```

[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]

                    ELECTRICITY MARKETS: CALIFORNIA

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

                                HEARINGS

                               before the

                 SUBCOMMITTEE ON ENERGY AND AIR QUALITY

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                      MARCH 20 and MARCH 22, 2001

                               __________

                            Serial No. 107-6

                               __________

       Printed for the use of the Committee on Energy and Commerce

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

                               __________

                   U.S. GOVERNMENT PRINTING OFFICE
71-504                     WASHINGTON : 2001

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

                    COMMITTEE ON ENERGY AND COMMERCE

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida           JOHN D. DINGELL, Michigan
JOE BARTON, Texas                    HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio                RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania     EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma              BART GORDON, Tennessee
RICHARD BURR, North Carolina         PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa                    ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia             BART STUPAK, Michigan
BARBARA CUBIN, Wyoming               ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois               TOM SAWYER, Ohio
HEATHER WILSON, New Mexico           ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona             GENE GREEN, Texas
CHARLES ``CHIP'' PICKERING,          KAREN McCARTHY, Missouri
Mississippi                          TED STRICKLAND, Ohio
VITO FOSSELLA, New York              DIANA DeGETTE, Colorado
ROY BLUNT, Missouri                  THOMAS M. BARRETT, Wisconsin
TOM DAVIS, Virginia                  BILL LUTHER, Minnesota
ED BRYANT, Tennessee                 LOIS CAPPS, California
ROBERT L. EHRLICH, Jr., Maryland     MICHAEL F. DOYLE, Pennsylvania
STEVE BUYER, Indiana                 CHRISTOPHER JOHN, Louisiana
GEORGE RADANOVICH, California        JANE HARMAN, California
CHARLES F. BASS, New Hampshire
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska

                  David V. Marventano, Staff Director

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

                 Subcommittee on Energy and Air Quality

                      JOE BARTON, Texas, Chairman

CHRISTOPHER COX, California          RICK BOUCHER, Virginia
STEVE LARGENT, Oklahoma              RALPH M. HALL, Texas
  Vice Chairman                      TOM SAWYER, Ohio
RICHARD BURR, North Carolina         ALBERT R. WYNN, Maryland
ED WHITFIELD, Kentucky               MICHAEL F. DOYLE, Pennsylvania
GREG GANSKE, Iowa                    CHRISTOPHER JOHN, Louisiana
CHARLIE NORWOOD, Georgia             HENRY A. WAXMAN, California
JOHN SHIMKUS, Illinois               EDWARD J. MARKEY, Massachusetts
HEATHER WILSON, New Mexico           BART GORDON, Tennessee
JOHN SHADEGG, Arizona                BOBBY L. RUSH, Illinois
CHARLES ``CHIP'' PICKERING,          KAREN McCARTHY, Missouri
Mississippi                          TED STRICKLAND, Ohio
VITO FOSSELLA, New York              THOMAS M. BARRETT, Wisconsin
ROY BLUNT, Missouri                  BILL LUTHER, Minnesota
ED BRYANT, Tennessee                 JOHN D. DINGELL, Michigan
GEORGE RADANOVICH, California          (Ex Officio)
MARY BONO, California
GREG WALDEN, Oregon
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                  (ii)

                            C O N T E N T S

                               __________
                                                                   Page

Hearings held:
    March 20, 2001...............................................     1
    March 22, 2001...............................................    91
Testimony of:
    Breathitt, Hon. Linda K., Commissioner, Federal Energy 
      Regulatory Commission......................................    33
    Cooper, Mark, Director of Research, Consumer Federation of 
      America....................................................   137
    Freeman, S. David, General Manager, Los Angeles Department of 
      Water & Power..............................................   108
    Hall, William F., Vice President Western Region, Duke Energy 
      North America..............................................   122
    Hebert, Hon. Curt L., Jr., Chairman, Federal Energy 
      Regulatory Commission......................................    22
    Keese, Hon. William J., Chairman, California Energy 
      Commission.................................................    94
    Kline, Steven L., Vice President, Federal, Governmental and 
      Regulatory Relations, Pacific Gas and Electric Company.....   112
    Lloyd, Alan C., Chairman, California Air Resources Board.....   101
    Makovich, Lawrence, Senior Director, Cambridge Energy 
      Research Associates........................................   130
    Massey, Hon. William L., Commissioner, Federal Energy 
      Regulatory Commission......................................    39
    Pope, Jim, Electric Utility Director, Silicon Valley Power...   116

                                 (iii)

  

 
                    ELECTRICITY MARKETS: CALIFORNIA

                              ----------                              

                        TUESDAY, MARCH 20, 2001

                  House of Representatives,
                  Committee on Energy and Commerce,
                    Subcommittee on Energy and Air Quality,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2 p.m., in 
room 2123, Rayburn House Office Building, Hon. Joe Barton 
(chairman) presiding.
    Members present: Representatives Barton, Cox, Largent, 
Burr, Whitfield, Ganske, Norwood, Shimkus, Shadegg, Bono, 
Walden, Boucher, Wynn, Waxman, Markey, McCarthy, Barrett, and 
Dingell (ex officio).
    Also present: Representative Harman.
    Staff present: Jason Bentley, majority counsel; Andy Black, 
policy coordinator, Sue Sheridan, minority counsel; and Hollyn 
Kidd, clerk.
    Mr. Barton. The Subcommittee on Energy and Air Quality 
hearing on the electricity markets in California with testimony 
from the three commissioners in the Federal Energy Regulatory 
Commission will come to order.
    Today we are going to turn our attention to the electricity 
problem in California and the West generally. We are going to 
explore what has brought us to this stage, what is being done 
to address it, what steps remain to be taken. This is not an 
academic exercise or an inside-the-beltway game. The issue is 
real.
    Yesterday California was subject again to rolling 
blackouts. The State was short of power. The California 
independent system operator, or ISO, ordered utilities to drop 
500 megawatts. That is enough electricity to power roughly 
500,000 homes.
    This lasted approximately an hour. For an hour, people sat 
in the dark with computers shut down and manufacturing plants 
idle. Today will bring even more blackouts. The question is why 
and what can be done about it.
    The answer is simple, yet it is not simple to do. There is 
not enough supply to supply demand in the State of California. 
California's peak demand exceeds its ability to supply 
electricity.
    The electricity deficit in California will continue through 
this summer, into September, and quite probably into next year, 
as well. The problem has spilled over to States outside of 
California, to clients in the Pacific Northwest and leaving 
some without even the promise of payment, while customer costs 
have risen and all-important water reservoirs in the West are 
draining lower and lower.
    This summer they tell us is going to again be a deficit in 
terms of rain in the West, and additional generation is not 
available by other means.
    There have been market structure problems in California. We 
are all familiar with the California law that was passed in 
1996 that helped to cause the problem. There have been acts of 
God bringing high temperatures in the summer and cold 
temperatures in the winter. There have been low rainfalls, 
which you have already spoken of, and snowpacks, making 
hydroelectric generation not as available as it would be 
normally.
    But there has also been a fundamental failure to understand 
that power plants and transmission expansion lines have to be 
constructed and they need to be built. The Federal Government 
does not site power plants or transmission lines, States do.
    Our ability at the Federal level to help in this regard is 
limited. The Federal Power Act gives the Federal Energy 
Regulatory Commission, or FERC--three Commissioners are here 
today--jurisdiction over only about half of the wholesale sales 
being conducted in the West today.
    As it should, the Federal Energy Regulatory Commission is 
taking a hard look at the recent history of some of these 
wholesale sales. But again, the FERC only regulates 
approximately half of these sales. If the rates they do 
regulate do not appear to be just and reasonable, it is the 
FERC's job to understand why and to do something about it.
    FERC has requested more information on certain sales, and 
has suggested that refunds are in order if they cannot be 
properly justified. The FERC has taken other actions to 
streamline processes and direct the State of California to 
reform programs that have gone awry.
    The Bush administration, in its 2 months in office has been 
active, as well. One of President Bush's first acts was to 
extend the emergency electricity sales for 2 weeks, giving 
California time to enact reform legislation to help maintain 
its existing electricity supply.
    At the request of the Governor of the State, Governor Gray 
Davis, President Bush issued an executive order directing 
Federal agencies to expedite permits relating to construction 
of new plants in California. In response to that executive 
order, the Environmental Protection Agency has issued permits 
for three new power plants in the past month. In response to a 
request by the State of California, EPA has provided other 
assistance, clarifying rules relating to operation of backup 
generators.
    President Bush and Secretary Abraham of the Energy 
Department have engaged in discussions with the government of 
Mexico about increasing electricity imports from Mexico. Again, 
at the behest of Governor Davis, Secretary Abraham has sent a 
letter to the FERC asking that the agency act on his request 
for an extension of the waiver for qualifying facilities from 
certain fuel requirements. FERC approved the qualifying 
facilities waiver last Wednesday, I am told.
    After hearing the testimony of this panel and the second 
panel on Thursday, it is my intention to poll the subcommittee 
members to see whether we should work on an electricity 
emergency piece of legislation in the next several weeks.
    I want to be clear on this point: If there are some things 
that can help California and the West by taking legislative 
action, I am more than prepared to do that. In fact, I have had 
discussions with the White House on that point within the last 
week.
    But we need to be cognizant that what we do legislatively 
should actually have the ability to help the problem, both in 
the short term and in the long term. To pass a bill out of this 
subcommittee simply to say that we have done something, if it 
does nothing in reality, is worse than not doing anything at 
all.
    So the hearing today with the chairman and our two 
commissioners and our hearing on Thursday could quite possibly 
result in a legislative action item coming up in the next 2 
weeks. It could also result in us making a determination, 
again, on a bipartisan basis and in conjunction with DOE and 
the White House, that legislatively there is not a need to do 
anything because it will not alleviate the problem.
    But if we come away as a result of the hearing record and 
make a determination that something could be done to help, it 
will be done.
    I want to thank the members of the FERC for coming today. 
They are still shorthanded. We have two empty chairs, one on 
the right and one on the left. I don't know if that is by 
design or not. But the three that are here, as we would say in 
Texas in high school football, are keepers. They are good 
folks, and I expect a good, fact-based hearing today.
    With that, I yield to my ranking member, the gentleman from 
Virginia, Mr. Boucher, for an opening statement.
    Mr. Boucher. Thank you very much, Mr. Chairman. I 
appreciate your scheduling this hearing today and the one that 
we will hold on Thursday of this week in our continuing 
examination of the problems affecting the western electricity 
markets, and for inviting today each of the three commissioners 
of the Federal Energy Regulatory Commission to offer their 
testimony. I want to join with you in extending a welcome to 
each of them.
    I particularly appreciate Chairman Barton's willingness to 
work with interested members on our side to ensure that we hear 
from the full range of parties who have expertise bearing on 
the serious problems that affect the electricity markets in the 
western region.
    I do not envy the FERC the role that it has in having to 
make these decisions. The Commission is obligated by law to 
review the wholesale aspects of California's electricity 
restructuring arrangements, and yet, it really has only very 
limited ability to affect the fundamentals of that State's 
competition plan.
    Almost any action that the Commission takes or declines to 
take is going to be opposed by someone, and the stakes, in 
fact, are very high for consumers and for investor-owned 
utilities in the States on the West coast.
    Last November, the Commission determined that it must 
modify its prior orders approving the wholesale aspects of 
California's restructuring plan. That decision was based on the 
Commission's finding that wholesale prices in the State in many 
instances were no longer just and reasonable, a point on which 
the commissioners apparently were in agreement.
    There was less accord, however, with respect to the proper 
remedy for that problem. That is one of the matters that I 
think it will be useful for our subcommittee to examine with 
the commissioners this afternoon.
    Of particular interest to the subcommittee is the question 
of whether the FERC has sufficient authority under the Federal 
Power Act to address the present and anticipated future 
problems in the wholesale power markets in the western region.
    I am also interested in whether the Commission's authority 
to address regional transmission matters is adequate. Of 
specific concern are the possible ramifications of California's 
current efforts to acquire the transmission assets of the 
investor-owned utilities, an event that some suggest might 
place thousands of miles of transmission lines beyond the 
jurisdiction of FERC, and the opinion of the commissioners on 
whether that would be the result of California's acquisition of 
these assets would be welcome.
    I would respectfully suggest to my colleagues on the 
subcommittee that in considering whether Congress should 
attempt to legislate a solution to California's problems, we 
must take a careful and deliberate approach. Congress must 
provide the FERC with adequate statutory authority to address 
the problems that arise in wholesale markets, including charges 
by generators that are beyond the just and the reasonable, 
other inappropriate abuses of market power by electricity 
generators, and the management of transmission lines in a 
manner which impedes the effective functioning of wholesale 
markets.
    It is appropriate as well for this subcommittee to conduct 
oversight to ensure that the Commission does its job. It is 
quite another matter, however, for Congress to attempt to 
devise specific remedies to a complex situation that is 
characterized by constant change. Since that undertaking would 
prove difficult, and since Congress has, at best, a mixed 
record in fashioning legislative responses in previous energy 
crises, I think we must proceed with caution.
    Above all, we must avoid taking any action that would 
exacerbate the current circumstance or undermine the efforts of 
the State of California to remedy a problem which was, in 
significant part, its own creation.
    That said, we will welcome suggestions from the 
Commissioners and from our witnesses at the hearing on Thursday 
of statutory changes which may be needed to empower the FERC to 
take such steps as it may deem necessary to ensure the 
effective functioning of wholesale markets, both markets 
specifically on the West coast, and wholesale markets generally 
around the Nation.
    We will also carefully examine the actions taken by the 
FERC to this point with reference to the California market to 
determine whether its orders target the complete range of 
transactions that may involve an abuse of market power.
    I have some particular concerns in this regard which I 
think we will address, Mr. Chairman, at a later point during 
this hearing.
    I want to join with you in welcoming these witnesses, and 
thank them for taking the time to share their opinions, advice, 
and explanations of the actions they have taken with us this 
morning, and along with you, I look forward to their testimony.
    Mr. Barton. I thank the gentleman.
    The gentleman from Illinois, Mr. Shimkus, is recognized for 
an opening statement.
    Mr. Shimkus. Thank you, Mr. Chairman. A lot of this has 
been covered, so I would like to submit my opening statement 
for the record and just follow up on the issue that I know we 
will get to in the hearing, which is on the debate on price 
caps, which I am avidly opposed to, because I feel that price 
caps do not work. They neither spur new generation nor do they 
lessen demand.
    Price caps do not allow the market forces to work. If we 
cap wholesale rates, like how California capped the retail 
rates for individual consumers, how do you encourage 
conservation? How do you affect the other side of the equation, 
not just the supply, but the demand?
    Governor Davis has said there is a solution to the crisis, 
and that is raising the retail rates. Unfortunately, that is 
not politically popular, and that is something we need to be 
careful of, especially in California, a government getting too 
involved in the market and then making decisions based upon 
politics. It distorts the market, and while the decision may 
appear good in the short run, it could have devastating effects 
in the long run.
    With that, Mr. Chairman, for the sake of time, I will yield 
back and wait for the responses.
    Mr. Barton. I thank the gentleman from Illinois.
    The distinguished ranking member of the full committee, the 
gentleman from Michigan, Mr. Dingell, for an opening statement.
    Mr. Dingell. Mr. Chairman, thank you for your courtesy. I 
commend you for holding these hearings.
    In recent months, extensive attention has been paid to the 
flaws in California's electric restructuring plan and the 
efforts undertaken by the Governors, the State legislature, and 
the Federal Energy Regulatory Commission, FERC, to address the 
resulting problems.
    With the passage of time, it has become clear that 
California's difficulties are having a profound effect on other 
western States who have become involuntary participants in this 
experience with retail competition.
    Today's hearing is particularly significant for the 
subcommittee because we will be hearing from the three 
commissioners of the Federal energy agency to whom Congress has 
given primary responsibility for maintaining viable wholesale 
electricity markets. Since 1935, the Federal Energy Regulatory 
Commission and its predecessor, the Federal Power Commission, 
have been charged with ensuring that power rates are just and 
reasonable and that the grid is operated in a nondiscriminatory 
fashion. This has not always been easy, and it is especially 
difficult now, as the electrical industry undergoes a period of 
replaced change.
    Today, however, we focus on more narrow issues: The 
Commission's role in approving California retail competition 
plans, its decision late last year that the State's plan was 
not operating in conformity with the Federal Power Act, and its 
recent efforts to decide what the Act requires FERC to do to 
restore order to western electricity markets, and thereby 
protect consumers.
    It is widely accepted now that the California problem is 
again in its own legislature, and that the problems in the 
electricity supply for California were created in California by 
Californians. The effort to remedy the resulting fiasco must 
begin in that State.
    There are probably things that must be done at the Federal 
level. However, the role FERC has played in this matter is also 
worth reviewing. In 1996, FERC approved the California 
utilities' requests to participate in the system established by 
the State's new restructuring law. The Commission clearly 
understood that at the time, that in issuing an approval, it 
was making something of a calculated risk.
    FERC characterized the proposal before itself at that time 
as a work in progress, which provided only, and I quote, an 
acceptable basis for going forward.
    Two, last summer, as prices in California began to spike 
and the reliability of service degenerated, FERC was drawn into 
the maelstrom of California's troubles. On December 15, 2000, 
FERC amended its earlier order. It stated that ``Flaws in the 
State's plans, coupled with an imbalance between supply and 
demand, have caused and continue to have the potential to cause 
unjust and unreasonable rates,'' in direct violation of the 
Commission's mandate under the Federal Power Act.
    That mandate, contained in section 206 A says, ``Whenever 
the Commission shall find any rate charges or classification 
demanded, observed, charged, or corrected by any public utility 
subject to the jurisdiction of the Commission is unjust, 
unreasonable, unduly discriminatory or preferential, the 
Commission shall determine the just and reasonable rate, 
charge, classification, rate, regulation, rule, practice, or 
contract to be thereafter observed and in force and shall fix 
the same by order.''
    The discussion of issues in the December order is 
particularly instructive for all, especially the subcommittee, 
because it goes to the heart of the Commission's authority and 
to its responsibility under the Act to ensure wholesale markets 
function in a fair and reasonable manner.
    In separate occurrences, and concurrences, Chairman Hebert 
and Commissioner Massey took reasoned but altogether opposing 
views on the price caps, about which I am sure we will hear 
more today.
    I would note, however, that the law is not a matter of 
opinion for the Commissioners. The law requires certain 
actions, which we expect will be taken in a suitable and proper 
fashion in conformity with law. I do not envy the work of the 
Commission since any action FERC undertakes is going to be 
criticized by somebody, somewhere. The situation presents a 
constantly moving target, complicated by litigation pending in 
Federal court and by California's attempts to acquire its 
private utility transmission lines, and other things.
    In closing, I would like to offer the Commissioners a 
modest suggestion. Retail State plans to embrace retail 
competition have thrust themselves upon FERC, and this leaves 
FERC with difficult questions involving State-initiated hybrids 
that are neither traditional nor fully competitive regimes. The 
Power Act is not a static document, and it falls to FERC to 
decide how to apply the law to a changing landscape, but to 
apply the law nonetheless, which is its function.
    It is also important to FERC to recognize that to date, the 
Congress has not authorized the Commission to promote retail 
competition. The Commission has certain specifically enumerated 
enunciations by the Congress which are set forth here in the 
law.
    It is not FERC's job to encourage or to save retail 
competition experience or experiments. Instead, Congress has 
vested the Commission with the unique responsibility for 
ensuring the soundness of wholesale power markets, and until 
that changes, this should and must remain the primary focus of 
the Commission's efforts until the Congress has afforded them 
different authorities, different duties, and different powers.
    Mr. Chairman, thank you.
    [The prepared statement of Hon. John D. Dingell follows:]

    PREPARED STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN 
                  CONGRESS FROM THE STATE OF MICHIGAN

    In recent months, extensive attention has been paid to the flaws in 
California's electric restructuring plan and the efforts undertaken by 
the Governor, the State Legislature, and the Federal Energy Regulatory 
Commission (FERC) to address the resulting problems. With the passage 
of time, it has become clear that California's difficulties are also 
having a profound impact on other western states who have become 
involuntary participants in this experiment with retail competition.
    Today's hearing is particularly significant for the Subcommittee 
because we will be hearing from all three Commissioners of the Federal 
agency to whom the Congress has given primary responsibility for 
maintaining viable wholesale electricity markets. Since 1935, the 
Federal Energy Regulatory Commission and its predecessor, the Federal 
Power Commission, have been charged with ensuring that power rates are 
just and reasonable and that the grid is operated in a 
nondiscriminatory fashion. This has not always been easy, and it is 
especially difficult now as the electric industry undergoes a period of 
rapid change.
    Today, however, we focus on more narrow issues--the Commission's 
role in approving the California retail competition plan, its decision 
late last year that the State's plan was not operating in conformance 
with the Federal Power Act, and its recent efforts to decide what the 
Act requires FERC to do to restore order to western electricity markets 
and thereby protect the consumer.
    It is widely accepted now that California's problems began in its 
own legislature, and that the effort to remedy the resulting fiasco 
must begin in the State. However, the role FERC played is also worth 
reviewing:
    (1) In 1996, FERC approved the California utilities' request to 
participate in the system established by the State's new restructuring 
law. The Commission clearly understood at the time that in issuing an 
approval, it was taking something of a calculated risk. FERC 
characterized the proposal before it as ``a work in progress'' which 
provided only an ``acceptable basis for going forward.''
    (2) Last summer, as prices in California began to spike and the 
reliability of service degenerated, FERC was drawn into the maelstrom 
of California's troubles. On December 15, 2000, FERC amended its 
earlier order. It stated that flaws in the State's plan, coupled with 
an imbalance between supply and demand, ``have caused, and continue to 
have the potential to cause, unjust and unreasonable rates''--in direct 
violation of the Commission's mandate under the Federal Power Act. That 
mandate, contained in Section 206(a) says:
          ``Whenever the Commission . . . shall find that any rate, 
        charges, or classification demanded, observed, charged or 
        collected by any public utility . . . subject to the 
        jurisdiction of the Commission . . . is unjust, unreasonable, 
        unduly discriminatory or preferential, the Commission shall 
        determine the just and reasonable rate, charge, classification, 
        rule, regulation, practice, or contract to be thereafter 
        observed and in force, and shall fix the same by order.''
    The discussion of issues in the December order is particularly 
instructive for the Subcommittee, because it goes to the heart of the 
Commission's authority--and responsibility--under the Act to ensure 
wholesale markets function in a fair and reliable manner. In separate 
concurrences, Chairman Hebert and Commissioner Massey took reasoned, 
but altogether opposing, views on the wisdom of price caps, about which 
I am sure we will hear more today.
    I do not envy the Commissioners' task, since any action FERC 
undertakes will be criticized in some quarter. The situation presents a 
constantly moving target, complicated by litigation pending in Federal 
court and California's attempt to acquire its private utilities' 
transmission lines.
    In closing, I would like to offer the Commissioners a modest 
suggestion. Recent state plans to embrace retail competition have 
thrust upon FERC difficult questions, involving state initiated hybrids 
that are neither traditional nor fully competitive regimes. The Power 
Act is not a static document, and it falls to FERC to decide how to 
apply the law to a changing landscape.
    But it is important for FERC to recognize that to date the Congress 
has not authorized the Commission to promote retail competition. It is 
not FERC's job to encourage or to save state retail competition 
experiments. Instead, Congress has vested the Commission with unique 
responsibility for ensuring the soundness of wholesale power markets, 
and until that changes, this should remain the primary focus of the 
Commission's efforts.
    I thank the Chairman.

    Mr. Barton. I thank the gentleman for his opening 
statement.
    In order of appearance, the next statement would be from 
Mr. Whitfield of Kentucky, but Mr. Cox of California has a 
leadership meeting and has asked if he could go out of order, 
so we will recognize Mr. Cox and then resume regular order.
    Mr. Cox.
    Mr. Cox. I appreciate your courtesy, Mr. Chairman. Out of 
courtesy to the other members, I will make my statement very 
brief, but I did not want to fail to extend my gratitude to the 
panelists who are testifying today. They have a responsibility 
for a great deal of what affects us in California and affects, 
in consequence of that responsibility alone, the entire Nation.
    Yesterday afternoon I was in Southern California when 
rolling blackouts occurred. I was at the moment scheduled to 
take a facility tower tour of Broadcom, one of our Nation's and 
the world's most significant players in the new economy.
    It struck me as particularly ironic that the chairman and 
CEO of this company spent the hour before our meeting using a 
letter-opener to open paper mail, sitting by a window so he 
could get some sunlight to read. The entire company, of course, 
could not function during this period of time, and the same was 
true for nearly a million people throughout the State for that 
hour.
    It is a Third-World experience in California to have this 
going on, and it is entirely unnecessary. This is a man-made 
catastrophe. It is not happening in other places that did not 
have California's legislative restrictions.
    So I urge you, as you take a look, for example, at 
California's application for your approval, which they must 
receive if they are going to go forward with their plan, to 
permit them to acquire the transmission system in California, 
that you consider just how wrong-headed the States' response 
has been so far.
    What California is doing is not limited to California 
alone. It will affect the rest of this country. It is a 
significant share of our Nation's economy already, but as we 
speak, that share is slipping somewhat.
    From my experience, taking these facility tours, which I 
have been doing a fair amount of of late, it has never failed 
that the executives point out that their incremental decisions 
about where to locate their new facilities, where to locate 
their new responsibilities, and so on, are all taking place 
outside of California because of the uncertainty. Sometimes the 
decisions they make, once they decide not to stay where they 
are, are not always limited to the United States.
    So this is hurting our country in that respect, as well. 
Neighboring States have sent their legislators to my office to 
complain about the dislocating impacts California's mess is 
having on the rest of the region.
    So we have to ask ourselves why it is the Federal 
Government should, in any way, try and encourage this wrong-
headed response by the State of California.
    In particular, it concerns me that we have this blunt 
instrument of rolling blackouts, which treats all possible uses 
of electricity as if they are exactly the same, because the 
State cannot pick; it does not know when we could use price 
signals to force conservation.
    Not all uses of electricity are equally important, but in a 
big, variegated economy such as California, it is the only way 
those choices can be made rationally is through a market 
distribution system. That is the one thing that California 
refuses to permit. It is the one thing the Governor refuses to 
permit.
    The acquisition at a cost of billions of dollars of the 
State's power grid is not going to produce a single drop more 
of energy or a single bit more of electricity. It is all an 
elaborate Rube Goldberg mechanism to shift the costs from 
ratepayers to taxpayers, as if they are different people. It is 
an enormous amount of waste when there is much work that needs 
to be done.
    I very much appreciate your being here at this hearing to 
help us work through the problem. The problems in California 
could not be more real. They are going to be equally real, but 
just bigger and more sustained this summer when, as the 
Department of Energy tells us, summer energy demand is going to 
outstrip California's supply by as much as 5,000 megawatts. 
That is about one-twelfth of our total demand.
    So this is a serious, serious issue that deserves all the 
attention, Mr. Chairman, that this committee is giving it.
    Mr. Barton. I thank the gentleman from California.
    We are going to go now to another gentleman from California 
who represents part of Los Angeles, the Honorable Henry Waxman, 
for an opening statement.
    Mr. Waxman. Thank you very much, Mr. Chairman.
    Mr. Chairman, we are now only 3 months into the Bush 
administration. Already a clear question is facing our country: 
Will President Bush look out for consumers and our national 
interest, or will he simply do what oil, gas, mining, and 
electric utility companies tell him to do?
    There are, of course, times when one policy can serve both 
industry and the public, but sometimes choices have to be made 
and only one interest can be served. So far in the early days 
of this administration, the oil, gas, and mining industries are 
routing the American people and getting every penny's worth of 
the millions they donated to Republican campaign committees 
last year.
    Last week, oil and coal lobbyists broke out the champagne 
to celebrate an early and major victory. They convinced the 
President to break his campaign promise to support legislation 
to comprehensively clean up dirty, polluting power plants.
    This was no easy feat. The President had made the promise 
clearly and publicly. His hand-picked administrator at the 
Environmental Protection Agency reaffirmed the promise as early 
as last month, and it appears he came remarkably close to 
talking about his promise in his first address to the Congress.
    Then, with an impressive swiftness and effectiveness, the 
oil and coal companies demanded the President back down, which 
he promptly did. Just today EPA administrator Whitman has 
announced she is pulling back long overdue standards to protect 
the public from arsenic in drinking water.
    Now we are on round two. As everyone knows, California has 
had a disastrous experiment with a State-wide electricity 
deregulation law. The result of that law has been skyrocketing 
energy bills and rolling blackouts across the State. Other 
western States, including Oregon and Washington, are beginning 
to feel the effects, also.
    Clear and seemingly easy choices have to be made. 
Electricity generators should be prohibited from gouging 
consumers. Supplies should not be arbitrarily held back from 
utilities. Measures that spur immediate conservation should be 
implemented, and the Federal Government, through the Federal 
Energy Regulatory Commission, should be ensuring that 
reasonably priced supplies are available to western families.
    But the oil and gas companies and electric utilities do not 
see it this way. They do not want gouging to be investigated or 
limited, and they do not want the Federal Government to 
interfere in what is becoming a very lucrative business 
opportunity.
    On top of that, the oil and gas interests want California's 
failed attempt at deregulation to provide a new excuse for 
drilling for oil in the Arctic National Wildlife Refuge.
    In October 2000, candidate Bush campaigned in Southern 
California and promised that if elected President, he would 
help California's energy crisis. At the time, FERC was 
resisting the idea of regional wholesale price caps, and 
candidate Bush reassured California voters by saying, ``I 
believe so strongly that part of this region is going to suffer 
unless you have a President who is willing to tell the FERC to 
do what is right for the consumer.''
    Well, California is suffering. A year ago, wholesale prices 
for electricity ranged from $12 per megawatt hour to $29 per 
megawatt hour. Now, thanks to a completely dysfunctional 
deregulatory scheme, recent wholesale prices ranged from $429 
per megawatt hour to $565 per megawatt hour.
    Think about that. In less than a year, we have gone from 
$29 to $565 for the same amount of electricity.
    Last week, the Governors of Oregon, California, and 
Washington joined together and asked that a cost-based price 
cap be imposed for power purchased in the smog market for 1 
year. This is what most people believe is needed to protect 
western families.
    It is not a radical or unprecedented idea. In fact, there 
are wholesale price caps in effect today in three ISOs in the 
East. Candidate Bush would no doubt have agreed, but now we are 
dealing with President Bush and an administration that I fear 
looks to utility lobbyists to decide policy.
    The industry lobbyists do not want anything to do with 
cost-based price caps. This is one of those situations where if 
you are not with us, you are against us. That is how it is for 
western families. If nothing is done, power that cost $7 
billion in 1999 will cost consumers $70 billion this year.
    I look forward to listening to today's witnesses. I hope to 
work with them and my colleagues to lend a helping land hand to 
western families. Thank you very much, Mr. Chairman.
    Mr. Barton. We thank the gentleman from California.
    We go to the gentleman from Kentucky, Mr. Whitfield, for an 
opening statement.
    Let me make an announcement. We are not timing opening 
statements today. We are not going to have opening statements 
on Thursday; it is a continuation. So the Chair is being very 
lenient with the 3-minute rule today on opening statements.
    Mr. Whitfield.
    Mr. Whitfield. Thank you, Mr. Chairman. I want to welcome 
members of FERC here, and particularly I want to welcome Linda 
Breathitt, former Chairman of the Public Service Commission in 
Kentucky, and also from my hometown. So I am sure that she will 
solve this problem in short order, Mr. Chairman.
    I was going to say that I am glad that at this point we 
have not tried to politicize this issue, and it looks like we 
are keeping in that same spirit.
    But I think all of us recognize that FERC alone cannot 
solve the energy crisis facing California. I do not think there 
is anyone who thinks there is a simple answer to the problem.
    Our friend, the gentleman from California, Mr. Waxman, 
tried to place a lot of blame on the Bush administration. Maybe 
they deserve some of the blame. But I think if you are going to 
do that, you also have to look at the Clinton Administration 
and what they did on encouraging the use of natural gas. 
California has one of the most complex, difficult permit siting 
procedures of any State in the country, so we have not had a 
lot of generation plants built in California.
    Then they adopted a law that you cannot enter into long-
term contracts, but you have to go to the spot market.
    So if we are going to try to place some blame around here, 
I think there is plenty of blame to go around. But I think the 
real purpose of these hearings is to try to come up with a 
comprehensive solution, not a short-term fix.
    We have talked about people, some Governors who wanted 
price caps. I know in February of this year, eight western 
Governors wrote a letter to the FERC asking that there not be 
price caps. So price caps might be a short-term answer, but 
they are not a long-term solution.
    I think that is why we are, or I certainly am. I am excited 
about listening to the testimony today from these three 
Commissioners who have legal responsibility in this area, who 
have studied the problem and maybe can come up with some 
recommendations that will help us put together a long-range 
solution to the problem.
    Mr. Barton. We now turn to the gentleman from 
Massachusetts, Mr. Markey, for an opening statement.
    Mr. Markey. Thank you, Mr. Chairman.
    Yesterday Energy Secretary Abraham delivered an address in 
which he warned that we were in a national energy crisis, and 
that we could have blackouts and brownouts in California and 
elsewhere around the country.
    The Secretary warned that over the next 20 years, energy 
demands could increase by 62 percent for natural gas, 32 
percent for oil, 45 percent for electricity.
    The administration's solution to the situation is focused 
so far almost entirely on increasing production: Drill the 
Arctic National Wildlife Refuge, build more refineries, build 
more oil and gas pipelines, build more power plants. Indeed, 
Secretary Abraham is calling for 1,300 new electric power 
plants to be built over the next 20 years.
    We have yet to hear the Secretary mention the word 
``automobile, SUV, light truck.'' We wait with bated breath his 
mention of where we put all the oil that we consume in the 
United States. Two-thirds of it goes into gasoline tanks. 
Perhaps at some point in the next year or so, the Secretary of 
Energy will mention that, and some recommendation as to what we 
can do to make our society more efficient.
    While President Bush said yesterday that our current energy 
problems are caused by supply and demand, I have yet to see any 
evidence that this administration is focused on the demand side 
of the equation at all, for our Nation's demand in electricity, 
the subject of today's hearing, is nothing more than the sum 
total of all the refrigerators, air conditioners, space 
heaters, water heaters, and other appliances that consume 
electricity.
    In 1997, 11.8 percent of all the electricity used in 
residences was used for air conditioning, and 12.9 percent was 
used for refrigerators; 11.4 percent was used for space 
heating, 9.2 percent was used for lighting, and 43 percent was 
used for other appliances, clothes dryers, TVs, dishwashers, et 
cetera, et cetera. That is all electrical generating plants 
are, just all of these appliances plugged in consuming the 
electricity.
    Now, if we decide to make all these appliances more 
efficient, double their efficiency, then we do not need to 
build new power plants. So do we look first to automobiles, 
SUVs, and air conditioners and other appliances, or do we look 
first to the Arctic pristine wildlife refuge? Is it the God-
made preserve that should be looked at first, or the man-made 
set of appliances?
    Are we a technology society? Do we pride ourselves as being 
the technology committee, and do we look at those technologies 
in terms of what we can do to improve their efficiency? Or do 
we look at what God made and say, let us destroy that further, 
before we ask any questions about that which pushes the demand 
up there?
    Now, the Bush administration right now is reviewing an 
appliance efficiency rule adopted by the outgoing Clinton 
Administration. If the Bush administration decides to weaken or 
repeal that rule, they will take our electrical generating 
problems and make them much worse.
    Over the next 30 years, the new efficiency standards are 
estimated to eliminate the need to build 91 new 400-megawatt 
power plants, with air conditioning standards alone eliminating 
the need for 53 new power plants. By the way, in California in 
the summer, one-third of all electricity is just to keep the 
air conditioning going. What if we just doubled the efficiency 
of air conditioners? What a revolution that would be.
    By the way, all the other efficiencies combined would be 
240 power plants that would not have to be built.
    But, what is the response from the administration? Well, 
here is their plan. They plan to cut the Department of Energy's 
budget by 6.8 percent, and they are going to cut the budget for 
energy efficiency funding by more than 30 percent, so energy 
efficiency is going to be cut in the Bush budget. That is 
exactly the wrong way of dealing with the underlying supply and 
demand problem.
    In addition to reassuring that we become more energy-
efficient, we also need to assure that we have fair and orderly 
wholesale and retail markets. Last year when the committee was 
considering the Federal electricity restructuring legislation, 
I tried to offer an amendment that would have helped to 
reinvent the Federal Energy Regulatory Commission, transforming 
it from a rate regulator to a market regulator that would be 
able to more effectively police the evolving competitive 
markets in California and around the country.
    My amendment would have given Federal regulators the tools 
that they are going to need to address market power abuses in 
the emerging competitive markets. As the markets become 
national and not just individual States, which is what they 
were for the first 100 years--we have moved now to a national 
market. We need national market regulation.
    But there was widespread opposition to my amendment from 
the electric utility industry and from members on the other 
side of the aisle. There is no market power problem, I was 
told. We should not be giving FERC any more authority in this 
area. We should leave it to the States.
    Well, we ended up doing nothing. What happened? Last fall, 
an investigation by the FERC staff revealed that the California 
market was seriously flawed and caused unjust and unreasonable 
rates for short-term energy to be charged. The FERC also 
observed that the California energy regime provided an 
opportunity for sellers to exercise market power when supply is 
tight.
    Unfortunately, it was not until last week that FERC finally 
took action against two companies for alleged withholding of 
generation to drive up prices. Is this type of activity limited 
to these two companies or, as Commissioner Massey suggested, 
might it be more widespread and pervasive, which is deeply 
troubling?
    I know there are many factors that combined to produce 
California's perfect storm. Some, like the amount of rainfall 
in the West coast, are beyond our control. But when we see 
evidence of market power abuses that result in excessive and 
artificial levels of market volatility, it seems to me we 
should act quickly and decisively.
    Markets are built on public confidence, and right now the 
public has little reason to have confidence in the 
dysfunctional market that has been permitted to develop in 
California. Hopefully, this hearing will help bring us a step 
closer to solving that problem and hopefully our Nation's 
problems.
    Mr. Barton. We will hear next from the gentleman from North 
Carolina, Mr. Burr, for his statement.
    Mr. Burr. I always cherish the fictional readings of Mr. 
Markey and the opportunity to hear what could be, what will be, 
and what has been, though it is not in a world that I 
necessarily see.
    Mr. Chairman, I want to thank you, and I want to thank our 
witnesses for their willingness to come in. We deal with a 
very, very tough issue. I am pleased that our current slate of 
FERC commissioners is able to join us today to discuss the 
Commission's beliefs as to how this crisis came about, what 
remedies they have prescribed, and those they might see fit to 
add to them which might cure this situation.
    While it may be difficult to remedy a short-term fix for 
the coming summer months, I am open to any and all 
considerations laid upon the table. However, it will take a 
good deal of convincing to make me believe that temporary 
wholesale price caps, absent retail rate increases by the State 
and other potential State-mandated requirements, will help 
correct the current imbalance between supply and demand.
    Yes, it is real. We are all aware of the reasons for the 
generation scarcity: unseasonable cold temperatures in the West 
and northwest this winter; less-than-expected amounts of 
rainfall and snow amounts; lack of additional generation in the 
northwest States; mandatory divestiture of generation owned by 
California utilities; restrictions on hedging their price risk. 
The list goes on.
    What is at the heart of this problem is the fact that 
California never fully deregulated its industry, which sends 
mixed signals to investors, regulators, and to customers. The 
former Chairman of FERC said this before he left: 
``California's market is clearly flawed by design. It will be 
very difficult to reform, but reform it must, and reform it 
can.''
    That is a very telling statement from somebody who was 
supportive of the direction for so long that it was headed in, 
but who faced the reality that it was flawed. It cannot work. 
That is what ``flawed'' means.
    I will be interested to hear from our Commissioners what 
signals the wholesale price cap, with a continued retail rate 
freeze, might continue to send, whether intended or unintended, 
to end use customers; what conflict of interest might arise 
from State ownership of transmission assets as it relates to 
its participation in an RTO; and how has FERC handled this 
wholesale price episode differently than the midwest price 
spikes in the late 1990's.
    Finally, Mr. Chairman, let it be known that we can debate 
all we want to about the States' role or the Fed's role in 
resolving this dilemma. The fact of the matter is that it will 
require tough decisions at both levels that might not be as 
politically saleable as some would prefer.
    Quality leadership, though, requires us--in the final 
analysis, short-term political gains do not outweigh the long-
term interests and needs of constituents and of the residents 
of California.
    Mr. Chairman, again, thank you. I yield back the balance of 
my time.
    Mr. Barton. I thank the gentleman from North Carolina.
    We would now like to hear from the gentlewoman from 
Missouri, Congresswoman McCarthy, for an opening statement.
    Ms. McCarthy. Mr. Chairman, thank you for continuing this 
series of hearings and allowing this subcommittee to hear 
firsthand from the important decisionmakers in the energy 
industry such as those we have before us today, and those we 
will hear from on Thursday.
    The continued blackouts are a reminder of why this 
committee needs to remain vigilant in its oversight of the 
problems in California so that we can do our best to avoid 
repeating them in other parts of this country.
    We have heard significant debate in this subcommittee over 
the past 2 years on abuses of market power, as well as what is 
just and reasonable.
    I am very interested in learning more about the recent 
decisions for which it was determined that prices nearly ten 
times what they were a year ago are deemed just and reasonable 
as a gauge for determining if market power abuses have 
occurred.
    Prices like these raise basic affordability issues. People 
just are not going to be able to pay these bills, even if the 
State is protecting some small consumers. Because there are 
many stakeholders who have called for a regional price cap, and 
nearly as many who feel that there should not be one, I am 
interested in what Commissioners feel about another alternative 
being discussed, such as a cost-based or cost-plus pricing 
mechanism, at least for a short time, to return some stability 
to the market.
    Thank you again, Mr. Chairman. I return the balance of my 
time in order to get to their important testimony.
    Mr. Barton. I thank the gentlewoman.
    The gentleman from Georgia, Mr. Norwood, is recognized for 
an opening statement.
    Mr. Norwood. Thank you very much, Mr. Chairman. As you are 
well aware, much of our country's focus recently has been on 
California, and very deservedly so.
    However, the current crisis within the energy industry in 
the Golden State is not merely a California problem. I believe 
it is pretty critical for us to impress this fact upon the 
American people. California's energy crisis has had direct and 
far-reaching effects on the entire region and consumers in 
Oregon and Washington, Arizona, Utah, Idaho.
    There has been much speculation and discussion as to the 
principal causes that have contributed to the energy problems 
California faces today. Although rising costs of natural gas 
and exceeding electricity demand over supply, lack of rainfall, 
and unforeseen weather conditions have exacerbated this 
situation, Californians' electricity market structure, capping 
of rates in the retail market while allowing the wholesale 
market rates to fluctuate, all of this has proved unworkable.
    Electricity is the lifeline of our economy. It is far too 
important to the entire public interest to move with hasty, 
unproven plans for restructuring that industry. An electricity 
problem such as the one in California on a national scale could 
potentially unnerve the entire country economically, proving 
catastrophic.
    I believe the failure of restructuring efforts in 
California should serve as a yellow light to this Congress as 
we examine proposals to restructure the industry at the Federal 
level.
    Mr. Chairman, I do appreciate your leadership of this 
committee. Thank you for making members aware of the critical 
importance of examining the problems in California as part of 
enacting an effective national energy policy.
    I do hope before we finish meeting, someone can explain to 
me why those mean old manufacturers of air conditioners and 
refrigerators do not make them more energy-efficient. I just 
cannot imagine that they would not do anything but sell more. 
So maybe we can get somebody to explain to me why we produce 
air conditioners and refrigerators that use so much 
electricity, because Mr. Markey thinks that solves the entire 
problem.
    I look forward, Mr. Chairman, to hearing the testimony 
today from our FERC Commissioners on these issues, and hope we 
can work together to determine whether lessons can be learned 
from the current situation in California so that we may avert 
similar crises in the future.
    Thank you, Mr. Chairman.
    Mr. Barton. I thank the gentleman from Georgia. Mr. Markey 
is not here. I'm sure he will return for the questions.
    It might just be those mean old manufacturers, they realize 
if they made them more efficient, some people could not afford 
to buy them, and they might just have to sweat. There is a 
reason the market works.
    Mr. Norwood. Nobody has thought of that. That is amazing.
    Mr. Waxman. It could be, Mr. Chairman, that unless the 
government sets a standard, that one manufacturer does not want 
to be at a competitive disadvantage by having to pay to make 
sure their product is more efficient. That is why government 
needs to come in there and set a level playing field in order 
to protect the public interest.
    Mr. Barton. I am sure in air conditioning that the standard 
that would be accessible for the mansions in Beverly Hills, 
where people make $5 million a year, would be the same standard 
that is made in Waco, Texas, where my mother lives and exists 
on an income of perhaps $15,000.
    Mr. Waxman. I think air conditioners ought to be made more 
efficient, no matter where they may be.
    Mr. Barton. You have to have air conditioning that people 
can afford.
    The gentlewoman from California.
    Mrs. Bono. Mr. Chairman, thank you for your ongoing 
interest in helping address California's energy crisis. Your 
concern is deeply appreciated by those of us most affected by 
the struggle.
    I would like to welcome the Commissioners from FERC, and I 
look forward to their testimony today. Unfortunately, Congress, 
FERC, and the administration are faced with a challenging task 
of addressing a problem that is mostly in the hands of State 
officials. However, the Federal Government cannot and must not 
shirk its responsibilities.
    FERC's December 15 order provided the State with a 
framework by which it could begin to rebuild its foundation. It 
was these Commissioners before us who urged the State to enter 
into long-term contracts, eliminate its single-market clearing 
price system, and expedite the siting of additional power 
plants.
    While certain aspects of its order were not immediately 
addressed, the State did recognize the value of these 
pronouncements and has undertaken efforts to employ them. In 
addition, I was pleased to see the Commission commit itself to 
discharging its authority to order refunds for unjust and 
unreasonable rates charged by generators.
    While I believe that wholesale price caps are not 
beneficial for our long-term needs, I do believe and further 
encourage FERC to exercise its authorities to call into 
question the wholesale rates.
    I understand that FERC has jurisdiction over only 40 
percent, or over 47 percent of California's generating 
facilities. Therefore, we must be mindful that any actions 
taken by FERC will factor in the 53 percent it has no 
jurisdiction over.
    In addition, generators must be able to earn a rate of 
return which allows them to recover their operating expenses, 
make reasonable profits, and have the financial capability to 
invest in capital expenditures, which will bring on a much 
needed increase in our supply.
    I believe we can both encourage an increase in supply and 
ensure just and reasonable rates, but we will never achieve 
stability without encouraging investments in both supply and 
transmission. Transmission of natural gas and electricity has 
been the unheralded and least-talked about issue during this 
crisis.
    Without an adequate system by which to transport this 
electricity, new facilities are for naught. If we don't have 
reliable and plentiful sources of natural gas for all these new 
gas-fired generators coming online, we will never see the 
benefits of these plants because we will not be able to turn 
them on.
    Therefore, I strongly urge California to expeditiously 
integrate itself into a West-wide RTO. I have stated before, 
and I do so again, that this is not a matter of quality of 
life, but of life itself.
    Thank you. I look forward to hearing the testimony. I yield 
back, Mr. Chairman.
    Mr. Barton. Thank you.
    The gentleman from Iowa, Mr. Ganske, is recognized for an 
opening statement.
    Mr. Ganske. Mr. Chairman, I am interested in moving on to 
the testimony, so I yield back.
    Mr. Barton. We have the presence of Congresswoman Harman, 
who is not a member of the subcommittee. She will be allowed to 
give an opening statement after all the subcommittee has been 
allowed to.
    Mr. Largent, the vice-chairman, is recognized for an 
opening statement.
    Mr. Largent. Thank you, Mr. Chairman. Every hearing this 
subcommittee has had or will have is crucial to developing a 
comprehensive energy policy, but I believe that today's and 
Thursday's hearings will prove to be an essential element in 
creating that blueprint.
    We are fortunate to have with us this afternoon the 
chairman of FERC, Curt Hebert, and two FERC Commissioners, 
Commissioners William Massey and Commissioner Linda Breathitt. 
Welcome to the subcommittee.
    Mr. Chairman, the lead headline in today's Los Angeles 
Times is ``Rolling Blackouts Hit California as State Gets Hint 
of Summer Heat.''
    For those who did not read the article, I will read a few 
excerpts: ``Southern California was plunged into daytime 
darkness Monday as summer-like weather and a drastic drop in 
supplies forced the first deliberate State-wide blackouts since 
World War II.
    ``A series of rolling outages which could resume today 
began about noon, extending from San Francisco to San Diego and 
continuing into early evening. In all, power was cut to more 
than 1.3 million customers.''
    There was also an enlightening quote in the article from 
one of our witnesses for Thursdays hearing, Mr. David Freeman, 
general manager of the L.A. Department of Water and Power.
    Mr. Freeman states, ``Despite months of dire electricity 
problems and screaming headlines, Californians still do not 
seem to grasp the underlying problem: There is a shortage of 
electricity in this State. That is a fact. The general public 
does not seem to believe it, but it is true.''
    Mr. Chairman, there are a number of proposals floating out 
there calling for some type of Federal intervention to 
alleviate California's current crisis, some with merit, some 
without. But ultimately, Californians are going to have to heed 
Mr. Freeman's admonition that there is a shortage of 
electricity in the State, and act accordingly.
    Mr. Chairman, I yield back.
    Mr. Barton. We thank the gentleman.
    The gentleman from Oregon, Mr. Walden, is recognized for an 
opening statement.
    Mr. Walden. Thank you very much, Mr. Chairman.
    I found the comments of my colleague, the gentleman from 
Massachusetts, intriguing, of course as we all do every 
hearing. But I also find it interesting this administration has 
been on the job for 2 months, about 2 hours and 55 minutes, and 
it was the last administration's Department of Energy which 
could not safeguard our nuclear secrets, and admitted that it 
was asleep at the wheel when it came to the energy problem 
facing the United States.
    There is plenty of blame to point around here. What we need 
to do is focus on what are the real issues at the heart of 
California's debacle, what impact is that having throughout the 
region, what can FERC do to make sure that consumers are not 
getting ripped off, and to fully use Federal law to make sure 
that the rates being charged are reasonable and prudent.
    We also have to look long-range, something that I think has 
not been done. We cannot have the kind of growth in 
California's economy at 29 percent, and then have a subsequent 
reduction in actual power supply, and not expect we are going 
to reach out to the other regions to consume power that becomes 
a diminishing resource.
    We have a heck of a mess on our hands. In the Northwest we 
are now facing what will most likely be the worst water year 
since they began keeping records in 1929. This summer, when we 
would normally ship surplus power to California to meet their 
energy-starved needs, we may indeed be in a deficit situation 
ourselves. We may overrun the biological opinion on saving 
salmon in the Columbia River so as to keep the BPA from going 
bankrupt, and so as to keep the lights on to the extent that we 
can.
    What we have to do is to look at how to streamline 
relicensing rules as they affect hydro facilities. Some 45 
percent of the hydro capacity in California, 73 percent in the 
Northwest, has to be relicensed in the next 15 years. I am 
going to continue to press FERC on how there are ways to 
streamline that and what can be done.
    We need to encourage conservation. We need to encourage 
California to do what the Bonneville Power Administration has 
done, which is buy down demand. We are doing that in the 
Northwest. We are shutting down industries.
    I do not like it. In my hometown there are 1,285 people out 
of work at the aluminum plant that will probably never come 
back because we are buying down demand so power can go 
elsewhere. That is a head-in-the-sand mentality we have to use 
right now, but it does not make any sense in the long term.
    The Vice President, with whom I met with the Northwest 
delegation earlier today, said we need between 1,300 and 1,900 
new power plants over the next 20 years. That takes into 
account conservation measures in terms of demand.
    Surely we can do more. I would join my colleague from 
Massachusetts in trying to do more on conservation. I believe 
in it strongly. That still means we need 65 plants a year 
online.
    In California, according to the study, Mr. Chairman, that 
is going to be presented later to our committee, California 
probably has one of the most difficult, time-consuming, and 
costly power plant approval processes in the Nation. We ought 
to address this. California has to address its problem, because 
it is killing our economy. Thank you, Mr. Chairman.
    Mr. Barton. The gentleman from Arizona, Mr. Shadegg, is 
recognized for an opening statement.
    Mr. Shadegg. Thank you, Mr. Chairman.
    I ask unanimous consent to insert my full opening statement 
in the record.
    Mr. Barton. Without objection, it will be included.
    Mr. Shadegg. Mr. Chairman, I will be brief. I would like to 
associate myself with the comments of my colleague, the 
gentleman from Oklahoma, Mr. Largent, and my colleague from 
Oregon. It is clear that we have an energy crisis in this 
country.
    Flying out here on the plane today, I noticed there is a 
lot of coverage of this issue and of the President's emphasis 
on it, and a lot of skeptics saying no, we really do not have 
an energy crisis. Experts are saying the President is placing 
the wrong emphasis on this problem.
    I want to make a few points clear. And I want to be brief 
and look forward to the testimony of the witnesses here today.
    First of all, I think Americans do need to understand we 
clearly have no comprehensive energy policy in this country. 
When we do not have one, we will find ourselves in the kind of 
situation we are in.
    No. 2, the allegation that the problem that is occurring in 
California is the result of deregulation is itself absurd. Any 
time that we cap retail rates but leave wholesale rates 
uncapped, that is not, in fact, deregulation, and we will not 
produce the kind of proper market forces.
    Many of the solutions that are proposed here today call for 
us to adopt some form of either cost-based price caps or some 
other type of price caps. Two of the Commissioners that appear 
before us make strong arguments on both sides of that issue.
    I would urge our committee that this is the key issue. If 
we make the wrong decision on this issue--and I lean against 
any kind of cap, because I don't believe it will produce the 
right result--but if we make the wrong decision here, the 
consequences will be very, very significant.
    In Arizona, we do not have increasing energy prices. In 
Arizona, we do not have a shortage of power plants under 
construction. Indeed, we have a number of plants under 
construction and even more plants on the drawing board. I 
believe that imposing so-called temporary price caps will send 
exactly the wrong signal.
    It is interesting that in the testimony of both 
Commissioners, who argue each side of the price cap issue, they 
both point out that the real cause of the problem is a lack of 
the construction of new generating capacity and a lack of the 
construction of new transmission capacity, and yet reach 
absolutely opposite results.
    I believe price caps will lead not to the construction of 
additional generating capacity and not to the construction of 
new transmission capacity, but will lead to the opposite 
result, even if they are imposed only on existing facilities, 
because the message will be sent clearly, just like the message 
of California's deregulation, that we are not truly 
deregulating and we are not going to allow market forces to 
apply.
    I welcome the testimony of our witnesses, and I appreciate 
your calling this hearing, Mr. Chairman.
    Mr. Barton. I thank the gentleman.
    [Additional statements submitted for the record follow:]

 PREPARED STATEMENT OF HON. W.J. ``BILLY'' TAUZIN, CHAIRMAN, COMMITTEE 
                         ON ENERGY AND COMMERCE

    Mr. Chairman: I'd like to commend you for holding this hearing on 
the California energy situation. I think our previous two hearings have 
shed a lot of light on this complex and troubling issue. I am confident 
that the more we learn from California's mistakes, the more likely it 
becomes that we will reach a common conclusion on the best remedies for 
the West's energy problems.
    California's problem is primarily one of supply and demand. Last 
summer's peak load in the Cal ISO was around 45,000 megawatts. This 
summer it's predicted to be another 2,000 plus megawatts higher. Last 
summer's available imports during that peak were around 4,500 
megawatts, about half what they were the year before, and they're 
expected to be even lower this summer. Just yesterday, and again today, 
Californians went without power because temperatures were too high. 
What's going to happen this summer?
    California, alone, needs about 5,000 megawatts of new generation to 
bring their grid back into balance. This summer, the entire West is 
only expected to get about half of that. Where do Californians think 
that power is going to come from?
    I applaud California's recent efforts to conserve electricity. In 
addressing an energy supply problem, it is important to look at forces 
affecting demand and find innovative ways to improve efficiency. The 
fact that California has resorted to mandatory conservation orders, 
however, should convince consumers of two things: (1) that California 
does not have a functioning electricity market, and (2) that the State 
has an electricity supply problem.
    In the long run, this Committee can help increase the supply of 
electricity. We will do that first by passing a national energy policy, 
which will promote the availability of all fuels. Second, we will pass 
electricity restructuring legislation that facilitates better wholesale 
competition.
    This Committee cares deeply about what is happening out West. I 
hope these two days of hearings will explore what can and should be 
done to get California's electricity supply back on track. I am 
concerned about the prospect of State ownership of anything. I hope 
that California, and the West generally, can create a regional 
marketplace that will attract much needed capital investment in 
infrastructure. You do that by allowing market forces to function and 
by giving investors regulatory certainty.
    I look forward to hearing what our FERC Commissioners and other 
witnesses have to say.
                                 ______
                                 
 PREPARED STATEMENT OF HON. BILL LUTHER, A REPRESENTATIVE IN CONGRESS 
                      FROM THE STATE OF MINNESOTA

    Mr. Chairman, thank you for holding this important and timely 
hearing today. Rotating blackouts are again occurring throughout 
California and this situation may have the potential to spread to other 
parts of the country as the summer approaches.
    What troubles me about the current debate is that some 
Administration officials and industry representatives seem to be using 
this crisis to simply advocate more drilling and exploration in 
pristine wilderness areas. It is clear that we cannot simply drill our 
way out of dependence of foreign oil. It is also clear that simply 
advocating for increasing domestic drilling will do nothing to 
alleviate the near term problems in Western energy markets.
    I am pleased that we will be able to hear testimony today from the 
Chairman and two Commissioner's of the Federal Regulatory Energy 
Commission. The FERC has issued a number of recent orders attempting to 
address the volatility in Western markets and they may have further 
plans to devise remedies. I look forward to their assessment of the 
situation and testimony at today's hearing.
    Thank you and I yield back the balance of my time.

    Mr. Barton. All members of the subcommittee that are 
present have been given an opportunity for an opening 
statement, so the chairman would welcome the distinguished 
member from California from the full committee, Congresswoman 
Harman, for an opening statement.
    Ms. Harman. Thank you, Mr. Chairman. I appreciate the 
opportunity to come and learn more about a subject that affects 
my district and every district in California, and I think 
increasingly, every district in the United States.
    I just wanted to make a few comments based on knowledge 
that I do have, and then I look forward to the testimony.
    First of all, this issue is not partisan. I think today's 
comments make that clear. The rolling blackouts that California 
is experiencing do not just occur in Democratic or Republican 
households, or do not avoid even green households, they are 
happening to everybody.
    Second of all, although this problem is centered in 
California for the moment, it is beginning to affect the whole 
western region, and a problem like this or this identical 
problem could be felt all over the United States.
    Third of all, I feel that part of the answer is better 
technology and better efficiency. I agree with Mr. Markey. But 
I also agree with some comments that you made that we have to 
be sure that new standards are fair to everyone, not just 
certain folks with more assets. I think we can design standards 
that could be fair to everyone.
    But most important, and the point I wanted to make as an 
observer to these witnesses, is that I have in front of me 42 
U.S. Code section 7172. This concerns the jurisdiction of FERC, 
the Federal Energy Regulatory Commission. In subsection B, it 
makes clear that FERC has jurisdiction over the establishment, 
review, and enforcement of rates and charges for the 
transmission or sale of electric energy.
    In subsection (c) it makes clear that FERC has jurisdiction 
over the establishment, review and enforcement of rates and 
charges for the transportation and sale of natural gas by a 
producer or gatherer, or by a natural gas pipeline or natural 
gas company, and so we have before us an agency which can help 
solve this problem, and I hope that we all focus as much as 
possible on solving this problem. That is what our constituents 
want, and I believe that is what your excellent subcommittee is 
capable of doing. Thank you for letting me sit in.
    Mr. Barton. We thank the gentlewoman from California.
    All members not present will have the requisite number of 
days to put their opening statements in the record, and as 
announced earlier Thursday, which is a continuation of today's 
hearing, Mr. Boucher and myself will give a brief opening 
statement, and Mr. Dingell and Mr. Tauzin. The others will put 
their statements in the record today.
    We want to welcome the Federal Energy Regulatory Commission 
to the subcommittee. We are not going to time you. This is an 
important issue, and we want to give you an opportunity to 
elaborate, each of you.
    We are going to recognize the Chairman first, the Honorable 
Curt Hebert, and we will go to the gentlelady from Kentucky 
Commissioner Breathitt, and then Commissioner Massey will be 
the cleanup hitter. We are going to set the clock at 10 minutes 
simply to kind of give you an idea of how long you have been 
testifying, but we want to give you a chance to elaborate.
    So, Chairman Hebert, welcome to the subcommittee. Your 
statement is in the record in its entirety, and we recognize 
you to elaborate on it.

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

    Mr. Hebert. Thank you, Chairman Barton, and thank you to 
the 5members that are here. I appreciate you giving us this 
opportunity to appear to discuss a topic of electricity markets 
in California.
    Wholesale and retail electricity markets in California are 
currently in a state of stress. Wholesale prices have increased 
substantially for a variety of reasons. Consumers are implored 
to conserve as much as possible, and utilities are facing 
growing financial problems. As a result many now argue that we 
need to turn to cost-based regulation instead of relying on 
market-driven principles and solutions.
    First, in my view, price caps are not a long-term solution. 
We need to promote new supply and load reductions. Market 
prices are sending the right signals to both sellers and 
buyers, at least those not subject to a rate freeze. Market 
prices will increase supply and reduce demand, thus correcting 
the current imbalance in the marketplace. A price cap imposed 
through regulation or legislation will have exactly the 
opposite effect.
    Second, infrastructure improvements are greatly needed in 
California and throughout the rest of the West. We need to 
create the appropriate financial incentives to ensure that new 
generation is built, the transmission system is upgraded, and 
that new gas pipelines are built.
    Finally, we need a regional transmission organization, or 
RTO, for the West. California is not an island. It depends on 
generation from outside of the State. The shortage in and 
prices in California have affected the supply and prices in the 
rest of the West. A West-wide RTO will increase market 
efficiency and trading opportunities for buyers and sellers 
throughout the West.
    Consistent with these three points, the Federal Energy 
Regulatory Commission has been aggressively identifying and 
implementing market-driven solutions to these 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, and by monitoring market prices and market 
conditions.
    Let me highlight some of the Commission's recent actions. 
In January the Commission issued an order finding the PX in 
violation of a Commission order issued earlier in the month. 
The prior order required the PX to change its rules on payment 
to generators when their prices exceeded $150 per megawatt 
hour. The January order found that the PX's failure to comply 
with this change was imposing excessive charges on California 
consumers. In the past 2 weeks, the Commission has taken 
additional steps to mitigate prices in California, specifically 
the prices charged in California's spot markets during Stage 3 
emergencies and in January and February of this year.
    After examining prices charged in these periods, the 
Commission identified many transactions that warranted further 
investigation. The Commission required these sellers to either 
refund certain amounts, or offset these amounts against amounts 
owed to them, or provide additional justification for their 
prices. Specifically, the Commission required potential refunds 
or offsets of approximately $69 million for January and $55 
million for February, based on the market clearing price that 
would have occurred if the sellers had bid their variable costs 
into a competitive single price auction.
    Also this month the Commission staff issued a proposal on 
how the Commission should monitor and mitigate prices in 
California's wholesale spot power markets. This proposal is 
based on monitoring and mitigating prices on a before-the-fact 
basis instead of through after-the-fact refunds. After 
receiving and considering public comment, the Commission 
intends to implement appropriate changes to its current market 
monitoring and mitigation requirements by May 1, 2001.
    Last Wednesday the Commission issued an order seeking to 
increase energy supplies in California and the West. The 
Commission implemented certain measures immediately. For 
example, the Commission streamlined regulatory procedures for 
wholesale electric power sales; extended and broadened 
regulatory waivers for qualifying facilities under PURPA; 
authorized market-based rates for sales, onsite generation and 
sales of demand reductions; expedited the certification of 
natural gas pipeline projects into California and the West; and 
urged all licensees to review their FERC-licensed hydroelectric 
projects in order to assess the potential for increased 
generating capacity.
    The Commission also proposed and sought comment on other 
measures, such as incentive rates for new transmission 
facilities and natural gas pipeline facilities completed by 
certain dates this year or next.
    Also last week the Commission ordered two California power 
sellers to make refunds of over $10 million unless they can 
justify their actions. Specifically the Commission said the 
utilities needed to demonstrate that power outages at part of 
their facilities in April and May of 2000 were not extended for 
the improper purpose of raising prices for power from their own 
facilities.
    Mr. Chairman and members of this committee, I have been 
Chairman for only about 2 months. These and other recent 
actions demonstrate my commitment to ensuring that energy 
markets in California and the West bring consumers the energy 
they need at reasonable prices. During this same time I have 
also emphasized the need for the Commission to act on pending 
applications filed by RTOs across the country enabling the 
Commission to issue two important RTO orders last week and 
others very soon. RTOs are a critical element in increasing the 
efficiency and competitiveness of power markets nationwide.
    My fellow Commissioners and I have our differences on 
policies, but our actions these past 2 months demonstrate our 
shared commitment to the priorities of improving western 
markets and facilitating formation of RTOs. As long as we keep 
moving toward competitive and regional markets, I am confident 
that the present energy problems, while serious, can be and 
will be solved. I am also confident that market-based solutions 
offer the most efficient way to move beyond the problems 
confronting California and the West.
    Mr. Chairman, I would ask you and the members of the 
committee to allow me to present my testimony in full into the 
record. I also have an attachment A, which would demonstrate to 
you, that I would like to attach as part of my testimony and 
have in the record, what this Commission has been doing.
    Mr. Barton. Without objection, so ordered.
    Does that conclude your oral statement?
    [The prepared statement of Hon. Curt L. Hebert, Jr. 
follows:]

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

                              I. OVERVIEW

    Mr. Chairman and Members of the Subcommittee: Thank you for the 
opportunity to appear here today to discuss the topic of electricity 
markets in California. Wholesale and retail electricity markets in 
California, and throughout much of the West, are in a state of stress. 
Wholesale prices for electricity have increased substantially for a 
variety of reasons in the last year. California power consumers face 
near-daily pleas to conserve. California load-serving utilities are 
under severe financial stress. Companies supplying wholesale power into 
California are unsure how much, or even whether, they will be paid for 
their supplies.
    While the situation in California is not representative of other 
parts of the country that are successfully developing competitive 
markets, it nevertheless underscores the fundamental infrastructure 
problems facing the country. The demand for electricity continues to 
expand while supply fails to keep pace. The development and licensing 
of new hydroelectric capacity--which provides much of the existing 
power supply in the West--is nearly exhausted. Very little fossil-fired 
generation has been added in many regions of the country over the last 
few years, and in California no major plants have been added in the 
last decade. And the existing electric transmission grid is often fully 
loaded and, absent necessary expansion, is often incapable of 
delivering power to those regions where it is valued the most.
    I would like to make three main points with respect to these 
problems and to identify the steps the Commission is taking to address 
these problems.
    First, price caps are not a long-term solution. We need to promote 
new supply and load reductions. Market prices are sending the right 
signals to both sellers and buyers (at least those not subject to a 
rate freeze). Market prices will increase supply and reduce demand, 
thus correcting the current imbalance. Capping prices artificially will 
have exactly the opposite effect.
    Second, infrastructure improvements are greatly needed throughout 
the West and especially in California. We need to create the 
appropriate financial incentives to ensure that new generation is 
built, that the transmission system is upgraded and that new gas 
pipelines are built.
    Finally, we need a regional transmission organization (RTO) for the 
West. California is not an island. It depends on generation from 
outside the State. The shortages and the prices in California have 
affected the supply and prices in the rest of the West. The Western 
transmission system is an integrated grid, and buyers and sellers need 
non-discriminatory access to all transmission facilities in the West. A 
West-wide RTO will increase market efficiency and trading opportunities 
for buyers and sellers throughout the West.
    Consistent with these three points, the Commission continues 
aggressively to identify and implement solutions to the problems:

 First, in recent months, the Commission has issued a number of 
        orders intended to restore market stability. The Commission has 
        acted to move utilities out of volatile spot markets to enable 
        them to develop a portfolio of risk reducing and creditworthy 
        contracts.
 Second, the Commission has recently adopted or proposed a 
        range of additional measures that will increase supply and 
        delivery infrastructure, as well as reduce demand for 
        electricity in the Western Interconnection.
 Third, the Commission is continuing to work with market 
        participants on developing, as quickly as possible, a West-wide 
        regional transmission organization. Such an organization will 
        bring a regional perspective and offer regional solutions to 
        regional problems.
 Fourth, the Commission is monitoring market prices and market 
        conditions with the goal of ensuring long-term confidence in 
        Western markets. Moreover, the Commission's staff has proposed 
        a new plan to monitor and, when appropriate, mitigate the price 
        of electric energy sold in California's spot markets on a 
        before-the-fact basis, instead of addressing prices through 
        after-the-fact refunds. The Commission intends to act on this 
        proposal by May 1, 2001.
    By itself, however, 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. I am encouraged by all of the hard 
work and effort undertaken in recent months by the State of California 
and other Western states. The issues are difficult and the stakes are 
high. While reasonable minds can differ over the appropriate solutions 
to these problems, the Commission is committed to resolving these 
problems deliberatively.
    An attachment to my testimony provides details on the Commission's 
major actions concerning California's electricity markets, particularly 
the Commission's original orders approving California's restructuring 
plan and recent Commission orders or decisions relating to California's 
markets, including enforcement actions.

                II. HOW DID WE GET INTO THIS SITUATION?

A. Legislative Design
    The State of California has been widely questioned for its 
restructuring legislation (A.B. 1890), enacted in 1996. While mistakes 
were made, California is to be commended for realizing that consumers 
are better off if supply and pricing decisions are based on market 
mechanisms, not bureaucratic fiat. The premise of this legislation is 
that consumers will enjoy lower rates and increased service options, 
without compromising reliability of service, if electricity providers 
are motivated to serve by market forces and competitive opportunities.
    There were two major flaws in California's market design. First, 
the three utilities were forced to divest almost half of their own 
generation, and buy and sell power exclusively through the spot markets 
of the California Power Exchange (PX). This prevented the utilities 
from hedging their risks by developing a portfolio of short-term and 
long-term energy products. Second, the State mandated a retail rate 
reduction and freeze, eliminating any incentives for demand reduction, 
discouraging entry by competitors for retail sales and, more recently, 
threatening the financial health of the three utilities by delaying or 
denying their recovery of billions of dollars in costs incurred to 
provide service to retail customers.
    However, California's situation does not demonstrate the failure of 
electricity competition. To the contrary, it demonstrates the need to 
embrace competition fully, instead of tentatively. Other states, such 
as Pennsylvania, have been successful in implementing electricity 
competition. California needs to move forward on the competitive path 
it has chosen, allow new generation and transmission to be sited and 
built, and allow its citizens to benefit from the lower rates, higher 
reliability, and wider variety of service options that a truly 
competitive marketplace can provide.

B. Other Factors
    Until last year, California's spot market prices were substantially 
lower than even California's mandated rate freeze level. This allowed 
the California utilities to pay down billions of dollars of costs 
incurred during cost-of-service regulation. However, several events 
resulted in higher spot electricity prices beginning last summer. Those 
events included one of the hottest summers and driest years in history, 
as well as several years of unexpectedly strong load growth. Other 
factors influencing prices recently include:

 Unusually cold temperatures earlier this winter in the West 
        and Northwest;
 California generation was unavailable to supply normal winter 
        exports to the Northwest;
 very little generation was added in the West, particularly in 
        California, Washington and Oregon, during the last decade;
 environmental restrictions limited the full use of power 
        resources in the region;
 scheduled and unscheduled outages, particularly at old and 
        inefficient generating units, removed large amounts of capacity 
        from service; and
 natural gas prices increased significantly, due to higher 
        commodity prices, increased gas demand, low storage, and 
        constraints on the delivery system.
    Taken together, these factors demonstrate that the present problems 
in electricity markets are not just ``California'' problems. Normal 
export and import patterns throughout the West have been disrupted. 
Reserve margins throughout the West are shrinking. Already this winter, 
when the demand for electricity is relatively low, Stage Three 
emergencies in California have become commonplace.

         III. THE COMMISSION HAS TAKEN IMPORTANT STEPS TO HELP

    These problems require bold and decisive action. Both the federal 
government and state governments have critical roles to play in 
promoting additional energy supply and deliverability and decreasing 
demand. Through its authority to set rates for transmission and 
wholesale power and to regulate interstate natural gas pipelines and 
non-federal hydroelectric facilities in interstate commerce, the 
Commission can take a range of measures to promote a better balance of 
supply and demand, but its jurisdiction is limited. The Commission can 
set pricing policies which encourage entry, but it is state regulators 
that have siting authority for electric generation and transmission 
facilities, as well as authority over local distribution facilities 
(both for electricity and natural gas). These authorities can go a long 
way in improving the grid for both electricity and natural gas. More 
importantly, state regulators have the most significant authorities to 
encourage demand reduction measures, which can greatly mitigate the 
energy problems in California and the West.

A. Promoting Market Stability
    In an order issued on December 15, 2000, the Commission adopted a 
series of remedial measures designed to stabilize wholesale electricity 
markets in California and to correct wholesale market dysfunctions. The 
Commission recognized that the primary flaw in the California market 
design was the requirement for the three California utilities to buy 
and sell solely in spot markets. The Commission concluded that the 
foremost remedy was to end this requirement and allow the utilities, 
first, to use their own remaining generation resources to meet demands 
and, second, to meet much of their remaining needs for power through 
forward contract purchases. This measure freed up 25,000 MW of 
generation that the utilities owned or controlled, which could be used 
directly to serve their load without having to sell it into the PX and 
buy it back at a much higher spot price. Our action returned to 
California the ability to regulate over one-half of its peak load 
requirements.

B. The Commission's Latest Efforts
    Earlier this month, the Commission took further steps to mitigate 
prices in California, specifically the prices charged in California's 
spot markets during Stage Three emergencies in January of this year. 
After examining prices charged in these periods, the Commission 
identified many transactions that warranted further investigation. The 
Commission required these sellers to either refund certain amounts (or 
offset these amounts against amounts owed to them) or provide 
additional information justifying their prices. Specifically, the 
Commission required refunds or offsets of approximately $69 million 
dollars, or all prices charged during Stage Three Emergency hours in 
excess of $273 per megawatthour. This analysis seeks to use a proxy 
price based on the market clearing price that would have occurred had 
the sellers bid their variable costs into a competitive single price 
auction.
    The California Independent System Operator (ISO) and the California 
Electricity Oversight Board (``California parties'') had asked the 
Commission to require larger refunds. However, the Commission explained 
the difference between their approach and the Commission's. First, they 
included over $170 million for refunds from non-public utility sellers, 
such as the Los Angeles Department of Water and Power. The Commission 
has no authority to order refunds from these sellers. Second, they 
included refunds for sales during all hours of January; the Commission 
limited its approach to Stage Three Emergency hours, when the supply-
demand imbalance is most severe and sellers know their power is most 
needed. Third, they used a pay-as-bid approach instead of the 
Commission's proxy market clearing price approach and they used prices 
only ten percent above variable costs. Finally, they included refunds 
for December 2000; the Commission will address the December 
transactions in a separate order. In sum, the Commission's approach 
fully protects consumers from possible exercises of market power during 
emergency conditions while still providing clear price signals 
encouraging sorely needed new generation and load reductions.
    Also this month, the Commission's staff issued a proposal on how 
the Commission should monitor and mitigate prices in California's 
wholesale spot power markets in the future. This proposal is based on 
monitoring and mitigating prices on a before-the-fact basis, instead of 
through after-the-fact refunds. Comments on the staff's proposal are 
due on March 22nd. After receiving and considering public comment, the 
Commission intends to implement appropriate changes to its current 
market monitoring and mitigation requirements by May 1st.
    Just last week, the Commission issued an order seeking to increase 
energy supplies and reduce energy demand in California and the West, to 
the extent of its jurisdictional authority. The Commission implemented 
several measures immediately, including:

 streamlining filing and notice requirements for various types 
        of wholesale electric sales, including sales of on-site or 
        backup generation and sales of demand reduction;
 extending (through December 31, 2001) and broadening 
        regulatory waivers for Qualifying Facilities under the Public 
        Utility Regulatory Policies Act of 1978, enabling those 
        facilities to generate more electricity;
 expediting the certification of natural gas pipeline projects 
        into California and the West; and,
 urging all licensees to review their FERC-licensed 
        hydroelectric projects in order to assess the potential for 
        increased generating capacity.
    The Commission also proposed, and sought comment on, other measures 
such as incentive rates and accelerated depreciation for new 
transmission facilities and natural gas pipeline facilities completed 
by specified dates, blanket certificates authorizing construction of 
certain types of natural gas facilities, and greater operating 
flexibility at hydroelectric projects to increase generation while 
protecting environmental resources.
    Finally, the Commission stated its intent to hold a one-day 
conference with state commissioners and other state representatives 
from Western states to discuss price volatility in the West, as well 
other FERC-related issues recently identified by the Governors of 
Western States. The conference will be held in Boise, Idaho, on April 
6th.
    Also last week, the Commission ordered two utilities (AES 
Southland, Inc., and Williams Energy Marketing & Trading Company) to 
show why they should not be found to have increased power prices in the 
California market and potentially compromised the reliability of the 
transmission network in violation of tariffs on file under the Federal 
Power Act. The Commission stated that the two utilities extended 
outages at certain generating facilities from April 25 through May 11, 
2000. These facilities are owned by AES, which sells the power to 
Williams for resale. The shut down forced the ISO to purchase power 
from other generation units also owned by AES, and whose power is also 
resold by Williams, at prices greatly in excess of the market price or 
the variable costs of operating the units. Williams and AES must 
explain why either or both should not make refunds totaling $10.84 
million. Williams also must explain why it should not be precluded from 
receiving a market-based rate for AES' Southern California facilities 
for one year.

                 IV. PRICE CAPS WOULD MAKE THINGS WORSE

    Some advocate price caps or cost-based limitations as a temporary 
way to protect consumers until longer-term remedies alleviate the 
supply/demand imbalance. The issue of price caps in the West has been 
raised on rehearing of the Commission's order of December 15, 2000, 
and, accordingly, is pending before the Commission. For this reason, I 
cannot debate the specific merits of price caps for California or the 
West. However, I will reiterate briefly the views I have stated 
publicly on this issue.
    As a general matter, price caps do not promote long-term consumer 
welfare. Price caps will not increase energy supply and deliverability 
or decrease demand. Instead, price caps will deter supply and 
discourage conservation. At this critical time, legislators and 
regulators need to do everything they can to promote supply and 
conservation, not discourage them.
    This viewpoint is based on experience, not just economic theory. 
The summer of 1998 illustrates the point. Then, wholesale electricity 
prices in the Midwest spiked up significantly. The Commission resisted 
pleas for immediate constraining action, such as price caps. 
Subsequently, suppliers responded to the market-driven price signals, 
and today the Midwest is not experiencing supply deficiencies.
    In short, price caps can have long-term harmful effects because 
they do not provide appropriate price signals and may exacerbate supply 
deficiencies. Supply and demand cannot balance in the long-term if 
prices are capped.
    In the context of California, today we have market prices and 
barely adequate supplies. If we reduce prices below market levels, 
supplies will go elsewhere, risking greater reliability problems. Price 
caps will only aggravate the supply-demand imbalance.
    In addition, capping prices based on individual seller costs likely 
would require lengthy, costly and contentious evidentiary hearings. 
Litigating such a rate case for one seller requires a significant 
commitment of resources. Concurrently litigating such cases for scores 
of sellers in the West would be overwhelming both for the Commission 
and the industry. Moreover, neither buyers nor sellers would be sure of 
the prices until the conclusion of this litigation. This delay in price 
certainty would be unfair to customers and discourage new investments 
by suppliers.
    Many leaders share these views. In a letter to the Secretary of 
Energy, dated February 6, 2001, eight Western governors expressed their 
opposition to regional price caps. They explained that ``[t]hese caps 
will serve as a severe disincentive to those entities considering the 
construction of new electric generation, at precisely the time all of 
us--and particularly California--are in need of added plant 
construction.''
    In the face of the current challenges, we all must have an open 
mind to any proposals that may mitigate the energy problems in the 
West. I remain unconvinced that price caps will help solve the problems 
and I do not believe they are in the long-term interest of consumers. 
Price caps will only serve to drive investment and supplies to those 
markets without caps, harming consumers in the long-term.

                             V. CONCLUSION

    The Commission remains willing to work in a cooperative and 
constructive manner with other federal and state agencies. The 
Commission will continue to take steps that, consistent with its 
authority, can help to ease the present energy situation without 
jeopardizing longer-term supply solutions. As long as we keep moving 
toward competitive and regional markets, I am confident that the 
present energy problems, while serious, can be solved. I am also 
confident that market-based solutions offer the most efficient way to 
move beyond the problems confronting California and the West.
    Thank you.
  Commission Staff Summary of Major Orders On California Restructuring

                              I. OVERVIEW

    The Commission began addressing the California restructuring in 
1996. Initially, the Commission's approach was largely deferential to 
State decisions affecting wholesale power market matters within FERC's 
jurisdiction. However, as problems started surfacing and then 
heightened significantly in the Summer of 2000, the Commission no 
longer deferred to State decisions affecting matters within the 
Commission's jurisdiction. The resources devoted by the Commission to 
California's restructuring were significant from the beginning and, in 
recent months, have increased steadily. In all, the Commission has 
issued over 80 orders involving California's restructuring, including 
over 30 amendments to the ISO tariff and 25 amendments to the PX 
tariff. This year alone, the Commission has issued over 20 orders 
involving California's wholesale power markets.
    The following sections address the most significant of the 
Commission's California initiatives, without citations to concurring or 
dissenting statements of individual Commissioners.

         II. INITIAL AUTHORIZATION OF CALIFORNIA RESTRUCTURING

    California's efforts to restructure its electric industry began in 
1994. Extensive hearings and negotiations in proceedings before the 
California Public Utilities Commission (CPUC) resulted in a final CPUC 
restructuring order issued in December 1995. The California legislature 
took up the subject next and this led to the unanimous enactment of 
Assembly Bill 1890 (AB 1890) in September 1996. FERC noted in its 
subsequent orders that California was the first state to enact a 
comprehensive restructuring plan and made it clear that FERC would give 
great weight to the decisions made in the state legislation.
    The major features of AB 1890 included: (1) creation of an ISO and 
PX by January 1998 and simultaneous authorization of retail 
competition; (2) creation of the California Electricity Oversight Board 
with members appointed by the Governor and legislature; (3) a 
competitive transition charge for the recovery of the traditional 
utilities' stranded costs; and (4) a ten percent rate reduction for 
residential and small customers, and a rate freeze for all retail 
customers.
    At California's request, the Commission considered the various 
aspects of California's restructuring in stages, resulting in a series 
of FERC orders as details were added to the restructuring plans.
    On November 26, 1996, the Commission accepted the filings of 
Pacific Gas and Electric Company (PG&E), Southern California Edison 
Company (SoCal Ed), and San Diego Gas and Electric Company (SDG&E) 
(collectively, Companies) seeking approval for those aspects of the 
restructuring subject to FERC's jurisdiction. 77 FERC para. 61,204 
(1996). The Companies' proposals reflected the CPUC's orders and AB 
1890. The Commission's order approved the transfer of operational 
control of transmission facilities to the ISO, the overall framework 
for establishment of the ISO and PX, and the jurisdictional split 
between the transmission and local distribution facilities of the 
utilities. The Commission largely approved the California market design 
as filed and provided guidance on matters that needed further support 
by the companies in order to gain final approval under the Federal 
Power Act (FPA).
    However, the Commission determined that it could not accept the 
proposed role of the Oversight Board in the governance or operations of 
the ISO and PX, or appellate review of ISO board decisions, because the 
Oversight Board's role was not limited to matters subject to State 
jurisdiction and concerned matters within the Commission's exclusive 
jurisdiction. Thus, the Commission did not approve a permanent role for 
the Oversight Board. Instead, the Commission approved only an initial 
start-up function for the Oversight Board, to expedite the 
establishment of the ISO and PX initial governing boards.
    In March 1997, as supplemented in August 1997, the ISO and PX 
submitted Phase II of the restructuring proposal, including 
organizational and governance documents, an Operating Agreement and 
Tariff for each, a Transmission Control Agreement, and other materials 
and explanations previously required by the Commission. The Commission 
addressed these filings in an order dated October 30, 1997, 
conditionally authorizing limited operation of the ISO and PX. 81 FERC 
para. 61,122 (1997). The Commission reiterated, and provided additional 
guidance on, its findings on the Oversight Board.
    In that order, the Commission also addressed the Companies' 
requests for market-based rates, which they filed at the direction of 
the CPUC. The Commission accepted the Companies' market-based rates, in 
part, due to the plans of PG&E and SoCal Ed to divest significant 
amounts of their generation. 81 FERC at 61,546-47.

                    III. EARLY ACTIONS ON PRICE CAPS

    Shortly after the ISO and PX commenced operations on March 31,1998, 
prices for ancillary services in the ISO's markets increased 
significantly. See AES Redondo Beach, L.L.C., et al., 84 FERC para. 
61,046 (1998), order on reh'g, 85 FERC para. 61,123 (1998) (October 28, 
1998 Order), order on further reh'g, 87 FERC para. 61,208 (1999) (May 
26, 1999 Order), order on further reh'g, 88 FERC para. 61,096 (1999), 
order on further reh'g, 90 FERC para. 61,148 (2000). The ISO proposed 
price caps as a solution. In an order issued July 17, 1998, the 
Commission authorized the ISO for an interim period to reject bids in 
excess of whatever price levels it believed were appropriate for the 
ancillary services it procures. On rehearing, the Commission explained 
that, as the procurer of ancillary services, the ISO had the discretion 
to reject excessive bids. The Commission also stated that a purchase 
price cap is not an ideal approach to operating a market and that it 
did not expect the cap to remain in place on a long-term basis. October 
28, 1998 Order, 85 FERC at 61,463. The Commission also directed the ISO 
to file a comprehensive proposal to redesign its ancillary services 
markets. AES Redondo Beach, L.L.C., et al., 85 FERC para. 61,123 at 
61,462 (1998).
    The Commission later approved a filing by the ISO authorizing the 
ISO to adopt a purchase price cap for its imbalance energy market at 
whatever level it deemed necessary and appropriate. California 
Independent System Operator Corporation, 86 FERC para. 61,059 (1999).
    In an order approving the ISO's ancillary services market redesign, 
the Commission allowed the ISO to retain the authority to specify 
purchase price caps for ancillary services and imbalance energy until 
November 15, 1999. May 26, 1999 Order, 87 FERC at 61,817-19. The ISO 
had proposed to raise and eventually eliminate existing price caps on 
ancillary services and imbalance energy upon the implementation of 
several redesign elements, but in the interim, it planned to maintain 
the then current $250/MWh purchase price caps. The Commission directed 
the ISO to eliminate the price caps by November 15, 1999, with the 
caveat that the ISO could file for an extension of its price cap 
authority if its experience with the market reforms over the summer 
indicated serious market design flaws still existed.
    In September 1999, by direction of the ISO's Governing Board, the 
price caps were raised from $250 to $750. On September 17, 1999, the 
ISO filed proposed tariff revisions to extend for one year, until 
November 15, 2000, its authority to cap ancillary services and 
imbalance energy prices. The proposal gave the ISO the discretion to 
lower the price caps to $500 effective June 1, 2000, if the ISO 
Governing Board determined that any of three specific conditions were 
met. The proposal also gave the ISO discretion to lower the price caps 
by an unspecified amount in the event that it determined that the 
markets were not workably competitive. The Commission accepted the 
proposed tariff provisions in November 1999, giving the ISO the 
opportunity to complete its market redesign and to test its reforms 
under summer peak conditions. See California Independent System 
Operator Corporation, 89 FERC para. 61,169 (1999), reh'g pending.

                     IV. DEVELOPMENTS ON GOVERNANCE

    On November 24, 1998, the Commission found the ISO and PX not to be 
in compliance with its prior orders on the role of the Oversight Board. 
85 FERC para. 61,263 (1998). The Commission denied the ISO's request to 
defer enforcement of its prior orders, and directed the ISO and PX to 
revise their bylaws to be consistent with the Commission's 
determinations. The Commission again provided guidance on the proper 
sphere of action by the Oversight Board.
    On August 5, 1999, the Commission granted a petition for 
declaratory order by the Oversight Board. The Commission said that the 
modified governance structures contained in proposed state legislation 
would comply with federal law. Under this proposed legislation, the 
Oversight Board's activities were narrowed to include, e.g., an 
appellate function on matters affecting the general welfare of the 
State's electric consumers and the right to confirm only those ISO and 
PX board members representing end-users. This proposed legislation was 
subsequently enacted.

                         V. LAST YEAR'S ACTIONS

    On July 26, 2000, the Commission ordered a fact-finding staff 
investigation on technical or operational factors, regulatory 
prohibitions or rules (Federal or State), market or behavioral rules, 
or other factors affecting the competitive pricing of electric energy 
or the reliability of service in electric bulk power markets. The 
Commission directed its staff to report its findings to the Commission 
by November 1, 2000.
    On August 23, 2000, the Commission issued an order initiating a 
formal hearing on the justness and reasonableness of the rates in 
California's spot markets. 92 FERC para. 61,172. This action meant that 
refunds could be ordered as of the refund effective date of October 2, 
2000, if rates were found to be unjust and unreasonable. The 
investigation was initiated partly in response to a complaint by SDG&E 
asking for the emergency imposition of a price cap to protect consumers 
from extreme price increases. The Commission simultaneously instituted 
an investigation into whether the tariffs and institutional structures 
and bylaws of the ISO and PX were adversely affecting the efficient 
operation of competitive wholesale electric power markets in 
California.
    On November 1, 2000, the Commission issued an order proposing 
measures to remedy the problems identified in a Commission Staff Report 
on Western Markets and the Causes of the Summer 2000 Price 
Abnormalities. 93 FERC para. 61,121. The Commission sought comment on 
its proposed remedies.
    Beginning in mid-November, the ISO began experiencing repeated 
emergency conditions forcing it to serve increasingly large portions of 
its load through its imbalance energy market. On December 8, 2000, the 
ISO filed a tariff amendment seeking expedited consideration of tariff 
revisions to address these conditions. Most significantly, the ISO 
sought immediate implementation of an interim price mitigation proposal 
based on a concept that was proposed in the November 1 Order, rather 
than continuing its $250/MWh price cap, to encourage greater 
participation of generators in its markets. The mechanism would pay 
sellers their bids even if their prices exceeded that level but their 
bids would not set a market clearing price to be paid to all sellers in 
the market. The Commission approved the tariff revisions in an order 
issued December 8, 2000. 93 FERC para. 61,239.
    Also on December 8, 2000, the Commission issued an order waiving 
certain regulations pertaining to QFs, effective for the period 
December 8 through December 31, 2000, to allow certain QFs to sell 
additional power to load located in California to help alleviate the 
supply-demand imbalance in California. 93 FERC para. 61,238.
    On December 15, 2000, the Commission issued an order adopting many 
of the remedies proposed in its November 1, 2000 order. 93 FERC para. 
61,294. It ordered specific short- and long-term measures to remedy the 
dysfunctional California bulk power markets.
    First, the December 15 order eliminated the requirement for 
California's investor-owned utilities to sell all of their generation 
into and buy all of their energy needs from the PX. The buy/sell 
requirement resulted in an over-reliance on spot market purchases and 
created an excessive exposure to short-term price fluctuations. The 
Commission also ordered the termination of the PX's wholesale rate 
schedules effective as of the close of the April 30, 2001 trading day. 
This resulted in 25,000 megawatts of generation, either owned by or 
under contract to the three California utilities, being returned to the 
utilities for direct sales to retail customers subject to State 
regulation, instead of being sold to, and repurchased from, the PX.
    In addition, the order addressed the problem of underscheduling, 
directing utilities to schedule 95 percent of their transactions in 
advance of real time, to reduce the reliance on the ISO's real-time 
market. A penalty was imposed for loads that exceed the prescheduled 
amount by more than five percent.
    The order also established a $150 per MWh breakpoint mechanism 
intended to help ensure just and reasonable rates from January 1, 2001 
until May 1, 2001, until long-term measures could be put in place. The 
single price auction was modified so that bids above $150 per MWh would 
not set the market clearing prices paid to all bidders. Public utility 
sellers (primarily the investor-owned utilities) that bid above this 
breakpoint were required to file weekly transaction reports with the 
Commission. Sellers were made subject to potential refund liability if 
the Commission finds they sold power at prices that were not just and 
reasonable.
    The order directed Commission staff to develop a comprehensive 
market monitoring and mitigation program to replace the $150/MWh 
breakpoint mechanism and to be in place by May 1, 2001. The order also 
rejected calls for price caps or cost-based rates, stating that the 
remedies adopted by the Commission were ``designed to help alleviate 
the extreme high prices being borne by Californians, but also to ensure 
that sellers continue to have incentives to sell into California and 
sufficient incentives to build sorely needed new generation and 
transmission necessary to provide reliable service in the future.''

                        VI. THIS YEAR'S ACTIONS

    On January 8, 2001, the Commission issued an order clarifying the 
December 15 order. 94 FERC para. 61,005. The Commission reiterated a 
directive for the PX to terminate its wholesale rate schedules 
effective April 30, 2001, but clarified that the order was not intended 
to preclude the PX from continuing its market for bilateral forward 
contracting.
    On January 29, 2001, the Commission issued an order finding the PX 
in violation of its December 15 order by not implementing the $150 per 
MWh breakpoint, and it required immediate recalculation of wholesale 
rates by the PX. 94 FERC para. 61,085.
    On February 1, 2001, the Commission staff issued a report on 
generating plant outages in California, focusing on whether unplanned 
maintenance or outages occurred to raise prices. Staff did not find 
evidence suggesting that the companies audited were scheduling 
maintenance or incurring outages in an effort to influence prices. 
Rather, the report concluded that the types of problems encountered 
(i.e., turbine seal leaks) are common considering that these facilities 
had been operating above normal levels and were 30 to 40 years old.
    Also on February 1, 2001, the Commission Staff released a study 
looking at power markets in the Northwest during November and December 
2000. The report found, in sum, that the Northwest power markets saw 
increased demand through the 1990s, without increased generation 
capacity. In November and December of 2000, the market was driven by 
extreme cold, high natural gas prices and low storage levels, and by 
low water, precipitation and stream flow levels. These conditions were 
made worse by a large number of plant outages and environmental 
constraints, and a general atmosphere of market uncertainty.
    On February 14, 2001, the Commission issued an order addressing the 
creditworthiness tariff provisions proposed by the ISO. 94 FERC para. 
61,132. The credit ratings of PG&E and SoCal Ed had deteriorated 
significantly, resulting in the inability of the utilities to meet the 
existing creditworthiness standards. The ISO proposed to amend its 
tariff to lower the creditworthiness standards. The order accepted the 
ISO's amendment for purposes of allowing PG&E and SoCal Edison to 
continue to schedule their own generating resources to serve their 
load. The order held, however, that the utilities could continue 
purchasing through the ISO from third-party suppliers only if they 
obtained financial backing from creditworthy counterparties.
    On March 9, 2001, the Commission directed 13 jurisdictional sellers 
of power into the ISO and PX short-term markets in January to either 
make refunds for certain power sales (or offsets against accounts 
receivables) or provide further justification of their prices. 94 FERC 
para. 61,245. The Commission reached this decision after reviewing 
generators' transaction reports and reports by the ISO and PX, and 
finding that certain transactions exceeded a Commission-determined 
market-clearing proxy price for Stage 3 emergency hours in January. The 
proxy price was based on data including average natural gas prices, 
average NOX allowance costs, and variable operation and 
maintenance costs.
    Public utility sellers with transactions above the January proxy 
price of $273/MWh must notify the Commission on or before March 23, 
2001 that they will either: (1) refund the excessive amounts or offset 
such amounts against any amounts due or owed to them; or, (2) supply 
further data to justify transactions above this level. The Commission 
will determine a proxy clearing price for each month through April 
2001. Commission staff will issue notice of the proxy price within 15 
days of the end of each month.
    Also on March 9, 2001, the Commission's staff issued a proposal on 
how the Commission should monitor and mitigate prices in California's 
wholesale spot power markets in the future. This proposal is based on 
monitoring and mitigating prices on a before-the-fact basis, instead of 
through after-the-fact refunds. Comments on the staff's proposal are 
due on March 22nd. After receiving and considering public comment, the 
Commission intends to implement appropriate changes to its current 
market monitoring and mitigation requirements by May 1st. These changes 
will supersede the $150 breakpoint mechanism currently in effect.
    On March 14, 2001, 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. For 
example, the Commission streamlined regulatory procedures for wholesale 
electric power sales, extended (through December 31, 2001) and 
broadened regulatory waivers for Qualifying Facilities under the Public 
Utility Regulatory Policies Act of 1978, authorized market-based rates 
for sales of on-site and back-up generation and sales of demand 
reductions, expedited the certification of natural gas pipeline 
projects into California and the West, and urged all licensees to 
review their FERC-licensed hydroelectric projects in order to assess 
the potential for increased generating capacity. The Commission also 
proposed, and sought comment on, other measures such as incentive rates 
for new transmission facilities and natural gas pipeline facilities 
completed by certain dates this year or next. The Commission also 
announced that it intends to meet with state regulators this Spring.
    Also on March 14, 2001, the Commission ordered two utilities (AES 
Southland, Inc., and Williams Energy Marketing & Trading Company) to 
show why they should not be found to have inflated power prices in the 
California market and potentially compromised the reliability of the 
transmission network in violation of tariffs on file under the Federal 
Power Act. 94 FERC para. 61,248. The Commission stated that the two 
utilities extended outages at certain generating facilities from April 
25 through May 11, 2000. These facilities are owned by AES, which sells 
the power to Williams for resale. The shut down forced the ISO to 
purchase power from other generation units also owned by AES, and whose 
power is also resold by Williams, at prices greatly in excess of the 
market price or the variable costs of operating the units. Williams and 
AES must explain why either or both should not make refunds totaling 
$10.84 million. Williams also must explain why it should not be 
precluded from profiting from outages of AES' Southern California 
facilities for one year.

    Mr. Hebert. It does, Mr. Chairman.
    Mr. Barton. We would like to hear next from Commissioner 
Breathitt. Your statement is in the record, and, again, we are 
going to set the clock at 10 minutes. We will at least let you 
know that, but we do want you to have the full ability to 
elaborate on your written statement.

  STATEMENT OF HON. LINDA K. BREATHITT, COMMISSIONER, FEDERAL 
                  ENERGY REGULATORY COMMISSION

    Ms. Breathitt. Thank you, Mr. Chairman.
    Good afternoon, Mr. Chairman and members of the 
subcommittee, and Mr. Whitfield, whose State and hometown we 
both share. I appreciate this opportunity to appear before you 
today to discuss the energy crisis in California and the 
worsening conditions of electricity markets throughout the 
West. This crisis is affecting the lives and well-being of 
millions of citizens and threatening the existence of thousands 
of businesses. In addition, the extraordinarily high prices for 
electricity and the extreme shortages of supply are creating a 
consumer backlash against newly restructured electricity 
markets. I fear the move toward a competitive electricity 
marketplace will be severely affect ed by this crisis and could 
even be suspended by States that fear what is happening in the 
West.
    For months the Commission has been grappling with and 
attempting to resolve the market disruptions in California and 
elsewhere in the West. I believe our actions to date have been 
significant and appropriate and will ultimately improve the 
long-term situation in the western electricity markets. 
However, I am becoming increasingly concerned about the near-
term problem, particularly about what will happen this summer 
in California.
    I believe yesterday's blackouts and today's are a harbinger 
of what is to come. The predictions I am hearing for this 
summer, including prolonged blackouts, supply shortages and 
even higher prices, are very alarming. In fact, a spokesman for 
the California ISO said that yesterday was, ``clearly the worst 
day we have ever had in California.''
    I am concerned that our actions to date, and those of 
California officials, will not improve the immediate situation 
in California. All of us together, FERC, State officials, 
Members of Congress and the administration, may have to begin 
exploring other shorter-term remedies to address the 
disruptions and volatility in these markets. It is imperative 
that the Commission place all available options on the table 
for consideration and prepare itself to make even tougher 
decisions necessary to resolve these problems.
    My written testimony discusses some of the causes of the 
energy crisis, including high production costs, increased 
demand and scarcity of generation. It is becoming increasingly 
apparent that the causes of the California energy crisis are 
not only State-specific, but regional in nature. We can no 
longer just look at California. It is now necessary to consider 
and understand the conditions throughout the entire Western 
Interconnection. Electricity markets in the West are 
interrelated, and the solution to these problems will likely be 
regional in scope.
    My written testimony also discusses several decisive 
actions taken by the Commission over the past several months to 
address these market distortions and instances of potential 
market power abuses. These include establishing specific 
remedies for the California market, launching an investigation 
of California marketers whose sanctions appear to have inflated 
electric prices in California, and requiring certain sellers in 
the California market either to refund potential overcharges 
totaling $124 million or to provide additional cost 
justification.
    In addition, we have scheduled a conference on April 6 in 
Boise, Idaho, with Western State Commissioners to discuss price 
volatility in these markets and to identify additional 
regulatory remedies that may be necessary.
    Mr. Chairman, I would like to ask that a copy of the notice 
for the meeting we are having in Boise on April 6 be entered 
into the record.
    Mr. Barton. Without objection, so ordered.
    Ms. Breathitt. Going forward, I believe the Commission may 
need to have a greater role in the siting of new 
infrastructure, because shortages of generation and 
transmission will no longer be single-State issues, and this 
would likely require an amendment to the Federal Power Act. 
Furthermore, I believe the formation of regional transmission 
organizations in the West is vital to the ultimate resolution 
of market disruptions and for expansion and enhancement of the 
transmission grid.
    With respect to the possible State purchase of the 
investor-owned utilities transmission system, I believe the 
issue is not so much who owns the transmission system in 
California. The issue is that the transmission system needs to 
be operated on an open, nondiscriminatory basis with full 
access, and it needs to be part of a regional grid.
    To address volatile natural gas prices, I would urge 
California regulators to limit the incentive for natural gas 
purchasers to gravitate to the spot market. The Commission will 
continue to do its part to get adequate pipeline infrastructure 
to California, but California needs to also assess whether 
there is sufficient intrastate capacity to take gas from the 
border to the market.
    And finally, I support the Commission's initiative to 
explore the feasibility of easing certain operating constraints 
for jurisdictional hydroelectric projects, but only if we can 
do so without compromising important environmental resources.
    In conclusion, I believe that competitive and open 
wholesale bulk power markets are still attainable and should 
remain the objective of Congress, energy regulators and State 
legislators throughout the country, and I look forward to 
working with this subcommittee and others to address these 
significant issues.
    [The prepared statement of Hon. Linda K. Breathitt 
follows:]

   PREPARED STATEMENT OF HON. LINDA BREATHITT, COMMISSIONER, FEDERAL 
                      ENERGY REGULATORY COMMISSION

    Mr. Chairman and Members of the Subcommittee: I appreciate this 
opportunity to appear before you today to discuss the energy crisis in 
California and the worsening conditions of electric systems and markets 
elsewhere in the Western United States. I believe it is not only 
appropriate, but necessary, that we meet at this time to examine a 
crisis that is affecting the lives and well-being of millions of 
citizens and threatening the very existence of thousands of commercial 
enterprises throughout the West.
    The magnitude of this growing crisis, and its potential disruptive 
capability, cannot be overestimated. The extraordinarily high prices 
for electricity and the extreme shortages of supply are creating a 
consumer backlash against newly restructured electricity markets. 
Unfortunately, the move toward a competitive electricity marketplace 
will undoubtedly be affected by this crisis and could even be suspended 
if other states, fearful of what they are seeing in the West, terminate 
their restructuring efforts. For these reasons, I welcome the interest 
and involvement of Congress in this matter and I look forward to 
working with you to address these problems.
    For many months, the Federal Energy Regulatory Commission has been 
grappling with and attempting to resolve the California energy crisis. 
We are now taking specific action, as well, to address problems in 
other parts of the West. I believe our actions to date have been 
significant and appropriate and will improve the long-term situation in 
the Western electricity markets. I am becoming increasingly concerned, 
however, about the near-term problem, particularly what will happen 
this summer in California. The predictions I am hearing for prolonged 
blackouts, supply shortages and even higher prices are alarming, to say 
the least.
    I am very concerned that, even as important as they are, our 
actions to date, and those of California officials, will not improve 
the immediate and near-term situation in California. We may have to 
explore other short-term remedies to stem the damaging disruptions in 
these markets. Indeed, over the past several weeks we have received 
letters from members of the California Congressional Delegation, 
governors of some Western states, and others urging immediate, short-
term action by the Commission, including the imposition of regional 
price caps, to restrain the high wholesale costs of electricity in the 
region. I believe it is imperative that the Commission place all 
available options on the table for consideration. The solutions to 
these problems will be as multi-faceted and complex as the causes. We 
must recognize that fact and prepare ourselves to make the tough 
decisions necessary to resolve the problems.
    My testimony today will build on that theme by discussing some of 
the apparent causes of the disruptions in Western electricity markets, 
some of our important actions intended to relieve these disruptions, 
and, what I believe to be, the appropriate role of the Commission in 
addressing the volatilities and uncertainties that exist in these 
markets. I will also briefly discuss recent actions taken by California 
officials. In addition, I adopt the attachment to Chairman Hebert's 
testimony which provides a description and summary of several important 
orders issued by the Commission over the past five years regarding 
California's restructuring plan and electricity markets. This summary 
was prepared by Commission Staff and I believe it will provide you with 
a sufficient framework for understanding the chronology and details of 
FERC's key decisions and actions addressing California's restructuring 
efforts, some of which were issued before I began my tenure on the 
Commission.
    The Commission has focused much of its attention over the past 
several months in defining and understanding the causes of the market 
disruptions and high electricity prices in California and throughout 
the West. As expected, we found that multiple factors contributed to 
the situation. A Commission Staff report completed in November 2000 
found, among other things that: (1) market forces in the form of 
significantly increased power production costs combined with increased 
demand due to unusually high temperatures to create unstable conditions 
in the West; (2) scarcity of available generation resources throughout 
the Western region played a significant role; (3) existing market rules 
worsened the tight supply-demand conditions by exposing the three 
investor-owned utilities in California to the volatility of the spot 
energy market without affording them the opportunity to mitigate price 
volatility by hedging their positions in forward electricity markets; 
(4) an underscheduling of demand and supply in the California Power 
Exchange's day-ahead and hour-ahead markets increased the activity in 
the more volatile real-time spot market operated by the California 
Independent System Operator (ISO); and (5) unplanned outages of power 
plants increased significantly during the summer of 2000.
    It is becoming increasingly apparent that the causes of the 
California energy crisis are not only state-specific, but are also 
regional in nature. In other words, to fully understand the problems in 
California, it is necessary to look at conditions in the entire Western 
Interconnection. California has historically relied on imports to 
supply 15 to 20 percent of its capacity needs during summer peak 
periods, primarily from hydroelectric plants in the Northwest. Due to 
increased demand elsewhere in the West and low water levels in 
hydroelectric reservoirs in the Northwest, available imports into 
California in 2000 were less than half what they were in 1999. As a 
result, the California ISO had approximately 3,000 MW less generating 
capacity available from outside the state in 2000 than in 1999. This is 
but one example of the regional nature of the problem in the West.
    I believe the Commission has taken bold and decisive actions, 
within its jurisdiction, to remedy the extreme distortions in the 
California markets and to address instances of potential market power 
abuses. First, on December 15, 2000, we issued a major order 
establishing a set of remedies for the California market. In an effort 
to significantly reduce California's exposure to the volatile spot 
market, we eliminated the requirement set by the California legislation 
that the investor-owned utilities sell all of their generation into, 
and buy all of their power needs from the California Power Exchange. In 
effect, this action immediately returned 25,000 MWs to State 
regulation. This should allow the IOUs to move their purchase power 
needs to long-term bilateral contracts and to adopt a balanced 
portfolio of contracts to mitigate cost exposure. We also adopted a 
benchmark price of $74 per megawatt-hour for assessing prices of long-
term electric supply contracts. In an effort to reduce the real-time 
spot market to only about 5 percent of peak load, we initiated a 
penalty charge that would be imposed on any market participants that 
under schedules load in day-ahead and other forward markets.
    To ensure that prices in the ISO and PX spot markets are just and 
reasonable, the Commission established an interim breakpoint mechanism 
for sellers bidding into the spot market. Sellers bidding at or below 
$150 per megawatt will receive the market clearing price. Sellers 
bidding above that level will receive their actual bids, but the bid 
will not set the market clearing price. In addition, these bidders will 
be subject to certain reporting requirements and monitoring. Bids above 
$150 are subject to refund pursuant to Section 206 of the Federal Power 
Act. This breakpoint mechanism will be replaced on May 1 by a permanent 
and comprehensive market monitoring and mitigation program which will 
screen for market abuses.
    On March 9, 2001, we issued an Order directing certain sellers into 
the California market to either provide refunds totaling $69 million 
dollars in excessive charges for electricity during January 2001 or 
supply further cost or other justification for prices charges above a 
proxy market clearing price established in the order. Similarly, on 
March 16, 2001, we ordered potential refunds totaling $55 million 
dollars in excessive charges for electricity during February 2001. 
These Orders directing potential refunds are pursuant to our December 
15, 2000 order establishing remedies for the California's wholesale 
electric markets.
    Last Wednesday, March 14, 2001, the Commission launched an 
investigation of two California power marketers, Williams Energy Market 
& Trading Company and AES Southland, Inc., and issued a Show Cause 
Order directing the companies to explain why they should not be found 
to have violated the Federal Power Act by engaging in actions that 
inflated electric prices in the California market and potentially 
compromising the reliability of the transmission network. If these 
companies are found to have violated the terms and conditions of filed 
tariffs, the Commission could direct the companies to return profits, 
in excess of $10.8 million, and condition the companies' future market-
based rate authority.
    Also on March 14, 2001, the Commission issued an order announcing 
certain actions that we will take or propose to take to increase the 
supply of electricity in the West. Our order examined both electric 
supply-side and demand-side actions that could be taken, and how best 
to assure the input of natural gas needed for electric power 
production. We acknowledge that our authority is somewhat limited, but 
the steps we plan or propose to take should help increase supply from 
existing power sources and could provide regulatory incentives to build 
new electric and natural gas infrastructure.
    From my perspective, two aspects of the order are especially worth 
noting. First, the order establishes a conference in which FERC 
Commissioners will meet with Western state commissioners to hear their 
views on how FERC can assist them in addressing the market disruptions 
in the West. This type of interaction and coordination is important 
since state regulators, not the FERC, presently have siting authority 
for electric generation and transmission facilities. Moreover, state 
regulators have the most significant authorities to encourage demand 
reduction measures. I look forward especially to seek state 
commissioners' advice on what the Commission can do with respect to 
price volatility in the region. Although our March 14 order does not 
focus specifically on the volatile wholesale prices in the West, I 
believe that FERC has to examine all its options in that aspect of the 
electricity markets as well. I will urge my state colleagues to be 
forthcoming and candid with us as we examine together the extreme price 
volatility in these markets and implementation issues associated with 
any additional actions.
    Second, our March 14 order supports and addresses the requests made 
by California Governor Gray Davis and Secretary of Energy Spencer 
Abraham for the Commission to extend our waivers of certain regulations 
for Qualifying Facilities. In our order, we extended through December 
31, 2001, our temporary waiver of operating and efficiency standards 
and fuel use requirements for QFs, in order to allow them to increase 
their generation. In addition, we found good cause to apply those 
waivers to the entire Western System Coordinating Council (WSCC). In so 
doing, we require that all additional output from those QFs be sold 
exclusively through negotiated bilateral contracts at market-based 
rates. This should benefit all parties and help serve load in the WSCC 
at a time when generation resources are inadequate.
    As I have stated, the Commission has taken important steps in these 
orders to address the market disruptions in California and the West. If 
these steps prove to be unsuccessful, the Commission must act quickly 
to establish alternative remedies. As I have stated publicly on recent 
occasions, I am maintaining an open mind and a willingness to implement 
the structural or regulatory remedies that are required. We must strive 
to stabilize the markets in the West before the summer peak period 
begins and before the California market imperfections further worsen 
the market problems that are already developing in the Northwest and 
elsewhere in the Western Interconnection.
    As we continue to monitor the situation in the West, the Commission 
will continue to examine its role in these matters and to take 
appropriate action when necessary. One important aspect of the 
electricity system in the West and elsewhere in the country in which 
the Commission's jurisdictional role is restricted as it pertains to 
the siting of new transmission and generation facilities. Currently, 
under the Federal Power Act, the Commission has no role in the 
permitting and siting of these new facilities. I am beginning to 
believe this may need to be changed. FERC may need to have a greater 
role in the siting of new infrastructure, because shortages of 
generation and transmission likely will no longer be just single state 
issues. I believe these shortages could become interstate commerce 
issues that must be addressed by the Federal government.
    Already we are seeing how a shortage of electric infrastructure in 
California can affect prices and the efficient operation of the 
interstate transmission grid. We've recognized that California is 
experiencing a shortage of generation capacity. But the state's need 
for new transmission infrastructure is also becoming an important 
factor affecting the electricity markets. The last major transmission 
line that was built in California was the California-Oregon 
Transmission Project in 1993. The California ISO has identified a 
number of transmission projects that will both increase import 
capability and improve the reliability of the grid in various parts of 
the state. In addition, the ISO has identified projects in the San 
Francisco area that should be constructed in the next 2-3 years. These 
projects, evidently, would relieve congestion along the major north-
south transmission path and improve the overall reliability of the ISO 
grid. I am concerned that some of these needed projects may not be 
built. My concern is heightened by delays such as are being experienced 
by San Diego Gas & Electric's proposed Valley-Rainbow 500 kV Project. 
Although this project was approved by the California ISO in May 2000, 
it is being delayed because of local opposition. The ISO has determined 
that this project or a comparable alternative is needed to reliably 
serve load growth in San Diego beyond 2003. This is just one example, 
but I believe that a federal role in transmission siting throughout the 
country could be helpful in instances such as this, and could, in fact, 
become necessary in the future.
    With regard to transmission upgrade and expansion, I believe the 
Commission's Order No. 2000, issued in December 1999, will create an 
important regulatory framework. Order No. 2000 is intended to encourage 
the formation of Regional Transmission Organizations throughout the 
United States. The Order includes a specific functional requirement for 
RTOs to develop a strategy for transmission planning and expansion. The 
order also describes innovative pricing options that the Commission 
would consider for RTOs. Such ratemaking mechanisms could provide 
necessary incentives for the construction of new or enhanced 
transmission facilities. I believe the formation of RTOs in the West 
will be a significant benefit for many aspects of the electric markets 
in that region, including the expansion and enhancement of the 
transmission grid.
    Due to the continuing convergence of the electric and natural gas 
industries, problems that have affected the electric utilities in 
California and the West also have been felt in the natural gas 
industry. Furthermore, there is a clear nexus between the pressure to 
capture all megawatts available and the increased use of hydroelectric 
facilities in the West. I will first address natural gas issues.
    I believe that there are both short-term and longer-term actions 
that need to be taken on the natural gas front. In the short-term, 
there appears to be an over-reliance on spot-market purchases of 
natural gas. Our December 15th order found that a major cause of the 
high electric prices in California was the over-reliance on the spot 
market for electricity. In that order, the Commission recommended that 
the IOU's put 95 percent of their load in forward markets to minimize 
exposure to the price volatility of the spot market. I believe that the 
same logic holds for the natural gas market.
    It is my understanding that the California Public Utilities 
Commission allows for recovery of gas costs that meet a benchmark 
determined by the use of monthly spot market purchases. It is my 
opinion that this policy creates an incentive to rely on spot market 
purchases of natural gas. Accordingly, I would suggest that policies 
should be in place that provide an incentive for natural gas buyers to 
use risk management tools, such as price hedging, to decrease commodity 
pricing uncertainties.
    I strongly believe that regulators need to be careful to discern 
the difference between hedging to reduce exposure to price volatility, 
and mere speculating. It may be a fine distinction, but it is one that 
is critical. Hedging can be a useful tool to decrease uncertainty, 
while speculating to beat the market can increase the possibility of 
risk. It could even be said that failing to hedge and, therefore, limit 
the exposure to the vagaries of the spot market, is actually 
speculating. Consequently, I would urge regulators in California to 
look at the benefits that may accrue by limiting the incentive for 
natural gas purchasers to gravitate toward the spot market.
    The Commission's March 14th order on supply and demand issues 
presented a number of longer term measures that the Commission is 
taking or may take to increase the amount of interstate natural gas 
capacity into California and the West. Specifically, the Commission has 
realigned its staff to be able to respond as quickly as possible to 
applications for new gas pipeline capacity for the West. Through this 
order, FERC also is seeking comments on the need to provide rate 
incentives to expedite construction of projects that will make 
additional capacity available this summer on constrained pipeline 
systems.
    However, there is another California infrastructure concern that 
should be resolved at the state level. While FERC has jurisdiction over 
the siting of interstate natural gas pipelines, the states have siting 
authority for intrastate facilities. Consequently, FERC can do its part 
to get adequate pipeline infrastructure to California, the state needs 
to assess whether there is sufficient intrastate capacity available to 
take natural gas from the border to market.
    The Commission is addressing the need for increased supplies 
through the administration of its hydro licensing program, as well. 
With hydropower comprising approximately 40 percent of the total WSCC 
generation capacity, the Commission has launched an initiative to 
explore the feasibility of easing certain operating constraints, such 
as minimum flow and reservoir level requirements, that act to reduce 
the energy production, peaking capacity, and other power benefits of 
hydropower projects. These operating constraints serve to protect many 
resources--such as resident and anadromous fish, water quality, 
recreation, municipal and industrial water supplies, and agricultural 
resources. The tension will be in finding a balance between greater 
operational flexibility and the protection of environmental resources. 
In addition, a more efficient use of available water resources at 
licensed projects could contribute to meet the electric capacity and 
energy needs of the Northwest.
    The Commission's goal is to establish a methodology by which the 
Commission can quickly identify projects where there is a potential for 
more electricity to be generated with the least effect on resources, 
and then to create a process by which we can quickly review requests 
for modifications. The Commission's experience with emergency drought 
conditions in California in the 1980s provides a general framework for 
this exercise. The tension in will be in finding a balance between 
greater operational flexibility and the protection of resources. In 
order to achieve this objective, it will be necessary to seek the 
cooperation not only of FERC licensees, but also federal, state, and 
local resource agencies and other interested parties. In our March 14th 
Order addressing supply and demand issues, we announced a staff 
conference, to be held as soon as possible this spring. I will be 
willing to support greater flexibility in cases where the reliability 
of the system can be enhanced during this critical time, without 
compromising important environmental resources.
    As I have stated throughout my testimony today, I believe the 
Commission is taking appropriate and important steps to address the 
market disruptions in the West. I want to point to some actions that 
are also being taken by California officials in their efforts to 
address some of the problems in their state. For instance, Governor 
Davis has: (1) implemented a limited-term rate reward program for 
conservation efforts by residential, commercial and industrial 
customers; (2) expedited the processing of applications for 
certification for peaking and renewable power plants; (3) provided for 
performance awards relating to the construction of power plants brought 
on line prior to July1, 2001; and (4) modified emissions limits that 
restrict the hours in which certain plants can operate.
    In addition, as noted in Chairman Barton's March 12, 2001, letter 
inviting me to testify before you today, the state has enacted 
legislation and regulations facilitating state contracting for power. 
The state is also considering other options, such as purchasing utility 
transmission lines. Most of these actions, I believe, will have 
beneficial long-term effects on California's electricity market. I 
would like to comment briefly, however, on one of these measures. The 
possible state purchase of the investor-owned utilities' transmission 
systems has received a great deal of press coverage and discussion. In 
my opinion, the issue is not so much who owns the transmission system 
in California, or elsewhere for that matter. The real issue is that the 
transmission system, whether public or private, needs to be part of a 
regional grid. Only independent, regionally operated grids will ensure 
competitive electricity markets that are open, efficient, reliable, and 
free from discrimination. As we continue discussing this matter, what's 
truly important is that California's transmission system remain as much 
a part of the Western regional grid in the future as it is today.
    In conclusion, I believe that competitive and open wholesale bulk 
power markets are still attainable and should remain the objective of 
regulators and legislators throughout the country. I remain confident 
that we can implement appropriate short-term and long-term solutions to 
current problems so that we can stay the course toward open and 
competitive markets. Let me again say that I look forward to working 
with this Subcommittee and others to address these significant issues.

    Mr. Barton. We thank you.
    We would now like to welcome Commissioner Massey, comes 
from the great State of Arkansas.
    Your statement is in the record in its entirety, and we 
recognize you to elaborate on it.

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

    Mr. Massey. Thank you, Mr. Chairman and members of the 
subcommittee. As we approach the second summer of a wildly 
dysfunctional wholesale market in California and the West, we 
stand at the edge of an abyss. We know the market will be 
several thousand megawatts short of generation this summer. We 
know that there is very little demand response that will dampen 
high prices in this market. We have reason to believe that 
market power is present in the market. The market monitors in 
California have told us this time and time again, and 
withholding of generation can be a highly profitable strategy, 
as we know from the recent order that we issued involving two 
sellers into California. We have already declared that the 
California market is severely dysfunctional and is not 
producing just and reasonable prices.
    The dysfunctional nature of the market will not be remedied 
by this summer and prices will soar even higher. Soaring prices 
will not get even one more megawatt of generation built by this 
summer. The price signal has been sent. Elementary school 
children in Bethesda, Maryland, know that the West is capacity-
short now because of all the news programs on it.
    A recent Wall Street Journal article detailed the concern 
in Washington State about the loss of jobs caused by high 
electricity prices. It is important to understand that while 
prices had climbed to $400 or even $500 or higher in 
California, they have recently been in the $50 range in the PJM 
market. Many new generators want to enter the PJM market. They 
are clamoring to do so because they are receiving the price 
signal of a well-functioning market. Without effective price 
mitigation out West, I fear a disaster in the making for the 
summer.
    I can see no constraint on prices for the summer under 
current policy. I have no idea whether Professor Wallach, the 
California market monitor, is accurate in his projection of a 
$70 billion market in California for this year. It was $7 
billion in 1999. If he is anywhere close to correct, it will be 
a catastrophe.
    We need a temporary time-out in wholesale markets out West. 
FERC should consider capping prices in short-term markets in 
the western interconnection at each generator's marginal 
production cost plus a reasonable capacity payment in the range 
of, say, $25. I would exempt new generation and impose a sunset 
date perhaps tied to achieving a certain reserve margin in the 
West.
    Without some effective price control this summer, I fear 
for the worst. What is more, the prices that arise in a 
dysfunctional wholesale market, and that is what we have 
declared it to be, are, according to the courts, unjust, 
unreasonable and flatly unlawful. We have the statutory 
obligation to ensure just and reasonable prices. There is no 
exception for poorly functioning markets, in Federal law. There 
is no exception for bad State law. There is no exception, 
period.
    FERC must take more forceful action to fulfill our 
statutory obligation. We cannot risk the health of the western 
economy for the philosophical purity of an unfettered price 
signal. Our policy favoring markets must surely be tempered 
with compassion and common sense at this critical time. Yes, 
there is a supply shortage out West, a critical one, and there 
is a critical price problem as well that appears to be getting 
worse, not better.
    That is the short term. Regarding long-term fixes, I agree 
with my colleagues, we need a large western interconnection, 
regional transmission organization, because California is not 
an island. I am indifferent about who owns the California 
transmission grid as long as they make a firm and lasting 
commitment to participate in a regional transmission 
organization. We must end overreliance on the spot markets. We 
must work with the State to elicit a demand response when 
prices get too high. We probably need to take the rules of our 
best market, which is the PJM market that we function in right 
here in this region, and we need to replicate that in 
California. Among the rules are efficient congestion management 
and a standing generation reserve requirement.
    Mr. Chairman and members of the subcommittee, I also 
appreciate Commissioner Breathitt's comments about the gas 
market. The transportation differential for natural gas into 
California has been at times exorbitant. That exorbitant 
transportation differential, sometimes in the range of $20- to 
$30 for delivering natural gas into California, then is 
leveraged into the wholesale price of electricity because the 
units that are on the margin are gas-fired units, and two-
thirds to three-fourths or even higher of their marginal 
production cost is natural gas. We have got to get a handle on 
that problem as well, and I appreciate Commissioner Breathitt's 
remarks in that regard.
    I look forward to your questions.
    [The prepared statement of Hon. William L. Massey follows:]

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

    Mr. Chairman and Members of the Subcommittee on Energy and Air 
Quality: Thank you for the opportunity to testify on the subject of the 
problems facing the California electricity market. The Federal Energy 
Regulatory Commission has been moving the electricity industry to a 
structure that relies on well-functioning wholesale markets to produce 
an economic and reliable supply of electricity for the nation. In 
supporting that policy, my expectation continues to be that markets 
will produce consumer benefits and lower prices over the long term 
compared to cost of service regulation. The recent events in California 
and the West present a significant challenge to that expectation.
    I am very concerned about the recent behavior of California's 
electricity market and its effects on consumers there and throughout 
the West. I cannot overstate the enormity of this market catastrophe. 
Power that cost California $7 billion in 1999 increased to over $27 
billion last year. Costs for 2001 may exceed $70 billion. This severely 
threatens the political consensus necessary to sustain a market-based 
approach to regulation, not just in California but across the country. 
The Commission must act forcefully and decisively to reassure market 
participants, policymakers and consumers that jurisdictional wholesale 
markets will produce consumer benefits and just and reasonable rates. 
Among other things, FERC must immediately declare a time out.

                  I. THE CAUSES OF MARKET DISRUPTIONS

A. Infrastructure
    The western electricity markets are in the midst of a serious 
market disruption. California has experienced extraordinarily high and 
volatile electricity prices in the last ten months and has skated on 
the edges of power outages for most of the winter. Other areas of the 
West have also seen very high wholesale prices, in part due to the 
problems in California. These are the symptoms of the problems. What 
are the problems?
    I think most observers agree on a number of factors that have 
affected the electricity market in California and the West. First and 
foremost among the causes is inadequate infrastructure. Whether it be 
due to regulatory uncertainty, siting restrictions, process inertia, or 
simply poor judgment, not enough generation has been built over the 
last few years to keep pace with demand. There has also been a 
significant lack of rainfall in the West such that normal hydroelectric 
generation levels are unavailable. Transmission constraints, especially 
along the notorious Path 15 in California, have played a role in local 
supply shortages and high prices. The critical transmission 
infrastructure has not kept pace with the needs of the electricity 
market.

B. Market Design
    California also suffered from a number of defects in market design. 
For example, a combination of rules resulted in creating an incentive 
for under scheduling in day ahead markets. Scheduling imprecision is to 
be expected to some degree, but my understanding is that deliberate 
under scheduling was done in the California PX day ahead markets by 
both load serving entities and generators in order to affect market 
prices. This forced the ISO to go into the real time markets to make up 
the difference between what was scheduled and what was needed to keep 
the system in balance. Under such conditions, the ISO paid very high 
prices. Perhaps even more important, last minute resource imbalances 
pose reliability concerns.
    Another market design defect was placing entirely too much reliance 
on the spot market. Spot markets and real time markets are almost by 
nature volatile. By way of analogy, a traveler purchasing his ticket 
while passengers are boarding the plane would expect to pay the highest 
price. While the spot market is the appropriate venue to secure limited 
portions of needed supply, it should not be relied upon for most or all 
of the supply portfolio. Unfortunately, there were rather severe state 
regulatory restrictions on the degree to which load serving utilities 
in California could forward contract. Surely purchasers having access 
to a balanced portfolio of long-term and short-term supply must be an 
ingredient of well-functioning markets.
    There has also been a lack of demand responsiveness to price. This 
is a standard means of moderating prices in well-functioning markets, 
but it is generally absent from electricity markets. When prices for 
other commodities get high, consumers can usually respond by buying 
less, thereby acting as a brake on price run-ups. If the price, say, 
for a head of cabbage spikes to $50, I simply don't purchase it. 
Without the ability of end use electricity consumers to respond to 
prices, there is virtually no limit on the price that suppliers can 
fetch in shortage conditions. This is a defect in virtually all U.S. 
electricity markets.
    Finally, there was a spike in natural gas prices in the winter that 
drove up electric generation prices, because some of the least 
efficient gas-fired generators were the marginal facilities to be 
dispatched.

C. Withholding of Generation
    I have been discussing what most observers generally agree have 
been contributing factors to the market problems. Market manipulation 
by some generators is also believed to have been present. On March 14, 
2001, after a non-public investigation, the Commission issued an order 
to show cause against Williams Energy and AES alleging the withholding 
of RMR generation during April and May of 2000. The order seeks the 
refund of over $10 million. While there is not universal agreement 
whether widespread withholding has occurred, I believe there is enough 
evidence to render this a reasonable suspicion. The Chairman of the 
California ISO's Market Surveillance Committee, Professor Frank Wolak, 
has repeatedly charged that the rapid escalation in price last summer 
was caused by market power and withholding of generation. A recent San 
Francisco Chronicle article, using data from the California ISO, 
challenges the notion that supply was short during much of the price 
run up. For example, California consumption grew only 4.75 percent in 
2000 from 1999, and average peak demand was only 4.79 percent higher. 
Demand growth was only 8.3 percent higher from May to August. I know 
that some also allege that market power can only be exercised during 
severe shortage conditions, but the ISO called only one Stage 3 alert 
(reserves of only 1.5%) during all of the year 2000, and that was in 
December. Yet prices soared beginning in June. The Commission has also 
received studies, most notably from Professors Paul Joskow and Edward 
Kahn, that indicated the market was manipulated by generators to drive 
up prices. While there are surely some legitimate supply inadequacies, 
I cannot help but suspect that some supply was withheld from the market 
by sellers.

                      II. STATE GOVERNMENT ACTIONS

    California is taking both short and long term measures intended to 
resolve the current market crisis. What's needed foremost is to close 
any gap between supply and demand. The state's program, as I understand 
it, is taking some steps to address this objective. One of California's 
major initiatives is entering long term contracts with generators to 
assure a reasonably priced and reliable supply of electricity. FERC has 
encouraged long term contracting. The state placed itself in the 
position of power purchaser because of the credit problems of the 
state's major utilities.
    Unfortunately, the state is signing long term contracts at a time 
when the spot market prices are very high and volatile and the market 
has been dysfunctional. Long term contract prices are based on the 
expectations of future spot market prices. California may be creating a 
new stranded cost problem by signing contracts that are too long and at 
too high a price. Long term contracts protect against volatility, but 
they do not protect against high prices.
    I am also aware that California is acting to speed up new supplies 
of electricity capacity. The state has identified 32 potential sites 
suitable for peaking plants that could be sited under the state's 
emergency siting process, streamlined somewhat its review of new 
plants, proposes to provide bonuses to plant developers to accelerate 
plant construction, and is providing incentives for distributed and 
renewable generation. These measures seem to be on target, although I 
have no way of predicting whether they will be sufficient.
    The state has also announced an energy conservation program that it 
hopes will reduce peak load by 3,200 MWs this summer. This also is on 
target. For the longer term, however, I would strongly recommend that 
California, and indeed all states, explore ways of increasing the 
responsiveness of demand to price signals. Without the ability of end 
use consumers to respond to price, there is virtually no limit on the 
price suppliers can fetch in shortage conditions. This does not make 
for a well functioning market.
    Instilling demand responsiveness into electricity markets requires 
two conditions: customers must be able to see prices before they 
consume, and they must have reasonable means to adjust consumption in 
response to those prices. Accomplishing both of these on a widespread 
scale will require technical innovation. A modest demand response, 
however, can make a significant difference. A recent study by the 
Electric Power Research Institute (EPRI) indicates that during this 
past summer, a 2.5% demand reduction at peak times could have reduced 
energy costs in California by $700 million. Other studies show that 
price spikes can be reduced by 73% if just 10% of demand is on real 
time pricing.
    And once there is a significant degree of demand responsiveness in 
a market, demand should be allowed to bid so called ``negawatts'' into 
organized markets along with the megawatts of the traditional 
suppliers. This direct bidding would be the most efficient way to 
include the demand side in the market. But however it is accomplished, 
the important point here is that market design simply cannot ignore the 
demand half of the market without suffering the consequences, 
especially during shortage periods.
    The state of California is also actively exploring a purchase of 
the transmission assets of the three major investor owned utilities. 
Such an action, if it comes to pass, raises a number of issues. First, 
will it help stabilize the electricity markets in California? The 
answer to this is uncertain. Over time, I believe that state ownership 
might help bring better coordination with public power transmission 
owners, thereby improving grid operation. A state owned grid may 
provide a better chance of making needed transmission improvements at 
constraint points, such as the infamous Path 15 that is responsible for 
substantial congestion in California.
    The other major issue raised by a state purchase of the 
transmission facilities is how will the Commission view the transfer? 
The Commission has jurisdiction of such a transfer under section 203 of 
the Federal Power Act. One of our major review criteria is the effect 
of the transfer on competition. We would not view favorably any asset 
transfer that is inconsistent with the requirements of regional 
competitive wholesale markets. I am personally indifferent whether the 
state or private interests own the transmission assets. I have strong 
views, however, on how those assets are operated. The Commission should 
consider conditioning the asset transfer on participation in a Regional 
Transmission Organization with a more expanded scope than California. 
This would ensure open access and efficient and non-discriminatory 
operation of these critical strategic assets.

                         III. THE FEDERAL ROLE

    The fundamental problems in the California market must be addressed 
by short and long terms actions. Siting authority for bringing on new 
generation and transmission facilities currently rests with state and 
local authorities, as does the authority to improve the retail price 
signals so that customers can respond better to market conditions. 
There are, however, a number of actions that the can taken at the 
federal level to fix the broken market in California and ensure well 
functioning electricity markets throughout the nation. Some can be 
achieved by the Commission under present authority, and some will 
require legislation.

A. Commission Action Under Current Authority
    The Commission should do all it can to narrow the gap between 
supply and demand in the short term and bring immediate price relief to 
consumers and businesses. Last week, the Commission issued an order 
that is aimed at removing obstacles to increased supply in the western 
United States. This order addresses modest short term actions. Among 
them are: temporary waivers of operating and efficiency standards for 
QFs, market based rate authority for sales from generation at business 
locations, and authorizing customers to ``sell'' load reduction at 
market based wholesale rates.
    These quick fix measures, though well motivated, will not close the 
gap between supply and demand substantially in the short term. Current 
estimates are that California will be at least several thousand 
megawatts short this summer. Moreover, it is generally agreed that 
demand in California and elsewhere in the West is not responsive enough 
to prices. So we will have a severe shortage of supply, and demand that 
is not responsive to price signals. In these circumstances, what will 
restrain prices? Absolutely nothing. California ISO market monitors 
reported that in such circumstances last summer, there was no 
constraint whatsoever on the prices generators could bid and still get 
dispatched. The situation this coming summer may be worse by orders of 
magnitude. The Commission has already found that the dysfunctional 
market in California is not producing just and reasonable prices. 
Addressing these problems is a long term endeavor. Unfortunately, 
market participants are forced to purchase in today's markets, and at 
prices that are arguably unlawful under the Federal Power Act.

1. Immediate Price Mitigation
    I am very concerned with the economic effects of the current market 
meltdown. The price shocks of short supply threaten serious economic 
dislocation and harm in the region. Already, factories are closing and 
utilities throughout the West are asking for exceptional rate 
increases. Bonneville is doubling its rates to cover wholesale 
purchased power costs: the City of Tacoma, Washington, has voted a 50-
70 % increase. State regulators are put in a tough spot. Refusing the 
price increases could threaten their utilities with bankruptcy. But 
allowing the rate increases could unleash a political backlash from 
consumers who think the prices in the wholesale markets are a blatant 
rip-off. An article in the March 13, 2001 Wall Street Journal reported 
that the current western energy crisis could cut disposable household 
income by $1.7 billion and cost 43,000 jobs over the next three years 
in Washington state alone. Some fear that it could tip the whole region 
into a recession. Moreover, the current volatile and high prices, which 
may be worse by magnitudes this coming summer, are devastating consumer 
and investor confidence in a market based approach to electricity 
regulation.
    Over the past three months, I have attended and spoken at two 
separate conferences sponsored by the Western Governors Association 
dealing with these issues. Scores of market participants and western 
public officials spoke passionately and eloquently about the nature of 
the problems they face. Certainly the issue of supply is a big problem 
that must be addressed, but so is the issue of price. Without price 
protection, there is huge concern out West about what the summer will 
bring in terms of high wholesale prices and volatility. If the West 
experiences another summer like the last, I fear for the future 
viability of our policy favoring wholesale competition. It may suffer 
irreparably.
    The Commission must initiate a formal section 206 investigation 
into the appropriateness of effective price mitigation in the Western 
interconnection until the longer term solutions are in place and the 
markets operate normally. This investigation would assess whether 
conditions in the Western interconnection are preventing competitive 
market operation, how long those conditions are expected to last, and 
possible wholesale price mitigation. We would also inquire about how 
any mitigation measures should be applied and how long they should 
last. A specific sunset provision is important to maintain investor 
confidence that price mitigation is temporary and imposed only to deal 
with a poorly functioning market and to provide an incentive to ensure 
that the market problems are addressed expeditiously. Most importantly, 
a section 206 investigation would set a refund effective date 60 days 
hence so that the Commission can protect consumers if our investigation 
finds that prices are not just and reasonable.
    It is time for FERC to call a time out from this broken western 
electricity market. At this point, high prices that exceed production 
and operating costs serve no useful purpose. Is it worth dragging down 
an entire regional economy, or perhaps even the national economy, for 
the theoretical purity of an unfettered price signal? I say no. FERC 
should consider a temporary cost-based price cap on sales in the 
Western interconnection. Such a price cap could be calculated on a 
generator-by-generator basis at each generator's variable operating 
costs plus a reasonable capacity adder perhaps in the range of $25/MWH. 
New generation sources should be exempt. In addition, such a cap should 
have a well specified sunset provision, tied either to a date certain 
or the attainment of certain specific conditions, such as some measure 
of adequate reserves.
    Such a wholesale price cap would allow generators to recover all 
their operating costs plus a return, so generators should have every 
incentive to provide power to the grid. In addition, such a cap would 
restore credibility to wholesale market prices, and thereby make any 
retail rate increases politically saleable. Surely suppliers have 
gotten the message by now that more supply is needed. They no longer 
need such extreme signals.

2. Good Market Structure
    Over the longer term, the Commission must insist on a good market 
structure that will produce just and reasonable prices. The difficulty 
is that good structure cannot be easily parsed between wholesale and 
retail jurisdictions. A well functioning wholesale market is needed for 
a well functioning retail market. For example, retail prices will 
suffer if the wholesale market is not characterized by competition and 
rational grid operation. Wholesale prices cannot be disciplined without 
adequate generation and transmission facilities sited by state and 
local officials, and without substantial numbers of retail customers 
seeing accurate market price signals and having the ability to react to 
them. This relationship means the Commission and the states must work 
together. But the bottom line is that the Commission must insist on a 
good wholesale market structure.
    One key element of good structure in California and the West is a 
single Regional Transmission Organization for the entire Western 
interconnection. I firmly believe that RTOs consistent with FERC's 
vision in Order No. 2000 are absolutely essential for the smooth 
functioning of electricity markets. RTOs will eliminate the conflicting 
incentives vertically integrated firms still have in providing access. 
RTOs will streamline interconnection standards and help get new 
generation into the market. A West-wide RTO will help ensure access to 
the western power market, improve transmission pricing, regional 
planning, congestion management, and produce consistent market rules 
across the West. We know for a fact that resources will trade into the 
market that is most favorable to them. Trade should be based on true 
economics, not the idiosyncracies of differing market rules across the 
region.
    To realize these many potential benefits, RTOs must be truly 
regional in scope--large and well shaped. Markets are regional in 
scope--this has been well demonstrated recently as prices over the 
entire West rose and fell with events in California. Thus, we need an 
RTO that covers the entire West. At last Wednesday's Commission 
meeting. Chairman Hebert indicated that he shares this objective, and I 
welcome his commitment.
    As mentioned earlier, the California market is defined by an over 
reliance on the volatile spot market. The Commission has recently 
encouraged substantial forward contracting by wholesale purchasers. 
Although some progress has been made in this area, it does not appear 
that significant forward hedging contracts will be in place for the 
summer. Substantial reliance on forward contracts is a key element of 
good market structure. The Commission must insist that this element is 
in place.
    Another element of good market structure is an ex ante assurance of 
adequate generating capacity, including a reserve margin requirement. 
The California market design called for no capacity obligations and 
very little forward contracting. Presumably, it was expected that the 
invisible hand of the market would ensure that capacity would show up 
when needed. Yet, given that electricity cannot be stored, relying 
solely on market signals for capacity could mean significant 
fluctuations of price and capacity availability as supply and demand 
adjust. The fundamental role that electricity plays in the social, 
economic, health and public safety fabric of our society, however, 
argues that substantial fluctuations in availability and price should 
be minimized. One way of guarding against these fluctuations would be 
to place an ex ante reserve requirement on the load serving entities 
that they could meet however they see fit. This is the current practice 
in PJM, and, given the level of capacity additions planned there, 
suppliers seem to have confidence in that market design.
    Markets also need demand responsiveness to price. Without the 
ability of end use consumers to respond to price, there is virtually no 
limit on the price suppliers can fetch in shortage conditions. 
Consumers see the exorbitant bill only after the fact. This does not 
make for a well functioning market. I addressed demand responsiveness 
earlier in this testimony.
    Good market structure also requires attention to efficient 
congestion management, the sequence of bidding, reasonable market rules 
and other details. It is generally recognized that the best functioning 
wholesale electricity market in the United States is the Pennsylvania, 
New Jersey, Maryland Interconnection, known as PJM. PJM has an 
excellent market structure that incorporates virtually all of the 
elements that I have mentioned. Market participants tell me that they 
have great confidence in the PJM market design. PJM works. The 
Commission should replicate the PJM structure in all U.S. wholesale 
electricity markets, including California and the West.
    Even with our best efforts to put in place well structured 
electricity markets, however, there may be times when those markets 
fail to do their job. When markets fail, the Commission must be 
aggressive in ensuring just and reasonable prices. If the states cannot 
depend on the wholesale market regulator to ensure reasonable prices 
for consumers, then states will surely think twice before heading down 
the restructuring path. Moreover, ensuring just and reasonable prices 
is our statutory mandate, and there is no exception for dysfunctional 
markets.

3. Mitigating Market Power
    The task of ensuring reasonable prices in wholesale markets must be 
addressed by FERC far differently now than under the old regime. It's 
much harder now. Our focus is no longer on the costs of individual 
companies. Instead, our focus is on markets and ensuring that they are 
free of market power and have the needed components to function well. 
This means that we must have the data, the analytic capability and the 
manpower to do the job well. FERC has yet to instill confidence in this 
policy area.
    In order to protect against market power, the Commission must 
identify and clearly define what constitutes an exercise of market 
power. We must update our market power standards. Is it market power 
when a generator regularly bids above its variable operating costs? I 
say yes, but the record in our California proceeding indicates there is 
no consensus on this issue. We need to develop clear standards for what 
is not acceptable market behavior. We cannot expect players to follow 
the rules when the rules haven't even been posted. We must ensure that 
markets are adequately monitored, and that the monitoring and policing 
task is equipped with the right data, and with sufficient manpower, to 
do the job. And when market monitors in California and elsewhere tell 
us that market power is being exercised, we must not ignore there 
pleas. We must forcefully respond.
    And finally, the Commission must aggressively intervene when the 
markets are not producing reasonable prices. New electricity markets 
need a lot of attention. They are just emerging from almost a century 
of monopoly regulation. Moreover, the unique characteristics of 
electricity make the markets exceptionally vulnerable to market power 
and to the potential for breathtaking price run-ups when supply is 
short. Billions of consumer dollars are at stake, so we must conduct 
tough-minded investigations. We have to be willing to impose a time out 
on markets that are not functioning. Even the venerable New York Stock 
Exchange uses circuit breakers to mitigate exceptional price 
fluctuations. When the stock market drops by a set percentage, the NYSE 
halts trading. In fact, all of the world's most sophisticated commodity 
markets have time outs.
    The Commission must demonstrate through decisive action a more 
forceful commitment to these tasks. This market crisis began last June 
with California's clearly dysfunctional market. On December 15, we 
found that the California market rules in combination with the 
imbalance of supply and demand have caused, and will continue to cause, 
unjust and unreasonable prices. High prices are rippling throughout the 
West causing great alarm and economic pain for citizens. Yet, the 
Commission has failed to provide any effective price relief. Our 
statutory mandate requires more forceful action by the Commission to 
resolve this crisis.

B. Federal Legislation
    There also is a need for federal legislation to ensure that the 
nation reaps the benefits of well-functioning electricity markets in 
California and beyond. I would not advocate a legislative solution for 
all of the causes of the recent problems in the California market. Many 
market design flaws, the lack of hedging, and the lack of demand side 
responsiveness can be addressed under existing authorities. But I do 
believe that this experience has demonstrated that electricity markets 
are inherently interstate in nature. Prices throughout the western 
United States rose and fell with events in California. In order to 
thrive, such markets must have an open, non-discriminatory, well 
managed, and efficiently priced interstate transmission network that 
links buyers and sellers of power. The existing patchwork of 
inconsistent and outdated jurisdictional rules for this essential 
interstate delivery system, coupled with splintered network management, 
create obstacles and uncertainties that undercut the market. If buyers 
and sellers lack confidence that electric power will be delivered 
reliably and on reasonable terms and conditions, they will not commit 
resources to those markets.
    Legislation should facilitate the development of a reliable and 
efficiently organized grid platform upon which vibrant wholesale 
markets can be built. Jurisdictional uncertainties or anomalies should 
be eliminated, the development of Regional Transmission Organizations 
should be ensured, and the authority to site interstate transmission 
facilities should reside with an interstate authority.
    My recommendations for federal legislation fall into five broad 
areas.
    First, Congress should place all interstate transmission under one 
set of open access rules. That means subjecting the transmission 
facilities of municipal electric agencies, rural cooperatives, the 
Tennessee Valley Authority, and the Power Marketing Administrations to 
the Commission's open access rules.
    In addition, all transmission, whether it underlies an unbundled 
wholesale, unbundled retail, or bundled retail transaction, should be 
subject to one set of fair and non-discriminatory interstate rules 
administered by the Commission. This will give market participants 
confidence in the integrity and fairness of the interstate delivery 
system, and will facilitate robust trade by eliminating the current 
balkanized state by state rules on what is essentially an interstate 
delivery system.
    Second, I continue to strongly believe that the development of well 
structured Regional Transmission Organizations is a necessary platform 
on which to build efficient electricity markets. The full benefits of 
RTOs to the marketplace will not be realized, however, if they do not 
form in a timely manner, if they are not truly independent of merchant 
interests, or if they are not shaped to capture market efficiencies and 
reliability benefits. While the Commission may have more authority 
regarding RTOs than it has exercised thus far, I nevertheless recommend 
that the Congress clarify existing law to authorize the Commission to 
require the formation of RTOs and to shape their configuration.
    Third, we need mandatory reliability standards. Vibrant markets 
must be based upon a reliable trading platform. Yet, under existing law 
there are no legally enforceable reliability standards. The North 
American Electric Reliability Council (NERC) does an excellent job 
preserving reliability, but compliance with its rules is voluntary. A 
voluntary system is likely to break down in a competitive electricity 
industry.
    I strongly recommend federal legislation that would lead to the 
promulgation of mandatory reliability standards. A private standards 
organization (perhaps a restructured NERC) with an independent board of 
directors would promulgate mandatory reliability standards applicable 
to all market participants. These rules would be reviewed by the 
Commission to ensure that they are not unduly discriminatory. The 
mandatory rules would then be applied by RTOs, the entities that will 
be responsible for maintaining short-term reliability in the 
marketplace. Mandatory reliability rules are critical to evolving 
competitive markets, and I urge Congress to enact legislation to 
accomplish this objective.
    Fourth, the FERC needs the authority to site new transmission 
facilities. The transmission grid is the critical superhighway for 
electricity commerce, but it is becoming congested due to the increased 
demands of a strong economy and to new uses for which it was not 
designed. Transmission expansion has not kept pace with these changes 
in the interstate electricity marketplace. The Commission has no 
authority to site electric transmission facilities that are necessary 
for interstate commerce. Existing law leaves siting to state 
authorities. This contrasts sharply with section 7 of the Natural Gas 
Act, which authorizes the Commission to site and grant eminent domain 
for the construction of interstate gas pipeline facilities. Exercising 
that authority, the Commission balances local concerns with the need 
for new pipeline capacity to support evolving markets. We have 
certificated 10,000 miles of new pipeline capacity over the last six 
years. No comparable expansion of the electric grid has occurred.
    I recommend legislation that would transfer siting authority to the 
Commission. Such authority would make it more likely that transmission 
facilities necessary to reliably support emerging regional interstate 
markets would be sited and constructed. A strong argument can be made 
that the certification of facilities necessary for interstate commerce 
to thrive should be carried out by a federal agency.
    Finally, I recommend legislation that would give the Commission the 
direct authority to mitigate market power in electricity markets. It 
should be clear by now that, despite our efforts, market power still 
exists in the electricity industry. The FERC, with its broad interstate 
view, must have adequate authority to ensure that market power does not 
squelch the very competition we are attempting to facilitate. However, 
the Commission now has only indirect conditioning authority to remedy 
market power. This is clearly inadequate. Therefore, I recommend 
legislation that would give the Commission the direct authority to 
remedy market power in wholesale markets, and also to do so in retail 
markets if asked by a state commission that lacks adequate authority.

                               CONCLUSION

    I stand ready to assist the Subcommittee in any way, and I thank 
the you for this opportunity to testify.

    Mr. Barton. Thank you, Commissioner.
    We are going to have at least two rounds of questions and 
perhaps more, depending on how many members stay. So we are 
going to start the clock at 5 minutes for the first round. 
Chair recognizes himself.
    Each of you in your testimony in one way or the other 
elaborated on the price caps, and some of you indicated why you 
thought they might be necessary, and others explained why they 
may not work. I would like the Chairman, and then if either of 
the other two Commissioners want to comment, explain the 
California price cap that the State put in last year and why it 
did not work, and what would be different about a Federal price 
cap if we were to put it in this year.
    So we will start with you, Mr. Hebert.
    Mr. Hebert. I am assuming, Mr. Chairman, I am assuming when 
you are talking about the price cap, you are talking about on 
retail level the prices that were placed into effect with it.
    Mr. Barton. There was an ISO cap put in place by the State 
last year, I am told, on wholesale. Now, I may be misinformed.
    Mr. Hebert. The purchase price cap or the bid cap--I am 
sorry. Well, as you know, I have been on record suggesting and, 
in fact, time and time again saying that price caps put us in 
exactly the wrong direction. I think they continue to do that. 
It doesn't matter if we are talking about a State bid cap or if 
we are talking about a price cap not only in California, but in 
the Northwest. The real question that comes to mind is what are 
we doing, if anything, to do one of two things that has to 
happen? What are we doing to increase supply, and, in fact, 
does that price cap accomplish that? Or what are we doing to 
decrease demand, and, in fact, does that price cap accomplish 
that?
    Well, we know the answer to both of those questions is no, 
the price cap is not going to do either of those things. As a 
matter of fact, even more so than what they have seen on the 
State side, what we saw with the FERC is as we move forward 
with price caps, moving them down from 1,000, 750, 500, and 
even 250, and then down to 150, we saw the average prices go 
up. We saw supply never build itself up, never provide more 
opportunity, never provide investment opportunity for 
infrastructure.
    It is funny because every time we talk about price caps, 
Mr. Chairman, everyone--when you read it in the media, what 
they would like you to do is make you think it is a simple 
solution, but, quite frankly, it is not simple, and it is not a 
solution. As you know, when we start capping the marketplace, 
we start doing two things generally. One is sending the wrong 
price signals, and two is--the second thing that we are doing 
through that is not giving the proper demand signals. The 
proper prices do not come to the marketplace.
    Mr. Barton. But it is safe to say that what California 
tried did not balance supply/demand, isn't that--for very long, 
so----
    Mr. Hebert. We currently have an imbalance in supply and 
demand. The real question is how do we accomplish getting 
beyond that. Congresswoman McCarthy was talking about her home 
State of Missouri, great example of where FERC actually had a 
shining moment, and actually where we did it right. And 
actually my colleague here and I were on somewhat different 
sides then on where we thought we needed to go. We had an 
imbalance in the marketplace.
    There was some suggestion to withdrawing market-based 
authority. There was some suggestion to price caps, at that 
point, certainly price mitigation. I had asked the Chairman at 
that time, Chairman Dennis Eckhart, please let's not do that; 
let's stay the course, let's send the price signals to 
Missouri. Well, that was in 1999 Mr. Chairman. We have not 
heard anything since then. You know why? Because they have got 
the adequate supply.
    Mr. Barton. Let me give Commissioner Massey and 
Commissioner Breathitt a question. My 5 minutes is down to 51 
seconds. First Commissioner Massey and then Commissioner 
Breathitt.
    Mr. Massey. Congressman, California capped retail rates so 
low that alternative retail suppliers decided not to enter the 
market, and I think that has been a problem. On the other hand, 
I don't think it necessarily follows that an unfettered price 
that results from a badly functioning market is the answer. 
First of all, it is unlawful. Second, it is bad policy. I don't 
support a long-term low price cap. I support a well-functioning 
market, but I really worry about the summer.
    I would also argue with respect to the demand side that 
Congress has said wholesale prices must be just and reasonable. 
So the price signal to the demand side of the market has to 
operate within that just and reasonable range.
    Mr. Barton. I am going to give Commissioner Breathitt a 
chance here, but isn't it true that if you regulate the price 
at the retail level so that there is an unlimited demand, 
ultimately you cannot manage the wholesale level?
    Mr. Massey. I agree, Mr. Chairman.
    Mr. Barton. And Federal Government, it is my understanding 
you don't--the Federal Energy Regulatory Commission, you have 
no authority over retail prices.
    Mr. Massey. No, sir, we don't.
    Mr. Barton. That is the State or local issue.
    Mr. Massey. That is right.
    Mr. Barton. Commissioner Breathitt.
    Ms. Breathitt. You were not misinformed. California ISO 
does in their tariff have the prerogative to set a price at 
which they will purchase energy for their imbalance and their 
spot market needs, and so that started out at $750, went down 
to $500, went down to $250, and then ended up at $150 soft cap 
price. At the same time retail rates were not reflective of the 
cost of energy. So when you cap the retail market, and you 
don't have the same cost restraints on the wholesale market, 
you end up with this distortion that has occurred and is 
occurring now.
    I hope that answers.
    Mr. Barton. And again, at the Federal level your authority, 
the Commission authority, is restricted to the wholesale.
    Ms. Breathitt. Yes.
    Mr. Barton. So if there is a solution at the retail, that 
is not within the jurisdiction of the Federal Government.
    Ms. Breathitt. Correct.
    Mr. Massey. May I make a comment, Mr. Chairman?
    Mr. Barton. And then Commissioner Hebert, and we will go to 
Mr. Boucher.
    Mr. Massey. I think part of the problem at the State level, 
part of the unwillingness to flow through wholesale prices is 
they believe the wholesale price is a rip-off. They don't want 
to flow it through to retail customers. I think if we can 
restore some credibility in wholesale prices, local 
policymakers also will be willing to flow them through. They 
should flow them through as long as they are just and 
reasonable, but it really poses a dilemma for them because my 
Commission has said prices throughout the summer and the fall 
were at many times unjust and unreasonable.
    It is very difficult to argue to State commissioners that 
they ought to flow those through, although they may be required 
to as a matter of Federal preemption.
    Mr. Hebert. Mr. Chairman, I would like to point out two 
things, and I think it is important for the committee to 
understand. One is that when you move toward these price caps 
in the spot market, you have got to understand indirectly what 
you have done is you have penalized everyone who has made a 
good decision and gotten it to the forward markets and properly 
hedged and therefore may be reliable. So while we are trying to 
move everyone into the forward market, what you do by capping 
that price is quite the opposite, because you are saying move 
to the forward market, but what you are doing is you are giving 
spot market purchasers a forward market price so they have no 
incentive to move to forward market.
    Another thing that is very important, if you look at 
California and what California did, when at a question of 
reliability when times got tough, and when you add the lack of 
an intersection, if you will, between the supply and the demand 
curve, when they started to do this and they didn't cross, what 
did California do? They didn't impose a cap. They went above 
the cap. They went above the cap to get power, keep the lights 
on. A cap is unworkable, it is impractical, it is not a 
solution.
    Mr. Barton. Gentleman from Virginia for 5 minutes.
    Mr. Boucher. Thank you very much, Mr. Chairman.
    I, again, want to thank each of our three witnesses for 
your testimony and your attendance here this afternoon.
    Mr. Hebert, I would like to spend a few minutes discussing 
with you some of the provisions that are contained in your 
March 9 order that suggest that certain transactions involve 
prices that are not just and reasonable, and frankly, I have 
some concerns that your order may not be directed toward the 
full range of transactions that involve overcharges by the 
generators during the month of January, which is the month that 
your order was directed to. And in posing this question, let me 
just review several facts with you.
    In your order of December 15, you set a soft cap of $150 
per megawatt hour, and sales above that cap then would have to 
be justified under the terms of your December 15 order, and 
presumably you believe that prices in excess of $150 per 
megawatt hour were suspect and were potentially both unjust and 
unreasonable.
    Then in your order of March 9, you set a rate screen at the 
level of $273 per megawatt hour, and you limited your order 
only to the charges that were above that number that occurred 
during the times of Stage 3 alerts. And so even charges that 
were above that number that occurred at some time other than 
during the Stage 3 alerts were not included in your March 9 
order.
    In the month of January there were 70,300 transactions that 
were above the soft cap of $150 per megawatt hour. Only 13,000, 
approximately, or 19 percent of that number, occurred during 
the Stage 3 alerts.
    And so with reference to your soft cap of $150, some 57,000 
transactions were above the break point; that is, fully 81 
percent of the transactions of those escaped any review in your 
order. And then even applying your proxy number of $273 per 
megawatt hour, fully 7,793 transactions in January escaped your 
order and were exempted from your order by virtue of the fact 
that they did not occur during the hours of Stage 3 alerts.
    Now, it would seem to me that a price that is unjust and 
unreasonable is unjust and unreasonable. It shouldn't matter 
whether it happens during a time of Stage 3 alerts or at some 
other time when that very high price is charged. And so my 
first question to you today is why did you exempt these 7,793 
transactions, the price of which was above your $273 rate 
screen, simply because they did not occur within that very 
narrow window when the Stage 3 alerts were in effect?
    Mr. Hebert. It is a lengthy answer.
    Mr. Boucher. That is okay. We have got some time.
    Mr. Hebert. No, I will attempt to shorten it, but I 
appreciate you asking the question because I will tell you, 
Congressman, there has been a lot written on this issue lately 
that, quite frankly, I wish people would read the orders 
specifically and spend time with them. They would understand 
how some of these things do work. I understand how tough that 
is to do, but I will explain to you the best I can.
    The $150 as we set up in the December 15 order was set up 
to be a break point, and at the break point above the $150 you 
would get an ``as bid'' pricing. Below it you would get the 
market clearing price.
    The reason the Commission did that at that time was 
twofold. One, the Commission did not want to allow prices bid 
above 150 to set the market clearing price. It would come back 
down, so it got the average back down, if you will.
    The other reason is the Commission wanted to make certain 
that anything that came in over $150 was going to be subject to 
a reporting requirement on a weekly basis to give us 
information that might be necessary on a going-forward basis to 
look and see whether or not they were just and reasonable. Now, 
that is not to say that there was a suggestion that anything 
above the $150, in fact, was per se unjust and unreasonable, 
but that we would want to take perhaps a second look at it, and 
we didn't want the clearing price to be set.
    Well, as we move forward and you talk about the $273 proxy 
price, that is a price that the Commission came up with to try 
to mimic a market that would be working given working 
conditions, working considerations. Now, obviously we know we 
did not have a working market at that time.
    There has also been some things mentioned and written that 
perhaps there are some 70,000 transactions that were exempt and 
we didn't look at. Nothing could be farther from the truth. We 
looked at all those transactions, and, in fact, when we came up 
with the proxy price that mimicked the market, what we said is 
we aren't going to demand more of anyone over $273, in fact.
    Mr. Boucher. Mr. Hebert, let me direct you precisely to the 
question, if I may, because my time has expired, but we do need 
an answer to this.
    Mr. Hebert. I am trying.
    Mr. Boucher. For purposes of this question, I am respecting 
your proxy price of $273. I do have some questions about the 
methodology for arriving at that, and if time permits in a 
subsequent round, I will ask you about, it but for purposes of 
this question, I will accept that. My question to you is 
applying that price of $273 per megawatthour, why did you not 
apply it to some 7,793 transactions that took place during the 
month of January where the price charged by the generator was 
above that number, but the transaction itself simply did not 
fall within the time when the Stage 3 alerts were in effect? 
Why did you not respect this screen number of $273 and apply 
that to these some 7,793 transactions?
    Mr. Hebert. As you know, there are several groups that, 
one, we cannot apply our price to, public power, the power 
marketing agencies, co-ops, munies. We have no jurisdiction 
over those whatsoever.
    Mr. Boucher. Did all of these fall within that category?
    Mr. Hebert. I am not certain which numbers you are talking 
about.
    Mr. Boucher. Let me ask Mr. Massey if he would care to 
comment on this matter. He perhaps has some knowledge about it.
    Mr. Massey. Congressman, I dissented on that order not 
because I disagree with providing refunds, but I thought the 
order, by drawing the line that it drew, was arbitrary and an 
abuse of discretion by the agency. If we are concerned about a 
$273 bid in Stage 3 conditions, you would think we would be 
even more concerned about a $273 bid that occurred when the 
shortage situation was not nearly so great. To me, the line 
that was drawn serves only one purpose, and that is to limit 
the scope of refunds, and I objected to it on that basis.
    For the refund order that was issued for the month of 
February, this is a another order that just came out last 
Friday, the new proxy price is $430. We are not concerned about 
a bid of less than $430 whenever it occurs, and we are only 
concerned about $430 bids that occur in Stage 3. We are not 
concerned about the 14,168 transactions that occurred outside 
of Stage 3, which is 56 percent of the transactions above $430. 
It makes absolutely no sense, and it will not withstand 
scrutiny on court review.
    Mr. Barton. Mr. Hebert, and then we are going to have to go 
to Shimkus.
    Mr. Hebert. Thank you, Mr. Chairman.
    I just need to correct a couple of things. One, I want to 
make it very clear to Congressman Boucher that all 
transactions, all 70,000, were subjected to the methodology 
replicating competitive conditions, all 70,000. Now, you need 
to make certain and understand that the Commission felt like we 
should be clear and recognize that we should not depress prices 
and eliminate scarcity price signals. It was very important 
that we sent price signals to get the adequate supply there. 
What we were worried about is a Stage 3 when reserves are at 
1.5 percent, and the lights were about to go out, and that is 
where we injected ourselves.
    Mr. Massey. Can I just make one other comment?
    Mr. Boucher. Mr. Massey.
    Mr. Massey. There were only 2 hours of Stage 3 transactions 
during the year 2000, 2 hours the whole year, but we declared 
the market to be wildly dysfunctional for most of that period 
of time.
    Mr. Boucher. Well, let me say, Mr. Chairman, my time has 
long since expired, and I am just going to conclude this with a 
comment.
    Mr. Barton. It was your first question.
    Mr. Boucher. It was only my first question. I am going to 
conclude this with a comment. I think we do deserve a more 
complete answer about why the Commission decided not to find 
that the transactions that were priced above this $273 figure 
in January were unjust and unreasonable, when they were finding 
that prices at that level were unjust and unreasonable during 
the Stage 3 alerts? Why not do it during the entire month? I 
think we deserve a more complete explanation of why the 7,773 
transactions that were outside the Stage 3 alert hours that 
were over that price were not also unjust and unreasonable, and 
I am sure we will pursue that at greater length. Thank you.
    Mr. Barton. Before we go to Mr. Shimkus, I just want to 
elaborate on what Commissioner Massey said, I am told, in 2000, 
because they basically let the--they let a clearing price set 
the market, they never got--they didn't get to the Stage 3 
shortage very often because at some price--they took whatever 
was needed at some price, which should have been substantially 
above 273. I mean, this is where we hear the horror stories of 
1,500 and $2,000. So it is not a good answer, but that would 
explain why they only had 2 hours of Stage 3 alerts.
    Mr. Massey. Yes. Mr. Chairman, my concern is that if this 
is our new standard, Stage 3 alerts above a certain price, 
there were only 2 hours of those all of last year when prices 
fluctuated wildly.
    Mr. Barton. The gentleman from Illinois Mr. Shimkus.
    Mr. Shimkus. Thank you, Mr. Chairman. I am going to try to 
get a couple of questions in. This is highly technical, and so 
the answers get pretty long, and I don't ask technical 
questions. But, Chairman Hebert, briefly, how would an RTO help 
the situation in California? I think most of you had agreed it 
would have, but if you could just tell me shortly how an RTO 
would have helped.
    Mr. Hebert. What the Commission recognized through Order 
2000 is that, in fact, there were certain natural markets, 
certain patterns of trading, certain flow paths that would 
develop a North American grid. The question in the end is how 
many regional transmission organizations do we end up with? We 
would like to get as few as possible.
    What we have found in the West, certainly found it through 
reports that the staff has done, that you do have a natural 
market there, and California is not an island in and of itself. 
As a matter of fact, what California has found is that, quite 
frankly, they are very dependent on friendly strangers. They 
have to have help from the other jurisdictions. We even saw 
during some off-peak periods and even some peak periods where 
prices were up in neighboring communities such as Arizona, and 
those prices and power would be needed, so the power wouldn't 
get shifted back down to California.
    The RTO has a natural opportunity to correct the problems 
of the past means that California and the rest of the West is 
going to have to work together, but I do want to make it clear 
that it is not that we think California is really any different 
than anyone else. The Commission has held and, quite frankly, 
is moving forward with RTOs. We are making it clear. We think 
it is important to have a southeastern RTO, to have a 
northeastern RTO, but the same is true in the West, and we have 
got to make certain as they plan transmission, electric 
transmission, that they understand a good and bad decision in 
Washington and in Arizona and in California probably has 
ramifications to each other; and the same on natural gas 
pipelines, and the same on siting generation, that we are all 
in this together.
    Mr. Shimkus. Thank you.
    I bring this up because, as you know, I am from Illinois, 
and in the Midwest we have four--three or four of our 
utilities, and they are in different ISOs, and I know you are 
reviewing that. And I think if you are--I think we are 
receiving a message from the country in different parts that we 
are going to need, you know, one honest broker partner in 
regions, and I just say that as a concern how lessons can be 
translated throughout the country and as kind of lobbying on my 
behalf that if we could get down to some manageable number.
    The L.A. Times article today, and I am going to go to Mr. 
Massey, states the ISO had hoped--this is today's--the ISO had 
hoped demand would start to subside and conservation would kick 
in, but that did not happen, officials said. ``We have been 
giving the conservation message since last May, and I am at a 
loss about why it is not working as well anymore, spokesman Pat 
Dorenson said.''
    Do you know why the conservation is not working, the 
conservation message is not working in the California market?
    Mr. Massey. Most of the consumers have a flat rate and have 
no opportunity to respond to any sort of price signal, even a 
price signal that was within a reasonable--just and reasonable 
range. That is problem No. 1.
    Problem No. 2, I think that we need to work harder so that 
the demand side of the market can bid in along with the supply 
side of the market in real-time, so that a ``negawatt''--a 
consumer willing to cut back--is paid a market clearing price, 
the same as a megawatt. But thus far I think it is because they 
simply do not see any sort of price signal at the retail level.
    Mr. Shimkus. So good intentions do not translate into 
quality decisions on demand without a price signal.
    Mr. Massey. I think that there is the necessity for at 
least some portion of the consumers to see a price signal that 
arises from a reasonable--just and reasonable wholesale price, 
and to have an opportunity to respond to that signal, and to 
have the tools, the various new computer technologies, chip 
technology that allow them to manage their load.
    Mr. Shimkus. I am going to cut you off so I can get my last 
question. It also deals with price signals. You have indicated 
that new generation of sources should be exempt from price 
caps, and you said that in your opening statement. Since new 
and existing generation are often owned by the same entities, 
won't this invite gaming or selling of uncapped capacity and 
withholding cap capacity?
    Mr. Massey. It could. We would have to watch that very 
carefully, but I would exempt new generation because I want to 
send a signal to the marketplace to encourage entry; and No. 2, 
I would make this price cap temporary, tied to a reserve margin 
in the West.
    Mr. Shimkus. Thank you, Mr. Chairman. I yield back my time.
    Mr. Barton. Gentleman from California Mr. Waxman.
    Mr. Waxman. Thank you, Mr. Chairman.
    Mr. Massey, the Governors of California, Oregon and 
Washington requested that FERC establish a cost-based price cap 
to purchase power in the spot market for 1 year. This is an 
approach similar to what you have suggested in the past; isn't 
that right?
    Mr. Massey. It is, Congressman.
    Mr. Waxman. Now, Secretary Abraham has criticized any kind 
of restraint on wholesale prices because he claims it would 
deter investment in new generation. I would like to know if you 
think he is right, and is there a smarter way to do this that 
can protect consumers while preserving incentive for 
investment?
    Mr. Massey. We must recognize that we face a debacle this 
summer without some sort of price relief out West. We must 
impose a temporary mitigation measure that is effective, that 
carries out our statutory responsibility, and that exempts new 
entry from the price cap. A badly dysfunctional market is not 
an investor's friend either, and if there is a political revolt 
out West because the prices are just too high, and consumers 
rise up through initiated act or whatever and make bad 
decisions, that won't help investors either.
    Mr. Waxman. Well, I think that is a good point, and I think 
if you look at it from that perspective, it is hard for me to 
understand statements like that of Secretary Abraham when he 
said price controls on electricity will lead to more blackouts. 
Well, short-term price controls are not going to lead to more 
blackouts. It looks like there is going to be more blackouts 
because of the dysfunctional market; is that correct?
    Mr. Massey. Well, stated the other way, an unfettered and 
very high, exorbitant price between now and the summer will not 
add one new megawatt of generation to the market for this 
summer, not one.
    Mr. Waxman. Well, how about this statement that it is a 
myth that energy companies are withholding energy? Do you 
believe that it is a myth that they are withholding energy?
    Mr. Massey. We just found--the Commission just charged that 
two companies were withholding last year. No. 2, the market 
monitors out West, both inside and outside the ISO, have told 
us time and time again that they believe there is withholding. 
Professor Joskow from MIT, a very respected economist, has told 
us that he believes that there was significant market power to 
the tune of more than a billion dollars exercised in the 
California markets that was exercised through withholding and 
other means.
    I think that we need to wake up and realize that this is a 
dysfunctional market that is subject to being gamed and 
manipulated by those who participate in it.
    Mr. Waxman. Well, I have to say that I am concerned when I 
see that your testimony, you say the current western energy 
crisis could cut disposable household income by $1.7 billion, 
cost 43,000 jobs over the next 3 years in Washington State 
alone. Some fear it could tip the whole region into a 
recession, and the current volatile and high prices may be 
worse by magnitudes this coming summer. They are devastating to 
consumers' and investors' confidence in the market-based 
approach to electricity deregulation.
    So when I see those kinds of statements, I just can't 
understand how we get the views that are being expressed that 
we want a deregulated market, and all we should do is just 
remove the cap on the consumers and let them pay more. If we 
remove the cap on what is charged the ultimate consumers, would 
that lead to anything like conservation or lower prices, or are 
they just going to pass on the charges?
    Mr. Massey. Well, if the cost of power in California this 
year is as high as it is projected to be, I don't know how you 
flow that through quickly to consumers. You can't increase 
their prices 4- or 5- or 6-fold. Ultimately, just and 
reasonable prices ought to be flowed through to consumers, but 
unless the wholesale price has credibility, unless it is a just 
and reasonable, lawful price, State policymakers aren't going 
to want to make retail customers pay it.
    Mr. Waxman. On March 9, 2001, FERC issued an order to some 
generators to either pay refunds or provide further 
justification for their prices, and to many of us in the West, 
this order was too little too late. The order eliminates 
consideration for refund any sale below $273 a megawatt and any 
sale that did not occur during a Stage 3 emergency. I know you 
disagreed with this order. Would you explain why you disagreed 
with it?
    Mr. Massey. I disagreed because I felt like the order 
artificially limited the scope of our review of just and 
reasonable prices. The order only--it limits our review to 
Stage 3 transactions, which are our severest conditions, and 
only to prices above $273. For the month of February, we just 
issued another order limiting our review to bids above $430 
during Stage 3.
    There were 14,168 transactions in which the bid was above 
$430 that did not occur in Stage 3, and they get a free and 
clear. This makes no sense.
    Mr. Waxman. Do you think the FERC decision gives a formula 
for generators to have a road map as to how they can charge 
without FERC asking any questions whatsoever?
    Mr. Massey. I think it makes clear that FERC is going to be 
looking for the wallet under the lamp post with the light 
shining, and nowhere else. And that concerns me.
    Mr. Barton. The gentleman from Georgia, Mr. Norwood, is 
recognized for 5 minutes.
    Mr. Norwood. Thank you, Mr. Chairman.
    Mr. Massey, let us see if we cannot say this so people can 
understand it.
    California does not have enough electricity. If they had a 
lot more electricity, we simply would have perhaps lower rates, 
and we would then not have the rolling blackouts. Correct?
    Mr. Massey. Correct.
    Mr. Norwood. Why don't they have enough electricity?
    Mr. Massey. They have not built enough generation over the 
past 10 years.
    Mr. Norwood. Is that a legislative decision from the State 
of California?
    Mr. Massey. I don't think it is a legislative decision. 
There was a lot of uncertainty in California about whether 
there would be a market-based approach or not throughout the 
nineties. I think new generation just did not enter.
    Mr. Norwood. These folks who build transmission and 
generating facilities do so for a reason, obviously. Why 
wouldn't they want to go into such a large, wonderful market 
like California?
    Mr. Massey. It was not clear that there would be shortages. 
But here we have a low hydro year in which California cannot 
count on sufficient power from the Northwest, and it is shining 
a spotlight on the need for new generation in the State.
    Mr. Norwood. You are telling me that the people in this 
industry were not aware that they potentially could run out of 
power in California under certain circumstances, and therefore 
the California legislature or the public service commission, 
working with them, were not concerned about this over the last 
10 years? Just all of a sudden this is a big surprise?
    Mr. Massey. It is rather shocking that it is a big 
surprise.
    Mr. Norwood. Is California a State that lends itself to 
making people want to come running in to build generation 
facilities and transmission facilities, or is it a State that 
makes it very difficult?
    Mr. Massey. I think the generators would argue it is a 
State that makes it very difficult. But that does not get me 
off the hook in terms of just and reasonable prices. I still 
have to ensure just and reasonable prices.
    Mr. Norwood. Tell me what ``consumers have a flat rate'' 
means in California.
    Mr. Massey. The consumers have their retail rates capped at 
a certain rate. That means that very high wholesale prices that 
have been paid in California, they are not getting flowed 
through to most of the retail consumers, they are just building 
up.
    Mr. Norwood. Somebody thinks this is a good way to get the 
consumer to conserve?
    Mr. Massey. I don't think it is a good way.
    Mr. Norwood. Obviously it does not work. I don't believe it 
is working, is it?
    Mr. Massey. It is not working very well.
    Mr. Norwood. That is the kind of thing I am trying to get 
at. California has been very helpful in bringing part of this 
on themselves.
    Mr. Massey. There is no question about that.
    Mr. Norwood. That has nothing to do with the fact that we 
all need to worry about this summer. But at this point, you 
have to say for sure they brought a lot of this on themselves.
    Part of the solution, and help me if I am wrong, would be 
to build more transmission and build more generation?
    Mr. Massey. Exactly. I agree with those comments.
    Mr. Norwood. Now, explain to me, if I were an investor and 
was going to spend billions of dollars to build more generation 
and build more transmission, why I would do that if you were 
going to put caps in place?
    Mr. Massey. Transmission rates are generally capped most 
everywhere. I think investors understand that. They sometimes 
complain about the rates of return that they get.
    Mr. Norwood. I think the chairman has pointed out, we have 
a pretty serious problem of transmission in America.
    Mr. Massey. Precisely.
    Mr. Norwood. Is that connected to the caps they are 
complaining about?
    Mr. Massey. The transmission owners argue their rates of 
return are not high enough, but I think for the most part 
transmission will continue to be a regulated business that is 
subject to price controls.
    Mr. Norwood. Go to the generation end of it. California 
could certainly use--and forgive me, Mr. Markey--two or three 
nuclear plants right now in a bad way.
    Mr. Massey. They could certainly use some new generation in 
a bad way.
    Mr. Norwood. I will bet you those folks who had their 
business shut down at Mr. Cox's aluminum plant, I will bet they 
would be happy to have that electricity right now, perhaps 
wherever it came from.
    Mr. Massey. That is correct.
    Mr. Norwood. How are you going to get anybody to take 
seriously an idea to go in there and spend billions to get the 
generation capacity when we say to them, no matter what you do 
or what it cost, baby, we know best what you can collect for 
revenue?
    Mr. Massey. But, Congressman, that is the Federal law, to 
ensure just and reasonable prices. There is an oversight 
respnsibility.
    Mr. Norwood. That is not the same thing as caps, is it?
    Mr. Massey. It was the same thing as caps for years and 
years and years. Now we have moved to a market-based approach. 
If the market is dysfunctional, the courts have told us time 
and time again that the prices are unjust and unreasonable. We 
have the obligation to ensure a well-functioning market. We 
cannot get that in place by this summer. It is impossible.
    Mr. Norwood. The last comment. One of the things that is 
possible here, if it is a long, hot summer in California, there 
could very well be some interesting results at the polls for 
the State legislature. Sometimes that is not all a bad idea. 
Thank you, Mr. Chairman.
    Mr. Barton. All right. The gentleman from Massachusetts, 
Mr. Markey, is recognized for 5 minutes.
    Mr. Markey. It is a good idea, and I appreciate that 
accent.
    So we have had the worst drought in 100 years, the worst 
drought in 100 years in the Northwest, but we are sending very 
strong price signals to the clouds that we expect them to rain 
a lot more. And the higher the price goes, the more we are 
going to punish the electrical consuming public for the 
drought.
    Usually what we do out in the Midwest is we take care of 
the farmers whenever there is a drought. Here, though, we send 
strong price signals to the marketplace, notwithstanding the 
fact that the consumers do not have any relief that they can 
get.
    Now, Chairman Hebert, at the subcommittee's September 11 
hearing on the California energy situation, when he was asked 
whether or not we should impose price caps to protect people 
from the fact that it did not rain, he said, ``I have always 
felt and always thought that if the truth kills Granny, then 
let her die, but the truth has to be told here. Price controls 
didn't work in the Nixon era, they didn't work in the Carter 
era.''
    Now, that doesn't sound exactly like compassionate 
conservatism, because we know that Granny did not design this 
system. We know Granny did not have anything to do with the 
fact that it did not rain for a year in the Northwest, 
notwithstanding the fact that I am sure she wishes that it did. 
But she is going to get killed by the blackouts, by the 
brownouts, by the rate increases.
    Mr. Barton. Will the gentleman yield?
    Mr. Markey. Yes.
    Mr. Barton. The record will also show that the chairman who 
held that hearing said he wanted to save Granny. I hope you 
would put that in the record also.
    Mr. Markey. Yes, the chairman from Texas stood solidly with 
Granny on this issue. We have a bipartisan agreement that 
Granny----
    Mr. Barton. That is compassionate conservatism.
    Mr. Markey. Granny should not have anything to do with 
this. Also, I am sure it was a metaphor.
    Mr. Barton. And Massachusetts is for Granny, we will 
stipulate that Massachusetts is.
    Mr. Markey. Granny is the key person in all of this, no 
question about it.
    So we also would like to state for the record that there 
may not have been a lot of utility construction in California 
in the last 5 years, but we also have to remember that it was 
the utilities who were seeking stranded cost recovery which 
said that they were expecting a surplus of electricity through 
the year 2005. So that was their representation to the PUC in 
California as the guise for their recovery of stranded cost 
investment.
    Now, Mr. DeLay and I have always cast a little bit of an 
arched eyebrow toward that stranded cost argument in 
legislation which we have introduced. But that notwithstanding, 
I think there is a queen of spades here, and we should put it 
right in front of the utilities which were trying to gain that 
kind of a benefit.
    You mentioned several long-term measures, Mr. Chairman, 
such as RTOs, new electricity transmission improvements, but 
these will take time. Commissioner Massey notes that the power 
that cost $7 billion in 1999 increased to $27 billion last year 
and is projected to cost $70 billion this year; from $7 billion 
to $70 billion for the same power over a year's period.
    Now, the demand, however, only increased 4.75 percent from 
1999 to 2000. Now, if demand for Wonder Bread, for a $1.39 loaf 
of Wonder Bread, went up 4.79 percent and the price increased 
from $1.39 to $13.90 for a loaf of Wonder Bread, we would be 
very concerned about that in our country, because that is what 
is happening to electricity in California.
    Now, under the Federal Power Act, are we not supposed to 
disapprove prices that are unjust and unreasonable? It seems to 
me that, by any definition, this is unjust and unreasonable 
that a 4.7 percent increase in demand results in that kind of a 
price spike.
    Mr. Chairman, what are you going to do about it? Are you 
just absolutely, unconditionally opposed to any kind of price 
relief for consumers?
    Mr. Hebert. How did I know you were coming to me?
    First of all----
    Mr. Markey. Because I don't want it to come to 
Massachusetts. I don't want it to come to New York. I don't 
want it to come east of the Mississippi. I don't want it to 
come east of the Rockies.
    Mr. Hebert. Part of the problem--and Chairman Barton, these 
questions are not 5-second sound bites to answer. I want to 
answer your question fully. So if you will give me just a 
couple of minutes, I will address quite frankly some of the 
things that you raised that I think are very important in your 
opening statement.
    But before I do that, let me defend my grandmother, both my 
grandmothers, who I am fortunate to have. The exchange was 
between the chairman and I, and I was trying to make a point 
not about, if I remember correctly, price caps, but in fact 
about market mitigation.
    In fact, they did have a dysfunctional market. They needed 
to do some positive things in California. In fact, they were 
not. I was trying to make the truth very clear.
    But let me answer your question. And it goes back to the 
proxy price of $2.73, because I truly believe if it would have 
been legal for me to sit down with you, Congressman Markey, and 
say how can we frame this methodology, and I could have sat 
down with you, I think you and I would have agreed what we came 
up with is workable.
    Let me tell you why. It is workable because what we did is 
we looked at exactly what you pointed out that we need to be 
looking at: inefficiencies, and how do we promote efficiency.
    When we are looking at setting parameters on cost, 
parameters on screening, a proxy price, if you will, should we 
not probably look at inefficiencies and what the inefficient 
unit is going to be at the margin, and if so, we should use 
that?
    In fact, that is what we did with our methodology, to give 
some incentive back to say we need adequate supply, but quite 
frankly, we need some new supply, which is also consistent with 
your argument on refrigerators, air conditioners.
    The reason it is important to understand this is that if we 
can set this price at such a point that we say that we are 
concerned whether or not they are going to intersect, whether 
the lights are going to go out--because what we do know is in 
fact that price caps are not working. I don't know how you 
argue they do not work on the retail side and do not send 
proper signals, but, by the way, let us set up an artificial 
market on the wholesale side. That is a totally inconsistent 
economics argument. We know this.
    Why did you have the same demand, yet you had a problem 
with outages? Well, you were exporting all types of energy to 
Arizona. You were exporting energy, quite frankly, to BPA, 
because you were doing a two-for-one trade in California on-
peak/off-peak. You were trying to refill some hydro facilities, 
pump storage. So you had a lot of factors going into this why 
you did not have the supply that you should have had.
    But at the very end of this argument, when it comes to some 
of the things that I think we all agree upon, bringing new 
supply into the system while at the same time concentrating on 
efficiencies, it proves that the methodology is correct. It 
proves that we are going to give signals with scarcity. But we 
are going to try to make certain that those lines are not going 
to cross, that we are going to intervene; because what FERC 
must do, while ensuring just and reasonable rates, is give 
markets certainty. We cannot intervene all the time, we have to 
give markets certainty.
    Let me close by saying this. If we are concerned with 
efficiencies and we know we need new supply, why would we not 
send the proper signals to suggest that, look, we know there 
are some 30,000 heat rate systems, some real dogs in 
California. We know every time we replace one of those 
generators, we replace them probably with a 7500 heat rate, 
much more efficient system, and we would all be winners in the 
end: California gets more supply; Californians and the rest of 
America get cleaner air.
    I think we are on the right track. It means we have to make 
tough decisions and it means I will have to defend those, but I 
think we are doing that.
    Mr. Markey. I will just finish up, if I could, Mr. 
Chairman.
    It seems to me what the FERC is saying is that it is not 
okay for the cornerstone to raise the price of bread to $13 
apiece a loaf right before a snowstorm, when everyone descends 
upon the corner store, but it is okay to charge $13 for a loaf 
of bread at all other times. That is what you are saying about 
this electricity crisis; that you are going to investigate the 
blackouts and the brownouts and see if there is an 
exploitation; but if the very same price is being charged every 
other day of the week and month, that you are not going to 
investigate, even though it is ten times higher than what 
common sense and experience tells us it should be.
    There is just something fundamentally wrong with that. I 
just think if we do not do something, then we are going to see 
the California economy and much of the West in very dire 
conditions by the end of this fall with, unfortunately, a 
ripple effect.
    I will tell you when I know I have a problem, when Craig 
Barrett, the chairman of Intel, says that he is not going to 
expand in California, but he is going to look to Massachusetts 
to expand Intel. Then we know that something is wrong, okay? 
All I can tell you is that his comment is going to be 
replicated by hundreds of other executives in California and 
other States out West in the very near future if something is 
not done.
    Mr. Hebert. Congressman, I think that has everything to do 
with that Sable Island project that we got done for you.
    Mr. Markey. I appreciate that. Thank you.
    Mr. Barton. Before I yield to the gentleman from Oklahoma, 
we have been talking about markets. Let us just set the record 
straight: In a classic supply demand market, as the cost of the 
product goes up, the demand of it goes down. That is economics 
101.
    Mr. Hebert. Agreed.
    Mr. Barton. We don't have that in California. We have a 
retail market that is capped below the price of the wholesale 
market. The wholesale market is infinity. It is infinity. It 
does not matter what the wholesale market pays, they do not 
pass it through to the retail, or at least most of the retail.
    To draw the demand-supply curve for California is crazy. 
You have demand below the cost of supply. It is just 
irrational, except in the real world of what is going on in 
California.
    Mr. Largent for 5 minutes.
    Mr. Largent. Thank you, Mr. Chairman.
    I was listening to my friend, Mr. Markey, when he asked 
you, Mr. Chairman, about are you going to offer any sort of 
price relief. It turned my attention to Granny that we talked 
about in his hypothetical question.
    It made me think, I wonder how this debate would fall out 
if the discussion was on a just and reasonable Federal tax cap; 
in other words, the Federal Government would have to cap the 
amount of taxes that we actually received every year. We could 
not take any more than that.
    I wonder how the debate would fall out on either side of 
the aisle if we had a Federal tax cap and we said that the 
Federal tax had to be just and it had to be reasonable.
    Mr. Hebert. I like the idea.
    Mr. Largent. I do, too.
    I started thinking, if we really wanted to offer relief to 
Granny, then we would be voting for things like the death tax 
repeal and we would be voting for marriage penalty relief, and 
perhaps even Mr. Markey's Granny would be in the 39.5 percent 
marginal rate and would think that that would not be fair, and 
we could offer her some relief in that respect, too.
    My question is to you, Mr. Chairman; does the FERC have 
some pretty objective measure in determining what is a just and 
reasonable price?
    Mr. Hebert. Congressman Largent, we do. That is what we are 
trying to do by somewhat mimicking a market, quite frankly, 
during a dysfunctional period of a market.
    When we set up this proxy clearing price--and I know there 
has been some suggestion that you had the 273 and then you have 
the 430, and there may have in fact been some different 
standard.
    The standard is the same. You are going to look at a 
weighted average on what the fuel costs were, you are going to 
look at what the NOx costs were, which, as you would know going 
into the $430 period, they were higher. Thus, the proxy price 
is higher.
    You also have the fixed cost of the system itself. Now, if 
you look at that and try to say, well, but there is this 
conversation out there about this $25 fixed cost rate with this 
adder, why is that not a good idea? Well, it goes back to your 
question? Have we got a methodology, will it work?
    I think it will work. We do have a methodology. The reason 
the $25 plus the adder does not work is, one, you have some 
systems, hydrosystems, quite frankly, their fixed costs may in 
fact be above $25.
    If we look at the adder and look at it on a separate 
transaction basis, we could manipulate that market by changing 
the transactions, so it will not work. Not to mention if we are 
going to go back to some type of cost-basing area, what you and 
I understand is that we cannot do that on a daily, a monthly, 
or even a yearly basis, because when we look at those systems, 
we look at them generally on 20- and 30-year terms. You cannot 
have a cost-based or cost-plus system and then come back in and 
do what we call market mitigation, which is what we are 
attempting to do, and what we are seeking comments on right 
now. We cannot do both. It just will not work.
    Mr. Largent. Mr. Massey?
    Mr. Massey. Congressman, you asked a very good question. It 
is one that I have struggled with, because the standard is a 
vague standard, ``FERC shall ensure just and reasonable 
wholesale prices.'' That is essentially all the law says.
    The courts have said, and we must pay attention to what 
they tell us or they reverse us, that if FERC is to move away 
from a cost-based system, it must do so carefully, with 
attention to the market design. In other words, FERC must 
ensure a well-functioning market, and only if there is a well-
functioning market does FERC have the legal authority to assume 
that prices are just and reasonable.
    No. 2, the courts have also said that in a well-functioning 
market, it is likely that producers over time will bid close to 
their marginal costs.
    Mr. Largent. Okay. That goes to the point of my question. 
That is, you all have filed suit against two companies on this 
very issue of just and reasonable prices. How can you hold 
anybody liable for a standard you don't know?
    Mr. Massey. It is an excellent question. We need to define 
what market power is, what acceptable conduct in the market 
is--we have not done a good job of that.
    Surely they cannot have reason to believe that any price, 
even the price of a dysfunctional market, is just and 
reasonable. But I agree with you, we have not done a good job 
of defining what just and reasonable means, what market power 
is, what is the definition of it, and so forth.
    Mr. Largent. I guess my point is that it seems 
unconstitutional, frankly, that you hold somebody responsible 
for a standard that you cannot define and has not been defined 
yet, and yet you are going to take them to court and incur a 
lot of legal costs in doing that, besides whatever other 
penalties are going to be handed out, when there is no standard 
defined in the first place.
    I yield back, Mr. Chairman.
    Mr. Barton. Before I yield to Mr. Wynn, I think in classic 
economics, if you cannot meet the demand at any price, the 
supply is infinity. You cannot get a just and reasonable price 
if there is not some way to clear the market. I may be wrong on 
that, but I think that is right.
    Mr. Wynn is recognized for 5 minutes.
    Mr. Wynn. Thank you, Mr. Chairman.
    Let me ask first a quick question, a follow-up.
    A lot of people are citing the November 1, 2000 
investigation by FERC to suggest that there are no abuses in 
the system. In light of your orders of March 9 and March 14, 
would you say that that statement still holds true, or would 
you back away from that statement?
    Ms. Breathitt. Congressman Wynn, I would not agree with 
your earlier statement that the November 1 order found that 
there were no abuses in the system.
    On December 15, we found that there were, and we set our 
remedies in place to correct some of those abuses, particularly 
with respect to the market design.
    Mr. Wynn. So anyone running around saying now FERC has 
found that there are no abuses would be really in error; is 
that fair to say?
    Ms. Breathitt. I would say so.
    Mr. Wynn. Okay. Thank you. That really kind of clears it 
up. People have said no, you are completely off base with that. 
But it seems to me clearly, based on what you said, that it is 
not the case.
    This discussion has seemed to come down in my mind to a 
statement of either caps or true price signals to encourage 
conservation and stimulate generation. I recognize off the top 
that generation is the key issue.
    But I think that setting it up that way is really not 
necessarily the most helpful way. It seems to me the issue is 
caps versus gouging.
    I want to go back to something that Mr. Massey said, that 
elected officials would not flow through these price increases 
because they thought they were a rip-off.
    Do you stand by that statement, Mr. Massey? If so, why do 
you believe that that is true--or why do you believe that 
perception exists? Let me rephrase that.
    Mr. Massey. I believe that perception because State 
officials have told us that in hearings before us. I believe 
that perception because I think the prices have been way too 
high myself. I believe it because the Commission has declared 
the market to be dysfunctional and declared prices to be unjust 
and unreasonable.
    I know that it is very difficult for local officials to say 
to their retail consumers, we want you to pay a price that 
Federal regulators have determined to be unjust and 
unreasonable. That is very difficult for them to do.
    Mr. Wynn. Thank you.
    Now, Mr. Hebert, in light of that comment and in light of 
your colleague's comments that there is evidence of abuses, Mr. 
Massey then says that, well, these prices are way too high and 
it is hard to pass through unjust prices. I guess I would pose 
to you, if not caps, what? What is the mechanism that we use to 
protect the consumer, not from the true cost, because I think 
people will concede that consumers ought to pay the true cost--
and if that stimulates conservation for generation that would 
be great--but how do we protect them from this unjust and 
unreasonable cost that seems to exist in some abundance based 
on the recent orders that you have issued?
    Mr. Hebert. An excellent question. Let me try to clear it 
up.
    Before I speak directly to that, let me clear up one 
conversation that took place a moment ago when Commissioner 
Massey was talking to Congressman Largent. He was talking about 
an abuse and some rates that were unjust and unreasonable.
    When it comes to the Williams AES case, which is what was 
being discussed, that was a tariff violation. It is a little 
different. We can get into that more. But actually, that was a 
little different than just rates being unjust and unreasonable.
    We have got out for comment right now something that goes 
to the heart of your question. That is, what direction will 
FERC take to ensure just and reasonable rates during this 
dysfunctional period? We are going to look at what anti- market 
mitigation, immediate market mitigation, should take place; how 
do we resolve that on a going-forward basis from May 1 forward? 
That is out for comment right now. We are going to hear back 
from parties soon, and we will be moving forward with something 
on or before May 1.
    But the reason it is important to at least make certain 
there are price signals during scarce periods is because we do 
know, and everyone in this room knows, I believe, there is an 
imbalance of supply and demand. I don't know how long this 
committee has been talking about this problem, but quite 
frankly, we three have been talking about it for a very long 
time and I think you have been engaged that entire time.
    You have to ask yourself, if the price signals are clear 
because they are so high, why in fact have they have not turned 
a shovel on the first substantial generation unit in the State 
of California?
    Mr. Wynn. That is certainly a legitimate question. But to 
go back to the flow-through question, to the extent that the 
prices are not just and reasonable, why should the elected 
officials pass through those costs, those inflated, perhaps 
abusive, manipulative costs, on to the consumers in order to 
suggest that this is a true price signal?
    I wouldn't object to the true price signal being sent to 
the consumer. The objection is to the inflated price signal 
that a substantial body of evidence that you have presented 
seems to suggests exists.
    Mr. Hebert. Let me just tell you, I can't say why anyone in 
any other appropriate jurisdiction may or may not be doing 
something. I mean, I am within the realm of speculation there. 
But I was a retail regulator for almost 6 years, and as much as 
it disheartened me and as painful as it was, when costs were 
prudently incurred, they were therefore passed on to the 
consumer.
    Mr. Wynn. We are beating the same horse. No one is 
objecting to true costs being passed on to the consumer. What 
we are objecting to is--you have disclosed evidence to suggest 
that there were abuses, specific cases of tariff violations, 
cases that merited a refund, 80 percent of which were excluded 
from your order.
    That suggests that there is a lot of gouging going on. If 
that is true, what are you going to do about the gouging; not 
the true price, not the legitimate price signal, but the 
gouging that seems to exist?
    Mr. Hebert. One, let me clear up the misinformation that 
you were given. Of those transactions, as we have already said, 
53 percent of the marketplace we do not regulate, so we could 
not look at those transactions if we wanted to.
    We certainly have not been able to look at transactions 
that took place from October through the end of December, 
because quite frankly, one, we have not set up a methodology, 
and two, we have not gotten the adequate information. That was 
the beauty of the $150 breakpoint where we would get the weekly 
information, and we are going to do that.
    Let me clear this up, as well. No matter what we are 
talking about here, no matter how many times we want to talk 
about price caps or market mitigation or anything else, there 
is one way to solve the market power problem. When you have 
more supply, you have less market power.
    Mr. Wynn. But we still have to come back to what we are 
dealing with.
    I know my time is about up. If the chairman would indulge 
me, I would like to ask Mr. Massey to respond on the question 
of the 80 percent of the transactions that were excluded which 
Mr. Hebert has suggested were justifiably excluded. That may or 
may not be the case, but since I believe it was cited in your 
dissent, I would like you to respond.
    Mr. Massey. I don't think they were justifiably excluded. I 
think the standard that the Commission chose limits the 
availability of refunds, and it is illogical, as far as I am 
concerned.
    No. 2, I may be wrong about this, but I think the only 
transactions that were reported to us were jurisdictional 
transactions.
    Mr. Wynn. Within your jurisdictions.
    Mr. Massey. Yes. So I don't think it is true that 53 
percent of those were nonjurisdictional transactions.
    Mr. Hebert. I was actually speaking to the ISO's numbers in 
that. Those numbers did include that.
    Mr. Wynn. I would like to ask the other Commissioner.
    Ms. Breathitt. Mr. Wynn, I voted for that order setting up 
the refund methodology. From my understanding, from a tough day 
to get an order out, in my conversations and briefings with 
senior staff, the figure and transactions that the ISO asked us 
to refund, once we took out the nonjurisdictional entities that 
we do not regulate and we looked at the month of January only--
because their filing captured more transactions over several 
months--it is my understanding that we captured 70 percent of 
the transactions that the ISO filing would have captured if you 
compare what we did in January to what they requested for the 
month of January alone, backing out the nonjurisdictional 
entities.
    So we captured 70 percent of their figure. And I think it 
is a point that I have been wanting to make this afternoon, 
because if we look at just the numbers of transactions, we are 
not comparing the same thing.
    Mr. Wynn. Thank you, Mr. Chairman.
    Ms. Breathitt. One more point. Starting in May, we will be 
going to a more permanent market monitoring plan. And if I find 
between now and May 1, when we go to that permanent one, that 
the methodology that we are using now needs to be adjusted or 
tweaked, I will be willing to do that.
    Mr. Barton. The gentleman from Oregon is recognized for 5 
minutes.
    Mr. Walden. What percent of California's energy does FERC 
regulate, Mr. Chairman?
    Mr. Hebert. About 47 percent.
    Mr. Walden. Forty-seven percent of that consumed by 
California is under your regulation? California, then, has the 
ability to regulate the other 53 percent under some sort of 
wholesale price cap. Is that correct or not?
    Mr. Hebert. Actually, so many of their transactions with 
co-ops, communities, public power administrations, do not go 
through our jurisdiction. They certainly have the ability 
through the ISO to treat transactions accordingly, and that 
would be within their realm, and certainly not ours.
    Mr. Walden. Can you tell me, what is California doing in 
terms of the wholesale controlled price on the power they do 
have jurisdiction over? What have they chosen to do?
    Mr. Hebert. At this point? I don't know what they are doing 
at this point. We have somewhat changed the scheme of things. 
They are moving around the PX now and not through the PX. We 
have returned 25,000 megawatts back into the system. So I will 
have to say they are making some very important strides in 
California.
    The one thing that they are not doing, where they are not 
stepping up to the plate, is trying to get some new supply 
online.
    Mr. Barton. Will the gentleman yield?
    Mr. Walden. Yes.
    Mr. Barton. I am told that the State of California does not 
have jurisdiction over municipal rates or co-op rates. Is that 
true or not true?
    Mr. Hebert. That is correct.
    Mr. Barton. So at the wholesale level, if it is not FERC 
jurisdictional, then it is not jurisdictional?
    Mr. Hebert. That is correct.
    Mr. Barton. Okay.
    Mr. Walden. So, Mr. Chairman, are you saying that no one 
has control over that that is not controlled by FERC?
    Mr. Barton. They are subject to the----
    Mr. Hebert. The point is if you are going to subject them 
to a price cap, if we are, they will be free and clear of that 
price cap.
    Mr. Walden. The 53 percent.
    Mr. Barton. They are subject to the market negotiations 
between the supplier of the power, i.e., the municipal, and the 
consumer, whether it be retail, the city council, or wholesale, 
a commercial user, but they are not subject to FERC 
jurisdiction and not subject to the PUC State of California 
jurisdiction is my understanding.
    Mr. Walden. So less than half of the power consumed in 
California could be affected by rate caps?
    Mr. Hebert. Correct. Which is one of the main reasons why 
it is totally unworkable.
    Mr. Walden. What could happen, then, to that being produced 
in California? Is there anything that stops that rate from 
spiking if you cap the wholesale market that you do have 
jurisdiction over?
    Mr. Hebert. You are saying, would there be anything that 
would stop the 53 percent from spiking?
    Mr. Walden. Correct.
    Mr. Hebert. Not that I am aware of. And probably what it 
would do is it might spike, but it will most assuredly be 
exported somewhere other than California.
    Mr. Walden. Can you elaborate on that? Why would it be 
exported?
    Mr. Hebert. If they are going to be subjected to perhaps a 
25 percent adder, cost-plus cap, you can bet they are going to 
maximize their opportunity cost somewhere else, which is one of 
the reasons that you saw that while the demand curve was 
somewhat constant between 1999 and 2000, they were not getting 
enough supply in, partially because of caps in place and 
partially because of weather.
    Mr. Walden. Help me out here, because what I hear from some 
is a price cap at the wholesale level that you have 
jurisdiction over, the 47 percent or whatever it is, would have 
a short-term positive impact.
    What I hear you saying, though, is it could actually have a 
short-term negative impact because the 53 percent that you do 
not regulate could go elsewhere?
    Mr. Hebert. In fact, that is absolutely true. The studies 
that have been done by the staff also show that as the price 
went down, the average price went up, which proves your point 
out.
    Mr. Walden. Say that again. What do you mean?
    Mr. Hebert. As the average price from $750 went down to 
$250, the average price per megawatt hour in the State of 
California went up.
    Mr. Walden. Price caps could actually drive up the cost of 
power?
    Mr. Hebert. They did in that case.
    Mr. Walden. How broad a sample is that case? Is it a one-
time issue?
    Mr. Hebert. I don't know the exact sampling. I can get that 
for you. I will be glad to provide that for you.
    Mr. Walden. Are you aware of any energy companies that had 
proposed to add to the supply in the West or in California 
that, since this talk of price caps, have decided to take their 
money elsewhere?
    Mr. Hebert. They seem to have some trouble entering into 
long-term contracts at this point, although I have seen and 
heard today--not seen, but heard--that they signed a contract 
for, I think, 1,500 megawatts for this summer with Dynergy.
    The important thing is what megawatts are going to be 
brought on for the summer. But then again to get back to a 
comment, actually, that was brought forth through some comments 
that Secretary Abraham had made, if you look at the 
opportunities that have been passed on, in other words, there 
was a conversation and some testimony given by the Secretary 
that was right on point, suggesting that in fact they could 
have signed up for $55 a megawatt back in November.
    If you look at that on an annual basis, that itself, had 
they done it, would have saved $5 billion in California.
    Mr. Walden. Who disallowed them from doing that long-term 
contract?
    Mr. Hebert. There are two sides to that story. One is that 
in fact the State CPUC was not allowing them to move into the 
forward markets and was pushing them into the spot market, 
which quite frankly was very volatile, a very wrong move.
    The other side of that is that they did not maximize their 
opportunity within the forward markets as well.
    Mr. Barton. The gentleman from Arizona, Mr. Shadegg, for 5 
minutes.
    Mr. Shadegg. Thank you, Mr. Chairman.
    I was intrigued by my friend, Mr. Markey, when he talked 
about trying to send price incentives to the clouds to induce 
raining, and making fun of that whole series of thoughts, and 
indeed making fun of the idea of sending price incentives at 
all.
    That line of questioning or commentary might be apropos if 
the only problem here were lack of rain; but, of course, the 
only problem is not a lack of rain, it is a whole series of 
problems that have converged together at the same time.
    He said he is worried about protecting Granny and thought 
we needed to insulate Granny from the consequences of her 
conduct, and that she did not create the system so she should 
not be punished for it.
    My concern here is that if we look at what happened in 
California, I think we will see a series of bad decisions by 
governmental bodies. And if we are to protect Granny, I believe 
at the risk of making another bad decision by a governmental 
body, that worries me.
    Mr. Massey, I am fascinated by your testimony. I think, 
quite frankly, at the end of the day I understand you basically 
to say that you agree that the long-run price caps send the 
wrong signal. You certainly have agreed here today that we have 
artificially low retail prices in California, and indeed, I 
think you called them ridiculous or absurd. You have used the 
word ``dysfunctional'' a number of times to describe the market 
in California.
    You would agree with me in part that it is dysfunctional 
because retail rates are capped and wholesale rates are not 
capped. You would say that causes the market not to function, 
would you not?
    Mr. Massey. I think that is part of the problem.
    Mr. Shadegg. You would also agree it is dysfunctional 
because we have a lack of supply compared with demand; is that 
right?
    Mr. Massey. Yes.
    Mr. Shadegg. You would agree that lack of supply is driven 
by the reluctance of the people in California, and indeed the 
governmental bodies in California, to site and allow the 
construction of new power plants?
    Mr. Massey. That has been true in the past. I don't think 
it is true now.
    Mr. Shadegg. I hope you are right. I would only note in a 
poll taken in February, 57 percent of the people in California 
say there is no energy shortage, even now. This is an article 
from the March 10 newspaper discussing a proposed 550 megawatt 
power project in Southgate, apparently located near Downey, 
California, in the L.A. Basin, where they have dropped the plan 
to build a plant.
    It seems to me one of the things we have done is we have a 
dysfunctional market in that the people of California, because 
they have capped retail rates, capped at a ridiculously low 
rate that they do not even realize there is a crisis. They are 
turning down plants and they are saying--almost two-thirds of 
them are saying there is no crisis.
    So we have a dysfunctional market because there is a lack 
of supply. We also have a dysfunctional market because we have 
a lack of transmission. You would agree with that?
    Mr. Massey. I think I would. I think Congress should 
transfer that siting decision to FERC.
    Mr. Shadegg. When I was traveling with the Chairman, we 
were told the cost of building and siting a plant is anywhere 
between 2 and 3 times as much as anywhere in the country, and 
the time it takes is somewhere in the neighborhood of 10 times 
as long as it takes elsewhere in the country.
    Let me ask you, each of those problems involve government 
kind of, I think, messing with the marketplace and distorting 
the reality: retail caps, by their so-called deregulation; 
failure to site plants; failure to site and construct 
transmission.
    As I understand the California law, it also caused one of 
the problems we are here discussing today, which is the 
overcharging, because the California law mandated, correct me 
if I am wrong here, that the price be driven not by a mix of 
long-term and short-term contracts, but, rather, be mandated by 
the short-term spot market.
    Is that not correct?
    Mr. Massey. That is exactly right.
    Mr. Shadegg. So all four of those are government-created 
problems that create this dysfunctional market. You would agree 
with that?
    Mr. Massey. I do agree.
    Mr. Shadegg. Okay. I am not sure that the right answer, 
then, is to set other caps.
    You said just a moment ago, in response to a question by 
one of my colleagues, that one of the reasons why there was 
inadequate construction of new generation was because there was 
uncertainty through the nineties on whether California was 
going to deregulate or not.
    Mr. Massey. Yes.
    Mr. Shadegg. Would you not agree that if you impose 
wholesale price caps now, will there not be uncertainty in the 
future as to whether or not those price caps, which you say are 
going to be temporary, will not in fact become permanent or 
long-term and therefore discourage future construction?
    Mr. Massey. That argument is always raised. I think it 
depends on how we do it and whether the marketplace senses that 
we are in fact committed to long-term, market-based solutions. 
I am myself, but I think it depends on how we do it.
    If we exempt new generation, if we get----
    Mr. Shadegg. That is the point. I have the idea of 
exempting new generation, so I am encouraged to come in and say 
I will go ahead and build new generation because they are 
exempting me now. But how will they know 12 months from today 
that this same Commission and Congress may say, no, prices are 
still high; we are going to cap rates, but we won't price it if 
you build it after next June rather than this June.
    Mr. Massey. They all operate in a marketplace in which they 
are very much aware that my Agency has the statutory obligation 
to ensure just and reasonable prices.
    Mr. Shadegg. That is a difficult point.
    Mr. Massey. Yes.
    Mr. Shadegg. That creates a problem.
    Mr. Massey. They all know that.
    Mr. Shadegg. They all know that government can make bad 
decisions, and we have just cited four of them. I agree that 
there is a problem with gouging or bad market incentives in the 
past, but I am worried about repeating those in the future.
    You said in your oral testimony, point blank, that price 
signals have been sent. I think you said that in the context of 
signals to outside producers to come in and build because the 
prices are high. But you would agree with me that price signals 
have not been sent to the people of California, when 57 percent 
of them agree or believe that there is no shortage and when 
they are turning down future power plants? You see both sides 
of the price signal issue?
    Mr. Massey. Of course. Of course. But I say again, my 
agency has declared the market to be dysfunctional. We have 
declared prices to be unjust and unreasonable.
    It is extraordinarily difficult politically for State 
policymakers to flow those through, although I think retail 
prices are going to have to increase, and retail customers are 
going to have to see a price signal.
    Having said that, State policymaker decisions do not 
relieve me of the obligation to ensure just and reasonable 
wholesale prices. There is no exception in the law.
    Mr. Shadegg. I understand that. You keep using the word 
``dysfunctional market.'' I think we have all agreed that four 
of the major factors that have caused this to be dysfunctional 
are not greed on the part of the utilities, though that may be 
there, but very bad government policies.
    Mr. Massey. Yes.
    Mr. Barton. Let the record show we gave you double time. We 
reset the clock.
    Mr. Shadegg. Let the record show I was not the only one who 
got double time.
    Mr. Barton. But you were one of the ones that got double 
time.
    The gentleman from North Carolina is recognized for 5 
minutes.
    Mr. Burr. Clearly, there was one hell of a precedent set 
while I was gone. I will take advantage of it.
    Let me read a statement that is attributed to the Governor 
and just ask for your comment. The Governor said in his State 
of the State speech on January 8, ``Never again can we allow 
out-of-State profiteers to hold Californians hostage.''
    Could I ask each one of you to comment as to whether you 
believe that the Governor's statement is accurate as it relates 
to the suppliers that have supplied that State?
    Mr. Massey?
    Mr. Massey. I will say that for a politician at the State 
level that is trying to get a handle on the situation----
    Mr. Burr. I am asking you to address whether the companies 
who supply on a wholesale level fit the description that the 
Governor of California referred to as them holding Californians 
hostage.
    Mr. Massey. No, I don't agree with that. I think there has 
been some profiteering. I think there has been withholding. I 
think there have been abuses that we have not ferreted out.
    But to take that kind of swipe at an entire industry, I 
don't agree with that.
    Mr. Burr. We will get to some of the reasons that possibly 
the price went up.
    Commissioner Hebert?
    Mr. Hebert. Again, I would rather not get into speculation 
as to what he intended. But as to whether or not I agree with 
that, I guess it depends on how we define profiteers.
    Mr. Burr. He said profiteers--``to hold Californians 
hostage.''
    Mr. Hebert. I think it is inaccurate; inaccurate in that it 
does not complete the subject class. If the subject class is 
profiteers, then you have to include the in-state profiteers, 
the munis, the co-ops; other people who were involved in this, 
as well. So I think it is very unfair to segregate the subject 
class.
    But let me speak to something quickly in regard to that.
    A moment ago my colleague, Commissioner Massey, was talking 
about the rates and how we found many to be unjust and 
unreasonable. Actually--and I don't have the language in front 
of me--but I am pretty sure that the language was, we found 
rates to be unjust and unreasonable at certain times during 
certain conditions. It is a little different language there. I 
know we are talking about semantics, but I think it is 
important that you understand that.
    Since we are talking about the profiteers, we have already 
concluded that for half the marketplace, FERC cannot do 
anything about it. As you know, through the December 15 order, 
we put pressure, downward pressure if you will, to have less of 
a spot market. A year ago, the spot market was nearly 100 
percent in California. Now we are hoping it is somewhere near 5 
percent.
    So if you get the bilaterals out of the way, which is where 
we are trying to press them toward--now we are talking about 
capping prices, but we are talking about capping 5 percent of 
the marketplace.
    Mr. Burr. I can assure you, anyone who was in this 
institution in the last Congress was very attuned to making 
sure that we understand the definition of words. So I 
appreciate your clarifying that.
    Mr. Hebert. Thank you.
    Ms. Breathitt. I believe the Governor may have felt that 
way, but I think it was a generalization that I don't agree 
with, although I concur with Commissioner Massey's comment that 
while it was a generalization that I do not agree with, I do 
think that there have been instances of market power abuse and 
withholding.
    Mr. Burr. I will go back over something my colleague, Mr. 
Walden, commented on.
    Last summer the volatility of the spot market reinforced 
the need for utilities to be able to enter into bilateral long-
term contracts. Duke Power is my power supplier in North 
Carolina. Duke offered to supply the needs to San Diego Gas and 
Electric on a long-term basis at a price of $55 per megawatt 
hour for 5 years.
    In your opinion, tell me how an offer like that is 
profiteering and holding Californians hostage. Now, that is not 
ultimately what California paid for their power, because they 
would not allow that contract to be entered into, but Duke 
Energy was willing to sell for 5 years at $55 a megawatt, to 
sign a contract with San Diego Electric.
    Tell me how that is profiteering and holding Californians 
hostage.
    Mr. Massey. That sounds like a good deal to me. I am sure 
that many of--that the utilities in California wish they had 
those kinds of bargains available to them now. But of course 
they don't, because the spot market is so high-priced it 
affects the long-term price in forward contracts.
    I think in retrospect, that looks like a pretty good deal.
    Mr. Burr. Isn't it true that over the last decade 
consumption has grown 25 percent and generation capacity has 
gone down? Is that not a reality, or 29 percent?
    Ms. Breathitt. Congressman, that is 5.5 cents a kilowatt 
hour. Hindsight being 20/20, I am sure they would have loved to 
grab that deal now.
    I have been somewhat disappointed in my reading in the 
trade press of the pace at which bilateral contracts are being 
negotiated, and we had begun that process before a FERC ALJ, 
and then it moved to the Treasury Department in the last days 
of the Clinton Administration. Now those negotiations are 
occurring at the State level, and we do not have a lot of 
information on the success of moving the spot market into the 
bilateral market for this summer.
    Everything that I have read is that the contracts are 
beginning in the fall, or even later than that. So I do not 
know how successful that is.
    Mr. Burr. Commissioner Massey said that hindsight is a 
wonderful thing. I would tell you when you have a 25 percent 
increase in consumption and you have a reduction in your 
generating capacity, it does not take hindsight to realize that 
potentially you are headed off of a cliff that actually we saw 
this year.
    Let me ask one last question, and then I know Commissioner 
Hebert has something to add.
    Mr. Barton. This round will be your last question.
    Mr. Burr. We are several months into this crisis. Tell me 
what California has done to increase the generating capacity 
within their State; not relying on the outside, on the 
profiteers and individuals who are holding California hostage, 
but what specifically has California done to increase the 
generation, the generation capacity within their State?
    Ms. Breathitt. I have been told by FERC senior staff that 
the California electricity siting authority has sped up their 
review to 21 days, but that is just one level of the siting. 
Then it has to go through all this local siting, and it gets 
bogged down there.
    So I have been told that they have sped up their siting 
timeframes significantly at the State level.
    Mr. Burr. What was their siting timeframe before, do you 
know?
    Ms. Breathitt. A year or 2. I don't know. It was a long 
time.
    Mr. Burr. It is amazing how efficient you can get when you 
have a problem.
    Commissioner Hebert, was there something you wanted to add?
    Mr. Hebert. Let me add to this one thing that I think you 
will find important.
    One of the questions is what is California doing, but also 
what have they not done? The things that FERC has asked them to 
do to help us help them, if you will, that they have not done 
is a congestion management plan has not been filed. They are 
the only State yet not to file an RTO. There was a deadline 
October 15; one, January 15. They have yet to file anything on 
a regional transmission organization plan.
    A governing board, that is inconsistent with the 12/15 
order; the PX failure to implement on as-bid pricing. SoCal for 
weeks failed to stop selling its own generation through the PX; 
creditworthiness; a tariff provision the ISO failed to 
implement properly; slow to move toward a more balanced 
protocol, but they are moving there.
    This announcement today with Dynergy is important. I am not 
convinced California is doing everything it can to expedite 
construction. It goes back to my point. They have not turned 
the first shovel on anything meaningful.
    But we got a letter today, actually, that I shared with my 
colleagues, after we issued an order last week looking for 
short-term and some long-term remedies for removing obstacles, 
if you will; something that the FERC could do to aid and assist 
California.
    I received that today from Governor Gray Davis. I will be 
glad to give you a copy.
    And it says I understand if the FERC is willing to do 
everything within its power to encourage the construction of 
additional natural gas supply transmission lines to bring 
needed natural gas and energy supplies to the State of 
California for its possible usage, and plants and hope to bring 
on line not later than July 1, 2001, including all activities 
that will help expedite licensing and approval of such as a 
resolution of environmental and other regulatory concerns will 
help meet critical construction deadlines and will help relieve 
the energy challenges we are facing.
    The Federal Energy Regulatory Commission's assistance in 
this regard will serve the public interest and help greatly to 
meet the challenges that exist in the State of California. So 
there is good news. We have got a good news letter here that 
basically says that the Governor is thankful for action we have 
taken to help them.
    The other thing I would like to quote is the question you 
asked about Duke and the $55 per megawatt hour, which is the 
one that I quoted earlier, that actually Secretary Abraham had 
brought out in his discussion, that would have saved $5 billion 
over a 1-year period, but here is the opposite of that, too, 
and this is the type thing that we don't think about, but I 
must think about as the Chairman of the FERC.
    At $55 a megawatt hour, chances are, December, January, 
February, March, because of----
    Mr. Barton. But they would have entered it willingly. They 
would have just--their stockholders would have got on them at 
the next meeting.
    Mr. Hebert. The secret is a balanced portfolio.
    Mr. Barton. They are probably happy that California didn't 
take them up on it.
    Mr. Hebert. Oh, they're probably ecstatic.
    Mr. Barton. That is what they are celebrating in North 
Carolina.
    Mr. Burr. We celebrate every day in North Carolina.
    Mr. Barton. Not celebrating the NCAA basketball tournament 
from North Carolina's perspective.
    Mr. Burr. We still have one small entry, Duke.
    Mr. Barton. And Texas has none. I don't think we got even 
past the first round.
    Is LSU still in?
    Ms. Breathitt. No, but Kentucky does play Duke Saturday 
night.
    Mr. Barton. Oh.
    The gentleman from Virginia. We are going to do a second 
round. I would ask if you let Mr. Boucher do his questions, and 
if you all want to take a quick personal convenience break, 
then I have got questions, Mr. Shadegg has got questions, Mr. 
Markey has got questions. So we are going to do at least three 
more questions. Mr. Boucher has got a pending engagement. I am 
not going to let him go now, and if you want to take a quick 
break, then we will come back.
    Mr. Hebert. Mr. Chairman, we could take turns if that would 
be convenient. I may stay gone longer than the rest.
    Mr. Barton. We may want to ask all three of you the same 
question.
    Mr. Boucher.
    Mr. Boucher. Thank you, Mr. Chairman. I just want to spend 
a moment now talking about the methodology that the Commission 
has employed in setting the rate screen, in the case of 
January, $273 per megawatt hour; in the case of February, a 
much higher number, $430 per megawatt hour; and this is the 
number above which you then determine that the rates that are 
charged for the transactions are unjust and unreasonable.
    Now, I am told that there was a time in the not-too-distant 
past when electricity at the wholesale level was being priced 
at something on the order of $30 per megawatt hour. Now, maybe 
that is low, but I am told that that, way back in the dark ages 
of 1998-1999, was the price; and in view of that historical 
record, one has to wonder if your methodology in arriving at 
these numbers of $273 for January and $430 for February is 
really based on an average of all of the costs of the utilities 
in California, or whether you are only looking at the cost of 
the most inefficient of the generators selling power into the 
State.
    Which is it? Is it the broader measure of all of the 
utilities in California, or is it the more narrow measure of 
only the most inefficient of those generators, and then if it 
is the latter, how can you justify that? If--in fact, if it is 
the latter, I would strongly encourage you--Ms. Breathitt, 
taking you up on your suggestion that you would be willing to 
look at this methodology and alter it if some alteration 
appeared to be necessary as you begin to look at the months 
that are subsequent to January.
    So let me ask you the basis on which you have arrived at 
this number. Is it an average of all utilities' costs, or is it 
just the most inefficient ones?
    Ms. Breathitt. We used three of--we used the top three most 
inefficient power plants that were previously owned by the 
three investor-owned utilities. For example, with PG&E, it was 
their top three least efficient power plants, with SoCal Edison 
and with San Diego.
    Mr. Boucher. Why did you choose the least efficient plants? 
Why did you not take an average of all of the utilities in the 
State?
    Ms. Breathitt. We then averaged those and came up with a 
price for a combustion turbine, using those. But we used those 
because in the tightest supply shortage, those units would be 
called on to operate, and those units--because California is 
under a market structure now, those units would have set what 
we call the ``market clearing price,'' and that is how the 
market is designed in California.
    So we used those because those units would be called into 
service, and the cost recovery would be based on the most 
inefficient plants put into service.
    Mr. Boucher. It would seem to me that at that time there 
would be a lot of generators selling power into the State who 
would have operating costs far below those most inefficient 
generators. And would it not be unjust and unreasonable for 
them to be selling power at a rate that is essentially the same 
as the least efficient of these generators--at a rate that is 
far below the rate that you were pegging for the least 
efficient of these generators?
    Why would it not be unreasonable for them to be selling 
power at a lesser number than that? Why are you holding them to 
the same standard?
    Ms. Breathitt. They would have been selling power at a 
lesser number than that, but we found that market power would 
most be abused during that--the tightest supply demand 
conditions, and one of our goals in setting up a market 
mitigation plan was to capture transactions that would have 
been--transactions that would most likely have involved the 
abuse of market power.
    Mr. Boucher. Mr. Massey, let me ask you for your comment on 
this methodology. Do you have any problem with the way that 
that proxy number is established?
    Mr. Massey. Well, I do. I don't think we did what we said 
we would do. We said in our December 15 order that when we get 
the transaction information, the Commission will look at the 
transaction information that is submitted and we will look for 
market power, we will look for evidence of strategic bidding, 
we will look for evidence of withholding and so forth. We 
didn't do any of that. We simply set a threshold below which 
the bidders get at free and clear, and it has the impact of 
excluding most of the transactions that occurred during that 
month over $150.
    And the point I have made before--I know I sound like a 
broken record, but if you are concerned about a $273 bid in 
stage three, you would be even more concerned about a $273 bid 
in stage two or stage one or where there weren't shortages at 
all. So it is, I think, illogical; and it gets worse for 
February where the price is $430, and the stage three 
limitation has the impact of giving 14,168 transactions above 
$430 a free and clear because they did not occur in stage 
three.
    Mr. Boucher. Well, I understand the concern you have, and 
it is one that I share about limiting the orders just to the 
transactions that occur in stage three. My question was really 
directed more toward the formulation of the screen itself.
    Mr. Massey. Oh, I think the formula was fairly generous as 
well, looking at only the inefficient 18,000 BTU units.
    Mr. Boucher. Would you agree that it would be sensible to 
look at average operating costs of all of the utilities of the 
State, not just the least efficient ones?
    Mr. Massey. That is another way you could do it.
    Mr. Boucher. Is it a better way to do it?
    Mr. Massey. It perhaps is. You could look at all the 
transactions. We have the actual data now, I think, before us. 
We don't actually have to use a screen.
    Mr. Boucher. So you could look at the actual operating 
costs of each generator; is what you are saying?
    Mr. Massey. Yes. The reason the Commission chose a screen 
is because it is easy to administer but it is not necessarily 
the most just way to go about it.
    Mr. Boucher. Are you going to advocate some change in this 
methodology as the determinations are made with regard to, 
let's say, February and subsequent months, or maybe March and 
subsequent months?
    Mr. Massey. I am, and I am concerned if this methodology is 
used for the period of time last year in which there is a 
refund effective date, almost no transactions will qualify for 
refunds because there were only 2 hours of stage three during 
all of the year 2000, and I think, going forward, we have to 
broaden our mitigation plan to hours other than stage three 
alerts.
    Mr. Boucher. Okay.
    Thank you very much, Mr. Chairman.
    Mr. Barton. We are going to take a quick--and I mean 
quick--personal convenience break, and I want the audience to 
let the testifiers have precedence on the facilities.
    I am going to be back here by 5:15, so maybe 5:16. So if 
you all will take a quick run for whatever you need to run for, 
and then we will be back here in about 4 or 5 minutes.
    We are in recess.
    [Brief recess.]
    Mr. Barton. I see two of the Commissioners--there is the 
third. So if we could get our stars back and continue.
    Okay, I want to apologize for keeping you past 5 o'clock, 
but at the Republican leadership meeting with the Speaker this 
afternoon, one of the items on the agenda anyway was what to do 
in California; and I have been asked to make a presentation to 
Chairman Tauzin later this week.
    So we really--we have got to focus. So I--normally we 
wouldn't keep you here this late, but these are not normal 
times.
    I want to put into the record a chart that was prepared by 
EIA about retail electricity charges around the country, and it 
shows that in Washington State from 1998 through the end of 
calendar year 2000 the retail rate charged to consumers was 
right at 5 cents a kilowatt hour. In Oregon it is fluctuating 
around 6 cents a kilowatt hour; in Texas, between 7 and 8 cents 
a kilowatt hour; in Michigan between 8 and 9 cents a kilowatt 
hour.
    Here in the PJM market, in the Atlantic, mid-Atlantic Coast 
region it has been between 8 and 9 cents a kilowatt hour, and 
in California it has been between 10 and 11 cents a kilowatt 
hour. So we are talking a lot about a retail price signal.
    I think the record--it is only fair to show that California 
is paying some of the highest retail rates in the country. 
Having said that, it is obvious that the market is still not 
working, because the wholesale rates coming into that market 
show the retail rate should be considerably higher than it is. 
But we will put this chart into the record at the appropriate 
point .
    We have focused most of our attention so far today on a 
debate about price caps, wholesale price caps, and who is for 
it and who is against it, and whether they work or not; but it 
has been pointed out by the Chairman, the FERC only has 
wholesale jurisdiction over approximately 50 percent of the 
market in California. The State of California, on the other 
hand, has total jurisdiction on the demand side.
    Now I would like to hear, first of all, is it your opinion 
as commissioners at FERC--if the State of California wished to 
put in a mandatory demand management program, does it have the 
authority to do that?
    Mr. Massey says yes.
    Chairman Hebert says yes.
    Ms. Breathitt. You are asking if the State has the 
authority?
    Mr. Barton. Does the State----
    Ms. Breathitt. More so than we do, in my opinion.
    Mr. Barton. Does the State of California have the authority 
to put in a mandatory demand management program? Because, let's 
be serious, you know, every one of you has testified--if not 
today, at some point in the last month between some committee 
of the House or the Senate--that you are not going to solve the 
supply problem this summer. There is anywhere from a 5,000 
megawatt peak load demand shortage--I hear as low as 2000; I 
have heard as high 8,000. The average is around 4- to 5,000 
that just ain't going to be there. So we need to look at the 
demand side.
    Now, Mr. Markey has got and Mr. Waxman has got some ideas 
about efficiency standards for appliances--perhaps not a bad 
idea, very tough to implement this summer. So my first question 
for this round is, if the State wanted to, could the State put 
in a mandatory demand management program that would cause 
certain factories to shut down at certain times of the day, 
protect that certain users, such as hospitals and schools and 
low income--so that they took this demand supply shortage 
situation and actually proactively tried to manage it?
    Could the State of California do that if they wished to?
    Ms. Breathitt. Yes, and it is my understanding from having 
regulated at the retail level that there are protocols for 
periods of outages, like the most critical--hospitals, nursing 
homes, et cetera--would stay--would have access to power.
    Mr. Barton. We will ask the State on Thursday. They have 
several officials. We will ask them what they are doing on the 
demand side, but I just want to get it on the record.
    From a Federal perspective, every commissioner--Republican 
and Democrat, there is unanimous agreement that the State could 
manage its demand this summer if it wanted to, all right?
    Mr. Hebert. Absolutely, and there are lots of different 
ways to do it.
    Mr. Barton. All right, second question.
    On the supply side there are a number of small energy 
suppliers, electricity suppliers, in California that are called 
QFs, qualified facilities, under PURPA, I believe. Many of them 
are shutting down not because their equipment is worn out, not 
because of air quality constraints, but simply because they 
have not been paid; and if they are a natural gas qualifying 
facility, they don't have the money to keep supplying power 
into the market if they don't get the money to pay for the 
power they have already supplied.
    What, if anything, could the FERC do to require the 
qualifying facilities that have shown good faith, have put 
power into the market in California which is on the order of 
1,500 megawatts, to make sure that they are paid? Could you 
tell the State of California to pay those bills, or is that 
again a State decision whether to pay for those bills?
    Mr. Massey. There is an argument that we could tell them to 
pay those bills because of the special provisions of PURPA, 
that those bills ought to actually have a priority in payment 
because of PURPA.
    I don't know whether that is the right answer, but I know 
that there are strong arguments that my agency could direct a 
payment.
    Mr. Barton. So, Commissioner Massey, you say that the FERC 
could say that those bills had to be paid?
    Mr. Massey. I think there are good arguments that we could 
say that.
    Mr. Barton. You are not saying you would say it.
    Mr. Massey. No.
    Mr. Barton. Chairman, would you say that you could? Do you 
agree there are good arguments where you could dictate the 
State to pay those bills or the utility to pay those bills?
    Mr. Hebert. Not directly, and let me tell you why.
    The one thing we have done is, like the refunds we spoke 
about, the refunds that came through January and February; we 
said they could either refund or be held against accounts 
receivable. Implicitly that is one way we can do something.
    Now, obviously we can't reach out and touch those QFs, but 
through the file rate doctrine, it is generally accepted and 
legally accepted that wholesale charges prudently incurred, or 
wholesale costs prudently incurred, shall be passed to the 
ratepayers absent some preconditioned agreement between, 
perhaps, the State of California and the utilities.
    Mr. Barton. Okay.
    Commissioner Breathitt.
    Ms. Breathitt. Mr. Barton, I do not know the answer to your 
question. If you would like me to, I will confer with some of 
the attorneys back at the agency.
    Mr. Barton. That is fine with me. Just get me the answer by 
close of business Friday.
    Ms. Breathitt. Okay.
    Mr. Barton. We are going to make some decisions this 
weekend.
    Yes, sir.
    Mr. Hebert. My guess is, Mr. Chairman, at some point, due 
to the file rate doctrine, some judge somewhere, somehow, will 
force those costs through.
    Mr. Barton. Well, any part of a comprehensive plan to 
minimize the shortage has got to put into play the existing 
facilities that could provide power, if they could be paid for 
the power they have already supplied and paid enough money to 
operate this summer.
    It is crazy to take 1,500 megawatts off the table. Most of 
it is clean power, most of it is relatively new power. So that 
is just--it is going away if we don't do something.
    Mr. Massey.
    Mr. Massey. I agree with you, Mr. Chairman. This is a 
problem that has to be solved before the summer.
    Mr. Barton. Last question, and then I will go to Mr. 
Markey.
    The fly in the ointment that nobody is talking about today 
so far is the permitting process for new power plants in 
California. Commissioner Breathitt said she talked about it, so 
we will give her a halo for that.
    What role, if any, does the Federal Government and the FERC 
have in expediting or reviewing applications for new power 
plants in any State--not just California, but specifically 
California, but generally, any State? Is there a FERC role in 
new plant certification permitting?
    Ms. Breathitt. There is no role, Chairman Barton. We 
attempted to carve out a role through the RTO process, to 
consult with the RTO and its members and State----
    Mr. Barton. But under current law, the FERC can't dictate a 
permit application?
    Ms. Breathitt. No. And in my opening statement, I advocated 
a change in the Power Act.
    Mr. Barton. Okay.
    Mr. Hebert. Only one exception to that as to generation, 
and that would be the licensing of a hydro facility.
    Mr. Barton. On Federal lands perhaps that would be an 
exception, too, would it not? If you wanted to build a new 
power plant on Federal property in California, is that an 
exception, or would that have to get a State permit?
    Mr. Hebert. It is going to be a State permit and they are 
probably going to have, quite frankly, substantial dealings 
with the Department of Interior.
    Mr. Barton. Okay.
    Mr. Massey, Commissioner Massey.
    Mr. Massey. I agree with those answers. Generally speaking, 
we have no role with respect to certification of plants.
    Mr. Barton. Okay.
    Now, current law, there may be an exception, but generally 
there is no Federal role. If you all were us--we can write law; 
that is what this subcommittee does.
    Would you want us, in an Emergency Electricity Act of 2001 
to give the FERC the right to override all State permitting 
requirements and set a time certain--not yes or no whether the 
plant should be built, but set a time certain that the State 
has to make a decision? Instead of its taking 3 years, 7 years, 
whatever, we said the State of California and every other State 
that is above the national average has to meet the national 
average within 6 months so that all decisions are made within 6 
months effective May 1 or June 1, 2001.
    In other words, would you want us to change the law, if you 
were us, on permitting? I want you to answer the question.
    Mr. Hebert. I will be glad to start.
    Mr. Barton. You can say yes or no. It is a real question.
    Mr. Hebert. The real answer is, I don't know; and let me 
tell you why.
    Mr. Barton. Okay.
    Mr. Hebert. And I will tell you the answer as I see it.
    Siting of generation has been decided by States. There is a 
long history there, and there is a reason. I have handled the 
retail side of it, and here is the perplexing situation you get 
yourself into. Who is to decide if California wants to say, we 
don't want----
    Mr. Barton. We will still let California say yes or no. We 
are just going to say, they have got to say it sooner.
    Mr. Hebert. No, but I am just saying, who is to say if they 
decide they don't want new generation and, quite frankly, they 
are going to embrace blackouts and brownouts; and they are 
going to embrace two and three times their current retail 
rates, as compared to someone perhaps maybe like a Texas, maybe 
like a Mississippi.
    Mr. Barton. Again, we are not dictating they have to say 
yes; we are just saying in a time certain--Mississippi can make 
a decision in 3 months, Ohio can make a decision in 6 months, 
Texas can make a decision in 9 months; the great State of 
California apparently can't make a decision in 3 years most of 
the time.
    Mr. Hebert. I guess the answer then changes to, if you are 
going to cross the bridge and say we are going to make this 
energy decision and make it a national and Federal decision, 
then the answer would be yes. But----
    Mr. Barton. We can make it temporary. We don't have to make 
it permanent.
    Mr. Hebert. I understand. But at the same time I do think 
that is a part of the beauty of Order 2000 and the RTOs, 
because understanding that the markets are national and 
regional, we are going to try to promote some of that.
    Mr. Barton. My time is way over.
    Commissioner Breathitt, would you want an emergency 
electricity act to require that the States make permitting 
decisions in a time certain?
    Ms. Breathitt. I think it would be cleaner to amend the 
Federal Power Act, at least temporarily, giving siting 
authority to FERC----
    Mr. Barton. So you want the authority. You don't want to 
just tell them they have got to do it; you want to do it?
    Ms. Breathitt. I am----
    Mr. Barton. You want to be the Power Queen of the West for 
the next year. That's okay.
    Ms. Breathitt. I wouldn't go that far.
    Mr. Barton. All right. So you say, temporarily give the 
authority to the FERC.
    What about you, Commissioner Massey?
    Mr. Massey. I think her comment was on transmission.
    Mr. Barton. I am talking power siting.
    Mr. Massey. On generation, you raise an interesting point 
because FERC does not have the tools to ensure a just and 
reasonable wholesale market, because so much authority is with 
the States.
    So, on an emergency basis, I think it is an intriguing 
idea. However, if you set a time limit, you might just get 
``no'' answers from the States.
    Mr. Barton. I don't feel--I very strongly--I can't stand 
here or sit here and say I want the Federal Government to make 
all these decisions because California can't do it, you know. I 
think States have the right to make bad decisions, and have 
made good decisions; but when that--when a particular State's 
particularly bad decisions over time impact the rest of the 
region and to some extent the country, I think it is in the 
Federal role to come in on a temporary basis perhaps and say, 
you are going to have to expedite making those decisions, and 
if we force you to in a constrained period, you might say, yes, 
more than you have in the past.
    Mr. Hebert. If I might just add two things----
    Mr. Barton. My time is way over, so Mr. Chairman and then 
Mr. Markey.
    Mr. Hebert. Quickly, one is, don't hard-wire it, don't be 
prescriptive if you are going to do it; and the second is--and 
I have testified to the effect that some type of one-stop 
shopping is a good idea.
    Mr. Barton. So you are kind of leaning toward Commissioner 
Breathitt's, let you folks do it for a while.
    Mr. Hebert. No, I didn't say let us do it.
    Mr. Barton. You said one-stop shopping.
    Mr. Hebert. I am not suggesting that. I will do either, 
but----
    Mr. Barton. Set up a regional commission, let them do it?
    Mr. Hebert. I do think the RTOs move in that direction.
    Mr. Barton. Okay, my time has expired.
    Mr. Markey for 5 minutes.
    Mr. Markey. Thank you, Mr. Chairman.
    Mr. Chairman, would you support immediate initiation of a 
formal 206 investigation?
    Mr. Hebert. Beyond what is going on now?
    Mr. Markey. Yes, so that consumers could get a refund if 
FERC found that prices aren't just and reasonable.
    Mr. Hebert. I have been open to any and all considerations. 
I have not seen the need at this point to initiate further 206 
proceedings.
    Mr. Markey. Commissioner Massey makes the case that we have 
reached that point, that the conditions are there.
    Where do you disagree with Commissioner Massey? What is 
wrong in his analysis?
    Mr. Hebert. Well, obviously we disagree on price caps. I 
don't think there is any way to price-cap 5 percent of the 
market and have any effect in a positive manner. If you are 
going to have price caps, it is certainly evident that you are 
going to have to have some type of 206.
    Mr. Markey. So do you agree with Commissioner Massey that 
widespread withholding may have occurred?
    Mr. Hebert. I would rather speak to our December 15 order 
and say that we found that market power may have existed during 
certain conditions and certain periods.
    Mr. Markey. Is it possible--if in your mind that widespread 
withholding did occur, is that something that you think you 
should look at?
    Mr. Hebert. I think we continue to look at that. I think 
that is our role.
    Mr. Markey. Why not initiate a formal proceeding in order 
to formally look at the question of whether or not energy 
companies were deliberately withholding energy? Why doesn't 
that make sense?
    Mr. Hebert. Well, obviously I think the Commission is 
moving in the right direction. I think we are moving in the 
right direction as to market mitigation, sending the right 
signals while making certain that a portion, that 5 percent of 
the spot market, does not create a further problem.
    Now, if I didn't believe that, then it may lend itself to 
some type of further 206 investigation, but the fact I do 
believe it moves me away from it.
    Mr. Markey. I appreciate that, but Commissioner Massey is 
saying that we are heading toward an abyss in the West this 
summer, an electricity abyss. Don't you think it makes sense 
for us to start now with a formal inquiry to make sure that 
there is not systematic gaming going on by these companies, 
because the profits are just so great that many companies might 
just find them irresistible, because ultimately the penalty 
that they might have to pay after the fact is small compared to 
the profits which they are able to reap and tipping Western 
consumers upside down.
    Mr. Hebert. I understand your concern, and I am certainly 
sympathetic to it, as well as to the people of California. That 
is why this Commission has acted, we have acted in setting up a 
proxy price. We are looking for comments to come in on what we 
are going to do with market mitigation, and quite frankly--let 
me make it clear one more time because I really need this to 
sink in.
    When you talk about me stepping in, the Commission stepping 
in, we three, you are talking about half of the marketplace; 
and now that we have pushed that 5 percent, we are not talking 
about the bilaterals. So we are talking about 5 percent of the 
spot market that perhaps we are going to intervene, and our 
direction is that we are going to give the profit-price signal 
while insulating against excessively and unjust and 
unreasonable prices, and I think that is what we are doing.
    Mr. Markey. Well, what is the test that you are using in 
your mind as to how much worse it has to get before you will 
commence a 206 proceeding? What additional evidence do you need 
in order to convince you that Mr. Massey is correct in terms of 
his analysis of this inexorable path toward the abyss which the 
West is taking in this electricity marketplace?
    Mr. Hebert. Let me be very careful in my comment because it 
is subject to rehearing. So my mind is open and I am 
considering.
    But you are very good at trying to get me to say something, 
quite frankly, that I am not going to be comfortable saying; 
and I will just stand by the record and tell you that I think 
the order speaks for itself, it is on rehearing, and we are 
doing something.
    Mr. Markey. Commissioner Massey, what is the nub of the 
disagreement that you have with Mr. Hebert? What is it that you 
disagree with him on in terms of your analysis of the crisis?
    Mr. Massey. I think what it boils down to is a 
philosophical disagreement about the role of my agency in 
ensuring just and reasonable prices. I think that we have no 
choice legally but to do so. In addition, it is the right thing 
to do, and we can't rely on a dysfunctional market that will 
not be fixed by this summer--and I think the law is clear on 
that--and that, frankly, we are not fulfilling our legal 
obligation.
    Mr. Markey. Commissioner Breathitt, whom do you agree with 
in this fight?
    Ms. Breathitt. I have recently signaled my willingness to 
look at the whole notion of price mitigation or capping the 
market. What I would prefer to do, which didn't go as far as my 
colleague, Commissioner Massey, in calling for a 206 
investigation, is--and we are going to do this--is to have an 
honest dialog with my State colleagues on April 6 in Boise. And 
they have--the State commissioners want to talk to us about 
price volatility in the West and what implementation issues 
there are.
    So I first wanted to talk to my State colleagues to see----
    Mr. Markey. But what would you want to hear from them? What 
is it that you could hear from them that would have you 
agreeing with Mr. Massey, that would then trigger a 206?
    Ms. Breathitt. What I would like to hear from them is that 
there is broad enough support to move forward. In other words, 
it would be very difficult to cap the market in three States 
only; it would need to be West-wide. I would need to be assured 
that there would be some participation of public power, because 
there is a lot in the West that is public power, and they would 
not be subject to that.
    And I would also like to be assured that there was a way to 
provide price mitigation to what is technically a bilateral 
spot market. There is no mechanism in the West outside of 
California.
    Mr. Markey. Does the Federal Energy Regulatory Commission 
usually wait for concurrence by the States before it initiates 
a 206 inquiry into fair and reasonable prices?
    Ms. Breathitt. It doesn't have to, but when you have got a 
disagreement among Governors whose States this would occur in 
and have something to say, quite frankly, about the matter, I 
think it makes sense to confer with my State colleagues.
    Mr. Markey. If I could ask one final question, do you agree 
with Mr. Massey that we could be heading toward an electricity 
abyss in the West this summer?
    Ms. Breathitt. I don't know if I would use the word 
``abyss.'' I agree with Commissioner Massey that we are 
potentially headed for greater problems than we have thus far 
seen.
    Mr. Markey. Greater than today by a significant magnitude, 
do you believe, in the middle of the summer?
    Ms. Breathitt. Yes, yes. I think that we could have more 
blackouts, that they won't just be rolling blackouts. And I 
said in my opening statement, I think prices could go even 
higher.
    Mr. Markey. And when do you think we are going to reach the 
last clear chance in terms of time before we will lose our 
ability to deal with this summer issue? Do you think time is of 
the essence? Do you think we are reaching that point?
    Ms. Breathitt. I think time is of the essence.
    Mr. Markey. Do you have a deadline in your mind--if I could 
ask each of you, when do each of you think you have to make a 
decision to avoid a real crisis in the West this summer? Do you 
have a deadline in your own mind?
    Ms. Breathitt. Whenever the heating season begins in the 
West, and I am told it is late June, early June. It is 
different from the East.
    Mr. Markey. You think you have until then to decide?
    Ms. Breathitt. At the farthest edge of it.
    Mr. Markey. So you don't think you have to initiate----
    Mr. Barton. The gentleman's time has expired.
    Mr. Markey. Thank you, Mr. Chairman. Thank you for 
indulging me.
    Mr. Barton. It is a serious question, and it is what we are 
wrestling with, how much time do we have to do anything if we 
think there is something we can do.
    Mr. Markey. Mr. Chairman, I am very concerned by the 
answers that I am receiving from the Commission in terms of the 
deadlines that I think are arriving.
    Ms. Breathitt. Mr. Markey, I also don't know, if Bill and I 
agree that this is the right thing to do, I have no idea what 
the practicality of our wanting to go down that path would be 
at the FERC.
    Mr. Barton. Chairman Hebert, and then we go to Congressman 
Shadegg.
    Mr. Hebert. Real quick, Congressman Markey, a couple of 
things.
    I think the Commission has reflected on what our last clear 
chance is, and I think that is what the market mitigation 
filing is about, and we are looking for those comments where we 
are going to hopefully have some plan that will mitigate any 
concerns through an ex-anti--through an immediate market 
mitigation plan on May 1 going forward. I think actually it 
came in from the staff for 1 year.
    Now, when you are asking me for a last clear chance, the 
reason I can't accurately answer that for you is, I can market-
mitigate 5 percent of the spot market now, which is what we are 
going to end up talking about.
    But let me tell you what I cannot do and what this 
Commission cannot do; and you know this. We cannot build 
interstate pipeline. We can remove barriers, and we can make it 
easier to do it, which is what we are doing and which is what 
the letter is about. But then if I get them six pipelines, and 
they don't have enough take-away capacity to deliver it once it 
gets there, I can't do anything about that. I can't site 
generation. This Commission cannot site transmission, can't 
build it.
    So we can mitigate. There are things we can do. I think we 
are exercising our discretion, but so much of this, an 
unbelievable amount of this, is outside of the control of this 
agency.
    Mr. Massey. May I have a 30-second comment.
    The market mitigation plan only applies to the California 
spot markets. If we are to deal with price volatility elsewhere 
in the Western interconnection, we have to open a formal 206 
investigation and set a refund effective date; otherwise, we 
have no authority to take any action whatsoever to mitigate 
price.
    And we need to be doing that right now, because under the 
statute that Congress passed, the earliest date is 60 days 
hence from the time we open the investigation. So if we opened 
it today, it would already be the middle of May before price 
relief could be effective.
    Mr. Markey. I think that you should initiate the proceeding 
now, gather the evidence, proceed, and then if you decide, then 
you already have fulfilled your legal requirements. If you 
decide not to, nothing's been lost, but if you decide you have 
to, then at least you are in a period of time where you might 
be able to do some good.
    Mr. Barton. The gentleman's time has expired.
    The gentleman from Arizona for the last question.
    Mr. Shadegg. I thank the chairman and I appreciate his 
indulgence of my colleague, because I have a fair amount of 
ground to cover myself.
    Let me first say, my compliments to all three of you. Your 
testimony here today and your written statements are some of 
the most thoughtful I have seen while serving in Congress, and 
I appreciate that. These are difficult problems that we are 
dealing with.
    I have a series of questions. The first one I want to 
direct to you, Commissioner Massey.
    You said in your testimony, and you repeated it in answers 
today--maybe you said it just in answers today--that uncapped 
high wholesale prices this summer will not create one 
additional megawatt this summer. As I have read your testimony 
and your comments here today, I don't know if there was price 
gouging in the past. I think you are concerned about price 
gouging in the future, and I am too, but I want to look at that 
statement very carefully, ``uncapped high wholesale prices this 
summer will not create one additional megawatt this summer.''
    You would agree with me that a higher price, a higher 
wholesale price, would incent the creation of additional 
megawatts, at least at some point in the future when they can 
be built; an assurance that you could recover the cost of what 
you put into a plant will encourage people to come in and build 
plants, right?
    Mr. Massey. It will, but the constraint in Federal law is 
``a just and reasonable wholesale price.''
    Mr. Shadegg. I am glad you raised that, because one of the 
comments I wanted to make during this series of questioning is, 
I think we have given you a near-impossible task. How you 
ascertain what a just and reasonable price is in the transition 
between a regulated market and unregulated market is extremely 
difficult. Indeed, I think the Congress may have given you an 
impossible task.
    When we had a regulated market, we knew how to figure out 
what a just and reasonable price is. How we figure that out in 
this circumstance, I don't know.
    I want to go to a second argument I would have with your 
assertion. You believe, for example, that one way to deal with 
the immediate problem in California is the concept of 
megawatts, that is, a large consumer of electricity coming back 
and saying, we will agree not to use electricity or we will 
agree to reduce our load or perhaps to reduce our load at 
certain times of the day. That is the concept of the megawatt. 
You would agree with me that in terms of producing an 
additional megawatt of electricity to be used this summer, a 
higher price for the wholesale cost of electricity would, in 
fact, encourage the exchange of megawatts by consumers back for 
others to use than a low price, would you not?
    Mr. Massey. I would agree with that.
    Mr. Shadegg. So, in point of fact, a high price, if it is 
an uncapped high wholesale price, could in fact create 
additional megawatts of electricity, even this summer?
    Mr. Massey. I don't know whether it could this summer or 
not. I think it depends on whether my agency and State agencies 
can work together to try to create a more robust demand side 
response between now and this summer.
    The State of California has said that it hopes to come up 
with a 3,200-megawatt demand reduction for the summer. Now, I 
don't know how they are going to do that, but I commend them 
for trying.
    Mr. Shadegg. It takes me exactly to the next question I 
want to ask Commissioner Breathitt. You really asked the 
question, which we haven't discussed very much today, and that 
is what I care the most about, solutions for this summer. For 
example, you would agree with me, would you not, that creating 
some kind of a link between retail prices and wholesale 
prices--that is, getting rid of the unrealistic disconnection 
or disconnect between retail prices and wholesale prices--would 
be one thing we could do for the summer, wouldn't it?
    Ms. Breathitt. Yes. I talked about earlier that retail 
rates in California--and this is not in other parts of the 
West--are not reflective of the cost of energy, and that retail 
caps impede that; and in order for there to be a true picture 
of the whole value stream from the wholesale cost to the retail 
rate, if FERC gets involved in price mitigation at the 
wholesale side, then the State of California needs to do their 
part on the retail side.
    Mr. Shadegg. Well, certainly then one thing this Congress 
could do would be to do what it can to get rid of those 
unrealistic retail price caps or encourage the State of the 
California to begin to move those up to where they more 
appropriately reflect the market.
    You would also agree that another thing we could do for 
this summer would be to encourage the megawatt concept that 
Commissioner Massey has talked about?
    Ms. Breathitt. Correct.
    Mr. Shadegg. And that also would be encouraged by a higher 
retail price and a higher wholesale price?
    Ms. Breathitt. I don't know how that would encourage a 
higher retail price. I think it just makes more megawatts 
available to the marketplace, but I think it also has some 
implications in terms of the work force.
    Mr. Shadegg. Can you provide--and I don't have time here 
today--but can you provide the committee with a list of other 
solutions for this summer that we might be looking at, because 
I am intensely interested in that and I don't think we have 
focused that much on it in your testimony. I would ask that of 
all three commissioners.
    Commissioner Hebert, I want to make sure----
    Mr. Barton. Would the gentleman yield on that? We need that 
list sooner rather than later, like the end of this week, 
sometime Friday.
    Mr. Shadegg. I want to make sure I understood one of the 
points you made about wholesale price caps. As I understood it, 
you said one negative context or consequence of a wholesale 
price cap, even a temporary one, this summer would be to 
discourage the purchasers of electricity in California, the 
wholesale purchasers, from looking at long-term contracts; is 
that not correct?
    Mr. Hebert. That is correct.
    Mr. Shadegg. It will encourage them to look at short-term 
contracts because they don't have to worry about managing out 
into the future?
    Mr. Hebert. Well, that is correct. In our December 15 order 
we put pressure on them to try to move away from the spot 
market toward the forward market. Now, if these entities are 
going to have the ability to buy a spot market product at a 
forward market price, why do they ever go to the forward 
market?
    Mr. Shadegg. I think it is a very good point.
    I want to talk about another concept that we haven't 
discussed here today of price caps. If we cap the prices--and 
you are saying in the Western area; I will tell you in Arizona 
if you cap just the prices in California, I am deeply worried. 
If you cap them in the other--in a region, don't we still have 
a problem of an unfairness to other areas where that 
electricity might have been sold?
    Mr. Hebert. Well, absolutely. What you are going to do is, 
you are going to cut yourself off in the West from Canada and 
Mexico.
    Mr. Shadegg. Is there any reason to believe, or do you have 
any authority--if you cap prices in the Western United States, 
do you have authority to force people to sell in the Western 
United States; or could they take the power they have and 
simply say, well, I am not going to sell into California, I am 
going to sell it somewhere else?
    Mr. Hebert. That power is not vested in this agency. It is 
vested in the Department of Energy.
    Ms. Breathitt. But because of the Western interconnection, 
the power can only move around in the West because it can't 
cross into the eastern interconnection or to ERCOT. So when 
people who propose price mitigation believe that, the only way 
that it could be done fairly is if it were entirely in the West 
so you don't have electrons unfairly flowing out of one State 
into another one that isn't capped.
    Mr. Shadegg. But you would agree with Commissioner Hebert 
that that would cause a problem with regard to both Canada and 
Mexico?
    Ms. Breathitt. Only because power flowing into the United 
States from Canada and from Mexico would not be subject to that 
price mitigation.
    Mr. Shadegg. Would not be subject to that price mitigation.
    Wouldn't that encourage capital formation, that is, the 
construction of plants outside the United States, encourage 
someone to build a new plant just across the border in Mexico 
or just across the border in Canada?
    Ms. Breathitt. I don't know the answer to that.
    Mr. Shadegg. I would suggest that it would have that 
effect.
    I thank you very much. I appreciate your testimony.
    Mr. Barton. That concludes our questions. We are going to 
have the second part of this hearing on Thursday where we have 
officials from California and the private sector. At the close 
of that hearing, I will sit down with Congressman Boucher and 
interested members of the subcommittee and decide what, if 
anything, we are going to do.
    Mr. Hebert. Mr. Chairman, if I could have one point of 
personal privilege----
    Mr. Barton. You may.
    Mr. Hebert. If you are looking at passing legislation, 
could I get you to put together a piece for me to expunge from 
all records any mention I have ever had of killing Granny.
    Mr. Barton. Well, we certainly will allow you to put a 
statement in the record that you love granting.
    Mr. Markey. Can I say, once again, I know it is a metaphor; 
I know it is not literal here. I want to make that clear, that 
I understand.
    Ms. Breathitt. Mr. Barton, when I was having a conversation 
with Mr. Wynn and I was talking about the refund order, what I 
meant to say was that I believe that we captured 70 percent of 
the dollars, in comparing that to the California filing, not 
the transactions.
    Mr. Barton. Correct. Thank you.
    We do want your thoughts on solutions, short-term and long-
term. We understand the reason we have more than one 
commissioner is because honorable people can disagree honorably 
on solutions and that is a good thing, not a bad thing. If we 
all agreed up here, we wouldn't need 435 members of the House. 
So it is a sign of vigor that there is a vigorous debate within 
the FERC on these issues, and I want the record to show it is 
not definitive that we are going to do something legislatively.
    But it is definitive, if this subcommittee is going to act 
to help the West on an emergency basis, it has got to do it 
within the next month. We can't be debating this in June and 
July. If we are going to do something, we have got to do it 
starting next week, at least attempt to put the package 
together.
    So we will recess this hearing. It is going to reconvene 
Thursday at 10 a.m.
    [Whereupon, at 5:55 p.m., the subcommittee was adjourned, 
to reconvene at 10 a.m., Thursday, March 22, 2001.]

                    ELECTRICITY MARKETS: CALIFORNIA

                              ----------                              

                        THURSDAY, MARCH 22, 2001

                  House of Representatives,
                  Committee on Energy and Commerce,
                    Subcommittee on Energy and Air Quality,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2322, Rayburn House Office Building, Hon. Joe Barton 
(chairman) presiding.
    Members present: Representatives Barton, Cox, Largent, 
Burr, Whitfield, Shimkus, Wilson, Shadegg, Pickering, Fossella, 
Blunt, Bryant, Radanovich, Bono, Walden, Boucher, Sawyer, 
Waxman, Markey, and McCarthy.
    Also present: Representative Harman.
    Staff present: Jason Bentley, majority counsel; Hollyn 
Kidd, legislattive clerk; and Sue Sheridan, minority counsel
    Mr. Barton. The Subcommittee on Energy and Air Quality 
second day continuing series of hearings on the electrify 
market in California will come to order. We are waiting on the 
ranking minority member to do the opening statements. By prior 
agreement, myself and Mr. Boucher will give an opening 
statement. I am going to go ahead and give mine and hopefully, 
by the time I finish, Mr. Boucher will have arrived and we can 
begin. I assume that all of our witnesses are here. I see the 
Honorable Mr. Freeman making his way, with his cowboy hat. Is 
Mr. Keese here? Hopefully he will arrive.
    The lights went out again on Tuesday for half a million 
homes and businesses in the golden State of California. 
Newspapers are full of predictions that supply will not equal 
demand for much of this summer.
    Today, the subcommittee will continue its focus on the 
electricity crisis in California specifically, in the West 
generally. Tuesday, we heard from the three Commissioners of 
the Federal Energy Regulatory Commission which oversees 
wholesale markets in the country. Today, we will hear from 
California State agencies, market participants, and market 
observers, people on the ground in California who are trying, 
to the best of their ability, to keep the lights on.
    I want to welcome all of our witnesses today, and I look 
forward to your testimony.
    One witness before us today is the Chairman of the 
California Energy Commission, Mr. Bill Keese, although he is 
actually not here yet. He has been helpful to this subcommittee 
before, and I will thank him personally when he arrives, for 
being here.
    His job is an important one, to use the current law and 
State authorities to get new generation built. Hopefully he is 
very involved in trying to further change the law and 
regulations to streamline the California permitting process. 
Time and again I am told that California is the toughest State 
in the Union to site a new power plant. If that is still the 
case in this time of crisis, the supply and-demand problem will 
not go away very quickly.
    In Chairman Keese's testimony, he anticipates 5,000 
megawatts of potential new generation to be built and 
operational this summer. Mr. Keese, to me, seems like a good 
man, and I have heard from many people that he is doing all 
that he personally can. However, I understand that these are 
times when one is told by higher authority to give us a big 
number.
    According to his testimony, 25 percent of that 5,000 
megawatts is to come from plants that are already approved; the 
other 75 percent worries me. Even the staff of the California 
ISO warns that peaking plants take longer to construct than the 
State is suggesting, and some of these may never be ready at 
all. One observer has said that the State's objections of new 
generation for this summer are so rosy and hopeful that this 
amounts to the most important faith-based initiative we have 
ever heard. I hope this is not the case.
    Dr. Lloyd, of the California Air Resources Board, makes his 
first appearance before the subcommittee today. We welcome you, 
sir. His job is also important, to do what the State can do to 
keep plants that are already built operating in this vital 
time, while protecting the environment. I am going to ask him 
to give us a clear picture of what is happening today in terms 
of the environmental regulations in California, why we have 
gotten to where we have gotten, where there is such a problem 
trying to comply with those regulations. I am going to also ask 
if he believes that the State of California would need to have 
any additional new authority in this area.
    If some of the witnesses' speed in submitting testimony is 
in any way an indicator of the State's speed at addressing 
problems, I think I am beginning to understand why California 
is what it is today. It is not just the State officials that we 
have had problems with, even our friends in the private sector, 
such as Mr. Kline of PG&E, was late getting his testimony. We 
can't study the testimony and give it to our staffs and to our 
members if it comes in after six o'clock the night before the 
hearing. That is not a good way to do business.
    We also have Mr. David Freeman here today, from the Los 
Angeles Department of Water and Power. We welcome you, sir. You 
are truly, in my mind, one of the heroes in the municipal power 
agencies of your generation, so it is truly an honor to have 
you here.
    Mr. Freeman is on leave from the city of Los Angeles to 
help Governor Davis establish a new system in which the State 
is going to buy power on behalf of the incumbent investor-owned 
distribution utilities. If that is not a real job, I don't know 
what is.
    Mr. Freeman. It doesn't pay too much, though.
    Mr. Barton. I don't envy you in that effort, but I know 
that you are trying the very best that you can to do it. Mr. 
Freeman has a lot of experience in these issues, and I again 
want to thank him for making the trip.
    I welcome all of our witnesses here. I especially want to 
call to the subcommittee's attention Mr. Larry Makovich. His 
group, the Cambridge Energy Research Associates, continues to 
offer some of the best analysis of the situation in California 
to this day. His work, the work of his company, has been very 
useful to me and other subcommittee members in giving us a 
broad overview.
    As we said on Tuesday, the Federal Government does not site 
power plants or transmission lines, States do. The ability of 
the Federal Government to help is limited, however, we do care 
about what is happening in California and the West, and we do 
want to do what can be done if what we do is a positive step in 
the right direction. We certainly want to help California avoid 
blackouts and deal with any blackouts that must occur.
    If there are new supply related Federal authorities that 
Congress should consider extending to the States in this 
electricity crisis, the subcommittee wants to hear them today. 
The time for addressing the expected summer supply problems is 
upon us. If we are going to act legislatively, we need to begin 
that process next week.
    I am sending to the White House a list of ideas at the end 
of this week, hopefully to consider on how to address the 
problem. Perhaps we can work with the State authorities in 
Sacramento on a bipartisan basis to do this.
    I welcome you gentlemen here today. We are going to have a 
good hearing. I would now like to turn to my ranking member, 
Mr. Boucher, for an opening statement.
    Mr. Boucher. Thank you very much, Mr. Chairman. I will be 
brief in my comments this morning so that we can turn rapidly 
to the testimony of our witnesses.
    The testimony to be presented this morning involves that of 
a wide range of parties with an interest in the western 
regional electricity market. This subcommittee's deliberations 
will be assisted substantially by the views of this morning's 
witnesses concerning several key questions. First, has the 
Federal Energy Regulatory Commission done enough to ensure that 
the prices for wholesale power transactions are just and 
reasonable, and what additional actions, if any, should be 
taken by the FERC to address the problems that affect the 
western regional electricity market?
    Second, what measure of confidence should this Committee 
take in the actions by the State of California, either actions 
taken to-date or those that can be reasonably anticipated, to 
address these concerns?
    And, finally, what recommendations, if any, do our 
witnesses have for Federal legislative approaches that now may 
be necessary either to address the problems of California and 
the Western States, or to prevent similar problems from arising 
elsewhere?
    I want to commend Chairman Barton for the careful and 
thorough examination which this subcommittee has undertaken of 
the western regional electricity problem. Through four 
hearings, we have been given the opportunity to review the 
malfunctioning of the market in detail, and a sound record has 
been established upon which to decide what actions, if any, 
this subcommittee should now take.
    I thank the chairman for his cooperative approach, for this 
careful review and, along with him, I look forward to the 
witnesses' testimony.
    Mr. Barton. Thank the gentleman for his statement. By prior 
agreement with the minority, those are the only opening 
statements that we are going to have today. All other members 
that wish to put an opening statement in the record, if you 
will submit it to us in writing, we will make it a part of the 
permanent record of the hearing.
    We are going to start with you, Mr. Keese, and we are going 
to go right down the line, ending with Mr. Cooper. We will give 
you 6 minutes. If it takes longer than 6 minutes, we will give 
you a little bit longer than that. We have got seven other 
witnesses, so we can't give you unlimited time, but we do want 
to hear from you.
    I said, as you were coming in, we do appreciate you coming. 
You have got a very difficult job. I have heard nothing but 
positive things about your attempts to keep the plants 
operating and to get new plants sited, so we are very 
interested especially in any ideas that you might have on how 
we can help expedite the siting process.
    Welcome to the subcommittee.

   STATEMENTS OF HON. WILLIAM J. KEESE, CHAIRMAN, CALIFORNIA 
  ENERGY COMMISSION; ALAN C. LLOYD, CHAIRMAN, CALIFORNIA AIR 
RESOURCES BOARD; S. DAVID FREEMAN, GENERAL MANAGER, LOS ANGELES 
 DEPARTMENT OF WATER & POWER; STEVEN L. KLINE, VICE PRESIDENT 
FEDERAL, GOVERNMENTAL AND REGULATORY RELATIONS, PACIFIC GAS AND 
ELECTRIC COMPANY; JIM POPE, ELECTRIC UTILITY DIRECTOR, SILICON 
 VALLEY POWER; WILLIAM F. HALL, VICE PRESIDENT WESTERN REGION, 
DUKE ENERGY NORTH AMERICA; LAWRENCE MAKOVICH, SENIOR DIRECTOR, 
CAMBRIDGE ENERGY RESEARCH ASSOCIATES; AND MARK COOPER, DIRECTOR 
          OF RESEARCH, CONSUMER FEDERATION OF AMERICA

    Mr. Keese. Thank you, Mr. Barton. You have my written 
statement, so if you will also enter that into the record, I 
will be brief.
    Mr. Barton. Without objection.
    Mr. Keese. It is my pleasure to be here. And I would like 
to focus my testimony this morning, California's efforts to 
respond to the situation at hand--namely, a dysfunctional 
electricity market brought on by a flawed deregulation plan in 
1996.
    Through the Governor's leadership, we have an aggressive 
plan of attack. We are working nonstop, day and night, to 
restore stability to the marketplace, bring down the prices, 
and ensure that adequate electricity supplies are available now 
and in the summer.
    I am going to deal with the set of actions we are taking: 
1) to increase energy supplies through expedited power plant 
construction and other sources; 2) decrease energy demand and 
increase energy efficiency; 3) expand the use of long-term 
energy contracts; and 4) maintain the financial viability of 
California's utilities. I will briefly hit each of these, 
particularly focusing on generation.
    I would like to say, as I start, that we hear a lot of 
cliches about why California got in trouble last year--it was 
inordinately hot, it was a low hydro year, we had unexpected 
growth. Wrong, wrong, wrong.
    Let me start with a myth. There are no generating 
facilities under construction in California. We have six under 
construction. We have three that will be completed by July 1.
    Myth #2: With our high tech industry, we are an energy hog. 
We have the lowest energy intensity in the West. Only Rhode 
Island is lower in energy intensity than California.
    Myth #3: Our environmental regulations and our reluctance 
to approve power plant applications have created our current 
shortage. We had no large major power plant submitted to the 
Energy Commission during the 1990's. None. The two largest that 
we licensed were not built because of economic reasons. Prices 
were low in California. Had you built a plant in 1997, you 
would have lost money in 1998, you would have lost money in 
1999. However, with the certainty that has been assured in the 
last few years, we now have 60 projects in front of us.
    Let me, Mr. Chairman, make it clear, Governor Davis is not 
interested in casting blame on anyone for the situation we have 
inherited. Californians do not care who started the problem or 
how it got started. They expect us to solve it and get the 
State back on course. We fully intend to do that.
    Let me talk about generation for a moment. In the past 2 
years, the Energy Commission has approved 13 power plants, with 
generating capacity of 8,400 megawatts. We currently have 15 
more major power plants under review, for an additional 6,700 
megawatts.
    Roughly 15,000 megawatts in the process. A majority of 
those that are in the process will be finalized by the end of 
May of this year. We have a 1-year process at the Energy 
Commission. Through an Executive Order issued by Governor Davis 
last month, we now have an expedited siting process of 21 days. 
Let me explain personally what that means.
    The Palm Springs peaking plant as filed on March 16. I will 
be holding a hearing on Tuesday. We will take it to the 
Commission on April 4. It will be, if appropriate, approved.
    Mr. Barton. If appropriate.
    Mr. Keese. Governor Davis asked President Bush to direct 
Federal agencies to expedite Federal permit reviews to go along 
with us, and the President has issued a memorandum calling on 
agencies to comply with our timetable, and we are very 
appreciative of that effort.
    Through all of these efforts, we anticipate bringing 5,000 
megawatts online this summer. That is an aggressive goal. We 
have not given up on it. We will work at it.
    Let me deal with conservation initiatives. Governor Davis 
initially called on Californians to reduce their energy 
consumption by 7 percent. Last month, consumption was down by 8 
percent, in our opinion. The State has vowed that when we are 
in Stage II, we will reduce State usage of power by 20 percent. 
We are on our way toward meeting that goal.
    Specific measures of the conservation plan include an $800 
million package for energy efficiency and renewable energy, and 
aggressive conservation measures in State buildings. Let me 
mention, the Governor announced his ``20/20'' program last 
week, in which consumers who reduce their energy use by 20 
percent will get a 20 percent rebate. That is his promise.
    Earlier this week, we signed, at the Energy Commission, 12 
grants and contracts for $9 million to install ``energy smart'' 
technology in commercial and industrial buildings. This itself 
should save 93 megawatts.
    On stabilization issues, getting our market back to where 
it should be, we have made significant progress in the last few 
weeks, particularly by reducing our reliance on the spot 
market. On Tuesday night, Governor Davis announced that the 
State, through the Public Utilities Commission, will take 
immediate steps to restructure the contracts between our QFs 
and the utilities. QFs will have the option of 5- or 10-year 
contracts.
    I am going to leave the details of the stabilization plan 
to someone on my left who knows much more, Mr. David Freeman.
    As you know, in the transmission area, we continue 
negotiations with the utilities. We believe that acquiring the 
transmission lines would enable the State to gain a valuable 
asset, at the same time allowing utilities to regain their 
financial solvency. The State's ownership would also ensure 
that critical and necessary infrastructure improvement in 
projects can be undertaken.
    Where are we going from here? Mr. Chairman, I believe you 
will see that we are aggressively pursuing every remedy 
available to us in an effort to increase generation, reduce 
demand and lower prices, but the Federal Government must 
intervene to help us fix a dysfunctional electricity market by 
reining in unacceptably high wholesale energy prices.
    Earlier this month, the Governors of California, Oregon and 
Washington called on the FERC to adopt a temporary cost-based 
regional price cap that would allow generators to recover all 
of their costs plus a reasonable rate of return.
    While I understand this is a controversial proposal, there 
are several points worth noting. First, the regional price cap 
would be temporary in nature. Second, generators would have the 
ability to recover all of their operating costs and receive a 
return. This proposal embodies the kind of bold, decisive 
action we are seeking from FERC. If FERC refuses to exercise 
its full authority under the law to restore price stability, we 
believe it is only appropriate for the Congress to do it for 
them.
    Mr. Chairman, California is determined to tackle the 
problem at hand. We are working feverishly to reverse course. 
At the same time, we need your assistance in partnering with us 
to encourage a responsible plan of action on the part of FERC.
    Thank you for being here. Thank you for allowing me to be 
here, I would be pleased to answer any questions.
    [The prepared statement of Hon. William J. Keese follows:]

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

    Thank you, Mr. Chairman, for inviting me here this morning. I 
appreciate the opportunity to testify before the Subcommittee in my 
role as Chairman of the California Energy Commission (CEC).
    I would like to focus my testimony this morning on California's 
efforts to respond to the situation at hand--namely, a dysfunctional 
electricity market brought on in large part by a flawed deregulation 
plan in 1996.
    The State of California, through the leadership of Governor Davis, 
has developed an aggressive plan of attack. We are working nonstop to 
restore stability to the marketplace, bring down prices and ensure that 
adequate electricity supplies are available now and in the summer.
    Towards this end, California has launched a comprehensive set of 
initiatives in four fundamental areas: 1) increasing energy supplies 
through expedited power plant construction and other sources of power 
generation, 2) decreasing energy demand and increasing efficiency, 3) 
expanding the use of long-term energy contracts rather than relying on 
the volatile and expensive spot market, and 4) maintaining the 
financial viability of California's utilities.
    I will elaborate briefly on each of these issues, with a particular 
focus on our generation development initiatives. But before proceeding 
further, I would like to dispel a few myths surrounding California's 
electricity situation.

                        MYTHS AND MISCONCEPTIONS

    Myth #1: There are currently no new generating facilities under 
construction in California. To the contrary, four months into the Davis 
Administration, new power plants began to be approved. Thirteen have 
been approved and six are under construction.
    Myth #2: California, with its high tech industry, is an energy hog. 
The reality is that California's per capita electricity usage ranks the 
lowest in the Western region. Nationally, only Rhode Island uses 
electricity at a lower rate per capita than California. Our state's 
energy demand has grown at a rate of only 1.2% per year, which is 
considerably lower than other Western states such as Oregon, Nevada, 
Idaho, Utah, Arizona, Colorado and New Mexico.
    Myth #3: California's environmental regulations and a reluctance to 
approve power plant applications have created our current shortage. 
While it is true that no major power plants were built in California 
from 1986 to 1998, the reasons had nothing to do with environmental 
regulations. The reality is that generation failed to keep pace with 
supply because of over-reliance on the market to determine additional 
need, as well as regulatory uncertainty associated with restructuring 
and deregulation.
    The enactment of the Energy Policy Act of 1992 spearheaded a 
movement away from planning and toward a reliance on the market to 
decide when additional power plants would be built. The 1992 law, and 
resulting discussions on deregulation, introduced great uncertainty 
into the generation development market and discouraged developers. This 
factor, along with low energy prices during the mid-1990s, resulted in 
no major power plants built in California.

                      CALIFORNIA'S CURRENT EFFORTS

    Mr. Chairman, Governor Davis has made it clear that he is not 
interested in casting blame on anyone for the situation we have 
inherited. Californians do not care who started the problem and how it 
got started. They expect us to solve it and get the state back on 
course. We fully intend to accomplish this mission.
    As I stated earlier, California has embarked on an aggressive 
course of action in the areas of generation, conservation, and 
stabilization. Let me touch upon each of these areas.

                   GENERATION DEVELOPMENT INITIATIVES

    We are determined to develop additional energy supplies in an 
expedited manner to meet this summer's anticipated demand. Towards this 
end, an all-out effort is underway in California to bring new plants on 
line and fully operational.
    In the past two years, the Energy Commission has approved 13 power 
plants with generating capacity in excess of 8400 megawatts. There are 
currently 15 more projects under review with an additional 6700 
megawatts of capacity.
    Through an Executive Order issued by Governor Davis last month, the 
Energy Commission has instituted a new streamlined review and licensing 
process. Natural gas fired or renewable ``peaking'' power plants that 
can be in full operation by the 2001 peak demand period and provide 
power to California residents are eligible for an expedited permit 
process. The Energy Commission will complete the permit process for 
these emergency peaking facilities within 21 days. CEC staff is 
currently utilizing this expedited process for several proposed peaker 
power plants, including one in Palm Springs.
    Another component of California's generation program centers around 
financial incentives to plant owners and local governments. Developers 
who can complete construction and bring plants on line before August 1, 
2001, will receive an acceleration bonus of $1,000,000 for a 50-
megawatt facility. This applies to distributed-generator, co-generator, 
or peaker power plants. In addition, local government agencies that 
expedite the permitting process for the siting of new plants will 
receive $10,000 per locally approved megawatt.
    Additionally, Governor Davis asked President Bush to direct federal 
agencies to expedite federal permit reviews for power projects. He has 
granted this request and issued a memorandum calling on agencies to 
comply with our timetable. The Davis Administration greatly appreciates 
the President's cooperation with this effort.
    Through all of these initiatives, we anticipate bringing 5,000 
megawatts on line this summer. 1,640 megawatts will come from three 
plants we have already approved, plus one plant that was licensed in 
December 2000 under a previous expedited permitting procedure. We 
expect to pick up approximately 3,800 megawatts through distributed 
generation, cogeneration, peaker and renewable energy facilities. 
Looking ahead to summer 2002 and beyond, we anticipate an additional 
5,000 megawatts next summer and 10,000 megawatts by 2004.
    The bottom line is that we are moving at warp speed to put new 
generation on line by accelerating the permit process, providing 
financial incentives and taking other measures under the Governor's 
emergency authority. We fully expect to meet our goal of securing 5,000 
additional megawatts this summer to meet the peak demand period.

                        CONSERVATION INITIATIVES

    Last month, the State unveiled a conservation strategy that 
includes, among other programs, appliance rebates, incentives to reduce 
commercial lighting, and a public media campaign. Governor Davis 
initially called on Californians to reduce their energy consumption by 
at least 7% and pledged that the State would cut consumption by 20% 
during Stage II alerts.
    Mr. Chairman, California has answered the call. Our businesses and 
consumers reduced energy consumption last month by 8%. Our data shows 
that electricity demand went down by 2,578 megawatts in February. As a 
result, the Governor is now asking Californians to conserve at least 
10%.
    Specific features of our conservation plan include the following 
items:

 $800 million package of incentives and rebates for 
        conservation and efficiency efforts.
 Aggressive conservation measures in state buildings, resulting 
        in 200 megawatts of savings during energy emergencies.
 Comprehensive outreach and education campaign to reach 
        businesses, organizations, and millions of California 
        consumers.
 Partnerships with private sector businesses and organizations 
        to reduce energy use.
 Retrofitting government buildings for energy efficiency.
 Adoption of the strongest energy efficiency standards in the 
        world for residential and non-residential buildings and 
        appliances.
 Incorporation of energy efficiency, sustainable building 
        designs in new state building projects.
    Additionally, just last week, California created an innovative 
energy rebate program. The ``20/20'' program will provide a 20% rebate 
to customers who reduce their electricity consumption this summer by 
20% over last summer's levels. It is a voluntary program that will 
cover both households and businesses in California. If only 10% of our 
residents and businesses achieve the 20% reduction, it will reduce our 
state's overall peak consumption this summer by as much as 2,200 
megawatts, thereby eliminating the need to purchase as much as $1.3 
billion in additional energy.
    Finally, the Energy Commission earlier this week signed 12 grants 
and contracts totaling over $9 million to install ``energy smart'' 
technology in commercial and industrial buildings throughout 
California. These agreements will account for about 93 megawatts of 
projected savings from buildings outfitted with demand responsive 
building systems technology. With these grants in place, our state will 
continue to be the national leader in energy efficiency.

                       STABILIZATION INITIATIVES

    Over the last month, we have made significant progress in 
stabilizing the market by reducing our reliance on the spot market. The 
state's flawed deregulation scheme led to 30% of all electricity 
purchases to be made on the spot market. The spot market represented an 
inexpensive source of power during the first two years of 
``deregulation''. However, we are currently paying between 500 to 900 
times what we paid for electricity last year on the spot market. This 
is in spite of the fact that the single greatest hour of electricity 
usage in 2000 was actually lower than any peak demand period in 1999 or 
1998.
    Before I continue with the issue of spot markets, I would like to 
call your attention to a recent development on an important matter 
related to this week's blackouts in California. It has to do with our 
efforts to keep ``qualifying facilities,'' or QF's, up and running.
    As you know, QF's produce alternative forms of energy, such as 
wind, solar, geothermal, biomass and cogeneration. QF's account for 
roughly 25% of California's electricity.
    Why did California experience blackouts earlier this week? The 
primary reason centers around the fact that many of these QF's have not 
been paid by utilities. As a result, they ran out of money and shut 
down. California lost several thousand megawatts due to this action.
    On Tuesday night, Governor Davis announced that the state, through 
the California Public Utilities Commission (PUC), will take immediate 
steps to restructure the contracts between QF's and utilities. QF's 
will have the option of choosing 5- or 10-year contracts, and the 
contracts will indicate that payment will be forthcoming starting April 
1, 2001.
    This effort, which is based on earlier negotiations led by State 
Senators Jim Battin and Debra Bowen and Assemblyman Fred Keeley, will 
ensure that QF's remain in operation and be made financially whole.
    QF's are the only generators in California that are not being paid 
for the power they have produced. Governor Davis strongly believes that 
QF's have been good corporate citizens and that we have a moral 
obligation to move quickly to fully compensate alternative energy 
producers in California.
    The PUC will take action on this proposal next Tuesday. We 
anticipate a final resolution to this matter in the very near future.
    Returning to the issue of spot markets, the Subcommittee should be 
aware that California is mounting a major effort to greatly reduce 
California's reliance on the spot market. Governor Davis earlier this 
month announced the signing of 40 long-term contracts and agreements 
between the State of California and companies such as Calpine, Duke, 
Dynegy, Enron, Reliant, Williams, Sempra, Merrill Lynch, Morgan 
Stanley, El Paso, Constellation, Panda, Cal Peak, Avista, PX BFM, 
PacifiCorp, and Primary Power. The long-term contracts and agreements 
are fairly evenly divided between three-year, five-year, and ten-year 
lengths, with one contract for 20 years. Together they provide:

 A total of 629,000,000 megawatts in a diversified long-term 
        portfolio over the next ten years, with 5,000 megawatts 
        scheduled to come on line within 24 months and some as early as 
        this summer.
 An average of 8,886 megawatts per year over the next ten 
        years.
 6,000 megawatts for this year, increasing to 10,000 megawatts 
        by 2004, and declining to 9,000 megawatts by 2010.
 An average price of $79 per megawatt for the first five years, 
        including ``superpeak'' periods. This is a 75% savings from 
        recent spot market prices.
 An average price of $61 per megawatt for the second five 
        years, including ``superpeak'' periods. This is an 80% savings 
        from recent spot market prices.
    In addition, we continue to negotiate a plan to revitalize the 
financial viability of the investor-owned utilities, which have been 
virtually bankrupt by the unjust and unreasonable wholesale rates being 
charged by generators and power marketers. The plan involves all three 
utilities: Southern California Edison, Pacific Gas and Electric, and 
San Diego Gas and Electric.
    On February 23, 2001, Governor Davis announced an agreement in 
principle with Southern California Edison. The State has agreed to 
purchase the utility's transmission lines for an estimated $2.76 
billion, which is 2.3 times the estimated book value, and to allow the 
utility to issue bonds for a substantial amount of its debt. Southern 
California Edison has agreed to do the following:

 Make payments of approximately $420 million from its parent 
        company, Edison International, to the utility.
 Commit the entire output of the parent company's Sunrise 
        Mission power project at low cost-based rates for ten years, 
        which has a value to ratepayers of $500 million over the next 
        two years.
 Provide cost-based rates from the generating facilities the 
        utility owns for another ten years.
 Grant to the State 99-year conservation easements over 20,000 
        acres of watershed lands the utility owns.
 Drop the utility's pending litigation against the California 
        Public Utilities Commission that could have resulted in 
        immediate higher electric rates for consumers if the utility 
        prevailed.
    Negotiations continue with Southern California Edison, as well as 
with the other two utilities, Pacific Gas and Electric, and San Diego 
Gas and Electric.
    We believe that acquiring transmission lines would enable the State 
to gain a valuable asset while at the same time allowing utilities to 
regain their financial footing. Under the plan, the State intends to 
lease the transmission lines back to the utilities, which in turn would 
assume day-to-day management of the transmission system. The State's 
ownership of the transmission lines will also ensure that critical and 
necessary infrastructure improvement projects are undertaken.

                       WHERE DO WE GO FROM HERE?

    Mr. Chairman, California is aggressively pursuing every remedy 
available to us in an effort to increase generation, reduce demand and 
lower prices. We are fully prepared to meet the challenge head on. But 
the federal government must intervene to fix a dysfunctional 
electricity market by reining in unacceptably high wholesale energy 
prices.
    In addition to the serious economic harm to California and other 
western states that will likely continue if stronger mitigation efforts 
are not adopted by the Federal Energy Regulatory Commission (FERC), I 
want to emphasize that the ``unjust and unreasonable'' prices being 
charged by generators serve absolutely no useful end. They do nothing 
to accelerate power plant construction in the short or long term.
    Earlier this month, the Governors of California, Oregon and 
Washington called on the FERC to adopt a temporary cost-based regional 
price cap that would allow generators to recover all of their costs 
plus a reasonable rate of return. Their request is based on a plan by 
Commissioner Massey, who appeared before you earlier this week and 
provided an overview of the proposal. If adopted by the FERC, this plan 
would go a long way in protecting consumers and businesses from the 
unpredictable nature of the current and add a much-needed dose of 
stability.
    While I understand the controversy surrounding this proposal, there 
are several points worth noting. First, the regional price cap is 
completely temporary in nature. Second, generators would have the 
ability to recover all of their operating costs and receive a return. 
For these reasons, I must take strong exception to the view that this 
plan would discourage the development of new generation facilities. We 
believe otherwise.
    This proposal embodies the kind of bold, decisive action we are 
seeking from the FERC. As Governor Davis has stated, high wholesale 
electricity prices is an issue that falls squarely on the shoulders of 
Washington. If the FERC refuses to exercise its full authority under 
the law to restore price stability, we believe it is only appropriate 
for the Congress to do it for them.
    Mr. Chairman, California is determined to tackle the problem at 
hand. We are working feverishly to reverse course. At the same time, we 
need your assistance in partnering with us to encourage a responsible 
plan of action on the part of the FERC.
    Thank you for the opportunity to appear before you today. I look 
forward to answering your questions.

    Mr. Barton. It is my job to be here. You are here 
voluntarily, and we appreciate that. I failed to mention that 
Mr. Keese is the Chairman of the California Energy Commission, 
so I want to give you the title. It took him about 8 minutes, 
so we are going to set the clock for everybody else at 8 
minutes. Feel free to give us back some time, but we want to 
give you all the same opportunity.
    We now want to hear from Dr. Alan Lloyd, who is the 
Chairman of the California Air Resources Board. This is your 
first appearance before the subcommittee. Again, we thank you 
for voluntarily appearing. Your statement is in the record in 
its entirety, and we recognize you for 8 minutes to elaborate 
on it.

                   STATEMENT OF ALAN C. LLOYD

    Mr. Lloyd. Hopefully I can save you 3 minutes. Thank you, 
Mr. Chairman and members of the subcommittee. My name is Alan 
Lloyd, and I serve as Chairman of the California Air Resources 
Board. I am pleased to be here to provide an overview of 
California's electricity challenge with respect to air quality 
issues.
    Governor Davis has embarked on a comprehensive strategy to 
address the electricity situation. A major component of this 
effort is to increase energy supplies by expediting the 
construction of power plants and other sources of generation. 
As of today, as Mr. Keese mentioned, 13 plants have been 
approved, six are under construction, and three will be online 
by this summer. Our goal is to bring 5,000 megawatts online 
this year and 20,000 megawatts by 2004, to meet energy demands 
this summer and beyond. A second component of our effort is to 
maintain our existing generating capacity and allow it to 
operate when needed.
    Mr. Chairman, my main message is this: We can accomplish 
these goals within the existing framework of California's air 
quality regulations. Furthermore, environmental laws do not 
pose a barrier in terms of our ability to bring new generation 
online and ensure that existing power plants can operate at 
maximum capacity. In short, we can increase energy supply in an 
expedited manner while at the same time maintaining our 
commitment to the environment.
    Air pollution controls have been identified as a major 
contributor to California's current energy challenge. That 
perception is not accurate. Where air quality rules might have 
affected or might have potentially affected the ability to 
create power, we have moved swiftly to keep needed plants 
online. Simply put, no essential electricity generation has 
been curtailed due to air emission limitations. California 
programs to protect public health are not a major factor in 
electricity shortages experienced to-date.
    Similarly, the allegation that environmental laws have 
prevented bringing new electrical generation facilities online 
is also erroneous. In the last 2 years, 13 major power projects 
totally over 8,400 megawatts of additional capacity have been 
fully permitted. Four of these units will be online this year. 
Another 15 projects that comply with air quality requirements 
are currently under review and can provide an additional 6,700 
megawatts of capacity. All of these projects include the 
necessary environmental offsets and utilize all required 
emission controls. Compliance with air quality requirements 
have proven to be both technically and economically feasible.
    Finally, although existing air pollution laws and 
regulations provide mechanisms for addressing our power needs. 
Our processes can be streamlined. Governor Davis has used his 
emergency powers to enable State and local agencies the ability 
to apply flexibility and common sense to act quickly to ensure 
that power generation will continue.
    By issuing Executive Orders, Governor Davis has added 
substantially to the State's ability to deal with our current 
energy situation. These orders ensure that where statutory and 
regulatory impediments exist, they will be swiftly addressed 
and resolved. For example, for the Governor's action will allow 
the operation of facilities that might otherwise face limits on 
hours of operation. The expedited approval for new peaking 
facilities and baseload units will provide emission credits to 
new peaking plants.
    The Governor's Executive Orders maintain all substantive 
environmental protections. For example, new units must utilize 
the best available control equipment, and must continue to 
provide emission reduction credits to mitigate their emission 
increases.
    Permitting will take less time, but will not be less 
protective. No single factor can explain the current energy 
crisis, the matter obviously is far too complex. However, it 
can be said with certainty that environmental laws are not to 
blame. Under existing environmental programs and the policy 
direction of Governor Davis, State and local regulators have 
had, have used, and will continue to use flexibility to ensure 
that power is supplied when needed and under environmentally 
sound conditions.
    While the review processes and decisionmaking timelines are 
being streamlined, substantive environmental standards and 
mitigation requirements have not been compromised.
    In sum, the air quality regulatory system works. The 
Governor's utilization of his emergency powers to expedite the 
process of power plant siting while maintaining environmental 
standards confirms that California can maintain its 
environmental and economic objectives.
    Thank you, Mr. Chairman, for the opportunity to testify 
this morning.
    [The prepared statement of Alan C. Lloyd follows:]

PREPARED STATEMENT OF ALAN C. LLOYD, CHAIRMAN, CALIFORNIA AIR RESOURCES 
                                 BOARD

                              INTRODUCTION

    Thank you, Mr. Chairman and Members of the Subcommittee. My name is 
Alan Lloyd, and I serve as Chairman of the California Air Resources 
Board (ARB). I welcome the opportunity to provide an overview of 
California's electricity challenge with respect to air quality issues.

                                SUMMARY

    Over the past several months, Governor Davis has embarked on a 
comprehensive strategy to address the electricity situation in 
California. One of the major components of the State's plan centers 
around increasing energy supplies by expediting the construction of 
power plants and other sources of generation. Specifically, we are in 
the midst of an aggressive effort to bring 5,000 megawatts on line by 
this summer and 20,000 megawatts by 2004 in order to meet anticipated 
energy demand this summer and beyond.
    Mr. Chairman, my main message is this: We can accomplish this goal 
within the existing framework of California's air quality regulations. 
Furthermore, environmental laws do not pose a barrier in terms of our 
ability to bring new generation on line and ensure that existing power 
plants can operate at maximum capacity. In short, we can increase 
energy supply in an expedited manner while at the same time maintaining 
our commitment to the environment.

                               BACKGROUND

    Air pollution controls have been identified as a major contributor 
to California's current energy challenge. That perception is not 
accurate. Air quality issues are a very small part of the State's 
overall power production problem. Where air quality rules have affected 
or might have potentially affected the ability to create essential 
power, state and local regulators have moved swiftly and successfully 
to keep needed plants on line. Simply put, no essential electricity 
generation has been curtailed due to air emission limitations. 
California's programs to protect public health are not a major factor 
in the electricity shortages experienced to date.
    No single factor can explain the current energy crisis. The matter 
is far too complex. However, it can be said with certainty that 
environmental laws are not to blame. Under existing environmental 
programs and the policy direction of Governor Davis, state and local 
air regulators have had, have used, and will continue to use, the 
considerable flexibility included in California's regulatory programs 
to ensure that power generating sources remain in operation under 
environmentally sound conditions. While the review process and decision 
making timelines have been streamlined, substantive environmental 
standards and mitigation requirements have not been compromised.

                                HISTORY

    Over the last several months, there has been an increasing focus on 
environmental laws as contributors to the energy crisis. This concern 
has taken two distinct forms:

1. The charge that environmental laws have prevented maximum 
        utilization of existing electrical generation facilities; and
2. The allegation that environmental laws have prevented bringing new 
        electrical generation facilities online.
    There have also been charges that the State of California has not 
been responsive enough in addressing the power issues, and has not been 
willing to take the extraordinary actions needed to deal with how 
environmental requirements have affected electricity production.
    Mr. Chairman, I submit to you that these statements have diverted 
attention from the true and complex causes of the current energy 
situation. As a result, they have not contributed to productive efforts 
to resolve it. I would like to briefly address each of these issues.

                ACTIONS TO EXPEDITE REVIEWS AND PERMITS

    Although existing laws and regulations provide mechanisms for 
addressing our power needs, they can also require substantial time and 
process. Governor Davis, through the exercise of his emergency powers 
under state law, has significantly expanded state and local agencies' 
ability to apply flexibility and common sense to act quickly to ensure 
that power generation will continue.
    By using his emergency powers and issuing Executive Orders, 
Governor Davis has added substantially to the state's ability to deal 
with our current energy situation. Executive Orders D-24-01, D-26-01, 
and D-28-01 ensure that where statutory and regulatory impediments 
exist--related to either the continued operation of an existing plant 
or the construction of a new clean facility--they will be swiftly 
addressed and resolved. The Executive Orders also provide that these 
actions will be accomplished without sacrificing needed air quality 
protections.
    State and local agencies now have both the direction and the 
authority they need to expeditiously review and approve permits. Under 
the Governor's Executive Orders, they are:

 Allowing the continued operation of existing facilities that 
        might otherwise face limits on hours of operation.
 Expediting the review and permit approval for new peaking 
        facilities that have acquired the needed control technology and 
        mitigation, but need rapid processing to come on line quickly.
 Enabling new peaking plants to obtain emission credits needed 
        for permitting through the state, rather than arranging for 
        them through private transactions.
 Completing permit reviews and approvals for new large 
        facilities in as little as four months to enable new capacity 
        to begin construction expeditiously.
    The Governor's Executive Orders maintain all substantive 
environmental protections. For example, existing units must continue to 
utilize all of the required emission control equipment, and must 
provide funds to mitigate the impact of their increased hours of 
operation. Similarly, new units must utilize the best available control 
equipment and must continue to provide emission reduction credits to 
mitigate their emission increases. Permitting will take less time, but 
will not be less protective.

    IMPACTS OF ENVIRONMENTAL LAWS ON EXISTING ELECTRICAL GENERATION

    All central station electrical generating facilities are permitted 
by local air pollution control districts under rules incorporated in 
the State Implementation Plan (SIP). These permits reflect operator-
provided information, including factors such as intended hours of 
operation and fuel type. This information has a direct bearing on the 
facility's anticipated emissions. Based on operator-provided data, 
emission limits are established through the air permits. It is these 
operator-defined limits that have been at issue. In many cases, these 
facilities are now in a position of having, or wanting to generate 
additional electrical power in excess of the time periods assumed in 
the original permitting process.
    Despite this unanticipated high level of operation, through the 
joint efforts of local air districts, the Air Resources Board (ARB), 
and the California Energy Conservation and Development Commission 
(CEC), as well as the assistance of the U.S. Environmental Protection 
Agency (U.S. EPA), needed electrical generation has not been 
interrupted. State law and local regulations provide several means to 
address permit limitations without disruption of electrical generation 
or unmitigated damage to air quality.
    The ARB has assisted local air districts in addressing any 
potential issues arising out of their efforts to maintain power 
generation. ARB has maintained close coordination with the U.S. EPA to 
ensure that state and local response to the energy situation does not 
raise concerns at the federal level. We have approached the electricity 
shortage with an environmentally sound balance of need awareness and 
impact concern. U. S. EPA has indicated its understanding of the 
complexities California is facing and has indicated a continued 
willingness to assist.
    At the Governor's direction, the ARB and air districts have been 
able to balance the State's energy needs with the public's right to 
clean air. Existing air quality regulations have provided the 
flexibility to address expeditiously the unexpected power demands of 
the State without material harm to air quality. These accommodations 
have been completed in very short time frames and have ensured 
continued power generation. This flexibility has been used numerous 
times over the last six months to enable continued power production. 
These have affected both large and small plants and are summarized in 
Attachment 1.
    The additional grants of authority to the Governor under the 
Emergency Services Act augments existing statutes and increases the 
ability of state and local agencies to work together in significantly 
reduced time frames. Whether it is providing for an existing source to 
operate beyond its permitted hours of operation or streamlining 
certification of new peaking sources, the Governor's emergency 
Executive Orders provide even greater flexibility in responding to 
source specific generation issues than previously existed.

  IMPACTS OF ENVIRONMENTAL LAWS ON BRINGING NEW ELECTRICAL GENERATION 
                                 ONLINE

    All new proposed power plants must be constructed and operated in 
compliance with applicable federal, state, and local air pollution 
requirements. Within California, the 35 local air districts are 
responsible for regulating emissions from stationary sources, including 
power plants. At the state level, ARB is the agency charged with 
coordinating efforts to attain and maintain federal and state ambient 
air quality standards and comply with the requirements of the federal 
Clean Air Act. To this end, ARB coordinates the activities of all the 
districts in order to comply with the Clean Air Act.
    Some have cited California's environmental laws as the reason new 
power generation has not been built in recent years. However, a review 
of CEC data demonstrates otherwise. Since April 1999, CEC has approved 
13 major power projects (including one expansion) totaling over 8,400 
MW of additional capacity. Six of these plants are under construction 
and four of those six are expected to be on line this year, with start 
dates spanning from July through November. Another 15 projects (new 
sitings and expansions) are currently under review for an additional 
6,700 MW of capacity. Lastly, there is still an additional 7,960 MW of 
capacity that has been publicly announced and for which the CEC 
anticipates receiving applications this year.
    Some have also argued that costs of compliance with air quality 
regulations are too substantial and must be relaxed to achieve needed 
power generation. This argument is also flawed. Today, approximately 
15,000 MW of new electrical generation has either been approved or is 
in the licensing process. All of these projects have included the 
necessary environmental offset packages and have incorporated all 
required emission controls. Compliance with these requirements has 
proven to be both technically and economically feasible.
    To bring new, additional peaking facilities on line, Governor Davis 
has created both a streamlined review process and an ARB-operated 
emission offset bank. These actions will ensure that all necessary 
peaking facilities can also be sited.
    The CEC's siting process is designed to take 12 months. However, a 
number of factors, other than environmental regulations, have recently 
influenced individual project timelines. Over the last two to three 
years, the actions of local activists, businesses, and others have 
slowed the pace of some projects. In fact, power generators themselves 
have utilized the siting process to hold up the licensing of a 
competitor. Since 1997, competing companies have intervened in 12 of 
the 21 projects proposed for licensing. Their participation has slowed 
the process in at least four cases.

                 OPPORTUNITY FOR DISTRIBUTED GENERATION

    Constraints on electrical generation capacity from central station 
powerplants have caused increased interest in the use of distributed 
generation (DG). DG is electrical generation at or near the place of 
use. Governor Davis supports legislative action that will provide 
incentives for distributed generation. Last September, the Governor 
signed Senate Bill 1298, which directs ARB to establish a certification 
program and adopt uniform emissions standards and general air quality 
guidelines for DG technologies. By law, this program must be in effect 
by January 1, 2003. ARB is on a fast track and expects to complete this 
December--over a year ahead of schedule.
    As the foregoing demonstrates, it is not environmental regulation 
that has prevented the creation of additional power generation. Rather, 
many factors have contributed to the current crisis. Among those is 
also the fact that market participants can and do manipulate the 
electrical power market by withholding capacity in order to maximize 
their price of electricity.
    Even the Federal Energy Regulatory Commission (FERC) agrees. 
Although it found insufficient evidence of market manipulation by any 
individual market participant:
        ``. . . there was clear evidence that the California market 
        structure and rules provide the opportunity for sellers to 
        exercise market power when supply is tight and can result in 
        unjust and unreasonable rates under the FPA--we reaffirm our 
        findings that unjust and unreasonable rates were charged and 
        could continue to be charged unless remedies are implemented.'' 
        1
---------------------------------------------------------------------------
    \1\ Order Directing Remedies for California Wholesale Market 91 
FERC 61,294 December 15, 2000 (California Order 215 at pp. 33, 34).
---------------------------------------------------------------------------

                               CONCLUSION

    The Air Resources Board is continuing its efforts to ensure that 
California has the maximum electrical power output possible, while 
still protecting public health and mitigating any adverse effects of 
increased electrical output. This is being done within the confines of 
existing law as recently expanded through the Governor's Executive 
Orders. To quote Governor Davis, California is demonstrating that we 
can cut red tape, build more power plants and continue to protect the 
environment.
    Our State's history reflects a pattern of success even in the face 
of unparalleled challenges. California, the most populous state in the 
nation, has made incredible strides in improving air quality and 
protecting public health. At the same time, the State has enjoyed 
immense population and business growth. During this current energy 
situation, California will maintain its record of achieving a balance 
among all the issues to ensure that a reasonable and successful 
solution is achieved.
    In sum, the air quality regulatory system works. The Governor's 
utilization of his emergency powers to expedite the process of power 
plant siting while maintaining environmental standards confirms that 
California can maintain its environmental and economic objectives.
    Thank you, Mr. Chairman, for the opportunity to testify this 
morning.

                              Attachment 1

 BACKGROUND PAPER ON FLEXIBILITY PROVIDED TO ENABLE EXPANDED OPERATION 
                        OF EXISTING POWER PLANTS

                             March 16, 2001
    SUMMARY: The Air Resources Board and local air districts have been 
proactive and effective in working with power plant owners/operators 
and the California Independent System Operator (ISO) to address 
potential operating limitations resulting from existing air quality 
permit restrictions.

                               BACKGROUND

--There are 35 local air districts in California responsible for 
        regulating emissions from stationary sources within their 
        jurisdictions, including power plants.
--District new source review (NSR) rules require major new or modified 
        sources of air pollution to install best available control 
        technology (BACT) and to mitigate any remaining emissions with 
        ``offsets.''
--When originally constructed, many facilities voluntarily limited 
        their operating hours or fuel usage to keep emissions below 
        levels that would have triggered BACT and/or offset 
        requirements.
--Those choices reflected the original owner/operator's balancing of 
        forecasted electricity demand (i.e., potential profit), versus 
        the cost of controls at higher production levels. These 
        decisions also reflected the anticipated retirement of older, 
        less efficient and higher emitting units.
--Where chosen, operating restrictions were incorporated into each 
        facility's air permit and are subject to compliance action if 
        violated.
--Today, California power plants both need and want to operate longer 
        hours to meet the State's energy needs.

                       RECENT FACILITY OPERATIONS

--Due to the State's power shortage, the California Independent System 
        Operator (ISO) has requested that facilities operate more 
        frequently than they originally anticipated.
--As such, some facilities are exceeding, or expected to exceed, the 
        operating limits specified in their air quality permit.
--When it is determined that a facility may exceed its allowable 
        operating limit, the ISO, ARB, local air districts, and power 
        plant operators have negotiated operating agreements which 
        allow the facility's to help ``keep the lights on'' while 
        minimizing air pollution.
--Typically, the negotiated agreements provide for increased fuel use 
        or additional operating hours.

             EXAMPLES OF SUCCESSFUL POWERPLANT NEGOTIATIONS

--AES Alamitos
--AES Huntington Beach
--AES Redondo Beach
--Duke Energy--Morro Bay
--Duke Energy--Oakland
--Los Angeles Department of Water and PowerReliant Energy--Mandalay 
        Unit 3
--Southern Energy Company--Potrero Peaking Turbines
    See Attachment 2 for more detail.

                              Attachment 2

              DETAIL ON SUCCESSFUL POWERPLANT NEGOTIATIONS

                             March 16, 2001
AES Alamitos
--AES operates the following facilities within the South Coast Air 
        Quality Management District: Huntington Beach, Alamitos, and 
        Redondo Beach.
--These facilities are subject to the District's RECLAIM NOx trading 
        program.
--The Alamitos facility exceeded its Year 2000 RECLAIM trading credits 
        (RTC) allocation and was issued a Notice of Violation by the 
        District.
--Based on available information, the Districts projected that the 
        Huntington Beach and Redondo Beach facilities would also exceed 
        their Year 2000 RTC allocations.
--The District and AES negotiated a settlement agreement based on the 
        principle of ``environmental dispatch'' (i.e., bringing cleaner 
        units on-line first).
--The settlement agreement also requires AES to: 1) install selective 
        catalytic reduction (SCR) or the equivalent on Alamitos units 1 
        thru 4, Huntington Beach units 1 thru 2, and Redondo Beach 
        units 5 and 6; 2) purchase sufficient RTCs to comply with 
        District rules; 3) deduct this year's excess emissions from 
        future year RTC allocations; and 4) provide $17M to mitigate 
        the impact of higher emissions.

Duke Energy--Morro Bay
--Duke Energy operates four utility boilers at its Morro Bay power 
        plant (two boilers rated at 345 MW and two rated at 170 MW).
--The permit to operate issued by the San Luis Obispo County Air 
        Pollution Control District limits the plant's NOx emission to a 
        cumulative of 3.5 tons per day.
--As a result of California's power shortage, the California ISO 
        requested that Duke Energy operate its Morro Bay facility more 
        frequently than allowed by the daily permit limit.
--On January 11, 2001, the District Hearing Board granted Duke Energy 
        an 30-day emergency variance that allows the facility to exceed 
        the daily emission cap during a Stage 1, Stage 2 or Stage 3 
        electrical emergency.
--The emergency variance also requires Duke Energy to pay a mitigation 
        fee of $7,800 per ton of excess NOx emissions.
--The District and Duke Energy are currently investigating the 
        feasibility of longer-term options to allow for extended 
        facility operation.

Duke Energy--Oakland
--Duke Energy operates six peaking combustion turbines at its Oakland 
        Power Plant.
--The operating permit issued by the Bay Area Air Quality Management 
        District limits the facility's annual hours of operation.
--As a result of the mid-January power shortage and need for additional 
        power, the operating restriction would not allow the facility 
        to operate to the extent it was needed.
--On January 18, 2001, Duke Energy submitted an application to the 
        District for a minor permit revision (increase limit to 877 
        hours per year), which would allow the facility to continue 
        operations.
--The District promptly reviewed the application and deemed it complete 
        on January 19, 2001. This action will allow the facility to 
        continue operating until a longer-term solution can be 
        identified.
--The District is in contact with Duke Energy to discuss the terms of a 
        possible agreement to allow operation in excess of the 877-hour 
        limit, as the turbines are expected to reach the limit in the 
        near future.

Los Angeles Department of Water and Power
--LADWP operates several power generation facilities within the South 
        Coast Air Quality Management District.
--LADWP is subject to the District's RECLAIM NOx trading program which 
        limits the facility's allowable operations.
--At the request of the ISO, LADWP operated their power generation more 
        than originally expected during the summer of 2000 to help 
        address California's power shortage.
--LADWP anticipated that it would deplete its RTC allotment before the 
        end of year 2000.
--The District and LADWP negotiated a settlement agreement which would 
        allow LADWP facilities to operate beyond the levels allowed by 
        their year 2000 RTC allocation.
--The settlement agreement includes the following mitigation measures:
    --LADWP will install SCR emission control equipment on Haynes Unit 
            6 which meet a NOX emission limit of 7 ppm.
    --LADWP will also install SCR on Valley units 1-3, Haynes units 3 
            and 4, Scattergood units 1-3, and Harbor units 6 and 7 if 
            deemed cost effective.
    --LADWP will be liable to the District for the revenue resulting 
            from emission in excess of its RTC allotment. LADWP agreed 
            to provide a minimum of $14,000,000 to be used for 
            supplemental environmental projects which benefit the 
            residents of the South Coast Air Basin.

Reliant Energy--Mandalay Unit 3
--Reliant Energy operates a 120 MW natural gas-fired turbine peaking 
        power plant in Oxnard, CA.
--The permit to operate issued by the Ventura County APCD establishes a 
        limit on the facility's annual fuel consumption.
--Due to California's power shortage, the facility anticipated a need 
        to exceed its annual operating limit.
--On July 31, 2000, the facility entered into a compliance agreement 
        with the District which would authorize additional facility 
        operations (942 MMscf per year, equivalent to about 394 hours), 
        provided that: 1) Reliant would apply best available control 
        technology within one year; and 2) Reliant would pay an 
        emission mitigation fee of $4,000 for each hour of operation 
        above the permitted limit. The compliance agreement was 
        subsequently approved by the Ventura County Hearing Board on 
        October 5, 2000.
--On February 14, 2001, the District sent a letter to Reliant Energy 
        stating the enforcement requirements under which the District 
        would take no further action against Reliant Energy if the fuel 
        use limit were exceeded. The letter required Reliant Energy to 
        sell electricity generated using fuel in excess of the limit to 
        the California Department of Water Resources.
--On February 15, 2001, the District issued a letter broadening the 
        scope of the February 14, 2001 letter to allow electricity 
        generated using fuel in excess of the compliance agreement to 
        be sold to the ISO.

Southern Energy Company--Potrero Units 4, 5, and 6
--Southern Energy operates three oil-fired peaking turbines in the San 
        Francisco Bay Area.
--Permits to operate issued by the Bay Area AQMD limit operation of 
        each turbine to 877 hours per year. The limit was requested by 
        the prior owner to avoid costs associated with installation of 
        additional pollution control equipment and emission offsets.
--Southern Energy and the ISO informed the District that the facility 
        might need to exceed its annual operating limit to avert/reduce 
        the magnitude of firm-load shedding in California.
--The District exercised its enforcement discretion to allow Southern 
        Energy to operate its turbines for the remainder of calendar 
        year 2000 (December 15-31, 2000), subject to the following 
        criteria:
    --The turbines may operate at the request of the ISO only under 
            specific circumstances:
      --Potrero turbines are used as a last resort under emergency 
            transmission system conditions and to avert firm-load 
            shedding in the Greater San Francisco Bay Area.
      Potrero turbines will operate up to 4 hours per day per engine, 
            only after declaration of a Stage 3 emergency.
    --Southern must provide mitigation funds for excess emissions.
    --Southern Energy shall pay civil penalties of $5,000 per turbine 
            per day for operation beyond permit limits.
    --By June 1, 2001, Southern Energy shall provide the District with 
            an analysis of the feasibility of applying NOx controls on 
            the Potrero peaking units.
--As of January 1, 2001, the clock for the 877 hours per year permit 
        limit restarted. However, the turbines are expected to reach 
        the limits shortly. The District is in discussion with Southern 
        Energy regarding the possible terms of an agreement to extend 
        operating hours.

    Mr. Barton. Thank you. I think that was exactly 5 minutes, 
which is amazing.
    We now want to hear from Mr. David Freeman, who is the 
General Manager of the Los Angeles Department of Water and 
Power, but he also has an additional duty, to coordinate the 
contract negotiations for the State of California in purchasing 
power on the open market for the incumbent utilities that are 
on the verge of declaring bankruptcy.
    Your statement is in the record in its entirety, Mr. 
Freeman. We welcome you to the subcommittee.

                  STATEMENT OF S. DAVID FREEMAN

    Mr. Freeman. Thank you. It is a privilege to appear before 
you. In view of my multiplicity of duties, perhaps I should 
simply say that I am a free man and I am testifying on my own 
behalf this morning, so I won't get anyone in trouble, but I do 
think I reflect the views of most Californians.
    Let me first acknowledge, Mr. Chairman, our appreciation 
for your coming to our State, putting in long hours of 
hearings, and then having the miserable prospect of listening 
to me late into the evening. I think that is above and beyond 
your job and it is much appreciated.
    Mr. Barton. It is actually a pleasure, and you always learn 
by listening. I have enjoyed our conversations.
    Mr. Freeman. That is correct, so I will try to be brief so 
I can spend most of my time listening.
    I also want to acknowledge the presence of two Members of 
Congress who represent our area, Henry Waxman. It is a pleasure 
to be before you. And as far as Congresswoman Jane Harman is 
concerned, I think the record should show that she and I once 
worked for the other side of the aisle. I don't know whether 
everyone knows that or not.
    Mr. Barton. Those are the good, old days, and you are 
welcome to come back anytime you want.
    Mr. Freeman. Well, what happened is that we passed and then 
Mr. Dingell and company would straighten them out, and we would 
spend long hours at the tune-in trying to get the legislation 
straight. So, this is nostalgia for me.
    Ms. Harman. Mr. Chairman, may I just make a comment, which 
is we worked for the other body, not the other side of the 
aisle.
    Mr. Barton. I like the other side of the aisle better, 
myself.
    Mr. Freeman. I sit corrected. Let me first say that when we 
talk about California, there ought to be a paragraph in each of 
these stories saying, ``But not in Los Angeles.'' We are just 
an old-fashioned utility, owned by the people of Los Angeles. 
We kept our power plants. We added capacity while everybody 
else was going to seminars on deregulation. We have 15 percent 
reserves and then a little surplus. Our rates are stable. The 
lights don't flicker. And we have a modest surplus that we 
supply to the rest of the State from time to time.
    Mr. Barton. At a modest profit, I am told.
    Mr. Freeman. We learn from the Texans.
    Mr. Barton. That is a good group to learn from.
    Mr. Freeman. Amidst all the rabbit trails we chase, I think 
there is a jugular issue here that needs to be stated, at least 
my opinion of it, and that is that deregulation is a disaster 
when there is a shortage. There is just no getting around it. 
It is not that California did it wrong, it is just that this is 
the oxygen of life, and when there is a shortage, the prices go 
through the ceiling, especially when the Federal Energy 
Regulatory Commission--which I had the privilege of serving as 
Executive Aide to the Chairman in the early 1960's--does not do 
its job.
    The statute has not been changed, Mr. Chairman. Sam Rayburn 
is turning over in his grave at what is happening now. That law 
is on the books, and it is not being enforced. And it seems to 
me that this Congress ought to either repeal the law or see 
that it is enforced. It is not a discretionary thing.
    Now, let me say to all these conspiracy-theory-types, they 
are wrong. There is a real shortage. But the reason, as has 
been explained here, is not environmental laws. Power plants 
were not built in Utah or Montana or any of the other Western 
States. It is what was explained about Chairman Keese, the 
price was a dog-eat-dog competition price of 2.5 cents a 
kilowatt hour in 1997, and the same capitalists would not 
invest their money in a new power plant when they weren't going 
to get a return at those prices. And so the power plants 
weren't built in Utah and they weren't built in California.
    And the new President is entirely correct, we have a 
national energy problem, not a California problem. And I think 
that one has to look at this and recognize that this is the 
oxygen of life, natural gas and electricity, and the 
marketplace just does not really do the perfect job, or an even 
adequate job, for the producer or the consumer.
    I don't know whether any other witness will say this to 
you, but the reason we have a natural gas shortage is that the 
market price got too low. Producers have said the same thing. 
The market price was too low for electricity, so that we have 
to have a hybrid system, in my opinion, where we let the market 
fluctuate over a wide band, but have floors and ceilings, 
because the volatility is what kills us. And it is a serious 
lesson that I think needs--we need to put our ideology aside, 
all of us. This is not an ideological issue, we are dealing 
with the lifeblood of this civilization. And we do not have a 
national energy policy, but the policy has to recognize that 
just as in housing we supplement the market with some housing, 
otherwise there wouldn't be any housing for poor people. We 
supplement the market--the Federal Reserve supplements the 
market with money. We have to have some presence to assure that 
businesses can know what their price is going to be in the 
future, and that drillers will know what they will get in the 
future, or else they won't drill.
    That is the burden of my testimony. Also, I want to say, 
don't feel sorry for California. We are going to come through 
this and be stronger than ever. I think that--I pray to you, 
sir, I know you are sincere. You believe in State's rights. You 
defended that issue a year ago, I recall, when people were 
trying to rush through a bill. And I know this Committee is a 
committee made up of people that are looking out for the public 
interest.
    We have underway in California a really large-scale effort 
to move through this crisis and come out of it with a stronger 
grid system, with stronger policies and, frankly, you will see 
us ushering in the age of the fuel cell and the micro-turbine 
and a whole set of new technologies. California will continue 
to lead this Nation as it has in the past, in the field of new 
technology and innovation.
    And let us just do our thing and leave us alone, with 
Federal legislation. If you can, help us; if you can't, make 
the FERC do its job--and I understand how stubborn regulatory 
agencies can be--but if you can't do that, at least my prayer 
is, you let the Governor of the State go ahead with the various 
programs that he has underway, a tremendous array of efforts 
that will, I believe, contain this problem, and California will 
emerge stronger than ever.
    And my last plea, don't try to use California as an excuse 
for messing up the Arctic Wildlife Refuge--please don't. The 
people of California don't want that, and I don't think the 
people of America want it.
    Oil production has gone down steadily since 1970. The 
supply side will not get us off all these imports. We have got 
to get back to the statute that this Congress passed under the 
leadership of Mr. Dingell and others in the 1970's, namely, 
improving the mileage of cars and working on the demand side. 
We are an old oil patch. We burned up the Prudhoe Bay oil 
between the last crisis and this one, and we have to preserve 
what is left of America the Beautiful. Thank you, sir.
    [The prepared statement of S. David Freeman follows:]

PREPARED STATEMENT OF S. DAVID FREEMAN, LOS ANGELES DEPARTMENT OF WATER 
                               AND POWER

    The City of Los Angeles has an adequate supply of electricity at 
stable prices. The reason is that we did not ``go down deregulation 
road.'' We are still an ``old-fashioned'' utility owning our 
generation, transmission and distribution, and maintaining 15 percent 
reserves with a modest surplus from time to time.
    Basic lesson of California's deregulation experiment is that it is 
a disaster when there is a shortage of electricity especially when the 
FERC fails to carry out its statutory duty to set ``just and 
reasonable'' rates for electricity and natural gas transportation.
    There is a real shortage, but the reason is not the environmental 
laws in California. It is a fact that there was a surplus in California 
before 1998. The wholesale price (about 2.5 cents per kWh) was too low 
to encourage the construction of new power plants. No new power plants 
were built in California, but they are not built in Utah either.
    The surplus and the low prices discouraged new plants, while loads 
grew. We ended up with the shortage and the high prices.The same is 
true with natural gas where market prices at the wellhead fell to about 
$2.50 per mmcf. Drilling slowed and now we have wellhead prices at 
triple that amount.
    There is a serious lesson to be learned from all this. A completely 
free market for electricity and natural gas is too volatile for either 
the producer or the consumer.
    Deregulation can work over time only if the price is not allowed to 
go so low that it does not reward new capital, and where the price is 
not so high that it punishes the consumer and businesses alike.
    Let us put all of our ideology aside and accept the fact that we 
are dealing with the oxygen of life in a high-energy civilization. We 
need a hybrid policy of ``floors and ceilings'' with a market price 
fluctuating in between.
    California has underway a program of massive conservation, 
acceleration of power production, power purchases by the State, buy-out 
of transmission lines and other facilities of the investor-owned 
utilities to restore their financial health, and any rate adjustment 
that may be necessary to assure that the State and the utilities can 
pay their electric bills in the future. In addition, thelegislature is 
in the process of enacting a California Power Authority that would be 
the builder and conserver of last resort to assure that we move to a 
surplus situation and maintain a surplus indefinitely.
    We recognize that the current administration and various 
legislators have their own opinion as to the California situation. My 
personal plea is that you respect the principle of State's rights which 
the new President has proclaimed.
    Opinions and suggestions are certainly welcome and everyone can 
profit from listening to the other person's point of view. But my 
personal plea is that if the Federal Government is not going to help 
us, the least it should do is to refrain from legislation that attempts 
to tell us what to do.
    We regret that FERC, under the previous administration, as well as 
this one, doggedly fails to do its job. And we would appreciate the 
Congress reviewing the Federal policy on wholesale prices and impose 
controls on a cost of service basis during the period when the market 
is clearly dysfunctional. We also appreciate any funds that would help 
support our own very strong conservation efforts, but please don't use 
the California energy crisis as an excuse to destroy the Arctic 
Wildlife Refuge with drilling or any other sacrifice of this Nation's 
natural beauty for any short-term inadequate production scheme.
    The United States production of petroleum has gone steadily down 
since 1970 despite periods of increased price and major subsidy. We 
cannot produce our way out of energy shortages. It could come only 
through a combination of major conservation and the development of 
cleaner alternative sources, such as wind, solar, biomass, geothermal, 
as well as natural gas and petroleum in areas where drilling is not the 
enemy of America the beautiful.

    Mr. Barton. Thank you, Mr. Freeman. Leave California alone, 
huh? That might be a good motto.
    We are going to hear now from Mr. Steven Kline, who is the 
Vice President of Federal, Government and Regulatory Relations 
for Pacific Gas and Electric Company. Your statement is in the 
record in its entirety. We recognize you for 8 minutes, Mr. 
Kline.

                  STATEMENT OF STEVEN L. KLINE

    Mr. Kline. Thank you. Good morning, Mr. Chairman and 
members of the subcommittee. This hearing comes at an 
especially opportune time, with California experiencing rolling 
blackouts in recent events. I would like to briefly share with 
you our view of what the current situation is, how we got here, 
and what, in our view, needs to be done both in the short- and 
longer-term to resolve this crisis.
    In terms of how we got here, or rather, where we are, 
prices remain at very high levels as you have heard. February's 
estimate average wholesale price in the wholesale market was 
over $225 per megawatt hour. Supplies, you have heard, remain 
extremely tight. Northwest hydro is at record lows, California 
hydro is, at best, at 70 percent of normal levels.
    On Monday and Tuesday, the California ISO ordered statewide 
rolling blackouts, which is an extraordinary development under 
any circumstance, but especially given that this is the low-
usage springtime period.
    The outlook for peak usage summer period is especially dire 
both in terms of price and supply, and the State's investor-
owned distribution companies and a number of small power 
producers all teeter ever closer to bankruptcy.
    How did we get here? I know you have heard a lot about 
this, I am not going to belabor it, but clearly the problem is 
fundamentally one of supply and demand. In addition, higher 
natural gas prices across the country have led to higher 
electricity prices.
    I do want to stress that the problems in California are not 
the result of the concept of opening markets. I don't believe 
they are the result of the concept of deregulation. Basic 
economics tells us that under any regulatory system, higher 
demand, higher gas prices, shorter supply, will produce higher 
prices--not necessarily the higher prices we are seeing in the 
market today, but they would have produced higher prices, in 
any event.
    That said, California's approach to electric 
restructuring--in essence, partial deregulation--made the 
problem worse, and certainly contributed to the 500 to 1,000 
percent wholesale price increases we have seen over the last 8 
months.
    The reasons, in more detail, are described in my written 
testimony, require divestiture without contracts, total 
reliance on spot market, inability to use bilateral contracts 
or financial hedges, are designed to work in a system of 
abundant supplies. As Mr. Freeman pointed out, California's 
market structure clearly has not served customers well in a 
period of short supplies.
    And, finally, frozen retail prices have shielded consumers 
from the real cost of electricity, including higher gas prices, 
and they have nearly eliminated the signals in prices to make 
energy efficiency investments and conservation, hence, demand 
reductions real.
    So, where do we go from here? California's energy crisis 
cannot be resolved until supply and demand are back in balance. 
In order to do that, we need to increase supply. We need 
additional energy infrastructure, new clean and efficient power 
plants, natural gas transmission and distribution, and high 
voltage power transmission lines. In order to reduce demand, we 
need energy efficiency investments and consumers ultimately 
need to see accurate price signals. Over time, with 
infrastructure investments and wise public policy, supply and 
demand can be brought into balance, and the market will be 
workably competitive again, as we believe wholesale prices 
should then return to appropriate levels.
    Having addressed that longer-term, let us talk about the 
very short-term in the form of this summer. The challenge, in 
our view, there is to moderate or limit electricity price 
increases, while still sending the longer-term market signals 
we all recognize we need.
    In short, we need market-oriented solutions that attack the 
supply problem first and encourage fast-track projects, as 
Chairman Keese described, as well as demand-reduction 
incentives which build on those that were initiated last 
summer.
    Even then, given the supply and demand imbalance we see, it 
is not clear that these tools will fully mitigate the potential 
economic impact, which leads us to the notion of temporary 
price caps.
    Historically, we have not supported price caps. In the 
long-term, we believe they create market distortions and have 
unanticipated and unintended consequences.
    That said, based on our experience, we have come to 
recognize that in cases where the power markets are clearly 
broken--for example, where FERC has determined that prices are 
not just and reasonable--short-term price caps may be warranted 
and necessary.
    We are very concerned that there is a good chance that 
California and possibly other Western States are heading for a 
meltdown this summer where, due to short supplies, the price of 
power could increase from today's already high levels to 
stratospheric levels this summer. That would inflict severe 
hardship on households and economies of the Western States to 
no good end; prices are already high enough to encourage new 
generation and, as you have heard, that new generation is being 
built as fast as it can be permitted and constructed not just 
in California, but across the West.
    In order to avoid such a meltdown, we think policymakers 
should create a mechanism, which would allow either the 
Secretary of Energy or the FERC to implement temporary price 
caps, should these worst fears be realized. It seems only 
prudent to start now to create such a policy tool and carefully 
define how and when that tool can be used, including the 
duration of use.
    My prepared testimony sets out some thoughts on the 
circumstances and limitations may be appropriate under those 
circumstances.
    What can be done now? State officials and stakeholders are 
still working to craft a comprehensive solution. These efforts 
are of paramount importance and are proceeding on an urgent 
basis.
    Beyond the necessary State actions, there is much the 
Federal Government can do. Specifically, I believe, be prepared 
to moderate prices this summer; encourage Regional Transmission 
Organizations that are truly open and push open access 
transmission systems across the country; accelerate permitting 
of natural gas pipelines; streamline Federal agency review and 
approval of energy infrastructure projects; encourage efficient 
use of electricity through research and efficiency standards; 
encourage continued development of renewable energy resources 
by maintaining the existing renewables production tax credit; 
and, finally, increase funding for low-income energy assistance 
to help assure that those least able to pay continue to have 
access to reliable energy.
    Thank you for the opportunity to appear before you today. I 
would be happy to answer any questions.
    [The prepared statement of Steven L. Kline follows:]

    PREPARED STATEMENT OF STEVEN L. KLINE, VICE PRESIDENT, FEDERAL 
         GOVERNMENTAL & REGULATORY RELATIONS, PG&E CORPORATION

                             INTRODUCTION.

    Good morning Mr. Chairman, and members of the subcommittee. I am 
Steven Kline, Vice President for Federal Governmental and Regulatory 
Relations of PG&E Corporation. Thank you for the opportunity to testify 
before you today, as you continue your examination of California's 
electricity shortages and related price impacts across the West.
    This hearing comes at an opportune time, with California 
experiencing rolling blackouts in recent days. Let me share with you 
what our current situation is; how we got here; and what in our view 
needs to be done, both in the short and longer-term, to resolve this 
crisis.

                             WHERE ARE WE?

    As you know, wholesale electricity prices in California and the 
West remain at unprecedented levels--the estimated average wholesale 
price for February in California was $228 per megawatt hour, with no 
relief in sight. Supply, both in terms of available megawatts and the 
natural gas used to produce electricity, is extraordinarily tight. 
Hydropower, in particular, continues to be short. At this point, it 
appears certain that the availability of hydropower across California 
and the Pacific Northwest will be substantially below normal. Our 
utility currently forecasts hydro availability of about 70 percent of 
normal and BPA continues to forecast hydro at around 60 percent of 
normal.
    As I mentioned, the California ISO ordered statewide rolling 
blackouts because available supplies were inadequate to meet demand, an 
extraordinary development to occur in the normally low usage 
springtime. As we look to the peak usage summer season, the predictions 
are dire. At best, according to the California ISO, the state will be 
short 2 to 3 thousand megawatts for the summer, and that forecast may 
not fully reflect current hydro conditions in the Northwest.

                          HOW DID WE GET HERE?

    California's problem is fundamentally one of supply and demand: 
statewide, between 1996 and 1999 electricity demand grew by 5,500 MW, 
while supply grew by only 672 MW. The effects of this extreme imbalance 
between supply and demand have been exacerbated by reduced hydropower 
supplies and rapid economic and population growth across the West.
    In addition, higher natural gas prices across the nation are 
contributing to higher electricity prices.
    The problems in California are not the result of the overall 
concept of opening electricity markets to competition. Basic economics 
tells us that under any regulatory system, wholesale power costs would 
be substantially higher under the conditions I have just described. 
That said, it is true that California's approach to electricity 
restructuring, combined with short power supplies, have undoubtedly led 
to the unexpected 500 to 1,000 percent wholesale power cost increases 
experienced over the last eight months and to the resulting financial 
crisis for the utilities.
    California's restructuring approach required utilities to divest 
their power plants and to purchase all of the power needed to serve 
their customers on the volatile spot market. Further, until recently, 
the use of long-term bilateral contracts or other price hedges were 
also precluded. Designed to work in an environment of abundant power 
supplies, California's market structure has not served customers well 
under short supply conditions.
    In addition, frozen retail customer prices have shielded consumers 
from the real costs of electricity, nearly eliminating price signals to 
make energy efficiency investments or to conserve, and thus reduce 
demand.

                       WHERE DO WE GO FROM HERE?

    California's energy crisis cannot be resolved until supply and 
demand are back in balance. In order to increase supply, new clean and 
efficient power plants must be sited and built, together with natural 
gas transmission and distribution pipelines and high voltage power 
transmission lines. In order to reduce demand, energy efficiency 
investments need to be made 1 and customers need to see 
accurate price signals. Over time, with infrastructure investments and 
wise public policy, supply and demand can be brought into balance, 
market forces will prevail, and wholesale prices should return to 
appropriate levels.
---------------------------------------------------------------------------
    \1\ Pacific Gas and Electric Company has long been a leader in 
energy efficiency. The Company was honored to receive from the 
Department of Energy and Environmental Protection Agency the Energy 
Star award for ``Excellence in Consumer Education'' earlier this week.
---------------------------------------------------------------------------
    In the very short-term, however, we anticipate major problems this 
summer. The summer challenge is to somehow moderate or limit 
electricity price impacts--while simultaneously sending the correct 
market signals to promote supply-demand equilibrium. California and the 
West will be scrambling to use all tools currently available to address 
the problem. In California, that means 1) bringing power plants not 
currently operating back on line; 2) siting and building additional 
``peaking'' power plants in an expeditious manner; and 3) implementing 
emergency demand reduction efforts. All three of these measures are the 
best mechanisms available to address the very top of the demand peaks 
that will occur--and to help mitigate prices without exacerbating the 
supply problem.
    In short, we must act immediately to provide market-oriented 
solutions that attack the supply problem first and encourage fast-track 
projects, such as is being done now with peaking units. In the interim, 
a combination of supply and demand initiatives is imperative--
everything from the longer-term bilateral contracts being implemented 
now between the state of California and suppliers, as well as demand-
reduction incentives which build on those that were initiated last 
summer.
    Even then, given the extent of the expected supply-demand imbalance 
for this summer, it is not clear that these tools will fully mitigate 
the potential economic impact. This leads us to consider legislation 
that addresses temporary price caps in one way or another.
    Historically, PG&E Corporation has not supported price caps; over 
the long term, they create market distortions and have unanticipated 
and unintended consequences. In a functioning market, they mask the 
peak price signals that spur conservation, changes in usage patterns, 
and investment in energy efficiency and new supply. Thus, price caps 
often make matters worse.
    That said, almost a year ago we recognized that in circumstances 
where power markets are not fully competitive, short-term 
implementation of price caps might be necessary. Therefore, we adopted 
a corporate policy statement (attached) that addressed those 
circumstances, which can be summarized as follows: where markets are 
clearly broken--for example, where FERC has determined that prices are 
not ``just and reasonable''--short-term price caps may be warranted.
    With that context, I would like to address temporary price caps for 
the Western energy market, for the summer of 2001. Based on what we 
know today, there is a very good chance that California and possibly 
other Western states are heading for a meltdown where--due to short 
supplies--the price of power could increase from today's already 
historically-high levels to sustained stratospheric levels for the 
summer. That would inflict severe hardship on households and the 
economies of the Western states to no good end; prices are already high 
enough to encourage new generation, which is being built as fast as it 
can be permitted and constructed.
    In order to avoid that meltdown, policy makers should create a 
mechanism, which would allow either the Secretary of Energy or the FERC 
to implement temporary price caps, should worst fears be realized. It 
seems only prudent to create the policy tool and carefully define the 
circumstances under which that tool can be used, including the duration 
of use. For example, any price cap should have an explicit start and 
sunset date, for instance, May 1st and September 30th of this year. And 
in order not to inadvertently discourage new, badly needed power 
plants, the price cap should apply only to existing generation.
    With respect to setting a price cap, it must be simple enough to be 
easily administered, and it should allow suppliers to make a reasonable 
profit. Most options being given serious consideration involve 
benchmark rates that build up from a cost basis. Frequently discussed 
are technology-specific caps that would cover suppliers' costs plus a 
stipulated profit margin. Under this approach, caps would be set at 
different levels based on the type of generating resource--natural gas, 
coal, hydro, etc. Other options include fixed price caps at levels high 
enough to accommodate input price fluctuations, such as variations in 
the price of natural gas, or indexed caps equal to some multiple of 
current input prices.

                         WHAT CAN BE DONE NOW?

    State officials and stakeholders are still working to craft a 
satisfactory resolution that assures reliability and public safety, 
stabilizes retail rates to customers, addresses the longer-term 
infrastructure needs while protecting California's environment, and 
returns the State's utilities to financial health. These efforts are of 
paramount importance and are proceeding on an urgent basis.
    Beyond the necessary state actions, the federal government should 
also do everything it can. Specifically, we believe the federal 
government should:

 moderate prices for the summer;
 encourage Regional Transmission Organizations and truly open 
        access transmission systems;
 accelerate permitting of natural gas pipelines;
 streamline federal agency review and approval of energy 
        infrastructure projects;
 encourage efficient use of electricity through research and 
        efficiency standards;
 encourage continued development of renewable energy resources 
        by maintaining the existing renewables production tax credit; 
        and
 increase funding for low-income energy assistance to help 
        assure that those least able to pay are not left without access 
        to reliable energy.
    Thank you for the opportunity to appear before you. I would be 
happy to answer any questions you might have.

    Mr. Barton. Thank you, Mr. Kline. We now want to hear from 
Mr. Jim Pope, who is Electric Utility Director of the Silicon 
Valley Power Authority in Santa Clara, California. Welcome to 
the subcommittee for the first time. Your statement is in the 
record. We will recognize you for 8 minutes to elaborate on it.
    We apparently have a pending vote on the floor. We are 
going to try to continue the hearing, so go ahead, Mr. Pope.

                      STATEMENT OF JIM POPE

    Mr. Pope. Good morning. It is a privilege to be here. This 
is my first opportunity to enjoy this exercise.
    As you have heard, California is struggling, and struggling 
makes you better, makes you tougher. Fixes are going to take 
time, as you have heard. The Northern California Power Agency 
is a strong proponent of a competitive wholesale power market, 
as is Silicon Valley Power.
    The Western power markets are dysfunctional and they lack 
the conditions for a competitive market, and you have heard a 
lot of examples of that.
    While California's municipal utilities have fared well 
during the crisis, we have not been insulated from this 
dysfunctional market. Our utilities and our consumers have 
suffered through blackouts and rate increases. NCPA and its 
members have suffered economic hardships.
    I have a customer that I recently shut two of the three of 
their facilities because the recent blackouts caused their 
furnaces to damage their product and they lost $2.7 million in 
the January rotating blackouts. And they now are possibly going 
to file bankruptcy.
    According to the Los Angeles Economic Development Group, 
$1.7 billion worth of economic loss was suffered by the State 
in the rolling blackouts, two blackouts in January, and I 
believe the blackouts we had last week probably doubled that 
because we had the entire State rather than just Northern 
California blacked out.
    The municipals in the North have lost their summer 
reserves. We have used hydro to keep the lights on in December 
and January. We have operated our gas-fired power plants and 
used up 20 percent of our energy credit or energy hours by the 
Environmental Air Credit Rules in the month of January. We have 
purchased power at the high market prices, and we have faced 
rate increases. Some of our utilities, one like the Lassen 
Municipal Utility District, may face 160 percent rate increase.
    We have sold to the California ISO and we have not been 
paid yet. But, as Mr. Keese pointed out, the State is taking 
steps and we support the State streamlining of power plant 
siting. We support the public ownership of transmission. We 
support the supply side improvements of more generation.
    NCPA members of Silicon Valley Power, Lompoc and Reading, 
have power plants planned. I have got an RFP on the street for 
four facilities in the city of Santa Clara to meet our growing 
load. We believe that the air emission efforts can go further.
    We support the energy conservation efforts. My customers 
have curtailed over 30 megawatts of peak load last summer, and 
are curtailing to the tune of 7 to 8 percent within the city of 
Santa Clara, as is the city of Santa Clara.
    State transmission acquisition: We support a transmission 
Publico, and we support some improvement or replacement of the 
California ISO, but we do have a couple concerns about the 
State transmission acquisition.
    It appears that the purchase price will be at a premium and 
it will impact future transmission rates. Second, the municipal 
utilities in Northern California and some in Southern 
California have interconnection agreements with the investor-
owned utilities, and those must be respected in the 
acquisition.
    We must get the system upgrades and repairs done. I am the 
Chairman of the Transmission Agency of Northern California, and 
we are stepping forward with the Western Area Power 
Administration to help offer assistance in those upgrades and 
repairs.
    The California ISO reform is critical. Transmission 
additions on a statewide basis, our most critical congested 
path is Path 15, which is the area in the center of the State 
from essentially Modesto down to Fresno.
    The Western Area Power Administration TANC in the State is 
the fastest fix and, most recently, the ISO supported our 
particular proposal at the California Public Utilities 
Commission.
    We need some appropriate Federal action. We need price 
stabilizing rates in the West. You have heard a couple of 
proposals. I don't really care what you call it, but we do need 
something in the West to help us manage through this crisis for 
an interim basis.
    Non-jurisdictional utilities are part of the solution. The 
municipal utilities make up a small share of the wholesale 
markets. NCPA members in Santa Clara are net purchasers in the 
wholesale market. Many of our sales have been at the request of 
the ISO or the PX, and we were early and consistent supporters 
of interim price protections. But there are no ``band-aid,'' 
``silver bullet'' solutions. The recent California experience 
has taught us a number of critical lessons.
    We believe FERC needs clear authority and direction on 
Regional Transmission Organizations to promote truly effective, 
regional and independent transmission management. Markets are 
regional, and the transmission system must be run in a manner 
that supports interstate commerce.
    Current transmission constraints, like Path 15, must be 
eliminated. Ultimately, RTOs should have clear authority and 
responsibility to plan and expand the transmission grid. 
Federal transmission siting authority is also needed.
    While there is a need for institutions to ensure 
independent grid management, these institutions should have 
minimal market involvement.
    FERC must establish clear and effective rules to promote 
sustainable competitive markets prior to granting authority for 
market-based rates. Reformatting FERC's role so that it is an 
effective market monitor, with clear authority and direction to 
detect and correct market manipulation or abuse is critical and 
needed.
    In conclusion, the municipal utilities have only one 
master. We live the obligation to serve. We buy resources, 
deliver resources for our citizen owners. NCPA, Public Power, 
Silicon Valley Power, continue to be part of the solution in 
the State of California and the West, and not part of the 
problem.
    We look forward to working with the subcommittee in 
promoting these objectives. Thank you.
    [The prepared statement of Jim Pope follows:]

 PREPARED STATEMENT OF JIM POPE, GENERAL MANAGER, SILICON VALLEY POWER 
           ON BEHALF OF THE NORTHERN CALIFORNIA POWER AGENCY

    Mr. Chairman, members of the subcommittee, thank you for this 
opportunity to testify on the current electricity crisis and the 
corrective steps that can be taken. I am Jim Pope, general manager of 
Silicon Valley Power--the municipal utility serving the city of Santa 
Clara, California. I am testifying today on behalf of the Northern 
California Power Agency (NCPA).1 I also serve as Chairman of 
the Transmission Agency of Northern California (TANC),2 
another municipal joint action agency that is the principal owner of 
the California-Oregon Transmission Project, the publicly owned high 
voltage transmission link between California and the Pacific Northwest.
---------------------------------------------------------------------------
    \1\ NCPA is a nonprofit California join powers agency established 
in 1968 to generate, transmit, and distribute electric power to and on 
behalf of its fourteen members: cities of Alameda, Biggs, Gridley, 
Healdsburg, Lodi, Lompoc, Palo Alton, Redding, Roseville, Santa Clara, 
Ukiah, the Port of Oakland, the Truckee Donner Public Utility District, 
and the Turlock Irrigation District; and seven associate members: cites 
of Davis, Santa Barbara, ABAG Power, Bay Area Rapid Transit District, 
Lassen Municipal Utility District, Placer County Water Agency, and the 
Plumas-Sierra Rural Electric Cooperative serving nearly 700,000 
consumers in central and northern California.
    \2\ TANC is a joint exercise of powers agency organized and 
existing under the laws of the State of California. Among TANC's 
purposes is the provision of electric transmission facilities and 
services for the use of its Members. TANC's Members are the California 
Cities of Alameda, Biggs, Gridley, Healdsburg, Lodi, Lompoc, Palo Alto, 
Redding, Roseville, Santa Clara, and Ukiah; the Sacramento Municipal 
Utility District; the Modesto Irrigation District; and the Turlock 
Irrigation District.
---------------------------------------------------------------------------
    Today, in California, we are struggling to develop solutions that 
will get us beyond the mistakes that have been made in restructuring 
the electricity market. NCPA has long supported steps to foster and 
promote sustainable and effective competition in the wholesale 
electricity market. Regrettably, the market conditions needed to 
sustain effective wholesale market competition are not present in 
California. It will take time, courage and coordinated state and 
federal efforts to develop and implement both the near-term stopgap 
protections and the long-term solutions. NCPA looks forward to working 
with our colleagues in the industry, the State, Congress and FERC to 
advance the necessary measures to ensure a reliable and affordable 
power system.

                      CAUSES OF THE CURRENT CRISIS

    While there is no value in finger pointing, it is clear that many 
factors contributed to the current crisis--a crisis that spills beyond 
California's borders and infects the regional power market. At its 
core, the California and associated Western power markets lack the 
conditions necessary for a competitive market: multiple sellers, ease 
of entry, free flow of commerce and price transparency. In California:

 There is a shortage of installed and operable generation in 
        California. This shortage has allowed market participants to 
        withhold generation, strategically bid and game the system to 
        maximize profits.
 There is a shortage of transmission capacity within the State. 
        Alleviating current transmission constraints between northern 
        and southern California would have prevented the recent rolling 
        blackouts. However, no party has both the responsibility and 
        authority to relieve such constraints.
 There is a shortage of transmission capacity to import 
        electricity products from outside California.
 The absence of a seamless, independent regional transmission 
        system impedes commerce and narrows the relevant market.
 From its inception, the Cal ISO and PX lacked the proper 
        rules, procedures and mechanisms to promote competition, 
        monitor market conditions and take corrective action.
    Market forces can only serve to check prices when competitive 
market conditions exist. In the absence of such conditions, sellers are 
able to dictate prices without suffering competitive responses that 
reduce sales and revenue. Whether generators in the state collected 
scarcity rents or excess profits, the result is the same: power prices 
that can devastate the economy. As recent experience in California 
demonstrates, market based rates only work when competitive market 
conditions exist.

     CALIFORNIA MUNICIPAL UTILITIES HARMED BY DYSFUNCTIONAL MARKET

    The general perception is that California's municipal utilities 
have been insulated from the volatile market. While it is true that 
California's municipal utilities retained the generation assets needed 
to serve load, our consumers have been far from insulated from the 
dysfunctional market. NCPA and its members:

 Voluntarily participated in the Cal-ISO load curtailment 
        programs and have been subject to rolling blackouts--even 
        though we had sufficient resources to meet our native load. The 
        cost to high-tech industries of variations in power quality or 
        unanticipated supply disruptions is severe. For example, a 
        silicon chip manufacturer in the area may be pursuing 
        bankruptcy due to the recent January rolling blackouts. These 
        blackouts caused their furnaces to shutdown and stopped 
        development of the silicon chips that caused them to lose $2.7 
        million of product.
 Have drawn down the reservoirs at our hydro projects to help 
        meet the electricity demands of the state, putting at risk our 
        ability to generate power at these projects during the critical 
        peak Summer months.
 Operated gas-fired combustion turbines at the sole direction 
        of the Cal-ISO, using 20 percent of available air emissions in 
        the first 20 days of January (at a time when the plants would 
        usually not operate)--again reducing our ability to operate the 
        plants during the Summer.
 Purchased power from the market at rates above what would 
        exist in a truly competitive market. Another NCPA member, the 
        Lassen Municipal Utility District, faces a 160% retail rate 
        increase as a result of the high price of its market purchases. 
        While Silicon Valley Power has sold surplus energy in the 
        market, we are net purchasers and should not be punished for 
        what benefit we may receive when we sell surplus energy. To do 
        anything else is fiscally irresponsible for our citizen-owners.
 Sold power to the Cal-ISO, for service to the state's 
        investor-owned utilities, for which we have since been told we 
        will not be paid.
    As consumer-owned utilities, the effects of these developments will 
be felt directly and exclusively by our consumers. We have no 
stockholders to ``share'' in the pain.
                 california's efforts to right the ship
    As outlined above, there are many factors contributing to the 
current crisis. The State has taken, or is considering, a number of 
short and long-term actions to address the current crisis. I would like 
to share with you my views on those proposals.

1. Supply Side Improvements
    All parties agree that California desperately needs generation 
additions. State siting laws, emissions limitations, investor 
uncertainty, and public opposition have all contributed to the 
inadequacy of current generation resources.
    However, my utility and the other utilities within NCPA have built, 
and will continue to build, desperately needed generation resources. 
The Lompoc municipal utility, located in Santa Barbara County, is 
looking at building a plant in cooperation with NCPA. In the Bay Area, 
my utility (Silicon Valley Power) and others are looking at new 
resources. We have been in discussions with merchant plant developers 
for over a year and now have a Request for Proposal (RFP) on the street 
for four sites within the City each ranging from 50 to 150 Megawatts. 
It is not impossible to build new resources. In order to succeed, 
project developers must exhibit both environmental and community 
sensitivity, and advance smart, cost-effective technology choices.
    The Governor's Executive Orders streamlining the siting process and 
providing greater flexibility in air emissions are important first 
steps--to maximize use of existing resources, jump-start generation 
additions, and show that the State is committed to adding generation. 
California municipal utilities believe these efforts can go farther. 
For instance, the short-term waivers of hourly emissions limits apply 
only to those plants under contract with the State Department of Water 
Resources. We believe the waiver should be expanded to include 
generation units owned by municipal utilities that are not under 
contract with the Department.

2. Energy Conservation Efforts
    The Governor and the State Legislature are pursuing important 
energy conservation efforts. Demand reductions are the quickest way to 
meet our energy needs for this summer, and it is incumbent on all 
parties to take part in this effort. For example, Silicon Valley Power 
was able to reduce our peak demand in summer 2000 by 30 Megawatts 
through our customers' energy conservation efforts. Additionally, 
during the rotating blackouts in January 2001, we were able to reduce 
our load by 20 Megawatts as requested by the PG&E and CA-ISO.
    With service to more than a quarter of the State's consumers, 
municipal utilities are pushing for a proportionate share of state 
conservation funds to allow us to assist our consumers in reducing 
energy demand even further.

3. State Transmission Acquisition
    NCPA supports the formation of a non-profit, public transmission 
entity--or Publico--to replace the California ISO and own and operate 
the transmission facilities within the state. The State is pursuing 
purchase of the private utilities' transmission facilities as a means 
of restoring the financial health of the companies and providing 
collateral to the state.
    While a state purchase of the transmission assets of the IOUs can 
work, we have serious concerns with the framework of the proposed 
acquisition. We are working with the Governor and others to address the 
following issues:

 Purchase Premium--NCPA and its members depend on the 
        transmission facilities of Pacific Gas and Electric, one of the 
        State's three investor-owned utilities, to move power from our 
        generation resources to our member communities. Paying 2.3 
        times the book value to acquire PG&E's transmission assets 
        could raise our transmission rates significantly and make our 
        consumers pay disproportionately for the financial rescue of 
        PG&E. It is possible for the state to both purchase these 
        assets at a premium, and avoid increasing costs associated with 
        transmission, either through targeting the acquisition premium 
        to IOU consumers or through other savings. There is a point, 
        however, when the purchase price will outstrip the anticipated 
        value. We hope that the purchase price stays within the range 
        that does not require transmission price, or tax, increases to 
        our consumers.
 Interconnection Agreements--NCPA and its members have 
        interconnection agreements with PG&E that outline the terms and 
        conditions of our transmission service. It is our expectation 
        that any final agreement to purchase the IOU transmission 
        system should respect and extend existing interconnection 
        agreements.
 System Upgrades/Repairs--We believe the state should give full 
        consideration to the upgrades and repairs necessary in the 
        existing transmission systems of the IOUs. Any final 
        negotiations over price should reflect those anticipated 
        projects and costs. The publicly owned electric systems of 
        California, through TANC and SPPCA, have offered to assist in 
        this endeavor.
 ISO Reform--We continue to work on reaching an agreement to 
        participate in the Cal-ISO or some future, similar 
        organization. To date, the complexity and costs associated with 
        Cal-ISO membership prevent municipal utilities from joining. 
        Reform of the Cal-ISO should be tied to a state purchase of the 
        IOU transmission system.
    We believe these issues can be adequately and fairly addressed, 
either through the purchase terms or through Federal Energy Regulatory 
Commission review of the asset disposition under Section 203 of the 
Federal Power Act.
    Fair, open access to the transmission system is critical to our 
industry and consumers as a whole. NCPA believes that it is possible to 
use the IOU's financial situation to accomplish this public good. We 
agree that this opportunity should not be missed and that a reasonable 
framework can be designed to accomplish both goals.

4. Transmission Additions
    The transmission system within the State is woefully inadequate. We 
believe that the current system must be both upgraded and expanded. One 
critical component of this effort is Path 15--the major link between 
northern and southern California.
    Had the current Path 15 transmission constraint been eliminated, we 
could have avoided the rolling blackouts that Northern California 
experienced last June and this January. Relieving this constraint--
building a third, 95-mile line between Los Banos and Gates--has been 
identified by the Cal ISO as the top transmission priority in the 
state.
    Given the financial position of PG&E and the uncertainty about 
transmission ownership, alternative approaches are needed to fast-track 
this project.
    It is NCPA's belief that, given the current situation, the best and 
fastest way to move this project is to support the federal Western Area 
Power Administration (WAPA) as it exercises its role as the lead agency 
for the environmental assessment for the project. WAPA performed 
initial environmental and engineering work on the project. That 
experience and familiarity with Path 15 will expedite the process. 
Additionally, WAPA should be authorized to work on the design, 
engineering and land acquisition activities for this project. In 
addition, WAPA's ability to acquire rights-of-way could help to 
expedite the construction process.
    It is not necessary for WAPA to either construct or own the line. A 
myriad of options are available. However, the line needs to be built, 
and WAPA is in a position to help start the process more quickly than 
any other entity.
    At this time, we, cooperatively though TANC, are working with the 
State to secure support and financial assistance. However, we believe 
that federal support is also warranted and appropriate. The 
arrangements with TANC and WAPA, which were the last successful 
constructors of high-voltage transmission in the State, give the 
highest probability of success for this project.

                      APPROPRIATE FEDERAL ACTIONS

    I understand that the response of this Administration and many in 
Congress has been for California to get its house in order before 
looking for federal assistance. I believe the State is taking positive 
steps, however, I believe federal action is also needed.
    In the short-term, NCPA supports the need for price stabilizing 
rates for the entire western wholesale power market. Consumers and the 
economy are bleeding, and we must apply a tourniquet. Imposing price 
stabilizing rates is neither a cure, nor a long-term solution. However, 
it is an appropriate step to provide interim relief until the long-term 
steps can be taken to support a competitive wholesale market. We are 
willing to work with all parties to design this interim measure in a 
manner that will maintain incentives for building new generation. I 
understand some have raised concerns about the treatment of non-
jurisdictional utilities in any FERC-applied interim rate. I would urge 
you to consider the facts and not be distracted by any jurisdictional 
red herrings:

 Municipal utilities make a small share of total wholesale 
        market sales in California--with the majority of our generation 
        dedicated to serving native load;
 NCPA members are net purchasers on the wholesale market. We 
        must attempt to recover our variable, fixed and opportunity 
        costs when we make sales to offset the high prices we pay when 
        we are purchasing. To do otherwise would be fiscally 
        irresponsible.
 Many of our sales have been at the request of the Cal-ISO or 
        PX to provide needed power--and these sales have reduced our 
        ability to operate our plants to serve native load consumers 
        this Summer;
 We were early and consistent supporters of interim price 
        protections--and have pledged to voluntarily abide by any 
        interim pricing structure.
    Another near-term step that the federal government can take is to 
support the upgrades to Path 15 through clear authorization for WAPA to 
participate in this project as a partner, and by providing the initial 
funding that would be fully repaid by either the state, or the ultimate 
owner of the line.
    I hope, however, that we look beyond short-term ``band-aids'' and 
take actions that address the underlying problems that plague the 
Western market.
    The recent California experience has taught us a number of critical 
lessons:

 Without clear authority on RTOs, FERC accepted inadequate, 
        inferior and flawed filings from the Cal-ISO. FERC needs clear 
        authority and direction on RTOs to promote truly effective, 
        regional and independent transmission management.
 While California would be the 6th largest country in the world 
        based on GDP, it is not big enough to serve as a stand-alone 
        energy market. Markets are regional, and the transmission 
        system must be run in a manner that supports interstate 
        commerce.
 There are numerous transmission constraints in California that 
        have contributed to the rolling blackouts and locational market 
        power. While the Cal-ISO identifies these constraints, it has 
        no authority to take corrective action. Current transmission 
        constraints--like Path 15--must be eliminated. Ultimately, RTOs 
        should have clear authority and responsibility to plan and 
        expand the transmission grid. Federal transmission siting 
        authority is also needed.
 Creation of contrived markets--within the PX and ISO--don't 
        work and exacerbate market problems. While there is a need for 
        institutions to ensure independent grid management, these 
        institutions should have minimal market involvement.
 Markets do not work well when there are too few market 
        participants and scarcity of supply. FERC must establish clear 
        and effective rules to promote sustainable competitive markets 
        prior to granting authority for market-based rates.
 While there are conflicting accounts on whether generators 
        have exercised market power, manipulated supply and bids, taken 
        advantage of poorly designed market rules or simply profited 
        from scarcity, it is clear that there is little public 
        confidence in the current system. Reformatting FERC's role so 
        that it is an effective market monitor, with clear authority 
        and direction to detect and correct market manipulation or 
        abuse, is needed.
    Congress and FERC have exclusive authority over interstate commerce 
in the sale of electricity. The interstate market is not currently 
working and will not sustain effective competition. It is critical that 
the structure and mechanisms necessary for a competitive market be 
established.
    NCPA is a participant in the Electricity Stakeholders--a diverse 
coalition supporting wholesale market reforms--and urges the Committee 
to adopt legislation consistent with the Stakeholder principles.

                               CONCLUSION

    NCPA remains committed in its belief that a competitive market is 
beneficial to all consumers. However, such a market will not 
miraculously appear simply by declaring markets deregulated. As the 
California experience has demonstrated, deregulated markets that lack 
the structure to support effective competition will simply cause 
consumer and economic hardship.
    California has begun to take steps that, if properly executed, can 
help resolve the current crisis. But Congress cannot simply pass the 
buck and watch the fall-out. Federal action must also occur. As a 
first-step, FERC must re-impose regulatory discipline in the 
uncompetitive western power markets. But we cannot stop there. Congress 
must also provide FERC with necessary guidance and authority to promote 
and monitor effective competition in the wholesale market.
    NCPA looks forward to working with the Subcommittee in promoting 
both of these objectives.

    Mr. Barton. Thank you, Mr. Pope. We now want to hear from 
Mr. William Hall, who is the Vice President for the Western 
Region for Duke Energy North America, and he is headquartered 
in Morro Bay, California. Your statement is in the record in 
its entirety, and we recognize you for 8 minutes to elaborate 
on it.

                  STATEMENT OF WILLIAM F. HALL

    Mr. Hall. Thank you, Mr. Chair and members of the 
subcommittee. My name is Bill Hall, and I represent the 
California assets. I am based in California, and I have lived 
there for 3 years. I represent a company who purchased those 
facilities that is based in North Carolina, and I have a North 
Carolinian accent. I have had the chance in the last few years 
to travel up and down the State from San Diego to Sacramento, 
participating in numerous public forums and hearings, and have 
felt first-hand the frustrations, the anxiety and, at times, 
the anger of Californians over the situation they are in. Duke 
has continued to offer solutions and supply and risk-management 
tools to the utilities and to the State to help mitigate this 
issue as soon as possible. We have a long-term commitment to 
the State.
    I want to talk about some short-term actions we think need 
to take place, as well as long-term, a few comments about who 
we are in California, very quickly. We own four fossil 
generating plants in the State, with a combined capacity of 
about 3,300 megawatts, about 4 percent of the total capacity 
available in the State. Those plants range in age from about 30 
to 50 years.
    Our plants produced in the year 2000 50 percent more 
generation than they did in 1999, and we have in plants--and we 
have actually permitted through Mr. Keese's agency, a project 
at our Moss Landing Facility where by the Summer of 2002 we 
will have 1,060 megawatt combined-cycle facility in service. So 
we are investing in excess of $1.5 billion to bring new supply 
on-line over the next few years to help the situation in 
California. We also have plans to add within the West 6-7,000 
megawatts of generation over the next three to 4 years.
    Now, let me talk a minute about short-term actions. As you 
have heard from the other panel members, we certainly have a 
significant situation that we have already experienced 
blackouts and we think certainly the Summer of 2001 and 
potentially 1902 could be significant in terms of additional 
blackouts, and we have some thoughts around what needs to be 
done there.
    First of all, Duke recommends a key Federal and State 
agency should immediately form a Crisis Team made up of key 
stakeholders capable of monitoring energy needs in the West, 
and with the right people who can bring to bear the needed 
actions to resolve problems as they arise this summer. We think 
it is critical that Federal and State organizations work 
together on this matter.
    Next, we do have some units, some plants, that are 
constrained due to emission limits. And we do applaud the 
Governor and his Executive Orders to require the air and water 
districts to work with us to see how those constraints could be 
lifted. Mr. Lloyd and his organization have been very 
cooperative, and we are making substantial progress. But at 
times, we do have situations where Federal and State agencies 
collide. U.S. EPA, for example, at one of our plants, they have 
the overriding constraint on that plant, and we are going to 
need the support of Region IX in that effort, and we ask the 
subcommittee to help with Region IX in terms of the sensitivity 
and need to rush forward with providing relief. And we are only 
asking for relief in stage emergency events to help produce 
more megawatt hours into the system.
    We think it is going to be a real challenge to bring new 
significant generation on-line this year. We appreciate Mr. 
Keese's comments, but we also urgently ask that, again, Federal 
and State agencies, in advance, identify where there are 
conflicting issues, resolve those so once projects get into the 
permitting process they don't buck up against those obstacles 
in the process, they are resolved up-front and we can quickly 
move through.
    And, finally, the only real chance in California to 
minimize blackouts this summer is through demand-side 
management. The Governor has instituted many initiatives to 
help out both the State agencies and consumers in California. 
We ask the Federal Government, who has a significant presence 
in California, to help with conservation, as well. The Governor 
has a goal this summer of shaving 3,700 megawatts off the peak 
during the summer months, and that is going to require 
everybody's efforts.
    Now let me talk about long-term actions--and long-term 
means over the next 3 years because we think, fundamentally, we 
have got to get between 15-20,000 megawatts of generation in 
service by 2004 in California, and obviously other generation 
in the West.
    We think if a cohesive and successful program is to be 
undertaken, the following issues must be addressed. We must 
stabilize the existing business climate situation in 
California. We must deal with the deficiencies in gas and 
electrical transmission; deal with the robust wholesale markets 
and retail markets; continue efforts to streamline permitting, 
and look for a Regional Transmission Group which will help the 
West. And I will talk about a couple of those very quickly.
    As you know, the Governor is contemplating the acquisition 
of the Utilities Transmission Grid as one means of helping them 
with their debt situation. Duke takes a neutral position on who 
owns the transmission grid, but we do ask FERC to work with 
California to ensure that any transfer of utility transmission 
assets will be conditioned to ensure open access, and that 
California will integrate itself into a larger regional 
transmission organization. You get consistent policy, you get 
consistent pricing, and you get consumers who have more options 
to go out and manage their portfolio of needs. So, we ask that 
the transfer be conditioned such that no one can interfere with 
interstate commerce or hamper the development of an effective 
regional market.
    Energy infrastructure issues: We have talked already quite 
a bit about supply. Again, we encourage Federal and State 
agencies to work together to streamline the process. A good 
example is the Endangered Species Act, where the Federal 
Government has certain species on their list, the State 
doesn't, and we get caught in the middle trying to sometimes 
deal with that and determine which agency prevails and what 
sort of monitoring programs have to be put in place.
    Also, the California ISO has identified most of the 
significant bottlenecks on the electric transmission grid in 
California, the most famous being the Path 15 constraint, and 
we ask again that FERC and the State agencies work collectively 
together to determine how we can make upgrades as quickly as 
possible.
    Let me also be candid here that while supply is difficult 
to site anywhere in North America, certainly new transmission 
projects are even more difficult. Nobody wants wires in their 
backyard. So we also recommend that while we look at building 
new transmission infrastructure, we look for other creative 
ways as well, and that is to upgrade wires to strategically 
place power plants on the grid near load centers, to get the 
power into the needed areas of the State because building new 
transmission projects will be difficult in California.
    Intrastate gas transmission is of real concern. We have 
already had rotating curtailments at our plants in Southern 
California. There are simply not enough pipes and storage 
capacity to supply the increased electrical generation from our 
plants in Southern California, and the increasing core loads in 
Southern California as well. So we think it should be a top 
priority to build the infrastructure of gas system because, as 
we build new power plants in the State--and they are natural 
gas plants--we have got to be able to get the gas to the 
plants, and that is a real concern. Again, FERC and the State 
agencies, Public Utilities Commissions, it is important that 
they work together in that manner. The FERC Order of March 14 
begins the initial steps to create incentives and to reduce 
obstacles to site both electric transmission and natural gas 
upgrades. So we applaud FERC for their efforts.
    Certain, a Utility Stabilization Plan, which Mr. Kline 
talked about, is very critical. And the Governor and Sacramento 
are working on that effort. We think it is very important that 
we get loads--in this case, utilities--out of the spot markets 
and into forward markets to mitigate their risk to wholesale 
market volatility. In hindsight, certainly that was something 
that was lacking. The laws or the regulations were designed 
such that couldn't be done. And companies like Duke who do that 
on the output side of our facilities, we manage our risk by 
selling in the forward markets. Certainly, to protect consumers 
in competitive markets, forward contracting should be one of 
many products that they use to mitigate their risk to market 
volatility.
    So those are thoughts that we have. That concludes my 
remarks. We look forward to working with both Federal and State 
agencies to help solve the problems in California and the West. 
We have a long-term commitment and we look forward to working 
with you. Thank you.
    [The prepared statement of William F. Hall follows:]

PREPARED STATEMENT OF WILLIAM F. HALL, VICE PRESIDENT, WESTERN REGION, 
                       DUKE ENERGY NORTH AMERICA

    Mr. Chairman and Members of the Subcommittee: Good morning. I am 
Bill Hall, Vice President of Duke Energy's California operations. I 
want to thank the members of this subcommittee for inviting Duke to 
your hearing. As we collectively explore needed solutions for 
California and the west, it is vitally important that all stakeholders 
be heard in this process. I am a career employee with Duke Energy, and 
am now based in California. So, I think I not only bring an industry 
perspective to these discussions but a perspective that feels firsthand 
the emotion and confusion over the events of the last 12 months. From 
its initial entry into the California market in early 1998, Duke has 
continued to offer solutions and ideas to the State's energy woes. 
Today, I would like to offer Duke's thoughts on both near and long term 
issues and our ideas for resolution.

Background on Duke's California Operations
    Duke owns four fossil fired generating units in California, with a 
combined capacity of 3,300 megawatts ranging in age from 30 to 50 
years. In December 1998, long before the hint of an energy crisis, Duke 
announced its intentions to develop an additional 1,500 megawatts of 
combined cycle generation at an investment in excess of $1.5 billion. 
In addition, Duke announced it would spend in excess of $100 million to 
retrofit its existing assets with environmental control equipment and 
perform upgrades to enhance reliability and flexibility. Our commitment 
to California and the west is long term, we have plans to add an 
additional 6,000 to 7,000 megawatts of generation in the west over the 
next 3-4 years.

What Happened in California
    The events of the last twelve months are well documented but I 
think it's important to highlight a few key points. First, we should 
remember that during the first 2 years of market operations, power 
prices remained at or below initial expectations. In fact, on many 
occasions power was sold during off peak hours at $0 per megawatt hour, 
and during on peak at values typically in the $20-50 per megawatt hour 
range. Why did this occur? The answer lies in market fundamentals, 
there was an adequate balance between supply and demand. With adequate 
supply to meet demand market prices remained at very attractive levels. 
The state's utilities were able to pay down their stranded costs while 
under a state mandated retail rate freeze by procuring their power 
through the various available spot markets at prices well below the 
rate freeze. However, this strategy failed miserably in 2000 when 
wholesale prices exceeded the fixed retail tariff rates and utilities 
had no hedging tools available to mitigate their exposure.
    Over the last ten years California has enjoyed significant growth 
in its economy. Since 1996 electricity demand in California has grown 
by 25% while supply has grown about 6%. Up until the summer of 2000 its 
economic growth and thirst for energy had been met through abundant 
electricity imports, and weather patterns that produced abundant winter 
rain and snowfalls and mild temperatures in the summer months. So 
California's decision to rely heavily on cheap available hydroelectric 
power from the northwest in the summer months and relatively cheap 
fossil generation available from the southwest during the winter months 
instead of building an adequate in state supply seemed prudent. This 
combination of favorable weather patterns and abundant cheap power 
lulled everyone in the west into a false sense of security.
    Not only has California benefited from a robust economy, but in 
fact most western states have seen their economies grow at similar or 
even higher rates. Just last week census figures were released that 
showed Nevada's population has grown at a faster rate that any other 
state in the nation over the last ten years. In the summer of 2000, the 
tremendous economic growth enjoyed by many western states coupled with 
a very dry 1999/2000 winter and high seasonal temperatures produced 
scarcity of a very valuable commodity . . . electricity. I have not 
encountered anyone who has yet to profess his or her surprise at the 
magnitude of the imbalance between supply and demand. The market is 
reacting to the severe shortage of electricity supply and the resulting 
fierce competition for this scarce commodity.
    In addition to the scarcity of electricity, California is now 
experiencing natural gas shortages due to the lack of available 
intrastate gas transmission infrastructure. With the passage of clean 
air laws in the early 1990's most California utilities switched to 
burning 100% natural gas to meet compliance, as burning fuel oil 
produced higher levels of emissions. With the increased demands on gas 
fired generation the past twelve months, Duke's California plants 
produced 50% more electricity in 2000 than in 1999, the gas 
transmission system has been severely strained causing curtailments to 
gas fired plants in southern California, and resulting price spikes of 
natural gas that translate into higher electrical production costs.
    California's energy infrastructure is severely challenged and must 
be dealt with immediately and effectively. While efforts are being made 
at the state level to improve the process, permitting and building new 
power plants and gas transmission is a tedious and laborious effort and 
will not be done overnight. As an example, at one of Duke's existing 
sites where we are proposing to modernize the site with new gas fired 
combined cycle technology it is anticipated to take 5 years to permit 
and build the new plant due to NIMBY impacts. While there are numerous 
opportunities to repair market policies and rules, this effort will be 
to no avail if we collectively do not address the very basic of market 
fundamentals, inadequate energy infrastructure.

Needed Solutions
    The very nature of problem solving in this business requires 
combinations of legislative, regulatory and investment schemes, all of 
which involves multiple players including federal and state 
governments, regulatory policy makers, suppliers and financial 
institutions. Already the California legislature has introduced in 
excess of 160 uncoordinated and conflicting bills, which send very 
mixed messages to existing and potential suppliers. In order to resolve 
these very complex issues California and the west, working 
cooperatively with federal and state agencies, must commit itself to a 
long term integrated energy policy that improves the investment climate 
to stimulate supply buildup, puts the necessary legislation and 
regulatory policy in place, and stabilizes energy prices for consumers. 
If we are unsuccessful in our efforts we will see an immediate retrench 
to a regulated environment. Even with the level of emotion and anger 
all of you have seen coming from California in the last year, I must 
say that those who ultimately desire to see competitive, unencumbered 
markets in the west far outweigh those who seek a return to regulation. 
However, as a resident of California for the last 3 years let me say 
unequivocally that if we do not restore stability to the market in an 
expeditious manner consumers will demand a return to regulation. 
Remember, the events of last summer only exposed 10% of the state's 
population directly to the volatility of the wholesale market. Already 
we see a ``slowdown de-regulation'' ripple effect moving from the west 
to the east.
    In Duke's opinion the elements of a comprehensive energy policy 
must include at least the following:

 Permit and build new supply quickly
 Institute appropriate retail tariff reforms that signal to 
        consumers the need to alter their consumption, while providing 
        them choices and tools
 Infrastructure improvements (electric and gas)
 Move towards a regional transmission framework with 
        appropriate market reforms
 Achieve these objectives while balancing the needs of the 
        environment
    I will address Duke's thoughts on needed solutions in two 
categories; the first being the very immediate and impending crisis 
this summer, and second what needs to be done in the long term though 
long term should not be viewed in the traditional sense of elapsed 
time. Additionally, I will comment on those areas where the federal 
government can assist California and the west in resolving its energy 
problems in a timely manner.

Summer 2001 Outlook--Immediate Action
    While there are varying opinions as to the potential severity of 
this summer's pending crisis we should not make the mistake of pinning 
our hopes on the cooperation of weather and new supply which has yet to 
manifest itself. The signs of impending supply shortages are evident, 
lack of rainfall and snow pack in the Pacific Northwest. The California 
ISO has projected this summer's peak capacity will be about 10% shy of 
peak demand. We must seek every way in which to responsibly free up 
constrained megawatts, put new generation on the ground, and institute 
aggressive conservation measures. Duke recommends the following actions 
be taken immediately:

 Key federal and state agencies should immediately form a 
        crisis team capable of monitoring energy needs in the west and 
        when required bring to bear needed actions and decisions to 
        avert potential blackouts.
 In concert with the Governor of California's executive orders 
        to make available potential constrained megawatts at existing 
        facilities due to environmental regulations, the US EPA and 
        state agencies should seek resolution on existing emission 
        constraints that allow variances during periods of critical 
        short supply. Many existing facilities are mandated by federal 
        EPA Title V programs. Under normal hydro and weather years most 
        plants can operate within these limits, but the projected 
        increased demands on generating facilities in 2001 will result 
        in premature curtailments of generation. Appropriate and sound 
        methods should be developed that allow plants to operate in 
        critical periods while ensuring appropriate and reasonable 
        mitigation measures are employed to offset any increased 
        emissions.
 It is highly unlikely that any new significant generation can 
        be brought on line this year. While the Governor of California 
        has approved new legislation and issued executive orders to 
        streamline plant permitting the reality is there is little 
        hardware to bring into the State and the current regulatory 
        instability will deter suppliers from taking significant 
        financial risk. However, where new generation permitting is 
        feasible this year, then both federal and state agencies should 
        ensure adequate resources are made available to expedite permit 
        processing, both the federal and state government should make 
        this the highest of priorities.
 The only real chance California has this summer to avert 
        blackouts is through demand side management. Duke applauds the 
        Governor's initiatives over the last several months to incent 
        industry, small business and residential consumers to employ 
        energy efficiency programs and curb consumption during peak 
        demand periods. The Governor has a goal this summer of reducing 
        on peak demand by 3,700 megawatts. However, as long as 
        consumers are locked into fixed rates I'm afraid we will not 
        see an appropriate level of response to curb consumption. Let 
        me be clear that Duke is not advocating consumers be exposed to 
        wholesale price volatility with no protection. In conjunction 
        with the phase out of retail rate caps, utilities should be 
        given the ability to mitigate their price exposure and 
        consumers should have available tools to monitor and make wise 
        energy choices.
    We should also be prepared to enact these same measures in 2002, as 
no significant new supply in the west will come on line until 2003.
Starting the Process to a Long Term Comprehensive Energy Policy--The 
        Solution
    There are many pieces to the energy puzzle, some must be identified 
but all must eventually fit together into an integrated policy for the 
west. California is not a market place unto its own. In fact, 
California through its own decision in the 1980's is heavily dependent 
on other west markets for its energy needs. While California should 
take immediate and decisive steps to reduce its dependence on imports, 
the very nature of energy supply in the west would not make it 
practical or cost effective for California to become wholly self 
sufficient. And as a practical matter it simply isn't technically or 
politically possible. So, a west region energy policy needs to take 
into account the overriding fundamental need for a region wide 
marketplace. Duke offers the following comments on the needed elements 
of a region wide energy policy:

 First and foremost California must restore stability to its 
        market, principally by restoring the utilities to financial 
        health as soon as possible. As you know California recently 
        passed legislation (AB1X-1) which provides for the State 
        Department of Water Resources to ``step in'' and cover the net 
        short position (difference between projected load and their 
        self provided generation) of the utilities, both for near term 
        power and long term power contracts. While this is major first 
        step, it is only a first step. The state is expending 
        approximately $50-70 million per day on power from the spot 
        markets, with no regulatory relief to collect these 
        expenditures from ratepayers. The California Public Utilities 
        Commission (CPUC) must act now to create sufficient revenues 
        from retail rates to cover the state's expenditures. Just this 
        past Friday the California State Senate Budget Committee 
        informed the Governor's office that it would suspend 
        appropriating additional funds from the state's budget until 
        the CPUC dealt with the recovery matter.
      Next, the state must determine a method that will allow the 
        utilities to pay off their past debts. As you maybe aware the 
        State is contemplating the purchase of the utilities' 
        transmission assets to at least retire a portion of the 
        utilities' debt. Duke takes no position on the potential sale 
        of the transmission grid to the State, however it does expect 
        FERC approval of any transfer of this asset conditioned on 
        commitments of fair and open access. The transfer of this asset 
        cannot be permitted to become a means to interfere with 
        interstate commerce or hamper the development of an effective 
        regional market.
 Build more power plants as quickly as possible. Some new 
        capacity will be online in neighboring states for the Summer 
        2001, but these supplies will probably be absorbed to meet 
        local needs for 2001 and beyond. California's internal demand 
        growth is growing at a rate of at least 1,000 megawatts per 
        year. To provide for that growth and an adequate reserve 
        margin, public and private generators must construct 
        approximately 15,000 to 20,000 megawatts in California by 2004. 
        In addition, the US Department of Energy should hold 
        discussions with Canada and Mexico to determine if and how 
        available native generation supplies can be sold into the west.
      The permitting process of new power generation projects needs to 
        be streamlined. Duke applauds the Governor for his actions to 
        provide legislation that expedites the process. However, there 
        are cases where federal and state environmental requirements 
        collide and slow down the process. One example is differences 
        between the federal Endangered Species Act (ESA) and the state 
        ESA. In the case of one species, it was given federal 
        ``endangered'' status, the highest level under the federal ESA, 
        but it has no state protection status. Even though it has been 
        proposed for federal delisting, it remains on the list 
        requiring and required Duke to spend months of additional time 
        performing sampling studies. Federal and state agencies should 
        meet and determine where differences exist that impede new 
        plant permitting and then devise acceptable solutions.
 Eliminate energy infrastructure deficiencies. Building more 
        power plants will not help if the electrons cannot get to 
        loads. Transmission congestion has frequently occurred at the 
        seams between California and other western states, and between 
        each of the three utilities. The best example is the January 
        2001 rolling blackouts that occurred in northern California, 
        due in part because of the well-known ``Path 15'' constraints 
        which prevented generation in southern California and the 
        southwest from flowing north. The California ISO has identified 
        most of the bottlenecks. The challenge will be to address them 
        quickly. It is imperative that FERC, other states and 
        California work quickly to provide solutions to upgrading an 
        aging and weak grid. The US Department of Energy should direct 
        the Bonneville Power Administration and the Western Area Power 
        Administration to identify any action they could pursue to 
        address transmission bottlenecks. A major impediment to new 
        additions will be local community resistance, which is even 
        more pronounced than resistance to power plants. In conjunction 
        with new additions, the industry should look for other 
        alternative more friendly measures such as wire upgrades, and 
        effective placement of power plants on the grid.
      Even more ominous for California are impending constraints on the 
        intrastate natural gas system that could impede the delivery of 
        fuel. In the winter of 2000/2001, the combination of high 
        electrical generating loads and high core loads strained the 
        gas infrastructure. San Diego Gas and Electric curtailed power 
        plants in its service area on numerous occasions. It is 
        expected that gas transmission infrastructure in San Diego this 
        summer will be inadequate as additional load is added from 
        Mexico generating plants. Adding new power plants to the 
        existing gas system in California requires careful gas supply 
        planning, including consideration of new gas pipeline capacity 
        to California, the intrastate gas pipeline system, and probably 
        significant expansion of gas storage capacity in Northern 
        California and San Diego.
      Duke applauds the actions taken by FERC in its Order of March 14, 
        2001, to remove obstacles to permitting and constructing new 
        electric and gas transmission infrastructure.
 Need for regional price stability and transmission grid. 
        California must work with the western states to develop and 
        enhance a regional transmission grid that maximizes effective 
        resource utilization and minimizes costs to consumers. 
        California as a net importer of electricity stands to benefit 
        from a regional market. To facilitate regional transmission 
        planning that would insure power could reach its markets 
        without undue congestion, California transmission owners (state 
        agencies, utilities, municipalities) should be encouraged to 
        form a Regional Transmission Organization that could include 
        the Northwest, Intermountain, and Desert Southwest regions. Any 
        transfer of transmission assets should require the integration 
        of those assets into a larger transmission framework that 
        complies with FERC 2000. Regional transmission systems would 
        promote consistent and fair policy, tariffs, promotes open 
        access, and would prevent power leaving one area for higher 
        prices in another.
 Retail markets must be given the opportunity to respond to 
        energy price signals. As long as retail price caps exist, there 
        will be no demand response to elevated power prices. However, 
        as retail markets are de-regulated, consumers must be given 
        adequate assurances that their exposure to wholesale market 
        volatility is mitigated. This can occur through the use of 
        fixed term power supply contracts in conjunction with the 
        utilities self provision of still a large portfolio of 
        generation and an appropriate level of procurement from spot 
        markets. This will create a balanced portfolio of energy 
        products but at the same time allow electric service providers 
        to reenter the marketplace and compete with the default service 
        provider. In addition, with education and tools to make wise 
        choices consumers can then begin to respond and dictate the 
        terms under which they desire to procure electricity, this 
        called the elasticity of demand.

Conclusion
    As I stated throughout my testimony today, Duke has a long-term 
commitment to California and the west region. I can not emphasize 
enough how crucial it is for California to integrate itself into a 
larger electric wholesale market. Talk of commandeering instate supply 
assets sends a chilling signal to new investment and spurs retaliatory 
measures from other border states who have historically sold their 
native generation to California. Already we see Nevada and Arizona 
contemplating legislation to give their state's the right of first 
refusal as a condition for any merchant generator to build power plants 
in their states.
    Finally let me say I'm pleased to see FERC's request for a 
convening of west region political and regulatory leaders on April 6, 
however this is much too late. If we are to solve these very complex 
energy issues in a timely manner, then all federal and state entities 
who can influence a successful outcome must make this the very top 
priority within their administrations.
    Let us all work together to solve this crisis just as this great 
country has dealt so effectively with other challenges of the 
past.Thank you.

    Mr. Largent [presiding]. Thank you, Mr. Hall. We are going 
to implement our own rolling blackout here in this subcommittee 
hearing. Due to the unpredictable nature of Congress, we have 
three additional votes that are about to occur. And so we are 
going to issue our rolling blackout until 11:30, when we will 
reconvene and hear the final two witnesses, and proceed with 
the questions.
    So, I apologize, but we will be back. Thank you.
    [Brief recess.]
    Mr. Barton. The subcommittee will please come to order. We 
will now hear from our next witness, Dr. Larry Makovich, Senior 
Director for the Cambridge Energy Research Associates. Dr. 
Makovich, your written statement will be included in the record 
in its entirety, and we recognize you for 8 minutes to 
elaborate on it.

                STATEMENT OF LAWRENCE J. MAKOVICH

    Mr. Makovich. Thank you, Mr. Chairman and members of the 
subcommittee.
    The real lesson of the California power crisis is that 
there is a right way and a wrong way to set up a power market. 
California's power crisis is the result of poor market design, 
which included some serious structural flaws in these markets 
right from the start. And it is these flaws that created the 
5,000 megawatt shortage in supply that exists in the State 
today. Unfortunately, actions taken so far do not address the 
underlying structural flaws of this market and, in some cases, 
these actions are likely to make matters worse.
    California should fix its market flaws instead of further 
distorting the market by taking over the transmission sector 
and entering into long-term energy contracts that defer the 
cost of this crisis into the future.
    The crisis in California arose because people believed that 
electric markets were just like other commodity markets--when 
demand and supply tightened up, prices would gradually rise, 
stimulate investment and keep supply and demand in balance. 
That notion was wrong. The power business is complex and has 
unique characteristics. There has been research done over many 
years that indicate if you are going to set a power market up, 
there are a minimum set of structural elements that need to be 
in place, and California simply didn't set its market up 
properly.
    So, it is no surprise that 5 years ago, when this 
restructuring legislation was passed, when this flawed market 
structure was put in place, the California economy has grown 
over 32 percent, electricity consumption has gone up by 24 
percent, generating capacity has actually declined.
    Why wasn't generation added? When California set up its 
market, it did many things, but not everything, to set it up 
properly. Two major flaws prevented people from building power 
plants. One was something that people have talked a lot about 
here, which is the siting and permitting process was simply too 
burdensome, and it is not clear today that that problem has 
been solved. It looks like California, with all of its current 
focus on this, and effort, may actually complete by this summer 
versus last summer, enough capacity to just satisfy 1 year's 
growth in demand, let alone make any closure on this shortage.
    Now, besides being difficult to build power plants, one of 
the key problems here was it was not profitable to build power 
plants. Both Mr. Keese and Mr. Freeman have noted that power 
prices were in the past too low in California, and that is the 
result of one of the structural flaws in this market.
    To set up a power market, you really need to set up markets 
for two commodities, energy--the megawatt hours, and capacity--
the megawatts. California set up a market for energy, but it 
did not pay for the capacity. There was no market for 
megawatts.
    The energy market they set up worked the way it ought to 
work. What it did was, it kept the market in balance in the 
short-run. Most of the time, electric demand is well above the 
amount of capacity you have, so the problem in any hour is to 
figure out which plants ought to be running to provide the most 
efficient electric supply. So, an energy market that is 
clearing on the basis of fuel and operating costs does the job 
of efficiently supplying power at any point in time, but 
because that market should and does clear on short-run cost, it 
doesn't provide a price signal that is high enough to support 
new plant development.
    And so, as you look back through time over the 1995 to 1999 
period, the price of power that cleared in this market was $14-
31 a megawatt hour. That is less than half of what you would 
need to justify new power plant construction. I mean, the 
amazing complacency about California was no one complained the 
prices were too low when there was very clear evidence that 
this market was tightening, and nobody had the incentive to 
build power plants because it was neither profitable nor 
possible to do so.
    Now, this energy market was very competitive over the past. 
It continued to clear at short-run cost when it was in surplus, 
when it came into balance in about 1998, and even when it moved 
into shortage in 1999, and it was only when in 2000, in the 
summer, we had a severe shortage that, of course, the prices 
exploded, and they went from being too low to being at 
multiples of what is necessary to justify power plant 
development.
    Now, this has created a very acrimonious debate regarding 
price gouging, but it is very, very clear--prior to the 
shortage, the energy market was very competitive and produced 
prices based on variable cost.
    Now, when you get into a shortage and you are talking about 
a commodity that customers regard as a necessity, if not a 
basic human right, and for which there are very few 
substitutes, you don't need market manipulation to have all of 
this demand chase far too limited supply and drive the price 
up.
    So there are no features in the California market with 
regard to supplier concentration or production agreements that 
would lead us to believe that this was a problem of market 
structure and collusion that led to gaming and higher prices. 
This is simply a shortage, and that is the crux of the problem.
    Now, what is just and reasonable? If a power market 
produced prices that did allow you to cover the cost of new 
supply, then it is very clear the prices we saw in 1995 through 
1999 were unreasonably low. Now that we have created a 
shortage, the prices are unreasonably high.
    It would be a mistake to argue that because prices were low 
in some periods and then too high in others that, on average 
over some period, we have got reasonable prices. The problem 
here is these wide swings in prices were both unreasonable, 
they create an unfair cost recovery because customers and their 
consumption patterns change through time, so we have had 
subsidized consumption in the past and now we are burdening the 
customers of today with paying for the prices that were too low 
in the past.
    A properly structured power market ought to pay for 
capacity, and that requires that if you are going to buy 
energy, you also have to buy capacity. That can be done through 
a number of mechanisms including the right type of long-term 
contract, but California has signed volume-based contracts 
which are likely to create enormous take-or-pay obligations in 
the future. If the State owns the transmission network, the 
vital linkage between buyers and sellers in this marketplace, 
it will further distort the market. Price caps are very 
difficult to employ. The current FERC price caps based on 
average incremental cost of the most expensive units are going 
to create market distortions. At best, those most expensive 
units are in different operation, most likely they are 
beginning a perverse incentive to shut down when they feel 
their prices are above monthly averages.
    The recommendations here are clear. We need to set these 
markets up with independent, expert governance structures. We 
need to align wholesale and retail deregulation. You can't 
deregulate wholesale without retail. You need energy and 
capacity markets. You need to allow entry, set goals, and 
enforce siting and permitting targets, and you need to give 
people the right incentives, which means public ownership of 
transmission price caps are going to be a problem. Thank you.
    [The prepared statement of Lawrence J. Makovich follows:]

 PREPARED STATEMENT OF LAWRENCE J. MAKOVICH, SENIOR DIRECTOR FOR NORTH 
     AMERICAN ELECTRIC POWER, CAMBRIDGE ENERGY RESEARCH ASSOCIATES

    Lawrence J. Makovich is Senior Director for North American Electric 
Power at Cambridge Energy Research Associates (CERA) and heads CERA's 
Global Power Forum. His recent writings include: ``Beyond California's 
Power Crisis: Impacts, Solutions, and Lessons,'' ``A Crisis by Design: 
California's Electric Power Crunch'' and ``Regulation versus Market 
Competition: Is Electricity Restructuring Changing Course?'' His recent 
studies include, High Tension: The Future of Power Transmission in 
North America and Electric Power Trends 2001.
    When California passed its electric power restructuring law in 
1996, it prided itself with being on the leading edge of deregulation 
in the United States. At that time, the state took on the daunting task 
of power deregulation for good reasons. The state's power prices were 
among the highest in the country, and the industry was mired in a 
complex regulatory system that promised to lead to still higher prices. 
The hopes were that deregulation would deliver lower prices and that 
California would be a model for other power markets to follow. That's 
not what happened. The results, instead, are today's power crisis: 
shortages, skyrocketing prices, rolling blackouts, financial distress 
and political turmoil.
    Today, one of the biggest problems in California is that no one can 
agree on what went wrong. Customers, regulators, politicians and power 
producers are all pointing a finger at each other to assign blame. 
Although tempting, it would be incorrect to blame the problems in 
California on deregulation itself. Indeed, there is a grave danger of 
drawing the wrong lessons. If this crisis drives California back to the 
heavy-handed regulation that launched deregulation in the first place 
or to a expansive public power authority then the state is likely to 
find its electric sector becoming increasingly inefficient and 
expensive--and very much disadvantaged compared to regions with 
properly structured power markets. California is now at a critical 
juncture--the state can go backwards by reregulating--or even taking 
outright ownership--or the state can fix the flaws in its power market. 
The latter is the way to go.
    Urgent action is needed not only to meet the current crisis but 
swift and dramatic steps are needed to avert an ever more severe 
shortage in the coming summer.

                            THE REAL LESSONS

    The real lesson of the California power crisis is that there is a 
right way and a wrong way to set up and run a power market. 
California's electricity crisis is the result of three critical 
failures:
1. California set up its power market with serious structural flaws 
        that made timely investment in new power supply neither 
        unprofitable. These flaws were part of the California market 
        design right from the start of deregulation. Consequently, the 
        current power crisis was both inevitable and yet could have 
        been prevented.
2. It has been enormously difficult to site and build new plants in the 
        state. California has perhaps the most daunting power plant 
        approval process in the nation. This process and the inability 
        to site have thwarted efforts by companies to build the new 
        power plant facilities that could have averted the supply 
        shortfall.
3. Although described as ``deregulation,'' the California system is 
        only a partial deregulation. Customers remain under controlled 
        prices (retail) that are well below the prices paid by 
        utilities to generators (wholesale). This is a fundamental 
        misalignment between the two parts of the market that creates a 
        liquidity problem for utilities and disconnects the demand side 
        from the market.
    The crisis in California arose because people believed that 
electric energy markets were just like other commodity markets--when 
demand and supply tightened up then prices would gradually rise, 
stimulate investment and keep supply and demand in balance. That 
assumption, however, is wrong. Power markets are not like other 
commodity markets. The power business is complex and has unique 
characteristics. Research over several decades pointed out that power 
markets are far more challenging to set up properly than most other 
markets. The system that was set up in California could have taken 
these realities into account--and come out with a good result. The 
system that was set up did not take these realities into account--with 
the results that we now see.

                       WHAT TRIGGERED THE CRISIS

    The flaws of the market design prevented supply from keeping up 
with demand. Five years ago, when California passed its power 
restructuring legislation, the state had a surplus of power generating 
capability. Since that time, the California economy grew a phenomenal 
32 percent, fueled by a 24 percent increase in electricity consumption. 
The fact that electricity use increased less than overall economic 
growth meant that the state was becoming more efficient in its use of 
power. Yet conservation and greater efficiency could not stem the need 
for additional supply. By 1998, demand growth had ended California's 
power surplus. The record of the past five years is clear--California 
failed to approve the siting and permitting of anything near the 1,200 
Mw needed each year to keep demand and supply in balance. As a result, 
far too few new power plants were added to California's power sector 
over the past five years. Moreover--and this point needs to be faced--
not enough power plants are currently under construction to end this 
shortage in the near term.
    Why was new generation not added? That is the heart of the matter. 
The California power market was simply not designed to add enough 
generating capacity at the right time.

                           THE MARKET DESIGN

    California's restructuring law involved sweeping changes that did 
many--but not all--of the things necessary to make a power market work 
properly. The legislation unleashed competitive forces: customers could 
choose electric service providers (ESPs); utilities were required to 
divest at least 50 percent of their generating capacity to create a 
large number of independent rival generators. The legislation replaced 
the existing decentralized wholesale power market with a centralized 
energy market called the California Power Exchange (PX). Another 
institution called the Independent System Operator (ISO) became the 
traffic cop in the transmission grid that physically interconnected the 
electric consumers and producers. The ISO also ran a market for other 
services power plants provide (for example, voltage control) to manage 
power flows on the grid.
    The California restructuring plan faced a particular complication--
``stranded costs.'' The traditional utilities had billions of dollars 
of costs that could not be recovered at expected market prices. Thus, 
California included a transition plan to move to a market while 
recovering these above market costs. To do this, the state backed 
utility bonds to finance a rate reduction of 10 percent along with the 
establishment of a retail price cap with a competitive transition 
charge--otherwise known as the ``CTC.'' The CTC was the difference 
between the retail rate cap and sum of all power costs, including the 
wholesale power price. The retail price cap and its associated CTC 
expired once a utility recovered enough revenues to cover stranded 
costs. At this point, utilities remained obligated to serve customers 
by buying power from the power exchange and passing along this cost. 
The California crisis exploded when stranded cost recovery began to end 
and thousands of customers were released to the market just in time for 
the shortage to hit with far too little additional power supply in the 
works. As an emergency measure, the state returned to price caps to 
counter the shortage driven price shocks.

                TOO FEW NEW PLANTS: OBSTACLES TO SITING

    The state's approval process creates significant obstacles to 
building new plants. These include an open-ended environmental review 
process, tough siting and permitting procedures and well-organized 
community opposition. These hurdles make California one of the most 
difficult places on earth to build a power plant. As a result, year 
after year, the state failed to approve anything near its annual 
requirement for new supply to keep up with its growing demand.

    TOO FEW POWER PLANTS: INSUFFICIENT INCENTIVE TO ADD ``CAPACITY''

    Even without these obstacles to siting and building, California set 
up a power market that guaranteed power prices that were too low to 
support enough timely investment in new supply. California set up an 
energy market that paid power generators to run their power plants but 
did not set up any market mechanism to pay generators for capacity--in 
other words, no capacity price signal to create an incentive to bring 
on new capacity. This meant that prices were lower in the short run, 
but it also meant that prices would eventually explode in a future 
shortage.
    Setting up a power market with the right price signals requires 
payments for two electric commodities--energy and capacity. For 
example, when someone turns on a 100-watt light bulb, the power system 
needs to have a power plant with the capacity to produce an additional 
100 watts of power. If capacity is available to meet this demand then 
utilization of the capacity through time can produce the watt-hours of 
energy. Unlike other commodities, electric energy is not stored in an 
inventory and thus requires capacity as well as utilization of that 
capacity to meet customer needs. Unlike other non-storable commodities 
like telecom, a busy signal is not an acceptable way to get around this 
capacity requirement ``because, when you're talking about electric 
power, a ``busy signal'' takes the form of a blackout.
    California needs enough capacity at any point in time to meet the 
sum of customer demands. During the summer time when air conditioners 
are humming, California reaches a peak demand of about 53,000 
megawatts. Since generating capacity can break down or hydroelectric 
capacity can vary depending on how much snow there was the previous 
winter, California like any other power market needs a capacity 
reserve--an additional 15 to 20 percent of capacity to insure that 
supply meets demand at all times. This margin provides the cushion that 
can absorb shocks caused by shortfalls in supply or surges in demand. 
In California, that cushion was eliminated by the growth in demand, on 
the one side, and lack of new capacity on the other.
    Although compelling evidence of a developing shortage was apparent, 
most industry observers were complacent due to the belief that when new 
supply was needed the energy price would rise and bring forth new power 
plant in time. This faith in the energy market was ill founded. The 
California energy market alone was incapable of providing a timely 
investment signal because it was successful in doing the job of 
providing a price signal to efficiently utilize existing power plants.
    Most of the time the amount of generating capacity available to 
meet customer needs exceeds the sum of customer demands. Thus the 
typical problem for a power market is to figure out which plants ought 
to be running to minimize production costs at any hour. To do this, 
sunk costs are irrelevant and competition should drive energy prices to 
reflect the short run costs of rival producers--even at time of peak. 
The evidence in California is compelling--as long as a surplus existed, 
the wholesale energy market cleared on the basis of short run 
production costs with a level and volatility that was half of what was 
needed to support new investment. Similarly, when demand and supply 
were in balance, energy prices continued to reflect production costs. 
Even in a slight shortage during 1999, competitive forces were so 
strong that the energy market did not break significantly from 
production costs. Thus the problem in California began with prices that 
were too low. The average annual price of wholesale power in California 
from 1995 to 1999 ranged from 14 to 31 dollars per MWH, a level that is 
half of what is necessary to cover the full costs of new power plants. 
When the market tipped to a severe shortage in 2000, energy prices 
soared and volatility exploded to levels that were multiples of what 
was needed to support new investment.
    The shortage induced California wholesale price run-up created an 
acrimonious debate regarding price gouging. The evidence from 
California is clear--prior to the shortage, the energy market was 
competitive and produced prices based on variable costs. However, when 
a shortage developed for a commodity that customers regard as a 
necessity and for which they have few substitutes then substantial 
price increases were necessary even in the absence of any manipulation 
from suppliers. Thus, high prices alone are not proof of market 
manipulation. There are no features in the California market such as 
market concentration or production agreements that would lead to the 
expectation that the price run-ups would arise from anything other than 
too much demand chasing too little supply in a shortage.
    Nevertheless, high wholesale prices trigger the question of what is 
the ``just and reasonable'' wholesale price level? When the market is 
in balance, the price should reflect the full costs--both fixed and 
variable--of new power supply. Prior to the shortage--when wholesale 
prices were too low--prices should have been recognized as unreasonable 
because they did not come close to covering both the fixed and variable 
costs of new power plants in a market that needed to stimulate 
investment. Conversely, during the shortage--when wholesale prices were 
too high--it was a mistake to judge the reasonableness of these prices 
without taking into consideration the foregone fixed cost recovery of 
previous years. Unfortunately, the California market guaranteed that 
just and reasonable prices would seldom prevail because the design 
required periodic shortages and reliability crises to provide fixed 
cost recovery for power investments.
    Furthermore, it is a mistake to argue that prices that were too low 
in some periods and then too high in other periods but were on average, 
reasonable over some interval. A properly structured market should give 
customers a consistent price signal that reflects the true cost of 
electric supply. Wide price swings resulting from the flawed power 
market create a misalignment of power consumption and fair cost 
recovery. In such a flawed market, customers and their consumption 
patterns change through time while the price swings end up shifting 
cost recovery to some time periods and not others.
    Clearly, a properly structured power market should not rely on 
periodic shortages and reliability crises to provide timely investment 
incentives. Such a flawed market design produces investment signals 
that are too sudden, too high and too late. The price signal for new 
investment needs to come several years before demand and supply reach 
balance to account for the lead-time needed to site, permit and 
construct new power plants. California provides a clear lesson--a 
properly structured power market should not rely on the energy market 
alone to keep electric supply and demand in balance.
    A properly structured power market needs a capacity payment 
mechanism. This begins with the simple requirement that anyone selling 
electric energy to customers must also buy enough capacity to cover 
these customers capacity needs plus a reserve. A capacity requirement 
met by the right type of bilateral contract or through a formal 
capacity market can provide the timely price signal needed to avert 
shortages and keep power markets in balance in the long run.

                HOW OTHER STATES HAVE SOLVED THE PROBLEM

    California's lack of a capacity payment mechanism stands in stark 
contrast to other restructured power markets such as New England and 
the Middle Atlantic region. For example, New England had a market rule 
that required anyone supplying electric energy to customers to also 
have enough capacity (either owned or under contract) to meet demand 
plus a reserve. As a result, power developers in New England expected 
to sell both the capacity and energy from power plants. Besides looking 
more profitable due to two revenue streams instead of just one, 
building new electric supply in New England was also possible. New 
England states approved the siting and permitting of more than enough 
new supply to keep the market in balance.

                           SHORT TERM ACTION

    California is currently about 5,000 Mw short of supply. 
Unfortunately, actions taken so far do not address the underlying 
shortage problem and in some cases are making matters worse.
    The state is creating large problems for the future by financing 
current power purchases and pushing payments into the future. 
California has signed the wrong types of long-term power contracts by 
agreeing to pay for energy volumes at fixed prices in the future. 
Remember, just such contracts were mandated by the Public Utilities 
Regulatory Policy Act and accounted for half of California's stranded 
costs. Having signed these contracts at the height of a shortage 
market, California is likely to have expensive take-or-pay obligations 
for decades.
    Continuing the retail price-freeze at 1996 price levels is 
subsidizing current power consumption and contributing to demand 
growth. If California customers faced a twenty percent increase in 
retail electricity prices then within a few months, demand would 
decline by over 1000 MW and close a significant portion of the shortage 
gap. The retail price freeze also created a grave liquidity problem. 
The state's utilities are trapped in a sort of no-man's land, between 
high wholesale prices and regulated, frozen retail prices. Forcing 
California's utilities to buy power at levels many times greater than 
the level they can charge customers caused major utilities to 
accumulate over twelve billion dollars of uncollected power expenses in 
just the past six months. Besides bringing these utilities to the brink 
of bankruptcy, the liquidity problem makes power sellers very nervous 
about selling their power and never being paid. This summer is likely 
to generate billions of dollars of additional wholesale power charges 
that will appear on the states books and need to be paid off over an 
untold number of years.
    The proposal for the State of California to acquire the 
transmission assets of the three major utilities to provide an infusion 
of cash to stave off bankruptcy will further distort the market. The 
state, through the Department of Water Resources, is now the largest 
buyer of power in the market. As the owner of the transmission assets, 
the state would also control the physical linkages of all suppliers to 
the market. Such a lack of independence would create incentives to 
distort the market. For example, the state has the incentive to include 
other costs in the transmission charge and increase this monopoly 
service price in order to squeeze profits from the many suppliers that 
agreed to long term fixed prices for their output. The prospect of the 
state controlling the physical infrastructure necessary for market 
transactions produces a chilling effect on power investment.
    The prospect for price caps also contributes to a negative power 
investment climate. Without fundamental reforms, the California power 
market remains a market in which a supplier should expect energy prices 
to reflect variable costs in the absence of a shortage. As a result, 
price caps retain all market downside risk and remove all market upside 
potential in the flawed design.
    Unfortunately, there is no quick fix to California's power 
problems. Nevertheless, there are many short run actions that can 
reduce demand and add supply. These measures include:

 Reconnect demand to the market. Necessary competitive forces 
        arise when customers react to market prices.
 Find more conservation and interruptible load on the demand 
        side.
 Add greater flexibility in legal and environmental limits on 
        the power supply side. For example, the back-up and emergency 
        generating systems at hospitals, hotels and office buildings in 
        addition to barge mounted and mobile emergency power sources 
        could provide a critical amount of additional supply in short 
        order.
 Reactivate mothballed generating units.
 Expedite permitting and construction of power development 
        already underway in California.

                           LONG-TERM ACTIONS

    California needs an independent and expert governance structure for 
its power market. The flaws in California's power markets resulted from 
a flawed process of deregulation based on an idea riddled with 
uncertainties--market governance through a stakeholder democracy. 
Stakeholder democracy is the belief that if all of the stakeholders of 
a problem are brought together, the correct policy will emerge through 
negotiation and compromise. Instead of independent, expert oversight, 
California intentionally designed large committees of stakeholders for 
the governance boards of the California Power Exchange and the 
Independent System Operator. When California formulated its 
deregulation policy with plenty of power plants already in place, it 
was no surprise that the majority of stakeholders voted not to pay for 
capacity as long as the reliability was free. Citizens and businesses 
throughout the West, as well as the utilities, are now stuck with the 
bill for what has turned out to be a huge and costly failure in 
deregulation policy formulation. The Federal Energy Regulatory 
Commission should make independent and expert market governance a 
keystone of the long run solutions to the California power crisis.
    Besides reforming the market governance structure, California needs 
a mechanism to pay for capacity and needs to set and enforce targets 
for approval of development plans each year for enough capacity to 
close the current gap and keep up with demand. These reforms are not 
simple. California could mistake its current long-term energy volume 
contracts for the needed capacity payment mechanism. Consequently, 
instead of using the appropriate type of contract or making the proper 
rules for a capacity market, the market flaws will continue. In 
addition, the politics of ``not in my backyard'' may subvert real 
attempts to site and permit needed supply in order to meet development 
targets.

    Mr. Barton. Thank you, Mr. Makovich. We want to hear now 
from Mr. Mark Cooper, who is the Director of Research for the 
Consumer Federation of America, located in Silver Spring, 
Maryland. Your statement is in the record. We recognize you for 
8 minutes. Welcome.

                    STATEMENT OF MARK COOPER

    Mr. Cooper. Thank you, Mr. Barton. You have mentioned a 
number of times about the frequency with which others have 
appeared before Congress. Actually, I took a look. I have 
testified before every Congress that has looked at electricity, 
at least since 1986, and, frankly, we told you so. We warned 
policymakers that the fundamentals of electricity were such 
that it is extremely difficult to create retail markets in 
which residential consumers would benefit. The physics of 
electrons and the economics of electricity are just very, very 
difficult.
    Now, we supported the 1992 Energy Policy Act. We believed 
that wholesale competition would work. But in the 10 years or 
so since that Act was passed, policymakers made two fundamental 
mistakes. State policymakers pushed deregulation into retail 
markets before there were workably competitive wholesale 
markets, and the Federal Energy Regulatory Commission failed 
utterly to create an interstate electricity market that would 
work.
    Electricity is a vital commodity in a vulnerable market. It 
cannot be economically stored. It has no substitutes. It 
requires perfect instantaneous balance. The rigorous real-time 
physics of electricity make it susceptible to highly disruptive 
accidents. Surplus generation and transmission capacity have 
been lacking, and take a long lead-time to develop.
    On the demand side, inelasticity of demand--its blood, its 
air, as you have heard--and weather-sensitivity make 
electricity prone to severe spikes and we lack the ability to 
shed load quickly in order to respond to those spikes.
    Managing the complex set of physical and financial 
transactions necessary to clear this market has proven to be 
extremely difficult, and clearly open to gaming and 
manipulation.
    Ignoring the warnings of Californians, the Federal Energy 
Regulatory Commission deregulated a market that was capacity-
constrained. It used the wrong definitions of markets. It 
opened the wholesale market to abuse.
    In California and elsewhere, the Federal Energy Regulatory 
Commission rubberstamped industry rules that were inadequate to 
discipline abusive behavior or produce open markets. FERC 
allowed a wave of mergers to concentrate the industry, 
rendering them more vulnerable to abuse. FERC made matters 
worse year after year by failing to discipline abusive 
practices, up to and including the most recent decisions on 
above-market prices.
    Premature deregulation--that is, deregulation in a market 
that was not workably competitive--led to perverse incentives. 
We reduced supply in California. Utilities limited their 
reserves. We had no reserves in California. Utilities 
eliminated alternative fuel capacity. They undercut 
conservation programs. They went into court to say, ``We don't 
want to buy conservation.'' They went into the PUC and said, 
``We don't want to buy distributed generation.'' They destroyed 
the reserve margin that we needed in order to make that market 
work much better. And, of course, in a tight market, the 
ability to extract windfalls, whether through collusion or 
conscious parallelism, is a major, major problem.
    Price spikes for a commodity like this produce jumps that 
are nowhere else seen. This is not just a commodity. It is air. 
It is blood. You need it. You will pay whatever you can for it.
    The inevitable result of the combination of irresponsible 
deregulation, mismanagement of a vital commodity, and greed--
which is a constant and exploits advantages wherever it finds 
them--the result has been a massive and unjustified run-up in 
prices and an inefficient transfer of wealth from consumers to 
producers.
    The electricity bill in California this year, at the 
January-February prices, will be something in the neighborhood 
of $70 billion, a $60 billion increase over 1998. If you look 
at our oil import bill between 2001--assuming OPEC successfully 
defends its $27 a barrel price--the total national import bill 
for oil will go only $50 billion. You cannot put that kind of 
burden on a State economy and expect it to survive or thrive.
    Consumers now face the claim that the larger reserve 
margins, higher capital costs, faster depreciation, are 
necessary to make the market work. In addition, we have got all 
these new transaction costs from deregulation and the creation 
of new market institutions.
    Consumers in California have rightly resisted the effort to 
put these price spikes into their bill because a large part of 
these price spikes are a result of artificial scarcity induced 
by market actors pursuing their profits, which is legal, but 
there are artificial scarcities, there is abuse of market 
power, and there is the pure stupidity of a poorly designed 
market.
    Until the utility industry demonstrates that it can wring 
these rents out of the system, consumers don't want to pay the 
ransom, and that is a legitimate and reasonable action. They 
are willing to pay a fair price for electricity, but not to be 
held up by stupidity, artificial scarcity and the abuse of 
market power.
    As I have suggested, Federal authorities bear a significant 
part of the blame for this problem because, if restructuring is 
going to work, it must be an interstate issue. Most States are 
too small to have a market, so we have to have an interstate 
generation market that is competitive and open, if any State is 
to succeed.
    We have to have serious law enforcement. As long as the 
windfalls from withholding power are much larger than the 
incentives to produce, you are going to get a constantly 
tightening market. No one dreamed we would have the price 
spikes we have in California at 25,000 megawatts. We didn't 
have that problem in the past.
    We believe that a cost-based price cap--cost-based--the 
soft cap we have today is not worth fighting for. We need a 
cost-based price cap for a number of years throughout the 
relevant market region. We need vigorous demand side 
management. We get lip service for demand side and dollars 
thrown at the supply side. We need dollar-for-dollar match, 
supply and demand programs at the Federal level. We need the 
Federal level in the wholesale market to be willing to look at 
distributed generation--it is very difficult to get it 
approved--to be willing to look demand side reductions.
    A megawatt in California, taking a megawatt of demand out 
of the market has a value that is at least 5 to 10 times the 
market clearing price. If you get a price at that. You need to 
get a price at that. But the value of the collective decision 
to reduce demand is infinitely higher in California today than 
the market clearing price.
    There are a set of policies here at the Federal level that 
must be implemented if the States are to be able to at least 
have competition on the wholesale side. We still believe that 
could work, but if we don't have a functioning interstate 
market, no one can benefit from this process. Thank you.
    [The prepared statement of Mark Cooper follows:]

   PREPARED STATEMENT OF MARK COOPER, DIRECTOR OF RESEARCH, CONSUMER 
                         FEDERATION OF AMERICA

    Mr. Chairman and Members of the Committee, I am Dr. Mark N. Cooper, 
Director of Research for the Consumer Federation of America (CFA). CFA 
is the nation's largest consumer advocacy group, a non-profit 
association of some 260 pro-consumer groups, with a combined membership 
of 50 million, founded in 1968 to advance the consumer interest through 
advocacy and education. I greatly appreciate the opportunity to appear 
before you today to offer our view of deregulated electricity markets.
    I have submitted for the record three CFA analyses of the real 
world performance of electricity markets since the beginning of 
restructuring. They do not present a pretty picture, but they come as 
no surprise to us. From the start of the electricity deregulation 
debate over 15 years ago we have warned policymakers that the 
fundamentals of electricity service--``the physics of electrons and the 
economics of electricity''--make it virtually impossible to create 
orderly retail markets that will benefit residential consumers.
    We have an open mind about the wholesale generation market and 
aggressively supported the Energy Policy Act of 1992. Unfortunately, in 
years since that Act became law policymakers made two fundamental 
mistakes. State policymakers pushed deregulation from the wholesale 
market into the retail market and federal policymakers failed, totally, 
to create an open and vigorously competitive interstate market. These 
mistakes are the root cause of the chaos in electricity markets across 
the country today.
    Electricity is a vital commodity in a vulnerable market. It cannot 
be economically stored, has no substitutes and requires perfect, 
instantaneous balance. The rigorous real-time physics of the 
electricity network make it susceptible to highly disruptive accidents. 
Surplus generation and transmission capacity are not generally 
available and take long lead times to build. Inelasticity and weather-
sensitivity of demand make electricity prone to severe peaks and 
programs to rapidly shed load have not been developed.
    Premature deregulation led to profit maximization that tightened 
electricity markets by reducing supplies, limiting reserves, 
eliminating back up requirements, undercutting conservation programs, 
and preventing facilities from being built. The small number of 
suppliers and the tendency for electricity product and geographic 
markets to be highly restricted in time and space make the exercise of 
market power and the implementation of gaming strategies that drive 
prices up easy to execute. Price spikes produce such huge windfalls 
that suppliers exhibit an OPEC-like (backward bending) supply curve, in 
which supplies are reduced, not increased, as prices rise.
    Ignoring warnings about the existence of market power and capacity 
constraints, the Federal Energy Regulatory Commission (FERC) 
irresponsibly deregulated the wholesale market. Federal policymakers 
should never forget that FERC fought for control of California markets 
and deregulated them over the opposition of many in California. In 
California and elsewhere, FERC rubber stamped industry rules for 
operating the grid that are prone to manipulation and abuse. FERC's 
voluntary approach to forming regional transmission organizations has 
failed to produce nondiscriminatory access. FERC allowed a wave of 
mergers to concentrate generation markets, rendering them more 
vulnerable to the abuse of market power. FERC made matters much worse 
by refusing to exercise responsible oversight authority until very 
recently, when the abuse became just too blatant to ignore any longer.
    Managing the complex set of real-time transactions necessary to 
physically and financially clear electricity markets raises 
transactions costs and has resulted in institutions that are plagued by 
manipulation and gaming. California's market institutions may appear to 
have been particularly flawed--including split markets for various 
types of energy and transmission, an auction that paid all producers 
the highest price allowed, a lack of reserve requirements, and a ban on 
long term contracts--but there is an ongoing debate about how important 
these factors were in comparison to the underlying problems of market 
power and the nature of the commodity. Markets with different 
institutions have suffered similar problems, albeit not as severe as 
California's.
    The inevitable result of greed, irresponsibility and mismanagement 
of a vital commodity in a volatile market is a dramatic run up in price 
and a massive, unjustified and economically inefficient transfer of 
wealth from consumers to producers. In one week in 1998 in the Midwest, 
$500 million changed hands. Well over a billion dollars of rents was 
collected in California before the summer 2000 problem and billions 
more are being litigated for the summer's debacle. The California 
Independent System Operator has asked for over $500 million in refunds 
for last December/January. Over $70 million was collected in spike 
costs in New York City in one day. The New England power pool 
experienced price run-ups and PIM has been afflicted with dramatically 
rising capacity charges.
    Competition has recently collapsed in the places like Pennsylvania 
and utilities there are seeking to bust their price caps, just as in 
California. This in spite of the fact that restructuring in 
Pennsylvania was supposed to be easy because of high prices at the 
outset, excess generation capacity, and location in the middle of a 
long standing power pool, well-endowed with transmission assets.
    To the extent residential ratepayers have benefited from 
restructuring, it has been a result of rate reductions mandated by 
regulators not driven by market developments. In fact, a good case can 
be made that, given market conditions, consumers would have saved as 
much or more under effective regulation, without exposing them to price 
spike risk. Under the best of circumstances, for residential consumers, 
electricity restructuring was a solution to a high cost problem that 
has not worked very well, under the worst of circumstances it threatens 
to make them much worse off.
    Consumers now face claims that larger reserve margins, higher 
capital costs, and faster depreciation are necessary to make the market 
work, in addition to new transaction costs resulting from the creation 
of new market institutions. Gone are the fanciful claims of 40 percent 
savings that were used to sell electricity restructuring to the public. 
Rather than bring dramatic new innovation and efficiency to the market, 
many of the entrants seem to have based their business models, and 
policymakers based their projections of consumer savings, on the 
ability to sell electricity powered by cheap natural gas. When cheap 
gas disappeared, so did the benefits of electricity restructuring.
    Consumers resist effort to force price spikes into their bills, and 
rightly so, because a large part of the market price run up is caused 
by artificial scarcity, abuse of market power and the pure stupidity of 
poorly designed markets. Until utility industry institutions 
demonstrate that they have wrung the inefficient and unjustified rents 
out of the system, consumers are unwilling to bear the burden of 
dealing with legitimate scarcity problems. This resistance is 
reinforced when they discover that the solutions now proposed are to 
use mandatory economic dispatch in transmission, long term contracts in 
supply, and vigorous interruptible and conservation programs on the 
demand side. In other words, after wasting tens of billions of dollars, 
we find that the old system works better.
    I have been all across the country educating state policymakers 
about what went wrong, and here in Washington I will focus on the large 
role that failed federal policy played in this tragedy.
    The failure to recognize the important role of the continuing 
monopoly in transmission resulted in the under-regulation of the wires 
segments of the industry. The transmission wires are the highways of 
commerce over which electricity flows. This is a highway system, not a 
market, which constitutes an essential, bottleneck facility with 
virtually no redundancy and never likely to support head-to-head 
competition. One of its primary inputs is right-of-way, which relies on 
governmental power of condemnation. The biggest obstacle to the 
expansion of transmission capacity is a social externality--public 
concern about ugly wires and local health effects--not inadequate 
economic incentives. Proposals to let the marketplace solve the wires 
problem are not likely to succeed, since given the market power that 
the wire ``owner'' would possess and the non-market barriers to 
expanding capacity, profit maximization would only result in the abuse 
of market power and the creation of artificial scarcity rents.
    The right model for transmission is a public or private entity 
imbued with the public interest and dedicated to ensuring that this 
essential facility fulfills it public functions--ensuring reliability 
and supporting nondiscriminatory market transactions in the widest area 
possible to achieve economies of coordination and maximum competitive 
effect. It must be independent of market participants and directly 
accountable to public authorities for achieving those goals. 
Transactions must be standardizes and transparent, with the creation of 
an exchange in which all rates terms and conditions can be identified. 
Brokers must be subject to rules that are similar to those applied to 
financial transactions like stock sales.
    The generation market must be demonopolized before it is 
deregulated. FERC should reconsider market-based pricing for markets 
that have not been found to be effectively competitive. Ownership 
limits should be established and additional mergers should be denied 
until effective market structures are defined.
    Aggressive policies to discipline abuse of market power should be 
implemented. It is critical to monitor closely the supply, bidding and 
pricing behavior of generation entities even in markets where 
divestiture and/or open access have taken place. The basic supply and 
demand conditions in electricity markets may be so severe, that market 
structures that are traditionally defined as competitive will break 
down situationally.
    Abusive conduct must be identified, investigated, eliminated and 
punished. Much closer market scrutiny than has occurred in the first 
few years is necessary. Law enforcement must be proactive, rather than 
reactive. It may be necessary to turn law enforcement over to agencies 
that have no stake in the day-to-day operation of the industry. It may 
also be necessary to identify a broader range of practices that are per 
se illegal, or at least trigger heightened scrutiny and to have a 
broader range of disciplinary measures to reflect the especially 
vulnerable and volatile nature of the commodity. Triggers for 
heightened scrutiny should be based on well-known structural conditions 
that are believed to increase the likelihood of the exercise of market 
power. Any entity that has engaged in market tightening behavior and 
later profited from actions that exploit the tightness should be 
subject to greater scrutiny.
    Consumers express a strong commitment to reliability and an 
aversion to price shocks. This is the baseline against which 
``competition'' will be judged. The most obvious means for preventing 
the overheating of markets is to have adequate reserve margins. 
However, in a competitive market, it is not clear that any supply-side 
entity has an interest in carrying excess capacity. For firm 
residential and small business customers, it may be more important to 
develop programs that let them enjoy stable prices without sending 
utilities plunging into markets to avoid blackouts. Proposals to build 
peaking reserves at stabilized prices become attractive if markets are 
going to be extremely volatile. Distributed generation and 
interruptible industrial load could provide a source of reserves on 
which utilities could rely to prevent price spikes. Aggregators could 
provide these functions.
    Having experienced repeated spikes, policymakers should also 
implement a series of circuit breakers to prevent the sort of abuse 
that has occurred. The most obvious circuit breaker is a price ceiling 
or cap that simply does not allow trades to take place at prices above 
a certain level. Caps on wholesale prices that are uniform throughout 
the relevant interstate market--most likely intertie-wide--should be 
set to protect consumers from wild price swings and to prevent energy 
suppliers from forum shopping and pursuing beggar they neighbor 
behaviors.
    My advice to state policymakers has been simple. Forty-seven of the 
lower forty-eight states are interconnected in the interstate grid and 
few have adequate generation resources to stand alone. They are 
dependent on a well-functioning interstate market and should not 
restructure retail markets until federal authorities demonstrate they 
can actually produce open, efficient, competitive interstate markets. 
Given the track record of the past decade and the current attitude of 
federal regulators, it is unlikely this will happen any time soon. 
Retail competition was always a dubious proposition for residential 
ratepayers. In the face of the failure of interstate markets, it is no 
longer just a disaster waiting to happen, it is a disaster that is 
actually happening in markets across the country.

    Mr. Barton. Thank you, Mr. Cooper. It is good to know that 
you have always known the answers. I would be happy to have 
them in writing to me by tomorrow afternoon at 5 o'clock so 
that I can give them to the White House and they can 
rubberstamp them, and we will just make that the law next week.
    Mr. Cooper. Well, I actually sat with you a couple of years 
ago about--face-to-face--and explained some of these problems.
    Mr. Barton. I remember that.
    Mr. Cooper. And we never did get a bill that reformed the 
interstate market.
    Mr. Barton. We are working on it.
    The Chair is going to recognize himself for 5 minutes for 
the first number of questions.
    Mr. Keese, I would like for you to tell us, based on your 
best information, what the peak supply demand shortage for this 
summer is expected to be in California in terms of megawatts?
    Mr. Keese. Thank you, Mr. Chairman. I believe that the 
consensus that we are operating under is approximately a 5,000 
megawatt shortage.
    Mr. Barton. On a peak demand?
    Mr. Keese. On a peak demand basis.
    Mr. Barton. Now, you indicated in your testimony you have 
six base-load power plants under construction, you have 
expected three of those will be in operation by July. What is 
the capacity of the three that you expect to be in operation by 
July?
    Mr. Keese. 1,300 megawatts.
    Mr. Barton. 1,300. So 5,000 minus 1,300 is still 3,700 that 
we are short.
    Mr. Keese. 3,700 to go.
    Mr. Barton. Okay. Now, there are a number of qualifying 
facilities that are currently shut down in California. If those 
facilities were to be paid the money that they are owed, how 
many megawatts could you get back on-line--not you personally, 
but the State of California--in terms of facilities that are 
available that are shut down because they haven't been paid and 
they have had to cease operations?
    Mr. Keese. Mr. Chairman, I have heard the number a high as 
3,000 megawatts. However, that would not add to our supply. We 
are already counting on those.
    Mr. Barton. Oh, you are counting on those. You are an 
honest man to say you are already counting on those. I was 
going to give you some credit, but you have already--okay.
    Mr. Keese. We are hoping for enhancements, and both we and 
the Federal Government have issued rulings the QFs do not have 
to limit themselves to what they may have been permitted at. 
For instance, in our case, there are a number of facilities 
that are 49 megawatts because they would have been licensed at 
50. We don't care if they operate at 65.
    Mr. Barton. Now, Mr. Freeman, you have been trying to 
negotiate contracts for power, I would assume, both within the 
State and out of the State. Do you have any definitive 
information on the availability of additional power that you 
think you will be able to contract for on behalf of the State 
of California for this summer, that we are not counting on 
right now?
    Mr. Freeman. No, sir. Just to be frank, we acquired all the 
power that was still available from the marketplace this 
summer, that wasn't already sold to someone else, but I think 
to put the situation in perspective, the California power 
supply, 25 percent of it is for municipal utilities, and that 
is in good shape. The other 75 percent goes to the investor-
owned utilities. That is divided into three parts. About a 
third of the power is still self-generated. They didn't sell 
all their plants. So, PG&E and the others still have----
    Mr. Barton. I can have an extended conversation with you 
off-camera and off the record. What I want to determine in my 
first 5 minutes is that we are actually going to have a real 
power shortage in California, and there is no disputing that, 
and it is apparently going to be in the 2-3,000 megawatt----
    Mr. Freeman. No question about that, in the conservation 
program of a World War II size is what the Governor is 
proposing to balance the books.
    Mr. Barton. You are not promising that you have gone out 
and negotiated additional power supplies to come in and make 
it, and Mr. Keese can't promise that he is going to----
    Mr. Freeman. No, sir, but I think the record should show 
that we negotiated about $42 billion worth of power with all 
the major companies, and we have an adequate power supply 
beginning about 2003 on, and this market is vigorous and there 
will be competition. There is a serious problem this summer and 
the conservation program is----
    Mr. Barton. I want to establish in this first round that 
you have got a major problem in California in terms of peak 
demand, and that if good-faith efforts aren't made on a demand 
management program that could reduce demand, that there are 
going to be significant blackouts. Does anybody dispute that? 
And they may not be confined to California. The record shows 
that everybody agrees that we are going to have a major 
problem.
    Mr. Keese. Mr. Chairman, I can augment the 1,300, if you 
would like. We also have in front of us at this time at the 
Commission, 362 megawatts of peaking projects which are slated 
to come on-line in July and August, and I have already 
indicated they are in the 21-day process.
    We have been informed by developers of another 1,300 
megawatts of peaking plants that will come on-line by 
September, approximately half of the in August and half in 
September. I can't guarantee that. I can tell you that five are 
in front of us. We are aware of another 13, for 1,326 
megawatts.
    We also are aware of another 1,500 for next year, but that 
should be off the table. So, the two numbers I would add would 
be 360 and 1,300.
    I would then, in line with my question previously on the 
QFs, indicate that we are looking at current units which, with 
augmentations and waivers, can add another 1,200 megawatts to 
their current generating capacity.
    Mr. Barton. My last question--okay, I still have time.
    Mr. Sawyer. You are the chairman.
    Mr. Barton. Well, I know that, but I am trying to be--I am 
a minute over, so I will ask my next question in the next go-
around, and recognize Mr. Boucher.
    Mr. Boucher. Thank you very much, Mr. Chairman. I want to 
commend these witnesses for the valuable information they have 
shared with us today.
    Mr. Keese, I have several questions of you. During your 
testimony, you indicated your support for a regional price cap 
on the wholesale prices, perhaps along the lines suggested by 
Commissioner Massey in his testimony and in his recent 
dissenting opinion. And as I am sure you know, there is a split 
among the members of the Federal Energy Regulatory Commission 
about the wisdom of that approach.
    I personally think that there are strong arguments that the 
Commission at least should undertake a Section 206 
investigation in order to examine the merits of a proposal for 
wholesale price caps. And I would note that it could take just 
about any form.
    The State of Texas recently imposed a wholesale price 
circuit breaker of, I think, $1,000 per megawatt hour, in case 
the prices in that State become truly extraordinary. So, a FERC 
could take any number of forms in terms of what kind of cap is 
imposed.
    My question to you is this: A bill was recently put 
forward, at least in draft form, by Senators Feinstein from 
California and Smith of Oregon, on a bipartisan basis, that 
would provide a temporary cap on wholesale prices in the 
Western Region, conditioned upon the willingness of the State 
of California to lift its retail price cap. And I wonder what 
your view is of a proposal, an approach, that would follow 
those lines?
    Mr. Keese. I am aware that our Governor has been in contact 
with Senator Feinstein on a regular basis. She introduced that 
bill in collaboration with the other States of the West because 
we are all in this problem together and our prices are high.
    I would certainly hope that the Senator and the Governor 
were communicating on that issue, but I do not know the answer.
    Mr. Boucher. So you don't have a position, as the Chairman 
of the Energy Commission in California, on that question?
    Mr. Keese. I do not. I would cede that position to the 
Governor.
    Mr. Boucher. The second question that I have of you relates 
to the proposal by the State of California to acquire the 
transmission lines that are currently owned by the investor-
owned utilities in exchange for a purchase price. And I can 
acknowledge readily the value of that kind of approach, and I 
clearly understand the possible merits of it--it would provide 
a cash infusion for the electric utilities, and that would be 
of some substantial assistance in the effort to restore their 
financial health and, at the same time, the State of California 
would obtain an asset that is of considerable value.
    Some people, however, have raised the concern that if the 
State of California obtains ownership of the transmission 
lines, that that act might remove the transmission lines from 
the jurisdiction of FERC, and that removal might have 
implications for the effective management of national wholesale 
transmission policies.
    And so my question to you is, I wonder what your advice 
would be on the possibility of the Federal Energy Regulatory 
Commission conditioning the transfer of the transmission lines 
to the State of California on a willingness of the State of 
California, perhaps, to participate in a Regional Transmission 
Organization--a number of witnesses before this Committee have 
suggested the appropriateness of that occurring--or perhaps the 
FERC imposing conditions on the transfer of the lines to 
California in some other way that would have the effect of a 
retention of FERC jurisdiction over those lines. So, your 
general advice, really, on two issues: First of all, the 
appropriateness of FERC retaining jurisdiction over the lines 
and, second, the appropriateness of California participating in 
a Regional Transmission Organization?
    Mr. Keese. I am aware that California is still open to 
discussions with the other Western States on how we handle the 
West as a unit, recognizing that from Mexico to Canada, we are 
one grid, and you can blow the grid with a toaster in Mexico, 
in any State in the West, or in Canada. Recognizing that, 
California is amenable to those discussions.
    As you have also indicated through your question, there is 
a very strong likelihood--if not an absolute--that FERC must 
approve your relationship under which these lines are changed. 
I would imagine that FERC would assert whatever policies they 
continue to have, and their past policy has certainly been to 
answer that they would want to condition the transfer.
    Mr. Boucher. You would not oppose FERC retaining 
jurisdiction over these lines, in the event that California 
obtains ownership?
    Mr. Keese. I would doubt that FERC is going to yield those 
lines to California, and abdicate control.
    Mr. Boucher. Let me just ask one very brief question of 
you, Mr. Keese--with your indulgence, Mr. Chairman. You used a 
phrase that I have not heard before, in your testimony, and 
that was ``energy intensity,'' and you were indicating that 
California has the second-lowest energy intensity of any State.
    Is that a measure of energy consumed per capita? I am 
curious as to the standard.
    Mr. Keese. Yes.
    Mr. Boucher. That is what that is.
    Mr. Keese. Energy per capita.
    Mr. Boucher. If you have further information concerning 
that measure and how the various States rank, I would 
appreciate having that. You might submit it.
    Mr. Keese. Yes, I will. There is an EIA, Energy Information 
Agency, report. I will submit it to you.
    Mr. Barton. We are going to recognize Congresswoman Wilson 
for 5 minutes, then we are going to recess until 12:30--and it 
really will be 12:30 because we have three votes, and the votes 
won't be through 'til about 12:20. So we are going to recognize 
Congresswoman Wilson for the last 5-minute questions before we 
recess.
    Mrs. Wilson. Thank you, Mr. Chairman.
    Mr. Keese, you talked about a projected energy shortage of 
peak time between 2,000 and 3,000 megawatts this summer in 
California, depending on what comes on-line when. Is it your 
estimation that the rolling blackouts and the shortages will 
extend beyond the State of California?
    Mr. Keese. Mrs. Wilson, we are optimistic and are hopeful, 
and our plan is not to have rolling blackouts. We have an 
agenda that the Governor has put forward, to bring on 5,000 
megawatts of generation by July 1. We have a balancing program 
to institute 5,000 megawatts of conservation by July 1. So, we 
remain optimistic that we can accomplish enough of that goal 
not to have blackouts.
    Mrs. Wilson. Perhaps I should ask Mr. Pope and Mr. Kline 
and Mr. Hall, do you think that there will be rolling blackouts 
in California, and that they will extend beyond the State of 
California this summer?
    Mr. Pope. I will start. We are clearly hoping that 
conservation and new generation----
    Mrs. Wilson. I am not talking about hope. I have got 
constituents. We supply power to California and New Mexico is 
on the grid with the State of California. We have market power 
that we sell to you, although we have stopped selling it to you 
because you are not paying your bills.
    I want to know if I can turn on the lights in New Mexico 
this summer, your best estimate.
    Mr. Pope. My best estimate, New Mexico probably will be 
okay. You have got enough coal in that area that you probably 
are going to be okay. I think the problem areas are going to be 
California and the Northwest, given the shortage of supply, the 
shortage of transmission capacity, and possibly the shortage of 
natural gas and air credits to get the energy produced and 
delivered into the State.
    I would like to point out, summer for California starts May 
15 and goes until about October 1. So those are the critical 
windows, the normal critical windows, and where you have risk 
of rotating blackouts and shortages. We have seen them in 
December, January, February, March.
    Mr. Hall. I agree with Mr. Pope. I think the key factor, 
particularly for California, is Mother Nature and what weather 
patterns look like this summer. If we have the kind of heat 
wave we did in June of last year, and spikes through the rest 
of the summer, I think it is going to be very precarious.
    So, Mother Nature is the key in the West this summer. I 
believe that we are going to have some level of blackouts in 
California, the question is how severe, and then how that 
impacts the rest of the West, depending on weather.
    Mr. Kline. I agree.
    Mrs. Wilson. Mr. Hall, I think this question is for you, 
but your colleagues may have something to add as well. This 
issue of NOX and whether there will be power taken 
off-line because power plants use up all their NOX 
chits. Can you talk about that a little bit and whether you 
anticipate power generation being taken off-line because of 
that?
    Mr. Hall. Well, certainly there are within our permits and 
our facilities, there are NOX caps in place, and 
typically those are based on the historical operation of the 
facilities and, when those permits were developed, how it was 
thought those plants understood they would operate in the 
future, but that has kind of all changed because now these 
plants are operating at a magnitude higher level than they were 
in the past.
    So, we do know for a fact that some of our plants could be 
constrained but, again, I am confident that the Governor, the 
Air and Water Districts--and we need the support of the EPA--
will work with us to allow those megawatts to be freed up 
during those critical periods this summer. And that is going to 
be a key to helping the supply demand imbalance this summer.
    Mrs. Wilson. I do want to ask Mr. Freeman a question about 
fuel cells and microturbines, which you mentioned about using 
those in the California market. These distributed generation 
technologies, which ultimately is one of the ways to get 
competitive power. When do you expect these technologies to be 
installed? Is this a short-term or a long-term impact on the 
supply of power?
    Mr. Freeman. The fuel cells will begin to be available in 
this calendar year, probably not this summer, though, in large 
numbers. There are plans for manufactures of hundreds of 
thousands of these machines next year and the year after. They 
are coming, and they will come decisively when they do, mainly, 
because the customers that have been interrupted are just sick 
of it, and they are just going to buy these things and they 
will start to happen in a big way. The marketplace, in its 
wisdom, does work. If the central station system won't work, 
these fuel cells and microturbines will come on like thunder.
    Mrs. Wilson. Thank you, Mr. Chairman.
    Mr. Barton. We are going to recess until 12:30, and it 
really is going to be 12:30, so I would ask our witnesses to be 
back in their seats by 12:30.
    [Brief recess.]
    Mr. Barton. The subcommittee will come to order. Let the 
record show that I am late, that somebody said, ``You are 
late,'' and that is true. When we recessed, Congresswoman 
Wilson of New Mexico had asked questions. We now go to the 
Democratic side, to Mr. Sawyer, for 5 minutes for questions.
    Mr. Sawyer. Thank you very much, Mr. Chairman. Let me just 
open with an observation, and that is that I think we all feel 
very much like trapeze artists who set out to get from one 
podium high above the crowd, and to travel his trapeze across 
to the other side and get safely on the other podium. Instead, 
he found himself not having jumped quite far enough, and is 
slowly dangling in the middle, unable to get back to the 
platform from which he came--a regulated environment in a 
fashion that we have been used to for most of the last 
century--nor can he get to the destination podium on the other 
side where he can safely stand in a--``safely'' is a relative 
term--in a restructured environment.
    We have not done a very good job of getting form one to the 
other, and my first question really goes to the comments that 
were made by both Chairman Keese and Mr. Freeman, where you 
suggested, each of you in different ways, that if we need to do 
something to break that sense of equilibrium where we are in 
between two--point of initiation to point of destination--and 
each of you suggested in different ways some of the same 
things.
    Mr. Keese, you suggested that we call on Washington--that 
is to say, FERC--to adopt a temporary cost-based regional price 
cap that would allow generators to recover all of their cost 
plus a reasonable rate of return.
    And, Mr. Freeman, you said, ``My personal plea is that if 
the Federal Government is not going to help, it should at least 
refrain from legislation that attempts to tell us what to do, 
and we would appreciate the Congress reviewing Federal policy 
on wholesale prices and impose controls on a cost-of-service 
basis during the period when the market is clearly 
dysfunctioning.''
    Both of those sound like a plea for return to a rate of 
return on investment style of regulation at least in the 
interim, until we can recover some measure of stability and go 
on to a period of more thoughtfully restructuring.
    Could you comment on that, either one of you--and if others 
would like to chime in, I would appreciate it. First of all, is 
my impression correct, No. 1, and, second, can you tell us how 
to get from where we are to where you suggest we be?
    Mr. Freeman. Yes, sir. I think you succinctly summarize our 
testimony, and, for me, it is not hard. I used to work there. 
The Federal Power Act is fairly clear. All they have to do is 
what they were doing, at least to my knowledge, from the early 
1960's until about 2 years ago, of just looking at the cost of 
generation and allowing people--I would even give them a 
generous rate of return on their cost-of-service and fixing the 
prices on that basis. And it is necessary because the statute 
requires that they fix rates that are just and reasonable, and 
no one can claim that the kind of prices in the wholesale 
market of recent vintage are either just or reasonable. To me, 
it is just that simple.
    It is not a discretionary thing where the policy of the 
administration can be one way or the other, it is a statute 
that was enacted under the leadership of Sam Rayburn a long 
time ago, been on the books, enforced until a couple of years 
ago when they decided to experiment with market-oriented price, 
with the idea that the market was going to give us a similar 
result, but it hasn't, not on electricity and not on the 
transportation of natural gas, which is the most overlooked 
issue in Washington. It is a double-whammy on the consumer. 
That is my view.
    Mr. Sawyer. Mr. Keese?
    Mr. Keese. I would suggest, Mr. Sawyer, that the letter 
from the Governors, I believe, had a figure of $25 over costs. 
Two years ago, the average price at this time of year was $25. 
So, in a way, that is not an unreasonable return, cost-plus, 
and that would take into consideration the increases in natural 
gas that have taken place. I concur with Mr. Freeman's comments 
that that is another concern that we should have.
    Mr. Sawyer. Mr. Chairman, I would hope that we could just 
hear from others, but I would like to express a concern, and 
that is that I can appreciate the desire to press FERC to do 
those things which is within FERC's ability to do. I am deeply 
concerned about trying to do, by a show of hands here or on the 
floor, the kind of things that have been done by careful 
regulation for more than a century. Other end of the table?
    Mr. Barton. We need to expedite. Answer the question, but 
we need to go to the next questioner.
    Mr. Cooper. There is a difference between what you have to 
do when you are trying to work out of a situation--a 
bankruptcy, a market failure, whatever--and the structure you 
want it to look like at the other end. I think it would be very 
helpful if policymakers in Washington and California would pick 
a time period and say, ``Here is what we need to work out,'' 
and they give you your supply curve, or when we think we will 
have rebuilt the supply curve, and in the interim work out a 
series of steps we need, extraordinary measure--one might be a 
price cap, you have heard someone suggest a NOX 
moratorium--a variety of things during the workout period, 
which is a classic set of actions that you take during this 
emergency, rather than throw the corporation into bankruptcy 
and destroy all of its assets.
    And, so, it would be very helpful for people to pick a time 
period--and we have heard the question of this-summer/next-
summer--and say, ``Here is what we are going to do 
extraordinary, this is what the market will look like when we 
are done.''
    Mr. Makovich. It is important to realize that these 
solutions we are talking about are really two different sets--
the short-run and the long-run. Price caps, cost-based price 
caps, are all short-run solutions. Most of the things people 
are talking about right now are things they want to get us 
through this summer and next summer.
    The problem is, we are failing to address the long-run 
solutions here. You can set up these power markets to work 
properly, if you set them up with the right rules. The good 
example is New England. New England started deregulation with a 
far tighter supply and-demand balance than California, because 
they had nuclear outages, unexpected outages with Millstone, 
but they set up a market that made it both profitable and 
possible to build power plants. New England has had thousands 
of megawatts of power plants added. The market works to bring 
forth supply. And it is all a matter of getting the structure 
right, and California is yet to do that.
    Mr. Sawyer. Thank you, Mr. Chairman.
    Mr. Barton. I think we need to put in the record--and Mr. 
Freeman knows this--the Federal Power Act was passed in the 
1930's. There was no regional market or national market. There 
was a law passed in 1992, I think, called the Energy Policy 
Act, that created a wholesale market, a deregulated market. So 
the first mission is a little bit different post-Energy Policy 
Act than it was between 1934 and 1993.
    Mr. Shimkus, for 5 minutes.
    Mr. Shimkus. Thank you, Mr. Chairman. I am going to try to 
go quickly. I have a couple of questions. First, Mr. Lloyd--and 
many of you, although Mr. Cooper just talked about an aspect of 
NOX capping--but most of you said our environmental 
regulations have not impacted this issue. But most of you have 
all continued to praise Governor Davis for his lifting of some 
of the environmental requirements.
    So, my question is, if environmental rules aren't a 
problem, why would you praise Governor Davis for waiving some 
of the requirements?
    Mr. Lloyd. I think that is an incorrect statement. Governor 
Davis has not waived the environmental requirements. What he 
has asked for is to speed up some of those issues that are on 
the books so, in fact, we can----
    Mr. Shimkus. What does that mean, speed up?
    Mr. Lloyd. Well, what it means is looking at some of the 
permits there from an air quality viewpoint. So, what we are 
saying is that, yes, we recognize there can be some speeding up 
in that process, but we are not talking about sacrificing the 
environment. We are not talking about sacrificing public 
health.
    Mr. Shimkus. And I would disagree that you would be 
sacrificing public health on some of the more stringent 
environmental standards that you all may have imposed on your 
public, but that is a different debate.
    Let me go to Mr. Pope. In your statement, you mention that 
in the first 20 days of January, you used 20 percent of your 
allotted air emissions in the first 20 days, is that correct?
    Mr. Pope. That is correct.
    Mr. Shimkus. What if the remaining 80 days were similar to 
the first 20 days and you used 100 percent of your allotted air 
emissions, what would have happened?
    Mr. Pope. If we would have used all the air emissions for a 
combustion turbine, we would not be able to run that for the 
remainder of the year.
    Mr. Shimkus. Mr. Lloyd, is that an impact?
    Mr. Lloyd. There is a process whereby we work with the 
local districts and we work with EPA so that, in fact, that 
does not happen.
    Mr. Shimkus. But it could happen.
    Mr. Lloyd. The point is, in the past, we have seen this as 
a possibility, but what we recognize now, because of the 
additional need for energy, we have to look at this and then--
--
    Mr. Shimkus. So you might waive some of the strict 
requirements.
    Mr. Lloyd. We would not waive the strict requirements, but 
you have to make up for those emissions down the lines. You are 
going to have to put on some additional controls.
    Mr. Shimkus. So you fudge on them a little bit.
    Mr. Lloyd. No.
    Mr. Shimkus. You stretch them a little bit.
    Mr. Lloyd. No.
    Mr. Shimkus. You are doing something.
    Mr. Lloyd. Recognize that these plants were put on with 
certain limits because they are higher emissions than what we 
typically allow, and that is why you have a cap on that, and 
that is what is agreed to by all parties. If, in fact, that cap 
is exceeded, what the Governor's Executive Order allowed us to 
do is work with the districts to make sure we keep the power 
there, but not sacrifice----
    Mr. Shimkus. Let me go to a little filibuster and I will 
follow up with a question. We know that the past 8 years of 
this administration, we have had a fuel of choice, which is 
natural gas. There was a comment here that natural gas is a 
part of this equation, and I will make my comment based upon my 
parochial interest in nuclear and in coal and in clean-burning 
alternatives, that if you continue to rely on natural gas as a 
solution to this problem, with the understanding that our 
baseload is met primarily by coal and nuclear, we continue to 
run on natural gas, not only are we going to have these 
continued power problems, but we are going to have continued 
high natural gas prices that we are experiencing all over the 
country.
    Mr. Freeman, I am a big supporter of munis. I represent 
Springfield, Illinois. We have a tremendous muni-power 
generating facility, and they do a great job.
    Is it not true that you are not regulated under FERC?
    Mr. Freeman. That is true.
    Mr. Shimkus. Is it also true that you were not impacted by 
the California Deregulation Bill?
    Mr. Freeman. It is true that we had a choice under the 
State law, and we chose to remain a vertically integrated 
utility, and the lights are on and the rates are stable.
    Mr. Shimkus. Very good, you are 2-for-2. Let me then go on 
and ask, you are a power exporter, correct?
    Mr. Freeman. We have modest surpluses from time to time, 
but we basically build on for our native load. But we conserve 
and when we have a slight surplus, we sell it to the rest of 
the State, to the ISO.
    Mr. Shimkus. And were you using the spot market to sell?
    Mr. Freeman. We were in the past, but we now have a 
contract with the Department of Water Resources that I did not 
negotiate, someone else did.
    Mr. Shimkus. Who negotiated it?
    Mr. Freeman. I was on leave and I was negotiating with some 
of my friends at the table here and ended up buying $42 billion 
worth of electricity from the State over the next 10 years, 
under the authority of the Governor. I am simply pointing out 
that we moved from the spot market to a contract within the 
last 30 days, as has a lot of other people.
    Mr. Shimkus. And I think we have identified, Chairman, one 
of the problems with the California deregulation bill was the 
spot market, the short, 1-day purchasing of power instead of 
long-term contracts.
    Mr. Freeman. We have moved mightily away from that.
    Mr. Shimkus. I appreciate your responses, I am sorry for 
the quickness of them. I got a lot in in 5 minutes. I yield 
back, Mr. Chairman.
    Mr. Barton. Before I recognize Mr. Markey, I just want to 
follow up on what Mr. Shimkus just said. I don't think this is 
the case, but it just tweaked my interest. There is not a 
chance that you were negotiating on behalf of the State of 
California with yourself on behalf of the city of Los Angeles--
--
    Mr. Freeman. No, sir, I walked out of the room deliberately 
and had nothing to do with the negotiations with the city of 
Los Angeles. I have some pride, though, in the fact that I 
think I cut better deals on the deals that I negotiated than 
the ones that I didn't.
    Mr. Barton. It wouldn't be difficult to negotiate with 
oneself.
    Mr. Freeman. It would be a conflict of interest back and 
forth, and it did not happen.
    Mr. Barton. I have driven a car that I owned into another 
car that I owned, and had to negotiate with myself on the 
insurance claim. That is not a fun experience.
    Mr. Freeman. I suspect you did rather well.
    Mr. Barton. It depends on which one of myself I was 
negotiating with. Mr. Markey is recognized for 5 minutes.
    Mr. Markey. Thank you, Mr. Chairman, very much. As the 
author of the wholesale bill in 1992, it was the Markey-
Moorehead Bill, Carlos Moorehead. I went to him and I suggested 
this would be a good idea--worked out great for Massachusetts, 
by the way. Carlos was from California, although I think in 
L.A. County, so he is probably still at the time, but it was my 
bill back then. And I did it with Bennett Johnson, actually, in 
the Senate, and included it into the 1992 Energy Act. And it 
was a little deal that I cut with Bennett, because Bennett was 
trying to remove the restriction which prohibited electric 
utility companies from generating electricity outside their own 
regions or outside the country. And so, in turn, I said why 
don't we open up this wholesale marketplace as well.
    Now, obviously, New England, Pennsylvania and other places 
are examples of where it is working quite well. California is 
an example of where it is not working well. You also have these 
extraordinary external events, including the greatest drought 
in 100 years. You cannot, plan on losing 3,000 megawatts, 
reduce hydropower generation as you are moving into a year, but 
you are also not assuming that if there is an increase in 
demand by 5 percent, reduction by 5 percent, the prices go from 
$6 or $7 billion for a commodity to $70 billion for a commodity 
over a 2-year period of time. That is irrational.
    That is why I believe that the FERC has to come in and 
order a time out. If the price of a loaf of bread went from 
$1.39 to $13.90, it would be impossible for us to envision any 
circumstances under which that would be acceptable, especial 
absent an ongoing 365-day-a-year snowstorm where there was a 
rush on bread. And that is what is happening here to 
electricity. It is now 365-days-a-year.
    So it is obviously a dysfunctional marketplace, and it has 
tremendous adverse long-term consequences for the economy of 
California, perhaps the West, and we don't want it to spread 
any further than that.
    Just to clarify, just so I can get back to my own Act so 
that it is not misunderstood, FERC's basic obligations and 
authorities to ensure just and reasonable wholesale rates, or 
required cost-of-service rates, were not altered by Markey-
Moorehead in 1992, those authorities are in Section 205 and 206 
of the Act, and were not erased by the new Section 211 that my 
amendment added to the Act. In fact, when FERC issued its Order 
888, it relied 211 which limited them to issuing wholesale 
transmission access orders on a case-by-case basis, but on 
Sections 205 and 206 which, in light of the congressional 
guidance set forth in my amendments, FERC interpreted to give 
them the flexibility to go to market-based rates. FERC always 
retains the power to return to cost-based rates either 
temporarily or permanently, just so everyone understands, in 
fact, what happened back then, and what my intent was.
    So, this power still sits there. The question is, does it 
make sense to go to a cost-based system for a period of time? 
Obviously, the regulatory system is quite familiar with that, 
especially when you are in a situation where such an incredible 
anomaly is occurring which has tremendous economic and societal 
consequences.
    Mr. Keese, today's L.A. Times reports that California's 
Independent System Operator is filing a study with FERC today, 
alleging that wholesale electricity suppliers overcharge 
California by about $5.5 billion between May 2000 and February 
2001. Specifically, the study found that the five largest in-
State generators, 16 smaller suppliers withheld supplies and 
manipulated prices. They are calling on these companies to 
refund the money.
    Does the California Energy Commission agree with these 
findings and recommendations?
    Mr. Keese. Mr. Markey, they have not been presented to me, 
and I am reading about them while you are reading about it. The 
ISO, Independent System Operator, is independent of State 
government.
    I would point out your comment that--regarding our 
comment--that perhaps some form of temporary price controls 
might be appropriate. There are obviously many ways FERC can do 
this.
    Mr. Markey. Mr. Hall, your company, Duke Energy, is one of 
the alleged manipulators. So, can you tell us, at anytime 
during the period covered by the California ISO study, did you 
effectively withhold supplies and bid at excessive prices? At 
anytime, did you have power generation available and did not 
bid at all?
    Mr. Hall. I have been asked this question a thousand times 
in California and elsewhere, and again I will say this, and I 
have said it over and over again, we do not conduct ourselves 
in that manner. We do not conduct ourselves in an illegal 
manner. We don't withhold generation. And the facts and the 
output of our facilities demonstrate that. We don't manipulate 
markets.
    Mr. Markey. Mr. Cooper and Mr. Freeman, your comments on 
price gouging.
    Mr. Barton. This will have to be the last comment on this 
round. We are going to have additional rounds.
    Mr. Markey. Thank you, Mr. Chairman.
    Mr. Cooper. The question of the cost-based rates is fairly 
straightforward. What the FERC has decided to do is find the 
least efficient generator and assume the highest price and 
assert that that is a just and reasonable price. That simply 
transfers all the economic rents to anyone who has actual cost 
below that level. That is not the point of a price cap. And so 
we have absolutely no interest in a soft price cap that is 
simply going to rubberstamp the windfall profits.
    Now, if we can start to work toward a reasonable binding 
wholesale price cap that gets prices toward costs, then you 
will hear a lot less shouting about giving up a hard retail 
cap. So, the fundamental point is, the point of law 
enforcement, the point of regulation, is to control rents, not 
rubberstamp them.
    Mr. Freeman. I haven't seen the study, but I think the 
study dramatically demonstrates the failure of FERC to do its 
job. This is the kind of report, the kind of analysis, that you 
would expect a regulatory agency with a statutory 
responsibility to conduct. And I think it should be an 
embarrassment to the FERC to have some agency in California 
suggesting that rates that they have sanctioned are not just 
and reasonable, and they don't have apparently a working 
knowledge from a regulatory point of view, to refute it. They 
need to be dealing with it, this is FERC's job, and they are 
not doing it. That is what that study demonstrates.
    Mr. Barton. The gentleman from Oklahoma, Mr. Largent.
    Mr. Largent. Thank you, Mr. Chairman. Mr. Freeman, how many 
transactions did the Los Angeles Department of Water and Power 
conduct in selling electricity above the soft cap?
    Mr. Freeman. We sell--our policy has been to sell on the 
basis of cost plus a reasonable rate of return of about 15 
percent, and we consistently sold on that basis other than in 
the years in the past----
    Mr. Largent. Did those exceed the soft cap, any of those 
transactions exceed the soft cap?
    Mr. Freeman. I don't have that knowledge in my head, but if 
I could finish----
    Mr. Largent. How much money has L.A.----
    Mr. Freeman. If I could complete my answer, sir. You asked 
me a question and I want to answer it.
    Mr. Largent. I don't need to know the rest of that. What 
I----
    Mr. Barton. Let us have a little decorum. The gentleman 
from California has the time. Let him ask the question--I mean 
the gentleman from Oklahoma, and then the gentleman from 
California can answer.
    Mr. Largent. I have seven questions. I have 5 minutes, and 
so I just need to ask you not to filibuster the question so I 
can get the answers so I can get through.
    How much money did L.A. Department of Water and Power make 
during the last year and a half, say, on those transactions?
    Mr. Freeman. Frankly, we are owed $200 million now, but we 
haven't been paid. So we haven't made a lot of money lately. In 
the years past, we have earned between about $150-200 million 
over a 3-year period, excepting the amount of money that the 
State decided was the price, and leading the fight, I might 
add, to lower those caps with the other municipalities during 
that period. Mr. Pope is my witness that we provided the votes 
to reduce the caps. We are in favor of low-priced electricity 
for everybody.
    Mr. Largent. Thank you. Did the Los Angeles Department of 
Water and Power withhold power to increase prices?
    Mr. Freeman. No, sir. We are the only outfit that added 
power during the last 3 years to the State of California. We 
added 1,000 megawatts, and our units are available whenever 
they are needed by the rest of the State.
    Mr. Largent. Mr. Makovich, I have a question for you. How 
much demand would need to be suppressed in order to avoid 
blackouts? How much would we have to suppress current demand to 
avoid blackouts this summer?
    Mr. Makovich. The analysis that we provided in our report 
showed that under expected conditions--soft economy, 8 percent 
availability on thermal, 80 percent normal hydro--we are 
looking at about a 5,000 megawatt gap.
    Demand can be reduced, in our estimate. If retail prices 
went up by 20 percent, like the way they have through the rest 
of the West, in California, you could probably get over 1,000 
megawatts in response after a couple of months.
    Mr. Largent. Would it be true to say that the rest of the 
West, minus California, is experiencing higher prices as a 
result of the retail caps imposed in California?
    Mr. Makovich. Yes, that is true.
    Mr. Largent. So, basically, California is profiting as a 
result of----
    Mr. Makovich. In fact, the low prices in California have 
stimulated demand and made the market tighter that has created 
higher prices throughout the West, which has pushed some of the 
burden of the 1996 frozen prices in California onto the rest of 
the retail customers in the West.
    Mr. Freeman. But the record shows that the price of 
electricity in California is much higher than it is in most of 
the other Western States.
    Mr. Barton. We put into the record at the hearing on 
Tuesday the latest EIA actual numbers on retail prices for the 
region. The California average price was a little over 10 cents 
a kilowatt hour at retail. In Arizona, it was around 8 cents a 
kilowatt hour. In Washington State it was around 5 cents. I am 
quoting from memory, but California has the highest retail 
prices in the region. Having said that, retail prices in the 
other States are going up more rapidly than they are in 
California. That is in the record and we can make those tables 
available.
    Mr. Freeman. Thank you, sir.
    Mr. Largent. Mr. Makovich, I wanted to ask you again, we 
have kind of a long-term issue that has to be addressed as well 
as a short-term issue getting through this summer. Do you see 
any other way to reduce demand in the snort-term, other than 
doing something about the retail caps in California?
    Mr. Makovich. I think that is the most efficient way to get 
any kind of real meaningful demand response. I think many of 
the efforts now to search out a greater interruptible power and 
so forth are very expensive and are going to produce rather 
small decreases in demand, given this gap.
    What seems to be lacking is a very focused and concerted 
effort to do everything you can to get additional supply on. 
That would be the more efficient way to close this gap in the 
short-run.
    Mr. Largent. Dr. Lloyd, I had a question for you. You 
mentioned that you have got your folks basically running a 
little faster in terms of expediting the process, but what 
specific actions have the State and local Air Quality 
Management Districts taken with respect to air regulation, to 
keep the lights on?
    Mr. Lloyd. I think what we have done, thanks to the 
Governor's Executive Order, worked with the local districts 
more closely so we have an oversight from the State. In those 
cases where we are needing to get the lights continuing to 
burn, if you like, we are working with the local districts and 
with EPA to, in fact, raise some of those caps so we can keep 
them running, the existing plants----
    Mr. Largent. Raise the NOX caps, you are talking 
about?
    Mr. Lloyd. Yes, to keep those running over a period of 
time, and then we have the flexibility then during this time 
period we can keep them running as long as then we have to 
reduce the NOX emissions down the line in a period 
where we are not expected to need such electrical demand.
    Mr. Largent. So the NOX caps are too low?
    Mr. Lloyd. The NOX caps are set because, as I 
said earlier, typically these plants are those which don't have 
state-of-the-art NOX controls on there, and so they 
have these caps because, in fact, they run for a certain period 
of hours so, in fact, we are protective of public health.
    Once they put those controls on, then they can run for much 
longer periods of time, and that, you see, is happening all 
over the State of California.
    Mr. Largent. Mr. Chairman, I will yield back. I see my time 
is up. I just want to tell Mr. Freeman, I wasn't trying to be 
rude, I was trying to be fast. So, I apologize if it appeared 
otherwise.
    Mr. Barton. Well, the Chair will indicate that our 5-minute 
cap is a soft cap, not a hard cap. We are going to try to allow 
for good questioning and good answers. And we are all in this 
together, if we can find some solutions, this subcommittee, on 
a bipartisan basis, is very interested in working to help not 
only California, but the rest of the region and the country, 
for that matter, on some of these issues.
    The gentleman from California, Mr. Waxman, is recognized 
for 5 minutes.
    Mr. Waxman. Thank you, Mr. Chairman, for recognizing me, 
and for the statement you just made because we do very much 
look forward to working with you.
    At Tuesday's hearing, there were a number of points of 
confusion, and I would like to clear up the record by 
introducing a letter from Governor Davis, which explains some 
of these misconceptions, and also make his letter available to 
the press. I think it is worth reading.
    I would also like to introduce into the record a Letter to 
the Editor from former Senator Bennett Johnson, which explains 
the flaws with a recent editorial in the Washington Post which 
was co-authored by Mr. Makovich.
    And, finally, I would like to introduce into the record an 
article from today's L.A. Times, which documents the 
allegations that consumers in California have been overcharged 
by $5.5 billion.
    Mr. Barton. We will show that to the staffs on both sides, 
but I am sure, without objection, we will put those documents 
into the record.
    Mr. Waxman. Mr. Keese, as you know, we heard testimony from 
FERC on Tuesday, and I was astounded to hear FERC Chairman 
Hebert reply that there have been inadequate market signals in 
the West to spur the development of new power plants. In fact, 
Mr. Hebert stated that the shovel has not been turned on the 
first new power plant in California. This statement leads me to 
believe that either Mr. Hebert is not following the California 
situation very carefully, or he is not being straightforward 
with this Committee.
    You mentioned in your testimony that six new power plants 
are currently under construction, and another seven have been 
approved. Would this be taking place if there were insufficient 
market signals in the West?
    Mr. Keese. No.
    Mr. Waxman. So now there is an incentive for these power 
plants to get on-line, where there was not that incentive 
before?
    Mr. Keese. Mr. Waxman, briefly, the power plants were 
started to be filed with us in 1998. We continue to get power 
plant filings. As I mentioned, we didn't have any basically 
built in the 1990's. Now we have 50 in front of us. They are 
arriving still at two a month.
    So, siting of major power plants was last year's problem. 
We are done with that. Siting peakers is today's problem, and 
seeing that those that we sited get built is today's problem.
    Mr. Waxman. Dr. Lloyd, let me ask you, President Bush, some 
Members of Congress, and some generators have claimed that the 
Clean Air Act has restricted electricity generation in 
California. These statements, though, don't appear to stand up 
to scrutiny.
    On February 26, 2001, EPA Administrator Christie Whitman 
appeared on the television show ``Crossfire'' and was asked if 
environmental regulations in California contributed to the 
energy crisis. And she responded, ``That is not the case. What 
is happening in California is due in large part to decisions 
made in California over a period of 10 years. I asked our 
people to go back and give me the environmental clean air 
regulations that were hampering the ability of utilities in 
California to provide power, and we couldn't find any``. That 
was a quote from Christie Whitman.
    Mr. Lloyd, how many permit applications for new power 
plants were denied in the last decade, on the basis of Clean 
Air Act regulations?
    Mr. Lloyd. Well, in fact, Congressman Waxman, we looked 
similarly back there, at the request of the Governor, and we 
could find no evidence of that at all. In fact, we see the 
flexibility provided under the Clean Air Act is, in fact--gives 
us that flexibility.
    Mr. Waxman. Now, Mr. Pope and Mr. Hall have implied that 
electricity generation may be curtailed due to the 
NOX trading program. Their comments don't seem to 
reflect the current changes in the program. Mr. Lloyd, do you 
expect any needed generation to be taken off-line due to the 
unavailability of NOX emissions credits this summer?
    Mr. Lloyd. We do not expect that. We are working under the 
Governor's Executive Order. We are working closely with the 
districts, with the EPA, to assure that. In addition, some of 
the issue of the reclaimed credits from the South Coast, their 
board is, in fact, looking at modification of that program in 
May of this year.
    Mr. Waxman. I just have to say, I am quite stunned. Here is 
the L.A. Times for today, and the headline is ``Energy 
Overcharge of $5.5 Billion Alleged.'' It just seems clear to 
anybody who looks at this situation in California objectively, 
is that this market is dysfunctional, and the producers, 
generators, of electricity have taken advantage of the 
situation and gouged the consumers, gouged at least the 
utilities, and made the system not work because they held back 
on supply, even though, as Mr. Freeman said, still not 
sufficient supply. They have taken advantage of an opportunity 
to make a lot of money.
    And what do we see in another newspaper? In the Washington 
Post, it says, ``Spencer Abraham, the Secretary of Energy, said 
'We need policies that are more friendly to the generators, 
more friendly to the business interests'.'' It seems to me 
somebody has got to look out for the consumers and taxpayers in 
California and all around the country, when a so-called ``de-
regulation'' ends up as an opportunity for an enormous amount 
of mischief and unfair trade practices.
    Mr. Freeman, is that an accurate statement, from your point 
of view?
    Mr. Freeman. I think is. The other point I want to make--I 
just got through negotiating for contracts for long-term power. 
We were flooded with offers for electricity beginning in 2004 
and 195, and turned down a number of offers because the price 
was too high, and negotiated.
    So, the myth that California is an unfriendly place for new 
power plants is a myth.
    Mr. Waxman. Well, I don't think it is a myth to think that 
our policies ought to be changed to be friendlier to these 
utility wholesalers, be more friendly to them and ignore the 
fact that the California ratepayers are being overcharged for 
electricity.
    Thank you, Mr. Chairman.
    Mr. Barton. Thank you. Before I recognize Congresswoman 
Bono, my staff indicates, Mr. Lloyd, on the question that 
Congressman Waxman just asked, that, in fact, there are several 
units that have been off-line within the last week because they 
have exceeded their Title 5 permit--specifically, Goleda FMC 
and Oakland No. 2. Do we just have wrong information?
    Mr. Lloyd. I don't have that information ahead of me, but, 
in fact, this may be some of the units we are working on 
closely with those areas. I can't confirm or deny that.
    Mr. Barton. These are peaking units, they are not baseload 
units. They are peaking units.
    Mr. Lloyd. Yes. I am not aware of the specific instances 
you talk about. Clearly, that is not what we desire. We are 
trying to work with those to make sure it doesn't happen, and I 
will certainly get staff to look into that issue and report 
back to you.
    Mr. Barton. The gentlelady from California, Congresswoman 
Bono, is recognized for 5 minutes.
    Mrs. Bono. Thank you, Mr. Chairman. I want to thank you all 
for your patience today. This problem, to me, is interesting. I 
was gone for the first part of January and February, I was home 
sick, and I have been back basically 2 weeks, and I have been 
hearing the same thing for 2 weeks. It is like Ground Hog Day. 
Every time we wake up, we are hearing the same thing out of 
everybody, and there is really nothing new. You know, we have 
supply, we have demand, and in between we have, for lack of a 
better term, ``voodoo economics,'' and we are sitting here 
going around and around, but if we are not addressing supply 
and demand, it seems we are addressing political problems more 
than anything else.
    Right now, I am telling you Palm Springs and Cochella 
Valley, Thermo-Cochella, are already hot. It was 88 degrees 
Monday, and getting hotter.
    What can we do now? I need to ask you all, why can't we at 
least warn our consumers that a blackout is coming their way? 
Why are we leaving people stranded in elevators? Why are people 
forced to shut down production lines when things are on the 
line? Why are people on life-saving devices suddenly being 
turned off and having to scramble for backup power? Why can't 
we at least--and, Chairman Keese, I guess this is directed to 
you--why can't you at least inform people, ``This is coming 
your way, be prepared''?
    Mr. Keese. Well, if one looked at the Energy Commission Web 
site starting in late 1999, one would have seen this was 
coming.
    Mrs. Bono. No, I am not talking about politicians and 
people here, I am talking about my constituents. I am talking 
about 90-year-old women who are on respirators. Do you want 
them to check a Website? I don't think that is fair.
    Mr. Keese. I am sorry, my answer was that we had indicated 
that 2001 was going to be a very year. We had not anticipated 
that as of earlier this week we would have 15,500 megawatts of 
production out, and that is what called this week's blackout. 
That is an economic. That is a market outage. That is not a 
supply outage.
    I think people should be forewarned that there is the 
possibility of blackouts this summer. If it gets as hot as 
1998, we probably can't take it.
    Mrs. Bono. Well, I understand that they are predicting a 
worse summer, too. I don't know if you all----
    Mr. Keese. 1998 was the worst--was a 1-out-of-40-year-
experience. If we would get something like that, we would 
clearly have problems.
    Mrs. Bono. Well, 1998, I think it was a few years prior to 
that it was 127 in the city of Cochella, it wasn't 1998. I 
thought I heard you all saying earlier it might not happen, we 
might not have blackouts. Did I--nobody said that?
    Mr. Keese. I did say, and I will say again, we are 
optimistic that we can meet the needs of a normal year.
    Mrs. Bono. You know, I think it is better for the 
California people that you say you are not optimistic, and you 
want them to be prepared. I don't think you should give them 
false hope.
    Mr. Keese. I will give both answers. We are optimistic, and 
they should be prepared.
    Mrs. Bono. That is a great political answer. We call it 
``tapdancing,'' but, you know, do you have another approach for 
people? Do we have something in mind that people can do to go 
hook up to power? There are generators coming on-line, portable 
generators, anything that people can do when there is nowhere 
to go, when it is 118? Do you have plans, contingency plans, 
anything that they can do? Are there red plugs somewhere that 
they can go find and hook up to?
    Mr. Keese. They can certainly check--we have two Websites 
in California, I can't tell you the other--I know you can get 
it through the Energy Commission Website, but the Governor's 
office has created a Website with----
    Mrs. Bono. That is great. We have no power, but we will go 
ahead and fire up our Website.
    Mr. Barton. Would the gentlelady yield just briefly?
    Mrs. Bono. Yes, Mr. Chairman.
    Mr. Barton. Is it possible, Mr. Keese, to have a directed 
blackout where certain facilities could be kept on-line--I 
mean, hospitals, senior citizen homes--or is it pretty much if 
you are in that area, you are going to get hit with it?
    Mr. Keese. We perhaps have somebody who can better answer 
that, however, we do not shut down fire stations, police 
stations, hospitals. They are immune.
    Mr. Barton. So, there are certain facilities that----
    Mr. Keese. If you want to buy a home next to--between a 
hospital and a police station, you will never have your power 
go out.
    Mr. Barton. I yield back.
    Mrs. Bono. I understood that that wasn't the case. Just 
going off, again, everything I have heard for 2 weeks, wasn't 
there a hospital that was actually without power during one of 
the recent blackouts, does anybody know?
    Mr. Keese. That would be an error.
    Mr. Barton. It could have happened, but it was an error if 
it did happen?
    Mr. Keese. It should not have happened.
    Mrs. Bono. Yesterday, I spoke with the folks from Loma 
Linda University, and we are not just talking about the lights, 
but we are talking about people who are going through radiation 
therapy. At least if we could figure out a way where they are 
not having to check the Website, that we could inform people to 
not schedule radiation treatment during a 2-hour blackout, it 
would be very helpful. And I would like to suggest that you 
look into that somehow because this, again, is a matter of life 
or death for some people.
    Mr. Keese. We are working on it, and I will carry that 
message back.
    Mrs. Bono. And you have three new plants coming on-line. 
Can you tell me where they are--this summer?
    Mr. Keese. Yes. We have a plant coming on in Yolo County, 
about 40 miles north of Sacramento. We have a plant coming on 
in Pittsburgh, which services the Bay area, and we have one in 
the Corine County area.
    Mrs. Bono. So, Northern California reigns supreme again? So 
Southern California won't see any of that benefit.
    Mr. Keese. Southern California would probably see the 
benefit because Northern California, which has the greater 
need, occasionally in summer will not draw down from----
    Mrs. Bono. So Path 15 won't be an issue?
    Mr. Keese. This will assist some of the problems on Path 
15.
    Mrs. Bono. Thank you. I see my time is expired. Thank you 
very much.
    Mr. Barton. Thank the gentlelady. The gentleman from 
Arizona, Mr. Shadegg.
    Mr. Shadegg. Thank you, Mr. Chairman. I guess I am hearing 
very different information. I heard today that California is a 
very friendly place for the siting of a power plant, and there 
is no reason why anybody wouldn't go there, and yet I was in 
Pasadena, California a few weeks ago with the chairman of this 
committee, and we had in front of us a panel of all of the 
independent power producers, and they testified quite clearly 
and quite bluntly to us that it is indeed very difficult to 
site a power plant in California. They explained that it cost 
them on-average three times as much, and takes on-average three 
times as long to site a power plant in the State of California.
    I just heard Dr. Lloyd, I think, say that no power plant 
ever gets turned down because of the Clean Air Act, and yet it 
appears that is not consistent with the information we have. I 
am holding here a whole series of articles about local 
opposition to power plants. Here is a story from the Press 
Enterprise in Riverside, California, ``Local opposition to a 
power plant in LaCresta, California''; another story from the 
Press Enterprise, ``Local opposition to the LaCresta power 
plant.'' Here is another, a Reuters story about local 
opposition to a power plant in the Coyote Valley, south of San 
Jose, being led by Cisco Systems, and two stories here from the 
Associated Press and the Press Enterprise in Riverside, 
California, about local opposition to a power plant in Blythe, 
California. Another story here from the South Bend Tribune, 
this one March 13, ``Local opposition to a power plant in the 
Newburg Township.'' Another story here about the Southgate 
power plant and local opposition to that power plant. Another 
story on that same opposition to the Southgate power plant. And 
then a story from the L.A. Times from March 10, about the 
opposition or additional requirements being posed for a power 
plant in Huntington Beach.
    Mr. Makovich, in light of your testimony that the low 
retail prices in California are imposing upon the rest of us in 
the West--and I am from Arizona--higher energy costs, I am a 
little concerned that the West is being asked to bear an unfair 
burden for both regulatory policies in California that have 
caused there to be a lack of siting of power plants, and also 
transmission lines. I am also concerned that while we talk 
about a dysfunctional market in California which may have led 
to price gouging--and, indeed, maybe it did, I don't know--but 
I am worried that that dysfunctional market was really created 
by Government action. It seems to me that the California ``de-
regulation'' bill--and I agree with my colleague, Mr. Waxman, 
he called it ``so-called de-regulation''--it clearly was not 
deregulation.
    When you de-regulate the wholesale price but don't de-
regulate the retail price, no one can see that as de-
regulation. When you artificially, through Government action, 
don't allow supply to meet demand and construction to meet the 
projected demand, you don't have de-regulation.
    I guess I would like to start by asking you, first of all, 
we are under a lot of pressure to go along with, or to agree 
to, the creation of some kind of price caps--cost-based, 
temporary cost caps.
    My own conclusion is that those will not incent the 
production or the construction of future power, and that indeed 
that will make the problem worse on into the future. How do you 
see that issue, and would you analyze it for us?
    Mr. Makovich. Okay. In my testimony, I said that one of the 
fundamental flaws of California was that it was not profitable 
nor possible to build power plants. I hear the same thing from 
our clients that are power developers. The reality in 
California is that it is still a very difficult place to site 
power plants.
    The second thing is, my advice to our power development 
clients is, California is still not a place to recommend 
building power plants based on the market prices.
    The evidence is very, very clear--Mr. Freeman and Mr. Keese 
both confirmed this--the record is, if there is not a shortage 
in California, the prices that prevail in the market as it is 
structured today will not provide a profitable return to power 
development.
    So we have got a market here that the only way you can hope 
to get a return on your investment is to have a periodic 
shortage. And if the response to that periodic shortage is to 
cap the prices, we have taken all the up-side out of this 
dysfunctional market and left developers with only the down 
side.
    So, yes, the investment environment in California is not 
conducive to power development. This market still suffers from 
the long-run problem of not being able to stimulate investment.
    Mr. Shadegg. Proponents of price caps say, ``Well, we will 
solve that problem by not capping the price on new power 
plants.'' Doesn't that just send the opposite signal that you 
go in there, you build a new power plant, we say, ``Well, we 
are not going to cap the price on the new power plant for 
now,'' but the long-term message is, ``The minute you get your 
plant completed, we are going to decide, `oh, well, on second 
thought' ''----
    Mr. Makovich. It will create all sorts of crazy arguments 
about ``is the incremental supply from the old power plant 
really new supply or old supply,'' and people will be fighting 
to get refurbished power plants considered new plants instead 
of old plants, and it is just another example of the 
distortions from a lot of these crisis remedies.
    Mr. Shadegg. Correct me if I am wrong, but there is no way 
that we can, in fact, at this level, in the U.S. Congress, cap 
the price of power sold from either Canada or Mexico into 
California, is that right?
    Mr. Makovich. I am not sure of the legal particulars there, 
I wouldn't think that is possible.
    Mr. Shadegg. It seems to me fairly difficult. I mean, they 
have the right to sell the power where they want. Wouldn't then 
price caps cause an incentive for a power producer to construct 
a plant somewhere outside the United States either in Mexico or 
in Canada, and not be under those caps, and wouldn't that 
discourage further production of power in California?
    Mr. Makovich. That is certainly possible, and it is 
probably more true of Canada than it would be of Mexico, but 
that is true, yes.
    Mr. Barton. This will be the last question.
    Mr. Shadegg. And this can be for any member of the panel. 
When we were in California, in Pasadena, a few weeks ago, 
looking at this issue, we were told by a number of people that 
on the short-term problem, the problem for this summer, the 
State of California could be aggressively pursuing the concept 
of megawatts and encouraging consumers, large consumers of 
power, to sell back essentially power that they wouldn't use--
and I presume they could even have the concept of ``megawatts 
during peak'' power. But we were told by the people there that 
the Governor is not actively pursuing that, that that is not 
one of the things he is doing.
    Mr. Freeman. That is just not true.
    Mr. Shadegg. Okay. Well, I am asking--I am asking you, can 
you give us evidence----
    Mr. Freeman. For one thing, my utility yesterday just 
approved a tariff where my customers can bid in megawatts, and 
the Governor has proposed that he will pay people 20 percent of 
their power bill if they save 20 percent.
    Mr. Barton. That just came out this week, isn't that right?
    Mr. Freeman. That is correct.
    Mr. Shadegg. So he was telling the truth several weeks ago 
and you are telling the truth today because time has changed 
the truth.
    Mr. Freeman. And the process is working. We are influencing 
each other, and we are sending a market signal.
    Mr. Shadegg. Can you give us an idea of how much the 
megawatt process between now and the summer might reduce this 
5,000 megawatt count?
    Mr. Freeman. We think that it will reduce the total demand 
by 5,000 megawatts, that is 10 percent, and that is the whole 
idea. This is going to be the most advertised, the most 
vigorous conservation program this country has seen since World 
War II.
    Let me say to you, sir, I just got through negotiating with 
all these companies, and there is a tremendous desire to sell 
electricity to California in 2003, 194, and 195. We got more 
offers than we can take. So, it is just not correct to leave 
the impression that California is a place where these 
generators don't want to sell electricity in the future. They 
have made the offers and we have accepted.
    Mr. Shadegg. I don't doubt that they want to sell you 
electricity, my question is, are they willing to allow it to be 
built, and it appears that the citizens of California aren't 
really anxious to have it built in some places.
    Mr. Freeman. Democracy is alive and well in California, 
sir, it is a good thing.
    Mr. Barton. Well, it is alive and well in the United 
States.
    Mr. Shadegg. It is alive and well in Arizona.
    Mr. Barton. The gentleman referenced several news articles. 
Does he wish those put in the record?
    Mr. Shadegg. I would like them put in the record, Mr. 
Chairman.
    Mr. Barton. Then as Mr. Waxman did, Mr. Shadegg will have 
to make a unanimous consent request that they be put in the 
record. Will you do that?
    Mr. Shadegg. I so request.
    Mr. Barton. We will show those to the minority staff and 
majority staff, and we will affirmatively act on that, I am 
sure.
    Mr. Cooper. This was an open question on megawatts, and 
there is an important point about megawatts that I wanted to 
make.
    Mr. Barton. You will get to make it because we are going to 
go to Mr. Walden for 5 minutes of questions.
    Mr. Walden. Thank you, Mr. Chairman. I want to follow up on 
this power buy-back plan and ask the question, why did it take 
until this week for the State of California to enter into this 
because in my part of the world up in Oregon, the Bonneville 
Power Administration entered into these sorts of agreements 
months ago. We have shut down aluminum smelters. We have put 
people out of work for buying back power. And I, like my friend 
from Oklahoma, need quick answers, if we can. Can anybody tell 
me why it took this long?
    Mr. Freeman. We just may not be as swift as the people in 
Oregon.
    Mr. Walden. I will accept that. I have another question. I 
want to preface some of my questions, too, by saying I am the 
last one who wants to wreak any kind of economic havoc on 
California. Your economy is too important to this country. We 
need to find both short-term and long-term solutions to this 
problem.
    Now, I am new to this Committee so I am learning as I go, 
so bear with me. The other day, the FERC folks told me that 
they only have jurisdiction over, I believe they said, 47 
percent of the power that California consumes, which means some 
53 percent, plus or minus, is actually not under their control.
    What is happening to that power? Are there hard caps, soft 
caps, what price range is being dealt with there?
    Mr. Freeman. Sir, this is municipal power that is self-
sufficient. In other words, I have 7,000 megawatts in Los 
Angeles. It is to serve the people of Los Angeles.
    Mr. Walden. What rate are you charging, megawatt hour rate?
    Mr. Freeman. We are charging the people of Los Angeles a 
cost-based rate. We are a non-profit, publicly owned utility.
    Mr. Walden. What is that rate?
    Mr. Freeman. At retail, it is about 10 cents a kilowatt 
hour, three times what you pay in Oregon.
    Mr. Barton. Would the gentleman yield?
    Mr. Walden. I will get back to that.
    Mr. Barton. Mr. Freeman, if the FERC put in a wholesale 
price cap, the city of Los Angeles, since it is a municipal 
utility, would not be subject to it, isn't that correct?
    Mr. Freeman. Our rates would not be subject to it.
    Mr. Barton. Nor would any other municipal power authority 
in California, nor would any other co-op in California.
    Mr. Freeman. But it would set the market price and we would 
abide by it.
    Mr. Barton. But you wouldn't be legally subject to it.
    Mr. Freeman. That is correct.
    Mr. Walden. Thank you, Mr. Chairman. I appreciate your 
comment about how your rates are double or triple, but I will 
tell you what, we don't have enough power to meet demand in our 
hydro system. And, Mr. Keese, when you say you are optimistic 
that we can meet the needs this summer in California, in the 
past you have been able to do that because we have had surplus 
power in the Northwest to sell to you, isn't that true?
    Mr. Keese. That is correct.
    Mr. Walden. And I understand that California depends on 
importing power for 25 percent of its peak load, and it 
represents 42 percent of the summer peak in the West--numbers I 
have been given. Given that we may have a deficit in the West 
because we have the lowest precipitation levels probably in the 
history of recordkeeping of precipitation level, how are you 
going to make up for that because I don't think we are going to 
have a surplus. What is your plan?
    Mr. Keese. We have figured that into some of our 
calculations. Historically, you are correct, we get 14 percent 
from the Southwest, 11 percent from the Northwest. We do not 
expect to get it this year.
    Mr. Walden. And so you have calculated that. You aren't 
going to need the surplus we normally would provide.
    Mr. Keese. Yes, we need it.
    Mr. Walden. You have calculated that you aren't going to 
get it.
    Mr. Keese. We are prepared that we may not get it.
    Mr. Walden. All right. So that is in your calculations.
    Mr. Freeman. Well, Mr. Walden, we traditionally swap power 
with the Northwest.
    Mr. Walden. I am aware of that.
    Mr. Freeman. And we provide power to you in the wintertime 
when you need it, so it is not just a one-way street.
    Mr. Walden. That is not my point. We appreciate that and it 
has been a good working relationship. Again, I am not here to 
throw stones at you or have you throw stones at Oregon, I don't 
think we are engaging in that, nor should we. The point is, 
what do we do in the short-term between now and next winter 
because we have been able to rely on this partnership. And, 
indeed, we have been getting a 2-to-1 return this winter which 
has helped us buildup some reservoirs that may help you down 
the road.
    What I am looking at is to make sure when you say you are 
optimistic, I am struggling in my own mind, how do you get 
there when that----
    Mr. Freeman. I just want you to know that we negotiated 
just within the last few weeks, additional exchange 
arrangements with both Bonneville and the British Columbia 
company, so we are working together.
    Mr. Walden. I don't think I have alleged anything less than 
that. My question, though, is, how you meet--I want to make 
sure--well, forget it. I will just grant you that.
    I know that Bonneville and the co-ops and the other power 
companies in my State and neighboring Washington State are in 
the process of shutting down any heavy manufacturing by buying 
the power out. We are in the process of shutting down irrigated 
agriculture right now, by buying power out, which is what you 
tell me you are engaging in as well. We are going in the 
dumpster up North in terms of our economy. What I am trying to 
do is make sure that Congresswoman Bono's constituents and 
others don't fry this summer.
    I mean, I am in the broadcast business by trade. I have 
lived through power outages and helped with emergency 
communications, have backup generators at my own facility. What 
I want to make sure of is that we are accessing every asset 
possible, whether it is FEMA or National Guard or Army, to make 
sure that there is power to meet the emergency this summer that 
is coming. I see that as a critical short-term problem. I don't 
want you to fail, and I don't want my people to fail. I yield 
back, Mr. Chairman.
    Mr. Barton. Thank the gentleman from Oregon. The gentleman 
from California, Mr. Radanovich, is recognized for 5 minutes.
    Mr. Radanovich. Thank you very much. Mr. Cooper, I 
understand that in your testimony, which I thought was very 
interesting, may I assume out of that that you do support some 
sort of temporary cost-plus caps, or however you want to say 
it, for wholesale markets to bring cost in line with supply?
    Mr. Cooper. Yes. To put it simply, we don't think you 
should de-regulate markets before they are effectively 
competitive, and when they are proven not to be workably and 
effectively competitive, you have to do some regulation to 
control the rents.
    Mr. Radanovich. In the California situation, part of the 
problem with the de-reg plan--I probably shouldn't even call it 
that anymore--but the plan that was installed fixed the cost or 
the rates that could be charged at the retail level as well. 
When you look at solving the California plan, I think you would 
agree that it is a problem of bringing supply in line with 
demand and pray for good weather.
    Where is your position on the demand side of this thing 
with regard to the cap on retail rates, are you in favor of 
lifting that as well?
    Mr. Cooper. No. We are vigorous supporters of administer 
demand side measures--that is, while there is no enthusiasm 
here for identifying specific types of interruptible load and 
interrupting it, we think that is a good approach. We think 
that when you take--if you take the average residential 
customer, who makes the fundamental choices about the energy 
consumption characteristics of their residence? Basically, the 
building and the landlord. They chose the shell, and they chose 
the appliances, and the consumer moves in, and if you increase 
his price by 330-fold or 1,000-fold, well, there is not a lot 
they can do except turn the lights off and turn the air 
conditioning off, and that is not what we are interested in.
    Mr. Radanovich. Again, you know, this tight schedule 
routine, I am going to have to ask these questions quickly. How 
can you then expect FERC to raise or impose a cap on 
Californians when the rest of the West and Oregon, their retail 
rates are going up 20 percent when the Governor refused to 
increase rates retail in California?
    Mr. Cooper. We support an areawide cap so that no one has 
to beggar-thy-neighbor, first of all. Second of all, it is the 
case that the rates in California are higher than anyplace else 
in the West.
    Mr. Radanovich. So, to our knowledge, the retail rates in 
California have not gone up in 10 years and, in fact, have 
decreased 1 percent.
    Mr. Cooper. In point of fact, if you go back to the bill 
that none of us liked, and we certainly didn't support, one of 
the ways you got to de-regulate was to tell consumers you were 
going to protect them from the dangers of this market, about 
which we have warned people from Day One. And that was part of 
the deal.
    And so now when the market goes crazy and there are 
billions of dollars of abuse in the market, you come along and 
say to the ratepayer, ``Well, we fooled you. We weren't going 
to protect you from this market,'' and that was part of the 
deal.
    And so from our point of view, you go back and you do a 
cost-of-service price cap areawide, so no more beggar-thy-
neighbor policies here. You establish a specific timeframe, 
whether it is a 2-year workout, or a 3-year workout--we do this 
all the time in the corporate world--we look at--as I have 
said, you have had a bunch of things put on the table. This 
question of NOX, and make sure nobody is shut in. In 
the context of a defined time period and quid pro quos, we 
should be able to make these exchanges.
    Mr. Radanovich. Thank you. Mr. Keese--and I want to thank 
you all for coming to this hearing. I do have a couple of 
questions. And, yes, in my district, we have been subject to 
rolling blackouts. Yesterday, there was a cataract surgeon who 
was in the middle of surgery and the lights went out, and the 
patient was going nuts while they were trying to get their 
generator on. Had no foreknowledge of any blackout coming, and 
were not warned.
    Given that, when we do get to a situation of blackouts this 
summer, what is the ability that you have, or is it possible to 
give a forewarning for areas in the country so that death and 
destruction don't occur--which they will, when we get to 
rolling blackouts this summer--some foreknowledge of that would 
help a lot not only in human health and lives, but also in cost 
of business. And I think it is good for you to accept the fact 
that they are with us and devise a means to prepare people for 
them, and your response is welcome.
    Mr. Keese. I believe that is certainly a reasonable 
suggestio. I believe our Governor may perhaps have already 
ordered that action, but since I am not responsible for 
emergencies, I cannot vouch for that.
    Mr. Freeman. Can I just say, every utility has a detailed 
knowledge of the critical loads, and it was just a mistake that 
it wasn't done yesterday or the day before. But people on life-
support, and things like that are not interrupted, and PG&E has 
that detailed----
    Mr. Radanovich. But, sir, that was interrupted in my 
district, it is actually happening, so you can't say that.
    Mr. Freeman. I say that it shouldn't have happened, it was 
wrong, but there are these plans--and I don't know what 
happened yesterday, we didn't have blackouts in L.A.--but I do 
know that we have knowledge of every load, and so does PG&E, 
and so does----
    Mr. Radanovich. I don't see how you can. I mean, I can see 
where you can take hospitals and block that part of the grid 
out of hospitals, but where surgery like this is being 
conducted almost in residential areas, you have no knowledge of 
that kind of stuff going on.
    Mr. Freeman. Every life-support customer is on a special 
rate in L.A., and we know who they are.
    Mr. Barton. This will have to be the last because I want 
Mr. Burr----
    Mr. Radanovich. I do have one more short question. Did I 
run out of time already?
    Mr. Barton. Yes, sir, unfortunately. And I want to let Mr. 
Burr ask his questions. Then we are going to have to recess for 
three votes, then we will come back. If Mr. Blunt comes back, 
he will be the first questioner, any other subcommittee 
members, and then we will go to Ms. Harman of the full 
Committee, and then we will start the second round. If you have 
one quick last question, and then we are going to go to Mr. 
Burr. Did you have one last question?
    Mr. Radanovich. I do. It is a quick question, I think. A 
lot of the reasons why the power went out yesterday was because 
COGEN facilities, which account for 30 percent of California's 
power, had not been paid. I think it makes sense to go--let 
those COGEN plants go direct to the consumer this summer. It 
may mean higher prices to the consumer, but they will not have 
blackouts as a result of that.
    Mr. Keese. I believe that situation will be rectified next 
Tuesday. The Governor did issue something Tuesday night. I 
believe there is a consensus agreement that will be handled by 
the Public Utilities Commission next Tuesday. It will require a 
brief piece of legislation after that, but I believe that deal 
is done.
    Mr. Radanovich. Thank you.
    Mr. Barton. The gentleman from North Carolina, Mr. Burr, is 
recognized for 5 minutes. This will be the last 5-minute 
question round before we go vote. There will be three votes. We 
will come back at approximately 2:20 and conclude the hearing.
    Mr. Burr. I thank the Chair. I know that there is 
frustration on both sides, that table and this dias. I think 
everybody is after an answer and, unfortunately, spending time 
pointing fingers and blaming does not necessarily get us the 
answer, and I think it has been displayed at all levels in the 
State and the Federal Government.
    Let me suggest that if I summarize what I have heard in the 
short time I have been here is, California did everything right 
except they bought power from the outside, and that was our big 
mistake because people profited from it. I don't think it is 
quite that simple, but I would challenge you that we need to 
constructively look for solutions, if you want the Federal 
Government to play a role, and that ``if'' is yet to be 
decided.
    Mr. Keese, if I understood you correctly, you said 
California had no shortage of electricity generation. Is that 
accurate of what you said?
    Mr. Keese. Today?
    Mr. Burr. Today.
    Mr. Keese. Correct. We have generating facilities that 
could easily produce in California, 45,000 megawatts. We are 
down in the 30,000 range, I believe, and we are short. But we 
have 15,500 megawatts out for repair.
    Mr. Burr. Dr. Lloyd, you said that no generation 
application had been turned down for the purposes that Mr. 
Barton had asked about. Tell me, how many applications for 
generation placement have been turned down in total in the last 
decade.
    Mr. Lloyd. I can get that to you. We will get it to you.
    Mr. Burr. Any?
    Mr. Burr. The reality is, from what I have been able to 
uncover is, you never turn them down, you just never accept 
them in California. And if you do, it is just drug out and out 
and out. So, your statement was fairly accurate to the 
chairman, but I think he maybe just misstated exactly how he 
should have asked it.
    Let me ask you, Mr. Freeman, I know that L.A. Power sold 
some power to the system. You had some surplus, you said that. 
FERC kicked in during the Stage 3 cap, which they used to 
determine any over-payments that needed to be paid back.
    When that threshold was hit in January, did L.A. Power sell 
anything above that $273 threshold per megawatt?
    Mr. Freeman. I am sure that we did because the price of 
natural gas was higher than that.
    Mr. Burr. And did you sell any----
    Mr. Freeman. Let me just finish my answer. We sold only 
cost-plus-15-percent basis, which is what we are advocating for 
everybody.
    Mr. Burr. So if you sold above that threshold of $273 and 
other people had to give back and you didn't give back, yours 
was based----
    Mr. Freeman. No one has given back anything yet.
    Mr. Burr. But did FERC require you to rebate----
    Mr. Freeman. FERC has not required anyone to rebate. They 
are looking into the charges by some people----
    Mr. Burr. Let me ask you, could FERC, since they have no 
control over you, force you to rebate?
    Mr. Freeman. No.
    Mr. Burr. Should FERC have control over public power?
    Mr. Freeman. No, because we are locally owned, and this has 
been tradition for about 80 years in this country, of local 
public ownership.
    Mr. Burr. Mr. Freeman, I have only got 5 minutes. In 
February when the threshold was $430 per megawatt, did you sell 
any power over that $430 threshold?
    Mr. Freeman. I was working for the Governor in January, and 
I don't know the facts, but our policy, which we have 
scrupulously implemented, is to sell on a cost-plus-reasonable-
return basis. The cost of natural gas has gone nuts in 
California, and the prices have gone nuts, and FERC is 
responsible for the lack of regulating the transportation of 
natural gas, so the prices are sky-high.
    Mr. Burr. But L.A. Power did not profiteer at the price 
they sold electricity to the systems, am I correct?
    Mr. Freeman. The word ``profiteer'' is a pejorative term. 
We earned a 15-percent return on our investment.
    Mr. Burr. Let me ask you, Mr. Hall, could you explain to us 
the importance of a formation of a Western RTO?
    Mr. Hall. Yes. There are a couple of fundamentals, and 
obviously we think California should integrate itself into a 
larger Regional Transmission Organization. It is a net importer 
of power, it has been for years, it only makes sense. And part 
of the problem is when you have different market----
    Mr. Burr. California is a net importer of power?
    Mr. Hall. Yes.
    Mr. Burr. I thought Mr. Keese told me they had enough 
generation in California to take care of California's needs.
    Mr. Barton. If it was all up and operating, but there is a 
lot of it just not up and operating.
    Mr. Hall. But historically it has been a net importer. The 
problem is when you have different markets within a region, you 
get different price signals and you get, obviously, generation 
chasing those different price signals. So what we advocate is a 
Regional Transmission Organization that has fair and consistent 
policy and fair and consistent tariffs, and in that way things 
are done on behalf of the region for California and elsewhere. 
So, when loads needs supply, there are consistent signals out 
there that don't necessarily skew the market and send power in 
another direction.
    Mr. Burr. I personally have some questions that I will 
pursue later, and possibly written to some of you, as relates 
to if California State owns the transmission grid, how can they 
become part of the RTO based upon what FERC was trying to 
accomplish with the divestiture of ownership by entities that 
might have a problem with Order 888.
    So, my last question would be, how important is it that 
California, if the State owns the transmission grid, fulfilled 
the obligations for the free flow of power under Order 888?
    Mr. Hall. It is extremely important. If that doesn't 
happen, it will send a chill into the marketplace, and you will 
see companies leave that particular region if there is a bias 
to California.
    Mr. Burr. So that should be a firm condition of any FERC 
agreement.
    Mr. Hall. Yes.
    Mr. Burr. I thank the entire panel.
    Mr. Barton. We are going to recess until approximately 2:15 
to 2:20. When we come back, Mr. Blunt is the first questioner, 
if he returns; if not, we will start the second round.
    [Brief recess.]
    Mr. Barton. There are going to be other subcommittee 
members come back. To expedite the hearing, I am going to start 
asking my second round and as other members come, we will 
recognize them for their first round and then go into the 
second round.
    I understand that Mr. Freeman has a flight at 5:30. Mr. 
Pope, are you on the same plane?
    Mr. Pope. I don't know if it is the same plane.
    Mr. Barton. Well, we really should be able to get out of 
here by--we are through voting for the day, so I would hope 
that 3:30 to 4 we can adjourn the hearing.
    The Chair will recognize himself for such time as he may 
consume until another member arrives, on the second round of 
questions.
    Chairman Keese, I want to ask you a question about the 
permitting process in California--and, Dr. Lloyd, you will be 
involved in this also. I am very positively impressed with the 
latest bill that the California Legislature has put in place on 
expedited review for permits, but I am not a wordsmith and I am 
somewhat confused about when the clock starts ticking on 
something that has been submitted.
    What is the protocol if Barton Energy, philanthropic Texas 
billionaire who doesn't want to make any money, just watches 
this hearing today and is moved to help build a power plant in 
California. I have not done anything until I see this hearing 
today, but I am so moved that we need to do something to help 
ease the plight in California that next week I send my agents. 
Do they come to the California Energy Commission first? Do they 
go to the California Air Quality Board first? Do they go to the 
California Public Utility Commission first? Do they go to one 
of the Regional Air Quality Boards first? What is the first 
thing that Barton Low-Cost Energy has to do to even let you 
know that I might want to build a power plant in your State?
    Mr. Keese. I would say that typically the process, it is 
almost a 5-year process. You spend a year making that decision, 
you spend a year finding your site, we license you in 1 year--
--
    Mr. Barton. I don't spend a year. I decided today that I 
want to do it.
    Mr. Keese. Right, I meant 2 years building. I would advise 
you to come to the Energy Commission. We are a one-stop shop, I 
override local laws.
    Mr. Barton. If I come to you first, you will help me with 
Dr. Lloyd's Air Quality Board.
    Mr. Keese. Correct.
    Mr. Barton. Dr. Lloyd, does that mean that the State 
California Air Quality Board also helps with the like 14 
regional--some number of regional Air Quality Boards?
    Mr. Lloyd. There are 35 Air Quality Districts in the State 
and, in fact, it is their responsibility on the siting. We will 
work with them as, obviously, part of the Governor's Executive 
Order, we will expedite the air side of that as well. Clearly, 
if you came for such an offer 1 day, I am sure we could get 
that turnaround.
    Mr. Barton. I just want to understand. I get such a totally 
different message when I talk to a Duke Energy, or Relion, or 
an Enron, or any of the operators that have come into the 
State, that I want to make sure we know the reality.
    Now, the reality is, from the time a reputable provider 
makes it known that they really want to site and build a power 
plant, it is going to take 3 years? Five years? One year? If 
everything goes well and they actually show that the design 
works and they meet the air quality standards and they meet the 
local site standards, how long is that process?
    Mr. Keese. Our standard process for a major power plant 
would be 12 months. We are under these orders, and with the 
additional staff that the Governor has----
    Mr. Barton. When does that clock----
    Mr. Keese. Well, we call it ``data adequacy,'' when they 
have submitted an application that shows what the project is 
and answers most of the key questions so the environmental work 
can start. Generally, that takes another 3 or 4 weeks after the 
first--they file it----
    Mr. Barton. Is it possible--we have heard the term 
``gaming'' a lot in relationship to power providers gaming the 
system to get a higher market price. Is it possible that people 
that don't want power plants built can game the data adequacy 
of it so that that drags out?
    Mr. Keese. You know, I don't believe so because I believe 
that--I can't remember one in the last 2 years that has taken 
more than 2 months after filing.
    Mr. Barton. These are honest, reputable people over here. 
They are looking at me with a straight face and saying that it 
is just hunky-dory out there in California. What is your view, 
from the time--if your company wanted to build, site and build 
a new power plant within the State of California, and your CEO 
made that decision today, when do you think they would give 
you--the clock would start ticking on this 12-month process? 
How long would it take before they officially accepted your 
application and began to review it in this 12-month period?
    Mr. Hall. I can give you two examples. One is our Moss 
Landing project which is under construction, and when we 
submitted the application which had to then be deemed data 
adequate, that did take longer than the initial 45 days, it 
took almost twice that. Then we went into the process once it 
was deemed data adequate, and it took there slightly longer 
than 12 months. That project was virtually unopposed up in the 
Monterrey-Carmel area, and it went, you know, fairly quickly, 
even though, again, it is a long process compared to other 
projects we do elsewhere whereas at our Morro Bay facility, 
which is a 50-year-old plant where the town grew up around it, 
we have encountered significant local opposition and long story 
short, from the time we announced the project to when that new 
plant could conceivably go on-line in 2003, 2004, it will have 
taken 5 years to permit and build the plant.
    Mr. Barton. Five years in an existing site, admittedly 
within a built up community.
    Mr. Hall. Correct.
    Mr. Barton. And in a new site in a rural area, from the 
time you decided you wanted to do it, it is going to take how 
long to get the permit to construct it?
    Mr. Hall. Well, there are a lot of things that influence, 
and a lot of it again is just whether the local community 
supports or opposes it because, again, California is a State 
of--you know, where the stakeholder process is alive and well, 
and they get very involved in that process.
    So assuming everything went reasonably well through the 
process, it usually takes us about 6 months to get our arms 
around the project, develop and application, and then put it 
into the process, and it would come out on the other end.
    Mr. Barton. To use your terminology, ``to get your arms 
around the process,'' in California it takes you about 6 
months. That is before you submit the formal application.
    Mr. Hall. Yes, and that is the minimum. Again, depending on 
whether the community is receptive or not.
    Mr. Barton. In the rest of the country, does it take you 6 
months to get your arms around the process, or does it take you 
6 weeks, or 6 years?
    Mr. Hall. It varies, but typically the entire process 
certainly doesn't take as long as it does in California. We 
have sited other projects in the Midwest, the Northeast, and 
the Southeast, and we can do it much quicker. In the time some 
of these projects have gone through the mill and we have gotten 
the permits to construct, we would have already gotten the 
permits and built the plants elsewhere.
    Mr. Barton. The reason I ask the question is because we are 
under active discussions about what package, if any, to put 
together for an emergency electricity bill for this summer. And 
we are trying to decide whether we want to put some incentives 
to State and local governments to expedite siting review. And 
we had the State of Ohio's Commissioner, and they have a system 
where from the time you bring a project forward--I mean, 
literally--they will give you a decision within 6 to 9 months, 
go-no go, period. And I don't get that impression in 
California.
    Now, as Mr. Freeman has pointed out, democracy is alive and 
well in California, and I am all for democracy, but if 
California is so democratic that it takes years to get 
everybody talking on the same page, that doesn't help build 
many new power plants in the next 12 months to 24 months.
    Mr. Hall. Well, there are extremes and there are some in 
the middle. Some we can do pretty much within the defined 
timeframes of the permitting process, others take much longer.
    Mr. Barton. We have other members back, so I am going to 
reserve the balance of my such-time-as-I-may-consume for later. 
I am going to recognize the gentlelady from California, who has 
waited patiently to ask questions, and then we will go to Mr. 
Largent, then to Mr. Shadegg, and then back to myself, if no 
other members show up, for 5 minutes.
    Ms. Harman. Thank you, Mr. Chairman. I appreciate the 
opportunity to sit in on this subcommittee hearing, as a member 
of the full committee, and it was worth the wait. It has been a 
very interesting hearing.
    I would just like to note a couple of things for the 
record. First of all, I knew David Freeman when we were Senate 
staffers together 30 years ago, and he was smart then, but he 
is much smarter now because he is a California resident now, 
and has been rendering good service to a great State. That is 
the first point.
    The second point is that Mr. Boucher stated incorrectly 
earlier today that the Feinstein-Smith bill had been 
introduced. It has not been introduced, and I want to commend 
them for continuing to talk to people about whether that is the 
best approach or not. I gather they--I know they are in 
discussions with Members of the House, and I believe they are 
in discussions with Governor Davis, too, on this issue. It 
would be better to bring the right bill that has bipartisan and 
substantial support to the floor, rather than some other bill. 
And so I think that is a good idea.
    Third observation, I just read Governor Davis' long letter 
to Henry Waxman that he asked to be put in the record. It lists 
lots of initiatives that the Governor and his team are taking--
and, by the way, Mr. Chairman, there are lots of initiatives 
that I believe would provide what you were looking for, a 
prompt action on siting of new power plants. But, at any rate, 
I just want to observe, as one Member of the House, that the 
Governor should be doing more to talk to us back here. The 
State Legislature is talking to us, but the Governor could do 
more to work directly with the Members of the House and Senate 
who do want to solve this problem not just for California, but 
for the Western Region and for the country.
    And I commend you, Mr. Chairman, particularly, because I 
know you are working on this hard, and I have worked closely 
with you in the past, and I am just hopeful we will come to 
some good options soon.
    I don't have much time, so I would just like to ask a 
question to my good friend, Mr. Freeman. My impression is that 
information about the State taking over the power grid is not 
well understood. Mr. Boucher was talking about it. Could you 
enlighten us again about what the State is proposing to do, and 
whether or not that has--what the relationship is between that 
and Federal law?
    Mr. Freeman. Yes, ma'am, but, first I want to complain--I 
don't understand why a Member of Congress is not growing old 
while I have grown old over the last 30 years.
    Mr. Barton. Who is that?
    Mr. Freeman. Ms. Harman. I just don't understand why she 
looks the same and I have gotten to be an old man, but I guess 
that is life.
    Mr. Barton. It is her friends in Congress that keep her 
young.
    Ms. Harman. It is the easy elections I have.
    Mr. Barton. I actually thought you were referring to Henry 
Waxman, who isn't here.
    Mr. Freeman. I better stop there. The transmission system 
is the interstate highway, and I agree completely with my 
friend from the Duke Power Company. It has got to be open on 
equal terms to everyone, and that would be the whole idea. But 
we can build all the power plants in the world, Mr. Chairman, 
if we do not add lanes to that interstate transmission system. 
We won't get the power where it is needed, and we will not have 
just reasonable rates, by anyone's definition.
    The investor-owned utilities in the State are broke, nearly 
broke. We try to keep them from going broke. They have not the 
resources to fund the expansion that is needed. So, one of the 
reasons the State is taking over the transmission system is to 
be able to finance the expansions on Path 15 that Congresswoman 
Bono is so familiar with, and I am impressed by that--she is 
not here--but there's a lot of knowledge of what the problems 
are on the transmission system. The State is determined to 
expand the transmission system so it will flow freely.
    The other point is, with all due respect to FERC, with all 
of their orders, they have not created a Regional Transmission 
Organization in the West. Most of the transmission is owned by 
public entities, not private entities. Bonneville Power, one of 
the companies that is cleaning up on us, is owned by the 
Federal Government, but they own the transmission system out 
there. L.A. owns a big chunk of transmission. A lot of public 
agencies own the transmission.
    I think under the leadership of Governor Davis, we will 
form a Regional Transmission Organization that we do not have 
now. So, I think that it should not be thought of as something 
that will detract from the national interest, but rather that 
it will add to the national interest and help us solve this 
problem.
    Ms. Harman. Thank you. Second, time is short. Everyone has 
been holding up this article in today's Los Angeles Times about 
the energy overcharge--alleged energy overcharge--$5.5 billion. 
I wanted to afford others on this panel an opportunity to 
comment on this issue. I see my time is out, but has anyone not 
commented who would choose to comment?
    Mr. Cooper. One of the important things to recognize with 
these overcharges, or alleged overcharges, is that part of it 
may be rent, and part of it may be gaming, and part of it may 
be some form of manipulation, and the bottom line for the 
residential ratepayer is that we don't care. The bill is too 
high. It is either stupid, or abusive, or just too smart, and 
other people were not smart enough, but the point is that to 
reform the system so that--there are two different steps here.
    The $5.5 billion is a big number, but if we are looking at 
$20 billion or $30 billion electricity bill in California, that 
is a real bill, that is a big number, too, and we have got to 
worry about that also.
    So, yes, the rents are important, and we shouldn't confuse 
cartel versus smart people versus stupid market structures. On 
the other hand, we ought to also think about how we are going 
to make the market work in the long-term.
    Ms. Harman. I agree with that part. Thank you very much. 
Thank you, Mr. Chairman.
    Mr. Barton. The gentleman from Oklahoma, Mr. Largent.
    Mr. Largent. Mr. Hall, would you like to respond to that 
last question?
    Mr. Hall. Well, I was just going to say, any market reforms 
that need to take place need to be done in the context of all 
the participants who play into the California market, and it is 
more than the five out-of-state generators. And I have not seen 
the information yet released by the ISO, but hopefully that is 
recognized in their analysis.
    Mr. Largent. Mr. Keese, I have a question for you. Does the 
CEC have some forecasting responsibilities for the State of 
California?
    Mr. Keese. Yes, we have had, historically. It has been 
diminished the last couple of years.
    Mr. Largent. And how did your forecast for the year 2000 
match actual usage in California?
    Mr. Keese. The maximum we anticipate for the year 2001, 
this year, is lower than what we have predicted since 1988.
    Mr. Largent. So you are lowering the expectation.
    Mr. Keese. The expectation has been coming down, correct.
    Mr. Largent. What has reality been? In other words, what 
did you predict for 2000?
    Mr. Keese. We basically predicted a 2-percent growth in 
demand year after year after year, and we have stayed right 
about that, but in the early to mid 1990's, we had a 
recessionary period where we got under the 2 percent. I will 
say that all indications are that in the year 2000, perhaps our 
overall demand grew about 4.5 percent, someplace in that range, 
but it is still within the range that had been predicted, that 
2 percent going out.
    Mr. Largent. So you predicted 2 percent, but actual growth 
was 4.5 percent, is that what you said?
    Mr. Keese. We had predicted that on a decade basis, 10-year 
basis, the growth will be 2 percent. Sometimes it is under, 
sometimes it is over. Last year it may have been as high as 4.5 
percent.
    Mr. Largent. Okay.
    Mr. Keese. But it is still under what----
    Mr. Largent. When did the CEC first believe that there were 
any problems with the design of the restructured California 
markets, how long ago?
    Mr. Keese. We have not voiced an opinion on the 
restructuring of the California markets. We issued our heat 
storm report in the Fall of 1999, indicating that 2001 was 
going to be a critical year.
    Mr. Largent. You did that when?
    Mr. Keese. The Fall of 1999.
    Mr. Largent. And what actions did the State of California 
take immediately following the predictions that you gave them?
    Mr. Keese. I believe the State of California--all the 
parties concerned looked at the report. At first, it was not 
accepted, but after a couple of months it was accepted, and I 
believe people have started putting it into their planning.
    Mr. Largent. So, the report showed that the plane was in a 
nosedive.
    Mr. Keese. Right.
    Mr. Largent. But nobody really responded to the report?
    Mr. Keese. There were no drastic actions taken in response 
to the report.
    Mr. Largent. Mr. Makovich, I wanted to ask you about price 
caps because that has been suggested by a number of the people 
on the panel today, wholesale price caps. What do wholesale 
price caps do in terms of encouraging new supply in the State 
of California, which really is the long-term fix that you 
talked about throughout your testimony and in many of your 
responses. What do those price caps do in terms of encouraging 
new supply in the State of California?
    Mr. Makovich. I think, at best, they don't discourage it, 
but they very likely will discourage it because the price caps 
we are seeing now that the FERC has established for what is 
just and reasonable, this is exactly the problem that we 
anticipated. Price caps are very difficult to employ properly. 
They are a limited emergency procedure, and all too often they 
are done wrong and make things worse.
    The caps that are in place right now are too low. The most 
expensive generating units have the incentive not to run, given 
these price caps. If they think that they are in the month and 
that their fuel or environmental costs are above what will turn 
out to be the average, they have been given the perverse 
incentive not to run. And that is exactly the kind of 
distortions that price caps produce. If they are indefinite, if 
they are something that is going to come and go in this 
marketplace, they increase the uncertainty on investment and, 
on whole, probably a negative influence on investment.
    Mr. Largent. Do you think even having price caps on a 
temporary basis is a wise idea, like just to get through this 
summer?
    Mr. Makovich. Given how bad this summer is, based upon our 
computer simulations of supply and demand, we expect at least 
200 hours under expected conditions--normal weather and so on--
when there is no reserve left in California. And when you get 
through all your interruptions and emergency procedures, there 
are going to be 20 hours that we just see you have to have 
rolling blackouts. So, yes, over those very limited points in 
time, this market will not clear. These prices can go to 
astronomical levels. But a price cap of $1,000 or something 
would be far more appropriate than what we have seen.
    Mr. Largent. But it wouldn't do anything to abate the 
blackout.
    Mr. Makovich. No.
    Mr. Largent. At all.
    Mr. Makovich. No.
    Mr. Largent. Mr. Chairman, I see my time has expired.
    Mr. Shadegg [presiding]. I don't think there is anyone on 
the minority side. Mr. Shimkus.
    Mr. Shimkus. Thank you, Mr. Chairman. Let me ask a question 
about nuclear. Someone--and maybe it could go to Mr. Keese and 
maybe Mr. Freeman, to begin with. Is there a prohibition of 
siting nuclear facilities in the State of California?
    Mr. Keese. There is, to the extent that California passed a 
law that indicates we cannot site a power plant until there is 
a Federal Repository in operation.
    Mr. Shimkus. So what would help California if we move the 
Yucca Mountain Plan and Facility?
    Mr. Keese. If there was a Federal Repository in operation, 
a project that came to the Energy Commission would be reviewed 
by the Energy Commission.
    Mr. Shimkus. We have had that bill on the floor a couple of 
times. It has been vetoed by the President. We look to move 
that bill again. I hope we have the Members of the California 
Delegation support.
    Let me then also ask, I know that the chairman----
    Mr. Freeman. Could I comment on that?
    Mr. Shimkus. I would rather move on, sir, thank you.
    Mr. Freeman. I can understand why.
    Mr. Shimkus. I would like to move back on this issue that 
Chairman Barton mentioned, which I was informed no one gave an 
answer to, which deals with Title 5 permits under the Clean Air 
Act. And if we have an assumption that three power plants had 
to reduce their productivity because of bumping up to the Title 
5--and I know you are going to get answers to that because no 
one had the answers to that--if we are projecting higher 
demand, how many other existing peaker units in California will 
face Title 5 operational constraints this summer?
    Mr. Lloyd. I am not sure about the exact number there. We 
have a mechanism in place, however, to take care of those 
because we have some offsets available.
    Mr. Shimkus. I don't understand this mechanism. From what I 
understand, I understand that the State of California can be 
gracious in its use of some of its regulations. The question 
is, if you bump up onto the Clean Air Act under Title 5, and if 
you surpass that, any individual--any individual--can sue. Is 
that correct?
    Mr. Lloyd. In fact, that is where we are working with EPA 
and working with Region IX to, in fact, try to get an 
administrative order to make sure that we don't run into those 
issues.
    Clearly, we would have to be concerned with that issue. 
That is one sensitive area.
    Mr. Shimkus. So you are asking for an Administrative Order 
waiver?
    Mr. Lloyd. We are asking for, in fact, that help from the 
EPA.
    Mr. Shimkus. So then are you saying that there are some 
Clean Air requirement issues that are in place that are 
limiting the ability of California generators to create 
generating capacity?
    Mr. Lloyd. We are saying that, in fact, the flexibility 
exists for us not to run into that issue.
    Mr. Shimkus. Flexibility by the State of California, but 
not flexibility under the Federal Clean Air Act.
    Mr. Lloyd. Flexibility under the Federal Clean Air Act, 
since the Administrator has that flexibility.
    Mr. Shimkus. Only if the individual does not want to be--
individual consumers can continue to sue under Title 5 of the 
Clean Air Act.
    Mr. Lloyd. Oh, I see.
    Mr. Shimkus. Mr. Hall, do you want to respond?
    Mr. Hall. Yes. We have a peaking unit right now that is in 
this dilemma where we have got the State working with us to 
issue an enforcement agreement so that we can operate beyond 
our limits. But then we are bumping into the Title 5 
restriction. And what we have got to have there is some 
assurances from the EPA, through some sort of an agreement, 
that they will not come back and litigate against us because we 
momentarily exceeded the limit in a crisis situation. But that 
still doesn't prevent any public citizen, person, or group from 
litigating us because we exceeded our permit. So we are always 
going to carry that exposure, and that has to go into our 
analysis of whether even with the assurances of EPA and the 
State that they are not going to litigate, we still have to 
weigh that risk of whether a public citizen's group will 
litigate against us.
    Mr. Shimkus. Thank you. Mr. Pope?
    Mr. Pope. As a municipal entity who serves load, I plan on 
877 hours from my peaking power plant in Santa Clara. Those are 
hours behind the dam, water behind the dam, that I need for 
energy for this year. I planned it in my operating plan.
    If I run out of those hours or that water behind the dam in 
July or August, I then have to go to the market to buy that 
energy. So there is a financial consequence if I don't manage 
that resource. So, if I am given the order to operate in an 
emergency and not forgiveness of that, I put myself at a 
financial risk and my citizen owners at a financial risk 
downstream for the second half of this year. We faced that 
situation in December, last year, with many of the power plants 
in the Northern California municipal community.
    Mr. Shimkus. Mr. Chairman, if I could just finish up with 
Mr. Pope, based upon his response to the question. So if you 
have to go to the wholesale market because you are reaching the 
Title 5 limits, you are then competing with other entities that 
are trying to wield wholesale power, and if you understand the 
basic economic model of supply and demand, instead of being 
able to produce your own power, you are now competing with 
people who are trying to import power. Wouldn't that suggest 
that the price of power, wholesale power price, would be 
greater?
    Mr. Pope. Experience in the last year and a half has been 
that, that the price has been higher. I am a net buyer, and if 
I need to buy, I have to buy on the market. I try not to do 
that. I want cost certainty for my citizens. So, if I am short, 
I have to buy. If I am long, I sell. But I sell a very small 
amount compared to the entire energy market, as do the rest of 
the municipal community.
    We may have a third of the residents and the customers in 
California, but we are very small in comparison to the total 
energy market because the bulk of our energy is committed to 
load in our towns and cities.
    Mr. Shimkus. Thank you. Again, I have been supportive on 
record with the co-ops and the munis and stuff, and I have a 
strong record. I appreciate what you do. Mr. Chairman, I yield 
back my time. Thank you.
    Mr. Shadegg. Dr. Lloyd, let me start with you. I was a 
little stunned to hear you say earlier that you thought that 
California would lose no capacity producing electricity this 
summer due to NOX limitations. That is not what I 
have heard elsewhere.
    And I just heard you say that, in point of fact, at least 
the Governor is trying to create flexibility at the State 
level, but you are not certain that there is flexibility at the 
Federal level with the EPA.
    Mr. Waxman tried to make the point that there is no problem 
with the Clean Air Act or with the EPA.
    This Committee is desperately trying to figure out what it 
can do to help in this problem, and I think we are being urged 
to impose rate caps. There is a concern that some of us have 
that they will not, in fact, help the problem. So we are 
searching for other things we might do to try to help.
    We have talked a little bit about the concept of megawatts. 
I am trying to understand. Do you maintain that in point of 
fact, the lack of NOX credits will not reduce the 
ability of California to produce as much power in-State as it 
can this year? And do others on the panel disagree with that 
statement, or agree with it?
    Mr. Lloyd. Let me try to help you with some of the 
confusion. I understand where you may have that because I think 
as we discussed earlier, things are evolving. There may be 
things that happened 6 months ago, before the Governor's 
Executive Order, before we all realized that we need to act 
very expeditiously here.
    Things are changing, and so we have been identifying these 
on basically and emergency basis, working with the local 
districts, working with EPA.
    Mr. Shadegg. Let me ask you again, because I am concerned 
about the time--do you need help from this Committee, with the 
EPA, for this summer, so that we don't have plants sitting idle 
because of NOX credits?
    Mr. Lloyd. To my knowledge, given the flexibility that we 
have, working the way we are with the EPA, we do not need that.
    Mr. Shadegg. I see Mr. Hall and Mr. Pope have a different 
opinion. Gentlemen?
    Mr. Hall. You asked if the Committee could provide support, 
and the answer is, I think, yes, to help again be sure that the 
EPA is appropriately attuned and aligned to what is going on in 
California and sensitized to the situation.
    Another comment real quick, because we share the same 
problem here with the peakers. When we do get relief to operate 
above, assuming that happens, there are certain expectations 
that we pay mitigation fees to offset those increased 
emissions. All we ask for there is that they be reasonable. And 
in some cases we have been told that we will allow you to do 
that, but you have to put like SCRs, low NOX control 
equipment, on the back end. These are old peakers that 
typically operate 100 to 200 hours a year, that now are 
operating as baseload and, in a couple of years as new supply 
comes on, they are going to be back in the supply stack and 
start operating again as they were intended, not as baseload 
but as peakers. It doesn't make economic sense to put that kind 
of equipment on those units.
    Mr. Shadegg. So, that demand is not economic, is that what 
I hear you saying?
    Mr. Hall. Right.
    Mr. Shadegg. It is an unreasonable demand. Mr. Pope?
    Mr. Pope. Just to add to that, if we get forgiveness for 
hours we are operating in emergencies this summer, let us say, 
then we will be able to have that energy available and avoid 
the consequences of rotating blackouts which would be congested 
traffic, which would create an air quality problem, and 
emergency generation would go on that would be inefficient, and 
would create--so it is a tradeoff that we need to work on. And 
we need the support from the Federal EPA all the way down.
    Mr. Shadegg. Mr. Pope, would it help--or, Mr. Hall, would 
it help--if we, as a piece of emergency legislation, provided 
that citizen suits could not be brought under certain 
circumstances, so that you wouldn't face the uncertainty of 
that?
    Mr. Hall. Yes, absolutely, it would.
    Mr. Pope. Yes.
    Mr. Shadegg. Mr. Makovich, you, I think, wanted to comment 
on this issue.
    Mr. Makovich. The availability of power plants due to 
environmental regulations is certainly a key issue, but the 
other thing that needs to be understood, the price of 
NOX allowances increased dramatically over the past 
year. They went from $6 to $50 a pound.
    The generating units that are setting the wholesale prices 
are emitting 2-to-10 pounds of NOX per megawatt 
hour. So, even if they are not restricting the capability of 
power plants, it is important to realize the environmental 
policy that made NOX allowances scarce at the same 
time that the market got short, added hundreds of dollars per 
megawatt hour to the wholesale power price.
    Mr. Shadegg. Is there something we can do about that in the 
short-run?
    Mr. Makovich. Well, obviously, if the NOX 
allowances were nowhere near as scarce, if they were $6 and not 
$50, you would get immediate relief on those wholesale power 
prices.
    Mr. Shadegg. And that $50 is a Government-set price, is 
that right?
    Mr. Makovich. That $50 is a market-set price given the 
State regulations set by the South Coast Air Quality District 
and the schedule of reductions they put in place in about 1995.
    Mr. Shadegg. So that is an issue the Governor would have to 
address.
    Mr. Makovich. Yes.
    Mr. Lloyd. Can I just say, as I indicated earlier, the 
Board of the South Coast Air Quality Management District 
recognizes the problem, they are acting on that in May.
    Mr. Cooper. Could I give you one little bit of help. If you 
are going to look at excuses here, or forgiveness, a critical 
point is a date-certain and a time-certain for how long they 
last, so that, you know, this is an emergency, we are not 
trying to undo your air quality, this is a crisis situation. 
So, let us have a date-certain and combine it with other things 
that are part of the workout, as I call it.
    Mr. Shadegg. It is a very valid point. Let me ask you, 
Glenn Canyon Dam, which happens to be located in my State, is 
under severe restrictions. It is not allowed to produce near 
the amount of power that it is capable of producing, as a 
result of various environmental restrictions. Some of those I 
believe are ongoing and necessary, but some, I believe, could 
be examined to determine if they are really needed this year. 
For example, they are talking about a low-flow evaluation.
    Do you know, or does anybody on the panel have information, 
with regard to environmental restrictions, for example, at 
Glenn Canyon Dam, that could be modified for this emergency to 
allow peaking power, additional peaking power, to be generated, 
or other dams where we face that same kind of problem with 
regard to hydro power? Anybody have a comment on that?
    [No response.]
    Thank you very much. I see my time is up, and the chairman 
is back.
    Mr. Barton. I had to do a meeting on the world oil 
situation, a minor thing compared to what we are talking about 
today, but something that still has to be done. I will 
recognize myself for 5 minutes, and then we will go to Mr. 
Largent in the third round.
    I tried in the first round of questions to find out what 
the shortage was this summer in California, and it was 
generally agreed that on peak demand days it is going to be in 
the neighborhood of 3,000 megawatts.
    In my second round, I tried to get a handle on the 
permitting situation in California, and it appears to me that 
California is really trying to expedite its permitting process, 
at least on an emergency basis, and I think that is to be 
commended.
    Third round I am going to ask something that hasn't been 
asked today, which is amazing that we are now 3 o'clock in the 
afternoon, and it is this concept of retail price increases.
    Now, I notice that our officials, Mr. Keese and Mr. Lloyd 
and Mr. Freeman, were studiously absent in any discussion of 
any need for a retail price increase. I have had a little 
economics, not a lot--three or four college courses--and I know 
the basic supply and demand curve, and I know that if you 
maintain the demand curve in a flat line, that regardless of 
quantity consumed, you pay the same price, and if you are in a 
shortage situation, the supply is never going to catch up. The 
supply goes up in a vertical line and the demand just goes out 
in a flat line, and you create this huge delta and we saw that 
in practice. The two incumbent utilities in Southern California 
burned through about $12 billion in less than 6 months.
    So, the Federal Government doesn't have--the FERC cannot 
institute a retail rate increase under current law. Now, we 
could preempt it. We could pass a bill next week, the President 
could sign it, and it could set the retail price for 
electricity in California at whatever we wanted to. All hell 
would break loose if we did that, but we could do it. But we 
are not going to do it.
    Now, I want to ask Mr. Keese and Mr. Lloyd and Mr. Freeman, 
do you all see any scenario in which a retail rate increase 
might be in order as part of a comprehensive solution to the 
short-term problem in California?
    Mr. Keese. Mr. Chairman, the first crack in that, I 
believe, was when the Governor did announce his 20/20 program 
which, in effect, is that. This says that in the 4-month period 
of the summer, for any retail customer who reduces their demand 
by 20 percent, they will get a 20-percent rebate on what they 
paid. A market signal.
    There have been suggestions in the Legislature to that 
effect, but at this point I am not aware of any other 
initiatives of the Governor in that area.
    Mr. Barton. Why would that be--I understand it is a demand 
management technique, and I commend the Governor for doing 
that, but unless you pay people more the less they use so that 
they get a higher price the more they save--which would be a 
rate increase to the State of California, I guess, paying more 
for them using less--if you pay them the same per kilowatt hour 
regardless of how much they use, they just get it back in 
rebate, that is not a price signal.
    Mr. Keese. Mr. Chairman, again, as the Energy Commission, 
we have suggested--my response to this is extremely critical, 
and that the failure of the California system was to deregulate 
the supply side and fix the demand side, so there was a 
disconnect here.
    If you look at the rates that are being paid on the 
wholesale level today, it would be unconscionable for 
California to pass those on in the retail system. That would be 
politically unacceptable.
    Mr. Barton. I accept it is unconscionable, Mr. Freeman 
pointed it out and I backed him up. California is paying some 
of the highest retail rates in the country right now for 
electricity. So, it is not like you all are at 3 cents and the 
rest of the country is at 8, so you are paying high prices. But 
it is unconscionable, in my mind, to ask the ratepayers in 
Arizona and Oregon and the rest of the West to raise their 
retail rates when the California retail rate is frozen. I am 
not saying that is the answer, but it would appear to me, to 
anybody that is acting objectively in a prudent, comprehensive 
way, that a retail rate increase would be a part of the answer. 
Governor Davis himself is quoted as saying he could solve this 
problem in 20 minutes by raising retail rates, but yet not any 
one of the officials--and I understand you come with a certain 
amount of guidance from higher authority on what you can say--
but it is just not credible to say that shouldn't be 
something--if you are pushing wholesale price caps, you ought 
to also acknowledge that, as a part of that, there should be 
some retail rate increase tied to it.
    Dr. Lloyd or Mr. Freeman, either one.
    Mr. Freeman. Mr. Chairman, there is a myth that has been 
repeated that the retail rates in California are frozen. They 
are not. First of all, there is a 10-percent rate increase that 
was enacted just sometime ago, that was at the time called 
temporary, but we all know it is permanent. There is another 
10-percent increase that will be automatic next year as a 
result of the end of this 10-percent reduction that was part of 
the deregulation scheme.
    The Legislature has deregulated one-third of the 
electricity. The fund that I was helping to administer where we 
bought all this power, the law of California says in plain 
English, and it has been confirmed by the PUC, that the rate 
for that power can be adjusted upward, if necessary, to pay for 
the power that we bought. The power that is on a cost-of-
service basis is below the existing rate.
     Now, obviously, the rates will be further adjusted upward. 
There is a serious question at the moment as to whether the 
wholesale rates all need to be passed-through. I use plain 
English, there is talk of a haircut, of a deal being negotiated 
where everybody would settle for some percentage of that on the 
grounds that the rates included a credit risk margin. And if 
you paid the whole 100 percent, you would be over-compensating. 
That is the theory that is being discussed. But there is nobody 
in California, including the Governor, that doesn't realize 
that if it is necessary, the retail rates will be adjusted. But 
he is a consumer-oriented Governor that is trying his best to 
keep the rates as low as he can and still pay the bills, but we 
are not trying to repeal the laws of supply and demand, or 
forget the laws of economics.
    Mr. Barton. Dr. Lloyd, would you like to comment on that 
before I go to Mr. Largent?
    Mr. Lloyd. No, I don't feel equipped to comment on that.
    Mr. Barton. Any of the other--Mr. Hall or Mr. Makovich or 
Mr. Cooper?
    Mr. Cooper. Well, I will reiterate what Congresswoman 
Harman suggested. It is important--and, again, in working out 
the elements of a buyout, everybody takes a haircut. And one of 
the things we don't want to do is swap a hard retail cap for a 
very bad soft wholesale cap, which is what we are getting from 
the FERC.
    When we begin to get a conversation about prices that 
reflect cost on this interim basis in a dysfunctional market, I 
suspect you may start to see less resistance to whose hair gets 
cut how short. And it is important to give and take here.
    Mr. Barton. Mr. Makovich--Dr. Makovich. I am told you are a 
Doctor. We have been calling you Mister. I should say Doctor.
    Mr. Makovich. It really is an attempt to repeal supply and 
demand. I mean, it is just common sense. If you are going to 
set up a market, the demand side ought to be connected to it. 
And this isn't a problem in just California. Go across the 
country, and time and again, when we have tried to deregulate 
our power markets, we have these well-intentioned price 
freezes, but they are multiple year. They are going to create 
big problems down the road, and California is just a specific 
example of if you are going to set up a market, have the demand 
side connected.
    Mr. Barton. Mr. Hall, your group that you represent--I 
mean, you are here for a specific company, but you represent 
generically the merchant power group. What is their general 
feeling on a wholesale price cap if tied to a retail price 
increase in some fashion that objective people found 
acceptable?
    Mr. Makovich. Well, again, of course you know fundamentally 
our position is we don't support price caps.
    Mr. Barton. I understand. That is my fundamental position, 
but I am trying to----
    Mr. Makovich. I think the way to sum that up is, you know, 
if you look at what has occurred in California in the last 2 
years with price caps, Duke hasn't left the State, and others 
haven't. We have a long-term vision and, to some degree, a leap 
of faith that with these caps in place, things will begin to 
get fixed such that markets can become unencumbered. So, again, 
we don't think that is necessarily the right solution, but I 
think the key is if those kinds of things are done, it has to 
be done on a fair and equitable basis.
    Somebody mentioned earlier that FERC only has jurisdiction 
over 47 percent of the capacity. There is a lot of other 
capacity out there that is not going to be tied----
    Mr. Barton. You wouldn't want to accept price caps that are 
FERC jurisdictional, and have our good friends in the co-ops 
and municipals not have price caps and, although with the best 
of intentions, if there was a shortage situation and one price 
was capped, it is obvious that prices would go up in the area 
that wasn't capped. So, we would have to get the State or some 
entity to have a relationship so that if you are going to be 
capped, everybody is capped together.
    Mr. Makovich. Yes.
    Mr. Barton. Mr. Pope?
    Mr. Pope. I think to add to that, we are not supporting the 
municipals to come under FERC jurisdiction, but----
    Mr. Barton. I would be stunned if you did.
    Mr. Pope. We would support an interim relief and we would 
abide by them in the marketplace in the West, as I think all 
of----
    Mr. Barton. Well, I think the municipals--I mean, have made 
a good-faith effort to be team players. But it is obvious that 
if there is money to be made, it behooves the taxpayers of Los 
Angeles or Santa Clara to make some money, too, because that 
helps to pay up for infrastructure in the future, and there is 
nothing wrong with that. That is not illegal, and it is not 
unethical. So, we don't expect if the market is at $75 or $100 
a megawatt hour for people who consistently sell into if they 
don't have to at $30 a megawatt hour. I mean, you just don't do 
that.
    Mr. Largent.
    Mr. Largent. Mr. Hall, how does Duke Power determine just 
and reasonable prices?
    Mr. Hall. Of course, Duke Power is a regulated business in 
Carolina, so Duke Energy North America is the business unit I 
represent, that is the merchant generation business. And, 
again, we factor in the basic variable costs that it takes to 
operate our plant and to cover that, and that is the price of 
fuel, that is environmental emission credits, there are fixed-
costs that are associated with that, and then obviously there 
is some built-in expectation of some rate of return that we 
would expect to gain in the market, and that is what we bid 
into the market. So, it is basic fundamental market bidding 
that we perform.
    Mr. Largent. And those costs vary from $50 to $1,000?
    Mr. Hall. Yes, depending on a number of factors--relative 
to variable costs, and the scarcity of power, and who is 
demanding it where, and what somebody is willing to pay for it.
    Mr. Largent. Mr. Cooper, how do you determine just and 
reasonable costs?
    Mr. Cooper. Well, we started out with the same definition, 
and then he ended up with what somebody is willing to pay for 
it. He started out from a cost description, of variable costs 
and fixed costs and a reasonable return, and that is a cost-
based rate. And he said he bid that in, and he has got one 
plant that may be at $100 and one plant that may be at $1,000. 
And the thing that we don't want is the plant that costs $100, 
including a reasonable rate of return, to be paid $1,000. That 
is what he ended up with because that is what the market is 
clearing at in California. So we have let the price be set for 
the $100 plant by the $1,000 plant. That is just rent. That is 
what we are fighting about.
    And so the difference in a truly competitive market, people 
don't collect a lot of rents. There may be a little bit of rent 
because the supply curve is upwardly sloping, but by and large 
no markets look like this one where the supply curve is 
vertical.
    And so as we described in the paper we released a couple 
days ago and submitted to the Committee, it is that problem--
that he has got two plants, one costs $100, one costs $1,000, 
and he is getting paid $1,000 for both. And on the $100 plant 
there is $900 of rent, and that is a problem. We don't want to 
pay that rent in this market.
    Mr. Hall. Well, again, the market is sending a signal. 
There is a scarcity of power, and this is the premium that is 
going to be required to purchase the power, but because of that 
signal, then new generation is being redeployed into the State, 
so eventually there is an equilibrium between supply and 
demand, the prices come back down to very reasonable levels. We 
have seen that in other areas of the country. And when we had 
an adequate balance of supply and demand in the first 2 years 
of the market operation, we saw very low prices. And that is 
where we have got to get back to, and that is the signal being 
sent, and that is why we are spending a lot of money to build 
new generation in the State.
    Mr. Barton. Would the gentleman yield? Are you a Doctor 
also?
    Mr. Cooper. I am a Doctor.
    Mr. Barton. You sounded like a Doctor in that last answer, 
so I thought maybe you were. Dr. Cooper makes, I think, a 
reasonable persuasive argument that we should switch to what we 
would call a ``bid auction'' system as opposed to this market 
clearing system. Had the State done that in their Power 
Exchange, had a bid auction, so that if his plant that cost 
$100 a megawatt hour bid in its capacity at, say, $150, you 
took it. And then when you use up all that power, you bid the 
next increment that was less efficient, so that finally you are 
bid auction for the $1,000 was just a tiny bid at the top of 
the market, would that have worked as opposed to what they did 
before they disbanded the Power Exchange?
    Mr. Hall. Again, you had a spot market in operation, and I 
am not necessarily that familiar with the bid-ask. I know it is 
used in other regions and seems to be fairly successful----
    Mr. Barton. Well, it works on the Yew York Stock Exchange, 
although the last week or so it has been working the wrong way.
    Mr. Hall. We are not opposed to that. The key is to get 
load out of the spot market and get some percentage over into 
the forward market, so then you don't have that much exposure 
in the spot market. So whether you have got the single market 
clearing price or bid-ask to us, it doesn't really matter.
    Mr. Barton. Well, it would matter to the consumers 
because--you know, I have to admit, I have looked at this--and 
I am not a Ph.D. economist--but I can't understand why you 
couldn't use a bid-ask market clearing mechanism as opposed to 
what----
    Mr. Cooper. And another point that I guess Mr. Makovich was 
going to point out, we also need a capacity market. The markets 
that have worked better have had separated out energy and 
capacity. Now, I will tell you that there is a debate between 
consumer advocates in California about how much this stuff 
matters, and I have given you my view, and that is shared by a 
significant number of consumer advocates--absolutely, capacity 
markets.
    Mr. Barton. Do you all have debates, too?
    Mr. Cooper. Oh, yes, we have debates.
    Mr. Barton. Maybe I could be invited to one of those 
debates, it might be educational.
    Mr. Cooper. So the point is that we think that is--we 
prefer a bid price. This was a lottery in California. I 
personally went to every RTO meeting that FERC had, and I have 
a sweatshirt to prove it, and I talked to these people. And 
what happened in California was essentially a lottery 
mentality. You bid in a certain number of capacity and you had 
a certain amount you could hold back, and you put an outrageous 
price on it. And, lo and behold, not only did they pay off on 
that, but they paid you the same price for everything else.
    Mr. Barton. I have taken up 5 minutes of Mr. Largent's 
time, we are going to restart his clock.
    Mr. Largent. Well, I just have one other question. Mr. 
Freeman, I wanted to ask you, it is fairly apparent that you 
are not a big fan of the deregulation of electricity in 
California, but why is it that California and their 
deregulation effort looks so bad, and yet in a State like 
Pennsylvania they love what they have done in deregulation?
    Mr. Freeman. I think one difference is that they have a 
surplus of power in Pennsylvania. Ours worked rather well the 
first year, too well. The price was real low and it discouraged 
power plants from being built. Then the curves crossed and we 
had a shortage, and with no caps. I think there are some caps 
in the Pennsylvania system.
    A hybrid system will work. Just turning it loose in a 
shortage is a disaster.
    Mr. Cooper. Mr. Largent, we took a hard look at 
Pennsylvania, and I actually testified in several of the cost 
cases in Pennsylvania for AARP. Pennsylvania is a rather 
different kettle of fish. And I said frequently that you really 
maybe can't export it to other places. You had surplus capacity 
and high prices. The constituents I represented in Philadelphia 
were paying 8 cents per kilowatt hour out of a nuclear power 
plant with excess capacity, and they were selling the excess 
capacity down the road in Baltimore for 2 cents. Now, I always 
thought we should have gotten the 2-cent power and let them 
sell the 8-cent power to the other guy. But we were the 
captives, and you couldn't sell 8-cent power back then.
    So it was easy to lower people's rates because they were so 
high, so that a system with excess capacity starts selling into 
a tight market, and the utilities were better off.
    But let us be careful about Pennsylvania. In the last 2 or 
3 months, a couple hundred thousand of the people who switched 
have come back. And why have they come back? Because 
Pennsylvania was driven by cheap gas. Electricity restructuring 
was driven by cheap gas, and the cheap gas is gone, and it 
remains to be seen whether or not anybody is going to save any 
money in Pennsylvania in the market. They have all saved money, 
but that was through regulation, through the write-off of 
stranded costs and very high prices, and that dynamic. Very few 
other States have that dynamic, and nobody has cheap gas except 
maybe Texas where you are on the right side of the----
    Mr. Barton. We have no cheap gas in Texas.
    Mr. Cooper. But the point is--it is cheaper than 
California. But the point is that so that it remains to be 
seen. I am not saying Pennsylvania has failed, but I am not so 
sure it succeeded, not nearly to the level of promises that 
were made, for sure. And, of course, let us be clear. There is 
a rate cap in Pennsylvania, and we have a utility in 
Pennsylvania that is seeking to bust that rate cap exactly like 
in California. GPU has come in and asked for $300 million of 
rate increases above their cap, which they claim they can do 
under the statute. So, let us be clear. California is worse, 
and you have heard a number of reasons, but the underlying 
dynamics in other places--and we are hearing concerns about New 
York. The underlying dynamics in other places ought to give 
people some pause and concern.
    Mr. Largent. Thank you, Mr. Chairman.
    Mr. Barton. The gentleman from Arizona for 5 minutes.
    Mr. Shadegg. Dr. Makovich, let me start with you. Correct 
me if I am wrong because I am trying to understand this, but as 
I understand it, the California deregulation structure 
essentially encouraged emphasis solely on short-term 
purchases--that is to say, it was created to say, we are going 
to create a system where people bid and they don't do long-term 
contracts. The analogy I heard was it is like somebody who 
shows up at the airport and buys an airplane ticket right there 
at the airport to go to the other side of the country. That 
person is going to expect to pay dramatically more than 
somebody that calls them up ahead and says, ``When can I get 
the best rate to fly across the country.'' That is exactly what 
the California ``deregulation plan'' calls for, is it not?
    Mr. Makovich. Well, yes. The California plan did involve a 
rule that meant the incumbent utilities, once they have 
released customers to the market after their stranded costs 
were recovered, were then obligated to buy just from the spot 
market. They weren't supposed to go into long-term contracts 
and then pass that along, just be an intermediary as a default-
provider. Of course, the irony there is we release customers 
just in time for a shortage where that would become a huge 
problem.
    It is not true, though, that the spot market is the 
problem. The spot market worked very well once it was 
established, until the shortage occurred. The spot market is 
the basis for a futures market. A futures market has to be 
based on a spot market because ultimately it has to clear to 
the spot market. But a futures contract isn't the mechanism 
that is going to pay for the capacity to get you to build. 
Long-term contracts--the right type of long-term contract could 
work out there, where people are paid for capacity and then 
there is an option to buy energy at a particular price. But 
long-term energy volume contracts, as I understand that have 
been signed in California right now, are a mistake, and it is 
going to be something that California regrets down the road.
    Mr. Shadegg. Let me just finish this point. They are forced 
to buy short-term at a certain point in time, now they are 
forced to buy long-term.
    Mr. Makovich. They are forced to buy long-term at the top 
of the market.
    Mr. Shadegg. We instead should have a blend all the time, 
ongoing, back then and now, of short- and long-term contracts.
    Mr. Makovich. Yes.
    Mr. Shadegg. And that is forced by the California law. That 
consequence that drove prices up then--part of the problem that 
Dr. Cooper just talked about and is going to talk about again 
in a moment--was driven by the California law, essentially 
commanded by the Legislature, and it created a problem then, 
and now it is creating another problem and they are buying in a 
long-term market and not necessarily getting any good deals in 
the long-term market, is that right?
    Mr. Makovich. Yes.
    Mr. Shadegg. Dr. Cooper?
    Mr. Cooper. The airplane analogy is really useful in the 
following sense. You said you will pay a lot more if you turn 
up at the airport and say ``I want it.'' Well, actually, you 
know what? If there was an auction there and that plane was 
about to leave and there were some empty seats, they would 
actually sell to you cheap. They would figure out what it cost 
to put your body on the plane, and you could get it pretty 
cheap.
    The problem is, I don't want my lights to depend on that 
kind of stuff. I mean, if you get there and there is a seat 
there and it is cheap, I am great, and if there is no seat, my 
lights go out.
    Mr. Shadegg. So you would agree there ought to be a mix of 
long-term and short-term.
    Mr. Cooper. Absolutely.
    Mr. Shadegg. And you would agree that it was a flaw in the 
law that commanded the spot market.
    Mr. Cooper. The document we have submitted to you tells 
people to stay out of the spot market, avoid the spot market 
like the plague. But let me talk about these long-term 
contracts--because there is a debate--that are being signed. 
The question now is, essentially the State of California is the 
provider of last resort. They are behaving just like any 
utility behaves--that is, they are trying to keep the damn 
lights on at a reasonable price. Are those 7-cent contracts a 
good deal? Well, it depends if you think 3-cent power is coming 
back, or you think 40-cent power is the future. if Iou can 
legitimately tell people that ``I avoided 40-cent power for 6 
months,'' those contracts are cheap. If it turns out that 3-
cent power or 5-cent power--actually, 5-cent power would not 
even be a problem. So, it is a question of, you are here today, 
how do you keep the lights on at a price people can afford? It 
is a workout.
    Mr. Shadegg. The point I am trying to figure out is, one of 
the questions that is kind of hanging over all this is the 
question of price gouging. Do we have a $5.6 billion price 
gouging that has already occurred, and if we don't impose price 
caps now, though many of us are opposed to that, will there be 
price gouging in the future? And I just want to establish the 
fact that, as a part of this question of whether or not there 
was price gouging, the merchant plants were buying into a 
system that incentivized that very kind of structure where 
price would go to the highest point. Wouldn't you agree, Mr. 
Pope?
    Mr. Pope. I believe that the market is dysfunctional, has 
been, and we have got a circumstance where having diversity in 
your resource mix as a utility to serve the load is the way it 
should be, but because of the circumstance that we have now 
where the State is playing catch-up and the merchant plant 
owners are trying to play in this market and figure it out on 
where to bid going forward, that is the dilemma that California 
is. And the obligation to serve is now resting with the State 
of California to be a default provider.
    Mr. Shadegg. Mr. Hall, you were accused by Mr. Cooper of 
essentially price gouging in this conversation just a moment 
ago, by the way you determined fair and reasonable price. 
Didn't the system created by the Legislature encourage the 
bidding of that price up by everybody in the business in 
California?
    Mr. Hall. I don't know that it did. Again, if you look at 
the first 2 years of operation of the marketplace, prices were 
very low because, again, market fundamentals were in place. 
There was an adequate supply meeting the needs of the loads. 
Again, when things began to disconnect, it started sending 
signals to the market. It wasn't necessarily that there was--
you know, we don't think there was market gouging going on, it 
was simply a signal to say there is a scarcity of power and 
there is a competition for that power, and it drives the price 
up, and that is what occurred.
    Mr. Shadegg. Dr. Makovich, do you want to comment on that, 
and then I am finished.
    Mr. Makovich. Yes. I think the point is, when there is a 
shortage--and this is a shortage problem, and I don't believe 
that there is strong evidence to support the allegation of 
price gouging. It is simply a fact that electricity doesn't 
have many substitutes. It is something that is considered a 
necessity. And when you create a shortage, although there is 
some price elasticity there, it is fairly inelastic, and you 
have got a lot of inelastic demand chasing a very limited 
supply, and price goes up. And that is not manipulation, it is 
not gouging, it is the way that the market works in a shortage.
    Mr. Shadegg. Thank you very much.
    Mr. Cooper. One caveat. As long as you are not shutting in 
capacity. If you are withholding capacity, then it is not just 
a shortage, and I haven't seen his plant, I don't know, but 
that is a critical debate in California.
    Mr. Hall. That doesn't happen.
    Mr. Shadegg. I would like to thank you all for your 
testimony, I appreciate it.
    Mr. Barton. I think it is down to the nitty-gritty now, 
just me and you guys. So, when I run out of questions, we are 
going to excuse the panel and you can go catch your airplanes.
    I want to go back to you, Dr. Lloyd. It is my understanding 
that the State of California, as it is allowed to under the 
Clean Air Act, has got air quality standards that are, on 
average, about 25 percent higher than the national standards. 
Is that true or not true?
    Mr. Lloyd. What do you mean by higher?
    Mr. Barton. Stricter. More restrictive, less emissions 
allowed.
    Mr. Lloyd. And you are talking about air quality standards?
    Mr. Barton. Yes, sir.
    Mr. Lloyd. I don't know the percentage, but typically they 
may be stricter, yes--understanding that we have typically more 
air pollution in California.
    Mr. Barton. Well, there is reason. Los Angeles Basin is 
more difficult, and you have got a lot more cars and a lot more 
people than any other State. There is nothing negative about 
that, at all. The Clean Air Act allows it, and you all have 
chosen to do it. But if Mr. Waxman were here--he is not here--
he has made the point repeatedly that the standards have no 
impact on the price of electricity. I agree with him, they 
haven't caused a problem, but it would appear obvious that if 
you have got a stricter standard, it is going to cost more to 
meet that standard, and that is going to end up meaning it 
costs more to generate electricity. Would you agree or disagree 
with that, in general?
    Mr. Lloyd. Well, recognize when you talk about the Air 
Quality Standard, there are many factors that play into what 
people breathe, and power plants are just one of those. So, in 
many cases, it is not going to be dominated by power plants, it 
is going to be dominated by mobile sources.
    Mr. Barton. In my region, is it dominated by mobile 
sources, so I agree with you on that.
    Mr. Lloyd. And we do, in fact, have the strictest standards 
on mobile sourcing in California.
    Mr. Barton. But, in general, the stricter the standard, the 
more expensive it is going to be to me. If you have got the 
strictest standards in the country, it stands to reason that 
the cost to meet those standards is going to be a little bit 
high. I don't know what that delta is. I don't know if it is a 
half-a-cent a kilowatt hour, or maybe a tenth-of-a-cent a 
kilowatt hour, but it almost has to be some higher, and we had 
some testimony at a previous hearing about the reclaim 
program--which is not Statewide, it is just in a part of 
California--but it is a trading system for NOX 
emissions, and the price of those emissions went through the 
roof. It went to like, I want to say, $200 a pound to try--as 
the generators were trying to generate to meet electricity 
demand, they were having to pay more and more to get these 
NOX standards under the reclaim program. So there is 
at least one sample in California in the last year where there 
is a measurable data file on the cost of meeting clean air 
standards.
    Mr. Lloyd. But I think in this case, that was clearly an 
aberration in terms of the way the market went up. If you go 
back historically----
    Mr. Barton. It is a lot lower, I understand that.
    Mr. Lloyd. No, I was going to say, if you go back 
historically before reclaim was put into place, you had a 
system whereby people could either choose--before that, they 
could either choose to put controls on, or buy credits on the 
market. Many companies did not choose to put emission controls 
on, they bought credits in the market. That worked perfectly 
until it began to really hurt, and I think Mr. Freeman can also 
attest to some of those, if you like, tradeoffs.
    Mr. Barton. And I am told, just at the staff level, this 
reclaim drove the price of NOX credits to $45,000 a 
ton, which would be phenomenal.
    Mr. Lloyd. In fact, I think there were peaks when that was 
the case. The point I was trying to make, Mr. Chairman, was, in 
fact, if companies had put on controls, had put on SCR, in 
fact, they wouldn't have to buy such large numbers of 
NOX credit, and so they would not have the problem.
    Mr. Barton. You didn't know you were doing that, but you 
led right into my next question. Because of the chance of 
blackouts this summer, I am told that the California ISO has 
proposed to your Board that you delay--they be allowed to delay 
installation of these SCR units, or selective catalytic 
reduction units, on certain plants. If you agree to that, your 
Board agrees to that, that is going to delay the anticipated 
reduction in certain NOX emissions from those 
plants. Have you estimated the amount of those emissions, and 
have you also worked with the Regional EPA to see how that 
affects the SIP plan, the State Implementation Plan, and 
whether that, in fact, somebody could sue that an illegal had 
been created by delaying the SCR unit installation? It is a 
long question.
    Mr. Lloyd. Yes, a many-part question. The first part of 
that, we have been aware of the ISO request. We have agreed 
that they could be delayed in about a third of those. Two-
thirds we feel should go ahead, and they will go ahead this 
spring before the summer period so, in fact, these plants can 
operate longer hours, polluting less, which is exactly what we 
want.
    We are working with the local districts on that part of it 
as well, and I assume, to my knowledge, we are working very 
closely and well with both the local districts and EPA Region 
IX.
    The issue you talk about about the citizen suits, clearly, 
I am going to have to look more at our legal part of that.
    Mr. Barton. That goes to the next part of my question. If, 
in fact, it is the Governor's decision and the California Air 
Quality Board decision to delay installation of these SCR 
units----
    Mr. Lloyd. A small portion of them.
    Mr. Barton. [continuing] then it is arguable that a citizen 
suit could be brought, that that is an illegal act under the 
Clean Air Act, because any citizen can bring a suit. So, one 
part of our Federal Remedy Bill could be an indemnification 
against such suits for a definite period of time. Would you 
support that, if we put that in an emergency relief package?
    Mr. Lloyd. Well, I think this issue, as I say, I don't 
think because of their limited emissions amount, you would not 
create a SIP problem. The more significant issue you talk about 
is the Administrator does have administrative power to actually 
grant that discretion.
    Mr. Barton. The Administrator doesn't have the ability to 
prevent suits under the law. And as Mr. Freeman has pointed 
out, democracy is alive and well in the State of California.
    Mr. Lloyd. That is an area where I would have to consult 
our lawyers.
    Mr. Barton. But my question is for everybody. We are 
looking at remedies. We are looking at solutions. We could put 
in the law for a specific period of time--to go to Dr. Cooper's 
concern earlier--some relief from lawsuits, if the Governor of 
a State has declared an electricity emergency and, as a part of 
that, is asked for relief from certain of these air quality 
standards, again, for a specific period of time.
    Mr. Lloyd. Mr. Chairman, what I would like to do is go back 
to our staff, our legal staff, to look at that issue and 
respond in writing to you to see whether that would be a 
helpful request and under what condition.
    Mr. Hall. There is another dimension of that decisionmaking 
process because--in concept, it sounds good, but keep in mind 
that the outages that have to be taken to perform these 
retrofits, while in concept it sounds good, but let us delay it 
a couple of years if we can work out these other issues. These 
are typically time to do it in major outage intervals when 
other work has to be done on units. Every 5 years is typical 
standard, prudent utility practice that units have to be 
brought down and major maintenance performed. So, if we push 
all of that out, those SCR retrofits, we have still got these 
major outages coming up where, if we don't do that work, we are 
going to have reliability problems. So, it is not quite as easy 
as it sounds.
    Mr. Barton. But wouldn't your group have the ability to 
give that information to Dr. Lloyd's agents. It would not make 
sense to me to say we are going to delay this SCR 
implementation so that we can run the plants, without checking 
with the plant operators, and say, ``Well, great, we are going 
to shut the plant down anyway because we have been running it 
full-bore for the last 18 months and it is going to wear out if 
we''----
    Mr. Hall. The independent system operator asked us for our 
feedback on that and we gave it to them. Now, we haven't to Mr. 
Lloyd. Maybe we need to have a conversation directly with him, 
but we have fed that back to----
    Mr. Barton. Aren't these hearings a wonderful mechanism for 
communication?
    Mr. Hall. We will do that.
    Mr. Barton. Well, let us get down to the heart of the 
matter here. I have to make some recommendations to the White 
House this weekend on what, if anything, to do at the Federal 
level in California. Mr. Boucher is working with his membership 
to see what solutions they think they would be willing to put 
on the table in an emergency bill that we will put together in 
the next several weeks.
    So, I am going to ask a series of questions--these are all 
things that have come up in discussions that we might could do. 
Again, these are Federal things that could be done, Federal 
actions, not presumptive to what the State of California would 
do or anything like that.
    One issue is the Path 15 transmission link between Northern 
and Southern California. It is an idea that has been bandied 
about, apparently hasn't been acted upon because of the cost of 
construction of the transmission facility. What would the 
State's view be if the Federal Government were willing to pay 
for that either directly or through some sort of a long-term 
loan that could be paid back with transmission fees generated 
by the transmission link? Mr. Pope, what would you think the 
State of California's reaction to that would be?
    Mr. Pope. I don't know. I think it is something that we 
certainly bring up. I think there is a unanimous opinion that 
Path 15 has to be fixed, and the faster we can fix it, the 
better.
    Mr. Barton. Mr. Freeman.
    Mr. Freeman. Hooray.
    Mr. Barton. Hooray.
    Mr. Freeman. Hooray.
    Mr. Barton. I understand that. That means yes, you would 
like it.
    Mr. Freeman. A strong yes.
    Mr. Barton. Mr. Keese, Chairman Keese.
    Mr. Keese. I will go with a strong yes.
    Mr. Barton. Dr. Lloyd, I don't know that California Air 
Quality Board would have a view. Mr. Hall, what do you think 
the private----
    Mr. Hall. Same position as Mr. Pope.
    Mr. Barton. I have been told that there are sites that are 
Federal lands that would be excellent sites for power plant 
siting, and that such sites are not subject to the entire range 
of siting requirements on privately owned land. Would there be 
any interest in the Federal Government making available sites 
to at least emplace peaking plants as quickly as possible--
federally owned land that would be made available for some sort 
of a power plant generation facility. Chairman Keese?
    Mr. Keese. Mr. Chairman, I think we can probably give a 
very specific answer on that. We have met with all the military 
branches in California. We have brought up this issue. We have 
done some preliminary identification of sites. And I believe 
that the team that is working on this has identified problems 
with it. So, I think I can get you a very specific response to 
that question. I don't have the answer here.
    Mr. Barton. We would need it probably no later than next 
Wednesday.
    Mr. Keese. We will get it for you immediately.
    Mr. Barton. This would be for Dr. Lloyd. It goes kind of to 
the question I asked you earlier. We understand under the Clean 
Air Act certain standards are in place, and we also understand 
the State of California has exercised discretion and 
enforcement of those standards, but that discretion is 
technically not allowed under the Clean Air Act.
    Would it be helpful to explicitly put into Federal law on 
an emergency basis, the authority or the permissiveness to 
allow the relaxation of certain standards for a definite period 
of time? Would that be helpful or hurtful?
    Mr. Lloyd. Offhand, I would say it would be hurtful.
    Mr. Barton. Hurtful. So that would not be something you 
would think we should do.
    Mr. Lloyd. Relaxation of standards, I think it would not be 
protective of public health, and I think it would not be 
necessary because we have the flexibility that we need.
    Mr. Barton. But my understanding is the flexibility that 
you are using, while commendable, is technically illegal.
    Mr. Lloyd. Then, in fact, what I would get back--if we 
isolate that one element you were talking about, I promise that 
we will get back to you a letter addressing that issue.
    Mr. Barton. What I am trying to get at is, we want you to 
be flexible. We don't want you to commit an illegal act. We 
want your flexibility to be legal while also protecting the 
public health and safety. And this wink-and-a-nod situation 
is----
    Mr. Lloyd. It is not a wink and a nod because what I 
promised you--your question was a very good one, but I am not 
going to be able to answer here.
    Mr. Barton. Well, thank you. A 6-hour hearing, I have had 
one good question.
    Mr. Lloyd. I appreciate your sense of humor. But I did 
promise to get you back, when our legal staff has looked at 
that, whether or not we need additional help there and under 
what conditions. And we will get that back to you.
    Mr. Barton. This next ones seems somewhat farfetched, but 
it has been postulated, the Navy has large warships that are 
powered by nuclear reactors. Some of those warships dock at 
ports in California. Is there enough capacity in those warships 
that if they were to be docked and be tied into the grid, that 
would help alleviate the peak problem in California this 
summer?
    Mr. Freeman. I have heard that idea discussed and, in 
concept, of course, it makes a lot of sense. I think there is a 
practical question of physically whether that power could be 
fed into the system. It should be looked at, but perhaps the 
Armed Forces have spare generators somewhere in the world that 
they could get one of their great, big transport planes and fly 
in before the summer.
    Mr. Barton. Well, Congressman Duncan Hunter has a bill on 
that issue, and the generator issue is being researched, too, 
and that will almost certainly be a part of any package that we 
put forth, but this is a little bit different because the ships 
are so much larger that they actually might have enough 
capacity, if they could be fed in the right way, that it could 
be somewhat significant. So, who would be the right person in 
the State of California to research that? Would that be 
Chairman Keese's Commission, or the PUC, or how would we do 
that?
    Mr. Keese. Well, it is actually multi-agency. It is the 
generation team. There is a team that is working on this, and I 
was approached by an ex-Navy man earlier this week at another 
presentation I was giving, and I referred him to the team. So, 
again, I----
    Mr. Barton. This ex-Navy man, was he acting in an official 
capacity, or was he just a good citizen?
    Mr. Keese. He was just a real good citizen, but he brought 
the pictures of the ships of the fleet that he thought were 
available.
    Mr. Barton. So, if we get an official of the United States 
Navy----
    Mr. Keese. That would probably carry a little more weight.
    Mr. Barton. And you would be receptive to the official at 
least making the contact?
    Mr. Keese. Absolutely. Absolutely. And I can give your 
counsel the name.
    Mr. Barton. We also have a pending bill before the 
subcommittee that would give the Governor of the State the 
authority to declare double-Daylight Savings Time. There is the 
theory that if you start demand clocks earlier, that it 
requires less electricity at peak time. Now, I don't know that 
I subscribe to the theory but, again, with our State officials, 
do you think your Governor would be receptive to having the 
authority to declare double-Daylight Savings Time? Apparently, 
under Federal law, a State can only declare normal Daylight 
Savings Time.
    Mr. Keese. Mr. Chairman, I would say we have a report that 
does indicate that such would save, and I do not recall whether 
it is 1 or 2 percent--but it would impact a 1 or 2 percent 
reduction in peak demand. We have that report. I am not aware 
that it has been presented to the Governor for action, but we 
can do that also.
    Mr. Barton. I would ask each of the panelists, if you have 
an idea to help in the short-term, i.e., this summer, to put it 
in writing and get it to the Committee staff. We will get 
copies to the majority and the minority. It has not been 
decided if we are going to put together an emergency bill, but 
if we are going to, I have declared that we are going to put it 
together in the next 2 weeks so that we can pass it as soon as 
possible, so that it actually is available before this summer.
    So there may be a decision made that there is not enough 
that can be done, and the existing statutes are satisfactory to 
an emergency situation. I am of the opinion we probably should 
put a bill together, but the final decision is yet to be made.
    Does anybody have any last great ideas for action in terms 
of a legislative solution you want to put on the table before 
we adjourn the hearing?
    Mr. Freeman. Mr. Chairman, being the person who said leave 
us alone, you are in the process of changing my mind. Money 
always talks.
    Mr. Barton. Well, it is easy for me to promise. It is the 
appropriators and the President that have to put the money on 
the table.
    Mr. Freeman. But we have not talked about the demand side. 
There is a tax bill going through the Congress, perhaps this 
Committee, but tax credits for investments in new appliances 
that would be much more efficient could help this summer, in 
tax credits for the most efficient refrigerator, air 
conditioner, lighting. That could be a wonderful help. And all 
that would be pulled through the market by the 20/20 program of 
the Governor.
    So, if the Committees talk to each other up here, perhaps 
that could be part of your package.
    Mr. Barton. We do. We are like the consumer activists, we 
do have debates from time to time, that are not seen on camera.
    Mr. Lloyd. I would also just like to follow up on a comment 
that David Freeman made early on, and I think it can help--not 
right immediately, but certainly in the coming months, and 
certainly in the short- or longer-term--and that is to continue 
to look at renewables. Wind is very cost-effective in 
California. Solar, anything you can do there. Biomass, and 
obviously fuel cells. I know when I was at South Coast, we 
could site a power plant without actually getting air quality 
permits. So I think those are areas, all those areas--air 
quality regulation is not an issue, and we can move ahead. And 
we need to encourage that energy diversity.
    Mr. Cooper. Similar vein as Mr. Freeman. The idea of having 
Federal tariffs look at demand side management and compete in a 
regionwide basis here, so that every time some load comes out 
of anyplace in the West, we now learn everybody in the West may 
benefit. To the extent that Federal funds can support that----
    Mr. Barton. Put that into regular language.
    Mr. Cooper. The point is that we are basically bribing 
people to give back their megawatts with this 20/20 program. 
That is a State program. It is not clear to me that the cost of 
the share problem through the interstate problem in the West, 
the FERC should not look at similar programs that could be 
justified in the context of that broader wholesale market. So 
perhaps some Federal dollars could go into demand side 
management.
    Mr. Barton. It is always a mistake to put Federal dollars 
on the table with this many people at the table.
    Mr. Cooper. It is exactly the same concept that people sort 
of were encouraging California to do insofar as it is an 
interstate problem and an interstate market, so maybe Federal 
dollars should go into it.
    Mr. Barton. You want a wholesale megawatt buy-back 
emergency provision----
    Mr. Cooper. At the Federal level.
    Mr. Barton. [continuing] at the Federal level. I don't hold 
out a lot of hope for that.
    Mr. Cooper. Well, it is the same principle, and people seem 
to like it when the State did it, insofar as it is a collective 
problem, and maybe the collective entity, the Federal 
Government, should think about it.
    Mr. Barton. Chairman Keese?
    Mr. Keese. I would be remiss if I left one factor out, but 
I don't think it was particularly appropriate to this hearing 
earlier. Approximately 30 percent of our power at peak goes to 
air conditioning in California. The Federal DOE did adopt a new 
air conditioner standard at the end of the last administration, 
that is being reviewed now.
    California has adopted an even tighter air conditioning 
standard, and we are going to be asking the administration for 
a waiver so that we can impose that.
    Mr. Barton. Waiver so that you can delay----
    Mr. Keese. So that the State can have a stricter standard 
on air conditioners than the Federal standard. I am leaving in 
here, I am saying 30 percent of our electricity goes to air 
conditioning.
    Mr. Barton. But a stricter standard--it is going to cost 
more to buy that air conditioner.
    Mr. Keese. Correct, in the short-term.
    Mr. Barton. You are going to ask Californians this summer, 
that already have an air conditioner, to go out and buy a more 
expensive air conditioner.
    Mr. Keese. It is not appropriate to this hearing because it 
is not going to happen this summer, but we would like to, 
within the next year or so, have better standards----
    Mr. Barton. Permission to enact a tighter appliance 
standard, and specifically for air conditioners.
    Mr. Keese. Correct, for air conditioners, which in the 
long-term will be extremely beneficial to keeping our peaks 
down, shaving our peaks off.
    Mr. Barton. Okay. I understand.
    Mr. Pope. And in California, we have a public benefits 
program that we can add incentives back to incent those to be--
inefficient air conditioners to be replaced with these more 
efficient air conditioners. In Santa Clara, we are doubling 
that rebate, or quadrupling that rebate right now.
    Mr. Barton. My last question, Mr. Hall. I have been told 
that last summer your company offered the State of California 
Power Exchange, I think, a lot of power at $55 a megawatt for 5 
years. Do you wish to put that offer back on the table today, 
effective immediately, or at least no later than June 1.
    Mr. Hall. Mr. Freeman knows, we have made offers to the 
State. He has been the chief negotiator on that side of the 
fence, and we have a Memorandum of Understanding that provides 
a portfolio of products--baseload, peaking, and such--and we 
have an agreement in place.
    Mr. Freeman. We think it is just and reasonable.
    Mr. Barton. Just and reasonable. Okay. Well, thank you, 
gentlemen. A lot of members are not here, they may have written 
questions for the record. If we get them to you quickly, we 
expect you to get them back quickly, and for any idea you want 
considered in terms of legislation, we really need it by the 
early part of next week.
    This hearing is adjourned.
    [Whereupon, at 3:50 p.m., the subcommittee was adjourned.]
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