```

[Senate Hearing 107-200]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 107-200

                 ELECTRIC TRANSMISSION INFRASTRUCTURE 
                          AND INVESTMENT NEEDS

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

                                HEARING

                               before the

                    SUBCOMMITTEE ON WATER AND POWER

                                 of the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

   TO RECEIVE TESTIMONY ON ELECTRIC TRANSMISSION INFRASTRUCTURE AND 
             INVESTMENT NEEDS; POLICY AND TECHNOLOGY ISSUES

                               __________

                             AUGUST 7, 2001

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

                                 ______

                    U.S. GOVERNMENT PRINTING OFFICE
76-590 PDF                  WASHINGTON : 2001

For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512-1800  
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001

               COMMITTEE ON ENERGY AND NATURAL RESOURCES

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

                    Robert M. Simon, Staff Director
                      Sam E. Fowler, Chief Counsel
               Brian P. Malnak, Republican Staff Director
               James P. Beirne, Republican Chief Counsel
                                 ------                                

                    Subcommittee on Water and Power

                BYRON H. DORGAN, North Dakota, Chairman
BOB GRAHAM, Florida                  GORDON SMITH, Oregon
RON WYDEN, Oregon                    JON KYL, Arizona
TIM JOHNSON, South Dakota            LARRY E. CRAIG, Idaho
DIANNE FEINSTEIN, California         BEN NIGHTHORSE CAMPBELL, Colorado
MARIA CANTWELL, Washington           RICHARD C. SHELBY, Alabama
THOMAS R. CARPER, Delaware           CHUCK HAGEL, Nebraska

  Jeff Bingaman and Frank H. Murkowski are Ex Officio Members of the 
                              Subcommittee

                 Leon Lowery, Professional Staff Member
             Howard Useem, Senior Professional Staff Member

                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Anderson, Tracy, Program Manager, 3M Electrical Products 
  Division, St. Paul, MN.........................................    45
Caldwell, James H., Jr., Policy Director, American Wind Energy 
  Association....................................................    48
Dorgan, Hon. Byron L., U.S. Senator from North Dakota............     1
Hacskaylo, Michael S., Administrator, Western Area Power 
  Administration, Department of Energy...........................     4
Humann, Ted, Senior Vice President for Transmission, Basin 
  Electric Power Cooperative, Bismarck, ND.......................    20
Longenecker, William G., Energy Industry Analyst, Office of 
  Markets, Tariffs & Rates, Federal Energy Regulatory Commission.     9
MacFarlane, John, Chairman & CEO, Otter Tail Power Company.......    19
Moler, Elizabeth A., Senior Vice President for Government Affairs 
  and Policy, Exelon Corporation.................................    22
Pomeroy, Hon. Earl, U.S. Representative from North Dakota........     3
Porter, Clifford, Director, Lignite Research, Development and 
  Marketing Program, Lignite Energy Council, Bismarck, ND........    54
Sparby, David, Vice President for Government and Regulatory 
  Affairs, Xcel Energy, Inc......................................    32

 
       ELECTRIC TRANSMISSION INFRASTRUCTURE AND INVESTMENT NEEDS

                              ----------                              

                        TUESDAY, AUGUST 7, 2001

                               U.S. Senate,
                   Subcommittee on Water and Power,
                 Committee on Energy and Natural Resources,
                                                      Bismarck, ND.
    The subcommittee met, pursuant to notice, at 10:08 a.m. in 
the Judicial Room, Best Western Doublewood Inn, 1400 East 
Interchange Avenue, Hon. Byron Dorgan presiding.

          OPENING STATEMENT OF HON. BYRON L. DORGAN, 
                 U.S. SENATOR FROM NORTH DAKOTA

    Senator Dorgan. The hearing will come to order. This is a 
hearing of the Subcommittee on Water and Power with the U.S. 
Senate Energy Committee.
    My name is Byron Dorgan. I am chairman of the subcommittee 
and I am joined today by Leon Lowery, who is with the 
professional staff of the Senate Energy Committee. We are also 
going to be joined by my colleague, Congressman Pomeroy, who is 
in the State and in town today and I have invited him to join 
us and he'll be with us shortly.
    I am joined by staff assistant Ladeene Freimuth, who works 
with me on energy issues, and I am pleased to have her here, as 
well.
    Let me make a brief opening comment and then I would like 
to begin hearing some testimony.
    The purpose of having a hearing on transmission issues, 
transmission infrastructure and investment needs today is 
because we are trying to write a new energy plan. Our chairman, 
Jeff Bingaman, had us working on one title, which was the 
research and development title, late last week. We completed 
that, but that is only the first title. When we come back in 
September, we will begin the efforts to complete writing an 
energy plan.
    This is not an easy task. We did not understand it to be 
easy when we started, but from my perspective, I am interested 
nationally in a range of issues. I believe we must produce 
more. That means more oil, more natural gas and more coal. We 
must do it in a manner that is environmentally sensitive. And 
even as we produce more, we must conserve more. We must have 
more efficient appliances and efficient use of energy and we 
must have renewable energy and limitless energy sources, as 
well. And all of those areas are areas that we should pay 
attention to in an energy bill.
    But especially in North Dakota we have a need to be 
concerned about the issue of transmission. Whether it is 
production of wind energy or the production of additional 
electric energy, it is not going to be of much value to the 
region or the country if we are not able to transmit that, and 
we don't have the transmission capability and infrastructure at 
present to substantially increase what this State and what our 
resources contribute to this country's energy needs.
    Because of that, we want to make sure that we are doing on 
the transmission side the right things and trying to develop 
the right policies. And Senator Bingaman has agreed to host a 
series of hearings. I am going to be holding a hearing this 
morning, I will be holding a hearing in Seattle in a couple 
days, a hearing in New Mexico. We have a series of hearings 
that are being held, and the purpose is to gather information, 
gather thoughts and ideas.
    And let me just finally say this. North Dakota has a great 
deal at stake on these issues. We produce oil, we produce coal, 
we have natural gas, we produce electric energy in substantial 
quantity, we have vast deposits of lignite, and so we have a 
lot at stake and we have a lot to contribute to this country in 
terms of energy supply and production. But the linchpin to 
making this available in most cases is transmission lines, 
especially with the opportunities to produce electric energy.
    We have a representative of 3M today, and I am not about 
giving commercials for corporate enterprises except to say that 
there is a lot of really interesting, exciting work going on in 
new technology. In transmission and new technology this is a 
composite conductor that is produced by 3M. Other companies are 
engaged in interesting research. This is, I understand, three 
to four times more efficient than current transmission wires 
and we can run using new technology, new approaches, new 
devices, new wires across the same corridors and have 
substantial new opportunities to export electricity from our 
State.
    I want to say one more time that when we contribute energy 
to a country that needs it, I want it all to be done in a 
manner that is very sensitive to our environment, with clean 
coal technology and the concern that all of us have about 
making certain there is significant and robust investment in 
that area. And Senator Bingaman especially, with me and others, 
believes very strongly in that. We can use our coal resources 
in a very thoughtful, environmentally safe way, and we intend 
to do that.
    But I want to thank all of you for being here. We have 
eight witnesses. It is my hope that we can complete this in 2 
hours.
    And I indicated that, Congressman Pomeroy, before you came 
that I was happy to invite you to participate. You are not only 
in the State, but in town, the House is in recess, as well, and 
I thank you for being here. If you have a comment, I would be 
happy to hear from you.
    [The prepared statement of Senator Dorgan follows:]
       Prepared Statement of Hon. Byron L. Dorgan, U.S. Senator 
                           From North Dakota
    Today, we will hear from our witnesses on policies and technologies 
to address transmission investment and infrastructure needs for North 
Dakota, the region, and the nation. I am pleased that we have as 
witnesses today representatives from the FERC, the PMAs, IOUs, and 
rural electric cooperatives, and from the lignite and wind industries, 
as well as from 3M--the latter to represent some of the new, innovative 
transmission technologies that are being developed.
    I would like to thank all of our witnesses for being here today, 
and especially thank those of you who have traveled long distances and 
adjusted your schedules to be here today. Your input will be invaluable 
to the energy debate, to me, and to the Committee's record, as we use 
this information to develop national energy policy legislation.
    Transmission is one of the most critical aspects of the energy 
debate and the energy policy Congress will be developing in the coming 
weeks. We can have vast energy supply sources, as is the case in North 
Dakota with its coal and wind, among other traditional and renewable 
energy resources, but if we can't move and export those resources, then 
we won't be able to use the resources to power our homes, businesses, 
and more. North Dakota is referred to as ``the Saudi Arabia of wind,'' 
because of its enormous potential for wind energy. And yet, we don't 
have a single turbine built yet, because we can't move the power that 
the wind would generate.
    We are facing problems with transmission both here in North Dakota 
and nationwide in terms of capacity constraints, siting issues, 
reliability of the electricity system, to name a few. We need to figure 
out the most effective structures and policies to enhance the 
effectiveness of our system and facilitate transmission across state 
boundaries, regions, and the nation. We need to enhance transmission to 
rural as well as urban areas. I know our witnesses will shed light on 
many of these issues.
    And it's not just about building more transmission lines, either. 
There's a lot we can do with our existing rights-of-way. New, advanced 
transmission technologies, such as composite conductor material, 
superconductor material, and other methods and devices can increase the 
efficiency of our transmission infrastructure.
    3M, for example, whom we will hear from today has developed a 
composite conductor transmission line. This line replaces existing 
lines and does not require new towers or new rights-of-way. As a 
result, extensive environmental assessments and permit reviews are not 
required, which will significantly expedite the time in which we can 
expand our transmission capacity. The 230 kilovolt (kV) line is being 
tested in France. 3M is hoping to test 500 and 750 kV lines in the 
United States. The lines increase the efficiency over existing lines 
tremendously and our witness will elaborate upon this even more.
    I have passed amendments at last week's Energy Committee markup and 
have inserted language in Senate appropriations bills to promote, 
develop, and test such innovative, new transmission technologies.
    Though not the total solution, these technologies could go a long 
way toward helping solve some of the transmission capacity constraints 
we are facing.
    I look forward to learning more from our witnesses about the 
combination of technologies and policies that Congress needs to examine 
to help solve the transmission problems we are facing.
    Now, I would like to invite our first panel to testify.

                STATEMENT OF HON. EARL POMEROY, 
             U.S. REPRESENTATIVE FROM NORTH DAKOTA

    Mr. Pomeroy. Very briefly, Chairman Dorgan. Let me say how 
sweet it is to say Chairman Dorgan. I appreciate very much you 
using your subcommittee chairmanship of the Senate committee to 
advance a particular focus on the issue of transmission.
    When you think about it in North Dakota, the striking 
similarities that exist between the transmission issues facing 
our ability to get more power produced in North Dakota to 
national markets to the railcar shortages we face every year in 
terms of getting the year's harvest out. We produce way more 
crop than we consume. We make a very significant contribution 
to our national food needs, in fact global food needs, but we 
have difficulty getting it to market.
    We produce more power than we consume. Our potential to 
make a much greater contribution to the Nation's energy needs 
are profound, and yet getting our power to the markets is 
constrained presently by a power grid that no one would 
maintain was constructive with an eye toward energy needs in 
the 21st century.
    I believe transmission is absolutely a key to North Dakota 
lignite development, key to alternative and renewable fuels 
development ranging from in particular wind energy when you 
talk about North Dakota.
    So as far as I am concerned, the House-passed energy bill 
last week did not devote sufficient discussion of the 
transmission issues in particular, and that is why your hearing 
is so particularly timely. I am very pleased your allowing me 
representing the House to participate. Thank you, Byron.
    Senator Dorgan. Congressman Pomeroy, thank you. I might say 
just as an editorial comment, the House energy bill, as 
Congressman Pomeroy said, I think will be changed very 
substantially by the Senate. It has obviously some ingredients 
that will be common to both bills, but the Senate will take, in 
my judgment, a substantially different approach than the House 
did.
    Mr. Pomeroy. It needs work.
    Senator Dorgan. Then that is what we are about.
    Mr. Pomeroy. Good.
    Senator Dorgan. We are joined today by a representative of 
FERC, the Federal Energy Regulatory Commission.
    And I should mention that this morning or yesterday, I 
guess, Chairman Curt Hebert of FERC announced his resignation 
effective at the end of the month, so FERC will be experiencing 
some changes.
    William Longenecker, who is an energy industry analyst at 
FERC, is with us, and we have the administrator of Western Area 
Power Administration from Lakewood, Colorado, Mike Hacskaylo. 
We appreciate very much your being with us. We have asked 
witnesses to summarize their testimony and we will make their 
full testimony a part of the record. We have asked, if we 
could, for 5-minute statements so that there is room for 
questions.
    Why don't we begin with Mr. Hacskaylo. Why don't you 
proceed.

STATEMENT OF MICHAEL S. HACSKAYLO, ADMINISTRATOR, WESTERN AREA 
           POWER ADMINISTRATION, DEPARTMENT OF ENERGY

    Mr. Hacskaylo. Thank you, Mr. Chairman. Good morning. Good 
morning, Mr. Pomeroy. I appreciate your invitation to be here 
today to speak on behalf of the Western Area Power 
Administration.
    Western is one of the four Federal power marketing 
administrations. We market and transmit 10,500 megawatts of 
Federal power, power produced at Federal powerplants, to nearly 
650 wholesale customers spread across 15 Central and Western 
States.
    For the purposes of this hearing, a significant point is 
that Western owns, operates and maintains almost 17,000 miles 
of high-voltage transmission system across the West. We are 
part of that backbone, that high-voltage backbone to move power 
between States, between markets. We have our employees based at 
51 duty stations in 12 States, including here in Bismarck, 
North Dakota, with our North Dakota maintenance facility.
    We operate four control areas and maintain about 1,600 
load-serving interconnections with other utilities inside our 
control area boundaries. We schedule energy. That is, we move 
energy owned by one entity being sold to another entity with at 
least another hundred load-serving entities with which we do 
not have a direct interconnection.
    Additionally, we make unused transmission capacity on our 
system available to any other buyer and seller, including power 
marketers and brokers, at a cost-reimbursable basis. As a 
matter of policy, Western offers transmission capacity on its 
system on a first-come, first-served basis under our open 
access tariff. This is in accordance with FERC Order 888 and 
889.
    For example, we are working with the Basin Electric Power 
Cooperative on interconnections in a variety of areas, 
including the Miles City DC tie. We are working with East River 
Electric Cooperative in South Dakota with their proposed T 
substation as they interconnect with our system in the Sioux 
Falls area. That is a new substation to deal with low growth in 
the area. We are also working with entities such as Basin on 
new transmission lines such as the Hettinger-to-Belfield line. 
Thank you, Mr. Chairman, for your efforts on that important 
project. That will help move power back and forth in this part 
of the country.
    We also provide interconnections with merchant powerplants 
seeking transmission paths to move their power to load centers; 
for example, in California and in southern Arizona. We have 
underway eight interconnections with these merchant plants, and 
these are large plants, 500 megawatts to 700 megawatts, to move 
power into and through California.
    Western Area Power Administration is responsive to the 
emerging generation market and we have seen strong demand on 
our available transmission capacity. We now have little 
capacity available to serve new generation or additional loads 
beyond these projects we are presently working on, so the 
system is becoming constrained.
    In recent years transmission improvements, generation 
additions and maintenance and rehabilitation programs have 
often been deferred, I think this is a fair statement, across 
the industry. At the same time load growth, deregulation and 
restructuring, transmission open access, and merchant plant 
interconnections are placing unprecedented demands on the 
interconnected power grid.
    Systemwide disturbances in the West in 1994 and 1996, 
energy shortages and price spikes in the Midwest last summer 
and the roller coaster ride that is going on in California have 
focused attention on the reliability of the nation's power grid 
and its ability to meet an ever-growing, instantaneous demand 
for high-quality, reliable electric service.
    There are those that say that electricity is what powers 
the nation's economy, and they are right. And what the economy 
demands is this high-quality, reliable service, and that is 
where transmission comes into play.
    Clearly, the system is much more integrated and being 
operated much more closer to the margin than in the past and 
its components are much more sensitive to disruptions. Minor 
outages that would have been a local inconvenience a few years 
ago now have the potential to take down an entire regional 
system.
    From the investment side, we work closely with the Congress 
through our budget process to obtain funds to upgrade our 
system as needed to improve reliability. We work closely with 
our customers as they advance funds to some of our activities. 
Merchant powerplants that interconnect with our system have to 
pay a freight, they pay their share of the costs to upgrade the 
system, and we are looking for more flexible ways with 
appropriate Congressional and customer oversight to use these 
funds to take care of emerging situations, rapid load growth 
and requests for quick interconnections.
    We at Western look forward to continuing to work with the 
members of your committee as you seek ways to reinforce the 
infrastructure and investments in the nationwide power grid.
    Thank you for the opportunity to testify.
    [The prepared statement of Mr. Hacskaylo follows:]
Prepared Statement of Michael S. Hacskaylo, Administrator, Western Area 
               Power Administration, Department of Energy
    Thank you, Mr. Chairman and members of the committee, for your 
invitation to speak with you today on behalf of Western Area Power 
Administration (Western).
    I will focus my remarks on Western's improvements and investments 
in the transmission infrastructure of the high-voltage system we own 
and operate on behalf of the people of the United States. Western's 
concerns are to protect public safety around our facilities and to 
maintain the reliability of our high-voltage transmission system.
    Western is one of the four Federal power marketing administrations. 
We market and transmit Federal power to nearly 650 wholesale customers 
spread across 15 Central and Western states. This power is generated at 
55 hydro plants owned and operated by the U.S. Bureau of Reclamation, 
the U.S. Army Corps of Engineers and the International Boundary and 
Water Commission. To deliver this power to our customers--the cities 
and towns, public utility and irrigation districts, rural electric 
cooperatives, and Federal, state and tribal organizations we own and 
operate nearly 17,000 miles of high-voltage transmission lines, 256 
electrical substations, 359 communication sites and a variety of other 
supporting facilities. Our employees are based at 51 duty stations in 
12 states.
    We deliver power to some of the most isolated communities in the 
nation. Our facilities are scattered across a 1.3 million-square-mile 
service territory traversing some of the most rugged terrain in the 
continental United States. Our transmission system is an integral part 
of the nation's high-voltage electrical grid in the West.
    We operate four control areas and maintain about 1,600 load-serving 
interconnections with other utilities inside our control area 
boundaries. We schedule energy with another 100 load-serving entities 
with which we do not have direct interconnections. Additionally, we 
make unused transmission capacity on our system available to any other 
buyer and seller, including power marketers and brokers, on a cost-
reimbursable basis.
    Maintaining the reliability of our vast transmission system to 
serve customers around the clock is our most significant operational 
obligation. This requirement is buttressed by:

   our contracts with customers to deliver firm power,
   our commitments to the North American Electric Reliability 
        Council and its member councils to reliably operate the 
        transmission system, and
   our duty to safeguard this critical infrastructure.

    Today, the Nation's transmission grid is interconnected, interstate 
and international. As Deputy Energy Secretary Francis Blake testified 
before this committee two weeks ago, assuring this integrated 
transmission system can reliably deliver bulk electricity is a core 
Federal issue.
    The Administration's National Energy Policy noted that our energy 
infrastructure has failed to keep pace with the changing requirements 
in our energy system. Nationwide, since 1989, electricity sales have 
increased by 2.1 percent per year, yet transmission capacity has 
increased by only 0.8 percent per year. Some experts across the 
electric industry sector agree that the bulk power transmission grid 
may need to be expanded to remove bottlenecks.
    The National Energy Policy also directed the Secretary, by December 
31, 2001, to examine the benefits of establishing a national grid, 
identify transmission bottlenecks and identify measures to remove those 
bottlenecks.
    Recent load growth in the Western United States has greatly 
impacted transmission system reserve margins. The interconnected power 
grid is constrained by insufficient capacity where demand is greatest.
    As a transmission system owner, Western must continue to take 
prudent steps to improve grid operations and ensure the safety and 
reliability of the Federal transmission system. We continue to 
cooperate with new merchant powerplants requesting interconnections to 
our transmission system.
    As a matter of policy, Western offers transmission capacity on a 
first-come, first-served basis under our Open Access Tariff. This 
includes providing interconnections to merchant powerplants seeking 
transmission paths to move their power to load centers. Western is 
responsive to the emerging generation market, and we've seen strong 
demand on our available transmission capacity. We now have little 
capacity available to serve new generation or additional loads beyond 
the dozen projects now in planning or under construction across our 
service territory.
    Before new generation is added, extensive studies are undertaken to 
evaluate its effects on the transmission grid. A number of technical, 
stop-gap measures address reliability in the short term. They do not, 
however, resolve the long-term reliability and operational security 
threats to the transmission system under the increasing stress and 
burden of many more bulk power transactions moving power long distances 
in response to market demands.
    Western has played a key role in joint transmission planning and 
construction across the West. Western conducts its own studies and 
participates in studies conducted by entities including Western Systems 
Coordinating Council, Western Regional Transmission Association and 
Southwest Regional Transmission Association as well as local and 
statewide transmission planning groups.
    Results of these studies have led us to develop a description of 
immediate and potential projects for grid enhancements to the Federal 
transmission system as permitted within the confines of Western's 
statutory authorizations and funding. A summary of these projects was 
provided to the Federal Energy Regulatory Commission earlier this year 
in response to the Commission's Order on Removing Obstacles to 
Increased Electric Generation and Natural Gas Supply in the Western 
United States (FERC Docket No. EL01-47-000). I am providing that 
summary for the Committee's use.*
---------------------------------------------------------------------------
    * The summary has been retained in subcommittee files.
---------------------------------------------------------------------------
    At Western, our charter is different from investor- and consumer-
owned utilities. They are required to invest in generation and 
transmission assets to meet load growth needs in their franchised 
service territories. Our transmission system was built to provide a way 
to deliver power from the Federal dams to the preference customers who 
have first call on this publicly generated power. Today, Western's 
high-voltage system provides a critical backbone of transmission grid 
in parts of the Western United States. This system includes nearly 
9,000 miles of steel pole lines and 7,900 miles of wood-pole lines.
    Wood-pole structures are expected to last an average of 40 years. 
Sixty-three percent, or 4,983 miles, of Western's wood-pole structures 
are more than 40 years old. Another 19 percent, or 1,482 miles, of 
wood-pole lines will reach the 40-year mark in this decade. Western has 
a long-term strategy for maintaining and extending the life of its 
aging infrastructure, particularly our wood-pole transmission lines.
    Part of that strategy is an ongoing wood-pole replacement program 
to reinforce and replace individual poles. The other part is rebuilding 
entire line segments. This summer, we completed a rebuild of the Havre-
Shelby line in northern Montana. This 115-kV transmission line was 
originally placed into service in 1951. Beginning in 1993, Western 
crews began the methodical task of replacing the rotted wooden poles on 
this 95-mile line, one by one, to extend the life of this vital line 
bringing electricity to small, isolated rural communities such as 
Chester, Rudyard and Kremlin. The project was scheduled to be completed 
in 2002, but the crews devised several innovations that sped up the 
work by a full year.
    Last year, we began a similar life extension project in North 
Dakota on a 56-mile, 115-kV transmission line between Rugby and Neal 
Substation near Voltaire and Bergen. The line was originally placed 
into service in April 1952. We rebuilt the first 10-mile stretch last 
summer and expect to finish in 2005. Next year, we'll begin work on the 
1949 vintage, 41-mile Williston-Watford City line and the 1951 vintage, 
34-mile Watford City to Charlie Creek line.
    We have also been able to stretch out our infrastructure 
replacement activities. The Havre-Shelby rebuild project was stretched 
out over nine years. It costs $7,000 in material and labor to replace 
one H-frame wood-pole structure. These costs include pro-rated shares 
for the heavy equipment and the often hidden costs of engineering 
design, work planning and acquiring the necessary materials. These 
costs also include the time and work needed to take down the old 
structures and comply with environmental requirements. The materials 
cost alone is about $3,500 for each structure.
    When you multiply the costs across Western's entire system, the 
amount is quite substantial.
    The equipment in our substations is also aging. Next year, we'll 
have 216 transformers and 183 circuit breakers that will have been in 
service for more than 40 years. Circuit breakers have an average 
service life of 30 to 35 years. The useful life of a transformer is 45 
to 50 years. Like all responsible utilities, Western monitors its 
electrical equipment and attempts to obtain the greatest useful life 
from each component as a matter of sound fiscal policy and good 
business practice. Keeping each older piece of equipment in service 
must be weighed against any increased risk to reliability and 
liability.
    Many of our partner utilities have minimized capital outlays in the 
past decade for transmission facilities in the face of uncertainty 
about who will pay for system additions and upgrades. As a result, 
transmission improvements, generation additions and maintenance and 
rehabilitation programs have often been deferred. At the same time, 
load growth, deregulation and restructuring, transmission open access 
and merchant plant interconnections are placing unprecedented demands 
on the interconnected power grid.
    Systemwide disturbances in 1994 and 1996, energy shortages and 
price spikes in the Midwest last summer and the roller coaster ride 
that's going on in California have focused attention on the reliability 
of the nation's power grid and its ability to meet an ever growing 
instantaneous demand for high-quality, reliable electric service.
    Clearly, the system is more integrated and being operated much 
closer to the margin than in the past, and its components are more 
sensitive to disruptions. Minor outages that would have been a local 
inconvenience a few years ago now have the potential to take down an 
entire regional system.
    Western's construction, rehabilitation and maintenance programs 
have generally kept pace with system needs for repairs, replacements 
and upgrades. Interconnection projects with numerous proposed merchant 
plants have pulled resources away from work on our own system the past 
couple of years. This trend will continue in the near future. Given the 
time frames required to construct new or upgraded facilities, Western 
expects stresses on the existing transmission grid will increase before 
any relief is evident. The possibility of both planned disturbances 
(sometimes called rolling blackouts) and unplanned outages will remain 
high in the near future.
    We at Western must maintain our excellent record of power system 
reliability. Today, as a WSCC member, we face sanctions and fines if a 
system disturbance is traced to poor maintenance practices or not 
replacing outdated equipment as required by reliability criteria. We 
expect the voluntary reliability systems that operate across the rest 
of the nation will soon be contractually or legislatively required as 
recommended in the National Energy Policy.
    Compounding these funding pressures in the Upper Great Plains 
region is our requirement to meet network load requirements on the 
Integrated System that we jointly own and operate with Basin Electric 
Power Cooperative and Heartland Consumers Power District. Under a 1998 
agreement, we and others transmit power across facilities owned by the 
three entities using a single transmission rate.
    Requests to interconnect with this system are forcing us to replace 
aging system components that cannot continue to withstand the strains 
now being placed upon them much longer. Our Congressional mandate to 
sell power at the lowest possible cost consistent with sound business 
principles, along with extensive customer involvement in developing our 
power rates and our construction, rehabilitation and maintenance work 
plans serves to cap the amount of work we can accomplish each year. 
Regardless, the need to continue addressing our aging inventory of 
equipment is unavoidable.
    We've been able to find creative ways to leverage our appropriated 
dollars with customer funding to meet our needs. Customer funding for 
these activities can offset our need for appropriated dollars. But 
their reluctance to provide more funding stems from their need to be 
competitive in the marketplace and the uncertainty over the future 
shape of the industry. Customers have no future guarantee they will 
receive the benefits of system improvements they finance today.
    We at Western look forward to continuing to work with the members 
of this committee as you seek ways to reinforce the infrastructure and 
investments in the nationwide power grid.
    Thank you for the opportunity to testify before you today.

    Senator Dorgan. Mr. Hacskaylo, thank you very much for 
being here and we will ask some questions after we hear from 
Mr. William Longenecker from FERC. Thank you for joining us.

 STATEMENT OF WILLIAM G. LONGENECKER, ENERGY INDUSTRY ANALYST, 
              OFFICE OF MARKETS, TARIFFS & RATES, 
              FEDERAL ENERGY REGULATORY COMMISSION

    Mr. Longenecker. Thank you. Mr. Chairman, members of the 
subcommittee and Mr. Pomeroy.
    Thank you for the opportunity to appear here today. I am 
pleased to offer testimony on current issues affecting the 
outlook of the Nation's electric transmission system. My 
testimony will focus on the development of regional 
transmission organizations--so-called RTOs--and how the Federal 
Energy Regulatory Commission can help on transmission 
infrastructure improvements and investments. The views 
expressed in this testimony are my own and they do not 
necessarily reflect those of the Commission or any one 
Commissioner.
    FERC addressed the issue of access to the transmission 
lines of public utilities in Order No. 888, which was issued in 
1996. Order No. 888 required all public utilities that own, 
control or operate facilities used for transmitting electric 
energy in interstate commerce to provide open access and 
nondiscriminatory transmission tariff service and to 
functionally unbundle wholesale power services.
    Since Order No. 888 was issued, wholesale electricity 
markets have become much more regional than local, encompassing 
large multistate areas. For competition to flourish and bring 
benefits to wholesale, as well as retail customers, it is 
critical that there be adequate transmission to carry 
electricity from sellers to buyers.
    The transmission grid is the essential superhighway for 
interstate electricity commerce, but it is becoming congested 
due to increased demands. Transmission constraints frequently 
prevent the use of lowest-cost generating facilities, and 
transmission expansion has not kept pace with changes in the 
electricity marketplace.
    In Order No. 2000, issued in 1999, the Commission sought to 
address several transmission impediments to competition in 
wholesale electricity markets. There are continuing 
opportunities for discriminatory treatment in access to 
transmission. There are engineering and economic inefficiencies 
in the operation of the transmission system and in managing 
congestion. Transmission reliability problems have increased. 
Pancaked transmission rates, where a separate access charge is 
assessed every time the transaction contract path crosses the 
boundary of another transmission owner, restrict the size of 
regional power markets.
    Finally, uncertainties associated with transmission 
planning and expansion processes has severely limited needed 
additions to the Nation's transmission system. We have found 
that these transmission problems could be best addressed if the 
interstate transmission grid were operated on a regional basis 
in a manner which is independent of entities that are buying or 
selling electricity.
    Accordingly, Order No. 2000 required all public utility 
transmission owners and operators to submit filings related to 
the creation of regional transmission organizations. The 
Commission has strongly encouraged public power and cooperative 
entities which constitute such an important part of the 
Nation's electric system to participate fully in RTOs.
    In addition, FERC has recognized that there must be 
adequate returns on transmission investments so as to encourage 
such investment. Order No. 2000 specifically indicated the 
Commission's receptiveness to innovative rate proposals that 
would reward those making new transmission.
    The Commission has aggressively acted to review pending RTO 
applications and announce that it favors the development of one 
RTO for the Northeast, one for the Midwest, one for the 
Southeast and one for the West.
    In conclusion, FERC is keenly aware of the importance to 
electricity markets of full and fair access to efficient and 
reliable transmission service. The Commission views the 
creation of RTOs as the single best approach to addressing, 
among other things, transmission congestion and facilitating 
expansion of the transmission grid.
    I will be pleased to answer any questions you may have.
    [The prepared statement of Mr. Longenecker follows:]
Prepared Statement of William G. Longenecker, Energy Industry Analyst, 
     Office of Markets, Tariffs & Rates, Federal Energy Regulatory 
                               Commission
                              i. overview
    Mr. Chairman and Members of the Subcommittee.
    Thank you for the opportunity to appear here today. I am pleased to 
offer testimony on current issues affecting the outlook for the 
Nation's electric transmission system. In particular, my testimony will 
focus on the development of regional transmission organizations (RTOs) 
and how the Federal Energy Regulatory Commission (FERC or the 
Commission) can help on infrastructure improvements and investments. 
The views expressed in this testimony are my own, and do not 
necessarily reflect those of the Commission or any one Commissioner.
    A competitive market is the best way to protect the public interest 
and ensure that consumers' needs are met over the long run at 
reasonable prices. For competition to flourish and bring benefits to 
wholesale as well as retail customers, it is critical that there be 
adequate transmission to carry electricity from sellers to buyers. It 
is also critical that transmission services be provided on the 
interstate grid on a fair and non-discriminatory basis.
    The transmission grid is the essential superhighway for interstate 
electricity commerce, but it is becoming congested due to increased 
demands. The use of the interstate transmission grid has grown 
dramatically, but transmission expansion has not kept pace with these 
changes in the interstate electricity marketplace. Also, wholesale 
electricity markets have become much more regional than local, 
encompassing large multi-state areas. Thus, the existing grid is being 
pushed to its operational limits, and transmission constraints 
frequently prevent the use of lowest cost generating facilities. The 
institutional structures used in the past for planning and expanding 
the grid are not currently meeting our needs.
    For a number of years, the Commission has recognized the importance 
of an efficient transmission grid, and has exercised its authority to 
make the transmission system operate efficiently.
                           ii. order no. 888
    The Commission addressed the issue of access to the transmission 
lines of public utilities in its Order No. 888, which was issued in 
1996. There, we found that unduly discriminatory and anti-competitive 
practices existed in the electric industry, and that transmission-
owning utilities had discriminated against others seeking transmission 
access. Accordingly, Order No. 888 required all public utilities that 
own, control or operate facilities used for transmitting electric 
energy in interstate commerce to provide open access non-discriminatory 
transmission tariff service and to functionally unbundle wholesale 
power services from transmission services.
                          iii. order no. 2000
    In Order No. 2000, issued in 1999, the Commission sought to address 
several remaining transmission impediments to competition in wholesale 
electricity markets. These impediments were identified as continuing 
opportunities for discriminatory treatment in access to transmission 
lines, and engineering and economic inefficiencies in the planning and 
operation of the transmission system. We identified the following 
specific problem areas that Order No. 2000 is intended to address: the 
reliability of the nation's bulk power system is being stressed in ways 
that were not experienced before; it is increasingly difficult to 
accurately compute the available transmission capacity on transmission 
facilities; existing transmission congestion management systems do not 
optimize regional congestion relief and are cumbersome, inefficient and 
disruptive to bulk power markets; the uncertainty associated with 
transmission planning and expansion have resulted in a noticeable 
decline in planned transmission investments; and pancaked transmission 
rates (where a separate access charge is assessed every time the 
transaction contract path crosses the boundary of another transmission 
owner) restrict the size of regional power markets. Order No. 2000 also 
recognizes that wholesale trading patterns have become increasingly 
regional and multi-state in character.
    Many of these transmission problems, we found, could best be 
addressed if the interstate transmission grid were operated on a 
regional basis, in a manner which is independent of entities that are 
buying or selling electricity. Utility-by-utility management of the 
interstate transmission grid is inadequate to support the efficient and 
reliable operation of the bulk power market. Accordingly, Order No. 
2000 requires all public utility transmission owners and operators to 
submit filings related to the creation of regional transmission 
organizations (RTOs). RTOs are institutions that will own and/or 
operate the transmission grid on a regional basis and that will not 
participate in the power sales business, i.e., they must be independent 
of power market participants.
    Order No. 2000 requires that RTOs address essential transmission 
functions on a regional basis. These functions include operation of the 
grid, maintenance of reliability, congestion management, planning and 
expansion, calculation of transmission capacity, parallel path flow 
management, and tariff administration. Although not all transmission 
owners are public utilities subject to the Commission's general Federal 
Power Act jurisdiction, the goal of Order No. 2000 is for all 
transmission-owning entities, including non-public utility entities 
(e.g., municipal and electric power cooperative utilities) to place 
their transmission facilities under the control of independent RTOs.
    Accordingly, in the future, the Commission will look to RTOs not 
only to ensure non-discriminatory access over the interstate grid, but 
also to manage congestion over existing regional transmission 
constraints and take the lead in regional transmission planning and 
expansion to remove or mitigate constraints over the long-term. RTOs 
must have the authority to ensure the short-term reliability of the 
regional grid and must be responsible for planning, and for directing 
or arranging, necessary transmission expansions and upgrades that will 
enable it to provide efficient and reliable transmission service. We 
expect that the RTOs will have a process for determining the most cost-
effective transmission upgrades, and that this process would take into 
consideration any technological advances in the transmission of energy 
that may be available.
         iv. commission efforts to establish rtos expeditiously
    Recognizing the critical importance of transmission issues, FERC 
established an aggressive timetable in Order No. 2000 for RTO 
implementation, and we have been acting expeditiously in response to 
the RTO filings. Since the beginning of 2001, the FERC has issued over 
20 orders on RTO filings. The Commission has also recently ordered 
mediation in an effort to create one large RTO for the Northeast U.S. 
and another for the Southeast U.S. Creation of effective RTOs has been 
and continues to be one of the top priorities of the Commission.
                      v. other commission actions
    In addition to efforts to get RTOs established, we have recognized 
that there must be adequate returns on transmission investments so as 
to encourage such investment by the private sector. Order No. 2000 
specifically recognizes the importance of transmission pricing reform, 
and indicates the Commission's receptiveness to innovative rate 
proposals that would reward those making new transmission investments.
    FERC also believes that so-called ``merchant'' transmission 
projects sponsored by entities other than traditional utilities can 
play a role in expanding competitive generation alternatives for 
customers, and it has taken initial action on two merchant high voltage 
direct current transmission line projects: the Neptune Regional 
Transmission System, LLC project consisting of several thousand miles 
of undersea cable which will connect capacity rich regions in Maine, 
New Brunswick and Nova Scotia with capacity constrained markets in 
Boston, New York City, Long Island and Connecticut; and the 
TransEnergie U.S. Ltd. 26-mile undersea cable project from Connecticut 
to Long Island, New York.
    In evaluating these proposals, the Commission has established 
criteria to use to determine whether merchant transmission line 
projects should qualify for negotiated or bid transmission rates: the 
merchant project should assume full market risk; the merchant project 
should create tradable transmission rights; the merchant project should 
not preclude access to essential facilities by competitors; the 
merchant project should be subject to market monitoring for market 
power abuse; the physical energy flows on the merchant project should 
be coordinated with, and subject to, reliability requirements of the 
relevant RTO; and the merchant project should not impair pre-existing 
property rights to use the transmission grids or inter-connected RTOs 
or utilities.
    Another related area where we have acted to increase efficiencies 
involves interconnection of generating facilities with the transmission 
system. In recent orders the Commission has stated its intent to 
evaluate in the near future the importance of standardizing 
interconnection policies and procedures. FERC has already taken some 
steps in this direction by encouraging utilities to file their 
interconnection rules. Standardizing interconnection rules and 
procedures may help minimize cost and barriers to entry for new 
generation.
  vi. limitations on the commission's ability to resolve transmission 
                                 issues
    FERC is statutorily unable to directly and completely address all 
transmission problems. A significant portion of the nation's 
transmission grid is owned and operated by utilities not subject to 
FERC's open access requirements. For example, the Commission has 
limited authority with respect to transmission facilities owned by the 
Federal government, state and municipal governments, and rural electric 
cooperatives or within the Electric Reliability Council of Texas 
(ERCOT). Public power entities control about 30% of the nation's 
electricity transmission grid. We have encouraged public power and 
cooperative entities, which constitute such an important part of the 
Nation's electric system, to participate fully in RTOs. In Order No. 
2000, the Commission stated that a properly formed RTO should include 
all transmission owners in a region, including municipals, 
cooperatives, Federal power marketing agencies, Tennessee Valley 
Authority and other state and local entities. Certain tax laws impede 
public power and cooperatively-owned utilities from fully participating 
in the development of RTOs. One such example is the Internal Revenue 
Code's restrictions that may prevent transfer of operational control of 
existing transmission facilities financed by tax-exempt bonds to a for-
profit transmission company.
    FERC also has no authority over transmission siting decisions. Even 
though public utilities must offer to expand transmission facilities to 
fulfill a transmission service request, the utilities first must obtain 
siting permission from relevant state and local authorities.
vii. changes that have been proposed to improve transmission efficiency
    Although the Commission itself has not taken a position on what 
action Congress should take with respect to transmission issues, and I 
a staff member do not here make any such recommendations, I note that a 
number of measures have been proposed to improve the operation of the 
Nation's transmission system. Among these are:

   proposals to extend the Commission's open access regulatory 
        authority to all transmission facilities, including those owned 
        by municipalities, rural cooperatives, the Tennessee Valley 
        Authority, and Federal power marketing administrations;
   proposals for the Commission to have transmission siting 
        authority for transmission facilities as a backstop in limited 
        circumstances;
   proposals providing for enforcement of transmission 
        reliability rules by a self-regulatory organization subject to 
        the Federal oversight; and
   proposals for legislation to eliminate tax code and other 
        restrictions that impede public power entities from fully 
        participating in RTOs.
                            viii. conclusion
    Full and fair access to efficient and reliable transmission service 
is vitally important to competitive electricity markets. The Commission 
has been diligent in exercising its authority to promote competitive 
markets. Currently, in our view, the creation of RTOs is the best 
approach to addressing a wide range of transmission problems, including 
transmission congestion and expansion of the transmission grid, among 
other things. RTO implementation is one of the Commission's top 
priorities.

    Senator Dorgan. Mr. Longenecker, thank you very much. Let 
me ask a series of questions and then call on my colleague, 
Congressman Pomeroy.
    First of all, with respect to WAPA, my understanding is 
that the capacity doesn't exist at this point for us to move 
much additional electric energy from North Dakota. I think you 
indicated that in your testimony.
    Mr. Hacskaylo. Yes, sir. That is correct.
    Senator Dorgan. Can you give me your perspective of why we 
have not seen investment and why we have not seen substantial 
improvement in the capability in the transmission system, and 
not just in North Dakota, but nationally? If you look at the 
miles of transmission capability available, it really has not 
changed much over the last couple of decades. Why is that the 
case?
    Mr. Hacskaylo. I think the most significant reason is that 
the rules of how the electric utility industry operates are 
changing. They are in a state of flux. It used to be in the 
days of regulated monopolies, regulated utilities, that 
utilities could make an investment in transmission and the 
State commissions or FERC would guarantee the return on 
investment so there is some certainty on the fact that the 
investment would in effect pay off.
    Now in these days of deregulation, in these days of 
companies merging, in these days of merchant plants coming into 
the system, that certainty is gone. And where investors are 
looking for a relatively quick return on the investment, we are 
not finding that in transmission. I think transmission has to 
be viewed more as a long-term, steady investment, with steady 
returns. So I think the rules are changing. That is the main 
reason.
    Senator Dorgan. Under a mechanism in which you had 
regulatory authorities providing returns that were sufficient 
to justify the investment and the investor would know those 
returns would be available, we had a buildout and we had 
certain redundancy and we had guarantees of service at a 
certain price. When we go to the marketplace and the 
marketplace decides on the incentives for the buildout to 
exist, would we have at the conclusion of that a redundancy in 
the system that will give the consumers the same protection of 
continued service that exists under the regulated system?
    Mr. Hacskaylo. The economic theory underlying that premise 
says yes. The facts may be very different. The facts may be 
very different because redundancy by nature implies 
overcapacity, capacity that might not always be used, and yet 
it still has to be paid for.
    Senator Dorgan. And the marketplace would not view that 
overcapacity with great sympathy, would it?
    Mr. Hacskaylo. It is hard to say. Certainly in California, 
given the transmission problems there, I think we are beginning 
to see some recognition that there does need to be redundancy 
in the system, additional capacity to deal with reliability 
issues. But it is a hard-fought issue and the costs are 
tremendous in California of not having the reliability, not 
having the extra capacity there to deal with system 
emergencies.
    Senator Dorgan. But I am just asking, is not the extra 
capacity almost antithetical to the market system?
    Mr. Hacskaylo. It is hard to make the two fit together.
    Senator Dorgan. Maybe impossible?
    Mr. Hacskaylo. I do not know. I do not know. Again, I think 
the industry is still in a state of flux. The rules keep 
changing. Directions are still different. So I think the jury 
is still out on whether all of this is going to work.
    Senator Dorgan. Let me ask you your view of technology. I 
talked about composite conductor technology this morning. How 
do you view technology as being able to address some of these 
transmission issues, especially in our region, especially in 
North Dakota? Are you high on technology producing substantial 
progress here, or do you think we are going to have to make 
progress the old-fashioned way, put more lines and more towers 
and worry less about increased technology?
    Mr. Hacskaylo. The new technology has very much a role to 
play in the industry, and certainly within Western's system. We 
have already made use of AC to DC to AC converter stations in 
Miles City and in Sidney and Nebraska. We've made use of 
flexible thyristor series compensation devices at various 
substations that we have in the West. The technology helps 
reduce losses on the system. It helps improve efficiencies on 
the system. So there is definitely a role for cost-effective 
technology to take its place as we rebuild transmission lines, 
as we upgrade our system.
    Senator Dorgan. Mr. Longenecker, FERC is going through some 
rather interesting times. Would you agree with that?
    Mr. Longenecker. Yes, sir.
    Senator Dorgan. Especially given what is going on in 
California and, of course, it has been the subject of great 
controversy and its actions or lack of actions have the subject 
of great controversy in Washington, D.C., recently.
    You describe in your testimony pretty much what we hear 
from most members of FERC, and that is that as our country has 
changed, the mechanism by which we develop and transmit 
electrical energy has to change, as well. Most of our structure 
was built for an intrastate-regulated system, and now we are 
trying to create a circumstance where we have effectively a 
transmission highway to be able to move energy back and forth 
across the entire country through RTOs. It is an entirely 
different approach, is it not?
    Mr. Longenecker. Yes, it is.
    Senator Dorgan. And can you tell me, how does FERC see our 
movement to the RTOs and the upgrade of the capability and the 
capacity? How do you see that happening? Can you describe the 
Federal involvement, State involvement, how that relates to the 
competitive market system? We are not only changing from a 
regulated environment to an unregulated environment in some 
cases. We are also changing from an intrastate to essentially a 
regional and national system. Tell me FERC's impression of 
different levels of government's responsibility here.
    Mr. Longenecker. Well, I think we see RTOs as taking the 
lead in assessing transmission needs within a region that are 
necessary to meet the evolving electricity market needs such as 
generation services. We see the RTO working with the States to 
decide how to best meet those transmission needs with the 
technology that might be the most economical solution to fixing 
appropriate in constrained areas, for example, and whether or 
not transmission is the answer. It may be that a generating 
station would be the better solution. We also see RTOs taking 
the lead in terms of seeking siting approvals, and so forth, 
for whatever projects that the RTO through a collaborative 
process, has decided best fit the needs at a particular time in 
a particular power market.
    Senator Dorgan. Congressman Pomeroy.
    Mr. Pomeroy. Thank you both for very interesting testimony.
    Mr. Hacskaylo, did you in indicating the projects WAPA was 
participating in reflect that basically WAPA transmission 
facilities are being used to carry privately generated power?
    Mr. Hacskaylo. Yes, sir.
    Mr. Pomeroy. How long has that been going on?
    Mr. Hacskaylo. It has been going on for as long as there 
has been a Western Area Power Administration. What we do is use 
our transmission system to move power from generation to load 
to our preference customers, and then with the additional 
capacity in the system we make that available to others to gain 
revenue to help repay the cost of the Federal investment.
    Mr. Pomeroy. The whole Power Administration concept is the 
Federal Government builds facilities and recoups costs from 
power generated over a period of time?
    Mr. Hacskaylo. Yes, sir. That is correct.
    Mr. Pomeroy. It also addresses neatly some of the 
investment issues you speak to?
    Mr. Hacskaylo. I think so.
    Mr. Pomeroy. Might that be a model then for Congress to 
look at as we would further invest Federal dollars in expanding 
carrying capacity on existing WAPA lines or other Power 
Administration facilities that could then be cost out over time 
carrying the power generated by others?
    Mr. Hacskaylo. That certainly is one option to be 
considered, yes, sir.
    Mr. Pomeroy. Mr. Longenecker, how long have these RTOs been 
an essential part of load management coordination?
    Mr. Longenecker. Well, the RTOs are in the process of 
forming, and in many parts of the country RTOs are an extension 
of the existing independent system operator that has already 
been in place for a number of years as a consequence of our 
Order No. 888 having been issued. In fact, many of the ISOs in 
the Northeast have proposed to transform themselves into an 
RTO.
    Mr. Pomeroy. You have two sentences in your statement--
excuse me for interrupting--that get to the point you were 
making, I think.
    On page 3 of your testimony you state, ``existing 
transmission congestion management systems do not optimize 
regional congestion relief and are cumbersome, inefficient and 
disruptive to bulk power markets; the uncertainty associated 
with transmission planning and expansion have resulted in a 
noticeable decline in planned transmission investments.''
    So we have a bad system, it is not working very well, we 
have got very little investment in terms of building a new and 
better system and the hope is RTOs. Now, what leaves me a 
little anxious about that is RTOs are quite new. I am concerned 
about whether they have within the RTO the governing capacity 
to really make it work to optimal efficiency, and, secondly, 
whether because they are inherently regional, as their very 
name implies, whether these regionals can hook up in a clear 
national system, and FERC is obviously betting the ranch on 
these RTOs at the present time. Would you please tell me just 
briefly how this is going to work?
    Mr. Longenecker. Well, we first determined in Order 2000 
that utility-by-utility management of each transmission grid 
does not work.
    Mr. Pomeroy. Right.
    Mr. Longenecker. We have had some ISOs--independent system 
operators--formed in various parts of the country, but even 
those, though they are larger and are serving subregions of 
electricity markets, they are not serving the entire 
marketplace, the electricity marketplace that has developed, 
for example, in the Northeast, and so we have a replication of 
the problem we had with individual utilities managing small 
transmission grids. We have a little bit bigger organizations, 
ISOs, managing bigger transmission grids, but it is not----
    Mr. Pomeroy. It is not the entire coordination?
    Mr. Longenecker. It is not the full coordination. They have 
differing approaches to congestion management in these 
subregions. They have not agreed on how to deal with a single 
market transaction that might cross their seams, the borders of 
the individual independent system operators.
    Mr. Pomeroy. My question is, will RTOs need to assume----
    Mr. Longenecker. We are looking for RTOs to be large enough 
to deal with the evolving electricity marketplace, the 
wholesale markets that are growing because of the interest in 
nontraditional utilities becoming involved with the selling of 
power.
    Mr. Pomeroy. And will FERC then provide the national 
overlay coordinating the RTOs?
    Mr. Longenecker. Well, under Order 2000 we require the RTOs 
to work with their neighbors to facilitate trade and work on 
common business practices, and so forth.
    Mr. Pomeroy. I am not convinced the good neighbor policy is 
enough to get an optimal national framework for building the 
next century's energy grid, but it remains to be seen. We look 
forward to continued dialogue with you on that.
    Thank you, Mr. Chairman.
    Senator Dorgan. Mr. Hacskaylo, you made a comment about, in 
some cases, minor problems could shut down a regional system at 
the present time because of a lack of transmission capacity. 
Can you expand on that?
    Mr. Hacskaylo. A good example is what is called the path 15 
bottleneck in central California. Due to system constraints as 
far away as Idaho, and, remember, we are dealing with an 
interconnected transmission system here, interstate. As a 
result of some system conditions in Idaho, for example, the 
flow of power from northern California to southern California 
can drop from approximately 3,500 megawatts down to 900 
megawatts at certain times of the year. That can cause rolling 
blackouts. It did so in northern California. It can cause 
system disturbances in severe cases such as we saw in 1996 
coming out of the Northwest. A relatively small problem can 
cause the entire Western interconnected system to break up for 
a short period of time before the system operator can restore 
it. So that is what all the utilities focus on, is the 
reliability of the interconnected system, as well as their own 
systems, to prevent that from happening. Where we see problems 
like this based on studies, we try to work together to solve 
them, to get the transmission upgrades in place to relieve 
congestion.
    Senator Dorgan. Mr. Longenecker, tell me what FERC's 
position is on some sort of mandatory FERC jurisdiction over 
the RTOs. What kind of jurisdiction?
    Mr. Longenecker. RTOs would be public utilities, and, 
hence, they would be subject to our jurisdiction. I am not sure 
if your question is going to public participation in RTOs. We 
certainly are encouraging public power bodies and cooperative 
systems to become full participants in the RTOs.
    Senator Dorgan. The reason I ask the question is, as you 
know, in the development of the RTOs, the creation of the RTOs, 
there is a healthy discussion going on about pricing plans and 
the mechanisms by which you price transmission and we have the 
license plate versus the postage stamp proposals, and the 
distinction between the two can have a profound impact on 
certain regions of the country. And I assume that under some 
circumstances if the pricing scheme is a scheme that is not 
satisfactory, you will have difficulty bringing some into the 
RTO organizations. Do you agree with that?
    Mr. Longenecker. I think FERC is very keenly interested in 
encouraging participation by all transmission owners, and an 
important factor that we realize in that regard is that each 
participant feel that it is being fully compensated for its 
contribution to a larger RTO effort. What has happened is that 
many of the RTOs that have developed so far, they are proposing 
the zonal rate approach as a transition mechanism to bring some 
certainty to each of the participants that they are going to be 
recovering their contribution to the system, the larger system.
    Senator Dorgan. What is the progress of the development of 
RTOs at this point?
    Mr. Longenecker. The Commission has actually issued about 
20 or so orders since this past January in regard to various 
RTO proposals. The RTO West effort is very much active in 
trying to form something larger than the Pacific Northwest area 
where it started. It is working towards the formation of a 
larger westwide RTO. The Northeast ISOs--independent system 
operators--are in the process of a mediation conference right 
now ordered by our Commission to look into the possibility of 
forming a larger RTO for the Northeast. The same thing is 
happening in the Southeast. And very recently the Midwestern 
independent system operator and the Alliance RTO reached a 
settlement to form a super region which would basically run, I 
think, from the Dakotas all the way to Virginia, a super region 
where there would be no pancaked rate in place. It would be a 
systemwide rate to facilitate trade over a large region of the 
country from middle America to Virginia.
    Senator Dorgan. Mr. Hacskaylo, WAPA, of course, is a very 
important element of our energy picture here in North Dakota 
and our region. I was reading in some testimony that we 
essentially do not have additional capacity at this point to 
unlock opportunities for additional production of electric 
energy and transmission of that energy from North Dakota. Is 
that the case? Do you agree with that?
    Mr. Hacskaylo. It is accurate. The system here is 
constrained, yes, sir.
    Senator Dorgan. And the solution to that, of course, is to 
find ways either through technology or through new transmission 
lines and the development of those lines connecting into RTOs 
and being able to be part of a regional and national grid, that 
allows us to access a whole series of new energy sources and 
new energy production in North Dakota. Do you agree with that?
    Mr. Hacskaylo. Yes, sir.
    Senator Dorgan. And in order to do that, there are some 
significant controversies on building transmission corridors. I 
mean, that is not without some controversy. There is some 
controversies dealing with the RTO issues. I mentioned a 
couple. We will have some testimony about them in a while from 
others about pricing. There are some people who think that, as 
you indicate in your testimony, this is all ``theory,'' putting 
together a system in which the market sends signals to replace 
a system that has largely been a regulated system that has 
tried to have over the years some redundant supply. I got when 
you testified some skepticism, maybe I read that wrong, but 
give me your assessment. Is this going to fit? Are we moving in 
the right direction? Are there points that we have to be very 
concerned about as we try to put this together in a new energy 
policy, and, if so, what are they?
    Mr. Hacskaylo. I think we are moving in the right 
direction. As I indicated, we do have an industry that is in 
flux, the rules keep changing. We have new direction from FERC 
and from others on ways to go. But I think that a judicious 
blend of the market dictating here is a good place to put 
generation, whatever type, wind power, coal, whatever, because 
it can be sold to this load center, we, the developers, whoever 
they might be, can make money on it, and we need this 
transmission and here is how we work the transmission. This can 
work, but it is going to take time. It is not going to happen 
overnight.
    Senator Dorgan. Let me raise one additional point finally, 
and that is, notwithstanding transmission or just transmission 
issues, some of us would observe that in a State like North 
Dakota where we have been blessed with relatively low-cost 
power for a long period of time and have been well satisfied 
with that, that there are others in the country that want 
access to that power, and if they achieve that access, our 
power will be replaced by higher-cost power. So what we are 
talking about being able to transmit our energy, if you have a 
so-called truly competitive system, those who have been pushing 
most for restructuring, which are the largest manufacturing 
companies in the country, the automobile industry and others, 
would like to access cheaper power, where is that going to come 
from and how is it going to be replaced? Some would say more 
production, for example.
    But, you know, I must say that I worry a bit about 
restructuring and its ultimate goal of making power available 
to be moved at a moment's notice and leaving a State like North 
Dakota, which is a very heavy user of power and has a 
significant need for the low-cost power that it has enjoyed for 
a long while. We don't want to be in a situation where North 
Dakota is left with a circumstance where that power is replaced 
by higher-cost power simply because we have a national system.
    Congressman Pomeroy, do you have other questions?
    Mr. Pomeroy. We did not build the interstate highway system 
based on the reaction of local investing interest. It is a 
national system to serve national transportation needs. I 
really agree when it comes to transmission, it is the critical 
backbone for the Nation's energy delivery system, it needs to 
be national, it needs to be coordinated, it needs to be fair to 
remotely populated areas that produce the power, as well as 
serve to maximum advantage the urban areas.
    That is why, Mr. Chairman, I think this panel has been an 
excellent panel, has shown that I am not sure, left to its own 
devices, we are at all on the road we need to be on to get this 
transmission system into shape for the 21st century. Thank you.
    Senator Dorgan. Mr. Hacskaylo and Mr. Longenecker, thank 
you very much for being with us today, and we will make your 
entire statement a part of the record.
    Mr. Longenecker. Thank you, sir.
    Senator Dorgan. I would like next to call on Ted Humann, 
senior vice president of transmission of Basin Electric Power; 
Dave Sparby with Xcel Energy; and Elizabeth Moler, senior vice 
president, government affairs, Exelon Corporation.
    While they are coming up, let me ask that we make a part of 
the record by consent testimony submitted by Otter Tail Power.
    [The information referred to follows:]

                                  Otter Tail Power Company,
                                                    August 7, 2001.
Hon. Byron Dorgan,
220 E. Rosser Ave., Room 312, Bismarck, ND.
    Dear Sen. Dorgan: It's my understand you are convening a panel in 
Bismarck today for the purpose of discussing ``Issues associated with 
Transmission Expansion'' in North Dakota.
    As you may be aware, Otter Tail Power Company has served electric 
customers in North Dakota for some ninety years now, and in this 
continuing capacity, I believe we have a significant stake in 
discussions related to transmission expansion. Our company currently 
operates some 2,700 miles of transmission lines in North Dakota, and we 
serve power to 249 North Dakota communities with these lines. It's my 
belief that these facts should have earned us a seat at the table for 
today's discussions.
    It may have been your impression that our views are represented by 
the North Dakota Lignite Energy Council on this issue. While we are 
members in good standing of the LEC, it should be noted that areas of 
common interest and purpose are generally limited to the extraction and 
sale of lignite coal in North Dakota. The electric transmission 
business, on the other hand, represents a very distinct dimension of 
the utility business. Issues relating to regional transmission are more 
appropriately handled through MAPP and, in the future, will be handled 
through the MISO.
            Very Sincerely,
                                           John MacFarlane,
                                Chairman & Chief Executive Officer.
                 Statement of Otter Tail Power Company
                              introduction
    Otter Tail Power Company would like to thank Senator Dorgan for the 
opportunity to provide testimony today on the topic of ``Issues 
associated with Transmission Expansion.'' This topic is very timely and 
Otter Tail Power Company looks forward to assisting in developing 
policy on this issue in the future. Our comments will focus on what 
Otter Tail Power Company believes are the primary issues related to 
electric transmission in our region, together with what we believe are 
some potential solutions to challenges faced by the transmission grid.
                               background
    Otter Tail Power Company is an investor-owned utility based in 
Fergus Falls, Minnesota, serving approximately 135,000 customers in 
North Dakota, Minnesota and South Dakota. Otter Tail Power own 5,300 
miles of transmission lines in those three states, of which 
approximately 2,700 miles are located in North Dakota. In North Dakota, 
we serve power to 249 communities; only three of these communities have 
populations over 3,000. In 1999, Otter Tail Power's residential 
electric rates were 24% less than the national average cost for 
electricity.
               challenges facing the transmission system
    Since the passage of the 1992 Energy Policy Act, the electric 
utility industry has been in a constant state of transition. Twenty-
five states have disaggregated the electric generation business from 
the electric delivery business, leaving a confusing hodge-podge of 
deregulation experiments. Changes in the electric transmission 
business, on the other hand, have been driven from the federal level by 
the FERC. But while central coordination of change in the transmission 
sector has created at least some degree of uniformity across the 
country, many issues are still unresolved and an environment of 
uncertainty has resulted. This uncertainty has further slowed the 
development and expansion of the transmission system, exacerbating a 
trend that dates back to the late 1970's. A recent study indicates that 
transmission investment throughout the United States has been declining 
for the last twenty years and, in 1999, was roughly half of what it was 
in 1979. Like most other areas of the country, North Dakota, South 
Dakota and Minnesota are living today on yesterday's invested 
transmission capital.
    Running parallel to this transmission deficit trend is an ever 
growing electric demand on the transmission system. By order of the 
FERC, wholesale power transactions are now an efficient means of 
bringing buyers and sellers together in the wholesale market. But these 
transactions are causing the regional grid to be used in ways that 
neither its designers nor the regulators intended or envisioned. In 
addition to serving as a local conduit to carry electricity from power 
plants to customers, the grid is now being relied on to do much more, 
including:

   Act as regional highways linking generators in one state to 
        customers in another;
   Maintain reliability of an entire interconnected system;
   Provide flexibility over a wide range of generation, 
        transmission and load conditions;
   Facilitate an ever increasing number of economic exchanges 
        among market participants who are moving electricity over ever 
        increasing distances.

    In summary, the regional transmission grid is being stretched to 
its limits. These limitations have resulted in limits to the expansion 
of the generation system. This is a particular problem for North 
Dakota, where we have abundant supplies of coal and almost unlimited 
potential for wind generation.
    In addition to preventing generation expansion, transmission 
``gridlock'' holds the potential for serious reliability problems in 
our future. We are at a critical juncture where transmission expansion 
must occur. Significant transmission reliability problems were 
identified in eastern North Dakota last winter, e.g. and these were 
only resolved through the cooperative efforts of GRE, Minnkota Power, 
Xcel Energy, MDU, Manitoba Hydro and Otter Tail Power Company. Repeated 
circumstances of this nature are not a desirable approach to dealing 
with transmission challenges in the future, however. North Dakota 
already has nearly twice as much generation as we require for our own 
use, and we need to pay attention to our export channels if we want to 
remain a significant seller of electricity--much less a bigger player 
in new markets. Increasing our market share of power sales in other 
states requires a remedy for the problem of inadequate transmission 
capacity. We need the help of the Congress and we need the help of the 
FERC in this regard.
    To better understand the barriers to transmission expansion, one 
must first understand the regional nature of the transmission system. 
Transmission systems and electrons do not recognize state boundaries. 
Rather, they are governed by the laws of physics. This is why it's a 
challenge to explain to citizens and politicians alike that a 
transmission line in one state can have a significant impact on 
customers in another state, and that thinking in terms of state 
boundaries is counter-productive.
    The regional nature of the transmission system has increased the 
difficulty of doing multi-state transmission expansions. While some 
states like North Dakota have very workable siting laws, other states' 
laws are more stringent and, in some cases, impossible. For a project 
that crosses state boundaries, one state may take a year to approve the 
project, while the other state may take seven years; or, the other 
state may choose to ignore the project altogether. This state-by-state 
approach makes it difficult, if not impossible, for utility companies 
to make necessary additions to the transmission system.
    A final barrier to transmission system expansions is the 
uncertainty that results from disparate methods of transmission 
pricing. In many cases, it is unclear who is going to pay for 
transmission system expansion costs. Because of this uncertainty, it is 
difficult for companies to commit to large capital investments. A 
common methodology needs to be established for ``who is going to pay 
the freight''.
    To all of the challenges above, add the potential for negative 
publicity that new electric transmission projects generally receive, 
and it's not difficult to understand why utility companies choose to 
exhaust all other options before going through the hassles of trying to 
get a new transmission project approved and constructed.
                      solutions to the challenges
    The top priority for developing solutions to the challenges cited 
above is for the Congress to give the FERC authority to mandate 
participation in Regional Transmission Organizations (RTO's). This will 
facilitate the resolution of most of the other transmission issues, 
including the development of regional tariffs that provide greater 
certainty with respect to transmission pricing and cost recovery. At 
present, participation in RTO's by transmission owners is voluntary. 
Mandatory, common membership in RTO's will provide the best vehicle for 
development of common rules and transmission tariffs among owners of 
transmission facilities.
    Regional transmission tariffs are very important for North Dakota, 
as well as they are for all of the transmission-owning utilities 
serving North Dakota. Certain methods of tariff pricing could result in 
significant cost shifts from urban areas to rural areas and this would 
be detrimental to our rural economy. Owners of both urban and rural 
transmission systems will do their best to protect their interests, but 
in the end, all transmission system stakeholders need to be willing to 
come to the table and compromise to establish tariffs that benefit 
everyone. In return, both regulators and the public must be willing to 
accept compromises that may result in increased costs in the short run, 
but hold the promise of improved reliability and cost savings in the 
long run. Again, the best vehicle for accomplishing all of the above is 
the Regional Transmission Organizations that are being formed with the 
FERC's encouragement today.
    A final mandate for Congress: Give FERC the authority to establish 
``need'' for interstate transmission system additions. States should 
retain the right to determine appropriate routes for new transmission 
lines, accounting for environmental concerns, etc. But the ``need'' for 
new transmission lines should not be considered on a state-by-state 
basis. Rather, it should be planned on a regional basis by the RTO's, 
with an eye toward achieving the greatest common good.
        the private sector seeks an equal opportunity to expand
    Otter Tail Power Company is very interested in being a part of 
North Dakota's transmission future. In fact, we are currently a partner 
in a transmission project with Xcel Energy and Manitoba Hydro that 
involves the construction of 160 miles of 230 kilovolt transmission 
line from Central North Dakota to central Manitoba. This is the largest 
transmission expansion in North Dakota since the mid-1980's. Together 
with our partners and the North Dakota Public Service Commission, we 
have demonstrated what it takes to move a transmission project forward 
successfully.
    For any transmission project proposed by the RTO, all transmission 
providers should have the opportunity to bid on ownership and 
construction of that project. Entities that can construct, own and 
maintain the new transmission line most efficiently while still meeting 
recognized standards of performance, should be awarded the right to do 
so. Competition of this sort among transmission providers would be 
healthy for consumers, and it would be beneficial for all of North 
Dakota.
    Otter Tail Power Company would like to thank Senator Dorgan and his 
staff for the opportunity to present this testimony. We look forward to 
working with the Senator as we build our energy future together.

                                   Loren Laugtug,
                                           Director, Legislative and 
                                               Regulatory Affairs.

                                   Tim Rogelstad,
                                           Manager, Transmission 
                                               Planning.

    Senator Dorgan. Thank you for being with us. Why don't we 
begin with Elizabeth Moler. Elizabeth, thank you very much for 
being here.

  STATEMENT OF ELIZABETH A. MOLER, SENIOR VICE PRESIDENT FOR 
       GOVERNMENT AFFAIRS AND POLICY, EXELON CORPORATION

    Ms. Moler. Thank you very much, Mr. Chairman and 
Congressman Pomeroy. I appreciate the invitation to join you in 
Bismarck today. I have not been in Bismarck in a long time. I 
was overdue.
    My name is Elizabeth Moler. My friends call me Betsy. I am 
the senior vice president for government affairs and policy of 
Exelon Corporation. Exelon Corporation is headquartered in 
Chicago, Illinois. Through our subsidiaries ComEd and PECO 
Energy we serve over five million customers principally in 
Chicago and Philadelphia areas, so we have generator 
installations in over 20 States.
    Prior to joining Exelon, I served as the Deputy Secretary 
of the U.S. Department of Energy and as a member and the Chair 
of the Federal Energy Regulatory Commission from 1988 to 1997. 
Before that I served as senior counsel to this committee.
    Your letter of invitation asked me to focus today on 
transmission issues. I am pleased to do so.
    Our transmission capacity, as the previous witnesses and as 
you, Mr. Chairman, have observed, has not expanded to keep pace 
with demand. The current situation is comparable to a country 
road carrying the traffic on an interstate highway. The 
transmission system is facing significant increases in 
congestion. Between 1999 and 2000, in one year, transmission 
congestion grew by more than 200 percent. And in the first 
quarter of this year transmission congestion was already three 
times the level experienced during the same period in 2000. The 
constraints that you see depicted on these maps, Mr. Chairman, 
are replicated many times all over the country.
    Annual investment in transmission is simply not enough to 
ensure that we have a reliable grid, and we will not make the 
needed investment through private enterprise or through 
government companies unless Congress modernizes the regulatory 
regime governing our transmission grid.
    My testimony today provides a policy prescription to cure 
the problems in our Nation's transmission infrastructure. I 
should add that most of these issues, Mr. Chairman, and the 
solutions are addressed in Chairman Bingaman's July 20 White 
Paper. We endorse his proposal wholeheartedly with only two 
minor tweaks.
    Can you imagine what it would be like to have different 
rules apply to individual cars using the same interstate 
highway? Chaos would reign. But that is the circumstance today 
along our interstate transmission grid. No wonder it does not 
work very well. In order to have the transmission grid function 
more efficiently, we simply must have all traffic subject to 
the same rules of the road.
    As Mr. Longenecker testified, the current rules of the road 
were written in Order No. 888 issued in 1996 while I was Chair 
of the Federal Energy Regulatory Commission. It directed all 
utilities subject to FERC's jurisdiction, an important caveat, 
to provide other users with access to transmission facilities.
    Order 888, however, applies directly only to those who are 
subject to the FERC's jurisdiction under the Federal Power Act. 
Thus, the open access regime looks like a piece of Swiss 
cheese. The holes in the cheese are those transmission 
facilities that are not subject to the Federal jurisdiction. 
They include high-voltage lines owned by cooperative utilities, 
publicly owned utilities, and federally owned utilities for a 
total of 27 percent of our Nation's transmission lines. In 
certain parts of the country, like the West, there are really 
more holes than there are cheese.
    In order for the transmission system to work more 
efficiently, all transmission-owning entities should be subject 
to the Federal Energy Regulatory Commission's jurisdiction.
    An equally confused regime applies when determining which 
regulatory authority has jurisdiction over a particular 
transmission line. The same set of high-voltage transmission 
lines is used to serve both wholesale and retail customers. 
Yet, in some circumstances the State regulatory authorities 
have jurisdiction over those live wires. In other circumstances 
the local co-op has jurisdiction over those wires, or the local 
municipal utility has jurisdiction over those wires. In still 
others FERC has jurisdiction.
    The who is in charge here question is not one that is 
easily answered. We have a crazy-quilt system of regulation 
over the Nation's transmission grid. It is subject to 
discrimination and abuse. Congress clearly has the authority, 
and I would assert the duty, to establish one traffic cop for 
these highways.
    The only practical solution that I know of given the use of 
the transmission line is to put all transmission under FERC's 
jurisdiction, whether the wires are used for wholesale 
transactions, whether they are used to serve bundled or 
unbundled retail load, and whether they are owned by municipal 
utilities or a cooperative.
    With respect to transmission siting, Exelon supports 
granting FERC a backstop role to site new transmission lines 
when States are unwilling or unable to act on new transmission 
line applications. Such an approach would give States the first 
opportunity to act on transmission siting applications.
    It made sense in 1935 when the Federal Power Act was 
enacted to leave transmission siting with the States since 
transmission lines were generally local in nature. Now, 
however, our transmission system is being asked to move large 
amounts of electricity across long distances and across State 
lines.
    The problems are not theoretical. They are real. AEP, for 
example, in Ohio has been trying to site a facility across 
Virginia for 10 years. They got the permit from the Virginia 
commission last month. However, they still do not have their 
permits from the Federal agencies. They are now talking to the 
Forest Service. Regulators in Idaho have been reluctant to 
build new capacity to serve California. Regulators in 
Connecticut recently refused to site a line across Connecticut 
because, heaven forbid, it helped serve people in New York. The 
problems are real.
    FERC-mandated regional transmission organizations are being 
established across the country. These RTOs will have 
responsibility to plan how the transmission grid should be 
upgraded and where new lines are necessary. If State regulatory 
authorities are unwilling or unable, and under some States' 
statutes they are unable, to take into account the benefit in 
another State, Federal regulators should examine the need for 
the facilities and issue the required permits.
    There has been a lot of loose rhetoric about the fact that 
this would mean FERC would have authority to take private 
property. That simply is not true. Eminent domain authority 
would rest with the holder of the certificate. If necessary, 
they could go to court to exercise the eminent domain 
authority. This model exists for natural gas pipelines today. 
It works. It should be applied to the electric transmission 
grid.
    Let me now turn to Federal tax issues. We also believe that 
the Internal Revenue Code should be amended to allow the tax-
free restructuring of transmission ownership and to allow 
municipal and cooperative utilities to participate in 
competitive wholesale and retail markets without imperiling 
their existing tax and financial status.
    FERC Order 2000 issued last year has already been 
mentioned. It requires utilities to form regional transmission 
organizations.
    I am in charge of Exelon's RTO formation efforts for both 
ComEd and PECO. RTOs will be these large-scale organizations. 
However, being in an RTO means that we will have to give up 
control over transmission lines to this independent third party 
who is going to be charged with running the RTO. Once that 
happens, the transmission lines will no longer have any 
strategic value to us as a company. We would sell our 
transmission system. ComEd, for example, is on record as saying 
we would be willing to sell our transmission system to the RTO, 
thus, furthering FERC's pro competition policies, if it did not 
mean we would have to pay a tremendous tax bill upon the sale 
of that transmission asset.
    Exelon endorses legislation that would enable a utility to 
sell its transmission assets to the RTO, or to an independent 
transmission company under the purview of an RTO, without 
having to pay taxes on the gain realized by the asset transfer. 
We would, however, of course, be willing to reinvest the gain 
in infrastructure to serve our customers within a specified 
period of time.
    If this legislation were enacted, it would encourage 
utilities to transfer the ownership of their transmission 
systems to RTOs. The RTOs, in turn, would be able to obtain the 
critical mass of assets under their ownership that would enable 
them to operate more efficiently, and this further would 
encourage the RTOs, the new owners, to invest in transmission 
infrastructure.
    When Congress restructured the telecommunications industry, 
it provided a similar mechanism for telecommunications asset 
divestitures. It should do so again in this instance.
    I would note that the transmission tax provisions were 
included in H.R. 4 passed by the House of Representatives last 
week, and I would further note that this was not one of the 
controversial areas of the bill.
    Let me talk now about innovative pricing for transmission 
assets.
    Current returns on transmission are simply too low to 
attract the huge amounts of capital necessary to fund 
investments in transmission expansion. A comprehensive national 
policy should include direction to FERC to provide innovative 
transmission rates for transmission owners, not just to owners 
who have made the transmission improvements and not just to RTO 
operators, which is the current FERC policy today.
    There are two additional statutes on the books, the Public 
Utility Holding Company Act and the Public Utility Regulatory 
Policies Act, which have outlived their usefulness and are a 
barrier to competition.
    Last, but by no means least, Congress should give FERC 
specific statutory authority over the reliability of the 
interstate transmission grid. The organization now charged with 
the responsibility for reliability issues, the North American 
Electric Reliability Council, does not have the necessary tools 
to do its job. In particular, it needs significantly enhanced 
authority to make its rules mandatory for all segments of the 
industry.
    Mr. Chairman and Congressman Pomeroy, I have given you a 
rather comprehensive listing of the transmission issues that 
need to be addressed by the Congress. Given the absolutely 
vital importance that transmission plays in our Nation's 
economy, you should be commended for focusing on this vitally 
important subject. It is certainly an arcane area, but it is 
vitally important.
    I have spent the last decade of my professional life 
focused on transmission issues, strange but true. The needs of 
the Nation's electricity superhighway cannot be ignored. 
Transmission should not be allowed to become the weakest link 
in our industry because we cannot tell it good-bye.
    I would be pleased to answer any questions you may have. 
Thank you.
    [The prepared statement of Ms. Moler Follows:]
  Prepared Statement of Elizabeth A. Moler, Senior Vice President for 
           Government Affairs and Policy, Exelon Corporation
    Mr. Chairman and Members of the Subcommittee:
    I appreciate the invitation to join you in Bismarck today to 
testify before the Subcommittee on Water and Power. My name is 
Elizabeth A. (Betsy) Moler. I am the Senior Vice President for 
Government Affairs and Policy of Exelon Corporation. Exelon, formed 
last year by the merger of Unicom Corporation and PECO Energy, is 
headquartered in Chicago, Illinois. We serve over five million 
customers principally in Illinois and Pennsylvania, which have both 
restructured their electricity markets. Prior to joining Exelon, I 
served as the Deputy Secretary of the United States Department of 
Energy (from 1997-98), and as a Member and the Chair of the Federal 
Energy Regulatory Commission (from 1988-1997). Before that I served as 
Senior Counsel to your Committee.
    Your letter of invitation requested me to focus my testimony today 
on the electric transmission infrastructure and investment needs, and 
to address transmission policy and technology issues. Before I turn to 
the transmission policy issues, I want to comment briefly on the 
overall policy context facing our industry.
    The electricity industry is in the middle of a sometimes painful 
transition from an industry composed of highly regulated integrated 
utilities with monopoly service territories and cost-based pricing, to 
an industry with competitive power generation markets, market-based 
pricing and a wide diversity of market participants. New institutions 
are emerging, such as regional transmission organizations. It remains 
our firm belief that market-oriented restructuring of the electric 
industry remains the best opportunity we have to provide consumer 
benefits and to develop reliable new sources of supply. We must work 
together to make competitive markets work.
    Let me turn now to the transmission policy issues.
   importance of transmission infrastructure; need for new investment
    Our transmission capacity has not expanded to keep pace with 
demand. The current situation is comparable to a country road trying to 
carry the traffic of an interstate highway. All segments of the 
electricity industry are imposing tremendous demands on the 
transmission system to carry more and more transactions across even 
greater distances. As a result, the transmission system is facing 
significant increases in congestion. Between 1999 and 2000, 
transmission congestion grew by more than 200 percent. In the first 
quarter of 2001, transmission congestion was already three times the 
level experienced during the same period in 2000.
    Annual investment in transmission has been declining by almost $120 
million a year for the past 25 years. Transmission investment in 1999 
was less than half of what it had been 20 years earlier. Maintaining 
transmission adequacy at current levels would require about $56 billion 
in investment during the present decade. The Electric Power Research 
Institute (``EPRI'') estimates it will cost up to $30 billion to bring 
the western regional transmission system back to a stable condition and 
$1 billion to $3 billion a year after that to maintain this condition 
in the face of continued growth.
    How do we ensure sufficient transmission capacity to help assure 
the success of competitive electricity markets? We believe the 
following proposals should be included in a comprehensive national 
energy policy. I should add that most of these issues--and solutions--
are addressed in Chairman Bingaman's July 24th Electricity White Paper. 
We endorse his proposal wholeheartedly with only minor tweaks.
                      proposed policy prescription
FERC: A Single Traffic Cop
    Can you imagine what it would be like to have different rules apply 
to individual cars using the same interstate highway? Chaos would 
reign. That's the circumstance today along our interstate transmission 
grid; no wonder it doesn't work very well. In order to have the 
transmission grid function more efficiently, we simply must have all 
traffic subject to the same rules of the road.
    In 1992, Congress passed the Energy Policy Act (EPAct). One of its 
most significant provisions is a requirement that, upon request, 
utilities must transmit or ``wheel'' wholesale power generated by 
others. If a utility fails to wheel when requested to do so on mutually 
satisfactory terms, the requesting party can petition the FERC for an 
order requiring the wheeling.
    In 1996, when I was the Chair of the FERC, the Commission 
determined there was the opportunity for discriminatory behavior and 
anti-competitive abuse in wholesale electric markets. We issued a 
landmark decision, known as Order No. 888. It directed all utilities 
under FERC's authority to provide other users with access to 
transmission facilities on the same terms and conditions that they 
themselves have. The purpose was to promote wholesale competition by 
providing ways for competitive generators to move their power to 
wholesale customers through open, non-discriminatory transmission 
services.
    Order No. 888, however, only applies directly to those utilities 
that are subject to FERC's jurisdiction under the Federal Power Act. 
Thus, the open access regime looks like a piece of Swiss cheese. The 
holes in the cheese are those transmission facilities in the United 
States that are not subject to FERC jurisdiction. They include high 
voltage transmission lines owned by cooperative utilities (6%); 
publicly owned utilities (8%); and federally owned utilities (13%), for 
a total of 27% of our Nation's transmission lines. In certain parts of 
the country, like the West, there are more holes than cheese.
    In order for the transmission system to work more efficiently, all 
transmission-owning entities should be subject to FERC jurisdiction.
Who's in Charge Here?
    A similarly confused regime applies when determining which 
regulatory authority has jurisdiction over the transmission line. The 
same set of high voltage transmission wires is used to serve both 
wholesale and retail customers. Yet, in some circumstances the state 
regulatory authorities have jurisdiction over those wires; in other 
circumstances the local cooperative or the local municipal utility has 
jurisdiction over those wires; in still others the FERC has 
jurisdiction.
    This confusing circumstance is due to FERC's determination in Order 
No. 888 that it has jurisdiction over transmission used for wholesale 
transactions, as well as the transmission component of so-called 
``unbundled'' retail sales (where the electricity and transmission 
services are sold separately). Order No. 888 determined that state 
authorities have jurisdiction over the transmission component of so-
called ``bundled'' retail sales (where the electricity and transmission 
services are sold as a package). Since that decision was made in 1996, 
approximately half of the states have restructured their electricity 
markets. In states that have ``unbundled'' their retail sales and have 
adopted customer choice, FERC has jurisdiction. In states that still 
have ``bundled'' retail sales (that is, where customers do not have the 
ability to choose their electricity supplied), state authorities have 
jurisdiction over the transmission wires that serve retail load, while 
FERC has jurisdiction over wires for wholesale transactions.
    That jurisdictional call was reviewed, and upheld, by the United 
States Court of Appeals for the District of Columbia Circuit. Indeed, 
the DC Circuit determined that FERC has jurisdiction over all 
transmission, but that it properly exercised its discretion to regulate 
only certain transactions when it issued Order No. 888. The DC 
Circuit's decision is now under review by the Supreme Court of the 
United States.
    While I supported FERC's decision at the time that Order No. 888 
was issued, the jurisdictional call is proving not to be practical in 
today's world. We have a crazy-quilt system of regulation over our 
Nation's transmission grid. It is subject to discrimination and abuse. 
The Supreme Court should not make the policy call on who has 
jurisdiction and under what circumstances. Congress clearly has the 
authority--and I would say the duty--to clarify this ambiguity. The 
only practical solution is to put all transmission under FERC's 
jurisdiction, whether the wires are used for wholesale sales, or 
whether they are used to serve bundled or unbundled retail load.
Transmission Siting Authority
    Exelon supports granting FERC a backstop role to help site new 
transmission lines when states are unable or unwilling to act on new 
transmission line applications. Such an approach would give states the 
first opportunity to act on transmission siting applications.
    It made sense in 1935 when the Federal Power Act was adopted to 
leave transmission siting authority with the states, since transmission 
lines were generally local in nature. Now, however, our transmission 
system is being asked to move large amounts of energy across long 
distances and across state lines. In some instances state authorities 
are being asked to consider siting transmission lines whose primary 
beneficiaries are electricity customers in other states. Many state 
siting agencies do not have authority to consider the beneficial 
effects of siting a new transmission line if those benefits accrue to 
citizens in another state. Under these circumstances, it is becoming 
increasingly difficult to obtain the necessary siting permits from 
affected states, which may receive few direct benefits and thus have 
little incentive to approve construction. As I will discuss later in my 
testimony, FERC-mandated Regional Transmission Organizations (RTOs) are 
being established across the country. These RTOs will have the 
responsibility to plan how the transmission grid should be upgraded and 
where new lines are necessary. If state regulatory authorities are 
unwilling to site the lines identified by RTOs, federal regulators 
should examine the need for the facilities and issue required permits.
    Under several proposals pending before the Congress, FERC would be 
given the authority to issue a certificate of public convenience and 
necessity for a transmission line if state authorities do not act in a 
timely fashion. There has been a lot of loose rhetoric that this would 
mean FERC would have authority to ``take'' private property. That 
simply is not true. Eminent domain authority would rest with the holder 
of the certificate. If necessary, they could go to court to exercise 
that authority. Electric utilities that are issued such certificates by 
the states also may exercise the power of eminent domain if they are 
unable to acquire the rights-of-way through other means.
Federal Tax Issues
    We also believe that the Internal Revenue Code should be amended to 
allow the tax-free structuring of transmission ownership and to allow 
municipal and cooperative utilities to participate in competitive 
wholesale and retail markets, without imperiling their existing tax and 
financial status.
    By way of background, the Federal Energy Regulatory Commission 
(``FERC'') issued Order No. 2000 last year. The order requires 
utilities to form what are known as ``regional transmission 
organizations'' or RTOs. RTOs will be large-scale regional 
organizations that will manage the flow of electricity over our 
Nation's transmission lines. Our Nation's utilities are in the process 
of forming RTOs. FERC has mandated that they begin operation no later 
than December 15, 2001. These new organizations will enable utilities 
to pool their transmission assets. An independent entity that is not 
associated with the utilities will be charged with operating the 
transmission lines in a manner that will make the transmission grid 
operate much more efficiently. A well-functioning transmission grid 
will spur investment.
    Certainly everyone is aware of the tremendous problems with 
electricity supplies and prices that have plagued California and the 
Western part of our country in the past year. Prices have skyrocketed; 
there have been shortages of electricity, which have resulted in 
rolling brownouts and even blackouts from time to time. The Chairman of 
the FERC, the Honorable Curtis Hebert, testified recently that if there 
had been an RTO serving the Western region that the electricity crisis 
in the West would not have been nearly as severe.
    Secretary of Energy Spencer Abraham recently issued a request for 
private investors to upgrade the transmission grid in California. The 
transmission resources in the State are simply not adequate to meet the 
State's needs. The Department of Energy is now evaluating private 
investors' plans to upgrade the California grid along a critical North-
South part of the grid known as Path 15. The shortcomings of Path 15 
have been known for years and years, yet neither the Federal government 
(through the Western Area Power Administration) nor the private 
utilities have made the infrastructure upgrades that are necessary.
    Unless we do something to encourage additional investments in our 
transmission infrastructure the California experience could be repeated 
time and time again. Properly structured, properly designed RTOs will 
meet that need.
    President Bush and Vice President Cheney's National Energy Policy 
Development Group Report, released on May 17, calls for the development 
of a National Transmission Grid. While the specific details of the 
Administration's proposal are still being written, the Administration 
strongly supports further investment in our transmission infrastructure 
and the FERC's Order No. 2000 initiative.
    We believe that the best model for organizing RTOs is to establish 
a for-profit transmission company known as a transco. A transco will 
have a business orientation. It will have an economic incentive to 
maximize throughput, make appropriate cost-effective transmission 
upgrades, and do a good job of managing congestion on the grid. 
Transcos should eventually own transmission system assets. In order to 
encourage utilities to sell their transmission systems to the transco, 
Congress should make changes in our tax laws.
    Under current law, if a utility divests its transmission system to 
one of these RTOs, it would suffer a tremendous tax burden. Exelon 
endorses legislation that would enable a utility to sell its 
transmission assets to the RTO, or to an independent transmission 
company under the purview of an RTO, without having to pay taxes on the 
gain realized by the asset transfer. In order to benefit from the 
provision, the utility must reinvest the proceeds in qualified utility 
property. This will encourage utilities to transfer their transmission 
systems to the RTOs. The RTOs in turn will be able to obtain the 
critical mass of assets under their ownership that will enable them to 
operate more efficiently and will encourage investment in additional 
infrastructure.
    In addition, municipal owners of transmission argue they cannot 
join RTOs because tax code provisions preclude the ``private use'' of 
tax-exempt financed utility property. These provisions should be 
modified to allow municipal transmission assets to be placed into an 
RTO without violating ``private use'' rules.
    When Congress restructured the telecommunications industry, it 
provided a similar mechanism for telecommunications asset divestitures. 
It should do so again in this instance.
    I would note that the tax provisions have very broad support within 
the utility industry. An unusual coalition of investor owned utilities, 
and small and large municipally owned utilities--groups that are 
frequently at odds with one another--developed the tax relief proposal 
I just described. The essential elements of the proposal were included 
in H.R. 4, the energy bill passed last week by the U.S. House of 
Representatives. Unlike many of the provisions in that bill, these 
provisions had broad bipartisan support. Chairman Bingaman's July 24, 
2001, White Paper on Electricity Legislation, highlighted the issue as 
follows:

          ``Certain provisions of the tax code (that) create a 
        disincentive for participants in the market to engage in 
        certain of the structural changes that are necessary. These 
        provisions should be repealed. The tax code should be amended 
        to allow utilities to spin transmission assets off into 
        separate corporations and to remove tax restrictions on 
        participation by public power utilities and cooperative 
        utilities. While such provisions are not jurisdictional to this 
        Committee, they represent an essential component of a 
        functional electricity policy and should be pursued through the 
        committees of jurisdiction.''

    The Bingaman proposal should be modified to provide relief if 
assets are sold rather than spun off. Sen. Murkowski has included all 
of the elements of the agreement reached last year between the investor 
owned utilities (through the Edison Electric Institute, or EEI), and 
the municipal utilities (through the American Public Power Association, 
or APPA, and the Large Public Power Council, or LPPC) in his proposed 
legislation, S. 389.
Innovative Pricing
    Current returns on transmission are too low to attract the huge 
amounts of capital needed to fund investments in transmission 
expansion. A comprehensive national energy policy should include 
direction to FERC to utilize innovative transmission pricing 
incentives, including rates of return more appropriate with the higher 
levels of investor risk in a restructured electricity industry. These 
incentives must be available to all transmission owners; not just to 
owners who have made transmission improvements and not just to RTO 
operators--which is the current FERC policy.
PUHCA and PURPA
    The Public Utility Holding Company Act of 1935 (PUHCA) has outlined 
its usefulness and is a barrier to competition. It was enacted during 
the Great Depression with a goal of simplifying the existing utility 
company structures and to protect investors and consumers from multi-
state utilities that had adopted abusive structures and practices. 
PUHCA now applies to fewer than 20 out of the Nation's more than 200 
electric and natural gas utilities. It limits their geographic scope 
and product diversification, and imposes burdensome filing 
requirements. It severely limits the ability of those who are subject 
to it--including Exelon--to compete in today's fast evolving energy 
marketplace.
    PUHCA is also a barrier to RTO formation, because it effectively 
limits those who can invest in RTOs. PUHCA is such a burden that none 
of the major investment banking firms, and none of the major 
engineering firms (to name just a couple of categories that would 
logically be interested in investing in RTOs) is willing to invest in 
RTOs. The Securities and Exchange Commission (SEC) has called for its 
repeal, believing that they have more than adequate authority to 
protect investors from abuse under other securities laws. State 
regulators also support its repeal, provided that FERC is given 
adequate authority to compel utilities to produce records necessary for 
their regulatory purposes and to guard against captive customers being 
forced to subsidize non-utility business ventures. Both provisions are 
included in legislation pending in the Senate. It is long past time to 
repeal this outmoded statute.
    Another statute that has outlived its usefulness is the Public 
Utility Regulatory Polices Act of 1978 (PURPA). It was enacted to help 
alleviate the oil and natural gas shortages of the late 1970s and to 
encourage the development of electricity generation by non-traditional 
players and to encourage construction of generators fueled by 
alternative energy resources. Certain provisions in PURPA now stand in 
the way of more competitive and efficient wholesale power markets 
particularly the provisions that require utilities to purchase 
generation from so-called ``qualified facilities'' or QFs. Those 
provisions have become both antiquated and burdensome in light of the 
later enactment of EPAct. PURPA should be repealed prospectively. 
However, existing contracts should be honored.
Reliability Organization
    Last, but by no means least, Congress should give FERC specific 
statutory authority over the reliability of the interstate transmission 
grid. The organization now charged with the responsibility for 
reliability issues, the North American Electric Reliability Council 
(NERC), does not have the tools necessary to do its job. In particular, 
it needs significantly enhanced authority to make its rules mandatory 
for all segments of the industry. As NERC testified recently before the 
full Energy and Natural Resources Committee, it is seeing increasing 
violations of its reliability rules. A voluntary reliability regime 
lacks the enforcement authority needed in a competitive electricity 
market. A comprehensive national energy policy should include 
provisions to establish a self-regulating reliability organization, 
with FERC oversight, to develop and enforce reliability rules and 
standards that are binding on all market participants. This Committee 
approved and the Senate passed a similar bill last year.
Conclusion
    Mr. Chairman, I have given you a comprehensive listing of the 
transmission issues that need to be addressed by the Congress. Given 
the absolutely vital importance that transmission plays in our Nation's 
economy you should be commended for focusing on this vitally 
important--but admittedly arcane--subject area. I have spent the last 
decade of my life focused in large part on transmission issues. The 
needs of the Nation's electricity superhighway cannot be ignored. 
Transmission should not be allowed to become ``The Weakest Link'' in 
our industry because we cannot simply tell it ``Goodbye''. Action is 
needed to ensure our country has affordable and reliable electricity 
for years to come. Congress has been debating electricity issues for 
six years. In the meantime, our Nation's electricity infrastructure has 
not kept pace with the growing demands of our new economy. California's 
woes have clearly sounded an alarm bell that must be heeded by the 
Congress. The time to act is now.
    I would be pleased to answer any questions the Committee may have.

    Senator Dorgan. Ms. Moler, thank you very much.
    Next, we will hear from Mr. Ted Humann representing Basin 
Electric Power Cooperative.

      STATEMENT OF TED HUMANN, SENIOR VICE PRESIDENT FOR 
  TRANSMISSION, BASIN ELECTRIC POWER COOPERATIVE, BISMARCK, ND

    Mr. Humann. Thank you, Senator. My name is Ted Humann. I am 
the senior vice president for transmission at Basin Electric 
Power Cooperative in Bismarck, North Dakota. Basin Electric 
delivers approximately 1,700 megawatts of primarily coal-based 
generation to its 121 member cooperatives located in North and 
South Dakota, Montana, Wyoming, Nebraska, Iowa, Minnesota, 
Colorado and New Mexico.
    I will focus my comments today on two issues relating to 
the high-voltage transmission system in this region, the 
movement towards regional transmission organizations and the 
transmission constraints in North Dakota.
    Basin Electric owns and operates high-voltage transmission 
facilities on both the eastern and western transmission grids. 
For our discussion here today, I will limit my comments to the 
Basin Electric facilities on the eastern grid, but the issues 
are similar on the west.
    Basin Electric owns approximately 1,300 miles of high-
voltage transmission facilities on the eastern grid that are 
interconnected with the high-voltage facilities of the Western 
Area Power Administration and Heartland Consumers Power 
District and operate as a single system known as the integrated 
system. This integrated system consists of approximately 9,000 
miles of high-voltage transmission facilities located in six 
States. In response to the reciprocity requirements of Order 
888 of the Federal Energy Regulatory Commission, the non-
jurisdictional owners of the integrated system developed and 
operate the system under an open access tariff. Basin 
Electric's facilities on the west grid also operate under an 
open access tariff.
    Basin Electric and the other owners of the integrated 
system have been following the development of the regional 
transmission organizations and are continuing to negotiate with 
existing regional transmission organizations or groups that 
hope to develop an active regional transmission organization. 
Talks have been held with the Midwest independent system 
operator, Crescent Moon, Desert Star, Southwest Power Pool and 
others, in an effort to determine if the integrated system 
should be a party to a regional transmission organization.
    The primary reason why Basin Electric and the other 
independent system operator owners have not elected to join a 
regional transmission organization is the way they are 
proposing to price transmission service using ``license plate'' 
pricing. In general, license plate pricing is where each 
transmission owner recovers the cost of owning and operating 
its transmission system from the customers whose loads are 
located within the area serviced by that system, known as a 
zone. Customers with loads in one zone and generation in 
another zone obtain transmission service in the other zones for 
free. They bear none of the costs of the transmission 
facilities in the other zones, even though they may be 
principal beneficiaries of those transmission facilities.
    The Midwest independent system operator is a good example. 
In the Midwest independent system operator, the existing load 
control area becomes a geographical rate zone and a customer 
located in a rate zone pays the tariff only in that zone. With 
only that payment, the utility can receive power from anywhere 
within the Midwest independent system operator region for no 
additional charge.
    This methodology is similar to purchasing a license plate 
for your car. If you purchase a license plate for your car in 
North Dakota, you can drive your car anywhere for no additional 
charge. This pricing does not work because, unlike highways, 
there is no cost assessed to build the electric transmission 
system. The gasoline tax pays for the interstate highway 
system.
    If the integrated system were to join the Midwest 
independent system operator, there would be an increase of 
approximately $40 million in the cost of transmission service 
to the customers in the integrated system zone because of 
license plate pricing. This occurs because more than one-third 
of the integrated system is located in other rate zones. The 
current integrated system rate is approximately four mills per 
kilowatt-hour. If the integrated system is located in the 
Midwest independent system operator, the transmission costs for 
users of the integrated system would almost double. A typical 
integrated system residential consumer could see an increase of 
more than $100 per year in his bill.
    Basin Electric believes that postage stamp pricing is the 
only fair and equitable method for pricing transmission service 
in a world of regional transmission organizations. Under this 
method there is a single rate paid for the use of the 
transmission system for the entire regional transmission 
organization region. This would require the sharing of 
transmission costs equally among all customers located in the 
regional transmission organization and would encourage 
construction of improvements to the transmission system for the 
benefit of all consumers. Postage stamp pricing eliminates the 
inequities that license plate pricing brings to rural areas and 
creates a level playing field among market participants.
    In recent weeks several FERC commissioners have noted the 
superior benefits of postage stamp pricing and the fallacy of 
using license plate pricing to avoid cost shifts.
    Basin Electric supports the development of regional 
transmission organizations and would even support a 
congressional grant of mandatory FERC jurisdiction over 
regional transmission organizations, if that grant of 
jurisdiction included the following:
    Number one, regional transmission organizations must 
utilize postage stamp pricing;
    Small systems that are operating primarily distribution 
facilities should not be required to include their facilities 
in the regional transmission organization;
    There should be no mandatory rate unbundling requirement;
    Any legislation should not materially alter the existing 
roles of the rural utilities service or the Federal power 
marketing agencies;
    Existing contracts should be grandfathered;
    And, also, standard depreciation and typical rates of 
return should be used for all new facilities constructed 
instead of incentive rates.
    As you mentioned earlier, Senator, there are transmission 
constraints in North Dakota in our inability to move additional 
generation out of the State. We feel before any significant 
amount of new generation can be built in North Dakota, be it 
fossil fuel, wind or other alternative forms of energy, 
significant additions to the transmission system will have to 
be constructed.
    It is my view that these transmission facilities will not 
be constructed under license plate pricing because it truly 
allows some parties to use portions of the transmission system 
and not pay for the privilege.
    The thought I would like to leave with you is that postage 
stamp pricing will foster the development of an interstate 
transmission grid similar to the interstate highway system. 
This interstate grid will allow for the future development of 
this region's abundant coal and wind energy resources and will 
provide the needed infrastructure to support the National 
Energy Policy.
    Because of time constraints, I must conclude my remarks. I 
appreciate the opportunity to speak to you and look forward to 
answering any questions that you may have. Thank you.
    Senator Dorgan. Mr. Humann, thank you very much.
    Next we will hear from Dave Sparby.

 STATEMENT OF DAVID SPARBY, VICE PRESIDENT FOR GOVERNMENT AND 
             REGULATORY AFFAIRS, XCEL ENERGY, INC.

    Mr. Sparby. Thank you, Mr. Chairman and Representative 
Pomeroy. I am Dave Sparby from Xcel Energy. Excel serves 
several communities in North Dakota together with 11 other 
States in the Midwest, and we move power and energy between 
these communities with about 16,000 miles of transmission line.
    My message today allows me to join this choir saying that 
we need more transmission infrastructure, but maybe because I 
am the guy that goes out to get all the regulatory permits and 
government approvals, my voice is perhaps a little louder and a 
little shriller than maybe others. And that is because those of 
us who have done that appreciate the very long lead times 
necessary for transmission improvements under today's 
regulatory framework.
    I know when I am asked what is that transmission system 
going to look like 4 or 5 years out, I can respond, take a look 
out your window, because large interstate transmission line 
additions typically require at least that much time to get 
permitted, to get designed, and to get built under today's 
regulatory framework.
    Now, this system and these improvements are going from 
being needed more urgently to being an absolute necessity in a 
short period of time. In the Midcontinent Area Power Pool, we 
see more requests for transmission being denied every single 
month than we have seen for the previous months. We are seeing 
line-loading relief being called on a national basis more and 
more frequently. We have seen the amount of investment in 
transmission on a normalized peak-load basis declining for more 
than two decades. None of this makes sense when you consider 
that transmission is about 6 percent of the average consumer's 
bill, and generation is about 60 percent.
    Very small changes in the amount of transmission investment 
can create huge savings for consumers, our local economies and 
the environment when looking at the value of their total 
investment.
    Now, the regulatory and legislative policies that we want 
to change will result in attracting more investment to the 
transmission business and providing some needed structural 
changes to help resolve many of these new issues the industry 
is facing.
    In the very briefest of words, we need some additional 
incentives, and we need those incentives designed to promote 
the upgrade and expansion of our current network. Traditional 
cost-based, average rate-based kind of regulation provides no 
incentives to expand and improve that system.
    And, Mr. Chairman, I think your concerns with respect to 
issues like research and development are right on. As we move 
to a desegregated industry, who is going to do that, what the 
level of that is going to be and how it is going to get done I 
think is a very significant public policy issue.
    We are one of the few industries, notwithstanding the work 
of 3M and others, that still use basically 1930's level of 
technology in an age of microchips. We need to move past that.
    Part of our program would be to direct the Federal 
Regulatory Commission, who has already undertaken some work 
with incentive regulation, but to continue their efforts to 
consider innovative noncost-based forms of regulation to expand 
this transmission network and to get the needed improvements 
operational.
    Now, with respect to a comment that Mr. Pomeroy made, I 
agree with the comment that RTOs perhaps standing alone may be 
worth thinking about whether or not they are going to meet all 
the challenges necessary to get power transmission network into 
place.
    We at Xcel have advocated the use of independent 
transmission companies in conjunction with RTOs to help get 
that transmission built. ITCs are companies that we propose 
would earn returns on getting that transmission constructed and 
getting those megawatts of power moved. The ITC can work within 
an RTO and also be subject to incentive regulation to make sure 
that issues like quality of service and the location and 
geography of service get properly addressed.
    We think for-profit transmission companies, together with 
innovative regulation, offer a great alternative that we should 
proceed along to help ensure transmission gets constructed.
    Other fixes, I think Ms. Moler addressed completely, PUHCA, 
some tax changes, expediting and reforming the siting process. 
These changes are changes we need to make today to ensure that 
the transmission network that carries our energy five years 
from now is in place.
    Thank you very much.
    [The prepared statement of Mr. Sparby follows:]
 Prepared Statement of David Sparby, Vice President for Government and 
                 Regulatory Affairs, Xcel Energy, Inc.
    Chairman Dorgan and members of the subcommittee:
    Thank you for the opportunity to come to Bismarck and testify.
    I am David Sparby, Vice President for Government and Regulatory 
Affairs of Xcel Energy Inc. Xcel Energy was created as the result of a 
merger between Minneapolis-based Northern States Power (NSP) and 
Denver-based New Century Energies (NCE). The merger of those two 
companies was completed on August 17 of last year, only 17 months after 
it was announced. Xcel Energy serves more than 3 million electricity 
and 1.5 million natural gas customers in 12 states, and 2 million 
electricity customers internationally. Xcel has $1.5 billion of 
existing transmission assets and over 16,000 miles of transmission 
lines.
                              introduction
    Electricity powers the U.S. economy and continues to provide the 
means to improve the quality of life in our homes. Constantly evolving 
electrically-powered technologies have made us more productive at work. 
The expectation that electricity will be there when we need it is 
fundamental to the American way of life in the 21st century. Adequate 
supply of highly reliable and reasonably priced power is and will 
continue to be of the highest national priority.
    Over the past decade, the electricity supply industry has undergone 
a profound change that--in many ways--mirrors the changes in our 
economy. Consumers today demand more electricity and expect lower 
prices. At the same time, the digital workplace requires greater 
reliability of the electricity supply than was needed in the past.
    In response, the electricity supply industry has embarked on a 
quest for greater efficiency and reliability in the generation, 
transmission and distribution of electric energy.
    While most power is still generated and delivered today by 
vertically integrated companies, the electricity supply industry is 
evolving into separate generation, transmission and distribution 
businesses. Independent generators selling to the burgeoning wholesale 
market today build most new generating facilities, while many 
traditional utilities, often directed by state legislation or 
regulation, now concentrate on individual elements of the electricity 
business.
    The wholesale electricity market, which once handled few 
transactions, now handles hundreds daily. The geographic size of these 
markets is also increasing rapidly, holding out the promise of greater 
competition and lower prices for consumers. The transmission grid was 
designed by integrated utilities to serve their retail customers. While 
transmission was interconnected to support reliability and some 
economic diversity, it was never intended to support the level of 
inter-company trading that is currently occurring. In addition, the 
siting of new transmission is an extremely cumbersome and difficult 
process due to the concerns of local communities. As a result, the 
transmission system is being stretched to the limit and concerns about 
the reliability of the system are increasing.
    There is an urgent need to improve our electric infrastructure--the 
fundamental bedrock of reliability and an economic and efficient 
wholesale energy market. The federal government can help by 
establishing a clearer statutory framework for the electric industry of 
the future. This framework should:

   Allowing for and supporting the creation of for-profit 
        independent transmission companies that are price regulated by 
        the FERC;
   Encouraging non-jurisdictional utilities to join RTO's and 
        ITC's by providing appropriate incentives (We are trying to get 
        publics and co-ops into TRANSLink through the carrot rather the 
        stick approach);
   Provide incentives for increased investment in and improved 
        operation of transmission facilities;
   Provide innovative, non-cost-based forms of transmission 
        rate regulation to promote smarter management of the existing 
        grid to reduce congestion and increase reliability;
   Remove federal barriers that block a more efficient system; 
        and
   Establish an enforceable reliability code of conduct.

    While the Federal Energy Regulatory Commission (FERC) can address a 
number of these issues, there is much that only the Congress can do. 
Congress should:
Support ITC's
    Late last year, FERC took another large step in ensuring workable 
competitive markets by issuing its Order 2000, which called upon 
jurisdictional utilities to voluntarily form Regional Transmission 
Organizations (RTOs). As the name suggests, RTOs will ensure that the 
transmission grid is operated on a regional basis to support efficient 
wholesale markets. Establishing RTOs would:

   Reduce opportunities for market abuse by separating control 
        of transmission systems from transmission owners;
   Reduce the charging of multiple transmission rates for use 
        of transmission within the RTO; and
   Eventually level rates within the operating region.

    FERC Order 2000 also envisions the creation of for-profit 
Independent Transmission Companies or ITC's. As their name implies, 
ITC's are companies whose sole purpose is the provision of transmission 
service to the wholesale markets. ITC's are designed to work within the 
regional transmission organizations and promote the efficient operation 
and extension of the transmission system to support the growing need 
for new investment, particularly investment that is necessary to 
transfer large amounts of energy from one region to another, and 
thereby promote greater efficiency and use of generation and 
transmission resources.
    The biggest gap in FERC's RTO authority remains its inability to 
impose the same requirements on federal electric utilities, municipal 
utilities and electric cooperatives. These utilities operate important 
transmission facilities that are integral to RTOs throughout the 
nation. FERC has invited these entities to participate in mediation 
talks. However, because FERC lacks jurisdiction over these entities' 
transmission systems, it cannot put the same pressure on them to join 
RTOs that it has clearly demonstrated it intends to put on shareholder-
owned utilities. Support of ITC's that include these non-jurisdictional 
companies is an efficient mechanism for FERC to include these companies 
in regional organizations.
Remove Disincentives From the Tax Code
    Ultimately, RTOs will succeed only if all transmission owners in a 
region join. In some areas of the country, such as the Pacific 
Northwest, the participation of all publicly-owned transmission 
entities will be needed to form an effective RTO. Municipal owners of 
transmission argue they cannot join RTOs because tax code provisions 
preclude the ``private use'' of tax-exempt financed utility property. 
These provisions should be modified to allow municipal transmission 
assets to be placed into an RTO without violating ``private use'' 
rules.
    For-profit transmission companies covering large regional areas are 
ideal candidates for RTO membership. Unfortunately, it is difficult, 
complex and expensive for utilities to spin-off or sell their 
transmission assets without incurring large tax liabilities. This 
discourages formation of transmission companies and slows needed 
realignment of the utility industry. The tax code should be modified to 
allow deferred recognition of any gain resulting from these types of 
reorganizations.
    H.R. 4, passed by the House last week, includes necessary changes 
to municipal utilities' ``private use'' restrictions and the deferred 
gains recognition required by IOUs.
Upgrade and Provide Necessary Incentives to Expand the Transmission 
        System
    Generation is of little use if the power that is generated cannot 
be moved to where it is needed, and when it is needed, instantaneously. 
``Busy'' signals are not acceptable in our business. Our increasingly 
interconnected and overloaded transmission system is what makes the 
entire electric system work (or not).
    All segments of the electricity industry are imposing tremendous 
demands on the transmission system to carry more and more transactions 
across greater distances. As a result, the transmission system is 
facing significant increases in congestion.
    On an interstate highway system overloaded with traffic, gridlock 
often results. On a transmission system with congestion, transactions 
are curtailed to ensure that the system does not become overloaded, 
limiting delivery of low-cost power and potentially resulting in a loss 
of reliability.
    Annual investment in transmission has been declining by almost $120 
million a year for the past 25 years. Transmission investment in 1999 
was less than half of what it had been 20 years earlier. Maintaining 
transmission adequacy at current levels would require about $56 billion 
in investment during the present decade. The Electric Power Research 
Institute estimates it will cost up to $30 billion to bring the western 
regional transmission system back to a stable condition and $1 billion 
to $3 billion a year after that to maintain this condition in the face 
of continued growth.
    Without change, the prospects for future investment in transmission 
are not much more promising. According to the North American Electric 
Reliability Council (NERC), only 8,445 miles of transmission facility 
additions are planned throughout North America over the next 10 
years.\1\ This represents just a 4.2 percent increase in total 
installed circuit miles, at a time when the EIA projects that 
electricity demand will grow by 1.8 percent per year.
---------------------------------------------------------------------------
    \1\ North American Electric Reliability Council, Reliability 
Assessment 2000-2009, The Reliability of Bulk Electric Systems in North 
America, at 31 (October, 2000).
---------------------------------------------------------------------------
    NERC has reported that:

   Unless proper incentives can be developed to encourage 
        investment in new transmission facilities and siting problems 
        can be resolved, few new transmission facilities and 
        reinforcements will be constructed. The lack of necessary 
        additional transmission facilities and reinforcements will 
        require that either new technologies be developed to alleviate 
        transmission congestion or that generating facilities be 
        located and dispatched in a manner to minimize the use of 
        constrained transmission corridors.\2\
---------------------------------------------------------------------------
    \2\ Id. at 5.
---------------------------------------------------------------------------
   Without adequate transmission capacity to meet growing 
        demand, reliability will be compromised, prices will increase, 
        overall system efficiency will decline and the benefits of 
        wholesale generation competition will not be realized.

    Government policies that have failed to recognize the key role of 
our transmission system are partly to blame for the declining 
investment in transmission. As the Department of Energy's Power Outage 
Study Team noted, ``In many cases, state and federal regulatory 
policies are not providing adequate incentives for utilities to 
maintain and upgrade facilities to provide an acceptable level of 
reliability.'' \3\
---------------------------------------------------------------------------
    \3\ Department of Energy, Power Outage Study Team Interim Report at 
S-2 (January 2000).
---------------------------------------------------------------------------
    FERC should be directed to provide incentive returns for 
investments that expand our transmission capacity.
Provide Innovative, Non-Cost-Based Rate Regulation to Enhance 
        Transmission Efficiency and Reliability
    While progress toward deregulating generation markets continues, 
transmission is, and will likely remain, a regulated business. 
Traditionally, transmission owners have been allowed to recover their 
prudently incurred costs, based on depreciation over many decades, plus 
earn a return on their investment. No consideration was given to the 
critical value of adequate transmission to the reliable, competitive 
operation of electricity markets.
    As a result, this cost-based form of regulation does not provide 
the incentives needed to build and operate an efficient, reliable 
transmission system. Nor does it encourage adoption of newer technology 
that may hold great promise for increasing system efficiency and 
reliability. FERC should be directed to implement innovative, non-cost-
based forms of regulation to reward investments and operations that 
enhance reliability and greater system efficiency.
    Without adequate transmission capacity to meet growing demand, 
reliability will be compromised, prices will increase, overall system 
efficiency will decline and the benefits of wholesale generation 
competition will not be realized. A regulatory regime that fosters an 
economic climate to encourage investment in transmission is necessary. 
It is time for innovative, non-cost-based forms of regulation to reward 
transmission investments and operations that enhance reliability and 
greater system efficiency.
    Bipartisan provisions designed to adequately incent new investment 
in transmission was included in last year's House-produced electricity 
bill. The same provisions were introduced as stand-alone legislation on 
August 3 by Reps. Sawyer and Burr (H.R. 2814). It is our understanding 
that a bipartisan group of members from the full Senate Energy 
Committee is preparing to introduce similar legislation immediately 
following the August break. We urge the Subcommittee's careful 
consideration of this bill.
Repeal the Public Utility Holding Company Act of 1935
    The Public Utility Holding Company Act of 1935 (``PUHCA''), was 
enacted during the Great Depression with two primary objectives: the 
integration and simplification of complex natural gas and electric 
utility holding company systems which then dominated the utility 
industry and protection of investors and consumers through effective 
regulation of multi-state utilities operating through subsidiaries.
    PUHCA long ago achieved its first objective of restructuring the 
electric and natural gas industries. And consumer protection is now the 
purview of other regulatory authorities, which didn't exist 65 years 
ago.
    PUHCA met its first objective by dismantling and simplifying the 
organizational structure of the more than 200 complex electric and gas 
utility holding company systems in existence in the mid 1930s. These 
geographically scattered and diverse businesses were limited to the 
operation of a single integrated utility system, plus such other 
businesses as were closely related to an integrated utility system. By 
the early 1950s, according to the Securities and Exchange Commission 
(``SEC''), the agency responsible for administering PUHCA, the 
reorganization of the electric and gas utility industries was 
complete.\4\
---------------------------------------------------------------------------
    \4\ See ``The Regulation of Public-Utility Holding Companies,'' a 
report of the Division of Investment Management, Securities and 
Exchange Commission, Executive Summary at viii (June 1995).
---------------------------------------------------------------------------
    The second objective of PUHCA--to protect investors and consumers--
was met by authorizing the SEC to regulate certain holding companies 
that remained the owner of utility subsidiaries in more than one state. 
This regulation requires advance SEC approval for many business and 
financial transactions, including the issuance of debt or equity, 
acquiring utility or non-utility assets and entering into service 
arrangements with affiliated companies.
    Even the SEC has recommended PUHCA's repeal because it is no longer 
needed and is largely duplicative of other investor and consumer 
protection authority administered by the SEC and the states. As an SEC 
report has noted, ``[a]cting under authority in the Securities Act of 
1933 and the Securities Exchange Act of 1934, the SEC has, over the 
past six decades, created a comprehensive system of investor protection 
that obviates the need for many of the specialized provisions of the 
Holding Company Act.'' \5\
---------------------------------------------------------------------------
    \5\ Id. at x.
---------------------------------------------------------------------------
    Not only has PUHCA outlived its usefulness, but it also is a 
barrier to competition. It requires fewer than 20 out of the nation's 
more than 200 electric and natural gas utilities to register and be 
subject to pervasive SEC regulation. By significantly limiting 
geographic and product diversification, and imposing numerous 
burdensome filing requirements, PUHCA severely limits the ability of 
companies to invest in transmission or other projects not immediately 
within their traditional franchise areas.
North Dakota Considerations
    For many of the reasons stated above, transmission in the general 
geographic region around North Dakota has never been sufficiently 
upgraded to address limitations imposed by large generation additions 
in the 1970s in the coal fields of the state.
    The state currently suffers from a severe lack of export capacity. 
The technical list is long: stability-based limits due to short 
circuits in the coal fields; blocks on the state's two DC lines, 
thermal limits on lines out of the coal fields and short circuits in 
the Twin Cities.
    Because of its rich resource base and lack of problems with 
environmental compliance, it is Xcel's view that rural regions like 
North Dakota are likely to host a large percentage of the many new 
base-load generation facilities that will be needed in the nation over 
the next 20 years. Some of these plans are already on the drawing 
board.
    We note again, however, that much of this generation will only be 
possible if incentives are put in place to ensure that associated 
transmission projects make financial sense.
    Following is a description of proposed transmission projects to 
increase the ND export level:

   Harvey-Glenboro 230 kv project. Xcel has planned this 
        project to meet contractual obligations to ensure our ability 
        to transfer 500 mw northward. In conjunction, our company is 
        also considering an additional 200 mw southward capability in 
        conjunction.
   WAPA/Basin increase ND export 100 mw. WAPA has recently 
        identified an overbooking of its ND export allocation. The 
        agency has identified some equipment additions that will be 
        necessary to relieve stability issues but has yet to address 
        thermal concerns in western Minnesota.
   North Dakota Lignite Council. Last fall, the Lignite Council 
        (of which Xcel is a member) performed a study to determine what 
        would be required to deliver another 500 and 1000 mw of 
        generation from the Coal Fields to the Twin Cities. The plan 
        recommended upgrade of the existing Antelope Valley-Huron Line 
        to 500 kv. The plan also calls for addition of a 500 kv line 
        from Huron to Sioux Falls and a 345 or 500 kv line from Sioux 
        Falls to Lakefield Junction. The plan, while comprehensive, 
        still needs to address Xcel-planned wind generation additions.
   Red River Valley Load serving. Last year the destruction of 
        the McHenry-Ramsey 345 kv line revealed a major winter peak 
        load serving risk in North Dakota. A study is underway looking 
        at adding major transmission to the valley. This includes 
        options of a coal fields line, back feed line from Bemidji or 
        another line from Manitoba. Any of these could impact ND export 
        levels.

    There are also on the drawing board a number of new proposed 
generation projects that will require new transmission investment:

   GRE has announced plans for a 500 MW coal field generation 
        unit;
   MDU has teamed with Westmoreland Coal to propose a separate 
        50O MW unit;
   WAPA is considering two sites to add 300 MW of wind 
        generation. The North Dakota site would be near Jamestown and 
        the South Dakota site near Ft. Thompson. Both sites would 
        require a 345 kv line across the state to Granite Falls, MN and 
        an additional 345 kv line from there to the Twin Cities;
   OTP is proposing a 500 MW merchant plant that would require 
        additional transmission to the Twin Cities.

    While Xcel supports all of these efforts, each raises concerns. In 
general, any increase in ND export will result in the need to increase 
transmission capacity through western Minnesota. With limited routes, 
conflicts are already apparent in the plans described above. One big 
conflict is with Xcel Energy's own wind outlet expansion plans. A 
single 345 kv line likely is not sufficient to deal with all the plans.
    To repeat once again, our ability to address these concerns within 
our business plans depends on reforming current policies to ensure that 
additions to our transmission network provide returns commensurate with 
those available through other investments.
    Mr. Chairman, there are three issues unrelated to investment that 
Congress must also address in order to ensure the development of 
wholesale markets, transmission efficiency and reliability. These are:
Provide a Federal Role in Sighting of Transmission Facilities
    The transmission planning, siting and approval process is often 
contentious, time-consuming, and fragmented. It is also still largely 
based around the outmoded idea that transmission facilities serve only 
small regional or local markets. Transmission approvals can be 
difficult to obtain in a jurisdiction which does not see a direct 
benefit for its citizens, even though the region as a whole may 
benefit.
    With today's interconnected transmission grid, congestion in one 
area can have an impact across state boundaries. This illustrates the 
urgent need for some level of federal involvement in the transmission 
sighting process.
    To begin, Congress should pass legislation that rewards the 
establishment of planning mechanisms. Such legislation would allow an 
RTO, a member of an RTO, including an ITC or any other applicant whose 
application is consistent with a planning process approved by an RTO 
(or comparable approved regional planning process) to submit a 
transmission expansion planning process for the construction and 
expansion of facilities to the FERC for review and approval.
    Plans should then be submitted to affected states for review and 
approval, much as happens under current state regulation. If, however, 
states are unable or unwilling to approve projects that would affect 
the efficient function of wide-scale wholesale markets, then an RTO or 
other applicant should be allowed to request a certificate of public 
convenience and necessity.
    If a transmission expansion plan has been approved through a FERC-
approved transmission planning process--and a certificate of 
convenience and necessity has been granted for the facilities by the 
FERC after notice and the opportunity for comment--a right of eminent 
domain would become available to the holder of the certificate. The 
certificate holder should be entitled to exercise this right if unable 
to acquire the necessary land by contract, or if unable to agree with 
the property owner on the amount of compensation for the required 
rights-of-way.
Require Federal Lands Agencies to Expedite Review of Applications for 
        Transmission Facilities That Would Cross Federal Lands
    Transmission facilities are difficult to site for reasons such as 
landowner opposition and the requirement to obtain approvals from 
dozens of different jurisdictions. Federal land management agency 
approvals, required when proposed facilities cross federal lands, are 
often the most time-consuming and difficult approvals to obtain. The 
federal government should not stand in the way of needed new 
transmission. Federal land management agencies must do a better job of 
streamlining and coordinating review of proposed transmission projects. 
Congressional codification of this directive would help expedite review 
of such projects.
Adopt an Enforceable Reliability Code of Conduct for the Bulk Power 
        System
    The system of voluntary reliability self-regulation by the 
electricity industry, which has worked well in the past, is not 
adequate to meet the growing demands on the bulk power system. With the 
advent of increased wholesale and retail competition, hundreds of new 
companies are today involved in the generation and sale of electricity. 
The existing industry reliability system, dependent upon the voluntary 
cooperation of incumbent electric utilities and institutions, simply 
was not designed to address this new marketplace.
    An enforceable reliability code of conduct adopted by an industry 
self-regulatory organization with oversight by the FERC, extending to 
all market participants and all owners of transmission, should replace 
the existing voluntary system designed for a different era. The means 
to achieve this objective is federal legislation. Reliability 
legislation alone, however, will not solve the reliability problem. 
Reliability legislation can only help fairly allocate shortages of 
electricity or transmission capacity. To help ensure reliability, 
Congress must also deal with the federal barriers and disincentives 
that plague the electric industry.
                               conclusion
    Federal and state policies must encourage, not discourage, the 
building of new transmission facilities needed to meet the power 
demands of a growing economy. The federal government must help ensure 
that the wholesale markets work more efficiently and reliably and that 
its policies do not stand in the way of greater efficiency. The 
adoption of legislation based on the recommendations outlined above 
will help accomplish these objectives.
    Action is needed now to ensure our country has affordable and 
reliable electricity for years to come. Xcel looks forward to working 
with this subcommittee to achieve these objectives.

    Senator Dorgan. Mr. Sparby, thank you very much.
    Your last point is certainly an appropriate point about 
siting and having the plans in place and the ability to go 
ahead and build the additional capacity we need. But all of you 
have talked some about pricing, which I think is a key to this 
issue. The decision about what additional capacity we need and 
how you price the utilization of that capacity is central, it 
seems to me, to what we try to do here in energy policy, and I 
would like to ask some questions about that. I will start with 
you, Mr. Sparby.
    You indicated that the cost-based, rate-based approach to 
pricing really provides no incentives. On the other hand, the 
whole description of using a market-based would suggest the 
market would provide incentives from the market, itself, and 
yet you say using a market-based approach you need financial 
incentives. Why do you need incentives if you use a market-
based approach for the buildout of a system? Would the market 
not send a signal that you need additional capacity and thereby 
from the market provide the incentives?
    Mr. Sparby. Well, I think certainly if you were to apply 
market-based incentives to transmission additions, yes, in part 
with some other improvements, that does send a much better 
signal to investors. However, we are going to need that market-
based incentive together with some reforms in siting and some 
of the other reduction of barriers in the Tax Code, as well as 
the repeal of PUHCA, to also get that investment on the ground.
    Senator Dorgan. I don't think I was very clear in my 
question. A market-based incentive, if the market describes 
this additional capacity as necessary, the market will design 
its own incentive, and, yet, I think you are talking about 
rates that say, let us use a market system, but provide 
incentives on top of it for the buildout. Why would the market, 
if the market is a good allocator of goods and services, not 
assess its own incentives?
    Mr. Sparby. Well, because the marketplace cannot do that, 
Mr. Chairman. Government defines every single aspect and facet 
of this marketplace that we operate in. It decides where we can 
spend our capital. It decides how we can raise it, decides what 
we can charge for its cost, and it is going to review our 
investment for its prudence and its impact on regulators.
    In the electric industry government shapes our market, and 
what our advice is about is working with government to reshape 
that market to address the lack of capital that has been coming 
into it because we have not seen investors willing to bring the 
type of capital to meet the growing demands of customers.
    Senator Dorgan. Mr. Humann, your assessment of that, 
market-based or cost-based?
    Mr. Humann. I guess I don't agree that we need incentive 
rates to build transmission lines because the pricing is wrong. 
Under license plate pricing, you run the risk of building a 
transmission facility and then someone else using it or 
upgrading it for their benefit and then you not getting paid 
for that transmission investment because someone else is using 
it.
    Under the postage stamp pricing methodology all consumers 
would be paying for that transmission investment; therefore, 
you are guaranteed a payment of that investment. And, 
therefore, the RTO could decide which transmission facilities 
are required and go out to the lowest bidder to build those 
facilities, and because you are guaranteed payment for those 
facilities, you do not need incentive rates.
    Senator Dorgan. Mr. Humann, I understand from your 
testimony that you are in the process of talking to entities 
about an RTO, but the pricing practices are very important to 
making a judgment about whether you join an RTO and under what 
conditions. What happens if you are not able to resolve that?
    Mr. Humann. Well, because of the cost shift, we will try to 
stay out of an RTO as long as possible because of the cost 
shift and we will just continue to operate our grid in the 
manner that we have today. We still make the sales across our 
grid, but we certainly are not going to join a transmission 
grid where we have a possible increase to our customers of $40 
million a year in transmission costs because of license plate 
pricing.
    Senator Dorgan. Ms. Moler, what is wrong with that 
thinking? Anything?
    Ms. Moler. I understand that Mr. Humann is looking out for 
his customers, but as long as that situation persists, you will 
not get the transmission upgrades. It is one of the holes I 
described in the Swiss cheese. There are lots of utilities 
across the country that are not participating in this regime, 
and you have huge increases in congestion across the country. 
You are not getting the infrastructure investment, and it is 
just not working very well. And until you get everybody singing 
off the same page, the situation is going to continue to worsen 
rather than get better.
    Senator Dorgan. Let me just ask, is it not the case that 
you could have buildout with a cost-based system if the cost 
base provided the reimbursement that was sufficient to 
accommodate the buildout?
    Ms. Moler. There are ways that you could design the rates. 
I mean, regulators do rate design. I used to be a regulator. I 
did rate design with the help of a very able staff. There are 
ways that you can design rates to enable the recovery of costs. 
There are also ways that you can design rates to have proper 
incentives for constructing new transmission. Right now the 
situation we face is, we expect to have roughly $400 million 
worth of upgrades needed on the ComEd system, for example, 
there is lots going on, and no ability to recover. We have 
frozen rates. We have the rate design that Mr. Humann described 
in the Alliance RTO. And we do not have any ability because of 
our current rate design to recover those costs. That is why the 
situation has to change.
    Senator Dorgan. What percent of the delivered cost of 
electricity to a customer is transmission of that electricity, 
roughly?
    Ms. Moler. The national figures are roughly 5 to 10 
percent, but they vary from system to system.
    Senator Dorgan. And if I might ask all three of you, as we 
construct the Senate energy bill, give me again--I think, Ms. 
Moler, you outlined the several steps concisely in your 
testimony, but give me again exactly the steps you believe we 
ought to take at the Federal level, in Federal law dealing with 
the transmission issue, capacity and reliability.
    Ms. Moler. I would put Mr. Humann's system and my system 
under the same regulatory regime so that we get a much better 
coordinated regime. I would provide innovative incentive 
pricing. There are ways that you can do it. You can give 
special rates, for example, for transmission upgrades. They do 
not necessarily have to go for the basic infrastructure that is 
there today. You can do it for capacity expansion. I would 
encourage utilities to sell their transmission assets to these 
transcos, the for-profit companies that will specialize in 
transmission. I would do it by changing of the tax code. And I 
would have the same traffic cop on the beat for all of us. It 
really will not work to have individual State regulatory 
commissions doing this when you have the interstate highway 
grid.
    Senator Dorgan. Mr. Humann.
    Mr. Humann. I guess Basin Electric would agree to come 
under FERC regulation. As I have indicated in my testimony, one 
of the requirements would be that we have a postage stamp rate 
where all consumers are on a level playing field. That is why 
RUS was organized in the first place in 1935, because all of 
the customers were not on the same playing field. And we need 
to put the transmission grid and all of our customers on the 
same playing field, and we can only do that through the postage 
stamp rate where everybody is charged the same price. And in 
that type of pricing I believe we will get the interstate 
transmission system built that is required.
    I compare that to the telephone system. Can you imagine if 
we would have deregulated the telephone system and tried to 
give incentive rates to AT&T whereby as long as you paid for 
your local telephone service, anybody from the country could 
call you for nothing? That is basically how we are trying to 
design the transmission grid, and that is not going to work 
under license plate pricing.
    Senator Dorgan. Mr. Sparby.
    Mr. Sparby. Thank you, Mr. Chairman. First of all, we need 
to take a whole new look at how we make rates to encourage 
investment in the transmission network and use innovative 
ratemaking not only for that purpose, but to address the R&D 
questions and some other emerging issues for our industry. We 
also need to encourage some innovative organizational 
structures like independent transmission companies that can 
work with RTOs to make sure that transmission gets built five 
years down the road and we don't have a worse problem tomorrow 
than we have today.
    We agree that nondiscriminatory open access needs to be 
extended, but with Basin a good customer and supplier of ours, 
we would like to see incentives to encourage cooperatives and 
other public entities to come into this type of regulatory 
framework as opposed to mandates.
    We argue for expediting and reforming the siting process, 
reducing some of the barriers moving into this market. For many 
companies that includes items like the repeal of PUHCA and also 
addressing some reliability issues that I think the Congress 
really needs to take a look at absolutely as soon as possible. 
That is our list. Thank you.
    Senator Dorgan. Congressman Pomeroy.
    Mr. Pomeroy. Mr. Chairman, this is a fascinating panel, 
deeply experienced with differing perspectives, and of one 
accord regarding the existing system, it makes no sense, it is 
going to get worse before it gets better unless we turn things 
around dramatically. Betsy's comments about how the thing 
doesn't have an overall coherency, Mr. Humann's comments about 
how it is not economically rationalized, and Mr. Sparby's 
comments about the dysfunctional regulatory overlay 
discouraging new investment all create a compelling picture 
that it requires fairly dramatic intervention.
    I used to be the insurance commissioner, and watching the 
interplay between regulation and marketplace, not just in North 
Dakota, but across 50 States, has left me with a keen 
appreciation of the public protection regulatory responsibility 
not getting in the way of market forces.
    On the other hand, I think we can see a much greater 
appreciation of markets today for the value investment that 
utilities represent even in a very extensively regulated 
environment. Even return over long term looks pretty good today 
as opposed to the go-go, hot NASDAQ market of a couple years 
ago even. So when we are looking at the long-term investment, 
providing the long-term return out of a nation's transmission 
grid, clearly a significant regulatory role is going to be part 
of the picture, but doing so in a way that does not forestall 
entrepreneurial activity in getting new plant built is the 
trick of it.
    What do you think, Mr. Sparby, about this ``postage stamp'' 
versus ``license plate'' rates? It seems to me any system that 
gives for free a passage over part of the line is inherently 
illogical, irrational in terms of trying to capture costs in 
the most realistic way under marketplace dynamics.
    Mr. Sparby. It is an issue that has been vigorously debated 
within the industry because our systems look so very different. 
Some are so very small and compact with very minimal amounts of 
transmission, and others, like Mr. Humann's, and to some extent 
ours, are just so geographically dispersed and investments are 
difficult to replace.
    As an industry, I think we come up with a lot of solutions 
that include grandfathering and revenue sharing and a lot of 
other tools. And there is no, I think, just answer that 
addresses everybody's needs in any particular time. What we 
need to do is we need to come together to get that issue 
addressed, to get it addressed in the short term because the 
impacts from whether or not you have a postage stamp rate or 
some other kind of rate are so small compared with the 
generation costs and the costs to our communities and cost to 
the public of not coming together to having regional solutions, 
that there is a long ways we can go to getting those issues 
addressed to get to the result we need to.
    Mr. Pomeroy. Betsy, given your present private experience 
and considerable public sector participation on this whole 
issue, do you think there is in place yet a model that we ought 
to be moving toward that puts an adequate national regulatory 
framework in place on the transmission question?
    Ms. Moler. Not yet. No, sir.
    Mr. Pomeroy. How do we develop one?
    Ms. Moler. I have tried in my prepared statement to give 
some of the essential elements of it.
    Mr. Pomeroy. It is one of the more substantive 15-page 
testimonies I have seen. I mean, that is condensed in very good 
testimony.
    Ms. Moler. Thank you. That makes the ruined weekend worth 
it.
    [Laughter.]
    Ms. Moler. There is a lot that needs to be done, and 
Congress has been debating these issues for 6 years and has not 
come to grips with them. There are differences among the 
players. But we have really got to stop having these endless 
debates and move forward. Everybody has agreed on certain 
essential elements of a legislative package. We are fighting 
over the last 5 or 10 percent and letting the perfect be the 
enemy of the good, and it really is time to do something. And I 
am very hopeful, because I am by nature an optimist, that 
Congress will come to grips with this. The California crisis 
could have been either just, oh, my goodness, it is too hard or 
it could be a call to action, and I am hoping it will be the 
latter.
    Mr. Pomeroy. You can run, but you cannot hide. I mean, 
California compels us to move forward no matter how intractable 
these problems.
    Mr. Humann, just a quick question. Would Basin view 
favorably an additional Federal law upgrading the WAPA carrying 
system so it might offer more access to additional power you 
could generate?
    Mr. Humann. I guess we could not support that because it 
depends upon who has to pay for that upgrade. Again, there are 
license plate pricing issues.
    Mr. Pomeroy. On initial Federal investment, carrying costs 
recouped over time.
    Mr. Humann. Recouped by the customers? Right now it would 
be the IS customers, and that is what concerns me. If it is 
recouped by the IS customers, then our customers bear the brunt 
of the cost to somebody else's benefit.
    Mr. Pomeroy. I understand. We have got to get the rate base 
fixed.
    Thank you, Mr. Chairman.
    Senator Dorgan. Let me just mention the California 
experience. Ms. Moler, you have been previously a chairman of 
FERC and you know I have been a rather aggressive critic of 
FERC, suggesting that they have done their best imitation of a 
potted plant for a couple of years in California. And I worry 
very much. I know they have taken some action more lately. But 
I worry very much that the California experience sends some 
signals to us that are not very good signals. And I think it is 
a call to action, but I think it also ought to be a call to all 
of us to be cautious about this notion that the marketplace, 
quote/unquote, by itself will resolve all of these issues, 
because the marketplace has some wonderful and some grotesque 
signals it sends from time to time.
    I have mentioned at the Energy Committee that Judge Judy, 
this cranky little judge on television, makes $7.4 million a 
year in income and the Chief Justice of the Supreme Court is 
paid $180,000, and so much for the market. Or a shortstop for 
the Texas Rangers is paid $252 million. Again, so much for the 
marketplace and its excesses. I am a big fan of the 
marketplace. I think it is a wonderful allocator of goods and 
services, but not perfect and it needs referees. And so we have 
FERC.
    We need especially in the area of energy to be careful. The 
ultimate concern of all of us is to have a consumer that has 
affordable energy when they need that energy.
    And so this is very good testimony. Let me say that 
Congressman Pomeroy is correct, I think all three of you 
presented some interesting testimony for us to consider as we 
put together the additional pieces of the energy bill in 
September.
    I have a couple of additional questions I would like to 
submit to you perhaps and ask you to send responses to us for 
the record. And we thank you very much for being here.
    Next, we will hear from Tracy Anderson, program manager at 
3M Electrical Products Division; Clifford Porter, Lignite 
Energy Council in Bismarck, North Dakota; and James Caldwell, 
policy director of American Wind Energy Association. If you 
would come forward, please, I would appreciate it.
    Why don't we begin with Mr. Anderson. Mr. Anderson, you are 
representing 3M Company and, I believe, are here to talk about 
the new technology issues in transmission. Thank you very much 
for being here.

         STATEMENT OF TRACY ANDERSON, PROGRAM MANAGER, 
         3M ELECTRICAL PRODUCTS DIVISION, ST. PAUL, MN

    Mr. Anderson. Good morning, Mr. Chairman, Representative 
Pomeroy and Mr. Lowery.
    I would like to thank you again for this opportunity to 
appear before you today to talk about this composite conductor 
technology.
    In all of the debate surrounding energy one of the 
forgotten elements is the cable, itself, and, more 
specifically, what materials the cables are produced from.
    The composite conductors that are in development by 3M are 
made with a new material, not steel like exists in our aluminum 
conductor steel reinforcement conductors that are installed in 
about 90 percent of the U.S. network. The composite conductors 
are reinforced with a high-strength ceramic fiber. This is a 
technology built on 3M's leadership in oxide fibers. Each 
composite wire within the conductor in fact contains about 
25,000 of these high-strength ceramic fibers. The fibers are 
fully embedded in high-purity aluminum to provide some 
conductivity.
    The material has been developed specifically for this 
application, meaning that it is resistant to UV exposure over 
its lifetime. There are no galvanic material science issues 
between the fibers in the aluminum. And the fact that we have 
high-purity aluminum inside embedded fibers essentially gives 
us some conductivity developed into the steel used today.
    The conductor has been designed with the application of 
ampacity increases in mind, where the idea is essentially take 
down the existing conductors and install one of these composite 
conductors to get more power through the existing corridor, and 
in doing that because of the improved performance of the 
materials, it is possible to get substantial increases in the 
amount of power while still respecting the clearance 
requirements and not increasing the mechanical or structural 
loads in the towers.
    We have done initial design studies in partnership with 
leading utilities throughout the United States, and sponsored 
by the Department of Energy, to take a look at what the 
potential would be for this technology, and we have well-
documented ampacity gains--that is the term that is used to 
measure the current--of up to 300 percent with a doubling very 
typical over the conventional conductor technology. In all 
cases the studies assume that towers were not modified or 
reinforced. So it is a very quick solution that has a lot of 
other side benefits.
    Most importantly, detailed economic analyses were also 
carried out as part of these studies in the composite 
conductor. It was shown they could offer substantial cost 
savings at the system level, even though it might cost more on 
a per-unit length basis than the conventional conductors.
    Key attributes of this new composite wire that has been 
developed by 3M is a very high-strength weight ratio, 
essentially is on a per-unit weight basis about ten times the 
strength of aluminum and three times the strength of steel. 
That is one very important property.
    The second is the fact that at high temperature, it does 
not expand very much, and that is a very important property for 
materials because an overhead conductor that expands by about 1 
foot in its length actually sags about 10 feet more by the time 
you actually measure that, so you want materials that are very 
stable in respect to thermal expansion. Then there is a range 
of other properties that make it very good for this sort of 
application.
    We have been working on this topic for some time and we are 
at a pivotal point right now where the conductor has been 
tested by a European utility. It is actually a lower-
temperature version of what would be required for the U.S. 
network. And we have test data on a small-diameter version of 
this conductor and there has been a whole range of properties, 
such as sag tension, strength, stiffness, and so forth, that 
utilities need to have confidence in this conductor that has 
been tested, and the results have been very promising and 
matched what you would predict from the constitutive 
properties.
    We are at a point right now where we need to have field 
trials installed to get that confidence on the part of the 
utilities, in addition to having available some of the larger-
diameter versions of the conductor, and we also need a version 
that operates at high temperature. DOE funding and technical 
support, in our opinion, is needed to strengthen this 
technology, the development and the implementation through 
selected field trials. These are needed to improve and assess 
the economic and technical benefits of this new conductor 
technology and to demonstrate the benefits to the U.S. utility 
industry.
    The participation and expertise of the Department of 
Energy's National Laboratories are also important to the 
acceleration of this technology. Their expertise in selecting 
utilities for field testing, as well as designing the 
instrumentation and monitoring and documenting the performance 
of the conductor is central to the rapid deployment of this 
revolutionary product.
    They also play an important role in assessing the national 
impact of such technology. And a couple of the labs have 
groundbreaking technology that could really help out here.
    In closing, I would like to thank you for the opportunity 
and I will look forward to answering your questions.
    [The prepared statement of Mr. Anderson follows:]
 Prepared Statement of Tracy Anderson, Program Manager, 3M Electrical 
                    Products Division, St. Paul, MN
    Good Morning, Mr. Chairman. Thank you for the opportunity to appear 
before you today to talk about 3M's Composite Conductor Program.
    As you may know, 3M is a diversified manufacturing company with 
sales of just over $16 billion dollars. The company has more than 40 
product divisions and is organized into six market centers: Industrial 
Transportation, Graphics and Safety, Health Care, Consumer and Office, 
Electro and Communications and Specialty Materials. As a result, the 
broad range of products we manufacture defy efforts to categorize us. 
From delivering power or communications to your home; transporting you 
safely in your automobile to manage your busy schedules with the 
ubiquitous Post-it Notes, it is sufficient to say we impact your lives 
daily.
    Generally we can be thought of as a materials company; we are good 
at focusing our various technological strengths into new materials and 
the products that flow from them. The lifeblood of 3M is this flow of 
new products. To sustain the flow of critical technologies on which new 
products are based requires substantial annual investment in research 
and development. In 2000, 3M invested just over $1 billion to this end.
                            a new conductor
    The Composite Conductors are reinforced with high strength ceramic 
fibers; a technology built by 3M leadership in oxide fibers. Each 
composite wire in the core of the cable contains thousands of ultra-
high strength, micrometer sized fibers. The fibers are fully embedded 
within aluminum metal. The 3M composite is resistant to UV exposure 
over its lifetime and there is no galvanic corrosion between the fibers 
and aluminum in high humidity and wet environments. The pure aluminum 
matrix enables a high conductivity in comparison with the steel cable 
or ACSR in use today.
    The Conductor has been designed to substantially increase ampacity 
for the reconducting of existing overhead transmission lines. Initial 
design studies done in partnership with leading utilities, and 
sponsored by DOE, have demonstrated potential ampacity increases of up 
to 300% over existing commercial conductor technology. In all cases, 
the studies assumed that the towers were not modified or reinforced. 
Most importantly, detailed economic analysis indicated that the 
composite conductors could offer substantial cost savings at the system 
level by increasing the capacity of existing transmission corridors.
    The key attributes of 3M conductor are: high strength (10 times 
that of aluminum) light weight (1/3 the weight of steel, low electrical 
resistance (1/4 that of steel) Low thermal expansion (1/4 of aluminum), 
retain properties up to 300 degrees Celsius, low creep (less than 
steel), good fatigue resistance, high stiffness and it is sensitive to 
the environment.
                conductor qualified by european utility
    3M development has reached a pivotal point where composite 
conductor have been made and tested by a leading European utility for 
use on the 69-230 kV network with maximum operating temperature of 150 
degrees Celsius. Critical properties such as sag-tension data, 
strength, stiffness, thermal expansion, resistance, creep have been 
validated for this class of composite conductors, i.e., and (26/7) 
ROUND 1350 AL-composite conductors.
                         need for field trials
    DOE funding and technical support is needed to strengthen the 
technology development and implementation through selected field 
trials. These are needed to prove and assess the economic/technical 
benefits of the new conductor technology and to demonstrate the 
benefits to the utility industry.
    The participation and expertise of DOE's National Laboratories are 
important to accelerate this program. Their expertise for selecting the 
utilities and sites for field testing, as well as designing the 
instrumentation and monitoring and documenting the performance of the 
composite conductor is central to the rapid evaluation and deployment 
of this revolutionary product. They also plan an important role in 
assessing the national impact of this new conductor on the nation as a 
whole. A couple of the labs have groundbreaking technology in the 
wireless instrumentation field that is needed to monitor and assess the 
performance of the overhead conductor and determine such parameters as 
sag. The lab would also support the standardization of this new class 
of conductor and work on identifying potential regulatory and 
implementation barriers.
    In closing, Mr. Chairman I thank for the opportunity to present to 
you today, I'll be happy to answer any questions.

    Senator Dorgan. Mr. Anderson, thank you. We will include 
your complete testimony in the record. And thank you.
    And we ask you again to summarize in 5 minutes. Mr. 
Caldwell, we will include your statement in the record in its 
entirety, and we appreciate your being here on behalf of wind 
energy.

 STATEMENT OF JAMES H. CALDWELL JR., POLICY DIRECTOR, AMERICAN 
                    WIND ENERGY ASSOCIATION

    Mr. Caldwell. Mr. Chairman, Representative Pomeroy, Leon. 
How about them Cubbies?
    At this late hour in this hearing, I would like to take a 
little bit of a risk and talk about a subject that we have not 
broached first and then, secondly, to take a little bit 
different view of the planning and regional transmission 
organization discussion that has been going forward.
    And the first subject I would like to talk about is the 
current grid scheduling and settlement protocols and the terms 
of wholesale trade and what that is doing to the grid.
    Virtually 100 percent of the transactions taking place 
today in wholesale transactions are confined to commodity 
strips and firm blocks of power that are being traded between 
and among the 150 control area operators in this country. And 
that is fine as far as it goes. And it is being done because it 
is easy. It is easy to trade those. It is relatively easy to 
schedule them. It is easy to settle them. It is easy to worry 
about credit terms.
    But the problem is that all of the rules and the protocols 
that are being put forward are essentially making it impossible 
to do anything else but trade those. And that for those 
resources that are not firm, that are not commodity strips and 
are not firm blocks of power, that are so-called non-firm 
resources, is today virtually impossible to settle a 
transaction for physical delivery across control areas. And 
this means that something upwards of 30 to 40 percent of the 
available resources and the cost-effective resources on our 
system are essentially excluded from wholesale trade today.
    Wind happens to be one of those. And that is far and away 
the largest reason why we are having trouble commercializing 
wind energy today.
    The problem is that these rules have been written, again, 
so that only firm blocks of power can be traded. And as I say, 
if it was just wind, that would be one thing, and maybe we 
could deal with that in some form. But it is not.
    As a matter of fact, I can make a case for saying that this 
was the triggering event for the California debacle. That in 
November 1999 the California ISO instituted a whole series of 
tariff changes which put severe imbalance penalties on people 
who deviated from their schedules. And what the result was was 
that people who had been trading power amongst themselves 
somewhat flexibly and settling their schedules flexibly after 
the fact, all of a sudden had to make sure that each one of 
those schedules was firm. And what that did is it drained two 
to three thousand megawatts of reserves out of the California 
system to support each individual schedule as opposed to 
supporting the system as a whole. So that in April 2000 the 
WSCC put out a report which said that reserves in the West 
would be adequate for the summer of 2000, tight but adequate.
    On May 23, right as this report hit the press, then we had 
the triggering event that then ended up in the debacle that 
happened from there. You can go back and you can look at the 
some 20,000 megawatts of transactions through the California 
system and you can detail out how 2,000 megawatts of reserves 
were drained from the system simply to support the imbalance 
penalty provisions that were installed in November 1999. That 
is just an illustration of how some of these terms in wholesale 
trade and some of these rules and protocols can really affect a 
system. And wind in that environment simply gets killed. Wind 
simply cannot operate under those conditions.
    Now, what should we do about that? We have language in the 
Bingaman bill as it exists today, and we can work to see if we 
can firm that language up in any way. And what it would do is 
three things.
    Let us say that none of these things that I am talking 
about are inconsistent with either economic theory or current 
FERC policy. Current FERC policy and economic theory says that 
we ought to be able to do these non-firm transactions, and 
certainly Order 2000 by the FERC does contemplate these kinds 
of transactions, in effect does mandate that one of the 
functions of an RTO is to ensure that these type of 
transactions can take place.
    So the first thing we have to do is we have to facilitate 
the full, complete and rapid implementation of Order 2000 in 
its functions, not so much in its form that we have been 
talking about today, but the functions of those RTOs. And we 
need to encourage the formulation of Order 2002, which will be 
the inevitable fix or the inevitable follow-on to the Order 
2000. This is work in progress, and we started with Order 888, 
Order 2000 built on that, and we will have to build again.
    The second thing that we need to do is we need to have an 
affirmative duty of the FERC to see that the rules, procedures 
and protocols of RTOs and indeed each control area operator 
pending the formation of RTOs allow and encourage non-firm, 
intermittent, as-available transactions.
    And the third thing we need to do is we need to provide for 
exemptions from these kind of rigid scheduling protocols and 
imbalance penalties pending the institution of the above.
    Now, as to the planning and the RTO function, let me take a 
little different view, and let me illustrate by looking at that 
chart there and say that if we take the green region and we 
drop off, I believe that is Saskatchewan and Manitoba up there, 
and we look at the green that is in the United States there, 
just for wind alone we have in that region somewhere around 200 
to 300 thousand megawatts of cost-effective resource, that with 
all due respect to my running partner here, Mr. Porter, that we 
would be perfectly willing to go toe-to-toe with him on bus-bar 
energy cost with lignite with this wind resource if we could 
develop it at that scale.
    And part of the problem that we have in terms of this 
planning process and in terms of RTOs is that, first of all, 
today we have no planning process. None. And we will not have 
if we do it this way and if we do what the rest of the panel 
has said for at least 5 years. It is going to take us 2 years 
to form these RTOs, and at least the first 2 years of the 
operation of these RTOs they are going to be so consumed with 
the day-to-day operations and with getting the people in place, 
with getting their rules down. You know, what happened in Texas 
last week, the day they opened their market, and the prices 
went to a thousand dollars and say, gee, we had a little 
software glitch, we had these flux. And we all know what it 
takes to get these kinds of systems, these kinds of 
institutions, these kinds of people in place, and it is going 
to be 5 years before they can ever turn their view to the long 
term, before they can ever get their head out of all these 
little transactions and all their computer problems, get their 
head out from under the desk and look up and say, what should 
we do in terms of energy policy? And so we will not have a 
planning process if we depend upon just RTOs.
    And I contrast the operation here and say in Texas, now in 
Texas, we do not have FERC jurisdiction, but what we do have--
and let's go back to this green here for a second. In Texas, 
very similar type of thing. West Texas has about 40,000 
megawatts of cost-effective wind resource. Unfortunately, all 
of the load or most of the load is in east Texas. And so that 
there is no transmission effectively between west Texas and 
east Texas.
    So what has Texas done? The first thing it did is, this 
year it decided to install a thousand megawatts of wind in west 
Texas, essentially mining all of the available transmission 
capacity from west to east. And before that is even installed, 
it has already got all but one of the major permits for a 
substantial upgrade that will allow another thousand megawatts 
to come on line in about 18 months.
    And 2 weeks ago I attended a meeting in Austin that 
included representatives from 3M, included representatives from 
the Texas PUC, from transmission owners, from virtually all of 
the stakeholders where we were discussing the technical 
alternatives for transporting 40,000 megawatts--not 300 or 
3,000, but 40,000 megawatts out of west Texas.
    Last Friday there was a follow-on meeting, including 
members of the legislature, including people from the 
Governor's office, talking about this same issue, how do we get 
40,000 megawatts from west Texas to wherever it needs to go?
    I think the difference that we are talking about between 
Texas and what we are talking about RTOs is that in Texas the 
transmission system, URCOT, is politically anchored. It is 
politically anchored to the Texas legislature. And that is one 
of the benefits of not having FERC jurisdiction, if you will, 
that there is one political master, and that political master 
made some decisions and they said that we will develop this 
resource in west Texas, and as a result then the technicians 
set about taking care of it.
    And it is the political anchoring of these RTOs that has 
been missing from the discussions so far. I despair of having a 
Midwest ISO that goes all the way from Oklahoma up through this 
region over into Virginia having any kind of political 
anchoring. And I don't think it is going to happen at the 
congressional level. It is certainly not going to happen at the 
national level.
    If it is not going to happen at the national level and is 
not going to happen at the State level, where is it going to 
be? And I think we need to consider these RTOs as being 
political bodies or at least having some political legitimacy 
to their outcome and to their formation and to their operation. 
And unless we make those considerations we are never going to 
get there from here. Thank you.
    [The prepared statement of Mr. Caldwell follows:]
     Prepared Statement of James H. Caldwell Jr., Policy Director, 
                    American Wind Energy Association
    My name is James H. Caldwell Jr. I am Policy Director for the 
American Wind Energy Association (AWEA). AWEA is proud to represent an 
industry poised to make significant contributions to the nation's 
energy supply and to rural economic development. AWEA is pleased to be 
in Bismarck--a place that represents a major portion of the wind 
industry's future--to speak on the timely subject of electric 
transmission infrastructure and investment needs.
    Before discussing the wind industry's views on electric 
transmission policy, a few words about the wind resource potential and 
economics are in order. Table 1 below lists electric generation 
capacity from wind divided geographically in the same way as the 
nation's electric transmission grid.

                                   Table 1.--ELECTRICITY GENERATION FROM WIND
                                            (Nameplate Capacity, MW)
----------------------------------------------------------------------------------------------------------------
                                                                                           Economic potential
                                                                              In-      -------------------------
                            Region                              On-line   development   @$2 natural  @$4 natural
                                                                                            gas          gas
----------------------------------------------------------------------------------------------------------------
West..........................................................    1,800      3,000        35,000       200,000
Midwest.......................................................      610        700         1,000       350,000
East..........................................................       35        225           500         7,000
Texas.........................................................      200        900         1,000        40,000
South.........................................................        2         20           100           600
----------------------------------------------------------------------------------------------------------------
    Total.....................................................    2,615      4,800        38,000       600,000
----------------------------------------------------------------------------------------------------------------

    In this table, ``in development'' is defined as identified projects 
with identified sites, owners, and customers who have agreed on price, 
timing, and quantity. Because the physical construction of a wind 
project is so quick, this broader definition is a truer measure of wind 
projects that will be on-line soon rather than the conventional 
designation of ``under construction.'' ``Economic potential'' is 
defined as the amount of wind capacity available at today's technology 
and today's costs that would yield equal or lower bus-bar energy costs 
than a new natural gas fired plant at the stated gas price given 
reasonable environmental and land use constraints on wind development.
    The fact that almost twice the existing wind capacity is currently 
under development makes wind the fastest growing electric generating 
source in the country. Indeed, more wind capacity is under construction 
in the United States than new coal and nuclear combined. In a growing 
number of regions in the U.S., wind is the most popular fuel diversity 
hedge against rising natural gas prices. The economic potential columns 
in Table 1 should be read like conventional oil, gas, and coal proven 
and probable reserve statistics. The basic data underlying the numbers 
is several years old and the DOE will issue an update later this year. 
Like oil and gas reserves, the numbers tend to grow as development 
occurs. The recent rapid development of the wind resource in West Texas 
has caused more ``potential reserves'' to be ``found'' and the new DOE 
update will show approximately double the economic wind resource in 
Texas as that in Table 1.
    What these data show is that there is enough wind resource 
available at today's technology and expected fossil fuel prices in the 
Upper Colorado and Missouri river basins plus West Texas to satisfy all 
the nation's electricity demands. Indeed it is realistic to expect that 
with appropriate public policies, about 20% of the nation's electricity 
could eventually be generated by the wind. Wind could be making a 
significant contribution to the nation's energy supply within a decade. 
Furthermore, this policy would be in the country's economic self-
interest even before environmental and economic development 
considerations. The vast majority of the commercially significant wind 
resource is on land now used for ranching and dry land farming, and 
harvesting of the wind ``crop'' does not interfere with these 
traditional uses. Royalties to the landowner for leasing space to wind 
turbines generally return many times the annual income of the 
agricultural crop that is displaced. Harvesting the wind for 
electricity uses a renewable domestic resource and creates no emissions 
of either carbon dioxide or criteria air pollutants. Thus, a multi-
billion dollar per year rural economic development program, a ``no 
regrets'' global warming policy, and a significant acid rain/regional 
haze mitigation measure come along naturally as added benefits to the 
development of wind based solely on bus bar energy prices. Clearly, 
sound energy policy should include measures to ensure wind's rightful 
place in the suite of electricity supply options.
    In order to fulfill this promise, the wind industry must attract 
significant capital, and no public policy is more important to this 
capital formation than electric transmission policy. As folks around 
here know all too well, only a few hardy people live where the wind 
blows hard enough and long enough to be commercially significant. 
Unless the wind to electricity ``crop'' can be efficiently brought to 
distant markets, capital will not be attracted to the industry, and the 
economic, rural development, and environmental promise of wind energy 
will not be realized.
    Transmission related issues for wind fall into two general 
categories: grid operation rules that promise fair treatment for 
``intermittent'' and ``as-available'' resources like wind; and robust, 
proactive grid expansion planning that anticipates long term needs for 
transportation services. Wind is an ``intermittent'' resource, meaning 
that it only produces energy when the wind blows, and its output is 
``as-available'' meaning that, even with accurate forecasting, the 
exact timing of its energy output cannot be precisely predicted. These 
characteristics are not desirable, but they are not fatal and are 
shared by many other potentially cost effective resources. Indeed, they 
are shared by electricity demand itself and are routinely handled in 
that context without complaint or cost by grid operators worldwide.
    Grid operation rules that accommodate intermittent resources like 
wind include the following technical features:

   Network transmission access fees paid by load.
   Flexible near real time scheduling.
   Penalty free imbalance settlements in a liquid spot market.
   Long term non-firm transmission rights at volumetric 
        pricing.
   No pancaking of transmission access fees.
   Robust secondary markets in transmission rights.

    These features are required for efficient transport of wind energy 
from its rural sources to urban load centers over the transmission 
grid. It is important to point out that these same features are 
required by many of the newer non-traditional resources such as as-
available cogeneration, distributed generation, run-of-the-river 
hydroelectric, demand response bidding, etc. In the near future, as 
much as 30% of the cost effective resources on the grid will require 
these or similar features. If these features are not offered by 
transmission owners and grid operators, essential reserves will be 
drained from the system and cost effective resources will be ignored. 
The inevitable result will be higher electricity prices and reduced 
reliability.
    To explain what each of these technical features means and why they 
are important for efficient grid operation requires fairly detailed 
technical knowledge of commodity market operations in general and 
electric grid operations in particular. AWEA here simply points out 
that all of the above are consistent with theoretical economic 
efficiency, all comport with current Federal Energy Regulatory 
Commission (FERC) policy, and none are available at most locations in 
today's wholesale electricity markets. Instead, what wind sees in 
today's market are the following:

   Rigid scheduling protocols with strong deviation penalties.
   Imbalance settlements in dysfunctional ``markets'' or 
        punitive non-cost based penalties.
   Market balkanization with significant ``trade barriers'' 
        between adjacent utility ``control areas.''
   FERC Order 888 pro-forma tariffs that presume perfect 
        dispatchability.
   Inflexible requirements for a ``balanced schedule.''
   A persistent and uneconomic bias toward ``commodity strips'' 
        and ``firm'' unit sales.
   No short term transmission rights. No flexibility for 
        partial resale of long term rights.
   No politically legitimate regional planning process.

    The existing transmission grid was designed and built for 
traditional large central station power plants that can precisely 
predict, and in many cases precisely control, their output. However, 
these large power plants are also subject to occasional ``forced 
outages'' or ``trips'' where the electric output suddenly goes to zero 
and grid reliability would be compromised if these ``contingencies'' 
were not anticipated and planned for. The considerable costs of 
planning for these contingencies is not charged to the individual 
generating unit but is shared by all users of the grid. Rules and 
protocols like the above list that do not affect dispatchable resources 
but that are convenient for risk-averse grid operators grew up as a 
means of simplifying the difficult job of balancing supply and demand 
in real time. Wind and many other non-traditional resources are not 
nearly as likely to suffer sudden, complete loss of output as, for 
example, nuclear plants, but cannot precisely predict or control their 
output in real time. Yet the current grid operating protocols do not 
value wind's resilience but unfairly punish its variability.
    In 1996, when the FERC was writing the initial set of rules 
governing wholesale competition in Order 888, it put forth a pro-forma 
tariff designed on a natural gas model and meant to serve as a least 
common denominator for grid operator behavior. Quite naturally, it 
presumed traditional resources and simply ignored the commercial needs 
of newer non-traditional resources. Transmission owners and grid 
operators took this tariff not as a floor but a ceiling that defined 
minimum acceptable behavior towards competitors and transmission owners 
did not take one step beyond the bounds of that tariff no matter how 
cost effective. The FERC quickly realized this limitation of Order 888 
and, in late 1999, issued a sequel called Order 2000. Order 2000 
carries an explicit requirement that ``Regional Transmission 
Organizations'' or RTOs (the FERC preferred form of transmission 
provider) offer or facilitate the offer by third parties of competitive 
services much like the above list of wind's needs. Unfortunately, FERC 
authority to require RTOs or their functional equivalent only extends 
to less than two thirds of the grid. What has been even more 
problematic is a ``passive-aggressive'' attitude by the FERC it has 
been aggressive about asserting jurisdiction over the wholesale grid, 
but passive about regulating grid operators or requiring compliance 
with its policies once it obtained jurisdiction.
    As a result, of all the areas of significant commercial wind 
potential, only Texas has a set of operating protocols conducive to the 
use of the grid by intermittent or as-available resources like wind. 
Somewhat ironically, the East Coast ``Independent System Operators'' 
with only scattered wind resource potential have nevertheless spent 
considerable time and effort designing rules that can accommodate 
intermittent resources.
    Congress is currently debating major changes to national energy 
policy including clarifying and redefining the role of the FERC in 
regulating wholesale commerce in electricity. This legislation should 
include provisions that:

   Ensure complete, rapid implementation of the principles and 
        commercial functions of RTOs as enumerated in FERC Order 2000.
   Define an affirmative duty of the FERC to ensure that 
        transmission providers design operating rules and protocols 
        conducive to fair, economic participation in wholesale markets 
        by intermittent and as-available resources like wind.
   Provide for exemptions from restrictive policies like 
        imbalance penalties for intermittent resources pending 
        maturation of markets and development of institutions capable 
        of efficiently dealing with these non-traditional resources.

    Consistent, fair grid operating rules are essential to allow wind 
to reach its full economic potential. So too are robust, pro-active 
grid expansion policies. One of the principal advantages of wind is 
that it can be developed quickly in small increments thereby reducing 
risks of over-investment in generating capacity or responding quickly 
to unexpected shortages. This attribute is extremely valuable as the 
emerging wholesale market rewards investment flexibility and short lead 
times. Many unanticipated surprises can occur in the almost ten years 
it would take to plan, design, and build a new nuclear plant. Once it 
begins operation, a nuclear plant's energy arrives in one large lump 
that must be swallowed whole by the market. Wind does not have these 
problems. Unfortunately, transmission expansion shares the undesirable 
characteristics of long lead time and ``lumpy'' investment.
    While the gross quantity of investment in transmission is small in 
relation to investment in generation, it is essential to have adequate 
transmission capacity in place before the new generation can operate. 
This requires planning and at least some investment in advance of the 
need for new generation. These requirements are particularly acute for 
wind resources which are generally developed quickly, are remote from 
load centers, and must be located in specific windy locations.
    Here again, Texas serves as a model for transmission planning 
processes favorable to the development of wind resources. The nearly 
1,000 MW of new Texas wind development this year essentially ``mined'' 
all the available West to East transmission capacity in Texas, but even 
before most of this new capacity is in operation, planning has begun in 
earnest for the transmission expansion necessary to serve the next 
large increment of wind capacity. Furthermore, mechanisms are in place 
in Texas that allow for the ``lumpiness'' of these investments to be 
financed by all users of the grid for eventual repayment by user fees 
over time.
    Texas has the distinct advantage of only one regulatory body with 
political oversight only at the state level. Texas intentionally 
avoided electrical connections with the rest of the country to avoid 
interstate commerce and attendant Federal jurisdiction. Texas is large 
enough both geographically and in electricity demand that the economic 
consequences of this decision are minimized. Moreover, it is 
politically and culturally compact enough that policy decisions and 
regulatory philosophy can consistently and quickly be converted into 
detailed tariffs, rules, and protocols. The advantages of this 
political structure are maximized in times like these where shifting 
technology and shifting ideas about market structure are much more 
difficult to implement when regulatory jurisdiction and political 
oversight of the monopoly transmission system is divided between 
Federal and state governments and political consensus is difficult to 
reach among diverse interests.
    It is for this reason that the FERC has promoted ``RTOs'' or 
regional transmission bodies as the appropriate scale for transmission 
planning that neither strictly respects state boundaries nor 
conveniently fits with a ``one-size-fits-all'' federal model. 
Unfortunately, these new regional organizations will take years to put 
in place, and then more years to achieve political legitimacy. 
Experience to date graphically illustrates the fact that the early 
years of these organizations will be consumed by problems of day-to-day 
operations for reliability and development of short-term market 
structures necessary to efficiently handle existing resources. If 
wind's economic potential is to be realized in a timely way, some jump-
start to the long-term planning process will be necessary.
    Fortunately, of the major wind resource areas, one, Texas, already 
has that jump start and the others, the Upper Colorado and Missouri 
basins, have an appropriate regionally based organization with the 
charter and expertise to conduct at least the preliminary planning--the 
Western Area Power Administration. Congress should require WAPA to 
conduct a long range planning exercise on technical options for 
bringing the vast wind resource potential in the Upper Great Plains to 
the urban load centers in both the Midwest and the West. This should be 
an open process which includes both resource rich but rural and 
resource poor but populous states, environmental interests, existing 
WAPA customers, Native American tribes, and other stakeholders in the 
region. The engineers can build whatever is politically desirable and 
economically attractive The difficulty is in defining the terms of 
reference for these concepts. As stated earlier ``economically 
attractive'' must include environmental and rural economic development 
considerations in order to be politically desirable.
    In summary, AWEA believes that wind resources can only reach their 
true economic and environmental potential if Congress takes this unique 
opportunity to formulate constructive electric transmission 
infrastructure policies that accommodate a maturing wind industry, and 
serve the nation's electricity consumers, rural landowners looking for 
economic development, and environmental interests in a win/win 
proposition.
    Together with policies such as the production tax credit extension 
to stimulate early capital formation, effective transmission planning 
and grid operating polices will ensure timely development of the 
indigenous, environmentally sustainable, and cost effective energy 
resource that is blowing in the wind. Thank you for this opportunity to 
express our views.

    Senator Dorgan. Mr. Caldwell, thank you very much.
    Mr. Porter representing the Lignite Council. Thank you.

        STATEMENT OF CLIFFORD PORTER, DIRECTOR, LIGNITE 
  RESEARCH, DEVELOPMENT AND MARKETING PROGRAM, LIGNITE ENERGY 
                     COUNCIL, BISMARCK, ND

    Mr. Porter. Thank you, Senator Dorgan, Representative 
Pomeroy, Mr. Lowery.
    First, I am Clifford Porter. I am director of the Lignite 
Research, Development and Marketing Program and also director 
of research and development for the Lignite Energy Council.
    I am here today as a designee for John Dwyer, who could not 
attend the meeting. He is off on military duty. He does want me 
to assure the committee that he feels that transmission is very 
important to the State of North Dakota and certainly to the 
lignite energy in North Dakota.
    The State of North Dakota through the Industrial Commission 
and the Lignite Energy Council have formed a partnership, and 
the design of that partnership is to revitalize the lignite 
industry. The program that we have right now is called Lignite 
Vision 21. It has a vision to construct one or more 500-
megawatt base-load lignite-fired powerplant in North Dakota.
    A 500-megawatt lignite-fired powerplant means an increased 
production of 3 million tons of lignite annually, $140 million 
of total business volume for the State, and $6 million in State 
tax revenue on an annual basis. Also, a 500-megawatt powerplant 
in mind would create 1,300 new jobs for North Dakota.
    The Lignite Vision 21 project is a significant economic 
development opportunity for the State of North Dakota. The 
Industrial Commission has provided over a million dollars for 
feasibility studies to support this activity. The feasibility 
studies have identified transmission issues, as well as 
potential routes for additional electrical output from North 
Dakota and has the estimated cost for seven specific sites 
within North Dakota.
    A potential electrical transmission system option may exist 
from North Dakota with upgrades from a site near Beulah, North 
Dakota, down through Huron and Sioux Falls, South Dakota, and 
then on to Lakefield Junction in Minnesota.
    Electrical export from North Dakota is currently limited by 
our existing transmission system. Interested parties must work 
together to resolve these existing limits on export. Resolution 
of these transmission challenges requires congressional, 
Federal agencies, State and government agencies and industry 
working together.
    In addition to our over $1 million in feasibility studies, 
the State of North Dakota and the Industrial Commission have 
committed to provide $20 million to date or $10 million to each 
of two projects, Great River Energy and Montana-Dakota 
Utilities/Westmoreland joint development. Great River Energy 
and Montana-Dakota Utilities/Westmoreland have initiated 
studies that could lead to construction of a new base-load 
lignite-fired powerplant.
    The Lignite Energy Council members have developed the 
following set of guiding principles to resolve transmission 
issues, and these are given in more detail to the testimony 
that I have provided beforehand.
    But in summary, recognize that transmission business is a 
regulated monopoly and that transmission owners must recover 
their cost.
    Encourage construction of new interstate transmission 
facilities and build a national grid system under FERC 
jurisdiction.
    Support the NERC and North American Energy Reliability 
Organization and their corresponding regional electric 
liability organizations, their standards and enforcement.
    Establish a regional transportation organization.
    Expands research and development for transmission, 
including options such as superconductivity.
    In consultation with appropriate State and Federal 
agencies, develop legislation to provide Federal siting 
authority for rights-of-way for electrical transmission lines 
similar to the authority already existing for natural gas 
pipelines.
    Support the $200,000 WAPA appropriation for studies and 
encourage WAPA to join the regional transportation 
organization.
    Ensure that financial incentives exist to build new 
transmission capability under FERC jurisdiction and assure that 
IOUs and G&Ts are handled equitably.
    Increase electrical export through expanding existing 
transmission system is a key element if the State is to acquire 
the economic development and jobs. Also, transmission is a key 
element if the surrounding region is to have access to 
additional low-cost base-load reliable electricity.
    Again, I thank you for the opportunity to present these 
comments and, again, I express my regrets for Mr. Dwyer that he 
is not able to attend.
    Thank you, Senator.
    [The prepared statement of Mr. Porter follows:]
  Prepared Statement of Clifford Porter, Director, Lignite Research, 
Development and Marketing Program, Lignite Energy Council, Bismarck, ND
    The Lignite Energy Council is a regional association whose primary 
interest is the development of lignite coal as an energy source. The 
membership of the association includes (1) the major producers of 
lignite coal in North Dakota and Montana, (2) all investor-owned 
utilities and rural electric cooperatives headquartered in North Dakota 
and Minnesota who have interests in plants that generate electricity 
from lignite, and (3) over 200 contractors and suppliers who provide 
goods and services to the lignite industry.
    The Lignite Energy Council is pleased to provide testimony to the 
Subcommittee on Water and Power regarding the electric transmission 
infrastructure and investment needs in North Dakota (ND).
    Mr. John Dwyer, President of the Lignite Energy Council, is on a 
military assignment and regrets that he is not able to be here to 
provide this testimony. However, he wants the Subcommittee to know that 
he feels strongly about the need to expand the transmission network in 
ND.
    The State of North Dakota and the Lignite Energy Council have 
formed a government/industry partnership to promote the use of North 
Dakota lignite and to enhance economic development. In the summer of 
1999, the North Dakota Industrial Commission (Industrial Commission), 
whose current members are Governor John Hoeven, Attorney General Wayne 
Stenehjem and Commissioner of Agriculture Roger Johnson, and the 
Lignite Energy Council initiated a partnership between the state and 
industry designed to revitalize the North Dakota lignite industry. This 
initiative is called the Lignite Vision 21 Project (LV21P). The LV21P 
project manager is Mr. Tony Rude, who is the former Chief Executive 
Officer (CEO) of United Power Association and co-CEO of Great River 
Energy.
    The vision of the LV 21 initiative is to construct one or more 
state-of-the-art lignite-fired base-load generating stations located in 
ND that utilize cost-effective generation technologies, the latest 
environmental technologies and the highest efficiency to meet the 
reliable low-cost electricity demands in our region.
    For North Dakota, a 500 MW plant means 3 million more tons of coal 
mined annually, 1,300 additional permanent jobs, $140 million more 
annual business volume and $6 million more tax revenue annually. 
Besides meeting our region's energy needs, the Lignite Vision 21 
Project will provide much needed economic development for the citizens 
of ND. The state of North Dakota through the Industrial Commission has 
provided significant support to promote the project. The Industrial 
Commission has provided over $1 million for feasibility studies to 
address environmental, generation, and transmission issues. 
Additionally, the Industrial Commission has provided up to $10 million 
in matching grants for detailed feasibility and permitting assistance 
for each project. To date, the Industrial Commission has approved 
funding for two potential projects--Great River Energy for a site to be 
selected and Montana-Dakota Utilities Company, who is involved in a 
joint development with Westmoreland Coal Company for a site at 
Gascoyne, ND.
    Black and Veatch, who conducted the generation study, believes the 
construction and operation of the plant is feasible and the project can 
be competitive in the marketplace. ABB Power analyzed existing 
electrical transmission system, identified system upgrades and 
recommended options to increase electrical export from North Dakota. As 
a part of their study, ABB recommended a proposed option for an 
existing transmission route that would increase the electrical export 
capability out of North Dakota to 2450 MW. This option included a 
system upgrade to the Antelope Valley to Huron line to permit 500kv 
operation and extending the line to Sioux Falls, South Dakota, and 
constructing a 345kv line to Lakefield Junction in Minnesota.
    The Industrial Commission and industry have provided $300,000 in 
additional funding for subsequent transmission studies evaluating the 
potential and estimated costs for additional electrical export from 
seven sites in North Dakota. ABB estimated the cost for upgrading the 
system from Antelope Valley to Lakefield Junction at $130,000,000 to 
$160,000,000. Site-specific cost for each of the seven locations was 
estimated at an additional $2,000,000 to $50,000,000.
    Additional studies have been proposed to evaluate options for 
eliminating restraints to the present electrical transmission system 
and for providing alternatives to further increase electrical export 
capability from North Dakota.
    The LV21P studies have identified major challenges that need to be 
solved and have identified how these challenges can be solved by the 
interested parties working together, including Congress and federal 
agencies, state government and agencies and industry.
    In that regard, the Lignite Energy Council and its members have 
developed the following guiding principles to resolve transmission 
issues concerning our state. They are as follows:
    1. Recognize that the transmission business is a regulated monopoly 
and as such transmission owners need to have assurance from the Federal 
Energy Regulatory Commission (FERC) that they can recover their cost.
    2. Encourage construction of new interstate transmission facilities 
to build a national grid system under FERC jurisdiction.
    3. Support the National Electric Reliability Council (NERC)--North 
American Electric Reliability Organization (NAERO) proposed national 
electric reliability organizations and regional organizations and 
standards with authority to set and enforce reliability standards 
subject to FERC oversight.
    4. Establish a regional transmission organization (RTO).
    5. Direct the Secretary of Energy to expend research and 
development on transmission superconductivity and other means to 
increase transmission capacity.
    6. Direct the Secretary of Energy, in consultation with the 
appropriate federal agencies and state and local governments officials, 
to develop legislation to provide federal siting authority and to grant 
authority to obtain rights-of-way for electricity transmission lines. 
Similar authority already exists for natural gas pipelines in 
recognition of their role in interstate commerce.
    7. Support the $200,000 federal appropriation for the Western Area 
Power Administration (WAPA) enhancement studies and provide the 
authority and encourage WAPA to join a RTO. In conducting transmission 
studies, WAPA must be sensitive to their limited resources and their 
primary mission to ensure that the reliability of the WAPA system is 
maintained.
    8. Ensure the financial incentives to build transmission benefit 
both utilities subject to FERC jurisdiction as well as those that are 
not subject to FERC jurisdiction. Investor owned utilities (IOUs) and 
generation and transmission cooperatives (G&Ts) have different 
regulatory, financial and corporate structures. These organizations 
must be handled equitably.
    The Lignite Energy Council appreciates the opportunity to provide 
testimony to the Subcommittee on Water and Power regarding improvement 
to the transmission network in North Dakota and the surrounding region. 
Without these transmission improvements, the LV21P power plant will not 
be constructed, North Dakota will lose out on all the jobs and economic 
development, and the surrounding region will not have access to the 
additional low-cost base-load reliable electricity.

    Senator Dorgan. Mr. Porter, thank you very much.
    I would ask, Mr. Anderson, you have field-tested your 230-
kV line in Europe, I understand. Have you field-tested your 
line anywhere in the United States, especially the larger 
capacity lines?
    Mr. Anderson. No, we have not. We have actually installed 
one span in Europe and also one span in the United States that 
has operated under current, but we have not installed a multi-
span installation as part of our field tests.
    Senator Dorgan. Do you have plans to do that?
    Mr. Anderson. We would like to do that, yes.
    Senator Dorgan. Mr. Porter, tell me what your impression is 
of the TAG project, the Transmission America Grid project. Have 
you been involved in that and, if so, what is your position on 
it?
    Mr. Porter. Certainly, Senator. I don't know if it is 
appropriate to say we have been involved with it. We certainly 
have been following it. I think the concept of looking at a 
national grid, however that is developed, is something that we 
think is very important and key to the export of power from 
North Dakota. Whether that is the base-load reliable lignite-
fired power or whether that is the wind energy, I think those 
both have the same requirements.
    Senator Dorgan. You talked about one or more powerplants 
when you talked about Vision 21. We have talked a great deal 
about clean coal technology in conjunction with Vision 21. Can 
you tell me, provided we have the transmission capability, what 
your expectation might be with respect to the production of 
lignite in the future for this State?
    Mr. Porter. I think it is very encouraging to look at these 
two Lignite Vision 21 projects that are currently moving 
forward, and they are evaluating advanced technologies, 
including integrated gasification combined cycle. There are 
also some recent new developments in Europe looking at super 
critical boilers that look at efficiencies in the neighborhood 
of 42 percent. So I think there are some exciting options for 
us out there in terms of new production from the lignite fields 
in North Dakota.
    Again, I just reiterate that getting power out of North 
Dakota is key. Certainly we are an energy-rich State and we can 
produce a great deal more energy than we can consume inside. I 
am also encouraged to see that although we have two proposals 
on the table, we have other people that are talking and we 
anticipate that we will be looking at other options as we go 
down the road.
    Senator Dorgan. Mr. Caldwell, as you discussed your 
testimony this morning with us, it occurred to me that much of 
what you are talking about could be accomplished by an 
aggressive FERC. Is that the case, and, if so, what remains and 
must be done legislatively, in your opinion?
    Mr. Caldwell. Well, first of all, I think an aggressive 
FERC is probably an oxymoron. You know, in terms of the 
criticism of the FERC, my criticism of the FERC in the recent 
past has been that it is passive-aggressive, that it is very 
aggressive about asserting its jurisdiction and very passive 
once it gets it.
    I think that is, first of all, genetic. It is the way it 
has been for 70 years. It has been in a position of appellate 
review. It has been a fairly sleepy place for a lot of years. 
And to think that all of a sudden that organization can be the 
traffic cop on the beat when I do not think it even knows how 
to carry a gun, I do not think it has a permit currently to 
carry a gun, and I do not think it has ever been trained in how 
to carry a gun, and I do not see it being the cop on the beat 
and I do not see it being the proactive regulatory commission.
    Part of the reason is because it is not anchored 
politically. It is sitting off all by itself up there at 888 
First Street. It is very close to the Capitol. But I recall, my 
wife was working for the EPA about 3 years ago when Order 888 
came out, and the EPA had some issues with Order 888, and so 
Mary Nichols, the assistant administrator for air and 
radiation, went to then Vice President Gore to talk about these 
issues that the EPA had with the FERC, and Vice President Gore 
said, Who are those guys? Who are they? And my wife's boss 
said, Well, you appointed them. He said, Well, why? What do 
they do? And that it is just simply not politically anchored. 
And if we expect this organization to be aggressive, if we 
expect it to take all these things to talk about this vision, 
and with all due respect, I would say the vision of one or two 
powerplants is not a vision, it is small steps by tiny feet. 
Now, it may lead to large things down the road, but we need to 
have the vision. That vision must come from the political 
entities, not from the regulatory people.
    Senator Dorgan. I got the feeling it was therapeutic for 
you to be able to answer that question.
    [Laughter.]
    Senator Dorgan. I almost felt I should take a microphone to 
Betsy Moler because she was probably gritting her teeth through 
some of that.
    Congressman Pomeroy.
    Mr. Pomeroy. Mr. Chairman, must be the clear air out here, 
the hearings outside the Beltway, at least as evidenced by this 
one this morning, are a heck of a lot more interesting than the 
ones you will find in any Senate or House office building in a 
given day. My commendation to all participants. This morning's 
hearing has been a particularly good one. We like straight talk 
out here, Mr. Caldwell, and, by God, you brought it.Who imposed 
that reserving change or the certainty change that you 
referenced having an impact on power available out in 
California?
    Mr. Caldwell. It was one of those things that had good 
intentions. I mean, it was intended to correct a problem that 
existed in California, and it was referred to as the under-
scheduling problem. And that problem came about because, again, 
the only way that people could actually physically transact for 
effect in the spot market was to deliberately unbalance their 
schedules and, therefore, put them in the spot market, and that 
was beginning to create reliability problems. In order to solve 
that perceived problem, the ISO instituted things to make 
people follow their schedules, and it had the unintended 
consequence, as I say, of draining reserves.
    I think that is the kind of thing that you are going to see 
from these RTOs, is they struggle to come up with the rules and 
the protocols to govern this thing. It is not easy to figure 
out how to do all of these things and how to do all these 
transactions, and especially if you start off from the 
proposition that I am independent and I am outside the market, 
that I am Zeus, I am not Olympus, who is going to watch all 
these people down in the Plains and let them duke it out in the 
marketplace, and I am up here just to ensure to keep the lights 
on. And that is a very, very difficult job. And it is going to 
take a long time before we ever get that right, and it is going 
to be a continuing problem. And this is just an example of the 
kind of thing.
    So, again, I think the problem with these organizations is 
more of governance and how they change and how they can adapt, 
that we set them up and we say, okay, we are going to design 
the perfect system, we are going to design the perfect market, 
and it never works, there is always a problem.
    And if there is a little problem, the one thing that 
markets are good at doing is they are good at driving that 
little itty-bitty wedge and driving it wide open. And that is 
what people are going to do. They are going to see a slight 
advantage and they are going to drive it open. These 
organizations are going to have to be able to adapt, they are 
going to have to be able to evolve, and the predators are going 
to have to--right now only the predators can evolve, and the 
prey cannot, and we tie people's hands.
    We say we cannot change the rules. If we go to the FERC, it 
is 18 months before we can get a tariff change. It is $400,000 
and a year before we can ever get an adjudication of a 
complaint. We can't operate that way with that speed, that 
clock. And I think that was what the problem was in California, 
and we are going to face that as we try to get our act together 
in this new market rules.
    Mr. Pomeroy. Mr. Chairman, I know you want to adjourn the 
hearing at noon. We are at the appointed hour, so I will hold 
additional questions other than just to commend Mr. Anderson 
and Mr. Porter for excellent testimony. There is a couple 
things I would like to pursue with you as we break up here.
    Senator Dorgan. Let me again thank all of those who have 
come today. I think that these issues are very important. We 
are going through a period of rather profound change in an area 
that is critically important to our citizens.
    We need to make sure that all of these issues work for both 
the producers of energy and consumers of energy, and I think 
the California experience, in which I think the market was 
essentially broken and the system that was being put together 
was fundamentally unworkable as it was constructed, ought to 
lead all of us to be cautious about this.
    It is one thing to not have the capacity on a telephone 
system. In that case, as they say, you get a busy signal, you 
cannot get through. If you have a lack of capacity on an 
electric energy system or a power grid of some type, the 
problem is a blackout. I mean, that is a whole different 
situation.
    So I think especially those of us in our region of the 
country have a healthy conservatism and caution about these 
issues as we move forward. We are trying to do new things in 
new ways, and in some ways it makes us very vulnerable. So we 
need to have thoughtful analysis of where we are heading and 
what the consequences might be, and that is the purpose of 
holding hearings.
    I appreciate very much the testimony that has been 
submitted. We will keep the record open for 2 weeks and we 
would accept testimony from others who wish on behalf of 
themselves or their organization to submit additional testimony 
for this hearing record.
    As I indicated, in September we will reconvene, myself, 
Senator Bingaman and others on the Senate Energy Committee, and 
we will continue trying to write the energy bill. We finished 
the research and development title and we will move to other 
titles. And transmission is a very, very important component of 
the construction of an energy policy so that we have one that 
works for this country. We appreciate all of your being here 
and your patience and your testimony, and this hearing is now 
adjourned.
    [Whereupon, at 12:04 p.m., the hearing was adjourned.]

                                    

      

```