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81–342 PDF 2002

FERC: REGULATORS IN DEREGULATED

ELECTRICITY MARKETS

HEARING

BEFORE THE

SUBCOMMITTEE ON ENERGY POLICY, NATURAL

RESOURCES AND REGULATORY AFFAIRS

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

AUGUST 2, 2001

Serial No. 107–88

Printed for the use of the Committee on Government Reform

(

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

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

MARK E. SOUDER, Indiana

JOE SCARBOROUGH, Florida

STEVEN C. LATOURETTE, Ohio

BOB BARR, Georgia

DAN MILLER, Florida

DOUG OSE, California

RON LEWIS, Kentucky

JO ANN DAVIS, Virginia

TODD RUSSELL PLATTS, Pennsylvania

DAVE WELDON, Florida

CHRIS CANNON, Utah

ADAM H. PUTNAM, Florida

C.L. ‘‘BUTCH’’ OTTER, Idaho

EDWARD L. SCHROCK, Virginia

JOHN J. DUNCAN, JR., Tennessee

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, Washington,

DC

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

JANICE D. SCHAKOWSKY, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

——— ———

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

JAMES C. WILSON, Chief Counsel

ROBERT A. BRIGGS, Chief Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON ENERGY POLICY, NATURAL RESOURCES AND REGULATORY

AFFAIRS

DOUG OSE, California, Chairman

C.L. ‘‘BUTCH’’ OTTER, Idaho

CHRISTOPHER SHAYS, Connecticut

JOHN M. MCHUGH, New York

STEVEN C. LATOURETTE, OHIO

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

——— ———

JOHN F. TIERNEY, Massachusetts

TOM LANTOS, California

EDOLPHUS TOWNS, New York

PATSY T. MINK, Hawaii

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

DAN SKOPEC, Staff Director

CONNIE LAUSTEN, Professional Staff Member

REGINA MCALLISTER, Clerk

ELIZABETH MUNDINGER, Minority Counsel

(III)

C O N T E N T S

Page

Hearing held on August 2, 2001 ............................................................................. 1

Statement of:

Madden, Kevin, General Counsel, Federal Energy Regulatory Commission; Shelton Cannon, Deputy Director, Office of Markets, Tariffs, and

Rates, Federal Energy Regulatory Commission; James E. Wells, Jr.,

Director, Natural Resources and Environment, General Accounting Office; Terry M. Winter, president and CEO, California Independent System Operator; Phillip Harris, president and CEO, PJM Interconnection,

LLC; and William W. Hogan, professor, John F. Kennedy School of

Government, Harvard University ................................................................ 16

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

Harris, Phillip, president and CEO, PJM Interconnection, LLC, prepared

statement of ................................................................................................... 81

Hogan, William W., professor, John F. Kennedy School of Government,

Harvard University, prepared statement of ............................................... 93

Kucinich, Hon. Dennis J., a Representative in Congress from the State

of Ohio, prepared statement of .................................................................... 7

Madden, Kevin, General Counsel, Federal Energy Regulatory Commission, prepared statement of .......................................................................... 18

Ose, Hon. Doug, a Representative in Congress from the State of California, prepared statement of ........................................................................... 3

Otter, Hon. C.L. ‘‘Butch’’, a Representative in Congress from the State

of Idaho, prepared statement of ................................................................... 9

Tierney, Hon. John F., a Representative in Congress from the State

of Massachusetts, prepared statement of ................................................... 14

Wells, James E., Jr., Director, Natural Resources and Environment, General Accounting Office, prepared statement of ........................................... 57

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

Operator, prepared statement of ................................................................. 65

(1)

FERC: REGULATORS IN DEREGULATED

ELECTRICITY MARKETS

THURSDAY, AUGUST 2, 2001

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON ENERGY POLICY, NATURAL

RESOURCES AND REGULATORY AFFAIRS, COMMITTEE ON GOVERNMENT REFORM, Washington, DC.

The subcommittee met, pursuant to notice, at 2:45 p.m., in room

2154, Rayburn House Office Building, Hon. Doug Ose (chairman of

the subcommittee) presiding.

Present: Representatives Ose, Otter, Duncan, Tierney, Towns,

Kucinich, and Waxman (ex officio).

Staff present: Dan Skopec, staff director; Barbara Kahlow, deputy staff director; Connie Lausten, professional staff member; Regina McAllister, clerk; Michelle Ash and Elizabeth Mundinger, minority counsels; Ellen Rayner, minority chief clerk; and Earley

Green, minority assistant clerk.

Mr. OSE. The committee will come to order. I want to thank everybody for showing up today. Today’s hearing is to discuss the

prospective efforts of the Federal Energy Regulatory Commission—

that I’m going to now refer to as FERC from hereafter—as they relate to energy markets and the effective functioning of them. We

have a choice to make today. There are two paths that we could

easily follow. Path A—sort of like Path 15. Path A is to engage in

finger pointing and the like, and that is pretty pointless, however,

I’m confident that some wish to pursue that path. Path B is to explore how to prevent a repeat of this debacle we’ve worked our way

through over the past year. I am intent that today’s hearing will

pursue the second path.

FERC has been asked to do many things lately. Up until a year

ago, this agency operated in the obscure back waters of the regulatory world. Over the past 12 months, though, circumstances have

significantly changed. Today’s challenge is that energy has become

a commodity that is traded across electronic markets, traded across

national borders and traded among market participants who, in

some cases, have no generating capacity. If FERC is to meet its

statutory obligations to ensure just and reasonable prices, then

Congress must periodically examine the tools that are available to

FERC to meet its responsibilities.

Now that FERC’s role has evolved into one of market monitoring,

as opposed to regulatory control, does the agency have the necessary tools to perform that function? As FERC tries to monitor the

energy market, does it have the necessary staff to do its job? From

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a statutory standpoint, does current law constrain FERC in ways

that are no longer useful? For instance, what was the original purpose of a 60-day lag between the time a pricing complaint was filed

and the time when FERC could actually examine that complaint?

Given the possibility that egregious pricing behavior might occur,

why were the remedies available to FERC restricted to ordering

only the amount of an overcharge to be refunded as opposed to assessing fines or penalties?

I have introduced legislation, H.R. 1941, to address these two

particular problems, and I look forward to the witnesses’ comments

on this piece of legislation. Members on both sides of the aisle and

all of you in attendance are quite familiar with the facts in the energy crisis. The question remains, are we going to try and fix the

problems, or are we going to engage in political sniping? I’m challenging every single member of this subcommittee to focus on the

question that I just posed. Are we going to try and fix it or are we

going to snipe?

The residents of my State of California need the Congress to examine this matter and provide direct concrete input as to how to

avoid a repeat of this debacle elsewhere in the country. I look forward to the testimony of our witnesses today. I will submit the balance of my statement to the record. I recognize the gentleman from

Cleveland for an opening statement.

[The prepared statement of Hon. Doug Ose follows:]

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Mr. KUCINICH. I thank the Chair, and I’m sure the Chair is

aware that yesterday I had the opportunity to support California

legislators who were looking for assistance in various amendments

to the bill. So I have a great deal of sensitivity to the issues that

were raised in the State of California. I’ve watched the troubles of

deregulated energy markets brewing for several years now. I’m

convinced that partially deregulated electricity market will do more

harm to consumers than good.

California, while unique in some ways, is not the exception to the

rule. Rising wholesale electricity costs can be found everywhere

electricity has been deregulated. The most ridiculous free market

argument is that California only partially deregulated and complete deregulation would have prevented the crisis. They are correct that complete deregulation would have prevented the bankruptcy, but only because of all of the excessive prices would have

been passed on to the consumer.

Consumers would have shouldered the brunt of the failed market, and many more families and small businesses would be in

bankruptcy. I have some serious concern with FERC’s recent actions. For example, it took FERC a year to offer any real relief to

California by applying the breaks to a dysfunctional market with

their June 19th order. Yet FERC, in the same action, decided to

illegally expand its jurisdiction to include public power agencies.

Where are FERC’s priorities? FERC took a year to clamp down

on the power producers who are reaping massive profits. In the

same order, FERC illegally attacked the public power agencies who

are nonprofit government agencies owned by the people. This contradiction amazes me. We all know that these public power agencies are not large enough to manipulate the market, and we all

know that the large power producers consistently manipulate the

market. Efforts to regulate the wrong party, I would suspectfully

suggest, are misguided. The long-term action FERC should take is

to significantly strengthen FERC Order 2000 to ensure regional

transmission organizations are truly independent and shielded

from market manipulation. Anything less, and greedy power producers will continually seek ways to manipulate the market for

their profit.

If FERC and the free-marketeers want competition, at least it

should be real competition. The average American cannot afford to

pay electricity bills if large corporations are allowed to set excessive

rates and eliminate competition. If FERC is to learn one thing

today, their mandate is to protect people from monopolies, not monopolies from competition. I thank the gentleman.

[The prepared statement of Hon. Dennis J. Kucinich follows:]

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Mr. OSE. I thank the gentleman. The gentleman from Idaho, Mr.

Otter, for an opening statement.

Mr. OTTER. Thank you, Mr. Chairman, and I take—I’m fully

aware of the comments you made earlier about asking us all not

to snipe, but it’s hard not to do in this environment, and considering some of the comments from my good friend, Mr. Kucinich, I feel

compelled to at least make a few statements out of the rest of my

statement, which I will submit for the record. But I do want to

commend you for your leadership in scheduling this very timely

hearing, and I’m pleased that the House just last night, with bipartisan support, passed the most important energy legislation in generations, which, by the way, I might add, included a dimension of

whether or not we ought to have price caps and they rejected that

opportunity to introduce the idea of price capping themselves.

I do want to begin my remarks, though, by expressing particular

outrage at the actions of Governor Gray Davis of California, who

for months now has tried to place the blame of his State’s energy

woes at the feet of President Bush, who came into office long after

California created the mess that they find themselves in. He tried

to get away by explaining that what they had done in California

was deregulate, when in fact they never did deregulate. It was a

failure of restructuring.

He’s also been quick to criticize other States and power companies, such as my own State of Idaho, that are outside of California,

yet 2 days ago, the Los Angeles Times reported—and perhaps this

is substance for another hearing of the Government Reform Committee—where his own consultants may have used inside information to trade the stock of power companies that were doing business with the State of California.

This hearing should not be focused on FERC’s handling of the deregulation of electricity markets, but rather on whether or not Governor Davis himself profited from the power companies and sold

power away from his own constituents.

Before the Governor or any of his fellow defenders here today try

to blame this administration, they should look at the actual source

of his decisions on California energy policy over the last few years

and how he and his advisers made their money.

As I said, Mr. Chairman, I’m going to submit the balance of my

statement for the record, but I would just conclude by saying that

we’ve long tried caps. We long tried to manipulate the marketplace,

and for the most part, what we’ve ended up doing is not creating

any more, as in this case we didn’t. We ended up dividing up scarcity, and we have to use the element of government, it seems, from

time to time, to inflict the government on the free market, and we

ended up dividing up the scarcity rather than dividing up the planning.

And I’m convinced that for as long as we want to try price caps,

we’re always going to end up dividing up scarcity and not the plenty.

Thank you, Mr. Chairman.

Mr. OSE. The gentleman’s statement will be entered in the

record.

[The prepared statement of Hon. C.L. ‘‘Butch’’ Otter follows:]

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Mr. OSE. The gentleman from Tennessee, Mr. Duncan, for an

opening statement.

Mr. DUNCAN. Well, thank you very much, Mr. Chairman. I’ll be

very brief. I thank you for calling this very important hearing and

I agree with the statements by my good friend, Mr. Otter, who just

referred to the landmark energy legislation which we passed last

night. It’s not been pointed out by many people, but that bill, 37

percent of that bill dealt with conservation and more funding for

alternative and renewable energy sources, and frankly, that is far

more than any President in history has ever done.

Yet some people don’t want to give President Bush credit for

that, because they want a political issue on certain other parts of

the bill. But I’m interested in this hearing, and I’ve read that California built no new power plants for 10 years or so, and yet this

was at a time when demand kept going up. It would be interesting

to know how people expect you to meet increased demands with no

increased production. As you know, Mr. Chairman, from the hearing we held 2 days ago, I just have completed 6 years as chairman

of the House Aviation Subcommittee. We ‘‘deregulated’’ the airline

industry many years ago. The airline industry remains, and it

should remain, one of the most heavily regulated industries in the

country.

I assume if we do get into utility deregulation, it will still be one

of the most heavily regulated industries in the country, even after

deregulation. So I’m very interested in this hearing, and I thank

you very much for calling it.

Mr. OSE. Thank the gentleman. The gentleman from Massachusetts, for an opening statement.

Mr. TIERNEY. Thank you, Mr. Chairman. I want to thank you for

holding this hearing and talk a little bit about those who advocated

deregulation of the electricity markets. When they did that, they

promised lower prices and workable markets. Twenty-four States

and the District of Columbia adopted these State deregulation

plans. However, as these States implement their plans, prices have

been going up, not spiraling down as was promised to us. In California, one of the first States to implement deregulation, wholesale

prices soared and the entire West has been thrown into an energy

crisis.

The Federal Energy Regulatory Commission [FERC], is charged

with monitoring the wholesale market and making sure that prices

are just and reasonable. However, FERC’s response, or you might

say, the lack of response, to the energy crisis in the West has made

me and others concerned that FERC may not be committed to actually doing its job. When FERC came to the obvious conclusion that

wholesale prices in California were unjust and unreasonable and

the market in the West was flawed, you would have expected

FERC to immediately take action. You would have hoped that they

would have rigorously enforced the law by ordering sufficient refunds and assessing penalties. You would have hoped that by imposing measures to prevent further abuse until a workable market

was in place, they’d be doing their job. And, you would have hoped

for monitoring of the market and you would have hoped they did

that closely with respect to future problems.

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Unfortunately, the reality is that FERC has ordered very few refunds and penalties. Its investigation of some of the overcharges

has been, in the estimate of many, inadequate. In fact, when conducting an investigation of whether generators scheduled outages

to influence prices, FERC ignored key evidence and vindicated industry on insufficient grounds. I look forward to hearing from the

Government Accounting Office [GAO], on this important issue

today.

In addition, FERC’s attempts to prevent further market abuses

were inadequate. FERC’s orders were based on market principles

when it was widely recognized that the market in the West was so

deeply flawed that it was unworkable. Although the Governors of

California, Oregon, and Washington and many others asked FERC

to impose cost of service based rates until there was a workable

market, FERC denied their request. In fact, FERC did not impose

region-wide price caps of any kind until June of this year, over a

year after the market flaws became apparent.

Moreover, FERC is apparently not gathering all the information

needed to monitor the markets now. In June, after trying to review

the status of California’s electricity supplies this summer, the GAO

released a report explaining that it did not have the information

about outages that was necessary to complete its task. Because

GAO can access information that FERC gathers, FERC was apparently not gathering the important outage information.

Some may argue that FERC simply does not have adequate staff

and expertise to monitor deregulated markets. If this is the case,

we ought to fix that situation. However, I don’t think we should

throw money at a problem unless we’re confident that FERC is

committed to doing its job. FERC needs to be committed to ensuring that wholesale prices are just and reasonable, even if this

means abandoning market principles in the face of a broken market. It needs to be willing to hold industry’s feet to the fire when

there are abuses, even if that requires complicated market analysis. And it needs to monitor electricity markets carefully to prevent

further abuses.

I’m looking forward to hearing about FERC’s vision for the future, where regional transmission organizations are the first line of

defense in market monitoring and how it should help FERC do its

job.

I ask unanimous consent to include relevant materials in the

record, Mr. Chairman. I thank you for the time.

Mr. OSE. Without objection. I thank the gentleman for his statement.

[The prepared statement of Hon. John F. Tierney follows:]

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Mr. OSE. Now we’re going to go ahead and swear our witnesses

in. We do that for all of our panels. We’re not just picking on you.

So if you’d all rise.

[Witnesses sworn.]

Mr. OSE. Let the record show that the witnesses all answered in

the affirmative.

Just as an introduction, I’m going to run through everybody who

is here today, and then we’re going to come back to Mr. Madden

as our first witness.

Joining us today on your panel are Kevin Madden, who is the

general counsel for the Federal Energy Regulatory Commission.

And Shelton Cannon, also from the FERC. He’s the Deputy Director of Office of Markets, Tariffs and Rates. Gentlemen, thank you

for joining us.

Also we have the Director of the Natural Resources and Environment for the GAO, Mr. James Wells, Jr. Thank you.

Also joining us is the president and CEO, and if I’m correct from

the testimony, the COO of the California ISO. The gentleman who

has testified before this subcommittee before, Mr. Terry Winter.

Also joining us is the president and CEO of the PJM Interconnection Organization. That would be Mr. Phillip Harris. And also professor William Hogan from the John F. Kennedy School of Government, Harvard University.

Gentlemen, thank you all for coming. Now, we have your testimony. We’ve read it. You can summarize it. I have a strict 5-

minute rule.

Mr. Madden, you’re recognized for 5 minutes for the purpose of

testimony.

STATEMENTS OF KEVIN MADDEN, GENERAL COUNSEL, FEDERAL ENERGY REGULATORY COMMISSION; SHELTON CANNON, DEPUTY DIRECTOR, OFFICE OF MARKETS, TARIFFS,

AND RATES, FEDERAL ENERGY REGULATORY COMMISSION;

JAMES E. WELLS, JR., DIRECTOR, NATURAL RESOURCES

AND ENVIRONMENT, GENERAL ACCOUNTING OFFICE;

TERRY M. WINTER, PRESIDENT AND CEO, CALIFORNIA INDEPENDENT SYSTEM OPERATOR; PHILLIP HARRIS, PRESIDENT

AND CEO, PJM INTERCONNECTION, LLC; AND WILLIAM W.

HOGAN, PROFESSOR, JOHN F. KENNEDY SCHOOL OF GOVERNMENT, HARVARD UNIVERSITY

Mr. MADDEN. Thank you, Mr. Chairman. I’m quite aware of your

5-minute rule, and I’ll be very brief. I want to personally thank you

and members of the committee for having what I consider a very,

very important hearing. I learned a lot at the field hearings that

this committee held in California in April, and we applied some of

those thoughts to our program. I believe the time is right now to

discuss key issues facing the electric industry, including how energy markets work, market monitoring and just how FERC operates in a new competitive environment.

Shelton and I share your views and want to hear a constructive

dialog between and among the members of the committee and the

panel members here. We may have been a backwater agency. I

didn’t think so. I’ve been there 20 years.

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Mr. OSE. That was said with the greatest of respect, I want you

to know that.

Mr. MADDEN. Well, now that we’re not, I have, though, been hit

a number of times by the sniping, and I believe a more constructive

dialog occurs and a program can be improved substantially quicker,

more efficiently than having political innuendos or the spin doctors

in the press attack important programs.

My job as general counsel is to be the adviser, the chief legal adviser to the Commission, representing all interests of parties before

us, and when we make the calls from a legal standpoint, not everyone likes our decisions. Contrary to some, I believe we’ve done a

pretty damn good job. We may not have done the things in hindsight that we should have done, but we are, indeed, out to protect

the interests of the consumer. We are indeed out there to promote

a more competitive environment. We stand ready to improve our

program so that the program is more viable, more competitive in

this 21st century. Thank you, Mr. Chairman.

[The prepared statement of Mr. Madden follows:]

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Mr. OSE. Thank you, Mr. Madden. I just want to make sure,

when I said an obscure backwater agency, my measure of success

is how quietly you do your job, not how loudly. So it was meant

as a measure of respect.

Mr. MADDEN. Thank you, Mr. Chairman.

Mr. OSE. Mr. Cannon.

Mr. CANNON. I would echo that. I’d like to get back to being an

obscure backwater agency where things are taken care of.

Good afternoon, Mr. Chairman, members of the subcommittee.

We appreciate the opportunity to be here today. We’re pleased to

offer testimony on some of the current challenges that confront regulators in restructured electricity markets. I have to add the standard caveat that as staff members, the views we’re going to express

today are our own and don’t necessarily reflect the view of any particular Commissioner.

At the Commission, though, we start from the simple premise

that a competitive market—that is, one with adequate supply,

enough sellers, the right organizational structures and sound market rules—is the best way to protect the public interest and to ensure that consumers pay the lowest price possible for reliable electric service. However, for competition to flourish, it is critical that

we have in place adequate market monitoring and the capability to

promptly step in and take appropriate action if markets malfunction or sellers engage in market power abuse. The Commission has

taken and continues to take actions to address these important

issues.

If we are to achieve and maintain competitive power markets in

the electric industry, a key structural reform necessary to support

such markets is the creation of regional transmission organizations

[RTOs]. We expect a great deal from these new organizations. But

fundamentally—I’m not going to give you the 12 characteristics

and functions—but we expect they will operate the interstate

transmission grid on a regional basis, independent of entities that

are buying and selling electricity. And we expect them to recognize

and to facilitate natural wholesale electricity trading patterns,

which are increasingly regional and multistate in character.

The independence of RTOs from power market participants is essential to the success of competition. The Commission is stepping

up its efforts to encourage the formation of RTOs that provide onestop shopping and fair and nondiscriminatory pricing and terms

and conditions for transmission service over very large regions.

Now, competitive power markets also must be supported by effective market monitoring. This is critical to ensure that wholesale

electricity prices remain just and reasonable and markets run efficiently. Effective market monitoring entails understanding energy

markets, getting the market rules right and making sure that market participants play by those rules. The role of the Commission

has changed dramatically from the days of command and control

cost of service relation, but as we rely more and more on competition to discipline the price that consumers pay for electricity, we

remain responsible for ensuring that wholesale electricity prices

are just and reasonable. This means that we have to be just as

good at monitoring energy markets as we were at auditing a utilVerDate 11-MAY-2000 08:54 Sep 19, 2002 Jkt 000000 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 C:\DOCS\81342.TXT HGOVREF1 PsN: HGOVREF1
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ity’s generation costs and awarding a fair return on plant investment.

The Commission has made great strides in transforming our organization into the new role of market monitor, not only seeking

to detect instances of market abuse, but also working to improve

and standardize market trading rules. Thus, our investigation and

oversight of the market we regulate will not be limited to finding—

simply finding someone who is breaking the rules, but we’re also

going to be focusing on trying to find rules that are broken and

need to be fixed.

At the same time, we want to establish price signals and incentives that make the most efficient use of existing resources and encourage investment in new generation and transmission facilities

where they are most needed.

Based on our experience with the severe market dysfunctions in

California and the west over the past year, we are continuing to

learn and we’re working to improve our processes and capabilities

in this critical area and trying to become more proactive in anticipating and addressing market power issues before they result in

market distortions.

RTOs can help us in this important function of monitoring electricity markets, and they allow us to limit—excuse me. They allow

us to leverage our limited resources.

But market monitoring by RTOs is not intended to supplant

Commission authority. Rather, we envision them as a first line of

defense that will provide the Commission with an additional means

of detecting market power abuses, identifying market design flaws,

and looking for opportunities for improvements in market efficiency.

Thank you again for the opportunity to appear before you today

and we look forward to addressing your questions.

Mr. OSE. Thank you, Mr. Cannon.

Mr. Wells for 5 minutes.

Mr. WELLS. Thank you, Mr. Chairman. It’s true. FERC is many

things to many people. While it’s true in the past, it was a backwater agency, it’s certainly not true today. To some it’s almost a

household word recently, and to others it may be a four-letter word.

But let me just be brief. The importance of FERC’s monitoring role

is illustrated by the situation in California. In response to concerns

about high prices and short supplies, FERC did undertake a

study—it was released in February 2001—to determine whether

generators were, in fact, using plant outages to physically withhold

power and drive up prices of electricity. FERC’s overall conclusion

was that the generators it audited had not physically withheld electricity supplies. Within days of the release of that study, the press

started with generating companies saying that they had been vindicated. The officials of the State of California and other parties insisted that market power had indeed been used to drive up electricity prices.

The State went into other studies. They claimed to have found

market power and demanded that FERC require generators to pay

refunds. It’s at this point the GAO was called in to review the thoroughness of what that FERC February study said.

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In that context, let me say that the FERC study was quick. It

was a few months, and it had a specific scope, and a limited timeframe. We found that the FERC study was not thorough enough to

support its overall conclusion that the audited generators were not

physically withholding electricity supply to, in fact, influence

prices. They did state that they found no evidence of withholding

power, but went into great detail defining their findings and that

each specific outage that they saw was examined and had a reasonable cause. The two academic studies that we looked at and studied

did, in fact, use broader evidence of exercise of market power in the

entire market by comparing wholesale electricity prices to the estimated cost of producing that electricity. They found in their conclusion that prices were, in fact, higher than would be expected if the

generators were acting competitively.

The bottom line was that none of the studies that was presented

to the press or to the public was thorough enough to truly determine the precise extent to which power market was either used or

not used versus other factors that cause the high electricity prices

in California since May 2000.

Let me conclude here and just say that we believe that as the

Federal Government’s marketing entity, FERC does have a very

important responsibility to fully investigate the potential exercise

of market power and clearly report its results of its investigations.

Perhaps the point is not that the FERC study was incomplete or

complete, but that it’s really how the market—how the press, and

even the Congress reacts. Anything FERC does in terms of publishing information sends a message that future studies need to be

sharp and clear, and they need to be issued quickly.

Market monitoring capabilities, the subject of today’s hearing, is

critical to the future credibility of FERC. In this area, we’ve begun

work to review FERC’s monitoring and oversight roles and responsibilities with respect to the energy market. We hope that this

work will include a broad-based review of FERC’s management, existing practices, staffing and their internal organization. We hope

to have this report ready for the Congress and the result of this

study shortly after the first of the year.

Mr. Chairman, you asked what should FERC do. Let me just

quickly say, my short answer would be they need to have a goal.

What is market success? I think it’s unknown today.

Second, they need to know how to monitor a market. I think

that’s unknown today.

Third, I think they need to communicate, communicate to the

American people and to the industry clearly and quickly, and I

don’t think the past has been great.

Mr. Chairman that, concludes my remarks.

Mr. OSE. Thank you, Mr. Wells.

[The prepared statement of Mr. Wells follows:]

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Mr. OSE. Mr. Winter for 5 minutes. And before you start, welcome back.

Mr. WINTER. I will try not to point fingers. I think a couple of

things historically we ought to remember, and that is that I don’t

think we can go back, and I think we need to understand there was

a reason why we went to competitive markets, why the Congress

itself opened up the generation of electricity to independent power

producers, why FERC had its open access rules of 888 and 889, and

I think they play a lot on what we are doing today.

But what is necessary? I totally agree that regulatory oversight

is probably more demanding in the electric industry than others.

I agree with the gentlemen that spoke on the aviation area. And

why is that? One, it is a very competitive, capital-intensive market

with a lot of barriers to entry, and when you can’t come in and out

of the market easily, you have to have regulatory oversight.

Second, there is no substitutability. If I don’t have enough wheat,

I can buy oat bread. It is pretty hard to substitute electricity, and

therefore it does need to be regulated.

I think State and Federal coordination is extremely important in

this area because markets are not made up of only the wholesale,

but the retail side.

Second, I think that the monitoring of the responsibility of how

the markets work has got to be pushed down to the lowest level

possible. If I have learned one thing from watching those markets

operate for the last 3 years, No. 1, for the first 2 years they operated quite well with prices in the $30 range. Then I watched the

thing become completely disconnected. And the analysis of that has

to take into account generation outages, which is happening in

real-time; how the market is responding to the rules. And you cannot get that from Washington, DC, you have got to be there where

the operator is making a decision on a day—minute-by-minute

basis.

Second, what is Congress’ role? To me, the FPA or the Federal

Power Act, was, in fact, a consumer protection act. I’m somewhat

dismayed when people tell me that they can’t go back and look at

the—the activity that occurred that may not be appropriate or that

people got windfall profits and can’t go back. So I think that is

something we clearly will try and need to correct.

Second, I do believe that you cannot have a market with one set

of players playing with one group of rules and another playing with

another. So I would encourage that FERC’s authority over those,

and specifically what they do in a market, be governed by FERC

or some common entity so that you don’t have two sets of rules.

OK. What are the effective elements of a market monitoring program? First, I think one of the things that we all desperately need

is a real-time benchmark so that we can say, what is the level of

pricing that, in fact, is inappropriate. Do we use market clearing

price? Against what benchmark? Do we allow a percentage of the

market to go above what we consider competitive prices? For how

long? To send encouragement, all of these need to be studied, but

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above all, we have to have a safety valve, some way to avoid the

runaway markets that we saw. And I think those only come

through a very strong and dedicated market monitoring element.

And with that, I will conclude my comments.

[The prepared statement of Mr. Winter follows:]

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Mr. OSE. Mr. Harris for 5 minutes.

Mr. HARRIS. Thank you, Mr. Chairman. PJM is the only fully

functioning, FERC-approved regional transmission organization in

the country. We operate the largest competitive wholesale electric

marketplace in the world, and we are the second largest centrally

dispatched entity in the world. We serve within five States and the

District of Columbia, and will soon include portions of Ohio and

West Virginia. We have 12 transmission owners and over 200 traders involved in our marketplace. Those five States plus the District

of Columbia are involved in retail choice programs.

The critical test of any economic theory or new business practice

is the test of use, and what we have discovered over 41⁄2 years of

use is that competition has worked in the Mid-Atlantic region. We

have discovered that reliability has increased, and we have discovered that value has been provided to customers over the past 41⁄2

years.

Last year, for example, our wholesale prices were below $100

over 95 percent of the time. Over 70 percent of the time, our wholesale prices were below $40 dollars.

So I come to you today to talk to you not as an economic expert,

but simply as someone who has had his shirtsleeves rolled up trying to do the job over the past 41⁄2 years in a system where some

things have worked out quite well.

We have certain recommendations that would help FERC’s role

as we move forward in electric competition. One, FERC should

have full authority and flexibility to adopt and enforce reliability

standards to integrate market-based solutions for maintaining and

improving the wholesale electricity system. What we have found is

that there are no clear distinctions between reliability and economics. With the power of technology today, it is very difficult to say

this is a reliability issue or that is an economic issue. There needs

to be clear and unambiguous authority for the Federal Energy Regulatory Commission to deal with those issues.

Second, we believe that FERC should ensure that there is a

strong market monitoring function within the regional transmission organization. Our market monitoring function has been

hailed as one that works quite well, and yet we have no sanction

authority. What our market monitoring unit has is data. We have

over 30 terabytes of real-time data. The amount of information that

is necessary to ensure the robustness of a market that is trading

with hundreds of customers every hour is massive. We are using

new tools. We have research and artificial intelligence so that our

market monitoring unit can see what is happening, make appropriate analyses of that information, and then report appropriately

to the respective authorities as necessary. It is the ability to access

information, and it is the ability to have the sophisticated tools of

the 21st century that can convert that data into information responsibly.

We have been directed by the Federal Energy Regulatory Commission to be responsive to each of the States, and we are responsive to our States in order to meet their needs and information requirements, so that they can understand what is going on in the

market.

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Third, we believe that the FERC could take a leadership role in

determining what the RTO Board’s responsibility is as far as market monitoring. Much like the Security and Exchange Commission

has determined what an audit committee of the board of directors

responsibilities are, the FERC should determine what the Board’s

responsibilities are for market monitoring along the same way that

the SEC does for internal auditing.

We also believe that there is a clear role for FERC to adopt some

of these newer technologies and these new authorities. It is

through these information technologies that we find that the State

and Federal jurisdictional issues should not be as contentious. We

work very carefully with the States to ensure that the wholesaler

and the retailer are adequately bonded. And indeed, from a reliability standpoint, 99 percent of the outages that occur, occur on

the distribution level, which is clearly State jurisdictional.

Electricity is the ultimate e-commerce. It travels at the speed of

light. Electricity doesn’t know from the time it passes wholesale to

retail. It is the power of information, information availability, and

the understanding of that dynamic that enables the public, enables

the States and enables this Congress and the FERC to ensure that

competition is working fairly. And with these improvements, Mr.

Chairman, we think that we can do go ahead and continue to improve in the Mid-Atlantic region. Thank you.

Mr. OSE. Thank you, Mr. Harris.

[The prepared statement of Mr. Harris follows:]

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Mr. OSE. Dr. Hogan for 5 minutes.

Mr. HOGAN. Thank you, Mr. Chairman. I too appreciate the invitation, and I have remarks that I submitted for the record. Let me

summarize them.

Your interest in market monitoring raises an important question,

which is prior to the evaluation of the success or failures in market

monitoring, and that has to do with the question of how we design

these markets to support competition.

There has been a debate in this country and other countries, but

especially here, for the last few years. One end of spectrum is an

argument that markets more or less take care of themselves. So if

we set a few broad principles, the institutional structure will evolve

naturally through the interplay of the participants. The FERC

doesn’t have to do that much other than announce those broad

principles, 1,000 flowers will bloom to provide different ways to approach the market.

The other approach says that electricity markets are special because of the technical characteristics of these markets and that certain functions, the types of things that are the responsibility of the

ISOs that have to be performed, that have to be performed in a certain way in order to be consistent with the operation of the market.

And this view dictates that FERC has to get much more into the

business of deciding in the public interest what is the structure of

the institutional design and how are the details going to work, how

are the rules going to operate. And that debate has been going back

and forth in the United States.

I would say that the—the position of the Commission so far has

reflected the debate and the positions that they have received, and

they have been relatively deferential to the regions in allowing

1,000 flowers to bloom and experiment and so forth. But I think

what we have from the experience in California, and the experience

elsewhere, is plenty of evidence now to conclude, as I have concluded, that, in fact, we know that we have to take the view that

FERC has to be much more prescriptive about standard market design in order to make sure that these markets work.

That makes a big difference if you are thinking about market

monitoring, because if you have a badly designed market in the

first place, it is going to be extremely difficult to monitor it. And,

in fact, I would argue that if it is badly designed, it may even be

impossible to find out exactly what is going on. And I think much

of the experience in California fits that case, that the—the situation there is so murky, because the market design is so convoluted,

that you have a hard time actually untangling actually what happened.

So before you can get into the question of how to monitor these

markets you have to address the question of what should be the

design, And I think the evidence points to the fact that the Commission should be much more aggressive about this.

The good experience in the United States is concentrated in the

Northeast, particularly in New York and PJM where Phil Harris

is. We do have a standard market design that has been working.

It has been working as long or longer than the failures that you

saw in California. And New England recently decided to embrace

this standard market design. The common elements include bidVerDate 11-MAY-2000 08:54 Sep 19, 2002 Jkt 000000 PO 00000 Frm 00095 Fmt 6633 Sfmt 6633 C:\DOCS\81342.TXT HGOVREF1 PsN: HGOVREF1
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based, security-constrained, economic dispatch with locational

prices, bilateral schedules, financial transmission rights, licenseplate access charges, and a broad scope for market-driven investment.

The details of this I have discussed in my papers, but I wanted

to recite them both to get them on the record here, and also to indicate that they are at a level of detail which is quite a bit below

the broad principles announced in Order 2000. So it requires FERC

to actually do more and to get more active in specifying the standard market design.

If FERC were to do so, then that would be—adopt a standard

market design—and recommended it for the other RTOs, it would

be a major step forward. It would make clear that FERC accepts

responsibility for doing what needs to be done to create effective institutions in support of a competitive market. It would make clear

that FERC recognizes that defining the essentials of a standard

market design is a task that only government can perform in its

role of setting the rules under which markets can do their magic,

and it would set limits on the scope of government action to supporting the market rather than dictating the outcomes.

And if we had a sensible standard market design modeled after

this experience in the Northeast, we also would then have a sensible structure for market monitoring, which is the question that

is before this committee today. That monitoring structure would be

dictated by the design and would follow some of the principles that

have already been developed, for example, in PJM and New York.

This is a very important question, but—market monitoring, but

I think you can’t deal with it until you deal with the standard market design question that is also before FERC, and I hope you can

encourage them to be more aggressive in this area. Thank you.

Mr. OSE. Thank you, Dr. Hogan.

[The prepared statement of Mr. Hogan follows:]

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Mr. OSE. I want to thank all of the witnesses for their summaries, and I’m going to recognize the gentleman from Idaho for

5 minutes.

Mr. OTTER. Thank you, Mr. Chairman.

Dr. Hogan, in the purest sense, and I wasn’t here, so I don’t

know what, nor was I in California when they thought to call what

they did as ‘‘deregulation’’ in 1995, but in the purest sense in

your—from your understanding of deregulation, I assume that

meant we should create a free market, we should let the marketplace discipline and marketplace controls decide what happens to

price, what happens to quantity, what happens to need.

Would you agree with that idea of what maybe the Congress

meant by deregulation?

Mr. HOGAN. Well, I think you have to be careful about the terminology. I wouldn’t call it ‘‘deregulation’’ myself, I would call it ‘‘restructuring,’’ which I tried to use in the formal remarks that I submitted, because you are changing the rules, not eliminating the

rules, and that is important.

And, second, there are many functions, maybe the most important functions that make the biggest difference, that can be left to

the market: investment decisions and all of the kinds of choices

that you have described. On the other hand, there are other characteristics of these markets over a very short period of time, like

a day, hours or minutes, where very careful coordination of the

market is necessary. This is a little counterintuitive because we are

not used to thinking about it that way, but in order to have the

kind of market that you are talking about, which I think can be

done and works well in many places and can be successful, it is

critical that the functions that the ISOs performed are done and

done in a way that is consistent with the market. The coordination

functin is not something that can be just left to the marketplace

to decide for itself.

Mr. OTTER. I guess what I am trying to get back to, Doctor, is

I am trying to get a sense of what the Congress had on its mind

when the Congress said, ‘‘let’s let these folks deregulate if they

want to.’’ And California was one, and Oregon was another that

said, ‘‘OK, we are going to deregulate.’’ And what they did—I agree

with you. In fact, if you recall in my formal opening statement, I

used the term it was a ‘‘failure of restructuring,’’ it wasn’t a failure

of deregulation. But I believe what Congress conceived was the academic theory, the academic idea of what deregulation meant, and

I think the end result was that there would be freedom in the marketplace, freedom of entry, which California did not allow, freedom

of price control for the market to control the price, which California

did not allow, and freedom to withhold product, which California

says that they didn’t allow.

Yet the only thing we really have is we have—under this restructuring—and the press continues to call it ‘‘deregulation,’’ which

would suggest that the free market disciplines were actually in

control, and they were not, because the only freedom that anybody

had was in the middle. The retail price was held at a certain level.

They were free to sell—buy and sell—pardon me. Even the wholesale market wasn’t free to buy and sell, because they were not allowed to buy except, as I recall, on the spot market. And so when

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they were offered long-term contracts—in fact, I have one right

here. When San Diego requested—Duke Energy offered to meet the

supply needs of San Diego Electric and Gas Co. for 5 years at a

price of $55 per megawatt hour, and of course this is a—this is 55

times what we are—California and Gray Davis is now selling

power for, I’m told, at $1 a megawatt. But this is also a fraction of the price of $376 paid on the spot market in December and $314

in January, and that was because they refused to permit its utilities to buy except on the spot market.

And so where is the marketplace discipline there if you still have

these controls that say, no, you can’t go take advantage of a long- term contract, 5 years at $55? I would almost guarantee you that

in December and January, we in Idaho, who were forced to run

water through our pen stocks and our dams in order to wheel

power down the Pacific grid into California and displace it, would

have loved to have had $55 megawatt power.

My point is, I hope you agree with me, and you can just say yes

or no to this, but did we or did we not have deregulation in California?

Mr. HOGAN. Well, that is an easy statement. The answer is no.

Mr. OTTER. Thank you.

Mr. OSE. Your time has expired.

Mr. OTTER. I’m still on yellow, Mr. Chairman.

Mr. OSE. The gentleman’s time has expired. The gentleman from

Tennessee. We will have multiple rounds.

Mr. DUNCAN. Thank you, Mr. Chairman.

You know, the title of this hearing is ‘‘FERC Regulators in Deregulated Electricity Markets.’’ This is my 13th year in the Congress, and every year I have been visited by companies and groups

that want to talk about utility deregulation, some for it, some

against it. And for several years I told them that I felt it was such

a complicated, difficult problem that I didn’t think we were going

to do it that year.

I still wonder, but sometimes I think we may be getting a little

closer to doing something. I do remember, though, when Congressman Dan Schaefer of Colorado chaired the Appropriations Subcommittee for the Energy and Commerce Committee as it was then

called, I think, and he is a very good man, but I think he thought

that was going to be his legacy in Congress, and he retired a few

years ago. So it is a complicated, difficult problem.

But I wonder, and I direct this to any of you who wish to comment, do you think that we are getting closer to real deregulation

in this industry or now, because of the problems in California, further away from it? And whatever you think, if we went to, if we

somehow could get to what we would call a deregulated electricity

or power market, do you think it would end up—there has been so

much consolidation and concentration in almost every industry

with most industries going toward the big giants—would the electricity market in this country end up being controlled by two or

three or four big giants?

Mr. HARRIS. Yes. I would be pleased to address at least portions

of that.

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ability. We have factual data that shows the reliability of our

power grid has increased because of introducing competition. We

have factual data that shows that the prices have decreased, as we

have seen. We have data that shows that the customers have benefited.

The Energy Policy Act of 1992, or the amendments to the Federal

Power Act, had as a goal their intention to ensure that customers

have the benefit of competitive price generation. We have seen that

with properly structured markets, customers have the benefit of

competitive price generation.

We are also discovering, and this is almost an epiphany, that because electricity really is the ultimate e-commerce and is the only

thing that is consumed the very instant it is produced, that network information technologies are the very tool that are there to

enable electricity to be competitive. We could not have done this 10

years ago or really even 5 years ago. It is the ability to take information and make it ubiquitously available that has enabled competition to work. That moves us forward. That creates jobs. That

creates business. That creates a new way of dealing with this thing

called electricity.

The sad thing about California, is that it has masked the value

of moving to competition. We have seen it work in the Mid-Atlantic. We have others that are endorsing and moving ahead.

I would agree with you, it is extraordinarily complicated, but one

of the things that the power of information does, is it enables us

to make life more simple for the customer and even more convenient. So it is a challenge worth taking. We have seen the measurable benefits, and it can work, but it must be done incrementally.

We believe it must be done regionally. It must be done with appropriate FERC oversight in the monitoring functions, because if you

lose the trust of the public, if you lose the confidence of business,

then you are dead in the water. And we spent a lot of time ensuring that the trust of the public and the confidence of the business

is maintained as we proceed and move down this path of restructuring.

Mr. DUNCAN. Let me ask Mr. Winter a question somewhat related to the question that I just asked, particularly as to the consolidation within the industry.

You mentioned barriers to entry, and I have dealt with that in

the aviation area. It is very difficult. But I know almost nothing

about the electricity industry, and it would seem to me that the

barriers to entry here would be even greater.

Is there anything on the horizon, or do any of you envision a

time in the future where it might be possible for even a small business or a medium-sized business to get into the business of generating electricity, or is this something that is going to always have

to be dominated by monopoly type giants?

Mr. WINTER. No, I don’t think it has to be dominated by giants

at all. Quite honestly, in California we have many independent

power producers called QFs, or qualifying facilities, with 50-megawatt units. They make up almost 10,000 megawatts in our system.

All of these are owned by various owners, some small, some large.

I think that the open markets are a way to get those people in.

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Now, the question is on the huge units that make up the gasfired units and some of the efficiencies that we see, they are very

clearly—they are gravitating to probably four, five, six large entities.

But, no, there is clearly a spot for wind, clearly a spot for renewables, a spot for the qualifying facilities, and we see tremendous

numbers of those coming into the market.

Mr. OSE. The gentleman’s time has expired. We will have multiple rounds.

Dr. Hogan, in your testimony, if I understand, what you are saying is you think FERC, from a national standpoint, needs to define

the template that the market works under, and then as it approves

that basic template, perhaps the regional markets that would work

under—submarkets that would work under the national market

template can apply to FERC for the little permutations that they

need to reflect their respective regions.

Is that your basic message on the market structure?

Mr. HOGAN. That is right, Mr. Chairman. The first part of the

story is that there is a template. For a long time I have been arguing that the model that is embraced, for example, by PJM and New

York is a way to approach a competitive market, that it was internally consistent, it made sense, and it worked. I think the evidence

is accumulating that it is the way to approach the market, and that

anything that is dramatically different from that is going to be very

problematic and will create enormous costs during the transition.

That doesn’t mean that everything has to be precisely identical,

because there are different requirements in different places for reliability. For example, New York City is not the same thing as the

rest of the Northeast. It has special reliability requirements and

the like. So you have to deal with those, and those would be somewhat different in every place.

But for the basic structure, I think there is a template.

Mr. OSE. If I understand your testimony further, it is that having

arrived at a template that works, that the market monitoring function thereby is significantly easier, not simple, but easier than it

otherwise might be?

Mr. HOGAN. That is correct.

Mr. OSE. All right.

Mr. Madden, as far as FERC’s obvious interest in this subject,

has FERC given any thought to a template, per se, for market

structure?

Mr. MADDEN. Mr. Chairman, in Order 2000 the Commission gave

its vision in terms of the functions and characteristics of what our

regional transmission organization should look like.

Dr. Hogan, of course, wants to drill down another hundred feet

to get into all of the details, but more recently the Commission in

a number of orders said that it would like to see in general four

regional transmission organizations, one in the Northeast, one in

the Southeast, one in the Midwest, and one in the West.

PJM, I must say from a personal standpoint, has worked very

well. The Commission recognized in its order about 2 weeks ago

that it should serve as the platform upon which a regional transmission organization is based.

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At the same time there are good things about what is currently

existing in New York as well as in New England, and we shouldn’t

necessarily throw out those good things when we try to establish

a regional transmission organization.

What we are doing right now is having settlement agreements,

or mediation agreements, rather, at the Commission with all of the

parties associated with those regional organizations in the Northeast as well as in the Southeast. But as to the Northeast, what we

are trying to do is to develop a plan to have one Northeast RTO

that has the principles meeting Order 2000, that is the first thing,

and then we will drill down and get into issues as to license-plate

rates, and I don’t want to dwell on that stuff today.

Mr. OSE. Actually, if I understood Order 2000, it is FERC’s desire that the RTO would then get into the regional details, if you

will, that you want to shift that burden to the RTO.

Mr. MADDEN. We set out general principles initially, and under

those general principles, of course, you have issues raised in terms

of what type of rates, congestion management, etc. We try to have

the parties work together on those particular issues to reach consensus.

The Commission will ultimately serve as the umpire, calling the

balls and strikes, as to how those details should look. We set out

the parameters. We have addressed some of the details in individual RTO filings to date, but we have more work to do.

Mr. OSE. I suspect you are going to get more work to do.

Mr. CANNON. I think the Commission is recognizing that there

is going to be a need to start standardizing certain aspects of market design, things like interconnection policy, the market rules,

particularly where one regional transmission organization butts up

against another. If you have got inconsistent rules on either side

of that seam, then that becomes an impediment to the efficient operation of the market.

So I think the whole movement that Mr. Madden just alluded to,

the Commission pushing toward even larger regional transmission

organizations, is an effort to reconcile those rules and to try to

standardize them over a much larger area.

Mr. OSE. Thank you.

Mr. Otter for 5 minutes.

Mr. OTTER. Let me begin, Mr. Chairman and members of the

panel, by making a disclaimer, which I guess I should have. As

Lieutenant Governor of Idaho the last 14 years, when deregulation

was offered to the States, I was adamantly against it for the State

of Idaho. And the State of Oregon and the State of California went

ahead and did what they thought was deregulation. But, just for

the record, I want you to know that I didn’t think the structure

was ready to handle the free market that was going to be required

to set the price either.

And I would just say one thing to a comment by you, Mr. Harris,

that energy is one of these things that is consumed or used the

minute that it is delivered. That may be the case; however, the effects of that are ongoing. And for a long period of time, because in

Idaho we have got a $32 billion economy that is reliant almost 90

percent on value-added products, one of the key elements in that

in this day and age happens to be the energy element. It didn’t

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used to be many years ago. But it takes 27,000 BTUs to make 1

pound of french fries, and those french fries won’t be consumed for

a long time, because they need to continue to consume energy because they need to be put in a freezer, and they need to be held

until the marketplace is ready for them.

So I just wanted you to know that in our case we see the longterm energy use as a long time between the time that we might

pay for it and actually get our money back. So we have got that

in it.

I want to ask either Mr. Madden or Mr. Cannon a question about

your June 18th price mitigation order for California so far, and

whether or not you think that is a success.

Mr. MADDEN. Mr. Otter, looking at the prices today in California,

as compared to some of the prior mitigation orders, and recognizing

the fact, though, that the weather in California has been pretty

good this year, and that—as compared to last year, and that Californians did their part and reduced a substantial amount of consumption, and that the Governor has added generation, I think our

mitigation order, if you look at all of those factors, has added stability and lower prices to California.

Mr. OTTER. Has it added additional supplies?

Mr. MADDEN. Our order recognized the importance that we not

have a price cap per se, or hard price cap, to affect the development

of supply.

I understand that the Governor of California has specified that

approximately 5,000 megawatts will be built by October. I think

they are a little bit behind schedule in terms of the amount, but

there has been additional supply added to California.

Mr. OTTER. But, Mr. Madden, I know that part of the action was

to kind of free the market up. Part of the action that was taken

was allowing the market to sort of set the price to the user, and

I don’t think it was any regulatory action that caused the great

wave of conservation that suddenly took place. It was a higher

price. It was a price that was starting to reflect really what the

cost of production was.

And so, you know, up in Idaho we started conserving right away,

because our we didn’t have a cap on our price. And when we started exporting that power to California, along with our water rights,

I was concerned about that. Immediately we started conserving

electricity. We started shutting down areas that weren’t necessary

to be operating that time of year.

So I think perhaps I would agree with you that the price and

conservation was working, but I think that is a result of the price

going up to the end user. But as far as any additional supplies, in

fact, it has been reported that the power suppliers are beginning

to leave the Northwest. Isn’t that true?

Mr. MADDEN. There—I don’t—I may have to ask Shelton Cannon

if that is true relative to the Northwest, but before I do, let me

make one particular statement. My personal belief is this, Congressman Otter, that what the market needs today is certainty in

the rules and the structure, and that the consumers indeed feel

comfortable in terms of protection. Those, to me, are critical things

that must happen.

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Now, I recognize when we did the mitigation order, we had to do

a balancing, and we had to balance the question of does this affect

supply against how are market rules working? How are the consumers affected? And the Commission believed for an interim period, and through September 2002, that mitigation was the best approach.

Mr. CANNON. I would just echo that with any form of mitigation

you are, by definition, interfering in the workings of the market,

and that can be dangerous, because it can have impact on entrepreneurial decisions of do I invest or do I not? Is this a good place

to go put money into a new generator? There certainly have been

allegations of—that people are going to not build generation, or

they are going to pull out.

What we have built into that order was an occasion in October

of this year to go back and take another hard look at the mitigation

and see if we have struck this balance correctly.

Mr. OTTER. Does that provide certainty? You are going to go back

and relook at it and maybe change the rules in October?

Mr. CANNON. No, it doesn’t. But—— Mr. OTTER. Wasn’t I just told that certainty was one of the most

important things here?

Mr. CANNON. Certainty is indeed very, very important, but I

guess it does reflect the fact—— Mr. OSE. The gentleman’s time has expired. Butch, we’ll come

back, if you’d like, on this question.

Mr. OTTER. Thank you, Mr. Chairman. Thank you, members of

the committee.

Mr. OSE. Mr. Waxman for 5 minutes.

Mr. WAXMAN. Thank you, Mr. Chairman. I want to thank you for

holding this hearing, and I will pick up where the gentleman left

off, because I think certainty is an important ingredient in decisions that will be made.

I think that a lot of the decisions by the industry not to produce

more power plants in California was based on the uncertainty after

the law was passed, unanimously by the legislature, Democratic

legislature, signed by a Republican Governor. Am I accurate in

that, Mr. Cannon? Is that your view?

Mr. CANNON. Yes. I think any time you have that kind of uncertainty in terms of legislative proposals or regulatory uncertainty,

that is something that very much weighs on the minds of someone

considering that kind of investment.

Mr. WAXMAN. So we had this law, which I think everyone now

will acknowledge was a serious mistake, on the books. Business

people were trying to make a decision about their investments, and

they didn’t see it made sense with all of the uncertainty to make

investments in new power plants.

And then we were caught off guard when the deregulation went

awry, and the way the deregulation went awry is that the generators saw that they could increase the supply by withholding electricity, increasing the price by withholding electricity, and driving

up the demand without having enough supply to meet it. Through

this contrivance, they were able to make a windfall because that

law required that the electricity be purchased at the spot market

price.

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Is that an accurate evaluation of what went on in California, Dr.

Hogan? You are an academic. Did you come to that conclusion?

Mr. HOGAN. I would certainly agree with parts of that. The requirement, for example, that utilities had to buy through the power

exchange, the spot market, I think everyone recognized was a mistake, and it contributed to the financial impact of the higher prices.

The question as to whether or not generators withheld supply in

order to increase prices and profit from it, I would echo the comments that Mr. Wells from the GAO made here earlier today. The

bottom line, when you look at all of the studies that have been

done so far, you can’t tell.

Mr. WAXMAN. I suppose that is true. You can’t tell for sure, but

it seems like a strange coincidence. It seems to me also that in this

kind of new world that we are living in with deregulation, some of

which is not thought through, the way that California’s was not

thought through, there is an even more important role for FERC.

Under the law FERC is to make sure that wholesale prices are

just and reasonable. The problem we had is that FERC basically

did nothing for a very long time. For months it ignored repeated

pleas from California for assistance. Most of its orders, such as

those in December 2000, April 2001, June 2001, were completely

ineffective or even made the problem worse.

And since FERC’s latest order in June, electricity prices have

eased, but we are not so sure whether that is not due to milder

weather and conservation.

Do you have any views of that?

Well, before I ask that question to get your views on it, let me

state that GAO’s investigation seems to confirm the inadequacy of

FERC’s oversight. In the report released last month, the General

Accounting Office found that, ‘‘FERC’s study of electricity generator

outages was not thorough enough to support its overall conclusion

that audited companies were not physically withholding electricity

supply to influence prices.’’ And, furthermore, GAO explained that

FERC officials verbally acknowledged that FERC could not determine whether generating companies were exercising market power

to increase prices, because FERC only looked at outages and maintenance records of generators.

The FERC report came at a time when people in this country,

and particularly in California, were paying colossal electricity

prices. Consumers, State officials and industry experts were looking for answers from FERC about whether electricity-generating

companies had been charging unfair prices, and unfortunately we

did not get such answers from the FERC report. We are only left

with more questions.

So some of us still have a question, now that FERC finally took

action, whether that action is going to be sufficient should the

weather get warm again in California, and we see no greater conservation than we already have, which is pretty impressive to this

point.

Mr. Madden, do you want to comment on this?

Mr. MADDEN. Yes, I would, Congressman Waxman. Let me first

say, we at the staff level have been involved in this for the past

year. And, contrary to statements made by many people here on

the Hill or elsewhere, we have taken a lot of actions.

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Now, I believe if we looked at our orders, we look at whether or

not the market was dysfunctional first, and we try to fix those dysfunctions. In that regard—— Mr. WAXMAN. The market was dysfunctional?

Mr. MADDEN. Clearly there were market flaws. I’m not disagreeing with you. Everyone here agrees with that.

The question arises, do you cure the market flaws or the dysfunctions, or do you go after the refunds from a remedy type of standpoint? That issue was squarely before the Ninth Circuit Court of

Appeals—— Mr. WAXMAN. Was it one or the other?

Mr. MADDEN. Yes. Here is what the court said in its order mandamus from San Diego: That the Commission was correct in correcting the market dysfunctions in setting the market rules first,

and that is the appropriate approach, and then look at what refunds or remedies lie with respect to refunds.

So that issue has already been before the court, and we have

granted refund authority back to October 2nd. So I think, and you

can ask the panelists, the important thing is to get the rules right,

set the structure, and we will have remedial authority on that.

As to the outages and GAO, I believe GAO in its opening statement recognized that it wasn’t the best study, it was a quick study,

and they recognized that. It was more of an engineering-related

type of study, and it is very difficult to find physical withholding

relative to outages.

As to the other economists’ report, they also found faults with

that. There was—we are trying to do a better job. For example, we

have gotten authority from OMB to collect outage data from all the

generators, even nonjurisdictionals. We work daily now with the

ISO on the outages. We are still looking at the historical patterns

of outages. There is not a lot of history on outages, as the ISO will

admit, in terms of a historical standpoint. We are trying to do a

better job.

Mr. WAXMAN. Thank you.

Thank you, Mr. Chairman.

Mr. OSE. I want to followup on the legislation that I have introduced, that being H.R. 1941.

If I understand the current statute that FERC operates under,

there is a statutory requirement that FERC allow 60 days to pass

from the date on which a pricing complaint is filed before any action can be taken. Am I correct on that?

Mr. MADDEN. It is 60 days from the filing of any type of complaint, or 60 days after the Commission on its own initiates the investigation and is placed in the Federal Register. That is correct.

Mr. OSE. All right. Am I also correct that the remedies that can

be determined by FERC are restricted to mandating refund of the

amount determined to be overcharges above just and reasonable

prices?

Mr. MADDEN. We—from a refund standpoint, we only have the

authority back to, in this particular case, October 2nd to those

prices above the J&R.

Mr. OSE. Separate and apart from the August 3rd filing.

Mr. MADDEN. That is J&R level plus any interest owed during

that period. In this particular case, we also got to consider the offVerDate 11-MAY-2000 08:54 Sep 19, 2002 Jkt 000000 PO 00000 Frm 00111 Fmt 6633 Sfmt 6633 C:\DOCS\81342.TXT HGOVREF1 PsN: HGOVREF1
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sets, offsets meaning how much do California parties owe the generators for not being paid.

Mr. OSE. I understand. I am just trying to make sure that I have

got the understanding of the statute.

So it is refund of overcharges plus interest, and that is the sole

financial remedy available to FERC when they find overcharges?

Mr. MADDEN. Under 206 of the act. We also have authority to go

after anyone who has violated a particular tariff or condition and

can ask for a disgorgement of profits.

Mr. OSE. Now, the question that I have is whether or not the

proposal to eliminate that 60-day delay has merit, and whether or

not giving the Commission the ability to assess fines and penalties

over and above the overcharges they might order refunded has

merit. I’m particularly interested in Mr. Harris’s response as operator of PJM, and Mr. Winter’s response as the CEO/COO of the Cal

ISO.

So, Mr. Harris.

Mr. HARRIS. Well, Mr. Chairman, we think as we administer the

tariff that certainly you have to have prompt response—capabilities

to respond when a complaint has been filed, and to be able to be

addressed. So we would support such amendments.

As we were discussing earlier, there is just so much money on

the table in administering competitive electricity markets. Delays

do and can create dysfunctions over time. So more prompt response

is always helpful, assuming that the facts and the merits are available so that FERC can make an informed decision.

Mr. OSE. Mr. Winter.

Mr. WINTER. I think clearly timeliness is of major importance.

Again, I don’t want to play attorney, because I am not one, but I

think the 60-day rules were in there to allow people to comment

on it. I think a better approach is rather than change those that

we put in play, the tariffs that allow for immediate action by

FERC, once we as a, quote, ISO or an RTO bring forward a complaint or something in the market that we don’t think is working

right, then if it is clearly a violation, and we set the rules up right,

we ought to be able to act on that immediately and not go through

any 160 days, 60 days, a year, whatever.

So, while I think people need the ability to have their day before

FERC and discuss what they have been accused of; if we have the

documentation, I don’t think you can go for a year on the prices

we have been seeing without taking some type of action immediately to at least forestall it until you can make your decisions.

Mr. OSE. There was a discussion over in the Senate last week

about conditioning the operating certificates that are issued to the

generators in just such a manner. In other words, you attach a condition to the certificate that gives the generators the ability to sell

power at market rates, and then if they violate that provision, you

basically pull their certificate.

Do you have any feedback on how this works?

Mr. Madden, I am going come to you, don’t worry.

Mr. WINTERS. Yeah. I have some immediate feedback, and that

is, if you are sitting in a situation where you don’t have enough

generation to serve your load, and I go to a generator and say, you

have been bad, I am going to take your 1,000 megawatts offline,

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I find myself in a real operating dilemma in that I am now unable

to serve the load that I need to serve. So I think there has got to

be some kind of—rather than just, quote, yank their license—there

has got to be some mechanism that I can force them to provide that

power at the same time penalizing them. Did I make that clear?

Mr. OSE. I think you are arguing in favor of fines and penalties

as opposed to pulling their certificate.

Mr. WINTER. Only because I am in a situation where there is insufficient supply. To take them out of the market would really hurt

me from a reliability standpoint.

Mr. OSE. Mr. Harris, do you agree with that?

Mr. HARRIS. Mr. Chairman, I am not directly familiar with the

discussion on the proposal for the licensing conditions for generating units. I would like to say, though, that what we have found in

operating the market over the past 41⁄2 years, that the real secret

is spot price transparency of information, and if you have information, then you have the information to determine if it was or was

not a problem.

One of the discussions that we have is in the approval of the

RTOs, that FERC has approved some RTOs that have spot price

administration capabilities and some that do not. We think this can

create a problem.

If the RTO is administering the spot market, we publish prices

every 5 minutes. They are universally available. If you want, we

will publish the price every 3 to 5 seconds for you. Having spot

price information then allows the market monitoring units to be

able to determine what was going on, and appropriate information

then would lead to appropriate remedy.

So I think my gut sense is I would rather see a system that

would ensure that you had spot price information uniformly distributed throughout the United States. Then you could take appropriate remedial action, whatever that may be.

Mr. OSE. We are going to come back and finish this question.

Mr. Towns for 5 minutes.

Mr. TOWNS. Mr. Chairman, I would like to ask unanimous consent to submit some questions and to have them answered. I have

a conflict, and I won’t be able to stay throughout, but I would like

to just read the questions and then have them answer them in

writing.

Mr. OSE. We will be happy to submit the questions to record. The

record will be left open for 10 days for such a purpose. If you would

like to read them, that is fine, but we will be happy to submit them

in writing, too.

Mr. TOWNS. On that note, then, I would just read them real fast,

and then, of course—what studies, economic analysis or cost-benefit

analyses have been done to justify the regional transmission organization ordered by FERC?

No. 2. What basis is there for setting up this market in such an

expedited fashion? What is the hurry? What is the rush?

What impact will this RTO arrangement have on a State like

New York that has a more sophisticated market?

And then I guess I probably picked this one up out of Professor

Hogan’s testimony. In your testimony you set criteria for RTOs.

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Which current independent system operator best fulfills this criteria?

So I would like to have those questions answered. Thank you

very much, Mr. Chairman. I yield back.

Mr. OSE. If I understand, you want the fourth question directed

to Dr. Hogan, the first three questions were directed to Mr.

Madden—— Mr. TOWNS. For—yes.

Mr. OSE [continuing]. And FERC. Well, we’ve got the general

counsel and Mr. Cannon. Neither of them are Commissioners here.

Mr. TOWNS. Either one of them.

Mr. OSE. OK. So we’ve got three for the FERC folks and one for

Dr. Hogan?

Mr. TOWNS. That’s correct.

Mr. OSE. Any for any of the other witnesses?

Mr. TOWNS. No. That’s it.

Mr. OSE. All right. So ordered.

Mr. TOWNS. Thank you very much. And I yield back, Mr. Chairman.

Mr. OSE. Mr. Otter for 5 minutes.

Mr. OTTER. Thank you, Mr. Chairman.

Mr. Wells, in GAO’s review of the FERC’s actions and the FERC

study and the other two studies referenced in your testimony here,

was there any analysis that the GAO did outside of that, for instance, many of the actions that were taken by Governor Davis and

his representatives during that same time period? Was there any

analysis of what kind of disruption and what kind of uncertainty

that those actions taken by Governor Davis made in the marketplace?

Mr. WELLS. We did not do our own analysis in the outage work

that we did, as well as some other work that we were asked to do

in terms of commenting on whether there was going to be a surplus

or shortage, and it came down to the thorny issue for us of access

to the data. We were not given access to outage information or information on outages wasn’t available. So, we only relied on the

critiquing and looking at what efforts had been made by others to

write their studies.

Mr. OTTER. I see. OK. Mr. Madden, in an answer to a question

from the gentleman from California, Mr. Waxman, his question to

you about supply and about suppliers was prefaced with the fact

that there hadn’t been any building, nobody had rushed to build a

lot of capacity in California since 1995. But in fact, did your report

discover that there were a lot of megawatts in the permitting process and in the request for construction process?

Mr. MADDEN. Congressman Otter, I believe there hasn’t been

any, really, construction at all since 1990, at least a good decade.

I don’t know what report you’re referring to. Is this the GAO outage report, or is this our December order?

Mr. OTTER. This is the analysis by the GAO of your report on

whether or not there was market manipulation by withholding supplies from the market.

Mr. MADDEN. Well, I think we have somewhat of a disagreement

between GAO, although I think they did a very good report. But

the report that staff tried to do was to focus more on engineering

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in terms of whether or not the plants went down for any physical

reasons. It didn’t focus on—and even though there’s a disagreement

between our two agencies, it didn’t focus on whether or not there

was influencing of prices, per se, etc. And maybe—I mean, that is

something we’ve got to look at.

Mr. OTTER. Before we get too involved in that, I’m just concerned

that we’re only looking at a very, very small part of what could

have been the reason for some of these things, and I am told, either

by direct reports or by other investigations, that there were some

14,000 megawatts of new generation capacity waiting to be permitted and waiting to startup. And if I’m a supplier and I see a

whole bunch of new products coming some way, I’m going to make

sure that my price is going to be competitive so that there’s not a

whole lot more enthusiasm for getting into my market and driving

the price even lower.

So it goes to that, in part, but I’m also told there was a terrific

curtailment in some of these plants, which was legitimized by the

fact that they didn’t have pollution permits to a certain level, and

so that they could run at 60 percent capacity or 50 percent capacity, because that’s all of the ‘‘pollution’’ permits that they had, because they didn’t get the bag houses on or for whatever purpose.

But I think to look at this thing, to go in and look and see whether or not they were soldering up cooling tubes in one of the production facilities, and that’s why they were shut down, and if they

weren’t carrying on some kind of maintenance, then they were artificially withholding product, curtailing their production. I think

there were a lot of reasons. What I’m saying is that there was a

curtailing of production, and it wasn’t all simply for market manipulation. That’s just my statement. I just want to ask you one question.

We were told last night in the debate on the energy bill that a

public facility, a municipal electric facility, the Los Angeles Department of Water and Power, was charging during this time period

$285 a megawatt. At the same time period, which they said was

market manipulation by the private sector, they were charging

$245. Have you any information about that?

Mr. MADDEN. Well, I don’t have the figures before me, but I do

have some information, since I usually deal in information at the

Commission. The system was set up in California to have one

clearinghouse with a single price auction, where you buy and sell

into the PX and the ISO. And you had as part of that framework

both public utility sellers, sellers over which we have direct jurisdiction over, and nonpublic utility sellers, LADWP for example,

over which we do not have direct jurisdiction, selling in, buying out

and getting the same price. All right? And that, in many cases, it

may have sold at higher rates than what the sellers, the jurisdictional sellers, may have sold on a bilateral basis or whatever the

case may be.

The issue before the Commission is the amount of refunds now

that LADWP and other nonjurisdictional entities may owe, along

with the jurisdictional entities, as a result of them using that single price clearinghouse and agreeing to be subject to those rules

during the time period.

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So the bottom line is this: those nonjurisdictional entities received the same price through the single price auction as did the

jurisdictional sellers.

Mr. OSE. The gentleman’s time has expired. I want to come back

to the question on the 60-day window and the fines and penalties,

and ask Mr. Madden for his input on that particular proposal.

Mr. MADDEN. If I may, let me just step back and address the license certificates for market-based rates. Let me just tell you that

with respect to sellers in the West who have market-based rates,

the Commission has conditioned those market-based rates now

from a prospective basis when it issued its, I believe, April order,

that they’re subject to anti-bidding behavior, and they have retroactive refund conditions attached to those market-based rates that

will give us flexibility to go after them. We have not done that yet

for the rest of the country, but we’re looking at our market-based

rate program in general.

Mr. OSE. Those conditions last until when?

Mr. MADDEN. We’ve never set a date.

Mr. OSE. OK.

Mr. MADDEN. A term date. They’re conditional with the marketbased rate.

As to your request for 60 days as to whether or not Congress

would be, or the consumer would be better off in having a refund

effective date from the date of complaint or when the Commission

took action, 60-day action, on its own. I have a couple thoughts.

One, I think it’s hard to apply that to the spot market type of

transactions, because they move so quickly. What I think Mr. Harris said, and I agree with him, is that what is important on the

spot market is the information, the transparency, etc. In terms of

the bilateral market, I think it could be done, but the problem,

from my own personal view, again, is that you create more certainty as to whether or not bilateral deals, which were mutually

agreed upon by the parties, get reopened. But should the Congress

want to modify that, I would recommend at the max to only go

back to the date that the complaint was filed.

Mr. OSE. My question is a little more subtle than that. Even with

the 60-day window on a bilateral contract, if there is a pricing complaint and FERC takes action ordering a refund and overcharge,

you’re still voiding a bilateral contract.

All I’m saying is, should the calculation be from the date of the

complaint regarding the pricing, or from 60 days after that date?

Mr. MADDEN. It’s a policy call, Mr. Chairman. I could go either

way on it. This issue was addressed with the Regulatory Fairness

Act that Congress dealt with in the early 1990’s when it modified

the act itself, and what it did before that was it was prospective

from the date of the final order of the Commission. I could see benefits going back from the date of the complaint in order to have

more certainty and get the Commission to act very quickly and get

the refunds moving.

On the other hand, the question is, is it really a viable complaint

unless you hear from all the parties and the Commission makes its

decision? But I think it has some merit, but there are pros and

cons associated with doing something like that.

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Mr. OSE. How about the issue of assessing fines and penalties as

opposed to just refund of the overcharge plus interest?

Mr. MADDEN. Here’s my personal opinion, and again I don’t want

to speak for the chairman or the commissioners. I personally believe in penalty authority. The Commission could have a good stick,

to go against those—we may not have remedial authority with respect to a complaint or a 206, but it’s something that the Commission can use against it. We do have penalty authority under the

Natural Gas Policy Act. We do have some remedial penalty authority in the Federal Power Act, but in my opinion, as we move forward and try to monitor these type of markets and make sure that

players play by the rules, I don’t think it’s a bad idea to have penalty authority.

Mr. OSE. Mr. Cannon.

Mr. CANNON. I would echo that, again as a personal opinion, because if you look at how these markets are starting to form with

some sort of single market clearing price auction, the Commission

right now is involved in a very tedious and horrible exercise of trying to figure out who owes money to whom for the last several

months in California. Trying to go back and reconstruct what

might or might not have happened in a market is almost impossible.

It’s just a very, very difficult task, and going forward, it seems

that refunds don’t make as much sense anymore. I mean, it was

a nice paradigm in the days of bilateral cost of service regulation.

You know, I was dealing with you. We could go back, and if I overcharged you, you could bring a complaint to the FERC, and we

could make sure I gave you back money with interest. But going

back and trying to reconstruct what might have happened in a

market, had certain entities done things differently, and putting

everybody back to where they would have been under those different actions is very, very hard. So I’m drawn to some sort of penalty that can be assessed against the entity that is breaking the

rules.

Mr. OSE. Thank you.

Mr. Otter for 5 minutes.

Mr. OTTER. Thank you, Mr. Chairman. I recently received from

Mr. Curt a letter stating that the State of Idaho, Idaho Power, the

National Marines Fishery, and FERC had reached an agreement,

and let me refresh you if you’re not familiar with this. I guess you

are familiar with it. I can tell by the look on your face.

Mr. MADDEN. I’m somewhat familiar with hydro, but my focus

hasn’t been on hydro the past couple of——

Mr. OTTER. Well, if you don’t feel——

Mr. MADDEN. No, I’ll——

Mr. OTTER [continuing]. That this is in your area, just tell me

you can’t answer this. But what the agreement came down to, National Marines Fishery came along and they said, ‘‘Idaho Power, we

want you to release 350,000 acre-feet of water out of Idaho and behind your empowerments, and we’re not going to give you compensation for it, and we need this 350,000 acre-feet of water for

salmon recovery and the continuum under their scientific study,’’ which I might add has not been, as far as there are many circumstances under which many people are saying that this is not

114

working. The flush is not working, but we do know what is working.

But anyway, in an agreement with FERC and NMFS, NMFS

backed off and said, ‘‘OK, we’re going to continue the regular flows

through the summer months,’’ and you know, I appreciate the wisdom and not only that, but the logic that NMFS—or that FERC obviously used to suggest to NMFS that this was not a good idea.

Where I want to go with this is the scarce electricity months are

coming up. Are we going to have that same kind of consideration

in the months to come? Will we continue that, whether we continue

the approach that FERC took for the summer months into the winter months when the electricity is going to be a lot more scarce?

Mr. MADDEN. Commissioner—excuse me, Congressman Otter—I

get used to answering commissioners these days. I’m aware of the

Hells Canyon Project, and I think it was crucial that we brought

all the parties in and we discussed it instead of having paper flying

back and forth, and I think I had to give NMFS ultimately credit

for, you know, pulling back on their proposal and recognizing the

importance of generating energy and recognizing there is a need to

balance environment against supply.

As to your ultimate question, we are working with other licensees in order to modify their particular projects to generate more

electricity, both during the summer and for the next year or so, and

working with the environmental agencies, many of whom support

us, by the way, so that more generation will be able to occur with

less environmental constraints, but yet within the environmental

law. So we are pulling together a dialog with numerous agencies

on a number of hydroprojects in the west.

Mr. OTTER. Just to make you aware, I have introduced, along

with several of my colleagues, legislation to actually put the U.S.

Fish and Wildlife back in charge of the Endangered Species until

it hits the ocean, and put NMFS back out in the ocean. Not only

in these circumstances, but we have many, many circumstances

over the Pacific northwest where it’s tough to find a place to go to

to surrender, because just about the time you get permission from

U.S. Fish and Wildlife to go ahead with a problem on the Endangered Species Act, then you have to go get permission also from

NMFS, and NMFS doesn’t want to dot the Is; they don’t want to

cross the Ts, and so what should take maybe 60 days working with

one agency, you end up spending years, in fact, running back and

forth between the agencies.

So I would be interested some time in a conversation that we

might have in less formal circumstances how you as a government

agency, who has to deal with all of these other government agencies and the dictates that Congress puts on them, like the Endangered Species Act, would feel in being able to go to a one-stop shop

when it comes to those kinds of things.

Mr. MADDEN. I can give you my opinion now.

Mr. OTTER. In public?

Mr. MADDEN. In public.

Mr. OTTER. On the record?

Mr. MADDEN. On the record.

Mr. OTTER. I want to hear it.

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Mr. MADDEN. Under oath. I believe in one-stop shopping. I am

firmly a believer of some agency having the ultimate call on balls

and strikes, working in a collegial fashion with the other agencies,

recognizing the statutory restrictions that have been imposed on

other agencies or the authorities as well. But I’ve worked on the

pipeline side of the business. I’ve worked on the electric side of the

business. I used to run the hydro program in my younger days, and

I think it’s about time to cut through the chase and cut through

the paperwork and timing and have a more collegial framework

and one-stop shopping.

Mr. OTTER. Thank you. Thank you, Mr. Chairman.

Mr. OSE. I want to return to something having to do with the

RTOs and the manner in which they’re operated. FERC put out an

order last week, July 25th, and the order said that while DWR is

a market participant that competes with other suppliers and purchasers of energy in the ISO markets, unlike other participants,

DWR has had access to the ISO’s control room and associated written materials, visual observations and oral statements regarding

ISO’s markets, systems, operations and activities. This has provided DWR a competitive advantage.

Now, that is a direct quote from an order dated July 25th from

FERC. And Dr. Hogan, I’m trying to figure out, DWR is the big

buyer in California. I mean, in my neighborhood, they’re the big

dog, so to speak. How do you run a market if the major participant

is in the same room as the operator of the system?

Mr. HOGAN. Well, I think the answer is obvious, and it’s obvious

in your question. We do have a short-run problem which was created by a whole series of mistakes, which led to DWR buying all

this power in the emergency mind-set that appeared last spring.

But going forward, it simply would not pass muster by any objective analysis that you should have one big buyer, and you would

have one big buyer sitting in the control room with special access

to all the information.

No one would call that a market or a sensible market design

going forward, and I don’t think California could call that a sensible market design going forward.

Mr. OSE. It may well just be a happenstance. And Terry, I’m

going to let you comment. I’m just trying to figure out how we fix

that. Mr. Madden, Mr. Cannon, do the FERC regulations allow this

to occur, or is this happening, again, by happenstance?

Mr. MADDEN. This is my personal opinion. The DWR buying on

behalf of the State and utilities in the State is a market participant, and as a market participant, it should not be in the ISO control room, and it should not have the ability to cherry-pick the contracts that come in—the lower price contracts, pull them out of the

ISO market and enter into bilateral sales with them. It gets into

the cornerstone question underlying the RTOs in a lot of things

going forward, and that is independence.

Mr. OSE. You brought this up about 12 or 15 minutes ago. It was

your comment.

Mr. MADDEN. I don’t recall that, but I don’t recall a lot of things

these days.

Mr. OSE. FERC has a desire for independence on behalf of the

RTO. How do you go about establishing that?

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Mr. MADDEN. Well, in the RTO, we establish the parameters

upon which we would see an independent RTO, an independent

board. Mr. Harris is operating the PJM, and they have met our established criteria for independence, and we view their board as an

independent board.

Now, as to looking at a particular California——

Mr. OSE. You have criteria that you’ve applied?

Mr. MADDEN. We look at individual cases in the RTOs and determine whether or not they’ve met the independence standard that

we specified in Order 2000.

Mr. OSE. Why does it make any difference? Why have you done

it? Why do you want an independent RTO board?

Mr. MADDEN. I’ll pass this to Shelton.

Mr. CANNON. The primary objective is to totally separate transmission decisionmaking—how this interstate grid is operated—

from decisions of market participants, where any particular entity

that may have a generator and has an interest in trying to influence decisions about how that transmission system is operated in

its favor. What we want the RTO to do is administer the interstate

transmission system in a totally unbiased manner so that it’s fair

to any and all market participants.

Mr. OSE. Well, I have to admit to some concern, and maybe, Mr.

Winter, you can speak to this. DWR is buying a lot of power in the

State. It’s not going to successfully function, at least on appearance’s sake, without them buying the power. I mean, how do we

reconcile this?

Mr. WINTER. I guess I have somewhat felt like a patient laying

on the table with everybody dissecting me and wondering how I’m

going to respond. But I would like to comment on several things,

this being certainly one of them.

Just for the record, I am not for standardization. To me, that’s

like taking a race car that is running well but it doesn’t have good

brakes, so it crashed on the corner. Therefore, we throw the race

car and everything else away.

Mr. OSE. Going back to the question I asked Dr. Hogan.

Mr. WINTER. Right. And so I want it on the record that I am not

for standardization. I think innovation will occur, because we all

look at things differently. That does not mean we don’t take the

best of what Dr. Hogan has proposed, the best that other people

have proposed, and take our experience and put it together. But

just to do standardization for standardization’s sake, in my opinion,

retards innovation and the things that Phil was talking about that

we really need to go forward with.

The supply issue, there were several questions asked about supply. I made the decision in 1994, along with some other people, not

to build a 500-megawatt power plant in San Diego, and the sole

reason for that was because deregulation was on the horizon, and

we could—we did not know what our responsibility as a utility

would be under that, and we did not know who was going to pay

for it. Without those two things, we were not going to go forward

with generation. That does not mean that we did not have over

14,000 megawatts of generation in the queue looking to build in the

State.

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Where we failed miserably was that we estimated up until the

year 2004 we would have sufficient supply in California. We made

two very critical errors. One, we did not see the increased growth

in the surrounding States, and since we’re an importer of about 30

percent of our power, we got caught when the other States grew,

and they used the resource and we had not contracted forward for

it.

The second mistake that we clearly made was that we didn’t recognize the State was going to grow, and so our demand grew much

more rapidly.

Having said that, the market failure, in my opinion, was the lack

of supply. We had two very good years when we had more supply.

We also got caught with the drought in the year, which advanced

things.

So I think, again, we’ve got to look at the reason, and I’m not

pointing fingers or looking back. I think we have to learn from history before we go forward. The whole power plant outage issue, extremely hard. I have run power plants. At any time, I could shut

the power plant down and have a very good justification for doing

it, because tubes leak. What acceptable leak rates are there?

I think there you have to go to performance-based criteria and

say give me availability of 92 percent or something that motivates

the people to do it, because they can always find something that

is wrong with it. You asked about DWR on the floor. That occurred

because, No. 1, the market was not functional. It was not working.

And it added an element that we haven’t talked about here and

that’s bankrupt or creditworthy entities on the other end.

So, as on the floor when we tried to ask a generator to supply

energy, his first question was, ‘‘Who is the backer of this purchase?’’ And the only way we could get that information in immediate real-time was to have a DWR operator who could commit for

DWR that they would back those transactions.

We advised FERC of that, and we’re working very hard to get

them moved out. Now that the crisis has moved along. I think the

last thing that I would like to say—and I know I’m over my 5 minutes, but we’ve asked whether the FERC mitigation has, in fact,

worked. I firmly believe it’s too early to tell, because I didn’t get

in the situation where I don’t have enough power to meet my load,

we don’t know what the impact is going to be and whether the

market is going to take off. I have high hopes for it, and I think

it’s well laid out and will help us, but until we get to that point,

I don’t think we’re going to know.

Now, on the point of independence, which you asked me——

Mr. OSE. Let me come back. Mr. Otter has been very patient

here. I’m way over my time. We’ll come back to that. OK? Mr.

Otter for 10 minutes if he so chooses.

Mr. OTTER. Thank you, Mr. Chairman. I would direct my first

question to Mr. Madden and Mr. Cannon, and let’s go back and

start in December 2000 when as part of your FERC order you requested a restructuring of the board. Then, again, certain times it

was mentioned that it was going to be up until, in fact, a couple

of weeks ago or a week ago, that it was part of the agenda as to

when they were going to get the restructuring, even after the Governor had gone forward and restructured the board himself.

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But yet you continued to put it on the schedule for addressing

what you felt was a problem or at least a concern that you had.

And yet you’ve continued to drop it off the schedule as you did this

last meeting just before this last meeting. When does FERC plan

on taking action on what they have since for the last 7 months indicated was a problem?

Mr. MADDEN. I’m precluded, Congressman Otter, from giving you

a certain date when the Commission would act on the question of

whether or not the board is independent or not under my regulations. It was on the Commission’s agenda last week, and it was

taken off. It was not on any other agenda prior to that time, at

least as I recall. The Commission recognizes that they have to act

swiftly one way or another on this issue, and there are different positions of the parties, of course.

California, the ISO believes that they’re in compliance with our

December 15th order and that they file bylaws to implement the

new changes that the Governor signed in January. It’s clear from

our November order and our December order, which essentially required that the old stakeholder board remove itself from service

and advisory board, and that the ISO management under Terry

Winter and others serve until such time as the consultant selected

or gave a list of candidates—— Mr. OTTER. Why do you feel that was necessary?

Mr. MADDEN. Because we thought the whole question of independence was not occurring with respect to the stakeholder board.

Under the order that we authorized back in 1998 that we allow the

State to pick 50 percent of the stakeholders because the retail—we

recognized that there were major problems with the stakeholder

boards where the Commission, in its draft order in December, recognized the importance of independence and wanted things to be

changed.

Mr. OTTER. And why didn’t you feel that they were independent?

Mr. MADDEN. There were questions as to whether or not they

were—the stakeholder board was representing the particular interest of their group and not the interests of the ISO, among other

things.

There are a number of party—or pleadings before the Commission which were scheduled last week which raised concerns about

the independence of the board right now. Like I said, the Commission had that matter taken off, and it will be before the Commission quickly, but I can’t tell you when.

Mr. OTTER. Mr. Winter, how would you characterize the relationship with the State agencies with the DWR?

Mr. WINTER. I guess I don’t understand. The relationship with

State agencies and DWR?

Mr. OTTER. Your relationship.

Mr. WINTER. Oh, our relationship with DWR. Clearly, they are

our biggest purchaser of power, although I should clearly state that

the IOUs self-provide about 48 percent of the power. DWR buys another 20 and some small real-time, and then the municipalities

provide their own. So they’re not in the sense of being a 60 or 70

percent buyer of power. That is not the case. They’re buying the

shortfall, but the investor-owned utilities cannot purchase with

their folks.

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Clearly, we have tried to work with them and are working with

them to set up procedures so that they can get the information

they need. When you have utilities with insufficient credit ratings,

they’re the only creditworthy person that is purchasing power, and

therefore we work with them to make sure that we’ve got the available resources to meet the load.

Mr. OTTER. Do you believe that the CAISO board now meets the

requirements that were laid out for independence?

Mr. WINTER. Let’s see. I want to be sure I understand your question. Do I believe that the current board meets the independent requirements that are laid out in the FERC rules for independence?

I think that we have a concern that as long as the State has a

buyer, that there is an issue in having the State and the buyer

with the board. Beyond that, who a board is appointed by, just like

regulatory agents are appointed by the President, I think they still

function very independently.

So just the fact that the Governor—you say the Governor, but in

fact, legislation was passed that gave him the authority to appoint

the current board. I clearly think that from that standpoint, they’re

independent from the market.

Mr. OTTER. Thank you, Mr. Chairman.

Mr. OSE. If I might followup. As I understand the legislation,

was it AB 5X?

Mr. WINTER. I believe so. I get 5X and 1X confused.

Mr. OSE. That’s the problem I have, too. Well, one of them actually made the pleasure appointments of the Governor? Is that not

correct? They’re not subject to Senate confirmation.

Mr. WINTER. That is correct.

Mr. OSE. Or anything? And I think that’s different. I want to be

sure I understand that difference between, say, a FERC appointee

who is confirmed by the Senate or any of the others.

Mr. WINTER. That is correct. That is different.

Mr. OSE. One case here at the Federal level, we have a Senate

confirmation process, but under AB 1X or 5X, whatever it is, these

are pleasure appointments who can be terminated on no notice, if

I understand it correctly, by the Governor.

Mr. WINTER. That is my understanding also.

Mr. OSE. OK. I’m trying to figure out what happens if we cannot

satisfy FERC as to the independence of the ISO board. What transpires? Mr. Madden, maybe I should ask you that.

Mr. WINTER. Yeah. Please ask FERC, because I don’t know.

Mr. MADDEN. Mr. Chairman, the matter is pending before the

Commission, but let me give you a scenario. Should the Commission find that the board is not independent, does not meet our independence as defined in Order 2000, the Commission could require—it does have the authority of pre-emption. The whole Cal

ISO is wholesale, is subject to the Federal Power Act, subject to

rates, terms and conditions. The authority under that and the conditions established there are therefore under the Federal Power

Act.

So what it could do is clearly enforce our rules and require what

we did in December 15th if we wanted to do that, and that is to

establish an advisory board, pending an independent consultant

being given a slate of candidates, etc.

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Mr. OSE. Did FERC sign off on having the DWR employee or the

DWR buyers on the floor of the ISO?

Mr. MADDEN. There has, to my knowledge, never been Commission action on that matter.

Mr. OSE. Mr. Winter, did somebody request—I’m seriously concerned about this independence issue, because if we can’t solve it,

I mean, it almost seems like everything just gets gridlocked, and

then we’re potentially back at square one. Somebody must have

asked whether or not the DWR employees could come on the floor,

or there’s got to be some understanding. Is that accurate?

Mr. WINTER. Yeah. Let me give you the scenario of what transpired. Clearly, the generators were refusing to supply power based

on the fact that, ‘‘the backers of our market were uncreditworthy.’’ Mr. OSE. So they were concerned about getting paid?

Mr. WINTER. Correct. DWR, on the other hand, felt that it had

a very strong fiduciary responsibility to be current on what the

prices were for their purchases and also have—give us immediate

response, because I’m buying in 10-minute intervals here, so it was

not a case where we could, in fact, wait around till people approved

a purchase. So DWR said that well, to meet their requirements,

they wished to be on the floor. To meet my requirements, I had to

have a creditworthy entity approving the contract.

So I made the decision that we would allow them on the floor

during the emergency crisis here and notified FERC with a letter

that they were on the floor and that we were doing this under the

emergency situation that we found ourself.

Mr. OSE. And the concern had to do with the ability of the alternative buyer, if you will, or the first line of buyers to be able to

pay for the power that they purchased from the generators?

Mr. WINTER. That’s correct. DWR was backing all the purchases

that we were making in real-time.

Mr. OSE. Why not extend the same offer to someone other than

DWR, who had the significant liquidity, to stand behind their purchases?

Mr. WINTER. If someone would have stepped up and said they

were willing to back the purchases, I’m sure we would have.

Mr. OSE. Mr. Madden, I don’t know how to evaluate this issue

of independence of the board as it relates to the apparent conflict

between DWR’s purchasers having access to the floor and the interests of the consumer in getting the best price at the end of the day.

Is this one of the criteria that FERC is going to use, or is this one

of the things that we need to fix in California to satisfy FERC

about the independence issue?

Mr. MADDEN. Mr. Chairman, I think the issue of whether or not

DWR has been the ISO can be easily remedied by Commission action. So I don’t think you need any type of congressional action on

to that particular matter. And as I mentioned to Congressman

Otter, the question of the independence in general of the board will

be before the Commission soon. In Order 888 and Order 2000, independence is the linchpin. You’ve got to have independence in order

for the market to work. People have to trust the market. You can’t

have—you know, we try to separate out the generators from the

transmission. You can’t have them working together. You have to

have the confidence, I believe.

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I think the Commission will answer that question very, very

soon.

Mr. OSE. Mr. Otter for 5 minutes.

Mr. OTTER. Mr. Winter, how many—how many employees, if any

number, work or consult with both CAISO and the State of California?

Mr. WINTER. I’m sorry. How many employees do what?

Mr. OTTER. How many State employees wear two hats, so to

speak? In other words, how many or do you know if there are employees of the State of California that also consult or work with

CAISO?

Mr. WINTER. I’m sorry. People in the—an employee of the State

of California?

Mr. OTTER. Yes.

Mr. WINTER [continuing]. That works—— Mr. OTTER. That also consult with California ISO.

Mr. WINTER. Well, when you say ‘‘consult,’’ I mean, if a person

from the Electric Oversight Board or the Energy Commission calls

us and asks us about how we came up with our projection for outages or how we came up with our projection of loads this summer,

is that—I mean, there’s many, many of them, because we’re constantly sharing information with all kinds of people.

So if that’s the tenor, then, you know, high numbers within the

company are actually sharing those kind of information with State

employees, as we do with FERC and we do with every other group

that asks us questions.

Mr. OTTER. And also with the CW—or CDWR?

Mr. WINTER. Correct.

Mr. OTTER. Do you have a—when you say high numbers, it

sounds like—could that be—— Mr. WINTER. Yeah. That could be 40, 50 people. I mean, we have

Enron call us. We have Reliant call us and ask us questions. We

talk to those folks all the time.

Mr. OTTER. Would you have a list of those? Could you make a

list available of those folks?

Mr. WINTER. I would have to qualify it by saying, until I go back

and ask if they ever had a phone call from a generator, I’m not

sure how productive that would be, because I’m not understanding

what it is you’re really after.

Mr. OSE. If I might interject here.

Mr. OTTER. I yield.

Mr. OSE. Is it the gentleman’s objective to find out who has had

access to the ISO floor while they are employees of DWR charged

with providing the power to the State? Is that what you’re trying

to get at? The name of the people who have been on the floor?

Mr. OTTER. As usual, the chairman has asked the question much

better than I could.

Mr. OSE. OK. Could we get that?

Mr. WINTER. Yes. We can give you the names of the DWR employees who have been on the floor. That is no problem.

Mr. OSE. He’s—OK. And you’ll be able to tell which of those have

been trading and which of them have not?

Mr. WINTER. Yes.

Mr. OSE. I think that’s what Congressman Otter’s interest is in.

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Mr. WINTER. Yes. All right.

Mr. OTTER. All right.

Mr. OSE. Mr. Winter, you mentioned that DWR first came on the

floor under an emergency provision. I mean, obviously we did have

a problem.

Mr. WINTER. Yes, we did.

Mr. OSE. I live in the State, so I’m familiar with it. They came

on the floor under an emergency provision. Circumstances at least

from a supply or pricing standpoint have changed significantly

from, say, January or February. Does that emergency order still

stand?

Mr. WINTER. Yes.

Mr. OSE. DWR employees are still coming on the floor.

Mr. WINTER. That is correct under the emergency order of the

Governor.

Mr. OSE. OK. At this point, can you tell me whether any of those

people who—I don’t remember if it’s the Times or the Bee or somebody reported they’d been let go. Are any of those people part of

the group of the DWR employees?

Mr. WINTER. I do not know. I have not gone back, mainly because I don’t know the list of the—I assume the folks you’re talking

about are the ones that were doing something, and I don’t have the

list of those names of those people, so I don’t know whether they

were ones that were on the floor or not. We certainly can give you

the list of the people that were on the floor and we—— Mr. OSE. OK. Mr. Harris, at PJM, how do you balance the independence of the ISO or the RTO with the need to provide power?

I mean, out in California, obviously, we’ve got some concerns here.

Any suggestions?

Mr. HARRIS. A few things, yes, sir. I think, first of all, it begins

with the fiduciary duties of the board. The board’s fiduciary duties

were very, very important to us when we were forming our market

in the 1995, 1996 timeframe. We had a lot of discussion with our

States. The States did not want a self-perpetuating board. They

wanted a board that was accountable to the stakeholders. So we set

up a board that the articles that are filed to incorporate the board

state that the board has three fiduciary duties, and upon these

three fiduciary duties, they are subject to all corporate law, practices and so forth.

The first fiduciary duty of our board is to ensure we operate a

safe and reliable interaction. That’s very important, because we

want it safe largely because of the nuclear concerns. We operate

more nuclear capacity in our area than any other area. The second

fiduciary duty of our board is to ensure that we create and operate

robust nondiscriminatory electric power markets.

The third fiduciary duty of our board is to ensure that no member or group of members has an undue influence over the interaction.

Additionally to that, our board has adopted a very strict code of

conduct, which we have filed with the Federal Energy Regulatory

Commission. In that code of conduct, no employee, nor any member

of the board, can have any financial interest in any market participant. That means zero. And with over 200 members in all their

subsidiaries, you can imagine the list is getting quite long.

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As far as daily operations, we do not allow any market participant to even enter the control room building. On certain occasions

for a tour, for example, a company wants to bring some employees

just for information, we will allow them under escort to the overhead viewer gallery, and then escort them off so they can at least

see the floor, but that’s the only time they have access. Outside of

that, they’re totally barred from the control room.

Mr. OSE. In terms of your daily obligations to provide power,

does your operating team meet once a day to talk about what

might be the unique challenges of that day?

Mr. HARRIS. Yes, sir, we do. We have a schedule of events. We

also have what we call a performance group that actually oversees

and monitors—we log every telephone call that comes in and out.

We have videotape that we have. We have a performance function

that looks at all the operations previously, and we go over that.

Mr. OSE. I didn’t ask my question very well. I’m thinking more

in terms of, say, a management team that meets before the market

opens, so to speak, and says, all right, it’s hot over here. There’s

low water over there. We’ve got a bottleneck here on transmission.

Do you meet regularly in a conference setting where the different

teams of the management—different members of the management

team can provide input and you can work out a lot of these problems?

Mr. HARRIS. Yes, sir, in short we do. It’s a continual theme, since

electricity is 24 by 7, and we have a mobilization plan, depending

on the severity of the events in front of us, that we mobilize different levels of management to deal with the situation that is in

front of us. And we rehearse and train on that several times a year

on the mobilization plan.

Mr. OSE. Members of this team are all subject to these parameters that you defined here?

Mr. HARRIS. Yes, sir, every employee is subject to that. We audit

that, and they also have to fill out certificates periodically that

they’ve met all the concerns. Every employee has.

Mr. OSE. OK. Mr. Otter for 5 minutes.

Mr. OTTER. Mr. Harris, if I might continue, I appreciate your reiteration of your three standards of conduct. I don’t know how

much information that you have available—I mean, you were

knowledgeable of before this panel and before today, but recognizing the lack of independence or the apparent lack of independence,

recognizing FERC’s early on concern, clear back in December and

their continuing concern for the appearance of a lack of independence, does the board meet your standard of conduct for independence?

Mr. HARRIS. Are you talking about the California board?

Mr. OTTER. Yes.

Mr. HARRIS. No, sir, it would not.

Mr. OTTER. Would—I mean, would that——

Mr. OSE. Would the gentleman yield?

Mr. OTTER. Yes.

Mr. OSE. I want to be very clear. Mr. Winter did not appoint the

board. All right? I don’t want to hang this around his neck.

Mr. OTTER. No.

Mr. OSE. And I yield back.

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Mr. OTTER. I wasn’t suggesting who did. I think I know who did

appoint the board. But let me be clear on this. No. 1—your No. 1

covenant was you’ve got to operate a safe operation.

Mr. HARRIS. Yes, sir.

Mr. OTTER. Your operations, you’re going to ensure that the operations that you operate are safe, and I’ll assume that’s for the employees but also for the customer base.

Mr. HARRIS. Yes, sir.

Mr. OTTER. So that there’s no damage there. Do you feel that the

lack of independence or the apparent lack of independence of the

California board makes the potential for what they do operate unsafe?

Mr. HARRIS. I can’t opine on that, because I’m just not that close

to the way that California operates.

Mr. OTTER. The second principle, ensure that we create an operation with nondiscriminatory groups. Does the California board

meet that test?

Mr. HARRIS. Well, from what I’ve heard today, there certainly are

questions, you know, when you have people that are bidding and

trading there, that makes it questionable. Our goal is to create and

operate robust, nondiscriminatory electric power markets, and it’s

very clear and that’s what we have to manage to do.

Mr. OTTER. And of course, the No. 3, no undue——

Mr. HARRIS. Yes, sir. Our board is accountable to the membership. We’re a limited liability company, so they’re elected by the

members under staggered terms, and the members have insisted

that they have to ensure that no group or single group has an

undue influence over the operations of the PJM interconnection.

Mr. OTTER. Mr. Hogan, from your perspective, do those seem to

be reasonable covenants that Mr. Harris enumerated?

Mr. HOGAN. Yes, I think they’re very reasonable, and I would

emphasize particularly the first one, safe and reliable, is not controversial. The controversial one is the part about operating robust

nondiscriminatory markets with no undo influence by any participants. And the pressure is always on the ISO, the pressure has certainly been on the California ISO. When you get into these tight

situations the pressure is to essentially take sides, to line up with

the buyers against the sellers or the sellers against the buyers or

something like that.

And the trick is to have a set of rules and procedures that the

ISO could administer without taking sides in that matter, and to

try to do so in and even-handed way. That’s an extremely difficult

task. It’s especially difficult if you have a very badly designed market, and so I don’t envy Terry Winter his job at all. He didn’t design the market. He didn’t create this mess, and he’s had to live

with it. I have thought for a long time the California design was

simply unworkable, but that’s the task that he has to get back to,

which is to meet that second fiduciary responsibility, which circumstances have made impossible.

Mr. OTTER. Mr. Madden and Mr. Cannon, would FERC agree

that those are good standards of integrity that should be adopted

by most boards to operate with that level of independence that you

obviously suggested in your December 15th report?

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Mr. MADDEN. Congressman Otter, PJM filed those with the Commission, and the Commission approved those standards as to PJM.

So the Commission has spoken on that. I cannot speak because of

the pending matter on the California independence, though.

Mr. OTTER. I see. And let me not speak—let me not ask you specifically, then, as it applies to California, but for a board that needed independence, wouldn’t those be three good pillars of——

Mr. MADDEN. We approved them, so I assume the Commission

thought they were good.

Mr. OTTER. Do you agree with that, Mr. Cannon?

Mr. CANNON. Yes.

Mr. OTTER. Let me just ask one other question. And maybe I

have to ask it across the board, and I know I’m over my time, Mr.

Chairman. But when the Governor appointed the board, is this correct now that there was no requirement for Senate confirmation,

Mr. Winter?

Mr. WINTER. That is correct.

Mr. OTTER. Was there an investigation of any potential conflicts

of interest of the board members for the board that they were going

on?

Mr. WINTER. Clearly, each of the board members had to sign a

certificate saying that they did not hold market positions, etc., in

other corporations.

Mr. OTTER. At that time?

Mr. WINTER. Market participants.

Mr. OTTER. At that time?

Mr. WINTER. That’s correct.

Mr. OTTER. Would they be required to not acquire a stock which

could be considered a conflict of interest during their time that

they were served on the board?

Mr. WINTER. Yes. I’m almost positive—I haven’t read it in the

last day or two, but that does prohibit them from investing in

stocks that are in the market.

Mr. OTTER. Do you know if anybody on the board has invested

in any stock?

Mr. WINTER. No, I do not know.

Mr. OTTER. Thank you, Mr. Chairman.

Mr. OSE. I might followup. It’s my understanding that the members of the ISO board have to file financial disclosure statements

with FERC. Am I correct?

Mr. MADDEN. I don’t know. I’d have to get back to the committee

on that. They currently have filed their bylaws to implement—I

think it’s AX 1, and the Governor’s selection of the boards, and

that’s pending—as part of an independence filing. But I don’t think

they have to file the financial, per se. I have to get back with you,

sir.

Mr. OSE. How about senior staff members such as might exist at

Cal ISO, such as Mr. Winter, or over at PJM, Mr. Harris. Do they

file such statements with FERC?

Mr. MADDEN. We have general standards of conduct that the employees of the ISOs are to abide by. I do not think—and, again, I

have to get back to the committee on whether we also review their

financial records.

126

Mr. OSE. OK. I’ve always found it helpful, as Mr. Harris and I

discussed, to talk about a challenge amongst the people that work

with me.

Mr. Winter, does that same kind of activity take place at Cal ISO

on any given day? I mean, do you have a regular gathering or a

conference call? And I’ll tell you why I asked that question. We’ve

had some interviews, and it has been suggested to us that there

are daily meetings where spot market prices and conditions are

talked about in advance, potential this, potential that. I’m just trying to clarify.

Mr. WINTER. I don’t know specifically that prices are discussed

in those meetings. We have an operational meeting and during the

crises times, those would last 24 hours a day. We have always been

open line with the operators talking. We have a 9 a.m. meeting

that we talk to all the operators. We tell them what we see as the

load. If it looks like we’re going to have a bad day the next day,

there’s a 7:30 a.m. meeting, as well as a 2:30 p.m. meeting where

they talk about where the load is going and what kind of demand

responsiveness we’ve got and whether a rain cloud is coming in, all

those kind of things are discussed.

The actual discussion of prices, I do not believe take part in

those meetings, but I’ve not sat in all of them, so I can’t tell you

that a price wasn’t mentioned in some meeting.

Mr. OSE. But you are in those meetings, or some of them at

least?

Mr. WINTER. No. My vice president of operations and the director

of operations sit in on those meetings.

Mr. OSE. Help me out here in terms of who might sit in on those

meetings. You have the vice president of operations.

Mr. WINTER. The director, the person who is over all the dispatchers on the floor, the emergency notification people, because

they’re impacted if we have to declare an emergency. We have the

investor-owned utilities calling in, who are the operators who have

to implement any load shedding.

Mr. OSE. Of the native generation, such as it still exists?

Mr. WINTER. Correct.

Mr. OSE. OK.

Mr. WINTER. We have members of the Electric Oversight Board,

the Energy Commission. Matter of fact, just about everybody sits

in on those to hear what the status is during the day. Then we

also—we’ve recently started publishing our load information, etc.

Mr. OSE. I have a couple questions. I just need to understand

whether or not the following people are participating in this. Is

Vikram Budhraha?

Mr. WINTER. Vikram Budhraha, no, he is not.

Mr. OSE. How about Mark Skowronski?

Mr. WINTER. I am not aware that he is.

Mr. OSE. Bruce Willison?

Mr. WINTER. No. He’s on the EOB board, but he is not in those

calls.

Mr. OSE. How about Richard Ferreiro?

Mr. WINTER. No, I do not believe he is. He is a DWR employee.

He may have, but I do not know for a fact that he did.

Mr. OSE. Is David Freeman in on those meetings?

127

Mr. WINTER. No, he is not.

Mr. OSE. Or Scott Maviglio?

Mr. WINTER. No. On Scott or—is it Scott or Steve?

Mr. OSE. Steve Maviglio. You’re right.

Mr. WINTER. I don’t know whether he’s ever listened in on those

or not.

Mr. OSE. Are any of the people who are actually making the decisions as to which power to take or not take involved in those meetings?

Mr. WINTER. There could be, because the people from DWR who

also are the operating people who approve the transactions occasionally have sat in those, but, again, remember we’re talking

about supply and demand, not the prices in those meetings.

Mr. OSE. Has William Mead ever sat in those meetings?

Mr. WINTER. I’m not aware—I’m not even sure I know who he

is.

Mr. OSE. How about Herman Leung?

Mr. WINTER. I don’t know who he is.

Mr. OSE. Constantine Louie?

Mr. WINTER. No. I’m not saying no he didn’t sit in. I’m saying

I don’t know him.

Mr. OSE. Peggy Cheng.

Mr. WINTER. I don’t know.

Mr. OSE. Elaine Griffin.

Mr. WINTER. I don’t know.

Mr. OSE. Bernard Barretto.

Mr. WINTER. Again, I do not know.

Mr. OSE. OK. All right. I want to shift back to something, if Mr.

Otter will allow me to, that Mr. Madden brought up some minutes

ago. You had said that FERC and everybody in the room knows it,

FERC’s working through a process by which it can determine what,

if any, refunds may or may not be due as a result of alleged overcharges, they are by the jurisdictional or nonjurisdictional entities

in California, and that’s something that is in process right now.

Mr. MADDEN. That is in hearing right now.

Mr. OSE. OK. Do you have a list of the—I think the number that

comes to my mind that I’m familiar with is $8.9 billion. Do you have a breakdown of the $8.9 billion number by—item by item by

company or by entity, the amount of the alleged overcharge?

Mr. MADDEN. I do not have that. If the Commission would have

it, it would come at the hearing, because the judge would require

the Cal ISO to specify under its methodology that the Commission—who owes what.

Terry may be in a better position to——

Mr. OSE. Yeah, but I’m asking the questions here. So——

Mr. MADDEN. Well, I don’t have—I don’t have——

Mr. OSE. You don’t have it?

Mr. MADDEN. I don’t have it.

Mr. OSE. Terry—or Mr. Winter, do you have it?

Mr. WINTER. We clearly have an indication of how we arrived at

those dollars, and I would have to check to be sure, but I’m quite

certain we gave those to the settlement folks.

Mr. OSE. Can we get a copy of it? It’s going to be a public record

here soon anyway.

128

Mr. WINTER. Again, I can’t answer, because of the FERC tariffs

and the settlement kind of restricted what I could give out. But

clearly I’ll check on it and give you an answer based on what information is available and who it was given to.

Mr. MADDEN. Mr. Chairman, if it’s filed with the judge, I think

there’s an August 9th or 10th date for the filing of information.

That is a public hearing, and I will see that if it’s filed, I will provide the committee with a copy of it.

Mr. OSE. The gentleman from Idaho.

Mr. OTTER. I have nothing more, Mr. Chairman.

Mr. OSE. All right. Let me work through the rest of my questions, then. Mr. Winter, do Cal ISO employees have to submit financial disclosure forms?

Mr. WINTER. Yes. I wouldn’t characterize it as a disclosure form.

In other words, they don’t have to tell us all their investments and

give us criteria. What they have to sign is a disclosure that they

have not traded any stocks that are controlled by the people whom

they are doing the business with, that they don’t have employment

with folks and so——

Mr. OSE. It’s a code of conduct.

Mr. WINTER. Yes, it is.

Mr. OSE. Much like what Mr. Harris has.

Mr. WINTER. Yes, it is.

Mr. OSE. Now, are these statements of economic interest or affidavits saying they will not and they have not?

Mr. WINTER. I think they are statements saying they will not

and they have not. I’m familiar with the ones as officers we sign,

which is we divest ourselves of all stocks that are in the market

and don’t deal with those. I haven’t looked at the employees signs.

Mr. OSE. Now, those are the Cal ISO employees?

Mr. WINTER. Correct.

Mr. OSE. Do you know what conditions apply to the DWR employees who might be on the floor?

Mr. WINTER. No, not at all.

Mr. OSE. OK. I need a moment here.

Mr. Madden, or the balance of the witnesses, I don’t have any

more questions, but you can tell from my questions and my curiosity the degree to which I’m concerned about this issue of independence of the Cal ISO board. I don’t have a solution for you. I worked

a month to make some suggestions to Mr. Madden and his colleagues over at FERC, and they were kind enough to take them

under advisement, but at some point or another, this issue of independence has to be resolved, and it has to be resolved positively so

that FERC, No. 1, can be satisfied. And as important, it has to be

resolved positively because of the difficulty California Members are

having here in Congress in working in the best interests of California.

We get, if you will, blindsided regularly, and it undermines our

credibility here, and it compounds the difficulty that we have in

being representatives for the State of California. I don’t know about

this stuff that I’ve read in the paper lately, I don’t know who’s

right or who’s wrong, but it’s a serious issue for us here to try and

resolve this positively. Think on that.

129

If any of you have any comments about or suggestions as to how

we could expedite that, I’d certainly appreciate them.

Mr. Harris.

Mr. HARRIS. Mr. Chairman, I just want to echo the fact of how

extremely important independence is. What we have found is that

because we have the central planning function, we do all the planning. We operate the market. We have all the functions. It’s the

largest wholesale competitive marketplace in the world. There were

only about 300 employees. Without the bedrock of independence,

we wouldn’t have the trust of the public or the customers. It is absolutely crucial for the functioning of our marketplace.

The other thing that applies to market monitoring, when we

talked earlier about the meetings that we have as we plan the days

and the weeks, our market monitoring function that reports to our

board is integral to that. They have to be coupled with what is

going on. We have some sophisticated tools that can provide check

points and highlight things, and the market monitoring then can

talk freely and understand what is going on in the system with

many different players. And you wouldn’t have that freedom if you

didn’t have the independence.

So independence is the bedrock upon which the other layers are

built to enable you to have a competitive effective marketplace.

Mr. MADDEN. Mr. Chairman, let me just add a couple things. As

I mentioned to you earlier, it is squarely before the Commission

and I will let the Commission know the urgency of acting quickly,

at least based on what I’m hearing today. Terry Winter is not part

of the building. Terry Winter is the CEO, CEO of the ISO. In my

personal opinion, he has done a great job under very difficult situations. I trust him. He’s honest. And I value his advice.

Mr. OSE. I share your analysis and evaluation.

Anybody else? Dr. Hogan.

Mr. HOGAN. I certainly agree with everything about independence, and I think it’s independence on both sides. You don’t want

the ISO owning shares and the generators, and you don’t want the

ISO representing the State at refund hearings. The ISO should be

providing information for all of those purposes, but you don’t want

to get into this taking sides.

Furthermore, you could have the most independent board in the

world, and if you don’t have a well designed market, it isn’t going

to help. So I think that independence is just the tip of the iceberg,

and it’s to easy to think that if I could just appoint an independent

board, that FERC could go home early and this committee wouldn’t

have any more work to do. I just don’t think that’s right. Independence is just the beginning, not the end, and you’ve got to get into

these details, as much as people hate to do it. But we have the benefit of things that work, and we know that they work, and we

should be using them. If people could innovate and provide something that is better, I’m all in favor of it. But when they come forward and they give you something that doesn’t work in theory,

that’s never been tried any place else, and the only reason they do

it is they say markets are so powerful, markets can overcome anything—the evidence is, you shouldn’t give that credence. It just

isn’t that way. This market is too complicated. We should do what

we have experienced actually works.

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Mr. OSE. Mr. Otter.

Mr. OTTER. I have nothing.

I want to thank the panel. Thank you very much for being here.

Mr. OSE. I do want to close. I had the opportunity to go over to

FERC’s new market monitoring room the other day, and it was

very interesting. It’s probably very much like Mr. Winter’s office,

where it’s got all the different markets and the transmission lines

and the generation facilities and what have you. I think that’s a

great step in the right direction, to bring the tools that are available to FERC staff into the 21st century. I know that they exist

or similar equipment, similar technology exists at the Commodity

Futures Trading Corp., and the SEC and similar regulatory bodies,

in terms of monitoring markets, and I know that Enron online has

it. I haven’t been to see it, but I know they have it.

What you do in Pennsylvania or PJM in putting your 5-minute

prices on your Web site, it’s a great idea. Transparency galore.

Here it is. Love it or leave it kind of thing. I’m hopeful that we can

refine what FERC has from a transparency standpoint. I haven’t

figured out the licensing thing with the provider of the service in

terms of aggregating and dissemination, but I hope we can provide

through FERC some similar vehicle for the RTOs to use to monitor

their respective or regional markets. I think that would be a great

step forward.

I want to thank the witnesses today. This has been very educational for me, very informative. I know some of you have travelled a long way to come today. We appreciate that. Thank you

again. This hearing is adjourned.

[Whereupon, at 5:20 p.m., the subcommittee was adjourned.]

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