[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
ASSESSING THE CALIFORNIA ENERGY CRISIS: HOW DID WE GET TO THIS POINT,
AND WHERE DO WE GO FROM HERE?
=======================================================================
JOINT HEARINGS
before the
SUBCOMMITTEE ON ENERGY POLICY, NATURAL
RESOURCES AND REGULATORY AFFAIRS
and the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
APRIL 10, 11 AND 12, 2001
__________
Serial No. 107-28
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
U.S. GOVERNMENT PRINTING OFFICE
76-761 WASHINGTON : 2002
_____________________________________________________________________________
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COMMITTEE ON GOVERNMENT REFORM
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California PATSY T. MINK, Hawaii
JOHN L. MICA, Florida CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia ELEANOR HOLMES NORTON, Washington,
MARK E. SOUDER, Indiana DC
JOE SCARBOROUGH, Florida ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio DENNIS J. KUCINICH, Ohio
BOB BARR, Georgia ROD R. BLAGOJEVICH, Illinois
DAN MILLER, Florida DANNY K. DAVIS, Illinois
DOUG OSE, California JOHN F. TIERNEY, Massachusetts
RON LEWIS, Kentucky JIM TURNER, Texas
JO ANN DAVIS, Virginia THOMAS H. ALLEN, Maine
TODD RUSSELL PLATTS, Pennsylvania JANICE D. SCHAKOWSKY, Illinois
DAVE WELDON, Florida WM. LACY CLAY, Missouri
CHRIS CANNON, Utah ------ ------
ADAM H. PUTNAM, Florida ------ ------
C.L. ``BUTCH'' OTTER, Idaho ------
EDWARD L. SCHROCK, Virginia 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 JOHN F. TIERNEY, Massachusetts
CHRISTOPHER SHAYS, Connecticut TOM LANTOS, California
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
STEVEN C. LaTOURETTE, Ohio PATSY T. MINK, Hawaii
CHRIS CANNON, Utah DENNIS J. KUCINICH, Ohio
------ ------ ROD R. BLAGOJEVICH, Illinois
------ ------
Ex Officio
DAN BURTON, Indiana HENRY A. WAXMAN, California
Dan Skopec, Staff Director
Johnathan Tolman, Professional Staff Member
Regina McAllister, Clerk
Elizabeth Mundinger, Minority Professional Staff Member
C O N T E N T S
----------
Page
Hearing held on:
April 10, 1001............................................... 1
April 11, 2001............................................... 239
April 12, 2001............................................... 381
Statement of:
Burton, Hon. Dan, a Representative in Congress from the State
of Indiana................................................. 3
Davis, Hon. Susan A., a Representative in Congress from the
State of California........................................ 378
Filner, Hon. Bob, a Representative in Congress from the State
of California.............................................. 375
Hapner, Dede, vice president, regulatory relations, Pacific
Gas & Electric; Stephen Pickett, vice president and general
counsel, Southern California Edison; Dean Vanech,
president, Delta Power Co.; and Paul Desrochers, director
of fuel procurement, Thermo Ecotek......................... 299
Hardage, Sam, president, Woodfin Suite Hotels, LLC; Bill
Horn, chairman, San Diego County Board of Supervisors;
Douglas Barnhart, president, Douglas E. Barnhart, Inc.;
Richard Thomas, vice president, Alpine Stained Glass; Mark
Seetin, vice president of governmental affairs, New York
Mercantile Exchange; and P. Gregory Conlon, former PUC
chairman................................................... 381
Hebert, Curt, chairman, Federal Energy Regulatory Commission. 248
Honda, Hon. Michael, a Representative in Congress from the
State of California........................................ 245
Horn, Hon. Stephen, a Representative in Congress from the
State of California........................................ 5
Hunter, Hon. Duncan, a Representative in Congress from the
State of California........................................ 379
Lee, Hon. Barbara, a Representative in Congress from the
State of California........................................ 243
Lofgren, Hon. Zoe, a Representative in Congress from the
State of California........................................ 241
Madden, Kevin P., general counsel, Federal Energy Regulatory
Commission; Fred John, senior vice president for external
affairs, Sempra Energy; Steve Malcolm, president, Williams
Energy Services; and John Stout, senior vice president for
asset commercialization, Reliant Energy.................... 440
Madden, Kevin P., general counsel, Federal Energy Regulatory
Commission; Loretta Lynch, president, California Public
Utilities Commission; Terry W. Winter, president and CEO,
California Independent System Operator; and Larry Makovich,
senior director, Cambridge Energy Research Associates...... 39
McDonald, J. William, Acting Commissioner, Bureau of
Reclamation; Brian Jobson, principal power contract
specialist, Sacramento Municipal Utility District; Becky
Dell Sheehan, associate counsel, California Farm Bureau
Federation; and Thomas Stokely, senior planner, Trinity
County Planning Department................................. 144
Yates, Ed, senior vice president, California League of Food
Processors; Peter Verboom, Glenn County Dairyman; and Lewis
K. Uhler, president, the National Tax Limitation Committee. 6
Letters, statements, etc., submitted for the record by:
Barnhart, Douglas, president, Douglas E. Barnhart, Inc.,
prepared statement of...................................... 394
Burton, Hon. Dan, a Representative in Congress from the State
of Indiana, prepared statement of.......................... 234
Desrochers, Paul, director of fuel procurement, Thermo
Ecotek, prepared statement of.............................. 332
Hapner, Dede, vice president, regulatory relations, Pacific
Gas & Electric, prepared statement of...................... 301
Hardage, Sam, president, Woodfin Suite Hotels, LLC, prepared
statement of............................................... 384
Hebert, Curt, chairman, Federal Energy Regulatory Commission,
prepared statement of...................................... 250
Honda, Hon. Michael, a Representative in Congress from the
State of California, prepared statement of................. 246
Jobson, Brian, principal power contract specialist,
Sacramento Municipal Utility District, prepared statement
of......................................................... 162
John, Fred, senior vice president for external affairs,
Sempra Energy, prepared statement of....................... 443
Lee, Hon. Barbara, a Representative in Congress from the
State of California, prepared statement of................. 244
Lofgren, Hon. Zoe, a Representative in Congress from the
State of California, prepared statement of................. 242
Lynch, Loretta, president, California Public Utilities
Commission, prepared statement of.......................... 73
Madden, Kevin P., general counsel, Federal Energy Regulatory
Commission, prepared statement of.......................... 42
Makovich, Larry, senior director, Cambridge Energy Research
Associates, prepared statement of.......................... 99
Malcolm, Steve, president, Williams Energy Services, prepared
statement of............................................... 485
McDonald, J. William, Acting Commissioner, Bureau of
Reclamation, prepared statement of......................... 148
Pickett, Stephen, vice president and general counsel,
Southern California Edison, prepared statement of.......... 311
Seetin, Mark, vice president of governmental affairs, New
York Mercantile Exchange, prepared statement of............ 409
Sheehan, Becky Dell, associate counsel, California Farm
Bureau Federation, prepared statement of................... 169
Stokely, Thomas, senior planner, Trinity County Planning
Department, prepared statement of.......................... 175
Thomas, Richard, vice president, Alpine Stained Glass,
prepared statement of...................................... 401
Uhler, Lewis K.,president, the National Tax Limitation
Committee, prepared statement of........................... 25
Vanech, Dean, president, Delta Power Co.:
Information concerning summary of net income............. 351
Prepared statement of.................................... 323
Winter, Terry W., president and CEO, California Independent
System Operator, prepared statement of..................... 84
Yates, Ed, senior vice president, California League of Food
Processors, prepared statement of.......................... 8
ASSESSING THE CALIFORNIA ENERGY CRISIS: HOW DID WE GET TO THIS POINT,
AND WHERE DO WE GO FROM HERE?
----------
TUESDAY, APRIL 10, 2001
House of Representatives, ,
Subcommittee on Energy Policy, Natural Resources
and Regulatory Affairs, ,
Committee on Government Reform, ,
Sacramento, CA.
The subcommittee met, pursuant to notice, at 11 a.m., in
the Sacramento Convention Center, room 204, 1400 J Street,
Sacramento, CA, Hon. Doug Ose (chairman of the subcommittee)
presiding.
Present: Representatives Ose, Horn and Burton.
Staff present: Dan Skopec, staff director; Jonathan Tolman,
professional staff member; Regina McAllister, clerk; and
Elizabeth Mundinger, minority professional staff member.
Mr. Ose. Good morning. A quorum being present, the
subcommittee will come to order. I ask unanimous consent that
all Members' and witnesses' written opening statements be
included in the record. Without objection, so ordered.
I ask unanimous consent that all articles, exhibits, and
other material referred to be included in the record. Without
objection, so ordered.
I ask unanimous consent that Members of Congress who are
not members of the committee be allowed to participate in
today's hearing. Without objection, that is agreed to.
I ask unanimous consent that all questions submitted in
writing to the witnesses, and their answers, be included in the
hearing record. And, I ask unanimous consent that questioning
in this matter proceed under clause 2(J)2 of House rule 11 and
committee rule 14 in which the chairman and ranking minority
member allocate time to members of the committee as they deem
appropriate for extended questioning, not to exceed 60 minutes
equally divided between the majority and the minority. Within
objection, so ordered.
I want to welcome everyone to the first of three hearings
we will be holding on the California energy crisis. Judging by
the turnout here today, I think we can safely say that this is
a crisis that is on the mind of everyone in California and
around the country. I am hopeful that these hearings will bring
about an honest discussion of our problems, and produce some
agreeable resolutions to this crisis. I especially want to
thank Chairman Burton for allowing the committee the
opportunity to conduct these hearings in California. Although
Chairman Burton is from Indiana, I think we will find that
resolving California's energy crisis is vital to the economic
well being of the entire country.
I also want to thank all of the other Members of Congress
who made the journey to Sacramento, and, in particular,
Chairman Horn from Long Beach. I look forward to your ideas and
participation.
The availability, reliability, and price of power are an
integral part of our economic and social success. The converse
of that statement is also true: An unavailable, unreliable, and
expensive source of power will cause an economic and social
crisis. And, to be sure, this is a crisis.
Few public policy issues affect consumers as much as
energy. Higher energy prices and the threat of blackouts affect
all Californians. California consumers will be faced with
higher energy prices that will cause real hardship to low
income families and those living on fixed incomes. I am
especially concerned about those who share a home with numerous
extended family members. These families will be held to the
same energy baseline use standards as a typical nuclear family,
even though they could have two or three times as many people
living under the same roof. Consumers will also pay more for
products they purchase as businesses are forced to pass on
higher energy costs to their consumers.
I am deeply concerned that seniors living on fixed incomes
will have to choose between air conditioning or costly
medicines in the summertime, or heating in the winter. Either
choice could be deadly.
In addition, as a result of the crisis, consumers will pay
more in the form of squandered surpluses, resulting in higher
taxes and cuts in government programs, such as education, law
enforcement, health care, and tax relief. And I just want to
point out, the San Francisco Chronicle this morning had an
article that listed the daily expenditures for anti-smoking,
for an algebra education, and for the war on amphetamine on a
comparative basis to what we are spending, unanticipatedly for
power.
Businesses will also face increased costs as a result of
this crisis. The cost of doing business in California is
already very high relative to the surrounding States. I am
fearful that high energy costs will drive more businesses out
of California, because many of the small businesses here right
now will be unable to pass on higher costs or relocate. The
losses of good jobs and tax revenues because of the energy
crisis are grave concerns for me. Intel Corp., for instance,
has stated very clearly that it will no longer invest in
California, citing an unfriendly business climate and
uncertainty as to the supply of a reliable source of power.
Let us also not forget that the California agricultural
industry is being devastated by high natural gas prices, and
must brace for massive increases in its electricity bill. As
you know, most farmers operate on very tight margins. They
simply will not be able to absorb the price hikes in both
natural gas and electricity.
Clearly, high energy prices will have a large, negative
effect on the California economy, and could possibly drag the
rest of the Nation into a recession. But, there is something
even worse than high energy prices, and that is blackouts. Just
last week, as reported by the L.A. Times, experts were
predicting over 30 days of blackouts this summer, and where
blackouts occur, disaster follows. Long-term blackouts this
summer will endanger lives, especially for our seniors. We have
already seen this happen in Chicago during the summer of 1998.
People of fragile health, who live in the deserts and valleys
of California, will be at extreme risk when the blackouts hit.
Blackouts wreak havoc on businesses as well. Tomato farmers
in the Third Congressional District tell me that if a
processing plant is shut down due to a blackout, that is, power
is cutoff without any explanation or anticipation, they lose
the entire product that is being processed, and then have to
shut down for days to clean and sanitize the plant.
The same is true in Silicon Valley, where chipmakers could
lose millions of dollars if they here hit with a single
blackout. Another example, and we will hear more from Mr.
Verboom later, is the dairy industry. If a dairy farmer is hit
with a blackout, you cannot milk your cows. I do not know about
you, but it is my understanding that if you do not milk a cow,
you have a problem, especially if that cow is ready to be
milked. These are but a few examples of a problem that will
occur among many industries statewide when blackouts hit.
The purpose of this hearing is to seek input as to what
role the Federal, State, and local governments have in creating
a solution for this energy crisis. Some of the questions I hope
to answer are: What measures have been taken by the State of
California to solve this crisis? In the wake of PG&E's
bankruptcy filing, does the Governor have a new plan? Has the
Bush administration been responsive to requests from the State
of California? What Federal regulatory measures can be taken to
help ease the current crisis? And, finally, what is the
prospect for a solution in the near term and in the long term?
I want to thank all the witnesses for coming today. I know
it is tough to make time to testify. I am looking forward to
hearing from every one, because they each have a unique
perspective that is important to our discussion. I am hopeful
that together we can shed some light on what Californians can
expect this summer, and take some necessary steps to ensure
that California's energy concerns are finally put behind us.
Now, I would like to recognize my colleague, Chairman
Burton, for the purpose of his opening statement.
STATEMENT OF DAN BURTON, A REPRESENTATIVE IN CONGRESS FROM THE
STATE OF INDIANA
Mr. Burton. It is nice to be in California. It sure is a
beautiful day. And I am sorry you are having this problem.
Chairman Ose is chairman of our new Subcommittee on Energy
Policy, Natural Resources and Regulatory Affairs, and he will
be watching and working on this problem over the coming months,
and hopefully coming months, not more than a year.
For the last year we have held a series of hearings on
energy policy. We held a hearing last summer on gasoline price
spikes in the Midwest. We held another hearing in the fall on
the problems with home heating oil and natural gas. We have
real problems in those areas. And we do not have all the
answers, but as a result of the hearings we have already held,
we have been able to draw at least some conclusions. First, we
need to develop our natural gas resources. We have tremendous
deposits of natural gas in this country, but many of them are
closed to development.
Almost all of the new electricity plants being built now
are run by natural gas because it is clean. Demand is going up,
as it is here in California, but new sources of supply are not
being developed. The price of natural gas has more than
tripled, and that is passed on in the form of higher utility
rates. This has created severe hardships on lower income
families. There are many areas that can be opened up to
development without endangering the sensitive environments, and
we need to do it, and we need to do it now, because it will
help here in California as well.
We have to develop more refinery capacity. In 1982 there
were 231 oil refineries in the United States. Today there are
only 155. The demands we are placing on them is straining them
to the breaking point. Because of all the environmental laws we
have, refineries have to produce more than 50 different blends
of gasoline for different seasons and regions of the country,
and that is an amazing burden. We are stretched so thin that
all it takes is one disruption in a pipeline or refinery to
cause chaos. That is what happened in the Midwest last summer,
and that is why they ended up paying more than $2 a gallon for
gasoline.
The restrictions we have that make it so difficult to build
new refineries are so counterproductive. Refineries built 20 or
30 years ago are dirty and inefficient. With today's
technology, cleaner, more environmentally safe refineries could
be built to replace them, but it is just not economical, and
that has to change.
We need to have good, strong environmental laws, but we
have to weigh the costs and the benefits. The new diesel fuel
rule being developed by the EPA is a good example. Everyone
agrees that diesel fuel needs to be cleaned up. The oil
industry has offered a plan to remove 90 percent of the sulfur
that is now in diesel fuel; 90 percent. Now, that is pretty
good. But the EPA will not accept that. They are insisting on
95 percent. And yet, experts are predicting that the extreme
measures they will have to take to get to that extra 5 percent
are going to cause serious disruptions in our energy markets,
and that will affect California as well. I think that decision
needs to be revisited. I think we have enough problems to deal
with, without creating new ones.
So we have learned a lot through this process, but we have
yet to do a thorough review of the problems we have with
electricity, and that is why we are here this week. If you want
to learn about the pitfalls of electricity policy, California
is the place to be. This is the laboratory, and the experiment
is not going very well. We are not here to assign blame. We are
not here to point fingers. We are here to listen and to learn
and to try to find out ways that we might be of assistance.
There is going to be an important debate in Congress this
year on energy policy. We have not had a serious energy policy
in this country for too long. The Bush administration is going
to offer a plan. Bills are now being introduced. We have some
important decisions to make whether we are going to take the
steps that are necessary to have energy independence and
reliable supplies, or whether we will not, and that is why
these hearings are so timely.
This is such an important issue that we created a new
subcommittee this year, and I just mentioned that, the
Subcommittee on Energy Policy, Natural Resources and Regulatory
Affairs, and I asked Mr. Ose to be the chairman of that
committee, and I asked him to chair today's hearing. He has
made this a top priority, and I think that is justified, and I
think he will do a great job.
There are a lot of different issues for us to look at this
week, and I will just mention a few. Why has demand grown so
rapidly in California and supply grown so slowly? Were there
early warning signs of this crisis that were missed, and if so,
what were they? Should the Federal Government place a cap on
electricity prices, or will this inhibit investment in new
plants and exploration? Why were long-term contracts not locked
in when prices were lower? Have power generators made excessive
profits, and should they be ordered to repay some of that
money? How are the utilities going to pay off their massive
debts? We have just seen one company declare bankruptcy. Will
there be more?
Over the next 3 days we are going to hear from all sides of
this debate. Hopefully by the end of the week we will have
answers to at least some of these questions. Today we are going
to focus on the State government's role in handling the crisis.
We are also going to look at how the U.S. Interior Department
might be contributing to some of the problems. Tomorrow we are
going to hear from the major utilities and the alternative
energy producers. We will also question the chairman of the
Federal Energy Regulatory Commission about their role. On
Thursday we are going to have the major electricity producers,
and we will have a lot of questions for them.
I want to thank all of our witnesses who are here today. We
have some representatives from the local agricultural sector. I
know they are having serious problems. Mrs. Lynch from the
Public Utilities Commission had to rearrange her schedule to be
here today, and we appreciate that. And to all our other
witnesses whom I have not mentioned, I want to thank you for
being here as well, and I look forward to hearing your
testimony.
Thank you, Mr. Chairman.
Mr. Ose. Thank you. My good friend from Long Beach, I would
like to recognize Mr. Horn for the purpose of an opening
statement.
STATEMENT OF STEPHEN HORN, A REPRESENTATIVE IN CONGRESS FROM
THE STATE OF CALIFORNIA
Mr. Horn. I thank the gentleman. I want the people of
northern California to know that in Mr. Ose they have a first-
class legislator. He has been at everything we have done and we
held 100 different hearings last year. And he asks first-rate
questions. I am going to waive an opening statement, because I
happen to believe in asking the questions, not talking myself.
The chairman of the full committee has spoken for all of us.
So, thank you very much.
Mr. Ose. Thank you, Mr. Horn.
All right, this committee swears its witnesses in, so we
are going to have the three of you rise.
[Witnesses sworn.]
Mr. Ose. Let the record show the witnesses answered in the
affirmative. I would ask that you summarize your written
statement, try and keep it under 5 minutes. Mr. Yates, you are
recognized.
STATEMENTS OF ED YATES, SENIOR VICE PRESIDENT, CALIFORNIA
LEAGUE OF FOOD PROCESSORS; PETER VERBOOM, GLENN COUNTY
DAIRYMAN; AND LEWIS K. UHLER, PRESIDENT, THE NATIONAL TAX
LIMITATION COMMITTEE
Mr. Yates. Thank you, Mr. Chairman, Mr. Horn, Mr. Burton.
Good morning. I am Ed Yates, senior vice president of the
California League of Food Processors.
The food processing industry in California is sizable. It
accounts for 40 percent of the Nation's domestic supply of
processed fruits and vegetables. It is totally reliant upon an
ample and adequate supply of energy to process the 16 million
tons--16 million tons of perishable fruits and vegetables,
converting that perishable product into safe and storable
products available to consumers across the country at any time
they wish to use them.
The current crisis in California is having a profound
impact and presents a significant challenge to the food
processing industry in California. We are facing rolling
blackouts this summer. Our estimate is at least 30. These are
extremely disruptive for a process, as Mr. Ose pointed out,
where it may take, due to a 1 or 2 hour outage, 24 to 36 hours
to bring the plant back on line. That represents as high as
24,000 tons of food that either gets thrown away or does not
get processed. We have no protection currently from rolling
blackouts, unless you wish to shed some load and participate in
those kinds of programs.
Again, I want to emphasize the importance of supply. We are
facing a prospect of having natural gas supplies curtailed or
seized by utilities in California. The prospect of that is more
than scary. We would not be looking at a 1 or 2-hour period of
down time, like a blackout. We are talking days, and maybe
weeks of unavailable supply of natural gas.
We are also extremely concerned about the price of natural
gas. Currently the price is above $12 a dekatherm. That
translates to almost $1 billion more in natural gas cost to the
food processing industry if those prices were to prevail and be
applied to everyone. We have a unique problem in California
with the price of delivery of gas to the border. It exceeds the
price of the commodity.
We are also very concerned with the effect in California
that we have in competing with the electric generation
industry. We compete with them on two levels: one for the price
of the commodity, and second, for delivery. As the Federal
Energy Regulatory Commission has opened up interstate pipelines
to some reasonable form of competition, it is whomever can pay
the most appears to get the highest priority for delivery. The
food processing industry, being a relatively low margin
industry, simply cannot compete with the prices that electric
generators can pay for the commodity or delivery.
Food processors, I describe it this way, we are in a
stainless steel straitjacket. We want the tools necessary to
help ourselves get through this crisis. Yet in California, the
very stringent regulations for air pollution and other
considerations extremely limit our ability to help ourselves.
We are making initiatives for alternative fuels. We are not
getting a very open ear for that. We are simply locked into
natural gas as a supply.
We did, in our prepared testimony, make four
recommendations for consideration at the Federal level. We
believe that the provisions of the Natural Gas Policy Act back
in the old days which provided for a high priority for
essential agricultural and food processing use of natural gas
ought to be revisited, restored, and extended to the burner
tips of food processors in California. We think that incentives
ought to be created that would promote the use of alternative
fuels for boilers and backup generation. We believe that
someone ought to discover whether or not the high wholesale
electric prices are reasonable and acceptable in terms of fair
pricing and competition. We do support competition as long as
it is fair and equitable and everyone has an opportunity to
participate. We are in a symbiotic relationship with the grower
community. We expect a number of processors may shut down this
season, and we are hoping for some remedies to be forthcoming.
And with that, I close, and again, I appreciate very much the
opportunity to make these remarks today. Thank you.
Mr. Ose. Thank you, Mr. Yates. I was remiss in not
introducing Mr. Yates. He is the senior vice president of the
California League of Food Processors.
Our second witness is Mr. Peter Verboom, who is a dairyman
from the great county of Glenn County in my district. Mr.
Verboom, you are recognized for 5 minutes.
[The prepared statement of Mr. Yates follows:]
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Mr. Verboom. My name is Peter Verboom. I am actually
relocating my dairy from San Diego County to Glenn County. I
have to apologize, I did not bring my written statement, if
that is OK.
Mr. Ose. Arrest this man--yes it's OK. [Laughter.]
Mr. Verboom. Being from San Diego County, when San Diego
Gas and Electric went to deregulation my cost on my dairy
facility in San Diego County tripled. They went from $3,500 a
month to over $10,000 a month. And there is no way that we can
pass on those costs with our milk prices being controlled. The
wholesale milk prices are regulated by the State, where the
retail prices are not, and so we have no way of passing on
those costs through our product. And so we have to absorb them.
It does not work, especially given the cost of milk prices as
they have been in the last year.
And moving my facility from to northern--I am in the
process, actually. We were moving cows last night at midnight,
and we are in the process of moving our herd up. And so I will
be able to get a clear picture of the difference between SDG&E
and PG&E, and I am kind of wondering what to expect.
And so it has been--as far as having the power at the
dairy, we do have generation facilities at the dairies. But, on
the other hand, in this past year in the rolling blackouts that
we have had, I produce milk for Land-O-Lakes. And, Land-O-Lakes
has a large facility in Tulare. In Tulare, with the brownouts,
their milk backed up on them, and when the milk backed up, they
were not able to pick it up at the dairies. A certain amount of
dairies had to dump their milk, and then also faced the
possibility of regulations from the Water Quality Control Board
for contaminating the groundwater. So, it has been a problem.
It kind of just feeds on itself all the way down the line.
But my initial statement is that we--as a producer, I have
no way to pass it on. And so, I wanted to relate that message
to you. With the milk storage problems, we cannot--that is
basically my opening statement. I will be open for questions. I
am sorry I did not have a prepared statement with me.
Mr. Ose. That is fine. Thank you, Mr. Verboom.
Our third witness is Lew Uhler, who is the president of the
National Tax Limitation Committee. He lives in this area.
Welcome.
Mr. Uhler. Thank you, Congressman, and Congressmen Burton
and Horn, for inviting us to do our best to represent the
viewpoint of taxpayers here in California. We are a national
committee. We keep our headquarters here in the Sacramento
area, with tens of thousands of members in this State and
elsewhere. We have been in operation for the last 25 years, and
I am proud to say we do not accept any government grants or
contracts, Federal, State, or local, but are supported only by
voluntary contributions of taxpayers.
The gravity of this situation is lost on no one. We know
that the electric and other energy situation we face now is the
result of a flawed deregulation program: frozen rates;
requirements that electrons be purchased on the spot market
rather than long-term contracts; and a peculiar method of
financing the daily or hourly requirements by paying everybody
the highest rate paid to any provider, instead of a blended
rate with some of the lower cost power being blended in to
bring the average rate down.
So, we confront a huge substantive, the politicians and the
Governor, political situation. Rather than accepting the
reality of the problem and choosing a market-based solution,
the Governor and the majority leaders of the legislature have
chosen a command economy approach as the solution. And in doing
so, they have opted to place the burden, not on the ratepayers,
but on the taxpayers of the State.
Now, there is some overlap, of course. But since 25 percent
of the generation in the State is by municipal utilities which
are not caught up in the stupidity of the deregulation plan and
its execution, they confront a different rate structure than
others do. And yet they are being asked, as taxpayers, to bear
some of this burden, I think mainly because they have been
around and they are credit-worthy. What the political process
in Sacramento has been doing is looking for credit-worthy
people to turn to. Hence the public treasury is now obligated
to pay tens of billions of dollars for current and future
electricity costs.
From this moment forward, we have a chance to improve the
situation. We ought to be guided by the medical Hippocratic
oath, ``first do no harm.'' And yet yesterday the Governor did
further harm by proposing--and of course the legislature will
dispose--that the people of the State, wearing their taxpayers'
hats, should purchase an antiquated grid system from part of
the electricity distribution system. So, it appears that the
Governor is not learning. He is creating a further nightmare
for the taxpayers. We should have learned, from the decline of
the Soviet Union, that command economies do not work. Free
markets do. We have to adopt free market solutions.
So, I think the real answers here are twofold. First, I
urge that we turn to the truly credit-worthy buyers, the
individual residential consumers, the businesses, cities, and
all the rest, and use their credit. Let their credit be used to
buy electricity directly from the suppliers, negotiating
contracts to benefit themselves.
When we started this crazy deregulation, we had limited
direct access. Less than 2 percent of the residential users
opted for alternative suppliers. Why? Because there was no
price differentiation. We froze the rates as requested by the
utilities. They have caused this problem now visited on them,
to a large degree. In terms of the industrial and commercial
users, 25 to 27 percent of the larger users actually entered
into direct access contracts. When the State passed AB1X, the
so-called ``relief act,'' they foreclosed the opportunity for
direct access. So one of the things we must do is to reverse
that action and give all of us the opportunity to go directly
to Enron or Reliant, or whomever and make the best deal we can.
That may not stop blackouts, but we can also negotiate
contracts, with the possibility of limiting the blackouts, at
least during this time.
Second, as with retailing, there are three things that are
important: location, location, and location. There are three
things that are important in solving this problem: supply,
supply, and supply. What we have to do is get more power out of
existing generators. As our friend who runs the California
League of Food Processors, Ed Yates has said, we simply are
being inundated with rules and regulations by local air quality
control management districts they have to be disciplined into
some system.
And we call on the Governor to ask you for relaxation of
the clean air rules. In turn, under his emergency authority, he
should relax the Clean Air Act requirements here in California,
discipline the local air quality management crowd into a
system, and get them to produce and continue to produce. Then,
of course, we need to build a new facilities, nuclear, hydro,
etc. And I would urge that the Auburn Dam be one of those
considered for the long-term benefit of this State. Thank you.
[The prepared statement of Mr. Uhler follows:]
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Mr. Ose. Thank you, Mr. Uhler. We will now entertain
questions from the Members. We are going to do this in 10-
minute sections. I want to recognize the gentleman from Indiana
first for 10 minutes.
Mr. Burton. Let me start with Mr. Verboom. You said that
Land-O-Lakes, which is a purchaser of milk products from you--
one of your larger milk purchasers--because of the blackouts
they had milk spoil.
Mr. Verboom. Yes.
Mr. Burton. And they had to dump it. And when they dumped
it, then they ran into an environmental problem because of the
pollution of the water supply.
Mr. Verboom. Let me back up there. The plant itself did not
dump the milk. They lost the capacity to bring in anymore milk
from the dairies.
Mr. Burton. So the dairies had to dump it?
Mr. Verboom. The dairies had to dump the milk.
Mr. Burton. And so all the dairy producers were then in
violation of the environmental rules?
Mr. Verboom. Yes.
Mr. Burton. And you said your rate in San Diego went up 300
percent? Three times?
Mr. Verboom. It multiplied three times; yes.
Mr. Burton. OK. So is that the main reason you are
relocating north?
Mr. Verboom. No. I was in the process of relocating, but it
has become a very good reason to--San Diego County, where we
were located, is not very conducive to dairies.
Mr. Burton. And you stated that there is a ceiling on the
wholesale price set by the State, so you have to eat the loss--
--
Mr. Verboom. Yes.
Mr. Burton. [continuing]. When you have to destroy milk or
get rid of milk that is spoiled?
Mr. Verboom. Yes. Well, it gets--Land-O-Lakes being a
cooperative, it gets distributed amongst all the producers, so
all the producers bear the loss.
Mr. Burton. OK. But also the electrical cost, also you have
to eat that?
Mr. Verboom. I have to eat that, yes. Oh, definitely.
Mr. Burton. Because of the price ceilings.
Mr. Verboom. Yes.
Mr. Burton. It sounds like there are other problems besides
just generation of electricity you have to deal with there.
Mr. Verboom. Yes.
Mr. Burton. Mr. Yates, you said that alternative fuels
should be allowed to be used, but there was a problem with
environmental laws in the State. Could you elaborate just a
little bit on that?
Mr. Yates. Thank you. In California there are standards for
the use of alternative fuels. However, the problem is if you
were to put in the equipment to utilize those fuels and they
happen to result in an increase of emissions, you have to,
before you install the equipment, make arrangements to offset
that increase of emissions. We think that we are not asking
that those requirements be eliminated. We simply ask that more
time be allowed to acquire those emission offsets, rather than
having to do them up front.
Alternate fuels have historically been an effective and
very viable means of fighting high costs for natural gas. The
air regulations in the State--in California have been tightened
up, so many food processors have lost their ability to utilize
alternative fuels, and natural gas has been plentiful,
reasonably priced, and so there was no need. Obviously there is
a need now to look----
Mr. Burton. And the utilities are using a lot of natural
gas?
Mr. Yates. That is correct. As I mentioned, there is an
increasing demand not only by the utilities to satisfy what
they call the core, which are residences and small businesses,
but also electric generation. All those loads are increasing,
and we set with the high probability that the utilities could
seize our gas to satisfy the needs of the core group. In
addition, the Public Utilities Commission in California has
proposed a rulemaking which would give electric generators
higher priority than we have for natural gas supply. It does us
no good to have a supply of electricity if we have no gas to
process the food.
Mr. Burton. So, you think you should be treated equally,
along with the utilities?
Mr. Yates. At minimum. That is correct.
Mr. Burton. Let me ask one more question of you, and that
is, we have tremendous natural gas supplies in the country, but
because of stringent environmental rules and regulations, a lot
of those areas have not been able to be tapped. Do you believe
that we ought to take another look at going after those
reserves that we have of natural gas in this country?
Mr. Yates. Yes, I do. I think all efforts should proceed
with all speed, including the potential of gas supplies in
California. I do not believe that the potential for gas
production in California has been either fully identified, nor
exploited. We hear the numbers, that there is a 50 to 60-year
supply of natural gas in this country to meet demand. We think
we would come to the conclusion that there is plenty of gas; it
is a matter of getting to it, to satisfy our needs.
Mr. Burton. And through your research, have you found that
could be garnered in an environmentally safe way?
Mr. Yates. I believe that is very possible.
Mr. Burton. Thank you. Mr. Uhler, you said that the
purchasers who are having a difficult time need to be able to
have direct access to the supply of electricity. They cannot do
that now because of State regulation?
Mr. Uhler. Well, what happened, Congressman, was when the
regulation plan was first implemented some commercial users
were given the opportunity for direct access. But meaningful
direct access to residential users was denied because of the
cost or rate structure imposed by the Public Utility
Commission. So, while Enron Commonwealth, many others came in
and sought to market their energy directly to the homeowner,
much in the same way AT&T, Sprint, and everybody else entered
in longline competition, because of the imposed rate control. A
very small percentage of the people actually signed up. When
AB1X passed in January here in the State, direct access was
foreclosed for all users.
Mr. Burton. Why was that? Why did they do that?
Mr. Uhler. It beats me. What happened here in California in
kind of a global sense is, when the crisis arose and we had an
opportunity to use market principles and buy long term the
apparent mental state and outlook of the political leadership
of this State, being essentially central planners, opted for a
command economy approach.
Mr. Burton. I understand.
Mr. Uhler. And decided to take over and run the thing their
way.
Mr. Burton. I understand. You said that earlier.
Mr. Uhler. Yes.
Mr. Burton. Do you think that should be changed so that
homeowners have----
Mr. Uhler. It absolutely must be changed. And I can only
say that one of the things that is so distressing, in
yesterday's announcement about the deal with Southern
California Edison, was that, one of the things taken off the
table was future development of hydroelectric properties owned
by Southern California Edison. This is further evidence that
this State administration will not confront the hardliners in
the environmental community here in California and ``go for
it'' in terms of relaxing the rules that will help our food
processors and our dairy people and help everybody. Unshackle
us. Our hands are tied.
Mr. Burton. I can see----
Mr. Uhler. Let us out! Let us have direct access and we
will make our own deals.
Mr. Burton. I can see your enthusiasm, and you were getting
into my next question. And that is----
[Applause.]
Mr. Burton. Is that a relative of yours back there?
Mr. Uhler. No, we brought no relatives here this morning,
Congressman.
Mr. Burton. Well, you have some supporters. Let me just ask
you this. And you were touching on this as I interrupted you
there, and I apologize. You said an increase in production of
the supply of energy by relaxing some of the clean air rules,
at least for a period of time I guess is what you were saying.
Over the long haul, you are for strong environmental standards,
though?
Mr. Uhler. Yes. Whether these are good or bad is for the
future.
Mr. Burton. But you are talking about in the short run?
Mr. Uhler. I am talking about in the short run.
Mr. Burton. OK. Let me follow----
Mr. Uhler. Both the Federal clean air----
Mr. Burton. [continuing]. Let me followup. And we can look
at that at the Federal level. But in the long run--and I will
address this question to all three of you. I see my time is
running out. Do you believe that an adequate supply of energy
can be produced here in California and this region in an
environmentally safe way, so that even though the rules might
be relaxed in the short run, if there are proper free market
principles installed, that we would be able to have an adequate
amount of energy created to take care of the needs in
California in an environmentally safe way?
Mr. Uhler. There is not even the slightest question. We
could turn to nuclear. We know France now produces 75 percent
of its domestic electricity through nuclear plants, and does it
safely. This terror on the part of some environmentalists about
nuclear is misplaced. We should reopen some nuclear plants that
have been moth-balled, if we can do it quickly and properly.
And hydro is of course the cleanest and safest, and also
conserves our water, which is the next infrastructure problem
the State faces.
Mr. Burton. Thank you, Mr. Chairman.
Mr. Ose. If I might just offer one observation. It would
help us to have yes or no or I do not know answers to
questions. And then a very clear statement, and then do the
expanding on the responses. So, Mr. Horn, for 10 minutes.
Mr. Horn. Just one to Mr. Uhler, the natural gas situation.
We have got the natural gas. The question is, can we get it in
the pipelines in the right places of the State. What do you
know about the pipelines in northern California?
Mr. Uhler. I have no specific technical knowledge. I know
they are trying to fill those pipelines with increased pressure
at night to increase the storage that otherwise is unavailable.
But beyond that, I do not have the technical knowledge.
Mr. Horn. Mr. Chairman, I would like to get the appropriate
group that represents natural gas, to get those answers to this
part of the State, and to the degree to which they clean the
pipes, as you say, and they put other things through there. But
let us get it at this point in the record, if I might.
Mr. Ose. Without objection.
Mr. Horn. No. 2. Mr. Yates, it is truly amazing the 100
percentages you have with pears and apricots and strawberries
and peaches. We have got another problem, and that is what is
gone at the roots of some of those. And I just wondered if you
know off the top of your head the degree to which those trees
are dying, and do you happen to have any information on that?
Mr. Yates. Pardon me? What specific crop are you referring
to?
Mr. Horn. Well, in terms of the roots with the peaches, the
grapes, so forth.
Mr. Yates. Oh, the disease in the grape community?
Mr. Horn. Exactly.
Mr. Yates. That is a huge problem. It is creating some
shifts in producing areas, severe economic losses, and those
sorts of things.
Mr. Horn. Mr. Chairman, I would like that put in the record
at this point.
Mr. Ose. Without objection.
Mr. Horn. Thank you. I yield back to questions.
Mr. Ose. The gentleman yields back. If I might followup on
a couple of things. Mr. Verboom, you are moving your dairy from
San Diego County to Glenn County?
Mr. Verboom. Yes.
Mr. Ose. I know you do not ask a cattleman how many head he
has, but you have a production of how many truckloads per day?
Mr. Verboom. We produce one truckload of milk per day.
Mr. Ose. OK. And, how many people work at your dairy?
Mr. Verboom. At home we have 11. On the new facility we
will have about 18.
Mr. Ose. OK. If you cannot get power and you have to dump
your milk, or you cannot plan with any degree of certainty,
what happens to those jobs?
Mr. Verboom. Well, the cows have to be milked and fed.
There is no getting around it. So, like I said, we have backup
facilities. But being able to ship the milk to the plant has
been the problem.
Mr. Ose. How long can you warehouse the milk on your dairy?
Mr. Verboom. One day.
Mr. Ose. So you have a 1-day window----
Mr. Verboom. Yes.
Mr. Ose [continuing]. To hold the milk before you have to
move it?
Mr. Verboom. Yes.
Mr. Ose. And, if I understand correctly, it is the Gonzalez
Milk Pool pricing system that governs what you get for your
product?
Mr. Verboom. Yes.
Mr. Ose. So you and hundreds, if not thousands, of other
dairy milkers have this same exact problem. You have a 24-hour
window in which you have to move product from the farm to the
processing plant. And, if they cannot handle it at the
processing plant, you lose----
Mr. Verboom. It stays at the dairy if they cannot take it.
It stays.
Mr. Ose. You lose the revenue that would come from the
milk?
Mr. Verboom. Yes, definitely.
Mr. Ose. Or the cheese or the butter or what-have-you?
Mr. Verboom. Right. We get paid for the raw product and we
would lose that money from that raw product.
Mr. Ose. How quickly does the unemployment or the economic
chain reach the people who work for you?
Mr. Verboom. Well, it has not gotten to that point, but if
it did, everybody would be out of work. Because if it came to
the point where we could not get paid for our product, we would
have to close it down.
Mr. Ose. OK.
Mr. Verboom. And it does not take long at a tanker load of
milk a day.
Mr. Ose. Mr. Yates, in the food processing business, one of
the standards you have to meet deals with food quality, the
ability to ensure that the processing system is clean or clear
of disease or infections and what-have-you, is that correct?
Mr. Yates. Absolutely, yes.
Mr. Ose. All right. So the FDA works with you and the
California Department of Food and Agriculture works with you
just to make sure that the product coming out of the plants
that your members run is fit for human consumption?
Mr. Yates. It is safe and wholesome; yes.
Mr. Ose. To the extent that you have an interruption and
a--let us say Campbell's Food Plant down here in south
Sacramento, let us say they lose power. They have a co-
generator, so they are probably not going to go down. But let
us say they lose power. To the extent that they have lost
power, just give me some sense of the impact on jobs at the
plant and the farm that feeds the plant.
Mr. Yates. Let us take, for example, a tomato--back to a
tomato processing facility. Delivery of tomatoes to a tomato
processing facility is a tightly orchestrated and scheduled
endeavor. Typically, a load of tomatoes is at the plant no
longer than 3 hours. In other words, from harvest to being
stabilized is, on average, about 3 hours. Now, if that plant is
down for 24 to 36 hours, first they have vessels filled with
20,000 to 40,000 pounds of tomato product. As soon as power is
lost, the aseptic or the sterility of that system is lost. That
food, thousands of pounds of it, have to be emptied out when
the power comes back on, because they have no power to get it
out. Then that entire system has to be sterilized again. And
then they have to start the plant up in a sterile condition.
In the meantime, during that 24 to 36 hours, there are
crops in the field that are not going to get harvested because
of the tight schedule of harvest and delivery. It is going to--
as your question suggests, it is going to back up clear out to
the field.
More importantly, and I will go to the natural gas
situation, let us say a plant is shut down for a week. Tomato
processing is highly seasonal. There is approximately a million
tons a week that would not get processed. That is nominally $50
million that growers would not be paid. The energy it took to
grow that crop, water pumping and so forth, would be lost.
There would be a week worth of wages lost by food processing
employees. Remember, this is an enterprise that is relatively
short, 3 months, so many of those workers depend upon working
every day during the season. That is a week's worth of wages
lost. That is significant to those folks.
On top of it, the California food processor would not have
product to satisfy its customer's needs, and that product will
likely be furnished by Chile, Italy, Greece, or some other of
our global competitors, because we do work in a global
marketplace.
Mr. Horn. Mr. Chairman, if you will yield for a question.
Mr. Ose. Certainly.
Mr. Horn. Mr. Yates, I learned about 2 weeks ago that the
last sugar beet processor had been closed. Is that true, and
how difficult is that? And was there any effect of electricity
in it?
Mr. Yates. That is my understanding, that the last one is
gone. I do not believe that electricity was the cause of that.
Sugar beet processing is a refining process. It is very energy-
intensive, natural gas dependent. There were a number of other
factors that have come to bear on the sugar beet industry in
California, and if you want elaboration, I would be happy to
provide it to you.
We are--if they were in business, the Public Utilities
Commission has proposed on-peak rates for electricity to raise
by 545 percent, an increase of 30 cents per kilowatt hour. We
simply cannot operate on that basis. We cannot shut down during
those peak times, and it presents an extreme challenge of how
we are going to cope with that kind of an outcome.
Mr. Ose. I want to follow----
Mr. Horn. I might add on the sugar, if you could provide
something for the record, I grew up on a farm 17 miles from
Spreckles Processing Plant in Salinas.
Mr. Yates. I will certainly do that. The sugar beet
industry in California, as you know, in years past was very
vigorous and it provided a lot of jobs. It is very unfortunate
that they are no longer in business in California.
Mr. Ose. Mr. Yates, some of the suggestions that we have
heard have to do with shifting load from say mid-afternoon to
overnight. My understanding, during harvest season, is that
your members are running their plants 24-hours a day; is that
accurate?
Mr. Yates. That is correct.
Mr. Ose. So shifting load is pointless.
Mr. Yates. Shifting load is a very challenging prospect.
Remember, and I am trying not to repeat, we are processing a
huge volume of food that is harvested ripe for a very short
period of time. So in order to get it all stabilized, they are
running 24 hours a day. Of course, there are periods of
shutdown for cleanup. I mean, it is just like your kitchen. You
got to stop once in a while and clean it up.
We have advanced and are advancing a proposal to shrink
that peak period of time for perishable food processors. Go
ahead and double the price for that time, but at least give us
a better opportunity to avoid that high-price period. And we
think there is a number of food processors that might be able
to work out a deal with their labor force, with their growers,
with their truckers, and everyone else that is dealing with
getting all this food processed. At least we would certainly
like to have that opportunity.
Mr. Ose. I need to ask one other question. I want to go to
Mr. Uhler on this. The State of California has been put on
watch by Moody's as a result of the implications of the energy
crisis we face. In a very real sense, it is my understanding
that in the financial markets that will cause an increase in
the bonding cost to the State of California. In other words,
there will be a premium attached to bonds from the State of
California to reflect that added risk. Am I understanding that
correctly? What are the implications for the provision of
government services?
Mr. Uhler. You are understanding that correctly, and that
will increase the cost of all the bonded indebtedness for the
State. Apparently there is some question as to whether the
markets can receive and absorb the level of revenue bonds,
which are proposed to meet this electricity problem, and do so
effectively. It is really riling up the bond situation for the
State of California and for our taxpayers.
Mr. Ose. My time has expired. I want to go back to Chairman
Burton for a followup.
Mr. Burton. I have a number of questions that I would like
for you to answer as concisely as you can, because I want to
have them for the record. The Governor is not releasing the
figures that the State is paying for electricity. Is that
information that taxpayers want to have and should have?
Mr. Uhler. Correct. And in our written testimony we have
asked for that, and numbers of individuals and members of the
media have asked, and that has not been forthcoming.
Mr. Burton. Has the Governor given a reason why that has
not been publicized?
Mr. Uhler. The stated public reason is that this will
interfere with confidential negotiations for future power
purchase contracts. But it seems to us that, since he is
obligating taxpayers, the taxpayers have a right to know to
what degree and in what direction.
Mr. Burton. Thank you. Let me run through these questions
rapidly here, and if you could answer them. In your testimony,
Mr. Yates, you talk about the problems that processors will
face in the event of a blackout. What actions is the food
processing industry taking to try and cope with the predicted
blackouts? You have talked about scheduling a little bit and
the difficulty, but what alternative fuels are you looking at,
if any? And so if you could answer that.
Mr. Yates. Thank you. We are doing a couple of things. We
were working with our legislatures and the administration to
pave the way for food processors and others to utilize backup
generation during a blackout period. That has been achieved.
Mr. Burton. What alternative fuels are you going to be
using, please?
Mr. Yates. Propane for firing boilers. The other thing we
are doing, and the industry, since this has not been a problem
in the past, does not have--there is only about 5 to 7 percent
of the industry that has backup generation. And this is backup
generation that does not satisfy the entire electric
requirements of the facility. It is minimal, it is enough to
keep computers going, the control room going, and those sorts
of things. So lights on for employee safety and those sorts of
things. And the industry is--a number of food processors are
looking at acquiring backup generation. Very few are looking at
enough backup generation to run the entire facility. That is
just too much.
Mr. Burton. And the only other alternative fuel you
mentioned there was liquified gas.
Mr. Yates. That is one of the options. Diesel is another
one. And I hasten to add----
Mr. Burton. That is an EPA problem.
Mr. Yates [continuing]. That both of those have limits.
They have emission limits. We are not asking that those be
eased. But we are asking eventually, let us comply with the
offset requirements, give us some more time to do that, because
it is practically impossible to do it in the time necessary for
this summer processing season.
Mr. Burton. In terms of using alternatives such as diesel,
oil, or propane, the regulatory barriers that you are facing,
as you just mentioned, are difficult, but you do not want them
relaxed, you just want them to be offset?
Mr. Yates. In our case, yes.
Mr. Burton. In other areas, do they need to be relaxed? I
mean, I know that in food processing--in the other areas, do
you need to have a relaxation for a short period of time,
either one of you?
Mr. Uhler. Well, you know, I stated to the Congressman
earlier that----
Mr. Burton. I know you have stated, but do you have any
facts that shows that there should be a relaxation of those EPA
rules?
Mr. Uhler. Well, only by empirical evidence of the shutdown
of perfectly capable generators that have run out of hours.
This is all arbitrary and artificial. To have people sit in the
dark in their homes or in their factories in July because a
local air quality management control district has arbitrarily
shut down a generator is, in my judgment, absurd.
Mr. Burton. I think I want--go ahead.
Mr. Horn. Could I just ask one that fits on your question?
Mr. Burton. Yes. I yield.
Mr. Horn. As I drove into Sacramento this morning, I
wondered, by seeing the sign over it, there is a fuel cell
technology movement going. And to what degree could that be
helpful, or is it--does not do enough?
Mr. Uhler. You know, again, I have done only the normal
reading on that, and there seem to be tremendous advances in
fuel cells. Once that technology is refined, people can have
that running their home or their business or whatever, but that
is not going to solve this summer's problem and maybe not next.
Mr. Horn. Mr. Chairman, if we could get a presentation from
the fuel cell technology people as to where they are on this
and what they can do.
Mr. Burton. Since the State has begun purchasing
electricity, your testimony, Mr. Uhler, notes that Wall Street
has reacted negatively. How would a downgraded bond rating
affect the budget of California, and does it negatively affect
other programs that rely on the State to issue bonds?
Mr. Uhler. Well, in driving up the interest cost on the
bonded indebtedness, of course, that will harm the State. We
have had huge surpluses which the State has spent over the last
couple of years. The predicted surplus for the next year is
probably ephemeral. We are probably eating into the money for
actual programs at this point, but because of the secrecy and
the lid imposed by the Governor's office, we do not know the
specific details.
Mr. Burton. OK, let me just ask a couple more questions.
Mr. Ose. Mr. Chairman, Mr. Yates has something.
Mr. Yates. Mr. Burton, may I clarify further your earlier
question about alternative fuels. My response was relative to
fuels to operate boilers. When it comes to the issue of
utilizing diesel generators for electricity, there is, in my
opinion, a number of arbitrary decisions that have been made.
For example, there is 5,000 megawatts--it is my understanding
there is 5,000 megawatts of emergency backup generation setting
around the State, and the State refuses to turn it loose, but
instead takes their chances on rolling blackouts.
Mr. Burton. Why are they--is it because of environmental
concerns that they are refusing to turn that loose?
Mr. Yates. That is my understanding. And our----
Mr. Burton. And there is 5,000 megawatts, you say?
Mr. Yates. That is my understanding; yes.
Mr. Ose. Mr. Chairman, would you yield for a minute?
Mr. Burton. I would be happy to yield.
Mr. Ose. Mr. Yates, 5,000 megawatts is a lot of megawatts.
Hearing that anecdotally is one thing, seeing a list is
another. Do you have a list?
Mr. Yates. I believe we can obtain--a list I believe has
been developed by the Air Resources Board. At least that is
what has been represented to us by representatives from the
California Resources Board, that there is 5,000 megawatts.
Mr. Ose. We need to get that list.
Mr. Yates. Now, modern backup generation----
Mr. Burton. Who would have that list?
Mr. Ose. Mr. Yates just said the Air Resources Board here
in the State of California is the source of that list, source
of that information.
Mr. Burton. Are they keeping that secret or are they not
letting that out?
Mr. Yates. Not to my knowledge, no. And I believe the
Governor's office has that kind of information.
Mr. Ose. Well, how do we get it?
Mr. Burton. Well, I know how we can get it.
Mr. Ose. You are the chairman.
Mr. Burton. Yes. We can take a hard look at how to get that
information.
Mr. Ose. We will get that information. If you can tell us
the name of the person who gave you that anecdotal information,
we will be able to followup accordingly.
Mr. Yates. I will certainly provide that to you. Thank you.
And one last comment relative to this scare, fear of diesel
generation. A modern, one-megawatt portable generator puts out
as much emissions, if you will, as three trucks rolling down
the highway. So people are making a big bogeyman out of this,
and they ought to be taking a harder look at it. Thank you.
Mr. Burton. Let me just ask a couple more questions so I
can get these for our record, Mr. Chairman. How much of a role
do you believe Federal and State environmental regulations have
in restricting the supply of electricity? I mean, how severe is
the controls affecting the supply?
Mr. Yates. It is my observation, if I may, that all of the
new power plants being proposed to be built in California are
setting new records for cleanliness, not only in terms of their
emissions, but their efficiency. They are so much more
efficient, that the amount of emissions--not only are the
emission limits very low, but the amount of emissions per
megawatt are extremely low, and they are going to push out the
old, dirty plants.
Mr. Burton. Are they being held up for any reason since
they meet the criteria that they should?
Mr. Yates. It is my understanding that the expedited
processes at the California Energy Commission, who is
responsible for siting those, is proceeding at the high levels
as expected.
Mr. Burton. OK.
Mr. Uhler. If I may add, Mr. Chairman, one of the things
that we have recommended, and that the Governor has within his
emergency powers, is to make the decision of the California
Energy Commission binding, with respect to the siting of any
particular plant, irrespective of local land use controls. And
he ought to do that, because we now have problems at the local
level, the NIMBY problem, ``not in my back yard.'' And yet we
need to site those plants close to the user base, given the
antiquated nature of our transmission system, and to expedite
that process before the California Energy Commission.
Mr. Burton. Mr. Chairman, I have a few questions I would
like to submit for the record for Mr. Verboom on the dairy
products, but if we could get those to him and he can just
answer them.
Mr. Ose. Without objection.
Mr. Burton. Thank you.
Mr. Ose. Mr. Chairman, just for your information, I want to
go back to Mr. Yates. Current California Energy Commission
requirements are that a generating facility in excess of 50
megawatts must come before the Commission for review. I know
that Assemblyman Cox has a legislative proposal that would
raise that threshold from 50 to 125 megawatts as the threshold.
The reason is that the technology for these turbines typically
creates a turbine of 60 megawatts capacity. So, the 50 megawatt
threshold is kind of pointless, because everything has to go.
If we could get that to move forward, we would have a lot of
these standby generators doubling their capacity without having
to go through a lengthy review process. We will put that in the
record.
Mr. Horn, anything else?
Mr. Horn. When you ask for that figure, I would like to see
it broken down in terms of hospitals, which already have
generators, and then try to get it in the rest of the economy,
agriculture.
Mr. Ose. You are talking about the 5,000 megawatts list?
Mr. Horn. Exactly, yes.
Mr. Ose. All right.
I want to thank these witnesses for joining us today. Your
information has been solid, and I appreciate you taking the
time.
Mr. Uhler. Thank you.
Mr. Yates. Thank you.
Mr. Verboom. Thank you.
Mr. Ose. OK, we are going to go ahead and call up the next
panel, and that would be Mr. Kevin Madden, Mrs. Loretta Lynch,
Mr. Terry Winter and Mr. Larry Makovich.
OK, if the witnesses would rise, please.
[Witnesses sworn.]
Mr. Ose. Let the record show the witnesses answered in the
affirmative.
Joining us on this panel, we will just move from my left to
the right. The first witness is Mr. Kevin Madden, who is the
general counsel for the Federal Energy Regulatory Commission.
Mr. Madden, you are recognized for a 5-minute statement.
STATEMENTS OF KEVIN P. MADDEN, GENERAL COUNSEL, FEDERAL ENERGY
REGULATORY COMMISSION; LORETTA LYNCH, PRESIDENT, CALIFORNIA
PUBLIC UTILITIES COMMISSION; TERRY W. WINTER, PRESIDENT AND
CEO, CALIFORNIA INDEPENDENT SYSTEM OPERATOR; AND LARRY
MAKOVICH, SENIOR DIRECTOR, CAMBRIDGE ENERGY RESEARCH ASSOCIATES
Mr. Madden. Thank you, Mr. Chairman. I thank the committee
and subcommittee for the opportunity to discuss the topic of
electricity markets in California and surrounding States. As
Mr. Chairman said, I am Kevin P. Madden. I am the general
counsel of the Federal Energy Regulatory Commission. I appear
today as a Commission staff witness, and I do not speak on
behalf of the Commission.
Electricity markets in California and throughout much of
the West are in a state of stress, and they will continue to
experience various serious problems throughout the coming
summer. Wholesale prices have increased substantially.
Consumers are being implored to conserve as much as possible,
and utilities continue to face severe financial problems. PG&E
has just filed for reorganization under Chapter 11 of the U.S.
bankruptcy code last week.
The Commission has aggressively been identifying and
implementing market-driven solutions to the problems. Let me
just highlight some of the recent actions we have taken to
address these problems. Earlier this month, the Commission took
strong action to mitigate prices in California's electricity
markets for the periods of January and February. The Commission
identified many transactions during these 2 months that
warranted further investigation. The Commission required the
sellers to either refund certain amounts or to offset those
amounts against what is already owed them. They also require
them to provide any additional information which they believe
could justify their particular rates. The total amount of
potential refunds for just those 2 months, January and
February, amounted to $124 million.
Also in March, the Commission issued an order seeking to
increase energy supplies and reduce energy demand in California
and in the West. The Commission implemented certain measures
immediately. These include extending and broadening waivers for
certain facilities under PURPA, enabling those facilities to
generate more electricity without the restrictions that they
usually have. We expedited the certification of natural gas
pipelines into California and the West. Just this week, the
Commission authorized Kern River Pipeline to provide
approximately 300 MCF per day additional capacity into southern
California; this is expected to come online in June or July of
this summer. We also urged all licensees to review the FERC
licenses that they hold in order to assess the potential to
increase the generating capacity at those particular projects.
The Commission also proposed and sought comment on what
other measures it should employ to assess rates for
transmission facilities and for natural gas facilities in order
for them to be online to provide energy this summer.
Finally, the Commission announced a 1-day conference with
State commissioners and other State representatives from
Western States to discuss the volatility of the price in the
Western United States, as well as other issues needed to
address those particular prices; infrastructure, for example.
The conference is being held today in Boise, ID.
On March 14th, the Commission ordered two utilities to
justify the duration of the outages in 2000, April and May
2000, at their California generating facilities. Those outages
forced the California ISO to purchase more expensive power from
the utilities for the generating facilities. Absent adequate
justification, the utilities must make refunds in the amount of
$10.8 million.
On March 28th, the Commission also addressed a complaint
filed by the California Public Utility Commission under section
5 of the Natural Gas Act against a pipeline company and its
marketing affiliate. While FERC found one part of the complaint
unsupported, FERC ordered a hearing on whether the pipeline and
its affiliate had market power; and if so, used that market
power to drive up the prices of natural gas at the California
border. The case is now pending before an administrative law
judge. The Commission set this case on a fast track and a
decision is due back to the Commission in 60 days.
Finally, the Commission's staff, at the Commission's
direction, has proposed a market monitoring and mitigation plan
for California. This would require all sellers with uncommitted
power to sell in the real-time market. The Commission is
currently considering comments on this proposal filed by
numerous entities, and expects to act on this in the near
future for the summer.
These actions, I believe, demonstrate the Commission's
commitment to take all appropriate action to remedy the current
imbalances in western energy markets. While some have accused
the Federal Energy Regulatory Commission of being indifferent
or even hostile to the concerns of California consumers, our
actions prove otherwise. It is not true. We have pursued the
remedies we believe will be most effective, not only in the
short term, but also in the long term. No one should doubt our
commitment to ensuring an adequate supply of energy for all
consumers at reasonable prices.
By itself, however, the Commission cannot contribute all.
It can only contribute a small part of the solution to today's
energy problems. A more comprehensive and permanent solution
requires the involvement of the States and other Federal
agencies and departments. In particular, California must do as
much as possible to expedite the construction of newer power
plants. I am encouraged by all the hard work and effort taken
in recent months, but----
Mr. Ose. Mr. Madden, are you about done?
Mr. Madden. I am about done.
Mr. Ose. Your time is about up here, so you need to wrap
up.
Mr. Madden. I am encouraged by the action taken by the
State of California and the other States, but we must be
vigilant to ensure that these new facilities are built.
Mr. Chairman, I will be happy to answer any questions.
Thank you.
Mr. Ose. Thank you.
Our next witness is Ms. Loretta Lynch, who is the president
of the California Public Utilities Commission. Ms. Lynch, you
are recognized for 5 minutes.
[The prepared statement of Mr. Madden follows:]
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Ms. Lynch. Thank you, Mr. Chairman and Members.
California's restructuring experiment has erroneously been
called deregulation. Rather, California Federalized the
regulation of its energy prices by allowing the utilities to
sell off their generating plants to private merchant
generators, converting retail relationships to unbundled
wholesale relationships, which created a wholesale market for
electricity that was then regulated by the Federal Government,
not by California.
To a much greater extent than was wise, California, under
the Wilson administration, placed control of its essential
economic infrastructure in the hands of the Federal Government
and the Federal Energy Regulatory Commission. Federalizing
control of California's grid has limited California's ability
to protect our economy from price gouging and supply
withholding.
To a much greater extent than was wise, California, under
the Wilson administration, dismantled the integrated energy
service delivery mechanisms in order to create business
opportunities for speculators. The prior administration caused
the utilities to sell off much of their generation to entities
who now hold California hostage daily to extortionate price
demands for electricity, a fundamental economic necessity that
cannot be stored, and for which there is no effective
substitute.
California, under the leadership of Governor Davis, is
already pursuing structural reforms that will reduce our
residences' and businesses' exposure to and dependence on the
deregulated wholesale market. These include ending the practice
of divesting utility-owned generation and selling it off to
private marketeers, reacquiring control of the transmission
system, and reforming the ISO and returning to a rational
system of unit commitment and dispatching the grid.
The California Public Utilities Commission took a very
difficult action a few weeks ago when we raised retail rates by
4 cents a kilowatt hour since January. Mr. Burton, that would
equal a 60 percent increase in your district in Indiana. It may
not be enough if the current price-gouging practices persist
and remain unabated by Federal regulators.
I have prepared an exhibit that is attached to my testimony
that illustrates what has happened in the California wholesale
pricing market. From April 1998, when the California market
opened, to January 2000, wholesale prices remained at
traditional levels, $30 to $35 per megawatt hour. But beginning
in January 2000, wholesale prices began to climb, averaging
about 60 percent above the previous year. Beginning in May
2000, average prices climbed to over $100 a megawatt hour,
reaching a peak of $166 per megawatt hour in August, 200 to 300
percent above historic levels.
On November 1st, the Federal regulators indicated an
intention to abolish price caps in the California wholesale
market and prices began a further upward spiral. On December
8th, the FERC, in a secret order procured by Mr. Winter,
without notice to a single California State policymaker or
elected official, eliminated all price caps, and average prices
rose to $377 per megawatt hour for the month of December, a
level 10 times the historic average. Wholesale prices for
electricity in California have remained at about that level
since, and they bear absolutely no correlation to demand, since
these prices are occurring right now at the lowest load levels
of the year. It is significant that peak demand has not
increased significantly in the past 4 years. The same plants
are running that have served load in California for the past 30
years, using the same fuels, and with the same pollution
emissions profiles.
But the practice of physical and economic withholding
continually puts California on the ragged edge. Any shortage of
generation to meet demand has been due to the failure of the
merchant generators to provide sufficient supply, and the
failure of past administrations to require that electricity
supply be built. Prior to restructuring, California added over
15,000 megawatts of new generation from 1980 to the mid-1990's.
In addition, thousands of megawatts were obtained from
aggressive conservation programs and new interstate
transmission lines.
During the 1980's, California added power plants,
notwithstanding our appropriate environmental requirements that
were then in place. However, all this development stopped in
the mid-1990's when California, under the Wilson
administration, unwisely decided to depend on the competitive,
unregulated market.
Under Governor Davis, California is now taking every action
to expedite the development of new generation. We are
restarting long-retired utility power plants; we are providing
incentives for distributed generation and renewable energy
projects; we are streamlining the permitting of large power
plants that are much more efficient and cleaner-running than
current plants. We are obtaining waivers from Federal
regulators to allow qualifying facilities to increase
generation capacity, and California is making a historic
commitment of ratepayer and taxpayer moneys to provide $1.5
billion in energy efficiency incentives to our businesses and
families so that we can use electricity as wisely and as
effectively as possible. California's energy efficiency
commitments dwarfs comparable Federal commitments.
However, all these changes under Governor Davis may not be
sufficient to stem our problems we are facing this summer,
particularly in light of suppliers' ability to withhold
generation capacity. You know, we are experiencing the
application of a strategy that was clearly articulated years
ago by the merchant generators. And I would like to quote. ``We
have a lot of experience dealing with summer peaks in
dispatching plants.'' This is a quote from Mr. Oglesbee, who is
President of Reliance Marketing Subsidiary. He says, ``When you
operate on a merchant basis and sell into a power exchange, you
can watch the price climb during the day. We might decide to
hold our plant off the market at 12 noon, even if the price
looks favorable, because we can get a better price at 4 p.m. We
think we know a little bit about what will happen if we hold
our plant out a few hours. We can play on that expertise.'' And
my testimony has the quote from Mr. Oglesbee.
What we realize is that the merchant generators will hold
California over a barrel unless the Federal regulators do their
job. The Federal Power Act provides for cost-based rates. The
act requires just and reasonable wholesale rates, or else,
under the statutes that Congress passed, those rates are
unlawful. Where market power exists, all sellers must have
cost-based rates. One part of the answer to California's
dilemma is to move back to cost-based rates as quickly as
possible, given the market that even the FERC calls
dysfunctional. The Federal law requires it. If FERC is
unwilling to enforce the laws on its own that are currently on
the books, the Congress should direct the FERC to do so.
I have additional testimony. I see my time is running
short, so I would like to wrap it up. But I would like to be
open to questions, especially about long-term contracts,
because the committee had asked specifically for testimony
about that. But I would like to address one final issue, which
is the cost of natural gas in California. Wholesale natural gas
is twice as expensive in California as anywhere else. This is
entirely a function of the cost and lack of availability of
interstate transportation.
Again, the practice of withholding and price gouging, the
classic symptoms of unlawful market power of the kind the
Natural Gas Act was intended to prevent, is victimizing
California without a remedy from the FERC. The remedy here is
for Congress to require the FERC to reverse its ill-considered
2-year regulatory exemption of the natural gas secondary
market, and to re-regulate the secondary market for natural gas
transport so that the infrastructure that consumers have built
and paid for is fully utilized.
Many fingers have been pointed over California's energy
crisis, but the cause is simple and fundamental. The Federal
market cops decided to leave the beat, leaving the market
completely unattended. The Nation has seen this situation play
out before in the 1920's, when electricity and natural gas
providers kept the whole Nation over a barrel. That gaming and
gouging led to the 1935 Federal Power Act that Congress passed,
a statute that was designed to protect businesses and consumers
from sellers who possessed market power. We face that situation
again today, and Congress should require FERC to enforce the
Federal statutes already on the books.
Mr. Ose. Ms. Lynch, we are going to wrap up your----
Ms. Lynch. Sure. I have submitted testimony with several
documents----
Mr. Ose. You have testimony?
Ms. Lynch [continuing]. Responding to the questions the
committee had asked me to prepare.
Mr. Ose. We will submit your written statement for the
record. We appreciate your giving it to us.
Our next witness is Mr. Terry Winter, who is the president
and CEO of the California Independent System Operator. Mr.
Winter, I have been kind to Mr. Madden and Ms. Lynch, but I am
going to give you 5 minutes.
Mr. Winter. That is not unusual for me.
Mr. Ose. All right.
[The prepared statement of Ms. Lynch follows:]
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Mr. Winter. Thank you, Mr. Chairman and Members of the
Congress.
First off, I would like to explain what the ISO does. We
are the operator of the transmission system, and we take
schedules. We are not always privy to what all the prices are.
Many bilateral contracts go through us that we never see, so
oftentimes people are asking us to identify what all the costs
are. We have no way of doing that. Our job is to perform the
scheduling on the system, and to ensure that it operates
reliably. And last but not least, we are the ones that, in the
end, if there is not sufficient supply and we must interrupt
firm load, we are the ones that make that order.
There are four things that I would like to very briefly
talk about and try to stay within my 5 minutes. The first, a
comment on the bankruptcies that we have now faced; second is
today's operation, what we go through; third is the summer load
that we are looking forward to and fourth, market costs.
My statement on bankruptcy is that one of the things that
the operator needs desperately is some stability to what is
going to happen during the day. And because of that, I think it
is incumbent upon us to make sure that these companies that
have moved into bankruptcy continue their attention on the
operation, and I believe PG&E's first motion was to ensure that
their employees would be paid, etc. I think that is a good
start. But we also have many plans for transmission lines that
they are building at the current time, and we need to ensure
that they have the financial wherewithal to continue that
building, because that will be part of our solution to serve
the customers and the ratepayers of California.
Today's operation, I do not think I can begin to explain to
you all, without an hour or two, or actually have you out
there, what it means to come in at 7 a.m. and sit down with the
operators who are facing a 5,000 to 7,000 megawatt shortage
that day as they move into their 7 a.m. timeframe. That means
at that point we have to go out into the market and beyond the
market to get all available generation. We face that every day.
And this summer we had periods when we were actually 16,000
megawatts short.
Looking forward to this summer, forecasting is always a
dangerous business, but I will tell you that we have done a
rather pessimistic report, which we are paid to do, quite
honestly, because we have to consider some of the worst cases.
But that shows in June that we will be about 3,700 megawatts
short on peak. Now, that decays as we move on into the summer
because of new generation. There is approximately 2,500
megawatts of generation that will be coming online in July and
August of this year, so it moves down to around the 600
megawatt timeframe or level.
But it should be noticed that, while we have not factored
in things like conservation and the impact that increased
prices will have, we also, on the other side, have not looked
at the worst possible heat, summer, we have not looked at the
worst possible situation of import from out of State. To give
you an idea, in 1999 we were importing 9,000 megawatts from
other States. Last year we were importing between 5,000 and
6,000. Right now, I am extremely lucky if I can get 1,000 to
1,500 from out of State. And what that has resulted in is that
we have to run in-state generation about 20 to 30 percent more
than we ever have in the past.
Moving on to markets, we were constantly asked how much we
felt the market was being paid above what would be a normal
competitive hourly rate in normal markets. Our figures show
that there is a little over $6 billion cost that we cannot
explain either through scarcity, cost of natural gas, cost of
higher emissions, etc. We have filed those reports with FERC,
and hopefully they will be able to review those and make their
findings on those, because we do not always have all the
information. But just in broad figures, that is about a 35
percent increase over what we would expect in competitive
markets, which allow for a portion of it to be paid above cost
base just because of the lack of supply.
With that, I will stop and hold to my 5 minutes.
Mr. Ose. Thank you, Mr. Winter. The trap door will not open
underneath you. [Laughter.]
Our final witness is Mr. Larry Makovich, who is the senior
director at Cambridge Energy Research Associates. Mr. Makovich
for 5 minutes.
[The prepared statement of Mr. Winter follows:]
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Mr. Makovich. Thank you. When California passed its
restructuring laws 5 years ago, it set a goal to move from
regulation and toward the market. California would still
benefit from a move to a market that works. Unfortunately, the
power market in California was set up with serious structural
flaws right from the start. These flaws made it neither
possible nor profitable to build power plants when needed.
These flaws were a siting and permitting process that creates
costly and time-consuming barriers to new power plant
development; a power market that paid generators to utilize
their power plants, but did not pay them enough to have
capacity in place to meet peak demand and retail prices that
were delinked from wholesale prices. And by disconnecting the
demand side from the market, it put utilities in an
unsustainable position that has resulted in bankruptcy and
supply reduction.
The flawed market design was the first problem, but an even
greater problem has been the complacency demonstrated when the
evidence that the market flaws were playing out and creating a
shortage. In answer to Congressman Burton's question, ``Was
there evidence that this shortage was happening?'' The answer
is clearly yes. The California economy grew 32 percent over the
past 5 years, electric consumption grew 24 percent, and power
generating capability declined. No one did anything year after
year, while the State failed to site and permit the 1,200
megawatts needed each year to keep supply and demand in
balance.
California ran out of capacity because it never set up a
market to supply it. From 1996 through 1999 the California
power market passed from supply surplus, to supply and demand
balance, to a supply shortage, and the market clearing prices
in California were clearly too low to support enough timely
investment. California made a deliberate mistake to expect that
the energy market alone, through either spot prices or energy
contracts, would keep power demand and supply in balance in the
long run. No other power market set up around the world relies
solely on an energy market. California's energy market, as set
up, did the job it was supposed to do. Prior to the shortage,
the energy market was very competitive, paid generators to
utilize their power plants efficiently, kept supply and demand
in balance in the short run. But to do this, it had to clear on
variable costs alone. The average annual wholesale price for
power ranged from $14 to $31 per megawatt hour from 1995 to
1999. This is a level that is half of what is necessary to
support new power supply development.
Clearly the market needed to pay for capacity to provide an
additional timely payment to attract investment; however, the
majority of stakeholders who set up the rules in California
decided not to pay for capacity as long as reliability is free.
What needs to be done in California to solve the problem falls
into two categories; short-run actions to deal with the crisis
and long-run actions to fix the market.
In the short run, California needs to connect wholesale and
retail prices. It needs to reduce power demand, and it needs to
focus on developing new power supply. The question is, are
there signs that things are being done? If 5,000 megawatts of
diesel-fired generation is not being coordinated and plans
being made to synchronize in that grid, there is clear evidence
that the efforts needed to relieve this problem in the short
run are not being done. Testimony has also made it clear that
there needs to be flexibility in environmental regulations that
are currently limiting power supply.
In the long run, California needs to fix its market. It
needs to establish a capacity market by mandating a capacity
requirement and enforcing a deficiency penalty. It needs to set
and enforce target levels of siting and permitting for new
power plants, and meet those year after year. And it needs to
create an independent and expert board to govern the market
rules.
The signs are again clear. California is doing only some of
what needs to be done, and many current policies are not
working. Keeping retail and wholesale prices delinked have led
to bankruptcies, it has kept thousands of megawatts out of
supply. Using the State's time and effort and resources to take
over the transmission grid will further distort the market, and
is taking the efforts away from increasing supply.
The Department of Water Resources moving to long-term
contracts at the top of the market is a mistake. These
contracts have allowed California to push the recovery of
current costs into the future. California will regret signing
these commitments in the years to come.
In addition, barriers to new supply remain. Even with all
the attention and hoopla focused on new supply, we are looking
at about 1,300 megawatts from last summer to this summer of new
supply, which is just about enough to offset 1 year's growth.
The Federal Energy Regulatory Commission is also making
mistakes in the way it is setting price caps. It is creating
the perverse incentive not to run power plants at peak demand.
California needs to realize it competes in a worldwide
market to attract capital for power development. It has created
a negative and hostile environment to that investment, and it
is moving to a very expensive and expansive public power
entity.
[The prepared statement of Mr. Makovich follows:]
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Mr. Ose. Thank you, Mr. Makovich. I would like to recognize
Congressman Horn to initiate questions for 10 minutes.
Mr. Horn. Just a few to clarify a few things. President
Lynch, as chairman of the California Public Utilities
Commission, I am sure you did look at this whole situation over
time. Did you ever work for the California legislature at all?
Ms. Lynch. I did.
Mr. Horn. You did? Was it at the time they were talking
about deregulation?
Ms. Lynch. No.
Mr. Horn. When did they first discuss deregulation?
Ms. Lynch. Well, they passed the bill in August 1996. I
believe they were talking about it for a while before.
Mr. Horn. Right. And as I remember, Steve Peace was the
leader of that.
Ms. Lynch. I believe that Senator Brulte is the author of
the legislation.
Mr. Horn. Really? Well, I guess everybody else saw it as
Peace, who was a Democrat, and every single Member, Democrat
and Republican, voted for that, I believe, as I remember the
vote.
Ms. Lynch. I was not there.
Mr. Horn. OK, you were not there. Well, Mr. Chairman, let
us get what the truth of it is in the record at this point as
to did they all agree to it or did they not. But as I remember,
they all agreed to it on deregulation.
Mr. Ose. If the gentleman would yield.
Mr. Horn. Yes.
Mr. Ose. It is my understanding that AB1890, which is the
legislation that implemented the restructuring, was at least in
part authored by then Assemblyman Brulte, and that Senator
Peace carried it in the Senate.
Mr. Horn. OK.
Mr. Ose. And, that it was adopted unanimously.
Mr. Horn. And it was adopted.
Mr. Ose. That is my understanding.
Mr. Horn. That is right.
Mr. Ose. We can check it out.
Mr. Horn. So, that is one thing to clarify. Let me ask you
about the situation, and we have a letter here from the law
firm Swidler, Merlin, Sherif, Friedman in Washington. Is that a
representation of the public utilities? I am just curious. We
have a letter from them, and I just wondered do they speak for
the California Public Utilities Commission?
Ms. Lynch. No, we have our own independent legal staff.
Mr. Horn. In Washington?
Ms. Lynch. No, in California.
Mr. Horn. I see.
Ms. Lynch. And we have----
Mr. Horn. Because we are talking about the Federal side,
and I just wondered if you kept counsel on the Federal side.
Ms. Lynch. No, we have State employees who are lawyers, who
represent the California Public Utilities Commission in
Washington at the Federal Energy Regulatory Commission.
Mr. Horn. But, let me tell you what worried us, the $6.7
billion were presumably potential excess cost. Now, the fact
is, when you put all the figures out, you are talking about 6.7
total overcharges for the independent systems operator, and the
power itself, including ancillary services, from May 2000 until
February 2001, that is 8 months. And $4 billion of the $6.7
billion is from that, say a lot of people. I would like to know
what Mr. Winter says on this. $3.1 billion is from the Federal
commission and jurisdictional sellers, and then $1.3 billion
occurred between October 2000 and February 2001, and that was
several months. Mr. Winter, could you untangle this as to who
did what to whom, and what it boils down to?
Mr. Winter. OK. So that it is clear, Swidler is the
representative of the ISO in Washington, DC, and does our
filings with them.
The report you are referring to was our comments to the
FERC market monitoring program. If you look at the numbers, the
first thing we were asked to do was to look at the total
wholesale energy cost, excluding the utilities. And of that, we
found that there was about $6.2 or $6.7, whichever number you
referred to, that was what we would consider to be what you
would expect if you had a working market. In other words, if
you had a market that was working, and had hourly prices, you
would expect a certain price. The price that Californians paid
was $6.7 billion above that number.
Now, that number is made up of several components, one of
those being bilateral contracts that we do not have any
knowledge of exactly what is included in those. So that is of
the total savings, about $2 billion was extrapolated from what
we saw in the market, which leaves us the $4 billion that is
over--you used the term ``overcharged.'' I would say above
market prices. Of that, a portion was the PX, part of it was
the ISO real-time, and part of it ancillary services. The PX
energy we have a good feel for, because as they were running,
they had rates that were open to us, and so we could review
those.
If you then break that $4 billion down, it amounts to
approximately $3 billion that is in the jurisdiction of FERC,
and about $1 billion that is non-jurisdictional. OK, now, if
you go to the timing, because there was a lot of debate over
when FERC could or could not do certain things, and if you look
at the timeframe from May through September--and May is when we
saw the cost start to go up--May through September, FERC
jurisdictional was about $1.7 billion. FERC jurisdictional for
the months of October through February was $1.3 billion, for a
total FERC jurisdictional for that timeframe of $3 billion. So,
I can submit this document. It is all in the report. And I
assume that is what you are reading from those.
Mr. Horn. Well, that is right. It seems to me that $1.3
billion occurred between October 2000 and February 2001, and
you say that is accurate?
Mr. Winter. Yes.
Mr. Horn. OK. Is there anything here that is not accurate?
Because one thing is that the Federal commission has a very
small role compared to the State commission.
Mr. Winter. Well, I would not classify it as not accurate.
The one we do not have information on are the bilateral
contracts that are done outside of our knowledge.
Mr. Horn. Now, who would know what those contracts amounted
to?
Mr. Winter. The entities who entered into them, which were
the generators and the utilities, and later on, of course, the
Department of Water Resources.
Mr. Horn. Well, did they file a document anywhere?
Mr. Winter. Not that I am aware of, but I would not be the
expert on that.
Mr. Horn. Well, between the two of you, you ought to know
whether it is Federal, State, or what. Or do they have to do
anything? It just seems to me somewhere a regulatory commission
ought to know what those amounts were.
Mr. Winter. I would assume that FERC can get that
information, but we do not have it.
Mr. Horn. Well, how about it, Mr. Madden?
Mr. Madden. Well, Congressman Horn, you asked a very
interesting question. The six point----
Mr. Horn. Usually when somebody says that, I give them a
``C'' as a student. So, as a former professor, is this going to
be more than interesting? [Laughter.]
Mr. Madden. It is going to be more than interesting.
Mr. Horn. OK, that is what we want.
Mr. Madden. Using the $6.2 billion that the ISO submitted,
I think around March 22nd, as a basis for people to read as
excess refunds due consumers is somewhat shaky. We asked the
ISO last week to provide us the details. What you have to
understand is that the $6.2 billion covers a period from May
2000 through February 2001.
Mr. Horn. Eight months.
Mr. Madden. It also includes non-jurisdictional money. And
those are sales made by municipals or co-operatives such as
Sacramento Municipal Utility District or Los Angeles
Ddepartment of Water and Power or Federal Power Marketing
administrators in the northwest, or other entities over which
we do not have jurisdiction. We find for the first time that
approximately $2 billion is associated with bilateral
contracts, which is not subject to our refund order. We were
dealing with a realtime market.
So, Congressman Horn, to get to the bottom line, FERC asked
the ISO to provide us the detail necessary to explain why or
how they arrived at the $6.2. Today, for the first time they
are trying to carve out the $6.2 billion. We can require the
jurisdictional sellers--the jurisdictional sellers and the
public utilities--to provide us that information. We have sent
a data request to the ISO to provide us that information
relative to both the jurisdictional and non-jurisdictional.
Mr. Horn. So you have no problem with asking for those bits
of information?
Mr. Madden. I have no problem at all, sir.
Mr. Horn. OK. Do you think the State commission ought to do
that, also?
Mr. Madden. Well, these are wholesale costs. They will be
submitted to us. Of course, the California Public Utility
Commission can provide its response, and I believe it has to
some extent with respect to the ISO filing. But they are
welcome to provide the comments, once the ISO provides us with
the information we have requested.
Mr. Horn. President Lynch, is your Commission going to ask
for the ISO information?
Ms. Lynch. We do have the ISO information. I applaud Mr.
Winter's cooperation, now that we have new members of the board
who are not stakeholders and not self-interested in the board.
We had quite a bit of trouble, as an entity of the State of
California, obtaining basic information from the ISO and the
sellers in the fall, and we had to apply to FERC for help in
getting that information, but we did not receive that help. But
now that we have disinterested members on the ISO, after the
Governor and the legislature changed State law, we have had
much more cooperation.
You noted, Congressman Horn, that the FERC has a small
role. Actually, I think the FERC has the whole ball game
because they control wholesale prices. We can ask for the
information, and fight in court with the generators over
receiving it, but we cannot impose price rationality in the
system. That is entirely FERC's jurisdiction as the Federal
regulator.
Mr. Horn. Is that correct, Mr. Madden?
Mr. Madden. We have total authority over the wholesale
rates, that is correct. We have requested that information from
the ISO, and if we do not get the full details, we can and will
request the information from the individual generators to the
extent they are jurisdictional.
Mr. Ose. Well, would you yield for a minute?
Mr. Horn. Yes.
Mr. Ose. Well, let me just--let us just jump in here. Mr.
Winter, can you give the information to Mr. Madden, so we can
cut this out?
Mr. Winter. Yes. I find this very interesting, but I will
not comment on that. Yes, they have the information that we
have. The interesting thing is that we have no authority to get
from the generators what their actual costs were, so all we can
do is present to FERC our suspicions. Now, FERC is the one that
has the authority to go to the generator and say justify your
rates.
Mr. Ose. OK, so we can get the information that you have to
Mr. Madden?
Mr. Winter. That is no problem. It has already been
submitted.
Mr. Horn. And then I think President Lynch was going to
note something here. You started a breath there, and I assume
that is a paragraph, so what is--well, how do you feel about
that?
Ms. Lynch. I think the important conclusion is that the
ISO, using all of the information that was available to it,
under the most conservative assumptions, found that the sellers
overcharged Californians over $6 billion in less than a year.
You know, in 1999, California paid $7.4 billion for power--for
electricity. In 2000, we paid over $27 billion for electricity.
That is $20 billion more in just 1 year for a 2-percent
increase in demand. And to paraphrase David Freeman, even a
blind pig can figure out that there is price gouging in that
kind of market. But it does fall to FERC to demonstrate--to
identify the gouging.
Mr. Horn. You mentioned stakeholders, and how they have
gone down to five from what you called, interested parties.
Tell me about how that worked. Did you make recommendations to
the Governor and advise him that, look, these people are just
doing something for themselves?
Mr. Ose. Mr. Horn, could we have a second round of
questions?
Mr. Horn. OK.
Mr. Ose. All right. We will come back to that. I would like
to recognize Chairman Burton for 10 minutes.
Mr. Burton. Do you have the information from the generators
that Mr. Winter alluded to?
Mr. Madden. I do not know all the information that Mr.
Winter alluded to. We have requested information from the
generators from the January-February period in which we
established a $124 million refund. We asked them to provide us
with the cost data or accept the refund numbers. As to the
October-November period, we have sent out a data request to the
generators asking for cost data.
Mr. Burton. Well, how long do you give them to get that
information back?
Mr. Madden. Seven days in one case.
Mr. Burton. Seven days?
Mr. Madden. Seven days.
Mr. Burton. And when did you send the request out?
Mr. Madden. We sent the request out for the October-
November period last week.
Mr. Burton. Why did you not do that before that?
Mr. Madden. The December 15th order that the Commission set
which established the section 206 procedding required us first
to look at the January to April period where we established the
break point--a $150 review for megawatts. So, we focused on
that first. We are now turning our efforts to the October-
December period.
Mr. Burton. It seems to me--of course, I am a novice at
this--that you ought to kick it into high gear and get that.
Mr. Madden. Mr. Chairman, we are. We just had different
rules apply in that period.
Mr. Burton. We will talk to the head of the agency and find
out why this is not getting done quicker. I mean, there is a
problem out here that needs to be solved, and I think there is
enough blame to go around.
Ms. Lynch, you said, or maybe it was Mr. Winter that said
that there was anticipated a shortfall peak in June of around
3,700 megawatts.
Mr. Winter. That is correct.
Mr. Burton. Is that right? And that it might go down to 600
megawatts shortfall around September.
Mr. Winter. Correct.
Mr. Burton. Have you taken into consideration the 5,000
megawatts that could be produced through diesel power that is
supposedly sitting around someplace in this State?
Mr. Winter. Yes, that number was a little bit of a surprise
to me. I was----
Mr. Burton. Why is it a surprise to you?
Mr. Winter. Well, because I know that there is generation,
but we do not look at emergency generation.
Mr. Burton. Why?
Mr. Winter. Well, for two reasons. No. 1 is the operator.
Let us say you have a hospital that has a 50 megawatt--or let
us say it is a 10 megawatt generator. That generator only
serves the operating room. And so----
Mr. Burton. Excuse me. Let me interrupt. It just seems to
me that, under the circumstances that you face here in
California, you would get on the stick and find out where all
that emergency power is so it could be utilized as quickly as
possible when an emergency arises. And to start saying that you
have not done that or you have not checked, you do not know
what hospital is doing it and all those other things--now,
obviously the hospital is going to use it for their own
purposes in the event of a blackout. But according to the
people we had on the previous panel, there is 5,000 megawatts
of power out there someplace that could be utilized, and when I
look at what you are looking at here next year or this summer,
you are 3,700 megawatts short. And you do not even know if that
5,000 megawatts is going to be figured into the equation. If
that is out there, then you have got a problem that can be
solved. If it is not, then you can do something else. But, you
cannot tell us anything today.
Mr. Winter. Well, what I can tell you is that even if you
could identify 5,000, it is my belief that the majority of it
would never be turned on because what the entity who has that
generation would have to do is shut off half their business
while they turned on just the emergency operating room.
Mr. Burton. But, how do you know that?
Mr. Winter. Well, because I have been in the business for
40 years and I know----
Mr. Burton. But have you looked into it? I mean, have you
really done an analysis of it.
Mr. Winter. Well, no, we have not done an analysis.
Mr. Burton. Well, do you not think you should?
Mr. Winter. I believe that the Energy Commission is looking
at those numbers, as is the Governor's people, and when they
identify how many megawatts are there and we can identify how
many could actually solve the problem as opposed to not solving
it, then we certainly would figure that into our equation.
Mr. Burton. I do not know how everybody else feels, but I
feel like everybody is pointing the finger at somebody else,
and everybody is not doing the things that ought to be done to
make sure that they have a complete analysis of where energy
is, where alternative sources are, so they can get the job
done, if possible, with what is out there. And you really do
not know where the 5,000 megawatts they alluded to in the
previous panel are. You say that it is probably in hospitals
and every place else, but you really do not know.
Mr. Winter. That is correct, I have not looked at it.
Mr. Burton. But you will try to find out?
Mr. Winter. Certainly.
Mr. Burton. Do you know how long that will take?
Mr. Winter. Well, I think the information resides in the
Energy Commission, and so we will go----
Mr. Burton. Can you talk to them tomorrow and find out?
Mr. Winter. I can talk to them tomorrow.
Mr. Burton. That would be great.
Now, let me just ask you a question, Mrs. Lynch. Last
summer, according to the records here, in April it was $26.56
per megawatt, right?
Ms. Lynch. I do not know what you are referring to.
Mr. Burton. This is the chart you gave us.
Ms. Lynch. Right, that is the average chart from the PX.
Mr. Burton. OK. So that is what it was per megawatt in May?
Ms. Lynch. On average.
Mr. Burton. OK. That was in April. And then in May it
jumped to $47.22, right?
Ms. Lynch. On average, that is correct.
Mr. Burton. On average. Well, about that time you had an
offer to buy electricity at 5 cents per kilowatt hour, you did
not buy it. Why?
Ms. Lynch. Well, the Public Utilities Commission does not
buy power, the utilities do. What the Public Utilities
Commission does do is authorize the utilities to buy power.
Mr. Burton. Did you authorize it?
Ms. Lynch. Absolutely. Since I have been on the Public
Utilities Commission, the utilities have asked 10 times for
authority for bilateral or forward contracts, or the authority
to participate in hedging products. Every single time the
Public Utilities Commission has allowed the utilities to do so.
Mr. Burton. Well, why did they not buy the electricity or
sign the long-term contract for 5 cents per kilowatt hour?
Ms. Lynch. I do not know the offer you are referring to.
Mr. Burton. You do not know?
Ms. Lynch. I know that many offers were made at various
points in time. I do not know a specific offer made in May of
2000.
Mr. Burton. But looking at the jump, there was a quantum
leap from April through--it almost doubled in May, and then it
was more than double again in June, and then it continued up
from there. What was the situation? We are going to talk
tomorrow in San Jose to some of the utilities. But the reason
they did not file for that was because there was so much
interference from the staff at the Commission. That is not
true?
Ms. Lynch. All I know is, every single time they asked for
authority, we gave it to them. And in fact, the facts show
that----
Mr. Burton. Did you give it to them in writing?
Ms. Lynch. Oh, absolutely.
Mr. Burton. Can I get copies of that?
Ms. Lynch. Certainly. August 3rd we said you buy your full
net short, your choice, your business decision, and the
utilities in fact did purchase bilateral contracts. We moved
with lightning speed. They asked us on July 21st for authority,
and we turned it around in 2 weeks and gave them full authority
2 weeks later. Then they started to buy, and they bought in
August, in September, in October, in November. So I believe it
is a canard to say that we stood in their way, because the
facts show differently.
Mr. Burton. They were buying at what rate?
Ms. Lynch. They were buying at whatever rate they chose.
Mr. Burton. I guess I am missing something here. There was
an offer for long-term contracts at 5 cents per kilowatt hour.
And you are saying that they did not purchase it, they did not
sign agreements for that. Why would they not do that?
Ms. Lynch. No, that is, I believe, Mr. Chairman, what you
said. I do not know the specific offer you are referring to,
because the utilities receive dozens, if not hundreds of offers
in a month.
Mr. Burton. So, I need to address that question to the
utility, themselves?
Ms. Lynch. I believe so. What the Public Utilities
Commission did was give the utilities the authority to expand
their business choices. They expanded their business choices to
the full limit, and the utilities actually took advantage of
some of that authority.
Mr. Burton. Well, there is a difference of opinion, and we
will get their side of the story tomorrow. They have said that
the problem was that they could not get through the red tape or
could not get through the staff at your office. But we will
check into that tomorrow.
I have more questions, Mr. Chairman, for the record. And I
would like to ask some of those on the next round.
Mr. Ose. We will come back.
Mr. Burton. Thank you.
Mr. Ose. Thank you, Mr. Chairman.
Mr. Winter, I want to examine something here that troubles
me greatly. Ms. Lynch, in her written testimony, talks about a
December 8th order that you obtained from FERC eliminating
price caps. December 8, 2000, and describes it as a secret
order. Is that an accurate description?
Mr. Winter. I think that is a little over-dramatic, but----
Mr. Ose. How would you describe it?
Mr. Winter. The way I would describe it is, on Wednesday of
that week the prices--we have a situation where we had a price
cap of $250. And what was occurring was that we quickly reached
the $250, and people were then not selling us power until they
would call us on the phone and say I am willing to give you the
power, but the price is $300. When we make and go above price
cap, what we are making is a bilateral agreement between the
market and the ISO committed to that $300 price. We were
completely inundated, because the price of natural gas at that
time was rising to the $40, $50 at burner tip, and we could not
get power into the system. So on Friday, what I did was, so
that we could put these prices that we were having to pay under
review of FERC, I did not remove the price cap, what I said was
any money that we paid above the $250 price cap would now be
subject to FERC review. Because I was already in the position
that I was having to pay those to keep the lights on. So, that
is what we did on the December 8th timeframe. We immediately
filed that at FERC, and they turned that decision around that
day and gave us authorization to make that part of our market.
Mr. Ose. Were there parties who were excluded from that
process? I mean, I am trying to reconcile your statement with
Mrs. Lynch's testimony.
Mr. Winter. Yes, I think we moved extremely fast. There is
no doubt about that. Because I was in a situation where I
literally could not make the phone calls that I had to in the
operating room, and I would not have had the power. Therefore,
I made the emergency filing with FERC and enacted it the next
day.
Mr. Ose. Mr. Madden, your recollection is consistent with
that?
Mr. Madden. My recollection is almost consistent with that.
They made an emergency filing on that day saying that they
needed power and they could not get the power at the $250 hard
cap. They asked for a soft cap, in which to bid the prices. We
have authority, under section 205 of the Federal Power Act, to
waive the notice of provisions in situations like this. The
Commission acted very swiftly on the filing, very swiftly, and
issued the order so that the ISO could get power that day and
the next day.
Mr. Ose. Ms. Lynch, is it the word secret that is causing a
problem here? Your testimony says that this was a secret order,
and I am trying to find out how we get some collegiality, if
you will, or call it whatever you want, in this process.
Ms. Lynch. We found out about it after it happened. And as
the head of an administrative agency, one process that I take
extremely seriously is the requirement for public notice and
comment. I think that is a fundamental tenet of due process
that is required by the U.S. Constitution. And what happened
there was a private entity, the ISO--actually the head of a
private entity, without consulting or getting a vote of the
board in a public process, went to FERC and privately asked for
an emergency order. And FERC, without notice to a single
California policymaker or elected official, granted that
without the opportunity for anyone else in California to even
comment, much less object.
Mr. Ose. How do you reconcile that situation with the
Governor's refusal to disclose information on power contracts?
Ms. Lynch. The difference is the FERC is required to act
under the Administrative Procedure Act, according to its
process. The Governor is--or the Department of Water Resources
is essentially in a market where arbitragers have the
technological capacity and the expertise to take advantage of
small bits of information in order to disadvantage California
ratepayers. So, if you are in a business transaction where you
are bidding against a bunch of other bidders, you want to make
sure that the other bidders do not know the terms of your bid,
because then they can outbid you. Essentially, Department of
Water Resources is now in the business of buying electricity,
and in that business situation, you do not want to hand over
all the cards you possess to your business competitors. The
difference here with FERC was that they were acting in their
administrative capacity as a regulator, yet they failed to
follow even the basic tenets of due process or notice.
Mr. Ose. I cannot quite understand the difference, from a
public policy standpoint, if you will, from ISO's action as you
described, in a secret manner, that redounds to the adverse
impact of California consumers and the inability of California
taxpayers, from a public policy standpoint, getting information
from the Governor's office about these contracts for forward
delivery of power that uses taxpayer resources. I am afraid I
am just a businessman, I am not an attorney. I do not quite
understand the difference.
Ms. Lynch. Well, certainly FERC failed to follow its
Federal statutes and administrative mandates such that its
action should be entitled to deference. Because if you fail to
follow the process and do not allow any other comment, then
your action should not be entitled to deference.
But as a business person, I am sure you know the cutthroat
world of business when you are competing on a price point or on
a term of a contract. Notwithstanding that, DWR does not have a
statute in which it failed to follow in competing in the
business world to get the best price for California consumers.
However, DWR has said that when that information is no longer
business sensitive, it will provide that information to the
public. The problem here is why should we put all of our cards
on the table and allow the same sellers, who have continued to
gouge the California utilities, to gouge the State.
Mr. Ose. Mr. Madden, do you share the differentiation that
Mrs. Lynch is describing here?
Mr. Madden. I do not share that differentiation,
whatsoever, and I would like to correct the record. The Federal
Power Act, section 205, gives us full authority to act on a
filing such as the ISO made that day without notice and without
opportunity to comment. We followed the statute. It was an
emergency situation. The ISO needed additional power.
Mr. Ose. I want to move on to another subject.
Mr. Horn. Could I, before----
Mr. Ose. Certainly, Mr. Horn.
Mr. Horn. I would like to follow this up a little and get
the public administration aspects of it. Mr. Winter, who
appointed you to the position of independent system operator?
Mr. Winter. That was under AB1890. It is a not-for-profit
corporation formed under the authority of AB1890, and under the
corporate laws of California.
Mr. Horn. And who appointed you?
Mr. Winter. The board at that time.
Mr. Horn. Which board?
Mr. Winter. We had a stakeholder board.
Mr. Horn. The original stakeholder board?
Mr. Winter. That is correct.
Mr. Horn. And there were what, 28 people on it?
Mr. Winter. 27, 28.
Mr. Horn. 27, 28. And the law then, which is a State law,
had certain categories, I assume. Consumer, term----
Mr. Winter. Yes. It was an attempt to be in a balance
between consumers, suppliers, utilities, municipalities,
generators, all of those were on the board.
Mr. Horn. Did the Governor at that time make all of those
appointments, or did the board meet and make the appointments,
up to 28 or so?
Mr. Winter. The way the process worked was, the State
appointed an oversight board, and it was their responsibility
to take the candidates and approve those, and then those were
sent on to FERC for approval.
Mr. Horn. So, in this case it was Governor Davis, was it,
that put the people on----
Mr. Winter. No, I believe that was done in the 1997
timeframe, the first board.
Mr. Horn. Well, is that Governor Wilson or who?
Mr. Winter. I believe it was during that timeframe.
Mr. Horn. OK. Somebody has to appoint them if they are not
voting each other in.
Mr. Winter. That is correct.
Mr. Horn. OK. So that is the way it worked?
Mr. Winter. Right.
Mr. Horn. The legislature passed a law. The sitting
Governor complied with the law and put in certain people.
Now, the next Governor was worried, in the words of Ms.
Lynch, with the interested parties maybe were too interested.
So, they left five stakeholders there. And as I remember, he
took the consumer person and left them there.
Mr. Winter. Yes. Actually, the existing stakeholder board
all retired, and the new board was appointed. Only one member
of that new board was a past member of the old board.
Mr. Horn. And that was presumably the consumer
representative; is that correct?
Mr. Winter. That was the consumer representative.
Mr. Horn. Yes. The other four had no previous experience
with electricity issues is what has been said. Is that true?
Mr. Winter. I do not know whether they have experience with
electric issues or not. Certainly they did not come from the
energy side of the business.
Mr. Horn. Well, some think that when the Governor took
everybody away except the consumer representative, that he
brought on people in the middle of a crisis without any
expertise to deal with it. Do you agree with that or what?
Mr. Winter. No. I think the board's position is to rely on
their staffs to get up to date, and this board clearly has
spent the time and the effort to get current on energy issues.
Mr. Horn. So those staff members--how many staff members
were there?
Mr. Winter. I am not following staff members.
Mr. Horn. Well, how many staff members came with the
stakeholders' board, with the legislation authorizing that
board, and was that also the board members, or was it the
Governor? Because obviously another Governor felt that they
served at his pleasure, which is often the way Federal boards
are in Washington. So I am curious who picked the staff.
Mr. Winter. Well, when you say staff, the staff of the ISO?
Mr. Horn. That is right, the stakeholders' group and the
ISO stakeholder board.
Mr. Winter. Well, the stakeholder board picked the
officers, who then, of course, selected the staff down through
the organization. When the new board came in, it is their
responsibility, of course, they had the choice of removing me,
if that is what they wanted to do, and clearly they could
change any of the staff people that they so desired.
Mr. Horn. Let me ask you, Ms. Lynch. Did you help staff the
board, because you are very close to the Governor, obviously?
So, who put the board together, and who put the staff together?
Ms. Lynch. I run the Public Utilities Commission, which is
a State entity. The Independent System Operator is a private,
not-for-profit corporation which is not a State entity.
However, the Governor, under AB5X, which was passed in January,
does appoint a financially non-interested five-member board.
So, the difference there was that anyone who could have a
financial interest or was employed by someone who could have a
financial interest in the decisions made by the ISO could not
then serve on the ISO board.
The Governor appointed five independent members of the ISO
board pursuant to AB5X. One of them was Michael Kahn, who was
the past chairman of the Electricity Oversight Board of the
State of California. And I would take issue with Mr. Winter
that Mr. Kahn has considerable energy expertise forged in the
heat of the recent crisis, and certainly is one of the premier
experts on this issue and on the failures of the restructuring
experiment in California.
In addition, Mr. Guardino, who is the executive director of
the Silicon Valley Manufacturers Group, I believe has made it a
special expertise of his to understand just exactly how this
energy crisis is affecting the Silicon Valley, and the key and
critical component of California's business. So I think that
Mr. Guardino also has considerable expertise, and I would take
issue with Mr. Winter's statement.
Mr. Horn. I am curious, who is the chairman of that board
now?
Ms. Lynch. Mr. Kahn, who was the past chairman of the
Electricity Oversight Board.
Mr. Horn. OK. Are we going to have Mr. Kahn somewhere along
between San Diego, Silicon Valley, and Sacramento?
Mr. Ose. He was invited, but declined to appear.
Mr. Horn. Well, so much for open things.
Ms. Lynch. I believe that Mr. Winter is appearing on behalf
of the entity that Mr. Kahn is the chair of.
Mr. Ose. Would you yield?
Mr. Horn. Yes.
Mr. Ose. Mr. Madden, in terms of the replacement or the
retirement, and the appointment of the new board for ISO, I
heard that those appointments come to FERC. Did FERC have
concerns about this based on this PX clearing price schedule?
Did the FERC have concerns about what was transpiring?
Mr. Madden. The Commission's December 15th order set a
date, and I do not recall the date, where the board that
existed prior to this new board would have to be reconstituted.
We set up a procedure to have discussions and negotiations with
the State as to the board composition. I believe those
discussions never took place; I believe the Governor appointed
the five board members. I cannot get into the further details,
because there are pending matters before the Commission
regarding this subject.
Mr. Ose. OK. I see my time has long since expired. I would
like to recognize the gentleman from Indiana for 10 minutes.
Mr. Burton. Let me go through some of the questions that we
have prepared for the record. And if I am redundant, I
apologize, but we need to get these in the record so we, when
we get back to Washington, can go through this very thoroughly.
Mr. Winter, you said on an average summer day the level of
demand varies, but it gets up to, you anticipate, around 3,700
megawatts short. Now, what is the total megawatts on a summer
day?
Mr. Winter. On a summer day, with a normal summer, we get
up around 47,000 to 48,000, and when you add reserves our
demand is around 50,000 megawatts.
Mr. Burton. Around 50,000 megawatts. And that is the peak?
Mr. Winter. That is the peak.
Mr. Burton. And then it goes down, I guess, after June or
July?
Mr. Winter. No, no. What happens is, when we get to July
there is new generators coming on, so therefore the peak day
stays pretty much at the 47,000 or 48,000 level, and as we add
more generation, then, of course, our deficiency decreases.
Mr. Burton. OK. Now, this summer what do you anticipate the
supply level to be? You said it would probably be 3,700
megawatts short. But what will the level be this summer? You
said the demand would be around 50,000.
Mr. Winter. Correct.
Mr. Burton. What is the supply going to be? Do you have any
projections on that?
Mr. Winter. Well, the supply is made up of a lot of
components. First is in-state generation, then there is out-of-
state generation that we can get.
Mr. Burton. I just want a number. [Laughter.]
Mr. Winter. Well, and I guess I am a little struggling on
what you mean by a number.
Mr. Burton. Well, if you are going to need 50,000
megawatts, do you have any idea on how much you are going to
have?
Mr. Winter. Yes, 3,000 less than that.
Mr. Burton. So 47,000 megawatts?
Mr. Winter. 47,000.
Mr. Burton. That is very good. [Laughter.]
OK. If a few key plants have breakdowns this summer because
they are old and have been running at full capacity, what will
that do? Do you have any projections on that?
Mr. Winter. Yes. We have projected about 2,500 megawatts
that would be off for emergency reasons, breakage, etc. If that
suddenly was much higher, then the number would go up and we
would be looking other places to try and obtain the power.
Mr. Burton. And you do not have any idea what the odds are
that would happen?
Mr. Winter. Well, last year we saw numbers ranging from
around 1,800 up to around 2,800 during the summer.
Mr. Burton. So, you think that the 2,500 is a fairly good
projection?
Mr. Winter. We think that is a fairly good number.
Mr. Burton. How frequently do you think California is going
to have blackouts this summer? Do you have any rough idea on
that?
Mr. Winter. No. I keep hearing all these numbers that
supposedly we came up with, but we in fact did not come up with
them.
Mr. Burton. Well, do you have any idea?
Mr. Winter. No. No, we do not.
Mr. Burton. So, you are just kind of driving in the dark?
Mr. Winter. That is the way we have been driving for quite
a while each day.
Mr. Burton. Mr. Makovich, do you agree with that?
Mr. Makovich. Well, 2 months ago in a study that we
released on the California crisis, we did some fairly extensive
computer simulation of this marketplace. Given the expected
conditions for this summer, normal weather, a soft economy, 1.5
percent growth in real GDP, an 8-percent outage rate on thermal
plants, 80 percent of normal hydro, we are expecting 200 hours
when there is no margin at all, and 20 hours of rolling
blackouts because the shortage is greater than 4,000 megawatts.
Mr. Burton. Now, over what period of time would the 20
hours of rolling blackouts be?
Mr. Makovich. That will be concentrated around the peak
demand period, which is going to be that August-September
timeframe.
Mr. Burton. So you are talking about in a 24-hour day,
there will be 20 hours of rolling blackouts? Is that what you
are talking about?
Mr. Makovich. Across that timeframe it will be necessary to
institute a rolling blackout probably in southern California
because of the load patterns for a cumulative outage across the
summer of 20 hours.
Mr. Burton. If I was a farmer, a milk producer like the
gentleman who was here awhile ago, I would want to have some
kind of a heads-up on when rolling blackouts were going to take
place. Is there any prospects of that, to let them know when
there is going to be a blackout. I was having dinner with some
people the other night and right in the middle of dinner
everything went black. There was no warning, whatsoever, and
the whole area was black. So I just wondered, is there going to
be any----
Mr. Winter. Was that in California or Indiana?
Mr. Burton. It was California. [Laughter.]
It was near Carmel.
Mr. Winter. OK. Let me quickly tell you the process that we
go through, and then I think that will answer the question. No.
1, if it is a distribution system problem that a transformer in
your front yard blows up, then yes, that has happened and you
are out of power.
Mr. Burton. Sure. That happens everywhere.
Mr. Winter. As the transmission operator, as we move into
the morning we make all of our projections, and we go through a
three-stage process. We start off with a stage 1, and that
usually indicates that we do not have enough resources to cover
our full reserves.
As we eat into our reserves, we get to a stage 2, which is
less than 5 percent reserves, and then a stage 3. When we
announce a stage 3, that means that we in fact are moving into
an area where we expect to drop load.
There is notifications that go to each of the utilities.
The utilities, in turn, notify their customers. And I believe--
and Loretta can correct me if I am wrong here. I think they
also just recently passed that the utility had to give each of
the blocks, which is a certain amount of load that is going to
be dropped, a notification if they are next on the line. The
utility----
Mr. Burton. How far in advance would that notification be
given?
Mr. Winter. Well, we are in an hourly market, so things can
happen within the hour. We warn people early in the morning
through the stages and through the notification of the PUCs.
Mr. Burton. I understand this explanation you are giving,
but how much time will people be given before there is a
blackout?
Mr. Winter. If the blackout is because we have identified
there is--and I am not trying to be evasive here, I am just
trying to help you understand what we face every day. And that
is that if we know, we send the warnings out. But literally in
the hour that it can occur, we will not know until about 30
minutes before that hour begins. Then, if we are faced with the
loss of a large unit like we were the other day, then that
drops to, you know, 15, 20 minutes is all the notice we can
give because we just lost units and did not have sufficient
supply to meet the demand.
Mr. Burton. You are talking about a transformer or
something like that?
Mr. Winter. Or a generator.
Mr. Burton. Or a generator.
Mr. Winter. I mean, we have a large generator that goes
out----
Mr. Burton. I was talking about in the normal course of
things, the rolling blackouts because of shortages. In the
normal course of things, not the emergencies, how much time
will these people be given? Do you have any idea?
Mr. Winter. The problem is, we are operating on such a thin
margin here that we can predict immediately or in the morning
that we are going to have plenty of supply, but then we lose a
unit. You are calling that an emergency; I call that an
everyday operation, you know.
Mr. Burton. OK. I guess I cannot get the answer to that
one.
Ms. Lynch. Chairman Burton, if I may.
Mr. Burton. Yes.
Ms. Lynch. The Public Utilities Commission did just change
the standards, because you are absolutely right, people deserve
to know. And even a half an hour's advance notice means you can
turn off your computer, you can shut down your business
process, you can make plans to run your backup generator. So,
what the Public Utilities Commission said to the utilities is,
you must notify in two ways. First, if you know that we are
tight in the morning, then tell folks you are next up to bat,
so that people can know during the day that there is a chance
that their block is going down. And then second, when you know
that block is going down, tell them in advance. The utilities
get a half an hour's notice, and often the ISO has more notice.
So, folks deserve at least a half an hour.
Mr. Burton. I see. I understand. It just seems if there is
even a remote possibility that there was going to be a
blackout, you would give them the heads-up, and if it did not
occur, so much the better.
Mr. Winter. Right.
Mr. Burton. Mr. Madden, in December FERC issued an order
imposing what has come to be known as a soft price cap. If a
generator charges more than $150 per megawatt hour, they have
to file with FERC. Have you explained that yet, how that works?
Mr. Madden. I did not get into the breakpoint analysis, no.
No, Mr. Chairman.
Mr. Burton. Well, do you want to real quickly explain that
so that we would have that on the record.
Mr. Madden. In the December 15th order, the Commission
established, going forward from January 1, that there would be
a breakpoint analysis in which sellers who bid in below 150
would get the market clearing price. So even if you bid in at
100, you would get 150. For those bids above 150, the
Commission required that the sellers provide transactional data
to support the basis of their bid.
Mr. Burton. And how long does that take for that to be
approved or disapproved?
Mr. Madden. We are required to issue--in terms of whether
or not the refund obligation accrues as to those transactions,
within 60 days at the most.
Mr. Burton. OK. How did they arrive at this threshold of
$150?
Mr. Madden. Prior to that period we had a soft cap
effective December 8th because of discussions we had on the
emergency filing with the ISO. Prior to that day, we had a 250
price cap. There was a concern the Commission addressed, that
we will go do an initial screen, and they felt that 150 was an
appropriate figure at that point for just an initial screen.
Mr. Burton. So the goal of the soft price cap is to keep
prices down?
Mr. Madden. Well, the goal----
Mr. Burton. Is that the goal of it?
Mr. Madden. The goal is to provide the necessary supply
where you need it, and at the same time review the
transactions--the bids that come in--to ensure that the rates
are appropriate. That was one of the key things we did in our
March 9th order.
Mr. Burton. So, you reviewed that. And the goal, then,
ultimately, is to keep the price as low as possible?
Mr. Madden. Well, attracting supply, necessary supply.
Mr. Burton. OK. And is that working?
Mr. Madden. It depends on what one believes is the
appropriate price. We, in our March 9th order, determined from
the January period that the appropriate price would be $273. At
which point those transactions which occurred higher than that,
the sellers would be required to either refund those moneys, or
show that their actual costs were higher than that. And the
basis for that is that we looked at the gas prices in January,
which were $12.50 on average. We looked at the NOx
cost, which is $22.50, and we looked at the average pounds
taken for a combustion turbine, and we arrived at a $273 price.
Mr. Burton. If I might ask one more question. I will have
more questions in the next round.
Mr. Ose. Certainly.
Mr. Burton. Mr. Winter, you requested FERC's December
order; is that right?
Mr. Winter. Well, the December 8th order. The December 15th
order was one that was a followup, I believe, to their November
decision and was a final order in December?
Is that correct, Mr. Madden?
Mr. Madden. No, the November order was a draft order where
we sought comments on the remedies proposed, and the December
15th order is the initial order, and that is on rehearing.
Mr. Burton. So, you did order that December----
Mr. Winter. 8th.
Mr. Burton [continuing]. 8th order. Why?
Mr. Winter. Well, as I explained before, I was suddenly----
Mr. Burton. If I missed it, I am sorry. I do not want you
to be redundant, but----
Mr. Winter. Yes. I just explained that I had seen the
prices go way above the price cap of $250, and I was not able
to get power to serve the load.
Mr. Burton. So it was an emergency?
Mr. Winter. Yes.
Mr. Burton. OK. I will come back for questions later.
Mr. Ose. I would like to followup on Chairman Burton's
question--if I understand correctly, there has been a
suggestion that your December 8th application to FERC for
emergency increase in the price of power was inappropriate. My
basic question is whether or not you had the authority to make
that December 8th request to FERC. Did you have the authority
to make that request?
Mr. Winter. Clearly, under the other board, yes, I did.
Mr. Ose. What do you mean the other board?
Mr. Winter. The Stakeholder Board that was in effect at
that time. Anytime the market has a tremendous change--in other
words, in 1998 we had a bid of----
Mr. Ose. My question deals more with procedurally. You were
fully authorized under State statute to make that request of
FERC?
Mr. Winter. Yes, in emergency situations I have the
authority to do that.
Mr. Ose. So nobody came to you beforehand and said do not
do this? They actually said quite the opposite, they said we
need to do this, or did you make that judgment?
Mr. Winter. No, I made that judgment based on what was
going on on the floor, and my inability to serve the load of
California.
Mr. Ose. And that was well within your statutory authority
under AB1890?
Mr. Winter. I do not know what AB1890 says, but as the
operator of the system, that is clearly in my authority. And
under the FERC tariff, I have the authority to do that in
emergencies.
Mr. Ose. OK. I want to recognize Mr. Horn for 10 minutes.
Mr. Horn. This is probably going over one of the colleagues
here, but we might as well look at it. How vital is the open
communication and cooperation between agencies? I would ask Ms.
Lynch what tools does the California Public Utilities
Commission use to communicate and coordinate efforts with other
agencies, including the California Energy Commission? Is there
communication, and what is their role in relation to your role?
Ms. Lynch. Sure. The California Energy Commissionsites
power plants, and also does research work on power trends, so
they publish reports and such about consumption, supply, and
power plants in California. The Public Utilities Commission
regulates the investor-owned utilities in the provision of
power in California. The Federal Energy Regulatory Commission
regulates the wholesale price of power charged by the private
generators who own power plants that are not utilities. We have
quite a good working relationship with the other State entities
in California that have jurisdiction over energy matters.
Mr. Horn. Does the California Energy Commission make
recommendations to you on the need for power, or is that simply
left for the community, the California Public Utility
Commission that you chair?
Ms. Lynch. No, the power siting--power plant siting
authority resides in the Energy Commission. And the Energy
Commission for decades participated in integrated resource
planning, to plan out the power needs of the State. In the
Wilson administration, the State stepped back and said the
State is not going to take a look at the power needs overall in
California. We will leave that to the market. So there was a
dearth of planning and building for critical years in the
1990's. As the power consumption rose, the State stepped back,
for ideological reasons, and that is one of the reasons we find
ourselves in the pickle in terms of supply that we have today.
Governor Davis stepped forward, and Governor Davis is pushing
the private market to build those power plants, streamlining
all the environmental regulations, getting every obstacle
possible out of the way to get more supply, because for the
past 8 years the prior administrations did not do the job to
ensure supply for California. They let the market do it, and
the market failed.
Mr. Ose. Would the gentleman yield?
Mr. Horn. Yes.
Mr. Ose. The California Energy Commission has a Web site,
and on that Web site it posts its projections for power demand
at some point in the future. These projections commenced being
developed in 1988 for the year 2001. The projections by the
California Energy Commission since 1988 have consistently shown
a demand for power in excess of 50,000 megawatts. It is
biannual. Every 2 years it updates the projections. So it has
been a continual stream, we are going to need 51,000, 52,000
megawatts of power in the year 2001.
Mr. Horn. Now, let us say that the figure is right. What
you are telling me is, it is a commission that is not doing
much of anything. And could your own Commission be able to pass
onsites? And I take it it does, does it?
Ms. Lynch. Well, Mr. Horn, actually I am not saying that
the Energy Commission is not doing anything. I applaud the
Energy Commission's efforts over the past 2 years to streamline
their processes. And, in fact, they have 16 plants through the
permit process, and 9 of them--it might be 6, I am actually
forgetting the number right now--are currently under
construction. That is more plants under construction and
permitted in the State of California in the past 2 years than
in the prior two administrations combined. So the California
Energy Commission is turning cartwheels to make sure we have
got enough supply in California. The problem is, you cannot
build a plant in just a couple of months. It takes a while to
attract the investment, to get the folks to go through the
process. They are going through the process now. The problem
with it was in the past.
Mr. Horn. Just for the record, I assume all of Governor
Davis's appointees are on the California Energy Commission?
Those are pleasure appointments, are they, of the Governor?
Ms. Lynch. No, they are term appointments.
Mr. Horn. They are term?
Ms. Lynch. And he received his third majority appointment
in January 2001.
Mr. Horn. What is the total number?
Ms. Lynch. A total of five.
Mr. Horn. Five. So he now has a majority on that as of
January?
Ms. Lynch. That is correct.
Mr. Horn. OK. Now, what is the role, if any, Mr. Madden, at
the Federal Energy Regulatory Commission? Do you also pass on
some of these selections for sites and development of
electricity and power?
Mr. Madden. The Federal Energy Regulatory Commission has no
jurisdiction over the siting of transmission facilities.
Mr. Horn. That is just up to each State?
Mr. Madden. It is up to the particular States, yes.
Mr. Horn. OK. We are talking really about cooperation and
communication with Ms. Lynch. The California Independent
Systems Operator, Mr. Winter?
Mr. Winter. Yes.
Mr. Horn. So do you talk to each other?
Ms. Lynch. I think we do now more than we have in the past.
Although this summer, when we had energy issues when there was
a blackout on June 14th, Mr. Winter was quite helpful and
cooperative. The problem really was the ISO tariffs, which
prevented governmental agencies from getting the same
information that market participants could get.
Mr. Horn. Chairman Burton noted that there is a lot of
finger-pointing in all directions, and you are saying that you
do not have that much finger-pointing unless you are perhaps
here. I do not know. So here he is, and you can talk to each
other.
Ms. Lynch. And I certainly talk to the members of the board
of the ISO on a regular basis. As you all know, as a private
corporation in the State of California, it really does fall to
the board to set the policy direction for the ISO.
Mr. Horn. Are you automatically, or the person in your
position automatically a member of that group?
Ms. Lynch. No, I am not at all.
Mr. Horn. You are not. So there is no linkage, generally.
And it just has to be whether people talk to each other or do
not.
Ms. Lynch. I think that Governor Davis ensures that his
appointees work together.
Mr. Horn. Yes. The California ISO, namely Mr. Winter,
investigated evidence of market abuse--I believe you did this,
is that correct--and reported its findings in a report issued
in March 2001?
Mr. Winter. That is correct.
Mr. Horn. And they project that power generators have
overcharged California by $6.2 billion between May 2000 and
February 2001. And, the Federal emergency commission determined
that California was overcharged $1.3 billion. While some of the
discrepancy can be explained by technical jurisdictional
reasons, what are the other factors that contribute to such a
large discrepancy?
Mr. Winter. The other discrepancies between the----
Mr. Horn. The idea of $6.2 billion overcharged.
Mr. Winter. Well, I think people have exercised market
power and driven the prices up by so doing it.
Mr. Horn. You do not think it is the market that did it. I
mean, in terms of the $6.2 billion, who came up with that?
Apparently there are various other items that I noted earlier.
Mr. Winter. Right. The way we arrived at the $6.2 billion
is we would take a unit, much as the FERC had done, determine
what its heat rates were, factor in the price of natural gas
during this timeframe, factor in the cost of emissions, and
arrive at what we call a cost-based rate. Then we allowed the
market to have some bit of flexibility, and then everything
above that which we are calling the competitive market price,
we considered to be overcharge, if that is the term I believe
you are using.
Mr. Horn. How about the Federal commission in terms of
putting the pieces together on whether gouging occurred or did
not occur?
Mr. Madden. Congressman, are you referring to the $6.2
billion?
Mr. Horn. Right, the $6.2 billion.
Mr. Madden. Well, as we----
Mr. Horn. Because that is the figure the public heard. That
is why I am going after that.
Mr. Madden. As we discussed earlier, the $6.2 billion
figure was that which the ISO submitted. As I recall now, the
ISO recognizes that, of the $6.2 billion, a substantial portion
of that is non-jurisdictional to FERC.
Mr. Horn. That would be the 47 percent that is non-
jurisdictional?
Mr. Madden. I do not know what the numbers are. Another
portion of that would be prior to October 2nd, 2000, in which
the Federal Energy Regulatory Commission has no authority to
require refunds pursuant to the November draft order and the
opinion that is taken there. He also mentioned that a
substantial portion--I do not know how much--referred to
bilateral contracts or involved bilateral contracts. That is
where you had a mutual agreement between the parties. That is
not subject to refund. The realtime spot market is subject to
refund.
He also mentioned how he factored in the cost, and he
mentioned a thermal unit. We factored in, for the committee's
information, a CT, combined turbines, which has a higher
inefficient rate than does usually a thermal. He factored in
gas costs and NOx costs, but I do not, and this is
why we requested information asking what those costs were.
Mr. Horn. Now, you get the Bonneville Power Authority
records, I suspect, since that is a Federal entity. Do they
file with you as to what they are generating?
Mr. Madden. Well, the PMA Bonneville is non-jurisdictional
to us. It is a non-jurisdictional seller. Although, under a
limited portion of the act, we can review the actual rates they
charge in very limited circumstances.
Mr. Horn. Now, I take it that the municipal utilities such
as those of the city of Los Angeles, Department of Water and
Power, do you have or do not have jurisdiction over them?
Mr. Madden. We do not have jurisdiction over entities like
that. We have no jurisdiction, for the most part, over
municipals and co-operatives. If you look behind the $6.2
billion figure, a substantial amount of those alleged refunds
or overcharges are associated with entities over which we do
not have jurisdiction.
Mr. Horn. Would anything be in the Department of Energy
where they might collect those records?
Mr. Madden. The U.S. Department of Energy has no
jurisdiction over the co-operatives or municipals. It does have
jurisdiction--or it oversees the Bonneville Power
Administration--as it oversees the other power marketing
administrations. You have to look at the organic statutes or
the charters that created the co-operatives or municipals
within each particular State.
Mr. Ose. Would the gentleman yield?
Mr. Horn. I was going to say the chairman is an expert on
some of the figures of Federal dams, so you ought to put that
in the record.
Mr. Ose. I actually want to followup on where you were
driving as it relates to the municipals, in particular. I
believe the ISO, on occasion, purchases surplus power from the
municipals for distribution elsewhere.
Mr. Winter. I am not sure what you mean by distribution
elsewhere. But yes, to serve the ISO grid, we get power from
Department of Water and Power clearly to distribute to other
people in the State of California.
Mr. Ose. Now, we just heard Mr. Madden say that FERC has no
jurisdiction over such entities. Would you kindly share with us
your recollection of the prices being paid by the ISO for that
power?
Mr. Winter. From the Department of Water and Power?
Mr. Ose. As an example, yes.
Mr. Winter. Well, clearly we were paying the market price
to everyone, which at the point that we went over the $250
price cap, those would range all the way from $250 up to 5 or
$600. I cannot remember exactly.
Mr. Ose. Who has jurisdiction over the prices charged by
municipals selling into the wholesale market?
Mr. Winter. I assume their governing agencies, be that a
city council and Department of Water and Power, I would assume.
Mr. Ose. But they are not subject to FERC's jurisdiction?
Mr. Winter. No, they are not.
Mr. Ose. They are non-jurisdictional. Ms. Lynch, are they
subject to PUC's jurisdiction?
Ms. Lynch. No. We have jurisdiction over the retail rates
charged by investor-owned utilities, not municipal utilities.
Mr. Ose. From your recollection, Mr. Winter, of this
report, did you break out, for instance, either in the
aggregate or by individual municipal entity, how much of this
$6.2 billion in overcharges were made?
Mr. Winter. I believe there is a confidential attachment
submitted to FERC, but I have not seen it myself.
Mr. Ose. You know, I am getting tired of being told I
cannot have information. I suspect there are people in this
State who share that opinion.
Mr. Madden. Mr. Chairman, I will be glad to provide that
information. I assume, if it is cumulative data, we have to
decide that issue in any event because we have the filing at
the Commission, and we have to look at the----
Mr. Ose. You have to separate it out somehow.
Mr. Madden. We have to separate it out and compare it to
what we have done, for example, in the March 9th refund order.
So, I will be glad to provide the committee with that
information.
Mr. Ose. We will be in contact with you.
Mr. Madden. Thank you.
Mr. Ose. I will yield back to the gentleman from Long
Beach.
Mr. Horn. I yield back to you. I believe we have a third
panel.
Mr. Ose. Yes.
Mr. Horn. OK.
Mr. Ose. I believe it is my 10 minutes?
I want to examine a couple of things, if I might. I want to
go to the issue of long-term contracts, because it seems to me
that the opportunity to hedge exposures, either by PG&E or
Southern California Edison, or San Diego, offers the
opportunity to effectively eliminate the uncertainty or the
lack of supply that might otherwise occur. It is my
understanding that AB1890 did not require the utilities to
purchase all of their electricity through the PX, is that
correct? Does anybody know the answer to that? There is no
specific language in 1890 that says the utilities must buy from
the PX.
Ms. Lynch. I believe that is true. I believe that was the
decision of my predecessors in order to create the PX and have
it up and running, that they required the utilities to buy
through the PX.
Mr. Ose. So, PUC adopted a rule that said investor-owned
utilities must buy through the PX?
Ms. Lynch. Yes, the past PUC.
Mr. Ose. The past PUC.
Mr. Madden. Mr. Chairman, they must sell into and buy from.
Mr. Ose. It is a buy-sell deal. Correct. Has this PUC ever
examined whether or not to revoke that requirement?
Ms. Lynch. Yes, we did.
Mr. Ose. And what was your determination?
Ms. Lynch. At the time, based on conversations I had with
Republican legislators who were active in creating the PX, they
asked us to keep that buy-sell requirement.
Mr. Ose. Did you talk to any Democratic legislators?
Ms. Lynch. I did, actually. I believe Senator Peace asked
me to keep that requirement, as well.
Mr. Ose. So it was bipartisan?
Ms. Lynch. At the time last--I believe it was June.
Nonetheless----
Mr. Ose. I appreciate your making that clear.
Ms. Lynch. Nonetheless, the PUC voted to allow the
utilities to not buy and sell exclusively through the PX in
June, and the legislature changed that in a bill at the end of
June.
Mr. Ose. How did you vote on that issue?
Ms. Lynch. I voted to keep the utilities buying and selling
through the PX.
Mr. Ose. OK. So you were asking that, if you will, the
transparency issue be maintained?
Ms. Lynch. That is correct. And at the request of
legislators who were there at the time AB1890 passed, with
their understanding of what their intent was.
Mr. Ose. I will just come back to my earlier point. I do
not understand why it is every time I ask about the PX or the
ISO or something like that, I hear this mantra of disclosure,
disclosure, disclosure. And yet when I ask the question and
when my constituents ask me why we cannot find out what
commitments the Governor is making of the State of California's
treasury, I am told I am not qualified to hear that. Now, who
is it that I have to ask to get that information? Does anybody
know? Do I have to issue a subpoena from this committee to get
that information?
Mr. Madden. Mr. Chairman, as I mentioned earlier, the
Commission has asked the ISO to provide that information. If
they cannot get that information, I can assure you that this
Commission will ask the generators who have entered into those
negotiations with the State to provide us with the information.
I will have to go back and review the law, but I could probably
provide that under confidentiality to the committee.
Mr. Ose. Do I understand these contracts that are being
considered by the State of California to be long-term
contracts?
Mr. Madden. As I understand it, and I am not an expert in
the area, there is a combination of short-term, mid-term, and
long-term contracts with different types of provisions.
Mr. Ose. So you have different exposure?
Mr. Madden. That is correct.
Mr. Ose. All right. Ms. Lynch, are those contracts subject
to PUC review?
Ms. Lynch. No.
Mr. Ose. Because?
Ms. Lynch. Because AB1X transfers the just and
reasonableness review of the power purchases to the Department
of Water Resources from the PUC.
Mr. Ose. Who is held accountable for that decision? If the
DWR makes a decision that something is unjust or unreasonable,
or something conversely, at a price is just or reasonable,
exactly how do the voters of this State hold someone
accountable? Does anybody have the answer to that question?
Ms. Lynch. The PUC does not have the jurisdiction to review
that question.
Mr. Ose. OK. In terms of DWR's contracts?
Ms. Lynch. That is correct.
Mr. Ose. OK. Let me go back to my original question. In
March 1999, Southern California Edison filed with the PUC for
authority to enter into bilateral contracts as part of a pilot
program designed to provide market stability and increase
supply. Now, if I am correct, that is prior to when you were
made President of the PUC.
Ms. Lynch. It is prior to my membership on the PUC.
Mr. Ose. OK. In July 1999, the PUC rejected that request
from Southern California Edison because, in effect, as you said
earlier, forcing the buy-sell transaction through the PX
provides transparency, mitigates market power, and reduces
regulatory burden. Now, since you have gotten there, Ms. Lynch,
my question is whether you have any comments about forcing the
IOUs into or through the PX, and the consequences of that
requirement?
Ms. Lynch. Well, the IOUs asked for additional authority to
buy various hedging products that were available through the
PX, and we granted that authority. And then, in addition, the
utilities asked for additional authority to enter into direct
bilateral sales only scheduled through the PX, but not
purchased that way, and we granted that authority. So, from
that perspective, the utilities had the full panoplies of tools
in their toolbox to hedge their risk. I think what no one could
have foreseen was the dramatic upward spiral of the market
prices, as demonstrated by the chart in front of you that I
have provided, because I believe no one could have foreseen
that the price caps would have been blown out as they were.
Mr. Ose. I want to yield for a question from Mr. Burton.
Mr. Burton. Yes. There was an article in the San Francisco
Chronicle. I want to read you just a little bit of this and
maybe you can explain this to me. It says, ``On July 21st,
Edison and PG&E filed emergency requests,''--this is last
year--``with the PUC seeking authority to sign longer-term
contracts directly with generators to protect themselves from
surging prices. Their cause appeared to be bolstered by the
August 2nd report that Davis,''--I presume the Governor--
``requested from the PUC and the Electricity Oversight Board
which clearly said the State spot markets were exacerbating
price spiking, and that contracts between the utilities and
power producers were needed. Sources say some State economists
feared that signing a 5-year contract at $50 per megawatt hour
could harm the economy. The day after the report was released,
the PUC voted to let the utilities sign bilateral contracts
through December 31, 2005 subject to a review of
reasonableness. But the utilities now say that the vote was
meaningless because the Commission's staff refused to
preapprove contracts as reasonable after a 30-day review, as
the Commission's order directed.''
And what I have been told is that the utilities were very
concerned because the contract--the long-term contract was
subject to a review of reasonableness. So if they signed a
long-term contract at $50 per megawatt hour, and the price on
the spot market started dropping below that, they were locked
into the $50 per megawatt hour, and they could be socked with a
demand for return. And they did not think that was reasonable,
because they were assuming risk, and if the price dropped they
were up the creek, because they would have to refund a lot of
money.
Why is it your office did not allow them to sign a long-
term contract without subject to a review of reasonableness
down the road?
Ms. Lynch. Sure.
Mr. Burton. For instance, I am a small businessman. I enter
into a contract and they say it is subject to a review of
reasonableness. And 5 years down the road, after I have signed
the contract in good faith, they say you could have gotten it
at $40 per megawatt hour. And then I am supposed to return that
large amount of money, and it could cost me a ton and put me
into bankruptcy. So, why was that reasonableness clause not
allowed to be taken out?
Ms. Lynch. On a unanimous vote 2 weeks after the utilities
asked for the authority to enter into bilateral contracts, the
PUC did give the utilities the authority to enter into
bilateral contracts, and then they entered into bilateral
contracts. I am prevented, for confidentiality reasons, of
telling the public exactly what they entered into, but I can
tell you they entered into significant bilateral contracts.
What the PUC did----
Mr. Burton. It was a lot more, though, than the $50 per
megawatt hour?
Ms. Lynch. Some of them have been, yes.
Mr. Burton. Well, but prior to that time, if that
reasonableness clause had not been in there, they could have
gotten it at $50 per megawatt hour.
Ms. Lynch. And some of them they did, and some of them they
did less than that. I cannot discuss the specifics, but it was
a full range of prices. But I will----
Mr. Burton. Excuse me just 1 second. The chairman of the
subcommittees and the people who are watching are seeing that
everything is under the veil of confidentiality. We cannot get
this and we cannot get that. We represent the Congress of the
United States and Federal agencies that participate in some of
these processes. We want that information. And if I have to
subpoena that information from you, I will do it. So, I want
you to give it to us. Now, if it is something that should not
be in the public domain, then we will honor that. But, we want
to see that information. And to be pounded time and again after
coming out here and having hearings, I do not want you to tell
me we cannot have that information because of confidentiality.
I want it.
Ms. Lynch. I would be happy to give it to you if I had it.
You can get it from the utilities. I, as a regulator, cannot
give their confidential information without their permission.
So I would be happy to give it to you confidentially. If you
would like it out in public, you can ask them for it. It is
theirs to give.
Mr. Burton. OK. But I want to find out about this
reasonableness clause.
Ms. Lynch. Sure.
Mr. Burton. You say that that reasonableness clause was
done away with so that they could go ahead and enter into these
long-term contracts without additional risk. But, what I have
been told is that it was after the cow was out of the barn and
the $50 rate that they could have gotten for long-term
contracts was then going up, skyrocketing up. And if they
entered into long-term contracts, it was at a much higher rate
because you kept that reasonableness clause in there until the
$50 rate was no longer available.
Ms. Lynch. Well, the reasonableness clause is still in
there, and they did sign contracts below $50 in some instances.
But why we kept the reasonableness clause in there is because
every other State also has a reasonableness review. That is the
fundamental basis of a regulated entity.
You, as a small business person, do not get a guaranteed
profit, which is what State law gives to the utilities. They
get to recover their cost, guaranteed, no doubt about it. The
only check on that cost recovery is a reasonableness review.
And the Public Utilities Commission of the State of California
had good reason to continue what every other State today still
does, which is a historical fact pattern which showed abuses in
the past between the utilities contracting with their
affiliates.
Mr. Burton. I understand. And there may be some
justification for price gouging by the utilities. But the fact
of the matter is, if you look back at the thing that you gave--
--
Mr. Ose. No, no, Mr. Chairman. You want to say there may
have been some justification for the reasonable review due to--
--
Mr. Burton. OK, due to. OK. [Laughter.]
But let us just take a look here. You could see from your
chart here that the price per megawatt was jumping at a
dramatic rate. And they were saying, you know, we can lock this
thing in at $50 per megawatt hour, and because of this
reasonableness clause in there, they were worried that they
were going to really lose their shirt if they signed it at that
time. And it seems to me that is something that was a
reasonable thing for them to be concerned about.
Ms. Lynch. Well, every State has a reasonableness review in
order to protect the ratepayers, and as does California. What
we did is not just for long-term contracts, it is a
reasonableness in their actions, so that they do not go out
and, you know, buy very expensive nuclear power that is 100
times what the original cost was because they have the
guaranteed rate of return.
Mr. Burton. Well, let me just make one more point. You did
not work with them on this, and it seems to me you should have,
and instead of being able to get it at $50 per kilowatt hour,
in December it was up to $377 per kilowatt hour. So you could
see from this chart that it went from $31.18 per kilowatt hour,
up to $47.22 in May per kilowatt hour. And then in June it
jumped to $120 per kilowatt hour. And the discussion, according
to this article, was in July, after it had already jumped to
over $120 per kilowatt hour, and they were trying to negotiate
for $50 per megawatt hour. And you would not do it.
Ms. Lynch. We did. We let them in 2 weeks time, which is
lightning speed for the PUC. We gave them full authority up to
their full average net short, and guess what, they actually
contracted for power. What they did not do was fill up their
full net short, because nobody was going to believe at the time
that the FERC was going to blow out the price caps, and the
average price of power every day of every hour in December was
$378----
Mr. Burton. Right.
Ms. Lynch. [continuing]. After FERC blew out the price
caps, and the generators had a field day with California's
economy.
Mr. Ose. Mr. Chairman, may I reclaim my time? I would be
happy to give----
Mr. Horn. I just have one question on this issue.
Mr. Ose. Certainly.
Mr. Horn. Is the California Utilities Commission under the
Ralph Brown Act? Are you familiar with that?
Ms. Lynch. The public process, yes. The Public Meetings
Act, yes.
Mr. Horn. Yes. Well, the fact is that, sure, you do not
make it public until the decision is made, but once the
decision is made, you can answer the chairman's question. It is
no violation of law that I am aware of under any State agency.
So, why do you not answer him?
Ms. Lynch. Oh, sure, all of our decisions are public, and
they are public before we vote on them, as was our August 3rd
decision which allowed the utilities to bilaterally contract up
to their full power needs on average. And that is out there,
and I would be happy to provide you--we can messenger it over
right now with those decisions.
Mr. Horn. Well, but you were saying you cannot because of
all the industry and such that. Once they are on the market and
they have done it, you could have released that afterwards. I
can realize you could not do it, because that might affect the
market in another way, which is bonds, stocks, and so forth.
Ms. Lynch. Well, the statute says that the utilities are
entitled to keep the information confidential when they are
buying and thereafter. For instance, they bought power ahead in
the market. What disadvantages the utilities as a buyer is if I
release how much power they bought, because then all the
generators can figure out how much power is left that they need
to buy. So if the utilities do not have to play all of their
cards, then the generators do not know if they need to buy a
lot or a little. So the generators, then, will bid more
competitively if they do not know exactly the utilities' needs,
which is why I cannot give to the public the utilities'
business confidential data.
Mr. Horn. Well, I do not know why not, because now they are
in bankruptcy and everything else. It seems to me it ought to
all be on the record.
Ms. Lynch. Well, if they would like to waive the
confidentiality provisions, they can provide the data and I
could then provide it to you. But right now, the way their
business confidential data works, is because I have special
access as a regulator to their business confidential data, I
need to keep it confidential unless, you know, we have a prior
conversation about that with the utilities.
Mr. Burton. Will the gentleman yield to me?
Mr. Ose. I would.
Mr. Burton. Mr. Makovich, as I understand it, and I think
you are totally familiar with this, when they were concerned
about this review of reasonableness, they wanted to have what,
20 percent as a percentage that they should be accountable for,
and the Commission wanted only 5 percent, is that correct?
Mr. Makovich. Outside of a reasonableness range, yes.
Mr. Burton. Yes. OK, is 5 percent, as the Commission wanted
it to be, a reasonable standard for this kind of a problem
across the country?
Mr. Makovich. No. Long-term power prices are very, very
hard to predict, and to enter into a long-term contract of the
type that have been signed, 4 to 20 years, that kind of a
margin of error is far too low.
Mr. Burton. What would be a reasonable margin of error?
Mr. Makovich. Well, my testimony has been I think long-term
contracts are not the right solution to this problem. They are
not going to solve this shortage problem. There is a liquid
futures market for power now that goes out about 12 to 18
months, so it is very, very clear what the market expectation
is for power.
Mr. Burton. And what is that?
Mr. Makovich. Everywhere else in the United States it
ranges from $20 to $30, depending upon the month, up to maybe
$100. In California it is in the $300 to $500 range as we look
out across the next year.
Mr. Burton. I am not sure I understand that. Maybe I am
missing something here. But as I understood it, the utilities,
when they went to the Commission, wanted a 20 percent----
Mr. Makovich. Right, reasonableness standard.
Mr. Burton. [continuing]. Reasonableness standard.
Mr. Makovich. Right.
Mr. Burton. And 5 percent was what the Commission wanted.
Mr. Makovich. Right. Even the 20 percent is probably a
mistake.
Mr. Burton. I understand. But the utilities were willing to
do that. And because they could not get that, they did not lock
in----
Mr. Makovich. Right.
Mr. Burton. [continuing]. The rate at $50 per megawatt
hour?
Mr. Makovich. Right.
Mr. Burton. Why is it that the Commission would not go
along with that 20 percent, which sounds like it is a fairly
reasonable standard, instead of the 5-percent which they were
standing fast on?
Ms. Lynch. Well, as Mr. Makovich just demonstrated, many
economists actually objected to our decision to give them long-
term contracting authority on a bilateral basis whatsoever. So
it was striking a reasonable balance at the time given the
market, because many people, like Mr. Makovich, would probably
criticize the decision of the Public Utilities Commission to
give the utilities full-throttle ahead on buying whatever they
would like to meet their next short. So, from that perspective,
I think that the Commission probably went over what some
economists thought was prudent at the time.
What we wanted to do was give the utilities the flexibility
to run their business as they saw fit, and they did buy power
at 5 cents, some less and some more over time. So I think that
the assumption that they did not buy at all is actually not
proven true by the facts. But the utilities have the specific
facts that I would encourage them to share with you.
Mr. Burton. We are going to talk to them tomorrow, I think.
Is that correct?
Mr. Ose. Yes.
Mr. Burton. OK. Thank you, Mr. Chairman.
Mr. Ose. I want to go back to a question I have. In terms
of the long-term contracts themselves, have you had any direct
communication with utility executives advising for or against
using long-term contracts?
Ms. Lynch. Well, the way the Commission works is, the
utilities bring in an application and then there is a pending
matter before us the parties can comment on. So I have
certainly seen their materials as they have, you know,
presented as a party to me, and considered those materials
carefully when we gave them the authority that they requested.
Mr. Ose. My question was whether or not you have had any
communications with utility executives advising for or against
long-term contracts?
Ms. Lynch. I do not understand advising for or against. Do
you mean giving them my policy pronouncement?
Mr. Ose. Have you talked with utility executives, privately
or publicly, in favor of or against the use of long-term
contracts?
Ms. Lynch. Well certainly publicly by my votes and
statements regarding my support for long-term contracts. And
privately, I do not recall.
Mr. Ose. Now, if I understand your support, the caveats are
that they go through the PX, and that they be within the 5-
percent margin that Mr. Makovich was talking about.
Ms. Lynch. For preapproval. But they would always just be
subject to the normal reasonableness review that all other
States give to essentially any procurement actions of the
utilities. So the retrospective reasonableness approval or
review is a function of what a prudent utility would do at the
time when faced with those facts at the time. So it is a
question in time. It is not that you can apply tomorrow's
standards to today's actions. You apply today's standards to
today's actions, as all the other States do.
Mr. Ose. Are you familiar with Doug Long's letter to the
two utilities objecting to their methodology for entering into
long-term bilateral contracts?
Ms. Lynch. I know there is lots of correspondence that goes
between my staff and utilities on a variety of matters. I do
not know which particular letter you are referring to.
Mr. Ose. Well, Doug Long is the gentleman on the California
Energy Division who apparently has staff jurisdiction over the
question of forward contracting. Am I correct on that?
Ms. Lynch. He is one of the managers in the Energy
Division.
Mr. Ose. OK. Now, it is my understanding, from feedback I
have had directly, that he has opposed very, very strenuously
on the methodology put forward by the utilities to try and
hedge their exposures. Is that consistent with your
understanding?
Ms. Lynch. My understanding is the Commission made a
decision which is then the policy of the regulator to allow the
utilities to move forward consistent with reasonableness
reviews that are in place in every other State.
Mr. Ose. OK. One of the questions I have as a business
person is, I like to think of certainty when I am entering into
an application in front of a government agency. We have heard
back and forth, is this one reasonable, is that one not
reasonable. The question I have is, was there ever a point at
which the PUC undertook to define in a prospective basis what
was reasonable and what was not reasonable?
Ms. Lynch. Actually, yes. Based on--and I am not recalling
specifically why I thought the utilities wanted further
guidance, but it could well have been a conversation. I just do
not recall.
Mr. Ose. Did that occur in August, September, March? I
mean, how long are we talking about?
Ms. Lynch. In the fall. Because by November, I decided to
go ahead and provide additional guidance which I put for a vote
of the Commission in December. So I put it on our agenda,
essentially, for additional guidance at the time.
Mr. Ose. Are those reasonable standards now adopted by the
PUC?
Ms. Lynch. They are not, because at that point I believe I
put it on for a vote right at--well, we put it on before we
knew, I think, or right around the time that the FERC blew out
the price caps. And so the anticipation was that it would be at
least under the soft caps that the FERC had proposed. The
actuality then, when prices shot up five times in 5 days in the
California market, that volatile market then outstripped the
parameters that I was proposing.
Mr. Ose. Let me go back to the standards; I think that was
the basis of my question, not what FERC did or did not do. If I
understand correctly, then, the PUC still has not issued a
final determination for use by the investor-owned utilities as
to what is or is not a reasonable standard for forward
contracting?
Ms. Lynch. The reason I mentioned FERC is because the
market determines--we have to understand the market to be able
to determine what is reasonable, and the market has been so out
of whack in California----
Mr. Ose. OK, let us cut through all that. Has the PUC
issued standards for reasonable or unreasonable forward
contracts for use by the investor-owned utilities?
Ms. Lynch. We issued our original standards in August. I
provided some additional further guidance that I put on the
agenda, and thereafter the utilities stopped buying on the
spot. So it was essentially useless for the utilities, since
they were not buying on the spot anymore.
Mr. Ose. Are those standards final?
Ms. Lynch. No, they are not.
Mr. Ose. So, you have not completed the process?
Ms. Lynch. Well, it is really the market outstripped our
ability to determine what was reasonable in California.
Mr. Ose. Going back to my question, you do not have
standards defining what is or is not reasonable in terms of
forward contracts for the investor-owned utilities?
Ms. Lynch. No, we do have initial standards that we adopted
and put in place unanimously on August 3rd.
Mr. Ose. Are they final?
Ms. Lynch. Yes, those are final.
Mr. Ose. They have binding protection, safe harbors for the
investor-owned utilities?
Ms. Lynch. There are some safe harbors, yes. But they
wanted further guidance. And we have not refined with further
guidance.
Mr. Ose. Do you have final standards defining what is or is
not reasonable for long-term contracts for investor-owned
utilities?
Ms. Lynch. Yes. Our August 3rd standards are final. We
could do additional refinements, which I proposed, which we
have not finished. But we have guidance that we adopted on
August 3rd. The utilities wanted additional guidance. We
started designing additional guidance and then they dropped out
of the market.
Mr. Ose. Just a moment.
Mr. Horn. Could we get when August is? Which year?
Mr. Ose. August 2000.
Mr. Horn. Excuse me.
Mr. Ose. August 2000.
Mr. Horn. OK.
Mr. Ose. Mr. Makovich, in terms of the buy-sell provisions
of the PX, would you care to offer any insights as to the value
of directing those contracts through the PX? Do you have any
opinion on that?
Mr. Makovich. Right. Well, in retrospect, the $50 per
megawatt hour would have been a good deal for utilities to be
able to lock into. People have then looked at that and said,
well, the problem to this whole crisis is if the utilities had
simply been allowed to lock into long-term contracts, we could
have avoided this whole mess, and I think that is not right.
That is wrong. And the reason for that is, if you allowed
people to sign long-term contracts, let us say that voluntarily
80 percent of electric demand was covered under long-term
contracts, the problem you have got then is those contracts are
supplied from both existing plants--actually, the contracts
that have been signed are mostly from existing plants. You are
not building any new power plants. If you then end up with a
shortage--and that is what we have got, we are fundamentally
short of power plants--you cannot enforce on residential
customers those that are covered by long-term contracts and
those that are not.
So, unless the long-term contracts are mandated to cover
120 percent of the market to also provide you a reserve, they
are not going to be the mechanism that builds enough capacity.
If they did, if long-term contracts--assume that you got 120
percent voluntarily. The evidence is, if you do not have a
shortage, the spot market clears on the basis of fuel and
variable costs alone. Energy traders would then attack the
long-term contract market. They would sell long, buy off the
spot market, and arbitrage out any capacity payment that would
be involved in those long-term contracts. And the only way to
prevent them would be to have a shortage that disciplined that
activity.
Mr. Ose. OK, you are going to have to speak in a language I
understand and can communicate with.
Mr. Makovich. OK.
Mr. Ose. Does that mean prices to consumers are higher or
lower?
Mr. Makovich. Prices to consumers would, I think, be
terribly higher if you force long-term contracting. Remember,
50 percent of the stranded costs, when we started this whole
process in California, were long-term energy contracts signed
at what people thought would be reasonable rates out in the
future, which were the PURPA contracts.
Mr. Ose. If the IOUs had the option of entering into long-
term contracts to meet the load that they are historically
familiar with----
Mr. Makovich. Right.
Mr. Ose. [continuing]. Does the same conclusion hold?
Mr. Makovich. No. The right type of long-term contract
would be to require people that serve electric customers to
sign capacity contracts. There is no reason to commit to the
energy--to the utilization of the power plants. They need to
pay people to have enough capacity to meet those future peak
loads, and then simply have the option to run those power
plants to produce the energy that they need.
Mr. Ose. So, a request from a power--or an IOU, such as
PG&E or Southern California Edison or San Diego, have the
hedging tool that a forward contract provides be available but
not mandate----
Mr. Makovich. Right.
Mr. Ose. [continuing]. You think it would lead to lower
prices?
Mr. Makovich. If you required people that produced--that
served customers with electric energy, if they were required to
also have enough capacity to meet their peaks, then you would
create a market in which long-term contracting for capacity
would be the mechanism by which that capacity payment is made.
And then you are paying people to have enough capacity so you
do not have a shortage.
Mr. Ose. Thank you. I understand that.
Mr. Makovich. OK.
Mr. Ose. I have one final question, Ms. Lynch, the PUC
recently recharacterized a certain amount of capital that PG&E
or Southern California Edison or San Diego to change it from
stranded investment to, if I understand correctly, advance
payment for future power purchases. I am trying to figure out
why that happened. I mean, explain that to me, if you would.
What is transpiring there?
Ms. Lynch. It is an accounting--it is a regulatory
accounting treatment where, under the auspices of AB1890, two
accounts were set up. One was for payment of their stranded
assets, and one was for payment of their--I like to
characterize it as operating costs versus capital costs.
Mr. Ose. OK.
Ms. Lynch. Although I think that is oversimplifying it. The
former PUC said you can essentially accelerate the depreciation
of your capital assets in three ways. You can make a profit off
the rates that are charged, and essentially match that up
against an accelerated depreciation schedule. You can sell off
your plants, and the profits used from that would also
accelerate depreciation. And then you can also--there was the
revenue from the ratepayer. There was the revenue that they
made themselves from their retained generation, because they
were selling that retained generation in the market. And then
there was the plant sales. So three different revenue streams
that could pay off their capital costs on an accelerated basis.
Mr. Ose. In fact, reduce to zero the basis that they had in
those plants?
Ms. Lynch. That was the goal of AB1890. And the bargain was
that they got to accelerate the depreciation of their capital
costs, which many people at the time thought were stranded
assets, in order to assume the risk, on a going-forward basis,
of their power purchases, of their operating costs.
So, rather than having the guarantee of the regulatory
compact, that their costs would be covered, they took a
bargain. They said we will get money up front for accelerated
depreciation of capital if we take the back end risk of power
purchase liabilities.
What the PUC did, in essence, was say, hey, wait a minute.
Some of those revenues that you originally counted against
accelerating your capital cost recovery were actually operating
revenues. You got money from the ratepayers in their bills
which--on an ongoing basis. You also got money from selling
your own generation into the market. And that, in fact, your
power purchase liabilities should be netted against your power
purchase revenues before you get to transfer all those revenues
over for accelerated depreciation of your capital costs.
So what the PUC said was, it is time to true-up the books.
It is time to net out your operating costs and revenues before
you just take the revenues and match them against your capital
costs. Because, essentially, you are prepaying your mortgage
before you pay your power bill or your light bill or your
grocery bill. So we were saying you have got to pay your bills,
your operating costs first, and then if you have money left
over, you can prepay your mortgage. But you do not get to
prepay your mortgage, and then come back to the ratepayers and
say please help me with my monthly bills.
Mr. Ose. The PUC made this determination recently, if I
recall.
Ms. Lynch. On March 27th.
Mr. Ose. It would seem to me that the logic that you have
just elucidated would also have held prior to the investor-
owned utilities advising folks that they had recovered their
entire stranded costs. I am trying to understand why this
decision was not made last year at this time, instead of 6
months after the investor-owned utilities had advised everybody
that they were ready to be free of 1890.
Ms. Lynch. Well, the investor-owned utilities came into the
Commission and applied for what they called a rate
stabilization plan in October. And in that proceeding
thereafter, some consumer groups came in and said hey, wait a
minute. When we are looking at the true-up of all the
accounting, you should make sure that operating costs are
netted against operating liabilities before you apply them to
capital costs. And so the PUC had a public proceeding where we
took evidence from all sorts of parties and had lots of
hearings from the period of October through March before we
made the decision. So we did have evidentiary hearings and had
full opportunity for public comment before we made the
decision. But the decision--the question arose in October, and
we fully vented it in public over the intervening months. But I
will say this, we did take a little bit longer time in that
decision because we put to the head of the pack the question of
a rate increase. And so we originally granted a rate increase
in January, and that did take precedence to this accounting
true-up question.
Mr. Ose. Is this recharacterization the substance of the
lawsuits in Federal court right now between the IOUs and the
PUC?
Ms. Lynch. Well, I have to say the utilities have thrown in
the kitchen sink in claims, and so I am not exactly sure of
their list of claims today. I would have to go back and check.
Mr. Ose. Well, I mean, is this one of them?
Ms. Lynch. This well could be one of them. The essence of
their claim is that they should be entitled to recover whatever
they pay for power purchase costs, regardless of how much they
got to prepay their mortgage in the past.
Mr. Ose. They are taking the position, under 1890, that
they have recovered their stranded costs, and therefore should
be relieved of the subsequent or the precedent requirements
thereof?
Ms. Lynch. They are taking the position that they do not
have to true-up their operating costs before they transfer
operating revenues over to the capital side.
Mr. Ose. You are arguing over definitions of what is an
operating cost versus a capital cost, is that what you are
saying?
Ms. Lynch. It is an accounting treatment question. But I
think that the utilities filed rate doctoring case actually
involves much more than the accounting treatment. It involves
the fundamental principle of whether a State, under State
jurisdiction to control the retail rate paid by the ratepayer,
has authority to shape the rate over time, and whether a State
has the authority to pass a statute like AB1890 which gave a
bargain and a risk to the utilities, or whether, instead, when
the Federal Government allows market rates on the wholesale
level to fluctuate, whether the State has to pass those
volatile costs through in realtime without shaping the retail
rate. So it is a larger policy question that is really at issue
in the filed rate doctrine case.
Mr. Burton. I have two quick questions. I hope they are
quick. We heard from the other panel about the high cost of
natural gas and how it has driven the costs of their businesses
through the roof. In California, you have some substantial
supplies of natural gas in the ground. What is the position of
the administration, or do you know, on allowing the research
and exploration for these reservoirs of natural gas to help
create an increase in supply so that the cost can be going
down?
Ms. Lynch. I just speak for the Public Utilities Commission
or for myself, as a commissioner. Certainly the Public
Utilities Commission has done everything in its power to
increase capacity for natural gas in California, and its
storage. So, for instance, early last year----
Mr. Burton. I am not talking about storage, I am talking
about exploration.
Ms. Lynch. The Public Utilities Commission does not do
exploration.
Mr. Burton. Well, I would like to maybe have somebody
address that question to the administration, because you have
reservoirs--according to some geologists that we know--in
California of natural gas that could be tapped to increase the
supply.
Let me ask one more question of Mr. Madden from FERC. How
much could the California utilities have saved if they had not
been prevented by the CPUC from entering into forward
contracts? And can you give us an answer to that, for sake of
the record?
Mr. Madden. I will provide my answer. I have already
provided my answer to the committee, but I need to step-back so
everyone will understand this. When we had the restructuring in
California, the CPUC required the utilities, for the most part,
to divest their thermal plants and CT plants; they kept their
hydro, nuclear, except a couple of their plants. That was
approximately 20,000 to 25,000 megawatts. Those plants were
bought by numerous generators at premium prices, which helped
the California utilities buy down their stranded costs.
As part of that structure, the utilities had to sell into
and buy from the PX. And I do not know for a fact--I assume Ms.
Lynch knows better--there is a per se prudence established in
California that if you buy in the spot market, you are going to
be per se prudent. And I also believe that there were some
restrictions initially set by the CPUC on utilities as to the
level or the amount of bilateral contracts they could have
versus their overall portfolio. So, essentially, most of the
market in California was in the spot market, because there was
very little, if any, bilateral forward contracts. It has
increased today. I think it might be 10, maybe 15 percent. That
compares to a number of other States, I must say, that never
required the divestiture of the utilities' facilities. And if
they did, they allowed the utilities to buy back the power for
a certain period of time. So with that perspective, let me try
to answer your question.
Now, if we look at, for example, an entity wanting to
purchase a forward contract last year, and the forward
contract, let us say, was to start in May and they were looking
for a price in April. There is some transparency out for
California, and they can look at what the prices are, for the
next month, for a 30-day service at Palo Verde or the
California-Oregon border.
So when responding to the question of the committee, we
looked at the amount it would charge for a megawatt hour of
electricity last April for May delivery was $32 a megawatt
hour. Then we looked at the recent filing that the Cal ISO
submitted dealing with the $6.2 billion. They state for the May
spot price in California, they averaged it at approximately $58
a megawatt hour.
So if you subtract the $32 that you could have paid from
the $58 that the spot was going for, we arrived at a $26
megawatt-hour differential. Now, if you take the transmission
load in California on a given day in May, you can approximate
it is about 19 million, almost 20 million. If you look at the
20 million that is on the load times the differential of $26--
the difference between the $32 and the $58--for May alone, if
utilities bought on the spot for the delivery, they would have
saved approximately $520 million for May.
Mr. Ose. If I understand, at the time in California, the
power distributors were required to buy at the price set by the
PX on any given day. So, it might well have been the $58 price.
I mean, their buy-sell requirement forced them into the PX to
buy, is that correct?
Ms. Lynch. Well, what happened was, under the FERC rules,
the highest priced bidder, that price was paid to everybody.
And that was the PX price. Now FERC has changed that rule
somewhat by saying essentially up to $150 everybody gets the
same price, and then you file some paperwork and you get a
higher price. But at that point----
Mr. Ose. FERC defined the rules for the PX?
Mr. Madden. Mr. Chairman, I believe Ms. Lynch is incorrect.
We had a filing by the ISO, a tariff filing under section 205
of the act to implement the restructuring. The FERC reviewed
that, received comments from the CPUC and from other parties,
who I believe also supported it. They were required to pay the
market clearing price established at the PX at that time. But
this was not FERC alone. It was the submission by the ISO, and
support and comments from other entities.
Now, Chairman Burton, I was also asked by committee to get
an idea of, if we look at a big city in California, how much
could we save? Well, Secretary Abraham testified last month at
the Senate hearing. He noted that there was an offer by Duke to
provide San Diego its entire load for a year at 55 megawatts an
hour. I do not know the terms and conditions of that offer,
other than the price. There may be some added provisions in it.
But if you look at the load of San Diego, what its needs are,
and you multiply that times the price that Duke was going to
offer San Diego to meet its needs, San Diego, alone, would have
saved $5 billion.
Mr. Burton. $5 billion?
Mr. Madden. $5 billion. This is somewhat hindsight. I do
want to make a comment that, contrary to some on the panel, I
do believe in entities or IOUs having a mixed portfolio of
contracts, spot, short, medium, and long. This does indicate
that, based on hindsight, had they done this, this is how much
the consumer would ultimately save.
Mr. Burton. OK, let me ask a few more questions, then I
will let my colleague from California, Mr. Horn, finish up.
This is on the issue that FERC, ``Blew out the price
caps.'' Mr. Winter, on December 7th you made an emergency
request to FERC to relax the hard price cap, is that not
correct?
Mr. Winter. That is correct.
Mr. Burton. Is it not correct, because not enough bids were
coming in and the system was going to collapse?
Mr. Winter. That is correct.
Mr. Burton. Going into this summer we are being told that
there is a shortage of 3,000 megawatts. Mr. Winter, what would
happen, under these circumstances, if FERC imposed a hard price
cap? Would the threat of blackouts get worse or better?
Mr. Winter. I think it would probably get worse, because if
the price cap was below what other States could provide at
their cost, then we would end up being unable to get that
power, and therefore would have to cut the load.
Mr. Burton. OK. Mr. Makovich, would hard price caps produce
more or fewer blackouts this summer?
Mr. Makovich. Price caps, as currently set, either soft or
hard, are making it worse, so they are going to extend the
hours of outages.
Mr. Burton. And Mr. Madden, do you want to answer that same
question?
Mr. Madden. I cannot get into specifics because the issue
is before the Commission in a number of hearings. But, my
personal opinion is that hard caps do not provide the supply
and the incentive for the need for power, for the need for
generation.
Mr. Burton. So your answer is pretty much the same as Mr.
Makovich's?
Mr. Madden. That is my personal opinion.
Mr. Burton. OK. Mrs. Lynch, what would a hard price cap do
this summer with a 3,000 megawatt shortfall?
Ms. Lynch. It is Ms. I am not married.
Mr. Burton. OK. I am sorry.
Ms. Lynch. That is OK.
Mr. Burton. Forgive me.
Ms. Lynch. I would join with economist Frank Wallach from
Stanford and Chris Woodruff from southern California, and even
Paul Krigman in the New York Times who say that price caps in a
dysfunction market where there is no competition are needed as
a market mitigation measure. The problem here is folks
withhold. The sellers and the generators withhold. And if you
do not discipline the sellers, then they have no incentive not
to withhold, and then bid in right when the price gets to the
very highest level. So even conservative economists like Paul
Krigman of the New York Times saying in this market, with this
level of dysfunction and market power evidenced, price caps are
a necessity.
But I would go farther and say in fact what we need is
cost-based pricing. We need cost-based pricing as a market
mitigation measure, so that the sellers have to prove up their
cost, and then gain a reasonable profit, rather than the many
hundreds of times of profit that they are sucking out of the
California economy.
Mr. Burton. So you disagree with your colleagues at the
table?
Ms. Lynch. Certainly as to that effect, that is right. But
I do agree with the vast majority of economists who have
studied this market, in particular.
Mr. Madden. Chairman Burton, could I add?
Mr. Burton. Yes.
Mr. Madden. As I note in my direct testimony, the
Commission staff has prepared a market mitigation plan to go
forward. And hopefully the Commission will bless that plan or
approve some type of plan going forward in terms of addressing
the current concerns of outages, the pricing at key times, the
need for confidential information from the generators, and the
questions of the requirement that generators be required to
schedule and provide the service, if in fact they have the
megawatts. We are receiving comments on that. So the concerns
that are being raised as to manipulation, withholding, and
market power are indeed going to be addressed in the very, very
near future by the Commission.
Mr. Burton. Give me a timeframe.
Mr. Madden. I would say we are on schedule. The Commission
noted in its December order, by May 1.
Mr. Burton. OK. Thank you, Mr. Chairman.
Mr. Ose. Mr. Horn.
Mr. Horn. Miss Lynch----
Mr. Burton. Ms. Lynch.
Mr. Horn. Ms. Lynch, the latest--well, I called her
president to start with. Is it a president or chairmanship?
Ms. Lynch. It is a president.
Mr. Horn. President. We will go back to president then.
When was the latest increase per kilowatt hour put at 3
percent? Did the Commission do that?
Ms. Lynch. 3 cents a kilowatt hour.
Mr. Horn. 3 cents per kilowatt hour.
Ms. Lynch. I wish it were 3 percent. We voted an additional
3 cents on March 27th. On January 4th, we voted a 1 cent
increase, which was on average--a 1 cent increase is, on
average, a 9-percent increase.
Mr. Horn. How did you come to that determination?
Ms. Lynch. Through an evidentiary record where we hired
independent auditors to look at the utilities and their
affiliated companies' books and records, and then also allowed
all parties an opportunity to present information about how
much was needed in order to buy power in California.
Mr. Horn. Apparently it was issued, right?
Ms. Lynch. Yes.
Mr. Horn. OK. Now, did it result in $45 million a day being
spent on purchasing electricity? Did it help do that?
Ms. Lynch. Well, whatever is spent is spent in the
California market. The question is who is going to pay for that
power purchase. And so what the Commission did was say the
ratepayers of the investor-owned utilities in Southern
California Edison and PG&E territory will bear the burden of
paying the exorbitant wholesale prices to the extent of a total
of a 4 cent increase on the kilowatt hour rate.
Mr. Horn. Do you think the explanation could also be that
the rate increase would be allocated between the State and the
small generators? Obviously the utilities would get some of it,
but a lot of it would have been to get some money in the pot
for everybody, I would think.
Ms. Lynch. Absolutely, Mr. Horn.
Mr. Horn. Yes.
Ms. Lynch. And, in fact, when we ordered the additional 3-
cent rate increase, we also ordered the utilities to pay those
small generators who were not being paid. I was quite
disturbed, and my colleagues as well, that the utilities had
stopped paying those small generators who are so key and
critical to our reliability needs. So they are starting to pay.
The order was, as of April 1st, you shall pay those small
generators what is owed for the power produced by those
generators.
Mr. Horn. Thank you, Mr. Chairman.
Mr. Ose. I want to followup on something. Mr. Madden, if I
understood you correctly, you said that FERC's jurisdiction
extends to roughly half of the market in California.
Mr. Madden. I do not believe I said half, but we do not
have a substantial amount of jurisdiction over the energy that
is sold into California because of municipals and co-
operatives. It is about 50 percent, we do not have jurisdiction
over 50 percent of the market West-wide.
Mr. Ose. OK. Energy Secretary Abraham advised me that it
was 47 percent non-jurisdictional in terms of the California
market specifically.
Mr. Madden. Chairman, I just do not have that figure. You
have to look at how much energy is generated, and I just do not
have it. It is a substantial amount. It is 40 percent, maybe. I
do not have the exact figure.
Mr. Ose. Well, my real question is actually for Mr.
Makovich, and that is that if FERC only regulates 40 to 50
percent of the wholesale power market in the West or in
California, what is the consequence of putting caps on that
portion of the market?
Mr. Makovich. Right. The price caps are a very, very
limited tool under the best of circumstances. If you can only
impose it on half the market, you are likely to create far
worse distortions than any kind of gain you are going to get
from these price caps. As Terry mentioned, you are going to be
giving people the incentive, for example, to move power to an
area of higher return; to export it from California to Palo
Verde to get a better return. And we saw that happen when we
had these soft price caps in effect.
Mr. Madden. Mr. Chairman, as I mentioned, 50 percent of the
energy produced in the West is non-jurisdictional to the
Commission. And, of course, the issue has come up in a number
of dockets, and I cannot talk about the merits, but I can tell
you my views on that. It is very difficult to put a cap, as you
mentioned, on only half the market, when the other half of the
market is not capped. We saw that problem with gas 15 years ago
when we regulated the intrastate side. Actually we did not
regulate the intrastate side, but regulated the interstate
side, and the interstate side of the market went to the
intrastate side of the market.
Second of all, we have substantial amount of bilateral
contracts in the West. Do you want to undo those contracts? If
you had a cap and if those contracts exceeded the cap.
The third thing is you really do not have a spot market in
the West as you do in California. So you do not have the
control; you do not have the transparency you would need to do
that. That said if a cap adds to or increases supply and
decreases demand, maybe you should look at it. But it has to
occur first.
Mr. Ose. Ms. Lynch.
Ms. Lynch. California did have price caps up until November
1st, and the ISO voted an effective price cap of $250 a
megawatt hour last July. So it is not as if we have not had
experience with a market that actually worked somewhat under
the prior caps. It is really the FERC's unprecedented action,
beginning with their draft order in November and then
continuing and extending more and more that has caused this
issue and the bleeding of the California economy because of
these outrageous wholesale prices. But it did work before.
Perhaps imperfectly, but certainly much better than it works
today with nothing, no protection for the California businesses
or consumers.
Mr. Burton. May I make one final comment?
Mr. Ose. You may, Mr. Chairman.
Mr. Burton. I just want to make one final comment. I think
we are about through with this panel.
Mr. Ose. We are.
Mr. Burton. It is apparent, I think, to anybody who has
taken a hard look at this, you need more generation in this
State, you need more power plants and you need them online as
quickly as possible. So, I hope that there is something worked
out between the environmental organizations in this State and
the utilities and the government so that they can get on with
generating enough electricity to take care of the need. Because
if you do not do that, this problem is going to get worse and
worse and worse. I think that is what you mean, is it not, Mr.
Makovich?
Mr. Makovich. Yes.
Mr. Burton. Yes. Thank you.
Mr. Ose. I want to thank the witnesses for coming. It has
been a long panel, and I apologize. But you have so much
information that we would like to glean from you, we could
probably go another couple of hours. But we will not. So,
anyway, thank you all for coming.
We are going to take a 5-minute recess, and then we will
have the third panel join us.
[Recess.]
Mr. Ose. OK, we are going to reconvene. I want to welcome
our third panel. That would be the Honorable J. William
McDonald; Mr. Brian Jobson; Ms. Becky Dell Sheehan and Mr.
Thomas Stokely. And, as with the first two panels, we are going
to swear you in. So if you would rise, please.
[Witnesses sworn.]
Mr. Ose. Let the record show the witnesses answered in the
affirmative.
As you have seen in previous panels, we have an opportunity
for each of you to make an opening statement of no more than 5
minutes in length. So we will start with Mr. McDonald. You are
recognized for 5 minutes.
STATEMENTS OF J. WILLIAM MCDONALD, ACTING COMMISSIONER, BUREAU
OF RECLAMATION; BRIAN JOBSON, PRINCIPAL POWER CONTRACT
SPECIALIST, SACRAMENTO MUNICIPAL UTILITY DISTRICT; BECKY DELL
SHEEHAN, ASSOCIATE COUNSEL, CALIFORNIA FARM BUREAU FEDERATION;
AND THOMAS STOKELY, SENIOR PLANNER, TRINITY COUNTY PLANNING
DEPARTMENT
Mr. McDonald. Thank you, Mr. Chairman. I do have a written
statement, and I will simply summarize it at this point.
Reclamation, as you may know, is the second largest
hydropower utility in the United States. We have 194 generating
units in 58 power plants throughout the 17 Western States with
an installed capacity of just a little less than 15,000
megawatts. While our power plants are located throughout the 17
Western States, I will limit my remarks today to those parts of
our system that are available to provide power to California.
Before I do that, though, let me review very quickly the
six basic conditions under which our power plants are operated.
The first, of course, is that in a hydropower system water is
the fuel. While it has the distinct advantage of being an
annually renewable fuel, it is also finite and highly variable
from year to year. That is always the underlying condition in
which a hydropower system operates.
Second, I would emphasize, in the context of our Federal
power plants, that even if water is physically available in
storage, the annual amount that is available to actually
release through a power plant is governed by a complex set of
laws in all instances. I would, generally speaking, break those
into three. There are instances in which by virtue of
international treaties, interstate compacts, and judicial
decrees of the U.S. Supreme Court, the amount of water that is
delivered on an interstate or international basis is governed
by those institutional arrangements.
There often are Federal statutes which govern project
operations and the parameters within which we operate. And
finally, every project is, of course, individually authorized.
Without exception, power is always a secondary purpose, not the
primary purpose of any Reclamation project.
Third, it is in that context that, as we schedule releases
of water, they are always governed by water user demands, since
water supply is the primary purpose of our projects, both for
irrigation, and municipal and industrial purposes.
Fourth, to the extent that we do generate power, it is
always first used for project purposes; for example, the
pumping of irrigation water supplies. It is only power that is
surplus to project use that is available for marketing. With
respect to that marketing, to take a very complex system and
simplify it, I would make three main points.
First of all, the marketing is always done by the Western
Area Power Administration or the Bonneville Power
Administration, which are components, of course, of the
Department of Energy. It is they who do the contracting and
purchase all replacement power that is needed pursuant to those
contracts. Second, they obviously enter into those contracts in
accordance with Federal law. And finally, I would note that in
general they contract to sell more capacity than is available
on an assured basis year in and year out given the vagaries of
a hydropower system. And it is expected, and it always has
been, that they, too, will be in the marketplace buying power
from time to time to cover the firm contractual commitments
that they have entered into when we are in low water years.
Fifth, there are transmission constraints. I will not try
to describe those at length here--there is a map associated
with my written testimony--but will simply point out that even
if Reclamation can generate energy, we cannot necessarily get
it at all times to the right place given system constraints. We
are not an owner or operator of any transmission, so that is
beyond our control.
And finally, in this contemporary climate we operate with
certain environmental considerations and respect for tribal
trust assets. That most often comes in the form of downstream
riverine environments and aquatic species that are of interest
under a number of Federal laws. That largely translates into
some limitations in certain instances on peaking power, that is
to say, on instantaneous capacity, but not on total energy
generated over time. That is because, except in a flood control
circumstance, almost all water that we have available to us
eventually runs through our power plants.
Let me turn now to the three major systems that are
available to benefit California, touching very briefly on
those. With respect to the Central Valley Project, we have
about 2,000 megawatts of installed capacity. About 75 percent
of the energy generated is surplus to project use. The other 25
percent is used for project pumping. All of that surplus energy
is under contract by Western to users in California,
principally in northern California.
For this summer, we face a forecasted runoff of only about
60 percent of average. We therefore think power generation will
be only about 80 percent of average this summer. In that
context, obviously, we will not be able to contribute, for lack
of fuel, as much as we otherwise might. We are doing three main
things, within that context, to try to help the California
situation with the Central Valley Project. First of all, we
have moved all maintenance forward so all units will be back
online by the first of June. I might say, as a footnote, no
planned outages this winter in any way impacted generation
capacity because we lacked water to move through the remaining
units that were up and running.
Second, we have been and will continue to shift project
pumping to off-peak hours as much as possible, working in
cooperation with the State water project, although there are
some significant limitations on our ability to do that.
Finally, we will, of course, work with the California ISO
and Western to optimize the scheduling of releases of our water
for peak periods within the physical and operational
constraints of our reservoir operations and our contractual
deliveries to our irrigation and municipal and industrial
contractors.
Let me turn next to the lower Colorado River dams, by which
I mean Hoover, Parker, and Davis Dams and power plants, all of
which are located on the Colorado River straddling the Nevada-
Arizona California-Arizona borders. These plants have about
2,400 megawatts of installed capacity amd are operated within a
very complex institutional system governed by the ``Law of the
Colorado River'' that essentially dictates the annual release
of water through the power plants on a monthly schedule.
Two things I would emphasize in that context. To the extent
there is surplus power, 50 percent of it, by law, is sold to
California. Southern California entities are the beneficiaries
of Hoover, Parker, and Davis. All of that power is under
contract pursuant to Federal statutes.
Finally, again with respect to maintenance, we have
accelerated all maintenance, and will have all units that were
otherwise regularly out for maintenance this winter back on
line by the first of June.
The Federal Columbia River Power System is the third major
system one that can provide power. When I talk about the
Federal Columbia River Power System, I am talking about the 12
Corps of Engineer facilities and the two Reclamation power
plants that operate as an integrated system for hydropower and
flood control in the Columbia River Basin. Historically,
California has peak demand in the summer, and the Pacific
Northwest and British Columbia Hydro would sell power to
California in the summer. Vice-versa, the Pacific Northwest
peak load condition is in the winter. California would
typically sell to the Pacific Northwest in the winter. That is
not going to be possible this summer. Basically, we are at a
near record drought of only 50 percent of average this year,
and all power generated by the Federal Columbia River Power
System is going to be required by the Bonneville Power
Administration to meet its contractual commitments to its
contractors, and even then, it is likely to face shortages and
have to purchase additional power in the marketplace.
We are also quite concerned, in the face of the drought,
about conserving fuel, or water, as best we can because our
reservoirs are at historically low levels. As we go into the
November-December timeframe, if a normal water year does not
materialize, the Pacific Northwest will be in worse condition
than we are presently.
Mr. Chairman, with that, I will conclude my oral comments
and be glad to respond to questions.
Mr. Ose. Thank you, Mr. McDonald.
Our next witness is Mr. Brian Jobson, who is the principal
power contract specialist for the Sacramento Municipal Utility
District. Mr. Jobson, 5 minutes.
[The prepared statement of Mr. McDonald follows:]
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Mr. Jobson. Good afternoon Chairman Ose and Chairman Burton
and Congressman Horn. I am here representing the Sacramento
Municipal Utility District to testify on the power supply
reductions that could result from restoring fisheries on the
Trinity River in the way prescribed by the record of decision
that mandates increased flows to the Trinity River. But before
I get into that, I want to make a note about the Federal
agencies involved in SMUD's power supply from the Federal
Government.
As they are under your purview, I think it is important
that you know that the cooperation that we have received in
making as much power available from the CVP has been
phenomenal. And this is by both the Bureau of Reclamation and
the Western Area Power Administration. We have advanced
customer funds, tens of millions of dollars, to rewind units,
repair tunnels, avoid bypasses of power plants, add
transformers at transmission stations and replace any other
facilities that are in need of it, and as was mentioned by Mr.
McDonald, accelerated on maintenance necessary to make sure all
facilities are in service. At all levels in these organizations
the cooperation has been terrific.
Getting on to the Trinity River issues. On October 19th,
1999, the Department of Interior's Fish and Wildlife Service
and Bureau of Reclamation released for comment the Trinity
River Environmental Impact Statement report. The report's
preferred method for restoring fishery habitat of the Trinity
River relies on dramatically increased water releases from
Trinity Dam to create a more natural flow regime. The Fish and
Wildlife's preferred flow schedule will result in reduced
availability of power generation from the Central Valley
Project, degrading the reliability of California's electric
system, and driving up the price of power to consumers. This
comes at a time when California is suffering an electricity
crisis, as you have heard, with rolling blackouts and dramatic
price spikes that threaten the economy of California, the West,
and the Nation as a whole.
Specifically, the proposal would result in approximately
250,000 megawatt hours of hydroelectric energy forgone in an
average year if interior's alternatives are implemented. This
is enough energy to meet all the needs of 31,000 households for
a year, or to meet all the needs of the State of California on
a summer afternoon for about 6 hours. The capacity lost in a
critically dry year, which is when hydroelectric capacity
should be measured, would be about 150 megawatts. And when
combined with the power impacts of implementing the Central
Valley Project Improvement Act, which has been largely
implemented, the total reduction would be approximately 325
megawatts, as has been documented by the Western Area Power
Administration.
Interior's proposed flow decision would also reduce water
supply to CVP supplied farms and cities, and raise temperatures
in the Upper Sacramento River, increasing mortality to juvenile
salmonids that are supposed to be protected by the Endangered
Species Act.
SMUD contends that many of these adverse impacts are
largely avoidable if the Trinity River restoration proposal is
amended to include non-flow habitat maintenance measures to
conserve water, essentially getting good results by using less
water. For instance, SMUD has suggested in its comments on the
EIS/EIR various alternative ways of restoring the fishery.
Modifying interior's proposal, for instance, by controlling
revegetation of gravel bars used for spawning by manual
measures, hand crews or light equipment, rather than keeping
them flooded for weeks at a time to prevent the seeds from
germinating.
Another example, we have suggested constructing silt traps
on tributary streams to reduce siltation in the river, as has
been done at Grass Valley Creek, rather than relying on very
high flows to entrain the silt to be deposited downstream in
the Trinity River flood plain or the Klamath River further
downstream.
Most remaining features of the Interior restoration plan
are retained in our power alternative, including pulse flows,
but at a reduced magnitude and duration. And while the power
alternative will result in some loss of hydroelectric
generation and water supply, the loss would be roughly 70
percent reduced from Interior's alternative. In addition,
adverse impacts on Sacramento River and Delta endangered
species would be less under the power alternative. These ideas
were rejected by Interior under the prior administration. At a
time when the State of California is desperately in need of
more power production, it seems incomprehensible to SMUD that
the Federal Government would act in a counterproductive manner
by taking power resources off line when better and less drastic
alternatives exist.
In the interest of time, I do not want to dwell on each and
every concern SMUD and other power users like NCPA have with
the EIS/EIR, or spell out in detail the scientific flaws and
procedural infirmities with which the Endangered Species Act
compliance and the National Environmental Policy Act compliance
were completed. These are identified in documents that are of
record already, and these are issues that are being litigated
presently.
The good news is that it appears that the Department of
Interior in this new administration will have the opportunity
to revisit this decision. And I will point out that there are
more agencies involved within Interior than the Bureau of
Reclamation, who is the only one represented here.
In light of SMUD's history as an environmentally conscious
utility, and its own belief the Trinity River fishery should be
restored, SMUD and other CVP power customers, like the Northern
California Power Agency, sincerely hope that interior will
reconsider the power alternative during its preparation of the
supplemental environmental impact statement report that it
appears the Federal court will require.
SMUD is willing to work with interior to modify the power
alternative to address legitimate concerns that may be raised.
We hope that interior will engage in a meaningful dialog with
SMUD and other power and water customers to develop a final
restoration plan that minimizes impacts on water and power
supply, and on the Sacramento River fisheries while restoring
Trinity River fishery habitat. Any assistance the committee can
provide will be greatly appreciated.
Mr. Ose. Thank you, Mr. Jobson. We will be back to you with
questions after we get through the other statements.
I would also like to welcome today Ms. Becky Dell Sheehan,
who is the principal power contract specialist for the
California Farm Bureau. Welcome, Ms. Sheehan, for 5 minutes.
[The prepared statement of Mr. Jobson follows:]
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Ms. Sheehan. Thank you, Mr. Chairman. Actually, if I could
clarify the record, my title is mistaken. I am an associate
counsel, and I work primarily with water and land use issues.
Mr. Ose. We are interested in accuracy and we will make
that correction.
Ms. Sheehan. Thank you. Thank you, Mr. Chairman.
My name is Becky Sheehan, and I am Associate Counsel for
the California Farm Bureau Federation. The California Farm
Bureau Federation represents approximately 40,000 farm and
ranch families, constituting approximately 80 percent of
California's production agriculture. Farm bureau members have
been paying more than $650 million annually for their electric
service, and with the recent rate increases, they will be
paying more than $900 million. When this year is compared to
last, our members' energy costs will have risen approximately
$250 million.
The State of California cannot afford any further
reductions in energy and water supplies this year or in the
near future. The Trinity River Fishery Restoration decision
will have impacts that were not adequately considered in the
decision's joint environmental documents. The current Trinity
decision will exacerbate a crisis that has already begun to
jeopardize the future of agriculture in California.
California's farms provide a resource of State, national, and
worldwide importance. As such, the lead agencies should
supplement the existing environmental document and consider the
Trinity decision's impacts in light of the current energy
crisis.
The current energy crisis and the ongoing water crisis are
intrinsically linked, with a shortage of one increasing the
cost and the availability of the other. This year in California
we will have probably a dry or critically dry water year which
will limit our ability to produce hydropower, which is the
flexible and reasonably priced energy source California relies
upon to cover our peak energy periods. At the same time, our
usual dry year alternative, groundwater, that will be necessary
to use to sustain California during a long, hot, and dry summer
will be very difficult to draw upon because the high energy
cost may make pumping groundwater cost prohibitive.
Farmers and ranchers cannot pass the higher cost of doing
business on to the consumer. While agriculture is an important
business in California, the farms and ranches are predominantly
family operations with very small profit margins. Our farmers
and ranchers cannot slash their overhead and ride out tough
financial times because there is no large overhead to cut. As
such, if all market indicators are proven correct, we will lose
substantial agricultural resources this year because of the
combination of the energy crisis, the dry water year, and the
regulatory drought.
The Trinity decision is another example of an ill-
considered government policy that will sacrifice our valuable
agricultural resources without truly considering and mitigating
these impacts as required by State and Federal law. The final
environmental document does recognize that the Trinity decision
will cause significant groundwater impacts due to overdraft,
that agricultural production will be lost, and that
agricultural lands will be fallowed. However, the magnitude of
these impacts is not properly recognized. The agency's
recommended mitigation for these impacts is the full
implementation of the CALFED Program and the Central Valley
Project Improvement Act. This is entirely inadequate, as these
programs will have additional negative impacts to our
agricultural resource base. While Farm Bureau is not opposed to
the CALFED Program--in fact, we have been actively involved
since its inception and continue to be so involved--we do have
substantial concerns about the current programs significant and
unmitigated impacts upon California's agricultural land and
water resources.
Finally, the Farm Bureau has grave concerns about the
underlying science and policy decisions that were made relating
to fish biology; in particular, the Trinity decision's
temperature impacts on threatened and endangered fish in the
Sacramento River. Several listed species within the Sacramento
River are being sacrificed in order to improve fish populations
within the Trinity River. We are concerned that the regulatory
agencies have not sufficiently considered these impacts or
developed policies to maintain the appropriate temperatures in
the Sacramento River during the implementation of the Trinity
decision. Thank you.
Mr. Ose. Thank you, Ms. Sheehan.
Finally, on our third panel, I would like to welcome Mr.
Thomas Stokely who is the senior planner for the Trinity County
Planning Department. Thank you for joining us. You are
recognized for 5 minutes.
[The prepared statement of Ms. Sheehan follows:]
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Mr. Stokely. Thank you, Mr. Ose, and thank you, Mr. Burton
and Mr. Horn. I would also like to thank our representative,
Wally Herger, and Mr. Thompson as well, for getting me here
today.
Mr. Ose. Well, I will tell you that Mr. Thompson twists my
arm, so he is very effective.
Mr. Stokely. He did? OK. [Laughter.]
It is an honor to be here. As you said, I am a senior
planner with the Trinity County Planning Department, and I have
worked on restoration of the Trinity River since about 1989. I
am Trinity County's lead agency representative for the EIS/EIR
that the other witnesses referred to, and I have been working
on that project since 1994.
The main points I would like to make today are that the
Federal court system is dealing with the Trinity River flow
decision, limiting its impacts this year on power, and it will
actually provide some minor benefits to power production this
summer. Second, delaying implementation of the Trinity River
flow decision will not assist in dealing with the energy crisis
during the year 2001. And third, the evaluations in the Trinity
River EIS/EIR actually show some power benefits from
implementing the preferred alternative, particularly for future
years, which helps to offset some of the negative impacts of
the power implications involved in the Trinity River record of
decision.
As far as the courts are concerned, on March 19th Federal
Eastern District Court Judge Oliver Wanger issued a verbal
preliminary injunction which limited increases in the Trinity
River this year to a critically dry year flow, which is an
increase of 28,600 acre feet. The no-action alternative is
340,000 acre feet. So that would put the flows down the river
this year at 368,600 acre feet.
Therefore, even if the year were to go to a dry year--
which, as I understand it, it is a critically dry year now. If
it were to go to a dry year, the river would not receive the
prescribed flows in the record of decision, which would be
113,000 additional acre feet. And in addition to that, he has
directed that a supplemental environmental impact statement be
prepared that would deal with the energy crisis in California,
as well as issues related to the Endangered Species Act.
And I might add that the Bureau of Reclamation has filed
declarations in Federal court which indicates that this
additional water going down the river this year will not come
out of any CVP water contracts, it will come completely out of
storage at Trinity Lake, which is not something that we are
very happy about in Trinity County, but it actually is to the
advantage of some of the other panelists and their constituents
here.
The additional in-stream flows will come out of Trinity
Lake storage, and the relationship of that to power production
is that the additional 28,600 acre feet of water that is going
down the Trinity River this year that would not otherwise be
going down the river in the absence of the record of decision,
will in fact generate power at the Trinity Dam Power Plant at
about 400 kilowatt hours per acre foot. That is approximately
11,000--or, excuse me, 11,440,000 kilowatt hours of energy that
is going to be in addition to what would have otherwise
occurred this year in absence of the Trinity River flow
decision.
In addition to that, there are also some other benefits
that we did not analyze in the EIS/EIR. There is a long-term
average--the EIS/EIR estimates a long-term average reduction of
7 megawatts. However, there are some other issues that make it
not as big as it could have been otherwise. The first one is
actually an issue that affects power generation this summer,
and that is, in the past the timing of exports from the Trinity
River to the Sacramento River has been in the spring months and
the early summer months, and that was to protect the winter run
chinook on the Sacramento River.
Because of temperature concerns in the Trinity River, what
has occurred as a result of the preferred alternative is the
timing of the exports has shifted from the spring months to the
summer months, and in fact, the peak of the exports or the
generation from the Trinity River division will now occur in
July, August, and September, and into early October of this
year and also in future years. So instead of generating a lot
of power during the spring months when it is generally not
needed, it will, in fact, be generating power during the peak
demand of the summer months. And that is an issue that will
occur this year.
Another issue for future consideration, but not necessarily
relevant this year, is that the record of decision does result
in a reduction of water contract deliveries, and in particular,
south of the Delta. For instance, as I mentioned in my
testimony, it takes 615 kilowatt hours of energy to pump water
up into San Luis reservoir to provide water for the Westlands
Water District, which is one of the plaintiffs in the
litigation. And with a reduction of water deliveries to
Westlands, there is a savings of that 615 kilowatt hours per
acre foot, so that helps offset some of the reduction in
generation from the flow decision.
A third consideration is that the analysis in the document
looked at power plant bypasses as a means of complying with
temperature requirements in the Trinity River. And what we
actually found is that the preferred alternative has a 9.4
percent frequency of power plant bypasses at Trinity Dam,
whereas the no-action alternative actually has a 13.8 percent
frequency of power plant bypasses. This is primarily because
the temperature compliance in the Trinity River is much
improved under the preferred alternative, and therefore it
results in less of a need to bypass the power plant at Trinity
Dam. Whenever that has been done in the past, it can lead to up
to an 85 megawatt reduction in power production because of the
loss of generation at Trinity Dam.
So, I would just like to conclude that the record of
decision will have minor but beneficial impacts to California's
power supply this year. A Federal court is dealing with the
issue. It is my understanding that the Interior Department and
probably Trinity County will be issuing a supplemental
environmental impact statement and report, and will be looking
at the power crisis, as well as issues of endangered species.
Thank you very much.
[The prepared statement of Mr. Stokely follows:]
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Mr. Ose. Thank you, Mr. Stokely.
I want to thank all the witnesses for their brief
summaries. I would like to recognize the gentleman from Indiana
for 5 minutes.
Mr. Burton. I have to tell you, Mr. Chairman, I am not
familiar with the Trinity River or the problems therein. And I
think I will let you ask the questions, and I will just
observe. As we go along, if I have questions, I will ask you to
yield to me.
Mr. Ose. All right.
Mr. Burton. Thank you.
Mr. Ose. Thank you, sir. Mr. Horn.
Mr. Horn. Thank you, Mr. Chairman. This is just a general
question of the Bureau of Reclamation. Without endangering
species' habitat or environmental protections, is there a way
to increase generation from hydroelectric facilities?
Mr. McDonald. Probably the only fair answer is that it
would be a highly site-specific circumstance that would depend
on the species you are dealing with, and the hydrology and
hydraulics of the riverine environment you are dealing with.
There certainly are places I can point to where we have had
those kinds of opportunities by working with the riverine
environment, perhaps with the mechanical manipulation of
vegetation, that kind of thing. There are other instances I can
point to where that could not be done. We simply had to change
power plant operations to achieve the required legal protection
of endangered species.
Mr. Horn. Well, you have just given us a safe method on at
least one situation. How do we implement them, and how do we
spread that along in different rivers?
Mr. McDonald. Again, it is a highly case-specific
situation. There are some instances in which, even though we
might have had to change power plant operations, we would have,
by virtue of generator upgrades, for example, we have recovered
lost capacity. In other situations, we can move water around in
terms of its monthly scheduling, and recover generation that
might have otherwise been forgone.
In general, as I testified to, I would emphasize that
seldom do we actually bypass a power plant. The issue is more
one of whether we can meet peak loads because we might have to
dampen out a historical peaking operation compared to current
requirements.
Mr. Horn. How does the system work here on all the
different things that the different Federal agencies think very
dearly about, whether it be fish and wildlife, reclamation,
Corps of Engineers, all the rest of it? How do we make
decisions on this?
Mr. McDonald. In the context of Reclamation as an action
agency, quote, unquote, under the Endangered Species Act,
having legal obligations under section 7(a)(2) to not cause
jeopardy to a listed species, or to adversely impact critical
habitat, the process calls for consultations with the relevant
agency, which might be the National Marine Fisheries Services,
or Fish and Wildlife Service. We go through those consultations
extensively on operating projects, utilizing the best available
scientific information about species. These tend to be very
case-specific circumstances that we have to sort through
project by project.
Mr. Horn. Does that mean that the decision is not made here
in the region? If there is a real difference, it goes back to
Washington, DC, and they get those people around the table? Or
do they?
Mr. McDonald. Anything that I have ever personally been
involved in has been a decision at the regional level among
regional directors of Reclamation, Fish and Wildlife Service,
and National Marine Fisheries Service.
Mr. Horn. And they try to get a consensus out of the group,
is that it? And then what happens? What is the directive?
Mr. McDonald. Certainly Reclamation's perspective as we
work with the consulting fishery agencies is to make our views
known and present the science as we understand it. It is our
obligation to start with a biological assessment. We will
defend what we understand to be the best science, and work with
the fishery agencies to try to understand their requirements
and their interpretation of the jeopardy standard under section
7(a)(2). In particular, we work with ways to be sure that
reasonable and prudent measures are not burdensome on a
project, or if we are causing jeopardy and have to go to a
reasonable and prudent alternative, to have a reasonable and
prudent alternative that meets the conditions of the act and
the regulations as to being, indeed, reasonable and prudent.
Mr. Horn. Which agency has the domination over saying OK,
folks, we have talked about this for 3 years, can we get this
thing moving?
Mr. McDonald. It is always the action agency as a matter of
law. The statute has a prescribed time line which the action
agency can require of the fishery agencies. At the end of the
day it is our decision, not theirs.
Mr. Horn. You say it is your decision.
Mr. McDonald. As the action agency.
Mr. Horn. As the action agency. And I gather there has been
several rules issued through the Bureau of Reclamation that
reduce generation capacity for the benefit of environmental
protection. So that would have been made by your particular
area, is that correct?
Mr. McDonald. Yes.
Mr. Horn. Yes. And are there any areas in the process that
allow for future forecasting of growth in electricity demand as
one of the factors, or for emergency plans for increased
generation? So is that in the law in any way electricity, or is
it sort of oriented primarily to species?
Mr. McDonald. The standards of section 7(a)(2) of the
Endangered Species Act, Congressman, do not permit an economic
analysis. It is strictly a scientific analysis relative to
jeopardy of the species. We certainly always, as an action
agency, try to understand those impacts. Instances that come to
my mind are those such as the decisions made in 1996 at Glen
Canyon Dam, where we did build into our final decision, based
on the biological opinion, emergency criteria that allow us, on
occasion, to operate outside the boundary of the biological
opinion if we face a system emergency.
Mr. Horn. Now, does the Environmental Protection Agency in
Washington or the region, do they have a say in any of this?
Mr. McDonald. The Environmental Protection Agency is not
the regulatory agency. That is either Fish and Wildlife Service
or NMFS. But to the extent that you can have water quality
parameters as a factor in the health of an endangered or
threatened listed species, then EPA can be involved. That will
always tie back into the water quality standard of the water
body that you are dealing with.
Mr. Horn. Yes. I have a lot of respect for Fish and
Wildlife, but I do not have any respect, frankly, for the on
science within EPA. When we put it in the law, they refused to
bring it to the floor back in 1993. And, you know, we have
referred things to the National Academy of Sciences, and that
helps, because they do have scientific people. But some
agencies, I have a feeling that they just do not really think
much about science, and that worries me. Now, do you run into
that, where some agencies seem not to really have a decent
scientific analysis?
Mr. McDonald. I would not characterize it that way. I think
the challenge that the ESA always presents to executive branch
agencies is that it is an absolute requirement to avoid
jeopardy, and in that context, you have to work with the best
available science. Often in the biological sciences the best
available science is full of risk and uncertainty that cannot
be reduced beyond a minimum that leaves a lot of judgment as to
indeed what is required by the species.
Mr. Horn. You seem to be very knowledgeable about the law
on that, and you noted that electricity and economics are not
part of it. I take it that----
Mr. McDonald. Not part of a jeopardy standard. No, sir.
Mr. Horn. Yes. Did anything else go? Because it used to be
that you could not build a dam unless there was certainly an
economic analysis that you could pay back the money for that
dam. And you had to go through very specific things in the
1950's and 1960's in terms of crops and what this will mean and
so forth.
Mr. McDonald. Sure.
Mr. Horn. Did all of that go out?
Mr. McDonald. Those are not requirements of the Endangered
Species Act under section 7(a)(2).
Mr. Horn. Well, does it have--is it existing still in
Reclamation law?
Mr. McDonald. Certainly if Reclamation were authorized by
Congress to do a feasibility study of a new project, we would
apply those economic justification criteria, or, as we call
them, the benefit cost analysis, which tries to capture
benefits and costs in dollar terms to society as a whole.
Mr. Horn. Well, would that not put on the table the matter
of economics, electricity, etc?
Mr. McDonald. Sure, if we were planning a new project, it
would.
Mr. Horn. OK. So it is not completely thrown overboard.
Mr. McDonald. No, sir.
Mr. Horn. OK. Thanks, Mr. Chairman.
Mr. Ose. Thank you.
Mr. Jobson, in terms of the Trinity River decision that
Judge Wanger has taken under his jurisdiction, Mr. Stokely was
talking about the positive or negative impacts in terms of
power generation that will result from the verbal injunction
that Judge Wanger--actually, it is not a verbal. It is actually
written. It is a temporary injunction that has actually been
written.
Mr. Stokely. It is my understanding it is a preliminary
injunction and he issued a memorandum of opinion. But I have
not seen a preliminary injunction, itself, yet. But he issued--
--
Mr. Ose. I actually read it, and I read it as a preliminary
injunction pending a final. Anyway, the point of my question is
whether or not you agree with Mr. Stokely's conclusions about
the impacts on power supply?
Mr. Jobson. No, sir, I do not. We see that differently, and
I will explain. First of all, in 2001 the judge did limit the
releases to that which would be made in a critically dry year,
rather than in a dry year, which I agree with Mr. Stokely.
Mr. Ose. 28,600?
Mr. Jobson. Right. And should it have been a dry year this
year--and it has not been determined yet--that would have saved
approximately 90,000 megawatt hours. The reduced flow would
have conserved 90,000 megawatt hours, which is a substantial
amount of electricity.
The fact that Reclamation has determined that these
additional releases to the Trinity, even if it is only 28,000,
will be made solely from storage merely delays the impact on
power and water. It means that Trinity reservoir will be lower.
It means that the power plant will therefore have less capacity
and produce less energy and it means that we will likely not
recover its full storage next year or will be less likely to.
So those are delayed impacts, they are not benefits.
In addition, any generation that will be added at Trinity
Power Plant as a result of this 28,000 acre feed, generation at
the remaining Trinity River division plants, Carr and Spring
Creek Power Plant, and at Shasta Power Plant--I mean, excuse
me, at Keswick Power Plant in the Shasta division will be lost,
because the releases from Trinity will not be diverted across
to the Sacramento River, they will go down the Trinity River.
Mr. Ose. Before you leave that issue, is that a one-for-
one? I mean, I am trying to understand. I understand you cannot
drink the water twice, so to speak.
Mr. Jobson. No. I understand.
Mr. Ose. But is it a one-for-one? If you go down Trinity,
you lose 1 megawatt hour, or if you go down the other way--I
mean, is it a one-for-one?
Mr. Jobson. Let me explain.
Mr. Ose. All right.
Mr. Jobson. In either case the water is released at
Trinity, and it generates approximately 400 kilowatt hours an
acre foot at Trinity Power Plant. However, after that, going
down the Trinity River there is a very small, almost
inconsequential power plant at Lewiston Dam. But, basically you
are dealing with about 400 kilowatt hours per acre foot as a
generation in that alternative.
If it is diverted to the Sacramento River, an additional
1,100 kilowatt hours per acre foot will be generated on top of
the 400, due to generation at Judge Carr, Spring Creek, and
Keswick Power Plants. So, it is about a three-to-one
difference. A total of 1,500 kilowatt hours per acre foot if it
is diverted to the Sacramento River, and 400 kilowatt hours
plus change at Lewiston it if is released to the Trinity River.
Mr. Ose. Do you agree with that, Mr. Stokely?
Mr. Stokely. I agree with his numbers. The only thing I
disagree with is that the water that will go down the river
this year will come out of storage. As I understand it, it is
not water that would have been sent over to the Sacramento
River to produce that 1,100 kilowatt hours per acre foot, it is
water that is coming out of storage, and if we do not have a
wet winter next year, there may be or there will be an impact
next year. If we have a wet winter and we have what we call
safety-of-dams releases, there will virtually be no impact in
future years because the reservoir will fill up, but we do not
know that.
Mr. Ose. I am just trying to get clear in my mind, as we
move forward to try and find solutions, is it a one-to-one
swap, is it a one-to-two, is it a two-to-one. And I
appreciate--I mean, you guys are agreed on that ratio, though,
in terms of the power generation?
Mr. Stokely. Yes.
Mr. Ose. OK.
Mr. Jobson. There were a couple of other areas that I found
that I viewed differently. Characterizing the capacity lost as
an average of 7 megawatts is misleading. Capacity is measured
in dry years by hydroelectric plants as their capability to
produce in dry years, standard industry approach. An average
capacity is almost a contradiction in terms. Capacity is
measured on what can be relied on in all circumstances, and
with a hydro project, in dry circumstances. That impact on the
Trinity River decision is 150 megawatts in a critically dry
year and the cumulative impact, with implementation of CVP
Improvement Act, is 325 megawatts in a critically dry year.
That is how the capacity should be measured.
Mr. Ose. So, in terms of a system-wide situation, the
record of decision signed by the secretary in a critically dry
year would cost us 300-and-some-odd megawatts of power
generated?
Mr. Jobson. That is the cumulative impact with Trinity and
CVP Improvement Act.
Mr. Ose. OK.
Mr. Jobson. CVP Improvement Act has been implemented, so
that is the number, but if you just look at the increment of
Trinity, it is 150.
Mr. Ose. Let us focus just on the Trinity, because that is
what Mr. Stokely came to testify about.
Mr. Jobson. 150 megawatts.
Mr. Ose. OK, great.
Mr. Jobson. The other thing I would point out is that I
think the timing benefits of moving generation around are
overrated, that there are still impacts--adverse net
significant impacts on power of the secretary's decision,
unless it is substantially changed when he revisits his
decision in the supplemental environmental document. And we
hope that this administration will employ a more open process
where our alternative--the power alternative is given a much
more fair shake. We took a lot of time and hired experts, PhDs
in their field, to develop an alternative that employs water
conservation as well as fishery restoration, and we hope this
administration gives it a fairer shake than the last one did.
Mr. Ose. My time has expired. Mr. Horn.
Mr. Horn. I yield back.
Mr. Ose. OK, I have more time. Ms. Sheehan, I just want to
visit with you about the consequence to the members of the Farm
Bureau that is likely to occur this summer, and for that matter
beyond. To the extent that we do not have enough power, from
your perspective, what are the consequences to the agricultural
community up and down this State?
Ms. Sheehan. Well, as you know, agriculture is having a
real tough go of it right now. The industry is under a lot of
pressure. The agricultural markets are struggling. Agricultural
regulations are getting stricter every year. We have had
numerous decisions reducing the water that is available for use
by agriculture. Water has been converted from agricultural use
to environmental purposes.
Now with the energy crisis on top of all these other
stresses on the industry, it is already becoming too much for
many of our farmers, and a lot of people are looking for
relief. Once we lose our valuable agricultural infrastructures,
our agricultural land is going to be converted to urban uses.
We are going to lose our industry, our agricultural industry.
We have already lost many packing plants. It is a steamroller
effect. Once you start losing the processing plants, even
though the land is there, you cannot make any kind of
profitable agricultural use of the land.
Mr. Ose. It is interesting. As I drive up and down the
valley, one of the dynamics that I see at play is that, for
whatever reason, things change. I mean, it is a very dynamic
economy. As it relates to our rice growers, by virtue of a
decision taken by the legislature, they have moved away from
what I would call a traditional rice burning or rice straw
burning template, to using water to deteriorate the straw in
the fields. I have to admit that I look at the water in those
fields, and I see power behind the dams. I am wondering about
the tradeoffs, whether or not that particular issue was ever
considered in the context of the original legislation for
particulate matter from the rice straw burning.
Ms. Sheehan. I do not believe it was, but it is not my area
of expertise. I was not involved in making this decision. I was
not involved in the development of this legislation. The energy
situation is so new right now, I do not think it was on
anyone's radar screen even a year ago. So, I do not believe
that impact was considered.
Mr. Ose. I am trying to find the right balance, is what--I
mean, Trinity River, Sacramento River, Shasta, all of these
different components play a piece here. To the extent we have a
surplus of this and a deficit of that, how do we use the
surplus to meet our deficit? I just cannot help driving up and
down I-5 looking at the rice fields. My gosh, that is power
behind a hydro dam.
So, Mr. McDonald, over on the Colorado, is that Bureau or
Corps of Engineers operated?
Mr. McDonald. If you are talking power plants, they are all
Bureau of Reclamation.
Mr. Ose. OK. First of all, I want to pay a compliment to
you and provide a little constructive feedback, if I might.
Your Web site is very informative.
Mr. McDonald. Oh, thank you.
Mr. Ose. I appreciate being able to go there.
Mr. McDonald. I will pass that on to our computer gurus.
Mr. Ose. The constructive feedback I would give you is that
the totals you have on the 58 different plants are aggregates
for the month rather than--there is no place I can go and say
well, what are we producing today.
Mr. McDonald. Oh, I see what you mean.
Mr. Ose. It would be helpful to me, watching the power
situation in the West, to have kind of like today's production,
month-to-date number, with a historical perspective. So I pass
that on as constructive feedback.
Mr. McDonald. Fine. I will see if it is doable.
Mr. Ose. Now, the issue in particular on the Glen Canyon is
that last May or June, if I recall, we came across a piece of
legislation that was passed through Congress and signed by Bush
41 to implement a low flow of release experiment from Glen
Canyon. I have to admit some respect for--significant respect
for the people who crafted the legislation, because imbedded in
the legislation is authorization for the Secretary of the
Interior, under emergency conditions of one sort or another, to
waive the requirements of the low flow experiment, and ramp up
the generation from Glen Canyon. Are you familiar with this
particular issue?
Mr. McDonald. Yes.
Mr. Ose. I noticed in your testimony you have a chart here.
It has got both Hoover and Glen Canyon.
Mr. McDonald. Yes.
Mr. Ose. What I am trying to figure out is the conditions
under which the Department now waives the continuation of the
low flow release experiment. In other words, is it a stage 3 in
Sacramento--or in California? Is it a stage 3 west of the
Rockies? Are there any definitions so that when we get to a
certain point it is automatic, rather than having to be a new
administrative act?
Mr. McDonald. There are definitions, Congressman. They are
spelled out as part of the 1996 decision on the operation of
Glen Canyon Dam. Basically, we will deviate from the
requirements of that decision in instances in which a system
has crashed and needs to be brought back up, there is a loss of
transmission and we need to stabilize the system, or there is a
loss of generation and the system needs to be stabilized.
There are a series of criteria that are actually set out in
that decision. If I could summarize those briefly. Basically,
Western Area Power Administration, the marketer of the power,
has to decide that the utility that is seeking assistance--and
in the context of California it is the ISO that calls up
Western--has exhausted all their reserve capacity, that there
are no non-firm energy sales out there to be had, that all
interruptible loads have been shed, and that a blackout
condition on the system is imminent, which in the context of
stage 3 brings us below a reserve of 1\1/2\ percent. If that
kind of request is received from the ISO, as it has been
several times in the last several months, and if--and this is
the biggest if--there is transmission capacity available from
Glen Canyon Dam into southern California, we, Reclamation, have
responded. In my written testimony I identify the four times
where transmission capacity was found by Western, we could
sneak electrons through Arizona, if you will, and we were able
to get power to California. In the other instances there was
simply no transmission capacity.
Mr. Ose. This brings me to my fundamental question, and
that is, as we look for solutions to California's energy
crisis, I mean, power is often fungible within certain
parameters. I mean, power from Glen Canyon can go east or west,
north or south under certain parameters. How do we make it
possible so that in a situation of an emergency nature we can
run Glen Canyon up or run Hoover up and get that power in here?
Clearly you have indicated we need transmission lines or
transmission capacity. Yet, you have also indicated the Bureau
does not own transmission capacity. Are there programs that we
could undertake or policies we could adopt that would
facilitate the creation of that transmission capacity?
Mr. McDonald. Two comments. First of all, transmission is
not a constraint at Hoover. There is ample capacity,
transmission capacity, to move power generated from the Hoover-
Parker-Davis complex into southern California. There is
essentially no limitation at Hoover on our peaking ability,
because the two downstream reservoirs provide re-regulation of
releases from Hoover. The limitation at Hoover is the
interstate compact and the international treaty which we have
to observe or we are wasting California's water. At Glen Canyon
it is a different situation.
Mr. Ose. Do not do that. Do not do that.
Mr. McDonald. I understand. At Glen Canyon, a different
situation. We lack the transmission capacity. It would take a
private utility or Western Area Power Administration, with
congressional authorization, to construct new transmission
capacity. But it would also take some changes in Federal law
that I need to point out.
Glen Canyon was authorized and is operated pursuant to the
Colorado River Storage Project Act of 1956. Pursuant to that
act, the surplus power from not just Glen Canyon, but the whole
of the Colorado River Storage Project system is marketable to
customers in Wyoming, Colorado, Utah, New Mexico, Arizona, and
Nevada, and only in those States. All of this surplus power is
in fact under contract, and there is nothing else available.
All Glen Canyon can do, even if there were transmission
capacity, in the context of those Federal statutory
requirements, is run some water through the generators on a
peaking basis, losing water that would otherwise be held to
generate for those customers. Then, Western has to go out on
the market and buy replacement power which those customers have
to pay for. So essentially, Glen Canyon is simply not available
except in the kind of very constrained emergencies that we have
already, and will in the future, continue to respond to.
Mr. Ose. In terms of those other States into which Glen
Canyon might send power under the compact, are there
alternatives for California? In other words, I mean, it is the
fungible nature of the electricity I am trying to get to. Maybe
this person is generating capacity into California and the
market changes, and then he is going to--that person is going
to go there and somebody else is going to fill the gap. Are
there things we can do operationally to maximize the
fungibility of the power? In other words, send Glen Canyon east
and bring somebody else west?
Mr. McDonald. Sure, it is certainly fungible. It basically
boils down to the transmission constraint. If you use that
water at Glen Canyon to generate power for other than Western's
customers, then Western has got to go into the marketplace. The
volatility of the marketplace, of course, has got them up
against the same problem that the private utilities in
California are up against.
Mr. Ose. Well, that is at the heart of the question because
Western delivers to any number of smaller retailers here in
California, whether they be municipalities or otherwise.
Mr. McDonald. That is correct.
Mr. Ose. The price of alternative or substitute power on
the spot market is absolutely hammering them in trying to
replace that. So, again, I am looking for suggestions as to
what we can do at the Federal level, even if it is Glen Canyon
or Hoover or somewhere else, to facilitate the delivery of
power into California for those gaps. You are saying very
clearly you need transmission facilities?
Mr. McDonald. Transmission and interties are probably the
two keys.
Mr. Ose. OK. It does not matter whether they go north, into
northern California, or into Nevada or Utah. The market will
just level that all out in terms of providing extra power where
it is needed?
Mr. McDonald. If we continue to have that kind of market
into the future. Obviously, that is the subject of your
hearings and what California State agencies may do as they
address all of these issues. But headed in the direction it is,
yes, it becomes a more fungible product.
Mr. Ose. My time has expired. Mr. Horn.
Mr. Horn. Just one question that relates to Hoover Dam, Mr.
McDonald.
Mr. McDonald. Yes.
Mr. Horn. Has the argument--when they formed the
percentages between Nevada, Arizona, and California, it was a
very dry period of years. Has the Bureau of Reclamation looked
at that in terms of what the percentage would--the percentage
would remain the same, but there would be a lot more based on
how wet the history was when that was put into the treaty or
compact between these States.
Mr. McDonald. I think there are two different issues there,
Congressman. The amount of water apportioned among the States
is based on the 1922 Colorado River Compact. With the virtue of
hindsight, they did look at a period of record that was
probably one of the wettest periods on record. The States have
never chosen to attempt to renegotiate that deal.
The power issue is different. That is not imbedded in the
compact, it is an act of Congress that directed the marketing
of power, 50 percent to California, 25 percent each to Arizona
and Nevada. That did not turn on the history of the water
supply in the Colorado River.
Mr. Horn. What year was that power----
Mr. McDonald. That is provided for by the authorizing
legislation for Hoover Dam. So, the authorizing act of 1928.
Mr. Horn. Yes. Well, you have got Las Vegas that has 10,000
people coming in--depending on who you talk to--a week, a
month. And added up to a year or so, I think you will find
there will be a pressure for water out of Hoover Dam. I do not
know what Reclamation is seeing in Nevada that might help that
situation, because they are going to really be up against it.
Arizona has not really started to get its share of the water.
It is available, but they have not used it that much. So, what
does Reclamation think looking ahead?
Mr. McDonald. To give a short answer to a very complicated
situation, the issue of the use by California of its compact
entitlement and its apportionment under the Supreme Court
decree of 1963 in Arizona v. California has been the subject of
much discussion in the last several years, leading to a
decision that the Secretary of the Interior just made late last
year, under his statutory authorities, relative to bringing
California back down from its current use of about 5.4 million
acre feet a year, to its entitlement of 4.4 million acre feet a
year. Associated with that was another Secretarial decision,
under Federal statute, as to how, when there are surplus
conditions in the Colorado River system, the Secretary will
arrive at a decision to declare that surplus. So, in fact, the
longstanding dispute among the seven States has been, I hope,
knock on wood, brought to a conclusion in just the last several
months.
Mr. Horn. Well, we have our friends in Mexico that----
Mr. McDonald. Who are raising a number of new issues that
will take our attention for a number of years to come, I am
sure.
Mr. Horn. Yes. Well, we have got two Presidents that like
each other for the first time in history, and I know the
Mexican people certainly would like to have a little better
situation than we have, and it is a lot better than it was in
the 1950's and 1960's when we were just sending salts and all
the rest down to kill some of their plants. And I think a lot
of that has been slowed down and stopped, has it not?
Mr. McDonald. The United States is complying with what we
call Minute 242, which deals with water quality. Minute 242 of
the International Boundary and Water Commission. We have
complied with that minute every year since it was agreed upon
by the two governments. So we are meeting the water quality
standards for salinity.
Mr. Horn. Mr. Chairman, I would like to have the
Secretary's decisions that were referred to by the
commissioner, and put them at this point in the record.
Mr. Ose. Without objection.
Mr. McDonald. Be glad to.
Mr. Horn. I yield back.
Mr. Ose. Let me go back to transmission questions. Down in
the south part of the valley--and I do not know who might be
able to answer this--Path 15.
Mr. Jobson. I can speak to that.
Mr. Ose. Apparently we have two-thirds of the capacity we
need for transmission at a certain point.
Mr. Jobson. There is a bottleneck on the north-south 500 KV
inter-tie in California called Path 15, and it is a spot where
there are two, rather than three, 500 KV lines. A third one is
necessary in order to relieve the bottleneck.
Mr. Ose. How do we get it?
Mr. Jobson. Well, it needs to be designed, constructed, and
built. The Transmission Agency of Northern California had
offered to go forward, and if forwarded money from the State of
California, as I understand it, go forward and get the
biological studies done this spring as soon as possible, and
take a leadership role in facilitating the construction of that
line, so long as there were interested parties with the funding
to do it.
Historically, the TANC, the Transmission Agency of Northern
California, and the Western Area Power Administration have
played a lead role in building the last 500 KV upgrade on the
north-south inter-tie, and that is the COTP, California-Oregon
Transmission Project. I think the publics will stand willing
and ready to contribute whatever services we can to resolving
that bottleneck, as it will help resolve a portion of the
reliability problems in the State.
I did also want to mention, with respect to public power,
that a topic came up in the last panel about supplying
information and municipals' role and that type of thing. And if
it pleases the chairman, I want to add a bit to the record on
that.
Mr. Ose. Feel free.
Mr. Jobson. SMUD and other municipals have made it clear
that we will voluntarily comply with any caps that apply to all
market participants. We largely are buyers. We are consumer
representatives. We serve load. We will voluntarily comply with
those caps, and voluntarily provide any other information that
other market participants are required to provide. So we do not
believe the jurisdictional differences will be a constraint to
our participation in resolving these problems.
Mr. Ose. Let me dwell on that for a moment. In terms of
SMUD's efforts to acquire long-term source supply for that
portion that they do not generate themselves----
Mr. Jobson. Right.
Mr. Ose. [continuing]. How long does it take you to
finalize it? SMUD is not subjected to PUC's directive on long-
term contracts?
Mr. Jobson. Correct. We have a number of long-term
contracts, the largest of which is with the Central Valley
Project. But we have a number of other contracts, and are
developing others as we speak, to mitigate our long-term risk.
We have continued to do that, and are stepping up some of those
efforts. So, how long does it take? Say you are talking a 10-
year contract, that can be brought from beginning to end in a
period of 6 months or less, if necessary.
Mr. Ose. Do they work pretty well?
Mr. Jobson. Yes. We have had long-term contracts with
suppliers in the Northwest which we have imported over our COTP
line for years, many years, with a variety of suppliers.
Mr. Ose. But it is an option that is available to SMUD, it
is not a mandate?
Mr. Jobson. Definitely.
Mr. Ose. It is just an option?
Mr. Jobson. No. It is a tool that one uses to diversify
ones risk.
Mr. Ose. Right.
Mr. Jobson. And not keep all your eggs in one basket. So
SMUD, for instance, generates about half the power we serve to
our customers. We buy the other half from a variety of long and
short-term contracts, primarily longer-term.
Mr. Ose. Different trenches?
Mr. Jobson. Yes, exactly.
Mr. Ose. All right.
Mr. Jobson. Risk diversification. That is what it is. But
our regulatory scheme is different from the investor-owned
utilities. We are directly accountable to our customer owners
through an elected board. They approve these decisions. And so
it is a little more, I think, timely and easy to reflect the
local community's desires.
Mr. Ose. I doubt if your cash-flow requirements differ
greatly from the IOUs, though you have got to have cash to pay
your bills.
Mr. Jobson. Definitely.
Mr. Ose. And, you have got to hedge your risks to make sure
you minimize your exposure.
Mr. Jobson. Right. We also approve our own rate increases
rather than going to the PUC. So that helps somewhat with
respect to the cash-flow. But, you know, the other large
difference is we operate without profit. We pass through
whatever our power costs are. It has allowed us to not raise
our rates in 10 years, although you will see that changing here
in the next few months.
Mr. Ose. Your rates are higher or lower than the investor-
owned utilities at present?
Mr. Jobson. Lower.
Mr. Ose. Yours are lower?
Mr. Jobson. Correct.
Mr. Ose. By what percent?
Mr. Jobson. It is not my field of expertise, but I would
estimate approximately 20 percent.
Mr. Ose. So, if I read the testimony correctly, the
investor-owned utilities you are given a profit margin of 11.6
percent, and you are 20 percent below them?
Mr. Jobson. Approximately. It may even be more than that,
especially with what is going on lately. This is a realtime----
Mr. Ose. Is there a connection between the optional tools
that are available to you as opposed to the investor-owned
utilities, and the ability of you to provide bargain-basement
rates?
Mr. Jobson. I think it is an advantage to have regulatory
flexibility and direct accountability to your ratepayers, so
that, for instance, we do not have to do what Los Angeles does.
We do not have to adhere to a set of requirements from a common
regulator, as Los Angeles--like, for instance, Edison and PG&E
do to the Public Utilities Commission. We are directly----
Mr. Ose. DWP does not, either, though.
Mr. Jobson. No. That is what I am saying. L.A. is
responsible to its customer owners through its city council or
whatever mechanism it has, and SMUD is responsible to our
customer owners. The same with Northern California Power Agency
cities. We have more flexibility, and are able to tailor our
risk management, our rates, our resource decisions directly to
what we feel and our customer owners feel is appropriate. SMUD,
for instance, has a high amount of demand-side management,
environmentally friendly resources, renewables, because that
reflects what our customers think is the right thing to do. And
they express that through a vote, and they elect board members,
and we immediately, within our own district, make these
decisions.
Mr. Ose. All right.
Mr. Jobson. We think that is a better model, and we think
our rates over the last--as long as we have been in business,
reflect that.
Mr. Ose. You like having those tools available at your
option to use?
Mr. Jobson. Definitely. And we like having the
accountability to our ratepayers directly for it.
Mr. Ose. So you tell your ratepayers the contracts you
enter into, so that they know and can vote accordingly?
Mr. Jobson. All long-term contracts are approved by the
board. The board is elected by the people, and they are
approved in open, public meetings.
Mr. Ose. How long of a timeframe between the time you enter
into the contracts and the time you disclose the basis of the
contract?
Mr. Jobson. Once the contract is approved by the board it
is a public document. The time between which negotiations start
and it gets approved could vary anywhere from 1 to 6 months, or
considerably longer, depending on how hard it is to negotiate a
deal. But, depending on the urgency, it can be done within a
matter of months, a few months.
Mr. Ose. Once you commit the ratepayer, you disclose it?
Mr. Jobson. Before we commit the ratepayer, we disclose it
to the--the board's decision is what commits the utility.
Mr. Ose. OK.
Mr. Jobson. And the board's decision is made in an open
meeting. And once the decision is made, it is a public
document.
Mr. Ose. All right. Mr. Horn.
Mr. Horn. It is all yours.
Mr. Ose. All right. You are finished?
Mr. Horn. Right.
Mr. Ose. All right. Mr. McDonald, do you have any sense of
the cost to complete path 15--or for that matter, Mr. Jobson--
of the cost of putting that third 500 KV line in there?
Mr. McDonald. I have no idea. Reclamation is not in the
transmission line business anymore.
Mr. Ose. OK. Mr. Jobson.
Mr. Jobson. I can tell you that the California-Oregon
Transmission Project cost about $480 million. Now, that is a
substantially larger, longer project. But I would think it
would be on the order of--you know, this is a guess--$200
million, something like that. We can get back to you with facts
on that. It has been costed.
Mr. Ose. I would be interested in what you would estimate
the cost of construction for removing this bottleneck would be?
All right?
Mr. Jobson. We will refine that $200 million estimate with
contact with your staff, if that is OK. But that would give you
an order of magnitude of what we are talking about. So I do not
know how many days of power supply that is in California today,
but it is not very many.
Mr. Ose. Let us think in terms--at some point we have to
have this solved. How do we get there? That is what I am trying
to get to.
Mr. Stokely, on the Trinity River issue--and I am willing
to be corrected on this. I am asking because I do not know the
answer.
Mr. Stokely. Sure.
Mr. Ose. The record of decision selected an alternative
that it is my understanding was not the preferred alternative.
Mr. Stokely. It did select the preferred alternative, which
is the Trinity River flow evaluation, plus additional watershed
restoration work. So the record of decision did select the
preferred alternative.
Mr. Ose. What is the reason--I mean, again, I read Judge
Wanger's preliminary injunction, and he was not too subtle
about his concerns there. I am trying to understand, were there
things beyond just release of water that Judge Wanger thought
should have been incorporated into the selected alternative?
Mr. Stokely. No. Actually, I believe on page 54 of his
memorandum he indicated that the two issue areas he was ruling
on that had a chance of success or had merit at a full trial
are the issue of the impacts of the two biological opinions on
water and power in California. That is, the National Marine
Fishery Services' biological opinion on the Sacramento chinook
species, as well as the steelhead in the Central Valley and the
Trinity River coho. And in addition to that, the U.S. Fish and
Wildlife Services' biological opinion on various species under
their jurisdiction.
Primarily, one of the main areas that he ruled on was that
the biological opinions came out concurrently with the final
EIS/EIR, so there was no analysis of the effects of those
biological opinions on the operations of the CVP. And then, in
addition to that, he basically said that the issues related to
the power crisis in California necessitated preparation of a
supplemental EIS.
Mr. Ose. Now, this is still before Judge Wanger, so there
may be additional rulings and the like to refine the ultimate
disposition of this matter?
Mr. Stokely. Again, maybe Mr. Jobson can correct me, but it
is my understanding that memorandum he issued was sort of the
framework for the preliminary injunction, and then he ordered
the plaintiffs to prepare the actual primarily injunction
itself. And as far as I know, he has not signed that order yet,
but it is pretty well laid out.
The two issue areas that I am aware of that he ruled did
not have a high likelihood of success at a full trial, I think
there is three of them, and two of them that I can remember.
One is the issue of alternative development. He basically
ruled, on page 54 in a footnote, that was not likely to prevail
in a full trial. And the other issue was the concept of the
healthy river, which was incorporated.
Mr. Ose. I did notice he told the plaintiffs, if I recall,
the first challenge he did not think would stand review, but
the second--I thought it was very interesting the way he
juxtaposed it. Anyway, Mr. Jobson.
Mr. Jobson. Mr. Stokely and I do not interpret that
memorandum the same way with respect to the characterization of
what issues may prevail and which may not. I think the salient
point from the memo is that there were two things that had to
be demonstrated in order for an injunction to be issued. One
was irreparable harm if it is not issued, and the other one is
a likelihood of prevailing on the merits on any of the issues
raised. He concluded that there was sufficient merit on some of
the issues, and did not rule on the merit of the other issues.
That is our feeling about the memo. Although it will be the
order that will be the one important ruling document that he
issues, so it may not be an important distinction.
Mr. Ose. All right. I have one final thing, Mr. Horn, if
your patience abides.
Mr. Horn. My patience is long-going.
Mr. Ose. All right. Well, you have been patient for 2\1/2\
years. I appreciate it.
Mr. Horn. You have been patient in my hearings, so go to
it.
Mr. Ose. One of the things my staff and I are giving
consideration to is legislation obviously. One of the pieces of
legislation we are giving specific consideration to is trying
to find a way under which--the circumstance in which a Governor
declares an emergency to authorize either the Secretary of the
Interior, in the case of the Bureau, or the Secretary of the
Army, in the case of the Army Corps of Engineers, the
discretion to waive restrictions on operations of facilities.
Do any of you have any input as to how that might
transpire? Mr. Stokely.
Mr. Stokely. In the Trinity River record of decision it
does reference development of an emergency operations plan for
the Trinity River division of the CVP. And as I understand it,
Reclamation submitted a plan to the court as part of the
evidentiary proceeding in the--I do not really know the status
of that particular plan. Maybe Mr. McDonald could explain it
more. But as I understand it, the Trinity River Division has
already operated under emergency criteria to provide power to
California during some of the stage 3 alerts. And, as I read
it, it basically allowed them several hours, if there was a
request similar to what Mr. McDonald had described with the
Colorado River project, if there was a request for power
because they knew there was going to be a shortfall, that the
project would be allowed to release water to generate
additional power. I really do not know any more than that, but
there is apparently some sort of an emergency operations plan.
I maybe did not answer your question completely, but----
Mr. Ose. Maybe my question more specifically is, using the
threshold of a declaration by the Governor to determine the
circumstances under which the Secretary of either Interior or
Army would then be able to act. Is that an appropriate
standard? That is, for the Governor's determination?
Mr. Stokely. I am really not prepared to answer that
question.
Mr. Ose. OK. Ms. Sheehan.
Ms. Sheehan. I am sorry, I do not know the answer.
Mr. Ose. OK. Mr. Jobson.
Mr. Jobson. The concept of mitigating lost power by having
emergency procedures is at best limited, and at worst
delusionary. Any water that is expended in an emergency
reaction will then not be available for future use. And so it
is kind of mortgaging your future with your present. So it
should be viewed carefully. And I will note a distinction. In
Glen Canyon you will have a situation where there is a lot of
undispatched capacity which could be used. In the CVP, because
we have regulating reservoirs, there is not a lot of
undispatched capacity unless you start dipping into your future
supplies. And if you did that every time there was an emergency
in California, by the end of the year you would have no water
left for next year.
Mr. Ose. You are eating your seed corn, is what you are
telling me?
Mr. Jobson. Exactly. So I think the important thing is to
make the right decision on Trinity, one that includes water
conservation wherever possible, so that we do not have to
delude ourselves with the fact that emergency procedures might
work. It is just a mortgage, is all it is.
Mr. Ose. Mr. McDonald, do you share that cautionary note?
Mr. McDonald. You know, the usual duck for those in the
executive branch, until the administration would take a
position, I cannot really comment. I think Brian makes a fair
point on the mechanics, though----
Mr. Ose. OK.
Mr. McDonald [continuing]. Just as a matter of fact. The
other thing I would observe is, where we have made decisions
already and have some set of criteria in place such as we have
at Glen Canyon Dam or we are working on, as Mr. Stokely pointed
out for Trinity, you need, as you craft language, to be precise
about whether you are intending to overcome some such
preexisting criteria that have been decided upon.
Mr. Ose. Right.
Mr. McDonald. And if so, under what circumstances, if not,
under what circumstances.
Mr. Ose. Right.
Mr. McDonald. I otherwise think you might create
substantial confusion.
Mr. Ose. All right. I want to thank the four of you for
joining us today. We very much appreciate your participation,
as we did the previous panels. We are going to leave the record
open for 10 days here. We are headed from here to San Jose. We
will convene tomorrow morning at 10 a.m. in San Jose. And with
that, we are going to adjourn.
[Note.--The report referred to entitled, ``California's
Electricity Options and Challenges, Report to Governor Gray
Davis,'' may be found in subcommittee files.
[Whereupon, at 4:17 p.m., the subcommittee was adjourned.]
[Additional information submitted for the hearing record
follows:]
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ASSESSING THE CALIFORNIA ENERGY CRISIS: HOW DID WE GET TO THIS POINT,
AND WHERE DO WE GO FROM HERE?
----------
WEDNESDAY, APRIL 11, 2001
House of Representatives,
Committee on Government Reform,
San Jose, CA.
The committee met, pursuant to notice, at 9:44 a.m., in the
Loma Prieta Ballroom, San Jose State University, One Washington
Square, San Jose, CA, Hon. Dan Burton (chairman of the
committee) presiding.
Present: Representatives Burton, Horn, Ose, Lofgren, Lee
and Honda.
Staff present: Kevin Binger, staff director; Caroline
Katzen, professional staff member; Robert Briggs, chief clerk;
and Elizabeth Mundinger, minority professional staff member.
Mr. Burton. Seeing a quorum the committee will come to
order.
I ask unanimous consent that all Members' and witnesses'
written opening statements be included in the record, and
without objection so ordered.
I ask unanimous consent that all articles, exhibits and
extraneous or tabular material referred to be included in the
record, and without objection so ordered.
I ask unanimous consent that Members of Congress who are
not members of the committee be allowed to participate in
today's hearing, and without objection so ordered.
I ask unanimous consent that all questions submitted in
writing to the witnesses and their answers be included in the
record.
I ask unanimous consent that questioning in this matter
proceed under clause 2(j)(2) of House rule 11 and committee
rule 14 in which the chairman and ranking minority member
allocate time to members of the committee as they deem
appropriate for extended questioning, not to exceed 60 minutes
equally divided between the majority and minority. Without
objection so ordered. We will however try to stay to the 5-
minute rule early on so that we can accommodate Mr. Hebert, but
we will go around as many times as we need to go around.
I want to welcome everyone to our second day of hearings on
the energy crisis here in California. I am going to keep my
opening statement fairly brief because our first witness, Mr.
Hebert, is under some time constraints and even more time
constraints since we are running a little late, and I want to
have as much time as possible for the Members to ask questions.
I want to say a couple of things about yesterday's hearing
in Sacramento. We came out here because there is a problem. We
want to understand it, we want to be a part of the solution. We
did not come to point fingers; we came here to listen and to
learn. We wanted to see if there were ways the Federal
Government and the State government could work together to get
past and through this crisis.
We want to play a constructive role. This summer, Congress
is going to have a serious debate about our country's energy
policies. If there are ways we can help, we want to do that.
But first, we need to understand the problems. We are trying to
take a balanced look at all sides of this equation. Today, we
are going to hear from the chairman of the Federal Energy
Regulatory Commission, Mr. Hebert. We are going to hear from
the utilities. Tomorrow, we are going to question the energy
producers. I think we are going to have a well-rounded debate.
What is becoming clear to me is that when you boil it all
down, the root problem here is supply and demand. One of our
witnesses yesterday was an independent energy analyst. He told
us that over the last 5 years, California's economy has grown
by about 32 percent, but at the same time, energy generation in
the State actually fell. So you had a tremendous increase in
demand and supply was not keeping pace.
A new power plant has not been completed in this State in
the last 12 years--I think that is accurate.
The head of the ISO told us yesterday that he expects to
have a 3,000 megawatt-hour shortage during peak periods this
summer and that is very serious. Everyone agrees that more
generating capacity is needed, but that is going to take some
time. The question is, how do we manage the situation in the
meantime.
Some people say price caps are the answer. We will not have
any demonstrations here today because we want to get through
this. So if people want to demonstrate, I suggest you do it out
outside. If we have to, we will have the police remove you. I
am going to keep order in this meeting. So if you want to hear
what is going on, be patient and listen because we are going to
hear all sides.
Some people say price caps are the answer. They want the
FERC to impose price caps. My concern is that price caps for
California may cause power to be diverted to other States where
sellers can get better prices. Three out of our four energy
experts who testified yesterday said that if FERC reimposed
price caps tomorrow, it would lead to more blackouts this
summer. In fact, the head of the ISO, Mr. Winter, testified
that he made an emergency request to FERC last December to
relax the price caps to avoid a collapse in the system. So I do
not think the price caps are a panacea. But we are going to
continue that discussion today with Mr. Hebert from FERC.
We also had a long discussion yesterday about long-term
contracts. The major utilities have said that they tried to
enter into long-term contracts last summer. They said that they
could have locked in a long-term rate of 5 cents a kilowatt
hour. That would have saved billions of dollars. But they said
that red tape at the Public Utilities Commission stopped it
from happening.
Ms. Lynch said that the Commission did not stand in their
way, but I got the impression that we were only getting one
side of the story. Today, we will ask California Edison and
PG&E what happened from their perspective.
This is no small issue. The general counsel from FERC
talked about long-term contracts yesterday. He said that if San
Diego Gas and Electric had entered into a long-term contract a
year ago, they would have saved roughly $5 billion last year.
So I think it is worth taking some time to get to the bottom of
this.
We are going to hear from two alternative energy producers.
Most of these facilities across the State had to shut down
because they were not being paid. This contributed directly to
blackouts this spring. If they do not begin receiving payments
soon, this will make the electricity shortage this summer even
worse.
We also have a number of other issues to discuss. PG&E has
declared bankruptcy. Cal Edison has agreed this week to sell
their transmission grid to the State to get out of debt. We
want to discuss those issues and others.
At this point, I want to stop my opening statement so we
can get on with the questioning and I want to thank our
witnesses for being here, and I look forward to your testimony.
And if other Members have opening statements, I will yield to
them. Ms. Lofgren, do you have an opening statement?
[The prepared statement of Hon. Dan Burton follows:]
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STATEMENT OF HON. ZOE LOFGREN, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF CALIFORNIA
Ms. Lofgren. First, Mr. Chairman, I have a statement I will
submit for the record, but I would like to thank the chairman
for allowing me to participate in this hearing even though I am
not a member of the committee and welcome you to the 16th
Congressional District.
Mr. Burton. You have a beautiful city.
Ms. Lee.
[The prepared statement of Hon. Zoe Lofgren follows:]
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STATEMENT OF HON. BARBARA LEE, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF CALIFORNIA
Ms. Lee. Thank you, Mr. Chairman, I too want to thank you
for allowing me to participate in today's hearing and I want to
thank our witnesses for coming today to discuss this crucial
issue. I would like to submit my statement for the record.
This crisis is not a Democratic crisis, nor is it a
Republican crisis; it is a crisis that affects all consumers
and it is going to require bipartisan solutions.
And thank you again for conducting this hearing.
Mr. Burton. We agree with that, and thank you for your
statement.
Mr. Ose.
[The prepared statement of Hon. Barbara Lee follows:]
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Mr. Ose. I do want to explore this article in the LA Times
this morning about the alleged price gouging from the
municipalities, so I am hoping some people can provide feedback
on that.
I will submit my statement for the record.
Mr. Burton. Thank you.
Mr. Horn.
Mr. Horn. Thank you, Mr. Chairman. I will waive the right
of an opening statement so we can get down to questions and
answers.
Mr. Burton. Mr. Representative Honda.
STATEMENT OF HON. MICHAEL HONDA, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF CALIFORNIA
Mr. Honda. Thank you, Mr. Chairman. I just want to welcome
you to San Jose and thank you for holding the committee
hearing.
I will submit my questions and my statements in writing
also, but I just wanted to reiterate some of the positions that
many of our colleagues have taken, Mr. Chairman, that we are
looking for not only long-term solutions, but short-term; and I
think one of my concerns is a short-term solution that we have
talked a lot about and that is the temporary capping of prices
and with a deadline, sunset, on that.
Thank you, Mr. Chairman.
[The prepared statement of Hon. Michael Honda follows:]
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Mr. Burton. Thank you, Congressman.
Mr. Hebert, would you please rise?
[Witness sworn.]
Mr. Burton. Do you have an opening statement, sir?
Mr. Hebert. Yes, I do, Mr. Chairman.
Mr. Burton. Proceed.
STATEMENT OF CURT HEBERT, CHAIRMAN, FEDERAL ENERGY REGULATORY
COMMISSION
Mr. Hebert. Thank you. And let me introduce, before I
start, our general counsel, to my left, to your right, sir,
Kevin Madden, who I believe testified before you yesterday.
Mr. Burton. Welcome, Mr. Madden again.
Mr. Madden. Thank you, Mr. Chairman.
Mr. Hebert. Thank you for the opportunity to appear here
today to discuss the topic of electricity markets in California
and surrounding States.
Electricity markets in California and through much of the
West are in a State of turmoil and they will continue to
experience very serious problems throughout this coming summer.
Wholesale prices have increased substantially, consumers are
being implored to conserve as much as possible, and utilities
continue to face severe financial problems. Last Friday's
announcement of Pacific Gas & Electric Co., that it has filed a
reorganization under Chapter 11 of the U.S. Bankruptcy Code
represents only the latest and the most obvious example of this
turmoil.
The Federal Energy Regulatory Commission has aggressively
identified and implemented market-driven solutions to problems
by stabilizing wholesale energy markets; by identifying
additional short-term and long-term measures that will increase
supply and delivery infrastructure, as well as decrease demand;
by promoting the development of a west-wide regional
transmission organization, understanding that we have a natural
market that works in the West; and by monitoring market prices
and market conditions.
Let me highlight just some of the recent actions we have
taken to address these problems. Early last month, the
Commission took action to mitigate prices in California's
electricity markets in January and February of this year. The
Commission identified many transactions during these 2 months
that warranted further investigation. The Commission required
the sellers to either refund certain amounts, or offset these
amounts against amounts owed to them, or provide additional
justification for their prices. The total amount of potential
refunds for these 2 months is $124 million.
Also in March, the Commission issued an order seeking to
increase energy supplies and reduce energy demand in California
and the West. The Commission implemented certain measures
immediately, including encouraging sales of backup or onsite
generation and sales of demand reductions; extending and
broadening waivers for certain facilities under the Public
Utility Regulatory Policies Act of 1978, enabling those
facilities to generate more electricity; expediting
certifications of natural gas pipelines into California and the
West; and for example, Mr. Chairman and members of the
committee, we issued one just the other day, the Kern River
Project. We got that filing out in 3 weeks, something
absolutely unheard of at the Federal Government and
specifically at the FERC.
Urging all licensees as well to review the FERC-licensed
hydroelectric projects in order to assess the potential for
increasing generating capacity.
The Commission also proposed and sought comment on other
measures such as incentive rates for new transmission
facilities and natural gas pipe facilities completed by
specific dates.
And finally, the Commission announced a 1-day conference
with State commissioners and other State representatives from
Western States to discuss price volatility in the West as well
as other FERC-related issues, related and identified by the
Governors of the Western States. That conference was held
yesterday in Boise, ID.
On March 14, the Commission ordered two utilities to
justify the duration of outages at their California generating
facilities. The outages forced the California ISO to purchase
more expensive power from the utilities' other generating
facilities. Absent adequate justification, the utilities must
make refunds, again, of over $10 million.
On March 28, the Commission addressed a complaint by the
California Public Utilities Commission against a pipeline
company and its marketing affiliate. While the FERC found one
part of the complaint unsupported, the FERC ordered a hearing
on whether the pipeline and its affiliate had market power, and
if so, used it to drive up natural gas prices at the California
border. The case is now pending before an Administrative Law
Judge.
These actions and many others I have not discussed, Mr.
Chairman, demonstrate the Commission's commitment to take all
appropriate actions to remedy the current imbalances in the
Western energy markets.
While some have accused the Commission of being indifferent
or hostile to the concerns of California consumers, our actions
prove otherwise. We have pursued the remedies we believe will
be most effective, not only in the short term, but also in the
long term. No one should doubt the Commission's commitment to
ensuring an adequate supply of energy for all consumers, at
reasonable prices. By itself, the Commission can contribute
only a small part of the solution to today's energy problems. A
more comprehensive and permanent solution requires the
involvement of the States and other Federal agencies and
departments.
As long as we keep moving toward competitive and regional
markets, I am confident that the present energy problems, while
serious, can be resolved.
Mr. Chairman and members of the committee, I thank you for
your hard work and I thank you for helping us shed light on
this subject.
[The prepared statement of Mr. Hebert follows:]
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Mr. Burton. Thank you, Chairman Hebert.
We will start with 5-minute rounds for questioning and we
will have both sides stick with that rule.
Yesterday, the committee heard testimony from the president
of ISO, Terry Winter. He said that on December 7, he made an
emergency request to FERC to relax the hard cap because the ISO
was not receiving enough bids to avoid collapse of the grid at
the hard price cap. Is this why FERC issued the emergency order
to relax the hard price caps?
Mr. Hebert. Yes, it is, Mr. Chairman, but just to add a
little piece to that.
I found it a little interesting--I understand there was
some testimony given perhaps that it was something that
happened almost in the middle of the night. Well, quite
frankly, I find it a little discomforting that we are being
criticized for acting judiciously and quickly. And the reason
we had to do that was that the CEO, Mr. Terry Winter, of the
ISO made it clear to us that in fact through that filing, if we
did not move, the lights would go off.
Mr. Burton. So what you are saying is if FERC had not
responded to the ISO's request, what was the probability that
there would be rolling blackouts starting in December was very
real.
Mr. Hebert. The probability was real and great, Mr.
Chairman.
Mr. Burton. So something had to be done.
Mr. Hebert. Absolutely, sir.
Mr. Burton. Is this why FERC followed up the December 7
order with the December 15 order to establish the soft price
cap?
Mr. Hebert. What we were trying to do through the December
15 order is set a point, the $150 soft cap, at which we would
get some reporting requirements that would show us, and give us
the opportunity to learn, whether or not in fact there might
have been market manipulation. It did give us that opportunity,
it is why we were able to act expeditiously and issue the
refunds in January and February.
Mr. Burton. Yesterday, the head of ISO, Mr. Winter,
estimated that there would be a 3,000 megawatt shortfall this
summer. What would happen if, under these circumstances, FERC
ordered a hard price cap?
Mr. Hebert. Mr. Chairman, I would love to give you a short
answer. That is a very complex question and it is a very
complex answer. I will do my best to make it short.
Mr. Burton. Will it result, in your opinion, in more
blackouts and more problems?
Mr. Hebert. I think it will, not to mention potential
blackouts in the West, specifically in Washington and in
Oregon.
Mr. Burton. So it is going to be a problem not restricted
to California, it will be the whole Northwest area.
Mr. Hebert. That is correct.
Mr. Burton. And you think there would probably be more
blackouts than otherwise?
Mr. Hebert. I think that is correct, especially given the
fact that, as I believe has been discussed in earlier
testimony, if you look at the entire market, you are only
talking about us capping about half of that market, a good
portion of that tied up in bilateral contracts. So you are only
talking about us capping the spot market, which in the end is
only going to be about 15 to 20 percent of the market.
Mr. Burton. You know what I wish you would do for the
people of California and everybody who is concerned about this
problem, is explain to them in your own words how supply and
demand works and what would happen if FERC imposed a hard price
cap here in California. I mean a lot of people are listening
across this State and they are hearing all this terminology
that they really do not understand. They know their prices are
going up, they know there are blackouts, but I am not sure they
understand the problem with energy being diverted elsewhere and
hard price caps causing that energy to be diverted elsewhere,
thus resulting in possibly more blackouts than they would
otherwise have. So I think it is important that you explain
that from your own perspective.
Mr. Hebert. I think you certainly made it clear in that the
energy is going to go where the caps are not.
Mr. Burton. Where the money is.
Mr. Hebert. Correct.
Mr. Burton. Energy is going to go where the money is.
Mr. Hebert. But having said that, that would even be true
if we could cap the complete marketplace, which we cannot. As I
told you, we can only cap around 15 to 20 percent of the
marketplace. So what you do is you create two markets, so you
understand that you cannot move in a positive direction when
you do that.
Now the one thing that I think is not being communicated to
the good people of California is the fact that when you say you
are going to have a hard cap, implicit within that remark--what
that person has said is there is a point at which we are not
going to pay for the electricity and we are going to turn your
lights out. There is a point at which we say enough is enough
and your lights are going out.
The problem with that, as I see it, and as we are learning
through this process, in California, the argument is that you
cannot just have a California price cap, it has to be a
Northwest price cap. The reason for that is because the West is
a natural market, and that is absolutely correct, they are
correct on that in California. The problem with it is that
whereas California wants a cap, I have got a letter here I will
be glad to put into the record from 9 Governors of the 11 in
the West, who say they do not want price controls in their
State.
Mr. Burton. Without objection.
Mr. Hebert. I had a conference yesterday in Boise, ID with
the 11 State commissions as well as representatives of the
Governor's office and this tally was not taken by me, it was
taken by a staff member, so it could be objective, and of the
11, only 3 favored price caps.
I guess the real question is do we feel we are better
suited in Washington, DC, to make decisions for these local
people. And I think that is a real dilemma. Are we willing to
say, quite frankly, we are not going to let you decide when to
turn the switch on or off. We think we are smarter than you in
Washington, DC, and we are going to decide, there is a price at
which we are going to turn it off for you.
I would submit to you I think that is improper, I think it
sends the wrong signal. Now that is not to say that the
Commission is not looking at price volatility. That is why we
were out there yesterday, that is why I was in Denver the day
before, it is why you have me here today. We have made it clear
through our refunds in January, through our refunds in
February, we are going to look at refunds from October to
December and we are also putting forth a market mitigation plan
as of May 1 on a going-forward basis. It is just the hard cap
sends us in the wrong direction.
Mr. Burton. Thank you.
Mr. Hebert. Thank you, sir.
Mr. Burton. Ms. Lofgren, do you have some questions?
Ms. Lofgren. Thank you, Mr. Chairman.
I believe that there is more agreement on some of these
issues than is generally understood. I think that everyone in
California who has paid attention to this understands that we
do have a supply and demand problem and that is absolutely
clear. We had phenomenal economic growth in this State that
really no one predicted and we had growth in our neighboring
States that surprised us as well. And so energy demand just
skyrocketed. That is the upside of a great economy, is the
shortfall in energy. And for a variety of reasons, supply did
not meet demand and so we have a problem.
We have nine power plants under construction right now in
the State and there are going to be more that will be needed
and I think there is general agreement about that.
We also, I think mostly, do believe in supply and demand
and market forces here in California. This is sort of ground
zero for the entrepreneurial spirit in California, here in
Silicon Valley. However, many here in California, including the
Governor, the California delegation, both Republicans and
Democrats agree on this as you know from the last meeting we
had with you in Washington, that we do need to, as part of the
picture, gain control of this out-of-control market. We do not
have a functioning market right now and part of the answer--not
the silver bullet, not the solution to the problem, because
that is supply and demand, is to gain control of price gouging
that is going on right now, so that we can move forward.
And so I was interested in the--obviously I was not at the
hearing yesterday in Sacramento, but Mr. Winter of the
California Independent System Operator indicated that the
wholesale energy prices since January--this is his testimony--
have exceeded the cost necessary for new investment by 400
percent. And that, in his judgment, this would allow for the
recovery of an investment in new supply in the period of less
than 2 years.
So clearly the price spikes would be an incentive to
invest, but that has not necessarily occurred. And my sense is
that the market is so wacky that it has chilled the possibility
of investment because the State might have to take dramatic, I
mean very unusual, steps. And so perhaps there might be a way
to put the rhetoric to one side where we could work out with
FERC an ability to get control of the price gouging for a
temporary period so that we can get through this.
What would your comment be on that kind of approach, Mr.
Hebert?
Mr. Hebert. Let me say two things. One, meeting with the
California delegation that obviously you are a part of, I can
assure your district you are doing everything you can and I
appreciate the attention you have paid to this, but I will tell
you--I am obviously trying not to be rhetorical, that is why I
am telling you there is a plant that we are looking, that we
are moving forward with. We are quasi-judicial, we cannot come
out with that right now, it is something that hopefully we are
going to have in place before May 1. It is not a hard cap, it
is something called a mitigation measure and I think it will
work. But when it comes to the wackiness of the industry and
the fact that you see these huge prices--now I am not exactly
sure of the numbers Mr. Winters talked about and I would like
to see those. But I will tell you this, it does not matter if
it is electricity, it does not matter if it is widgets--
uncertainty in a market is very unsettling to investors.
You keep changing the rules on them--you hear these
discussions about cost-based rates. Well, some of these people
are not looking to invest in anything that is going to return
them on a cost-based rate scenario, that is going to be based
on some 30-year average, not to mention it is hard for us to
turn that around and do it again. But I will tell you the
market uncertainty has everything to do that.
And it is great to hear about these generators that they
finally permitted, but it will be great when they turn one of
them on. That will be significant and that is what we have got
to get done.
Ms. Lofgren. We are looking forward to that, believe me.
Mr. Hebert. I know you are. But the other thing, you have
got path 15----
Ms. Lofgren. Yes.
Mr. Hebert [continuing]. Huge transmission problem in the
State of California. How many studies must be done before
someone invests another dollar in it and does something so you
can move electricity in the other direction.
Ms. Lofgren. You are correct on that----
Mr. Hebert. And I know that is not your fault, I am not
blaming you.
Ms. Lofgren. No, but part of the issue is that we had
tremendous profit-taking after the sale of generating assets,
none of which was reinvested into the infrastructure. I think
maybe--well, it is going to be up to the State of California,
not up to the California congressional delegation, or probably
up to you, but some investment in that infrastructure clearly
does need to be made and I think everyone is aware of that.
I think my time is about over, but I am encouraged by your
comment that we might be able to move off of the rhetoric and
get into a--whatever you want to call it--a stabilization
effort having to do with prices that will allow that aspect--
not the whole solution, but that aspect to be dealt with.
Thank you very much, Mr. Chairman.
Mr. Hebert. My general counsel would like to make one
followup if that is all right, Mr. Chairman, or would you
rather move on? We can move on, we can submit later.
Mr. Burton. Let me just say that we will have a second
round if you have more questions, Ms. Lofgren.
You may proceed and make your comment.
Mr. Madden. Yes, I would like to make one comment.
When the generators were sold, they were sold at a premium,
the were sold at substantially above book. And as Mr. Winter
testified yesterday with respect to what he believed was not
competitive prices, I think by the time we finished the
hearing, the numbers had come down substantially, from a $6.7
billion figure to almost a $1 billion figure. And we can get
into that.
Mr. Burton. Mr. Ose.
Mr. Ose. Thank you, Mr. Chairman.
Mr. Madden's comment is timely. Yesterday we did hear about
discrepancies between the Cal ISO report and FERC's analysis on
the issue of overcharges. One of the things I am concerned
about is at some point or another, this issue dealing with
Southern California Edison's proposed sale may very well come
before FERC and we will be asked to provide input for the
record.
And what I am trying to get to is a clear understanding of
the number that took place. Can you elaborate on the flaws, as
you see them, in the Cal ISO report? And let me just briefly
describe them, as I understand the discrepancy. The Cal ISO
report, I think the actual number is $6.2 billion, it uses
assumptions that we cannot quantify specifically, it
encompasses the entire market, both bilateral contracts--excuse
me--bilateral contracts, non-jurisdictional entities and
jurisdictional entities. And I am having a hard time figuring
out what is the right number.
And the reason I ask that question is that Cal ISO's own
attorneys have provided a letter that we have a copy of that
says the only amount subject to FERC jurisdiction is $1.3
billion. So I mean, you can understand my confusion here. I
asked this question yesterday. Can you elaborate on this?
Mr. Hebert. Well, Congressman Ose, I think Congresswoman
Lofgren made a good point about the rhetoric. So much of this,
especially when you talk about numbers, it is what can we throw
out there to make the press feel good about what we are doing.
$6.7 billion sounds a little bit better than $1.3 billion, does
it not? And I think that is what much of that is about, but to
walk you through it quickly--and I jotted these numbers down--
we sent out a memo, I think it was sometime last week, through
the general counsel's office, requesting the information from
the ISO to break those numbers down. I have not seen that yet,
but I will tell you $4 billion of that goes through the PX and
the ISO market, $2.7 of that is bilateral contracts that you
spoke of, not subject to us, and $3.1 of that is FERC
jurisdictional, but $1.8 of the $3.1 is beyond our authority.
Mr. Ose. All right, you have lost me here.
Mr. Hebert. Sorry.
Mr. Ose. You have got $4 billion that goes through the ISO
and the PX, and of that $4 billion, $2.6 billion is non-
jurisdictional?
Mr. Hebert. $2.7.
Mr. Ose. $2.7, all right. So we separate the market out
that way.
Mr. Hebert. That is part of what comes under FERC.
Mr. Ose. All right, go on then, to on with your numbers.
Mr. Hebert. My general counsel has seen the numbers, so if
he has got something to add, I am going to let him here.
Mr. Madden. Mr. Winters, finally yesterday, increased the
$6.2 million to $6.7 because he included an additional $400
million for ancillary services. So let me start with that.
Of the $6.7 the, he took out approximately $2.7 billion
because they were bilateral contracts. Some of those are
subject to our jurisdiction, depending on who entered into
those bilateral contracts, but the whole issue is people going
forward. And these were contracts that in many cases even the
CPUC approved. So if you take that out, you then come up with a
number of $3.1 for FERC jurisdictional from the October to
February period. Then $1.8 billion of the $3.1 billion is
before October 2 and we do not have refund authority for that.
Correct? So then we have a remaining portion of $1.3
approximately. Now that represents the 5-months, October
through February. We have refund for just 2 months, January and
February, which was $124 million.
So we're about $1 billion off, a little bit more than $1
billion in terms of our numbers right now. Then you have got to
look at the ISO has looked at all the hours that the generator
ran during that period versus our belief that you look at a
different period, a period where there supply and demand does
not cross, which is substantially much less. And then we do not
know what gas numbers or Nox numbers they used. So
until they supply that information, will we be able to clearly
define what really is the differentiation between their number
and ours.
But I want to point out this $6.2 or $6.7 is clearly now,
the public should know, is totally out of whack and it is more
in the $1 billion range and most likely it will come down
substantially more.
Mr. Ose. Thank you, Mr. Chairman.
Mr. Burton. Mr. Honda, I understand you have to be
someplace at 11, so we will recognize you now.
Mr. Honda. Mr. Chairman and Mr. Hebert, thank you for
coming.
We have all heard comments about the discussion about caps.
We discussed it a little earlier about hard caps and soft caps.
And I am not so sure even folks in the community understand the
difference anyway. The bottom line is that the rates have gone
out of sight and FERC has the responsibility and it is public
that FERC had said upon your examination of the situation that
the rates are unjust and unreasonable, I think that is a fair
quote.
Commissioner Massie had submitted a written testimony as
far as his solution, his perspective of the situation, that
there is no marketplace and therefore there is no competition,
and I tend to agree with him. There are two things happening
right now and they are parallel. One is groups are looking and
seeking for a long-term solution which we need to do, and then
we are looking at a short-term solution, which I am looking to
FERC to help us with. We have some bills that have been
submitted asking for relief, temporary relief, that we cap the
costs, considering cost of production of energy plus a profit
and that this bill has a sunset date of 2003. And that would
mean that it is temporary.
Now your discussions in the past have always been you want
the marketplace to determine the prices and in your discussion
just earlier, you talked about hard caps. My question to you is
when you talk about hard caps and the comments you are making
right now, it sounds like theoretically you are talking about a
long-term continuous situation rather than looking at the
immediate solution.
I am concerned for the constituents of this State, the
immediate short-term relief until we get a long-term solution.
And I would like your response there.
Mr. Hebert. Congressman Honda, I think that is an excellent
question, and what I would like to do is explain to you some of
the misconceptions in regard to what the Commission has done in
regard to actually what my comments have been.
You quoted the fact that there have been market power
issues and a manipulation of the market, or unjust and
unreasonable rates. And I think the quote that may have been
shared with you is that we found that. Yes, that is true, but
it is a little bit--since we are here at a university--like
quoting first kill all the lawyers without saying what is in
front of that quote. It does not give you the full explanation
of what the author was talking about.
What we said in our order was that we found rates to be
unjust and unreasonable at certain times and under certain
conditions. That is not to say that they all were. We have
moved forward on that. What is so interesting about the price
cap debate--and I really think this is just someone's artful
way, I have to give them a lot of credit--of keeping the debate
away from what it should be and about supply and about demand
and getting things done, because most people, when they talk
about these price caps, they look at New York and they look at
New England, they look at PJM, which has $1,000 price caps.
Well in January and in February, in January, we set subject to
refund everything over $273--much less than $1,000. In
February, we put everything subject to refund over $430--much
less than $1,000. But I want to assure you, sir, this
Commission is working to come forward with something on a going
forward basis of May 1, on price mitigation. We are looking at
that, it is not that we are not paying attention, we certainly
are and we are prepared to move forward.
But when it comes to cost, let me close this gap for you,
because this is important. So many people want to talk about
moving away and going back to cost. One of the reasons we moved
away from cost is what Congresswoman Lofgren brought up and
that is investment, to get the opportunity, to get the choice.
Another real reason is quite frankly because we get so bogged
down. I have got rate cases at the Commission right now--I was
left with a backlog of 2,000 cases that we are trying to deal
with, some that go back to 1993. California needs help now, the
West needs help now. Cost-based scenarios do not get you help
now. I do not think you can wait 8 years for a remedy.
Mr. Honda. Thank you, Mr. Chairman, if I may continue on my
time.
The next question then is when FERC decided to put a cap, a
temporary cap a couple of months ago, you indicated that you
would do it at $150. But it was at stage three and I think that
consumers want to have a cap on all the stages and not only a
stage three, because if you want to cap at a stage three,
whether it is soft or hard, it still increases the rates for
our consumers. We need to have ways to be able to anticipate
the cost of our energy when we consume it. And as consumers, we
do not know what that price is going to be and that is unfair
in the marketplace and the marketplace is dysfunctional, and
that is a quote, it is dysfunctional at this time and that is
why we have to work on a long-term solution, so that the market
is functional and that there is competition and that will be
able to drive the prices down. But apparently it is
dysfunctional and when you start to talk about price caps, it
is my contention that it should not only be on stage three, but
it should be all stages, so that you really truly have a lower
rate.
Mr. Hebert. Do you want me to respond to that, sir?
Mr. Honda. Well, you said something about in the near
future you are going to come up with some sort of interim
solution. Hopefully the interim solution does not relegate
itself to stage three, but an across-the-board, firm kind of
pricing that the consumers can anticipate in the future.
Mr. Hebert. We issued an order on price mitigation and
actually the comment period closed about 2 weeks ago. We are
looking at that now and going to move forward.
Mr. Honda. Thank you, Mr. Chairman.
Mr. Hebert. Thank you.
Mr. Burton. Thank you, Mr. Honda.
[Inaudible comment from the audience.]
Mr. Burton. We are here to hear from the panelists who we
have asked to testify and we had not made provision for public
input; however, if any of you would like to submit to us in
writing information or concerns that you have, we would be very
happy to have those.
Voice. I did, to our Congressman.
Mr. Burton. Well, I will be very happy to take that and
that will become part of the record. So any of you that have
comments or things that you would like, be sure to get those to
us, and make no mistake about it, we are going to review
everything that we have. But the problem is, because of time
constraints, we simply cannot have everybody testify.
Voice. Just because our questions are entered into the
record does not mean we are getting answers. We are concerned
that FERC approved billions of dollars going to PG&E, to the
parent company, now they have declared bankruptcy, are they
going to rescind that so PG&E can pay their bills?
Mr. Burton. Ma'am, I think your question has been heard and
we will see if we cannot have a response to that in just a
minute. But if you have other questions, get those to us and we
will see if we cannot find some format that we can get them
back to you, but we do not have time to have questions from
everybody in the audience right now.
Let me see--Mr. Horn.
Mr. Horn. I yield 30 seconds.
[Inaudible comment from the audience.]
Mr. Burton. Ma'am----
[Inaudible comment from the audience.]
Mr. Honda. Mr. Chair, I believe my colleague Mr. Horn had
conceded 30 seconds to me.
Mr. Burton. 30 seconds.
Mr. Honda. Let me just share with the community that I will
be submitting this in writing on your behalf and any other
questions that the community may have. And I think that the
frustration of the community is reflected in the outspokenness
of some of the folks that had to leave. I share their
frustration, I think more than they share this frustration, Mr.
Chair, so on their behalf, I will be submitting these questions
and I have their names and addresses and you will receive a
response from the FERC. Thank you, Mr. Chair; thank you, Mr.
Horn.
Mr. Horn. Mr. Chairman, I would like to have you clarify
for the record, we are talking about hard caps, soft caps, I
begin to think I am talking with the three bears. So just what,
in your judgment, as chairman of that very important
commission, do you feel and what did the Governors you met with
feel--I think it was 3 out of 11 that had a cap interest--could
you sort of define for me, will a soft cap always become a hard
cap or what?
Mr. Hebert. A soft cap does not always become a hard cap.
Once it is in place, it is a soft cap, as the $150 was, with a
reporting requirement. What it did was bids that arose above
the $150 mark would not set the clearing price, it would come
back down to $150, therefore, not setting a high market
clearing price. Whereas a hard cap is a hard cap at which no
purchases can be made beyond that.
Mr. Horn. And does the Commission have any view to maybe do
one or the other on this? Or what will it take to not do it or
to do it?
Mr. Hebert. Congressman Horn, my thoughts have been, as the
Commission has been clear in looking at market mitigation, that
is the direction we need to move in. That is the direction we
are moving in, that is why we had the comment period and that
is why we are trying to come out with something before the May
1 period. We felt so strongly about that we placed in one of
our orders, Order 2000, where we are trying to set up regional
transmission organizations, which every State in the United
States of America has filed with us, save one--California. They
are the only one that has not filed.
We put in that plan, in Order 2000, that in fact the RTOs
would have additional market monitoring obligations, so that
would shore us up as well. We are moving in that direction, I
think the market mitigation is the answer, it will send the
proper signals to the investment community, it will make sure
and keep prices, I believe, at a level that would mimic a
competitive market when things get extremely tight like we were
talking about in a stage three, when reserves are at 1.5
percent, when in fact your curves are about to do this, when
supply and demand do not cross and in fact the lights go out.
Mr. Horn. When California did not reply and the other 49
States did, was there any action by the Commission to request
the Governor or the Commission, the Public Utilities Commission
here, to respond on that? Or what do you think, why aren't they
responding?
Mr. Hebert. I would certainly be living within the realm of
speculation to assert why I think they are not acting, but I
will tell you we have communicated. I as recently as yesterday,
not only phoned the Speaker of the House, the Pro Tem as well,
as well as one of the new Commissioners at California, and they
said that they could use someone to communicate more with them.
And I had a gentleman behind me by the name of Shelton Cannon,
who works closely with me, I gave them the name and number and
I said let us get this together and let us move forward.
Mr. Horn. Let me move from this to natural gas. There has
been interest in the capacity of natural gas to providing a
certain amount of megawatts and I wonder if the Commission has
some analysis where the natural gas would be a certain portion
of providing electricity, and I wonder what is the view as to
how much an importance natural gas is, and are the States who
can also regulate pipelines doing what they should be doing,
has there been sort of a view of some that we will just keep
moving other things through those pipelines and it will not be
natural gas? So what is the Commission going to be able to tell
us on that?
Mr. Hebert. Well, what we have done, as I had said earlier,
we are expediting any and all applications that come before us
for the West and for California. Kern River is a great example
of that, acting on that in 3 weeks. I would also have to
commend some other Federal agencies that helped us get that
done.
At the same time, the natural gas price, which under most
scenarios of combined cycle, is about 70 percent of the price
of the megawatt hour. That being said, the price of natural gas
has everything to do with what the price of a megawatt is going
to be. Having said that, you must understand, and I think you
do, that in the end it does not matter if I get the West 100
pipelines, if I get California 100 interstate pipes. They have
got some takeaway problems. In other words, I have got a big
pipe that brings it to them, and their takeaway capacity is
much less; therefore, they cannot move it and it inflates their
prices. Not to mention they did the same thing in the natural
gas markets that they did in electricity, they played the spot
market. They did not have a balanced portfolio.
Mr. Horn. Thank you, Mr. Chairman.
Mr. Burton. Ms. Lee.
Ms. Lee. Thank you, Mr. Chairman.
I think you are quickly dispelling the notion that many
have had that California's energy problems really are our only
concern here in California. Modern energy systems, by their
nature and design, cross State borders. Oregon, Washington and
Arizona are already directly caught up now in this so-called
California problem and problems now have emerged in New England
and New York and elsewhere in the country. So it is clear that
energy cannot be treated as just another free market commodity.
Now you mentioned earlier your concerns with regard to
Washington, DC, and FERC in terms of putting on caps because it
is a regional problem, but the region actually, as I understand
it, does not have the jurisdiction over wholesale rates.
Let me just ask you, Mr. Hebert, am I correct or not; is
FERC the only entity with that type of power and authorization
in terms of the wholesale rate price capping?
Mr. Hebert. We do have the wholesale rate authority, but as
I suggested to you, with Public Power, BPA, which--
municipalities, which take up about half of the power in the
West, we do not have authority over. But yes, you are right.
Ms. Lee. So it is FERC that we need to look to. Otherwise,
what entity?
Mr. Hebert. Well, you could certainly look to BPA, you
could certainly look to municipalities, you could certainly
look to other Public Power entities where we do not have
jurisdiction.
My general counsel wanted to add something.
Mr. Madden. When we discussed yesterday the $6.7 billion,
approximately $1 billion of that was associated with co-ops and
munis--LA, DWR and SMUD. Yes, the cities can do something about
that, the munis can do something about that. They, if they
want, can lower the price to provide better prices to the
consumer. We do not have jurisdiction over them, but they can
do it.
Ms. Lee. In terms of wholesale rates?
Mr. Madden. In terms of the energy that they sell at the
wholesale level, yes.
Ms. Lee. Let me ask you about the finding, going back to
Congressman Honda's question with regard to the fact that you
did find--and as you said, at sometimes under some conditions,
under certain conditions, that generators have exceeded just
and reasonable wholesale prices--since that finding was made,
let me just ask you, under--since it was only under certain
conditions, have you, under certain conditions, assessed
penalties against the generators that have been found to exceed
the just and reasonable wholesale prices? Or what is going on
at this point with regard to the generators?
Mr. Hebert. We have got some matters subject to rehearing,
so I want to be careful, but yes, we have. That is in fact--we
acted in January, we acted in February, we are getting ready to
act on the time period between October and December where, if
you will remember right, we did not have the reporting
requirements that we had on everything above $150, so it has
taken us a little more time to get the information together.
But we will get that information together and we will act.
But there is some misunderstanding that if FERC has not
acted in the capacity of a cap or something else, that we are
not doing anything. I can assure you that this Commission is
looking for and is ready to make certain that there is not
market manipulation; and if so, we will provide relief.
Ms. Lee. But again, have you assessed penalties or not? Or
are you still trying to determine what the level or amount of
penalties should be, as a result of your finding?
Mr. Hebert. Penalties in the sense of a refund.
Ms. Lee. But not against the generators?
Mr. Hebert. The refunds will be made by them, yes.
Ms. Lee. OK, when will we know what that amount is, how
much that is and what that will add in terms of refunding?
Mr. Hebert. Right now, as I told you, under the January and
February, we were at $124 million, I think in my testimony, I
told you about another additional $10 million. So the numbers
are adding up. And we will act on March, we will also be acting
on October through December.
Ms. Lee. OK, finally let me just ask, in terms of
regulatory practices, given again your findings, how, in terms
of your regulatory efforts, are you going to ensure just and
reasonable prices? Are you taking steps now to correct that in
addition to the assessment of penalties?
Mr. Hebert. Well, again, the penalties come in the form of
refunds and yes, that is exactly what those orders are about. I
mean we--as I have told Congressman Honda and----
Ms. Lee. But are there any regulatory reforms in place now?
Mr. Hebert. Well, the reforms that hopefully we will have
in place by May 1 will be the market mitigation that I have
spoken about. Again, the RTOs, when we get them up and running,
hopefully that will be soon, we certainly need a filing from
the State of California, would have additional market
mitigation through market monitoring as well.
Ms. Lee. I think, Mr. Chairman, what is very important is
that the short-term solution happen immediately, as soon as
possible, and that consumers do see a refund coming right away,
because it is going to be a very hard, hot summer this year, I
think. And while we work on hopefully a national energy policy,
which is what we need, short-term, I think consumers are going
to need a refund, especially low-income individuals, people on
fixed income, senior citizens. They need those refunds in their
pocket right away so they can just manage to get through the
next 3 or 4 months.
Mr. Hebert. I would agree with you and I will tell you that
President Bush has been very clear as to his commitment, I know
the committee has as well. We are doing everything we can on
our part to make sure that those people are protected as well.
Ms. Lee. It is my understand though that LIHEP was frozen
in the budget, I do not think we see an increase in LIHEP
funding.
Mr. Hebert. I cannot tell you what they are doing with an
increase or not an increase, but I can tell you the commitment
from the last is brought forward.
Ms. Lee. Thank you, Mr. Chairman.
Mr. Ose. As it relates to the LIHEP line item in the
budget, I would be happy to work with you to ensure that
California's low income and senior citizens are eligible to
file under that.
Ms. Lee. Thank you very much. I look forward to working
with you on that because as I understand the budget, it is
frozen at the previous levels and we do need to work to ensure
that there is an increase for California consumers. Thank you.
Mr. Burton. We will start a second round. As I understand
it, we probably have another 45 minutes of your time. Does that
sound about right to you?
Mr. Hebert. I think I have got about another 20 or 25, Mr.
Chairman, but if you need me, I can----
Mr. Burton. I think if we stick to the 5-minute rounds, we
can get through, if there are five of us, we can get done in
about 25 minutes.
Mr. Hebert. Thank you, sir.
Mr. Burton. As I understand it, the California ISO now says
there were $6.7 billion in overcharges and we have not seen
exactly what they are basing that on, but that is their
opinion. Of that, you are saying that there is only $1.3
billion more or less than you can do anything about.
There are lots of electricity sales that are outside of
your jurisdiction. Can you give us some examples of that as
well as that difference we are talking about?
Mr. Hebert. Well, the sales absolutely that we are looking
at as far as entities outside of our jurisdiction is what the
general counsel had mentioned earlier, we have got munis, we
have got co-ops, we have got BPA, Canada as well which comes
into the market and actually you have had BPA try to say they
can do what they can, but as well as you know, they are looking
at rate increases themselves right now. The Secretary of Energy
has been very specific that they are going to have to meet
their revenue obligations.
Mr. Burton. What percentage of the power here in
California, do you have jurisdiction over?
Mr. Hebert. What percentage? Roughly half. But if you are
talking about capping the market, there would be no way to cap
those bilaterals, so if you are talking about existing
bilateral contracts, you take the spot market out of that, you
are only talking about us capping maybe 20-25 percent at most.
Mr. Burton. OK, so there is only 20 to 25 percent that you
could cap. Let us say that there is a tremendous energy
shortage and we anticipate that across the State, and you cap
25 percent. What is going to happen then? They are going to
send it to the other 75 percent where they can get a higher
rate, right?
Mr. Hebert. That is correct.
Mr. Burton. OK, I hope everybody understands that. If you
can only cap 25 percent of the State market and there is a
tremendous need, and the other parts of the State, the other 75
percent, is willing to pay more than the cap that you put on
the 25 percent, then you can bet your bottom dollar, the people
who are selling the energy that is necessary to produce more
energy are going to go to the 75 percent that is not under the
cap, correct?
Mr. Hebert. Correct, not to mention out of State.
Mr. Burton. That is important. I think everybody needs to
know that, because they are going to go where the money is.
Now as I understand it, you cannot review sales before
October 1 of last year. Can you give us a layman's explanation
as to why that is that you cannot?
Mr. Hebert. Well, when the utility filings come in, in
dealing with--I am going to put it in layman's terms--what we
are dealing with right now, there is a 60-day period, we are
prohibited from going beyond that 60-day period. That is at the
point at which it was filed. Was it October 2 exactly? I think
it was the second.
Mr. Madden. San Diego Gas & Electric filed a complaint
August 2, so we, in our order October 2, established the
earliest possible date under the act, 60 days after a complaint
was filed.
Mr. Burton. So you are limited to 60 days.
Mr. Madden. That is the earliest period.
Mr. Burton. Now I understand that you have ordered refunds
for January and February. Are you currently investigating
transactions for other months?
Mr. Hebert. Yes, sir, March, and then the period from
October through December, and then again, we are looking at the
market mitigation, May 1 going forward.
Mr. Burton. And when do you expect to issue orders for
those months that you are currently looking at?
Mr. Hebert. Whereas I am prohibited from giving you exact
dates, Mr. Chairman, I will tell you I have instructed my staff
to move with all deliberate speed and get them out quickly.
Mr. Burton. One final question and then I will yield to my
colleagues. Yesterday, we ran into some stonewalls from the
State as well as your agency on some information that the
committee requires. We understand that that has to be kept
confidential, but it will be helpful in our deliberations and
we will have your cooperation to get that?
Mr. Hebert. You will have my cooperation, Mr. Chairman.
Anything that you request, I will be glad to give you under
cover. I think it is important you see many things.
Mr. Burton. OK, thank you very much.
Ms. Lofgren--1 more second. One question further. How
aggressively do you intend to move to get those refunds from
January and February? You said as quickly as possible.
Mr. Hebert. We are in that process right now.
Mr. Burton. OK, has your ruling been challenged?
Mr. Hebert. It is on rehearing at this point. So yes.
Mr. Burton. So what is the next step?
Mr. Hebert. Well, the rehearing, hopefully we are going to
deal with that as quickly as possible. They obviously will have
their right to appeal. Like any other court of appropriate
jurisdiction, there are appeal rights that go beyond that----
Mr. Burton. But you are going to move as quickly as you
possibly can.
Mr. Hebert. We are going to do everything we can to get it
out from under us, yes.
Mr. Burton. Ms. Lofgren.
Ms. Lofgren. Thank you, Mr. Chairman.
Just thinking about this, there are some, I think, simple
things that the people of California want done, and that is for
our agency, since I think you are the only ones who can do it,
to aggressively recoup the unjust and unreasonable prices that
have been assessed against California consumers. And along
those lines, I am interested--and I understand the current act
precludes you from looking past October, but clearly there was
very--in my judgment, very questionable activity that occurred
prior to October. Just before recess, members of the
Washington, Oregon and California delegations came together and
introduced a bill that would change the act and allow you to go
past the October date that is currently in law. Would you
support that bill or what would your reaction be to that?
Mr. Hebert. Congresswoman Lofgren, I have not read the
legislation; therefore, I would not want to say if I support it
or not.
Ms. Lofgren. That is fair enough. Could I ask you to read
it and consider supporting that?
Mr. Hebert. I will commit to that and if you would like a
response on that, I will be glad to give that to you.
Ms. Lofgren. I would very much appreciate that.
Second, I think, Congresswoman, we touched on this as well,
but ISO has indicated to--Cal ISO has indicated in their
testimony that market manipulation is going on, not just during
stage three emergencies but also during stage one and two, and
they are suggesting that FERC needs to look at those, not just
stage three, but also one and two for market manipulation and
price gouging. Are you prepared to do that? Can you do that
under the act?
Mr. Hebert. Congresswoman Lofgren, this has been one of the
huge misunderstandings. In the dead of the night when we are
all asleep and rates are lower, we are looking for market
mitigation which also includes one, two and three. We are
always looking for market mitigation.
Ms. Lofgren. So your answer is you will accept and you
would order rebates if you found unjust even in those stages.
That is just a confusion?
Mr. Hebert. Absolutely. We are continually looking for
market manipulation and misconduct.
Ms. Lofgren. That is great to hear.
Finally, you know, I saw today that President Bush had
figured out the right words to use so that the Chinese Army
could be happy about an apology. So it seems to me we could
figure out the right words to use that will allow FERC to
control, proactively and prospectively, price gouging. And I
guess the question is, is the term ``market mitigation'' the
right word for your proactively controlling prospective price
gouging, which California needs you to do?
Mr. Hebert. That is correct. What our intent is, and again,
we have not ruled on this yet, we sent out for comments--it
closed out 2 weeks ago, but our intent is to find a process by
which we can mitigate market conduct based on what a market
would be doing if it were functional, even during a
dysfunctional period, taking certain factors into
consideration. So, yes.
Ms. Lofgren. All right, finally, you know, we read in the
paper and we do not know obviously all the details, but it
appears that some of the energy companies have just made
extraordinary--I mean extraordinary--profits at the expense of
California consumers. Duke operating revenue more than doubled
from 1999 to 2000. Reliant had a 1,685 percent increase in
operating income. So I am hopeful that we can see some of this
revenue, as the complaints are made, flowing back to the State
so that we can have the financial ability to make the
investments that are required. At the end of my last
questioning period, I was commenting about the sale of the
generating assets and, you know, without saying whether the
price was right or wrong, I mean, there was a tremendous amount
of money that came into PG&E and they did not invest that money
in path 15 or anything else, it just went back to the parent
corporation. So we need to be able to recoup some of the
gouging, get the money back, take care of the suffering
consumers in California, but also make some of the investments
that are going to keep us healthy in the future, including path
15. I am hopeful that we will be able to get the prospective
control of prices that will avoid the necessary delay of the
regulatory and review process for the refunds.
Mr. Hebert. Let me say a couple of things about that. One,
the PG&E is on rehearing, so I would have to be very careful
about making comments. But I will tell you it is my
understanding that several of those companies have made
commitments to reinvest capital, do not know to what extent,
cannot quote to you which companies they are. I know you are
going to have them later to talk to you.
Many of those decisions when it comes to reinvesting
capital and what you do with that investment dollar is made
with CPUC.
Ms. Lofgren. I understand that as well as with Public
Power, but you understand the California consumers feel a bit
ripped off right now.
Mr. Hebert. Well, and the CPUC could change some of that,
yes.
Ms. Lofgren. Thank you, Mr. Chairman.
Mr. Hebert. Thank you.
Mr. Burton. Mr. Ose.
Mr. Ose. Thank you, Mr. Chairman.
I want to followup on something that Congresswoman Lofgren
said. If it is your point that when a filing is made with FERC
to remove that 60-day delay by legislation, that makes
eminently good sense to me, that the analysis ought to start
from the date of the filing rather than 60 days hence, and I
appreciate you bring that forward and I would like to visit
with you about that later.
Mr. Hebert, on FERC's jurisdiction over bilateral
contracts, does FERC have the authority to reverse bilateral
contracts?
Mr. Hebert. Yes.
Mr. Ose. Is it statutory or regulatory rulings that give
you that authority?
Mr. Hebert. Well, through the Federal Power Act, we have
the authority, but I will tell you it is only subject to
wholesale, which gets us back to where we were talking about
before, as to the percentage of the marketplace.
Mr. Ose. The 47/53 break?
Mr. Hebert. Correct.
Mr. Ose. Mr. Chairman, I am not sure we did this yesterday,
but I do want to enter into the record, this letter from Cal
ISO's counsel that says the only amount of overcharges that is
the subject of FERC's jurisdiction is $1.3 billion.
Mr. Burton. Without objection, so ordered.
Mr. Ose. And then finally, I want to again come back to
this article in the LA Times this morning about--I do not know
if you have read this, but there is an article here by Robert
Lopez and Rich Connell and I see it is not copyrighted, so we
may well be able to put it in the record, about the context of
these municipalities--in the context of municipalities selling
power to the ISO during times of market emergency. This article
suggests that in particular the Department of Water and Power
has engaged in some of that activity. It is my understanding
that they are outside your jurisdiction?
Mr. Hebert. That is correct.
Mr. Ose. This speaks right to the heart of one of our
problems here, Mr. Chairman, and that is FERC has jurisdiction
over 47 percent or 53--pick your number--and then they have
jurisdiction over some of the bilateral contracts, but not
others. And I find it most difficult, as I did in my earlier
round of questioning, to understand the usefulness of the
original six point whatever billion number that was created in
FERC's report. I am trying to get to the hard number, so we can
talk specifics about how to address it.
Now I want to make sure I have got this. Pursuant to Mr.
Winter's testimony yesterday, ISO is saying there are $6.7
billion in overcharges, of which $2.7 billion is involved in
bilateral contracts, some of which are FERC jurisdiction, some
of which are not. OK. Then of the remaining $4 billion, about
$900 million of that precedes October 2. Am I correct so far?
Mr. Madden. I think it is $1.8 billion before October 2.
Mr. Hebert. That is correct.
Mr. Madden. And the $900 is non-jurisdictional.
Mr. Ose. OK. So you have got--of that $4 billion, you have
got $900 million which is non-jurisdictional, which gets you
down to $3.1 billion and that is for the period from say May
2000 through February 2001?
Mr. Madden. Through February 2001.
Mr. Ose. OK. So now you have got $3.1 billion you are
looking at. And you are prevented by statute from going back
prior to October 2, because that is the 60-day--the expiration
of the 60-day period following the filing. And if you take out
the numbers or the amounts prior to October 2, which is $1.8
billion, you end up with a universe of $1.3 billion.
And if I understood testimony yesterday, some of the
questions which you have and which you are examining relate to
how do you quantify the $1.3 billion. In other words, do you
look at the month ahead contract versus the spot? Because
yesterday's testimony was you came up on an annualized basis I
think of $5 billion worth of overcharges attributable to the
San Diego area only.
Mr. Madden. The $5 billion, Mr. Chairman, was associated
with if San Diego had bought a year contract, based on its
load, from the Duke contract offer. I do not know all the terms
and conditions, at $55 a megawatt hour, versus what it would
have to pay on the spot market in December-January, which is
$345, you would have a differential of $5 billion they would
have saved, just using that differential.
The testimony I gave yesterday with respect to the $1.3
billion is the ISO includes all hours, they say all hours are
non-competitive, for the most part. We include an hour.
Mr. Ose. Thank you, Mr. Chairman.
Mr. Burton. Let me just say that we have about 10 minutes
maybe, at the most 15; is that right? So if we could stick
close to the 5-minute rule so that he can leave. And if we have
additional questions, we will go to Mr. Madden, he can stick
around for awhile; is that correct, Mr. Madden?
Mr. Madden. Yes, Mr. Chairman.
Mr. Burton. Let me see, Mr. Honda.
Mr. Honda. Thank you, Mr. Chair.
A couple of quick questions. I heard you say that FERC has
jurisdiction over 50 percent of the market more or less?
Mr. Hebert. Roughly, yes.
Mr. Honda. That is the retail or wholesale?
Mr. Hebert. Wholesale.
Mr. Honda. Wholesale.
Mr. Hebert. We do not have retail jurisdiction.
Mr. Honda. Statutorily do you have jurisdiction over the
other percentages that does not appear under your control
statutorily. If something is going wrong, something is being
manipulated, do you have any responsibility in the name of
protecting the consumers to look at the other percentages?
Mr. Hebert. I do not have the legal authority or ability to
do it.
Mr. Honda. Next question, natural gas. It is said that gas
imported from outside the State rises considerably. Have you
found that to be unreasonable and unjust and have you found
that to be part of the increase in cost that we are looking at
and does FERC have jurisdiction over that?
Mr. Hebert. I have got a pending issue on that. Yes, we
have jurisdiction over those issues. I will tell you, as I
shared earlier, there are concerns that we have got as well
providing interstate capacity understanding there are
intrastate constraints, takeaway capacity in the State. So
hopefully, again, that is something else the CPUC can correct,
but they are going to have to site some intrastate pipes, deal
with some compression, to do that.
Mr. Honda. Just very quickly, does FERC have responsibility
or jurisdiction over looking at the possible price gouging from
the increase in the gas prices here in California, coming from
out of State? Because there have been some articles in the
paper of possible manipulation of prices in that area too.
Mr. Hebert. We have jurisdiction over the manipulation or
over such conduct and it is pending hearing right now, so I
cannot speak to it.
Mr. Honda. Will your decisions and your assessment be
shared with us by the time you have come up with the May report
or May solution?
Mr. Hebert. I am prohibited from giving you a time line on
which--the May 1 I can share with you because it was in the
order. This, which is subject to pending action, does not have
a time line in it. I am acting expeditiously, I can assure you
the Commission will act. I am prohibited from giving you a
date.
Mr. Honda. Is there a time line that you may share with us,
more or less a soft date?
Mr. Hebert. Protecting myself ethically and legally, and
protecting the integrity of the Commission, I am prohibited
from doing so.
Mr. Honda. But we can expect something sometime in the
future.
Mr. Hebert. You have my word I am acting quickly.
Mr. Honda. Thank you.
Mr. Burton. Mr. Horn. Are you going to yield to Mr. Ose?
OK, Mr. Ose, Mr. Horn is yielding to you.
Mr. Ose. Thank you, Mr. Chairman; thank you, Mr. Horn.
I want to go to the regional transmission organizations. I
am trying to make sure I understand the timing of the request
to all 50 States to submit their plans and the utility--or
excuse me, the usefulness--I do not want to confuse it--the
usefulness of the RTO proposals that you are supposed to be
receiving. So specifically, could you tell me when FERC asked
the various States to submit their proposals and for what
purpose are you collecting that information?
Mr. Hebert. We had two deadlines, the first being December
15, the second being--I am sorry--October 15 and the second
being January 15, which is the one that California would have
been subject to. One bit of correction, which I think I may
have miscommunicated to you, there are two States, Alaska and
Hawaii, of which we do not have that jurisdiction over.
Mr. Ose. Three total?
Mr. Hebert. Well, Texas, if you include RCOT, correct.
Mr. Ose. Four total. How many States do you not have a
regional transmission organization proposal from?
Mr. Hebert. That we legally have the ability to get it
from, one.
Mr. Ose. One, OK. Now the usefulness of the proposal is?
Mr. Hebert. Understanding that we have natural markets, we
are trying to set up competitive markets that work, that are
functional. Good decisions, bad decisions that are made in
California have good and bad effects in Washington and Oregon
and Nevada. Understanding that, knowing that, California
understands that, is committed to that. That is why, in fact,
they talk about a Northwest price cap. That is why it is
essential that we work together understanding that something
like path 15 not only injures California and effects higher
prices there when they do not repair it and move beyond it, it
also affects others in the Northwest.
Mr. Ose. So your point is that because the sources of power
are distributed across a multitude of States, of which they are
selling at different times all into California or all out of
California, we need to have some cooperation, if you will, or a
meeting place where that sort of discussion can take place.
Mr. Hebert. Right. When we were strictly looking at it in a
monopolistic perspective, it was not an interstate commodity.
When it is an interstate commodity, we have got to look at it
in an interstate sense.
Mr. Ose. So we have Oregon's plan, we have Washington's
plan, we have Idaho's plan, we have Wyoming's, Montana, Nevada,
Arizona, New Mexico, Colorado. California? No, we do not have
California.
Mr. Hebert. No, sir, we do not.
Mr. Ose. Is that an impediment?
Mr. Hebert. Yes, sir, it is.
Mr. Ose. Why?
Mr. Hebert. Because we cannot move forward with our
regional transmission organization, understanding that the West
is one regional market.
Mr. Ose. How do we help you--I mean, can we do that at
Congress, can we create that submittal?
Mr. Hebert. It is a State action through the ISO. Obviously
any direction that you, through your leadership, would give to
them, I think they would take wisely.
Mr. Ose. I yield back to the gentleman from California.
Mr. Burton. Let me see who is next. Ms. Lee.
Ms. Lee. Thank you, Mr. Chairman.
Given the out-of-control prices in the Western region,
especially here in California, I, like many, support at least
temporary price controls--price caps actually--on electricity,
natural gas and heating oil. Let me ask you though about your
argument that these caps will discourage development since
temporary price caps--I mean, how do they inhibit future
investments when plants really would not be completed for 2 to
3 years, they have a generating lifetime and actual expected
return on investment for decades? So I am curious about your
argument with regard to that. How do you see that, in terms of
wholesale price caps, as impeding development?
Mr. Hebert. The decades of return based on some cost
mechanism and variation of that, is something we have moved
beyond, obviously. So they are not guaranteed anything for
decades any more. That is yesterday's regulation, not today's.
The other part of that, as far as stimulating investment,
we have certainly and a pretty valid conversation, I think,
about that and what is being done with some of those dollars.
We cannot force them to invest. What we can do is send proper
signals, but the other side of that is again, what I continue
to say, if you set a hard cap in place, you are telling the
good people of California there is a price at which you are
willing to turn the lights out. I am not willing to say that,
or have not been convinced that is in our best interest, not to
mention when the hard caps were in place and they moved the
hard cap from $750 to $250 in California, the empirical
evidence not only suggests but proves that average prices went
up. And should that not be what this debate is about? Not what
a single price spike is, but what the average price is.
Ms. Lee. But even--OK, what after soft cap then or a
temporary soft cap? What--how does that----
Mr. Hebert. Again, the Commission has moved in the
direction of market mitigation so that we may try to mimic the
market and move forward with it, and I think that is what we
believe to be in the best interest and hopefully, you will see
us move on something quickly with the May 1 timeframe in mind.
Ms. Lee. May 1, OK. Let me just ask you long-term, in terms
of how you see the whole push now by some to require, say a 20
percent of the Nation's electricity to come from renewable
sources by a certain year, say by the year 2020. I mean in
terms of this crisis now, I think it provides us an opportunity
to look at alternatives and we have not discussed long-term as
much as I would like to, because we have got the immediate
crisis that we have got to deal with. But what is your position
or what does FERC think with regard to renewable energy
sources?
Mr. Hebert. I will tell you my persona position. As you,
the Commission acts as one, we speak through our orders. We
have made it very clear, in removing some impediments and
obstacles with PURPA and others, that we think it is very
important to do that. At the same time, I will tell you that
California and the West is in a position where they need to add
supply quickly and the quicker the better. I think it is very
important to diversify, I think renewables has to be a part of
that. I think it is important and that is what our orders have
been about, removing obstacles and impediments, squeezing every
megawatt out of this system that we can possibly do. We are
committed to that. I think it is a wonderful idea.
Ms. Lee. Thank you very much, Mr. Chairman. Glad to hear
you say that.
Mr. Burton. I want to thank you very much for your candor
today. There is one last question I would like to ask. There
are environmental concerns about diesel-fired generators. We
did have somebody to talk to me privately and I wanted to ask
your opinion, even though this may not be in your jurisdiction,
and that was that they said to get California over the hump
this summer, that there could be brought into the State
temporarily on barges and on trucks and so forth diesel-fired
generators that could create the capacity to get the State over
the hump without rolling blackouts. Do you have an opinion on
that?
Mr. Hebert. My opinion would be that darkness, the lights
going out, is absolutely the worse thing that could happen.
Whatever you can do to prevent that, I think is good. I think
demand side is very important, but at the end of the day, you
had better have adequate supply. Historically, California has
not been willing to do much with diesel generation. If you will
remember right, and I know you do, they brought barges up
through the Canal Zone and actually into San Francisco Bay when
they feared a blackout and they turned them around and sent
them back since they were diesel generators.
I have also had meetings with producers who were flaring
natural gas, who informed me that there is about 1,000
megawatts of production right there that they could put on line
if they were allowed to do it.
There are lots of opportunities here. The conversations
need to stop, someone needs to start putting shovels in the
ground, someone needs to start hooking up some type of
generators to provide the electricity so the people will not be
in danger this summer.
Mr. Burton. Thank you very much.
Mr. Hebert. Thank you.
Mr. Burton. We appreciate you being here. I hope you make
your plane.
Mr. Hebert. I will submit this to the reporter, is that is
all right, Mr. Chairman.
Mr. Burton. That will be fine, we will accept that without
object and put it into the record.
Mr. Hebert. Thank you. And if I may tell the public, the
one question that the public had asked is on rehearing. We
cannot speak to it. If Congressman Honda would like for us to
give him what we can, we will be glad to do that. It is on
rehearing, and I am going to a hearing right now, as you know.
I am not trying to escape anything, but thank you for having us
and shedding light.
Mr. Burton. Thank you. Thank you, Mr. Madden, as well. I
think we have concluded with your total panel and we appreciate
your help.
The next panel--do you want to take a break? Why do we not
take a 10-minute break and then we will go to the next panel,
10 minutes.
[Recess.]
Mr. Burton. If we could get everyone to take their seats, I
understand that the media is anxious to talk to a number of
members of the panel and others, but we really need to get
started.
Our next panel consists of Ms. Dede Hapner, vice president
of regulatory relations for Pacific Gas and Electric; Stephen
Pickett, who is the vice president and general counsel of
Southern California Edison; Mr. Dean Vanech--is that correct--
president of Delta Power Co.; and Mr. Paul Desrochers--how do
you pronounce it, like Leo Desrocher? OK, I will not forget
that one--Mr. Paul E. Desrochers, director of fuel procurement
for Thermo Ecotek.
Would you please stand?
[Witnesses sworn.]
Mr. Burton. Being a gentleman, we will start with Ms. Dede
Hapner and let her make an opening statement.
STATEMENTS OF DEDE HAPNER, VICE PRESIDENT, REGULATORY
RELATIONS, PACIFIC GAS & ELECTRIC; STEPHEN PICKETT, VICE
PRESIDENT AND GENERAL COUNSEL, SOUTHERN CALIFORNIA EDISON; DEAN
VANECH, PRESIDENT, DELTA POWER CO.; AND PAUL DESROCHERS,
DIRECTOR OF FUEL PROCUREMENT, THERMO ECOTEK
Ms. Hapner. Thank you very much, Mr. Chairman, and members
of the committee and guests to the committee. My name is Dede
Hapner, I am vice president of regulatory relations for Pacific
Gas & Electric Co., that is the regulated utility. And I
appreciate the opportunity to speak before you today.
Clearly, this hearing comes at a very opportune time. You
have heard both yesterday and today about the prices that we
have in the West. In March, for example, the average wholesale
price was approximately $307 per megawatt hour and there is no
relief in sight.
At this point, we are even more concerned about the
megawatt shortages because there is less hydropower in the
California system and in the entire Northwest than we
traditionally have, about 60 percent of normal, at least based
on the last snow pack results.
In the first several months of this year, the California
Independent System Operator has declared 52 stage two electric
power emergencies and 36 stage three electric power
emergencies. Residents of California had no idea what stages
one, two and three meant 6 months ago, and now that is as
common as hearing about the traffic report.
At best--and I believe you heard from Mr. Winter
yesterday--we will be short several thousand megawatts this
summer and that is at best.
The utilities, including Pacific Gas & Electric Co., first
raised the issue of shortages and the gap between wholesale
power costs last summer. We have been working with the State
officials to try and address these issues, but unfortunately
the activity that we have seen so far, while it has most
assuredly meant progress, has still been on a very incremental
basis and not in a comprehensive form.
Earlier this year, the State legislature passed and the
Governor signed AB-1x, which we looked forward to as a way of
stopping the bleeding with respect to the amount we were paying
in wholesale power costs. The State authorized the Department
of Water Resources, which had some experience in the
electricity market, to enter into contracts and purchase
electricity on behalf of the customers of California's
investor-owned utilities. We were pleased because we thought
that bill required the Department of Water Resources to buy the
entire net open position of the utilities and that would be the
amount that we would have to buy on behalf of our customers
that was not generated by our hydro system, for example, or
Diablo Canyon or our qualifying facility contracts.
Unfortunately, that has not proved to be the case. The
Department of Water Resources has signed many, many contracts,
but they still have to buy on the daily market and in real time
and because of the price constraints that they have set for
themselves, there is still a gap. And so in real time, the
Independent System Operator, in order to keep the lights on,
buys power in the very expensive spot market and the utilities
have been billed for those power costs. So clearly, our net
open position is not being covered by the law, as it currently
stands.
You have also heard from President Lynch on the California
Public Utilities Commission that they have moved very swiftly
and adopted several orders to ease the situation, including a
series of rate increases or, as they are termed to avoid the
implication that the rate freeze is actually over, surcharges.
Again, that would seem to help the financial situation for
the utilities. In reality, however, the 1 cent surcharge and
the 3 cent surcharge that the Public Utilities Commission
passed through over the last several months will not do
anything for the billions of dollars of uncollected power costs
that the utilities have already incurred, and perhaps even more
importantly, once Pacific Gas & Electric Co. pays the required
amounts to the Department of Water Resources for the power that
they are buying on behalf of our customers, pays our qualifying
facilities as per our contracts, pays for our own generation,
there frankly just is not any money left. In fact, it is very
doubtful, and we have testified at the Public Utilities
Commission, that there is a negative amount, even looking at
that 4 cents.
Mr. Burton. Ms. Hapner, we try to stay with 5 minutes.
Ms. Hapner. I am sorry, I apologize.
Mr. Burton. If you have just a little bit more, please go
on.
Ms. Hapner. I will wrap up.
Basically, we are now in a situation, as the committee well
knows, where our utility has sought protection of the
Bankruptcy Court, in hopes of finding a comprehensive solution.
What we would like to ask the committee to consider today is
some short-term steps that will help California through this
next summer. Particularly, we would like to see the committee
recommend to the Secretary of Energy or to the FERC that there
be short-term price caps to help stabilize the situation and
then anything that the committee can do to move regional
transmission organizations forward and look at the situation of
the entire West with respect to renewables would be very much
appreciated.
Thank you.
Mr. Burton. Mr. Pickett.
[The prepared statement of Ms. Hapner follows:]
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Mr. Pickett. Thank you, Mr. Chairman, members of the
committee. I am Steve Pickett, I am vice president and general
counsel of Southern California Edison and I hope you forgive my
scratchy voice, I have a cold today unfortunately.
We are very pleased at Edison that over the last few
months, both the State and the Federal Government have begun to
move to solve this crisis. We do have a crisis and it is time
to roll up our sleeves and start solving the crisis in
practical ways that can be implemented quickly.
Let us make no mistake, many of the problems are of
California's making and many of them are California's to fix.
And that does not include just the State government, but it
includes the utilities as well. There is no question but what
the utilities were slow off the mark in recognizing the impacts
of the dramatic load growth brought about by the booming
economy and were undoubtedly too slow in sounding the alarm of
the impending crisis.
The State government, for its part, did clearly adopt in
the deregulation process in California, a very flawed market
structure. FERC approved it and I think in good faith, the
State Government and the utilities in California expected FERC
to be on the job monitoring that market in a more aggressive
way than it has done, but clearly the market structure is a
California problem.
The California utilities were prevented from entering into
long-term contracts to solve the problem until it was way too
late for them to do so. And most fundamentally, the State
government was way, way, way too slow in recognizing the basic
business fundamental that retail prices have to match wholesale
costs or the utilities will be driven into bankruptcy.
In recent weeks and months, we have seen some action in
California, the California Commission, as Ms. Hapner said, has
raised rates 10 percent approximately in January, another 30
percent in March, a very difficult and traumatic decision for
the State. And I am very pleased to say that last Monday, my
company, Edison, and representatives of the Governor of
California entered into a memorandum of understanding that we
think provides a framework and a comprehensive plan for helping
us resolve the crisis for us and for our customers, allow our
company to return to a credit-worthy status that will allow us
to continue providing quality service to our customers.
Many, many, many hurdles remain to implementing that MOU,
but it is a very positive first step and we are pleased that we
have been able to take it.
FERC has begun to act as well, Unfortunately I believe not
nearly as aggressively as they should have done. The San Diego
complaint that brought the matter first to FERC's attention was
filed in August of last year and the final rehearing is not out
on that yet, so that we can get the matter before the court. We
believe the FERC has taken an unduly narrow view of their
jurisdiction there. There is a 65-year old statute and a host
of regulations, the Federal Power Act and a host of regulations
under it, that are well-established law, that are designed and
were adopted in the depression era to prevent exactly what is
happening in California today, and that is the abuse of
customers, who have essentially no choice in the price of power
that they have to pay.
In November, the FERC did find that the wholesale rates
being charged in California were not just and reasonable. I
think Commissioner Hebert's reading of that order, as he
presented it today, was unfortunately unduly narrow. The FERC
did find that the wholesale rates were not just and reasonable
and yet they have allowed them to continue to be charged.
In the face of evidence that the market is dysfunctional,
evidence by the way that the FERC has never held an evidentiary
hearing upon, they eliminated the ISO's market caps back in
November and December, and the predictable happened, the market
exploded. At a time of low load when prices should be down,
where there is plenty of supply available, the market exploded.
Now some have argued that price caps are antithetical to
efficient, effective, competitive markets and would disincent
new supply. I am not an economist, I am not here to argue about
the efficacy of those views today, but I am here to say that we
do have a crisis. And this is not a time for ideology at any
regulatory agency, State or Federal. It is a time for
practicality, it is a time for common sense and it is a time to
protect the public interest.
It is the public interest that only the FERC under the
statute can protect. They have the authority, the only
authority, over the wholesale markets.
Two quick points, I see I am out of time, I will wrap up
quickly. One is that this is not entirely a supply and demand
problem. There is no question that supply is tight, we do have
a need for new supply, and in the summer months, the few peak
hours in California, we have a potential supply problem--no
question.
But the blackouts in January and again in March were not a
function of that supply problem. In March--when the blackouts
occurred in March, there were 14,000 megawatts of capacity
idle. Some of that may be due to legitimate problems and
maintenance, clearly not all of it. That is not a supply
problem, that is a market function problem, one that has to be
corrected.
And let me just close by suggesting what I believe needs to
be done quickly and I would urge this committee and the
Congress to urge the FERC to do; and that is, we need to call a
time out. We need to say stop, this is crazy. We need to
temporarily return to a system that we know that works. Maybe
it is a system that had problems, everybody would acknowledge
that, but we know that cost-based ratemaking works. It is
embodied in the law, it is embodied in the FERC's regulations,
it is the norm. Market-based ratemaking is the exception, it is
only supposed to exist when there are workably competitive
markets. We do not have that. We need to temporarily return to
the regulated, cost-based system which provides a fair return
to the generators, it imposes an obligation to serve, so we
will not have 14,000 megawatts off line while people are
sitting in the dark and if need be, we can look at exceptions
to that rule for new generation, so that we can clearly incent
supply.
But let us take a time out here, let us fix this market. I
happen to believe and my company believes that markets are the
right way to go. They allocate capital for new generation
projects more efficiently than the regulated system did, but
the market has to be set up to work and we cannot sit here with
a failed market and allow customers to be gouged.
Thank you.
Mr. Burton. Thank you, Mr. Pickett.
Mr. Vanech.
[The prepared statement of Mr. Pickett follows:]
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Mr. Vanech. Thank you, Mr. Chairman, committee, I
appreciate the opportunity to discuss the views of gas-fired QF
cogenerators in the State.
Just for some background, since the passage of PURPA in
1978, California has been a leader in developing QF facilities,
by far more than any other State. In fact, now it amounts to
nearly one-third of the supply to the IOUs. In numbers, that
means about 10,000 megawatts of QFs are on line and about 5,400
or roughly 60 percent of those QFs are natural gas-fired. Of
the 5,400 or so megawatts, we understand about 3,000 are
actually off line right now, and given the system-wide load of
about 30,000 megawatts, that is obviously significant.
Going back a bit and almost since the inception of PURPA
and the time these projects came on line, there has been from
time to time, more often than not, a contentious relationship
between the QFs and the regulated utilities. And in my view,
there is at least three reasons why that is.
No. 1, when QFs build plants, the utilities lose rate base
and when they don't have rate base, they earn less profits
since they make a profit off of their assets.
No. 2, I think there is a general concern about loss of
control.
And third, a fear that QF power is more costly than
otherwise available power that the utilities can actually
construct.
QFs have provided significant benefits to the State,
including an increase in system reliability by scattering
generation rather than having fewer plants, typically away from
the load center. There have been ancillary benefits to the
transmission and distribution network. California's
manufacturers and institutions have saved hundreds of millions
of dollars, if not more, in the way of competitively or low-
cost thermal energy that is typically heat wasted in a
conventional power plant. That steam or other energy is used in
manufacturing and replaces the cost of production, or lowers
the cost of production for those manufacturers.
Also, QFs have used new and clean technologies. Most of
these plants are less than 15 years old and have adhered to
more stringent permitting requirements.
The QFs are often compared to otherwise available sources
of supply for the utilities. QFs by nature are long-term in
respect to their agreements, and from time to time, there
clearly have been imbalances between the cost of QF power and
the cost of otherwise available power over the short term. And
in fact, during certain periods and during certain years, QF
power, as compared to the otherwise available spot market cost
of power, has in fact been more expensive.
But there is another side to that equation. We calculate,
based on our consultants, that in year 2000 alone, Edison saved
somewhere around $800 million by buying QF power as opposed to
spot market power. We think that PG&E has probably realized
similar savings. In fact, the monthly cost, additional cost, of
the QFs being down now, around 300 megawatts--I will just speak
to the gas-fired QFs that are shut down--are probably costing
the State somewhere between $200 and $300 million a month in
additional cost because that power has to be brought in from
other sources that are much higher priced than the QF
contracts.
Why the QFs are not operating today--and again, I will
narrow my discussion on the gas-fired QFs. As has been well
publicized, the QFs have not been getting paid by the utilities
and that is widely known. As a result, and particularly acute
for gas-fired projects, we cannot pay our fuel suppliers and
they will not sell us fuel any more. These projects are
typically financed on a stand-alone basis so it is not as
though there is an enormous balance sheet that can just keep
funding these losses. These projects have to be able to pay
their bills.
In addition, the current and recent formula or the order
passed by the Public Utility Commission substantially modified
the way QFs get paid and it is particularly problematic for
gas-fired projects.
There are two major changes that were made to the formula.
One was the efficiency rate used in the formula was lowered
significantly from around 10,100 to 9,100. That results in
lower revenues.
And the second major issue is the Topock Index, which is
the southern California Gas Index, was substituted with the
northern California Gas Index, known as Malin. The problem is
there is about a $5 difference in the cost differential between
Malin and Topock. This issue is the QF cogenerator, gas-fired
cogenerator, has to buy gas at Topock, but in the revenue
formula only gets the benefit of the Malin price. So
therefore--and just for quick numbers; if today, the Topock gas
price results in a cost to produce of about $140 per megawatt
hour, the new revenue formula passed by the Utility Commission
pays us somewhere around $8 or $9, perhaps a little less. In
other words, even on margin, there is about a $50 per megawatt
hour loss on generation. That is why it is impossible for the
QFs, the gas-fired particularly, to stay in business.
I will try to finish quickly.
I just wanted to quickly discuss what we think needs to be
done because these projects need to come back on line,
particularly given the acute shortage of power in the State.
No. 1, until there is liquidity in the market and until the
investor-owned utilities can pay their bills, we need the right
to be able to sell outside of our contracts. And that does not
necessarily mean they terminate, it just means that we have the
right to be able to sell to other parties in order to get
liquidity in our projects, to avoid the projects themselves
going bankrupt.
The other issue is, and it is perhaps a lessor issue, these
projects are paid both a fixed and a variable charge, known as
capacity payments, the fixed charge. The utilities must
continue to pay the fixed charges even though certain plants
have been down, because of non-payment. The financing parties
rely on these capacity payments to repay debt and equity and if
those are not paid, they get--as you can tell, the projects get
into trouble.
The other thing I would just quickly add is there needs to
be a clear permitting process, and I think it started
favorably, between the State and the Federal Government. There
is, as most know, an accelerator or emergency permitting
program, which is a 21-day or 4 month program, depending on
when this new capacity comes on line. I would urge the Federal
Government to have the EPA work closely with the State EPA to
have a cohesive, single committee so that we are not forced to
deal with the State and then have to turn around and have a
different set of rules at the Federal level. And I think that
is really important to try to get capacity on line.
That is enough for now.
Mr. Burton. We will get to questions with you, Mr. Vanech
in just a minute.
Mr. Desrochers.
[The prepared statement of Mr. Vanech follows:]
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Mr. Desrochers. Good morning. Chairman Burton,
Representative Ose and committee members, thank you for the
opportunity to meet before your committee to discuss the
current energy crisis and its impact on the biomass to energy
industry in California.
My name is Paul Desrochers, I am the director of fuel
procurement for Thermo Ecotek. We own and operate 125 megawatts
of energy, both in New England and in California, 100 megawatts
in California.
The industry in total in the State of California is--we
have 29 biomass to energy facilities currently operating,
producing over 600 megawatts of energy, of renewable energy.
But I think my message today is not only are we producing
electrons to the State of California, we are also providing
substantial environmental benefits. Those are primarily air
emission reductions, reduced greenhouse gases while consuming
material that is normally open burned in the Central Valley and
also material that normally would go to municipal landfills.
And I am not talking about regular household waste, I am
talking about wood waste that is, you know, tree trimmings from
your home, grass clippings, that type of material. All that
material would, if we did not exist, go to the landfill.
In California alone, we utilize 700 million tons of that
material a year on an annualized basis. So again, if our
facilities do not operate, which some of them are not currently
operating, that environmental benefit goes away also, the State
pays again. And as Mr. Vanech mentioned, it has to replace that
energy with higher priced spot energy.
Not only do we utilize that, in the Central Valley, we
provide 1,200 post-harvest jobs. That is extremely important in
our Central Valley because of its unemployment during the non-
crop season. All of our operations are--not the facilities, but
the collection, processing and gathering operations are all
done post-harvest, after the harvest of whatever crop that they
are working on--very important.
These facilities are under long-term agreements with the
utilities, both Southern California Edison, but primarily
Pacific Gas & Electric. And as Mr. Vanech has said, as of April
1, these facilities have not been paid for at least 3 months
and in the case of Southern California Edison, 4 months. Thermo
Ecotek's facilities are currently owed--currently right now,
$12.1 million for energy delivered since December.
The energy crisis in California, as we have all heard,
deepened as PG&E has sought protection under Chapter 11. Just
prior to PG&E's decision, the State Public Utilities Commission
ordered the utilities pay our facilities, which were called
qualified facilities or QFs, for the energy generated after
April 1, with no provisions for past-due. These facilities have
been operating for the last 3 months, providing energy to the
State of California, while the California Department of Water
Resources are making prompt payments to out-of-state
generators. That to me is criminal. Here we are in-state
generation not getting paid, out-of-state generators getting
paid. Something is wrong with that equation.
Our facilities have continued to operate and provide energy
to the State of California, providing the environmental
benefits that we provide, hopeful that there would be a
solution in the last 3 months, based on efforts the Governor
has been working on, California Public Utilities Commission and
attempts through the legislature. All those have failed. We are
still not sure the power line acquisition from Southern
California Edison is going to work.
Unfortunately, we have waited too long to discontinue our
operations and we are at the end of our ability to fund our
fuel purchases and our operating costs. What is most
unfortunate, as I have said before, is not only does the State
lose the renewable electrons that we produce, the State is also
going to lose the environmental benefits that we provide.
I will list you an example of that. The San Joaquin Valley
Unified Air Pollution Control District, which is the second
largest air pollution control district in the State, is about
to be placed under severe non-attainment for ozone. Our
facilities reduce 32,000 tons of material that are precursors
to ozone development, on an annualized basis. That is a
substantial amount of material, substantial emissions
reductions.
Additionally, our facilities utilize 3 million tons of
urban wood waste, which we have talked about, the material that
would go to municipal landfills. We are the only renewable
energy technology that has to pay for its fuel, because of the
cost of collection, processing and transportation, we have to
pay for our fuel. Wind, obviously geothermal does not a fuel
cost.
We have reduced the amount--just in the last 2 months, we
have reduced the amount of material that we are currently--we
normally utilize, by half. So the State has already lost half
of its benefits, and we are looking at, if we do not receive
payment, based on the PUC ruling, by April 17, we probably will
discontinue power generation.
Mr. Burton. Mr. Desrochers, could you summarize so we can--
--
Mr. Desrochers. Yes. Without rapid resolution of our
current contract payments, we will suspend operations--I just
said that.
We do not know what their future brings. The Bankruptcy
Court will do one of two things, either affirm our contracts or
reject them. We feel that being--either way will be a positive
move, but at least there is some forward movement.
What we would ask is that as you return to Washington, that
our industry is proposing similar to the wind industry, an
energy tax credit that will help some long-term viability and
also we would support, as Congressman Lee has said, renewables
in the United States and in the State, and we call it a
renewable portfolio standard, that with a national energy
policy and with a State energy policy, that at least 20 percent
of that generation is based on renewable technology, and we
would support that.
Thank you.
[The prepared statement of Mr. Desrochers follows:]
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Mr. Burton. Thank you, Mr. Desrochers. Let me just start
with you, Mr. Desrochers, I did not catch that last part, I am
sorry. Congresswoman Lofgren and I were talking, but I was told
that the alternative sources of energy that are produced, like
what you are talking about, accounts for what, about 25
percent?
Mr. Desrochers. No, in this State here, we are only a
little less than 10.
Mr. Burton. A little less than 10 percent, but that is a
significant amount.
Mr. Desrochers. I am sorry, I misstated that, less than 2
percent.
Mr. Burton. Oh, less than 2 percent.
Mr. Desrochers. 2 percent.
Mr. Burton. But that still makes a dent.
Mr. Desrochers. Yes.
Mr. Burton. Let me start off with questions for California
Edison and PG&E. Last summer, were your companies engaged in
negotiations on long-term contracts for electricity?
Ms. Hapner. Last summer, we had very little authority to go
out and sign long-term contracts. Ever since the deregulation
policies at the Commission and at the State legislature passed,
we have tried to move in that direction. We have requested
several times the authority to enter into long-term contracts
to be relieved of the buy-sell provision, etc. and to hedge, so
that we would not be forced to operate in the volatile spot
market.
In 1999, we received very limited authority to make some
long-term purchases through the Power Exchange, the block
forward market, and then in August 2000, we received broader
authority to sign longer term contracts, but without the
reasonableness protection that we require to protect ourselves
after the fact.
Mr. Burton. So you were not negotiating at that time in
long-term contracts?
Ms. Hapner. On a very----
Mr. Burton. We heard yesterday and I think day before when
we were on our way out here, that you had an opportunity and
entered into a 5-year contract or contracts at around 5 cents a
kilowatt hour, in that neighborhood; is that true?
Ms. Hapner. Yes and no. We did not have the authority to
enter----
Mr. Burton. Was that offer made?
Ms. Hapner. I beg your pardon?
Mr. Burton. Was there an offer made to you for 5 cent per
kilowatt hour?
Ms. Hapner. When we investigated those offers, they were
not what they appeared to be and what were covered in the
media.
Mr. Burton. What were they?
Ms. Hapner. They were considerably higher than 5 cents,
particularly for peak period.
Mr. Burton. So there were no 5 or 6 cent per kilowatt
offers made?
Ms. Hapner. Certainly not in the last spring and early
summer timeframe. We did----
Mr. Burton. Going back to April, May, June of last year.
Ms. Hapner. No, we did not.
Mr. Burton. What was the lowest offer you had?
Ms. Hapner. I do not know for sure, Mr. Chairman----
Mr. Burton. You do not know?
Ms. Hapner [continuing]. That is not my area of expertise.
Mr. Burton. Does anybody know? Do you know?
Mr. Pickett. No, sir, I do not have the exact number. We
can get the numbers that were made available to us and present
them to you, if it is of benefit to the committee. We found, as
PG&E apparently did, that a number of generators made offers,
usually through the press, not directly to us, that they were
willing to sell us power, a figure that was tossed around in
the early or late spring, early summer of last year was 5 cent
power. We also found----
Mr. Burton. Did anybody contact the people who were making
these assertions in the paper to see if that was a fact?
Mr. Pickett. Yes, sir.
Mr. Burton. And what did they say?
Mr. Pickett. It proved, on investigation, not to be the
fact. The terms of the contract would have ultimately made them
substantially more expensive.
Mr. Burton. OK, what did the terms of the contract take it
up to?
Mr. Pickett. Again, I do not have that specific figure. Ms.
Hapner apparently has some information, but we can go back and
look at that record and provide it to the committee, if it
would be helpful.
Ms. Hapner. I do not have the specific information, Mr.
Chairman, but I can tell you that those contracts were for a
considerably longer period of time, up to 10 years, and we did
not have the authority to sign long-term contracts.
Mr. Burton. Well, let us just say that there was a 10-year
proposal made. Do you know how much that was for?
Ms. Hapner. No, that is some of the information I will have
to get back to you.
Mr. Burton. Were the long-term rates that you heard about
considerably lower than the short-term spot rate?
Ms. Hapner. Absolutely.
Mr. Burton. Well, then why was that not pursued?
Mr. Pickett. In our case, we did pursue it with several
vendors who were proposing it. We have had I think three
problems. One, the contracts and the offers did not pan out,
they either were not there during the critical periods of time,
the summer peak periods, or they were proving to be
substantially more expensive than they were advertised.
Mr. Burton. How much more?
Mr. Pickett. Again, I do not have that number, but that is
a figure that we can supply to you.
Second, we did not have the authority--even if the offer
had been there, we did not have the authority to sign the
contract.
Mr. Burton. The authority would have rested with whom?
Mr. Pickett. With the California Public Utilities
Commission.
Mr. Burton. And what was their position on those, or did
you pursue that?
Mr. Pickett. We pursued that vigorously beginning----
Mr. Burton. So what happened when you pursued it with the
California regulatory agency?
Mr. Pickett. Well, if I may, I can back up and explain a
little of the history, if that would be helpful to you. We
started in March 1999 trying to get authority to do
contracting, bilateral contracting, because we began to see
then that the market was on an upward trend. And in July 1999,
the PUC rejected categorically our request for authority to do
bilateral contracts.
Mr. Burton. Why?
Mr. Pickett. Because they believed that at that time the
Power Exchange provided the transparent pricing that would
allow them to conclude that the prices that we were paying for
power to serve our customers were reasonable. They wanted to
see the transparent price and they wanted to be sure that the--
--
Mr. Burton. I do not want to belabor this, but did they not
see the projections that showed that the price of generation
was going to go up?
Mr. Pickett. I do not know if they did or did not. We tried
to explain that what we were doing was hedging against price
volatility and certainly the possibility that they would go up
in 1999, and that argument fell on deaf ears.
Mr. Burton. So they were not going to let you buy it at
that price?
Mr. Pickett. No, they--well, when you say at that price, in
1999, in July 1999, they categorically rejected our request for
authority to do bilateral contracts.
Mr. Burton. But the prices, according to the charts we got
yesterday, started to go up appreciably around May of last
year, sort of jumping up in quantum leaps.
Mr. Pickett. Yes, sir.
Mr. Burton. We were told--and I am out of time, but we were
told that you could get prices in the 5 cent per kilowatt hour
range during that timeframe. You are telling me that is not the
case and you are going to let me know what you could have
gotten it for. But they would not let you do that even though
the projections showed that there was going to be some dramatic
increases in cost.
Mr. Pickett. Let me say for our part, we were prepared at
one point to try and take a long-term low-price contract to the
Commission for authority to sign it if we could get that----
Mr. Burton. At what point, when was that?
Mr. Pickett. That was already I believe in June or July.
Again, I can get the precise information on this for you, but
the contract we would have taken to the Commission never
materialized.
Ms. Hapner. I would agree with the comments that Mr.
Pickett made. I would just say for our part, after either
getting rejected or just having our request sit, we finally
went out at our own risk, and we still do not have
reasonableness protection, but we actually went out at our own
risk and signed a series of contracts, several of them at about
5.5 cents.
Mr. Burton. If the Public Utilities Commission had moved
more expeditiously, would that have eliminated a large part of
the problem you face?
Ms. Hapner. Well, hindsight is 20/20, but certainly----
Mr. Burton. You could see the problem at----
Ms. Hapner [continuing]. We could have taken advantage of
the opportunities in the marketplace.
Mr. Burton. And had you taken advantage, would you be in
the financial position you are in today? You can put a pencil
to that.
Ms. Hapner. Certainly the financial situation that we are
in today is a function of collecting 5 cents from customers and
paying upwards of 15 or 20 cents.
Mr. Burton. You are not answering the question.
Ms. Hapner. Well, clearly if we had--I do not mean not to
answer your question--clearly had we been able to buy power in
the wholesale market that was more closely related to the
prices that we were collecting from our customers, we would
have prevented the huge debt that we are in today.
Mr. Burton. Ms. Lofgren.
Ms. Lofgren. Thank you, Mr. Chairman.
Mr. Pickett, I was very interested in your testimony and I
do not think I have heard anyone be as plainly spoken and
concise as you in terms of what should happen. And on page 7 of
your testimony you suggest that the FERC should essentially
deal with the dysfunctional market by revoking market-based
rate authority. And I actually have to say I agree with you on
that.
I believe that the FERC should have been more aggressive in
terms of refunds, it should have been more aggressive in terms
of prospective control of price gouging and the like, but
clearly that did not occur.
Our President has indicated an opposition to price caps,
the Secretary of Energy and Mr. Hebert as well. So I guess my
question to you is not getting plan A that might be the best
way to deal with our situation right now, what advice would you
be able to give for the market manipulation controls that Mr.
Hebert discussed this morning, that I think are at least
apparently some intention to prospectively control price. How
could that be structured best to help California avoid further
price gouging.
Mr. Pickett. Let me say that I regard price caps as the
second best alternative from either perspective. I regard price
caps, you know, a working, competitive market, even one that
may be approaching a supply shortage, as providing some of the
disincentives that Chairman Hebert and others have said. They
are not a good solution. But when you have a broken market----
Ms. Lofgren. I agree with you on that as well. I wanted to
limit my question to the comments that relate to a
dysfunctional market in an emergency situation.
Mr. Pickett. I think in the current situation, I cannot
conceive of a real practical way to make this market work. The
market structure is so badly flawed that we have to stop, we
have to take time out and say this is not working. You cannot
set a just and reasonable rate using a proxy derived from a
non-functional market, which is what the FERC's last order did.
That does not work.
So I would suggest to Chairman Hebert--and if I had the
drafting pen, I would write a suspension of market-based rate
authority for the entire Western region. I believe he is right
when he says you cannot look at a narrow region, you have got
to look at the whole region. Electricity does not stop at State
borders.
But you have to not just withdraw the market-based rate
authority, you have to have a system that both fairly
compensates the generators--cost-based ratemaking does that, it
provides them a fair return on their investment and, as the
general counsel of the FERC indicated, a number of these
generators paid amounts substantially above book when they
purchased the generating assets. None of us may like that today
but it is a fact and those people who paid that money I think
are entitled to, if they are going to be compelled to operate,
are entitled to earn a fair return on that money, regulated by
the FERC.
That is not a complicated operation, I have practiced in
this area for 20 years. I cut my lawyer's teeth doing FERC rate
cases. I know how the system works.
The Federal Power Act and the regulations are in place.
Cost-based ratemaking is the norm, it was done for 60 years.
And I do not find it an acceptable excuse that the FERC says
well things back up. Give me a break. Everything backs up if
you do not turn attention to it. They need to turn attention to
it, focus on what the law and the regulations are and enforce
it.
Ms. Lofgren. Let me ask you a question about our future. We
have nine power plants under construction in California right
now, I think the first one is set to fire up in June. We have
13 more that have already received approval. When those 9 are
up and running and the 13 are up and running, are we going to
be able to meet our power needs, or what further are we going
to need to do in terms of--you know, we've got approval rates
down to 6 months, we are 48th in terms of energy conservation
in the State--among the States. What else are we going to need
to do to be healthy energy-wise.
Mr. Pickett. I smiled at your question because the power
plant that we hope starts up first is a power plant being built
by an affiliate of my company and in the MOU we signed on
Monday, if it is not up and running by mid-August, we are
subject to a significant penalty. So I indeed hope that power
plant and all the rest come on line.
Beyond that, I think we need to assure that there is an
obligation to serve here. What is missing in this market
equation today is the obligation to serve that was imposed on
utilities in return for the regulated rate of return. The
example are the blackouts. During the blackouts, we had 14,000
megawatts off line. In a period of low load, there was no
shortage, none of those generators had an obligation to be on
line serving. We need to re-establish that in the short term
until we can create the market mechanism that will incent them
to be on line as a matter of economics, rather than withhold
their power to drive prices up.
Ms. Lofgren. Thank you, Mr. Pickett. I see my time is over,
so I yield back, Mr. Chairman.
Mr. Burton. Mr. Ose.
Mr. Ose. Thank you, Mr. Chairman.
I find I have more questions than we are likely to have
time for, so I may be sending you written interrogatories for
you to respond to, to the extent we can get to them we will
reduce that pile. I want to go back to the original legislation
that----
Mr. Burton. Excuse me, Mr. Ose, real quickly, she has got
one question, could we yield to her and we will start your time
over here just real quickly.
Mr. Ose. Sure.
Ms. Lofgren. You are very kind, Doug.
Yesterday, the president of the Public Utilities Commission
apparently testified that they had never refused a request for
long term contracts and we have heard testimony here today that
contradicts that. So I am just asking the chairman, not here
today obviously because Ms. Lynch is not here, but I think we
ought to do some written inquiry to clarify that contradiction
in testimony and I thank you for yielding the time.
Mr. Burton. We will do that, we will send a note to her and
hopefully you will respond in writing to that as well, so we
can have both sides of that. All right?
Mr. Ose.
Mr. Ose. Thank you, Mr. Chairman. I do want to tell my
friend that it was very clear what Ms. Lynch was saying, but I
do think it would be interesting to have it in writing.
I want to go back to AB-1890. As I understood AB-1890, the
legislation defined a point beyond which the IOUs, the
investor-owned utilities, would be free to charge retail rates
based on market rather than a frozen level, it is embedded in
the legislation to some degree or another. And that threshold
was basically defined as the point at which the utilities
declared that they had recovered their stranded costs.
Ms. Hapner, Mr. Pickett, is my understanding correct?
Mr. Pickett. I think in the broadest sense, yes, but I
would like to define a couple of key terms so that we are not
talking past each other.
AB-1890 envisioned deregulating the generation market, not
the utilities' distribution lines or transmission system, which
would be transmission under the regulation of the FERC, the
distribution under the regulation of the PUC, on a regulated,
rate of return basis, as it has always been done. In our case,
until the recent rate increases, we were charging a system
average rate of about 10 cents and about 3 cents of it was
transmission/distribution and the regulated portion of the
business.
The generation portion of the business, AB-1890 envisioned
moving that to a competitive environment and both the PUC's
prior implementing orders and AB-1890 provided incentives
designed to get the utilities to sell their generation and in
fact, until this market melted down, we were in the process, as
a utility, of moving out of the generation business.
But I think in direct answer to the central question, if
the market had not melted down and if the utilities retained
their generation with a possible exception for some nuclear
issues, and the PUC had gone through what they referred to as
the valuation process for our plants that were designed to
compensate the ratepayers for those plants, post-valuation the
unregulated side of the utility would have had a generator that
it could have sold into the market.
I hope I have not bored you with detail, but the process
envisioned doing a market valuation process with the generation
and then allowing the utilities, to the extent they retained
that generation, to sell it into the open market.
Mr. Ose. Ms. Hapner, before I get another answer of that
nature, let me ask the question differently. Did the
legislation define a date certain at which the utilities would
be free to price their retail power delivery without CPUC
jurisdiction?
Ms. Hapner. The legislation said that the rate freeze,
which was part of the legislative package, would end either
when the utilities had collected their stranded costs or no
later than December 31, 2001.
Mr. Ose. December 31, 2001. So December of this year.
Ms. Hapner. December of this year.
Mr. Ose. Is that your understanding, Mr. Pickett?
Mr. Pickett. Yes, that is correct with the possible
exception of a 3-month stub period that would have taken it to
the end of March 2002. But clearly there was an end date, one
or the other, anticipated.
Mr. Ose. Has PG&E, Southern California Edison or San Diego
Gas & Electric submitted to the PUC filings that say they have
recovered their stranded costs?
Ms. Hapner. Yes, on several occasions--well, first let me
say that monthly, each utility provides an accounting of the
stranded costs that have been collected up until that point.
And we, per CPUC regulation, had alerted the Commission that we
were very close to recovering our stranded costs and that
surely when the valuation of our hydro facilities was made,
that the stranded costs would have been collected. We estimate
that at the latest, that was last summer.
Mr. Ose. Summer being July, August, June?
Ms. Hapner. By August.
Mr. Ose. Mr. Pickett, is that similar to what Southern
California Edison did?
Mr. Pickett. Yes, sir, we also submitted a filing
indicating that our stranded costs had been collected in the
early August timeframe.
Mr. Ose. So at that point, your contention was that under
the legislation, you were then free to go ahead and use market-
based retail prices.
Mr. Pickett. For the generation; yes, sir.
Mr. Ose. For the generation. And how did the PUC respond?
Mr. Pickett. The PUC has basically declined to end the rate
freeze and there are a whole series of intervening steps, but
on March 27, they issued an order that retroactively reversed a
number of these accounting procedures such that if you accept
the legality, which we do not, but if you accept the legality
of what they have done retroactively, it would say that the
stranded costs have not been collected.
Mr. Ose. Mr. Chairman, if I could just get Ms. Hapner's
response. I see my time is clearly out.
Ms. Hapner. That is absolutely true and in fact, they would
never be collected by the statutory end date of the rate
freeze.
Mr. Ose. Under the new definition.
Ms. Hapner. Under the new so-called accounting change. We
would go back to the beginning, January 1, 1998 and take all of
the costs that we collected per the legislation and use those
dollars to pay for the generation costs on behalf of customers.
Mr. Ose. I have to yield back. We will come back to this
question.
Mr. Burton. Ms. Lee.
Ms. Lee. Thank you, Mr. Chairman.
OK, to Ms. Hapner, first let me just say of course, PG&E
filing bankruptcy does not settle very well with me. And the
irony of this is that many consumers now are going to be
paying, as they are now, and in the future, paying higher
utility rates and yet unfortunately bankruptcy laws have been
changed now that will make it harder even for consumers who
have to pay these higher rates to file bankruptcy and yet PG&E
can do this so easily.
Now we have read in the newspapers that PG&E, before
declaring bankruptcy, paid $1\1/2\ million, was it, in legal
fees and distributed more than $50 million to employees and
provided bonuses to CEOs of over $2 million. Also we understand
and we have read, and I am asking this because I have just read
this, that there have been--or at least there is about $30
billion in the parent company.
So what I am wondering is how do you reconcile declaring
bankruptcy with these assets and expenditures. And I know that
you made billions in 1998 and in 1999, and what happened to
this money? Why has it not been used to pay off your debt? And
finally, let me just say that there is no question where this
money has gone in terms of the escalating costs, to the
generators, and why have you not gone after them in terms of
trying to find some relief, rather than filing bankruptcy or
going to the State for assistance?
Ms. Hapner. Let me try and handle those one at a time and
if I miss one, please remind me--I am sure you will.
With respect to the profits that you mentioned in 1998 and
1999. Those were very different from the experience that we had
in 2000. During that timeframe, the dollars that we were
collecting per the rate freeze were enough to cover the
wholesale generation costs. Beginning in May 2000, we
experienced a gap that we have all referred to. The distortions
in the market, which contributed to exorbitant prices.
With respect to going after the generators, we have been
very active with our fellow investor-owned utilities and in
some cases even the municipal utilities and with the Public
Utilities Commission in seeking recompense from the Federal
Energy Regulatory Commission and as Chairman Hebert said, some
of those cases have been resolved, not to our liking and others
are up for rehearing.
Moving to the choice to or the decision to seek protection
of the Bankruptcy Court, let me first say I am not a bankruptcy
attorney, so I cannot answer that question in much detail.
Ms. Lee. Well can you just tell me, do you know whether or
not you transferred money to the parent company?
Ms. Hapner. Let me answer that by saying that as vice
president for the regulated side of the business, I can say
unequivocally that we have complied with all of the Commission
rules with respect to how the utility interacts with our
corporate parent and our other businesses.
Ms. Lee. So if the rules allowed you to transfer money to
the parent company, then there is a chance that you could have
transferred it.
Ms. Hapner. Others are much more familiar with the cash
transfers and transactions than I am. All I can say is that we
have followed those rules very carefully. We have been audited
on those rules and have had our method of doing business
blessed by the Commission. They have just begun a new
proceeding and we look forward to that.
Ms. Lee. If possible, Ms. Hapner, Mr. Chairman, I would
like to ask for the details of this to be submitted to the
committee for the record, if you can do that.
Ms. Hapner. Absolutely.
Mr. Burton. Without objection.
Ms. Lee. Thank you very much, Mr. Chairman.
Let me ask you about the impact now of the bankruptcy
filing on consumers and also on employees, those loyal
employees who have worked for the company for many years, who
have their retirement now at stake and also those senior
citizens who, for example, have dividends coming in as a result
of investments in the stable stock. What are they going to do
now with regard to their dividends and their investments?
Ms. Hapner. Basically, we were very clear in our statement
on Friday, particularly with our employees, and our retirees
that we take our obligation to serve very, very seriously, we
do not expect that our business will change very much. Our
employees have been dealt with very fairly. In fact, the $50
million that you referred to went to paying non-union,
management employees--not officers or the CEO, I can attest to
that personally--for their very good performance in the year
2000. So we do not expect employees to be laid off.
With respect to customers, customers are again--taking care
of customers is our bread and butter business. We do not want
our customers to suffer. We support the programs that the State
and Federal Government has in place for protecting small users
and customers who have limited means.
Ms. Lee. Mr. Chairman, may I have just 30 more seconds,
please?
Mr. Burton. The gentlelady is recognized for 30 seconds.
Ms. Lee. So are you saying that employees who worked for
PG&E, say 20 or 25 years will be vested, their retirement is
secure and when they retire, they will be able to benefit from
what they thought they would have received as a result of
working for that long for PG&E?
Ms. Hapner. Again--and I apologize--I am not an expert in
terms of the pension programs, but I understand that employees'
retirements are safe. With respect to the dividend and the
share holders at large, unfortunately, because of our economic
situation, we have not been able to declare a dividend for this
most recent period, but we are hopeful that with the
reorganization of our debt, that we will get back to a credit-
worthy status as soon as possible.
Ms. Lee. Thank you very much. Thank you, Mr. Chairman.
Mr. Ose. If I might just add something, one of the
jurisdictional subjects that my subcommittee has is the Pension
Benefit Guaranty Corp., I was telling Congresswoman Lofgren, we
have looked at the funding at the Guaranty Corp. which would
handle a failure of PG&E's pension plan, if it ever occurred.
We looked at the funding, the Guaranty Corp. is very well
situated and PG&E is on nobody's list from the pension plan
side of things, as being vulnerable or subject to failure.
Ms. Lee. Thank you, Mr. Chairman. I think that is very
important to make clear and to make public so people will
understand that because there is a sense of panic out there.
Mr. Ose. We will be watching it as the says go forth. I am
not speaking to the dividends to stockholders, I am talking
about pensions.
Ms. Lee. Retirement pensions, thank you very much.
Mr. Ose [presiding]. Mr. Horn for 5 minutes.
Mr. Horn. Thank you, Mr. Chairman.
Most of you agree, I take it, 1999 was when, as one person
said, the market was getting a little wacky. Do you all agree
that is the date on that?
Mr. Pickett. Speaking for Edison, Congressman, no. March
1999 was a date I believe I referred to and that was a date
that we first applied to the California Public Utilities
Commission for authority to do bilateral contracts. The market
meltdown became apparent I think most clearly in early May
2000.
Mr. Horn. OK, do you all agree on that?
Ms. Hapner. Yes, sir.
Mr. Horn. In sequence, gentlemen, what about you?
Mr. Vanech. Unfortunately, I do not have enough data with
me to answer that question.
Mr. Horn. Well, was it about that time in the chronology?
Mr. Vanech. I recall that prices started to escalate about
a year ago, actually started to escalate noticeably.
Mr. Horn. OK, that is the year 2000 or are you into the
year 2001?
Mr. Vanech. No, in 2000.
Mr. Horn. 2000.
Mr. Vanech. That is correct.
Mr. Horn. OK, and as I listen to you and read your various
interesting papers, you also think the Federal Energy
Regulation Commission should have acted sooner; is that
basically what your position is?
Mr. Pickett. Speaking for Edison again; yes, sir, very much
so.
Mr. Horn. Now those were done--and they would not extend
it. And apparently the California PUC would not extend it
either, is that correct?
Ms. Hapner. Well, the California PUC does not have the
authority to set the wholesale price, that is the purview of
the Federal Energy Regulatory Commission. The PUC, along with
Southern California Edison, PG&E and San Diego Gas & Electric
went arm in arm to the FERC to extend them.
Mr. Horn. I think on the Federal side, I would like to know
what kind of an environment you felt there, because that was
just about before one administration followed the other and
when you first went there, that was the Clinton administration
and what changed? Now if you heard Chairman Hebert this
morning, they are ready to roll and get things done, but you
are saying there was just too much of a lag. So I am wondering
what was going on, was there turmoil within the Commission and
this kind of thing, because people are leaving and people are
coming?
Mr. Pickett. Congressman, I do not know and cannot speak to
what effect the pending change in administration had on the
thinking of the FERC Commissioners. We simply do not have
insight into that. I think the history of what FERC had been
trying to do since the passage of the 1992 Energy Policy Act by
the Congress, is more instructive. They had been clearly trying
to develop competitive markets and Edison supported that. We
believe that a competitive market, a workable, functioning
competitive market, is a better way to price goods and services
than a regulated monopoly.
But the FERC also is the cop on the beat in those markets.
And when the market began to melt down, frankly the cop on the
beat was not there, they did not respond. Now Chairman Hebert
said they are responding now, we have been pleased to see the
progress, but we still have on rehearing at the Commission the
decision from the first filing in August, that has not come
out, that will give us a chance to test the unduly narrow view
that the FERC has taken of its own jurisdiction and get it to a
court for a decision. That has not come yet.
Mr. Horn. Now there is a Department of Energy and again,
there were Secretaries coming and going. What, if anything,
could the Department of Energy have done in default based on
the Commission, was there anything that could happen, maybe
jawboning if nothing else?
Mr. Pickett. Well, the Department of Energy was actively
involved in a fair amount of jawboning in the critical time of
late December through January where the utilities were running
out of cash, running out of credit, were unable to buy power
and the State had not yet stepped in with its emergency
legislation to give the State agencies the authority to buy
power. The Secretary of Energy at that point signed a series of
emergency orders designed to require generators to sell into
California despite the looming credit-worthiness problem, and
it is on an emergency basis to keep the lights on. And there
was a lot of jawboning around that activity.
Mr. Horn. What is your feeling on that, Ms. Hapner?
Ms. Hapner. That is my recollection as well. I would say
that Secretary Richardson signed several of those orders and
that was carried forward by Secretary Abraham into the spring
of this year. There came a point when the Secretary did not
want to renew those orders and I cannot recall exactly when
that was.
Mr. Horn. And what did he do? Did he renew them? You
mentioned that you were not sure----
Ms. Hapner. I believe Secretary Abraham renewed those
orders once or twice, I really cannot recall.
Mr. Horn. So the two of them agreed, the two Secretaries,
on this, I take it.
Ms. Hapner. I would not presume to speculate on whether or
not those Secretaries of Energy agreed. Certainly on that point
they both had a similar reaction.
Mr. Horn. Well, did those emergency signatures of theirs,
did they gain anything from it and you gain anything from it?
Ms. Hapner. Go ahead.
Mr. Pickett. I do not think either company gained anything
from it. The people of the State of California gained from it
because the continuation of the emergency orders over the
critical period in January allowed the State legislature to
implement the necessary legislation to have the State buy the
power, have a credit-worthy entity behind the power purchases,
so the lights could stay on, thereby making continuation of the
emergency orders unnecessary.
Mr. Horn. Well, if the Federal Commission was not doing
enough at that point, it sounds like the State Commission was
not doing enough.
Mr. Pickett. We are clearly of the view that from May 2000
when this market started to melt and it was visible to
everybody, that the governmental response on both sides was an
unfortunate exercise in finger pointing, and it continued for
way too long. I think we are starting to see responsible
reaction by both the State and the Federal Government but we
already have one of the major utilities here in bankruptcy and
my company is on the edge of insolvency.
Mr. Ose. Mr. Horn, we are going to have another round.
Mr. Horn. I would like the questions I put earlier on this
to be put to the chairman, because he is not here.
Mr. Ose. Chairman Hebert.
Mr. Horn. Right.
Mr. Ose. Without objection, so ordered.
I recognize the gentlelady from this area for 5 minutes.
Ms. Lofgren. Thank you very much.
I am wondering if I could ask you, Ms. Hapner--and my
constituents talk to me about this all the time--how much was
transferred from PG&E to its parent corporation, what is the
dollar figure?
Ms. Hapner. Congresswoman, I do not have the exact dollar
figure of transactions that have occurred over the years, it is
fairly typical for subsidiaries of a parent corporation to
shift dollars.
Ms. Lofgren. Let us go from 1999 to present.
Ms. Hapner. I do not have the exact amount, I would just
reiterate that all actions that we took were in compliance with
the Commission rules. I will get you that exact amount.
Ms. Lofgren. Can we get the information? I would just
observe that I understand that there are rules, but did the
rules make you transfer the money or allow you to transfer the
money?
Ms. Hapner. The rules are very explicit in terms of how
dollars can be used and it is very clear that the utility
dollars cannot subsidize the activities of other parts of the
business.
Ms. Lofgren. Could you have used those funds that you
recovered from sale of generation assets to improve path 15,
for example?
Ms. Hapner. The dollars that we recovered from the sale of
the generating assets were designed to pay off the uneconomic
generation costs and the accounting on those is pretty
explicit.
Ms. Lofgren. So you could not have used that for
infrastructure, is that what your testimony is?
Ms. Hapner. Dollars that we use for transmission and
distribution--throughout the entire rate freeze process, we
have continued to make capital improvements and we request
dollars for those improvements on the distribution side from
the Public Utilities Commission and on the transmission side,
which would be path 15 from the Federal Energy Regulatory
Commission.
Ms. Lofgren. So is your testimony that you were prohibited
from using the proceeds for transmission infrastructure
improvements or that you were not prohibited from using that?
Ms. Hapner. We used those dollars to recover stranded costs
from generation.
Ms. Lofgren. The question is what were you allowed to do
with it, what were your options?
Ms. Hapner. Well, I suppose that our option was not to pay
for the generation costs that were incurred, not to buy
generation on behalf of our customers and to mix dollars that
were for power procurement and use them for transmission or
distribution, which was not the intent of AB-1890.
Mr. Ose. Would the gentlelady yield?
Ms. Lofgren. If you will give me a couple more seconds
after I yield.
Mr. Ose. I will do so.
I think that is a very interesting question, whether or not
the legislation underlying her restructuring allowed or
disallowed certain actions with the proceeds of the
restructuring. I think we ought to find that out.
Ms. Lofgren. I think we should.
If I could ask Mr. Pickett, does Southern California Edison
have a parent corporation?
Mr. Pickett. Yes, we do.
Ms. Lofgren. And were there transfers of funds to the
parent corporation from you all as well?
Mr. Pickett. Yes.
Ms. Lofgren. And do you know what the dollar amount was say
since 1999?
Mr. Pickett. I do not know the dollar amount off the top of
my head. We can get it and supply it to the committee. I can
say that there are three categories of transfers and one may
not have occurred in 1999, but the three categories of
transfers are dividends of earnings to the parent company,
payments of taxes to the parent company because the companies
pay tax on a consolidated basis; and third, are in the category
of special dividends. They were the return of the equity that
had been invested in the generating plants that we sold. And
all of that was done because the PUC, as a condition of our
being allowed to have a holding company, requires the utility
to maintain a balanced capital structure. And that means that
there is so much of the utility financed with debt and a
specified percentage financed with equity. If those dollars had
been kept in the utility, the equity portion would have
ballooned and we would have been out of compliance with the
PUC's rules.
Ms. Lofgren. Rather than ask either one of you to speculate
as to dollar amounts, I am hopeful that we can get a written
report from both companies to the committee.
Mr. Ose. Without objection, that question will be answered.
Ms. Lofgren. Finally, Mr. Pickett, your strong testimony
about the need for FERC to be more vigorous in its activities
given the dysfunctional market, has I think a lot of agreement
really, on my part at least. But there is discussion in the
State now that if FERC does not take the kind of action, the
strong action that you recommended and many other have, that
the State of California will necessarily have to take some
rather extraordinary measures; for example, using its power of
condemnation to seize private companies and begin directly to
control this market. What do you think that outcome would mean
for the State of California?
Mr. Pickett. I think it would be a very uncertain and
expensive undertaking. The State, of course, can exercise the
power of eminent domain but it must pay the fair market value
for the assets. We are faced with a broken market that has
created huge apparent value for the assets that might have to
be paid for them. That could be hugely expensive for the State
and at least in my perspective, not necessarily the best way to
incent what we really need, new generation and an efficient
operating market that will drive prices down. So that sort of
extraordinary action I hope does not come to pass for that
reason and I think the State has already taken some very
extraordinary action. Rates have gone up hugely and that is a
very painful thing to do for anyone.
Mr. Ose. Have we met your 2 or 3 seconds?
Ms. Lofgren. I do not want to take advantage of the
chairman's--that is sufficient for me and I will----
Mr. Ose. We will go around again. I do want to add that
when Chairman Burton returns, we will insert his 5 minutes here
at the appropriate spot and we will all defer to him
accordingly.
I want to go back to the issue of the recharacterization
that followed the PUC's ruling on stranded costs, which we were
talking about earlier.
Both PG&E and Southern California Edison late summer 2000
filed with PUC documents that said we have recovered our
stranded costs and under 1890 and PUC rulings, we should now be
free to price our power, with certain caveats, at market; is
that an accurate statement?
Mr. Pickett. Yes, sir.
Mr. Ose. Ms. Hapner.
Ms. Hapner. Yes, it is.
Mr. Ose. PUC turned around--took that under advisement and
over a period of time responded. How long of a period of time
before PUC action was taken on that filing?
Mr. Pickett. The PUC action retroactively changing the
accounting procedure was in a decision on March 27.
Mr. Ose. Of this year?
Mr. Pickett. Of this year. The filings to end the rate
freeze, August, September, October timeframe, there were a
series of filings, but basically in the late summer, early fall
timeframe.
Mr. Ose. Is that consistent with what PG&E did also?
Ms. Hapner. Well, the one added piece is that at the order
of the Commission, we filed an interim value for our remaining
non-nuclear assets, our hydro facility.
Mr. Ose. That was the piece that put you over the top, if
you will?
Ms. Hapner. And that clearly put us over the top and that
filing was rejected.
Mr. Ose. Has Southern California Edison submitted a similar
filing for any of their non-nuclear assets?
Mr. Pickett. Yes, sir, there were filings seeking
authorization to sell our interest in three of our five major
remaining power plants. We had contracts for sale of two coal-
fired units, one in New Mexico and one in Arizona, excuse me,
one in Nevada and our interest in the Palo Verde Nuclear
Station in Arizona, we had sought Commission authority to do
that. We had also filed a settlement we had reached with the
consumer advocacy group at the California PUC that would have
allowed us to retain our hydro generation assets and operate
them in a quasi-market mechanism under California PUC
regulation. Those applications had been submitted and we were
waiting for action. One had been waiting for well over a year
for action before the market melted down and a hold was put on
this activity.
Mr. Ose. You are saying you filed it in May--let me see,
the market started melting down in spring of 2000, you are
saying you filed it a year prior to that or a year prior to
today?
Mr. Pickett. A year prior to that. The application to sell
our Mojave Power Plant was filed, if memory serves here, and we
can certainly get exact dates, that was filed in 1999.
Mr. Ose. OK, so these filings were made consistent with the
legislative intent of 1890 that would basically empower the
utilities to State, subject to PUC affirmation or rejection,
that they had recovered their stranded costs and under the law,
they could go forward with retail-based prices.
Mr. Pickett. No, I am sorry, that is----
Mr. Ose. I just want to make sure I have got this clear
because it is important to me.
Mr. Pickett. In 1999, and up until the time the market
began to melt down in May, we believed it was going to be
necessary to sell our power plants, realize the gain, in order
to pay off our stranded costs.
Mr. Ose. Right.
Mr. Pickett. And we had engaged in doing that and we were
engaged in a program to take the utility, the regulated utility
out of the generating business under the incentives in AB-1890.
Mr. Ose. And those requests to sell those generating
facilities are still pending.
Mr. Pickett. Well, they are still pending. Pursuant to our
MOU, they will be withdrawn, but those were the filings that I
referred to that had been filed back into 1999. As the market
price went up, and you have to bear in mind here, this is a
very complicated and arcane accounting mechanism, but we were
buying power from ourselves.
Mr. Ose. Right.
Mr. Pickett. And we were doing it through the Power
Exchange and we were paying the market-based price for it, not
set by us, but set by the market. Those market revenues that we
were being paid for our generation as we tried to sell it, we
still owned it and were selling the electrons into the market,
those market revenues were also going to pay off the stranded
costs.
We reached a point and it depends on any number of
variables, but we reached a point where we believed that
without the sales, we had recovered our stranded costs.
Mr. Ose. I am going to yield to Mr. Horn for a question.
Mr. Horn. It is not unusual that a corporation gets rid of
certain things so that they can show the stockholders, look at
what we have in revenue this quarter, or this half year, or
whatever. Now I think a lot of charges have flown around by
both PG&E and Southern Cal Ed that they got rid of a number of
things that generated power and they used the money to keep the
stockholders happy, and I would just like to know what the
policy is there.
Mr. Pickett. Well, first of all, in our utility business,
it is very unusual to sell assets. Selling assets that are
dedicated to the public service requires the approval of the
PUC to ensure that just that does not happen, that we are not
churning assets for the momentary benefit of shareholders, but
that at the same time, the long-run interests of our customers
are being served. And it is our policy to serve the long-run
interests of our customers and to do it under the rules set by
the PUC, that as I mentioned a moment ago, require the balanced
capital structure, require that we not have excess equity in
the utility, increasing rates for customers, and as we went
through deregulation, the utility business shrank, our earnings
shrank and they shrank because we took the earning assets out
of the utility.
Mr. Ose. I recognize Ms. Lee for 5 minutes.
Ms. Lee. Thank you, Mr. Chairman.
Let me direct my question to Mr. Vanech, is it?
Mr. Vanech. Yes.
Ms. Lee. You indicated in your testimony that the QFs are
owed huge sums of money and that they cannot pay fuel
suppliers. Let me just ask you this then. In terms of Delta
Power's profits, what were they in 1999 and 2000? Do you have
any idea, just ballpark?
Mr. Vanech. We have grown rapidly through acquisition. Boy,
are you asking total corporate? We have 13 plants, 5 of which
are in California.
Ms. Lee. OK, give me the California numbers, if you have
them.
Mr. Vanech. I am afraid to say. I do not have the numbers
at my fingertips, but I can certainly provide that to you.
Ms. Lee. Would you provide that for the record, 1999 and
2000?
Mr. Vanech. Yes.
[The information referred to follows:]
Summary of Net Income for the years ending December 31,
1999 and December 31, 2000 for Delta Power Company, LLC's
California affiliates: (i) OLS Energy-Chino, (ii) OLS Energy-
Camarillo, (iii) Carson Cogeneration Company, (iv) Mojave
Cogeneration Company, and (v) PE Berkeley, Inc.
------------------------------------------------------------------------
Year Net Income
------------------------------------------------------------------------
1999........................................... $2,017,320
2000........................................... $(1,801,341)
------------------------------------------------------------------------
Ms. Lee. We would just like a ballpark figure----
Mr. Vanech. Yeah, that would be fine.
Ms. Lee [continuing]. Of what the profits were. The
California Independent Systems Operators found that there was a
potential of over--I believe it was $6 billion in overcharges
by the generators. That represents approximately 30 percent of
wholesale energy costs over the last year. How do you respond
to that? Do you agree with that or is that an inflated number
from your perspective?
Mr. Vanech. I understand the question. I can only respond
from the perspective of qualifying facilities. The contracts
that we sell to the utility--the contracts under which we sell
to the utility essentially came out of Federal legislation and
are in a sense--they are not regulated. The revenues we
received are a function of the cost that the utility avoids, in
other words, in not buying that kilowatt hour from another
producer. So it is supposed to represent incremental cost.
Clearly the rates have gone up across the board, including
under our contracts. I mean, we are getting a lot more revenue
then we were 6 months or a year ago, assuming we are operating.
The other side to that is we have significantly higher fuel
costs and some projects make more money, some lose more money
as fuel prices go up. The key issue is how efficient that
particular generator is compared to the overall market. I hope
that makes sense to you.
With respect to the $6 billion, as we heard earlier--and I
do not know the breakout specifically, but a significant amount
of that appears to have come from non-QFs. I do not believe, to
my knowledge, that the QFs are not being attacked as part of
this $6 billion overpayment, because the QF contracts, as I
said, really fall under Federal and State jurisdiction. They
are based on a formula, as I said earlier, which is supposed to
represent the utilities avoided cost.
Ms. Lee. OK. Well many believe that the generators are
gouging and that is part of the problem, a large part of the
problem. What do you say to that in terms of QFs role in price
gouging? Is that an issue or not for you?
Mr. Vanech. I do not believe--and again, let me speak to
gas fired projects, because there is a difference between
renewables and gas fired. Mr. Desrochers may want to comment on
the renewables. The incremental revenue that we have earned
because of higher prices has substantially gone to the gas
suppliers, and we can demonstrate that showing our
profitability. So even though market prices have gone up
dramatically, our profitability in some cases has actually gone
down, in some cases have gone up or in some cases remained
flat. We have not--these gas-fired QFs--and I can speak to our
five--have not made any windfall profits as a result of higher
energy prices. The big reason is because--the way the formula
works, the utility formula, is that we get paid every month
based on an assumed deficiency rate and the border gas price
for that month. We buy gas from our gas suppliers based on that
exact price that is used in the formula. In other words, there
is a perfect hedge in a sense between the additional revenue
and the additional fuel cost. It works when the fuel prices go
up or down. But it has the effect of maintaining our margin to
be a fairly constant number.
Ms. Lee. So you have not inflated your prices; you have not
gouged and you have not withheld supply?
Mr. Vanech. Absolutely not. In fact, we have no ability to
manipulate prices. The prices--and this is another important
point. The prices we receive are set by the California Public
Utility Commission each month. We have no control over the
pricing we receive.
Ms. Lee. Thank you very much, Mr. Chairman.
Mr. Burton. Let me--since I had to make a couple of calls,
let me ask some questions I would have asked. I appreciate Mr.
Ose taking the chair in my absence.
If the FERC imposes price caps, do you think there will be
more or fewer blackouts this summer?
Mr. Pickett. My judgment is there will be fewer.
Mr. Burton. Why?
Mr. Pickett. Because if the price cap is imposed at a level
that is sufficiently reasonable that it will allow the
generators to recover their fair costs, they will lose the
incentive to withhold capacity from the market to drive prices
ever higher.
Mr. Burton. Do you agree with that?
Ms. Hapner. Well, I believe that a price cap should be
applied regionally. California is very a part of a larger grid,
in fact, we are a net buyer of electricity. So clearly, we have
to work and partner with the other Western States. I do think
that if there is a price cap just in California, then we are
likely to see some of the effects that you mentioned earlier in
terms of megawatts following the money. Right now what we are
seeing is, when there was a price cap in California the
megawatts left California and then came back in as more
expensive out-of-market costs. So clearly a cap, particularly a
short-term cap to get us through this very difficult period,
has to be a region-wide cap and that should very much help our
situation.
Mr. Burton. And if it is not a region-wide cap, then do you
think that it would probably exacerbate the problem?
Ms. Hapner. I am----
Mr. Burton. If it is not a region-wide cap, the problem
could be exacerbated as far as blackouts are concerned?
Ms. Hapner. I would not speculate on the blackout
situation, Mr. Chairman. What I would say is that if it was
just a California cap or an ISO-wide grid cap as we had before,
then it encourages generators that are not part of the ISO grid
or regulated by the FERC--including the municipal utilities
that Mr. Ose mentioned earlier--to certainly drive up the
prices to stratospheric levels.
Mr. Burton. And then the energy would go where the money is
and you probably would have some blackout problems in those
areas that couldn't break the caps, right?
[No response.]
Mr. Burton. I mean, I know it is hypothetical, but if the
FERC, as they said earlier, said they could only control 25
percent--put a cap on only 20, 25 or 30 percent of the market,
that means that the other 70, if the prices went above the cap
and was forced up, that is where the energy would go to produce
electricity.
Ms. Hapner. Well unfortunately that is----
Mr. Burton. And in those----
Ms. Hapner. Excuse me.
Mr. Burton. And in those areas where the cap was in place
you could have more severe blackouts, could you not?
Ms. Hapner. I really cannot say about the blackouts. I do
think, though, this is exactly the kind of example that
Congresswoman Lofgren was referring to. In this type of crisis,
we all have to pitch in, and that includes the municipal
utilities who are not price constrained.
Mr. Burton. I understand, but when you start making these
kinds of decisions you have to look at every eventuality and
what it is going--if you push in here, what is going to come
out over here. What do you think the price cap should be?
Mr. Pickett. Our belief is that the price cap should be set
at a level that will allow the generators to recover their
costs, plus a fair return on investment. It could be set--and I
guess I would want to say that I would be very much opposed, or
find a distant second best a one-size-fits-all price cap done
generically, because there are substantial differences from
generator to generator in terms of cost, the age of their
plants, their fuel sources and so forth. What they need to be
set, price caps, on a generator-by-generator basis at a level
which provides cost recovery and a fair return on investment.
That is the standard in the law.
Mr. Burton. This letter from the Governors that was sent to
Mr. Hebert had nine of the Governors on there from this region
and they are not in favor of price caps. So a region-wide price
cap might be a tough nut to crack there. So you may have a
price cap only for California, and then I think you run into
the problem we were talking about.
Let me ask you a couple of other questions. Did you ask the
PUC in July to give you the authority to enter into what they
call bilateral forward contracts?
Mr. Pickett. Our request to the PUC for the bilateral
forward contracts was made in April. I believe at that time the
PX was then developing its bilateral forward program. It had
not been adopted yet. The FERC approved the PX's bilateral
forward contacting in May 1999, May 26th. On July 14, 1999 the
PUC finally gave us limited authority to do bilateral--to
engage in the--excuse me, not bilaterals, in the block forward
market, but there was a very severe constraint on the amount of
transactions we could do at that time.
Mr. Burton. Now up to that time is it true that you were
only allowed to purchase power through the PX or the spot
market?
Mr. Pickett. Yes, sir. Well when you say the spot market,
that is to say through the ISOs' imbalance market, yes, sir.
Mr. Burton. Ms. Lynch said that the PUC gave you the
authority you needed to enter into long-term contracts. She
said she rushed your proposal through in 2 weeks and got it
passed on August 3rd, is that true?
Mr. Pickett. I do not know if she rushed it through, but
what was--this is now August 2000----
Mr. Burton. Right.
Mr. Pickett [continuing]. And what was done then was only
half the job. They gave us authority to enter into bilateral
contracts; they gave us no assurance of recovery of the costs
of those bilateral contracts. The two have to go together. If
you do not have assurance of recovery you are not a credit
worthy entity. You cannot get somebody to sign a contract with
you.
Mr. Burton. Did you talk to her about that?
Mr. Pickett. To the extent we could, yes, sir.
Mr. Burton. What do you mean to the extent you could?
Mr. Pickett. The PUC has a series of what they refer to as
ex parte communication rules that prevent open communication
between the regulated companies and PUC commissioners. We
certainly did bring our concerns about the nature of the order
and the limitations on it to the attention of the Commission
through formal filings. I just cannot say to you that we--did
we talk to Ms. Lynch about it? I do not know. We may have in
various times, but it would have been under the constraints of
the PUC's ex parte rule.
Mr. Burton. As I understand--this will be the last question
on this round. As I understand it, the PUC would not preapprove
long-term contracts and the rates had to pass a reasonable test
after the fact, is that right?
Mr. Pickett. That is correct. I can give you the history
here if you want. I think Ms. Hapner has something to say.
After we got the authority in August, the PUC set up a
preapproval procedure. Ms. Lynch has often said well, the
utilities had the authority in August, they could have gone and
signed contracts on their own nickel. As I just explained, that
is not a realistic expectation. They also set up this
preapproval procedure you have just referred to. We filed our
contracts under that preapproval procedure in September 2000.
By the end of October, even though there was a 30-day mandate
in the PUC order, the PUC had not acted. We were ultimately
able to sign those contracts only in November 2000, well after
we were beginning to run out of credit and people were
beginning to refuse to deal with us.
Mr. Burton. During that time period, how much did the
prices go up that month?
Mr. Pickett. Sir, I do not know, but we could go back and--
--
Mr. Burton. It was a big jump though, was it not?
Mr. Pickett. It was a big jump, yes, sir.
Mr. Burton. So if you had gotten the approval a little
quicker you could have gotten a better price?
Mr. Pickett. Absolutely.
Mr. Burton. Go ahead.
Ms. Hapner. Mr. Chairman, rather than take the committee's
time, I would be happy to provide for the record a history of
our requests for that authority. With respect to your specific
question about conversations with the Public Utilities
Commission and with President Lynch, again taking into account
the ex parte restrictions that Mr. Pickett mentioned, we had
several conversations with staff members of the Public
Utilities Commission at high levels. The only guidance that we
were provided was a figure of per se reasonableness that is
actually several cents below what the Department of Water
Resources paid for the power that they procured very recently.
Mr. Burton. So it would not work?
Ms. Hapner. We were told antidotally, but nonetheless, that
even if we had criteria for reasonableness it would not be
worth the paper it was printed on.
Mr. Burton. OK, who is next? Mr. Horn.
Mr. Horn. Mr. Chairman, I will yield my time to Mr. Ose.
Mr. Burton. You are going to yield your time to Mr. Ose?
Mr. Horn. Yes.
Mr. Burton. OK.
Mr. Ose. OK, recharacterization of stranded assets. If I
understand the basic impact of your application, it was to say
very clearly that the capital base on which rates had been
structured had been reduced to zero by recovery and that you
now were willing to go into the open market and compete at the
retail level; is that correct, Ms. Hapner?
Ms. Hapner. I would say it a little bit differently, if you
will permit me, Mr. Ose. AB-1890 said that when the assets were
valued and/or stranded costs were collected, that those assets
that were still with the utility family were free from
regulation and could go out and be merchant plants, if you
will.
Mr. Ose. At the wholesale level?
Ms. Hapner. At whatever the market price was.
Mr. Ose. Now the impact--I think I understand the impact of
Edison's and PG&E's filings saying that the stranded cost had
been reduced to zero. What is the impact on the PUC's
recharacterization--let me ask the question differently.
Describe for me the PUC's recent recharacterization that
effectively said no, you have not recovered your stranded cost.
Keep it in layman's terms, OK.
Mr. Pickett. I will try, and if I do not, let me try again.
It is a very complex and arcane subject. Before the PUC
recharacterized the accounting, AB-1890 and the implementation
by the PUC provided three sources of revenue for the utilities
to recover their stranded costs. AB-1890 and the PUC made it
clear that the utilities were at risk for recovery of their
stranded costs. The three sources of revenue were market
revenues, revenue from the sale of the generating plants and
headroom. Headroom is that amount of costs that we have in rate
recovery above our actual cost.
Mr. Ose. It is the amount of rate over your basic cost?
Mr. Pickett. That is correct. Those were the three sources
of revenue for stranded cost recovery. When the market melted
down and wholesale costs went up headroom disappeared and
market revenues increased.
Mr. Ose. I got all of that part. I understand the dynamics
there. What is the consequence to Edison of PUC's
recharacterization now?
Mr. Pickett. The important point to understand, though,
here is that, in our view, the procurement costs were intended
to be recoverable.
Mr. Ose. And when the market went up, you no longer had
that avenue?
Mr. Pickett. We may have lost stranded cost recovery but it
was always intended that we would recover our procurement
costs. The PUC disagreed with that in the implementation of AB-
1890, and the recharacterization says that the first thing that
will be recovered by the utility are the procurement costs and
the rest is beyond.
Mr. Ose. So you went 3 years with one set of rules, or 4
years with one set of rules in terms of rate structure and what
have you, and then March 28th, you had your world turned upside
down, so to speak, in terms of how those funds--or how that
rate base was supposed to impact your operations?
Mr. Pickett. Yes, sir. And with the point that it was--the
PUC said this was to carry back to the beginning, so it has
retroactive effect, which we believe is illegal.
Mr. Ose. And that is the basis of your pending Federal
lawsuit. Do you not have a lawsuit pending over this particular
issue?
Mr. Pickett. Not on that issue. The Federal lawsuit deals
with the recoverability of the procurement costs. I can explain
that if you would like. It is not related to the
recharacterization issue.
Mr. Ose. It predates--your Federal lawsuit predates the
recharacterization. We may well have a second lawsuit as a
function of recharacterization?
Mr. Pickett. Yes, sir. If our memorandum of understanding
is not implemented, we have reserved the right to pursue our
remedies in this regard.
Mr. Ose. Now if you prevail on either the first or the
second law--no, you do not have a second. You have a first
lawsuit, the existing lawsuit. Actually you have agreed to set
that aside in the course of the transmission, so maybe my
question should be directed to Ms. Hapner.
Are you a party to this lawsuit? Is PG&E a party to this
lawsuit?
Ms. Hapner. We also have a Federal filed rate doctrine case
with the Federal court.
Mr. Ose. Similar circumstances?
Ms. Hapner. Well as Mr. Pickett said----
Mr. Ose. Over procurement costs recovery?
Ms. Hapner. Yes, that those are legitimate--those costs
were approved by the Federal Energy Regulatory Commission;
therefore, we are allowed to pass those costs through to our
customers.
Mr. Ose. Were they approved by the PUC?
Ms. Hapner. Our claim and the basis for our case is that
these are wholesale costs.
Mr. Ose. So they would be Federal?
Ms. Hapner. Right.
Mr. Ose. And the PUC does not have any input or review or
what-have-you over that particular aspect?
Ms. Hapner. That is correct. The PUC has challenged that
case.
Mr. Ose. OK. I want to shift my focus just a little bit
now. Yesterday I asked this question at least five times,
having to do with whether or not there are any standards in
existence at the PUC to give you direction as to what is
reasonable or unreasonable in terms of forward contracts you
may wish to enter into. I was told very directly that the PUC
has finalized that rule five times. I am asking today, do you
have any document such as this, which is a PUC printed--
actually this is California Energy Markets, but it looks pretty
official, so we are going to wave it around a little bit.
Something of this nature, like we would have in the Federal
Register for any agency ruling. Do you have anything from the
PUC that in fact is final regarding what is reasonable relative
to long-term forward contracts that you may wish to enter into?
Mr. Pickett. No, sir.
Mr. Ose. None?
Mr. Pickett. No, sir.
Mr. Ose. That is 180 degrees different from what we were
told yesterday.
Mr. Pickett. The only caveat I would put on that is that
the traditional standard for recovery of utility costs is that
they be reasonable. The PUC has not issued, to my knowledge,
guidelines that would say what is reasonable for utility
procurement.
Mr. Ose. What is the standard?
Mr. Pickett. That is our problem. That is why we sought--
when we finally got authority to enter into contracts, we
wanted them preapproved because there was no standard to say
what is reasonable, what costs are we going to be allowed to
recover. You have to have the cost recovery piece in order to
enter into a viable contract and not just be incinerating
money.
Ms. Hapner. I believe that all three investor-owned
utilities have submitted different criteria suggesting those be
the basis for preapproval standards, and to my knowledge none
of those, nor any version of any of those has been approved.
Mr. Ose. What you are trying to do is eliminate uncertainty
by asking for the standards.
Mr. Pickett. Absolutely, yes.
Mr. Ose. Apparently when the yellow light goes on my
microphone goes off. That is pretty tricky. I want to go back
just for a moment, and if my time expires we will come back to
it. In terms of the recharacterization of the stranded costs on
a 3 or 4-year after-the-fact basis, what is the consequence to
the capital structure of the utilities based on what you said
earlier about utilities having to maintain a certain capital
structure, the reaction of Wall Street?
I knew I was going to do this. We will have to come back to
this, Mr. Chairman. I yield back.
Mr. Burton. Ms. Lee.
Ms. Lee. Thank you, Mr. Chairman.
Let me ask Mr. Desrochers what he thinks the impact of the
proposed 15 percent cut in renewable energy and energy
efficient kind of activities would mean in terms of the
California energy crisis, and also just in terms of renewable
energy in general. There is a 15 percent proposed cut I believe
in the President's budget, which is approximately $180 million
which would be taken away.
Mr. Desrochers. I am not aware of that. This is a cut in
the President's budget?
Ms. Lee. Right.
Mr. Desrochers. I am not aware----
Ms. Lee. For renewable energy activities.
Mr. Desrochers. Yes, I could not give you a guess at what
the impact on that would be. We are proposing some legislation
for a tax credit for renewable energy similar to what the wind
energy industry has currently. So that would be an additional
legislation. I could not address what that impact would be.
Ms. Lee. OK. What do you think a reasonable rate in terms
of percentage for renewable energy should be? I am supporting
20 percent by 2020. What is your take on that?
Mr. Desrochers. I would agree that 20 percent would be----
Ms. Lee. You think 20 percent?
Mr. Desrochers. Yes. In fact, we proposed legislation about
4 years ago in California that we have a 5-percent of what we
call renewable portfolio standard.
Ms. Lee. What is it now in California? Did you mention that
earlier?
Mr. Desrochers. I said it is 2 percent.
Ms. Lee. It is 2 percent now?
Mr. Desrochers. 2 percent, correct.
Ms. Lee. OK, thank you.
Let me go now to Ms. Hapner and Mr. Pickett. Let me just
ask you what you think the distinguishing or most important
factor was in your decision to file bankruptcy and your
decision, Mr. Pickett, to move forward with an MOU? I mean,
what was it that caused you to go in different directions in
this crisis?
Mr. Pickett. Well, I cannot speak, of course, to the what I
am sure were terribly painful judgments at PG&E that led them
to their decision. For our company, we are not out of the
woods. We have more bills stacked up on the desk than we have
money to pay, and it is not a good situation to be in
obviously. As this crisis has developed, we have struggled
mightily to maintain our levels of customer service and keep
our employees working and calm and focused on the job that
needs to be done. We continue to believe, even as we are
hanging on the edge by our fingernails here, that a negotiated
solution, if one can be reached and implemented, is preferable
to the lengthy process that bankruptcy will involve. It is
preferable for the State to have its policymakers in control of
the utilities going forward rather than a Federal judge. It is
in everyone's interest to get the utility credit-worthy,
because as several of the panelists have commented, billions of
dollars of investment are required in California infrastructure
over the next few years. Path 15 is one example.
We have not shorted our utility in terms of the investment
that it needs, but a bankrupt utility cannot put that kind of
money into the infrastructure. It just simply cannot do it, the
money is not there. So we believe that a negotiated workout
that will quickly get the utilities back to a credit-worthy
status where the critical investment in infrastructure can be
made, where we can keep our employees on the job and we can
continue to provide the quality customer service is the way to
go. Ms. Hapner, of course, will address PG&E, but I have to
tell you we are not out of the woods and we are hanging on the
edge.
Ms. Lee. So you have more debts than assets. Clearly
bankruptcy is a remedy in those circumstances, but you chose to
try to negotiate your way out of it?
Mr. Pickett. We have chosen this far--and thus far is the
critical phrase--to try and negotiate our way out of it. We
have 14 or 15 lawsuits from QFs now seeking back payment. We do
not have the money to pay even if they got their judgment. We
have more bills stacked up on our desk, back bills, than we
have money to pay. We have got to find a negotiated solution
and we have to do it quickly because our creditors, the people
who have invested in this business, our bankers have legitimate
expectations of being paid and their patience is not infinite.
Ms. Lee. So, Ms. Hapner, was bankruptcy the easy way out?
Ms. Hapner. Anyone who thinks that a decision to go to the
bankruptcy court for protection is the easy way out,
particularly for a company that's over 100 years old, does not
understand just how difficult this decision was, Ms. Lee. Let
me just say the only thing that separates our two utilities--we
are both facing mounting debts and we both have faced a series
of very destabilizing actions from the Public Utilities
Commission. We did not feel that sufficient progress was made
on a comprehensive solution. I was not part, and I am not part,
of the utility negotiating team that worked with the State. But
it is my understanding that those negotiations have been very
complex and they have been very honest, but they have not moved
forward as quickly as we would have hoped. In the meantime, it
was very clear that the State did not assume the full
procurement obligation that we had hoped they would, meaning
that every month we are incurring over $300 million more of
generation debt, which, of course, then is--our inability to
pay, as Mr. Pickett said, has impacted our ability to pay our
qualifying facilities. Our ability to make our commercial paper
debts and thousands--literally thousands of vendors that we
have quite inadvertently brought into this situation with us.
So it is the lack of progress, and in the midst of that lack of
progress the actions by the Public Utilities Commission,
including the change in accounting that Mr. Ose was pursuing,
that led us to believe that the quickest and the best way to
get to resolution was to move to the Federal courts.
Ms. Lee. Thank you for your candor.
Thank you, Mr. Chairman.
Mr. Burton. Thank you, Ms. Lee.
We are going to do one more round. I know that you are
probably getting a little tired of sitting there. Do any of you
have to take a break real quickly or can you sit there for
another 25 minutes? If you can, then what we will do is, we
will start our final round and after we conclude this round, if
we still have questions we will submit them to you. And if you
will kindly give them to us for the record would be helpful,
OK.
OK, let me start this final round by saying, Mr. Vanech,
how many megawatts of power of qualifying facilities are idle
right now because they are not being paid?
Mr. Vanech. As I understand it, there are--out of the gas-
fired projects totaling 5,200 megawatts, I understand 3,000 are
now shut down.
Mr. Burton. 3,000 megawatts are shut down?
Mr. Vanech. That is my understanding. I believe this is
current as of April 2nd. That is the information I got.
Mr. Burton. Would your company prefer the ability to sell
electricity in an open market?
Mr. Vanech. Let me answer that in two ways. With respect to
the existing QF facilities we have, our preference would be to
sell under our existing contracts, because our existing
contracts are long-term agreements and we have lived up to our
end of the bargain and what we want is our customers to live up
to their end of the bargain.
Mr. Burton. But you have not been paid?
Mr. Vanech. No, we have not been paid; therefore, in turn,
we cannot pay our fuel suppliers who will not give us gas.
For new projects--and we, by the way, are trying to get a
project off the ground for 200 megawatts. The first turbine
would start delivering energy in last September of this year in
California. We have to make a decision as to which way we are
going to go. We have basically three options. We can sell to
the Department of Water Resources under their procurement plan.
We can enter into an agreement with a third party such as an El
Paso or a Shell, one of the large energy companies. Or we can
try to essentially go it alone and sell into the market. The
first two are sort of simple because they are going to be long-
term contracts and we essentially are going to lay the risk
off--the market risk to somebody else.
The problem is there is really no market now that exists in
California. The PX, obviously, was discontinued or terminated,
however you want to characterize it. So there is really no
transparent market to buy and sell power and trade power in the
State at this point. I think it would be extremely beneficial--
and I realize that after terminating the PX, I am sure no one
has the appetite to start it up tomorrow. But I think there
needs to be a realization that in order to have an effective
transparent open market, there has got to be a way to trade the
commodity. So I think longer term some sort of open market
needs to be reintroduced.
Mr. Burton. So if you had your druthers it would be an open
market?
Mr. Vanech. Yes.
Mr. Burton. What would be the result if the QFs were freed
from their contracts with the utilities?
Mr. Vanech. I believe the QFs for the most part would be
able to come back on line. The reason we would be able to come
back on line is, the large energy companies, such as the El
Pasos of the world, who I mentioned earlier, we believe would
be willing to pay us a fee to convert natural gas into power,
and they essentially would sell that power for us. It
eliminates the current credit issue. Our balance sheets do not
look very attractive right now since we have huge liabilities
and in most cases little or no cash. But what they will do is
essentially deliver gas--they have title to the gas--and we in
turn deliver them electricity back. In other words, we convert
the gas to electricity and in exchange they will pay us a fee
for that service.
Mr. Burton. So if you could get out of your contracts you
would jump at that in a heartbeat?
Mr. Vanech. Absolutely. Different QFs have different views.
We are not seeking at this point to terminate our contracts.
Mr. Burton. I understand, but you are not getting paid.
Mr. Vanech. Exactly. We need the right to suspend these
contracts, that is correct.
Mr. Burton. Have you gone to court or anything to try to
suspend the contracts because of nonpayment?
Mr. Vanech. We have. We started by actually sending a
letter to Edison for the four southern California projects
asking for relief, but we did not get a response. We then, more
recently, filed a lawsuit in Los Angeles County, on behalf of
our four projects, asking the court to give us the relief. And
this past Monday the California Cogen Council, of which we are
a member filed a petition in front of FERC asking FERC to give
emergency relief to allow the QFs to sell to third parties. To
my knowledge, nothing has been done, at least as of this time.
Mr. Burton. Well, I do not see how anybody in good
conscious could say you have to go bankrupt when you have an
opportunity to find another market that will keep you afloat.
It does not make any sense.
Mr. Vanech. I agree.
Mr. Burton. To PG&E and Southern Cal Edison, what is your
companies' position on allowing the QFs to end their contracts
with utilities and sell their power on the market since you are
not paying them?
Mr. Pickett. Well, beginning this Friday--checks will go
out this Friday. Under the order of the Public Utilities
Commission, we will be paying the QFs going forward.
Mr. Burton. Will you be paying them all that you owe them
or just a portion?
Mr. Pickett. We will be paying all of the QFs that are on
line. These are output contracts. So all of the QFs that are
delivering in April will be paid beginning--and the checks will
go out on an advanced basis this Friday.
Mr. Burton. So that will be for the total amount that is
owed?
Mr. Pickett. No, no, sir. I am sorry. It is for the going
forward amount beginning--I have forgotten whether the date is
March 27th or--it is basically for April forward we will be
paying the QFs. Hopefully, if we have enough money on an
ongoing basis--on a current basis, there still is a past debt
owing.
Mr. Burton. Excuse me, but are the arrearages necessary for
you folks to be able to continue to move on? I mean, if they
start paying you in full.
Mr. Vanech. The answer is, I believe our gas suppliers will
work with us and start supplying gas again to start back up,
assuming there is a clear path to us getting paid, and to know
that we are actually going to get paid. Just saying that, you
know, at some point in the future we are going to get paid I do
not think works. I think that most of the QFs have flexibility
with respect to some sort of suspension, if you will, of this
amount owed from the utilities. But there needs to be a clear
path so we can turn around to our fuel suppliers principally
and say OK, you can be comfortable now because we are going to
get paid X dollars over a period of time, and this is a credit-
worthy obligation, so we know in fact that there is going to be
money to get paid. That is what we require.
Mr. Burton. Do you need the arrearages in order to keep
those suppliers happy?
Mr. Vanech. It is a mixed bag. We have three different fuel
suppliers. I think one will supply gas to us on the basis of
getting paid currently, assuming we can reasonably demonstrate
an ability to pay them off over time. The other two I do not
think are as flexible. So, I think it is company-specific.
Mr. Burton. So you still need some relief from your
contracts in order to keep things going, is that what you are
saying?
Mr. Vanech. We either need relief from our contracts, i.e.,
the ability to suspend or not sell under the contracts, or to
the extent we sell under the contracts we need two things. We
need credit-worthiness behind the payment so that we know we
can get paid.
The second problem is, as I said in my opening statement,
the current formula that was approved by the Public Utilities
Commission, I think about 2 weeks ago, does not work for the
gas-fired plants. The revenue--again, taking an average
qualifying facility, the revenue of $80 a megawatt hour does
not even come close to covering the fuel cost of about $140 a
megawatt hour at today's gas prices. So it is totally
uneconomic for the gas-fired plants to run today until the
Public Utilities Commission, or some other body, changes the
formula to be consistent with the Federal and State law. Right
now that formula is inconsistent with Federal and State law and
that is one of the arguments or causes we are going to FERC to
seek relief on, that this formula does not work and is just
wrong.
Mr. Burton. Let me get on to another subject here.
Yesterday Ms. Lynch testified that both of your companies did
enter into some long-term contracts last summer after the
Public Utilities Commission issued its August 3rd order. You
have testified to that effect today. Will each of you provide
us with documentation of all the forward contracts you entered
into during that period? That is after the PUC gave you
authority to do it in July 2000.
Mr. Pickett. Yes, sir, we are pleased to do that. We
entered into five contracts for 350 megawatts. When you say
documentation, we would just like to be clear on what it is you
want. We can give you the contract itself or whatever else we
have.
Mr. Burton. We would like to have a copy of the contract,
if we could. The Public Utilities Commission said yesterday
that we had to get permission from you to get this information.
They would not give it to us. So we would like to have the
contracts. Can we get them for you as well?
Mr. Pickett. Let me say there may be confidentiality
provisions in those contracts. If we cannot provide them for
that reason, we would provide them pursuant to a subpoena from
the Commission.
Mr. Burton. Well we will send you a subpoena if it is
required. So you just tell us what is necessary. We do not plan
to divulge this information publicly, but it is something that
we need to take a look at to see what, if anything, we can do
to be of assistance at the Federal level.
Mr. Pickett. I understand. For our part, we would be
pleased to provide whatever material we have, subject only to
the confidentiality provisions that may have been entered into
with the other party to the contract. But I would think if this
committee subpoenas them they can have them.
Mr. Burton. Would you prefer for us to subpoena them?
Mr. Pickett. Well let us check the confidentiality
provisions. I just do not know----
Mr. Burton. We want to make sure we have got all of the
facts. That is all I am saying.
Mr. Pickett. One way or the other you will have the facts.
Mr. Burton. OK, good. Ms. Lofgren.
Ms. Lofgren. This has been a long day, so I will be quick.
Mr. Pickett, you have been active in your legal career around
energy issues your whole career, if I heard you correctly, and
know a lot about FERC and the law. I am wondering if in that
capacity as a witness you could comment on this question. The
chairman mentioned that there had been a letter sent by nine
Governors to FERC objecting to rate caps, and he was kind
enough to share a copy of the letter with me. We also know,
however, that the Governors of Washington, Oregon and
California on March 9th asked FERC to impose price caps, and I
do not believe they have received an answer to that. Now
putting aside the politics of the situation, and that the
founders in their wisdom made North Dakota have two Senators
and California two Senators as well. Would the law allow for
the feds to impose regional price caps for the Western region
despite the fact the Governors of some of these small States do
not like it, even though the Governors of Washington, Oregon
and California have asked for it?
Mr. Pickett. I am not sure how much I really know the law,
but I have practiced in the energy area for 20 years, sometimes
to my regret. I have done a number of FERC rate cases and
proceedings before the FERC of other natures. My understanding
of the Federal Power Act, the whole reason for it is to be sure
that regional differences and inter-regional competitive
pressures do not impact the public interest. I believe that the
FERC--if it had the record before it, which it can surely make,
it has the rules to make the record so that it can take
action--can impose a region-wide price cap either on individual
generators--the regulation as it is contemplated is on the
seller--or it can do it region wide, either way. I believe it
could do it.
Ms. Lofgren. All right, if I can just quickly followup. I
am sure that there are more users of electricity in California
than these nine States put together. If nothing is done--if the
FERC--what did they say, market--what was the phrase they used
this morning? Mitigation plan proves to be puny and not very
helpful and we end up with this price control situation that is
completely out of hand, do you believe that the States of
Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, North
Dakota, Utah and Wyoming will not also be caught up in the
rapid price escalation and crazy market that has developed here
in the West?
Mr. Pickett. I believe they already are with the possible
exception of North Dakota.
Ms. Lofgren. It is under water right now.
Mr. Pickett. Well most of the Western States are
interconnected in a grid, but are not connected to the Eastern
half of the United States on a line that runs roughly East of
the Rocky Mountains. There is very limited interconnection
there. I think North Dakota is on the Eastern side of that. But
with that exception, I think that the Western States, like it
or not, are going to rise together or fall together here. The
market impacts and certainly spreads to nearby States in
California and--or spread to the Northwest and are certainly
likely to spread elsewhere if the situation is not corrected.
Now having said that, I should say that a number of these
States have not deregulated their markets and the effect of
that is very, very important when you talk about caps and the
percentages and so forth. A State that is not deregulated and
has utilities operating as a vertically integrated monopoly is
providing most, if not all of their power, from rate-based
regulated generation. They are not in the market, or if they
are in the market, it is for a very, very tiny percentage of
their power. Sure, they may be willing to pay a huge amount for
that little tiny increment. In California, we are paying that
huge amount for the whole thing and that is what is crazy. We
have got to stop that. That can be stopped.
Ms. Lofgren. And is that why, in your judgment--I will not
ask you to speculate what the Governors were thinking, but why
it would be in the interest of the State of Washington and
Oregon to join with California on a request for cost-based
price caps to FERC?
Mr. Pickett. In part--and I have to hedge the answer
because the regulatory situation--the extent of deregulation in
each State is different, and the supply and demand situation in
each State is different. As a general matter supply is
tightening up. As I said earlier, it is not all a supply and
demand problem, but clearly in the summer, in the peak months--
in southern California the peak months are in the summer and
there is a supply shortage. In the Northwest the situation is
reversed. It is a winter shortage, or it is a winter-time
peaking and therefore a shortage problem. Supply is tightening
up there as well. So you have to be careful and look at the
inter-regional factors, but in general the answer is yes.
Ms. Lofgren. Thank you.
Mr. Burton. Thank you, Ms. Lofgren.
Mr. Ose.
Mr. Ose. Thank you, Mr. Chairman.
On the issue of the recharacterization and its impact on
your financials, I am going to ask you to respond to that in
writing because I do want to ask these fellows a couple of
questions.
I want to make sure I understand as it relates to the QFs
the impacts in the valley. In Sacramento and its surrounding
area, we are a severe non-attainment region regularly and San
Joaquin is on the verge of being characterized or classified
similarly. So in effect, a vast majority of the central valley
will then be on a non-attainment basis. My understanding of the
QFs is that they provide power that has a far lower level of
emission into that geographic area than say a more traditional
type of power generating infrastructure, is that correct?
Mr. Desrochers. Yes, that is correct. And not only that,
the material that we utilize normally is open-field burned,
which is still permitted in the Central Valley. We take that
material and use it for fuel in a controlled combustion
atmosphere and reduce the pollutants by 96 percent of what
would have happened if it was burned in the open fields.
Mr. Ose. So it is very environmentally friendly?
Mr. Desrochers. Yes.
Mr. Ose. Is that the same with you, Mr.--is it Vanech?
Mr. Vanech. Vanech. Yes it is directly resultant from the
age of the plant typically. But since the QFs tend to be 10 or
12 years old and have to comply with the best available
technology, most of them have selected catalytic reduction on
the back end, which means the Nox emissions are
generally in single parts per million. All that means is that
they are very clean plants, simply put.
Mr. Ose. Now the decision recently by the PUC to reduce the
compensable level for the IER from 11,000 plus to 9000 plus in
effect says--if I understand correctly--that you are only going
to be compensated for using enough--in terms of your
recoverable costs or your rate, you are only going to be
compensated for the costs that would get you up to an IER of
9140 BTU, whereas it might take you 11,000 to get to the
appropriate level so that your facilities run?
Mr. Vanech. That is exactly correct.
Mr. Ose. OK.
Mr. Vanech. In fact, the rate is actually supposed to
represent an incremental energy rate. Just by comparison, the
average energy rate, which is far below the increment, for
Edison over a 20-year period we calculated it about 9,900 or
10,000. So not only is that 9,100 way below an incremental
energy rate, it is actually below the average rate.
Mr. Ose. Now you have facilities in the Central Valley. Mr.
Vanech, do you have facilities in the Central Valley? You said
you have five in California, four in Los Angeles?
Mr. Vanech. And one is at UC-Berkeley serving the State.
Mr. Ose. OK. LA has got air quality problems regularly. The
question I have is that to the extent that the QFs, who were
originally developed under PURPA, as I recall--to the extent
that the QFs cannot recover cost, they are going to shut down
or they are going to reduce operations.
Mr. Vanech. Absolutely.
Mr. Ose. So my question is, because--I mean, I have to tell
you between the health and safety of young people--I should say
the health of young people, the health of older folks in the
valley, our ability to have clean air, it would seem to me that
the arbitrary decision to reduce the IER from 11,000 to 9,000
is a direct attack on our environmental quality, because it
makes it less economical or less possible for you folks to
operate. I mean if you just connect the dots.
Mr. Vanech. Yes.
Mr. Desrochers. Yeah, you have come to the right
conclusion, that is correct.
Mr. Ose. The thinking behind the decision by the PUC is
found--what is the fundamental logic?
Mr. Vanech. I will speculate that it is based on political
pressure to lower the rates. I mean, it clearly contradicts
Federal and State laws, PURPA laws. I can only imagine that it
is politically motivated in a desperate attempt to lower rates.
Mr. Ose. Is there anything we can do at FERC to reverse
this?
Mr. Vanech. We have filed a petition, effective as of
Monday, to ask for relief at FERC, yes.
Mr. Ose. And the basis on which you are doing it relates to
PURPA or to the fact that maybe your electrons travel
interstate?
Mr. Vanech. Strictly as it relates to the rules of PURPA,
because the formula now violates Federal and State law.
Mr. Ose. How many folks work at your plant, Paul?
Mr. Desrochers. Statewide we have 100 folks and then we
have indirect employees of right around 400.
Mr. Ose. Mr. Vanech.
Mr. Vanech. We have about 65, including management and
operators.
Mr. Ose. You testified earlier that the natural gas that
you get is provided to you by third parties.
Mr. Vanech. Yes, that is correct.
Mr. Ose. And it is on a spot price basis?
Mr. Vanech. It is.
Mr. Ose. And you return the electricity based on a factor
above and beyond the cost of natural gas. In other words, you
take the natural gas and you produce the electricity and you
sell it back to the guy?
Mr. Vanech. Exactly.
Mr. Ose. OK. My time has expired, Mr. Chairman.
Mr. Burton. We will go to Ms. Lee and then we will come
right back to Mr. Horn who can yield to Mr. Ose if he so
chooses--what a nice fellow you are. Ms. Lee.
Ms. Lee. Thank you, Mr. Chairman. For the record, let me
just indicate that it was brought to my attention that on March
22, 2001, Dr. Alan Lloyd who is the chair of the California Air
Resources Board, he actually testified in front of the
Subcommittee on Energy and Air Quality of the House Committee
on Energy and Commerce. His quote was it can be said with
certainty that environmental laws are not to blame. I just want
to make sure that is in the record.
Let me just mention this, and then I would just like each
of you to respond very briefly. Some say that the only way out
of this crisis is actually through re-regulation. Price gouging
was not as evident when utilities were regulated and utility
bills were much lower. So I guess I want to ask each of you,
which regulatory or which nonregulatory environment worked best
for the consumers, for the utility companies and for the
generators? Ms. Hapner and each of you. I would like to hear
your take on that, because many people are saying that it was
better before, and there is evidence that at least consumer
costs were much lower. We did not see the evidence of price
gouging, even though it may have been occurring.
Ms. Hapner. I agree that this has definitely turned into a
deregulation versus regulation debate. We still think that a
correctly structured market could work. It is certainly working
in other States. I think in retrospect, all of us who were part
of this process--and I worked on the restructuring--on
proposals for the last 7 or 8 years. All of us involved made a
series of compromises in order to get the kind of legislation
that would be unanimously passed, which it was. In retrospect--
and certainly it is always easy to do this in retrospect--the
way that the market was structured was designed to fail.
Obviously we did not do that intentionally.
It is very easy to be critical right now of one or all of
the parts of the electric restructuring that we took on in
California. Admittedly, we are California, we are an easy
target for others. But knowing what we know now about how to
establish the market, knowing what we know now about the impact
of supply and demand and the record growth that we faced, we
clearly could have done a much better job of restructuring this
market.
Mr. Pickett. I share all of those comments and would now
look to the future and say we need to do two things, in my
judgment. As I said in my opening comments, the first thing we
have to do is take the time out and fix this thing so that we
can fix it while customers are not being gouged. We just have
to stop this. The market does not work. But beyond that, I
think it can be fixed. There are electricity markets around the
country that work.
We believe that generation is probably best provided in a
competitive market that is workably competitive, that provides
the kind of price restraints that competitive markets provide
and provides the kind of rigor that best allocates capital to
the most efficient projects that wind up benefiting customers.
But we are faced with a real crisis here and we cannot just
wish away that crisis and rely on the ideology of getting to
the workably competitive market to carry us through the next 2
years.
Ms. Lee. Mr. Vanech.
Mr. Vanech. It is my strong view that a correctly
functioning deregulated market is the best situation for
everyone. PJM, Texas, you can look to those markets, they
really work pretty well and people have actually saved money.
The other big issue I think is utilities need the ability
to create a balanced portfolio of energy purchases. What that
means is, it should not be all long term and it certainly
shouldn't be all short term, as evidenced by California. It is
like any other investor putting a portfolio together, not
everybody buys high tech stocks presumably and not everybody
buys only bonds. There has got to be risk and reward and an
understanding by the regulators that long-term contracts from
time to time may be more expensive than short-term
alternatives, but on the other hand, they are also going to be
less expensive at certain times. So I think there needs to be a
balanced portfolio approach.
I think the other thing I would add is there needs to be a
clear way for developers to come in and actually get things
done. That means both from a regulatory perspective and from an
environmental perspective there needs to be a clear path to get
projects built. Nothing will scare a developer away who is
putting millions and millions of dollars at risk before we ever
know we have a project if we cannot see--knowing if we follow
the rules and go down the correct path, that--you know, we do
what we are supposed to do, that we can get a project put
together. That is what needs to be done. There needs to be
confidence in the market for people to commit significant
amounts of capital. Again, if you go back to Texas and go back
to PJM, just to take those two markets, significant amounts of
new capacity have been added over the last 2 years and continue
to be added because people feel that if they put their money in
the market there is no guarantee of return certainly, but at
least there is an assurance that there will be a fair process
in the market.
Ms. Lee. Mr. Chairman, can we have 30 seconds to hear Mr.
Desrochers' response.
Mr. Burton. [Nods.]
Ms. Lee. Thank you very much.
Mr. Desrochers. I would echo the statements and the
comments that the other panel members stated. I would just add
one more statement, in that I do believe that we need a
comprehensive National and State energy policy that would
include a focus on renewable energy. That is all.
Ms. Lee. Thank you very much.
Mr. Burton. Mr. Horn.
Mr. Horn. I am going to ask one question and then turn it
over to Mr. Ose. I am fascinated by the two gentlemen's
testimony, and I wonder, since every group in America always
has an office in Washington, DC, and the QFs that do all of
these good deeds, is there a national group in Washington
speaking for you?
Mr. Vanech. I think there used to be and it merged with a
group known as EPSA, that you may be aware of, Electric Power
Supply Association, and that group tends to represent
generators. I am not aware of a specific QF industry group.
Mr. Horn. How many units are there in the Nation similar to
yours? Are we talking 10,000, 5000?
Mr. Vanech. If I had to guess, I would say--boy, that is a
tough question. I would just hazard a guess and say maybe 1,000
to 2,000. I might be on the high side.
Mr. Horn. It is very interesting that you can be the
balance wheel here and solve some of these problems.
I now yield the rest of my time to the gentleman from
California, Mr. Ose.
Mr. Ose. Thank you, Mr. Chairman.
I have just a couple of simple, straightforward questions
and they are based on a concern that our colleagues in other
States not have to experience in their States what we are
experiencing in ours. My question is, if other States are
looking at a deregulation--quote, deregulation proposal, would
you recommend that those States allow utilities, IOUs, QFs,
whatever, the ability to enter into long-term contracts without
undue after-the-fact review? In other words, my question is,
should those other States give their power companies the
option--not the mandate, but the option of entering into long-
term forward contract deliveries? The second question is
whether you would suggest to those other States allowing
generators direct access to the marketplace? In other words,
the ability to sell not only here but there. Ms. Hapner.
Ms. Hapner. I think if I was advising another State on how
to go forward or in the alternative how to do things
differently, I would first of all not require that the
regulated utilities buy and sell from only one market.
Mr. Ose. I need----
Ms. Hapner. I am getting to----
Mr. Ose. I do not have a lot of time here. I have four
people I want to ask this question.
Ms. Hapner. OK. Yes, they should be able to contract in the
market with clear standards ahead of time, so that down the
road they shouldn't be second guessed for their decision.
Mr. Ose. If there are other suggestions that any of you
have beyond the two questions I have, we would be happy to take
those in writing.
Ms. Hapner. Great, I will do that.
Mr. Ose. Now you would support--if other States are
considering restructuring, your advice would be to allow the
utilities in their States to engage in long-term forward
contracts without undue reviews or second guessing or however
you want to describe it?
Ms. Hapner. Without undue review after the fact. I think it
is quite appropriate before the fact to lay out criteria.
Mr. Ose. OK. Mr. Pickett, would you agree with that?
Mr. Pickett. Yes, sir.
Mr. Ose. OK. Mr. Vanech.
Mr. Vanech. Yes, fully. In addition, I might sort of
propose that the committee consider resurrecting the original
intent of PURPA. One thing PURPA did is it got a lot of new
plants off the ground, and the reason it did is because
utilities were able to enter into long-term contracts. I will
keep it quick. Basically the generator knew they could recover
their capital.
Mr. Ose. As to the PURPA question, I would be happy to take
your other suggestions in writing.
Mr. Vanech. The answer is yes then.
Mr. Ose. Paul.
Mr. Desrochers. Yes. The answer is yes.
Mr. Ose. OK. On direct access, is that a tool other States
ought to allow their generators--their intrastate generators to
utilize?
Ms. Hapner. I apologize, Mr. Ose, but I am not sure I
understand what you mean by direct access.
Mr. Ose. OK, let me just cite an example. Let us say that
Mr. Desrochers' plant has the opportunity to contract in a new
market environment with any number of people rather than being
forced to sell to a single point of purchasing. Is that
something that would help this?
Ms. Hapner. I think that all the markets work better if
they are unfettered. I do think though that where contracts
already exist between two parties, they need to be respected.
Mr. Ose. Bilateral contracts?
Ms. Hapner. Yes.
Mr. Ose. OK. Mr. Pickett.
Mr. Pickett. Fundamentally I think that direct access, by
which I take it to mean generators selling directly to other
retail customers, is not a useful tool in the long run because
the market is not one in which choices--the product is
fungible. There are not a lot of choices that can be made.
Mr. Ose. What about wholesale?
Mr. Pickett. At wholesale there should be an open market. I
think to allow unfettered direct access allows the big users to
cream skim and the small customers and the residential
customers wind up bearing the burden.
Mr. Ose. But you would support wholesale direct access?
Mr. Pickett. Wholesale, yes, sir.
Mr. Ose. OK. Mr. Vanech.
Mr. Vanech. Yes, anything to enhance liquidity will
increase the supply and should actually make prices better--
lower.
Mr. Ose. Do you think the solution--I mean, you suggest
supply is--I am going to ask you a question in writing--and you
can respond to it--on the supply and demand issue.
Paul.
Mr. Desrochers. Yes, I would agree with wholesale direct
access.
Mr. Ose. Mr. Chairman, I want to come back to something
Congresswoman Lee said, and I heartily agree with her. I have
said this time and time again. This is not a question of
California's environmental standards being too tough, and I
will tell you why. The technology that is available today to
convert natural gas to electricity, as an example, is 50
percent more efficient at that conversion with emission levels
25 to 50 percent below technology that was developed as
recently as 8 or 10 years ago. We can bring on line plants that
take that same amount of gas and instead of creating 10,000
megawatts, create 15,000 megawatts with 25 to 50 percent fewer
emissions. The consequence of that is, if we would expedite
siting licensing and allow the supply to come on line, we would
have a temporary uptick, as you would expect, in emissions, but
as those new plants come on line the old plants would fall from
a base position in the load to a standby or peak load and that
curve would come down on the emissions. So I agree with
Congresswoman Lee. I have been beating my brains out trying to
get that message out and I just wanted to reinforce it.
Ms. Lofgren. Would the gentleman yield for just one
comment.
Mr. Ose. Subject to the chairman's discretion.
Ms. Lofgren. Just in support of your statement and
Congresswoman Lee's, although no one is thrilled about it,
practically every large user of electricity in this valley that
I know of has backup generators that are diesel. When those
diesel generators get powered up this summer, as they
inevitably will, the air quality will be severely impacted. So
everybody really wants these cleaner plants to be approved and
built as quickly as possible.
Mr. Burton. I want to thank you for your diligence and your
patience and your ability to sit there that long.
I would just like to say that the last series of questions
that Mr. Ose put to you, every one of you were in favor of free
market principles and that flies in the face of the price caps
you were talking about. So I presume you want the price caps
removed as quickly as possible once this crisis is over, is
that correct?
Ms. Hapner. That is correct.
Mr. Pickett. Yes, as long as we take the time to get it
right next time.
Mr. Burton. OK. Do you all agree with that?
Mr. Vanech. Yes.
Mr. Desrochers. Yes.
Mr. Burton. I want to thank you very much. I want to thank
my colleagues and our colleagues who are not members of the
committee for spending your time with us today. You were very
helpful. Thank you very much. We stand adjourned.
[Whereupon, the committee was adjourned at 2:15 p.m.]
ASSESSING THE CALIFORNIA ENERGY CRISIS: HOW DID WE GET TO THIS POINT,
AND WHERE DO WE GO FROM HERE?
----------
THURSDAY, APRIL 12, 2001
House of Representatives,
Committee on Government Reform,
San Diego, CA.
The committee met, pursuant to notice, at 10 a.m., in the
County Board of Supervisors, 1600 Pacific Highway, room 310,
San Diego, CA, Hon. Dan Burton (chairman of the committee)
presiding.
Present: Representatives Burton, Horn, Ose, Hunter, Filner,
and Davis.
Staff present: Caroline Katzen, professional staff member;
Robert A. Briggs, chief clerk; and Elizabeth Mundinger,
minority professional staff member.
Mr. Burton. If I can get everybody to take a seat. Can you
hear me all right? Is this mic on? If everybody could take
seats, we could close the doors.
Good morning. A quorum being present, the committee will
come to order. I ask unanimous consent that all Members' and
witnesses' written opening statements be included in the
record, and without objection, so ordered.
I ask unanimous consent that all articles, exhibits, and
extraneous or tabular material referred to be included in the
record, and without objection, so ordered.
I ask unanimous consent that Members of Congress who are
not members of the committee be allowed to participate in
today's hearing, and without objection, so ordered.
I ask unanimous consent that all questions submitted be in
writing to the witnesses, and their answers be included in the
hearing record. I ask unanimous consent that questioning in
this matter proceed under clause 2(J)(2) of House rule 11 and
committee rule 14, in which the chairman and ranking minority
member allocate time to members of the committee as they deem
appropriate for extended questioning, not to exceed 60 minutes
equally divided between the majority and the minority. And
without objection, so ordered.
I want to welcome the members of the committee who are here
with us today: Congressman Ose, who is from up North, around
Sacramento; and Congressman Horn who are both subcommittee
chairmen on our committee. Congressman Horn, is from the Long
Beach area. We also from this region have Congressman Duncan
Hunter, Congressman Filner, and Congresswoman Davis. And we
appreciate you being here and participating in the hearing
today.
I want to welcome everyone to our third day of hearings on
the energy crisis here in California. I want to say a couple of
things about why we are here. We came here because we want to
play a constructive role in the crisis. We did not come to
point fingers at anybody. We came to listen and learn. We want
to see if there are ways the Federal Government and the State
government can work together to get past this crisis. But first
we need to understand the problems.
This summer, Congress is going to have a serious debate
about our country's energy policy. It is a debate that is long
overdue. Energy policy has been neglected for far too long. On
the Government Reform Committee we have been holding hearings
to prepare for this debate. We study our oil and gasoline
markets. It is very clear that we need to have more domestic
production to reduce our reliance on OPEC.
It is clear that we need to have more refinery capacity to
avoid the kind of disruptions that we had in the Midwest last
summer. We have studied the problems in the natural gas
markets. America has abundant supplies of natural gas, but
prices are skyrocketing because those reserves are off-limits.
Today we have the technology that makes it environmentally
safe to drill for natural gas. As demand keeps growing, we must
increase our supplies. This week we are focusing on
electricity. If you want to learn about the problems in our
electricity markets, then you have to come to California.
We have tried to look at this problem from every angle. We
have heard from State regulators. We have heard from the
Federal regulators. We have heard from the major utilities. And
today we will hear from the generators.
As we have gone through this process, one thing has become
very clear to me. When you boil it all down, the root problem
here is supply and demand. One of our witnesses in Sacramento
was an independent energy analyst. He told us that over the
last 5 years, California's economy has grown by about 32
percent. But at the same time, energy generation in the State
actually went down--it fell. A major new power plant has not
been completed in this State in the last 12 years. The head of
the ISO told us that he expects to have a 3,000 megawatt
shortage during peak periods this summer, and that is very
serious.
Everyone agrees that more generating capacity is needed.
But that is going to take time. The question is: How do we
manage the situation in the meantime? Some people say price
caps are the answer. My concern is that price caps for
California may cause power to be diverted to other States where
sellers can get better prices. Three out of our four energy
experts who testified in Sacramento said that if FERC reimposed
price caps it would lead to more blackouts this summer. Out of
11 Governors of the Western States, 8 are opposed to price caps
on the Western grid. What is more, the Washington chairman of
the FERC testified yesterday that they only have jurisdiction
over about 25 percent of the electricity sales in California.
If they impose rate caps on the 25 percent, the electricity
will flow to the other 75 percent where prices are not capped.
So I do not think that price caps are a panacea.
We have also had a running debate about long-term
contracts. The press has reported that the Public Utilities
Commission last summer blocked the major utilities from
entering into long-term contracts that would have saved
billions of dollars. On Tuesday we heard from the president of
the Public Utilities Commission, Loretta Lynch. She insisted
that the PUC did everything necessary to allow the utilities to
enter into long-term contracts. She went so far as to say that
they published final guidelines that gave the utilities
everything they needed.
Then yesterday we questioned officials from Cal Edison and
PG&E. It was like night and day. They told us that there was no
way that they could enter into those contracts under the PUC's
rules. Mr. Pickett, from Cal Edison, said it would have been
like incinerating or burning money. They said that to this day
the PUC has not published the guidelines that are needed. Now,
this is very disturbing. The general counsel from FERC talked
about long-term contracts on Tuesday. He said that if San Diego
Gas & Electric had entered into a long-term contract a year
ago, they would have saved roughly $5 billion last year. SDG&E
will be testifying today.
Today we are going to focus on the power generators. We
have representatives from Reliant and Williams testifying
today. As prices have skyrocketed, the generators have been
accused of profiteering and price gouging. Today they will have
a chance to defend themselves, and talk about why this market
is not working like it should. Williams and their partner, AES,
have been accused of manipulating the market last year. The
Federal Electric Regulatory Commission said they intentionally
prolonged the shutdowns of two of their units where they were
obliged by contract to provide electricity at a lower rate. As
a result, electricity had to be purchased from two other AES
units at 10 times the cost. FERC has ordered them to repay $10
million. We are going to have a lot of questions about that
case today.
On our first panel we have several distinguished
businessmen from the San Diego area. As we all know, San Diego
ratepayers have been hit harder than anyone across the country
this year. We want to hear from them, how that has affected
their competitiveness. We also have added one new witness, Mr.
Gregory Conlon. He was the president of the Public Utilities
Commission under Governor Wilson. At our first hearing, the
current president, Loretta Lynch, had a number of criticisms of
her predecessors, and Mr. Conlon is here to respond. I believe
we have added one other person, Mr. Bill Horn, to the first
panel. He is the chairman of the San Diego County Board of
Supervisors.
Before we get to our first panel, I better allow my
colleagues to say something. So why do I not start with you,
Mr. Filner. Do you have an opening comment you would like to
make?
STATEMENT OF HON. BOB FILNER, A REPRESENTATIVE IN CONGRESS FROM
THE STATE OF CALIFORNIA
Mr. Filner. I thank the chairman for the courtesy of
appearing with him on the committee. I thank you for coming to
San Diego, which is ground zero, really, in this energy crisis.
I am glad to have Mr. Horn, who is the chairman of our Board of
Supervisors. You are sitting in his chair, Mr. Chairman.
Mr. Burton. It is a very comfortable chair.
Mr. Filner. And unfortunately, in San Diego we just had
another deadly shooting yesterday, so we are very sensitive
about these issues here in San Diego.
As I said, you are at ground zero of our crisis. Last
summer San Diego was the first area, in fact, the only area in
California, to have complete deregulation of both our retail
and our wholesale prices. What occurred there, Mr. Chairman,
was a disaster, and disaster quickly. Within the first month of
deregulation, bills had doubled for businesses and for
individuals. Within 2 months they had tripled. And there was no
end in sight, and no explanation. Can you imagine, Mr.
Chairman, a small business person who was paying $800, faced
with a bill of $2,500? Can you imagine a person on fixed income
paying $50 or $60 a month, all of a sudden up to nearly $200 a
month? There is no way people can survive in this situation.
There was no way that we could continue.
A revolution broke out here, Mr. Chairman. This is a very
conservative county. And yet very conservative school boards
and city councils tore up their utility bills. There were
rallies. There were demonstrations. And, in fact, the State put
a temporary cap or a deferred cap on our retail prices which
said we will stem the bleeding, but you will have to pay in the
future.
Now, why did that occur? The demand was not any more than
the summer before. The temperatures were not any hotter. It was
clear, Mr. Chairman, that this was, at root, when it started
here in San Diego, not a supply and demand problem, but a
manipulation of the market by a group of people who had control
over the energy coming into our area and into our State.
Prices had no relation to cost, no relation to supply and
demand. And I will tell you, Mr. Chairman, that when we asked
the Federal Energy Regulatory Commission to investigate the
sudden rise in prices in San Diego, they did investigate. And
what did they find? That prices were unjust and unreasonable!
In fact, under the Federal Power Act, that means they were
illegal. FERC found the prices that California was paying to be
illegal. And yet they did nothing--they did absolutely nothing.
And what they did, by their inaction, was to say to the energy
cartel, who we will have members here today before us, ``Go rob
the State blind.'' That is what they said to this energy
cartel. And boy, did they rob the State blind.
You know what we are paying, Mr. Chairman, for energy; we
are paying over $2 million an hour, maybe $3 million. Up to $50
million, up to $80 million a day, almost $2 billion a month.
This energy cartel has taken almost $20 billion out of our
State in the last 10 months--$20 billion was robbed from our
economy. Schools cannot educate because they are paying their
electricity bills. Libraries cannot buy books because they are
paying their electricity bills. The guy yesterday in a senior
center in my district, a half block from my office, who went on
a rage, had been evicted from his apartment because he refused
to pay an increase in rent, and that increase in rent, Mr.
Chairman, was caused by a raise in electricity prices.
This is disastrous, what is occurring. And I will tell you
we have tight supplies, and the Governor of California is doing
everything he can to increase the generation of electicity. We
have to conserve more, and the Governor is doing everything he
can to encourage that. But the problem is the price structure.
The wholesale prices are criminal. They have been found to be
illegal, and we are still paying them. And it is because of the
criminal prices that this is occurring.
Mr. Chairman, we have 45,000 megawatts capacity in
California. The demand right now is 30,000 megawatts, because
it is not the summer. And yet we had blackouts. Why? Because
certain suppliers were not getting paid, and they just said we
cannot supply. This is not a supply problem, it is a
manipulation of the market.
And the folks that will appear before us later today have
had incredible increases in profits in the last year. They have
increased dramatically their ratings in the Fortune 500. They
are taking the money, and they are killing off the economy of
California. This threatens the West, it threatens the entire
United States.
I have a bill which is supported by my colleague, Mr.
Hunter and Ms. Davis, which says let us establish cost-based
rates on wholesale prices, and more important, Mr. Chairman,
let us refund the overcharges to California consumers and
utilities. If that bill passed tomorrow, California would be
made whole. We still would have to try to deal with some
issues, but we would be made whole tomorrow. So I urge us to
look very carefully at this legislation.
[Applause.]
Mr. Burton. Let me just say to the audience that we
appreciate your being here. At some of our hearings we have had
some disruptions, and I try to tell the audience that we would
like for them to be here. We appreciate their attendance. But
if there are disruptions, then we have instructed the police--
the Capitol Hill police and the local police and sheriff to
remove those people from the room.
So we want you to stay. We want you to get as much
information as possible. But it is very important that there be
control of the hearing.
With that, I would like for the Members to try to stick to
the 5-minute rule as close as possible. So we will now
recognize Mr. Ose.
Mr. Ose. Thank you, Mr. Chairman. For brevity sake, I will
submit my statement to the record.
I do want to welcome our friends from San Diego, Mr.
Hunter, Mr. Filner, and Ms. Davis. I was most appreciative of
Ms. Lofgren and Ms. Lee and Mr. Honda joining us in San Jose. I
regret that we did not have any of our friends from the other
side of the aisle in Sacramento. I have found the testimony
very compelling, and to the extent that our colleagues have
joined us for just today's hearing, have the opportunity to
review that, I am hopeful that it will help them as much as it
is helped me. So thank you, Mr. Chairman.
Mr. Burton. Very good. Ms. Davis.
STATEMENT OF HON. SUSAN A. DAVIS, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF CALIFORNIA
Ms. Davis. Thank you, Mr. Chairman. I appreciate your being
here, and I appreciate the folks here, all of you here today.
And I would like to share with the audience one of the
concerns, of course, that we did hear about at the hearing on
Tuesday night. And I regret that one of the great resources
here in San Diego, the San Diego's Utility Consumers Action
Network is not part of the panel or the testimony today,
because I know they have been providing a vital resource to all
of us, and I wanted to just acknowledge that for the record.
I do appreciate the fact that you are all here because you
recognize that this is not just a California crisis; in fact,
this is a crisis today that threatens our national economy. And
it is important that the Federal Government take more forceful
action to address the crisis. And so far it is clear that we
feel that has not happened, and in fact, that the action has
been sorely lacking.
I believe, and I know my colleagues believe, that the
Federal Energy Regulatory Commission has failed to step up to
the plate. And in determining that California is paying unjust
and unreasonable prices for energy, it has, nevertheless,
stepped away from its obligation to truly look at that, to
truly investigate, and to determine why that is the case. It
has failed to impose, as well, the cost-based rate
stabilization that we think would bring about fair and
reasonable prices.
I know that at last week's hearing Commissioner Linda
Breathitt demonstrated a new willingness to consider some
regional price stabilization, and I applaud her for her change
of attitude. And I hope that FERC today--that the general
counsel will dispense with a number of their philosophical
statements on the beauties of this free market, and offer some
useful information on FERC's legal authority to act where the
free markets do not yet exist.
Again, I want to thank Congressman Hunter and Congressman
Filner for their energy on this issue, for your leadership. We
have met as a California delegation, and I know that we feel
very focused, and we certainly want things to change. As a San
Diegan, as someone here, and associate myself with Congressman
Filner's remarks, as well as, I am certain, Congressman
Hunter's. Because what we experienced in San Diego early on was
almost a feeling of the death of a city.
And what we predicted in many cases has certainly come
true. We acted responsibly here. In many cases, San Diegans
actually kept the lights on for the State because of our
conservation. And at the same time, we know we have to do our
part. But, Mr. Chairman, we believe that there is a greater
part to do on the part of our government, and we hope that this
hearing is helpful to everybody in looking at those issues.
Thank you.
Mr. Burton. Thank you, Congresswoman Davis. Mr. Horn.
Mr. Horn. Thank you, Mr. Chairman, but I am going to waive
my 5 minutes or whatever. Let us get down to the question and
answers.
Mr. Burton. We appreciate, as always, your brevity.
Mr. Hunter.
STATEMENT OF HON. DUNCAN HUNTER, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF CALIFORNIA
Mr. Hunter. Thank you, Mr. Chairman. And I thank Steve for
giving me his time. Very kind of him. [Laughter.]
And do not remove anybody for laughing at that.
Mr. Chairman, thank you, as an old friend, and all my
colleagues, for being here. And Mrs. Davis, Mr. Filner, for
your work on this issue.
Mr. Chairman, this is a problem that really has a couple of
sides to it--one, pricing; the other, supply of energy. And we
did have FERC in front of us here a while back in a hearing
that Mr. Barton chaired. And I pointed out, and Mr. Filner also
did, that the prices at one point on the exchange actually
increased. This was verified by the head of the exchange who
was here. They went up 9,000 percent in a matter of minutes.
Now, that is not a free market operating; that is the lack of a
free market. And that was the equivalent--and that was paid and
reflected in these bills across the State. That reflected the
equivalent of a $200 gallon of gasoline.
And there is a statutory duty that is attached to FERC that
says that they have the duty, and courts have subsequently said
the duty, not the option, to reform unreasonable rates. I think
a $200 gallon of gasoline is unreasonable. And they have now,
somewhat belatedly and many months later, come in with orders
for some fairly small refunds. But certainly you had a price
gouging. When you have a 9,000 percent increase, that is price
gouging, and that has nothing to do with free enterprise.
The other aspect of this that is very interesting is this,
typically, if you have a bakery on your side of the street and
you are charging $5 a loaf, the way the free enterprise system
operates is that other people build bakeries on the other side
of the street, they charge $1 a loaf, and the consumer wins. So
when prices go up, typically supply goes up, because other
people get in the business.
Because of a lot of very powerful political forces in
California--some of them the environmental forces--we, as you
have said, have not built a generating plant in some 12 years.
So when prices went up and we have--basically we are in what I
would call nothing short of paralysis in terms of moving
quickly to build generational plants. So when prices went up in
the summertime last summer, a number of people said wait until
winter gets here, when we are not running our air conditioners.
That means the demand will go down from about 45,000 megawatts,
to about 33,000, it will go down almost 30 percent. And prices
will go down.
When the winter got here and we went down, in fact, in
demand by 30 percent, the generators turned to us and said you
know, we have had some problems at the plant. Looks like supply
just went down 30 percent, too. Supplies are still tight. Now,
that is not free enterprise, that is John D. Rockefeller owning
all of the kerosene in the United States and telling us the
times are tough and we are going to have to see a shortened
supply.
On the other side of the equation is the supply problem.
And that is a problem in which you had two unusual
participants. One was the energy industry which took advantage
of an opportunity to, on this exchange, this futures market
that we created basically in California, to get the highest
possible price for their product.
But aiding and abetting them was the environmental lobby.
And if you were sitting in a board room, I would say, in an
energy company, and you were asking one of your analysts if
anybody was going to come in and compete with you in
California, thereby driving the price down, your analyst would
say do not worry about it. If these other competitors who
compete with us in other States try to build something in
California, when the Sierra Club gets finished with them it
will be 20 years before they build a power plant. So you had an
unusual situation in which the supply was constricted. And it
was constricted by some partners who on most occasions do not
come together for any common cause.
And so what we have right now is, we are about 2 months out
from summer. We know that our air conditioners are going to be
turned on in the summertime. We know that industry is going to
need lots of power. And we have to do something that government
is not very good at doing, and that is building something fast.
We can do it in California. We did it when we had the
earthquake. We did not wait for massive studies and reports and
the Endangered Species Act and all of the other regulations and
laws to work themselves out over 2 and 3-year time periods
before we acted to rebuild infrastructure that was damaged by
the earthquake. We jumped right in.
And what we need to do today is to build supply. That means
we have got to build power plants in California, and in the
interim, we can move in some of these high tech power plants
that we have, that we built in fact in San Diego County, that
Solar builds, a Caterpillar subdivision. They built a great 13
megawatt generator that produces electricity very efficiently.
And we sell it around the world. We sell it almost every place
except in our own State, which it is very, very difficult to
get this stuff sited.
So I would just ask you, Mr. Chairman, in closing, to look
at a couple of things. One is a bill that I have that is
directed toward summertime. And it says if you have a generator
in the State of California, you can turn it on. Now, that seems
to be elementary. But you cannot turn it on right now. You will
have all types of agencies, environmental and otherwise,
closing you down. So we have to have the right to turn on
whatever we have got, whether it runs on diesel, natural gas,
or whatever.
I have got another bill that says that the President and
the Governor can waive siting requirements--that is, the
bureaucracy that puts off siting of power plants for years and
years--and move quickly to build power plants.
And the last one that I mentioned, the price problem, it
gives the Secretary of Energy the right and the same power as
FERC to reform unreasonable rates. And I think there is a
difference between price caps or price fixing or price setting,
and allowing energy to increase by 9,000 percent in 60 minutes.
Thank you, Mr. Chairman.
Mr. Burton. Thank you, Mr. Hunter, for that very
comprehensive statement. And that first bill I think is--I have
not seen the other two, but that first one seems reasonable to
me, and I would like to be a co-sponsor of that one. And I will
look at the other two.
We will now go to our first panel. Mr. Sam Hardage, who is
the president of Woodfin Suite Hotels; Mr. Bill Horn, who is
the chairman of the San Diego County Board of Supervisors; Mr.
Douglas Barnhart, who is president of Douglas E. Barnhart,
Inc.; Mr. Richard Thomas, the vice president of Alpine Stained
Glass; Mr. Mark Seetin--I think he had to cancel.
Is Mr. Mark Seetin here? Oh, you are there. Thank you for
being here. Mr. Mark Seetin. He is the vice president of
governmental affairs for New York Mercantile Exchange. And Mr.
P. Gregory Conlon, who is the former PUC president under
Governor Wilson. Would you all please stand, please. Raise your
right hands.
[Witnesses sworn.]
Mr. Burton. You will each be recognized for 5 minutes. And
because we have a long schedule, I hope you will stick as close
to that as possible. And we will start with you, Mr. Hardage.
STATEMENTS OF SAM HARDAGE, PRESIDENT, WOODFIN SUITE HOTELS,
LLC; BILL HORN, CHAIRMAN, SAN DIEGO COUNTY BOARD OF
SUPERVISORS; DOUGLAS BARNHART, PRESIDENT, DOUGLAS E. BARNHART,
INC.; RICHARD THOMAS, VICE PRESIDENT, ALPINE STAINED GLASS;
MARK SEETIN, VICE PRESIDENT OF GOVERNMENTAL AFFAIRS, NEW YORK
MERCANTILE EXCHANGE; AND P. GREGORY CONLON, FORMER PUC CHAIRMAN
Mr. Hardage. Thank you, Chairman Burton and members of the
committee. My name is Sam Hardage, and I am chairman and CEO of
Woodfin Suite Hotels, a national hotel company with 18
properties in 11 States. Here in California we operate
properties in San Diego, Emeryville, Sunnyvale, Newark,
Cypress, Brea, and Fullerton.
It is my pleasure to speak to you today concerning the
impact the current electricity crisis is having on my company,
and the travel and tourism industry in California. The
committee is doing the people of California a great service by
highlighting the impact of this crisis on various sectors of
the State economy. Only through a thorough examination of how
this crisis can and will affect jobs and income can the
magnitude of this crisis be understood.
For all of my life, and I suspect the lives of most
Americans, we have not even given a second thought to the
simple event of turning on a light switch. We have always had
adequate power to make our lives better. Indeed, the poorest of
our citizens enjoy daily power and convenience that only kings
and queens of a few centuries ago could command. In fact,
cheap, abundant power has enabled Americans to participate in
the most awesome growth of wealth in the history of the world.
Without reliable, abundant power, none of the industrial
revolution would have been possible. Our citizens would be
impoverished, and our lives infinitely worse. And yet, here in
California, we seem to be trying to drive our citizens backward
in time to an era of shortages and scarcity. Californians need
to examine our priorities and decide what kind of future we
really want as we begin the 21st century. The insane
environment that we find ourselves in today will continue to
reduce the availability of power, increase the level of misery
for all Californians, decrease the number of jobs available for
our citizens and our children, and make a mockery of the
sacrifices that so many have made to build our mighty State.
I am optimistic that this dark view can be prevented, since
the situation that we find ourselves in is entirely man-made.
Our leaders in California need to stop blaming everyone else
for the current situation, and take responsibility for their
own actions. Providers of electricity, natural gas, and other
sources of energy should be encouraged and welcomed into
California with open arms, not driven away by shrill, mean
voices threatening seizure, taxes, and more onerous regulation.
I am hopeful that these hearings will provide the impetus for a
return to sanity in California.
I am deeply concerned that the human cost in California
will be enormous unless we correct the present situation. We
are in the hotel business, which is one of the largest
employers in the State of California. Our industry is gravely
threatened by the specter of rolling blackouts and unreliable
energy supplies. The effect on our State's business environment
will be devastating, starting this summer. We have already seen
many businesses sharply modify their travel plans, greatly
reducing the number of room nights spent in California.
In March alone industry income dropped 3.9 percent in the
San Francisco Bay area. Imagine yourself making a family
decision about where to vacation this summer. Most tourists
would rather not run the risk of being stuck in a hotel
elevator, sitting in their hotel room in the dark, or otherwise
having vacation plans interrupted by blackouts. Vacationers
seeking warm weather without these risks may choose other
vacation destinations, ranging from Florida to Hawaii.
California government officials have made clear that
rolling blackouts will most likely occur in the early summer
season. The fact that these threats persist can only have a
chilling effect on families who are now planning their summer
vacation. Fewer tourists means not only more empty hotel rooms,
but also downward pressure on prices for those rooms we are
able to sell.
The impact of this ongoing uncertainty will not be confined
just to the tourism industry. Executives with major employers
in California have indicated that they will curtail expansion
in the State until the power crisis is over. With 82 percent of
our company's business coming from the corporate traveler,
fewer business expansions will have a direct impact on our
company's occupancy rates and revenue streams.
Other States have been quick to exploit the uncertainty
here in California, and have launched public campaigns to lure
businesses out of State. One State recently sent flashlights to
Silicon Valley executives as a reminder that their State may
not have California's sun and palm trees, but their lights do
stay on.
I am concerned that the sum of these consequences for our
company could force us into a new round of cost-cutting
sometime this year. With real estate costs, taxes, and other
overhead costs fixed, skyrocketing utility bills would force us
and other hoteliers to look to our labor force to bring cost
into line, to prevent us from going into the red.
Those who own and operate hotels will not be the only ones
to suffer as this crisis wears on. Unfortunately, the greatest
loss will come to our treasured employees, who will be hit
hardest by layoffs and job reductions due to the slowdown in
the industry. Couple that with the increase in the personal
misery felt as our employees also suffer at home with the
specter of rolling blackouts. That is a recipe for a long, hot
summer indeed.
The current situations has forced our hotels to impose a $4
per night surcharge on all of our guests. As an operator of All
Suite Hotels, we attract a high number of extended stay guests.
A typical corporate guest with a week-long stay now sees their
bill rise by $28, purely for electrical costs. Over the past
year our California hotels have experienced a 313 percent
increase in our electric bills, and a 200 percent increase in
our natural gas bills. The Loeas Coronado Bay Resort here in
San Diego has experienced a 357 percent increase in its
electricity cost, despite a 4-percent drop in consumption.
California has experienced extraordinary growth during the
past few decades, precisely because it is such an attractive
place to live, work, and play. While some parts of the country
wrestle with the problem of out-migration, California has had
no such problems. California is home to thousands of leading
companies. The presence of these companies has helped drive
California incomes up, and made the American dream possible for
millions of Californians. But that future, which once appeared
so bright, has been dimmed by threat of unreliable power
supplies and skyrocketing cost. California and the people of
California deserve better.
Mr. Burton. Thank you very much, Mr. Hardage. Our next
witness will be Mr. Horn. Mr. Horn, you are recognized for 5
minutes.
[The prepared statement of Mr. Hardage follows:]
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Mr. Bill Horn. Thank you, sir. I normally only give people
who testify 3 minutes, as Duncan Hunter can understand.
I want to thank you, Congressman Burton and members of the
committee, and Congressmen, for being here. I am chairman of
the San Diego County Board of Supervisors, and I am sure you
are aware, as you are here, of the many stories that have gone
on with the electric crisis in California and throughout the
West. While I would like to reiterate many of these stories, I
am sure you have heard them over and over again. I would like
to focus on what we in San Diego have been experiencing.
The effects of this new market system that allowed for
profiteering and market manipulation hit us hard last year. We
were the first. During the summer of 2000 residents saw their
bills jump over three times what they had been paying in the
previous year. As the hot weather began, and the increase in
demand, wholesale price for electricity climbed high, and
generators profited tidily from this. The county of San Diego
currently is $25 million over budget because of this electric
crisis. Those are services that would have gone to our
taxpayers, that have gone off to pay for the electric bills.
You may have heard of the numerous rallies, some of which I
organized, and town meetings that were brought before SDG&E,
and displaying the bills, and how the bills were hurting us.
The rally that took place, that we organized and took place on
San Diego Gas & Electric where residents burned their bills in
protest, currently pointing out, as we go through this rolling
blackouts which we just incurred a few weeks ago, that blackout
occurred when southern California had plenty of power to keep
the lights on. The problem is, the ISO ordered SDG&E to produce
the blackouts so that we could suffer like the rest of the
State did. And because of those blackouts, if SDG&E had not
cooperated with those, they would have been financially
penalized. And because of that, a number of our businesses
experienced shutdown. We had employees who went home in the
afternoon.
I am going to talk for a moment, and I brought you a tape,
and this tape is for your committee. This is a biotechnology
conference which I put on here in the county of San Diego.
Mr. Burton. And we will have it there for the record.
Mr. Bill Horn. We have over 500 firms involved in medical
research in San Diego. Of those firms, 250 are currently
involved in FDA approved drugs. These rolling blackouts
produced loss of experiments that had taken up to 3 years in
two firms. Because they had no prior warning of the fact that
the blackouts were coming and they could not put on secondary
power, their labs went down. And when they went down, they lost
3 years worth of medical experiment on FDA approved drugs that
were in the pipeline just because of the blackouts. They have
to have warnings. I have met with SDG&E to see if we cannot,
from now on, include those in the areas that get the prior
warning.
We have learned that firms in San Diego and California
cannot survive with the high energy costs in California, and
will likely be looking to move out of the State unless we can
come back with reliable supplies and a reliable market. One
such company is Idec Pharmaceuticals, which outlined the risk
of continued energy crisis on the health of their company. They
anticipated higher manufacturing costs, in part due to the high
energy costs. This firm, that is anticipating approval this
year of a new cancer drug, now has to explain to its customers
why the price tag of these drugs has risen, and could even
become unaffordable. It does not take into account the fact
that blackouts for any significant period of time could harm
the ability to manufacture the clinical and commercial
requirements of this product. These firms will look elsewhere
to do business if we do not solve this problem.
Many businesses now include in the power crisis as part of
their annual reports to alert their shareholders of the
significant impacts that are damaging earnings. Shareholders
will not stand by and watch their money go to generators. They
will pull out, and you will see an economic downfall never
before seen in California. As a businessman and someone who has
always been an advocate of the free market, I now find that
this crisis has put me in a position that I believe that we
need to place temporary wholesale caps on electric prices, not
only in California, but in the Western market. This must occur
to restore stability and reliability for residents, industries,
and customers in these States. I would suggest that at the
Federal level, also, you consider extending temporary emergency
emission credits to distributive generating facilities who come
online during a Stage 3 alert. We have a number of those
facilities in San Diego County that could come online. The
reason they do not is they will be penalized if they use up
their air credits. And so something we could do at the Federal
level is, during this emergency, until we can get the supply
back, extend to them those credits.
What we have not seen here in San Diego is a concern for
the wellbeing coming from Sacramento. I just returned from
Washington, DC, where I met with congressional leaders,
Senators, and the White House, including Spencer Abraham, the
Secretary of Energy. And I was surprised to learn that our
Governor has been conspicuously absent from D.C. And I am
concerned for the wellbeing of the residents and the economy of
San Diego and all of California.
If we cannot find solutions quickly, we will surely lose
our businesses, industry. And I know that San Diego cannot
afford it, and I am sure the State cannot afford it. As
chairman of the San Diego County Board of Supervisors, I urge
you to examine all the possible solutions to this crisis at all
levels. This is not just a California energy crisis anymore,
but it extends throughout the United States. All eyes are
watching to see what will happen here, and are fearful that if
California cannot resolve this crisis, then deregulation will
surely fail.
I want to thank you for coming to San Diego and for
listening to our testimony, and God bless you for a speedy
resolution of this crisis.
Mr. Burton. Well, thank you, Mr. Horn. We appreciate your
comments.
Mr. Barnhart.
Mr. Barnhart. Thank you for letting me be here today to
participate in this field hearing on today's energy crisis in
California.
The construction industry is feeling the effects of the
energy shortage, like many other industries. I am Doug
Barnhart, chief executive officer of the Douglas E. Barnhart
Co., based here in San Diego. We are a construction management,
general contracting firm, active in public and private
construction in San Diego and elsewhere. In fact, if you came
through Terminal 2 at the airport you might have seen our
handiwork, or when your plane was flying into San Diego, you
might have seen the sales enclosure at the convention center or
the new ballpark.
I am a member of the Associated General Contractors of
America. The 33,000 companies who are members of AGC are
beginning to evaluate the impact of the energy crisis on the
industry, and how the construction industry can play a role in
alleviating the energy shortage.
The construction industry is a lagging economic indicator.
While we have yet to see a dramatic drop in construction
spending, we can definitely see the beginning of a construction
slowdown based on the energy problems in the State. If the
California energy crisis precipitates a national energy crisis,
we will probably experience a national economic downturn that
will impact all industries. That is why it is important that
the crisis be dealt with rationally, methodically, and
carefully.
AGC believes that the solution to our energy crisis comes
from both energy conservation and energy production.
Construction can ease production and transmission shortages
through development of new facilities, and through the
retrofitting of existing facilities. Furthermore, the promotion
and production of energy efficient structures can promote
energy conservation. California is the world's sixth largest
economy. We have become synonymous with the technology boom. It
is ironic that the same energy that powered our rise to become
the world's technology leader is now threatening our tech-heavy
economy. Once the haven of high tech, concern over rising
energy prices and unstable power supply is opening doors to
other States interested in stealing our employers. The State of
Michigan has distributed glow-in-the-dark mouse pads; North
Carolina has sent high tech companies batteries.
The following are examples of construction delays. Cisco
Systems has placed two tech centers on hold, and is looking
into alternative sites outside California's borders. A southern
California refrigeration plant was recently canceled. In
addition, the diversion of State budget surplus causes strong
concern that funds set aside for infrastructure funding will be
diverted to fund State electrical purchases. If this happens,
schools, roads, bridges, and other essential infrastructure
projects could be delayed or canceled.
The San Diego Economic Development Commission, of which the
Barnhart Corp. is a member, conducted a survey of their
membership; 33 companies responded, which collectively employed
24,667 workers. Here is what they said. Average monthly energy
costs prior to June 2000, $57,000 a month; current monthly
energy cost, $134,150 a month. Average bills have increased
since June 2000 135 percent; 42 percent of those companies
invested in capital equipment to promote conservation; 82
percent had made operational changes to conserve energy; 67
percent said administration/business operations would be
negatively affected by blackouts; 33 percent, there would be
significant amounts of lost inventory, wasted inventory by
power outages.
The Barnhart Corp. mirrors the results of this survey. In
the first quarter of 2000 our energy costs totaled $20,000;
third quarter, they had exceeded $120,000 with the corporation
absorbing the majority of the increase. I have even run into
problems where owners now are refusing to take facilities,
avoiding paying the energy costs during the summers and
delaying taking them until the fall.
Tom Collier, an AGC contractor, closed his heavy equipment
rental company because of high fuel and utility costs. This put
14 individuals out of work. Tom closed his business because he
fears the construction market will be drastically affected by
the energy crisis.
Hazard Construction, long a mainstay in San Diego, reports
that during February 2001, employees were sent home in the
middle of resurfacing projects, causing tens of thousands of
dollars in losses due to blackouts.
Last month woman-owned AGC contractor I E Pacific
experienced an unannounced rolling blackout at 1 p.m. They were
in the process of posting accounts payable, lost all entries.
The office staff of nine people were sent home for the day.
Since the staff is salaried, they received no productive effort
for wages paid, solely due to the blackout.
Construction contractors often must submit time-sensitive
bids for projects. Every minute of the day is critical in
developing the best value for the owners. We are very concerned
what will happen if a blackout occurs on bid days. There would
be no power, no faxes, E-mails, phones. This communication
technology is essential in order to meet given deadlines. How
is a general contractor to coordinate a bid with its
subcontractors and provide responsible bids? What happens if a
blackout does not affect all bidding contractors equally? These
are just a few of the examples.
This problem is part a political problem. Government cannot
control retail prices despite volatile swings in wholesale
prices, as was the situation outside of San Diego. Any business
owner will tell you this is an impossible situation. While it
may be proper for government to step in and help pay for power
in life and death situations, it should not be involved in
keeping everyone from paying their fair share. A power subsidy
has a detrimental impact because, by artificially holding down
prices, it supresses the incentive to conserve power, and will
only delay the construction of new facilities.
We worry about the impact of the energy crisis. We can fix
this if we are permitted to use our God-given talents to
provide new production and transmission facilities. We have a
commitment to the community and the economy that is not shared
by certain groups who have used well-intentioned laws as a
means to impede much-needed construction projects. This is a
critical issue for the industry, my country, my State, my
hometown.
I hope that these hearings give you a better understanding
of what has caused the problems, and that you can develop a
strategy that ensures that the problems are not repeated in
other States or nationally. I hope you can design a balanced
response that can solve the problems here and elsewhere. I hope
you understand that
my company and the rest of the construction industry stands
ready to do our part to alleviate this crisis. Thank you very
much.
Mr. Burton. Thank you, Mr. Barnhart.
Mr. Thomas.
[The prepared statement of Mr. Barnhart follows:]
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Mr. Thomas. My name is Richard Thomas, and I am the vice
president of Alpine Stained Glass and Door located here in San
Diego. I am the founder of Alpine Glass, and been in business
over 25 years. Our company is quite diverse in the
architectural and stained glass industries throughout San Diego
and throughout much of the Nation.
We also distribute a lot of stained glass and related
products to the hobby and craft industry, and that is basically
through the Internet and worldwide sales quite often. Our main
warehouse markets bulk glass and related products to glass
studios, furniture and cabinet manufacturers, as well as craft
stores throughout the Nation.
California's power crisis is affecting the wellbeing of my
business in numerous ways, both directly, and even more
importantly occasionally indirectly. I have highlighted six
major obstacles that are currently facing us. No. 1 is our
procurement of inventory. Our major glass manufacturer just
outside of Seattle, WA, Spectrum Glass, was shut down on their
power in December 2000 when the electricity they receive--they
are an all-electric type of furnaces--was shut back and they
were not able to produce a lot of the glass we needed. This
created a situation of them not running the full line;
consequently, their glass production was diminished, and it
forced us to purchase glass manufactured in China. The glass
was not of a quality we use in our upper-end doors and panels
and entryways. This not only disrupted our schedule, the extra
labor to accommodate this was absorbed by the company. Most of
our jobs are contract.
The increases and fluctuations in power prices have created
surcharges added to our freight bills. These surcharges are not
normally a condition of freight contracts. This leads to
erroneous cost projections for us, as well as inaccurate quotes
to our customers. It degrades our reliability, and customer
relations are slowly declining. Because of that, we have to
keep adjusting for it. The method and amount of applying these
charges varies widely from either the manufacturers or from the
freight companies. What is good today may not be good tomorrow.
The power crisis has greatly increased our overhead costs
for our utility and power bills. It has been up as high as 400
percent. All sheet glass and most of our material products have
increased by a minimum of 10 percent since the first of this
year, 2001. This is due to elevated manufacturing, not just
normal inflation.
Alpine Glass has an extensive program of classes for
training new students in the art of stained glass, as well as
many seminars and multi-day workshops directed at professional
artists and the advanced hobbyists. Professional glass artists
and instructors are brought here from around the Nation to
present these workshops. The increase in utility rates has
prompted a decrease in students that are able to participate in
these classes and directly purchase materials.
At this time--and this was as of about a week ago--we are
showing almost a 40 percent decrease in attendance, which is
actually leading to a deletion of these classes, or at best a
postponement to a later date. In 25 years we have never had
this problem, and I was shocked. Many of the attendees and many
of our customers are on fixed incomes and cannot afford the
high utility prices plus the hobby at the same time.
This tends to run into the area of or is especially true of
any of the jobs that require the electric glass kilns. We sell
them. They are a common item. You see them also in pottery
areas. Twenty percent of our customers are retired, and use
stained glass as a hobby, or even better yet, as a second
income. Producing a stained glass panel or object that is not
only beautiful, but quite practical, fills a very important
need for their self-esteem. Our cost of running our electric
kilns to slump and fuse glass has forced us to increase our
prices on some of our finished products, as well as rental fees
for student or customer use.
The increased cost of products beyond normal inflation,
without any predictability, is forcing us to increase prices to
our customers, or to absorb the cost from declining company
profits. This scenario becomes quite apparent in some of our
larger entryway and window projects that are often quoted many
months ahead, as in the case of large institutions, hospitals,
churches, or residences. They also have a budget to follow. And
if our quotations become too far out of line, they will seek
these services elsewhere in this Nation or out of country.
The situation and unpredictability defeats the reliability
of our printed catalog. And they have always been on an annual
basis. Furthermore, added to this increased product cost is the
cost of labor, where our own employees are now having to
sustain substantial increases in their basic cost of living
expenses. The persistent and unpredictable timing of rolling
blackouts has caused a great amount of anxiety and apprehension
when we use our high temperature kilns, as I mentioned earlier,
for classes or to produce products we have for sale.
Large investments of labor, not including product, can be
ruined by just the power being turned off at any time. The
cooling process in these kilns is at a controlled rate, meaning
we cannot just cool it off in a very short period of time. It
can run from 4 hours to 72 hours, or, as many of the
professional glass artists, not only here but around the
country have, they quite often can take anywhere from 5 to 7
day cycles. They will end up with 2 weeks of work in a project.
If the cooling rate is interrupted at any phase of it, it is
gone. It does not take long, with 2 weeks of work, to lose your
faith real quick.
A little bit on climate control. Our ability to conduct
business with our customers and clientele is directly linked to
the availability of power. Light and temperature is extremely
important to our company. Our customers and clients need to
view colors with light. Does not work in the dark. When they
come in, we have many, many wood doors, entryways, lampshades.
We need light. Room temperature, when you have clients coming
in, if they are not comfortable it is a sales fact.
Uncomfortable customers do not buy. Never have.
Mr. Burton. Mr. Thomas, could you summarize as quickly as
possible?
Mr. Thomas. Sure. I am right at the end right now.
Mr. Burton. Thank you, sir.
Mr. Thomas. Personnel reduction. We will have to eliminate
jobs if it continues. There is not much other choice. We have
done the same as all other companies in reducing it. We are
using separate switches on lights, and as long as they do not
compromise safety.
In conclusion, the power crisis has given us a jolt. But if
we use our ingenuity and development of new operating
procedures, we can endure this, unless the generating companies
withhold their power and the ISOs continue rolling blackouts.
We must take a much closer look at how we utilize our day-to-
day electrical consumption. And I am a firm believer in this. A
$10 energy-saving light bulb or a $3 switch is much less
expensive than any interruption of power. I feel it is
imperative for business to set the example and create a
stabilizing effect. We should pride ourselves in how much we
are able to save. It only makes good business sense. Thank you,
Mr. Chairman.
Mr. Burton. Thank you, Mr. Thomas.
Mr. Seetin.
[The prepared statement of Mr. Thomas follows:]
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Mr. Seetin. Thank you, Mr. Chairman and members of the
committee. My name is Mark Seetin. I am vice president for
government affairs for the New York Mercantile Exchange. NYMEX,
based in New York City, is the world's largest physical
commodities futures exchange, specializing in energy and
metals. On any given day we trade three to five times world oil
production, seven times North American natural gas production
in a regulated marketplace. We are a regulated public
marketplace.
Mr. Ose. Mr. Seetin, would you pull that mic closer to you.
I can barely hear you up here.
Mr. Seetin. I am sorry, sir.
We are a regulated public marketplace under the auspices of
the Commodity Futures Trading Commission. As such, NYMEX does
not have a stake in the outcome of this particular situation in
California. Our interest has always been in competitive
markets, and offering our services, which are not mandated, but
voluntary. We provide competition under the auspices of the
CFTC.
And I must say also that, just to make it clear to people,
under Section 5 of the Commodity Exchange Act, fraud and
manipulation are felony offenses. And we, as a marketplace, are
bound by our oversight of those markets, to detect and prevent
that. We also have no interest in whether commodity prices are
high or low, only that they are fairly arrived at through
competitive means, and reported.
California is in a real crisis. You have heard the
symptoms, the results of this situation. I am going to talk a
little bit about some of the causes and what can be done,
hopefully, to help it. Our analysts agree that probably, among
all the predictions on blackouts, that probably they are going
to be on the high side. And we have heard some say as high as
55 days of rolling blackouts. From our market access and our
looking at it, that is what we see.
But I want to say first of all that what California did was
not deregulation. If you believe that California deregulated
its industry, you will probably believe that Hannibal Lecter is
a gifted surgeon. [Laughter.]
Does this sound like deregulation? You take three monopoly
utilities, you create a taxpayer-funded, centralized monopoly
power exchange through which the utilities are mandated to buy
and sell all of their electricity and then you tack, inside of
that, a cockamamie pricing system that, instead of matching
buyers and sellers, like most of the rest of the world does--
including Third World countries--you have one price clears all.
So that no matter what the number of bids in this 1-hour block
of lower prices, if it takes the highest price bid to fill that
need, boom, you have got it. Our guys would go to jail if they
did that. [Laughter.]
Well, maybe some should, I do not know, it is not my
judgment. I am not done yet, though.
Because, you know, next you get the government that
decides, OK, for this efficient marketplace the electricity
bought and sold through this PX is going to be done in the next
day, the day ahead. While the electricity market outside the PX
had been evolving in a traditional energy path that we are
familiar with of longer-term contracts, direct contracts,
forwards, future swaps that move out into the future, this one
mandated a 24-hour-ahead marketplace that was where the trading
was going to take place.
Can you imagine GM being forced to buy their parts and
equipment just a day ahead? I mean, that is as much sense as it
made for electricity. Everybody knows what their needs are
within a certain percentage. The electricity market was heading
in the way of the traditional energy markets, that that spot
market, that up-close market was a very small percentage.
The benefit of that, of course, is you have the price
certainty of the longer-term pricing that direct contracts and
forwards and futures give. But in addition to that, it is only
a small percentage, so that if you do have a price spike, which
happens periodically in commodity markets, it affects a much
smaller part of the marketplace instead of the 30 or 40 percent
that is in California. Well, I am not done yet.
Next, for good measure, the government, through the CPUC,
steadfastly denied, because retail prices were still regulated,
that the utilities could increase their rates, even despite the
fact that these guys were paying 20 cents in the wholesale
market and selling in at 5.5. I mean, they had the economic
equivalent of the Ebola virus. They were hemorrhaging all over
the place with cash.
They were then, in desperation, denied the ability to lock
in prices through contracts last summer, inexplicably. Reports
were in the press, apparently, that they had offers of 5 cent
contracts, but they were not allowed to do that by the actions
of the Commission. And it still gets a little bit better,
because when the CPUC did take action last June--I think it was
June 8th--they moved to allow the utilities to use other
outside exchanges to procure their electricity.
Remarkably, within 5 days, on June 13th, when the State
budget was adopted, there was a specific provision in the
budget that created a study which prevented them from
implementing that CPUC action. So, in essence, they were frozen
out again.
Well, it did happen that finally the crisis got so bad that
by August there was a ruling that allowed them to use a small,
limited number of forward contracts. But guess where--out of
the monopoly PX. Once again, if you call that deregulation, you
know, it sounds to me like California put Dr. Jack Kevorkian in
the recovery rooms. I mean, I do not know what they had in
mind, but, you know, it certainly was not recovery from this
standpoint. [Laughter.]
Every time a decision came up, it seems like--and I have
been working here for a long time, so if I sound a little
frustrated, I guess I have to confess I am--but every time the
policymakers made a decision here regarding this marketplace,
it always seemed like Yogi Berra said, ``When you come to a
fork in the road, take it.'' Well, in California when they came
to a fork in the road, they stepped on it. Their foot looks
like a pincushion at a quilting bee.
Where are we now? Well, only a couple of the players now
have entered a new chapter. Of course, it is Chapter 11. That
is the PX and PG&E. [Laughter.]
The utilities had their credit cards shredded last January,
and now the State has stepped in, and the DWR is the sole buyer
and seller of electricity in the marketplace. And that was 3
months and about $5 billion ago.
So where are we now? Still the critical problem has not
been solved. And what is it? The State needs to immediately do
a couple of things. First of all, they have got to implement
direct access. This is the anathema that has been denied. You
know, individuals outside are certainly not qualified to go and
buy electricity, the businesses that are here, apparently, in
the view of a lot of people. We think those people are the few
that have the credit rating left in the State to be able to buy
electricity.
Direct access means bilateral contracts. Let at least the
70 percent of the State that commercial and industrial
businesses represent the chance to step out from under the
State purchasing DWR and find and procure their own
electricity. Under the law that was passed in January, that is
illegal. In California, the only legal buyer and seller is the
State. I mean, we trained the Russian oil company, Rosneft
Product, at the request of the State Department in 1993. This
was under the old Brezhnev regime. Rosneft Product had more
freedom than these guys have. I mean, at least they traded in
commodities.
You have to let the commercial and businesses out of there
for two reasons: Because the State simply has not been able to
take care of all the electricity purchasing on the long term
that it needs, and it should not be expected to do that,
either. The businesses need to do that. A benefit of that
direct access movement will be to change the spot market that
we are still in, because people are still having to buy, the
energy is still being bought, largely in the spot market, and
it is costing a lot of money. As I said, it is about $5
billion.
You know, people have been angry about the State government
not talking about how much they are paying for electricity.
But, you know what, you can figure it out fairly closely. As
somebody said here, it takes about 30,000 megawatts a day to
power the State. And you know that the utilities have about
12,000 of that or so. There is another 3000 megawatts that are
the QFs. So if you put 10 cents or whatever the new price cap
is on that 12,000, and you add about 14 cents, which is the
agreement supposedly for the QFs, that leaves you about 15,000
megawatts to have to be purchased in the market by the DWR. So
if every 10 days they are coming in and getting $500 million,
that means $50 million a day, which is what the press reports
say. If you take the 10 or 11 cents times the 12,000, the 14
cents times the 3, you wind up with about $33\1/2\ million that
is being paid for the remaining 15,000 megawatts. A little
math, a little division shows that that is about 22\1/2\ cents,
roughly. Now, that is about probably what they are paying. Now,
you know, I could be off by a few cents. But if you take a look
at what the spot markets are--and you can look up on the
Internet, a site called Interfacts, which prints out a lot of
those sites--this is pretty well within it.
What the ominous part of that is, is that is still 22\1/2\
cents. And people are going crazy right now about their
electricity rates being raised to 11 cents. The stunning part
of this is, if I am even off by half, the rates have to come up
a whale of a lot more to hit that market. So the bottom line
is----
Mr. Burton. Mr. Seetin, can you sum up?
Mr. Seetin. What I am trying to say is, first of all, get
direct access. Allow those commercial businesses to go out and
take care of themselves. They can do that. That will help get
the State off of this treadmill of the spot market.
Second of all, the other thing is transmission access. The
ISO had a good proposal in January to allocate transmission
capacity. That goes hand-in-hand with transmission access, so
that buyers and sellers of electricity can lock in the
transportation and the commodity price. There is nothing that
will build this foundation faster, that is crumbling right now,
than those two. Without building that foundation with direct
access and transmission access, this building cannot be
rebuilt.
Thank you, Mr. Chairman.
Mr. Burton. Thank you. We did not get your opening
statement, Mr. Seetin. Did we get that?
Mr. Seetin. Yes.
Mr. Burton. We do have that?
Mr. Seetin. Yes.
Mr. Burton. OK. I have not had a chance to look at that.
Did that opening statement cover everything that you said?
Mr. Seetin. Yes, sir.
Mr. Burton. OK. I think that was a very important----
Mr. Seetin. I did not have Kevorkian in there.
Mr. Burton. I would like to know who writes your metaphors,
though, because--they are in the opening statement? They are
not?
Mr. Seetin. No.
Mr. Burton. Your metaphors were not in the opening
statement, but I need a good comedy writer, so if you would
give me your phone number, I will get a hold of you sometime in
the future. [Laughter.]
Our next witness is Mr. Conlon, former head of the PUC.
[The prepared statement of Mr. Seetin follows:]
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Mr. Conlon. I think he just gave me a new name here. But I
assume, Mr. Seetin, that other than the comments you meant--
that you stated, that everything is fine.
I want to try to do two things today in my 5 minutes, is to
give you the reasons for why we went through the restructuring
and the deregulation of the generation. And I would like----
Mr. Burton. Can you pull your microphone a little closer.
Those mics are not picking up as well as----
Mr. Conlon. And how I think we got where we are today, you
know, without attributing it to the restructuring and the
deregulation.
I think you need to put in perspective where we started. Is
this mic coming on now?
Unidentified. We can barely hear you.
Mr. Conlon. Is this better? Is this better? OK? All right?
OK, I want to give you a perspective on why we started and
why we did what we did. I think you have got to go back to 1993
and think a minute, for those of you who were involved in the
business community at that time. This State was in a recession
that was almost as bad as the depression. We had unemployment
over 10 percent. We had lost over 500,000 jobs, almost 800,000
jobs in the State of California. We had very close to a
depression going. I mean, compared to where we are today, you
know, I think our recession back then was a lot more serious.
And without in any way demeaning what we are up against
today--because we do have problems but I just think that with
the situation we had at that time, we had large industrial
customers and co-generators coming to us and said we are no
longer building in California. There were two specific projects
that I am aware of that were $250 million each that were built
outside of California, and they attributed it solely to our
high rates. We had the highest or the second highest rates in
the United States, and in their view, we had the worst
regulation in the United States.
So the five commissioners, at that time, were committed to
do something to help the situation. Because all the high energy
users in the State blamed us rather than the recession for
their problem. So I think that is the environment we started
in.
We went through hearings for 3 years. We had two different
proposals on how to restructure the industry and how to fix the
high rates and the poor regulation. So it was probably the most
thoroughly examined hearings. We had over 50 to 100 days of
hearings all day long, and I think that it was the most
thoroughly examined proposals of what to do.
And I think you have to also remember at that time we had
30 percent excess capacity in the State. Our natural gas rates
were the lowest in the United States because of deregulation 10
years earlier. So we were sitting with low gas rates and excess
capacity. No one was going to build new power plants in
California because of those two facts.
We even tried to order 3,000 to 4,000 megawatts of
renewables back in 1995 and 1996, and everybody went
hysterical. They went to FERC and got an order that said we
could not build those plants because there was no need, and the
prices were too high. They were 5\1/2\ and 6 cents. And I think
here in San Diego it was 5\1/2\ cents, and you were paying 3\1/
2\ cents. So the utilities in the State were against building
any additions. Everyone was against it. So we threw up our
hands and said hey, if nobody wants to build these plants, we
are not going to build them. We have got 30 percent excess
capacity, we have a 2-percent growth rate. That gives us 15
years of excess capacity. That is where we were when we went
through this process, so that everybody understands that we
were not doing this as an academic exercise.
So what did we do? We ordered--the major concern that we
had was that if we tried to deregulate the market--which is
what we concluded was the right answer, because it would happen
faster and it would get more investment than if we tried to
continue the traditional regulation. So we ordered the
utilities to divest 10 percent of their--or 10,000 megawatts in
a 45,000 megawatt market of their generation. And they agreed
to do it.
So when they sold those plants, that created a situation
where no player in the State had a large control of the market.
And our main concern was market power. In spite of the market
power you are concerned about today, if you only had two
generators, the market power would be much more significant. We
saw that in the UK, and we said that was not what we wanted to
do.
So we created a situation where we had five or six
competitors, rather than just two. We created the independent
system operator, so that he could be the traffic cop, the
airport director. And then we created the power exchange. And
we created the power exchange only during the transitional
period, about 4 years, to protect the small consumer. Because
our view was if we start out with bilateral contracts, which is
what Mr. Seetin is advocating, all the low-cost generation
would be sold to the large customers, and the high-cost
generation would be left to the small customers. So our belief
was to have all the utility assets sold into the power exchange
during the transition period, until they divested their assets
and a market was established. And that is why we had the
requirement that they sell into the market.
And we allowed all customers, large and small, for direct
access. The legislators came along and put a rate freeze on,
which virtually was very difficult for the marketers and
suppliers to sell into the market, if they had a rate freeze
and a power exchange. So the only people that really elected
direct access were the large industrial users. They have
today--about one-third of them have elected direct access, and
about half of their volumes now are bought directly. And they
wanted the opportunity to make their own mistakes. They did not
want the Commission to set the rates, they wanted to go out and
buy their own power. And some of them did. And some of them
won, some of them lost. But that was the basic structure we
did.
And I think what happened after that I believe is
attributed to three acts of God and some delay in some
government action. And we are facing the worst drought in 25
years in the Northwest. We are dependent on the Northwest for
at least four nuclear plants worth of generation. We have been
without that generation for over 15 months. And now they are--
the drought this year is even worse than last year. So we are
suffering where we are not going to get any hydro to speak of
from the Pacific Northwest, and we have lost 2,000 megawatts in
California.
So the 6,000 megawatts we have lost to reduced hydro is
virtually the problem this summer. Because if we had those
6,000 megawatts, we would not have any blackouts. So let me
make it clear that the hydro situation in the Pacific Northwest
and California is one of the prime drivers for this crisis. And
along with the fact that the price of natural gas is
skyrocketing. It has gone up fivefold. I am not sure what these
gentlemen were talking about when they said high prices, but
the natural gas prices came through with at least a 200 percent
increase in California, and all customers are paying it. So I
think, when they say energy bills, they ought to be careful
that they are looking at natural gas versus electricity.
Because only in San Diego do the electric prices go up.
Everywhere else in this State they have been frozen.
Mr. Burton. Mr. Conlon, could you sum up?
Mr. Conlon. All right. And I just want to say that the
energy commission has been blessed with 17,000 megawatts of new
projects, and they have taken an average 18 months to approve
those, as compared to other States, which do it in 3 months.
And I think if the nine projects they have already approved,
were approved 9 months earlier or 15 months earlier, we would
also have additional supply. And they have got 15 more projects
there that they need to approve.
We need to get these new projects out and approved, 17,000
megawatts in a 45,000 megawatt market would completely solve
the problem. I mean, you are having one-third new capacity.
They need to approve those plants as fast as possible. I do not
know how you could help, but if you can, I will rest on that
case.
Mr. Burton. Thank you, Mr. Conlon.
We will now go to the 5-minute rounds for the Members. And
I will start off here.
First of all, to the business people that testified, Mr.
Barnhart and Mr. Hardage, have the high electricity prices
threatened the viability of your companies?
Mr. Hardage. Mr. Chairman, the high energy prices will
affect not only our company, but the electric company.
[Laughter.]
The high energy prices will definitely affect not only my
company, but every hotel company. Because of not only the
direct effects of 300--so far we have had over 300 percent
increase in our electric power cost. And other hoteliers have
had the same problem.
The problem is that the indirect causes will have a greater
effect, and that means that fewer businesses will be expanding
or growing in California because of the uncertainty, fewer
tourists will be coming to California. And when you combine a
high fixed cost, and most hotels have debt and they have real
estate taxes, they have operating costs, and you can only cut
costs so much. So I would say that probably at the margin, that
you would begin to see the less-competitive hotel companies and
hotel sectors begin to suffer the most. And if this goes on for
a long period of time without solving it, without solving the
problem, without getting more supply--and the only solution is
more supply, there is no other solution. So unless we get more
supply, I would say that business, and certainly the hotel
business in California, is in great danger.
Mr. Burton. Mr. Barnhart.
Mr. Barnhart. Well, there is actually three answers. The
first answer is the first price increases--because construction
operates primarily on fixed price contracts, the first price
increases, the companies took the hits right out of their
bottom line, because they didn't have any choice.
The second round will be passed on to the owners. Because,
as you are bidding new projects, you are going to price it
right in on the cost for power.
The third round is similar to Sam's answer. What we figure,
it is just a matter of time until somebody figures out, well,
if we cannot supply all the power needs for the existing
facilities, why do we need any new facilities. And then we are
in a total--you know, we are in a total shutdown. And we will
see owners delaying their projects, and we will see private
owners moving outside the State. So, long-term, it is a
disaster.
Mr. Burton. Mr. Seetin, I got a great deal out of your
statement, so pull that mic close because I do not want to miss
what you have to say here. Can you once again go into the flaws
that were--in the way that the California market was
structured, and also why you think the crisis has lasted so
long. And if you could, make it as quick as possible.
Mr. Seetin. Sure.
Mr. Burton. Not too long.
Mr. Seetin. Again, I will try to be very brief. First of
all, they created a mandatory power exchange. We said, you
know, we do not mind if you take the taxpayer money, and it is
not bad to create this exchange. It is unnecessary, because
every other market, such as natural gas, those institutions
competed with each other and came in without forcing the
taxpayers to pay an additional piece.
However, if they would have not made that mandatory, others
would have, and that would have stopped from happening what
actually did happen, and that is that cockamamie pricing system
where they take the highest price for every hour that fills the
demand. Because somebody else would have said, hey, guys, there
is a better way to do this. It is called matching buyers and
sellers, which every traditional marketplace would have done.
When they then further stopped these people from using
long-term and direct contracts, you have got that marketplace
now forced into 24 hours. They cannot get those instruments.
They could not get forwards if they wanted, because much of
that market is short-term.
Which, by the way, when you want to talk about a link,
natural gas is directly linked to that. About 60 percent of the
electricity generated in the State comes from natural gas
sources. When you force electricity into the day-ahead market,
what have you done? You have done the same thing to natural
gas. That is why it does not do any good to have a long-term
contract with natural gas. You are going to make more of that
the volatile spot marketplace.
Mr. Burton. Well, let me followup on that. How do you
think--and I think you covered this a little bit. But how do
you think California could solve the current electricity
prices. I see here from your notes that you are talking about
direct access, which you just mentioned, and long-term
contracts.
Mr. Seetin. Right. The first thing you have got to fix--the
thing that has been completely overlooked, everybody talks
about the symptoms. Nobody looks at the cause. The root cause
is a screwed-up marketplace underneath. You have got to fix
that first. You have got to fix it with direct access. That
will lead to other types of contracts--direct contracts,
forward contracts, swaps, and future--that is going to bring
financial soundness to that economy. It will bring in people to
build power plants financed without the taxpayer's dollar, and
it will stabilize the market. It is going to get away from that
spot market because it is going to move everything into the
future, where it naturally would go.
Second with that, you have got to have transmission access.
You have got to have the ability for those buyers and sellers
to lock in their space on that transmission line. And I am not
talking about completely, because there is also the need to
take care of the citizens, the hospitals, the schools, and that
type of thing. I am talking just about for the commercial and
industrial sector.
Mr. Burton. So that is the recommendation you would make to
the PUC?
Mr. Seetin. Yeah, absolutely.
Mr. Burton. Mr. Filner.
Mr. Filner. Thank you, Mr. Chairman, and thank you, panel,
for your testimony.
I do want to make several points for the record, and for
the visiting committee and the chairman. Mr. Horn's appearance
here as chairman of the Board of Supervisors to me makes the
point, although you did not make it in your prepared testimony,
Mr. Chairman, that the approach--that the legislation that we
have taken in Congress, supported by myself, Mr. Hunter, Ms.
Davis, is supported by the Board of Supervisors, supported by
virtually every city council in our county. And I will tell
this committee and this chairman that most of those are
controlled by the Republican party, although all those offices
are non-partisan, they are Republican registered. And so this
is a bipartisan response to the crisis. It is a bipartisan
response to say that we ought to set cost-based rates to get us
over this disaster, and that we should refund the over charges.
I think that is a fair statement, Mr. Horn, is it not?
Mr. Horn. That is correct.
Mr. Filner. Thank you, sir. This is a bipartisan approach,
and nobody should think that it is only some Democrats
screaming about this.
Second, we have heard many statements about it is
environmental regulations and whacko environmentalists that
have caused this problem. I think Mr. Conlon stated it very
succinctly. The market that everybody here is praying to
decided that there was no reason to build capacity over the
last decade. That is, utilities themselves and the private
sector decided that they ought not to build. As Mr. Conlon
said, there was a forecast of 15 years of excess capacity. We
have people, public-minded citizens in San Diego, who are going
to build us capacity following all environmental regulations,
and they will produce energy at a profit, and provide San
Diegans with reasonably priced electricity. It is not
environmental regulations. That is a myth that people are using
to take advantage of this thing to get rid of all environmental
laws that we have had in this Nation for some time.
I have heard from the business people at the table here
very eloquently an expression of the situation you are in. It
is disaster. And people who have less resources than your
companies have gone out of business. Scores of our constituents
are out of business, who could not cover this. But I did not
hear any recommendations for what we ought to do, except you
said that--I think Mr. Barnhart and others have said people
ought to be paying fair retail rates. Well, Mr. Barnhart, you
saw what happened when the retail rates were deregulated in San
Diego. They tripled within 60 days.
You are all assuming there is a market at work here. There
is no market. There is a control by a few companies. And what
makes you all think that if we increase supply--which I agree
with--that you are going to get a reduced cost? All of the
assessments that have been made have shown that the wholesale
price you are paying has no relationship to the time of day, to
the demand, to the cost of anything. So what makes you think
that the same few companies will not charge increased prices
when the supply increases?
When we conserved here in San Diego and decreased the
demand, prices went up. There was no relationship, because
there is control of the market. And all of you folks who are
complaining about the costs of your doing business, you are
absolutely correct. But you are paying criminal rates. You are
paying wholesale prices that have been found, by the Federal
Energy Regulatory Commission, to be illegal. ``It is the price,
stupid,'' if I may coin a phrase.
It is not environmental regulations that are forcing you
out of business, it is not that we are not paying adequate
retail prices. It is not the lack of supply. There is no
market. And you are paying a price that is demanded from you by
a few people. Why do you not support the legislation that says
have a refund for all the overcharges over the last 10 months?
Mr. Horn and his board have supported that. And as I hear your
recommendations or lack thereof, I hear nothing about renewable
sources of energy, which I think is the key to the future in
terms of our supply. I hear only let us build some more power
plants, and the Governor is trying to do that.
What about public control of this situation? I did not hear
anything about that. Where there is public ownership--as in
L.A. or Sacramento, there seems to be some control of the
pricing. They are not paying the prices that you are, that are
forcing you guys out of business. So I sympathize with your
position. And again, my constituents are paying a higher price
than that.
But it seems to me your ideology is somehow refusing to let
you face the reality that it is the prices that are controlled
by a monopoly or by a cartel that are found to be criminal. We
should demand the refund of those prices. And I tell you, Mr.
Seetin, the structure that you have so eloquently described as
flawed, which is--you are perfectly right--was set up by, you
know, the previous administration, and had the goal as Mr.
Conlon said, of increasing competition. It failed. But it was
the cartel that took advantage of every one of those things
that you pointed out to hurt the consumers of California. They
took advantage of all that. They forced all the purchases into
the spot market. They did not have to. They forced it in there.
And all of the things that you described were caused----
Mr. Ose [presiding]. The gentleman's time has expired.
Mr. Filner [continuing]. By a few companies who have ripped
us off for $20 billion.
Mr. Seetin. May I respond to that?
Mr. Ose. Unfortunately----
Mr. Filner. That was a question at the end, so----
Mr. Ose [continuing]. Unfortunately, I am not sure which
was a question and which was not. Perhaps on our second round
we will have questions.
I am going to recognize Mr. Horn for 5 minutes.
Mr. Horn. Thank you, Mr. Chairman. This thing just seems
to--well, we will just forget the little furry thing, whatever
that is.
Mr. Conlon, were you in the Wilson administration?
Mr. Conlon. Yes.
Mr. Horn. What was your position?
Mr. Conlon. I was on the Commission for 6 years, 1993 to
1998. And I was president for 2 years, 1996 and 1997.
Mr. Horn. I think we all know that where the recession
started was in March 1988, because of the end of the cold war.
Mr. Conlon. Yes.
Mr. Horn. And people were being let go, in certainly Los
Angeles County, 400,000 people were out of work.
Mr. Conlon. Yes. Absolutely.
Mr. Horn. So I am interested in the role of Governor
Wilson, because he was assaulted by the President of the
current group in terms of it was all, it seemed to be, on his
plate, not now, and do not bother us with it. So I would be
curious what the Wilson administration did do in this period.
Mr. Conlon. Well, you know, they had an economy that was
very sick, and the high energy users blamed the Commission and
its regulation and the high rates, rather than the recession,
itself. So I think the burden was on the CPUC to take
initiative to try and lower the rates, and to try and open the
market. And, you know, I think that the result of that was to
do exactly what we did.
Now, I really think that the retail level for the small
customers was deferred until the end of this year because of
the rate freeze. I mean, I think the smaller customers really
did not have the opportunity to lock in a rate. I mean, San
Diego was offered a rate of 5\1/2\ cents or 6 cents last
summer, and they had a debacle with the Commission, the current
Commission, not to get that approved. But be that as it may,
there was no energy suppliers that came into the San Diego area
and offered individual customers 5\1/2\ or 6 cents, so they
could have locked in the rate. Each of these gentlemen here
could have locked in a 5\1/2\ or 6 rate if there was a marketer
in the area willing to do that. And I pleaded with some of the
marketers to come in. And they said hey, things are just too
unstable now for us to even come in. Because, until the rate
freeze was over, they were not going to do anything.
And I said, well, why are you not in San Diego?
And they said, well, we are going to stay in the wholesale
market until the entire State comes off of freeze. So I think
that was--the idea, though, was that competition would do a
better job. I mean, we are in California. This is not the
Republic of California. We got Silicon Valley, which is the
heart of the free enterprise system. I mean, that is what has
driven this State for the last 5 years out of the recession,
into a prosperous economy.
So for us to turn to government regulation to make an
allocation of resources was so inconsistent with the free
enterprise system and the Silicon Valley prosperity. I mean, 7
percent of the growth was due to Silicon Valley and the
computers and high tech.
So I think that Governor Wilson and the Commission were
convinced that competition, in an area where you have multiple
providers of generation, was the only answer. And that is why
we went down that street. And I think if it had not been for
the hydro problems and the run-up in natural gas because they
had to use so much natural gas, and it was a cold winter this
year, both in the Midwest and the East, that natural gas prices
have driven these prices--if you look at the price composition,
and I have got an article here out of the Fortnightly Magazine
for February 15th, 75 to 80 percent of the prices throughout
the summer were driven by natural gas and NOx
credits. And there was about 20 to 25 percent of those prices
was due to other causes. And you can call it price gouging or
whatever you want. But only 20 to 25 percent of the cost for
those high prices was attributable to other than natural gas
and Nox credits. And Nox credits were a
large part of last summer's high prices. I hope I answered your
question.
Mr. Horn. Mr. Seetin, you probably had a view of both the
Public Utilities Commission 10 years ago, 15 years ago, and
now. What advice would you give us in terms of how they
conducted themselves?
Mr. Seetin. Well, at this stage, I think we are in a
situation where you have got to go forward. But as I said in my
testimony, I think even when the crisis became apparent a year
ago, things could have been done that would have mitigated it
quite a bit, we believe. At any time they could have opened up
the market to other exchanges, they could have allowed those
people to use direct access, which would have had a very quick
effect in that regard. It would not have brought on more
supply, because that takes some time.
But the bottom line is, for example, they did not have a
choice of whether or not to use the PX. That 24-hour-a-day,
that day-ahead market was mandatory. They did not choose not to
go in that thing. They certainly would have over the last year.
It was put in by regulatory fiat and maintained by regulatory
fiat. And, you know, that is where the responsibility--I am
getting on dangerous ground here. But the policymakers that
implement those institutions do bear responsibility, when
things are going bad, to adjust that.
Mr. Horn. The current group there that is running the
Public Utilities Commission just points all their fingers at
Washington. Is that a realistic thing to be done, or is that
just demagoguery?
Mr. Seetin. When Washington, DC, gets the authority to
rewrite California statutes that prohibit direct access and
that oversee the power lines----
Mr. Burton. [presiding]. Mr. Seetin, I am sorry, we are
going to have to come back on a second round.
Mr. Seetin. OK.
Mr. Burton. Gentleman's time has expired.
I am going to recognize Ms. Davis for 5 minutes.
Mr. Horn. Thank you, Mr. Chairman.
Ms. Davis. Thank you, Mr. Chairman. And I appreciate all of
you being here and sharing your stories with us. Obviously we
met with many businesses that had dire predictions of the
outcomes for them and for their customers, and I appreciate
that.
I wonder if we could go to the issue of the long-term
contracts. Because I am hearing different things, and I hope
that you can clarify for me. You mentioned Mr. Seetin, and I
know others have said that the real problem here was the lack
of direct forward contracts. But it is also my understanding,
and I wonder if Mr. Conlon could respond, that in fact the
California PUC worked with companies to try and develop long-
term contracts. And part of the requirement was that there be a
reasonable clause as part of that. That is what most States
have, or a lot of States have a reasonableness clause, so that
you set it at one time, but that continue. Could you enlighten
us a little bit about that, and did in fact companies not want
to enter into long-term contracts that you tried to bring them
into because of that?
Mr. Conlon. You know, this question really should be
addressed to President Lynch, when she was here Wednesday.
Because I am off the Commission and I am not--all I can speak
is as an observer and as when I was a Commissioner. There is a
great lack of faith and trust between the utilities and the
Commission. And this debacle that you are talking about is
manifested clearly, as you can see.
Because on one hand, the Commission says the utilities can
go out and buy any kind of bilateral contracts they wish, but
it is subject to review and refund after the fact. And the
utilities say hey, if we go out and buy a contract and commit
to $10 million and the Commission comes along 2 years later and
disallows $2 million of it, I mean, how could we go out and
contract in good faith with a creditor for $10 million?
So it is a lack of trust. The Commission does not trust the
utility for reasonable prices; the utility does not trust the
Commission, because in hindsight they could disallow the cost.
So they need standards--and I think the Commission is working
on that now--that are specific enough that the utilities can go
out and buy contracts with the assurance that they were not
going to get hammered after the fact. I mean, that is the
problem. And your colleagues were here on Wednesday when they
talked to President Lynch, so you can get from them what she
said. I do not know exactly. I think she said they authorized
the contracts, which they probably did. But the subject of
refund and disallowance is the hook that the utilities have
trouble accepting.
Ms. Davis. Did you----
Mr. Ose. If the gentlelady would yield, I would be happy to
share with you after--when we break, the information that Ms.
Lynch and the utilities provided us Tuesday and Wednesday.
Ms. Davis. OK. Thank you. But I really was wondering, did
you know--was there a look at other States and the way that
they pulled that together, so that they were able to agree to
reasonableness?
Mr. Conlon. Well, the only other State that I think would
be a good analogy would probably be Pennsylvania. And I think
they relied on bilateral contracts almost entirely. Mr. Seetin,
is that your understanding? Yeah. So I think they have a
different situation. It was a spot market that Mr. Seetin was
criticizing, that we felt was imperative to protect the small
consumers from what we called cream skimming.
And, you know, this was only during the transition, which
was 4 years. The PX today, the power exchange he was
criticizing, went bankrupt 2 months ago. So it is no longer in
the market. So there is no spot market today. And as a result,
the new generators have no idea what the current price or the
forward price of electricity is to build new power plants,
which was one of the other reasons for having that. If you have
a clear, deep, liquid price, then new investors can come into
the State knowing what they are going to get paid when they
invest their money.
Now, you know, we had a debate at the Commission with NYMEX
on one side and two economists on the other, and this was a
debate that went on for about 8 hours. So this was thoroughly
hashed out. And everyone agreed to have this separate power
exchange that bought into the whole process. And there was
virtually no one dissented. So right or wrong, good or bad,
there was complete consensus that the power exchange and the
ISO were absolutely essential. And the power exchange is now
gone. It is bankrupt. So NYMEX has 100 percent of the market,
or anybody else. So if it is going to work, where is it?
Mr. Seetin. Could I also add that the Harvard economists
won that argument. That is why we are here today. We do not
have 100 percent of any market. I want to make that clear.
There is no mandate. So I just want to make it very clear,
though, and we filed a lot of testimony, that the argument did
go on like that, but we lost.
Ms. Davis. OK. Thank you. One more just followup question,
if I could go back to you again, Mr. Conlon, for a second.
Mr. Conlon. Certainly. That is why I am here.
Ms. Davis. As we are talking about the competitive market
and when the PUC had the ability to lift caps here in San
Diego, when San Diego Gas & Electric indicated that they had no
longer the market share that would have disallowed them from
doing that, did you think at that time that there was a
competitive market here in San Diego that would have responded
in the way that we would hope the markets would have responded?
Mr. Ose. Before you answer, Mr. Conlon, you are going to
have to hold your thought. The gentle lady's time has expired,
and we recognize Mr. Hunter for 5 minutes.
Mr. Hunter. Thank you, Mr. Chairman. Gentlemen, I think we
have had a chance to understand a lot of the problem from your
perspective, and probably watching the panel, you have been
able to understand a lot of the problem from our perspective.
And you have seen us agree, Republicans and Democrats, at least
some of us, on the idea that 9,000 percent increases in a
matter of minutes do not reflect a free market, they reflect a
market that is certainly not an operation of free enterprise.
On the other hand, you have seen us also--at least myself--
criticize the paralysis that we have in California,
particularly, which--with the application of a lot of laws,
including environmental laws. And you have seen a staunch
defense of those laws by Mr. Filner. That is not slowing
anything down. And he referenced Mr. Conlon to say, well, we
did this because of our economic predictions. That is why no
power plants came in.
But, Mr. Conlon, you also stated that plants that try to
get permitted take about 18 months in California versus about 3
months in other States; is that not true?
Mr. Conlon. That is correct.
Mr. Hunter. And are a number of those considerations not
environmental considerations that lead to that 18-month delay
in permitting?
Mr. Conlon. Well, the EIR and all the environmental
constraints is what the Commission addresses. And they try and
accomplish it in a year, but it usually takes 6 months to get
the data adequate, if you will, before they implement their 1-
year rule.
Mr. Hunter. And Mr. Conlon, and let me--because we have got
a limited amount of time.
Mr. Conlon. OK.
Mr. Hunter. You are precisely right. And let me just give
you a laundry list, in this effort that I am undertaking to try
to get some generational capability at Miramar, our Marine
Corps air station here. Walking down through this list the
other day of what we have to comply with: the Endangered
Species Act; the Clean Air Act; the NEPA process, which
involves a number of public hearings, all duly noticed, and
then our response to those hearings. The fact that we have
attainment.
In California you can only put so much stuff in the air.
And any Federal landlord--in this case the Marines--are worried
that the amount of stuff that is put in the air, pollution that
is put in the air by a generational capability that would
supply the citizens of San Diego County will be charged against
them under the law, to their air operations for the U.S.
military, and could foreclose their air operations.
And so the bottom line was, after you walk through the
environmental requirements in terms of meetings, studies,
plans, permits, hearings, what are we looking at? And the
answer: years. So certainly there is--one problem with this
whole situation is it does not come neatly packaged. And
certainly, for people that believe in free enterprise, who say
no cost caps, they do not understand that there is, to some
degree, the aspect of--electric supply has some of the aspects
of public infrastructure. You have only a limited amount of
lines that this stuff can pass through. You have a lot of
difficulty in terms of siting locations. All those things that
deny the one aspect of real free enterprise, which is easily
qualifiable competition.
So, Mr. Conlon, when the economy did turn around and our
usage started to go up dramatically, the problem was we could
not easily qualify new plants that could come online and
increase the supply; is that not true?
Mr. Conlon. Right. We had $10 billion of free private
capital ready to be built in California without any government
assurances, without any government incentives. This was all
free enterprise investment. And they cannot get it through the
energy commission on a timely basis.
So, I mean, that $10 billion, you could go back to
regulation and let the State build the power plants and take
the $10 billion away from the schools and the libraries and all
these streets and everything else that California needs, also.
So I think it is--you have got to define the role. And I think
when you have got $10 billion of private moneys waiting to be
built, let it be built.
Mr. Hunter. Let us get down to business. One thing we could
do right now that I think everybody is for, is if you have got
a generator or if you can locate a generator--in fact, Solar
tells us their power peaking plants that they built at the
plant, you do not build them onsite, can be sited and started
up within 1 week. Those are the easily transferrable units.
Within 1 week. Meaning that if we had permitting taken care of
in California, and in San Diego particularly, you could roll
these components out on flatbed trucks, put them down on a
cement slab and hook them up and have those babies going in a
week, meaning we could save ourselves from summer.
So, Mr. Chairman, I have got H.R. 1075, which says if you
have got a generator in California, you can turn it on without
any punishment with respect to air attainment. And I would like
to give that to Bill Horn, to our county supervisors, and to
you. Thank you for your co-sponsorship. And Bill, if you guys
could support us on this thing, I think this would give us a
shot, at least, at saving ourselves from summer. Thank you very
much.
Mr. Bill Horn. If I might, Congressman, I agree that if we
could get some emergency air credits to these folks, we would
not have any blackouts in San Diego. In fact, we did not get to
get into that, but I do not think there is any reason for the
blackouts in San Diego.
Mr. Burton. Thank you, Mr. Hunter.
Mr. Ose.
Mr. Ose. Thank you, Mr. Chairman. Mr. Horn, the Governor
has entered into a memorandum of understanding with one of the
utilities to I believe acquire their transmission facilities.
If the transmission facilities for San Diego Gas & Electric
were acquired by the State, what is the amount of lost property
tax revenue that the county would suffer?
Mr. Bill Horn. I am sorry, I do not have the number for
you. The franchise fee, I believe, it is about $3 million, but
I am not certain as to that exact number. I disagree with the
Governor. I do not believe he should buy the transmission lines
to free up capital for the utilities. I personally believe that
there is enough capacity, at least in southern California, for
us not to have any rolling blackouts. When we have plants, and
the two plants both, Encino and Duke----
Mr. Ose. Mr. Horn, let me cut you off, because I noticed my
time is evaporating here.
Mr. Bill Horn. Sure.
Mr. Ose. I just want to be clear. $3 million in lost----
Mr. Bill Horn. I am saying approximately. I do not know the
exact----
Mr. Ose. OK. Approximately $3 million in lost franchise fee
equates to what in terms of law enforcement, library service
hours? Quantify that. I mean, you have quantified it. Tell me
the impact.
Mr. Bill Horn. Well, obviously our budget in the county of
San Diego is $3 billion. So I suppose we could absorb the $3
million. But at the same time, we now have a $25 million over
cost overrun just in power alone. That is why you do not get
all the lights in the chamber here. We are trying to conserve.
But at the same time, the $3 million does have a direct
impact. I do not believe the Governor should be rescuing the
utilities. They should have let them go bankrupt.
Mr. Ose. All right. Thank you. Thank you for your comment.
Mr. Seetin, I find your remarks on market structure--pardon
the pun--highly illuminating. The concept that you have put
forward about direct access strikes right at the heart of
providing liquidity to the market, so that there is certainty
on both ends of the transaction. If we had the proposal that
you have made here for direct access--and I presume implicit in
that proposal is the ability to contract--in addition to your
proposal on the ability to acquire transmission capacity, how
long would it take us to get out of this problem, this crisis
that we have in California?
Mr. Seetin. Well, it is hard to say. Depends on how quickly
the law could be changed and enact this. We think it would be
very fast, No. 1, because California is the world's sixth
largest economy. There are, we think, a lot of people that
would come in quickly to offer those instruments.
Mr. Ose. Let me back up. It is my understanding that the
direct access prohibition is regulatory, not statutory.
Mr. Seetin. No, it is statutory. The CPUC has not enacted
the law that was passed, AB 1X, in January. They have not taken
the action. But it is in the statute. The CPUC has not put the
date in yet.
Mr. Ose. OK, 1890 did not prohibit access, but 1X does?
Mr. Seetin. AB 1X does specifically.
Mr. Ose. Did 1890 prohibit long-term forward contracting by
the utilities?
Mr. Seetin. I do not think so. I am not sure, but I do not
think so.
Mr. Ose. Does AB 1X?
Mr. Seetin. Well, it is----
Mr. Ose. By its nature, it does?
Mr. Seetin. Yeah. It is insignificant. Because it basically
creates a single buying agency. That is the DWR. It does not
matter.
Mr. Ose. In effect, it does prohibit long-term forward
contracts?
Mr. Seetin. Yes.
Mr. Ose. Now, if I look across the panel today, I see a
market participant, Mr. Hardage; market participant, county of
San Diego; a market participant, Mr. Barnhart; a market
participant, Mr. Thomas. I see a market operator, Mr. Seetin.
Is that accurate?
Mr. Seetin. Yes, we operate the market. We do not have the
physical commodities.
Mr. Ose. I understand. You do not take a pro or con
position.
Mr. Seetin. Right.
Mr. Ose. And Mr. Conlon, I see a market--with someone with
experience as a market regulator.
Mr. Chairman, I have to say in Sacramento and in San Jose
we did not have the opportunity to talk to a market operator.
And I would commend his testimony to the committee and the rest
of the Members of Congress, regardless of their State, as to
the impact of I think your phrase was artificial standards and
their impact.
I want to go back to one other thing we covered. I cannot
remember if it was yesterday or Tuesday. The issue of a
regional transmission organization. As I understand the market
for power in the Western United States, the Rockies actually
acts as the divider. In other words, West of the Rockies
basically is a whole market, and East of the Rockies is a
separate market.
Of those States West of the Rockies, some have put forward
regional transmission organization plans and some have not.
Which States have not? Is there some reason for them to hold
out? And what is the consequence of having all the States
participate or some of the States only?
Mr. Seetin. I am glad this is not a quiz, because I would
probably flunk that question. But I will tell you in general
terms, those that are more resistant to the RTOs, the regional
groups, are those that feel they have lower cost power and may
be disadvantaged by being part of a larger group. I think that
is fast going by the wayside, because they are seeing now that
politically you cannot stop that border. Just markets cannot be
held in. God knows, California learned that.
Mr. Ose. The testimony we had yesterday was that the 50
States, and I believe 49 have put forward their RTO plans. The
one being absent is California. Do you have any information
about that?
Mr. Seetin. That would square with my basic knowledge.
Mr. Ose. That the markets are screwed up? All right. My
time is about to expire. Mr. Chairman, I yield back.
Mr. Burton. We are going to go to a second round. I do not
think all the Members are going to take their full time. Some
will. But I did want to ask one question I think is very
important. Mr.--I cannot----
Mr. Seetin. Seetin.
Mr. Burton. Seetin. Excuse me. My Lasik surgery is not
working right now.
Mr. Seetin. Just think of looking at a tin roofing and see
tin.
Mr. Burton. There is a number of Congressmen and business
people that believe that price caps are important, rate caps. I
would like to have your perspective on that.
Mr. Seetin. Well, we, you know, as a marketplace----
Mr. Burton. And let me add one caveat to that. Eight of the
Governors of the Western States have sent a letter to the
Federal regulators saying that they are against price caps. The
only three that did not sign it, I believe, were Oregon,
Washington, and California. With that as a backdrop, will price
caps work, or do you have to have everybody involved?
Mr. Seetin. Well, obviously the more that are involved in
that, of course, you spread the pain. Because, in fact, we do
not believe that the history of those things has anything of
success. They have failed every time.
Now, let me say personally I was a fan of price caps,
because I grew up on a farm in Minnesota and we raised cattle.
And when the administration, back in 1972, put a price cap on
the price of beef, our cattle were selling for 58 cents. They
put a price cap of 70 on and, boom, the market went right to
70, and we were happy for that price cap.
So I can just tell you that is traditionally how markets
respond. In that particular market you are focusing on, it
might deal with it, but then you have got all of the side
markets that all of a sudden are influenced by that. So, as
those off-peak markets may be influenced by that price cap, all
of a sudden your net cost of energy goes way up and your supply
is inhibited. Because, again, how can you say we want supply,
but you can only get this much for it?
Mr. Hunter. Mr. Chairman, would you yield on that briefly?
Mr. Burton. I will be happy to yield to my colleague.
Mr. Hunter. Thank you for yielding, because I think you
have come to an important point here. The law right now has a
species of price caps, in that the law says that FERC shall
reform unjust and unreasonable rates, which seems to be an
anti-gouging provision. But it is not necessarily a price cap
or does not have a formula for figuring out how much you pay
for electricity. But a 9,000 percent increase in a matter of
minutes is not a matter of a long-term market adjusting itself,
and it is not something that is going to, I think, motivate
producers to get into the market. I think everybody is going to
view it for what it is, which is a very short-term taking
advantage of an opportunity that appears on the board.
So do you see any distinction between those two things?
One, an anti-gouging statute, if you will; and No. 2, price
controls?
Mr. Seetin. First of all, let me make it clear that I do
not believe that fraud or market manipulation ought to be
allowed, and I agree with your contention that a price spike
like that is an indication that something is very wrong,
something is sick. That is very atypical for a truly
competitive market, and you need to find out what that is.
We do not like price caps. But if price caps are the ransom
in this, they are not going to do any good if you do not fix
the underlying market. Again, I am getting back to that. If you
do not fix the underlying market with direct access and
transmission access, price caps will do no good. So if you pay
the ransom of price caps, get the baby.
Mr. Burton. Let me just reclaim my time and ask a followup
question. And that is, according to the Federal regulators who
testified in Sacramento, they indicated that there was only
about 25 percent of the market that they could put a price cap
on. Which means that you have another 75 percent of the market
that would be not under the price cap. Now, if that is the
case, and you had a supplier who was inhibited by the price
cap, what would they do?
Mr. Seetin. I think you have intuitively figured out one of
the big problems in those things, and that is it.
Mr. Burton. They would go to the 75 percent where they
could make more money.
Mr. Seetin. Well, just like if California decides to do it
differentially, you know, you have 40 percent of your power
coming in. What are those guys going to do if the power--if the
cap is here and it is not----
Mr. Burton. Well, I think that is the point I am trying to
make, is if all the Western States in the grid are not together
on this, or if all of California is not under the price cap
along with them, then if there is a price increase, they are
going to go where they can sell the electricity, and those that
are under the price cap are going to suffer with blackouts.
Now, did California not have price caps in December? I think
they did. And I wanted to followup and just ask how did those
price caps work, and why did they not work, if they did not?
Mr. Conlon. Well, the ISO had various degrees of price caps
during last year. It went from I think $750 down to $500 down
to $250. And then FERC came in in January and set a cap--a soft
cap at $150 in January, and $420 in February. And they said
yesterday to you that they were going to go back and do October
through December, and then they were also going to do March and
April, so that they will retroactively set a price based on the
price of natural gas and the price of Nox credits
for each month. And FERC I think is doing that, or did it for
January and February. The ISO did it. When it went to $250, I
think the price many hours went to $250, even though it was not
the peak.
Mr. Burton. Well, will price caps increase the likelihood
of blackouts this summer, or reduce the likelihood?
Mr. Conlon. I do not think anybody knows for sure, but I
just think that the main participants who are not under FERC's
jurisdiction are the municipals. You are talking about LADWP,
Sacramento, Palo Alto.
Mr. Burton. Well, thank you, Mr. Conlon. You want to
respond to that real quickly?
Mr. Seetin. Well, if they do work, this would be the first
time, I would think. The problem with those, you know, you are
in a situation where you are worried about supply, and you are
doing something that runs counter to that in the marketplace.
That is the problem with price caps.
Mr. Burton. Mr. Filner.
Mr. Filner. Thank you, Mr. Chairman. You have opened an
extremely important issue, and there is obviously different
perspectives on that. And I think that is the debate that has
to take place in a rational way without labeling.
But, I have a different perspective. I would point out that
the panel does not have a cross-section of folks who we can ask
that question to and get the kind of answers that at least
might contribute to this debate.
You raised two important issues. One, if a price cap was
not regionwide, obviously there would be differences in
approach by different States. My legislation, and almost every
legislation that calls for--not caps, Mr. Chairman, cost-base
rates. And there is a real important distinction there that I
want to add.
Cost-base rates are all regionwide applied in our
legislation. So, and if I am not mistaken--although I would
like this clarified later for the record--some of those
Governors who you point to in the letter have in fact earlier
come out in support of what the Western--far Western States
supported. But California, Oregon, and Washington, all of whose
Governors have called for cost-based rates, probably have a
population and economy more than double or triple all the other
ones combined. So if you had a weighted vote here, I think you
would agree that the cost-base rates would win.
Now, on your issue about the jurisdiction of FERC, I will
accept your number, 25 percent, for the sake of argument. But
let us remember that 25 percent is what is determining the
prices. It is that marginal control when supplies get tight
that allows this cartel to set the prices.
And most of that other energy, as was pointed out by Mr.
Conlon, and I think Mr. Seetin, is from municipals and Federal
hydroelectric. These--by contract, by law, by practice--all
have consumer-friendly rates. If you control the 25 percent
that FERC has the ability to, you control the market here. That
is why the prices are so high. The people who control that 25
percent control the prices. So if we brought them under
control, you would have a reduction in prices and a
stabilization in the market.
And I will tell the people who are ideologically opposed to
this, you just keep yelling price controls, price controls
never work. You know we have had cost-based rates for 100 years
or since Edison. Utilities provided reasonably priced and
reliable electricity. They made money. They were the most Blue
Chip stocks you can buy if you were looking for that. And so I
do not know who did not make money or what did not work there.
But it is that cartel that is now setting the prices. If you
eliminate all the structure--which I agree with Mr. Seetin, it
was just a completely flawed structure--you are not going to
have competition.
There is not a competitive market here. Those folks have
destroyed basically any research and development of renewables.
They have through the political process, gotten all kinds of
incentives for themselves to make the money. I do not know why
you think there is going to be competition.
You say let the markets work. There is no market. Mr.
Hunter keeps pointing that out. And Mr. Hunter had an exchange
with Mr. Hebert, who was then a commissioner and now the
chairman of the FERC, who said in response to complaints that
people on fixed incomes were making life and death decisions,
that the markets must work, even if granny dies.
And even the Republicans on the committee had a reaction to
that, including Mr. Hunter, who said look, Mr. Hebert, and I am
going to quote, as well as I remember, Mr. Hunter. He said,
``Look, Mr. Hebert, there is no more free enterprise person
than me. There are no more free entrepreneurs than my
constituents. But if you want to philosophize, Mr. Hebert, get
on the philosophy unit. We have an emergency. We need a trauma
unit at work.'' I think Mr. Hunter will remember those words.
Virtually all the public officials in San Diego County,
Republican, Democrat, school board, city council, board of
supervisors, Congress people, have looked death in the eye when
we had full deregulation. And there was panic here in San
Diego. The market was at work. And people went out of business,
people suffered. We were the only ones, Mr. Chairman, who had
full deregulation of retail prices. Everyone else in the State
and the region had been shielded up until now. Now the prices
are going to hit them. And I will tell all the elected
officials in those areas, whether it is Washington, Oregon,
Montana, New Mexico, and increasingly every Western State, as
these obscene prices, criminal prices spread, and I think these
guys are going to charge whatever they can until cost-based
rates come--and they will eventually come, believe me--they are
going to get everything they can. And there is no market at
work that you are all praying to and praying for.
Mr. Seetin. Could I respond just briefly. I just want to
tell you that those markets do work everywhere but California,
apparently. Because that is why we are around. People do not
have to use us. And certainly, if we were not providing a
service, I would not be here talking to you right now. So I
just want to emphasize I strongly disagree with the fact that
those markets do not work. They work everywhere else.
Mr. Filner. Well, that is not accurate--we have not had the
experience long enough for a, ``deregulated market'' for you to
make that statement.
Mr. Bill Horn. If I might, Mr. Filner, you mentioned
municipal utilities, and specifically L.A. Water & Power. I
would point out that L.A. Water & Power sold excess energy
which they got from Federal hydropower at less than 1 cent a
kilowatt, into the market, and wiped out $85 million worth of
bonds, at San Diego County ratepayers' expense, in 6 weeks. So
I would like to----
Mr. Filner. I have no trouble blaming with L.A. too. But
take off the same, Mr. Horn, on Enron and Williams and Southern
and----
Mr. Bill Horn. I will. I would be happy to.
Mr. Filner. OK.
Mr. Burton. Mr. Ose.
Mr. Ose. Thank you, Mr. Chairman. I want to go back to Mr.
Horn's comment here a minute ago. You are saying L.A. Water &
Power had Federal power wheeled into its market area, under
contract, and I think it is either Hoover or Glenn Canyon, that
they are paying a penny a kilowatt----
Mr. Bill Horn. Less than a penny.
Mr. Ose. Less than a penny. All right, we are going to say
a penny, for simplicity sake. A penny a kilowatt for the power.
And then turned around and sold that power to the ISO.
Mr. Bill Horn. Back into the ISO.
Mr. Ose. This was the substance of the L.A. Times article
yesterday.
Mr. Bill Horn. 23 cents a kilowatt hour they got for that
power.
Mr. Ose. It seems to me, if I recall correctly, there are
provisions in the Internal Revenue Code that you cannot use
public bonding capacity and convert it to private purpose. And
I am curious whether or not using L.A. municipal water and
power facilities in this way is consistent with the law. And
that may be above yours and my pay grade here. But I think that
is a question we need to ask, Mr. Chairman.
Mr. Bill Horn. I think the other question I would like to
point out is San Diego County, because it is a Federal dam. My
ratepayers and my taxpayers paid for that power that they are
getting. Now, they are fortunate----
Mr. Ose. That is exactly my point.
Mr. Bill Horn [continuing]. They are fortunate to have a
municipal, and I would like to get one here in San Diego, but
the law has precluded that until we get that changed. But at
the same time, I think they should have sold that excess power
into the grid or to San Diego at at least the cost of
generating it and moving it to L.A., and then moving it to us.
Not gouging us.
Mr. Ose. All right, I want to go back to Mr. Seetin.
Ms. Davis. Could you yield, Mr. Chairman, for just a
followup on that, Mr. Ose, if you do not mind?
Mr. Ose. Sure. You yielded to me. I would be happy to
yield.
Ms. Davis. Thank you. It is my understanding that they were
compelled to sell into the ISO at the going rate, that they
could not--is that correct? I mean, if someone could just----
Mr. Bill Horn. No. We mentioned price caps a minute ago,
and I keep wanting to weigh in on these things. I am a free
enterprise person and I really do not like the price caps. But
we have got an unregulated monopoly at the moment. We took a
regulated monopoly and made it unregulated.
I would get rid of the ISO, frankly. Allow these
distributive utilities to purchase the power from the
generators, and then we could at least get close to a free
market. Because at the moment you have a controlled market. It
is the last person in, they get the highest price, and
everybody below that gets that same price. That is what has
literally robbed San Diego County's ratepayers of their money.
We have a transfer of wealth going on here. And I think
somebody mentioned the fact that we need a trauma unit. Duncan
Hunter. We need a trauma unit here. We are being gouged from
both ends, and we do not see any relief coming from Sacramento.
Every time they make an adjustment--I would not bail these
utilities out. Allow them at least to have a free market, and
then we can hold them accountable. We cannot hold them
accountable this way. We have an ISO who every 10 minutes can
change the ball game. And I just think it is absolutely
unconscionable.
Mr. Ose. I want to reclaim my time. All right, I want to go
back to Mr. Seetin. In your statement you talk about the entire
market, that being--you know, you have to have the ability to
move power here and there to meet demand and supply. If one
State is not participating in a regional transmission
organization and all the States surrounding it are, in this
example--and I cannot tell you if this is the case or not, so
it is hypothetical. If California has not submitted its RTO
plan and every other State has, what kind of difficulties does
that create?
Mr. Seetin. Well, it again creates two separate markets,
theoretically. And that is what our experience has been. That
every time you segment a market like that--and it really hurts
the efficiency. Because, again, your products are not
transferrable as easily. And from the marketplace standpoint,
we have always urged that the control areas should be as broad
as possible to maintain reliability and take care of the
necessary things, of course.
Mr. Ose. I want to go back to one other thing. The PUC
recently changed the manner in which the qualifying facilities
are compensated for the power that they generate. In other
words, they put a cap on the cost that they could factor into
their retail rates, lowering the IER rating from 11,000 plus to
9,000, thereby making Biomass and other qualifying facility-
generated power less remunerative.
The point I want to make here is that those are sources of
power that are very favorable for us environmentally in terms
of the air emissions that they put into the basis. In
particular, in Sacramento and in San Joaquin Counties, we are a
non-attainment area. And the consequence of a reduction in
compensation to the qualifying facilities is that we will have
to buy more power from other sources, which will contribute to
our non-attainment. So, in fact, the PUC's order makes it more
difficult for us to comply with air quality standards, and it
is absolutely unnecessary, if we would just give the qualifying
facilities the ability to directly access the market.
And I want to finally, Mr. Chairman--I think Mr. Filner is
right. This is not a function of our environmental constraints,
and I will tell you why. If you look at the major generators,
whether they be the guys we like or the guys we do not like,
they have facilities that largely are 10 or 15 years old. They
have technology that is 10 or 15 years old. New technology
converts gas to electricity at up to 50 percent greater
efficiency than that old technology at 25 to 50 percent less in
emissions. What we need to do is find a way to get that new
technology online so we have reduced demand for gas, we can
lower the price accordingly.
Thank you, Mr. Chairman.
Mr. Burton. Ms. Davis.
Ms. Davis. Thank you. And thank you, Mr. Ose, because I
appreciate your comments about the environmental
considerations. I think there are a number of statements made
by very responsible people, but that, in itself, is not the
issue. But we do need to address that, and we do need to find
those alternative sources of energy.
I wonder if we could go back just to Mr. Conlon for a
second, because I know I was cutoff. There has been a lot of
talk about competitive markets. And probably it is a little
like so many other things, we cannot always describe it, but we
know it when we see it. And I am wondering in San Diego,
because part of the charge of the PUC was to lift the caps when
the competitive markets were in place, could you share with us
what indications you had or you believed that the Commission
had that there were competitive markets that would work in San
Diego.
Mr. Conlon. Well, I think the requirement was to lift the
cap when the utility recovered all its stranded assets, not
when the market was competitive. So, you know, the presumption
was that the markets were going to continue to be competitive,
because we had a 30 percent excess capacity. And I think a
competitive market is where 20 or 30 percent of the players do
not operate every day.
Otherwise, when you know you are not going to operate
because there is 130 percent of the people in the market and
there is only 100 percent, then prices are going to go down to
meet the most inefficient player that is going to operate that
day. So the guy that gets the 100 percent, his price sets the
price. And the other 30 percent go home. They do not work at
all. So that is when you get competitive markets, when these
people go home instead of operating.
Ms. Davis. Would you say that today in the marketplace,
then, that some of the companies that are operating have a
market share that could be considered in the neighborhood of 15
to 20 percent?
Mr. Conlon. No. I am saying that we intentionally made sure
that no one had more than 20 percent, because----
Ms. Davis. No, I understand that. I am sorry, if I could
just interrupt for a second.
Mr. Conlon. OK. I am sorry.
Ms. Davis. I am wondering today--and we have the companies
that are going to be joining us in a little while, whether you
have the knowledge or impression, in some cases, that they
actually do have the market share that we were working hard to
insure that companies did not have?
Mr. Conlon. Well, the problem is, with the supply where it
is, especially when you get into Stage 2 or Stage 3, that
everybody has market power because you need every ounce of
generation you can get. So that is why the market is not
competitive, because there is not enough capacity available. If
there was 110, 120, or 130 percent capacity available, then I
think they would have no choice but to lower their rates.
Because again, they would not be in the 100 percent that
operates.
Ms. Davis. Thank you.
Mr. Filner. I just want to point out, if the gentlelady
would yield. I just want to thank the chairman. Ms. Davis and
I, and Mr. Hunter, are not members of this committee, and it is
by the courtesy of the chairman that we can join you today. And
I just want to thank the chairman for giving us full expression
of our questions, and allowing us to participate. I think it is
very helpful to the whole debate. I thank the Chair.
Mr. Burton. Well, I think Mr. Filner and Ms. Davis and
everybody, all of us understand this is not a partisan issue.
We have got to figure out, along with the Federal and the State
regulators, some way to solve this problem.
Mr. Horn.
Mr. Horn. Thank you, Mr. Chairman. I would like Mr. Conlon
and Mr. Seetin to answer this. Agencies, over time, always have
some sort of corporate culture, even if they are in government,
not in the private sector. And I would be curious as to how you
would analyze the relationships 15 years ago between the State
utilities commission, that you headed, and the Federal
situation, where right now everybody is pointing their fingers
at each other. And I would be curious how you would think the
Wilson, for want of a better thing--although other Governors
had put their people in there--Wilson commissioners versus the
Davis commissioners. What is the difference between the two,
and where is it that we are being shorted by our own
Commission?
Mr. Conlon. Well, all I can say is what public statements
that the present commissioners have made. And I think, by and
large, they do not believe that there should be competition in
the generation market, they do not believe that there should be
deregulation of any form. I think at least two of the
commissioners have been very vocal on that point.
And I think that all five of the commissioners under
Governor Wilson were supportive of competition where there were
adequate competitors. And with 30 percent excess capacity, I
mean, we never dreamed of a supply problem. I mean, these
events that have occurred, the drought, the worst in 25 years,
we had the hottest summer in 100 years last year. It was the
hottest summer in 100 years in the State of California.
And I think those two events, together, has caused this
problem, not the fact that we had deregulation or a regulated.
If we had a regulated market, if we had not changed anything,
we would have had a serious problem in the entire State, and we
would have had 30 percent rate increases under a regulated
basis. Because the price of natural gas skyrocketed fivefold.
And whether you are regulated or unregulated, if you are going
to use natural gas, you are going to pay that price. It is an
unregulated price done by the Federal Government 15 years ago.
So regulated markets today, we would have just as much rate
increase as we are having today in an unregulated market.
Because natural gas is driving it, and we have got the shortage
of capacity. And, you know, until we get that 17,000 megawatts
online, this is a serious problem. These short-term contracts
the Governor did are just the right idea.
President Bush mentioned using aircraft carriers to drive--
in the summer to drive power in the cities. And I think San
Diego, with I assume two or three aircraft carriers, should
certainly consider that in the short term. I read that in the
press someplace. I am a compulsive reader.
Mr. Horn. Mr. Seetin, what would you like to comment on
that question?
Mr. Seetin. That is one you do not touch with a 10 foot
pole. But I would just say this, that I think that clearly, if
the market needs had been responded to, we would not be having
this hearing here today. And I just think, from our standpoint
and the market's standpoint, they continually missed the mark.
That is all I can say.
Mr. Horn. I yield the rest of my time to Mr. Ose. Did he
hear me?
Mr. Burton. I think Mr. Ose has temporarily flown the coop.
You are going to yield it to Mr. Hunter?
Mr. Horn. Mr. Hunter.
Mr. Burton. Mr. Hunter, he yields his time.
Mr. Hunter. Well, thank you, Mr. Chairman. I want to thank
you again for having the hearing.
Gentlemen, we have got about 60 days until summer reaches
us, and we are vastly understocked in terms of generational
capability in San Diego and elsewhere. My colleagues--not to
beat a dead horse, but my colleagues have said they do not
think there is any environmental consideration here. That is
kind of a myth and a red herring. So I wanted to offer to Ms.
Davis, my good friend in the House, and Mr. Filner, co-
sponsorship on my bill that says we will allow any business or
individual in the State of California, or in any State
experiencing a power emergency, which is defined as supply
being within 10 percent of demand, to operate any type of power
generator available to insure their economic stability. Now,
gentlemen, do you all agree that would be a good thing for us
to pass, now, on the Federal level?
Mr. Hardage. Absolutely. Absolutely.
Mr. Hunter. Mr. Horn.
Mr. Bill Horn. I totally agree. We have enough capacity, if
we could bring those generators up.
Mr. Hunter. Mr. Barnhart.
Mr. Barnhart. Yes, sir.
Mr. Hunter. Mr. Thomas.
Mr. Thomas. I totally agree.
Mr. Hunter. Mr. Seetin.
Mr. Seetin. We are only the marketplace and neutral to
that.
Mr. Hunter. OK. Mr. Conlon.
Mr. Conlon. Well, you know, you have to define that very
carefully, because the environmental concerns are still there.
But you could certainly get it done in 90 days instead of 18
months. I mean, I think it is a matter of time.
Mr. Hunter. OK. Let me then offer, Susan, could you get on
my--since Mr. Filner asked me in the last hearing if I would
co-sponsor his legislation, which I did, could you sign up to
this and say we are going to let anybody turn on a generator
who has one in the State of California during an emergency?
Ms. Davis. Mr. Hunter, I appreciate your asking me that,
and I will take it under advisement.
Mr. Hunter. OK. Mr. Filner.
Mr. Filner. Dr. Filner. I am glad we have 100 percent from
the Republicans on this. But let me tell you, Duncan, I do not
have any idea what your peaker plant proposed entails.
Mr. Hunter. Well, then, why not sign it and turn them on?
Mr. Filner. They are not the problem. This is not the
problem. And we are going to have new problems if we go down
your route. We have the ability to provide the energy that we
need to our county and to our State that is prohibited--it is
prohibited from being used now.
Mr. Hunter. OK, Mr. Chairman, let me take my time back and
follow on.
Mr. Filner. It is not the environmental thing that----
Mr. Hunter. If Mr. Filner's answer is not preceded with a
``yes,'' I do not want to hear the rest of it.
Mr. Burton. Let me interrupt just 1 second.
Mr. Hunter. OK.
Mr. Burton. Please. I feel like Johnny Carson on a bad
night. Let me just say that Mr. Horn's time has now expired,
and now it is your time for 5 minutes.
Mr. Hunter. I thank the chairman. And now that we have
established that, and my point is that we--this is a crisis and
we do need to have a bipartisan response to this crisis. And I
have told my friends who are the free marketeers that the 9,000
percent price spike is not free enterprise.
And I have also told my friends who have very strong
environmental considerations, when you are going under for the
third time and you want to reach for that lifesaver, and that
lifesaver is the ability to turn on a diesel generator in your
own plant to keep your life savings from going out in the next
2 weeks, you should be allowed to do it. Right now in
California you cannot do it.
We have been told by Solar, which makes great generators,
and Mr. Ose spoke about it, extremely efficient, makes them in
San Diego with the great expertise of San Diegans, and we have
been told by them that they can bring their peaker plants out
and could actually set those babies up within a week, assuming
that we could get into the production schedule, because
everybody else and the rest of the world, except California, is
buying them.
Mr. Barnhart, you are a contractor, a heavy-duty contractor
who does lots of big infrastructure projects. How fast could
you build 10,000 square feet of cement slab, if you were given
a contract to do that? What kind of time are we talking about?
Mr. Barnhart. Just put down 10,000 square feet of concrete
slab?
Mr. Hunter. If you had to do it on an emergency basis?
Mr. Barnhart. We would probably have it down within 48
hours.
Mr. Hunter. You could do it in 48 hours. Solar could move
these peaker plants in and install them within a week. We are
60 days away from disaster. And in the State of California, in
the county of San Diego, we are unable to help ourselves
because of regulations and laws that we have to meet and comply
with.
And so once again, Mr. Chairman, to our head of the board
of supervisors, I would hope that the board of supervisors,
which has met, incidently, with the Coalition for Electricity
Independence, which is our group of business people in San
Diego County who want to have the ability to save themselves by
turning on a generator this summer, I would hope that the
county of San Diego and the State of California--and I am still
hopeful on this--would be willing to waive all regulations to
let us save ourselves from this impending disaster. So, Mr.
Chairman, I would hope that we could get co-sponsorship of 1075
or support of 1075 from the county board of supervisors.
And, Mr. Barnhart, one last question for you. You could
build a 10,000 square foot slab in 48 hours. How long would it
take you to knock out--assuming you were permitted--to knock
out a 1-mile pipeline, a gas pipeline, 16 inch pipeline? You
have done that before?
Mr. Barnhart. I have not done that specifically before.
That might take longer, I would suspect.
Mr. Hunter. Longer than 48 hours. OK. Well, we hope that
you will work with us, and Sam and other folks who are
interested in continuing to employ people in San Diego County,
to get this--try to get some respite in before the summer
reaches.
Mr. Hardage. Thank you, Congressman Hunter. We, in the
hotel business, in order to keep the lights on, as a matter of
fact met in executive committee yesterday to discuss the
purchasing and installation of individual co-generating plants
in all of our hotels here in California, because we do not know
what we are going to do when the lights go out in California.
And your bill would make it infinitely easier. Contrary to what
Congressman Filner says, there are definitely very strong
environmental hurdles to solving the problem. And your bill
would literally help turn the lights back on. And thank you
very much for introducing that.
Mr. Bill Horn. And I might say, on behalf of the board of
supervisors, I would be happy to carry that and get your
endorsement for you, Congressman Hunter. I would like to point
out--my staff just brought me this--this is dated today, April
12th. Dynergy's plans for the 18 combustion turbines they have
in San Diego County, they are refusing to turn on and to sell
that power to SDG&E because they do not believe they are going
to get paid from the ISO. And this is a transmission I just got
from SDG&E. So there is 250 megawatts we will not have
available if they refuse to sell them. And I am telling you,
the ISO is the problem.
Mr. Filner. And that is not an environmental restriction;
right?
Mr. Bill Horn. They say they are not going to get paid, so
they are going to refuse to give you the power.
Mr. Filner. That is purely a price problem.
Mr. Burton. Mr. Hunter, do you yield back your time?
Mr. Hunter. Yes. In fact, I would be happy to yield the
balance of my time to Mr. Ose, who stepped out at a--if he has
any more questions to ask.
Mr. Ose. Well, I thank the gentleman from this area. And if
I could reserve it, I would. And not wishing to spend the
committee's time fruitlessly, I would yield it back to the
chairman for further use.
Mr. Burton. Well, I want to thank you for yielding back to
me. We will dispense with this very fine panel we just had.
Thank you very much for your testimony. You all were very
eloquent. We really appreciate it.
We will take a 10-minute break, because I think you cannot
think if you cannot--if your seat goes to sleep. So we will
take a 10-minute break and we will come back with the second
panel. Thank you.
[Recess.]
Mr. Burton. The next panel consists of Mr. Kevin P. Madden.
He is the general counsel for the Federal Energy Regulatory
Commission. Mr. Madden has been with us before and has been
helpful. Mr. Fred John, senior vice president for external
affairs for Sempra Energy. Mr. Steve Malcolm, president of
Williams Energy Services. And Mr. John Stout, senior VP for
asset commercialization for Reliant Energy. Would you please
stand, gentlemen.
[Witnesses sworn.]
Mr. Burton. Let us start with Mr. Madden. Do you have an
opening statement?
STATEMENTS OF KEVIN P. MADDEN, GENERAL COUNSEL, FEDERAL ENERGY
REGULATORY COMMISSION; FRED JOHN, SENIOR VICE PRESIDENT FOR
EXTERNAL AFFAIRS, SEMPRA ENERGY; STEVE MALCOLM, PRESIDENT,
WILLIAMS ENERGY SERVICES; AND JOHN STOUT, SENIOR VICE PRESIDENT
FOR ASSET COMMERCIALIZATION, RELIANT ENERGY
Mr. Madden. A very brief one. Mr. Chairman, thank you for
the opportunity to appear here today to address the electricity
matters and markets in California and surrounding States. I
applaud this committee for the time and effort it has spent
over the past 3 days gathering the unvarnished facts about the
reasons why the electricity markets in California and
throughout much of the West are in a state of stress.
It is my belief that these markets will continue to
experience various serious problems throughout this coming
summer. Wholesale prices have increased substantially.
Consumers are being implored to conserve as much as possible.
Generation has not been built for the past decade. Restrictions
have been placed on long-term commitments. And utilities
continue to face severe financial problems.
While some have accused FERC of being indifferent or even
hostile to the concerns of California, I think our actions
prove otherwise. I will not dwell on those actions, as I have
already addressed them in my opening statement to the committee
on Tuesday. I believe we need to work together, not point
fingers at one another. We need this to solve the electricity
crisis that exists now. We need supply, we need the market
certainty, and we need to move forward. Thank you.
Mr. Burton. Thank you, Mr. Madden.
We will now hear from Mr. Fred John, senior vice president
for external affairs for Sempra Energy.
Mr. John. Thank you, Mr. Chairman. Sempra Energy is the
parent company of both SDG&E and Southern----
Mr. Burton. Would you pull that mic a little bit closer, if
you can.
Mr. John. Sempra Energy is the parent company of both San
Diego Gas & Electric Co. and Southern California Gas Co. My
comments today will focus on both electric and natural gas
issues as they relate to the State of California's present
crisis.
You already heard from Mr. Seetin and former CPUC
commissioner Greg Conlon on an overview of what has evolved in
California over the past 6 to 7 years that got us to the point
where we are today. And I would be happy to respond to some of
those points that they made in the Q&A, but I am not going to
reiterate all of those.
You have also heard from segments of the commercial and
industrial market here in San Diego on the negative impact that
high energy prices and poor power reliability have on them as
customers, and also on the general economy in California. My
comments are focused on what we think is the real crux of the
problem, though, and that is skyrocketing wholesale electric
prices. This was addressed earlier by Congressman Filner,
Congresswoman Davis, and Congressman Hunter. But I want to
amplify on these points.
One of the assumptions we made here in California, when the
deregulation process started back in 1998, was that FERC would
act as an effective policeman of the wholesale electric and
natural gas market. Unfortunately, our hopes have been--we have
been somewhat disappointed. I am not going to point fingers at
FERC, and I know Mr. Madden made comments about it earlier. But
we do believe that the Federal legislation is very clear. It is
mandatory. It is not discretionary. Wholesale sellers of
electricity and wholesale transporters of natural gas must be
required to charge prices that are just and reasonable.
However, prices that are 500 percent higher tha historical
norm clearly do not pass the just and reasonable test. Even
FERC has agreed that the prices in the wholesale market do not
pass that test. Yet for 10 months FERC has refused to require
wholesale sellers of electricity to charge just and reasonable
rates prospectively, or to refund dollars to consumers that
exceed the just and reasonable standard.
We do recognize that in early March FERC did issue two
orders with respect to potential refunds, and we are hopeful
that they will follow through on that. But even the sums that
are set forth in those orders are a small percentage of what
the total alleged overcharges are, at least according to the
California ISO.
We are also disappointed on the natural gas side, because
we filed a petition in December 2000 with FERC requesting a
temporary reimposition of the maximum rates on natural gas
transportation in the secondary market. FERC has not yet acted
on the petition, and transportation rates in California exceed
those of every other State by ranges of $5 to $50 per million
BTU.
I know there have been a lot of comments this morning about
whether natural gas prices have driven up electric prices. I
think you should also look at the flip side. Have the high
electric prices caused natural gas transportation rates in
California to have increased, and increased dramatically?
Our belief is that if FERC is not going to take further
actions--and I still say there is an ``if'' there based on
recent comments at least by Commissioner Breathitt--that
Congress and the President need to step in. Commissioner
Massey, himself, in testimony on March 20th before the House
Energy and Air Quality Subcommittee said, ``Power that cost
California $7 billion in 1999 increased to more than $27
billion last year. Costs in 2000 may exceed $70 billion.''
Customers--and believe me, we have been going through this
here in San Diego since May. Customers are saying to us we are
mad as hell, and we are not going to take it anymore. But it is
not just an impact on the customers. Because of these wholesale
price increases, and up to this point the refusal, until
recently, of the California commission to pass through any of
these costs, at least one of the major utilities in this State
has gone bankrupt. And with all due respect to the statement
that Supervisor Horn made earlier, I do not think it is
responsible to say that a major utility, who is the backbone of
the infrastructure in this State, should be allowed to go
bankrupt. The State of California has also been required to
purchase power on behalf of the investor-owned utilities, and
they have already built up a bill of $4 billion, and that is on
top of the $14 billion of under-collections that the utilities
have absorbed.
Although the Commission in California has recently allowed
retail rates to increase for PG&E and Edison, none of these
dollars are targeted at their under-collections. The revenues
are going to basically help the State repay its general fund.
Our view is, all of this could have been avoided back in
the summer of 2000 if two things happened. One, if FERC had
taken action on the wholesale side, and if the State of
California had taken action on the retail side to increase
rates, but to do it in a way where it was conservation-
oriented, and higher use cause ratepayers to pay more money.
We respect the fact that Congress has held several
hearings, including two field hearings: The one you have held,
and previous hearings out in California. And we really respect
that. But there does come a time for hearings to stop and
action to be taken. And we think that time is now.
We also recognize that Congress is trying to do a lot of
good things to help consumers, not only in California, but
throughout the country. For example, a Federal tax cut bill.
Well, what good is a Federal tax cut bill if the consumer has
to use all of its payments to pay its electric and gas bill,
and then it is still underwater? What good is a Federal
education reform bill if parents do not have enough money to
take care of the basic necessities of life for their children,
or if schools are having to spend their money on electricity
instead of on teachers and equipment? What good is a Federal
healthcare reform bill if people have to make a choice between
freezing in the winter or suffocating in the summer because
they cannot afford to pay their gas and electric bills? It is
time to act.
Mr. Burton. Thank you, Mr. John. I think you made a very
strong point there.
Mr. Steve Malcolm, the president of Williams Energy
Services.
[The prepared statement of Mr. John follows:]
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Mr. Malcolm. Mr. Chairman, I want to thank you again for
the opportunity to offer Williams' views on the urgent actions
that are necessary to minimize the stress that Californians
will face this summer because of energy concerns.
First, a little background on Williams. Williams is a
publicly traded, diversified energy company that is active in
most parts of the domestic energy industry through various
operating subsidiaries.
We are the second largest natural gas pipeline company in
the United States, transporting about 17 percent of the
Nation's peak day consumption through five wholly owned
pipeline transportation and storage systems. This network does
include our Kern River pipeline which just received expedited
approval to add a substantial amount of new capacity to
California for this summer.
Many people outside our industry are just now becoming
aware that we also have a large and rapidly growing energy
marketing and trading group.
In the electricity area, we market about 15,000 megawatts
of installed and planned generating capacity around the
country, and intend to grow that portfolio to about 40,000
megawatts over the next 5 years.
Here in California, we dispatch roughly 4,000 megawatts
from three plants in the Los Angeles area. And as you all know,
that represents about 10 percent of California's peak day
demand. And we sell the majority of our megawatts through
forward contracts.
Key elements of the Williams message are unchanged and are
consistent with what we have been saying in California and in
Washington since early last summer. In the few minutes I have
today, while I want to update you on the most recent actions by
the company, I will focus primarily on the most urgent and
immediate actions we think are necessary based on today's
circumstances.
I want to emphasize, our focus is and has been on
developing solutions to the real problems. In fact, Williams
has worked closely with State and Federal Government officials
to develop solutions toward that end. Despite the decision by
PG&E last week, Williams has refrained from taking action to
force utilities into bankruptcy. We were at the forefront of
the initial movement to postpone due dates for payments in
January. Since then, Williams has continued to sell power to
the ISO voluntarily, despite the mounting unpaid bills.
Williams has used its own credit and liquidity to buy power
outside the State, and then resell it to the ISO at the ISO's
request during the period when many out-of-state generators
refused to sell to the ISOs. Williams signed one of the first
long-term contracts with the Department of Water Resources
earlier this year, and most recently, as I mentioned earlier,
we worked diligently and urgently to get approvals necessary to
expand the capacity of our Kern River pipeline to bring more
natural gas to the State by this summer.
Looking first at some much needed near-term actions, it is
absolutely critical that we remove every obstacle to utilizing
all existing generation, and to adding new generating capacity
this summer. First, the dampening of new development caused by
regulatory uncertainty and the financial instability of major
purchasers in the market must be removed. Credit-worthy counter
parties with the flexibility to take advantage of risk
management tools must participate in the wholesale market to
obtain supplies for end use customers.
Last summer we actively encouraged California regulatory
agencies to follow the utilities to add long-term--to allow the
utilities to add long-term contracts to their power portfolios.
Fortunately, the Department of Water Resources has recently had
some success in this area, and including an arrangement with
Williams. But there are important issues that remain
unaddressed, not the least of which is a solution of the
problem of past due payments.
Second, the permitting and approval process for new
generation needs to be streamlined and improved. The good news
is that we have seen some progress, but clearly the processes
leading to project approval still need more attention.
We have been monitoring with particular interest an
application at Huntington Beach that would take an existing
site and add 450 megawatts by revitalizing old, out-of-
commission units. The developer has estimated that it will take
3 months of 20-hour days to get that power online. But the
construction has yet to commence, as the developer tries to
work his way through a long list of obstacles.
Third, and certainly a tough choice, is that a significant
amount of power can be available only if certain environmental
regulations are suspended. Power plants that have specific
limits on the number of hours that they can run may already be
over the limit because of strains on the system last year and
in the first quarter of 2001. Rules must be clarified to allow
those plants to run and make that power available, and not just
under Stage 3 conditions.
Further, these changes must be made in a way that does not
put greater pressure on prices, nor mortgage the future of
those facilities.
And finally, we must have a significant demand side
response. Painful as it is, the fact of the matter is that
consumers must be exposed to price signals before they will
reduce consumption in a meaningful way, just as suppliers and
potential suppliers must receive appropriate price signals to
encourage development.
Looking now at some of the longer-term solutions, to avoid
us having to be back here again next year, again accurate price
signals are the most effective means of attracting the
investment in new generation and new transmission that is
essential. We must take actions to facilitate the integrated
planning operation and upgrading of the electric transmission
grid. The answers in this area must be developed on a regional,
not a State basis.
And I would just conclude by saying we certainly appreciate
the opportunity to share our views, and look forward to being a
constructive part of finding a solution. Thank you.
Mr. Burton. Thank you, Mr. Malcolm.
We will now hear from Mr. John Stout, senior vice president
for asset commercialization for Reliant Energy.
[The prepared statement of Mr. Malcolm follows:]
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Mr. Stout. Thank you very much, Chairman Burton. First of
all, let me say I am an engineer by profession and I like to
deal with the cold, hard facts. And so I have chosen to use
some slide presentations to help illustrate some of the facts
that we developed to try and explain what took place this year.
Originally in the package that has been handed out to you,
you had several slides dealing with the supply demand
situation. I am going to skip those and go straight to the
heart of a couple of important issues.
This is a slide that represents how much generation we
produced from our facilities over the last 5 years. Now, we
only owned these the last 3 years. Before that they were owned
by Southern California Edison. What I would like to point out
is that in year 2000 we produced two-and-a-half times as much
energy from these facilities as they historically averaged in
the past.
Couple of points about that. No. 1, in respect to a comment
made by Congressman Hunter about the extensive outages we are
having now, a lot of that has to do with these extra hours that
we ran on these units. We do not have a single power plant that
is less than 20 years old, and we have a couple of them that
are nearly as old as I am. They were built in 1953. So we have
a very old fleet. And it is kind of like taking a 20 or 30-
year-old automobile and putting about 50,000 miles in 1 year on
that car. At the end of that year you are going to have a lot
of maintenance and a lot of repairs that you have to do. And
this slide tends to illustrate that.
The other point I would like to make--go back to that
slide. I think you skipped ahead. Is that I need to ask the
question: Does this really look like the strategy of a business
who is trying to withhold energy from the market? We produced
two-and-a-half times as much as the historical average. I would
argue that is totally inconsistent with someone who is trying
to withhold. If you would, skip the next two slides. One more.
Congressman Filner pointed out a comment a minute ago in
his opening statement about a $20 billion outflow from
California. That is a reflection of the increase in market
prices in California, which went from $5 billion in 1998 to $7
billion in 1999 to $27 billion in year 2000. And what I would
like to illustrate to you is that when you look at how much
money an independent generator such as Reliant had to spend on
natural gas for fuel, our cost actually went up 50 percent more
than that.
Our costs are up 738 percent from what we spent for fuel in
the year 1998. Now, the gentleman from the hotel industry
commented that their fuel bills have gone up, too. Theirs have
only gone up 350 percent, he said. Ours have gone up more than
double that. That is not a market manipulation, that is just a
cost of doing business.
And in response to another comment made by Congressman
Filner about how well the old regulated system worked, I would
point out that even if you had the old regulated system and you
had this sort of increase in the amount of usage of gas-fired
generation and those sort of gas price increases, even the
regulated utility would see similar increases in their cost of
producing energy.
Because of these increases, fuel now takes two-thirds of
every dollar of revenue that we take in. Two years ago it was
45 percent; now it is 65 percent. Not a whole lot that I can do
about that. That money comes in, goes right back out to the
fuel suppliers.
I would like to point out, though, that in trying to be
part of the solution to this problem, Reliant has offered--has
made this offer to every one of the IOUs, to DWR, even to the
Governor's office that we will provide energy for 2 cents a
kilowatt hour for the next 5 years. All you have to do is bring
the fuel to us. We will cook it, make electricity out of it. We
are not trying to gouge California consumers, we are trying to
be part of the solution. And 2 cents is a very reasonable price
for converting that gas into electricity. But it highlights the
fact that the cost of that gas is a critical element of the
high cost of power in California right now. That offer is still
on the table. So far no one has taken us up on it.
Now, I would like to get into something that I hope you
find quite interesting. It has to do with the fact that there
are some people who have been raising their bid prices in this
market. And I would like to show you a little bit of the detail
that explains exactly who they are. If you would flip to the
next slide, please.
This slide shows what the PX day-ahead market supply bids
looked like on June 29, 2000. This is what suppliers such as
Reliant bid in. The PX adds them all up and produces a big
curve like this. We do not set the price in the market, though.
You actually have to have people who are buying power also put
a bid in as to what they are willing to pay. And if you will
flip to the next slide, you will see what was bid in.
These were the bids from the buyers in the market. And the
point where those two curves cross, which is about $175 a
megawatt hour, reflects the clearing price in the market for
that hour. Now, I picked June 29th, because that is the very
date that the CPUC Chairman Loretta Lynch highlighted her
report to the Governor as a day that illustrated market
manipulation, withholding. Her argument is that the price at 5
p.m. had jumped to $750 a megawatt hour. And her contention was
that perhaps this is evidence of suppliers withholding from the
market.
Now, if that was the case, and I were to show you the bid
curves that were submitted by suppliers at 5 p.m., you would
see that red line that stretches up to the right-hand side of
the sheet, you would see that shift to the left. That means
less supply was being offered into the market. Let me show you
now what actually happened. Next slide, please.
The supply curve did not shift to the left, it shifted to
the right. Suppliers offered more supply into the market at
even lower prices. So why did the market clear at $750 a
megawatt hour? Next slide, please.
Because the buyers in the market raised their bid prices.
You can see from this that the supply cleared at $750 a
megawatt hour. And if you will flip to the next slide, this
shows you the whole bid curve for those 2 hours. It is pretty
clear who raised their bid prices in this market. Next slide,
please.
This is a slide those of you in Washington have seen
before. Excuse me?
Mr. Burton. Who raised their bid prices?
Mr. Stout. It is the buyers. But I do not have information
as to which specific buyers it was. That is considered
confidential.
Those of you in Washington have seen this slide, I think.
It was passed around as evidence of the sort of problem in the
market. Shows much, much higher prices on a day. In fact, this
was a Sunday. I went back, researched exactly which day this
was. And if you will flip to the next slide, that is what the
bid curves looked like on that day. Once again, the exact same
pattern of buyers bidding the price up, which is consistent
with any auction where you have a scarce resource.
I actually have with me a binder with every single day this
summer. Pick any day you would like to look at, I will be happy
to show it to you, because you will see exactly the same
pattern of buyer bid behavior.
And let me close by explaining why this takes place. Next
slide, please. Because this is a competitive auction, but the
competition, because you had a shortage of supply, was existing
between buyers, not as much between suppliers. Buyers were
working against one another to try and get scarce resources.
And what made it especially worse were the rules that were in
place in California that require the utilities to bid all of
their own generation into the market, because what they had to
do then was bid back into the market to get that generation for
their own use. It was equivalent to having to put your house on
the auction block every day, and having to outbid every other
home buyer that came along just so you could stay in your own
house.
The quote you see here is from a CPUC audit of PG&E, trying
to investigate what happened last summer. And it pretty well
explains the situation. And with that, I conclude my opening
comments.
Mr. Burton. Thank you very much. We will now go to 5 minute
rounds of the questions.
Mr. Madden, in your March 14th order regarding the AES,
Southland, and Williams, you essentially concluded that they
intentionally shut down two plants where they were going to
receive about $63 per megawatt hour. As a result, the power had
to be purchased from other AES units right next-door at more
than 10 times the price. Is that a fair characterization?
Mr. Madden. Yes.
Mr. Burton. If they did that, is that illegal?
Mr. Madden. They violated--in the March 14th order, which
is a show cause order where we essentially tell AES/Williams to
prove otherwise, if they do not prove otherwise, it is a
violation of 205 of the Federal Power Act and the tariffs at
the Commission.
Mr. Burton. Under your order, AES and Williams were given
20 days to contest that finding. That time period should run
out I guess on Tuesday. Have they done so?
Mr. Madden. They have submitted additional filings with the
staff, the enforcement staff, and have had discussions with
them.
Mr. Burton. In your order, you stated the information
suggests that Williams took action to extend the outage at
Alamedas, and to make Huntington Beach Two unavailable for
pretextual reasons. What does that mean?
Mr. Madden. What I believe, that what they meant behind the
order is that they did not necessarily have to have that outage
at that plant.
Mr. Burton. What led you to believe that the outages at the
two plants were not directly related to the necessary and
timely maintenance of the units?
Mr. Madden. Mr. Chairman, there is confidential information
in the record which demonstrates otherwise, we believe.
Mr. Burton. Well, we would like to have that confidential
information, and I think I have talked to the director, the
president--what is his title? Mr. Hebert. I cannot remember----
Mr. Madden. The Chairman?
Mr. Burton. Yeah, the chairman. The chairman. And he said
that they would give that to us. The confidential information
we will keep confidential. And if a subpoena is required, you
let me know and I will issue a subpoena.
Mr. Madden. Yes, Mr. Chairman.
Mr. Burton. OK. Now, to Williams, why were the Huntington
Beach Two and Alamedas Four units shut down in April and May
2000?
Mr. Malcolm. First, I would like to start by saying we take
these allegations very seriously. We believe very strongly in
doing the right thing, treating people fairly, maintaining a
very high level of integrity. Integrity----
Mr. Burton. Why were----
Mr. Malcolm. Excuse me?
Mr. Burton [continuing]. Why were they shut down?
Mr. Malcolm. Well, they were shut down because of needed
maintenance. There was a tube leak, there was a water cooling
tunnel that needed work. There was a boiler that needed repair
work done on it.
Mr. Burton. Can you document all that?
Mr. Malcolm. Yes, we can.
Mr. Burton. Well, we want to have those documents. And if I
need to, I will subpoena them. Because if they were--if that is
a real reason for the shutdown, then that makes some sense. But
we want documentation to that effect, to make sure that is what
happened.
Is $63 a megawatt hour a good estimate of your variable
costs?
Mr. Malcolm. I am really not sure.
Mr. Burton. $63. Well, that was the price quoted in what?
Mr. Madden. Mr. Chairman, that was the price quoted in our
March 14th order, at $63 a megawatt hour.
Mr. Burton. OK.
Mr. Madden. Versus the 750 bid price, or close to it,
that----
Mr. Burton. But that was a good estimate on the plants that
were up and running, that they shut down?
Mr. Madden. I have not heard anything to the contrary.
Mr. Burton. To Williams, could you give us an estimate of
your fixed cost per megawatt hour at those two plants?
Mr. Malcolm. No, sir, I do not have that detail.
Mr. Burton. Well, we want that, too.
Mr. Malcolm. All right.
Mr. Burton. Setting aside the question of whether you
intentionally shut down these units, explain to us how it is
that you were charging a price that was 10 times your cost.
Mr. Malcolm. I think the circumstances at the time were
that we had to take those facilities down. Those were RMR units
that had to be taken down. And we simply bid into the market,
and the market allowed us to capture the higher rate.
Mr. Burton. Did you ever charge prices of more than $750?
Mr. Malcolm. I do not know.
Mr. Burton. Well, according to our information, that your
prices got as high as $1,500 per megawatt hour at some times.
And you do not know about that?
Mr. Malcolm. No, sir, I do not have those facts in front of
me.
Mr. Burton. How much profit did you make in the year 2000?
Mr. Malcolm. Which business unit?
Mr. Burton. We are talking about the energy unit.
Mr. Malcolm. The energy unit made about $1.7 billion.
Mr. Burton. $1.7 billion?
Mr. Malcolm. $1.7 billion in operating profit in 2000.
Mr. Burton. Reliant, how much profit did you make in the
year 2000?
Mr. Stout. And you are asking for the business units, or
are you asking about California?
Mr. Burton. California.
Mr. Malcolm. My answer did not----
Mr. Burton. Well, you can give us California and then give
us the total as well.
Mr. Stout. I would respectfully request that you let us
file that with you under confidentiality.
Mr. Burton. Will you require a subpoena?
Mr. Stout. No, sir.
Mr. Burton. OK. Well, then, we would have that information.
Mr. Malcolm. I would be happy to answer the question as you
have now asked it. Our energy unit made about $1.7 billion, and
I am speaking now about our energy services group, which is
responsible for the unregulated and lightly regulated
businesses. Marketing and trading is a part of that. And with
respect to California's spot market activities, the percentage
was about 5 percent of the $1.7 billion.
Mr. Burton. Well, does that $1.7 billion include other
States besides California?
Mr. Malcolm. I have not expressed myself very well. The
$1.7 billion relates to all the earnings of our energy services
group, which includes products, pipelines, gathering
facilities, refineries.
Mr. Burton. That is inside and outside of California?
Mr. Malcolm. Inside and outside of California.
Mr. Burton. Do you have a breakdown that could give us the
figures for California alone?
Mr. Malcolm. I do not have them on the tip of my tongue.
Mr. Burton. Can you get that for us as well?
Mr. Malcolm. Yes.
Mr. Burton. OK, we would like to have that.
Mr. Filner.
Mr. Filner. Thank you, Mr. Chairman. Those are very good
questions, similar to what I was going to ask, so they must
have been good. Thank you. [Laughter.]
Now I have some not-so-good ones. First of all, Mr. John,
thank you for your statement and your words. I want to take
advantage of you here and do some case work that my other
Congressmen will appreciate. Do you have staff with you?
Mr. John. Yes, some.
Mr. Filner. I mean, there is a constituent of mine named
Jaime Salazar--if you would raise your hand, Jaime--who got a
bill that was 500 times what it was the previous month, in
which he had been out of town. He has tried to protest this, he
has tried to call SDG&E, but has gotten no response.
He has pictures of the fact that his meter is behind a
fence that is locked, and his rottweilers are there. He would
know if the meter was read. Apparently the meter was not read,
and yet he is getting bills of incredible amount, and they are
threatening to turn off his electricity. Could you please make
sure that Mr. Salazar's questions are taken care of.
Mr. John. We will have somebody work with him this
afternoon.
Mr. Filner. Thank you very much.
Mr. Madden, for the record I have to say you are coming to
California and to San Diego, which is the center of an
incredible disaster, as you heard in the first panel. The
economy of California, and maybe the Nation, is teetering. And
you do not have anything to say. And just for the record, I
found that very unsatisfactory. FERC is supposed to guard the
interest of the consumer. Not only did you take no action back
in December, when there was evidence of manipulation of the
market--and in my opinion you caused most of the crisis that
has been with us since--but you have nothing to say to us when
you come here.
Mr. Madden. Congressman Filner, I have been with this
committee for the past 3 days. I have----
Mr. Filner. I have not.
Mr. Madden. Well, I wanted to cut my opening statement
short simply to move on and get the questions answered.
Mr. Filner. People in San Diego are in this audience. They
are looking for some help. And we have nothing to say.
Mr. Malcolm and Mr. Stout, I am surprised that I guess Mr.
Malcolm was ready to give some answers to the chairman. Mr.
Stout claimed confidentiality. I am not sure why you have a
different approach there. You were not very confidential in all
these charts you got for us. Why can you not tell us the
profits you made?
Mr. Stout. Well, what I will do is give you an indication
that I think means something to the----
Mr. Filner. Can you tell me why you cannot tell us how much
money did you make off California last year?
Mr. Stout. The answer that I would like to give to that
question is one that I think is in a context that means
something in terms of what people pay for electricity. What I
will tell you is that our net income in California this last
year was less than 2 cents per kilowatt hour.
Mr. Filner. And multiply that by millions of kilowatt
hours. How much money is that?
Mr. Stout. Well, that is the part that we would like to
retain confidentiality on.
Mr. Filner. Well, that is why we have so many problems with
you all. You are whining about your costs and about all kinds
of things, but then you will not tell us stuff we want to know
about. Because everything is relative. I mean, do either of
you, for example, have affiliates, subsidiaries that you buy
your natural gas from?
Mr. Stout. Yes, we do.
Mr. Filner. Mr. Malcolm.
Mr. Malcolm. Yes, we do.
Mr. Filner. Mr. Stout.
Mr. Stout. Yes, we do.
Mr. Filner. So your increase in cost of natural gas, which
you so proudly were telling us about, you are paying to
yourself and they are making the money; right?
Mr. Stout. Actually, our affiliates have to go out to the
market and buy it. We are not producers.
Mr. Filner. But you are buying from yourself. I mean, you
are just playing games with these numbers.
Mr. Stout. If I may answer the question.
Mr. Filner. Your filings with SEC that you have to make
public--I am not sure what is different then that you cannot
tell us here--show incredible increases in profit over the last
couple of years. You particularly have moved up on the Fortune
500, you know. You have gone from, I do not know, 117 to 55. So
you are not doing too bad, with all this whining about the
costs; right? Is that correct?
Mr. Stout. Well, if I could, I would like to go back to
your question about the gas purchases. It is absolutely true
that we have an affiliate, but the affiliate is not a producer.
They do have to purchase from the open market. We simply use
that affiliate because of their gas brokering skills. So it is
just an expediency measure, so that we have----
Mr. Filner. And who are they buying from? I mean, do they
have any relationship to the producers?
Mr. Stout. Let me finish your first question, then I will
come back to that last one.
You also asked a question about our SEC filings. The
filings that we have made at the SEC that a lot of people have
quoted as saying we have had a 600 percent increase in profit,
that is a fundamentally flawed analysis. And the reason is, is
because the numbers they are quoting are not profit numbers,
those are numbers called operating income. That is before you
take out things like interest, depreciation, and taxes. So that
is not the bottom line.
Second, the size of our company, when compared with 1999
earnings, we more than doubled the number of megawatts that we
have in the market. Our company has grown significantly since
1999.
And finally, 1999 was a year that was exceptionally poor
return for a generating company in California. In fact, our
income dropped about 80 percent between 1998 and 1999. Simply
stated, 1999 was an exceptionally good hydro year, and that
depressed the earnings. So anytime you draw an analysis
comparing 1999 to year 2000, you get extraordinary increases.
Mr. Ose. Mr. Stout----
Mr. Stout. Yes, sir.
Mr. Ose [continuing]. The red light has come on. The
gentleman's time has expired. I am going to recognize Mr. Horn
for 5 minutes.
Mr. Filner. I will be back.
Mr. Horn. Mr. Madden, you have been with us in a number of
these hearings. And after the chairman left to go back to
Washington, a number of things were said by the president of
the California Public Utilities Commission.
OK, can you hear it now? Somehow, somewhere?
Mr. Madden. I can hear you now.
Mr. Horn. You were there during some of the testimony of
President Lynch, the head of the California public utilities.
And I just----
Mr. Madden. I was there for all of it.
Mr. Horn. Yeah. And I just wonder if you would like to make
a few statements for the records as to whether she said was
accurate or not. Because there was a lot of finger pointing at
your agency, etc.
Mr. Madden. Congressman Horn, if you do not mind, since I
believe we should stop the finger pointing and the rhetoric
between and among the various participants, whether State
commissions, Federal, the players, I would prefer not.
Other than to say I think this committee has learned a lot
of things in terms of the policies of the CPUC, as well as the
FERC. And with respect to long-term contracts, there were major
restrictions put on the IOUs in terms of buying long or buying
in short-term packages, and there was also questions in terms
of how they determine what the reasonableness is, or they would
then second-guess the purchases by the IOUs.
Mr. Horn. Thank you. I will give you, Mr. Ose, the rest of
my time.
Mr. Ose. Thank the gentleman.
Mr. John, you are with Sempra, if I understand correctly.
Mr. John. Yes, sir.
Mr. Ose. The question I have has to do with the Governor's
proposal to buy the transmission grid. I know he has a
memorandum of understanding with Edison to buy theirs. Are you
engaged in discussions with the Governor's office or the
Governor's representatives to acquire San Diego Gas &
Electric's?
Mr. John. Yes, we are in discussions with the Governor's
office.
Mr. Ose. I mean, I keep coming back to try and to figure
out how to increase supply or reduce demand. And I am trying to
understand how buying transmission grid facilities increases
supply or reduces demand. Could you sort of elucidate or
illuminate this, if you will?
Mr. John. Well, that is a good point. There are two issues
here. One is the point you are making about supply and demand.
And on the supply side, I know the State has taken a lot of
criticism for not building a sufficient number of power plants
over the past 10 to 12 years.
On the other hand, I think the record does show that over
the past year or so a lot of those projects have been approved.
The concern is that not enough new power will be online by
2000, and certainly not by the summer of 2001, likely not the
summer of 2002. Maybe 2003, but more likely 2004. The only
remedy we see over the short term, to avoid--and I do not mean
avoid--to mitigate outages is increased conservation.
And that is one of the reasons we said to the PUC last year
that we recognize the difficulty the customers down here were
having with the high rates, but that some action had to be
taken to start increasing rates on a stair-step approach in
order to get customers to conserve. And there was some
conservation in San Diego last year.
Mr. Ose. So going back to my question, how does the----
Mr. John. OK. The sale of the transmission assets is a
separate issue. That is to deal with removing or mitigating, at
least, the huge balancing account under-collections that have
built up, which, absent offsetting those balancing account
under-collections, will be passed on to the consumer.
Mr. Ose. Your point is that the function of the transaction
is to basically recapitalize the balance sheets of the
utilities?
Mr. John. That is correct.
Mr. Ose. It has nothing to do with increasing supply or
increasing demand or conservation.
Mr. John. And I do not think the Governor has ever said
that it did.
Mr. Ose. OK. I appreciate that clarification.
I am going to recognize Mrs. Davis for 5 minutes.
Ms. Davis. Thank you. I appreciate--if I can just fix my
microphone. Great. Thank you.
Mr. Ose. We are going to--let us restart the clock on Susan
here. There you go.
Ms. Davis. Thank you, Mr. Chairman. I was reaching out so
much that I got my mic.
I appreciate your all being here as well. And I wanted to
just go first, if I may, to Mr. Madden with FERC. And what you
may have been--I believe you were at the hearing that we had at
Washington when the California delegation met with Mr. Hebert.
And at that particular hearing I asked him what authority he
lacks--the Commission lacks to do their job. And I wonder if
you could respond to that.
And if you also could, tell us about the authority that you
feel you perhaps need to better define for everyone how to
figure out what is a fair and reasonable rate. How do you
determine what levels of profit are OK? Are there some levels
of profit that you think are not OK? And also, do you believe
that you have the full power to subpoena people and establish
whether or not there was manipulation in the market, and
whether or not those--whether you have looked at those
documents and tapes?
We know that in one of the reports where you suggested that
the rates were not just or reasonable, that you also
recognized, and in fact, you had it investigated what was going
on in the market. So that would be helpful, just to get a sense
of that, if you could. The other--and then I have some other
questions, as well.
Mr. Madden. There are a lot of questions just there. Let me
see if I can start out. The Commission has a great deal of
authority under the Federal Power Act, to remedy the type of
actions that exist today. Now, in terms of refund authority,
our authority is the earliest of 60 days after a complaint is
filed, such as the one that San Diego filed in August, or the
date the--60 days after the Commission order is noticed in the
public register--Federal Register, rather.
In this particular case, we took the earliest one, SDG&E's
filing of August 2nd, and established the refund date of
October 2. So in terms of the remedies and the refunds--and so
our refund authority does not go back beyond or before October
2nd.
In terms of the remedies under the Federal Power Act, I
think, as they exist today we have the full authority. There
may be one thing in the future, depending on whether or not
RTOs get up and running--and we hope they are--and that is
transmission siting does not occur, transmission is not built,
that is something that Congress should look at in terms of
giving the FERC authority, if a State or an RTO does not act
within a certain period of time.
In terms of subpoena power, the Commission has the subpoena
power built in under the Federal Power Act in I believe 309 and
307 of the act specifically. And, in fact, in the Williams/AES
proceeding, they delegated to me the full range of subpoena
power so I can, in that particular case, request any particular
documents and they have to be brought to me.
One thing that is missing in this Williams case, and which
was in the notice, is that, although the timeframe talked about
the April-May period, the Commission directed me to look into
the remaining part of 2000 and into 2001. And I can assure you
I will be vigilant in looking into those dates and those
actions.
In terms of manipulation, there are a number of informal
investigations that staff is doing to look at questions of
outages, look at questions of withholding, look at bidding
patterns. Although, you know, there have been, at the same
time, some more public documents, we, at the staff level,
conduct the type of informal primarily investigations as we did
in the Williams case. I believe that should cover it.
Ms. Davis. Are those all included in public documents that
we have been able to acquire?
Mr. Madden. The preliminary investigations are confidential
until they are brought to the Commission, and the Commission
has to decide what it will release. Because in many instances
the entities that we review, audit, and monitor ask for
confidential treatment. And many ask why confidential
treatment. Well, there is a lot of things out there, that if it
were released to the public, may affect them from a competitive
standpoint.
At the same time, my view is that in order to get the type
of interaction and the information we need from the various
entities, it is best, at various stages, to give them
confidential treatment.
Ms. Davis. Thank you. If I could go on. I know I only have
5 minutes. OK. All right. If I could just turn to Mr. Malcolm
and Mr. Stout for a second.
Could you please share with us what percent of market share
you believe your company has in gas-fired generation in
California.
Mr. Stout. Well, for Reliant, it depends on how you want to
measure the market. If you measure California, I believe our
market share is around eight--I am sorry. If you measure the
ISO grid, our share is about 8 percent. If you measure all of
California, which picks up the munis and things like that, that
market share drops to I believe around 5 percent, maybe 4
percent. And if you pick up the whole Western interconnection,
which that is really the market, not just California, it drops
down to probably less than 2 percent.
Mr. Burton. Mr. Stout, I appreciate the brevity. Your time
has expired. I am going to go to Mr. Hunter. Mr. Hunter for 5
minutes.
Mr. Hunter. First, let me--since Mr. Hebert has been
mentioned several times, and Mr. Madden, you are here
representing the Commission. Mr. Hebert and I, as Mr. Filner
depicted, have crossed swords on several occasions on this
issue in terms of price, and what is unjust and unreasonable.
But he does have a right to be quoted accurately. And
actually, he did not say that if the high price of energy hurt
granny, let granny die. He said that he believed in speaking
the truth, and if the truth hurt granny, let granny die. And he
further added that he had talked that over with his grandmother
several times, and she did not agree with that statement. But I
just wanted to make sure he is quoted correctly. And obviously
he has in the record here, because he testified right where you
are at.
Mr. Ose. Record stands corrected.
Mr. Hunter. Mr. Stout, you pointed out that Reliant has
actually increased the amount of energy that they now provide
to California. They have not shrunk their energy output in
California; right?
Mr. Stout. That is correct.
Mr. Hunter. Last summer we were using in excess of 45,000
megawatts. And as you probably are aware, if you watched the
discussion among State leaders, it was to the effect, wait till
winter gets here and all the air conditioners are turned off,
and we historically drop usage by about 30 percent. So supplies
are very tight right now at 45,000 megawatts. When they go down
to about 33,000 megawatts, then the price will come down.
Winter arrived. We went down to about 33,000 megawatts, and
we were told by the energy suppliers doggone it, supplies are
still tight. Now, my question to you is: Were there any natural
disasters that destroyed some of the generating plants, or was
there some other reason for the supply of this product, energy,
to go down by 30 percent when prices were rising?
Because typically, when prices are up and you are making
lots of money and there was a lot of opportunity, you might not
see new generational capability coming online right away
because it takes a long time to get this stuff permitted. But
certainly it is highly unusual that, in the face of rising
prices, supplies were constricted. What do you think happened
here?
Mr. Stout. The answer to that is there were actually two
disasters that took place. One was natural, one was manmade.
The natural disaster was the fact that the Northwest region's
hydro battery was being drained. If you look in the----
Mr. Hunter. Say again. The hydro----
Mr. Stout. Hydro battery. And I use that word loosely.
Mr. Hunter. Yeah.
Mr. Stout. It is not really a battery. But there is a
certain amount of energy that is stored in the hydro systems in
the Pacific Northwest. If you look at the amount of hydro you
had in 1999, it was above average. If you look at the amount
that you had in year 2000, by the numbers I have seen, it was
about 25 percent below what it was in 1999, but only slightly
below average.
The bad news is the forecast for this year looks like it is
going to be about 60 percent of average, which is even worse.
Now, that impacted the problem, because the people that
generate power with hydro up in the Pacific Northwest, a lot of
those people, I believe, were coming to California to buy
energy, trying to save what little charge they had left in
their hydro batteries because they will not get another chance
to recharge that battery until next winter.
There was also a manmade disaster.
Mr. Hunter. Just on that point, how much of our usage is
hydro?
Mr. Stout. I could not quote a specific percentage without
checking my records, but I would be happy to get that
information.
Mr. Hunter. So you think some of it was hydro being reduced
as a function of the drought?
Mr. Stout. Less hydro being generated. But also hydro being
saved so more gas-fired generation in California was being
utilized. There was also----
Mr. Hunter. You say hydro being saved?
Mr. Stout. Correct.
Mr. Hunter. What does that mean?
Mr. Stout. The folks that have hydro are trying to make
sure they have enough energy to get them through this coming
summer. The hydro battery is not fully charged. As I indicated
a second ago, it may only be at 60 percent charge going into
this year. And if they use up too much of it now, they will run
out big time later in the summer.
Mr. Hunter. OK. Well, just an aside, I was up campaigning
in Washington last summer. And the talk--and again, I do not
want to just--you deal in facts, and we need to deal in facts.
But the talk was that several of the hydro producers were
pulling their stuff offline because they were anticipating
higher profits.
So whereas I do not have any specifics on the hydro
reduction that you have talked about--apparently you do not
have too many specifics, either--there is at least the
possibility that they were anticipating and looking forward to
reaping some of the same higher prices that some of the gas-
fired guys were receiving on the spot market.
Mr. Stout. Well, there is two sides to that story. The
first is----
Mr. Hunter. Do you think there is any truth to that at all?
Mr. Stout. It is very possible there may be. I do not have
factual basis.
Mr. Hunter. OK, well, I tell you what, let us leave hydro,
because we have got a lot of stuff we have got to talk about.
Let us leave hydro.
You said part of this is hydro. Do you think there was any
reduction among the gas-fired users that was a function of a
strategy that said if we got high prices when supply is
constrained, let us keep the supplies constrained. Do you think
there is any of that?
Mr. Stout. I cannot speak for every producer, but certainly
that was not the case for Reliant.
Mr. Hunter. OK. But you think that may have happened with
others?
Mr. Stout. I have no idea. I am not saying it did.
Mr. Hunter. Mr. Malcolm, when you produce those records of
documentation for the----
Mr. Ose. Mr. Hunter, the gentleman's time has expired.
Mr. Hunter. Can I just finish my sentence, and I will be
done with that question.
Mr. Ose. Finish your question. We will hold the thought on
the answer.
Mr. Hunter. OK. When you produce those documents for
Chairman Burton, could you make sure you include any internal
memos with respect to the direction of shutting down your
facilities?
Mr. Stout. Be happy to.
Mr. Hunter. Thank you, sir.
Mr. Ose. Recognize myself for 5 minutes. One of the
questions I have, and I want to be very clear about this, is if
I understand, Mr. John, your company is subject to both FERC
and PUC oversight.
Mr. John. No. San Diego Gas & Electric Co. and Southern
California Gas Co. are both regulated by the CPUC. They are not
regulated by the FERC.
Mr. Ose. OK. Mr. Malcolm, how about you? Are you subject to
the PUC regulation?
Mr. Malcolm. I do not think so; no.
Mr. Ose. Mr. Stout.
Mr. Stout. I do not believe so.
Mr. Ose. Are you subject to FERC?
Mr. Stout. Yes, sir.
Mr. Ose. Mr. Malcolm.
Mr. Malcolm. Most assuredly.
Mr. Ose. OK. Mr. John, you have generating facilities here
in the State for electricity?
Mr. John. San Diego Gas & Electric divested their
generating facilities as part of the electric restructuring
process. We do own a 20 percent interest in a nuclear facility
up the coast.
Mr. Ose. But you have no generating facilities besides
them?
Mr. John. That is correct.
Mr. Ose. OK. So you buy your power on the market?
Mr. John. Yes.
Mr. Ose. You have to go in and buy it.
Mr. John. And I know there was a lot of discussion this
morning about last year. And we were obligated for a
significant portion of the year 2000 to buy our power through
the PX.
Mr. Ose. OK. Mr. Malcolm, I want to make sure I understand
your business motto. And Mr. Stout, you also. As I understand,
Williams--or in Mr. Stout's case, Reliant--you in effect take
the place of the credit-worthy buyer, provide the seller of the
natural gas or the electricity the assurance of being paid. And
then, as the market works, you will deliver power to the high
bidder, so to speak. Is that accurate?
Mr. Malcolm. Generally speaking, yes.
Mr. Ose. Mr. Stout.
Mr. Stout. Yes, sir.
Mr. Ose. OK. Mr. Malcolm, do you have any generating
facilities that you own?
Mr. Malcolm. We have generation facilities in Pennsylvania
and in Four Corners.
Mr. Ose. OK. So you are down here South--or actually East.
Not South from----
Mr. Malcolm. We control a portfolio today of about 15,000
megawatts by virtue of what we call tolling agreements, where
we partner with someone, like AES in the case of California. We
partner with them. They own and operate the facility. We
provide the natural gas to and market the power from those
facilities.
Mr. Ose. They have agreed to sell you the generation at
some price on a long-term contract?
Mr. Malcolm. We effectively pay a tolling fee for them to
generate the power for us.
Mr. Ose. Mr. Stout, do you own your generating facilities?
Mr. Stout. Yes, sir, we own facilities in California, about
4,000 megawatts. Another 4,000 in what we call the Midatlantic
States. Generation in Florida, the Midwest. There are quite a
number of facilities in our portfolio.
Mr. Ose. One of the things that just continues to challenge
my understanding is if the PUC does not allow you to forward
contract beyond 24 hours, how do you run your facilities? Mr.
Malcolm.
Mr. Malcolm. Well, that does represent some concern and
some difficulty. But we are working in the spot market. And
there have thus far been buyers for that power.
Mr. Ose. Well, let me turn the question around on the input
side. In terms of the inputs that you buy to run your plant, do
you buy those on a 24, day-ahead market?
Mr. Malcolm. We contract for natural gas supplies in a
variety of ways in order to be----
Mr. Ose. You transit, basically?
Mr. Malcolm. Yes. Yes. In order to meet our needs. There is
a base load, and there is certainly also a piece that we
utilize on a peak day.
Mr. Ose. So what percentage of your total load do you leave
vulnerable to the spot market?
Mr. Malcolm. I am sorry, I do not have that number.
Mr. Ose. Could you get that for us?
Mr. Malcolm. Sure could.
Mr. Ose. And my point--and I am going to ask you, Mr.
Stout, the same question. My point is I want to understand--you
know, business takes their vulnerability down to some
percentage on a spot market basis. Whereas, the structure we
have in the State of California basically has it at 100
percent.
Now, Mr. Stout, in terms of your generating facilities on
the input side, in order to control your costs, provide a cost
effective product at the far end, do you forward contract for
the raw material, if you will, to run your facilities?
Mr. Stout. That is a good question. The answer is, if I
have a forward sale, then I forward contract for the input
supply. If I do not have a forward sale, I have to buy it on
the spot market. Because otherwise I would be taking a
speculative position in the market.
Mr. Ose. All right. So you tie your exposure to your
contract?
Mr. Stout. That is correct.
Mr. Ose. OK. Now, as I look at--I see my time is about up,
but we are going to come back to this if we have time. In the
Wall Street Journal, every single day a report on the price of
natural gas that you can buy forward. And it goes out 3 or 4
years in some cases. And I go back historically and I look
last--they also have the high-low for the past year. And the
high-low for the past year indicates natural gas at $2.07 low
versus $5 plus for a high. Now, seems to me that most
businesses would contract a year ahead, if you will--time?
Rules are rules. No, rules are rules.
Mr. Hunter. I yield to Mr. Ose.
Mr. Ose. All right. My question is: If the opportunity that
existed last spring to buy natural gas at $2 was available, why
were the intrastate generating facilities, that are subject to
the PUC, not allowed to buy that, just to take the uncertainty
off the table?
Mr. Stout. I guess I am a little confused by your question
when you said the intrastate utilities subject to the PUC. Are
you referring to the IOUs?
Mr. Ose. Yes. I am separating you out on this.
Mr. Stout. OK.
Mr. Ose. I am just trying to get some sense of what
happened. I mean, it seems like you would take a whole
uncertainty out of the entire transaction.
Mr. Stout. I would have to defer that question to someone
from one of those utilities.
Mr. Ose. But Mr. John last year you had facilities that
were generating capacity.
Mr. John. No, sir.
Mr. Ose. You had sold them by then?
Mr. John. Yes, sir.
Mr. Ose. All right.
Mr. John. We sold those in--my recollection was in 1998.
Mr. Ose. It seems like an excellent way to----
Mr. John. When prices of gas were very low and prices of
electricity were very low.
Mr. Ose. But being able to buy a year ahead certainly seems
like an excellent way, when you know what your base load is
going to be.
Mr. John. Yeah. But, I mean, on the gas side, though,
because we also own Southern California Gas Co., the real spike
in the gas price started in the fall--at least into California,
started in the fall, my recollection is, of 2000. And it went
nuts in December 2000, where a delivered price into California
was $50 per million BTU, compared to a historical price maybe
of $2.50 or $3.
Even today, although it is not $50 per million BTU, it is
close to $15 per million BTU. And that is primarily the
transportation rate, not the wellhead cost of the gas. It is
the transportation cost in the secondary market from Texas and
Oklahoma, to California.
Mr. Ose. I am going to have to ring the bell on myself
here.
Mr. Madden. Mr. Chairman, I did not want to ring the bell,
but let me help the record a little. San Diego Gas & Electric
is jurisdictional to us, to the extent it is sales for resale
and wholesale transmission.
Mr. Burton. That is correct. I was sitting back there
listening. I guess I will take my time now.
You said at the wellhead the price is still fairly low?
Mr. John. Well, again, low--it is higher than historical.
Mr. Burton. What is it at the wellhead?
Mr. John. Probably today around $4 to $5 per million BTU.
Mr. Burton. Why are the transportation costs so high?
Mr. John. Because the cap was removed in the secondary
market on an experimental basis by the FERC. And several
companies--I think even we--supported it at that time. But it
was on an experimental basis. And I think that there is a
limited capacity coming into California right now on interstate
pipeline capacity, and people are taking advantage of it.
Mr. Burton. So what you are saying is that they need more
pipeline capacity and probably more exploration?
Mr. John. I do not know about the exploration so much, but
we certainly do need additional pipeline capacity coming into
the State. And I think the gentleman from Williams talked about
one of their projects.
What we are trying to convince the Federal regulators of is
to make sure that we are meshing the new interstate pipeline
capacity with the intrastate capacity, so when the new
interstate capacity comes in, we are able to use it for
electric generation. Because that is where the real demand is
today.
Mr. Malcolm. If I might add, there is no question that
there is more pipeline capacity needed, and there is more
wellhead deliverability needed.
Mr. Burton. So you need more exploration as well?
Mr. Malcolm. Yeah, there is a perception on a peak day that
there is not enough supply, and therefore we do need additional
deliverability.
Mr. Burton. As I understand it, there are areas of
California where there is reservoirs of natural gas that could
be tapped if they could get by, I guess, the environmental
requirements for exploration. Is that correct?
Mr. John. Our company is not a producer, so I cannot
comment.
Mr. Malcolm. I am not aware of what the reserves are in
California.
Mr. Burton. I would be happy to yield. Turn on your mic.
Mr. Hunter. I understand there are untapped gas resources
in California. But on that point, Mr. John, you folks have now
constructed a 30 inch pipeline going into Mexico.
Mr. John. We have a pipe that serves the Rosasito Power
Plant. We also are planning to build--one of our affiliates is
planning to build a pipeline in northern Mexico.
Mr. Hunter. Well, now, so my question is--I understand
that. If we are short on gas and that gas shortage is--and the
inability of our present pipeline system to move that gas is a
main driver. And, you know, Mr. Malcolm says that--or Mr.
Stout, that they would sell all the electricity we wanted for 2
cents above the gas price per kilowatt hour, that is kind of
astounding. And if you are moving gas--if you are preparing to
move gas to Mexico, does that not compound the price problem we
are going to have here in the United States?
Mr. John. I am not sure I am following you, Congressman.
Mr. Hunter. Well, you got a 30-inch pipeline going down to
the border. We got a shortage of natural gas in California
which has driven prices to 500 percent of what they were. Why
are we going to be moving gas down to Mexico when this low
supply and high demand in California is driving our electricity
costs 500 percent? Why are we moving more of it out of State?
Mr. John. Because several of the plants in northern Mexico,
when they are built, will be able to provide electricity to
southern California.
Mr. Hunter. Well, do you not have--but right now you are
moving natural gas right now into Mexico, are you not?
Mr. John. Yes.
Mr. Hunter. How much are you moving?
Mr. John. I think it is probably around--this is subject to
check, but probably 40 to 50 million cubic feet a day.
Mr. Hunter. Well, now, I was told, when you guys told us
earlier, that you were moving electricity back, so there was
kind of a quid pro quo, gas to Mexico, electricity to the
United States. There is almost no electricity coming back into
the United States.
Mr. John. I think there is a limited amount right now. But
the point I was making is the new pipeline that we are
proposing to build in northern Mexico is for brand new energy
efficient power plants, and a significant amount of that power
will come into the United States.
Mr. Burton. Let me reclaim my time, Mr. Hunter.
Mr. Hunter. Thank you, Mr. Burton.
Mr. Burton. How many cubic feet of gas are you sending down
there a day?
Mr. John. Right now?
Mr. Burton. Yeah.
Mr. John. My recollection is it is around 40 to 50 million
cubic feet a day.
Mr. Burton. Why is it going down there if there is no power
plant to use it?
Mr. John. There is a power plant. And we are going to----
Mr. Burton. And where does that electricity go?
Mr. John. There is an existing power plant at Rosasito.
Mr. Burton. Where does the electricity go from that power
plant?
Mr. John. Most of it is to serve northern Mexico.
Mr. Burton. So what we are doing is we are supplying this
amount of gas to Mexico to power their utility?
Mr. John. Yes. And that agreement was struck several years
ago before we had this crisis. And we--you know, we believe in
honoring agreements.
Mr. Burton. What about gas exploration here in California?
I was told there is some reservoirs of gas here in California.
Can anybody tell me why that is not being tapped? I mean, it
seems to me that you would not have to have an intrastate
problem with pipeline if you could get more gas within the
State, and the pipes could be utilized right here.
Mr. John. Again, we are not a producer, so I cannot comment
on that.
Mr. Burton. Well, we probably ought to look into that. What
is this here? Yeah. Why are we building electric plants in
Mexico?
Mr. John. Because the Government of Mexico seems to be more
willing to have power plants built there than they seem to be
historically in the State of California.
Mr. Burton. Oh, my God. The government of Mexico has less
stringent requirements for building a power plant, so you are
building them in Mexico?
Mr. John. Well, I do not think they are less stringent.
Mr. Burton. Well, then why are they being built there?
Mr. John. I think it is an expedited permit process.
Mr. Burton. So you can get through the bureaucracy faster?
Mr. John. So far; yes.
Mr. Burton. Now, if you could get through the bureaucracy
faster in Sacramento and in California, you could build them
here.
Mr. John. And I think they are working on that. I mean, I
think the----
Mr. Burton. Well, how many plants are you building down in
Mexico?
Mr. John. We, personally?
Mr. Burton. Well, yeah. I mean, I would just like to know
how many plants are being----
Mr. John. We, personally, we are looking at one plant right
now in Mexico. Other suppliers are in the process of building
plants in Mexico. Not our company.
Mr. Burton. And those could be built in California?
Mr. John. Perhaps. I cannot speak for other suppliers. I am
just telling you, we are building the natural gas pipeline
system to serve those power plants.
Mr. Burton. And is all the electricity that is going to be
produced going to be utilized here in California?
Mr. John. Not all of it. I think some of it will.
Mr. Burton. How much?
Mr. John. I do not know the figure.
Mr. Burton. Well, wait a minute. It is your plant.
Mr. John. One of the plants that are being proposed----
Mr. Burton. Well, let us just talk about your plant. Your
plant that you are building in Mexico, that is using American
or Californian gas, is that plant going to be used----
Mr. John. It is going to be a merchant power plant, and it
depends who wants to take power from the power plant.
Mr. Burton. So you are going to sell to Mexico as well as
to the United States and to California?
Mr. John. Possibly; yes.
Mr. Burton. I see. With the power shortage here in
California, when that plant comes online, if you still have
that problem, you will still be bifurcating the power, giving
part to Mexico and part here; right?
Mr. John. Well, hopefully by the time our plant is online,
which is probably going to be in the 2004 timeframe, enough
additional supply would have come online in California that
there will be enough reserve capacity, we will not have to
worry about that.
Mr. Burton. Mr. Filner.
Mr. Filner. Thank you, Mr. Chairman. Welcome to California.
[Laughter.]
I want to talk a little bit or try to get some
understanding of what has been called market power. Regardless
of all the stuff that you can or cannot tell us, the facts of
the matter, are that California paid about $7 billion for
electricity in 1999, and it is projected we could pay as much
as $70 billion this year. That is some tenfold increase that
has no relationship to anything you have told us about the cost
of natural gas or regulation or anything. I mean, that has gone
into your pockets and the other members of the cartel.
But how does that occur? Mr. Malcolm, in your statement you
said you transport 17 percent of the Nation's consumption of
natural gas.
Mr. Malcolm. Yes, sir.
Mr. Filner. What percentage coming into California do you
control?
Mr. Malcolm. The pipeline that we have coming into
California is Kern River. And I think the capacity that Kern
River controls versus all of the pipeline capacity coming to
the State is fairly small. And I think, importantly, Williams
does not control the capacity. Its customers, its end use
customers----
Mr. Filner. You transport 17 percent of the Nation's
natural gas?
Mr. Malcolm. We do, throughout the country.
Mr. Filner. That is a pretty high percentage. And you have
4,000 megawatts, you said, basically of the gas-fired capacity
in California?
Mr. Malcolm. Yes, sir.
Mr. Filner. I mean, you were asked the question, both of
you, about percentage of the market, and you gave us some 8
percents, 4 percents, 2 percents. I have been told by people in
the industry and the economists that the best way to measure
market power is the number of megawatts that really determines
the price. That is, there is a baseline use of, I do not know,
20,000 megawatts. And when you start getting demand above that,
that is where control of the market comes in.
So that is where the 17,000 gas-fired megawatts come in. So
if you have 4,000--each of you actually has about 4,000, as I
understand it--it looks to me, of the ability to control the
market in terms of prices, you have 25 percent of the market.
Now, is that a good or bad way to look at it?
Mr. Stout. Well, if I can respond to that. One of the
things that we do in order to try and manage risk, is we try to
sell off forward as much of that 4,000 megawatts as we can, so
that we have some price certainty in our financial forecast.
While I answered the question based on the number of megawatts
that we had, when you take a look at how much we sold forward,
who now someone else owns and controls, our market share is cut
by more than half. So it is considerably less than that.
Mr. Filner. Well, who has that stuff?
Mr. Stout. There are at least 20 or 30 different market
participants who have each bought portions of our generation
portfolio, who now market that in the Western interconnection.
To get back, though, to another comment you made,
Congressman Filner, about the $70 billion forecast, that is a
very questionable forecast. I think that----
Mr. Filner. What is your forecast?
Mr. Stout. Well, my forecast I have not done. But I can
tell you, from asking questions----
Mr. Filner. We are paying $2 billion a month now, right
now. So, just make that one. That is $25 billion. Is that
closer to what you think?
Mr. Stout. That may be. That is--if you look at what you
pay----
Mr. Filner. All right. So compare that with $7 billion,
then.
Mr. Stout. If I may finish the answer. If you look at what
you paid in year 2000, you paid $27 billion, it is very
possible that the prices could be very similar to what they
were because of the increase in natural gas prices. Counter-
affecting that, though there have been a number of forward
contracts that have been entered into, which the Governor has
publicly announced, which should help to mitigate some of that
price exposure. I do not believe that that $70 billion estimate
takes into account all those forward contracts that the
Governor has put in place.
Mr. Filner. But it is an incredible increase, and somebody
is making that money. And that cannot be accounted for by
anything else except profit. I mean, that is where it is going.
This is America. You are allowed to make a profit. But let us
understand what is going on here.
Mr. Stout. If I may respond to that, sir----
Mr. Filner. I want to ask Mr. Madden. Your name fell down,
so I forgot your name. These folks who sell into the California
market at a wholesale price, did they have to get authority to
do that from FERC?
Mr. Madden. Are you talking, now, gas or electricity?
Mr. Filner. Electricity.
Mr. Madden. They have market-based rates and they have----
Mr. Filner. Is that based on an approval from FERC?
Mr. Madden. They received approval from the FERC.
Mr. Filner. All right, now, correct me if I am wrong, any
of the three of you. When they asked for that authority, one of
your criteria is market power. They said in those filings, as I
read them, that there was something like 60,000 megawatts of
capacity in California. And therefore, their few thousand was a
real low percentage of that, and therefore they had no market
power. Do those figures sound like what they had filed to you?
Mr. Madden. I do not recall, Congressman.
Mr. Filner. Do either of you recall what you estimated as
the California capacity was?
Mr. Stout. I do not recall.
Mr. Malcolm. I do not recall.
Mr. Filner. You guys got to prepare like I do here. All
right, read your filings. You said around 60,000 was available,
which is, of course, way above what the actual capacity is. So
therefore, your estimates of market power were way below what
the actual fact is. And if you take a true estimate that
economists have told me--that is, the percentage of the market
that really determines the price--it is inescapable to me that
you have market power. Notwithstanding what you said about
forward contracts, etc.
And it seems to me, Mr. Madden, that your approval of their
market-based rates was based on a certain estimate of market
power, and I think we can prove that it is much greater. Would
that not lead you to reconsider their authority to sell at
market-based rates?
Mr. Madden. We have the authority to look at our market-
based rates that we have issued under Section 206 of the act.
Mr. Filner. So you can do that right today?
Mr. Madden. We have the authority to initiate an
investigation.
Mr. Filner. All right. And we would formally request that
at some point; OK?
Mr. Madden. In the November order we looked into the
particular rates being charged, and those were subsequently
addressed in the December 15th order by the Commission. We are
looking at the rates now.
Mr. Filner. And in the December 15th order, as I said, you
found all kinds of problems and have not acted on any of them.
And I will ask you guys, do those figures about market power
sound reasonable or not to you?
Mr. Stout. Well, let me respond to your 60,000 megawatt
number. When you examine market power, you do not draw a
boundary at the State border. You examine the market that you
are competing against. I compete against generators in Arizona,
Nevada, and all around the Western interconnection. It is very
possible that in trying to define the range of market
competition, that it included more than just California. And so
you may, in fact, have had more megawatts in that market power
analysis than----
Mr. Filner. So, but your 4,000--the 4,000 figure is also
only California, so you may have more megawatts elsewhere;
right? Too, right?
Mr. Stout. That is correct.
Mr. Filner. So if you will give me all those figures, I
will tell you what your market share is. And I bet you you have
market power.
Mr. Stout. Well, we respectfully disagree with your
conclusion with regard to market power, but we will be happy to
furnish you with the details of other generating units. I can
quickly summarize, if you would like.
We actually brought on a generating unit this last year. No
one mentions that. But it was this 500 megawatt unit. We own
half of it, Sempra Energy owns the other half. It is located
just outside Las Vegas, but it is not connected to the Nevada
power system, or at least it was not last summer. It was
actually connected to the California grid, and was contributing
to help keep the problems in California as minimal as possible,
as well as keep the price down.
We are also bringing on another 500 megawatt project this
summer in the Western interconnection.
Mr. Filner. I appreciate your attempts to keep our prices
down. I have not seen that in anything that you have told us
today.
Mr. Stout. Well, you just indicated that the more
competition you have, the more effective the market works, and
I agree with you on that. Bringing on more generation increases
the competition in the market.
Mr. Filner. Well, hold it.
Mr. Hunter. I just want him to be allowed to answer the
question. The second 500 megawatts?
Mr. Stout. Arizona.
Mr. Burton. Who is next? Mr. Ose.
Mr. Ose. Thank you, Mr. Chairman. I want to go back to Mr.
Seetin's remarks this morning. He indicated very clearly today
that he thought the market structure in California was
seriously flawed. And interestingly enough, when he was asked
to testify before the legislature in 1996, he made the same
observation. And in fact, much to everybody's chagrin, his
prognostications appear to have come to fruition.
The question that I am trying to deal with is, as we go
from here forward, how do we solve this problem. And we can sit
up here and argue about everything.
But I just want to make sure I understand. I heard you very
clearly say we need additional gas transmission lines into the
State. Is that accurate?
Mr. Malcolm. Yes.
Mr. Ose. OK. I believe I heard you say that the market
structure that exists in--I think Pennsylvania was the citation
you made, where the long-term forward contracting was allowed,
and direct access was allowed, is a far more preferable model
than the current one we have in this State; is that accurate?
Mr. Malcolm. That is not part of my filing.
Mr. Ose. Mr. Stout.
Mr. Stout. Well, the comment was made. And let me clarify
what really goes on in PJM. They have a spot market in PJM, as
well. The difference is that the spot market only accounts for
15 percent of the energy supply. The rest of it is either
utility-owned generation, which is about 50 percent. The
remainder, I think that is about 35 percent or so, is forward
contracting. So what they have is PJM is a portfolio of supply.
That is what you did not have in California. So when you had--
and, in fact, you can have thousand dollar megawatt hour prices
in PJM, but that only applies to a portion of the energy.
California, if you had thousand dollar prices, under the
market design which you had this last summer, you had that
applied to 45,000 megawatts.
Mr. Ose. So your point, then, was that the construction of
the now-defunct PX--but I guess now the ISO is doing it. The
construction by which the market-clearing price that you showed
up there, where the lines crossed as opposed to where the bid
was, is flawed because it pays the----
Mr. Stout. No, absolutely not.
Mr. Ose [continuing]. Because it pays the top guy's price
to everybody in the market.
Mr. Stout. No. Let me be perfectly clear on that. The
problem was not in the market-clearing price concept. The
problem was in the fact that California had to buy everything
from that one market, rather than having a portfolio of markets
to buy their energy from. The PJM clears at a clearing price in
their spot market, just like California did.
Mr. Ose. OK. Then it is the constriction that allows the
different tranches of demand, the base versus the peak, to all
be priced at one price, instead of a variety of prices?
Mr. Stout. That is right on target.
Mr. Ose. OK. Now, the other question that I have, and this
is news to me, and I appreciate Mr. Hunter and Mr. Burton and
Mr. Filner and Ms. Davis bringing it to our attention. Did I
understand correctly that we are shipping natural gas to Mexico
right now?
Mr. John. Yes. And so are other pipeline companies in Texas
for power plants.
Mr. Ose. We are shipping natural gas out of California into
Mexico?
Mr. John. Uh-huh.
Mr. Ose. For what purpose?
Mr. John. To generate electricity in northern Mexico.
Mr. Ose. For whom?
Mr. John. I do not know the exact figures, but I know some
of the power comes back into California, some of it is actually
used in northern Mexico. This is part of the North American
Energy Policy that President Bush has been espousing.
Mr. Ose. Well, I appreciate you bringing that up. I think I
have found something that I can drop a note to President Bush
about. And I am sure that he can speak with President Fox about
it. But I am just amazed. I mean, how many--Mr. Hunter, if you
will, how many--some of your constituents have been cutoff, if
I understand correctly, from access to natural gas.
Mr. John. And so have some--and so has this power plant in
Mexico, but it has been done on a pro rata curtailment basis.
Mr. Burton. Would the gentleman yield to me just a second?
Mr. Ose. I would yield; yes.
Mr. Burton. I would like to know what rate per cubic foot,
or however you charge for the gas, what rate are you getting in
Mexico? Are you getting more there or same amount of money?
Mr. John. Same. I mean, it is basically a tariff rate that
is approved by the California Public Utilities Commission.
Mr. Burton. It is a rate that is approved by the Public
Utilities Commission here in California?
Mr. John. Right.
Mr. Burton. That you sell to Mexico?
Mr. John. Uh-huh.
Mr. Burton. So you are getting the same amount of money?
Mr. John. Uh-huh.
Mr. Burton. But you have less what? Restrictions?
Mr. John. The restrictions I was referring to, Congressman,
is the restrictions on construction of new power plants.
Mr. Burton. OK. Thank you for yielding.
Mr. Ose. Did the PUC approve the transfer of this natural
gas to Mexico?
Mr. John. Yes.
Mr. Ose. Did FERC?
Mr. Madden. The export-import of gas is approved by the
Department of Energy. The siting of the facility is the Federal
Energy Regulatory Commission. The CPUC, because of the Hinshaw
status of this facility, approved the tariff. We did not do
that.
Mr. Ose. I can flat guarantee you, Mr. Chairman, we are
going to look into this. And I yield back.
Mr. Burton. If the gentleman would yield his time.
Mr. Ose. I yield my time.
Mr. Burton. I think that Mexico has substantial gas
reserves. In fact, they have a lot of oil reserves, too, down
there. Is the reason that they are importing gas from us
because they do not have the pipeline capacity down there?
Mr. John. That is correct. I mean, there are very few--to
the best of my knowledge, there are very few natural gas
reserves in northern Mexico. Most of the reserves are in the
southern part of the country.
Mr. Burton. Well, but that is--but we are sending our gas
down there while Americans are suffering, at a time when they
really need the generation; right?
Mr. John. But I think you have to take a longer-term look
at this issue. I do not think it makes----
Mr. Burton. Well, you tell that to somebody whose lights go
out. I was having dinner the other night, and the lights went
out in the middle of dinner.
Mr. John. And all I am saying to you, Congressman, is when
we have to curtail in southern California, we also curtail in
northern Mexico. So they are feeling the same pain. It is not--
they are not getting favoritism.
Mr. Burton. Well, that is very nice, except we do not
represent Mexico, we represent America.
Who is next?
Ms. Davis. Thank you. Thank you. While we are on natural
gas--and I appreciate, Mr. John, what you are sharing with us,
because sometimes it is hard to get information like that
directly. I am aware that there was a Rand Corp. report in I
guess December or January that said that California was being
charged something in the neighborhood of about 60 times the
rate of other States, other places in the country. Is that
correct, that we were paying----
Mr. John. I think what they were referring to,
Congresswoman, is in the month of December 2000 the price of
gas to California was about $50 per million BTU. And you would
compare that to probably somewhere around $5 or $6 per million
BTU in other parts of the country. So that we were paying
basically, at that point in time, about 10 times more than
other States.
Ms. Davis. And why was that?
Mr. John. Because of the cost of transportation between the
Southwest and the California border.
Ms. Davis. And then, so if there was natural gas, what
about in Mexico, then? What were they being charged at that
time?
Mr. John. I do not know that.
Ms. Davis. But is it possible that we were being charged a
lot more here in San Diego than in Mexico?
Mr. John. The transportation rate that we were charging to
the power plant in Mexicali, as I said, was a PUC approved
rate, not a FERC approved rate.
Ms. Davis. So the ones that were higher in southern
California were FERC approved rates?
Mr. John. They were rates in the secondary market. The
maximum rates that FERC approves are tariffed rates in the
primary market. But as I said earlier, FERC allowed, on an
experimental basis, the caps to be lifted in the secondary
market.
Mr. Madden. Congressman, if I may, the prices did hit $50,
even $60 at Topock, CA, for about 2 or 3 days in California. If
you look at the San Juan basin at that time, it was about $10
to $15. Other areas of the country with constraint points, like
New York City, had about $50.
In terms of the gas itself, the Federal Energy Regulatory
Commission has very little jurisdiction over the amount of gas
because of the decontrol. Essentially it is with respect to gas
that is in interstate, intrastate, or in LDC ships, or it is an
affiliated. And even then it is restricted. If it comes in from
Canada, we do not have the authority, and if it is their own
production, we do not have the authority.
We are looking into that matter right now. And he raised
the case in terms of the transmission. We do have jurisdiction
over the transmission. No one can charge more than the J&R rate
on the pipeline. The pipeline cannot get that.
Mr. John is talking about the secondary market, where we
relaxed the price and allowed people to--people, not the
pipeline shippers, and they include everyone, including Mr.
John's company, everyone to charge the value of the
transportation.
We have done an analysis of it, and it has shown that in
the secondary market--and we required it to go on the board--in
the secondary market, very few volumes went into the secondary
market, and the prices were at or above the J&R rate that is
approved in the primary market. So there is transparency there.
At the same time, we are looking into whether or not
certain entities manipulated the gas prices, because they were
a market power, to raise the prices at those points in
California.
Ms. Davis. When will that information be available to the
public?
Mr. Madden. We, in the first instance, have set a matter
for hearing last week, and we ordered the judge to report back
to us in 60 days on that matter.
Ms. Davis. Thank you. If I may, Mr. Chairman, just for a
moment, to go back to the market control that we were talking
about. And I think, Mr. Stout, you had answered the question
about the percentage that you control. I do not--Mr. Malcolm,
did--what percentage?
Mr. Malcolm. Less than 10 percent on a peak day.
Ms. Davis. Less than 10 percent. Because when the ISO
reviewed the records and did a profile, it is my understanding
that there were about five companies that they looked at, and
those five companies controlled about 98 percent of the market.
Was Williams part of that, do you think, in that survey? Would
they be----
Mr. Malcolm. I do not think so. I can assure you it would
be my view that Williams is not part of any five-company group
that controls 98 percent of the capacity.
Mr. Stout. I would agree wholeheartedly. There is no way
the five generators, who I think together have about 16,000
megawatts, that, by no stretch of the imagination, is 98
percent of the market.
Ms. Davis. Well, we might go back and look at that.
Mr. Filner. Would you yield?
Ms. Davis. Yield? Sure.
Mr. Filner. It was not 98 percent of the market, it was 98
percent of all the bids that five companies submitted, and you
two are amongst those five, showed control of the market. The
bids reflected market power, is what the ISO has alleged.
Mr. Stout. Well, I would very much appreciate you sharing
that particular document with me. I am not aware of that
document.
Mr. Malcolm. Nor am I.
Mr. Filner. If that were true, Mr. Madden, if ISO has
alleged it correctly, would their authority for market-based
rates be revoked?
Mr. Madden. I think the facts upon which you are relying
are not based in anything that I am aware of. Because if you--
their share in total--you have to look at what PG&E has, you
have to look at what So Cal Edison has, you have to look at
what San Diego has.
Mr. Filner. You understand ISO knows this better than I do.
Mr. Madden. Well, if you look at those alone, they are
about 60 percent of the market. And then you have to look at
all the other sellers in----
Mr. Filner. The issue was not what percent of the market.
What the issue was, as I understand it, the bidding pattern and
the ability to get the price that they bid reflected market
power. And that is their statement, not mine. And if that is
true, now I am just asking you if it was true, would their
authority to sell at market-based rates be revoked?
Mr. Madden. We would have a number of equitable remedies to
do with respect to that, including revocation of market-based
rates.
Mr. Filner. Thank you.
Mr. Burton. Mr. Horn.
Mr. Horn. I yield my time to Mr. Ose.
Mr. Burton. Mr. Ose.
Mr. Ose. Thank you, Mr. Horn. I want to go back to the
Pennsylvania--PJM, Pennsylvania-Jersey Market situation. I just
want to make sure I understand that. Mr. Stout, based on your
comments, I am inclined to believe that people in the energy
business in that marketplace calculate their base, hedge their
exposures for a vast, vast percentage of the entire load that
they have to provide. Am I correct?
Mr. Stout. On average, that is correct. On specific company
basis, that may not be correct.
Mr. Ose. OK. From your experience relative to the average
company basis, do they hedge 95 percent on long-term?
Mr. Stout. The actual percentage is 85 percent, as
published in the PJM annual report last year.
Mr. Ose. OK. Now, when you look in the Wall Street Journal
on a daily basis, there is a chart in there that says ``PJM,''
``Four Corners,'' ``California-Oregon Border,'' etc. And it
shows prices for firm and non-firm, peak and off-peak power,
electricity. I think the actual compilation of data is either 3
or 4 days, the day immediately past, and the preceding 2 or 3
days.
And it always seems to me, when I look in or at that chart,
that the price at COB is far higher than say at Mead or Four
Corners or PJM. And I have never--why is that? Is that a recent
development?
Mr. Stout. I would have to say that is more of a recent
development. And the primary reason is, if you look at what
fuel is on the margin in PJM this time of year, it is not
natural gas, it is typically coal. They are down low enough in
load that they are able to minimize their use of natural gas as
the marginal fuel.
But the problem you have in the West right now is, because
of the low hydro battery I mentioned earlier, gas is on the
margin. Gas prices are up, and the cost of generating with
natural gas is causing those higher prices there.
Mr. Ose. Would you agree with that, Mr. Malcolm?
Mr. Malcolm. Yes.
Mr. Ose. Is there a premium that is attached in the market
to power being sold into California? In other words, is there a
risk premium that is attached to that power?
Mr. Malcolm. There is certainly a credit premium----
Mr. Ose. OK, a credit premium.
Mr. Malcolm [continuing]. Assigned to sales coming to
California. And for good reason.
Mr. Stout. But there is also an opposite effect. And I
guess I would comment that if I looked at prices in California
for power for next summer, compared them with prices around
California, California is actually lower. The reason that
occurs is because California has put in place, through their
ISO, some rules that allow them to confiscate exported power
whenever California runs short.
That puts anyone who is in California, who is selling power
in the market, at risk for firm contracts that they enter into
with anyone in Nevada or Arizona. And as a result, you have to
add an additional risk premium when you sell power to someone
outside of California, because of the risk that California will
confiscate that power.
Mr. Ose. Because of the interruptible nature?
Mr. Stout. It is not interruptible. We are doing firm
contracts, but their rules say that if they need the power in
California, they can interrupt it and keep the power in
California.
Mr. Burton. Would the gentleman yield real briefly?
Mr. Ose. It is Mr. Horn's, but I would be happy to.
Mr. Burton. Mr. Horn, would you--OK. We will get you some
more time, if you would yield to me a little bit.
Mr. Horn. That will be fine.
Mr. Burton. You are talking about the electricity; right?
Mr. Stout. That is right.
Mr. Burton. What about gas? Can they confiscate gas, too?
Mr. Stout. I am not aware of anything in that regard.
Mr. Burton. I was just wondering about the gas that is
going to Mexico.
Mr. Stout. Well, this is in the California ISO rules.
Mr. Burton. That is a power generating source. I mean----
Mr. Madden. Mr. Chairman, they cannot confiscate interstate
gas supplies.
Mr. Burton. What is the difference between that and the
electricity he was talking about?
Mr. Madden. Well, I assume what he is talking about, there
is a tariff provision in the ISO that says in emergency
conditions they will require power that is sold into other
areas come back to California.
Mr. Burton. Well, I understand that. But you cannot
generate power without gas down here, and it is going to
Mexico, so what is the difference? You cutoff generation.
Mr. Madden. The difference is that there is a tariff, and
the tariff on file is--all I can think of, there is no
confiscation of interstate natural gas supplies.
Mr. Burton. Well, we ought to look into that. If it applies
to electricity, why would it not apply to gas which produces
the electricity?
Mr. Ose. I want to examine this particular issue. And I
appreciate the information on the PJM market. Are there
turbines or generating capacity in California that is offline
for lack of natural gas, to anybody's knowledge?
Mr. John. Not to my knowledge.
Mr. Stout. Not to mine.
Mr. Malcolm. Not to mine.
Mr. John. And that is why I think this issue with Mexico is
a red herring.
Mr. Ose. Well, I think it is a fair question. I mean, I
think your point is a fair point to make.
Mr. Madden. Mr. Chairman, there is about 7.1 BCF of
interstate gas supplies, gas supplies coming into the
California market every day. Every single day. There are
constraint points in various parts of southern California where
they cannot take away the gas supplies that come into
California.
Mr. Ose. OK.
Mr. Madden. So, and that is something that I believe the
CEC now is looking with the other utilities in terms of
identifying what infrastructure in the State needs to be added
in order to take more gas supplies away from the pipelines.
Mr. Ose. We are still going to look at it. But I think your
point is fairly made. So I appreciate that.
Mr. John. And the only thing I would add to what Mr. Madden
just said is, one of the filings we recently made to the FERC
was to take a regional approach, looking at all the new
interstate pipeline capacity coming into California, and make
sure it meshes with the intrastate capacity. And I know they
are looking at that.
Mr. Stout. Congressman, if I could add a very important
point to that. It is very easy to take the attitude, let us
protect our natural resources. Let us keep it in California.
Let us not let it go to Mexico. But let me remind you,
California is also critically dependent on power coming from
Canada.
Mr. Burton. If the gentleman would yield real quickly, let
me just say that Canada does not have a power problem, do they,
right now?
Mr. Stout. Not that I am aware of.
Mr. Burton. Well, that is the difference. You are talking
about eggs and apples.
Mr. Hunter.
Mr. Hunter. Thank you, Mr. Burton. Mr. John, let us go back
to this issue. I am glad I brought it up with respect to
Mexico.
You testified about a 500 percent increase in the cost of
natural gas, and the fact that is the driver on electricity. In
fact, Mr. Malcolm said that you had a standing offer, anybody
wants to buy electricity from us, 2 cents a kilowatt hour,
which is extremely low, plus the price of natural gas.
Then we said well, why is natural gas so expensive?
And one of you said well, at the wellhead it is still
relatively inexpensive. But because of the constraints on our
pipelines coming into California, it has gone up 400 or 500
percent.
Mr. John. From the Southwest.
Mr. Hunter. Then we said but some of it is going out to
Mexico.
And you then said, in answer to a question, we got plenty.
And what is sent to Mexico does not bother our supply at all.
And no plant is short because of the amount going to Mexico.
Mr. John. That was in response to a question from
Congressman Ose.
Mr. Hunter. OK, now, reconcile--well, taken holistically,
now, reconcile those statements you made. There is no problem
with supply, and so we should not worry about Mexico. And yet
the problem with supply in California has driven the price up
500 percent.
Mr. John. But it is not the supply, Congressman. It is the
cost of the transportation.
Mr. Hunter. Well, now, wait a second. But one of you
testified it was not the physical cost of transportation, it
was the fact that there was a shortage of transportation, and
there is apparently a competition for the transportation; that
is, for portions of the gas line. Right?
Mr. John. On the interstate side. In the case of the gas
that is going to Mexico, it is going through the existing
distribution systems in California, and there has----
Mr. Hunter. Well, but if you were not sending that gas to
Mexico----
Mr. John. Yes.
Mr. Hunter [continuing]. Then you would not have to be--
everything that goes to Mexico passes through California from
another State; right? We are not generating much natural gas
ourselves; right?
Mr. John. The gas supply that is coming in from--that is
serving Mexico?
Mr. Hunter. Do we generate much natural gas from wells in
California?
Mr. John. We produce a fair amount, but not as much as you
are getting from the Southwest.
Mr. Hunter. OK. If you have got a supply of gas coming to
California in the intake lines, we will call them, and you said
because of a constriction in these intake lines we have--prices
have gone up much more than they are at the wellhead, so that
is a line problem you have got. Some of that capacity is being
taken by the gas that comes into California, and then flows out
in this 30-inch line into Mexico; right? Right?
Mr. John. Go ahead.
Mr. Hunter. Then why are you saying there is no
relationship between the capacity in those lines? If you did
not have the gas going into Mexico, presumably that volume of
gas would not be a factor in the constriction of the lines
coming into California, because you would not be trans-shipping
it; is that right?
Mr. John. I am still not following you.
Mr. Hunter. OK. You got a pipeline coming into California
bringing gas from other States; OK?
Mr. John. I understand that.
Mr. Hunter. Part of that gas is going through California
and going into Mexico. OK? You stated, or one of the panelists
stated that one reason the price of gas is going up is not
because of what it costs at the wellhead, it is because of the
constriction or the lack of availability of capacity in the
lines coming into California.
If part of that capacity is taken, with natural gas that
comes from other States, goes through California and goes out
to Mexico, why would you not alleviate part of that problem and
the attendant price increases if you did not have that volume
of gas basically flowing through? If we were not also flowing
through our neighbor's gas?
Mr. John. But there are other pipelines that serve
California, other than from the Southwest.
Mr. Hunter. I understand that.
Mr. John. There are pipelines from Canada, there are
pipelines from the Rocky Mountain region.
Mr. Hunter. We understand all that.
Mr. John. So you cannot assume that all of the gas that is
going into Mexico is coming from the Southwest.
Mr. Hunter. No. But you can assume that it is relevant.
Because, as you know, as we all know now, the, you know, 5
percent shortage on supply can mean a doubling of price.
You other gentlemen have any insights on this?
Mr. Stout. I guess my comment would be there is a direct
relationship between supply, demand, balance, and price. The
more demand you put on a pipeline, the more likely it is that
the cost of using that pipeline will rise. And I think that is
the point you are alluding to.
Mr. Hunter. Yeah.
Mr. John. I know that is. All I am trying to say is, do not
assume that all of the gas that is coming into Mexico----
Mr. Hunter. We have not.
Mr. John [continuing]. Is going from the Southwest.
Mr. Hunter. No, we have not. But it may be relevant.
Mr. John. Maybe.
Mr. Malcolm. I think some of the points, some of the
pipelines that bring gas into California are constrained.
Others are not. And therefore, there may be some excess gas
that could go to Mexico.
Mr. Hunter. OK. Second question. If you have got a 500
percent increase in natural gas prices, does that make diesel
more attractive? And do we have diesel generational capability
we could turn on either in California, or in other States that
moves electricity into California, if diesel remained
relatively stable? Is diesel a good deal right now in terms of
cost? Not air quality, but cost.
Mr. Stout. Unfortunately I do not have any diesel
generation, so I have not done that particular analysis. But
there is a breakpoint where it will become economically
efficient to do that. I just do not know exactly where that
breakpoint is.
Mr. Malcolm. I think for the most part it would be economic
today.
Mr. Hunter. You think it would be economically feasible
now?
Mr. Malcolm. Yes. Yes.
Mr. Hunter. So if we had some relaxation on air standards,
if we are in an emergency situation in the summertime, moving
some diesel-fired electricity would be economically feasible?
Mr. Malcolm. I think it would be. No question that every
little bit would help.
Mr. Hunter. Just a last question. Do you have more
generational capability you could turn on right now, but for
regulations, procedures, laws? If you were having to--if you
wanted to save California in 60 days from what is going to
happen in the summer, and you were told to get every piece of
generational capability online, is there anything you would do
that you are not doing now?
Mr. Malcolm. We may be plagued with Nox
restrictions at some point this summer, that could reduce the
amount of megawatts that we have available.
Mr. Hunter. That is when you have to stop because you put
too much stuff in the air?
Mr. Malcolm. That is right. That is right.
Mr. Hunter. OK. Mr. Stout.
Mr. Stout. That is absolutely correct for me as well.
Mr. Hunter. OK. OK, thank you, Mr. Chairman.
Mr. Burton. Thank you. I guess it comes back to me. I think
we have covered that.
Mr. Malcolm. Mr. Chairman, could I have 15 seconds----
Mr. Burton. Sure.
Mr. Malcolm [continuing]. On the show cause order, which we
sort of went through very quickly at the beginning.
Mr. Burton. Sure. Sure.
Mr. Malcolm. I would just want to say that we feel very
strongly that a full and fair investigation will yield the
conclusion that we did no wrongdoing, that we did not break any
rules. And to the extent that information is provided to the
committee, we want to have the opportunity to present our side
of that story. The show cause order is very one-sided and very
biased.
Mr. Burton. We will be very happy to. First thing we need
is, we need to get the information we have requested from you
and FERC. We get all that information, and we will have our
legal staff and everybody take a look at it. And then if you
would like to come to Washington and appear and make a case, we
will be happy to talk to you. We are not in the decisionmaking
process in that area. We are looking at legislative remedies to
help with the problem. But if you want to do that, we could
probably talk to FERC and you and, from a congressional level,
take a hard look at it.
Mr. Malcolm. Thank you.
Mr. Burton. To Reliant and Williams, what is the difference
between the profits made by the independent generators compared
with the municipal and Federal power sellers such as the Los
Angeles Department of Water and Power and Bonneville Power
Administration? Did you understand the question?
Mr. Malcolm. You asked what the difference is?
Mr. Burton. What is the difference between the profits made
by the independent generators compared with the municipal and
Federal power sellers such as the Los Angeles Department of
Water and Power and Bonneville Power Administration?
Mr. Stout. Mr. Chairman, I would love to know the answer to
that question, myself. But, honestly, there is no way for me to
have access to their profit numbers.
Mr. Burton. So we would have to get information from you
and them?
Mr. Stout. That is correct.
Mr. Burton. And then compare them. Did you hear that? OK,
we need to get that. We will request your information and we
will get that. I am way past that already. Do not worry about
it. I am probably up to about 1,100.
To Reliant, Williams, or Sempra, the utilities--I was not
suggesting I was going to have to subpoena these things. I
think they are going to volunteer those information, are you
not?
Mr. Malcolm. That is correct.
Mr. Burton. Thank you. But if necessary, we will do what we
have to do.
The utilities, in order to receive the benefit of the Cal
ISO price cap, often scheduled their power purchase in the spot
market instead of the PX. How did this affect the price of
electricity last year? You want me to repeat that?
Mr. Stout. Well, I guess my comment on that is that they
were almost forced to buy all of theirs in the spot market. So
that question sounds a little strange to me.
Mr. John. That is my understanding. If that is the
question, the utilities were required to buy out of the PX, and
the PX was basically the spot market at that time.
Mr. Malcolm. And so, since they were not able to take
advantage of the forward market, long-term sales, then it had
the impact of increasing the cost of power.
Mr. Burton. We will submit these questions to you a little
more succinctly in writing. And if you could respond to those,
we would appreciate that.
Why did generators continue to make large profits as the
price caps were lowered last summer? Any one of you.
Mr. Stout. Well, I am not sure that the statement is
accurate. I do not personally know----
Mr. Burton. Did you not make large profits last summer.
Mr. Stout. We made profits last summer. I do not know the
relationship between the profits that were being made versus
the price cap. I have never gone back and looked at that.
Mr. Burton. Well, as the price caps were going down----
Mr. Stout. Part of the problem--part of the reason that
generators in California probably made more money when price
caps were lowered is because people outside of California were
less likely to sell into California, which increased the volume
that generators in California sold. Our profits are directly
related to the amount we sell. So as volume goes up, the order
of profits should go up as well.
Mr. Burton. So you are saying your profits were outside the
State?
Mr. Stout. No. What I am saying is, people from outside the
State, when given a choice between selling into a price capped
market, like California, and other markets which were not price
capped, probably chose to keep their power and sell it
somewhere else.
Mr. Burton. I can understand that. That makes sense. But
your profit margin continued to rise, did it not?
Mr. Stout. Once again, I do not know that is an accurate
statement, because I do not know how our profit margins
compared month by month as the price cap changed. I have never
looked at that.
Mr. Burton. Can we get that information?
Mr. Stout. I am not sure if we have that, but I will take a
look and see.
Mr. Burton. Well, it should be a simple accounting--you
should have records, I would think, showing your profit margin
month by month during those times.
Mr. Stout. Well, I agree to go back and check and see what
we can put together for you on that.
Mr. Burton. Would you do that? Would you do that as well?
Mr. Malcolm. Yes, sir.
Mr. Burton. Thank you, sir.
Why has FERC only focused on Stage 3 days when considering
refunds?
Mr. Madden. The Commission, in its order, believed that the
Stage 3 was the appropriate time when supply and demand would
be out of imbalance, and that it was the time that the FERC
should intervene in terms of looking at the prices.
Mr. Burton. But if you focus solely on the Stage 3
emergency deals, FERC had eliminated more than 81 percent, and
according to these records, 57,151 of the transactions above
the $150 were--which were, what, in January? In January.
Mr. Madden. Mr. Chairman, I believe that came from
Commissioner Massey's dissent. But let me say the Commission
staff looked at the 70,000 transactions that were filed in
January, and determined to look at a proxy as to what price is
necessary to mimic the market and sell in at a variable price.
What we did, essentially, was to look at the price of gas,
the Nox, and the Nox rate. And the price
of gas for January was 12-50 on the spot. Your Nox
costs were 22-50, I believe. And we gave 2 pounds for the
average CT unit, which would use that, plus the variable cost
of $2. And we used a CT unit of 18,000 heat rate unit. And that
was based upon the generating facilities that the three IOUs
owned.
Mr. Burton. Did you get all that? OK.
Mr. Filner.
Mr. Filner. Thank you, Mr. Chairman.
Mr. Madden, the ISO, I think in filings to you, estimated
or alleged or said that there was a $6\1/2\ billion overcharge
by the wholesalers into the market. And you have issued several
findings which found a couple hundred million or $60 million at
one point, some other figure less. And why is there such a
great difference between your findings of overcharges and
ISO's?
Mr. Madden. Well, Congressman Filner, I am glad you raised
that. Because if you were here for the past 2 days of the
testifying and the hearing, we now hear that the ISO believes
that the $6.7 number that it gave was inappropriate, and that
the real number, at most, is $1.3 billion.
Mr. Filner. When did they say this?
Mr. Madden. They have a filing that came into the
committee. They now recognize for the first time that figure
represents $2.7 billion associated with bilateral contracts,
many contracts of which the CPUC reviewed from entities. It
also included approximately $900 million associated with non-
jurisdictional entities such as L.A. Water and Power.
Mr. Filner. So they are down to $1.3 billion or whatever?
Mr. Madden. They have come down now to $1.3 billion, at
most. And we have asked them for further data, which we asked
them last week and they did not provide it to us, as to--they
account for all the hours in all the days, for the most part.
Nor have they told us what the gas prices are and what the
Nox credits are.
More importantly, if you look at it, the $1.3 includes also
October through December. We have not looked at that period yet
at all.
Mr. Filner. All right.
Mr. Madden. And on rehearing, we do have----
Mr. Filner. If we pass my legislation, you will have the
authority to look before October, back to June.
In your findings, when you looked at the overcharges, you
only counted during the period of Stage 3 alerts, as I remember
it.
Mr. Madden. That is what the committee order said.
Mr. Filner. That seems like a strange thing, because it is
at that moment that you would find that there is real
competition, I mean, when there is so little left. Why did you
not look at other times when price spikes occurred for
unaccountable reasons all through the----
Mr. Madden. The Commission, in its order, believed that the
Stage 3 was appropriate. What we now have to do--it is on
rehearing. We discussed the rehearings in April 8th, or this
Monday, rather. And one of the issues that you have raised in
terms of why not look at a different stage----
Mr. Filner. What price did you come up with, then?
Mr. Madden [continuing]. And a different stage is on
rehearing. And I cannot address that because it is a contested
case.
Mr. Filner. OK.
Mr. Burton. Was it because you had a manpower problem that
you did not go beyond Stage 3?
Mr. Madden. Oh, no. No. No, Mr. Chairman.
Mr. Burton. It was not that reason?
Mr. Madden. No. We developed on a methodology, and then
applied that methodology to the transactions.
Mr. Filner. Just one final comment, Mr. Chairman. And, Mr.
Stout, I appreciate all the charts and who was bidding and
when. It reminded me of--I have to quote my friend, Mr. Hunter,
again. He has the best quotes. He said what that bidding
represents, really, is if you came into a hospital for a life-
and-death operation that was scheduled at a certain time, and 5
minutes before the operation--I am getting this right; right,
Duncan?
Mr. Hunter. Yes.
Mr. Filner. The administrator of the hospital came in and
asked: ``what were you willing to pay for the oxygen?'' That
is, you control a commodity at the moment you need it. It has
nothing to do with anything but control at a time that is
necessary. And you could charge anything you please at that
moment.
I think that is what those bids represent, more than
anything. Not that somebody was ready to pay a good price. They
needed the electricity at that moment. You controlled it.
Mr. Stout. If I might respond to that. We still have an
offer on the table for forward contracts at 2 cents a kilowatt
hour. That is a competitive bid. It is out there.
Mr. Filner. I will have to look at that. Of course, you
guys also control the cost of the natural gas. I mean, the
reconciliation that you asked for earlier, Mr. Hunter, how can
you reconcile this and that. Because there is a cartel that
controls the transportation. I mean, I think the cartel is even
smaller than that controls the energy production. So they could
charge whatever they please for the natural gas stuff. So we
are just moving the cartel from one place to another.
One final question, if I may. You have heard stories about
people going out of business in this area. You have heard
stories, schools that cannot educate because they are paying
these costs, libraries that cannot buy books because they are
paying these costs. I have got YMCAs that have closed down
because they cannot handle the energy cost.
However you want to look at it, you guys are doing well. I
mean, I look at the Fortune 500, I look at your profit
statements. Do you feel any responsibility for a situation in
which you are making literally hundreds of millions of dollars,
and people are bankrupt, people cannot get educated, people
cannot get into their YMCA, people on fixed income making life-
and-death decisions? Do you have any responsibility for that?
Mr. Stout. Well, if you are using the word responsibility
in a negative connotation, the answer is no, because the
profits that we make in this market are rolled back into this
market in terms of solutions. We are investing millions of
dollars in equipment at our power plants that will reduce
emissions from those power plants. We are investing hundreds of
millions of dollars in new supply that will bring power to
California, that will help to supply the electricity for those
hospitals that Mr. Hunter is worried about, and for the elderly
citizens who need to have that power in order to have their
refrigerator running.
Mr. Filner. Yeah, but meanwhile you have killed off their
business and you have killed off their families, so it is not
going to help them too much.
Mr. Stout. Well, it is certainly not our intent to see that
sort of result occur. We hope that the policymakers in
California can address that concern in a way that precludes
those customers from being harmed. But by the same token, the
solution to this market is supply. You have got to get the
supply and demand back in balance. And rather than blame
suppliers for the problem, we are here to be part of the
solution, and we want to have the opportunity to provide that
solution.
Mr. Filner. We have just today one of your fellow
producers, Dynegy, told SDG&E that they would close down their
operated plants because of a payment problem, a dispute over
the payment. There is not a shortage of capacity, it is a
question of who controls the ability to give it out. You have
Duke Energy in my district had its biggest generator closed
down during our Stage 3 alerts.
You keep yelling supply. I will show you example after
example the supply is there, and because you guys chose not to
use that supply, it put us into an incredibly difficult
situation. And you can yell supply all you want, but it is your
control that is the problem.
Mr. Burton. Mr. Horn. Well, you want to go--let me take 2
minutes, real quickly, and then we will yield to Mr. Horn.
Mr. Horn. Chairman, you go ahead.
Mr. Burton. Thank you. We are not here to beat up on you
fellows, although it may appear as though we are being a little
aggressive. And we understand that if you have outstanding
debts to you, you have got to answer to your stockholders and
that sort of thing. And so if they are not paying, it goes down
the line.
But this is an extremely difficult situation, and we really
need to get as much information and answers as possible, so
that if there is a legislative remedy that we can assist
California with in Washington, or if we can make some overtures
to the EPA to relax some standards so we can get some other
forms of generation online to help ease the problem, then we
want to do that. But we really need information for us to make
some kind of informed decision, and a lot of us are neophytes
as far as understanding all the intricacies of the electricity-
producing area.
Let me ask FERC this. Why has the floating soft cap changed
every month? In December it was $150, in January it was $273,
in February it was the Commission that said it would determine
a new screening price for each month until the $150 soft cap
expired at the end of April. Can you explain that?
Mr. Madden. Mr. Chairman, the ISO came in with a filing I
believe sometime in 1999, which we approved, to establish a
cap. First it was $750, then it was $500, then $250. Up until
December 8th there was a hard cap, $250. At which point the ISO
made a filing, emergency filing that was discussed yesterday,
and to change that $250 cap to a $250 soft cap in order to
attract more energy.
The Commission, in its December 15th order, then said
starting January 1, from an initial screening standpoint, we
will establish a $150 breakpoint, upon which we will look at
all those transactions. And those are the 70,000 transactions I
talked about that the Commission staff looked at to establish
the price. And the $273, as I discussed, is based upon an
18,000 heat rate unit.
You multiply the 18,000 times the 12-50 gas, and you come
up with the $273 if you include the Nox prices. And
that changes each month, depending what the value of the spot
is.
Mr. Burton. I understand. OK. Why did FERC decide to only
seek refunds on electricity sold in excess of $430 per megawatt
hour during the Stage 3 alerts in February?
Mr. Madden. We used the same methodology as we applied in
January, so you had higher gas prices on average for February,
Nox went up substantially from $22 to----
Mr. Burton. So the soft cap went up to $430 because of the
formula?
Mr. Madden. That is right. The methodology. You just input
it.
Mr. Burton. OK. I got it.
Mr. Hunter, go ahead.
Mr. Hunter. Thank you, Mr. Chairman. I think it has been a
good, informative session.
I think one of the most instructive statements for us, as
Californians and San Diegans, was the fact that SDG&E is going
to Mexico to build a plant that will transport American--that
will receive American transported gas into Mexico, and then
presumably export some of the created energy or electricity
back into California, because doing all of that is easier than
building the plant in California in the first place. Is that
the essence of what you said, Mr. John?
Mr. John. What I said, and you are close to it, is for a
lot of suppliers these days it is easier to build power plants
outside of California than it is within the State.
Mr. Hunter. OK. I think there is a lesson for all of us
here, and I want to go back to the solution that we need to
come to, because again we are 60 days away from what could be a
disastrous summer.
But we are also looking at a situation where literally
thousands of prospective high wage employers who would come and
locate in our community, are going to ask in the boardroom to
their energy analyst, what is the picture for electricity in
San Diego County, CA?
And what they are going to get, at best, probably is, it is
uncertain. And that term uncertain will mean that whoever is
competing with us for that location of that prized employer for
our citizens will probably win, and that company will go
elsewhere. Besides driving a number--in my estimation, a number
of American or Californian companies are going to be probably
moving out of State if things do not get better quickly.
So it is clear that we could build generational capability
in California. We are not talking high tech. You make
electricity by running--by flowing natural gas through a
generator. And most of the big new generators that we make now,
like the LM-6000, you bring in and you bolt down on a concrete
pad. That is not too complex. And you run pipelines. We have
been running pipelines for a long time.
And yet, because of our own laws, regulations, bureaucracy,
it takes literally years, roughly half the time it took us to
win World War II, to get a permit for a power plant in
California.
My question to all of you gentlemen is--and this is kind of
a San Diego question--do you have right now in your inventory,
Mr. Malcolm and Mr. Stout, do you folks have any 15 to 30 to
50-megawatt generators that you can move in quickly and
operate, presuming they are permitted? Do you maintain that
kind of inventory?
Mr. Malcolm. Just recently we had ongoing discussions with
parties in California to site new generation, and unfortunately
were unable to get the kinds of commitments that we needed in
terms of siting, in terms of permitting, that would have
allowed us to have new generation on stream by the end of July.
Mr. Hunter. But you actually could move--have new
generation on stream by the end of July if you had permitting
and if you had financial backing for those plants?
Mr. Malcolm. That is correct. We scrambled throughout the
country and throughout the world trying to find generation
units that we could bring in, and had located some, and very
clearly were trying to bring additional units in for the
summer. Were unable to do so.
Mr. Hunter. Would you work with San Diego if we could--if
we can----
Mr. Malcolm. Most assuredly.
Mr. Hunter [continuing]. If we would be willing to work
with you on this project?
Mr. Malcolm. Sure.
Mr. Hunter. Mr. Stout.
Mr. Stout. We had a couple of units earlier this year. In
fact, we had nearly 100 megawatts of gas-serving capacity we
were trying to locate in California. We approached Southern
California Edison. We already had a site. Unfortunately they
said their transmission grid was not sufficient to support it.
So we were unable to place those. Now it is a little too late.
Mr. Burton. We will be back to you in a minute.
Ms. Davis.
Ms. Davis. Thank you. Just to followup for 1 second, the
transmission grid was not supportive. But is there anything in
the legislation--there was legislation passed last fall--that
precludes you from doing that? Are there any obstacles in that
area for you to locate capacity?
Mr. Stout. I am not familiar with which legislation you are
referring to that was passed last fall. Could you clarify that
for me?
Ms. Davis. Well, there was legislation that made it easier,
streamlined some of the processes. And I am just wondering
whether--was that helpful? I think, Mr. Madden, you signaled
earlier that--or perhaps Mr. John, that it is easier now. Are
there additional obstacles that are precluding you from doing
something that you would like to do?
Mr. Stout. I think the most significant obstacle at this
point is what I call political and regulatory uncertainty in
California. We do not know what this market is going to look
like. There are threats of confiscation of power plants. It
would be very difficult, I think, for us to go to our boardroom
or go to our bankers and request that they loan us hundreds of
millions of dollars to invest in California until we have a
clear strategic plan on how this market is going to evolve from
this point forward.
Ms. Davis. One of the things we hear a lot about is
municipal power. But I think, you know, you need to understand
that one of the reasons that cities are talking about municipal
power is because they feel so ripped off. And so it is a shared
responsibility that we all have, I think, to do something about
this.
What is your sense of cities developing their own ability
to regulate their own power?
Mr. Madden. Congresswoman, are you talking about the
transmission facilities or generation, now?
Ms. Davis. Well, I think here in San Diego they are talking
about transmission.
Mr. Madden. Well, if we are talking about the----
Ms. Davis. I am sorry. Generation.
Mr. Madden. Oh, generation.
Ms. Davis. Right.
Mr. Madden. In terms of San Diego itself becoming a muni,
for example?
Ms. Davis. Yes.
Mr. Madden. I think that it should be under consideration
in terms of where San Diegans think you will get the most bang
for their buck and their value in terms of developing their own
generation.
Mr. John. From our standpoint, we have been working with
the county and the city. If they want to build their own
generation, that is fine with us. And we are also working with
independent generators, to try and hook them up to our system
as best we can. We have been working with Congressman Hunter's
office on issues like that. Especially with respect to the
military. We would love to see some new generation built on
some of the military bases, if it could get done.
Ms. Davis. OK. Well, one final question, if I could go back
for a moment. We talked about--and I am sure I appreciate you
all have really hung in here, and we appreciate that very much.
And my colleagues, as well, have certainly hung in here. I
appreciate that.
The issue of the forward contracts came up early on. And I
spoke to Mr. Conlon about that. He suggested that in fact there
was real mistrust going on quite some time ago, and that
contributed to the lack of forward thinking, perhaps, we might
suggest. Is one of the problems that--and maybe, Mr. John, you
can answer this. What do you think it would have taken for
those forward contracts to be developed in concert with the PUC
here?
Mr. John. OK.
Ms. Davis. It is my understanding that there was a need for
a reasonableness clause that was rejected. And correct me if I
am wrong on that. What was wrong, what was missing, and how can
we improve that? How can we move forward from here?
Mr. John. OK, the issue was that once the Commission
started to give us some leeway to deal in the bilateral market,
we went to them and said, that is fine. But what we need from
you are some up-front reasonableness review criteria, so that
if we enter into contracts, we are not going to get a hindsight
review a couple of years later and you are going to tell us you
paid too much for the power.
And to this day we do not have those standards. If we had--
and in some cases we actually brought proposals to the
Commission that were negotiated with some of the generators and
suppliers, and we tried to say is this OK or is it not? And we
could not get a response. So I am not sure it is as much
mistrust as it is frustration, because the regulators have not
been able to keep pace with the market.
Mr. Madden. Congresswoman, if I may, California was unlike
many, many other States when they subsequently deregulated the
market. And I think Chairman Ose mentioned Pennsylvania. The
utilities were not required to divest, as they were in
California, all of their portfolio. And when they were, or they
had to give up something, they entered into long-term
contracts.
You do not have 85, 90 percent of your needs being sold
into and bought out of the spot market. It does not make sense.
You should have a mixed portfolio of spot, short, mid, and
long. That is the best way. And you should also have financial
and risk instruments. And a lot of State regulatory agencies
recognize the importance of that.
One part of our order, in the December 15th order, we told
the State--we told the utilities, as well--that with respect to
the generation you have left, the State can do what it wants
with respect to the cost, but we want you out of the spot
market, and we wanted approximately 95 percent of that
remaining generation to be done forward, so that the realtime
market would only consist of 5 percent. And so that even if it
was volatile at certain points, it would be masked because of
the certainty associated with the contract prices you got on
the forward market.
Ms. Davis. I guess my frustration is, with your expertise
and the expertise of the FERC, seeing that, and I am assuming
you saw that from the beginning in California, it seems as if
there was a point at which you could have intervened,
acknowledging that the likelihood of a fair and reasonable
market would not occur.
Mr. Madden. Well, Mr. Chairman----
Ms. Davis. Could you have done that earlier?
Mr. Madden. I assumed--and I was not in the position I was
earlier, so I assume, though, the Commission could have
rejected the ISO's filings. But the history of it indicates
there was great deference because California was the first one
to unbundle, and they worked at it very hard.
Hindsight is 20/20. But even as late as--or as of 2000 they
should have changed their position. They should have allowed
the utilities to have a higher level portfolio, and not subject
them to prudence reviews if the market does not work out.
Ms. Davis. Thank you, Mr.----
Mr. Burton. The gentlelady's time has expired.
Mr. Ose.
Mr. Ose. Thank you, Mr. Chairman. I do want to share with
Congresswoman Davis that Southern California Edison, PG&E, and
now Sempra have all said that they do not have a standard by
which they could have a safe harbor on long-term contracts. And
that is a critical issue here. The testimony we received in
Sacramento on Tuesday and on Wednesday was that Southern
California Edison and PG&E and I believe Sempra, also----
Mr. John. SDG&E.
Mr. Ose [continuing]. San Diego Gas was into PUC late last
summer and early last fall asking for those standards to be
finalized, and they have yet to receive finalized standards. It
is a huge problem, because it creates such uncertainty. And I
appreciate you asking that question.
As far as Mr. Stout and Mr. Malcolm, in terms of either
Williams or Reliant, are either of your companies contracted
with the State of California, through the Governor's office, on
any of these contracts that we cannot seem to get any
information about?
Mr. Malcolm. Yes, we have entered into a 10-year, fixed
price, 1,400 megawatt contract.
Mr. Ose. How about you, Mr. Stout?
Mr. Stout. Reliant had a short--I think it was around a 30-
day contract. That has since expired. We do not have any long-
term contract.
Mr. Ose. The reason I ask that question is that ultimately
the question of transaction relating to the transmission lines,
as I understand it, falls under the jurisdiction of the FERC.
Mr. Madden. That is correct.
Mr. Ose. And we may well need to understand the financial
implications of these long-term contracts that the Governor's
office has arranged, but for which we cannot get any
information. Would you be willing to, under seal, provide us
with a copy of your contract so that we can at least have some
information as it relates to that?
Mr. Malcolm. I am sure something can be arranged.
Mr. Ose. I appreciate your offer, because--and I will say
that the others that we have asked that have also consented to
provide us that information, and I am appreciative of it.
One final point, Mr. Chairman. Mr. John's company has
technology that is relatively old. But, well, excuse me. Your
generating capacity before you sold it was relatively dated?
Mr. John. Yes.
Mr. Ose. Mr. Malcolm's company and Mr. Stout's company are
forced, just by economics, to produce the power at the lowest
possible price, and thereby generating the returns that their
capital partners and the like will want. And the interesting
thing about that is that in non-attainment areas like the
Sacramento Valley and the San Joaquin Valley and elsewhere
across the country, they can bring to the market power. In
other words, they can convert natural gas to electricity at up
to 50 percent more efficiently using new technology than old,
at a 25 to 50 percent reduction in emissions. Whether it be
nitrous oxide or sulfur dioxide or what have you. And the issue
that we need to figure out is how to help increase supply in
such a manner that it is positive for the environment. These
are things that we can do.
Now, Duncan cited the issue of regulatory burden being one
of the factors pushing the construction of these plants into
Mexico. I am curious whether we can work with FERC on such a
manner where some improvement of conversion or some decrease in
emission, the Federal Government can give the opt-out for a
company to move ahead in a regulatory environment. I think this
is absolutely a huge opportunity for us. And I hope that as we
contemplate the information we have received over the past 3-
days hearing from all the witnesses, that we are able to take
that and put it into legislation that will make something
happen, and relieve the supply crisis that we have here. Thank
you, Mr. Chairman.
Mr. Hunter. Doug, would you yield for 1 second on that?
Mr. Burton. We are going to you next. But we certainly will
try, and that is the whole purpose of all this.
Mr. Hunter.
Mr. Hunter. Yeah, thank you, Mr. Chairman. Doug, I think
you have pointed out a path that would be a very wise path for
us to follow. Because what we have now is a situation, it is
like buying a car, and you are told you buy the technology. If
you want to buy the earliest technology you possibly can have,
in the year 2000 the newest car you can have is a 1990. And the
reason you cannot have a 1995 or a 1996 or a 1999 or a 2000
model is because it takes you so long to get that online, so
when you get something online, almost by definition, somewhat
analogous to our military systems, it would take us a long time
to develop. You do not have the state-of-the-art.
And so, Doug, it would seem to me your point or your
recommendation that, in exchange for eliminating this 18-month
permitting time, if you promise and you commit to the
regulatory agency that you are going to use the highest
technology available--in fact, you may even get that down to
where you specify models and types of equipment--and the
bureaucracy can look at that and say that is going to put 50
percent less emissions into the field, into the air. Is it in
our interest, as a government, to delay the new stuff, and
thereby guarantee we are going to have the old model continuing
to operate for the next 5 years? Or is it in our interest to go
to a 1-month permitting time, and thereby get the new model
into the field, help the environment at the same time we are
getting new stuff online? Now, does that make sense to you
guys?
Mr. Madden. Well, it makes sense to me to get the dirtier
plants off, and get the more efficient steam, CT plants in. And
that is what we mentioned in our March 14th order.
You have got to send the right price signals for that to be
accomplished. And, you know, the regulatory prohibitions, in
terms of the timing, I think really need to be changed
dramatically, and they have to come down. It does not make
sense when everyone wants a site outside of California. It does
not make sense.
Mr. John. The only thing I would add is, we have talked a
lot today about generation, appropriately. We have talked about
gas transmission. But the same issue applies to electric
transmission. And you have to have electricity transmission
either upgraded or built in order to hook into some of these
generation facilities. And it is harder to build transmission,
especially in California, than it is generation.
Mr. Hunter. Is that right?
Mr. John. Yes.
Mr. Hunter. Mr. John, just one point on that. I am trying
to go back to getting through the summer again. You folks have
substations around San Diego County, obviously.
Mr. John. Yes.
Mr. Hunter. It looks to me like a substation, if you are
going to try to have some distributive generation capability,
the best place to have that is at a substation, because you
obviously have got your fuel there and you have got your line
there; right? Is there a lot of capacity at the substations to
put in an extra 50 megawatts, 10 megawatts, 20 megawatts?
Mr. John. I do not know the actual amount, but I do know
that the people over at SDG&E have been working with certain
developers on--but I do not have the specifics. I can get that
for you.
Mr. Hunter. OK. Thank you. And I want to thank everybody
here, Mr. Chairman, for their testimony. And, Mr. John, thanks
to you folks for working with Bob Simmons, who is the president
of the Coalition for Electricity Independence. I think that it
is a bunch of businesses trying to get the answer here and get
stuff online. Thank you, Mr. Chairman.
Mr. Burton. I think Mr. Filner has one last question.
Mr. Filner. Mr. Malcolm, Mr. Stout, you have put yourselves
in this position and I thank you. I mean, you had to take a lot
from us, and we appreciate your being here and answering our
questions.
Mr. John, we heard an offer for 2 cents plus the price of
natural gas. There must be something wrong with that offer.
Mr. John. And last year we heard 5 cents. Again,
everybody--it has either been made in the newspapers or in
congressional hearings. And the problem is, when we then sit
down and try and have discussions with the generators, it is
almost like a bait-and-switch. You know, all I can tell you is
in previous discussions we have had with certain generators,
they have said one thing in public; and then when we sat down
to negotiate, new bells and whistles get added and the 2 cents
becomes 10 cents or 12 cents.
Mr. Burton. Let me just say that if some kind of an
overture is made on the 2 cent issue and it does materialize,
give me a call and we will have everybody come to Washington
and talk about it. And we will just ask you to come out. And, I
mean, if this offer that was made today is a valid offer, and
you take him up on it, and it does not work out, our committee
has oversight over the entire Federal Government, which has
ancillary responsibility for what is going on here through
Federal agencies. We will be happy to have people come out
there and we will discuss it in an open forum.
Let me just say we have some more questions for the record,
but I do not want to keep you people here overnight. So if you
do not mind, we would like to submit some questions to you for
the record, and if you can have your staffs or you answer those
questions and get them back to us, along with the other
information which we have asked for, we sure would appreciate
it. And if you get that information back to us that we ask for
in a timely way, then I think that will probably conclude what
we have to do out here in California.
And with that, if there is no more questions, thank you for
being here. We appreciate it. We stand adjourned. Thank you.
[Whereupon, the committee was adjourned at 3:09 p.m.]
[Additional information submitted for the hearing record
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