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ENSURING THE RELIABILITY OF THE NATION’S

ELECTRICITY SYSTEM

HEARING

BEFORE THE

SUBCOMMITTEE ON ENERGY AND RESOURCES

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

JUNE 8, 2005

Serial No. 109–87

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

CHRISTOPHER SHAYS, Connecticut

DAN BURTON, Indiana

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

CANDICE S. MILLER, Michigan

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

GINNY BROWN-WAITE, Florida

JON C. PORTER, Nevada

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

CHARLES W. DENT, Pennsylvania

VIRGINIA FOXX, North Carolina

——— ———

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. DUTCH RUPPERSBERGER, Maryland

BRIAN HIGGINS, New York

ELEANOR HOLMES NORTON, District of

Columbia

———

BERNARD SANDERS, Vermont

(Independent)

MELISSA WOJCIAK, Staff Director

DAVID MARIN, Deputy Staff Director/Communications Director

ROB BORDEN, Parliamentarian

TERESA AUSTIN, Chief Clerk

PHIL BARNETT, Minority Chief of Staff/Chief Counsel

SUBCOMMITTEE ON ENERGY AND RESOURCES

DARRELL E. ISSA, California, Chairman

LYNN A. WESTMORELAND, Georgia

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

PATRICK T. MCHENRY, NORTH CAROLINA

KENNY MARCHANT, Texas

DIANE E. WATSON, California

BRIAN HIGGINS, New York

TOM LANTOS, California

DENNIS J. KUCINICH, Ohio

EX OFFICIO

TOM DAVIS, Virginia HENRY A. WAXMAN, California

LAWRENCE J. BRADY, Staff Director

DAVE SOLAN, Professional Staff Member

LORI GAVAGHAN, Clerk

RICHARD BUTCHER, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on June 8, 2005 ................................................................................. 1

Statement of:

Wood, Pat, III, chairman, Federal Energy Regulatory Commission;

Michehl R. Gent, president and CEO, North American Electric Reliability Council; David Owens, executive vice president, Edison Electric

Institute; and Dr. Mark Cooper, director of research, Consumer Federation of America .............................................................................................. 8

Cooper, Dr. Mark ....................................................................................... 59

Gent, Michehl R. ....................................................................................... 30

Owens, David ............................................................................................. 42

Wood, Pat, III ............................................................................................ 8

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

Cooper, Dr. Mark, director of research, Consumer Federation of America,

prepared statement of ................................................................................... 62

Gent, Michehl R., president and CEO, North American Electric Reliability Council, prepared statement of .............................................................. 33

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

California, prepared statement of ................................................................ 3

Owens, David, executive vice president, Edison Electric Institute, prepared statement of ........................................................................................ 45

Wood, Pat, III, chairman, Federal Energy Regulatory Commission, prepared statement of ........................................................................................ 13

(1)

ENSURING THE RELIABILITY OF THE

NATION’S ELECTRICITY SYSTEM

WEDNESDAY, JUNE 8, 2005

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON ENERGY AND RESOURCES,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 2:35 p.m., in room

2154, Rayburn House Office Building, Hon. Darrell Issa (chairman

of the subcommittee) presiding.

Present: Representatives Issa, Westmoreland, Kucinich, Higgins

and Watson.

Staff: Larry Brady, staff director; Lori Gavaghan, clerk; Dave

Solan, Steve Cima, and Chase Huntley, professional staff members;

Richard Butcher, minority professional staff member; and Cecelia

Morton, minority assistant clerk.

Mr. ISSA. Good afternoon.

A quorum being present, this hearing of the Government Reform

Subcommittee on Energy and Resources will come to order.

I want to thank all of our witnesses for their indulgence in the

slight delay. I also want to apologize in advance for stepping in and

out during this hearing as we vote on U.N. reform in another committee. My vice chairman will do an able job, I am sure, of continuing the meeting.

Meeting the Nation’s increasing energy demand is essential to

empowering our dynamic economic economy. According to the Energy Information Administration, electricity demand is forecasted

to rise 45 percent by 2025. A competitive electricity marketplace

must ensure reliability of the system and reasonable prices in the

wholesale and retail markets. In the past few decades, the electricity marketplace has moved beyond the depression era legal regulatory framework. The system has been superseded by developments in technology and new ownership structures as well as concerns about the diversity of sources of energy for electricity generation.

Deregulation at the Federal level in wholesale bulk power markets and increased competition at the retail level in many but certainly not all States has occurred with the aim of increasing efficiency and lowering prices for wholesale and retail customers. However, the result of the patchwork of deregulation and restructuring

has been inconsistent from State to State. Management, investment, and maintenance of the electricity system have varied widely

across geographic regions, as demonstrated by the experience in my

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home State of California and the August 14, 2003 Northeast and

Midwest blackout.

I will add, as a Californian and a native of Ohio, I have been impacted by both the unfortunate experiences so I have an especially

keen interest in these issues. I should also note that I am disappointed to hear reports that southern California has an especially tight supply of electricity and may this summer according to

our first witness, experience blackouts again.

Bearing these events in mind, the subcommittee meets today to

conduct a frank assessment of the Nation’s electricity system, to

analyze challenges to investment in transmission infrastructure

and capacity, and to discuss how these issues must be addressed

as part of a comprehensive energy policy. Ensuring reliability is essential to meeting the growing needs of the 21st century. I look forward to hearing from this panel and I particularly look forward to

the passage and the signing of an energy bill out of this Congress,

one which the House has passed repeatedly and on which the Senate has not taken action. And as chairman here today, I call on everyone who anticipates that we may have a blackout in California

to ask would such blackout occur if we in fact had passed an energy bill 3 or 4 years ago as we should have.

With that, I will yield to the ranking member.

[The prepared statement of Hon. Darrell E. Issa follows:]

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Mr. KUCINICH. I want to thank the Chair for holding this meeting. I note in the prepared testimony for Mr. Wood that he cites

the need for adequate electric infrastructure. I think I could agree

with him on that although I do not agree that the Public Utility

Holding Company Act should be repealed.

Mr. Chairman, in the last 10 years, the deregulation of electricity

markets has pushed electric utilities to cut their costs to boost profits. I saw that in my own area where First Energy cut costs and

did not adequately maintain their infrastructure which led to the

blackouts that we had throughout the Northeast. They failed to

maintain critical reliability standards and that led directly to the

blackouts.

The blackout began in Ohio and spread quickly as far west as

Michigan and east to New York, north to Ontario, Canada and as

far south as Maryland. The analysis of the blackout revealed that

the principal cause was trees short circuiting major transmission

lines and then critical computer malfunction. Mr. Wood is familiar

with that.

Proper tree maintenance and computer maintenance would have

prevented the blackout. An electric utility has the responsibility to

ensure reliable electricity. That responsibility includes the prevention of blackouts like the August blackout of last year that crippled

the northeastern United States. First Energy Corp. was clearly

identified as the leading cause of the blackout because they did a

bad job, they didn’t trim the trees around the power lines and laid

people off who were supposed to do that. So when you talk about

infrastructure, you also have to keep in mind there have to be people around to maintain the infrastructure. If you lay them off, then

work is not going to get done. Tree trimming has been a necessary

task since the electric utilities were created, but First Energy, in

order to save money, didn’t perform that task and that was one of

the reasons for the blackout.

What has happened in response is that First Energy Corp. has

swung to the other end of the spectrum and has declared that all

the trees be chopped down in these right-of-ways because it is

cheaper to chop a tree down than to trim it every 3 years. Think

about this. You live in a nice community; it depends on trees for

quality of life and all of a sudden, your local utility is beginning

to use this axe to chop down all the trees instead of trimming

them. This is a problem in some of the suburban areas where these

lines run.

First Energy has even instituted a bonus pay system that may,

and I underscore may, encourage its tree trimmers to chop down

trees rather than trim them. Such a system would incentivize tree

trimmer priorities to cut more than necessary and it would harm

property values.

So, First Energy is placing profits above all other considerations.

The last time it was sacrificing reliability; this time they are sacrificing property values. First Energy has a right-of-way for power

lines, and it is not being a good neighbor despite this last House

energy bill in efforts to improve reliability of the electric grid. The

failure of First Energy and other utilities in placing safety, security

and reliability before profits I think is going to ensure continued

blackouts.

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I want to thank the Chair for holding the hearing and thank the

panelists for being here.

Mr. ISSA. We will now hear from the vice Chairman of the committee, Mr. Westmoreland.

Mr. WESTMORELAND. Thank you, Mr. Chairman.

I want to thank you also for having this hearing on the reliability

of our electrical system, something each one of us takes for granted

every day when we walk into a room and flip on a light switch. I

also want to thank the witnesses for being here today. I look forward to hearing your testimony and what you have to say.

Electricity transmission is a complicated issue. When you really

get down to it, the bottom line is we have over 680,000 miles of

transmission lines in the United States that feeds about 100,000

substations which then distributes the power through 21⁄2 million

miles of local power lines to the people, our constituents and all of

us.

Our grid is the largest and most reliable in the world and of

course we are not without problems. We all know that, but in the

past 10 years there have been two instances that come to mind and

they end up being international news because it is so unusual for

us to have these transmission problems. I think we will have our

work cut out for us over the next few years when we look at the

growing demand of electricity we are all going to have, but I think

before we jump the gun on some of the proposals that are out

there, we need to realize that some parts of the country have

things under control. I think in the southeast our rates are low, we

have a good delivery system and are doing a great job of delivering

power and hopefully, we will pass that along to the rest of the

country.

While we have been fortunate in our State to escape the power

outages that other regions of the country have seen, I know that

it is not out of the realm of possibility for us to experience such

an outage. I look forward to hearing what everyone has to say and

I am sure we will learn a thing or two this afternoon about the importance of making sure that our grid system stays reliable.

Thank you.

Mr. ISSA. Mr. Higgins, do you have an opening statement?

[Mr. Westmoreland presiding.]

Mr. HIGGINS. Actually, I didn’t. I have nothing to say because I

wanted to hear what was going to be said but I am told we have

to fill in some time here, so I will have to give you something.

The reliability issue is obviously very important to the Nation.

Lessening our dependence on foreign oil is obviously important for

economic reasons as well as national security. Tom Friedman’s recent book, ‘‘The World is Flat,’’ where he argues the old vertical

model of economic superiority is over, that the world is flat, it is

horizontal and knowing who is emerging, who is up and down is

a much more complicated exercise today.

In the book, he also argues that the United States, in essence,

is funding both sides in the war on terrorism. Because of our overdependence on foreign oil, we are paying a lot of money that would

be used for other things to help finance the wrong side of terrorism

as far as we are concerned. Then, through our tax dollars, we are

financing the American interests in the fight against terrorism.

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I think when we look at energy reliability, its impact on our Nation, if you consider since World War II, anytime the cost of oil has

increased beyond 40 or 50 percent, the economy goes into recession.

The reason for that is money, being more broadly spread throughout the world economy, is going to every oil producing nation. If

you look at the impact on our cities, why is it kids in the inner city

are disproportionately stuck with asthma and upper respiratory

diseases? It is our reliance on fossil fuels to move our engines and

move us around.

I think when we look at an energy policy in this Nation, obviously reliability is very, very important for the efficient, safe transmission of electricity, but also the issue of a more diversified portfolio of energy sources including renewable sources is fundamentally as important to the economy as it is to national security as

well.

I have talked to people from Chariman Wood’s office who have

been very helpful by the way and I thank you for that.

On the issue of New York State who is experiencing all kinds of

problems, we have the State’s energy use on a daily basis which

is approximately 31,000 megawatts. The supply is about 35,000.

Those narrow margins do not produce the cost cutting savings

stimulus, if you will, that was to result from competition because

there are not enough competitors in the system.

We in western New York have an extraordinary resource in the

Niagara Power Project which produces about 10 percent of the

State’s energy supply but because the demands throughout New

York State and through seven States outside of New York are so

great, we are unable to use that cheap hydropower for economic development because it is spread so thin over a large campus, if you

will. Historically, the Niagara Power Project which is powered by

Niagara Falls was built as an economic development tool for western New York and now is being used to subsidize the losing operations of a state authority that is responsible.

The chairman is on his way back and I will stop with my discourse in a minute.

I have talked to your office and they have been very, very helpful

in terms of information and confirming certain assumptions, etc.

and we appreciate that.

With that, the chairman has returned.

Mr. ISSA [presiding]. Thank you.

No ranking member has ever done better by his Chair.

At this time, I would like to request that the witnesses and anyone else who may be consulting to the witnesses please rise and

raise your right hands.

[Witnesses sworn.]

Mr. ISSA. The clerk will report that all present nodded or spoke

in the affirmative.

I would like to at this time introduce the Honorable Pat Wood

III, chairman, Federal Energy Regulatory Commission, the independent regulator of the Nation’s wholesale electric power supply

industry and natural gas, oil and refined products, pipelines and

hydroelectric facilities.

Prior to joining FERC in 2001, Mr. Wood served as chairman of

the Public Utilities Commission in Texas. He has also worked as

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an engineer with ARCO Indonesia and as an attorney with Baker

and Botts. He holds degrees from Texas A&M and Harvard School

of Law.

Without further ado, Mr. Wood, you can deliver your testimony

as your able staff prepared it and as we all have copies of it or at

any point you may consider it all in the record as it will be, and

go off script and give it to us from the heart.

STATEMENTS OF PAT WOOD III, CHAIRMAN, FEDERAL ENERGY REGULATORY COMMISSION; MICHEHL R. GENT,

PRESIDENT AND CEO, NORTH AMERICAN ELECTRIC RELIABILITY COUNCIL; DAVID OWENS, EXECUTIVE VICE PRESIDENT, EDISON ELECTRIC INSTITUTE; AND DR. MARK COOPER, DIRECTOR OF RESEARCH, CONSUMER FEDERATION OF

AMERICA

STATEMENT OF PAT WOOD III

Mr. WOOD. Thank you.

Actually, I will give you what I worked on last night which is a

version of what I wrote but it tells you a bit more and I think tries

to address the concerns you have.

I would venture that nothing is as directly relevant to our Nation’s economic well being than the topic you are looking at here

today which is a dependable electricity system. The severe economic impact of the 2003 blackout more than underscored how critical electricity has become to our way of life. Not only does there

need to be enough power plants to generate the electricity, but the

delivery grid also needs to be robust and reliable. And, as we saw

in the last decade, the need to keep a vigilant eye on the grid and

on the players that use the grid, who buy and sell the power there,

is a critical role for the Government.

I would like to focus today on two issues, the current state of our

electric infrastructure, which includes the need for more investment, and the actions the Nation should be taking today to beef up

the grid. Right now, our electricity transmission system is the

weakest link in our electric supply system. Only about 6 to 10 percent of a customer’s power bill pays for transmission and the men

and women who build and maintain it, but transmission is such a

crucial part of keeping the lights on that it doesn’t matter that it

is only 6 to 10 percent.

Unfortunately, however, transmission investment is not keeping

up with customer demand for power. This trend has occurred in

every area of the country. Although in the last few years, we have

seen a short term increase in transmission investment, growth in

transmission capacity still appears to be lagging the growth in demand overall.

According to FERC public reports, transmission investment increased this last year for the 4th year in a row and it is up 69 percent since 2001, but in the same years, few new high voltage lines

came on line. So just talking about transmission in the aggregate

is a bit of a difficult thing to do when it is really the

interconnectivity of the grid that we are talking about. It is challenging to measure those on a form that anybody can agree with.

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In the last 4 years, 931 circuit miles nationally out of 150,000

circuit miles were added to the grid on the high voltage side. This

modest progress is in contrast to the 500 to 2,000 miles of interstate natural gas pipeline that FERC authorized each year of the

last 4 years.

There are a number of factors that cause this and I would like

to address those today. At one of our recent workshops on transmission investment which we held about 6 weeks ago, a witness for

investor-owned utilities discussed the forecast of a significant increase in transmission investment in the coming few years. Other

witnesses at the same hearing asserted that much of the investment is catch up to make up for years of under investment and

that U.S. investment levels are significantly below those in other

countries.

In any case, there have been two serious consequences for the

overall under investment, increased transmission congestion and

degradation of reliability. We have seen the increase of transmission congestion in almost every region of the country. When the

grid is under built, more expensive, less efficient and in many

cases, dirtier, power plants must be run in order to serve the customers’ needs, to keep the lights on, or worse yet, economic transactions aren’t scheduled in the first place.

Congestion is handled several different ways across the United

States from the more market-based mechanisms here in the East

and in the Midwest to manual reconfiguring of the system through

slower processes elsewhere. The amount of congestion has increased steadily since 2000 and this has cost customers billions of

dollars since then.

I would like to show you the extent of the national transmission

congestion problem. This schematic map is drawn from the Department of Energy’s 2002 National Transmission Grid Study and

shows there is significant congestion and transmission constraints

across the United States. The red arrows indicate the paths of flow

that are often congested which reflect where transactions cannot be

scheduled in the first place, or if they can be scheduled, they run

the risk of being curtailed.

Only one new large, inter-utility transmission project was completed in recent years and that was the famous Path 15 in central

California, 500 kilovolt, which is a very big line, from north to

south in the State. The new byproduct of building this one transmission line is that congestion increases on the neighboring line. So

Path 26 is now the new poster child of western potential development. This is not unrecognized because after all each of the Nation’s three interconnective grids carry a product that moves at the

speed of light, 186,000 miles a second, so you can believe the congestion can spread pretty easily.

To focus on southern California, not for any particular reason but

just because the chairman mentioned it in his opening statement

and our wonderful staff was foresightful enough to envision this,

this chart focuses on what we view as one of the most concerning

areas for the summer for a few different reasons than we have seen

in the past. Yes, southern California is experiencing congestion

problems because imports are a major factor in meeting the demand in southern California. Due to a lack of local generation supVerDate 11-MAY-2000 10:29 Nov 16, 2005 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 D:\DOCS\24412.TXT HGOVREF1 PsN: HGOVREF1
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plies, congestion has to be closely watched there. There are other

regions of the country that are similar.

Imports from one source curiously impact the ability to import

from another, so depending on how you take power over the D.C.

tie from the hydropower in Oregon, it might affect the ability to

take in gas-fired power imported from Arizona. So that balancing

act is very important and the dispatch of one line may actually

pinch off the ability to bring in power another way.

If we have normal temperatures this summer, there should be

adequate electricity to meet peak loads in southern California.

However, if it is warmer than normal, a 1 in 10 summer, for example, we could have problems meeting electricity demand, particularly in the peak month of August. Population and economic growth

will continue in that region which, of course, is a good thing, but

southern California will have continued difficulties the next summer to match delivered supplies with the increased demand.

Our commission met at the California Public Utilities Commission’s offices with the CPUC commissioners and with the California

Energy Commission commissioners and chairman last Thursday to

talk about this issue and to work on solutions for this problem so

that in fact we do not have a repeat of 2000 even if there are shortfalls and that they can be contained, localized and not replicated

elsewhere.

In addition we see this type of congestion not only in southern

California but in many regions of the country. I think Mr. Owens’

testimony points out how that has increased eight-fold. There are

reliability concerns for not having a robust transmission infrastructure. We saw this most recently in the summer of 2003 when the

northeast States and Canadian provinces were affected by that. It

was estimated that brief but profound blackout cost American and

Canadian customers $4 billion to $10 billion in costs for just the

day or in some cases, up to 6 days that the power was out in Canada.

If customers are to get the benefits, and there are many, of competitive wholesale markets and also avoid the cost of congestion

and reduced reliability, we have to find ways to accelerate investment in transmission. Inadequate transmission infrastructure becomes particularly acute as we look at developing a large transmission grid to handle new clean coal supplies and more nuclear

power which I think have to be a big part of our future development. Those types of plants are, by nature, going to be located distant from the cities and from where the load is and will require a

much more robust and stable grid than we have today.

I think one of the thoughts we have been grappling with at the

Commission since I have been there and actually before are what

are the hurdles to getting transmission built? I think from several

conferences and several years of experience on my part, and on our

staff’s part as well, we categorize them into about five: local and

State siting approvals; retail rate freezes at the State level that

discourage new investment; and where you don’t have those, the

lengthy regulatory cost recovery proceedings that do ensue; intracorporate competition for capital, if you have a chance to build a

power plant or build some distribution lines or build a transmission

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line, transmission tends to always be third in that race; and concerns about losing customers to outside competitors.

Why build a line that is going to help your competitor take away

your customer? It is just an intuitive thing that you have to address your fiduciary obligation to your shareholders if you are privately held companies, so if it doesn’t make a lot of sense to them,

why are you building that line to help your competitor take away

your customer? It is tough.

We are working within our current statutory authority to encourage an adequate investment climate and additional measures are

needed. I think we have before you in the Congress a bill that you

mentioned, Mr. Chairman, that I think can address three of these

things.

Those things are only in service of a greater vision. We brought

copies of a study that came out unfortunately a week or so before

the blackout in North America. The Department of Energy did an

excellent study which has been a fixture at our Commission for the

last couple of years, ‘‘The Vision: Where Are We Going To? What

is it we want to build toward?’’ This is Grid 2030, it is a vision,

a high level document but it is one I think is important to get the

ball rolling. What is it we are building toward? We are building toward interconnection of the regions across the country so that the

fuel diversity of our great country can work to the advantage of everybody without working to the detriment of the people who have

the supplies near them.

This vision statement is one I fully support and it describes a

regulatory framework as well as a technological framework that

governs system planning and market operations for the years

ahead. It builds on existing infrastructure much as the interstate

highway system was built on the old U.S. highway system and

doesn’t try to Federalize the transmission grid but indicates there

are some areas of national interest that need to be addressed. I

would highly recommend that as really the end point.

This bill before the Congress has a number of steps in it that I

think move in that direction and for that reason, I share your exultation that the Congress should adopt and get it to the President

so he can sign it. You have passed it a few times as has the Senate.

It is just sewing that suit together that makes an ugly part, so if

that could be done this year, I think it will be important for America.

I want to close with three things of particular interest to us at

the Commission as we try to look after the broad public interest

that are real critical parts of this bill. The first is the mandatory

and enforceable reliability standards of setting up a system by

which the rules of the road are not only clear and enforceable but

they have a sting if you don’t obey them. That is an important step

we do not have today. As I have heard my friend Michehl Gent say

a lot of times, this is going to be one of the most important things

we could do this century to make our grid reliable and it could

have prevented what happened in your colleague’s hometown and

I think your former hometown.

An important thing the House did stick in was a specific explicit

authority over the interstate grid’s cyber-security standards. While

I think anybody would view these as incorporated in reliability

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standards, the current situation that allows utilities or doesn’t really govern utilities’ ability to get inconsistent cyber protection for

their grid across the country would be remedied here and be put

under all the other reliability standards and treated that way.

I think a focused cyber attack is one of the things I am concerned

about. I think, more than inadequate tree trimming, the potential

for somebody at a desk to infect the weakest part of the grid and

reek some damage is a real concern. I think the standards that

govern that need to be very agile and very smart and need to be

mandatory and consistent. It has been 2 years since the blackout

and I think it is unconscionable that we don’t have this enacted despite the recent actions of the Congress.

Back stop siting authority for our Commission is the second of

the three big items. I think some certain critical electric corridors

can be identified by the Department of Energy. Much like the Grid

2030 vision, those types of corridors are the ones where you would

focus the backstop authority, but not Federalize the whole system

as we have on natural gas which admittedly has worked quite well,

but make sure the focus is on the backbone systems that are not

being built if a State cannot or does not act in a timely manner.

Finally, I know there are some points of discussion about this but

I do think repeal of PUHCA, the Public Utility Holding Company

Act, is overdue. I think the protections that were not in place in

1935 that would have prevented the need for PUHCA in the first

place are in place and have been in place for quite a while at the

State and Federal level both at the utility commissions and at the

Securities and Exchange Commission. I think those laws do ensure

quite an amount of redundant customer protection which PUHCA

was intended to adopt. I think it would spur investment in transmission infrastructure and would facilitate competition across the

country.

Thank you for the opportunity to talk on a topic near and dear

to my heart and I look forward to any questions you may have

after our good panelists get through.

[The prepared statement of Mr. Wood follows:]

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Mr. ISSA. I will note for the record, without objection, the entire

document, ‘‘The Grid 2030,’’ will be included in the record of this

hearing.

[NOTE.—The U.S. Department of Energy document entitled,

‘‘Transforming the Grid to Revolutionize Electric Power in North

America ‘Grid 2030’ A National Vision for Electricity’s Second 100

Years, July 2003,’’ may be found in subcommittee files.]

Mr. ISSA. At this time, if I may go back to regular order for a

moment, I would like to introduce the rest of our speakers and

then get to Mr. Gent.

Our next speaker will be Michehl R. Gent, president and CEO,

North American Reliability Council. After he speaks, we will have

Mr. David Owens, executive vice president, Edison Electric Institute; and then Dr. Mark Cooper, Director of Research, Consumer

Federation of America.

With that, we would next go to Mr. Gent.

STATEMENT OF MICHEHL R. GENT

Mr. GENT. Thank you.

As we approach the second anniversary of the largest blackout

in North American history, I think it is important that I share with

you the status of our efforts to prevent such a reoccurrence. I thank

you for that opportunity. My prepared comments have the details

of many of the programs, processes and standards that we have implemented and I again make the case that the next move, passing

the reliability legislation, is up to Congress.

The electricity industry has undergone profound changes in the

past decade as competition has taken the place of regulation in

major parts of our country. Those changes have had significant consequences for how the industry maintains the reliability of the bulk

electric supply systems serving North America. The introduction of

competition means that we must change the way we deal with reliability matters. I think the blackout of August 14, 2003 proves that

the old way of handling reliability will not work effectively in a restructured electricity market.

There are understandable reasons why the old ways will not

work. Before restructuring, the industry was comprised of entirely

vertically integrated utilities, both investor owned and publicly

owned, each owning its own generation, each owning its own transmission, its own distribution system, and in fact owning its own

customers, if you will.

Utilities sold electricity to one another but it was mostly between

neighbors trading back and forth and then in later years, it developed into emergency purposes and then finally with the advent of

the passage of the Energy Act of 1992 we have more transactions

on the interconnections.

As the competitive wholesale electric market developed, trade in

electricity spanned longer and longer distances with organizations

moving larger and larger blocks of power from one region to the

other. However, the electric transmission system was not designed,

nor was it built, to move such large amounts of power. In fact, it

hasn’t changed substantially in the last 10 years.

Along with the increased competition and supply of electricity

came what we call corporate restructuring. Here are just a few exVerDate 11-MAY-2000 10:29 Nov 16, 2005 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 D:\DOCS\24412.TXT HGOVREF1 PsN: HGOVREF1
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amples of what has happened. Some organizations have sold off

generation assets as part of their move to competitive wholesale

markets. Other organizations have turned operation of their transmission system over to independent transmission operators or regional transmission organizations. Some have become transmission

only organizations. Independent power producers have become the

primary developers of new generation plants and services have

been unbundled in many parts of the country. We no longer have

this link between the generation plant and the customer.

The net result is often that several generating plants under separate ownership might now sell their output to an unaffiliated marketer who would arrange for an unaffiliated transmission company

to transmit the electricity to an unaffiliated distribution company

for delivery to the ultimate customer who may feel unaffiliated.

With that degree of unbundling and restructuring, the required

near constant coordination and communication among the operators of the transmission system that formerly took place in a vertically integrated system became at the same time more difficult and

yet more important than ever.

An important indicator of the status of the electric system, as

Chairman Wood said, is the amount of congestion occurring on the

system. For each year in the last decade, more transmission lines

have been experiencing congestion for more hours of the year. We

have fashioned reliability rules for handling that congestion but

that could also mean that someone doesn’t get transmission service. Someone is going to have to pay more for their electric energy

because of the congestion. It is obvious to me that the needed construction of additional transmission capacity has not kept pace either with the expansion of generation or with the increase in the

customer’s demand.

Since the blackout of August 14, 2003, the electricity industry

has accomplished much to strengthen the reliability of bulk electric

systems in North America, yet much more needs to be done. Long

before the blackout, the industry realized that the way we had

been handling reliability for the previous three decades would no

longer suffice. The voluntary system of cooperation and peer pressure that had worked so well for 30 years would not be sufficient

to maintain the reliability of the system. We all agreed that the answer was to make the reliability rules mandatory and enforceable.

To accomplish that, we started about 6 years ago—that is

NAERC and a broad coalition of the electric industry stakeholders

from all industry sectors as well as the customers and regulators—

to put together legislation that we could all live with. We have

been seeking amendments to the Federal Power Act and as you

mentioned, that has been passed in the House bill. That legislation

would make reliability rules mandatory for all owners, operators

and users of the bulk electric system regardless of those entities’

jurisdictional status under the Federal Power Act.

It would authorize creation of an industry-based electric reliability organization to set and enforce reliability standards subject to

the oversight in the United States of the Federal Energy Regulatory Commission. I might add, in Canada, that would include a

provisional agreement.

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Legislation also recognizes that the international nature of the

interconnected grid does exist and that the reliability activities

have to be carried out by regional entities, not some central force

located in either Washington or Princeton, again with FERC oversight.

Congress now appears poised to finally enact the reliability legislation that we have been seeking as part of the comprehensive energy bill, but we have been here before and we have been disappointed before. This time it is a little different because, as a result of the blackout we had 2 years ago, we even have the support

of the United States and Canadian governments. In fact, the U.S.-

Canada Power System Outage Task Force that investigated the

2003 outage concluded, ‘‘The single most important step for maintaining a high level reliability is for Congress to enact the reliability provisions in the pending legislation you already passed.’’

NERC is very hopeful that this will be our year.

I am convinced that if we had the legislation 3 years ago, the

blackout would not have occurred. In my written testimony is a

brief description of many of the steps that we have taken to assure

that a blackout like the one that occurred in August 2003 cannot

be repeated. We have implemented many of the steps that were

called for in our own report, recommendations in the report of the

U.S.-Canada Power System Outage Task Force and steps in the

proposed legislation.

Those implemented steps include a rewrite of our standards to

make them sharp and clear; required training programs for system

operators that will be handling emergencies; standards for vegetation management; and readiness audits of the operating centers to

just name a few. However, memories are short and all we have are

promises. We need the reliability legislation to make all of this

mandatory and lasting.

After the blackout, we were able to accomplish much because everyone was focused on reliability. However, as time has passed, priorities have shifted, people have moved on, and other issues are

competing for your time and my time. Having the reliability legislation in place finally will make sure that NERC and the entire

electricity industry can make the proper focus on reliability an ongoing and sustainable activity.

Thank you, and I would be pleased to answer your questions.

[The prepared statement of Mr. Gent follows:]

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Mr. ISSA. Mr. Owens is executive vice president for business operations with the Edison Electric Institute. He joined the Institute

in 1980 and has held a number of positions related to power supply

policy and industry regulation. Prior to joining Edison, he served

as Chief Engineer of the Division of Corporate Regulations of the

Securities and Exchange Commission.

Mr. Owens holds a Bachelors and Masters degree in engineering

from Harvard University as well as a Masters from George Washington University.

Welcome, Mr. Owens. Your entire testimony will be put in the

record. So again, feel free to, within our timeframe, expand upon

your written testimony.

STATEMENT OF DAVID OWENS

Mr. OWENS. Thank you.

You dated me a little. In 1980, I was a child prodigy. I was about

4 years old when I started my career.

Mr. ISSA. I was a child prodigy captain in the Army at that time,

so our prodigy background is duly noted. [Laughter.]

Mr. OWENS. On a serious note, EEI is the association of U.S.

shareholder-owned electric utilities and industry affiliates and associates worldwide. We certainly do appreciate this opportunity to

testify on electric reliability and transmission issues.

As you know, the energy bills now pending in Congress contain

a number of important transmission reform provisions that would

help to strengthen our Nation’s transmission infrastructure. EEI

strongly supports these provisions. I would like to take a moment

and highlight for you eight items I think are very critical to maintaining reliability and enhancing our overall transmission infrastructure.

Like the other witnesses, I feel very strongly that Congress

should establish mandatory reliability rules for all market participants with important FERC oversight. We strongly urge the inclusion of these provisions in an energy bill, but without the budget

limitations contained in this year’s House passed version of H.R. 6.

My second point would be that Congress should require FERC to

reform its transmission rate policy in a manner that will provide

greater certainty to investment in the transmission system. We certainly do support the FERC pricing and technologies provisions in

H.R. 6, and particularly those incentives to expand transmission

infrastructure. I also appreciate the comments that Chairman Pat

Wood has made with respect to some of the things FERC is seeking

to undertake.

Third, I would urge that Congress give FERC backstop transmission siting authority for many of the various reasons that

Chairman Pat Wood spoke of. In my view, regional electricity markets require a transmission siting process that has the ability to

consider regional and even national needs. As you know, most

siting laws do not allow the consideration of regional benefits.

Many of them also do not recognize the role of some new important

entities such as multi-state, regional transmission organizations or

independent transmission companies. These entities, in my view,

play a significant role in the planning and siting of transmission.

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H.R. 6 would give FERC limited backstop transmission siting authority. This authority would certainly not be as comprehensive as

the authority that FERC currently has with respect to natural gas

pipelines, but it would help site transmission lines in interstate

congested areas, which are designated by the Department of Energy. This would occur only if States have been unable to agree or

to act within a year.

My fourth point is that Congress should reform the transmission

permitting process on Federal lands by designating the Department of Energy as the lead agency to coordinate and set deadlines

for the Federal environmental review and permitting process. As

you know, the Federal transmission permitting process needs to be

coordinated, needs to be simplified, and needs to be able to work.

It is a very cumbersome, complicated process today. We strongly

support the provisions in H.R. 6 that would accomplish this goal.

My fifth point is that Congress should ensure all transmissions

providers must allow open access to their transmission lines to any

third party power seller. The current system that we have today

is one where government-owned utilities and electric cooperatives

collectively own and operate about 32 percent of the Nation’s transmission system. Unfortunately, these transmission owners are not

subject to the same level of FERC jurisdiction over transmission

that applies to shareholder owned utilities.

In my view, this bifurcated regulation of interstate transmission

lines certainly will not work as the industry structure continues to

evolve. We believe that sound public policy to protect consumers

would mean putting all utilities participating in interstate wholesale electricity markets under FERC’s full, just, and reasonable requirements. At a minimum, EEI strongly supports inclusion of an

effective FERC-lite provision in any electricity bill, which would

make all types of utilities subject to non-discriminatory open access

transmission rules.

My sixth point is that Congress should clarify Federal law to authorize Federal utilities to join an RTO or independent transmission system operators voluntarily. I am not supporting mandatory RTOs but I do believe that certain Federal entities, such as

in the Pacific Northwest, where the Bonneville Power Administration controls over 70 percent of the transmission system in that region, has to have the clarity that they can become a part of a regional transmission organization.

My seventh point is that Congress should repeal and modernize

the Public Utility Holding Company Act of 1935. As the Chair correctly pointed out, PUHCA acts as a substantial impediment to

new investment in energy infrastructure. It is keeping billions of

dollars of capital out of the industry and particularly capital that

could be very useful in modernizing our transmission system. We

believe this outdated statute has contributed to the failure of electricity infrastructure to keep pace with growing electricity demand

and the development of regional wholesale electricity markets.

H.R. 6 contains provisions that will repeal PUHCA and transfer

consumer protections to FERC and the States. These provisions are

similar to PUHCA repeal language that has been included in every

major electricity bill considered by the Congress over the last decade, and which have been endorsed by every administration, ReVerDate 11-MAY-2000 10:29 Nov 16, 2005 Jkt 000000 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 D:\DOCS\24412.TXT HGOVREF1 PsN: HGOVREF1
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publican and Democratic, since 1982. They should be included in

the energy bill again this year.

My eighth and final point is that Congress should provide for enhanced, accelerated depreciation for electric transmission assets, in

other words, reducing the depreciable lines from 20 years to 15

years similar to the tax treatment governing other major capital

assets. Currently, transmission assets received less favorable tax

treatment than any other critical infrastructure and technology.

Accelerated depreciation for transmission will help increase investment in and strengthen our energy infrastructure.

Let me conclude. Congress needs to finish the job and pass an

energy bill as soon as possible to help promote fuel diversity, to improve the energy efficiency and conservation of our systems, to provide regulatory certainty in energy markets, and to encourage investment in critical infrastructure. We urge Congress to adopt an

energy bill that includes the transmission provisions contained in

H.R. 6.

This completes my statement and I would be pleased to answer

any of your questions.

[The prepared statement of Mr. Owens follows:]

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Mr. ISSA. Thank you, Mr. Owens.

We now turn to Dr. Mark Cooper, an author of many books and

writings and a scholar. Dr. Mark Cooper is director of research,

Consumer Federation of America, where he is responsible for energy, telecommunications and electronic policy analysis. Dr. Cooper

is author of a book, ‘‘Equity in Energy,’’ and has published numerous articles on energy policy and deregulation over the last 20

years.

Dr. Cooper received his Ph.D in sociology from Yale University,

a Masters degree in sociology from the University of Maryland, and

a Bachelors degree in English from the City College of New York.

With that, I very much look forward to hearing parts of your

written testimony and anything wlse you may be willing to give us

that is not yet included in your written statement.

STATEMENT OF DR. MARK COOPER

Mr. COOPER. There is always a tendency to just throw them

away and respond to what went before because I have a rather different point of view, but let me sort of lay the base by explaining

why we view the electric utility industry rather differently from the

market philosophy you have heard heretofore. Then I will try and

go through about 10 points at which we disagree.

Frankly, the failure of Congress to pass the legislation the last

couple of years has not troubled us a great deal because bad legislation is worse than no legislation. We don’t think that the legislation will do us a great deal of good.

I want to start with a simple observation. I commend the committee for focusing on the important point here, the reliable supply

of electricity and casting a very broad net, because the framework

of the letter invited me to go where I thought I needed to go to

make my points.

Electricity is like oxygen in the 21st century. The way I like to

get my audiences to understand this is the ‘‘E’’ in e-commerce

stands for electronic. If the electrons don’t flow, all the gee-whiz

digital gadgets we love won’t work. This is the foundational service

in our society. In fact, we believe that reliability is a public good.

The transmission system is a commons in the following sense.

The benefit of reliability is shared. Once people are hooked to the

grid, it is hard to exclude anyone from enjoying the benefits of the

reliability that is provided to the group as a whole and is nonrivalrous. That is, the fact that I get the benefit of reliability does

not deny my neighbor the benefit of reliability. In that sense, it is

a classic public good. But there is more than that.

Electricity has massive positive externalities. You heard the numbers. A few days’ blackout cost $4 billion to $6 billion. That is

the external value of electricity. There are also severe negative

externalities with respect to building these facilities, so people do

resist having lines built through their neighborhoods because there

are environmental, health, and property values that are undermined by these facilities. This is a legitimate source of debate between people about the private value of transmission versus the external negative values that it imposes on people.

We firmly believe that as long as you try and take this public

good and commodify it, this infrastructure, you will in fact restrict

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the supply of reliability and undermine the public benefits that it

can provide. So we see critical public values here in electricity. The

law says it is affected with the public interest. It is a public good

in its infrastructure, it relies on public resources, it demands public

participation and cooperation between all these many entities that

must make the system work.

I believe that we had the best electric utility system in the world

precisely because we found the way to balance the public obligations with the private incentives, the social responsibility, and the

private profit motive. We believe irrational exuberance for deregulation in the 1990’s undermined that important balance.

Electricity is not a commodity that can be easily sold in the marketplace on a spot market basis, and we have seen that in the last

10 years. It is not shirts or shoes. You can’t build them in Taiwan,

transfer them to Brooklyn and put them in a warehouse for a year

and wait to sell them. It is not a store-bought commodity. It doesn’t

behave well as a commodity market, and therefore, we have to

treat it very, very differently.

The cost of capital in this industry, if you try and treat it on a

merchant basis, goes through the roof because it needs a very long

term perspective, but the merchants want to recover the costs on

a very short term basis. You have heard about accelerating depreciation to 15 years. This is for facilities that will last 30 and 40

years. When I studied economics, the idea of financial accounting

was to match the financial life to the economic life because that is

what keeps things in balance. These are assets that need long financial lives because they have long economic lives and they are

shared facilities.

As we look out at the experience of deregulation, we understand

that restructuring puts stress on the grid. You heard some of the

reasons here: a dramatic increase in the number of transactions, a

dramatic increase in the complexity of transactions, increased difficulties of coordinating these sales, and contracts which were not

what the system was built to do.

It is a physical system, intending to move electrons, and electrons are the most nasty little beings in nature on which we depend. First of all, they go where they want, the path of least resistance; when they arrive under the wrong circumstances, they actually do a great deal of harm. In the end, the engineers are going

to tell what is supposed to happen, not the market transaction. So

we have wasted a tremendous amount of effort and energy in trying to build transactions on top of the physical system.

This leads us to a very different view of how to deal with the

transmission system. It needs to be affected deeply at its core, its

root has to be in the public interest, not in the maximizing of profits and markets transactions. When we look down the list of things,

you have heard about what needs to be done. We need long term,

integrated resource planning around these facilities, that is a comprehensive, rigorous approach. We need a study of the grid to figure out exactly which facilities need to be built.

We don’t need the marketplace to figure out where we need to

build facilities; the engineers know exactly where to build facilities.

In fact, we can move that around if we want, but the simple, physVerDate 11-MAY-2000 10:29 Nov 16, 2005 Jkt 000000 PO 00000 Frm 00064 Fmt 6633 Sfmt 6633 D:\DOCS\24412.TXT HGOVREF1 PsN: HGOVREF1
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ical nature of the system dictates in the end. We don’t need to have

the marketplace to discover that mechanism.

Frankly, every time we amend the Public Utility Holding Company Act, a consumer pays the price. Enron lost its Public Utility

Holding Company Act exemption about 2 years after the disaster

in California and, in fact, if they had never been given it, the consumer would have been better off.

The Public Utility Holding Company Act has a simple purpose,

to keep utilities focused on their central task, which is providing

electrons to consumers, to not get distracted with other businesses,

to not get distracted with maximizing profits. In California, we

learned a lesson. Electric utilities worry about keeping the lights

on. Merchant generators only worry about getting paid and maximizing profits. When the lights went out, we have now discovered

they were joking in their control rooms about the pain being imposed on people. We cannot run the system that way. The Public

Utility Holding Company Act went a long way to protecting us

from those difficulties.

Ultimately, we believe in open access systems, but the problem

is not with governmental entities who are in fact created to promote solely the public interest. We think the problem has been

with the investor-owners who have used their control over the grid

to prevent the flow of electrons.

On each of these points we have a rather different view which

arises from a fundamental difference of opinion about how we need

to organize this sector. The primary core of the electric utility industry, the transmission grid, is not a market, it is a commons. It

is a public good and that needs to be the way it is designed,

thought about and administered.

Thank you.

[The prepared statement of Dr. Cooper follows:]

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Mr. ISSA. Thank you.

With that, I would ask unanimous consent that all Members be

allowed to put their opening statements and any other pertinent or

extraneous information into the record for 5 days after this hearing.

The Chair would recognize, as is our custom, myself for 5 minutes. I will make my questions short and we will alternate, and undoubtedly, we will get a second round.

Dr. Cooper, I really enjoyed your testimony. I say that with no

reservations. I think you hit on something that is very, very important. Perhaps I agree with you in part and disagree with you in

part. You said that electricity isn’t a market. Might I ask you a

leading question, isn’t it, no matter how you look at it, a market?

What we are debating in deregulation is whether it is, as you used

the term, a spot market or whether it is a market in slow motion,

in other words a market of 30 year purchases, a market of 30

minute purchases.

In California, we had a market of 30 year purchases for 100

years. You bid the plant prior to construction based on a formula

of what you anticipated to be the cost and you recovered it. If you

bid a hydroelectric plant that cost 2 cents a kilowatt hour and

never changed prices for all practical purposes for 100 years, or you

bid a natural gas-fired plant that might be 2 cents a kilowatt hour

at the beginning, but over the years because of the cost of that fuel,

might go up higher and higher, you were still bidding its cost plus

a profit.

Would it be fair to say that the debate is between that model

which I would still call a market, but a market that in a sense is

a 30 year market versus the market that you didn’t seem to like

which you called the spot market?

Mr. COOPER. We were vigorous supporters of the 1992 EPACT.

We were one of the few groups that supported it. There was not

a market before that. There were regulated franchise service territories. There were no bids or a few bids but very little bidding. In

the 1980’s, we discovered that every time a utility was told to go

out to bid, this was for bid chunks, not a retail spot market. Every

time they went out to bid for capacity, they were offered 10

megawatts for every 1 they needed. It looked like why couldn’t we

run the system in that bidding framework.

In fact, the previous 30 years, the whole history of the industry

did not have that market discipline. We were interested in that

market discipline, but let us be clear, in the 1990’s, we never tried

that model of what we could call managed competition. It wasn’t

very popular around here when you talked about health care, but

that was the model that was in the 1992 act.

That model was never tried. It got hijacked into the short term

spot market transactions model, the Enron model, which I have

testimony from 1997 in Pennsylvania where we were opposing it

even before we saw how ugly it was precisely for these principles.

I agree with you in that sense. There was a middle ground which

was not dependent upon the spot market, and in fact, in a certain

sense when people tell me just get long term contracts and you can

protect yourself, the utility franchise was a long term contract between the ratepayers and the utility. So one answer is yes, there

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may be a middle ground we need to get back to but that looks very

different than what we had in the one-third of the States that tried

it.

The second problem with the 30 year versus 30 minutes, once

you start with the mixed model, what happens is, and you heard

this described, the people who think they can maximize their profit

in the 30 minute market don’t want to sign deals in the 30 year

markets. So it gets very difficult to have that mixed basis. So there

are people outside in two-thirds of the States who are signing long

term contracts and doing long term deals, but in the area where

you have this 30 minute market, you have difficulty raising funds

even around prominent projects obviously needed.

On the one hand, there is a middle model; on the other hand, it

is very, very difficult to run this mixed set because everyone keeps

holding out for the fantastic profits they think they can make in

the 30 minute market, starving the 30 year market of the capital

it needs.

Mr. ISSA. Let me ask not a followup question but a question that

came out of the part of your testimony that was extemporaneous.

I appreciate that. You seemed to be concerned that accelerating depreciation was somehow unjust. Perhaps I am a recovering businessman, but say we are talking 30 year assets, matching assets

with depreciation is an interesting question of accounting more

than economics.

Isn’t it true that for the first 15 years of a 30 year depreciation,

even if you accelerated the 30-year lifespan to 15, what you really

have is you have loaned the Federal Government money because

you have put in your tax paid capital and now you are waiting to

get back against the loss. At the 15-year mark, in a 15 year depreciation of a 30 year asset, you actually only get even. You paid the

Government as though it was profit, and then get your money back

over 15 years.

I might suggest for your future testimony, that when you match

it, remember that capitalization is to a certain extent loaning the

Government against tax revenue and getting it back over time. If

you match it 30 for 30, what it really means is you put all your

money up front, pay the taxes and then were allowed to depreciate

it as it went to zero value, but essentially you still made a loan of

that tax money to the Government.

Mr. COOPER. In the utility model, the matching between the long

and the short term is much less of a problem because you have

that long term relationship, which is precisely why the cost of capital is so much lower.

The other problem that I see with the incentives schemes, and

you heard two of them here, accelerated depreciation and higher

rates of return, is that the theory of giving those incentives is to

induce people to build things that they might not otherwise have

built. The impediment to building transmission by and large is not

an economic impediment. We have social impediments, we have socially imposed scarcity frequently, and we have heard a lot about

that. We can argue about whether that is a rational or irrational

choice, but it certainly is a choice that people have to make.

From my point of view, throwing incentives at transmission

projects is good money out for bad. I don’t need to incentivize these

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things. I know where they are, I can guarantee, or pretty much

guarantee, the rate of return without paying too much for them. So

to me these two incentive schemes are in fact not efficient. The

problem in this industry is that it is rich in rents, and rents have

nothing to do with efficiency.

The other point about acceleration is that on the tail end, the

rate payer is supposed to get it back because what they are paying

for depreciation declines. Our experience has been that when the

tail end finally arrives, as it did with the nuclear power plants,

they decided to find some other way to make sure they didn’t lower

my rates. They decided they needed to transfer those assets to companies that were about to face competition.

My problem is that I paid the price in the short term and I don’t

tend to get the benefit in the long term.

Mr. ISSA. I appreciate that.

My time has really expired. I will give one more question for

Commissioner Wood if I have my vice chairman’s permission.

The repeal of PUHCA, or its substantial elimination and reform,

is timely according to Warren Buffett, one of the most trusted men

in America. And we might all say Warren Buffett is no Enron and

get very little if any argument. His estimate is that there will be

$10 billion to $15 billion in new energy capital that will come in

if PUHCA is either reformed or repealed, a win-win, if you will.

Could you give us your thoughts on how accurate Mr. Buffett is

and how much of that relates to your belief as an outgoing commissioner that PUHCA ought to go?

Mr. WOOD. Of course that may be Mr. Buffett’s share, what he

is talking about.

Mr. ISSA. It could be just his share. That is a good point.

Mr. WOOD. I think it is common knowledge.

Mr. ISSA. I apologize, it is his share, so I guess we are talking

about probably double that if we include the rest of the investors.

Mr. WOOD. It is an attractive business, if the two big impediments which are cost recovery and siting issues can be dealt with.

As a regulator of a State that has kind of gone through the full

transition, when it was all fully regulated, the cost recovery and

the siting issues were dealt with pretty cleanly, so there was investment in transmission, not necessarily the kind of transmission

we need to facilitate a market but transmission got built.

When it gets fully unregulated, you have clear mechanisms in

place as, for instance in my home State of Texas where they have

now transmission, is getting built there as well, windmills are getting interconnected, and new power plants. It is this awkward

transition that we are in and I think PUHCA can address all three

worlds.

Allowing utilities to bulk up is not a bad thing, if we are talking

about their wires business. Having one wires company over maybe

four States like in Mr. Westmoreland’s case, Southern Co. covers

a lot of States as opposed to having four companies in one State,

just natural intuition tells you economies of scale, those four companies could pack together and become one company and you could

probably save some money and run a smooth operation That is not

a bad thing and PUHCA doesn’t necessarily prevent that but I

think it does discourage that the way it is set up.

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So unleashing capital, yes, I think you would have also some foreign investment in the United States, which I am not concerned

about, you would allow companies to buy across the country, which

from a generation market power point of view, we actually like better than companies buying their next door neighbor, which is about

the only thing you can merge with the way PUHCA is written.

I think the capital is there, but I do think the bigger questions

honestly could be addressed by cost recovery and siting. PUHCA is

important. I don’t know if it is the dispositive one.

Mr. ISSA. As a followup, wouldn’t you say that we have hundreds

of billions of dollars of foreign investment coming into this country

from Canadian electricity, Canadian gas, Middle Eastern oil, and

soon to be large amounts of LNG. In a sense, we have that investment and the choice is will it be dollars, or will it be an imbalance

of payments that we have to make every day by buying their products?

Mr. WOOD. That is fair and I think certainly electricity is a little

different for the reasons I think Mark Cooper laid out. It is going

to be made in America because of the way you can’t store it and

you have to consume it right away, but the interconnectivity of us

with Canada, as a good example, one Mr. Gent went through with

the blackout, we do have a lot of investment across border and energy, particularly to the north going both ways. Now with LNG

coming in, we will have it much more like it is with oil, stretched

around the world. It is not necessarily a bad thing.

I do think the balance of payments issue is of concern, but an

interdependent economy does probably lead to a more peaceful

world. I guess as one who plans to be here a few years longer, that

is not a bad outcome.

Mr. ISSA. Very good.

I will now turn to Mr. Westmoreland for his questions. You certainly will have any extensions of time you feel you need. I have

taken them.

Mr. WESTMORELAND. Thank you, Mr. Chairman. You have always been fair about that.

I want to put it on a simpler level since we are talking about the

reliability of electricity. Most people who go into a room and turn

on their light may not know where this electricity comes from.

They just know they have it. They know when they have a power

outage. I think a lot of people assume when they have a power outage that it is the lack of electricity when it could be too much electricity or too much demand on the lines.

As you mentioned, electricity cannot be stored. This is an energy

that you cannot store, so it is a complicated situation I am sure

when you look at how much power is being generated and how

much of the 680,000 miles of transmission line can put into these

substations that distributed 2.5 million miles of power lines. We

were talking about building more generation plants.

I know in my district we have built what they call peak plants.

When the loads are there, they cut on and in the peak power use,

they put them through there. It is almost as if we are taking congestion, and I will use traffic congestion as an example, and saying

rather than building more roads, we are going to build more cars

to help with the congestion.

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I think Mr. Owens said to let any generation go on anybody’s

transmission line, you can’t use more power than what that transmission line will accept. It can only handle X amount of power. So

I don’t know that generating more and allowing somebody else to

put on a commodity that cannot be used, unless it is used at that

moment, it can’t be stored anywhere.

I guess my question is this, is there any technology, or whatever,

that is going about? We talk about the siting problems. Nobody

wants a transmission line in their backyard. Is there anything

about these lines being able to carry more electricity on the same

routes as they are now? I know it used to be when you had a telephone line put in your house, that is exactly what you got, one line.

Now, with some of the cables and capabilities that we have, you

can get an unlimited number of telephone lines in your house by

just running one line. Is there any technology that we are looking

at from that standpoint that may make our power situation more

reliable?

Mr. WOOD. One that comes to mind is one I heard about 2 weeks

ago, XCEL Energy, which is the investor-owned utility that serves

Minneapolis Twin Cities as well as other areas which put in a conductor, the same diameter conductor, the same diameter wire. It

has the capability to carry over a 10 mile period a pretty tight

right-of-way, right there in the Twin Cities and was able to double

the capacity without a new right-of-way. They didn’t have to condemn any more land or have any more landowner hearings, or do

any more environmental reviews. They were able to use a newer

technology for metal alloy and actually use a line that was lighter

and because it is lighter, it can carry more load and not require a

bigger tower.

Those types of things cost more, so each of these utilities is going

to run through a cost benefit. Is it cheaper for me to buy more expensive wire than to go through another siting hearing?

I saw the same thing in New England. They are using some

newer technologies in some of the cities there and go underneath

the city. We have seen that in Detroit as well. I think the cost benefit issues are very real to these utilities. It is true with public

power as well. TVA and Bonneville have been very much leaders

in exploring new technologies because they had some leeway from

their boards and from their corporate structure to do that.

I do think the laboratories, and I know Mike probably knows

about them as well, are approving a lot of new technology. As with

telecoms, the power industry will be transformed by technology I

would predict. Right-of-ways is certainly the most easy point to

think of it.

Mr. COOPER. I would just offer the observation, Chairman Wood

has sort of described of what is an incremental advance. I don’t

think we will see the exponential advances that you have mentioned in the digital products, telephone products. One of the fundamental differences is in contrast to electrons, which are these

nasty little beings, bits are wonderfully, remarkably behaved. You

can take a bit and tell it what to do and if you download something

on your screen, you will see the packets arriving as it goes in

pieces, so they are very different, the physics of the two things are

different.

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So the incremental improvement is certainly there and ought to

be encouraged. Things like distributed generation which saves on

both generation and transmission are interesting and advances in

technology, but I think it is incremental as opposed to the exponential hope and advances that we have had in information services.

Mr. WESTMORELAND. Thank you.

I guess the last question is for Mr. Wood and I will give you

these extra questions since you are leaving in a couple weeks.

You mentioned four companies becoming one company. Does that

not take away a little of the competition? I know you said maybe

they could do it for less money by having one company but what

we found especially in Georgia is we have some EMCs and different power companies along with the Southern Co. and even

though we have not deregulated, we do offer competition. I think

if you use more than 900 kWs or something you have your choice

of using any power company that will come in there. It has made

it very competitive.

I was talking to some folks that do business in Georgia and some

of the other southeast States and they were talking about how

much money they save by us doing that and not just having to buy

from one power company. I guess my question is, do you think we

need to federally deregulate power and what is the real reason, the

guts of it? Why do you think it would be better?

Mr. WOOD. That has kind of been my career for the last 10 years,

which is allowing customers to choose. What we do at FERC is regulate the wholesale level between and among parties but I think

I differ from what Mark Cooper laid out, in that I do think it is

very important not just for ideological reasons but for the innovations in both technology and in customer service, the improvement

in price, to allow customers to pick.

A guy introduced me the other day who was chairman of the

Maryland Commission. He said the best way to get to deregulated

power in Maryland would be to put my poster board up and say,

do you want this man setting your power rates or do you want to

pick them yourself? That is a little flippant but the point is true.

In so much else in our economy, customers have gotten a choice in

items we never dreamed we would have choices in. I do look forward in a month to moving home to Houston and I have 21 choices

of electric power providers. Some are 100 percent renewable, some

give you airline miles with it, one was at an 18 percent discount

to the going rate everybody else was paying. I like that, I like that

when I shop for cars, but I do think that the State should make

that choice.

You asked me about Federal. I testified 9 years ago to Mr.

Blyley’s committee and I had to think long and hard about that,

but I think each State is different. Some of the States, for example,

that have low cost resources, some of the hydro and coal plants

that have been depreciated, it is probably better to keep those in

rate base because customers have paid those off and the price

would actually go up in the competitive market.

My four to one comment was really talking about the part that

stays regulated. Wires are regulated yesterday, today and tomorrow. If you aggregate a bunch of generation in one area, then you

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have a problem because of what Congress said in 1992 and everybody has agreed since that generation is competitive. So if you

have one big competitor on the block, that does deprive customers

of the choices that they should have. We have tools to deal with

that.

Mr. WESTMORELAND. So you are talking about just the grid?

Mr. WOOD. Yes. I think the aggregation of just the grid companies is a good idea. I hope it does accelerate. I do think PUHCA

reform could allow that to happen and so long as either our commission or the Justice Department, Congress or somebody is keeping an eye on making sure that the generation stays diverse and

competitive, then I think we have a win-win there.

Mr. WESTMORELAND. Thank you.

That is it, Mr. Chairman.

Mr. ISSA. Thank you.

Since Chairman Wood did such a great job of mentioning his testimony 9 years ago, I will read my testimony of much less than

that ago before the Energy and Commerce Committee when I said

three markups ago of the energy bill, ‘‘I would like to urge the body

to think federally, to think long term. First of all, deregulation has

not proven to be a failure because,’’ and this was at the time the

lights were going out in California, ‘‘because California has not deregulated. Second of all, deregulation of any free market system to

work, it must tear down barriers to entry. California did not do so.’’

Mr. Chairman, like you, I believe in deregulation. I just was in

Moscow last week and I have seen they haven’t quite figured out

that they can’t run things from the top anymore, proven by the

government taking over Yukos, in order to get back one of their

significant commodities that happens to be producing today but

much of its efficiency came from the time in which it was

privatized. Now they want it back because oil is at $50 a barrel

and at that point, any inefficient organization can make a profit.

It really rings a bell, doesn’t it, that anyone can make a profit if

the price is high enough?

Looking at the likelihood that California is going to be somewhere between just enough power and very tight and not quite

enough power and the lights go out, more than 3 years after we

had the lights go out or 4 or 5 years after we had the lights go out,

and more than 3 years after an energy bill initially left this House,

do you think that if we had passed the energy bill, we would have

gone a long way toward not having that tight market this summer

in California? Because I suspect that alone wouldn’t have done it.

What should California and States like it be addressing now if we

are not going to have the lights go out? That goes more broadly to

yourself but also to Edison and so on because you are part of the

producers.

Mr. WOOD. Let me say I don’t think the problem you have in

southern California would have been addressed by the Federal bill,

either the 2002 version or the one on deck now. The California

issues have to be solved by California. The first one they have to

resolve is do they want to go to a retail and bundled state, do they

want to stay at the interim phase, or do they want to go all the

way back?

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I think the debate is probably between go all the way to a competitive world and stay in the middle. Nobody will make investments unless they know we are talking about the 5 to 10 year future. You can’t ask utilities or even public power companies to live

in that world. That is one of the problems, there is not a vision

about where they are going longer term.

Second, I think what is problematic in southern California is

what is called resource adequacy. This is what we had our hearing

about with the California PUC last week. That is a problem that

is actually teed up. The Governor has gotten very involved, the bipartisan commission of the CPUC is very engaged on this issue and

I think they will be resolving some core points on that by the end

of the summer.

By next summer, every utility and everybody serving power in

California will be obligated to have 15 percent or X percent margin

over and above their peak needs, and the PUC will be looking at

making sure everybody has that and is enforcing that. That provides more security. That obligation does not exist under State law

there today.

I don’t think that a Federal solution was even offered that would

have fixed this. This is one the State knows it has to fix and to

their credit, they are addressing it although I think a little more

slowly than I would have liked.

Mr. ISSA. Being the sixth largest economy in the world, California tends to be closer to France than to a small State. France is

fifth I understand but soon California will pass them.

Following up on that, and my ranking member has arrived—this

is the real ranking member not each of the other ranking members

I introduced earlier—I just want to ask one sort of leading question. Mr. Westmoreland talked about peaker plants and as some

here know, I have a 500 megawatt peaker plant that is under proposal. It has gone through the FERC, it is going through the process, it has been funded. It is a pump storage station in my district

and I am very excited about that because I think it brings that opportunity not to build a 500 megawatt plant somewhere else and

yet still have 100 percent clean power when you need it.

To that extent, particularly for those who look at the savings we

have had in California, isn’t it true that California to a certain extent has been its own worst enemy because of its past good behavior? We have a good system of shutting down or peak shaving due

to various uses, we have done a good job of insulating, we have

done a good job of updating our air conditioners, lights and so on.

What we have done is all the easy fixes other than build power

production and now aren’t we in a position in which for all practical purposes, the things others will say what about this, ‘‘what

about this, you don’t have to build,’’ have already been done and

in some ways we would have been better off if we had been building. Isn’t that sort of the trend that public utilities often incentivize

us to do things that reduce consumption or at least reduce peak

and that is good except at some point you run out of that and then

you have to build that capacity?

Mr. WOOD. Build now or build later. I think that conservation

buys you some time but it doesn’t avoid the need to do it at all.

That California was able to wait until much later to build probably

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is a lot of money that stayed in their pocket, but it is not free. To

do conservation, in which California certainly probably leads the

world, costs money and I think the customers have paid for it.

Mr. ISSA. Mr. Gent.

Mr. GENT. I can speak to that issue personally because I worked

in Los Angeles in the 1960’s and it was well known to every electric utility in the State that we could never build a plant in-State

again. That was public policy. You may not be able to find that in

the papers or in the books, but it was certainly known to all of us

in the business.

Mr. ISSA. Mr. Owens.

Mr. OWENS. I think you have to have all of the above and I do

agree with Chairman Wood, you can only count conservation once.

I think unfortunately California historically had an attitude

against building major new facilities.

You made reference to peaking facilities. I think there is also a

recognition that there is a need for base load facilities. All the

things Dr. Cooper talked about increased electrification of our systems, and so forth, and the average consumer—even though we are

conserving—is still using more electricity and they are using it

longer hours of the day. Obviously that suggests to me that the infrastructure, particularly in California that exists, will not be sufficient to sustain the level of service customers are demanding.

I think there is a need to recognize that more and new and efficient facilities need to be constructed. Unfortunately, California

had an environment that was opposed to that.

Mr. ISSA. Thank you.

Mr. COOPER. Let me offer the observation that is exactly one of

the things that needs to be in the Federal legislation is the fact

that California did do more than other States and their neighbors

didn’t and in the public good sense, if you go back and look at the

press when the lights started going out, the first tune was oh,

those Californians consumed too much energy for their swimming

pool heaters and stuff and they were mostly solar installations and

we quickly discovered that California was more efficient than other

States.

So precisely because this is a public good, reliability is a shared

product, the neighboring States and the other States in their grid

who haven’t done what California has done need to do it. They

need to stop being free riders, the classic economic question, and

make their contribution to the public good. That observation is fundamentally correct. Californians have higher standards.

Mr. ISSA. I appreciate that. You are going to get a followup question before you can blink, because Ms. Diane Watson has joined us

and she has not had a question yet and I know she has them for

you.

Ms. WATSON. I would like to read my statement because it then

places the position that I probably share with you as well.

Mr. ISSA. We have already put it in the record but you can read

all or part of it as you see fit. That is what you get to be the ranking member for.

Ms. WATSON. Let me just say I thank Dr. Cooper for coming and

I am sure he expressed the position coming from a consumer standpoint. I want to join the Chair of the committee and really comVerDate 11-MAY-2000 10:29 Nov 16, 2005 Jkt 000000 PO 00000 Frm 00093 Fmt 6633 Sfmt 6633 D:\DOCS\24412.TXT HGOVREF1 PsN: HGOVREF1
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ment that I think California has been shortchanged. You have to

take into consideration, and I am sure you have, the size of our

State and the climate of most of our State and the need for air conditioning and the need for warming, cooling and so on, all electrical

matters and the fact that we over the years have set in place policies that would restrain the use, not necessarily rationing, but we

have been very sensitive to the issue.

Solar power has come into play in the last few decades and many

people are turning toward it, but I don’t think we were treated fairly by the FERC and the middleman. I do think that California is

owed some credit and maybe some returns, and I can’t appreciate

enough the fact that you have presented this timely hearing publicly.

If my statement is already in the record, I won’t reiterate it but

I just wanted to say that we have to look at ways of restructuring

and ways of saving and ways of implementing our policy so it is

serving the public good. I promise you I will not be late on the next

hearing of this kind.

Thank you very much, Mr. Chairman.

Mr. ISSA. Thank you and you can now go forward with your questioning. For everyone’s understanding, to be honest you were doing

your duty in the International Relations Committee while I was

flicking back and forth and not quite doing my duty to either one,

so I appreciate your efforts in IR.

Ms. WATSON. One of the questions I would like to raise, to whoever would like to respond, is—I think a couple of years ago—the

Governor of the State of California said we would need 19 new

peaker plants. One was proposed in a neighborhood in which I live.

I never saw so many homeowners at a meeting, 1,800. That was

a miracle. That peaker stack was going to go right up in the center

of their residence and so they were very concerned.

That one was taken off the list but the Governor at that time

had a goal of 19. Can someone inform me if those 19 peaker plants

and stations were completed?

Mr. WOOD. Ms. Watson, I work at the FERC. We do track that.

I will get that information to you. I know all were not built, some

were. I was actually at the dedication of one Friday in San Jose.

It is more than a peaker though. I think it runs a bit more often

than that but some progress has been made. Governor Davis did

set some ambitious goals. He directed his agencies to process the

permits and to his credit, they were. It is the investment climate:

people were reluctant to come and invest there.

As one who has dealt with siting, there is always another site

that will work if you have to. That is probably why yours got taken

off.

Ms. WATSON. There were a couple of Native American reservations that came forth with proposals, particularly in the Palm

Springs area. Are any of you familiar with those proposals and

what happened to them in the long run? I know I was getting telephone calls and trying to get some consideration for their proposals

but something happened with the ownership of the land and so on.

Can anyone shed any light on what happened with those proposals?

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It seemed like they had the capacity to take care of the peaker

operations and so on. I just want to get a followup as to what has

happened?

Mr. WOOD. I will get that information for you.

Ms. WATSON. Good. If you can give it to me in writing, I would

be satisfied.

Mr. WOOD. I would be glad to.

Mr. OWENS. Congresswoman, I think you are raising a fundamental point. I don’t know the details or the status of any of

those facilities. A point we were trying to make and I think all of

the witnesses sought to make, I think even Dr. Cooper sought to

make, was the recognition that if we are expanding our infrastructure, siting is always going to be a big issue. Nobody wants a power

plant built in their backyard, nobody wants a transmission system

running through their neighborhood but the reality is if we are

going to seek to provide the level of reliability and low cost electricity that our customers are demanding, then we do have to find

a way to streamline and harmonize the siting laws and get public

acceptance of these areas.

Ms. WATSON. This is the reason I was so interested, Mr. Owens,

in the proposals that came from the Native American groups, because there is a lot of vacant land, desert land and so on out there.

It seems to me there was a mechanism by which they could pump

electricity into the urban areas in southern California. So I just

need to have some followup.

Mr. COOPER. Let me make two points to followup on that. I said

this on the Senate side at one of the first forums they held. I think

there are three critical elements and these are going to be tough

decisions. The health and safety and land value impacts are real

and this is a democracy, so we are going to have to deal with them.

I think it is important to have a structure in decisionmaking that

accomplishes three things. One, the people have to be convinced

that you really need this facility, whether it is a transmission line

or power plant. A lot of debate goes around whether we really need

it. You have to have a framework that they come away with, understanding that we really need it. Second of all, they have to be

convinced this is the best way to meet that need. Third, they have

to be convinced they have the opportunity to represent their interests in the process. There will always be people who are disgruntled, but a fair and democratic process is critical to getting these

things built.

The more we work on designing that process so that they understand they need it; this is the best thing to do and they get to give

their side about why they would be the most impacted and have

others come forward and say if there is an economic benefit here,

we will take the impact. That process is a part of the democracy

and we have not spent a lot of time working on that process. We

have spent more time fighting about jurisdiction than really figuring out whether it is the State or Federal level, how to accomplish

those three things in the process.

Ms. WATSON. Mr. Chairman, if I can reclaim my time for a second, I would like you, Dr. Cooper, to put that in writing to me and

I am asking the Chair to talk to the FERC. We might see a piece

of Federal policy here. We ought to be doing this all over the counVerDate 11-MAY-2000 10:29 Nov 16, 2005 Jkt 000000 PO 00000 Frm 00095 Fmt 6633 Sfmt 6633 D:\DOCS\24412.TXT HGOVREF1 PsN: HGOVREF1
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try in grids. So if we can concentrate maybe in the southwestern

areas of the United States, it might be very helpful as we try to

solve this problem.

Mr. ISSA. You are absolutely right and even before you came in,

it was one of the areas of great agreement between the FERC and

Dr. Cooper that some of these things can very much be agreed on

and we certainly understand the impediments. Nimbyism is not a

debatable infection. It is certainly something we have.

If it would be OK with Dr. Cooper, we can allow 2 weeks for any

answers to any questions, any additional information you want to

add. If you need more time, let us know, but without objection, we

will hold the record open for 2 weeks from this date.

Mr. OWENS. Are we also invited to provide some additional input

as well?

Mr. ISSA. Absolutely. Not only would we enjoy it, but so would

the majority and minority staffs that made this all possible today,

that did all the background work to have this be effective and who

lobbied all of you to come here. We don’t get the kind of great witnesses we had here today without their efforts coaxing and I suspect making promises they can’t keep.

Once again, I want to thank our witnesses and our staff for making this happen and with that, this hearing is adjourned.

[Whereupon, at 2:52 p.m., the subcommittee was adjourned.]

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