, one of our critical areas. 

It also has given us an expedited siting process. Currently, the 

Energy Commission cites power plants in a 1-year timeframe. We 

do it within 12 months of the acceptance of the filing for a power 

plant. The delay in building power plants is a result of the additional 2 years it generally takes to build a power plant after it gets 

licensed. 

So we have at least a 3-year process there. We will now have an 

expedited siting process for plants that do not have a significant 

adverse impact on the environment. I will leave AB-265 to Ms. 

Lynch of the Public Utilities Commission. It deals with the rates 

in San Diego particularly. 

The citizens of San Diego have a right to be concerned with the 

prices that they have seen, which were obviously not intended by 

the legislation, AB-1890. How did we get here? I have attached to 

my written presentation, which I believe the committee members 

have, four graphs. And you will see in the first graph an outline 

of the States that are growing more rapidly than the others in the 

country. 

And there is no doubt, when you look at it, that California is surrounded by Arizona growing at 30 percent, Nevada at 50 percent. 

Utah, Oregon, Idaho. Every State around California is growing 

faster than we are. 

Yes, it is true that California did not build a major power plant 

in the last 10 years. Actually, very few major power plants were 

built anywhere in the country or the West. 

The problem is a Western problem. There have been moves now 

to start building power plants, and the actual number is 50. We are 

now talking to developers of 50 power plants in California who 

want to go through the California Energy Commission siting process. 

The second slide would indicate where we are in reliability. That 

is, how much operating reserve do we have when we reach our 

peak demand. I will just give you a little fact that if we have a hot 

year, if we have a hot siege, a heat storm, we require 4,000 

megawatts more than if we have a normal year. This was not a 

heat storm year. This was a little above normal year. So that’s 8.5 

percent more load. 

We’re going to need something to accommodate that additional 

8.5 percent that would come if we had a heat storm. And a competitive market for generation is not the way that you will achieve 

that. Because very few generators will be willing to put the $300, 

$400 million into building a power plant that’s necessary once a 

year for 3 days. 

The third slide would show you our peak demand. And you will 

see that 29 percent of our power at peak goes to air conditioning 

in California. Air conditioning therefore becomes a great target for 

energy efficiency and for addressing the issue of peak demand. 

Additional generation is a possibility. The last slide will show 

you the five projects the Energy Commission has approved, four of 

which are under construction, three of which may come on next 

summer. 

18

We are doing everything in our power to work with the developers to see if we can move the dates up. You will see on the 

slides—— Mr. BARTON. That’s 5 minutes. We’ll give you 1 more minute. 

Mr. KEESE. Okay. They’re coming on from July to September. We 

are working to try to get them facilitated so that they can come on 

by June, which is the time we need. 

I will just cut to the end and suggest what there is that Congress 

could do. And we are very strongly supportive of S-2718, the Smith 

bill, Energy-efficient Buildings Incentive Act, which will deal with 

buildings and appliances. We would strongly urge your support of 

that. 

We are strongly urging to either adopt new energy-efficiency 

standards for air conditioners, standards that apply to the west, 

where it’s dry, and to the east, where it’s damp. There’s a tremendous difference. We think that’s important. 

We would like a Federal exemption from the preemption of the 

Federal Government in appliance standards for efficiency, and the 

bill that was passed asks us to try to expedite that. Support of communities. 

And we would ask FERC to confront the major issues of wholesale prices and to give California all the flexibility that they can. 

Thank you, Mr. Chairman. 

[The prepared statement of William J. Keese follows:]

PREPARED STATEMENT OF WILLIAM J. KEESE, CHAIRMAN, CALIFORNIA ENERGY

COMMISSION

Mr. Chairman I appreciate the opportunity to testify before the Committee in my 

role as Chairman of the California Energy Commission on electricity industry restructuring in California. 

I would like to thank you for travelling to California and especially for meeting 

here in San Diego where the local citizens are justifiably interested and concerned 

about both the short- and long-term prospects of restructuring. 

In response to those concerns, the California Legislature passed and Governor 

Davis signed two important bills in the past ten days, AB 970 and SB 265. 

Two of the principal features of AB 970 are: 

First, the allocation of $50 million to the Energy Commission to implement costeffective energy conservation and demand-side management programs. We believe 

it is critical that we reduce our peak electricity demand and improve energy efficiency. This allocation of funds is an important component in achieving these goals. 

A second key feature of the bill is the creation of an expedited siting process for 

power plant projects. Projects will be eligible for this expedited process if, on the 

basis of an initial review, the Energy Commission concludes there is substantial evidence that the project will not cause a significant adverse impact on the environment or electrical system, and will comply with all applicable laws. 

AB 265 requires, among other things, the California Public Utilities Commission 

to establish a ceiling on the energy component of electric bills for residential and 

small commercial customers through December 31, 2002, retroactive to June 1, 

2000. 

The citizens of San Diego have experienced firsthand what happens when a market does not function properly and when there are barely sufficient resources to 

meet the demand for electricity during periods of peak use. 

How did we get in this situation? First, population and electricity demand have 

grown substantially in California and the West in the past decade. Remember that 

California and the West, including British Columbia and Alberta, are part of an 

interconnected electrical grid. Problems in one area can affect the entire western 

United States. 

California, which used to import large amounts of energy from the Northwest and 

Southwest during the summer months, has seen these sources diminish as electrical 

demand has increased in those areas. In addition, in the new competitive and restructured market, California generators are now exporting power out-of-state. 

19

Because of the uncertainty created by restructuring in the latter part of the 

1990s, few power plants were constructed in California. This meant that electrical 

reserve margins began to decline. 

Today, we find ourselves with inadequate generating capacity during periods of 

peak demand which corresponds to hot summer days when people are using their 

air conditioners. During these periods, air conditioning accounts for about 29% of 

Statewide peak demand. 

One solution to our problem in California and the West is additional generation. 

In the last year the Energy Commission has licensed five power plants with a combined generating capacity in excess of 3600 megawatts (MWs). Three of these facilities are expected to be on line sometime during the summer of 2001. 

In addition, we are currently reviewing an additional 14 applications with a combined generating capacity exceeding 8000 MWs. We believe this additional generating capacity, combined with new facilities in the other western states, will create 

a more competitive electricity market in a few years. 

However, even in the long-term, more generation by itself is not the answer. 

In order for the restructured electricity market to function competitively, and to 

provide benefits to consumers in San Diego, as well as other parts of California, and 

the rest of the western states, mechanisms must be in place that allow consumers 

to respond to higher prices. 

California Power Exchange data suggests that a three percent decrease in demand 

at peak hours can reduce market clearing prices by 25%. This means it is more costeffective to reduce peak demand for electricity than to build power plants to meet 

peak demand. 

The basic framework to provide incentives to end-users, including interval pricing 

and interval data recording meters, are important elements of a robust competitive 

market. When consumers reduce demand during periods of high prices, they will 

benefit themselves and concomitantly lower prices for others. This also reduces the 

need for additional power plants. 

It is also critical to continue efforts to promote energy efficiency. First, energy efficiency programs will help reduce demand. This will contribute to both improved system reliability and lower prices. Second, there are significant environmental benefits 

associated with reducing demand since the environmental impacts of constructing 

and operating additional power plants are avoided. 

Along with additional generation capacity, there is a need for selected upgrades 

and expansion of our transmission line system in California, particularly in constrained areas like the San Diego region. 

The Energy Commission is currently funding a $7.2 million contract with the Consortium for Electric Reliability Solutions to determine what solutions might exist to 

improve the reliability of the electric grid. DOE is providing approximately $10 million in additional funding. 

New transmission lines, however, do not represent a quick fix as they can take 

5 to 7 years to plan, permit, and construct. Also, in California, they are not always 

the appropriate fix. It has not been the lack of bulk transmission lines from outof-state that has constrained electricity supply in California this summer. For example, problems with adequate generating capacity and transformer capacity constraints were major factors leading to rolling blackouts in the Bay Area in June. 

There are many things Congress can do to help address the electric supply, price 

and reliability problems facing California and the West. 

• Pass the Smith Bill (S. 2718) which would enact the ‘‘Energy Efficient Buildings 

Incentive Act,’’ which will provide federal tax credits and deductions for energy-efficient design and construction of residential and commercial buildings. 

We believe this will lead to substantial energy savings in California, approximately 150 MWs annually. 

• DOE should adopt a new efficiency standard for residential air conditioners 

which will lower energy bills for homeowners. 

We are recommending the standard be set at SEER 13 (seasonal energy efficiency 

ratio) and include an EER (energy efficiency ratio) requirement because this is 

based on a hot, dry climate like the West’s, which will do more to reduce peak demand. 

• DOE should grant California exemptions from federal preemption for new state 

appliance efficiency standards covered by federal law. 

AB 970 requires the CEC to consider expedited adoption of efficiency standards 

that achieve the maximum feasible level of conservation that is cost-effective. 

• Congress should support cool communities by providing funds for highly-reflective roof research. 

20

• The Federal Energy Regulatory Commission must confront and resolve the 

issue of wholesale electricity prices. There must be just and reasonable prices for 

all ratepayers, something we did not have in San Diego this summer. And, 

• States need to be given maximum flexibility and latitude to implement solutions 

to their unique set of issues. 

The electricity supply problems facing California and the West are significant and 

should not be underestimated. However, I am optimistic they can be resolved if we 

work together cooperatively to develop solutions. 

I look forward to answering your questions.


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Mr. BARTON. Thank you, Mr. Keese. 

We now go to Mr. Roy Tyler, of Tyler’s Taste of Texas, for 5 minutes. 

STATEMENT OF ROY TYLER 

Mr. TYLER. Thank you, Mr. Chairman. Thank you, council, for inviting me here. 

Mr. BARTON. You need to be at some microphone, either sitting 

or—I guess you could stand up here at the podium. 

Mr. BILBRAY. If you go to the podium, they can turn that on. 

Mr. BARTON. Either one. You can do either one, but we need to 

hear you. 

Mr. TYLER. Is that on? 

Mr. BARTON. Yes, sir. 

Mr. TYLER. Roy Tyler. My wife and I own and operate Tyler’s 

Taste of Texas restaurant here in San Diego for 22 years. I appreciate the opportunity to be here. I speak not for the restaurant industry, but for small business in general. 

In our restaurants, we’ve had a number of meetings with small 

business in San Diego, and also, by the way, I represent the great 

State of Texas here in San Diego, of course. 

Mr. BARTON. That’s not an easy job, I guess. 

Mr. TYLER. It’s a tough job. Somebody has to do it. 

It puts me to mind—I had the unfortunate opportunity as a 

young man in Texas—one reason I came to San Diego—to be destroyed in a natural disaster. And I saw the power of the government step in and save our economy, save our businesses, save our 

people overnight. I saw the action. 

And since that day, I’ve also seen government come in and save 

something to death. And that’s my greatest fear. At this point, this 

power failure is equivalent of that hurricane or of an 8.0 earthquake. 

And the effects are virtually the same. You haven’t seen it yet. 

I understand from the business people, which represents a big part 

of the economy of this county and small business of this Nation. 

I’ve seen the after-effects of this. We’ve had an eight-point earthquake already. We need the Federal Government here now, not 

study and not talking. We need some action. 

If we were a scientist, we also could say we’re sitting on a fault 

now that will produce a nine-point earthquake in another few 

months. The walls will come tumbling down in small business. 

In 22 years, I came here virtually with nothing after a disaster, 

and I built some equity. My equity is gone. Effectively today, my 

equity has disappeared, as most of my business colleagues and 

small business. It’s gone. Where is the Federal Government? Not 

to study it. We want to see some action from the government. We 

don’t care who’s to blame. We think there was some bad business 

decisions made. But the effect is, it’s killing us. You know? 

My power bill. I can talk about it pretty easily, because it belongs to me. Our combined bills were $8,500 before the disaster. 

Combined last month was $22,456. That’s a $13,941 increase in my 

bill. That’s everything. That’s everything I own down the toilet if 

it’s not corrected. The effect of that on my employees, the ones that 

25

pay their bills at home. We’re worried about how do they pay their 

increased bills. That’s assuming they still have income. 

I’ve got 150 payroll hours from my business, most of the employees that work for me. Half a dozen people have lost their jobs 

today. And I’m not sure what the effect will be next month, because 

those same people, their disposable incomes are disappearing. 

That’s my customer. And when they quit coming in the door, what’s 

next? We’re only seeing the beginning, the first shock of the earthquake. The after-shock, I believe, will be worse. 

Businesses that I’ve spoken with and met with, Buck Knives— this is an old chart. It’s old numbers. They’ve almost doubled since 

then, or some of them. Buck Knives is up more than 100 percent. 

What’s 100 percent? That’s tremendous. 

Manufacturing companies, 130 percent. Certified Metal, a small 

metal craft shop with 30 or 40 employees, is up $70,000 in 1 

month. They can’t survive it. And it’s not a matter of months or 

a few years when you guys figure out what to do. It’s a matter if 

we don’t do something now, we’re all in trouble. 

And the trouble will run downhill. Not to San Diego. It’ll go to 

California, and it’ll go to the country, and it very well could go to 

the entire world. This is a total economic disaster, and we need relief from it. Not tomorrow. We need relief today. 

Everybody said everything that needs to be said about the free 

market. We all understand you can’t have more demand than supply and have a free market. It doesn’t work. We have to come up 

with supply. 

I commend Congressman Hunter as being the only person so far 

that has stepped forward with a plan that could be immediate. 

Mr. BARTON. If you could wrap up in about a minute. 

Mr. TYLER. Will do it. I’m wrapping now. 

We need electric independence in San Diego. Congressman 

Hunter has brought us a plan. We should look at the plan. It can 

be implemented, from what I’m told, in a matter of a few months. 

We need to respond. 

FERC. I don’t understand. Congressman Hunter read the deferred ruling, and I’ve been told that the Federal Government has 

no power to step in and regulate rates. Explain. The business community would like the explanation of what just and reasonable 

means. 

If the law is just and reasonable, why can’t you step in? That’s 

our question for the day. And we need somebody stepping in now, 

not studying it, not looking it over, not thinking about it. We want 

you now. Thank you. 

[The prepared statement of Roy Tyler follows:]

PREPARED STATEMENT OF ROY TYLER, OWNER, TYLER’S TASTE OF TEXAS

It’s time to talk about the consequences of the energy crisis. As well as a homeowner, I am representative of many small business owners whose electric bills have 

doubled, tripled and more. I am here to talk about concerns for the future of small 

business, which represents a large portion of the economy, not only of San Diego, 

but of the entire country. 

Any business, small or large has to budget its major bills. Heretofore a business 

owner, in their wildest dreams could not imagine one of those bills budgeted at 

$33,000 becoming $75,000 in July and $91,000 in August. 

What would most businesses do? They may have to borrow money to pay the bill, 

digging the same hole financial hole to business disaster. Most business can’t raise 

26

prices to customers that rapidily. Many businesses have customers on contract and 

can’t raise prices at all, so how do they cut costs to keep operating. 

Employee salaries are often the only ‘‘variable’’ costs he has, therefore lay-offs become a necessary means of surviving. I have cut over 150 hours per week for my 

very small businesses, resulting in loss of income to many people in our community. 

These are the people who will benefit for the rate roll back, but how will they pay 

any rate when they don’t have a job? 

One more utility bill of these proportions and this owner is forced to close his 

doors. Multiply this by the over 5 to 20,000 small operating and manufacturing companies that are dependent on electricity to operate, and not only East County, but 

all of San Diego. We are facing economic disaster to the same proportion of a major 

earthquake, with possibly longer lasting devastation. Ironically, at least for a short 

period of time the rest of the country is celebrating prosperity and most of the State 

of California. 

Much of the media attention has been focused on residential needs...the struggles of low-income households and the elderly. The consequence of ignoring the 

plight of business can, and will, include large numbers of unemployed, business closures and business relocations out of this state. Discretionary income will become 

non-existent, retail will suffer and business and housing sales will drop. In short 

a major depression is possible in a short time. Already, it is almost impossible to 

sell a small business in San Diego County, profitable businesses a few months ago, 

that would have sold at a premium sold and sold quickly, are now not marketable. 

The leaders at every level of business and government should be dedicated to finding both short term and long-term solutions to this crisis. All should endeavor to 

avoid the dead end thinking demonstrated by many that got us into this mess. The 

county, state and federal officials, S.D.G.&E, the PUC and FERC, and business 

leaders should ban together to prevent the consequences of doing nothing, or of repeating past mistakes. 

Though electricity deregulation was created at the state level, I, as well as many, 

believe that fast action and intervention by the federal government is necessary, 

and required to reverse the impacts of the deregulation and prevent a major economic disaster. Free market, in order to be completive requires a more than adequate supply to meet demand for any product. Perhaps, if the leaders that drafted 

the de-regulation of SDG&E had picked up the phone and called the owner of most 

any business, (or their high school teacher for that matter) and asked how things 

work, this could have been avoided.

Mr. BARTON. Thank you, Mr. Tyler. 

We’d now like to hear from Jeffrey Byron, who is Energy Director 

for Oracle Corporation. 

STATEMENT OF JEFFREY D. BYRON 

Mr. BYRON. If it please Mr. Chairman and Commerce Committee 

members. Thank you for the invitation to provide input to your deliberations on the——

Mr. BARTON. Pull the microphone to you, if that’s possible, so we 

can hear you a little bit better. 

Mr. BYRON. Thanks for the opportunity to provide some input to 

your deliberations on the electric industry in California and what 

Congress can do to address our problems. 

My name is Jeff Byron. I’m the Energy Director at Oracle in Redwood Shores, California. Oracle is a software developer who sells 

to many of the Fortune 500 companies and is one of the largest economic engines of the digital economy. 

However, like Mr. Tyler, I’m here today as an end-use customer 

of electric commodity and services. Reliability drives Oracle’s energy decisions. It’s clear that if we need a higher level of service, 

we’ll have to take care of it ourselves. And it’s worth a great deal 

to Oracle to minimize interruptions by investing in options to mitigate them. 

27

Other digital economy companies have taken similar actions because it’s the absence of electricity that’s far more costly to the digital economy company than the cost of electricity. 

We can expect to see more sophisticated end-use customers in 

the future because digital economy companies do not only suffer 

lost productivity during an interruption of power, they suffer credibility, customer loyalty and the ability to conduct business continuously around the world. 

It’s imperative that there is an adequate supply of electricity in 

order to sustain economic growth and meet the needs of all consumers. These were the correct intentions for restructuring in California and still are the right issue going forward. 

Now the marketplace must provide customers with the right to 

choose the level of reliability and other products and services that 

are most important to them. This is the point I’d like to direct my 

remaining comments toward. The electric power issues for digital 

economy companies are as follows: 

One, digital economy companies require higher reliability than a 

utility is able to provide or will be able to provide in the future. 

Two, the grid may not be able to provide sufficient capacity to 

match increases in demand. 

Three, the actions of regulators and legislators may have unintended negative consequences. 

And four, the emerging technologies to address these needs may 

be inhibited from entering the marketplace. 

These issues must be addressed by legislators and policymakers. 

Some programs are currently under way and should continue or be 

accelerated. These include programs to improve efficiency and reduce wasteful energy consumption, siting and approval of transmission and distribution facilities to address local capacity limitations, incentive programs to reduce energy consumption during 

peak load periods, and continued efforts to open up the generation 

market and provide competitive pricing for new engines. 

However, these four solutions will not happen quickly enough to 

provide sufficient capacity in California to meet the growing needs 

by the summer of 2001. Now Oracle must consider other options to 

address an inadequate supply of power and requirement for higher 

levels of reliability. 

One of the most promising ways to do this is with onsite or distributed generation. Digital economies require the ability to install 

and operate these innovative and necessary generation technologies 

in a timely manner. 

Conceptually, this is not a difficult or controversial proposition. 

However, the details to enable its implementation are critical. The 

following are the required steps that will enable digital economy 

companies to meet their electricity needs with onsite generation. 

One, digital economy companies may need to operate in parallel 

with the utility. To do this, clear interconnection standards that 

the utility cannot alter or delay are needed. 

Two, customers should be relieved of the stranded cost payments 

and rules that prevent privately owed construction of new electrical 

infrastructure if the utility is unable to meet capacity requirements. 

28

Three, standby rates should be unbundled to allow customers alternative generation sources. 

Four, depreciation schedules should be accelerated to promote 

more efficient technologies going forward, and distributed generation owners should be encouraged to use the cleanest and most efficient technologies through investment or production tax credits. 

Five, digital economy companies must still be required to selfgenerate in compliance with all existing environmental and regulatory statutes. 

Therefore, I appeal to Congress to consider legislation that will 

expand customer choices to install distributed generation. 

Standardized interconnection policies, unbundled standby rates 

and fair environmental standards for onsite generation should be 

a high priority for energy policymakers this fall. Thank you for the 

opportunity to speak before you today. 

[The prepared statement of Jeffrey D. Byron follows:]

PREPARED STATEMENT OF JEFF BYRON, ENERGY DIRECTOR, ORACLE CORPORATION

Greetings Mr. Chairman and Honorable Commerce Committee members and 

thank you for the invitation to provide input to your deliberations on the electric 

industry in California and what Congress can do to address our problems. 

My name is Jeff Byron. I am the energy director at Oracle Corporation in Redwood Shores, California. Oracle is a software developer who sells to many of the 

Fortune 500 companies. I am here today as an end-use customer of electric commodity and services. 

I have been associated with the electric power industry my entire professional career. I was trained as an engineer at Stanford University and have worked since 

then in many capacities in the electric power industry; nuclear containment, fossil 

generation, solar power, and most recently in transmission and distribution systems. I have worked for General Electric’s Nuclear Energy Division, Accurex Corporation’s Aerotherm Division on solar energy, Aptech Engineering Services consulting firm to the electric power industry, the Electric Power Research Institute, 

BrightLine Energy market research firm, and for the past four years in my current 

position at Oracle Corporation. I have nearly 25 years of diverse experience in this 

industry. 

As Oracle’s energy director, charged with keeping that aspect of the company’s infrastructure up and running, I do my best to keep abreast of the industry and the 

actions taken by others that will affect us. Like all electric customers, Oracle is at 

the end of a supply chain over which we have little control. It is my responsibility 

to anticipate and understand the effects of change, make recommendations, and 

then take action to maintain the level of electric reliability the company requires 

to maintain productivity and profitability. However, end use customers, like Oracle, 

have little influence on the reliability, capacity, and price of the commodity that is 

delivered. 

I believe Oracle is representative of many of the high tech companies of the digital-economy. Although I am only speaking on behalf of my company, my comments 

are also focused on the energy needs of our customer companies. I am not authorized to speak for them, but the reliability of the electric supply is important to our 

customers, and therefore, important to Oracle. Therefore, my comments are not just 

focused on Oracle’s needs, but I hope you find them applicable to all high-reliability 

customers. 

I operate a 15 megawatt distribution system at Oracle. Like all of Oracle’s operations, we do our best to minimize costs while providing the optimal infrastructure 

to run our business. This operation is as thinly staffed as it can be. I am a oneman operation, whose responsibility is to maintain the highest level of reliability of 

electric supply at the lowest feasible cost. The expertise I bring to Oracle is not a 

core competency for the world’s second largest software company. However, in 1996 

Oracle had become frustrated with the number of power outages that were being 

experienced, and instead of making substantial expenditures for uninterruptable 

power supplies (batteries) that would maintain critical functions through short 

power interruptions, Oracle invested in its own substation and distribution system. 

This system was put in service in July 1997 during two consecutive weekends. 

It was a monumental undertaking for a software company and it has proven to be 

29

a worthwhile risk. Becoming a transmission customer has provided Oracle with a 

higher level of reliability than it had before. Oracle was able to design and build 

a more expensive system than the regulated utility would have been permitted to 

provide within its rate structure. This investment cost Oracle approximately $6.5 

million and involved taking a risk that few commercial companies have considered. 

Nevertheless, the investment has afforded Oracle a moderately more reliable electric 

supply than most commercial customers. 

But this independence has also come with a price. Oracle must now operate and 

maintain medium and high voltage equipment, including switchgear, transformers, 

and miles of underground cable. Oracle has utilized independent contractors with 

the necessary expertise, independent of the regulated utility. And Oracle has instituted preventive maintenance programs, hired emergency response contractors, and 

developed procedures for high voltage switching and emergency situations. This is 

not what software development companies normally do. So, why did Oracle undertake such a venture? 

In a word, Oracle ventured into electricity distribution for improvement in ‘‘reliability.’’ Oracle is not the first end user to take these measures and I am certain 

there will be many more. Why? Because it is becoming clear that if customers need 

a higher level of service, they will have to take care of it themselves. 

Because of what Oracle does, create software, it has always been difficult to calculate financial losses due to a power interruption or significant voltage sag. A voltage fluctuation that causes the majority of Oracle computers to crash and restart 

is significant to Oracle. This could be as little as a 25% voltage sag for 0.2 seconds 

and may occur 6 to 12 times per year. When a voltage sag or outage occurs, the 

work of 7,000 Oracle software developers comes to a halt. They may lose what they 

are working on. Equipment may fail, causing the loss of more work and data. Overnight porting and program execution may be lost and have to be recreated. Oracle 

worldwide data communications may be interrupted. Sales force demonstrations 

using web-based software will not work and sales opportunities for Oracle software 

may be lost. And in many cases even that short voltage sag may take hours, if not 

days, for a complete recovery of all Oracle data and communications systems. In all, 

losses from each event can be many millions of dollars. It is worth a great deal to 

Oracle to minimize these interruptions and to invest in options to mitigate them. 

Oracle has also installed power quality monitoring equipment at each critical 

building and monitors and collects this information in real-time. These meters allow 

Oracle to continuously measure each fraction of a cycle of the 60 cycle per second 

alternating current. When a cycle of power is distorted by switching, faults on the 

transmission grid, or equipment failure, we are aware of it immediately. We know 

if it occurred on our campus, or if it occurred outside our system. This information 

is extremely empowering. Although we cannot alter the power that we monitor with 

this system, we can immediately begin to respond, determine the cause of the problem, and correct or influence correction of the problem. Information is the beginning 

of understanding and provides a sense of control that is relatively new for an enduse customer. 

Oracle has also added emergency power capability for its critical facilities. This 

is no different than many other companies who have installed uninterruptable 

power supplies and diesel generators to maintain critical systems during power outages and voltage sags. Altogether, Oracle has created a more reliable system than 

most other commercial customers. Oracle built, paid for, owns, operates, and maintains this system. Oracle also paid for the installation and subsequent removal of 

the system originally provided by the utility. The cost of these actions were not 

borne by any other customers. 

Oracle is an E20-T rate tariff customer in the service territory of Pacific Gas & 

Electric Company. This tariff means that our load exceeds 1 megawatt and electric 

service is taken at transmission voltage of 60,000 volts or greater. The actions I 

have described above were all taken under existing rate structures and had nothing 

to do with deregulation. These actions are worthy of mention as they indicate the 

level of effort that Oracle has undertaken to improve the reliability of its electric 

supply. 

Other digital-economy companies have taken similar actions. Some have installed 

their own substation and distribution systems, and others have installed generators 

and power quality monitors. Some have installed co-generation to improve energy 

efficiency, save money, and improve reliability. While large industrial companies 

have taken similar actions in the past, the reasons for doing so were generally different than they are today for digital-economy companies. For industrial customers, 

where energy costs may be a significant portion of production costs, minimizing electric costs provides an important competitive advantage. But for the digital-economy 

companies, electric costs are typically a very small fraction of revenue or production 

30

costs. It is the absence of electricity that is far more costly to a digital-economy company than the cost of electricity. 

This is a new and critical change in the value proposition for electricity. For nearly 100 years, all end use customers have received the same unlimited supply of electrons with interruptions, voltage sags, and other distortions according to how well 

the supplier delivered it to them. This is not a criticism, but recognition of how the 

electric power grid works and the service limitations of a regulated monopoly. 

In the past few years we have seen restructuring of the electricity market and 

more energy services on the customer side of the meter in California. Recently customers have become aware of emerging technologies and service offerings that can 

improve the reliability of the electric supply to their critical functions. It has also 

only been recently that companies have come to realize that they can invest in options that can go beyond the ‘‘one size fits all’’ offerings of the local utility. We can 

expect to see more sophisticated end-use customers in the future. 

The electric power supply needs of the digital-economy companies are different 

than those of the traditional-economy companies. The digital-economy companies 

are not a one or two shift per day product line. Rather, they are 24 hours per day 

and 365 days per year, or 24 by forever. Any company that has computers, servers, 

routers, hubs, or depends on the services of those that do, is a ‘‘digital-economy company’’ and has many of the same needs as Oracle. Digital-economy companies do not 

only suffer lost productivity during an interruption of power they suffer credibility, 

customer loyalty, and the inability to conduct business continuously around the 

world. 

Not all digital-economy companies have the identical requirements for continuous 

power. Each makes a determination of what optimal improvements can be made to 

meet their electrical supply needs. This is the point I would like to direct my remaining comments towards; the marketplace must provide customers with the right 

to choose the level of reliability and other products and services that are most important to them. 

For the most part, the digital-economy customers are the missing stakeholder in 

the deregulation process. I offer that this has been the case for two reasons. First, 

most digital-economy companies did not grasp the significance of what was at stake, 

except for anticipated savings from lower energy costs. And second, most energy 

managers have operational jobs that greatly constrain their involvement in the regulatory process. They simply do not have the time or resources to participate. 

We must rely on the policy makers to understand this complex industry and balance the needs and interests of all stakeholders. Policy makers must balance many 

issues in considering what is best in deregulating this industry, such as:

• Encouraging competition and efficiency 

• Protecting unfair shifting of costs 

• Sustainability of the UDC 

• Protecting the environment 

• Ensuring safety and reliability of the grid 

This is a difficult task. The California PUC and legislature did a thorough and 

thoughtful job of initiating a fair and open market for electricity. There is a tendency to search for the guilty when symptomatic issues, such as high electricity 

prices, arise and a tendency to overreact with quick-fix solutions. There is an overwhelming concern that the best intentions of those who were not initially involved 

in this process could result in unintended consequences and make the situation 

worse than it currently is. It is imperative that there is an adequate supply of electricity in order to sustain economic growth and meet the needs of all consumers. 

These were the correct intentions for restructuring in California and still are the 

right issues going forward. 

I will conclude my comments by outlining what I believe are the problems facing 

the electric markets and what steps policy-makers should take to ensure that customers have reliable and affordable energy supplies. 

The electric power issues for digital-economy companies are as follows:

1. Digital-economy companies require higher reliability than the utility is able to 

provide or will be able to provide in the future. 

2. The grid may not be able to provide sufficient capacity to match increasing demand. 

3. The actions of regulators and legislators may have unintended negative consequences 

4. The emerging technologies to address these needs may be inhibited from entering 

the marketplace. 

31

These issues must be addressed by legislators and policy makers simultaneously 

on four fronts. Some programs are currently underway and should continue or accelerated. These include:

1. Programs to improve efficiency and reduce wasteful energy consumption 

2. Siting and approval of transmission and distribution facilities to address local capacity limitations 

3. Incentive programs to reduce energy consumption during peak load periods 

4. Continued efforts to open the generation market and provide competitive pricing 

for new entrants 

However, these four solutions will not happen quickly enough to provide sufficient 

capacity in California to meet the growing capacity needs by the summer of 2001. 

Given these issues, what should a company like Oracle do to make sure that it 

does not have significant nor frequent interruptions of business? As with all other 

critical business issues and decisions, Oracle cannot assume others will solve the 

problem for them. Oracle has already begun that process by building its own substation and distribution system, by operating and maintaining this system, and putting in backup systems to prevent interruption of critical services. Now Oracle must 

consider other options to address an inadequate supply of power and a requirement 

for higher levels of reliability. 

One of the most promising ways to do this is with on-site or distributed generation (DG). DG is being discussed and considered in many forms. I would like to ask 

that you consider DG from the perspective of meeting the needs of the digital-economy companies. These companies do not want to sell power for a profit. They do 

not want to bypass the utility or strand assets that others may have to pay for. 

They do not want to circumvent safety standards that protect utility workers and 

the public. Digital-economy companies require the ability to install and operate innovative and necessary generation technologies in a timely manner. Conceptually, 

this is not a difficult or controversial proposition. However, the details to enable its 

implementation are critical. 

The following are required steps that will enable digital-economy companies to 

meet their electricity needs with onsite generation:

1. In order to prevent business interruptions and losses, digital-economy companies 

need to operate in parallel with the utility. To do this clear interconnection 

standards that the utility cannot alter or delay are needed. Timeliness is important to these businesses and ‘‘Internet speed’’ is a phrase not in the lexicon of 

the regulated utility. 

2. The utility may not be able to serve the growing electric requirements of an existing company or of new construction. If the utility’s ‘‘obligation to serve’’ cannot 

be met in a timely manner, then the digital-economy company’s ‘‘obligation to 

pay’’ for stranded assets should not apply. Customers should be relived of 

stranded cost payments and rules preventing privately owned construction of 

new electrical infrastructure. 

3. If a digital-economy company elects to use the grid as a backup source of power 

and has access to other backup generation sources, they should not have to pay 

for a bundled standby rate that includes both transmission and generation. 

Standby rates should be unbundled. 

4. The financial ‘‘playing field’’ for distributed generation must be fair. Distributed 

generation has a shorter life span than large centralized power plants. Thus, 

the depreciation schedules should be accelerated to promote more efficient technologies going forward and distributed generation owners should be encouraged 

to use the cleanest and most efficient technologies through investment or production tax credits. 

5. And finally, if the digital-economy company must take the necessary actions to 

secure its financial success in an uncertain regulatory environment and with inadequate electric capacity, they must still be required to do so in compliance 

with all existing environmental and regulatory statutes. 

CONCLUSIONS

One goal of restructuring was to promote private investment in new generation 

and lower energy prices through increased competition. Another goal was to encourage the development of new technologies, products, and services for customers. 

These remain extremely important goals. The current crisis in electricity supplies 

is proof that we must accelerate our efforts to offer more demand-side options to 

customers, including load shedding programs, time of use pricing, and the topic on 

which I have concentrated my remarks, distributed generation. Without quick action 

on these policy fronts, I anticipate that the problems we’ve been having this summer 

will be an order of magnitude worse next year. 

32

Therefore, I appeal to Congress to consider legislation that will expand customer 

choices to install distributed generation. Standardized interconnect policies, 

unbundled standby rates, and fair environmental standards for onsite generation 

should be a high priority for energy policy makers this fall. 

Thank you for the opportunity to speak before you today.

Mr. BARTON. Thank you, sir. And you actually finished within 5 

minutes. We appreciate that. 

We now go to Mr. Michael Shames, who is the Executive Director 

of Utility Consumers’ Action Network. 

Mr. BILBRAY. Now the pressure is on Michael. 

STATEMENT OF MICHAEL SHAMES 

Mr. SHAMES. Four minutes, 59 seconds. Here we go. 

Welcome, committee members, Congressmen, to San Diego, a region that in the last year has been racked by double if not tripledigit increases, not just in electricity, but natural gas, gasoline, 

housing, rental. Basic necessities of life in San Diego have substantially increased, thus creating trauma for all of its customers, all 

of its residents in a number of ways. 

Truly in San Diego, the cost of living index has turned into a cost 

of misery index. And that’s why it’s so important that you are here 

today. 

The facts are daunting. You’ve heard many of them. Five hundred and eighteen percent increase in electricity in the last 90 

days. I’m sorry, 100 days. We’re looking at 185 percent increase in 

the average bill for the residential customer. And as you heard 

from Mr. Tyler, substantially more for some small businesses. The 

impacts are dramatic. 

The statement that I have prepared for you, the written statement, is called, ‘‘Lessons Learned from San Diego.’’ And I’ve spent 

about 16 pages, which I will certainly not go over here, detailing 

what the problems are, what the lessons were that can be learned 

by this committee, and how some fixes can be made. 

All we ask in exchange for these lessons that we’ve offered to you 

is tuition. Now, it won’t be cheap, but our terms are flexible. And 

some of the means of payment that you can offer to San Diego in 

exchange for the very important lessons that we are providing to 

you are, first, please use whatever powers you have to impose upon 

FERC its obligation to find that the rate that have been charged 

to San Diego and to California are just unreasonable. Gentleman, 

they cannot be, not given the rate that have been imposed upon 

San Diego. 

Second, certainly we will not turn away any efforts or any offerings that you make to help us pay what is going to be a substantially large bill. The differential, as has been explained to you, between 6.5 cents and the current 21 cents is formidable. 

SDG&E estimates it’s probably somewhere in the billion dollar 

range. We expect that figure is lower, but certainly somewhere in 

the $400 to $500 million range can be expected. The San Diego 

economy cannot afford that, especially given the trauma that we’re 

feeling from all of the other basic necessities that have gone up just 

in this past year. 

Three important lessons that I want to share with you in the 2 

minutes I have left. First, lesson No. 1, is it’s going to take longer 

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for the market to respond than you may imagine. And I think a 

lot of theoreticians had imagined when deregulation had begun. 

Your facts, Congressman Barton, about generation in California 

may not be exactly accurate. Yes, a new generating plant is not 

open for a good 10 years, if not more, in California. A large reason 

for that was because we relied heavily on power from out of State 

that was cheaper. 

Only within the last couple of years did it seem as though it was 

economically feasible to build in California, and then we found 

there are a number of factors—not just environmental restrictions, 

but a number of factors that make it very difficult for generation 

to be sited. 

So it does take a longer time for the market to respond than I 

think people had imagined when the legislation was passed in 

1996. 

Lesson No. 2. It’s also far more complicated to deregulate or to 

change regulation. We spent 80 years building a very complex—I 

can assure you very complex—regulatory process. It’s going to take 

more than just 5 years or 10 years to tear that process apart. And 

we’re seeing that. 

We’re also seeing two truisms that I think you need to take to 

heart. First is that in addition to the fact that there will be a transition period that will take longer than people expected. The second 

truism is that weather is going to have a significant impact during 

this transition period. 

In the Western States, we’ve had extremely hot weather that’s 

caused this shortage of power and the increases in prices in California. You saw just 2 years ago the Mid West was racked by substantial increases in power demand due to a heat wave there. 

The Northeast this year looks pretty good. A lot of people tout 

Pennsylvania as being a model that should be followed, and yet 

Pennsylvania and New York have had an unusually cool summer 

with a lot of water, very wet, and yet in New York, power prices 

have jumped by 40 percent. Weather will be a major factor. And 

I think you needn’t necessarily assume that the California model 

is clearly the wrong model. 

I’m going to end there. My time is up. I’ll look forward to question and answer if we have opportunity. Thank you. 

[The prepared statement of Michael Shames follows:]

PREPARED STATEMENT OF MICHAEL SHAMES, EXECUTIVE DIRECTOR, UCAN 

The heralded pioneers that opened the western United States in 19th century 

could have taught California the following lesson: the first one in often never makes 

it out alive. Perhaps California’s pioneering spirit prompted it to be the first state 

in the nation to deregulate. But now, after a summer marked by 510% increases 

in energy rates for San Diego residents, the state’s regulators are retrenching, utilities are running for cover, consumers are publicly burning their utility bills even 

as the state’s politicians adopt rate caps and talk about windfall profit taxes, or 

even the dreaded ‘‘r’’ word—re-regulation. 

San Diego’s experience offers the Congress an unparalleled opportunity to learn 

from a bungled attempt at deregulation. And from this deregulation debacle, important lessons can be learned. As will be explained below, UCAN believes that there 

are five important lessons to be gleaned. They are:

• It takes the energy market longer to respond to market forces than anyone predicted. 

• It is more complicated and more time consuming to unravel the regulated energy 

markets than anyone predicted. 

34

• The absence of a safety net has caused tremendous damage to the most vulnerable customers. • Ensure effective monitoring—government can not be blind to what is occurring in 

the markets. • Don’t confuse customer education campaigns with wish-fulfillment marketing 

campaigns 

I. SETTING THE STAGE

The furor pertaining to electric deregulation stretches beyond California; the economic stakes in this political hot-potato affects the entire nation. New York is reeling from far more modest electric rate hikes than those seen in San Diego. Nationally, a booming economy fueled by an electricity-driven technological revolution has 

created unprecedented demand for new electricity capacity. 

Deregulation was heavily advertised in California to open the door to lower rates. 

The electric service industry restructuring model adopted in 1996 by California was 

intended to fundamentally change electric service and regulation in this state by infusing competition in the electric generation market to the benefit of all electric consumers and market participants. That legislation—AB1890—promised a 20% cumulative rate reduction by April 1, 2002 for residential customers, innovation, efficiency and increased quality in electric service, with a reduction of costly regulatory 

oversight; and ‘‘meaningful and immediate rate reductions for residential and small 

customers’’. 

And it promised to open the door to new technological innovations and greater energy efficiencies. Electricity generation technology in the form of a new generation 

of natural gas-fired combustion turbines were supposed to flow into the state like 

a second gold rush. New distributed generation technologies like fuel cells were supposed to give centralized generation plants a run for their money. And communications-based energy services offers value-added benefits unavailable in the regulatoroverseen monopoly world. 

These new innovations effectively forced changes in the way power companies are 

regulated. Throughout the world, new ‘‘disruptive’’ technologies are emerging which 

are changing the economics of electricity generation. The old paradigm of large centralized power plants linked to customers via complex webs of power transmission 

will soon be obsolete, replaced by new, low-pollution distributed generation.This 

transition into the new economics of generation have made traditional generation 

investments riskier. But it has pushed regulators into recognizing that the rules of 

the past may not apply to the future. 

It is this technological revolution that really has forced a change in the way the 

industry is regulated. But de-regulation has proven to be a challenging task—the 

dismantling of rules that took 80 years to develop more resembles a Gordian Knot 

than a Boy Scout loop knot. But if full re-regulation in states suffering from rate 

shock like California and New York occurs, will the needed capacity, along with 

technological innovations and increased productivity be thrown out with the bath 

water? Perhaps. 

UCAN submits that the transition to a ‘‘competitive’’ market for energy was 

tougher than California’s pioneers bargained for. It was more complicated, more 

time consuming and more unpredictable than California policy makers had expected. And this is compounded by the fact that the era of cheap natural gas prices 

appears to be ending. The price of gas has more than doubled, and more trouble 

looms on the horizon. This should come as a surprise to no one. As early as 1990, 

energy experts began warning about the cumulative effects of the utility industry’s 

‘‘dash for gas.’’ These experts predicted much greater volatility in electricity prices—

particularly in a deregulated market. 

They were right. And yet, the energy markets appear surprised. In the space of 

just a few months, San Diego ratepayers saw their electricity bills more than triple. 

No wonder these consumers are angry—and rightfully so. Nor has it helped the political climate that San Diego Gas & Electric’s affiliate, Sempra Energy, reported 

a 34% increase in its second-quarter earnings. 

II. SUMMER ELECTRIC STORM HITS STRIKES SAN DIEGO

On its surface, the dysfunction of the state’s electric market appears to have been 

quick and startling. Within the past 100 days, the price of electricity for residential 

consumers has tripled from 3.2 cents per kWhr to 21.4 cents per kWhr. Bundled 

with distribution, transmission and other charges, the overall energy rate zoomed 

from 11 cents to 28 cents per kWhr. For the ‘‘mythical’’ average residential customer 

who uses 500 kWhrs in the summer, this 182% overall rate hike translates to a 

monthly increase of $94. For small businesses, the increase is substantially larger. 

35

Natural gas prices have also soared. One year ago, the average residential customer paid 21 cents per therm. Today, SDG&E is charging core residential customers an average cost of gas in excess of 45 cents per therm. This 115% increase 

in natural gas prices has more than doubled the natural gas component of customers’ bills. Additional 40% increases are predicted for this coming winter; UCAN 

believes natural gas prices will be even higher. 

But it hasn’t been that quick, in reality. Active efforts to reform the state’s energy 

markets began in 1995, culminating in state law passed in 1996 that ordered the 

restructuring of the electric services market. Utilities’ roles changed, a new energy 

exchange was created and regulators were compelled to revise most of the regulations that had been on the books for decades. Since 1996, numerous Commission decisions have been issued (a rare few good, most really bad) that paved the way for 

San Diego to be exposed to an unregulated electricity market beginning in late 1999. 

Deregulation has also spawned many nasty forms of market manipulation that 

drives up prices and artificially constricts supplies. Recently, San Diego Gas & Electric called for an investigation into the under-scheduling of power and market manipulation by other investor-owned utilities in California that resulted in San Diego 

paying higher energy costs. And it has condemned profiteering by private generators. 

III. LESSONS LEARNED FROM SAN DIEGO’S BRUSH WITH DEREGULATION

Lesson #1—The Energy Market Is Not A Roadrunner 

When AB1980 passed in 1996, the predictions were that by 1998, California would 

be rich in new, clean-burning, ultra-efficient combined cycle turbines producing adequate power for California’s needs. Based upon these representations, the state legislature unanimously passed the deregulation law. Hindsight shows that the lawmakers were conned, much like Congress was misled by cable and telecommunication interests who predicted robust telecommunications competition if the 1996 

federal overhaul of the telecom industry were approved. It turns out that the market did not speedily respond to the challenges that faced it. In fact, the market 

turned downright timid. 

For many reasons, the promised generation did not materialized. Some of the rationales include:

• Complications in siting/locating plants—NIMBYism & shortage of acceptable sites 

• Unavailability of next-generation generating turbines 

• Restrictions on emissions. 

• Uncertainty about regulatory decisions pertaining to the deregulation law. 

• Unavailability of low-cost natural gas 

• Interference by monopoly distribution companies 

• Absence of uniform interconnection rules 

While observers assumed that the market would devise solutions to many of these 

problems, it turns out that the problems were not readily solvable by the market. 

For one example, stringent air pollution regulations. Under EPA rules, there are 

simply no surplus pollution emission credits available to allow the permitting of a 

new plant in San Diego. Moreover, clean air regulations were not developed with 

energy issues in mind, so the grandfather-oriented regulations need to be reformulated in order to allow new, cleaner burning plants to be located in emissions-constrained areas (which includes almost ALL of California). 

A second problem is more insidious. Through its Sempra affiliate, SDG&E has a 

monopoly over the local natural gas pipeline. And it is building competing power 

plants just over the borders, in Baja California and Nevada. That means potential 

competitors are blocked from entering the local generation market because they 

can’t get dedicated gas capacity and interconnection agreements at a fair price. 

Sempra isn’t eager to accommodate competitors to its own power plant investments—instead, its proposed solution is building more transmission lines (to its outof-region power plants) and changing its rate structure so that it collects more of 

its fixed costs through fixed charges. 

These are hardly the only non-competitive element plaguing the system. About 

seventy percent of the power sold in California’s Power Exchange is purchased by 

the state’s Big Three utilities. That’s an oligopsony by anyone’s standards. Predictably, these utilities have used their considerable market buying power to manipulate both bidding protocols and prices. This observation leads us to a major barrier 

to entry. Suppliers were reluctant to enter an oligopsony-dominated market, so only 

five companies took the plunge into the California generation market. Effectively, 

a five-company unregulated oligopoly was substituted for a three-company regulated 

oligopoly. 

36

Another underlying problem contributing to this problem has been market manipulation. For example, where generators bid to provide power at prices that approach 

the prevailing price-cap—a ‘‘band-aid’’ that has been applied. Only California has a 

market structure that is devoid of major controls on market power abuse. California 

allows generators and large loads to bid into any market they wish, without restriction, subject only to maximum price-cap. The predictable result is the equivalent of 

monopoly power which translates inexorably into higher prices at times when power 

is scarce in particular regions. 

Finally, there is little evidence that legislators anticipated the unbridled degree 

of greed that would be displayed by the generators. Many, if not all, of those companies that purchased California generating plants at inflated prices have largely recouped their investment within the first two years of ownership. Record profits and 

unabashed exploitation of market loopholes have been the hallmark of the California experience. 

For those who believed that the creativity of the market would result in rapid response to an energy deficit, the truth was crushing. It turns out that, like telecommunications, the market is slow to respond to a transitionary market where a 

powerful incumbent lays in wait for any overly ambitious challenger. 

Lesson #2—Deregulation Is Complicated Thing 

In the years following the passage of the 1996 law, the legislators and regulators 

failed deal with the following critical assignments necessary to making a competitive electricity market function:

• Ensure an adequate number of generators existed before deregulation began; • Protect against market power manipulation and abuses by those generators selling into the market • Develop effective bidding protocols and congestion management schemes • Develop effective congestion pricing schemes • Ensure a sufficient number of bidders purchasing power, thus resulting in some 

buying power manipulation • Define a clear role for utility distribution companies • Target demand responsiveness, thus giving customers the power to influence the 

market • Effectively promote distributed generation, utilizing smaller, decentralized generation 

The result was the absence of a level playing field for competitors coupled with 

glaring flaws in the California’s incomplete deregulation model. 

It is not as though the regulators haven’t had time. The Public Utilities Commission has been locked in lengthy, time-consuming, resource-draining regulatory hearings since early 1997 trying to sort out the very complicated and contentious issues. 

Well-resourced utilities have spared little expensive in protecting their interests 

and, in doing so, delaying or appealing decisions. The regulators never had a chance 

to complete the restructuring process in three years. It probably won’t in ten years. 

Lesson #3—The Absence Of A Safety Net 

What has happened in the San Diego region is politically impossible. Yet, it occurred. There is no region in the country that would tolerate the volatility experienced this summer. It is a testament to the civility and sophistication of San 

Diegans that there was no violence. But the reality is that electricity is not a service 

in which extreme rate volatility is acceptable. Ultimately, elected officials had to intervene and provide some legislatively mandated rate stability. 

The folly of imposing a volatile market upon electric customers during a time of 

shortage is perhaps the most obvious failure in this deregulation debacle. But perhaps the greatest failure of California’s deregulation, at this point, is the fact that 

consumers have been given no tools and few options with which to respond to rate 

volatility and no safety net to protect against an absence of such options. The worst 

case scenario was given no credence by regulators and thus they were totally unprepared for it. Consumer groups were forced to sit and wait for the disaster to hit. 

And when it did, they were ready. But even then, California regulators were content 

to fiddle. Finally, the state legislature was forced to step in and quell a growing 

ratepayer rebellion in San Diego. 

In addition to not preparing for Armageddon, regulators did little to assure that 

consumers had choices or tools with which to deal with rate volatility. For example:

• The demand-side of the equation has been largely overlooked. There are no ‘‘interval’’ or time-sensitive meters that enable small customers to obtain specific market signals about actual electricity use and costs. 

• There are few, if any, energy efficiency and load management programs available 

to small customers to help reduce or change the way in which they use energy. 

37

• Self-generation isn’t cost-effective yet • The rules for interconnecting to the utility power grid are not resolved. • Competitive energy providers have been reluctant to enter this unsettled market;only three such providers are offering mildly discounted prices to San 

Diegans. 

Without meaningful choices, customers are left powerless and increasingly frustrated. Perhaps the most galling aspect of these problems is that the customers who 

can least afford the rate hikes are being hit the hardest. For the average consumer, 

the $94 per month summer penalty that they have to pay squeezes a family budget 

already battered by a similar 70% increase in gasoline prices. Add to this the recent 

increases in telephone, cable and home rental prices and you have an unprecedented 

mugging of the household budgets of fixed-income and low-income customers. 

One such barrier is the product itself. The visionaries of deregulation see electricity as just one of a suite of products competitors can offer customers. Other products offered by these ‘‘network providers’’ range from simple billing and smart metering to a more lucrative bundling of electricity with cable, internet access, and 

phone services. It is within this broader suite of products where the real profit margins lay and where the real incentives to play in the electricity market exist and 

other states like Pennsylvania have recognized this and designed their deregulation 

model accordingly. 

Unfortunately, in California, competitors are effectively limited to selling electricity as a pure, undifferentiated bulk commodity. To further stifle competition, the 

Big Three utilities have also retained the power to do the billing and the metering 

for any customers they happen to lose to competitors; and, of course, they charge 

competitors too much for these services. The result: profit margins are simply too 

thin to attract enough players to make competition a reality. 

Lesson #4—Regulators Are Referees—They Can’t Wear Blinders 

Perhaps the most egregious mistake by the various regulatory and quasi-regulatory agencies involved in California’s deregulation was their ignorance of the market. A host of bodies purporting to be trying to create a competitive market appeared to be blind to what was really going on in the market. And they had little 

inkling of the significant rate volatility that could be expected; or if they knew, they 

kept it a well-guarded secret. 

With the new reliance upon the competitive market to provide basic electric services for small consumers, the new regulator’s challenges are, in the simplest of 

terms:

a. Promote a competitive marketplace with multiple buyers and sellers 

b. To arm all consumers with the information necessary to make informed choices. 

These two elements are essential components to a competitive market. If either 

of the two elements are missing, then a competitive market will not materialize. 

This assertion is a basic economic axiom that is not disputed by any reputable 

party. 

This underlying premise compels the state regulator to ensure a multi-seller/

multi-buyer marketplace using supply and demand forces. Supply means using market conduct and incentive to ensure multiple sellers are serving all customers. Demand means adequately informing all consumers of choices and ensuring that customers have the necessary economic incentives to choose among competitors. 

Upon the commencement of a deregulated market, the demand upon regulatory 

resources will increase due to the increased number of consumer complaints and inquiries spawned by an uncertain, transitional environment. A virtual or real direct 

access world would spawn a number of aggregators, brokers, marketers and other 

third parties offering services to individual retail customers or cooperatives. These 

transactions will likely spawn a multitude of complaints, disputes and disharmonies 

that will need to be addressed in a uniform and knowledgeable fashion. Similarly, 

in the telecommunications market, the amount of consumer choices and consumer 

confusion will increase 

During the transition years, demands made upon the new regulator’s staff time 

for complaint resolution and investigation will increase. Funding levels would have 

to increase in order for staff to be trained, armed and capable of fielding the slew 

of complaints. For example, in telecommunications California regulators have seen 

its staff swamped with a tidal wave of telecommunication service abuses ranging 

from benign, but irritating slamming (unauthorized switching of long-distance service providers) to outright scam artist activity. It has even found that the large incumbent LECs and the established IXCs have engaged in illegal or unethical sales 

practices. 

But because of the complexity of energy services, new and more widespread types 

of complaints are expected, such as have been spawned by telecommunications comVerDate Aug 2, 2002 06:03 Aug 07, 2002 Jkt 010199 PO 00010 Frm 00041 Fmt 6633 Sfmt 6621 E:\HEARINGS\67633.TXT pfrm12 PsN: 67633
38

petition. Contractual disputes will abound, as will new billing, service and jurisdictional disputes. Information-based infractions (misleading advertising, unrealized 

expectations, fraud) will also develop into huge growth industries in their own right. 

Current funding levels at most regulatory bodies are simply inadequate to deal with 

current demands upon the regulator. The future demands will likely dwarf current 

ones, thus further necessitating a new approach to dispute resolution. 

The focus of the state regulator’s challenge will be one of monitoring market conduct. Not only will it need to be vigilant for market dominance problems (a critical 

function that California regulators have proven themselves impressively inept) but 

it must also be attentive to whether the competitors are treating customers responsibly, are providing adequate service, and are not engaging in unintentional redlining. The problems will be developing at a fast and furious rate. Most regulators 

are woefully under-prepared to track, let alone respond, to these problems. 

Lesson #5—Customer Education Shouldn’t Be A Misinformation Campaign 

In the California restructuring proceeding, R94-04-031, the California Commission 

committed to a consumer education process. It asked stakeholders to create an education process. Pursuant to this group’s recommendation created a trust ‘‘to promote 

consumer education and understanding of forthcoming changes in the structure of 

the electric industry in California and to educate consumers about service options 

available to them in the newly competitive electric environment.’’ (D. 97-03-068) It 

was the last ‘‘correct’’ thing that the Commission did regarding consumer education. 

The trust concept was based on the model of the Telecommunications Education Trust set up by the California Commission with $16.5 million in fines paid by Pacific Bell as a result of alleged abusive and deceptive marketing practices. These 

funds were disbursed over a six year period to community groups and other grantees to provide basic telecommunications educational information, especially to underserved consumer populations. The CPUC spent upwards of $90 million during 1997 and 1998 in an awareness 

building campaign that turned out to be very controversial within the state. It created an Electric Restructuring Education Group (EREG) to advise the Commission 

on how to spend these monies. 

The main failing of the regulator’s adopted education plan is that it failed to adequately differentiate between leading customers to an information source and providing the substantive information. The former is focused on educating consumers 

on HOW to find information. The latter is focused upon trying to explain the 

changes to customers. Greater emphasis should have been placed upon the former 

during the first two phases of the effort. 

The plan appeared to be based upon an erroneous assumption that the education 

of consumers must be done via mass media and is not a simple message affording 

a useful tool to consumers. It recommended an expensive first phase mass media 

campaign during a very expensive media market period. Its assumptions were in 

error because it:

a. Underestimated the amount of independent mass media marketing that will be 

done by private marketers; 

b. Overestimated the quickness with which mass markets would be served by competitors. 

c. Assumed that a simple message will inadequate; 

d. Underestimated the value of targeted public education of opinion leaders; 

e. Undervalued the amount of free education time available via public service announcements and news programming. 

f. It did not anticipate consumer reaction to rate volatility. 

In delivering messages, it is more important to direct the available resources to 

the more inaccessible, hard-to-reach, small business and local government. Television and radio are good for reaching out to the population that is generally not 

at-risk of being underserved. Most small business owners and bill payers do not 

have much time to watch television or listen to the radio. The best way to reach 

these people is through trade journals and/or through trade association meetings, 

or mixers, or one-on-one contact through local CBOs (community-based organizations) such as California Small Business Association, Minority Business Council, 

Overall Economic Development Program, ethnic chambers, Wester Council for Construction, Business Link, Women Business Association and the California Community College System. 

The message(s) could have been very simple. In the first phase, it could have been 

supplemented by advertising done by the private market. Rather than buying large 

amounts of expensive airtime, the CPUC could have disseminated a simple message: 

‘‘Change is coming and by calling 1-800-MYPOWER (or some such toll-free number) 

I can get some useful info.’’

39

That, combined with an aggressive targeted education campaign to opinion leaders, community groups and traditionally underserved or vulnerable communities, 

should have been sufficient for the First Phase of the program. The expected free 

news and public service announcement time should have been adequate substitutes 

an for expensive mass media campaign. 

Alas, the Commission didn’t do that. Instead, it ran an awareness campaign that 

left consumers feeling confused and, ultimately, betrayed. They were promised savings if they switched providers and partook in the competitive market. As one current CPUC commissioner observed, ratepayers have good reason to believe that they 

were lied to—at a formidable $90 million cost borne by all ratepayers. 

IV. UCAN’S RECOMMENDATIONS

From these observations, UCAN submits that is not yet clear that deregulation 

is the problem in California. That is because the fundamentally flawed nature of 

the initiating legislation and its implementation by state regulatory agencies has 

not yet permitted functional market to work. Consumers have witnessed lousy regulation—not deregulation. Nor is re-regulation the solution. It may not even be possible;with most of the utilities’ power plants sold to third parties at inflated prices, 

the state may not want these old, inefficient units back. 

Yet, deregulation is now been tainted. And deservedly so. The dangers of relying 

upon a market to provide an essential commodity has been uncovered. States may 

appropriately conclude that the importance of reliability and rate stability may outweigh any benefits to be gained by a fully unregulated electric market. The Federal 

government should respect that decision. 

However, the federal government has an obligation to ensure that all consumers 

are afforded a minimum level of protection in those states that do adopt a deregulatory scheme. Before getting to these protections, it is important to establish principles for any deregulatory scheme. These principles should be considered in any 

federal deregulation bill as sacrosanct; and they should be required for any state 

embarking upon deregulation of energy. 

Essential Deregulation Principles 

The wholesale and retail electricity markets in California are broken. Putting 

aside the question of whether the process it is incomplete (as claimed by proponents) 

or fundamentally flawed (as opponents insist), it is almost inarguable that what has 

happened to San Diego is not acceptable and not an expected outcome of a competitive energy market. The following principles were not heeded in California and 

should be in other states.

• A competitive retail market is an impossibility in the absence of a workably competitive wholesale market. Conversely, a competitive wholesale market depends 

upon a reasonably functional and responsive retail competitive market. • Extreme rate volatility should not be imposed upon customers who can not effectively respond to such volatility • Electric service must be kept affordable and reliable • The ability of consumers to send price signals to energy producers must be enhanced • Energy reliability and prices can not be held hostage by profit-seeking electric 

generators—market power must be kept balanced; • Until the competitively market develops completely, energy efficiency and load 

management must be encouraged; • Ratepayers should not be locked into long-term, expensive fixes in this increasingly dynamic market; • Regulators have an important role to play in monitoring the market and making 

sure that is working; 

• Local governments have to play a bigger role in protecting its citizens and its 

economy from energy market volatility and they should have the tools to do so; 

• Consumers must be given useful information about the market and about their 

options; and 

• The local distribution company must not base its profitability on selling more 

power, but smarter power. 

Specific Elements of Any Federal Deregulation Law 

Some specific applications of the lessons learned from San Diego’s disaster are 

listed below. This list is in no way exhaustive. But it is representative of the kinds 

of minimal steps that must be taken by the federal government to ensure that no 

other city or region in this country experiences the damage suffered by San Diego. 

More effective customer protection, information, and education programs 

and a safety net for small customers. For retail competition to work, customers 

40

must be comfortable participating in the market. California’s SB477 is a reasonably 

decent model for the kind of consumer protections that should be a part of any state 

deregulation plan. California’s consumer education effort is the opposite—a lesson 

in what NOT to do. In educating customers, they must be given tools by which to 

take advantages of choices. Finally, they must be afforded some form of safety net 

which caps the risk that they can take. 

Support aggregation opportunities for small customers. Aggregating many 

small customers into one large customer can help overcome both the supply side and 

demand side barriers of marketing to and serving small customers individually. 

There are too few good examples of small customer aggregation projects. Any state 

law impeding aggregation of customers, especially by accountable public or quasipublic agencies, should be precluded by law. 

Major commitment to energy efficiency and load management. States must 

include a commitment to utilizing cost-effective, flexible efficiency and demand management programs as any part of a deregulation process. This effort should utilize 

the combined resources of public agencies, industry, consumer groups and environmental organizations. Long-term, capital intensive investments in transmission or 

central generation infrastructure must be compared to efficiency investments as a 

precondition for them being built. 

Expand net metering and other policies to open up the distribution system to alternative supply sources. California adopted a net metering statute, 

which allows small customers who self generate to return extra kilowatt-hours to 

the utility grid and ‘‘run their meter backwards.’’ Net metering offers opportunities 

for homes and businesses to connect small-scale wind and solar applications, save 

on their power bill and perhaps contribute increased efficiencies to the overall electricity production and delivery system. Any state precluding or unduly limiting consumer access to renewable alternatives can not be tolerated. Moreover, any state deregulation plan should have some component that addresses means by which renewable or emerging generation technologies will be promoted in that state. Innovation 

may be the true benefit of deregulation; states should not be allowed to create barriers to these innovations. 

Better definition of the role of the default provider. A default supplier provides regulated electricity supply to customers who do not have real supply alternatives or have not switched to a competitive supplier. The idea of several competing default suppliers is one that needs to be seriously considered. Whatever default supply method is ultimately used it should not hamper the development of 

competition, where competition is workable. However, an effective default supply 

program is essential and must be an early component of any state deregulation 

plan. Retail competition should not go forward without a well-defined role for incumbent distribution companies. 

Distribution system policies to support efficiency and resource diversity.

Some experts see energy distribution monopolies of the future as ‘‘converged’’ companies that deliver electricity, natural gas, and even water. In their view, future distribution monopolies would be fully separated from production assets and would 

play an important role in ensuring reliable, high quality service and supporting public purposes in a competitively neutral way. Future distribution providers could also 

help shape an economically efficient and environmentally sustainable supply infrastructure through the use of distributed generation. Also more thought also needs 

to go into distribution rate design for deregulated markets—they must not be designed to impose fixed charges upon small customers. Such charges discourage efficiency and the cost-effectiveness of alternative, distributed generation. These matters must be resolved a priori, that is, before a market is opened to competition. 

V. CONCLUSION

UCAN requests that this Committee ensure that the principles and essential elements discussed above be incorporated into any federal legislation that sanctions energy deregulation. It also requests that special attention be paid to reducing barriers 

to entry by emerging technologies and that, in fact, the government commit to making subsidies available to promote these alternative generation options and enhanced energy service services available to large and small customers. Ultimately, 

it will be the generation and energy service technologies that will make any deregulation scheme a successful one. These, more than anything else, will ensure that 

competition blossoms and that real choice exists for small consumers.

Mr. BARTON. Thank you, Mr. Shames. 

41

We’d now like to hear from Mr. Jan Smutny-Jones, who is Executive Director of Independent Energy Producers here in California. 

Welcome, Mr. Jones. 

STATEMENT OF JAN SMUTNY-JONES 

Mr. SMUTNY-JONES. Thank you, Chairman Barton and members 

of the committee and San Diego Congressmen. 

I am Jan Smutny-Jones. I’m the Executive Director of the Independent Energy Producers. We represent a large portion of the generation community here in California. Not just gas fired, but also 

a significant amount of the renewables, such as the wind, biomass 

and the geothermal companies down in the Imperial Valley, which 

are a part of Mr. Hunter’s district, if I remember correctly. 

Our view of this is the fundamental cause of both the high prices 

and reliability problems that California has been facing is the lack 

of power plant construction actually keeping up with the demands 

of a booming economy. 

And let me put this in sort of a back of an envelope perspective 

for you just so you understand. Since restructuring began in 1998, 

we’ve had three different summers. The peak has grown by about 

1,000 megawatts per year. If you figure the average size of a power 

plant is about 500 megawatts, that’s six power plants in the last 

3 years. 

Mr. BARTON. What is the peak right now, Mr. Jones? 

Mr. SMUTNY-JONES. The peak we hit at the ISO this summer, I 

believe, was 46,000. 

Mr. WINTER. The peak that we—— Mr. SMUTNY-JONES. Overall it was 50. It was over 50. 

Mr. WINTER. Yeah. The peak, we had about 45, but in fact, we 

had curtailed so much load that we’re really looking at peaks in the 

47, 48,000 range. 

Mr. BARTON. Thank you. 

We won’t take it away from your time. 

Mr. SMUTNY-JONES. That’s fine. In addition to that, growth in 

the west, which Mr. Shames just referred to, has gobbled up about 

an additional 2,000 megawatts of power we used to be able to import from Arizona and the northwest. That’s another four power 

plants. 

So just to get back to where we started, just in terms of the 

amount of supply out there in the last 3 years, we would have 

needed to add 10 power plants. That hasn’t happened. That’s the 

bad news. The good news is, help is on the way. 

But I also want to make it very clear that deregulation is not the 

cause of power supply shortages in California. Rather, it’s a legacy 

of a failed regulatory process that failed to add power plants in the 

1990’s. We did, in fact, have a process that went to great lengths 

to try to identify needs for new power plants. There were supposed 

to be about 1400 megawatts added in 1999 and the year 2000. That 

was back in 1994, 1995 timeframe. We saw all that coming. 

A couple of utilities out here opposed that, went to FERC, got 

that decision overturned. Those power plants didn’t get built. They 

would have come in handy right about now. 

That was the old world. Okay. And part of the reason my membership is supporting deregulation trying to move to a different 

42

world is basically because we believe that in a more deregulated 

market, you will see more power plants being constructed. 

In fact, right now, as Mr. Keese indicated, there is a significant 

amount of activity going on at the California Energy Commission. 

We have five plants that currently have been licensed, four under 

construction. There’s another 10 or so in the process right now and 

a whole slew of them about to follow that. 

That’s good news. These are new state-of-the-art clean resources 

that will not only add needed capacity to California, but will be environmentally beneficial as well. Right now we’re estimating it’s 

about $10 billion worth of new investment in there. 

So it’s very important to recognize that California has attracted 

this new capital base, and these people are here to build power 

plants. Maybe they make money, maybe they lose money, but it’s 

their money, and the rate payors aren’t going to be basically captured or held to that as we had with the old stranded cost problems 

that developed in the 1970’s and 1980’s. 

Our obvious concern is is that we don’t try to reregulate, because 

those dollars can go elsewhere. This is an international market. 

We’re competing for turbines internationally, and we need them 

here in California. 

The California legislature has enacted some legislation that we 

believe will help speed along siting of power plants. Mr. Keese referred to that. Governor Davis did, in fact, order the agencies here 

to expedite review of various applications before them while still 

maintaining the integrity of environmental law. This is California. 

We have environmental laws that people take very seriously, and 

we’re not asking those be overturned, but we do believe you can 

trim months off of the siting process. 

From the standpoint of what can the Federal Government do: 

one, accelerate necessary Federal review of permits. That’s a relatively easy thing to do. When an application comes in from a 

power plant, take it out of the bottom of the ‘‘in’’ box, put it on the 

top. You don’t have to say yes, but you have to expedite that. 

Second, and it’s in my testimony, there are some Catch-22’s with 

respect to how the Federal Coastal Zone Management Act complies 

with California laws who are literally in a Catch-22—I’m almost 

done—inside a power plant——

Mr. BARTON. Go ahead about 2 more minutes because I cost you 

a minute when I asked the question. 

Mr. SMUTNY-JONES. Okay. I’ll take you up on that. 

Last but not least in this is giving the Environmental Appeals 

Board of EPA the discretion of all other appellate bodies out there. 

We have a real world experience where a power plant in Northern 

California jumped through every firey hoop, is going to be the 

cleanest gas plant built anywhere in the world. 

Okay. One person sent a letter. Automatically, that plant got 

stayed for 4 months. Notwithstanding the fact that every regulator 

that reviewed it thought it was a good plan. So basically, what 

we’re asking is that EPA Appeals Board apply the same appellate 

process that if you went to any other court or any other appellate 

body, that you basically have to show that you’re going to probably 

win this and be irreparably harmed if you didn’t. 

43

1 IEP was founded in 1981 to represent the interests of non-utility electric generators selling 

electricity to the state’s investor-owned utilities under long-term contracts. Over the next fifteen 

years, the industry grew to nearly 10,000 MW and made California a world leader in efficient 

industrial cogeneration and renewable energy technologies. 

In 1996, the State Legislature fundamentally changed the California’s electric industry with 

the passage of AB 1890. As a result, California’s investor-owned utilities sold all of their gasfired power plants and their geothermal power plants. 

The purchasers of these assets—some of the largest, most innovative energy market participants in the world—are now members of IEP. As a result, IEP now represents the owners of 

most of the electric generation in California. Moreover, IEP’s membership includes owners and 

developers of virtually every electric generation technology in California. The technologies include conventional and cogeneration gas-fired power plants, coal-fired cogeneration plants, geothermal plants, solar plants, biomass plants, and wind farms. 

IEP represents its members in a variety state legislative issues and administrative proceedings. The organization is committed to maintaining a viable, competitive electric generation 

industry that can meet the state’s growing electricity demand and reliability needs. With proper 

state leadership and an ongoing state commitment to a competitive electricity market, the industry is poised to invest billions of additional dollars in the California economy to these ends. 

So in closing, I would just say that what we need to be doing in 

California is giving customers meaningful choice so they actually, 

you know, have something to choose from, and building out the 

generation. It is very critical. This is—short of repealing the laws 

of supply and demand—and I haven’t heard anybody suggest that 

that’s where you want to go—it’s very important that we build additional supply out there so we’re able to meet the needs not only 

of people here in San Diego, but the rest of the west as well. Thank 

you very much, Mr. Chairman. 

[The prepared statement of Jan Smutny-Jones follows:]

PREPARED STATEMENT OF JAN SMUTNY-JONES, EXECUTIVE DIRECTOR, INDEPENDENT

ENERGY PRODUCERS

Mr. Chairman, members of the Committee, I am Jan Smutny-Jones, representing 

the California Independent Energy Producers Association.1 IEP represents the independent generators and marketers doing business in California. Its members own 

or operate over half the generation in California and all of the proposed new generation. IEP has been an active participant in restructuring efforts in California over 

the past decade, a fact reflected in my service as Chairman of the Board of the California Independent System Operator. I emphasize that my comments this morning 

are solely on behalf of IEP. 

Thank you for your invitation to address what has become front page news in 

California: this summer’s high retail electricity prices and threats of electricity 

blackouts. John Stout of Reliant Energy, one of IEP’s member companies, will testify this morning regarding the reasons for price volatility in California’s retail and 

wholesale markets. I will not repeat John’s testimony, other than to say that IEP 

concurs with his key points. Most fundamentally, John is correct in his conclusion 

that lack of supply is the fundamental driving force behind both the price and reliability problems making headlines in California. My testimony focuses on the causes 

of this lack of supply, what solutions are already underway, and some specific further steps that the federal government might take to help solve this problem. 

Although this problem only hit the front pages this summer, the seeds of California’s current electricity shortage were planted over many years, both on the demand 

side and the supply side. They were planted on the demand side in the emergence 

of the vibrant ‘‘dot.com economy’’ of which Californians are justly proud. But as we 

advance the frontiers of ‘‘e-commerce’’, let us not forget what the ‘‘e’’ stands for. Indeed, our entire economy and lifestyle should have an explicit ‘‘e’’ in front of it. Take 

a brief moment to consider just how fundamental electricity is in our everyday lives. 

When the electric grid fails, it is not just the lights that go out. Computers, automatic teller machines, traffic lights, air conditioning, television, radio, public transportation, and millions of other devices upon which we depend demand electricity. 

Everyday we plug more and more of these devices into our electric grid, taking for 

granted that some power plant somewhere will generate when we flip the switch. 

Given California’s booming economy, not to mention its growing population, it is 

entirely predictable that demand for electricity is booming as well. Indeed, in the 

famed Silicon Valley, demand for electricity is growing at 5 per cent annually. In 

some California locations electric demand this summer reached levels which until 

44

recently were forecast to be more than a decade away. The California Energy Commission’s 1998 statewide electric demand forecast for the year 2000—then only two 

years into the future—was revised upward last June by a full 5.1 per cent or 2,640 

megawatts. And that, of course, is just the size of the revision in one year, not the 

overall growth in demand. Moreover, this growth is occurring throughout the West, 

not just in California—which means that electricity once available to California 

from other states now serves local loads. 

Other seeds of today’s shortage were planted on the supply-side—or, to be more 

accurate, the seeds of a solution were killed. Despite its growing population and 

economy, California’s former regulated monopoly regime brought construction of 

new power plants to a virtual standstill beginning in the late 1980’s. Although electricity demand grew by nearly 10,000 megawatts during the 1990’s, California’s lead 

agency for thermal power plant licensing permitted only 1,620 megawatts of new 

generation. Moreover, of these permitted facilities, only 1,076 megawatts were constructed. For example, in the case of San Francisco Energy Company’s proposal for 

a 240 megawatt facility in San Francisco, local government opposition killed the 

project despite its ostensibly preemptive state license. 

Lest my Washington friends jump to the ‘‘excessive California environmental regulation’’ explanation, however, I must tell you that is not the problem. Modern 

power plants can meet even California’s notoriously stringent environmental standards. In fact, by reducing the operation of older, dirtier and less efficient generation, 

new power plants substantially reduce air and water pollution from power plants 

overall in California. While the ‘‘NIMBY’’ phenomena is certainly alive and well, the 

sophisticated major environmental groups understand and support the construction 

of state-of-the-art power plants in markets, such as California, where the alternative 

is continued reliance on much dirtier facilities. 

No, the seeds of the supply shortage were not planted by environmentalists. They 

were planted by economic regulators who removed the incentives for new power 

plant construction. Indeed, those that deprecate California might be surprised to 

learn that the most egregious California electricity supply decision of the past decade actually occurred in Washington at the Federal Energy Regulatory Commission. 

I refer to the FERC’s 1995 decision granting the petitions of two California utilities, 

Southern California Edison and San Diego Gas & Electric Company, to overturn a 

decision of the California Legislature and the California Public Utilities Commission 

that would have resulted in the construction of 1,400 megawatts of cost effective 

new gas and renewable generation. These projects would be on-line today, generating clean power at prices between 3.5 and 6 cents per kilowatt hour under longterm contracts, had the FERC not overturned the state’s decision authorizing the 

contracts. 

Of course, California made its own flawed supply decisions in the regulated market as well. The California Energy Commission, in determining the need for new 

power plants in 1992, chose to rely upon over 8,000 megawatts (by 2003) of ‘‘uncommitted conservation’’—that is, conservation representing a ‘‘future commitment’’ beyond the conservation deemed enforceable at the time. (This is in addition to the 

Commission’s reliance upon ‘‘committed conservation’’ such as adopted energy efficiency standards or other existing programs.) Not surprisingly, this ‘‘uncommitted 

conservation’’ left California prior to the wedding without reducing real-world demand. 

In short, the problem California is experiencing today is the result of growing demand and the failure of the economic regulatory structure in place before deregulation. That former regulated monopoly regime failed to acknowledge the need for new 

power plant construction over the past decade or more. This fact was a major reason, though not the only one, underlying the decision of the California Legislature 

to fundamentally restructure California’s electricity market in 1997-98. 

That restructuring has been strikingly successful in attracting proposals for private sector investment in new power plants in California. Indeed, I must tell you 

candidly that even I have been shocked at the swiftness of the private sector response, especially given the economic and regulatory risks involved in constructing 

new power plants in a fledgling market. In the four years since the California Legislature enacted AB-1890, and as a direct result of it, over 40 new power plants requiring the investment of over 10 billion dollars have been planned or filed for licenses in California—all with private sector capital and no guarantee of capital recovery other than the opportunity to compete in a real market. 

Just the projects which have already filed for licenses would total over 14,000 

megawatts—greatly reducing the threat of blackouts. They will compete with existing generation and each other to reduce consumer prices. And, because of that competition, older, inefficient, more polluting facilities will either operate less or be reVerDate Aug 2, 2002 06:03 Aug 07, 2002 Jkt 010199 PO 00010 Frm 00048 Fmt 6633 Sfmt 6621 E:\HEARINGS\67633.TXT pfrm12 PsN: 67633
45

placed altogether, resulting in overall reductions in air emissions, water use and 

other environmental impacts system-wide. 

The problem, of course, is that most of these power plants are still on the drawing 

boards or in the hearing room, not under construction or operating. To be precise, 

of the announced projects, only five projects totaling 3,643 megawatts have been 

granted licenses to date or are under construction. 14 additional projects totaling 

8,015 megawatts are in the licensing process. Others will be filing for licenses in 

the near future. 

Governor Gray Davis has made processing of these license applications a top state 

priority. While making clear that all applicable standards will be enforced, the Governor has asked state agencies to give priority to reviews of power plant applications. 

The California Legislature has also already acted to address both the supply side 

and demand side problem in California. Within the past two weeks, the Legislature 

enacted bills to increase demand responsiveness, cap retail prices in San Diego and 

expedite the siting of power plants. The governor is expected to sign these bills into 

law in the next few days. 

The legislation to expedite the siting of power plants is limited to temporary installation of simple cycle peaking facilities and facilities which have no significant 

environmental impacts and are in compliance with all applicable laws, standards 

and ordinances. The goal of this legislation is to accelerate the licensing of facilities 

without compromising environmental standards. This is an objective which IEP 

strongly supports. 

As you know, power plant licensing is primarily in the hands of the states. However, power plants are subject to numerous federal laws and regulations. Thus, 

without compromising the substance of these requirements, the federal government 

can assist California by making its administration of these requirements more efficient and less ambiguous. 

Perhaps the greatest single thing the federal government can do is simply to determine compliance with its standards more quickly and efficiently. Anything this 

committee can do to accelerate key federal permits such as U.S. Fish and Wildlife 

Service biological opinions or Environmental Protection Agency determinations 

under the Clean Air Act would be an important step. 

There are also two other very specific things that the federal government can do 

to accelerate power plants without compromising federal standards. The first concerns determinations under the Federal Coastal Zone Management Act. As you 

know, California has numerous facilities along its coast, many of which are likely 

candidates for replacement and repowering proposals. These proposals are particularly beneficial because they directly replace older, more polluting facilities with 

state-of-the-art power plants. There is, however, a ‘‘Catch 22’’ created by a conflict 

between federal and state law regarding who determines compliance with the Federal Coastal Zone Management Act. 

When the California Energy Commission was created in 1974 by the California 

legislature, the legislature sought to consolidate all permitting issues into that agency. As part of that effort, the legislature enacted a statute which prohibits the California Coastal Commission, the agency that would otherwise determine compliance 

with the Federal Coastal Zone Management Act as a delegate of the federal government, from performing that function. The state sought to transfer this delegation 

for power plants to the California Energy Commission. However, according to the 

California Coastal Commission, federal law does not recognize the state law on this 

issue and prohibits any state agency other than the California Coastal Commission 

from determining compliance with the federal law. Thus, power plant developers in 

California have been told by the Coastal Commission that the agency is simultaneously prohibited by state law from making the determination, yet it is the only 

agency under federal law which can do so. The federal government could remove 

this ‘‘Catch 22’’ by designating the California Energy Commission as the entity 

which determines the conformance of power plant proposals in the coastal zone with 

the requirements of the Federal Coastal Zone Management Act. 

Another area where the federal government can help concerns expediting the resolution of frivolous appeals to the Environmental Protection Agency’s Environmental 

Appeals Board. Under current law, an appeal to the Environmental Appeals Board 

automatically stays the challenged permit and therefore prevents commencement of 

construction regardless of the merit of the appeal. In other words, unlike virtually 

every other appellate body, the Environmental Appeals Board lacks the authority 

to determine whether the merit of an appeal warrants a stay of construction. It has 

no choice other than to stay construction pending the final resolution of the appeal 

which can take many months. Using this mechanism, a single individual in California, by writing a one-page letter, was able to delay construction of the first of 

46

California’s post-deregulation power plants for several months with claims that were 

utterly without merit and had been rejected by the EPA staff, the California Energy 

Commission and ultimately by the Environmental Appeals Board. Recognizing the 

urgency of the situation and the frivolity of the appeal, the Environmental Appeals 

Board gave this appeal a priority and dismissed it as quickly as it could. Nonetheless, because the appeal automatically stayed the necessary permit, the project was 

significantly delayed, its costs were increased and its ability to meet the summer 

peak of 2001 was jeopardized. 

The solution to this problem is to give the Environmental Appeals Board the same 

sort of appellate injunctive relief role that is typical of other appellate bodies. Specifically, the filing of an appeal with the Environmental Appeals Board should be 

required to justify the need for a stay of the challenged permit based upon the likelihood of success of the appeal and the relative harms to the appellate and the public 

interest. This would be an important reform as many opponents of power plant 

projects in California have become very aware of their ability to significantly delay 

projects in this fashion at essentially no cost to themselves. 

In conclusion, the law which is most affecting price and reliability in California 

is the law of supply and demand. Obviously, no one can amend that law and it will 

continue to apply regardless of the regulatory structure. The solution to California’s problems lies in reforming the retail market as discussed by John Stout and by accelerating the licensing of the many projects which deregulation has brought forward consistent with applicable environmental standards. While these solutions are 

primarily the responsibility of state government, the federal government can support the state’s efforts by accelerating its own reviews, addressing jurisdictional ambiguities and applying standard appellate rules regarding construction stays to federal environmental appeals.

Mr. BARTON. Thank you, Mr. Jones, and thank you for changing 

your schedule to appear. You’re one of the witnesses that I really 

wanted to hear from, so I appreciate you coming. 

We now want to hear from Mr. Greg Barr, who is the Vice President of Power Generation for Solar Turbines. 

STATEMENT OF GREGORY BARR 

Mr. BARR. Thank you, Mr. Chairman, members of the Commission and local Congressmen. 

Mr. BARTON. Use that big microphone because I think it’s a little 

bit better. 

Mr. BARR. Okay. Solar Turbines is a wholly-owned subsidiary of 

Caterpillar, Incorporated, located here in San Diego. And we, along 

with our 3,000 employees and other members of the community at 

large, have been experiencing extraordinarily high electricity prices 

for the last few weeks. 

We are a manufacturer of medium-sized industrial gas turbines. 

And together with Caterpillar’s engine division, we produce 20 

gigawatts of generating capacity per year. That’s the equivalent of 

about nine Hoover Dams. 

I’m honored to be here. My role in the company is to lead our 

power division. I’m not an expert on utility regulatory and legal 

structure. However, it is clear that the new regulatory structure 

did not fully anticipate the electricity market dynamics. 

Restructuring has proceeded slowly. Market forces work rapidly. 

Price signals would normally prompt supply and demand responses. But those responses have been blocked to date by residual 

regulation and continuing uncertainty. 

The heart of the problem today is a shortage of generating capacity. We are Solar Turbines make generating capacity. As such, we 

believe we are part of the solution. 

The gas turbine generators that we make are ideally suited for 

distributed generation. And by distributed generation, I mean genVerDate Aug 2, 2002 06:03 Aug 07, 2002 Jkt 010199 PO 00010 Frm 00050 Fmt 6633 Sfmt 6602 E:\HEARINGS\67633.TXT pfrm12 PsN: 67633
47

eration cited at industrial, commercial and institutional facilities 

where the heat and power is used in their process, as well as generations cited at distribution and transmission substations that respond to periods of peak demand. 

There are several reasons why distributed generation is a critical 

part of the solution that you are looking for today. It has very short 

lead time. Barring regulatory barriers, a distributed generation 

unit can be operational within 1 year. 

It has attractive and predictable economics because it is customer-driven. However, regulatory uncertainty can undermine investment criteria and economics. It creates supply side diversity, 

which dampens market price swings and addresses concerns over 

market power. 

It reduces transmission and distribution system constraints rather than adding to them because it is located near the consumer. 

This can defer needed additions to the T and D system. And in 

many cases, it can actually reduce emissions from existing industrial locations by as much as 50 percent. 

Economically and environmentally, distributed generation makes 

sense. Both Federal and State governments should work to eliminate barriers to distributed generation. In particular, Congress 

should create uniform national standards for interconnection of distributed generation. Congress should work to eliminate rate policies that penalize self-generators and instead should credit them 

for the benefits they create. 

Where generation ownership is not prohibited by State law, utilities and their affiliates should be permitted to own and operate distributed resources. Congress should work to eliminate any requirements that distributed generators be regulated as public utilities. 

We need an electricity market structure that is efficient economic 

and fair to all consumers in the way that only an open and competitive market can be. Distributed generation can play a major 

part in such a market. 

Thank you very much, and I will be happy to take any questions 

that you may have on my testimony. 

[The prepared statement of Gregory Barr follows:]

PREPARED STATEMENT OF GREGORY BARR, VICE PRESIDENT, SOLAR TURBINES

INCORPORATED

INTRODUCTION

My name is Gregory Barr and I am Vice President of Solar Turbines Incorporated. 

On behalf of my company and our three thousand employees here at our headquarters in San Diego, I am honored to have this opportunity to testify at this important hearing. We thank the Subcommittee for holding this hearing to assess the 

problems that have occurred in our newly restructured electricity market and to 

consider our recommendations for addressing and solving these issues. 

Solar Turbines is a leading manufacturer of combustion gas turbine generator 

sets. Of the 11,000 Solar combustion gas turbines installed around the world, over 

4,000 generator packages are sited in the United States. Solar Turbines is currently 

working in partnership with the United States Department of Energy to develop 

high efficiency, low emissions, low cost advanced turbine systems (ATS) specifically 

designed for distributed power generation. Solar Turbines is owned by Caterpillar 

Inc., the world leader in the manufacture of earthmoving and mining equipment. 

Caterpillar also makes reciprocating engines, often used for power generation. Together, Caterpillar Inc. and Solar Turbines are one of the largest manufacturers of 

electrical generation capacity in the world, producing each year about twenty 

gigawatts of generating plant—the equivalent of nine Hoover Dams. 

48

As you well know and as you have heard from other witnesses this morning, the 

restructured electricity market in California is enduring a very rough ‘‘break-in’’ period. Consumers and businesses in this area have been involuntary participants in 

what has effectively been a massive initial experiment in electric industry reform, 

and the costs to them have been extreme. Solar Turbines urges this Subcommittee, 

the rest of the Federal government, and the California state government to work 

closely and quickly to alleviate the huge economic penalty that has effectively been 

imposed on this region. In the same way that other regions and states will be able 

to benefit from the lessons learned here about restructuring, it is not unfair to ask 

that the costs of the experiment be shared more widely, at least for the benefit of 

the residential and small commercial customers who are least able to cope with 

them. It is perhaps ironic that Solar Turbines, as a major manufacturer of electricity generating capacity, has itself been subject to extraordinarily high electricity 

rates because of what is generally recognized to be a shortage of electricity generating capacity. 

In this testimony, Solar Turbines will provide its own perspective on the general 

problems, but we will not attempt to compete with the elaborate analysis of causes 

and effects the Subcommittee will have heard from other witnesses. Instead, my testimony will focus on my company’s role as a part of the solution through its business 

of providing equipment for high-efficiency, low-emission distributed generation of 

electricity. I will note the barriers that have so far prevented greater application of 

distributed generating resources and the policy changes needed to remove those barriers. 

THE NATURE OF THE PROBLEM

As the electricity industry is a highly complex group of enterprises and activities, 

so too the current problems are highly complex. The essence of the current problem, 

stated as simply as I can, is that there is a remaining mismatch between the new 

market structure designed and embodied in legislation and the actual market dynamics of the electricity business. 

There has been a general consensus that in the electricity industry, as in other 

industries that were once thoroughly regulated, it makes sense to allow the competitive forces of the free market to work their magic in providing price signals to consumers and suppliers to the extent possible, gaining economic efficiency as a result. 

Yet the same consensus holds that many electricity industry activities, such as 

transmission, distribution, facility siting, and environmental emissions, must remain subject to regulation in the public interest—these are not activities that can 

be simply deregulated. 

Determining how to restructure once-pervasive regulation to allow market forces 

to operate where they can operate is not an easy task. Solar believes that it would 

have been unreasonable to expect that electric industry restructuring could have 

proceeded without any ‘‘glitches.’’ By their nature, markets are unpredictable. Newly 

created markets are particularly unpredictable. For this reason, Solar Turbines is 

unwilling to join in attempting to assign blame to anyone for the problems that have 

been experienced. The key questions are what should be changed to make the new 

structure work better and how should the impacts of the problems to date be alleviated. 

A major part of the problem has come from the fact that the markets have moved 

on while the complex decision-making process of restructuring was unfolding. Yet 

the uncertainties about the new structure of regulations and market incentives kept 

those who would earlier have responded to market developments by adding capacity 

and transmission from doing so. Key market changes included the following:

• Electricity demand grew strongly, driven by resurgent economic growth in California following several low-growth years in the early 1990s. 

• Peak summer weather conditions have added seasonal emphasis to this demand 

growth. 

• New capacity investment awaited clarity in the new institutional roles of the utilities and other market participants. It is simply not feasible to make multi-million-dollar commitments of resources to a new generation plant if one is uncertain about the terms under which that plant can be operated, or even whether 

that plant must be sold to others. 

• Similarly, new transmission investment was not made, leading to the perpetuation and growth of transmission bottlenecks. Transmission bottlenecks isolated 

and amplified generation capacity shortages. 

• On the demand side of the market, very few consumers have the flexibility or 

timely information to be able to react to market price signals by adapting their 

usage, creating an artificially inelastic short-term demand curve. 

49

While regulators were focused on reshaping the fundamental regulatory structure 

of the electric industry, there was not similar focus on the underlying siting, permitting, and environmental regulations applying to electricity facilities. As a result, 

once the signals began to emerge from a newly competitive electricity market, the 

potential participants were unable to respond in a timely manner. They continued 

to be subject to the welter of inflexible, time-consuming, multi-agency regulations 

and requirements that not only delayed new generation, but added significantly to 

its costs and to the uncertainty of cost recovery that creates business risk. In a market, higher business risk means a higher minimum price threshold. It is not merely 

hunger for profits, but also knowledge of the risks from continued uncertainty that 

leads market participants to seek maximum returns when returns are available. In 

short, regulatory speed and flexibility have not matched the market’s speedy evolution or new requirements. 

There has also been a failure to recognize that the very mechanics of the electricity industry have also been changing as a function of new technology. In particular, new small-scale electric generation technologies have in recent years created 

the potential for a proliferation of generators sited near load centers. These small 

power sources include not only the turbines manufactured by Solar Turbines, but 

other technologies that are emerging. 

Restructuring policy-makers have been slow to recognize that the new regulatory 

structure needed not only to accommodate competitive electricity markets, but also 

to accommodate the new potential for distributed generation. In the same way that 

the old monopoly electrical utility industry paradigm (generating, transmitting, distributing, and selling all by the same company) is being restructured, Solar Turbines believes that the old paradigm of large remote power plants, long-distance 

high voltage transmission, and networks of distribution wires will also undergo dramatic reconfiguration. The emerging electricity industry will be much more a network of both suppliers and consumers, linked together for optimum reliability and 

uniformity by a grid of distribution and transmission wires, and joined in a transparent, broad, and seamless market for electricity supply pricing. So far, the regulatory restructuring has been too much designed for the old industry, not the new 

one. 

HOW CAN DISTRIBUTED GENERATION HELP SOLVE THE PROBLEMS?

Distributed generation, i.e., generation sited in numerous places on the grid, and 

particularly near load centers, offers solutions to numerous issues confronting us 

today. In the face of generating capacity shortages, distributed generation offers 

multi-faceted help:

• Assembly-line production of medium sized distributed generation units allows for 

rapid response to orders, and therefore promises—depending on regulatory and 

permitting delays—exceptionally short lead-times to achieving new capacity on 

line. A typical turn-key combined heat and power installation for continuous operation can be completed in one year. A peaking unit can be ready to meet periodic requirements typically in about nine months. 

• Distributed generators are sized precisely to the need they are intended to fill. 

Because they are linked to the demand conditions of a particular user or area, 

demands which are therefore more easily projected, there is no risk of over-investment which has in the past created problems for electric rates and utility 

company financial health. 

• Distributed generation customers can obtain total certainty of the capital costs of 

their generating equipment, allowing them valuable economic predictability and 

autonomy. While they may still be subject to fuel price uncertainty, today’s fuel 

markets allow hedging in futures and other derivative transactions in a manner 

that can also make fuel prices predictable. Distributed generators can thus protect themselves significantly from the variability of the broader market. 

• Perhaps more important to the questions confronting this hearing, distributed 

generators can help dampen the market-price swings that may otherwise occur 

in the broader market: when prices are high, they can self-generate and take 

demand out of the surging market, perhaps also selling additional power into 

that market. 

In addition to the benefits of adding new capacity to the market, distributed generation offers the important additional benefit of reducing the burdens on the transmission and distribution system. Sited at load centers, distributed generators require less of the limited capacity of transmission lines and distribution lines bringing power from remote central generating stations. Indeed, they may export power 

into the grid. Environmental and aesthetic impacts, land use issues, and land-owner 

resistance has made it virtually impossible to add new transmission right-of-way 

50

throughout the United States. Increasing the voltage of existing transmission lines 

presents major technical, investment, and timing issues. Distributed generation can 

be a major part of the answer to this dilemma by adding generation at the consumer’s end of the line, and thereby improving both the transmission access and the 

transmission reliability of all users who continue to use system transmission and 

distribution resources. 

In addition, distributed generation can mitigate residual concerns about generating-industry market power by creating a large number of new and dispersed generators on the supply side of the bulk power markets, increasing competition, and 

adding capacity available to purchasers on behalf of small customers. 

While these benefits of distributed generation clearly help the restructured electricity market directly, society as a whole benefits from the general energy efficiency 

gains and environmental emission reductions that come from creating combined 

heat and power applications. Simple-cycle thermal generation efficiency still averages about 40%—the balance of the energy content of the fuel is lost though waste 

heat discharge. Delivery to consumers may take an additional 10% of the original 

energy in the form of line losses on transmission and distribution lines. By contrast, 

local combined heat and power applications can usefully extract upwards of 90% of 

the original fuel energy—from two to three times the overall energy efficiency. This 

energy efficiency helps put downward pressure on fuel market prices. 

Equally important to the efficiency gain, combined heat and power creates air 

emissions that are one-half to one-third of what they would be from accomplishing 

the same purposes with separate fuel consumption. While some emissions must 

come from any combustion-powered generator, a combined heat and power application is one of the lowest-emission technologies available. These environmental benefits are shared with everyone, and can help offset the increased emissions that 

would otherwise come from continued economic growth. 

Economically and environmentally, distributed therefore makes good sense. The 

current process of restructuring the electric industry is a tremendous opportunity 

for regulators and policy-makers to reduce the serious barriers that are preventing 

distributed generation and combined heat and power from playing their appropriate 

roles in the electricity market. 

OBSTACLES TO ACHIEVING THE PROMISE OF DISTRIBUTED GENERATION. 

There are numerous barriers to the implementation of distributed generation, including but not limited to the following:

• Lack of standardization of requirements. Distributed generation units are 

manufactured to be standard in their inputs and outputs, yet there has not 

been a parallel standardization of treatment by regulators, environmental permit authorities, and utilities. Much red tape could be cut and substantial time 

saved in getting the needed electricity to the consumer by adopting standardized regulatory and permitting requirements on standardized units. 

• Lack of reasonable interconnection policies. Interconnection standards in 

particular often differ from utility to utility, and can be unduly complex and 

burdensome. Intentionally or not, such complexity discourages competition with 

the utility’s own generation. There are no major technical issues with interconnection of distributed generation in a manner that is fully compatible with 

reliable grid operation. This is done all over the world. 

• Rate policies that discriminate against self-generation. Utility rates are frequently set in a manner that discourages distributed generation in order to preserve industrial load for the utilities, under the assumption that other ratepayers would suffer cost increases if industrial load went to self-generation. In 

fact, as noted above, all customers obtain significant system benefits when distributed generation is installed, not merely the company installing it. 

• For example, distributed generators effectively create additional transmission 

and distribution capacity by removing their own load from the total demand 

and often by providing excess energy to other users downstream of transmission bottlenecks. Yet rate policies typically deny distributed generators 

any credit for this effect of their operations. Indeed, rate regimes typically 

burden distributed generators by attributing to their new generation a full 

share of the cost of transmission and distribution systems they will not use 

as a result of the new generation, as if their new distributed generation were 

adding to rather than subtracting from the load on the system. 

• Sometimes industrial customers are offered special discounts in utility rates 

to encourage them not to install their own generation. When industrial rates 

are discounted to prevent a customer from opting for distributed generation, 

all customers may be the losers, because the other customers rates must offVerDate Aug 2, 2002 06:03 Aug 07, 2002 Jkt 010199 PO 00010 Frm 00054 Fmt 6633 Sfmt 6621 E:\HEARINGS\67633.TXT pfrm12 PsN: 67633
51

set the discount and all customers lose the efficiency and environmental benefits. 

• Frequently distributed generators are charged high rates for standby and 

peaking power they may require from the grid as a disincentive to self-generate. On the contrary, distributed generators should be credited in their 

rates for the contribution their generation makes to system reliability at the 

margin and for the diminished transmission constraints as a result of their 

self-generation. 

These ratemaking policies are vestiges of an earlier regulatory environment 

premised on utility monopoly power and non-market economics for consumers 

and generators alike. Utilities are no longer required to provide non-market 

price subsidies to alternative power suppliers, and utilities should not be permitted to discriminate against them. Customers will only seek to install distributed generation where it makes economic sense to them, and do not require 

utility subsidies to do so, but should not face artificial economic barriers from 

outmoded rate policies. 

• Ambivalence about the utility role in distributed generation. Many utilities themselves are aware of and support the need for distributed generation, 

yet until their own potential role in building and operating distributed generation is clarified, they are often resistant to having other parties construct such 

generation on their systems. Solar Turbines believes that except in states where 

regulators have forbidden utilities to own generation, the utilities themselves or 

their affiliates should be able to own and operate distributed generation units 

to meet the supply needs they continue to serve, such as core loads. There is 

no reason that the utilities themselves should not be able to capture the economic, efficiency, and environmental benefits of distribute generation. However, 

the terms for others to add distributed generation to the utility grids must be 

no different or more onerous than the terms the utilities themselves must meet. 

In other words, an open market means open competition! 

• Defining distributed generators as utilities. Under current state and federal 

policies (particularly the Public Utility Holding Company Act [‘‘PUHCA’’]), distributed generators may be subject to traditional regulation as public utilities 

in order to make any off-site sales. In the new electricity industry, ‘‘wires’’ companies are the utilities; those who generate and sell power, especially at wholesale or to bulk power markets and exchanges, are competitive entities that 

clearly do not require regulation. As in other unregulated sectors of the economy, their fully-enforceable contractual duties, obligations, and rights eliminate 

any need for utility-style regulation. 

WHAT THE FEDERAL GOVERNMENT SHOULD DO

Solar Turbines believes that the electricity industry is inherently a regional industry, not a state or national industry. There is no level of government which ideally 

fits a regional industrial structure for purposes of regulation and approvals. It is 

understandable that State authorities want to continue regulation of industry functions they have traditionally managed, and this is appropriate for regulation of distribution rates, interrelationships of suppliers and utilities with consumers, facility 

siting, and other inherently local activities. However, much of the efficiency that can 

be achieved in electricity restructuring will come from moving toward larger workable markets for power, and reducing barriers to those markets. Indeed, markets 

already are operating regionally (and indeed internationally in the case of the region 

California is part of) and must therefore operate under federal supervision. 

Transmission capacity generally must interconnect and serve the entire regional 

market, and therefore should generally also function under federal supervision. 

Solar Turbines believes that transmission regulation should aim to achieve viable 

electricity commodity markets which are not bounded at state borders but which are 

open, nondiscriminatory, and transparent at the regional and inter-regional level. 

Solar Turbines does not attempt in this testimony to prescribe a new state-federal 

division of responsibility for a restructured industry, merely to indicate that there 

are critical roles for both levels of government, and both must cooperate to get the 

legal structure right so that the markets can function optimally. Solar Turbines will 

be happy to work with Subcommittee members and staff to refine these ideas and 

express them in appropriate legislation. 

The key issue is timing. Solar Turbines is concerned that after several additional 

years of attempting regulation fundamentally at the state level, Congress will eventually be compelled to step in to assure the minimum consistency of policy in certain 

key areas to preserve functional regional markets. This should happen sooner rather 

than later. 

52

Among other things, both the federal and state governments should work to reduce the barriers to distributed generation mentioned above. In particular:

• Congress should consider actions that will identify uniform national standards for 

interconnection of distributed generation and require all utilities involved in 

interstate commerce in electricity to adopt such standards. • Congress should encourage the states to change rate policies to encourage distributed generation, and combined heat and power generation, and to eliminate 

rate policies that penalize self-generators. • FERC should be empowered to adopt nondiscriminatory rate policies throughout 

wholesale and interstate markets that recognize the system benefits of distributed generation, and that liberally allow distributed generators to interconnect 

to the grid under a common set of interconnection standards. Utilities that utilize the grid for their own wholesale bulk power transactions should be expected 

and required to offer ready interconnection of distributed generators to the grid 

for wholesale transactions. 

• Where generation ownership by utilities is not prohibited by state law, utilities 

and their affiliates should be permitted to own and operate distributed generation resources on the same basis and under the same constraints that they own 

and operate any other form of generation. 

• Congress should repeal the provisions of PUHCA that would require regulation 

of distributed generators making off-site sales, and should either clarify or encourage the states to clarify that distributed generators can sell power without 

becoming public utilities subject to regulation under the provisions that apply 

to monopoly electric distribution and transmission companies. 

What the federal and state governments should not do is panic in the face of current difficulties. They should certainly cooperate on quick actions to ease the economic trauma in this area, and should work to prevent similar short-term market 

crunches in other areas by learning the lessons of this summer in California. Market-driven electric commodity markets are working in other parts of the country and 

the world, and can work in California and throughout the regions of the United 

States. The difficulty is structuring them to allow the proper pricing signals to flow 

both to the suppliers and consumers, and reforming the regulatory structure so that 

both suppliers and consumers can react to those signals quickly. Transmission and 

distribution regulation must support the viability of the commodity markets for 

power, and create proper incentives for transmission and distribution investment, 

in order to avoid balkanizing and hamstringing the commodity markets. 

CONCLUSION

Distributed generation can offer, as noted above, very important assistance in 

reaching many of the public policy goals that electricity restructuring must not ignore: the need for growing, efficient, dispersed, and diversified new supply capacity, 

with a net benefit to transmission and distribution resources, all at a net benefit 

to environmental emissions and general fuel-use efficiency. Because a large part of 

the answers to the current dilemmas with electricity restructuring can and should 

come from distributed generation, a large emphasis in electricity restructuring policy should be put on removing barriers to distributed generation, including those 

cited here. 

It is Solar Turbines’ business objective to play a major role in the development 

of distributed generation and combined heat and power projects in support of the 

goals and objectives of a restructured utility model. But it is also Solar Turbines’

responsibility to its community to assist with creating an electric market structure 

that is efficient, economic, and fair to all consumers in the ways that only an competitive market can achieve. Thank you again on behalf of Solar Turbines for the 

honor of testifying, and I am happy to respond to any questions you may have.

Mr. BARTON. Thank you, Mr. Barr. 

We now want to hear from Mr. Terry Winter, who is the President and CEO of the California Independent System Operator. We 

really want to hear from you because you’re kind of right at the 

heart of the issue, so to speak. So welcome to the subcommittee, 

and we’ll recognize you for 5 minutes. 

STATEMENT OF TERRY WINTER 

Mr. WINTER. Chairman Barton, Members of Congress, I want to 

thank you for inviting me here. I’ve been a resident of San Diego 

53

for 21 years, and this is kind of like homecoming, but not exactly 

the one I would like to have experienced. 

I think that here in California, that we have to be very careful 

as we look at what has happened to be certain that we don’t throw 

out markets completely because I think they have a real role to 

play. 

The California ISO is the one where I guess you would say the 

buck stops here, because at each hour of the day, it is my organization that has to make the decisions of how we keep the lights on 

and where we get the power. It was always intended that we do 

that in what we call the real time market, which was designed to 

allow us to take account for the discrepancies in forecast, the 

weather deviations. 

That 5 to 6 percent of the requirements that we have needed has 

now grown to 25 or 30 percent. And what that means to me is that 

starting at 7 o’clock in the morning, I can be as much as 10 to 

16,000 megawatts short for the peak hours of that day. That means 

I’ve got to go find that in a matter of 2 or 3 hours, and that is a 

reliability concern that we greatly are concerned about. 

I think there’s been adequate discussion of why that exists. 

Clearly, the demand has far outgrown the supply. But it doesn’t 

stop with just that. It also has to deal with the transmission facilities that we have and that we can use to move power back and 

forth. 

I think in the long run, that clearly the markets will provide the 

innovation that will send the signals for demand that are required, 

and they clearly are a benefit in the final cost analysis. But we are 

faced with an interim problem that we must solve because it is totally unacceptable, in my opinion, to have prices where they are. 

Now, there’s lots of ways that people have proposed to solve that. 

One of them is price caps. Price caps are a partial solution that we 

lowered our caps down to $250, and, in fact, that did not cause the 

total energy bill to go down. It merely capped the peaks that we 

hit. 

I think the other area, as you look at the structure of what we 

have developed here, was that we moved very quickly to a wholesale market on the supply side. We have not built the transmission 

to move that supply around, and probably the biggest shortcoming 

is we have not implemented the demand side that we needed for 

people to be able to turn off. 

As you have heard Oracle speak, very clearly, they are willing to 

pay a considerable price for reliability. But you can’t transpose that 

to everyone on the system. And so I believe that we need to look 

at the market in almost a two-piece scenario, still keeping markets 

in play. Because during times of sufficient demand, the last 2 years 

before we hit this summer, there was considerable doubt as to 

whether the price we paid in California would support new generation. This year it has gone completely the other way and out-ofhand. 

So I think we have to look at almost a two-market structure, one 

that deals with the peak units that occur at the very high time of 

the day when you’re only running a unit for 200 hours out of the 

year, and deal with that as one price, and that price also ought to 

54

be the one that we look at to pay demand side to get off because 

it is those peaks that we are after. 

Then I think the more basic or base load type plants need to 

compete. And if we put that structure in place, it will give us the 

results that we’ve seen over the last 2 to 3 years. 

Having said that, I think actions have been taken to get new 

generation licensed. I believe that load-serving entities have to be 

given hedging opportunities. People talk about the market setting 

the high price, and everyone has to pay that. 

The hedging market is a price paid as bid, which you can then 

do what most averaging would expect. But people have to be free 

to go into that hedging market. 

Second, I think we have to commit to the encouraging commitments of transmission line building. One of the great advantages 

of operating the total system in California is the ability to take advantage—I heard the beeper—take advantage of the facilities in 

Northern California to serve the southern where hydro capacity is. 

We’ve had a wet year. It’s very important that we be able to move 

that power back and forth. 

Right now in the regional market, we serve the northwest every 

night because they have low water supply and want to retain that 

water. It is a regional market, and we are going to have to deal 

with it as a regional market. Thank you. 

[The prepared statement of Terry Winter follows:]

PREPARED STATEMENT OF TERRY WINTER, PRESIDENT AND CHIEF EXECUTIVE

OFFICER, CALIFORNIA INDEPENDENT SYSTEM OPERATOR CORPORATION

Thank you for inviting me to share with you my perspective on the health of electric utility restructuring in California. I do so from a unique vantage point and experience base. Since the spring of 1998, the California ISO has had operational responsibility for most of California’s electric transmission grid—the network that is 

critical to reliability and to competitive commerce. 

From that experience I readily confirm the reality that brings this Committee 

here today: unquestionably the market is not mature and the consequences have 

been serious. But the overriding message that I wish you to draw from my remarks 

is one of hope, not because I am an optimist at heart, but because restructuring of 

the electric services industry was and remains correct. Notwithstanding the challenges we have encountered, the benefits that are yet attainable more than justify 

the growing pains and the effort. 

It is for this reason that I truly welcome this hearing. It can do much to put the 

California experience in perspective for the rest of the nation. In saying that, I do 

not presume to suggest that electric restructuring nationally is or should hinge on 

what is happening in California. But the California ‘‘problems’’ that now are being 

prominently discussed in the national press cannot help but discourage movement 

from a regulated to a competitive paradigm elsewhere. That would be most unfortunate. 

For the commodity side of the business, that is for the kilowatt hours that consumers expect to be available, at fair prices, when they flick on light switches or 

power up motors, the competitive model is the correct one. It can and it will produce 

the lowest prices. It can and it will bring innovation in the form of new technologies, 

new energy products, and new market participants. It can and it will provide consumers with choice: of when and when not to consume; of the level of reliability that 

makes economic sense considering their individual requirements. 

We are experiencing serious challenges in California, but these challenges should 

not be attributed solely to the restructuring decisions. Reliability is being tested as 

never before and some consumers already have experienced rate shock. However, I 

am here to tell you that California made the right choice when it set out on the 

path of restructuring more than five years ago; to tell you that if public policy decisionmakers and market participants cooperatively work together, the enormous benefits that a competitive market is capable of producing for consumers can yet be attained. 

55

In a moment I will offer my views on the challenges that we face, and on what 

corrective action must be taken. It is most important that we distill the lessons to 

be learned from the experience that we have had. If I can make any contribution 

to your deliberation, let it be that we not repeat the most basic, and in my view, 

most costly mistake that was made when restructuring first began to be debated: 

we created a climate of uncertainty and with it discouraged planning and infrastructure investments. It is precisely because of that uncertainty that I and my staff 

must wage a near-daily battle just to keep the lights on in California; it is because 

of the consequences of that uncertainty that more and more consumers face the risk 

of rate shock. 

In my judgment, the single most significant contribution that this Committee and 

that State decisionmakers can make to the restoration of economic order is to put 

an end to uncertainty: to make clear the commitment to a competitive commodity 

market facilitated by a regulated transmission infrastructure. I am concerned that 

until that happens, the investment that is the precondition to a robust competitive 

market will not be forthcoming and a painful transition will plague us—and consumers—for far longer than is necessary. 

It is also important that we keep in mind the impetus for restructuring. It was 

the failure of the old regulatory paradigm to bring forth the capacity, fairly priced, 

and the investment in the transmission infrastructure necessary for a robust economy. It was precisely because independent generators were more successful in developing innovative, more efficient and more economical capacity that Congress enacted the Public Utilities Regulatory Policy Act. It was precisely because of the unwillingness of the utilities to open their transmission highways to the new breed of 

independent generators, and to permit those essential facilities to be used for competitive commerce, that Congress mandated access and that the FERC issued its 

groundbreaking orders, 888 and 889. Lest we are tricked into thinking nostalgically 

about the ‘‘good old days’’, let us first reflect on them soberly. Restructuring came 

about because the entrenched industry was not doing its job and the former regulatory paradigm of ‘‘command and control’’ had failed. 

The world of electric power supply is different today because it has to be. We must 

not delude ourselves into believing that all will be right if we simply superimpose 

the former regulatory model onto today’s industry structure. It will not work. 

That does not mean that the market is to be allowed to run free of oversight. It 

means that an entirely different type of oversight is required—demanding far different skills and competencies. The market will require oversight that has the capability to develop rules ensuring that competition will thrive to bring forth the consumer and social benefits that it is uniquely suited to promote; and oversight that 

is willing to step back when that is the right course of action. Those are not attributes of the former regulatory model. 

Before addressing today’s challenges and tomorrow’s solutions, I think it important that I summarize for you the California model and in particular the responsibility that has been entrusted to the ISO. In a word, we are responsible for the 

‘‘highway’’. Our statutory mandate is to safeguard reliability. While other States 

have elected to combine responsibility for operation of the commodity markets and 

the transmission grid, the designers of restructuring in California were of the view 

that competitive objectives would be furthered if those functions were bifurcated. In 

my judgment, FERC was wise to encourage restructuring under general guidelines 

rather than mandating a ‘‘one size fits all’’ approach, for the latter surely would 

have been met with resistance. 

When restructuring became a reality in California, the ISO was given operational 

responsibility for the high voltage transmission facilities then owned by the State’s 

three investor-owned utility systems. As such, the ISO manages approximately 80% 

of the high voltage facilities in California and is responsible for maintaining the reliability of that grid and its interconnections with neighboring systems. A reliable 

transmission system, providing open, non-discriminatory access, is an absolute precondition to a competitive commodity market. 

The ISO’s objective is to secure needed services that will assure grid reliability 

through operation of markets. Toward this end the ISO operates Ancillary Services 

markets, established for the competitive acquisition of reliability services. For example, the operating reserves that are critical to system reliability are acquired 

through these markets. Further, because supply must be kept in balance with actual consumer demands, the ISO operates a real-time spot market. When the market structure was designed, the assumption was that this spot market would be limited to a fine tuning function acquiring energy to meet perhaps 1-5% of normal control area load. As I will explain presently, it has become much more. Finally, the 

ISO manages congestion. When the available transmission is incapable of reliably 

56

accommodating the requested transactions, the ISO utilizes market mechanisms to 

allocate available capacity to those who value it most. 

Notwithstanding that concerns remain, the model is a sound one. The most critical concern perhaps should have been obvious at the outset of restructuring. Since 

the mid 1980s the investor-owned utilities have made virtually no investments in 

either incremental generation or transmission. In the aftermath of the large prudence disallowances of the 1980s and with the expectation of restructuring beginning in the early 1990s, it was understandable that utilities would be loathe to commit capital to a highly uncertain future. As a result, it now is the case that over 

60 percent of California’s generation stock has been in service for over 30 years. And 

of the newer capacity, a significant portion is nuclear and of questionable economic 

longevity. 

Moreover, electricity is an interstate commodity and California most definitely is 

not an island. Indeed, if it were it would not be self-sufficient. Historically, California has been a net importer of electricity, importing between 4,000 and 8,000 MW 

per hour, to meet a peak load that varies between 27,000 and 48,000 MW. 

The supply problem largely was camouflaged when restructuring commenced. 

While California was a net importer, the Western region had ample capacity and 

load growth was modest. It was not too long ago that the Western region enjoyed 

a generation reserve or supply margin of 25 to 30 percent; it is now below 10 percent. As units age and are stressed, the adequacy of reserves becomes an even more 

pressing issue. In truth, during the debate that preceded restructuring California 

ignored supply issues choosing instead to focus on market power concerns and to 

debate about the generation that investor-owned utilities would retain while the remainder of the supply inventory was divested. Further, there has been a lack of 

specificity as to where responsibility lay for acquiring the resources necessary to 

meet load and an absence of policy and tools to provide entities that serve load with 

the capability to do what providers of commodities must do—hedge against price 

spikes by forward contracting. 

And, to most end-use consumers, restructuring was not visible. As a consequence, 

consumers were not prepared for the significant changes that they would have to 

confront. Viewed from their vantage point, it was as if nothing had changed. The 

legislature imposed retail price freezes. I do not say that critically. I understand and 

support fully the importance of protecting consumers during difficult, untested transition periods and before they have been given the information and the tools to enable them to protect themselves. But there were counter-costs. Consumers were left 

unprepared. They were not encouraged or enabled to shop wisely. In retrospect, in 

the market redesign not nearly enough consideration was given to the demand side 

of the equation. This was not a recipe for an effective competitive market. Both supply and demand must be prepared and must confront rational economic incentives. 

This underscores the point that I made at the outset—the point that I view to 

be absolutely critical. If we are to pass through the transition successfully we simply 

must encourage new infrastructure investment—both on the part of generation and 

transmission supply and on the part of demand. But logic and history tell us that 

investment will not be forthcoming in a climate of uncertainty with investors fearful 

that the rules are in flux. And history also tells us that absent the ability to induce 

entry by merchant generators, consumers may be denied the best bargains attainable in the market. One of the motivations that led California to go to a marketbased environment was the recognition that, in the regulatory planning process, 

merchant generators consistently underbid utility-sponsored projects. 

Let me share with you a few more facts so that you can better appreciate the 

challenges we confront. The Western region, thankfully, has shared in our Nation’s 

economic growth. That has translated directly into increased demand for electricity. 

But as I already have noted, supply has not kept pace. Please understand, while 

the focus today is on California, this is a regional problem requiring regional solutions. Commerce in electricity does not and economically should not respect state 

geographical boundaries. That is why I have made no secret of my support for a 

Regional RTO—so that the states that inevitably are tied together electrically can 

plan and act for the mutual benefit of all consumers. I say this recognizing that 

each state can and should retain jurisdiction over retail matters rightfully under 

their respective control. 

It is premature to determine whether the RTO effort requires federal legislative 

initiatives. FERC has gotten it right and should be supported as it encourages each 

region to develop the model that is best adapted for local requirements while still 

satisfying minimum prescriptive guidelines. 

From the ISO’s perspective, the regional effort makes eminent sense. We depend 

on the region as we struggle daily to meet ever-increasing threats to reliability. In 

all of 1999 the ISO had to declare a total of four system emergencies and in only 

57

one of those instances was it necessary to curtail service to loads that had agreed 

to be interruptible. Thus far in 2000 we have been required to declare 22 system 

emergencies, and 14 of them required the curtailment of interruptible load. We are 

far from being out of the woods. It is not uncommon for California to experience 

some of its hottest weather early in the fall, and our contractual ability to curtail 

interruptible load has greatly diminished. 

A key to maintaining reliability is having available to the system operator reserves that it may call upon to meet emergencies—the loss of a generator or of a 

transmission facility. In our region the Western System Coordinating Council is responsible for prescribing minimum operating requirements and for sanctioning those 

who fail to comply. In all of 1999 the ISO was fined just less than $55,000 for operating reserve inadequacies. Thus far in 2000 the fines imposed by the WSCC are 

approximately $700,000. 

To some extent this has been the direct result of episodic market dysfunction. 

Under the California market design, it was intended that the principal balancing 

of supply and demand would take place in forward markets; for example, those administered by the California Power Exchange. As I explained, the ISO’s energy market was intended only for the inevitable fine-tuning required in real-time. It has 

proven anything but. Over the past few months it has not been unusual for the ISO 

to have to scramble in real time for 20 to 30 percent of the energy supply actually 

required to meet demand. There are reasons for this and they are being addressed. 

But until this over reliance on real time markets is resolved and until the balancing 

market is limited to the fine tuning that was intended, we are concerned that there 

will continue to be reliability and price impacts. Reliability will be compromised as 

reserves intended to be on call to meet emergencies continue to be conscripted simply to meet load. And the solutions will likely be expensive. During real-time operations the ISO will be required to pay what the market requires—unless I am told 

to sacrifice reliability, a solution I would not find palatable. 

I have painted a bleak picture because candor requires no less. But at the outset 

I told you that I am optimistic, that I am convinced that the benefits capable of 

being achieved are worth the efforts that yet will have to be expended. 

There is a silver lining. This summer has been a call to action, and we are responding. We know what corrective steps need to be taken and efforts have begun.

• The State is taking steps to expedite the licensing of new generation. 

• Renewables can and must make a substantial contribution to an augmented supply portfolio. I fear that we are committing too much of our inventory to natural 

gas-fired facilities. If we have learned anything from history, it should have 

been the essentiality of fuel diversity. 

• Distributed generation must be encouraged—perhaps with tax incentives that 

typically have been used to encourage innovative technologies. It is the one resource that can satisfy both generation and transmission inadequacies. 

• The California Public Utilities Commission is providing load-serving entities with 

the capability to hedge against price volatility. The IOUs must be encouraged 

to utilize that capacity with the understanding that decisions made in a market 

environment cannot be judged in the same manner as decisions made in a stable, regulatory environment. 

• Actions are being taken to stabilize rates in the San Diego area—the first of the 

IOU service territories to be exposed to rate shock. It is important that rate stability be provided to all consumers during the several year transition that we 

must yet navigate while simultaneously arming consumers with the information 

and capacity to shop intelligently. 

• We must reaffirm our commitment to energy efficiency and conservation. We must 

marshal our resources and redouble efforts to ensure that we maximize the contribution that each can and must make to a comprehensive energy strategy. 

• The ISO is taking action to facilitate greater market participation by demand. 

These efforts must be pursued vigorously and metering technology that will enable consumers to plan their purchases judiciously must be encouraged. 

• Commitments must be made to the transmission infrastructure. To date the ISO 

has identified and authorized over $800 million in transmission upgrades. This 

must continue. 

These are necessary first steps, not easily achieved. For example, from my vantage point a robust transmission network is key. Without it new generation may be 

left without an avenue for commerce. The rules of interconnection must be clear and 

fair and the network has to be planned with the needs of the competitive marketplace paramount. I commit that the ISO will do its part—it will develop interconnection guidelines; it will work with transmission owners and users to plan for a robust 

grid; it will identify the projects that must go forward and on what schedule. 

58

But that alone will not suffice to get transmission built. There will have to be appropriate economic incentives and if the IOUs are still reluctant to move forward, 

others must have that opportunity. And there will have to be a rational siting and 

licensing process. I wish that I could tell you that all you need do is to pass some 

legislative language. It is not that simple. The siting and licensing of transmission 

as well as of generation must remain a local prerogative. But that does not mean 

that we can tolerate improvident vetoes. I have asked my staff to give immediate 

consideration to the issue of how best to reconcile local imperatives with the absolute need that we move forward expeditiously with projects that are essential. We 

will be offering our recommendations to those responsible for siting decision making, 

and I urge others to do the same. 

I must conclude by returning to the beginning. That we are facing many challenges and that they are serious cannot be disputed. My greatest apprehension is 

that decision-makers will overreact. That pressures will lead to short-sighted expediencies or, worse yet, leave the marketplace confused about our resolve, about our 

commitment to a competitive commodity market. I can think of no more counterproductive message. 

Therefore, if I could write your conclusions they would be straightforward and unmistakable. California made the right decision when it embarked upon restructuring. It has made mistakes in implementation and in not moderating expectations, 

but none of these mistakes are fatal. With cooperation from all, California’s grand 

initiative will succeed. Economic development and consumers will be the beneficiaries. 

I pledge to you that the ISO will do its part—and more.

Mr. BARTON. Thank you. Thank you, Mr. Winter. 

We now want to hear from Mr. George Sladoje, who is the President and CEO of the California Power Exchange. And again, along 

with Mr. Winter of the California ISO, you’ve kind of been at the 

heart of the storm too. So we appreciate you being here in person 

and welcome your testimony. 

STATEMENT OF GEORGE SLADOJE 

Mr. SLADOJE. Thank you, Mr. Chairman. It’s an honor to be here. 

I would like to supplement my written testimony, which was submitted last week, and also there’s 75 copies here, and I hope the 

committee has it all, and has had a chance to take a look at it. 

When California went into the restructuring, went into the deregulation efforts, they constructed two new enterprises to implement that, one of them, of course, being the ISO for grid reliability, 

the other being the California Power Exchange for market reliability. 

Other major features which we need to keep in mind, were three 

IOUs in California were required to divest a portion of their generation and then required to sell the power from what generation 

remained and purchase all of their load out of the California Power 

Exchange. In return, they were given a 4-year transition period to 

recover stranded costs, and purchases through the Power Exchange 

were deemed reasonable. This is a very important concept. Not 

subject to second-guess audits, fines and so on down the road. 

And, of course, the concentration of this load and demand would 

make for one big liquid marketplace, which would yield a fair and 

reasonable market price. 

Just to digress for a minute, the mechanics of the Power Exchange in its day-ahead market is that we run 24 separate auctions 

each day so that everybody can see what the wholesale price of 

power is throughout the night and the day. 

We began on March 31, 1998 with 27 bidders in a day-ahead 

market. Since that time, we have gone now to where we have 80 

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certified participants from three countries, and from offering one 

product in March 1998, we now offer nearly 20, a day-ahead market, a day-up market, block-forward markets, five separate versions 

of that, 1-year strips that go out for 5 years, daily blocks, balance 

of the month and ancillary service forward markets. 

Our goal is to have our participants utilize these markets in 

order to smooth out market effects and peaks. How is this all working? Well, I think it was working mighty fine until about May 

2000. Prices here for the first 9 months in California averaged 2.6 

cents a kilowatt hour and over the first year 2.4 cents. For all of 

1999, the average price of power through the Power Exchange dayahead market was 3.1 cents. 

So why are we here? May, the average was 4.7 cents a kilowatt 

hour versus 2.4 cents the previous year. June, the price got up to 

12 cents a kilowatt hour versus 2.4 cents in 1999. July, 10.6 cents 

versus 2.9 cents. August, 16.7 cents versus 3.2 cents and so on. 

Remember, those prices that I just gave you reflect the dayahead price. Now let’s take a look at what the prices were for those 

who hedged in our forward market. And these are peak hours, 16-

hour peak hours. 

If you purchased in our forward market, the average price that 

you paid for May was 3.4 cents, not the 6 cents that was the actual 

result in the spot market or day-ahead market. June, you would 

have paid 3.7 cents, not the 17 cents that was experienced in the 

day-ahead market. 

July, you would have paid 6.8 cents, not the 14 cents that we 

saw in the day-ahead market. And in August, you would have paid 

7.5 cents, not the 21 cents. 

In my written testimony, I go through the fundamental reasons 

for overall price increases that you’ve seen. But I want to place 

particular emphasis on the need to hedge and to utilize these market opportunities that we present. 

And also, besides the forward market, I want to add to the forward market, those who did buy in our block forward market saved 

some $600 million compared to that day-up price. So we need to 

have participants go into that forward market in a much larger 

quantity. 

Second, there is a major flaw, I believe, in the structure of the 

marketplace, and that is too much of the power is being purchased 

in the ISO real time market. As Mr. Winter said, 25 to 30 percent 

some hours for something that was designed to only be 2 percent 

or so. 

It worked fine until about May, and then all of a sudden we saw 

a lot of supply go into that market, obviously waiting for the higher 

price or waiting to the last minute to gain a higher price. 

So we’re working with the ISO to correct that flaw and take 

charge and move that supply back into the day-ahead market, 

which we think should help stabilize price. 

Finally, of course, we need more supply. Very simple. And then 

ultimately, we need demand response. In California and elsewhere, 

few consumers see wholesale hourly prices, and if they did, they 

have no economic incentive to shift demand to slower demand 

times. 

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1 I have attached detailed analysis from the CalPX Compliance Unit regarding the price 

movements in California’s electricity markets during May-July, 2000. 

So in conclusion, Mr. Chairman, the California Power Exchange, 

we believe, has developed products that should help stabilize the 

market. We’re in the middle of the transition period, and I think 

we need to transition over to utilizing those products to a greater 

extent. We also have several new products on the drawing boards 

which we’ll be introducing come the winter months. 

California’s deregulation can work, and I think it worked well for 

2 years. And after all, when you look back at it, one of the reasons 

we’re here today is that San Diego Gas and Electric recovered its 

stranded cost early. And one of the reasons they recovered their 

stranded cost early was because of the relatively low prices on the 

California Power Exchange for the first 2 years. Thank you. 

[The prepared statement of George Sladoje follows:]

PREPARED STATEMENT OF GEORGE SLADOJE, CHIEF EXECUTIVE OFFICER/PRESIDENT, CALIFORNIA POWER EXCHANGE

BACKGROUND

The California Power Exchange (CalPX) is a non-profit, public benefit corporation 

created by legislative and regulatory bodies to provide a marketplace for trading 

electricity. The CalPX is one of the institutions that was developed as part of the 

adopted market design for California’s restructuring of its electric utility industry. 

The CalPX, which is regulated by the Federal Regulatory Energy Commission 

(FERC), operates a number of markets, the largest of which is the Day-Ahead Market that establishes an hourly market-clearing price for wholesale power in California. The CalPX also operates other markets, including a Block Forward Market 

to allow participants to manage price risk through purchases and sales of electricity 

on a forward basis for up to five years into the future. California is slightly more 

than two years through a four-year transition period that was adopted in order to 

allow the features of a competitive electricity market to develop. The purpose of my 

testimony is to explain the factors that the CalPX has identified that contributed 

to the price disruptions during this summer and to discuss potential solutions to address this situation.1

WHY CALIFORNIA PRICES INCREASED IN MAY-JULY 2000

This summer, California has experienced dramatic wholesale price increases. In 

general, the CalPX has found that certain key fundamental factors have contributed 

to these increased prices. These factors include load growth that has steadily increased in California, but construction of new large generation has been at a standstill for more than a decade. In addition, natural gas prices have nearly doubled 

since last summer, there was an extraordinary hot weather situation throughout the 

Western United States, hydro outflows from the Northwest are below normal, environmental constraints have a negative effect on electric supplies, and there has been 

a significant shift of trading volume out of the CalPX Day-Ahead Market and into 

the Real-Time Market operated by the California Independent System Operator 

(ISO). 

Because electricity is in a situation of tight supply in California, scarcity premiums are more likely to be charged. By reducing demand during the tight supply 

times, consumers in a mature market provide a mechanism for limiting scarcity 

rents by suppliers to their economically efficient level. In the California market, few 

consumers today see their wholesale prices and have the choice to buy less electricity during high price hours. Hence, they cannot provide a moderating influence 

on scarcity rents during times of tight supply. Electricity is instantly perishable, so 

the market price of power can quickly rise to very high levels to achieve a supplydemand balance. Over time, new power plants can be built in response to these high 

prices, which in turn will bring back down the price of power. But the time lag for 

attracting that additional supply can lead to high short-term bills for consumers 

whose costs are tied to the spot wholesale power market. 

During this summer, subregions throughout the Western Systems Coordinating 

Council (WSCC) system, especially California and the Southwest, experienced pronounced declines in reserve margins, much greater than forecasts predicted. These 

61

reserve margin declines were due in part to an extraordinary weather circumstance 

where the entire Western United States was unusually hot at the same time, and 

this higher than normal heat pattern persisted. Typically, heat variations throughout the West allow for reserve margins to be supported in one area where high temperatures occur by accessing resources from other regions that are not experiencing 

high temperatures and associated reserve margin pressures. During the critical time 

periods this summer, all subregions of the WSCC were faced with unusually high 

temperatures and consequently the Western system was unable to support individual subregions. 

Another element that exacerbated the price increases this summer is the NOX

market in southern California. Environmental constraints on critical electric supplies forced generators to either buy NOx credits at higher than expected prices or 

to operate within existing constraints. If generators did operate within existing constraints, some supply was simply not available because plants could not run given 

their environmental limitations. If generators bought NOX credits at high market 

prices, it is possible that they could not actually acquire adequate offsets to allow 

for full production. This dynamic contributed to supply uncertainty and amplified 

price premiums to assure certainty of supply during a protracted period of high system stress. The CalPX continues to analyze this issue to assess the market interactions between environmental credits, generation availability, and competitive market dynamics. 

The CalPX has also observed that there was less supply in the CalPX Day-Ahead 

Market during the summer of 2000 as compared to the summer of 1999. Exports 

from the CalPX Day-Ahead market increased from 1% in 1999 to 4% in 2000, 

whereas imports continue to be approximately 15% of the Day-Ahead volume. This 

export supply is voluntary, which means that it can sell to any available market, 

including bilateral markets anywhere in the West, as well as other markets sequentially downstream from the Day-Ahead Market. During this summer, prices were 

more attractive in markets outside California, notably in the Northwest, as well as 

the ISO’s Real-Time Market and Ancillary Services Reserve Markets. This circumstance had the effect of pulling supply out of the Day-Ahead Market and forcing 

demand to follow supply into these other markets. 

The shift of demand from the Day-Ahead Market to the Real-Time Market exacerbated price volatility and contributed to the crisis atmosphere, and it has been the 

most dominant cause of the significant supply reduction in the Day-Ahead Market. 

The situation is particularly problematic in that it burdens the ISO with procuring 

significant amounts of energy along with capacity in the most volatile and time sensitive period, and it offers an inter-market arbitrage opportunity that was outside 

the design intentions of the California market founders. 

POTENTIAL SOLUTIONS

A number of recommendations should be explored to ensure that consumers receive the benefits of a competitive market as California restructures the electricity 

industry. These options include a strong emphasis on ensuring that San Diego Gas 

& Electric Company, Pacific Gas and Electric Company, and Southern California 

Edison utilize the Block Forward Market in the CalPX to manage price volatility. 

In addition, market structure changes should be considered that would limit the 

shift of supply from the CalPX Day-Ahead Market into the ISO Real-Time Market. 

The CalPX and the ISO have jointly developed a set of concepts to mitigate this situation. These and other options are discussed below. 

1. Increase forward purchases of power. One way to protect customers from spot 

market volatility is through the forward purchasing of power. This forward purchasing can include 1-5 year contracts for power, which also provide financial certainty to suppliers to encourage investment in new power plants. Forward purchasing also includes more procurement of power in the Day-Ahead rather than the 

Real-Time Market. The CalPX currently offers 1-5 year (and shorter) forward contracts. Another option the CalPX is developing is capacity or call option contracts. 

This product would allow generators to recover their fixed costs through a fixed payment rather than through spot market scarcity rents. Such an arrangement can reduce the volatility of (and the amount of load affected by) the spot price. The advantage of such contracts is that buyers and sellers have more balanced negotiating leverage when the contract is done before the pressures of a real-time need. Because 

the market value of peaking capacity is known, such contracts also make it easier 

to monitor whether suppliers are extracting excess scarcity rents. 

2. The ISO Real-Time price that is paid for supply should be capped at the actual 

ISO Real-Time price for any supply deviations up to 5% outside Day-Ahead forecasts. 

The ISO Real-Time price should be no higher than the CalPX Day-Ahead price for 

62

all other Real-Time supply procured by the ISO. Conversely, load deviations greater 

than 5% should pay the greater of the ISO Real-Time price or the CalPX Day-Ahead 

price, and the first 5% will be at the CalPX Day-Ahead price. This modification 

would eliminate economic incentives, without undue penalties, to under-schedule 

load or withhold supply from the Day-Ahead Market and avoid the price/time pressure of the Real-Time Market. It would also allow utilization of the Real-Time Market for its intended purpose of close-in adjustments due to load/weather changes or 

loss of generation capability. 

3. Limit the allocation of ISO Out-of-Market costs to participants who caused Outof-Market purchases to occur. This ensures price certainty for participants who 

scheduled energy in the Forward markets. 

4. The CalPX Board will review the market implications of amending its tariff to 

provide for publishing the daily supply offered into the CalPX Day-Ahead Market at 

various prices or releasing aggregate daily curves instead of the current three-month 

lag policy. 

5. The CalPX and the ISO will explore the introduction of electronic tagging from 

source to zone for all in-state production. This will provide an audit trail to track 

the exact routes of generation from within California. 

6. The CalPX will provide daily to local newspapers the hourly PX prices for the 

Day-Ahead Market in areas where the rate freeze has ended. This valuable market 

information could help trigger potential demand response opportunities. 

7. The CalPX will explore with the ISO the benefit of the ISO utilizing CalPX markets (Day-Ahead, Day-Of, the daily block products and potentially a new capacity option market) to reduce out of market purchases and minimize procurement resource 

requirements. 

ROLE OF THE FEDERAL GOVERNMENT

In order to implement several of the potential solutions described herein, FERC 

must accept revisions to the tariffs of the CalPX and/or the ISO. The Commodity 

Futures Trading Commission (CFTC) may also need to review and approve the capacity or call option solutions offered by the CalPX. The federal government, under 

the auspices of FERC and/or the CFTC, will therefore actively supervise the implementation of certain potential solutions through the regulatory approval process. 

By an order issued July 26, 2000, FERC initiated an informal investigation into 

bulk power markets throughout the United States. By order issued August 23, 2000, 

FERC also initiated a formal investigation under Section 206 of the Federal Power 

Act into the California electricity markets (Docket Nos. EL00-95-000 and EL00-98-

000: ‘‘Order Initiating Hearing Proceedings to Investigate Justness and Reasonableness of Rates of Public Utility Sellers in California ISO and PX Markets and to Investigate ISO and PX Tariffs, Contracts, Institutional Structures and Bylaws; and 

Providing Further Guidance to California Entities’’). By these actions, FERC has 

chosen to exercise its plenary jurisdiction to review wholesale markets in California. 

NEED FOR FEDERAL LEGISLATION

I do not see a present need for federal legislation. It is possible that the need for 

a legislative solution may emerge as an outcome of the pending FERC investigations.

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Mr. BARTON. Thank you, Mr. Sladoje. 

We’re now going to do our question period. We have five members here. I’m going to recognize each member one time for 10 minutes instead of trying to do two rounds of 5 minutes each so you 

can get into some questions. 

But we’re just going to do one round. So we’ll recognize myself 

first and Mr. Bilbray and Mr. Shadegg, Mr. Filner, and then Mr. 

Hunter. 

So the Chair would recognize himself first for 10 minutes. And 

I want to say at the beginning that I understand how politically 

sensitive this issue is. It’s very easy coming from Washington or 

from a State like I come from to come out here and not be sensitized to what the tripling of your electricity price means to somebody like Mr. Tyler, somebody like Oracle. 

On the other hand, it does give nonCalifornians a certain ability 

to be more objective perhaps than those that are right here in the 

fight, and I hope that you’ll take some of my questions in that spirit of objectivity. 

Mr. Tyler, I want to ask you, as a small business representative, 

under the system that was put in place, could you have at any time 

chosen a different supplier than the incumbent utility? 

Mr. TYLER. Not to my knowledge, sir. 

Mr. BARTON. So you were—— Mr. TYLER. Not that would have been effectively different. 

Mr. BARTON. As I understand the California law, they put a price 

cap in place. It was 10 percent below the average price the year 

before. So you were, at least in the beginning, as a retail customer, 

given a lower price than you had had, but did you at that time 

have an option to go to a different supplier from the incumbent 

utility who might have this year given you a lower price. And 

you’re saying, to your knowledge, you didn’t know that you had 

that option. 

Mr. TYLER. No. 

Mr. BARTON. Okay. Could somebody else, Mr. Jones or Mr. Winter, the average small businessman or woman, do they have any 

real opportunity at any time to go to a different supplier who might 

have—could have prevented some of the charges they’ve been paid? 

Mr. SHAMES. I can probably help with that, Mr. Chair. UCAN 

runs a survey of all the energy service provider options for consumers in San Diego and have for the last 2 years. What I can tell 

you is, most small customers, meaning residential and small business customers, were offered options that were pegged to the PX 

so that customers could receive savings based on how the PX price 

went. 

There were some small and medium-sized commercial customers 

who did have available to them service providers who would offer 

a fixed rate, essentially a hedge. There were a couple of these companies. The problem was, since nobody had any track record of 

what rates would do, very few commercial customers had the sophistication or foresight to say, ‘‘I’ll take that gamble,’’ since there 

was no history. But those are the options available. 

Mr. BARTON. But now in the other States that have gone to competition, they’ve set a price to be that’s a little above the market, 

prevented incumbent utility from matching that price and then 

80

tried to create price competition by suppliers coming in and downbidding. California did it differently, took an average price, cut it 

10 percent, give everybody the same price, regardless of who the 

supplier was. 

So there wasn’t much incentive for a supplier to come to Mr. 

Tyler. Isn’t that correct, or am I incorrect in that? 

Mr. SHAMES. I think you’re incorrect. I think the State you’re referring to is Pennsylvania, which essentially took some of the 

stranded cost that it would obligate it to pay the utilities, instead 

gave it to customers in the form of a shopping credit. That’s the 

only State that I’m familiar with that took that action. 

There’s no doubt that the 10 percent artificial rate reduction that 

was created through legislation reduced somewhat the interest of 

consumers to switch. But truthfully, what we saw on the market 

was simply 10 percent savings. The best deal was 10 percent savings over the PX, which had the 10 percent artificial reduction not 

existed, would have been a 20 percent reduction. Very few small 

customers were attracted to that deal. 

Mr. BARTON. Okay. Mr. Jones, and then I’ve got a direct question 

for the gentleman from Oregon. 

Mr. SMUTNY-JONES. Okay. Yeah. Let me just follow up on that. 

I think fundamentally one of the key problems in California is we 

do not have meaningful retail choice. It is an exception, not the 

rule. There are some exceptions. 

A notable exception is my understanding is the University of 

California here in San Diego and the State University system 

saved somewhere in the vicinity of about $2 million in their June 

and July bills. I think this is what Michael was referring to in 

terms of a fixed contract in which a different type of product was 

being offered. 

But that is the exception rather than the rule. And I guess my 

take on this is that whatever impediments exist for trying to get 

other additional retail suppliers into the marketplace need to be removed so, in fact, we have meaningful retail choice so people can 

get out of the way of high prices. 

Mr. BARTON. I want to ask the gentleman from Oracle. As a 

large user, do you have the ability to directly negotiate with a 

power generator and create your own market, so to speak, bilaterally, or do you have to buy through the Power Exchange like everybody else? 

Mr. BYRON. Mr. Chairman, we were entitled to go ahead and do 

a direct access agreement with someone else. There was no incentive to do so in the current market situation. 

Mr. BARTON. Is there an incentive in today’s market situation? 

Mr. BYRON. No, sir. As I understand it, even those that have entered into a direct agreement are still going to be held responsible 

for these high prices because——

Mr. BARTON. Is that——

Mr. BYRON. [continuing] because they’re receiving a credit. 

They’re receiving a credit equal to the amount of these energy 

costs. 

Mr. BARTON. Okay. Now I want Mr. Winter or Mr. Sladoje. Is 

that true? If a big user does a direct negotiation, are they required 

under California law to pay this PX price, this market-clearing 

81

price? Or if they can negotiate something that’s below the public 

price, are they allowed to do that? 

Mr. WINTER. I’m not the expert on retail rates, but let me tell 

you how I understand. Yes, they could go directly, but the reason 

the incentive isn’t there for Oracle, which I believe is in the San 

Francisco area, is that PG&E has not recovered its CTC rate. 

So even though they went directly, they would have to still pay 

that CTC recovery portion of the bill, and therefore it’s not attractive. Now, in the case of those in San Diego where they were off 

of that CTC recovery, then those people—and I understand Hewlett 

Packard did that. They went directly to a supplier, tied down a 

fixed rate and was delivered that energy from them. 

Mr. BARTON. Oracle can’t do it because they’re in a different part 

of the State. 

Mr. WINTER. Right. 

Mr. BARTON. And under the California law, their supplier is not 

allowed to compete on price yet. Is that—— Mr. WINTER. Correct. Because they have—— Mr. BARTON. I know barely just enough to barely understand the 

answer you just gave me. 

Mr. WINTER. They are allowed to compete on the energy price, 

but they still have to pay the stranded cost recovery. 

Mr. BARTON. Mr. Jones, under this recently passed legislation 

here in California that the Governor just signed last week or the 

week before, what percentage of the new power plants that are 

under consideration does that legislation cover? 

Mr. SMUTNY-JONES. My understanding of how it operates, those 

that are currently in the licensing process, it does not effect. It will 

affect some of those that are not into the process yet. It potentially 

has a pretty big impact on some of the peaking capacity that Mr. 

Winter’s organization, the ISO, is asking to pull into California and 

I think Mr. Hunter was referring to earlier that could be cited. 

It would basically reduce the siting time by about half, depending upon whether or not that plant was subsequently going to be 

what’s called a combined cycle generator. 

So it does have an impact. We think it’s an important step, but 

obviously we will continue to work with the State and the Federal 

Government to try to streamline this even further. 

Mr. BARTON. I’ve got about 2 minutes left. These last questions 

are directed generally to Mr. Winter and Mr. Sladoje. I want to try 

to understand this pricing mechanism and the ISO and the PX. 

As I understand it, the day-before market and the same-day market, people bid into that. You’ve got bidders which I would say 

would be suppliers, and I think you’ve got about 80, if I understood 

you correctly, that can offer to supply power. But you kind of get 

an idea of how much power you’re going to need to supply the demand. You publicized that, and suppliers come forward and offer 

so much power at such a price. 

If I understand it correctly, once you get all the power you need 

for that particular time, the last price that’s bid that tends to be 

the highest price, the market-clearing price, everybody who bid in 

gets that price. Is that correct? 

Mr. SLADOJE. There is a uniform price in our hourly day-ahead 

market, but I wouldn’t characterize it exactly that way. Let me just 

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go through it just very briefly. I was going to go through it in my 

remarks, but it would have taken a little bit of time. 

At 7 a.m., all the bids for the following day for each hour are 

submitted to the California Power Exchange. And we are approximately 85 percent of the ISO grid. And these are both suppliers 

and purchasers, and they are required for each hour to submit a 

minimum of two price and quantity pairs and up to 16 price and 

quantity pairs. 

So in other words, a supplier might say, ‘‘I will sell 100 

megawatts if the price is $50. If the price is $60, I’ll sell 110. If 

the price’’—so on and so forth, going up, of course, as the quantity 

increases. 

Mr. BARTON. Well, I’ve only got 14 seconds, so once everybody 

has bid in in these pricing pairs, and once you know that you’ve 

got enough power, what is the price that is passed through to the 

retail customer? Is it the highest price or is it an average price or 

is it the lowest price? I mean, how is all of that averaged out so 

that Mr. Tyler here gets charged this pass-through price. 

Mr. SLADOJE. It is where the aggregate supply and demand curve 

intersect. That is the price, the uniform price for that hour in California. 

And in most of the States, the retail customer doesn’t have any 

idea what that price is. In San Diego, though, it’s generally passed 

straight through to them, since they’ve recovered their stranded 

cost. 

Mr. BARTON. Well, I would really appreciate somebody on your 

staff trying to put in layman’s language how you price. I know you 

use the market to get enough power to keep all the lights going, 

and that’s a good thing. I understand that. 

I’m still not quite sure how you take that and convert it to the 

price that Mr. Tyler has to pay as a pass-through because it really 

seems to me that Mr. Tyler is ending up paying a lot higher price 

than he has to if we had some sort of an average price scheme in 

place that not everybody who pays into the power pool gets the 

highest price. 

Mr. SLADOJE. Mr. Chairman, I believe that the argument would 

be that the generators are encouraged to bid their marginal cost so 

that they are for sure to be picked to supply, and that while there 

may be some generators who bid under the market clearing price, 

they don’t really expect to get that price, and that if this was a traditional bid-and-ask system—and believe me, I spent 15 years in 

Chicago Board of Trade and 5 years in the equity market. I’m very 

familiar with that. 

Mr. BARTON. You know more about it than I do. 

Mr. SLADOJE. Anyway, if, in fact, we had a traditional bid-andask system here, they would then guess at what the market clearing price should be, and over the long haul, most of the academics 

believe that the traditional bid-and-ask system will end up with 

higher prices. 

Now, we are appointing a blue ribbon committee at the California Power Exchange to take a look at this this fall. Because 

you’re right, it’s been the subject of some controversy and some 

misunderstanding, frankly. And we’ll report back to you. 

83

But I would love to send you and your staff something to go 

through some of the details of how this works and—— Mr. BARTON. Well, I would appreciate that because I really want 

to try to understand it. 

Mr. SLADOJE. Okay. And then one last thing. We’re only one of 

40 some scheduling coordinators, so we send schedules resulting 

from our prices and quantities from our participants up to the 

power, up to the California ISO, and then Mr. Winter takes over 

from there. 

Mr. WINTER. I think I can answer this real quickly. 

Mr. BARTON. Do it really quickly. 

Mr. WINTER. Okay. In the day-ahead market, a price is established based on a meeting of the load and the supply and a price. 

That price is then the price that the generator will get and the load 

will pay for it. That’s the day ahead. 

And if 90 percent of the load is bid in and accepted, that’s the 

price they pay. What is happening is that either the load or the 

generator has such a high price or the load sets a price that they’re 

not willing to pay above, that the day-ahead market price shortfall 

then moves into real time. 

But even in real time, if the real time price is $250 and you’ve 

bought in the day-ahead market at $100, you’re still only going to pay the $100. The $250 will only be charged to those who have not 

signed up an equal time. And that’s why I get so concerned when 

I have 16,000 megawatts in the real time price, because now I’m 

out shopping at an extremely high price. But to either have that 

in the day-ahead or the hedging ties down the price you will pay. 

Mr. BARTON. Well, that’s a whole other issue, and we need to get 

it back to where you’re not having 20 to 30 percent of your load 

in the real time market. That is absolutely idiotic to try to run a 

power grid when the next hour you’re just praying that the Lord 

will provide you power. I mean, it does not work over time. That’s 

a whole different question. 

Mr. Bilbray. 

Mr. BILBRAY. Thank you, Mr. Chairman. 

George, I was just sort of thinking when you were saying everything was going fine, we’ve had no problems, it was a great cruise, 

and we just happened to have this quote-unquote, problem. My 

daughter’s favorite movie is The Titanic, and I can just imagine the 

skipper of the Titanic saying, ‘‘It was a great cruise until we ran 

into this iceberg. I mean, what are you complaining about?’’ But we’re talking about a substantive issue here. The iceberg 

seems to be this issue that rather than 2, 3 or 4 percent, we’re 

talking 20 to 30 percent being on the spot market. So let’s try to 

melt down this iceberg and address the fact of making it clear for 

the next cruise that goes through here that the consumers get. 

Why is there so much market going to this spot market? In fact, 

one of the things is, why isn’t the block forward, the hedge market, 

being used more? 

Mr. SLADOJE. First on the hedge market itself, we began trading 

in that hedge market in July 1999. We introduced it in 1999. The 

Public Utility Commission put severe limits on what the three 

IOUs could actually hedge in that market, for their reasons, which 

I’m sure were legitimate. 

84

Mr. BILBRAY. Let’s clarify. That’s a State—PUC put limits on—— Mr. SLADOJE. Correct. The State—— Mr. BILBRAY. [continuing] what you can—— Mr. SLADOJE. [continuing] Public Utility Commission on what the 

three investor-owned utilities—how much they could purchase. 

Later on, they released and relaxed those requirements after about 

8 or 9 months, still with a meaningful limit on what they can 

hedge. 

And then on top of that, the hedging that was available to them, 

they didn’t use completely. You know, you’ll have to talk to the investor-owned utilities as to why they did or did not or what their 

strategy was. 

Mr. BILBRAY. You don’t have any idea why they would not utilize 

the resources—— Mr. SLADOJE. Well, of course, I was told by one of them that they 

just thought the block-forward prices were too high, so they didn’t 

purchase several months in advance. I’m not sure why those that 

did stopped it where they did. I think that they’ll say the market 

was probably thin and that they thought that they were going to 

move the market too much higher. But that is speculation, I think, 

because you don’t know until you actually put bids in what the response is going to be. 

So hedging was not utilized to the extent that it could have been, 

and now looking back on it, of course, should have been. And I 

don’t want to say hedging always results in lower prices because 

for about 10 months it didn’t. The prices just kind of fluctuated 

around the spot market. 

But it does provide certainty. It does provide an opportunity to 

plan, and it does provide an opportunity to strategize. So it’s still 

very important, even if you don’t realize the $600 million in savings that we did. So I think it’s a market that’s really got to be 

emphasized. 

The other issue on the real time market, we have worked with 

the ISO. We are submitting to our market monitoring committee 

on Friday, a meeting they’re having. An independent market monitoring committee’s suggestion that the price and the ISO real time 

market for generators be capped at the Power Exchange day-ahead 

market so that nobody could save generation until the 11th hour 

and get a premium. 

And by the same token, some kind of a penalty for load, who’s 

also kind of playing that game and going to the real time market, 

we want to put some device in place to encourage them both to put 

everything in the day-ahead market. 

Mr. BILBRAY. George, the utilities that are served in the public 

care, can they go out and get the best bid they can or do they have 

to go through your exchange by State law? 

Mr. SLADOJE. They are required to go through the California 

Power Exchange for all their purchases. 

Mr. BILBRAY. So you are—you basically are the clearinghouse. 

Mr. SLADOJE. That’s correct. 

Mr. BILBRAY. And I’m just saying I know that there is a—you set 

prices based on two formulas, first the bids, and then you’ve got 

what people are willing to pay, and those two lines conflict. 

Mr. SLADOJE. Correct. 

85

Mr. BILBRAY. Why are the utilities, their projected—what they 

were willing to pay, why is that inflated so much? Why would they 

constantly be increasing that number? Because I saw that it was 

a substantial increase, and that by themselves increases what the 

consumer is going to get hit with, not just the producer, but also 

utility, what they’re proposing. 

Mr. SLADOJE. When we get into these shortage situations or tight 

situations, the utilities frankly, just from an economic standpoint, 

really have no choice. They’ve really got to pay because they’ve got 

customers out there that they’ve got to provide power for. 

Mr. BILBRAY. Okay. I think that—and I guess when you get 

down to it, it’s just like you said. They really have no choice from 

two points. One, they have to provide the power. The other is the 

State law requires them to go through you and doesn’t allow them 

to go out and try to shop around for a better price outside. So they 

basically are tied to a system that is regulated—the majority of it. 

You said 85 percent. What is the rest of the market doing outside 

that 85 percent? 

Mr. SLADOJE. Well, the rest of the market, I guess, just consists 

of some of these generators who are not required to bid into the 

Power Exchange and—— Mr. BILBRAY. Like who? 

Mr. SLADOJE. Like the new generator owners that bought the 

generators that Edison, PG&E, and San Diego divested, like 

Dynagy, like Enron, Southern, Williams, Reliant and so on. They’re 

not required to bid into the Power Exchange. 

Mr. BILBRAY. Why don’t they have to go through the market? 

Mr. SLADOJE. Just not required by the Public Utility Commission. Now, they do bid into our market on occasion, most of them 

haven’t bid that heavily into our market during these 3 or 4 

months. 

Mr. BILBRAY. Okay. Especially if they can go sell it someplace 

else. 

Mr. SLADOJE. I believe that’s true. 

Mr. BILBRAY. Terry, what percentage of the market out there is 

going through your process? 

Mr. WINTER. Well, in the whole State? 

Mr. BILBRAY. The whole State. Or will when it’s all done. 

Mr. WINTER. Well, it would be 100 percent less—— Mr. BILBRAY. A hundred percent. 

Mr. WINTER. [continuing] less the municipalities. So what——

Mr. BILBRAY. Less the municipalities. Now, those are Los Angeles, Alameda and Sacramento? 

Mr. WINTER. Yes, generally. IID, I think, also. 

Mr. BILBRAY. Why aren’t they going through the process, and 

why are they exempt? In San Diego, we’re reading articles about 

L.A. as selling power out of the State and making these huge windfall profits and celebrating all these great rates. And down here in 

San Diego, we’re saying, ‘‘Wait a minute. What’s going on? Why is 

Los Angeles being given that special carve-out?’’ Mr. WINTER. The reason is that Los Angeles is a separate control 

area. Now, as the ISO, I schedule all load that goes through the 

grid. And that grid is comprised of those utilities who turn their 

transmission facilities over to me for the operation. 

86

So when I say 100 percent goes through the ISO, 100 percent of 

the power scheduled goes through the ISO. Hewlett Packard can 

schedule a 100-megawatt deal with Dynagy, a generator, and I will 

see those schedules, but I will not see the price or know even what 

the price is. 

So from a control area, I schedule it and keep track of whose 

power went where, but from a market standpoint, they do not then 

get involved in the real time market because they’ve already made 

their bilateral deal outside the market. 

Mr. BILBRAY. And so—explain this again. Where Alameda and 

Los Angeles—they had a special carve-out in the original legislation? 

Mr. WINTER. Yes. It wasn’t in the legislation. The legislation encouraged them to join the ISO and put their facilities under the 

control, but they have not done that. 

Mr. BARTON. They had an opportunity to either opt in or opt out, 

and the municipals chose to opt out. 

Mr. WINTER. Correct. 

Mr. BILBRAY. Okay. Now, did anybody else have that choice? 

Mr. WINTER. Not who were in the investor-owned utilities, no. 

Mr. BILBRAY. So they were—they didn’t have the choice, but the 

L.A. utilities had that option. 

Mr. WINTER. Correct. 

Mr. BARTON. Isn’t it true that the investor-owned utilities were 

basically forced to divest because their rate of return was below 

market, that they didn’t—they weren’t required to, but if they 

didn’t, they were—they got about a 5 percent rate of return? So in 

point of fact, like San Diego Gas & Electric was almost forced to 

divest its generation? 

Mr. WINTER. I think you would have to ask San Diego that question. In the PUC decision, it required Edison and PG&E to divest 

one half of their generation. I do not believe San Diego was put 

under that requirement. 

Now, what that means in the rate return, et cetera, I don’t know. 

Mr. BILBRAY. George, when Bonneville—the Federal Government’s generation comes into the State and is trying to get to San 

Diego consumers through SDG&E, are they required under the 

State law to come through you or could SDG&E try to work out 

some separate agreement with the Federal Government like they 

have with Los Angeles? 

Mr. SLADOJE. I just want to correct just one thing. Right now, 

the Public Utility Commission, just last month, gave three IOUs 

the opportunity to do bilateral forward purchases going out in the 

future. 

Right now—the situation has been if San Diego wanted to purchase power from Bonneville, Bonneville would sell that power into 

the California Power Exchange. 

Mr. BILBRAY. And so——

Mr. SLADOJE. And that’s the way that we’d get the power. 

Mr. BILBRAY. You’d end up paying the higher price anyways because everything that goes through yours has that set number. 

Mr. SLADOJE. Yes. If indeed our price was higher, that’s correct. 

87

Mr. BILBRAY. Now, in Los Angeles, though, they don’t have to go 

through—Bonneville doesn’t have to go through your exchange to 

get to the consumers in Los Angeles? 

Mr. SLADOJE. That’s correct. I believe they’ve got to go through 

the——

Mr. BILBRAY. And that is because the State law specifically gave 

them that carve-out. 

Mr. SLADOJE. That’s correct. 

Mr. BILBRAY. Okay. 

Mr. SLADOJE. I think the muni’s were exempt. That’s correct. 

Mr. BILBRAY. Michael, are you—Michael, I wanted to just point 

out something that Mr. Jones—they were talking about this—just 

new projects up north, an environmentaler basically trying to upgrade an old unit, come up with a new one, and that the sign-off 

of the EPA sort of holding it up for 4 months or whatever and causing basically a financial and time problem, but also not necessarily 

addressing any new environmental stuff. Do you agree with that 

statement? 

Mr. SHAMES. I don’t know enough about the facts of the case. I’m 

sorry. 

Mr. BILBRAY. Okay. I just saw you nodding, and I was just——

Mr. SHAMES. We were talking about a response that Mr. Sladoje 

had given concerning what would happen in a situation where 

SDG&E wanted to buy power from Bonneville, and it would have 

to be done through the PX. But if it was a bilateral forward contract, it would not pay the higher PX price. They would pay the 

terms of the bilateral contract and scheduled through the PX, but 

they would so—I think Mr. Sladoje, I think you misstated the facts. 

Did I——

Mr. SLADOJE. Well, I tried to correct it a minute ago when I said 

they did get bilateral authority just about a month ago. That’s correct. They got that authority for forward purchases into the future. 

Mr. BARTON. But that’s only in the last 3 months. 

Mr. SLADOJE. That’s correct. 

Mr. BARTON. Prior to that time, if SDG&E decided it could get 

a bilateral contract from Bonneville, they could do it, but the price 

they’d pay would be based on this market-clearing price at the time 

the power was delivered. 

Mr. SLADOJE. Well, they couldn’t a few months ago actually do 

a contractual arrangement. 

Mr. BARTON. They couldn’t even go out and negotiate. 

Mr. SLADOJE. No. They’d have to just go through the California 

Power Exchange and hope that the price was driven down. 

Mr. BILBRAY. Thank you. I appreciate that. 

Mr. Chairman, I just think that—and George, I didn’t mean to 

be hitting on you, but it just looks like, from a layman’s point of 

view, 100 years ago this country started outlawing systems where 

industries got together and cooperated to be able to set a price that 

was, you know, congenial to their provider capabilities. We call 

them trust—you know, monopolies or cartels. 

And frankly, it almost looks like, from a layman’s point of view, 

if I can say this sincerely, that it looks like a cartel has been developed here and that you guys are the ones that are carrying the 

88

mantel of a—you know, basically some kind of cartel that works it 

all out so no one gets burned in the long-run except the consumer. 

Now, I know that’s just—that’s just a layman’s perception, but 

I think that’s what we need to address to make sure that that isn’t 

what the reality is. 

Mr. SLADOJE. I understand. And I hope you look at us as being 

something comparable to the New York Stock Exchange or the Chicago Board of Trade where we actually bring the buyers and sellers 

together. I mean, that’s really what our mission is. 

Mr. BILBRAY. Okay. Thank you. 

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

Arizona, Mr. Shadegg, is recognized for 10 minutes. 

Mr. SHADEGG. Thank you, Chairman. 

I begin again by saying, Mr. Tyler, I deeply sympathize with the 

situation you’re in. It seems to me that, as I listen to your testimony and listen to what happened to your own utility bill and saw 

you put it up there, I recognize that my wife and I, simply in the 

Shadegg family budget, couldn’t afford to see that kind of an increasing in our energy price, and it seems stunning that we have 

created a situation where this has been allowed to happen. 

I also—I think my colleague, Mr. Hunter’s testimony about what 

is going to happen to the business climate in this community backs 

up your assertion that we need a solution and we need one very, 

very quickly. And I think Mr. Winter and Mr. Sladoje are the ones 

that we’re going to have to look to to try to at least in the shortrun provide that. 

I have to tell you that I find this rather confusing from an outsider’s perspective because I see some things here that violate all 

the principles that we’ve been talking about in energy deregulation 

at the Federal level. And the first principle that I see violated is 

the notion of a level playing field. It looks to me like we have created an unlevel playing field on at least several different tiers. 

First of all, as near as I can tell, the new law essentially applies 

to only investor-owned utilities, and as near as I can tell, it’s largely three investor-owned utilities. Is that correct? 

Mr. WINTER. That’s correct. 

Mr. SHADEGG. And as a result of the structural law, the municipals in the State have not been required to participate in this new 

process. Can somebody explain a—I understand there’s a technical 

reason for that. Mr. Winter, I heard from your testimony, which 

had to do with them being in a different distribution area, except 

it seems to me that other than perhaps interconnection issues, that 

should not have been allowed to cause them to be given a different 

playing field to play on. 

And I guess one of the questions I have to ask you is, is that 

were they given a different playing field or not required to be on 

the same playing field as the investor-owned utilities simply as a 

matter of politics. 

Mr. WINTER. Boy, what a question. No. I think it really related 

to the FERC jurisdiction. In other words, FERC has jurisdiction 

over the investor-owned utilities. FERC does not have jurisdiction 

over Government municipal entities. 

And so the State found itself in a position where the ISO operates under the tariffs of FERC, and therefore, that’s where we get 

89

our authority to actually schedule and demand people to provide 

generation, all the things that we can force people to do. That could 

not be applied to the municipality, since they were not under the 

FERC rules, and therefore, they could not be forced to join. 

Mr. BARTON. Would the gentleman yield? 

Mr. SHADEGG. Sure. 

Mr. BARTON. Is it not also true that the municipals in California 

have power generation surpluses so they could opt out simply because they had enough generation capacity to serve their market? 

And if they did opt out, they could serve their market, and they 

didn’t have to let people come into their market. Is that not correct? 

Mr. WINTER. Again, I’m not an expert, but that is my understanding. Now, I want to be careful not to say that all the municipalities had excess generation. There were many of them which 

are, in fact, in the same position and are buying out of the ISO to 

meet their needs. 

Mr. BARTON. But Los Angeles, which is the largest municipal, 

does have surplus generation capacity. 

Mr. WINTER. That’s correct. 

Mr. SHADEGG. Largely through WAPA and hydro-electric generation. Okay. 

The second unlevel playing field that I observed here, which is 

some concern to me—and I understand a little bit less than the 

first one—is that it appears that of the three major investor-owned 

utilities, one of them was in a different position, and that is San 

Diego Gas & Electric. 

And the structure, as I can read it, is that the other two IOUs 

serving other parts of the State have an incentive to forward contract and did so to a greater degree than San Diego Gas & Electric. 

Is that right? 

Mr. WINTER. That’s correct. 

Mr. SHADEGG. And as a result of having done so, you have not—

they have not experienced or their customers, the Mr. Tyler living 

in their district, has not suffered the same kind of price spikes as 

has been experienced here in the San Diego Gas & Electric territory; is that right? 

Mr. WINTER. The difference that I would say is their customers 

have not suffered it, but believe me, those investor-owned utilities 

have suffered it because their prices to the retail market have been 

frozen at a level. And so what they have been trying to do over the 

last 4 years is to recover all of their stranded cost. 

San Diego was fortunate or unfortunate in getting their stranded 

cost paid off first, so they went to the free marketplace first. But 

the investor-owned utilities of PG&E and Southern California Edison clearly have been paying prices for wholesale energy well above 

what their retail rates would support. So they are losing money 

from the standpoint of not having collected CTC, but also having 

lost money in total. 

And because of that, they have opted to do more forward contracting to try and hedge against that eventuality. 

Mr. SHADEGG. Mr. Sladoje, as I understand your testimony, the 

restrictions on buying through a bilateral contract and forward 

90

buying have now been—have they been lifted or have they just 

been raised to some degree? 

Mr. SLADOJE. They’ve just gotten permission in the last couple 

of months to do bilateral forward contracts, again, with limits, the 

same limits that they had on them as far as what they could purchase through the Power Exchange. So it’s still not unlimited, ability to do bilateral forward, but they can do some. 

Mr. SHADEGG. Have you seen an improvement in rates with them 

being able to take advantage of that? 

Mr. SLADOJE. No. I don’t think they’ve made any long-term bilateral deals yet. I know Edison just put out an RFI or an RFP just 

this week, we haven’t seen the result of any of that yet. 

Mr. SHADEGG. Are you optimistic that that will have that effect? 

Mr. SLADOJE. Hopefully, I am. Or I’m hopeful that they’ll put 

more bids into our forward markets that go out 5 years. Because 

we have seen some offers to sell going out 5 years, but we haven’t 

seen much activity on the other side. 

Mr. SHADEGG. I want to follow up on some questions by the 

chairman. The materials we’ve been given lead me to understand 

that, in fact, when the bidding process is concluded, everybody who 

has bid gets the highest rate bid. And that was the question that 

I think Mr. Barton put to you, and it’s the information we’ve been 

given as an explanation of—by our staff of the way the structure 

works here. 

Instead, you and—you and Mr. Winter have indicated it’s where 

the aggregate supply and demand curve intersect. 

Mr. SLADOJE. That’s correct. 

Mr. SHADEGG. I guess my question is, if there is a price below 

that and somebody has bid below that price, why isn’t that electricity purchased at the lower price? 

Mr. SLADOJE. There are—I don’t know—a dozen power exchanges 

in the world. They all use this methodology. And the belief is that 

those bidders who bid less than the market clearing price generally 

bid that price just to be sure that they end up selling, and that 

once we change to a traditional bid-and-ask system, then they’re 

going to be guessing as to where the market clearing price should 

be, and the suppliers are liable to bid higher. That’s the theory behind all of this anyway. 

Mr. BARTON. Would the gentleman yield? 

Mr. SHADEGG. Certainly. 

Mr. BARTON. Well, why don’t we give them a chance, for God’s 

sake. I mean, you know, if you’re ending up with a price that poor 

Mr. Tyler and his people have to pay, if somebody will bid into the 

market at 10 cents a kilowatt hour, we ought to take them up on 

it. And then if they change their behavior, then you can go back 

to the system you have today. 

Mr. SLADOJE. Well, as I mentioned, we do have a blue ribbon 

committee going to look at that this fall, going to review the results 

of the first 21⁄2 years and going to make a recommendation as to 

whether or not the theory that was originally espoused holds true. 

Certainly it would be easier from our standpoint to run a bidand-ask market. But there’s several reasons, I think, that this 

method was chosen. First of all, it is everywhere. PJM, everywhere 

91

in Europe, everywhere in Australia and New Zealand and so on, 

they utilize this method. 

Second, you’ve got to keep in mind that two of the IOUs are 

about 70 percent of the demand and still 50 to 60 percent of the 

supply. Consequently, I don’t need to explain to you that that looks 

as though there would be an opportunity to have the perception 

that they’re controlling too much of the market on both sides. 

Third, this methodology does allow small generators to jump into 

the game. Those who have 10 to 20 megawatts to sell, they can sell 

at our market, whereas at a bid-and-ask price, when PG&E and 

Edison come in and want to buy 2,000, they have no chance. 

So it’s not an all black and white issue. And I hate to quote the 

academics, but I will quote the academics. Severin Borenstein from 

Berekely who told Senator Pease the other day when he was criticizing this methodology saying, ‘‘You should go to a bid-and-ask 

type of system and get lower prices.’’ Borenstein said, ‘‘That would 

hold true if the bidders were morons.’’ And these bidders are not 

morons. 

So as I mentioned, we’ll report back to you this fall after we have 

a distinguished blue ribbon committee look at it, and if you have 

people that you think should participate in that, I’d be glad to hear 

from you on it. 

Mr. BARTON. Well, it just seems to me that you can—and I’m not 

an mathematician, and I’m not a power supply marketeer, but it 

would seem to me you create a system that the people that first 

bid in at a lower rate, the suppliers, if they’re first into the market, 

they get some incentive later on, some bonus for selling at a lower 

price than what turns out to be the higher price. 

I mean, smarter people than me could devise a system that at 

least gives the price that’s passed through an opportunity to be a 

lower price than apparently you’re getting today. But look, it’s always easy when we don’t have to do it, to question how it is done. 

Mr. Shadegg, I took some of your time, so——

Mr. SHADEGG. Some. 

Mr. BARTON. That’s the prerogative of being the chairman, you 

know. 

Mr. SHADEGG. It is the prerogative of being the chairman. Give 

me a few more years. 

I’ll try to conclude fairly quickly, Mr. Chairman. Mr. Byron, I 

want to thank you for your testimony. I think it was very thoughtful. I think several of the suggestions you made, I’d like to see the 

Federal Government do, and I’d like to follow your testimony and 

work with you in the future on that. 

Clearly, your company has been very far-sighted in looking out 

on how to deal with this. I found it also fascinating, since one of 

the issues we face is the reliability issue, and having had great difficulty getting through a broad spectrum deregulation bill in the 

U.S. Congress, we are now looking at what can we do in the balance of this section on the issue of reliability. 

And with one of my colleagues on the other side of the aisle, I 

am sponsoring a reliability piece of legislation. And having listened 

to what your testimony and read what your testimony says can 

happen with regard to reliability and, quite frankly, looking at the 

92

whole situation here, I think that’s very useful information, and I’d 

like to work with you on that. 

Mr. Shames, I want to thank you for, I think, contributing positively to this discussion. Lots of times people in you position simply 

point fingers and talk about blame, and I think that it’s been fairly 

helpful that you are not doing that. 

Looking at it in a productive way, I found it interesting that—

and I actually was thinking—suggesting to the chairman that we 

hold a hearing in Pennsylvania and look at why it seems to be 

working in Pennsylvania. Your comments on what’s going on in the 

northeast kind of enlighten me on that point and are somewhat 

helpful. 

Mr. Smutny-Jones, I want to conclude by simply asking you, the 

three recommendations you made, the first one had to do with expediting Federal rules regarding siting here in California. 

Mr. SMUTNY-JONES. In general, what I have in mind there is 

when a request comes in, for example, to the Fish & Wildlife Service, that that application is processed immediately, that it doesn’t 

go to the bottom of the stack. It’s put on the top of the stack. And 

they may say no. I mean, there are places that power plants don’t 

belong, but—Mr. SHADEGG. It’s worth a shot. Have you ever dealt 

with the Fish & Wildlife Service? 

Mr. SMUTNY-JONES. Yeah. That’s why it’s on the list. 

Mr. SHADEGG. One of our colleagues in Northern California can 

tell you about some people killed by our inability to repair a levy 

where there was an endangered species that happened to live on 

the levy. I was, I think, discovered—the levy was damaged 11 

years earlier, and ultimately a flood killed somebody because we 

weren’t able to fix the levy. But perhaps just moving it to the top 

of the pile is worthwhile. 

The last one you mentioned was—had to do specifically with the 

EPA, and I guess I wanted to get clarification on that. 

Mr. SMUTNY-JONES. Right now, my understanding, it may be 

part of the Clean Air Act. My understanding of the way the appeals 

process works now is you could come in and build a power plant. 

If the local agency says, ‘‘Yes, you’ve met our standards,’’ California 

Air Resources Board can say, ‘‘Yes, you’ve met our standards,’’ and 

then EPA says, ‘‘Thank you very much. Yes, you’ve met the standards as well.’’

A one-page letter comes in saying, ‘‘I protest that,’’ and it’s automatically stayed, regardless of its merits or not. Now, we’re not 

suggesting that people should not have the ability to participate in 

this process and challenge decisions of administrative agencies, but 

the automatic part of that stay basically means that no matter how 

silly that appeal may be, EPA is required to automatically put a 

stay on that. 

And the example I was talking about happened in Sutter County. 

They were already moving dirt when that came in. They basically 

had construction workers sitting around for 4 months. Ultimately, 

EPA said, ‘‘No, the plant is, in fact’’—‘‘meets all the standards that 

we need, and the plant happily now is under construction.’’

The problem is, whether it’s here in June 2001 when we need it 

is now being called into question. And so, you know, that—any 

93

other appeals process in a court of law or anywhere else, you have 

to show that you’re probably going to succeed on the merits. 

Mr. SHADEGG. The likelihood of prevail standard. 

Mr. SMUTNY-JONES. Right. 

Mr. SHADEGG. Thank you very much. 

Mr. BARTON. Thank you, Congressman. 

Maybe we should let the people that asked for the stay pay the 

deferred costs that are being delayed. That might be an incentive 

to think about before they send those letters in. 

We now recognize Mr. Filner for 10 minutes. 

Mr. FILNER. Thank you, Mr. Chairman. And I appreciate my colleagues trying to really understand the situation. 

Just first briefly, Mr. Tyler, your explanation of the situation of 

an earthquake, et cetera, I thought, was very important for our colleagues from out of San Diego to hear. Do you have—you said all 

you equity was gone. Do you see any hope of getting that back? 

Mr. TYLER. Actually, the hope lies that someone at all the committee levels will find an immediate answer to this. Eventually, I 

think it’ll go past the point of return. 

Mr. FILNER. I agree with you, and I understand your support of 

Mr. Hunter’s ideas, which I also support. But I will tell you, the 

only way that the victim, which is you and your colleagues and the 

individuals, are going to recover their equity is if the original folks 

who gouged us on the prices, that is, the energy—the energy generators, pay that price. 

Right now, they are not paying any price. And I have—after talking to FERC, I understand that they don’t have the authority to 

make that happen. I have a bill to make them make that happen. 

So I would hope you tell Mr. Hunter and tell Mr. Bilbray to support HR-5131 because that will give you your money back immediately. Your equity is protected in this legislation. They have—

they are the criminals here, not you, and yet the victim is going 

to pay. 

So I’m trying to get the criminal to pay here with my legislation. 

And that’s something we can do now. And I hope that you in El 

Cajon and all others will tell Mr. Hunter and tell Bilbray and tell 

Cunningham to support this legislation because that’s the only 

thing that’s going to save you equity. I guarantee it. 

Mr. HUNTER. Bob, sign me up. And I need your help in getting 

this plant cited at Miramar with all the bird and turtle people. 

Mr. FILNER. We’ve got a coalition here—we’ve got a coalition here 

that’s going to take it over to Congress. Thank you, Mr. Hunter. 

Mr. TYLER. And if I may say so, I think the important thought 

or perhaps answer in the whole thing lies with what you just mentioned, that the folks that profited from this mistake pay in business, on a business level. 

Mr. FILNER. Thank you. That’s what my aim is. By the way——

Mr. TYLER. We pay. When we make a mistake, we pay. 

Mr. FILNER. Right. 

Mr. BARTON. Would the gentleman yield just for a second? 

Mr. FILNER. And I’m sure your frustration at hearing that a blue 

ribbon committee would set up was just what you were talking 

about. You want something now. 

94

Mr. TYLER. We can investigate it, study it, question it and report 

it back, but we’re all dead by the time you get your report back. 

Mr. FILNER. I think we could—I think we can give you that action in the next 3 or 4 weeks if this committee acts and if the leadership of the Congress allows that to happen. 

Mr. BARTON. Would the gentleman yield? 

Mr. FILNER. Yes, sir. 

Mr. BARTON. And I’ll give you additional time. 

The gentleman from California just used the word ‘‘criminal.’’ Is 

there any allegation outside of the political arena of criminal activity in this? 

Mr. FILNER. There’s investigation. 

Mr. SHAMES. As I understand it, the Attorney General of the 

State of California is currently looking into that. There has been 

no finding thus far. 

Mr. FILNER. I appreciate that, Mr. Chairman. I use that word advisably. In fact, I am thinking of going to the district attorney, 

going to the State attorney general and saying that these guys 

have attempted murder of small business people. They have committed grand larceny. We’re talking about—we say they’re business 

practices. I want to get into what the gentleman said was gaming. 

But these are criminal actions, in my view, because they have— they’re robbing you of your equity, they are threatening you with 

dying, with death, and our whole economy with death. 

I don’t think we should be sugar-coating this and saying, ‘‘Well, 

this is a business practice. This is supply and demand. This is 

where those curves intersect.’’ We are affecting people’s lives here, 

and people ought to be—talk in those areas. 

I know Mr. Smutny-Jones, it looks like you’re just anxious to 

have a whack at me here. Tell me—— Mr. SMUTNY-JONES. Actually, I’m waiting for you to whack at 

me, but—— Mr. FILNER. Well, with that invitation. You represent the Independent Energy Producers Association. Like who are your—who 

are the people you represent? 

Mr. SMUTNY-JONES. I represent a large number of the generators. Here in the San Diego area, it would be Dynagy energy plant, 

Carlsbad. I represent Duke, who has a deal with the port here. I 

represent PG&E Gen, who has been trying for 7 years to build a 

power plant at Otay Mesa. 

Mr. FILNER. These are people who have basically the whole market of San Diego Gas & Electric, right? 

Mr. SMUTNY-JONES. They have a large portion of the market here 

in San Diego. 

Mr. FILNER. How much profits have they made in the last 3 

months? 

Mr. SMUTNY-JONES. I don’t have any idea. 

Mr. FILNER. You don’t have any—you’ve given us—you spent—

I have this whole thing about every little megawatt and every little 

kilowatt, and you don’t have any idea of the profits? If you had to 

go to a shareholders meeting, you couldn’t say to the people what 

they were making? 

Mr. SMUTNY-JONES. I assume that my individual members can, 

in fact, make those statements, given the fact that they are——

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Mr. FILNER. You have no idea? 

Mr. SMUTNY-JONES. I do not have any idea in terms of any specific——

Mr. FILNER. Do you know how much it costs to produce a kilowatt hour or a megawatt? 

Mr. SMUTNY-JONES. I know the ranges of it, yes. 

Mr. FILNER. What does it cost? 

Mr. SMUTNY-JONES. Well, right now in California, with gas prices pushing about $7. It depends on the type of generating unit. Some 

of them can operate around $80. Some of them are peakers, I’m 

aware of a peaker that’s a municipal-owned utility that’s up over $220. 

Mr. FILNER. Eighty dollars is, what, 8 cents a kilowatt hour? 

Mr. SMUTNY-JONES. That’s about right. 

Mr. FILNER. And what are being charged, 21 cents and up to 

much higher? 

Mr. SMUTNY-JONES. That was my understanding of someone’s 

testimony, yes. 

Mr. FILNER. Would you agree there’s no relationship here between the cost and the price? 

Mr. SMUTNY-JONES. I would basically say people have been bidding into the markets. And let me—Mr. Filner—— Mr. FILNER. Wait. You want to talk about everything about supply——

Mr. SMUTNY-JONES. Mr. Filner, let me answer. 

Mr. FILNER. [continuing] and demand. There is sufficient supply 

here. We have heard that somebody would supply this at this price, 

but they would supply more at a higher price and more at a higher 

price. That means the supply is there. They just want to do what 

Mr. Hunter said earlier—and I thought that was a very important 

metaphor—that when you’re 5 minutes away from the operation 

and need the oxygen, the guy who controls that oxygen can say 

anything he wants about the price. It’s not a question of supply. 

It’s a question of gouging that person who needs the operation. 

We need electricity. It’s there. There is no—I would like to build 

more plants, and I would like to have alternative energy sources, 

but I will tell you, the supply is there. This is manipulation of the 

market. 

Now, you don’t tell—you won’t tell me how much profits your 

guys made. We’re told that the costs that were charged to San 

Diego consumers on the last 3-month period over the year before 

was approaching $350 million. With no significant things that I’ve 

seen, an increase in cost, that means that’s all profit that was 

made this year over last year. Now, is that a wrong way of looking 

at it? 

Mr. SMUTNY-JONES. Yes. 

Mr. FILNER. Tell me why. 

Mr. SMUTNY-JONES. Three reasons. Reason No. 1, a significant 

amount of the generation that’s produced in San Diego and elsewhere was sold in the forward markets. Okay? As Mr. Sladoje indicated, those forward markets back in May and June were selling 

somewhere between $40 and $50. That power was available. It 

came out of these plants. It’s in the market. I don’t know who 

bought it, okay, but it was out there. That’s option——

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Mr. FILNER. What does that mean? 

Mr. SMUTNY-JONES. That’s option one. 

What I’m basically saying is is that if San Diego Gas & Electric, 

which did not buy any hedging product, had purchased power in 

the May/June timeframe—they were allowed to buy up to 400 

megawatts—they could have been buying it at between 4 and 5 

cents. Okay? That’s issue one. 

Issue two, since then—— Mr. FILNER. Those aren’t their plants. They had to divest their 

own by somebody else, their own by somebody—— Mr. SMUTNY-JONES. They’re currently owned by someone else. I 

am not certain if they were required to divest those plants. They 

may have because they went through a merger with Southern California Gas, which resulted in a company called Sempra being 

formed. 

So they may have been required to sell that generation because 

of that. Prior to that, however, they were not required to sell their 

plant. That’s issue A. 

Issue B, Mr. Filner, is that since then, people have come forward 

with a variety of deals. For example, one that was published here 

in the newspapers—I believe it was Duke—offered to sell power at 

5 cents for 5 years. Now, there’s a lot of people saying, ‘‘Well, that’s 

too expensive because we’re worried about maybe in year 4 it’s 

going to be 3.5 cents.’’ But the point is is that people have stepped 

forward offering those products out there. 

The third point—because I think it’s very important. You’re presuming that where the money going is necessarily to California 

generators. This is a western regional market that includes a large 

number of public entities, not only municipal utilities here, but 

BPA, WAPA, Salt River project and Canada, okay, all of whom—— Mr. FILNER. Whatever it is, they’re putting Mr. Tyler out of business. And the supply is there. There is no reason for them to be 

killing him off. Do you know that one of your clients, Dynagy, 

bought this plant in Carlsbad, paid off the cost in 1 year instead 

of the 20 that they had anticipated? That, to me, says that they’re 

making 20 times the profit that they had anticipated. 

And he is threatened to be going out of business. I have seniors 

making choices between food and air conditioning. I have small 

businesses in my district who have—are out of business. And I will 

tell you, when they look at this balancing account that the State 

legislature has set up, they’re going to look at it—Mr. Tyler is 

going to look at it. He’s going to get his bill from SDG&E, and I 

suspect—although I’ll ask SDG&E when they come—it’s going to 

say, ‘‘What you paid this year under the cap, this month, and what 

you owe.’’

And he’s going to look at that, and that’s going to grow with interest, and that’s going to be the cost that he’s worried about, not 

what he’s paying now. And I will tell you, if we don’t solve that, 

we are killing off our economy. He said it much more eloquently 

than I. Mr. Hunter said it very eloquently about the death of our 

economy. And this is all going into excess profits. And I have an 

excess profits bill I’m going to put in the day I get back. 

One last—if I can—1 more minute, Mr. Chairman. 

Mr. BARTON. I took some of your time. 

97

Mr. FILNER. Mr. Sladoje, you used words like ‘‘gaming,’’ they 

played games. You know, this is basically what’s going on here. 

Whether it’s illegal in the criminal sense, in the official criminal 

sense or not, what you call gaming, I call criminal action. 

When you say that the pricing pairs are there, that means the 

supply is available. When you say they’re holding back from the 

forward market into the real time market, that’s not a question of 

supply and demand. That’s pure manipulation. If you say 20 or 30 

percent of what we need is not in the—not in the exchange, but in 

the real time—or the forward—I’m sorry. I’m not an expert here. 

That’s games being played with this guy’s life. 

That’s why I call it criminal. They are playing games. They are—

they are doing what is called congestion gaming. They are doing 

what’s called market gaming. They are doing what’s called dayahead energy market gaming. 

Do any of your folks—do you think any of your folks, Mr. 

Smutny-Jones, have engaged in that? 

Mr. SMUTNY-JONES. Well, I did ask for a study—a report to be 

done by the market surveillance committee of the ISO. That report 

is available. And I think——

Mr. FILNER. And that’s exactly what they said has happened by 

some of your clients, that they have played the games, they have 

held back supply to increase their price, they have used—they have 

used congestion gaming to make it appears that the supply is available. They can’t use it, so they increase the price. On and on and 

on. 

And my seniors and my small business people are being killed 

off by your gaming. And I resent it, and I’m going to have legislation that I hope this Congress will pass and improve that situation. 

Thank you. 

Mr. BARTON. Thank you, Mr.——

Mr. SMUTNY-JONES. Mr. Barton, if I might. 

Mr. BARTON. Briefly. 

Mr. SMUTNY-JONES. Very briefly. Actually, what the report did, 

in fact, conclude is that there are indeed fundamental structural 

changes that need to be made on a retail level in California, Mr. 

Filner. So your seniors and the businessmen here actually have an 

opportunity to buy competitive products. 

Mr. FILNER. But they need structural changes because you guys 

are playing games with it. That market could work if you didn’t 

hold back 30 percent of it to get the extra price. That market 

would—it’s not a question of supply and demand here that you 

guys keep talking about. It’s a question of, ‘‘What price can I get 

at this moment because everybody is going to get it?’’

And the way—so the rules were set up to allow, quote, gaming. 

It’s—you didn’t have to play this game. Your guys did not have to 

play this game. And it’s a question of holding back the oxygen from 

the patient who needs it to get a price. And it sucked our economy 

out for 3 months at $350 million, and the consumers ought to be 

rising up in rebellion as a result of that. 

Mr. BARTON. Well, before I recognize Congressman Hunter, as 

the chairman of the subcommittee, I want to make just a couple 

of points. 

98

We think it’s important in Washington to let States have as 

much flexibility as possible. The great State of California did decide 

to initiate this voyage on restructuring, and they did it in a little 

bit different way. 

I don’t think any of the State legislatures that passed the law 

back in 1996 expected the kind of result that’s happened this summer. I would point out for the first 2 years, Californians have had 

what I would say below market prices compared to the national average. 

This summer, because of a series of situations, they’re in San 

Diego experiencing higher than market prices. But I cannot let 

things said in this hearing indicate that unless we have factual information, that there’s a criminal activity underway. 

Now, if the Attorney General of California has a criminal investigation, we ought to see what that says. But in the meantime, 

these are arbitrary rules that the California legislature put in 

place, and they gave authority to various State regulatory authorities to set additional regulations. 

Obviously, in hindsight, we can second-guess some of those mechanisms. That doesn’t mean there’s criminal activity going on. It is 

human nature if you have the ability to maximize whatever it is, 

whether it’s us maximizing votes or private sector maximizing profits, you’re going to tend toward that maximization unless you 

change the rules. 

And that’s what we’re here to do today, find out what the rules 

are and how either Washington can help change the rules or we 

can encourage the State of California to change the rules. But I 

can’t let people throw around charges of criminality unless there 

are facts to back those up. 

Mr. FILNER. But don’t you think those who played by those rules 

and made unconscionable profits by it should pay the price, and not 

Mr. Tyler and our small business people here in San Diego? 

Mr. BARTON. Well, it is not unconstitutional to make a profit. 

Mr. FILNER. It’s unconscionable and unethical the way the profits 

were made for a basic commodity, the way they—again, Mr. 

Hunter said it best. The patient needed oxygen, and they charged 

a fortune to get it. 

Mr. BARTON. The State of California can change the oxygen distribution system if they choose to do so. 

Mr. Hunter. 

Mr. HUNTER. Thank you, Mr. Chairman. And thank you for the 

hearing. I want to thank Brian for his work in putting this thing 

together. I think this has been a good hearing. 

I want to thank Terry Saverson, the CEO of the East County 

Chamber of Commerce, for all the work in bringing these bills forward, along with Roy’s literally hundreds of bills that we’ve analyzed and tried to—tried to figure out about how long these folks 

can last until businesses are extinguished, which has already happened in some cases over—and the other aspect is, until the business climate is judged to be so adverse in San Diego County that 

good, high-paying businesses which provide good jobs will not come 

to the county. 

Mr. Sladoje—is it Sladoje? 

Mr. SLADOJE. Sladoje. 

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Mr. HUNTER. Sladoje. Okay. Let me ask you, because this has 

been—this has been—the speaker has been used. At some time 

during this—on this real time market where you have, it’s been 

fairly well established, a captive consumer in people like Mr. Tyler, 

the other thousands of small businesses who are totally passed—

who have the total cost passed through to them by their utility 

company. 

In that real time market, that market has gone up—if you took 

10 cents a kilowatt hour—but the market has gone up to as much 

as $9 a kilowatt hour; is that right? It’s been sold off at that cost. 

Mr. SLADOJE. Oh, I think it’s been higher than that. 

Mr. HUNTER. Been higher than that? 

Mr. SLADOJE. Yes. 

Mr. HUNTER. That’s a nine—if you took 10 cents a kilowatt hour 

as a base, that’s a 9,000 percent increase. How high has it gone? 

Mr. SLADOJE. At one time when there was a price cap of $750 

a megawatt hour or 75 cents a kilowatt hour back in, I guess, May 

and June, it hit that level a couple of times. And then the price 

caps were then established at $500 and——

Mr. HUNTER. Well, now, this—I said $9 a kilowatt hour. That’s 

90 times—if you used 10 cents a kilowatt hour as a base, that’s 90 

times the base. Is that accurate, that it’s gone that high? 

Mr. SLADOJE. It’s gone—it’s gone to—well, not quite nine times, 

but almost. 

Mr. HUNTER. Almost nine times? 

Mr. SLADOJE. Yeah. Yeah. 

Mr. HUNTER. That’s a 9,000 percent increase. 

Mr. SLADOJE. That’s correct. 

Mr. HUNTER. Now, is it true, then, that a customer like Mr. 

Tyler, who is using electricity—he’s got a 24-hour restaurant—at 

that peak time is having—whether he’s a volunteer or not, he’s 

having that 9,000 percent increase passed through to him at that 

period of time of the day; is that right? 

Mr. SLADOJE. That’s correct. Unless he’s on some kind of a bill 

evening program with his utility, that’s correct. 

Mr. HUNTER. Okay. Mr. Sladoje, you said you wanted—that what 

we brought to the California power distribution system is a stock 

exchange type of a system. I think that’s our problem. I mean, do 

you agree that it’s appropriate to have a commodity like electricity 

subject to the volatility of a market that is like a pork belly futures 

market where individual consumers can have passed through to 

them increases that are 9,000 percent increases in the cost of something which they have—they have no ability to resist. They’re captive customers. Do you think that’s a working system that you’ve 

just described? 

Mr. SLADOJE. Mr. Hunter, I spent 15 years at the Chicago Board 

of Trade, and there was a time when the farmers circled the Chicago Board of Trade with their tractors because they thought the 

prices were too low. 

I think that this type of market can and should work in electricity. I think we’ve got to remember we’re in a transition period 

here, and we have to smooth these things out. I do believe that this 

type of market can and will work here ultimately. 

100

Mr. HUNTER. What—I’m trying to establish what you think is 

fair and reasonable. What do you think is—do you think a 9,000 

percent increase in a matter of hours is fair and reasonable? 

Mr. SLADOJE. No. I’m a consumer also, Mr. Hunter. 

Mr. HUNTER. What do you think is a reasonable range? 

Mr. SLADOJE. I don’t know what a reasonable range is because, 

you know, we’re talking to Jan Smutny-Jones here a few minutes 

ago about what is the cost of each generator, what is their cost of 

production. 

Mr. HUNTER. Yeah, but wait a second. 

Mr. SLADOJE. I have heard—— Mr. HUNTER. Obviously, if the generators can work, if you take 

10 cents a kilowatt hour as a base price, it may yield a small yield 

to a generator or may be right on the margin, and you’d multiply 

that by 90, by a 9,000 percent increase. I think you’ve covered his 

costs. Wouldn’t you agree with that? If he can live at—if he can live 

at 10 cents a kilowatt hour, he’s making some big profit at $9 a 

kilowatt hour, 9,000 percent increase. 

Mr. SLADOJE. Yes, but—— Mr. HUNTER. Now, let me just analogize that to a situation you 

might—if your mother-in-law needed heart medicine and sent you down to get a $10 bottle of heart medicine, and you got there at 

2 o’clock in the morning at the all-night pharmacy, which is when 

these prices might spike. 

The equivalent of what Mr. Tyler and our consumers in San 

Diego County and the other businesses are going through is having 

you come back to your mother-in-law and say, you know, ‘‘I’m 

sorry. I know you have to have this medicine. It’s a nonnegotiable. 

You’ve got to have it now. Between the hours of 1 in the morning and 2 in the morning, your $10 vial of heart medicine went to 

$1,000. Now, I had one of your checks. I’m just the pass-through. 

I had to buy it for you. I bought it for you.’’ That’s precisely what this system is delivering to our consumers. 

So I would offer to you that the system is absolutely broken, absolutely unworkable. 

Our people in San Diego County don’t have the financial legs—

some of them have already lost their business. They don’t have the 

legs for a system to work out in which you think the volatility is 

going to disappear. 

The volatility has never disappeared from the futures market or 

from the stock exchange when you’re talking about real time spot 

purchases. It’s always been highly volatile. That’s why there’s always been the possibility of major profits and major losses. 

To give that volatility to a customer who may end up paying 10 

times as much 2 hours later that they were paying at 10 o’clock 

at night is incredible. It’s totally nonworkable. 

Let me ask the rest of you. Go back to a central program that 

we’ve put together. And that is the only way I think we can survive 

this in San Diego County is to have a steady, predictable supply 

of electricity that we can offer to our job suppliers and our consumers. 

If we put a site in San Diego County, maybe at Miramar where—

the head of Miramar Air Base, General Bowden, is interested in 

siting a plant, a generating plant. If we put some of the new highVerDate Aug 2, 2002 06:03 Aug 07, 2002 Jkt 010199 PO 00010 Frm 00104 Fmt 6633 Sfmt 6602 E:\HEARINGS\67633.TXT pfrm12 PsN: 67633
101

tech generators that you folks have, Mr. Barr, we put it next to a 

36-inch natural gas line that we’ve got here, and next to a part of 

the grid that we can plug into, do you see any impediment to San 

Diego County producing effective, efficient electricity prices in the 

range of the 2 to 3.5 cents per kilowatt hour that the generators 

that Sacramento is now using in their municipal district? Do you 

see any impediment to that? Do you think that’s doable, and could 

you expand on that? 

Mr. BARR. Certainly if the political initiative is there, the political will, that can be done. The engineering part of generating electricity at those levels of costs is certainly achievable, with equipment today is that efficient and environmentally friendly. 

Mr. HUNTER. So you—and let me ask you this. We’ve looked at 

the prices of the LM-6000. That’s the G.E. generator belt around 

their aircraft engine, 2 to 3.5 cents per kilowatt hour based even 

on today’s high prices of natural gas, relatively high prices. Are you 

folks that efficient or are you close to that with your solar system? 

Mr. BARR. We’re just as efficient. 

Mr. HUNTER. Have you got—what’s your production market like? 

Do you have the capability of supplying—if San Diego should put 

together a district and site a plant, could you folks meet a fairly 

ambitious schedule? 

Mr. BARR. The question is always timing. We annually produce 

about 400 megawatts of power. That production can be ramped up. 

It’s a question of when we can begin. Because lead time equipment 

will tend to be 4 to 6 months. And it really depends on having it 

in place and sold and operating by next summer. 

Typically, it’s timed by the permit acquisition part before you can 

begin construction. But having a power station running at Miramar 

within a year will not be limited by the availability of equipment. 

Mr. HUNTER. It wouldn’t be limited by availability of equipment. 

Mr. BARR. It wouldn’t. 

Mr. HUNTER. Okay. Mr. Jones, do you have any comment on that 

in terms of siting, the time it would take to site a plant? 

Mr. SMUTNY-JONES. Well, you could probably get peak—or hopefully, if you knew you were going to install it by next summer and 

you were working on that right now, you might be able to get in 

by that period of time. You’re going to have significant longer term 

air quality problems, because San Diego—I mean, the reason it’s 

taken so long to build Otay Mesa is there is nothing to offset in 

San Diego. There’s not a lot of heavy kind of industry that throws 

a lot of NOX out there. 

Mr. BILBRAY. Mobile sources are the only thing. 

Mr. SMUTNY-JONES. Yeah. You have a very big challenge on the 

air quality piece of it. I would caution the 2 to 3 cent range, simply 

given the fact that where natural gas prices are right now. That 

may be the fixed cost recovery, the capital cost. But I’d be cautious 

about that number because——

Mr. HUNTER. Well, that’s a number that—that’s a number that 

Sacramento is generating at right now with their new generators. 

They said 3.5 cents a kilowatt hour. They said it goes between 2 

and 4. 

102

Mr. SMUTNY-JONES. They may have longer term gas deals that 

they can actually operate at that level. What I’m saying is is that 

those plants have been there for a while. 

Mr. HUNTER. They’ve got four. 

Mr. SMUTNY-JONES. The last thing is is that there are—there 

continue to be offers being put out in the market in terms of longer 

term contracts at lower prices. So if San Diego wanted to lock some 

of that in, you could, in fact, do that in the current marketplace 

and continue to go forward and build power plants if you like. 

I mean, I’m in the business of encouraging people to build power 

plants, so anything we can do to help you build at Miramar, happy 

to help you. But there are other alternatives out there now. And 

the question actually is, you know, what is the price of electricity, 

you know, 2 or 3 years out. 

What we’ve seen happen—and Mr. Shames has referred earlier, 

what happened in PJM, prices are down 70 percent over last year, 

largely because of weather and also because 20,000 megawatts of 

generation showed up. 

Mr. HUNTER. Well, I think we’ve established—and Mr. Chairman, thank you for the time. I think we’ve established that this futures market real time spot market or spot prices that can go up 

to 9,000 percent increase in a matter of hours is not a function of 

supply and demand. It’s a function of opportunity to exploit a market that we put in place with this deregulation bill. 

And Mr. Chairman, I think one thing that I think should come 

to the committee very strongly is that the folks that are affected 

by this have very limited endurance. Some of them have already 

gone broke, and a number of consumers have lost literally the 

money they were going to send their kids to school with, pay their 

mortgages with. I know a lot of folks——

Mr. BILBRAY. Pay their Federal taxes. 

Mr. HUNTER. [continuing] are just not paying their bills. 

So I think a roll-back is in order. I think also expediting these 

distributive systems or sited systems with a municipality. And I 

think that’s the only way you can avoid having to sell back into the 

energy exchange, which then can be sold back to you with enormous increase, is the only—the only game in town at this point. I 

think a roll-back to save our consumers and businesses has to 

occur. These guys need the oxygen. 

Mr. BARTON. We thank the gentleman from San Diego. 

We’re going to excuse this first panel. Unless—Mr. Winter, we’ll 

give you the last word here before we excuse you. 

Mr. WINTER. Just one thing. I’m getting into an area I don’t 

know a lot about, but I know a little bit, and that’s always dangerous. But clearly, the ISO next year—we’ve already submitted an 

RFP for what we call peaking units, which is 3,000 megawatts 

we’re trying to go out and find. That is exactly what Congressman 

Hunter is talking about in putting these units in place. 

I have to tell you that I will be very surprised if the price comes 

in at 2.5 to 3.2 cents because if you look at an LM-6000, that’s a 

single pass unit, and I don’t remember their efficiencies, but it’s 

not all that great. And I think if you were to put those in place 

and then——

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Mr. HUNTER. That’s Sacramento’s record right now. They’re 

doing 3.5 cents, according to their director. 

Mr. BARTON. Well, it depends——

Mr. WINTER. Well, then we’ve got to talk about what’s all in that 

3.5 cents. Because if you look at paying for the fixed cost, clearly 

a combined cycle with efficiencies in 55 to 60 percent, which are 

the larger power plants, they, if you spread their costs over time, 

are going to give you a much more efficient price. 

And the other thing that we haven’t talked about is we’ve really 

centered on the hours when it’s very expensive, and rightfully so. 

But I have to tell you, there are also times in the real price market 

when generators are paying me to supply power. 

And so that gets averaged over the total day. So there are times 

when you need to look at averages, and there’s times when you 

need to look at spiked prices and how they’re affecting the total 

cost of energy. So I would just caution you to keep that in mind. 

Mr. BARTON. For the absolute last word before we let this panel 

go, Congressman Bilbray. 

Mr. BILBRAY. Mr. Winters, I’d like—my concern was I’ve been 

working with Solar Turbines for the last 4 years over the fact that 

there is institutional barriers to allow people to get on grid, be able 

to provide clean, cost-effective power on-line now. 

There is institutional barriers that have existed historically in 

this country that still haven’t been torn down. And until we do that 

homework and build that foundation of allowing true competition, 

much like we did with telecommunication, we’re always going to 

have the problem with the fact that there’s not enough sources out 

there for the consumer to be protected in the long term. 

So those barriers really—and remember, this is not pork bellies 

we’re talking about. We’re talking about a utility that is mandated 

by the government. Local Government will condemn your home if 

you don’t have it hooked up to some power source. This is something that Government mandates. 

So it does catch the consumer in the Catch-22 when you have 

Government mandating you have it and Government actually creating barriers and stopping people from providing you cost-effective 

services. So I think the real challenge is to tear down a lot of those 

barriers and not just create a whole new monopoly. 

Mr. WINTER. I agree. And one of the other things that we continue to work on is what we call the gird interconnection agreement, which goes right to the heart of the subject you’re speaking 

of. 

Mr. BILBRAY. That was my responsibility under the Federal——

Mr. BARTON. You and Congressman Bilbray can agree out in the 

hall. We are going to have to suspend this panel so we can get our 

second panel. 

We appreciate your attendance, and there will be follow-up written questions for the record. Our first panel is excused, and we’ll 

ask our second panel to come forward. 

While the second panel is coming forward, a few housekeeping 

announcements. I have an airplane to catch, so we won’t take any 

breaks. Let’s expedite the exchange of panels. 

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I believe we have our second panel at least at the witness desk, 

so if you all could be seated. If everybody in the audience could reclaim your seat or step outside. 

We want to welcome the second panel. I think we have the entire 

Federal Energy Regulatory Commission here in terms of commissioners that are actually approved by the President and on duty. 

We understand you’re going to have a similar hearing tomorrow, 

and so this is kind of a dry run for you. We appreciate your testimony. 

We’re going to start with the Chairman, the distinguished Chairman of the Federal Energy Regulatory Commission, Mr. Hoecker, 

and then we’ll go right down the line. 

I have a plane that leaves at 1:40, so I’m going to have to excuse 

myself around 1 p.m. I hope we can get all the testimony on the 

record, and then maybe I can ask some questions and turn it over 

to Congressman Bilbray to continue the hearing. 

So Chairman Hoecker, welcome, again, before the subcommittee, 

normally in Washington and here in the great city of San Diego. 

We recognize you for 5 minutes. 

STATEMENTS OF HON. JAMES J. HOECKER, CHAIRMAN; HON. 

LINDA KEY BREATHITT, COMMISSIONER; HON. CURT L. 

HE ́ BERT, JR., COMMISSIONER; HON. WILLIAM L. MASSEY, 

COMMISSIONER, FEDERAL ENERGY REGULATORY COMMISSION; LORETTA M. LYNCH, PRESIDENT, CALIFORNIA PUBLIC 

UTILITIES COMMISSION; EDWIN A. GUILES, CHAIRMAN, SAN 

DIEGO GAS AND ELECTRIC; JOHN STOUT, VICE PRESIDENT, 

SOUTHWEST REGION COMMERCIALIZATION, RELIANT ENERGY; AND STEVEN J. KEAN, CHIEF OF STAFF, ENRON CORPORATION 

Mr. HOECKER. Thank you, Mr. Chairman. It’s nice to see you. I 

want to commend you personally and members of your subcommittee for having this hearing in San Diego. It’s very timely, 

and there is a need for public examination of this energy crisis. 

The Commission, as you mentioned, is having its hearing in town 

tomorrow, and we plan on probing deeply into the causes of San 

Diego’s plight as far as electric prices are concerned. 

Your witnesses today have already painted a clear but pretty disturbing picture. It is a picture of electricity markets dramatically 

out of sync with the needs of the digital economy. It’s a picture of 

an electricity market out of sync with the expectations of public 

policymakers, and most importantly out of sync with the economic 

well-being of the average electric consumer in Southern California. 

Granted, the causes and proposed solutions to all this are very 

complex, but that must not be allowed to obscure what I think are 

two basic facts. First, the California electricity markets were not 

competitive during periods of peak demand in the summer. There 

should be a risk to wholesale generators that they will lose money 

if they insist on selling at an extraordinarily high price. We are 

finding that during current supply shortages, sellers can often 

name their price. 

Likewise, at the retail level, if retail competition is about choice, 

where were the options for San Diegans in buying electricity? It appears to me there were none. There were few, if any, suppliers 

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competing with San Diego Gas & Electric for the business of energy consumers here. Citizens of this community had no information, they had no warning, and most of all, they had no options. 

I agree with Supervisor Jacob that San Diegans were blameless 

in what is an awful situation. At some point, it’s my belief that 

when markets don’t work, rationing an essential commodity like 

electricity by price alone is unacceptable. 

The second fact I’d mention is that it ought to be clear that the 

efforts of State and Federal Governments, and the private power 

companies to anticipate and avoid this crisis simply proved inadequate. There is plenty of responsibility for this market’s performance and its prices to go around. That’s to be sure. But this ought 

to be about accountability and not about blame. And I appreciate 

you setting that tone. 

In that connection, I therefore commit the Commission to work 

with you and the policymakers in this State to identify and address 

the real problems to the fullest extent of the Commission’s authority. 

Now, if that means devising new ways to thwart market power, 

we will try to do that. If that means changing market rules and 

wholesale market structures, then we will do that. If it means imposing stricter controls on the ability to collect market rates at certain times, then we will do that. And if it means making rates subject to refund during high-risk periods, at least until we can reasonably be confident that Californians will be receiving price signals instead of price shocks, then the Commission will undertake 

that as well. 

We will be assessing the need for these actions tomorrow and in 

the future, as we go through our investigation and hearings on 

these issues. 

Now, I am enormously gratified by the CPUC’s actions to lift restrictions on the ability of wholesale purchasers like SDG&E to 

hedge in forward markets and to buy outside the ISO and PX markets, and the CPUC’s order to refund stranded cost overcollections. 

And I would also congratulate Governor Davis and the legislature 

for their leadership in getting rates back to normal levels in San 

Diego and working to expedite the siting of new generation facilities. 

Meanwhile, the FERC has allowed the ISO to reimpose purchase 

price caps in the wholesale market. The Commission is vigorously 

pursuing its investigation of this summer’s price spikes and reliability problems in California. The report of the Cal ISO’s market 

surveillance committee, which I just received, promises to be a 

great help. 

And while Federal law does not allow the Commission to impose 

rate remedies retroactively, we are prepared to do all in our power 

to get the facts and then fix the problems. 

Thank you, Mr. Chairman. Thank you for inviting the Commission, and we’ll be pleased to respond to your questions. 

[The prepared statement of Hon. James J. Hoecker follows:]

PREPARED STATEMENT OF HON. JAMES J. HOECKER, CHAIRMAN, FEDERAL ENERGY

REGULATORY COMMISSION

Mr. Chairman and Members of the Subcommittee: Good morning. I am James 

Hoecker, Chairman of the Federal Energy Regulatory Commission (Commission). 

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Thank you for inviting me and the other members of the Commission to participate 

in today’s hearing on recent developments in California’s electricity markets. I commend Chairman Barton and the members of this Subcommittee for responding 

quickly and constructively to the plight of southern California ratepayers and I 

want to assure the Subcommittee that the Commission is prepared to take appropriate action based on a factual understanding of what went wrong and to work 

hard to ensure that competition brings benefits, not risks, to consumers in the future. 

I want to stress four key points:

1. The Commission is very concerned about high electricity prices in California and 

their effect on consumers. The Commission is actively investigating the causes 

of high wholesale market prices, and is committed to taking prompt action to 

correct identified problems. 

2. Since California’s 1996 enactment of landmark legislation establishing electric retail competition (AB 1890), the Commission and the State have cooperated in 

restructuring power markets in California. California’s restructuring legislation 

affected matters within the Commission’s jurisdiction. However, the Commission chose at the time to work hard to give deference to the State’s approach 

to restructuring and to implement the State’s approach to restructuring on an 

aggressive schedule. It is still unclear whether this summer’s events require 

fundamental changes in that approach, but we should be willing to make them 

if necessary. 

3. Possible causes for the sharp price increases include insufficient additions of new 

generating facilities, rising demand for electricity, lack of hedging by buyers, 

unusually hot weather over a large region, inefficient market rules, and, according to some observers, collusion or other anticompetitive behavior by generators. 

While our investigation is not complete, my preliminary view is that California’s 

markets are being affected primarily by an imbalance of supply and demand, 

and that wholesale market rules and structure may have exacerbated the resulting price increases. 

4. The Commission has responded to these events by approving programs for eliciting voluntary load reductions from customers on peak days, rejecting a challenge to the decision of the California Independent System Operator Corporation (ISO) to lower its payments to power sellers, and initiating a fact-finding 

investigation as well as a formal proceeding with refund protection. However, 

the Commission has limited ability to relieve the immediate customer crisis. Important aspects of this problem are a State responsibility, such as authorizing 

construction of new generation and transmission facilities. Moreover, plans for 

competitive bulk power markets in the long-run would be aided immeasurably 

by Federal legislation. 

I. RESTRUCTURING IN CALIFORNIA AND THE COMMISSION’S ROLE

AB 1890 radically restructured the electric industry in California. Prior to enactment of AB 1890, most electricity consumed in California was supplied by verticallyintegrated utilities with franchise service territories. These utilities owned power 

plants to generate the electricity, as well as transmission and distribution facilities 

to deliver the power to customers. The utilities were required to serve the retail customers within their territories, and retail customers within those territories were 

required to buy from those utilities. 

AB 1890 ‘‘unbundled’’ the traditional service of California’s three major investorowned utilities, creating a new structure and new institutions to allow competition 

for retail power sales. Under AB 1890, generators may sell power directly to customers or into the markets operated by a new entity created under AB 1890, the 

California Power Exchange Corporation (PX), except that the three major utilities 

were required to buy and sell exclusively through the PX for a period of time. Operational control of the high-voltage transmission facilities of the three major utilities 

was transferred to the California ISO, another new entity created under AB 1890. 

The three utilities divested most of their generation assets in response to State 

stranded cost incentives, but they continue to provide distribution services within 

their franchise territories. 

Under AB 1890, the retail rates of California’s three major utilities were frozen 

until they finished recovering their stranded costs, through a Competitive Transition Charge. Last year, San Diego Gas & Electric finished recovering its stranded 

costs and its rates were no longer frozen. The rate shocks occurred when this utility, 

after fully recovering its stranded costs, continued to buy all of its power through 

the California PX at spot (short-term) prices and immediately flowed through these 

high short-term prices to retail customers. 

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The Commission’s primary role in electricity markets under the Federal Power 

Act (FPA) has remained unchanged since the 1930s. FPA Sections 205 and 206 give 

the Commission jurisdiction over the rates, terms and conditions of sales for resale 

of electric energy and transmission service in interstate commerce by public utilities. FPA Section 203 gives the Commission jurisdiction over public utility transfers 

of ownership or control of facilities used for these services. Public utilities regulated 

under FPA sections 203, 205 and 206 include investor-owned utilities but exclude 

government-owned utilities (such as the federal power marketing agencies and municipal utilities) and most cooperatively-owned utilities. 

Developments in the market itself, such as competitive generation by non-traditional utilities, have made the wholesale market more competitive, dynamic and 

commercially important. The unbundling of services in California expanded the 

Commission’s role in California’s electricity markets. Both the California ISO and 

the California PX are public utilities, and their sales for resale and transmission 

services are within the Commission’s jurisdiction. Additionally, the three major utilities in California are public utilities, and their sales for resale and transmission 

services also are within the Commission’s jurisdiction. 

For over four years, the Commission has made a significant investment of resources in carrying out the fundamental mechanisms of AB 1890. We issued extensive orders authorizing the initial creation of the ISO and PX and, since then, have 

acted on almost 30 filings by the ISO alone to amend various rules and procedures. 

Often, the Commission has been asked to expedite action on these matters in order 

to address problems needing quick attention, and we have done so consistently. In 

addition, the Commission has deferred to the policy choices made by state legislators, regulators and stakeholders in the California restructuring, such as the total 

separation of the ISO and PX, a requirement that the three major IOUs buy and 

sell electricity exclusively through the PX’s short-term markets, a requirement that 

the ISO rely exclusively on short-term markets to obtain reliability services, a governance board for the ISO and PX consisting of representatives from defined stakeholder groups and a state-appointed oversight board for these two entities. 

We deferred to these choices in part because our own experience with bulk power 

competition and institutions like independent system operators had not advanced to 

the point where the Commission felt comfortable being prescriptive. Today, with 

Order No. 2000 on the books encouraging the formation of regional transmission organizations (RTOs), the Commission is in a very different posture with respect to 

the structure of wholesale markets under RTOs. 

Today, the Commission continues to regulate transmission and sale for resale activities in California’s electricity markets, and the State continues to regulate retail 

activities. For example, sales of electricity to end users are retail sales, a matter 

left to the States under the FPA. States likewise have jurisdiction over local distribution facilities and the siting of generation and transmission facilities. 

Let me emphasize two points. The Commission does not prescribe how states 

should open their retail markets. In addition, most states have been less prescriptive than California in telling the Commission how their wholesale markets should 

operate. Despite this, I think it is still fair to say that California and the Commission share the same goal—an electric industry that provides reliable and efficient 

service to consumers at reasonable prices. The constructive working relationship developed between California and the Commission in recent years is particularly important as we seek to serve the public interest under conditions that stress the 

power system. The State and the Commission must continue to work together to ensure that any regulatory response to current events does not undermine reliability 

of the electric system or unduly delay the maturation of competitive wholesale electricity markets to the detriment of consumers. 

It is my belief, and the position of the Commission, that consumers will benefit 

from competition in wholesale markets. Competition requires a sufficient number of 

competitors and a market structure and market ‘‘rules’’ that do not interfere with 

efficient market operation. In properly structured markets, wholesale buyers can 

choose from a wide range of sellers, and sellers can reach many more buyers. Effective competition can allow investment decisions to be driven by the market forces 

of supply and demand, not by regulatory decisions. The result is lower prices for 

wholesale buyers (and, ultimately, their end-use customers) than if we continued to 

rely on cost-based regulation of these markets. 

However, the Commission’s encouragement of competition in wholesale markets 

is not driven by a blind ideological devotion to deregulation. Instead, our policies 

are based on the practical belief that, in today’s wholesale power markets, competition will produce the most benefits for consumers. Our goal, consistent with the 

FPA, is to use our regulatory authority to serve the public interest and ensure benefits for consumers, whatever approach that may require. In general, the Commission 

108

has adopted policies that involve thorough regulation of access to, and prices for, 

essential transmission services; careful attention to mergers and other corporate 

consolidations that may concentrate generation markets; and relatively light-handed 

regulation of wholesale rates for sellers that lack market power. 

Various parts of the country have different utility operations and business cultures, different market structures, and different retail competition policies. But, utilities are tied together commercially and operationally by a network of transmission 

that will support an ever-widening traffic in electrons in the years to come. Large 

regional markets can be made to work effectively. For example, in the case of Pennsylvania, whose utilities operate within the PJM Independent System Operator and 

whose retail customers were allowed to choose their power suppliers several years 

ago, the results contrast with what has happened in California. Pennsylvania’s Department of Revenue estimates that, to date, the total benefit of competition over 

regulation to the state’s gross state product is $770 million. Individuals have saved 

$562 million in inflation-adjusted dollars. 

II. RATE SHOCKS THIS SUMMER IN CALIFORNIA

Wholesale prices in California appear to have increased significantly this year, at 

least for the summer peak months. According to San Diego Gas & Electric Company, for example, prices in June and July of 1999 rarely exceeded $150/MWh, 

while prices for the same period this year exceeded $250/MWh in 167 hours and 

$500/MWh in 59 hours. According to Southern California Edison Company, the total 

cost of electricity charged to the California market for June 2000 was nearly half 

of California’s total electricity cost for all of 1999. 

In addition to price increases, California’s retail consumers have increasingly been 

alerted of the risk of brownouts or blackouts. In mid-June, this risk was realized 

for thousands of consumers in the San Francisco area, during a virtually unprecedented heat wave. 

These events have prompted a number of actions in recent weeks. Earlier this 

summer, for example, the ISO lowered the price at which it would buy certain types 

of energy from $750/MWh to $500/MWh, and later to $250/MWh. In response, a 

market participant filed a complaint with the Commission, arguing that the ISO improperly exercised its authority to reduce the purchase price caps in its markets. 

The Commission resolved this case quickly, concluding that it need not evaluate the 

ISO’s decision to lower the maximum price at which it will buy imbalance energy 

and ancillary services. 

Recognizing the need for pro-active steps in California as well as other parts of 

the country, the Commission in late July directed its staff to investigate the conditions in bulk power markets in various parts of the country. Staff was told to determine any technical or operational factors, regulatory prohibitions or rules (Federal 

or State), market or behavioral rules, or other factors affecting the competitive pricing of electric energy or the reliability of service, and to report its findings to the 

Commission by November 1, 2000. In addition, I have asked staff to accelerate its 

investigation as it relates to California and Western markets because the serious 

events here warrant special attention to California. 

In July of this year, San Diego Gas & Electric Company filed a complaint with 

the Commission, seeking immediate imposition of a seller’s price cap of $250/MWh 

for all public utility sellers in the California ISO and PX markets. On August 23, 

the Commission ruled on this complaint. The Commission instituted formal hearing 

proceedings under FPA section 206 to investigate the justness and reasonableness 

of the rates of public utility sellers in the California ISO and PX markets, and also 

to investigate whether the tariffs, contracts, institutional structures and bylaws of 

the ISO and PX are adversely affecting the efficient operation of competitive wholesale power markets in California and need to be modified. The Commission was unable to grant SDG&E’s request for a seller’s price cap because it had not provided 

sufficient evidence to support immediate imposition of such a cap. However, the 

Commission left undisturbed the ISO’s $250 per MWh purchase price cap, and explained that this will serve to mitigate price volatility in both the ISO and PX markets. By establishing the hearing proceeding in the August 23 order, the Commission will have the ability under the FPA to order refunds, if appropriate, if it finds 

that rates for sales by public utilities to the ISO or the PX are unjust and unreasonable. 

Other important actions were taken to provide more immediate relief to hard-hit 

retail ratepayers. For example, in late August, President Clinton extended $2.6 million in federal emergency loans to low-income residents in the San Diego area to 

help pay their electric bills. This amount doubled the funds that the affected region 

in Southern California receives under the LIHEAP program. The California Public 

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Utilities Commission (CPUC) has authorized SDG&E to refund certain stranded 

cost overcollections to its customers, to help offset increased retail rates. Similarly, 

Governor Davis has recently signed legislation adopting a rate stabilization plan for 

San Diego customers and expediting the authorization of construction of new generation and transmission facilities. Finally, the CPUC, the California Electricity 

Oversight Board and the California Attorney General have undertaken investigations of the problems in the State’s electric markets. The Commission welcomes all 

these measures. Now, we must focus on longer-term and structured market issues. 

III. POSSIBLE CAUSES FOR THE PROBLEMS

As I noted, the Commission is undertaking careful and thorough investigations to 

address the recent problems in California this summer. I cannot prejudge the results of our investigative work. There are complex questions of fact involved. As a 

preliminary matter, however, there appears to be a select list of problem areas that 

command our closest scrutiny. Clearly, the problems that may have otherwise 

caused aberrant prices in California were exacerbated by the unusually high temperatures over the West, limiting California’s ability to import power from neighboring states. Market-specific issues that are of more direct interest to the Commission include:

• Most observers agree that additions of new generating facilities in recent years 

have not kept pace with rapidly rising electrical demand in California and 

neighboring states. Among other things, this limits California’s ability to import 

power from other states. The 12 percent estimated increase in California’s electric demand since 1996 is unmatched by expansion of the infrastructure or 

means to manage the demand-side response; • inefficient market design including, for example, flawed rules for managing transmission congestion; • a lack of long-term contracting strategies for purchasing electricity; • a lack of demand-side response programs that would allow buyers to receive and 

respond to price signals, ensuring that both the demand and supply side of this 

market are fully functioning; • alleged collusion among sellers or other anticompetitive behavior by market participants; • little competition at the retail level by energy service providers; and, • transmission congestion that may have restricted imports. 

A combination of these or other factors may have contributed to the problems 

California faced at various times. My preliminary view is that the fundamental 

issue is an overall imbalance of supply and demand. When demand increases and 

supply does not, prices can be expected to go up. The lack of adequate supply may 

be an inheritance from a pre-competitive era but it cannot be allowed to endure. 

Nevertheless, wholesale market rules and structure may have exacerbated the resulting price increases. 

IV. WHAT CAN THE COMMISSION DO AND WHAT CAN IT NOT DO?

The seriousness with which we view the situation in San Diego is shown by the 

Commission’s quick resolution of the complaints filed with the Commission this 

summer. In the cases presented to us, the Commission still afforded the industry, 

market participants, and members of the public opportunities to comment on the 

complaints and how the Commission should address them. Similarly, earlier this 

summer, the Commission carefully reviewed and approved the ISO’s proposed demand response programs. These programs allowed the ISO to prearrange for load 

reductions from customers when necessary to meet peak demands. Tomorrow the 

Commission will be holding a public meeting here in San Diego to learn more about 

the problems in California’s wholesale markets and hear what others recommend 

as appropriate courses of action. 

The Commission is hard at work on completing its fact-finding investigation into 

California’s wholesale markets. As soon as the staff provides its report to the Commission, the Commission is prepared to implement further measures, if appropriate, 

to address the issues we are discussing today. If we need to fix market rules or market structures within our jurisdiction, we will do so. If market power is being exercised as some have alleged, we will respond accordingly, by revoking market-based 

rates or otherwise. We may order refunds to the extent allowed by the FPA, if refunds are justified by record evidence. We also intend to act promptly on the recently-filed cases addressing these issues, and on any other filings that we may receive in the coming weeks. 

However, the FPA defines the boundaries of the Commission’s authority, and prevents us from taking certain actions that have been suggested. For example, we canVerDate Aug 2, 2002 06:03 Aug 07, 2002 Jkt 010199 PO 00010 Frm 00113 Fmt 6633 Sfmt 6621 E:\HEARINGS\67633.TXT pfrm12 PsN: 67633
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not change the rates, terms and conditions of services until we have a record supporting such action. Also, the statutes we implement do not permit us to order retroactive refunds of amounts charged this summer to San Diego Gas & Electric Company. And, we cannot unilaterally change the status of municipal utilities. 

V. WHAT CAN OTHERS DO?

Others also have a role to play. For example, the State of California should continue working to remove any unreasonable impediments to the siting of new generation and transmission facilities. The State also should ensure that State-regulated 

wholesale buyers can choose prudently among the full range of possible buying options, including entering into long-term contracts or into hedging arrangements. The 

State also should take further actions to facilitate demand response to prices 

through such measures as real-time metering, and encourage entry by retail competitors so that retail customers may be offered a broader array of pricing options. 

Congress, too, has a role to play. In this industry, as elsewhere, uncertainty can 

deter new investments. I believe the uncertainty about Federal restructuring legislation is among the factors chilling investment in new generating and transmission 

facilities. As I have testified previously before this Subcommittee, I believe Congress 

should enact legislation that includes four main elements:

(1) placing all electric transmission in the continental United States under the same 

rules for non-discriminatory open access and comparable service; 

(2) reinforcing the Commission’s authority to foster regional transmission organizations; 

(3) establishing mandatory reliability rules to protect the integrity of transmission 

service, relying on a self-regulating organization with appropriate Federal oversight of rule development and enforcement; and, 

(4) providing the Commission with appropriate authority to remedy market power. 

The other components of balanced restructuring legislation for the bulk power 

market are reform or repeal of the Public Utility Holding Company Act and clarification of Federal/State jurisdiction. 

While each of these legislative reforms is important, the issues we are discussing 

today emphasize the Commission’s need for effective tools to address market power. 

Currently, the Commission has only limited remedies available to address market 

power problems. The Commission can prevent enhancement of market power when 

utility mergers or other corporate transactions require authorization under FPA section 203. This remedy does not address market power that is already built into current commercial and operational arrangements, however. The Commission also can 

deny or revoke authorization for market-based wholesale rates. But, when this approach is employed to reimpose cost-based rates, the Commission does little or nothing to promote efficiency or competition. And, in California where generation plants 

have recently been sold at well above book value, cost-based rates may not represent 

a real reduction. 

Reforms to the Federal statutory scheme are appropriate to permit regulators to 

keep up with the challenges posed by market power in evolving markets. Without 

such reforms, and without adequate remedial authority, market power could be used 

to impair competition and the related benefits to consumers. For example, the Administration’s bill would even allow the Commission to address market power in retail markets, if asked to do so by a state lacking adequate authority to address the 

problem. The Administration’s bill would also give the Commission explicit authority to address market power in wholesale markets by requiring a public utility to 

file and implement a market power mitigation plan. I believe it would be helpful 

to close these gaps in the Commission’s remedial authorities, and to provide future 

protections in circumstances like those in California. 

VI. CONCLUSION

Recent events cast doubt on anyone’s ability to predict or prevent aberrant prices 

in complex electricity markets. Price spikes are a timely reminder that, while we 

are involved in the intoxicating work of re-inventing a major industry, we must look 

diligently after consumer needs throughout this difficult transition. We must do so 

because electricity is so essential to people that it cannot always be rationed purely 

by price. We must also do so to ensure that competitive market initiatives are not 

summarily reversed before their benefits to the public become real and apparent. 

In conclusion, the Commission remains committed to effective competition in 

wholesale power markets, as the best means to ensure reasonable rates for electricity. If competition is not working well, our current investigations will allow us 

to identify the problems and take appropriate remedial action. 

Thank you.

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Mr. BARTON. Thank you, Chairman Hoecker. We’d now like to 

hear from distinguished member of the Commission, Commissioner 

Linda Breathitt. 

STATEMENT OF HON. LINDA KEY BREATHITT 

Ms. BREATHITT. Thank you, Mr. Chairman. Good morning to you 

and to other Members of Congress. Thank you for inviting me to 

appear before you to discuss the price spikes and volatile electricity 

markets confronted by California consumers this summer. And you 

also asked us to comment on the continuing need for Federal electric utility restructuring legislation, and I have done so in my testimony. 

This is an urgent matter deserving careful attention by Congress, 

the administration, the FERC and California regulators, legislators 

and market institutions. I can assure you that my colleagues and 

I share your concerns and are just as anxious to understand this 

difficult situation. 

My experience as a regulator at the Federal level has taught me 

a lot about how wholesale markets work, but my experience as a 

State regulator in Kentucky taught me a lot about retail customers’ concerns and problems. 

This is an important session for me to hear firsthand the plight 

and concerns of California consumers, and I have begun to do that 

with the excellent panel you put together this morning. 

The price volatility experience by California consumers this summer are complex, as we have heard, and many have speculated as 

to the causes of these problems. I list nine causes that I have heard 

about, and I’m not going to list them all because they’re in my testimony, but several of them are higher than expected loads, a lack 

of demand side response, impediments for utilities to hedge in forward markets, et cetera. 

But when combined, all of these and other conditions have led 

to higher market prices and higher bills for consumers, and it is 

crucial that we continue to examine this situation and look for 

other factors, if there are any, for this price volatility. 

And once we have this information, we will be better able to decide on the appropriate steps that will be necessary to correct the 

problems. But our fact-finding has already begun, as the chairman 

stated. We are holding our meeting tomorrow. 

Second, we have directed our staff to initiate a thorough factfinding investigation of factors affecting competition and market 

fluctuations, and we have directed staff to identify any technical, 

operational or behavioral factors affecting competitive pricing. 

They’re to report to us on November 1 for that market investigation. 

Third, in response to a complaint filed by San Diego Gas & Electric, we instituted hearing proceedings pursuant to Section 206 of 

the power act. And there, we will investigate the justness and reasonableness of the rates charged by public utilities that sell energy 

and ancillary services to and through the ISO and the PX. 

A Section 206 investigation provides a mechanism for the Commission to exercise its remedial powers to change the rates, terms 

and conditions of jurisdictional services that are found to be unjust 

and unreasonable, and if appropriate, to order refunds. 

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So our goal of these investigations is to detect, and to the extent 

within our jurisdiction, to resolve as expeditiously as possible any 

defects in the bulk power markets in California and elsewhere. 

Because regulation of the California market is shared between 

FERC and various State regulators, it will be imperative that we 

work closely together in order to arrive at a reasonable and timely 

resolution of these problems. I am committed to such a partnership 

with my State colleagues. 

Since the enactment of AB-1890 by the legislature in 1996, the 

State legislature, which dramatically restructured the utility industry and implemented retail access, FERC has devoted significant 

resources to processing tariffs and agreements proposed by the ISO 

and PX. 

And in fulfilling our jurisdictional responsibilities with regards to 

these markets institutions, we’ve had to make some tough decisions 

regarding the formation of the competitive markets in California. 

And I believe we’ve been mindful of the ambitious goals of the 

PUC and the legislature. However, there are flaws in the existing 

market that must be repaired, and the solutions must result in a 

lasting solution. We must find ways to encourage supply into the 

market, which includes generation and transmission. 

So the opportunity to benefit consumers through the creation of 

competitive markets is too important to squander, and I urge all 

of us to work together to achieve these benefits that consumers are 

entitled to have. Thank you. 

[The prepared statement of Hon. Linda Key Breathitt follows:]

PREPARED STATEMENT OF HON. LINDA KEY BREATHITT, COMMISSIONER, FEDERAL

ENERGY REGULATORY COMMISSION

Mr. Chairman and Members of the Subcommittee: Thank you for inviting me to 

appear before you this morning in San Diego to discuss the price spikes and volatile 

electricity markets confronted by California consumers this summer and the continuing need for Federal electric utility restructuring legislation. Let me begin by 

commending you, Mr. Chairman, Congressman Boucher, and other Members of the 

Subcommittee for sensing the urgency of the situation in southern California and 

convening this important congressional hearing in San Diego. This is a matter deserving careful attention by Congress, the Administration, the Federal Energy Regulatory Commission, and California regulators, legislators, and market institutions. 

I can assure you that my colleagues and I share your concerns and are just as anxious to understand fully this difficult situation. I have no doubt that today’s hearing, 

as well as recent actions taken by FERC, which I discuss below, will result in significant findings that will lead us to real and long-lasting solutions to the problems 

affecting the energy markets in this region. 

The electricity market abnormalities experienced by California consumers this 

summer are complex and multi-faceted. Although many in the energy industry and 

media have speculated as to the causes of these problems, the exact origin is not 

known. What is known, however, is that the result of these market flaws has been 

alarming for consumers and policy makers alike. For instance, we have learned that 

prices for electricity in the San Diego area have more than doubled this summer, 

with the average monthly residential bill rising from around $50 to more than $100. 

Some accounts even estimate that, during the second week of June, purchasers of 

California power paid 300 percent more than they paid during the same period in 

1999. These are troubling estimates that have caught the attention of the entire Nation. 

Several causes of this price volatility have been proffered by various industry analysts. These include: (1) a lack of new generation resources being sited and constructed in California, leading to tight regional demand/supply conditions; (2) a lack 

of new transmission facilities leading to reduced availability of imports into California; (3) higher-than-expected loads (i.e., a 15 percent increase in average daily 

peak since 1999); (4) a lack of demand-side programs that allow consumers and 

businesses to receive and respond to price signals; (5) impediments for utilities to 

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hedge in forward markets, resulting in an over-reliance on the spot market; (6) 

flawed market structures, such as congestion management and ancillary services 

markets; (7) underscheduling of loads and generation in the Day Ahead market; (8) 

possible exercise of market power by both in-state and import suppliers; and (9) unusually high temperatures in southern California. When combined, these and other 

conditions would likely lead to higher market prices and ultimately, to higher electric bills for consumers. However, since we cannot identify the exact underlying 

causes, it is crucial that we delve deeply into this situation in order to ascertain 

whether these or other factors are to blame for the price volatility. Once we have 

this information, we will be better able to decide on the appropriate steps that will 

be necessary to correct the problems. This important fact-finding process has already begun. 

Earlier this summer, FERC undertook definitive actions to address market abnormalities in California. First, and most recently, on September 1, 2000, we announced that we will convene a public meeting here in San Diego to allow interested 

persons to give us their views on recent events in California’s wholesale markets. 

This public meeting will be held tomorrow, September 12, 2000, beginning at 9:00 

a.m. at the San Diego Concourse. This public meeting will be an important forum 

for FERC to obtain first-hand information regarding the concerns of consumers that 

were affected by these price spikes and to hear from policy makers on recommendations they may have to address this situation. 

Second, on July 26, 2000, we directed our Staff to initiate a thorough fact-finding 

investigation of factors affecting competition and market price fluctuations in electric bulk power markets in various regions of the country, including California and 

the Western region. We directed Staff to determine any technical or operational factors, regulatory prohibitions or rules (Federal or State), market or behavioral rules, 

or other factors affecting the competitive pricing of electric energy or the reliability 

of service. Staff is to report its findings to us by November 1, 2000. Since the 

issuance of that order, Staff has been directed to concentrate its initial efforts on 

the California market and to report to us on that portion of the investigation as 

soon as possible. 

Third, on August 23, 2000, in response to a complaint filed by San Diego Gas & 

Electric Company (SDG&E), FERC instituted hearing proceedings pursuant to Section 206 of the Federal Power Act. As part of these proceedings, we will investigate 

the justness and reasonableness of the rates charged by public utilities that sell energy and ancillary services to or through the California Independent System Operator (ISO) and Power Exchange (PX). We will also investigate whether the tariffs 

and institutional structures and bylaws of the California ISO and PX are adversely 

affecting the efficient operation of competitive wholesale electric power markets in 

California and need to be modified. As our order explains, a Section 206 investigation initiates a formal evidentiary process where all interested parties are assured 

an opportunity to present evidence and arguments on the record before the Commission. In addition, it provides a mechanism for the Commission to exercise its remedial powers to change the rates, terms and conditions of jurisdictional services that 

are found to be unjust, unreasonable, unduly discriminatory or preferential and, if 

appropriate, to order refunds. 

Our overarching goal in these investigations and hearings is to detect and, to the 

extent within our jurisdiction, to resolve as expeditiously as possible, any defects in 

the operation of competitive bulk power markets in California and elsewhere. It is 

important to understand that, while FERC has jurisdiction over certain aspects of 

the California market, such as wholesale electric prices and the market design and 

rules of the ISO and PX, certain other factors fall within the jurisdiction of state 

regulatory authorities in California. In particular, these include the siting of new 

generation and transmission facilities, the removal of constraints on hedging in forward markets, and the implementation of consumer demand-side programs. These 

are important functions that must receive serious consideration by the California 

regulators. 

Because regulation of the California electric market is shared between FERC and 

various State regulators, it will be imperative that we work closely together in order 

to arrive at a reasonable and timely resolution of these problems. I am committed 

to such a partnership with my State colleagues. 

Although FERC has undertaken important activities over the past few months to 

address the current situation in southern California, our involvement in the California energy markets has not been limited to this summer. Since the enactment 

of A.B. 1890 by the California Legislature in 1996, which dramatically restructured 

the California electric utility industry and implemented retail access, FERC has devoted significant resources to analyzing and processing the myriad tariffs and agreements proposed by the ISO and PX. In fulfilling our jurisdictional responsibilities 

114

and duties with regard to these market institutions, I believe FERC has been especially diligent over the past four years in addressing the interests and concerns of 

California regulators, legislators and industry stakeholders. We have had to make 

some tough decisions regarding the formation of competitive bulk power markets in 

California, but I believe we’ve been mindful of the ambitious goals of the California 

PUC and Legislature to create competitive markets in that State. 

However, there are flaws in the existing market structure that must be repaired 

and the repairs must result in a lasting solution. That is why I supported our decision on August 23, 2000, to deny SDG&E’s request for an immediate cap of $250 

per MWh on seller’s prices in California. In my opinion, approving the seller’s price 

cap at this time would have been an inappropriate and rash action that would have 

sent the wrong signal to the market. I am concerned that such a cap would only 

exacerbate the current scarcity of supply by discouraging generators from serving 

California markets. We must find ways to encourage supply into the market and 

to ensure a sufficient generation and transmission infrastructure. 

I continue to believe that robust competitive wholesale bulk power markets are 

attainable. Moving forward, not retreating, is the right thing to do. In order to accomplish this challenging work we will need the assistance and commitment of Congress. As I testified before this Committee last October and before the Senate Committee on Energy and Natural Resources in April, I continue to believe that Federal 

electricity restructuring legislation is needed. I urge Congress to pass comprehensive restructuring legislation as soon as possible. Such legislation, I believe, is necessary to address important and unresolved issues in the Nation’s electric industry, 

such as reliability, jurisdiction, and transmission access. Legislation is needed to enable FERC to achieve its goals of creating fair, open, and competitive bulk power 

markets. The opportunity to benefit consumers through the creation of truly competitive and efficient wholesale bulk power markets is too important to squander. 

Therefore, I ask Congress to become a partner with FERC and California officials 

in our attempt to ensure that competitive markets are achieved and that consumers 

enjoy the intended benefits. 

In conclusion, let me reiterate that FERC is on a fast track to understand the 

causes of the abnormalities that currently exist in the California electricity market 

and to decide on the appropriate remedies. Our Staff will complete its preliminary 

investigation of bulk power markets by November 1, 2000. The California and Western regional portion of that investigation should be completed in advance of that 

date. Our investigation will identify those areas of the market that are in need of 

repair. FERC is committed to doing all that it can to make those repairs that are 

within our jurisdiction in a timely and resolute manner.

Mr. BARTON. Thank you, Commissioner. We appreciate your testimony. 

We now welcome a very tanned and California-looking commissioner, the Honorable Curt Hebert, for your testimony. 

STATEMENT OF HON. CURT L. HE ́ BERT, JR. 

Mr. HE ́ BERT. Thank you, Mr. Chairman. I have been working 

with the Naval Academy on the—some boats, so they have contributed to my tan. 

But it’s good to be here. I want to thank you for your leadership 

and for the legislation that you’ve been working so hard to push 

through the U.S. Congress. I also want to thank Congressman Bray 

(sic), who I understand has stepped out, but if you would thank 

him for his leadership as well and tell him I appreciate him bringing us here. And Congressman Shadegg and Hunter and Congressman Filner as well. Always good to be here and be before you. 

The recent rise in electricity prices in Southern California is 

sadly not simply a California problem, nor is it simply an aberrant 

one-time summer of 2000 problem. Rather, it represents a manifestation of a larger problem, that if left unchecked surely will reemerge, perhaps with equal or greater severity in other parts of the 

country, during future months and future years. 

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The problem is a failure of the current administration in the Federal Government, including the Federal Energy Regulatory Commission, to commit itself to promoting the adequacy of energy supply and energy delivery. 

Competition in energy markets, which I vigorously support, cannot be successful if regulatory policies fail to ensure that supply 

will be available to meet surging demand. Without this equilibrium, breakdowns in energy markets inevitably will occur, Mr. 

Chairman. California is merely one of the first. 

What is needed and is currently lacking is a comprehensive plan 

that understands that all forms of energy production are vital to 

maintain this country’s energy needs. Regulatory policies that inhibit the construction of generation plants, transmission lines, natural gas pipelines and hydro-electric facilities are counter-productive. So too are regulatory policies that fail to commit to competition in emerging markets for energy products. 

Price controls which have been approved by California by the 

majority here at FERC and supported by the administration do not 

work, Mr. Chairman. This is not a political statement. It’s not partisan at all. 

I’ve always felt and always thought that if the truth kills granny, 

let her die, but the truth has to be told here. Price controls didn’t 

work in the Nixon era. They didn’t work in the Carter era. 

Mr. BARTON. If the truth does what? 

Mr. HE ́ BERT. If you’ll not take away from my time. If the truth 

kills granny, let her die. 

Mr. BARTON. Let her die. Well, I didn’t say that. I want to save 

granny. 

Mr. HE ́ BERT. And my grandmother hates that statement, by the 

way. She fears I’ll tell the truth at some interval. 

Mr. FILNER. You haven’t killed her yet? 

Mr. BARTON. The truth is not always pretty, but the truth is the 

truth. 

Mr. HE ́ BERT. Well, that’s correct. 

Mr. BARTON. It’s a little more polite way to say that. 

Mr. HE ́ BERT. It’s probably more polite. I’m not always polite, Mr. 

Chairman, even though I am from Mississippi and I should be. 

But this is important, and it’s not partisan or political. As I said, 

it didn’t work in the Nixon administration with price controls, it 

didn’t work in the Carter administration, and it’s not working in 

the Clinton-Gore administration. And we’ve got to move forward. 

Price caps are not the solution. Recent events have demonstrated 

that they mask and significantly exacerbate the problem. Since 

price caps in California were lowered in July, the average market 

price seen in the California ISO market has increased. This is no 

coincidence. 

The causal effect is that price caps have dampened the need of 

wholesale buyers to hedge their position and suppliers to build or 

sell in the California markets. It’s caused sellers to turn their generation elsewhere and also slow the emergence of an active and liquid hedge market for both buyers and sellers that is needed in 

order for competitive markets to thrive. In short, price caps have 

impeded the very market responses that the public clamors for. 

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In addition, it has been reported by market surveillance committee of the Cal ISO that utility distribution companies called 

UDCs that are able simply to pass through their wholesale cost of 

power to retail customers without fear of retail competition have 

insufficient incentive to hedge, given the little risk of customer departures that they face. 

The California Public Utility Commission further has placed restrictions on the quantity of forward financial contracts that UDCs 

are able to enter into. Rather than impose price caps that decrease 

the liquidity of the market and eliminate price signals that would 

otherwise encourage trading activity and investment in new generation that you speak of, Congressman Hunter, FERC and the 

CPUC should work together to modify the market’s rules that are 

currently constraining the market. 

Limitations on UDC’s ability to hedge in the forward market 

should be lifted. Delays in the siting and permitting process for 

new generation and transmission line construction should be eliminated. Parties should be permitted to enter into bilateral purchase 

and sell agreements as they deem prudent. 

If we look at two areas, Mr. Chairman and committee members, 

that have done well, we can look at the Midwest price fights of 

1998 where several people were urging this commission to put up 

price fights. We didn’t—price caps. I apologize. We didn’t do that, 

and they were covered, and they built generation, and they’ve got 

adequate supply. 

On the other hand, there’s only one State that has an ISO that 

doesn’t have price caps. It’s the State of Texas, Mr. Chairman. 

Ercot does not have those price controls, and they appear to be 

doing very well. 

The evidence would suggest that price caps are part of the problem. And I understand Supervisor Jacob and what she’s trying to 

do, and I think she’s well-intentioned, but I would say that when 

you talk about supply and that none is likely to come on the scene 

soon, you have to look at what’s happening here. It could come on 

line soon. 

Take a lesson from what they did in Shelby, Illinois. They actually had it permitted, and in 6 months time turned dirt and had 

to switch on. Six months time. Twelve months time from permit to 

turning the switch on. It can be done, but you’ve got to change the 

way you’re thinking. You’ve got to change the way you’re acting. 

There are only two thoughts here and two ways you can go. You 

can either have adequate supply or you can understand forecasting 

and forward markets and bilateral contracts. Hopefully, you’ll understand both of those. But if you’re like California is and you’ve 

got the low supply so you’ve got to depend on the other, you better 

work hard to understand the forecasting. 

And I’ll close with this. Congressman Bray said—and I think it’s 

a great example—that as a lifeguard, he had to always look at how 

you changed it, how you went in and re-evaluated it and made sure 

the same thing didn’t happen again. 

Well, while California rate payors are now swimming in high energy costs, regulators and policymakers continue to flounder in the 

past. We’ve got to look forward. We’ve got to change the conduct. 

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If you want to know what we can do short-term—we don’t have 

jurisdiction over San Diego. That’s right. But we do have jurisdiction over the ISO and the PX, and we can get in and assist that, 

and we can make changes. We can do that at FERC, and we’re 

going to have to do it. The consumers deserve it. Thank you for 

your time. 

[The prepared statement of Hon. Curt L. He ́bert follows:]

PREPARED STATEMENT OF HON. CURT L. HE ́ BERT, JR., COMMISSIONER, FEDERAL

ENERGY REGULATORY COMMISSION

OVERVIEW

I thank the Committee for the honor of testifying here this morning. What brings 

us all here this morning, specifically, is the topic of recent price increases for the 

supply of electricity in Southern California. I applaud the Committee for listening 

to testimony on this topic, as it has extreme significance to the future of competition 

in electricity markets, wholesale and retail, in Southern California and in the rest 

of the United States. 

I am greatly disturbed by recent events in California energy markets. It is truly 

a disgrace that San Diego ratepayers now face electricity bills that are double or 

triple those that they paid last summer. No one should have to face the decision 

whether to pay for electricity service, on the one hand, and groceries or prescription 

drugs, on the other. Something is clearly wrong. I take second place to no one in 

extolling the virtues of competition and choice. However, those virtues need not 

come at the expense of the low price and high degree of reliability of electric service 

that all Americans have come to enjoy and expect. 

Nevertheless, I caution against labeling the current situation as simply a ‘‘California problem.’’ Nor is the problem one that is fleeting; it is not simply a ‘‘summer 

of 2000 problem.’’ Rather, the problems that are now confronting Southern California represent a manifestation of larger, deeper problems that may confront other 

portions of the country in later months and years. 

There is, unfortunately, no easy fix. Rebates, refunds, and emergency releases 

may offer some relief right now. However, these short-term bandages do nothing to 

mask the larger problem that surely will reemerge next summer and future summers until something is done to address the true, underlying nature of the problem. 

At bottom, the situation in Southern California demonstrates that the Federal Government—in particular, the Federal Energy Regulatory Commission, of which I am 

a Member—can and should do much more to promote energy supply, energy delivery, and utility innovation. 

Regrettably, the Federal Government and the FERC have done little to address 

the issues of supply, delivery and innovation. There is no comprehensive energy 

strategy. Decisions are made on an expedient, ad hoc basis, with little regard for 

long-term impacts. And policies made in one energy sector (electricity, natural gas, 

oil, etc.) fail to take into account their impact on other sectors. 

What is needed is a new form of thinking. Most regulators claim to support competition, but their decisions belie their stated intentions. What regulators need to 

do is to demonstrate the courage of their convictions by allowing competition actually to operate—by trusting that markets will make appropriate allocative decisions. 

Regulatory policies that claim to help consumers by inhibiting the operation of market forces—such as through price controls—actually work to their detriment. Consumers will never truly enjoy the benefit of lower prices, enhanced service options, 

and unimpaired reliability until regulators make decisions that promote entry into 

competitive markets and capital investment in generating plants and delivery lines. 

I now discuss my understanding of the problem as it applies to the United States 

as a whole and California in particular. I offer suggestions as to what the FERC 

can do to promote energy supply and deliverability and, thus, lower prices. While 

I appreciate and applaud the initiative of the Committee, I believe that the FERC 

already possesses considerable authority, without the need for additional legislative 

authority, to redress the problem at hand. What is needed most is political resolve, 

rather than political posturing, to do what is best for the American people. 

A NATION-WIDE PROBLEM

Today’s headlines, unfortunately, announce one type of energy crisis after another. Last winter, residents in New England experienced sharp increases in the 

price of home heating oil. Earlier this summer, automobile owners—especially those 

118

in the upper Midwest—faced gasoline prices in excess of $2.00/gallon. Natural gas 

inventories are down steeply and experts expect sharply higher natural gas prices 

this winter. There remains no political will to solve the issue of nuclear waste disposal. 

To complicate matters, the FERC has demonstrated its reluctance to authorize, 

in a timely manner, the construction of natural gas pipelines to those portions of 

the country that are particularly starved for gas supply. See Independence Pipeline 

Company, et al., 91 FERC ¶ 61,102 at 61,366-67 (2000) (He ́bert, Comm’nr, dissenting). Moreover, the FERC is pursuing a hydroelectric dam decommissioning policy, of dubious legality, when it is not debatable that the Federal Power Act contains 

no such express authority. That policy threatens to tear down existing dams and 

complicate the already glacial process of dam relicensing. See State of Maine, 91 

FERC ¶ 61,213 at 61,773-76 (2000) (He ́bert, Comm’nr, dissenting). 

The energy crisis of the moment concerns the price and reliability of electric service. Geographic pockets of the country are starting to experience disruptions in the 

price and delivery of electricity, just as competition is starting to open up markets 

and induce the participation of non-traditional utilities. Two summers ago, the Midwest experienced dramatic spikes upward (more than 100-fold) in the price of wholesale power. Last summer, several major metropolitan centers (New York, Chicago, 

San Francisco) experienced temporary blackouts when local delivery systems failed. 

This summer, southern California and, to a lesser extent, New York are experiencing price spikes of their own. 

The underlying causes of these disruptions in electricity supply are many and are 

vigorously debated. What is certain is that reserve margins are shrinking, as a 

growing, computerized economy increasingly demands more power, and as electricity 

supply fails to keep pace. In addition to supply and demand disharmony, the nation’s electricity delivery system—millions of miles of transmission and distribution 

lines—increasingly is being stressed by competitively-driven transactions for which 

they were never intended. 

In my three years of service as a FERC Commissioner, and for six years before 

that as Chairman and Commissioner of the Mississippi Public Service Commission, 

I have advocated a balanced approach. It is perfectly appropriate for federal and 

state governments to factor environmental considerations and landowner objections 

into their siting and certification decisions. Every form of energy production—

whether based on fossil fuels or renewable fuels—has its attendant advantages and 

disadvantages. What is not appropriate is for regulators to summarily dismiss a 

form of energy production, through outright rejection or overly laborious procedures, 

without considering what alternatives will be available to meet demand. When a 

state blocks the siting and construction of generating plants or transmission lines, 

it needs to figure out how the energy demands of its consumers (and those of neighboring states) will be met. When the FERC blocks the construction of a natural gas 

pipeline or the development of a hydroelectric project, energy customers are all the 

more susceptible to the rigors of a fluctuating market. 

(I discuss in a later section of my testimony what more the federal government 

can do to promote market entry, induce supply, and enhance deliverability.) 

A CALIFORNIA PROBLEM

At this juncture, I can only speculate as to the principal causes of the sharp rise 

in electricity prices in Southern California. The FERC recently has initiated investigations into wholesale electricity markets and practices, both on a nation-wide 

basis and on a California-specific basis. When presented with the reports of its investigative staff, the FERC can then determine what policies to pursue that can alleviate immediate pressures and can act, hopefully, to ensure that California and 

other regions do not experience similar crises on a regular or periodic basis. 

At this time, however, I have four prime suspects: (1) California utilities; (2) the 

California Independent System Operator; (3) the California Public Utilities Commission; and (4) the FERC. We are certainly not without blame in Washington, D.C. 

This Administration has done little to promote, and nothing to develop, a positive 

energy policy, with adequate supplies and necessary investments, to give consumers 

choices of fuels and reasonable prices. 

Electric utilities are starting to grapple with competitive choices and are developing a number of different corporate strategies. Some are proving more successful 

than others. While strategies may differ, all load-serving utilities should be expected 

to hedge their risks in certain respects. Utilities such as San Diego Gas & Electric 

Company that sell off their generating units are susceptible to market forces. Those 

that rely on the spot market, rather than entering into long-term power supply arrangements or capacity buy-backs, or purchasing financial instruments, are particuVerDate Aug 2, 2002 06:03 Aug 07, 2002 Jkt 010199 PO 00010 Frm 00122 Fmt 6633 Sfmt 6621 E:\HEARINGS\67633.TXT pfrm12 PsN: 67633
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larly susceptible. While my information is imperfect, it appears that SDG&E, for 

whatever reasons, may have exposed its ratepayers to considerable market risk by 

failing to employ adequate risk management techniques. If so, it would hardly be 

alone in failing to shield its ratepayers from the whims of market forces. See New 

York Independent System Operator, Inc.; New York State Electric & Gas Corp. v. 

New York ISO, 92 FERC ¶ 61,073 at 61,315-18 (2000) (He ́bert, Comm’nr, dissenting). 

Though it employs capable people, the California ISO, as an institution, lacks the 

incentives and accountability to make difficult decisions necessary for the transition 

to competition. Most recently, we have seen the ISO compromise its independence. 

Bowing to pressure, it met over and over again until, against its own professional 

judgment, it adopted price caps that the ISO itself acknowledged will cause harm 

in the short and long term. Lowering price caps may look good but does not work. 

In fact, evidence not yet presented to the Commission may demonstrate that price 

caps during peak hours have the effect of raising rates during off-peak hours and, 

possibly, on an annualized basis. This is because suppliers that cannot recover their 

costs during peak hours must raise their bids during remaining off-peak hours. 

Thus, the decision by the ISO to adopt and lower price caps only makes matters 

worse and electricity more expensive for California ratepayers. 

(This is not mere speculation. In a report dated September 6, 2000, the Market 

Surveillance Committee of the California ISO concludes that price caps have little 

ability to constrain prices. Specifically, it notes that monthly average energy prices 

in California during June of this year, when the price cap was $750/MWh, were 

lower than monthly average energy prices during August of this year, when the 

price cap was $250/MWh—even though energy consumption was virtually the same 

in both months.) 

The problem of the ISO, however, goes back further. Over the years it has reached 

many decisions that make sense as politics, but not economics. FERC orders have 

found, among other things, that the ISO restricted imports without reason, encouraged suppliers to bid when prices would be the highest, and failed to penalize customers who understated their demand or generators that failed to deliver what they 

promised. In addition, the ISO mishandled congestion management by creating 

price zones that obscured the cost of locating in the wrong place. Like a political 

institution, it sought to spread the pain, and have other customers subsidize the 

high costs in congested areas. Most ISO filings state, not that it has adopted the 

right solution, but that it has reached a compromise that pleases all parties. 

The California PUC deserves some attention for policies that fail to allow for the 

timely siting and construction of badly-needed generation. There is nothing wrong, 

of course, with the CPUC considering seriously the environmental consequences of 

new construction. It should. That intense consideration, however, comes at a cost. 

Suppliers are much less likely to enter California markets when the review process 

is uncertain and requires many difficult years of prior review and public input. 

Moreover, the California PUC needs to reconsider regulatory policies that, in practice, fail to motivate its utilities to respond to the needs of their ratepayers. If 

SDG&E has no incentive to keep its wholesale costs down, and if it can act merely 

as a conduit by passing those costs on to its retail customers, without limitation, 

the utility has less of an incentive to engage in responsible risk management. The 

California PUC may wish to consider performance-based measures of regulation 

similar to those I helped implement in Mississippi. Under policies adopted by the 

Mississippi Public Service Commission, utility earnings depend on the number and 

duration of interruptions, customer satisfaction (using actual complaints), and price. 

In response, Mississippi utilities have figured out how to set and meet reserve margins, safety standards, and capacity goals. In this manner, state regulators can better align private economic interest with the public interest. 

Finally, much of the finger-pointing deserves to be directed at my agency. The 

FERC has been sending inconsistent signals to energy suppliers. On the one hand, 

it offers negotiated, market-determined rates to all suppliers who can demonstrate 

that they cannot exercise market power. On the other hand, it has signaled that 

it is willing to impose price controls and readjust bids if prices threaten to rise higher than anticipated. As a result, suppliers are wary of entering into markets that 

are not truly competitive—such as California—and if they cannot be confident of recovering a reasonable profit. The operators of peaking units—which are expensive 

and are intended to run only in periods of peak demand—are particularly disenchanted with pricing policies that may hinder their ability to recover the costs of 

operation. 

Moreover, the FERC has been much too deferential to the operation of the California ISO that, as explained above, has hindered the operation of the competitive 

market. I have been willing to give ISOs, such as the California ISO, some time to 

commence operations and develop familiarity with competitive energy markets. UnVerDate Aug 2, 2002 06:03 Aug 07, 2002 Jkt 010199 PO 00010 Frm 00123 Fmt 6633 Sfmt 6621 E:\HEARINGS\67633.TXT pfrm12 PsN: 67633
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fortunately, with experience, ISOs have turned out to be flawed institutions that 

have proved successful only in perpetuating and expanding their bureaucratic reach. 

In contrast, I believe that independent transmission companies (transcos) offer a 

vastly superior alternative. Because they are independent of other market participants, and have no incentive to favor any one particular source of supply, transcos 

offer truly non-discriminatory transmission service to market participants. Moreover, because they have a profit incentive to maximize transmission and throughput 

over their lines, transcos (unlike ISOs) have an incentive to operate their facilities 

efficiently and to expand their network when necessary to meet increased demand. 

California needs new capacity, to feed a growing population and to meet the new 

demands of prosperity. It no longer needs a government institution—the ISO—that 

performs merely as a debating society, catering to all affected stakeholders. After 

three years of oversight under the ISO, which has focused short-sightedly on getting 

through the upcoming summer, rather than adding transmission and generating capacity, it is now time for California to turn to a different model. A transco, to be 

sure, just like any other business, operates to make money. But such a business 

model—rather than a governmental model—is what is needed to satisfy customer 

needs cheaply and quickly. 

WHAT THE FEDERAL GOVERNMENT CAN DO TO ADDRESS THE PROBLEM

As I already said, the FERC has done little to avoid the type of pricing and reliability problem we now see in California. If inclined to act decisively on electricity 

pricing and reliability, there is much the FERC can do right now—without a single 

drop of additional legislative authority. 

For starters, if the FERC is serious about increasing generation supply, it should 

act immediately to withdraw all price caps in generation markets. They distort price 

signals and inhibit entry into competitive markets. By facilitating efforts to minimize short-term price disruptions, and placing regulatory shackles on what should 

be competitive markets, the FERC is inhibiting precisely the type of investment in 

the grid that it should be supporting—and that is crucial to assuring true electrical 

reliability. 

Another important means of enhancing reliability and promoting customer accountability is to give energy providers an incentive to provide reliable, efficient 

service. Conventional pricing methods provide no such incentive. It is my strong 

preference to afford utilities some type of performance-based measure of accountability to their customers and their regulators. Consistent with its existing authority, the FERC could—and should—tie earnings and profits to reliability-based and 

performance-based criteria. 

Despite my urgings, the FERC has refused to adopt performance-based pricing 

measures of the type previously adopted in Mississippi. I was tremendously gratified 

when the FERC made its first tentative moves in this direction last winter, when 

it adopted its Order No. 2000 rulemaking on the development of regional transmission organizations. As the FERC explained, a RTO that meets the enumerated 

characteristics and functions— and that has demonstrated a commitment to promote grid reliability and efficiency—will be eligible for a number of incentives. 

These incentives include performance-based rates, accelerated depreciation, and return on equity enhancements (formula and risk-based). 

While I appreciate the FERC’s baby steps on performance-based pricing, it will 

take awhile for RTOs to develop, win the FERC’s approval, and qualify for innovative pricing. If it were up to me, I would adopt pricing measures now that would 

give both regional and individual electricity providers an incentive to minimize or 

eliminate service disruptions and to keep prices down, this summer and future summers. 

I can think of numerous other measures the FERC can adopt to promote reliability and price stability, without delay and without additional authority conferred 

by Congress. The FERC could afford transcos an additional incentive to build transmission facilities by providing a higher rate of return on transmission assets. The 

FERC could articulate greater receptivity to proposals to build and invest in merchant transmission facilities. The FERC could pique additional interest in investment and corporate restructuring by allowing acquisition adjustments on the sale 

of transmission assets that confers benefits on ratepayers. 

In addition, the FERC could greatly advance the cause of reliability by indicating 

its support for stand-alone transmission companies. As I have explained, a transco—

much more so than any other type of regional institution or model—has a strong 

economic incentive to provide reliable, efficient and low-cost service. I wish the 

FERC would give a transmission company the chance to operate—and give an unVerDate Aug 2, 2002 06:03 Aug 07, 2002 Jkt 010199 PO 00010 Frm 00124 Fmt 6633 Sfmt 6621 E:\HEARINGS\67633.TXT pfrm12 PsN: 67633
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equivocal green light to other utilities that might be considering participation in 

similar for-profit ventures. 

And the FERC—if truly committed to providing supply alternatives—could do 

much more to promote the development of hydroelectric facilities and the construction of natural gas transmission facilities. The answer to our nation’s energy reliability needs lies not in the development of additional regulatory bodies and responsibilities—as the Administration, with the acquiescence of a majority of the FERC, 

now argues. Rather, the answer lies in promoting policies that encourage capital investment in all types of energy technologies and that allow competitive markets to 

operate as they should. 

What the FERC should not do is now embrace calls for a return to cost-based 

regulation. Nor should the FERC encourage hybrid forms of rate regulation that 

graft cost-based ceilings on top of otherwise negotiated rates. In either event, suppliers would turn their back on California and investment would dry up. California 

increasingly would operate as an island amidst a sea of competition, and no longer 

would be able to turn outside the state for supply during times of peak demand. 

In addition, customers would lose a signal to conserve during periods of peak demand, and entrepreneurs would lose an incentive to develop and bring to market 

innovative, technological solutions (such as fuel cells, electricity storage, and other 

forms of distributed generation) to relieve capacity bottlenecks. 

Rather, the FERC should follow its own example, when it refrained from adopting 

‘‘retro’’ measures in response to the upward spike in Midwestern wholesale electric 

prices during the summer of 1998. Numerous market participants and observers implored the federal government to do something, and to do something quick, to ensure that prices never rise to extreme levels again. Keeping a cool head, the FERC 

(as well as state commissions) instead focused its attention on determining whether 

any market manipulation or anticompetitive behavior had led to the price spikes. 

Finding none, the FERC decided to allow high prices to signal to suppliers that 

there is strong Midwestern demand for additional capacity. This is exactly what 

happened. Two years later, the Midwest has ample new supply of electricity and is 

now an exporter of power to other capacity-starved regions. Prices have stabilized, 

and reliability has remained unimpaired. 

I encourage all regulators of California energy markets to adopt the same cautious, courageous, long-term approach. 

WHAT THE CONGRESS CAN DO TO ADDRESS THE PROBLEM

In the past year, I have had the privilege of testifying twice before Congress on 

the subject of electricity restructuring. On October 5, 1999, I testified before the 

House Commerce Subcommittee on Energy and Power on the subject of H.R. 2944, 

the ‘‘Electricity Competition and Reliability Act of 1999’’ (the Barton Bill). On April 

27, 2000, I testified before the Senate Committee on Energy and Natural Resources 

on eight pending electricity restructuring bills. 

Despite the events of the past summer, in California and elsewhere, my opinion 

has not changed on the subject of additional federal legislation. I continue to believe 

strongly that any new legislation should remove—not add—obstacles to the natural 

evolution of the industry in the direction of competitive markets. As I have explained, what the FERC does need to do is to take decisive action under its existing 

authorization to promote capital investment in all forms of energy supply and delivery, and to enhance operational efficiencies. 

Such action would benefit ratepayers in California and throughout the rest of the 

United States. There is no need for a California-specific congressional solution. 

For this reason, I continue to believe that legislation is needed merely to repeal 

outdated laws of general applicability. Both the Public Utility Holding Company Act 

(PUHCA), dating from the Depression, and the Public Utility Regulatory Policies 

Act, dating from the Clinton Administration, act as serious brakes on utility restructuring. They stifle, rather than promote, competition. Similarly, there is no reason 

for the FERC to be in the business of reviewing electric utility mergers and to duplicate the efforts of the Antitrust Division of the Department of Justice and the Federal Trade Commission. FERC merger review, under section 203 of the Federal 

Power Act, brakes utility efforts to restructure themselves as they deem best to respond to and take advantage of competitive opportunities and challenges. More troubling, FERC uses mergers to further policy goals that it has no authority to order 

directly. 

Beyond that, I do not see the need for additional legislative action. In particular, 

I do not see the need for the FERC to assume additional reliability authority. I favor 

business over government solutions to the issue of maintaining electric reliability 

in a restructured market. A quasi-governmental reliability organization, under 

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FERC oversight, and with FERC having last-resort authority to impose mandatory 

reliability standards on the industry, will operate no more effectively than any other 

quasi-governmental organization—such as the California ISO. 

Instead, I prefer to advance market-oriented policies that offer incentives for 

badly needed investment. I favor injecting reliability standards in the performancebased rate plans I advocate for utilities. Specifically, I favor tying profits to performance. Each plan for each RTO would contain a target for reliable performance. An 

RTO’s earnings would rise or fall on how well it meets its business plans (safe, reliable and low-cost service; maximizing transactions) and serves its customers. 

Similarly, I do not see any need for additional FERC authority over ‘‘market 

power.’’ Unlike some observers, I am not quick to assume an exercise of market 

power whenever price rises above marginal (operating) cost. FERC staff already possesses sufficient authority to investigate whether actual manipulation or collusion 

has led to high prices that are not justified by market conditions. (Indeed, this is 

what FERC staff is doing right now, in responses to unconfirmed accounts that market mis-behavior has led to high prices in California and elsewhere.) Should FERC 

staff detect improper or illegal behavior, the FERC (or, if appropriate, the Antitrust 

Division or the Federal Trade Commission) can craft an appropriate response. 

Finally, I see no need to legislate rules governing the connection of generators to 

the grid. An RTO, especially a for-profit, stand-alone transmission company, has no 

reason to favor any particular source of generation. To the contrary, a transco, with 

an economic incentive to push power over the grid, would welcome interconnection 

from as many generators as possible.

Mr. BARTON. Thank you, Commissioner He ́bert. 

We’d now like to hear from Commissioner Massey. Last, but certainly not least, we welcome your testimony to the subcommittee. 

STATEMENT OF HON. WILLIAM L. MASSEY 

Mr. MASSEY. Thank you. Is this on, Mr. Chairman? 

Mr. BARTON. The bigger mic is a little bit better microphone. 

Mr. MASSEY. Mr. Chairman and Members of Congress, thank you 

for inviting me to testify at this hearing. 

There is indeed a crisis in California electricity markets caused 

by skyrocketing prices. Consumers are suffering. This demands our 

urgent attention. Existing prices are not just and reasonable. We 

must take the actions necessary to ensure that jurisdictional markets produce consumer benefits and just and reasonable rates. 

A FERC staff investigation is underway, and we do not yet have 

their findings. There have, however, been a number of reports by 

market monitors and economists outlining the serious flaws in the 

California markets, many of which have been mentioned today. 

But let me offer my preliminary observations. First, a shortage 

of generation as well as constraints in the transmission network 

are fundamental problems in the California market. 

A shortage of generation creates an imbalance between supply 

and demand, and it causes high prices. And transmission constraints prohibit cheaper generation from reaching the California 

market. Siting rules must be streamlined consistent with sound environmental policy, and generation interconnection rules must be 

standardized. 

Second, it appears to me that the market rules and market conditions allow market power to be exercised to drive up prices, particularly during high-demand conditions when most or all generators know that they are likely to be dispatched, regardless of how 

high they bid. This serious problem must be addressed. 

Third, there is virtually no demand side response to a high price. 

In other commodity markets besides electricity, consumers purVerDate Aug 2, 2002 06:03 Aug 07, 2002 Jkt 010199 PO 00010 Frm 00126 Fmt 6633 Sfmt 6602 E:\HEARINGS\67633.TXT pfrm12 PsN: 67633
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chase less when the price is too high, and this consumer response 

has a substantial price dampening effect on the market. 

But without a demand side response to prices, there is virtually 

no limit to the price that suppliers can charge during shortage conditions. This must be remedied quickly. 

Fourth, there has been too much reliance on volatile spot markets and too little use of hedging tools, such as forward contracts. 

The use of these tools can levalize prices and substantially dampen 

the exercise of market power in the more volatile spot markets operated by the ISO and the PX. This must be accomplished. 

Fifth, the underscheduling of both generation and load in both 

the day-ahead and day-of hourly markets puts pressure on the ISO 

to purchase substantial generation in real time in order to keep the 

lights on. The generation purchased in real time is considerably 

more expensive. Underscheduling has contributed to high prices 

and raised reliability concerns. This must be urgently remedied. 

We must form a partnership with appropriate State authorities 

to solve these and any other problems that are identified. Neither 

the State of California nor the FERC acting in isolation can solve 

these problems alone. The FERC can promote competitive wholesale markets, but we cannot site the facilities necessary for wholesale markets to thrive. That is a State responsibility under existing 

law. 

The State must also play a key role in encouraging the use of 

hedging tools by power purchasers and in facilitating a demandside response. By the same token, the State of California cannot 

police market power in interstate wholesale markets. That is a 

Federal responsibility, as is the regulation of the high-voltage grid. 

We must work together to solve these problems at hand. And as 

I have said, we must proceed with all speed. 

Now, turning to the issue of Federal legislation, it is my view 

that many of the market design flaws in California can be addressed under existing authorities. Nevertheless, this summer’s 

events demonstrate, among other things, that electricity markets 

are inherently interstate in nature. 

Prices throughout the western U.S. rose and fell with events in 

California. Thus, I continue to believe that legislation should facilitate a reliable and efficiently organized grid platform upon which 

vibrant wholesale markets can be built. 

I respectfully suggest that jurisdictional uncertainties and anomalies should be eliminated. The development of regional transmission organizations should be ensured. Reliability of bulk power 

markets should be subject to mandatory rules. 

The FERC should have direct authority to mitigate market 

power in wholesale markets, and the authority to site interstate 

transmission facilities necessary for interstate commerce should be 

transferred to an interstate authority as it is for natural gas pipelines. 

I stand ready to work with this subcommittee to accomplish 

these goals. I continue to believe that well-structured wholesale 

markets will produce consumer benefits, but the California markets are severely flawed. Consumers are bearing the brunt. This is 

not reasonable. We must attack these problems. Thank you. 

[The prepared statement of Hon. William L. Massey follows:]

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1See Attachment B to Notice of Intervention of the Public Utilities Commission of the State 

of California in Docket No. EL00-95. 2Motion to Intervene and Response of Southern California Edison Company in Docket No. 

EL00-95. 3 Complaint of San Diego Gas & Electric Company in Docket No. EL00-95. 

4 Notice of Intervention of the Public Utilities Commission of the State of California in Docket 

No. EL00-95, at 8. 

PREPARED STATEMENT OF HON. WILLIAM L. MASSEY, COMMISSIONER, FEDERAL

ENERGY REGULATORY COMMISSION

Mr. Chairman and Members of the Subcommittee on Energy and Power: Thank 

you for the opportunity to testify on the subject of the recent events in the California electricity market. The Federal Energy Regulatory Commission has been 

moving the electricity industry to a structure that relies on well-functioning wholesale markets to produce an economic and reliable supply of electricity for the nation. 

In supporting that policy, my expectation continues to be that markets will produce 

consumer benefits and lower prices compared to cost of service regulation. 

Thus, I am very concerned about the behavior of California’s electricity market 

this summer and its effects on consumers. I am concerned that this summer’s events 

are causing a crisis of confidence in California wholesale electricity markets that 

threatens to erode the political consensus necessary to sustain a market-based approach to regulation, not just in California but across the country. The Commission 

must act forcefully and decisively to reassure market participants, policymakers and 

consumers that jurisdictional wholesale markets will produce consumer benefits and 

just and reasonable rates. 

California’s Experience This Summer 

Based on the records of proceedings at the Commission this summer, I believe 

that there are sufficient indications that California wholesale markets are not producing prices that are just and reasonable. For example, California wholesale electricity costs for June 29 of this year were seven times what they were for the same 

date in 1999 ($340 million vs. $45 million) even though energy usage was only about 

3% more.1 During the month of June, 2000, the total cost of electricity (energy and 

ancillary services combined) charged to the California market was nearly half of 

California’s total electricity cost for all of 1999. In two separate five-day periods in 

June, 2000 (when demand was at least 3,000 MW to 5,000 MW below the projected 

annual peak) California’s total cost of electricity exceeded $1 billion, with one of 

those five day periods reaching $1.3 billion.2 During June and July of 1999, prices 

in the Power Exchange rarely exceeded $150/MWh even during the highest load levels. But during the same period this year, prices have multiplied to three and four 

times the levels reached last year whenever load levels exceed 33,000 MW.3 I would 

also note that the California Public Utilities Commission states that every analysis 

of the California markets since their opening has found substantial exercises of market power.4 I believe that there are serious flaws in the California wholesale markets. 

Ensuring Well-functioning Electricity Markets 

The events in California this summer provide an opportunity for the Commission 

and all policy makers to gain a better understanding of what elements are needed 

for well-functioning electricity markets and to act decisively to ensure that such elements are in place. Taking a laissez-faire approach, letting the markets police themselves, is not an acceptable answer in my view. We must ensure that the road to 

market-based solutions and customer benefits is well paved, and we must proceed 

with a real sense of urgency. 

A few weeks ago, the Commission directed its staff to conduct a thorough investigation of bulk power markets. That investigation is now focused primarily on California, and I am confident that staff’s report will shed much needed light on the 

problem. However, I believe that there are a number of shortcomings in the California market that have become fairly evident, and that these should be regarded 

as lessons that can be applied to all electricity markets. 

First, policy makers must ensure that there are no impediments to expanding the 

supply of generation and transmission facilities. This is critical. Markets will not 

work if supply cannot enter easily in response to demand. There seems to be widespread agreement that a shortage of generation as well as constraints in the transmission network are fundamental problems in California. I recognize that some of 

these shortages were the result of unforeseen events, exceptionally hot weather or 

sustained demand growth due to the economy’s continued strong performance. 

Nonetheless, necessary facilities must be sited and built for competitive markets to 

125

produce benefits. State siting authorities must respect this fundamental truth, and 

ensure that reasonable and time limited siting rules are in place, balancing the need 

for new generation capacity with a responsible environmental policy. It is my hope 

that California authorities will accomplish this goal. 

Streamlined, standardized interconnection procedures and agreements are also 

needed to facilitate generation entry. I have been pushing for such a policy at the 

Commission. Interconnection legerdemain is anticompetitive and anti-consumer. But 

not all interconnection authority resides at the federal level. The interconnection of 

many generators, including many applications of distributed generation, is at the 

state level. We still have a lot of work to do in streamlining and standardizing interconnection procedures and agreements. 

Transmission capacity must be adequate to support competitive markets. There 

are two aspects to this piece of the puzzle. One is to provide adequate financial incentives to encourage grid expansion. The Commission recently demonstrated its 

willingness to allow higher rates of return on transmission facilities in a case involving Southern California Edison. And I believe that performance-based rates and 

other financial incentives for members of Regional Transmission Organizations, or 

RTOs, will help to spur transmission investments. 

The other part of the transmission issue is siting. This, too, is in the hands of 

the individual states. Just as with generation, California authorities must develop 

time limited processes for siting new transmission facilities. I would point out, however, that electricity markets are interstate in nature. Transmission lines provide 

the highway for interstate electricity commerce. California and other states depend 

on regional trade. I am not confident that the current state-by-state approach to 

siting interstate transmission facilities will get the job done. I believe that the siting 

of interstate facilities should be carried out by an interstate authority. I continue 

to strongly recommend federal siting authority with the power of eminent domain. 

A second broad area that must be addressed is market design. California’s experience this summer has demonstrated that market power can be exercised during extreme demand conditions with very dramatic price impacts. During high demand periods, it was impossible to meet all demand without relying on all or almost all of 

the available generation resources. The relatively high-cost generator operators— those on the upper end of the supply curve—know when these conditions are likely 

and can bid very high prices with a fair degree of confidence that they will be dispatched. Moreover, the market rule in California is that the generator that clears 

the market sets the price for the entire market. This means that all generators benefit from that exercise of market power and consumers suffer. Thus, market prices 

can be manipulated by one or very few sellers. The Commission must examine 

whether the so-called single price auction for generation is appropriate in these circumstances. The Commission should also consider whether there may be a need to 

place some limits on wholesale price levels in these conditions until all the pieces 

of a well-functioning competitive market are in place. Generation entry is spurred 

by the price signal that results from a well-functioning market. But if a high market 

clearing price is pegged by market power, such an extreme price does not serve a 

legitimate market function. 

A third factor contributing to high prices in California is underscheduling of both 

load and generation. Scheduling imprecision is to be expected to some degree, but 

my understanding is that deliberate underscheduling is done in the California PX 

day ahead markets by both load serving entities and generators in order to affect 

market prices. Substantial underscheduling then forces the ISO to go into the real 

time markets to make up the difference between what has been scheduled and what 

is needed to keep the system in balance. Under such conditions, the ISO is vulnerable to paying very high prices. Perhaps even more important, last minute resource 

imbalances pose reliability concerns. I understand that the California ISO is attempting to improve the incentives for market participants to schedule as accurately 

as possible. The Commission should examine such rules during our investigation. 

A fourth critical issue is demand responsiveness to price. This is a standard 

means of moderating prices in well-functioning markets, but it is all but absent 

from California’s and other electricity markets. When prices for other commodities 

get high, consumers can usually respond by buying less, thereby acting as a brake 

on price run-ups. Without the ability of end use electricity consumers to respond to 

prices, there is virtually no limit on the price that suppliers can fetch in shortage 

conditions. 

We must urgently seek ways to increase demand responsiveness. There are two 

aspects to this. One is showing an accurate price signal to the consumer before consumption decisions are made. The second is the ability of the consumer to react to 

the price signal. The first may be addressed by appropriate metering and communications, and that is the easiest part of the equation. However, residential cusVerDate Aug 2, 2002 06:03 Aug 07, 2002 Jkt 010199 PO 00010 Frm 00129 Fmt 6633 Sfmt 6621 E:\HEARINGS\67633.TXT pfrm12 PsN: 67633
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tomers cannot easily respond to price signals. I do not believe any of us want to 

sit at home watching the hourly price signal so we know whether we should postpone dinner or adjust the thermostat. The capability for residential and even commercial customers to adjust consumption lies in so called ‘‘smart houses’’ or ‘‘smart 

buildings’’ that allow computers to adjust the operation of certain equipment in response to market prices and ‘‘strike price’’ instructions. 

Until such ‘‘smart’’ technology has penetrated a large part of the market, I think 

electricity providers should concentrate on arrangements that compensate large industrial and large commercial customers for reducing consumption. That will provide the biggest bang for the buck and may even capture enough of the demand 

curve to help discipline price run-ups. I understand that the California ISO is aggressively pursuing such demand side programs to be in place by next summer. 

It has also been suggested that RTOs operate demand-side markets where demand aggregators bid negawatts. The Commission could consider this as part of our 

RTO policy. All options for improving demand responsiveness to prices should be 

considered. All reports and analyses I have seen have emphasized this lack of demand responsiveness as a critical problem. We must attempt to solve it. 

A fifth area that needs attention is risk management. The California market design places entirely too much reliance on the spot market. Spot markets are almost 

by nature volatile. While the spot market is the appropriate venue to secure limited 

portions of needed supply, it should not be relied upon for most or all of the supply 

portfolio. Yet that is the case in California. The painful results are almost predictable. 

My understanding is that there were state regulatory restrictions placed on the 

degree to which load serving utilities in California may forward contract. This policy 

should be changed. Regulators must ensure that everyone on the demand side of 

the market is given appropriate incentives and are well informed regarding hedging. 

Surely a balanced portfolio of long-term and short-term supply must be an ingredient of well-functioning markets. 

It is clear that we should move forward by ensuring well-functioning markets. 

This is surely a long-term effort, at least in some respects, but market problems in 

California and in other regions are here and now and we must deal with them. 

What should we do in the meantime, before we have all the elements of efficient 

markets in place? 

Some form of price caps or bid caps may be needed as temporary stopgap measures. The California ISO currently has adopted a $250/MWh purchase price cap. 

Such a cap on the market does serve to keep down the exceptionally high price 

spikes that dramatically increased bills in California earlier this summer. To that 

extent, it is valuable. But price or bid caps, especially market wide caps, are not 

the long-term answer. Such caps water down the price signals we need for bringing 

about new supply and for hedging. In addition, while the price spikes are avoided, 

existing market imperfections can still keep prices well above competitive levels yet 

remain below the $250 cap. We must explore more precisely targeted mitigation 

measures. 

Going forward, California authorities and the FERC must form a partnership for 

ensuring well-functioning markets. Neither the FERC nor state policymakers, acting 

in isolation from each other, can solve all market flaws because our respective jurisdictions are sharply delineated under existing law. State policymakers cannot effectively define or police market power in interstate wholesale markets. They cannot 

require a wholesale market structure, based upon an efficiently operating interstate 

transmission grid, that will produce just and reasonable rates. These are federal responsibilities. By the same token, under existing law the FERC cannot site the generation and transmission facilities that are necessary to bring supply and demand 

into equilibrium, and it has no direct authority to require purchasers of power to 

hedge price volatility risk in forward or financial markets. These are state responsibilities. Both federal and state policymakers have a role in pursuing policies that 

will facilitate an effective and price-dampening demand side response. We must 

work together to solve the problems at hand. 

The Need for Federal Legislation 

I strongly believe that there is a need for federal legislation to ensure that the 

nation reaps the benefits of well-functioning electricity markets. I would not advocate a legislative solution for all of the problems experienced in the California market this summer. Many market design flaws, hedging, and the lack of demand side 

responsiveness can be addressed under existing authorities. But I do believe that 

this summer’s experience has demonstrated that electricity markets are inherently 

interstate in nature. Prices throughout the western United States rose and fell with 

events in California. In order to thrive, such markets must have an open, non-disVerDate Aug 2, 2002 06:03 Aug 07, 2002 Jkt 010199 PO 00010 Frm 00130 Fmt 6633 Sfmt 6621 E:\HEARINGS\67633.TXT pfrm12 PsN: 67633
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criminatory, well managed, and efficiently priced interstate transmission network 

that links buyers and sellers of power. The existing patchwork of inconsistent and 

outdated jurisdictional rules for this essential interstate delivery system, coupled 

with splintered network management, create obstacles and uncertainties that undercut the market. If buyers and sellers lack confidence that electric power will be 

delivered reliably and on reasonable terms and conditions, they will not commit resources to those markets. 

Legislation should facilitate the development of a reliable and efficiently organized grid platform upon which vibrant wholesale markets can be built. Jurisdictional uncertainties or anomalies should be eliminated, the development of Regional 

Transmission Organizations should be ensured, and the authority to site interstate 

transmission facilities should reside with an interstate authority. 

My recommendations for federal legislation fall into five broad areas. 

First, Congress should place all interstate transmission under one set of open access rules. That means subjecting the transmission facilities of municipal electric 

agencies, rural cooperatives, the Tennessee Valley Authority, and the Power Marketing Administrations to the Commission’s open access rules. 

Moreover, the majority of transmission—that is, the transmission that underlies 

bundled retail sales—is arguably now subject to state control under existing law. 

This has a balkanizing effect on what is essentially an interstate delivery system. 

State rules may discriminate against interstate transactions. The solution is to subject all transmission, whether it underlies an unbundled wholesale, unbundled retail, or bundled retail transaction, to one set of fair and non-discriminatory interstate rules administered by the Commission. This will give market participants confidence in the integrity and fairness of the interstate delivery system, and will facilitate robust trade. All transmission should be subject to one set of rules, while local 

distribution wires are governed by state regulations. 

Second, I continue to strongly believe that the development of well structured Regional Transmission Organizations is a necessary platform on which to build efficient electricity markets. Having said that, I realize RTOs are not a panacea. Indeed, California already has an ISO that operates its transmission grid. However, 

the causes of the problems plaguing California are related to market design, an inability to site new facilities, and the restricted scope of the ISO. The problems were 

not due to transmission grid operation. 

The widespread development of RTOs is needed to ensure open access to an efficiently organized transmission grid. Discrimination in access is still a problem, and 

the current utility-by-utility approach to grid management is inefficient. RTOs that 

meet the requirements of Order No. 2000 will help ensure access to large power 

markets, better transmission pricing, improved regional planning, improved congestion management, and consistent market rules within a trading region. We know 

for a fact that resources will trade into the market that is most favorable to them. 

Trade should be based on true economics, not the idiosyncracies of differing market 

rules. 

Grid reliability is one of the unsung benefits of the RTO institution. Existing grid 

management is scattered among more than one hundred operators. Consolidating 

grid operations through RTOs (in the form of ISOs, transcos or hybrid entities) will 

eliminate seams and facilitate institutions that are more congruent with reliability 

management regions and evolving markets. A large RTO can manage congestion 

and plan for loop flow efficiently. An RTO can also facilitate regional consensus 

among market participants, transmission owners and state siting authorities about 

the need for new transmission siting and construction. A large RTO also provides 

the appropriate scope and forum for transmission pricing reform. As such, an RTO 

can, by adopting performance-based rates, provide the incentives for needed new 

transmission facilities. These features of the RTO can provide a reliable platform 

for emerging markets. 

The full benefits of RTOs to the marketplace will not be realized, however, if they 

do not form in a timely manner, if they are not truly independent of merchant interests, or if they are not shaped to capture market efficiencies and reliability benefits. 

While the Commission may have more authority regarding RTOs than it has exercised thus far, I nevertheless recommend that the Congress clarify existing law to 

authorize the Commission to require the formation of RTOs and to shape their configuration. 

The current tax codes may be an obstacle to participation in RTOs. Public utility 

transmission owners cite unfavorable tax consequences of spinning off or selling 

their transmission facilities to RTOs, and public power entities cite difficulties staying within the bounds of private use restrictions on their transmission facilities if 

such entities join RTOs. Legislation has been introduced (H.R. 4971) that addresses 

these problems. For public utilities, this legislation would defer taxes on the sale, 

128

and eliminate taxes on the spin off, of transmission facilities to independent entities 

in Commission approved RTOs. The bill also would modify the private use restrictions to enable public power entities to provide open access service and participate 

in RTOs without losing their tax-exempt bonds. This legislation appears to be a reasonable compromise and could be important in attracting RTO participation by public utilities and public power entities. I commend this legislation to the Subcommittee. 

Third, we need mandatory reliability standards. Vibrant markets must be based 

upon a reliable trading platform. Yet, under existing law there are no legally enforceable reliability standards. The North American Electric Reliability Council 

(NERC) does an excellent job preserving reliability, but compliance with its rules 

is voluntary. A voluntary system is likely to break down in a competitive electricity 

industry. 

I strongly recommend federal legislation that would lead to the promulgation of 

mandatory reliability standards. A private standards organization (perhaps a restructured NERC) with an independent board of directors would promulgate mandatory reliability standards applicable to all market participants. These rules would 

be reviewed by the Commission to ensure that they are not unduly discriminatory. 

The mandatory rules would then be applied by RTOs, the entities that will be responsible for maintaining short-term reliability in the marketplace. Mandatory reliability rules are critical to evolving competitive markets, and I urge Congress to 

enact legislation to accomplish this objective. 

Fourth, the FERC needs the authority to site new transmission facilities. The 

transmission grid is the critical superhighway for electricity commerce. But it is becoming congested due to the increased demands of a strong economy and to new 

uses for which it was not designed. Transmission expansion has not kept pace with 

these changes in the interstate electricity marketplace. Under current law, however, 

the Commission does not have the authority to get the job done alone. The Commission has no authority to site electric transmission facilities that are necessary for 

interstate commerce. Existing law leaves siting to state authorities. This contrasts 

sharply with section 7 of the Natural Gas Act, which authorizes the Commission to 

site and grant eminent domain for the construction of interstate gas pipeline facilities. Exercising that authority, the Commission balances local concerns with the 

need for new pipeline capacity to support evolving markets. We have certificated 

thousands of miles of new pipeline capacity over the last few years. 

I strongly recommend legislation that would transfer siting authority to the Commission. Such authority would make it more likely that transmission facilities necessary to reliably support emerging regional interstate markets would be sited and 

constructed. 

Finally, I recommend legislation that would give the Commission the direct authority to mitigate market power in electricity markets. It should be clear by now 

that, despite our best efforts, market power still exists in the electricity industry. 

The FERC, with its broad interstate view, must have adequate authority to ensure 

that market power does not squelch the very competition we are attempting to facilitate. However, the Commission now has only indirect conditioning authority to 

remedy market power. This is clearly inadequate. Therefore, I recommend legislation that would give the Commission the direct authority to remedy market power 

in wholesale markets, and also to do so in retail markets if asked by a state commission that lacks adequate authority. 

Conclusion 

I stand ready to assist the Subcommittee in any way, and I thank the you for 

this opportunity to testify.

Mr. BARTON. Thank you, Commissioner Massey. 

We now want to welcome the president of the California Public 

Utilities Commission, Loretta Lynch. She’s accompanied by Commissioner Wood. Mr. Wood does not have a statement, but he’s 

available to take questions when we get to the question period. 

We just got your statement, or at least I just got your statement, 

so I’m going to kind of glance through it as you give it. You’re recognized for 5 minutes, and welcome to the committee. 

129

STATEMENT OF LORETTA M. LYNCH 

Ms. LYNCH. Thank you. Thank you for inviting the California 

Public Utilities Commission to your hearing today. 

As a result of California’s experiment in restructuring its electricity market, wholesale electric energy prices in California have 

risen significantly. 

As Michael Kahn, the Chairman of the Electricity Oversight 

Board, and I found in a report we prepared for Governor Gray 

Davis in August, prices for electricity in June 2000 were seven 

times higher than comparable prices California paid in June 1999. 

Analyzing this monthly data, wholesale energy prices have risen 

significantly in just the last year, reaching an average monthly 

price of 17 cents a kilowatt hour in June, 12 cents in July and 18 

cents in August. 

The total bill for energy purchased for those same 3 months in 

California was over $10 billion. California experienced historic billion-dollar weeks in paying over $1 billion for electricity purchases 

from the Power Exchange and the ISO ancillary services markets. 

The August electricity prices are especially troubling as California experienced the coolest August on record with concomitant 

lower levels of electricity use. The substantial cost to California 

from higher energy prices caused real harm to California families 

and businesses, as you heard this morning. 

Families and businesses have seen their electricity bills double 

and in some cases triple over what they paid just last year, in most 

cases for basically the same amount of electricity consumed. 

For instance, San Diego schools must now divert funds previously committed to improve their classrooms and their playgrounds to pay for their higher energy bills. The additional funds 

that Governor Davis and the California State Legislature provided 

to San Diego schools are now being paid just to keep the lights on 

and the computers working and are not available to improve our 

children’s education. 

Governor Davis and the California Public Utilities Commission 

have now both done what we can to minimize the effects of these 

wholesale energy prices. My testimony indicates some of those actions. But California’s efforts represent only part of the solution. 

Under California’s past electric restructuring experiment, we ceded 

to the Federal Government, specifically to the FERC, the ability to 

control a significant portion of the energy costs paid by California 

consumers. 

Almost all of the energy consumed by customers at California’s 

investor-owned utilities is now regulated by the FERC, not the 

PUC. It is the FERC, not our PUC, which regulates both the ISO 

and the Power Exchange, as you read this morning. 

So while California can work at the retail level to mitigate these 

price problems we face, it is now in the hands of the Federal Government and the FERC to solve the problem at the wholesale level. 

Several factors have been ascribed to the run-up in these prices, 

and we’ll have robust debate on that. But certainly increased costs 

for some of the components of producing electricity cannot explain 

away a significant portion of the price increases experienced in 

California. 

130

As numerous reports already document, as Commissioner 

Massey detailed, a major reason for the run-up in energy prices appears to be the problem of market power where a few generators 

on the margin can set the price for energy, particularly on peak demand days when all generating units are needed. 

Data from May and June 2000 show that wholesale energy prices 

were 37 percent higher than could possibly be expected and 186 

percent higher in June than should have been expected in a competitive market, according to Professor Frank Wollock, professor at 

Stanford and a member of the ISO’s market surveillance committee. 

Some preliminary estimates peg the amount at which actual 

prices diverge from even the highest prices that could have been 

expected in a competitive market at close to $2 billion. This $2 billion price signal that California has already paid this summer simply cannot be justified. Had we just directly invested $2 billion into 

California’s electricity infrastructure, we could have built 4,000 

megawatts at new power plants or made untold but vast improvements in energy efficiency. 

Equally troubling are the higher off-peak energy prices that we 

have seen, particularly for the month of August. While high onpeak prices might be justified theoretically, the high off-peak prices 

that California is experiencing for virtually every hour of the day 

are difficult to justify, absent the existence of market power. 

And market power is particularly pernicious in the electricity 

arena, as electricity constitutes a fundamental necessity that has 

no effective substitutes. California cannot run its information-age 

economy on candles. 

The electricity market is unique, and the theories that work in 

other markets, for instance, like ones for applies and oranges, do 

not apply to the workings of electricity. In this market, electricity 

cannot be stored. Thus, buyers, the utilities, must always purchase 

a continuous real time supply for every hour of every day. Supply 

must always balance with demand to maintain system reliability. 

Given the realities of how the electricity market works in California and nationwide, the calculation of prices on an hourly basis 

provides a strong incentive for sellers to engage in strategic bidding 

to increase prices. I believe that Representative Hunter called that 

his oxygen analogy. At some point, you’ll pay for it at any price. 

As the high energy prices we have seen clearly show, the wholesale market in California is not working properly and is not workably competitive. While we remain hopeful that a truly competitive 

wholesale market can be achieved in the long term, we believe that 

the FERC must address the market power and market structure 

problems immediately. 

We hope that Federal regulators and California will work closely 

together to bring down these unconscionable prices. Both Congress 

and the Federal Government should give California the maximum 

flexibility to craft solutions to our problem and to recognize our individual needs to address and solve this problem before this problem causes further harm both to California citizens and California’s 

entire economy. Thank you. 

[The prepared statement of Loretta M. Lynch follows:]

131

PREPARED STATEMENT OF LORETTA M. LYNCH, PRESIDENT, CALIFORNIA PUBLIC

UTILITIES COMMISSION

The reason we are here today is to address the extraordinary rise in electric energy prices in California and to identify how to mutually work together to solve this 

problem. 

As a result of California’s experiment in restructuring its electricity market, embarked upon in the Wilson Administration, wholesale electric energy prices in California have risen significantly. As Michael Kahn and I found in a report we prepared for Governor Gray Davis in August, prices for electricity on selected days in 

June 2000 were seven times higher than comparable prices California paid in June, 

1999. 

Analyzing a monthly data, wholesale energy prices have risen significantly in the 

last year, reaching an average monthly price of 17 cents a kilowatt hour in June, 

12 cents in July, and 18 cents in August. The total bill for energy purchased for those same three months was over $10 billion. California experienced historic ‘‘billion dollar weeks’’ in paying over $1 billion for electricity purchases from the Power 

Exchange and ISO ancillary services markets. The August electricity prices are especially troubling, as California experienced the coolest August on record, with concomitant lower levels of electricity use. 

The Substantial costs to California from higher energy prices cause real harm to 

California families and businesses. Families and businesses have seen their electricity bills double and in some cases triple over what they paid last year—in most 

cases for the same amount of electricity consumed. San Diego schools must divert 

funds previously committed to improve their classrooms and playgrounds to pay for 

higher energy bills. The additional funds Governor Davis provided to San Diego 

schools are now being paid to keep the lights on and the computers working—and 

are not available to improve our children’s education. 

Residents and businesses in the service territories of Pacific Gas & Electric and 

Southern California Edison have yet to be directly affected by the run-up in wholesale energy prices as they are still covered by a state legislatively mandated rate 

freeze. Once the rate freeze ends, however, and it will statutorily expire no later 

than March, 2002, these California customers will also face significantly higher 

prices for electricity unless appropriate action is taken. In the meantime, higher 

wholesale energy prices have cut into the ability of California’s other utilities to provide electricity to their customers and to stay in business. 

Governor Gray Davis, and the California Public Utilities Commission, have both 

done what we can to minimize the effects of these high wholesale energy prices. 

California has:

• Adopted a ceiling on energy commodity costs for all families and for most businesses in the San Diego area, especially safeguarding schools and hospitals, of 

61⁄2 cents/kilowatt hour pursuant to Governor Davis signing AB 265, an urgency 

bill authored by state Assemblywoman Susan Davis; 

• Freed up electricity used by state buildings to put it back on the grid and available to others during periods of short supply; 

• Reinvigorated California’s commitment to energy efficiency including reallocating 

$72 million in uncommitted funds toward programs designed to reduce peak demand for the Summer of 2001; 

• Streamlined, where possible, the siting of new power plants, and 

• Removed constraints to upgrading the state’s transmission and distribution systems. 

California’s efforts represent only one part of the solution, however. Under California’s electric restructuring experiment during the Wilson Administration, California ceded to the federal government, specifically to the Federal Energy Regulatory Commission (FERC), the ability to control a significant portion of the energy 

costs paid by California consumers. Almost all of the energy consumed by customers 

of California’s investor-owned utilities is now regulated by FERC, not the Public 

Utilities Commission. It is FERC, not our Commission, which regulates both the 

ISO and the Power Exchange. While California can work at the retail level to mitigate the retail pricing problems we face, it is now in the hands of federal regulators 

at the FERC to solve the problem at the wholesale level. 

Several factors have been ascribed to the run-up in these prices. Among the listed 

causes are higher natural gas prices, higher prices for air pollution emission credits 

in the Southern California area, and increased demand for electric energy as the 

result of a robust economy. Our Commission held a hearing to examine these issues 

last Friday in San Diego. My personal conclusion is that these factors pale as causes 

for any of the run-ups, contributing at most what amounts to pennies while electric 

bills have skyrocketed. Increased costs for some of the components of producing elecVerDate Aug 2, 2002 06:03 Aug 07, 2002 Jkt 010199 PO 00010 Frm 00135 Fmt 6633 Sfmt 6621 E:\HEARINGS\67633.TXT pfrm12 PsN: 67633
132

1 Assumes $500 per megawatt of installed capacity. 

tricity cannot explain away a significant portion of the price increases experienced 

in California. 

As numerous reports document, a major reason for the run-up in energy prices 

appears to be the problem of market power, where a few generators on the margin 

can set the price for energy, particularly on peak demand days when all generating 

units are needed. 

Last week, Professor Frank Wolak, Professor of Economics at Stanford and member of the ISO’s Market Surveillance Committee, presented the results of a study 

comparing estimates of the marginal cost of generation compared to actual prices 

seen in California’s energy markets. In a competitive market place, energy prices 

should be close to marginal costs, except at times of scarcity when prices may be 

higher. 

Data for May and June of 2000, the last two months for which data is available, 

show that wholesale energy prices were 37% higher than could possibly be expected 

in May 2000 and 186% higher in June. Some preliminary estimates peg the amount 

at which actual prices diverged from even the highest prices that could be expected 

in a competitive market at close to $2 billion. 

The $2 billion ‘‘price signal’’ that California has already paid this summer cannot 

be justified. Had we just directly invested this $2 billion into California’s electric 

infrastructure, we could have built 4,000 megawatts of new power plants or made 

untold but vast improvements in energy efficiency.1

Equally troubling are the higher off-peak energy prices that we have seen, particularly for the month of August. While high on-peak prices might be justified theoretically during periods of high-demand, the high off-peak prices (at times as high 

as 12 cents/kilowatt hour) that California is experiencing for virtually every hour 

of the day are difficult to justify absent the existence of market power. 

Market power is particularly pernicious in the electricity arena, as electricity constitutes a fundamental necessity that has no effective substitutes. California cannot 

run its information age economy on candles. The electricity market is unique and 

theories that work—in other markets—like ones for apples or oranges—or even 

phone service—do not apply to the workings of this market. In this market, electricity cannot be stored. Thus, buyers must always purchase a continuous real-time 

supply for every hour of every day. Supply must always balance with demand to 

maintain system reliability. Given the realities of the electricity market, the calculation of prices on an hourly basis provides a strong incentive for sellers to engage 

in strategic bidding to increase prices. 

As the high energy prices we have seen clearly show, the wholesale market is not 

working properly and is not ‘‘workably competitive.’’ While we remain hopeful that 

a truly competitive wholesale market can be achieved in the long-term, FERC must 

address the market power and market structure problems immediately. 

FERC must also work closely with California to bring down these unconscionable 

prices. Both Congress and the federal government should give California the maximum flexibility to craft solutions to our problems and to recognize the need for 

California to address, and solve this problem, before it causes further harm both to 

California’s citizens and to California’s entire economy. 

Thank you.

Mr. BARTON. Thank you, Madam President. As indicated, Commissioner Wood is also here, and we’ll ask him some questions. 

Mr. WOOD. Mr. Chairman, may I make a few remarks? 

Mr. BARTON. Actually, you may not. 

We’d now like to hear from Mr. Edwin Guiles, who is the chairman of San Diego Gas & Electric and who has been at the center 

of this storm for several months. 

STATEMENT OF EDWIN A. GUILES 

Mr. GUILES. Thank you, Mr. Chairman. Good afternoon. I’m Ed 

Guiles, Chairman of San Diego Gas & Electric. Chairman Barton 

and Members of Congress——

Mr. BILBRAY. Ed, would you mind pulling that mic up? I’m sure 

everybody is dying to hear every word that you say. 

133

Mr. GUILES. All right. Anyway, good afternoon. I’m glad to be 

here. Chairman Barton, I want to thank you for working to enact 

Federal electric restructuring to mitigate the problems we’re experiencing nationwide. And Congressman Bilbray, I want to thank 

you for bringing this issue to the forefront here in San Diego. 

SDG&E and its customers are in a difficult and agonizing position as a result of the electric restructuring legislation that was enacted in 1996. Our customers are the first utility customers in the 

Nation truly subject to the market price of electric commodity. And 

as has been stated throughout the day, this has been a situation 

resulting in extremely high prices, far-reaching ramifications. They 

have been talked about, but I want to repeat them a little bit. 

And Chairman Barton, I’ve got copies of some letters from customers that I’d like to submit to you, if I might, please. 

Mr. BARTON. Without objection. 

Mr. GUILES. When you think about the impact on our customers, 

which we have felt, we’ve got elderly citizens, we’ve got working 

families on fixed incomes. I’ve seen our bills go from $55 to $130 

a month. We’ve got medium-sized commercial customers, large customers who are having difficulty paying bills, canceling expansion 

plans, talking about moving out of San Diego and other manufacturers considering moving here who are now not intending to move 

here until this crisis gets resolved. 

Legislation was recently passed by the State Legislature to stabilize rates on an emergency basis for our smaller customers. And 

certainly, this bill has been well-intentioned, but we think it is 

really merely a short-term Band Aid that will help soften the immediate impact on our customers, but does nothing to address the 

long-term structural impacts that have been talked about by others 

here today. 

By requiring the utility to continue to buy electricity at the inflated market prices that we have seen, but to deliver it to our customers at a much lower fixed price, for all practical purposes, this 

creates an effective balloon payment that will come due in a few 

years. 

Deregulation was supposed to result in greater choices, more 

competition and competitive prices. It hasn’t worked out that way. 

Instead, the tremendous population growth, lack of construction 

and new capacity and awkward—and I’ll use the word ‘‘awkward’’—wholesale market purchasing structure has given rise to a 

dysfunctional market that requires immediate Federal action and 

attention. 

Some argue that extreme fluctuation in electric prices are simply 

supply and demand, but I’d like to show you a quick chart. And I 

tried to choose these charts carefully. This chart is a diagram of 

the daily power exchange price comparison for 1999 and 2000. 

Mr. BILBRAY. Excuse me, Mr. Chairman. You’re going to have to 

hold that higher because—thank you. 

Mr. GUILES. Do you see that all right now, Brian? 

Mr. BILBRAY. Yeah. 

Mr. GUILES. It’s a price comparison for 1999 and 2000. On the 

left-hand side is the average daily power exchange price in dollars 

for megawatt hour, and on the bottom, the actual scheduled 

megawatts of average PX daily load. 

134

And the point I want to make here, the blue on the bottom is 

the prices for 1999, and on the red or pink, if you will, magenta, 

is prices for 2000. And if you take a look at that, I mean, the prices 

for 2000 are far above the level necessarily, we think, to achieve 

a reasonable return, attract new generation, and it’s compelling 

evidence, in our judgment, that the market is broken, if you look 

at the prices that have been charged in 2000, the summer of 2000 

versus 1999. 

If you look at some of these rates, we saw 4 cents a kilowatt hour 

in the summer of 1999. We’ve seen rates in the 18, 20-cent and 

above range for the year 2000, a fivefold increase in prices. 

And increased generation in the region has been talked about 

today, as frequent threats of service interruption. California this 

summer has made clear, in California, supply has not kept pace 

with demand. To compound matters, the approval process for siting 

has historically been cumbersome. And I include both generation 

and transmission of that. 

We’re hopeful that recently passed State legislation which was 

signed by the Governor will help bring on line new plants and increase the availability of supply, both generation and transmission. 

But as the chart we put up here suggests, supply is not the only 

factor in creating or mitigating the current crisis. We have a market that’s broken. And that market has exacted a heavy toll on energy consumers in San Diego. 

It would be a major understatement to say that we’ve been hearing from our customers. They’re angry about the extreme and sudden increase in their bills, and they have every right to be angry. 

Unfortunately, SDG&E and its 3200 employees have been the 

focal point for the community’s anger and frustration about deregulation. That’s understandable. We realize we share in the responsibility for this crisis. We supported deregulation, as did many other 

business community and consumer interest groups. 

We’ve also been the only energy supplier that most San Diegans 

have ever known, because electric costs are carried on SDG&E’s 

bills, even though California’s electric restructuring law requires 

SDG&E to pass on to its customers the wholesale price of electricity without markup. It’s not clear to customers that the problem 

is beyond our ability to fix. 

No one anticipated the increase in the price of electricity of the 

magnitude we witnessed this summer. All of us have been the unfortunate trailblazers in the deregulation of California’s electric 

marketplace. 

Along the way, we’ve encountered spiraling electric prices, limited supplies——

Mr. BARTON. If you could wrap it up. I hate to cut you off, but 

we’ve still got two more witnesses. 

Mr. GUILES. Okay. Mr. Chairman, California’s energy market 

structure has blurred the roles and responsibilities between the 

market and the regulators, which has resulted in a system with 

conflicting rules and regulations. There’s been much discussion, 

and we can talk more about the arrangement of the California 

Power Exchange and the California ISO. 

It’s the only State that has this division of roles and responsibilities, and we believe this split is a direct contributor to the inflated 

135

wholesale prices. That’s why we’ve turned to the Federal Energy 

Regulatory Commission to devise a solution. 

Tomorrow we’ll testify before the FERC and highlight what we 

believe the Commission needs to do to fix the dysfunctional market 

in the western region. While the FERC works to help fix our market, our customers must be protected. So we also believe the FERC 

must act during the transition to limit prices in the region’s wholesale market. 

If the FERC’s current investigation, which we strongly support, 

finds that a workably competitive wholesale market does not exist, 

we believe the Commission must act immediately to intervene in 

the market to assure that wholesale prices charged by jurisdictional sellers are just and reasonable. Our customers deserve no 

less. 

Congress must—— Mr. BARTON. Mr. Guiles, you really do need to——

Mr. GUILES. All right. 

Mr. BARTON. I’ve given you about 3 extra minutes, and I apologize, but we just have a lot we still have to get through. 

Mr. GUILES. Thank you, Mr. Chairman. Let me just wrap up. 

Hard decisions need to be made. We urge you to support the 

FERC to make sure that they have the tools necessary in fixing the 

market in the western region of the U.S. Thank you, Mr. Chairman. 

[The prepared statement of Edwin A. Guiles follows:]

PREPARED STATEMENT OF EDWIN A. GUILES, GROUP PRESIDENT SEMPRA ENERGY

REGULATED OPERATIONS

OVERVIEW

Good morning. I am Ed Guiles, Chairman of San Diego Gas & Electric (SDG&E) 

and Chairman and President of Southern California Gas Company (SoCalGas), both 

subsidiaries of Sempra Energy. 

Sempra Energy is a Fortune 500 energy services holding company whose subsidiaries provide electricity and natural gas services. We believe it is important to work 

closely with federal and state regulators to provide safe, reliable and low cost service to our customers and a fair rate of return to our shareholders. 

I appreciate the invitation to appear before you today to help in your examination 

of the energy market in San Diego, and to propose options that we believe will address the high-energy prices plaguing our customers. In particular, I applaud Congressman Bilbray for focusing attention on this critical problem, which is an issue 

of national importance. 

I do not use the term ‘‘national importance’’ lightly. For more than a decade, the 

electric industry has faced uncertainty regarding its future, as various proposals for 

restructuring have been debated and implemented in a piecemeal fashion. One result of the long period of uncertainty has been a steady and rapid erosion of our 

national power supply reliability. As new investment in generation slowed, our population and economic growth have continued, sometimes at near record pace. The 

result has been that our reserve capacity margin has shrunken to the point that 

in some regions, like ours, a hot day sets off a scramble so that some customers 

have to be asked to curtail use just to keep the state from suffering rolling blackouts. 

The restructuring of the electric industry was intended, in some part, to accelerate investment in new generation. There are signs it is having that effect. Roughly 

$10 billion in investments in new power plants to serve California have been proposed since restructuring was enacted. 

But now we are facing an economic crisis caused by large increases in the generation price of electricity. The pricing markets in California are broken, and the delivered cost of electricity in California is so high that public confidence in restructuring 

itself has eroded. This is a problem beyond the ability of a single state to solve. Consequently, we have asked the Federal Energy Regulatory Commission (FERC) to 

136

step in and fix what we believe is a problem in the transition to the new system. 

We’re pleased that the FERC has responded, and will hold a hearing in San Diego 

tomorrow to hear from all parties impacted by recent events in California’s wholesale market. 

We recognize that a critical part of the operation of a competitive market is the 

price signal. The price signals we are seeing clearly demonstrate that supply and 

demand are out of balance. What we are seeing now are prices that are vastly inflated, in large part because the market structure in California is dysfunctional. The 

current prices are the result of immature and poorly functioning markets. This is 

a transitional problem, but one that comes with a very human cost to our customers, one that cannot be ignored. 

I stress this to you because failure to respond quickly to this pricing crisis may 

create a political climate in which the solutions will be worse than the problems. 

Some of the solutions currently being considered will add whole new levels to the 

uncertainty within the electric system. That uncertainty, and its historically demonstrated effect on investment, threatens to slow or halt the development of new 

supply that our nation so desperately needs. A failure to act on this pricing crisis 

would be a step toward greater risk, more uncertainty and less reliability. These are 

the stakes if Congress and FERC fail to send the signal that the path has been set 

and that they will not allow the abuse of temporary market imperfections to undermine the commitment to restructuring. 

At the same time, I would be remiss if I did not mention the projected increase 

in natural gas prices and the expected impact that increase will have on our customers and on other Californians. At some point, customers are no longer able or 

willing to shoulder the burden of high energy costs. 

I should also note that in addition to the impact of high prices on residential customers, large industrial manufacturers—the companies that are the backbone of employment for our region—are not immune to the rising energy costs. In fact, some 

manufacturers have already moved operations to other regions where electric costs 

are significantly lower. Large employers planning to move to San Diego have put 

their plans on hold until the energy issues are addressed. And, many small businesses have already closed, and hundreds more are expected to close if change does 

not occur soon. 

Additionally, there is a misperception that the market offers a solution to commercial and industrial customers. Even though larger customers were able to negotiate energy savings by obtaining commodity and value-added services from Energy 

Service Providers (ESPs), many businesses that negotiated deals with ESPs have 

had their contracts terminated or have not had their contracts renewed because it 

did not make economic sense, in light of skyrocketing electric prices, for the ESP 

to continue to provide services at the negotiated rates. 

That’s why Sempra Energy has advocated before your committee and Senate committees that Congressional action is needed to successfully restructure the electric 

market. In retrospect, it was unreasonable to expect that the drafters of AB 1890 

would be able to anticipate all of the intricate interstate manipulations that could 

occur in electric restructuring, which I believe are largely at the core of the problem 

we face here in San Diego. Unless Congress and the FERC are willing to address 

the interstate issues that are beyond the jurisdiction of state legislators and regulators, I predict that our experience in San Diego is indicative of what others will 

encounter in trying to create a competitive electricity market. 

In simplest terms, the goal of any system of electric restructuring must be to ensure the availability of and access to reliable and affordable power. However, in San 

Diego that clearly has not been the result of the current market structure. 

ENERGY AFFORDABILITY

One reason that your committee has chosen to hold a hearing here is that the 

whole concept of electric restructuring is being called into question by the impact 

of AB 1890 on rates in San Diego. Our customers are the only utility customers in 

the nation truly subject to market prices for the electric commodity price. SDG&E 

customers have seen their electric bills double in recent months, as demand for electricity has increased during the hot summer weather. Senior citizens and working 

families have seen their monthly bills for the average residential customer increase 

from $55 to almost $130. Many small businesses have seen increases of more than 

$1000 per month. 

Some of you may want to know why this electric price crisis has not yet spread 

statewide. When AB 1890, the state’s electric restructuring legislation was passed 

in 1996, there were concerns about potential market power abuses by the incumbent 

utilities. Consequently, in implementing AB 1890, the California Public Utilities 

137

Commission (CPUC) required utilities to sell their electric generating plants. The 

legislation also allowed utilities to pay off the debt on stranded assets and move to 

a competitive environment in which the cost of power obtained from the wholesale 

market would be passed on to customers without a mark-up. Under the state law, 

each utility had a rate cap until either it recovered its stranded costs or the opportunity to collect the costs sunset in March 2002. Once either condition was met, the 

utility became exclusively an energy delivery company, and the price of electricity 

would be set by the market. Because SDG&E sold all of its fossil fuel power plants 

and paid off the debt on its stranded assets ahead of schedule (in fact far ahead 

of the state’s other two investor owned utilities), it became the first utility in California whose customers pay market rates for electricity. 

I suspect that representatives of the state’s other investor owned utilities will tell 

you that if the high commodity costs are not fixed when their stranded assets are 

paid off in 2002, there will be a state wide energy crisis because their customers 

will also face exorbitant energy prices. Right now these exorbitant energy prices are 

being charged to the state’s other utilities, but their customers are not seeing the 

impact yet because of the AB 1890-imposed rate cap. 

The extraordinarily high prices San Diegans have faced this summer suggest that 

supply bids into the day ahead market are being withheld and then later bid into 

the ‘‘same day’’ market where everyone pays the highest price bid, when power is 

desperately needed. Since the beginning of June, wholesale electricity prices in California have increased to levels that often exceed prices seen at comparable levels 

in prior years. The increase in prices has significantly outpaced the increase in fuel 

prices and greatly exceeds the cost of producing electricity. The attached chart provides an example of this unusual phenomenon. 

Ironically, it is the entities who purchased the generating plants owned by utilities prior to restructuring—companies beyond the control of state regulators—who 

were intended to be the ‘‘fix’’ for incumbent utility market power who are now 

charging the exorbitantly high wholesale electricity rates we face today. Although 

market power was one of the problems AB 1890 sought to address, in retrospect the 

legislation could not anticipate the ability of market participants to extract remarkable profits from the auction rules in the California market. 

The FERC, CPUC and the state Attorney General are conducting investigations 

into market manipulation. Whatever the outcome of these investigations, it is important to note that it is still possible to exercise market power and increase prices 

excessively if the market structure is itself dysfunctional, which we believe is the 

situation in California. 

The political backlash in California has been swift. Elected officials are trying to 

mitigate the prices for the people of San Diego. The proposals have ranged from 

spreading payments out over time, to trying to undo the whole law. But the ability 

of the state to act alone is limited, and the continuing crisis is adding a whole new 

level of uncertainty to the whole system.

• the state Legislature passed AB 265, a bill that would cap SDG&E’s customers’

bills. While the legislation was well intentioned, we believe that the bill is seriously flawed and are disappointed that the Governor has signed it. We believe 

that the bill postpones a huge customer bill that could grow to $840 million and 

come due in 2004. 

• Passage of another bill, AB 970, that is designed to streamline the permitting 

process to less than six months for projects that meet stringent environmental 

standards. We support AB 970. 

ENERGY RELIABILITY

In addition to suspicious pricing practices, California’s energy crisis is a result of 

the convergence of two key factors. First, the region has experienced unprecedented 

growth, and as a consequence, electric usage has increased exponentially. In just the 

past five years, more than five million new residents have moved to the region. In 

addition, the heightened demand due to the state’s economic expansion, especially 

due to heavy energy users like the growing internet industries, have created significant demand growth. Current demand growth levels are about equal to an increase 

in peak demand of 1,000 MW per year. 

To keep pace with demand growth requires two 500 MW merchant power plants 

to come on line each year. Yet, according to estimates from the ISO, it will not be 

until the summer of 2003, at current rates of development, that the generation coming on line is equal to the demand growth (assuming that all of the power plants 

in the permitting queue are constructed on schedule). Thus, until that time, the gap 

between demand and supply in California will continue to worsen. In hindsight, 

138

California should not have unleashed its full force of deregulation on the consumer 

until it was more assured of additional generation. 

Secondly, despite the growth in population and the resultant increase in electricity demand, no new generating plants have been built in California during the 

past ten years as industry uncertainty has persisted. Not only does this mean a 

worsening gap between supply and demand, but the existing fleet of power plants 

serving California is an older one, with 60 percent of the plants 30 to 40 years old 

(increasing likelihood of break-downs). Efforts to re-power these plants and make 

them more efficient have been met with many regulatory challenges. 

Legislative discussions about deregulation in California incorrectly assumed that 

there would be new electric generation capacity built before peak demand would 

reach current levels. While deregulation has led to a greater willingness by business 

to invest in power plants, the long lag time in development of the plants means that 

there is a three to five year period of tight supplies facing the region. 

Specifically, the approval process for building new generating plants is a time consuming process, one that can take as long as twelve to eighteen months just for regulatory reviews. In the past, the process has been greatly complicated by environmental concerns that want to slow growth and promote conservation, and local governments that practice ‘‘Not in My Backyard’’ (NIMBY) politics. We are heartened 

by the passage of AB 970 and the Governor’s support of it, and anticipate that the 

bill will help to respond to the current energy crisis by expediting the permitting 

and construction of plants already ‘‘in the pipe.’’

POTENTIAL REMEDIES

The unintended consequences that have occurred during the transition to a restructured market threaten the continued economic success of our region. California 

is facing a crisis. This is a crisis that threatens brownouts and blackouts, which we 

have come perilously close to experiencing this summer. And California is facing a 

crisis in the cost of energy. The exorbitant prices for electricity in San Diego are 

causing widespread hardships, and cannot be allowed to go unchecked. Given California’s impact on the nation’s economy and as a global economic force on its own, 

federal action must be taken to prevent the continuation or the spread of this statewide crisis. 

While we believe that the benefits of deregulation—lower prices and customer 

choice—are attainable over time, the system must be fixed to address the unintended consequences that the piecemeal approach has created. 

I would like to propose near and long term actions that, if undertaken, we believe 

will enable Congress and the FERC to successfully navigate through the legislative 

and regulatory actions taken to date by different states to create a restructured electric market bound by national rules and regulations. 

SDG&E ACTIONS

Before I address what we see as the federal government’s role in helping to manage the energy crisis San Diegans face, I want to tell you about actions SDG&E has 

taken to address the problem:

• This summer we provided rebates to customers totaling nearly $500 million that 

could be used to offset high bills. 

• We are trying to smooth out the impact of high price spikes by offering a level 

pay plan to all customers. Under this payment option, customers pay the same 

amount every month, regardless of actual electric usage, with a quarterly ‘‘trueup.’’ The monthly amount is based on an average historical or regional usage 

(if historical data is unavailable). 

• We worked with the Department of Energy and the White House to secure almost 

$3 million in Low Income Home Energy Assistance Program (LIHEAP) emergency funds for low-income households in southern California. The funds are 

double the amount that the affected region currently receives under the federal 

LIHEAP program. We also encouraged the Administration to direct the Small 

Business Administration to help San Diego businesses survive this crisis. 

• We appealed to FERC to remedy the wholesale electric pricing system throughout 

the Western region of the United States. While FERC rejected our requested 

remedies until it performed further fact-finding, it did accelerate its investigation of the California market and is holding a hearing in San Diego tomorrow 

to better understand the crisis we face. 

• We have appealed to Governor Davis and the state Legislature to streamline the 

permitting process for generating plants and transmission lines, which we believe can be reduced from the present 12 to 18 months to six months, without 

compromising existing environmental laws. AB 970 is evidence of our success. 

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NEEDED FEDERAL ACTIONS

While our efforts and state actions have yielded some relief, until the supply of 

electricity is increased, the only option available to provide meaningful relief to our 

customers is fixing the flawed wholesale electricity market structure for the Western region of the U.S. This is action that can only be undertaken by FERC. 

Briefly, the structure of the California market has blurred the roles and responsibilities between the market regulators, and resulted in a system with conflicting 

rules and regulations. For example, the Power Exchange (PX) is responsible for 

hourly, day-ahead markets. The ISO is responsible for transmission and real time 

energy markets and ancillary services markets. The ISO was never intended to play 

the strong role it does on price setting. Its mandate is reliability. The fact that the 

current market has forced the ISO into this role is a significant contributor to the 

problem. And, the legislatively-inspired retail rate caps in the rest of the state, 

while shielding customers from the high prices the generators are charging, have 

inhibited end users from responding to real time energy prices because there is no 

price volatility seen by consumers. This only makes the problem worse over time. 

The serious structural difficulties that face the California market are far beyond 

the scope of the state’s ISO. In fact, recent attempts by the ISO to address the problem—lowering the maximum price it will pay for imbalance energy and ancillary 

services to $250 per MWh but excluding the larger PX markets—indicate that the 

panel has neither the tools nor the standing to address this challenge. Importantly, 

the ISO has yet to comply with FERC mandates to reform its pricing methodologies. 

We believe that the FERC should not hesitate to impose a solution, given the apparent inability of the current ISO structure to reform itself. If findings indicate 

that a workably competitive wholesale market does not exist, FERC must immediately intervene in this market to assure that the wholesale prices charged by jurisdictional sellers are just and reasonable. Regardless of those findings, FERC 

needs to focus on the structural problems with our pricing market and make the 

changes needed to ensure that consumers will be protected within a restructured 

electric market. 

Importantly, we urge Congress to monitor FERC’s examination of California’s 

market structure, and to ensure that needed reforms are undertaken. While our intention is not to tie FERC’s hands or to reregulate the electric industry, some hard 

decisions will need to be made to create a market that provides lower cost energy 

and options for consumers as we make the transition to a restructured marketplace. 

We need Congress to support FERC and hold it accountable for fixing the market 

in the Western region of the U.S., and for ensuring that the rules that govern the 

electric industry make sense for every region and do not disadvantage one region 

at the expense of another. We commend Chairman Barton for his leadership in advancing important legislation that provides many pieces of the solution to the problems our nation’s electricity delivery system faces. 

Nonetheless, as a response to the serious issues facing our company, we submitted 

to FERC, and the Commission initially denied, a proposal that would have limited 

what sellers across the region can bid. As we will testify at FERC’s hearing tomorrow, we believe that the FERC should adopt a bid cap approach for those generators 

that possess potential market power. We look forward to the results of FERC’s review. 

In the long term, other solutions to this problem may need to be considered to 

ensure that comprehensive restructuring is undertaken. Some of the possible longterm legislative solutions to be considered include:

• coordinating action by federal agencies to reduce the time and streamline the 

process to get new generation and transmission lines sited to provide needed 

generation; 

• helping to implement Executive Order 13123 (in turn implementing the program 

created by Congress in the Energy Policy Act of 1992) to encourage energy efficiency at federal facilities, and 

• examining the scope of FERC’s responsibilities to determine that the Commission 

has adequate authority to manage the nation’s energy system. 

CONCLUSION

Thank you again for the opportunity to offer my views. I have focused primarily 

on actions that impact the San Diego region, actions to which you can lend your 

support to FERC to ensure that the deregulated electric market that is ultimately 

created provides low cost, safe and reliable service. I would be pleased to provide 

comments in the future if it would be helpful to the Committee, and am pleased 

to answer any questions you may have for me today.

140

Mr. BARTON. I want to apologize to Commissioner Wood. I’m not 

trying to be personally impolite, but we’ve had several other people 

that came in today that wanted to testify, and we’ve got your president of the Commission testifying, and it just wouldn’t be fair to 

these other people to let you say something. We will ask you questions, I promise you, when we get to the question period. 

We’d now recognize Mr. Stout, who is Vice President for the 

southwest region of Reliant Energy for 5 minutes. 

STATEMENT OF JOHN STOUT 

Mr. STOUT. Thank you, Mr. Chairman. My company has invested about $3 billion in the wholesale marketplace throughout the country, and about 4,000 megawatts of 

that investment is located in California. In fact, we just opened up 

a brand new 500-megawatt power plant just in time for this summer’s peak to help serve the California marketplace. 

We are one of about six new generation owners who are participating in the California market, and we own about 9 percent market share. Beginning last summer, we began having people approach us indicating that they were interested in trying to lock in 

power prices for the summer of 2000. 

They saw some of the handwriting on the wall that perhaps the 

summer of 2000 was going to be a very tough summer in terms of 

power prices. They wanted to make sure they had reliable supply, 

and they wanted to lock in the price. So we began selling portions 

of our 4,000-megawatt portfolio to them. 

Over the course of perhaps 6 to 9 months, we sold over half of 

our portfolio in what we call the forward market. Those people 

locked in price certainty, and they were protected from the price 

spikes that occurred this summer. 

As it turns out, that 5 percent market share that we sold to other 

participants actually went to about a dozen or more other market 

participants who are now bidding that power in various markets in 

the west, not necessarily the California market, but wherever they 

choose to bid it. 

I point that out to highlight the fact that it’s not just six generation owners who are supplying this market. There are literally dozens of parties who have bought into the supply in this market and 

are serving the needs of California. 

For next year, we are already being approached by numerous 

parties wanting to lock in price for next summer. In fact, in the 

last month we sold an additional 700 megawatts from two people 

who were interested in locking in those prices. Next summer’s supply is going away rapidly as well. 

Interestingly, nearly all the power that we sold in the summer 

of 2000 was at prices less than half of what the market ended up 

being. Those people got real bargains. Who knows what the summer of 2001 will bring. That’s speculation to say whether it’s going 

to be more expensive or less expensive. But the point is, you have 

to hedge in this type of market in order to protect your customers, 

in order to give price certainty to those customers. 

None of the power that we sold last year, and so far none of it 

that we have sold for the year of 2001 has been sold to an IOU in 

California. It’s all alternative buyers. We want to be part of the soVerDate Aug 2, 2002 06:03 Aug 07, 2002 Jkt 010199 PO 00010 Frm 00144 Fmt 6633 Sfmt 6602 E:\HEARINGS\67633.TXT pfrm12 PsN: 67633
141

lution. We’re trying to make offers and propose ideas that will help 

the consumers of California. 

Just a week and a half ago, we made a proposal to sell energy 

to San Diego Gas & Electric for 24 months at a fixed price of 5.6 

cents per kilowatt hour. To date, we’re told that there is no response yet. And, in fact, we’re told it’ll probably be September 21 

before we hear any response to that offer. 

But that is an offer that’s intended to try and help to stabilize 

the rates for San Diego and to help the customers of San Diego before they get hit with the same sort of price volatility next year. 

I had a number of written remarks prepared, but I think I’m 

going to diverge from those just a minute and talk a little bit about 

some of the comments that I’ve heard earlier today. 

It is very important that investigations like this get to the truth, 

get the facts all out on the table. Because I think when you get the 

facts out on the table, you’ll find that some of the accusations 

which are being made and fingers that are being pointed perhaps 

are being pointed unfairly. 

A good example is the allegations that we heard just a moment 

ago of generators withholding capacity from the market. They’re 

supposedly doing so just to drive price up. In fact, there’s at least 

three reasons why withholding occurs in the market for clear business reasons. 

First of all, as I said just a moment ago, we have sold over half 

of our capacity already. We can’t possibly bid that in the market. 

It’s already been sold to someone else. In fact, statistics from the 

PX clearly show that about 6,000 megawatts of supply in California 

has already been sold in the bilateral market. 

Second, we have a lot of units that are constrained in how much 

they can operate due to air emission constraints. They can only run 

a certain number of hours per year. If we just bid those in at marginal cost, they will all be used up long before the summer peak 

gets here. 

And then Terry Winter at the ISO, when he looks to get the 300 

or 400 megawatts of capacity from those peaking units that have 

air emissions constraints, he’ll be told, ‘‘I’m sorry. It’s against the 

law for us to run those units any longer.’’ We have to hold those 

types of units back in order to make sure they’re available to serve 

peak needs in order to keep from having blackouts in California. 

And third, there’s considerable financial risk associated with bidding every last megawatt you have into the day-ahead market. 

That is what we call a financially firm market. And if we were to 

do that and one of our power plants were to have an operating 

problem and trip off line, we would be accountable for the financial 

damages associated with purchasing replacement power. 

Those are simple explanations of why withholding apparently occurs, and I illustrate that just to point to how important it is to 

get to the facts before drawing conclusions as to blame. 

Once again, we want to be part of the solution. We continue to 

work with all the interested parties in California to try and develop 

solutions to the problem that we currently face. And I think you’ve 

heard a number of excellent recommendations, most of which we 

endorse, regarding opening the door for more hedging, not requiring everyone to purchase everything through the PX, and putting 

142

1 The term ‘‘forward markets’’ refers to transactions made well in advance of the physical delivery, i.e. a sale for August 2000 power which is agreed to in December 1999 2 The term ‘‘spot markets’’ refers to daily and hourly transactions made just prior to physical 

delivery, i.e. the PX day ahead and ISO real time energy markets 

proper incentives on retail providers and building a strong retail 

marketplace in California. Thank you very much. 

[The prepared statement of John Stout follows:]

PREPARED STATEMENT OF JOHN STOUT, RELIANT ENERGY

Good morning. My name is John Stout. I have worked in the electric power industry for 28 years and currently serve as Vice President of Asset Commercialization 

for Reliant Energy. Our company owns approximately 4,000 megawatts of merchant 

generation, used to serve wholesale markets in California and the southwest United 

States.

As you can see from the slide, our ownership share in the CAISO market is about 

9% of the total load requirement. Because of prior supply commitments we have 

made through forward 1 markets, we currently have less than 4% market share remaining for participation in the spot 2 markets in California. 

I agree with the comments you will hear from many speakers today that the market in California is flawed on both the wholesale and the retail side. My comments 

are intended to build consensus on the root causes, not to cast blame or to chase 

symptoms. But let me say up front that the events that have unfolded this summer 

in San Diego are not the creation of Congress of FERC. The solution to this situation does not require FERC or Congressional intervention, although those of you 

here today should be applauded for your willingness to examine this issue and to 

get the facts on the table. 

As this hearing no doubt will disclose, the problems with the California market 

must be fixed at the state level. In fact, in recognition of this, the CPUC, the Legislature, and the Governor have, in recent weeks, taken positive steps to begin implementing corrections to these deficienciesOn the wholesale side, this market has 

failed because of too much reliance on spot market energy. Spot markets are inherently more volatile than forward markets and market participants who rely on spot 

market prices are exposed to dangerous financial risk. Other markets, such as PJM, 

purchase only about 15% of their energy from the spot market. California purchases 

nearly 100%. At least three different reasons explain this dependence. First, limits 

were imposed as to where the incumbent utilities could shop for power. As a result, 

SDG&E could not purchase NYMEX futures or enter into forward bilateral transactions. Second, limits were imposed on how much power could be bought on an advance basis. That limit was set at too low a level, only 400Mw for SDG&E. Third, 

a business decision by SDG&E to forgo opportunities to lock in forward prices, on 


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hindsight, turned out to be the wrong decision. SDG&E could have locked in prices 

at one fourth of subsequent spot market prices.

This slide illustrates the impact that less reliance on spot market purchases could 

have had, based on a estimate that San Diego procured about 25% of its June 2000 

energy from resources under its control and the remaining 75% of its energy from 

the spot market. Assuming spot market prices which reflect the average day ahead 

energy market price in June 2000 and forward energy prices which reflect the prices 

which could have been locked in earlier this year, you can see that someone who 

depends 75% on spot market purchases would have an average energy price of nearly 14 cents a kilowatt hour. On the other hand, purchasing only 15% of energy from 

the spot market, as is the case in PJM, would have resulted in a blended energy 

price of less than 6 cents a kilowatt hour. 

Why is the California spot market experiencing high price volatility? This is the 

result of a subtle, yet significant change in the way the California market now operates. Under the original ‘‘regulated’’ market, the cost of peaking capacity was recovered gradually across the whole year through monthly demand charges or slightly 

increased energy charges. Most unregulated markets have a similar recovery mechanism, such as the capacity market in PJM. The California market does not to have 

such a mechanism. As a result, a merchant generator who supplies summer peak 

energy in California must somehow recover an entire year’s cost during a few hours 

of actual operation. During 1999, the last 10% of the peak load, approximately 

4500Mw, used summer peak generation for only 33 hours. This load shape, coupled 

with a market design that does not provide other mechanisms for fixed cost recovery, inevitably results in large price spikes. Ironically, summer peaking related costs 

have always been there, but they were camouflaged by levelized cost recovery. 

If those kinds of prices have always been there, why are bills in SDG&E so much 

higher than ever before? The reason lies with the market rule that all of the base 

load generation still owned or contracted by the incumbent utilities be sold into, 

then repurchased from, the spot market. Forcing base load energy to be purchased 

in a market with high volatility has inflated costs for base load generation such as 

nuclear, QF, hydro, and coal generation. California consumers are purchasing half 

a billion KWh per day of base load generation at spot market prices. Other markets 

purchase most base load capacity through long term forward markets. Simply stated, California residents should not be forced to buy over 40,000 megawatts from a 

market that exhibits peaking volatility. 

On the retail side, a large number of the problems in San Diego are created by 

a ‘‘change in perspective’’ of the incumbent utility provider. SDG&E has clearly indicated the belief that they no longer have responsibility to manage the energy costs 

that are passed on to their retail customers. It is not hard to understand how such 

a perception originated with the current market structure. More importantly, if not 

fixed, other incumbent utility suppliers may repeat this perception. Once again, this 


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144

attitude is the result of a flaw in the policies that established the deregulated market in California. Those policies placed no economic incentives on the default utility 

providers to look out for the costs that are ultimately passed on to their consumers. 

Such is not the case in other states which typically have a ‘‘price-to-beat.’’ A priceto-beat structure provides a natural incentive for the incumbent provider to manage 

purchased power costs in a reasonable and prudent fashion. 

Another underlying issue with regard to the retail equation is the fact the California has established policy which inhibits the development of a retail marketplace 

with a healthy portfolio of retail suppliers. This has occurred because of a flawed 

perception on how to set the price passed on to retail customers. In an effort to 

produce instant savings, California has set the price expectation so unrealistically 

low, it virtually eliminates the ability of any third party provider to come in and 

provide retail service to residential and commercial customers. The prices in the 

market for the last three years are actually prices set in 1996 and discounted by 

10%, arguably equivalent to early 1990 level prices. Furthermore, these prices reflected an artificially depressed rate base that did not reflect proper investment in 

new generation. Just over one week ago, the California legislature capped rates for 

San Diego customers at 6.5 cents per kilowatt hour for the next two years.

This slide reflects the current energy market summer prices for the trading hub 

at Palo Verde, an index commonly used to reflect western markets. One can see how 

unlikely it will be for a third party retail provider to purchase energy for the next 

two years at a price at or below the rate cap charged by SDG&E. SDG&E will get 

special ‘‘balancing account’’ treatment for this below market pricing. Upstart retail 

providers get nothing. This creates a roadblock for any retail service provider trying 

to get a foothold in this market. 

The retail and wholesale problems which have hurt San Diego ratepayers have 

nearly every participant pointing fingers at someone else. Accusations of withholding, megawatt laundering, price gouging, and profiteering have been made 

against Reliant Energy. I would like to respond to each of these charges. I cannot 

speak for all market participants. My responses apply to Reliant Energy. However, 

upon completion of your investigations, I believe that you may find them applicable 

to all market suppliers. 

With respect to charges of withholding capacity in order to drive up energy prices, 

you will find that those charges are untrue. Instead, you will find sound business 

explanations for why capacity is routinely not bid in the day ahead market. First, 

our company has sold over half of its capacity to buyers in the forward market. We 

do so to hedge our risk of having a mild summer with low power prices, as we did 

in 1999. This capacity is ‘‘withheld’’ from the market simply because it has already 

been sold and is no longer available for the spot market. Second, one of our units 

has run out of operating hours because of air emission limitations of only 200 hours 

of operation per year. It is being ‘‘withheld’’ because it is against the law to run it 


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145

any more this year. Several other units are being ‘‘withheld’’ during off peak periods 

to keep them available for peak periods when unavailability could contribute to a 

blackout. And finally, we don’t bid every remaining megawatt into the day ahead 

energy market. If we do, and a unit breaks and cannot supply its day ahead schedule, we are exposed to significant financial penalties, often the 3 to 4 times the original revenue of the unit. To protect against this financial risk, we routinely carry 

an ‘‘operating reserve’’ to cover the loss of our largest on-line unit. We don’t do such 

to drive up prices, we do so to prudently manage our risk. Those reserved 

megawatts ultimately are sold in the CAISO real time market, because there is no 

financial penalty for unit contingencies in that market. 

Megawatt laundering is a relatively new accusation, caused by the below market 

price caps imposed by the CAISO. Allegedly, an in-state generator sells to a partner 

out of state in order to resell back to the ISO during emergencies at prices above 

the price cap. The theory is that the ISO will be willing to pay over the price cap 

if the supplier is out of state. Truth is, the ISO has rarely, if ever, paid in excess 

of the price cap, even for out of state emergency purchases. Second, the laws of 

physics don’t allow the exported generation to simply be stored on a shelf until the 

ISO needs it back. It has to be used to serve load somewhere. Thus, in order to sell 

the ‘‘laundered megawatts’’ back, someone has to produce a new megawatt of energy 

for every megawatt the ISO buys back. This makes for a classic chicken and egg 

question as to whether or not the sale back into California is coming from the original in-state generation, or from the new source of replacement energy. Reliant Energy does not engage in this type of practice in order to get paid more than the price 

caps. However, we can recall an occasion when the ISO contacted Reliant Energy 

during one of this summer’s many emergencies, asking if we could do anything to 

get them some extra energy. We called one of the parties to whom we had previously sold power and asked if we could buy it back. They agreed but only at a 

price higher that the cap. We agreed to pay the price and buy it back, and when 

we called the ISO, they said they didn’t need it anymore. We didn’t launder 

megawatts, we simply tried to help and ended up losing money. If megawatt laundering conduct is suspected, let’s get the when and who so we can get to the truth. 

Price gouging is used by some critics to explain why the prices this year appear 

to jump every time the demand approaches about 40,000Mw. Truth is, the bid 

curves that have been made public show basically the same supply curve being bid 

day after day, hour after hour. The last few megawatts are always bid at high 

prices. That’s not just in California, its true in most other markets in the country. 

What’s causing the apparent ‘‘gouging’’ is simply the fact that the market is actually 

running out of supply and those last few megawatts are being purchased. It is running out of supply because California is clearly out of supply. To make matters 

worse, California buyers keep waiting to the last minute, the real time market, after 

the rest of the western market has locked up all the moderately priced power, to 

make their last 10,000 to 15,000 megawatts of purchases. As a result, they are left 

with the tail end of the supply curve. They know what prices to expect, and yet the 

market rules and their bidding strategies consistently put them last in line. Its true 

that sellers can sometimes name their price in such a situation, but only because 

imprudent buying practices give them that ability. 

With respect to charges of profiteering, Reliant Energy has seen substantial profit 

increases during the summer of 2000. Some of that is due to the doubling of our 

portfolio with over 4000Mw of additional generation, normal weather compared to 

the milder summer of 1999, and some is due to the higher market prices in the California market. However, as mentioned earlier, we have forward sold over half of our 

portfolio for this summer. That means that we didn’t get the benefit of this summer’s higher spot prices for the portion we sold. Furthermore, we would have made 

the same profits even if the spot prices had been below normal. What profits we 

did make, we made according to the rules. We are in business to make a profit but 

accept the risk that we may not always make one. Making a profit is not improper 

or unjust. It is the economic signal for us to do everything we can to keep our plants 

running and to keep the lights on in California. Those profits are also the fundamental mechanism for attracting much needed new generation to the state. 

While there is a strong preference to simply point fingers at ‘‘out-of-state suppliers’’ for causing prices to be greater this year than last, we welcome your investigation because we believe when the truth is known, you will find that higher 

prices are really the market telling you something. California is short supply, and 

the market has flaws that are magnifying the consumer impact of these market signals. Reliant Energy is committed to work with your investigation and looks forward to the opportunity to be part of the solution.

Mr. BARTON. Thank you, Mr. Stout. 

146

Last, but not least, we want to hear from Steve Kean, who is 

chief of staff for Enron Corporation, who is a supplier in the California market. 

STATEMENT OF STEVEN J. KEAN 

Mr. KEAN. Last guy, last panel. I’ll try to be fast. I want to thank 

you for inviting me to speak here. 

I think you’ve heard a lot about the problems today and a lot 

about the real-life consequences, and I’m going to focus my testimony on the solutions. 

First I want you to understand our perspective. Enron is not a 

generator nor a consumer of power in the State. We buy and sell 

power. We buy and sell power to serve both our producers as well 

as consumers, as well as customers. 

Mr. BARTON. You have no generating capacity in California? 

Mr. KEAN. We have some wind-generating facilities in the south 

part of the State, but I believe they’re all contracted. And we are 

looking at developing some generation as well. But the point is 

this. What matters to us is that this market works well. If it 

doesn’t work well, then it doesn’t work well for the producers who 

sell to us or for the customers we serve. 

The solutions, one by one. California must expedite its siting 

process. This is a State and local matter. We have to open up the 

market to allow new plants to get sited. There’s about twice as 

much capacity waiting to get sited as there is growth and peak demand in California. We need to open it up and let those facilities 

get sited. 

There’s a lot of people anxious to blame generators. I think the 

fastest thing you can do to undermine generator market power is 

to give them competition. Open it up, let more facilities get sited. 

Federal regulators have to expedite the interconnection of these 

facilities to the grid. It’s a Federal matter. We need clear deadlines, 

we need clear standards so that the facilities that people are willing to build can get interconnected. 

State and Federal regulators should remove the restrictions 

which prevent utilities from purchasing outside the exchange. Last 

winter, if you wanted to buy power for this summer, you could have 

bought it for 50 bucks, and you would have had a lot of producers 

who would have been tickled pink to sell it to you for that. 

It’s ridiculous that every last megawatt that a utility purchases 

is forced to go through an exchange, forced to go through a single 

market when there are competitive venues available. 

Federal regulators must ensure that all transmission into, out of 

and inside the State is available on a nondiscriminatory basis. This 

is particularly important at the seams. There are some issues 

which make it more difficult to move ancillary services in particular from the northwest United States into California. We need 

to examine the seams, and we need to open up the system so that 

transmission is available so we can get power from where it is to 

where it’s needed. 

The information that’s available to the ISO and the Power Exchange must be made available to everybody. If market participants know how the system is loaded, we know where the constraints are and we know what temperatures are and what loads 

147

look like, we can help find solutions to problems. We can have 50 

hands and 50 heads searching for solutions rather than one or two. 

And customers should be encouraged to choose. Many are. Those 

customers who chose us are doing fine. They’ve got fixed price 

power. We went out and hedged our position in the marketplace by 

buying from producers, and our customers and shareholders are 

fine. Customers should choose and should be encouraged to choose. 

I want to extend this a little bit to the national arena. I think 

California is just the first and probably not the last of disruptions 

we are going to see. And a lot of the solutions that we need are 

the same. We need the Federal Energy Regulatory Commission to 

finish the job of opening up transmission access on a nondiscriminatory basis so we can get power from where it is to where it’s 

needed. 

We need interconnection standards which are clear and straightforward and allow generators to overcome sometimes—not in all 

cases, but sometimes—utility incumbent foot-dragging when we’re 

trying to get new supply on the ground. 

FERC must also require the Nation’s transmission on the utilities to join the regional transmission organization so that we can 

make sure the transmission is provided on an ongoing nondiscriminatory basis. 

The problems that we’re observing in California and that we’re 

going to observe, I think, with increasing frequency in the rest of 

the country are not going to be solved overnight. We need policymakers both at the State and Federal level to act quickly so that 

we can put these solutions in place. Thank you. 

[The prepared statement of Steven J. Kean follows:]

PREPARED STATEMENT OF STEVEN J. KEAN, ENRON CORP. 

DESCRIPTION OF ENRON

Enron develops and operates networks primarily in energy and communications. 

We combine physical assets and contracts to make markets in energy and related 

commodities as well as bandwidth. 

Enron is the largest buyer and seller of electric power in North America and participates in power markets throughout the world. 

Our perspective on the current issues is a uniquely objective one: we buy and sell 

power so we are neither a net generator nor a net consumer. We make markets in 

power to allow us to serve both producers and customers. We sell protection from 

price volatility to both producers and customers. Consequently, our interest in California’s power market (and the rest of the power markets we participate in) is to 

ensure that markets work effectively. That’s what enables us to do business. 

Enron believes that it is time to fix the problems in electric markets, not time 

to fix blame. 

My testimony will address the California situation as well as the national situation. California is just the latest problem area in U.S. power markets and, unless 

policy makers act quickly, it will not be the last. 

I will identify what happened, what the problems are, what the solutions are, and 

finally what state and federal policy makers can do to reduce the barriers to those 

solutions. 

CALIFORNIA

The problems in California this summer (spiking prices and threats to reliability) 

have straightforward causes. Let’s look at the facts:

• A booming economy has increased power demand in California and throughout 

the West. 

• It is very difficult to site new power generation facilities in California, so supply 

has not kept pace with demand (even though suppliers have proposed to build 

about twice as much new capacity as needed to meet peak demand growth). 

148

1San Diego customers are exposed to this volatility because rate caps which were part of California’s legislation expire once stranded costs are fully recovered. San Diego’s stranded costs 

have been fully recovered, so wholesale market prices were passed through directly to customers. 

• Hydro capacity from the Northwest has been lower than in recent years, thus 

sharpening the problem this summer. 

• There is still very little demand response to rising prices. In a typical market, 

price increases will be met with a demand response. Electricity is no different. 

There are customers, particularly certain larger commercial, institutional and 

industrial customers, who have flexibility in how much and when they consume. 

Their flexibility to reduce demand at critical times brings overall market prices 

down. Inflexible tariff and contract structures prevent much of that demand response from materializing because too many customers with flexibility do not 

get price signals that trigger conservation. 

In summary, growing overall demand, inability to add supply, and an absence of 

a demand response as prices rise, create price spikes and shortages. 

An added fact compounded the California situation: utilities, who still control 

most of the residential load in the state, were restricted in their ability to hedge. 

Just as suppliers are begging to site new generation to meet demand, many suppliers offered San Diego Gas & Electric Co. the opportunity to purchase power at 

fixed, predictable rates for 4-5 years at costs below this summer’s prices. Unfortunately, SDG&E’s ability to consider those offers is restricted. So, customers in San 

Diego not only see the effects of higher prices, they are also left exposed to price 

volatility—the unpredictable rise and fall of prices.1

The solutions in California are similarly straightforward:

New power plants must be built and interconnected 

Customers must be permitted to ‘‘hedge’’ to eliminate their price risk. 

Customers should choose competitive providers (and more are because of this summer’s events). Competitive providers do a better job of managing demand as 

well as supply and protecting customers from price volatility. 

The state and federal actions required to let these solutions through include:

California must expedite its siting process. 

Federal regulators must expedite the interconnection of these facilities to the grid. 

State and federal regulators should remove the restrictions which prevent utilities 

from purchasing outside of the Power Exchange. 

FERC must ensure that all transmission into, out of, and inside the state is available on a nondiscriminatory basis. 

Information available to the ISO and Power Exchange must be made available to 

market participants so that they can search for and implement solutions. 

NATIONAL

California is just the latest of several disruptions in U.S. power markets and, unless we act quickly, it will not be the last. Reliability problems and price spikes have 

occurred with increasing frequency across the country. Some of the underlying 

causes are the same (e.g. higher demand spurred by economic expansion throughout 

the country). 

To prevent reliability and pricing of power from becoming a problem throughout 

the nation, policymakers must act now. Power plants are not built in a day. 

The solutions which will prevent local emergencies from becoming a national disaster are straightforward:

New generation must be built and interconnected. 

The interstate transmission system must be opened to enable power to move from 

where it is to where it is needed. 

Customers need to be free to choose. Choices mean not only lower prices but greater 

innovation in products and services which can reduce demand at critical times. 

Policymakers need to remove the barriers which inhibit these solutions. Federal 

lawmakers should enact comprehensive legislation to enable all Americans to choose 

their power provider and to provide them with access to the nation’s interstate grid. 

In the meantime, the Federal Energy Regulatory Commission must act. It must 

fully unbundle transmission service and provide for nondiscriminatory access to that 

service. It must ensure open access transmission through the ‘‘seams’’ (the administrative borders separating parts of the grid). It must also expedite the interconnection of new generation with clear rules and deadlines to prevent footdragging by 

utilities who don’t want to connect with competitors’ generation. FERC must also 

require the nation’s transmission owning utilities to join Regional Transmission OrVerDate Aug 2, 2002 07:15 Aug 07, 2002 Jkt 010199 PO 00010 Frm 00152 Fmt 6633 Sfmt 6621 E:\HEARINGS\67633.TXT pfrm12 PsN: 67633
149

ganizations which will ensure that this access and interconnection continue to occur 

on a nondiscriminatory basis. 

The problems we are observing in California and other markets will not be solved 

overnight. Policymakers need to act now so that market participants can begin putting the needed solutions in place.

Mr. BARTON. Thank you, Mr. Kean. 

The Chair will now recognize himself for 10 minutes. Before I do 

that, after my question period, I’m going to leave to go to the airport. I’m going to turn it over to Congressman Bilbray to chair the 

rest of the hearing this afternoon. 

My first question is—I’m going to direct it to the chairman of the 

FERC, but the other three commissioners, if you want to answer, 

can also. We’ve heard quite a bit of talk about hedging and longterm pricing and energy markets. What’s the FERC’s estimate 

what the natural gas well head prices are going to be next July? 

They were between $1 and $2 last year. They’re around $4 this 

year. I want to go on record as what they’re going to be next summer when all these peaking demand units are using natural gas to 

clean burning fuel is. 

Mr. HOECKER. Well, this isn’t an official commission estimate, 

but the futures for December this year are already five dollars 

plus, and I expect that there will not be a price response to increased drilling and supply for several months. So I would imagine 

the price is still going to be fairly expensive next summer. 

Mr. BARTON. The rest of the commissioners—I tend to agree. 

Ms. BREATHITT. I agree with the chairman’s response. 

Mr. BARTON. But no one would want to stake your life savings 

on specifically estimating what the price is going to be within 10 

cents in MCF next summer, would you? Anybody here want to— Mr. He ́bert, you’re willing to do that? 

Mr. HE ́ BERT. No, sir. Not my life. And it goes to the point—and 

I know the point you’re trying to make is that we have changed 

really the direction of fuels and what we’re doing especially with 

natural gas, and we’ve got to have adequate EMP and infrastructure to make sure that we’ve got opportunities in natural gas. 

It’s no longer a market that shoulders seasons because we’re converting it into electricity. So the shoulder seasons when we inject 

are no longer with us, so fuel prices, I think, are going to get worse, 

not better. That’s my forecast. 

But also, while I’ve got the moment, I grew up with a Bill Bray, 

and every time I see Congressman Bilbray, I want to call him Congressman Bray, so I apologize. I caught myself last time I said 

that. 

Mr. BARTON. We thought that’s the way Mississippians talked to 

Californians. 

Mr. BILBRAY. That’s okay. My father was named Hubert, and he 

went by Bill just to avoid it, so——

Mr. HE ́ BERT. There you go. 

Mr. BARTON. Well, my first point is, you know, it is obvious it’s 

a good thing to let the market here in California begin to hedge 

and buy in the foreign market. But that’s no guarantee of lower 

prices next summer, because we don’t know where the energy market is going to be. Oil prices right now are about $36 a barrel. Natural gas prices have doubled at the wellhead in the last 6 months. 

Hopefully, it’ll go back down, but they could go higher. 

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Mr. HE ́ BERT. But Mr. Chairman, that’s only part of the question 

because the entire question is the difference in the spot market and 

the forward market itself. And if you look at what the spot market 

was on the given day that they could have hedged and what 

they—— Mr. BARTON. I understand that. 

Mr. HE ́ BERT. [continuing] ended up paying, there’s a huge difference in the two. So your expertise has to be in the forecasting 

of those forward markets. And if you guess wrong, which has happened here and has happened in other markets, your rate payor is 

going to pay for it, and that’s what happens. So it is a part of the 

equation. 

Mr. BARTON. It is part of it. And I’m on record in saying I think 

we ought to allow more hedging and more forward pricing and you 

know, forward purchasing and all that, because until recently here 

in California, they weren’t allowed to do that. So it’s a step in the 

right direction. 

Mr. HE ́ BERT. Absolutely. 

Mr. MASSEY. Mr. Chairman, if I might comment. It seems to me 

that a power purchaser wants the flexibility to have a balanced 

portfolio of short-term and long-term supply. And regulatory policies ought to promote that mutual fund type of approach. 

Here in California thus far, there’s been too much reliance on a 

volatile market of last resort, the spot market, so all of us want to 

encourage purchasers to hedge, and yet I think what we’re looking 

for is a more balanced approach of long-term and short-term supply. 

Mr. BARTON. Now, I want to ask Commissioner Lynch or Mr. 

Wood. Your testimony, you talk about an average monthly price of 

17 cents a kilowatt hour in June, 12 cents in July, 18 cents in August. Are those retail prices here in San Diego? 

Ms. LYNCH. Yes. They’re actually prices statewide for energy, 

just the energy component of that. 

Mr. BARTON. Statewide. 

Ms. LYNCH. That’s right. But the only people who are actually 

paying it are the San Diego folks, because the rest of the State is 

under a legislatively mandated rate freeze. 

Mr. BARTON. Then let me ask Mr. Guiles. 

Mr. GUILES. Yes, sir. 

Mr. BARTON. Mr. Guiles. Excuse me. What are the prices that 

the San Diego homeowner or small businessmen have paid in June, 

July and August? Do they pay 17 cents a kilowatt hour in June 

and 12 cents in July and 18 cents in August or do they pay some 

percentage of that? 

Mr. GUILES. Mr. Chairman, they have been seeing bills that 

passed through the full commodity price for the energy, plus we 

have a base rate that’s slightly declined, but that’s a base rate for 

the distribution facilities. So the rates have been in total much 

above 20 cents a kilowatt hour. 

Mr. BARTON. So they’ve been higher than that. 

Mr. GUILES. Absolutely. 

Mr. BARTON. San Diego, since you’re at the center of the fire 

storm, you’re not a generating utility, are you? 

Mr. GUILES. That’s correct, sir. 

151

Mr. BARTON. Do you have any generation at all? 

Mr. GUILES. We have some contracts, if you will, that are generation-related contracts, but we no longer own any generation. 

SDG&E does not. 

Mr. BARTON. Okay. So you’re a distribution utility. 

Mr. GUILES. We are—— Mr. BARTON. You buy through this Power Exchange or the ISO, 

and then you sell whatever you buy, but you have to pass through 

the commodity cost. 

Mr. GUILES. Right. 

Mr. BARTON. Now, I’ve gotten a different answer to this question. 

I’m still told today that—some of the folks from the first panel said 

your utility now has the right to go into the futures market, and 

you also have the right to enter into bilateral contracts. And I’ve 

had somebody else at the staff level say that’s not true. 

To the best of your knowledge, what can your company do today 

in terms of bilateral contracting and hedging in the futures markets? 

Mr. GUILES. Well, let me real quickly go back. We are not allowed any bilateral contracts. We have asked for the authority to 

enter into bilateral contracts. So presently today, we buy 100 percent from the California Power Exchange. We have had the ability 

since last summer to buy forward for about 400 megawatts, which 

is about 10 percent of our supply on peak in the summer, and then 

we have had the ability since August 3 to increase that amount up 

to 1900 megawatts, but that’s in the block forward market that’s 

administered by the California Power Exchange. 

Mr. BILBRAY. That’s what you asked for, though. 

Mr. GUILES. Pardon? 

Mr. BILBRAY. But that’s what you asked for, the authority to do 

that. Now, why did you—— Mr. GUILES. We’ve asked——

Mr. BILBRAY. [continuing] only ask for that percentage? 

Mr. GUILES. For 1900 megawatts? Well, that’s essentially about 

half of our load on peak. And so we felt that that was a substantial 

amount. Looking forward, the amount to hedge forward. 

Mr. BARTON. But now, this bilateral contracting authority, you 

have a request to the California PUC; is that correct? 

Mr. GUILES. Yes. Yes, sir. 

Mr. BARTON. It doesn’t have to go to the FERC. 

Mr. GUILES. That’s correct. We have a request for authority. And 

perhaps President Lynch would like to comment. 

Mr. BARTON. When do you expect to make—I can’t ask you what 

your decision is going to be, but what’s your time table for making 

that decision on this pending request? 

Ms. LYNCH. Our time table is as soon as possible, as San Diego 

Gas & Electric just applied for that authority, unlike the other utilities which applied several months ago. 

Mr. BARTON. Okay. So you have a feeling in the next month that 

you can make a decision, the next week? 

Ms. LYNCH. It’s my understanding that we’ll be taking up this 

matter at our next meeting on September 21. 

Mr. BARTON. Okay. See, that’s why it’s good to have all you all 

folks here. We have the feds and the State and the petitioner. 

152

Sometimes we can just kind of expedite things by getting all our 

friends together here. It’s a good thing. 

I want to ask Chairman Hoecker, San Diego has basically asked 

the FERC to come in and take over. Now, I’m putting words in San 

Diego Gas & Electric’s mouth, but that’s kind of a layman’s interpretation. Do you really think the FERC ought to come in and supersede California law that was passed by the California legislature? 

Mr. HOECKER. Well, you raise a very interesting question. I know 

that SDG&E asked us to impose a cap on bids. We effectively have 

imposed a cap on the market, but if you go down the list of issues 

that have been raised this morning about what potential causes are 

in the market, the Commission’s responsibility relates to some of 

them, the CPUC’s responsibility relates to some. 

But to make structural changes in the market—for example, the 

remark that was just made about the PX and the ISO being separate, for us to look at that and make a judgment that the market 

would be more efficient and more in the public interest to combine 

those two institutions, I think would require us to preempt AB1890 and the provisions of the California statute. 

There may be instances where we might be willing to do that, 

and I think we have to follow the trail of facts in our investigation 

and see what makes the most sense in terms of market structure 

and to act on that in the interest of California rate payers, but also 

rate payers in the last—— Mr. BARTON. That’s a real long answer. Now, you do think you 

ought to supersede California law or you don’t think you ought to 

supersede—— Mr. HOECKER. I don’t come to the table with that as a position, 

but I think we need to make the most reasonable decisions, and if 

we find that the California legislature has structured the market 

in a way that doesn’t work and that those features are FERC jurisdictional, then I think we have—— Mr. BARTON. Let me ask you a straight, point-blank question. Do 

you think the FERC has the authority under Federal law today to 

change the way the Power Exchange in California does its bid system? 

Mr. HOECKER. Yes. 

Mr. BARTON. Okay. Do the other Commissioners agree with that? 

Mr. HE ́ BERT. Absolutely. Yes. 

Mr. BARTON. Okay. My time has expired, but I’ve got two more 

questions. I want to ask President Lynch to define market power 

for me. Because in your testimony, you say the problem is market 

power being exercised by these unknown generators, so define market power for me. 

Ms. LYNCH. I’m just going to give you a common definition. The 

economists and all sorts of other folks have various structural definitions for that. But to me, it’s when a generator or a collection of 

generators can set the price on the margin for energy at any particular time. 

And given the way that the PX pricing works, I just want to clarify what some of the speakers this morning said. The last highest 

bid is paid to all. No matter what those folks bid at, everybody gets 

the highest bid. So given the way that market structure works——

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Mr. BARTON. You can change that. That is set by the California 

law. That’s not set by the generators. 

Ms. LYNCH. I appreciate that, but because the California market 

works in that way, the person who is able to control that last bid 

gets to control the price for all. 

Mr. BARTON. So that one person, some little bitty generator, Barton Generation, who has 100 megawatts has got—I am the market 

power demon if I’m the last one to bid into that market? 

Ms. LYNCH. I don’t think necessarily you’re the demon, although 

sometimes it can be a small amount of generation that can control 

that price. But in general, you’ve got generators who have several 

plants, and by determining which of those plants are going to run 

when and how much they’re going to bid in at various prices, 

they’ve got the ability to make that price go higher. 

Mr. BARTON. Now, let me ask as my final question Mr. Stout and 

Mr. Kean, according to President Lynch, your group has got this 

tremendous market power. Now, how often do you all collude with 

each other to set these extremely high above-market rates so that 

everybody else in the bid curve gets them? Is that a daily conference call or is that a—— Mr. STOUT. I can’t speak for Enron, but Reliant does not participate in that activity. 

Mr. BARTON. You don’t. Do you—— Mr. KEAN. We didn’t even collude on the answer. My answer is 

never too. 

Mr. BARTON. Explain, because obviously President Lynch puts 

this in writing, so she’s fairly serious about that there is market 

power, even though California went to great lengths, it required divestiture of the incumbent utilities to divest their generation capacity. By your own testimony, most of the independent generators are 

not selling into the Power Exchange. They’re in bilateral contracts. 

It seems to be a very diverse market, but it also—the way the bid 

system works, it appears to be very imperfect. 

How—as either Mr. Kean or Mr. Stout, whichever—probably Mr. 

Stout, since you’re on the operational side, and I don’t think Mr. 

Kean is in the operational side of Enron. You have a fixed amount 

of assets. You try to maximize your return on those assets. You 

want those assets being used rather than unused to maximize returns. So how do you determine generally what to bid into the 

Power Exchange if you were to do that? 

Mr. STOUT. As a general rule, we do bid our marginal cost into 

the Power Exchange in order to optimize the volume that we 

placed in the Power Exchange. But in the California market, as is 

in the case in virtually every market in the country, the bids that 

go in on the supply side of the equation tend to tail up for the last 

few hundred megawatts or thousand megawatts. That’s the market 

trying to establish the value of supply in the market. 

As was discussed earlier, the intersection point between the demand bid and supply bid sets the price in the market. We expect 

that the supply, if it does not want to purchase power at those 

higher prices, will actually bid a lower price curve that intersects 

at a lower price. 

So that’s simply a test of the market to see what the value of the 

energy in the market at that particular point in time is. 

154

Mr. BARTON. But have you ever participated in a dialog or a conference within your company where the decision was made to withhold power from the market intentionally to get a higher price the 

next hour? 

Mr. STOUT. Absolutely not. 

Mr. MASSEY. Mr. Chairman, may I comment on this——

Mr. BARTON. Sure. 

Mr. MASSEY. [continuing] point? 

I think the problem is, in times of scarcity, there is very little 

risk of nondispatch if the bid is high, because virtually every generator will be dispatched. And I believe that all market participants 

know that, and I think it affects bidding behavior, and I do believe 

that this amounts to market power. 

Mr. GUILES. Mr. Chairman, may I make a comment on behalf of 

SDG&E on this? 

Mr. BARTON. Sure. 

Mr. GUILES. Well, we brought the proceeding to the Federal Energy Regulatory Commission, you know, from our point of view saying that the market, in our judgment, is not workably competitive. 

And I’d like you to just keep in mind before you leave this graph. 

This is a scatter diagram that shows over the load range. 

I ran plants for about 15 years, and what that chart is telling 

you, if you look at 1999 prices and you look at 2000 prices, 

throughout that load range, even with low loads—I’ll give you an 

example. On August 23, 1999, the demand in the State was 41,000 

megawatts. The price early morning, midday and evening was in 

the 2.1 to 4-cent per kilowatt hour range. 

This summer on that same day, with a load of 38,000 megawatts, 

the price in the morning was 10 to 19.5 cents, 22 to 25 cents or 

13 to 25 cents in the evening. This is not a rational market. It’s 

not working. It needs to be changed. 

Mr. BARTON. Well, unfortunately, I have an airplane to catch. I’m 

going to turn it over to Congressman Bilbray to chair the rest of 

the hearing. 

I just want to say before I leave, we really are trying to find 

what the facts are here. We do not want the situation in California 

that exists in San Diego County to be the norm. I mean, it’s obvious that something has happened out here that’s different, and it’s 

caused tremendous price fights that flow through the retail consumer, and that’s simply not sustainable. 

So we want to at least understand what the facts are before we 

can determine what, if anything, we can do at the legislative level 

in Washington, DC. And I think the FERC’s hearing tomorrow is 

going to be very important to try to help establish the facts out 

here. 

And I also happen to think that the State PUC—the country is 

going to be watching what you all do the next couple months out 

here. So, you know, I intend to be in the Congress next year, I intend to be Chairman of the Energy and Power Subcommittee, and 

I intend to move Federal legislation at the Federal level for comprehensive restructuring. 

So I’m going to be very interested in the California experience. 

And any of you come to Washington, I’d love to sit down privately 

155

and talk to you. And we’ll probably do a public hearing on this as 

a follow-up in Washington also. 

With that, I’m going to turn it over to Congressman Bilbray for 

the rest of the hearing and recognize Mr. Shadegg. 

Mr. HUNTER. Before you go, thank you for coming out here and 

taking this time. We appreciate it. 

Mr. BARTON. This is just a first step. 

Mr. FILNER. Thank you for allowing Mr. Hunter and I, who don’t 

serve on this committee, the opportunity to join. 

Mr. BARTON. It’s important to develop the facts. 

Mr. BILBRAY. Mr. Chairman, it was important that you found the 

time to come out and actually see what—and putting together this 

panel. And I’m not going to discount the previous panel, but I think 

that anybody who is listening to this testimony realized the way 

the hot potato is being—bouncing back and forth, and that the 

California or San Diego consumer is saying, you know, ‘‘We have 

people in front of us who probably can address this issue in the 

short—maybe not the long term, but at least in the interim.’’ And your coming out here from the east and helping us out here 

was essential, and I appreciate the fact that you’ve been involved 

with it. 

Mr. BARTON. If you’ll come forward and continue the hearing. 

Mr. BILBRAY [presiding]. Okay. Let me sort of jump into this, and 

we’ll try to dialog. I guess I’ll start off with Mr. He ́bert. He ́bert. My 

wife is from Picayune, Mississippi, so I wish she was here so she 

could translate for me every time you give a presentation. 

But you were—I was interested in the—and I apologize to the 

FERC because this is sort of my chance to be able to plead for the 

people of San Diego County before you. The fact is is the discussion 

of Shelby, New York, Mr. He ́bert, saying that 6 months the ability 

to put on line. I don’t know. Do you know if that’s a nonattainment 

area, according to the Clean Air Act of the Federal Government? 

Mr. HE ́ BERT. I don’t specifically know. My thought is that it—I 

think it is not, but I’m not certain of that. 

Mr. BILBRAY. I mean—and that’s—there are whole—as an ex-Air 

Resources Board member, as Madam President understands, that 

puts in a whole new bunch of hoops in there. But even if the State 

wanted to waive it, the Federal Government is on top of it. 

And I say this to the FERC commissioners that understand that 

the Federal Government has an obligation to participate 

proactively because we do create barriers. It keeps the market from 

being able to compete. The State does it too and actually creates 

defenses for the big guy from little guys being able to get on line 

that Commission He ́bert was saying that we need these guys to 

come on line. 

I just hope you’re sensitive tomorrow of the fact that this is not 

an open market and that the Federal Government is part and parcel to creating sanctuaries for certain power generators from legitimate on-line competition. And we hope to tear that down. 

And all I’ve got to say is, Commissioner, if you look at those 

rates up there, I hope you take a look at that, and under our obligation of the Federal Government to do oversight, because that’s 

one of the big battles that we have on the commerce committee 

that I may agree or disagree with the subcommittee chairman on, 

156

and that is how much oversight and the safety valve that FERC 

should create on this. And I guess this will be a real test there. 

Mr.——

Mr. HE ́ BERT. A couple of things real quick, Congressman. I think 

you’re absolutely right. And this is where we kind of get lost in just 

kind of looking at the horizon and not looking at everything else. 

It’s the big energy picture. It’s not just what electricity is costing 

San Diegans right now. It’s what it’s costing everyone throughout 

America. It’s what we’re doing on hydro-electric situations. It’s 

what we’re doing with natural gas. It’s what we’re doing with electric transmission. It’s what we’re doing with the siting authority. 

It’s what we’re doing with Kyoto. It’s the big picture. 

And individually, what people love to do is they love to do one 

thing that is really minuscule when you single it out. And they say, 

‘‘Well, this doesn’t harm the market by itself.’’ But when you throw 

all these together, Congressman, it is a recipe for disaster, and that 

is exactly why we are where we are. We’ve had a failed energy policy. We’ve got to rethink this, and we’ve got to move forward. 

And one of the things that we can do here, if we’re willing to embrace it and take difficult steps, is to look at these market rules 

and see what we do need to change about them. Look at performance-based rate making. Give some reliance, give some sharing between consumers and the energy company when there are bad situations. 

These prices, you can look at them, look at the one—what is it? 

I can barely see it. Maybe 375. What I would love to know is what 

that cost a year out if you could have hedged it. What could you 

have paid for it that day. And that’s why the hedging market is important. 

So it’s the overall scheme of things. We need to look at the big 

picture, and I think you’re doing that. 

Mr. BILBRAY. I just ask, as you review this item tomorrow, that 

you understand that this is not just regulatory reviews, but the 

State needs to change. The majority of the population of this State 

is under Federal mandate on air nonattainment areas between San 

Diego, Los Angeles and Sacramento. 

And the fact is is that the largest percentage of the population 

in the State lives under rules that the rest of the country doesn’t 

live under, and those rules have an impact on the ability to have 

infrastructure within the State. 

And even if New York is nonattainment, you don’t have 65 percent of their emissions being mobile sources and a small percentage 

being stationary sources. That’s why the proposal at Otay Mesa is 

going—is actually going to convert trucks as a way to be able to 

get the emissions offset. This is the extraordinary effort we’re making. I just ask you to be sensitive to that. 

I do want to compliment you, Commissioner, on saying that the 

FERC wants to work with the State. I mean, frankly, I’ve got to 

say this, Madam President, the argument of, ‘‘Well, we can’t do 

anything. We’re going to throw the ball in to the FERCs,’’ I hope 

that we get a reciprocal agreement here that the PUC is open and 

available to work with the FERC, and the FERC needs to look at 

the fact that the State is here to cooperate at doing whatever is 

possible. 

157

Now, I would ask to go back on the issue to SDG&E. What percentage of your projected power needs are you asking from the 

State PUC for prospective purchase? 

Mr. GUILES. Congressman—— Mr. BILBRAY. I mean bilateral purchase. 

Mr. GUILES. Yeah. Looking forward, we have a request before the 

Commission for up to 1900 megawatts, which would be just about 

50 percent of the summer peak demand. 

Mr. BILBRAY. And my question to you is, that’s what you think 

you might need. Do you have any projection you might need more 

than that? 

Mr. GUILES. Not at this time, no. 

Mr. BILBRAY. See, I’m just saying, if I was going in to ask, I’d 

be asking at least 10 percent of what I think I need, just in case, 

so we don’t come back and say, ‘‘Oh, I just don’t have it clear.’’ Would the Madam President of the PUC, would you comment on 

that or your perspective on it? Either one of you. 

Mr. WOOD. Thank you. Congressman Bilbray, I’d like to make a 

more general comment about all of the talk about—— Mr. BILBRAY. I’ll let you, but it’s basically because the chairman 

didn’t let you. 

Mr. WOOD. Thank you. Well, it’s not going to be a general comment about everything, but about the issue of hedging. I think we 

need to put that in a little bit of perspective. 

The purpose—as the chairman pointed out at the very beginning 

of his remarks, he said that the purpose behind deregulation was 

not supposed to be to create higher prices. That wasn’t the goal. 

And certainly, I think we would all agree that that was never the 

stated goal of anybody. And yet we’ve come out of it with very significantly higher prices this summer in San Diego. 

We’ve heard testimony here today to the effect that it might have 

been—or it would have been possible months ago to purchase forward contracts for August at a price of a little over 7 cents a kilowatt hour, 70 cents a megawatt hour. I’ve heard some other numbers bandied around that were in that range. 

Had anyone, at the time that AB-1890 were passed, or even 2 

years ago, even a year ago, suggested that it would be appropriate 

for the Public Utilities Commission to sanction or approve rates for 

energy of 7 cents a kilowatt hour, we would have been run out of 

town on a rail. 

And the only thing that makes those rates—those prices look in 

any sense reasonable—because they’re significantly larger than the 

average cost of generation by anyone’s measure. The only thing 

that makes them look reasonable is that we have this out-of-control 

market in which market power is clearly being exercised to produce 

prices that are maybe five times what the actual costs of generation are. 

Therefore—the point of all of this is that while it may be that 

we can reduce the volatility of these markets very significantly by 

the use of forward contracts and other hedging mechanisms, all of 

the discussion so far has been about producing prices that are significantly higher than those that existed prior to deregulation. 

I would refer you back to the testimony that I gave before this 

subcommittee on June 19, 3 years ago in which I stated that this 

158

particular commodity market theory didn’t apply in the same way 

that it does for other types of commodities. 

Mr. BILBRAY. Okay. Let me—I want to ask, did the FERC have 

any indication when the State of California came to you that there 

might be this glitch or this problem or this catastrophe on the horizon? Was there any concern by FERC when the State presented 

their plan to you that there might have been some——

Mr. HOECKER. When they initially adopted the whole restructuring in 1996, nothing like this. 

Mr. BILBRAY. Nothing. There was no concern about the—about 

how the clearinghouse was going to be used or the spot market 

issue? 

Mr. HOECKER. We dealt with setting up these institutions initially and 30 very complicated amendments to their tariffs and 

their rules. This has been anything but a simple process. It’s been 

very labor-intensive for the Commission and its staff. 

Our theory going into this is that we would take AB-1890, and 

in deference to the legislation in California, work through these 

issues, try and accommodate the basic plan in that statute and to 

help the ISO, the PX and the CPUC in its activities, get them into 

our market. 

And in many respects, as I think Terry Winter and other people 

have said this morning, at certain times it’s been very good. The 

prices have come down. Did we, when we granted market based 

rate authority, anticipate something like this? No. The FERC’s 

analysis was not predicated on what happens in periods of acute 

shortages. 

And as Commissioner Massey says, transitory market power 

arises in periods of capacity shortages like this, and prices become 

irrational. 

Mr. BILBRAY. When 1890 was brought to you, did you have any 

concerns with segments of it, or did you think it was just pretty 

good—a pretty good package overall with no problems? 

Mr. HOECKER. Well, we had concerns with segments of it. There 

was a very lively debate among economists here and around the 

Nation as to various features of the legislation. But I have to tell 

you that back in 1996, the adoption through the legislation especially of a regional market mechanism of this kind was relatively 

unprecedented. 

And what we decided to do, since our view is that this market 

is moving toward competition, and we need to use our resources to 

help it become a rational competitive market, we determined to 

work within the constraints of the legislation. 

Mr. BILBRAY. Did you—did you communicate to the State your 

concerns about that segment of——

Mr. HOECKER. We’ve spent enormous amounts of time with the 

CPUC, not only with the current president, who’s been very good, 

but past commissioners for the last 4 or 5 years we’ve worked very 

close with. 

Mr. BILBRAY. Okay. I’m going to yield to the gentleman from the 

great State of Arizona, which we like to think of as Eastern San 

Diego County. 

159

Mr. SHADEGG. Thank you, Mr. Chairman. I also have a time constraint, so I’m going to try to get through a series of my questions, 

and then I apologize, I’m going to have to leave. 

I want to thank all the panelists for being here. It’s been a great 

education for me. One of the things I want to just make as an 

opening remark is that I have heard here today an effort to boil 

this down to kind of a simplistic effort to blame a bad guy and to 

say this is all the result of the greedy exercise of power by people 

who even it’s been alleged are criminally violating the law. 

Let me start by asking the commissioners from the FERC, do 

any of you see anything here that would suggest that this is a result of criminal conduct or do you see something here that is more 

indicative of the market forces that we have created in the combination of the State law, the California Public Utilities Commission and the scheme, which I think, Commissioner Hoecker, you 

just described as being relatively unique when it was adopted. 

Mr. HOECKER. In my view, Congressman, it’s the latter. 

Mr. SHADEGG. Does anybody want to comment on that? 

Ms. BREATHITT. Well, our investigation is ongoing, but from what 

I’ve read and what I know and what I’ve learned thus far, I don’t 

personally see any evidence of criminal behavior. Certainly, there 

are market flaws that we’ve all recognized and need to be fixed. 

And we’re going to do that. 

Mr. HE ́ BERT. Congressman Shadegg, just quickly. I was not on 

the commission in 1996. I came on in 1997, so obviously some 

things came before us. But there was also discussion always as to 

whether or not California was moving in the right direction. I think 

they made some good hard choices. At the same time, we’re looking 

at some different market situations. 

I think it would be premature for us to judge whether or not 

there’s been any criminal or even market discriminatory conduct 

until we get all of the evidence before us, which would be November 1. 

But I will suggest that I have been one, as you know, that is always willing to disagree with the majority or the chair and to give 

some obvious credibility to the chair and the majority of FERC 

when they acted. 

I think, in the beginning, FERC really wanted to give deference 

to the State of California and kind of let them see where they could 

go with it. Obviously, I think there have been some problems. We 

need to get in there and reassess. 

I think part of the answers are, move toward performance-based 

rate-making, give some incentive to do something, and also look at 

the opportunity to use profit in a good way. And that would be to 

move away from the ISO like I suggested and toward an independent transmission company, which would be for profit and have 

every reason to do the right thing and be penalized when they 

don’t. 

Mr. SHADEGG. Mr. Massey. 

Mr. MASSEY. As others have commented, our investigation is still 

underway. Every report that has commented on the California 

market, however, has outlined the points that many witnesses have 

made today, so many of these flaws are fairly obvious, I think, in 

the market. 

160

But basically what I see is market participants attempting to exploit the market rules to their advantage. It seems to me that what 

we’re learning is that market rules, market structure is extraordinarily important in electricity markets. 

Mr. SHADEGG. The message for me, at least, is that at the national level, we have to do this right. And I guess secondarily that 

I would hope FERC can play hero in trying to fix it. 

Chairman Hoecker just said a minute ago that FERC does, you 

believe, have the authority to step in and correct some flaws in the 

State system, which may be leading to this circumstance, and I 

think that would be—I would encourage you tomorrow at your 

hearing to look at that as a possibility because there obviously 

needs to be immediate relief. 

Let me—Mr. Massey, let me talk—let’s just walk through some 

of those problems. For example, the shortage of generation and the 

shortage of adequate transmission and the interconnection problems that we have been talking about, none of those are the result 

of the power—are short term. All of those have been built up over 

time; is that correct? 

Mr. MASSEY. Yes. It seems to me not much generation has been 

added in California for years. I hope that is changing. It sounds to 

me, from the witnesses that have testified, that it is. Interconnection policy must be streamlined so generators can hook up. We 

have a responsibility at the Federal level to do that, and the State 

has a responsibility. 

I frankly think that siting of interstate transmission facilities 

should be done at the Federal level. That may be a controversial 

position here in California, but we do it for natural gas pipelines, 

and we’ve sited thousands and thousands of miles of interstate natural gas pipelines, and I think we have a fairly well functioning 

natural gas market because of it. 

Mr. SHADEGG. As we’re emerging from a regulated market to 

hopefully a deregulated market, which with luck or hopefully will 

produce lower prices for everybody, those problems at least are not 

caused by the generators, the lack of capacity at this point. Those 

are regulatory problems stemming from past practices, aren’t they? 

Mr. MASSEY. Yes. 

Mr. SHADEGG. You made a comment, and I wrote your testimony 

down. You said the rules here in California, which have led to— I believe you called it market design flaws—those rules have allowed market power, in your opinion, to be exercised here. Those 

are—those are State rules. That’s as a result of the structure which 

California enacted under its State law in 1996; is that correct? 

Mr. MASSEY. Many of them are. The lack of hedging, I think, is 

primarily a result of a State rule. It sounds to me like State policymakers are changing that rule, and I welcome it. I think hedging 

can mitigate market power in the real time markets. There’s no 

question about it. 

The other issue that I emphasize is the lack of the demand side 

response. I think that is an issue all over the country. It’s not 

unique to California. I think we are understanding that we really 

don’t know what the value of that last megawatt of generation is 

in the market because consumers can’t choose—don’t have the tools 

necessary to choose not to purchase it at that price. And both FedVerDate Aug 2, 2002 07:15 Aug 07, 2002 Jkt 010199 PO 00010 Frm 00164 Fmt 6633 Sfmt 6602 E:\HEARINGS\67633.TXT pfrm12 PsN: 67633
161

eral regulators and State regulators need to understand this problem and move forward to correct it. 

Mr. SHADEGG. I guess I’m glad you went to no demand side response, because I think that’s a key part of it. At least in Arizona, 

what we’ve done is we’ve tried to structure a situation where individual consumers can choose between different utilities and give 

them some ability to exercise some demand-side response. 

With regard to no demand-side response, is a part of the problem 

the fact that these IOUs are compelled to buy all power through 

this one PX and it can’t go anywhere else? Isn’t that actually antithetical to the notion of a deregulation market, and isn’t that a key 

message that policymakers in California or policymakers at FERC 

have to fix? 

Mr. MASSEY. I think it’s part of the problem. Both Federal and 

State regulators need to work to create incentives for customers in 

real time to choose not to consume at a certain price. 

It has been suggested that these regional transmission organizations should actually operate demand-side markets that are integrated into supply side markets where consumers that are willing 

not to consume actually bid negawatts into the market. A negawatt 

would be as valuable as a megawatt. So I think all our options are 

on the table. We should explore all of these ideas. 

Mr. SHADEGG. And you also made a reference to there being too 

much reliance on the spot market. It seems to me—I got to thinking about that and trying to understand how the average layman 

would understand it. When I looked at buying a ticket to come over 

here today, I had a choice of buying that ticket 2 weeks out or buying that ticket yesterday morning as I got to the airport. 

Obviously, I could have gotten a much better price by buying 

that ticket 2 weeks out to fly over here. And yet, as I understand 

the structure of the California law, it discouraged that advanced 

purchasing for—it prohibited it to some degree and discouraged 

other utilities from engaging in it. Is that—— Mr. MASSEY. The working assumption in California was that the 

spot market would produce the lowest prices. And I think we now 

have evidence that that has not occurred. Purchasers should have 

the flexibility to have a well-balanced portfolio of spot market 

prices, of medium-term prices and long-term hedging agreements. 

That is what I think ought to be the goal in a well-functioning market. 

Mr. SHADEGG. Just to make sure I understand it, though, the 

spot market is like the situation when I got to America West or 

Southwest and want to buy a ticket, if I buy that ticket 3 weeks 

out or a month out, they have a chance to know how full that plane 

is going to be ahead of time, and they’ll want to sell that for a 

lower price at that point in time. 

If I wait until the day before, I’m going to pay the highest price 

possible. And you’re telling me that the structure here was the assumption that the spot market, the last price would be the lowest 

price? 

Mr. MASSEY. Well, I don’t want to speak for Californians, but I 

think that was the working assumption. Now, spot market prices 

have been fairly reasonable up until this summer. So the spot market doesn’t always produce high prices. If spot market prices had 

162

remained low, then those who had purchased hedging contracts at 

a high price would be criticized for that. 

I don’t want to be a broken record, but what purchasers need is 

the flexibility to engage in a well-balanced portfolio of short-term 

and long-term supply. 

Mr. SHADEGG. Let me ask a different question that nobody has 

asked today. Clearly, they’ve had excessively high prices in the 

summer, and there’s been a lot of discussion about that being 

keyed off of demand and some length of that demand giving generators the ability to exercise market power. 

Is there some reason to believe that current structure is going to 

lead to below-market prices this winter when demand drops? 

Mr. MASSEY. The prices in the winter are usually substantially 

lower than in the summer, but frankly, under this market structure, we do not know what will happen this winter in California 

markets. 

Mr. SHADEGG. I’m sure the gentleman who owned the restaurant 

chain who was here earlier would like to see his prices go to 900 

percent below market. 

I have other questions, Mr. Chairman, but—— Mr. BILBRAY. Well, editorial note. Projections are from the Energy Department that the electricity rates will drop marginally, but 

then the gas rates will skyrocket. So the poor consumer has to get 

ready for another major hit. 

Mr. SHADEGG. If I could ask your indulgence, Mr. Chairman, I’d 

like to ask one last question. 

Mr. BILBRAY. Go ahead. 

Mr. SHADEGG. Both Reliant and Enron here, Mr. Stout and Mr. 

Kean. As I understand it, Reliant at least has made a put offer on 

the table at—would you say 5.6 cents? Mr. Guiles or Guiles, are 

you now legally able to accept that? And if so, how long ago were 

you given that authority? 

Mr. GUILES. Not yet, Congressman, but we will be working with 

the California Public Utilities Commission so that we can be taking 

a look at that, and once we’ve got bilateral contract authority approval. 

But while I’ve got the mic, could I comment on a comment you 

made earlier about the current market structure? And just to set 

the record straight, when we lifted the rate cap—the current structure, customers can acquire a commodity through energy service 

providers. Any customer can do that today. We have about 20 percent of our customer load that is currently acquiring commodity 

outside of SDG&E. 

Mr. SHADEGG. Retail homeowner customers? 

Mr. GUILES. Sure they can. SDG&E, however, is the default provider, so that if a customer chooses not to switch, then we would 

provide that commodity to them. So I just wanted to make that 

clarification. 

Mr. SHADEGG. Thank you. 

Mr. BILBRAY. Thank you. Yield to the gentleman from—— Mr. SHADEGG. I think Mr. Kean had a response to my question. 

Mr. KEAN. I’m sorry. I just wanted to point out real quickly, in 

other parts of the country, in fact, the default supplier obligation 

has been competitively sourced. And by that I mean utility compaVerDate Aug 2, 2002 07:15 Aug 07, 2002 Jkt 010199 PO 00010 Frm 00166 Fmt 6633 Sfmt 6602 E:\HEARINGS\67633.TXT pfrm12 PsN: 67633
163

nies have gone out and had the authority in advance to go procure 

their commodity competitively and get a fixed price for that commodity and insulate their customers from energy price swings. In 

fact, our customers, including a customer in Connecticut, did exactly that. 

So there are options in the marketplace separate and apart from 

just the kind of deficit spending I think that we’re ending up with 

in the San Diego context. And I know that we, for one company, 

look forward to San Diego getting the flexibility to procure outside 

of that context. 

Mr. SHADEGG. I guess I’d like to just conclude by saying, you 

know, I think everybody here is, in fact, playing by the rules. I 

don’t think we have—we in Government have set the rules correctly. I think the people of San Diego are suffering. I think we 

ought to reject any simplistic notion that there is one person to 

blame. There’s lots of blame to go around. What we have to do is 

find the solution. And I thank you, Mr. Chairman, for the opportunity to participate. 

Mr. BILBRAY. The gentleman yields to Mr. Filner. 

Mr. FILNER. Mr. Shadegg, if you are correct that no one is to 

blame, they just figured out how to play the—use the rules for 

their own advantage——

Mr. SHADEGG. Well, the State legislature set the rules, Mr. Filner. 

Mr. FILNER. I understand. I understand. But what happens to 

the folks who were victims of all this? 

Mr. SHADEGG. Well, I think we’re trying to fix it for those victims 

to all of this. 

Mr. FILNER. No. I mean, my constituents for the last 3 months 

who have paid out $350 million more this year than last year. 

What do we do about that? I mean, that’s——

Mr. SHADEGG. Well, I think we’re talking about the Federal—

FERC being here. I mean, if you’re going to engage me in a dialog, 

I’d be happy to get in that dialog. I’d like to ask FERC if, in fact, 

they had the ability to go back and deal with those rates in the 

past because——

Mr. FILNER. That was my first question because I——

Mr. SHADEGG. I don’t—I’m not certain that your reading of the 

law is correct that they can’t deal with it in the past. 

Mr. FILNER. I got it from Mr. Hoecker, so maybe Mr. Hoecker 

could respond. 

Mr. SHADEGG. But I also think it would be useful to see the Federal Government come in and solve a problem that appears to have 

been created by the State government. Often we at the Federal 

Government——

Mr. FILNER. Apparently, we’re the only ones who can do it. 

Mr. BILBRAY. The Chair is——

Mr. FILNER. Mr. Hoecker, do you have the authority to retroactively roll back prices? 

Mr. HOECKER. We do not under the Federal Power Act. 

Mr. FILNER. You do not. Do you have any advice for how we deal 

with the situation of the over—everybody has said the prices of the 

last 3 months were not just and reasonable. How do we make sure 

164

the people who are victims do not have to pay the price for those 

unreasonable prices? I mean, do you have any advice for me? 

Mr. HOECKER. Advice for you? Well, my advice, first off, for people who have been overcharged this summer is that we need to 

look at all our legal options under State as well as Federal law. 

The State has acted to reduce utility rates in the San Diego area, 

it’s my understanding. I do know——

Mr. FILNER. They have—they have deferred the rates. They have 

not—they have put a cap, but have set up what is called a balancing account for future payment. And I could—I don’t know what 

SDG&E is going to do. Mr. Guiles might want to respond. 

But I will bet that the average person or business will get a bill 

that says, ‘‘Here’s what we should have charged you under our 

pass-through. Here’s what the State says its cap is. Here’s what 

you owe me this month, and then here’s what the total amount for 

the’’—and people are going to look at that, what they owe as the 

real thing, and Mr. Tyler and others are going to say, ‘‘Hey, I can’t 

stay in business.’’ How do we fix that? Who’s going to pay off that 

balancing account? Mr. Wood or Ms.—I mean, who’s going to pay 

that balancing account? 

Mr. HOECKER. In truth, the rate payers in San Diego pay off that 

balancing account unless that amount is renegotiated. 

Mr. FILNER. After these just and unreasonable prices have been 

exerted for 3 months. I don’t think that’s who should pay it off. But 

who—under your thinking so far—how are we going to solve this, 

Commissioner Wood or Madam Chair? 

Mr. WOOD. This is a real deep hole to try to step into without 

benefit of counsel, but I’ll throw out some ideas. One is that I’m 

not personally convinced, based on my legal advice, that FERC 

does not have this authority, first of all. 

Because the Federal Power Act is so explicitly clear that it is required that wholesale prices be found just and reasonable, they 

have in this case deferred to a market. It’s a market that is clearly 

broken. I can’t imagine any stretch of the English language that 

would cause one to believe that, not the spiked prices, but the protracted average monthly wholesale market prices in California, 

which have been many times multiples, literally multiples of the 

cost of service, which has historically been——

Mr. FILNER. And they have nothing—it has nothing to do with 

supply and demand, as I hear key people who are logically sort of 

fixed on that notion because——

Mr. WOOD. It also has nothing to do with real underlying costs. 

Mr. FILNER. Exactly. It has nothing to do with the cost. It doesn’t 

matter—the peak loads I’m told this year were less than they were 

last year. The temperatures were less. We didn’t have a heat 

storm, somebody said earlier. And yet all the prices went up. 

It looks to me, if they didn’t do anything illegal—and whatever 

they did, I would define as illegal—at least they learned how to 

game the system. It took them a year to learn how to game the system, which produced these incredible results. 

So I mean, I have to ask, I guess, Mr. Stout or—Mr. WOOD. May 

I finish the answer? 

Mr. FILNER. No, because I’ll lose my time. Go ahead. Go ahead. 

165

Mr. WOOD. Then I’ll try to be a little more quick. So one is I 

think that FERC may have this authority. Second, I do not rule out 

the possibility that the State may, in fact, have the authority to 

make a determination about just and reasonable rates in this case. 

If FERC is waiving this—— Mr. BILBRAY. Now we’re getting somewhere. Okay. Keep going. 

Mr. FILNER. So in a retroactive sense. 

Mr. WOOD. That is a possibility. Again, I’m not an attorney, and 

I haven’t studied this issue legally at this point. 

The other is that I do not accept automatically that there has 

been no misconduct, legal misconduct in this market. In fact, I am 

conducting an investigation at the present time in which I’m 

charged to look into this question. I don’t want to prejudge anything there, and I won’t. But that has not been ruled out. 

I would also note that—— Mr. BILBRAY. That’s up to Bob to do. You’re not supposed to—— Mr. WOOD. There are other measures of illegal exercise of market 

power, of price fixing, in other words, then collusion. And I think 

that those need to be looked into, and if indeed we find—or if the 

State Attorney General finds or if the Justice Department finds 

that there has been some illegal exercise of monopoly market 

power, then it ought to be possible to recapture some of—or maybe 

all of what has been overpaid by San Diego consumers. 

That all being said, I think we’re up against very considerable 

obstacles in trying to achieve some sort of reduction. 

Mr. FILNER. No question. I don’t have real confidence in either 

watching the votes on either the State or the Federal commissions 

that that thinking is going to be—the thinking I just propounded 

would be accepted, so I’m trying to do legislative action and sort 

of force that. 

I’d be interested from Mr. Stout if he could tell me how much— what are the profits from the Reliant Energy of San Diego for the 

last 3 months. 

Mr. STOUT. I don’t have specific numbers associated with San 

Diego. The profits that our corporation makes are public knowledge. They were published for the second quarter. Reliant Energy 

had an operating margin of $184 million out of a $3 billion investment plant. 

Mr. FILNER. I’m sorry. What? Out of what? 

Mr. STOUT. $184 million for a $3 billion investment. 

Mr. FILNER. How did that compare with the year before? 

Mr. STOUT. The year before was a rather bad year in terms of 

profit. 

Mr. FILNER. I’m glad we were able to save you. 

Mr. STOUT. We only had $9 million for the same period of time. 

In addition——

Mr. FILNER. I’m glad——

Mr. STOUT. In addition——

Mr. FILNER. When I hear that, sir—— Mr. STOUT. [continuing] during this year, we doubled the size of 

our portfolio. We went from 4,000 megawatts to 8,000 megawatts, 

and that had a lot to do with the increase. 

Mr. FILNER. Certainly the prices in San Diego have something to 

do with it, right? 

166

Mr. STOUT. They have had something to do with it, yes. 

Mr. FILNER. I mean, you have something like—the PUC says you 

have almost 20 percent of the market here in California. 

Mr. STOUT. I have no idea where they come up with those calculations. 

Mr. FILNER. Well, it says PUC, I have—it says you have 17 percent of the California market. And I assume that means that you 

have 17 percent of the $350 million that was extra, so that would 

tell me how many—how much money that you all made from that. 

Now, you will claim that you played by the rules, or at least you 

figured out what the rule were. When you hear somebody like Mr. 

Tyler or us politicians say our consumers are suffering, we have 

people making life-and-death decisions about temperature versus 

food, small business people going out of business and you’re reporting these incredibly higher profits, is there any relationship—is 

there any responsibility that you have for that situation? 

Do you feel that you have anything to say about it or is that, ‘‘Oh, that’s the way capitalism works. That’s the market.’’ I mean, 

what’s your response to when—you heard Mr. Tyler earlier, I assume. 

Mr. STOUT. Well, you have proposed that there be some sort of 

return of the profits that we’ve made this year to the residents of 

San Diego. Actually, I would hope that we have the opportunity to 

do so, but I would propose that we have the opportunity to do so 

through investment and new generating facilities to help serve the 

load here in San Diego. 

Mr. FILNER. Well, how are you going to save Mr. Tyler from 

going out of business, then? 

Mr. STOUT. That’s something that policymakers will have to address. 

Mr. FILNER. You have no responsibility for the fact that the games that you play produce $60 million or whatever extra million 

dollars, and we have hundreds of people going out of business. 

There may be even deaths involved in all of this. You have no responsibility for that whatsoever? 

Mr. STOUT. I respectfully disagree with your calculations in the 

amount of profit that we have made in San Diego. I have no idea 

of the basis for those. 

Mr. FILNER. Well, give me—you told me you had no answer, so 

I’m going to make it up. I mean, I’m using the 20 percent of the 

350, so that’s what? That’s $70 million. You said you had no exact 

figure. Somehow when it comes to profits, you guys have no answers, but you go to the nth degree to tell me what environmental 

regulations we haven’t done and how many megawatts we need 

from this plant. Tell me a better figure. If you don’t like the $70 

million, tell me what the figure is. 

Mr. STOUT. Well, as I said earlier——

Mr. FILNER. That was in 3 months, by the way. 

Mr. STOUT. As I said earlier, the number that I gave you, the public number of $184 million, is the best I can give you in terms 

of the profit that our company has made during the second quarter 

of this year. I simply don’t have a breakdown for San Diego. The perception that we have made 20 percent of the $350 million 

is fatally flawed. We don’t own that much of a generation share. 

167

Mr. FILNER. All right. To mark—I want you to give me the 

amount of money you made in San Diego this year over last year. 

Just—you could—I’m sure you have those statistics. Why don’t you 

just give them to us, and then I can decide whether I’m being reasonable in saying you ought to return part of your profits to the 

people who have gone out of business or who cannot afford to pay 

their electric bill. 

Mr. STOUT. The simple fact is, the power that I sell to the ISO 

and the Power Exchange simply goes to the ISO and the Power Exchange. 

Mr. FILNER. You have no responsibility for what’s going on here? 

Mr. STOUT. I have no way of calculating exactly what portion of 

that was paid by San Diego customers. 

Mr. FILNER. You have to agree that a big part of your profit came 

from the San Diego price—California pricing situation. 

Mr. STOUT. I would agree with that. 

Mr. FILNER. What? 

Mr. STOUT. I would agree with that. 

Mr. FILNER. All right. So you have no responsibility to try—for 

us to deal with it except you’re going to invest in more power 

plants? 

Mr. STOUT. I’m offering a solution that—— Mr. FILNER. That’s not a solution for people who have gone out 

of business. That’s not a solution for people who can’t pay their 

bills. Commissioner He ́bert talked about the granny—it’s granny 

we’ve got to tell the truth to. What if Mr. Hunter, who used this thing about the heart medicine, came back, it was $10, went to 

1,000, and you couldn’t afford it. ‘‘Granny, you’re going to die.’’ Do 

you have any responsibility for that? 

We have people who can’t afford to pay your prices. They’re 

dying. I think you have some responsibility, and we’re going to 

have to fix it legislatively if you won’t take it. 

Mr. BILBRAY. I’d like to, on that note, make sure I remind the 

Federal Regulatory Commission, as we’re looking at responsibility 

in this gouging, that 10 percent of the power gouging right now is 

being projected as coming out of Bonneville, which is the Federal 

Government participating in what my colleague here calls the 

gouging of the power generators. 

And I’ll tell you, as a representative of the Federal Government, 

I don’t know how I can justify that our participation—as Bob was 

saying, how do you justify this—will turn over the fact that it’s one 

thing for private people saying, ‘‘Well, you made the rules, and 

we’re playing by the rules,’’ but those of us in the Federal Government to be part and parcel in the process. 

Now, I don’t know from the PUC if there’s any way for the Federal Government not to participate in the gouging, but I definitely 

think that physician heal thyselves. We should set an example so 

that we can tell—actually have justified pointing fingers at the private sector gouging that we’re not participating in it too. 

And I think that that’s a major issue that I’d ask the FERC to 

take a look at. Is the Federal Government actually participating in 

this gouging. And when the president talks about it, does he really 

care, and when Congress talks about outrage, what are we doing 

to make sure we’re not participating in the process. 

168

Now, Mr. Hunter wants to have us start producing it at 6 cents, 

even though there’s a competitor over here already ready to undercut you. 

Mr. HUNTER. Three and a half. 

Mr. BILBRAY. Pardon? 

Mr. HUNTER. Three and a half. 

Mr. BILBRAY. Three and a half. Okay. Go ahead, Mr. Hunter. 

Mr. HUNTER. Three and a half is what Sacramento says they’re 

producing with their new generation capability. 

But you know, I think nothing so deserves real free enterprise 

as what I would call phony free enterprise. And the idea that what 

we’ve engaged in is free enterprise is absolutely wrong. It’s wrong 

for a number of reasons. 

No. 1, the essence—the quintessential element of free enterprise 

is a noncaptive consumer. That’s the consumer who can walk 

across the street and buy the load of bread cheaper at the other 

market. 

Our consumers, as this testimony came out today from Mr. Tyler 

and the people who have been put together by Terry Saverson, who 

is the East County Chamber of Commerce director who got these 

bills, as the testimony has developed, these people are total captives. 

Second, another element of free enterprise is that the person who 

does the purchasing has to have an economic interest in the outcome. It’s established that SDG&E is the pass-through, if you will, 

for this energy. SDG&E doesn’t partake in the economic hardship 

of the 9,000 percent increase during peak hours. So you’ve violated 

the second rule of real free enterprise. 

Third, you have a desperation market where there is total flexibility on the part of the seller—that is, they can sell or not sell—

and total inflexibility on the part of the buyer, which always creates—in the history of man, has always created higher prices. 

The idea that somehow the desperation market is going to create 

lower prices for the consumer who has no flexibility of purchasing 

is again totally unsupported by any historic evidence. So you don’t 

have a free enterprise situation, Mr. He ́bert. 

And let me tell you, my take—and Mr. Hoecker, we had a good 

discussion about 3 weeks ago, but I became somewhat disenchanted with FERC because I read your charter under Federal 

law, and the more I read it and read it over, the more I came to 

the conclusion that you do have a duty here, that you are—one hat 

that you wear is the emergency response team. 

And let me quote the Federal legislation that gives you the power 

to do something, I think. Title XVI, Chapter 2, Subchapter 11, Section 842(d), Just and Reasonable Rates. 

‘‘All rates and charges made, demanded or received by any public 

utility for or in connection with the transmission or sale of electric 

energy subject to the jurisdiction of the Commission, and all rules 

and regulations affecting or pertaining to such rates or charges 

shall be just and reasonable.’’

The words you’ve heard during this entire hearing. 

‘‘And any such rate or charge that is not just and reasonable is 

hereby declared to be unlawful.’’

169

Now, Mr. Sladoje, who is the CEO of the California Power Exchange, has acknowledged that at certain times during the purchasing period, the price for energy totally passed through by 

SDG&E to the consumer in San Diego has at times gone up to 

9,000 percent what it was a few hours earlier. 

Now, Mr. He ́bert, you, saying we shouldn’t regulate, we shouldn’t 

believe in price fixing, related a story about the price of gas in the 

Midwest, when it approached $2 an hour, people started to get 

upset. If you relate that 9,000 percent increase to the price of gas, 

that’s 180-gallon—$180-per-gallon gallon of gas that you have to 

buy as a totally captive consumer. That’s a gallon of milk at $200. 

I just cited this statute that would seem to empower you to take 

action. And instead of taking action, what we’ve had is philosophy 

about the importance of providing more electricity, which I agree 

with. 

And so to some degree, you’re like the emergency action team, 

the trauma unit that is called to go out and save somebody who 

is dying. And Mr. He ́bert, as you answer the phone, you say, you 

know, ‘‘What I want to do is talk about the necessity—because you 

guys are having a fire. Your place is burning down. I think we need 

to start drafting some legislation that produces in the future some 

more fire-resistant buildings.’’ Which we may totally agree with. 

But nonetheless, this statute was written to empower somebody—and I think it’s FERC—to be the emergency response team 

that when a price—and presumably 9,000 percent increases in 2 

hours represent an unreasonable price—to take action and to prevent that. Since it says it is hereby declared to be unlawful, you 

should then have the power to do something about that price. And 

I would presume to declare it to be unlawful and roll it back. 

So Mr. Hoecker, why don’t you respond to that, and then Mr. 

He ́bert, tell me why you’re not interested in responding to the fire, 

and instead you want to philosophize about the importance of fireresistant buildings. 

Mr. Hoecker, go ahead. 

Mr. HOECKER. Can I explain? You’re absolutely right in most respects about how demanding and inelastic this market is and what 

a terrible situation the rate payers are in in San Diego. And the 

Commission is empowered to do things and obligated to do things 

to protect those consumers. 

But the way our statute works—since we had granted generators 

market-based rates, and based on an analysis of their possible market dominance in generation, the way the statute works is if we 

want to change that rate, if we want to bring it down, if we want 

to find that a different rate is just and reasonable, we are required 

to have an investigation and create a record, and we are only permitted to impose that new rate prospectively. 

Mr. HUNTER. Well, question for you. We went through this, and 

I went through this with several of your staff folks on this thing. 

You need an investigation to determine that it’s an unreasonable 

rate. If you had a bill that shows that milk has gone to $200 a gallon, which is what you had, in part, from these past-throughs of 

these enormous increases, $200 a gallon, and it’s a legitimate bill, 

it’s one where SDG&E has the right to take court action, to seize 

your assets if you don’t pay the $200 a gallon for a gallon of milk, 

170

that’s not evidence that supply—that suffices or supplies the factfinding that is required? You need to do more investigation to determine that $200 a gallon is too high for a gallon of milk? 

Mr. HOECKER. Well, there are two issues there. No. 1 is, my gut 

reaction would be of course it’s unjust and unreasonable. It’s probably an outrage. We would want to change that rate because it 

would be prima facie unlawful. The statute requires us to do an investigation and to change that rate. 

Mr. HUNTER. But isn’t that an—don’t you have everything you 

need for the investigation where you have a record of $200—the 

equivalent of $200 per gallon of milk being charged or $180 for a 

gallon of gasoline? That’s what the $9 per kilowatt hour represents. 

Mr. HOECKER. Fortunately, not all the situations we deal with 

are that extreme. 

Mr. HUNTER. Well, that’s—well, let me tell you, that’s what the 

president of the Exchange acknowledged. That was one of the 

prices that was charged which was passed through directly to Mr. 

Tyler and others like him. 

And the reason I say that is—and the reason I was the author 

of a letter that Mr. Bilbray and I have sent to you gentlemen and 

lady saying, ‘‘If you don’t want to do this job as the emergency task 

force or the emergency rescue team, we think you should leave and 

let somebody else do it.’’

Because we have small businesses like the metal business in east 

county, which had an increase of in excess of $60,000 for their electrical rate for 1 month. They don’t have the ability to even withstand 2 or 3 months of investigation. They’re going to go out of 

business. 

And ironically, the hard core pro-free enterprise, ‘‘Just let me 

fight it out my own way’’ guys like Roy Tyler, who are more profree enterprise than Mr. He ́bert, who are total captives in the system, as we’ve established, are the ones who are going to be destroyed by this. The free enterprise guys are going out of business. 

So why can’t you take action based on the record—on the record 

of the price itself? Because that’s all you need to establish it is—

it’s not reasonable. 

Mr. HOECKER. And we could declare it to be unreasonable. We’d 

have to develop a new rate. And what would that be? Based on a 

record, we would determine what a just and reasonable rate is. 

Mr. HUNTER. Okay. So there is a—so you are undertaking this 

investigation, and your position is that the investigation may culminate in a cap on these rates. 

Mr. HOECKER. The investigation could culminate in a variety of 

measures, that being conceivably one of them. 

Mr. HUNTER. I thought that you said that you didn’t think you 

had the power to cap the——

Mr. HOECKER. We don’t have the power to go back retroactively 

and order refunds of the moneys that were collected by some. 

Mr. HUNTER. One question on that. The statute says if you determine that it is unreasonable, that the rate are unreasonable, that 

they are then declared illegal and unlawful. If an unlawful rate 

was charged in July, why don’t you have the right to receive the 

reimbursement that’s a delta between what you charged and what 

171

was reasonable? If it’s declared—if it’s deemed to be illegal by Federal statute. 

Mr. HOECKER. I think that’s a terrific question, but our reading 

of the statute and precedent going back 60 years doesn’t support 

our reaching back and retroactively correcting that situation. 

Mr. HUNTER. I never—I mean, you know, I guess we’re all lawyers here, but something is gained——

Mr. BILBRAY. Excuse me. Bob and I don’t want to be included in 

that line. 

Mr. HUNTER. If something is deemed to be unlawful, it’s unlawful 

at the time that the action is taken that accrues that status. And 

so if you’re going to charge 9,000 percent increases in electricity in 

July, that 9,000 percent increase is unlawful at that time. So why 

wouldn’t the extra cost be something that could be recovered? 

If you get—if property is stolen in July—and I’m not using this 

to imply that this is a criminal act, but if property is stolen in July, 

it’s stolen property as of that time, not at the point that the trial 

is convened. 

Mr. BILBRAY. If the gentleman would yield, I’d like to yield to the 

commissioners so they can answer your question. 

Mr. HUNTER. Okay. And I want to let Mr. He ́bert have a shot. 

Mr. HE ́ BERT. You want me——

Mr. BILBRAY. That is why—there is two commissioners here who 

want to respond. And seeing that you’re meeting tomorrow and 

have so much authority over this issue, we’re going to make a special effort for you to leave here happy and contented so that you 

help us tomorrow. 

Mr. HE ́ BERT. I want to make sure, Mr. Chairman, an answer, but 

I would like to yield to the young lady from Kentucky, if I may, 

and I’ll come back and answer. 

Ms. BREATHITT. I am not an attorney, but I wanted to just expound a little bit more on the—our legal rights to remedy a situation going forward. But even when I was regulating at the State 

level, a regulatory principle in most State commissions across the 

country and, I found, at FERC applies the filed rate doctrine, 

which prohibits us from retroactive rate-making and retroactive 

cost recovery. 

Mr. HUNTER. Is that a law? 

Ms. BREATHITT. So it has to be done on a prospective basis. 

Mr. HUNTER. Is that a Federal statute? Because what I quoted 

was Federal statute. 

Ms. BREATHITT. The filed rate doctrine applies, as I understand 

it, to our Federal statute. It also applied to State statutes when I 

regulated at the State level. I’m just giving you that as further support that——

Mr. HUNTER. If you folks—and I don’t mean to interrupt, but if 

you folks have a legal opinion—obviously, you’ve got lots of counsel. 

I’d like to see the legal opinion on that because it looks like that 

flies totally in the face of the statute. 

Mr. HOECKER. Congressman, I’ll ask my lawyers to sharpen their 

pencils on that. I think you’re asking a good question. 

Mr. HUNTER. Okay. 

172

Ms. BREATHITT. It doesn’t prohibit us from doing the investigation and correcting wrongs going forward in terms of price adjustments. 

The only other point that I was going to make is in response to 

your belief that we have a record now to make this finding. I wanted to point out that because the Commission speaks through its orders, and those orders are appealable, that we have to make sure 

that our record has been gathered under our due process standards 

and that it’s—our record is gathered in an open, transparent manner for all parties to comment on because they’re appealable. They 

have to be able to be fact-supported and supported by legal precedent and the law. 

Mr. MASSEY. Can I just make a 15-second comment? Whatever 

legal authority we have, we should utilize to remedy these problems, period. No. 2, we only have the authority Congress has given 

us, whatever that is. And No. 3, it seems to me it’s an argument 

for us to proceed with a sense of urgency in case it is true that all 

of our remedies have to be prospective. 

Mr. BILBRAY. Commissioner, you wanted to——

Mr. HUNTER. Let Mr. He ́bert have a shot here. 

Mr. HE ́ BERT. Thank you. As the only Republican, I’m accustomed 

to going last, so it works out all right. 

Let me clear up a couple of things. I want to make sure that you 

understand where I’m coming from, Congressman Hunter. I’m a 

former legislator, and I’m a former State commissioner, and I’m 

presently a Federal regulator. I understand constituent needs and 

concerns, and I do not want you to think or anyone to think here 

that I am unsympathetic to that because, quite frankly, I’m not. 

But what I’ve learned to do is to no longer just worry about Mississippians, but to worry about people in California and New York 

and New England. And that is why, when I talk about price 

spikes—and I do want to clear something up—evidently I’ve 

miscommunicated it to you. We don’t have anything to do with gasoline, and I was not talking about the price spikes on gasoline. I 

was talking about the 1998 price spikes where megawatts went to 

$10,000 a megawatt hour and the fact that this Commission did 

not invoke price caps. 

And if you look at the evidence—and all I’m suggesting you do, 

Congressmen and everyone else here, all I’m suggesting that they 

do is look at the evidence. What happened when we didn’t do that? 

What happened when we let the market—you want to talk about 

markets. What happened when we let the market respond? They 

built generation. They got new supply. 

And that is why I dissented on price caps in New England. I 

thought it was important for them to get a market. I dissented on 

price caps in New York. I have dissented on every price cap that’s 

come forward since the beginning. 

And the reason is this. The evidence is even beginning to show 

that you’re seeing higher average prices since you’ve reduced the 

price cap from 750 to 250. Now, that’s no accident. Economists can 

predict this. Look at the great economists who understand how to 

do this. Yes, I am a lawyer, but listen to the economists, Alfred 

Cahn, Daniel Yurgin. They will tell you——

173

Mr. HUNTER. You’re talking to the fire because I agree with your 

philosophy, but I don’t agree with your not reacting to the emergency of the minute—— Mr. HE ́ BERT. No. 

Mr. HUNTER. [continuing] which will sink these people long before our philosophy can take place. 

Mr. HE ́ BERT. I want you to understand that I am. Look, you want 

to talk about emergencies, this is September 30, 1999. I issue a 

copy of every one of my dissents to the Committee. And this is a 

copy of my dissent. I identified early on, almost a year ago today: ‘‘Prominent advocates claim that electricity will become more of 

a financial and less of a physical market. Hedging will only increase. Textbooks and introductory economics in our own experience in the Midwest and elsewhere spell out benefits of allowing 

the market to produce high prices and the harm of imposing ceilings, artificial by definition. When we give the ISO the crutch of 

price caps, we encourage the organization to avoid necessary reforms. Price caps give the ISO no incentive to improve.’’ Those are the type of things that I have been saying. That’s not 

changed. And these are the things that are occurring. And I have 

said early on that we need to reassess this and we need to try to 

move toward the market. 

Now, you can’t have it both ways. People want to tell you things 

that sound good to the ear. But they may sound good to the ear, 

but they’re not going to help the people of San Diego. When you 

say price caps have worked when, in fact, the evidence is suggesting they haven’t—— Mr. HUNTER. Price caps—— Mr. HE ́ BERT. And then you say demand-side management will 

work. You can’t mix those price signals. 

Mr. HUNTER. But price caps will work—but my point is, you have 

a chart where prices are unfair and unreasonable. Your charter, according to what I read, is to declare those unlawful. 

Now, if your philosophy, your personal philosophy is that’s a nonstarter, we shouldn’t be on the trauma care unit. If you think that 

the way to meet this is deep philosophical discussions about the 

long-term problems and fixing things in the long term, which I 

agree with you on—I mean, you start trying to site a plant right 

now, it will take you longer than it took to win World War II to 

site the plant. 

The people—the free enterprise guys who are having the 9,000 

percent increases will be gone in 2 or 3 months. So if you don’t 

want to serve on the trauma care unit and you want to be in the 

philosophy unit, I think that’s great, but I don’t think you should 

be on the unit. If you don’t agree with enforcing the law—if this 

is the law that I’m reading, the statute that says if it’s an unreasonable price—and I think you would agree a 9,000 percent increase is unreasonable by most people’s standards. If you’re not interested in enforcing what you think is a bad law, you shouldn’t be 

on this board doing it. 

Mr. HE ́ BERT. Well, I’ll let you make——

Mr. BILBRAY. Enforcing the law, the Chair is going to invoke on 

this. Mr. He ́bert, I understand your frustration with what’s 

going——

174

Mr. HUNTER. Remember, Bilbray, you borrowed my car a few 

days ago. 

Mr. BILBRAY. Yeah. And you owe me for that. 

Mr. HE ́ BERT. The Congressman knows——

Mr. FILNER. Nine thousand percent more than you paid for it. 

Mr. BILBRAY. I should get danger pay out of that. 

Mr. HE ́ BERT. As the entire panel knows, upon invitation, I’ll be 

glad to come and sit down with you in your office and talk with 

you. And I’m not a policy wonk. I’ve been fighting this fight. But 

you’re listening to people who are changing their tune, people who 

are even suggesting that pipelines are in good order, when I’ve 

been working for almost 3 years to get a pipeline to the northeast 

to give those people a choice. We’ve got to get things done. 

Mr. BILBRAY. Okay. Let me echo that. In the long run, we’ve got 

to confront those who always oppose the creation of infrastructure. 

That if we took the same attitude with our roads and with housing, 

we would have a much bigger crisis on our highways and in our 

housing than what we see if we took the same attitude as we do 

with power generation. 

Those of us in government have taken an attitude about power 

generation as it’s somebody else’s problem. And the fact is, politically, it’s expedient to oppose the infrastructure development because there’s always some organized group to oppose the infrastructure expansion. 

But there’s never anyone out there pushing for the general public 

and the consumer to protect them from a deficiency in infrastructure except those of us who serve in government. And too often, we 

sell out and run the other way. 

Now, we’ve got a crisis with electricity in San Diego today. Anyone with a brain in their head and eyes in their head knows that 

natural gas is the next big crisis, which is the environmentally preferred option for power generation in this country right now. Like 

it or not, no matter what one side or the other side says. 

But we haven’t built the pipelines, and we’re not building the 

pipelines, so it’s not the great success. It’s the fact that we’re behind schedule, we’re going to have a crisis this time. We’ve got the 

same crisis when it comes up with other infrastructure issues. 

And I’ve worked on this from everything from clean water to 

clean air to being able to bury garbage. It’s always fine for us to 

run away from the infrastructure. 

That aside, I would ask the commissioners, both State and Federal, to recognize that it’s those of us who are legislatures have to 

get back to the business of creating something that we can conserve rather than always asking the consumer to slice it thinner. 

Please recognize to the FERC members that it says that all rates 

fall under that category. It doesn’t say proactive. I understand that 

you have a supreme court ruling that raises major concerns, but I 

would ask you to consider the fact that the statute does not say 

that the rates have to be illegal before they are unfair. It says if 

they’re unfair, they are illegal, ill-gotten gains. 

And I would have to agree with my colleague about the issue 

that when it reaches a point to where there has been basically 

gouging going on, it’s not just immoral, as my colleague from San 

175

Diego might point out, it, by definition, looks like the statute says 

it’s illegal. 

And the question that my colleague from the east part of the 

county pointed out, if it is illegal, is it their property, is it their 

profit, or is it confiscated gains, illegally confiscated gains which 

need to be repossessed? 

And I understand that issue of the taking. We’ve got an issue 

there. I’ve been around since 1976 in government. I have seen 

these issues. We’ve got the issue of will this constitute a taking if 

we roll back. All I’ve got to say is that there are drug dealers and 

there are illegal activities out there that every day we’ve given the 

authority to go back and confiscate ill-gotten gains that fall under 

the category of unlawful. 

I would ask you to at least take that. And I ask both commissioners. And I want to say this sincerely. The people of San Diego 

County are looking to you to come into this community and respond to this crisis and this disaster just as they would expect the 

Federal Government and the State government to come in in a natural disaster. 

We’ve witnessed this month that there were major disaster and 

fires in the west, and we didn’t see the State say, ‘‘It’s not our department. Let the Federal Government do it.’’ And we didn’t see 

the Federal Government say, ‘‘Soldiers are not trained to go fight 

fires.’’ You saw the President found ways to be able to send soldiers 

in to do something, not because they usually do it, but because it 

needed to be done. 

I just ask both of you to rise to the occasion like those men and 

women did and do the job that needs to be done, even if you 

haven’t gotten used to doing it in the past. 

I think you for being here today. 

Mr. HUNTER. Brian. 

Mr. BILBRAY. We look forward to taking care of it. 

Mr. HUNTER. Mr. Chairman. 

Mr. BILBRAY. Go ahead. 

Mr. HUNTER. Let me ask just one—I just had two questions for 

the record for Mr. Guiles. 

Mr. GUILES. Yes, sir. 

Mr. HUNTER. We’re looking at this—we’re looking at this proposed plant at Miramar, and I would just ask that you would continue to engage—your people have been engaging with whether we 

can hook into the grid at that point. 

Mr. GUILES. Absolutely. 

Mr. HUNTER. If you could look at that. 

And Ms. Lynch, one thing that’s come through a lot of our employers. You know, we have ship building, we have aerospace, lots 

of manufacturing here with fixed contracts where people are just 

losing their shirts. 

And I’ve noticed that—at least it’s been stated by our business 

community, for the large employers, and even a lot of the small 

business employers who qualify as small business, there is not rate 

relief. Is that something that’s being looked at? Because losing your 

job and your paycheck is just as bad as being priced out of your 

house. 

176

Ms. LYNCH. It is something we began to look at. My colleague, 

Carl Wood, opened an investigation into looking at that, and then 

the legislation overtook it, which vastly expanded rate relief to 

most businesses. But the largest businesses who already can directly contract for power, have an ability to contract on annual contract basis to get certainty. That number at 6.5 cents is still a pretty high number, but they can get certainty. 

Mr. BILBRAY. Okay. 

Mr. HUNTER. Okay. Thank you, Mr. Chairman. Great job, Brian. 

Mr. BILBRAY. I would thank my colleague for coming in with— just as Duncan Hunter always does, he wants to build something 

to address the problem. He’s always—in his 20 years in Congress, 

I’ve always been inspired with how much he’s willing to get in 

there and get the dirt pushed. 

I want to thank my colleague for introducing a bill that may specifically try to address this issue of what is the authority of the 

FERC on this issue. Frankly, some of us think that the legislation 

isn’t needed, and I think—we hope it’s not needed. Let’s just say 

that. But I think that we need to make sure it’s there to move in 

the next month if we have to. 

I would just ask that we also look at—I’ve asked that bill about 

the issue of making sure that if there’s gouging going on, that the 

Federal Government isn’t participating in it by the sale of our 

power through the power exchange. 

And we’ll try to do our part to get the infrastructure side down. 

We really ask you in the next week or 2 to try to address the other 

side as to the short term, and only you can do that. 

The Chair will adjourn this meeting after making sure—declaring that the record will remain open for testimony and correction, 

and I will now adjourn this meeting at this time. Thank you. 

[Whereupon, at 2:08 p.m., the subcommittee was adjourned.] 

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