ASSESSING THE CALIFORNIA ENERGY CRISIS:

HOW DID WE GET TO THIS POINT, AND

WHERE DO WE GO FROM HERE?

JOINT HEARINGS

BEFORE THE

SUBCOMMITTEE ON ENERGY POLICY, NATURAL

RESOURCES AND REGULATORY AFFAIRS

AND THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

APRIL 10, 11 AND 12, 2001

Serial No. 107–28

Printed for the use of the Committee on Government Reform

(

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

http://www.house.gov/reform

ASSESSING THE CALIFORNIA ENERGY CRISIS: HOW DID WE GET TO THIS POINT, AND

WHERE DO WE GO FROM HERE?

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ASSESSING THE CALIFORNIA ENERGY CRISIS:

HOW DID WE GET TO THIS POINT, AND

WHERE DO WE GO FROM HERE?

JOINT HEARINGS

BEFORE THE

SUBCOMMITTEE ON ENERGY POLICY, NATURAL

RESOURCES AND REGULATORY AFFAIRS

AND THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

APRIL 10, 11 AND 12, 2001

Serial No. 107–28

Printed for the use of the Committee on Government Reform

(

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

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

MARK E. SOUDER, Indiana

JOE SCARBOROUGH, Florida

STEVEN C. LATOURETTE, Ohio

BOB BARR, Georgia

DAN MILLER, Florida

DOUG OSE, California

RON LEWIS, Kentucky

JO ANN DAVIS, Virginia

TODD RUSSELL PLATTS, Pennsylvania

DAVE WELDON, Florida

CHRIS CANNON, Utah

ADAM H. PUTNAM, Florida

C.L. ‘‘BUTCH’’ OTTER, Idaho

EDWARD L. SCHROCK, Virginia

——— ———

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, Washington,

DC

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

JANICE D. SCHAKOWSKY, Illinois

WM. LACY CLAY, Missouri

——— ———

——— ———

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

JAMES C. WILSON, Chief Counsel

ROBERT A. BRIGGS, Chief Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON ENERGY POLICY, NATURAL RESOURCES AND REGULATORY

AFFAIRS

DOUG OSE, California, Chairman

C.L. ‘‘BUTCH’’ OTTER, Idaho

CHRISTOPHER SHAYS, Connecticut

JOHN M. MCHUGH, New York

STEVEN C. LATOURETTE, OHIO

CHRIS CANNON, Utah

——— ———

——— ———

JOHN F. TIERNEY, Massachusetts

TOM LANTOS, California

EDOLPHUS TOWNS, New York

PATSY T. MINK, Hawaii

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

DAN SKOPEC, Staff Director

JOHNATHAN TOLMAN, Professional Staff Member

REGINA MCALLISTER, Clerk

ELIZABETH MUNDINGER, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on:

April 10, 1001 ................................................................................................... 1

April 11, 2001 ................................................................................................... 239

April 12, 2001 ................................................................................................... 381

Statement of:

Burton, Hon. Dan, a Representative in Congress from the State of Indiana .................................................................................................................. 3

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

California ....................................................................................................... 378

Filner, Hon. Bob, a Representative in Congress from the State of California .................................................................................................................. 375

Hapner, Dede, vice president, regulatory relations, Pacific Gas & Electric;

Stephen Pickett, vice president and general counsel, Southern California Edison; Dean Vanech, president, Delta Power Co.; and Paul

Desrochers, director of fuel procurement, Thermo Ecotek ........................ 299

Hardage, Sam, president, Woodfin Suite Hotels, LLC; Bill Horn, chairman, San Diego County Board of Supervisors; Douglas Barnhart, president, Douglas E. Barnhart, Inc.; Richard Thomas, vice president, Alpine Stained Glass; Mark Seetin, vice president of governmental affairs, New York Mercantile Exchange; and P. Gregory Conlon, former

PUC chairman ............................................................................................... 381

Hebert, Curt, chairman, Federal Energy Regulatory Commission .............. 248

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

California ....................................................................................................... 245

Horn, Hon. Stephen, a Representative in Congress from the State of

California ....................................................................................................... 5

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

California ....................................................................................................... 379

Lee, Hon. Barbara, a Representative in Congress from the State of California .............................................................................................................. 243

Lofgren, Hon. Zoe, a Representative in Congress from the State of California .............................................................................................................. 241

Madden, Kevin P., general counsel, Federal Energy Regulatory Commission; Fred John, senior vice president for external affairs, Sempra

Energy; Steve Malcolm, president, Williams Energy Services; and John

Stout, senior vice president for asset commercialization, Reliant Energy ................................................................................................................ 440

Madden, Kevin P., general counsel, Federal Energy Regulatory Commission; Loretta Lynch, president, California Public Utilities Commission;

Terry W. Winter, president and CEO, California Independent System

Operator; and Larry Makovich, senior director, Cambridge Energy Research Associates .......................................................................................... 39

McDonald, J. William, Acting Commissioner, Bureau of Reclamation;

Brian Jobson, principal power contract specialist, Sacramento Municipal Utility District; Becky Dell Sheehan, associate counsel, California

Farm Bureau Federation; and Thomas Stokely, senior planner, Trinity

County Planning Department ...................................................................... 144

Yates, Ed, senior vice president, California League of Food Processors;

Peter Verboom, Glenn County Dairyman; and Lewis K. Uhler, president, the National Tax Limitation Committee ........................................... 6

Letters, statements, etc., submitted for the record by:

Barnhart, Douglas, president, Douglas E. Barnhart, Inc., prepared statement of ........................................................................................................... 394

Page

IV

Letters, statements, etc., submitted for the record by—Continued

Burton, Hon. Dan, a Representative in Congress from the State of Indiana, prepared statement of .......................................................................... 234

Desrochers, Paul, director of fuel procurement, Thermo Ecotek, prepared

statement of ................................................................................................... 332

Hapner, Dede, vice president, regulatory relations, Pacific Gas & Electric,

prepared statement of ................................................................................... 301

Hardage, Sam, president, Woodfin Suite Hotels, LLC, prepared statement

of ..................................................................................................................... 384

Hebert, Curt, chairman, Federal Energy Regulatory Commission, prepared statement of ........................................................................................ 250

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

California, prepared statement of ................................................................ 246

Jobson, Brian, principal power contract specialist, Sacramento Municipal

Utility District, prepared statement of ....................................................... 162

John, Fred, senior vice president for external affairs, Sempra Energy,

prepared statement of ................................................................................... 443

Lee, Hon. Barbara, a Representative in Congress from the State of California, prepared statement of ...................................................................... 244

Lofgren, Hon. Zoe, a Representative in Congress from the State of California, prepared statement of ...................................................................... 242

Lynch, Loretta, president, California Public Utilities Commission, prepared statement of ........................................................................................ 73

Madden, Kevin P., general counsel, Federal Energy Regulatory Commission, prepared statement of .......................................................................... 42

Makovich, Larry, senior director, Cambridge Energy Research Associates,

prepared statement of ................................................................................... 99

Malcolm, Steve, president, Williams Energy Services, prepared statement

of ..................................................................................................................... 485

McDonald, J. William, Acting Commissioner, Bureau of Reclamation, prepared statement of ........................................................................................ 148

Pickett, Stephen, vice president and general counsel, Southern California

Edison, prepared statement of ..................................................................... 311

Seetin, Mark, vice president of governmental affairs, New York Mercantile Exchange, prepared statement of .................................................... 409

Sheehan, Becky Dell, associate counsel, California Farm Bureau Federation, prepared statement of .......................................................................... 169

Stokely, Thomas, senior planner, Trinity County Planning Department,

prepared statement of ................................................................................... 175

Thomas, Richard, vice president, Alpine Stained Glass, prepared statement of ........................................................................................................... 401

Uhler, Lewis K.,president, the National Tax Limitation Committee, prepared statement of ........................................................................................ 25

Vanech, Dean, president, Delta Power Co.:

Information concerning summary of net income .................................... 351

Prepared statement of ............................................................................... 323

Winter, Terry W., president and CEO, California Independent System

Operator, prepared statement of ................................................................. 84

Yates, Ed, senior vice president, California League of Food Processors,

prepared statement of ................................................................................... 8

(1)

ASSESSING THE CALIFORNIA ENERGY CRISIS:

HOW DID WE GET TO THIS POINT, AND

WHERE DO WE GO FROM HERE?

TUESDAY, APRIL 10, 2001

HOUSE OF REPRESENTATIVES, ,

SUBCOMMITTEE ON ENERGY POLICY, NATURAL

RESOURCES AND REGULATORY AFFAIRS, ,

COMMITTEE ON GOVERNMENT REFORM, ,

Sacramento, CA.

The subcommittee met, pursuant to notice, at 11 a.m., in the

Sacramento Convention Center, room 204, 1400 J Street, Sacramento, CA, Hon. Doug Ose (chairman of the subcommittee) presiding.

Present: Representatives Ose, Horn and Burton.

Staff present: Dan Skopec, staff director; Jonathan Tolman, professional staff member; Regina McAllister, clerk; and Elizabeth

Mundinger, minority professional staff member.

Mr. OSE. Good morning. A quorum being present, the subcommittee will come to order. I ask unanimous consent that all

Members’ and witnesses’ written opening statements be included in

the record. Without objection, so ordered.

I ask unanimous consent that all articles, exhibits, and other material referred to be included in the record. Without objection, so

ordered.

I ask unanimous consent that Members of Congress who are not

members of the committee be allowed to participate in today’s

hearing. Without objection, that is agreed to.

I ask unanimous consent that all questions submitted in writing

to the witnesses, and their answers, be included in the hearing

record. And, I ask unanimous consent that questioning in this matter proceed under clause 2(J)2 of House rule 11 and committee rule

14 in which the chairman and ranking minority member allocate

time to members of the committee as they deem appropriate for extended questioning, not to exceed 60 minutes equally divided between the majority and the minority. Within objection, so ordered.

I want to welcome everyone to the first of three hearings we will

be holding on the California energy crisis. Judging by the turnout

here today, I think we can safely say that this is a crisis that is

on the mind of everyone in California and around the country. I am

hopeful that these hearings will bring about an honest discussion

of our problems, and produce some agreeable resolutions to this crisis. I especially want to thank Chairman Burton for allowing the

committee the opportunity to conduct these hearings in California.

2

Although Chairman Burton is from Indiana, I think we will find

that resolving California’s energy crisis is vital to the economic well

being of the entire country.

I also want to thank all of the other Members of Congress who

made the journey to Sacramento, and, in particular, Chairman

Horn from Long Beach. I look forward to your ideas and participation.

The availability, reliability, and price of power are an integral

part of our economic and social success. The converse of that statement is also true: An unavailable, unreliable, and expensive source

of power will cause an economic and social crisis. And, to be sure,

this is a crisis.

Few public policy issues affect consumers as much as energy.

Higher energy prices and the threat of blackouts affect all Californians. California consumers will be faced with higher energy prices

that will cause real hardship to low income families and those living on fixed incomes. I am especially concerned about those who

share a home with numerous extended family members. These

families will be held to the same energy baseline use standards as

a typical nuclear family, even though they could have two or three

times as many people living under the same roof. Consumers will

also pay more for products they purchase as businesses are forced

to pass on higher energy costs to their consumers.

I am deeply concerned that seniors living on fixed incomes will

have to choose between air conditioning or costly medicines in the

summertime, or heating in the winter. Either choice could be deadly.

In addition, as a result of the crisis, consumers will pay more in

the form of squandered surpluses, resulting in higher taxes and

cuts in government programs, such as education, law enforcement,

health care, and tax relief. And I just want to point out, the San

Francisco Chronicle this morning had an article that listed the

daily expenditures for anti-smoking, for an algebra education, and

for the war on amphetamine on a comparative basis to what we are

spending, unanticipatedly for power.

Businesses will also face increased costs as a result of this crisis.

The cost of doing business in California is already very high relative to the surrounding States. I am fearful that high energy costs

will drive more businesses out of California, because many of the

small businesses here right now will be unable to pass on higher

costs or relocate. The losses of good jobs and tax revenues because

of the energy crisis are grave concerns for me. Intel Corp., for instance, has stated very clearly that it will no longer invest in California, citing an unfriendly business climate and uncertainty as to

the supply of a reliable source of power.

Let us also not forget that the California agricultural industry is

being devastated by high natural gas prices, and must brace for

massive increases in its electricity bill. As you know, most farmers

operate on very tight margins. They simply will not be able to absorb the price hikes in both natural gas and electricity.

Clearly, high energy prices will have a large, negative effect on

the California economy, and could possibly drag the rest of the Nation into a recession. But, there is something even worse than high

energy prices, and that is blackouts. Just last week, as reported by

3

the L.A. Times, experts were predicting over 30 days of blackouts

this summer, and where blackouts occur, disaster follows. Longterm blackouts this summer will endanger lives, especially for our

seniors. We have already seen this happen in Chicago during the

summer of 1998. People of fragile health, who live in the deserts

and valleys of California, will be at extreme risk when the blackouts hit.

Blackouts wreak havoc on businesses as well. Tomato farmers in

the Third Congressional District tell me that if a processing plant

is shut down due to a blackout, that is, power is cutoff without any

explanation or anticipation, they lose the entire product that is

being processed, and then have to shut down for days to clean and

sanitize the plant.

The same is true in Silicon Valley, where chipmakers could lose

millions of dollars if they here hit with a single blackout. Another

example, and we will hear more from Mr. Verboom later, is the

dairy industry. If a dairy farmer is hit with a blackout, you cannot

milk your cows. I do not know about you, but it is my understanding that if you do not milk a cow, you have a problem, especially

if that cow is ready to be milked. These are but a few examples

of a problem that will occur among many industries statewide

when blackouts hit.

The purpose of this hearing is to seek input as to what role the

Federal, State, and local governments have in creating a solution

for this energy crisis. Some of the questions I hope to answer are:

What measures have been taken by the State of California to solve

this crisis? In the wake of PG&E’s bankruptcy filing, does the Governor have a new plan? Has the Bush administration been responsive to requests from the State of California? What Federal regulatory measures can be taken to help ease the current crisis? And,

finally, what is the prospect for a solution in the near term and in

the long term?

I want to thank all the witnesses for coming today. I know it is

tough to make time to testify. I am looking forward to hearing from

every one, because they each have a unique perspective that is important to our discussion. I am hopeful that together we can shed

some light on what Californians can expect this summer, and take

some necessary steps to ensure that California’s energy concerns

are finally put behind us.

Now, I would like to recognize my colleague, Chairman Burton,

for the purpose of his opening statement.

STATEMENT OF DAN BURTON, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF INDIANA

Mr. BURTON. It is nice to be in California. It sure is a beautiful

day. And I am sorry you are having this problem. Chairman Ose

is chairman of our new Subcommittee on Energy Policy, Natural

Resources and Regulatory Affairs, and he will be watching and

working on this problem over the coming months, and hopefully

coming months, not more than a year.

For the last year we have held a series of hearings on energy policy. We held a hearing last summer on gasoline price spikes in the

Midwest. We held another hearing in the fall on the problems with

home heating oil and natural gas. We have real problems in those

4

areas. And we do not have all the answers, but as a result of the

hearings we have already held, we have been able to draw at least

some conclusions. First, we need to develop our natural gas resources. We have tremendous deposits of natural gas in this country, but many of them are closed to development.

Almost all of the new electricity plants being built now are run

by natural gas because it is clean. Demand is going up, as it is here

in California, but new sources of supply are not being developed.

The price of natural gas has more than tripled, and that is passed

on in the form of higher utility rates. This has created severe hardships on lower income families. There are many areas that can be

opened up to development without endangering the sensitive environments, and we need to do it, and we need to do it now, because

it will help here in California as well.

We have to develop more refinery capacity. In 1982 there were

231 oil refineries in the United States. Today there are only 155.

The demands we are placing on them is straining them to the

breaking point. Because of all the environmental laws we have, refineries have to produce more than 50 different blends of gasoline

for different seasons and regions of the country, and that is an

amazing burden. We are stretched so thin that all it takes is one

disruption in a pipeline or refinery to cause chaos. That is what

happened in the Midwest last summer, and that is why they ended

up paying more than $2 a gallon for gasoline.

The restrictions we have that make it so difficult to build new

refineries are so counterproductive. Refineries built 20 or 30 years

ago are dirty and inefficient. With today’s technology, cleaner, more

environmentally safe refineries could be built to replace them, but

it is just not economical, and that has to change.

We need to have good, strong environmental laws, but we have

to weigh the costs and the benefits. The new diesel fuel rule being

developed by the EPA is a good example. Everyone agrees that diesel fuel needs to be cleaned up. The oil industry has offered a plan

to remove 90 percent of the sulfur that is now in diesel fuel; 90 percent. Now, that is pretty good. But the EPA will not accept that.

They are insisting on 95 percent. And yet, experts are predicting

that the extreme measures they will have to take to get to that

extra 5 percent are going to cause serious disruptions in our energy

markets, and that will affect California as well. I think that decision needs to be revisited. I think we have enough problems to deal

with, without creating new ones.

So we have learned a lot through this process, but we have yet

to do a thorough review of the problems we have with electricity,

and that is why we are here this week. If you want to learn about

the pitfalls of electricity policy, California is the place to be. This

is the laboratory, and the experiment is not going very well. We are

not here to assign blame. We are not here to point fingers. We are

here to listen and to learn and to try to find out ways that we

might be of assistance.

There is going to be an important debate in Congress this year

on energy policy. We have not had a serious energy policy in this

country for too long. The Bush administration is going to offer a

plan. Bills are now being introduced. We have some important decisions to make whether we are going to take the steps that are necVerDate 11-MAY-2000 10:55 Apr 01, 2002 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 C:\DOCS\76761.TXT HGOVREF1 PsN: HGOVREF1
5

essary to have energy independence and reliable supplies, or

whether we will not, and that is why these hearings are so timely.

This is such an important issue that we created a new subcommittee this year, and I just mentioned that, the Subcommittee

on Energy Policy, Natural Resources and Regulatory Affairs, and

I asked Mr. Ose to be the chairman of that committee, and I asked

him to chair today’s hearing. He has made this a top priority, and

I think that is justified, and I think he will do a great job.

There are a lot of different issues for us to look at this week, and

I will just mention a few. Why has demand grown so rapidly in

California and supply grown so slowly? Were there early warning

signs of this crisis that were missed, and if so, what were they?

Should the Federal Government place a cap on electricity prices, or

will this inhibit investment in new plants and exploration? Why

were long-term contracts not locked in when prices were lower?

Have power generators made excessive profits, and should they be

ordered to repay some of that money? How are the utilities going

to pay off their massive debts? We have just seen one company declare bankruptcy. Will there be more?

Over the next 3 days we are going to hear from all sides of this

debate. Hopefully by the end of the week we will have answers to

at least some of these questions. Today we are going to focus on

the State government’s role in handling the crisis. We are also

going to look at how the U.S. Interior Department might be contributing to some of the problems. Tomorrow we are going to hear

from the major utilities and the alternative energy producers. We

will also question the chairman of the Federal Energy Regulatory

Commission about their role. On Thursday we are going to have

the major electricity producers, and we will have a lot of questions

for them.

I want to thank all of our witnesses who are here today. We have

some representatives from the local agricultural sector. I know they

are having serious problems. Mrs. Lynch from the Public Utilities

Commission had to rearrange her schedule to be here today, and

we appreciate that. And to all our other witnesses whom I have not

mentioned, I want to thank you for being here as well, and I look

forward to hearing your testimony.

Thank you, Mr. Chairman.

Mr. OSE. Thank you. My good friend from Long Beach, I would

like to recognize Mr. Horn for the purpose of an opening statement.

STATEMENT OF STEPHEN HORN, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF CALIFORNIA

Mr. HORN. I thank the gentleman. I want the people of northern

California to know that in Mr. Ose they have a first-class legislator. He has been at everything we have done and we held 100 different hearings last year. And he asks first-rate questions. I am

going to waive an opening statement, because I happen to believe

in asking the questions, not talking myself. The chairman of the

full committee has spoken for all of us. So, thank you very much.

Mr. OSE. Thank you, Mr. Horn.

All right, this committee swears its witnesses in, so we are going

to have the three of you rise.

[Witnesses sworn.]

6

Mr. OSE. Let the record show the witnesses answered in the affirmative. I would ask that you summarize your written statement,

try and keep it under 5 minutes. Mr. Yates, you are recognized.

STATEMENTS OF ED YATES, SENIOR VICE PRESIDENT, CALIFORNIA LEAGUE OF FOOD PROCESSORS; PETER VERBOOM,

GLENN COUNTY DAIRYMAN; AND LEWIS K. UHLER, PRESIDENT, THE NATIONAL TAX LIMITATION COMMITTEE

Mr. YATES. Thank you, Mr. Chairman, Mr. Horn, Mr. Burton.

Good morning. I am Ed Yates, senior vice president of the California League of Food Processors.

The food processing industry in California is sizable. It accounts

for 40 percent of the Nation’s domestic supply of processed fruits

and vegetables. It is totally reliant upon an ample and adequate

supply of energy to process the 16 million tons—16 million tons of

perishable fruits and vegetables, converting that perishable product

into safe and storable products available to consumers across the

country at any time they wish to use them.

The current crisis in California is having a profound impact and

presents a significant challenge to the food processing industry in

California. We are facing rolling blackouts this summer. Our estimate is at least 30. These are extremely disruptive for a process,

as Mr. Ose pointed out, where it may take, due to a 1 or 2 hour

outage, 24 to 36 hours to bring the plant back on line. That represents as high as 24,000 tons of food that either gets thrown away

or does not get processed. We have no protection currently from

rolling blackouts, unless you wish to shed some load and participate in those kinds of programs.

Again, I want to emphasize the importance of supply. We are facing a prospect of having natural gas supplies curtailed or seized by

utilities in California. The prospect of that is more than scary. We

would not be looking at a 1 or 2-hour period of down time, like a

blackout. We are talking days, and maybe weeks of unavailable

supply of natural gas.

We are also extremely concerned about the price of natural gas.

Currently the price is above $12 a dekatherm. That translates to

almost $1 billion more in natural gas cost to the food processing

industry if those prices were to prevail and be applied to everyone.

We have a unique problem in California with the price of delivery

of gas to the border. It exceeds the price of the commodity.

We are also very concerned with the effect in California that we

have in competing with the electric generation industry. We compete with them on two levels: one for the price of the commodity,

and second, for delivery. As the Federal Energy Regulatory Commission has opened up interstate pipelines to some reasonable form

of competition, it is whomever can pay the most appears to get the

highest priority for delivery. The food processing industry, being a

relatively low margin industry, simply cannot compete with the

prices that electric generators can pay for the commodity or delivery.

Food processors, I describe it this way, we are in a stainless steel

straitjacket. We want the tools necessary to help ourselves get

through this crisis. Yet in California, the very stringent regulations

for air pollution and other considerations extremely limit our abilVerDate 11-MAY-2000 10:55 Apr 01, 2002 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 C:\DOCS\76761.TXT HGOVREF1 PsN: HGOVREF1
7

ity to help ourselves. We are making initiatives for alternative

fuels. We are not getting a very open ear for that. We are simply

locked into natural gas as a supply.

We did, in our prepared testimony, make four recommendations

for consideration at the Federal level. We believe that the provisions of the Natural Gas Policy Act back in the old days which provided for a high priority for essential agricultural and food processing use of natural gas ought to be revisited, restored, and extended

to the burner tips of food processors in California. We think that

incentives ought to be created that would promote the use of alternative fuels for boilers and backup generation. We believe that

someone ought to discover whether or not the high wholesale electric prices are reasonable and acceptable in terms of fair pricing

and competition. We do support competition as long as it is fair

and equitable and everyone has an opportunity to participate. We

are in a symbiotic relationship with the grower community. We expect a number of processors may shut down this season, and we

are hoping for some remedies to be forthcoming. And with that, I

close, and again, I appreciate very much the opportunity to make

these remarks today. Thank you.

Mr. OSE. Thank you, Mr. Yates. I was remiss in not introducing

Mr. Yates. He is the senior vice president of the California League

of Food Processors.

Our second witness is Mr. Peter Verboom, who is a dairyman

from the great county of Glenn County in my district. Mr.

Verboom, you are recognized for 5 minutes.

[The prepared statement of Mr. Yates follows:]

8

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14

15

16

17

18

19

20

21

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Mr. VERBOOM. My name is Peter Verboom. I am actually relocating my dairy from San Diego County to Glenn County. I have to

apologize, I did not bring my written statement, if that is OK.

Mr. OSE. Arrest this man—yes it’s OK. [Laughter.]

Mr. VERBOOM. Being from San Diego County, when San Diego

Gas and Electric went to deregulation my cost on my dairy facility

in San Diego County tripled. They went from $3,500 a month to

over $10,000 a month. And there is no way that we can pass on

those costs with our milk prices being controlled. The wholesale

milk prices are regulated by the State, where the retail prices are

not, and so we have no way of passing on those costs through our

product. And so we have to absorb them. It does not work, especially given the cost of milk prices as they have been in the last

year.

And moving my facility from to northern—I am in the process,

actually. We were moving cows last night at midnight, and we are

in the process of moving our herd up. And so I will be able to get

a clear picture of the difference between SDG&E and PG&E, and

I am kind of wondering what to expect.

And so it has been—as far as having the power at the dairy, we

do have generation facilities at the dairies. But, on the other hand,

in this past year in the rolling blackouts that we have had, I

produce milk for Land-O-Lakes. And, Land-O-Lakes has a large facility in Tulare. In Tulare, with the brownouts, their milk backed

up on them, and when the milk backed up, they were not able to

pick it up at the dairies. A certain amount of dairies had to dump

their milk, and then also faced the possibility of regulations from

the Water Quality Control Board for contaminating the groundwater. So, it has been a problem. It kind of just feeds on itself all

the way down the line.

But my initial statement is that we—as a producer, I have no

way to pass it on. And so, I wanted to relate that message to you.

With the milk storage problems, we cannot—that is basically my

opening statement. I will be open for questions. I am sorry I did

not have a prepared statement with me.

Mr. OSE. That is fine. Thank you, Mr. Verboom.

Our third witness is Lew Uhler, who is the president of the National Tax Limitation Committee. He lives in this area. Welcome.

Mr. UHLER. Thank you, Congressman, and Congressmen Burton

and Horn, for inviting us to do our best to represent the viewpoint

of taxpayers here in California. We are a national committee. We

keep our headquarters here in the Sacramento area, with tens of

thousands of members in this State and elsewhere. We have been

in operation for the last 25 years, and I am proud to say we do not

accept any government grants or contracts, Federal, State, or local,

but are supported only by voluntary contributions of taxpayers.

The gravity of this situation is lost on no one. We know that the

electric and other energy situation we face now is the result of a

flawed deregulation program: frozen rates; requirements that electrons be purchased on the spot market rather than long-term contracts; and a peculiar method of financing the daily or hourly requirements by paying everybody the highest rate paid to any provider, instead of a blended rate with some of the lower cost power

being blended in to bring the average rate down.

23

So, we confront a huge substantive, the politicians and the Governor, political situation. Rather than accepting the reality of the

problem and choosing a market-based solution, the Governor and

the majority leaders of the legislature have chosen a command

economy approach as the solution. And in doing so, they have opted

to place the burden, not on the ratepayers, but on the taxpayers

of the State.

Now, there is some overlap, of course. But since 25 percent of the

generation in the State is by municipal utilities which are not

caught up in the stupidity of the deregulation plan and its execution, they confront a different rate structure than others do. And

yet they are being asked, as taxpayers, to bear some of this burden,

I think mainly because they have been around and they are creditworthy. What the political process in Sacramento has been doing

is looking for credit-worthy people to turn to. Hence the public

treasury is now obligated to pay tens of billions of dollars for current and future electricity costs.

From this moment forward, we have a chance to improve the situation. We ought to be guided by the medical Hippocratic oath,

‘‘first do no harm.’’ And yet yesterday the Governor did further

harm by proposing—and of course the legislature will dispose—that

the people of the State, wearing their taxpayers’ hats, should purchase an antiquated grid system from part of the electricity distribution system. So, it appears that the Governor is not learning.

He is creating a further nightmare for the taxpayers. We should

have learned, from the decline of the Soviet Union, that command

economies do not work. Free markets do. We have to adopt free

market solutions.

So, I think the real answers here are twofold. First, I urge that

we turn to the truly credit-worthy buyers, the individual residential consumers, the businesses, cities, and all the rest, and use

their credit. Let their credit be used to buy electricity directly from

the suppliers, negotiating contracts to benefit themselves.

When we started this crazy deregulation, we had limited direct

access. Less than 2 percent of the residential users opted for alternative suppliers. Why? Because there was no price differentiation.

We froze the rates as requested by the utilities. They have caused

this problem now visited on them, to a large degree. In terms of

the industrial and commercial users, 25 to 27 percent of the larger

users actually entered into direct access contracts. When the State

passed AB1X, the so-called ‘‘relief act,’’ they foreclosed the opportunity for direct access. So one of the things we must do is to reverse that action and give all of us the opportunity to go directly

to Enron or Reliant, or whomever and make the best deal we can.

That may not stop blackouts, but we can also negotiate contracts,

with the possibility of limiting the blackouts, at least during this

time.

Second, as with retailing, there are three things that are important: location, location, and location. There are three things that

are important in solving this problem: supply, supply, and supply.

What we have to do is get more power out of existing generators.

As our friend who runs the California League of Food Processors,

Ed Yates has said, we simply are being inundated with rules and

24

regulations by local air quality control management districts they

have to be disciplined into some system.

And we call on the Governor to ask you for relaxation of the

clean air rules. In turn, under his emergency authority, he should

relax the Clean Air Act requirements here in California, discipline

the local air quality management crowd into a system, and get

them to produce and continue to produce. Then, of course, we need

to build a new facilities, nuclear, hydro, etc. And I would urge that

the Auburn Dam be one of those considered for the long-term benefit of this State. Thank you.

[The prepared statement of Mr. Uhler follows:]

25

26

27

28

29

Mr. OSE. Thank you, Mr. Uhler. We will now entertain questions

from the Members. We are going to do this in 10-minute sections.

I want to recognize the gentleman from Indiana first for 10 minutes.

Mr. BURTON. Let me start with Mr. Verboom. You said that

Land-O-Lakes, which is a purchaser of milk products from you—

one of your larger milk purchasers—because of the blackouts they

had milk spoil.

Mr. VERBOOM. Yes.

Mr. BURTON. And they had to dump it. And when they dumped

it, then they ran into an environmental problem because of the pollution of the water supply.

Mr. VERBOOM. Let me back up there. The plant itself did not

dump the milk. They lost the capacity to bring in anymore milk

from the dairies.

Mr. BURTON. So the dairies had to dump it?

Mr. VERBOOM. The dairies had to dump the milk.

Mr. BURTON. And so all the dairy producers were then in violation of the environmental rules?

Mr. VERBOOM. Yes.

Mr. BURTON. And you said your rate in San Diego went up 300

percent? Three times?

Mr. VERBOOM. It multiplied three times; yes.

Mr. BURTON. OK. So is that the main reason you are relocating

north?

Mr. VERBOOM. No. I was in the process of relocating, but it has

become a very good reason to—San Diego County, where we were

located, is not very conducive to dairies.

Mr. BURTON. And you stated that there is a ceiling on the wholesale price set by the State, so you have to eat the loss——

Mr. VERBOOM. Yes.

Mr. BURTON. [continuing]. When you have to destroy milk or get

rid of milk that is spoiled?

Mr. VERBOOM. Yes. Well, it gets—Land-O-Lakes being a cooperative, it gets distributed amongst all the producers, so all the producers bear the loss.

Mr. BURTON. OK. But also the electrical cost, also you have to

eat that?

Mr. VERBOOM. I have to eat that, yes. Oh, definitely.

Mr. BURTON. Because of the price ceilings.

Mr. VERBOOM. Yes.

Mr. BURTON. It sounds like there are other problems besides just

generation of electricity you have to deal with there.

Mr. VERBOOM. Yes.

Mr. BURTON. Mr. Yates, you said that alternative fuels should be

allowed to be used, but there was a problem with environmental

laws in the State. Could you elaborate just a little bit on that?

Mr. YATES. Thank you. In California there are standards for the

use of alternative fuels. However, the problem is if you were to put

in the equipment to utilize those fuels and they happen to result

in an increase of emissions, you have to, before you install the

equipment, make arrangements to offset that increase of emissions.

We think that we are not asking that those requirements be elimiVerDate 11-MAY-2000 10:55 Apr 01, 2002 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 C:\DOCS\76761.TXT HGOVREF1 PsN: HGOVREF1
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nated. We simply ask that more time be allowed to acquire those

emission offsets, rather than having to do them up front.

Alternate fuels have historically been an effective and very viable

means of fighting high costs for natural gas. The air regulations in

the State—in California have been tightened up, so many food

processors have lost their ability to utilize alternative fuels, and

natural gas has been plentiful, reasonably priced, and so there was

no need. Obviously there is a need now to look—— Mr. BURTON. And the utilities are using a lot of natural gas?

Mr. YATES. That is correct. As I mentioned, there is an increasing demand not only by the utilities to satisfy what they call the

core, which are residences and small businesses, but also electric

generation. All those loads are increasing, and we set with the high

probability that the utilities could seize our gas to satisfy the needs

of the core group. In addition, the Public Utilities Commission in

California has proposed a rulemaking which would give electric

generators higher priority than we have for natural gas supply. It

does us no good to have a supply of electricity if we have no gas

to process the food.

Mr. BURTON. So, you think you should be treated equally, along

with the utilities?

Mr. YATES. At minimum. That is correct.

Mr. BURTON. Let me ask one more question of you, and that is,

we have tremendous natural gas supplies in the country, but because of stringent environmental rules and regulations, a lot of

those areas have not been able to be tapped. Do you believe that

we ought to take another look at going after those reserves that we

have of natural gas in this country?

Mr. YATES. Yes, I do. I think all efforts should proceed with all

speed, including the potential of gas supplies in California. I do not

believe that the potential for gas production in California has been

either fully identified, nor exploited. We hear the numbers, that

there is a 50 to 60-year supply of natural gas in this country to

meet demand. We think we would come to the conclusion that

there is plenty of gas; it is a matter of getting to it, to satisfy our

needs.

Mr. BURTON. And through your research, have you found that

could be garnered in an environmentally safe way?

Mr. YATES. I believe that is very possible.

Mr. BURTON. Thank you. Mr. Uhler, you said that the purchasers

who are having a difficult time need to be able to have direct access to the supply of electricity. They cannot do that now because

of State regulation?

Mr. UHLER. Well, what happened, Congressman, was when the

regulation plan was first implemented some commercial users were

given the opportunity for direct access. But meaningful direct access to residential users was denied because of the cost or rate

structure imposed by the Public Utility Commission. So, while

Enron Commonwealth, many others came in and sought to market

their energy directly to the homeowner, much in the same way

AT&T, Sprint, and everybody else entered in longline competition,

because of the imposed rate control. A very small percentage of the

people actually signed up. When AB1X passed in January here in

the State, direct access was foreclosed for all users.

31

Mr. BURTON. Why was that? Why did they do that?

Mr. UHLER. It beats me. What happened here in California in

kind of a global sense is, when the crisis arose and we had an opportunity to use market principles and buy long term the apparent

mental state and outlook of the political leadership of this State,

being essentially central planners, opted for a command economy

approach.

Mr. BURTON. I understand.

Mr. UHLER. And decided to take over and run the thing their

way.

Mr. BURTON. I understand. You said that earlier.

Mr. UHLER. Yes.

Mr. BURTON. Do you think that should be changed so that homeowners have——

Mr. UHLER. It absolutely must be changed. And I can only say

that one of the things that is so distressing, in yesterday’s announcement about the deal with Southern California Edison, was

that, one of the things taken off the table was future development

of hydroelectric properties owned by Southern California Edison.

This is further evidence that this State administration will not confront the hardliners in the environmental community here in California and ‘‘go for it’’ in terms of relaxing the rules that will help

our food processors and our dairy people and help everybody.

Unshackle us. Our hands are tied.

Mr. BURTON. I can see——

Mr. UHLER. Let us out! Let us have direct access and we will

make our own deals.

Mr. BURTON. I can see your enthusiasm, and you were getting

into my next question. And that is——

[Applause.]

Mr. BURTON. Is that a relative of yours back there?

Mr. UHLER. No, we brought no relatives here this morning, Congressman.

Mr. BURTON. Well, you have some supporters. Let me just ask

you this. And you were touching on this as I interrupted you there,

and I apologize. You said an increase in production of the supply

of energy by relaxing some of the clean air rules, at least for a period of time I guess is what you were saying. Over the long haul,

you are for strong environmental standards, though?

Mr. UHLER. Yes. Whether these are good or bad is for the future.

Mr. BURTON. But you are talking about in the short run?

Mr. UHLER. I am talking about in the short run.

Mr. BURTON. OK. Let me follow——

Mr. UHLER. Both the Federal clean air——

Mr. BURTON. [continuing]. Let me followup. And we can look at

that at the Federal level. But in the long run—and I will address

this question to all three of you. I see my time is running out. Do

you believe that an adequate supply of energy can be produced

here in California and this region in an environmentally safe way,

so that even though the rules might be relaxed in the short run,

if there are proper free market principles installed, that we would

be able to have an adequate amount of energy created to take care

of the needs in California in an environmentally safe way?

32

Mr. UHLER. There is not even the slightest question. We could

turn to nuclear. We know France now produces 75 percent of its

domestic electricity through nuclear plants, and does it safely. This

terror on the part of some environmentalists about nuclear is misplaced. We should reopen some nuclear plants that have been

moth-balled, if we can do it quickly and properly. And hydro is of

course the cleanest and safest, and also conserves our water, which

is the next infrastructure problem the State faces.

Mr. BURTON. Thank you, Mr. Chairman.

Mr. OSE. If I might just offer one observation. It would help us

to have yes or no or I do not know answers to questions. And then

a very clear statement, and then do the expanding on the responses. So, Mr. Horn, for 10 minutes.

Mr. HORN. Just one to Mr. Uhler, the natural gas situation. We

have got the natural gas. The question is, can we get it in the pipelines in the right places of the State. What do you know about the

pipelines in northern California?

Mr. UHLER. I have no specific technical knowledge. I know they

are trying to fill those pipelines with increased pressure at night

to increase the storage that otherwise is unavailable. But beyond

that, I do not have the technical knowledge.

Mr. HORN. Mr. Chairman, I would like to get the appropriate

group that represents natural gas, to get those answers to this part

of the State, and to the degree to which they clean the pipes, as

you say, and they put other things through there. But let us get

it at this point in the record, if I might.

Mr. OSE. Without objection.

Mr. HORN. No. 2. Mr. Yates, it is truly amazing the 100 percentages you have with pears and apricots and strawberries and peaches. We have got another problem, and that is what is gone at the

roots of some of those. And I just wondered if you know off the top

of your head the degree to which those trees are dying, and do you

happen to have any information on that?

Mr. YATES. Pardon me? What specific crop are you referring to?

Mr. HORN. Well, in terms of the roots with the peaches, the

grapes, so forth.

Mr. YATES. Oh, the disease in the grape community?

Mr. HORN. Exactly.

Mr. YATES. That is a huge problem. It is creating some shifts in

producing areas, severe economic losses, and those sorts of things.

Mr. HORN. Mr. Chairman, I would like that put in the record at

this point.

Mr. OSE. Without objection.

Mr. HORN. Thank you. I yield back to questions.

Mr. OSE. The gentleman yields back. If I might followup on a

couple of things. Mr. Verboom, you are moving your dairy from San

Diego County to Glenn County?

Mr. VERBOOM. Yes.

Mr. OSE. I know you do not ask a cattleman how many head he

has, but you have a production of how many truckloads per day?

Mr. VERBOOM. We produce one truckload of milk per day.

Mr. OSE. OK. And, how many people work at your dairy?

Mr. VERBOOM. At home we have 11. On the new facility we will

have about 18.

33

Mr. OSE. OK. If you cannot get power and you have to dump

your milk, or you cannot plan with any degree of certainty, what

happens to those jobs?

Mr. VERBOOM. Well, the cows have to be milked and fed. There

is no getting around it. So, like I said, we have backup facilities.

But being able to ship the milk to the plant has been the problem.

Mr. OSE. How long can you warehouse the milk on your dairy?

Mr. VERBOOM. One day.

Mr. OSE. So you have a 1-day window——

Mr. VERBOOM. Yes.

Mr. OSE [continuing]. To hold the milk before you have to move

it?

Mr. VERBOOM. Yes.

Mr. OSE. And, if I understand correctly, it is the Gonzalez Milk

Pool pricing system that governs what you get for your product?

Mr. VERBOOM. Yes.

Mr. OSE. So you and hundreds, if not thousands, of other dairy

milkers have this same exact problem. You have a 24-hour window

in which you have to move product from the farm to the processing

plant. And, if they cannot handle it at the processing plant, you

lose——

Mr. VERBOOM. It stays at the dairy if they cannot take it. It

stays.

Mr. OSE. You lose the revenue that would come from the milk?

Mr. VERBOOM. Yes, definitely.

Mr. OSE. Or the cheese or the butter or what-have-you?

Mr. VERBOOM. Right. We get paid for the raw product and we

would lose that money from that raw product.

Mr. OSE. How quickly does the unemployment or the economic

chain reach the people who work for you?

Mr. VERBOOM. Well, it has not gotten to that point, but if it did,

everybody would be out of work. Because if it came to the point

where we could not get paid for our product, we would have to

close it down.

Mr. OSE. OK.

Mr. VERBOOM. And it does not take long at a tanker load of milk

a day.

Mr. OSE. Mr. Yates, in the food processing business, one of the

standards you have to meet deals with food quality, the ability to

ensure that the processing system is clean or clear of disease or infections and what-have-you, is that correct?

Mr. YATES. Absolutely, yes.

Mr. OSE. All right. So the FDA works with you and the California Department of Food and Agriculture works with you just to

make sure that the product coming out of the plants that your

members run is fit for human consumption?

Mr. YATES. It is safe and wholesome; yes.

Mr. OSE. To the extent that you have an interruption and a—let

us say Campbell’s Food Plant down here in south Sacramento, let

us say they lose power. They have a co-generator, so they are probably not going to go down. But let us say they lose power. To the

extent that they have lost power, just give me some sense of the

impact on jobs at the plant and the farm that feeds the plant.

34

Mr. YATES. Let us take, for example, a tomato—back to a tomato

processing facility. Delivery of tomatoes to a tomato processing facility is a tightly orchestrated and scheduled endeavor. Typically,

a load of tomatoes is at the plant no longer than 3 hours. In other

words, from harvest to being stabilized is, on average, about 3

hours. Now, if that plant is down for 24 to 36 hours, first they have

vessels filled with 20,000 to 40,000 pounds of tomato product. As

soon as power is lost, the aseptic or the sterility of that system is

lost. That food, thousands of pounds of it, have to be emptied out

when the power comes back on, because they have no power to get

it out. Then that entire system has to be sterilized again. And then

they have to start the plant up in a sterile condition.

In the meantime, during that 24 to 36 hours, there are crops in

the field that are not going to get harvested because of the tight

schedule of harvest and delivery. It is going to—as your question

suggests, it is going to back up clear out to the field.

More importantly, and I will go to the natural gas situation, let

us say a plant is shut down for a week. Tomato processing is highly

seasonal. There is approximately a million tons a week that would

not get processed. That is nominally $50 million that growers

would not be paid. The energy it took to grow that crop, water

pumping and so forth, would be lost. There would be a week worth

of wages lost by food processing employees. Remember, this is an

enterprise that is relatively short, 3 months, so many of those

workers depend upon working every day during the season. That

is a week’s worth of wages lost. That is significant to those folks.

On top of it, the California food processor would not have product

to satisfy its customer’s needs, and that product will likely be furnished by Chile, Italy, Greece, or some other of our global competitors, because we do work in a global marketplace.

Mr. HORN. Mr. Chairman, if you will yield for a question.

Mr. OSE. Certainly.

Mr. HORN. Mr. Yates, I learned about 2 weeks ago that the last

sugar beet processor had been closed. Is that true, and how difficult

is that? And was there any effect of electricity in it?

Mr. YATES. That is my understanding, that the last one is gone.

I do not believe that electricity was the cause of that. Sugar beet

processing is a refining process. It is very energy-intensive, natural

gas dependent. There were a number of other factors that have

come to bear on the sugar beet industry in California, and if you

want elaboration, I would be happy to provide it to you.

We are—if they were in business, the Public Utilities Commission has proposed on-peak rates for electricity to raise by 545 percent, an increase of 30 cents per kilowatt hour. We simply cannot

operate on that basis. We cannot shut down during those peak

times, and it presents an extreme challenge of how we are going

to cope with that kind of an outcome.

Mr. OSE. I want to follow——

Mr. HORN. I might add on the sugar, if you could provide something for the record, I grew up on a farm 17 miles from Spreckles

Processing Plant in Salinas.

Mr. YATES. I will certainly do that. The sugar beet industry in

California, as you know, in years past was very vigorous and it proVerDate 11-MAY-2000 10:55 Apr 01, 2002 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 C:\DOCS\76761.TXT HGOVREF1 PsN: HGOVREF1
35

vided a lot of jobs. It is very unfortunate that they are no longer

in business in California.

Mr. OSE. Mr. Yates, some of the suggestions that we have heard

have to do with shifting load from say mid-afternoon to overnight.

My understanding, during harvest season, is that your members

are running their plants 24-hours a day; is that accurate?

Mr. YATES. That is correct.

Mr. OSE. So shifting load is pointless.

Mr. YATES. Shifting load is a very challenging prospect. Remember, and I am trying not to repeat, we are processing a huge volume of food that is harvested ripe for a very short period of time.

So in order to get it all stabilized, they are running 24 hours a day.

Of course, there are periods of shutdown for cleanup. I mean, it is

just like your kitchen. You got to stop once in a while and clean

it up.

We have advanced and are advancing a proposal to shrink that

peak period of time for perishable food processors. Go ahead and

double the price for that time, but at least give us a better opportunity to avoid that high-price period. And we think there is a

number of food processors that might be able to work out a deal

with their labor force, with their growers, with their truckers, and

everyone else that is dealing with getting all this food processed.

At least we would certainly like to have that opportunity.

Mr. OSE. I need to ask one other question. I want to go to Mr.

Uhler on this. The State of California has been put on watch by

Moody’s as a result of the implications of the energy crisis we face.

In a very real sense, it is my understanding that in the financial

markets that will cause an increase in the bonding cost to the

State of California. In other words, there will be a premium attached to bonds from the State of California to reflect that added

risk. Am I understanding that correctly? What are the implications

for the provision of government services?

Mr. UHLER. You are understanding that correctly, and that will

increase the cost of all the bonded indebtedness for the State. Apparently there is some question as to whether the markets can receive and absorb the level of revenue bonds, which are proposed to

meet this electricity problem, and do so effectively. It is really

riling up the bond situation for the State of California and for our

taxpayers.

Mr. OSE. My time has expired. I want to go back to Chairman

Burton for a followup.

Mr. BURTON. I have a number of questions that I would like for

you to answer as concisely as you can, because I want to have them

for the record. The Governor is not releasing the figures that the

State is paying for electricity. Is that information that taxpayers

want to have and should have?

Mr. UHLER. Correct. And in our written testimony we have asked

for that, and numbers of individuals and members of the media

have asked, and that has not been forthcoming.

Mr. BURTON. Has the Governor given a reason why that has not

been publicized?

Mr. UHLER. The stated public reason is that this will interfere

with confidential negotiations for future power purchase contracts.

36

But it seems to us that, since he is obligating taxpayers, the taxpayers have a right to know to what degree and in what direction.

Mr. BURTON. Thank you. Let me run through these questions

rapidly here, and if you could answer them. In your testimony, Mr.

Yates, you talk about the problems that processors will face in the

event of a blackout. What actions is the food processing industry

taking to try and cope with the predicted blackouts? You have

talked about scheduling a little bit and the difficulty, but what alternative fuels are you looking at, if any? And so if you could answer that.

Mr. YATES. Thank you. We are doing a couple of things. We were

working with our legislatures and the administration to pave the

way for food processors and others to utilize backup generation

during a blackout period. That has been achieved.

Mr. BURTON. What alternative fuels are you going to be using,

please?

Mr. YATES. Propane for firing boilers. The other thing we are

doing, and the industry, since this has not been a problem in the

past, does not have—there is only about 5 to 7 percent of the industry that has backup generation. And this is backup generation that

does not satisfy the entire electric requirements of the facility. It

is minimal, it is enough to keep computers going, the control room

going, and those sorts of things. So lights on for employee safety

and those sorts of things. And the industry is—a number of food

processors are looking at acquiring backup generation. Very few

are looking at enough backup generation to run the entire facility.

That is just too much.

Mr. BURTON. And the only other alternative fuel you mentioned

there was liquified gas.

Mr. YATES. That is one of the options. Diesel is another one. And

I hasten to add—— Mr. BURTON. That is an EPA problem.

Mr. YATES [continuing]. That both of those have limits. They

have emission limits. We are not asking that those be eased. But

we are asking eventually, let us comply with the offset requirements, give us some more time to do that, because it is practically

impossible to do it in the time necessary for this summer processing season.

Mr. BURTON. In terms of using alternatives such as diesel, oil, or

propane, the regulatory barriers that you are facing, as you just

mentioned, are difficult, but you do not want them relaxed, you

just want them to be offset?

Mr. YATES. In our case, yes.

Mr. BURTON. In other areas, do they need to be relaxed? I mean,

I know that in food processing—in the other areas, do you need to

have a relaxation for a short period of time, either one of you?

Mr. UHLER. Well, you know, I stated to the Congressman earlier

that——

Mr. BURTON. I know you have stated, but do you have any facts

that shows that there should be a relaxation of those EPA rules?

Mr. UHLER. Well, only by empirical evidence of the shutdown of

perfectly capable generators that have run out of hours. This is all

arbitrary and artificial. To have people sit in the dark in their

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agement control district has arbitrarily shut down a generator is,

in my judgment, absurd.

Mr. BURTON. I think I want—go ahead.

Mr. HORN. Could I just ask one that fits on your question?

Mr. BURTON. Yes. I yield.

Mr. HORN. As I drove into Sacramento this morning, I wondered,

by seeing the sign over it, there is a fuel cell technology movement

going. And to what degree could that be helpful, or is it—does not

do enough?

Mr. UHLER. You know, again, I have done only the normal reading on that, and there seem to be tremendous advances in fuel

cells. Once that technology is refined, people can have that running

their home or their business or whatever, but that is not going to

solve this summer’s problem and maybe not next.

Mr. HORN. Mr. Chairman, if we could get a presentation from the

fuel cell technology people as to where they are on this and what

they can do.

Mr. BURTON. Since the State has begun purchasing electricity,

your testimony, Mr. Uhler, notes that Wall Street has reacted negatively. How would a downgraded bond rating affect the budget of

California, and does it negatively affect other programs that rely

on the State to issue bonds?

Mr. UHLER. Well, in driving up the interest cost on the bonded

indebtedness, of course, that will harm the State. We have had

huge surpluses which the State has spent over the last couple of

years. The predicted surplus for the next year is probably ephemeral. We are probably eating into the money for actual programs

at this point, but because of the secrecy and the lid imposed by the

Governor’s office, we do not know the specific details.

Mr. BURTON. OK, let me just ask a couple more questions.

Mr. OSE. Mr. Chairman, Mr. Yates has something.

Mr. YATES. Mr. Burton, may I clarify further your earlier question about alternative fuels. My response was relative to fuels to

operate boilers. When it comes to the issue of utilizing diesel generators for electricity, there is, in my opinion, a number of arbitrary decisions that have been made. For example, there is 5,000

megawatts—it is my understanding there is 5,000 megawatts of

emergency backup generation setting around the State, and the

State refuses to turn it loose, but instead takes their chances on

rolling blackouts.

Mr. BURTON. Why are they—is it because of environmental concerns that they are refusing to turn that loose?

Mr. YATES. That is my understanding. And our——

Mr. BURTON. And there is 5,000 megawatts, you say?

Mr. YATES. That is my understanding; yes.

Mr. OSE. Mr. Chairman, would you yield for a minute?

Mr. BURTON. I would be happy to yield.

Mr. OSE. Mr. Yates, 5,000 megawatts is a lot of megawatts.

Hearing that anecdotally is one thing, seeing a list is another. Do

you have a list?

Mr. YATES. I believe we can obtain—a list I believe has been developed by the Air Resources Board. At least that is what has been

represented to us by representatives from the California Resources

Board, that there is 5,000 megawatts.

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Mr. OSE. We need to get that list.

Mr. YATES. Now, modern backup generation——

Mr. BURTON. Who would have that list?

Mr. OSE. Mr. Yates just said the Air Resources Board here in the

State of California is the source of that list, source of that information.

Mr. BURTON. Are they keeping that secret or are they not letting

that out?

Mr. YATES. Not to my knowledge, no. And I believe the Governor’s office has that kind of information.

Mr. OSE. Well, how do we get it?

Mr. BURTON. Well, I know how we can get it.

Mr. OSE. You are the chairman.

Mr. BURTON. Yes. We can take a hard look at how to get that

information.

Mr. OSE. We will get that information. If you can tell us the

name of the person who gave you that anecdotal information, we

will be able to followup accordingly.

Mr. YATES. I will certainly provide that to you. Thank you. And

one last comment relative to this scare, fear of diesel generation.

A modern, one-megawatt portable generator puts out as much

emissions, if you will, as three trucks rolling down the highway. So

people are making a big bogeyman out of this, and they ought to

be taking a harder look at it. Thank you.

Mr. BURTON. Let me just ask a couple more questions so I can

get these for our record, Mr. Chairman. How much of a role do you

believe Federal and State environmental regulations have in restricting the supply of electricity? I mean, how severe is the controls affecting the supply?

Mr. YATES. It is my observation, if I may, that all of the new

power plants being proposed to be built in California are setting

new records for cleanliness, not only in terms of their emissions,

but their efficiency. They are so much more efficient, that the

amount of emissions—not only are the emission limits very low,

but the amount of emissions per megawatt are extremely low, and

they are going to push out the old, dirty plants.

Mr. BURTON. Are they being held up for any reason since they

meet the criteria that they should?

Mr. YATES. It is my understanding that the expedited processes

at the California Energy Commission, who is responsible for siting

those, is proceeding at the high levels as expected.

Mr. BURTON. OK.

Mr. UHLER. If I may add, Mr. Chairman, one of the things that

we have recommended, and that the Governor has within his emergency powers, is to make the decision of the California Energy

Commission binding, with respect to the siting of any particular

plant, irrespective of local land use controls. And he ought to do

that, because we now have problems at the local level, the NIMBY

problem, ‘‘not in my back yard.’’ And yet we need to site those

plants close to the user base, given the antiquated nature of our

transmission system, and to expedite that process before the California Energy Commission.

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Mr. BURTON. Mr. Chairman, I have a few questions I would like

to submit for the record for Mr. Verboom on the dairy products, but

if we could get those to him and he can just answer them.

Mr. OSE. Without objection.

Mr. BURTON. Thank you.

Mr. OSE. Mr. Chairman, just for your information, I want to go

back to Mr. Yates. Current California Energy Commission requirements are that a generating facility in excess of 50 megawatts

must come before the Commission for review. I know that Assemblyman Cox has a legislative proposal that would raise that threshold from 50 to 125 megawatts as the threshold. The reason is that

the technology for these turbines typically creates a turbine of 60

megawatts capacity. So, the 50 megawatt threshold is kind of

pointless, because everything has to go. If we could get that to

move forward, we would have a lot of these standby generators

doubling their capacity without having to go through a lengthy review process. We will put that in the record.

Mr. Horn, anything else?

Mr. HORN. When you ask for that figure, I would like to see it

broken down in terms of hospitals, which already have generators,

and then try to get it in the rest of the economy, agriculture.

Mr. OSE. You are talking about the 5,000 megawatts list?

Mr. HORN. Exactly, yes.

Mr. OSE. All right.

I want to thank these witnesses for joining us today. Your information has been solid, and I appreciate you taking the time.

Mr. UHLER. Thank you.

Mr. YATES. Thank you.

Mr. VERBOOM. Thank you.

Mr. OSE. OK, we are going to go ahead and call up the next

panel, and that would be Mr. Kevin Madden, Mrs. Loretta Lynch,

Mr. Terry Winter and Mr. Larry Makovich.

OK, if the witnesses would rise, please.

[Witnesses sworn.]

Mr. OSE. Let the record show the witnesses answered in the affirmative.

Joining us on this panel, we will just move from my left to the

right. The first witness is Mr. Kevin Madden, who is the general

counsel for the Federal Energy Regulatory Commission. Mr. Madden, you are recognized for a 5-minute statement.

STATEMENTS OF KEVIN P. MADDEN, GENERAL COUNSEL, FEDERAL ENERGY REGULATORY COMMISSION; LORETTA

LYNCH, PRESIDENT, CALIFORNIA PUBLIC UTILITIES COMMISSION; TERRY W. WINTER, PRESIDENT AND CEO, CALIFORNIA INDEPENDENT SYSTEM OPERATOR; AND LARRY

MAKOVICH, SENIOR DIRECTOR, CAMBRIDGE ENERGY RESEARCH ASSOCIATES

Mr. MADDEN. Thank you, Mr. Chairman. I thank the committee

and subcommittee for the opportunity to discuss the topic of electricity markets in California and surrounding States. As Mr. Chairman said, I am Kevin P. Madden. I am the general counsel of the

Federal Energy Regulatory Commission. I appear today as a ComVerDate 11-MAY-2000 10:55 Apr 01, 2002 Jkt 000000 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 C:\DOCS\76761.TXT HGOVREF1 PsN: HGOVREF1
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mission staff witness, and I do not speak on behalf of the Commission.

Electricity markets in California and throughout much of the

West are in a state of stress, and they will continue to experience

various serious problems throughout the coming summer. Wholesale prices have increased substantially. Consumers are being implored to conserve as much as possible, and utilities continue to

face severe financial problems. PG&E has just filed for reorganization under Chapter 11 of the U.S. bankruptcy code last week.

The Commission has aggressively been identifying and implementing market-driven solutions to the problems. Let me just highlight some of the recent actions we have taken to address these

problems. Earlier this month, the Commission took strong action to

mitigate prices in California’s electricity markets for the periods of

January and February. The Commission identified many transactions during these 2 months that warranted further investigation. The Commission required the sellers to either refund certain

amounts or to offset those amounts against what is already owed

them. They also require them to provide any additional information

which they believe could justify their particular rates. The total

amount of potential refunds for just those 2 months, January and

February, amounted to $124 million.

Also in March, the Commission issued an order seeking to increase energy supplies and reduce energy demand in California and

in the West. The Commission implemented certain measures immediately. These include extending and broadening waivers for certain facilities under PURPA, enabling those facilities to generate

more electricity without the restrictions that they usually have. We

expedited the certification of natural gas pipelines into California

and the West. Just this week, the Commission authorized Kern

River Pipeline to provide approximately 300 MCF per day additional capacity into southern California; this is expected to come

online in June or July of this summer. We also urged all licensees

to review the FERC licenses that they hold in order to assess the

potential to increase the generating capacity at those particular

projects.

The Commission also proposed and sought comment on what

other measures it should employ to assess rates for transmission

facilities and for natural gas facilities in order for them to be online

to provide energy this summer.

Finally, the Commission announced a 1-day conference with

State commissioners and other State representatives from Western

States to discuss the volatility of the price in the Western United

States, as well as other issues needed to address those particular

prices; infrastructure, for example. The conference is being held

today in Boise, ID.

On March 14th, the Commission ordered two utilities to justify

the duration of the outages in 2000, April and May 2000, at their

California generating facilities. Those outages forced the California

ISO to purchase more expensive power from the utilities for the

generating facilities. Absent adequate justification, the utilities

must make refunds in the amount of $10.8 million.

On March 28th, the Commission also addressed a complaint filed

by the California Public Utility Commission under section 5 of the

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Natural Gas Act against a pipeline company and its marketing affiliate. While FERC found one part of the complaint unsupported,

FERC ordered a hearing on whether the pipeline and its affiliate

had market power; and if so, used that market power to drive up

the prices of natural gas at the California border. The case is now

pending before an administrative law judge. The Commission set

this case on a fast track and a decision is due back to the Commission in 60 days.

Finally, the Commission’s staff, at the Commission’s direction,

has proposed a market monitoring and mitigation plan for California. This would require all sellers with uncommitted power to sell

in the real-time market. The Commission is currently considering

comments on this proposal filed by numerous entities, and expects

to act on this in the near future for the summer.

These actions, I believe, demonstrate the Commission’s commitment to take all appropriate action to remedy the current imbalances in western energy markets. While some have accused the

Federal Energy Regulatory Commission of being indifferent or even

hostile to the concerns of California consumers, our actions prove

otherwise. It is not true. We have pursued the remedies we believe

will be most effective, not only in the short term, but also in the

long term. No one should doubt our commitment to ensuring an

adequate supply of energy for all consumers at reasonable prices.

By itself, however, the Commission cannot contribute all. It can

only contribute a small part of the solution to today’s energy problems. A more comprehensive and permanent solution requires the

involvement of the States and other Federal agencies and departments. In particular, California must do as much as possible to expedite the construction of newer power plants. I am encouraged by

all the hard work and effort taken in recent months, but—— Mr. OSE. Mr. Madden, are you about done?

Mr. MADDEN. I am about done.

Mr. OSE. Your time is about up here, so you need to wrap up.

Mr. MADDEN. I am encouraged by the action taken by the State

of California and the other States, but we must be vigilant to ensure that these new facilities are built.

Mr. Chairman, I will be happy to answer any questions. Thank

you.

Mr. OSE. Thank you.

Our next witness is Ms. Loretta Lynch, who is the president of

the California Public Utilities Commission. Ms. Lynch, you are recognized for 5 minutes.

[The prepared statement of Mr. Madden follows:]

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Ms. LYNCH. Thank you, Mr. Chairman and Members.

California’s restructuring experiment has erroneously been called

deregulation. Rather, California Federalized the regulation of its

energy prices by allowing the utilities to sell off their generating

plants to private merchant generators, converting retail relationships to unbundled wholesale relationships, which created a wholesale market for electricity that was then regulated by the Federal

Government, not by California.

To a much greater extent than was wise, California, under the

Wilson administration, placed control of its essential economic infrastructure in the hands of the Federal Government and the Federal Energy Regulatory Commission. Federalizing control of California’s grid has limited California’s ability to protect our economy

from price gouging and supply withholding.

To a much greater extent than was wise, California, under the

Wilson administration, dismantled the integrated energy service

delivery mechanisms in order to create business opportunities for

speculators. The prior administration caused the utilities to sell off

much of their generation to entities who now hold California hostage daily to extortionate price demands for electricity, a fundamental economic necessity that cannot be stored, and for which

there is no effective substitute.

California, under the leadership of Governor Davis, is already

pursuing structural reforms that will reduce our residences’ and

businesses’ exposure to and dependence on the deregulated wholesale market. These include ending the practice of divesting utilityowned generation and selling it off to private marketeers, reacquiring control of the transmission system, and reforming the ISO and

returning to a rational system of unit commitment and dispatching

the grid.

The California Public Utilities Commission took a very difficult

action a few weeks ago when we raised retail rates by 4 cents a

kilowatt hour since January. Mr. Burton, that would equal a 60

percent increase in your district in Indiana. It may not be enough

if the current price-gouging practices persist and remain unabated

by Federal regulators.

I have prepared an exhibit that is attached to my testimony that

illustrates what has happened in the California wholesale pricing

market. From April 1998, when the California market opened, to

January 2000, wholesale prices remained at traditional levels, $30

to $35 per megawatt hour. But beginning in January 2000, wholesale prices began to climb, averaging about 60 percent above the

previous year. Beginning in May 2000, average prices climbed to

over $100 a megawatt hour, reaching a peak of $166 per megawatt

hour in August, 200 to 300 percent above historic levels.

On November 1st, the Federal regulators indicated an intention

to abolish price caps in the California wholesale market and prices

began a further upward spiral. On December 8th, the FERC, in a

secret order procured by Mr. Winter, without notice to a single

California State policymaker or elected official, eliminated all price

caps, and average prices rose to $377 per megawatt hour for the

month of December, a level 10 times the historic average. Wholesale prices for electricity in California have remained at about that

level since, and they bear absolutely no correlation to demand,

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since these prices are occurring right now at the lowest load levels

of the year. It is significant that peak demand has not increased

significantly in the past 4 years. The same plants are running that

have served load in California for the past 30 years, using the

same fuels, and with the same pollution emissions profiles.

But the practice of physical and economic withholding continually puts California on the ragged edge. Any shortage of generation to meet demand has been due to the failure of the merchant

generators to provide sufficient supply, and the failure of past administrations to require that electricity supply be built. Prior to restructuring, California added over 15,000 megawatts of new generation from 1980 to the mid-1990’s. In addition, thousands of

megawatts were obtained from aggressive conservation programs

and new interstate transmission lines.

During the 1980’s, California added power plants, notwithstanding our appropriate environmental requirements that were then in

place. However, all this development stopped in the mid-1990’s

when California, under the Wilson administration, unwisely decided to depend on the competitive, unregulated market.

Under Governor Davis, California is now taking every action to

expedite the development of new generation. We are restarting

long-retired utility power plants; we are providing incentives for

distributed generation and renewable energy projects; we are

streamlining the permitting of large power plants that are much

more efficient and cleaner-running than current plants. We are obtaining waivers from Federal regulators to allow qualifying facilities to increase generation capacity, and California is making a historic commitment of ratepayer and taxpayer moneys to provide

$1.5 billion in energy efficiency incentives to our businesses and

families so that we can use electricity as wisely and as effectively

as possible. California’s energy efficiency commitments dwarfs comparable Federal commitments.

However, all these changes under Governor Davis may not be

sufficient to stem our problems we are facing this summer, particularly in light of suppliers’ ability to withhold generation capacity.

You know, we are experiencing the application of a strategy that

was clearly articulated years ago by the merchant generators. And

I would like to quote. ‘‘We have a lot of experience dealing with

summer peaks in dispatching plants.’’ This is a quote from Mr.

Oglesbee, who is President of Reliance Marketing Subsidiary. He

says, ‘‘When you operate on a merchant basis and sell into a power

exchange, you can watch the price climb during the day. We might

decide to hold our plant off the market at 12 noon, even if the price

looks favorable, because we can get a better price at 4 p.m. We

think we know a little bit about what will happen if we hold our

plant out a few hours. We can play on that expertise.’’ And my testimony has the quote from Mr. Oglesbee.

What we realize is that the merchant generators will hold California over a barrel unless the Federal regulators do their job. The

Federal Power Act provides for cost-based rates. The act requires

just and reasonable wholesale rates, or else, under the statutes

that Congress passed, those rates are unlawful. Where market

power exists, all sellers must have cost-based rates. One part of the

answer to California’s dilemma is to move back to cost-based rates

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as quickly as possible, given the market that even the FERC calls

dysfunctional. The Federal law requires it. If FERC is unwilling to

enforce the laws on its own that are currently on the books, the

Congress should direct the FERC to do so.

I have additional testimony. I see my time is running short, so

I would like to wrap it up. But I would like to be open to questions,

especially about long-term contracts, because the committee had

asked specifically for testimony about that. But I would like to address one final issue, which is the cost of natural gas in California.

Wholesale natural gas is twice as expensive in California as anywhere else. This is entirely a function of the cost and lack of availability of interstate transportation.

Again, the practice of withholding and price gouging, the classic

symptoms of unlawful market power of the kind the Natural Gas

Act was intended to prevent, is victimizing California without a

remedy from the FERC. The remedy here is for Congress to require

the FERC to reverse its ill-considered 2-year regulatory exemption

of the natural gas secondary market, and to re-regulate the secondary market for natural gas transport so that the infrastructure that

consumers have built and paid for is fully utilized.

Many fingers have been pointed over California’s energy crisis,

but the cause is simple and fundamental. The Federal market cops

decided to leave the beat, leaving the market completely unattended. The Nation has seen this situation play out before in the

1920’s, when electricity and natural gas providers kept the whole

Nation over a barrel. That gaming and gouging led to the 1935

Federal Power Act that Congress passed, a statute that was designed to protect businesses and consumers from sellers who possessed market power. We face that situation again today, and Congress should require FERC to enforce the Federal statutes already

on the books.

Mr. OSE. Ms. Lynch, we are going to wrap up your——

Ms. LYNCH. Sure. I have submitted testimony with several

documents——

Mr. OSE. You have testimony?

Ms. LYNCH [continuing]. Responding to the questions the committee had asked me to prepare.

Mr. OSE. We will submit your written statement for the record.

We appreciate your giving it to us.

Our next witness is Mr. Terry Winter, who is the president and

CEO of the California Independent System Operator. Mr. Winter,

I have been kind to Mr. Madden and Ms. Lynch, but I am going

to give you 5 minutes.

Mr. WINTER. That is not unusual for me.

Mr. OSE. All right.

[The prepared statement of Ms. Lynch follows:]

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Mr. WINTER. Thank you, Mr. Chairman and Members of the Congress.

First off, I would like to explain what the ISO does. We are the

operator of the transmission system, and we take schedules. We

are not always privy to what all the prices are. Many bilateral contracts go through us that we never see, so oftentimes people are

asking us to identify what all the costs are. We have no way of

doing that. Our job is to perform the scheduling on the system, and

to ensure that it operates reliably. And last but not least, we are

the ones that, in the end, if there is not sufficient supply and we

must interrupt firm load, we are the ones that make that order.

There are four things that I would like to very briefly talk about

and try to stay within my 5 minutes. The first, a comment on the

bankruptcies that we have now faced; second is today’s operation,

what we go through; third is the summer load that we are looking

forward to and fourth, market costs.

My statement on bankruptcy is that one of the things that the

operator needs desperately is some stability to what is going to

happen during the day. And because of that, I think it is incumbent upon us to make sure that these companies that have moved

into bankruptcy continue their attention on the operation, and I believe PG&E’s first motion was to ensure that their employees

would be paid, etc. I think that is a good start. But we also have

many plans for transmission lines that they are building at the

current time, and we need to ensure that they have the financial

wherewithal to continue that building, because that will be part of

our solution to serve the customers and the ratepayers of California.

Today’s operation, I do not think I can begin to explain to you

all, without an hour or two, or actually have you out there, what

it means to come in at 7 a.m. and sit down with the operators who

are facing a 5,000 to 7,000 megawatt shortage that day as they

move into their 7 a.m. timeframe. That means at that point we

have to go out into the market and beyond the market to get all

available generation. We face that every day. And this summer we

had periods when we were actually 16,000 megawatts short.

Looking forward to this summer, forecasting is always a dangerous business, but I will tell you that we have done a rather pessimistic report, which we are paid to do, quite honestly, because we

have to consider some of the worst cases. But that shows in June

that we will be about 3,700 megawatts short on peak. Now, that

decays as we move on into the summer because of new generation.

There is approximately 2,500 megawatts of generation that will be

coming online in July and August of this year, so it moves down

to around the 600 megawatt timeframe or level.

But it should be noticed that, while we have not factored in

things like conservation and the impact that increased prices will

have, we also, on the other side, have not looked at the worst possible heat, summer, we have not looked at the worst possible situation of import from out of State. To give you an idea, in 1999 we

were importing 9,000 megawatts from other States. Last year we

were importing between 5,000 and 6,000. Right now, I am extremely lucky if I can get 1,000 to 1,500 from out of State. And

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what that has resulted in is that we have to run in-state generation about 20 to 30 percent more than we ever have in the past.

Moving on to markets, we were constantly asked how much we

felt the market was being paid above what would be a normal competitive hourly rate in normal markets. Our figures show that

there is a little over $6 billion cost that we cannot explain either

through scarcity, cost of natural gas, cost of higher emissions, etc.

We have filed those reports with FERC, and hopefully they will be

able to review those and make their findings on those, because we

do not always have all the information. But just in broad figures,

that is about a 35 percent increase over what we would expect in

competitive markets, which allow for a portion of it to be paid

above cost base just because of the lack of supply.

With that, I will stop and hold to my 5 minutes.

Mr. OSE. Thank you, Mr. Winter. The trap door will not open underneath you. [Laughter.]

Our final witness is Mr. Larry Makovich, who is the senior director at Cambridge Energy Research Associates. Mr. Makovich for 5

minutes.

[The prepared statement of Mr. Winter follows:]

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Mr. MAKOVICH. Thank you. When California passed its restructuring laws 5 years ago, it set a goal to move from regulation and

toward the market. California would still benefit from a move to

a market that works. Unfortunately, the power market in California was set up with serious structural flaws right from the start.

These flaws made it neither possible nor profitable to build power

plants when needed. These flaws were a siting and permitting

process that creates costly and time-consuming barriers to new

power plant development; a power market that paid generators to

utilize their power plants, but did not pay them enough to have capacity in place to meet peak demand and retail prices that were

delinked from wholesale prices. And by disconnecting the demand

side from the market, it put utilities in an unsustainable position

that has resulted in bankruptcy and supply reduction.

The flawed market design was the first problem, but an even

greater problem has been the complacency demonstrated when the

evidence that the market flaws were playing out and creating a

shortage. In answer to Congressman Burton’s question, ‘‘Was there

evidence that this shortage was happening?’’ The answer is clearly

yes. The California economy grew 32 percent over the past 5 years,

electric consumption grew 24 percent, and power generating capability declined. No one did anything year after year, while the State

failed to site and permit the 1,200 megawatts needed each year to

keep supply and demand in balance.

California ran out of capacity because it never set up a market

to supply it. From 1996 through 1999 the California power market

passed from supply surplus, to supply and demand balance, to a

supply shortage, and the market clearing prices in California were

clearly too low to support enough timely investment. California

made a deliberate mistake to expect that the energy market alone,

through either spot prices or energy contracts, would keep power

demand and supply in balance in the long run. No other power

market set up around the world relies solely on an energy market.

California’s energy market, as set up, did the job it was supposed

to do. Prior to the shortage, the energy market was very competitive, paid generators to utilize their power plants efficiently, kept

supply and demand in balance in the short run. But to do this, it

had to clear on variable costs alone. The average annual wholesale

price for power ranged from $14 to $31 per megawatt hour from

1995 to 1999. This is a level that is half of what is necessary to

support new power supply development.

Clearly the market needed to pay for capacity to provide an additional timely payment to attract investment; however, the majority

of stakeholders who set up the rules in California decided not to

pay for capacity as long as reliability is free. What needs to be done

in California to solve the problem falls into two categories; shortrun actions to deal with the crisis and long-run actions to fix the

market.

In the short run, California needs to connect wholesale and retail

prices. It needs to reduce power demand, and it needs to focus on

developing new power supply. The question is, are there signs that

things are being done? If 5,000 megawatts of diesel-fired generation

is not being coordinated and plans being made to synchronize in

that grid, there is clear evidence that the efforts needed to relieve

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this problem in the short run are not being done. Testimony has

also made it clear that there needs to be flexibility in environmental regulations that are currently limiting power supply.

In the long run, California needs to fix its market. It needs to

establish a capacity market by mandating a capacity requirement

and enforcing a deficiency penalty. It needs to set and enforce target levels of siting and permitting for new power plants, and meet

those year after year. And it needs to create an independent and

expert board to govern the market rules.

The signs are again clear. California is doing only some of what

needs to be done, and many current policies are not working. Keeping retail and wholesale prices delinked have led to bankruptcies,

it has kept thousands of megawatts out of supply. Using the State’s

time and effort and resources to take over the transmission grid

will further distort the market, and is taking the efforts away from

increasing supply.

The Department of Water Resources moving to long-term contracts at the top of the market is a mistake. These contracts have

allowed California to push the recovery of current costs into the future. California will regret signing these commitments in the years

to come.

In addition, barriers to new supply remain. Even with all the attention and hoopla focused on new supply, we are looking at about

1,300 megawatts from last summer to this summer of new supply,

which is just about enough to offset 1 year’s growth. The Federal

Energy Regulatory Commission is also making mistakes in the way

it is setting price caps. It is creating the perverse incentive not to

run power plants at peak demand.

California needs to realize it competes in a worldwide market to

attract capital for power development. It has created a negative

and hostile environment to that investment, and it is moving to a

very expensive and expansive public power entity.

[The prepared statement of Mr. Makovich follows:]

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Mr. OSE. Thank you, Mr. Makovich. I would like to recognize

Congressman Horn to initiate questions for 10 minutes.

Mr. HORN. Just a few to clarify a few things. President Lynch,

as chairman of the California Public Utilities Commission, I am

sure you did look at this whole situation over time. Did you ever

work for the California legislature at all?

Ms. LYNCH. I did.

Mr. HORN. You did? Was it at the time they were talking about

deregulation?

Ms. LYNCH. No.

Mr. HORN. When did they first discuss deregulation?

Ms. LYNCH. Well, they passed the bill in August 1996. I believe

they were talking about it for a while before.

Mr. HORN. Right. And as I remember, Steve Peace was the leader of that.

Ms. LYNCH. I believe that Senator Brulte is the author of the legislation.

Mr. HORN. Really? Well, I guess everybody else saw it as Peace,

who was a Democrat, and every single Member, Democrat and Republican, voted for that, I believe, as I remember the vote.

Ms. LYNCH. I was not there.

Mr. HORN. OK, you were not there. Well, Mr. Chairman, let us

get what the truth of it is in the record at this point as to did they

all agree to it or did they not. But as I remember, they all agreed

to it on deregulation.

Mr. OSE. If the gentleman would yield.

Mr. HORN. Yes.

Mr. OSE. It is my understanding that AB1890, which is the legislation that implemented the restructuring, was at least in part authored by then Assemblyman Brulte, and that Senator Peace carried it in the Senate.

Mr. HORN. OK.

Mr. OSE. And, that it was adopted unanimously.

Mr. HORN. And it was adopted.

Mr. OSE. That is my understanding.

Mr. HORN. That is right.

Mr. OSE. We can check it out.

Mr. HORN. So, that is one thing to clarify. Let me ask you about

the situation, and we have a letter here from the law firm Swidler,

Merlin, Sherif, Friedman in Washington. Is that a representation

of the public utilities? I am just curious. We have a letter from

them, and I just wondered do they speak for the California Public

Utilities Commission?

Ms. LYNCH. No, we have our own independent legal staff.

Mr. HORN. In Washington?

Ms. LYNCH. No, in California.

Mr. HORN. I see.

Ms. LYNCH. And we have——

Mr. HORN. Because we are talking about the Federal side, and

I just wondered if you kept counsel on the Federal side.

Ms. LYNCH. No, we have State employees who are lawyers, who

represent the California Public Utilities Commission in Washington

at the Federal Energy Regulatory Commission.

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Mr. HORN. But, let me tell you what worried us, the $6.7 billion

were presumably potential excess cost. Now, the fact is, when you

put all the figures out, you are talking about 6.7 total overcharges

for the independent systems operator, and the power itself, including ancillary services, from May 2000 until February 2001, that is

8 months. And $4 billion of the $6.7 billion is from that, say a lot

of people. I would like to know what Mr. Winter says on this. $3.1

billion is from the Federal commission and jurisdictional sellers,

and then $1.3 billion occurred between October 2000 and February

2001, and that was several months. Mr. Winter, could you untangle

this as to who did what to whom, and what it boils down to?

Mr. WINTER. OK. So that it is clear, Swidler is the representative

of the ISO in Washington, DC, and does our filings with them.

The report you are referring to was our comments to the FERC

market monitoring program. If you look at the numbers, the first

thing we were asked to do was to look at the total wholesale energy

cost, excluding the utilities. And of that, we found that there was

about $6.2 or $6.7, whichever number you referred to, that was

what we would consider to be what you would expect if you had

a working market. In other words, if you had a market that was

working, and had hourly prices, you would expect a certain price.

The price that Californians paid was $6.7 billion above that number.

Now, that number is made up of several components, one of

those being bilateral contracts that we do not have any knowledge

of exactly what is included in those. So that is of the total savings,

about $2 billion was extrapolated from what we saw in the market,

which leaves us the $4 billion that is over—you used the term ‘‘overcharged.’’ I would say above market prices. Of that, a portion

was the PX, part of it was the ISO real-time, and part of it ancillary services. The PX energy we have a good feel for, because as

they were running, they had rates that were open to us, and so we

could review those.

If you then break that $4 billion down, it amounts to approximately $3 billion that is in the jurisdiction of FERC, and about $1

billion that is non-jurisdictional. OK, now, if you go to the timing,

because there was a lot of debate over when FERC could or could

not do certain things, and if you look at the timeframe from May

through September—and May is when we saw the cost start to go

up—May through September, FERC jurisdictional was about $1.7

billion. FERC jurisdictional for the months of October through February was $1.3 billion, for a total FERC jurisdictional for that timeframe of $3 billion. So, I can submit this document. It is all in the

report. And I assume that is what you are reading from those.

Mr. HORN. Well, that is right. It seems to me that $1.3 billion

occurred between October 2000 and February 2001, and you say

that is accurate?

Mr. WINTER. Yes.

Mr. HORN. OK. Is there anything here that is not accurate? Because one thing is that the Federal commission has a very small

role compared to the State commission.

Mr. WINTER. Well, I would not classify it as not accurate. The

one we do not have information on are the bilateral contracts that

are done outside of our knowledge.

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Mr. HORN. Now, who would know what those contracts amounted

to?

Mr. WINTER. The entities who entered into them, which were the

generators and the utilities, and later on, of course, the Department of Water Resources.

Mr. HORN. Well, did they file a document anywhere?

Mr. WINTER. Not that I am aware of, but I would not be the expert on that.

Mr. HORN. Well, between the two of you, you ought to know

whether it is Federal, State, or what. Or do they have to do anything? It just seems to me somewhere a regulatory commission

ought to know what those amounts were.

Mr. WINTER. I would assume that FERC can get that information, but we do not have it.

Mr. HORN. Well, how about it, Mr. Madden?

Mr. MADDEN. Well, Congressman Horn, you asked a very interesting question. The six point—— Mr. HORN. Usually when somebody says that, I give them a ‘‘C’’ as a student. So, as a former professor, is this going to be more

than interesting? [Laughter.]

Mr. MADDEN. It is going to be more than interesting.

Mr. HORN. OK, that is what we want.

Mr. MADDEN. Using the $6.2 billion that the ISO submitted, I

think around March 22nd, as a basis for people to read as excess

refunds due consumers is somewhat shaky. We asked the ISO last

week to provide us the details. What you have to understand is

that the $6.2 billion covers a period from May 2000 through February 2001.

Mr. HORN. Eight months.

Mr. MADDEN. It also includes non-jurisdictional money. And

those are sales made by municipals or co-operatives such as Sacramento Municipal Utility District or Los Angeles Ddepartment of

Water and Power or Federal Power Marketing administrators in

the northwest, or other entities over which we do not have jurisdiction. We find for the first time that approximately $2 billion is associated with bilateral contracts, which is not subject to our refund

order. We were dealing with a realtime market.

So, Congressman Horn, to get to the bottom line, FERC asked

the ISO to provide us the detail necessary to explain why or how

they arrived at the $6.2. Today, for the first time they are trying

to carve out the $6.2 billion. We can require the jurisdictional sellers—the jurisdictional sellers and the public utilities—to provide us

that information. We have sent a data request to the ISO to provide us that information relative to both the jurisdictional and nonjurisdictional.

Mr. HORN. So you have no problem with asking for those bits of

information?

Mr. MADDEN. I have no problem at all, sir.

Mr. HORN. OK. Do you think the State commission ought to do

that, also?

Mr. MADDEN. Well, these are wholesale costs. They will be submitted to us. Of course, the California Public Utility Commission

can provide its response, and I believe it has to some extent with

respect to the ISO filing. But they are welcome to provide the comVerDate 11-MAY-2000 10:55 Apr 01, 2002 Jkt 000000 PO 00000 Frm 00115 Fmt 6633 Sfmt 6633 C:\DOCS\76761.TXT HGOVREF1 PsN: HGOVREF1
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ments, once the ISO provides us with the information we have requested.

Mr. HORN. President Lynch, is your Commission going to ask for

the ISO information?

Ms. LYNCH. We do have the ISO information. I applaud Mr. Winter’s cooperation, now that we have new members of the board who

are not stakeholders and not self-interested in the board. We had

quite a bit of trouble, as an entity of the State of California, obtaining basic information from the ISO and the sellers in the fall, and

we had to apply to FERC for help in getting that information, but

we did not receive that help. But now that we have disinterested

members on the ISO, after the Governor and the legislature

changed State law, we have had much more cooperation.

You noted, Congressman Horn, that the FERC has a small role.

Actually, I think the FERC has the whole ball game because they

control wholesale prices. We can ask for the information, and fight

in court with the generators over receiving it, but we cannot impose price rationality in the system. That is entirely FERC’s jurisdiction as the Federal regulator.

Mr. HORN. Is that correct, Mr. Madden?

Mr. MADDEN. We have total authority over the wholesale rates,

that is correct. We have requested that information from the ISO,

and if we do not get the full details, we can and will request the

information from the individual generators to the extent they are

jurisdictional.

Mr. OSE. Well, would you yield for a minute?

Mr. HORN. Yes.

Mr. OSE. Well, let me just—let us just jump in here. Mr. Winter,

can you give the information to Mr. Madden, so we can cut this

out?

Mr. WINTER. Yes. I find this very interesting, but I will not comment on that. Yes, they have the information that we have. The interesting thing is that we have no authority to get from the generators what their actual costs were, so all we can do is present to

FERC our suspicions. Now, FERC is the one that has the authority

to go to the generator and say justify your rates.

Mr. OSE. OK, so we can get the information that you have to Mr.

Madden?

Mr. WINTER. That is no problem. It has already been submitted.

Mr. HORN. And then I think President Lynch was going to note

something here. You started a breath there, and I assume that is

a paragraph, so what is—well, how do you feel about that?

Ms. LYNCH. I think the important conclusion is that the ISO,

using all of the information that was available to it, under the most

conservative assumptions, found that the sellers overcharged Californians over $6 billion in less than a year. You know, in 1999,

California paid $7.4 billion for power—for electricity. In 2000, we

paid over $27 billion for electricity. That is $20 billion more in just

1 year for a 2-percent increase in demand. And to paraphrase

David Freeman, even a blind pig can figure out that there is price

gouging in that kind of market. But it does fall to FERC to demonstrate—to identify the gouging.

Mr. HORN. You mentioned stakeholders, and how they have gone

down to five from what you called, interested parties. Tell me about

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how that worked. Did you make recommendations to the Governor

and advise him that, look, these people are just doing something

for themselves?

Mr. OSE. Mr. Horn, could we have a second round of questions?

Mr. HORN. OK.

Mr. OSE. All right. We will come back to that. I would like to recognize Chairman Burton for 10 minutes.

Mr. BURTON. Do you have the information from the generators

that Mr. Winter alluded to?

Mr. MADDEN. I do not know all the information that Mr. Winter

alluded to. We have requested information from the generators

from the January-February period in which we established a $124

million refund. We asked them to provide us with the cost data or

accept the refund numbers. As to the October-November period, we

have sent out a data request to the generators asking for cost data.

Mr. BURTON. Well, how long do you give them to get that information back?

Mr. MADDEN. Seven days in one case.

Mr. BURTON. Seven days?

Mr. MADDEN. Seven days.

Mr. BURTON. And when did you send the request out?

Mr. MADDEN. We sent the request out for the October-November

period last week.

Mr. BURTON. Why did you not do that before that?

Mr. MADDEN. The December 15th order that the Commission set

which established the section 206 procedding required us first to

look at the January to April period where we established the break

point—a $150 review for megawatts. So, we focused on that first.

We are now turning our efforts to the October-December period.

Mr. BURTON. It seems to me—of course, I am a novice at this—

that you ought to kick it into high gear and get that.

Mr. MADDEN. Mr. Chairman, we are. We just had different rules

apply in that period.

Mr. BURTON. We will talk to the head of the agency and find out

why this is not getting done quicker. I mean, there is a problem

out here that needs to be solved, and I think there is enough blame

to go around.

Ms. Lynch, you said, or maybe it was Mr. Winter that said that

there was anticipated a shortfall peak in June of around 3,700

megawatts.

Mr. WINTER. That is correct.

Mr. BURTON. Is that right? And that it might go down to 600

megawatts shortfall around September.

Mr. WINTER. Correct.

Mr. BURTON. Have you taken into consideration the 5,000

megawatts that could be produced through diesel power that is

supposedly sitting around someplace in this State?

Mr. WINTER. Yes, that number was a little bit of a surprise to

me. I was——

Mr. BURTON. Why is it a surprise to you?

Mr. WINTER. Well, because I know that there is generation, but

we do not look at emergency generation.

Mr. BURTON. Why?

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Mr. WINTER. Well, for two reasons. No. 1 is the operator. Let us

say you have a hospital that has a 50 megawatt—or let us say it

is a 10 megawatt generator. That generator only serves the operating room. And so—— Mr. BURTON. Excuse me. Let me interrupt. It just seems to me

that, under the circumstances that you face here in California, you

would get on the stick and find out where all that emergency power

is so it could be utilized as quickly as possible when an emergency

arises. And to start saying that you have not done that or you have

not checked, you do not know what hospital is doing it and all

those other things—now, obviously the hospital is going to use it

for their own purposes in the event of a blackout. But according to

the people we had on the previous panel, there is 5,000 megawatts

of power out there someplace that could be utilized, and when I

look at what you are looking at here next year or this summer, you

are 3,700 megawatts short. And you do not even know if that 5,000

megawatts is going to be figured into the equation. If that is out

there, then you have got a problem that can be solved. If it is not,

then you can do something else. But, you cannot tell us anything

today.

Mr. WINTER. Well, what I can tell you is that even if you could

identify 5,000, it is my belief that the majority of it would never

be turned on because what the entity who has that generation

would have to do is shut off half their business while they turned

on just the emergency operating room.

Mr. BURTON. But, how do you know that?

Mr. WINTER. Well, because I have been in the business for 40

years and I know—— Mr. BURTON. But have you looked into it? I mean, have you really done an analysis of it.

Mr. WINTER. Well, no, we have not done an analysis.

Mr. BURTON. Well, do you not think you should?

Mr. WINTER. I believe that the Energy Commission is looking at

those numbers, as is the Governor’s people, and when they identify

how many megawatts are there and we can identify how many

could actually solve the problem as opposed to not solving it, then

we certainly would figure that into our equation.

Mr. BURTON. I do not know how everybody else feels, but I feel

like everybody is pointing the finger at somebody else, and everybody is not doing the things that ought to be done to make sure

that they have a complete analysis of where energy is, where alternative sources are, so they can get the job done, if possible, with

what is out there. And you really do not know where the 5,000

megawatts they alluded to in the previous panel are. You say that

it is probably in hospitals and every place else, but you really do

not know.

Mr. WINTER. That is correct, I have not looked at it.

Mr. BURTON. But you will try to find out?

Mr. WINTER. Certainly.

Mr. BURTON. Do you know how long that will take?

Mr. WINTER. Well, I think the information resides in the Energy

Commission, and so we will go——

Mr. BURTON. Can you talk to them tomorrow and find out?

Mr. WINTER. I can talk to them tomorrow.

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Mr. BURTON. That would be great.

Now, let me just ask you a question, Mrs. Lynch. Last summer, according to the records here, in April it was $26.56 per megawatt,

right?

Ms. LYNCH. I do not know what you are referring to.

Mr. BURTON. This is the chart you gave us.

Ms. LYNCH. Right, that is the average chart from the PX.

Mr. BURTON. OK. So that is what it was per megawatt in May?

Ms. LYNCH. On average.

Mr. BURTON. OK. That was in April. And then in May it jumped to $47.22, right?

Ms. LYNCH. On average, that is correct.

Mr. BURTON. On average. Well, about that time you had an offer

to buy electricity at 5 cents per kilowatt hour, you did not buy it.

Why?

Ms. LYNCH. Well, the Public Utilities Commission does not buy

power, the utilities do. What the Public Utilities Commission does

do is authorize the utilities to buy power.

Mr. BURTON. Did you authorize it?

Ms. LYNCH. Absolutely. Since I have been on the Public Utilities

Commission, the utilities have asked 10 times for authority for bilateral or forward contracts, or the authority to participate in hedging products. Every single time the Public Utilities Commission has

allowed the utilities to do so.

Mr. BURTON. Well, why did they not buy the electricity or sign

the long-term contract for 5 cents per kilowatt hour?

Ms. LYNCH. I do not know the offer you are referring to.

Mr. BURTON. You do not know?

Ms. LYNCH. I know that many offers were made at various points

in time. I do not know a specific offer made in May of 2000.

Mr. BURTON. But looking at the jump, there was a quantum leap

from April through—it almost doubled in May, and then it was

more than double again in June, and then it continued up from

there. What was the situation? We are going to talk tomorrow in

San Jose to some of the utilities. But the reason they did not file

for that was because there was so much interference from the staff

at the Commission. That is not true?

Ms. LYNCH. All I know is, every single time they asked for authority, we gave it to them. And in fact, the facts show that—— Mr. BURTON. Did you give it to them in writing?

Ms. LYNCH. Oh, absolutely.

Mr. BURTON. Can I get copies of that?

Ms. LYNCH. Certainly. August 3rd we said you buy your full net

short, your choice, your business decision, and the utilities in fact

did purchase bilateral contracts. We moved with lightning speed.

They asked us on July 21st for authority, and we turned it around

in 2 weeks and gave them full authority 2 weeks later. Then they

started to buy, and they bought in August, in September, in October, in November. So I believe it is a canard to say that we stood

in their way, because the facts show differently.

Mr. BURTON. They were buying at what rate?

Ms. LYNCH. They were buying at whatever rate they chose.

Mr. BURTON. I guess I am missing something here. There was an

offer for long-term contracts at 5 cents per kilowatt hour. And you

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are saying that they did not purchase it, they did not sign agreements for that. Why would they not do that?

Ms. LYNCH. No, that is, I believe, Mr. Chairman, what you said.

I do not know the specific offer you are referring to, because the

utilities receive dozens, if not hundreds of offers in a month.

Mr. BURTON. So, I need to address that question to the utility,

themselves?

Ms. LYNCH. I believe so. What the Public Utilities Commission

did was give the utilities the authority to expand their business

choices. They expanded their business choices to the full limit, and

the utilities actually took advantage of some of that authority.

Mr. BURTON. Well, there is a difference of opinion, and we will

get their side of the story tomorrow. They have said that the problem was that they could not get through the red tape or could not

get through the staff at your office. But we will check into that tomorrow.

I have more questions, Mr. Chairman, for the record. And I

would like to ask some of those on the next round.

Mr. OSE. We will come back.

Mr. BURTON. Thank you.

Mr. OSE. Thank you, Mr. Chairman.

Mr. Winter, I want to examine something here that troubles me

greatly. Ms. Lynch, in her written testimony, talks about a December 8th order that you obtained from FERC eliminating price caps.

December 8, 2000, and describes it as a secret order. Is that an accurate description?

Mr. WINTER. I think that is a little over-dramatic, but——

Mr. OSE. How would you describe it?

Mr. WINTER. The way I would describe it is, on Wednesday of

that week the prices—we have a situation where we had a price

cap of $250. And what was occurring was that we quickly reached

the $250, and people were then not selling us power until they

would call us on the phone and say I am willing to give you the

power, but the price is $300. When we make and go above price

cap, what we are making is a bilateral agreement between the

market and the ISO committed to that $300 price. We were completely inundated, because the price of natural gas at that time

was rising to the $40, $50 at burner tip, and we could not get

power into the system. So on Friday, what I did was, so that we

could put these prices that we were having to pay under review of

FERC, I did not remove the price cap, what I said was any money

that we paid above the $250 price cap would now be subject to

FERC review. Because I was already in the position that I was

having to pay those to keep the lights on. So, that is what we did

on the December 8th timeframe. We immediately filed that at

FERC, and they turned that decision around that day and gave us

authorization to make that part of our market.

Mr. OSE. Were there parties who were excluded from that process? I mean, I am trying to reconcile your statement with Mrs.

Lynch’s testimony.

Mr. WINTER. Yes, I think we moved extremely fast. There is no

doubt about that. Because I was in a situation where I literally

could not make the phone calls that I had to in the operating room,

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and I would not have had the power. Therefore, I made the emergency filing with FERC and enacted it the next day.

Mr. OSE. Mr. Madden, your recollection is consistent with that?

Mr. MADDEN. My recollection is almost consistent with that.

They made an emergency filing on that day saying that they needed power and they could not get the power at the $250 hard cap.

They asked for a soft cap, in which to bid the prices. We have authority, under section 205 of the Federal Power Act, to waive the

notice of provisions in situations like this. The Commission acted

very swiftly on the filing, very swiftly, and issued the order so that

the ISO could get power that day and the next day.

Mr. OSE. Ms. Lynch, is it the word secret that is causing a problem here? Your testimony says that this was a secret order, and I

am trying to find out how we get some collegiality, if you will, or

call it whatever you want, in this process.

Ms. LYNCH. We found out about it after it happened. And as the

head of an administrative agency, one process that I take extremely seriously is the requirement for public notice and comment. I think that is a fundamental tenet of due process that is required by the U.S. Constitution. And what happened there was a

private entity, the ISO—actually the head of a private entity, without consulting or getting a vote of the board in a public process,

went to FERC and privately asked for an emergency order. And

FERC, without notice to a single California policymaker or elected

official, granted that without the opportunity for anyone else in

California to even comment, much less object.

Mr. OSE. How do you reconcile that situation with the Governor’s

refusal to disclose information on power contracts?

Ms. LYNCH. The difference is the FERC is required to act under

the Administrative Procedure Act, according to its process. The

Governor is—or the Department of Water Resources is essentially

in a market where arbitragers have the technological capacity and

the expertise to take advantage of small bits of information in

order to disadvantage California ratepayers. So, if you are in a

business transaction where you are bidding against a bunch of

other bidders, you want to make sure that the other bidders do not

know the terms of your bid, because then they can outbid you. Essentially, Department of Water Resources is now in the business of

buying electricity, and in that business situation, you do not want

to hand over all the cards you possess to your business competitors.

The difference here with FERC was that they were acting in their

administrative capacity as a regulator, yet they failed to follow

even the basic tenets of due process or notice.

Mr. OSE. I cannot quite understand the difference, from a public

policy standpoint, if you will, from ISO’s action as you described,

in a secret manner, that redounds to the adverse impact of California consumers and the inability of California taxpayers, from a

public policy standpoint, getting information from the Governor’s

office about these contracts for forward delivery of power that uses

taxpayer resources. I am afraid I am just a businessman, I am not

an attorney. I do not quite understand the difference.

Ms. LYNCH. Well, certainly FERC failed to follow its Federal statutes and administrative mandates such that its action should be

entitled to deference. Because if you fail to follow the process and

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do not allow any other comment, then your action should not be entitled to deference.

But as a business person, I am sure you know the cutthroat

world of business when you are competing on a price point or on

a term of a contract. Notwithstanding that, DWR does not have a

statute in which it failed to follow in competing in the business

world to get the best price for California consumers. However,

DWR has said that when that information is no longer business

sensitive, it will provide that information to the public. The problem here is why should we put all of our cards on the table and

allow the same sellers, who have continued to gouge the California

utilities, to gouge the State.

Mr. OSE. Mr. Madden, do you share the differentiation that Mrs.

Lynch is describing here?

Mr. MADDEN. I do not share that differentiation, whatsoever, and

I would like to correct the record. The Federal Power Act, section

205, gives us full authority to act on a filing such as the ISO made

that day without notice and without opportunity to comment. We

followed the statute. It was an emergency situation. The ISO needed additional power.

Mr. OSE. I want to move on to another subject.

Mr. HORN. Could I, before—— Mr. OSE. Certainly, Mr. Horn.

Mr. HORN. I would like to follow this up a little and get the public administration aspects of it. Mr. Winter, who appointed you to

the position of independent system operator?

Mr. WINTER. That was under AB1890. It is a not-for-profit corporation formed under the authority of AB1890, and under the corporate laws of California.

Mr. HORN. And who appointed you?

Mr. WINTER. The board at that time.

Mr. HORN. Which board?

Mr. WINTER. We had a stakeholder board.

Mr. HORN. The original stakeholder board?

Mr. WINTER. That is correct.

Mr. HORN. And there were what, 28 people on it?

Mr. WINTER. 27, 28.

Mr. HORN. 27, 28. And the law then, which is a State law, had

certain categories, I assume. Consumer, term—— Mr. WINTER. Yes. It was an attempt to be in a balance between

consumers, suppliers, utilities, municipalities, generators, all of

those were on the board.

Mr. HORN. Did the Governor at that time make all of those appointments, or did the board meet and make the appointments, up

to 28 or so?

Mr. WINTER. The way the process worked was, the State appointed an oversight board, and it was their responsibility to take

the candidates and approve those, and then those were sent on to

FERC for approval.

Mr. HORN. So, in this case it was Governor Davis, was it, that

put the people on—— Mr. WINTER. No, I believe that was done in the 1997 timeframe,

the first board.

Mr. HORN. Well, is that Governor Wilson or who?

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Mr. WINTER. I believe it was during that timeframe.

Mr. HORN. OK. Somebody has to appoint them if they are not

voting each other in.

Mr. WINTER. That is correct.

Mr. HORN. OK. So that is the way it worked?

Mr. WINTER. Right.

Mr. HORN. The legislature passed a law. The sitting Governor

complied with the law and put in certain people.

Now, the next Governor was worried, in the words of Ms. Lynch,

with the interested parties maybe were too interested. So, they left

five stakeholders there. And as I remember, he took the consumer

person and left them there.

Mr. WINTER. Yes. Actually, the existing stakeholder board all retired, and the new board was appointed. Only one member of that

new board was a past member of the old board.

Mr. HORN. And that was presumably the consumer representative; is that correct?

Mr. WINTER. That was the consumer representative.

Mr. HORN. Yes. The other four had no previous experience with

electricity issues is what has been said. Is that true?

Mr. WINTER. I do not know whether they have experience with

electric issues or not. Certainly they did not come from the energy

side of the business.

Mr. HORN. Well, some think that when the Governor took everybody away except the consumer representative, that he brought on

people in the middle of a crisis without any expertise to deal with

it. Do you agree with that or what?

Mr. WINTER. No. I think the board’s position is to rely on their

staffs to get up to date, and this board clearly has spent the time

and the effort to get current on energy issues.

Mr. HORN. So those staff members—how many staff members

were there?

Mr. WINTER. I am not following staff members.

Mr. HORN. Well, how many staff members came with the stakeholders’ board, with the legislation authorizing that board, and was

that also the board members, or was it the Governor? Because obviously another Governor felt that they served at his pleasure, which

is often the way Federal boards are in Washington. So I am curious

who picked the staff.

Mr. WINTER. Well, when you say staff, the staff of the ISO?

Mr. HORN. That is right, the stakeholders’ group and the ISO

stakeholder board.

Mr. WINTER. Well, the stakeholder board picked the officers, who

then, of course, selected the staff down through the organization.

When the new board came in, it is their responsibility, of course,

they had the choice of removing me, if that is what they wanted

to do, and clearly they could change any of the staff people that

they so desired.

Mr. HORN. Let me ask you, Ms. Lynch. Did you help staff the

board, because you are very close to the Governor, obviously? So,

who put the board together, and who put the staff together?

Ms. LYNCH. I run the Public Utilities Commission, which is a

State entity. The Independent System Operator is a private, notfor-profit corporation which is not a State entity. However, the

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Governor, under AB5X, which was passed in January, does appoint

a financially non-interested five-member board. So, the difference

there was that anyone who could have a financial interest or was

employed by someone who could have a financial interest in the decisions made by the ISO could not then serve on the ISO board.

The Governor appointed five independent members of the ISO

board pursuant to AB5X. One of them was Michael Kahn, who was

the past chairman of the Electricity Oversight Board of the State

of California. And I would take issue with Mr. Winter that Mr.

Kahn has considerable energy expertise forged in the heat of the

recent crisis, and certainly is one of the premier experts on this

issue and on the failures of the restructuring experiment in California.

In addition, Mr. Guardino, who is the executive director of the

Silicon Valley Manufacturers Group, I believe has made it a special

expertise of his to understand just exactly how this energy crisis

is affecting the Silicon Valley, and the key and critical component

of California’s business. So I think that Mr. Guardino also has considerable expertise, and I would take issue with Mr. Winter’s statement.

Mr. HORN. I am curious, who is the chairman of that board now?

Ms. LYNCH. Mr. Kahn, who was the past chairman of the Electricity Oversight Board.

Mr. HORN. OK. Are we going to have Mr. Kahn somewhere along

between San Diego, Silicon Valley, and Sacramento?

Mr. OSE. He was invited, but declined to appear.

Mr. HORN. Well, so much for open things.

Ms. LYNCH. I believe that Mr. Winter is appearing on behalf of

the entity that Mr. Kahn is the chair of.

Mr. OSE. Would you yield?

Mr. HORN. Yes.

Mr. OSE. Mr. Madden, in terms of the replacement or the retirement, and the appointment of the new board for ISO, I heard that

those appointments come to FERC. Did FERC have concerns about

this based on this PX clearing price schedule? Did the FERC have

concerns about what was transpiring?

Mr. MADDEN. The Commission’s December 15th order set a date,

and I do not recall the date, where the board that existed prior to

this new board would have to be reconstituted. We set up a procedure to have discussions and negotiations with the State as to the

board composition. I believe those discussions never took place; I

believe the Governor appointed the five board members. I cannot

get into the further details, because there are pending matters before the Commission regarding this subject.

Mr. OSE. OK. I see my time has long since expired. I would like

to recognize the gentleman from Indiana for 10 minutes.

Mr. BURTON. Let me go through some of the questions that we

have prepared for the record. And if I am redundant, I apologize,

but we need to get these in the record so we, when we get back

to Washington, can go through this very thoroughly.

Mr. Winter, you said on an average summer day the level of demand varies, but it gets up to, you anticipate, around 3,700

megawatts short. Now, what is the total megawatts on a summer

day?

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Mr. WINTER. On a summer day, with a normal summer, we get

up around 47,000 to 48,000, and when you add reserves our demand is around 50,000 megawatts.

Mr. BURTON. Around 50,000 megawatts. And that is the peak?

Mr. WINTER. That is the peak.

Mr. BURTON. And then it goes down, I guess, after June or July?

Mr. WINTER. No, no. What happens is, when we get to July there

is new generators coming on, so therefore the peak day stays pretty

much at the 47,000 or 48,000 level, and as we add more generation,

then, of course, our deficiency decreases.

Mr. BURTON. OK. Now, this summer what do you anticipate the

supply level to be? You said it would probably be 3,700 megawatts

short. But what will the level be this summer? You said the demand would be around 50,000.

Mr. WINTER. Correct.

Mr. BURTON. What is the supply going to be? Do you have any

projections on that?

Mr. WINTER. Well, the supply is made up of a lot of components.

First is in-state generation, then there is out-of-state generation

that we can get.

Mr. BURTON. I just want a number. [Laughter.]

Mr. WINTER. Well, and I guess I am a little struggling on what

you mean by a number.

Mr. BURTON. Well, if you are going to need 50,000 megawatts, do

you have any idea on how much you are going to have?

Mr. WINTER. Yes, 3,000 less than that.

Mr. BURTON. So 47,000 megawatts?

Mr. WINTER. 47,000.

Mr. BURTON. That is very good. [Laughter.]

OK. If a few key plants have breakdowns this summer because

they are old and have been running at full capacity, what will that

do? Do you have any projections on that?

Mr. WINTER. Yes. We have projected about 2,500 megawatts that

would be off for emergency reasons, breakage, etc. If that suddenly

was much higher, then the number would go up and we would be

looking other places to try and obtain the power.

Mr. BURTON. And you do not have any idea what the odds are

that would happen?

Mr. WINTER. Well, last year we saw numbers ranging from

around 1,800 up to around 2,800 during the summer.

Mr. BURTON. So, you think that the 2,500 is a fairly good projection?

Mr. WINTER. We think that is a fairly good number.

Mr. BURTON. How frequently do you think California is going to

have blackouts this summer? Do you have any rough idea on that?

Mr. WINTER. No. I keep hearing all these numbers that supposedly we came up with, but we in fact did not come up with

them.

Mr. BURTON. Well, do you have any idea?

Mr. WINTER. No. No, we do not.

Mr. BURTON. So, you are just kind of driving in the dark?

Mr. WINTER. That is the way we have been driving for quite a

while each day.

Mr. BURTON. Mr. Makovich, do you agree with that?

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Mr. MAKOVICH. Well, 2 months ago in a study that we released

on the California crisis, we did some fairly extensive computer simulation of this marketplace. Given the expected conditions for this

summer, normal weather, a soft economy, 1.5 percent growth in

real GDP, an 8-percent outage rate on thermal plants, 80 percent

of normal hydro, we are expecting 200 hours when there is no margin at all, and 20 hours of rolling blackouts because the shortage

is greater than 4,000 megawatts.

Mr. BURTON. Now, over what period of time would the 20 hours

of rolling blackouts be?

Mr. MAKOVICH. That will be concentrated around the peak demand period, which is going to be that August-September timeframe.

Mr. BURTON. So you are talking about in a 24-hour day, there

will be 20 hours of rolling blackouts? Is that what you are talking

about?

Mr. MAKOVICH. Across that timeframe it will be necessary to institute a rolling blackout probably in southern California because

of the load patterns for a cumulative outage across the summer of

20 hours.

Mr. BURTON. If I was a farmer, a milk producer like the gentleman who was here awhile ago, I would want to have some kind

of a heads-up on when rolling blackouts were going to take place.

Is there any prospects of that, to let them know when there is

going to be a blackout. I was having dinner with some people the

other night and right in the middle of dinner everything went

black. There was no warning, whatsoever, and the whole area was

black. So I just wondered, is there going to be any—— Mr. WINTER. Was that in California or Indiana?

Mr. BURTON. It was California. [Laughter.]

It was near Carmel.

Mr. WINTER. OK. Let me quickly tell you the process that we go

through, and then I think that will answer the question. No. 1, if

it is a distribution system problem that a transformer in your front

yard blows up, then yes, that has happened and you are out of

power.

Mr. BURTON. Sure. That happens everywhere.

Mr. WINTER. As the transmission operator, as we move into the

morning we make all of our projections, and we go through a threestage process. We start off with a stage 1, and that usually indicates that we do not have enough resources to cover our full reserves.

As we eat into our reserves, we get to a stage 2, which is less

than 5 percent reserves, and then a stage 3. When we announce

a stage 3, that means that we in fact are moving into an area

where we expect to drop load.

There is notifications that go to each of the utilities. The utilities,

in turn, notify their customers. And I believe—and Loretta can correct me if I am wrong here. I think they also just recently passed

that the utility had to give each of the blocks, which is a certain

amount of load that is going to be dropped, a notification if they

are next on the line. The utility——

Mr. BURTON. How far in advance would that notification be

given?

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Mr. WINTER. Well, we are in an hourly market, so things can

happen within the hour. We warn people early in the morning

through the stages and through the notification of the PUCs.

Mr. BURTON. I understand this explanation you are giving, but

how much time will people be given before there is a blackout?

Mr. WINTER. If the blackout is because we have identified there

is—and I am not trying to be evasive here, I am just trying to help

you understand what we face every day. And that is that if we

know, we send the warnings out. But literally in the hour that it

can occur, we will not know until about 30 minutes before that

hour begins. Then, if we are faced with the loss of a large unit like

we were the other day, then that drops to, you know, 15, 20 minutes is all the notice we can give because we just lost units and

did not have sufficient supply to meet the demand.

Mr. BURTON. You are talking about a transformer or something

like that?

Mr. WINTER. Or a generator.

Mr. BURTON. Or a generator.

Mr. WINTER. I mean, we have a large generator that goes out—— Mr. BURTON. I was talking about in the normal course of things,

the rolling blackouts because of shortages. In the normal course of

things, not the emergencies, how much time will these people be

given? Do you have any idea?

Mr. WINTER. The problem is, we are operating on such a thin

margin here that we can predict immediately or in the morning

that we are going to have plenty of supply, but then we lose a unit.

You are calling that an emergency; I call that an everyday operation, you know.

Mr. BURTON. OK. I guess I cannot get the answer to that one.

Ms. LYNCH. Chairman Burton, if I may.

Mr. BURTON. Yes.

Ms. LYNCH. The Public Utilities Commission did just change the

standards, because you are absolutely right, people deserve to

know. And even a half an hour’s advance notice means you can

turn off your computer, you can shut down your business process,

you can make plans to run your backup generator. So, what the

Public Utilities Commission said to the utilities is, you must notify

in two ways. First, if you know that we are tight in the morning,

then tell folks you are next up to bat, so that people can know during the day that there is a chance that their block is going down.

And then second, when you know that block is going down, tell

them in advance. The utilities get a half an hour’s notice, and often

the ISO has more notice. So, folks deserve at least a half an hour.

Mr. BURTON. I see. I understand. It just seems if there is even

a remote possibility that there was going to be a blackout, you

would give them the heads-up, and if it did not occur, so much the

better.

Mr. WINTER. Right.

Mr. BURTON. Mr. Madden, in December FERC issued an order

imposing what has come to be known as a soft price cap. If a generator charges more than $150 per megawatt hour, they have to file

with FERC. Have you explained that yet, how that works?

Mr. MADDEN. I did not get into the breakpoint analysis, no. No,

Mr. Chairman.

120

Mr. BURTON. Well, do you want to real quickly explain that so

that we would have that on the record.

Mr. MADDEN. In the December 15th order, the Commission established, going forward from January 1, that there would be a

breakpoint analysis in which sellers who bid in below 150 would

get the market clearing price. So even if you bid in at 100, you

would get 150. For those bids above 150, the Commission required

that the sellers provide transactional data to support the basis of

their bid.

Mr. BURTON. And how long does that take for that to be approved or disapproved?

Mr. MADDEN. We are required to issue—in terms of whether or

not the refund obligation accrues as to those transactions, within

60 days at the most.

Mr. BURTON. OK. How did they arrive at this threshold of $150?

Mr. MADDEN. Prior to that period we had a soft cap effective December 8th because of discussions we had on the emergency filing

with the ISO. Prior to that day, we had a 250 price cap. There was

a concern the Commission addressed, that we will go do an initial

screen, and they felt that 150 was an appropriate figure at that

point for just an initial screen.

Mr. BURTON. So the goal of the soft price cap is to keep prices

down?

Mr. MADDEN. Well, the goal——

Mr. BURTON. Is that the goal of it?

Mr. MADDEN. The goal is to provide the necessary supply where

you need it, and at the same time review the transactions—the

bids that come in—to ensure that the rates are appropriate. That

was one of the key things we did in our March 9th order.

Mr. BURTON. So, you reviewed that. And the goal, then, ultimately, is to keep the price as low as possible?

Mr. MADDEN. Well, attracting supply, necessary supply.

Mr. BURTON. OK. And is that working?

Mr. MADDEN. It depends on what one believes is the appropriate

price. We, in our March 9th order, determined from the January

period that the appropriate price would be $273. At which point

those transactions which occurred higher than that, the sellers

would be required to either refund those moneys, or show that

their actual costs were higher than that. And the basis for that is

that we looked at the gas prices in January, which were $12.50 on

average. We looked at the NOx cost, which is $22.50, and we looked

at the average pounds taken for a combustion turbine, and we arrived at a $273 price.

Mr. BURTON. If I might ask one more question. I will have more

questions in the next round.

Mr. OSE. Certainly.

Mr. BURTON. Mr. Winter, you requested FERC’s December order;

is that right?

Mr. WINTER. Well, the December 8th order. The December 15th

order was one that was a followup, I believe, to their November decision and was a final order in December?

Is that correct, Mr. Madden?

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Mr. MADDEN. No, the November order was a draft order where

we sought comments on the remedies proposed, and the December

15th order is the initial order, and that is on rehearing.

Mr. BURTON. So, you did order that December—— Mr. WINTER. 8th.

Mr. BURTON [continuing]. 8th order. Why?

Mr. WINTER. Well, as I explained before, I was suddenly—— Mr. BURTON. If I missed it, I am sorry. I do not want you to be

redundant, but—— Mr. WINTER. Yes. I just explained that I had seen the prices go way above the price cap of $250, and I was not able to get power

to serve the load.

Mr. BURTON. So it was an emergency?

Mr. WINTER. Yes.

Mr. BURTON. OK. I will come back for questions later.

Mr. OSE. I would like to followup on Chairman Burton’s question—if I understand correctly, there has been a suggestion that

your December 8th application to FERC for emergency increase in

the price of power was inappropriate. My basic question is whether

or not you had the authority to make that December 8th request

to FERC. Did you have the authority to make that request?

Mr. WINTER. Clearly, under the other board, yes, I did.

Mr. OSE. What do you mean the other board?

Mr. WINTER. The Stakeholder Board that was in effect at that

time. Anytime the market has a tremendous change—in other

words, in 1998 we had a bid of—— Mr. OSE. My question deals more with procedurally. You were

fully authorized under State statute to make that request of

FERC?

Mr. WINTER. Yes, in emergency situations I have the authority

to do that.

Mr. OSE. So nobody came to you beforehand and said do not do

this? They actually said quite the opposite, they said we need to

do this, or did you make that judgment?

Mr. WINTER. No, I made that judgment based on what was going

on on the floor, and my inability to serve the load of California.

Mr. OSE. And that was well within your statutory authority

under AB1890?

Mr. WINTER. I do not know what AB1890 says, but as the operator of the system, that is clearly in my authority. And under the

FERC tariff, I have the authority to do that in emergencies.

Mr. OSE. OK. I want to recognize Mr. Horn for 10 minutes.

Mr. HORN. This is probably going over one of the colleagues here,

but we might as well look at it. How vital is the open communication and cooperation between agencies? I would ask Ms. Lynch

what tools does the California Public Utilities Commission use to

communicate and coordinate efforts with other agencies, including

the California Energy Commission? Is there communication, and

what is their role in relation to your role?

Ms. LYNCH. Sure. The California Energy Commissionsites power

plants, and also does research work on power trends, so they publish reports and such about consumption, supply, and power plants

in California. The Public Utilities Commission regulates the investor-owned utilities in the provision of power in California. The FedVerDate 11-MAY-2000 10:55 Apr 01, 2002 Jkt 000000 PO 00000 Frm 00129 Fmt 6633 Sfmt 6633 C:\DOCS\76761.TXT HGOVREF1 PsN: HGOVREF1
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eral Energy Regulatory Commission regulates the wholesale price

of power charged by the private generators who own power plants

that are not utilities. We have quite a good working relationship

with the other State entities in California that have jurisdiction

over energy matters.

Mr. HORN. Does the California Energy Commission make recommendations to you on the need for power, or is that simply left

for the community, the California Public Utility Commission that

you chair?

Ms. LYNCH. No, the power siting—power plant siting authority

resides in the Energy Commission. And the Energy Commission for

decades participated in integrated resource planning, to plan out

the power needs of the State. In the Wilson administration, the

State stepped back and said the State is not going to take a look

at the power needs overall in California. We will leave that to the

market. So there was a dearth of planning and building for critical

years in the 1990’s. As the power consumption rose, the State

stepped back, for ideological reasons, and that is one of the reasons

we find ourselves in the pickle in terms of supply that we have

today. Governor Davis stepped forward, and Governor Davis is

pushing the private market to build those power plants, streamlining all the environmental regulations, getting every obstacle possible out of the way to get more supply, because for the past 8

years the prior administrations did not do the job to ensure supply

for California. They let the market do it, and the market failed.

Mr. OSE. Would the gentleman yield?

Mr. HORN. Yes.

Mr. OSE. The California Energy Commission has a Web site, and

on that Web site it posts its projections for power demand at some

point in the future. These projections commenced being developed

in 1988 for the year 2001. The projections by the California Energy

Commission since 1988 have consistently shown a demand for

power in excess of 50,000 megawatts. It is biannual. Every 2 years

it updates the projections. So it has been a continual stream, we

are going to need 51,000, 52,000 megawatts of power in the year

2001.

Mr. HORN. Now, let us say that the figure is right. What you are

telling me is, it is a commission that is not doing much of anything.

And could your own Commission be able to pass onsites? And I

take it it does, does it?

Ms. LYNCH. Well, Mr. Horn, actually I am not saying that the

Energy Commission is not doing anything. I applaud the Energy

Commission’s efforts over the past 2 years to streamline their processes. And, in fact, they have 16 plants through the permit process,

and 9 of them—it might be 6, I am actually forgetting the number

right now—are currently under construction. That is more plants

under construction and permitted in the State of California in the

past 2 years than in the prior two administrations combined. So

the California Energy Commission is turning cartwheels to make

sure we have got enough supply in California. The problem is, you

cannot build a plant in just a couple of months. It takes a while

to attract the investment, to get the folks to go through the process. They are going through the process now. The problem with it

was in the past.

123

Mr. HORN. Just for the record, I assume all of Governor Davis’s

appointees are on the California Energy Commission? Those are

pleasure appointments, are they, of the Governor?

Ms. LYNCH. No, they are term appointments.

Mr. HORN. They are term?

Ms. LYNCH. And he received his third majority appointment in

January 2001.

Mr. HORN. What is the total number?

Ms. LYNCH. A total of five.

Mr. HORN. Five. So he now has a majority on that as of January?

Ms. LYNCH. That is correct.

Mr. HORN. OK. Now, what is the role, if any, Mr. Madden, at the

Federal Energy Regulatory Commission? Do you also pass on some

of these selections for sites and development of electricity and

power?

Mr. MADDEN. The Federal Energy Regulatory Commission has no

jurisdiction over the siting of transmission facilities.

Mr. HORN. That is just up to each State?

Mr. MADDEN. It is up to the particular States, yes.

Mr. HORN. OK. We are talking really about cooperation and communication with Ms. Lynch. The California Independent Systems

Operator, Mr. Winter?

Mr. WINTER. Yes.

Mr. HORN. So do you talk to each other?

Ms. LYNCH. I think we do now more than we have in the past.

Although this summer, when we had energy issues when there was

a blackout on June 14th, Mr. Winter was quite helpful and cooperative. The problem really was the ISO tariffs, which prevented governmental agencies from getting the same information that market

participants could get.

Mr. HORN. Chairman Burton noted that there is a lot of fingerpointing in all directions, and you are saying that you do not have

that much finger-pointing unless you are perhaps here. I do not

know. So here he is, and you can talk to each other.

Ms. LYNCH. And I certainly talk to the members of the board of

the ISO on a regular basis. As you all know, as a private corporation in the State of California, it really does fall to the board to set

the policy direction for the ISO.

Mr. HORN. Are you automatically, or the person in your position

automatically a member of that group?

Ms. LYNCH. No, I am not at all.

Mr. HORN. You are not. So there is no linkage, generally. And

it just has to be whether people talk to each other or do not.

Ms. LYNCH. I think that Governor Davis ensures that his appointees work together.

Mr. HORN. Yes. The California ISO, namely Mr. Winter, investigated evidence of market abuse—I believe you did this, is that

correct—and reported its findings in a report issued in March

2001?

Mr. WINTER. That is correct.

Mr. HORN. And they project that power generators have overcharged California by $6.2 billion between May 2000 and February

2001. And, the Federal emergency commission determined that

California was overcharged $1.3 billion. While some of the discrepVerDate 11-MAY-2000 10:55 Apr 01, 2002 Jkt 000000 PO 00000 Frm 00131 Fmt 6633 Sfmt 6633 C:\DOCS\76761.TXT HGOVREF1 PsN: HGOVREF1
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ancy can be explained by technical jurisdictional reasons, what are

the other factors that contribute to such a large discrepancy?

Mr. WINTER. The other discrepancies between the——

Mr. HORN. The idea of $6.2 billion overcharged.

Mr. WINTER. Well, I think people have exercised market power

and driven the prices up by so doing it.

Mr. HORN. You do not think it is the market that did it. I mean,

in terms of the $6.2 billion, who came up with that? Apparently

there are various other items that I noted earlier.

Mr. WINTER. Right. The way we arrived at the $6.2 billion is we

would take a unit, much as the FERC had done, determine what

its heat rates were, factor in the price of natural gas during this

timeframe, factor in the cost of emissions, and arrive at what we

call a cost-based rate. Then we allowed the market to have some

bit of flexibility, and then everything above that which we are calling the competitive market price, we considered to be overcharge,

if that is the term I believe you are using.

Mr. HORN. How about the Federal commission in terms of putting the pieces together on whether gouging occurred or did not

occur?

Mr. MADDEN. Congressman, are you referring to the $6.2 billion?

Mr. HORN. Right, the $6.2 billion.

Mr. MADDEN. Well, as we——

Mr. HORN. Because that is the figure the public heard. That is

why I am going after that.

Mr. MADDEN. As we discussed earlier, the $6.2 billion figure was

that which the ISO submitted. As I recall now, the ISO recognizes

that, of the $6.2 billion, a substantial portion of that is non-jurisdictional to FERC.

Mr. HORN. That would be the 47 percent that is non-jurisdictional?

Mr. MADDEN. I do not know what the numbers are. Another portion of that would be prior to October 2nd, 2000, in which the Federal Energy Regulatory Commission has no authority to require refunds pursuant to the November draft order and the opinion that

is taken there. He also mentioned that a substantial portion—I do

not know how much—referred to bilateral contracts or involved bilateral contracts. That is where you had a mutual agreement between the parties. That is not subject to refund. The realtime spot

market is subject to refund.

He also mentioned how he factored in the cost, and he mentioned

a thermal unit. We factored in, for the committee’s information, a

CT, combined turbines, which has a higher inefficient rate than

does usually a thermal. He factored in gas costs and NOx costs, but

I do not, and this is why we requested information asking what

those costs were.

Mr. HORN. Now, you get the Bonneville Power Authority records,

I suspect, since that is a Federal entity. Do they file with you as

to what they are generating?

Mr. MADDEN. Well, the PMA Bonneville is non-jurisdictional to

us. It is a non-jurisdictional seller. Although, under a limited portion of the act, we can review the actual rates they charge in very

limited circumstances.

125

Mr. HORN. Now, I take it that the municipal utilities such as

those of the city of Los Angeles, Department of Water and Power,

do you have or do not have jurisdiction over them?

Mr. MADDEN. We do not have jurisdiction over entities like that.

We have no jurisdiction, for the most part, over municipals and cooperatives. If you look behind the $6.2 billion figure, a substantial

amount of those alleged refunds or overcharges are associated with

entities over which we do not have jurisdiction.

Mr. HORN. Would anything be in the Department of Energy

where they might collect those records?

Mr. MADDEN. The U.S. Department of Energy has no jurisdiction

over the co-operatives or municipals. It does have jurisdiction—or

it oversees the Bonneville Power Administration—as it oversees the

other power marketing administrations. You have to look at the organic statutes or the charters that created the co-operatives or municipals within each particular State.

Mr. OSE. Would the gentleman yield?

Mr. HORN. I was going to say the chairman is an expert on some

of the figures of Federal dams, so you ought to put that in the

record.

Mr. OSE. I actually want to followup on where you were driving

as it relates to the municipals, in particular. I believe the ISO, on

occasion, purchases surplus power from the municipals for distribution elsewhere.

Mr. WINTER. I am not sure what you mean by distribution elsewhere. But yes, to serve the ISO grid, we get power from Department of Water and Power clearly to distribute to other people in

the State of California.

Mr. OSE. Now, we just heard Mr. Madden say that FERC has no

jurisdiction over such entities. Would you kindly share with us

your recollection of the prices being paid by the ISO for that

power?

Mr. WINTER. From the Department of Water and Power?

Mr. OSE. As an example, yes.

Mr. WINTER. Well, clearly we were paying the market price to ev- eryone, which at the point that we went over the $250 price cap,

those would range all the way from $250 up to 5 or $600. I cannot

remember exactly.

Mr. OSE. Who has jurisdiction over the prices charged by municipals selling into the wholesale market?

Mr. WINTER. I assume their governing agencies, be that a city

council and Department of Water and Power, I would assume.

Mr. OSE. But they are not subject to FERC’s jurisdiction?

Mr. WINTER. No, they are not.

Mr. OSE. They are non-jurisdictional. Ms. Lynch, are they subject

to PUC’s jurisdiction?

Ms. LYNCH. No. We have jurisdiction over the retail rates

charged by investor-owned utilities, not municipal utilities.

Mr. OSE. From your recollection, Mr. Winter, of this report, did

you break out, for instance, either in the aggregate or by individual

municipal entity, how much of this $6.2 billion in overcharges were

made?

Mr. WINTER. I believe there is a confidential attachment submitted to FERC, but I have not seen it myself.

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Mr. OSE. You know, I am getting tired of being told I cannot

have information. I suspect there are people in this State who

share that opinion.

Mr. MADDEN. Mr. Chairman, I will be glad to provide that information. I assume, if it is cumulative data, we have to decide that

issue in any event because we have the filing at the Commission,

and we have to look at the——

Mr. OSE. You have to separate it out somehow.

Mr. MADDEN. We have to separate it out and compare it to what

we have done, for example, in the March 9th refund order. So, I

will be glad to provide the committee with that information.

Mr. OSE. We will be in contact with you.

Mr. MADDEN. Thank you.

Mr. OSE. I will yield back to the gentleman from Long Beach.

Mr. HORN. I yield back to you. I believe we have a third panel.

Mr. OSE. Yes.

Mr. HORN. OK.

Mr. OSE. I believe it is my 10 minutes?

I want to examine a couple of things, if I might. I want to go to

the issue of long-term contracts, because it seems to me that the

opportunity to hedge exposures, either by PG&E or Southern California Edison, or San Diego, offers the opportunity to effectively

eliminate the uncertainty or the lack of supply that might otherwise occur. It is my understanding that AB1890 did not require the

utilities to purchase all of their electricity through the PX, is that

correct? Does anybody know the answer to that? There is no specific language in 1890 that says the utilities must buy from the PX.

Ms. LYNCH. I believe that is true. I believe that was the decision

of my predecessors in order to create the PX and have it up and

running, that they required the utilities to buy through the PX.

Mr. OSE. So, PUC adopted a rule that said investor-owned utilities must buy through the PX?

Ms. LYNCH. Yes, the past PUC.

Mr. OSE. The past PUC.

Mr. MADDEN. Mr. Chairman, they must sell into and buy from.

Mr. OSE. It is a buy-sell deal. Correct. Has this PUC ever examined whether or not to revoke that requirement?

Ms. LYNCH. Yes, we did.

Mr. OSE. And what was your determination?

Ms. LYNCH. At the time, based on conversations I had with Republican legislators who were active in creating the PX, they asked

us to keep that buy-sell requirement.

Mr. OSE. Did you talk to any Democratic legislators?

Ms. LYNCH. I did, actually. I believe Senator Peace asked me to

keep that requirement, as well.

Mr. OSE. So it was bipartisan?

Ms. LYNCH. At the time last—I believe it was June.

Nonetheless——

Mr. OSE. I appreciate your making that clear.

Ms. LYNCH. Nonetheless, the PUC voted to allow the utilities to

not buy and sell exclusively through the PX in June, and the legislature changed that in a bill at the end of June.

Mr. OSE. How did you vote on that issue?

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Ms. LYNCH. I voted to keep the utilities buying and selling

through the PX.

Mr. OSE. OK. So you were asking that, if you will, the transparency issue be maintained?

Ms. LYNCH. That is correct. And at the request of legislators who

were there at the time AB1890 passed, with their understanding

of what their intent was.

Mr. OSE. I will just come back to my earlier point. I do not understand why it is every time I ask about the PX or the ISO or

something like that, I hear this mantra of disclosure, disclosure,

disclosure. And yet when I ask the question and when my constituents ask me why we cannot find out what commitments the Governor is making of the State of California’s treasury, I am told I

am not qualified to hear that. Now, who is it that I have to ask

to get that information? Does anybody know? Do I have to issue a

subpoena from this committee to get that information?

Mr. MADDEN. Mr. Chairman, as I mentioned earlier, the Commission has asked the ISO to provide that information. If they cannot get that information, I can assure you that this Commission

will ask the generators who have entered into those negotiations

with the State to provide us with the information. I will have to

go back and review the law, but I could probably provide that

under confidentiality to the committee.

Mr. OSE. Do I understand these contracts that are being considered by the State of California to be long-term contracts?

Mr. MADDEN. As I understand it, and I am not an expert in the

area, there is a combination of short-term, mid-term, and long-term

contracts with different types of provisions.

Mr. OSE. So you have different exposure?

Mr. MADDEN. That is correct.

Mr. OSE. All right. Ms. Lynch, are those contracts subject to PUC

review?

Ms. LYNCH. No.

Mr. OSE. Because?

Ms. LYNCH. Because AB1X transfers the just and reasonableness

review of the power purchases to the Department of Water Resources from the PUC.

Mr. OSE. Who is held accountable for that decision? If the DWR

makes a decision that something is unjust or unreasonable, or

something conversely, at a price is just or reasonable, exactly how

do the voters of this State hold someone accountable? Does anybody

have the answer to that question?

Ms. LYNCH. The PUC does not have the jurisdiction to review

that question.

Mr. OSE. OK. In terms of DWR’s contracts?

Ms. LYNCH. That is correct.

Mr. OSE. OK. Let me go back to my original question. In March

1999, Southern California Edison filed with the PUC for authority

to enter into bilateral contracts as part of a pilot program designed

to provide market stability and increase supply. Now, if I am correct, that is prior to when you were made President of the PUC.

Ms. LYNCH. It is prior to my membership on the PUC.

Mr. OSE. OK. In July 1999, the PUC rejected that request from

Southern California Edison because, in effect, as you said earlier,

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forcing the buy-sell transaction through the PX provides transparency, mitigates market power, and reduces regulatory burden.

Now, since you have gotten there, Ms. Lynch, my question is

whether you have any comments about forcing the IOUs into or

through the PX, and the consequences of that requirement?

Ms. LYNCH. Well, the IOUs asked for additional authority to buy

various hedging products that were available through the PX, and

we granted that authority. And then, in addition, the utilities

asked for additional authority to enter into direct bilateral sales

only scheduled through the PX, but not purchased that way, and

we granted that authority. So, from that perspective, the utilities

had the full panoplies of tools in their toolbox to hedge their risk.

I think what no one could have foreseen was the dramatic upward

spiral of the market prices, as demonstrated by the chart in front

of you that I have provided, because I believe no one could have

foreseen that the price caps would have been blown out as they

were.

Mr. OSE. I want to yield for a question from Mr. Burton.

Mr. BURTON. Yes. There was an article in the San Francisco

Chronicle. I want to read you just a little bit of this and maybe you

can explain this to me. It says, ‘‘On July 21st, Edison and PG&E

filed emergency requests,’’—this is last year—‘‘with the PUC seeking authority to sign longer-term contracts directly with generators

to protect themselves from surging prices. Their cause appeared to

be bolstered by the August 2nd report that Davis,’’—I presume the

Governor—‘‘requested from the PUC and the Electricity Oversight

Board which clearly said the State spot markets were exacerbating

price spiking, and that contracts between the utilities and power

producers were needed. Sources say some State economists feared

that signing a 5-year contract at $50 per megawatt hour could

harm the economy. The day after the report was released, the PUC

voted to let the utilities sign bilateral contracts through December

31, 2005 subject to a review of reasonableness. But the utilities

now say that the vote was meaningless because the Commission’s

staff refused to preapprove contracts as reasonable after a 30-day

review, as the Commission’s order directed.’’

And what I have been told is that the utilities were very concerned because the contract—the long-term contract was subject to

a review of reasonableness. So if they signed a long-term contract

at $50 per megawatt hour, and the price on the spot market started dropping below that, they were locked into the $50 per megawatt hour, and they could be socked with a demand for return. And

they did not think that was reasonable, because they were assuming risk, and if the price dropped they were up the creek, because

they would have to refund a lot of money.

Why is it your office did not allow them to sign a long-term contract without subject to a review of reasonableness down the road?

Ms. LYNCH. Sure.

Mr. BURTON. For instance, I am a small businessman. I enter

into a contract and they say it is subject to a review of reasonableness. And 5 years down the road, after I have signed the contract

in good faith, they say you could have gotten it at $40 per megawatt hour. And then I am supposed to return that large amount

of money, and it could cost me a ton and put me into bankruptcy.

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So, why was that reasonableness clause not allowed to be taken

out?

Ms. LYNCH. On a unanimous vote 2 weeks after the utilities

asked for the authority to enter into bilateral contracts, the PUC

did give the utilities the authority to enter into bilateral contracts,

and then they entered into bilateral contracts. I am prevented, for

confidentiality reasons, of telling the public exactly what they entered into, but I can tell you they entered into significant bilateral

contracts. What the PUC did—— Mr. BURTON. It was a lot more, though, than the $50 per megawatt hour?

Ms. LYNCH. Some of them have been, yes.

Mr. BURTON. Well, but prior to that time, if that reasonableness clause had not been in there, they could have gotten it at $50 per

megawatt hour.

Ms. LYNCH. And some of them they did, and some of them they

did less than that. I cannot discuss the specifics, but it was a full

range of prices. But I will—— Mr. BURTON. Excuse me just 1 second. The chairman of the subcommittees and the people who are watching are seeing that everything is under the veil of confidentiality. We cannot get this and

we cannot get that. We represent the Congress of the United States

and Federal agencies that participate in some of these processes.

We want that information. And if I have to subpoena that information from you, I will do it. So, I want you to give it to us. Now,

if it is something that should not be in the public domain, then we

will honor that. But, we want to see that information. And to be

pounded time and again after coming out here and having hearings, I do not want you to tell me we cannot have that information

because of confidentiality. I want it.

Ms. LYNCH. I would be happy to give it to you if I had it. You

can get it from the utilities. I, as a regulator, cannot give their confidential information without their permission. So I would be happy

to give it to you confidentially. If you would like it out in public,

you can ask them for it. It is theirs to give.

Mr. BURTON. OK. But I want to find out about this reasonableness clause.

Ms. LYNCH. Sure.

Mr. BURTON. You say that that reasonableness clause was done

away with so that they could go ahead and enter into these longterm contracts without additional risk. But, what I have been told

is that it was after the cow was out of the barn and the $50 rate

that they could have gotten for long-term contracts was then going

up, skyrocketing up. And if they entered into long-term contracts,

it was at a much higher rate because you kept that reasonableness

clause in there until the $50 rate was no longer available.

Ms. LYNCH. Well, the reasonableness clause is still in there, and

they did sign contracts below $50 in some instances. But why we

kept the reasonableness clause in there is because every other

State also has a reasonableness review. That is the fundamental

basis of a regulated entity.

You, as a small business person, do not get a guaranteed profit,

which is what State law gives to the utilities. They get to recover

their cost, guaranteed, no doubt about it. The only check on that

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cost recovery is a reasonableness review. And the Public Utilities

Commission of the State of California had good reason to continue

what every other State today still does, which is a historical fact

pattern which showed abuses in the past between the utilities contracting with their affiliates.

Mr. BURTON. I understand. And there may be some justification

for price gouging by the utilities. But the fact of the matter is, if

you look back at the thing that you gave——

Mr. OSE. No, no, Mr. Chairman. You want to say there may have

been some justification for the reasonable review due to——

Mr. BURTON. OK, due to. OK. [Laughter.]

But let us just take a look here. You could see from your chart

here that the price per megawatt was jumping at a dramatic rate.

And they were saying, you know, we can lock this thing in at $50

per megawatt hour, and because of this reasonableness clause in

there, they were worried that they were going to really lose their

shirt if they signed it at that time. And it seems to me that is

something that was a reasonable thing for them to be concerned

about.

Ms. LYNCH. Well, every State has a reasonableness review in

order to protect the ratepayers, and as does California. What we

did is not just for long-term contracts, it is a reasonableness in

their actions, so that they do not go out and, you know, buy very

expensive nuclear power that is 100 times what the original cost

was because they have the guaranteed rate of return.

Mr. BURTON. Well, let me just make one more point. You did not

work with them on this, and it seems to me you should have, and

instead of being able to get it at $50 per kilowatt hour, in December it was up to $377 per kilowatt hour. So you could see from this

chart that it went from $31.18 per kilowatt hour, up to $47.22 in

May per kilowatt hour. And then in June it jumped to $120 per kilowatt hour. And the discussion, according to this article, was in

July, after it had already jumped to over $120 per kilowatt hour,

and they were trying to negotiate for $50 per megawatt hour. And

you would not do it.

Ms. LYNCH. We did. We let them in 2 weeks time, which is lightning speed for the PUC. We gave them full authority up to their

full average net short, and guess what, they actually contracted for

power. What they did not do was fill up their full net short, because nobody was going to believe at the time that the FERC was

going to blow out the price caps, and the average price of power

every day of every hour in December was $378——

Mr. BURTON. Right.

Ms. LYNCH. [continuing]. After FERC blew out the price caps,

and the generators had a field day with California’s economy.

Mr. OSE. Mr. Chairman, may I reclaim my time? I would be

happy to give——

Mr. HORN. I just have one question on this issue.

Mr. OSE. Certainly.

Mr. HORN. Is the California Utilities Commission under the

Ralph Brown Act? Are you familiar with that?

Ms. LYNCH. The public process, yes. The Public Meetings Act,

yes.

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Mr. HORN. Yes. Well, the fact is that, sure, you do not make it

public until the decision is made, but once the decision is made,

you can answer the chairman’s question. It is no violation of law

that I am aware of under any State agency. So, why do you not

answer him?

Ms. LYNCH. Oh, sure, all of our decisions are public, and they are

public before we vote on them, as was our August 3rd decision

which allowed the utilities to bilaterally contract up to their full

power needs on average. And that is out there, and I would be

happy to provide you—we can messenger it over right now with

those decisions.

Mr. HORN. Well, but you were saying you cannot because of all

the industry and such that. Once they are on the market and they

have done it, you could have released that afterwards. I can realize

you could not do it, because that might affect the market in another way, which is bonds, stocks, and so forth.

Ms. LYNCH. Well, the statute says that the utilities are entitled

to keep the information confidential when they are buying and

thereafter. For instance, they bought power ahead in the market.

What disadvantages the utilities as a buyer is if I release how

much power they bought, because then all the generators can figure out how much power is left that they need to buy. So if the

utilities do not have to play all of their cards, then the generators

do not know if they need to buy a lot or a little. So the generators,

then, will bid more competitively if they do not know exactly the

utilities’ needs, which is why I cannot give to the public the utilities’ business confidential data.

Mr. HORN. Well, I do not know why not, because now they are

in bankruptcy and everything else. It seems to me it ought to all

be on the record.

Ms. LYNCH. Well, if they would like to waive the confidentiality

provisions, they can provide the data and I could then provide it

to you. But right now, the way their business confidential data

works, is because I have special access as a regulator to their business confidential data, I need to keep it confidential unless, you

know, we have a prior conversation about that with the utilities.

Mr. BURTON. Will the gentleman yield to me?

Mr. OSE. I would.

Mr. BURTON. Mr. Makovich, as I understand it, and I think you

are totally familiar with this, when they were concerned about this

review of reasonableness, they wanted to have what, 20 percent as

a percentage that they should be accountable for, and the Commission wanted only 5 percent, is that correct?

Mr. MAKOVICH. Outside of a reasonableness range, yes.

Mr. BURTON. Yes. OK, is 5 percent, as the Commission wanted

it to be, a reasonable standard for this kind of a problem across the

country?

Mr. MAKOVICH. No. Long-term power prices are very, very hard

to predict, and to enter into a long-term contract of the type that

have been signed, 4 to 20 years, that kind of a margin of error is

far too low.

Mr. BURTON. What would be a reasonable margin of error?

Mr. MAKOVICH. Well, my testimony has been I think long-term

contracts are not the right solution to this problem. They are not

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going to solve this shortage problem. There is a liquid futures market for power now that goes out about 12 to 18 months, so it is

very, very clear what the market expectation is for power.

Mr. BURTON. And what is that?

Mr. MAKOVICH. Everywhere else in the United States it ranges from $20 to $30, depending upon the month, up to maybe $100. In

California it is in the $300 to $500 range as we look out across the

next year.

Mr. BURTON. I am not sure I understand that. Maybe I am missing something here. But as I understood it, the utilities, when they

went to the Commission, wanted a 20 percent—— Mr. MAKOVICH. Right, reasonableness standard.

Mr. BURTON. [continuing]. Reasonableness standard.

Mr. MAKOVICH. Right.

Mr. BURTON. And 5 percent was what the Commission wanted.

Mr. MAKOVICH. Right. Even the 20 percent is probably a mistake.

Mr. BURTON. I understand. But the utilities were willing to do

that. And because they could not get that, they did not lock in—— Mr. MAKOVICH. Right.

Mr. BURTON. [continuing]. The rate at $50 per megawatt hour?

Mr. MAKOVICH. Right.

Mr. BURTON. Why is it that the Commission would not go along

with that 20 percent, which sounds like it is a fairly reasonable

standard, instead of the 5-percent which they were standing fast

on?

Ms. LYNCH. Well, as Mr. Makovich just demonstrated, many

economists actually objected to our decision to give them long-term

contracting authority on a bilateral basis whatsoever. So it was

striking a reasonable balance at the time given the market, because many people, like Mr. Makovich, would probably criticize the

decision of the Public Utilities Commission to give the utilities fullthrottle ahead on buying whatever they would like to meet their

next short. So, from that perspective, I think that the Commission

probably went over what some economists thought was prudent at

the time.

What we wanted to do was give the utilities the flexibility to run

their business as they saw fit, and they did buy power at 5 cents,

some less and some more over time. So I think that the assumption

that they did not buy at all is actually not proven true by the facts.

But the utilities have the specific facts that I would encourage

them to share with you.

Mr. BURTON. We are going to talk to them tomorrow, I think. Is

that correct?

Mr. OSE. Yes.

Mr. BURTON. OK. Thank you, Mr. Chairman.

Mr. OSE. I want to go back to a question I have. In terms of the

long-term contracts themselves, have you had any direct communication with utility executives advising for or against using longterm contracts?

Ms. LYNCH. Well, the way the Commission works is, the utilities

bring in an application and then there is a pending matter before

us the parties can comment on. So I have certainly seen their materials as they have, you know, presented as a party to me, and

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considered those materials carefully when we gave them the authority that they requested.

Mr. OSE. My question was whether or not you have had any communications with utility executives advising for or against longterm contracts?

Ms. LYNCH. I do not understand advising for or against. Do you

mean giving them my policy pronouncement?

Mr. OSE. Have you talked with utility executives, privately or

publicly, in favor of or against the use of long-term contracts?

Ms. LYNCH. Well certainly publicly by my votes and statements

regarding my support for long-term contracts. And privately, I do

not recall.

Mr. OSE. Now, if I understand your support, the caveats are that

they go through the PX, and that they be within the 5-percent margin that Mr. Makovich was talking about.

Ms. LYNCH. For preapproval. But they would always just be subject to the normal reasonableness review that all other States give

to essentially any procurement actions of the utilities. So the retrospective reasonableness approval or review is a function of what a

prudent utility would do at the time when faced with those facts

at the time. So it is a question in time. It is not that you can apply

tomorrow’s standards to today’s actions. You apply today’s standards to today’s actions, as all the other States do.

Mr. OSE. Are you familiar with Doug Long’s letter to the two

utilities objecting to their methodology for entering into long-term

bilateral contracts?

Ms. LYNCH. I know there is lots of correspondence that goes between my staff and utilities on a variety of matters. I do not know

which particular letter you are referring to.

Mr. OSE. Well, Doug Long is the gentleman on the California Energy Division who apparently has staff jurisdiction over the question of forward contracting. Am I correct on that?

Ms. LYNCH. He is one of the managers in the Energy Division.

Mr. OSE. OK. Now, it is my understanding, from feedback I have

had directly, that he has opposed very, very strenuously on the

methodology put forward by the utilities to try and hedge their exposures. Is that consistent with your understanding?

Ms. LYNCH. My understanding is the Commission made a decision which is then the policy of the regulator to allow the utilities

to move forward consistent with reasonableness reviews that are in

place in every other State.

Mr. OSE. OK. One of the questions I have as a business person

is, I like to think of certainty when I am entering into an application in front of a government agency. We have heard back and

forth, is this one reasonable, is that one not reasonable. The question I have is, was there ever a point at which the PUC undertook

to define in a prospective basis what was reasonable and what was

not reasonable?

Ms. LYNCH. Actually, yes. Based on—and I am not recalling specifically why I thought the utilities wanted further guidance, but

it could well have been a conversation. I just do not recall.

Mr. OSE. Did that occur in August, September, March? I mean,

how long are we talking about?

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Ms. LYNCH. In the fall. Because by November, I decided to go

ahead and provide additional guidance which I put for a vote of the

Commission in December. So I put it on our agenda, essentially, for

additional guidance at the time.

Mr. OSE. Are those reasonable standards now adopted by the

PUC?

Ms. LYNCH. They are not, because at that point I believe I put

it on for a vote right at—well, we put it on before we knew, I think,

or right around the time that the FERC blew out the price caps.

And so the anticipation was that it would be at least under the soft

caps that the FERC had proposed. The actuality then, when prices

shot up five times in 5 days in the California market, that volatile

market then outstripped the parameters that I was proposing.

Mr. OSE. Let me go back to the standards; I think that was the

basis of my question, not what FERC did or did not do. If I understand correctly, then, the PUC still has not issued a final determination for use by the investor-owned utilities as to what is or is

not a reasonable standard for forward contracting?

Ms. LYNCH. The reason I mentioned FERC is because the market

determines—we have to understand the market to be able to determine what is reasonable, and the market has been so out of whack

in California—— Mr. OSE. OK, let us cut through all that. Has the PUC issued

standards for reasonable or unreasonable forward contracts for use

by the investor-owned utilities?

Ms. LYNCH. We issued our original standards in August. I provided some additional further guidance that I put on the agenda,

and thereafter the utilities stopped buying on the spot. So it was

essentially useless for the utilities, since they were not buying on

the spot anymore.

Mr. OSE. Are those standards final?

Ms. LYNCH. No, they are not.

Mr. OSE. So, you have not completed the process?

Ms. LYNCH. Well, it is really the market outstripped our ability

to determine what was reasonable in California.

Mr. OSE. Going back to my question, you do not have standards

defining what is or is not reasonable in terms of forward contracts

for the investor-owned utilities?

Ms. LYNCH. No, we do have initial standards that we adopted

and put in place unanimously on August 3rd.

Mr. OSE. Are they final?

Ms. LYNCH. Yes, those are final.

Mr. OSE. They have binding protection, safe harbors for the investor-owned utilities?

Ms. LYNCH. There are some safe harbors, yes. But they wanted

further guidance. And we have not refined with further guidance.

Mr. OSE. Do you have final standards defining what is or is not

reasonable for long-term contracts for investor-owned utilities?

Ms. LYNCH. Yes. Our August 3rd standards are final. We could

do additional refinements, which I proposed, which we have not

finished. But we have guidance that we adopted on August 3rd.

The utilities wanted additional guidance. We started designing additional guidance and then they dropped out of the market.

Mr. OSE. Just a moment.

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Mr. HORN. Could we get when August is? Which year?

Mr. OSE. August 2000.

Mr. HORN. Excuse me.

Mr. OSE. August 2000.

Mr. HORN. OK.

Mr. OSE. Mr. Makovich, in terms of the buy-sell provisions of the

PX, would you care to offer any insights as to the value of directing

those contracts through the PX? Do you have any opinion on that?

Mr. MAKOVICH. Right. Well, in retrospect, the $50 per megawatt

hour would have been a good deal for utilities to be able to lock

into. People have then looked at that and said, well, the problem

to this whole crisis is if the utilities had simply been allowed to

lock into long-term contracts, we could have avoided this whole

mess, and I think that is not right. That is wrong. And the reason

for that is, if you allowed people to sign long-term contracts, let us

say that voluntarily 80 percent of electric demand was covered

under long-term contracts, the problem you have got then is those

contracts are supplied from both existing plants—actually, the contracts that have been signed are mostly from existing plants. You

are not building any new power plants. If you then end up with a

shortage—and that is what we have got, we are fundamentally

short of power plants—you cannot enforce on residential customers

those that are covered by long-term contracts and those that are

not.

So, unless the long-term contracts are mandated to cover 120

percent of the market to also provide you a reserve, they are not

going to be the mechanism that builds enough capacity. If they did,

if long-term contracts—assume that you got 120 percent voluntarily. The evidence is, if you do not have a shortage, the spot market clears on the basis of fuel and variable costs alone. Energy

traders would then attack the long-term contract market. They

would sell long, buy off the spot market, and arbitrage out any capacity payment that would be involved in those long-term contracts. And the only way to prevent them would be to have a shortage that disciplined that activity.

Mr. OSE. OK, you are going to have to speak in a language I understand and can communicate with.

Mr. MAKOVICH. OK.

Mr. OSE. Does that mean prices to consumers are higher or

lower?

Mr. MAKOVICH. Prices to consumers would, I think, be terribly

higher if you force long-term contracting. Remember, 50 percent of

the stranded costs, when we started this whole process in California, were long-term energy contracts signed at what people thought

would be reasonable rates out in the future, which were the

PURPA contracts.

Mr. OSE. If the IOUs had the option of entering into long-term

contracts to meet the load that they are historically familiar

with—— Mr. MAKOVICH. Right.

Mr. OSE. [continuing]. Does the same conclusion hold?

Mr. MAKOVICH. No. The right type of long-term contract would

be to require people that serve electric customers to sign capacity

contracts. There is no reason to commit to the energy—to the utiliVerDate 11-MAY-2000 10:55 Apr 01, 2002 Jkt 000000 PO 00000 Frm 00143 Fmt 6633 Sfmt 6633 C:\DOCS\76761.TXT HGOVREF1 PsN: HGOVREF1
136

zation of the power plants. They need to pay people to have enough

capacity to meet those future peak loads, and then simply have the

option to run those power plants to produce the energy that they

need.

Mr. OSE. So, a request from a power—or an IOU, such as PG&E

or Southern California Edison or San Diego, have the hedging tool

that a forward contract provides be available but not mandate——

Mr. MAKOVICH. Right.

Mr. OSE. [continuing]. You think it would lead to lower prices?

Mr. MAKOVICH. If you required people that produced—that

served customers with electric energy, if they were required to also

have enough capacity to meet their peaks, then you would create

a market in which long-term contracting for capacity would be the

mechanism by which that capacity payment is made. And then you

are paying people to have enough capacity so you do not have a

shortage.

Mr. OSE. Thank you. I understand that.

Mr. MAKOVICH. OK.

Mr. OSE. I have one final question, Ms. Lynch, the PUC recently

recharacterized a certain amount of capital that PG&E or Southern

California Edison or San Diego to change it from stranded investment to, if I understand correctly, advance payment for future

power purchases. I am trying to figure out why that happened. I

mean, explain that to me, if you would. What is transpiring there?

Ms. LYNCH. It is an accounting—it is a regulatory accounting

treatment where, under the auspices of AB1890, two accounts were

set up. One was for payment of their stranded assets, and one was

for payment of their—I like to characterize it as operating costs

versus capital costs.

Mr. OSE. OK.

Ms. LYNCH. Although I think that is oversimplifying it. The

former PUC said you can essentially accelerate the depreciation of

your capital assets in three ways. You can make a profit off the

rates that are charged, and essentially match that up against an

accelerated depreciation schedule. You can sell off your plants, and

the profits used from that would also accelerate depreciation. And

then you can also—there was the revenue from the ratepayer.

There was the revenue that they made themselves from their retained generation, because they were selling that retained generation in the market. And then there was the plant sales. So three

different revenue streams that could pay off their capital costs on

an accelerated basis.

Mr. OSE. In fact, reduce to zero the basis that they had in those

plants?

Ms. LYNCH. That was the goal of AB1890. And the bargain was

that they got to accelerate the depreciation of their capital costs,

which many people at the time thought were stranded assets, in

order to assume the risk, on a going-forward basis, of their power

purchases, of their operating costs.

So, rather than having the guarantee of the regulatory compact,

that their costs would be covered, they took a bargain. They said

we will get money up front for accelerated depreciation of capital

if we take the back end risk of power purchase liabilities.

137

What the PUC did, in essence, was say, hey, wait a minute.

Some of those revenues that you originally counted against accelerating your capital cost recovery were actually operating revenues.

You got money from the ratepayers in their bills which—on an ongoing basis. You also got money from selling your own generation

into the market. And that, in fact, your power purchase liabilities

should be netted against your power purchase revenues before you

get to transfer all those revenues over for accelerated depreciation

of your capital costs.

So what the PUC said was, it is time to true-up the books. It is

time to net out your operating costs and revenues before you just

take the revenues and match them against your capital costs. Because, essentially, you are prepaying your mortgage before you pay

your power bill or your light bill or your grocery bill. So we were

saying you have got to pay your bills, your operating costs first,

and then if you have money left over, you can prepay your mortgage. But you do not get to prepay your mortgage, and then come

back to the ratepayers and say please help me with my monthly

bills.

Mr. OSE. The PUC made this determination recently, if I recall.

Ms. LYNCH. On March 27th.

Mr. OSE. It would seem to me that the logic that you have just

elucidated would also have held prior to the investor-owned utilities advising folks that they had recovered their entire stranded

costs. I am trying to understand why this decision was not made

last year at this time, instead of 6 months after the investor-owned

utilities had advised everybody that they were ready to be free of

1890.

Ms. LYNCH. Well, the investor-owned utilities came into the Commission and applied for what they called a rate stabilization plan

in October. And in that proceeding thereafter, some consumer

groups came in and said hey, wait a minute. When we are looking

at the true-up of all the accounting, you should make sure that operating costs are netted against operating liabilities before you

apply them to capital costs. And so the PUC had a public proceeding where we took evidence from all sorts of parties and had lots

of hearings from the period of October through March before we

made the decision. So we did have evidentiary hearings and had

full opportunity for public comment before we made the decision.

But the decision—the question arose in October, and we fully vented it in public over the intervening months. But I will say this, we

did take a little bit longer time in that decision because we put to

the head of the pack the question of a rate increase. And so we

originally granted a rate increase in January, and that did take

precedence to this accounting true-up question.

Mr. OSE. Is this recharacterization the substance of the lawsuits

in Federal court right now between the IOUs and the PUC?

Ms. LYNCH. Well, I have to say the utilities have thrown in the

kitchen sink in claims, and so I am not exactly sure of their list

of claims today. I would have to go back and check.

Mr. OSE. Well, I mean, is this one of them?

Ms. LYNCH. This well could be one of them. The essence of their

claim is that they should be entitled to recover whatever they pay

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for power purchase costs, regardless of how much they got to prepay their mortgage in the past.

Mr. OSE. They are taking the position, under 1890, that they

have recovered their stranded costs, and therefore should be relieved of the subsequent or the precedent requirements thereof?

Ms. LYNCH. They are taking the position that they do not have

to true-up their operating costs before they transfer operating revenues over to the capital side.

Mr. OSE. You are arguing over definitions of what is an operating

cost versus a capital cost, is that what you are saying?

Ms. LYNCH. It is an accounting treatment question. But I think

that the utilities filed rate doctoring case actually involves much

more than the accounting treatment. It involves the fundamental

principle of whether a State, under State jurisdiction to control the

retail rate paid by the ratepayer, has authority to shape the rate

over time, and whether a State has the authority to pass a statute

like AB1890 which gave a bargain and a risk to the utilities, or

whether, instead, when the Federal Government allows market

rates on the wholesale level to fluctuate, whether the State has to

pass those volatile costs through in realtime without shaping the

retail rate. So it is a larger policy question that is really at issue

in the filed rate doctrine case.

Mr. BURTON. I have two quick questions. I hope they are quick.

We heard from the other panel about the high cost of natural gas

and how it has driven the costs of their businesses through the

roof. In California, you have some substantial supplies of natural

gas in the ground. What is the position of the administration, or

do you know, on allowing the research and exploration for these

reservoirs of natural gas to help create an increase in supply so

that the cost can be going down?

Ms. LYNCH. I just speak for the Public Utilities Commission or

for myself, as a commissioner. Certainly the Public Utilities Commission has done everything in its power to increase capacity for

natural gas in California, and its storage. So, for instance, early

last year——

Mr. BURTON. I am not talking about storage, I am talking about

exploration.

Ms. LYNCH. The Public Utilities Commission does not do exploration.

Mr. BURTON. Well, I would like to maybe have somebody address

that question to the administration, because you have reservoirs—

according to some geologists that we know—in California of natural

gas that could be tapped to increase the supply.

Let me ask one more question of Mr. Madden from FERC. How

much could the California utilities have saved if they had not been

prevented by the CPUC from entering into forward contracts? And

can you give us an answer to that, for sake of the record?

Mr. MADDEN. I will provide my answer. I have already provided

my answer to the committee, but I need to step-back so everyone

will understand this. When we had the restructuring in California,

the CPUC required the utilities, for the most part, to divest their

thermal plants and CT plants; they kept their hydro, nuclear, except a couple of their plants. That was approximately 20,000 to

25,000 megawatts. Those plants were bought by numerous generaVerDate 11-MAY-2000 10:55 Apr 01, 2002 Jkt 000000 PO 00000 Frm 00146 Fmt 6633 Sfmt 6633 C:\DOCS\76761.TXT HGOVREF1 PsN: HGOVREF1
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tors at premium prices, which helped the California utilities buy

down their stranded costs.

As part of that structure, the utilities had to sell into and buy

from the PX. And I do not know for a fact—I assume Ms. Lynch

knows better—there is a per se prudence established in California

that if you buy in the spot market, you are going to be per se prudent. And I also believe that there were some restrictions initially

set by the CPUC on utilities as to the level or the amount of bilateral contracts they could have versus their overall portfolio. So, essentially, most of the market in California was in the spot market,

because there was very little, if any, bilateral forward contracts. It

has increased today. I think it might be 10, maybe 15 percent. That

compares to a number of other States, I must say, that never required the divestiture of the utilities’ facilities. And if they did,

they allowed the utilities to buy back the power for a certain period

of time. So with that perspective, let me try to answer your question.

Now, if we look at, for example, an entity wanting to purchase

a forward contract last year, and the forward contract, let us say,

was to start in May and they were looking for a price in April.

There is some transparency out for California, and they can look

at what the prices are, for the next month, for a 30-day service at

Palo Verde or the California-Oregon border.

So when responding to the question of the committee, we looked

at the amount it would charge for a megawatt hour of electricity

last April for May delivery was $32 a megawatt hour. Then we

looked at the recent filing that the Cal ISO submitted dealing with

the $6.2 billion. They state for the May spot price in California,

they averaged it at approximately $58 a megawatt hour. So if you subtract the $32 that you could have paid from the $58 that the spot was going for, we arrived at a $26 megawatt-hour differential. Now, if you take the transmission load in California on

a given day in May, you can approximate it is about 19 million, almost 20 million. If you look at the 20 million that is on the load

times the differential of $26—the difference between the $32 and

the $58—for May alone, if utilities bought on the spot for the delivery, they would have saved approximately $520 million for May.

Mr. OSE. If I understand, at the time in California, the power

distributors were required to buy at the price set by the PX on any

given day. So, it might well have been the $58 price. I mean, their

buy-sell requirement forced them into the PX to buy, is that correct?

Ms. LYNCH. Well, what happened was, under the FERC rules,

the highest priced bidder, that price was paid to everybody. And

that was the PX price. Now FERC has changed that rule somewhat

by saying essentially up to $150 everybody gets the same price, and

then you file some paperwork and you get a higher price. But at

that point——

Mr. OSE. FERC defined the rules for the PX?

Mr. MADDEN. Mr. Chairman, I believe Ms. Lynch is incorrect. We

had a filing by the ISO, a tariff filing under section 205 of the act

to implement the restructuring. The FERC reviewed that, received

comments from the CPUC and from other parties, who I believe

also supported it. They were required to pay the market clearing

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price established at the PX at that time. But this was not FERC

alone. It was the submission by the ISO, and support and comments from other entities.

Now, Chairman Burton, I was also asked by committee to get an

idea of, if we look at a big city in California, how much could we

save? Well, Secretary Abraham testified last month at the Senate

hearing. He noted that there was an offer by Duke to provide San

Diego its entire load for a year at 55 megawatts an hour. I do not

know the terms and conditions of that offer, other than the price.

There may be some added provisions in it. But if you look at the

load of San Diego, what its needs are, and you multiply that times

the price that Duke was going to offer San Diego to meet its needs,

San Diego, alone, would have saved $5 billion.

Mr. BURTON. $5 billion?

Mr. MADDEN. $5 billion. This is somewhat hindsight. I do want

to make a comment that, contrary to some on the panel, I do believe in entities or IOUs having a mixed portfolio of contracts, spot,

short, medium, and long. This does indicate that, based on hindsight, had they done this, this is how much the consumer would ultimately save.

Mr. BURTON. OK, let me ask a few more questions, then I will

let my colleague from California, Mr. Horn, finish up.

This is on the issue that FERC, ‘‘Blew out the price caps.’’ Mr.

Winter, on December 7th you made an emergency request to FERC

to relax the hard price cap, is that not correct?

Mr. WINTER. That is correct.

Mr. BURTON. Is it not correct, because not enough bids were coming in and the system was going to collapse?

Mr. WINTER. That is correct.

Mr. BURTON. Going into this summer we are being told that

there is a shortage of 3,000 megawatts. Mr. Winter, what would

happen, under these circumstances, if FERC imposed a hard price

cap? Would the threat of blackouts get worse or better?

Mr. WINTER. I think it would probably get worse, because if the

price cap was below what other States could provide at their cost,

then we would end up being unable to get that power, and therefore would have to cut the load.

Mr. BURTON. OK. Mr. Makovich, would hard price caps produce

more or fewer blackouts this summer?

Mr. MAKOVICH. Price caps, as currently set, either soft or hard,

are making it worse, so they are going to extend the hours of outages.

Mr. BURTON. And Mr. Madden, do you want to answer that same

question?

Mr. MADDEN. I cannot get into specifics because the issue is before the Commission in a number of hearings. But, my personal

opinion is that hard caps do not provide the supply and the incentive for the need for power, for the need for generation.

Mr. BURTON. So your answer is pretty much the same as Mr.

Makovich’s?

Mr. MADDEN. That is my personal opinion.

Mr. BURTON. OK. Mrs. Lynch, what would a hard price cap do

this summer with a 3,000 megawatt shortfall?

Ms. LYNCH. It is Ms. I am not married.

141

Mr. BURTON. OK. I am sorry.

Ms. LYNCH. That is OK.

Mr. BURTON. Forgive me.

Ms. LYNCH. I would join with economist Frank Wallach from

Stanford and Chris Woodruff from southern California, and even

Paul Krigman in the New York Times who say that price caps in

a dysfunction market where there is no competition are needed as

a market mitigation measure. The problem here is folks withhold.

The sellers and the generators withhold. And if you do not discipline the sellers, then they have no incentive not to withhold, and

then bid in right when the price gets to the very highest level. So

even conservative economists like Paul Krigman of the New York

Times saying in this market, with this level of dysfunction and

market power evidenced, price caps are a necessity.

But I would go farther and say in fact what we need is costbased pricing. We need cost-based pricing as a market mitigation

measure, so that the sellers have to prove up their cost, and then

gain a reasonable profit, rather than the many hundreds of times

of profit that they are sucking out of the California economy.

Mr. BURTON. So you disagree with your colleagues at the table?

Ms. LYNCH. Certainly as to that effect, that is right. But I do

agree with the vast majority of economists who have studied this

market, in particular.

Mr. MADDEN. Chairman Burton, could I add?

Mr. BURTON. Yes.

Mr. MADDEN. As I note in my direct testimony, the Commission

staff has prepared a market mitigation plan to go forward. And

hopefully the Commission will bless that plan or approve some type

of plan going forward in terms of addressing the current concerns

of outages, the pricing at key times, the need for confidential information from the generators, and the questions of the requirement

that generators be required to schedule and provide the service, if

in fact they have the megawatts. We are receiving comments on

that. So the concerns that are being raised as to manipulation,

withholding, and market power are indeed going to be addressed

in the very, very near future by the Commission.

Mr. BURTON. Give me a timeframe.

Mr. MADDEN. I would say we are on schedule. The Commission

noted in its December order, by May 1.

Mr. BURTON. OK. Thank you, Mr. Chairman.

Mr. OSE. Mr. Horn.

Mr. HORN. Miss Lynch——

Mr. BURTON. Ms. Lynch.

Mr. HORN. Ms. Lynch, the latest—well, I called her president to

start with. Is it a president or chairmanship?

Ms. LYNCH. It is a president.

Mr. HORN. President. We will go back to president then. When

was the latest increase per kilowatt hour put at 3 percent? Did the

Commission do that?

Ms. LYNCH. 3 cents a kilowatt hour.

Mr. HORN. 3 cents per kilowatt hour.

Ms. LYNCH. I wish it were 3 percent. We voted an additional 3

cents on March 27th. On January 4th, we voted a 1 cent increase,

142

which was on average—a 1 cent increase is, on average, a 9-percent

increase.

Mr. HORN. How did you come to that determination?

Ms. LYNCH. Through an evidentiary record where we hired independent auditors to look at the utilities and their affiliated companies’ books and records, and then also allowed all parties an opportunity to present information about how much was needed in order

to buy power in California.

Mr. HORN. Apparently it was issued, right?

Ms. LYNCH. Yes.

Mr. HORN. OK. Now, did it result in $45 million a day being

spent on purchasing electricity? Did it help do that?

Ms. LYNCH. Well, whatever is spent is spent in the California

market. The question is who is going to pay for that power purchase. And so what the Commission did was say the ratepayers of

the investor-owned utilities in Southern California Edison and

PG&E territory will bear the burden of paying the exorbitant

wholesale prices to the extent of a total of a 4 cent increase on the

kilowatt hour rate.

Mr. HORN. Do you think the explanation could also be that the

rate increase would be allocated between the State and the small

generators? Obviously the utilities would get some of it, but a lot

of it would have been to get some money in the pot for everybody,

I would think.

Ms. LYNCH. Absolutely, Mr. Horn.

Mr. HORN. Yes.

Ms. LYNCH. And, in fact, when we ordered the additional 3-cent

rate increase, we also ordered the utilities to pay those small generators who were not being paid. I was quite disturbed, and my colleagues as well, that the utilities had stopped paying those small

generators who are so key and critical to our reliability needs. So

they are starting to pay. The order was, as of April 1st, you shall

pay those small generators what is owed for the power produced

by those generators.

Mr. HORN. Thank you, Mr. Chairman.

Mr. OSE. I want to followup on something. Mr. Madden, if I understood you correctly, you said that FERC’s jurisdiction extends to

roughly half of the market in California.

Mr. MADDEN. I do not believe I said half, but we do not have a

substantial amount of jurisdiction over the energy that is sold into

California because of municipals and co-operatives. It is about 50

percent, we do not have jurisdiction over 50 percent of the market

West-wide.

Mr. OSE. OK. Energy Secretary Abraham advised me that it was

47 percent non-jurisdictional in terms of the California market specifically.

Mr. MADDEN. Chairman, I just do not have that figure. You have

to look at how much energy is generated, and I just do not have

it. It is a substantial amount. It is 40 percent, maybe. I do not have

the exact figure.

Mr. OSE. Well, my real question is actually for Mr. Makovich,

and that is that if FERC only regulates 40 to 50 percent of the

wholesale power market in the West or in California, what is the

consequence of putting caps on that portion of the market?

143

Mr. MAKOVICH. Right. The price caps are a very, very limited tool

under the best of circumstances. If you can only impose it on half

the market, you are likely to create far worse distortions than any

kind of gain you are going to get from these price caps. As Terry

mentioned, you are going to be giving people the incentive, for example, to move power to an area of higher return; to export it from

California to Palo Verde to get a better return. And we saw that

happen when we had these soft price caps in effect.

Mr. MADDEN. Mr. Chairman, as I mentioned, 50 percent of the

energy produced in the West is non-jurisdictional to the Commission. And, of course, the issue has come up in a number of dockets,

and I cannot talk about the merits, but I can tell you my views on

that. It is very difficult to put a cap, as you mentioned, on only half

the market, when the other half of the market is not capped. We

saw that problem with gas 15 years ago when we regulated the

intrastate side. Actually we did not regulate the intrastate side,

but regulated the interstate side, and the interstate side of the

market went to the intrastate side of the market.

Second of all, we have substantial amount of bilateral contracts

in the West. Do you want to undo those contracts? If you had a cap

and if those contracts exceeded the cap.

The third thing is you really do not have a spot market in the

West as you do in California. So you do not have the control; you

do not have the transparency you would need to do that. That said

if a cap adds to or increases supply and decreases demand, maybe

you should look at it. But it has to occur first.

Mr. OSE. Ms. Lynch.

Ms. LYNCH. California did have price caps up until November 1st, and the ISO voted an effective price cap of $250 a megawatt

hour last July. So it is not as if we have not had experience with

a market that actually worked somewhat under the prior caps. It

is really the FERC’s unprecedented action, beginning with their

draft order in November and then continuing and extending more

and more that has caused this issue and the bleeding of the California economy because of these outrageous wholesale prices. But

it did work before. Perhaps imperfectly, but certainly much better

than it works today with nothing, no protection for the California

businesses or consumers.

Mr. BURTON. May I make one final comment?

Mr. OSE. You may, Mr. Chairman.

Mr. BURTON. I just want to make one final comment. I think we

are about through with this panel.

Mr. OSE. We are.

Mr. BURTON. It is apparent, I think, to anybody who has taken

a hard look at this, you need more generation in this State, you

need more power plants and you need them online as quickly as

possible. So, I hope that there is something worked out between the

environmental organizations in this State and the utilities and the

government so that they can get on with generating enough electricity to take care of the need. Because if you do not do that, this

problem is going to get worse and worse and worse. I think that

is what you mean, is it not, Mr. Makovich?

Mr. MAKOVICH. Yes.

Mr. BURTON. Yes. Thank you.

144

Mr. OSE. I want to thank the witnesses for coming. It has been

a long panel, and I apologize. But you have so much information

that we would like to glean from you, we could probably go another

couple of hours. But we will not. So, anyway, thank you all for coming.

We are going to take a 5-minute recess, and then we will have

the third panel join us.

[Recess.]

Mr. OSE. OK, we are going to reconvene. I want to welcome our

third panel. That would be the Honorable J. William McDonald;

Mr. Brian Jobson; Ms. Becky Dell Sheehan and Mr. Thomas

Stokely. And, as with the first two panels, we are going to swear

you in. So if you would rise, please.

[Witnesses sworn.]

Mr. OSE. Let the record show the witnesses answered in the affirmative.

As you have seen in previous panels, we have an opportunity for

each of you to make an opening statement of no more than 5 minutes in length. So we will start with Mr. McDonald. You are recognized for 5 minutes.

STATEMENTS OF J. WILLIAM MCDONALD, ACTING COMMISSIONER, BUREAU OF RECLAMATION; BRIAN JOBSON, PRINCIPAL POWER CONTRACT SPECIALIST, SACRAMENTO MUNICIPAL UTILITY DISTRICT; BECKY DELL SHEEHAN, ASSOCIATE COUNSEL, CALIFORNIA FARM BUREAU FEDERATION;

AND THOMAS STOKELY, SENIOR PLANNER, TRINITY COUNTY

PLANNING DEPARTMENT

Mr. MCDONALD. Thank you, Mr. Chairman. I do have a written

statement, and I will simply summarize it at this point.

Reclamation, as you may know, is the second largest hydropower

utility in the United States. We have 194 generating units in 58

power plants throughout the 17 Western States with an installed

capacity of just a little less than 15,000 megawatts. While our

power plants are located throughout the 17 Western States, I will

limit my remarks today to those parts of our system that are available to provide power to California.

Before I do that, though, let me review very quickly the six basic

conditions under which our power plants are operated. The first, of

course, is that in a hydropower system water is the fuel. While it

has the distinct advantage of being an annually renewable fuel, it

is also finite and highly variable from year to year. That is always

the underlying condition in which a hydropower system operates.

Second, I would emphasize, in the context of our Federal power

plants, that even if water is physically available in storage, the annual amount that is available to actually release through a power

plant is governed by a complex set of laws in all instances. I would,

generally speaking, break those into three. There are instances in

which by virtue of international treaties, interstate compacts, and

judicial decrees of the U.S. Supreme Court, the amount of water

that is delivered on an interstate or international basis is governed

by those institutional arrangements.

There often are Federal statutes which govern project operations

and the parameters within which we operate. And finally, every

145

project is, of course, individually authorized. Without exception,

power is always a secondary purpose, not the primary purpose of

any Reclamation project.

Third, it is in that context that, as we schedule releases of water,

they are always governed by water user demands, since water supply is the primary purpose of our projects, both for irrigation, and

municipal and industrial purposes.

Fourth, to the extent that we do generate power, it is always

first used for project purposes; for example, the pumping of irrigation water supplies. It is only power that is surplus to project use

that is available for marketing. With respect to that marketing, to

take a very complex system and simplify it, I would make three

main points.

First of all, the marketing is always done by the Western Area

Power Administration or the Bonneville Power Administration,

which are components, of course, of the Department of Energy. It

is they who do the contracting and purchase all replacement power

that is needed pursuant to those contracts. Second, they obviously

enter into those contracts in accordance with Federal law. And finally, I would note that in general they contract to sell more capacity than is available on an assured basis year in and year out given

the vagaries of a hydropower system. And it is expected, and it always has been, that they, too, will be in the marketplace buying

power from time to time to cover the firm contractual commitments

that they have entered into when we are in low water years.

Fifth, there are transmission constraints. I will not try to describe those at length here—there is a map associated with my

written testimony—but will simply point out that even if Reclamation can generate energy, we cannot necessarily get it at all times

to the right place given system constraints. We are not an owner

or operator of any transmission, so that is beyond our control.

And finally, in this contemporary climate we operate with certain

environmental considerations and respect for tribal trust assets.

That most often comes in the form of downstream riverine environments and aquatic species that are of interest under a number of

Federal laws. That largely translates into some limitations in certain instances on peaking power, that is to say, on instantaneous

capacity, but not on total energy generated over time. That is because, except in a flood control circumstance, almost all water that

we have available to us eventually runs through our power plants.

Let me turn now to the three major systems that are available

to benefit California, touching very briefly on those. With respect

to the Central Valley Project, we have about 2,000 megawatts of

installed capacity. About 75 percent of the energy generated is surplus to project use. The other 25 percent is used for project pumping. All of that surplus energy is under contract by Western to

users in California, principally in northern California.

For this summer, we face a forecasted runoff of only about 60

percent of average. We therefore think power generation will be

only about 80 percent of average this summer. In that context, obviously, we will not be able to contribute, for lack of fuel, as much

as we otherwise might. We are doing three main things, within

that context, to try to help the California situation with the Central Valley Project. First of all, we have moved all maintenance forVerDate 11-MAY-2000 10:55 Apr 01, 2002 Jkt 000000 PO 00000 Frm 00153 Fmt 6633 Sfmt 6633 C:\DOCS\76761.TXT HGOVREF1 PsN: HGOVREF1
146

ward so all units will be back online by the first of June. I might

say, as a footnote, no planned outages this winter in any way impacted generation capacity because we lacked water to move

through the remaining units that were up and running.

Second, we have been and will continue to shift project pumping

to off-peak hours as much as possible, working in cooperation with

the State water project, although there are some significant limitations on our ability to do that.

Finally, we will, of course, work with the California ISO and

Western to optimize the scheduling of releases of our water for

peak periods within the physical and operational constraints of our

reservoir operations and our contractual deliveries to our irrigation

and municipal and industrial contractors.

Let me turn next to the lower Colorado River dams, by which I

mean Hoover, Parker, and Davis Dams and power plants, all of

which are located on the Colorado River straddling the Nevada-Arizona California-Arizona borders. These plants have about 2,400

megawatts of installed capacity amd are operated within a very

complex institutional system governed by the ‘‘Law of the Colorado

River’’ that essentially dictates the annual release of water through

the power plants on a monthly schedule.

Two things I would emphasize in that context. To the extent

there is surplus power, 50 percent of it, by law, is sold to California. Southern California entities are the beneficiaries of Hoover,

Parker, and Davis. All of that power is under contract pursuant to

Federal statutes.

Finally, again with respect to maintenance, we have accelerated

all maintenance, and will have all units that were otherwise regularly out for maintenance this winter back on line by the first of

June.

The Federal Columbia River Power System is the third major

system one that can provide power. When I talk about the Federal

Columbia River Power System, I am talking about the 12 Corps of

Engineer facilities and the two Reclamation power plants that operate as an integrated system for hydropower and flood control in

the Columbia River Basin. Historically, California has peak demand in the summer, and the Pacific Northwest and British Columbia Hydro would sell power to California in the summer. Viceversa, the Pacific Northwest peak load condition is in the winter.

California would typically sell to the Pacific Northwest in the winter. That is not going to be possible this summer. Basically, we are

at a near record drought of only 50 percent of average this year,

and all power generated by the Federal Columbia River Power System is going to be required by the Bonneville Power Administration

to meet its contractual commitments to its contractors, and even

then, it is likely to face shortages and have to purchase additional

power in the marketplace.

We are also quite concerned, in the face of the drought, about

conserving fuel, or water, as best we can because our reservoirs are

at historically low levels. As we go into the November-December

timeframe, if a normal water year does not materialize, the Pacific

Northwest will be in worse condition than we are presently.

Mr. Chairman, with that, I will conclude my oral comments and

be glad to respond to questions.

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Mr. OSE. Thank you, Mr. McDonald.

Our next witness is Mr. Brian Jobson, who is the principal power

contract specialist for the Sacramento Municipal Utility District.

Mr. Jobson, 5 minutes.

[The prepared statement of Mr. McDonald follows:]

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Mr. JOBSON. Good afternoon Chairman Ose and Chairman Burton and Congressman Horn. I am here representing the Sacramento Municipal Utility District to testify on the power supply

reductions that could result from restoring fisheries on the Trinity

River in the way prescribed by the record of decision that mandates

increased flows to the Trinity River. But before I get into that, I

want to make a note about the Federal agencies involved in

SMUD’s power supply from the Federal Government.

As they are under your purview, I think it is important that you

know that the cooperation that we have received in making as

much power available from the CVP has been phenomenal. And

this is by both the Bureau of Reclamation and the Western Area

Power Administration. We have advanced customer funds, tens of

millions of dollars, to rewind units, repair tunnels, avoid bypasses

of power plants, add transformers at transmission stations and replace any other facilities that are in need of it, and as was mentioned by Mr. McDonald, accelerated on maintenance necessary to

make sure all facilities are in service. At all levels in these organizations the cooperation has been terrific.

Getting on to the Trinity River issues. On October 19th, 1999,

the Department of Interior’s Fish and Wildlife Service and Bureau

of Reclamation released for comment the Trinity River Environmental Impact Statement report. The report’s preferred method for

restoring fishery habitat of the Trinity River relies on dramatically

increased water releases from Trinity Dam to create a more natural flow regime. The Fish and Wildlife’s preferred flow schedule

will result in reduced availability of power generation from the

Central Valley Project, degrading the reliability of California’s electric system, and driving up the price of power to consumers. This

comes at a time when California is suffering an electricity crisis,

as you have heard, with rolling blackouts and dramatic price spikes

that threaten the economy of California, the West, and the Nation

as a whole.

Specifically, the proposal would result in approximately 250,000

megawatt hours of hydroelectric energy forgone in an average year

if interior’s alternatives are implemented. This is enough energy to

meet all the needs of 31,000 households for a year, or to meet all

the needs of the State of California on a summer afternoon for

about 6 hours. The capacity lost in a critically dry year, which is

when hydroelectric capacity should be measured, would be about

150 megawatts. And when combined with the power impacts of implementing the Central Valley Project Improvement Act, which has

been largely implemented, the total reduction would be approximately 325 megawatts, as has been documented by the Western

Area Power Administration.

Interior’s proposed flow decision would also reduce water supply

to CVP supplied farms and cities, and raise temperatures in the

Upper Sacramento River, increasing mortality to juvenile

salmonids that are supposed to be protected by the Endangered

Species Act.

SMUD contends that many of these adverse impacts are largely

avoidable if the Trinity River restoration proposal is amended to

include non-flow habitat maintenance measures to conserve water,

essentially getting good results by using less water. For instance,

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SMUD has suggested in its comments on the EIS/EIR various alternative ways of restoring the fishery. Modifying interior’s proposal, for instance, by controlling revegetation of gravel bars used

for spawning by manual measures, hand crews or light equipment,

rather than keeping them flooded for weeks at a time to prevent

the seeds from germinating.

Another example, we have suggested constructing silt traps on

tributary streams to reduce siltation in the river, as has been done

at Grass Valley Creek, rather than relying on very high flows to

entrain the silt to be deposited downstream in the Trinity River

flood plain or the Klamath River further downstream.

Most remaining features of the Interior restoration plan are retained in our power alternative, including pulse flows, but at a reduced magnitude and duration. And while the power alternative

will result in some loss of hydroelectric generation and water supply, the loss would be roughly 70 percent reduced from Interior’s

alternative. In addition, adverse impacts on Sacramento River and

Delta endangered species would be less under the power alternative. These ideas were rejected by Interior under the prior administration. At a time when the State of California is desperately

in need of more power production, it seems incomprehensible to

SMUD that the Federal Government would act in a counterproductive manner by taking power resources off line when better

and less drastic alternatives exist.

In the interest of time, I do not want to dwell on each and every

concern SMUD and other power users like NCPA have with the

EIS/EIR, or spell out in detail the scientific flaws and procedural

infirmities with which the Endangered Species Act compliance and

the National Environmental Policy Act compliance were completed.

These are identified in documents that are of record already, and

these are issues that are being litigated presently.

The good news is that it appears that the Department of Interior

in this new administration will have the opportunity to revisit this

decision. And I will point out that there are more agencies involved

within Interior than the Bureau of Reclamation, who is the only

one represented here.

In light of SMUD’s history as an environmentally conscious utility, and its own belief the Trinity River fishery should be restored,

SMUD and other CVP power customers, like the Northern California Power Agency, sincerely hope that interior will reconsider the

power alternative during its preparation of the supplemental environmental impact statement report that it appears the Federal

court will require.

SMUD is willing to work with interior to modify the power alternative to address legitimate concerns that may be raised. We hope

that interior will engage in a meaningful dialog with SMUD and

other power and water customers to develop a final restoration

plan that minimizes impacts on water and power supply, and on

the Sacramento River fisheries while restoring Trinity River fishery habitat. Any assistance the committee can provide will be

greatly appreciated.

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Mr. OSE. Thank you, Mr. Jobson. We will be back to you with

questions after we get through the other statements.

I would also like to welcome today Ms. Becky Dell Sheehan, who

is the principal power contract specialist for the California Farm

Bureau. Welcome, Ms. Sheehan, for 5 minutes.

[The prepared statement of Mr. Jobson follows:]

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Ms. SHEEHAN. Thank you, Mr. Chairman. Actually, if I could

clarify the record, my title is mistaken. I am an associate counsel,

and I work primarily with water and land use issues.

Mr. OSE. We are interested in accuracy and we will make that

correction.

Ms. SHEEHAN. Thank you. Thank you, Mr. Chairman.

My name is Becky Sheehan, and I am Associate Counsel for the

California Farm Bureau Federation. The California Farm Bureau

Federation represents approximately 40,000 farm and ranch families, constituting approximately 80 percent of California’s production agriculture. Farm bureau members have been paying more

than $650 million annually for their electric service, and with the

recent rate increases, they will be paying more than $900 million.

When this year is compared to last, our members’ energy costs will have risen approximately $250 million.

The State of California cannot afford any further reductions in

energy and water supplies this year or in the near future. The

Trinity River Fishery Restoration decision will have impacts that

were not adequately considered in the decision’s joint environmental documents. The current Trinity decision will exacerbate a

crisis that has already begun to jeopardize the future of agriculture

in California. California’s farms provide a resource of State, national, and worldwide importance. As such, the lead agencies

should supplement the existing environmental document and consider the Trinity decision’s impacts in light of the current energy

crisis.

The current energy crisis and the ongoing water crisis are intrinsically linked, with a shortage of one increasing the cost and the

availability of the other. This year in California we will have probably a dry or critically dry water year which will limit our ability

to produce hydropower, which is the flexible and reasonably priced

energy source California relies upon to cover our peak energy periods. At the same time, our usual dry year alternative, groundwater, that will be necessary to use to sustain California during a

long, hot, and dry summer will be very difficult to draw upon because the high energy cost may make pumping groundwater cost

prohibitive.

Farmers and ranchers cannot pass the higher cost of doing business on to the consumer. While agriculture is an important business in California, the farms and ranches are predominantly family

operations with very small profit margins. Our farmers and ranchers cannot slash their overhead and ride out tough financial times

because there is no large overhead to cut. As such, if all market

indicators are proven correct, we will lose substantial agricultural

resources this year because of the combination of the energy crisis,

the dry water year, and the regulatory drought.

The Trinity decision is another example of an ill-considered government policy that will sacrifice our valuable agricultural resources without truly considering and mitigating these impacts as

required by State and Federal law. The final environmental document does recognize that the Trinity decision will cause significant

groundwater impacts due to overdraft, that agricultural production

will be lost, and that agricultural lands will be fallowed. However,

the magnitude of these impacts is not properly recognized. The

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agency’s recommended mitigation for these impacts is the full implementation of the CALFED Program and the Central Valley

Project Improvement Act. This is entirely inadequate, as these programs will have additional negative impacts to our agricultural resource base. While Farm Bureau is not opposed to the CALFED

Program—in fact, we have been actively involved since its inception and continue to be so involved—we do have substantial concerns about the current programs significant and unmitigated impacts upon California’s agricultural land and water resources.

Finally, the Farm Bureau has grave concerns about the underlying science and policy decisions that were made relating to fish biology; in particular, the Trinity decision’s temperature impacts on

threatened and endangered fish in the Sacramento River. Several

listed species within the Sacramento River are being sacrificed in

order to improve fish populations within the Trinity River. We are

concerned that the regulatory agencies have not sufficiently considered these impacts or developed policies to maintain the appropriate temperatures in the Sacramento River during the implementation of the Trinity decision. Thank you.

Mr. OSE. Thank you, Ms. Sheehan.

Finally, on our third panel, I would like to welcome Mr. Thomas

Stokely who is the senior planner for the Trinity County Planning

Department. Thank you for joining us. You are recognized for 5

minutes.

[The prepared statement of Ms. Sheehan follows:]

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Mr. STOKELY. Thank you, Mr. Ose, and thank you, Mr. Burton

and Mr. Horn. I would also like to thank our representative, Wally

Herger, and Mr. Thompson as well, for getting me here today.

Mr. OSE. Well, I will tell you that Mr. Thompson twists my arm,

so he is very effective.

Mr. STOKELY. He did? OK. [Laughter.]

It is an honor to be here. As you said, I am a senior planner with

the Trinity County Planning Department, and I have worked on

restoration of the Trinity River since about 1989. I am Trinity

County’s lead agency representative for the EIS/EIR that the other

witnesses referred to, and I have been working on that project

since 1994.

The main points I would like to make today are that the Federal

court system is dealing with the Trinity River flow decision, limiting its impacts this year on power, and it will actually provide

some minor benefits to power production this summer. Second, delaying implementation of the Trinity River flow decision will not

assist in dealing with the energy crisis during the year 2001. And

third, the evaluations in the Trinity River EIS/EIR actually show

some power benefits from implementing the preferred alternative,

particularly for future years, which helps to offset some of the negative impacts of the power implications involved in the Trinity

River record of decision.

As far as the courts are concerned, on March 19th Federal Eastern District Court Judge Oliver Wanger issued a verbal preliminary injunction which limited increases in the Trinity River this

year to a critically dry year flow, which is an increase of 28,600

acre feet. The no-action alternative is 340,000 acre feet. So that

would put the flows down the river this year at 368,600 acre feet.

Therefore, even if the year were to go to a dry year—which, as

I understand it, it is a critically dry year now. If it were to go to

a dry year, the river would not receive the prescribed flows in the

record of decision, which would be 113,000 additional acre feet. And

in addition to that, he has directed that a supplemental environmental impact statement be prepared that would deal with the energy crisis in California, as well as issues related to the Endangered Species Act.

And I might add that the Bureau of Reclamation has filed declarations in Federal court which indicates that this additional

water going down the river this year will not come out of any CVP

water contracts, it will come completely out of storage at Trinity

Lake, which is not something that we are very happy about in

Trinity County, but it actually is to the advantage of some of the

other panelists and their constituents here.

The additional in-stream flows will come out of Trinity Lake storage, and the relationship of that to power production is that the additional 28,600 acre feet of water that is going down the Trinity

River this year that would not otherwise be going down the river

in the absence of the record of decision, will in fact generate power

at the Trinity Dam Power Plant at about 400 kilowatt hours per

acre foot. That is approximately 11,000—or, excuse me, 11,440,000

kilowatt hours of energy that is going to be in addition to what

would have otherwise occurred this year in absence of the Trinity

River flow decision.

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In addition to that, there are also some other benefits that we

did not analyze in the EIS/EIR. There is a long-term average—the

EIS/EIR estimates a long-term average reduction of 7 megawatts.

However, there are some other issues that make it not as big as

it could have been otherwise. The first one is actually an issue that

affects power generation this summer, and that is, in the past the

timing of exports from the Trinity River to the Sacramento River

has been in the spring months and the early summer months, and

that was to protect the winter run chinook on the Sacramento

River.

Because of temperature concerns in the Trinity River, what has

occurred as a result of the preferred alternative is the timing of the

exports has shifted from the spring months to the summer months,

and in fact, the peak of the exports or the generation from the

Trinity River division will now occur in July, August, and September, and into early October of this year and also in future years.

So instead of generating a lot of power during the spring months

when it is generally not needed, it will, in fact, be generating power

during the peak demand of the summer months. And that is an

issue that will occur this year.

Another issue for future consideration, but not necessarily relevant this year, is that the record of decision does result in a reduction of water contract deliveries, and in particular, south of the

Delta. For instance, as I mentioned in my testimony, it takes 615

kilowatt hours of energy to pump water up into San Luis reservoir

to provide water for the Westlands Water District, which is one of

the plaintiffs in the litigation. And with a reduction of water deliveries to Westlands, there is a savings of that 615 kilowatt hours

per acre foot, so that helps offset some of the reduction in generation from the flow decision.

A third consideration is that the analysis in the document looked

at power plant bypasses as a means of complying with temperature

requirements in the Trinity River. And what we actually found is

that the preferred alternative has a 9.4 percent frequency of power

plant bypasses at Trinity Dam, whereas the no-action alternative

actually has a 13.8 percent frequency of power plant bypasses. This

is primarily because the temperature compliance in the Trinity

River is much improved under the preferred alternative, and therefore it results in less of a need to bypass the power plant at Trinity

Dam. Whenever that has been done in the past, it can lead to up

to an 85 megawatt reduction in power production because of the

loss of generation at Trinity Dam.

So, I would just like to conclude that the record of decision will

have minor but beneficial impacts to California’s power supply this

year. A Federal court is dealing with the issue. It is my understanding that the Interior Department and probably Trinity County will be issuing a supplemental environmental impact statement

and report, and will be looking at the power crisis, as well as issues

of endangered species. Thank you very much.

[The prepared statement of Mr. Stokely follows:]

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Mr. OSE. Thank you, Mr. Stokely.

I want to thank all the witnesses for their brief summaries. I

would like to recognize the gentleman from Indiana for 5 minutes.

Mr. BURTON. I have to tell you, Mr. Chairman, I am not familiar

with the Trinity River or the problems therein. And I think I will

let you ask the questions, and I will just observe. As we go along,

if I have questions, I will ask you to yield to me.

Mr. OSE. All right.

Mr. BURTON. Thank you.

Mr. OSE. Thank you, sir. Mr. Horn.

Mr. HORN. Thank you, Mr. Chairman. This is just a general

question of the Bureau of Reclamation. Without endangering species’ habitat or environmental protections, is there a way to increase generation from hydroelectric facilities?

Mr. MCDONALD. Probably the only fair answer is that it would

be a highly site-specific circumstance that would depend on the

species you are dealing with, and the hydrology and hydraulics of

the riverine environment you are dealing with. There certainly are

places I can point to where we have had those kinds of opportunities by working with the riverine environment, perhaps with the

mechanical manipulation of vegetation, that kind of thing. There

are other instances I can point to where that could not be done. We

simply had to change power plant operations to achieve the required legal protection of endangered species.

Mr. HORN. Well, you have just given us a safe method on at least

one situation. How do we implement them, and how do we spread

that along in different rivers?

Mr. MCDONALD. Again, it is a highly case-specific situation.

There are some instances in which, even though we might have

had to change power plant operations, we would have, by virtue of

generator upgrades, for example, we have recovered lost capacity.

In other situations, we can move water around in terms of its

monthly scheduling, and recover generation that might have otherwise been forgone.

In general, as I testified to, I would emphasize that seldom do

we actually bypass a power plant. The issue is more one of whether

we can meet peak loads because we might have to dampen out a

historical peaking operation compared to current requirements.

Mr. HORN. How does the system work here on all the different

things that the different Federal agencies think very dearly about,

whether it be fish and wildlife, reclamation, Corps of Engineers, all

the rest of it? How do we make decisions on this?

Mr. MCDONALD. In the context of Reclamation as an action agency, quote, unquote, under the Endangered Species Act, having legal

obligations under section 7(a)(2) to not cause jeopardy to a listed

species, or to adversely impact critical habitat, the process calls for

consultations with the relevant agency, which might be the National Marine Fisheries Services, or Fish and Wildlife Service. We

go through those consultations extensively on operating projects,

utilizing the best available scientific information about species.

These tend to be very case-specific circumstances that we have to

sort through project by project.

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Mr. HORN. Does that mean that the decision is not made here

in the region? If there is a real difference, it goes back to Washington, DC, and they get those people around the table? Or do they?

Mr. MCDONALD. Anything that I have ever personally been involved in has been a decision at the regional level among regional

directors of Reclamation, Fish and Wildlife Service, and National

Marine Fisheries Service.

Mr. HORN. And they try to get a consensus out of the group, is

that it? And then what happens? What is the directive?

Mr. MCDONALD. Certainly Reclamation’s perspective as we work

with the consulting fishery agencies is to make our views known

and present the science as we understand it. It is our obligation to

start with a biological assessment. We will defend what we understand to be the best science, and work with the fishery agencies to

try to understand their requirements and their interpretation of

the jeopardy standard under section 7(a)(2). In particular, we work

with ways to be sure that reasonable and prudent measures are

not burdensome on a project, or if we are causing jeopardy and

have to go to a reasonable and prudent alternative, to have a reasonable and prudent alternative that meets the conditions of the

act and the regulations as to being, indeed, reasonable and prudent.

Mr. HORN. Which agency has the domination over saying OK,

folks, we have talked about this for 3 years, can we get this thing

moving?

Mr. MCDONALD. It is always the action agency as a matter of

law. The statute has a prescribed time line which the action agency

can require of the fishery agencies. At the end of the day it is our

decision, not theirs.

Mr. HORN. You say it is your decision.

Mr. MCDONALD. As the action agency.

Mr. HORN. As the action agency. And I gather there has been

several rules issued through the Bureau of Reclamation that reduce generation capacity for the benefit of environmental protection. So that would have been made by your particular area, is that

correct?

Mr. MCDONALD. Yes.

Mr. HORN. Yes. And are there any areas in the process that

allow for future forecasting of growth in electricity demand as one

of the factors, or for emergency plans for increased generation? So

is that in the law in any way electricity, or is it sort of oriented

primarily to species?

Mr. MCDONALD. The standards of section 7(a)(2) of the Endangered Species Act, Congressman, do not permit an economic analysis. It is strictly a scientific analysis relative to jeopardy of the species. We certainly always, as an action agency, try to understand

those impacts. Instances that come to my mind are those such as

the decisions made in 1996 at Glen Canyon Dam, where we did

build into our final decision, based on the biological opinion, emergency criteria that allow us, on occasion, to operate outside the

boundary of the biological opinion if we face a system emergency.

Mr. HORN. Now, does the Environmental Protection Agency in

Washington or the region, do they have a say in any of this?

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Mr. MCDONALD. The Environmental Protection Agency is not the

regulatory agency. That is either Fish and Wildlife Service or

NMFS. But to the extent that you can have water quality parameters as a factor in the health of an endangered or threatened listed species, then EPA can be involved. That will always tie back

into the water quality standard of the water body that you are

dealing with.

Mr. HORN. Yes. I have a lot of respect for Fish and Wildlife, but

I do not have any respect, frankly, for the on science within EPA.

When we put it in the law, they refused to bring it to the floor back

in 1993. And, you know, we have referred things to the National

Academy of Sciences, and that helps, because they do have scientific people. But some agencies, I have a feeling that they just

do not really think much about science, and that worries me. Now,

do you run into that, where some agencies seem not to really have

a decent scientific analysis?

Mr. MCDONALD. I would not characterize it that way. I think the

challenge that the ESA always presents to executive branch agencies is that it is an absolute requirement to avoid jeopardy, and in

that context, you have to work with the best available science.

Often in the biological sciences the best available science is full of

risk and uncertainty that cannot be reduced beyond a minimum

that leaves a lot of judgment as to indeed what is required by the

species.

Mr. HORN. You seem to be very knowledgeable about the law on

that, and you noted that electricity and economics are not part of

it. I take it that—— Mr. MCDONALD. Not part of a jeopardy standard. No, sir.

Mr. HORN. Yes. Did anything else go? Because it used to be that

you could not build a dam unless there was certainly an economic

analysis that you could pay back the money for that dam. And you

had to go through very specific things in the 1950’s and 1960’s in

terms of crops and what this will mean and so forth.

Mr. MCDONALD. Sure.

Mr. HORN. Did all of that go out?

Mr. MCDONALD. Those are not requirements of the Endangered

Species Act under section 7(a)(2).

Mr. HORN. Well, does it have—is it existing still in Reclamation

law?

Mr. MCDONALD. Certainly if Reclamation were authorized by

Congress to do a feasibility study of a new project, we would apply

those economic justification criteria, or, as we call them, the benefit

cost analysis, which tries to capture benefits and costs in dollar

terms to society as a whole.

Mr. HORN. Well, would that not put on the table the matter of

economics, electricity, etc?

Mr. MCDONALD. Sure, if we were planning a new project, it

would.

Mr. HORN. OK. So it is not completely thrown overboard.

Mr. MCDONALD. No, sir.

Mr. HORN. OK. Thanks, Mr. Chairman.

Mr. OSE. Thank you.

Mr. Jobson, in terms of the Trinity River decision that Judge

Wanger has taken under his jurisdiction, Mr. Stokely was talking

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about the positive or negative impacts in terms of power generation

that will result from the verbal injunction that Judge Wanger—actually, it is not a verbal. It is actually written. It is a temporary

injunction that has actually been written.

Mr. STOKELY. It is my understanding it is a preliminary injunction and he issued a memorandum of opinion. But I have not seen

a preliminary injunction, itself, yet. But he issued—— Mr. OSE. I actually read it, and I read it as a preliminary injunction pending a final. Anyway, the point of my question is whether

or not you agree with Mr. Stokely’s conclusions about the impacts

on power supply?

Mr. JOBSON. No, sir, I do not. We see that differently, and I will

explain. First of all, in 2001 the judge did limit the releases to that

which would be made in a critically dry year, rather than in a dry

year, which I agree with Mr. Stokely.

Mr. OSE. 28,600?

Mr. JOBSON. Right. And should it have been a dry year this

year—and it has not been determined yet—that would have saved

approximately 90,000 megawatt hours. The reduced flow would

have conserved 90,000 megawatt hours, which is a substantial

amount of electricity.

The fact that Reclamation has determined that these additional

releases to the Trinity, even if it is only 28,000, will be made solely

from storage merely delays the impact on power and water. It

means that Trinity reservoir will be lower. It means that the power

plant will therefore have less capacity and produce less energy and

it means that we will likely not recover its full storage next year

or will be less likely to. So those are delayed impacts, they are not

benefits.

In addition, any generation that will be added at Trinity Power

Plant as a result of this 28,000 acre feed, generation at the remaining Trinity River division plants, Carr and Spring Creek Power

Plant, and at Shasta Power Plant—I mean, excuse me, at Keswick

Power Plant in the Shasta division will be lost, because the releases from Trinity will not be diverted across to the Sacramento

River, they will go down the Trinity River.

Mr. OSE. Before you leave that issue, is that a one-for-one? I

mean, I am trying to understand. I understand you cannot drink

the water twice, so to speak.

Mr. JOBSON. No. I understand.

Mr. OSE. But is it a one-for-one? If you go down Trinity, you lose

1 megawatt hour, or if you go down the other way—I mean, is it

a one-for-one?

Mr. JOBSON. Let me explain.

Mr. OSE. All right.

Mr. JOBSON. In either case the water is released at Trinity, and

it generates approximately 400 kilowatt hours an acre foot at Trinity Power Plant. However, after that, going down the Trinity River

there is a very small, almost inconsequential power plant at Lewiston Dam. But, basically you are dealing with about 400 kilowatt

hours per acre foot as a generation in that alternative.

If it is diverted to the Sacramento River, an additional 1,100 kilowatt hours per acre foot will be generated on top of the 400, due

to generation at Judge Carr, Spring Creek, and Keswick Power

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Plants. So, it is about a three-to-one difference. A total of 1,500 kilowatt hours per acre foot if it is diverted to the Sacramento River,

and 400 kilowatt hours plus change at Lewiston it if is released to

the Trinity River.

Mr. OSE. Do you agree with that, Mr. Stokely?

Mr. STOKELY. I agree with his numbers. The only thing I disagree with is that the water that will go down the river this year

will come out of storage. As I understand it, it is not water that

would have been sent over to the Sacramento River to produce that

1,100 kilowatt hours per acre foot, it is water that is coming out

of storage, and if we do not have a wet winter next year, there may

be or there will be an impact next year. If we have a wet winter

and we have what we call safety-of-dams releases, there will virtually be no impact in future years because the reservoir will fill

up, but we do not know that.

Mr. OSE. I am just trying to get clear in my mind, as we move

forward to try and find solutions, is it a one-to-one swap, is it a

one-to-two, is it a two-to-one. And I appreciate—I mean, you guys

are agreed on that ratio, though, in terms of the power generation?

Mr. STOKELY. Yes.

Mr. OSE. OK.

Mr. JOBSON. There were a couple of other areas that I found that

I viewed differently. Characterizing the capacity lost as an average

of 7 megawatts is misleading. Capacity is measured in dry years

by hydroelectric plants as their capability to produce in dry years,

standard industry approach. An average capacity is almost a contradiction in terms. Capacity is measured on what can be relied on

in all circumstances, and with a hydro project, in dry circumstances. That impact on the Trinity River decision is 150

megawatts in a critically dry year and the cumulative impact, with

implementation of CVP Improvement Act, is 325 megawatts in a

critically dry year. That is how the capacity should be measured.

Mr. OSE. So, in terms of a system-wide situation, the record of

decision signed by the secretary in a critically dry year would cost

us 300-and-some-odd megawatts of power generated?

Mr. JOBSON. That is the cumulative impact with Trinity and

CVP Improvement Act.

Mr. OSE. OK.

Mr. JOBSON. CVP Improvement Act has been implemented, so

that is the number, but if you just look at the increment of Trinity,

it is 150.

Mr. OSE. Let us focus just on the Trinity, because that is what

Mr. Stokely came to testify about.

Mr. JOBSON. 150 megawatts.

Mr. OSE. OK, great.

Mr. JOBSON. The other thing I would point out is that I think

the timing benefits of moving generation around are overrated,

that there are still impacts—adverse net significant impacts on

power of the secretary’s decision, unless it is substantially changed

when he revisits his decision in the supplemental environmental

document. And we hope that this administration will employ a

more open process where our alternative—the power alternative is

given a much more fair shake. We took a lot of time and hired experts, PhDs in their field, to develop an alternative that employs

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water conservation as well as fishery restoration, and we hope this

administration gives it a fairer shake than the last one did.

Mr. OSE. My time has expired. Mr. Horn.

Mr. HORN. I yield back.

Mr. OSE. OK, I have more time. Ms. Sheehan, I just want to visit

with you about the consequence to the members of the Farm Bureau that is likely to occur this summer, and for that matter beyond. To the extent that we do not have enough power, from your

perspective, what are the consequences to the agricultural community up and down this State?

Ms. SHEEHAN. Well, as you know, agriculture is having a real

tough go of it right now. The industry is under a lot of pressure.

The agricultural markets are struggling. Agricultural regulations

are getting stricter every year. We have had numerous decisions

reducing the water that is available for use by agriculture. Water

has been converted from agricultural use to environmental purposes.

Now with the energy crisis on top of all these other stresses on

the industry, it is already becoming too much for many of our farmers, and a lot of people are looking for relief. Once we lose our valuable agricultural infrastructures, our agricultural land is going to

be converted to urban uses. We are going to lose our industry, our

agricultural industry. We have already lost many packing plants.

It is a steamroller effect. Once you start losing the processing

plants, even though the land is there, you cannot make any kind

of profitable agricultural use of the land.

Mr. OSE. It is interesting. As I drive up and down the valley, one

of the dynamics that I see at play is that, for whatever reason,

things change. I mean, it is a very dynamic economy. As it relates

to our rice growers, by virtue of a decision taken by the legislature,

they have moved away from what I would call a traditional rice

burning or rice straw burning template, to using water to deteriorate the straw in the fields. I have to admit that I look at the water

in those fields, and I see power behind the dams. I am wondering

about the tradeoffs, whether or not that particular issue was ever

considered in the context of the original legislation for particulate

matter from the rice straw burning.

Ms. SHEEHAN. I do not believe it was, but it is not my area of

expertise. I was not involved in making this decision. I was not involved in the development of this legislation. The energy situation

is so new right now, I do not think it was on anyone’s radar screen

even a year ago. So, I do not believe that impact was considered.

Mr. OSE. I am trying to find the right balance, is what—I mean,

Trinity River, Sacramento River, Shasta, all of these different components play a piece here. To the extent we have a surplus of this

and a deficit of that, how do we use the surplus to meet our deficit?

I just cannot help driving up and down I–5 looking at the rice

fields. My gosh, that is power behind a hydro dam.

So, Mr. McDonald, over on the Colorado, is that Bureau or Corps

of Engineers operated?

Mr. MCDONALD. If you are talking power plants, they are all Bureau of Reclamation.

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Mr. OSE. OK. First of all, I want to pay a compliment to you and

provide a little constructive feedback, if I might. Your Web site is

very informative.

Mr. MCDONALD. Oh, thank you.

Mr. OSE. I appreciate being able to go there.

Mr. MCDONALD. I will pass that on to our computer gurus.

Mr. OSE. The constructive feedback I would give you is that the

totals you have on the 58 different plants are aggregates for the

month rather than—there is no place I can go and say well, what

are we producing today.

Mr. MCDONALD. Oh, I see what you mean.

Mr. OSE. It would be helpful to me, watching the power situation

in the West, to have kind of like today’s production, month-to-date

number, with a historical perspective. So I pass that on as constructive feedback.

Mr. MCDONALD. Fine. I will see if it is doable.

Mr. OSE. Now, the issue in particular on the Glen Canyon is that

last May or June, if I recall, we came across a piece of legislation

that was passed through Congress and signed by Bush 41 to implement a low flow of release experiment from Glen Canyon. I have

to admit some respect for—significant respect for the people who

crafted the legislation, because imbedded in the legislation is authorization for the Secretary of the Interior, under emergency conditions of one sort or another, to waive the requirements of the low

flow experiment, and ramp up the generation from Glen Canyon.

Are you familiar with this particular issue?

Mr. MCDONALD. Yes.

Mr. OSE. I noticed in your testimony you have a chart here. It

has got both Hoover and Glen Canyon.

Mr. MCDONALD. Yes.

Mr. OSE. What I am trying to figure out is the conditions under

which the Department now waives the continuation of the low flow

release experiment. In other words, is it a stage 3 in Sacramento— or in California? Is it a stage 3 west of the Rockies? Are there any

definitions so that when we get to a certain point it is automatic,

rather than having to be a new administrative act?

Mr. MCDONALD. There are definitions, Congressman. They are

spelled out as part of the 1996 decision on the operation of Glen

Canyon Dam. Basically, we will deviate from the requirements of

that decision in instances in which a system has crashed and needs

to be brought back up, there is a loss of transmission and we need

to stabilize the system, or there is a loss of generation and the system needs to be stabilized.

There are a series of criteria that are actually set out in that decision. If I could summarize those briefly. Basically, Western Area

Power Administration, the marketer of the power, has to decide

that the utility that is seeking assistance—and in the context of

California it is the ISO that calls up Western—has exhausted all

their reserve capacity, that there are no non-firm energy sales out

there to be had, that all interruptible loads have been shed, and

that a blackout condition on the system is imminent, which in the

context of stage 3 brings us below a reserve of 11⁄2 percent. If that

kind of request is received from the ISO, as it has been several

times in the last several months, and if—and this is the biggest

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if—there is transmission capacity available from Glen Canyon Dam

into southern California, we, Reclamation, have responded. In my

written testimony I identify the four times where transmission capacity was found by Western, we could sneak electrons through Arizona, if you will, and we were able to get power to California. In

the other instances there was simply no transmission capacity.

Mr. OSE. This brings me to my fundamental question, and that

is, as we look for solutions to California’s energy crisis, I mean,

power is often fungible within certain parameters. I mean, power

from Glen Canyon can go east or west, north or south under certain parameters. How do we make it possible so that in a situation

of an emergency nature we can run Glen Canyon up or run Hoover

up and get that power in here?

Clearly you have indicated we need transmission lines or transmission capacity. Yet, you have also indicated the Bureau does not

own transmission capacity. Are there programs that we could undertake or policies we could adopt that would facilitate the creation

of that transmission capacity?

Mr. MCDONALD. Two comments. First of all, transmission is not

a constraint at Hoover. There is ample capacity, transmission capacity, to move power generated from the Hoover-Parker-Davis

complex into southern California. There is essentially no limitation

at Hoover on our peaking ability, because the two downstream reservoirs provide re-regulation of releases from Hoover. The limitation at Hoover is the interstate compact and the international treaty which we have to observe or we are wasting California’s water.

At Glen Canyon it is a different situation.

Mr. OSE. Do not do that. Do not do that.

Mr. MCDONALD. I understand. At Glen Canyon, a different situation. We lack the transmission capacity. It would take a private

utility or Western Area Power Administration, with congressional

authorization, to construct new transmission capacity. But it would

also take some changes in Federal law that I need to point out.

Glen Canyon was authorized and is operated pursuant to the

Colorado River Storage Project Act of 1956. Pursuant to that act,

the surplus power from not just Glen Canyon, but the whole of the

Colorado River Storage Project system is marketable to customers

in Wyoming, Colorado, Utah, New Mexico, Arizona, and Nevada,

and only in those States. All of this surplus power is in fact under

contract, and there is nothing else available. All Glen Canyon can

do, even if there were transmission capacity, in the context of those

Federal statutory requirements, is run some water through the

generators on a peaking basis, losing water that would otherwise

be held to generate for those customers. Then, Western has to go

out on the market and buy replacement power which those customers have to pay for. So essentially, Glen Canyon is simply not

available except in the kind of very constrained emergencies that

we have already, and will in the future, continue to respond to.

Mr. OSE. In terms of those other States into which Glen Canyon

might send power under the compact, are there alternatives for

California? In other words, I mean, it is the fungible nature of the

electricity I am trying to get to. Maybe this person is generating

capacity into California and the market changes, and then he is

going to—that person is going to go there and somebody else is

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going to fill the gap. Are there things we can do operationally to

maximize the fungibility of the power? In other words, send Glen

Canyon east and bring somebody else west?

Mr. MCDONALD. Sure, it is certainly fungible. It basically boils

down to the transmission constraint. If you use that water at Glen

Canyon to generate power for other than Western’s customers, then

Western has got to go into the marketplace. The volatility of the

marketplace, of course, has got them up against the same problem

that the private utilities in California are up against.

Mr. OSE. Well, that is at the heart of the question because Western delivers to any number of smaller retailers here in California,

whether they be municipalities or otherwise.

Mr. MCDONALD. That is correct.

Mr. OSE. The price of alternative or substitute power on the spot

market is absolutely hammering them in trying to replace that. So,

again, I am looking for suggestions as to what we can do at the

Federal level, even if it is Glen Canyon or Hoover or somewhere

else, to facilitate the delivery of power into California for those

gaps. You are saying very clearly you need transmission facilities?

Mr. MCDONALD. Transmission and interties are probably the two

keys.

Mr. OSE. OK. It does not matter whether they go north, into

northern California, or into Nevada or Utah. The market will just

level that all out in terms of providing extra power where it is

needed?

Mr. MCDONALD. If we continue to have that kind of market into

the future. Obviously, that is the subject of your hearings and what

California State agencies may do as they address all of these

issues. But headed in the direction it is, yes, it becomes a more

fungible product.

Mr. OSE. My time has expired. Mr. Horn.

Mr. HORN. Just one question that relates to Hoover Dam, Mr.

McDonald.

Mr. MCDONALD. Yes.

Mr. HORN. Has the argument—when they formed the percentages between Nevada, Arizona, and California, it was a very dry

period of years. Has the Bureau of Reclamation looked at that in

terms of what the percentage would—the percentage would remain

the same, but there would be a lot more based on how wet the history was when that was put into the treaty or compact between

these States.

Mr. MCDONALD. I think there are two different issues there, Congressman. The amount of water apportioned among the States is

based on the 1922 Colorado River Compact. With the virtue of

hindsight, they did look at a period of record that was probably one

of the wettest periods on record. The States have never chosen to

attempt to renegotiate that deal.

The power issue is different. That is not imbedded in the compact, it is an act of Congress that directed the marketing of power,

50 percent to California, 25 percent each to Arizona and Nevada.

That did not turn on the history of the water supply in the Colorado River.

Mr. HORN. What year was that power——

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Mr. MCDONALD. That is provided for by the authorizing legislation for Hoover Dam. So, the authorizing act of 1928.

Mr. HORN. Yes. Well, you have got Las Vegas that has 10,000

people coming in—depending on who you talk to—a week, a month.

And added up to a year or so, I think you will find there will be

a pressure for water out of Hoover Dam. I do not know what Reclamation is seeing in Nevada that might help that situation, because they are going to really be up against it. Arizona has not

really started to get its share of the water. It is available, but they

have not used it that much. So, what does Reclamation think looking ahead?

Mr. MCDONALD. To give a short answer to a very complicated situation, the issue of the use by California of its compact entitlement

and its apportionment under the Supreme Court decree of 1963 in

Arizona v. California has been the subject of much discussion in

the last several years, leading to a decision that the Secretary of

the Interior just made late last year, under his statutory authorities, relative to bringing California back down from its current use

of about 5.4 million acre feet a year, to its entitlement of 4.4 million acre feet a year. Associated with that was another Secretarial

decision, under Federal statute, as to how, when there are surplus

conditions in the Colorado River system, the Secretary will arrive

at a decision to declare that surplus. So, in fact, the longstanding

dispute among the seven States has been, I hope, knock on wood,

brought to a conclusion in just the last several months.

Mr. HORN. Well, we have our friends in Mexico that——

Mr. MCDONALD. Who are raising a number of new issues that

will take our attention for a number of years to come, I am sure.

Mr. HORN. Yes. Well, we have got two Presidents that like each

other for the first time in history, and I know the Mexican people

certainly would like to have a little better situation than we have,

and it is a lot better than it was in the 1950’s and 1960’s when we

were just sending salts and all the rest down to kill some of their

plants. And I think a lot of that has been slowed down and

stopped, has it not?

Mr. MCDONALD. The United States is complying with what we

call Minute 242, which deals with water quality. Minute 242 of the

International Boundary and Water Commission. We have complied

with that minute every year since it was agreed upon by the two

governments. So we are meeting the water quality standards for

salinity.

Mr. HORN. Mr. Chairman, I would like to have the Secretary’s

decisions that were referred to by the commissioner, and put them

at this point in the record.

Mr. OSE. Without objection.

Mr. MCDONALD. Be glad to.

Mr. HORN. I yield back.

Mr. OSE. Let me go back to transmission questions. Down in the

south part of the valley—and I do not know who might be able to

answer this—Path 15.

Mr. JOBSON. I can speak to that.

Mr. OSE. Apparently we have two-thirds of the capacity we need

for transmission at a certain point.

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Mr. JOBSON. There is a bottleneck on the north-south 500 KV

inter-tie in California called Path 15, and it is a spot where there

are two, rather than three, 500 KV lines. A third one is necessary

in order to relieve the bottleneck.

Mr. OSE. How do we get it?

Mr. JOBSON. Well, it needs to be designed, constructed, and built.

The Transmission Agency of Northern California had offered to go

forward, and if forwarded money from the State of California, as

I understand it, go forward and get the biological studies done this

spring as soon as possible, and take a leadership role in facilitating

the construction of that line, so long as there were interested parties with the funding to do it.

Historically, the TANC, the Transmission Agency of Northern

California, and the Western Area Power Administration have

played a lead role in building the last 500 KV upgrade on the

north-south inter-tie, and that is the COTP, California-Oregon

Transmission Project. I think the publics will stand willing and

ready to contribute whatever services we can to resolving that bottleneck, as it will help resolve a portion of the reliability problems

in the State.

I did also want to mention, with respect to public power, that a

topic came up in the last panel about supplying information and

municipals’ role and that type of thing. And if it pleases the chairman, I want to add a bit to the record on that.

Mr. OSE. Feel free.

Mr. JOBSON. SMUD and other municipals have made it clear

that we will voluntarily comply with any caps that apply to all

market participants. We largely are buyers. We are consumer representatives. We serve load. We will voluntarily comply with those

caps, and voluntarily provide any other information that other

market participants are required to provide. So we do not believe

the jurisdictional differences will be a constraint to our participation in resolving these problems.

Mr. OSE. Let me dwell on that for a moment. In terms of

SMUD’s efforts to acquire long-term source supply for that portion

that they do not generate themselves——

Mr. JOBSON. Right.

Mr. OSE. [continuing]. How long does it take you to finalize it?

SMUD is not subjected to PUC’s directive on long-term contracts?

Mr. JOBSON. Correct. We have a number of long-term contracts,

the largest of which is with the Central Valley Project. But we

have a number of other contracts, and are developing others as we

speak, to mitigate our long-term risk. We have continued to do

that, and are stepping up some of those efforts. So, how long does

it take? Say you are talking a 10-year contract, that can be brought

from beginning to end in a period of 6 months or less, if necessary.

Mr. OSE. Do they work pretty well?

Mr. JOBSON. Yes. We have had long-term contracts with suppliers in the Northwest which we have imported over our COTP line

for years, many years, with a variety of suppliers.

Mr. OSE. But it is an option that is available to SMUD, it is not

a mandate?

Mr. JOBSON. Definitely.

Mr. OSE. It is just an option?

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Mr. JOBSON. No. It is a tool that one uses to diversify ones risk.

Mr. OSE. Right.

Mr. JOBSON. And not keep all your eggs in one basket. So SMUD,

for instance, generates about half the power we serve to our customers. We buy the other half from a variety of long and shortterm contracts, primarily longer-term.

Mr. OSE. Different trenches?

Mr. JOBSON. Yes, exactly.

Mr. OSE. All right.

Mr. JOBSON. Risk diversification. That is what it is. But our regulatory scheme is different from the investor-owned utilities. We

are directly accountable to our customer owners through an elected

board. They approve these decisions. And so it is a little more, I

think, timely and easy to reflect the local community’s desires.

Mr. OSE. I doubt if your cash-flow requirements differ greatly

from the IOUs, though you have got to have cash to pay your bills.

Mr. JOBSON. Definitely.

Mr. OSE. And, you have got to hedge your risks to make sure you

minimize your exposure.

Mr. JOBSON. Right. We also approve our own rate increases rather than going to the PUC. So that helps somewhat with respect to

the cash-flow. But, you know, the other large difference is we operate without profit. We pass through whatever our power costs are.

It has allowed us to not raise our rates in 10 years, although you

will see that changing here in the next few months.

Mr. OSE. Your rates are higher or lower than the investor-owned

utilities at present?

Mr. JOBSON. Lower.

Mr. OSE. Yours are lower?

Mr. JOBSON. Correct.

Mr. OSE. By what percent?

Mr. JOBSON. It is not my field of expertise, but I would estimate

approximately 20 percent.

Mr. OSE. So, if I read the testimony correctly, the investor-owned

utilities you are given a profit margin of 11.6 percent, and you are

20 percent below them?

Mr. JOBSON. Approximately. It may even be more than that, especially with what is going on lately. This is a realtime—— Mr. OSE. Is there a connection between the optional tools that

are available to you as opposed to the investor-owned utilities, and

the ability of you to provide bargain-basement rates?

Mr. JOBSON. I think it is an advantage to have regulatory flexibility and direct accountability to your ratepayers, so that, for instance, we do not have to do what Los Angeles does. We do not

have to adhere to a set of requirements from a common regulator,

as Los Angeles—like, for instance, Edison and PG&E do to the

Public Utilities Commission. We are directly——

Mr. OSE. DWP does not, either, though.

Mr. JOBSON. No. That is what I am saying. L.A. is responsible

to its customer owners through its city council or whatever mechanism it has, and SMUD is responsible to our customer owners. The

same with Northern California Power Agency cities. We have more

flexibility, and are able to tailor our risk management, our rates,

our resource decisions directly to what we feel and our customer

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owners feel is appropriate. SMUD, for instance, has a high amount

of demand-side management, environmentally friendly resources,

renewables, because that reflects what our customers think is the

right thing to do. And they express that through a vote, and they

elect board members, and we immediately, within our own district,

make these decisions.

Mr. OSE. All right.

Mr. JOBSON. We think that is a better model, and we think our

rates over the last—as long as we have been in business, reflect

that.

Mr. OSE. You like having those tools available at your option to

use?

Mr. JOBSON. Definitely. And we like having the accountability to

our ratepayers directly for it.

Mr. OSE. So you tell your ratepayers the contracts you enter into,

so that they know and can vote accordingly?

Mr. JOBSON. All long-term contracts are approved by the board.

The board is elected by the people, and they are approved in open,

public meetings.

Mr. OSE. How long of a timeframe between the time you enter

into the contracts and the time you disclose the basis of the contract?

Mr. JOBSON. Once the contract is approved by the board it is a

public document. The time between which negotiations start and it

gets approved could vary anywhere from 1 to 6 months, or considerably longer, depending on how hard it is to negotiate a deal. But,

depending on the urgency, it can be done within a matter of

months, a few months.

Mr. OSE. Once you commit the ratepayer, you disclose it?

Mr. JOBSON. Before we commit the ratepayer, we disclose it to

the—the board’s decision is what commits the utility.

Mr. OSE. OK.

Mr. JOBSON. And the board’s decision is made in an open meeting. And once the decision is made, it is a public document.

Mr. OSE. All right. Mr. Horn.

Mr. HORN. It is all yours.

Mr. OSE. All right. You are finished?

Mr. HORN. Right.

Mr. OSE. All right. Mr. McDonald, do you have any sense of the

cost to complete path 15—or for that matter, Mr. Jobson—of the

cost of putting that third 500 KV line in there?

Mr. MCDONALD. I have no idea. Reclamation is not in the transmission line business anymore.

Mr. OSE. OK. Mr. Jobson.

Mr. JOBSON. I can tell you that the California-Oregon Transmission Project cost about $480 million. Now, that is a substantially larger, longer project. But I would think it would be on the

order of—you know, this is a guess—$200 million, something like

that. We can get back to you with facts on that. It has been costed.

Mr. OSE. I would be interested in what you would estimate the

cost of construction for removing this bottleneck would be? All

right?

Mr. JOBSON. We will refine that $200 million estimate with contact with your staff, if that is OK. But that would give you an order

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of magnitude of what we are talking about. So I do not know how

many days of power supply that is in California today, but it is not

very many.

Mr. OSE. Let us think in terms—at some point we have to have

this solved. How do we get there? That is what I am trying to get

to.

Mr. Stokely, on the Trinity River issue—and I am willing to be

corrected on this. I am asking because I do not know the answer.

Mr. STOKELY. Sure.

Mr. OSE. The record of decision selected an alternative that it is

my understanding was not the preferred alternative.

Mr. STOKELY. It did select the preferred alternative, which is the

Trinity River flow evaluation, plus additional watershed restoration

work. So the record of decision did select the preferred alternative.

Mr. OSE. What is the reason—I mean, again, I read Judge

Wanger’s preliminary injunction, and he was not too subtle about

his concerns there. I am trying to understand, were there things

beyond just release of water that Judge Wanger thought should

have been incorporated into the selected alternative?

Mr. STOKELY. No. Actually, I believe on page 54 of his memorandum he indicated that the two issue areas he was ruling on that

had a chance of success or had merit at a full trial are the issue

of the impacts of the two biological opinions on water and power

in California. That is, the National Marine Fishery Services’ biological opinion on the Sacramento chinook species, as well as the

steelhead in the Central Valley and the Trinity River coho. And in

addition to that, the U.S. Fish and Wildlife Services’ biological

opinion on various species under their jurisdiction.

Primarily, one of the main areas that he ruled on was that the

biological opinions came out concurrently with the final EIS/EIR,

so there was no analysis of the effects of those biological opinions

on the operations of the CVP. And then, in addition to that, he basically said that the issues related to the power crisis in California

necessitated preparation of a supplemental EIS.

Mr. OSE. Now, this is still before Judge Wanger, so there may

be additional rulings and the like to refine the ultimate disposition

of this matter?

Mr. STOKELY. Again, maybe Mr. Jobson can correct me, but it is

my understanding that memorandum he issued was sort of the

framework for the preliminary injunction, and then he ordered the

plaintiffs to prepare the actual primarily injunction itself. And as

far as I know, he has not signed that order yet, but it is pretty well

laid out.

The two issue areas that I am aware of that he ruled did not

have a high likelihood of success at a full trial, I think there is

three of them, and two of them that I can remember. One is the

issue of alternative development. He basically ruled, on page 54 in

a footnote, that was not likely to prevail in a full trial. And the

other issue was the concept of the healthy river, which was incorporated.

Mr. OSE. I did notice he told the plaintiffs, if I recall, the first

challenge he did not think would stand review, but the second—I

thought it was very interesting the way he juxtaposed it. Anyway,

Mr. Jobson.

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Mr. JOBSON. Mr. Stokely and I do not interpret that memorandum the same way with respect to the characterization of what

issues may prevail and which may not. I think the salient point

from the memo is that there were two things that had to be demonstrated in order for an injunction to be issued. One was irreparable harm if it is not issued, and the other one is a likelihood

of prevailing on the merits on any of the issues raised. He concluded that there was sufficient merit on some of the issues, and

did not rule on the merit of the other issues. That is our feeling

about the memo. Although it will be the order that will be the one

important ruling document that he issues, so it may not be an important distinction.

Mr. OSE. All right. I have one final thing, Mr. Horn, if your patience abides.

Mr. HORN. My patience is long-going.

Mr. OSE. All right. Well, you have been patient for 21⁄2 years. I

appreciate it.

Mr. HORN. You have been patient in my hearings, so go to it.

Mr. OSE. One of the things my staff and I are giving consideration to is legislation obviously. One of the pieces of legislation we

are giving specific consideration to is trying to find a way under

which—the circumstance in which a Governor declares an emergency to authorize either the Secretary of the Interior, in the case

of the Bureau, or the Secretary of the Army, in the case of the

Army Corps of Engineers, the discretion to waive restrictions on

operations of facilities.

Do any of you have any input as to how that might transpire?

Mr. Stokely.

Mr. STOKELY. In the Trinity River record of decision it does reference development of an emergency operations plan for the Trinity

River division of the CVP. And as I understand it, Reclamation

submitted a plan to the court as part of the evidentiary proceeding

in the—I do not really know the status of that particular plan.

Maybe Mr. McDonald could explain it more. But as I understand

it, the Trinity River Division has already operated under emergency criteria to provide power to California during some of the

stage 3 alerts. And, as I read it, it basically allowed them several

hours, if there was a request similar to what Mr. McDonald had

described with the Colorado River project, if there was a request

for power because they knew there was going to be a shortfall, that

the project would be allowed to release water to generate additional

power. I really do not know any more than that, but there is apparently some sort of an emergency operations plan. I maybe did not

answer your question completely, but——

Mr. OSE. Maybe my question more specifically is, using the

threshold of a declaration by the Governor to determine the circumstances under which the Secretary of either Interior or Army

would then be able to act. Is that an appropriate standard? That

is, for the Governor’s determination?

Mr. STOKELY. I am really not prepared to answer that question.

Mr. OSE. OK. Ms. Sheehan.

Ms. SHEEHAN. I am sorry, I do not know the answer.

Mr. OSE. OK. Mr. Jobson.

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Mr. JOBSON. The concept of mitigating lost power by having

emergency procedures is at best limited, and at worst delusionary.

Any water that is expended in an emergency reaction will then not

be available for future use. And so it is kind of mortgaging your

future with your present. So it should be viewed carefully. And I

will note a distinction. In Glen Canyon you will have a situation

where there is a lot of undispatched capacity which could be used.

In the CVP, because we have regulating reservoirs, there is not a

lot of undispatched capacity unless you start dipping into your future supplies. And if you did that every time there was an emergency in California, by the end of the year you would have no

water left for next year.

Mr. OSE. You are eating your seed corn, is what you are telling

me?

Mr. JOBSON. Exactly. So I think the important thing is to make

the right decision on Trinity, one that includes water conservation

wherever possible, so that we do not have to delude ourselves with

the fact that emergency procedures might work. It is just a mortgage, is all it is.

Mr. OSE. Mr. McDonald, do you share that cautionary note?

Mr. MCDONALD. You know, the usual duck for those in the executive branch, until the administration would take a position, I cannot really comment. I think Brian makes a fair point on the mechanics, though—— Mr. OSE. OK.

Mr. MCDONALD [continuing]. Just as a matter of fact. The other

thing I would observe is, where we have made decisions already

and have some set of criteria in place such as we have at Glen

Canyon Dam or we are working on, as Mr. Stokely pointed out for

Trinity, you need, as you craft language, to be precise about whether you are intending to overcome some such preexisting criteria

that have been decided upon.

Mr. OSE. Right.

Mr. MCDONALD. And if so, under what circumstances, if not,

under what circumstances.

Mr. OSE. Right.

Mr. MCDONALD. I otherwise think you might create substantial

confusion.

Mr. OSE. All right. I want to thank the four of you for joining

us today. We very much appreciate your participation, as we did

the previous panels. We are going to leave the record open for 10

days here. We are headed from here to San Jose. We will convene

tomorrow morning at 10 a.m. in San Jose. And with that, we are

going to adjourn.

[NOTE.—The report referred to entitled, ‘‘California’s Electricity

Options and Challenges, Report to Governor Gray Davis,’’ may be

found in subcommittee files.

[Whereupon, at 4:17 p.m., the subcommittee was adjourned.]

[Additional information submitted for the hearing record follows:]

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(231)

ASSESSING THE CALIFORNIA ENERGY CRISIS:

HOW DID WE GET TO THIS POINT, AND

WHERE DO WE GO FROM HERE?

WEDNESDAY, APRIL 11, 2001

HOUSE OF REPRESENTATIVES,

COMMITTEE ON GOVERNMENT REFORM,

San Jose, CA.

The committee met, pursuant to notice, at 9:44 a.m., in the Loma

Prieta Ballroom, San Jose State University, One Washington

Square, San Jose, CA, Hon. Dan Burton (chairman of the committee) presiding.

Present: Representatives Burton, Horn, Ose, Lofgren, Lee and

Honda.

Staff present: Kevin Binger, staff director; Caroline Katzen, professional staff member; Robert Briggs, chief clerk; and Elizabeth

Mundinger, minority professional staff member.

Mr. BURTON. Seeing a quorum the committee will come to order.

I ask unanimous consent that all Members’ and witnesses’ written opening statements be included in the record, and without objection so ordered.

I ask unanimous consent that all articles, exhibits and extraneous or tabular material referred to be included in the record, and

without objection so ordered.

I ask unanimous consent that Members of Congress who are not

members of the committee be allowed to participate in today’s

hearing, and without objection so ordered.

I ask unanimous consent that all questions submitted in writing

to the witnesses and their answers be included in the record.

I ask unanimous consent that questioning in this matter proceed

under clause 2(j)(2) of House rule 11 and committee rule 14 in

which the chairman and ranking minority member allocate time to

members of the committee as they deem appropriate for extended

questioning, not to exceed 60 minutes equally divided between the

majority and minority. Without objection so ordered. We will however try to stay to the 5-minute rule early on so that we can accommodate Mr. Hebert, but we will go around as many times as we

need to go around.

I want to welcome everyone to our second day of hearings on the

energy crisis here in California. I am going to keep my opening

statement fairly brief because our first witness, Mr. Hebert, is

under some time constraints and even more time constraints since

we are running a little late, and I want to have as much time as

possible for the Members to ask questions.

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I want to say a couple of things about yesterday’s hearing in Sacramento. We came out here because there is a problem. We want

to understand it, we want to be a part of the solution. We did not

come to point fingers; we came here to listen and to learn. We

wanted to see if there were ways the Federal Government and the

State government could work together to get past and through this

crisis.

We want to play a constructive role. This summer, Congress is

going to have a serious debate about our country’s energy policies.

If there are ways we can help, we want to do that. But first, we

need to understand the problems. We are trying to take a balanced

look at all sides of this equation. Today, we are going to hear from

the chairman of the Federal Energy Regulatory Commission, Mr.

Hebert. We are going to hear from the utilities. Tomorrow, we are

going to question the energy producers. I think we are going to

have a well-rounded debate.

What is becoming clear to me is that when you boil it all down,

the root problem here is supply and demand. One of our witnesses

yesterday was an independent energy analyst. He told us that over

the last 5 years, California’s economy has grown by about 32 percent, but at the same time, energy generation in the State actually

fell. So you had a tremendous increase in demand and supply was

not keeping pace.

A new power plant has not been completed in this State in the

last 12 years—I think that is accurate.

The head of the ISO told us yesterday that he expects to have

a 3,000 megawatt-hour shortage during peak periods this summer

and that is very serious. Everyone agrees that more generating capacity is needed, but that is going to take some time. The question

is, how do we manage the situation in the meantime.

Some people say price caps are the answer. We will not have any

demonstrations here today because we want to get through this. So

if people want to demonstrate, I suggest you do it out outside. If

we have to, we will have the police remove you. I am going to keep

order in this meeting. So if you want to hear what is going on, be

patient and listen because we are going to hear all sides.

Some people say price caps are the answer. They want the FERC

to impose price caps. My concern is that price caps for California

may cause power to be diverted to other States where sellers can

get better prices. Three out of our four energy experts who testified

yesterday said that if FERC reimposed price caps tomorrow, it

would lead to more blackouts this summer. In fact, the head of the

ISO, Mr. Winter, testified that he made an emergency request to

FERC last December to relax the price caps to avoid a collapse in

the system. So I do not think the price caps are a panacea. But we

are going to continue that discussion today with Mr. Hebert from

FERC.

We also had a long discussion yesterday about long-term contracts. The major utilities have said that they tried to enter into

long-term contracts last summer. They said that they could have

locked in a long-term rate of 5 cents a kilowatt hour. That would

have saved billions of dollars. But they said that red tape at the

Public Utilities Commission stopped it from happening.

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Ms. Lynch said that the Commission did not stand in their way,

but I got the impression that we were only getting one side of the

story. Today, we will ask California Edison and PG&E what happened from their perspective.

This is no small issue. The general counsel from FERC talked

about long-term contracts yesterday. He said that if San Diego Gas

and Electric had entered into a long-term contract a year ago, they

would have saved roughly $5 billion last year. So I think it is worth

taking some time to get to the bottom of this.

We are going to hear from two alternative energy producers.

Most of these facilities across the State had to shut down because

they were not being paid. This contributed directly to blackouts

this spring. If they do not begin receiving payments soon, this will

make the electricity shortage this summer even worse.

We also have a number of other issues to discuss. PG&E has declared bankruptcy. Cal Edison has agreed this week to sell their

transmission grid to the State to get out of debt. We want to discuss those issues and others.

At this point, I want to stop my opening statement so we can get

on with the questioning and I want to thank our witnesses for

being here, and I look forward to your testimony. And if other

Members have opening statements, I will yield to them. Ms.

Lofgren, do you have an opening statement?

[The prepared statement of Hon. Dan Burton follows:]

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STATEMENT OF HON. ZOE LOFGREN, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF CALIFORNIA

Ms. LOFGREN. First, Mr. Chairman, I have a statement I will

submit for the record, but I would like to thank the chairman for

allowing me to participate in this hearing even though I am not a

member of the committee and welcome you to the 16th Congressional District.

Mr. BURTON. You have a beautiful city.

Ms. Lee.

[The prepared statement of Hon. Zoe Lofgren follows:]

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STATEMENT OF HON. BARBARA LEE, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF CALIFORNIA

Ms. LEE. Thank you, Mr. Chairman, I too want to thank you for

allowing me to participate in today’s hearing and I want to thank

our witnesses for coming today to discuss this crucial issue. I would

like to submit my statement for the record.

This crisis is not a Democratic crisis, nor is it a Republican crisis;

it is a crisis that affects all consumers and it is going to require

bipartisan solutions.

And thank you again for conducting this hearing.

Mr. BURTON. We agree with that, and thank you for your statement.

Mr. Ose.

[The prepared statement of Hon. Barbara Lee follows:]

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Mr. OSE. I do want to explore this article in the LA Times this

morning about the alleged price gouging from the municipalities, so

I am hoping some people can provide feedback on that.

I will submit my statement for the record.

Mr. BURTON. Thank you.

Mr. Horn.

Mr. HORN. Thank you, Mr. Chairman. I will waive the right of

an opening statement so we can get down to questions and answers.

Mr. BURTON. Mr. Representative Honda.

STATEMENT OF HON. MICHAEL HONDA, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF CALIFORNIA

Mr. HONDA. Thank you, Mr. Chairman. I just want to welcome

you to San Jose and thank you for holding the committee hearing.

I will submit my questions and my statements in writing also,

but I just wanted to reiterate some of the positions that many of

our colleagues have taken, Mr. Chairman, that we are looking for

not only long-term solutions, but short-term; and I think one of my

concerns is a short-term solution that we have talked a lot about

and that is the temporary capping of prices and with a deadline,

sunset, on that.

Thank you, Mr. Chairman.

[The prepared statement of Hon. Michael Honda follows:]

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Mr. BURTON. Thank you, Congressman.

Mr. Hebert, would you please rise?

[Witness sworn.]

Mr. BURTON. Do you have an opening statement, sir?

Mr. HEBERT. Yes, I do, Mr. Chairman.

Mr. BURTON. Proceed.

STATEMENT OF CURT HEBERT, CHAIRMAN, FEDERAL ENERGY

REGULATORY COMMISSION

Mr. HEBERT. Thank you. And let me introduce, before I start, our

general counsel, to my left, to your right, sir, Kevin Madden, who

I believe testified before you yesterday.

Mr. BURTON. Welcome, Mr. Madden again.

Mr. MADDEN. Thank you, Mr. Chairman.

Mr. HEBERT. Thank you for the opportunity to appear here today

to discuss the topic of electricity markets in California and surrounding States.

Electricity markets in California and through much of the West

are in a State of turmoil and they will continue to experience very

serious problems throughout this coming summer. Wholesale prices

have increased substantially, consumers are being implored to conserve as much as possible, and utilities continue to face severe financial problems. Last Friday’s announcement of Pacific Gas &

Electric Co., that it has filed a reorganization under Chapter 11 of

the U.S. Bankruptcy Code represents only the latest and the most

obvious example of this turmoil.

The Federal Energy Regulatory Commission has aggressively

identified and implemented market-driven solutions to problems by

stabilizing wholesale energy markets; by identifying additional

short-term and long-term measures that will increase supply and

delivery infrastructure, as well as decrease demand; by promoting

the development of a west-wide regional transmission organization,

understanding that we have a natural market that works in the

West; and by monitoring market prices and market conditions.

Let me highlight just some of the recent actions we have taken

to address these problems. Early last month, the Commission took

action to mitigate prices in California’s electricity markets in January and February of this year. The Commission identified many

transactions during these 2 months that warranted further investigation. The Commission required the sellers to either refund certain amounts, or offset these amounts against amounts owed to

them, or provide additional justification for their prices. The total

amount of potential refunds for these 2 months is $124 million.

Also in March, the Commission issued an order seeking to increase energy supplies and reduce energy demand in California and

the West. The Commission implemented certain measures immediately, including encouraging sales of backup or onsite generation

and sales of demand reductions; extending and broadening waivers

for certain facilities under the Public Utility Regulatory Policies

Act of 1978, enabling those facilities to generate more electricity;

expediting certifications of natural gas pipelines into California and

the West; and for example, Mr. Chairman and members of the committee, we issued one just the other day, the Kern River Project.

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We got that filing out in 3 weeks, something absolutely unheard of

at the Federal Government and specifically at the FERC.

Urging all licensees as well to review the FERC-licensed hydroelectric projects in order to assess the potential for increasing generating capacity.

The Commission also proposed and sought comment on other

measures such as incentive rates for new transmission facilities

and natural gas pipe facilities completed by specific dates.

And finally, the Commission announced a 1-day conference with

State commissioners and other State representatives from Western

States to discuss price volatility in the West as well as other

FERC-related issues, related and identified by the Governors of the

Western States. That conference was held yesterday in Boise, ID.

On March 14, the Commission ordered two utilities to justify the

duration of outages at their California generating facilities. The

outages forced the California ISO to purchase more expensive

power from the utilities’ other generating facilities. Absent adequate justification, the utilities must make refunds, again, of over

$10 million.

On March 28, the Commission addressed a complaint by the

California Public Utilities Commission against a pipeline company

and its marketing affiliate. While the FERC found one part of the

complaint unsupported, the FERC ordered a hearing on whether

the pipeline and its affiliate had market power, and if so, used it

to drive up natural gas prices at the California border. The case

is now pending before an Administrative Law Judge.

These actions and many others I have not discussed, Mr. Chairman, demonstrate the Commission’s commitment to take all appropriate actions to remedy the current imbalances in the Western energy markets.

While some have accused the Commission of being indifferent or

hostile to the concerns of California consumers, our actions prove

otherwise. We have pursued the remedies we believe will be most

effective, not only in the short term, but also in the long term. No

one should doubt the Commission’s commitment to ensuring an

adequate supply of energy for all consumers, at reasonable prices.

By itself, the Commission can contribute only a small part of the

solution to today’s energy problems. A more comprehensive and

permanent solution requires the involvement of the States and

other Federal agencies and departments.

As long as we keep moving toward competitive and regional markets, I am confident that the present energy problems, while serious, can be resolved.

Mr. Chairman and members of the committee, I thank you for

your hard work and I thank you for helping us shed light on this

subject.

[The prepared statement of Mr. Hebert follows:]

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Mr. BURTON. Thank you, Chairman Hebert.

We will start with 5-minute rounds for questioning and we will

have both sides stick with that rule.

Yesterday, the committee heard testimony from the president of

ISO, Terry Winter. He said that on December 7, he made an emergency request to FERC to relax the hard cap because the ISO was

not receiving enough bids to avoid collapse of the grid at the hard

price cap. Is this why FERC issued the emergency order to relax

the hard price caps?

Mr. HEBERT. Yes, it is, Mr. Chairman, but just to add a little

piece to that.

I found it a little interesting—I understand there was some testimony given perhaps that it was something that happened almost

in the middle of the night. Well, quite frankly, I find it a little discomforting that we are being criticized for acting judiciously and

quickly. And the reason we had to do that was that the CEO, Mr.

Terry Winter, of the ISO made it clear to us that in fact through

that filing, if we did not move, the lights would go off.

Mr. BURTON. So what you are saying is if FERC had not responded to the ISO’s request, what was the probability that there

would be rolling blackouts starting in December was very real.

Mr. HEBERT. The probability was real and great, Mr. Chairman.

Mr. BURTON. So something had to be done.

Mr. HEBERT. Absolutely, sir.

Mr. BURTON. Is this why FERC followed up the December 7

order with the December 15 order to establish the soft price cap?

Mr. HEBERT. What we were trying to do through the December 15 order is set a point, the $150 soft cap, at which we would get

some reporting requirements that would show us, and give us the

opportunity to learn, whether or not in fact there might have been

market manipulation. It did give us that opportunity, it is why we

were able to act expeditiously and issue the refunds in January

and February.

Mr. BURTON. Yesterday, the head of ISO, Mr. Winter, estimated

that there would be a 3,000 megawatt shortfall this summer. What

would happen if, under these circumstances, FERC ordered a hard

price cap?

Mr. HEBERT. Mr. Chairman, I would love to give you a short answer. That is a very complex question and it is a very complex answer. I will do my best to make it short.

Mr. BURTON. Will it result, in your opinion, in more blackouts

and more problems?

Mr. HEBERT. I think it will, not to mention potential blackouts

in the West, specifically in Washington and in Oregon.

Mr. BURTON. So it is going to be a problem not restricted to California, it will be the whole Northwest area.

Mr. HEBERT. That is correct.

Mr. BURTON. And you think there would probably be more blackouts than otherwise?

Mr. HEBERT. I think that is correct, especially given the fact

that, as I believe has been discussed in earlier testimony, if you

look at the entire market, you are only talking about us capping

about half of that market, a good portion of that tied up in bilateral

contracts. So you are only talking about us capping the spot marVerDate 11-MAY-2000 10:55 Apr 01, 2002 Jkt 000000 PO 00000 Frm 00286 Fmt 6601 Sfmt 6601 C:\DOCS\76761.TXT HGOVREF1 PsN: HGOVREF1
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ket, which in the end is only going to be about 15 to 20 percent

of the market.

Mr. BURTON. You know what I wish you would do for the people

of California and everybody who is concerned about this problem,

is explain to them in your own words how supply and demand

works and what would happen if FERC imposed a hard price cap

here in California. I mean a lot of people are listening across this

State and they are hearing all this terminology that they really do

not understand. They know their prices are going up, they know

there are blackouts, but I am not sure they understand the problem with energy being diverted elsewhere and hard price caps

causing that energy to be diverted elsewhere, thus resulting in possibly more blackouts than they would otherwise have. So I think

it is important that you explain that from your own perspective.

Mr. HEBERT. I think you certainly made it clear in that the energy is going to go where the caps are not.

Mr. BURTON. Where the money is.

Mr. HEBERT. Correct.

Mr. BURTON. Energy is going to go where the money is.

Mr. HEBERT. But having said that, that would even be true if we

could cap the complete marketplace, which we cannot. As I told

you, we can only cap around 15 to 20 percent of the marketplace.

So what you do is you create two markets, so you understand that

you cannot move in a positive direction when you do that.

Now the one thing that I think is not being communicated to the

good people of California is the fact that when you say you are

going to have a hard cap, implicit within that remark—what that

person has said is there is a point at which we are not going to

pay for the electricity and we are going to turn your lights out.

There is a point at which we say enough is enough and your lights

are going out.

The problem with that, as I see it, and as we are learning

through this process, in California, the argument is that you cannot just have a California price cap, it has to be a Northwest price

cap. The reason for that is because the West is a natural market,

and that is absolutely correct, they are correct on that in California. The problem with it is that whereas California wants a cap,

I have got a letter here I will be glad to put into the record from

9 Governors of the 11 in the West, who say they do not want price

controls in their State.

Mr. BURTON. Without objection.

Mr. HEBERT. I had a conference yesterday in Boise, ID with the

11 State commissions as well as representatives of the Governor’s

office and this tally was not taken by me, it was taken by a staff

member, so it could be objective, and of the 11, only 3 favored price

caps.

I guess the real question is do we feel we are better suited in

Washington, DC, to make decisions for these local people. And I

think that is a real dilemma. Are we willing to say, quite frankly,

we are not going to let you decide when to turn the switch on or

off. We think we are smarter than you in Washington, DC, and we

are going to decide, there is a price at which we are going to turn

it off for you.

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I would submit to you I think that is improper, I think it sends

the wrong signal. Now that is not to say that the Commission is

not looking at price volatility. That is why we were out there yesterday, that is why I was in Denver the day before, it is why you

have me here today. We have made it clear through our refunds

in January, through our refunds in February, we are going to look

at refunds from October to December and we are also putting forth

a market mitigation plan as of May 1 on a going-forward basis. It

is just the hard cap sends us in the wrong direction.

Mr. BURTON. Thank you.

Mr. HEBERT. Thank you, sir.

Mr. BURTON. Ms. Lofgren, do you have some questions?

Ms. LOFGREN. Thank you, Mr. Chairman.

I believe that there is more agreement on some of these issues

than is generally understood. I think that everyone in California

who has paid attention to this understands that we do have a supply and demand problem and that is absolutely clear. We had phenomenal economic growth in this State that really no one predicted

and we had growth in our neighboring States that surprised us as

well. And so energy demand just skyrocketed. That is the upside

of a great economy, is the shortfall in energy. And for a variety of

reasons, supply did not meet demand and so we have a problem.

We have nine power plants under construction right now in the

State and there are going to be more that will be needed and I

think there is general agreement about that.

We also, I think mostly, do believe in supply and demand and

market forces here in California. This is sort of ground zero for the

entrepreneurial spirit in California, here in Silicon Valley. However, many here in California, including the Governor, the California delegation, both Republicans and Democrats agree on this as

you know from the last meeting we had with you in Washington,

that we do need to, as part of the picture, gain control of this outof-control market. We do not have a functioning market right now

and part of the answer—not the silver bullet, not the solution to

the problem, because that is supply and demand, is to gain control

of price gouging that is going on right now, so that we can move

forward.

And so I was interested in the—obviously I was not at the hearing yesterday in Sacramento, but Mr. Winter of the California

Independent System Operator indicated that the wholesale energy

prices since January—this is his testimony—have exceeded the cost

necessary for new investment by 400 percent. And that, in his

judgment, this would allow for the recovery of an investment in

new supply in the period of less than 2 years.

So clearly the price spikes would be an incentive to invest, but

that has not necessarily occurred. And my sense is that the market

is so wacky that it has chilled the possibility of investment because

the State might have to take dramatic, I mean very unusual, steps.

And so perhaps there might be a way to put the rhetoric to one

side where we could work out with FERC an ability to get control

of the price gouging for a temporary period so that we can get

through this.

What would your comment be on that kind of approach, Mr.

Hebert?

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Mr. HEBERT. Let me say two things. One, meeting with the California delegation that obviously you are a part of, I can assure your

district you are doing everything you can and I appreciate the attention you have paid to this, but I will tell you—I am obviously

trying not to be rhetorical, that is why I am telling you there is

a plant that we are looking, that we are moving forward with. We

are quasi-judicial, we cannot come out with that right now, it is

something that hopefully we are going to have in place before May

1. It is not a hard cap, it is something called a mitigation measure

and I think it will work. But when it comes to the wackiness of the

industry and the fact that you see these huge prices—now I am not

exactly sure of the numbers Mr. Winters talked about and I would

like to see those. But I will tell you this, it does not matter if it

is electricity, it does not matter if it is widgets—uncertainty in a

market is very unsettling to investors.

You keep changing the rules on them—you hear these discussions about cost-based rates. Well, some of these people are not

looking to invest in anything that is going to return them on a costbased rate scenario, that is going to be based on some 30-year average, not to mention it is hard for us to turn that around and do

it again. But I will tell you the market uncertainty has everything

to do that.

And it is great to hear about these generators that they finally

permitted, but it will be great when they turn one of them on. That

will be significant and that is what we have got to get done.

Ms. LOFGREN. We are looking forward to that, believe me.

Mr. HEBERT. I know you are. But the other thing, you have got

path 15—— Ms. LOFGREN. Yes.

Mr. HEBERT [continuing]. Huge transmission problem in the

State of California. How many studies must be done before someone invests another dollar in it and does something so you can

move electricity in the other direction.

Ms. LOFGREN. You are correct on that——

Mr. HEBERT. And I know that is not your fault, I am not blaming

you.

Ms. LOFGREN. No, but part of the issue is that we had tremendous profit-taking after the sale of generating assets, none of which

was reinvested into the infrastructure. I think maybe—well, it is

going to be up to the State of California, not up to the California

congressional delegation, or probably up to you, but some investment in that infrastructure clearly does need to be made and I

think everyone is aware of that.

I think my time is about over, but I am encouraged by your comment that we might be able to move off of the rhetoric and get into

a—whatever you want to call it—a stabilization effort having to do

with prices that will allow that aspect—not the whole solution, but

that aspect to be dealt with.

Thank you very much, Mr. Chairman.

Mr. HEBERT. My general counsel would like to make one followup

if that is all right, Mr. Chairman, or would you rather move on?

We can move on, we can submit later.

Mr. BURTON. Let me just say that we will have a second round

if you have more questions, Ms. Lofgren.

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You may proceed and make your comment.

Mr. MADDEN. Yes, I would like to make one comment.

When the generators were sold, they were sold at a premium, the

were sold at substantially above book. And as Mr. Winter testified

yesterday with respect to what he believed was not competitive

prices, I think by the time we finished the hearing, the numbers

had come down substantially, from a $6.7 billion figure to almost

a $1 billion figure. And we can get into that.

Mr. BURTON. Mr. Ose.

Mr. OSE. Thank you, Mr. Chairman.

Mr. Madden’s comment is timely. Yesterday we did hear about

discrepancies between the Cal ISO report and FERC’s analysis on

the issue of overcharges. One of the things I am concerned about

is at some point or another, this issue dealing with Southern California Edison’s proposed sale may very well come before FERC and

we will be asked to provide input for the record.

And what I am trying to get to is a clear understanding of the

number that took place. Can you elaborate on the flaws, as you see

them, in the Cal ISO report? And let me just briefly describe them,

as I understand the discrepancy. The Cal ISO report, I think the

actual number is $6.2 billion, it uses assumptions that we cannot

quantify specifically, it encompasses the entire market, both bilateral contracts—excuse me—bilateral contracts, non-jurisdictional

entities and jurisdictional entities. And I am having a hard time

figuring out what is the right number.

And the reason I ask that question is that Cal ISO’s own attorneys have provided a letter that we have a copy of that says the

only amount subject to FERC jurisdiction is $1.3 billion. So I mean,

you can understand my confusion here. I asked this question yesterday. Can you elaborate on this?

Mr. HEBERT. Well, Congressman Ose, I think Congresswoman

Lofgren made a good point about the rhetoric. So much of this, especially when you talk about numbers, it is what can we throw out

there to make the press feel good about what we are doing. $6.7

billion sounds a little bit better than $1.3 billion, does it not? And

I think that is what much of that is about, but to walk you through

it quickly—and I jotted these numbers down—we sent out a memo,

I think it was sometime last week, through the general counsel’s

office, requesting the information from the ISO to break those

numbers down. I have not seen that yet, but I will tell you $4 billion of that goes through the PX and the ISO market, $2.7 of that

is bilateral contracts that you spoke of, not subject to us, and $3.1

of that is FERC jurisdictional, but $1.8 of the $3.1 is beyond our

authority.

Mr. OSE. All right, you have lost me here.

Mr. HEBERT. Sorry.

Mr. OSE. You have got $4 billion that goes through the ISO and

the PX, and of that $4 billion, $2.6 billion is non-jurisdictional?

Mr. HEBERT. $2.7.

Mr. OSE. $2.7, all right. So we separate the market out that way.

Mr. HEBERT. That is part of what comes under FERC.

Mr. OSE. All right, go on then, to on with your numbers.

Mr. HEBERT. My general counsel has seen the numbers, so if he

has got something to add, I am going to let him here.

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Mr. MADDEN. Mr. Winters, finally yesterday, increased the $6.2 million to $6.7 because he included an additional $400 million for

ancillary services. So let me start with that. Of the $6.7 the, he took out approximately $2.7 billion because

they were bilateral contracts. Some of those are subject to our jurisdiction, depending on who entered into those bilateral contracts,

but the whole issue is people going forward. And these were contracts that in many cases even the CPUC approved. So if you take

that out, you then come up with a number of $3.1 for FERC jurisdictional from the October to February period. Then $1.8 billion of

the $3.1 billion is before October 2 and we do not have refund authority for that. Correct? So then we have a remaining portion of

$1.3 approximately. Now that represents the 5-months, October

through February. We have refund for just 2 months, January and

February, which was $124 million.

So we’re about $1 billion off, a little bit more than $1 billion in

terms of our numbers right now. Then you have got to look at the

ISO has looked at all the hours that the generator ran during that

period versus our belief that you look at a different period, a period

where there supply and demand does not cross, which is substantially much less. And then we do not know what gas numbers or

Nox numbers they used. So until they supply that information, will

we be able to clearly define what really is the differentiation between their number and ours.

But I want to point out this $6.2 or $6.7 is clearly now, the pub- lic should know, is totally out of whack and it is more in the $1

billion range and most likely it will come down substantially more.

Mr. OSE. Thank you, Mr. Chairman.

Mr. BURTON. Mr. Honda, I understand you have to be someplace

at 11, so we will recognize you now.

Mr. HONDA. Mr. Chairman and Mr. Hebert, thank you for coming.

We have all heard comments about the discussion about caps.

We discussed it a little earlier about hard caps and soft caps. And

I am not so sure even folks in the community understand the difference anyway. The bottom line is that the rates have gone out of

sight and FERC has the responsibility and it is public that FERC

had said upon your examination of the situation that the rates are

unjust and unreasonable, I think that is a fair quote.

Commissioner Massie had submitted a written testimony as far

as his solution, his perspective of the situation, that there is no

marketplace and therefore there is no competition, and I tend to

agree with him. There are two things happening right now and

they are parallel. One is groups are looking and seeking for a longterm solution which we need to do, and then we are looking at a

short-term solution, which I am looking to FERC to help us with.

We have some bills that have been submitted asking for relief, temporary relief, that we cap the costs, considering cost of production

of energy plus a profit and that this bill has a sunset date of 2003.

And that would mean that it is temporary.

Now your discussions in the past have always been you want the

marketplace to determine the prices and in your discussion just

earlier, you talked about hard caps. My question to you is when

you talk about hard caps and the comments you are making right

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now, it sounds like theoretically you are talking about a long-term

continuous situation rather than looking at the immediate solution.

I am concerned for the constituents of this State, the immediate

short-term relief until we get a long-term solution. And I would

like your response there.

Mr. HEBERT. Congressman Honda, I think that is an excellent

question, and what I would like to do is explain to you some of the

misconceptions in regard to what the Commission has done in regard to actually what my comments have been.

You quoted the fact that there have been market power issues

and a manipulation of the market, or unjust and unreasonable

rates. And I think the quote that may have been shared with you

is that we found that. Yes, that is true, but it is a little bit—since

we are here at a university—like quoting first kill all the lawyers

without saying what is in front of that quote. It does not give you

the full explanation of what the author was talking about.

What we said in our order was that we found rates to be unjust

and unreasonable at certain times and under certain conditions.

That is not to say that they all were. We have moved forward on

that. What is so interesting about the price cap debate—and I really think this is just someone’s artful way, I have to give them a

lot of credit—of keeping the debate away from what it should be

and about supply and about demand and getting things done, because most people, when they talk about these price caps, they look

at New York and they look at New England, they look at PJM,

which has $1,000 price caps. Well in January and in February, in

January, we set subject to refund everything over $273—much less

than $1,000. In February, we put everything subject to refund over

$430—much less than $1,000. But I want to assure you, sir, this

Commission is working to come forward with something on a going

forward basis of May 1, on price mitigation. We are looking at that,

it is not that we are not paying attention, we certainly are and we

are prepared to move forward.

But when it comes to cost, let me close this gap for you, because

this is important. So many people want to talk about moving away

and going back to cost. One of the reasons we moved away from

cost is what Congresswoman Lofgren brought up and that is investment, to get the opportunity, to get the choice. Another real

reason is quite frankly because we get so bogged down. I have got

rate cases at the Commission right now—I was left with a backlog

of 2,000 cases that we are trying to deal with, some that go back

to 1993. California needs help now, the West needs help now. Costbased scenarios do not get you help now. I do not think you can

wait 8 years for a remedy.

Mr. HONDA. Thank you, Mr. Chairman, if I may continue on my

time.

The next question then is when FERC decided to put a cap, a

temporary cap a couple of months ago, you indicated that you

would do it at $150. But it was at stage three and I think that consumers want to have a cap on all the stages and not only a stage

three, because if you want to cap at a stage three, whether it is

soft or hard, it still increases the rates for our consumers. We need

to have ways to be able to anticipate the cost of our energy when

we consume it. And as consumers, we do not know what that price

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is going to be and that is unfair in the marketplace and the marketplace is dysfunctional, and that is a quote, it is dysfunctional at

this time and that is why we have to work on a long-term solution,

so that the market is functional and that there is competition and

that will be able to drive the prices down. But apparently it is dysfunctional and when you start to talk about price caps, it is my

contention that it should not only be on stage three, but it should

be all stages, so that you really truly have a lower rate.

Mr. HEBERT. Do you want me to respond to that, sir?

Mr. HONDA. Well, you said something about in the near future

you are going to come up with some sort of interim solution. Hopefully the interim solution does not relegate itself to stage three, but

an across-the-board, firm kind of pricing that the consumers can

anticipate in the future.

Mr. HEBERT. We issued an order on price mitigation and actually

the comment period closed about 2 weeks ago. We are looking at

that now and going to move forward.

Mr. HONDA. Thank you, Mr. Chairman.

Mr. HEBERT. Thank you.

Mr. BURTON. Thank you, Mr. Honda.

[Inaudible comment from the audience.]

Mr. BURTON. We are here to hear from the panelists who we

have asked to testify and we had not made provision for public

input; however, if any of you would like to submit to us in writing

information or concerns that you have, we would be very happy to

have those.

VOICE. I did, to our Congressman.

Mr. BURTON. Well, I will be very happy to take that and that will

become part of the record. So any of you that have comments or

things that you would like, be sure to get those to us, and make

no mistake about it, we are going to review everything that we

have. But the problem is, because of time constraints, we simply

cannot have everybody testify.

VOICE. Just because our questions are entered into the record

does not mean we are getting answers. We are concerned that

FERC approved billions of dollars going to PG&E, to the parent

company, now they have declared bankruptcy, are they going to rescind that so PG&E can pay their bills?

Mr. BURTON. Ma’am, I think your question has been heard and

we will see if we cannot have a response to that in just a minute.

But if you have other questions, get those to us and we will see

if we cannot find some format that we can get them back to you,

but we do not have time to have questions from everybody in the

audience right now.

Let me see—Mr. Horn.

Mr. HORN. I yield 30 seconds.

[Inaudible comment from the audience.]

Mr. BURTON. Ma’am——

[Inaudible comment from the audience.]

Mr. HONDA. Mr. Chair, I believe my colleague Mr. Horn had conceded 30 seconds to me.

Mr. BURTON. 30 seconds.

Mr. HONDA. Let me just share with the community that I will

be submitting this in writing on your behalf and any other quesVerDate 11-MAY-2000 10:55 Apr 01, 2002 Jkt 000000 PO 00000 Frm 00293 Fmt 6601 Sfmt 6601 C:\DOCS\76761.TXT HGOVREF1 PsN: HGOVREF1
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tions that the community may have. And I think that the frustration of the community is reflected in the outspokenness of some of

the folks that had to leave. I share their frustration, I think more

than they share this frustration, Mr. Chair, so on their behalf, I

will be submitting these questions and I have their names and addresses and you will receive a response from the FERC. Thank you,

Mr. Chair; thank you, Mr. Horn.

Mr. HORN. Mr. Chairman, I would like to have you clarify for the

record, we are talking about hard caps, soft caps, I begin to think

I am talking with the three bears. So just what, in your judgment,

as chairman of that very important commission, do you feel and

what did the Governors you met with feel—I think it was 3 out of

11 that had a cap interest—could you sort of define for me, will a

soft cap always become a hard cap or what?

Mr. HEBERT. A soft cap does not always become a hard cap. Once it is in place, it is a soft cap, as the $150 was, with a reporting

requirement. What it did was bids that arose above the $150 mark

would not set the clearing price, it would come back down to $150,

therefore, not setting a high market clearing price. Whereas a hard

cap is a hard cap at which no purchases can be made beyond that.

Mr. HORN. And does the Commission have any view to maybe do

one or the other on this? Or what will it take to not do it or to do

it?

Mr. HEBERT. Congressman Horn, my thoughts have been, as the

Commission has been clear in looking at market mitigation, that

is the direction we need to move in. That is the direction we are

moving in, that is why we had the comment period and that is why

we are trying to come out with something before the May 1 period.

We felt so strongly about that we placed in one of our orders, Order

2000, where we are trying to set up regional transmission organizations, which every State in the United States of America has filed

with us, save one—California. They are the only one that has not

filed.

We put in that plan, in Order 2000, that in fact the RTOs would

have additional market monitoring obligations, so that would shore

us up as well. We are moving in that direction, I think the market

mitigation is the answer, it will send the proper signals to the investment community, it will make sure and keep prices, I believe,

at a level that would mimic a competitive market when things get

extremely tight like we were talking about in a stage three, when

reserves are at 1.5 percent, when in fact your curves are about to

do this, when supply and demand do not cross and in fact the

lights go out.

Mr. HORN. When California did not reply and the other 49 States

did, was there any action by the Commission to request the Governor or the Commission, the Public Utilities Commission here, to

respond on that? Or what do you think, why aren’t they responding?

Mr. HEBERT. I would certainly be living within the realm of speculation to assert why I think they are not acting, but I will tell you

we have communicated. I as recently as yesterday, not only phoned

the Speaker of the House, the Pro Tem as well, as well as one of

the new Commissioners at California, and they said that they could

use someone to communicate more with them. And I had a genVerDate 11-MAY-2000 10:55 Apr 01, 2002 Jkt 000000 PO 00000 Frm 00294 Fmt 6601 Sfmt 6601 C:\DOCS\76761.TXT HGOVREF1 PsN: HGOVREF1
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tleman behind me by the name of Shelton Cannon, who works

closely with me, I gave them the name and number and I said let

us get this together and let us move forward.

Mr. HORN. Let me move from this to natural gas. There has been

interest in the capacity of natural gas to providing a certain

amount of megawatts and I wonder if the Commission has some

analysis where the natural gas would be a certain portion of providing electricity, and I wonder what is the view as to how much

an importance natural gas is, and are the States who can also regulate pipelines doing what they should be doing, has there been

sort of a view of some that we will just keep moving other things

through those pipelines and it will not be natural gas? So what is

the Commission going to be able to tell us on that?

Mr. HEBERT. Well, what we have done, as I had said earlier, we

are expediting any and all applications that come before us for the

West and for California. Kern River is a great example of that, acting on that in 3 weeks. I would also have to commend some other

Federal agencies that helped us get that done.

At the same time, the natural gas price, which under most scenarios of combined cycle, is about 70 percent of the price of the

megawatt hour. That being said, the price of natural gas has everything to do with what the price of a megawatt is going to be. Having said that, you must understand, and I think you do, that in the

end it does not matter if I get the West 100 pipelines, if I get California 100 interstate pipes. They have got some takeaway problems. In other words, I have got a big pipe that brings it to them,

and their takeaway capacity is much less; therefore, they cannot

move it and it inflates their prices. Not to mention they did the

same thing in the natural gas markets that they did in electricity,

they played the spot market. They did not have a balanced portfolio.

Mr. HORN. Thank you, Mr. Chairman.

Mr. BURTON. Ms. Lee.

Ms. LEE. Thank you, Mr. Chairman.

I think you are quickly dispelling the notion that many have had

that California’s energy problems really are our only concern here

in California. Modern energy systems, by their nature and design,

cross State borders. Oregon, Washington and Arizona are already

directly caught up now in this so-called California problem and

problems now have emerged in New England and New York and

elsewhere in the country. So it is clear that energy cannot be treated as just another free market commodity.

Now you mentioned earlier your concerns with regard to Washington, DC, and FERC in terms of putting on caps because it is a

regional problem, but the region actually, as I understand it, does

not have the jurisdiction over wholesale rates.

Let me just ask you, Mr. Hebert, am I correct or not; is FERC

the only entity with that type of power and authorization in terms

of the wholesale rate price capping?

Mr. HEBERT. We do have the wholesale rate authority, but as I

suggested to you, with Public Power, BPA, which—municipalities,

which take up about half of the power in the West, we do not have

authority over. But yes, you are right.

288

Ms. LEE. So it is FERC that we need to look to. Otherwise, what

entity?

Mr. HEBERT. Well, you could certainly look to BPA, you could

certainly look to municipalities, you could certainly look to other

Public Power entities where we do not have jurisdiction.

My general counsel wanted to add something.

Mr. MADDEN. When we discussed yesterday the $6.7 billion, ap- proximately $1 billion of that was associated with co-ops and

munis—LA, DWR and SMUD. Yes, the cities can do something

about that, the munis can do something about that. They, if they

want, can lower the price to provide better prices to the consumer.

We do not have jurisdiction over them, but they can do it.

Ms. LEE. In terms of wholesale rates?

Mr. MADDEN. In terms of the energy that they sell at the wholesale level, yes.

Ms. LEE. Let me ask you about the finding, going back to Congressman Honda’s question with regard to the fact that you did

find—and as you said, at sometimes under some conditions, under

certain conditions, that generators have exceeded just and reasonable wholesale prices—since that finding was made, let me just ask

you, under—since it was only under certain conditions, have you,

under certain conditions, assessed penalties against the generators

that have been found to exceed the just and reasonable wholesale

prices? Or what is going on at this point with regard to the generators?

Mr. HEBERT. We have got some matters subject to rehearing, so

I want to be careful, but yes, we have. That is in fact—we acted

in January, we acted in February, we are getting ready to act on

the time period between October and December where, if you will

remember right, we did not have the reporting requirements that

we had on everything above $150, so it has taken us a little more

time to get the information together. But we will get that information together and we will act.

But there is some misunderstanding that if FERC has not acted

in the capacity of a cap or something else, that we are not doing

anything. I can assure you that this Commission is looking for and

is ready to make certain that there is not market manipulation;

and if so, we will provide relief.

Ms. LEE. But again, have you assessed penalties or not? Or are

you still trying to determine what the level or amount of penalties

should be, as a result of your finding?

Mr. HEBERT. Penalties in the sense of a refund.

Ms. LEE. But not against the generators?

Mr. HEBERT. The refunds will be made by them, yes.

Ms. LEE. OK, when will we know what that amount is, how

much that is and what that will add in terms of refunding?

Mr. HEBERT. Right now, as I told you, under the January and

February, we were at $124 million, I think in my testimony, I told

you about another additional $10 million. So the numbers are adding up. And we will act on March, we will also be acting on October

through December.

Ms. LEE. OK, finally let me just ask, in terms of regulatory practices, given again your findings, how, in terms of your regulatory

efforts, are you going to ensure just and reasonable prices? Are you

289

taking steps now to correct that in addition to the assessment of

penalties?

Mr. HEBERT. Well, again, the penalties come in the form of refunds and yes, that is exactly what those orders are about. I mean

we—as I have told Congressman Honda and——

Ms. LEE. But are there any regulatory reforms in place now?

Mr. HEBERT. Well, the reforms that hopefully we will have in

place by May 1 will be the market mitigation that I have spoken

about. Again, the RTOs, when we get them up and running, hopefully that will be soon, we certainly need a filing from the State of

California, would have additional market mitigation through market monitoring as well.

Ms. LEE. I think, Mr. Chairman, what is very important is that

the short-term solution happen immediately, as soon as possible,

and that consumers do see a refund coming right away, because it

is going to be a very hard, hot summer this year, I think. And

while we work on hopefully a national energy policy, which is what

we need, short-term, I think consumers are going to need a refund,

especially low-income individuals, people on fixed income, senior

citizens. They need those refunds in their pocket right away so

they can just manage to get through the next 3 or 4 months.

Mr. HEBERT. I would agree with you and I will tell you that

President Bush has been very clear as to his commitment, I know

the committee has as well. We are doing everything we can on our

part to make sure that those people are protected as well.

Ms. LEE. It is my understand though that LIHEP was frozen in

the budget, I do not think we see an increase in LIHEP funding.

Mr. HEBERT. I cannot tell you what they are doing with an increase or not an increase, but I can tell you the commitment from

the last is brought forward.

Ms. LEE. Thank you, Mr. Chairman.

Mr. OSE. As it relates to the LIHEP line item in the budget, I

would be happy to work with you to ensure that California’s low

income and senior citizens are eligible to file under that.

Ms. LEE. Thank you very much. I look forward to working with

you on that because as I understand the budget, it is frozen at the

previous levels and we do need to work to ensure that there is an

increase for California consumers. Thank you.

Mr. BURTON. We will start a second round. As I understand it,

we probably have another 45 minutes of your time. Does that

sound about right to you?

Mr. HEBERT. I think I have got about another 20 or 25, Mr.

Chairman, but if you need me, I can——

Mr. BURTON. I think if we stick to the 5-minute rounds, we can

get through, if there are five of us, we can get done in about 25

minutes.

Mr. HEBERT. Thank you, sir.

Mr. BURTON. As I understand it, the California ISO now says

there were $6.7 billion in overcharges and we have not seen exactly

what they are basing that on, but that is their opinion. Of that, you

are saying that there is only $1.3 billion more or less than you can

do anything about.

290

There are lots of electricity sales that are outside of your jurisdiction. Can you give us some examples of that as well as that difference we are talking about?

Mr. HEBERT. Well, the sales absolutely that we are looking at as

far as entities outside of our jurisdiction is what the general counsel had mentioned earlier, we have got munis, we have got co-ops,

we have got BPA, Canada as well which comes into the market and

actually you have had BPA try to say they can do what they can,

but as well as you know, they are looking at rate increases themselves right now. The Secretary of Energy has been very specific

that they are going to have to meet their revenue obligations.

Mr. BURTON. What percentage of the power here in California, do

you have jurisdiction over?

Mr. HEBERT. What percentage? Roughly half. But if you are talking about capping the market, there would be no way to cap those

bilaterals, so if you are talking about existing bilateral contracts,

you take the spot market out of that, you are only talking about

us capping maybe 20–25 percent at most.

Mr. BURTON. OK, so there is only 20 to 25 percent that you could

cap. Let us say that there is a tremendous energy shortage and we

anticipate that across the State, and you cap 25 percent. What is

going to happen then? They are going to send it to the other 75

percent where they can get a higher rate, right?

Mr. HEBERT. That is correct.

Mr. BURTON. OK, I hope everybody understands that. If you can

only cap 25 percent of the State market and there is a tremendous

need, and the other parts of the State, the other 75 percent, is willing to pay more than the cap that you put on the 25 percent, then

you can bet your bottom dollar, the people who are selling the energy that is necessary to produce more energy are going to go to

the 75 percent that is not under the cap, correct?

Mr. HEBERT. Correct, not to mention out of State.

Mr. BURTON. That is important. I think everybody needs to know

that, because they are going to go where the money is.

Now as I understand it, you cannot review sales before October

1 of last year. Can you give us a layman’s explanation as to why

that is that you cannot?

Mr. HEBERT. Well, when the utility filings come in, in dealing

with—I am going to put it in layman’s terms—what we are dealing

with right now, there is a 60-day period, we are prohibited from

going beyond that 60-day period. That is at the point at which it

was filed. Was it October 2 exactly? I think it was the second.

Mr. MADDEN. San Diego Gas & Electric filed a complaint August

2, so we, in our order October 2, established the earliest possible

date under the act, 60 days after a complaint was filed.

Mr. BURTON. So you are limited to 60 days.

Mr. MADDEN. That is the earliest period.

Mr. BURTON. Now I understand that you have ordered refunds

for January and February. Are you currently investigating transactions for other months?

Mr. HEBERT. Yes, sir, March, and then the period from October

through December, and then again, we are looking at the market

mitigation, May 1 going forward.

291

Mr. BURTON. And when do you expect to issue orders for those

months that you are currently looking at?

Mr. HEBERT. Whereas I am prohibited from giving you exact

dates, Mr. Chairman, I will tell you I have instructed my staff to

move with all deliberate speed and get them out quickly.

Mr. BURTON. One final question and then I will yield to my colleagues. Yesterday, we ran into some stonewalls from the State as

well as your agency on some information that the committee requires. We understand that that has to be kept confidential, but it

will be helpful in our deliberations and we will have your cooperation to get that?

Mr. HEBERT. You will have my cooperation, Mr. Chairman. Anything that you request, I will be glad to give you under cover. I

think it is important you see many things.

Mr. BURTON. OK, thank you very much.

Ms. Lofgren—1 more second. One question further. How aggressively do you intend to move to get those refunds from January and

February? You said as quickly as possible.

Mr. HEBERT. We are in that process right now.

Mr. BURTON. OK, has your ruling been challenged?

Mr. HEBERT. It is on rehearing at this point. So yes.

Mr. BURTON. So what is the next step?

Mr. HEBERT. Well, the rehearing, hopefully we are going to deal

with that as quickly as possible. They obviously will have their

right to appeal. Like any other court of appropriate jurisdiction,

there are appeal rights that go beyond that—— Mr. BURTON. But you are going to move as quickly as you possibly can.

Mr. HEBERT. We are going to do everything we can to get it out

from under us, yes.

Mr. BURTON. Ms. Lofgren.

Ms. LOFGREN. Thank you, Mr. Chairman.

Just thinking about this, there are some, I think, simple things

that the people of California want done, and that is for our agency,

since I think you are the only ones who can do it, to aggressively

recoup the unjust and unreasonable prices that have been assessed

against California consumers. And along those lines, I am interested—and I understand the current act precludes you from looking past October, but clearly there was very—in my judgment, very

questionable activity that occurred prior to October. Just before recess, members of the Washington, Oregon and California delegations came together and introduced a bill that would change the act

and allow you to go past the October date that is currently in law.

Would you support that bill or what would your reaction be to

that?

Mr. HEBERT. Congresswoman Lofgren, I have not read the legislation; therefore, I would not want to say if I support it or not.

Ms. LOFGREN. That is fair enough. Could I ask you to read it and

consider supporting that?

Mr. HEBERT. I will commit to that and if you would like a response on that, I will be glad to give that to you.

Ms. LOFGREN. I would very much appreciate that.

Second, I think, Congresswoman, we touched on this as well, but

ISO has indicated to—Cal ISO has indicated in their testimony

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that market manipulation is going on, not just during stage three

emergencies but also during stage one and two, and they are suggesting that FERC needs to look at those, not just stage three, but

also one and two for market manipulation and price gouging. Are

you prepared to do that? Can you do that under the act?

Mr. HEBERT. Congresswoman Lofgren, this has been one of the

huge misunderstandings. In the dead of the night when we are all

asleep and rates are lower, we are looking for market mitigation

which also includes one, two and three. We are always looking for

market mitigation.

Ms. LOFGREN. So your answer is you will accept and you would

order rebates if you found unjust even in those stages. That is just

a confusion?

Mr. HEBERT. Absolutely. We are continually looking for market

manipulation and misconduct.

Ms. LOFGREN. That is great to hear.

Finally, you know, I saw today that President Bush had figured

out the right words to use so that the Chinese Army could be

happy about an apology. So it seems to me we could figure out the

right words to use that will allow FERC to control, proactively and

prospectively, price gouging. And I guess the question is, is the

term ‘‘market mitigation’’ the right word for your proactively controlling prospective price gouging, which California needs you to

do?

Mr. HEBERT. That is correct. What our intent is, and again, we

have not ruled on this yet, we sent out for comments—it closed out

2 weeks ago, but our intent is to find a process by which we can

mitigate market conduct based on what a market would be doing

if it were functional, even during a dysfunctional period, taking certain factors into consideration. So, yes.

Ms. LOFGREN. All right, finally, you know, we read in the paper

and we do not know obviously all the details, but it appears that

some of the energy companies have just made extraordinary—I

mean extraordinary—profits at the expense of California consumers. Duke operating revenue more than doubled from 1999 to 2000.

Reliant had a 1,685 percent increase in operating income. So I am

hopeful that we can see some of this revenue, as the complaints are

made, flowing back to the State so that we can have the financial

ability to make the investments that are required. At the end of

my last questioning period, I was commenting about the sale of the

generating assets and, you know, without saying whether the price

was right or wrong, I mean, there was a tremendous amount of

money that came into PG&E and they did not invest that money

in path 15 or anything else, it just went back to the parent corporation. So we need to be able to recoup some of the gouging, get the

money back, take care of the suffering consumers in California, but

also make some of the investments that are going to keep us

healthy in the future, including path 15. I am hopeful that we will

be able to get the prospective control of prices that will avoid the

necessary delay of the regulatory and review process for the refunds.

Mr. HEBERT. Let me say a couple of things about that. One, the

PG&E is on rehearing, so I would have to be very careful about

making comments. But I will tell you it is my understanding that

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several of those companies have made commitments to reinvest

capital, do not know to what extent, cannot quote to you which

companies they are. I know you are going to have them later to

talk to you.

Many of those decisions when it comes to reinvesting capital and

what you do with that investment dollar is made with CPUC.

Ms. LOFGREN. I understand that as well as with Public Power,

but you understand the California consumers feel a bit ripped off

right now.

Mr. HEBERT. Well, and the CPUC could change some of that, yes.

Ms. LOFGREN. Thank you, Mr. Chairman.

Mr. HEBERT. Thank you.

Mr. BURTON. Mr. Ose.

Mr. OSE. Thank you, Mr. Chairman.

I want to followup on something that Congresswoman Lofgren

said. If it is your point that when a filing is made with FERC to

remove that 60-day delay by legislation, that makes eminently good

sense to me, that the analysis ought to start from the date of the

filing rather than 60 days hence, and I appreciate you bring that

forward and I would like to visit with you about that later.

Mr. Hebert, on FERC’s jurisdiction over bilateral contracts, does

FERC have the authority to reverse bilateral contracts?

Mr. HEBERT. Yes.

Mr. OSE. Is it statutory or regulatory rulings that give you that

authority?

Mr. HEBERT. Well, through the Federal Power Act, we have the

authority, but I will tell you it is only subject to wholesale, which

gets us back to where we were talking about before, as to the percentage of the marketplace.

Mr. OSE. The 47/53 break?

Mr. HEBERT. Correct.

Mr. OSE. Mr. Chairman, I am not sure we did this yesterday, but

I do want to enter into the record, this letter from Cal ISO’s counsel that says the only amount of overcharges that is the subject of

FERC’s jurisdiction is $1.3 billion.

Mr. BURTON. Without objection, so ordered.

Mr. OSE. And then finally, I want to again come back to this article in the LA Times this morning about—I do not know if you have

read this, but there is an article here by Robert Lopez and Rich

Connell and I see it is not copyrighted, so we may well be able to

put it in the record, about the context of these municipalities—in

the context of municipalities selling power to the ISO during times

of market emergency. This article suggests that in particular the

Department of Water and Power has engaged in some of that activity. It is my understanding that they are outside your jurisdiction?

Mr. HEBERT. That is correct.

Mr. OSE. This speaks right to the heart of one of our problems

here, Mr. Chairman, and that is FERC has jurisdiction over 47 percent or 53—pick your number—and then they have jurisdiction

over some of the bilateral contracts, but not others. And I find it

most difficult, as I did in my earlier round of questioning, to understand the usefulness of the original six point whatever billion number that was created in FERC’s report. I am trying to get to the

hard number, so we can talk specifics about how to address it.

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Now I want to make sure I have got this. Pursuant to Mr. Winter’s testimony yesterday, ISO is saying there are $6.7 billion in overcharges, of which $2.7 billion is involved in bilateral contracts,

some of which are FERC jurisdiction, some of which are not. OK.

Then of the remaining $4 billion, about $900 million of that precedes October 2. Am I correct so far?

Mr. MADDEN. I think it is $1.8 billion before October 2.

Mr. HEBERT. That is correct.

Mr. MADDEN. And the $900 is non-jurisdictional.

Mr. OSE. OK. So you have got—of that $4 billion, you have got $900 million which is non-jurisdictional, which gets you down to

$3.1 billion and that is for the period from say May 2000 through

February 2001?

Mr. MADDEN. Through February 2001.

Mr. OSE. OK. So now you have got $3.1 billion you are looking

at. And you are prevented by statute from going back prior to October 2, because that is the 60-day—the expiration of the 60-day period following the filing. And if you take out the numbers or the

amounts prior to October 2, which is $1.8 billion, you end up with

a universe of $1.3 billion.

And if I understood testimony yesterday, some of the questions

which you have and which you are examining relate to how do you

quantify the $1.3 billion. In other words, do you look at the month

ahead contract versus the spot? Because yesterday’s testimony was you came up on an annualized basis I think of $5 billion worth of

overcharges attributable to the San Diego area only.

Mr. MADDEN. The $5 billion, Mr. Chairman, was associated with

if San Diego had bought a year contract, based on its load, from

the Duke contract offer. I do not know all the terms and conditions,

at $55 a megawatt hour, versus what it would have to pay on the

spot market in December-January, which is $345, you would have

a differential of $5 billion they would have saved, just using that

differential.

The testimony I gave yesterday with respect to the $1.3 billion

is the ISO includes all hours, they say all hours are non-competitive, for the most part. We include an hour.

Mr. OSE. Thank you, Mr. Chairman.

Mr. BURTON. Let me just say that we have about 10 minutes

maybe, at the most 15; is that right? So if we could stick close to

the 5-minute rule so that he can leave. And if we have additional

questions, we will go to Mr. Madden, he can stick around for

awhile; is that correct, Mr. Madden?

Mr. MADDEN. Yes, Mr. Chairman.

Mr. BURTON. Let me see, Mr. Honda.

Mr. HONDA. Thank you, Mr. Chair.

A couple of quick questions. I heard you say that FERC has jurisdiction over 50 percent of the market more or less?

Mr. HEBERT. Roughly, yes.

Mr. HONDA. That is the retail or wholesale?

Mr. HEBERT. Wholesale.

Mr. HONDA. Wholesale.

Mr. HEBERT. We do not have retail jurisdiction.

Mr. HONDA. Statutorily do you have jurisdiction over the other

percentages that does not appear under your control statutorily. If

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something is going wrong, something is being manipulated, do you

have any responsibility in the name of protecting the consumers to

look at the other percentages?

Mr. HEBERT. I do not have the legal authority or ability to do it.

Mr. HONDA. Next question, natural gas. It is said that gas imported from outside the State rises considerably. Have you found

that to be unreasonable and unjust and have you found that to be

part of the increase in cost that we are looking at and does FERC

have jurisdiction over that?

Mr. HEBERT. I have got a pending issue on that. Yes, we have

jurisdiction over those issues. I will tell you, as I shared earlier,

there are concerns that we have got as well providing interstate capacity understanding there are intrastate constraints, takeaway capacity in the State. So hopefully, again, that is something else the

CPUC can correct, but they are going to have to site some intrastate pipes, deal with some compression, to do that.

Mr. HONDA. Just very quickly, does FERC have responsibility or

jurisdiction over looking at the possible price gouging from the increase in the gas prices here in California, coming from out of

State? Because there have been some articles in the paper of possible manipulation of prices in that area too.

Mr. HEBERT. We have jurisdiction over the manipulation or over

such conduct and it is pending hearing right now, so I cannot

speak to it.

Mr. HONDA. Will your decisions and your assessment be shared

with us by the time you have come up with the May report or May

solution?

Mr. HEBERT. I am prohibited from giving you a time line on

which—the May 1 I can share with you because it was in the order.

This, which is subject to pending action, does not have a time line

in it. I am acting expeditiously, I can assure you the Commission

will act. I am prohibited from giving you a date.

Mr. HONDA. Is there a time line that you may share with us,

more or less a soft date?

Mr. HEBERT. Protecting myself ethically and legally, and protecting the integrity of the Commission, I am prohibited from doing so.

Mr. HONDA. But we can expect something sometime in the future.

Mr. HEBERT. You have my word I am acting quickly.

Mr. HONDA. Thank you.

Mr. BURTON. Mr. Horn. Are you going to yield to Mr. Ose? OK,

Mr. Ose, Mr. Horn is yielding to you.

Mr. OSE. Thank you, Mr. Chairman; thank you, Mr. Horn.

I want to go to the regional transmission organizations. I am trying to make sure I understand the timing of the request to all 50

States to submit their plans and the utility—or excuse me, the usefulness—I do not want to confuse it—the usefulness of the RTO

proposals that you are supposed to be receiving. So specifically,

could you tell me when FERC asked the various States to submit

their proposals and for what purpose are you collecting that information?

Mr. HEBERT. We had two deadlines, the first being December 15,

the second being—I am sorry—October 15 and the second being

January 15, which is the one that California would have been subVerDate 11-MAY-2000 10:55 Apr 01, 2002 Jkt 000000 PO 00000 Frm 00303 Fmt 6601 Sfmt 6601 C:\DOCS\76761.TXT HGOVREF1 PsN: HGOVREF1
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ject to. One bit of correction, which I think I may have

miscommunicated to you, there are two States, Alaska and Hawaii,

of which we do not have that jurisdiction over.

Mr. OSE. Three total?

Mr. HEBERT. Well, Texas, if you include RCOT, correct.

Mr. OSE. Four total. How many States do you not have a regional

transmission organization proposal from?

Mr. HEBERT. That we legally have the ability to get it from, one.

Mr. OSE. One, OK. Now the usefulness of the proposal is?

Mr. HEBERT. Understanding that we have natural markets, we

are trying to set up competitive markets that work, that are functional. Good decisions, bad decisions that are made in California

have good and bad effects in Washington and Oregon and Nevada.

Understanding that, knowing that, California understands that, is

committed to that. That is why, in fact, they talk about a Northwest price cap. That is why it is essential that we work together

understanding that something like path 15 not only injures California and effects higher prices there when they do not repair it and

move beyond it, it also affects others in the Northwest.

Mr. OSE. So your point is that because the sources of power are

distributed across a multitude of States, of which they are selling

at different times all into California or all out of California, we

need to have some cooperation, if you will, or a meeting place

where that sort of discussion can take place.

Mr. HEBERT. Right. When we were strictly looking at it in a monopolistic perspective, it was not an interstate commodity. When it

is an interstate commodity, we have got to look at it in an interstate sense.

Mr. OSE. So we have Oregon’s plan, we have Washington’s plan,

we have Idaho’s plan, we have Wyoming’s, Montana, Nevada, Arizona, New Mexico, Colorado. California? No, we do not have California.

Mr. HEBERT. No, sir, we do not.

Mr. OSE. Is that an impediment?

Mr. HEBERT. Yes, sir, it is.

Mr. OSE. Why?

Mr. HEBERT. Because we cannot move forward with our regional

transmission organization, understanding that the West is one regional market.

Mr. OSE. How do we help you—I mean, can we do that at Congress, can we create that submittal?

Mr. HEBERT. It is a State action through the ISO. Obviously any

direction that you, through your leadership, would give to them, I

think they would take wisely.

Mr. OSE. I yield back to the gentleman from California.

Mr. BURTON. Let me see who is next. Ms. Lee.

Ms. LEE. Thank you, Mr. Chairman.

Given the out-of-control prices in the Western region, especially

here in California, I, like many, support at least temporary price

controls—price caps actually—on electricity, natural gas and heating oil. Let me ask you though about your argument that these

caps will discourage development since temporary price caps—I

mean, how do they inhibit future investments when plants really

would not be completed for 2 to 3 years, they have a generating

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lifetime and actual expected return on investment for decades? So

I am curious about your argument with regard to that. How do you

see that, in terms of wholesale price caps, as impeding development?

Mr. HEBERT. The decades of return based on some cost mechanism and variation of that, is something we have moved beyond,

obviously. So they are not guaranteed anything for decades any

more. That is yesterday’s regulation, not today’s.

The other part of that, as far as stimulating investment, we have

certainly and a pretty valid conversation, I think, about that and

what is being done with some of those dollars. We cannot force

them to invest. What we can do is send proper signals, but the

other side of that is again, what I continue to say, if you set a hard

cap in place, you are telling the good people of California there is

a price at which you are willing to turn the lights out. I am not

willing to say that, or have not been convinced that is in our best

interest, not to mention when the hard caps were in place and they

moved the hard cap from $750 to $250 in California, the empirical

evidence not only suggests but proves that average prices went up.

And should that not be what this debate is about? Not what a single price spike is, but what the average price is.

Ms. LEE. But even—OK, what after soft cap then or a temporary

soft cap? What—how does that—— Mr. HEBERT. Again, the Commission has moved in the direction

of market mitigation so that we may try to mimic the market and

move forward with it, and I think that is what we believe to be in

the best interest and hopefully, you will see us move on something

quickly with the May 1 timeframe in mind.

Ms. LEE. May 1, OK. Let me just ask you long-term, in terms of

how you see the whole push now by some to require, say a 20 percent of the Nation’s electricity to come from renewable sources by

a certain year, say by the year 2020. I mean in terms of this crisis

now, I think it provides us an opportunity to look at alternatives

and we have not discussed long-term as much as I would like to,

because we have got the immediate crisis that we have got to deal

with. But what is your position or what does FERC think with regard to renewable energy sources?

Mr. HEBERT. I will tell you my persona position. As you, the

Commission acts as one, we speak through our orders. We have

made it very clear, in removing some impediments and obstacles

with PURPA and others, that we think it is very important to do

that. At the same time, I will tell you that California and the West

is in a position where they need to add supply quickly and the

quicker the better. I think it is very important to diversify, I think

renewables has to be a part of that. I think it is important and that

is what our orders have been about, removing obstacles and impediments, squeezing every megawatt out of this system that we

can possibly do. We are committed to that. I think it is a wonderful

idea.

Ms. LEE. Thank you very much, Mr. Chairman. Glad to hear you

say that.

Mr. BURTON. I want to thank you very much for your candor

today. There is one last question I would like to ask. There are environmental concerns about diesel-fired generators. We did have

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somebody to talk to me privately and I wanted to ask your opinion,

even though this may not be in your jurisdiction, and that was that

they said to get California over the hump this summer, that there

could be brought into the State temporarily on barges and on

trucks and so forth diesel-fired generators that could create the capacity to get the State over the hump without rolling blackouts. Do

you have an opinion on that?

Mr. HEBERT. My opinion would be that darkness, the lights going

out, is absolutely the worse thing that could happen. Whatever you

can do to prevent that, I think is good. I think demand side is very

important, but at the end of the day, you had better have adequate

supply. Historically, California has not been willing to do much

with diesel generation. If you will remember right, and I know you

do, they brought barges up through the Canal Zone and actually

into San Francisco Bay when they feared a blackout and they

turned them around and sent them back since they were diesel

generators.

I have also had meetings with producers who were flaring natural gas, who informed me that there is about 1,000 megawatts of

production right there that they could put on line if they were allowed to do it.

There are lots of opportunities here. The conversations need to

stop, someone needs to start putting shovels in the ground, someone needs to start hooking up some type of generators to provide

the electricity so the people will not be in danger this summer.

Mr. BURTON. Thank you very much.

Mr. HEBERT. Thank you.

Mr. BURTON. We appreciate you being here. I hope you make

your plane.

Mr. HEBERT. I will submit this to the reporter, is that is all right,

Mr. Chairman.

Mr. BURTON. That will be fine, we will accept that without object

and put it into the record.

Mr. HEBERT. Thank you. And if I may tell the public, the one

question that the public had asked is on rehearing. We cannot

speak to it. If Congressman Honda would like for us to give him

what we can, we will be glad to do that. It is on rehearing, and

I am going to a hearing right now, as you know. I am not trying

to escape anything, but thank you for having us and shedding

light.

Mr. BURTON. Thank you. Thank you, Mr. Madden, as well. I

think we have concluded with your total panel and we appreciate

your help.

The next panel—do you want to take a break? Why do we not

take a 10-minute break and then we will go to the next panel, 10

minutes.

[Recess.]

Mr. BURTON. If we could get everyone to take their seats, I understand that the media is anxious to talk to a number of members

of the panel and others, but we really need to get started.

Our next panel consists of Ms. Dede Hapner, vice president of

regulatory relations for Pacific Gas and Electric; Stephen Pickett,

who is the vice president and general counsel of Southern California Edison; Mr. Dean Vanech—is that correct—president of Delta

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Power Co.; and Mr. Paul Desrochers—how do you pronounce it, like

Leo Desrocher? OK, I will not forget that one—Mr. Paul E.

Desrochers, director of fuel procurement for Thermo Ecotek.

Would you please stand?

[Witnesses sworn.]

Mr. BURTON. Being a gentleman, we will start with Ms. Dede

Hapner and let her make an opening statement.

STATEMENTS OF DEDE HAPNER, VICE PRESIDENT, REGULATORY RELATIONS, PACIFIC GAS & ELECTRIC; STEPHEN

PICKETT, VICE PRESIDENT AND GENERAL COUNSEL,

SOUTHERN CALIFORNIA EDISON; DEAN VANECH, PRESIDENT, DELTA POWER CO.; AND PAUL DESROCHERS, DIRECTOR OF FUEL PROCUREMENT, THERMO ECOTEK

Ms. HAPNER. Thank you very much, Mr. Chairman, and members of the committee and guests to the committee. My name is

Dede Hapner, I am vice president of regulatory relations for Pacific

Gas & Electric Co., that is the regulated utility. And I appreciate

the opportunity to speak before you today.

Clearly, this hearing comes at a very opportune time. You have

heard both yesterday and today about the prices that we have in

the West. In March, for example, the average wholesale price was

approximately $307 per megawatt hour and there is no relief in

sight.

At this point, we are even more concerned about the megawatt

shortages because there is less hydropower in the California system and in the entire Northwest than we traditionally have, about

60 percent of normal, at least based on the last snow pack results.

In the first several months of this year, the California Independent System Operator has declared 52 stage two electric power

emergencies and 36 stage three electric power emergencies. Residents of California had no idea what stages one, two and three

meant 6 months ago, and now that is as common as hearing about

the traffic report.

At best—and I believe you heard from Mr. Winter yesterday—we

will be short several thousand megawatts this summer and that is

at best.

The utilities, including Pacific Gas & Electric Co., first raised the

issue of shortages and the gap between wholesale power costs last

summer. We have been working with the State officials to try and

address these issues, but unfortunately the activity that we have

seen so far, while it has most assuredly meant progress, has still

been on a very incremental basis and not in a comprehensive form.

Earlier this year, the State legislature passed and the Governor

signed AB–1x, which we looked forward to as a way of stopping the

bleeding with respect to the amount we were paying in wholesale

power costs. The State authorized the Department of Water Resources, which had some experience in the electricity market, to

enter into contracts and purchase electricity on behalf of the customers of California’s investor-owned utilities. We were pleased because we thought that bill required the Department of Water Resources to buy the entire net open position of the utilities and that

would be the amount that we would have to buy on behalf of our

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customers that was not generated by our hydro system, for example, or Diablo Canyon or our qualifying facility contracts.

Unfortunately, that has not proved to be the case. The Department of Water Resources has signed many, many contracts, but

they still have to buy on the daily market and in real time and because of the price constraints that they have set for themselves,

there is still a gap. And so in real time, the Independent System

Operator, in order to keep the lights on, buys power in the very expensive spot market and the utilities have been billed for those

power costs. So clearly, our net open position is not being covered

by the law, as it currently stands.

You have also heard from President Lynch on the California Public Utilities Commission that they have moved very swiftly and

adopted several orders to ease the situation, including a series of

rate increases or, as they are termed to avoid the implication that

the rate freeze is actually over, surcharges.

Again, that would seem to help the financial situation for the

utilities. In reality, however, the 1 cent surcharge and the 3 cent

surcharge that the Public Utilities Commission passed through

over the last several months will not do anything for the billions

of dollars of uncollected power costs that the utilities have already

incurred, and perhaps even more importantly, once Pacific Gas &

Electric Co. pays the required amounts to the Department of Water

Resources for the power that they are buying on behalf of our customers, pays our qualifying facilities as per our contracts, pays for

our own generation, there frankly just is not any money left. In

fact, it is very doubtful, and we have testified at the Public Utilities

Commission, that there is a negative amount, even looking at that

4 cents.

Mr. BURTON. Ms. Hapner, we try to stay with 5 minutes.

Ms. HAPNER. I am sorry, I apologize.

Mr. BURTON. If you have just a little bit more, please go on.

Ms. HAPNER. I will wrap up.

Basically, we are now in a situation, as the committee well

knows, where our utility has sought protection of the Bankruptcy

Court, in hopes of finding a comprehensive solution. What we

would like to ask the committee to consider today is some shortterm steps that will help California through this next summer.

Particularly, we would like to see the committee recommend to the

Secretary of Energy or to the FERC that there be short-term price

caps to help stabilize the situation and then anything that the committee can do to move regional transmission organizations forward

and look at the situation of the entire West with respect to renewables would be very much appreciated.

Thank you.

Mr. BURTON. Mr. Pickett.

[The prepared statement of Ms. Hapner follows:]

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Mr. PICKETT. Thank you, Mr. Chairman, members of the committee. I am Steve Pickett, I am vice president and general counsel of

Southern California Edison and I hope you forgive my scratchy

voice, I have a cold today unfortunately.

We are very pleased at Edison that over the last few months,

both the State and the Federal Government have begun to move

to solve this crisis. We do have a crisis and it is time to roll up

our sleeves and start solving the crisis in practical ways that can

be implemented quickly.

Let us make no mistake, many of the problems are of California’s

making and many of them are California’s to fix. And that does not

include just the State government, but it includes the utilities as

well. There is no question but what the utilities were slow off the

mark in recognizing the impacts of the dramatic load growth

brought about by the booming economy and were undoubtedly too

slow in sounding the alarm of the impending crisis.

The State government, for its part, did clearly adopt in the deregulation process in California, a very flawed market structure.

FERC approved it and I think in good faith, the State Government

and the utilities in California expected FERC to be on the job monitoring that market in a more aggressive way than it has done, but

clearly the market structure is a California problem.

The California utilities were prevented from entering into longterm contracts to solve the problem until it was way too late for

them to do so. And most fundamentally, the State government was

way, way, way too slow in recognizing the basic business fundamental that retail prices have to match wholesale costs or the

utilities will be driven into bankruptcy.

In recent weeks and months, we have seen some action in California, the California Commission, as Ms. Hapner said, has raised

rates 10 percent approximately in January, another 30 percent in

March, a very difficult and traumatic decision for the State. And

I am very pleased to say that last Monday, my company, Edison,

and representatives of the Governor of California entered into a

memorandum of understanding that we think provides a framework and a comprehensive plan for helping us resolve the crisis for

us and for our customers, allow our company to return to a creditworthy status that will allow us to continue providing quality service to our customers.

Many, many, many hurdles remain to implementing that MOU,

but it is a very positive first step and we are pleased that we have

been able to take it.

FERC has begun to act as well, Unfortunately I believe not nearly as aggressively as they should have done. The San Diego complaint that brought the matter first to FERC’s attention was filed

in August of last year and the final rehearing is not out on that

yet, so that we can get the matter before the court. We believe the

FERC has taken an unduly narrow view of their jurisdiction there.

There is a 65-year old statute and a host of regulations, the Federal Power Act and a host of regulations under it, that are wellestablished law, that are designed and were adopted in the depression era to prevent exactly what is happening in California today,

and that is the abuse of customers, who have essentially no choice

in the price of power that they have to pay.

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In November, the FERC did find that the wholesale rates being

charged in California were not just and reasonable. I think Commissioner Hebert’s reading of that order, as he presented it today,

was unfortunately unduly narrow. The FERC did find that the

wholesale rates were not just and reasonable and yet they have allowed them to continue to be charged.

In the face of evidence that the market is dysfunctional, evidence

by the way that the FERC has never held an evidentiary hearing

upon, they eliminated the ISO’s market caps back in November

and December, and the predictable happened, the market exploded.

At a time of low load when prices should be down, where there is

plenty of supply available, the market exploded.

Now some have argued that price caps are antithetical to efficient, effective, competitive markets and would disincent new supply. I am not an economist, I am not here to argue about the efficacy of those views today, but I am here to say that we do have

a crisis. And this is not a time for ideology at any regulatory agency, State or Federal. It is a time for practicality, it is a time for

common sense and it is a time to protect the public interest.

It is the public interest that only the FERC under the statute

can protect. They have the authority, the only authority, over the

wholesale markets.

Two quick points, I see I am out of time, I will wrap up quickly.

One is that this is not entirely a supply and demand problem.

There is no question that supply is tight, we do have a need for

new supply, and in the summer months, the few peak hours in

California, we have a potential supply problem—no question.

But the blackouts in January and again in March were not a

function of that supply problem. In March—when the blackouts occurred in March, there were 14,000 megawatts of capacity idle.

Some of that may be due to legitimate problems and maintenance,

clearly not all of it. That is not a supply problem, that is a market

function problem, one that has to be corrected.

And let me just close by suggesting what I believe needs to be

done quickly and I would urge this committee and the Congress to

urge the FERC to do; and that is, we need to call a time out. We

need to say stop, this is crazy. We need to temporarily return to

a system that we know that works. Maybe it is a system that had

problems, everybody would acknowledge that, but we know that

cost-based ratemaking works. It is embodied in the law, it is embodied in the FERC’s regulations, it is the norm. Market-based

ratemaking is the exception, it is only supposed to exist when there

are workably competitive markets. We do not have that. We need

to temporarily return to the regulated, cost-based system which

provides a fair return to the generators, it imposes an obligation

to serve, so we will not have 14,000 megawatts off line while people

are sitting in the dark and if need be, we can look at exceptions

to that rule for new generation, so that we can clearly incent supply.

But let us take a time out here, let us fix this market. I happen

to believe and my company believes that markets are the right way

to go. They allocate capital for new generation projects more efficiently than the regulated system did, but the market has to be set

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up to work and we cannot sit here with a failed market and allow

customers to be gouged.

Thank you.

Mr. BURTON. Thank you, Mr. Pickett.

Mr. Vanech.

[The prepared statement of Mr. Pickett follows:]

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Mr. VANECH. Thank you, Mr. Chairman, committee, I appreciate

the opportunity to discuss the views of gas-fired QF cogenerators

in the State.

Just for some background, since the passage of PURPA in 1978,

California has been a leader in developing QF facilities, by far

more than any other State. In fact, now it amounts to nearly onethird of the supply to the IOUs. In numbers, that means about

10,000 megawatts of QFs are on line and about 5,400 or roughly

60 percent of those QFs are natural gas-fired. Of the 5,400 or so

megawatts, we understand about 3,000 are actually off line right

now, and given the system-wide load of about 30,000 megawatts,

that is obviously significant.

Going back a bit and almost since the inception of PURPA and

the time these projects came on line, there has been from time to

time, more often than not, a contentious relationship between the

QFs and the regulated utilities. And in my view, there is at least

three reasons why that is.

No. 1, when QFs build plants, the utilities lose rate base and

when they don’t have rate base, they earn less profits since they

make a profit off of their assets.

No. 2, I think there is a general concern about loss of control.

And third, a fear that QF power is more costly than otherwise

available power that the utilities can actually construct.

QFs have provided significant benefits to the State, including an

increase in system reliability by scattering generation rather than

having fewer plants, typically away from the load center. There

have been ancillary benefits to the transmission and distribution

network. California’s manufacturers and institutions have saved

hundreds of millions of dollars, if not more, in the way of competitively or low-cost thermal energy that is typically heat wasted in

a conventional power plant. That steam or other energy is used in

manufacturing and replaces the cost of production, or lowers the

cost of production for those manufacturers.

Also, QFs have used new and clean technologies. Most of these

plants are less than 15 years old and have adhered to more stringent permitting requirements.

The QFs are often compared to otherwise available sources of

supply for the utilities. QFs by nature are long-term in respect to

their agreements, and from time to time, there clearly have been

imbalances between the cost of QF power and the cost of otherwise

available power over the short term. And in fact, during certain periods and during certain years, QF power, as compared to the otherwise available spot market cost of power, has in fact been more

expensive.

But there is another side to that equation. We calculate, based

on our consultants, that in year 2000 alone, Edison saved somewhere around $800 million by buying QF power as opposed to spot

market power. We think that PG&E has probably realized similar

savings. In fact, the monthly cost, additional cost, of the QFs being

down now, around 300 megawatts—I will just speak to the gasfired QFs that are shut down—are probably costing the State somewhere between $200 and $300 million a month in additional cost

because that power has to be brought in from other sources that

are much higher priced than the QF contracts.

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Why the QFs are not operating today—and again, I will narrow

my discussion on the gas-fired QFs. As has been well publicized,

the QFs have not been getting paid by the utilities and that is

widely known. As a result, and particularly acute for gas-fired

projects, we cannot pay our fuel suppliers and they will not sell us

fuel any more. These projects are typically financed on a standalone basis so it is not as though there is an enormous balance

sheet that can just keep funding these losses. These projects have

to be able to pay their bills.

In addition, the current and recent formula or the order passed

by the Public Utility Commission substantially modified the way

QFs get paid and it is particularly problematic for gas-fired

projects.

There are two major changes that were made to the formula.

One was the efficiency rate used in the formula was lowered significantly from around 10,100 to 9,100. That results in lower revenues.

And the second major issue is the Topock Index, which is the

southern California Gas Index, was substituted with the northern

California Gas Index, known as Malin. The problem is there is

about a $5 difference in the cost differential between Malin and

Topock. This issue is the QF cogenerator, gas-fired cogenerator, has

to buy gas at Topock, but in the revenue formula only gets the benefit of the Malin price. So therefore—and just for quick numbers;

if today, the Topock gas price results in a cost to produce of about

$140 per megawatt hour, the new revenue formula passed by the

Utility Commission pays us somewhere around $8 or $9, perhaps

a little less. In other words, even on margin, there is about a $50

per megawatt hour loss on generation. That is why it is impossible

for the QFs, the gas-fired particularly, to stay in business.

I will try to finish quickly.

I just wanted to quickly discuss what we think needs to be done

because these projects need to come back on line, particularly given

the acute shortage of power in the State.

No. 1, until there is liquidity in the market and until the investor-owned utilities can pay their bills, we need the right to be able

to sell outside of our contracts. And that does not necessarily mean

they terminate, it just means that we have the right to be able to

sell to other parties in order to get liquidity in our projects, to

avoid the projects themselves going bankrupt.

The other issue is, and it is perhaps a lessor issue, these projects

are paid both a fixed and a variable charge, known as capacity payments, the fixed charge. The utilities must continue to pay the

fixed charges even though certain plants have been down, because

of non-payment. The financing parties rely on these capacity payments to repay debt and equity and if those are not paid, they

get—as you can tell, the projects get into trouble.

The other thing I would just quickly add is there needs to be a

clear permitting process, and I think it started favorably, between

the State and the Federal Government. There is, as most know, an

accelerator or emergency permitting program, which is a 21-day or

4 month program, depending on when this new capacity comes on

line. I would urge the Federal Government to have the EPA work

closely with the State EPA to have a cohesive, single committee so

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that we are not forced to deal with the State and then have to turn

around and have a different set of rules at the Federal level. And

I think that is really important to try to get capacity on line.

That is enough for now.

Mr. BURTON. We will get to questions with you, Mr. Vanech in

just a minute.

Mr. Desrochers.

[The prepared statement of Mr. Vanech follows:]

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Mr. DESROCHERS. Good morning. Chairman Burton, Representative Ose and committee members, thank you for the opportunity to

meet before your committee to discuss the current energy crisis and

its impact on the biomass to energy industry in California.

My name is Paul Desrochers, I am the director of fuel procurement for Thermo Ecotek. We own and operate 125 megawatts of

energy, both in New England and in California, 100 megawatts in

California.

The industry in total in the State of California is—we have 29

biomass to energy facilities currently operating, producing over 600

megawatts of energy, of renewable energy.

But I think my message today is not only are we producing electrons to the State of California, we are also providing substantial

environmental benefits. Those are primarily air emission reductions, reduced greenhouse gases while consuming material that is

normally open burned in the Central Valley and also material that

normally would go to municipal landfills. And I am not talking

about regular household waste, I am talking about wood waste that

is, you know, tree trimmings from your home, grass clippings, that

type of material. All that material would, if we did not exist, go to

the landfill.

In California alone, we utilize 700 million tons of that material

a year on an annualized basis. So again, if our facilities do not operate, which some of them are not currently operating, that environmental benefit goes away also, the State pays again. And as Mr.

Vanech mentioned, it has to replace that energy with higher priced

spot energy.

Not only do we utilize that, in the Central Valley, we provide

1,200 post-harvest jobs. That is extremely important in our Central

Valley because of its unemployment during the non-crop season. All

of our operations are—not the facilities, but the collection, processing and gathering operations are all done post-harvest, after the

harvest of whatever crop that they are working on—very important.

These facilities are under long-term agreements with the utilities, both Southern California Edison, but primarily Pacific Gas &

Electric. And as Mr. Vanech has said, as of April 1, these facilities

have not been paid for at least 3 months and in the case of Southern California Edison, 4 months. Thermo Ecotek’s facilities are currently owed—currently right now, $12.1 million for energy delivered since December.

The energy crisis in California, as we have all heard, deepened

as PG&E has sought protection under Chapter 11. Just prior to

PG&E’s decision, the State Public Utilities Commission ordered the

utilities pay our facilities, which were called qualified facilities or

QFs, for the energy generated after April 1, with no provisions for

past-due. These facilities have been operating for the last 3

months, providing energy to the State of California, while the California Department of Water Resources are making prompt payments to out-of-state generators. That to me is criminal. Here we

are in-state generation not getting paid, out-of-state generators getting paid. Something is wrong with that equation.

Our facilities have continued to operate and provide energy to

the State of California, providing the environmental benefits that

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we provide, hopeful that there would be a solution in the last 3

months, based on efforts the Governor has been working on, California Public Utilities Commission and attempts through the legislature. All those have failed. We are still not sure the power line

acquisition from Southern California Edison is going to work.

Unfortunately, we have waited too long to discontinue our operations and we are at the end of our ability to fund our fuel purchases and our operating costs. What is most unfortunate, as I

have said before, is not only does the State lose the renewable electrons that we produce, the State is also going to lose the environmental benefits that we provide.

I will list you an example of that. The San Joaquin Valley Unified Air Pollution Control District, which is the second largest air

pollution control district in the State, is about to be placed under

severe non-attainment for ozone. Our facilities reduce 32,000 tons

of material that are precursors to ozone development, on an

annualized basis. That is a substantial amount of material, substantial emissions reductions.

Additionally, our facilities utilize 3 million tons of urban wood

waste, which we have talked about, the material that would go to

municipal landfills. We are the only renewable energy technology

that has to pay for its fuel, because of the cost of collection, processing and transportation, we have to pay for our fuel. Wind, obviously geothermal does not a fuel cost.

We have reduced the amount—just in the last 2 months, we have

reduced the amount of material that we are currently—we normally utilize, by half. So the State has already lost half of its benefits, and we are looking at, if we do not receive payment, based on

the PUC ruling, by April 17, we probably will discontinue power

generation.

Mr. BURTON. Mr. Desrochers, could you summarize so we

can——

Mr. DESROCHERS. Yes. Without rapid resolution of our current

contract payments, we will suspend operations—I just said that.

We do not know what their future brings. The Bankruptcy Court

will do one of two things, either affirm our contracts or reject them.

We feel that being—either way will be a positive move, but at least

there is some forward movement.

What we would ask is that as you return to Washington, that our

industry is proposing similar to the wind industry, an energy tax

credit that will help some long-term viability and also we would

support, as Congressman Lee has said, renewables in the United

States and in the State, and we call it a renewable portfolio standard, that with a national energy policy and with a State energy policy, that at least 20 percent of that generation is based on renewable technology, and we would support that.

Thank you.

[The prepared statement of Mr. Desrochers follows:]

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Mr. BURTON. Thank you, Mr. Desrochers. Let me just start with

you, Mr. Desrochers, I did not catch that last part, I am sorry. Congresswoman Lofgren and I were talking, but I was told that the alternative sources of energy that are produced, like what you are

talking about, accounts for what, about 25 percent?

Mr. DESROCHERS. No, in this State here, we are only a little less

than 10.

Mr. BURTON. A little less than 10 percent, but that is a significant amount.

Mr. DESROCHERS. I am sorry, I misstated that, less than 2 percent.

Mr. BURTON. Oh, less than 2 percent.

Mr. DESROCHERS. 2 percent.

Mr. BURTON. But that still makes a dent.

Mr. DESROCHERS. Yes.

Mr. BURTON. Let me start off with questions for California Edison and PG&E. Last summer, were your companies engaged in negotiations on long-term contracts for electricity?

Ms. HAPNER. Last summer, we had very little authority to go out

and sign long-term contracts. Ever since the deregulation policies

at the Commission and at the State legislature passed, we have

tried to move in that direction. We have requested several times

the authority to enter into long-term contracts to be relieved of the

buy-sell provision, etc. and to hedge, so that we would not be forced

to operate in the volatile spot market.

In 1999, we received very limited authority to make some longterm purchases through the Power Exchange, the block forward

market, and then in August 2000, we received broader authority to

sign longer term contracts, but without the reasonableness protection that we require to protect ourselves after the fact.

Mr. BURTON. So you were not negotiating at that time in longterm contracts?

Ms. HAPNER. On a very—— Mr. BURTON. We heard yesterday and I think day before when

we were on our way out here, that you had an opportunity and entered into a 5-year contract or contracts at around 5 cents a kilowatt hour, in that neighborhood; is that true?

Ms. HAPNER. Yes and no. We did not have the authority to

enter—— Mr. BURTON. Was that offer made?

Ms. HAPNER. I beg your pardon?

Mr. BURTON. Was there an offer made to you for 5 cent per kilowatt hour?

Ms. HAPNER. When we investigated those offers, they were not

what they appeared to be and what were covered in the media.

Mr. BURTON. What were they?

Ms. HAPNER. They were considerably higher than 5 cents, particularly for peak period.

Mr. BURTON. So there were no 5 or 6 cent per kilowatt offers

made?

Ms. HAPNER. Certainly not in the last spring and early summer

timeframe. We did——

Mr. BURTON. Going back to April, May, June of last year.

Ms. HAPNER. No, we did not.

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Mr. BURTON. What was the lowest offer you had?

Ms. HAPNER. I do not know for sure, Mr. Chairman—— Mr. BURTON. You do not know?

Ms. HAPNER [continuing]. That is not my area of expertise.

Mr. BURTON. Does anybody know? Do you know?

Mr. PICKETT. No, sir, I do not have the exact number. We can

get the numbers that were made available to us and present them

to you, if it is of benefit to the committee. We found, as PG&E apparently did, that a number of generators made offers, usually

through the press, not directly to us, that they were willing to sell

us power, a figure that was tossed around in the early or late

spring, early summer of last year was 5 cent power. We also

found—— Mr. BURTON. Did anybody contact the people who were making

these assertions in the paper to see if that was a fact?

Mr. PICKETT. Yes, sir.

Mr. BURTON. And what did they say?

Mr. PICKETT. It proved, on investigation, not to be the fact. The

terms of the contract would have ultimately made them substantially more expensive.

Mr. BURTON. OK, what did the terms of the contract take it up

to?

Mr. PICKETT. Again, I do not have that specific figure. Ms.

Hapner apparently has some information, but we can go back and

look at that record and provide it to the committee, if it would be

helpful.

Ms. HAPNER. I do not have the specific information, Mr. Chairman, but I can tell you that those contracts were for a considerably

longer period of time, up to 10 years, and we did not have the authority to sign long-term contracts.

Mr. BURTON. Well, let us just say that there was a 10-year proposal made. Do you know how much that was for?

Ms. HAPNER. No, that is some of the information I will have to

get back to you.

Mr. BURTON. Were the long-term rates that you heard about considerably lower than the short-term spot rate?

Ms. HAPNER. Absolutely.

Mr. BURTON. Well, then why was that not pursued?

Mr. PICKETT. In our case, we did pursue it with several vendors

who were proposing it. We have had I think three problems. One,

the contracts and the offers did not pan out, they either were not

there during the critical periods of time, the summer peak periods,

or they were proving to be substantially more expensive than they

were advertised.

Mr. BURTON. How much more?

Mr. PICKETT. Again, I do not have that number, but that is a figure that we can supply to you.

Second, we did not have the authority—even if the offer had been

there, we did not have the authority to sign the contract.

Mr. BURTON. The authority would have rested with whom?

Mr. PICKETT. With the California Public Utilities Commission.

Mr. BURTON. And what was their position on those, or did you

pursue that?

Mr. PICKETT. We pursued that vigorously beginning——

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Mr. BURTON. So what happened when you pursued it with the

California regulatory agency?

Mr. PICKETT. Well, if I may, I can back up and explain a little

of the history, if that would be helpful to you. We started in March

1999 trying to get authority to do contracting, bilateral contracting,

because we began to see then that the market was on an upward

trend. And in July 1999, the PUC rejected categorically our request

for authority to do bilateral contracts.

Mr. BURTON. Why?

Mr. PICKETT. Because they believed that at that time the Power

Exchange provided the transparent pricing that would allow them

to conclude that the prices that we were paying for power to serve

our customers were reasonable. They wanted to see the transparent price and they wanted to be sure that the—— Mr. BURTON. I do not want to belabor this, but did they not see

the projections that showed that the price of generation was going

to go up?

Mr. PICKETT. I do not know if they did or did not. We tried to

explain that what we were doing was hedging against price volatility and certainly the possibility that they would go up in 1999,

and that argument fell on deaf ears.

Mr. BURTON. So they were not going to let you buy it at that

price?

Mr. PICKETT. No, they—well, when you say at that price, in 1999,

in July 1999, they categorically rejected our request for authority

to do bilateral contracts.

Mr. BURTON. But the prices, according to the charts we got yesterday, started to go up appreciably around May of last year, sort

of jumping up in quantum leaps.

Mr. PICKETT. Yes, sir.

Mr. BURTON. We were told—and I am out of time, but we were

told that you could get prices in the 5 cent per kilowatt hour range

during that timeframe. You are telling me that is not the case and

you are going to let me know what you could have gotten it for.

But they would not let you do that even though the projections

showed that there was going to be some dramatic increases in cost.

Mr. PICKETT. Let me say for our part, we were prepared at one

point to try and take a long-term low-price contract to the Commission for authority to sign it if we could get that—— Mr. BURTON. At what point, when was that?

Mr. PICKETT. That was already I believe in June or July. Again,

I can get the precise information on this for you, but the contract

we would have taken to the Commission never materialized.

Ms. HAPNER. I would agree with the comments that Mr. Pickett

made. I would just say for our part, after either getting rejected or

just having our request sit, we finally went out at our own risk,

and we still do not have reasonableness protection, but we actually

went out at our own risk and signed a series of contracts, several

of them at about 5.5 cents.

Mr. BURTON. If the Public Utilities Commission had moved more

expeditiously, would that have eliminated a large part of the problem you face?

Ms. HAPNER. Well, hindsight is 20/20, but certainly——

Mr. BURTON. You could see the problem at——

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Ms. HAPNER [continuing]. We could have taken advantage of the

opportunities in the marketplace.

Mr. BURTON. And had you taken advantage, would you be in the

financial position you are in today? You can put a pencil to that.

Ms. HAPNER. Certainly the financial situation that we are in

today is a function of collecting 5 cents from customers and paying

upwards of 15 or 20 cents.

Mr. BURTON. You are not answering the question.

Ms. HAPNER. Well, clearly if we had—I do not mean not to answer your question—clearly had we been able to buy power in the

wholesale market that was more closely related to the prices that

we were collecting from our customers, we would have prevented

the huge debt that we are in today.

Mr. BURTON. Ms. Lofgren.

Ms. LOFGREN. Thank you, Mr. Chairman.

Mr. Pickett, I was very interested in your testimony and I do not

think I have heard anyone be as plainly spoken and concise as you

in terms of what should happen. And on page 7 of your testimony

you suggest that the FERC should essentially deal with the dysfunctional market by revoking market-based rate authority. And I

actually have to say I agree with you on that.

I believe that the FERC should have been more aggressive in

terms of refunds, it should have been more aggressive in terms of

prospective control of price gouging and the like, but clearly that

did not occur.

Our President has indicated an opposition to price caps, the Secretary of Energy and Mr. Hebert as well. So I guess my question

to you is not getting plan A that might be the best way to deal with

our situation right now, what advice would you be able to give for

the market manipulation controls that Mr. Hebert discussed this

morning, that I think are at least apparently some intention to prospectively control price. How could that be structured best to help

California avoid further price gouging.

Mr. PICKETT. Let me say that I regard price caps as the second

best alternative from either perspective. I regard price caps, you

know, a working, competitive market, even one that may be approaching a supply shortage, as providing some of the disincentives

that Chairman Hebert and others have said. They are not a good

solution. But when you have a broken market——

Ms. LOFGREN. I agree with you on that as well. I wanted to limit

my question to the comments that relate to a dysfunctional market

in an emergency situation.

Mr. PICKETT. I think in the current situation, I cannot conceive

of a real practical way to make this market work. The market

structure is so badly flawed that we have to stop, we have to take

time out and say this is not working. You cannot set a just and reasonable rate using a proxy derived from a non-functional market,

which is what the FERC’s last order did. That does not work.

So I would suggest to Chairman Hebert—and if I had the drafting pen, I would write a suspension of market-based rate authority

for the entire Western region. I believe he is right when he says

you cannot look at a narrow region, you have got to look at the

whole region. Electricity does not stop at State borders.

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But you have to not just withdraw the market-based rate authority, you have to have a system that both fairly compensates the

generators—cost-based ratemaking does that, it provides them a

fair return on their investment and, as the general counsel of the

FERC indicated, a number of these generators paid amounts substantially above book when they purchased the generating assets.

None of us may like that today but it is a fact and those people

who paid that money I think are entitled to, if they are going to

be compelled to operate, are entitled to earn a fair return on that

money, regulated by the FERC.

That is not a complicated operation, I have practiced in this area

for 20 years. I cut my lawyer’s teeth doing FERC rate cases. I know

how the system works.

The Federal Power Act and the regulations are in place. Costbased ratemaking is the norm, it was done for 60 years. And I do

not find it an acceptable excuse that the FERC says well things

back up. Give me a break. Everything backs up if you do not turn

attention to it. They need to turn attention to it, focus on what the

law and the regulations are and enforce it.

Ms. LOFGREN. Let me ask you a question about our future. We

have nine power plants under construction in California right now,

I think the first one is set to fire up in June. We have 13 more that

have already received approval. When those 9 are up and running

and the 13 are up and running, are we going to be able to meet

our power needs, or what further are we going to need to do in

terms of—you know, we’ve got approval rates down to 6 months,

we are 48th in terms of energy conservation in the State—among

the States. What else are we going to need to do to be healthy energy-wise.

Mr. PICKETT. I smiled at your question because the power plant

that we hope starts up first is a power plant being built by an affiliate of my company and in the MOU we signed on Monday, if it

is not up and running by mid-August, we are subject to a significant penalty. So I indeed hope that power plant and all the rest

come on line.

Beyond that, I think we need to assure that there is an obligation to serve here. What is missing in this market equation today

is the obligation to serve that was imposed on utilities in return

for the regulated rate of return. The example are the blackouts.

During the blackouts, we had 14,000 megawatts off line. In a period of low load, there was no shortage, none of those generators

had an obligation to be on line serving. We need to re-establish

that in the short term until we can create the market mechanism

that will incent them to be on line as a matter of economics, rather

than withhold their power to drive prices up.

Ms. LOFGREN. Thank you, Mr. Pickett. I see my time is over, so

I yield back, Mr. Chairman.

Mr. BURTON. Mr. Ose.

Mr. OSE. Thank you, Mr. Chairman.

I find I have more questions than we are likely to have time for,

so I may be sending you written interrogatories for you to respond

to, to the extent we can get to them we will reduce that pile. I want

to go back to the original legislation that——

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Mr. BURTON. Excuse me, Mr. Ose, real quickly, she has got one

question, could we yield to her and we will start your time over

here just real quickly.

Mr. OSE. Sure.

Ms. LOFGREN. You are very kind, Doug.

Yesterday, the president of the Public Utilities Commission apparently testified that they had never refused a request for long

term contracts and we have heard testimony here today that contradicts that. So I am just asking the chairman, not here today obviously because Ms. Lynch is not here, but I think we ought to do

some written inquiry to clarify that contradiction in testimony and

I thank you for yielding the time.

Mr. BURTON. We will do that, we will send a note to her and

hopefully you will respond in writing to that as well, so we can

have both sides of that. All right?

Mr. Ose.

Mr. OSE. Thank you, Mr. Chairman. I do want to tell my friend

that it was very clear what Ms. Lynch was saying, but I do think

it would be interesting to have it in writing.

I want to go back to AB–1890. As I understood AB–1890, the legislation defined a point beyond which the IOUs, the investor-owned

utilities, would be free to charge retail rates based on market rather than a frozen level, it is embedded in the legislation to some degree or another. And that threshold was basically defined as the

point at which the utilities declared that they had recovered their

stranded costs.

Ms. Hapner, Mr. Pickett, is my understanding correct?

Mr. PICKETT. I think in the broadest sense, yes, but I would like

to define a couple of key terms so that we are not talking past each

other.

AB–1890 envisioned deregulating the generation market, not the

utilities’ distribution lines or transmission system, which would be

transmission under the regulation of the FERC, the distribution

under the regulation of the PUC, on a regulated, rate of return

basis, as it has always been done. In our case, until the recent rate

increases, we were charging a system average rate of about 10

cents and about 3 cents of it was transmission/distribution and the

regulated portion of the business.

The generation portion of the business, AB–1890 envisioned moving that to a competitive environment and both the PUC’s prior implementing orders and AB–1890 provided incentives designed to

get the utilities to sell their generation and in fact, until this market melted down, we were in the process, as a utility, of moving

out of the generation business.

But I think in direct answer to the central question, if the market had not melted down and if the utilities retained their generation with a possible exception for some nuclear issues, and the PUC

had gone through what they referred to as the valuation process

for our plants that were designed to compensate the ratepayers for

those plants, post-valuation the unregulated side of the utility

would have had a generator that it could have sold into the market.

I hope I have not bored you with detail, but the process envisioned doing a market valuation process with the generation and

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then allowing the utilities, to the extent they retained that generation, to sell it into the open market.

Mr. OSE. Ms. Hapner, before I get another answer of that nature,

let me ask the question differently. Did the legislation define a date

certain at which the utilities would be free to price their retail

power delivery without CPUC jurisdiction?

Ms. HAPNER. The legislation said that the rate freeze, which was

part of the legislative package, would end either when the utilities

had collected their stranded costs or no later than December 31,

2001.

Mr. OSE. December 31, 2001. So December of this year.

Ms. HAPNER. December of this year.

Mr. OSE. Is that your understanding, Mr. Pickett?

Mr. PICKETT. Yes, that is correct with the possible exception of

a 3-month stub period that would have taken it to the end of

March 2002. But clearly there was an end date, one or the other,

anticipated.

Mr. OSE. Has PG&E, Southern California Edison or San Diego

Gas & Electric submitted to the PUC filings that say they have recovered their stranded costs?

Ms. HAPNER. Yes, on several occasions—well, first let me say

that monthly, each utility provides an accounting of the stranded

costs that have been collected up until that point. And we, per

CPUC regulation, had alerted the Commission that we were very

close to recovering our stranded costs and that surely when the

valuation of our hydro facilities was made, that the stranded costs

would have been collected. We estimate that at the latest, that was

last summer.

Mr. OSE. Summer being July, August, June?

Ms. HAPNER. By August.

Mr. OSE. Mr. Pickett, is that similar to what Southern California

Edison did?

Mr. PICKETT. Yes, sir, we also submitted a filing indicating that

our stranded costs had been collected in the early August timeframe.

Mr. OSE. So at that point, your contention was that under the

legislation, you were then free to go ahead and use market-based

retail prices.

Mr. PICKETT. For the generation; yes, sir.

Mr. OSE. For the generation. And how did the PUC respond?

Mr. PICKETT. The PUC has basically declined to end the rate

freeze and there are a whole series of intervening steps, but on

March 27, they issued an order that retroactively reversed a number of these accounting procedures such that if you accept the legality, which we do not, but if you accept the legality of what they

have done retroactively, it would say that the stranded costs have

not been collected.

Mr. OSE. Mr. Chairman, if I could just get Ms. Hapner’s response. I see my time is clearly out.

Ms. HAPNER. That is absolutely true and in fact, they would

never be collected by the statutory end date of the rate freeze.

Mr. OSE. Under the new definition.

Ms. HAPNER. Under the new so-called accounting change. We

would go back to the beginning, January 1, 1998 and take all of

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the costs that we collected per the legislation and use those dollars

to pay for the generation costs on behalf of customers.

Mr. OSE. I have to yield back. We will come back to this question.

Mr. BURTON. Ms. Lee.

Ms. LEE. Thank you, Mr. Chairman.

OK, to Ms. Hapner, first let me just say of course, PG&E filing

bankruptcy does not settle very well with me. And the irony of this

is that many consumers now are going to be paying, as they are

now, and in the future, paying higher utility rates and yet unfortunately bankruptcy laws have been changed now that will make it

harder even for consumers who have to pay these higher rates to

file bankruptcy and yet PG&E can do this so easily.

Now we have read in the newspapers that PG&E, before declaring bankruptcy, paid $11⁄2 million, was it, in legal fees and distributed more than $50 million to employees and provided bonuses to

CEOs of over $2 million. Also we understand and we have read,

and I am asking this because I have just read this, that there have

been—or at least there is about $30 billion in the parent company.

So what I am wondering is how do you reconcile declaring bankruptcy with these assets and expenditures. And I know that you

made billions in 1998 and in 1999, and what happened to this

money? Why has it not been used to pay off your debt? And finally,

let me just say that there is no question where this money has

gone in terms of the escalating costs, to the generators, and why

have you not gone after them in terms of trying to find some relief,

rather than filing bankruptcy or going to the State for assistance?

Ms. HAPNER. Let me try and handle those one at a time and if

I miss one, please remind me—I am sure you will.

With respect to the profits that you mentioned in 1998 and 1999.

Those were very different from the experience that we had in 2000.

During that timeframe, the dollars that we were collecting per the

rate freeze were enough to cover the wholesale generation costs.

Beginning in May 2000, we experienced a gap that we have all referred to. The distortions in the market, which contributed to exorbitant prices.

With respect to going after the generators, we have been very active with our fellow investor-owned utilities and in some cases even

the municipal utilities and with the Public Utilities Commission in

seeking recompense from the Federal Energy Regulatory Commission and as Chairman Hebert said, some of those cases have been

resolved, not to our liking and others are up for rehearing.

Moving to the choice to or the decision to seek protection of the

Bankruptcy Court, let me first say I am not a bankruptcy attorney,

so I cannot answer that question in much detail.

Ms. LEE. Well can you just tell me, do you know whether or not

you transferred money to the parent company?

Ms. HAPNER. Let me answer that by saying that as vice president for the regulated side of the business, I can say unequivocally

that we have complied with all of the Commission rules with respect to how the utility interacts with our corporate parent and our

other businesses.

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Ms. LEE. So if the rules allowed you to transfer money to the

parent company, then there is a chance that you could have transferred it.

Ms. HAPNER. Others are much more familiar with the cash transfers and transactions than I am. All I can say is that we have followed those rules very carefully. We have been audited on those

rules and have had our method of doing business blessed by the

Commission. They have just begun a new proceeding and we look

forward to that.

Ms. LEE. If possible, Ms. Hapner, Mr. Chairman, I would like to

ask for the details of this to be submitted to the committee for the

record, if you can do that.

Ms. HAPNER. Absolutely.

Mr. BURTON. Without objection.

Ms. LEE. Thank you very much, Mr. Chairman.

Let me ask you about the impact now of the bankruptcy filing

on consumers and also on employees, those loyal employees who

have worked for the company for many years, who have their retirement now at stake and also those senior citizens who, for example, have dividends coming in as a result of investments in the stable stock. What are they going to do now with regard to their dividends and their investments?

Ms. HAPNER. Basically, we were very clear in our statement on

Friday, particularly with our employees, and our retirees that we

take our obligation to serve very, very seriously, we do not expect

that our business will change very much. Our employees have been

dealt with very fairly. In fact, the $50 million that you referred to

went to paying non-union, management employees—not officers or

the CEO, I can attest to that personally—for their very good performance in the year 2000. So we do not expect employees to be

laid off.

With respect to customers, customers are again—taking care of

customers is our bread and butter business. We do not want our

customers to suffer. We support the programs that the State and

Federal Government has in place for protecting small users and

customers who have limited means.

Ms. LEE. Mr. Chairman, may I have just 30 more seconds,

please?

Mr. BURTON. The gentlelady is recognized for 30 seconds.

Ms. LEE. So are you saying that employees who worked for

PG&E, say 20 or 25 years will be vested, their retirement is secure

and when they retire, they will be able to benefit from what they

thought they would have received as a result of working for that

long for PG&E?

Ms. HAPNER. Again—and I apologize—I am not an expert in

terms of the pension programs, but I understand that employees’

retirements are safe. With respect to the dividend and the share

holders at large, unfortunately, because of our economic situation,

we have not been able to declare a dividend for this most recent

period, but we are hopeful that with the reorganization of our debt,

that we will get back to a credit-worthy status as soon as possible.

Ms. LEE. Thank you very much. Thank you, Mr. Chairman.

Mr. OSE. If I might just add something, one of the jurisdictional

subjects that my subcommittee has is the Pension Benefit GuarVerDate 11-MAY-2000 10:55 Apr 01, 2002 Jkt 000000 PO 00000 Frm 00352 Fmt 6601 Sfmt 6601 C:\DOCS\76761.TXT HGOVREF1 PsN: HGOVREF1
345

anty Corp., I was telling Congresswoman Lofgren, we have looked

at the funding at the Guaranty Corp. which would handle a failure

of PG&E’s pension plan, if it ever occurred. We looked at the funding, the Guaranty Corp. is very well situated and PG&E is on nobody’s list from the pension plan side of things, as being vulnerable

or subject to failure.

Ms. LEE. Thank you, Mr. Chairman. I think that is very important to make clear and to make public so people will understand

that because there is a sense of panic out there.

Mr. OSE. We will be watching it as the says go forth. I am not

speaking to the dividends to stockholders, I am talking about pensions.

Ms. LEE. Retirement pensions, thank you very much.

Mr. OSE [presiding]. Mr. Horn for 5 minutes.

Mr. HORN. Thank you, Mr. Chairman.

Most of you agree, I take it, 1999 was when, as one person said,

the market was getting a little wacky. Do you all agree that is the

date on that?

Mr. PICKETT. Speaking for Edison, Congressman, no. March 1999

was a date I believe I referred to and that was a date that we first

applied to the California Public Utilities Commission for authority

to do bilateral contracts. The market meltdown became apparent I

think most clearly in early May 2000.

Mr. HORN. OK, do you all agree on that?

Ms. HAPNER. Yes, sir.

Mr. HORN. In sequence, gentlemen, what about you?

Mr. VANECH. Unfortunately, I do not have enough data with me

to answer that question.

Mr. HORN. Well, was it about that time in the chronology?

Mr. VANECH. I recall that prices started to escalate about a year

ago, actually started to escalate noticeably.

Mr. HORN. OK, that is the year 2000 or are you into the year

2001?

Mr. VANECH. No, in 2000.

Mr. HORN. 2000.

Mr. VANECH. That is correct.

Mr. HORN. OK, and as I listen to you and read your various interesting papers, you also think the Federal Energy Regulation

Commission should have acted sooner; is that basically what your

position is?

Mr. PICKETT. Speaking for Edison again; yes, sir, very much so.

Mr. HORN. Now those were done—and they would not extend it.

And apparently the California PUC would not extend it either, is

that correct?

Ms. HAPNER. Well, the California PUC does not have the authority to set the wholesale price, that is the purview of the Federal

Energy Regulatory Commission. The PUC, along with Southern

California Edison, PG&E and San Diego Gas & Electric went arm

in arm to the FERC to extend them.

Mr. HORN. I think on the Federal side, I would like to know what

kind of an environment you felt there, because that was just about

before one administration followed the other and when you first

went there, that was the Clinton administration and what

changed? Now if you heard Chairman Hebert this morning, they

346

are ready to roll and get things done, but you are saying there was

just too much of a lag. So I am wondering what was going on, was

there turmoil within the Commission and this kind of thing, because people are leaving and people are coming?

Mr. PICKETT. Congressman, I do not know and cannot speak to

what effect the pending change in administration had on the thinking of the FERC Commissioners. We simply do not have insight

into that. I think the history of what FERC had been trying to do

since the passage of the 1992 Energy Policy Act by the Congress,

is more instructive. They had been clearly trying to develop competitive markets and Edison supported that. We believe that a competitive market, a workable, functioning competitive market, is a

better way to price goods and services than a regulated monopoly.

But the FERC also is the cop on the beat in those markets. And

when the market began to melt down, frankly the cop on the beat

was not there, they did not respond. Now Chairman Hebert said

they are responding now, we have been pleased to see the progress,

but we still have on rehearing at the Commission the decision from

the first filing in August, that has not come out, that will give us

a chance to test the unduly narrow view that the FERC has taken

of its own jurisdiction and get it to a court for a decision. That has

not come yet.

Mr. HORN. Now there is a Department of Energy and again,

there were Secretaries coming and going. What, if anything, could

the Department of Energy have done in default based on the Commission, was there anything that could happen, maybe jawboning

if nothing else?

Mr. PICKETT. Well, the Department of Energy was actively involved in a fair amount of jawboning in the critical time of late December through January where the utilities were running out of

cash, running out of credit, were unable to buy power and the State

had not yet stepped in with its emergency legislation to give the

State agencies the authority to buy power. The Secretary of Energy

at that point signed a series of emergency orders designed to require generators to sell into California despite the looming creditworthiness problem, and it is on an emergency basis to keep the

lights on. And there was a lot of jawboning around that activity.

Mr. HORN. What is your feeling on that, Ms. Hapner?

Ms. HAPNER. That is my recollection as well. I would say that

Secretary Richardson signed several of those orders and that was

carried forward by Secretary Abraham into the spring of this year.

There came a point when the Secretary did not want to renew

those orders and I cannot recall exactly when that was.

Mr. HORN. And what did he do? Did he renew them? You mentioned that you were not sure——

Ms. HAPNER. I believe Secretary Abraham renewed those orders

once or twice, I really cannot recall.

Mr. HORN. So the two of them agreed, the two Secretaries, on

this, I take it.

Ms. HAPNER. I would not presume to speculate on whether or not

those Secretaries of Energy agreed. Certainly on that point they

both had a similar reaction.

Mr. HORN. Well, did those emergency signatures of theirs, did

they gain anything from it and you gain anything from it?

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Ms. HAPNER. Go ahead.

Mr. PICKETT. I do not think either company gained anything

from it. The people of the State of California gained from it because

the continuation of the emergency orders over the critical period in

January allowed the State legislature to implement the necessary

legislation to have the State buy the power, have a credit-worthy

entity behind the power purchases, so the lights could stay on,

thereby making continuation of the emergency orders unnecessary.

Mr. HORN. Well, if the Federal Commission was not doing

enough at that point, it sounds like the State Commission was not

doing enough.

Mr. PICKETT. We are clearly of the view that from May 2000

when this market started to melt and it was visible to everybody,

that the governmental response on both sides was an unfortunate

exercise in finger pointing, and it continued for way too long. I

think we are starting to see responsible reaction by both the State

and the Federal Government but we already have one of the major

utilities here in bankruptcy and my company is on the edge of insolvency.

Mr. OSE. Mr. Horn, we are going to have another round.

Mr. HORN. I would like the questions I put earlier on this to be

put to the chairman, because he is not here.

Mr. OSE. Chairman Hebert.

Mr. HORN. Right.

Mr. OSE. Without objection, so ordered.

I recognize the gentlelady from this area for 5 minutes.

Ms. LOFGREN. Thank you very much.

I am wondering if I could ask you, Ms. Hapner—and my constituents talk to me about this all the time—how much was transferred from PG&E to its parent corporation, what is the dollar figure?

Ms. HAPNER. Congresswoman, I do not have the exact dollar figure of transactions that have occurred over the years, it is fairly

typical for subsidiaries of a parent corporation to shift dollars.

Ms. LOFGREN. Let us go from 1999 to present.

Ms. HAPNER. I do not have the exact amount, I would just reiterate that all actions that we took were in compliance with the

Commission rules. I will get you that exact amount.

Ms. LOFGREN. Can we get the information? I would just observe

that I understand that there are rules, but did the rules make you

transfer the money or allow you to transfer the money?

Ms. HAPNER. The rules are very explicit in terms of how dollars

can be used and it is very clear that the utility dollars cannot subsidize the activities of other parts of the business.

Ms. LOFGREN. Could you have used those funds that you recovered from sale of generation assets to improve path 15, for example?

Ms. HAPNER. The dollars that we recovered from the sale of the

generating assets were designed to pay off the uneconomic generation costs and the accounting on those is pretty explicit.

Ms. LOFGREN. So you could not have used that for infrastructure,

is that what your testimony is?

Ms. HAPNER. Dollars that we use for transmission and distribution—throughout the entire rate freeze process, we have continued

348

to make capital improvements and we request dollars for those improvements on the distribution side from the Public Utilities Commission and on the transmission side, which would be path 15 from

the Federal Energy Regulatory Commission.

Ms. LOFGREN. So is your testimony that you were prohibited

from using the proceeds for transmission infrastructure improvements or that you were not prohibited from using that?

Ms. HAPNER. We used those dollars to recover stranded costs

from generation.

Ms. LOFGREN. The question is what were you allowed to do with

it, what were your options?

Ms. HAPNER. Well, I suppose that our option was not to pay for

the generation costs that were incurred, not to buy generation on

behalf of our customers and to mix dollars that were for power procurement and use them for transmission or distribution, which was

not the intent of AB–1890.

Mr. OSE. Would the gentlelady yield?

Ms. LOFGREN. If you will give me a couple more seconds after I

yield.

Mr. OSE. I will do so.

I think that is a very interesting question, whether or not the

legislation underlying her restructuring allowed or disallowed certain actions with the proceeds of the restructuring. I think we

ought to find that out.

Ms. LOFGREN. I think we should.

If I could ask Mr. Pickett, does Southern California Edison have

a parent corporation?

Mr. PICKETT. Yes, we do.

Ms. LOFGREN. And were there transfers of funds to the parent

corporation from you all as well?

Mr. PICKETT. Yes.

Ms. LOFGREN. And do you know what the dollar amount was say

since 1999?

Mr. PICKETT. I do not know the dollar amount off the top of my

head. We can get it and supply it to the committee. I can say that

there are three categories of transfers and one may not have occurred in 1999, but the three categories of transfers are dividends

of earnings to the parent company, payments of taxes to the parent

company because the companies pay tax on a consolidated basis;

and third, are in the category of special dividends. They were the

return of the equity that had been invested in the generating

plants that we sold. And all of that was done because the PUC, as

a condition of our being allowed to have a holding company, requires the utility to maintain a balanced capital structure. And

that means that there is so much of the utility financed with debt

and a specified percentage financed with equity. If those dollars

had been kept in the utility, the equity portion would have

ballooned and we would have been out of compliance with the

PUC’s rules.

Ms. LOFGREN. Rather than ask either one of you to speculate as

to dollar amounts, I am hopeful that we can get a written report

from both companies to the committee.

Mr. OSE. Without objection, that question will be answered.

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Ms. LOFGREN. Finally, Mr. Pickett, your strong testimony about

the need for FERC to be more vigorous in its activities given the

dysfunctional market, has I think a lot of agreement really, on my

part at least. But there is discussion in the State now that if FERC

does not take the kind of action, the strong action that you recommended and many other have, that the State of California will

necessarily have to take some rather extraordinary measures; for

example, using its power of condemnation to seize private companies and begin directly to control this market. What do you think

that outcome would mean for the State of California?

Mr. PICKETT. I think it would be a very uncertain and expensive

undertaking. The State, of course, can exercise the power of eminent domain but it must pay the fair market value for the assets.

We are faced with a broken market that has created huge apparent

value for the assets that might have to be paid for them. That

could be hugely expensive for the State and at least in my perspective, not necessarily the best way to incent what we really need,

new generation and an efficient operating market that will drive

prices down. So that sort of extraordinary action I hope does not

come to pass for that reason and I think the State has already

taken some very extraordinary action. Rates have gone up hugely

and that is a very painful thing to do for anyone.

Mr. OSE. Have we met your 2 or 3 seconds?

Ms. LOFGREN. I do not want to take advantage of the chairman’s—that is sufficient for me and I will—— Mr. OSE. We will go around again. I do want to add that when

Chairman Burton returns, we will insert his 5 minutes here at the

appropriate spot and we will all defer to him accordingly.

I want to go back to the issue of the recharacterization that followed the PUC’s ruling on stranded costs, which we were talking

about earlier.

Both PG&E and Southern California Edison late summer 2000

filed with PUC documents that said we have recovered our stranded costs and under 1890 and PUC rulings, we should now be free

to price our power, with certain caveats, at market; is that an accurate statement?

Mr. PICKETT. Yes, sir.

Mr. OSE. Ms. Hapner.

Ms. HAPNER. Yes, it is.

Mr. OSE. PUC turned around—took that under advisement and

over a period of time responded. How long of a period of time before

PUC action was taken on that filing?

Mr. PICKETT. The PUC action retroactively changing the accounting procedure was in a decision on March 27.

Mr. OSE. Of this year?

Mr. PICKETT. Of this year. The filings to end the rate freeze, August, September, October timeframe, there were a series of filings,

but basically in the late summer, early fall timeframe.

Mr. OSE. Is that consistent with what PG&E did also?

Ms. HAPNER. Well, the one added piece is that at the order of the

Commission, we filed an interim value for our remaining non-nuclear assets, our hydro facility.

Mr. OSE. That was the piece that put you over the top, if you

will?

350

Ms. HAPNER. And that clearly put us over the top and that filing

was rejected.

Mr. OSE. Has Southern California Edison submitted a similar filing for any of their non-nuclear assets?

Mr. PICKETT. Yes, sir, there were filings seeking authorization to

sell our interest in three of our five major remaining power plants.

We had contracts for sale of two coal-fired units, one in New Mexico and one in Arizona, excuse me, one in Nevada and our interest

in the Palo Verde Nuclear Station in Arizona, we had sought Commission authority to do that. We had also filed a settlement we had

reached with the consumer advocacy group at the California PUC

that would have allowed us to retain our hydro generation assets

and operate them in a quasi-market mechanism under California

PUC regulation. Those applications had been submitted and we

were waiting for action. One had been waiting for well over a year

for action before the market melted down and a hold was put on

this activity.

Mr. OSE. You are saying you filed it in May—let me see, the

market started melting down in spring of 2000, you are saying you

filed it a year prior to that or a year prior to today?

Mr. PICKETT. A year prior to that. The application to sell our Mojave Power Plant was filed, if memory serves here, and we can certainly get exact dates, that was filed in 1999.

Mr. OSE. OK, so these filings were made consistent with the legislative intent of 1890 that would basically empower the utilities to

State, subject to PUC affirmation or rejection, that they had recovered their stranded costs and under the law, they could go forward

with retail-based prices.

Mr. PICKETT. No, I am sorry, that is—— Mr. OSE. I just want to make sure I have got this clear because

it is important to me.

Mr. PICKETT. In 1999, and up until the time the market began

to melt down in May, we believed it was going to be necessary to

sell our power plants, realize the gain, in order to pay off our

stranded costs.

Mr. OSE. Right.

Mr. PICKETT. And we had engaged in doing that and we were engaged in a program to take the utility, the regulated utility out of

the generating business under the incentives in AB–1890.

Mr. OSE. And those requests to sell those generating facilities are

still pending.

Mr. PICKETT. Well, they are still pending. Pursuant to our MOU,

they will be withdrawn, but those were the filings that I referred

to that had been filed back into 1999. As the market price went up,

and you have to bear in mind here, this is a very complicated and

arcane accounting mechanism, but we were buying power from ourselves.

Mr. OSE. Right.

Mr. PICKETT. And we were doing it through the Power Exchange

and we were paying the market-based price for it, not set by us,

but set by the market. Those market revenues that we were being

paid for our generation as we tried to sell it, we still owned it and

were selling the electrons into the market, those market revenues

were also going to pay off the stranded costs.

351

We reached a point and it depends on any number of variables,

but we reached a point where we believed that without the sales,

we had recovered our stranded costs.

Mr. OSE. I am going to yield to Mr. Horn for a question.

Mr. HORN. It is not unusual that a corporation gets rid of certain

things so that they can show the stockholders, look at what we

have in revenue this quarter, or this half year, or whatever. Now

I think a lot of charges have flown around by both PG&E and

Southern Cal Ed that they got rid of a number of things that generated power and they used the money to keep the stockholders

happy, and I would just like to know what the policy is there.

Mr. PICKETT. Well, first of all, in our utility business, it is very

unusual to sell assets. Selling assets that are dedicated to the public service requires the approval of the PUC to ensure that just

that does not happen, that we are not churning assets for the momentary benefit of shareholders, but that at the same time, the

long-run interests of our customers are being served. And it is our

policy to serve the long-run interests of our customers and to do it

under the rules set by the PUC, that as I mentioned a moment ago,

require the balanced capital structure, require that we not have excess equity in the utility, increasing rates for customers, and as we

went through deregulation, the utility business shrank, our earnings shrank and they shrank because we took the earning assets

out of the utility.

Mr. OSE. I recognize Ms. Lee for 5 minutes.

Ms. LEE. Thank you, Mr. Chairman.

Let me direct my question to Mr. Vanech, is it?

Mr. VANECH. Yes.

Ms. LEE. You indicated in your testimony that the QFs are owed

huge sums of money and that they cannot pay fuel suppliers. Let

me just ask you this then. In terms of Delta Power’s profits, what

were they in 1999 and 2000? Do you have any idea, just ballpark?

Mr. VANECH. We have grown rapidly through acquisition. Boy,

are you asking total corporate? We have 13 plants, 5 of which are

in California.

Ms. LEE. OK, give me the California numbers, if you have them.

Mr. VANECH. I am afraid to say. I do not have the numbers at

my fingertips, but I can certainly provide that to you.

Ms. LEE. Would you provide that for the record, 1999 and 2000?

Mr. VANECH. Yes.

[The information referred to follows:]

Summary of Net Income for the years ending December 31, 1999 and December

31, 2000 for Delta Power Company, LLC’s California affiliates: (i) OLS EnergyChino, (ii) OLS Energy-Camarillo, (iii) Carson Cogeneration Company, (iv) Mojave

Cogeneration Company, and (v) PE Berkeley, Inc.

Year Net Income

1999 ..................................................................................................................................................... $2,017,320

2000 ..................................................................................................................................................... $(1,801,341)

Ms. LEE. We would just like a ballpark figure——

Mr. VANECH. Yeah, that would be fine.

352

Ms. LEE [continuing]. Of what the profits were. The California

Independent Systems Operators found that there was a potential

of over—I believe it was $6 billion in overcharges by the generators. That represents approximately 30 percent of wholesale energy

costs over the last year. How do you respond to that? Do you agree

with that or is that an inflated number from your perspective?

Mr. VANECH. I understand the question. I can only respond from

the perspective of qualifying facilities. The contracts that we sell to

the utility—the contracts under which we sell to the utility essentially came out of Federal legislation and are in a sense—they are

not regulated. The revenues we received are a function of the cost

that the utility avoids, in other words, in not buying that kilowatt

hour from another producer. So it is supposed to represent incremental cost. Clearly the rates have gone up across the board, including under our contracts. I mean, we are getting a lot more revenue then we were 6 months or a year ago, assuming we are operating. The other side to that is we have significantly higher fuel

costs and some projects make more money, some lose more money

as fuel prices go up. The key issue is how efficient that particular

generator is compared to the overall market. I hope that makes

sense to you. With respect to the $6 billion, as we heard earlier—and I do not

know the breakout specifically, but a significant amount of that appears to have come from non-QFs. I do not believe, to my knowledge, that the QFs are not being attacked as part of this $6 billion

overpayment, because the QF contracts, as I said, really fall under

Federal and State jurisdiction. They are based on a formula, as I

said earlier, which is supposed to represent the utilities avoided

cost.

Ms. LEE. OK. Well many believe that the generators are gouging

and that is part of the problem, a large part of the problem. What

do you say to that in terms of QFs role in price gouging? Is that

an issue or not for you?

Mr. VANECH. I do not believe—and again, let me speak to gas

fired projects, because there is a difference between renewables and

gas fired. Mr. Desrochers may want to comment on the renewables.

The incremental revenue that we have earned because of higher

prices has substantially gone to the gas suppliers, and we can demonstrate that showing our profitability. So even though market

prices have gone up dramatically, our profitability in some cases

has actually gone down, in some cases have gone up or in some

cases remained flat. We have not—these gas-fired QFs—and I can

speak to our five—have not made any windfall profits as a result

of higher energy prices. The big reason is because—the way the formula works, the utility formula, is that we get paid every month

based on an assumed deficiency rate and the border gas price for

that month. We buy gas from our gas suppliers based on that exact

price that is used in the formula. In other words, there is a perfect

hedge in a sense between the additional revenue and the additional

fuel cost. It works when the fuel prices go up or down. But it has

the effect of maintaining our margin to be a fairly constant number.

Ms. LEE. So you have not inflated your prices; you have not

gouged and you have not withheld supply?

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Mr. VANECH. Absolutely not. In fact, we have no ability to manipulate prices. The prices—and this is another important point. The

prices we receive are set by the California Public Utility Commission each month. We have no control over the pricing we receive.

Ms. LEE. Thank you very much, Mr. Chairman.

Mr. BURTON. Let me—since I had to make a couple of calls, let

me ask some questions I would have asked. I appreciate Mr. Ose

taking the chair in my absence.

If the FERC imposes price caps, do you think there will be more

or fewer blackouts this summer?

Mr. PICKETT. My judgment is there will be fewer.

Mr. BURTON. Why?

Mr. PICKETT. Because if the price cap is imposed at a level that

is sufficiently reasonable that it will allow the generators to recover

their fair costs, they will lose the incentive to withhold capacity

from the market to drive prices ever higher.

Mr. BURTON. Do you agree with that?

Ms. HAPNER. Well, I believe that a price cap should be applied

regionally. California is very a part of a larger grid, in fact, we are

a net buyer of electricity. So clearly, we have to work and partner

with the other Western States. I do think that if there is a price

cap just in California, then we are likely to see some of the effects

that you mentioned earlier in terms of megawatts following the

money. Right now what we are seeing is, when there was a price

cap in California the megawatts left California and then came back

in as more expensive out-of-market costs. So clearly a cap, particularly a short-term cap to get us through this very difficult period,

has to be a region-wide cap and that should very much help our

situation.

Mr. BURTON. And if it is not a region-wide cap, then do you think

that it would probably exacerbate the problem?

Ms. HAPNER. I am——

Mr. BURTON. If it is not a region-wide cap, the problem could be

exacerbated as far as blackouts are concerned?

Ms. HAPNER. I would not speculate on the blackout situation, Mr.

Chairman. What I would say is that if it was just a California cap

or an ISO-wide grid cap as we had before, then it encourages generators that are not part of the ISO grid or regulated by the

FERC—including the municipal utilities that Mr. Ose mentioned

earlier—to certainly drive up the prices to stratospheric levels.

Mr. BURTON. And then the energy would go where the money is

and you probably would have some blackout problems in those

areas that couldn’t break the caps, right?

[No response.]

Mr. BURTON. I mean, I know it is hypothetical, but if the FERC,

as they said earlier, said they could only control 25 percent—put

a cap on only 20, 25 or 30 percent of the market, that means that

the other 70, if the prices went above the cap and was forced up,

that is where the energy would go to produce electricity.

Ms. HAPNER. Well unfortunately that is—— Mr. BURTON. And in those——

Ms. HAPNER. Excuse me.

Mr. BURTON. And in those areas where the cap was in place you

could have more severe blackouts, could you not?

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Ms. HAPNER. I really cannot say about the blackouts. I do think,

though, this is exactly the kind of example that Congresswoman

Lofgren was referring to. In this type of crisis, we all have to pitch

in, and that includes the municipal utilities who are not price constrained.

Mr. BURTON. I understand, but when you start making these

kinds of decisions you have to look at every eventuality and what

it is going—if you push in here, what is going to come out over

here. What do you think the price cap should be?

Mr. PICKETT. Our belief is that the price cap should be set at a

level that will allow the generators to recover their costs, plus a

fair return on investment. It could be set—and I guess I would

want to say that I would be very much opposed, or find a distant

second best a one-size-fits-all price cap done generically, because

there are substantial differences from generator to generator in

terms of cost, the age of their plants, their fuel sources and so

forth. What they need to be set, price caps, on a generator-by-generator basis at a level which provides cost recovery and a fair return on investment. That is the standard in the law.

Mr. BURTON. This letter from the Governors that was sent to Mr.

Hebert had nine of the Governors on there from this region and

they are not in favor of price caps. So a region-wide price cap might

be a tough nut to crack there. So you may have a price cap only

for California, and then I think you run into the problem we were

talking about.

Let me ask you a couple of other questions. Did you ask the PUC

in July to give you the authority to enter into what they call bilateral forward contracts?

Mr. PICKETT. Our request to the PUC for the bilateral forward

contracts was made in April. I believe at that time the PX was

then developing its bilateral forward program. It had not been

adopted yet. The FERC approved the PX’s bilateral forward contacting in May 1999, May 26th. On July 14, 1999 the PUC finally

gave us limited authority to do bilateral—to engage in the—excuse

me, not bilaterals, in the block forward market, but there was a

very severe constraint on the amount of transactions we could do

at that time.

Mr. BURTON. Now up to that time is it true that you were only

allowed to purchase power through the PX or the spot market?

Mr. PICKETT. Yes, sir. Well when you say the spot market, that

is to say through the ISOs’ imbalance market, yes, sir.

Mr. BURTON. Ms. Lynch said that the PUC gave you the authority you needed to enter into long-term contracts. She said she

rushed your proposal through in 2 weeks and got it passed on August 3rd, is that true?

Mr. PICKETT. I do not know if she rushed it through, but what

was—this is now August 2000——

Mr. BURTON. Right.

Mr. PICKETT [continuing]. And what was done then was only half

the job. They gave us authority to enter into bilateral contracts;

they gave us no assurance of recovery of the costs of those bilateral

contracts. The two have to go together. If you do not have assurance of recovery you are not a credit worthy entity. You cannot get

somebody to sign a contract with you.

355

Mr. BURTON. Did you talk to her about that?

Mr. PICKETT. To the extent we could, yes, sir.

Mr. BURTON. What do you mean to the extent you could?

Mr. PICKETT. The PUC has a series of what they refer to as ex

parte communication rules that prevent open communication between the regulated companies and PUC commissioners. We certainly did bring our concerns about the nature of the order and the

limitations on it to the attention of the Commission through formal

filings. I just cannot say to you that we—did we talk to Ms. Lynch

about it? I do not know. We may have in various times, but it

would have been under the constraints of the PUC’s ex parte rule.

Mr. BURTON. As I understand—this will be the last question on

this round. As I understand it, the PUC would not preapprove

long-term contracts and the rates had to pass a reasonable test

after the fact, is that right?

Mr. PICKETT. That is correct. I can give you the history here if

you want. I think Ms. Hapner has something to say. After we got

the authority in August, the PUC set up a preapproval procedure.

Ms. Lynch has often said well, the utilities had the authority in

August, they could have gone and signed contracts on their own

nickel. As I just explained, that is not a realistic expectation. They

also set up this preapproval procedure you have just referred to.

We filed our contracts under that preapproval procedure in September 2000. By the end of October, even though there was a 30-

day mandate in the PUC order, the PUC had not acted. We were

ultimately able to sign those contracts only in November 2000, well

after we were beginning to run out of credit and people were beginning to refuse to deal with us.

Mr. BURTON. During that time period, how much did the prices

go up that month?

Mr. PICKETT. Sir, I do not know, but we could go back and—— Mr. BURTON. It was a big jump though, was it not?

Mr. PICKETT. It was a big jump, yes, sir.

Mr. BURTON. So if you had gotten the approval a little quicker

you could have gotten a better price?

Mr. PICKETT. Absolutely.

Mr. BURTON. Go ahead.

Ms. HAPNER. Mr. Chairman, rather than take the committee’s

time, I would be happy to provide for the record a history of our

requests for that authority. With respect to your specific question

about conversations with the Public Utilities Commission and with

President Lynch, again taking into account the ex parte restrictions

that Mr. Pickett mentioned, we had several conversations with

staff members of the Public Utilities Commission at high levels.

The only guidance that we were provided was a figure of per se

reasonableness that is actually several cents below what the Department of Water Resources paid for the power that they procured

very recently.

Mr. BURTON. So it would not work?

Ms. HAPNER. We were told antidotally, but nonetheless, that

even if we had criteria for reasonableness it would not be worth the

paper it was printed on.

Mr. BURTON. OK, who is next? Mr. Horn.

Mr. HORN. Mr. Chairman, I will yield my time to Mr. Ose.

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Mr. BURTON. You are going to yield your time to Mr. Ose?

Mr. HORN. Yes.

Mr. BURTON. OK.

Mr. OSE. OK, recharacterization of stranded assets. If I understand the basic impact of your application, it was to say very clearly that the capital base on which rates had been structured had

been reduced to zero by recovery and that you now were willing to

go into the open market and compete at the retail level; is that correct, Ms. Hapner?

Ms. HAPNER. I would say it a little bit differently, if you will permit me, Mr. Ose. AB–1890 said that when the assets were valued

and/or stranded costs were collected, that those assets that were

still with the utility family were free from regulation and could go

out and be merchant plants, if you will.

Mr. OSE. At the wholesale level?

Ms. HAPNER. At whatever the market price was.

Mr. OSE. Now the impact—I think I understand the impact of

Edison’s and PG&E’s filings saying that the stranded cost had been

reduced to zero. What is the impact on the PUC’s recharacterization—let me ask the question differently. Describe for me the

PUC’s recent recharacterization that effectively said no, you have

not recovered your stranded cost. Keep it in layman’s terms, OK.

Mr. PICKETT. I will try, and if I do not, let me try again. It is

a very complex and arcane subject. Before the PUC recharacterized

the accounting, AB–1890 and the implementation by the PUC provided three sources of revenue for the utilities to recover their

stranded costs. AB–1890 and the PUC made it clear that the utilities were at risk for recovery of their stranded costs. The three

sources of revenue were market revenues, revenue from the sale of

the generating plants and headroom. Headroom is that amount of

costs that we have in rate recovery above our actual cost.

Mr. OSE. It is the amount of rate over your basic cost?

Mr. PICKETT. That is correct. Those were the three sources of

revenue for stranded cost recovery. When the market melted down

and wholesale costs went up headroom disappeared and market

revenues increased.

Mr. OSE. I got all of that part. I understand the dynamics there.

What is the consequence to Edison of PUC’s recharacterization

now?

Mr. PICKETT. The important point to understand, though, here is

that, in our view, the procurement costs were intended to be recoverable.

Mr. OSE. And when the market went up, you no longer had that

avenue?

Mr. PICKETT. We may have lost stranded cost recovery but it was

always intended that we would recover our procurement costs. The

PUC disagreed with that in the implementation of AB–1890, and

the recharacterization says that the first thing that will be recovered by the utility are the procurement costs and the rest is beyond.

Mr. OSE. So you went 3 years with one set of rules, or 4 years

with one set of rules in terms of rate structure and what have you,

and then March 28th, you had your world turned upside down, so

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to speak, in terms of how those funds—or how that rate base was

supposed to impact your operations?

Mr. PICKETT. Yes, sir. And with the point that it was—the PUC

said this was to carry back to the beginning, so it has retroactive

effect, which we believe is illegal.

Mr. OSE. And that is the basis of your pending Federal lawsuit.

Do you not have a lawsuit pending over this particular issue?

Mr. PICKETT. Not on that issue. The Federal lawsuit deals with

the recoverability of the procurement costs. I can explain that if

you would like. It is not related to the recharacterization issue.

Mr. OSE. It predates—your Federal lawsuit predates the recharacterization. We may well have a second lawsuit as a function

of recharacterization?

Mr. PICKETT. Yes, sir. If our memorandum of understanding is

not implemented, we have reserved the right to pursue our remedies in this regard.

Mr. OSE. Now if you prevail on either the first or the second

law—no, you do not have a second. You have a first lawsuit, the

existing lawsuit. Actually you have agreed to set that aside in the

course of the transmission, so maybe my question should be directed to Ms. Hapner.

Are you a party to this lawsuit? Is PG&E a party to this lawsuit?

Ms. HAPNER. We also have a Federal filed rate doctrine case with

the Federal court.

Mr. OSE. Similar circumstances?

Ms. HAPNER. Well as Mr. Pickett said—— Mr. OSE. Over procurement costs recovery?

Ms. HAPNER. Yes, that those are legitimate—those costs were approved by the Federal Energy Regulatory Commission; therefore,

we are allowed to pass those costs through to our customers.

Mr. OSE. Were they approved by the PUC?

Ms. HAPNER. Our claim and the basis for our case is that these

are wholesale costs.

Mr. OSE. So they would be Federal?

Ms. HAPNER. Right.

Mr. OSE. And the PUC does not have any input or review or

what-have-you over that particular aspect?

Ms. HAPNER. That is correct. The PUC has challenged that case.

Mr. OSE. OK. I want to shift my focus just a little bit now. Yesterday I asked this question at least five times, having to do with

whether or not there are any standards in existence at the PUC

to give you direction as to what is reasonable or unreasonable in

terms of forward contracts you may wish to enter into. I was told

very directly that the PUC has finalized that rule five times. I am

asking today, do you have any document such as this, which is a

PUC printed—actually this is California Energy Markets, but it

looks pretty official, so we are going to wave it around a little bit.

Something of this nature, like we would have in the Federal Register for any agency ruling. Do you have anything from the PUC

that in fact is final regarding what is reasonable relative to longterm forward contracts that you may wish to enter into?

Mr. PICKETT. No, sir.

Mr. OSE. None?

Mr. PICKETT. No, sir.

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Mr. OSE. That is 180 degrees different from what we were told

yesterday.

Mr. PICKETT. The only caveat I would put on that is that the traditional standard for recovery of utility costs is that they be reasonable. The PUC has not issued, to my knowledge, guidelines that

would say what is reasonable for utility procurement.

Mr. OSE. What is the standard?

Mr. PICKETT. That is our problem. That is why we sought—when

we finally got authority to enter into contracts, we wanted them

preapproved because there was no standard to say what is reasonable, what costs are we going to be allowed to recover. You have

to have the cost recovery piece in order to enter into a viable contract and not just be incinerating money.

Ms. HAPNER. I believe that all three investor-owned utilities have

submitted different criteria suggesting those be the basis for

preapproval standards, and to my knowledge none of those, nor any

version of any of those has been approved.

Mr. OSE. What you are trying to do is eliminate uncertainty by

asking for the standards.

Mr. PICKETT. Absolutely, yes.

Mr. OSE. Apparently when the yellow light goes on my microphone goes off. That is pretty tricky. I want to go back just for a

moment, and if my time expires we will come back to it. In terms

of the recharacterization of the stranded costs on a 3 or 4-year

after-the-fact basis, what is the consequence to the capital structure of the utilities based on what you said earlier about utilities

having to maintain a certain capital structure, the reaction of Wall

Street?

I knew I was going to do this. We will have to come back to this,

Mr. Chairman. I yield back.

Mr. BURTON. Ms. Lee.

Ms. LEE. Thank you, Mr. Chairman.

Let me ask Mr. Desrochers what he thinks the impact of the proposed 15 percent cut in renewable energy and energy efficient kind

of activities would mean in terms of the California energy crisis,

and also just in terms of renewable energy in general. There is a

15 percent proposed cut I believe in the President’s budget, which

is approximately $180 million which would be taken away.

Mr. DESROCHERS. I am not aware of that. This is a cut in the

President’s budget?

Ms. LEE. Right.

Mr. DESROCHERS. I am not aware——

Ms. LEE. For renewable energy activities.

Mr. DESROCHERS. Yes, I could not give you a guess at what the

impact on that would be. We are proposing some legislation for a

tax credit for renewable energy similar to what the wind energy industry has currently. So that would be an additional legislation. I

could not address what that impact would be.

Ms. LEE. OK. What do you think a reasonable rate in terms of

percentage for renewable energy should be? I am supporting 20

percent by 2020. What is your take on that?

Mr. DESROCHERS. I would agree that 20 percent would be——

Ms. LEE. You think 20 percent?

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Mr. DESROCHERS. Yes. In fact, we proposed legislation about 4

years ago in California that we have a 5-percent of what we call

renewable portfolio standard.

Ms. LEE. What is it now in California? Did you mention that earlier?

Mr. DESROCHERS. I said it is 2 percent.

Ms. LEE. It is 2 percent now?

Mr. DESROCHERS. 2 percent, correct.

Ms. LEE. OK, thank you.

Let me go now to Ms. Hapner and Mr. Pickett. Let me just ask

you what you think the distinguishing or most important factor

was in your decision to file bankruptcy and your decision, Mr. Pickett, to move forward with an MOU? I mean, what was it that

caused you to go in different directions in this crisis?

Mr. PICKETT. Well, I cannot speak, of course, to the what I am

sure were terribly painful judgments at PG&E that led them to

their decision. For our company, we are not out of the woods. We

have more bills stacked up on the desk than we have money to pay,

and it is not a good situation to be in obviously. As this crisis has

developed, we have struggled mightily to maintain our levels of

customer service and keep our employees working and calm and focused on the job that needs to be done. We continue to believe,

even as we are hanging on the edge by our fingernails here, that

a negotiated solution, if one can be reached and implemented, is

preferable to the lengthy process that bankruptcy will involve. It

is preferable for the State to have its policymakers in control of the

utilities going forward rather than a Federal judge. It is in everyone’s interest to get the utility credit-worthy, because as several of

the panelists have commented, billions of dollars of investment are

required in California infrastructure over the next few years. Path

15 is one example.

We have not shorted our utility in terms of the investment that

it needs, but a bankrupt utility cannot put that kind of money into

the infrastructure. It just simply cannot do it, the money is not

there. So we believe that a negotiated workout that will quickly get

the utilities back to a credit-worthy status where the critical investment in infrastructure can be made, where we can keep our

employees on the job and we can continue to provide the quality

customer service is the way to go. Ms. Hapner, of course, will address PG&E, but I have to tell you we are not out of the woods and

we are hanging on the edge.

Ms. LEE. So you have more debts than assets. Clearly bankruptcy is a remedy in those circumstances, but you chose to try to

negotiate your way out of it?

Mr. PICKETT. We have chosen this far—and thus far is the critical phrase—to try and negotiate our way out of it. We have 14 or

15 lawsuits from QFs now seeking back payment. We do not have

the money to pay even if they got their judgment. We have more

bills stacked up on our desk, back bills, than we have money to

pay. We have got to find a negotiated solution and we have to do

it quickly because our creditors, the people who have invested in

this business, our bankers have legitimate expectations of being

paid and their patience is not infinite.

Ms. LEE. So, Ms. Hapner, was bankruptcy the easy way out?

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Ms. HAPNER. Anyone who thinks that a decision to go to the

bankruptcy court for protection is the easy way out, particularly for

a company that’s over 100 years old, does not understand just how

difficult this decision was, Ms. Lee. Let me just say the only thing

that separates our two utilities—we are both facing mounting debts

and we both have faced a series of very destabilizing actions from

the Public Utilities Commission. We did not feel that sufficient

progress was made on a comprehensive solution. I was not part,

and I am not part, of the utility negotiating team that worked with

the State. But it is my understanding that those negotiations have

been very complex and they have been very honest, but they have

not moved forward as quickly as we would have hoped. In the

meantime, it was very clear that the State did not assume the full

procurement obligation that we had hoped they would, meaning

that every month we are incurring over $300 million more of generation debt, which, of course, then is—our inability to pay, as Mr.

Pickett said, has impacted our ability to pay our qualifying facilities. Our ability to make our commercial paper debts and thousands—literally thousands of vendors that we have quite inadvertently brought into this situation with us. So it is the lack of

progress, and in the midst of that lack of progress the actions by

the Public Utilities Commission, including the change in accounting that Mr. Ose was pursuing, that led us to believe that the

quickest and the best way to get to resolution was to move to the

Federal courts.

Ms. LEE. Thank you for your candor.

Thank you, Mr. Chairman.

Mr. BURTON. Thank you, Ms. Lee.

We are going to do one more round. I know that you are probably

getting a little tired of sitting there. Do any of you have to take

a break real quickly or can you sit there for another 25 minutes?

If you can, then what we will do is, we will start our final round

and after we conclude this round, if we still have questions we will

submit them to you. And if you will kindly give them to us for the

record would be helpful, OK.

OK, let me start this final round by saying, Mr. Vanech, how

many megawatts of power of qualifying facilities are idle right now

because they are not being paid?

Mr. VANECH. As I understand it, there are—out of the gas-fired

projects totaling 5,200 megawatts, I understand 3,000 are now shut

down.

Mr. BURTON. 3,000 megawatts are shut down?

Mr. VANECH. That is my understanding. I believe this is current

as of April 2nd. That is the information I got.

Mr. BURTON. Would your company prefer the ability to sell electricity in an open market?

Mr. VANECH. Let me answer that in two ways. With respect to

the existing QF facilities we have, our preference would be to sell

under our existing contracts, because our existing contracts are

long-term agreements and we have lived up to our end of the bargain and what we want is our customers to live up to their end of

the bargain.

Mr. BURTON. But you have not been paid?

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Mr. VANECH. No, we have not been paid; therefore, in turn, we

cannot pay our fuel suppliers who will not give us gas.

For new projects—and we, by the way, are trying to get a project

off the ground for 200 megawatts. The first turbine would start delivering energy in last September of this year in California. We

have to make a decision as to which way we are going to go. We

have basically three options. We can sell to the Department of

Water Resources under their procurement plan. We can enter into

an agreement with a third party such as an El Paso or a Shell, one

of the large energy companies. Or we can try to essentially go it

alone and sell into the market. The first two are sort of simple because they are going to be long-term contracts and we essentially

are going to lay the risk off—the market risk to somebody else.

The problem is there is really no market now that exists in California. The PX, obviously, was discontinued or terminated, however

you want to characterize it. So there is really no transparent market to buy and sell power and trade power in the State at this

point. I think it would be extremely beneficial—and I realize that

after terminating the PX, I am sure no one has the appetite to

start it up tomorrow. But I think there needs to be a realization

that in order to have an effective transparent open market, there

has got to be a way to trade the commodity. So I think longer term

some sort of open market needs to be reintroduced.

Mr. BURTON. So if you had your druthers it would be an open

market?

Mr. VANECH. Yes.

Mr. BURTON. What would be the result if the QFs were freed

from their contracts with the utilities?

Mr. VANECH. I believe the QFs for the most part would be able

to come back on line. The reason we would be able to come back

on line is, the large energy companies, such as the El Pasos of the

world, who I mentioned earlier, we believe would be willing to pay

us a fee to convert natural gas into power, and they essentially

would sell that power for us. It eliminates the current credit issue.

Our balance sheets do not look very attractive right now since we

have huge liabilities and in most cases little or no cash. But what

they will do is essentially deliver gas—they have title to the gas—

and we in turn deliver them electricity back. In other words, we

convert the gas to electricity and in exchange they will pay us a

fee for that service.

Mr. BURTON. So if you could get out of your contracts you would

jump at that in a heartbeat?

Mr. VANECH. Absolutely. Different QFs have different views. We

are not seeking at this point to terminate our contracts.

Mr. BURTON. I understand, but you are not getting paid.

Mr. VANECH. Exactly. We need the right to suspend these contracts, that is correct.

Mr. BURTON. Have you gone to court or anything to try to suspend the contracts because of nonpayment?

Mr. VANECH. We have. We started by actually sending a letter

to Edison for the four southern California projects asking for relief,

but we did not get a response. We then, more recently, filed a lawsuit in Los Angeles County, on behalf of our four projects, asking

the court to give us the relief. And this past Monday the California

362

Cogen Council, of which we are a member filed a petition in front

of FERC asking FERC to give emergency relief to allow the QFs

to sell to third parties. To my knowledge, nothing has been done,

at least as of this time.

Mr. BURTON. Well, I do not see how anybody in good conscious

could say you have to go bankrupt when you have an opportunity

to find another market that will keep you afloat. It does not make

any sense.

Mr. VANECH. I agree.

Mr. BURTON. To PG&E and Southern Cal Edison, what is your

companies’ position on allowing the QFs to end their contracts with

utilities and sell their power on the market since you are not paying them?

Mr. PICKETT. Well, beginning this Friday—checks will go out this

Friday. Under the order of the Public Utilities Commission, we will

be paying the QFs going forward.

Mr. BURTON. Will you be paying them all that you owe them or

just a portion?

Mr. PICKETT. We will be paying all of the QFs that are on line.

These are output contracts. So all of the QFs that are delivering

in April will be paid beginning—and the checks will go out on an

advanced basis this Friday.

Mr. BURTON. So that will be for the total amount that is owed?

Mr. PICKETT. No, no, sir. I am sorry. It is for the going forward

amount beginning—I have forgotten whether the date is March

27th or—it is basically for April forward we will be paying the QFs.

Hopefully, if we have enough money on an ongoing basis—on a current basis, there still is a past debt owing.

Mr. BURTON. Excuse me, but are the arrearages necessary for

you folks to be able to continue to move on? I mean, if they start

paying you in full.

Mr. VANECH. The answer is, I believe our gas suppliers will work

with us and start supplying gas again to start back up, assuming

there is a clear path to us getting paid, and to know that we are

actually going to get paid. Just saying that, you know, at some

point in the future we are going to get paid I do not think works.

I think that most of the QFs have flexibility with respect to some

sort of suspension, if you will, of this amount owed from the utilities. But there needs to be a clear path so we can turn around to

our fuel suppliers principally and say OK, you can be comfortable

now because we are going to get paid X dollars over a period of

time, and this is a credit-worthy obligation, so we know in fact that

there is going to be money to get paid. That is what we require.

Mr. BURTON. Do you need the arrearages in order to keep those

suppliers happy?

Mr. VANECH. It is a mixed bag. We have three different fuel suppliers. I think one will supply gas to us on the basis of getting paid

currently, assuming we can reasonably demonstrate an ability to

pay them off over time. The other two I do not think are as flexible.

So, I think it is company-specific.

Mr. BURTON. So you still need some relief from your contracts in

order to keep things going, is that what you are saying?

Mr. VANECH. We either need relief from our contracts, i.e., the

ability to suspend or not sell under the contracts, or to the extent

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we sell under the contracts we need two things. We need creditworthiness behind the payment so that we know we can get paid.

The second problem is, as I said in my opening statement, the

current formula that was approved by the Public Utilities Commission, I think about 2 weeks ago, does not work for the gas-fired

plants. The revenue—again, taking an average qualifying facility, the revenue of $80 a megawatt hour does not even come close to

covering the fuel cost of about $140 a megawatt hour at today’s gas

prices. So it is totally uneconomic for the gas-fired plants to run

today until the Public Utilities Commission, or some other body,

changes the formula to be consistent with the Federal and State

law. Right now that formula is inconsistent with Federal and State

law and that is one of the arguments or causes we are going to

FERC to seek relief on, that this formula does not work and is just

wrong.

Mr. BURTON. Let me get on to another subject here. Yesterday

Ms. Lynch testified that both of your companies did enter into

some long-term contracts last summer after the Public Utilities

Commission issued its August 3rd order. You have testified to that

effect today. Will each of you provide us with documentation of all

the forward contracts you entered into during that period? That is

after the PUC gave you authority to do it in July 2000.

Mr. PICKETT. Yes, sir, we are pleased to do that. We entered into

five contracts for 350 megawatts. When you say documentation, we

would just like to be clear on what it is you want. We can give you

the contract itself or whatever else we have.

Mr. BURTON. We would like to have a copy of the contract, if we

could. The Public Utilities Commission said yesterday that we had

to get permission from you to get this information. They would not

give it to us. So we would like to have the contracts. Can we get

them for you as well?

Mr. PICKETT. Let me say there may be confidentiality provisions

in those contracts. If we cannot provide them for that reason, we

would provide them pursuant to a subpoena from the Commission.

Mr. BURTON. Well we will send you a subpoena if it is required.

So you just tell us what is necessary. We do not plan to divulge

this information publicly, but it is something that we need to take

a look at to see what, if anything, we can do to be of assistance

at the Federal level.

Mr. PICKETT. I understand. For our part, we would be pleased to

provide whatever material we have, subject only to the confidentiality provisions that may have been entered into with the other

party to the contract. But I would think if this committee subpoenas them they can have them.

Mr. BURTON. Would you prefer for us to subpoena them?

Mr. PICKETT. Well let us check the confidentiality provisions. I

just do not know——

Mr. BURTON. We want to make sure we have got all of the facts.

That is all I am saying.

Mr. PICKETT. One way or the other you will have the facts.

Mr. BURTON. OK, good. Ms. Lofgren.

Ms. LOFGREN. This has been a long day, so I will be quick. Mr.

Pickett, you have been active in your legal career around energy

issues your whole career, if I heard you correctly, and know a lot

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about FERC and the law. I am wondering if in that capacity as a

witness you could comment on this question. The chairman mentioned that there had been a letter sent by nine Governors to

FERC objecting to rate caps, and he was kind enough to share a

copy of the letter with me. We also know, however, that the Governors of Washington, Oregon and California on March 9th asked

FERC to impose price caps, and I do not believe they have received

an answer to that. Now putting aside the politics of the situation,

and that the founders in their wisdom made North Dakota have

two Senators and California two Senators as well. Would the law

allow for the feds to impose regional price caps for the Western region despite the fact the Governors of some of these small States

do not like it, even though the Governors of Washington, Oregon

and California have asked for it?

Mr. PICKETT. I am not sure how much I really know the law, but

I have practiced in the energy area for 20 years, sometimes to my

regret. I have done a number of FERC rate cases and proceedings

before the FERC of other natures. My understanding of the Federal

Power Act, the whole reason for it is to be sure that regional differences and inter-regional competitive pressures do not impact the

public interest. I believe that the FERC—if it had the record before

it, which it can surely make, it has the rules to make the record

so that it can take action—can impose a region-wide price cap either on individual generators—the regulation as it is contemplated

is on the seller—or it can do it region wide, either way. I believe

it could do it.

Ms. LOFGREN. All right, if I can just quickly followup. I am sure

that there are more users of electricity in California than these

nine States put together. If nothing is done—if the FERC—what

did they say, market—what was the phrase they used this morning? Mitigation plan proves to be puny and not very helpful and

we end up with this price control situation that is completely out

of hand, do you believe that the States of Arizona, Colorado, Idaho,

Montana, Nevada, New Mexico, North Dakota, Utah and Wyoming

will not also be caught up in the rapid price escalation and crazy

market that has developed here in the West?

Mr. PICKETT. I believe they already are with the possible exception of North Dakota.

Ms. LOFGREN. It is under water right now.

Mr. PICKETT. Well most of the Western States are interconnected

in a grid, but are not connected to the Eastern half of the United

States on a line that runs roughly East of the Rocky Mountains.

There is very limited interconnection there. I think North Dakota

is on the Eastern side of that. But with that exception, I think that

the Western States, like it or not, are going to rise together or fall

together here. The market impacts and certainly spreads to nearby

States in California and—or spread to the Northwest and are certainly likely to spread elsewhere if the situation is not corrected.

Now having said that, I should say that a number of these States

have not deregulated their markets and the effect of that is very,

very important when you talk about caps and the percentages and

so forth. A State that is not deregulated and has utilities operating

as a vertically integrated monopoly is providing most, if not all of

their power, from rate-based regulated generation. They are not in

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the market, or if they are in the market, it is for a very, very tiny

percentage of their power. Sure, they may be willing to pay a huge

amount for that little tiny increment. In California, we are paying

that huge amount for the whole thing and that is what is crazy.

We have got to stop that. That can be stopped.

Ms. LOFGREN. And is that why, in your judgment—I will not ask

you to speculate what the Governors were thinking, but why it

would be in the interest of the State of Washington and Oregon to

join with California on a request for cost-based price caps to FERC?

Mr. PICKETT. In part—and I have to hedge the answer because

the regulatory situation—the extent of deregulation in each State

is different, and the supply and demand situation in each State is

different. As a general matter supply is tightening up. As I said

earlier, it is not all a supply and demand problem, but clearly in

the summer, in the peak months—in southern California the peak

months are in the summer and there is a supply shortage. In the

Northwest the situation is reversed. It is a winter shortage, or it

is a winter-time peaking and therefore a shortage problem. Supply

is tightening up there as well. So you have to be careful and look

at the inter-regional factors, but in general the answer is yes.

Ms. LOFGREN. Thank you.

Mr. BURTON. Thank you, Ms. Lofgren.

Mr. Ose.

Mr. OSE. Thank you, Mr. Chairman.

On the issue of the recharacterization and its impact on your financials, I am going to ask you to respond to that in writing because I do want to ask these fellows a couple of questions.

I want to make sure I understand as it relates to the QFs the

impacts in the valley. In Sacramento and its surrounding area, we

are a severe non-attainment region regularly and San Joaquin is

on the verge of being characterized or classified similarly. So in effect, a vast majority of the central valley will then be on a non-attainment basis. My understanding of the QFs is that they provide

power that has a far lower level of emission into that geographic

area than say a more traditional type of power generating infrastructure, is that correct?

Mr. DESROCHERS. Yes, that is correct. And not only that, the material that we utilize normally is open-field burned, which is still

permitted in the Central Valley. We take that material and use it

for fuel in a controlled combustion atmosphere and reduce the pollutants by 96 percent of what would have happened if it was

burned in the open fields.

Mr. OSE. So it is very environmentally friendly?

Mr. DESROCHERS. Yes.

Mr. OSE. Is that the same with you, Mr.—is it Vanech?

Mr. VANECH. Vanech. Yes it is directly resultant from the age of

the plant typically. But since the QFs tend to be 10 or 12 years old

and have to comply with the best available technology, most of

them have selected catalytic reduction on the back end, which

means the Nox emissions are generally in single parts per million.

All that means is that they are very clean plants, simply put.

Mr. OSE. Now the decision recently by the PUC to reduce the

compensable level for the IER from 11,000 plus to 9000 plus in effect says—if I understand correctly—that you are only going to be

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compensated for using enough—in terms of your recoverable costs

or your rate, you are only going to be compensated for the costs

that would get you up to an IER of 9140 BTU, whereas it might

take you 11,000 to get to the appropriate level so that your facilities run?

Mr. VANECH. That is exactly correct.

Mr. OSE. OK.

Mr. VANECH. In fact, the rate is actually supposed to represent

an incremental energy rate. Just by comparison, the average energy rate, which is far below the increment, for Edison over a 20-

year period we calculated it about 9,900 or 10,000. So not only is

that 9,100 way below an incremental energy rate, it is actually

below the average rate.

Mr. OSE. Now you have facilities in the Central Valley. Mr.

Vanech, do you have facilities in the Central Valley? You said you

have five in California, four in Los Angeles?

Mr. VANECH. And one is at UC-Berkeley serving the State.

Mr. OSE. OK. LA has got air quality problems regularly. The

question I have is that to the extent that the QFs, who were originally developed under PURPA, as I recall—to the extent that the

QFs cannot recover cost, they are going to shut down or they are

going to reduce operations.

Mr. VANECH. Absolutely.

Mr. OSE. So my question is, because—I mean, I have to tell you

between the health and safety of young people—I should say the

health of young people, the health of older folks in the valley, our

ability to have clean air, it would seem to me that the arbitrary

decision to reduce the IER from 11,000 to 9,000 is a direct attack

on our environmental quality, because it makes it less economical

or less possible for you folks to operate. I mean if you just connect

the dots.

Mr. VANECH. Yes.

Mr. DESROCHERS. Yeah, you have come to the right conclusion,

that is correct.

Mr. OSE. The thinking behind the decision by the PUC is found—

what is the fundamental logic?

Mr. VANECH. I will speculate that it is based on political pressure

to lower the rates. I mean, it clearly contradicts Federal and State

laws, PURPA laws. I can only imagine that it is politically motivated in a desperate attempt to lower rates.

Mr. OSE. Is there anything we can do at FERC to reverse this?

Mr. VANECH. We have filed a petition, effective as of Monday, to

ask for relief at FERC, yes.

Mr. OSE. And the basis on which you are doing it relates to

PURPA or to the fact that maybe your electrons travel interstate?

Mr. VANECH. Strictly as it relates to the rules of PURPA, because

the formula now violates Federal and State law.

Mr. OSE. How many folks work at your plant, Paul?

Mr. DESROCHERS. Statewide we have 100 folks and then we have

indirect employees of right around 400.

Mr. OSE. Mr. Vanech.

Mr. VANECH. We have about 65, including management and operators.

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Mr. OSE. You testified earlier that the natural gas that you get

is provided to you by third parties.

Mr. VANECH. Yes, that is correct.

Mr. OSE. And it is on a spot price basis?

Mr. VANECH. It is.

Mr. OSE. And you return the electricity based on a factor above

and beyond the cost of natural gas. In other words, you take the

natural gas and you produce the electricity and you sell it back to

the guy?

Mr. VANECH. Exactly.

Mr. OSE. OK. My time has expired, Mr. Chairman.

Mr. BURTON. We will go to Ms. Lee and then we will come right

back to Mr. Horn who can yield to Mr. Ose if he so chooses—what

a nice fellow you are. Ms. Lee.

Ms. LEE. Thank you, Mr. Chairman. For the record, let me just

indicate that it was brought to my attention that on March 22,

2001, Dr. Alan Lloyd who is the chair of the California Air Resources Board, he actually testified in front of the Subcommittee on

Energy and Air Quality of the House Committee on Energy and

Commerce. His quote was it can be said with certainty that environmental laws are not to blame. I just want to make sure that is

in the record.

Let me just mention this, and then I would just like each of you

to respond very briefly. Some say that the only way out of this crisis is actually through re-regulation. Price gouging was not as evident when utilities were regulated and utility bills were much

lower. So I guess I want to ask each of you, which regulatory or

which nonregulatory environment worked best for the consumers,

for the utility companies and for the generators? Ms. Hapner and

each of you. I would like to hear your take on that, because many

people are saying that it was better before, and there is evidence

that at least consumer costs were much lower. We did not see the

evidence of price gouging, even though it may have been occurring.

Ms. HAPNER. I agree that this has definitely turned into a deregulation versus regulation debate. We still think that a correctly

structured market could work. It is certainly working in other

States. I think in retrospect, all of us who were part of this process—and I worked on the restructuring—on proposals for the last

7 or 8 years. All of us involved made a series of compromises in

order to get the kind of legislation that would be unanimously

passed, which it was. In retrospect—and certainly it is always easy

to do this in retrospect—the way that the market was structured

was designed to fail. Obviously we did not do that intentionally.

It is very easy to be critical right now of one or all of the parts

of the electric restructuring that we took on in California. Admittedly, we are California, we are an easy target for others. But

knowing what we know now about how to establish the market,

knowing what we know now about the impact of supply and demand and the record growth that we faced, we clearly could have

done a much better job of restructuring this market.

Mr. PICKETT. I share all of those comments and would now look

to the future and say we need to do two things, in my judgment.

As I said in my opening comments, the first thing we have to do

is take the time out and fix this thing so that we can fix it while

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customers are not being gouged. We just have to stop this. The

market does not work. But beyond that, I think it can be fixed.

There are electricity markets around the country that work.

We believe that generation is probably best provided in a competitive market that is workably competitive, that provides the

kind of price restraints that competitive markets provide and provides the kind of rigor that best allocates capital to the most efficient projects that wind up benefiting customers.

But we are faced with a real crisis here and we cannot just wish

away that crisis and rely on the ideology of getting to the workably

competitive market to carry us through the next 2 years.

Ms. LEE. Mr. Vanech.

Mr. VANECH. It is my strong view that a correctly functioning deregulated market is the best situation for everyone. PJM, Texas,

you can look to those markets, they really work pretty well and

people have actually saved money.

The other big issue I think is utilities need the ability to create

a balanced portfolio of energy purchases. What that means is, it

should not be all long term and it certainly shouldn’t be all short

term, as evidenced by California. It is like any other investor putting a portfolio together, not everybody buys high tech stocks presumably and not everybody buys only bonds. There has got to be

risk and reward and an understanding by the regulators that longterm contracts from time to time may be more expensive than

short-term alternatives, but on the other hand, they are also going

to be less expensive at certain times. So I think there needs to be

a balanced portfolio approach.

I think the other thing I would add is there needs to be a clear

way for developers to come in and actually get things done. That

means both from a regulatory perspective and from an environmental perspective there needs to be a clear path to get projects

built. Nothing will scare a developer away who is putting millions

and millions of dollars at risk before we ever know we have a

project if we cannot see—knowing if we follow the rules and go

down the correct path, that—you know, we do what we are supposed to do, that we can get a project put together. That is what

needs to be done. There needs to be confidence in the market for

people to commit significant amounts of capital. Again, if you go

back to Texas and go back to PJM, just to take those two markets,

significant amounts of new capacity have been added over the last

2 years and continue to be added because people feel that if they

put their money in the market there is no guarantee of return certainly, but at least there is an assurance that there will be a fair

process in the market.

Ms. LEE. Mr. Chairman, can we have 30 seconds to hear Mr.

Desrochers’ response.

Mr. BURTON. [Nods.]

Ms. LEE. Thank you very much.

Mr. DESROCHERS. I would echo the statements and the comments

that the other panel members stated. I would just add one more

statement, in that I do believe that we need a comprehensive National and State energy policy that would include a focus on renewable energy. That is all.

Ms. LEE. Thank you very much.

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Mr. BURTON. Mr. Horn.

Mr. HORN. I am going to ask one question and then turn it over

to Mr. Ose. I am fascinated by the two gentlemen’s testimony, and

I wonder, since every group in America always has an office in

Washington, DC, and the QFs that do all of these good deeds, is

there a national group in Washington speaking for you?

Mr. VANECH. I think there used to be and it merged with a group

known as EPSA, that you may be aware of, Electric Power Supply

Association, and that group tends to represent generators. I am not

aware of a specific QF industry group.

Mr. HORN. How many units are there in the Nation similar to

yours? Are we talking 10,000, 5000?

Mr. VANECH. If I had to guess, I would say—boy, that is a tough

question. I would just hazard a guess and say maybe 1,000 to

2,000. I might be on the high side.

Mr. HORN. It is very interesting that you can be the balance

wheel here and solve some of these problems.

I now yield the rest of my time to the gentleman from California,

Mr. Ose.

Mr. OSE. Thank you, Mr. Chairman.

I have just a couple of simple, straightforward questions and

they are based on a concern that our colleagues in other States not

have to experience in their States what we are experiencing in

ours. My question is, if other States are looking at a deregulation— quote, deregulation proposal, would you recommend that those

States allow utilities, IOUs, QFs, whatever, the ability to enter into

long-term contracts without undue after-the-fact review? In other

words, my question is, should those other States give their power

companies the option—not the mandate, but the option of entering

into long-term forward contract deliveries? The second question is

whether you would suggest to those other States allowing generators direct access to the marketplace? In other words, the ability

to sell not only here but there. Ms. Hapner.

Ms. HAPNER. I think if I was advising another State on how to

go forward or in the alternative how to do things differently, I

would first of all not require that the regulated utilities buy and

sell from only one market.

Mr. OSE. I need—— Ms. HAPNER. I am getting to—— Mr. OSE. I do not have a lot of time here. I have four people I

want to ask this question.

Ms. HAPNER. OK. Yes, they should be able to contract in the

market with clear standards ahead of time, so that down the road

they shouldn’t be second guessed for their decision.

Mr. OSE. If there are other suggestions that any of you have beyond the two questions I have, we would be happy to take those

in writing.

Ms. HAPNER. Great, I will do that.

Mr. OSE. Now you would support—if other States are considering

restructuring, your advice would be to allow the utilities in their

States to engage in long-term forward contracts without undue reviews or second guessing or however you want to describe it?

Ms. HAPNER. Without undue review after the fact. I think it is

quite appropriate before the fact to lay out criteria.

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Mr. OSE. OK. Mr. Pickett, would you agree with that?

Mr. PICKETT. Yes, sir.

Mr. OSE. OK. Mr. Vanech.

Mr. VANECH. Yes, fully. In addition, I might sort of propose that

the committee consider resurrecting the original intent of PURPA.

One thing PURPA did is it got a lot of new plants off the ground,

and the reason it did is because utilities were able to enter into

long-term contracts. I will keep it quick. Basically the generator

knew they could recover their capital.

Mr. OSE. As to the PURPA question, I would be happy to take

your other suggestions in writing.

Mr. VANECH. The answer is yes then.

Mr. OSE. Paul.

Mr. DESROCHERS. Yes. The answer is yes.

Mr. OSE. OK. On direct access, is that a tool other States ought

to allow their generators—their intrastate generators to utilize?

Ms. HAPNER. I apologize, Mr. Ose, but I am not sure I understand what you mean by direct access.

Mr. OSE. OK, let me just cite an example. Let us say that Mr.

Desrochers’ plant has the opportunity to contract in a new market

environment with any number of people rather than being forced

to sell to a single point of purchasing. Is that something that would

help this?

Ms. HAPNER. I think that all the markets work better if they are

unfettered. I do think though that where contracts already exist between two parties, they need to be respected.

Mr. OSE. Bilateral contracts?

Ms. HAPNER. Yes.

Mr. OSE. OK. Mr. Pickett.

Mr. PICKETT. Fundamentally I think that direct access, by which

I take it to mean generators selling directly to other retail customers, is not a useful tool in the long run because the market is

not one in which choices—the product is fungible. There are not a

lot of choices that can be made.

Mr. OSE. What about wholesale?

Mr. PICKETT. At wholesale there should be an open market. I

think to allow unfettered direct access allows the big users to

cream skim and the small customers and the residential customers

wind up bearing the burden.

Mr. OSE. But you would support wholesale direct access?

Mr. PICKETT. Wholesale, yes, sir.

Mr. OSE. OK. Mr. Vanech.

Mr. VANECH. Yes, anything to enhance liquidity will increase the

supply and should actually make prices better—lower.

Mr. OSE. Do you think the solution—I mean, you suggest supply

is—I am going to ask you a question in writing—and you can respond to it—on the supply and demand issue.

Paul.

Mr. DESROCHERS. Yes, I would agree with wholesale direct access.

Mr. OSE. Mr. Chairman, I want to come back to something Congresswoman Lee said, and I heartily agree with her. I have said

this time and time again. This is not a question of California’s environmental standards being too tough, and I will tell you why. The

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technology that is available today to convert natural gas to electricity, as an example, is 50 percent more efficient at that conversion with emission levels 25 to 50 percent below technology that

was developed as recently as 8 or 10 years ago. We can bring on

line plants that take that same amount of gas and instead of creating 10,000 megawatts, create 15,000 megawatts with 25 to 50 percent fewer emissions. The consequence of that is, if we would expedite siting licensing and allow the supply to come on line, we would

have a temporary uptick, as you would expect, in emissions, but as

those new plants come on line the old plants would fall from a base

position in the load to a standby or peak load and that curve would

come down on the emissions. So I agree with Congresswoman Lee.

I have been beating my brains out trying to get that message out

and I just wanted to reinforce it.

Ms. LOFGREN. Would the gentleman yield for just one comment.

Mr. OSE. Subject to the chairman’s discretion.

Ms. LOFGREN. Just in support of your statement and Congresswoman Lee’s, although no one is thrilled about it, practically every

large user of electricity in this valley that I know of has backup

generators that are diesel. When those diesel generators get powered up this summer, as they inevitably will, the air quality will

be severely impacted. So everybody really wants these cleaner

plants to be approved and built as quickly as possible.

Mr. BURTON. I want to thank you for your diligence and your patience and your ability to sit there that long.

I would just like to say that the last series of questions that Mr.

Ose put to you, every one of you were in favor of free market principles and that flies in the face of the price caps you were talking

about. So I presume you want the price caps removed as quickly

as possible once this crisis is over, is that correct?

Ms. HAPNER. That is correct.

Mr. PICKETT. Yes, as long as we take the time to get it right next

time.

Mr. BURTON. OK. Do you all agree with that?

Mr. VANECH. Yes.

Mr. DESROCHERS. Yes.

Mr. BURTON. I want to thank you very much. I want to thank

my colleagues and our colleagues who are not members of the committee for spending your time with us today. You were very helpful. Thank you very much. We stand adjourned.

[Whereupon, the committee was adjourned at 2:15 p.m.]

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ASSESSING THE CALIFORNIA ENERGY CRISIS:

HOW DID WE GET TO THIS POINT, AND

WHERE DO WE GO FROM HERE?

THURSDAY, APRIL 12, 2001

HOUSE OF REPRESENTATIVES,

COMMITTEE ON GOVERNMENT REFORM,

San Diego, CA.

The committee met, pursuant to notice, at 10 a.m., in the County

Board of Supervisors, 1600 Pacific Highway, room 310, San Diego,

CA, Hon. Dan Burton (chairman of the committee) presiding.

Present: Representatives Burton, Horn, Ose, Hunter, Filner, and

Davis.

Staff present: Caroline Katzen, professional staff member; Robert

A. Briggs, chief clerk; and Elizabeth Mundinger, minority professional staff member.

Mr. BURTON. If I can get everybody to take a seat. Can you hear

me all right? Is this mic on? If everybody could take seats, we could

close the doors.

Good morning. A quorum being present, the committee will come

to order. I ask unanimous consent that all Members’ and witnesses’

written opening statements be included in the record, and without

objection, so ordered.

I ask unanimous consent that all articles, exhibits, and extraneous or tabular material referred to be included in the record, and

without objection, so ordered.

I ask unanimous consent that Members of Congress who are not

members of the committee be allowed to participate in today’s

hearing, and without objection, so ordered.

I ask unanimous consent that all questions submitted be in writing to the witnesses, and their answers be included in the hearing

record. I ask unanimous consent that questioning in this matter

proceed under clause 2(J)(2) of House rule 11 and committee rule

14, in which the chairman and ranking minority member allocate

time to members of the committee as they deem appropriate for extended questioning, not to exceed 60 minutes equally divided between the majority and the minority. And without objection, so ordered.

I want to welcome the members of the committee who are here

with us today: Congressman Ose, who is from up North, around

Sacramento; and Congressman Horn who are both subcommittee

chairmen on our committee. Congressman Horn, is from the Long

Beach area. We also from this region have Congressman Duncan

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Hunter, Congressman Filner, and Congresswoman Davis. And we

appreciate you being here and participating in the hearing today.

I want to welcome everyone to our third day of hearings on the

energy crisis here in California. I want to say a couple of things

about why we are here. We came here because we want to play a

constructive role in the crisis. We did not come to point fingers at

anybody. We came to listen and learn. We want to see if there are

ways the Federal Government and the State government can work

together to get past this crisis. But first we need to understand the

problems.

This summer, Congress is going to have a serious debate about

our country’s energy policy. It is a debate that is long overdue. Energy policy has been neglected for far too long. On the Government

Reform Committee we have been holding hearings to prepare for

this debate. We study our oil and gasoline markets. It is very clear

that we need to have more domestic production to reduce our reliance on OPEC.

It is clear that we need to have more refinery capacity to avoid

the kind of disruptions that we had in the Midwest last summer.

We have studied the problems in the natural gas markets. America

has abundant supplies of natural gas, but prices are skyrocketing

because those reserves are off-limits.

Today we have the technology that makes it environmentally

safe to drill for natural gas. As demand keeps growing, we must

increase our supplies. This week we are focusing on electricity. If

you want to learn about the problems in our electricity markets,

then you have to come to California.

We have tried to look at this problem from every angle. We have

heard from State regulators. We have heard from the Federal regulators. We have heard from the major utilities. And today we will

hear from the generators.

As we have gone through this process, one thing has become very

clear to me. When you boil it all down, the root problem here is

supply and demand. One of our witnesses in Sacramento was an

independent energy analyst. He told us that over the last 5 years,

California’s economy has grown by about 32 percent. But at the

same time, energy generation in the State actually went down—it

fell. A major new power plant has not been completed in this State

in the last 12 years. The head of the ISO told us that he expects

to have a 3,000 megawatt shortage during peak periods this summer, and that is very serious.

Everyone agrees that more generating capacity is needed. But

that is going to take time. The question is: How do we manage the

situation in the meantime? Some people say price caps are the answer. My concern is that price caps for California may cause power

to be diverted to other States where sellers can get better prices.

Three out of our four energy experts who testified in Sacramento

said that if FERC reimposed price caps it would lead to more

blackouts this summer. Out of 11 Governors of the Western States,

8 are opposed to price caps on the Western grid. What is more, the

Washington chairman of the FERC testified yesterday that they

only have jurisdiction over about 25 percent of the electricity sales

in California. If they impose rate caps on the 25 percent, the elecVerDate 11-MAY-2000 10:55 Apr 01, 2002 Jkt 000000 PO 00000 Frm 00382 Fmt 6601 Sfmt 6601 C:\DOCS\76761.TXT HGOVREF1 PsN: HGOVREF1
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tricity will flow to the other 75 percent where prices are not

capped. So I do not think that price caps are a panacea.

We have also had a running debate about long-term contracts.

The press has reported that the Public Utilities Commission last

summer blocked the major utilities from entering into long-term

contracts that would have saved billions of dollars. On Tuesday we

heard from the president of the Public Utilities Commission, Loretta Lynch. She insisted that the PUC did everything necessary to

allow the utilities to enter into long-term contracts. She went so far

as to say that they published final guidelines that gave the utilities

everything they needed.

Then yesterday we questioned officials from Cal Edison and

PG&E. It was like night and day. They told us that there was no

way that they could enter into those contracts under the PUC’s

rules. Mr. Pickett, from Cal Edison, said it would have been like

incinerating or burning money. They said that to this day the PUC

has not published the guidelines that are needed. Now, this is very

disturbing. The general counsel from FERC talked about long-term

contracts on Tuesday. He said that if San Diego Gas & Electric had

entered into a long-term contract a year ago, they would have

saved roughly $5 billion last year. SDG&E will be testifying today.

Today we are going to focus on the power generators. We have

representatives from Reliant and Williams testifying today. As

prices have skyrocketed, the generators have been accused of profiteering and price gouging. Today they will have a chance to defend

themselves, and talk about why this market is not working like it

should. Williams and their partner, AES, have been accused of manipulating the market last year. The Federal Electric Regulatory

Commission said they intentionally prolonged the shutdowns of two

of their units where they were obliged by contract to provide electricity at a lower rate. As a result, electricity had to be purchased

from two other AES units at 10 times the cost. FERC has ordered

them to repay $10 million. We are going to have a lot of questions

about that case today.

On our first panel we have several distinguished businessmen

from the San Diego area. As we all know, San Diego ratepayers

have been hit harder than anyone across the country this year. We

want to hear from them, how that has affected their competitiveness. We also have added one new witness, Mr. Gregory Conlon.

He was the president of the Public Utilities Commission under

Governor Wilson. At our first hearing, the current president, Loretta Lynch, had a number of criticisms of her predecessors, and Mr.

Conlon is here to respond. I believe we have added one other person, Mr. Bill Horn, to the first panel. He is the chairman of the

San Diego County Board of Supervisors.

Before we get to our first panel, I better allow my colleagues to

say something. So why do I not start with you, Mr. Filner. Do you

have an opening comment you would like to make?

STATEMENT OF HON. BOB FILNER, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF CALIFORNIA

Mr. FILNER. I thank the chairman for the courtesy of appearing

with him on the committee. I thank you for coming to San Diego,

which is ground zero, really, in this energy crisis. I am glad to have

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Mr. Horn, who is the chairman of our Board of Supervisors. You

are sitting in his chair, Mr. Chairman.

Mr. BURTON. It is a very comfortable chair.

Mr. FILNER. And unfortunately, in San Diego we just had another deadly shooting yesterday, so we are very sensitive about

these issues here in San Diego.

As I said, you are at ground zero of our crisis. Last summer San

Diego was the first area, in fact, the only area in California, to

have complete deregulation of both our retail and our wholesale

prices. What occurred there, Mr. Chairman, was a disaster, and

disaster quickly. Within the first month of deregulation, bills had

doubled for businesses and for individuals. Within 2 months they

had tripled. And there was no end in sight, and no explanation.

Can you imagine, Mr. Chairman, a small business person who was

paying $800, faced with a bill of $2,500? Can you imagine a person

on fixed income paying $50 or $60 a month, all of a sudden up to

nearly $200 a month? There is no way people can survive in this

situation. There was no way that we could continue.

A revolution broke out here, Mr. Chairman. This is a very conservative county. And yet very conservative school boards and city

councils tore up their utility bills. There were rallies. There were

demonstrations. And, in fact, the State put a temporary cap or a

deferred cap on our retail prices which said we will stem the bleeding, but you will have to pay in the future.

Now, why did that occur? The demand was not any more than

the summer before. The temperatures were not any hotter. It was

clear, Mr. Chairman, that this was, at root, when it started here

in San Diego, not a supply and demand problem, but a manipulation of the market by a group of people who had control over the

energy coming into our area and into our State.

Prices had no relation to cost, no relation to supply and demand.

And I will tell you, Mr. Chairman, that when we asked the Federal

Energy Regulatory Commission to investigate the sudden rise in

prices in San Diego, they did investigate. And what did they find?

That prices were unjust and unreasonable! In fact, under the Federal Power Act, that means they were illegal. FERC found the

prices that California was paying to be illegal. And yet they did

nothing—they did absolutely nothing. And what they did, by their

inaction, was to say to the energy cartel, who we will have members here today before us, ‘‘Go rob the State blind.’’ That is what

they said to this energy cartel. And boy, did they rob the State

blind.

You know what we are paying, Mr. Chairman, for energy; we are

paying over $2 million an hour, maybe $3 million. Up to $50 million, up to $80 million a day, almost $2 billion a month. This energy cartel has taken almost $20 billion out of our State in the last

10 months—$20 billion was robbed from our economy. Schools cannot educate because they are paying their electricity bills. Libraries

cannot buy books because they are paying their electricity bills.

The guy yesterday in a senior center in my district, a half block

from my office, who went on a rage, had been evicted from his

apartment because he refused to pay an increase in rent, and that

increase in rent, Mr. Chairman, was caused by a raise in electricity

prices.

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This is disastrous, what is occurring. And I will tell you we have

tight supplies, and the Governor of California is doing everything

he can to increase the generation of electicity. We have to conserve

more, and the Governor is doing everything he can to encourage

that. But the problem is the price structure. The wholesale prices

are criminal. They have been found to be illegal, and we are still

paying them. And it is because of the criminal prices that this is

occurring.

Mr. Chairman, we have 45,000 megawatts capacity in California.

The demand right now is 30,000 megawatts, because it is not the

summer. And yet we had blackouts. Why? Because certain suppliers were not getting paid, and they just said we cannot supply.

This is not a supply problem, it is a manipulation of the market.

And the folks that will appear before us later today have had incredible increases in profits in the last year. They have increased

dramatically their ratings in the Fortune 500. They are taking the

money, and they are killing off the economy of California. This

threatens the West, it threatens the entire United States.

I have a bill which is supported by my colleague, Mr. Hunter and

Ms. Davis, which says let us establish cost-based rates on wholesale prices, and more important, Mr. Chairman, let us refund the

overcharges to California consumers and utilities. If that bill

passed tomorrow, California would be made whole. We still would

have to try to deal with some issues, but we would be made whole

tomorrow. So I urge us to look very carefully at this legislation.

[Applause.]

Mr. BURTON. Let me just say to the audience that we appreciate

your being here. At some of our hearings we have had some disruptions, and I try to tell the audience that we would like for them

to be here. We appreciate their attendance. But if there are disruptions, then we have instructed the police—the Capitol Hill police

and the local police and sheriff to remove those people from the

room.

So we want you to stay. We want you to get as much information

as possible. But it is very important that there be control of the

hearing.

With that, I would like for the Members to try to stick to the 5-

minute rule as close as possible. So we will now recognize Mr. Ose.

Mr. OSE. Thank you, Mr. Chairman. For brevity sake, I will submit my statement to the record.

I do want to welcome our friends from San Diego, Mr. Hunter,

Mr. Filner, and Ms. Davis. I was most appreciative of Ms. Lofgren

and Ms. Lee and Mr. Honda joining us in San Jose. I regret that

we did not have any of our friends from the other side of the aisle

in Sacramento. I have found the testimony very compelling, and to

the extent that our colleagues have joined us for just today’s hearing, have the opportunity to review that, I am hopeful that it will

help them as much as it is helped me. So thank you, Mr. Chairman.

Mr. BURTON. Very good. Ms. Davis.

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STATEMENT OF HON. SUSAN A. DAVIS, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF CALIFORNIA

Ms. DAVIS. Thank you, Mr. Chairman. I appreciate your being

here, and I appreciate the folks here, all of you here today. And I

would like to share with the audience one of the concerns, of

course, that we did hear about at the hearing on Tuesday night.

And I regret that one of the great resources here in San Diego, the

San Diego’s Utility Consumers Action Network is not part of the

panel or the testimony today, because I know they have been providing a vital resource to all of us, and I wanted to just acknowledge that for the record.

I do appreciate the fact that you are all here because you recognize that this is not just a California crisis; in fact, this is a crisis

today that threatens our national economy. And it is important

that the Federal Government take more forceful action to address

the crisis. And so far it is clear that we feel that has not happened,

and in fact, that the action has been sorely lacking.

I believe, and I know my colleagues believe, that the Federal Energy Regulatory Commission has failed to step up to the plate. And

in determining that California is paying unjust and unreasonable

prices for energy, it has, nevertheless, stepped away from its obligation to truly look at that, to truly investigate, and to determine

why that is the case. It has failed to impose, as well, the cost-based

rate stabilization that we think would bring about fair and reasonable prices.

I know that at last week’s hearing Commissioner Linda Breathitt

demonstrated a new willingness to consider some regional price

stabilization, and I applaud her for her change of attitude. And I

hope that FERC today—that the general counsel will dispense with

a number of their philosophical statements on the beauties of this

free market, and offer some useful information on FERC’s legal authority to act where the free markets do not yet exist.

Again, I want to thank Congressman Hunter and Congressman

Filner for their energy on this issue, for your leadership. We have

met as a California delegation, and I know that we feel very focused, and we certainly want things to change. As a San Diegan,

as someone here, and associate myself with Congressman Filner’s

remarks, as well as, I am certain, Congressman Hunter’s. Because

what we experienced in San Diego early on was almost a feeling

of the death of a city.

And what we predicted in many cases has certainly come true.

We acted responsibly here. In many cases, San Diegans actually

kept the lights on for the State because of our conservation. And

at the same time, we know we have to do our part. But, Mr. Chairman, we believe that there is a greater part to do on the part of

our government, and we hope that this hearing is helpful to everybody in looking at those issues. Thank you.

Mr. BURTON. Thank you, Congresswoman Davis. Mr. Horn.

Mr. HORN. Thank you, Mr. Chairman, but I am going to waive

my 5 minutes or whatever. Let us get down to the question and

answers.

Mr. BURTON. We appreciate, as always, your brevity.

Mr. Hunter.

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STATEMENT OF HON. DUNCAN HUNTER, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF CALIFORNIA

Mr. HUNTER. Thank you, Mr. Chairman. And I thank Steve for

giving me his time. Very kind of him. [Laughter.]

And do not remove anybody for laughing at that.

Mr. Chairman, thank you, as an old friend, and all my colleagues, for being here. And Mrs. Davis, Mr. Filner, for your work

on this issue.

Mr. Chairman, this is a problem that really has a couple of sides

to it—one, pricing; the other, supply of energy. And we did have

FERC in front of us here a while back in a hearing that Mr. Barton

chaired. And I pointed out, and Mr. Filner also did, that the prices

at one point on the exchange actually increased. This was verified

by the head of the exchange who was here. They went up 9,000

percent in a matter of minutes. Now, that is not a free market operating; that is the lack of a free market. And that was the equivalent—and that was paid and reflected in these bills across the State. That reflected the equivalent of a $200 gallon of gasoline.

And there is a statutory duty that is attached to FERC that says

that they have the duty, and courts have subsequently said the

duty, not the option, to reform unreasonable rates. I think a $200

gallon of gasoline is unreasonable. And they have now, somewhat

belatedly and many months later, come in with orders for some

fairly small refunds. But certainly you had a price gouging. When

you have a 9,000 percent increase, that is price gouging, and that

has nothing to do with free enterprise.

The other aspect of this that is very interesting is this, typically,

if you have a bakery on your side of the street and you are charging $5 a loaf, the way the free enterprise system operates is that

other people build bakeries on the other side of the street, they

charge $1 a loaf, and the consumer wins. So when prices go up,

typically supply goes up, because other people get in the business.

Because of a lot of very powerful political forces in California— some of them the environmental forces—we, as you have said, have

not built a generating plant in some 12 years. So when prices went

up and we have—basically we are in what I would call nothing

short of paralysis in terms of moving quickly to build generational

plants. So when prices went up in the summertime last summer,

a number of people said wait until winter gets here, when we are

not running our air conditioners. That means the demand will go

down from about 45,000 megawatts, to about 33,000, it will go

down almost 30 percent. And prices will go down.

When the winter got here and we went down, in fact, in demand

by 30 percent, the generators turned to us and said you know, we

have had some problems at the plant. Looks like supply just went

down 30 percent, too. Supplies are still tight. Now, that is not free

enterprise, that is John D. Rockefeller owning all of the kerosene

in the United States and telling us the times are tough and we are

going to have to see a shortened supply.

On the other side of the equation is the supply problem. And that

is a problem in which you had two unusual participants. One was

the energy industry which took advantage of an opportunity to, on

this exchange, this futures market that we created basically in

California, to get the highest possible price for their product.

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But aiding and abetting them was the environmental lobby. And

if you were sitting in a board room, I would say, in an energy company, and you were asking one of your analysts if anybody was

going to come in and compete with you in California, thereby driving the price down, your analyst would say do not worry about it.

If these other competitors who compete with us in other States try

to build something in California, when the Sierra Club gets finished with them it will be 20 years before they build a power plant.

So you had an unusual situation in which the supply was constricted. And it was constricted by some partners who on most occasions do not come together for any common cause.

And so what we have right now is, we are about 2 months out

from summer. We know that our air conditioners are going to be

turned on in the summertime. We know that industry is going to

need lots of power. And we have to do something that government

is not very good at doing, and that is building something fast. We

can do it in California. We did it when we had the earthquake. We

did not wait for massive studies and reports and the Endangered

Species Act and all of the other regulations and laws to work themselves out over 2 and 3-year time periods before we acted to rebuild

infrastructure that was damaged by the earthquake. We jumped

right in.

And what we need to do today is to build supply. That means we

have got to build power plants in California, and in the interim,

we can move in some of these high tech power plants that we have,

that we built in fact in San Diego County, that Solar builds, a Caterpillar subdivision. They built a great 13 megawatt generator that

produces electricity very efficiently. And we sell it around the

world. We sell it almost every place except in our own State, which

it is very, very difficult to get this stuff sited.

So I would just ask you, Mr. Chairman, in closing, to look at a

couple of things. One is a bill that I have that is directed toward

summertime. And it says if you have a generator in the State of

California, you can turn it on. Now, that seems to be elementary.

But you cannot turn it on right now. You will have all types of

agencies, environmental and otherwise, closing you down. So we

have to have the right to turn on whatever we have got, whether

it runs on diesel, natural gas, or whatever.

I have got another bill that says that the President and the Governor can waive siting requirements—that is, the bureaucracy that

puts off siting of power plants for years and years—and move

quickly to build power plants.

And the last one that I mentioned, the price problem, it gives the

Secretary of Energy the right and the same power as FERC to reform unreasonable rates. And I think there is a difference between

price caps or price fixing or price setting, and allowing energy to

increase by 9,000 percent in 60 minutes. Thank you, Mr. Chairman.

Mr. BURTON. Thank you, Mr. Hunter, for that very comprehensive statement. And that first bill I think is—I have not seen the

other two, but that first one seems reasonable to me, and I would

like to be a co-sponsor of that one. And I will look at the other two.

We will now go to our first panel. Mr. Sam Hardage, who is the

president of Woodfin Suite Hotels; Mr. Bill Horn, who is the chairVerDate 11-MAY-2000 10:55 Apr 01, 2002 Jkt 000000 PO 00000 Frm 00388 Fmt 6601 Sfmt 6601 C:\DOCS\76761.TXT HGOVREF1 PsN: HGOVREF1
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man of the San Diego County Board of Supervisors; Mr. Douglas

Barnhart, who is president of Douglas E. Barnhart, Inc.; Mr. Richard Thomas, the vice president of Alpine Stained Glass; Mr. Mark

Seetin—I think he had to cancel.

Is Mr. Mark Seetin here? Oh, you are there. Thank you for being

here. Mr. Mark Seetin. He is the vice president of governmental affairs for New York Mercantile Exchange. And Mr. P. Gregory

Conlon, who is the former PUC president under Governor Wilson.

Would you all please stand, please. Raise your right hands.

[Witnesses sworn.]

Mr. BURTON. You will each be recognized for 5 minutes. And because we have a long schedule, I hope you will stick as close to that

as possible. And we will start with you, Mr. Hardage.

STATEMENTS OF SAM HARDAGE, PRESIDENT, WOODFIN SUITE

HOTELS, LLC; BILL HORN, CHAIRMAN, SAN DIEGO COUNTY

BOARD OF SUPERVISORS; DOUGLAS BARNHART, PRESIDENT, DOUGLAS E. BARNHART, INC.; RICHARD THOMAS,

VICE PRESIDENT, ALPINE STAINED GLASS; MARK SEETIN,

VICE PRESIDENT OF GOVERNMENTAL AFFAIRS, NEW YORK

MERCANTILE EXCHANGE; AND P. GREGORY CONLON,

FORMER PUC CHAIRMAN

Mr. HARDAGE. Thank you, Chairman Burton and members of the

committee. My name is Sam Hardage, and I am chairman and

CEO of Woodfin Suite Hotels, a national hotel company with 18

properties in 11 States. Here in California we operate properties in

San Diego, Emeryville, Sunnyvale, Newark, Cypress, Brea, and

Fullerton.

It is my pleasure to speak to you today concerning the impact the

current electricity crisis is having on my company, and the travel

and tourism industry in California. The committee is doing the people of California a great service by highlighting the impact of this

crisis on various sectors of the State economy. Only through a thorough examination of how this crisis can and will affect jobs and income can the magnitude of this crisis be understood.

For all of my life, and I suspect the lives of most Americans, we

have not even given a second thought to the simple event of turning on a light switch. We have always had adequate power to make

our lives better. Indeed, the poorest of our citizens enjoy daily

power and convenience that only kings and queens of a few centuries ago could command. In fact, cheap, abundant power has enabled Americans to participate in the most awesome growth of

wealth in the history of the world.

Without reliable, abundant power, none of the industrial revolution would have been possible. Our citizens would be impoverished,

and our lives infinitely worse. And yet, here in California, we seem

to be trying to drive our citizens backward in time to an era of

shortages and scarcity. Californians need to examine our priorities

and decide what kind of future we really want as we begin the 21st

century. The insane environment that we find ourselves in today

will continue to reduce the availability of power, increase the level

of misery for all Californians, decrease the number of jobs available

for our citizens and our children, and make a mockery of the sacrifices that so many have made to build our mighty State.

382

I am optimistic that this dark view can be prevented, since the

situation that we find ourselves in is entirely man-made. Our leaders in California need to stop blaming everyone else for the current

situation, and take responsibility for their own actions. Providers

of electricity, natural gas, and other sources of energy should be encouraged and welcomed into California with open arms, not driven

away by shrill, mean voices threatening seizure, taxes, and more

onerous regulation. I am hopeful that these hearings will provide

the impetus for a return to sanity in California.

I am deeply concerned that the human cost in California will be

enormous unless we correct the present situation. We are in the

hotel business, which is one of the largest employers in the State

of California. Our industry is gravely threatened by the specter of

rolling blackouts and unreliable energy supplies. The effect on our

State’s business environment will be devastating, starting this

summer. We have already seen many businesses sharply modify

their travel plans, greatly reducing the number of room nights

spent in California.

In March alone industry income dropped 3.9 percent in the San

Francisco Bay area. Imagine yourself making a family decision

about where to vacation this summer. Most tourists would rather

not run the risk of being stuck in a hotel elevator, sitting in their

hotel room in the dark, or otherwise having vacation plans interrupted by blackouts. Vacationers seeking warm weather without

these risks may choose other vacation destinations, ranging from

Florida to Hawaii.

California government officials have made clear that rolling

blackouts will most likely occur in the early summer season. The

fact that these threats persist can only have a chilling effect on

families who are now planning their summer vacation. Fewer tourists means not only more empty hotel rooms, but also downward

pressure on prices for those rooms we are able to sell.

The impact of this ongoing uncertainty will not be confined just

to the tourism industry. Executives with major employers in California have indicated that they will curtail expansion in the State

until the power crisis is over. With 82 percent of our company’s

business coming from the corporate traveler, fewer business expansions will have a direct impact on our company’s occupancy rates

and revenue streams.

Other States have been quick to exploit the uncertainty here in

California, and have launched public campaigns to lure businesses

out of State. One State recently sent flashlights to Silicon Valley

executives as a reminder that their State may not have California’s

sun and palm trees, but their lights do stay on.

I am concerned that the sum of these consequences for our company could force us into a new round of cost-cutting sometime this

year. With real estate costs, taxes, and other overhead costs fixed,

skyrocketing utility bills would force us and other hoteliers to look

to our labor force to bring cost into line, to prevent us from going

into the red.

Those who own and operate hotels will not be the only ones to

suffer as this crisis wears on. Unfortunately, the greatest loss will

come to our treasured employees, who will be hit hardest by layoffs

and job reductions due to the slowdown in the industry. Couple

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that with the increase in the personal misery felt as our employees

also suffer at home with the specter of rolling blackouts. That is

a recipe for a long, hot summer indeed. The current situations has forced our hotels to impose a $4 per

night surcharge on all of our guests. As an operator of All Suite

Hotels, we attract a high number of extended stay guests. A typical

corporate guest with a week-long stay now sees their bill rise by

$28, purely for electrical costs. Over the past year our California

hotels have experienced a 313 percent increase in our electric bills,

and a 200 percent increase in our natural gas bills. The Loeas

Coronado Bay Resort here in San Diego has experienced a 357 percent increase in its electricity cost, despite a 4-percent drop in consumption.

California has experienced extraordinary growth during the past

few decades, precisely because it is such an attractive place to live,

work, and play. While some parts of the country wrestle with the

problem of out-migration, California has had no such problems.

California is home to thousands of leading companies. The presence

of these companies has helped drive California incomes up, and

made the American dream possible for millions of Californians. But

that future, which once appeared so bright, has been dimmed by

threat of unreliable power supplies and skyrocketing cost. California and the people of California deserve better.

Mr. BURTON. Thank you very much, Mr. Hardage. Our next witness will be Mr. Horn. Mr. Horn, you are recognized for 5 minutes.

[The prepared statement of Mr. Hardage follows:]

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Mr. BILL HORN. Thank you, sir. I normally only give people who

testify 3 minutes, as Duncan Hunter can understand.

I want to thank you, Congressman Burton and members of the

committee, and Congressmen, for being here. I am chairman of the

San Diego County Board of Supervisors, and I am sure you are

aware, as you are here, of the many stories that have gone on with

the electric crisis in California and throughout the West. While I

would like to reiterate many of these stories, I am sure you have

heard them over and over again. I would like to focus on what we

in San Diego have been experiencing.

The effects of this new market system that allowed for profiteering and market manipulation hit us hard last year. We were the

first. During the summer of 2000 residents saw their bills jump

over three times what they had been paying in the previous year.

As the hot weather began, and the increase in demand, wholesale

price for electricity climbed high, and generators profited tidily

from this. The county of San Diego currently is $25 million over

budget because of this electric crisis. Those are services that would

have gone to our taxpayers, that have gone off to pay for the electric bills.

You may have heard of the numerous rallies, some of which I organized, and town meetings that were brought before SDG&E, and

displaying the bills, and how the bills were hurting us. The rally

that took place, that we organized and took place on San Diego Gas

& Electric where residents burned their bills in protest, currently

pointing out, as we go through this rolling blackouts which we just

incurred a few weeks ago, that blackout occurred when southern

California had plenty of power to keep the lights on. The problem

is, the ISO ordered SDG&E to produce the blackouts so that we

could suffer like the rest of the State did. And because of those

blackouts, if SDG&E had not cooperated with those, they would

have been financially penalized. And because of that, a number of

our businesses experienced shutdown. We had employees who went

home in the afternoon.

I am going to talk for a moment, and I brought you a tape, and

this tape is for your committee. This is a biotechnology conference

which I put on here in the county of San Diego.

Mr. BURTON. And we will have it there for the record.

Mr. BILL HORN. We have over 500 firms involved in medical research in San Diego. Of those firms, 250 are currently involved in

FDA approved drugs. These rolling blackouts produced loss of experiments that had taken up to 3 years in two firms. Because they

had no prior warning of the fact that the blackouts were coming

and they could not put on secondary power, their labs went down.

And when they went down, they lost 3 years worth of medical experiment on FDA approved drugs that were in the pipeline just because of the blackouts. They have to have warnings. I have met

with SDG&E to see if we cannot, from now on, include those in the

areas that get the prior warning.

We have learned that firms in San Diego and California cannot

survive with the high energy costs in California, and will likely be

looking to move out of the State unless we can come back with reliable supplies and a reliable market. One such company is Idec

Pharmaceuticals, which outlined the risk of continued energy crisis

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on the health of their company. They anticipated higher manufacturing costs, in part due to the high energy costs. This firm, that

is anticipating approval this year of a new cancer drug, now has

to explain to its customers why the price tag of these drugs has

risen, and could even become unaffordable. It does not take into account the fact that blackouts for any significant period of time

could harm the ability to manufacture the clinical and commercial

requirements of this product. These firms will look elsewhere to do

business if we do not solve this problem.

Many businesses now include in the power crisis as part of their

annual reports to alert their shareholders of the significant impacts

that are damaging earnings. Shareholders will not stand by and

watch their money go to generators. They will pull out, and you

will see an economic downfall never before seen in California. As

a businessman and someone who has always been an advocate of

the free market, I now find that this crisis has put me in a position

that I believe that we need to place temporary wholesale caps on

electric prices, not only in California, but in the Western market.

This must occur to restore stability and reliability for residents, industries, and customers in these States. I would suggest that at the

Federal level, also, you consider extending temporary emergency

emission credits to distributive generating facilities who come online during a Stage 3 alert. We have a number of those facilities

in San Diego County that could come online. The reason they do

not is they will be penalized if they use up their air credits. And

so something we could do at the Federal level is, during this emergency, until we can get the supply back, extend to them those credits.

What we have not seen here in San Diego is a concern for the

wellbeing coming from Sacramento. I just returned from Washington, DC, where I met with congressional leaders, Senators, and the

White House, including Spencer Abraham, the Secretary of Energy.

And I was surprised to learn that our Governor has been conspicuously absent from D.C. And I am concerned for the wellbeing of the

residents and the economy of San Diego and all of California.

If we cannot find solutions quickly, we will surely lose our businesses, industry. And I know that San Diego cannot afford it, and

I am sure the State cannot afford it. As chairman of the San Diego

County Board of Supervisors, I urge you to examine all the possible

solutions to this crisis at all levels. This is not just a California energy crisis anymore, but it extends throughout the United States.

All eyes are watching to see what will happen here, and are fearful

that if California cannot resolve this crisis, then deregulation will

surely fail.

I want to thank you for coming to San Diego and for listening

to our testimony, and God bless you for a speedy resolution of this

crisis.

Mr. BURTON. Well, thank you, Mr. Horn. We appreciate your

comments.

Mr. Barnhart.

Mr. BARNHART. Thank you for letting me be here today to participate in this field hearing on today’s energy crisis in California.

The construction industry is feeling the effects of the energy

shortage, like many other industries. I am Doug Barnhart, chief exVerDate 11-MAY-2000 10:55 Apr 01, 2002 Jkt 000000 PO 00000 Frm 00398 Fmt 6601 Sfmt 6601 C:\DOCS\76761.TXT HGOVREF1 PsN: HGOVREF1
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ecutive officer of the Douglas E. Barnhart Co., based here in San

Diego. We are a construction management, general contracting

firm, active in public and private construction in San Diego and

elsewhere. In fact, if you came through Terminal 2 at the airport

you might have seen our handiwork, or when your plane was flying

into San Diego, you might have seen the sales enclosure at the convention center or the new ballpark.

I am a member of the Associated General Contractors of America. The 33,000 companies who are members of AGC are beginning

to evaluate the impact of the energy crisis on the industry, and

how the construction industry can play a role in alleviating the energy shortage.

The construction industry is a lagging economic indicator. While

we have yet to see a dramatic drop in construction spending, we

can definitely see the beginning of a construction slowdown based

on the energy problems in the State. If the California energy crisis

precipitates a national energy crisis, we will probably experience a

national economic downturn that will impact all industries. That is

why it is important that the crisis be dealt with rationally, methodically, and carefully.

AGC believes that the solution to our energy crisis comes from

both energy conservation and energy production. Construction can

ease production and transmission shortages through development

of new facilities, and through the retrofitting of existing facilities.

Furthermore, the promotion and production of energy efficient

structures can promote energy conservation. California is the

world’s sixth largest economy. We have become synonymous with

the technology boom. It is ironic that the same energy that powered

our rise to become the world’s technology leader is now threatening

our tech-heavy economy. Once the haven of high tech, concern over

rising energy prices and unstable power supply is opening doors to

other States interested in stealing our employers. The State of

Michigan has distributed glow-in-the-dark mouse pads; North

Carolina has sent high tech companies batteries.

The following are examples of construction delays. Cisco Systems

has placed two tech centers on hold, and is looking into alternative

sites outside California’s borders. A southern California refrigeration plant was recently canceled. In addition, the diversion of State

budget surplus causes strong concern that funds set aside for infrastructure funding will be diverted to fund State electrical purchases. If this happens, schools, roads, bridges, and other essential

infrastructure projects could be delayed or canceled.

The San Diego Economic Development Commission, of which the

Barnhart Corp. is a member, conducted a survey of their membership; 33 companies responded, which collectively employed 24,667

workers. Here is what they said. Average monthly energy costs

prior to June 2000, $57,000 a month; current monthly energy cost,

$134,150 a month. Average bills have increased since June 2000

135 percent; 42 percent of those companies invested in capital

equipment to promote conservation; 82 percent had made operational changes to conserve energy; 67 percent said administration/

business operations would be negatively affected by blackouts; 33

percent, there would be significant amounts of lost inventory, wasted inventory by power outages.

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The Barnhart Corp. mirrors the results of this survey. In the

first quarter of 2000 our energy costs totaled $20,000; third quarter, they had exceeded $120,000 with the corporation absorbing the

majority of the increase. I have even run into problems where owners now are refusing to take facilities, avoiding paying the energy

costs during the summers and delaying taking them until the fall.

Tom Collier, an AGC contractor, closed his heavy equipment

rental company because of high fuel and utility costs. This put 14

individuals out of work. Tom closed his business because he fears

the construction market will be drastically affected by the energy

crisis.

Hazard Construction, long a mainstay in San Diego, reports that

during February 2001, employees were sent home in the middle of

resurfacing projects, causing tens of thousands of dollars in losses

due to blackouts.

Last month woman-owned AGC contractor I E Pacific experienced an unannounced rolling blackout at 1 p.m. They were in the

process of posting accounts payable, lost all entries. The office staff

of nine people were sent home for the day. Since the staff is salaried, they received no productive effort for wages paid, solely due

to the blackout.

Construction contractors often must submit time-sensitive bids

for projects. Every minute of the day is critical in developing the

best value for the owners. We are very concerned what will happen

if a blackout occurs on bid days. There would be no power, no

faxes, E-mails, phones. This communication technology is essential

in order to meet given deadlines. How is a general contractor to coordinate a bid with its subcontractors and provide responsible bids?

What happens if a blackout does not affect all bidding contractors

equally? These are just a few of the examples.

This problem is part a political problem. Government cannot control retail prices despite volatile swings in wholesale prices, as was

the situation outside of San Diego. Any business owner will tell you

this is an impossible situation. While it may be proper for government to step in and help pay for power in life and death situations,

it should not be involved in keeping everyone from paying their fair

share. A power subsidy has a detrimental impact because, by artificially holding down prices, it supresses the incentive to conserve

power, and will only delay the construction of new facilities.

We worry about the impact of the energy crisis. We can fix this

if we are permitted to use our God-given talents to provide new

production and transmission facilities. We have a commitment to

the community and the economy that is not shared by certain

groups who have used well-intentioned laws as a means to impede

much-needed construction projects. This is a critical issue for the

industry, my country, my State, my hometown.

I hope that these hearings give you a better understanding of

what has caused the problems, and that you can develop a strategy

that ensures that the problems are not repeated in other States or

nationally. I hope you can design a balanced response that can

solve the problems here and elsewhere. I hope you understand that

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my company and the rest of the construction industry stands ready

to do our part to alleviate this crisis. Thank you very much.

Mr. BURTON. Thank you, Mr. Barnhart.

Mr. Thomas.

[The prepared statement of Mr. Barnhart follows:]

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Mr. THOMAS. My name is Richard Thomas, and I am the vice

president of Alpine Stained Glass and Door located here in San

Diego. I am the founder of Alpine Glass, and been in business over

25 years. Our company is quite diverse in the architectural and

stained glass industries throughout San Diego and throughout

much of the Nation.

We also distribute a lot of stained glass and related products to

the hobby and craft industry, and that is basically through the

Internet and worldwide sales quite often. Our main warehouse

markets bulk glass and related products to glass studios, furniture

and cabinet manufacturers, as well as craft stores throughout the

Nation.

California’s power crisis is affecting the wellbeing of my business

in numerous ways, both directly, and even more importantly occasionally indirectly. I have highlighted six major obstacles that are

currently facing us. No. 1 is our procurement of inventory. Our

major glass manufacturer just outside of Seattle, WA, Spectrum

Glass, was shut down on their power in December 2000 when the

electricity they receive—they are an all-electric type of furnaces— was shut back and they were not able to produce a lot of the glass

we needed. This created a situation of them not running the full

line; consequently, their glass production was diminished, and it

forced us to purchase glass manufactured in China. The glass was

not of a quality we use in our upper-end doors and panels and

entryways. This not only disrupted our schedule, the extra labor to

accommodate this was absorbed by the company. Most of our jobs

are contract.

The increases and fluctuations in power prices have created surcharges added to our freight bills. These surcharges are not normally a condition of freight contracts. This leads to erroneous cost

projections for us, as well as inaccurate quotes to our customers.

It degrades our reliability, and customer relations are slowly declining. Because of that, we have to keep adjusting for it. The

method and amount of applying these charges varies widely from

either the manufacturers or from the freight companies. What is

good today may not be good tomorrow.

The power crisis has greatly increased our overhead costs for our

utility and power bills. It has been up as high as 400 percent. All

sheet glass and most of our material products have increased by a

minimum of 10 percent since the first of this year, 2001. This is

due to elevated manufacturing, not just normal inflation.

Alpine Glass has an extensive program of classes for training

new students in the art of stained glass, as well as many seminars

and multi-day workshops directed at professional artists and the

advanced hobbyists. Professional glass artists and instructors are

brought here from around the Nation to present these workshops.

The increase in utility rates has prompted a decrease in students

that are able to participate in these classes and directly purchase

materials.

At this time—and this was as of about a week ago—we are showing almost a 40 percent decrease in attendance, which is actually

leading to a deletion of these classes, or at best a postponement to

a later date. In 25 years we have never had this problem, and I

was shocked. Many of the attendees and many of our customers are

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on fixed incomes and cannot afford the high utility prices plus the

hobby at the same time.

This tends to run into the area of or is especially true of any of

the jobs that require the electric glass kilns. We sell them. They

are a common item. You see them also in pottery areas. Twenty

percent of our customers are retired, and use stained glass as a

hobby, or even better yet, as a second income. Producing a stained

glass panel or object that is not only beautiful, but quite practical,

fills a very important need for their self-esteem. Our cost of running our electric kilns to slump and fuse glass has forced us to increase our prices on some of our finished products, as well as rental

fees for student or customer use.

The increased cost of products beyond normal inflation, without

any predictability, is forcing us to increase prices to our customers,

or to absorb the cost from declining company profits. This scenario

becomes quite apparent in some of our larger entryway and window projects that are often quoted many months ahead, as in the

case of large institutions, hospitals, churches, or residences. They

also have a budget to follow. And if our quotations become too far

out of line, they will seek these services elsewhere in this Nation

or out of country.

The situation and unpredictability defeats the reliability of our

printed catalog. And they have always been on an annual basis.

Furthermore, added to this increased product cost is the cost of

labor, where our own employees are now having to sustain substantial increases in their basic cost of living expenses. The persistent and unpredictable timing of rolling blackouts has caused a

great amount of anxiety and apprehension when we use our high

temperature kilns, as I mentioned earlier, for classes or to produce

products we have for sale.

Large investments of labor, not including product, can be ruined

by just the power being turned off at any time. The cooling process

in these kilns is at a controlled rate, meaning we cannot just cool

it off in a very short period of time. It can run from 4 hours to 72

hours, or, as many of the professional glass artists, not only here

but around the country have, they quite often can take anywhere

from 5 to 7 day cycles. They will end up with 2 weeks of work in

a project. If the cooling rate is interrupted at any phase of it, it is

gone. It does not take long, with 2 weeks of work, to lose your faith

real quick.

A little bit on climate control. Our ability to conduct business

with our customers and clientele is directly linked to the availability of power. Light and temperature is extremely important to our

company. Our customers and clients need to view colors with light.

Does not work in the dark. When they come in, we have many,

many wood doors, entryways, lampshades. We need light. Room

temperature, when you have clients coming in, if they are not comfortable it is a sales fact. Uncomfortable customers do not buy.

Never have.

Mr. BURTON. Mr. Thomas, could you summarize as quickly as

possible?

Mr. THOMAS. Sure. I am right at the end right now.

Mr. BURTON. Thank you, sir.

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Mr. THOMAS. Personnel reduction. We will have to eliminate jobs

if it continues. There is not much other choice. We have done the

same as all other companies in reducing it. We are using separate

switches on lights, and as long as they do not compromise safety.

In conclusion, the power crisis has given us a jolt. But if we use

our ingenuity and development of new operating procedures, we

can endure this, unless the generating companies withhold their

power and the ISOs continue rolling blackouts. We must take a

much closer look at how we utilize our day-to-day electrical consumption. And I am a firm believer in this. A $10 energy-saving

light bulb or a $3 switch is much less expensive than any interruption of power. I feel it is imperative for business to set the example

and create a stabilizing effect. We should pride ourselves in how

much we are able to save. It only makes good business sense.

Thank you, Mr. Chairman.

Mr. BURTON. Thank you, Mr. Thomas.

Mr. Seetin.

[The prepared statement of Mr. Thomas follows:]

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Mr. SEETIN. Thank you, Mr. Chairman and members of the committee. My name is Mark Seetin. I am vice president for government affairs for the New York Mercantile Exchange. NYMEX,

based in New York City, is the world’s largest physical commodities

futures exchange, specializing in energy and metals. On any given

day we trade three to five times world oil production, seven times

North American natural gas production in a regulated marketplace. We are a regulated public marketplace.

Mr. OSE. Mr. Seetin, would you pull that mic closer to you. I can

barely hear you up here.

Mr. SEETIN. I am sorry, sir.

We are a regulated public marketplace under the auspices of the

Commodity Futures Trading Commission. As such, NYMEX does

not have a stake in the outcome of this particular situation in California. Our interest has always been in competitive markets, and

offering our services, which are not mandated, but voluntary. We

provide competition under the auspices of the CFTC.

And I must say also that, just to make it clear to people, under

Section 5 of the Commodity Exchange Act, fraud and manipulation

are felony offenses. And we, as a marketplace, are bound by our

oversight of those markets, to detect and prevent that. We also

have no interest in whether commodity prices are high or low, only

that they are fairly arrived at through competitive means, and reported.

California is in a real crisis. You have heard the symptoms, the

results of this situation. I am going to talk a little bit about some

of the causes and what can be done, hopefully, to help it. Our analysts agree that probably, among all the predictions on blackouts,

that probably they are going to be on the high side. And we have

heard some say as high as 55 days of rolling blackouts. From our

market access and our looking at it, that is what we see.

But I want to say first of all that what California did was not

deregulation. If you believe that California deregulated its industry, you will probably believe that Hannibal Lecter is a gifted surgeon. [Laughter.]

Does this sound like deregulation? You take three monopoly utilities, you create a taxpayer-funded, centralized monopoly power exchange through which the utilities are mandated to buy and sell

all of their electricity and then you tack, inside of that, a

cockamamie pricing system that, instead of matching buyers and

sellers, like most of the rest of the world does—including Third

World countries—you have one price clears all. So that no matter

what the number of bids in this 1-hour block of lower prices, if it

takes the highest price bid to fill that need, boom, you have got it.

Our guys would go to jail if they did that. [Laughter.]

Well, maybe some should, I do not know, it is not my judgment.

I am not done yet, though.

Because, you know, next you get the government that decides,

OK, for this efficient marketplace the electricity bought and sold

through this PX is going to be done in the next day, the day ahead.

While the electricity market outside the PX had been evolving in

a traditional energy path that we are familiar with of longer-term

contracts, direct contracts, forwards, future swaps that move out

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into the future, this one mandated a 24-hour-ahead marketplace

that was where the trading was going to take place.

Can you imagine GM being forced to buy their parts and equipment just a day ahead? I mean, that is as much sense as it made

for electricity. Everybody knows what their needs are within a certain percentage. The electricity market was heading in the way of

the traditional energy markets, that that spot market, that upclose market was a very small percentage.

The benefit of that, of course, is you have the price certainty of

the longer-term pricing that direct contracts and forwards and futures give. But in addition to that, it is only a small percentage,

so that if you do have a price spike, which happens periodically in

commodity markets, it affects a much smaller part of the marketplace instead of the 30 or 40 percent that is in California. Well, I

am not done yet.

Next, for good measure, the government, through the CPUC,

steadfastly denied, because retail prices were still regulated, that

the utilities could increase their rates, even despite the fact that

these guys were paying 20 cents in the wholesale market and selling in at 5.5. I mean, they had the economic equivalent of the

Ebola virus. They were hemorrhaging all over the place with cash.

They were then, in desperation, denied the ability to lock in

prices through contracts last summer, inexplicably. Reports were in

the press, apparently, that they had offers of 5 cent contracts, but

they were not allowed to do that by the actions of the Commission.

And it still gets a little bit better, because when the CPUC did take

action last June—I think it was June 8th—they moved to allow the

utilities to use other outside exchanges to procure their electricity.

Remarkably, within 5 days, on June 13th, when the State budget

was adopted, there was a specific provision in the budget that created a study which prevented them from implementing that CPUC

action. So, in essence, they were frozen out again.

Well, it did happen that finally the crisis got so bad that by August there was a ruling that allowed them to use a small, limited

number of forward contracts. But guess where—out of the monopoly PX. Once again, if you call that deregulation, you know, it

sounds to me like California put Dr. Jack Kevorkian in the recovery rooms. I mean, I do not know what they had in mind, but, you

know, it certainly was not recovery from this standpoint. [Laughter.]

Every time a decision came up, it seems like—and I have been

working here for a long time, so if I sound a little frustrated, I

guess I have to confess I am—but every time the policymakers

made a decision here regarding this marketplace, it always seemed

like Yogi Berra said, ‘‘When you come to a fork in the road, take

it.’’ Well, in California when they came to a fork in the road, they

stepped on it. Their foot looks like a pincushion at a quilting bee.

Where are we now? Well, only a couple of the players now have

entered a new chapter. Of course, it is Chapter 11. That is the PX

and PG&E. [Laughter.]

The utilities had their credit cards shredded last January, and

now the State has stepped in, and the DWR is the sole buyer and

seller of electricity in the marketplace. And that was 3 months and

about $5 billion ago.

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So where are we now? Still the critical problem has not been

solved. And what is it? The State needs to immediately do a couple

of things. First of all, they have got to implement direct access.

This is the anathema that has been denied. You know, individuals

outside are certainly not qualified to go and buy electricity, the

businesses that are here, apparently, in the view of a lot of people.

We think those people are the few that have the credit rating left

in the State to be able to buy electricity.

Direct access means bilateral contracts. Let at least the 70 percent of the State that commercial and industrial businesses represent the chance to step out from under the State purchasing

DWR and find and procure their own electricity. Under the law

that was passed in January, that is illegal. In California, the only

legal buyer and seller is the State. I mean, we trained the Russian

oil company, Rosneft Product, at the request of the State Department in 1993. This was under the old Brezhnev regime. Rosneft

Product had more freedom than these guys have. I mean, at least

they traded in commodities.

You have to let the commercial and businesses out of there for

two reasons: Because the State simply has not been able to take

care of all the electricity purchasing on the long term that it needs,

and it should not be expected to do that, either. The businesses

need to do that. A benefit of that direct access movement will be

to change the spot market that we are still in, because people are

still having to buy, the energy is still being bought, largely in the

spot market, and it is costing a lot of money. As I said, it is about

$5 billion.

You know, people have been angry about the State government

not talking about how much they are paying for electricity. But,

you know what, you can figure it out fairly closely. As somebody

said here, it takes about 30,000 megawatts a day to power the

State. And you know that the utilities have about 12,000 of that

or so. There is another 3000 megawatts that are the QFs. So if you

put 10 cents or whatever the new price cap is on that 12,000, and

you add about 14 cents, which is the agreement supposedly for the

QFs, that leaves you about 15,000 megawatts to have to be purchased in the market by the DWR. So if every 10 days they are

coming in and getting $500 million, that means $50 million a day,

which is what the press reports say. If you take the 10 or 11 cents

times the 12,000, the 14 cents times the 3, you wind up with about

$331⁄2 million that is being paid for the remaining 15,000

megawatts. A little math, a little division shows that that is about

221⁄2 cents, roughly. Now, that is about probably what they are

paying. Now, you know, I could be off by a few cents. But if you

take a look at what the spot markets are—and you can look up on

the Internet, a site called Interfacts, which prints out a lot of those

sites—this is pretty well within it.

What the ominous part of that is, is that is still 221⁄2 cents. And

people are going crazy right now about their electricity rates being

raised to 11 cents. The stunning part of this is, if I am even off

by half, the rates have to come up a whale of a lot more to hit that

market. So the bottom line is——

Mr. BURTON. Mr. Seetin, can you sum up?

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Mr. SEETIN. What I am trying to say is, first of all, get direct access. Allow those commercial businesses to go out and take care of

themselves. They can do that. That will help get the State off of

this treadmill of the spot market.

Second of all, the other thing is transmission access. The ISO

had a good proposal in January to allocate transmission capacity.

That goes hand-in-hand with transmission access, so that buyers

and sellers of electricity can lock in the transportation and the

commodity price. There is nothing that will build this foundation

faster, that is crumbling right now, than those two. Without building that foundation with direct access and transmission access, this

building cannot be rebuilt.

Thank you, Mr. Chairman.

Mr. BURTON. Thank you. We did not get your opening statement,

Mr. Seetin. Did we get that?

Mr. SEETIN. Yes.

Mr. BURTON. We do have that?

Mr. SEETIN. Yes.

Mr. BURTON. OK. I have not had a chance to look at that. Did

that opening statement cover everything that you said?

Mr. SEETIN. Yes, sir.

Mr. BURTON. OK. I think that was a very important—— Mr. SEETIN. I did not have Kevorkian in there.

Mr. BURTON. I would like to know who writes your metaphors,

though, because—they are in the opening statement? They are not?

Mr. SEETIN. No.

Mr. BURTON. Your metaphors were not in the opening statement,

but I need a good comedy writer, so if you would give me your

phone number, I will get a hold of you sometime in the future.

[Laughter.]

Our next witness is Mr. Conlon, former head of the PUC.

[The prepared statement of Mr. Seetin follows:]

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Mr. CONLON. I think he just gave me a new name here. But I

assume, Mr. Seetin, that other than the comments you meant— that you stated, that everything is fine.

I want to try to do two things today in my 5 minutes, is to give

you the reasons for why we went through the restructuring and the

deregulation of the generation. And I would like—— Mr. BURTON. Can you pull your microphone a little closer. Those

mics are not picking up as well as—— Mr. CONLON. And how I think we got where we are today, you

know, without attributing it to the restructuring and the deregulation.

I think you need to put in perspective where we started. Is this

mic coming on now?

UNIDENTIFIED. We can barely hear you.

Mr. CONLON. Is this better? Is this better? OK? All right?

OK, I want to give you a perspective on why we started and why

we did what we did. I think you have got to go back to 1993 and

think a minute, for those of you who were involved in the business

community at that time. This State was in a recession that was almost as bad as the depression. We had unemployment over 10 percent. We had lost over 500,000 jobs, almost 800,000 jobs in the

State of California. We had very close to a depression going. I

mean, compared to where we are today, you know, I think our recession back then was a lot more serious.

And without in any way demeaning what we are up against

today—because we do have problems but I just think that with the

situation we had at that time, we had large industrial customers

and co-generators coming to us and said we are no longer building

in California. There were two specific projects that I am aware of

that were $250 million each that were built outside of California,

and they attributed it solely to our high rates. We had the highest

or the second highest rates in the United States, and in their view,

we had the worst regulation in the United States.

So the five commissioners, at that time, were committed to do

something to help the situation. Because all the high energy users

in the State blamed us rather than the recession for their problem.

So I think that is the environment we started in.

We went through hearings for 3 years. We had two different proposals on how to restructure the industry and how to fix the high

rates and the poor regulation. So it was probably the most thoroughly examined hearings. We had over 50 to 100 days of hearings

all day long, and I think that it was the most thoroughly examined

proposals of what to do.

And I think you have to also remember at that time we had 30

percent excess capacity in the State. Our natural gas rates were

the lowest in the United States because of deregulation 10 years

earlier. So we were sitting with low gas rates and excess capacity.

No one was going to build new power plants in California because

of those two facts.

We even tried to order 3,000 to 4,000 megawatts of renewables

back in 1995 and 1996, and everybody went hysterical. They went

to FERC and got an order that said we could not build those plants

because there was no need, and the prices were too high. They

were 51⁄2 and 6 cents. And I think here in San Diego it was 51⁄2

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cents, and you were paying 31⁄2 cents. So the utilities in the State

were against building any additions. Everyone was against it. So

we threw up our hands and said hey, if nobody wants to build

these plants, we are not going to build them. We have got 30 percent excess capacity, we have a 2-percent growth rate. That gives

us 15 years of excess capacity. That is where we were when we

went through this process, so that everybody understands that we

were not doing this as an academic exercise.

So what did we do? We ordered—the major concern that we had

was that if we tried to deregulate the market—which is what we

concluded was the right answer, because it would happen faster

and it would get more investment than if we tried to continue the

traditional regulation. So we ordered the utilities to divest 10 percent of their—or 10,000 megawatts in a 45,000 megawatt market

of their generation. And they agreed to do it.

So when they sold those plants, that created a situation where

no player in the State had a large control of the market. And our

main concern was market power. In spite of the market power you

are concerned about today, if you only had two generators, the

market power would be much more significant. We saw that in the

UK, and we said that was not what we wanted to do.

So we created a situation where we had five or six competitors,

rather than just two. We created the independent system operator,

so that he could be the traffic cop, the airport director. And then

we created the power exchange. And we created the power exchange only during the transitional period, about 4 years, to protect the small consumer. Because our view was if we start out with

bilateral contracts, which is what Mr. Seetin is advocating, all the

low-cost generation would be sold to the large customers, and the

high-cost generation would be left to the small customers. So our

belief was to have all the utility assets sold into the power exchange during the transition period, until they divested their assets and a market was established. And that is why we had the requirement that they sell into the market.

And we allowed all customers, large and small, for direct access.

The legislators came along and put a rate freeze on, which virtually

was very difficult for the marketers and suppliers to sell into the

market, if they had a rate freeze and a power exchange. So the

only people that really elected direct access were the large industrial users. They have today—about one-third of them have elected

direct access, and about half of their volumes now are bought directly. And they wanted the opportunity to make their own mistakes. They did not want the Commission to set the rates, they

wanted to go out and buy their own power. And some of them did.

And some of them won, some of them lost. But that was the basic

structure we did.

And I think what happened after that I believe is attributed to

three acts of God and some delay in some government action. And

we are facing the worst drought in 25 years in the Northwest. We

are dependent on the Northwest for at least four nuclear plants

worth of generation. We have been without that generation for over

15 months. And now they are—the drought this year is even worse

than last year. So we are suffering where we are not going to get

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any hydro to speak of from the Pacific Northwest, and we have lost

2,000 megawatts in California.

So the 6,000 megawatts we have lost to reduced hydro is virtually the problem this summer. Because if we had those 6,000

megawatts, we would not have any blackouts. So let me make it

clear that the hydro situation in the Pacific Northwest and California is one of the prime drivers for this crisis. And along with the

fact that the price of natural gas is skyrocketing. It has gone up

fivefold. I am not sure what these gentlemen were talking about

when they said high prices, but the natural gas prices came

through with at least a 200 percent increase in California, and all

customers are paying it. So I think, when they say energy bills,

they ought to be careful that they are looking at natural gas versus

electricity. Because only in San Diego do the electric prices go up.

Everywhere else in this State they have been frozen.

Mr. BURTON. Mr. Conlon, could you sum up?

Mr. CONLON. All right. And I just want to say that the energy

commission has been blessed with 17,000 megawatts of new

projects, and they have taken an average 18 months to approve

those, as compared to other States, which do it in 3 months. And

I think if the nine projects they have already approved, were approved 9 months earlier or 15 months earlier, we would also have

additional supply. And they have got 15 more projects there that

they need to approve.

We need to get these new projects out and approved, 17,000

megawatts in a 45,000 megawatt market would completely solve

the problem. I mean, you are having one-third new capacity. They

need to approve those plants as fast as possible. I do not know how

you could help, but if you can, I will rest on that case.

Mr. BURTON. Thank you, Mr. Conlon.

We will now go to the 5-minute rounds for the Members. And I

will start off here.

First of all, to the business people that testified, Mr. Barnhart

and Mr. Hardage, have the high electricity prices threatened the

viability of your companies?

Mr. HARDAGE. Mr. Chairman, the high energy prices will affect

not only our company, but the electric company. [Laughter.]

The high energy prices will definitely affect not only my company, but every hotel company. Because of not only the direct effects of 300—so far we have had over 300 percent increase in our

electric power cost. And other hoteliers have had the same problem.

The problem is that the indirect causes will have a greater effect,

and that means that fewer businesses will be expanding or growing

in California because of the uncertainty, fewer tourists will be coming to California. And when you combine a high fixed cost, and

most hotels have debt and they have real estate taxes, they have

operating costs, and you can only cut costs so much. So I would say

that probably at the margin, that you would begin to see the lesscompetitive hotel companies and hotel sectors begin to suffer the

most. And if this goes on for a long period of time without solving

it, without solving the problem, without getting more supply—and

the only solution is more supply, there is no other solution. So unVerDate 11-MAY-2000 10:55 Apr 01, 2002 Jkt 000000 PO 00000 Frm 00425 Fmt 6601 Sfmt 6601 C:\DOCS\76761.TXT HGOVREF1 PsN: HGOVREF1
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less we get more supply, I would say that business, and certainly

the hotel business in California, is in great danger.

Mr. BURTON. Mr. Barnhart.

Mr. BARNHART. Well, there is actually three answers. The first

answer is the first price increases—because construction operates

primarily on fixed price contracts, the first price increases, the

companies took the hits right out of their bottom line, because they

didn’t have any choice.

The second round will be passed on to the owners. Because, as

you are bidding new projects, you are going to price it right in on

the cost for power.

The third round is similar to Sam’s answer. What we figure, it

is just a matter of time until somebody figures out, well, if we cannot supply all the power needs for the existing facilities, why do

we need any new facilities. And then we are in a total—you know,

we are in a total shutdown. And we will see owners delaying their

projects, and we will see private owners moving outside the State.

So, long-term, it is a disaster.

Mr. BURTON. Mr. Seetin, I got a great deal out of your statement,

so pull that mic close because I do not want to miss what you have

to say here. Can you once again go into the flaws that were—in the

way that the California market was structured, and also why you

think the crisis has lasted so long. And if you could, make it as

quick as possible.

Mr. SEETIN. Sure.

Mr. BURTON. Not too long.

Mr. SEETIN. Again, I will try to be very brief. First of all, they

created a mandatory power exchange. We said, you know, we do

not mind if you take the taxpayer money, and it is not bad to create this exchange. It is unnecessary, because every other market,

such as natural gas, those institutions competed with each other

and came in without forcing the taxpayers to pay an additional

piece.

However, if they would have not made that mandatory, others

would have, and that would have stopped from happening what actually did happen, and that is that cockamamie pricing system

where they take the highest price for every hour that fills the demand. Because somebody else would have said, hey, guys, there is

a better way to do this. It is called matching buyers and sellers,

which every traditional marketplace would have done.

When they then further stopped these people from using longterm and direct contracts, you have got that marketplace now

forced into 24 hours. They cannot get those instruments. They

could not get forwards if they wanted, because much of that market

is short-term.

Which, by the way, when you want to talk about a link, natural

gas is directly linked to that. About 60 percent of the electricity

generated in the State comes from natural gas sources. When you

force electricity into the day-ahead market, what have you done?

You have done the same thing to natural gas. That is why it does

not do any good to have a long-term contract with natural gas. You

are going to make more of that the volatile spot marketplace.

Mr. BURTON. Well, let me followup on that. How do you think—

and I think you covered this a little bit. But how do you think CaliVerDate 11-MAY-2000 10:55 Apr 01, 2002 Jkt 000000 PO 00000 Frm 00426 Fmt 6601 Sfmt 6601 C:\DOCS\76761.TXT HGOVREF1 PsN: HGOVREF1
419

fornia could solve the current electricity prices. I see here from

your notes that you are talking about direct access, which you just

mentioned, and long-term contracts.

Mr. SEETIN. Right. The first thing you have got to fix—the thing

that has been completely overlooked, everybody talks about the

symptoms. Nobody looks at the cause. The root cause is a screwedup marketplace underneath. You have got to fix that first. You

have got to fix it with direct access. That will lead to other types

of contracts—direct contracts, forward contracts, swaps, and future—that is going to bring financial soundness to that economy.

It will bring in people to build power plants financed without the

taxpayer’s dollar, and it will stabilize the market. It is going to get

away from that spot market because it is going to move everything

into the future, where it naturally would go.

Second with that, you have got to have transmission access. You

have got to have the ability for those buyers and sellers to lock in

their space on that transmission line. And I am not talking about

completely, because there is also the need to take care of the citizens, the hospitals, the schools, and that type of thing. I am talking

just about for the commercial and industrial sector.

Mr. BURTON. So that is the recommendation you would make to

the PUC?

Mr. SEETIN. Yeah, absolutely.

Mr. BURTON. Mr. Filner.

Mr. FILNER. Thank you, Mr. Chairman, and thank you, panel, for

your testimony.

I do want to make several points for the record, and for the visiting committee and the chairman. Mr. Horn’s appearance here as

chairman of the Board of Supervisors to me makes the point, although you did not make it in your prepared testimony, Mr. Chairman, that the approach—that the legislation that we have taken

in Congress, supported by myself, Mr. Hunter, Ms. Davis, is supported by the Board of Supervisors, supported by virtually every

city council in our county. And I will tell this committee and this

chairman that most of those are controlled by the Republican

party, although all those offices are non-partisan, they are Republican registered. And so this is a bipartisan response to the crisis.

It is a bipartisan response to say that we ought to set cost-based

rates to get us over this disaster, and that we should refund the

over charges.

I think that is a fair statement, Mr. Horn, is it not?

Mr. HORN. That is correct.

Mr. FILNER. Thank you, sir. This is a bipartisan approach, and

nobody should think that it is only some Democrats screaming

about this.

Second, we have heard many statements about it is environmental regulations and whacko environmentalists that have caused

this problem. I think Mr. Conlon stated it very succinctly. The market that everybody here is praying to decided that there was no

reason to build capacity over the last decade. That is, utilities

themselves and the private sector decided that they ought not to

build. As Mr. Conlon said, there was a forecast of 15 years of excess capacity. We have people, public-minded citizens in San Diego,

who are going to build us capacity following all environmental regVerDate 11-MAY-2000 10:55 Apr 01, 2002 Jkt 000000 PO 00000 Frm 00427 Fmt 6601 Sfmt 6601 C:\DOCS\76761.TXT HGOVREF1 PsN: HGOVREF1
420

ulations, and they will produce energy at a profit, and provide San

Diegans with reasonably priced electricity. It is not environmental

regulations. That is a myth that people are using to take advantage of this thing to get rid of all environmental laws that we have

had in this Nation for some time.

I have heard from the business people at the table here very eloquently an expression of the situation you are in. It is disaster.

And people who have less resources than your companies have

gone out of business. Scores of our constituents are out of business,

who could not cover this. But I did not hear any recommendations

for what we ought to do, except you said that—I think Mr.

Barnhart and others have said people ought to be paying fair retail

rates. Well, Mr. Barnhart, you saw what happened when the retail

rates were deregulated in San Diego. They tripled within 60 days.

You are all assuming there is a market at work here. There is

no market. There is a control by a few companies. And what makes

you all think that if we increase supply—which I agree with—that

you are going to get a reduced cost? All of the assessments that

have been made have shown that the wholesale price you are paying has no relationship to the time of day, to the demand, to the

cost of anything. So what makes you think that the same few companies will not charge increased prices when the supply increases?

When we conserved here in San Diego and decreased the demand, prices went up. There was no relationship, because there is

control of the market. And all of you folks who are complaining

about the costs of your doing business, you are absolutely correct.

But you are paying criminal rates. You are paying wholesale prices

that have been found, by the Federal Energy Regulatory Commission, to be illegal. ‘‘It is the price, stupid,’’ if I may coin a phrase.

It is not environmental regulations that are forcing you out of

business, it is not that we are not paying adequate retail prices.

It is not the lack of supply. There is no market. And you are paying

a price that is demanded from you by a few people. Why do you

not support the legislation that says have a refund for all the overcharges over the last 10 months? Mr. Horn and his board have supported that. And as I hear your recommendations or lack thereof,

I hear nothing about renewable sources of energy, which I think is

the key to the future in terms of our supply. I hear only let us

build some more power plants, and the Governor is trying to do

that.

What about public control of this situation? I did not hear anything about that. Where there is public ownership—as in L.A. or

Sacramento, there seems to be some control of the pricing. They

are not paying the prices that you are, that are forcing you guys

out of business. So I sympathize with your position. And again, my

constituents are paying a higher price than that.

But it seems to me your ideology is somehow refusing to let you

face the reality that it is the prices that are controlled by a monopoly or by a cartel that are found to be criminal. We should demand

the refund of those prices. And I tell you, Mr. Seetin, the structure

that you have so eloquently described as flawed, which is—you are

perfectly right—was set up by, you know, the previous administration, and had the goal as Mr. Conlon said, of increasing competition. It failed. But it was the cartel that took advantage of every

421

one of those things that you pointed out to hurt the consumers of

California. They took advantage of all that. They forced all the purchases into the spot market. They did not have to. They forced it

in there. And all of the things that you described were caused——

Mr. OSE [presiding]. The gentleman’s time has expired.

Mr. FILNER [continuing]. By a few companies who have ripped us

off for $20 billion.

Mr. SEETIN. May I respond to that?

Mr. OSE. Unfortunately——

Mr. FILNER. That was a question at the end, so——

Mr. OSE [continuing]. Unfortunately, I am not sure which was a

question and which was not. Perhaps on our second round we will

have questions.

I am going to recognize Mr. Horn for 5 minutes.

Mr. HORN. Thank you, Mr. Chairman. This thing just seems to—

well, we will just forget the little furry thing, whatever that is.

Mr. Conlon, were you in the Wilson administration?

Mr. CONLON. Yes.

Mr. HORN. What was your position?

Mr. CONLON. I was on the Commission for 6 years, 1993 to 1998.

And I was president for 2 years, 1996 and 1997.

Mr. HORN. I think we all know that where the recession started

was in March 1988, because of the end of the cold war.

Mr. CONLON. Yes.

Mr. HORN. And people were being let go, in certainly Los Angeles

County, 400,000 people were out of work.

Mr. CONLON. Yes. Absolutely.

Mr. HORN. So I am interested in the role of Governor Wilson, because he was assaulted by the President of the current group in

terms of it was all, it seemed to be, on his plate, not now, and do

not bother us with it. So I would be curious what the Wilson administration did do in this period.

Mr. CONLON. Well, you know, they had an economy that was

very sick, and the high energy users blamed the Commission and

its regulation and the high rates, rather than the recession, itself.

So I think the burden was on the CPUC to take initiative to try

and lower the rates, and to try and open the market. And, you

know, I think that the result of that was to do exactly what we did.

Now, I really think that the retail level for the small customers

was deferred until the end of this year because of the rate freeze.

I mean, I think the smaller customers really did not have the opportunity to lock in a rate. I mean, San Diego was offered a rate

of 51⁄2 cents or 6 cents last summer, and they had a debacle with

the Commission, the current Commission, not to get that approved.

But be that as it may, there was no energy suppliers that came

into the San Diego area and offered individual customers 51⁄2 or 6

cents, so they could have locked in the rate. Each of these gentlemen here could have locked in a 51⁄2 or 6 rate if there was a marketer in the area willing to do that. And I pleaded with some of

the marketers to come in. And they said hey, things are just too

unstable now for us to even come in. Because, until the rate freeze

was over, they were not going to do anything.

And I said, well, why are you not in San Diego?

422

And they said, well, we are going to stay in the wholesale market

until the entire State comes off of freeze. So I think that was—the

idea, though, was that competition would do a better job. I mean,

we are in California. This is not the Republic of California. We got

Silicon Valley, which is the heart of the free enterprise system. I

mean, that is what has driven this State for the last 5 years out

of the recession, into a prosperous economy.

So for us to turn to government regulation to make an allocation

of resources was so inconsistent with the free enterprise system

and the Silicon Valley prosperity. I mean, 7 percent of the growth

was due to Silicon Valley and the computers and high tech.

So I think that Governor Wilson and the Commission were convinced that competition, in an area where you have multiple providers of generation, was the only answer. And that is why we

went down that street. And I think if it had not been for the hydro

problems and the run-up in natural gas because they had to use

so much natural gas, and it was a cold winter this year, both in

the Midwest and the East, that natural gas prices have driven

these prices—if you look at the price composition, and I have got

an article here out of the Fortnightly Magazine for February 15th,

75 to 80 percent of the prices throughout the summer were driven

by natural gas and NOx credits. And there was about 20 to 25 percent of those prices was due to other causes. And you can call it

price gouging or whatever you want. But only 20 to 25 percent of

the cost for those high prices was attributable to other than natural gas and Nox credits. And Nox credits were a large part of last

summer’s high prices. I hope I answered your question.

Mr. HORN. Mr. Seetin, you probably had a view of both the Public Utilities Commission 10 years ago, 15 years ago, and now. What

advice would you give us in terms of how they conducted themselves?

Mr. SEETIN. Well, at this stage, I think we are in a situation

where you have got to go forward. But as I said in my testimony,

I think even when the crisis became apparent a year ago, things

could have been done that would have mitigated it quite a bit, we

believe. At any time they could have opened up the market to other

exchanges, they could have allowed those people to use direct access, which would have had a very quick effect in that regard. It

would not have brought on more supply, because that takes some

time.

But the bottom line is, for example, they did not have a choice

of whether or not to use the PX. That 24-hour-a-day, that dayahead market was mandatory. They did not choose not to go in

that thing. They certainly would have over the last year. It was put

in by regulatory fiat and maintained by regulatory fiat. And, you

know, that is where the responsibility—I am getting on dangerous

ground here. But the policymakers that implement those institutions do bear responsibility, when things are going bad, to adjust

that.

Mr. HORN. The current group there that is running the Public

Utilities Commission just points all their fingers at Washington. Is

that a realistic thing to be done, or is that just demagoguery?

423

Mr. SEETIN. When Washington, DC, gets the authority to rewrite

California statutes that prohibit direct access and that oversee the

power lines——

Mr. BURTON. [presiding]. Mr. Seetin, I am sorry, we are going to

have to come back on a second round.

Mr. SEETIN. OK.

Mr. BURTON. Gentleman’s time has expired.

I am going to recognize Ms. Davis for 5 minutes.

Mr. HORN. Thank you, Mr. Chairman.

Ms. DAVIS. Thank you, Mr. Chairman. And I appreciate all of you

being here and sharing your stories with us. Obviously we met

with many businesses that had dire predictions of the outcomes for

them and for their customers, and I appreciate that.

I wonder if we could go to the issue of the long-term contracts.

Because I am hearing different things, and I hope that you can

clarify for me. You mentioned Mr. Seetin, and I know others have

said that the real problem here was the lack of direct forward contracts. But it is also my understanding, and I wonder if Mr. Conlon

could respond, that in fact the California PUC worked with companies to try and develop long-term contracts. And part of the requirement was that there be a reasonable clause as part of that.

That is what most States have, or a lot of States have a reasonableness clause, so that you set it at one time, but that continue.

Could you enlighten us a little bit about that, and did in fact companies not want to enter into long-term contracts that you tried to

bring them into because of that?

Mr. CONLON. You know, this question really should be addressed

to President Lynch, when she was here Wednesday. Because I am

off the Commission and I am not—all I can speak is as an observer

and as when I was a Commissioner. There is a great lack of faith

and trust between the utilities and the Commission. And this debacle that you are talking about is manifested clearly, as you can see.

Because on one hand, the Commission says the utilities can go

out and buy any kind of bilateral contracts they wish, but it is subject to review and refund after the fact. And the utilities say hey,

if we go out and buy a contract and commit to $10 million and the

Commission comes along 2 years later and disallows $2 million of

it, I mean, how could we go out and contract in good faith with a

creditor for $10 million?

So it is a lack of trust. The Commission does not trust the utility

for reasonable prices; the utility does not trust the Commission, because in hindsight they could disallow the cost. So they need standards—and I think the Commission is working on that now—that

are specific enough that the utilities can go out and buy contracts

with the assurance that they were not going to get hammered after

the fact. I mean, that is the problem. And your colleagues were

here on Wednesday when they talked to President Lynch, so you

can get from them what she said. I do not know exactly. I think

she said they authorized the contracts, which they probably did.

But the subject of refund and disallowance is the hook that the

utilities have trouble accepting.

Ms. DAVIS. Did you——

424

Mr. OSE. If the gentlelady would yield, I would be happy to share

with you after—when we break, the information that Ms. Lynch

and the utilities provided us Tuesday and Wednesday.

Ms. DAVIS. OK. Thank you. But I really was wondering, did you

know—was there a look at other States and the way that they

pulled that together, so that they were able to agree to reasonableness?

Mr. CONLON. Well, the only other State that I think would be a

good analogy would probably be Pennsylvania. And I think they relied on bilateral contracts almost entirely. Mr. Seetin, is that your

understanding? Yeah. So I think they have a different situation. It

was a spot market that Mr. Seetin was criticizing, that we felt was

imperative to protect the small consumers from what we called

cream skimming.

And, you know, this was only during the transition, which was

4 years. The PX today, the power exchange he was criticizing, went

bankrupt 2 months ago. So it is no longer in the market. So there

is no spot market today. And as a result, the new generators have

no idea what the current price or the forward price of electricity

is to build new power plants, which was one of the other reasons

for having that. If you have a clear, deep, liquid price, then new

investors can come into the State knowing what they are going to

get paid when they invest their money.

Now, you know, we had a debate at the Commission with

NYMEX on one side and two economists on the other, and this was

a debate that went on for about 8 hours. So this was thoroughly

hashed out. And everyone agreed to have this separate power exchange that bought into the whole process. And there was virtually

no one dissented. So right or wrong, good or bad, there was complete consensus that the power exchange and the ISO were absolutely essential. And the power exchange is now gone. It is bankrupt. So NYMEX has 100 percent of the market, or anybody else.

So if it is going to work, where is it?

Mr. SEETIN. Could I also add that the Harvard economists won

that argument. That is why we are here today. We do not have 100

percent of any market. I want to make that clear. There is no mandate. So I just want to make it very clear, though, and we filed a

lot of testimony, that the argument did go on like that, but we lost.

Ms. DAVIS. OK. Thank you. One more just followup question, if

I could go back to you again, Mr. Conlon, for a second.

Mr. CONLON. Certainly. That is why I am here.

Ms. DAVIS. As we are talking about the competitive market and

when the PUC had the ability to lift caps here in San Diego, when

San Diego Gas & Electric indicated that they had no longer the

market share that would have disallowed them from doing that,

did you think at that time that there was a competitive market

here in San Diego that would have responded in the way that we

would hope the markets would have responded?

Mr. OSE. Before you answer, Mr. Conlon, you are going to have

to hold your thought. The gentle lady’s time has expired, and we

recognize Mr. Hunter for 5 minutes.

Mr. HUNTER. Thank you, Mr. Chairman. Gentlemen, I think we

have had a chance to understand a lot of the problem from your

perspective, and probably watching the panel, you have been able

425

to understand a lot of the problem from our perspective. And you

have seen us agree, Republicans and Democrats, at least some of

us, on the idea that 9,000 percent increases in a matter of minutes

do not reflect a free market, they reflect a market that is certainly

not an operation of free enterprise.

On the other hand, you have seen us also—at least myself—criticize the paralysis that we have in California, particularly, which— with the application of a lot of laws, including environmental laws.

And you have seen a staunch defense of those laws by Mr. Filner.

That is not slowing anything down. And he referenced Mr. Conlon

to say, well, we did this because of our economic predictions. That

is why no power plants came in.

But, Mr. Conlon, you also stated that plants that try to get permitted take about 18 months in California versus about 3 months

in other States; is that not true?

Mr. CONLON. That is correct.

Mr. HUNTER. And are a number of those considerations not environmental considerations that lead to that 18-month delay in permitting?

Mr. CONLON. Well, the EIR and all the environmental constraints is what the Commission addresses. And they try and accomplish it in a year, but it usually takes 6 months to get the data

adequate, if you will, before they implement their 1-year rule.

Mr. HUNTER. And Mr. Conlon, and let me—because we have got

a limited amount of time.

Mr. CONLON. OK.

Mr. HUNTER. You are precisely right. And let me just give you

a laundry list, in this effort that I am undertaking to try to get

some generational capability at Miramar, our Marine Corps air station here. Walking down through this list the other day of what we

have to comply with: the Endangered Species Act; the Clean Air

Act; the NEPA process, which involves a number of public hearings, all duly noticed, and then our response to those hearings. The

fact that we have attainment.

In California you can only put so much stuff in the air. And any

Federal landlord—in this case the Marines—are worried that the

amount of stuff that is put in the air, pollution that is put in the

air by a generational capability that would supply the citizens of

San Diego County will be charged against them under the law, to

their air operations for the U.S. military, and could foreclose their

air operations.

And so the bottom line was, after you walk through the environmental requirements in terms of meetings, studies, plans, permits,

hearings, what are we looking at? And the answer: years. So certainly there is—one problem with this whole situation is it does not

come neatly packaged. And certainly, for people that believe in free

enterprise, who say no cost caps, they do not understand that there

is, to some degree, the aspect of—electric supply has some of the

aspects of public infrastructure. You have only a limited amount of

lines that this stuff can pass through. You have a lot of difficulty

in terms of siting locations. All those things that deny the one aspect of real free enterprise, which is easily qualifiable competition.

So, Mr. Conlon, when the economy did turn around and our

usage started to go up dramatically, the problem was we could not

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easily qualify new plants that could come online and increase the

supply; is that not true?

Mr. CONLON. Right. We had $10 billion of free private capital

ready to be built in California without any government assurances,

without any government incentives. This was all free enterprise investment. And they cannot get it through the energy commission

on a timely basis. So, I mean, that $10 billion, you could go back to regulation and let the State build the power plants and take the $10 billion away

from the schools and the libraries and all these streets and everything else that California needs, also. So I think it is—you have got to define the role. And I think when you have got $10 billion of private moneys waiting to be built, let it be built.

Mr. HUNTER. Let us get down to business. One thing we could

do right now that I think everybody is for, is if you have got a generator or if you can locate a generator—in fact, Solar tells us their

power peaking plants that they built at the plant, you do not build

them onsite, can be sited and started up within 1 week. Those are

the easily transferrable units. Within 1 week. Meaning that if we

had permitting taken care of in California, and in San Diego particularly, you could roll these components out on flatbed trucks, put

them down on a cement slab and hook them up and have those babies going in a week, meaning we could save ourselves from summer.

So, Mr. Chairman, I have got H.R. 1075, which says if you have

got a generator in California, you can turn it on without any punishment with respect to air attainment. And I would like to give

that to Bill Horn, to our county supervisors, and to you. Thank you

for your co-sponsorship. And Bill, if you guys could support us on

this thing, I think this would give us a shot, at least, at saving ourselves from summer. Thank you very much.

Mr. BILL HORN. If I might, Congressman, I agree that if we could

get some emergency air credits to these folks, we would not have

any blackouts in San Diego. In fact, we did not get to get into that,

but I do not think there is any reason for the blackouts in San

Diego.

Mr. BURTON. Thank you, Mr. Hunter.

Mr. Ose.

Mr. OSE. Thank you, Mr. Chairman. Mr. Horn, the Governor has

entered into a memorandum of understanding with one of the utilities to I believe acquire their transmission facilities. If the transmission facilities for San Diego Gas & Electric were acquired by

the State, what is the amount of lost property tax revenue that the

county would suffer?

Mr. BILL HORN. I am sorry, I do not have the number for you.

The franchise fee, I believe, it is about $3 million, but I am not certain as to that exact number. I disagree with the Governor. I do

not believe he should buy the transmission lines to free up capital

for the utilities. I personally believe that there is enough capacity,

at least in southern California, for us not to have any rolling blackouts. When we have plants, and the two plants both, Encino and

Duke—— Mr. OSE. Mr. Horn, let me cut you off, because I noticed my time

is evaporating here.

427

Mr. BILL HORN. Sure.

Mr. OSE. I just want to be clear. $3 million in lost——

Mr. BILL HORN. I am saying approximately. I do not know the

exact——

Mr. OSE. OK. Approximately $3 million in lost franchise fee

equates to what in terms of law enforcement, library service hours?

Quantify that. I mean, you have quantified it. Tell me the impact.

Mr. BILL HORN. Well, obviously our budget in the county of San

Diego is $3 billion. So I suppose we could absorb the $3 million.

But at the same time, we now have a $25 million over cost overrun

just in power alone. That is why you do not get all the lights in

the chamber here. We are trying to conserve.

But at the same time, the $3 million does have a direct impact.

I do not believe the Governor should be rescuing the utilities. They

should have let them go bankrupt.

Mr. OSE. All right. Thank you. Thank you for your comment.

Mr. Seetin, I find your remarks on market structure—pardon the

pun—highly illuminating. The concept that you have put forward

about direct access strikes right at the heart of providing liquidity

to the market, so that there is certainty on both ends of the transaction. If we had the proposal that you have made here for direct

access—and I presume implicit in that proposal is the ability to

contract—in addition to your proposal on the ability to acquire

transmission capacity, how long would it take us to get out of this

problem, this crisis that we have in California?

Mr. SEETIN. Well, it is hard to say. Depends on how quickly the

law could be changed and enact this. We think it would be very

fast, No. 1, because California is the world’s sixth largest economy.

There are, we think, a lot of people that would come in quickly to

offer those instruments.

Mr. OSE. Let me back up. It is my understanding that the direct

access prohibition is regulatory, not statutory.

Mr. SEETIN. No, it is statutory. The CPUC has not enacted the

law that was passed, AB 1X, in January. They have not taken the

action. But it is in the statute. The CPUC has not put the date in

yet.

Mr. OSE. OK, 1890 did not prohibit access, but 1X does?

Mr. SEETIN. AB 1X does specifically.

Mr. OSE. Did 1890 prohibit long-term forward contracting by the

utilities?

Mr. SEETIN. I do not think so. I am not sure, but I do not think

so.

Mr. OSE. Does AB 1X?

Mr. SEETIN. Well, it is——

Mr. OSE. By its nature, it does?

Mr. SEETIN. Yeah. It is insignificant. Because it basically creates

a single buying agency. That is the DWR. It does not matter.

Mr. OSE. In effect, it does prohibit long-term forward contracts?

Mr. SEETIN. Yes.

Mr. OSE. Now, if I look across the panel today, I see a market

participant, Mr. Hardage; market participant, county of San Diego;

a market participant, Mr. Barnhart; a market participant, Mr.

Thomas. I see a market operator, Mr. Seetin. Is that accurate?

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Mr. SEETIN. Yes, we operate the market. We do not have the

physical commodities.

Mr. OSE. I understand. You do not take a pro or con position.

Mr. SEETIN. Right.

Mr. OSE. And Mr. Conlon, I see a market—with someone with

experience as a market regulator.

Mr. Chairman, I have to say in Sacramento and in San Jose we

did not have the opportunity to talk to a market operator. And I

would commend his testimony to the committee and the rest of the

Members of Congress, regardless of their State, as to the impact of

I think your phrase was artificial standards and their impact.

I want to go back to one other thing we covered. I cannot remember if it was yesterday or Tuesday. The issue of a regional transmission organization. As I understand the market for power in the

Western United States, the Rockies actually acts as the divider. In

other words, West of the Rockies basically is a whole market, and

East of the Rockies is a separate market.

Of those States West of the Rockies, some have put forward regional transmission organization plans and some have not. Which

States have not? Is there some reason for them to hold out? And

what is the consequence of having all the States participate or

some of the States only?

Mr. SEETIN. I am glad this is not a quiz, because I would probably flunk that question. But I will tell you in general terms, those

that are more resistant to the RTOs, the regional groups, are those

that feel they have lower cost power and may be disadvantaged by

being part of a larger group. I think that is fast going by the wayside, because they are seeing now that politically you cannot stop

that border. Just markets cannot be held in. God knows, California

learned that.

Mr. OSE. The testimony we had yesterday was that the 50

States, and I believe 49 have put forward their RTO plans. The one

being absent is California. Do you have any information about

that?

Mr. SEETIN. That would square with my basic knowledge.

Mr. OSE. That the markets are screwed up? All right. My time

is about to expire. Mr. Chairman, I yield back.

Mr. BURTON. We are going to go to a second round. I do not think

all the Members are going to take their full time. Some will. But

I did want to ask one question I think is very important. Mr.—I

cannot——

Mr. SEETIN. Seetin.

Mr. BURTON. Seetin. Excuse me. My Lasik surgery is not working right now.

Mr. SEETIN. Just think of looking at a tin roofing and see tin.

Mr. BURTON. There is a number of Congressmen and business

people that believe that price caps are important, rate caps. I

would like to have your perspective on that.

Mr. SEETIN. Well, we, you know, as a marketplace——

Mr. BURTON. And let me add one caveat to that. Eight of the

Governors of the Western States have sent a letter to the Federal

regulators saying that they are against price caps. The only three

that did not sign it, I believe, were Oregon, Washington, and CaliVerDate 11-MAY-2000 10:55 Apr 01, 2002 Jkt 000000 PO 00000 Frm 00436 Fmt 6601 Sfmt 6601 C:\DOCS\76761.TXT HGOVREF1 PsN: HGOVREF1
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fornia. With that as a backdrop, will price caps work, or do you

have to have everybody involved?

Mr. SEETIN. Well, obviously the more that are involved in that,

of course, you spread the pain. Because, in fact, we do not believe

that the history of those things has anything of success. They have

failed every time.

Now, let me say personally I was a fan of price caps, because I

grew up on a farm in Minnesota and we raised cattle. And when

the administration, back in 1972, put a price cap on the price of

beef, our cattle were selling for 58 cents. They put a price cap of

70 on and, boom, the market went right to 70, and we were happy

for that price cap.

So I can just tell you that is traditionally how markets respond.

In that particular market you are focusing on, it might deal with

it, but then you have got all of the side markets that all of a sudden are influenced by that. So, as those off-peak markets may be

influenced by that price cap, all of a sudden your net cost of energy

goes way up and your supply is inhibited. Because, again, how can

you say we want supply, but you can only get this much for it?

Mr. HUNTER. Mr. Chairman, would you yield on that briefly?

Mr. BURTON. I will be happy to yield to my colleague.

Mr. HUNTER. Thank you for yielding, because I think you have

come to an important point here. The law right now has a species

of price caps, in that the law says that FERC shall reform unjust

and unreasonable rates, which seems to be an anti-gouging provision. But it is not necessarily a price cap or does not have a formula for figuring out how much you pay for electricity. But a 9,000

percent increase in a matter of minutes is not a matter of a longterm market adjusting itself, and it is not something that is going

to, I think, motivate producers to get into the market. I think everybody is going to view it for what it is, which is a very short-term

taking advantage of an opportunity that appears on the board.

So do you see any distinction between those two things? One, an

anti-gouging statute, if you will; and No. 2, price controls?

Mr. SEETIN. First of all, let me make it clear that I do not believe

that fraud or market manipulation ought to be allowed, and I agree

with your contention that a price spike like that is an indication

that something is very wrong, something is sick. That is very atypical for a truly competitive market, and you need to find out what

that is.

We do not like price caps. But if price caps are the ransom in

this, they are not going to do any good if you do not fix the underlying market. Again, I am getting back to that. If you do not fix the

underlying market with direct access and transmission access,

price caps will do no good. So if you pay the ransom of price caps,

get the baby.

Mr. BURTON. Let me just reclaim my time and ask a followup

question. And that is, according to the Federal regulators who testified in Sacramento, they indicated that there was only about 25

percent of the market that they could put a price cap on. Which

means that you have another 75 percent of the market that would

be not under the price cap. Now, if that is the case, and you had

a supplier who was inhibited by the price cap, what would they do?

430

Mr. SEETIN. I think you have intuitively figured out one of the

big problems in those things, and that is it.

Mr. BURTON. They would go to the 75 percent where they could

make more money.

Mr. SEETIN. Well, just like if California decides to do it differentially, you know, you have 40 percent of your power coming in.

What are those guys going to do if the power—if the cap is here

and it is not——

Mr. BURTON. Well, I think that is the point I am trying to make,

is if all the Western States in the grid are not together on this, or

if all of California is not under the price cap along with them, then

if there is a price increase, they are going to go where they can sell

the electricity, and those that are under the price cap are going to

suffer with blackouts. Now, did California not have price caps in

December? I think they did. And I wanted to followup and just ask

how did those price caps work, and why did they not work, if they

did not?

Mr. CONLON. Well, the ISO had various degrees of price caps

during last year. It went from I think $750 down to $500 down to

$250. And then FERC came in in January and set a cap—a soft

cap at $150 in January, and $420 in February. And they said yesterday to you that they were going to go back and do October

through December, and then they were also going to do March and

April, so that they will retroactively set a price based on the price

of natural gas and the price of Nox credits for each month. And

FERC I think is doing that, or did it for January and February.

The ISO did it. When it went to $250, I think the price many hours

went to $250, even though it was not the peak.

Mr. BURTON. Well, will price caps increase the likelihood of

blackouts this summer, or reduce the likelihood?

Mr. CONLON. I do not think anybody knows for sure, but I just

think that the main participants who are not under FERC’s jurisdiction are the municipals. You are talking about LADWP, Sacramento, Palo Alto.

Mr. BURTON. Well, thank you, Mr. Conlon. You want to respond

to that real quickly?

Mr. SEETIN. Well, if they do work, this would be the first time,

I would think. The problem with those, you know, you are in a situation where you are worried about supply, and you are doing

something that runs counter to that in the marketplace. That is

the problem with price caps.

Mr. BURTON. Mr. Filner.

Mr. FILNER. Thank you, Mr. Chairman. You have opened an extremely important issue, and there is obviously different perspectives on that. And I think that is the debate that has to take place

in a rational way without labeling.

But, I have a different perspective. I would point out that the

panel does not have a cross-section of folks who we can ask that

question to and get the kind of answers that at least might contribute to this debate.

You raised two important issues. One, if a price cap was not regionwide, obviously there would be differences in approach by different States. My legislation, and almost every legislation that calls

431

for—not caps, Mr. Chairman, cost-base rates. And there is a real

important distinction there that I want to add.

Cost-base rates are all regionwide applied in our legislation. So,

and if I am not mistaken—although I would like this clarified later

for the record—some of those Governors who you point to in the

letter have in fact earlier come out in support of what the Western—far Western States supported. But California, Oregon, and

Washington, all of whose Governors have called for cost-based

rates, probably have a population and economy more than double

or triple all the other ones combined. So if you had a weighted vote

here, I think you would agree that the cost-base rates would win.

Now, on your issue about the jurisdiction of FERC, I will accept

your number, 25 percent, for the sake of argument. But let us remember that 25 percent is what is determining the prices. It is

that marginal control when supplies get tight that allows this cartel to set the prices.

And most of that other energy, as was pointed out by Mr.

Conlon, and I think Mr. Seetin, is from municipals and Federal hydroelectric. These—by contract, by law, by practice—all have consumer-friendly rates. If you control the 25 percent that FERC has

the ability to, you control the market here. That is why the prices

are so high. The people who control that 25 percent control the

prices. So if we brought them under control, you would have a reduction in prices and a stabilization in the market.

And I will tell the people who are ideologically opposed to this,

you just keep yelling price controls, price controls never work. You

know we have had cost-based rates for 100 years or since Edison.

Utilities provided reasonably priced and reliable electricity. They

made money. They were the most Blue Chip stocks you can buy if

you were looking for that. And so I do not know who did not make

money or what did not work there. But it is that cartel that is now

setting the prices. If you eliminate all the structure—which I agree

with Mr. Seetin, it was just a completely flawed structure—you are

not going to have competition.

There is not a competitive market here. Those folks have destroyed basically any research and development of renewables.

They have through the political process, gotten all kinds of incentives for themselves to make the money. I do not know why you

think there is going to be competition.

You say let the markets work. There is no market. Mr. Hunter

keeps pointing that out. And Mr. Hunter had an exchange with Mr.

Hebert, who was then a commissioner and now the chairman of the

FERC, who said in response to complaints that people on fixed incomes were making life and death decisions, that the markets must

work, even if granny dies.

And even the Republicans on the committee had a reaction to

that, including Mr. Hunter, who said look, Mr. Hebert, and I am

going to quote, as well as I remember, Mr. Hunter. He said, ‘‘Look,

Mr. Hebert, there is no more free enterprise person than me. There

are no more free entrepreneurs than my constituents. But if you

want to philosophize, Mr. Hebert, get on the philosophy unit. We

have an emergency. We need a trauma unit at work.’’ I think Mr.

Hunter will remember those words.

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Virtually all the public officials in San Diego County, Republican,

Democrat, school board, city council, board of supervisors, Congress

people, have looked death in the eye when we had full deregulation. And there was panic here in San Diego. The market was at

work. And people went out of business, people suffered. We were

the only ones, Mr. Chairman, who had full deregulation of retail

prices. Everyone else in the State and the region had been shielded

up until now. Now the prices are going to hit them. And I will tell

all the elected officials in those areas, whether it is Washington,

Oregon, Montana, New Mexico, and increasingly every Western

State, as these obscene prices, criminal prices spread, and I think

these guys are going to charge whatever they can until cost-based

rates come—and they will eventually come, believe me—they are

going to get everything they can. And there is no market at work

that you are all praying to and praying for.

Mr. SEETIN. Could I respond just briefly. I just want to tell you

that those markets do work everywhere but California, apparently.

Because that is why we are around. People do not have to use us.

And certainly, if we were not providing a service, I would not be

here talking to you right now. So I just want to emphasize I strongly disagree with the fact that those markets do not work. They

work everywhere else.

Mr. FILNER. Well, that is not accurate—we have not had the experience long enough for a, ‘‘deregulated market’’ for you to make

that statement.

Mr. BILL HORN. If I might, Mr. Filner, you mentioned municipal

utilities, and specifically L.A. Water & Power. I would point out

that L.A. Water & Power sold excess energy which they got from

Federal hydropower at less than 1 cent a kilowatt, into the market,

and wiped out $85 million worth of bonds, at San Diego County

ratepayers’ expense, in 6 weeks. So I would like to—— Mr. FILNER. I have no trouble blaming with L.A. too. But take

off the same, Mr. Horn, on Enron and Williams and Southern

and——

Mr. BILL HORN. I will. I would be happy to.

Mr. FILNER. OK.

Mr. BURTON. Mr. Ose.

Mr. OSE. Thank you, Mr. Chairman. I want to go back to Mr.

Horn’s comment here a minute ago. You are saying L.A. Water &

Power had Federal power wheeled into its market area, under contract, and I think it is either Hoover or Glenn Canyon, that they

are paying a penny a kilowatt—— Mr. Bill Horn. Less than a penny.

Mr. OSE. Less than a penny. All right, we are going to say a

penny, for simplicity sake. A penny a kilowatt for the power. And

then turned around and sold that power to the ISO.

Mr. BILL HORN. Back into the ISO.

Mr. OSE. This was the substance of the L.A. Times article yesterday.

Mr. BILL HORN. 23 cents a kilowatt hour they got for that power.

Mr. OSE. It seems to me, if I recall correctly, there are provisions

in the Internal Revenue Code that you cannot use public bonding

capacity and convert it to private purpose. And I am curious

whether or not using L.A. municipal water and power facilities in

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this way is consistent with the law. And that may be above yours

and my pay grade here. But I think that is a question we need to

ask, Mr. Chairman.

Mr. BILL HORN. I think the other question I would like to point

out is San Diego County, because it is a Federal dam. My ratepayers and my taxpayers paid for that power that they are getting.

Now, they are fortunate—— Mr. OSE. That is exactly my point.

Mr. BILL HORN [continuing]. They are fortunate to have a municipal, and I would like to get one here in San Diego, but the law

has precluded that until we get that changed. But at the same

time, I think they should have sold that excess power into the grid

or to San Diego at at least the cost of generating it and moving it

to L.A., and then moving it to us. Not gouging us.

Mr. OSE. All right, I want to go back to Mr. Seetin.

Ms. DAVIS. Could you yield, Mr. Chairman, for just a followup on

that, Mr. Ose, if you do not mind?

Mr. OSE. Sure. You yielded to me. I would be happy to yield.

Ms. DAVIS. Thank you. It is my understanding that they were

compelled to sell into the ISO at the going rate, that they could

not—is that correct? I mean, if someone could just—— Mr. BILL HORN. No. We mentioned price caps a minute ago, and

I keep wanting to weigh in on these things. I am a free enterprise

person and I really do not like the price caps. But we have got an

unregulated monopoly at the moment. We took a regulated monopoly and made it unregulated.

I would get rid of the ISO, frankly. Allow these distributive utilities to purchase the power from the generators, and then we could

at least get close to a free market. Because at the moment you

have a controlled market. It is the last person in, they get the highest price, and everybody below that gets that same price. That is

what has literally robbed San Diego County’s ratepayers of their

money.

We have a transfer of wealth going on here. And I think somebody mentioned the fact that we need a trauma unit. Duncan

Hunter. We need a trauma unit here. We are being gouged from

both ends, and we do not see any relief coming from Sacramento.

Every time they make an adjustment—I would not bail these utilities out. Allow them at least to have a free market, and then we

can hold them accountable. We cannot hold them accountable this

way. We have an ISO who every 10 minutes can change the ball

game. And I just think it is absolutely unconscionable.

Mr. OSE. I want to reclaim my time. All right, I want to go back

to Mr. Seetin. In your statement you talk about the entire market,

that being—you know, you have to have the ability to move power

here and there to meet demand and supply. If one State is not participating in a regional transmission organization and all the

States surrounding it are, in this example—and I cannot tell you

if this is the case or not, so it is hypothetical. If California has not

submitted its RTO plan and every other State has, what kind of

difficulties does that create?

Mr. SEETIN. Well, it again creates two separate markets, theoretically. And that is what our experience has been. That every

time you segment a market like that—and it really hurts the effiVerDate 11-MAY-2000 10:55 Apr 01, 2002 Jkt 000000 PO 00000 Frm 00441 Fmt 6601 Sfmt 6601 C:\DOCS\76761.TXT HGOVREF1 PsN: HGOVREF1
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ciency. Because, again, your products are not transferrable as easily. And from the marketplace standpoint, we have always urged

that the control areas should be as broad as possible to maintain

reliability and take care of the necessary things, of course.

Mr. OSE. I want to go back to one other thing. The PUC recently

changed the manner in which the qualifying facilities are compensated for the power that they generate. In other words, they put

a cap on the cost that they could factor into their retail rates, lowering the IER rating from 11,000 plus to 9,000, thereby making

Biomass and other qualifying facility-generated power less remunerative.

The point I want to make here is that those are sources of power

that are very favorable for us environmentally in terms of the air

emissions that they put into the basis. In particular, in Sacramento

and in San Joaquin Counties, we are a non-attainment area. And

the consequence of a reduction in compensation to the qualifying

facilities is that we will have to buy more power from other

sources, which will contribute to our non-attainment. So, in fact,

the PUC’s order makes it more difficult for us to comply with air

quality standards, and it is absolutely unnecessary, if we would

just give the qualifying facilities the ability to directly access the

market.

And I want to finally, Mr. Chairman—I think Mr. Filner is right.

This is not a function of our environmental constraints, and I will

tell you why. If you look at the major generators, whether they be

the guys we like or the guys we do not like, they have facilities

that largely are 10 or 15 years old. They have technology that is

10 or 15 years old. New technology converts gas to electricity at up

to 50 percent greater efficiency than that old technology at 25 to

50 percent less in emissions. What we need to do is find a way to

get that new technology online so we have reduced demand for gas,

we can lower the price accordingly.

Thank you, Mr. Chairman.

Mr. BURTON. Ms. Davis.

Ms. DAVIS. Thank you. And thank you, Mr. Ose, because I appreciate your comments about the environmental considerations. I

think there are a number of statements made by very responsible

people, but that, in itself, is not the issue. But we do need to address that, and we do need to find those alternative sources of energy.

I wonder if we could go back just to Mr. Conlon for a second, because I know I was cutoff. There has been a lot of talk about competitive markets. And probably it is a little like so many other

things, we cannot always describe it, but we know it when we see

it. And I am wondering in San Diego, because part of the charge

of the PUC was to lift the caps when the competitive markets were

in place, could you share with us what indications you had or you

believed that the Commission had that there were competitive markets that would work in San Diego.

Mr. CONLON. Well, I think the requirement was to lift the cap

when the utility recovered all its stranded assets, not when the

market was competitive. So, you know, the presumption was that

the markets were going to continue to be competitive, because we

435

had a 30 percent excess capacity. And I think a competitive market

is where 20 or 30 percent of the players do not operate every day.

Otherwise, when you know you are not going to operate because

there is 130 percent of the people in the market and there is only

100 percent, then prices are going to go down to meet the most inefficient player that is going to operate that day. So the guy that

gets the 100 percent, his price sets the price. And the other 30 percent go home. They do not work at all. So that is when you get

competitive markets, when these people go home instead of operating.

Ms. DAVIS. Would you say that today in the marketplace, then,

that some of the companies that are operating have a market share

that could be considered in the neighborhood of 15 to 20 percent?

Mr. CONLON. No. I am saying that we intentionally made sure

that no one had more than 20 percent, because—— Ms. DAVIS. No, I understand that. I am sorry, if I could just interrupt for a second.

Mr. CONLON. OK. I am sorry.

Ms. DAVIS. I am wondering today—and we have the companies

that are going to be joining us in a little while, whether you have

the knowledge or impression, in some cases, that they actually do

have the market share that we were working hard to insure that

companies did not have?

Mr. CONLON. Well, the problem is, with the supply where it is,

especially when you get into Stage 2 or Stage 3, that everybody has

market power because you need every ounce of generation you can

get. So that is why the market is not competitive, because there is

not enough capacity available. If there was 110, 120, or 130 percent

capacity available, then I think they would have no choice but to

lower their rates. Because again, they would not be in the 100 percent that operates.

Ms. DAVIS. Thank you.

Mr. FILNER. I just want to point out, if the gentlelady would

yield. I just want to thank the chairman. Ms. Davis and I, and Mr.

Hunter, are not members of this committee, and it is by the courtesy of the chairman that we can join you today. And I just want

to thank the chairman for giving us full expression of our questions, and allowing us to participate. I think it is very helpful to

the whole debate. I thank the Chair.

Mr. BURTON. Well, I think Mr. Filner and Ms. Davis and everybody, all of us understand this is not a partisan issue. We have got

to figure out, along with the Federal and the State regulators, some

way to solve this problem.

Mr. Horn.

Mr. HORN. Thank you, Mr. Chairman. I would like Mr. Conlon

and Mr. Seetin to answer this. Agencies, over time, always have

some sort of corporate culture, even if they are in government, not

in the private sector. And I would be curious as to how you would

analyze the relationships 15 years ago between the State utilities

commission, that you headed, and the Federal situation, where

right now everybody is pointing their fingers at each other. And I

would be curious how you would think the Wilson, for want of a

better thing—although other Governors had put their people in

there—Wilson commissioners versus the Davis commissioners.

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What is the difference between the two, and where is it that we

are being shorted by our own Commission?

Mr. CONLON. Well, all I can say is what public statements that

the present commissioners have made. And I think, by and large,

they do not believe that there should be competition in the generation market, they do not believe that there should be deregulation

of any form. I think at least two of the commissioners have been

very vocal on that point.

And I think that all five of the commissioners under Governor

Wilson were supportive of competition where there were adequate

competitors. And with 30 percent excess capacity, I mean, we never

dreamed of a supply problem. I mean, these events that have occurred, the drought, the worst in 25 years, we had the hottest summer in 100 years last year. It was the hottest summer in 100 years

in the State of California.

And I think those two events, together, has caused this problem,

not the fact that we had deregulation or a regulated. If we had a

regulated market, if we had not changed anything, we would have

had a serious problem in the entire State, and we would have had

30 percent rate increases under a regulated basis. Because the

price of natural gas skyrocketed fivefold. And whether you are regulated or unregulated, if you are going to use natural gas, you are

going to pay that price. It is an unregulated price done by the Federal Government 15 years ago.

So regulated markets today, we would have just as much rate increase as we are having today in an unregulated market. Because

natural gas is driving it, and we have got the shortage of capacity.

And, you know, until we get that 17,000 megawatts online, this is

a serious problem. These short-term contracts the Governor did are

just the right idea.

President Bush mentioned using aircraft carriers to drive—in the

summer to drive power in the cities. And I think San Diego, with

I assume two or three aircraft carriers, should certainly consider

that in the short term. I read that in the press someplace. I am

a compulsive reader.

Mr. HORN. Mr. Seetin, what would you like to comment on that

question?

Mr. SEETIN. That is one you do not touch with a 10 foot pole. But

I would just say this, that I think that clearly, if the market needs

had been responded to, we would not be having this hearing here

today. And I just think, from our standpoint and the market’s

standpoint, they continually missed the mark. That is all I can say.

Mr. HORN. I yield the rest of my time to Mr. Ose. Did he hear

me?

Mr. BURTON. I think Mr. Ose has temporarily flown the coop.

You are going to yield it to Mr. Hunter?

Mr. HORN. Mr. Hunter.

Mr. BURTON. Mr. Hunter, he yields his time.

Mr. HUNTER. Well, thank you, Mr. Chairman. I want to thank

you again for having the hearing.

Gentlemen, we have got about 60 days until summer reaches us,

and we are vastly understocked in terms of generational capability

in San Diego and elsewhere. My colleagues—not to beat a dead

horse, but my colleagues have said they do not think there is any

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environmental consideration here. That is kind of a myth and a red

herring. So I wanted to offer to Ms. Davis, my good friend in the

House, and Mr. Filner, co-sponsorship on my bill that says we will

allow any business or individual in the State of California, or in

any State experiencing a power emergency, which is defined as

supply being within 10 percent of demand, to operate any type of

power generator available to insure their economic stability. Now,

gentlemen, do you all agree that would be a good thing for us to

pass, now, on the Federal level?

Mr. HARDAGE. Absolutely. Absolutely.

Mr. HUNTER. Mr. Horn.

Mr. BILL HORN. I totally agree. We have enough capacity, if we

could bring those generators up.

Mr. HUNTER. Mr. Barnhart.

Mr. BARNHART. Yes, sir.

Mr. HUNTER. Mr. Thomas.

Mr. THOMAS. I totally agree.

Mr. HUNTER. Mr. Seetin.

Mr. SEETIN. We are only the marketplace and neutral to that.

Mr. HUNTER. OK. Mr. Conlon.

Mr. CONLON. Well, you know, you have to define that very carefully, because the environmental concerns are still there. But you

could certainly get it done in 90 days instead of 18 months. I mean,

I think it is a matter of time.

Mr. HUNTER. OK. Let me then offer, Susan, could you get on

my—since Mr. Filner asked me in the last hearing if I would cosponsor his legislation, which I did, could you sign up to this and

say we are going to let anybody turn on a generator who has one

in the State of California during an emergency?

Ms. DAVIS. Mr. Hunter, I appreciate your asking me that, and I

will take it under advisement.

Mr. HUNTER. OK. Mr. Filner.

Mr. FILNER. Dr. Filner. I am glad we have 100 percent from the

Republicans on this. But let me tell you, Duncan, I do not have any

idea what your peaker plant proposed entails.

Mr. HUNTER. Well, then, why not sign it and turn them on?

Mr. FILNER. They are not the problem. This is not the problem.

And we are going to have new problems if we go down your route.

We have the ability to provide the energy that we need to our county and to our State that is prohibited—it is prohibited from being

used now.

Mr. HUNTER. OK, Mr. Chairman, let me take my time back and

follow on.

Mr. FILNER. It is not the environmental thing that——

Mr. HUNTER. If Mr. Filner’s answer is not preceded with a ‘‘yes,’’

I do not want to hear the rest of it.

Mr. BURTON. Let me interrupt just 1 second.

Mr. HUNTER. OK.

Mr. BURTON. Please. I feel like Johnny Carson on a bad night.

Let me just say that Mr. Horn’s time has now expired, and now

it is your time for 5 minutes.

Mr. HUNTER. I thank the chairman. And now that we have established that, and my point is that we—this is a crisis and we do

need to have a bipartisan response to this crisis. And I have told

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my friends who are the free marketeers that the 9,000 percent

price spike is not free enterprise.

And I have also told my friends who have very strong environmental considerations, when you are going under for the third time

and you want to reach for that lifesaver, and that lifesaver is the

ability to turn on a diesel generator in your own plant to keep your

life savings from going out in the next 2 weeks, you should be allowed to do it. Right now in California you cannot do it.

We have been told by Solar, which makes great generators, and

Mr. Ose spoke about it, extremely efficient, makes them in San

Diego with the great expertise of San Diegans, and we have been

told by them that they can bring their peaker plants out and could

actually set those babies up within a week, assuming that we could

get into the production schedule, because everybody else and the

rest of the world, except California, is buying them.

Mr. Barnhart, you are a contractor, a heavy-duty contractor who

does lots of big infrastructure projects. How fast could you build

10,000 square feet of cement slab, if you were given a contract to

do that? What kind of time are we talking about?

Mr. BARNHART. Just put down 10,000 square feet of concrete

slab?

Mr. HUNTER. If you had to do it on an emergency basis?

Mr. BARNHART. We would probably have it down within 48

hours.

Mr. HUNTER. You could do it in 48 hours. Solar could move these

peaker plants in and install them within a week. We are 60 days

away from disaster. And in the State of California, in the county

of San Diego, we are unable to help ourselves because of regulations and laws that we have to meet and comply with.

And so once again, Mr. Chairman, to our head of the board of

supervisors, I would hope that the board of supervisors, which has

met, incidently, with the Coalition for Electricity Independence,

which is our group of business people in San Diego County who

want to have the ability to save themselves by turning on a generator this summer, I would hope that the county of San Diego and

the State of California—and I am still hopeful on this—would be

willing to waive all regulations to let us save ourselves from this

impending disaster. So, Mr. Chairman, I would hope that we could

get co-sponsorship of 1075 or support of 1075 from the county

board of supervisors.

And, Mr. Barnhart, one last question for you. You could build a

10,000 square foot slab in 48 hours. How long would it take you

to knock out—assuming you were permitted—to knock out a 1-mile

pipeline, a gas pipeline, 16 inch pipeline? You have done that before?

Mr. BARNHART. I have not done that specifically before. That

might take longer, I would suspect.

Mr. HUNTER. Longer than 48 hours. OK. Well, we hope that you

will work with us, and Sam and other folks who are interested in

continuing to employ people in San Diego County, to get this—try

to get some respite in before the summer reaches.

Mr. HARDAGE. Thank you, Congressman Hunter. We, in the hotel

business, in order to keep the lights on, as a matter of fact met in

executive committee yesterday to discuss the purchasing and inVerDate 11-MAY-2000 10:55 Apr 01, 2002 Jkt 000000 PO 00000 Frm 00446 Fmt 6601 Sfmt 6601 C:\DOCS\76761.TXT HGOVREF1 PsN: HGOVREF1
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stallation of individual co-generating plants in all of our hotels here

in California, because we do not know what we are going to do

when the lights go out in California. And your bill would make it

infinitely easier. Contrary to what Congressman Filner says, there

are definitely very strong environmental hurdles to solving the

problem. And your bill would literally help turn the lights back on.

And thank you very much for introducing that.

Mr. BILL HORN. And I might say, on behalf of the board of supervisors, I would be happy to carry that and get your endorsement

for you, Congressman Hunter. I would like to point out—my staff

just brought me this—this is dated today, April 12th. Dynergy’s

plans for the 18 combustion turbines they have in San Diego County, they are refusing to turn on and to sell that power to SDG&E

because they do not believe they are going to get paid from the

ISO. And this is a transmission I just got from SDG&E. So there

is 250 megawatts we will not have available if they refuse to sell

them. And I am telling you, the ISO is the problem.

Mr. FILNER. And that is not an environmental restriction; right?

Mr. BILL HORN. They say they are not going to get paid, so they

are going to refuse to give you the power.

Mr. FILNER. That is purely a price problem.

Mr. BURTON. Mr. Hunter, do you yield back your time?

Mr. HUNTER. Yes. In fact, I would be happy to yield the balance

of my time to Mr. Ose, who stepped out at a—if he has any more

questions to ask.

Mr. OSE. Well, I thank the gentleman from this area. And if I

could reserve it, I would. And not wishing to spend the committee’s

time fruitlessly, I would yield it back to the chairman for further

use.

Mr. BURTON. Well, I want to thank you for yielding back to me.

We will dispense with this very fine panel we just had. Thank you

very much for your testimony. You all were very eloquent. We really appreciate it.

We will take a 10-minute break, because I think you cannot

think if you cannot—if your seat goes to sleep. So we will take a

10-minute break and we will come back with the second panel.

Thank you.

[Recess.]

Mr. BURTON. The next panel consists of Mr. Kevin P. Madden.

He is the general counsel for the Federal Energy Regulatory Commission. Mr. Madden has been with us before and has been helpful.

Mr. Fred John, senior vice president for external affairs for Sempra

Energy. Mr. Steve Malcolm, president of Williams Energy Services.

And Mr. John Stout, senior VP for asset commercialization for Reliant Energy. Would you please stand, gentlemen.

[Witnesses sworn.]

Mr. BURTON. Let us start with Mr. Madden. Do you have an

opening statement?

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STATEMENTS OF KEVIN P. MADDEN, GENERAL COUNSEL, FEDERAL ENERGY REGULATORY COMMISSION; FRED JOHN,

SENIOR VICE PRESIDENT FOR EXTERNAL AFFAIRS, SEMPRA

ENERGY; STEVE MALCOLM, PRESIDENT, WILLIAMS ENERGY

SERVICES; AND JOHN STOUT, SENIOR VICE PRESIDENT FOR

ASSET COMMERCIALIZATION, RELIANT ENERGY

Mr. MADDEN. A very brief one. Mr. Chairman, thank you for the

opportunity to appear here today to address the electricity matters

and markets in California and surrounding States. I applaud this

committee for the time and effort it has spent over the past 3 days

gathering the unvarnished facts about the reasons why the electricity markets in California and throughout much of the West are

in a state of stress.

It is my belief that these markets will continue to experience various serious problems throughout this coming summer. Wholesale

prices have increased substantially. Consumers are being implored

to conserve as much as possible. Generation has not been built for

the past decade. Restrictions have been placed on long-term commitments. And utilities continue to face severe financial problems.

While some have accused FERC of being indifferent or even hostile to the concerns of California, I think our actions prove otherwise. I will not dwell on those actions, as I have already addressed

them in my opening statement to the committee on Tuesday. I believe we need to work together, not point fingers at one another.

We need this to solve the electricity crisis that exists now. We need

supply, we need the market certainty, and we need to move forward. Thank you.

Mr. BURTON. Thank you, Mr. Madden.

We will now hear from Mr. Fred John, senior vice president for

external affairs for Sempra Energy.

Mr. JOHN. Thank you, Mr. Chairman. Sempra Energy is the parent company of both SDG&E and Southern——

Mr. BURTON. Would you pull that mic a little bit closer, if you

can.

Mr. JOHN. Sempra Energy is the parent company of both San

Diego Gas & Electric Co. and Southern California Gas Co. My comments today will focus on both electric and natural gas issues as

they relate to the State of California’s present crisis.

You already heard from Mr. Seetin and former CPUC commissioner Greg Conlon on an overview of what has evolved in California over the past 6 to 7 years that got us to the point where we

are today. And I would be happy to respond to some of those points

that they made in the Q&A, but I am not going to reiterate all of

those.

You have also heard from segments of the commercial and industrial market here in San Diego on the negative impact that high

energy prices and poor power reliability have on them as customers, and also on the general economy in California. My comments are focused on what we think is the real crux of the problem, though, and that is skyrocketing wholesale electric prices.

This was addressed earlier by Congressman Filner, Congresswoman Davis, and Congressman Hunter. But I want to amplify on

these points.

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One of the assumptions we made here in California, when the

deregulation process started back in 1998, was that FERC would

act as an effective policeman of the wholesale electric and natural

gas market. Unfortunately, our hopes have been—we have been

somewhat disappointed. I am not going to point fingers at FERC,

and I know Mr. Madden made comments about it earlier. But we

do believe that the Federal legislation is very clear. It is mandatory. It is not discretionary. Wholesale sellers of electricity and

wholesale transporters of natural gas must be required to charge

prices that are just and reasonable.

However, prices that are 500 percent higher tha historical norm

clearly do not pass the just and reasonable test. Even FERC has

agreed that the prices in the wholesale market do not pass that

test. Yet for 10 months FERC has refused to require wholesale sellers of electricity to charge just and reasonable rates prospectively,

or to refund dollars to consumers that exceed the just and reasonable standard.

We do recognize that in early March FERC did issue two orders

with respect to potential refunds, and we are hopeful that they will

follow through on that. But even the sums that are set forth in

those orders are a small percentage of what the total alleged overcharges are, at least according to the California ISO.

We are also disappointed on the natural gas side, because we

filed a petition in December 2000 with FERC requesting a temporary reimposition of the maximum rates on natural gas transportation in the secondary market. FERC has not yet acted on the petition, and transportation rates in California exceed those of every

other State by ranges of $5 to $50 per million BTU.

I know there have been a lot of comments this morning about

whether natural gas prices have driven up electric prices. I think

you should also look at the flip side. Have the high electric prices

caused natural gas transportation rates in California to have increased, and increased dramatically?

Our belief is that if FERC is not going to take further actions—

and I still say there is an ‘‘if’’ there based on recent comments at

least by Commissioner Breathitt—that Congress and the President

need to step in. Commissioner Massey, himself, in testimony on

March 20th before the House Energy and Air Quality Subcommittee said, ‘‘Power that cost California $7 billion in 1999 increased

to more than $27 billion last year. Costs in 2000 may exceed $70

billion.’’

Customers—and believe me, we have been going through this

here in San Diego since May. Customers are saying to us we are

mad as hell, and we are not going to take it anymore. But it is not

just an impact on the customers. Because of these wholesale price

increases, and up to this point the refusal, until recently, of the

California commission to pass through any of these costs, at least

one of the major utilities in this State has gone bankrupt. And with

all due respect to the statement that Supervisor Horn made earlier,

I do not think it is responsible to say that a major utility, who is

the backbone of the infrastructure in this State, should be allowed

to go bankrupt. The State of California has also been required to

purchase power on behalf of the investor-owned utilities, and they

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have already built up a bill of $4 billion, and that is on top of the

$14 billion of under-collections that the utilities have absorbed.

Although the Commission in California has recently allowed retail rates to increase for PG&E and Edison, none of these dollars

are targeted at their under-collections. The revenues are going to

basically help the State repay its general fund.

Our view is, all of this could have been avoided back in the summer of 2000 if two things happened. One, if FERC had taken action

on the wholesale side, and if the State of California had taken action on the retail side to increase rates, but to do it in a way where

it was conservation-oriented, and higher use cause ratepayers to

pay more money.

We respect the fact that Congress has held several hearings, including two field hearings: The one you have held, and previous

hearings out in California. And we really respect that. But there

does come a time for hearings to stop and action to be taken. And

we think that time is now.

We also recognize that Congress is trying to do a lot of good

things to help consumers, not only in California, but throughout

the country. For example, a Federal tax cut bill. Well, what good

is a Federal tax cut bill if the consumer has to use all of its payments to pay its electric and gas bill, and then it is still underwater? What good is a Federal education reform bill if parents do

not have enough money to take care of the basic necessities of life

for their children, or if schools are having to spend their money on

electricity instead of on teachers and equipment? What good is a

Federal healthcare reform bill if people have to make a choice between freezing in the winter or suffocating in the summer because

they cannot afford to pay their gas and electric bills? It is time to

act.

Mr. BURTON. Thank you, Mr. John. I think you made a very

strong point there.

Mr. Steve Malcolm, the president of Williams Energy Services.

[The prepared statement of Mr. John follows:]

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Mr. MALCOLM. Mr. Chairman, I want to thank you again for the

opportunity to offer Williams’ views on the urgent actions that are

necessary to minimize the stress that Californians will face this

summer because of energy concerns.

First, a little background on Williams. Williams is a publicly

traded, diversified energy company that is active in most parts of

the domestic energy industry through various operating subsidiaries.

We are the second largest natural gas pipeline company in the

United States, transporting about 17 percent of the Nation’s peak

day consumption through five wholly owned pipeline transportation

and storage systems. This network does include our Kern River

pipeline which just received expedited approval to add a substantial amount of new capacity to California for this summer.

Many people outside our industry are just now becoming aware

that we also have a large and rapidly growing energy marketing

and trading group.

In the electricity area, we market about 15,000 megawatts of installed and planned generating capacity around the country, and

intend to grow that portfolio to about 40,000 megawatts over the

next 5 years.

Here in California, we dispatch roughly 4,000 megawatts from

three plants in the Los Angeles area. And as you all know, that

represents about 10 percent of California’s peak day demand. And

we sell the majority of our megawatts through forward contracts.

Key elements of the Williams message are unchanged and are

consistent with what we have been saying in California and in

Washington since early last summer. In the few minutes I have

today, while I want to update you on the most recent actions by

the company, I will focus primarily on the most urgent and immediate actions we think are necessary based on today’s circumstances.

I want to emphasize, our focus is and has been on developing solutions to the real problems. In fact, Williams has worked closely

with State and Federal Government officials to develop solutions

toward that end. Despite the decision by PG&E last week, Williams

has refrained from taking action to force utilities into bankruptcy.

We were at the forefront of the initial movement to postpone due

dates for payments in January. Since then, Williams has continued

to sell power to the ISO voluntarily, despite the mounting unpaid

bills. Williams has used its own credit and liquidity to buy power

outside the State, and then resell it to the ISO at the ISO’s request

during the period when many out-of-state generators refused to sell

to the ISOs. Williams signed one of the first long-term contracts

with the Department of Water Resources earlier this year, and

most recently, as I mentioned earlier, we worked diligently and urgently to get approvals necessary to expand the capacity of our

Kern River pipeline to bring more natural gas to the State by this

summer.

Looking first at some much needed near-term actions, it is absolutely critical that we remove every obstacle to utilizing all existing

generation, and to adding new generating capacity this summer.

First, the dampening of new development caused by regulatory uncertainty and the financial instability of major purchasers in the

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market must be removed. Credit-worthy counter parties with the

flexibility to take advantage of risk management tools must participate in the wholesale market to obtain supplies for end use customers.

Last summer we actively encouraged California regulatory agencies to follow the utilities to add long-term—to allow the utilities

to add long-term contracts to their power portfolios. Fortunately,

the Department of Water Resources has recently had some success

in this area, and including an arrangement with Williams. But

there are important issues that remain unaddressed, not the least

of which is a solution of the problem of past due payments.

Second, the permitting and approval process for new generation

needs to be streamlined and improved. The good news is that we

have seen some progress, but clearly the processes leading to

project approval still need more attention.

We have been monitoring with particular interest an application

at Huntington Beach that would take an existing site and add 450

megawatts by revitalizing old, out-of-commission units. The developer has estimated that it will take 3 months of 20-hour days to

get that power online. But the construction has yet to commence,

as the developer tries to work his way through a long list of obstacles.

Third, and certainly a tough choice, is that a significant amount

of power can be available only if certain environmental regulations

are suspended. Power plants that have specific limits on the number of hours that they can run may already be over the limit because of strains on the system last year and in the first quarter of

2001. Rules must be clarified to allow those plants to run and

make that power available, and not just under Stage 3 conditions.

Further, these changes must be made in a way that does not put

greater pressure on prices, nor mortgage the future of those facilities.

And finally, we must have a significant demand side response.

Painful as it is, the fact of the matter is that consumers must be

exposed to price signals before they will reduce consumption in a

meaningful way, just as suppliers and potential suppliers must receive appropriate price signals to encourage development.

Looking now at some of the longer-term solutions, to avoid us

having to be back here again next year, again accurate price signals are the most effective means of attracting the investment in

new generation and new transmission that is essential. We must

take actions to facilitate the integrated planning operation and upgrading of the electric transmission grid. The answers in this area

must be developed on a regional, not a State basis.

And I would just conclude by saying we certainly appreciate the

opportunity to share our views, and look forward to being a constructive part of finding a solution. Thank you.

Mr. BURTON. Thank you, Mr. Malcolm.

We will now hear from Mr. John Stout, senior vice president for

asset commercialization for Reliant Energy.

[The prepared statement of Mr. Malcolm follows:]

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Mr. STOUT. Thank you very much, Chairman Burton. First of all,

let me say I am an engineer by profession and I like to deal with

the cold, hard facts. And so I have chosen to use some slide presentations to help illustrate some of the facts that we developed to try

and explain what took place this year.

Originally in the package that has been handed out to you, you

had several slides dealing with the supply demand situation. I am

going to skip those and go straight to the heart of a couple of important issues.

This is a slide that represents how much generation we produced

from our facilities over the last 5 years. Now, we only owned these

the last 3 years. Before that they were owned by Southern California Edison. What I would like to point out is that in year 2000 we

produced two-and-a-half times as much energy from these facilities

as they historically averaged in the past.

Couple of points about that. No. 1, in respect to a comment made

by Congressman Hunter about the extensive outages we are having

now, a lot of that has to do with these extra hours that we ran on

these units. We do not have a single power plant that is less than

20 years old, and we have a couple of them that are nearly as old

as I am. They were built in 1953. So we have a very old fleet. And

it is kind of like taking a 20 or 30-year-old automobile and putting

about 50,000 miles in 1 year on that car. At the end of that year

you are going to have a lot of maintenance and a lot of repairs that

you have to do. And this slide tends to illustrate that.

The other point I would like to make—go back to that slide. I

think you skipped ahead. Is that I need to ask the question: Does

this really look like the strategy of a business who is trying to

withhold energy from the market? We produced two-and-a-half

times as much as the historical average. I would argue that is totally inconsistent with someone who is trying to withhold. If you

would, skip the next two slides. One more.

Congressman Filner pointed out a comment a minute ago in his opening statement about a $20 billion outflow from California.

That is a reflection of the increase in market prices in California,

which went from $5 billion in 1998 to $7 billion in 1999 to $27 billion in year 2000. And what I would like to illustrate to you is that

when you look at how much money an independent generator such

as Reliant had to spend on natural gas for fuel, our cost actually

went up 50 percent more than that.

Our costs are up 738 percent from what we spent for fuel in the

year 1998. Now, the gentleman from the hotel industry commented

that their fuel bills have gone up, too. Theirs have only gone up

350 percent, he said. Ours have gone up more than double that.

That is not a market manipulation, that is just a cost of doing business.

And in response to another comment made by Congressman Filner about how well the old regulated system worked, I would point

out that even if you had the old regulated system and you had this

sort of increase in the amount of usage of gas-fired generation and

those sort of gas price increases, even the regulated utility would

see similar increases in their cost of producing energy.

Because of these increases, fuel now takes two-thirds of every

dollar of revenue that we take in. Two years ago it was 45 percent;

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now it is 65 percent. Not a whole lot that I can do about that. That

money comes in, goes right back out to the fuel suppliers.

I would like to point out, though, that in trying to be part of the

solution to this problem, Reliant has offered—has made this offer

to every one of the IOUs, to DWR, even to the Governor’s office

that we will provide energy for 2 cents a kilowatt hour for the next

5 years. All you have to do is bring the fuel to us. We will cook

it, make electricity out of it. We are not trying to gouge California

consumers, we are trying to be part of the solution. And 2 cents

is a very reasonable price for converting that gas into electricity.

But it highlights the fact that the cost of that gas is a critical element of the high cost of power in California right now. That offer

is still on the table. So far no one has taken us up on it.

Now, I would like to get into something that I hope you find

quite interesting. It has to do with the fact that there are some

people who have been raising their bid prices in this market. And

I would like to show you a little bit of the detail that explains exactly who they are. If you would flip to the next slide, please.

This slide shows what the PX day-ahead market supply bids

looked like on June 29, 2000. This is what suppliers such as Reliant bid in. The PX adds them all up and produces a big curve like

this. We do not set the price in the market, though. You actually

have to have people who are buying power also put a bid in as to

what they are willing to pay. And if you will flip to the next slide,

you will see what was bid in.

These were the bids from the buyers in the market. And the point where those two curves cross, which is about $175 a megawatt hour, reflects the clearing price in the market for that hour.

Now, I picked June 29th, because that is the very date that the

CPUC Chairman Loretta Lynch highlighted her report to the Governor as a day that illustrated market manipulation, withholding.

Her argument is that the price at 5 p.m. had jumped to $750 a

megawatt hour. And her contention was that perhaps this is evidence of suppliers withholding from the market.

Now, if that was the case, and I were to show you the bid curves

that were submitted by suppliers at 5 p.m., you would see that red

line that stretches up to the right-hand side of the sheet, you would

see that shift to the left. That means less supply was being offered

into the market. Let me show you now what actually happened.

Next slide, please.

The supply curve did not shift to the left, it shifted to the right.

Suppliers offered more supply into the market at even lower prices.

So why did the market clear at $750 a megawatt hour? Next slide,

please.

Because the buyers in the market raised their bid prices. You

can see from this that the supply cleared at $750 a megawatt hour.

And if you will flip to the next slide, this shows you the whole bid

curve for those 2 hours. It is pretty clear who raised their bid

prices in this market. Next slide, please.

This is a slide those of you in Washington have seen before. Excuse me?

Mr. BURTON. Who raised their bid prices?

Mr. STOUT. It is the buyers. But I do not have information as to

which specific buyers it was. That is considered confidential.

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Those of you in Washington have seen this slide, I think. It was

passed around as evidence of the sort of problem in the market.

Shows much, much higher prices on a day. In fact, this was a Sunday. I went back, researched exactly which day this was. And if

you will flip to the next slide, that is what the bid curves looked

like on that day. Once again, the exact same pattern of buyers bidding the price up, which is consistent with any auction where you

have a scarce resource.

I actually have with me a binder with every single day this summer. Pick any day you would like to look at, I will be happy to

show it to you, because you will see exactly the same pattern of

buyer bid behavior.

And let me close by explaining why this takes place. Next slide,

please. Because this is a competitive auction, but the competition,

because you had a shortage of supply, was existing between buyers,

not as much between suppliers. Buyers were working against one

another to try and get scarce resources. And what made it especially worse were the rules that were in place in California that require the utilities to bid all of their own generation into the market, because what they had to do then was bid back into the market to get that generation for their own use. It was equivalent to

having to put your house on the auction block every day, and having to outbid every other home buyer that came along just so you

could stay in your own house.

The quote you see here is from a CPUC audit of PG&E, trying

to investigate what happened last summer. And it pretty well explains the situation. And with that, I conclude my opening comments.

Mr. BURTON. Thank you very much. We will now go to 5 minute

rounds of the questions.

Mr. Madden, in your March 14th order regarding the AES,

Southland, and Williams, you essentially concluded that they intentionally shut down two plants where they were going to receive

about $63 per megawatt hour. As a result, the power had to be

purchased from other AES units right next-door at more than 10

times the price. Is that a fair characterization?

Mr. MADDEN. Yes.

Mr. BURTON. If they did that, is that illegal?

Mr. MADDEN. They violated—in the March 14th order, which is

a show cause order where we essentially tell AES/Williams to prove

otherwise, if they do not prove otherwise, it is a violation of 205

of the Federal Power Act and the tariffs at the Commission.

Mr. BURTON. Under your order, AES and Williams were given 20

days to contest that finding. That time period should run out I

guess on Tuesday. Have they done so?

Mr. MADDEN. They have submitted additional filings with the

staff, the enforcement staff, and have had discussions with them.

Mr. BURTON. In your order, you stated the information suggests

that Williams took action to extend the outage at Alamedas, and

to make Huntington Beach Two unavailable for pretextual reasons.

What does that mean?

Mr. MADDEN. What I believe, that what they meant behind the

order is that they did not necessarily have to have that outage at

that plant.

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Mr. BURTON. What led you to believe that the outages at the two

plants were not directly related to the necessary and timely maintenance of the units?

Mr. MADDEN. Mr. Chairman, there is confidential information in

the record which demonstrates otherwise, we believe.

Mr. BURTON. Well, we would like to have that confidential information, and I think I have talked to the director, the president—

what is his title? Mr. Hebert. I cannot remember——

Mr. MADDEN. The Chairman?

Mr. BURTON. Yeah, the chairman. The chairman. And he said

that they would give that to us. The confidential information we

will keep confidential. And if a subpoena is required, you let me

know and I will issue a subpoena.

Mr. MADDEN. Yes, Mr. Chairman.

Mr. BURTON. OK. Now, to Williams, why were the Huntington

Beach Two and Alamedas Four units shut down in April and May

2000?

Mr. MALCOLM. First, I would like to start by saying we take

these allegations very seriously. We believe very strongly in doing

the right thing, treating people fairly, maintaining a very high

level of integrity. Integrity——

Mr. BURTON. Why were——

Mr. MALCOLM. Excuse me?

Mr. BURTON [continuing]. Why were they shut down?

Mr. MALCOLM. Well, they were shut down because of needed

maintenance. There was a tube leak, there was a water cooling

tunnel that needed work. There was a boiler that needed repair

work done on it.

Mr. BURTON. Can you document all that?

Mr. MALCOLM. Yes, we can.

Mr. BURTON. Well, we want to have those documents. And if I

need to, I will subpoena them. Because if they were—if that is a

real reason for the shutdown, then that makes some sense. But we

want documentation to that effect, to make sure that is what happened.

Is $63 a megawatt hour a good estimate of your variable costs?

Mr. MALCOLM. I am really not sure.

Mr. BURTON. $63. Well, that was the price quoted in what?

Mr. MADDEN. Mr. Chairman, that was the price quoted in our

March 14th order, at $63 a megawatt hour.

Mr. BURTON. OK.

Mr. MADDEN. Versus the 750 bid price, or close to it, that——

Mr. BURTON. But that was a good estimate on the plants that

were up and running, that they shut down?

Mr. MADDEN. I have not heard anything to the contrary.

Mr. BURTON. To Williams, could you give us an estimate of your

fixed cost per megawatt hour at those two plants?

Mr. MALCOLM. No, sir, I do not have that detail.

Mr. BURTON. Well, we want that, too.

Mr. MALCOLM. All right.

Mr. BURTON. Setting aside the question of whether you intentionally shut down these units, explain to us how it is that you

were charging a price that was 10 times your cost.

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Mr. MALCOLM. I think the circumstances at the time were that

we had to take those facilities down. Those were RMR units that

had to be taken down. And we simply bid into the market, and the

market allowed us to capture the higher rate.

Mr. BURTON. Did you ever charge prices of more than $750?

Mr. MALCOLM. I do not know.

Mr. BURTON. Well, according to our information, that your prices

got as high as $1,500 per megawatt hour at some times. And you

do not know about that?

Mr. MALCOLM. No, sir, I do not have those facts in front of me.

Mr. BURTON. How much profit did you make in the year 2000?

Mr. MALCOLM. Which business unit?

Mr. BURTON. We are talking about the energy unit.

Mr. MALCOLM. The energy unit made about $1.7 billion.

Mr. BURTON. $1.7 billion?

Mr. MALCOLM. $1.7 billion in operating profit in 2000.

Mr. BURTON. Reliant, how much profit did you make in the year

2000?

Mr. STOUT. And you are asking for the business units, or are you

asking about California?

Mr. BURTON. California.

Mr. MALCOLM. My answer did not——

Mr. BURTON. Well, you can give us California and then give us

the total as well.

Mr. STOUT. I would respectfully request that you let us file that

with you under confidentiality.

Mr. BURTON. Will you require a subpoena?

Mr. STOUT. No, sir.

Mr. BURTON. OK. Well, then, we would have that information.

Mr. MALCOLM. I would be happy to answer the question as you

have now asked it. Our energy unit made about $1.7 billion, and

I am speaking now about our energy services group, which is responsible for the unregulated and lightly regulated businesses.

Marketing and trading is a part of that. And with respect to California’s spot market activities, the percentage was about 5 percent

of the $1.7 billion.

Mr. BURTON. Well, does that $1.7 billion include other States besides California?

Mr. MALCOLM. I have not expressed myself very well. The $1.7

billion relates to all the earnings of our energy services group,

which includes products, pipelines, gathering facilities, refineries.

Mr. BURTON. That is inside and outside of California?

Mr. MALCOLM. Inside and outside of California.

Mr. BURTON. Do you have a breakdown that could give us the

figures for California alone?

Mr. MALCOLM. I do not have them on the tip of my tongue.

Mr. BURTON. Can you get that for us as well?

Mr. MALCOLM. Yes.

Mr. BURTON. OK, we would like to have that.

Mr. Filner.

Mr. FILNER. Thank you, Mr. Chairman. Those are very good

questions, similar to what I was going to ask, so they must have

been good. Thank you. [Laughter.]

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Now I have some not-so-good ones. First of all, Mr. John, thank

you for your statement and your words. I want to take advantage

of you here and do some case work that my other Congressmen will

appreciate. Do you have staff with you?

Mr. JOHN. Yes, some.

Mr. FILNER. I mean, there is a constituent of mine named Jaime

Salazar—if you would raise your hand, Jaime—who got a bill that

was 500 times what it was the previous month, in which he had

been out of town. He has tried to protest this, he has tried to call

SDG&E, but has gotten no response.

He has pictures of the fact that his meter is behind a fence that

is locked, and his rottweilers are there. He would know if the meter

was read. Apparently the meter was not read, and yet he is getting

bills of incredible amount, and they are threatening to turn off his

electricity. Could you please make sure that Mr. Salazar’s questions are taken care of.

Mr. JOHN. We will have somebody work with him this afternoon.

Mr. FILNER. Thank you very much.

Mr. Madden, for the record I have to say you are coming to California and to San Diego, which is the center of an incredible disaster, as you heard in the first panel. The economy of California, and

maybe the Nation, is teetering. And you do not have anything to

say. And just for the record, I found that very unsatisfactory.

FERC is supposed to guard the interest of the consumer. Not only

did you take no action back in December, when there was evidence

of manipulation of the market—and in my opinion you caused most

of the crisis that has been with us since—but you have nothing to

say to us when you come here.

Mr. MADDEN. Congressman Filner, I have been with this committee for the past 3 days. I have——

Mr. FILNER. I have not.

Mr. MADDEN. Well, I wanted to cut my opening statement short

simply to move on and get the questions answered.

Mr. FILNER. People in San Diego are in this audience. They are

looking for some help. And we have nothing to say.

Mr. Malcolm and Mr. Stout, I am surprised that I guess Mr. Malcolm was ready to give some answers to the chairman. Mr. Stout

claimed confidentiality. I am not sure why you have a different approach there. You were not very confidential in all these charts you

got for us. Why can you not tell us the profits you made?

Mr. STOUT. Well, what I will do is give you an indication that

I think means something to the——

Mr. FILNER. Can you tell me why you cannot tell us how much

money did you make off California last year?

Mr. STOUT. The answer that I would like to give to that question

is one that I think is in a context that means something in terms

of what people pay for electricity. What I will tell you is that our

net income in California this last year was less than 2 cents per

kilowatt hour.

Mr. FILNER. And multiply that by millions of kilowatt hours.

How much money is that?

Mr. STOUT. Well, that is the part that we would like to retain

confidentiality on.

497

Mr. FILNER. Well, that is why we have so many problems with

you all. You are whining about your costs and about all kinds of

things, but then you will not tell us stuff we want to know about.

Because everything is relative. I mean, do either of you, for example, have affiliates, subsidiaries that you buy your natural gas

from?

Mr. STOUT. Yes, we do.

Mr. FILNER. Mr. Malcolm.

Mr. MALCOLM. Yes, we do.

Mr. FILNER. Mr. Stout.

Mr. STOUT. Yes, we do.

Mr. FILNER. So your increase in cost of natural gas, which you

so proudly were telling us about, you are paying to yourself and

they are making the money; right?

Mr. STOUT. Actually, our affiliates have to go out to the market

and buy it. We are not producers.

Mr. FILNER. But you are buying from yourself. I mean, you are

just playing games with these numbers.

Mr. STOUT. If I may answer the question.

Mr. FILNER. Your filings with SEC that you have to make public—I am not sure what is different then that you cannot tell us

here—show incredible increases in profit over the last couple of

years. You particularly have moved up on the Fortune 500, you

know. You have gone from, I do not know, 117 to 55. So you are

not doing too bad, with all this whining about the costs; right? Is

that correct?

Mr. STOUT. Well, if I could, I would like to go back to your question about the gas purchases. It is absolutely true that we have an

affiliate, but the affiliate is not a producer. They do have to purchase from the open market. We simply use that affiliate because

of their gas brokering skills. So it is just an expediency measure,

so that we have—— Mr. FILNER. And who are they buying from? I mean, do they

have any relationship to the producers?

Mr. STOUT. Let me finish your first question, then I will come

back to that last one.

You also asked a question about our SEC filings. The filings that

we have made at the SEC that a lot of people have quoted as saying we have had a 600 percent increase in profit, that is a fundamentally flawed analysis. And the reason is, is because the numbers they are quoting are not profit numbers, those are numbers

called operating income. That is before you take out things like interest, depreciation, and taxes. So that is not the bottom line.

Second, the size of our company, when compared with 1999 earnings, we more than doubled the number of megawatts that we have

in the market. Our company has grown significantly since 1999.

And finally, 1999 was a year that was exceptionally poor return

for a generating company in California. In fact, our income dropped

about 80 percent between 1998 and 1999. Simply stated, 1999 was

an exceptionally good hydro year, and that depressed the earnings.

So anytime you draw an analysis comparing 1999 to year 2000, you

get extraordinary increases.

Mr. OSE. Mr. Stout——

Mr. STOUT. Yes, sir.

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Mr. OSE [continuing]. The red light has come on. The gentleman’s time has expired. I am going to recognize Mr. Horn for 5

minutes.

Mr. FILNER. I will be back.

Mr. HORN. Mr. Madden, you have been with us in a number of

these hearings. And after the chairman left to go back to Washington, a number of things were said by the president of the California

Public Utilities Commission.

OK, can you hear it now? Somehow, somewhere?

Mr. MADDEN. I can hear you now.

Mr. HORN. You were there during some of the testimony of President Lynch, the head of the California public utilities. And I

just——

Mr. MADDEN. I was there for all of it.

Mr. HORN. Yeah. And I just wonder if you would like to make

a few statements for the records as to whether she said was accurate or not. Because there was a lot of finger pointing at your agency, etc.

Mr. MADDEN. Congressman Horn, if you do not mind, since I believe we should stop the finger pointing and the rhetoric between

and among the various participants, whether State commissions,

Federal, the players, I would prefer not.

Other than to say I think this committee has learned a lot of

things in terms of the policies of the CPUC, as well as the FERC.

And with respect to long-term contracts, there were major restrictions put on the IOUs in terms of buying long or buying in shortterm packages, and there was also questions in terms of how they

determine what the reasonableness is, or they would then secondguess the purchases by the IOUs.

Mr. HORN. Thank you. I will give you, Mr. Ose, the rest of my

time.

Mr. OSE. Thank the gentleman.

Mr. John, you are with Sempra, if I understand correctly.

Mr. JOHN. Yes, sir.

Mr. OSE. The question I have has to do with the Governor’s proposal to buy the transmission grid. I know he has a memorandum

of understanding with Edison to buy theirs. Are you engaged in

discussions with the Governor’s office or the Governor’s representatives to acquire San Diego Gas & Electric’s?

Mr. JOHN. Yes, we are in discussions with the Governor’s office.

Mr. OSE. I mean, I keep coming back to try and to figure out how

to increase supply or reduce demand. And I am trying to understand how buying transmission grid facilities increases supply or

reduces demand. Could you sort of elucidate or illuminate this, if

you will?

Mr. JOHN. Well, that is a good point. There are two issues here.

One is the point you are making about supply and demand. And

on the supply side, I know the State has taken a lot of criticism

for not building a sufficient number of power plants over the past

10 to 12 years.

On the other hand, I think the record does show that over the

past year or so a lot of those projects have been approved. The concern is that not enough new power will be online by 2000, and certainly not by the summer of 2001, likely not the summer of 2002.

499

Maybe 2003, but more likely 2004. The only remedy we see over

the short term, to avoid—and I do not mean avoid—to mitigate outages is increased conservation.

And that is one of the reasons we said to the PUC last year that

we recognize the difficulty the customers down here were having

with the high rates, but that some action had to be taken to start

increasing rates on a stair-step approach in order to get customers

to conserve. And there was some conservation in San Diego last

year.

Mr. OSE. So going back to my question, how does the—— Mr. JOHN. OK. The sale of the transmission assets is a separate

issue. That is to deal with removing or mitigating, at least, the

huge balancing account under-collections that have built up, which,

absent offsetting those balancing account under-collections, will be

passed on to the consumer.

Mr. OSE. Your point is that the function of the transaction is to

basically recapitalize the balance sheets of the utilities?

Mr. JOHN. That is correct.

Mr. OSE. It has nothing to do with increasing supply or increasing demand or conservation.

Mr. JOHN. And I do not think the Governor has ever said that

it did.

Mr. OSE. OK. I appreciate that clarification.

I am going to recognize Mrs. Davis for 5 minutes.

Ms. DAVIS. Thank you. I appreciate—if I can just fix my microphone. Great. Thank you.

Mr. OSE. We are going to—let us restart the clock on Susan here.

There you go.

Ms. DAVIS. Thank you, Mr. Chairman. I was reaching out so

much that I got my mic.

I appreciate your all being here as well. And I wanted to just go

first, if I may, to Mr. Madden with FERC. And what you may have

been—I believe you were at the hearing that we had at Washington

when the California delegation met with Mr. Hebert. And at that

particular hearing I asked him what authority he lacks—the Commission lacks to do their job. And I wonder if you could respond

to that.

And if you also could, tell us about the authority that you feel

you perhaps need to better define for everyone how to figure out

what is a fair and reasonable rate. How do you determine what levels of profit are OK? Are there some levels of profit that you think

are not OK? And also, do you believe that you have the full power

to subpoena people and establish whether or not there was manipulation in the market, and whether or not those—whether you

have looked at those documents and tapes?

We know that in one of the reports where you suggested that the

rates were not just or reasonable, that you also recognized, and in

fact, you had it investigated what was going on in the market. So

that would be helpful, just to get a sense of that, if you could. The

other—and then I have some other questions, as well.

Mr. MADDEN. There are a lot of questions just there. Let me see

if I can start out. The Commission has a great deal of authority

under the Federal Power Act, to remedy the type of actions that

exist today. Now, in terms of refund authority, our authority is the

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earliest of 60 days after a complaint is filed, such as the one that

San Diego filed in August, or the date the—60 days after the Commission order is noticed in the public register—Federal Register,

rather.

In this particular case, we took the earliest one, SDG&E’s filing

of August 2nd, and established the refund date of October 2. So in

terms of the remedies and the refunds—and so our refund authority does not go back beyond or before October 2nd.

In terms of the remedies under the Federal Power Act, I think,

as they exist today we have the full authority. There may be one

thing in the future, depending on whether or not RTOs get up and

running—and we hope they are—and that is transmission siting

does not occur, transmission is not built, that is something that

Congress should look at in terms of giving the FERC authority, if

a State or an RTO does not act within a certain period of time.

In terms of subpoena power, the Commission has the subpoena

power built in under the Federal Power Act in I believe 309 and

307 of the act specifically. And, in fact, in the Williams/AES proceeding, they delegated to me the full range of subpoena power so

I can, in that particular case, request any particular documents

and they have to be brought to me.

One thing that is missing in this Williams case, and which was

in the notice, is that, although the timeframe talked about the

April-May period, the Commission directed me to look into the remaining part of 2000 and into 2001. And I can assure you I will

be vigilant in looking into those dates and those actions.

In terms of manipulation, there are a number of informal investigations that staff is doing to look at questions of outages, look at

questions of withholding, look at bidding patterns. Although, you

know, there have been, at the same time, some more public documents, we, at the staff level, conduct the type of informal primarily

investigations as we did in the Williams case. I believe that should

cover it.

Ms. DAVIS. Are those all included in public documents that we

have been able to acquire?

Mr. MADDEN. The preliminary investigations are confidential

until they are brought to the Commission, and the Commission has

to decide what it will release. Because in many instances the entities that we review, audit, and monitor ask for confidential treatment. And many ask why confidential treatment. Well, there is a

lot of things out there, that if it were released to the public, may

affect them from a competitive standpoint.

At the same time, my view is that in order to get the type of

interaction and the information we need from the various entities,

it is best, at various stages, to give them confidential treatment.

Ms. DAVIS. Thank you. If I could go on. I know I only have 5

minutes. OK. All right. If I could just turn to Mr. Malcolm and Mr.

Stout for a second.

Could you please share with us what percent of market share

you believe your company has in gas-fired generation in California.

Mr. STOUT. Well, for Reliant, it depends on how you want to

measure the market. If you measure California, I believe our market share is around eight—I am sorry. If you measure the ISO grid,

our share is about 8 percent. If you measure all of California,

501

which picks up the munis and things like that, that market share

drops to I believe around 5 percent, maybe 4 percent. And if you

pick up the whole Western interconnection, which that is really the

market, not just California, it drops down to probably less than 2

percent.

Mr. BURTON. Mr. Stout, I appreciate the brevity. Your time has

expired. I am going to go to Mr. Hunter. Mr. Hunter for 5 minutes.

Mr. HUNTER. First, let me—since Mr. Hebert has been mentioned

several times, and Mr. Madden, you are here representing the

Commission. Mr. Hebert and I, as Mr. Filner depicted, have

crossed swords on several occasions on this issue in terms of price,

and what is unjust and unreasonable.

But he does have a right to be quoted accurately. And actually,

he did not say that if the high price of energy hurt granny, let

granny die. He said that he believed in speaking the truth, and if

the truth hurt granny, let granny die. And he further added that

he had talked that over with his grandmother several times, and

she did not agree with that statement. But I just wanted to make

sure he is quoted correctly. And obviously he has in the record

here, because he testified right where you are at.

Mr. OSE. Record stands corrected.

Mr. HUNTER. Mr. Stout, you pointed out that Reliant has actually increased the amount of energy that they now provide to California. They have not shrunk their energy output in California;

right?

Mr. STOUT. That is correct.

Mr. HUNTER. Last summer we were using in excess of 45,000

megawatts. And as you probably are aware, if you watched the discussion among State leaders, it was to the effect, wait till winter

gets here and all the air conditioners are turned off, and we historically drop usage by about 30 percent. So supplies are very tight

right now at 45,000 megawatts. When they go down to about

33,000 megawatts, then the price will come down.

Winter arrived. We went down to about 33,000 megawatts, and

we were told by the energy suppliers doggone it, supplies are still

tight. Now, my question to you is: Were there any natural disasters

that destroyed some of the generating plants, or was there some

other reason for the supply of this product, energy, to go down by

30 percent when prices were rising?

Because typically, when prices are up and you are making lots

of money and there was a lot of opportunity, you might not see new

generational capability coming online right away because it takes

a long time to get this stuff permitted. But certainly it is highly

unusual that, in the face of rising prices, supplies were constricted.

What do you think happened here?

Mr. STOUT. The answer to that is there were actually two disasters that took place. One was natural, one was manmade. The natural disaster was the fact that the Northwest region’s hydro battery was being drained. If you look in the—— Mr. HUNTER. Say again. The hydro—— Mr. STOUT. Hydro battery. And I use that word loosely.

Mr. HUNTER. Yeah.

Mr. STOUT. It is not really a battery. But there is a certain

amount of energy that is stored in the hydro systems in the Pacific

502

Northwest. If you look at the amount of hydro you had in 1999, it

was above average. If you look at the amount that you had in year

2000, by the numbers I have seen, it was about 25 percent below

what it was in 1999, but only slightly below average.

The bad news is the forecast for this year looks like it is going

to be about 60 percent of average, which is even worse. Now, that

impacted the problem, because the people that generate power with

hydro up in the Pacific Northwest, a lot of those people, I believe,

were coming to California to buy energy, trying to save what little

charge they had left in their hydro batteries because they will not

get another chance to recharge that battery until next winter.

There was also a manmade disaster.

Mr. HUNTER. Just on that point, how much of our usage is

hydro?

Mr. STOUT. I could not quote a specific percentage without checking my records, but I would be happy to get that information.

Mr. HUNTER. So you think some of it was hydro being reduced

as a function of the drought?

Mr. STOUT. Less hydro being generated. But also hydro being

saved so more gas-fired generation in California was being utilized.

There was also—— Mr. HUNTER. You say hydro being saved?

Mr. STOUT. Correct.

Mr. HUNTER. What does that mean?

Mr. STOUT. The folks that have hydro are trying to make sure

they have enough energy to get them through this coming summer.

The hydro battery is not fully charged. As I indicated a second ago,

it may only be at 60 percent charge going into this year. And if

they use up too much of it now, they will run out big time later

in the summer.

Mr. HUNTER. OK. Well, just an aside, I was up campaigning in

Washington last summer. And the talk—and again, I do not want

to just—you deal in facts, and we need to deal in facts. But the talk

was that several of the hydro producers were pulling their stuff offline because they were anticipating higher profits.

So whereas I do not have any specifics on the hydro reduction

that you have talked about—apparently you do not have too many

specifics, either—there is at least the possibility that they were anticipating and looking forward to reaping some of the same higher

prices that some of the gas-fired guys were receiving on the spot

market.

Mr. STOUT. Well, there is two sides to that story. The first is——

Mr. HUNTER. Do you think there is any truth to that at all?

Mr. STOUT. It is very possible there may be. I do not have factual

basis.

Mr. HUNTER. OK, well, I tell you what, let us leave hydro, because we have got a lot of stuff we have got to talk about. Let us

leave hydro.

You said part of this is hydro. Do you think there was any reduction among the gas-fired users that was a function of a strategy

that said if we got high prices when supply is constrained, let us

keep the supplies constrained. Do you think there is any of that?

Mr. STOUT. I cannot speak for every producer, but certainly that

was not the case for Reliant.

503

Mr. HUNTER. OK. But you think that may have happened with

others?

Mr. STOUT. I have no idea. I am not saying it did.

Mr. HUNTER. Mr. Malcolm, when you produce those records of

documentation for the—— Mr. OSE. Mr. Hunter, the gentleman’s time has expired.

Mr. HUNTER. Can I just finish my sentence, and I will be done

with that question.

Mr. OSE. Finish your question. We will hold the thought on the

answer.

Mr. HUNTER. OK. When you produce those documents for Chairman Burton, could you make sure you include any internal memos

with respect to the direction of shutting down your facilities?

Mr. STOUT. Be happy to.

Mr. HUNTER. Thank you, sir.

Mr. OSE. Recognize myself for 5 minutes. One of the questions

I have, and I want to be very clear about this, is if I understand,

Mr. John, your company is subject to both FERC and PUC oversight.

Mr. JOHN. No. San Diego Gas & Electric Co. and Southern California Gas Co. are both regulated by the CPUC. They are not regulated by the FERC.

Mr. OSE. OK. Mr. Malcolm, how about you? Are you subject to

the PUC regulation?

Mr. MALCOLM. I do not think so; no.

Mr. OSE. Mr. Stout.

Mr. STOUT. I do not believe so.

Mr. OSE. Are you subject to FERC?

Mr. STOUT. Yes, sir.

Mr. OSE. Mr. Malcolm.

Mr. MALCOLM. Most assuredly.

Mr. OSE. OK. Mr. John, you have generating facilities here in the

State for electricity?

Mr. JOHN. San Diego Gas & Electric divested their generating facilities as part of the electric restructuring process. We do own a

20 percent interest in a nuclear facility up the coast.

Mr. OSE. But you have no generating facilities besides them?

Mr. JOHN. That is correct.

Mr. OSE. OK. So you buy your power on the market?

Mr. JOHN. Yes.

Mr. OSE. You have to go in and buy it.

Mr. JOHN. And I know there was a lot of discussion this morning

about last year. And we were obligated for a significant portion of

the year 2000 to buy our power through the PX.

Mr. OSE. OK. Mr. Malcolm, I want to make sure I understand

your business motto. And Mr. Stout, you also. As I understand,

Williams—or in Mr. Stout’s case, Reliant—you in effect take the

place of the credit-worthy buyer, provide the seller of the natural

gas or the electricity the assurance of being paid. And then, as the

market works, you will deliver power to the high bidder, so to

speak. Is that accurate?

Mr. MALCOLM. Generally speaking, yes.

Mr. OSE. Mr. Stout.

Mr. STOUT. Yes, sir.

504

Mr. OSE. OK. Mr. Malcolm, do you have any generating facilities

that you own?

Mr. MALCOLM. We have generation facilities in Pennsylvania and

in Four Corners.

Mr. OSE. OK. So you are down here South—or actually East. Not

South from—— Mr. MALCOLM. We control a portfolio today of about 15,000

megawatts by virtue of what we call tolling agreements, where we

partner with someone, like AES in the case of California. We partner with them. They own and operate the facility. We provide the

natural gas to and market the power from those facilities.

Mr. OSE. They have agreed to sell you the generation at some

price on a long-term contract?

Mr. MALCOLM. We effectively pay a tolling fee for them to generate the power for us.

Mr. OSE. Mr. Stout, do you own your generating facilities?

Mr. STOUT. Yes, sir, we own facilities in California, about 4,000

megawatts. Another 4,000 in what we call the Midatlantic States.

Generation in Florida, the Midwest. There are quite a number of

facilities in our portfolio.

Mr. OSE. One of the things that just continues to challenge my

understanding is if the PUC does not allow you to forward contract

beyond 24 hours, how do you run your facilities? Mr. Malcolm.

Mr. MALCOLM. Well, that does represent some concern and some

difficulty. But we are working in the spot market. And there have

thus far been buyers for that power.

Mr. OSE. Well, let me turn the question around on the input side.

In terms of the inputs that you buy to run your plant, do you buy

those on a 24, day-ahead market?

Mr. MALCOLM. We contract for natural gas supplies in a variety

of ways in order to be—— Mr. OSE. You transit, basically?

Mr. MALCOLM. Yes. Yes. In order to meet our needs. There is a

base load, and there is certainly also a piece that we utilize on a

peak day.

Mr. OSE. So what percentage of your total load do you leave vulnerable to the spot market?

Mr. MALCOLM. I am sorry, I do not have that number.

Mr. OSE. Could you get that for us?

Mr. MALCOLM. Sure could.

Mr. OSE. And my point—and I am going to ask you, Mr. Stout,

the same question. My point is I want to understand—you know,

business takes their vulnerability down to some percentage on a

spot market basis. Whereas, the structure we have in the State of

California basically has it at 100 percent.

Now, Mr. Stout, in terms of your generating facilities on the

input side, in order to control your costs, provide a cost effective

product at the far end, do you forward contract for the raw material, if you will, to run your facilities?

Mr. STOUT. That is a good question. The answer is, if I have a

forward sale, then I forward contract for the input supply. If I do

not have a forward sale, I have to buy it on the spot market. Because otherwise I would be taking a speculative position in the

market.

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Mr. OSE. All right. So you tie your exposure to your contract?

Mr. STOUT. That is correct.

Mr. OSE. OK. Now, as I look at—I see my time is about up, but

we are going to come back to this if we have time. In the Wall

Street Journal, every single day a report on the price of natural gas

that you can buy forward. And it goes out 3 or 4 years in some

cases. And I go back historically and I look last—they also have the

high-low for the past year. And the high-low for the past year indicates natural gas at $2.07 low versus $5 plus for a high. Now,

seems to me that most businesses would contract a year ahead, if

you will—time? Rules are rules. No, rules are rules.

Mr. HUNTER. I yield to Mr. Ose.

Mr. OSE. All right. My question is: If the opportunity that existed last spring to buy natural gas at $2 was available, why were the

intrastate generating facilities, that are subject to the PUC, not allowed to buy that, just to take the uncertainty off the table?

Mr. STOUT. I guess I am a little confused by your question when

you said the intrastate utilities subject to the PUC. Are you referring to the IOUs?

Mr. OSE. Yes. I am separating you out on this.

Mr. STOUT. OK.

Mr. OSE. I am just trying to get some sense of what happened.

I mean, it seems like you would take a whole uncertainty out of

the entire transaction.

Mr. STOUT. I would have to defer that question to someone from

one of those utilities.

Mr. OSE. But Mr. John last year you had facilities that were generating capacity.

Mr. JOHN. No, sir.

Mr. OSE. You had sold them by then?

Mr. JOHN. Yes, sir.

Mr. OSE. All right.

Mr. JOHN. We sold those in—my recollection was in 1998.

Mr. OSE. It seems like an excellent way to——

Mr. JOHN. When prices of gas were very low and prices of electricity were very low.

Mr. OSE. But being able to buy a year ahead certainly seems like

an excellent way, when you know what your base load is going to

be.

Mr. JOHN. Yeah. But, I mean, on the gas side, though, because

we also own Southern California Gas Co., the real spike in the gas

price started in the fall—at least into California, started in the fall,

my recollection is, of 2000. And it went nuts in December 2000,

where a delivered price into California was $50 per million BTU,

compared to a historical price maybe of $2.50 or $3.

Even today, although it is not $50 per million BTU, it is close

to $15 per million BTU. And that is primarily the transportation

rate, not the wellhead cost of the gas. It is the transportation cost

in the secondary market from Texas and Oklahoma, to California.

Mr. OSE. I am going to have to ring the bell on myself here.

Mr. MADDEN. Mr. Chairman, I did not want to ring the bell, but

let me help the record a little. San Diego Gas & Electric is jurisdictional to us, to the extent it is sales for resale and wholesale transmission.

506

Mr. BURTON. That is correct. I was sitting back there listening.

I guess I will take my time now.

You said at the wellhead the price is still fairly low?

Mr. JOHN. Well, again, low—it is higher than historical.

Mr. BURTON. What is it at the wellhead?

Mr. JOHN. Probably today around $4 to $5 per million BTU.

Mr. BURTON. Why are the transportation costs so high?

Mr. JOHN. Because the cap was removed in the secondary market

on an experimental basis by the FERC. And several companies— I think even we—supported it at that time. But it was on an experimental basis. And I think that there is a limited capacity coming

into California right now on interstate pipeline capacity, and people

are taking advantage of it.

Mr. BURTON. So what you are saying is that they need more

pipeline capacity and probably more exploration?

Mr. JOHN. I do not know about the exploration so much, but we

certainly do need additional pipeline capacity coming into the

State. And I think the gentleman from Williams talked about one

of their projects.

What we are trying to convince the Federal regulators of is to

make sure that we are meshing the new interstate pipeline capacity with the intrastate capacity, so when the new interstate capacity comes in, we are able to use it for electric generation. Because

that is where the real demand is today.

Mr. MALCOLM. If I might add, there is no question that there is

more pipeline capacity needed, and there is more wellhead deliverability needed.

Mr. BURTON. So you need more exploration as well?

Mr. MALCOLM. Yeah, there is a perception on a peak day that

there is not enough supply, and therefore we do need additional deliverability.

Mr. BURTON. As I understand it, there are areas of California

where there is reservoirs of natural gas that could be tapped if they

could get by, I guess, the environmental requirements for exploration. Is that correct?

Mr. JOHN. Our company is not a producer, so I cannot comment.

Mr. MALCOLM. I am not aware of what the reserves are in California.

Mr. BURTON. I would be happy to yield. Turn on your mic.

Mr. HUNTER. I understand there are untapped gas resources in

California. But on that point, Mr. John, you folks have now constructed a 30 inch pipeline going into Mexico.

Mr. JOHN. We have a pipe that serves the Rosasito Power Plant.

We also are planning to build—one of our affiliates is planning to

build a pipeline in northern Mexico.

Mr. HUNTER. Well, now, so my question is—I understand that.

If we are short on gas and that gas shortage is—and the inability

of our present pipeline system to move that gas is a main driver.

And, you know, Mr. Malcolm says that—or Mr. Stout, that they

would sell all the electricity we wanted for 2 cents above the gas

price per kilowatt hour, that is kind of astounding. And if you are

moving gas—if you are preparing to move gas to Mexico, does that

not compound the price problem we are going to have here in the

United States?

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Mr. JOHN. I am not sure I am following you, Congressman.

Mr. HUNTER. Well, you got a 30-inch pipeline going down to the

border. We got a shortage of natural gas in California which has

driven prices to 500 percent of what they were. Why are we going

to be moving gas down to Mexico when this low supply and high

demand in California is driving our electricity costs 500 percent?

Why are we moving more of it out of State?

Mr. JOHN. Because several of the plants in northern Mexico,

when they are built, will be able to provide electricity to southern

California.

Mr. HUNTER. Well, do you not have—but right now you are moving natural gas right now into Mexico, are you not?

Mr. JOHN. Yes.

Mr. HUNTER. How much are you moving?

Mr. JOHN. I think it is probably around—this is subject to check,

but probably 40 to 50 million cubic feet a day.

Mr. HUNTER. Well, now, I was told, when you guys told us earlier, that you were moving electricity back, so there was kind of a

quid pro quo, gas to Mexico, electricity to the United States. There

is almost no electricity coming back into the United States.

Mr. JOHN. I think there is a limited amount right now. But the

point I was making is the new pipeline that we are proposing to

build in northern Mexico is for brand new energy efficient power

plants, and a significant amount of that power will come into the

United States.

Mr. BURTON. Let me reclaim my time, Mr. Hunter.

Mr. HUNTER. Thank you, Mr. Burton.

Mr. BURTON. How many cubic feet of gas are you sending down

there a day?

Mr. JOHN. Right now?

Mr. BURTON. Yeah.

Mr. JOHN. My recollection is it is around 40 to 50 million cubic

feet a day.

Mr. BURTON. Why is it going down there if there is no power

plant to use it?

Mr. JOHN. There is a power plant. And we are going to—— Mr. BURTON. And where does that electricity go?

Mr. JOHN. There is an existing power plant at Rosasito.

Mr. BURTON. Where does the electricity go from that power

plant?

Mr. JOHN. Most of it is to serve northern Mexico.

Mr. BURTON. So what we are doing is we are supplying this

amount of gas to Mexico to power their utility?

Mr. JOHN. Yes. And that agreement was struck several years ago

before we had this crisis. And we—you know, we believe in honoring agreements.

Mr. BURTON. What about gas exploration here in California? I

was told there is some reservoirs of gas here in California. Can

anybody tell me why that is not being tapped? I mean, it seems to

me that you would not have to have an intrastate problem with

pipeline if you could get more gas within the State, and the pipes

could be utilized right here.

Mr. JOHN. Again, we are not a producer, so I cannot comment on

that.

508

Mr. BURTON. Well, we probably ought to look into that. What is

this here? Yeah. Why are we building electric plants in Mexico?

Mr. JOHN. Because the Government of Mexico seems to be more

willing to have power plants built there than they seem to be historically in the State of California.

Mr. BURTON. Oh, my God. The government of Mexico has less

stringent requirements for building a power plant, so you are building them in Mexico?

Mr. JOHN. Well, I do not think they are less stringent.

Mr. BURTON. Well, then why are they being built there?

Mr. JOHN. I think it is an expedited permit process.

Mr. BURTON. So you can get through the bureaucracy faster?

Mr. JOHN. So far; yes.

Mr. BURTON. Now, if you could get through the bureaucracy faster in Sacramento and in California, you could build them here.

Mr. JOHN. And I think they are working on that. I mean, I think

the——

Mr. BURTON. Well, how many plants are you building down in

Mexico?

Mr. JOHN. We, personally?

Mr. BURTON. Well, yeah. I mean, I would just like to know how

many plants are being——

Mr. JOHN. We, personally, we are looking at one plant right now

in Mexico. Other suppliers are in the process of building plants in

Mexico. Not our company.

Mr. BURTON. And those could be built in California?

Mr. JOHN. Perhaps. I cannot speak for other suppliers. I am just

telling you, we are building the natural gas pipeline system to

serve those power plants.

Mr. BURTON. And is all the electricity that is going to be produced going to be utilized here in California?

Mr. JOHN. Not all of it. I think some of it will.

Mr. BURTON. How much?

Mr. JOHN. I do not know the figure.

Mr. BURTON. Well, wait a minute. It is your plant.

Mr. JOHN. One of the plants that are being proposed——

Mr. BURTON. Well, let us just talk about your plant. Your plant

that you are building in Mexico, that is using American or Californian gas, is that plant going to be used——

Mr. JOHN. It is going to be a merchant power plant, and it depends who wants to take power from the power plant.

Mr. BURTON. So you are going to sell to Mexico as well as to the

United States and to California?

Mr. JOHN. Possibly; yes.

Mr. BURTON. I see. With the power shortage here in California,

when that plant comes online, if you still have that problem, you

will still be bifurcating the power, giving part to Mexico and part

here; right?

Mr. JOHN. Well, hopefully by the time our plant is online, which

is probably going to be in the 2004 timeframe, enough additional

supply would have come online in California that there will be

enough reserve capacity, we will not have to worry about that.

Mr. BURTON. Mr. Filner.

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Mr. FILNER. Thank you, Mr. Chairman. Welcome to California.

[Laughter.]

I want to talk a little bit or try to get some understanding of

what has been called market power. Regardless of all the stuff that

you can or cannot tell us, the facts of the matter, are that California paid about $7 billion for electricity in 1999, and it is projected

we could pay as much as $70 billion this year. That is some tenfold

increase that has no relationship to anything you have told us

about the cost of natural gas or regulation or anything. I mean,

that has gone into your pockets and the other members of the cartel.

But how does that occur? Mr. Malcolm, in your statement you

said you transport 17 percent of the Nation’s consumption of natural gas.

Mr. MALCOLM. Yes, sir.

Mr. FILNER. What percentage coming into California do you control?

Mr. MALCOLM. The pipeline that we have coming into California

is Kern River. And I think the capacity that Kern River controls

versus all of the pipeline capacity coming to the State is fairly

small. And I think, importantly, Williams does not control the capacity. Its customers, its end use customers—— Mr. FILNER. You transport 17 percent of the Nation’s natural

gas?

Mr. MALCOLM. We do, throughout the country.

Mr. FILNER. That is a pretty high percentage. And you have

4,000 megawatts, you said, basically of the gas-fired capacity in

California?

Mr. MALCOLM. Yes, sir.

Mr. FILNER. I mean, you were asked the question, both of you,

about percentage of the market, and you gave us some 8 percents,

4 percents, 2 percents. I have been told by people in the industry

and the economists that the best way to measure market power is

the number of megawatts that really determines the price. That is,

there is a baseline use of, I do not know, 20,000 megawatts. And

when you start getting demand above that, that is where control

of the market comes in.

So that is where the 17,000 gas-fired megawatts come in. So if

you have 4,000—each of you actually has about 4,000, as I understand it—it looks to me, of the ability to control the market in

terms of prices, you have 25 percent of the market. Now, is that

a good or bad way to look at it?

Mr. STOUT. Well, if I can respond to that. One of the things that

we do in order to try and manage risk, is we try to sell off forward

as much of that 4,000 megawatts as we can, so that we have some

price certainty in our financial forecast. While I answered the question based on the number of megawatts that we had, when you

take a look at how much we sold forward, who now someone else

owns and controls, our market share is cut by more than half. So

it is considerably less than that.

Mr. FILNER. Well, who has that stuff?

Mr. STOUT. There are at least 20 or 30 different market participants who have each bought portions of our generation portfolio,

who now market that in the Western interconnection.

510

To get back, though, to another comment you made, Congress- man Filner, about the $70 billion forecast, that is a very questionable forecast. I think that—— Mr. FILNER. What is your forecast?

Mr. STOUT. Well, my forecast I have not done. But I can tell you,

from asking questions—— Mr. FILNER. We are paying $2 billion a month now, right now. So, just make that one. That is $25 billion. Is that closer to what

you think?

Mr. STOUT. That may be. That is—if you look at what you

pay——

Mr. FILNER. All right. So compare that with $7 billion, then.

Mr. STOUT. If I may finish the answer. If you look at what you paid in year 2000, you paid $27 billion, it is very possible that the

prices could be very similar to what they were because of the increase in natural gas prices. Counter-affecting that, though there

have been a number of forward contracts that have been entered

into, which the Governor has publicly announced, which should

help to mitigate some of that price exposure. I do not believe that

that $70 billion estimate takes into account all those forward contracts that the Governor has put in place.

Mr. FILNER. But it is an incredible increase, and somebody is

making that money. And that cannot be accounted for by anything

else except profit. I mean, that is where it is going. This is America. You are allowed to make a profit. But let us understand what

is going on here.

Mr. STOUT. If I may respond to that, sir—— Mr. FILNER. I want to ask Mr. Madden. Your name fell down, so

I forgot your name. These folks who sell into the California market

at a wholesale price, did they have to get authority to do that from

FERC?

Mr. MADDEN. Are you talking, now, gas or electricity?

Mr. FILNER. Electricity.

Mr. MADDEN. They have market-based rates and they have——

Mr. FILNER. Is that based on an approval from FERC?

Mr. MADDEN. They received approval from the FERC.

Mr. FILNER. All right, now, correct me if I am wrong, any of the

three of you. When they asked for that authority, one of your criteria is market power. They said in those filings, as I read them,

that there was something like 60,000 megawatts of capacity in

California. And therefore, their few thousand was a real low percentage of that, and therefore they had no market power. Do those

figures sound like what they had filed to you?

Mr. MADDEN. I do not recall, Congressman.

Mr. FILNER. Do either of you recall what you estimated as the

California capacity was?

Mr. STOUT. I do not recall.

Mr. MALCOLM. I do not recall.

Mr. FILNER. You guys got to prepare like I do here. All right,

read your filings. You said around 60,000 was available, which is,

of course, way above what the actual capacity is. So therefore, your

estimates of market power were way below what the actual fact is.

And if you take a true estimate that economists have told me—that

is, the percentage of the market that really determines the price—

511

it is inescapable to me that you have market power. Notwithstanding what you said about forward contracts, etc.

And it seems to me, Mr. Madden, that your approval of their

market-based rates was based on a certain estimate of market

power, and I think we can prove that it is much greater. Would

that not lead you to reconsider their authority to sell at marketbased rates?

Mr. MADDEN. We have the authority to look at our market-based

rates that we have issued under Section 206 of the act.

Mr. FILNER. So you can do that right today?

Mr. MADDEN. We have the authority to initiate an investigation.

Mr. FILNER. All right. And we would formally request that at

some point; OK?

Mr. MADDEN. In the November order we looked into the particular rates being charged, and those were subsequently addressed in

the December 15th order by the Commission. We are looking at the

rates now.

Mr. FILNER. And in the December 15th order, as I said, you

found all kinds of problems and have not acted on any of them.

And I will ask you guys, do those figures about market power

sound reasonable or not to you?

Mr. STOUT. Well, let me respond to your 60,000 megawatt number. When you examine market power, you do not draw a boundary

at the State border. You examine the market that you are competing against. I compete against generators in Arizona, Nevada, and

all around the Western interconnection. It is very possible that in

trying to define the range of market competition, that it included

more than just California. And so you may, in fact, have had more

megawatts in that market power analysis than——

Mr. FILNER. So, but your 4,000—the 4,000 figure is also only

California, so you may have more megawatts elsewhere; right? Too,

right?

Mr. STOUT. That is correct.

Mr. FILNER. So if you will give me all those figures, I will tell

you what your market share is. And I bet you you have market

power.

Mr. STOUT. Well, we respectfully disagree with your conclusion

with regard to market power, but we will be happy to furnish you

with the details of other generating units. I can quickly summarize,

if you would like.

We actually brought on a generating unit this last year. No one

mentions that. But it was this 500 megawatt unit. We own half of

it, Sempra Energy owns the other half. It is located just outside

Las Vegas, but it is not connected to the Nevada power system, or

at least it was not last summer. It was actually connected to the

California grid, and was contributing to help keep the problems in

California as minimal as possible, as well as keep the price down.

We are also bringing on another 500 megawatt project this summer in the Western interconnection.

Mr. FILNER. I appreciate your attempts to keep our prices down.

I have not seen that in anything that you have told us today.

Mr. STOUT. Well, you just indicated that the more competition

you have, the more effective the market works, and I agree with

512

you on that. Bringing on more generation increases the competition

in the market.

Mr. FILNER. Well, hold it.

Mr. HUNTER. I just want him to be allowed to answer the question. The second 500 megawatts?

Mr. STOUT. Arizona.

Mr. BURTON. Who is next? Mr. Ose.

Mr. OSE. Thank you, Mr. Chairman. I want to go back to Mr.

Seetin’s remarks this morning. He indicated very clearly today that

he thought the market structure in California was seriously flawed.

And interestingly enough, when he was asked to testify before the

legislature in 1996, he made the same observation. And in fact,

much to everybody’s chagrin, his prognostications appear to have

come to fruition.

The question that I am trying to deal with is, as we go from here

forward, how do we solve this problem. And we can sit up here and

argue about everything.

But I just want to make sure I understand. I heard you very

clearly say we need additional gas transmission lines into the

State. Is that accurate?

Mr. MALCOLM. Yes.

Mr. OSE. OK. I believe I heard you say that the market structure

that exists in—I think Pennsylvania was the citation you made,

where the long-term forward contracting was allowed, and direct

access was allowed, is a far more preferable model than the current

one we have in this State; is that accurate?

Mr. MALCOLM. That is not part of my filing.

Mr. OSE. Mr. Stout.

Mr. STOUT. Well, the comment was made. And let me clarify

what really goes on in PJM. They have a spot market in PJM, as

well. The difference is that the spot market only accounts for 15

percent of the energy supply. The rest of it is either utility-owned

generation, which is about 50 percent. The remainder, I think that

is about 35 percent or so, is forward contracting. So what they have

is PJM is a portfolio of supply. That is what you did not have in

California. So when you had—and, in fact, you can have thousand

dollar megawatt hour prices in PJM, but that only applies to a portion of the energy.

California, if you had thousand dollar prices, under the market

design which you had this last summer, you had that applied to

45,000 megawatts.

Mr. OSE. So your point, then, was that the construction of the

now-defunct PX—but I guess now the ISO is doing it. The construction by which the market-clearing price that you showed up there,

where the lines crossed as opposed to where the bid was, is flawed

because it pays the——

Mr. STOUT. No, absolutely not.

Mr. OSE [continuing]. Because it pays the top guy’s price to everybody in the market.

Mr. STOUT. No. Let me be perfectly clear on that. The problem

was not in the market-clearing price concept. The problem was in

the fact that California had to buy everything from that one market, rather than having a portfolio of markets to buy their energy

513

from. The PJM clears at a clearing price in their spot market, just

like California did.

Mr. OSE. OK. Then it is the constriction that allows the different

tranches of demand, the base versus the peak, to all be priced at

one price, instead of a variety of prices?

Mr. STOUT. That is right on target.

Mr. OSE. OK. Now, the other question that I have, and this is

news to me, and I appreciate Mr. Hunter and Mr. Burton and Mr.

Filner and Ms. Davis bringing it to our attention. Did I understand

correctly that we are shipping natural gas to Mexico right now?

Mr. JOHN. Yes. And so are other pipeline companies in Texas for

power plants.

Mr. OSE. We are shipping natural gas out of California into Mexico?

Mr. JOHN. Uh-huh.

Mr. OSE. For what purpose?

Mr. JOHN. To generate electricity in northern Mexico.

Mr. OSE. For whom?

Mr. JOHN. I do not know the exact figures, but I know some of

the power comes back into California, some of it is actually used

in northern Mexico. This is part of the North American Energy Policy that President Bush has been espousing.

Mr. OSE. Well, I appreciate you bringing that up. I think I have

found something that I can drop a note to President Bush about.

And I am sure that he can speak with President Fox about it. But

I am just amazed. I mean, how many—Mr. Hunter, if you will, how

many—some of your constituents have been cutoff, if I understand

correctly, from access to natural gas.

Mr. JOHN. And so have some—and so has this power plant in

Mexico, but it has been done on a pro rata curtailment basis.

Mr. BURTON. Would the gentleman yield to me just a second?

Mr. OSE. I would yield; yes.

Mr. BURTON. I would like to know what rate per cubic foot, or

however you charge for the gas, what rate are you getting in Mexico? Are you getting more there or same amount of money?

Mr. JOHN. Same. I mean, it is basically a tariff rate that is approved by the California Public Utilities Commission.

Mr. BURTON. It is a rate that is approved by the Public Utilities

Commission here in California?

Mr. JOHN. Right.

Mr. BURTON. That you sell to Mexico?

Mr. JOHN. Uh-huh.

Mr. BURTON. So you are getting the same amount of money?

Mr. JOHN. Uh-huh.

Mr. BURTON. But you have less what? Restrictions?

Mr. JOHN. The restrictions I was referring to, Congressman, is

the restrictions on construction of new power plants.

Mr. BURTON. OK. Thank you for yielding.

Mr. OSE. Did the PUC approve the transfer of this natural gas

to Mexico?

Mr. JOHN. Yes.

Mr. OSE. Did FERC?

Mr. MADDEN. The export-import of gas is approved by the Department of Energy. The siting of the facility is the Federal Energy

514

Regulatory Commission. The CPUC, because of the Hinshaw status

of this facility, approved the tariff. We did not do that.

Mr. OSE. I can flat guarantee you, Mr. Chairman, we are going

to look into this. And I yield back.

Mr. BURTON. If the gentleman would yield his time.

Mr. OSE. I yield my time.

Mr. BURTON. I think that Mexico has substantial gas reserves. In

fact, they have a lot of oil reserves, too, down there. Is the reason

that they are importing gas from us because they do not have the

pipeline capacity down there?

Mr. JOHN. That is correct. I mean, there are very few—to the

best of my knowledge, there are very few natural gas reserves in

northern Mexico. Most of the reserves are in the southern part of

the country.

Mr. BURTON. Well, but that is—but we are sending our gas down

there while Americans are suffering, at a time when they really

need the generation; right?

Mr. JOHN. But I think you have to take a longer-term look at

this issue. I do not think it makes—— Mr. BURTON. Well, you tell that to somebody whose lights go out.

I was having dinner the other night, and the lights went out in the

middle of dinner.

Mr. JOHN. And all I am saying to you, Congressman, is when we

have to curtail in southern California, we also curtail in northern

Mexico. So they are feeling the same pain. It is not—they are not

getting favoritism.

Mr. BURTON. Well, that is very nice, except we do not represent

Mexico, we represent America.

Who is next?

Ms. DAVIS. Thank you. Thank you. While we are on natural

gas—and I appreciate, Mr. John, what you are sharing with us, because sometimes it is hard to get information like that directly. I

am aware that there was a Rand Corp. report in I guess December

or January that said that California was being charged something

in the neighborhood of about 60 times the rate of other States,

other places in the country. Is that correct, that we were

paying——

Mr. JOHN. I think what they were referring to, Congresswoman,

is in the month of December 2000 the price of gas to California was

about $50 per million BTU. And you would compare that to probably somewhere around $5 or $6 per million BTU in other parts

of the country. So that we were paying basically, at that point in

time, about 10 times more than other States.

Ms. DAVIS. And why was that?

Mr. JOHN. Because of the cost of transportation between the

Southwest and the California border.

Ms. DAVIS. And then, so if there was natural gas, what about in

Mexico, then? What were they being charged at that time?

Mr. JOHN. I do not know that.

Ms. DAVIS. But is it possible that we were being charged a lot

more here in San Diego than in Mexico?

Mr. JOHN. The transportation rate that we were charging to the

power plant in Mexicali, as I said, was a PUC approved rate, not

a FERC approved rate.

515

Ms. DAVIS. So the ones that were higher in southern California

were FERC approved rates?

Mr. JOHN. They were rates in the secondary market. The maximum rates that FERC approves are tariffed rates in the primary

market. But as I said earlier, FERC allowed, on an experimental

basis, the caps to be lifted in the secondary market.

Mr. MADDEN. Congressman, if I may, the prices did hit $50, even

$60 at Topock, CA, for about 2 or 3 days in California. If you look

at the San Juan basin at that time, it was about $10 to $15. Other

areas of the country with constraint points, like New York City,

had about $50.

In terms of the gas itself, the Federal Energy Regulatory Commission has very little jurisdiction over the amount of gas because

of the decontrol. Essentially it is with respect to gas that is in

interstate, intrastate, or in LDC ships, or it is an affiliated. And

even then it is restricted. If it comes in from Canada, we do not

have the authority, and if it is their own production, we do not

have the authority.

We are looking into that matter right now. And he raised the

case in terms of the transmission. We do have jurisdiction over the

transmission. No one can charge more than the J&R rate on the

pipeline. The pipeline cannot get that.

Mr. John is talking about the secondary market, where we relaxed the price and allowed people to—people, not the pipeline

shippers, and they include everyone, including Mr. John’s company,

everyone to charge the value of the transportation.

We have done an analysis of it, and it has shown that in the secondary market—and we required it to go on the board—in the secondary market, very few volumes went into the secondary market,

and the prices were at or above the J&R rate that is approved in

the primary market. So there is transparency there.

At the same time, we are looking into whether or not certain entities manipulated the gas prices, because they were a market

power, to raise the prices at those points in California.

Ms. DAVIS. When will that information be available to the public?

Mr. MADDEN. We, in the first instance, have set a matter for

hearing last week, and we ordered the judge to report back to us

in 60 days on that matter.

Ms. DAVIS. Thank you. If I may, Mr. Chairman, just for a moment, to go back to the market control that we were talking about.

And I think, Mr. Stout, you had answered the question about the

percentage that you control. I do not—Mr. Malcolm, did—what percentage?

Mr. MALCOLM. Less than 10 percent on a peak day.

Ms. DAVIS. Less than 10 percent. Because when the ISO reviewed the records and did a profile, it is my understanding that

there were about five companies that they looked at, and those five

companies controlled about 98 percent of the market. Was Williams

part of that, do you think, in that survey? Would they be——

Mr. MALCOLM. I do not think so. I can assure you it would be

my view that Williams is not part of any five-company group that

controls 98 percent of the capacity.

516

Mr. STOUT. I would agree wholeheartedly. There is no way the

five generators, who I think together have about 16,000 megawatts,

that, by no stretch of the imagination, is 98 percent of the market.

Ms. DAVIS. Well, we might go back and look at that.

Mr. FILNER. Would you yield?

Ms. DAVIS. Yield? Sure.

Mr. FILNER. It was not 98 percent of the market, it was 98 percent of all the bids that five companies submitted, and you two are

amongst those five, showed control of the market. The bids reflected market power, is what the ISO has alleged.

Mr. STOUT. Well, I would very much appreciate you sharing that

particular document with me. I am not aware of that document.

Mr. MALCOLM. Nor am I.

Mr. FILNER. If that were true, Mr. Madden, if ISO has alleged

it correctly, would their authority for market-based rates be revoked?

Mr. MADDEN. I think the facts upon which you are relying are

not based in anything that I am aware of. Because if you—their

share in total—you have to look at what PG&E has, you have to

look at what So Cal Edison has, you have to look at what San

Diego has.

Mr. FILNER. You understand ISO knows this better than I do.

Mr. MADDEN. Well, if you look at those alone, they are about 60

percent of the market. And then you have to look at all the other

sellers in—— Mr. FILNER. The issue was not what percent of the market. What

the issue was, as I understand it, the bidding pattern and the ability to get the price that they bid reflected market power. And that

is their statement, not mine. And if that is true, now I am just asking you if it was true, would their authority to sell at market-based

rates be revoked?

Mr. MADDEN. We would have a number of equitable remedies to

do with respect to that, including revocation of market-based rates.

Mr. FILNER. Thank you.

Mr. BURTON. Mr. Horn.

Mr. HORN. I yield my time to Mr. Ose.

Mr. BURTON. Mr. Ose.

Mr. OSE. Thank you, Mr. Horn. I want to go back to the Pennsylvania—PJM, Pennsylvania-Jersey Market situation. I just want to

make sure I understand that. Mr. Stout, based on your comments,

I am inclined to believe that people in the energy business in that

marketplace calculate their base, hedge their exposures for a vast,

vast percentage of the entire load that they have to provide. Am

I correct?

Mr. STOUT. On average, that is correct. On specific company

basis, that may not be correct.

Mr. OSE. OK. From your experience relative to the average company basis, do they hedge 95 percent on long-term?

Mr. STOUT. The actual percentage is 85 percent, as published in

the PJM annual report last year.

Mr. OSE. OK. Now, when you look in the Wall Street Journal on

a daily basis, there is a chart in there that says ‘‘PJM,’’ ‘‘Four Corners,’’ ‘‘California-Oregon Border,’’ etc. And it shows prices for firm

and non-firm, peak and off-peak power, electricity. I think the acVerDate 11-MAY-2000 10:55 Apr 01, 2002 Jkt 000000 PO 00000 Frm 00524 Fmt 6601 Sfmt 6601 C:\DOCS\76761.TXT HGOVREF1 PsN: HGOVREF1
517

tual compilation of data is either 3 or 4 days, the day immediately

past, and the preceding 2 or 3 days.

And it always seems to me, when I look in or at that chart, that

the price at COB is far higher than say at Mead or Four Corners

or PJM. And I have never—why is that? Is that a recent development?

Mr. STOUT. I would have to say that is more of a recent development. And the primary reason is, if you look at what fuel is on the

margin in PJM this time of year, it is not natural gas, it is typically coal. They are down low enough in load that they are able to

minimize their use of natural gas as the marginal fuel.

But the problem you have in the West right now is, because of

the low hydro battery I mentioned earlier, gas is on the margin.

Gas prices are up, and the cost of generating with natural gas is

causing those higher prices there.

Mr. OSE. Would you agree with that, Mr. Malcolm?

Mr. MALCOLM. Yes.

Mr. OSE. Is there a premium that is attached in the market to

power being sold into California? In other words, is there a risk

premium that is attached to that power?

Mr. MALCOLM. There is certainly a credit premium——

Mr. OSE. OK, a credit premium.

Mr. MALCOLM [continuing]. Assigned to sales coming to California. And for good reason.

Mr. STOUT. But there is also an opposite effect. And I guess I

would comment that if I looked at prices in California for power for

next summer, compared them with prices around California, California is actually lower. The reason that occurs is because California has put in place, through their ISO, some rules that allow them

to confiscate exported power whenever California runs short.

That puts anyone who is in California, who is selling power in

the market, at risk for firm contracts that they enter into with anyone in Nevada or Arizona. And as a result, you have to add an additional risk premium when you sell power to someone outside of

California, because of the risk that California will confiscate that

power.

Mr. OSE. Because of the interruptible nature?

Mr. STOUT. It is not interruptible. We are doing firm contracts,

but their rules say that if they need the power in California, they

can interrupt it and keep the power in California.

Mr. BURTON. Would the gentleman yield real briefly?

Mr. OSE. It is Mr. Horn’s, but I would be happy to.

Mr. BURTON. Mr. Horn, would you—OK. We will get you some

more time, if you would yield to me a little bit.

Mr. HORN. That will be fine.

Mr. BURTON. You are talking about the electricity; right?

Mr. STOUT. That is right.

Mr. BURTON. What about gas? Can they confiscate gas, too?

Mr. STOUT. I am not aware of anything in that regard.

Mr. BURTON. I was just wondering about the gas that is going

to Mexico.

Mr. STOUT. Well, this is in the California ISO rules.

Mr. BURTON. That is a power generating source. I mean——

518

Mr. MADDEN. Mr. Chairman, they cannot confiscate interstate

gas supplies.

Mr. BURTON. What is the difference between that and the electricity he was talking about?

Mr. MADDEN. Well, I assume what he is talking about, there is

a tariff provision in the ISO that says in emergency conditions they

will require power that is sold into other areas come back to California.

Mr. BURTON. Well, I understand that. But you cannot generate

power without gas down here, and it is going to Mexico, so what

is the difference? You cutoff generation.

Mr. MADDEN. The difference is that there is a tariff, and the tariff on file is—all I can think of, there is no confiscation of interstate

natural gas supplies.

Mr. BURTON. Well, we ought to look into that. If it applies to

electricity, why would it not apply to gas which produces the electricity?

Mr. OSE. I want to examine this particular issue. And I appreciate the information on the PJM market. Are there turbines or

generating capacity in California that is offline for lack of natural

gas, to anybody’s knowledge?

Mr. JOHN. Not to my knowledge.

Mr. STOUT. Not to mine.

Mr. MALCOLM. Not to mine.

Mr. JOHN. And that is why I think this issue with Mexico is a

red herring.

Mr. OSE. Well, I think it is a fair question. I mean, I think your

point is a fair point to make.

Mr. MADDEN. Mr. Chairman, there is about 7.1 BCF of interstate

gas supplies, gas supplies coming into the California market every

day. Every single day. There are constraint points in various parts

of southern California where they cannot take away the gas supplies that come into California.

Mr. OSE. OK.

Mr. MADDEN. So, and that is something that I believe the CEC

now is looking with the other utilities in terms of identifying what

infrastructure in the State needs to be added in order to take more

gas supplies away from the pipelines.

Mr. OSE. We are still going to look at it. But I think your point

is fairly made. So I appreciate that.

Mr. JOHN. And the only thing I would add to what Mr. Madden

just said is, one of the filings we recently made to the FERC was

to take a regional approach, looking at all the new interstate pipeline capacity coming into California, and make sure it meshes with

the intrastate capacity. And I know they are looking at that.

Mr. STOUT. Congressman, if I could add a very important point

to that. It is very easy to take the attitude, let us protect our natural resources. Let us keep it in California. Let us not let it go to

Mexico. But let me remind you, California is also critically dependent on power coming from Canada.

Mr. BURTON. If the gentleman would yield real quickly, let me

just say that Canada does not have a power problem, do they, right

now?

Mr. STOUT. Not that I am aware of.

519

Mr. BURTON. Well, that is the difference. You are talking about

eggs and apples.

Mr. Hunter.

Mr. HUNTER. Thank you, Mr. Burton. Mr. John, let us go back

to this issue. I am glad I brought it up with respect to Mexico.

You testified about a 500 percent increase in the cost of natural

gas, and the fact that is the driver on electricity. In fact, Mr. Malcolm said that you had a standing offer, anybody wants to buy electricity from us, 2 cents a kilowatt hour, which is extremely low,

plus the price of natural gas.

Then we said well, why is natural gas so expensive?

And one of you said well, at the wellhead it is still relatively inexpensive. But because of the constraints on our pipelines coming

into California, it has gone up 400 or 500 percent.

Mr. JOHN. From the Southwest.

Mr. HUNTER. Then we said but some of it is going out to Mexico.

And you then said, in answer to a question, we got plenty. And

what is sent to Mexico does not bother our supply at all. And no

plant is short because of the amount going to Mexico.

Mr. JOHN. That was in response to a question from Congressman

Ose.

Mr. HUNTER. OK, now, reconcile—well, taken holistically, now,

reconcile those statements you made. There is no problem with

supply, and so we should not worry about Mexico. And yet the

problem with supply in California has driven the price up 500 percent.

Mr. JOHN. But it is not the supply, Congressman. It is the cost

of the transportation.

Mr. HUNTER. Well, now, wait a second. But one of you testified

it was not the physical cost of transportation, it was the fact that

there was a shortage of transportation, and there is apparently a

competition for the transportation; that is, for portions of the gas

line. Right?

Mr. JOHN. On the interstate side. In the case of the gas that is

going to Mexico, it is going through the existing distribution systems in California, and there has——

Mr. HUNTER. Well, but if you were not sending that gas to

Mexico—— Mr. JOHN. Yes.

Mr. HUNTER [continuing]. Then you would not have to be—everything that goes to Mexico passes through California from another

State; right? We are not generating much natural gas ourselves;

right?

Mr. JOHN. The gas supply that is coming in from—that is serving

Mexico?

Mr. HUNTER. Do we generate much natural gas from wells in

California?

Mr. JOHN. We produce a fair amount, but not as much as you

are getting from the Southwest.

Mr. HUNTER. OK. If you have got a supply of gas coming to California in the intake lines, we will call them, and you said because

of a constriction in these intake lines we have—prices have gone

up much more than they are at the wellhead, so that is a line problem you have got. Some of that capacity is being taken by the gas

520

that comes into California, and then flows out in this 30-inch line

into Mexico; right? Right?

Mr. JOHN. Go ahead.

Mr. HUNTER. Then why are you saying there is no relationship

between the capacity in those lines? If you did not have the gas

going into Mexico, presumably that volume of gas would not be a

factor in the constriction of the lines coming into California, because you would not be trans-shipping it; is that right?

Mr. JOHN. I am still not following you.

Mr. HUNTER. OK. You got a pipeline coming into California

bringing gas from other States; OK?

Mr. JOHN. I understand that.

Mr. HUNTER. Part of that gas is going through California and

going into Mexico. OK? You stated, or one of the panelists stated

that one reason the price of gas is going up is not because of what

it costs at the wellhead, it is because of the constriction or the lack

of availability of capacity in the lines coming into California.

If part of that capacity is taken, with natural gas that comes

from other States, goes through California and goes out to Mexico,

why would you not alleviate part of that problem and the attendant

price increases if you did not have that volume of gas basically

flowing through? If we were not also flowing through our neighbor’s

gas?

Mr. JOHN. But there are other pipelines that serve California,

other than from the Southwest.

Mr. HUNTER. I understand that.

Mr. JOHN. There are pipelines from Canada, there are pipelines

from the Rocky Mountain region.

Mr. HUNTER. We understand all that.

Mr. JOHN. So you cannot assume that all of the gas that is going

into Mexico is coming from the Southwest.

Mr. HUNTER. No. But you can assume that it is relevant. Because, as you know, as we all know now, the, you know, 5 percent

shortage on supply can mean a doubling of price.

You other gentlemen have any insights on this?

Mr. STOUT. I guess my comment would be there is a direct relationship between supply, demand, balance, and price. The more demand you put on a pipeline, the more likely it is that the cost of

using that pipeline will rise. And I think that is the point you are

alluding to.

Mr. HUNTER. Yeah.

Mr. JOHN. I know that is. All I am trying to say is, do not assume that all of the gas that is coming into Mexico——

Mr. HUNTER. We have not.

Mr. JOHN [continuing]. Is going from the Southwest.

Mr. HUNTER. No, we have not. But it may be relevant.

Mr. JOHN. Maybe.

Mr. MALCOLM. I think some of the points, some of the pipelines

that bring gas into California are constrained. Others are not. And

therefore, there may be some excess gas that could go to Mexico.

Mr. HUNTER. OK. Second question. If you have got a 500 percent

increase in natural gas prices, does that make diesel more attractive? And do we have diesel generational capability we could turn

on either in California, or in other States that moves electricity

521

into California, if diesel remained relatively stable? Is diesel a good

deal right now in terms of cost? Not air quality, but cost.

Mr. STOUT. Unfortunately I do not have any diesel generation, so

I have not done that particular analysis. But there is a breakpoint

where it will become economically efficient to do that. I just do not

know exactly where that breakpoint is.

Mr. MALCOLM. I think for the most part it would be economic

today.

Mr. HUNTER. You think it would be economically feasible now?

Mr. MALCOLM. Yes. Yes.

Mr. HUNTER. So if we had some relaxation on air standards, if

we are in an emergency situation in the summertime, moving some

diesel-fired electricity would be economically feasible?

Mr. MALCOLM. I think it would be. No question that every little

bit would help.

Mr. HUNTER. Just a last question. Do you have more

generational capability you could turn on right now, but for regulations, procedures, laws? If you were having to—if you wanted to

save California in 60 days from what is going to happen in the

summer, and you were told to get every piece of generational capability online, is there anything you would do that you are not doing

now?

Mr. MALCOLM. We may be plagued with Nox restrictions at some

point this summer, that could reduce the amount of megawatts

that we have available.

Mr. HUNTER. That is when you have to stop because you put too

much stuff in the air?

Mr. MALCOLM. That is right. That is right.

Mr. HUNTER. OK. Mr. Stout.

Mr. STOUT. That is absolutely correct for me as well.

Mr. HUNTER. OK. OK, thank you, Mr. Chairman.

Mr. BURTON. Thank you. I guess it comes back to me. I think we

have covered that.

Mr. MALCOLM. Mr. Chairman, could I have 15 seconds——

Mr. BURTON. Sure.

Mr. MALCOLM [continuing]. On the show cause order, which we

sort of went through very quickly at the beginning.

Mr. BURTON. Sure. Sure.

Mr. MALCOLM. I would just want to say that we feel very strongly that a full and fair investigation will yield the conclusion that

we did no wrongdoing, that we did not break any rules. And to the

extent that information is provided to the committee, we want to

have the opportunity to present our side of that story. The show

cause order is very one-sided and very biased.

Mr. BURTON. We will be very happy to. First thing we need is,

we need to get the information we have requested from you and

FERC. We get all that information, and we will have our legal staff

and everybody take a look at it. And then if you would like to come

to Washington and appear and make a case, we will be happy to

talk to you. We are not in the decisionmaking process in that area.

We are looking at legislative remedies to help with the problem.

But if you want to do that, we could probably talk to FERC and

you and, from a congressional level, take a hard look at it.

Mr. MALCOLM. Thank you.

522

Mr. BURTON. To Reliant and Williams, what is the difference between the profits made by the independent generators compared

with the municipal and Federal power sellers such as the Los Angeles Department of Water and Power and Bonneville Power Administration? Did you understand the question?

Mr. MALCOLM. You asked what the difference is?

Mr. BURTON. What is the difference between the profits made by

the independent generators compared with the municipal and Federal power sellers such as the Los Angeles Department of Water

and Power and Bonneville Power Administration?

Mr. STOUT. Mr. Chairman, I would love to know the answer to

that question, myself. But, honestly, there is no way for me to have

access to their profit numbers.

Mr. BURTON. So we would have to get information from you and

them?

Mr. STOUT. That is correct.

Mr. BURTON. And then compare them. Did you hear that? OK,

we need to get that. We will request your information and we will

get that. I am way past that already. Do not worry about it. I am

probably up to about 1,100.

To Reliant, Williams, or Sempra, the utilities—I was not suggesting I was going to have to subpoena these things. I think they are

going to volunteer those information, are you not?

Mr. MALCOLM. That is correct.

Mr. BURTON. Thank you. But if necessary, we will do what we

have to do.

The utilities, in order to receive the benefit of the Cal ISO price

cap, often scheduled their power purchase in the spot market instead of the PX. How did this affect the price of electricity last

year? You want me to repeat that?

Mr. STOUT. Well, I guess my comment on that is that they were

almost forced to buy all of theirs in the spot market. So that question sounds a little strange to me.

Mr. JOHN. That is my understanding. If that is the question, the

utilities were required to buy out of the PX, and the PX was basically the spot market at that time.

Mr. MALCOLM. And so, since they were not able to take advantage of the forward market, long-term sales, then it had the impact

of increasing the cost of power.

Mr. BURTON. We will submit these questions to you a little more

succinctly in writing. And if you could respond to those, we would

appreciate that.

Why did generators continue to make large profits as the price

caps were lowered last summer? Any one of you.

Mr. STOUT. Well, I am not sure that the statement is accurate.

I do not personally know——

Mr. BURTON. Did you not make large profits last summer.

Mr. STOUT. We made profits last summer. I do not know the relationship between the profits that were being made versus the price

cap. I have never gone back and looked at that.

Mr. BURTON. Well, as the price caps were going down——

Mr. STOUT. Part of the problem—part of the reason that generators in California probably made more money when price caps were

lowered is because people outside of California were less likely to

523

sell into California, which increased the volume that generators in

California sold. Our profits are directly related to the amount we

sell. So as volume goes up, the order of profits should go up as well.

Mr. BURTON. So you are saying your profits were outside the

State?

Mr. STOUT. No. What I am saying is, people from outside the

State, when given a choice between selling into a price capped market, like California, and other markets which were not price

capped, probably chose to keep their power and sell it somewhere

else.

Mr. BURTON. I can understand that. That makes sense. But your

profit margin continued to rise, did it not?

Mr. STOUT. Once again, I do not know that is an accurate statement, because I do not know how our profit margins compared

month by month as the price cap changed. I have never looked at

that.

Mr. BURTON. Can we get that information?

Mr. STOUT. I am not sure if we have that, but I will take a look

and see.

Mr. BURTON. Well, it should be a simple accounting—you should

have records, I would think, showing your profit margin month by

month during those times.

Mr. STOUT. Well, I agree to go back and check and see what we

can put together for you on that.

Mr. BURTON. Would you do that? Would you do that as well?

Mr. MALCOLM. Yes, sir.

Mr. BURTON. Thank you, sir.

Why has FERC only focused on Stage 3 days when considering

refunds?

Mr. MADDEN. The Commission, in its order, believed that the

Stage 3 was the appropriate time when supply and demand would

be out of imbalance, and that it was the time that the FERC

should intervene in terms of looking at the prices.

Mr. BURTON. But if you focus solely on the Stage 3 emergency

deals, FERC had eliminated more than 81 percent, and according

to these records, 57,151 of the transactions above the $150 were—

which were, what, in January? In January.

Mr. MADDEN. Mr. Chairman, I believe that came from Commissioner Massey’s dissent. But let me say the Commission staff

looked at the 70,000 transactions that were filed in January, and

determined to look at a proxy as to what price is necessary to

mimic the market and sell in at a variable price.

What we did, essentially, was to look at the price of gas, the Nox,

and the Nox rate. And the price of gas for January was 12–50 on

the spot. Your Nox costs were 22–50, I believe. And we gave 2

pounds for the average CT unit, which would use that, plus the

variable cost of $2. And we used a CT unit of 18,000 heat rate unit.

And that was based upon the generating facilities that the three

IOUs owned.

Mr. BURTON. Did you get all that? OK.

Mr. Filner.

Mr. FILNER. Thank you, Mr. Chairman.

Mr. Madden, the ISO, I think in filings to you, estimated or al- leged or said that there was a $61⁄2 billion overcharge by the wholeVerDate 11-MAY-2000 10:55 Apr 01, 2002 Jkt 000000 PO 00000 Frm 00531 Fmt 6601 Sfmt 6601 C:\DOCS\76761.TXT HGOVREF1 PsN: HGOVREF1
524

salers into the market. And you have issued several findings which

found a couple hundred million or $60 million at one point, some

other figure less. And why is there such a great difference between

your findings of overcharges and ISO’s?

Mr. MADDEN. Well, Congressman Filner, I am glad you raised

that. Because if you were here for the past 2 days of the testifying

and the hearing, we now hear that the ISO believes that the $6.7

number that it gave was inappropriate, and that the real number,

at most, is $1.3 billion.

Mr. FILNER. When did they say this?

Mr. MADDEN. They have a filing that came into the committee. They now recognize for the first time that figure represents $2.7

billion associated with bilateral contracts, many contracts of which

the CPUC reviewed from entities. It also included approximately

$900 million associated with non-jurisdictional entities such as L.A.

Water and Power.

Mr. FILNER. So they are down to $1.3 billion or whatever?

Mr. MADDEN. They have come down now to $1.3 billion, at most.

And we have asked them for further data, which we asked them

last week and they did not provide it to us, as to—they account for

all the hours in all the days, for the most part. Nor have they told

us what the gas prices are and what the Nox credits are.

More importantly, if you look at it, the $1.3 includes also October

through December. We have not looked at that period yet at all.

Mr. FILNER. All right.

Mr. MADDEN. And on rehearing, we do have—— Mr. FILNER. If we pass my legislation, you will have the authority to look before October, back to June.

In your findings, when you looked at the overcharges, you only

counted during the period of Stage 3 alerts, as I remember it.

Mr. MADDEN. That is what the committee order said.

Mr. FILNER. That seems like a strange thing, because it is at that

moment that you would find that there is real competition, I mean,

when there is so little left. Why did you not look at other times

when price spikes occurred for unaccountable reasons all through

the——

Mr. MADDEN. The Commission, in its order, believed that the

Stage 3 was appropriate. What we now have to do—it is on rehearing. We discussed the rehearings in April 8th, or this Monday,

rather. And one of the issues that you have raised in terms of why

not look at a different stage—— Mr. FILNER. What price did you come up with, then?

Mr. MADDEN [continuing]. And a different stage is on rehearing.

And I cannot address that because it is a contested case.

Mr. FILNER. OK.

Mr. BURTON. Was it because you had a manpower problem that

you did not go beyond Stage 3?

Mr. MADDEN. Oh, no. No. No, Mr. Chairman.

Mr. BURTON. It was not that reason?

Mr. MADDEN. No. We developed on a methodology, and then applied that methodology to the transactions.

Mr. FILNER. Just one final comment, Mr. Chairman. And, Mr.

Stout, I appreciate all the charts and who was bidding and when.

It reminded me of—I have to quote my friend, Mr. Hunter, again.

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He has the best quotes. He said what that bidding represents, really, is if you came into a hospital for a life-and-death operation that

was scheduled at a certain time, and 5 minutes before the operation—I am getting this right; right, Duncan?

Mr. HUNTER. Yes.

Mr. FILNER. The administrator of the hospital came in and

asked: ‘‘what were you willing to pay for the oxygen?’’ That is, you

control a commodity at the moment you need it. It has nothing to

do with anything but control at a time that is necessary. And you

could charge anything you please at that moment.

I think that is what those bids represent, more than anything.

Not that somebody was ready to pay a good price. They needed the

electricity at that moment. You controlled it.

Mr. STOUT. If I might respond to that. We still have an offer on

the table for forward contracts at 2 cents a kilowatt hour. That is

a competitive bid. It is out there.

Mr. FILNER. I will have to look at that. Of course, you guys also

control the cost of the natural gas. I mean, the reconciliation that

you asked for earlier, Mr. Hunter, how can you reconcile this and

that. Because there is a cartel that controls the transportation. I

mean, I think the cartel is even smaller than that controls the energy production. So they could charge whatever they please for the

natural gas stuff. So we are just moving the cartel from one place

to another.

One final question, if I may. You have heard stories about people

going out of business in this area. You have heard stories, schools

that cannot educate because they are paying these costs, libraries

that cannot buy books because they are paying these costs. I have

got YMCAs that have closed down because they cannot handle the

energy cost.

However you want to look at it, you guys are doing well. I mean,

I look at the Fortune 500, I look at your profit statements. Do you

feel any responsibility for a situation in which you are making literally hundreds of millions of dollars, and people are bankrupt,

people cannot get educated, people cannot get into their YMCA,

people on fixed income making life-and-death decisions? Do you

have any responsibility for that?

Mr. STOUT. Well, if you are using the word responsibility in a

negative connotation, the answer is no, because the profits that we

make in this market are rolled back into this market in terms of

solutions. We are investing millions of dollars in equipment at our

power plants that will reduce emissions from those power plants.

We are investing hundreds of millions of dollars in new supply that

will bring power to California, that will help to supply the electricity for those hospitals that Mr. Hunter is worried about, and for

the elderly citizens who need to have that power in order to have

their refrigerator running.

Mr. FILNER. Yeah, but meanwhile you have killed off their business and you have killed off their families, so it is not going to help

them too much.

Mr. STOUT. Well, it is certainly not our intent to see that sort of

result occur. We hope that the policymakers in California can address that concern in a way that precludes those customers from

being harmed. But by the same token, the solution to this market

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is supply. You have got to get the supply and demand back in balance. And rather than blame suppliers for the problem, we are here

to be part of the solution, and we want to have the opportunity to

provide that solution.

Mr. FILNER. We have just today one of your fellow producers,

Dynegy, told SDG&E that they would close down their operated

plants because of a payment problem, a dispute over the payment.

There is not a shortage of capacity, it is a question of who controls

the ability to give it out. You have Duke Energy in my district had

its biggest generator closed down during our Stage 3 alerts.

You keep yelling supply. I will show you example after example

the supply is there, and because you guys chose not to use that

supply, it put us into an incredibly difficult situation. And you can

yell supply all you want, but it is your control that is the problem.

Mr. BURTON. Mr. Horn. Well, you want to go—let me take 2 minutes, real quickly, and then we will yield to Mr. Horn.

Mr. HORN. Chairman, you go ahead.

Mr. BURTON. Thank you. We are not here to beat up on you fellows, although it may appear as though we are being a little aggressive. And we understand that if you have outstanding debts to

you, you have got to answer to your stockholders and that sort of

thing. And so if they are not paying, it goes down the line.

But this is an extremely difficult situation, and we really need

to get as much information and answers as possible, so that if

there is a legislative remedy that we can assist California with in

Washington, or if we can make some overtures to the EPA to relax

some standards so we can get some other forms of generation online to help ease the problem, then we want to do that. But we

really need information for us to make some kind of informed decision, and a lot of us are neophytes as far as understanding all the

intricacies of the electricity-producing area.

Let me ask FERC this. Why has the floating soft cap changed

every month? In December it was $150, in January it was $273,

in February it was the Commission that said it would determine

a new screening price for each month until the $150 soft cap expired at the end of April. Can you explain that?

Mr. MADDEN. Mr. Chairman, the ISO came in with a filing I believe sometime in 1999, which we approved, to establish a cap.

First it was $750, then it was $500, then $250. Up until December

8th there was a hard cap, $250. At which point the ISO made a

filing, emergency filing that was discussed yesterday, and to

change that $250 cap to a $250 soft cap in order to attract more

energy.

The Commission, in its December 15th order, then said starting

January 1, from an initial screening standpoint, we will establish

a $150 breakpoint, upon which we will look at all those transactions. And those are the 70,000 transactions I talked about that

the Commission staff looked at to establish the price. And the

$273, as I discussed, is based upon an 18,000 heat rate unit.

You multiply the 18,000 times the 12–50 gas, and you come up

with the $273 if you include the Nox prices. And that changes each

month, depending what the value of the spot is.

527

Mr. BURTON. I understand. OK. Why did FERC decide to only

seek refunds on electricity sold in excess of $430 per megawatt

hour during the Stage 3 alerts in February?

Mr. MADDEN. We used the same methodology as we applied in

January, so you had higher gas prices on average for February, Nox

went up substantially from $22 to——

Mr. BURTON. So the soft cap went up to $430 because of the formula?

Mr. MADDEN. That is right. The methodology. You just input it.

Mr. BURTON. OK. I got it.

Mr. Hunter, go ahead.

Mr. HUNTER. Thank you, Mr. Chairman. I think it has been a

good, informative session.

I think one of the most instructive statements for us, as Californians and San Diegans, was the fact that SDG&E is going to Mexico to build a plant that will transport American—that will receive

American transported gas into Mexico, and then presumably export

some of the created energy or electricity back into California, because doing all of that is easier than building the plant in California in the first place. Is that the essence of what you said, Mr.

John?

Mr. JOHN. What I said, and you are close to it, is for a lot of suppliers these days it is easier to build power plants outside of California than it is within the State.

Mr. HUNTER. OK. I think there is a lesson for all of us here, and

I want to go back to the solution that we need to come to, because

again we are 60 days away from what could be a disastrous summer.

But we are also looking at a situation where literally thousands

of prospective high wage employers who would come and locate in

our community, are going to ask in the boardroom to their energy

analyst, what is the picture for electricity in San Diego County,

CA?

And what they are going to get, at best, probably is, it is uncertain. And that term uncertain will mean that whoever is competing

with us for that location of that prized employer for our citizens

will probably win, and that company will go elsewhere. Besides

driving a number—in my estimation, a number of American or Californian companies are going to be probably moving out of State if

things do not get better quickly.

So it is clear that we could build generational capability in California. We are not talking high tech. You make electricity by running—by flowing natural gas through a generator. And most of the

big new generators that we make now, like the LM–6000, you bring

in and you bolt down on a concrete pad. That is not too complex.

And you run pipelines. We have been running pipelines for a long

time.

And yet, because of our own laws, regulations, bureaucracy, it

takes literally years, roughly half the time it took us to win World

War II, to get a permit for a power plant in California.

My question to all of you gentlemen is—and this is kind of a San

Diego question—do you have right now in your inventory, Mr. Malcolm and Mr. Stout, do you folks have any 15 to 30 to 50-megawatt

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generators that you can move in quickly and operate, presuming

they are permitted? Do you maintain that kind of inventory?

Mr. MALCOLM. Just recently we had ongoing discussions with

parties in California to site new generation, and unfortunately

were unable to get the kinds of commitments that we needed in

terms of siting, in terms of permitting, that would have allowed us

to have new generation on stream by the end of July.

Mr. HUNTER. But you actually could move—have new generation

on stream by the end of July if you had permitting and if you had

financial backing for those plants?

Mr. MALCOLM. That is correct. We scrambled throughout the

country and throughout the world trying to find generation units

that we could bring in, and had located some, and very clearly were

trying to bring additional units in for the summer. Were unable to

do so.

Mr. HUNTER. Would you work with San Diego if we could—if we

can——

Mr. MALCOLM. Most assuredly.

Mr. HUNTER [continuing]. If we would be willing to work with

you on this project?

Mr. MALCOLM. Sure.

Mr. HUNTER. Mr. Stout.

Mr. STOUT. We had a couple of units earlier this year. In fact,

we had nearly 100 megawatts of gas-serving capacity we were trying to locate in California. We approached Southern California Edison. We already had a site. Unfortunately they said their transmission grid was not sufficient to support it. So we were unable to

place those. Now it is a little too late.

Mr. BURTON. We will be back to you in a minute.

Ms. Davis.

Ms. DAVIS. Thank you. Just to followup for 1 second, the transmission grid was not supportive. But is there anything in the legislation—there was legislation passed last fall—that precludes you

from doing that? Are there any obstacles in that area for you to locate capacity?

Mr. STOUT. I am not familiar with which legislation you are referring to that was passed last fall. Could you clarify that for me?

Ms. DAVIS. Well, there was legislation that made it easier,

streamlined some of the processes. And I am just wondering whether—was that helpful? I think, Mr. Madden, you signaled earlier

that—or perhaps Mr. John, that it is easier now. Are there additional obstacles that are precluding you from doing something that

you would like to do?

Mr. STOUT. I think the most significant obstacle at this point is

what I call political and regulatory uncertainty in California. We

do not know what this market is going to look like. There are

threats of confiscation of power plants. It would be very difficult,

I think, for us to go to our boardroom or go to our bankers and request that they loan us hundreds of millions of dollars to invest in

California until we have a clear strategic plan on how this market

is going to evolve from this point forward.

Ms. DAVIS. One of the things we hear a lot about is municipal

power. But I think, you know, you need to understand that one of

the reasons that cities are talking about municipal power is beVerDate 11-MAY-2000 10:55 Apr 01, 2002 Jkt 000000 PO 00000 Frm 00536 Fmt 6601 Sfmt 6601 C:\DOCS\76761.TXT HGOVREF1 PsN: HGOVREF1
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cause they feel so ripped off. And so it is a shared responsibility

that we all have, I think, to do something about this.

What is your sense of cities developing their own ability to regulate their own power?

Mr. MADDEN. Congresswoman, are you talking about the transmission facilities or generation, now?

Ms. DAVIS. Well, I think here in San Diego they are talking

about transmission.

Mr. MADDEN. Well, if we are talking about the—— Ms. DAVIS. I am sorry. Generation.

Mr. MADDEN. Oh, generation.

Ms. DAVIS. Right.

Mr. MADDEN. In terms of San Diego itself becoming a muni, for

example?

Ms. DAVIS. Yes.

Mr. MADDEN. I think that it should be under consideration in

terms of where San Diegans think you will get the most bang for

their buck and their value in terms of developing their own generation.

Mr. JOHN. From our standpoint, we have been working with the

county and the city. If they want to build their own generation,

that is fine with us. And we are also working with independent

generators, to try and hook them up to our system as best we can.

We have been working with Congressman Hunter’s office on issues

like that. Especially with respect to the military. We would love to

see some new generation built on some of the military bases, if it

could get done.

Ms. DAVIS. OK. Well, one final question, if I could go back for a

moment. We talked about—and I am sure I appreciate you all have

really hung in here, and we appreciate that very much. And my

colleagues, as well, have certainly hung in here. I appreciate that.

The issue of the forward contracts came up early on. And I spoke

to Mr. Conlon about that. He suggested that in fact there was real

mistrust going on quite some time ago, and that contributed to the

lack of forward thinking, perhaps, we might suggest. Is one of the

problems that—and maybe, Mr. John, you can answer this. What

do you think it would have taken for those forward contracts to be

developed in concert with the PUC here?

Mr. JOHN. OK.

Ms. DAVIS. It is my understanding that there was a need for a

reasonableness clause that was rejected. And correct me if I am

wrong on that. What was wrong, what was missing, and how can

we improve that? How can we move forward from here?

Mr. JOHN. OK, the issue was that once the Commission started

to give us some leeway to deal in the bilateral market, we went to

them and said, that is fine. But what we need from you are some

up-front reasonableness review criteria, so that if we enter into

contracts, we are not going to get a hindsight review a couple of

years later and you are going to tell us you paid too much for the

power.

And to this day we do not have those standards. If we had—and

in some cases we actually brought proposals to the Commission

that were negotiated with some of the generators and suppliers,

and we tried to say is this OK or is it not? And we could not get

530

a response. So I am not sure it is as much mistrust as it is frustration, because the regulators have not been able to keep pace with

the market.

Mr. MADDEN. Congresswoman, if I may, California was unlike

many, many other States when they subsequently deregulated the

market. And I think Chairman Ose mentioned Pennsylvania. The

utilities were not required to divest, as they were in California, all

of their portfolio. And when they were, or they had to give up

something, they entered into long-term contracts.

You do not have 85, 90 percent of your needs being sold into and

bought out of the spot market. It does not make sense. You should

have a mixed portfolio of spot, short, mid, and long. That is the

best way. And you should also have financial and risk instruments.

And a lot of State regulatory agencies recognize the importance of

that.

One part of our order, in the December 15th order, we told the

State—we told the utilities, as well—that with respect to the generation you have left, the State can do what it wants with respect

to the cost, but we want you out of the spot market, and we wanted

approximately 95 percent of that remaining generation to be done

forward, so that the realtime market would only consist of 5 percent. And so that even if it was volatile at certain points, it would

be masked because of the certainty associated with the contract

prices you got on the forward market.

Ms. DAVIS. I guess my frustration is, with your expertise and the

expertise of the FERC, seeing that, and I am assuming you saw

that from the beginning in California, it seems as if there was a

point at which you could have intervened, acknowledging that the

likelihood of a fair and reasonable market would not occur.

Mr. MADDEN. Well, Mr. Chairman—— Ms. DAVIS. Could you have done that earlier?

Mr. MADDEN. I assumed—and I was not in the position I was

earlier, so I assume, though, the Commission could have rejected

the ISO’s filings. But the history of it indicates there was great deference because California was the first one to unbundle, and they

worked at it very hard.

Hindsight is 20/20. But even as late as—or as of 2000 they

should have changed their position. They should have allowed the

utilities to have a higher level portfolio, and not subject them to

prudence reviews if the market does not work out.

Ms. DAVIS. Thank you, Mr.——

Mr. BURTON. The gentlelady’s time has expired.

Mr. Ose.

Mr. OSE. Thank you, Mr. Chairman. I do want to share with

Congresswoman Davis that Southern California Edison, PG&E,

and now Sempra have all said that they do not have a standard

by which they could have a safe harbor on long-term contracts. And

that is a critical issue here. The testimony we received in Sacramento on Tuesday and on Wednesday was that Southern California Edison and PG&E and I believe Sempra, also—— Mr. JOHN. SDG&E.

Mr. OSE [continuing]. San Diego Gas was into PUC late last

summer and early last fall asking for those standards to be finalized, and they have yet to receive finalized standards. It is a huge

531

problem, because it creates such uncertainty. And I appreciate you

asking that question.

As far as Mr. Stout and Mr. Malcolm, in terms of either Williams

or Reliant, are either of your companies contracted with the State

of California, through the Governor’s office, on any of these contracts that we cannot seem to get any information about?

Mr. MALCOLM. Yes, we have entered into a 10-year, fixed price,

1,400 megawatt contract.

Mr. OSE. How about you, Mr. Stout?

Mr. STOUT. Reliant had a short—I think it was around a 30-day

contract. That has since expired. We do not have any long-term

contract.

Mr. OSE. The reason I ask that question is that ultimately the

question of transaction relating to the transmission lines, as I understand it, falls under the jurisdiction of the FERC.

Mr. MADDEN. That is correct.

Mr. OSE. And we may well need to understand the financial implications of these long-term contracts that the Governor’s office

has arranged, but for which we cannot get any information. Would

you be willing to, under seal, provide us with a copy of your contract so that we can at least have some information as it relates

to that?

Mr. MALCOLM. I am sure something can be arranged.

Mr. OSE. I appreciate your offer, because—and I will say that the

others that we have asked that have also consented to provide us

that information, and I am appreciative of it.

One final point, Mr. Chairman. Mr. John’s company has technology that is relatively old. But, well, excuse me. Your generating

capacity before you sold it was relatively dated?

Mr. JOHN. Yes.

Mr. OSE. Mr. Malcolm’s company and Mr. Stout’s company are

forced, just by economics, to produce the power at the lowest possible price, and thereby generating the returns that their capital

partners and the like will want. And the interesting thing about

that is that in non-attainment areas like the Sacramento Valley

and the San Joaquin Valley and elsewhere across the country, they

can bring to the market power. In other words, they can convert

natural gas to electricity at up to 50 percent more efficiently using

new technology than old, at a 25 to 50 percent reduction in emissions. Whether it be nitrous oxide or sulfur dioxide or what have

you. And the issue that we need to figure out is how to help increase supply in such a manner that it is positive for the environment. These are things that we can do.

Now, Duncan cited the issue of regulatory burden being one of

the factors pushing the construction of these plants into Mexico. I

am curious whether we can work with FERC on such a manner

where some improvement of conversion or some decrease in emission, the Federal Government can give the opt-out for a company

to move ahead in a regulatory environment. I think this is absolutely a huge opportunity for us. And I hope that as we contemplate the information we have received over the past 3-days

hearing from all the witnesses, that we are able to take that and

put it into legislation that will make something happen, and relieve

the supply crisis that we have here. Thank you, Mr. Chairman.

532

Mr. HUNTER. Doug, would you yield for 1 second on that?

Mr. BURTON. We are going to you next. But we certainly will try,

and that is the whole purpose of all this.

Mr. Hunter.

Mr. HUNTER. Yeah, thank you, Mr. Chairman. Doug, I think you

have pointed out a path that would be a very wise path for us to

follow. Because what we have now is a situation, it is like buying

a car, and you are told you buy the technology. If you want to buy

the earliest technology you possibly can have, in the year 2000 the

newest car you can have is a 1990. And the reason you cannot have

a 1995 or a 1996 or a 1999 or a 2000 model is because it takes you

so long to get that online, so when you get something online, almost by definition, somewhat analogous to our military systems, it

would take us a long time to develop. You do not have the stateof-the-art.

And so, Doug, it would seem to me your point or your recommendation that, in exchange for eliminating this 18-month permitting time, if you promise and you commit to the regulatory

agency that you are going to use the highest technology available—

in fact, you may even get that down to where you specify models

and types of equipment—and the bureaucracy can look at that and

say that is going to put 50 percent less emissions into the field,

into the air. Is it in our interest, as a government, to delay the new

stuff, and thereby guarantee we are going to have the old model

continuing to operate for the next 5 years? Or is it in our interest

to go to a 1-month permitting time, and thereby get the new model

into the field, help the environment at the same time we are getting new stuff online? Now, does that make sense to you guys?

Mr. MADDEN. Well, it makes sense to me to get the dirtier plants

off, and get the more efficient steam, CT plants in. And that is

what we mentioned in our March 14th order.

You have got to send the right price signals for that to be accomplished. And, you know, the regulatory prohibitions, in terms of the

timing, I think really need to be changed dramatically, and they

have to come down. It does not make sense when everyone wants

a site outside of California. It does not make sense.

Mr. JOHN. The only thing I would add is, we have talked a lot

today about generation, appropriately. We have talked about gas

transmission. But the same issue applies to electric transmission.

And you have to have electricity transmission either upgraded or

built in order to hook into some of these generation facilities. And

it is harder to build transmission, especially in California, than it

is generation.

Mr. HUNTER. Is that right?

Mr. JOHN. Yes.

Mr. HUNTER. Mr. John, just one point on that. I am trying to go

back to getting through the summer again. You folks have substations around San Diego County, obviously.

Mr. JOHN. Yes.

Mr. HUNTER. It looks to me like a substation, if you are going

to try to have some distributive generation capability, the best

place to have that is at a substation, because you obviously have

got your fuel there and you have got your line there; right? Is there

533

a lot of capacity at the substations to put in an extra 50

megawatts, 10 megawatts, 20 megawatts?

Mr. JOHN. I do not know the actual amount, but I do know that

the people over at SDG&E have been working with certain developers on—but I do not have the specifics. I can get that for you.

Mr. HUNTER. OK. Thank you. And I want to thank everybody

here, Mr. Chairman, for their testimony. And, Mr. John, thanks to

you folks for working with Bob Simmons, who is the president of

the Coalition for Electricity Independence. I think that it is a

bunch of businesses trying to get the answer here and get stuff online. Thank you, Mr. Chairman.

Mr. BURTON. I think Mr. Filner has one last question.

Mr. FILNER. Mr. Malcolm, Mr. Stout, you have put yourselves in

this position and I thank you. I mean, you had to take a lot from

us, and we appreciate your being here and answering our questions.

Mr. John, we heard an offer for 2 cents plus the price of natural

gas. There must be something wrong with that offer.

Mr. JOHN. And last year we heard 5 cents. Again, everybody— it has either been made in the newspapers or in congressional

hearings. And the problem is, when we then sit down and try and

have discussions with the generators, it is almost like a bait-andswitch. You know, all I can tell you is in previous discussions we

have had with certain generators, they have said one thing in public; and then when we sat down to negotiate, new bells and whistles get added and the 2 cents becomes 10 cents or 12 cents.

Mr. BURTON. Let me just say that if some kind of an overture

is made on the 2 cent issue and it does materialize, give me a call

and we will have everybody come to Washington and talk about it.

And we will just ask you to come out. And, I mean, if this offer that

was made today is a valid offer, and you take him up on it, and

it does not work out, our committee has oversight over the entire

Federal Government, which has ancillary responsibility for what is

going on here through Federal agencies. We will be happy to have

people come out there and we will discuss it in an open forum.

Let me just say we have some more questions for the record, but

I do not want to keep you people here overnight. So if you do not

mind, we would like to submit some questions to you for the record,

and if you can have your staffs or you answer those questions and

get them back to us, along with the other information which we

have asked for, we sure would appreciate it. And if you get that

information back to us that we ask for in a timely way, then I

think that will probably conclude what we have to do out here in

California.

And with that, if there is no more questions, thank you for being

here. We appreciate it. We stand adjourned. Thank you.

[Whereupon, the committee was adjourned at 3:09 p.m.]

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Æ